Source - RNS
RNS Number : 5891I
National Bank of Canada
31 August 2016
 

National Bank of Canada

August 31, 2016

 

Regulatory Announcement (Part 1)

 

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

To view the full PDF of this Third 2016 Report to Shareholders, please click on the following link:

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

 

 

 

MANAGEMENT'S DISCUSSION

AND ANA LYSIS

 

August 30, 2016

 

The following Management's Discussion and Analysis (MD&A) presents the financial condition and operating results of National Bank of Canada (the Bank). This analysis was prepared in accordance with the requirements set out in National Instrument 51-102 Continuous Disclosure Obligations released by the Canadian Securities Administrators (CSA). It is based on the unaudited interim condensed consolidated financial statements (the consolidated financial statements) for the quarter and nine-month period ended July 31, 2016 prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB). This MD&A should be read in conjunction with the consolidated financial statements and accompanying notes for the quarter and nine-month period ended July 31, 2016 and with the 2015 Annual Report. All amounts are presented in Canadian dollars. Additional information about the Bank, including the Annual Information Form, can be obtained from the Bank's website at nbc.ca and SEDAR's website at sedar.com.

 

 

 

Financial Reporting Method

4


Accounting Policies and Financial Disclosure

15

Highlights

5


     Accounting Policies and Critical Accounting Estimates

15

Financial Analysis 

6


     Accounting Policy Changes

15

    Consolidated Results

6


     Changes in Accounting Estimates

16

    Results by Segment

9


     Future Accounting Policy Changes

16

    Consolidated Balance Sheet

12


     Financial Disclosure

17

    Acquisition

14


Additional Financial Disclosure

17

    Related Party Transactions

14


     Risk Disclosures

18

    Securitization and Off-Balance-Sheet Arrangements 

14


Capital Management

19




Risk Management

26




Quarterly Financial Information

39

 

Caution Regarding Forward-Looking Statements

From time to time, the Bank makes written and oral forward-looking statements, such as those contained in the Outlook for National Bank and the Major Economic Trends sections of the 2015 Annual Report, in other filings with Canadian securities regulators, and in other communications, for the purpose of describing the economic environment in which the Bank will operate during fiscal 2016 and the objectives it hopes to achieve for that period. These forward-looking statements are made in accordance with current securities legislation in Canada and the United States. They include, among others, statements with respect to the economy-particularly the Canadian and U.S. economies-market changes, observations regarding the Bank's objectives and its strategies for achieving them, Bank-projected financial returns and certain risks faced by the Bank. These forward-looking statements are typically identified by future or conditional verbs or words such as "outlook," "believe," "anticipate," "estimate," "project," "expect," "intend," "plan," and similar terms and expressions.

 

By their very nature, such forward-looking statements require assumptions to be made and involve inherent risks and uncertainties, both general and specific. Assumptions about the performance of the Canadian and U.S. economies in 2016 and how that will affect the Bank's business are among the main factors considered in setting the Bank's strategic priorities and objectives and in determining its financial targets, including provisions for credit losses. In determining its expectations for economic growth, both broadly and in the financial services sector in particular, the Bank primarily considers historical economic data provided by the Canadian and U.S. governments and their agencies.

 

There is a strong possibility that express or implied projections contained in these forward-looking statements will not materialize or will not be accurate. The Bank recommends that readers not place undue reliance on these statements, as a number of factors, many of which are beyond the Bank's control, could cause actual future results, conditions, actions or events to differ significantly from the targets, expectations, estimates or intentions expressed in the forward-looking statements. These factors include credit risk, market risk, liquidity and funding risk, operational risk, regulatory compliance risk, reputation risk, strategic risk and environmental risk (all of which are described in more detail in the Risk Management section beginning on page 55 of the 2015 Annual Report), the general economic environment and financial market conditions in Canada, the United States and certain other countries in which the Bank conducts business, including regulatory changes affecting the Bank's business, capital and liquidity; changes in the accounting policies the Bank uses to report its financial condition, including uncertainties associated with assumptions and critical accounting estimates; tax laws in the countries in which the Bank operates, primarily Canada and the United States (including the U.S. Foreign Account Tax Compliance Act (FATCA)); changes to capital and liquidity guidelines and to the manner in which they are to be presented and interpreted; changes to the credit ratings assigned to the Bank; and potential disruptions to the Bank's information technology systems, including evolving cyber attack risk.

 

The foregoing list of risk factors is not exhaustive. Additional information about these factors can be found in the Risk Management section of the 2015 Annual Report. Investors and others who rely on the Bank's forward-looking statements should carefully consider the above factors as well as the uncertainties they represent and the risk they entail. Except as required by law, the Bank does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time, by it or on its behalf.

 

The forward-looking information contained in this document is presented for the purpose of interpreting the information contained herein and may not be appropriate for other purposes.


FINANCIAL REPORTING METHOD

 

The Bank's unaudited interim condensed consolidated financial statements have been prepared in accordance with IFRS, as issued by the IASB. The Bank also uses non-IFRS financial measures when assessing its results and measuring Bank-wide performance. Presenting such information helps readers to better understand how management analyzes results, shows the impacts of specified items on the results of the reported periods, and allows readers to assess results without the specified items if they consider such items not to be reflective of ordinary operations. Securities regulators require companies to caution readers that net income and other measures adjusted using non-IFRS criteria are not standard under IFRS and cannot be easily compared with similar measures used by other companies.

 

Financial Information

 

(millions of Canadian dollars, except per share amounts)


Quarter ended July 31



Nine months ended July 31


  



2016 




2015 


% Change



2016 




2015 



% Change




  





















Net income excluding specified items  






















Personal and Commercial  



 203 




 193 


 5 



 378 




 528 



 (28)



Wealth Management  



 86 




 82 


 5 



 256 




 247 



 4 



Financial Markets  



 174 




 201 


 (13)



 529 




 552 



 (4)



Other  



 23 




 (32)





 (13)




 (62)





Net income excluding specified items  



 486 




 444 


 9 



 1,150 




 1,265 



 (9)



Items related to holding restructured notes(1)



 (1)




 16 





 (5)




 52 






Acquisition-related items(2)



 (7)




 (7)





 (33)




 (21)






Write-off of an equity interest in an associate(3)



 − 




 − 





 (145)




 − 






Impact of changes to tax measures(4)



 − 




 − 





 (18)




 − 






Gain on disposal of Fiera Capital shares(5)



 − 




 − 





 − 




 25 






Share of current tax asset write-down of an associate(6)



 − 




 − 





 − 




 (16)






Impairment losses on intangible assets(7)



 − 




 − 





 − 




 (33)





Net income  



 478 




 453 


 6 



 949 




 1,272 



 (25)




  





















Diluted earnings per share excluding specified items


$

 1.33 



$

 1.25 


 6 


$

 3.11 



$

 3.54 



 (12)



Items related to holding restructured notes(1)



 − 




 0.05 





 (0.01)




 0.16 






Acquisition-related items(2)



 (0.02)




 (0.02)





 (0.10)




 (0.07)






Write-off of an equity interest in an associate(3)



 − 




 − 





 (0.43)




 − 






Impact of changes to tax measures(4)



 − 




 − 





 (0.05)




 − 






Premium paid on preferred shares redeemed for cancellation(8)



 − 




 − 





 (0.01)




 − 






Gain on disposal of Fiera Capital shares(5)



 − 




 − 





 − 




 0.08 






Share of current tax asset write-down of an associate(6)



 − 




 − 





 − 




 (0.05)






Impairment losses on intangible assets(7)



 − 




 − 





 − 




 (0.10)





Diluted earnings per share


$

 1.31 



$

 1.28 


 2 


$

 2.51 



$

 3.56 



 (29)




  





















Return on common shareholders' equity






















Including specified items  



 18.7 

%



 18.8 

%




 12.0 

%



 18.1 

%





Excluding specified items  



 19.0 

%



 18.4 

%




 14.9 

%



 17.9 

%




 

(1)    During the quarter ended July 31, 2016, the Bank recorded $2 million in financing costs ($1 million net of income taxes) related to holding restructured notes (2015: $5 million, $3 million net of income taxes). In addition, during the quarter ended July 31, 2015, it had recorded $26 million in revenues ($19 million net of income taxes) to reflect capital repayments and a rise in the fair value of these notes. During the nine months ended July 31, 2016, the Bank recorded $7 million in financing costs ($5 million net of income taxes) related to holding restructured notes (2015: $14 million, $11 million net of income taxes). In the same nine-month period of 2015, the Bank had recorded $49 million in revenues ($36 million net of income taxes) to reflect capital repayments and a rise in the fair value of these notes as well as a gain of $37 million ($27 million net of income taxes) upon the disposal of the restructured notes of the MAV III conduits.

(2)    During the quarter ended July 31, 2016, the Bank recorded $8 million ($7 million net of income taxes) in acquisition-related charges (2015: $9 million, $7 million net of income taxes). For the nine months ended July 31, 2016, these charges stood at $42 million ($33 million net of income taxes) and, for the same period in 2015, they were $27 million ($21 million net of income taxes). These charges consisted mostly of retention bonuses and also included the Bank's share in the integration costs incurred by Fiera Capital Corporation (Fiera Capital) as well as the Bank's share in the charges related to its equity interest in TMX Group Limited (TMX), particularly goodwill and intangible asset impairment losses of $18 million ($13 million net of income taxes) recorded in the first quarter of 2016.

(3)    During the nine months ended July 31, 2016, the Bank wrote off its equity interest in associate Maple Financial Group Inc. (Maple) in an amount of $164 million ($145 million net of income taxes) following the February 6, 2016 event described in the Consolidated Balance Sheet section on page 14.

(4)    During the nine months ended July 31, 2016, an $18 million tax provision was recorded to reflect the impact of substantively enacted changes to tax measures.

(5)    During the nine months ended July 31, 2015, a gain of $29 million ($25 million net of income taxes), net of underwriting fees, had been recorded upon a disposal of Fiera Capital shares through one of the Bank's subsidiaries.

(6)    During the nine months ended July 31, 2015, a loss of $18 million ($16 million net of income taxes) had been recorded following a write-down of an associate's current tax assets. 

(7)    During the nine months ended July 31, 2015, the Bank had recorded $46 million ($33 million net of income taxes) in intangible asset impairment losses on technology developments.

(8)    During the nine months ended July 31, 2016, a $3 million premium was paid on the Series 20 First Preferred Shares redeemed for cancellation.


