REG - Nat Bank of Canada - MD&A - Part 1 <Origin Href="QuoteRef">NA.TO</Origin> - Part 3
29/10/2014 15:45
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financial system. In addition to those measures,
OSFI now requires that regulatory capital instruments other than common shares have a non-viability contingent capital
(NVCC) clause to ensure that investors bear losses before taxpayers should the government determine that rescuing a
non-viable financial institution is in the public interest.
The new Basel III regulatory framework sets out transitional arrangements for the period of 2013 to 2019. OSFI has
introduced two methodologies for determining capital. The "all-in" methodology includes all of the regulatory adjustments
that will be required by 2019 while retaining the phase-out rules for non-qualifying capital instruments. The
"transitional" methodology, in addition to applying the phase-out rules for non-qualifying capital instruments, also
applies a more flexible and steady phasing in of the required regulatory adjustments. The Bank will disclose its capital
ratios calculated according to both methodologies in each quarter until the start of 2019. Nevertheless, OSFI has been
requiring Canadian banks to meet the 2019 minimum "all-in" requirements since the first quarter of 2013 for Common Equity
Tier 1 (CET1) and since the first quarter of 2014 for Tier 1 capital and total capital. Furthermore, to ensure an
implementation similar to that of other countries, OSFI has decided to phase in the credit valuation adjustment (CVA)
charge over a period of five years beginning in 2014. In the first year, only 57%, 65% and 77% of total CVA will be applied
to the calculation of the CET1, Tier 1 and total capital ratios, respectively, and these percentages will gradually
increase each year until they reach 100% by 2019.
As such, the Bank must now maintain a CET1 capital ratio, Tier 1 capital ratio and total capital ratio of at least 7.0%,
8.5% and 10.5%, respectively, all of which include the 2.5% capital conservation buffer. In March 2013, OSFI designated
Canada's six largest banks, a group that includes National Bank, as Domestic Systemically Important Banks (D-SIBs). For
these banks, a 1% surcharge will apply to their capital ratios as of January 1, 2016. Consequently, as of that date, the
Bank and all other major Canadian banks will have to maintain a CET1 capital ratio of at least 8.0%, a Tier 1 capital ratio
of at least 9.5% and a total capital ratio of at least 11.5%, all determined using the "all-in" methodology.
In addition to regulatory capital ratios, OSFI also requires Canadian banks to meet a financial leverage test. Leverage or
the assets-to-capital multiple (ACM) is calculated by dividing the Bank's total assets, including certain off-balance-sheet
items, by its total regulatory capital in accordance with the transitional requirements for Basel III. In January 2014,
after the BCBS updated the Basel III rules for the leverage ratio, OSFI announced that the new Basel III leverage ratio
would replace the ACM as of January 1, 2015. The new leverage ratio is calculated by dividing Tier 1 capital by total on-
and off-balance-sheet assets. Items deducted from Tier 1 capital will also be excluded from the calculation of the leverage
ratio.
New disclosure requirements pursuant to Pillar 3 of the Basel II framework came into force in the third quarter of 2013.
Canadian financial institutions must use a disclosure template for their "all-in" regulatory capital and must present a
reconciliation of all regulatory capital items back to the balance sheet. These two requirements are presented in the
Supplementary Regulatory Capital Disclosure report published quarterly and available on the Bank's website at nbc.ca.
Furthermore, a complete list of capital instruments and their main features is now available on the Bank's website under
Investor Relations > Capital and Debt Information > Main Features of Regulatory Capital Instruments.
The following table presents the regulatory capital ratios determined using the "all-in" methodology and the regulatory
targets under Basel III.
Capital ratios Minimum capital ratios to be maintained
As at July 31,2014 (1) As at October 31, 2013 (2) BCBS 2014 OSFI 2014 (3) OSFI January 1, 2016 (3)(4)
Common Equity Tier 1 (CET1) 9.1 % 8.7 % 4.0 % 7.0 % 8.0 %
Tier 1 12.0 % 11.4 % 5.5 % 8.5 % 9.5 %
Total 14.8 % 15.0 % 8.0 % 10.5 % 11.5 %
(1) Basel III ratios, including a portion of the CVA charge.
