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ENHANCED DISCLOSURE TASK FORCE (EDTF) RECOMMENDATIONS
The Enhanced Disclosure Task Force (EDTF) was established by the Financial Stability Board in May 2012 with the goal of developing fundamental disclosure principles. On October 29, 2012 the EDTF published its report, “Enhancing the Risk Disclosures of Banks”, which sets forth recommendations around improving risk disclosures and identifies existing leading practice risk disclosures.
Below is the index of all these recommendations to facilitate easy reference in the Bank’s annual report and other public disclosure documents available on www.scotiabank.com/investorrelations.
Reference Table for EDTF |
Pages | ||||||||||||||||||
Supplementary Regulatory Capital Disclosures | ||||||||||||||||||
Type of risk | Number | Disclosure | MD&A | Financial Statements | ||||||||||||||
General | 1 | The index of risks to which the business is exposed. | 14 | |||||||||||||||
2 | The Bank’s risk to terminology, measures and key parameters. | 82-85 | ||||||||||||||||
3 | Top and emerging risks, and the changes during the reporting period. | 87-88, 92-98 | ||||||||||||||||
4 | Discussion on the regulatory development and plans to meet new regulatory ratios. | | 61-64, 106-109, 122-124 |
| ||||||||||||||
Risk governance, risk management and business model | 5 | The Bank’s Risk Governance structure. | 79-81 | |||||||||||||||
6 | Description of risk culture and procedures applied to support the culture. | 82-85 | ||||||||||||||||
7 | Description of key risks from the Bank’s business model. | 86 | ||||||||||||||||
8 | Stress testing use within the Bank’s risk governance and capital management. | 82-83 | ||||||||||||||||
Capital Adequacy and risk-weighted assets | 9 | Pillar 1 capital requirements, and the impact for global systemically important banks. | 61-64 | 216 | 3 | |||||||||||||
10 | a) Regulatory capital components. | 65 | 18-21 | |||||||||||||||
b) Reconciliation of the accounting balance sheet to the regulatory balance sheet. | 15-16 | |||||||||||||||||
11 | Flow statement of the movements in regulatory capital since the previous reporting period, including changes in common equity tier 1, additional tier 1 and tier 2 capital. | 66-67 | 76 | |||||||||||||||
12 | Discussion of targeted level of capital, and the plans on how to establish this. | 61-64 | ||||||||||||||||
13 | Analysis of risk-weighted assets by risk type, business, and market risk RWAs. | 69-73, 86, 131 | 185, 240 | | 5, 34, 36-47, 59-61, 65, 77, 83 | | ||||||||||||
14 | Analysis of the capital requirements for each Basel asset class. | 69-73 | 185, 233-240 | | 13-14, 34-48, 58-61, 65, 70-73 | | ||||||||||||
15 | Tabulate credit risk in the Banking Book. | 69-73 | 235 | 13-14, 34-48, 70-73 | ||||||||||||||
16 | Flow statements reconciling the movements in risk-weighted assets for each risk-weighted asset type. | 69-73 | 49, 64, 76 | |||||||||||||||
17 | Discussion of Basel III Back-testing requirement including credit risk model performance and validation. | 70-72 | 50-53, 81 | |||||||||||||||
Liquidity Funding | 18 | Analysis of the Bank’s liquid assets. | 104-109 | |||||||||||||||
19 | Encumbered and unencumbered assets analyzed by balance sheet category. | 106 | ||||||||||||||||
20 | Consolidated total assets, liabilities and off-balance sheet commitments analyzed by remaining contractual maturity at the balance sheet date. | 110-112 | ||||||||||||||||
21 | Analysis of the Bank’s sources of funding and a description of the Bank’s funding strategy. | 109-110 | ||||||||||||||||
Market Risk | 22 | Linkage of market risk measures for trading and non-trading portfolios and the balance sheet. | 103 | |||||||||||||||
23 | Discussion of significant trading and non-trading market risk factors. | 99-104 | 239-240 | |||||||||||||||
24 | Discussion of changes in period on period VaR results as well as VaR assumptions, limitations, backtesting and validation. | 99-104 | 239-240 | |||||||||||||||
25 | Other risk management techniques e.g. stress tests, stressed VaR, tail risk and market liquidity horizon. | 99-104 | 240 | |||||||||||||||
Credit Risk | 26 | Analysis of the aggregate credit risk exposures, including details of both personal and wholesale lending. | 92-98,125-131 | 194-196, 236-238 | 5, 34, 36-47, 59-61 | |||||||||||||
27 | Discussion of the policies for identifying impaired loans, defining impairments and renegotiated loans, and explaining loan forbearance policies. | 163-165, 196 | ||||||||||||||||
28 | Reconciliations of the opening and closing balances of impaired loans and impairment allowances during the year. | | 94, 125-126, 128-129 | | 196 | 31-32 | ||||||||||||
29 | Analysis of counterparty credit risk that arises from derivative transactions. | 90-91 | 183-186 | 82 | ||||||||||||||
30 | Discussion of credit risk mitigation, including collateral held for all sources of credit risk. | 90-91, 95 | ||||||||||||||||
Other risks | 31 | Quantified measures of the management of operational risk. | 73, 113 | |||||||||||||||
32 | Discussion of publicly known risk items. | 78 | ||||||||||||||||
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Management’s Discussion and Analysis
|
16 | Forward-looking statements | |
17 | Non-GAAP measures | |
26 | Financial highlights | |
Overview of Performance | ||
27 | Financial results: 2021 vs 2020 | |
27 | Medium-term objectives | |
27 | Shareholder returns | |
28 | Economic summary and outlook | |
28 | Impact of COVID-19 | |
30 | Impact of foreign currency translation | |
31 | Impact of divested operations | |
Group Financial Performance | ||
32 | Net income | |
32 | Net interest income | |
34 | Non-interest income | |
35 | Provision for credit losses | |
37 | Non-interest expenses | |
37 | Provision for income taxes | |
38 | Financial results review: 2020 vs 2019 | |
39 | Fourth quarter review | |
41 | Trending analysis | |
Business Line Overview | ||
42 | Overview | |
45 | Canadian Banking | |
48 | International Banking | |
53 | Global Wealth Management | |
56 | Global Banking and Markets | |
59 | Other |
Group Financial Condition | ||
61 | Statement of financial position | |
61 | Capital management | |
74 | Off-balance sheet arrangements | |
77 | Financial instruments | |
78 | Selected credit instruments – publicly known risk items | |
Risk Management | ||
79 | Risk management framework | |
89 | Credit risk | |
99 | Market risk | |
104 | Liquidity risk | |
113 | Other risks | |
Controls and Accounting Policies | ||
118 | Controls and procedures | |
118 | Critical accounting policies and estimates | |
122 | Future accounting developments | |
122 | Regulatory developments | |
124 | Related party transactions | |
Supplementary Data | ||
125 | Geographic information | |
127 | Credit risk | |
132 | Revenues and expenses | |
134 | Selected quarterly information | |
135 | Ten-year statistical review |
2021 Scotiabank Annual Report | 15
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Management’s Discussion and Analysis
From time to time, our public communications often include oral or written forward-looking statements. Statements of this type are included in this document, and may be included in other filings with Canadian securities regulators or the U.S. Securities and Exchange Commission, or in other communications. In addition, representatives of the Bank may include forward-looking statements orally to analysts, investors, the media and others. All such statements are made pursuant to the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities legislation. Forward-looking statements may include, but are not limited to, statements made in this document, the Management’s Discussion and Analysis in the Bank’s 2021 Annual Report under the headings “Outlook” and in other statements regarding the Bank’s objectives, strategies to achieve those objectives, the regulatory environment in which the Bank operates, anticipated financial results, and the outlook for the Bank’s businesses and for the Canadian, U.S. and global economies. Such statements are typically identified by words or phrases such as “believe,” “expect,” “foresee,” “forecast,” “anticipate,” “intend,” “estimate,” “plan,” “goal,” “project,” and similar expressions of future or conditional verbs, such as “will,” “may,” “should,” “would” and “could.”
By their very nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties, which give rise to the possibility that our predictions, forecasts, projections, expectations or conclusions will not prove to be accurate, that our assumptions may not be correct and that our financial performance objectives, vision and strategic goals will not be achieved.
We caution readers not to place undue reliance on these statements as a number of risk factors, many of which are beyond our control and effects of which can be difficult to predict, could cause our actual results to differ materially from the expectations, targets, estimates or intentions expressed in such forward-looking statements.
The future outcomes that relate to forward-looking statements may be influenced by many factors, including but not limited to: general economic and market conditions in the countries in which we operate; changes in currency and interest rates; increased funding costs and market volatility due to market illiquidity and competition for funding; the failure of third parties to comply with their obligations to the Bank and its affiliates; changes in monetary, fiscal, or economic policy and tax legislation and interpretation; changes in laws and regulations or in supervisory expectations or requirements, including capital, interest rate and liquidity requirements and guidance, and the effect of such changes on funding costs; changes to our credit ratings; operational and infrastructure risks; reputational risks; the accuracy and completeness of information the Bank receives on customers and counterparties; the timely development and introduction of new products and services, and the extent to which products or services previously sold by the Bank require the Bank to incur liabilities or absorb losses not contemplated at their origination; our ability to execute our strategic plans, including the successful completion of acquisitions and dispositions, including obtaining regulatory approvals; critical accounting estimates and the effect of changes to accounting standards, rules and interpretations on these estimates; global capital markets activity; the Bank’s ability to attract, develop and retain key executives; the evolution of various types of fraud or other criminal behaviour to which the Bank is exposed; disruptions in or attacks (including cyber-attacks) on the Bank’s information technology, internet, network access, or other voice or data communications systems or services; increased competition in the geographic and in business areas in which we operate, including through internet and mobile banking and non-traditional competitors; exposure related to significant litigation and regulatory matters; climate change and other environmental and social risks, including sustainability that may arise, including from the Bank’s business activities; the occurrence of natural and unnatural catastrophic events and claims resulting from such events; the emergence of widespread health emergencies or pandemics, including the magnitude and duration of the COVID-19 pandemic and its impact on the global economy, financial market conditions and the Bank’s business, results of operations, financial condition and prospects; and the Bank’s anticipation of and success in managing the risks implied by the foregoing. A substantial amount of the Bank’s business involves making loans or otherwise committing resources to specific companies, industries or countries. Unforeseen events affecting such borrowers, industries or countries could have a material adverse effect on the Bank’s financial results, businesses, financial condition or liquidity. These and other factors may cause the Bank’s actual performance to differ materially from that contemplated by forward-looking statements. The Bank cautions that the preceding list is not exhaustive of all possible risk factors and other factors could also adversely affect the Bank’s results, for more information, please see the “Risk Management” section of the Bank’s 2021 Annual Report, as may be updated by quarterly reports.
Material economic assumptions underlying the forward-looking statements contained in this document are set out in the 2021 Annual Report under the headings “Outlook”, as updated by quarterly reports. The “Outlook” sections are based on the Bank’s views and the actual outcome is uncertain. Readers should consider the above-noted factors when reviewing these sections. When relying on forward-looking statements to make decisions with respect to the Bank and its securities, investors and others should carefully consider the preceding factors, other uncertainties and potential events.
Any forward-looking statements contained in this document represent the views of management only as of the date hereof and are presented for the purpose of assisting the Bank’s shareholders and analysts in understanding the Bank’s financial position, objectives and priorities, and anticipated financial performance as at and for the periods ended on the dates presented, and may not be appropriate for other purposes. 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 or on its behalf.
Additional information relating to the Bank, including the Bank’s Annual Information Form, can be located on the SEDAR website at www.sedar.com and on the EDGAR section of the SEC’s website at www.sec.gov.
November 30, 2021
16 | 2021 Scotiabank Annual Report
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MANAGEMENT’S DISCUSSION & ANALYSIS
The Management’s Discussion and Analysis (MD&A) is provided to enable readers to assess the Bank’s financial condition and results of operations as at and for the year ended October 31, 2021. The MD&A should be read in conjunction with the Bank’s 2021 Consolidated Financial Statements, including the Notes. This MD&A is dated November 30, 2021.
Additional information relating to the Bank, including the Bank’s 2021 Annual Report, are available on the Bank’s website at www.scotiabank.com. As well, the Bank’s 2021 Annual Report and Annual Information Form are available on the SEDAR website at www.sedar.com and on the EDGAR section of the SEC’s website at www.sec.gov.
The Bank uses a number of financial measures to assess its performance. Some of these measures are not calculated in accordance with Generally Accepted Accounting Principles (GAAP), which are based on International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), are not defined by GAAP and do not have standardized meanings that would ensure consistency and comparability among companies using these measures. The Bank believes that non-GAAP measures are useful as they provide readers with a better understanding of how management assesses performance. These non-GAAP measures are used throughout this report and defined below.
Adjusted results and diluted earnings per share
The following table presents a reconciliation of GAAP Reported financial results to Non–GAAP Adjusted financial results. The financial results have been adjusted for the following:
1. Adjustments impacting current and prior periods:
A. Amortization of Acquisition-related intangible assets:
These costs relate to the amortization of intangibles recognized upon the acquisition of businesses and are recorded in the Canadian Banking, International Banking and Global Wealth Management operating segments.
B. Restructuring and other provisions, recorded in Q4, 2021:
The Bank recorded a restructuring charge of $126 million pre-tax, substantially related to International Banking for the cost of reducing branches and full-time employees, driven by the accelerated customer adoption of digital channels and process automation. These efficiencies are a result of the Bank’s commitment to simplify processes and optimize distribution channels to run businesses more effectively while meeting changing customer needs. This charge was recorded in the Other operating segment.
The Bank recorded settlement and litigation provisions in the amount of $62 million pre-tax in the Other operating segment in connection with the Bank’s former metals business.
2. Adjustments impacting prior periods only:
A. Acquisition and divestiture-related amounts, which are defined as follows:
i. | Acquisition-related integration costs – Includes costs that were incurred and related to integrating previously acquired businesses. These costs were recorded in the Canadian Banking, International Banking and Global Wealth Management operating segments. The costs relate to the following acquisitions: |
• | Banco Cencosud, Peru (closed Q2, 2019) |
• | Banco Dominicano del Progreso, Dominican Republic (closed Q2, 2019) |
• | MD Financial Management, Canada (closed Q4, 2018) |
• | Jarislowsky, Fraser Limited, Canada (closed Q3, 2018) |
• | Citibank consumer and small and medium enterprise operations, Colombia (closed Q3, 2018) |
• | BBVA, Chile (closed Q3, 2018) |
ii. | Net (gain)/loss on divestitures – The Bank announced a number of divestitures in accordance with its strategy to reposition the Bank. The net (gain)/loss on divestitures is recorded in the Other operating segment (refer to Note 37 for further details): |
• | Operations in British Virgin Islands (closed Q3, 2020) |
• | Equity-accounted investment in Thanachart Bank, Thailand (closed Q1, 2020) |
• | Colfondos AFP, Colombia (closed Q1, 2020) |
• | Operations in Puerto Rico and USVI (closed Q1, 2020) |
• | Insurance and banking operations in El Salvador (closed Q1, 2020) |
• | Banking operations in the Caribbean: Anguilla, Dominica, Grenada, St. Kitts & Nevis, St. Lucia, St. Maarten, St. Vincent & the Grenadines (closed Q4, 2019) |
• | Insurance and pension operations in the Dominican Republic (closed Q2, 2019) |
iii. | Day 1 provision for credit losses on acquired performing financial instruments, as required by IFRS 9. The accounting standard does not differentiate between originated and purchased performing loans and as such, requires the same accounting treatment for both. These credit losses are considered Acquisition-related costs in periods where applicable and are recorded in the International Banking segment. The provision for 2019 relates to Banco Cencosud, Peru and Banco Dominicano del Progreso, Dominican Republic. |
2021 Scotiabank Annual Report | 17
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Management’s Discussion and Analysis
B. | Valuation-related adjustments, recorded in Q1, 2020: |
The Bank modified its allowance for credit losses measurement methodology by adding an additional, more severe pessimistic scenario, consistent with developing practice among major international banks in applying IFRS 9, and the Bank’s prudent approach to expected credit loss provisioning. The modification resulted in an increase in provision for credit losses of $155 million which was recorded in Canadian Banking, International Banking, Global Wealth Management and Global Banking and Markets operating segments. The Bank enhanced its fair value methodology primarily relating to uncollateralized OTC derivatives which resulted in a pre-tax charge of $116 million. This charge was recorded in the Global Banking and Markets and Other operating segments. The Bank also recorded an impairment loss in the Other operating segment of $44 million pre-tax, related to one software asset.