HIGHLIGHTS

 

(millions of Canadian dollars, except per share amounts )



Quarter ended July 31



Nine months ended July 31


  



2016 




2015 



% Change



2016 




2015 


% Change



  





















Operating results  





















Total revenues



 1,557 




 1,510 



 3 



 4,271 




 4,341 


 (2)


Net income



 478 




 453 



  6 



 949 




 1,272 


 (25)


Net income attributable to the Bank's shareholders  



 460 




 436 



  6 



 892 




 1,221 


 (27)


Return on common shareholders' equity



 18.7 

%



 18.8 

%





 12.0 

%



 18.1 

%



Earnings per share






















Basic


$

 1.32 



$

 1.29 



 2 


$

 2.52 



$

 3.61 


 (30)



Diluted



 1.31 




 1.28 



 2 



 2.51 




 3.56 


 (29)



  





















Excluding specified items(1)





















Operating results





















(taxable equivalent basis) (2)





















Total revenues



 1,610 




 1,553 



  4 



 4,647 




 4,509 


  3 


Net income



 486 




 444 



  9 



 1,150 




 1,265 


 (9)


Net income attributable to the Bank's shareholders  



 468 




 427 



  10 



 1,093 




 1,214 


 (10)


Return on common shareholders' equity  



 19.0 

%



 18.4 

%





 14.9 

%



 17.9 

%



Efficiency ratio



 57.9 

%



 58.0 

%





 58.1 

%



 58.5 

%



Earnings per share






















Basic


$

 1.35 



$

 1.27 



 6 


$

 3.13 



$

 3.58 


 (13)



Diluted



 1.33 




 1.25 



 6 



 3.11 




 3.54 


 (12)



  





















Common share information





















Dividends declared


$

 0.55 



$

 0.52 





$

 1.63 



$

 1.52 




Book value













 28.39 




 27.60 




Share price






















High



 46.65 




 50.01 






 46.65 




 55.06 





Low



 40.98 




 43.78 






 35.83 




 43.78 





Close



 44.71 




 45.74 






 44.71 




 45.74 




Number of common shares (thousands)



  336,826 




 330,001 






  336,826 




 330,001 




Market capitalization



  15,059 




 15,094 






  15,059 




 15,094 




 

(millions of Canadian dollars)


As at July 31,

 2016



As at October 31,

2015


% Change



  









Balance sheet and off-balance-sheet









Total assets


 229,896 



 216,090 


 6 


Loans and acceptances


 124,789 



 115,238 


 8 


Impaired loans, net of total allowances


 (328)



 (112)





As a % of average loans and acceptances   


 (0.3)

%


 (0.1)

%



Deposits


 138,875 



 128,830 


 8 


Equity attributable to common shareholders


 9,563 



 9,531 


 − 


Assets under administration and under management   


 387,743 



 358,139 


 8 



  









Earnings coverage


 8.06 



 10.49 




Asset coverage   


 10.01 



 6.78 





  









Regulatory ratios under Basel III









Capital ratios(3)










Common Equity Tier 1 (CET1)  


 9.9 

%


 9.9 

%




Tier 1(4)


 13.3 

%


 12.5 

%




Total(4)(5)


 15.1 

%


 14.0 

%



Leverage ratio(3)


 3.7 

%


 3.7 

%



Liquidity coverage ratio (LCR)


 137 

%


 131 

%




  









Other information









Number of employees(6)


 21,731 



 20,189 


 8 


Number of branches in Canada   


 453 



 452 


 − 


Number of banking machines   


 937 



 930 


 1 


 

(1)    See the Financial Reporting Method section on page 4.

(2)    See the Consolidated Results section on page 6.

(3)    The ratios are calculated using the "all-in" methodology.

(4)    The ratios as at October 31, 2015 include the redemption of the Series 20 preferred shares on November 15, 2015.

(5)    The ratio as at October 31, 2015 includes the $500 million redemption of notes on November 2, 2015.

(6)    Number of employees now includes employees from Credigy Ltd. and Advanced Bank of Asia Limited.


FINANCIAL ANALYSIS

 

Consolidated Results

                                                                

On 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 incomeCredit 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.

 

(millions of Canadian dollars)


Quarter ended July 31


Nine months ended July 31


  


2016



2015



% Change


2016



2015



% Change



  


















Operating results


















Net interest income


 772 



 672 



 15 


  2,187 



  1,987 



 10 


Non-interest income


 785 



 838 



 (6)


  2,084 



  2,354 



 (11)


Total revenues


 1,557 



 1,510 



 3 


  4,271 



  4,341 



 (2)


Non-interest expenses


 937 



 906 



 3 


  2,716 



  2,705 



 − 


Contribution


 620 



 604 



 3 


  1,555 



  1,636 



 (5)


Provisions for credit losses


 45 



 56 



(20)


  425 



  167 





Income before income taxes


 575 



 548 



 5 


  1,130 



  1,469 



 (23)


Income taxes


 97 



 95 



 2 


  181 



  197 



 (8)


Net income


 478 



 453 



 6 


  949 



  1,272 



 (25)


Diluted earnings per share (dollars)


 1.31 



 1.28 



 2 


 2.51 



 3.56 



 (29)



  


















Taxable equivalent(1)


















Net interest income


 48 



 61 





  178 



  247 





Non-interest income


 − 



 − 





  2 



 − 





Income taxes


 48 



 61 





  180 



  247 





Net income


 − 



 − 





 − 



 − 






  


















Specified items(2)


















Items related to holding restructured notes


 (2)



 21 





 (7)



  72 





Acquisition-related items


 (8)



 (9)





 (42)



 (27)





Write-off of an equity interest in an associate


 − 



 − 





 (164)



 − 





Gain on disposal of Fiera Capital shares


 − 



 − 





 − 



  29 





Share of current tax asset write-down of an associate


 − 



 − 





 − 



 (18)





Impairment losses on intangible assets


 − 



 − 





 − 



 (46)





Specified items before income taxes


 (10)



 12 





 (213)



  10 





Income taxes on specified items(3)


 (2)



 3 





 (12)



  3 





Specified items after income taxes(4)


 (8)



 9 





 (201)



  7 






  


















Operating results on a taxable equivalent



















 basis excluding specified items(1)(2)


















Net interest income


 822 



 738 



 11 


  2,372 



  2,248 



 6 


Non-interest income


 788 



 815 



 (3)


  2,275 



  2,261 



 1 


Total revenues


 1,610 



 1,553 



 4 


  4,647 



  4,509 



 3 


Non-interest expenses


 932 



 900 



 4 


  2,699 



  2,636 



 2 


Contribution


 678 



 653 



 4 


  1,948 



  1,873 



 4 


Provisions for credit losses


 45 



 56 



(20)


  425 



  167 





Income before income taxes


 633 



 597 



 6 


  1,523 



  1,706 



 (11)


Income taxes


 147 



 153 



 (4)


  373 



  441 



 (15)


Net income


 486 



 444 



 9 


  1,150 



  1,265 



 (9)


Diluted earnings per share (dollars) (4)


 1.33 



 1.25 



 6 


  3.11 



  3.54 



 (12)



  


















Net income excluding sectoral provision(5)










  1,333 



  1,265 



 5 


Diluted earnings per share excluding sectoral provision(5) (dollars)  










 3.65 



 3.54 



 3 


Average assets


 237,447 



 221,644 



 7 


 233,439 



 221,014 



 6 


Average loans and acceptances


 122,267 



 110,062 



 11 


 119,673 



 107,160 



 12 


Impaired loans, net of total allowances


 (328)



 (112)





 (328)



 (112)





Average deposits


 140,253 



 128,387 



 9 


 139,293 



 126,082 



 10 


Efficiency ratio excluding specified items(2)


 57.9 

%


 58.0 

%




 58.1 

%


 58.5 

%




 

(1)    The Bank uses the taxable equivalent basis to calculate net interest income, non-interest income and income taxes. This calculation method consists of grossing up certain tax-exempt income (particularly dividends) by the income tax that would have been otherwise payable. An equivalent amount is added to income taxes. This adjustment is necessary in order to perform a uniform comparison of the return on different assets regardless of their tax treatment.

(2)    See the Financial Reporting Method section on page 4.

(3)    For the nine months ended July 31, 2016, the income taxes on specified items included an $18 million tax provision recorded to reflect the impact of substantively enacted changes to tax measures.

(4)    For the nine months ended July 31, 2016, the specified items included a premium of $3 million, or $0.01 per share, on the redemption of the Series 20 preferred shares for cancellation.

(5)    During the nine months ended July 31, 2016, a $250 million sectoral provision for credit losses ($183 million net of income taxes) was recorded for producers and service companies in the oil and gas sector.

 


Financial Results

The Bank is reporting net income of $478 million for the third quarter of 2016, up 6% from $453 million in the third quarter of 2015. Third-quarter diluted earnings per share stood at $1.31 versus $1.28 in the third quarter of 2015.

 

Excluding specified items, net income was a record $486 million in the third quarter of 2016, up 9% from $444 million in the third quarter of 2015, and third-quarter diluted earnings per share stood at $1.33, up 6% from $1.25 in the same quarter of 2015. For the third quarter of 2016, the specified items, net of income taxes, consisted of $1 million in financing costs (2015: $3 million) related to holding restructured notes and $7 million in acquisition-related items (2015: $7 million). For the third quarter of 2015, the specified items, net of income taxes, had also consisted of $19 million in revenues to reflect capital repayments and a rise in the fair value of restructured notes.

                       

For the nine months ended July 31, 2016, the Bank's net income totalled $949 million compared to $1,272 million in the same nine-month period of 2015, and its nine-month diluted earnings per share stood at $2.51 versus $3.56 in the same period of 2015. These decreases were essentially due to two items, net of income taxes, recorded during the nine months ended July 31, 2016: a $183 million sectoral provision for credit losses recorded for oil and gas producers and service companies and a $145 million write-off of the Bank's equity interest in associate Maple. Excluding the sectoral provision and specified items, the Bank's net income for the nine months ended July 31, 2016 totalled $1,333 million, up 5% from $1,265 million in the same period of 2015, and its nine-month diluted earnings per share stood at $3.65, up 3% from $3.54 in the first nine months of 2015. The specified items for the nine months ended July 31, 2016, net of income taxes, consisted of the following items: $5 million in financing costs (2015: $11 million) related to holding restructured notes; $33 million in charges (2015: $21 million) related to the Wealth Management acquisitions, including an amount of $13 million representing the Bank's share in the goodwill and intangible asset impairment losses arising from its equity interest in TMX; the $145 million write-off of the Bank's equity interest in associate Maple; and an $18 million tax provision recorded to reflect the impact of changes to tax measures. For the same nine-month period in 2015, the specified items, net of income taxes, had also consisted of the following: a $27 million gain on the disposal of restructured notes of the MAV III conduits; $36 million in revenues to reflect capital repayments and a rise in the fair value of restructured notes; a $25 million gain, net of underwriting fees, on the disposal of Fiera Capital shares; a $16 million loss on a current tax asset write-down of an associate; and $33 million in intangible asset impairment losses.

