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Nat Bank of Canada (32SS)

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Wednesday 04 December, 2019

Nat Bank of Canada

MD&A 2019

RNS Number : 7123V
National Bank of Canada
04 December 2019
 

National Bank of Canada

December 4, 2019

 

2019 Management's Discussion and Analysis

 

National Bank of Canada (the "Bank") announces publication of its 2019 Annual Report, including the Management's Discussion and Analysis thereon (the "2019 MD&A"). The 2019 MD&A has 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 as part of the 2019 Annual Report at: https://www.nbc.ca/en/about-us/investors/investor-relations/annual-reports-proxy-circulars-aif.html.

 

To view the full PDF of the 2019 MD&A, the 2019 Annual Report and the 2019 Annual CEO and CFO Certifications please click on the following link:

http://www.rns-pdf.londonstockexchange.com/rns/7123V_1-2019-12-4.pdf

http://www.rns-pdf.londonstockexchange.com/rns/7123V_2-2019-12-4.pdf

http://www.rns-pdf.londonstockexchange.com/rns/7123V_3-2019-12-4.pdf

 

 

Message From the President and Chief Executive Officer       

 

 

Another Strong Year for National Bank

Fiscal 2019 was another strong year for National Bank. Across the Bank, we achieved solid business growth and record profitability. Our performance reflects our commitment to delivering consistent value to all stakeholders: our clients, our employees, our shareholders and our communities.

 

In 2019, we generated diluted earnings per share of $6.34, up 7% from last year, and we met all of our medium-term objectives. Our credit quality is excellent, reflecting our prudent approach to lending. Our transformation translated into further improvements in our efficiency ratio. Again this year, we delivered an industry-leading return on equity of 18.0%.

 

National Bank's share price reached new highs in 2019, and the Bank is in the unique position of having delivered industry-leading compound annual total shareholder returns of 18.9%, 17.1%, 13.9% and 15.1% over the one, three, ten and twenty-year periods, respectively.

 

National Bank's share price reached new highs in 2019, and the Bank is in the unique position of having delivered industry-leading compound annual total shareholders returns, […]

 

Our capital deployment strategy is clear and remains unchanged. Our top priority is to maintain strong capital levels, providing us with the flexibility to invest in growth initiatives in our core markets and to return capital to shareholders. In 2019, we raised our dividend by 9% and returned $281 million of additional capital through share repurchases.

 

Well-Positioned for Growth

As a Canadian super-regional bank with a leading franchise in Quebec, we continue to benefit from favourable economic conditions both in our home province and across Canada. The Quebec economy remains strong, with historically low unemployment rates, sound public finances and housing affordability well above the national average.

 

At this point of the economic cycle, we remain very comfortable with our business positioning and our prudent approach to risk. As we are entering a new year, we will maintain our overweight positions in the province of Quebec as well as in secured lending, which we view as favourable in the current environment. We will also continue to strive to achieve the right balance between volume growth, healthy margins, and strong credit quality. Our overall objective is to position the Bank to perform well through the cycle.

 

 

At this point of the economic cycle, we remain very comfortable with our business positioning and our prudent approach to risk. […] Our overall objective is to position the Bank to perform well through the cycle.

 

Our Personal and Commercial Banking segment is benefitting from our strong market position in Quebec. In the retail market, we are deepening relationships with clients, focusing on advice and leveraging our digital platforms to create a compelling and secure client experience, which drives customer loyalty and acquisition. In Commercial Banking, we are pursuing a focused growth strategy across Canada in specialized markets, harnessing our recognized strengths in healthcare, agriculture, technology, creative industries and real estate.

 

As a leading franchise in Quebec and firmly established in Canada, we are pleased with the differentiated positioning of our Wealth Management segment. With a focus on distribution, our open-architecture model responds to client needs for choice and unbiased advice. We are proud to be the Canadian leader in providing administrative services to independent asset managers.

 

Our Financial Markets segment is a strong pillar for the Bank. Our established leadership in selected niches across Canada is underpinned by our entrepreneurial culture, our differentiated business mix and our flexible approach to capital allocation. We continue to invest in our franchise to further our presence domestically and capitalize on targeted opportunities abroad.

 

We are very satisfied with the overall performance of our international strategy, which generates strong growth and superior returns. Both Credigy in the U.S. and ABA Bank in Cambodia have greatly exceeded our expectations, and we continue to see attractive growth potential for each platform. Looking ahead, our efforts and capital dedicated to international markets will be concentrated on these two successful subsidiaries.

 

 

Message From the President and Chief Executive Officer (cont.)

 

 

People and Culture:

A Competitive Advantage

At a time of profound change, we believe that people and culture are the cornerstone of our long-term success. Our entrepreneurial culture, deeply rooted within the organization, is a key differentiator in the way we transform the Bank, serve our clients, and attract people with the right skills and values. Our evolution as an agile organization goes hand-in-hand with our digital transformation-all essential components to delivering superior customer experience, sustainable revenue growth and higher operating efficiency.

 

At National Bank, we are putting

People First.

 

In 2019, we adjusted our mission statement to respond to the rapid evolution of our operating environment. At National Bank, we are putting People First. We believe that building long-term relationships with our clients, our employees and our communities is key to creating sustainable long-term value for all stakeholders.

 

Ensuring Long-Term Sustainability

The long-term sustainability of an institution like ours depends on the ability to maintain a healthy balance between the interests of all stakeholders. As a proud founding signatory of the UN Principles for Responsible Banking and joining the UN Principle for Responsible Investment in 2019, we are putting the full strength of our organization behind our environmental, social and governance guiding principles with the aim to develop a green economy, enrich our communities, and uphold the highest standards in corporate governance.  How we achieve success is crucial and our principles must translate into tangible action. As we look forward, we are more committed than ever to maximizing the positive impact of our actions to the benefit of our clients, employees, communities and shareholders.

 

Moving Forward With Confidence

As we embark on a new year, I look to the future with cautious optimism. The outlook in Quebec remains favourable and we continue to take advantage of Canada's broader economic soundness. Our credit quality is excellent, our capital ratios are strong, and disciplined cost management remains a priority throughout the organization. In an environment of macroeconomic and geopolitical uncertainties, we are comfortable with our current positioning and we remain vigilant in balancing our objectives of sustainable growth with prudent risk management.

 

As we mark our 160th anniversary, I am proud of the Bank's influential role in the economic and social development of Quebec and Canada. I wish to sincerely thank my colleagues of the Office of the President for their leadership and our more than 25,000 employees for their contribution in achieving our mission each day. I thank the Board of Directors for its judicious counsel and support. I also thank our 2.7 million clients and our shareholders for their trust and continued support. We have the right team in place to ensure the Bank's long-term success and truly live our mission of putting People First.

 

 

 

 

Louis Vachon

President and Chief Executive Officer

 

 

 

 

Message From the Chairman of the Board                     

 

 

National Bank celebrated its 160th anniversary in 2019, and the Board is truly proud of its heritage and rich history. Over the last century and a half, the Bank has successfully evolved and made positive contributions to the economic and social development of its communities.

 

Against this backdrop, the Board is very pleased with the Bank's strong performance in 2019 and with the continued execution of its strategy. The Bank has demonstrated, once again, its capacity to create tangible value for all stakeholders: its clients, employees, communities and shareholders.

 

Strategic Oversight

As stewards of the Bank, the Board plays a critical and active role in overseeing the sound execution of the Bank's strategy to ensure its long-term success. The Board participates in annual strategic reviews with the senior leadership team and in monitoring the progress of the Bank's initiatives and key performance indicators.

 

In order to provide sound guidance to management, the Board remains at the forefront of new realities facing the financial services industry and stays abreast of emerging technologies and other innovations. The Board also continues to engage meaningfully with stakeholders, including shareholders, to always keep its finger on the pulse of its industry.

 

Focused on Talent and Culture

The Board works closely with management to ensure talent development. Succession planning is also a key Board responsibility, and we have great confidence in the strength of the leadership team and a solid pipeline of talent across the Bank.

 

People and culture are the cornerstone of the Bank's long-term success. As the banking industry evolves in an ever-changing environment, a strong entrepreneurial culture with the ability to adapt rapidly have become competitive advantages in the pursuit of our transformation.

 

Strong Risk Management Culture

The Board champions a strong risk management culture, strengthened through active compliance, controls, and audits across all business lines. The Board assesses the soundness of business opportunities against the Bank's risk management framework, which considers both financial and non-financial risks.

 

In 2019, cybersecurity remained a key priority for the Board, and the Bank continued its significant investments in this critical aspect of our industry. Protecting client information is of the utmost importance, and risk-reduction strategies are continually being assessed by the Board.

 

Best-in-Class Board Governance

Leadership in the area of governance is fundamental. We have a strong Board, thanks to the active engagement of its dedicated members who put forth diverse perspectives, backgrounds, and expertise, all critical to strong oversight.

 

To ensure that the Board's composition is both aligned with and can anticipate the Bank's ever-evolving needs, we remain proactive in promoting the highest standards of board renewal and committee chair rotations. In 2019, we welcomed Patricia Curadeau-Grou to the Board, a National Bank alumna who brings deep knowledge of the banking industry and solid expertise in finance and risk management.

 

Embedding ESG Principles Into our

Decision-Making

The Bank recognizes that its long-term success is directly tied to its ability to create sustainable value for all stakeholders.

 

Corporate responsibility and ethical standards have always been embedded into the Bank's culture. The Board understands the increasing importance of environmental, social, and governance (ESG) factors to all stakeholders. In 2019, we made significant progress in this regard, with the development and formal adoption of the Bank's ESG principles by the Board.

 

Ready for the Future

On behalf of the Board, I would like to thank Louis Vachon and our executive team for their leadership and lasting contributions. I would also like to thank the Bank's more than 25,000 employees for their unwavering commitment and for being dedicated Bank ambassadors in their communities. Our passion for people has allowed us to successfully build lasting relationships for the past 160 years, and we look forward to continuing to do so in the future.

 

I wish to conclude by thanking our customers for their loyalty, our shareholders for their support, and all our stakeholders for the confidence they continue to manifest in National Bank.

 

 

 

Jean Houde

Chairman of the Board of Directors

 

For more information regarding the Bank's governance, please refer to the Statement of Corporate Practices available on the Bank's website at nbc.ca.

 

 

Members of the Board of Directors

 

Jean Houde

Montreal, Quebec, Canada

Chairman of the Board of Directors,

National Bank of Canada

and Corporate Director

Director since March 2011

 

 

Pierre Boivin

Montreal, Quebec, Canada

President and Chief Executive Officer,

Claridge inc.

Director since April 2013

 

 

Rebecca McKillican

Oakville, Ontario, Canada

Chief Retail Officer,

McKesson Canada

Director since October 2017

 

 

Pierre Thabet

St-Georges, Quebec, Canada

President, Boa-Franc inc.

Director since March 2011

 

 

Raymond Bachand

Montreal, Quebec, Canada

Strategic Advisor,

Norton Rose Fulbright Canada LLP

and Corporate Director

Director since October 2014

 

 

Patricia Curadeau-Grou

Montreal, Quebec, Canada

Corporate Director

Director since April 2019

 

 

 

Robert Paré

Westmount, Quebec, Canada

Strategic Advisor,

Fasken Martineau DuMoulin LLP

and Corporate Director

Director since April 2018

 

Louis Vachon

Beaconsfield, Quebec, Canada

President and Chief Executive Officer,

National Bank of Canada

Director since August 2006

 

 

 

 

 

Maryse Bertrand

Westmount, Quebec, Canada

Corporate Director

Director since April 2012

 

 

 

 

Gillian H. Denham

Toronto, Ontario, Canada

Corporate Director

Director since October 2010

 

 

 

Lino A. Saputo Jr.

Montreal, Quebec, Canada

Chief Executive Officer and

Chairman of the Board of Directors,

Saputo Inc.

Director since April 2012

 

 

Pierre Blouin

Town of Mount-Royal, Quebec, Canada

Corporate Director

Director since September 2016

 

 

 

 

Karen Kinsley

Ottawa, Ontario, Canada

Corporate Director

Director since December 2014

 

 

 

Andrée Savoie

Dieppe, New Brunswick, Canada

President and Chair of the

Board of Directors,

Acadian Properties Ltd.

Director since April 2015

 

 

 

 

Board Committees

 

Audit Committee

Karen Kinsley (Chair)

Maryse Bertrand

Pierre Blouin

Andrée Savoie

Pierre Thabet

Human Resources Committee

Pierre Boivin (Chair)

Maryse Bertrand

Pierre Blouin

Gillian H. Denham

Rebecca McKillican

 

 

Risk Management Committee

Pierre Thabet (Chair)

Raymond Bachand

Patricia Curadeau-Grou

Karen Kinsley

Lino A. Saputo Jr.

 

 

Conduct Review and Corporate

Governance Committee

Lino A. Saputo Jr. (Chair)

Raymond Bachand

Jean Houde

Robert Paré

Andrée Savoie

 

 

 

 

 

Risk Disclosures

 

In 2012, the Financial Stability Board (FSB) formed a working group, the Enhanced Disclosure Task Force (EDTF), that was mandated to develop principles for enhancing the risk disclosures of major banks, to recommend improvements to current risk disclosures, and to identify risk disclosure best practices used by major financial institutions. The EDTF published a report entitled Enhancing the Risk Disclosures of Banks, which contains 32 recommendations. The Bank makes every effort to ensure overall compliance with those recommendations and is continuing to enhance its risk disclosures to meet the best practices on an ongoing basis. The risk disclosures required by the EDTF are provided in this Annual Report and in the document entitled Supplementary Regulatory Capital and Pillar 3 Disclosure  available on the Bank's website at nbc.ca.

 

 

 

 

 

 

 

 

 

 

Pages

 

 

 

 

 

 

Annual

Report

 

 

Supplementary

Regulatory Capital

and Pillar 3 Disclosure(1)

 

 

 

 

 

 

 

 

 

 

 

 

General

 

 

 

 

 

 

 

1

 

Location of risk disclosures

 

12

 

 

 

 

 

 

 

 

Management's Discussion and Analysis

 

50 to 94, 107, 109 and 110

 

 

 

 

 

 

 

 

Consolidated Financial Statements

 

Notes 1, 7, 16, 23 and 29

 

 

 

 

 

 

 

 

Supplementary Financial Information

 

 

 

 

19 to 29(2)

 

 

 

 

 

Supplementary Regulatory Capital and Pillar 3 Disclosure

 

 

 

 

5 to 52

 

 

2

 

Risk terminology and risk measures

 

58 to 94

 

 

 

 

 

3

 

Top and emerging risks

 

63 to 67

 

 

 

 

 

4

 

New key regulatory ratios

 

51 to 53, 80, 82 and 86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk governance and risk management

 

 

 

 

 

 

 

5

 

Risk management organization, processes and key functions

 

58 to 76, 82 and 83

 

 

 

 

 

6

 

Risk management culture

 

58 and 59

 

 

 

 

 

7

 

Key risks by business segment, risk management

 

 

 

 

 

 

 

 

 

 

and risk appetite

 

57 to 59 and 63

 

 

 

 

 

8

 

Stress testing

 

50, 59, 71, 80, 81 and 83

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital adequacy and risk-weighted assets (RWA)

 

 

 

 

 

 

 

9

 

Minimum Pillar 1 capital requirements

 

51 to 53

 

 

 

 

 

10

 

Reconciliation of the accounting balance sheet to

 

 

 

 

 

 

 

 

 

 

the regulatory balance sheet

 

 

 

 

7 to 13, 16 and 17

 

 

11

 

Movements in regulatory capital

 

55

 

 

 

 

 

12

 

Capital planning

 

50 to 57

 

 

 

 

 

13

 

RWA by business segment

 

 

 

 

 

 

 

 

 

 

and by risk type

 

57

 

 

6

 

 

14

 

Capital requirements by risk and RWA calculation method

 

67 to 71

 

 

6

 

 

15

 

Banking book credit risk

 

 

 

 

6

 

 

16

 

Movements in RWA by risk type

 

56

 

 

6

 

 

17

 

Assessment of credit risk model performance

 

62, 68 to 70 and 75

 

 

35

 

 

 

 

 

 

 

 

 

 

 

 

Liquidity

 

 

 

 

 

 

 

18

 

Liquidity management and components of the liquidity buffer

 

82 to 87

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funding

 

 

 

 

 

 

 

19

 

Summary of encumbered and unencumbered assets

 

84 and 85

 

 

 

 

 

20

 

Residual contractual maturities of balance sheet items and

 

 

 

 

 

 

 

 

 

 

off-balance-sheet commitments

 

203 to 207

 

 

 

 

 

21

 

Funding strategy and funding sources

 

87 to 89

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market risk

 

 

 

 

 

 

 

22

 

Linkage of market risk measures to balance sheet

 

77 and 78

 

 

 

 

 

23

 

Market risk factors

 

75 to 81, 191 and 192

 

 

 

 

 

24

 

VaR: Assumptions, limitations and validation procedures

 

78 and 79

 

 

 

 

 

25

 

Stress tests, stressed VaR and backtesting

 

75 to 81

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit risk

 

 

 

 

 

 

 

26

 

Credit risk exposures

 

74 and 151 to 163

 

 

18 to 44 and 19 to 27(2)

 

 

27

 

Policies for identifying impaired loans

 

72, 126 and 127

 

 

 

 

 

28

 

Movements in impaired loans and allowances for credit losses

 

107, 109, 110 and 151 to 163

 

 

24 to 26(2)

 

 

29

 

Counterparty credit risk relating to derivatives transactions

 

72, 73 and 171 to 174

 

 

37 to 44 and 28(2) and 29(2)

 

 

30

 

Credit risk mitigation

 

70 to 72 and 148

 

 

20, 24 and 42 to 52

 

 

 

 

 

 

 

 

 

 

 

 

Other risks

 

 

 

 

 

 

 

31

 

Other risks: Governance, measurement and management

 

66, 67 and 90 to 94

 

 

 

 

 

32

 

Publicly known risk events

 

90

 

 

 

 

 

(1)    Fourth quarter 2019.

