REG - Nat Bank of Canada - MD&A - Part 1 <Origin Href="QuoteRef">NA.TO</Origin> - Part 2
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Net impaired loans − 1 − 1
Net impaired loans as a % of average loans and acceptances − % − % − % − %
Efficiency ratio 42.2 % 44.6 % 45.2 % 47.8 %
(1) For additional information, see Note 22 to the unaudited interim condensed consolidated financial statements.
(2) Certain amounts have been adjusted to reflect changes in accounting standards. See Note 2to the unaudited interim
condensed consolidated financial statements.
In the Financial Markets segment, net income totalled $187 million for the third quarter of 2014, up $32 million from $155
million in the same quarter of 2013. On a taxable equivalent basis, the segment's total revenues amounted to $445 million
versus $381 million in the third quarter of 2013, with the increase being driven by all revenue items except gains on
available-for-sale securities. The growth in trading activity revenues came from equities and fixed-income business
activity, whereas commodities and foreign exchange business activity resulted in a 33% decrease. Financial market fees were
up owing to greater merger and acquisition activity as well as to greater equity issuances in the markets, whereas gains on
available-for-sale securities had been higher in 2013. The segment's third-quarter Other revenues grew 54% year over year
given sustained revenue growth at Credigy Ltd. and the disposal of portfolios from this entity.
At $188 million for the third quarter of 2014, non-interest expenses were up $18 million year over year, particularly
because of the higher variable compensation associated with revenue growth. Provisions for credit losses were nil for the
third quarters of 2014 and 2013.
For the first nine months of fiscal 2014, the segment's net income totalled $459 million, up $50 million or 12% from the
same period in 2013. On a taxable equivalent basis, nine-month total revenues amounted to $1,147 million versus $1,047
million in the same period of 2013, a $100 million year-over-year increase that was mainly due to growth in trading
activity revenues, in particular client business in equities and financial market fees. The increase in nine-month
Other revenues stems mainly from a disposal of investments and from sustained growth by Credigy Ltd.
For the first nine months of fiscal 2014, the segment's non-interest expenses increased year over year. The segment did not
record any provisions for credit losses for the first nine months of 2014, whereas $12 million in recoveries of credit
losses had been recorded for the first nine months of 2013.
Other
(taxable equivalent basis)(1)
(millions of Canadian dollars) Quarter ended July 31 Nine months ended July 31
2014 2013 (2) 2014 2013 (2)
Operating results excluding specified items(3)
Net interest income (76) (67) (194) (184)
Non-interest income 27 21 88 105
Total revenues (49) (46) (106) (79)
Non-interest expenses 57 43 120 107
Provisions for credit losses − 1 − 1
Income before income taxes (106) (90) (226) (187)
Income taxes (81) (75) (205) (190)
Net income excluding specified items (25) (15) (21) 3
Specified items after income taxes(3) 25 34 50 139
Net income − 19 29 142
Non-controlling interests 13 14 41 41
Net income attributable to the Bank's shareholders (13) 5 (12) 101
Average assets 26,348 20,042 28,386 20,743
(1) For additional information, see Note 22 to the unaudited interim condensed consolidated financial statements.
(2) Certain amounts have been adjusted to reflect changes in accounting standards. See Note 2 to the unaudited
interim condensed consolidated financial statements.
(3) See the Financial Reporting Method section on page 4.
For the Other heading of segment results, net income was nil in the third quarter of 2014 compared to $19 million in the
same quarter of 2013. Excluding specified items, there was a $25 million net loss this third quarter versus a $15 million
net loss in the third quarter of 2013. The higher net loss was particularly driven by higher variable compensation and by
business development expenses.
For the first nine months of fiscal 2014, net income totalled $29 million versus $142 million in the same nine-month period
of 2013. Excluding specified items, there was a $21 million net loss for the first nine months of fiscal 2014 versus $3
million in net income for the same period in 2013, explained by a lower contribution from Treasury and by the same reasons
provided for the quarter.