 

Excluding specified items, return on common shareholders' equity was 14.9% for the nine months ended July 31, 2016 compared to 17.9% in the same period of 2015; this change was essentially due to the sectoral provision recorded in the second quarter of 2016.

 

Total Revenues

For the third quarter of 2016, the Bank's total revenues amounted to $1,557 million, up $47 million from the third quarter of 2015. Excluding the specified items related to holding restructured notes and to the Wealth Management segment's acquisitions, total revenues on a taxable equivalent basis amounted to $1,610 million, up 4% from $1,553 million in the third quarter of 2015. Third-quarter net interest income was up year over year, mainly due to increases in personal and commercial loans and deposits, to net interest income growth in the Wealth Management segment that was partly driven by the CashPerformer account, to net interest income growth at Credigy Ltd. and to the revenues generated by subsidiary Advanced Bank of Asia Limited (ABA). As for third-quarter non-interest income, it was down year over year due to decreases in trading revenues, gains on available-for-sale securities, securities brokerage commissions, foreign exchange revenues, the share in the net income of associates and joint ventures as well as to the portion of Credigy Ltd. revenues recorded in non-interest income. These decreases were partly offset by a $41 million gain realized on a revaluation of the previously held equity interest in ABA as well as by higher mutual fund revenues.

 

For the nine months ended July 31, 2016, total revenues amounted to $4,271 million, down 2% from $4,341 million in the same period of 2015. Excluding the specified items related to holding restructured notes, to the Wealth Management acquisitions in the first nine-month periods of 2016 and 2015, to the Bank's share in the goodwill and intangible asset impairment losses resulting from its equity interest in TMX, to the write-off of its equity interest in Maple during the first quarter of 2016, to the gain on the disposal of Fiera Capital shares, and to the loss resulting from the share in the current tax asset write-down of an associate recorded in the first nine months of 2015, total revenues on a taxable equivalent basis amounted to $4,647 million for the nine months ended July 31, 2016, up 3% from $4,509 million in the same period of 2015. The increase was driven, in part, by 6% growth in net interest income attributable to the same reasons provided for the quarter. Nine-month non-interest income rose $14 million, mainly due to the gain realized on the revaluation of the previously held equity interest in ABA, to revenue growth at the Credigy Ltd. subsidiary as well as to increases in mutual fund revenues, trust service revenues, credit fee revenues, revenues from deposit and payment service charges, gains on available-for-sale securities, and insurance revenues. These increases were tempered by a year-over-year decrease in trading revenues.



 

Provisions for Credit Losses 

For the third quarter of 2016, the Bank recorded $45 million in provisions for credit losses, $11 million less than in the same quarter of 2015, mainly because of lower provisions for credit losses on Personal Banking and Commercial Banking loans.  

 

For the nine months ended July 31, 2016, the Bank recorded $425 million in provisions for credit losses, $258 million more than in the same period of 2015. This increase was attributable to the sectoral provision for credit losses recorded for producers and service companies in the oil and gas sector in the second quarter of 2016.  

 

As at July 31, 2016, gross impaired loans stood at $452 million, declining $5 million since October 31, 2015. This decrease came from both the commercial and personal loan portfolios. Impaired loans represented 5.8% of the tangible capital adjusted for allowances as at July 31, 2016, down 0.1 percentage points from 5.9% as at October 31, 2015. As at July 31, 2016, the total allowances for credit losses exceeded gross impaired loans by $328 million versus $112 million as at October 31, 2015.

 

Non-Interest Expenses

For the third quarter of 2016, non-interest expenses stood at $937 million, a $31 million or 3% year-over-year increase attributable to technology investments, professional fees and expenses related to the activities of the new ABA subsidiary. Excluding specified items, the 2016 third-quarter non-interest expenses stood at $932 million compared to $900 million in the same quarter of 2015.

 

For the nine months ended July 31, 2016, non-interest expenses stood at $2,716 million compared to $2,705 million, up $11 million from the same period in 2015. The increase was attributable to professional fees, specifically the management fees associated with business growth by the Credigy Ltd. subsidiary, business development expenses, expenses related to the activities of the new ABA subsidiary, the compensatory tax on salaries and other expenses, particularly because sales tax recoveries had been recorded in the first quarter of 2015. In addition, there were decreases in the compensation and employee benefits expense and in technology expenses. Excluding the specified items recorded during the nine months ended July 31, 2016 and 2015, non-interest expenses were up $63 million or 2%.

 

Income Taxes 

For the third quarter of 2016, income taxes stood at $97 million compared to $95 million in the same quarter of 2015. The 2016 third-quarter effective tax rate was 17%, unchanged from the same quarter in 2015. 

 

For the nine months ended July 31, 2016, the effective tax rate was 16% versus 13% in the same nine-month period of 2015. The change in the effective tax rate came mainly from a tax provision recorded during the second quarter of 2016 to reflect the impact of substantively enacted changes to tax measures, from a year-over-year decrease in tax-exempt dividend income, and from the gain on the disposal of Fiera Capital shares recorded in 2015.


Results by Segment

 

The Bank carries out its activities in three business segments. For presentation purposes, other operating activities, certain international activities, and Corporate Treasury activities are grouped in the Other heading. Each reportable segment is distinguished by services offered, type of clientele and marketing strategy.

 

Personal and Commercial 

 

(millions of Canadian dollars)


 Quarter ended July 31


Nine months ended July 31


  


2016 



2015 

  


% Change


2016 



2015 

  


% Change



  






  








  




Operating results






  








  




Net interest income


  486 



  462 

  


  5 


  1,426 



  1,352 

  


  5 


Non-interest income


  253 



  269 

  


 (6)


  735 



  754 

  


 (3)


Total revenues  


  739 



  731 

  


  1 


  2,161 



  2,106 

  


  3 


Non-interest expenses  


  417 



  412 

  


  1 


  1,222 



  1,219 

  


 − 


Contribution  


  322 



  319 

  


  1 


  939 



  887 

  


  6 


Provisions for credit losses(1)


  44 



  55 

  


  (20)


  421 



  165 

  




Income before income taxes  


  278 



  264 

  


  5 


  518 



  722 

  


 (28)


Income taxes  


  75 



  71 

  


  6 


  140 



  194 

  


 (28)


Net income  


  203 



  193 

  


  5 


  378 



  528 

  


 (48)


Net income excluding sectoral provision(1)






  




  561 



  528 

  


  6 


Net interest margin(2)


  2.25 

%


  2.24 

%




  2.22 

%


  2.24 

%




Average interest-bearing assets  


  86,103 



  81,838 

  


  5 


  85,701 



  80,642 

  


  6 


Average assets  


  91,100 



  87,479 

  


  4 


  90,877 



  86,181 

  


  5 


Average loans and acceptances  


  90,766 



  87,086 

  


  4 


  90,526 



  85,794 

  


  6 


Net impaired loans  


  245 



  249 

  


 (2)


  245 



  249 

  


 (2)


Net impaired loans as a % of average loans and acceptances  


  0.3 

%


  0.3 

%




  0.3 

%


  0.3 

%




Average deposits


  49,317 



  45,059 

  


  9 


  47,723 



  44,205 

  


  8 


Efficiency ratio


  56.4 

%


  56.4 

%




  56.5 

%


  57.9 

%




 

(1)    For the nine-month period ended July 31, 2016, the provisions for credit losses included a $250 million sectoral provision ($183 million net of income taxes) on non-impaired loans recorded for the oil and gas producer and service company loan portfolio.

(2)    Net interest margin is calculated by dividing net interest income by average interest-bearing assets.

 

The Personal and Commercial segment posted record net income of $203 million in the third quarter of 2016 compared to net income of $193 million in the third quarter of 2015. The segment's third-quarter total revenues increased by $8 million year over year owing to higher net interest income, which rose $24 million, partly offset by a $16 million year-over-year decrease in non-interest income in the third quarter of 2016. The higher net interest income came mainly from growth in personal and commercial loans and deposits. The net interest margin stood at 2.25% in the third quarter of 2016 versus 2.24% in the third quarter of 2015.

 

Personal Banking's third-quarter total revenues remained stable compared to the same quarter of 2015. Growth in loan volume, particularly mortgage loans, and in credit card transactions was offset by decreases in credit fee revenues, credit card revenues and insurance revenues. Commercial Banking's total revenues rose $8 million, mainly due to growth in loan and deposit volumes, tempered by a decrease in credit fee revenues on bankers' acceptances and foreign exchange revenues.

 

The segment's 2016 third-quarter non-interest expenses increased $5 million or 1% year over year, mainly due to professional fees and credit-card-related expenses, partly offset by a lower compensation and employee benefits expense. At 56.4%, the efficiency ratio for the third quarter of 2016 was unchanged from the same quarter of 2015.

 

The segment's third-quarter provisions for credit losses were $44 million, $11 million less than in the same quarter of 2015. This decrease stems from lower provisions for credit losses on both Personal Banking and Commercial Banking loans.

 

For the nine months ended July 31, 2016, the Personal and Commercial segment posted net income of $378 million, down from $528 million in the same nine-month period of 2015. This change was mainly due to the $183 million, net of income taxes, sectoral provision on non-impaired loans recorded for the oil and gas producer and service company loan portfolio during the second quarter of 2016. Excluding this sectoral provision, net income for the nine months ended July 31, 2016 totalled $561 million, up 6% from the same period of 2015. The segment's total revenues grew 3%. Personal Banking's nine-month net interest income grew year over year for the same reasons provided above for the quarter. In addition, credit card revenues were down, whereas revenues from deposit and payment service charges were up. Commercial Banking's nine-month total revenues also increased, partly due to growth in loan and deposit volumes, tempered by lower deposit margins and by decreases in credit fee revenues and foreign exchange revenues. The segment's nine-month contribution rose by $52 million or 6%, and its nine-month provisions for credit losses were $256 million higher than in the same period of 2015. Most of this increase came from the $250 million sectoral provision recorded during the second quarter of 2016 and from higher provisions for credit losses on Commercial Banking loans, partly offset by lower provisions for credit losses on Personal Banking loans. At 56.5% for the nine months ended July 31, 2016, the efficiency ratio improved by 1.4 percentage points versus the same nine-month period of 2015.