(2)    These pages are included in the document entitled Supplementary Financial Information - Fourth Quarter 2019. 

 

 

Management's Discussion

and Analysis

 

 

December 3, 2019

 

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 audited annual consolidated financial statements for the year ended October 31, 2019 (the consolidated financial statements) and prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), unless otherwise indicated. IFRS represent Canadian generally accepted accounting principles (GAAP). This MD&A should be read in conjunction with the consolidated financial statements and accompanying notes for the year ended October 31, 2019. 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

14

 

Quarterly Financial Information

43

Financial Disclosure 

16

 

Analysis of the Consolidated Balance Sheet

44

Overview

17

 

Securitization and Off-Balance-Sheet Arrangements

48

Financial Analysis

21

 

Capital Management

50

Business Segment Analysis  

24

 

Risk Management

58

   Personal and Commercial

25

 

Critical Accounting Estimates

95

   Wealth Management

29

 

Future Accounting Policy Changes

101

   Financial Markets

33

 

Additional Financial Information

102

   U.S. Specialty Finance and International (USSF&I)

38

 

 

 

   Other

42

 

 

 

Caution Regarding Forward-Looking Statements

From time to time, the Bank makes written and oral forward-looking statements, such as those contained in the Economic Review and Outlook section of this 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 2020 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 2020 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 58 of this Annual Report, and more specifically, 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; 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 cyberattack risk.

 

The foregoing list of risk factors is not exhaustive. Additional information about these factors can be found in the Risk Management section of this 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

 

As stated in Note 1 to the consolidated financial statements, the Bank adopted IFRS 15 on November 1, 2018. As permitted by IFRS 15, the Bank did not restate comparative consolidated financial statements, and Note 1 to the consolidated financial statements presents the impact of IFRS 15 adoption on the Bank's Consolidated Balance Sheet as at November 1, 2018.

 

The presentation of segment disclosures is consistent with the presentation adopted by the Bank for the year beginning November 1, 2018. This presentation reflects the fact that advisor banking service activities, which had previously been presented in the Wealth Management segment, are now presented in the Personal and Commercial segment. The Bank made this change to better align the monitoring of its activities with its management structure.

 

Non-GAAP Financial Measures

 

The Bank uses a number of financial measures when assessing its results and measuring its overall performance. Some of these financial measures are not calculated in accordance with GAAP, which are based on IFRS. Presenting non-GAAP financial measures 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 the underlying performance of the Bank's operations. Securities regulators require companies to caution readers that non-GAAP measures do not have a standardized meaning under GAAP and therefore may not be comparable to similar measures used by other companies.

 

Like many other financial institutions, 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.

 

The specified items related to the acquisitions of recent years (mainly those of the Wealth Management segment) are no longer presented as specified items as of November 1, 2018, since the amounts are not considered significant. The figures for the year ended October 31, 2018 reflect this change.

 

 

Reconciliation of Non-GAAP Financial Measures

 

Year ended October 31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(millions of Canadian dollars)

 

 

 

 

 

 

 

 

 

 

2019

 

2018(1)

 

 

 

Personal and Commercial

 

Wealth Management

 

Financial Markets

 

USSF&I

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

2,383

 

469

 

283

 

656

 

(195)

 

3,596

 

3,382

 

Taxable equivalent

 

1

 

191

 

 

3

 

195

 

144

 

Net interest income on a taxable equivalent basis

2,383

 

470

 

474

 

656

 

(192)

 

3,791

 

3,526

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest income

1,069

 

1,273

 

1,141

 

59

 

294

 

3,836

 

3,784

 

Taxable equivalent

 

 

135

 

 

 

135

 

101

 

Gain on disposal of Fiera Capital shares(2)

 

 

 

 

(79)

 

(79)

 

 

Gain on disposal of premises and equipment(3)

 

 

 

 

(50)

 

(50)

 

 

Remeasurement at fair value of an investment(4)

 

 

 

 

33

 

33

 

 

Non-interest income on a taxable equivalent basis and

  excluding specified items

1,069

 

1,273

 

1,276

 

59

 

198

 

3,875

 

3,885

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues on a taxable equivalent basis and

  excluding specified items

3,452

 

1,743

 

1,750

 

715

 

6

 

7,666

 

7,411

 

Non-interest expenses

1,816

 

1,067

 

743

 

285

 

390

 

4,301

 

4,063

 

Impairment losses on premises and equipment and on intangible assets(5)

 

 

 

 

(57)

 

(57)

 

 

Provisions for onerous contracts(6)

 

 

 

 

(45)

 

(45)

 

 

Charge related to Maple(7)

 

 

 

 

(11)

 

(11)

 

 

Severance pay(8)

 

 

 

 

(10)

 

(10)

 

 

Non-interest expenses excluding specified items

1,816

 

1,067

 

743

 

285

 

267

 

4,178

 

4,063

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contribution on a taxable equivalent basis and excluding specified items

1,636

 

676

 

1,007

 

430

 

(261)

 

3,488

 

3,348

 

Provisions for credit losses

237

 

 

30

 

80

 

 

347

 

327

 

Income before income taxes on a taxable equivalent basis and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

excluding specified items

1,399

 

676

 

977

 

350

 

(261)

 

3,141

 

3,021

 

Income taxes

372

 

176

 

(66)

 

71

 

(91)

 

462

 

544

 

Taxable equivalent

 

1

 

326

 

 

3

 

330

 

245

 

Income taxes on the gain on disposal of Fiera Capital shares(2)

 

 

 

 

(11)

 

(11)

 

 

Income taxes on the gain on disposal of premises and equipment(3)

 

 

 

 

(7)

 

(7)

 

 

Income taxes on the remeasurement at fair value of an investment(4)

 

 

 

 

6

 

6

 

 

Income taxes related to impairment losses on premises and equipment

  and on intangible assets(5)

 

 

 

 

15

 

15

 

 

Income taxes on provisions for onerous contracts(6)

 

 

 

 

12

 

12

 

 

Income taxes on the charge related to Maple(7)

 

 

 

 

3

 

3

 

 

Income taxes on severance pay(8)

 

 

 

 

3

 

3

 

 

Income taxes on a taxable equivalent basis and excluding specified items

372

 

177

 

260

 

71

 

(67)

 

813

 

789

 

Net income excluding specified items

1,027

 

499

 

717

 

279

 

(194)

 

2,328

 

2,232

 

Specified items after income taxes

 

 

 

 

(6)

 

(6)

 

 

Net income   

1,027

 

499

 

717

 

279

 

(200)

 

2,322

 

2,232

 

Non-controlling interests

 

 

 

40

 

26

 

66

 

87

 

Net income attributable to the Bank's shareholders

1,027

 

499

 

717

 

239

 

(226)

 

2,256

 

2,145

 

 

(1)    For the year ended October 31, 2018, certain amounts have been reclassified, mainly amounts related to advisor banking service activities, which have been transferred from the Wealth Management segment to the Personal and Commercial segment.

(2)    During the year ended October 31, 2019, following the Bank's disposal of a portion of its investment in Fiera Capital Corporation (Fiera Capital) the Bank recorded a gain on disposal of $79 million ($68 million net of income taxes), including a gain of $31 million ($27 million net of income taxes) upon remeasurement at fair value of the retained interest.

(3)    During the year ended October 31, 2019, the Bank completed the sale of its head office land and building located at 600 De La Gauchetière Street West, Montreal, Quebec, Canada, for gross proceeds of $187 million, and a gain on disposal of premises and equipment of $50 million ($43 million net of income taxes) was recorded.

(4)    During the year ended October 31, 2019, the Bank remeasured at fair value its investment in NSIA Participations (NSIA) and recorded a loss of $33 million ($27 million net of income taxes).

(5)    During the year ended October 31, 2019, the Bank recorded $57 million ($42 million net of income taxes) in impairment losses on premises and equipment and on intangible assets related to computer equipment and technology developments.

(6)    During the year ended October 31, 2019, the Bank reviewed all of its corporate building leases and recorded provisions for onerous contracts of $45 million ($33 million net of income taxes).

(7)    During the year ended October 31, 2019, the Bank recorded a charge of $11 million ($8 million net of income taxes) related to the company Maple Financial Group Inc. (Maple) following the event of November 19, 2019, as described in the section entitled Event After the Consolidated Balance Sheet on page 47.

(8)    During the year ended October 31, 2019, following an optimization of certain organizational structures, the Bank recorded $10 million ($7 million net of income taxes) in severance pay.

 

 

Financial Disclosure

 

Disclosure Controls and Procedures

 

The Bank's financial information is prepared with the support of a set of disclosure controls and procedures (DC&P) that are implemented by the President and Chief Executive Officer (CEO) and by the Chief Financial Officer and Executive Vice-President, Finance (CFO). During the year ended October 31, 2019, in accordance with Regulation 52-109 Respecting Certification of Disclosure in Issuers' Annual and Interim Filings (Regulation 52-109), released by the CSA, the design and operation of these controls and procedures were evaluated to determine their effectiveness.

 

As at October 31, 2019, the CEO and the CFO confirmed the effectiveness of the DC&P. These controls are designed to provide reasonable assurance that the information disclosed in annual and interim filings and in other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified by that legislation. These controls and procedures are also designed to ensure that such information is accumulated and communicated to the Bank's management, including its signing officers, as appropriate, to allow for timely decisions regarding disclosure.

 

This Annual Report was reviewed by the Disclosure Committee, the Audit Committee, and the Bank's Board of Directors (the Board), which approved it prior to publication.

 

Internal Controls Over Financial Reporting

 

The internal controls over financial reporting (ICFR) are designed to provide reasonable assurance that the financial information presented is reliable and that the consolidated financial statements were prepared in accordance with GAAP, which are based on IFRS, unless indicated otherwise as explained on pages 14 and 15 of this MD&A. Due to inherent limitations, the ICFR may not prevent or detect all misstatements in a timely manner.

 

The CEO and the CFO oversaw the evaluation work performed on the design and operation of the Bank's ICFR in accordance with Regulation 52‑109. These controls were evaluated in accordance with the control framework of the Committee of Sponsoring Organizations of the Treadway Commission (COSO - 2013) for financial controls and in accordance with the control framework of the Control Objectives for Information and Related Technologies (COBIT) for general information technology controls.

 

Based on the evaluation results, the CEO and CFO concluded, as at October 31, 2019, that there are no material weaknesses, that the ICFR are effective and provide reasonable assurance that the financial reporting is reliable, and that the Bank's consolidated financial statements were prepared in accordance with GAAP.

 

Changes to Internal Controls Over Financial Reporting

 

The CEO and CFO also undertook work whereby they were able to conclude that, during the year ended October 31, 2019, no changes were made to the ICFR that have materially affected, or are reasonably likely to materially affect, the design or operation of the ICFR.

 

Disclosure Committee

 

The Disclosure Committee assists the CEO and CFO by ensuring that disclosure controls and procedures and internal control procedures for financial reporting are implemented and operational. In so doing, the committee ensures that the Bank is meeting its disclosure obligations under current regulations and that the CEO and CFO are producing the requisite certifications.

Overview                                                                                                         

 

Highlights

 

 

 

 

 

 

 

 

 

 

 

 

 

As at October 31 or for the year ended October 31

 

 

 

 

 

 

 

 

 

 

 

(millions of Canadian dollars, except per share amounts)

 

 

2019

 

 

 

2018

 

 

% change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating results

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

7,432

 

 

 

7,166

 

 

4

 

Net income

 

 

2,322

 

 

 

2,232

 

 

4

 

Net income attributable to the Bank's shareholders

 

 

2,256

 

 

 

2,145

 

 

5

 

Return on common shareholders' equity

 

 

18.0

%

 

 

18.4

%

 

 

 

Dividend payout ratio

 

 

42

%

 

 

41

%

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

6.39

 

 

$

6.01

 

 

6

 

 

Diluted

 

 

6.34

 

 

 

5.94

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating results on a taxable equivalent basis and excluding specified items(1)

 

 

 

 

 

 

 

 

 

 

 

Total revenues on a taxable equivalent basis and excluding specified items

 

 

7,666

 

 

 

7,411

 

 

3

 

Net income excluding specified items

 

 

2,328

 

 

 

2,232

 

 

4

 

Return on common shareholders' equity excluding specified items

 

 

18.0

%

 

 

18.4

%

 

 

 

Dividend payout ratio excluding specified items

 

 

42

%

 

 

41

%

 

 

 

Efficiency ratio on a taxable equivalent basis and excluding specified items

 

 

54.5

%

 

 

54.8

%

 

 

 

Earnings per share excluding specified items(1)

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

6.40

 

 

$

6.01

 

 

6

 

 

Diluted

 

 

6.36

 

 

 

5.94

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common share information

 

 

 

 

 

 

 

 

 

 

 

Dividends declared

 

$

2.66

 

 

$

2.44

 

 

9

 

Book value

 

 

36.89

 

 

 

34.40

 

 

 

 

Share price

 

 

 

 

 

 

 

 

 

 

 

 

High

 

 

68.02

 

 

 

65.63

 

 

 

 

 

Low

 

 

54.97

 

 

 

58.69

 

 

 

 

 

Close

 

 

68.02

 

 

 

59.76

 

 

 

 

Number of common shares (thousands)

 

 

334,172

 

 

 

335,071

 

 

 

 

Market capitalization

 

 

22,730

 

 

 

20,024

 

 

 

 

Balance sheet and off-balance-sheet

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

281,458

 

 

 

262,471

 

 

7

 

Loans and acceptances, net of allowances

 

 

153,251

 

 

 

146,082

 

 

5

 

Deposits

 

 

189,566

 

 

 

170,830

 

 

11

 

Equity attributable to common shareholders

 

 

12,328

 

 

 

11,526

 

 

7

 

Assets under administration and under management

 

 

565,396

 

 

 

485,080

 

 

17

 

Regulatory ratios under Basel III

 

 

 

 

 

 

 

 

 

 

 

Capital ratios

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 (CET1)

 

 

11.7

%

 

 

11.7

%

 

 

 

 

Tier 1

 

 

15.0

%

 

 

15.5

%

 

 

 

 

Total

 

 

16.1

%

 

 

16.8

%

 

 

 

Leverage ratio

 

 

4.0

%

 

 

4.0

%

 

 

 

Liquidity coverage ratio (LCR)

 

 

146

%

 

 

147

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Information

 

 

 

 

 

 

 

 

 

 

 

Number of employees - worldwide

 

 

25,487

 

 

 

23,450

 

 

9

 

Number of branches in Canada

 

 

422

 

 

 

428

 

 

(1)

 

Number of banking machines in Canada

 

 

939

 

 

 

937

 

 

-

 

 

(1)    See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.

 

 

 

Business Mix(1)

Year ended October 31, 2019

(taxable equivalent basis)(2)

 

Personal

and Commercial

Wealth Management

Financial Markets

USSF&I

 

Total revenue

Net income

Economic capital

 

Net income

Year ended October 31 

(millions of Canadian dollars)

 

         2018

2019

 

Including specified items

Excluding specified items(2)

 

Diluted earnings per share

Year ended October 31 

(Canadian dollars)

 

      2018

       2019

 

Including specified items

Excluding specified items(2)

 

(1)   Excluding the Other  heading.

(2)   See the Financial Reporting Method section on pages

14 and 15 for additional information on non-GAAP

financial measures.

 

 

About National Bank

 

The Bank carries out its activities in four business segments: Personal and Commercial, Wealth Management, Financial Markets, and U.S. Specialty Finance and International. For presentation purposes, other operating activities, certain non-recurring items, and treasury activities are grouped in the Other heading of segment results. Each reportable segment is distinguished by services offered, type of clientele, and marketing strategy. Additional information is provided in the Business Segment Analysis section of this MD&A.

 

Objectives and 2019 Results

 

When setting its objectives, the Bank aims for a realistic challenge in the current business environment and factors in the predictable evolution in banking industry financial results as well as the Bank's business development plan. When the Bank sets its medium-term objectives, it does not take specified items(1) into consideration, as they are inherently unpredictable or non-recurring. Management therefore excludes specified items when assessing the Bank's performance against its objectives.