Consolidated Balance Sheet
Assets
As at July 31, 2014, the Bank had total assets of $198.8 billion compared to $188.2 billion as at October 31, 2013, a $10.6
billion or 6% increase. Cash and deposits with financial institutions increased by $2.3 billion. Securities increased by
$1.1 billion since October 31, 2013 due to securities at fair value through profit or loss, whereas securities purchased
under reverse repurchase agreements and securities borrowed increased by $0.6 billion since October 31, 2013.
Master Asset Vehicles (MAV)
As at July 31, 2014, the face value of the restructured notes of the MAV conduits and of the other restructured notes held
by the Bank was $1,527 million ($1,727 million as at October 31, 2013), of which $1,294 million was designated as
Securities at fair value through profit or loss under the fair value option, and an amount of $233 million was classified
in Available-for-sale securities ($1,506 million designated as Securities at fair value through profit or loss and $221
million classified in Available-for-sale securities as at October 31, 2013). The change in the face value of the
restructured notes of the MAV conduits during the first nine months of fiscal 2014 was mainly due to capital repayments and
disposals. During the nine months ended July 31, 2014, the Bank participated in two optional redemption unwind processes
for restructured notes of the MAV II conduits and disposed of certain notes, classified in Securities at fair value through
profit or loss, for a face value of $199 million. In exchange, the Bank received $179 million in cash and liquidation trust
units with a fair value of $9 million as at July 31, 2014 and classified these units in Available-for-sale securities.
The carrying value of the restructured notes of the MAV conduits and of the other restructured notes held by the Bank in an
investment portfolio as at July 31, 2014, designated as Securities at fair value through profit or loss, was $1,203
million, and $78 million was classified in Available-for-sale securities ($1,293 million designated as Securities at fair
value through profit or loss and $68 million classified in Available-for-sale securities as at October 31, 2013). The notes
held in an investment portfolio with one or more embedded derivatives were designated as Securities at fair value through
profit and loss under the fair value option, and the other notes were classified in Available-for-sale securities.
In establishing the fair value of the restructured notes of the MAV conduits and ineligible assets, the Bank applied the
same methodologies used as at October 31, 2013. For additional information, see Note 6 to the audited annual consolidated
financial statements for the year ended October 31, 2013. In addition, the Bank adjusted its assumption on the liquidity of
the MAV I notes to reflect market conditions; for the restructured notes of the MAV I and MAV II conduits for Class C, it
also adjusted its weighting for broker quotes. During the quarter ended July 31, 2014, revenues totalling $47 million (a
negligible amount for the quarter ended July 31, 2013) were recognized in Trading revenues (losses) in the Consolidated
Statement of Income to reflect a rise in the fair value of the restructured notes. For the nine months ended July 31, 2014,
the rise in the fair value of the restructured notes amounted to $92 million ($151 million for the nine-month period ended
July 31, 2013). The carrying value of the restructured notes, designated as Securities at fair value through profit or
loss, was within estimated fair value ranges as at July 31, 2014. The credit ratings of the restructured notes of the MAV
conduits have not changed from October 31, 2013.
The Bank has committed to contribute $835 million ($886 million as at October 31, 2013) to a margin funding facility
related to the MAV conduits in order to finance potential collateral calls. As at July 31, 2014 and as at October 31, 2013,
no amount had been advanced by the Bank.
Loans and Acceptances
As at July 31, 2014, loans and acceptances increased since October 31, 2013 owing to growth across all credit business,
except for customers' liabilities under acceptances, which decreased by $0.4 billion. The following table provides a
breakdown of the main loan and acceptance portfolios.
