Source - RNS
RNS Number : 5903I
National Bank of Canada
31 August 2016
 

 

RNS Number : 5903I

National Bank of Canada

August 31, 2016

 

Regulatory Announcement (Part 2)

 

Q3 2016 Results

National Bank of Canada (the "Bank") announces publication of its Third Quarter 2016 Report to Shareholders. The Third Quarter Results have been uploaded to the National Storage Mechanism and will shortly be available at www.morningstar.co.uk/uk/nsm and is available on the Bank's website at https://www.nbc.ca/en/about-us/investors/investor-relations/quarterly-results.html

Click on, or paste the following link into your web browser, to view the associated PDF document.

http://www.rns-pdf.londonstockexchange.com/rns/5891I_-2016-8-31.pdf 

 

 

INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

 

 

(unaudited)

 

 

Consolidated Balance Sheets

41

Consolidated Statements of Income

42

Consolidated Statements of Comprehensive Income

43

Consolidated Statements of Changes in Equity

44

Consolidated Statements of Cash Flows

45

Notes to the Interim Condensed Consolidated Financial Statements

46



 

 

 

 


CONSOLIDATED BALANCE SHEETS

(unaudited) (millions of Canadian dollars)

 







As at July 31, 2016


As at October 31, 2015













Assets










Cash and deposits with financial institutions






 8,824 


 7,567 












Securities (Notes 4 and 5)










At fair value through profit or loss






 45,527 


 41,997 


Available-for-sale






 14,156 


 14,043 


Held-to-maturity






 2,758 


 − 









 62,441 


 56,040 













Securities purchased under reverse repurchase agreements











and securities borrowed






 14,880 


 17,702 













Loans (Note 6)










Residential mortgage






 47,531 


 43,520 


Personal and credit card






 33,429 


 31,933 


Business and government






 37,650 


 30,954 









 118,610 


 106,407 


Customers' liability under acceptances




 6,959 


 9,400 


Allowances for credit losses






 (780)


 (569)









 124,789 


 115,238 













Other










Derivative financial instruments






 10,943 


 10,842 


Due from clients, dealers and brokers






 235 


 415 


Purchased receivables






 1,553 


 1,438 


Investments in associates and joint ventures (Note 8)




 638 


 831 


Premises and equipment






 1,445 


 1,817 


Goodwill (Note 24)






 1,404 


 1,277 


Intangible assets






 1,142 


 1,059 


Other assets (Note 9)






 1,602 


 1,864 









 18,962 


 19,543 









 229,896 


 216,090 













Liabilities and equity










Deposits (Notes 4 and 10)










Personal






 49,489 


 45,981 


Business and government






 83,590 


 74,441 


Deposit-taking institutions






 5,796 


 8,408 









 138,875 


 128,830 













Other










Acceptances






 6,959 


 9,400 


Obligations related to securities sold short






 12,748 


 17,333 


Obligations related to securities sold under repurchase agreements











and securities loaned






 23,548 


 13,779 


Derivative financial instruments






 7,968 


 7,756 


Due to clients, dealers and brokers






 2,595 


 1,871 


Liabilities related to transferred receivables (Notes 4 and 7)






 19,560 


 19,770 


Other liabilities (Note 11)






 4,612 


 4,474 









 77,990 


 74,383 













Subordinated debt (Note 13)






 1,014 


 1,522 













Equity 










Equity attributable to the Bank's shareholders (Notes 15 and 19)










Preferred shares






 1,650 


 1,023 


Common shares






 2,592 


 2,614 


Contributed surplus






 71 


 67 


Retained earnings






 6,683 


 6,705 


Accumulated other comprehensive income






 217 


 145 









 11,213 


 10,554 


Non-controlling interests (Note 16)






 804 


 801 









 12,017 


 11,355 









 229,896 


 216,090 


The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.



CONSOLIDATED STATEMENTS OF INCOME

(unaudited) (millions of Canadian dollars)

 

  


 Quarter ended July 31


Nine months ended July 31


  


2016 


2015


2016 


 2015


Interest income   










Loans


 993 


 903 


 2,822 


 2,684 


Securities at fair value through profit or loss


 157 


 174 


 476 


 521 


Available-for-sale securities  


 77 


 65 


 244 


 209 


Held-to-maturity securities


 8 


 − 


 11 


 − 


Deposits with financial institutions   


 18 


 7 


 50 


 20 


  


 1,253 


 1,149 


 3,603 


 3,434 


Interest expense  










Deposits  


 358 


 332 


 1,040 


 1,005 


Liabilities related to transferred receivables   


 100 


 105 


 304 


 313 


Subordinated debt


 9 


 15 


 25 


 45 


Other  


 14 


 25 


 47 


 84 


  


 481 


 477 


 1,416 


 1,447 


Net interest income  


 772 


 672 


 2,187 


 1,987 


  










Non-interest income










Underwriting and advisory fees  


 116 


 113 


 285 


 304 


Securities brokerage commissions  


 58 


 66 


 178 


 214 


Mutual fund revenues


 94 


 84 


 266 


 238 


Trust service revenues


 113 


 113 


 336 


 331 


Credit fees


 101 


 99 


 286 


 275 


Card revenues  


 32 


 36 


 89 


 100 


Deposit and payment service charges  


 67 


 62 


 190 


 175 


Trading revenues (losses) (Note 18)


 12 


 62 


 67 


 179 


Gains (losses) on available-for-sale securities, net   


 18 


 29 


 58 


 92 


Insurance revenues, net


 31 


 34 


 85 


 81 


Foreign exchange revenues, other than trading


 19 


 24 


 62 


 67 


Share in the net income of associates and joint ventures   


 6 


 17 


 13 


 17 


Other (Note 8)


 118 


 99 


 169 


 281 


  


 785 


 838 


 2,084 


 2,354 


Total revenues  


 1,557 


 1,510 


 4,271 


 4,341 


Provisions for credit losses (Note 6)


 45 


 56 


 425 


 167 


  


 1,512 


 1,454 


 3,846 


 4,174 


Non-interest expenses










Compensation and employee benefits  


 556 


 557 


 1,605 


 1,643 


Occupancy  


 60 


 58 


 174 


 171 


Technology  


 137 


 121 


 405 


 409 


Communications


 16 


 17 


 51 


 53 


Professional fees  


 66 


 61 


 193 


 168 


Other  


 102 


 92 


 288 


 261 


  


 937 


 906 


 2,716 


 2,705 


Income before income taxes   


 575 


 548 


 1,130 


 1,469 


Income taxes  


 97 


 95 


 181 


 197 


Net income


 478 


 453 


 949 


 1,272 


  










Net income attributable to










Preferred shareholders


 14 


 11 


 41 


 34 


Common shareholders


 446 


 425 


 851 


 1,187 


Bank shareholders


 460 


 436 


 892 


 1,221 


Non-controlling interests


 18 


 17 


 57 


 51 


  


 478 


 453 


 949 


 1,272 


  










Earnings per share (dollars) (Note 21)










   Basic  


 1.32 


 1.29 


 2.52 


 3.61 


   Diluted  


 1.31 


 1.28 


 2.51 


 3.56 


Dividends per common share (dollars)


 0.55 


 0.52 


 1.63 


 1.52 


The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.