 

In fiscal 2019, the Bank recorded $2,322 million in net income compared to $2,232 million in fiscal 2018. Its 2019 diluted earnings per share stood at $6.34 versus $5.94 in fiscal 2018, and its 2019 return on common shareholders' equity (ROE) was 18.0% versus 18.4% in 2018. Net income excluding specified items totalled $2,328 million in fiscal 2019, up 4% year over year, and diluted earnings per share excluding specified items stood at $6.36, up 7% from $5.94 in 2018. Furthermore, ROE excluding specified items was 18.0% in 2019 versus 18.4% in 2018.

 

The following table compares the Bank's medium-term objectives with its 2019 results.

 

Medium-Term Objectives and 2019 Results

 

 

Medium-term

objectives (%)

 

2019

results (%)

 

 

 

 

 

 

 

 

 

 

Growth in diluted earnings per share excluding specified items(1)

 

5-10

 

7

 

ROE excluding specified items(1)

 

15-20

 

18.0

 

Dividend payout ratio excluding specified items(1)

 

40-50

 

42

 

CET1 capital ratio

 

> 10.75

 

11.7

 

Leverage ratio

 

> 3.75

 

4.0

 

                 

 

(1)    See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.

 

In 2019, the Bank's financial results met all of the medium-term objectives. The 7% growth in diluted earnings per share excluding specified items was driven by solid net income growth in all business segments, except in the Financial Markets segment, where net income was affected by a slowdown during the first six months of fiscal 2019. And, even though the dividend per share was raised twice, for a 9% increase in fiscal 2019, the dividend payout ratio excluding specified items was at the lower end of the target range, mainly due to rapid growth in diluted earnings per share.

 

 

Dividends

For fiscal 2019, the Bank declared $892 million in dividends to common shareholders (2018: $829 million), representing 42% of net income attributable to common shareholders (2018: 41%).

 

Regulatory Capital Ratios 

As at October 31, 2019, the Bank's CET1, Tier 1 and Total capital ratios were, respectively, 11.7%, 15.0% and 16.1%, i.e., above the regulatory requirements, compared to ratios of, respectively, 11.7%, 15.5% and 16.8% as at October 31, 2018. The CET1 capital ratio remained stable. Net income net of dividends, and common share issuances under the Stock Option Plan offset the application of the Standardized Approach for measuring Counterparty Credit Risk (SA-CCR) rules for measuring counterparty credit risk, growth in risk-weighted assets, the common share repurchases during the year ended October 31, 2019, and remeasurements of pension plans and other post-employment benefit plans. The decreases in the Tier 1 capital ratio and the Total capital ratio were essentially due to growth in risk-weighted assets. As at October 31, 2019, the leverage ratio was 4.0%, stable compared to October 31, 2018. The growth in Tier 1 capital was offset by growth in total leverage exposure.

 

High-Quality Loan Portfolio

 

For fiscal 2019, the Bank recorded $347 million in provisions for credit losses, $20 million more than those recorded in fiscal 2018. The higher year-over-year provisions stem mainly from provisions for credit losses on credit card receivables and on loans in the Financial Markets segment. However, the provisions for credit losses on loans of the USSF&I segment were down, essentially related to the Credigy Ltd. (Credigy) subsidiary. The 2019 provisions for credit losses represented 0.23% of average loans and acceptances, unchanged from fiscal 2018.

 

Risk Profile

 

As at October 31 or for the year ended October 31

 

 

 

 

 

 

 

(millions of Canadian dollars)

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

Provisions for credit losses

 

347

 

 

327

 

 

Provisions for credit losses as a % of average loans and acceptances

 

0.23

%

 

0.23

%

 

Provisions for credit losses on impaired loans

 

 

 

 

 

 

 

 

as a % of average loans and acceptances

 

0.21

%

 

0.23

%

 

Net write-offs as a % of average loans and acceptances

 

0.20

%

 

0.23

%

 

Gross impaired loans(1)

 

684

 

 

630

 

 

Net impaired loans(2)

 

450

 

 

404

 

 

 

(1)    All loans classified in Stage 3 of the expected credit loss model are impaired loans. The impaired loans presented in this table exclude purchased or originated credit-impaired (POCI) loans.

(2)    Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn. The net impaired loans presented in this table exclude POCI loans.

 

 

Annual Dividend per Common Share

Year ended October 31

(Canadian dollars)

 

 

2015

2016

2017

2018

2019

 

             

 

 

Evolution of Regulatory Ratios under

Basel III

As at October 31

 

                      2018

 2019

 

CET1

Tier 1

Total

Leverage ratio

 

 

 

 

Breakdown of the Average Loan and

Acceptance Portfolio(1)

As at October 31, 2019

 

 

 

Personal Banking (2018: 54%)

Commercial Banking (2018: 25%)

Wealth Management (2018: 4%)

Financial Markets - Corporate Banking (2018: 11%)

U.S. Specialty Finance and International

(2018: 6%)

 

(1)   Excluding loans and acceptances in the Other heading

 

 

 

Economic Review and Outlook

 

Global Economy

While talks between China and the Unites States in the trade war opposing the two countries seem to be making headway, the damage to the global economy has already been considerable. Worldwide, the manufacturing sector has been contracting for the past six months, but the services sector has kept the economy afloat. Washington, like Beijing, stands to benefit from a truce. The trade war has hurt the Middle Kingdom, where slower growth is in large part due to a downturn not only in exports but also in investment. To address the situation, Chinese authorities have had to implement stimulus measures via monetary and budgetary policy in order to achieve their growth target of 6-6.5%. Owing to its relatively intense participation in the global value chain, the eurozone has been hardest hit by the turmoil of the trade war. Germany, for instance, may already be in the midst of a technical recession after its economy contracted again in the second quarter. Given the growing uncertainty, a majority of central banks have opted to ease their monetary policy in the third quarter, a record high since the global recession of 2008-2009. This should be enough for the global economy to keep expanding. We expect global economic growth to reach 3.2% in 2020(1), up slightly from 2019 (3.0%)(1).

 

In the U.S., the longest growth streak in history is showing signs of losing steam, thus reviving fears of recession in the present context of strained international trade relations. In our opinion, the probability of a recession in the next twelve months does not exceed 30%, as a truce remains the most likely scenario in light of the coming U.S. presidential election. Moreover, the resilience of consumption and of the labour market is largely compensating for the weakness in foreign trade, which is putting the brakes on business investment. By lowering interest rates in October after twice doing so this summer, the U.S. Federal Reserve has contributed to setting the yield curve back on an upward slope after its inversion in 2019 had raised alarm bells. We believe that this rate adjustment will suffice for now. With the 2020 election in the offing, we can expect both monetary and budgetary policy to remain accommodative. We expect U.S. GDP to grow 2.3% and 1.9% in 2019 and 2020(1), respectively.

 

Canadian Economy

The Canadian economy has once again proven the skeptics wrong after weakness in the energy and real estate sectors early in the year was seen as a bad omen. As it happens, the economy bounced back spectacularly in the second quarter, growing at an annualized rate of 3.7%. Job creation in the first ten months of the year has been the strongest ever since 2002 and wage growth has picked up relentlessly. The vitality of the labour market and lower interest rates have energized the housing market, which has managed to rebound in both Ontario and British Columbia. There is no denying that household debt levels are high and the savings rate very low at present. This should translate into moderate consumption growth. However, other sectors should step up in 2020 and push the economy to grow near potential (1.6%)(1). Canadian exports should benefit from persistently strong U.S. demand and a weak currency. Furthermore, given the federal election results, a fiscal stimulus is in the cards for 2020. Given the economy's resilience and an annual core inflation rate essentially on target, the Bank of Canada should not have to follow the Fed's lead in easing monetary policy, unless hostilities flare up again between China and the United States.

 

Quebec Economy

The Quebec economy continues to forge ahead at a sustained pace. GDP has grown for ten months in a row, the longest such streak since statistics began to be calculated in 1997. The economy and the labour market are being spurred on by an accommodative monetary policy and budgetary stimulus. Over 87,000 net new jobs have been created in the province since the beginning of 2019, the best showing in this regard since 2012. The unemployment rate could hit a record low for a fourth straight year in 2019. Labour shortages are no doubt having an impact on the hourly wages of permanent employees, which in the past year have registered their steepest increase by far since 1998 (6.1% in 2019 third quarter). In this context, the real estate market, which remains more affordable in Quebec than elsewhere in Canada, is headed for a record year in terms of home sales. Economic growth is expected to slow down but should remain solid at 1.5% in 2020 (2.5% in 2019)(1). The household savings rate is high and household debt is lower than in the rest of the country, which bodes well for consumption in the coming quarters.

 

 

 

 

 

(1)   GDP growth expectations, Economy and Strategy Group

 

 

Financial Analysis                                                                                            

 

Consolidated Results

 

Year ended October 31

 

 

 

(millions of Canadian dollars)

 

2019

 

 

2018

 

 

% change

 

Operating results

 

 

 

 

 

 

 

 

 

Net interest income

 

3,596

 

 

3,382

 

 

6

 

Non-interest income

 

3,836

 

 

3,784

 

 

1

 

Total revenues

 

7,432

 

 

7,166

 

 

4

 

Non-interest expenses

 

4,301

 

 

4,063

 

 

6

 

Contribution

 

3,131

 

 

3,103

 

 

1

 

Provisions for credit losses

 

347

 

 

327

 

 

6

 

Income before income taxes

 

2,784

 

 

2,776

 

 

 

Income taxes

 

462

 

 

544

 

 

(15)

 

Net income

 

2,322

 

 

2,232

 

 

4

 

Diluted earnings per share (dollars)

 

6.34

 

 

5.94

 

 

7

 

Taxable equivalent basis(1)

 

 

 

 

 

 

 

 

 

Net interest income

 

195

 

 

144

 

 

 

 

Non-interest income

 

135

 

 

101

 

 

 

 

Income taxes

 

330

 

 

245

 

 

 

 

Impact of taxable equivalent basis on net income

 

 

 

 

 

 

 

Specified items(1)

 

 

 

 

 

 

 

 

 

Gain on disposal of Fiera Capital shares

 

79

 

 

 

 

 

 

Gain on disposal of premises and equipment

 

50

 

 

 

 

 

 

Remeasurement at fair value of an investment

 

(33)

 

 

 

 

 

 

Impairment losses on premises and equipment and on intangible assets

 

(57)

 

 

 

 

 

 

Provisions for onerous contracts

 

(45)

 

 

 

 

 

 

Charge related to Maple

 

(11)

 

 

 

 

 

 

Severance pay

 

(10)

 

 

 

 

 

 

Specified items before income taxes

 

(27)

 

 

 

 

 

 

Income taxes on specified items

 

(21)

 

 

 

 

 

 

Specified items after income taxes

 

(6)

 

 

 

 

 

 

Operating results on a taxable equivalent basis and

 

 

 

 

 

 

 

 

 

 

excluding specified items(1)

 

 

 

 

 

 

 

 

 

Net interest income on a taxable equivalent basis

 

3,791

 

 

3,526

 

 

8

 

Non-interest income on a taxable equivalent basis

 

 

 

 

 

 

 

 

 

 

and excluding specified items

 

3,875

 

 

3,885

 

 

 

Total revenues on a taxable equivalent basis and excluding specified items

 

7,666

 

 

7,411

 

 

3

 

Non-interest expenses excluding specified items

 

4,178

 

 

4,063

 

 

3

 

Contribution on a taxable equivalent basis and excluding specified items

 

3,488

 

 

3,348

 

 

4

 

Provisions for credit losses

 

347

 

 

327

 

 

6

 

Income before income taxes on a taxable equivalent basis and excluding specified items

 

3,141

 

 

3,021

 

 

4

 

Income taxes on a taxable equivalent basis and excluding specified items

 

813

 

 

789

 

 

3

 

Net income excluding specified items

 

2,328

 

 

2,232

 

 

4

 

Diluted earnings per share excluding specified items (dollars)

 

6.36

 

 

5.94

 

 

7

 

Average assets

 

286,162

 

 

265,940

 

 

8

 

Average loans and acceptances

 

148,765

 

 

139,603

 

 

7

 

Average deposits

 

184,460

 

 

167,176

 

 

10

 

Efficiency ratio on a taxable equivalent basis and excluding specified items(1)

 

54.5

%

 

54.8

%

 

 

 

 

(1)    See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.

 

 

Analysis of Consolidated Results

 

Financial Results

For fiscal 2019, the Bank's net income totalled $2,322 million compared to $2,232 million in fiscal 2018, a year-over-year increase owing essentially to net income growth across most of the business segments, tempered by a slowdown in the Financial Markets segment during the first six months of fiscal 2019. Specified items, net of income taxes, had a $6 million unfavourable impact on net income in fiscal 2019. The fiscal 2019 specified items, net of income taxes, include a $68 million gain on disposal of Fiera Capital shares, a $43 million gain on disposal of premises and equipment, a $27 million loss on the remeasurement at fair value of the Bank's investment in NSIA, $42 million in impairment losses on premises and equipment and on intangible assets, $33 million in provisions for onerous contracts, an $8 million charge related to Maple, and $7 million in severance pay. For fiscal 2019, the Bank's net income excluding specified items(1) totalled $2,328 million, up 4% from $2,232 million in fiscal 2018.

 

Total Revenues

For fiscal 2019, the Bank's total revenues amounted to $7,432 million, up $266 million or 4% from $7,166 million in fiscal 2018. The fiscal 2019 total revenues include a $79 million gain on disposal of Fiera Capital shares, a $50 million gain on disposal of premises and equipment, and a $33 million loss arising from the remeasurement at fair value of the Bank's investment in NSIA. The increase in total revenues was driven by revenue growth across all of the Bank's business segments. The 2019 total revenues on a taxable equivalent basis and excluding specified items(1) were up $255 million or 3% year over year. For additional information about total revenues on a taxable equivalent basis(1), see Table 2 on page 104.

 

Net Interest Income

For fiscal 2019, the Bank's net interest income totalled $3,596 million, rising $214 million from $3,382 million in fiscal 2018. The 2019 net interest income on a taxable equivalent basis(1) was $3,791 million compared to $3,526 million in fiscal 2018 (Table 3, page 104).

 

In the Personal and Commercial (P&C) segment, the fiscal 2019 net interest income totalled $2,383 million, a $107 million or 5% year-over-year increase driven mainly by growth in loan volumes (primarily from mortgage and commercial lending activity) and in deposit volumes, which rose 5% and 7%, respectively. This increase in P&C's net interest income was tempered by a narrowing of the net interest margin, which was 2.23% in fiscal 2019 versus 2.24% in fiscal 2018, that was largely due to a decrease in loan margins. In the Wealth Management segment, the fiscal 2019 net interest income on a taxable equivalent basis(1) totalled $470 million, a $24 million year-over-year increase owing to growth in loan and deposit volumes.

 

As for the Financial Markets segment, its 2019 net interest income on a taxable equivalent basis(1) was up $65 million or 16% year over year, mainly due to trading activities, and should be examined together with the other items of trading activity revenues. In the USSF&I segment, the fiscal 2019 net interest income was up $72 million year over year owing to growth in loan and deposit volumes at the Advanced Bank of Asia Limited (ABA Bank) subsidiary, tempered by a decrease in net interest income at the Credigy subsidiary.

 

Non-Interest Income

For fiscal 2019, non-interest income totalled $3,836 million versus $3,784 million in fiscal 2018. The 2019 non-interest income includes a $79 million gain on disposal of Fiera Capital shares, a $50 million gain on disposal of premises and equipment, and a $33 million loss arising from the remeasurement at fair value of the Bank's investment in NSIA. Non-interest income on a taxable equivalent basis and excluding specified items(1) amounted to $3,875 million in fiscal 2019 compared to $3,885 million in fiscal 2018. For additional information on non-interest income on a taxable equivalent basis(1), see Table 4 on page 105.

 

The fiscal 2019 revenues from underwriting and advisory fees were down 19% when compared to fiscal 2018, in particular due to merger and acquisition activities in the Financial Markets segment. Revenues from securities brokerage commissions were also down, declining $17 million as a result of lower transaction volume during fiscal 2019. Together, mutual fund revenues and trust service revenues totalled $1,058 million in fiscal 2019, a $33 million year-over-year increase resulting from growth in fee-based revenues and from an increase in assets under administration and under management arising from stronger stock market performance in 2019.

 

The trading revenues recorded in non-interest income amounted to $829 million in fiscal 2019 compared to $840 million in fiscal 2018. Trading revenues on a taxable equivalent basis(1) recorded in non-interest income totalled $964 million, an increase from $941 million in 2018. Including the portion recorded in net interest income, trading activity revenues on a taxable equivalent basis(1) amounted to $1,199 million in 2019, a $50 million year-over-year increase (Table 5, page 105) attributable to revenues from equity securities and from fixed-income securities, whereas revenues from commodities and foreign exchange activities and revenues from other segments decreased year over year.

 

 

 

 

 

(1)    See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.