(millions of Canadian dollars) As at July 31, 2014 As at October 31, 2013 As at July 31, 2013
Loans and acceptances
Consumer loans 27,369 26,064 25,665
Residential mortgages 38,663 36,573 35,896
Credit card receivables 1,953 1,925 1,911
Business and government 36,007 33,354 34,056
103,992 97,916 97,528
As at July 31, 2014, loans and acceptances totalled $104.0 billion, a $6.1 billion or 6% increase since October 31, 2013.
Consumer loans were up 5%, due primarily to home equity lines of credit and personal loans. Rising 6%, residential
mortgages were also up as at July 31, 2014. Loans and acceptances to business and government increased by 8% since October
31, 2013, mainly due to corporate and government financing activities and to loans to companies in the energy sector.
Compared to a year ago, loans and acceptances increased $6.5 billion or 7%, and consumer loans and residential mortgage
loans rose, respectively, by 7% and 8%. Loans and acceptances to business and government also contributed to the growth,
rising 6% from a year ago, mainly because of corporate loan financing.
Liabilities
As at July 31, 2014, the Bank had total liabilities of $188.8 billion compared to $179.3 billion as at October 31, 2013.
As at July 31, 2014, the Bank's deposit liability stood at $114.9 billion, rising $12.8 billion or 13% from $102.1 billion
as at October 31, 2013. The following table provides a breakdown of total personal savings.
(millions of Canadian dollars) As at July 31, 2014 As at October 31, 2013 As at July 31, 2013
Balance sheet
Deposits 44,657 42,652 42,064
Off-balance-sheet
Full-service brokerage 104,209 94,550 91,035
Mutual funds 18,671 16,633 16,137
Other 3,952 3,680 3,639
126,832 114,863 110,811
Total 171,489 157,515 152,875
At $44.7 billion as at July 31, 2014, personal deposits were up $2.0 billion since October 31, 2013 owing essentially to
Bank initiatives undertaken to grow this type of deposit. Since the beginning of the fiscal year, personal savings included
in assets under administration and under management grew 10% due to acquisition-driven business growth and to a recovery in
stock markets. Personal deposits were up $2.6 billion from a year ago, while personal savings included in assets under
administration and under management were up $16.0 billion.
Since October 31, 2013, business and government deposits grew $8.5 billion or 15%, partly due to covered bond issuances
totalling 2.0 billion euros. At $4.7 billion, deposits from deposit-taking institutions rose $2.3 billion since October 31,
2013, mainly attributable to U.S. government financial institutions. Other financing activities decreased since October 31,
2013, essentially due to a decrease in obligations related to securities sold short.
Equity
As at July 31, 2014, the Bank's equity was $10.0 billion compared to $9.0 billion as at October 31, 2013, an increase that
stems mainly from higher retained earnings and from a $350 million preferred share issuance.
As at August 22, 2014, there were 327,901,202 common shares and 15,474,176 stock options outstanding. For additional
information on share capital, see Note 17 to the audited annual consolidated financial statements for the year ended
October 31, 2013 and Note 13 to the unaudited interim condensed consolidated financial statements.
Acquisition
TD Waterhouse Institutional Services
On November 12, 2013, through a subsidiary, the Bank completed the acquisition of Toronto-Dominion Bank's institutional
services known as TD Waterhouse Institutional Services. This acquisition marks another step in the Bank's expansion of its
wealth management platform across Canada. The final purchase price is $260 million.The net assets acquired include client
list intangible assets totalling approximately $58 million. The purchase price exceeded the fair value of the net assets
acquired by $206 million. This excess amount was recorded on the Consolidated Balance Sheet as goodwill and mainly
represents synergies and the benefits expected from combining the acquired operations with those of the Bank. The tax
deductible portion of the goodwill is $155 million. The acquired receivables, consisting mainly of loans to clients for the
purchase of securities, had an acquisition-date fair value of $448 million. This amount also represents the gross
contractual amounts receivable, which the Bank expects to fully recover.