18 | 2021 Scotiabank Annual Report
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T1 Reconciliation of reported and adjusted results and diluted earnings per share
As at October 31 ($ millions) | 2021 | 2020 | 2019 | |||||||||
Reported Results | ||||||||||||
Net interest income | $ | 16,961 | $ | 17,320 | $ | 17,177 | ||||||
Non-interest income | 14,291 | 14,016 | 13,857 | |||||||||
Total revenue | 31,252 | 31,336 | 31,034 | |||||||||
Provision for credit losses | 1,808 | 6,084 | 3,027 | |||||||||
Non-interest expenses | 16,618 | 16,856 | 16,737 | |||||||||
Income before taxes | 12,826 | 8,396 | 11,270 | |||||||||
Income tax expense | 2,871 | 1,543 | 2,472 | |||||||||
Net income | $ | 9,955 | $ | 6,853 | $ | 8,798 | ||||||
Net income attributable to non-controlling interests in subsidiaries (NCI) | 331 | 75 | 408 | |||||||||
Net income attributable to equity holders | 9,624 | 6,778 | 8,390 | |||||||||
Preferred shareholders and other equity instrument holders | 233 | 196 | 182 | |||||||||
Net income attributable to common shareholders | 9,391 | 6,582 | 8,208 | |||||||||
Diluted earnings per share (in dollars) | $ | 7.70 | $ | 5.30 | $ | 6.68 | ||||||
Adjustments | ||||||||||||
Amortization of Acquisition-related intangible assets, excluding software(1) | $ | 103 | $ | 106 | $ | 116 | ||||||
Restructuring and other provisions(1) | 188 | – | – | |||||||||
Acquisition-related integration costs(1) | – | 177 | 178 | |||||||||
Net (gain)/ loss on divestitures(2) | – | (298 | ) | 148 | ||||||||
Day 1 provision for credit losses on acquired performing financial instruments(2) | – | – | 151 | |||||||||
Allowance for credit losses – Additional scenario(3) | – | 155 | – | |||||||||
Derivatives valuation adjustment(4) | – | 116 | – | |||||||||
Impairment charge on software asset(1) | – | 44 | – | |||||||||
Adjustments (Pre-tax) | 291 | 300 | 593 | |||||||||
Income tax expense/(benefit) | (77 | ) | (192 | ) | 18 | |||||||
Adjustments (After tax) | 214 | 108 | 611 | |||||||||
Adjustments attributable to NCI | (10 | ) | (60 | ) | (50 | ) | ||||||
Adjustments (After tax and NCI) | $ | 204 | $ | 48 | $ | 561 | ||||||
Adjusted Results | ||||||||||||
Net interest income | $ | 16,961 | $ | 17,320 | $ | 17,177 | ||||||
Non-interest income | 14,291 | 13,819 | 13,984 | |||||||||
Total revenue | 31,252 | 31,139 | 31,161 | |||||||||
Provision for credit losses | 1,808 | 5,929 | 2,876 | |||||||||
Non-interest expenses | 16,327 | 16,514 | 16,422 | |||||||||
Income before taxes | 13,117 | 8,696 | 11,863 | |||||||||
Income tax expense | 2,948 | 1,735 | 2,454 | |||||||||
Net income | $ | 10,169 | $ | 6,961 | $ | 9,409 | ||||||
Net income attributable to NCI | 341 | 135 | 458 | |||||||||
Net income attributable to equity holders | 9,828 | 6,826 | 8,951 | |||||||||
Preferred shareholders and other equity instrument holders | 233 | 196 | 182 | |||||||||
Net income attributable to common shareholders | $ | 9,595 | $ | 6,630 | $ | 8,769 | ||||||
Adjusted diluted earnings per share | ||||||||||||
Adjusted net income attributable to common shareholders | $ | 9,595 | $ | 6,630 | $ | 8,769 | ||||||
Dilutive impact of share-based payment options and others | 48 | 38 | 160 | |||||||||
Adjusted net income attributable to common shareholders (diluted) | $ | 9,643 | $ | 6,668 | $ | 8,929 | ||||||
Weighted average number of basic common shares outstanding (millions) | 1,214 | 1,212 | 1,222 | |||||||||
Dilutive impact of share-based payment options and others (millions) | 11 | 31 | 29 | |||||||||
Adjusted weighted average number of diluted common shares outstanding (millions) | 1,225 | 1,243 | 1,251 | |||||||||
Adjusted diluted earnings per share (in dollars)(5) | $ | 7.87 | $ | 5.36 | $ | 7.14 | ||||||
Impact of adjustments on diluted earnings per share (in dollars) | $ | 0.17 | $ | 0.06 | $ | 0.46 |
(1) | Recorded in non-interest expenses. |
(2) | (Gain)/Loss on divestitures is recorded in non-interest income; costs related to divestitures are recorded in non-interest expenses. |
(3) | Recorded in provision for credit losses. |
(4) | Recorded in non-interest income. |
(5) | Earnings per share calculations are based on full dollar and share amounts. |
2021 Scotiabank Annual Report | 19
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Management’s Discussion and Analysis
T1A Reconciliation of reported and adjusted results by business line
For the year ended October 31, 2021(1) | ||||||||||||||||||||||||
($ millions) | Canadian Banking | International Banking | Global Wealth Management | Global Banking and Markets | Other | Total | ||||||||||||||||||
Reported Results | ||||||||||||||||||||||||
Net interest income | $ | 8,030 | $ | 6,625 | $ | 628 | $ | 1,436 | $ | 242 | $ | 16,961 | ||||||||||||
Non-interest income | 2,868 | 2,993 | 4,752 | 3,587 | 91 | 14,291 | ||||||||||||||||||
Total revenue | 10,898 | 9,618 | 5,380 | 5,023 | 333 | 31,252 | ||||||||||||||||||
Provision for credit losses | 333 | 1,574 | 2 | (100 | ) | (1 | ) | 1,808 | ||||||||||||||||
Non-interest expenses | 4,951 | 5,254 | 3,255 | 2,458 | 700 | 16,618 | ||||||||||||||||||
Income before taxes | 5,614 | 2,790 | 2,123 | 2,665 | (366 | ) | 12,826 | |||||||||||||||||
Income tax expense | 1,459 | 635 | 549 | 590 | (362 | ) | 2,871 | |||||||||||||||||
Net income | $ | 4,155 | $ | 2,155 | $ | 1,574 | $ | 2,075 | $ | (4 | ) | $ | 9,955 | |||||||||||
Net income attributable to non-controlling interests in subsidiaries (NCI) | – | 332 | 9 | – | (10 | ) | 331 | |||||||||||||||||
Net income attributable to equity holders | $ | 4,155 | $ | 1,823 | $ | 1,565 | $ | 2,075 | $ | 6 | $ | 9,624 | ||||||||||||
Adjustments | ||||||||||||||||||||||||
Amortization of Acquisition-related intangible assets, excluding software(2) | $ | 22 | $ | 45 | $ | 36 | $ | – | $ | – | $ | 103 | ||||||||||||
Restructuring and other provisions(2) | – | – | – | – | 188 | 188 | ||||||||||||||||||
Adjustments (Pre-tax) | 22 | 45 | 36 | – | 188 | 291 | ||||||||||||||||||
Income tax expense/(benefit) | (6 | ) | (13 | ) | (9 | ) | – | (49 | ) | (77 | ) | |||||||||||||
Adjustments (After tax) | 16 | 32 | 27 | – | 139 | 214 | ||||||||||||||||||
Adjustment attributable to NCI | – | – | – | – | (10 | ) | (10 | ) | ||||||||||||||||
Adjustments (After tax and NCI) | $ | 16 | $ | 32 | $ | 27 | $ | – | $ | 129 | $ | 204 | ||||||||||||
Adjusted Results | ||||||||||||||||||||||||
Net interest income | $ | 8,030 | $ | 6,625 | $ | 628 | $ | 1,436 | $ | 242 | $ | 16,961 | ||||||||||||
Non-interest income | 2,868 | 2,993 | 4,752 | 3,587 | 91 | 14,291 | ||||||||||||||||||
Total revenue | 10,898 | 9,618 | 5,380 | 5,023 | 333 | 31,252 | ||||||||||||||||||
Provision for credit losses | 333 | 1,574 | 2 | (100 | ) | (1 | ) | 1,808 | ||||||||||||||||
Non-interest expenses | 4,929 | 5,209 | 3,219 | 2,458 | 512 | 16,327 | ||||||||||||||||||
Income before taxes | 5,636 | 2,835 | 2,159 | 2,665 | (178 | ) | 13,117 | |||||||||||||||||
Income tax expense | 1,465 | 648 | 558 | 590 | (313 | ) | 2,948 | |||||||||||||||||
Net income | $ | 4,171 | $ | 2,187 | $ | 1,601 | $ | 2,075 | $ | 135 | $ | 10,169 | ||||||||||||
Net income attributable to NCI | – | 332 | 9 | – | – | 341 | ||||||||||||||||||
Net income attributable to equity holders | $ | 4,171 | $ | 1,855 | $ | 1,592 | $ | 2,075 | $ | 135 | $ | 9,828 |
(1) | Refer to Business Line Overview on page 42. |
(2) | Recorded in non-interest expenses. |
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T1A Reconciliation of reported and adjusted results by business line
For the year ended October 31, 2020(1) | ||||||||||||||||||||||||
($ millions) | Canadian Banking | International Banking | Global Wealth Management | Global Banking and Markets | Other | Total | ||||||||||||||||||
Reported Results | ||||||||||||||||||||||||
Net interest income | $ | 7,838 | $ | 7,603 | $ | 575 | $ | 1,435 | $ | (131 | ) | $ | 17,320 | |||||||||||
Non-interest income | 2,461 | 3,207 | 4,009 | 3,947 | 392 | 14,016 | ||||||||||||||||||
Total revenue | 10,299 | 10,810 | 4,584 | 5,382 | 261 | 31,336 | ||||||||||||||||||
Provision for credit losses | 2,073 | 3,613 | 7 | 390 | 1 | 6,084 | ||||||||||||||||||
Non-interest expenses | 4,811 | 5,943 | 2,878 | 2,473 | 751 | 16,856 | ||||||||||||||||||
Income before taxes | 3,415 | 1,254 | 1,699 | 2,519 | (491 | ) | 8,396 | |||||||||||||||||
Income tax expense | 879 | 182 | 437 | 564 | (519 | ) | 1,543 | |||||||||||||||||
Net income | $ | 2,536 | $ | 1,072 | $ | 1,262 | $ | 1,955 | $ | 28 | $ | 6,853 | ||||||||||||
Net income attributable to non-controlling interests in subsidiaries (NCI) | – | 92 | 10 | – | (27 | ) | 75 | |||||||||||||||||
Net income attributable to equity holders | $ | 2,536 | $ | 980 | $ | 1,252 | $ | 1,955 | $ | 55 | $ | 6,778 | ||||||||||||
Adjustments | ||||||||||||||||||||||||
Amortization of Acquisition-related intangible assets, excluding software(2) | $ | 22 | $ | 47 | $ | 37 | $ | – | $ | – | $ | 106 | ||||||||||||
Acquisition-related integration costs(2) | – | 154 | 23 | – | – | 177 | ||||||||||||||||||
Net (gain)/loss on divestitures(3) | – | – | – | – | (298 | ) | (298 | ) | ||||||||||||||||
Allowance for credit losses - Additional scenario(4) | 71 | 77 | 1 | 6 | – | 155 | ||||||||||||||||||
Derivatives valuation adjustment(5) | – | – | – | 102 | 14 | 116 | ||||||||||||||||||
Impairment charge on software asset(2) | – | – | – | – | 44 | 44 | ||||||||||||||||||
Adjustments (Pre-tax) | 93 | 278 | 61 | 108 | (240 | ) | 300 | |||||||||||||||||
Income tax expense/(benefit) | (25 | ) | (78 | ) | (16 | ) | (29 | ) | (44 | ) | (192 | ) | ||||||||||||
Adjustments (After tax) | 68 | 200 | 45 | 79 | (284 | ) | 108 | |||||||||||||||||
Adjustment attributable to NCI | – | (32 | ) | – | – | (28 | ) | (60 | ) | |||||||||||||||
Adjustments (After tax and NCI) | $ | 68 | $ | 168 | $ | 45 | $ | 79 | $ | (312 | ) | $ | 48 | |||||||||||
Adjusted Results | ||||||||||||||||||||||||
Net interest income | $ | 7,838 | $ | 7,603 | $ | 575 | $ | 1,435 | $ | (131 | ) | $ | 17,320 | |||||||||||
Non-interest income | 2,461 | 3,207 | 4,009 | 4,049 | 93 | 13,819 | ||||||||||||||||||
Total revenue | 10,299 | 10,810 | 4,584 | 5,484 | (38 | ) | 31,139 | |||||||||||||||||
Provision for credit losses | 2,002 | 3,536 | 6 | 384 | 1 | 5,929 | ||||||||||||||||||
Non-interest expenses | 4,789 | 5,742 | 2,818 | 2,473 | 692 | 16,514 | ||||||||||||||||||
Income before taxes | 3,508 | 1,532 | 1,760 | 2,627 | (731 | ) | 8,696 | |||||||||||||||||
Income tax expense | 904 | 260 | 453 | 593 | (475 | ) | 1,735 | |||||||||||||||||
Net income | $ | 2,604 | $ | 1,272 | $ | 1,307 | $ | 2,034 | $ | (256 | ) | $ | 6,961 | |||||||||||
Net income attributable to NCI | – | 124 | 10 | – | 1 | 135 | ||||||||||||||||||
Net income attributable to equity holders | $ | 2,604 | $ | 1,148 | $ | 1,297 | $ | 2,034 | $ | (257) | $ | 6,826 |
(1) | Refer to Business Line Overview on page 42. |
(2) | Recorded in non-interest expenses. |
(3) | (Gain)/loss on divestitures is recorded in non-interest income; costs related to divestitures are recorded in non-interest expenses. |
(4) | Recorded in provision for credit losses. |
(5) | Recorded in non-interest income. |
2021 Scotiabank Annual Report | 21
Table of Contents
Management’s Discussion and Analysis
T1A Reconciliation of reported and adjusted results by business line
For the year ended October 31, 2019(1) | ||||||||||||||||||||||||
($ millions) | Canadian Banking | International Banking | Global Wealth Management | Global Banking and Markets | Other | Total | ||||||||||||||||||
Reported Results | ||||||||||||||||||||||||
Net interest income | $ | 7,848 | $ | 8,353 | $ | 564 | $ | 1,396 | $ | (984 | ) | $ | 17,177 | |||||||||||
Non-interest income | 2,616 | 4,366 | 3,937 | 3,084 | (146 | ) | 13,857 | |||||||||||||||||
Total revenue | 10,464 | 12,719 | 4,501 | 4,480 | (1,130 | ) | 31,034 | |||||||||||||||||
Provision for credit losses | 972 | 2,076 | – | (22 | ) | 1 | 3,027 | |||||||||||||||||
Non-interest expenses | 4,772 | 6,596 | 2,905 | 2,463 | 1 | 16,737 | ||||||||||||||||||
Income before taxes | 4,720 | 4,047 | 1,596 | 2,039 | (1,132 | ) | 11,270 | |||||||||||||||||
Income tax expense | 1,232 | 909 | 412 | 505 | (586 | ) | 2,472 | |||||||||||||||||
Net income | $ | 3,488 | $ | 3,138 | $ | 1,184 | $ | 1,534 | $ | (546 | ) | $ | 8,798 | |||||||||||
Net income attributable to non-controlling interests in subsidiaries (NCI) | – | 373 | 18 | – | 17 | 408 | ||||||||||||||||||
Net income attributable to equity holders | $ | 3,488 | $ | 2,765 | $ | 1,166 | $ | 1,534 | $ | (563 | ) | $ | 8,390 | |||||||||||
Adjustments | ||||||||||||||||||||||||
Amortization of Acquisition-related intangible assets, excluding software(2) | $ | 22 | $ | 55 | $ | 39 | $ | – | $ | – | $ | 116 | ||||||||||||
Acquisition-related integration costs(2) | – | 151 | 27 | – | – | 178 | ||||||||||||||||||
Net (gain)/loss on divestitures(3) | – | – | – | – | 148 | 148 | ||||||||||||||||||
Day 1 provision for credit losses on acquired performing financial instruments(4) | – | $ | 151 | – | – | – | 151 | |||||||||||||||||
Adjustments (Pre-tax) | 22 | 357 | 66 | – | 148 | 593 | ||||||||||||||||||
Income tax expense/(benefit) | (6 | ) | (103 | ) | (17 | ) | – | 144 | 18 | |||||||||||||||
Adjustments (After tax) | 16 | 254 | 49 | – | 292 | 611 | ||||||||||||||||||
Adjustment attributable to NCI | – | (66 | ) | – | – | 16 | (50 | ) | ||||||||||||||||
Adjustments (After tax and NCI) | $ | 16 | $ | 188 | $ | 49 | $ | – | $ | 308 | $ | 561 | ||||||||||||
Adjusted Results | ||||||||||||||||||||||||
Net interest income | $ | 7,848 | $ | 8,353 | $ | 564 | $ | 1,396 | $ | (984 | ) | $ | 17,177 | |||||||||||
Non-interest income | 2,616 | 4,366 | 3,937 | 3,084 | (19 | ) | 13,984 | |||||||||||||||||
Total revenue | 10,464 | 12,719 | 4,501 | 4,480 | (1,003 | ) | 31,161 | |||||||||||||||||
Provision for credit losses | 972 | 1,925 | – | (22 | ) | 1 | 2,876 | |||||||||||||||||
Non-interest expenses | 4,750 | 6,390 | 2,839 | 2,463 | (20 | ) | 16,422 | |||||||||||||||||
Income before taxes | 4,742 | 4,404 | 1,662 | 2,039 | (984 | ) | 11,863 | |||||||||||||||||
Income tax expense | 1,238 | 1,012 | 429 | 505 | (730 | ) | 2,454 | |||||||||||||||||
Net income | $ | 3,504 | $ | 3,392 | $ | 1,233 | $ | 1,534 | $ | (254 | ) | $ | 9,409 | |||||||||||
Net income attributable to NCI | – | 439 | 18 | – | 1 | 458 | ||||||||||||||||||
Net income attributable to equity holders | $ | 3,504 | $ | 2,953 | $ | 1,215 | $ | 1,534 | $ | (255) | $ | 8,951 |
(1) | Refer to Business Line Overview on page 42. |
(2) | Recorded in non-interest expenses. |
(3) | Loss/(gain) on divestitures are recorded in non-interest income; costs related to divestitures are recorded in non-interest expenses. |
(4) | Recorded in provision for credit losses. |
22 | 2021 Scotiabank Annual Report
Table of Contents
International Banking business segment results are analyzed on a constant dollar basis. Under the constant dollar basis, prior period amounts are recalculated using current period average foreign currency rates. The following table presents the reconciliation between reported and constant dollar results for International Banking for prior periods. The Bank believes that constant dollar is useful for readers in assessing ongoing business performance. The tables below are computed on a basis that is different than the table “Impact of foreign currency translation” in Overview of Performance on page 30.