 

 

In fiscal 2019, revenues from credit fees and revenues from acceptances and letters of credit and guarantee were up $14 million year over year, as there was increased credit activity in Commercial Banking, the Financial Markets segment, and the Credigy subsidiary. Card revenues posted 10% year-over-year growth during fiscal 2019, whereas revenues from deposit and payment service charges were down $9 million given a revision to rates. The Bank's fiscal 2019 insurance revenues were up $15 million year over year, partly due to a revision to actuarial reserves. As for other-than-trading foreign exchange revenues and gains on non-trading securities, they remained stable when compared to fiscal 2018. The Bank's share in the net income of associates and joint ventures was also up, rising $6 million year over year. Other revenues amounted to $251 million in fiscal 2019, a $78 million year-over-year increase owing mainly to the 2019 specified items, which include a gain on disposal of Fiera Capital shares and a gain on disposal of premises and equipment, tempered by a loss arising from a fair value remeasurement of the Bank's investment in NSIA.

 

Non-Interest Expenses

Non-interest expenses stood at $4,301 million in fiscal 2019, up $238 million from fiscal 2018 (Table 6, page 106). The 2019 non-interest expenses include $57 million in impairment losses on premises and equipment and on intangible assets, $45 million in provisions for onerous contracts, an $11 million charge related to Maple, and $10 million in severance pay. Non-interest expenses excluding specified items(1) stood at $4,178 million, up $115 million or 3% year over year.

 

Compensation and employee benefits stood at $2,532 million in fiscal 2019, a 3% year-over-year increase resulting from an increase in the number of employees, which essentially stems from the expansion of ABA Bank's banking network, and an annual increase in salaries, tempered somewhat by a lower pension expense. Occupancy expenses were also up, rising year over year due to provisions for onerous contracts recorded during the year in addition to business growth at ABA Bank. The increase in technology expenses, including amortization, came from the technology investments made to execute the Bank's transformation plan and for business development activities, in addition to impairment losses on premises and equipment and intangible assets recorded in fiscal 2019. Other expenses were also up, mainly due to expenses related to the activities of the Financial Markets segment and to the charge related to Maple.

 

Provisions for Credit Losses

For fiscal 2019, the Bank recorded $347 million in provisions for credit losses, $20 million more than the provisions recorded in fiscal 2018 (Table 7, page 107). This increase came mainly from higher credit loss provisions on credit card receivables, which rose $7 million year over year, and from higher credit loss provisions on loans in the Financial Markets segment, which rose $26 million year over year. These higher provisions relate mainly to provisions on impaired loans. In the USSF&I segment, provisions for credit losses on loans were down $14 million, essentially attributable to the Credigy subsidiary. At $313 million, the fiscal 2019 provisions for credit losses on impaired loans represent 0.21% of average loans and acceptances, less than last year's 0.23%, notably due to a decrease in the credit losses on impaired loans of the Credigy subsidiary, tempered by an increase in credit losses on impaired loans in the Financial Markets segment.

 

Income Taxes

Detailed information about the Bank's income taxes is provided in Note 24 to the consolidated financial statements. For fiscal 2019, income taxes stood at $462 million, representing an effective tax rate of 17% compared to $544 million and an effective tax rate of 20% in 2018. This change in effective tax rate was created mainly by a realization of capital gains taxed at a lower rate, by higher income from lower tax rate jurisdictions, and by a year-over-year increase in the 2019 tax-exempt dividend income.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)    See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.

 

 

Business Segment Analysis

 

The Bank carries out its activities in four business segments, which are defined below. For presentation purposes, other activities are grouped in the Other heading. Each reportable segment is distinguished by services offered, type of clientele and marketing strategy.

 

The presentation of segment disclosures is consistent with the presentation adopted by the Bank for the year beginning November 1, 2018. This presentation reflects the fact that advisor banking service activities, which had previously been presented in the Wealth Management segment, are now presented in the Personal and Commercial segment. The Bank made this change to better align the monitoring of its activities with its management structure.

 

 

National Bank of Canada

 

 

 

 

 

 

 

 

 

Business

Segment

 

Personal and

Commercial

 

Wealth

Management

 

Financial

Markets

 

U.S. Specialty

Finance and
International

 

 

 

 

 

 

 

 

 

Major
Activities

 

·   Banking services

·   Credit services

·   Financing

·   Investment solutions

·   Insurance

 

·   Full-service brokerage

·   Private banking

·   Direct brokerage

·   Investment solutions

·   Administrative and trade execution services

·   Transaction products for advisors

·   Trust and estate services

 

·   Equities, fixed-income, commodities and foreign exchange

·   Corporate banking

·   Investment banking

 

 

·   U.S. Specialty Finance

Credigy

·   International

ABA Bank (Cambodia)

Minority interests in emerging markets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other: Treasury activities, liquidity management, Bank funding, asset/liability management, corporate units

 

 

Results by Business Segment

 

Year ended October 31(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(millions of Canadian dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal and Commercial

 

Wealth

Management

 

Financial

Markets

 

USSF&I

 

Other

 

Total

 

 

 

2019

 

2018

 

2019

 

2018

 

2019

 

2018

 

2019

 

2018

 

2019

 

2018

 

2019

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income(2)

 

2,383

 

2,276

 

470

 

446

 

474

 

409

 

656

 

584

 

(387)

 

(333)

 

3,596

 

3,382

 

Non-interest income(2)

 

1,069

 

1,033

 

1,273

 

1,243

 

1,276

 

1,334

 

59

 

55

 

159

 

119

 

3,836

 

3,784

 

Total revenues

 

3,452

 

3,309

 

1,743

 

1,689

 

1,750

 

1,743

 

715

 

639

 

(228)

 

(214)

 

7,432

 

7,166

 

Non-interest expenses

 

1,816

 

1,782

 

1,067

 

1,058

 

743

 

697

 

285

 

251

 

390

 

275

 

4,301

 

4,063

 

Contribution

 

1,636

 

1,527

 

676

 

631

 

1,007

 

1,046

 

430

 

388

 

(618)

 

(489)

 

3,131

 

3,103

 

Provisions for credit losses

 

237

 

228

 

 

1

 

30

 

4

 

80

 

94

 

 

 

347

 

327

 

Income before income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(recovery)

 

1,399

 

1,299

 

676

 

630

 

977

 

1,042

 

350

 

294

 

(618)

 

(489)

 

2,784

 

2,776

 

Income taxes (recovery)(2)

 

372

 

347

 

177

 

166

 

260

 

278

 

71

 

72

 

(418)

 

(319)

 

462

 

544

 

Net income

 

1,027

 

952

 

499

 

464

 

717

 

764

 

279

 

222

 

(200)

 

(170)

 

2,322

 

2,232

 

Non-controlling interests

 

 

 

 

 

 

 

40

 

38

 

26

 

49

 

66

 

87

 

Net income attributable to the 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank's shareholders

 

1,027

 

952

 

499

 

464

 

717

 

764

 

239

 

184

 

(226)

 

(219)

 

2,256

 

2,145

 

Average assets

 

112,798

 

106,857

 

6,219

 

6,167

 

112,493

 

100,721

 

10,985

 

9,270

 

43,667

 

42,925

 

286,162

 

265,940

 

 

(1)    For the year ended October 31, 2018, certain amounts have been reclassified, mainly amounts related to advisor banking service activities, which have been transferred from the Wealth Management segment to the Personal and Commercial segment.

(2)    The Net interest income, Non-interest income and Income taxes (recovery) items of the business segments are presented on a taxable equivalent basis. See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.

 

 

Business Segment Analysis | Personal and Commercial

 

 

The Personal and Commercial segment meets the financial needs of close to 2.6 million individuals and approximately 137,000 businesses across Canada. These clients entrust the Bank to manage, invest, and safeguard their assets and to finance their projects. Clients turn to the Bank's experienced advisors who take the time to understand their specific needs and help them reach their financial goals. And thanks to the Bank's convenient self-banking channels, 422 branches and 939 banking machines across Canada, clients can do their daily banking whenever and wherever they wish.

 

Personal Banking

 

Personal Banking provides a complete range of financing and investment products and services, mainly in Quebec, to help clients reach their financial goals throughout every stage in their lives. It offers everyday transaction solutions, mortgage loans and home equity lines of credit, consumer loans, payment solutions, savings and investment solutions as well as a diverse range of insurance products.

 

Commercial Banking

 

Commercial Banking serves the financial needs of small and medium-sized enterprises and large corporations, helping them to achieve growth. It offers a full line of financial products and services, including credit, deposit and investment solutions, international trade, foreign exchange transactions, payroll, cash management, insurance, electronic transactions and complementary services. With deep roots in the business community for 160 years, Commercial Banking is Quebec's leading provider of the core banking products for businesses and is also known across Canada for its expertise in targeted specialized industries such as health, agriculture and agri-food, technology, creative industries, real estate, and energy.

 

Economic and Market Review

 

The economic environment is resilient in Quebec and in the rest of the country, driven by accommodative monetary policy and fiscal stimulus. Consumers are benefitting from strong employment gains and accelerating wages. The unemployment rate is on track to hit a record low for a fourth straight year in 2019 in Quebec. Wages are rising at the fastest pace among provinces, and the savings rate stands at a multi-year high, providing a cushion that can support consumption. Furthermore, both consumer and business confidence are high in Quebec. The province's household debt level is below the Canadian average, and housing affordability is better. Business investment is being supported by accelerated depreciation measures implemented by the federal and some provincial governments. The financial sector is quickly transforming toward digital and mobile services, and there is vigorous competition between established entities and new market participants that are distinguishing themselves through new technologies.

 

The economic environment in 2019 and the outlook for 2020 are discussed in more detail in the Economic Review and Outlook section on page 20.

 

Key Success Factors

 

·     Strong penetration in our core Quebec market thanks to a full range of personal and commercial services.

·     Well-established and enduring client relationships grounded in an ability to provide both advice and a full range of solutions tailored to specific client needs.

·     The largest sales force in Quebec, consisting of both generalists and specialists, positioning us to offer the best advice to clients.

·     Unmatched closeness to Quebec entrepreneurs, with leading expertise in business lending and risk management solutions.

·     Recognized expertise across Canada in specialized industries.

·     Ability to meet all of the needs facing businesses and entrepreneurs in collaboration with other Bank segments.

 

 

Objectives and Strategies

 

The Personal and Commercial segment is targeting growth by becoming a more simple, efficient bank focused on constantly improving the client experience.

 

Strategic Priorities

2019 Achievements and Highlights

Maintain volume growth and accelerate net client acquisition

 

>   Raised our presence through greater geographic coverage, a larger sales force, and an enhanced advisory offering, including a partnership with M3 Mortgage Group whereby mortgage brokers can offer Bank products to their clients.

>   Personalized our advisory services to target strategic clients such as newcomers, millennials, professionals, people aged 50 to 64 and SMEs.

>   Assisted Canadian SMEs with their export activities through a partnership with Export Development Canada (EDC).

>   Maintained a high credit quality, with credit loss provisions on impaired loans at 22 basis points for Personal Banking and at 10 basis points for Commercial Banking.

 

Improve the client experience

 

>   Enhanced the capabilities of the transactional platform and mobile app to deliver a simpler, safer, and more intuitive digital experience.

>   Placed emphasis on a team approach, one that combines generalists and specialists, to give customers the best possible advice and solutions.

>   Transformed 35 branches to assist clients in their switch to self-service, by removing physical barriers, and by being proactive with the advisory offering.

>   Strengthened business relations with companies and improved the advisory offering to entrepreneurs through strategic partnerships, such as the partnership with Operio whereby SMEs can benefit from integrated accounting and advisory services.

 

Accelerate the digital transformation

 

>   Enhanced online origination processes (account opening and mortgage preapproval).

>   Launched NATgo, an entirely digital investment experience based on client goals.

>   Won three major Boomerang Awards, which recognize outstanding digital branding performance, for the experience provided on our transactional sites, mobile apps and website.

 

Improve efficiency

 

>   Simplified our product offering, particularly for savings accounts.

>   Unified client processes, both for retail clients (account openings, payments, residential financing and investing) and for business clients (account openings, financing, and cash management).

 

 

Priorities and Outlook for 2020

 

Maintain volume growth and accelerate net client acquisition

·     Grow our client base, particularly among newcomers, millennials, professionals, peopled aged 50 to 64 and SMEs, with our online origination capabilities, while enhancing the Bank's presence with clients who have strong growth potential.

·     Continue to tailor our offering to market particularities, competition, geographic location and micromarkets.

 

Optimize the client experience 

·     Provide clients with a simple, unified experience characterized by an integrated approach across all products and distribution channels.

·     Expand self-service options on our digital channels.

·     Continue to deploy an innovative experience within 100-some branches in the network.

·     Enhance the user experience by providing a consolidated view of all investments and a fully automated savings service.

·     Help business clients to grow by giving them access to the Bank's network of entrepreneurs.

 

Focus on efficiency

·     Continue simplification and automation of certain targeted processes (transactional solutions, payments, and commercial financing).

 

Segment Results - Personal and Commercial

 

Year ended October 31

 

 

 

 

 

 

 

 

 

(millions of Canadian dollars)

 

2019

 

 

2018(1)

 

 

% change

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

2,383

 

 

2,276

 

 

5

 

Non-interest income

 

1,069

 

 

1,033

 

 

3

 

Total revenues

 

3,452

 

 

3,309

 

 

4

 

Non-interest expenses

 

1,816

 

 

1,782

 

 

2

 

Contribution

 

1,636

 

 

1,527

 

 

7

 

Provisions for credit losses

 

237

 

 

228

 

 

4

 

Income before income taxes

 

1,399

 

 

1,299

 

 

8

 

Income taxes

 

372

 

 

347

 

 

7

 

Net income

 

1,027

 

 

952

 

 

8

 

Net interest margin(2)

 

2.23

%

 

2.24

%

 

 

 

Average interest-bearing assets

 

106,995

 

 

101,446

 

 

5

 

Average assets

 

112,798

 

 

106,857

 

 

6

 

Average loans and acceptances

 

112,290

 

 

106,513

 

 

5

 

Net impaired loans(3)

 

409

 

 

386

 

 

6

 

Net impaired loans(3) as a % of average loans and acceptances

 

0.4

%

 

0.4

%

 

 

 

Average deposits

 

62,487

 

 

58,383

 

 

7

 

Efficiency ratio

 

52.6

%

 

53.9

%

 

 

 

                     

 

(1)    For the year ended October 31, 2018, certain amounts have been reclassified, mainly amounts related to advisor banking service activities, which have been transferred from the Wealth Management segment to the Personal and Commercial segment.

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

(3)    Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn.

 

 

 

Average Loans and Acceptances and Deposits

Year ended October 31

(millions of Canadian dollars)

 

 

Total Revenues by Geographic Distribution

Year ended October 31, 2019

 

 

 

 

 

 

 

 

2018

2019

 

 

 

 

Personal Banking

Commercial Banking

 

 

Province of Quebec (2018: 79%)

Other provinces (2018: 21%)

 

           

 

Financial Results

 

In the Personal and Commercial segment, net income totalled $1,027 million in fiscal 2019, up 8% from $952 million in fiscal 2018. The segment's total revenues rose $143 million or 4% year over year, primarily owing to growth in net interest income, which was up $107 million, as well as to a $36 million increase in non-interest income. The growth in net interest income was driven mostly by higher personal and commercial loan and deposit volumes but was tempered by a narrowing of the net interest margin, which was 2.23% in fiscal 2019 versus 2.24% in fiscal 2018, a decrease resulting mainly from loan margins.

 

The segment's non-interest expenses stood at $1,816 million in fiscal 2019, a 2% year-over-year increase attributable mainly to increases in operations support charges and in amortization expense arising from the segment's activities as well as in compensation and employee benefits. Given these results, the segment's fiscal 2019 contribution was up 7% year over year. And, at 52.6% for fiscal 2019, the segment's efficiency ratio improved by 1.3 percentage points from 53.9% in 2018.

 

For fiscal 2019, the segment recorded $237 million in provisions for credit losses, $9 million more than the $228 million recorded in fiscal 2018. This increase came mainly from higher credit loss provisions on credit card receivables.

 

Personal Banking

 

For fiscal 2019, Personal Banking's total revenues amounted to $2,164 million, up 4% from $2,085 million in fiscal 2018. This growth came mainly from a 4% increase in loan volumes, mainly mortgage loans, and a 6% increase in deposit volumes. Non-interest income was up $21 million, essentially due to card revenues and to insurance revenues, reflecting revisions made to actuarial reserves. Personal Banking's non-interest expenses rose by $19 million in 2019, resulting mainly from higher technology investment expenses as well as higher operations support charges related to the segment's activities.

 

Commercial Banking

 

For fiscal 2019, Commercial Banking's total revenues amounted to $1,288 million, rising 5% from $1,224 million in fiscal 2018. Its net interest income was up, essentially due to growth in loan volumes and deposit volumes, both of which rose 8%, tempered by a narrowing of the net interest margin on loan and deposit volumes. Non-interest income grew $15 million year over year owing to increases in revenues from bankers' acceptances and in revenues from derivative financial instruments. Commercial Banking's non-interest expenses rose $15 million in fiscal 2019, mainly due to higher compensation and employee benefits as well as to higher operations support charges related to the segment's activities.