 

Wealth Management 

 

(millions of Canadian dollars)  


 Quarter ended July 31


Nine months ended July 31


  


2016 



2015 

  


% Change


2016 



2015 

  


% Change



  






  








  




Operating results excluding specified items(1)






  








  




Net interest income   


 94 



78 

  


 21 


  274 



  242 

  


  13 


Fee-based revenues  


 202 



 196 

  


 3 


  590 



  566 

  


  4 


Transaction-based and other revenues  


 66 



 73 

  


 (10)


  211 



  244 

  


 (14)


Total revenues   


 362 



 347 

  


 4 


  1,075 



  1,052 

  


  2 


Non-interest expenses   


 245 



 236 

  


 4 


  726 



  717 

  


  1 


Contribution  


 117 



 111 

  


 5 


  349 



  335 

  


  4 


Provisions for credit losses  


 1 



 1 

  




  4 



  2 

  




Income before income taxes   


 116 



 110 

  


 5 


  345 



  333 

  


  4 


Income taxes   


 30 



 28 

  


 7 


  89 



  86 

  


  3 


Net income excluding specified items   


 86 



 82 

  


 5 


  256 



  247 

  


  4 


Specified items after income taxes(1)


 (6)



 (6)

  




 (19)



  6 

  




Net income   


 80 



 76 

  


 5 


  237 



  253 

  


 (6)


Average assets   


 11,007 



 10,442 

  


 5 


  10,991 



  10,283 

  


  7 


Average loans and acceptances


 9,413 



 8,818 

  


 7 


  9,356 



  8,663 

  


  8 


Net impaired loans


 5 



 5 

  




  5 



  5 

  




Average deposits


 28,274 



 24,185 

  


 17 


  27,280 



  24,354 

  


  12 


Efficiency ratio excluding specified items(1)


 67.7 

%


 68.0 

%




 67.5 

%


 68.2 

%




 

(1)    See the Financial Reporting Method section on page 4.

 

In the Wealth Management segment, net income totalled $80 million for the third quarter of 2016 compared to $76 million in the same quarter of 2015. Excluding specified items, which include the acquisition-related items of recent years, Wealth Management's 2016 third-quarter net income totalled $86 million, up 5% from $82 million in the same quarter of 2015. Also excluding specified items, the segment's third-quarter total revenues amounted to $362 million, up 4% from $347 million in the third quarter of 2015. This revenue increase came mainly from net interest income growth, which was driven by the CashPerformer account and brokerage accounts, and from fee-based revenues, partly offset by a decrease in transaction-based and other revenues given a decline in brokerage transactions.

 

Excluding the acquisition-related specified items of recent years, non-interest expenses stood at $245 million in the third quarter of 2016, a 4% year-over-year increase that was mainly due to a rise in variable compensation and management fees given the higher revenues. At 67.7%, the efficiency ratio for the third quarter of 2016 improved by 0.3 percentage points when compared to the same quarter of 2015.

 

For the nine months ended July 31, 2016, the Wealth Management segment's net income totalled $237 million, down 6% from $253 million in the same period of 2015. Excluding specified items, which include the acquisition-related items of recent years and a gain on the sale of Fiera Capital shares recorded in 2015, net income totalled $256 million for the nine months ended July 31, 2016, up $9 million or 4% from the same period in 2015. The segment's nine-month total revenues amounted to $1,075 million versus $1,052 million in the nine months ended July 31, 2015. This increase came from growth in net interest income and from higher fee-based revenues associated with the migration of assets from transactional accounts to fee-based accounts. These increases more than offset the decrease in transaction-based and other revenues. For the nine months ended July 31, 2016, non-interest expenses stood at $726 million, a $9 million increase from the same nine-month period of 2015 owing to the same factors provided for the quarter. At 67.5%, the efficiency ratio for the first nine months of 2016 improved from 68.2% in the same nine-month period of 2015.



 

Financial Markets 

 

(taxable equivalent basis)(1)






  








  




(millions of Canadian dollars)  


 Quarter ended July 31


Nine months ended July 31


  


2016 



2015 

  


% Change


2016 



2015 

  


% Change


  






  








  




Operating results excluding specified items(2)






  








  




Trading activity revenues






  








  





Equities


 85 



 127 

  


 (33)


 320 



 353 

  


 (9)



Fixed-income


 75 



 53 

  


 42 


 183 



 174 

  


 5 



Commodities and foreign exchange


 21 



 26 

  


 (19)


 92 



 112 

  


 (18)


  


 181 



 206 

  


 (12)


 595 



 639 

  


 (7)


Financial market fees


 93 



 90 

  


 3 


 214 



 229 

  


 (7)


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


 7 



 15 

  


 (53)


 11 



 11 

  


 − 


Banking services


 84 



 75 

  


 12 


 231 



 207 

  


 12 


Credigy Ltd.


 70 



 63 

  


 11 


 244 



 146 

  


 67 


Other


 5 



 21 

  


 (76)


 25 



 84 

  


 (70)


Total revenues


 440 



 470 

  


 (6)


 1,320 



 1,316 

  


 − 


Non-interest expenses


 198 



 194 

  


 2 


 583 



 559 

  


 4 


Contribution


 242 



 276 

  


 (12)


 737 



 757 

  


 (3)


Provisions for credit losses


 − 



 − 

  




 − 



 − 

  




Income before income taxes    


 242 



 276 

  


 (12)


 737 



 757 

  


 (3)


Income taxes  


 68 



 75 

  


 (9)


 208 



 205 

  


 1 


Net income excluding specified items


 174 



 201 

  


 (13)


 529 



 552 

  


 (4)


Specified items after income taxes(2)


 − 



 − 

  




 (145)



 (16)

  




Net income    


 174 



 201 

  


 (13)


 384 



 536 

  


 (28)


Non-controlling interests  


 3 



 3 

  




 15 



 8 

  




Net income attributable to the Bank's shareholders


 171 



 198 

  


 (14)


 369 



 528 

  


 (30)


Average assets  


 92,696 



 87,064 

  


 6 


 89,657 



 88,672 

  


 1 


Average loans and acceptances (Corporate Banking only)  


 13,234 



 10,380 

  


 27 


 12,279 



 9,744 

  


 26 


Average deposits


 13,156 



 12,757 

  


 3 


 13,268 



 12,473 

  


 6 


Efficiency ratio excluding specified items(2)


 45.0 

%


 41.3 

%




 44.2 

%


 42.5 

%




 

(1)    See Note 23 to the consolidated financial statements.

(2)    See the Financial Reporting Method section on page 4.

 

In the Financial Markets segment, net income totalled $174 million for the third quarter of 2016 compared to $201 million in the same quarter of 2015. On a taxable equivalent basis, the segment's third-quarter total revenues amounted to $440 million compared to $470 million in the third quarter of 2015. Trading activity revenues declined 12%, mainly due to decreases in revenues from equity securities and from commodities and foreign exchange contracts, partly offset by a 42% increase in revenues from fixed-income securities. Third-quarter banking service revenues grew 12% year over year, particularly due to more robust credit activity, and revenues from financial market fees were up slightly compared to the same quarter of 2015. Revenues from the Credigy Ltd. subsidiary rose $7 million due to sustained growth in specialty finance activities, whereas revenues from the segment's other activities were down, particularly because of the share in the net income of associate Maple that had been recorded during the third quarter of 2015.

 

At $198 million, the segment's 2016 third-quarter non-interest expenses increased $4 million year over year, mainly due to higher operations support charges. At 45.0% in the third quarter of 2016, the efficiency ratio rose by 3.7 percentage points from the same quarter of 2015. Provisions for credit losses were nil in both the third quarters of 2016 and 2015. 

 

For the nine months ended July 31, 2016, the Financial Markets segment posted net income of $384 million, down $152 million from the same nine-month period of 2015. Excluding the write-off of the equity interest in associate Maple and the 2015 specified item of $16 million, net of income taxes, for the share in the current tax asset write-down of an associate, the segment's net income totalled $529 million for the nine months ended July 31, 2016, a 4% decrease from the same period of 2015. On a taxable equivalent basis and excluding specified items, the segment's nine-month total revenues amounted to $1,320 million, up $4 million from $1,316 million in the first nine months of 2015. This increase came from the revenues generated by the Credigy Ltd. subsidiary, which rose $98 million compared to the same period in 2015. In addition, banking service revenues grew by 12%. Given market conditions, trading activity revenues and financial market fee revenues decreased year over year. The nine-month decrease in trading activity revenues was essentially due to equity securities and commodities and foreign exchange contracts, the revenues from which decreased by 9% and 18%, respectively, year over year. Revenues from the segment's other activities also decreased, as gains on investments and the share in net income of associate Maple had been recorded in the nine-month period ended July 31, 2015.

 

For the nine months ended July 31, 2016, the segment's non-interest expenses increased year over year, particularly due to higher expenses at the Credigy Ltd. subsidiary as a result of its business growth.



 

Other

 

(taxable equivalent basis)(1)




  




  


(millions of Canadian dollars)  


Quarter ended July 31  


Nine months ended July 31  


  


2016 


2015 


2016 


2015 


  




  




  


Operating results excluding specified items(2)




  




  


Net interest income  


 (5)


 (36)


 (73)


 (103)


Non-interest income  


 74 


 41 


 164 


 138 


Total revenues  


 69 


 5 


 91 


 35 


Non-interest expenses  


 72 


 58 


 168 


 141 


Income before income taxes


 (3)


 (53)


 (77)


 (106)


Income taxes (recovery)


 (26)


 (21)


 (64)


 (44)


Net income excluding specified items   


 23 


 (32)


 (13)


 (62)


Specified items after income taxes(2)


 (2)


 15 


 (37)


 17 


Net income


 21 


 (17)


 (50)


 (45)


Non-controlling interests


 15 


 14 


 42 


 43 


Net income attributable to the Bank's shareholders  


 6 


 (31)


 (92)


 (88)


Average assets  


 42,644 


 36,659 


 41,914 


 35,878 


 

(1)    See Note 23 to the consolidated financial statements.

(2)    See the Financial Reporting Method section on page 4.