(2) Basel III ratios, excluding the CVA charge; these ratios have not been adjusted to reflect changes in accounting
standards.
(3) Includes the 2.5% capital conservation buffer.
(4) Includes the 1% surcharge applicable to D-SIBs.
Management Activities
On November 15, 2013, the Bank redeemed, at nominal value, for cancellation $500 million in notes maturing in November
2018. On December 13, 2013, the Bank redeemed for cancellation debentures with a nominal value of US$25 million maturing in
February 2087.
On February 7, 2014, the Bank issued 14,000,000 Non-Cumulative 5-Year Rate-Reset Series 30 First Preferred Shares at a
per-share price of $25.00 for gross proceeds of $350 million. Given that the Series 30 preferred shares satisfy the
non-viability contingent capital requirements, they qualify for the purposes of calculating regulatory capital under Basel
III.
On February 15, 2014, the Bank redeemed the outstanding 2,425,880 Non-Cumulative Series 24 First Preferred Shares and the
outstanding 1,724,835 Non-Cumulative Series 26 First Preferred Shares at a per-share price of $25.00 plus the periodic
declared and unpaid dividend. Given the fact that these instruments were already grandfathered, subject to a phase-out
under the Basel III transition rules, the impact of this redemption on the capital ratios was negligible.
Movement in Regulatory Capital(1)
(millions of Canadian dollars) Nine months ended July 31, 2014
Common Equity Tier 1 (CET1) Capital
Balance at beginning 5,350
Issuance of common shares (including Stock Option Plan) 77
Repurchase of common shares −
Contributed surplus 17
Dividends on preferred and common shares (488)
Net income attributable to the Bank's shareholders 1,157
Removal of own credit spread net of income taxes 4
Removal of reserves arising from property revaluation 26
Other (84)
Movements in accumulated other comprehensive income
Translation adjustments 8
Available-for-sale securities 79
Change in goodwill and intangible assets (net of related tax liability) (307)
Other, including regulatory adjustments and transitional arrangements
Change in defined benefit pension plan asset (net of related tax liability) (21)
Change in amount exceeding 15% threshold
Deferred tax assets 19
Significant investment in common shares of financial institutions 24
Change in other regulatory adjustments(2) 15
Balance at end 5,876
Additional Tier 1 Capital
Balance at beginning 1,652
New Tier 1 eligible capital issuances 350
Redeemed capital −
Change in non-qualifying Additional Tier 1 subject to phase-out (104)
Other, including regulatory adjustments and transitional arrangements −
Balance at end 1,898
Total Tier 1 Capital 7,774
Tier 2 Capital
Balance at beginning 2,184
New Tier 2 eligible capital issuances −
Redeemed capital (531)
Change in non-qualifying Tier 2 subject to phase-out 245
Change in eligible collective allowances (22)
Other, including regulatory adjustments and transitional arrangements −
Balance at end 1,876
Total Regulatory Capital 9,650
(1) Figures are presented on an "all-in" basis.
(2) Represents the change in investments in the Bank's own CET1 and shortfall of total provisions to expected
losses.
RWA by Key Risk Drivers
CET1 RWA increased by $3.4 billion, totalling $64.7 billion as at July 31, 2014 compared to $61.3 billion as at October 31,
2013. This increase was mainly due to the coming into force of the CVA charge (the CVA charge had not been included in the
RWA calculation as at October 31, 2013) and to organic growth. The Bank's risk-weighted assets are presented in the
following table.