 

 

 

Total Revenues by Category

Year ended October 31, 2019

 

Retail (2018: 46%)

Payment Solutions (2018: 13%)

Insurance (2018: 4%)

Commercial Banking (2018: 37%)

 

Operating Results

Year ended October 31

(millions of Canadian dollars)

 

 

 

2018

2019

 

 

Personal Banking

Commercial Banking

 

 

Business Segment Analysis | Wealth Management

 

As a leader in Quebec and firmly established across Canada, the Wealth Management segment serves all market segments by emphasizing advisory services and close client relationships. It delivers a full range of wealth management products and solutions through a multi-channel distribution network and a differentiated business model. The Wealth Management segment also proposes investment solutions to independent advisors as well as solutions to institutional clients.

 

Business Units

 

Full-Service Brokerage

Drawing on the largest network of investment advisors in Quebec, National Bank Financial - Wealth Management (NBFWM) provides wealth management advisory services through close to 1,000 advisors at over 100 service points across Canada. Its advisors serve over 400,000 retail clients, proposing portfolio management services, financial and succession planning services, and insurance services while working in close collaboration with other segments of the Bank.

 

Private Banking

Private Banking 1859 (PB1859) offers highly personalized wealth management services and advice across Canada, helping affluent clients to benefit from comprehensive management of their personal and family fortunes. As a true market leader in Quebec, PB1859 continues to expand its operations across Canada with its extensive range of financial solutions and strategies covering the protection, growth, and transition of wealth.

 

Direct Brokerage

National Bank Direct Brokerage (NBDB) offers a multitude of financial products and investment tools to self-directed investors across Canada through its online investment solution. NBDB helps customers who want to manage their own investments to do so through a trading platform and an optimized mobile trading platform or by speaking directly to a representative on the phone.

 

Investment Solutions

National Bank Investments Inc. (NBI) manufactures and offers mutual funds, investment solutions, and services to consumers and institutional investors through the Bank's extended network. With its open architecture model, NBI is Canada's largest investment fund manager to entrust the management of its investments exclusively to external portfolio managers. 

 

Administrative and Trade Execution Services

National Bank Independent Network (NBIN) is a Canadian leader in providing administrative services such as trade execution, custodial services, and brokerage solutions to many independent financial services firms across Canada, in particular to introducing brokers, portfolio managers, and investment fund managers. 

 

Transaction Products

The Wealth Management segment provides independent advisors across Canada with an extensive range of investment products, including guaranteed investment certificates (GICs), mutual funds, notes, structured products, and monetization, helping to support their own business needs and client relationships. 

 

Trust and Estate Services

Through National Bank Trust Inc. (NBT), the Wealth Management segment provides retail and institutional clients with turnkey services and solutions. Its team of experts offers a full range of high value-added services designed to consolidate, protect, and transfer its customers' wealth and give them peace of mind. NBT also offers integrated trustee and depository services as well as securities custody services.

 

Economic and Market Review

 

Policymakers acted pre-emptively as a fear of the global economy sliding into a recession increased as a result of the trade conflict between the United States and China. The U.S. Federal Reserve applied a rate-cut, realizing a 75-basis point decline in its policy rate. Given the resilience of the Canadian economy and inflation, the Bank of Canada did not deem stimulus as necessary as the Canadian economy is benefitting from lower long-term rates and improving global financial conditions. Those welcomed developments, combined with resilience in the labour market and housing market, suggest steady growth in the coming quarters.

 

The economic environment in 2019 and the outlook for 2020 are discussed in more detail in the Economic Review and Outlook section on page 20.

 

 

Key Success Factors

 

·     Leadership position in Quebec in terms of market share and brand recognition.

·     Largest manager of managers in Canada (open architecture); clients benefit from objective advice.

·     Leadership position in Canada in securities custody and brokerage services for independent wealth management firms.

·     Firmly rooted across Canada in full-service brokerage and private management services.

·     Ability to forge solid, lasting client relationships built on personalized advice and solutions provided at every life stage.

·     High level of client satisfaction with direct brokerage services.

·     Proven track record and excellent reputation as a business partner among non-bank financial institutions.

·     Ability to work closely with the Personal and Commercial segment and to leverage its distribution platform.

 

Objectives and Strategies

 

The Wealth Management segment will capitalize on the strength of the Bank's brand, distribution capacity, and differentiated business model to grow market shares in the mass and mass affluent markets. The segment seeks to increase market penetration across Canada through organic growth as well as targeted actions and partnerships.

 

Strategic Priorities

2019 Achievements and Highlights

 

Transform the partnership with clients

 

 

>   Launched National Bank exchange-traded funds (ETFs).

>   Launched NATgo, an entirely digital investment experience based on client goals.

>   Deployed a strategy that centres on goals and life stages.

>   Deployed a new online brokerage platform.

 

 

Invest in high-growth markets

 

 

>   Gradually deploying a new MFDA (Mutual Fund Dealers Association of Canada) platform for B2B clients.

>   Developed a new cross-selling strategy in partnership with other Bank segments.

>   Developed a strategy for women investors.

 

 

Continue transforming Wealth Management's culture

 

>   Promoted a joint mission and an integrated client approach within Wealth Management.

>   Implemented concrete measures to promote innovation and accelerate transformation.

 

 

Priorities and Outlook for 2020

 

Transform the way we serve clients

·     Deploy a customer relationship management (CRM) system for employees of NBFWM.

·     Enhance the online brokerage and account opening platform.

·     Increase the usability of the new MFDA platform, which is designed to replace certain existing asset management platforms.

 

Concentrate on fast-growing markets

·     Launch new types of investment products.

·     Develop markets outside Quebec, including the Ontario strategy to grow PB1859's market presence, and its acquisition of high net worth customers and increase synergies with the Personal and Commercial segment.

·     Implement the multi-family office strategy.

 

Continue transforming Wealth Management's culture

·     Invest in client satisfaction measures in various Wealth Management subsidiaries.

·     Fine-tune the leadership skills of managers using best management practices.

 

Segment Results - Wealth Management

 

Year ended October 31

 

 

 

 

 

 

 

 

 

(taxable equivalent basis)(1)

 

 

 

 

 

 

 

 

 

(millions of Canadian dollars)

 

2019

 

 

2018(2)

 

 

% change

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income on a taxable equivalent basis

 

470

 

 

446

 

 

5

 

Fee-based revenues

 

1,013

 

 

983

 

 

3

 

Transaction and other revenues

 

260

 

 

260

 

 

 

Total revenues on a taxable equivalent basis

 

1,743

 

 

1,689

 

 

3

 

Non-interest expenses

 

1,067

 

 

1,058

 

 

1

 

Contribution on a taxable equivalent basis

 

676

 

 

631

 

 

7

 

Provisions for credit losses

 

 

 

1

 

 

 

 

Income before income taxes on a taxable equivalent basis

 

676

 

 

630

 

 

7

 

Income taxes on a taxable equivalent basis

 

177

 

 

166

 

 

7

 

Net income

 

499

 

 

464

 

 

8

 

Average assets

 

6,219

 

 

6,167

 

 

1

 

Average loans and acceptances

 

4,855

 

 

4,720

 

 

3

 

Net impaired loans(3)

 

3

 

 

3

 

 

 

Average deposits

 

32,321

 

 

31,261

 

 

3

 

Efficiency ratio on a taxable equivalent basis(1)

 

61.2

%

 

62.6

%

 

 

 

                     

 

(1)    See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.

(2)    For the year ended October 31, 2018, certain amounts have been reclassified, mainly amounts related to advisor banking service activities, which have been transferred from the Wealth Management segment to the Personal and Commercial segment.

(3)    Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn.

 

Assets Under Administration and Under Management - Wealth Management

 

As at October 31

 

 

 

 

 

 

 

(millions of Canadian dollars)

 

2019

 

2018

 

% change

 

 

 

 

 

 

 

 

 

 

Assets under administration

 

484,636

 

416,199

 

16

 

 

 

 

 

 

 

 

 

 

Assets under management

 

 

 

 

 

 

 

 

Individual

 

43,941

 

37,007

 

19

 

 

Mutual funds

 

36,819

 

31,874

 

16

 

 

 

80,760

 

68,881

 

17

 

 

 

 

 

 

 

 

 

 

Assets under administration and under management

 

565,396

 

485,080

 

17

 

 

 

 

Assets Under Administration and Under Management

Year ended October 31

(millions of Canadian dollars)

 

Total Revenues by Geographic Distribution

Year ended October 31, 2019

(on a taxable equivalent basis)(1)

 

 

 

 

 

 

 

 

       2018

 

 2019

 

 

 

 

 

Assets under administration

Assets under management

 

Province of Quebec (2018: 62%)

Other provinces (2018: 38%)

 

 

 

 

 

 

(1)   See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.

 

           

 

 

 

Financial Results

 

In the Wealth Management segment, net income totalled $499 million in fiscal 2019, up $35 million or 8% from $464 million in fiscal 2018. The segment's total revenues on a taxable equivalent basis(1) amounted to $1,743 million in fiscal 2019, up $54 million from $1,689 million in fiscal 2018. This increase stems mainly from a 5% increase in net interest income on a taxable equivalent basis(1) owing to growth in the segment's loan and deposit volumes. The fiscal 2019 fee-based revenues were up 3% year over year given growth in assets under administration and under management generated by net inflows into various solutions and due to stronger stock market performance in fiscal 2019. As for the transaction-based and other revenues category, it remained stable when compared to fiscal 2018.

 

The segment's non-interest expenses stood at $1,067 million in fiscal 2019, a $9 million year-over-year increase attributable mainly to higher compensation and employee benefits as well as to higher operations support charges related to the segment's initiatives. The 2019 efficiency ratio on a taxable equivalent basis(1) was 61.2% in fiscal 2019, an improvement of 1.4 percentage points from 62.6% in 2018.

 

The segment's provisions for credit losses were negligible in fiscal years 2019 and 2018.

 

Assets Under Administration and Under Management

As at October 31, 2019, assets under administration and under management totalled $565.4 billion, rising $80.3 billion or 17% from October 31, 2018 due to net inflows into various solutions and to stronger stock market performance in fiscal 2019.

 

Assets under administration totalled $484.6 billion as at October 31, 2019, up $68.4 billion compared to October 31, 2018. This increase came from net inflows into various solutions and to stronger stock market performance in fiscal 2019.

 

In the individuals category, assets under management amounted to $43.9 billion as at October 31, 2019 compared to $37.0 billion as at October 31, 2018. The mutual funds category totalled $36.8 billion as at October 31, 2019, rising 16% from October 31, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)    See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.

 

 

 

Total Revenues by Category

Year ended October 31, 2019

(on a taxable equivalent basis)(1)

 

Net interest income (2018: 27%)

Fee-based services (2018: 58%)

Transaction-based and other revenues (2018: 15%)

 

 

 

 

Operating Results

Year ended October 31

(on a taxable equivalent basis)(1)

(millions of Canadian dollars)

 

      2018

        2019

Total revenues

Non-interest expenses

Net income

 

Business Segment Analysis | Financial Markets

 

The Financial Markets segment offers a complete suite of products and services to corporations, institutional clients, and public-sector entities. Whether providing comprehensive advisory services and research or capital markets products and services, its focus is on client relationships and their growth. Over 800 professionals serve client needs through offices in North America, Europe, the U.K. and Asia.

 

Business Units

 

The Financial Markets segment operates two main business lines: Global Markets and Corporate and Investment Banking.

 

Global Markets

Financial Markets is a Canadian leader in risk management solutions and structured products and is the largest market-maker in exchange-traded funds (ETFs) in Canada by volume. The segment offers solutions covering fixed income securities, currencies, equities and commodities in order to mitigate the financial and business risks of clients. It also provides new product development expertise to asset managers and fund companies and supports their success by providing liquidity, research, and counterparty services. Financial Markets also provides tailored investment products across all asset classes to institutional and retail distribution channels.

 

Corporate and Investment Banking

Financial Markets provides services in corporate banking, advisory and capital markets. It offers loan origination and syndication to corporations for project financing, merger and acquisition transactions, and corporate financing solutions. The segment is also an investment banking leader in Quebec and across Canada. Its comprehensive services include strategic advisory for financing and mergers and acquisitions as well as for debt and equity underwriting. It is the Canadian leader in government and corporate high-yield debt underwriting. Dominant in Quebec, it leads deals for provincial and municipal governments across Canada while growing its national position in infrastructure and project financing. Financial Markets is active in securitization financing, mainly Government-of-Canada-insured mortgages and mortgage-backed securities.

 

Economic and Market Review

 

In 2019, global uncertainties dominated financial headlines. Trade negotiations between the United States and China oscillated between detente and escalation before taking a turn for the better at the end of October with the announcement of significant progress for a truce between the two countries. Given the growing uncertainty and the slowing global economy, a majority of central banks have opted to ease their monetary policy in the third quarter, a record high since the global recession of 2008-2009. The Bank of Canada did not deem it necessary to add stimulus as labour market strength contributed to a housing market rebound. Steady growth is expected in the coming quarters, as financial conditions have improved and some fiscal stimulus is expected next year.

 

The economic environment in 2019 and the outlook for 2020 are discussed in more detail in the Economic Review and Outlook section on page 20.

 

Key Success Factors

 

·     Pan-Canadian franchise with established leadership in government debt underwriting, ETF market-making, and securities lending and recognized capabilities in risk management solutions, structured products and equity derivatives.

·     Integrated approach, teamwork, and alignment among all groups.

·     Focused on client relationships and diversified client activity and revenue mix.

·     Sound risk management.

·     Flexible approach to capital allocation and proven ability to adapt to evolving capital market conditions and deliver consistent financial performance.

 

 

Objectives and Strategies

 

Strategic Priorities

2019 Achievements and Highlights

Maintain leadership in Canadian debt underwriting

Ranked first in government debt underwriting:

>   Lead and joint lead on Canada Mortgage Bond issuances aggregating $30.25 billion.

>   Lead on multiple deals for the Province of Quebec aggregating $9.5 billion.

>   Inaugural joint lead for the Government of Canada on a US$3.0 billion 3-year offering.

>   Inaugural lead for the Province of Newfoundland and Labrador on a $300 million 10-year offering.

>   Lead on the First Nations Finance Authority's $163 million 9-year offering.

>   Joint lead for South Coast British Columbia Transportation Authority's (TransLink) $200 million 31-year Green Bond offering.

>   Joint lead for the City of Toronto's $200 million 20-year Green Bond offering.

 

Lead in corporate debt underwriting:

>   Joint bookrunner on a $300 million senior unsecured note offering for Parkland Fuel Corporation.

>   Joint bookrunner on a $350 million 2.25-year senior unsecured debenture offering for SmartCentres REIT.

>   Joint bookrunner on an inaugural $125 million senior unsecured note offering for Kruger Packaging Holdings L.P.

>   Joint bookrunner on a $200 million 5-year senior unsecured note offering for Cominar REIT.

>   Sole lead placement agent on a $325 million private placement transaction for Capital Power Corporation.

>   Joint bookrunner on two U.S.-dollar high-yield transactions for Fairstone Financial Inc., raising US$425 million for the company.

>   Joint bookrunner on a $450 million dual tranche offering for EPCOR Utilities.

>   Joint bookrunner on a $350 million senior unsecured debenture offering for CI Financial Corporation.

>   Joint bookrunner on a $700 million dual-tranche offering for Enbridge Gas Inc.

>   Joint bookrunner on a US$750 million inaugural U.S.-dollar bail-in and first sustainable note offering for National Bank of Canada.

 

Maintain leadership in investment products

Strengthened our relationships with international networks by issuing more than $1 billion of notes outside of Canada, which contributed to the diversification of the Bank's deposit base.

 

Ranked first in ETF market-making in Canada:

>   Increased our market share relative to last year, capturing 42% of total buy and sell volume, despite market conditions.

>   Selected as designated broker 64 times, which represents a 48% increase year over year.

 

Pioneer in overnight offerings, which continue to be a successful means for asset managers to raise capital:

>   Led another $500 million of overnight offerings as a combination of split-share and single-trust unit funds.

>   Launched the first ever Canadian at-the-market (ATM) issuance programs for two listed investment funds.

>   Awarded Deal of the Year in rate structures by mtn-i, a global news, data and analytics platform covering the private debt market.

>   Awarded Most Impressive Financial Institutional Structured MTN Issuer by GlobalCapital, a global service provider of capital markets information whose methodology relies on the views of market participants.

 

 

 

Strategic Priorities

2019 Achievements and Highlights

 

Expand our client coverage to increase our presence in advisory services

 

Awarded the Greenwich Quality Leader in Canadian FX Service by Greenwich Associates, a leading global provider of data, analytics and insights to the financial services industry. Overall, National Bank Financial leads in the ability to understand client needs and deliver intensive sales coverage.

 

Involved in significant mandates including:

>   Acted as financial advisor to the Special Committee of Dream Global REIT in relation to its acquisition by Blackstone Group Inc.