 

For the Other heading of segment results, there was net income of $21 million in the third quarter of 2016 compared to a net loss of $17 million in the same quarter of 2015. This change stems essentially from a $41 million non-taxable gain on a revaluation of the previously held equity interest in ABA and from a higher contribution from treasury activities in the third quarter of 2016 that more than offset the revenues related to holding restructured notes recorded in the third quarter of 2015. In addition, the acquisition of ABA completed during the third quarter of 2016 contributed $9 million to net income.

 

For the nine months ended July 31, 2016, there was a net loss of $50 million compared to a net loss of $45 million in the same nine-month period of 2015; this change was attributable to the $41 million non-taxable gain on a revaluation of the previously held equity interest in ABA, partly offset by the Bank's share in the charges arising from its equity interest in TMX, particularly an amount of $13 million, net of income taxes, in goodwill and intangible asset impairment losses; by the higher compensatory tax on salaries; by business development expenses; and by an $18 million tax provision recorded in the second quarter of 2016. In addition, during the nine-month period ended July 31, 2015, the year-over-year change was due to the following items, net of income taxes: $36 million in revenues related to a rise in the fair value of restructured notes and a $27 million gain on the disposal of restructured notes of the MAV III conduits that had been partly offset by $33 million in intangible asset impairment losses.


 

Consolidated Balance Sheet

 

Consolidated Balance Sheet Summary

 

(millions of Canadian dollars)


As at July 31, 2016


As at October 31, 2015


% Change











Assets








Cash and deposits with financial institutions


 8,824 


 7,567 


 17 


Securities


 62,441 


 56,040 


 11 


Securities purchased under reverse repurchase agreements









and securities borrowed


 14,880 


 17,702 


 (16)


Loans and acceptances (net of allowances for credit losses)


 124,789 


 115,238 


 8 


Other


 18,962 


 19,543 


 (3)





 229,896 


 216,090 


 6 










Liabilities and equity








Deposits


 138,875 


 128,830 


 8 


Other


 77,990 


 74,383 


 5 


Subordinated debt


 1,014 


 1,522 


 (33)


Equity attributable to the Bank's shareholders


 11,213 


 10,554 


 6 


Non-controlling interests


 804 


 801 


 − 





 229,896 


 216,090 


 6 


 

Assets

As at July 31, 2016, the Bank had total assets of $229.9 billion compared to $216.1 billion as at October 31, 2015, a $13.8 billion or 6% increase. Cash and deposits with financial institutions increased by $1.2 billion. Securities rose $6.4 billion since October 31, 2015, particularly given the $2.8 billion purchase of held-to-maturity securities and a $3.5 billion increase in equity securities at fair value through profit or loss, whereas securities purchased under reverse repurchase agreements and securities borrowed decreased by $2.8 billion.



 

As at July 31, 2016, loans and acceptances, net of allowances for credit losses, increased by $9.6 billion since October 31, 2015 owing to growth in mortgage lending (including home equity lines of credit) and in loans to businesses and government. The following table provides a breakdown of the main loan and acceptance portfolios.

 

(millions of Canadian dollars)


As at July 31, 2016


As at October 31, 2015


As at July 31, 2015











Loans and acceptances








Consumer


 31,289 


 29,864 


 29,372 


Residential mortgage


 47,531 


 43,520 


 42,200 


Credit card receivable


 2,140 


 2,069 


 2,005 


Business and government


 44,609 


 40,354 


 39,774 





 125,569 


 115,807 


 113,351 


 

Since October 31, 2015, consumer loans increased by 5%, primarily due to home equity lines of credit and personal loans, and, rising 9%, residential mortgages also grew, particularly mortgages purchased for securitization purposes. Loans and acceptances to businesses increased by $4.3 billion or 11% since October 31, 2015, mainly because of corporate loan financing and the activities of the Credigy Ltd. subsidiary. When compared to a year ago, loans and acceptances increased by $12.2 billion or 11%. Consumer loans and residential mortgage loans rose, respectively, by 6% and 13% from a year ago. Loans and acceptances to businesses also contributed to the growth, rising 12% from a year ago and due to the same reasons provided for the change since October 31, 2015.

 

As at July 31, 2016, derivative financial instruments amounted to $10.9 billion, an increase of $0.1 billion since October 31, 2015. This change should be analyzed along with the derivative financial instruments presented in liabilities, which, at $8.0 billion, were up $0.2 billion, resulting in a net decrease of $0.1 billion since October 31, 2015. 

 

Liabilities

As at July 31, 2016, the Bank had total liabilities of $217.9 billion compared to $204.7 billion as at October 31, 2015.

 

As at July 31, 2016, the Bank's total deposit liability was $138.9 billion versus $128.8 billion as at October 31, 2015, an increase of $10.1 billion or 8%. The following table provides a breakdown of total personal savings.

 

(millions of Canadian dollars)


As at July 31, 2016


As at October 31, 2015


As at July 31, 2015











Balance sheet








Deposits


 49,489 


 45,981 


 45,825 











Off-balance-sheet








Full-service brokerage


 113,502 


 105,395 


 108,941 


Mutual funds


 28,068 


 25,783 


 20,899 


Other


 518 


 636 


 4,084 





 142,088 


 131,814 


 133,924 


Total personal savings


 191,577 


 177,795 


 179,749 


 

At $49.5 billion as at July 31, 2016, personal deposits increased by 8% since October 31, 2015 and were up $3.7 billion from a year ago. Since the beginning of the fiscal year, personal savings included in assets under administration and under management increased 8% and, from a year ago, were up $8.2 billion or 6% given the stock market recovery.

 

At $83.6 billion, business and government deposits rose $9.2 billion since October 31, 2015 as a result of Bank initiatives to grow this type of deposit. At $5.8 billion, deposits from deposit-taking institutions decreased $2.6 billion since October 31, 2015, mainly attributable to deposits from U.S. government financial institutions and other international financial institutions. Other funding activities increased $3.6 billion since October 31, 2015, essentially due to obligations related to securities sold under repurchase agreements and securities loaned.

 

Equity

As at July 31, 2016, the Bank's equity amounted to $12.0 billion, up $0.7 billion from October 31, 2015. This increase came mainly from the issuance of Series 34 and 36 preferred shares for an amount of $800 million, partly offset by the redemption of Series 20 preferred shares for an amount of $176 million. Furthermore, retained earnings decreased, essentially due to remeasurements of pension plans and other post-employment benefit plans.

 

As at August 26, 2016, there were 337,746,549 common shares and 17,589,649 stock options outstanding. For additional information on share capital, see Note 18 to the audited annual consolidated financial statements for the year ended October 31, 2015 and Note 15 to the consolidated financial statements of this quarter.

 



Maple Financial Group Inc.

Maple Financial Group Inc. (Maple) is a privately owned Canadian company that operated through direct and indirect wholly owned subsidiaries in Canada, Germany, the United Kingdom and the United States. The Bank has a 24.9% interest in that company. In August 2016, Maple filed for bankruptcy under the applicable Canadian laws, and a receiver was appointed to administer the company. Similar proceedings have been initiated for each of Maple's other material subsidiaries in their home jurisdictions.

 

Maple Bank GmbH, an indirect wholly owned subsidiary of Maple, has been the subject of an investigation into alleged tax irregularities by German prosecutors since September 2015 and that, to the Bank's knowledge, is ongoing. The Bank understands that the investigation is focusing on selected trading activities by Maple Bank GmbH and some of its current and former employees during taxation years 2006 to 2010. The German authorities have alleged that these trading activities violated German tax laws. Neither the Bank nor its employees were involved in these trading activities and, to the Bank's knowledge, are not the subject of this investigation.

 

On February 6, 2016, the German Federal Financial Supervisory Authority, BaFin, placed a moratorium on the business activities of Maple Bank GmbH, preventing it from carrying out its normal business activities. In light of the situation, the Bank wrote off the carrying value of its equity interest in Maple in an amount of $164 million ($145 million net of income taxes) during the first quarter of 2016. The $164 million write-off of the equity interest in this associate was recognized in the Non-interest income - Other item of the Consolidated Statement of Income for the nine-month period ended July 31, 2016 and is presented in the Financial Markets segment.

 

The Bank has advised the German authorities that if it is determined that portions of dividends received from Maple could be reasonably attributable to tax fraud by Maple Bank GmbH, arrangements will be made to repay those amounts to the relevant authority. If any repayments are required, they are not expected to be material to the Bank's financial position.

 

 

Acquisition

 

Advanced Bank of Asia Limited

On May 16, 2016, the Bank completed the acquisition of Advanced Bank of Asia Limited (ABA), a major Cambodian financial institution that offers financial products and services to individuals and businesses. This acquisition is part of the Bank's international growth strategy and, upon completion, brings the Bank's common share equity interest in ABA to 90%. The sum of the $119 million cash purchase price, of the fair value of the previously held interest, and of the estimated value of the non-controlling interest established at the acquisition date exceeds the fair value of the net assets acquired by $125 million. This excess amount was recorded on the Consolidated Balance Sheet as goodwill and mainly represents ABA's expected business growth in Cambodia. The goodwill from this acquisition is not deductible for tax purposes. The acquired receivables, consisting mainly of personal and commercial loans, had an estimated acquisition-date fair value of $754 million. This amount also represents the gross contractual amounts receivable that the Bank expects to fully recover.

 

For the third quarter and nine-month period ended July 31, 2016, the amount of the acquisition-related costs included in Non-interest expenses in the Consolidated Statement of Income was negligible. During the quarter ended July 31, 2016, the Bank also recognized a $41 million non-taxable gain on the revaluation of its previously held equity interest in ABA in the Non-interest income - Other item of the Consolidated Statement of Income. For segment disclosure purposes, this gain and ABA's financial results have been included in the Other heading. ABA's results have been consolidated in the Bank's financial statements as of May 17, 2016. During the nine-month period ended July 31, 2016, ABA contributed approximately $18 million to the Bank's total revenues and approximately $9 million to its net income. Had the Bank completed the acquisition on November 1, 2015, it would have reported total revenues of approximately $4,304 million and net income of approximately $959 million for the nine months ended July 31, 2016.

 

Related Party Transactions

 

The Bank's policies and procedures regarding related party transactions have not significantly changed since October 31, 2015. For additional information, see Note 29 to the audited annual consolidated financial statements for the year ended October 31, 2015.

 

Securitization and 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 master asset vehicle (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 43 and 44 of the 2015 Annual Report. For additional information on guarantees and a description of obligations under certain indemnification agreements, see Note 27 to the audited annual consolidated financial statements for the year ended October 31, 2015.