An amount of $1 million in acquisition-related costs was included in Non-interest expenses in the Consolidated Statement of
Income for the nine months ended July 31, 2014. The consolidated financial statements include the results of the acquired
business as of November 12, 2013. During the quarter ended July 31, 2014, the acquired business contributed approximately
$12 million to the Bank's total revenues and $4 million to its net income (excluding integration costs). For the nine
months ended July 31, 2014, the contributions to total revenues and net income amounted to $39 million and $16 million,
respectively. If the Bankhad completed the acquisition on November 1, 2013, total revenues would have been approximately
$4,102 million and net income approximately $1,209 million for the nine months ended July 31, 2014.
Related Party Transactions
The Bank's policies and procedures regarding related party transactions have not significantly changed since October 31,
2013. For additional information, see Note 28 to the audited annual consolidated financial statements for the year ended
October 31, 2013.
Off-Balance-Sheet Arrangements
In the normal course of business, the Bank is party to various financial arrangements that, under IFRS, are not required to
be recorded on the Consolidated Balance Sheet or are recorded at amounts other than their notional or contractual values.
These arrangements include, among others, transactions with structured entities, derivative financial instruments,
issuances of guarantees, the margin funding facility of the MAV conduits, credit instruments, and financial assets received
as collateral. A complete analysis of these types of arrangements, including their nature, business purpose and importance,
is provided on pages 45 and 46 of the 2013 Annual Report. For additional information on guarantees and a description of
obligations under certain indemnification agreements, see Note 25 to the audited annual consolidated financial statements
for the year ended October 31, 2013.
For additional information about financial assets transferred but not derecognized and structured entities, see Notes 7 and
21, respectively, to the unaudited interim condensed consolidated financial statements.
ACCOUNTING POLICIES AND FINANCIAL DISCLOSURE
Accounting Policies and Critical Accounting Estimates
The Bank's consolidated financial statements have been prepared in accordance with section 308(4) of the Bank Act (Canada),
which states that, except as otherwise specified by the Office of the Superintendent of Financial Institutions (Canada)
(OSFI), the financial statements are to be prepared in accordance with International Financial Reporting Standards (IFRS),
as issued by the International Accounting Standards Board (IASB) and set out in the CPA Canada Handbook. None of the OSFI
accounting requirements are exceptions to IFRS.
The consolidated financial statements have been prepared in accordance with IAS 34 - Interim Financial Reporting using the
accounting policies described in Note 1 to the audited annual consolidated financial statements for the year ended October
31, 2013, except for the accounting policy changes described below. Also described below are future accounting policy
changes.
In preparing consolidated financial statements in accordance with IFRS, management must exercise judgment and make
estimates and assumptions that affect the reporting date carrying amounts of assets and liabilities, net income and related
information. Some of these accounting policies are considered critical given their importance to the presentation of the
Bank's financial position and operating results and require difficult, subjective and complex judgments and estimates
because they relate to 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 critical accounting estimates remain substantially
unchanged from those described on pages 48 to 51 of the 2013 Annual Report, except for the changes described below in the
Accounting Policy Changes section. Additional information on fair value determination is provided in Notes 3, 4 and 5 to
the consolidated financial statements, and additional information on the consolidation of structured entities is provided
in Note 21 to the consolidated financial statements.
Accounting Policy Changes
Effective Date - November 1, 2013
As required by the IASB, on November 1, 2013, the Bank adopted the following new or amended accounting standards.
IAS 19 − Employee Benefits
In June 2011, the IASB issued an amended version of IAS 19, introducing significant changes to the accounting of employee
benefits, primarily for defined benefit pension plans. The main changes to the revised standard are as follows:
- The expected return on plan assets is no longer used in calculating the pension plan expense. The discount rate used
to measure the accrued benefit obligation must also be used to measure the return on plan assets.
- Past service costs are recognized when a plan is amended, with no deferral over the vesting period.
- Additional annual disclosure is to be provided regarding the characteristics of defined benefit plans and the risks
to which entities are exposed by participating in those plans.