>   Advisor to Pipestone Oil Corp. in their $650 million reverse takeover of Blackbird Energy Inc. to form Pipestone Energy Corp. (TSX-V: PIPE) as well as underwriting and currently acting as administrative agent, lead arranger and sole bookrunner with respect to Pipestone's $198.5 million senior secured credit facilities.

>   Financial advisor to Atlantic Gold Corp. on its sale to Australian-based St Barbara Limited, for a total consideration of $802 million. Also acted as sole lead arranger and bookrunner for Atlantic Gold Corporation's $150 million revolving credit facility and underwrote the change of control provision for St Barbara in conjunction with the transaction.

>   Exclusive financial advisor to Osisko Gold Royalties Ltd. on: (i) its acquisition of Barkervillle Gold Mines Ltd. in a transaction valued at $338 million and (ii) its $175 million asset swap transaction with Orion Resource Partners. Also acted as sole lead arranger and bookrunner for Osisko's $400 million revolving credit facility.

>   Sole financial advisor to Bombardier Inc. on a US$300 million disposal of the Q Series program and the underlying aftermarket business to Longview Aviation Capital Corp.

>   Sole financial advisor to Bombardier Inc. on a US$800 million disposal of its Business Aircraft Training activities, including a US$155 million monetization of royalties that were payable by CAE Inc.

>   Sole financial advisor to Transat A.T. Inc. in its review of strategic alternatives and $720 million disposal to Air Canada.

 

Leverage leadership in equity distribution to increase lead and co-lead positions

 

>   Joint bookrunner on Lightspeed POS Inc.'s  $276 million initial public offering and $217 million follow-on offering.

>   Co-bookrunner on $144 million equity offering for Park Lawn Corporation.

>   Co-lead on Northland Power Inc.'s $347 million subscription receipt equity financing.

>   Co-financial advisor for Crescent Point Energy Corp. on the sale of certain oil & gas assets in southeast Saskatchewan and Manitoba for $219 million.

>   Co-bookrunner and co-lead on an equity financing and administrative agent for Allied Energy Corp. as well co-lead arranger and joint bookrunner on a $75 million senior secured credit facility to finance the acquisition of certain assets from Crescent Point Energy Corp.

 

Priorities and Outlook for 2020

 

·     Continue to expand our activities in areas of expertise with a constant focus on Canadian clients.

·     Continue to be a strategic partner for our clients.

·     Increase market share among corporations for all fee-based products.

·     Continue to automate processes, use artificial intelligence, and increase data-sharing across the Financial Markets segment.

·     Maintain tight cost control and an industry-leading efficiency ratio.

Segment Results - Financial Markets

 

Year ended October 31

 

 

 

 

 

 

 

 

 

(taxable equivalent basis)(1)

 

 

 

 

 

 

 

 

 

(millions of Canadian dollars)

 

2019

 

 

2018(2)

 

 

% change

 

 

 

 

 

 

 

 

 

 

 

Global markets

 

 

 

 

 

 

 

 

 

 

Equities

 

624

 

 

576

 

 

8

 

 

Fixed-income

 

289

 

 

267

 

 

8

 

 

Commodities and foreign exchange

 

126

 

 

130

 

 

(3)

 

 

 

1,039

 

 

973

 

 

7

 

Corporate and investment banking

 

719

 

 

750

 

 

(4)

 

Gains on investments and other

 

(8)

 

 

20

 

 

 

 

Total revenues on a taxable equivalent basis

 

1,750

 

 

1,743

 

 

 

Non-interest expenses

 

743

 

 

697

 

 

7

 

Contribution on a taxable equivalent basis

 

1,007

 

 

1,046

 

 

(4)

 

Provisions for credit losses

 

30

 

 

4

 

 

 

 

Income before income taxes on a taxable equivalent basis

 

977

 

 

1,042

 

 

(6)

 

Income taxes on a taxable equivalent basis

 

260

 

 

278

 

 

(6)

 

Net income

 

717

 

 

764

 

 

(6)

 

Average assets

 

112,493

 

 

100,721

 

 

12

 

Average loans and acceptances

 

16,575

 

 

15,116

 

 

10

 

Net impaired loans(3)

 

23

 

 

 

 

 

 

Average deposits

 

30,311

 

 

23,510

 

 

29

 

Efficiency ratio on a taxable equivalent basis(1)

 

42.5

%

 

40.0

%

 

 

 

 

(1)    See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.

(2)    For the year ended October 31, 2018, certain amounts have been reclassified.

(3)    Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn.

 

 

 

Total Revenues by Category

Year ended October 31

(taxable equivalent basis)(1)

(millions of Canadian dollars)

 

 

Total Revenues by Geographic Distribution

Year ended October 31, 2019

(taxable equivalent basis)(1)

 

 

 

 

 

 

 

  2018

 

        2019

 

 

 

 

 

Global markets - Equities

Global markets - Fixed-income

Global markets - Commodities and foreign exchange

Corporate and investment banking

Gains on investments and other

 

Province of Quebec (2018: 31%)

Other provinces (2018: 42%)

Outside of Canada (2018: 27%)

 

 

 

(1)     See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.

 

           

 

Financial Results

 

In the Financial Markets segment, net income totalled $717 million in fiscal 2019, down 6% year over year. The segment's fiscal 2019 total revenues on a taxable equivalent basis(1) amounted to $1,750 million, up $7 million from $1,743 million in fiscal 2018. Revenues from the Global Markets category posted year-over-year growth of 7%, with revenues from equity securities and from fixed-income securities each rising 8%, tempered by a 3% decrease in revenues from commodities and foreign exchange activities. As for corporate and investment banking revenues, they were down 4% year over year, mainly due to a slowdown in capital markets activity as well as to a decrease in merger and acquisition activities in fiscal 2019. This decrease was partly offset by higher banking services revenues in fiscal 2019. Lastly, higher gains on investments and other revenues were recorded in fiscal 2018.

 

For the year ended October 31, 2019, the segment's non-interest expenses rose 7% year over year, mainly due to increases in compensation and employee benefits, in expenses related to technological investments, in business development expenses, and in operations support charges. The segment's fiscal 2019 efficiency ratio on a taxable equivalent basis(1) was 42.5% in fiscal 2019 versus 40.0% in 2018.

 

Financial Markets recorded $30 million in provisions for credit losses during fiscal 2019 compared to $4 million in fiscal 2018, an increase that stems mainly from credit loss provisions on impaired loans.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)    See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.

 

 

Total Revenues by Category

Year ended October 31, 2019

(taxable equivalent basis)(1)

 

 

 

Global markets (2018: 56%)

Corporate and investment banking (2018: 43%)

Gains on investments and other (2018: 1%)

 

 

 

Operating Results

Year ended October 31

(taxable equivalent basis)(1)

(millions of Canadian dollars)

 

2018

2019

 

Total revenues

Non-interest expenses

Net income

 

Business Segment Analysis | U.S. Specialty Finance and International

 

The Bank complements its Canadian growth with a targeted, disciplined international strategy that aims for superior returns. The Bank is currently focused on specialty finance in the U.S. through Credigy and on personal and commercial banking in Cambodia through ABA Bank. The Bank also holds minority positions in financial groups operating in French-speaking Africa and Africa-Asia. The Bank has a moratorium in effect on any new significant investments in emerging markets. During fiscal 2019, the U.S. Specialty Finance and International (USSF&I) segment generated 10% of the Bank's consolidated total revenue and 12% of its net income.

 

U.S. Specialty Finance - Credigy

 

Founded in 2001, Credigy is a specialty finance company with flexibility across its capital structure to acquire or finance a diverse range of assets. Based in Atlanta, Georgia, Credigy is primarily active in performing assets covering a broad range of asset classes, mostly consumer receivables in the U.S. market. The Bank holds an 80% ownership interest in Credigy.

 

Economic and Market Review

 

Despite global uncertainty negatively affecting exports and business investment, the U.S. economy posted steady growth in 2019 thanks to resilience in consumption. Consumer confidence in the U.S. is flying high given a still-hot labour market that is fuelling household income. Lower interest rates and low leverage suggest upside potential for household credit in the U.S.

 

The economic environment in 2019 and the outlook for 2020 are discussed in more detail in the Economic Review and Outlook section on page 20.

 

Key Success Factors

 

·     Ability to seize opportunities in rapidly changing market conditions through a disciplined yet adaptable investment strategy.

·     Diversification across several classes of performing assets.

·     Market credibility achieved through over 300 transactions life-to-date, representing over US$13 billion in total investments supported by the Bank.

·     Rigorous pricing approach strengthened by continuous refinement of modelling and analytics capabilities and deep expertise in specific asset classes.

·     Proven expertise in the successful management and servicing of consumer assets.

 

Objectives and Strategies

 

Credigy aims to provide customized solutions for the consumer receivables market in pursuit of the best risk-adjusted returns and a return on assets (ROA) of at least 2.5%.

 

Strategic Priorities

2019 Achievements and Highlights

 

Sustain deal flow by being a partner of choice for bank and non‑bank institutions facing complex challenges and strategic changes

 

>   Maintained average assets of approximately $7 billion.

Maintain a diversified mix of performing assets

 

>   Performing assets accounted for 96% of assets.

>   Continued diversification in asset classes focusing on both secured and unsecured consumer assets.

 

Achieve best risk-adjusted returns

 

>   Credit model monitoring and refinement helped Credigy focus on the best risk/reward investments.

>   Maintained a disciplined approach to ensure a risk-return balance and an ROA of at least 2.5%.

 

 

Priorities and Outlook for 2020

 

·     Deliver growth by leveraging relationships with current and prospective partners.

·     Leverage committed funding agreements to support asset growth.

·     Capitalize on changing market conditions that have potential for large investment opportunities.

·     Maintain focus on asset diversification and a balanced risk/return investment profile.

 

 

 

International - ABA Bank

 

Established in 1996, ABA Bank provides financial services to individuals and businesses in Cambodia. It is the third largest and fastest-growing commercial bank in the country with an ROE of approximately 30%. It offers a full spectrum of financial services to micro, small and medium enterprises (MSMEs) as well as to individuals through 70 branches, 541 ATM and cash deposit machines, and advanced online banking and mobile banking platforms. For the fifth and sixth straight years respectively, ABA Bank has been selected as the Best Bank in Cambodia by Global Finance and Euromoney magazines. In fiscal 2019, the Bank became 100% shareholder of ABA Bank after acquiring the remaining 10% ownership interest.

 

Economic and Market Review

 

The Cambodian economy is rapidly growing, with GDP growth nearing 7% in the past decade. It is a well-diversified economy, largely based on the U.S. dollar. The strong GDP growth is supported by its membership in the Association of Southeast Asian Nations (ASEAN) trade association and an expansionary fiscal policy. The Cambodian market is highly underbanked, with approximately 8% of the population having a credit account and 40% having a deposit account. Mobile technology and social media are widely adopted and used in the country, and over 70% of the population of 16.5 million is under 35 years of age.

 

Key Success Factors

 

·     Loan strategy targeting MSMEs with simple products.

·     Strong risk management driving high credit quality.

·     Ability to fund loan growth through the deposit strategy.

·     Deposit strategy leveraging state-of-the art technology, leading to an expanding transactional banking ecosystem.

·     Experienced leadership team, and educated workforce supported by robust training programs.

·     Governance structure based on high Canadian standards while providing local management with the autonomy to pursue strategic priorities and business objectives.

·     Leveraging National Bank's reputation as a world-class financial institution.

 

Objectives and Strategies

 

ABA Bank wishes to pursue omnichannel banking strategy focused on being the lending partner of choice to MSMEs while increasing market penetration in deposits and transactional services for retail and business clients.

 

Strategic Priorities

2019 Achievements and Highlights

Grow market share in MSME lending while contributing to the economy and maintaining credit quality

 

>   Achieved 52% growth in loan volumes, with 100% of loans collateralized.

>   At 0.7% in 2019, non-performing loans below market average.

>   Increased market penetration with the opening of 7 new branches for a total of 70 branches country-wide.

>   Improved from fourth to third largest bank in Cambodia by assets.

 

Sustain growth in deposits and transactional services

 

>   Deposits increased 82% compared to 2018.

>   Continued to make enhancements to self-banking capabilities, including the first full-scale mobile banking application in Cambodia.

>   ABA's online payment gateway (PayWay) was optimized, adding new functions that facilitate merchant operations and that transform the Cambodian eCommerce landscape.

>   Self-banking transactions made up 94% of all transactions, compared to 90% in 2018.

 

Retain international recognition of ABA Bank's progress

 

 

>   Global Finance magazine named ABA Bank as the "Best Bank in Cambodia" for the fifth consecutive year.

>   Euromoney magazine named ABA Bank as the "Best Bank in Cambodia" for the sixth consecutive year.

 

 

 

Priorities and Outlook for 2020

 

Leverage positive economic outlook by staying focused on core target markets

·     Continue to offer simple and efficient banking solutions aligned with domestic needs in the underbanked Cambodian market.

·     Focus on MSME clients to achieve loan growth.

·     Increase deposit base by offering convenience to retail customers through an advanced digital and self-banking infrastructure and an expanding branch network.

 

Ensure solid foundation for sustainable long-term growth

·     Open 10 to 12 additional branches in 2020 to extend its reach in Cambodia and gain direct access to a larger pool of MSME customers and retail deposits.

·     Focus on sound business processes as well as on strong governance and risk management.

 

Segment Results - USSF&I

 

Year ended October 31

 

 

 

 

 

 

 

 

 

(millions of Canadian dollars)

 

2019

 

 

2018

 

 

% change

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

 

 

 

 

 

 

 

 

Credigy

 

402

 

 

446

 

 

(10)

 

 

ABA Bank

 

303

 

 

192

 

 

58

 

 

International

 

10

 

 

1

 

 

 

 

 

 

 

715

 

 

639

 

 

12

 

Non-interest expenses

 

 

 

 

 

 

 

 

 

 

Credigy

 

152

 

 

156

 

 

(3)

 

 

ABA Bank

 

131

 

 

93

 

 

41

 

 

International

 

2

 

 

2

 

 

 

 

 

 

 

285

 

 

251

 

 

14

 

Contribution

 

430

 

 

388

 

 

11

 

Provisions for credit losses

 

 

 

 

 

 

 

 

 

 

Credigy

 

68

 

 

81

 

 

(16)

 

 

ABA Bank

 

12

 

 

13

 

 

(8)

 

 

 

 

80

 

 

94

 

 

(15)

 

Income before income taxes 

 

350

 

 

294

 

 

19

 

Income taxes

 

71

 

 

72

 

 

(1)

 

Net income

 

279

 

 

222

 

 

26

 

Non-controlling interests

 

40

 

 

38

 

 

5

 

Net income attributable to the Bank's shareholders

 

239

 

 

184

 

 

30

 

Average assets

 

10,985

 

 

9,270

 

 

19

 

Average loans and receivables

 

8,907

 

 

7,853

 

 

13

 

Net impaired loans - Stage 3(1)

 

15

 

 

15

 

 

 

Purchased or originated credit-impaired (POCI) loans

 

1,166

 

 

1,576

 

 

(26)

 

Average deposits

 

3,474

 

 

1,907

 

 

82

 

Efficiency ratio

 

39.9

%

 

39.3

%

 

 

 

 

 

(1)    Net impaired loans - Stage 3 exclude POCI loans and are presented net of allowances for credit losses on Stage 3 loan amounts drawn.

 

 

 

 

Average Loans - Credigy

Year ended October 31

(millions of Canadian dollars)

 

Average Loans and Deposits - ABA Bank

Year ended October 31

(millions of Canadian dollars)

 

 

 

 

 

 

 

 

            2018

 

2019

 

           2018

2019

 

 

Loans

POCI loans

 

Loans

Deposits

 

             

 

Financial Results

 

In the USSF&I segment, the fiscal 2019 net income totalled $279 million compared to $222 million in fiscal 2018. The segment's fiscal 2019 total revenues amounted to $715 million versus $639 million in fiscal 2018, representing year-over-year growth of 12% that came mainly from a $111 million increase in the revenues of the ABA Bank subsidiary owing to sustained growth in loan and deposit volumes. At the Credigy subsidiary, revenues were down $44 million as a result of changes in the loan portfolio mix.

 

The segment's non-interest expenses stood at $285 million in fiscal 2019, a $34 million year-over-year increase essentially attributable to all of ABA Bank's non-interest expenses and related to its growing banking network. At the Credigy subsidiary, non-interest expenses were down slightly year over year.

 

In fiscal 2019, the segment recorded $80 million in provisions for credit losses, consisting essentially of Credigy's credit loss provisions.

 

Credigy

For fiscal 2019, Credigy's net income totalled $144 million, down $10 million from fiscal 2018. The subsidiary's total revenues amounted to $402 million compared to $446 million in fiscal 2018, a $44 million or 10% decrease attributable mainly to lower net interest income arising from changes in the loan portfolio mix. Credigy's fiscal 2019 non-interest expenses stood at $152 million versus $156 million in fiscal 2018, with the decrease being attributable to the variable compensation associated with the subsidiary's revenues. Credigy recorded $68 million in provisions for credit losses for fiscal 2019 versus $81 million in fiscal 2018, a decrease that is attributable to credit loss provisions on impaired and non-impaired loans following repayments and maturities of certain loan portfolios, whereas credit loss provisions on POCI loans were up compared to fiscal 2018.