 


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited) (millions of Canadian dollars)

 







 Quarter ended July 31


Nine months ended July 31




2016 


 2015


2016 


2015
















Net income


 478 


 453 


 949 


 1,272 


Other comprehensive income, net of income taxes











Items that may be subsequently reclassified to net income












Net foreign currency translation adjustments













Net unrealized foreign currency translation gains (losses) on investments in foreign operations


 54 


 106 


 24 


 124 





Net foreign currency translation (gains) losses on investments in foreign operations













 reclassified to net income


 − 


 − 


 (12)


 − 





Impact of hedging net foreign currency translation gains (losses)


 (33)


 (84)


 (16)


 (114)





Impact of hedging net foreign currency translation (gains) losses reclassified to net income


 − 


 − 


 5 


 − 








 21 


 22 


 1 


 10 




Net change in available-for-sale securities













Net unrealized gains (losses) on available-for-sale securities


 74 


 (14)


 90 


 46 





Net (gains) losses on available-for-sale securities reclassified to net income


 (27)


 (22)


 (61)


 (84)








 47 


 (36)


 29 


 (38)




Net change in cash flow hedges













Net gains (losses) on derivative financial instruments designated as cash flow hedges


 13 


 (43)


 57 


 (17)





Net (gains) losses on designated derivative financial instruments reclassified to net income


 (6)


 (3)


 (13)


 (9)








 7 


 (46)


 44 


 (26)




Share in the other comprehensive income of associates and joint ventures


 − 


 (1)


 1 


 2 



Items that will not be subsequently reclassified to net income












Remeasurements of pension plans and other post-employment benefit plans


 (86)


 16 


 (223)


 (6)




Net fair value change attributable to the credit risk on financial liabilities designated at













fair value through profit or loss


 (4)


 − 


 (44)


 − 








 (90)


 16 


 (267)


 (6)


Total other comprehensive income, net of income taxes


 (15)


 (45)


 (192)


 (58)


Comprehensive income


 463 


 408 


 757 


 1,214 


Comprehensive income attributable to











Bank shareholders


 442 


 382 


 697 


 1,160 



Non-controlling interests


 21 


 26 


 60 


 54 





 463 


 408 


 757 


 1,214 


 

income taxes - other comprehensive income

 

The following table presents the income tax expense or recovery for each component of other comprehensive income.

 





 Quarter ended July 31


Nine months ended July 31




2016 


2015


2016 


 2015


Net foreign currency translation adjustments











Net unrealized foreign currency translation gains (losses) on investments in foreign operations

 1 


 4 


 2 


 6 



Net foreign currency translation (gains) losses on investments in foreign operations












reclassified to net income


 − 


 − 


 (2)


 − 



Impact of hedging net foreign currency translation gains (losses)


 (6)


 (20)


 (7)


 (20)



Impact of hedging net foreign currency translation (gains) losses reclassified to net income


 − 


 − 


 2 


 − 






 (5)


 (16)


 (5)


 (14)


Net change in available-for-sale securities











Net unrealized gains (losses) on available-for-sale securities


 27 


 (4)


 33 


 19 



Net (gains) losses on available-for-sale securities reclassified to net income


 (10)


 (8)


 (22)


 (31)






 17 


 (12)


 11 


 (12)


Net change in cash flow hedges











Net gains (losses) on derivative financial instruments designated as cash flow hedges


 4 


 (16)


 20 


 (7)



Net (gains) losses on designated derivative financial instruments reclassified to net income


 (1)


 (1)


 (4)


 (3)






 3 


 (17)


 16 


 (10)


Remeasurements of pension plans and other post-employment benefit plans


 (31)


 5 


 (81)


 (3)


Net fair value change attributable to the credit risk on financial liabilities designated at











fair value through profit or loss


 (2)


 − 


 (16)


 − 






 (18)


 (40)


 (75)


 (39)


The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.







CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(unaudited) (millions of Canadian dollars)

 




Nine months ended July 31




2016 


2015 









Preferred shares at beginning (Note 15)


 1,023 


 1,223 


Issuance of Series 34 and 36 preferred shares


 800 


 − 


Redemption of Series 16 and 20 preferred shares for cancellation


 (173)


 (200)


Preferred shares at end


 1,650 


 1,023 









Common shares at beginning


 2,614 


 2,293 


Issuances of common shares







Stock Option Plan


 31 


 35 


Impact of shares purchased or sold for trading


 (53)


 (15)


Common shares at end


 2,592 


 2,313 









Contributed surplus at beginning


 67 


 52 


Stock option expense (Note 19)


 9 


 15 


Stock options exercised


 (4)


 (4)


Other


 (1)


 (1)


Contributed surplus at end


 71 


 62 









Retained earnings at beginning


 6,705 


 5,850 


Net income attributable to the Bank's shareholders


 892 


 1,221 


Dividends (Note 15)







Preferred shares


 (38)


 (34)



Common shares


 (550)


 (501)


Premium paid on preferred shares redeemed for cancellation


 (3)


 − 


Share issuance expenses


 (11)


 − 


Remeasurements of pension plans and other post-employment benefit plans


 (223)


 (6)


Net fair value change attributable to the credit risk on financial liabilities designated at fair value through profit or loss


 (44)


 − 


Impact of a financial liability resulting from put options written to non-controlling interests


 (45)


 (30)


Retained earnings at end


 6,683 


 6,500 









Accumulated other comprehensive income at beginning


 145 


 289 


Net foreign currency translation adjustments


 1 


 10 


Net change in unrealized gains (losses) on available-for-sale securities


 29 


 (38)


Net change in gains (losses) on cash flow hedges


 41 


 (29)


Share in the other comprehensive income of associates and joint ventures


 1 


 2 


Accumulated other comprehensive income at end


 217 


 234 









Equity attributable to the Bank's shareholders


 11,213 


 10,132 









Non-controlling interests at beginning


 801 


 795 


Net income attributable to non-controlling interests


 57 


 51 


Other comprehensive income attributable to non-controlling interests


 3 


 3 


Distributions to non-controlling interests


 (57)


 (65)


Non-controlling interests at end


 804 


 784 









Equity


 12,017 


 10,916 









 

accumulated other comprehensive income

 



As at July 31, 2016


As at July 31, 2015









Accumulated other comprehensive income






Net foreign currency translation adjustments


 5 


 7 


Net unrealized gains (losses) on available-for-sale securities


 41 


 130 


Net gains (losses) on instruments designated as cash flow hedges


 165 


 94 


Share in the other comprehensive income of associates and joint ventures


 6 


 3 




 217 


 234 


The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.







CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited) (millions of Canadian dollars)

 


  


Nine months ended July 31


  


 2016 


 2015 


Cash flows from operating activities






Net income  


 949 


 1,272 


Adjustments for







Provisions for credit losses


 425 


 167 



Amortization of premises and equipment and intangible assets


 312 


 196 



Impairment losses on intangible assets


 − 


 46 



Write-off of an equity interest in an associate (Note 8)


 164 


 − 



Gain on the revaluation of the previously held equity interest in Advanced Bank of Asia Limited (Note 24)


 (41)


 − 



Gain on the disposal of shares of Fiera Capital Corporation


 − 


 (34)



Deferred taxes


 (74)


 21 



Translation adjustment on foreign currency denominated subordinated debt


 − 


 1 



Losses (gains) on sales of available-for-sale securities, net


 (62)


 (104)



Impairment losses on available-for-sale securities  


 4 


 12 



Share in the net income of associates and joint ventures


 (13)


 (17)



Stock option expense


 9 


 15 


Change in operating assets and liabilities







Securities at fair value through profit or loss


 (3,530)


 532 



Securities purchased under reverse repurchase agreements and securities borrowed


 2,822 


 5,112 



Loans, net of securitization


 (11,873)


 (4,599)



Deposits


 9,076 


 7,723 



Obligations related to securities sold short


 (4,585)


 (1,124)



Obligations related to securities sold under repurchase agreements







   and securities loaned


 9,769 


 (2,083)



Derivative financial instruments, net


 111 


 (1,491)



Due from and to clients, dealers and brokers, net


 904 


 160 



Purchased receivables


 (115)


 (579)



Interest and dividends receivable and interest payable


 (31)


 (37)



Current tax assets and liabilities


 160 


 (120)



Other items


 79 


 (1,654)



  


 4,460 


 3,415 


Cash flows from financing activities






Issuance of preferred shares


 800 


 − 


Redemption of preferred shares for cancellation


 (176)


 (200)


Issuance of common shares, net of the impact of shares purchased for trading


 (26)


 16 


Redemption of subordinated debt


 (500)


 (350)


Share issuance expenses


 (11)


 − 


Dividends paid


 (585)


 (534)


Distributions to non-controlling interests


 (57)


 (65)



  


 (555)


 (1,133)


Cash flows from investing activities






Acquisition of Advanced Bank of Asia Limited (Note 24)


 (119)


 − 


Disposal of shares of Fiera Capital Corporation


 − 


 114 


Acquisition of an equity interest in NSIA Participations


 − 


(116)


Purchases of available-for-sale securities


 (4,967)


 (6,921)


Maturities of available-for-sale securities  


 601 


 489 


Sales of available-for-sale securities


 4,647 


 3,617 


Purchases of held-to-maturity securities


 (2,755)


 − 


Net change in tangible assets leased under operating leases


 276 


 (1,551)


Net change in premises and equipment


 (108)


 (73)


Net change in intangible assets


 (186)


 (171)



  


 (2,611)


 (4,612)


Impact of currency rate movements on cash and cash equivalents


 (37)


 800 


Increase (decrease) in cash and cash equivalents


 1,257 


 (1,530)


Cash and cash equivalents at beginning  


 7,567 


 8,086 


Cash and cash equivalents at end(1)


 8,824 


 6,556 


Supplementary information about cash flows from operating activities






Interest paid


 1,478 


 1,574 


Interest and dividends received


 3,633 


 3,493 


Income taxes paid


 215 


 208 


The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.






 

(1)    This item is the equivalent of Consolidated Balance Sheet item Cash and deposits with financial institutions. It includes an amount of $1.2 billion as at July 31, 2016 ($1.3 billion as at October 31, 2015) for which there are restrictions. In addition, $3 million was held in escrow as at July 31, 2016 ($3 million as at October 31, 2015).


NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) (millions of Canadian dollars)

 











Note 1

Basis of Presentation

46 


Note 13

Subordinated Debt

64 



Note 2

Changes in Accounting Policies and Estimates

47 


Note 14

Hedging Activities

65 



Note 3

Fair Value of Financial Instruments

49 


Note 15

Share Capital

66 



Note 4

Financial Instruments Designated at Fair Value Through Profit or Loss

57 


Note 16

Non-Controlling Interests

67 



Note 5

Securities

58 


Note 17

Capital Disclosure

68 



Note 6

Loans

59 


Note 18

Trading Activity Revenues

69 



Note 7

Financial Assets Transferred But Not Derecognized

62 


Note 19

Share-Based Payments

69 



Note 8

Associates and Joint Ventures

63 


Note 20

Employee Benefits - Pension Plans and Other Post-Employment Benefits

70 



Note 9

Other Assets

63 


Note 21

Earnings Per Share

71 



Note 10

Deposits

63 


Note 22

Structured Entities

72 



Note 11

Other Liabilities

64 


Note 23

Segment Disclosures

74 



Note 12

Restructuring

64 


Note 24

Acquisition

75 





















 

 

NOTE 1 - Basis of Presentation

 

On August 30, 2016, the Board of Directors authorized the publication of the Bank's unaudited interim condensed consolidated financial statements (the consolidated financial statements) for the quarter ended July 31, 2016.

 

The Bank's consolidated financial statements are 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). None of the OSFI accounting requirements are exceptions to IFRS.

 

These consolidated financial statements have been prepared in accordance with IAS 34 - Interim Financial Reporting using the same accounting policies described in Note 1 to the audited annual consolidated financial statements for the year ended October 31, 2015, except the changes described in Note 2. Future accounting policy changes are also presented in Note 2. Since these interim consolidated financial statements do not include all of the annual financial statement disclosures required under IFRS, they should be read in conjunction with the audited annual consolidated financial statements and accompanying notes for the year ended October 31, 2015.

 

As at November 1, 2015, the Bank reclassified certain amounts in the Consolidated Statement of Income to better reflect the nature of reported revenues in the Personal and Commercial segment. Accordingly, for the quarter ended July 31, 2015, an amount of $11 million presented in the Non-interest income - Credit fees item was reclassified to Net interest income ($30 million for the nine-month period ended July 31, 2015). This reclassification had no impact on Net income.

 

Unless otherwise indicated, all amounts are presented in Canadian dollars, which is the Bank's functional and presentation currency.

 


NOTE 2 - CHANGES IN ACCOUNTING POLICIES AND ESTIMATES

 

Accounting Policy Changes

 

IFRS 9 - Financial Instruments (own credit risk)

On February 1, 2016, the Bank early adopted, on a prospective basis, the own credit risk provisions set out in IFRS 9 - Financial Instruments. According to these provisions, changes in the fair value of financial liabilities designated at fair value through profit or loss that are attributable to changes in an entity's own credit risk must be recognized in Other comprehensive income unless these changes offset the amounts recognized in Net income. Fair value changes not attributable to an entity's own risk continue to be recognized in Non-interest income in the Consolidated Statement of Income. The amounts recognized in Other comprehensive income will not be subsequently reclassified to Net income. For the interim and annual periods prior to February 1, 2016, changes in the fair value of financial liabilities designated at fair value through profit or loss had been recognized in Non-interest income in the Consolidated Statement of Income.

 

Held-to-Maturity Securities

During the quarters ended April 30, 2016 and July 31, 2016, the Bank classified securities in the held-to-maturity category. Held-to-maturity securities are financial assets with fixed or determinable payments and a fixed maturity that the Bank intends and is able to hold until maturity. The Bank accounts for held-to-maturity securities transactions on the trade date, and the related transaction costs are capitalized. These securities are initially recognized at fair value. In subsequent periods, they are recognized at amortized cost using the effective interest rate method, less any impairment loss measured using the same impairment model used for loans. Interest income and the amortization of premiums and discounts on these securities are recognized in Net interest income in the Consolidated Statement of Income.