- The revised standard requires that all actuarial gains and losses be immediately recognized in Other comprehensive
income. The recognition of actuarial gains and losses can no longer be deferred. This last amendment has no impact on the
Bank since it already recognizes actuarial gains and losses in Other comprehensive income.
The requirements of the amended version of IAS 19 have been applied retrospectively. The impacts of adopting the amendments
on the Consolidated Balance Sheet as at October 31, 2013 are presented below. There is no impact on the Consolidated
Balance Sheet as at November 1, 2012.
(millions of Canadian dollars) As at October 31, 2013
Consolidated Balance Sheet
Increase in Other assets 15
Decrease in Other liabilities 6
Increase in Retained earnings 21
Retrospective adoption of the changes had the following impacts on the Consolidated Statement of Income and the
Consolidated Statement of Comprehensive Income for the third quarter and nine months ended July 31, 2013.
(millions of Canadian dollars) Quarter ended July 31, 2013 Nine months ended July 31, 2013
Consolidated Statements of Income and Comprehensive Income
Increase in Compensation and employee benefits (19) (22) (1)
Decrease in Income taxes 5 6
Decrease in Net income (14) (16)
Increase in Other comprehensive income - Actuarial gains and losses on employee benefit plans 13 38
Increase (decrease) in Comprehensive income (1) 22
Decrease in earnings per share (dollars)
Basic (0.04) (0.05)
Diluted (0.04) (0.05)
(1) This amount includes a $35 million decrease in past service costs, less a $4.5 million reduction recorded under
the previous IAS 19, resulting from changes that had been made to provisions in the Bank's pension plans and other
post-retirement plans in the first quarter of 2013.
IFRS 10 - Consolidated Financial Statements
IFRS 10 replaces the consolidation guidance in IAS 27 - Consolidated and Separate Financial Statements and in
interpretation SIC-12 - Consolidation - Special Purpose Entities, by establishing a single consolidation model based on
control for all interests held in all types of entities (investees). According to IFRS 10, control is based on the concepts
of decision-making authority regarding the investee's relevant activities, exposure or rights to variable returns from its
involvement with the investee, and the ability to use its power to affect the amount of returns. An entity must consolidate
the entities it controls and present consolidated financial statements.
The Bank retrospectively adopted IFRS 10, the impact of which is the deconsolidation of NBC Capital Trust (the Trust).
Under IFRS 10, the Bank does not control the Trust because the Bank's interest does not expose it to variable returns. The
Bank's earnings per share has not been affected. The impacts of the deconsolidation are as follows:
- A $225 million increase in Deposits on the Consolidated Balance Sheet as at October 31, 2013 and as at November 1,
2012, representing the Trust's deposit note.
- A $229 million decrease in Non-controlling interests on the Consolidated Balance Sheet as at October 31, 2013 and as
at November 1, 2012, representing the trust units issued by the Trust.
- A $4 million increase in Other liabilities on the Consolidated Balance Sheet as at October 31, 2013 and as at
November 1, 2012, representing accrued interest payable on the deposit note.
- Decreases in Net income and equivalent decreases in Non-controlling interests of $3 million and $9 million on the
Consolidated Statement of Income for the third quarter and nine-month period ended July 31, 2013, respectively.
IFRS 7 - Financial Instruments: Disclosures
The amendments to IFRS 7 require disclosure about legally enforceable rights of set-off for financial instruments under
master netting agreements or similar arrangements. The Bank retrospectively adopted these amendments, which had no impact
on its results or financial position since the standard only affects disclosures. The required IFRS 7 disclosure amendments
will be presented in the audited annual consolidated financial statements as at October 31, 2014.