 

ABA Bank

For fiscal 2019, ABA Bank's net income totalled $128 million, up $59 million or 86% from fiscal 2018. The subsidiary's total revenues amounted to $303 million compared to $192 million in fiscal 2018, a $111 million or 58% increase driven mainly by higher net interest income owing to sustained growth in loan volumes and deposit volumes, which rose 52% and 82%, respectively. The subsidiary's fiscal 2019 non-interest expenses stood at $131 million compared to $93 million in fiscal 2018. This increase was attributable to the expansion of the subsidiary's banking network, including compensation and employee benefits as well as occupancy expenses. For fiscal 2019, ABA Bank recorded $12 million in provisions for credit losses, stable when compared to $13 million in fiscal 2018.

 

 

Total Revenues by Category

Year ended October 31, 2019

 

 

Credigy (2018: 70%)

ABA Bank (2018: 30%)

International (2018: negligible)

 

 

 

Operating Results

Year ended October 31

(millions of Canadian dollars)

 

 

 

2018

 

2019

Credigy

ABA Bank and International

 

Business Segment Analysis | Other

 

The Other heading reports on Treasury operations, liquidity management, Bank funding, asset and liability management, certain non-recurring items, and the unallocated portion of corporate units. Corporate units include Information Technology, Risk Management, Employee Experience, Operations, and Finance. These units provide advice and guidance throughout the Bank and to its business segments in addition to expertise and support in their respective fields.

 

Segment Results - Other

 

Year ended October 31

 

 

 

 

 

(taxable equivalent basis)(1)

 

 

 

 

 

(millions of Canadian dollars)

 

2019

 

2018(2)

 

 

 

 

 

 

 

Net interest income on a taxable equivalent basis

 

(192)

 

(189)

 

Non-interest income on a taxable equivalent basis

 

294

 

220

 

Total revenues on a taxable equivalent basis

 

102

 

31

 

Non-interest expenses

 

390

 

275

 

Contribution on a taxable equivalent basis

 

(288)

 

(244)

 

Provisions for credit losses

 

 

 

Income before income taxes on a taxable equivalent basis

 

(288)

 

(244)

 

Income taxes (recovery) on a taxable equivalent basis

 

(88)

 

(74)

 

Net loss

 

(200)

 

(170)

 

Non-controlling interests

 

26

 

49

 

Net loss attributable to the Bank's shareholders

 

(226)

 

(219)

 

Specified items after income taxes(1)

 

6

 

 

Net loss excluding specified items(1)

 

(194)

 

(170)

 

Average assets

 

43,667

 

42,925

 

 

(1)    See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.

(2)    For the year ended October 31, 2018, certain amounts have been reclassified.

 

 

Financial Results

 

For the Other heading of segment results, there was a net loss of $200 million in fiscal 2019 compared to a net loss of $170 million in fiscal 2018. This change in net loss was essentially due to a lower contribution from treasury activities during fiscal 2019 arising in part from the impact of market volatility on the Bank's asset/liability management portfolio during the first quarter of 2019. The specified items recorded for fiscal 2019 had a $6 million unfavourable impact on the net income recorded in the Other heading. Net loss excluding specified items stood at $194 million for fiscal 2019 compared to a $170 million net loss in fiscal 2018.

 

Total revenues on a taxable equivalent basis were up, mainly due to the specified items recorded for fiscal 2019, which include a $79 million gain on disposal of Fiera Capital shares, a $50 million gain on disposal of premises and equipment, and a $33 million loss arising from the fair value remeasurement of the Bank's investment in NSIA. The fiscal 2019 non-interest expenses were also up as a result of the following specified items: $57 million in impairment losses on premises and equipment and on intangible assets, $45 million in provisions for onerous contracts, an $11 million charge related to Maple, and $10 million in severance pay.

 

 

Quarterly Financial Information

 

Several trends and factors have an impact on the Bank's quarterly net income, revenues, non-interest expenses and provisions for credit losses. For example, the second quarter of the fiscal year has fewer days than the other quarters, which can result in reductions to total revenues and certain non-interest expense items. The following table presents a summary of results for the past eight quarters. Furthermore, a summary of results for the past 12 quarters is provided in Table 1 on pages 102 and 103.

 

Quarterly Results Summary(1)

 

(millions of Canadian dollars)

 

2019

 

 

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

Q4

 

 

Q3

 

 

Q2

 

 

Q1

 

Q4

 

 

Q3

 

 

Q2

 

 

Q1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Statement of income data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

936

 

 

855

 

 

942

 

 

863

 

826

 

 

837

 

 

885

 

 

834

 

Non-interest income

 

979

 

 

1,093

 

 

828

 

 

936

 

988

 

 

955

 

 

869

 

 

972

 

Total revenues

 

1,915

 

 

1,948

 

 

1,770

 

 

1,799

 

1,814

 

 

1,792

 

 

1,754

 

 

1,806

 

Provisions for credit losses

 

89

 

 

86

 

 

84

 

 

88

 

73

 

 

76

 

 

91

 

 

87

 

Non-interest expenses

 

1,095

 

 

1,154

 

 

1,026

 

 

1,026

 

1,036

 

 

1,011

 

 

992

 

 

1,024

 

Income taxes

 

127

 

 

100

 

 

102

 

 

133

 

139

 

 

136

 

 

124

 

 

145

 

Net income

 

604

 

 

608

 

 

558

 

 

552

 

566

 

 

569

 

 

547

 

 

550

 

 

(1)    For additional information about the 2019 fourth quarter results, visit the Bank's website at nbc.ca or the SEDAR website at sedar.com to consult the Bank's Press Release for the Fourth Quarter of 2019, published on December 4, 2019.

 

The above analysis of the past eight quarters reflects the sustained performance of all the business segments and helps readers identify the items that have favourably or unfavourably affected results. Thanks to net income growth across most of the Bank's main business segments, the net income for each quarter of 2019 was up year over year. However, the year-over-year growth in net income for the first and second quarters of 2019 was tempered somewhat by a slowdown in the activities of the Financial Markets segment.

 

Net interest income posted year-over-year growth in every quarter of 2019. These increases were mainly driven by growth in personal and commercial loan and deposit volumes, net interest income growth at Wealth Management (notably due to loan and deposit growth) and to growth in the net interest income of the ABA Bank subsidiary. The year-over-year increases in net interest income for the first and third quarters of 2019 were tempered somewhat by lower net interest income in the Financial Markets segment. Furthermore, the Credigy subsidiary posted less net interest income in the first, second, and third quarters of 2019 as a result of changes in the loan portfolio mix.

 

The non-interest income results for the first, second and fourth quarters of 2019 were down year over year. Non-interest income in the first and second quarters of 2019 was down year over year given a slowdown in the activities of the Financial Markets segment. The 2019 third-quarter non-interest income included a revision to actuarial reserves and the following specified items: a $79 million gain on disposal of Fiera Capital shares, a $50 million gain on disposal of premises and equipment, and a $33 million loss arising from the remeasurement at fair value of the Bank's investment in NSIA.

 

The provisions for credit losses posted year-over-year increases in almost every quarter of 2019. Higher credit loss provisions were recorded in the third and fourth quarters of 2019 as a result of provisions on personal loans, credit card receivables, and Financial Markets loans. For the second quarter of 2019, provisions for credit losses saw a year-over-year decrease, mainly due to provisions recorded on loans at the Credigy subsidiary.

 

The non-interest expense results for every quarter of 2019 were up year over year. Explaining these increases were compensation and employee benefits (including the variable compensation associated with revenue growth in the business segments), technology investment expenses made as part of the Bank's transformation plan and for business development activities, and expenses related to the expansion of ABA Bank's banking network. In addition, non-interest expenses for the third quarter of 2019 included $57 million in impairment losses on premises and equipment and on intangible assets, $45 million in provisions for onerous contracts, and $10 million in severance pay. For the fourth quarter of 2019, non-interest expenses included an $11 million charge related to Maple.

 

The effective income tax rate for every quarter of 2019 was down year over year. These changes in effective tax rate between the quarters of 2019 and 2018 were created mainly by a realization of capital gains taxed at a lower rate, by higher income from lower tax rate jurisdictions, and by lower tax-exempt dividend income. In addition, the U.S. tax reform had an impact on the effective tax rate of the first quarter of 2019 compared to the first quarter of 2018.

 

Analysis of the Consolidated Balance Sheet

 

Consolidated Balance Sheet Summary

 

As at October 31 

 

 

 

 

 

 

 

(millions of Canadian dollars)

 

2019

 

2018

 

% change

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and deposits with financial institutions

 

13,698

 

12,756

 

7

 

Securities

 

82,226

 

69,783

 

18

 

Securities purchased under reverse repurchase agreements and securities borrowed

 

17,723

 

18,159

 

(2)

 

Loans and acceptances, net of allowances

 

153,251

 

146,082

 

5

 

Other

 

14,560

 

15,691

 

(7)

 

 

 

 

281,458

 

262,471

 

7

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

Deposits

 

189,566

 

170,830

 

11

 

Other

 

75,983

 

76,539

 

(1)

 

Subordinated debt

 

773

 

747

 

3

 

Equity attributable to the Bank's shareholders

 

14,778

 

13,976

 

6

 

Non-controlling interests

 

358

 

379

 

(6)

 

 

 

 

281,458

 

262,471

 

7

 

 

As at October 31, 2019, the Bank's total assets amounted to $281.5 billion compared to $262.5 billion at year-end 2018, a $19.0 billion or 7% increase owing mainly to a $12.4 billion increase in securities and a $7.2 billion increase in loans and acceptances, net of allowances.

 

Cash and Deposits With Financial Institutions

At $13.7 billion as at October 31, 2019, cash and deposits with financial institutions rose $0.9 billion or 7% since the same date last year, mainly due to deposits with financial institutions made by the ABA Bank subsidiary. The Bank's liquidity and funding risk management practices are described on pages 82 to 89 of this MD&A.

 

Securities

As at October 31, 2019, securities totalled $82.2 billion (29% of total assets). During fiscal 2019, they grew $12.4 billion from $69.8 billion as at October 31, 2018. This growth was partly due to a $6.0 billion increase in securities at fair value through profit or loss attributable to a $13.5 billion increase in equity securities and to a $1.3 billion increase in securities issued or guaranteed by U.S. Treasury, other U.S. agencies and other foreign governments. These increases were tempered by a $4.2 billion decrease in securities issued or guaranteed by the Canadian government and a $3.9 billion decrease in securities issued or guaranteed by Canadian provincial and municipal governments. Securities other than those measured at fair value through profit or loss were up $6.4 billion, essentially due to a $2.1 billion increase in securities issued or guaranteed by the Canadian government, to a $3.5 billion increase in securities issued or guaranteed by U.S. Treasury, other U.S. agencies, and other foreign governments, and to a $0.8 billion increase in other debt securities. Securities purchased under reverse repurchase agreements and securities borrowed totalled $17.7 billion as at October 31, 2019, a 2% decrease since year-end 2018 that is mainly related to activities in the Financial Markets segment. The Bank's market risk management policies are described on pages 75 to 81 of this MD&A.

 

Loans and Acceptances

As at October 31, 2019, loans and acceptances, net of allowances for credit losses, totalled $153.3 billion, up $7.2 billion or 5% from October 31, 2018, and accounted for 54% of total assets.

 

Residential mortgage loans outstanding totalled $57.2 billion as at October 31, 2019, rising $3.5 billion or 7% since year-end 2018. This growth was driven by sustained demand for mortgage credit as well as by business growth at the ABA Bank subsidiary. Personal loans totalled $36.9 billion at year-end 2019, declining $0.5 billion from $37.4 billion at year-end 2018 due in part to changes in the loan portfolio mix of the Credigy subsidiary. As for credit card receivables, they totalled $2.3 billion, remaining stable when compared to October 31, 2018.

 

At $57.5 billion as at October 31, 2019, loans and acceptances to businesses and government increased $4.1 billion or 8% since October 31, 2018. This increase was driven mainly by Commercial Banking and Credigy subsidiary activities.

 

Table 9 (page 109) shows gross loans and acceptances by borrower category as at October 31, 2019. At $74.4 billion, residential mortgages (including home equity lines of credit) have posted strong growth since 2015 and account for 48% of total loans and acceptances. This growth in residential mortgages was driven by sustained demand for mortgage credit as well as by growth in business activity at the ABA Bank subsidiary. As for retail loans, they totalled $15.7 billion as at October 31, 2019. With respect to commercial loans, there was year-over-year growth in the agriculture category, utilities category, and manufacturing category. As at October 31, 2019, certain categories posted year-over-year decreases, notably the mining category, the finance and insurance category, and the government category. Furthermore, the Credigy subsidiary's POCI  loans were down from October 31, 2018 due to maturities and repayments in certain portfolios.

 

 

Impaired Loans

Impaired loans include loans classified in Stage 3 of the expected credit loss model and the purchased or originated credit-impaired (POCI) loans of the Credigy subsidiary.

 

As at October 31, 2019, gross impaired loans excluding POCI loans stood at $684 million compared to $630 million as at October 31, 2018 (Table 10, page 109). Net impaired loans excluding POCI loans totalled $450 million as at October 31, 2019 compared to $404 million as at October 31, 2018, a $46 million increase related to net impaired loans in the Commercial Banking portfolio and the Financial Markets segment. Gross POCI loans stood at $1,166 million as at October 31, 2019, down from $1,576 million as at October 31, 2018 as a result of maturities and repayments of certain portfolios.

 

A detailed description of the Bank's credit risk management practices is provided on pages 67 to 74 of this MD&A as well as in Note 7 to the consolidated financial statements.

 

Other Assets

As at October 31, 2019, other assets totalled $14.6 billion compared to $15.7 billion as at October 31, 2018. This $1.1 billion decrease in other assets can essentially be traced to a $0.5 billion decrease in derivative financial instruments and to a $0.4 billion decrease in other assets. Investments in associates and joint ventures declined due to the disposal of a portion of the Bank's interest in Fiera Capital as well as to a conclusion to stop recognizing the equity stake in NSIA as an investment in an associate following a loss of significant influence. Premises and equipment also decreased due to the sale of the land and head office building occupied by the Bank.

 

Deposit Liability

At $189.6 billion as at October 31, 2019, deposits increased by $18.8 billion or 11% since year-end 2018. At $60.1 billion, personal deposits, as presented in Table 12 (page 110), increased $4.4 billion since October 31, 2018 and accounted for 32% of all deposits. This increase was driven by Bank initiatives designed to grow this type of deposit as well as by business growth at the ABA Bank subsidiary. A summary of total personal savings is provided in the table below.

 

As shown in Table 12, business and government deposits totalled $125.3 billion, up $15.0 billion from $110.3 billion at year-end 2018. This increase came from business growth at Commercial Banking and from treasury funding activities, including $3.5 billion in deposits subject to bank recapitalization (bail-in) conversion regulations, from corporate financing activities and from issuances of structured notes. Deposits from deposit-taking institutions were down $0.6 billion from the same date last year.

 

As at October 31, 2019, total personal savings amounted to $233.0 billion, up from $211.5 billion as at October 31, 2018. Overall, off-balance-sheet personal savings stood at $172.9 billion as at October 31, 2019 compared to $155.8 billion a year ago given net inflows in brokerage operations and stronger stock market performance.

 

Total Personal Savings

As at October 31

 

 

 

 

 

 

 

(millions of Canadian dollars)

 

2019

 

2018

 

% change

 

 

 

 

 

 

 

 

 

Balance sheet

 

 

 

 

 

 

 

Deposits

 

60,065

 

55,688

 

8

 

 

 

 

 

 

 

 

 

Off-balance-sheet

 

 

 

 

 

 

 

Brokerage

 

135,768

 

123,458

 

10

 

Mutual funds

 

36,819

 

31,874

 

16

 

Other

 

319

 

440

 

(28)

 

 

 

172,906

 

155,772

 

11

 

Total

 

232,971

 

211,460

 

10

 

 

 

 

 

 

 

 

 

Other Liabilities

As at October 31, 2019, other liabilities stood at $76.0 billion, declining $0.5 billion since October 31, 2018, essentially due to a $5.0 billion decrease in obligations related to securities sold short, partly offset by a $1.9 billion increase in obligations related to securities sold under repurchase agreements and securities loaned, a $0.9 billion increase in derivative financial instruments, and a $1.2 billion increase in liabilities related to transferred receivables.

 

Subordinated Debt and Other Contractual Obligations

Subordinated debt has remained relatively stable since October 31, 2018. The contractual obligations are presented in detail in Note 29 to the consolidated financial statements.

 

 

Equity

As at October 31, 2019, equity attributable to the Bank's shareholders was $14.8 billion, rising $0.8 billion from $14.0 billion since October 31, 2018. This increase came from net income net of dividends, tempered by remeasurements of pension plans and other post-employment benefit plans, by a net change in gains (losses) on cash flow hedges, and by repurchases of common shares for cancellation, factors which themselves were partly offset by issuances of common shares under the Stock Option Plan and the impact of shares purchased or sold for trading. The Consolidated Statements of Changes in Equity on page 118 of this Annual Report present the items of equity. In addition, an analysis of the Bank's regulatory capital is presented in the Capital Management section of this MD&A.