 

Accounting Estimate Changes

 

Impairment of Available-for-Sale Securities

During the quarter ended January 31, 2016, following an assessment of market conditions, the Bank revisited the definition of the terms "significant" and "prolonged" in order to provide a better estimate of impairment losses, when applicable, on the equity securities classified in available-for-sale securities. As defined in Note 1 to the audited annual consolidated financial statements for the year ended October 31, 2015, the term "significant" represents a decline in fair value of more than 30% over a consecutive period of at least six months, and the term "prolonged" represents a decline in fair value of more than 5% over a consecutive period of at least 12 months. Considering the facts and circumstances, the definitions were changed to the following: a decline in fair value of more than 40% over a consecutive period of at least six months for the term "significant" and a decline in fair value of more than 5% over a consecutive period of at least 18 months for the term "prolonged." This change in definitions, effective November 1, 2015, is considered a change in accounting estimate and is therefore applied prospectively. This change had the effect of decreasing the impairment losses on the equity securities classified in available-for-sale securities from $9 million to $3 million for the quarter ended January 31, 2016.

 

Sectoral Provision on Non-Impaired Loans

During the quarter ended April 30, 2016, following a significant increase in the credit risk of a group of loans of a specific industry, the Bank recorded a sectoral provision on non-impaired loans. When the credit risk of a loan portfolio with similar credit risk characteristics or of a group of loans of a specific industry increases significantly but the loans have yet to be individually identified as impaired, a sectoral provision is established collectively for the entire loan portfolio or loan group. This sectoral provision reflects the impairment losses that the Bank has incurred as a result of events that have occurred but where the individual loss has not been identified.

 



NOTE 2 - CHANGES IN ACCOUNTING POLICies AND ESTIMATES (cont.)

 

Future Accounting Policy Changes

 

The Bank is currently assessing the impact that the adoption of the following standards will have on its consolidated financial statements.

 

Effective Date - Early Adoption on November 1, 2017

IFRS 9 - Financial Instruments

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.

 

IFRS 9 also introduces a new, single 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. This model requires the recognition of 12-month expected credit losses as of the initial recognition date of a financial asset and recognition of lifetime expected losses if the financial instrument's credit risk has increased significantly since initial recognition. In December 2015, the Basel Committee on Banking Supervision issued Guidance on Credit Risk and Accounting for Expected Credit Losses. In June 2016, OSFI issued the final guideline on IFRS 9 Financial Instruments and Disclosures, setting out its expectations regarding IFRS 9 application.

 

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.

 

The IASB is requiring IFRS 9 to be applied as of November 1, 2018 and is permitting early adoption. On January 9, 2015, OSFI issued a final version of Early Adoption of IFRS 9 Financial Instruments for Domestic Systemically Important Banks, stating, however, that it expects Domestic Systemically Important Banks, a group that includes the Bank, to adopt IFRS 9 as of November 1, 2017. In general, IFRS 9 is to be applied retrospectively.

 

The Bank will therefore adopt the IFRS 9 provisions as of November 1, 2017. Its first financial statements presented in accordance with these provisions will be its unaudited interim condensed consolidated financial statements for the quarter ending January 31, 2018 and will include an opening consolidated balance sheet as at November 1, 2017.

 

In preparation for the adoption of IFRS 9, the Bank has established an enterprise-wide project, assembled a dedicated team, and established a formal governance structure. It has started implementing a detailed project plan comprising key activities and a corresponding schedule. The project is proceeding according to schedule. As interpretations of the new standard are still evolving, the Bank continues to monitor the interpretations and revisit its preliminary conclusions.

 

Effective Date - November 1, 2018

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.

 

At its meeting on July 22, 2015, the IASB unanimously confirmed its proposal to defer the effective date of IFRS 15 to fiscal years beginning on or after January 1, 2018. Early application is still permitted.

 

Effective Date - November 1, 2019

IFRS 16 - Leases

In January 2016, the IASB issued a new standard, IFRS 16 - Leases. The new standard requires lessees to recognize most leases on the balance sheet using a single model, thereby eliminating the distinction between operating and finance leases. Lessor accounting, however, remains similar to current accounting practice, and the distinction between operating and finance leases is retained. Early application is permitted if IFRS 15 - Revenue from Contracts with Customers has also been applied.


NOTE 3 - Fair Value of Financial Instruments

 

Fair Value and Carrying Value of Financial Instruments by Category

 

Financial assets and financial liabilities are recognized on the Consolidated Balance Sheet at fair value or at amortized cost in accordance with the categories set out in the accounting framework for financial instruments.

 










  


As at July 31, 2016







Carrying value and fair value


Carrying value

  


Fair value


Total

carrying

value


Total

fair

value







Financial instruments classified

as at fair value through profit or loss


Financial instruments

designated

at fair value

through profit

or loss


Available-

for-sale


Financial

instruments at

amortized cost

  


Financial

instruments at

amortized cost
















  








Financial assets









  









Cash and deposits with financial









  










institutions


 − 


 − 


 − 


 8,824 

  


 8,824 


 8,824 


 8,824 














  









Securities


 43,867 


 1,660 


 14,156 


 2,758 

  


 2,804 


 62,441 


 62,487 














  









Securities purchased under reverse









  










repurchase agreements and









  










securities borrowed


 − 


 460 


 − 


 14,420 

  


 14,420 


 14,880 


 14,880 














  









Loans and acceptances


 5,871 


 134 


 − 


 118,784 

  


 119,699 


 124,789 


 125,704 














  









Other









  









Derivative financial instruments


 10,943 


 − 


 − 


 − 

  


 − 


 10,943 


 10,943 



Due from clients, dealers and brokers


 − 


 − 


 − 


 235 

  


 235 


 235 


 235 



Purchased receivables


 − 


 − 


 − 


 1,553 

  


 1,553 


 1,553 


 1,553 



Other assets


 − 


 − 


 − 


 428 

  


 428 


 428 


 428 














  








Financial liabilities









  









Deposits


 − 


 4,133 




 134,742 

 (1)


 135,622 


 138,875 


 139,755 














  









Other









  









Acceptances


 − 


 − 




 6,959 

  


 6,959 


 6,959 


 6,959 



Obligations related to securities sold short


 12,748 


 − 




 − 

  


 − 


 12,748 


 12,748 



Obligations related to securities sold under









  










repurchase agreements and









  










securities loaned


 − 


 − 




 23,548 

  


 23,548 


 23,548 


 23,548 



Derivative financial instruments


 7,968 


 − 




 − 

  


 − 


 7,968 


 7,968 



Due to clients, dealers and brokers


 − 


 − 




 2,595 

  


 2,595 


 2,595 


 2,595 



Liabilities related to transferred receivables


 − 


 6,097 




 13,463 

  


 13,505 


 19,560 


 19,602 



Other liabilities


 44 


 − 




 2,287 

  


 2,301 


 2,331 


 2,345 














  









Subordinated debt


 − 


 − 




 1,014 

  


 1,014 


 1,014 


 1,014 


 

(1)    Including embedded derivative financial instruments.

 

 



NOTE 3 - FAIR VALUE OF FINANCIAL INSTRUMENTS (cont.)