T2 Reconciliation of International Banking’s reported and adjusted results and constant dollar results
For the year ended October 31 ($ millions) | 2020 | 2019 | ||||||||||||||||||||||
(Taxable equivalent basis) | Reported | Foreign exchange | Constant dollar | Reported | Foreign exchange | Constant dollar | ||||||||||||||||||
Net interest income | $ | 7,603 | $ | 543 | $ | 7,060 | $ | 8,353 | $ | 1,031 | $ | 7,322 | ||||||||||||
Non-interest income | 3,207 | 192 | 3,015 | 4,366 | 385 | 3,981 | ||||||||||||||||||
Total revenue | 10,810 | 735 | 10,075 | 12,719 | 1,416 | 11,303 | ||||||||||||||||||
Provision for credit losses | 3,613 | 244 | 3,369 | 2,076 | 283 | 1,793 | ||||||||||||||||||
Non-interest expenses | 5,943 | 340 | 5,603 | 6,596 | 733 | 5,863 | ||||||||||||||||||
Income tax expense | 182 | 23 | 159 | 909 | 107 | 802 | ||||||||||||||||||
Net Income | $ | 1,072 | $ | 128 | $ | 944 | $ | 3,138 | $ | 293 | $ | 2,845 | ||||||||||||
Net income attributable to non-controlling interest in subsidiaries | $ | 92 | $ | 5 | $ | 87 | $ | 373 | $ | 46 | $ | 327 | ||||||||||||
Net income attributable to equity holders of the Bank | $ | 980 | $ | 123 | $ | 857 | $ | 2,765 | $ | 247 | $ | 2,518 | ||||||||||||
Other measures | ||||||||||||||||||||||||
Average assets ($ billions) | $ | 206 | $ | 12 | $ | 194 | $ | 201 | $ | 21 | $ | 180 | ||||||||||||
Average liabilities ($ billions) | $ | 155 | $ | 8 | $ | 147 | $ | 153 | $ | 16 | $ | 137 |
For the year ended October 31 ($ millions) | 2020 | 2019 | ||||||||||||||||||||||
(Taxable equivalent basis) | Adjusted | Foreign exchange | Constant dollar adjusted | Adjusted | Foreign exchange | Constant dollar adjusted | ||||||||||||||||||
Net interest income | $ | 7,603 | $ | 543 | $ | 7,060 | $ | 8,353 | $ | 1,031 | $ | 7,322 | ||||||||||||
Non-interest income | 3,207 | 192 | 3,015 | 4,366 | 385 | 3,981 | ||||||||||||||||||
Total revenue | 10,810 | 735 | 10,075 | 12,719 | 1,416 | 11,303 | ||||||||||||||||||
Provision for credit losses | 3,536 | 239 | 3,297 | 1,925 | 255 | 1,670 | ||||||||||||||||||
Non-interest expenses | 5,742 | 328 | 5,414 | 6,390 | 707 | 5,683 | ||||||||||||||||||
Income tax expense | 260 | 29 | 231 | 1,012 | 122 | 890 | ||||||||||||||||||
Net Income | $ | 1,272 | $ | 139 | $ | 1,133 | $ | 3,392 | $ | 332 | $ | 3,060 | ||||||||||||
Net income attributable to non-controlling interest in subsidiaries | $ | 124 | $ | 7 | $ | 117 | $ | 439 | $ | 57 | $ | 382 | ||||||||||||
Net income attributable to equity holders of the Bank | $ | 1,148 | $ | 132 | $ | 1,016 | $ | 2,953 | $ | 275 | $ | 2,678 |
2021 Scotiabank Annual Report | 23
Table of Contents
Management’s Discussion and Analysis
Earning assets
Earning assets are defined as income generating assets which include interest-bearing deposits with banks, trading assets, investment securities, investments in associates, securities borrowed or purchased under resale agreements, loans net of allowances, and customers’ liability under acceptances.
Non-earning assets
Non-earning assets are defined as cash and non-interest bearing deposits with financial institutions, precious metals, derivative financial instruments, property and equipment, goodwill and other intangible assets, deferred tax assets and other assets.
Core earning assets
Core earning assets are defined as earning assets excluding investments in associates, customers’ liability under acceptances, and trading assets, securities borrowed or purchased under resale agreements, and assets related to capital markets businesses.
Core net interest income
Core net interest income is defined as net interest income earned from core earning assets.
Net interest margin
Net interest margin is calculated as core net interest income for the business line divided by average core earning assets.
T3 Average earning assets, average total assets, average core earning assets and net interest margin by business line
For the year ended October 31, 2021 ($ millions) | Canadian Banking | International Banking | Global Wealth Management | Global Banking and Markets | Other | Total | ||||||||||||||||||
Deposits with financial institutions | $ | 146 | $ | 16,014 | $ | 742 | $ | 237 | $ | 58,423 | $ | 75,562 | ||||||||||||
Trading assets | – | 6,352 | 14 | 134,639 | 1,850 | 142,855 | ||||||||||||||||||
Securities purchased under resale agreements and securities borrowed | – | 2,919 | – | 116,896 | 3 | 119,818 | ||||||||||||||||||
Investment securities including investments in associates | 1,080 | 16,500 | 302 | 6,097 | 68,229 | 92,208 | ||||||||||||||||||
Net loans and acceptances | 375,444 | 137,121 | 17,420 | 106,020 | (4,143 | ) | 631,862 | |||||||||||||||||
Total earning assets | $ | 376,670 | $ | 178,906 | $ | 18,478 | $ | 363,889 | $ | 124,362 | $ | 1,062,305 | ||||||||||||
Non-earning assets | 4,102 | 15,218 | 10,487 | 37,020 | 28,081 | 94,908 | ||||||||||||||||||
Total assets | $ | 380,772 | $ | 194,124 | $ | 28,965 | $ | 400,909 | $ | 152,443 | $ | 1,157,213 | ||||||||||||
Total earning assets | 376,670 | 178,906 | 18,478 | 363,889 | 124,362 | 1,062,305 | ||||||||||||||||||
Less: | ||||||||||||||||||||||||
Investments in associates | 783 | 1,646 | – | – | 62 | 2,491 | ||||||||||||||||||
Trading assets | – | 5,812 | – | 134,372 | 1,849 | 142,033 | ||||||||||||||||||
Securities purchased under resale agreements and securities borrowed | – | – | – | 116,829 | – | 116,829 | ||||||||||||||||||
Customers’ liability under acceptances | 16,599 | 42 | 4,077 | 10,413 | (14,679 | ) | 16,452 | |||||||||||||||||
Other deductions | – | 642 | – | 21,681 | 10,484 | 32,807 | ||||||||||||||||||
Core earning assets | $ | 359,288 | $ | 170,764 | $ | 14,401 | $ | 80,594 | $ | 126,646 | $ | 751,693 | ||||||||||||
Net interest margin | ||||||||||||||||||||||||
Net interest income | 8,030 | 6,625 | 628 | 1,436 | 242 | 16,961 | ||||||||||||||||||
Less: Non-core net interest income | – | 50 | – | 138 | 2 | 190 | ||||||||||||||||||
Core net interest income | $ | 8,030 | $ | 6,575 | $ | 628 | $ | 1,298 | $ | 240 | $ | 16,771 | ||||||||||||
Net interest margin | 2.23 | % | 3.85 | % | 4.36 | % | 1.61 | % | nm | (1) | 2.23 | % | ||||||||||||
(1) Not meaningful. | ||||||||||||||||||||||||
For the year ended October 31, 2020 ($ millions) | Canadian | International | Global | Global Banking | Other | Total | ||||||||||||||||||
Deposits with financial institutions | $ | 153 | $ | 17,790 | $ | 1,009 | $ | 956 | $ | 46,056 | $ | 65,964 | ||||||||||||
Trading assets | – | 4,852 | 17 | 119,637 | 3,614 | 128,120 | ||||||||||||||||||
Securities purchased under resale agreements and securities borrowed | – | 2,412 | – | 125,741 | 136 | 128,289 | ||||||||||||||||||
Investment securities including investments in associates | 976 | 15,573 | 300 | 5,730 | 82,504 | 105,083 | ||||||||||||||||||
Net loans and acceptances | 353,540 | 147,681 | 14,109 | 114,265 | (3,957 | ) | 625,638 | |||||||||||||||||
Total earning assets | $ | 354,669 | $ | 188,308 | $ | 15,435 | $ | 366,329 | $ | 128,353 | $ | 1,053,094 | ||||||||||||
Non-earning assets | 4,101 | 18,074 | 10,601 | 45,796 | 28,918 | 107,490 | ||||||||||||||||||
Total assets | $ | 358,770 | $ | 206,382 | $ | 26,036 | $ | 412,125 | $ | 157,271 | $ | 1,160,584 | ||||||||||||
Total earning assets | 354,669 | 188,308 | 15,435 | 366,329 | 128,353 | 1,053,094 | ||||||||||||||||||
Less: | ||||||||||||||||||||||||
Investments in associates | 713 | 1,868 | – | – | 87 | 2,668 | ||||||||||||||||||
Trading assets | – | 4,399 | – | 119,395 | 1,113 | 124,907 | ||||||||||||||||||
Securities purchased under resale agreements and securities borrowed | – | – | – | 125,701 | – | 125,701 | ||||||||||||||||||
Customers’ liability under acceptances | 13,584 | 42 | 2,748 | 10,669 | (10,996 | ) | 16,047 | |||||||||||||||||
Other deductions | – | 1,194 | – | 18,296 | 7,294 | 26,784 | ||||||||||||||||||
Core earning assets | $ | 340,372 | $ | 180,805 | $ | 12,687 | $ | 92,268 | $ | 130,855 | $ | 756,987 | ||||||||||||
Net interest margin | ||||||||||||||||||||||||
Net interest income | 7,838 | 7,603 | 575 | 1,435 | (131 | ) | 17,320 | |||||||||||||||||
Less: Non-core net interest income | – | 39 | – | 78 | 5 | 122 | ||||||||||||||||||
Core net interest income | $ | 7,838 | $ | 7,564 | $ | 575 | $ | 1,357 | $ | (136 | ) | $ | 17,198 | |||||||||||
Net interest margin | 2.30 | % | 4.18 | % | 4.53 | % | 1.47 | % | nm | (1) | 2.27 | % | ||||||||||||
(1) Not meaningful. |
24 | 2021 Scotiabank Annual Report
Table of Contents
For the year ended October 31, 2019 ($ millions) | Canadian Banking | International Banking | Global Wealth Management | Global Banking and Markets | Other | Total | ||||||||||||||||||
Deposits with financial institutions | $ | 177 | $ | 16,270 | $ | 975 | $ | 667 | $ | 31,491 | $ | 49,580 | ||||||||||||
Trading assets | – | 3,271 | 14 | 112,293 | 1,279 | 116,857 | ||||||||||||||||||
Securities purchased under resale agreements and securities borrowed | – | 2,141 | – | 118,375 | 467 | 120,983 | ||||||||||||||||||
Investment securities including investments in associates | 803 | 17,053 | 534 | 4,475 | 64,658 | 87,523 | ||||||||||||||||||
Net loans and acceptances | 335,833 | 147,596 | 12,369 | 101,779 | (3,433 | ) | 594,144 | |||||||||||||||||
Total earning assets | $ | 336,813 | $ | 186,331 | $ | 13,892 | $ | 337,589 | $ | 94,462 | $ | 969,087 | ||||||||||||
Non-earning assets | 3,358 | 14,265 | 10,772 | 34,320 | 24,261 | 86,976 | ||||||||||||||||||
Total assets | $ | 340,171 | $ | 200,596 | $ | 24,664 | $ | 371,909 | $ | 118,723 | $ | 1,056,063 | ||||||||||||
Total earning assets | 336,813 | 186,331 | 13,892 | 337,589 | 94,462 | 969,087 | ||||||||||||||||||
Less: | ||||||||||||||||||||||||
Investments in associates | – | – | – | – | – | – | ||||||||||||||||||
Trading assets | – | 2,981 | – | 112,033 | (2,981 | ) | 112,033 | |||||||||||||||||
Securities purchased under resale agreements and securities borrowed | – | – | – | 118,355 | – | 118,355 | ||||||||||||||||||
Customers’ liability under acceptances | 11,229 | 61 | 1,946 | 10,108 | (7,019 | ) | 16,325 | |||||||||||||||||
Other deductions | – | 412 | – | 15,432 | 2,727 | 18,571 | ||||||||||||||||||
Core earning assets | $ | 325,584 | $ | 182,877 | $ | 11,946 | $ | 81,661 | $ | 101,735 | $ | 703,803 | ||||||||||||
Net interest margin | ||||||||||||||||||||||||
Net interest income | 7,848 | 8,353 | 564 | 1,396 | (984 | ) | 17,177 | |||||||||||||||||
Less: Non-core net interest income | – | 42 | – | 28 | (42 | ) | 28 | |||||||||||||||||
Core net interest income | $ | 7,848 | $ | 8,311 | $ | 564 | $ | 1,368 | $ | (942 | ) | $ | 17,149 | |||||||||||
Net interest margin | 2.41 | % | 4.54 | % | 4.73 | % | 1.68 | % | nm | (1) | 2.44 | % |
(1) | Not meaningful. |
Return on equity
Return on equity is a profitability measure that presents the net income attributable to common shareholders as a percentage of average common shareholders’ equity.
The Bank attributes capital to its business lines on a basis that approximates 10.5% of Basel III common equity capital requirements which includes credit, market and operational risks and leverage inherent within each business segment.
Return on equity for the business segments is calculated as a ratio of net income attributable to common shareholders of the business segment and the capital attributed.
Adjusted return on equity represents adjusted net income attributable to common shareholders as a percentage of adjusted average common shareholders’ equity.
Productivity ratio
Management uses the productivity ratio as a measure of the Bank’s efficiency. This ratio represents operating expenses as a percentage of total revenue. A lower ratio indicates improved productivity.