IFRS 11 - Joint Arrangements
IFRS 11- Joint Arrangements replaces IAS 31- Interests in Joint Venturesand SIC-13- Jointly Controlled Entities -
Non-Monetary Contributions by Venturers. Under IFRS 11, a joint arrangement is an arrangement in which two or more parties
have joint control. Joint control means the contractually agreed sharing of control of an arrangement, which exists only
when decisions about the relevant activities require the unanimous consent of the parties sharing control. Under IFRS 11, a
joint arrangement must be classified as either a joint operation or a joint venture, depending on an assessment of the
rights and obligations of the parties to the arrangement.
A joint operation is a joint arrangement wherein joint operators have rights to the assets and obligations for the
liabilities. A joint operator shall account for the assets, liabilities, revenues and expenses relating to its interest in
a joint operation in accordance with the IFRS standards applicable to the particular assets, liabilities, revenues and
expenses. A joint venture is a joint arrangement wherein the joint venturers have rights to the net assets of the
arrangement. A joint venturer accounts for its interest in a joint venture using the equity method.
The Bank retrospectively adopted IFRS 11 and concluded that the joint arrangements in which it has rights constitute joint
ventures. Since these investments had already been accounted for using the equity method under IAS 31, there was no impact
on the Bank's consolidated financial statements.
IFRS 12 - Disclosure of Interests in Other Entities
IFRS 12 applies to entities that hold interests in subsidiaries, joint arrangements, associates and non-consolidated
structured entities. It requires additional disclosure that enables financial statement users to assess the nature of, and
risks associated with, an entity's interests in other entities and the effects of those interests on the entity's financial
position, financial performance and cash flows. The Bank retrospectively adopted IFRS 12, and the required disclosures will
be presented in the audited annual consolidated financial statements as at October 31, 2014. However, certain disclosures
related to structured entities are presented in these consolidated financial statements.
IFRS 13 - Fair Value Measurement
IFRS 13 defines fair value, sets out in a single standard a framework for measuring fair value and requires disclosures
about fair value measurements. Prospective adoption of this standard did not have a significant impact on the Bank's
consolidated financial statements. The required quarterly disclosures are presented in the consolidated financial
statements; the additional annual disclosures required will be presented in the audited annual consolidated financial
statements as at October 31, 2014.
Effective Date - November 1, 2014
IAS 32 - Financial Instruments: Presentation
IAS 32 was amended to clarify the requirements for offsetting financial assets and financial liabilities in order to reduce
inconsistencies in current practice. The Bank is currently assessing the impact these amendments will have on the
consolidated financial statements.
IFRIC Interpretation 21 - Levies
IFRIC Interpretation 21 (IFRIC 21) provides guidance on when to recognize a liability to pay a levy imposed by a government
that is accounted for in accordance with IAS 37 - Provisions, ContingentLiabilities and Contingent Assets. IFRIC 21 is to
be applied retrospectively and the Bank is currently assessing the impact of adopting this interpretation.
Effective Date - November 1, 2017
IFRS 15 - Revenue from Contracts with Customers
In May 2014, the IASB issued a new standard, IFRS 15, which replaces the current revenue recognition standards and
interpretations. IFRS 15 provides a single comprehensive model to use when accounting for revenue arising from contracts
with customers. The new model applies to all contracts with customers except those that are within the scope of other IFRS
standards such as leases, insurance contracts and financial instruments. IFRS 15 is to be applied retrospectively, and the
Bank is currently assessing the impact of adopting this standard.
Effective Date - November 1, 2018
IFRS 9 - FinancialInstruments
In July 2014, the IASB issued a complete and final version of IFRS 9, which replaces the current standard on financial
instruments. IFRS 9 sets out requirements for the classification and measurement of financial assets and financial
liabilities, for the impairment of financial assets, and for general hedge accounting. Macro hedge accounting has been
decoupled from IFRS 9 and will be considered and issued as a separate standard. IFRS 9 provides a single model for
financial asset classification and measurement that is based on contractual cash flow characteristics and on the business
model for holding financial assets. With respect to measuring financial liabilities designated at fair value through profit
or loss, the standard prescribes that fair value changes attributable to an entity's own credit risk be accounted for in
Other comprehensive income unless they offset amounts recognized in Net income. The IASB and OSFI are permitting early
adoption of these new requirements for recognizing changes in an entity's own credit risk.