 










  


As at October 31, 2015







Carrying value and fair value


Carrying value

  


Fair value


Total

carrying

value


Total

fair

value







Financial instruments classified

as at fair value through profit or loss


Financial instruments

designated

at fair value

through profit

or loss


Available-

for-sale


Financial

instruments at

amortized cost

  


Financial

instruments at

amortized cost
















  






  


Financial assets









  






  



Cash and deposits with financial









  






  




institutions


 − 


 − 


 − 


 7,567 

  


 7,567 


 7,567 


 7,567 














  






  



Securities


 39,753 


 2,244 


 14,043 


 − 

  


 − 


 56,040 


 56,040 














  






  



Securities purchased under reverse









  






  




repurchase agreements and









  






  




securities borrowed


 − 


 295 


 − 


 17,407 

  


 17,407 


 17,702 


 17,702 














  






  



Loans and acceptances


 4,413 


 152 


 − 


 110,673 

  


 111,407 


 115,238 


 115,972 














  






  



Other









  






  



Derivative financial instruments


 10,842 


 − 


 − 


 − 

  


 − 


 10,842 


 10,842 



Due from clients, dealers and brokers


 − 


 − 


 − 


 415 

  


 415 


 415 


 415 



Purchased receivables


 − 


 − 


 − 


 1,438 

  


 1,438 


 1,438 


 1,438 



Other assets


 − 


 − 


 − 


 459 

  


 459 


 459 


 459 














  






  


Financial liabilities









  






  



Deposits


 − 


 3,053 




 125,777 

 (1)


 126,247 


 128,830 


 129,300 














  






  



Other









  






  



Acceptances


 − 


 − 




 9,400 

  


 9,400 


 9,400 


 9,400 



Obligations related to securities sold short


 17,333 


 − 




 − 

  


 − 


 17,333 


 17,333 



Obligations related to securities sold under









  






  




repurchase agreements and









  






  




securities loaned


 − 


 − 




 13,779 

  


 13,779 


 13,779 


 13,779 



Derivative financial instruments


 7,756 


 − 




 − 

  


 − 


 7,756 


 7,756 



Due to clients, dealers and brokers


 − 


 − 




 1,871 

  


 1,871 


 1,871 


 1,871 



Liabilities related to transferred receivables


 − 


 6,402 




 13,368 

  


 13,427 


 19,770 


 19,829 



Other liabilities


 50 


 − 




 2,227 

  


 2,227 


 2,277 


 2,277 














  






  



Subordinated debt


 − 


 − 




 1,522 

  


 1,526 


 1,522 


 1,526 


 

(1)    Including embedded derivative financial instruments.

 

Establishing Fair Value

 

The fair value of a financial instrument is the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction in the principal market at the measurement date under current market conditions (i.e., an exit price).

 

Unadjusted quoted prices in active markets provide the best evidence of fair value. When there is no quoted price in an active market, the Bank applies other valuation techniques that maximize the use of relevant observable inputs and that minimize the use of unobservable inputs. Such valuation techniques include the following: using information available from recent market transactions, referring to the current fair value of a comparable financial instrument, applying discounted cash flow analysis, applying option pricing models, or relying on any other valuation technique that is commonly used by market participants and has proven to yield reliable estimates. Judgment is required when applying many of the valuation techniques.

 

Fair value is established in accordance with a rigorous control framework. The Bank has policies and procedures that govern the process for determining fair value. The Bank's valuation governance structure has remained largely unchanged from that described in Note 3 to the audited annual consolidated financial statements for the year ended October 31, 2015. The valuation techniques used to determine the fair value of financial assets and liabilities are also described in this note, and no significant changes have been made to the valuation techniques.

 

Financial Instruments Recorded at Fair Value on the Consolidated Balance Sheet

 

Hierarchy of Fair Value Measurements

IFRS establishes a fair value hierarchy that classifies the inputs used in financial instrument fair value measurement techniques according to three levels. This fair value hierarchy requires observable market inputs to be used whenever such inputs exist. According to the hierarchy, the highest level of inputs are unadjusted quoted prices in active markets for identical instruments and the lowest level of inputs are unobservable inputs. If inputs from different levels of the hierarchy are used, the financial instrument is classified in the same level as the lowest level input that is significant to the fair value measurement. For additional information, see Note 3 to the audited annual consolidated financial statements for the year ended October 31, 2015.

 

Transfers of financial instruments between Levels 1 and 2 and transfers to (or from) Level 3 are deemed to have taken place at the beginning of the quarter in which the transfer occurred. Significant transfers can occur between the fair value hierarchy levels due to new information on inputs used to determine fair value and the observable nature of those inputs.

 

During the quarter ended July 31, 2016, $126 million in securities classified as at fair value through profit or loss and $20 million in obligations related to securities sold short were transferred from Level 2 to Level 1 resulting from changing market conditions ($42 million in securities classified as at fair value through profit or loss and no significant transfer of obligations related to securities sold short for the quarter ended July 31, 2015). During the nine months ended July 31, 2016, $208 million in securities classified as at fair value through profit or loss and $66 million in obligations related to securities sold short were transferred from Level 2 to Level 1 resulting from changing market conditions ($112 million in securities classified as at fair value through profit or loss and no significant transfer of obligations related to securities sold short for the nine months ended July 31, 2015). In addition, during the nine-month periods ended July 31, 2016 and 2015, other financial instruments were transferred to (or from) Level 3 due to changes in the availability of observable market inputs resulting from changing market conditions.

 

The following tables show financial instruments recorded at fair value on the Consolidated Balance Sheet according to the fair value hierarchy.

 









As at July 31, 2016








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


 3,197 


 5,148 


 − 


 8,345 






Provinces


 − 


 9,935 


 − 


 9,935 






Municipalities and school boards


 − 


 297 


 − 


 297 






U.S. Treasury, other U.S. agencies and other foreign governments


 2,317 


 440 


 − 


 2,757 





Other debt securities


 − 


 2,985 


 − 


 2,985 





Equity securities


 20,289 


 882 


 37 


 21,208 








 25,803 


 19,687 


 37 


 45,527 




Available-for-sale













Securities issued or guaranteed by














Canada


 213 


 6,030 


 − 


 6,243 






Provinces


 − 


 4,718 


 − 


 4,718 






Municipalities and school boards


 − 


 389 


 − 


 389 






U.S. Treasury, other U.S. agencies and other foreign governments


 1,119 


 27 


 − 


 1,146 





Other debt securities


 − 


 992 


 31 


 1,023 





Equity securities


 209 


 158 


 270 


 637 








 1,541 


 12,314 


 301 


 14,156 



Securities purchased under reverse repurchase agreements and












securities borrowed


 − 


 460 


 − 


 460 

















Loans and acceptances


 − 


 6,005 


 − 


 6,005 

















Other












Derivative financial instruments


 125 


 10,680 


 138 


 10,943 







 27,469 


 49,146 


 476 


 77,091 
















Financial liabilities











Deposits


 − 


 4,507 


 11 


 4,518 

















Other












Obligations related to securities sold short


 6,432 


 6,316 


 − 


 12,748 




Derivative financial instruments


 136 


 7,705 


 127 


 7,968 




Liabilities related to transferred receivables


 − 


 6,097 


 − 


 6,097 




Other liabilities


 − 


 44 


 − 


 44 







 6,568 


 24,669 


 138 


 31,375 




 

NOTE 3 - FAIR VALUE OF FINANCIAL INSTRUMENTS (cont.)