Capital Adequacy Under Basel III(1)
(millions of Canadian dollars) As at July 31, 2014 As at October 31, 2013
Exposure at default Risk-weighted assets Capital requirement (2) Risk-weighted assets
StandardizedApproach AdvancedApproach Other Total Total
Credit risk
Retail
Residential mortgages 40,388 69 4,414 − 4,483 359 4,565
Qualifying revolving retail 4,992 − 1,012 − 1,012 81 1,440
Other retail 12,213 516 4,435 − 4,951 396 5,625
Non-retail
Corporate 47,950 2,702 20,362 − 23,064 1,845 22,174
Sovereign 21,162 − 486 − 486 39 418
Financial institutions 3,273 127 852 − 979 78 743
Banking book equities(3) 469 − 469 − 469 38 437
Securitization 4,077 − 2,200 − 2,200 176 2,269
Other assets 22,228 − − 5,004 5,004 400 4,337
Counterparty credit risk
Corporate 8,176 308 53 − 361 29 229
Sovereign 10,560 − 9 − 9 1 10
Financial institutions 51,546 − 1,893 − 1,893 151 2,425
Trading portfolio 9,846 363 3,085 − 3,448 276 2,524
Credit valuation adjustment charge(4) 1,914 − − 1,914 153 -
Regulatory scaling factor − 2,313 − 2,313 185 2,255
Total - Credit risk 236,880 5,999 41,583 5,004 52,586 4,207 49,451
Market risk
VaR − 780 − 780 62 775
Stressed VaR − 1,351 − 1,351 108 1,109
Interest-rate-specific risk 1,310 − − 1,310 105 1,498
Total - Market risk 1,310 2,131 − 3,441 275 3,382
Operational risk 8,676 − − 8,676 694 8,418
Total 236,880 15,985 43,714 5,004 64,703 5,176 61,251
(1) Figures are presented on an "all-in" basis, and the October 31, 2013 figures have not been adjusted to reflect
changes in accounting standards.
(2) The capital requirement is equal to 8% of risk-weighted assets.
(3) Calculated using the simple risk weight method.
(4) Calculated based on CET1 risk-weighted assets.
Risk-Weighted Assets Movement by Key Drivers(1)
(millions of Canadian dollars) Quarter ended
July 31, 2014 April 30, 2014 January 31, 2014
Non-counterparty credit risk Counterpartycredit risk(2) Total Total Total
Credit risk - Risk-weighted assets at beginning 44,926 6,918 51,844 52,030 49,451
Book size 716 366 1,082 (141) 1,209
Book quality (27) 324 297 (120) (697)
Model updates (672) − (672) − −
Methodology and policy − − − − 1,625
Acquisitions and disposals − − − − −
Foreign exchange movements 18 17 35 75 442
Credit risk - Risk-weighted assets at end 44,961 7,625 52,586 51,844 52,030
Market risk - Risk-weighted assets at beginning 3,888 4,110 3,382
Movement in risk levels(3) (447) (222) 728
Model updates − − −
Methodology and policy − − −
Acquisitions and disposals − − −
Market risk - Risk-weighted assets at end 3,441 3,888 4,110
Operational risk - Risk-weighted assets at beginning 8,503 8,487 8,418
Movement in risk levels 173 16 69
Acquisitions and disposals − − −
Operational risk - Risk-weighted assets at end 8,676 8,503 8,487
Risk-weighted assets at end 64,703 64,235 64,627
(1) Figures are presented on an "all-in" basis.
(2) Calculated based on CET1 risk-weighted assets.
(3) Also includes foreign exchange movement that is not considered material.
The change in the "Model Updates" line reflects revisions to models that follow the Advanced IRB approach for exposures
related to residential mortgages and to retail term loans and credit lines.
Regulatory Capital Ratios
The CET1 capital ratio, determined using the "all-in" methodology, was 9.1% as at July 31, 2014 versus 8.7% as at October
31, 2013.The increase in the CET1 capital ratio was essentially due to net income, net of dividends, and to the issuance of
common shares related mainly to exercised stock options, partly offset by the impacts of the TD Waterhouse Institutional
Services acquisition and of the coming into force of the CVA charge. The Tier 1 and the total capital ratios determined
using the "all-in" methodology were, respectively, 12.0% and 14.8% as at July 31, 2014 versus 11.4% and 15.0% as at October
31, 2013. The change stems essentially from the above-mentioned factors, the removal of ineligible capital instruments and
the $350 million preferred share issuance.
The assets-to-capital multiple was 18.8 as at July 31, 2014 versus 18.4 as at October 31, 2013.