IFRS 9 also introduces a new impairment model for financial assets not measured at fair value through profit or loss that
requires recognition of expected credit losses rather than incurred losses as applied under the current standard. As for
the new hedge accounting model, it provides better alignment of hedge accounting with risk management activities. However,
the current hedge accounting requirements may continue to be applied until the IASB finalizes its macro hedge accounting
project. In general, IFRS 9 is to be applied retrospectively, and the Bank is currently assessing the impact of adopting
this standard.
Financial Disclosure
During the third quarter of 2014, no changes were made to the policies, procedures and other processes that comprise the
Bank's internal control over financial reporting that had or could reasonably have a significant impact on the Bank's
internal control over financial reporting.
ADDITIONAL FINANCIAL DISCLOSURE
The Financial Stability Board (FSB) develops financial stability standards and seeks to promote cooperation in the
oversight and monitoring of financial institutions. OSFI has asked Canadian banks to apply certain recommendations issued
by the FSB. The recommendations seek to enhance transparency and measurement with respect to certain exposures, in
particular structured entities, subprime and Alt-A exposures, collateralized debt obligations, residential and commercial
mortgage-backed securities, and leveraged financing structures.
The Bank does not market any specific mortgage financing program to subprime or Alt-A clients. Subprime loans are generally
defined as loans granted to borrowers with a higher credit risk profile than prime borrowers, and the Bank does not grant
this type of loan. Alt-A loans are granted to borrowers who cannot provide standard proof of income. The Bank's Alt-A loan
volume was $629 million as at July 31, 2014 ($661 million as at October 31, 2013).
The Bank does not have any significant direct position in residential and commercial mortgage-backed securities that are
not insured by the Canadian Mortgage and Housing Corporation (CMHC). Credit derivative positions are shown in the table
below.
Leveraged financing structures are defined by the Bank as loans granted to large corporate and financial sponsor-backed
companies that are typically non-investment grade with much higher levels of debt relative to other companies in the same
industry. Leveraged finance is commonly employed to achieve a specific objective, for example, to make an acquisition,
complete a buy-out or repurchase shares. Leveraged finance risk exposure takes the form of both funded and unfunded
commitments. As at July 31,2014, total commitments for this type of loan stood at $1,043 million ($865 million as at
October 31, 2013). Details about other exposures are provided in the table on structured entities in Note 21 to the
unaudited interim condensed consolidated financial statements.
Credit Derivative Positions (notional amounts)
(millions of Canadian dollars) As at July 31, 2014 As at October 31, 2013
Credit portfolio Trading Credit portfolio Trading
Protectionpurchased Protectionsold Protectionpurchased Protectionsold Protectionpurchased Protectionsold Protectionpurchased Protectionsold
Credit default swaps
Indices, single names
and other 55 − 593 253 42 − 1,071 235
Tranches on indices − − − 1 − − − 1
Total return swaps − − 40 7 − − − 9
The FSB created the Enhanced Disclosure Task Force (EDTF), a working group that, on October 29, 2012, published a report
entitled Enhancing the Risk Disclosures of Banks, which contains 32 recommendations. As at October 31, 2013, the Bank has
made every effort to ensure overall compliance with those recommendations and is continuing to enhance its risk disclosures
to meet the best practices on an ongoing basis. The risk disclosures required by the EDTF are provided in the 2013 Annual
Report, in this Report to Shareholders, and in the documents entitled Supplementary Regulatory Capital Disclosure for the
Third Quarter Ended July 31, 2014 and Supplementary Financial Information for the Third Quarter Ended July 31, 2014, which
are available on the Bank's website at nbc.ca. In addition, on the following page is a table of contents that users can use
to locate information relative to the 32 recommendations.