 









As at October 31, 2015








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


 1,969 


 6,647 


 − 


 8,616 






Provinces


 − 


 10,359 


 − 


 10,359 






Municipalities and school boards


 − 


 789 


 − 


 789 






U.S. Treasury, other U.S. agencies and other foreign governments


 326 


 866 


 − 


 1,192 





Other debt securities


 − 


 3,264 


 − 


 3,264 





Equity securities


 17,145 


 611 


 21 


 17,777 








 19,440 


 22,536 


 21 


 41,997 




Available-for-sale













Securities issued or guaranteed by














Canada


 283 


 6,184 


 − 


 6,467 






Provinces


 − 


 4,676 


 − 


 4,676 






Municipalities and school boards


 − 


 428 


 − 


 428 






U.S. Treasury, other U.S. agencies and other foreign governments


 904 


 25 


 − 


 929 





Other debt securities


 − 


 913 


 30 


 943 





Equity securities


 225 


 144 


 231 


 600 








 1,412 


 12,370 


 261 


 14,043 



Securities purchased under reverse repurchase agreements and












securities borrowed


 − 


 295 


 − 


 295 

















Loans and acceptances


 − 


 4,565 


 − 


 4,565 

















Other












Derivative financial instruments


 95 


 10,730 


 17 


 10,842 







 20,947 


 50,496 


 299 


 71,742 
















Financial liabilities











Deposits


 − 


 3,184 


 20 


 3,204 

















Other












Obligations related to securities sold short


 11,456 


 5,877 


 − 


 17,333 




Derivative financial instruments


 42 


 7,659 


 55 


 7,756 




Liabilities related to transferred receivables


 − 


 6,402 


 − 


 6,402 




Other liabilities


 − 


 50 


 − 


 50 







 11,498 


 23,172 


 75 


 34,745 


 

Financial Instruments Classified in Level 3

 

The Bank classifies financial instruments in Level 3 when the valuation technique is based on at least one significant input that is not observable in the markets. The Bank maximizes the use of observable inputs to determine the fair value of financial instruments.

 

Valuation Techniques Applied to Financial Instruments Classified in Level 3 

Other Restructured Notes of the Master Asset Vehicle (MAV) I and MAV II Conduits

The fair value of these financial instruments is determined based on the net asset value, which represents the estimated value of a security based on valuations received from the administrator of the conduits.

 

Equity Securities and Other Debt Securities

The fair value of these financial instruments is determined primarily based on the net asset value, which represents the estimated value of a security based on valuations received from investment or fund managers or the general partners of the limited partnerships. Fair value can also be determined using internal valuation techniques adjusted for risk factors related to the financial instruments and for economic conditions.



Derivative Financial Instruments

To determine the fair value of over-the-counter (OTC) derivative financial instruments, the Bank uses well-established valuation techniques that incorporate assumptions based primarily on observable market inputs such as current market prices and the contractual prices of the underlying instruments, the time value of money, interest rate yield curves, credit curves, currency rates as well as price and rate volatility factors. The Bank also includes the Credit Valuation Adjustment (CVA), the Debit Valuation Adjustment (DVA) and the Funding Valuation Adjustment (FVA).

 

Structured Deposit Notes

The fair value of structured deposit notes is established using valuation models that maximize the use of observable inputs when available, such as benchmark indices, and also incorporates the DVA. When fair value is determined using option pricing models, the valuation techniques are similar to those described for derivative financial instruments.

 

The following tables show the significant unobservable inputs used for the fair value measurements of financial instruments classified in Level 3 of the hierarchy.

 













As at July 31, 2016










Primary

valuation techniques


Significant

unobservable inputs


Range of input values





Fair value




Low



High



Financial assets















Securities
















Other restructured notes of the


















MAV I and MAV II conduits


 6 


Net asset value


Net asset value





100 

%






















Equity securities and other debt securities


 332 


Net asset value


Net asset value





100 

%










Market comparable


EV/EBITDA(1) multiple


11 

x


14 

x










Price-based model


Price equivalent


71 

%


121 

%





















Other
















Derivative financial instruments


















Interest rate contracts


 2 


Discounted cash flows


Discount rate





2.20

%
























Equity contracts


 136 


Option pricing model


Long-term volatility


%


57 

%












Market correlation


(59)

%


86 

%








 476 






























Financial liabilities















Deposits
















Structured deposit notes


 11 


Option pricing model


Long-term volatility


10 

%


57 

%












Market correlation


(57)

%


86 

%





















Other
















Derivative financial instruments


















Equity contracts


 127 


Option pricing model


Long-term volatility


%


55 

%












Market correlation


(59)

%


86 

%







 138 












 

(1)    EV/EBITDA means Enterprise Value/Earnings Before Interest, Taxes, Depreciation and Amortization.

 

 



 

NOTE 3 - Fair Value of Financial Instruments (cont.)

 













As at October 31, 2015








Fair value


Primary

valuation techniques


Significant

unobservable inputs


Range of input values








Low



High



Financial assets















Securities
















Other restructured notes of the


















MAV I and MAV II conduits


 7 


Net asset value


Net asset value





100 

%






















Equity securities and other debt securities


 275 


Discounted cash flows


Credit spread


425 

Bps(1)


445 

Bps(1)










Net asset value


Net asset value





100 

%










Market comparable


EV/EBITDA(2) multiple


4.2

x


13 

x










Price-based model


Price equivalent


80 

%


95 

%





















Other
















Derivative financial instruments


















Interest rate contracts


 2 


Discounted cash flows


Discount rate





2.20 

%
























Equity contracts


 15 


Option pricing model


Long-term volatility


%


49 

%












Market correlation


(50)

%


77 

%








 299 






























Financial liabilities















Deposits
















Structured deposit notes


 20 


Option pricing model


Long-term volatility


10 

%


59 

%












Market correlation


(51)

%


85 

%





















Other
















Derivative financial instruments


















Equity contracts


 55 


Option pricing model


Long-term volatility


%


67 

%












Market correlation


(50)

%


85 

%







 75 












 

(1)    Bps or basis point is a unit of measure equal to 0.01%.

(2)    EV/EBITDA means Enterprise Value/Earnings Before Interest, Taxes, Depreciation and Amortization.

 



 

Significant Unobservable Inputs Used for Fair Value Measurements of Financial Instruments Classified in Level 3

Net Asset Value

Net asset value is the estimated value of a security based on valuations received from the investment or fund managers, the administrators of the conduits or the general partners of the limited partnerships. The net asset value of a fund is the total fair value of assets less liabilities.

 

Credit Spread

Credit spread is the difference between a benchmark interest rate and the interest rate required by market participants to accept the lower credit quality of the measured financial asset. The interest rate on certain government bonds with a high credit rating and a maturity similar to the measured asset can often be considered a benchmark interest rate. An increase (decrease) in this unobservable input generally results in a decrease (increase) in fair value.

 

EV/EBITDA (Enterprise Value/Earnings Before Interest, Taxes, Depreciation and Amortization) Multiple and Price Equivalent

Private equity valuation inputs include earnings multiples, which are determined based on comparable companies, and a higher multiple will translate into a higher fair value. Price equivalent is a percentage of the market price based on the liquidity of the security.

 

Discount Rate

When discounted cash flow methods are used, the discount rate is the input used to bring future cash flows to their present value. A higher discount rate will translate into a lower fair value.