Regulatory Capital and Capital Ratios Under Basel III(1)
(millions of Canadian dollars) As at July 31, 2014 As at October 31, 2013
Common Equity Tier 1 Capital (CET1) 5,876 5,350
Tier 1 Capital 7,774 7,002
Total Regulatory Capital 9,650 9,186
CET1 Risk-Weighted Assets 64,703 61,251
Tier 1 Capital Risk-Weighted Assets 64,972
Total Regulatory Capital Risk-Weighted Assets 65,375
Capital ratios
Common Equity Tier 1 (CET1) 9.1 % 8.7 %
Tier 1 12.0 % 11.4 %
Total 14.8 % 15.0 %
Assets-to-capital multiple 18.8 18.4
(1) Figures are presented on an "all-in" basis except for the assets-to-capital multiple, which is presented in
accordance with the transitional requirements for Basel III, and the October 31, 2013 figures have not been adjusted to
reflect changes in accounting standards.
Dividends
On August 26, 2014, the Board of Directors declared regular dividends on the various series of first preferred shares and a
dividend of 48 cents per common share payable on November 1, 2014 to shareholders of record on September 25, 2014.
RISK MANAGEMENT
The Bank aims to maintain its financial performance by continuing to ensure prudent management and a sound balance between
return and the risks assumed. The Bank views risk as an integral part of its development and the diversification of its
activities and advocates a management approach consistent with its business expansion strategy. The Bank's governance
structure for risk management has remained largely unchanged from that described in the 2013 Annual Report.
Managing risk requires a solid understanding of every type of risk found across the Bank. In addition to providing
assurance that risk levels do not exceed acceptable thresholds, effective risk management can be used to control the
volatility of the Bank's results. Despite the exercise of stringent risk management and the mitigation measures in place,
risk cannot be suppressed entirely, and the residual risks may occasionally cause important losses.
Certain risks are discussed below. For additional information, see the Risk Management and Other Risk Factors sections on
pages 60 to 85 of the 2013 Annual Report as well as Note 5 to the audited annual consolidated financial statements for the
year ended October 31, 2013, which covers the management of risks associated with financial instruments, on pages 127 to
143 of the 2013 Annual Report. Risk management information is also provided in Note 6 to the unaudited interim condensed
consolidated financial statements, which covers loans.
Credit Risk
Credit risk is the risk of a financial loss if an obligor does not fully honour its contractual commitments to the Bank.
Obligors may be borrowers, issuers, counterparties or guarantors. Credit risk is the most significant risk facing the Bank
in the normal course of business.
The amounts in the following table represent the Bank's maximum exposure to credit risk as at the financial reporting date
without taking into account any collateral held or any other credit enhancements. These amounts do not take into account
allowances for credit losses nor amounts pledged as collateral. The table also excludes equity securities.
Gross Credit Risk Exposure Under the Basel II Asset Categories
(millions of Canadian dollars) As at July 31,2014 As at October 31,2013
Drawn Undrawncommitments Repo-styletransactions (1) OTCderivatives Otheroff-balance-sheet items (2) Total Total
Retail
Residential mortgages 35,069 5,319 − − − 40,388 38,414
Qualifying revolving retail 2,620 2,372 − − − 4,992 4,574
Other retail 11,000 1,199 − − 14 12,213 11,976
48,689 8,890 − − 14 57,593 54,964
Non-retail
Corporate 32,975 12,626 8,128 49 2,348 56,126 48,721
Sovereign 18,209 2,855 10,394 166 98 31,722 34,833
Financial institutions 2,411 221 50,878 669 640 54,819 52,108
53,595 15,702 69,400 884 3,086 142,667 135,662
Trading portfolio − − − 9,846 − 9,846 8,074
Securitization 1,223 − − − 2,854 4,077 4,307
Total - Gross Credit Risk 103,507 24,592 69,400 10,730 5,954 214,183 203,007
Standardized Approach 5,628 324 4,741 621 1,003 12,317 9,669
AIRB Approach 97,879 24,268 64,659 10,109 4,951 201,866 193,338
Total - Gross Credit Risk 103,507 24,592 69,400 10,730 5,954 214,183 203,007
(1) Securities purchased under reverse repurchase agreements and sold under repurchase agreements as well as
securities loaned and borrowed.
(2) Letters of guarantee, documentary letters of credit, and securitized assets that represent the Bank's commitment
to make payments in the event that a client cannot meet its financial obligations to third parties.