 

Acquisition

 

On September 27, 2019, the Bank acquired the entire remaining non-controlling interest in the Cambodian subsidiary Advanced Bank of Asia Limited (ABA Bank) for $84 million. Following this transaction, ABA Bank became a wholly owned subsidiary of the Bank.

 

Exposures to Certain Activities

 

In 2012, the Financial Stability Board (FSB) formed a working group, the Enhanced Disclosure Task Force (EDTF), that was mandated to develop principles for enhancing the risk disclosures of major banks. The EDTF published a report containing 32 recommendations. The risk disclosures required by the EDTF are provided in this Annual Report and in the documents entitled Supplementary Regulatory Capital and Pillar 3 Disclosure and Supplementary Financial Information, which are available on the Bank's website at nbc.ca. In addition, on page 12 of this Annual Report is a table of contents that readers can use to locate information relative to the 32 recommendations.

 

The FSB 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. Alt-A loans are granted to borrowers who cannot provide standard proof of income. The Bank's Alt-A loan volume was $402 million as at October 31, 2019 ($425 million as at October 31, 2018). The Bank does not have any significant direct position in residential and commercial mortgage-backed securities that are not insured by the CMHC. Credit derivative positions are presented in the Supplementary Regulatory Capital and Pillar 3 Disclosure report, which is available on the Bank's website at nbc.ca.

 

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 October 31, 2019, total commitments for this type of loan stood at $3,559 million ($2,967 million as at October 31, 2018). Details about other exposures are provided in the table concerning structured entities in Note 27 to the consolidated financial statements.

 

 

Related Party Transactions

 

In the normal course of business, the Bank provides various banking services and enters into contractual agreements and other transactions with associates, joint ventures, directors, key officers and other related parties. These agreements and transactions are entered into under conditions similar to those offered to non-related third parties.

 

In accordance with the Bank Act (Canada), the aggregate of loans granted to key officers of the Bank, excluding mortgage loans granted on their principal residence, cannot exceed twice the officer's annual salary.

 

Loans to eligible key officers are granted under the same conditions as those granted to any other employee of the Bank. The main conditions are as follows:

 

·     the employee must meet the same credit requirements as a client;

·     mortgage loans are offered at the preferential employee rate;

·     home equity lines of credit bear interest at Canadian prime less 0.5%, but never lower than Canadian prime divided by two;

·     personal loans bear interest at a risk-based regular client rate;

·     credit card advances bear interest at a prescribed fixed rate in accordance with Bank policy;

·     personal lines of credit bear interest at Canadian prime less 0.5%, but never lower than Canadian prime divided by two.

 

The Bank also offers a deferred stock unit plan to directors who are not Bank employees. For additional information, see Note 22 to the consolidated financial statements. Additional information on related parties is presented in Notes 9, 27 and 28 to the consolidated financial statements.

 

Income Taxes

 

In June 2019, the Bank was reassessed by the Canada Revenue Agency (CRA) for additional income tax and interest of approximately $150 million (including estimated provincial tax and interest) in respect of certain Canadian dividends received by the Bank during 2014. 

 

In prior fiscal years, the Bank was reassessed for additional income tax and interest of approximately $220 million (including provincial tax and interest) in respect of certain Canadian dividends received by the Bank during the 2013 and 2012 taxation years.

 

The transactions to which the above-mentioned reassessments relate are similar to those prospectively addressed by income tax legislation enacted as a result of the 2015 Canadian federal budget.

 

The CRA may issue reassessments to the Bank for taxation years subsequent to 2014 in regard to activities similar to those that were the subject of the abovementioned reassessments. The Bank remains confident that its tax position was appropriate and intends to vigorously defend its position. As a result, no amount has been recognized in the consolidated financial statements as at October 31, 2019.

 

Event After the Consolidated Balance Sheet

 

On November 19, 2019, the Bank paid 7.7 million euros to the German tax authorities in relation to the Maple case. This payment was made upon a final tax claim of the tax authorities against the insolvency administrator that was approved by the Maple GmbH creditor assembly. As at October 31, 2019, a provision of $11 million was recorded to reflect this adjusting event after the Consolidated Balance Sheet date. For additional information, see Note 26 to the consolidated financial statements.

 

 

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 under amounts other than their notional or contractual values. These arrangements include, among others, transactions with structured entities, derivative financial instruments, the issuance of guarantees, credit instruments, and financial assets received as collateral.

 

Structured Entities

 

The Bank uses structured entities, among other means, to diversify its funding sources and to offer services to clients, in particular to help them securitize their financial assets or provide them with investment opportunities. Under IFRS, a structured entity must be consolidated if the Bank controls the entity. Note 1 to the consolidated financial statements describes the accounting policy and criteria used for consolidating structured entities. Additional information on consolidated and non-consolidated structured entities is provided in Note 27 to the consolidated financial statements.

 

Securitization of the Bank's Financial Assets

Mortgage Loans

The Bank participates in two Canada Mortgage and Housing Corporation (CMHC) securitization programs: the Mortgage-Backed Securities Program under the National Housing Act (Canada) (NHA) and the Canada Mortgage Bond (CMB) Program. Under the first program, the Bank issues NHA securities backed by insured residential mortgage loans and, under the second, the Bank sells NHA securities to Canada Housing Trust (CHT), which finances the purchase through the issuance of mortgage bonds insured by CMHC. Moreover, these mortgage bonds feature an interest rate swap agreement under which a CMHC-certified counterparty pays CHT the interest due to investors and receives the interest on the NHA securities. As at October 31, 2019, the outstanding amount of NHA securities issued by the Bank and sold to CHT was $19.2 billion. The mortgage loans sold consist of fixed- or variable-rate residential loans that are insured against potential losses by a loan insurer. In accordance with the NHA-MBS Program, the Bank advances the funds required to cover late payments and, if necessary, obtains reimbursement from the insurer that insured the loan. The NHA-MBS and CMB programs do not use liquidity guarantee arrangements. The Bank uses these securitization programs mainly to diversify its funding sources. In accordance with IFRS, because the Bank retains substantially all of the risks and rewards of ownership of the mortgage loans transferred to CHT, the derecognition criteria are not met. Therefore, the insured mortgage loans securitized under the CMB Program continue to be recognized in Loans on the Bank's Consolidated Balance Sheet, and the liabilities for the considerations received from the transfer are recognized in Liabilities related to transferred receivables on the Consolidated Balance Sheet. For additional information, see Note 8 to the consolidated financial statements.

 

Credit Card Receivables

In April 2015, the Bank set up Canadian Credit Card Trust II (CCCT II) to continue its program of securitizing credit card receivables on a revolving basis. The Bank uses this entity for capital management and funding purposes. The Bank acts as the servicer of the receivables sold and maintains the client relationship. Furthermore, it administers the securitization program and ensures that all related procedures are stringently followed and that investors are paid according to the provisions of the program.

 

As at October 31, 2019, the credit card receivables portfolio held by CCCT II (net of the Bank Certificate held by the Bank) represented an amount outstanding of $1.6 billion. CCCT II issued investors' certificates, $0.9 billion of which is held by third parties and $0.7 billion is held by the Bank. New receivables are periodically sold to the structure on a revolving basis to replace the receivables reimbursed by clients.

 

The different series of certificates are rated by the Fitch and DBRS rating agencies. From this portfolio of sold receivables, the Bank retains the excess spread, i.e., the residual net interest income after all the expenses related to this structure have been paid, and thus provides first-loss protection. Furthermore, second-loss protection for issued series is provided by certificates subordinated to the senior notes, representing 5.8% of the total amount of the series issued. The Bank controls CCCT II and thus consolidates it.

 

Securitization of Third-Party Financial Assets

The Bank administers multi-seller conduits that purchase financial assets from clients and finance those purchases by issuing commercial paper backed by the acquired assets. Clients use these multi-seller conduits to diversify their funding sources and reduce borrowing costs while continuing to service the financial assets and providing some amount of first-loss protection. Notes issued by the conduits and held by third parties provide additional credit loss protection. The Bank acts as a financial agent and provides administrative and transaction structuring services to these conduits. The Bank provides backstop liquidity and credit enhancement facilities under the commercial paper program. These facilities are presented and described in Notes 26 and 27 to the consolidated financial statements. The Bank has concluded derivative financial instrument contracts with these conduits, the fair value of which is presented on the Bank's Consolidated Balance Sheet. The Bank is not required to consolidate these conduits, as it does not control them.

 

 

Derivative Financial Instruments

 

The Bank uses various types of derivative financial instruments to meet its clients' needs, generate trading activity revenues and manage its exposure to interest rate, foreign exchange and credit risk as well as other market risks. All derivative financial instruments are accounted for at fair value on the Consolidated Balance Sheet. Transactions in derivative financial instruments are expressed as notional amounts. These amounts are not presented as assets or liabilities on the Consolidated Balance Sheet. They represent the face amount of the contract to which a rate or price is applied to determine the amount of cash flows to be exchanged. Notes 1 and 16 to the consolidated financial statements provide additional information on the types of derivative financial instruments used by the Bank and their accounting basis.

 

Guarantees

 

In the normal course of business, the Bank enters into various guarantee contracts. The principal types of guarantees are letters of guarantee, backstop liquidity and credit enhancement facilities, certain securities lending activities, and certain indemnification agreements. Note 26 to the consolidated financial statements provides detailed information on these guarantees.

 

Credit Instruments

 

In the normal course of business, the Bank enters into various off-balance-sheet credit commitments. The credit instruments used to meet the financing needs of its clients represent the maximum amount of additional credit that the Bank could be required to extend if the commitments were fully drawn. For additional information on these off-balance-sheet credit instruments and other items, see Note 26 to the consolidated financial statements.

 

Financial Assets Received as Collateral

 

In the normal course of business, the Bank receives financial assets as collateral as a result of transactions involving securities purchased under reverse repurchase agreements, securities borrowing and lending agreements, and derivative financial instrument transactions. For additional information regarding financial assets received as collateral, see Note 26 to the consolidated financial statements.

 

 

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.

 

Capital Management Framework

 

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 activities and accommodate unexpected losses arising from extremely adverse economic and operational conditions. The Bank has implemented a rigorous internal capital adequacy assessment process that comprises the following procedures:

 

·     conducting an overall risk assessment;

·     measuring significant risks and the capital requirements related to the Bank's financial budget for the next fiscal year and current and prospective risk profiles;

·     integrating stress tests across the organization and executing sensitivity analyses to determine the capital buffer above minimum regulatory levels (for additional information on enterprise-wide stress testing, see the Risk Management section of this MD&A);

·     aggregating capital and monitoring the reasonableness of internal capital compared with regulatory capital;

·     comparing projected internal capital with regulatory capital levels, internal operating targets, and competing banks;

·     attesting to the adequacy of the Bank's capital levels.

 

Assessing capital adequacy is an integral part of capital planning and strategy. The Bank sets internal capital ratio targets that include a discretionary cushion in excess of the regulatory requirements, which provides a solid financial structure and sufficient capital to meet management's business needs in accordance with its risk appetite, along with competitive returns to shareholders, under both normal market conditions and a range of severe but plausible stress testing scenarios. The internal capital adequacy assessment process is a key tool in establishing the Bank's capital strategy and is subject to quarterly reviews and periodic amendments.

 

Risk-adjusted return on capital (RAROC) and shareholder value added (SVA), which are obtained from an assessment of required economic capital, are calculated quarterly for each of the Bank's business segments. The results are then used to guide management in allocating capital among the different business segments.

 

Structure and Governance

Along with its partners from Risk Management, Global Funding and Treasury Group, and Finance, the Capital Management team is responsible for maintaining integrated control methods and processes so that an overall assessment of capital adequacy may be performed.

 

The Board oversees the structure and development of the Bank's capital management policy and ensures that the Bank maintains sufficient capital in accordance with regulatory requirements and in consideration of market conditions. The Board delegates certain responsibilities to the Risk Management Committee (RMC), which in turn recommends capital management policies and oversees their application. However, the Board, on the recommendation of the RMC, assumes the following responsibilities:

 

·     reviewing and approving the capital management policy;

·     reviewing and approving the Bank's risk appetite, including the main capital and risk targets and the corresponding limits;

·     reviewing and approving the capital plan and strategy on an annual basis, including the Bank's internal capital adequacy assessment process;

·     reviewing and approving the implementation of significant measures respecting capital, including contingency measures;

·     reviewing significant capital disclosures, including Basel capital adequacy ratios;

·     ensuring the appropriateness of the regulatory capital adequacy assessment.

 

The Office of the President is responsible for defining the Bank's strategy and plays a key role in guiding measures and decisions regarding capital. The Enterprise‑Wide Risk Management Committee oversees capital management, which consists of reviewing the capital plan and strategy and implementing significant measures respecting capital, including contingency measures, and making recommendations with respect to these measures.

 

 

Basel Accord and Regulatory Environment

 

Basel Accord

The Basel Accord proposes a range of approaches of varying complexity, the choice of which determines the sensitivity of capital to risks. A less complex approach, such as the Standardized Approach, uses regulatory weightings, while a more complex approach uses the Bank's internal estimates of risk components to establish risk-weighted assets and calculate regulatory capital.

 

As required under Basel, risk-weighted assets (RWA) are calculated for each credit risk, market risk, and operational risk. The Bank uses the Advanced Internal Rating-Based (AIRB) Approach for credit risk to determine minimum regulatory capital requirements for a majority of its portfolios. The credit risk of certain portfolios considered to be less significant is weighted according to the Basel Standardized Approach. The simple risk-weighted method is used to calculate the charge related to banking book equity securities. This method requires proactive management of the capital allocated to portfolios with banking book equity securities since, beyond a certain investment threshold, the cost of regulatory capital becomes prohibitive. As for operational risk, the Bank uses the Standardized Approach. Market risk-weighted assets are primarily determined using the Internal Model-Based Approach, but the Standardized Approach is used to assess interest-rate specific risk.

 

With respect to the risk related to securitization operations, the capital treatment depends on the type of underlying exposures and on the information available about the exposures. The Bank must use the Securitization Internal Rating-Based Approach (SEC-IRBA) if it is able to apply an approved internal ratings-based model and has sufficient information to calculate the capital requirements for all underlying exposures in the securitization pool. Under this approach, the RWA is derived from a combination of supervisory inputs and inputs specific to the securitization exposure such as the implicit capital charge related to the underlying exposures, the credit enhancement level, the effective maturity, the number of exposures, and the weighted average loss given default (LGD). 

 

If the Bank cannot use the SEC-IRBA, it must use the Securitization External Rating-Based Approach (SEC-ERBA) for the securitization exposures that are externally rated. This approach assigns risk weights to exposures using external ratings. The Bank uses the ratings assigned by Moody's, Standard & Poor's (S&P), Fitch, DBRS or a combination of these ratings. The Bank uses the Internal Assessment Approach (IAA) for unrated securitization exposures relating to the asset-backed commercial paper conduits it sponsors. If the Bank cannot apply the SEC-ERBA or the IAA, it must use the supervisory formula under the Securitization Standardized Approach (SEC-SA). Under this approach, RWA is derived from inputs specific to the securitization exposure such as the implicit capital charge related to the underlying exposures calculated under the standardized credit risk approach as well as credit enhancement and delinquency levels.

 

If none of the above approaches can be used, the securitization exposure must be assigned a risk weight of 1,250%. The Bank can apply a reduced capital charge for securitization exposures that meet the criteria of the Simple, Transparent and Comparable (STC) framework. To mitigate the impact of the revised securitization framework, which took effect on November 1, 2018, OSFI has permitted grandfathering of the current capital treatment for one year through a negative adjustment to RWA that eliminates the initial increase in risk weights. OSFI has also provided transitional arrangements for all securitization transactions completed by December 31, 2018 for a maximum of two years.

 

Capital ratios are calculated by dividing capital by risk-weighted assets. Credit, market, and operational risks are factored into the risk-weighted assets calculation for regulatory purposes. Basel rules apply at the consolidated level of the Bank. Assets of non-consolidated entities for regulatory purposes are therefore excluded from the risk-weighted assets calculation.

 

The definition adopted by the Basel Committee on Banking Supervision (BCBS) distinguishes between three types of capital. Common Equity Tier 1 (CET1) capital consists of common shareholders' equity less goodwill, intangible assets, and other capital deductions. The Additional Tier 1 instruments comprise eligible non-cumulative preferred shares and the eligible amount of innovative instruments. The sum of CET1 and Additional Tier 1 capital forms what is known as Tier 1 capital. Tier 2 capital consists of eligible subordinated debt and certain allowances for credit losses. Total regulatory capital is the sum of Tier 1 and Tier 2 capital.

 

OSFI is responsible for applying the Basel Accord in Canada. As required under the Basel Accord, OSFI requires that regulatory capital instruments other than common equity have a non-viability contingent capital (NVCC) cl