 

Long-Term Volatility

Volatility is a measure of the expected future variability of market prices. Volatility is generally observable in the market through options prices. However, the long-term volatility of options with a longer maturity might not be observable. An increase (decrease) in long-term volatility is generally associated with an increase (decrease) in long-term correlation. Higher long-term volatility may increase or decrease an instrument's fair value depending on its terms.

 

Market Correlation

Correlation is a measure of the inter-relationship between two different variables. A positive correlation means that the variables tend to move in the same direction; a negative correlation means that the variables tend to move in opposite directions. Correlation is used to measure financial instruments whose future returns depend on several variables. Changes in correlation will either increase or decrease a financial instrument's fair value depending on the terms of its contractual payout.

 

Sensitivity Analysis of Financial Instruments Classified in Level 3

The Bank performs sensitivity analyses for the fair value measurements of financial instruments classified in Level 3, substituting unobservable inputs with one or more reasonably possible alternative assumptions.

 

For the other restructured notes of the MAV I and MAV II conduits classified in Level 3, the most significant input used to determine fair value is net asset value. As at July 31, 2016 and as at October 31, 2015, the Bank varies the values used within a range that could result in a less-than $1 million increase or decrease in fair value.

 

For equity securities and other debt securities, the Bank varies significant unobservable inputs such as net asset values, credit spreads, or EV/EBITDA multiples and price equivalents, and establishes a reasonable fair value range that could result in a $44 million increase or decrease in the fair value recorded as at July 31, 2016 (a $36 million increase or decrease as at October 31, 2015).

 

For derivative financial instruments and embedded derivatives related to structured deposit notes, the Bank varies long-term volatility and market correlation inputs and establishes a reasonable fair value range. As at July 31, 2016, for derivative financial instruments, the net fair value could result in a $4 million increase or decrease ($11 million increase or decrease as at October 31, 2015), whereas for structured deposit notes, fair value could result in a less-than $1 million increase or decrease ($4 million increase or decrease as at October 31, 2015).

 

 

 

 


NOTE 3 - Fair Value of Financial Instruments (cont.)

 

Change in the Fair Value of Financial Instruments Classified in Level 3

The Bank may hedge the fair value of financial instruments classified in the various levels through offsetting hedge positions. Gains and losses for financial instruments classified in Level 3 presented in the following tables do not reflect the inverse gains and losses on financial instruments used for economic hedging purposes that may have been classified in Level 1 or 2 by the Bank. In addition, the Bank may hedge the fair value of financial instruments classified in Level 3 using other financial instruments classified in Level 3. The effect of these hedges is not included in the net amount presented in the following tables. The gains and losses presented hereafter may comprise changes in fair value based on observable and unobservable inputs.

 

  






Nine months ended July 31, 2016



  


Securities

at fair value

through profit

or loss


Available-

for-sale

securities


Derivative

financial

instruments(1)


Deposits


Fair value as at October 31, 2015  


 21 


 261 


 (38)


 (20)


Total realized and unrealized gains (losses) included in Net income (2)


 6 


 7 


 (28)


 9 


Total realized and unrealized gains (losses) included in   











Other comprehensive income  


 − 


 8 


 − 


 − 


Purchases


 18 


 42 


 − 


 − 


Sales


 (8)


 (10)


 − 


 − 


Issuances


 − 


 − 


 − 


 (7)


Settlements and other


 − 


 (8)


 15 


 4 


Financial instruments transferred into Level 3


 − 


 1 


 68 


 (32)


Financial instruments transferred out of Level 3


 − 


 − 


 (6)


 35 


Fair value as at July 31, 2016


 37 


 301 


 11 


 (11)


Change in unrealized gains and losses included in Net income  with respect











to financial assets and financial liabilities held as at July 31, 2016(3)


 (2)


 − 


 (28)


 9 


 

 

  






Nine months ended July 31, 2015



  


Securities

at fair value

through profit

or loss


Available-

for-sale

securities


Derivative

financial

instruments(1)


Deposits


Fair value as at October 31, 2014  


 1,223 


 237 


 (39)


 (81)


Total realized and unrealized gains (losses) included in Net income (4)


 56 


 62 


 (17)


 (7)


Total realized and unrealized gains (losses) included in  











 Other comprehensive income


 − 


 (37)


 − 


 − 


Purchases


 3 


 76 


 − 


 − 


Sales


 (33)


 (98)


 − 


 − 


Issuances


 − 


 − 


 − 


 (12)


Settlements and other


 (585)


 (4)


 1 


 − 


Financial instruments transferred into Level 3


 − 


 − 


 (1)


 (5)


Financial instruments transferred out of Level 3


 − 


 − 


 − 


 85 


Fair value as at July 31, 2015  


 664 


 236 


 (56)


 (20)


Change in unrealized gains and losses included in Net income  with respect











to financial assets and financial liabilities held as at July 31, 2015(5)


 37 


 − 


 (17)


 (7)


 

(1)    The derivative financial instruments include assets and liabilities presented on a net basis.

(2)    Total net losses included in Non-interest income was $6 million.

(3)    Total unrealized losses included in Non-interest income was $21 million.

(4)    Total net gains included in Non-interest income was $94 million.

(5)    Total unrealized gains included in Non-interest income was $13 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, 2015. Consistent with its risk management strategy and as permitted by the fair value option, when the designation eliminates or significantly reduces the measurement or recognition mismatch resulting from measuring financial assets and liabilities on different bases, the Bank designated at fair value through profit or loss certain securities, certain securities purchased under reverse repurchase agreements, and certain liabilities related to transferred receivables. 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.

 

To determine a change in fair value arising from a change in the credit risk of deposits designated at fair value through profit or loss, the Bank calculates, at the beginning of the period, the present value of the instrument's contractual cash flows using the following rates: first, using an observed discount rate that reflects the Bank's credit spread and, then, using a rate that excludes the Bank's credit spread. The difference obtained between the two values is then compared to the difference obtained using the same rates at the end of the period.

 

Information about the financial assets and financial liabilities designated at fair value through profit or loss is provided in the following tables.

 

  


Carrying

value as at

July 31, 2016


Change in total fair

value (including

the change in the fair

value attributable to

credit risk) for

the quarter ended

July 31, 2016


Change in total fair

value (including

the change in the fair

value attributable to

credit risk) for the

nine months ended

July 31, 2016


Change in

fair value

since the initial

recognition of

the instrument


Financial assets designated at fair value through profit or loss











Securities


 1,660 


 17 


 22 


 342 



Securities purchased under reverse repurchase agreements


 460 


 − 


 − 


 − 



Loans


 134 


 17 


 (5)


 (24)


  


 2,254 


 34 


 17 


 318 


Financial liabilities designated at fair value through profit or loss











Deposits(1)(2)


 4,133 


 (73)


 (114)


 (33)



Liabilities related to transferred receivables


 6,097 


 (17)


 12 


 (235)


 


 10,230 


 (90)


 (102)


 (268)


 

  