Adjusted productivity ratio represents adjusted operating expenses as a percentage of adjusted total revenue.
Operating leverage
This financial metric measures the rate of growth in total revenue less the rate of growth in operating expenses.
Adjusted operating leverage represents the rate of growth in adjusted total revenue less the rate of growth in adjusted operating expenses.
Provision for credit losses as a % of average net loans and acceptances
The ratio represents provision for credit losses (PCL) expressed as a % of average net loans and acceptances.
Adjusted provision for credit losses as a % of average net loans and acceptances represents adjusted PCL expressed as a % of average net loans and acceptances.
Effective tax rate
The effective tax rate is the overall tax rate paid by the Bank on its earned income. The effective tax rate is calculated by dividing the Bank’s income tax expenses by the income before taxes.
Adjusted effective tax rate is calculated by dividing adjusted income tax expenses by the adjusted income before taxes.
Taxable equivalent basis
The Bank analyzes its trading-related revenue on a taxable equivalent basis (TEB). This methodology grosses up tax-exempt income earned on certain securities reported in either net interest income or non-interest income to an equivalent before tax basis. Management believes that this basis for measurement provides a uniform comparability of net interest income and non-interest income arising from both taxable and non-taxable sources and facilitates a consistent basis of measurement. While other banks also use TEB, their methodology may not be comparable to the Bank’s methodology.
2021 Scotiabank Annual Report | 25
Table of Contents
Management’s Discussion and Analysis
As at and for the years ended October 31 | 2021(1) | 2020(1) | 2019 | |||||||||
Operating results ($ millions) | ||||||||||||
Net interest income | 16,961 | 17,320 | 17,177 | |||||||||
Non-interest income | 14,291 | 14,016 | 13,857 | |||||||||
Total revenue | 31,252 | 31,336 | 31,034 | |||||||||
Provision for credit losses | 1,808 | 6,084 | 3,027 | |||||||||
Non-interest expenses | 16,618 | 16,856 | 16,737 | |||||||||
Income tax expense | 2,871 | 1,543 | 2,472 | |||||||||
Net income | 9,955 | 6,853 | 8,798 | |||||||||
Net income attributable to common shareholders | 9,391 | 6,582 | 8,208 | |||||||||
Operating performance | ||||||||||||
Basic earnings per share ($) | 7.74 | 5.43 | 6.72 | |||||||||
Diluted earnings per share ($) | 7.70 | 5.30 | 6.68 | |||||||||
Return on equity (%)(2) | 14.7 | 10.4 | 13.1 | |||||||||
Productivity ratio (%)(2) | 53.2 | 53.8 | 53.9 | |||||||||
Operating leverage (%)(2) | 1.1 | 0.3 | (3.3 | ) | ||||||||
Net interest margin (%)(3) | 2.23 | 2.27 | 2.44 | |||||||||
Financial position information ($ millions) | ||||||||||||
Cash and deposits with financial institutions | 86,323 | 76,460 | 46,720 | |||||||||
Trading assets | 146,312 | 117,839 | 127,488 | |||||||||
Loans | 636,986 | 603,263 | 592,483 | |||||||||
Total assets | 1,184,844 | 1,136,466 | 1,086,161 | |||||||||
Deposits | 797,259 | 750,838 | 733,390 | |||||||||
Common equity | 64,750 | 62,819 | 63,638 | |||||||||
Preferred shares and other equity instruments | 6,052 | 5,308 | 3,884 | |||||||||
Assets under administration(2)(4) | 652,924 | 556,916 | 558,408 | |||||||||
Assets under management(2)(4) | 345,762 | 289,839 | 301,631 | |||||||||
Capital and liquidity measures | ||||||||||||
Common Equity Tier 1 (CET1) capital ratio (%)(5) | 12.3 | 11.8 | 11.1 | |||||||||
Tier 1 capital ratio (%)(5) | 13.9 | 13.3 | 12.2 | |||||||||
Total capital ratio (%)(5) | 15.9 | 15.5 | 14.2 | |||||||||
Leverage ratio (%)(6) | 4.8 | 4.7 | 4.2 | |||||||||
Risk-weighted assets ($ millions)(5) | 416,105 | 417,138 | 421,185 | |||||||||
Liquidity coverage ratio (LCR) (%)(7) | 124 | 138 | 125 | |||||||||
Net stable funding ratio (NSFR) (%)(8) | 110 | n/a | n/a | |||||||||
Credit quality | ||||||||||||
Net impaired loans ($ millions) | 2,801 | 3,096 | 3,540 | |||||||||
Allowance for credit losses ($ millions)(9) | 5,731 | 7,820 | 5,145 | |||||||||
Gross impaired loans as a % of loans and acceptances(2) | 0.67 | 0.81 | 0.84 | |||||||||
Net impaired loans as a % of loans and acceptances(2) | 0.42 | 0.50 | 0.58 | |||||||||
Provision for credit losses as a % of average net loans and acceptances(2)(10) | 0.29 | 0.98 | 0.51 | |||||||||
Provision for credit losses on impaired loans as a % of average net loans and acceptances(2)(10) | 0.53 | 0.56 | 0.49 | |||||||||
Net write-offs as a % of average net loans and acceptances(2) | 0.54 | 0.47 | 0.50 | |||||||||
Adjusted results(3) | ||||||||||||
Adjusted net income ($ millions) | 10,169 | 6,961 | 9,409 | |||||||||
Adjusted diluted earnings per share ($) | 7.87 | 5.36 | 7.14 | |||||||||
Adjusted return on equity (%) | 15.0 | 10.4 | 13.9 | |||||||||
Adjusted productivity ratio (%) | 52.2 | 53.0 | 52.7 | |||||||||
Adjusted operating leverage (%) | 1.5 | (0.6 | ) | (2.1 | ) | |||||||
Adjusted provision for credit losses as a % of average net loans and acceptances(10) | 0.29 | 0.95 | 0.49 | |||||||||
Common share information | ||||||||||||
Closing share price ($) (TSX) | 81.14 | 55.35 | 75.54 | |||||||||
Shares outstanding (millions) | ||||||||||||
Average – Basic | 1,214 | 1,212 | 1,222 | |||||||||
Average – Diluted | 1,225 | 1,243 | 1,251 | |||||||||
End of period | 1,215 | 1,211 | 1,216 | |||||||||
Dividends paid per share ($) | 3.60 | 3.60 | 3.49 | |||||||||
Dividend yield (%)(2) | 5.2 | 5.8 | 4.9 | |||||||||
Market capitalization ($ millions) (TSX) | 98,612 | 67,055 | 91,867 | |||||||||
Book value per common share ($)(2) | 53.28 | 51.85 | 52.33 | |||||||||
Market value to book value multiple(2) | 1.5 | 1.1 | 1.4 | |||||||||
Price to earnings multiple (trailing 4 quarters)(2) | 10.5 | 10.2 | 11.2 | |||||||||
Other information | ||||||||||||
Employees (full-time equivalent)(11) | 89,488 | 91,447 | 101,380 | |||||||||
Branches and offices | 2,518 | 2,618 | 3,109 |
(1) | The amounts for the years ended October 31, 2021 and October 31, 2020 have been prepared in accordance with IFRS 16; prior year amounts have not been restated. |
(2) | Refer to Glossary on page 141 for the description of the measure. |
(3) | Refer to page 17 for a discussion of Non-GAAP measures. |
(4) | Prior period amounts have been restated to appropriately reflect certain intercompany items. |
(5) | This measure has been disclosed in this document in accordance with OSFI Guideline – Capital Adequacy Requirements (November 2018). |
(6) | This measure has been disclosed in this document in accordance with OSFI Guideline – Leverage Requirements (November 2018). |
(7) | This measure has been disclosed in this document in accordance with OSFI Guideline – Public Disclosure Requirements for Domestic Systemically Important Banks on Liquidity Coverage Ratio (April 2015). |
(8) | This measure has been disclosed in this document in accordance with OSFI Guideline – Net Stable Funding Ratio Disclosure Requirements (January 2021). |
(9) | Includes allowance for credit losses on all financial assets – loans, acceptances, off-balance sheet exposures, debt securities, and deposits with financial institutions. |
(10) | Includes provision for credit losses on certain financial assets – loans, acceptances, and off-balance sheet exposures. |
(11) | Prior year amounts have been restated to conform with current period presentation. |
26 | 2021 Scotiabank Annual Report
Table of Contents
Management’s Discussion and Analysis | Overview of Performance
Financial Results: 2021 vs 2020
Net income was $9,955 million in 2021, up 45% from $6,853 million in 2020, due primarily to lower provision for credit losses, as a result of a more favourable credit and macroeconomic outlook. Diluted earnings per share (EPS) were $7.70 compared to $5.30. Return on equity was 14.7% compared to 10.4%.
Adjusting items during the current year were $214 million after-tax ($291 million pre-tax) (refer Table T1). The Bank recorded a restructuring charge of $93 million ($126 million pre-tax), substantially related to International Banking for the cost of reducing branches and full-time employees, driven by the accelerated customer adoption of digital channels and process automation. These efficiencies are a result of the Bank’s commitment to simplify processes and optimize distribution channels to run businesses more effectively while meeting changing customer needs. The Bank also recorded settlement and litigation provisions in the amount of $46 million ($62 million pre-tax) in connection with the Bank’s former metals business. Other adjusting items in the current year included amortization of Acquisition-related intangible assets of $75 million ($103 million pre-tax). The prior year’s adjustments were $108 million after-tax ($300 million pre-tax), including net gain on divestitures of $327 million ($298 million pre-tax), valuation-related adjustments of $233 million ($315 million pre-tax), Acquisition-related integration costs of $125 million ($177 million pre-tax) and amortization of Acquisition-related intangible assets of $77 million ($106 million pre-tax).
Adjusted net income was $10,169 million, up 46% from $6,961 million. The increase in net income was due primarily to lower provision for credit losses, as a result of a more favourable credit and macroeconomic outlook. Adjusted diluted EPS were $7.87 compared to $5.36 and adjusted return on equity was 15.0% compared to 10.4%.
Net interest income was $16,961 million, a decrease of $359 million or 2%. The negative impact of foreign currency translation was 3%, which together with lower margin more than offset the increases from strong asset growth in Canadian Banking, and higher contribution from asset/liability management activities. The net interest margin was down four basis points to 2.23%, driven by lower margins in International Banking and Canadian Banking related to changes in business mix and the impact of central bank rate cuts in 2020, partly offset by a higher contribution from asset/liability management activities.
Non-interest income was up $275 million or 2% to $14,291 million. Adjusted non-interest income increased $472 million or 3%. The negative impact of foreign currency translation was 2%. The increase was driven mainly by strong wealth management revenues which benefitted from annual performance fees and higher banking revenues, investment gains, and income from associated corporations. This was partly offset by lower trading revenues, insurance income, and lower realized gains on investment securities.
The provision for credit losses was $1,808 million, compared to $6,084 million last year, a decrease of $4,276 million. Adjusted provision for credit losses decreased $4,121 million or 70% due primarily to lower provision for credit losses on performing loans across all business lines. The provision for credit losses ratio decreased 69 basis points to 29 basis points and adjusted provision for credit losses ratio decreased by 66 basis points.
Non-interest expenses were $16,618 million, a decrease of $238 million or 1%. Adjusted non-interest expenses also decreased 1%. Expenses were positively impacted by foreign currency translation and divested operations, lower COVID-19 related costs, share-based compensation, premises costs, advertising and communication expenses. These were partially offset by higher performance-based compensation, technology-related costs to support business growth, the investment in the SCENE loyalty program, higher professional fees and business and capital taxes. Operating leverage was positive 1.1% on a reported basis and positive 1.5% on an adjusted basis.
The provision for income taxes was $2,871 million compared to $1,543 million last year. The effective tax rate was 22.4% compared to 18.4%. On an adjusted basis, the effective tax rate was 22.5% compared to 19.9% due primarily to significantly higher provision for credit losses in entities that operate in higher tax rate jurisdictions in the prior year and changes in business and earnings mix.
The Basel III Common Equity Tier 1 (CET1) ratio was 12.3% as at October 31, 2021, compared to 11.8% last year.
Medium-term financial objectives
The following table provides a summary of our 2021 performance against our medium-term financial performance objectives:
2021 Results | ||||||||||||
Reported | Adjusted(1) | |||||||||||
Diluted earnings per share growth of 7%+ | 45.3 | % | 46.8% | |||||||||
Return on equity of 14%+ | 14.7 | % | 15.0% | |||||||||
Achieve positive operating leverage | Positive 1.1 | % | Positive 1.5% | |||||||||
Maintain strong capital ratios | CET1 capital ratio of 12.3 | % | CET1 capital ratio of 12.3% |
(1) | Refer to Non-GAAP Measures on page 17. |
In fiscal 2021, the total shareholder return on the Bank’s shares was 53.7%, compared to the total return of the S&P/TSX Composite Index of 38.8%. The total compound annual shareholder return on the Bank’s shares over the past five years was 7.4%, and 9.2% over the past 10 years. This is below the total annual return of the S&P/TSX Composite Index over the past five years of 10.6%, but above the total annual return over the past 10 years of 8.8%.
Dividends per share totaled $3.60 for the year, no change from 2020. The dividend payout ratio for the year of 46.5%, was in-line with the Bank’s target payout range of 40-50%. On November 4, 2021, OSFI lifted the COVID-19 related capital distribution restrictions allowing financial institutions to increase regular dividends. The Board of Directors approved a quarterly dividend of $1.00 per common share, a 10 cent increase, at its meeting on November 29, 2021. This quarterly dividend applies to shareholders of record at the close of business on January 4, 2022, and is payable January 27, 2022. |
C1 Closing common share price
|
2021 Scotiabank Annual Report | 27
Table of Contents
Management’s Discussion and Analysis
T5 Shareholder returns
For the years ended October 31 | 2021 | 2020 | 2019 | |||||||||
Closing market price per common share ($) | 81.14 | 55.35 | 75.54 | |||||||||
Dividends paid ($ per share) | 3.60 | 3.60 | 3.49 | |||||||||
Dividend yield (%)(1) | 5.2 | 5.8 | 4.9 | |||||||||
Increase (decrease) in share price (%) | 46.6 | (26.7 | ) | 6.9 | ||||||||
Total annual shareholder return (%)(1) | 53.7 | (22.3 | ) | 12.4 | ||||||||
(1) | Refer to Glossary on page 141 for the description of the measure. |
C2 | Return to common shareholders Share price appreciation plus dividends reinvested, 2010=100 |
A robust global recovery is underway in all our key markets, though the strength of the recovery is causing significant bottlenecks in central supply chains. These bottlenecks are leading to modestly lower growth in key economies, such as the United States and Canada, though fundamentals continue to suggest powerful economic momentum. These supply challenges, combined with the strength of local and global demand, have led to an inflationary surge in a broad range of economies. It is now clear that earlier assumptions that the price increases associated with the supply disruptions would be temporary were overly optimistic, as upward revisions to inflation forecasts now suggest that inflationary dynamics will be more persistent, though still temporary. As a result of these developments, central banks are rapidly recalibrating the stance of monetary policy. In some countries, this involves an end to or a phasing out of quantitative easing programs and, in others, higher policy rates. Markets have already priced in expectations of significantly higher policy rates, with a consequent impact on interest rates all along the yield curve.
In both Canada and the United States, concerns about the economic impact of COVID-19 appear to have passed, though risks remain to the outlook as the virus mutates. The key concern now is the strength of demand relative to the economies’ ability to import or produce goods. Supply bottlenecks are making it challenging for firms to source inputs and to meet the rapidly rising needs of their clientele. We expect these bottlenecks to fade in the first half of 2022. Fundamentals remain very strong however, as both economies continue to benefit from substantial policy support, very high household wealth, solid corporate and household balance sheets, strong employment growth, and high commodity prices. The strength of demand and the temporary supply challenges are leading to inflation that is well above targets in both countries. As a result, we expect the Bank of Canada will raise interest rates by 100 basis points next year, and the Federal Reserve will respond with a more modest 25 basis point increase at end-2022 given underperformance of the American labour market relative to Canada’s.
A broad range of economic data in all Pacific Alliance countries show that the economies have been far more resilient to COVID-19 flare-ups and political uncertainty than earlier considered. This likely reflects the strength of global demand and elevated commodity prices, both of which are key to the economies’ prospects. As a consequence, forecasts for all Pacific Alliance countries have been revised up markedly as the year has progressed. Political uncertainty has led to sizeable moves in some exchange rates, adding to inflationary pressures coming from global supply challenges. In response to these developments, all regional central banks have raised interest rates in recent months, with more increases to come.