 

For additional information about financial assets transferred but not derecognized and structured entities, see Notes 7 and 22, respectively, to the consolidated financial statements.


ACCOUNTING POLICIES AND FINANCIAL DISCLOSURE

 

Accounting Policies and Critical Accounting Estimates

 

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 IFRS, as issued by the 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 for the changes described further down. Future accounting policy changes are described on the following page.

 

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.

 

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. Certain 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 90 to 93 of the 2015 Annual Report, except for the changes described on the following page.

 

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.

 



Changes in Accounting Estimates

 

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.

 

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.

 

Financial Disclosure

 

During the third quarter of 2016, 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 the transparency and measurement of 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 $509 million as at July 31, 2016 ($568 million as at October 31, 2015).

 

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 presented in the Supplementary Regulatory Capital Disclosure report, which is available on the Bank's website at nbc.ca.

 

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, 2016, total commitments for this type of loan stood at $2,395 million ($1,859 million as at October 31, 2015). Details about other exposures are provided in the table on structured entities in Note 22 to the consolidated financial statements.

 

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. The Bank ensures 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 2015 Annual Report, in this Report to Shareholders, and in the documents entitled Supplementary Regulatory Capital Disclosure for the Third Quarter Ended July 31, 2016, and Supplementary Financial Information for the Third Quarter Ended July 31, 2016, 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







2015

Annual Report


Report to Shareholders(1)


Supplementary

Regulatory Capital

Disclosure(1)














General










Location of risk disclosures


10


18








Management's Discussion and Analysis


46 to 89, 100 and 104


19 to 38








Consolidated Financial Statements


Notes 1, 7, 16, 23 and 30


Notes 6 and 17








Supplementary Regulatory Capital Disclosure






4 to 29




Risk terminology and risk measures


55 to 89








Top and emerging risks


55 and 56








New key regulatory ratios


47 to 49, 75, 77 and 82


19 to 21, 30 and 68
















Risk governance and risk management










Risk management organization, processes and key functions


58 to 61








Risk management culture


58 and 59








Key risks by business segment, risk management and risk appetite


54, 58 and 59








Stress testing


46, 59, 67 and 75 to 79


















Capital adequacy and risk-weighted assets (RWA)










Minimum Pillar 1 capital requirements


47 to 49


19 to 21





10 


Reconciliation of the accounting balance sheet to












the regulatory balance sheet






4 to 7



11 


Movements in regulatory capital


51


22





12 


Capital planning


46 to 54







13 


RWA by business segment and by risk type


52 and 54


23


8



14 


Capital requirements by risk and RWA calculation method


52 and 62 to 67


23


8



15 


Banking book credit risk


52


23


8 and 11 to 16



16 


Movements in RWA by risk type


53


24


9



17 


Assessment of credit risk model performance


61, 65 and 73




11 to 17














Liquidity









18 


Liquidity management and components of the liquidity buffer


77 to 83


30 to 34
















Funding









19 


Summary of encumbered and unencumbered assets


80 and 81


32





20 


Residual contractual maturities of balance sheet items and












off-balance-sheet commitments


191 to 194


35 to 38





21 


Funding strategy and funding sources


83 to 85


34
















Market risk









22 


Linkage of market risk measures to balance sheet


71 and 72


27 and 28





23 


Market risk factors


70, 73 to 76, 177 to 179


28 to 30





24 


VaR: Assumptions, limitations and validation procedures


73 to 75







25 


Stress tests, stressed VaR and backtesting


73 to 76


















Credit risk









26 


Credit risk exposures


63, 66 and 147 to 150


26 and 59 to 61


10 to 24 and 17 to 23(2)



27 


Policies for identifying impaired loans


68, 120 and 121







28 


Movements in impaired loans and allowances for credit losses


100, 104 and 147 to 150


59 to 61


20



29 


Counterparty credit risk relating to derivatives transactions


68, 69 and 161 to 163




25 and 26



30 


Credit risk mitigation


67 to 69




22 and 24














Other risks









31 


Other risks: Governance, measurement and management


56, 57 and 86 to 89







32 


Publicly known risk events


86


No risk event




 

(1)    For the third quarter ended July 31, 2016.

(2)    These pages are included in the document entitled Supplementary Financial Information for the Third Quarter Ended July 31, 2016.


CAPITAL MANAGEMENT

 

Capital management has a dual role of ensuring a competitive return to the Bank's shareholders while maintaining a solid capital foundation that covers risks inherent to the Bank's business, supports its business segments and protects its clients. The Bank's capital management policy defines guiding principles as well as the roles and responsibilities of its internal capital adequacy assessment process. This process aims to determine the capital that the Bank needs to pursue its business operations and accommodate unexpected losses arising from extremely adverse economic and operational conditions. For additional information on the capital management framework, see the Capital Management section on pages 46 to 54 of the Bank's 2015 Annual Report.

 

Basel Accord

The 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 adheres to the guidelines of the Basel Committee on Banking Supervision (BCBS) and, 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 for each quarter until the start of 2019. However, OSFI is requiring Canadian banks to meet the minimum "all-in" thresholds rather than the minimum thresholds calculated using the "transitional" method.

 

OSFI designated Canada's six largest banks, a group that includes National Bank, as Domestic Systemically Important Banks (D-SIBs). Consequently, the Bank and all other major Canadian banks 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 those measures, OSFI is requiring that regulatory capital instruments other than common equity have a non-viability contingent capital (NVCC) clause to ensure that investors bear losses before taxpayers should the government determine that it is in the public interest to rescue a non-viable financial institution. Instruments issued before January 1, 2013 that would be Basel III compliant if it were not for the absence of the NVCC clause are grandfathered and will be phased out over a period of ten years. The Bank expects to phase out all of its non-NVCC instruments without resorting to any regulatory event redemption.

 

To ensure an implementation similar to that in other countries, OSFI has decided to phase in the Credit Valuation Adjustment (CVA) charge over a five-year period beginning in 2014. For fiscal 2016, 64%, 71% 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 thereafter until they reach 100% by 2019.

 

Since January 1, 2015, OSFI has been requiring Canadian banks to meet a Basel III leverage ratio of at least 3.0%. The leverage ratio is a measure independent of risk that is calculated by dividing the amount of Tier 1 capital by total exposure. Total exposure is defined as the sum of on-balance-sheet assets (including derivative exposures and securities financing transaction exposures) and off-balance-sheet items. The assets deducted from Tier 1 capital are also deducted from total exposure.


 

The Bank ensures that its capital levels are always above the minimum regulatory capital requirements for OSFI's "all-in" ratios. By maintaining a strong capital structure, the Bank can cover the risks inherent to its business activities, support its business segments and protect its clients.

 

Other disclosure requirements pursuant to Pillar 3 of the Basel Accord and a set of recommendations defined by the EDTF 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 also available on the Bank's website under Investor Relations > Capital and Debt Information > Regulatory Capital > Main Features of Regulatory Capital Instruments.



Regulatory Environment

In December 2014, the BCBS issued two consultative papers, Capital Floors: The Design of a Framework Based on Standardised Approaches and Revisions to the Standardised Approach for Credit Risk, the latter having been reviewed a second time in December 2015. The capital floor is meant to mitigate risk related to internal credit risk calculation models and enhance the comparability of risk across banks. The new floor will replace the current one, which is still based on Basel I. The new standardized approach for credit risk aims to reduce reliance on credit rating agencies and improve risk sensitivity.

 

On January 28, 2015, the BCBS issued the final disclosure rules under Pillar 3: Revised Pillar 3 Disclosure Requirements. The new requirements are intended to improve transparency, consistency and comparability of results across banks and must be applied as of the end of 2016. However, on January 21, 2016, OSFI issued a draft guideline entitled Pillar 3 Disclosure Requirements, specifying therein that D-SIBs will have to meet the BCBS's requirements as of the fiscal year ending October 31, 2017; most recently, in August 2016, OSFI decided to postpone the application to fiscal year ending October 31, 2018. The final version of the guideline will replace OSFI's November 2007 advisory, Pillar 3 Disclosure Requirements. On March 11, 2016, the BCBS issued a consultative paper entitled Pillar 3 Disclosure Requirements - Phase 2.

 

In July 2015, the BCBS issued a consultative paper, Review of the Credit Valuation Adjustment Risk Framework, with the aim of ensuring that all important drivers of CVA are considered in calculating capital, aligning the various accounting frameworks and ensuring consistency with the market risk framework. No date has been set for the implementation of these new rules, which will increase the level of capital the Bank is required to maintain.

 

On November 9, 2015, the FSB issued a standard entitled Total Loss-Absorbing Capacity (TLAC) Standard for Global Systemically Important Banks (G-SIBs), which aims to implement a resolution strategy to determine whether global systemically important banks (G-SIBs) have sufficient loss-absorbing capacity to minimize impacts on financial stability and maintain the continuity of critical economic functions. There is currently no guidance on how the proposed standard will be incorporated into Canada's bail-in regime, which has yet to be finalized. Also on November 9, 2015, the BCBS issued a consultative paper, TLAC Holdings, which sets out the proposed regulatory capital treatment for loss-absorbing instruments held by internationally active banks. This proposed prudential treatment is intended to reduce contagion in the financial system should a G-SIB go into resolution.

 

On December 17, 2015, the BCBS issued a consultative paper, Identification and Measurement of Step-In Risk, that measures the risk of the Bank providing support to an unconsolidated entity, should that entity experience financial stress, and do so beyond or in the absence of any contractual obligation in order to mitigate the impact of the shadow banking system.

 

On January 14, 2016, the BCBS issued the final rules for calculating market risk in Minimum Capital Requirements for Market Risk, a document that aims to remedy structural weaknesses in the trading portfolio that had not been addressed in previous market risk revisions. These rules will come into effect on January 1, 2019.

 

On March 4, 2016, the BCBS issued Standardised Measurement Approach for Operational Risk, a consultative document that proposes a new standardized method for calculating operational risk.

 

In the federal budget tabled on March 22, 2016, the Government of Canada confirmed its intention to move forward with the rules proposed in the Taxpayer Protection and Bank Recapitalization Regime Consultation Paper, which outlines a proposed bail-in regime applicable to D-SIBs that is in line with key international standards such as the FSB's Key Attributes of Effective Resolution Regimes for Financial Institutions. On April 20, 2016, Canada's Finance Minister introduced draft legislation that creates a bail-in regime for D-SIBs. The shares and eligible liabilities that will be subject to the conversion powers mentioned in the draft legislation, as well as the terms and conditions of such conversion, will be prescribed by regulations. The draft legislation also provides that OSFI will require D-SIBs to maintain a minimum capacity to absorb losses. Higher loss absorbency requirements will be established to ensure that affected banks maintain sufficient capital to absorb the proposed conversions. The implementation date of the proposed regime has not yet been determined. The Bank continues to monitor bail-in regime developments, as additional details on implementation, scope and timing are expected to follow through regulations.