In order to meet OSFI's mortgage loan disclosure requirements, additional information has been provided in Supplementary
Financial Information for the Third Quarter Ended July 31, 2014 and in Supplementary Regulatory Capital Disclosure for the
Third Quarter Ended July 31, 2014, which are available on the Bank's website at nbc.ca.
To reduce counterparty risk, certain derivative financial instruments traded over the counter are settled directly or
indirectly by central counterparties. The table below shows the distribution of notional amounts with respect to these
financial instruments.
(millions of Canadian dollars) As at July 31, 2014 As at October 31, 2013
OTC-traded OTC-traded
Settled by Not settled Settled by Not settled
Exchange-traded central by central Exchange-traded central by central
contracts counterparties counterparties contracts counterparties counterparties
Interest rate contracts 92,658 250,636 189,014 21,725 86,304 231,335
Foreign exchange contracts 85 − 136,386 207 − 91,206
Equity, commodity and
credit derivative contracts 14,311 726 31,408 12,330 280 27,548
Market Risk
Market risk is the risk of financial loss resulting from adverse movements in underlying market factors. Managing this risk
is a core competency for the Bank in its trading, investing and asset/liability management activities.
The following tables provide a breakdown of the Bank's Consolidated Balance Sheet into financial assets and liabilities by
those that carry market risk and those that do not carry market risk, distinguishing between trading positions whose main
risk measures are VaR and stressed VaR (SVaR) and non-trading positions that use other risk measures.
Reconciliation of Market Risk with Consolidated Balance Sheet Items
(millions of Canadian dollars) As at July 31, 2014
Market risk measures
Balancesheet Trading (1) Non-Trading (2) Not subject to market risk Non-traded risk primary risk sensitivity
Assets
Cash and deposits with financial institutions 5,912 39 5,591 282 Interest rate(3)
Securities
At fair value through profit or loss 45,632 42,956 2,676 − Interest rate(3) and other(4)
Available-for-sale 9,133 − 9,133 − Interest rate(3) and equity(5)
Securities purchased under reverse repurchase
agreements and securities borrowed 22,019 − 22,019 − Interest rate(3)(6)
Loans, net of allowances 94,815 2,581 92,234 − Interest rate(3)
Customers' liability under acceptances 8,584 − 8,584 − Interest rate(3)
Derivative financial instruments 6,086 5,414 672 − Interest rate
Accrued benefit asset 141 − 141 − Other
Other 6,500 − − 6,500
198,822 50,990 141,050 6,782
Liabilities
Deposits 114,944 2,550 112,394 − Interest rate(3)
Acceptances 8,584 − 8,584 − Interest rate(3)
Obligations related to securities sold short 16,249 16,249 − −
Obligations related to securities sold under repurchase
agreements and securities loaned 20,344 − 20,344 − Interest rate(3)(6)
Derivative financial instruments 4,370 4,161 209 − Interest rate
Liabilities related to transferred receivables 16,376 2,580 13,796 − Interest rate(3)
Accrued benefit liability 227 − 227 − Other
Other 5,870 88 − 5,782
Subordinated debt 1,885 − 1,885 − Interest rate(3)
188,849 25,628 157,439 5,782
(1) Trading positions whose main risk measures are VaR and SVaR. For additional information, see the tables on the
following pages as well as the Market Risk Management section in Note 5 to the audited annual consolidated financial
statements as at October 31, 2013.
(2) Non-trading positions that use other risk measures.
(3) For additional information, see the tables on the following pages as well as the Market Risk Management section
in Note 5 to the audited annual consolidated financial statements as at October 31, 2013.
(4) See the Master Asset Vehicles section in Note 5 to the unaudited interim condensed consolidated financial
statements.
(5) The fair value of equity securities classified as available-for-sale is disclosed in Notes 3 and 5 to the
unaudited interim condensed consolidated financial statements.
(6) These instruments are recorded at amortized cost and subject to credit risk for capital management purposes. For
transactions with maturities of more than one day, the interest rate risk is included in the VaR and SVaR measures when
they relate to trading activities.
(millions of Canadian dollars) As at October 31, 2013(1)
Market risk measures
Balancesheet Trading (2) Non-Trading (3) Not subject to market risk Non-traded risk primaryrisk sensitivity
Assets
Cash and deposits with financial institutions 3,596 5 2,806 785 Interest rate(4)
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