Outlook
The Bank expects to deliver solid performance across all our businesses in 2022. Revenue is expected to grow from solid loan growth, modest interest margin expansion and higher non-interest income benefitting from improving economic conditions, offset by the impact of a potentially stronger Canadian dollar and lower investment gains. Provision for credit losses is expected to remain low. The Bank continues to focus on prudent expense management to generate positive operating leverage. Expenses are expected to grow at low single-digit to support business growth and meet upcoming regulatory requirements. The Bank’s capital position is expected to remain strong in 2022.
2021 Update
The COVID-19 virus is a fading risk to the global recovery. With health impacts largely limited to unvaccinated groups, any future waves of the virus should have minor impacts on the economic outlook as governments seem unlikely to reintroduce wide-ranging mobility restrictions in the event additional COVID-19 waves materialize. In addition, most economies are experiencing solid economic recoveries, with healthy household and corporate balance sheet, and strong employment growth. This should provide an additional layer of protection against the potential consequences of new surges in the virus. There remain, nonetheless ongoing but fading impacts from COVID-19 in economies. Unemployment is well above pre-COVID levels in several countries, and the sectors most heavily affected by COVID since its outset continue to operate well below pre-pandemic levels.
2020
On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. In the early days of the pandemic and absent any medical approaches to slow the spread of the virus, governments around the world implemented a number of measures to curtail the outbreak and slow its progression. These included business closures, travel restrictions, quarantines, and limits on public and private gatherings. Uncertainty about the impact of the virus and the ability to control it led to severe stresses in financial markets. To ease strains in funding markets, central banks undertook prompt and large-scale efforts to increase market liquidity. This resulted in sharp cuts in interest rates, quantitative easing programs in some countries, direct lending to businesses, and targeted liquidity injections in various credit product markets. In some countries, regulatory authorities allowed banks to offer deferral programs to customers without requiring them to reclassify affected loans. In addition to these financial measures, fiscal authorities deployed historic amounts of direct support to firms and households including most prominently, wage subsidies for firms and financial assistance to employees affected by the pandemic.
28 | 2021 Scotiabank Annual Report
Table of Contents
Management’s Discussion and Analysis | Overview of Performance
Pandemic response measures
Customer Assistance Programs
To support customers, starting in Q2, 2020 the Bank implemented a number of customer assistance programs across the footprint, including deferral of loan payments.
Canada
As at October 31, 2021, there were no loans in active deferral status. The table below provides a brief description of the nature of these programs and outstanding balances as of October 31, 2020:
Product | As at October 31, 2020 | Program Detail | ||||
# of customer accounts (000s) | Amount outstanding ($ millions) | |||||
Residential Mortgages | 16 | $4,257 | Up to six months deferral of total payments | |||
Personal Loans | 16 | 612 | Up to six months deferral on minimum requirements for line of credit accounts, and total payments on secured and unsecured term loans including auto | |||
Credit Cards | 3 | 18 | Up to four months deferral on minimum payment requirements | |||
Commercial & Small Business Loans | 1 | 232 | Up to three months payment deferral |
For customer accounts where payment deferrals have expired during the year, approximately 97% are current on payments (October 31, 2020 – 97%).
Government of Canada’s COVID-19 Economic Response Plan
The Bank participated in the following plans as part of the Government of Canada’s COVID-19 Economic Response Plan:
2020
Canada Emergency Wage Subsidy (CEWS)
The Bank participated in the CEWS by facilitating enrolment in direct deposit where eligible businesses received a subsidy from the Government of Canada of 75% of employee wages for up to 24 weeks, enabling businesses to re-hire workers previously laid off as a result of COVID-19.
Canada Emergency Business Account (CEBA)
Through the CEBA program, the Bank facilitated loans with eligible small business customers and Export Development Canada (EDC). Eligible small business customers received a loan of up to $60,000.
Business Credit Availability Program (BCAP)
The BCAP provided additional liquidity support to small business and commercial customers through EDC and Business Development Bank of Canada (BDC).
• | Under the EDC plan, EDC guarantees an 80% portion of new operating loans made to the export sector as well as domestic companies. |
• | Under the BCAP, BDC entered into a co-lending facility with the Bank in which BDC purchases an 80% participation in term loans made to eligible small business and commercial customers. |
• | Under the BCAP Mid-Market Financing Program, BDC enters into loan syndications with the Bank and underwrites 90% of junior term loans made to eligible medium-sized businesses. |
2021
Highly Affected Sectors Credit Availability Program (HASCAP)
The Highly Affected Sectors Credit Availability Program (HASCAP) was launched on February 1, 2021. Under this program, the Business Development Bank of Canada (BDC) fully guarantees eligible loans made by the Bank to small and medium-sized businesses heavily impacted by the COVID-19 pandemic. As of October 31, 2021, loans issued under this program were $201 million.
For details on the CEBA and BCAP, refer to the off-balance sheet arrangements section on page 74.
2021 Scotiabank Annual Report | 29
Table of Contents
Management’s Discussion and Analysis
International
The table below provides a brief description of the nature of these programs and outstanding balances for accounts that remain in active deferral status as of October 31st:
Product | As at October 31, 2021 | As at October 31, 2020 | Program Detail | |||||||
# of customer accounts (000s) | Amount outstanding ($ millions) | # of customer accounts (000s) | Amount outstanding ($ millions) | |||||||
Residential Mortgages | – | 9 | 36 | $3,699 | Up to six months deferral of total payments | |||||
Personal Loans | – | 3 | 152 | 1,342 | Up to six months deferral on minimum payment requirements for line of credit accounts, and total payments on secured and unsecured term loans including auto | |||||
Credit Cards | – | 3 | 299 | 961 | Up to six months deferral on minimum payment requirements | |||||
Commercial & Small Business Loans | – | – | 0.7 | 4,600 | Up to six months payment deferral, increases in short term liquidity lines, and other amendments |
For customer accounts where payment deferrals have expired during the year, approximately 92% are current on payments (October 31, 2020 – 90%).
Fiscal and monetary stimulus
At the start of the pandemic, governments implemented a number of monetary and fiscal stimulus measures to deal with the unprecedented situation. Central banks in Canada and across the Bank’s footprint enacted reductions in benchmark policy rates in order to stimulate economic activity. In addition, governments launched programs to provide additional funding to financial institutions to support lending in the real economy and promote stability of financial markets. The Bank participated in some of these programs in the prior year to bolster its liquidity position. During the current year, the majority of the liquidity that the Bank received under these programs was repaid.
Impact of Foreign Currency Translation
The impact of foreign currency translation on net income is shown in the table below.
T6 Impact of foreign currency translation
2021 | 2020 | 2019 | ||||||||||||||||||||||
For the fiscal years | Average exchange rate | % Change | Average exchange rate | % Change | Average exchange rate | % Change | ||||||||||||||||||
U.S. Dollar/Canadian Dollar | 0.795 | 6.9 | % | 0.744 | (1.2 | )% | 0.753 | (3.2 | )% | |||||||||||||||
Mexican Peso/Canadian Dollar | 16.035 | 1.3 | % | 15.832 | 8.4 | % | 14.607 | (1.3 | )% | |||||||||||||||
Peruvian Sol/Canadian Dollar | 3.032 | 18.0 | % | 2.569 | 2.3 | % | 2.512 | (1.0 | )% | |||||||||||||||
Colombian Peso/Canadian Dollar | 2,929 | 7.6 | % | 2,722 | 11.2 | % | 2,447 | 7.7 | % | |||||||||||||||
Chilean Peso/Canadian Dollar | 593.123 | 0.2 | % | 591.712 | 14.3 | % | 517.805 | 5.1 | % | |||||||||||||||
Impact on net income(1) ($ millions except EPS) | 2021 vs. 2020 | 2020 vs. 2019 | 2019 vs. 2018 | |||||||||
Net interest income | $ | (512 | ) | $ | (481 | ) | $ | (52 | ) | |||
Non-interest income(2) | (276 | ) | (196 | ) | 30 | |||||||
Non-interest expenses | 408 | 397 | 60 | |||||||||
Other items (net of tax) | 203 | 261 | 22 | |||||||||
Net income | $ | (177 | ) | $ | (19 | ) | $ | 60 | ||||
Earnings per share (diluted) | $ | (0.14 | ) | $ | (0.02 | ) | $ | 0.05 | ||||
Impact by business line ($ millions) | ||||||||||||
Canadian Banking | $ | (6 | ) | $ | 2 | $ | 7 | |||||
International Banking(2) | (130 | ) | (23 | ) | 51 | |||||||
Global Wealth Management | (15 | ) | (9 | ) | – | |||||||
Global Banking and Markets | (79 | ) | 11 | 28 | ||||||||
Other(2) | 53 | – | (26 | ) | ||||||||
$ | (177 | ) | $ | (19 | ) | $ | 60 | |||||
(1) | Includes impact of all currencies. |
(2) | Includes the impact of foreign currency hedges. |
30 | 2021 Scotiabank Annual Report
Table of Contents
Management’s Discussion and Analysis | Overview of Performance
The table below reflects the income earned in each period from divested operations prior to the closing. Refer to Note 37 in the accompanying financial statements for the list of divested operations that have closed.
T7 Impact of divested operations
($ millions) | 2021 | 2020 | 2019 | |||||||||
Net interest income | $ | 23 | $ | 123 | $ | 486 | ||||||
Non-interest income | 13 | 95 | 875 | |||||||||
Total revenue | 36 | 218 | 1,361 | |||||||||
Provision for credit losses | 9 | 27 | 21 | |||||||||
Non-interest expenses | 16 | 96 | 438 | |||||||||
Income before taxes | 11 | 95 | 902 | |||||||||
Income tax expense | 4 | 25 | 223 | |||||||||
Net income | $ | 7 | $ | 70 | $ | 679 | ||||||
Net income attributable to non-controlling interests (NCI) | – | – | 7 | |||||||||
Net income attributable to equity holders – relating to divested operations | $ | 7 | $ | 70 | $ | 672 |
($ millions except EPS) | 2021 vs. 2020 | 2020 vs. 2019 | ||||||
Net interest income | $ | (100 | ) | $ | (363 | ) | ||
Non-interest income | (82 | ) | (780 | ) | ||||
Total revenue | (182 | ) | (1,143 | ) | ||||
Provision for credit losses | (18 | ) | 6 | |||||
Non-interest expenses | (80 | ) | (342 | ) | ||||
Income before taxes | (84 | ) | (807 | ) | ||||
Income tax expense | (21 | ) | (198 | ) | ||||
Net income | $ | (63 | ) | $ | (609 | ) | ||
Net income attributable to equity holders of the Bank | (63 | ) | (602 | ) | ||||
Earnings per share (diluted) | $ | (0.05 | ) | $ | (0.48 | ) |
2021 Scotiabank Annual Report | 31
Table of Contents
Management’s Discussion and Analysis
GROUP FINANCIAL PERFORMANCE
Net income was $9,955 million in 2021, up 45% from $6,853 million in 2020 due primarily to lower provision for credit losses, as a result of a more favourable credit and macroeconomic outlook.
Adjusting items during the current year were restructuring and other provisions of $139 million, as well as amortization of acquisition-related intangible assets of $75 million (October 31, 2020 – $77 million). The prior year also included net gain on divestitures of $327 million, as well as valuation-related adjustments of $233 million. Refer Non-GAAP Measures for further details.
Adjusted net income was $10,169 million, up 46% from $6,961 million due primarily to lower provision for credit losses.
Net interest income was $16,961 million, a decrease of $359 million or 2%. The negative impact of foreign currency translation of 3%, together with lower margins and the impact of divested operations, more than offset positive increases from strong asset growth in Canadian Banking and higher contribution from asset/liability management activities.
Net interest income increased $192 million or 2% in Canadian Banking, due primarily to strong loan and deposit growth, partially offset by lower margins from changes in business mix and Bank of Canada interest rate cuts in 2020. International Banking net interest income decreased $978 million or 13%, including a 6% negative impact from foreign currency translation, as well as lower margins and lower personal lending, impacted by macroeconomic conditions. Net interest income increased $53 million or 9% in Global Wealth Management from growth in deposits and Private Banking loans. Global Banking and Markets net interest income was in line with the previous year as lower loans and the negative impact of foreign currency translation, were offset by higher lending margins. The Other operating segment net interest income increased $373 million mainly from the higher contribution from asset/liability management activities.
Core earning assets decreased $5 billion or 1% to $752 billion. Growth in residential mortgages and commercial loans in Canadian Banking, and higher loans in Global Wealth Management were more than offset by the negative impact of foreign currency translation of 3%, as well as lower corporate loans in Global Banking and Markets.
The net interest margin was down four basis points to 2.23%, driven by lower margins in International Banking and Canadian Banking related to changes in business mix and the impact of central bank rate cuts in 2020, partially offset by a higher contribution from asset/liability management activities.