 



On March 24, 2016, the BCBS issued Reducing Variation in Credit Risk-Weighted Assets - Constraints on the Use of Internal Model Approaches, a consultative document that aims to limit the use of advanced credit risk calculation models. On April 6, 2016, the BCBS also issued Revisions to the Basel III Leverage Ratio Framework, a consultative document that proposes, in particular, revisions to the treatment of derivative exposures.

 

On April 21, 2016, the BCBS issued Interest Rate Risk in the Banking Book, a document that addresses risk management, capital treatment and the supervision of interest rate risk in the banking book. These rules, which have to be implemented by 2018, are intended to ensure that banks have adequate capital to cover potential banking book losses arising from interest rate movements and to limit capital arbitrage between the trading book and the banking book.

 

In July 2016, the BCBS revised the final securitization framework rules issued in December 2014 in the document entitled Revisions to the Securitisation Framework, which will come into effect as of January 2018. This document was amended to include Criteria for Identifying Simple, Transparent and Comparable Securitisations, a document issued in July 2015, as well as Capital Treatment for 'Simple, Transparent and Comparable' Securitisations, a consultative paper issued in November 2015. The aim of this new document is to address some shortcomings in the current securitization framework while allowing a more favourable capital treatment for transactions meeting the requirements of simplicity, transparency and comparability.

 

The following table presents the capital ratios and the leverage ratio calculated using the "all-in" methodology and the regulatory targets under Basel III.

 




Regulatory ratios

  

Minimum regulatory ratios to be maintained

  




As at July 31,

2016

  

 As at October 31,

2015

  

BCBS

2016

 (1)


OSFI

2016

 (1)(2)





  


  


  



  

Capital ratios



  


  


  



  


CET1


 9.9 

%

 9.9 

%

 5.125 

%


 8.0 

%


Tier 1(3)


 13.3 

%

 12.5 

%

 6.625 

%


 9.5 

%


Total(3)(4)


 15.1 

%

 14.0 

%

 8.625 

%


 11.5 

%

Leverage ratio


 3.7 

%

 3.7 

%

n.a.

  


 3.0 

%

 

n.a.   Not applicable

(1)    For the capital ratios, includes the 0.625% conservation buffer set by the BCBS and the 2.5% conservation buffer set by OSFI.

(2)    For the capital ratios, includes a 1% surcharge applicable to D-SIBs since January 1, 2016.

(3)    Figures as at October 31, 2015 include the redemption of the Series 20 preferred shares on November 15, 2015.

(4)    Figures as at October 31, 2015 include the $500 million redemption of notes on November 2, 2015.

 

 

Management Activities

On November 2, 2015, the Bank completed a $500 million redemption of medium-term notes maturing in November 2020 at a price equal to their nominal value plus accrued interest. These instruments had been excluded from the capital ratio calculations as at October 31, 2015.

 

On November 15, 2015, the Bank redeemed all the issued and outstanding Non-Cumulative Fixed-Rate Series 20 First Preferred Shares. Pursuant to the share conditions, the redemption price was $25.50 per share plus the periodic dividend declared and unpaid. These instruments had been excluded from the capital ratio calculations as at October 31, 2015.

 

On January 22, 2016, the Bank completed the issuance of 16,000,000 Non-Cumulative 5-Year Rate-Reset Series 34 First Preferred Shares at a price equal to $25.00 per share for gross proceeds of $400 million. Given that the Series 34 preferred shares satisfy the non-viability contingent capital requirements, they qualify for the purposes of calculating regulatory capital under Basel III.

 

On June 13, 2016, the Bank completed the issuance of 16,000,000 Non-Cumulative 5-Year Rate-Reset Series 36 First Preferred Shares at a price equal to $25.00 per share for gross proceeds of $400 million. Given that the Series 36 preferred shares satisfy the non-viability contingent capital requirements, they qualify for the purposes of calculating regulatory capital under Basel III.

 

On June 30, 2016, NBC Capital Trust, an open-end trust established by the Bank, redeemed the 225,000 Trust Capital Securities - Series 1, or NBC CapS - Series 1, issued and outstanding on June 30, 2016 at a redemption price of $1,000 per trust capital security plus the unpaid distributions as at the redemption date. Given this redemption, the Bank redeemed the $225 million deposit note from NBC Capital Trust.



 

Movement in Regulatory Capital(1)

 

(millions of Canadian dollars)




Nine months ended

July 31, 2016




  






Common Equity Tier 1 (CET1) capital  






Balance at beginning




 6,801 



Issuance of common shares (including Stock Option Plan)  




 31 



Repurchase of common shares  




 − 



Contributed surplus  




 4 



Dividends on preferred and common shares  




 (588)




  







Net income attributable to the Bank's shareholders  




 892 



Common share capital issued by subsidiaries and held by third parties




 7 



Removal of own credit spread net of income taxes  




 7 



Other




 (368)




  







Movements in accumulated other comprehensive income  








Translation adjustments  




 1 




Available-for-sale securities  




 29 




Other  




 42 




  







Change in goodwill and intangible assets (net of related tax liability)




 (194)



Other, including regulatory adjustments and transitional arrangements  








Change in defined benefit pension plan asset (net of related tax liability)




 146 




Change in amount exceeding 15% threshold  








  Deferred tax assets  




 − 




  Significant investment in common shares of financial institutions  




 − 




Change in other regulatory adjustments(2)




 (52)


Balance at end




 6,758 




  






Additional Tier 1 capital  






Balance at beginning  




 1,825 



New Tier 1 eligible capital issuances  




 800 



Redeemed capital(3)




 − 



Change in non-qualifying Additional Tier 1 subject to phase-out




 (225)



Other, including regulatory adjustments and transitional arrangements  




 − 


Balance at end  




 2,400 




  






Total Tier 1 capital




 9,158 




  






Tier 2 capital  






Balance at beginning




 1,052 



New Tier 2 eligible capital issuances  




 − 



Redeemed capital(4)




 − 



Change in non-qualifying Tier 2 subject to phase-out




 1 



Tier 2 instruments issued by subsidiaries and held by third parties




 2 



Change in eligible collective allowances  




 192 



Other, including regulatory adjustments and transitional arrangements  




 − 


Balance at end




 1,247 




  






Total regulatory capital  




 10,405 


 

(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.

(3)    The redemption of the Series 20 preferred shares on November 15, 2015 was included in the October 31, 2015 Tier 1 capital.

(4)    The $500 million redemption of notes on November 2, 2015 was included in the October 31, 2015 Tier 2 capital.

 



Risk-Weighted Assets by Key Risk Drivers

CET1 risk-weighted assets (RWA) decreased by $0.3 billion to total $68.5 billion as at July 31, 2016 compared to $68.8 billion as at October 31, 2015. This decrease came mainly from the impact of a decrease in market risk. The Bank's CET1 RWA are presented in the following table.

 

Capital Adequacy Under Basel III(1)

 

(millions of Canadian dollars)







As at July 31, 2016


As at October 31, 2015




Exposure

at default

Risk-weighted

 assets


Capital

requirement(2)


Risk-weighted

assets






Standardized

Approach


AIRB

Approach


Other


Total




Total


















Credit risk















Retail
















Residential mortgages

 47,567 


 624 


 4,824 


 − 


 5,448 


 436 


 4,975 



Qualifying revolving retail

 5,692 


 − 


 1,227 


 − 


 1,227 


 98 


 1,036 



Other retail

 15,306 


 1,966 


 4,908 


 − 


 6,874 


 550 


 6,651 


Non-retail
















Corporate

 57,548 


 2,257 


 23,744 


 − 


 26,001 


 2,080 


 26,662 



Sovereign

 28,045 


 193 


 656 


 − 


 849 


 68 


 629 



Financial institutions

 4,303 


 360 


 1,011 


 − 


 1,371 


 109 


 974 


Banking book equities(3)

 624 


 − 


 624 


 − 


 624 


 50 


 593 


Securitization

 3,177 


 − 


 785 


 − 


 785 


 63 


 798 


Other assets

 27,291 


 − 


 − 


 3,700 


 3,700 


 296 


 4,252 


















Counterparty credit risk
















Corporate

 6,853 


 58 


 61 


 − 


 119 


 10 


 96 



Sovereign

 15,257 


 − 


 18 


 − 


 18 


 1 


 22 



Financial institutions

 58,759 


 − 


 1,683 


 − 


 1,683 


 135 


 1,402 



Trading portfolio

 9,683 


 189 


 2,307 


 − 


 2,496 


 199 


 2,774 



Credit valuation adjustment charge(4)



 2,145 


 − 


 − 


 2,145 


 172 


 2,367 



















Regulatory scaling factor



 − 


 2,508 


 − 


 2,508 


 201 


 2,512 


Total - Credit risk

 280,105 


 7,792 


 44,356 


 3,700 


 55,848 


 4,468 


 55,743 


















Market risk
















VaR



 − 


 1,097 


 − 


 1,097 


 88 


 1,262 



Stressed VaR



 − 


 1,512 


 − 


 1,512 


 121 


 1,875 



Interest rate specific risk



 682 


 − 


 − 


 682 


 54 


 828 


Total - Market risk



 682 


 2,609 


 − 


 3,291 


 263 


 3,965 


















Operational risk



 9,391 


 − 


 − 


 9,391 


 751 


 9,127 


















Total

 280,105 


 17,865 


 46,965 


 3,700 


 68,530 


 5,482 


 68,835 


 

(1)    Figures are presented on an "all-in" basis.

(2)    The capital requirement is equal to 8% of risk-weighted assets.

(3)    Calculated using the simple risk-weighted method.

(4)    Calculated based on CET1 RWA.