Risk Disclosures
The following table lists the references where users can find information that responds to the EDTF's 32 recommendations.
Pages
2013 Annual Report Report to Shareholders(1) Supplementary Regulatory CapitalDisclosure(1)
General
1 Location of risk disclosures 10 18
Management's Discussion and Analysis 18, 53 to 85, 90 and 93 19 to 35
Consolidated Financial Statements Notes 1, 5, 7, 15 and 22 Note 6
Supplementary Regulatory Capital Disclosure 4 to 26
2 Risk terminology and risk measures 60 to 84
3 Top and emerging risks 60
4 New key regulatory ratios 76 and 80 19 and 28
Risk governance and risk management
5 Risk management organization, processes and key functions 61 to 64
6 Risk management culture 61
7 Key risks by business segment, risk management and risk appetite 18, 61 and 62
8 Stress testing 53, 62, 67 and 74 to 78
Capital adequacy and risk-weighted assets (RWA)
9 Minimum Pillar 1 capital requirements 55 19
10 Reconciliation of the accounting balance sheet to
the regulatory balance sheet 4 to 6
11 Movements in regulatory capital 56 20
12 Capital planning 53 to 59
13 RWA by business segment and by risk type 18 and 58 21 7
14 Capital requirements by risk and RWA calculation method 58 and 65 to 67 21 7
15 Banking book credit risk 21 7 and 10 to 15
16 Movements in RWA by risk type 59 22 8
17 Assessment of credit risk model performance 64, 67 and 73 10 to 15
Liquidity
18 Liquidity management and components of the liquidity buffer 77 to 79 29
Funding
19 Summary of encumbered and unencumbered assets 79 30
20 Residual contractual maturities of balance sheet items and
off-balance-sheet commitments 140 to 143 32 to 35
21 Funding strategy and funding sources 80 to 82 31
Market risk
22 Linkage of market risk measures to balance sheet 72 24 and 25
23 Market risk factors 71, 75, 135, 137 and 179 26 and 27
24 VaR: assumptions, limitations and validation procedures 73, 74 and 135
25 Stress tests, stressed VaR and backtesting 73 to 75, 135 and 137
Credit risk
26 Credit risk exposures 132, 133 and 149 to 152 23 and 55 to 57 9 to 22 and 18 to 24(2)
27 Policies for identifying impaired loans 69 and 108
28 Movements in impaired loans and allowances for credit losses 90, 93 and 149 to 151 55 to 57 18
29 Counterparty credit risk relating to derivatives transactions 69, 70 and 161 to 163 24 23
30 Credit risk mitigation 68 to 70 20 and 22
Other risks
31 Other risks: governance, measurement and management 64 and 82 to 85
32 Publicly known risk events No risk event No risk event
(1) For the third quarter and nine-month period ended July 31, 2014.
(2) These pages are included in the document entitled Supplementary Financial Information for the Third Quarter Ended
July 31, 2014.
CAPITAL MANAGEMENT
The Bank's capital management policy sets out the principles and practices that the Bank incorporates into its capital
management strategy and the basic criteria it adopts to ensure that it has sufficient capital at all times and is prudently
managing such capital to satisfy any future capital requirements. The Bank has maintained adequate capital ratios through
internal capital generation, balance sheet management and issuances and repurchases of shares and subordinated debt
securities. For additional information on the capital management framework, see the Capital Management section on pages 53
to 59 of the Bank's 2013 Annual Report.
In December 2012, OSFI released the Capital Adequacy Requirements (CAR) Guideline, which took effect in January 2013 and
was updated in April 2014. The guideline reflects the changes to capital requirements adopted by the Basel Committee on
Banking Supervision (BCBS), which are commonly referred to as Basel III. These changes, along with global liquidity
standards, seek to strengthen the resiliency of the banking sector and
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