T8 Net interest income and net interest margin(1)(2)
2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||
($ billions, except percentage amounts) | Average balance | Interest | Average rate | Average balance | Interest | Average rate | Average balance | Interest | Average rate | |||||||||||||||||||||||||||
Total average assets and net interest income | $ | 1,157.2 | $ | 17.0 | $ | 1,160.6 | $ | 17.3 | $ | 1,056.1 | $ | 17.2 | ||||||||||||||||||||||||
Less: trading related businesses(1) | 322.8 | 0.2 | 321.5 | 0.1 | 279.5 | 0.1 | ||||||||||||||||||||||||||||||
Banking margin on average total assets | $ | 834.4 | $ | 16.8 | 2.01 | % | $ | 839.1 | $ | 17.2 | 2.05 | % | $ | 776.6 | $ | 17.1 | 2.21 | % | ||||||||||||||||||
Less: non-earning assets and customers’ liability under acceptances | 82.7 | – | 82.1 | – | 72.8 | – | ||||||||||||||||||||||||||||||
Core earning assets and net interest margin | $ | 751.7 | $ | 16.8 | 2.23 | % | $ | 757.0 | $ | 17.2 | 2.27 | % | $ | 703.8 | $ | 17.1 | 2.44 | % |
(1) | Most net interest income from trading assets is recorded in trading revenues in non-interest income. |
(2) | Refer to non-GAAP measures on page 17. |
32 | 2021 Scotiabank Annual Report
Table of Contents
Management’s Discussion and Analysis | Group Financial Performance
T9 Average balance sheet(1) and net interest income
2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||
For the fiscal years ($ billions) | Average balance | Interest | Average rate | Average balance | Interest | Average rate | Average balance | Interest | Average rate | |||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||
Deposits with financial institutions | $ | 75.6 | $ | 0.2 | 0.24 | % | $ | 66.0 | $ | 0.4 | 0.63 | % | $ | 49.6 | $ | 0.9 | 1.87 | % | ||||||||||||||||||
Trading assets | 142.9 | 0.3 | 0.22 | % | 128.1 | 0.4 | 0.36 | % | 116.9 | 0.3 | 0.25 | % | ||||||||||||||||||||||||
Securities purchased under resale agreements and securities borrowed | 119.8 | 0.2 | 0.15 | % | 128.3 | 0.3 | 0.22 | % | 121.0 | 0.5 | 0.41 | % | ||||||||||||||||||||||||
Investment securities | 92.2 | 1.1 | 1.25 | % | 105.0 | 1.6 | 1.50 | % | 87.5 | 2.0 | 2.22 | % | ||||||||||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||||||
Residential mortgages | 299.7 | 9.3 | 3.09 | % | 273.4 | 9.2 | 3.36 | % | 261.5 | 9.4 | 3.59 | % | ||||||||||||||||||||||||
Personal loans | 92.0 | 5.1 | 5.56 | % | 96.2 | 6.1 | 6.35 | % | 97.7 | 6.8 | 6.98 | % | ||||||||||||||||||||||||
Credit cards | 13.3 | 2.3 | 17.11 | % | 16.4 | 3.2 | 19.31 | % | 17.5 | 3.3 | 18.76 | % | ||||||||||||||||||||||||
Business and government | 217.2 | 6.5 | 3.00 | % | 229.7 | 8.5 | 3.71 | % | 206.3 | 9.6 | 4.66 | % | ||||||||||||||||||||||||
Allowance for credit losses | (6.8 | ) | (6.1 | ) | (5.2 | ) | ||||||||||||||||||||||||||||||
Total loans | $ | 615.4 | $ | 23.2 | 3.76 | % | $ | 609.6 | $ | 27.0 | 4.43 | % | $ | 577.8 | $ | 29.1 | 5.04 | % | ||||||||||||||||||
Customers’ liability under acceptances | 16.4 | 16.1 | 16.3 | |||||||||||||||||||||||||||||||||
Total earning assets(2) | $ | 1,062.3 | $ | 25.0 | 2.35 | % | $ | 1,053.1 | $ | 29.7 | 2.82 | % | $ | 969.1 | $ | 32.8 | 3.38 | % | ||||||||||||||||||
Other assets | 94.9 | 107.5 | 87.0 | |||||||||||||||||||||||||||||||||
Total assets | $ | 1,157.2 | $ | 25.0 | 2.16 | % | $ | 1,160.6 | $ | 29.7 | 2.56 | % | $ | 1,056.1 | $ | 32.8 | 3.10 | % | ||||||||||||||||||
Liabilities and equity | ||||||||||||||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||||||||||||||
Personal | $ | 245.4 | $ | 2.0 | 0.81 | % | $ | 231.4 | $ | 3.2 | 1.39 | % | $ | 221.0 | $ | 3.8 | 1.70 | % | ||||||||||||||||||
Business and government | 489.7 | 4.2 | 0.85 | % | 487.3 | 6.9 | 1.42 | % | 448.3 | 9.1 | 2.03 | % | ||||||||||||||||||||||||
Financial institutions | 44.4 | 0.3 | 0.72 | % | 47.5 | 0.6 | 1.25 | % | 40.2 | 1.0 | 2.56 | % | ||||||||||||||||||||||||
Total deposits | $ | 779.5 | $ | 6.5 | 0.83 | % | $ | 766.2 | $ | 10.7 | 1.40 | % | $ | 709.5 | $ | 13.9 | 1.95 | % | ||||||||||||||||||
Obligations related to securities sold under repurchase agreements and securities lent | 116.5 | 0.1 | 0.12 | % | 134.8 | 0.2 | 0.17 | % | 114.6 | 0.3 | 0.29 | % | ||||||||||||||||||||||||
Subordinated debentures | 6.6 | 0.2 | 2.74 | % | 7.3 | 0.2 | 3.28 | % | 7.5 | 0.3 | 3.91 | % | ||||||||||||||||||||||||
Other interest-bearing liabilities | 78.3 | 1.2 | 1.58 | % | 69.5 | 1.3 | 1.71 | % | 63.9 | 1.1 | 1.74 | % | ||||||||||||||||||||||||
Total interest-bearing liabilities | $ | 980.9 | $ | 8.0 | 0.82 | % | $ | 977.8 | $ | 12.4 | 1.27 | % | $ | 895.5 | $ | 15.6 | 1.74 | % | ||||||||||||||||||
Financial instruments designated at fair value through profit or loss | 21.1 | 16.9 | 11.3 | |||||||||||||||||||||||||||||||||
Other liabilities including acceptances | 83.3 | 95.6 | 79.8 | |||||||||||||||||||||||||||||||||
Equity(3) | 71.9 | 70.3 | 69.5 | |||||||||||||||||||||||||||||||||
Total liabilities and equity | $ | 1,157.2 | $ | 8.0 | 0.69 | % | $ | 1,160.6 | $ | 12.4 | 1.07 | % | $ | 1,056.1 | $ | 15.6 | 1.48 | % | ||||||||||||||||||
Net interest income | $ | 17.0 | $ | 17.3 | $ | 17.2 |
(1) | Average of daily balances. |
(2) | Prior year amounts have been restated to include the Customers’ liability under acceptances. |
(3) | Includes non-controlling interest of $2.3 (2020 – $2.5; 2019 – $2.7). |
2021 Scotiabank Annual Report | 33
Table of Contents
Management’s Discussion and Analysis
T10 Non-interest income
For the fiscal years ($ millions) | 2021 | 2020 | 2019 | 2021 versus 2020 | ||||||||||||
Banking | ||||||||||||||||
Card revenues | $ | 749 | $ | 789 | $ | 977 | (5 | )% | ||||||||
Banking services fees | 1,598 | 1,540 | 1,812 | 4 | ||||||||||||
Credit fees | 1,485 | 1,348 | 1,316 | 10 | ||||||||||||
Total banking revenues | $ | 3,832 | $ | 3,677 | $ | 4,105 | 4 | % | ||||||||
Wealth management | ||||||||||||||||
Mutual funds | $ | 2,394 | $ | 1,945 | $ | 1,849 | 23 | % | ||||||||
Brokerage fees | 1,039 | 902 | 876 | 15 | ||||||||||||
Investment management and trust | ||||||||||||||||
Investment management and custody | 792 | 749 | 848 | 6 | ||||||||||||
Personal and corporate trust | 202 | 197 | 202 | 3 | ||||||||||||
994 | 946 | 1,050 | 5 | |||||||||||||
Total wealth management revenues | $ | 4,427 | $ | 3,793 | $ | 3,775 | 17 | % | ||||||||
Underwriting and other advisory | 724 | 690 | 497 | 5 | ||||||||||||
Non-trading foreign exchange | 787 | 708 | 667 | 11 | ||||||||||||
Trading revenues | 2,033 | 2,411 | 1,488 | (16 | ) | |||||||||||
Net gain on sale of investment securities | 419 | 607 | 351 | (31 | ) | |||||||||||
Net income from investments in associated corporations | 339 | 242 | 650 | 40 | ||||||||||||
Insurance underwriting income, net of claims | 398 | 497 | 676 | (20 | ) | |||||||||||
Other fees and commissions | 677 | 688 | 949 | (2 | ) | |||||||||||
Other | 655 | 703 | 699 | (7 | ) | |||||||||||
Total non-interest income | $ | 14,291 | $ | 14,016 | $ | 13,857 | 2 | % | ||||||||
Non-GAAP Adjusting items(1) | ||||||||||||||||
Derivatives valuation adjustment(2) | – | 116 | – | |||||||||||||
Net (gain)/loss on divestitures(3) | – | (313 | ) | 127 | ||||||||||||
Adjusted non-interest income | $ | 14,291 | $ | 13,819 | $ | 13,984 | 3 | % |
(1) | Refer to page 17 for a discussion of Non-GAAP measures. |
(2) | Recorded in Trading Revenues. |
(3) | Recorded in Other Non-interest Income. |
C3 | Sources of non-interest income |
Non-interest income was up $275 million or 2% to $14,291 million. Adjusted non-interest income increased $472 million or 3%. The negative impact of foreign currency translation was 2%. The increase was driven mainly by strong wealth management revenues which benefitted from annual performance fees, higher banking revenues as well as higher investment gains in associated corporations and other income. This was partially offset by lower trading revenues, insurance income, and lower realized gains on investment securities.
Banking revenues were up $155 million or 4% to $3,832 million. The increase was due mainly to higher credit fees, partly offset by lower card revenues.
Wealth management revenues increased $634 million or 17% driven primarily by higher mutual fund revenues which included elevated annual performance fees, and higher brokerage fees.
Trading revenues were down $378 million or 16%. On an adjusted basis, the decline was $494 million mainly from lower revenues in fixed income as the prior year benefitted from higher market volatility. This was partially offset by higher revenues in global equities.
Net income from investments in associated corporations was up $97 million or 40%, due primarily to higher investment gains in the underlying businesses.
Insurance underwriting income decreased $99 million or 20%, primarily from increased COVID-19 related claims and lower premiums.
Other income declined by $48 million. On an adjusted basis, other income increased by $264 million due to higher investment gains.
34 | 2021 Scotiabank Annual Report
Table of Contents
Management’s Discussion and Analysis | Group Financial Performance
T11 Trading revenues(1)
For the fiscal years ($ millions) | 2021 | 2020 | 2019 | |||||||||
Trading-related revenue (TEB)(2) | ||||||||||||
Net interest income | $ | 136 | $ | 112 | $ | 67 | ||||||
Non-interest income | ||||||||||||
Trading revenues | 2,321 | 2,671 | 1,652 | |||||||||
Other fees and commissions | 185 | 205 | 379 | |||||||||
Total trading-related revenue (TEB) | $ | 2,642 | $ | 2,988 | $ | 2,098 | ||||||
Trading-related revenue (TEB) | ||||||||||||
Interest rate and credit | $ | 941 | $ | 1,552 | $ | 644 | ||||||
Equities | 932 | 631 | 696 | |||||||||
Foreign exchange | 583 | 396 | 273 | |||||||||
Commodities | 66 | 263 | 216 | |||||||||
Other(3) | 120 | 146 | 269 | |||||||||
Total trading-related revenue (TEB) | $ | 2,642 | $ | 2,988 | $ | 2,098 | ||||||
Taxable equivalent adjustment | (288 | ) | (260 | ) | (164 | ) | ||||||
Trading-related revenue (Non-TEB) | $ | 2,354 | $ | 2,728 | $ | 1,934 |
(1) | Refer to Non-GAAP Measures on page 17. |
(2) | Trading-related revenue consists of net interest income and non-interest income. Included are unrealized gains and losses on security positions held, realized gains and losses from the purchase and sale of securities, fees and commissions from securities borrowing and lending activities, and gains and losses on trading derivatives. Underwriting and other advisory fees, which are shown separately in the Consolidated Statement of Income, are excluded. |
(3) | Includes the impact of economic hedges. |
The provision for credit losses was $1,808 million, compared to $6,084 million, a decrease of $4,276 million from last year. Adjusted provision for credit losses decreased $4,121 million or 70% due primarily to lower provision for credit losses on performing loans across all business lines.
Provision for credit losses on performing loans was a net reversal of $1,498 million, a decrease of $4,114 million. Adjusted provision for credit losses on performing loans decreased $3,992 million of which $2,930 million related to retail and $1,062 million to commercial and corporate banking. Approximately $700 million (October 31, 2020 – nil) of the provision reversals was due to reduction of allowances built in the prior year, reflecting the improvement in credit quality and more favourable macroeconomic outlook. The remaining reversal of $798 million was due to credit migration, the majority of which was to impaired loans in the retail portfolio, mainly in International Banking.
The provision for credit losses on impaired loans was $3,306 million, a decrease of $162 million from last year. Adjusted provision for credit losses on impaired loans decreased $129 million or 4%, due to lower provisions in the Canadian Banking and Global Banking and Market portfolios, driven by lower formations, partially offset by higher retail provisions in International Banking driven by credit migration. The provision for credit losses ratio on impaired loans decreased three basis points to 53 basis points and adjusted provision for credit losses ratio on impaired loans decreased by two basis points.
The provision for credit losses ratio decreased 69 basis points to 29 basis points and adjusted provision for credit losses ratio decreased by 66 basis points.
T12 Provision for credit losses by business line
2021 | 2020 | |||||||||||||||||||||||
For the fiscal years ($ millions) | Performing (Stage 1 and 2) | Impaired (Stage 3) | Total | Performing (Stage 1 and 2) | Impaired (Stage 3) | Total | ||||||||||||||||||
Canadian Banking | ||||||||||||||||||||||||
Retail | $ | (166 | ) | $ | 578 | $ | 412 | $ | 660 | $ | 927 | $ | 1,587 | |||||||||||
Commercial | (191 | ) | 112 | (79 | ) | 283 | 203 | 486 | ||||||||||||||||
Total | (357 | ) | 690 | 333 | 943 | 1,130 | 2,073 | |||||||||||||||||
International Banking | ||||||||||||||||||||||||
Retail | (952 | ) | 2,329 | 1,377 | 1,247 | 1,882 | 3,129 | |||||||||||||||||
Commercial | (54 | ) | 250 | 196 | 166 | 319 | 485 | |||||||||||||||||
Total | (1,006 | ) | 2,579 | 1,573 | 1,413 | 2,201 | 3,614 | |||||||||||||||||
Global Wealth Management | – | 2 | 2 | 5 | 3 | 8 | ||||||||||||||||||
Global Banking and Markets | (135 | ) | 35 | (100 | ) | 257 | 133 | 390 | ||||||||||||||||
Other | 1 | – | 1 | (1 | ) | 1 | – | |||||||||||||||||
Provision for credit losses on loans, acceptances and off-balance sheet exposures | $ | (1,497 | ) | $ | 3,306 | $ | 1,809 | $ | 2,617 | $ | 3,468 | $ | 6,085 | |||||||||||
International Banking | $ | 1 | $ | – | $ | 1 | $ | (1 | ) | $ | – | $ | (1 | ) | ||||||||||
Global Wealth Management | $ | – | $ | – | $ | – | $ | (1 | ) | $ | – | $ | (1 | ) | ||||||||||
Global Banking and Markets | $ | – | $ | – | $ | – | $ | – | $ | – | $ | – | ||||||||||||
Other | (2 | ) | – | (2 | ) | 1 | – | 1 | ||||||||||||||||
Provision for credit losses on debt securities and deposits with banks | $ | (1 | ) | $ | – | $ | (1 | ) | $ | (1 | ) | $ | – | $ | (1 | ) | ||||||||
Total provision for credit losses | $ | (1,498 | ) | $ | 3,306 | $ | 1,808 | $ | 2,616 | $ | 3,468 | $ | 6,084 | |||||||||||
Non-GAAP Adjusting items(1) | – | – | – | (122 | ) | (33 | ) | (155 | ) | |||||||||||||||
Adjusted provision for credit losses(1) | $ | (1,498 | ) | $ | 3,306 | $ | 1,808 | $ | 2,494 | $ | 3,435 | $ | 5,929 |
(1) | Refer to page 17 for a discussion of Non-GAAP measures. |
2021 Scotiabank Annual Report | 35
Table of Contents
Management’s Discussion and Analysis
T12A Provision for credit losses against impaired financial instruments by business line
For the fiscal years ($ millions) | 2021 | 2020 | 2019(1) | |||||||||
Canadian Banking | ||||||||||||
Retail | $ | 578 | $ | 927 | $ | 890 | ||||||
Commercial | 112 | 203 | 84 | |||||||||
$ | 690 | $ | 1,130 | $ | 974 | |||||||
International Banking | ||||||||||||
Caribbean and Central America | $ | 324 | $ | 319 | $ | 292 | ||||||
Latin America | ||||||||||||
Mexico | 449 | 400 | 291 | |||||||||
Peru | 1,059 | 484 | 446 | |||||||||
Chile | 181 | 582 | 403 | |||||||||
Colombia | 522 | 322 | 422 | |||||||||
Other Latin America | 44 | 94 | 68 | |||||||||
Total Latin America | 2,255 | 1,882 | 1,630 | |||||||||
$ | 2,579 | $ | 2,201 | $ | 1,922 | |||||||
Global Wealth Management | $ | 2 | $ | 3 | $ | (1 | ) | |||||
Global Banking and Markets | ||||||||||||
Canada | $ | 16 | $ | 67 | $ | 11 | ||||||
U.S. | 2 | 6 | (1 | ) | ||||||||
Asia and Europe | 17 | 61 | (6 | ) | ||||||||
$ | 35 | $ | 134 | $ | 4 | |||||||
Total | $ | 3,306 | $ | 3,468 | $ | 2,899 | ||||||
Non-GAAP Adjusting items(2) | – | (33 | ) | – | ||||||||
Adjusted total | $ | 3,306 | $ | 3,435 | $ | 2,899 |
(1) | Amounts for 2019 have been restated to reflect the impact of the establishment of Global Wealth Management as a separate business segment. |
(2) | Refer to page 17 for a discussion of Non-GAAP measures. |
T13 Provision for credit losses as a percentage of average net loans and acceptances(1)(2)(3)
For the fiscal years (%) | 2021 | 2020 | 2019(4) | |||||||||
Canadian Banking | ||||||||||||
Retail | 0.13 | % | 0.54 | % | 0.32 | % | ||||||
Commercial | (0.13 | ) | 0.84 | 0.15 | ||||||||
0.09 | 0.59 | 0.29 | ||||||||||
International Banking | ||||||||||||
Retail | 2.25 | 4.74 | 2.57 | |||||||||
Commercial | 0.26 | 0.59 | 0.28 | |||||||||
1.15 | 2.45 | 1.40 | ||||||||||
Global Wealth Management | 0.01 | 0.05 | 0.00 | |||||||||