 

 



Risk-Weighted Assets Movement by Key Drivers(1)

 

(millions of Canadian dollars)



Quarter ended


  

July 31, 2016


April 30, 2016


January 31, 2016




  

Non-counterparty

 credit risk


Counterparty

credit risk(2)


Total


Total


Total




  











Credit risk - Risk-weighted assets at beginning  

 49,089 


 6,061 


 55,150 


 56,684 


 55,743 



Book size  

 (420)


 6 


 (414)


 (368)


 631 



Book quality  

 (432)


 297 


 (135)


 (41)


 (411)



Model updates  

 − 


 − 


 − 


 8 


 − 



Methodology and policy  

 − 


 − 


 − 


 − 


 − 



Acquisitions and disposals  

 790 


 − 


 790 


 − 


 − 



Foreign exchange movements  

 360 


 97 


 457 


 (1,133)


 721 


Credit risk - Risk-weighted assets at end  

 49,387 


 6,461 


 55,848 


 55,150 


 56,684 


  











Market risk - Risk-weighted assets at beginning  





 3,971 


 3,779 


 3,965 



Movement in risk levels(3)





 (680)


 192 


 (186)



Model updates  





 − 


 − 


 − 



Methodology and policy  





 − 


 − 


 − 



Acquisitions and disposals  





 − 


 − 


 − 


Market risk - Risk-weighted assets at end  





 3,291 


 3,971 


 3,779 


  











Operational risk - Risk-weighted assets at beginning  





 9,254 


 9,278 


 9,127 



Movement in risk levels  





 137 


 (24)


 151 



Acquisitions and disposals  





 − 


 − 


 − 


Operational risk - Risk-weighted assets at end  





 9,391 


 9,254 


 9,278 




  











Risk-weighted assets at end





 68,530 


 68,375 


 69,741 


 

(1)    Figures are presented on an "all-in" basis.

(2)    Calculated based on CET1 risk-weighted assets.

(3)    Also includes foreign exchange movements that are not considered material.

 

The table above provides the risk-weighted assets movements by key drivers underlying the different risk categories.

 

The Book size item reflects organic changes in exposure size and composition (including new loans and maturing loans). RWA movements attributable to book size include increases or decreases in exposures, measured by exposure at default, assuming a stable risk profile.

 

The Book quality item is the Bank's best estimate of changes in book quality related to experience, such as underlying customer behaviour or demographics, including changes resulting from model recalibrations or realignments.

 

The Acquisitions and disposals item includes the impact of the acquisition of the ABA subsidiary completed during the third quarter of 2016.



Regulatory Capital Ratios

The CET1 capital ratio was 9.9% as at July 31, 2016, unchanged from 9.9% as at October 31, 2015. The Tier 1 and the Total capital ratios were, respectively, 13.3% and 15.1% as at July 31, 2016 versus 12.5% and 14.0% as at October 31, 2015. The change in these two capital ratios stems essentially from the issuances of Series 34 and 36 preferred shares for $800 million as well as from the Bank's redemption of the $225 million deposit note from NBC Capital Trust.

 

The leverage ratio was 3.7% as at July 31, 2016, unchanged from October 31, 2015.

 

Regulatory Capital and Ratios Under Basel III(1)

 

(millions of Canadian dollars)


As at July 31, 2016



As at October 31, 2015












Capital









CET1


 6,758 



 6,801 




Tier 1(2)


 9,158 



 8,626 




Total(2)(3)


 10,405 



 9,678 












Risk-weighted assets









CET1 capital


 68,530 



 68,835 




Tier 1 capital


 68,765 



 69,094 




Total capital


 68,966 



 69,316 












Total exposure


 248,276 



 234,957 












Capital ratios









CET1


 9.9 

%


 9.9 

%



Tier 1(2)


 13.3 

%


12.5 

%



Total(2)(3)


 15.1 

%


14.0 

%


Leverage ratio


 3.7 

%


  3.7 

%


 

(1)    Figures are presented on an "all-in" basis.

(2)    Figures as at October 31, 2015 include the redemption of the Series 20 preferred shares on November 15, 2015.

(3)    Figures as at October 31, 2015 include the $500 million redemption of notes on November 2, 2015.

 

Dividends

On August 30, 2016, the Board of Directors declared regular dividends on the various series of first preferred shares and a dividend of 55 cents per common share, payable on November 1, 2016 to shareholders of record on September 26, 2016. 


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 risk 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 2015 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 help 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 significant losses.

 

Certain risks are discussed below. For additional information, see the Risk Management section on pages 55 to 89 of the 2015 Annual Report. Risk management information is also provided in Note 6 to the consolidated financial statements, which covers loans.

 

Credit Risk

Credit risk is the risk of incurring a financial loss if an obligor does not fully honour its contractual commitments to the Bank. Obligors may be borrowers, issuers, counterparties or guarantors. Credit risk is the most significant risk facing the Bank in the normal course of business.

 

The amounts shown 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.

 

Maximum Credit Risk Exposure Under the Basel Asset Categories

 

(millions of Canadian dollars)


As at July 31,

2016


As at October 31,

2015





Drawn


Undrawn

commitments


Repo-style

transactions(1)

  


OTC

derivatives


Other

off-balance-

sheet items(2)

  


Total


Total





  


  



  


  



  






Retail


  


  



  


  



  







Residential mortgages


 41,590 


 5,977 


 − 

  


 − 


 − 

  


 47,567 


 44,431 



Qualifying revolving retail


 2,763 


 2,929 


 − 

  


 − 


 − 

  


 5,692 


 5,198 



Other retail


 14,014 


 1,279 


 − 

  


 − 


 13 

  


 15,306 


 15,052 




 58,367 


 10,185 


 − 

  


 − 


 13 

  


 68,565 


 64,681 


Non-retail


  


  



  


  



  







Corporate


 41,348 


 13,376 


 6,842 

  


 11 


 2,824 

  


 64,401 


 58,429 



Sovereign


 24,345 


 3,592 


 14,956 

  


 301 


 108 

  


 43,302 


 35,584 



Financial institutions


 3,398 


 347 


 58,296 

  


 463 


 558 

  


 63,062 


 63,033 




 69,091 


 17,315 


 80,094 

  


 775 


 3,490 

  


 170,765 


 157,046 


Trading portfolio


 − 


 − 


 − 

  


 9,683 


 − 

  


 9,683 


 10,318 


Securitization


 636 


 − 


 − 

  


 − 


 2,541 

  


 3,177 


 2,982 


Total - Gross Credit Risk


 128,094 


 27,500 


 80,094 

  


 10,458 


 6,044 

  


 252,190 


 235,027 





  


  



  


  



  






Standardized Approach


 10,851 


 455 


 2,058 

  


 238 


 453 

  


 14,055 


 10,865 


AIRB Approach


 117,243 


 27,045 


 78,036 

  


 10,220 


 5,591 

  


 238,135 


 224,162 


Total - Gross Credit Risk


 128,094 


 27,500 


 80,094 

  


 10,458 


 6,044 

  


 252,190 


 235,027 


 

(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 fails to 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, 2016 and in Supplementary Regulatory Capital Disclosure for the Third Quarter Ended July 31, 2016, which are available on the Bank's website at nbc.ca.


 

Market Risk

Market risk is the risk of losses in on- and off-balance-sheet positions arising from movements in market parameters. Managing this risk is a core competency for the Bank in its market making, 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 Value-at-Risk (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, 2016






Market risk measures









Balance

sheet


Trading(1)


Non-Trading(2)


Not subject to market risk


Non-traded risk primary

risk sensitivity















Assets












Cash and deposits with financial institutions

 8,824 


 57 


 8,043 


 724 


Interest rate(3)



Securities













At fair value through profit or loss

 45,527 


 43,917 


 1,610 


 − 


Interest rate(3) and other(4)




Available-for-sale

 14,156 


 − 


 14,156 


 − 


Interest rate(3) and equity(5)




Held-to-maturity

 2,758 


 − 


 2,758 


 − 


Interest rate(3)



Securities purchased under reverse repurchase













agreements and securities borrowed

 14,880 


 − 


 14,880 


 − 


Interest rate(3)(6)



Loans, net of allowances

 117,830 


 6,005 


 111,825 


 − 


Interest rate(3)



Customers' liability under acceptances

 6,959 


 − 


 6,959 


 − 


Interest rate(3)



Derivative financial instruments

 10,943 


 9,354 


 1,589 


 − 


Interest rate



Purchased receivables

 1,553 


 − 


 1,553 


 − 


Interest rate



Defined benefit asset

 49 


 − 


 49 


 − 


Other



Other

 6,417 


 − 


 − 


 6,417 







 229,896 


 59,333 


 163,422 


 7,141 

















Liabilities












Deposits

 138,875 


 4,518 


 134,357 


 − 


Interest rate(3)



Acceptances

 6,959 


 − 


 6,959 


 − 


Interest rate(3)



Obligations related to securities sold short

 12,748 


 12,748 


 − 


 − 





Obligations related to securities sold under repurchase













agreements and securities loaned

 23,548 


 − 


 23,548 


 − 


Interest rate(3)(6)



Derivative financial instruments

 7,968 


 6,956 


 1,012 


 − 


Interest rate



Liabilities related to transferred receivables

 19,560 


 4,256 


 15,304 


 − 


Interest rate(3)



Defined benefit liability

 263 


 − 


 263 


 − 


Other



Other

 6,944 


 44 


 1,349 


 5,551 


Interest rate(3)



Subordinated debt

 1,014 


 − 


 1,014 


 − 


Interest rate(3)




 217,879 


 28,522 


 183,806 


 5,551 




 

(1)    Trading positions whose risk measures are VaR and SVaR. See the tables that show the VaR and SVaR distributions of the trading portfolios by risk category as well as their correlation effect, which are presented on the following pages and in the Market Risk Management section of the 2015 Annual Report.

(2)    Non-trading positions that use other risk measures.

(3)    See the tables that show the VaR and SVaR distributions of the trading portfolios by risk category and their correlation effect as well as the interest rate sensitivity tables which are presented on the following pages and in the Market Risk Management section of the 2015 Annual Report.

(4)    See the Master Asset Vehicles section in Note 6 to the audited annual consolidated financial statements as at October 31, 2015.

(5)    The fair value of equity securities classified as available-for-sale is disclosed in Notes 3 and 5 to the consolidated financial statements.

(6)    These instruments are recorded at amortized cost and are subject to credit risk for capital management purposes. For trading-related transactions with maturities of more than one day, interest rate risk is included in the VaR and SVaR measures. 

 

 



 

(millions of Canadian dollars)

As at October 31, 2015






Market risk measures









Balance

sheet


Trading(1)


Non-Trading(2)


Not subject to market risk


Non-traded risk primary

risk sensitivity















Assets












Cash and deposits with financial institutions

 7,567 


 36 


 7,192 


 339 


Interest rate(3)



Securities













At fair value through profit or loss

 41,997 


 39,805 


 2,192