Carrying

value as at

July 31, 2015


Change in total fair

value (including the

change in the fair

value attributable to

credit risk) for the

quarter ended

July 31, 2015


Change in total fair

value (including the

change in the fair

value attributable to

credit risk) for the

nine months ended

July 31, 2015


Change in

fair value

since the initial

recognition of

the instrument


Financial assets designated at fair value through profit or loss











Securities


 2,213 


 26 


 58 


 348 



Securities purchased under reverse repurchase agreements


 664 


 − 


 − 


 − 



Loans


 149 


 5 


 (18)


 (23)


  


 3,026 


 31 


 40 


 325 


Financial liabilities designated at fair value through profit or loss











Deposits(1)(2)


 3,009 


 61 


 (3)


 (133)



Liabilities related to transferred receivables


 5,977 


 (39)


 (104)


 (278)


  


 8,986 


 22 


 (107)


 (411)


 

(1)    For the quarter ended July 31, 2016, the change in the fair value of deposits designated at fair value through profit or loss attributable to credit risk, and recorded in Other comprehensive income, resulted in a loss of $6 million ($9 million gain recorded in Non-interest income in the Consolidated Statement of Income for the quarter ended July 31, 2015). For the nine months ended July 31, 2016, this change was a loss of $45 million, which included a gain of $15 million recorded in Net income ($9 million gain recorded in Net income for the nine months ended July 31, 2015). For additional information, see Note 2.

(2)    The amount at maturity that the Bank will be contractually required to pay to the holders of these deposits varies and will differ from the reporting date fair value.


NOTE 5 - SECURITIES

 

Gross Gains (Losses) on Available-for-Sale Securities

 



As at July 31, 2016





Amortized

cost


Gross

unrealized

gains


Gross

unrealized

losses


Carrying

value













Securities issued or guaranteed by











Canada


 6,153 


 93 


 (3)


 6,243 



Provinces


 4,363 


 373 


 (18)


 4,718 



Municipalities and school boards


 367 


 22 


 − 


 389 



U.S. Treasury, other U.S. agencies and other foreign governments


 1,123 


 23 


 − 


 1,146 


Other debt securities


 993 


 32 


 (2)


 1,023 


Equity securities


 599 


 90 


 (52)


 637 




 13,598 


 633 


 (75)


 14,156 

























As at October 31, 2015





Amortized

cost


Gross

unrealized

gains


Gross

unrealized

losses


Carrying

value













Securities issued or guaranteed by











Canada


 6,423 


 62 


 (18)


 6,467 



Provinces


 4,475 


 231 


 (30)


 4,676 



Municipalities and school boards


 414 


 15 


 (1)


 428 



U.S. Treasury, other U.S. agencies and other foreign governments


 929 


 2 


 (2)


 929 


Other debt securities


 937 


 15 


 (9)


 943 


Equity securities


 569 


 78 


 (47)


 600 




 13,747 


 403 


 (107)


 14,043 


 

Impairment Losses Recognized

At the end of each financial reporting period, the Bank determines whether there is objective evidence of impairment for each available-for-sale security. During the quarter ended July 31, 2016, no impairment loss ($3 million for the quarter ended July 31, 2015) was recognized in Gains (losses) on available-for-sale securities, net in the Consolidated Statement of Income. For the nine months ended July 31, 2016, impairment losses amounted to $4 million ($12 million for the nine months ended July 31, 2015). In addition, during the nine-month periods ended July 31, 2016 and 2015, no amount was reversed in the Consolidated Statement of Income to recognize subsequent increases in the fair value of previously impaired debt securities.

 

Gross Unrealized Losses

As at July 31, 2016 and as at October 31, 2015, the Bank concluded that the gross unrealized losses on available-for-sale securities were mainly due to market price fluctuations and to changes in foreign exchange rates and that there was no objective evidence of impairment requiring an impairment charge to be recognized in the Consolidated Statement of Income.

 

Held-to-Maturity Securities

 

At the end of each financial reporting period, the Bank determines whether there is objective evidence of impairment for each held-to-maturity security. As at July 31, 2016, there was no objective evidence of impairment on held-to-maturity securities.


NOTE 6 - LOANS

 

Credit Quality of Loans

 



  

As at July 31, 2016




  

Residential mortgage


Personal and credit card


Business and government(1)(2)


Total




  









Neither past due(3) nor impaired

 47,238 


 33,059 


 44,191 


 124,488 


Past due(3) but not impaired

 218 


 295 


 116 


 629 


Impaired

 75 


 75 


 302 


 452 


Gross loans  

 47,531 


 33,429 


 44,609 


 125,569 


Less: Allowances on impaired loans  










Individual allowances  

 12 


 19 


 149 


 180 



Collective allowances  

 − 


 19 


 2 


 21 


Allowances on impaired loans  

 12 


 38 


 151 


 201 




  

 47,519 


 33,391 


 44,458 


 125,368 



  









Less:  










Sectoral allowance on non-impaired loans - Oil and gas(4)







 213 



Collective allowance on non-impaired loans(5)







 366 


  







 579 


Loans and acceptances, net of allowances  







 124,789 




  









 


  










  

As at October 31, 2015



  

Residential mortgage


Personal and credit card


Business and government(1)(2)


Total



  









Neither past due(3) nor impaired

 43,184 


 31,556 


 39,953 


 114,693 


Past due(3) but not impaired

 266 


 295 


 96 


 657 


Impaired

 70 


 82 


 305 


 457 


Gross loans  

 43,520 


 31,933 


 40,354 


 115,807 


Less: Allowances on impaired loans  










Individual allowances  

 10 


 18 


 151 


 179 



Collective allowances  

 − 


 22 


 2 


 24 


Allowances on impaired loans  

 10 


 40 


 153 


 203 



  

 43,510 


 31,893 


 40,201 


 115,604 


  









Less: Collective allowance on non-impaired loans(5)







 366 


Loans and acceptances, net of allowances  







 115,238 


 

(1)       Business credit portfolios are closely monitored and a monthly watchlist of problem commitments is produced. The watchlist is analyzed by the loan portfolio managers concerned, who must then submit a report to Credit Risk Management. 

(2)       Including customers' liability under acceptances.

(3)       A loan is past due when the counterparty has not made a payment by the contractual due date.

(4)       The sectoral allowance on non-impaired loans was established collectively for the portfolio of loans to producers and service companies in the oil and gas sector.

(5)       The collective allowance on non-impaired loans for credit risk was established taking into account the Bank's overall credit portfolio, except for loans covered by the sectoral allowance.

 

NOTE 6 - LOANS (cont.)

 

Loans Past Due But Not Impaired(1)

 




As at July 31, 2016




As at October 31, 2015





Residential

mortgage


Personal and

credit card


Business and

government(2)


Residential

mortgage


Personal and

credit card


Business and

government(2)









  






  


Past due but not impaired






  






  



31 to 60 days


 107 


 117 


 46 


 120 


 109 


 36 



61 to 90 days


 34 


 32 


 16 


 54 


 38 


 26 



Over 90 days


 77 


 146 


 54 


 92 


 148 


 34 




 218 


 295 


 116 


 266 


 295 


 96 


 

(1)    Loans less than 31 days past due are not presented as they are not considered past due from an administrative standpoint.

(2)    As at July 31, 2016, the fair value of financial collateral held against loans past due but not impaired was $15 million ($16 million as at October 31, 2015).

 

 

Impaired Loans

 

  

As at July 31, 2016



  

Gross


Individual

allowances


Collective allowances


Net