Global Banking and Markets | (0.10 | ) | 0.35 | (0.02 | ) | |||||||
Provisions against impaired loans | 0.53 | 0.56 | 0.49 | |||||||||
Provisions against performing loans | (0.24 | ) | 0.42 | 0.02 | ||||||||
Provision for credit losses as a percentage of average net loans and acceptances | 0.29 | % | 0.98 | % | 0.51 | % | ||||||
Adjusted provision for credit losses as a percentage of average net loans and acceptances(5) | 0.29 | % | 0.95 | % | 0.49 | % |
(1) | Includes provision for credit losses on certain financial assets – loans, acceptances, and off-balance sheet exposures. |
(2) | 2019 includes Day 1 acquisition-related impact in International Banking. |
(3) | Refer to Glossary on page 141 for the description of the measure. |
(4) | Amounts for 2019 have been restated to reflect the impact of the establishment of Global Wealth Management as a separate business segment. |
(5) | Refer to page 17 for a discussion of Non-GAAP measures. |
T14 Net write-offs(1) as a percentage of average loans and acceptances(2)
For the fiscal years (%) | 2021 | 2020 | 2019(3) | |||||||||
Canadian Banking | ||||||||||||
Retail | 0.19 | % | 0.29 | % | 0.32 | % | ||||||
Commercial | 0.19 | 0.26 | 0.15 | |||||||||
0.19 | 0.29 | 0.29 | ||||||||||
International Banking | ||||||||||||
Retail | 3.89 | 2.38 | 2.50 | |||||||||
Commercial | 0.28 | 0.31 | 0.15 | |||||||||
1.89 | 1.24 | 1.29 | ||||||||||
Global Wealth Management | 0.01 | – | 0.02 | |||||||||
Global Banking and Markets | 0.05 | 0.09 | 0.03 | |||||||||
Total | 0.54 | % | 0.47 | % | 0.50 | % | ||||||
(1) | Write-offs net of recoveries. |
(2) | Refer to Glossary on page 141 for the description of the measure. |
(3) | Amounts for 2019 have been restated to reflect the impact of the establishment of Global Wealth Management as a separate business segment. |
36 | 2021 Scotiabank Annual Report
Table of Contents
Management’s Discussion and Analysis | Group Financial Performance
T15 Non-interest expenses and productivity
For the fiscal years ($ millions) | 2021 | 2020 | 2019 | 2021 versus 2020 | ||||||||||||
Salaries and employee benefits | ||||||||||||||||
Salaries | $ | 4,694 | $ | 5,028 | $ | 4,939 | (7 | )% | ||||||||
Performance-based compensation | 2,086 | 1,738 | 1,761 | 20 | ||||||||||||
Share-based payments | 223 | 298 | 278 | (25 | ) | |||||||||||
Other employee benefits | 1,538 | 1,560 | 1,465 | (1 | ) | |||||||||||
$ | 8,541 | $ | 8,624 | $ | 8,443 | (1 | )% | |||||||||
Premises and technology | ||||||||||||||||
Premises | ||||||||||||||||
Occupancy | 1 | 25 | 527 | (96 | ) | |||||||||||
Property taxes | 97 | 98 | 95 | (1 | ) | |||||||||||
Other premises costs | 415 | 483 | 458 | (14 | ) | |||||||||||
$ | 513 | $ | 606 | $ | 1,080 | (15 | )% | |||||||||
Technology | $ | 1,838 | $ | 1,802 | $ | 1,727 | 2 | % | ||||||||
$ | 2,351 | $ | 2,408 | $ | 2,807 | (2 | )% | |||||||||
Depreciation and amortization | ||||||||||||||||
Depreciation | 769 | 797 | 402 | (4 | ) | |||||||||||
Amortization of intangible assets | 742 | 749 | 651 | (1 | ) | |||||||||||
$ | 1,511 | $ | 1,546 | $ | 1,053 | (2 | )% | |||||||||
Communications | $ | 369 | $ | 418 | $ | 459 | (12 | )% | ||||||||
Advertising and business development | $ | 404 | $ | 445 | $ | 625 | (9 | )% | ||||||||
Professional | $ | 789 | $ | 753 | $ | 861 | 5 | % | ||||||||
Business and capital taxes | ||||||||||||||||
Business taxes | 461 | 469 | 471 | (2 | ) | |||||||||||
Capital taxes | 50 | 48 | 44 | 4 | ||||||||||||
$ | 511 | $ | 517 | $ | 515 | (1 | )% | |||||||||
Other | $ | 2,142 | $ | 2,145 | $ | 1,974 | (0 | )% | ||||||||
Total non-interest expenses | $ | 16,618 | $ | 16,856 | $ | 16,737 | (1 | )% | ||||||||
Non-GAAP adjusting items(1) | ||||||||||||||||
Amortization of acquisition-related intangible assets, excluding software(2) | (103 | ) | (106 | ) | (116 | ) | ||||||||||
Acquisition-related integration costs(3) | – | (177 | ) | (178 | ) | |||||||||||
Restructuring and other provisions(4) | (188 | ) | – | – | ||||||||||||
Net (gain)/loss on divestitures(5) | – | (15 | ) | (21 | ) | |||||||||||
Impairment charge on software assets(2) | – | (44 | ) | – | ||||||||||||
Adjusted non-interest expenses | $ | 16,327 | $ | 16,514 | $ | 16,422 | (1 | )% | ||||||||
Productivity ratio(6) | 53.2 | % | 53.8 | % | 53.9 | % | ||||||||||
Adjusted productivity ratio(1) | 52.2 | % | 53.0 | % | 52.7 | % |
(1) | Refer to page 17 for a discussion of Non-GAAP measures. |
(2) | Recorded in Depreciation and Amortization. |
(3) | Recorded in the following categories in 2020 and 2019: Salaries and Benefits (2020: $85; 2019: $83), Premises and Technology (2020: $37; 2019: $37), Depreciation and Amortization (2020: $10; 2019: $12), Communications (2020: $6; 2019: $1), Advertising and Business Development (2020: $3; 2019: $6), Professional (2020: $8; 2019: $17), Business and Capital Taxes (2020: $5; 2019: $2), Other Operating Expenses (2020: $23; 2019: $21). |
(4) | Recorded in Other Operating Expenses. |
(5) | Recorded in the following categories in 2020 and 2019: Salaries and Benefits (2020: $11; 2019: $7), Premises and Technology (2020: $0; 2019: $3), Advertising and Business Development (2020: $0; 2019: $2), Professional (2020: $0; 2019: $3), Business and Capital Taxes (2020: $0; 2019: $3), Other Operating Expenses (2020: $4; 2019: $3). |
(6) | Refer to Glossary on page 141 for the description of the measure. |
C4 | Non-interest expenses $ millions |
C5 | Direct and indirect taxes $ millions |
Non-interest expenses were $16,618 million, a decrease of $238 million or 1%. Adjusted non-interest expenses also decreased 1%. Expenses were positively impacted by foreign currency translation and divested operations, lower COVID-19 related costs, share-based compensation, premises costs, advertising and communication expenses and the prior year’s metals business charges. These were partly offset by higher performance-based compensation, technology-related costs to support business growth, the investment in the SCENE loyalty program, higher professional fees and business and capital taxes.
The Bank’s total technology cost, consisting of Technology expenses in Table T15 as well as those included within Salaries, Professional, and Amortization of Intangible Assets and Depreciation, was approximately $3.8 billion, an increase of 3% compared to 2020 and represented 12% of revenues, consistent with 2020. This reflects our continued investment in modernization, growth and technology initiatives, and cybersecurity.
The productivity ratio was 53.2% compared to 53.8%. On an adjusted basis, the productivity ratio was 52.2% compared to 53.0%. Operating leverage was positive 1.1% on a reported basis and positive 1.5% on an adjusted basis.
The provision for income taxes was $2,871 million compared to $1,543 million last year. The effective tax rate was 22.4% compared to 18.4%. On an adjusted basis, the effective tax rate was 22.5% compared to 19.9% due primarily to significantly higher provision for credit losses in entities that operate in higher tax rate jurisdictions in the prior year, and changes in business and earnings mix.
2021 Scotiabank Annual Report | 37
Table of Contents
Management’s Discussion and Analysis
Financial Results Review: 2020 vs. 2019
In order to identify key business trends between 2020 and 2019, commentary and the related financial results are below.
Net income
Net income was $6,853 million in 2020, down 22% from $8,798 million in 2019. Diluted earnings per share (EPS) were $5.30 compared to $6.68. Return on equity was 10.4% compared to 13.1%.
Adjusted net income was $6,961 million, down 26% from $9,409 million. This decrease was due mainly to the higher provision for credit losses on performing loans resulting from the impact of COVID-19 market and economic conditions. Adjusted Diluted EPS were $5.36 compared to $7.14 and adjusted Return on equity was 10.4% compared to 13.9%. Refer to non-GAAP measures on page 17.
Net interest income
Net interest income was $17,320 million, an increase of $143 million or 1%. The negative impact of divested operations of approximately 2% was more than offset by business growth of 3%, driven primarily by increases in earning assets and higher contribution from asset/liability management activities, partly offset by the impact of foreign currency translation. The net interest margin was down 17 basis points to 2.27% from lower margins across all business lines due to impact of central bank rate cuts and changes in business mix, as well as an increased mix of lower-margin high quality liquid assets related to higher liquidity levels.
Non-interest income
Non-interest income was $14,016 million, up $159 million or 1%. Adjusted non-interest income was $13,819 million, a decrease of $165 million or 1%. The impact of divested operations was approximately 6%, offset by business growth of 5%. This growth was driven by higher trading revenues, underwriting and advisory fees, investment gains, and wealth management fees. These were partly offset by lower banking revenues, insurance income, other fees and commissions, and the negative impact of foreign currency translation.
Provision for credit losses
The provision for credit losses was $6,084 million, compared to $3,027 million in 2019, an increase of $3,057 million. Adjusted provision for credit losses was $5,929 million, compared to $2,876 million, an increase of $3,053 million or 106% due primarily to higher provision on performing loans across all business lines. The provision for credit losses ratio was 98 basis points, up 47 basis points from 51 basis points in 2019. Adjusted provision for credit losses ratio was 95 basis points, 46 basis points above 2019.
Non-interest expenses
Non-interest expenses were $16,856 million, an increase of $119 million or 1%. Adjusted non-interest expenses were $16,514 million, an increase of 1%. Higher salaries and benefits related to regulatory and technology initiatives, charges related to the metals investigations, COVID-19 related costs and other business growth-related expenses were mostly offset by lower advertising and business development expenses, professional fees, the positive impact of foreign currency translation and divested operations. Operating leverage was positive 0.3% on a reported basis and negative 0.6% on an adjusted basis.
Income taxes
The provision for income taxes was $1,543 million, a decrease of $929 million. The effective tax rate was 18.4% compared to 21.9%, due primarily to significantly higher provision for credit losses recorded in entities that operate in higher tax rate jurisdictions and changes in earnings mix across businesses and jurisdictions.
38 | 2021 Scotiabank Annual Report
Table of Contents
Management’s Discussion and Analysis | Group Financial Performance
T16 Fourth quarter financial results
For the three months ended | ||||||||||||
($ millions) | October 31 2021 | July 31 2021 | October 31 2020 | |||||||||
Reported Results | ||||||||||||
Net interest income | $ | 4,217 | $ | 4,217 | $ | 4,258 | ||||||
Non-interest income | 3,470 | 3,540 | 3,247 | |||||||||
Total revenue | 7,687 | 7,757 | 7,505 | |||||||||
Provision for credit losses | 168 | 380 | 1,131 | |||||||||
Non-interest expenses | 4,271 | 4,097 | 4,057 | |||||||||
Income tax expense | 689 | 738 | 418 | |||||||||
Net income | $ | 2,559 | $ | 2,542 | $ | 1,899 | ||||||
Net income attributable to non-controlling interests in subsidiaries (NCI) | 70 | 81 | 72 | |||||||||
Net income attributable to equity holders of the Bank | $ | 2,489 | $ | 2,461 | $ | 1,827 | ||||||
Preferred shareholders and other equity instrument holders | 78 | 35 | 82 | |||||||||
Common shareholders | $ | 2,411 | $ | 2,426 | $ | 1,745 | ||||||
Adjustments(1) | ||||||||||||
Amortization of Acquisition-related intangible assets, excluding software(2) | $ | 25 | $ | 24 | $ | 26 | ||||||
Restructuring and other provisions(2) | 188 | – | – | |||||||||
Acquisition-related integration costs(2) | – | – | 20 | |||||||||
Net (gain)/ loss on divestitures(3) | – | – | 8 | |||||||||
Adjustments (Pre-tax) | 213 | 24 | 54 | |||||||||
Income tax expense/(benefit) | (56 | ) | (6 | ) | (15 | ) | ||||||
Adjustments (After tax) | 157 | 18 | 39 | |||||||||
Adjustments attributable to NCI | (10 | ) | – | – | ||||||||
Adjustments (After tax and NCI) | $ | 147 | $ | 18 | $ | 39 | ||||||
Adjusted Results | ||||||||||||
Net interest income | $ | 4,217 | $ | 4,217 | $ | 4,258 | ||||||
Non-interest income | 3,470 | 3,540 | 3,247 | |||||||||
Total revenue | 7,687 | 7,757 | 7,505 | |||||||||
Provision for credit losses | 168 | 380 | 1,131 | |||||||||
Non-interest expenses | 4,058 | 4,073 | 4,003 | |||||||||
Income tax expense | 745 | 744 | 433 | |||||||||
Net income | $ | 2,716 | $ | 2,560 | $ | 1,938 | ||||||
Net income attributable to non-controlling interests in subsidiaries (NCI) | 80 | 81 | 72 | |||||||||
Net income attributable to equity holders of the Bank | $ | 2,636 | $ | 2,479 | $ | 1,866 | ||||||
Preferred shareholders and other equity instrument holders | 78 | 35 | 82 | |||||||||
Common shareholders | $ | 2,558 | $ | 2,444 | $ | 1,784 |
(1) | Refer to Non-GAAP Measures on page 17. |
(2) | Recorded in non-interest expenses. |
(3) | (Gain)/loss on divestitures is recorded in non-interest income; costs related to divestitures are recorded in non-interest expenses. |
Net income
Q4 2021 vs Q4 2020
Net income was $2,559 million compared to $1,899 million. Adjusted net income was $2,716 million compared to $1,938 million, up 40%, due mainly to lower provision for credit losses as a result of a more favourable credit and macroeconomic outlook.
Q4 2021 vs Q3 2021
Net income was $2,559 million compared to $2,542 million. Adjusted net income was $2,716 million compared to $2,560 million, up 6%, due mainly to lower provision for credit losses, partially offset by lower revenues.
Total revenue
Q4 2021 vs Q4 2020
Revenues were $7,687 million, an increase of $182 million or 2%, due mainly to higher non-interest income, partially offset by lower net interest income.
Q4 2021 vs Q3 2021
Revenues were $7,687 million, a decrease of $70 million or 1%, due mainly to lower non-interest income.
Net interest income
Q4 2021 vs Q4 2020
Net interest income was $4,217 million, a decrease of $41 million or 1%. Strong mortgage and commercial loan growth was more than offset by the 3% negative impact of foreign currency translation, lower corporate and unsecured lending balances, and margin compression.
2021 Scotiabank Annual Report | 39
Table of Contents
Management’s Discussion and Analysis
The net interest margin was down five basis points to 2.17%, driven primarily by lower margins in International and Canadian Banking related to changes in business mix and the impact of central bank rate cuts in 2020, partly offset by decreased levels of high quality, lower-margin liquid assets.
Q4 2021 vs Q3 2021
Net interest income was in line with the prior quarter. Loan growth across all business lines was offset by lower margins and the negative impact of foreign currency translation.
The net interest margin of 2.17% was down six basis points due primarily to a lower contribution from asset/liability management activities, as well as lower margins driven by changes in business mix.
Non-interest income
Q4 2021 vs Q4 2020
Non-interest income was $3,470 million, up $223 million or 7%. This was due mainly to higher banking and wealth management revenues, income from associated corporations, and higher investment gains. These were partly offset by lower fixed income trading revenues.
Q4 2021 vs Q3 2021
Non-interest income was down $70 million or 2%. This was due mainly to lower trading revenues and underwriting and advisory fees, which were partially offset by higher income from associated corporations, wealth management revenues, and insurance income.
Provision for credit losses
Q4 2021 vs Q4 2020
The provision for credit losses was $168 million, compared to $1,131 million, a decrease of $963 million or 85%. The provision for credit losses ratio decreased 63 basis points to 10 basis points.
The provision for credit losses on performing loans was a net reversal of $343 million, a decrease of $639 million. Retail provisions decreased by $364 million, while commercial and corporate loan provisions decreased by $275 million across all business lines. These decreases were driven by the more favourable credit and macroeconomic outlook.
The provision for credit losses on impaired loans was $511 million, compared to $835 million, a decrease of $324 million or 39%, due primarily to lower retail provisions driven by lower credit migration across markets. Commercial and corporate loan provisions decreased $96 million across all business lines driven by lower formations. The provision for credit losses ratio on impaired loans was 31 basis points, a decrease of 23 basis points.
Q4 2021 vs Q3 2021
The provision for credit losses was $168 million, compared to $380 million, a decrease of $212 million. The provision for credit losses ratio decreased 14 basis points to 10 basis points.
The provision for credit losses on performing loans was a net reversal of $343 million, compared to a net reversal of $461 million last quarter. Approximately $320 million of the provision reversals this quarter was due to reduction of allowances built in the prior year, reflecting the improvement in credit quality and more favourable macroeconomic outlook. The remaining reversal of $23 million was due to credit migration, the majority of which was to impaired loans in the retail portfolio, mainly in International Banking.
The provision for credit losses on impaired loans was $511 million, compared to $841 million, a decrease of $330 million or 39%, due primarily to lower retail provisions, mainly in International Banking, driven by lower credit migration. The provision for credit losses ratio on impaired loans was 31 basis points, a decrease of 22 basis points.
Non-interest expenses
Q4 2021 vs Q4 2020
Non-interest expenses were $4,271 million, up $214 million or 5% including $188 million related to restructuring and other provisions. Adjusted non-interest expenses of $4,058 million increased 1%. The increase was due to higher performance-based compensation, professional fees, advertising and technology-related costs to support business growth. Partly offsetting were the positive impact of foreign currency translation, lower personnel and premises costs.
The productivity ratio was 55.6% compared to 54.1%. On an adjusted basis, the productivity ratio was 52.8% compared to 53.3%.
Q4 2021 vs Q3 2021
Non-interest expenses were up $174 million or 4% including $188 million related to restructuring and other provisions. Adjusted non-interest expenses were in line with prior quarter. Lower performance-based compensation and other employee benefits expenses were offset by increases in advertising and business development, professional fees and share-based compensation expenses.
The productivity ratio was 55.6% compared to 52.8%. On an adjusted basis, the productivity ratio was 52.8% compared to 52.5%.
Provision for income taxes
Q4 2021 vs Q4 2020
The effective tax rate was 21.2% compared to 18.0% in the same quarter last year. On an adjusted basis, the effective tax rate was 21.5% compared to 18.2% due primarily to changes in business and earnings mix across jurisdictions.
Q4 2021 vs Q3 2021
The effective tax rate was 21.2% compared to 22.5% in the previous quarter. On an adjusted basis, the effective tax rate was 21.5% compared to 22.5% in the previous quarter due primarily to changes in business and earnings mix across jurisdictions.
40 | 2021 Scotiabank Annual Report
Table of Contents
Management’s Discussion and Analysis | Group Financial Performance
T17 Quarterly financial highlights
For the three months ended | ||||||||||||||||||||||||||||||||
($ millions) | October 31 2021 | July 31 2021 | April 30 2021 | January 31 2021 | October 31 2020 | July 31 2020 | April 30 2020 | January 31 2020 | ||||||||||||||||||||||||
Reported results | ||||||||||||||||||||||||||||||||
Net interest income | $ | 4,217 | $ | 4,217 | $ | 4,176 | $ | 4,351 | $ | 4,258 | $ | 4,253 | $ | 4,417 | $ | 4,392 | ||||||||||||||||
Non-interest income | 3,470 | 3,540 | 3,560 | 3,721 | 3,247 | 3,481 | 3,539 | 3,749 | ||||||||||||||||||||||||
Total revenue | $ | 7,687 | $ | 7,757 | $ | 7,736 | $ | 8,072 | $ | 7,505 | $ | 7,734 | $ | 7,956 | $ | 8,141 | ||||||||||||||||
Provision for credit losses | 168 | 380 | 496 | 764 | 1,131 | 2,181 | 1,846 | 926 | ||||||||||||||||||||||||
Non-interest expenses | 4,271 | 4,097 | 4,042 | 4,208 | 4,057 | 4,018 | 4,363 | 4,418 | ||||||||||||||||||||||||
Income tax expense | 689 | 738 | 742 | 702 | 418 | 231 | 423 | 471 | ||||||||||||||||||||||||
Net income | $ | 2,559 | $ | 2,542 | $ | 2,456 | $ | 2,398 | $ | 1,899 | $ | 1,304 | $ | 1,324 | $ | 2,326 | ||||||||||||||||
Basic earnings per share ($) | 1.98 | 2.00 | 1.89 | 1.87 | 1.44 | 1.10 | 1.03 | 1.86 | ||||||||||||||||||||||||
Diluted earnings per share ($) | 1.97 | 1.99 | 1.88 | 1.86 | 1.42 | 1.04 | 1.00 | 1.84 | ||||||||||||||||||||||||
Net interest margin (%)(1) | 2.17 | 2.23 | 2.26 | 2.27 | 2.22 | 2.10 | 2.35 | 2.45 | ||||||||||||||||||||||||
Effective tax rate (%)(2) | 21.2 | 22.5 | 23.2 | 22.7 | 18.0 | 15.1 | 24.2 | 16.8 | ||||||||||||||||||||||||
Adjusted results(1) | ||||||||||||||||||||||||||||||||
Adjusted net income | $ | 2,716 | $ | 2,560 | $ | 2,475 | $ | 2,418 | $ | 1,938 | $ | 1,308 | $ | 1,371 | $ | 2,344 | ||||||||||||||||
Adjusted diluted earnings per share | $ | 2.10 | $ | 2.01 | $ | 1.90 | $ | 1.88 | $ | 1.45 | $ | 1.04 | $ | 1.04 | $ | 1.83 |
(1) | Refer to page 17 for a discussion of non-GAAP measures. |
(2) | Refer to Glossary on page 141 for the description of the measure. |
Earnings have been trending upwards after initial reductions in net income due to the impact of the COVID-19 pandemic. Results this quarter increased both quarter over quarter and year over year, mainly driven by lower loan loss provision as a result of more favourable macroeconomic conditions. The results in 2020 were negatively impacted by COVID-19 which resulted in significantly higher provision for credit losses and lower personal and commercial revenue, partly offset by strong capital markets results.
Canadian Banking results have improved every quarter during 2021, driven by improved revenue growth, ongoing expense management and lower loan loss provisions, as a result of a more favourable macroeconomic outlook and lower net writeoffs. Results in 2020 reflected the impact of COVID-19, with higher loan loss provisions, lower fee revenue and lower net interest margins from central bank rate cuts.
International Banking results have reflected improvements in every quarter of 2021 compared to the negative impacts of the pandemic during 2020, as well as reductions due to divested operations. Loan losses have normalized, and expense remain well controlled, driven by cost management initiatives. Margins remain under pressure due to the economic environment and central bank rate cuts in 2020.
Global Wealth Management has delivered strong earnings growth in recent quarters. Revenue increases were driven by strong sales momentum and elevated levels of market activity in the Canadian asset management and wealth advisory businesses. Expense growth in recent quarters was due largely to high volume-driven expenses.
Global Banking and Markets results are driven mainly by market conditions that impact client activity in the corporate and investment banking and capital markets businesses. Following the onset of the COVID-19 pandemic, 2020 was characterized by elevated levels of market volatility. Capital markets businesses benefited from these market conditions as client activity increased. Corporate banking also benefited from strong growth in loan and deposit volumes. The results of the recent quarters reflect the normalization of capital markets business following elevated levels in 2020 and the exit of the metals business in 2021. This quarter’s results benefitted from loan loss reversals, driven by the more favourable macroeconomic outlook.
Provision for credit losses
The provision for credit losses decreased significantly during the period driven by releases of performing loan provisions due to improving macroeconomic and credit outlook across all portfolios. Impaired loan provisions also trended lower due to lower formations across markets.
Non-interest expenses
Non-interest expenses have been well controlled over the period, although certain quarters have been impacted by seasonality or adjusting items. This trend has been driven by the favourable impact of foreign currency translation and divested operations, and ongoing expense management and efficiency initiatives. Partly offsetting were higher performance-based compensation, technology-related costs to support business growth, the investment in the SCENE loyalty program and charges related to the metals business.
Provision for income taxes
The effective tax rate was 21.2% this quarter and averaged 20.5% over the period, with a range of 15.1% to 24.2%. Effective tax rates were impacted by divestitures, varying levels of provision for credit losses and net income earned in foreign jurisdictions, as well as the variability of tax-exempt dividend income.
2021 Scotiabank Annual Report | 41
Table of Contents
Management’s Discussion and Analysis
Business line results are presented on a taxable equivalent basis, adjusting for the following:
• | The Bank analyzes revenue on a taxable equivalent basis (TEB) for business lines. This methodology grosses up tax-exempt income earned on certain securities reported in either net interest income or non-interest income to an equivalent before tax basis. A corresponding increase is made to the provision for income taxes; hence, there is no impact on net income. Management believes that this basis for measurement provides a uniform comparability of net interest income and non-interest income arising from both taxable and non-taxable sources and facilitates a consistent basis of measurement. While other banks also use TEB, their methodology may not be comparable to the Bank’s methodology. A segment’s revenue and provision for income taxes are grossed up by the taxable equivalent amount. The elimination of the TEB gross up is recorded in the Other segment. |
• | For business line performance assessment and reporting, net income from associated corporations, which is an after-tax number, is adjusted to normalize for income taxes. The tax normalization adjustment grosses up the amount of net income from associated corporations and normalizes the effective tax rate in the business lines to better present the contribution of the associated corporations to the business line results. |
• | International Banking business segment results are analyzed on a constant dollar basis. Under constant dollar basis, prior period amounts are recalculated using current period average foreign currency rates thereby eliminating the impact of foreign currency translation. The Bank believes that reporting in constant dollar is useful for readers in assessing ongoing business performance. |
Below are the results of the Bank’s four business operating segments for 2021.
CANADIAN BANKING
Canadian Banking reported net income attributable to equity holders of $4,155 million in 2021, an increase of $1,619 million or 64% compared to prior year. Adjusted net income attributable to equity holders was $4,171 million, an increase of $1,567 million or 60%. The increase was due primarily to lower provision for credit losses and higher revenues driven by non-interest income and strong loan growth. Return on equity was 25.2% compared to 15.1% in the prior year. Adjusted return on equity was 25.3% compared to 15.5% in the prior year.
INTERNATIONAL BANKING
Net income attributable to equity holders was $1,823 million, an increase of $843 million. Adjusted net income attributable to equity holders was $1,855 million, an increase of $707 million. This increase was due largely to lower provision for credit losses and non-interest expenses partially offset by lower revenues, higher income taxes, the impact of divested operations, and the negative impact of foreign currency translation. Return on equity was 10.4% compared to 5.0% in the prior year. Adjusted return on equity was 10.6% compared to 5.8% in the prior year.
GLOBAL WEALTH MANAGEMENT
Net income attributable to equity holders was $1,565 million, an increase of $313 million or 25%. Adjusted net income attributable to equity holders increased $295 million or 23%. The increase was due primarily to higher mutual fund fees, brokerage revenues, and elevated performance fees, partially offset by higher volume related expenses. Return on equity was 16.7% compared to 13.5% in the prior year. Adjusted return on equity was 17.0% compared to 14.0% in the prior year.
GLOBAL BANKING AND MARKETS
Global Banking and Markets reported net income attributable to equity holders of $2,075 million, an increase of $120 million or 6% from last year. Adjusted net income attributable to equity holders increased by $41 million or 2%. Higher income in business banking, lower provision for credit losses, and lower expenses, were partly offset by lower income in capital markets. Return on equity was 16.5% compared to 14.8% last year. Adjusted return on equity was 16.5% compared to 15.4% last year.
42 | 2021 Scotiabank Annual Report
Table of Contents
Management’s Discussion and Analysis | Business Line Overview
KEY PERFORMANCE INDICATORS FOR ALL BUSINESS LINES
|
Management uses a number of key metrics to monitor business line performance: | ||||||||
• Net income
| • Return on equity | • Productivity ratio | • Provision for credit losses ratio |
T18 Financial performance – Reported
For the year ended October 31, 2021 ($ millions)(1) | Canadian Banking | International Banking | Global Wealth Management | Global Banking and Markets | Other(2) | Total | ||||||||||||||||||
Net interest income(3) | $ | 8,030 | $ | 6,625 | $ | 628 | $ | 1,436 | $ | 242 | $ | 16,961 | ||||||||||||
Non-interest income(3) | 2,868 | 2,993 | 4,752 | 3,587 | 91 | 14,291 | ||||||||||||||||||
Total revenue(3) | 10,898 | 9,618 | 5,380 | 5,023 | 333 | 31,252 | ||||||||||||||||||
Provision for credit losses | 333 | 1,574 | 2 | (100 | ) | (1 | ) | 1,808 | ||||||||||||||||
Non-interest expenses | 4,951 | 5,254 | 3,255 | 2,458 | 700 | 16,618 | ||||||||||||||||||
Provision for income taxes(3) | 1,459 | 635 | 549 | 590 | (362 | ) | 2,871 | |||||||||||||||||
Net income | $ | 4,155 | $ | 2,155 | $ | 1,574 | $ | 2,075 | $ | (4 | ) | $ | 9,955 | |||||||||||
Net income attributable to non-controlling interests in subsidiaries | – | 332 | 9 | – | (10 | ) | 331 | |||||||||||||||||
Net income attributable to equity holders of the Bank | $ | 4,155 | $ | 1,823 | $ | 1,565 | $ | 2,075 | $ | 6 | $ | 9,624 | ||||||||||||
Return on equity(%)(4) | 25.2 | % | 10.4 | % | 16.7 | % | 16.5 | % | – | % | 14.7 | % | ||||||||||||
Total average assets ($ billions) | $ | 381 | $ | 194 | $ | 29 | $ | 401 | $ | 152 | $ | 1,157 | ||||||||||||
Total average liabilities ($ billions) | $ | 313 | $ | 149 | $ | 45 | $ | 385 | $ | 193 | $ | 1,085 |
(1) | The amounts for the years ended October 31, 2021 and October 31, 2020 have been prepared in accordance with IFRS 16; prior year amounts have not been restated. |
(2) | The Other category represents smaller operating segments, including Group Treasury, and other corporate adjustments that are not allocated to an operating segment. Corporate adjustments include the net residual in matched maturity transfer pricing, the elimination of the tax-exempt income gross-up reported in net interest income, non-interest income and provision for income taxes, and differences in the actual amount of costs incurred and charged to the operating segments. |
(3) | Taxable equivalent basis. Refer to Glossary. |
(4) | Refer to Non-GAAP Measures on page 17 for the description of the measure. |
For the year ended October 31, 2020 ($ millions) | Canadian Banking | International Banking | Global Wealth Management | Global Banking and Markets | Other(1) | Total | ||||||||||||||||||
Net interest income(2) | $ | 7,838 | $ | 7,603 | $ | 575 | $ | 1,435 | $ | (131 | ) | $ | 17,320 | |||||||||||
Non-interest income(2) | 2,461 | 3,207 | 4,009 | 3,947 | 392 | 14,016 | ||||||||||||||||||
Total revenue(2) | 10,299 | 10,810 | 4,584 | 5,382 | 261 | 31,336 | ||||||||||||||||||
Provision for credit losses | 2,073 | 3,613 | 7 | 390 | 1 | 6,084 | ||||||||||||||||||
Non-interest expenses | 4,811 | 5,943 | 2,878 | 2,473 | 751 | 16,856 | ||||||||||||||||||
Provision for income taxes(2) | 879 | 182 | 437 | 564 | (519 | ) | 1,543 | |||||||||||||||||
Net income | $ | 2,536 | $ | 1,072 | $ | 1,262 | $ | 1,955 | $ | 28 | $ | 6,853 | ||||||||||||
Net income attributable to non-controlling interests in subsidiaries | – | 92 | 10 | – | (27 | ) | 75 | |||||||||||||||||
Net income attributable to equity holders of the Bank | $ | 2,536 | $ | 980 | $ | 1,252 | $ | 1,955 | $ | 55 | $ | 6,778 | ||||||||||||
Return on equity(%)(3) | 15.1 | % | 5.0 | % | 13.5 | % | 14.8 | % | – | % | 10.4 | % | ||||||||||||
Total average assets ($ billions) | $ | 359 | $ | 206 | $ | 26 | $ | 412 | $ | 158 | $ | 1,161 | ||||||||||||
Total average liabilities ($ billions) | $ | 277 | $ | 155 | $ | 39 | $ | 379 | $ | 240 | $ | 1,090 |
(1) | The Other category represents smaller operating segments, including Group Treasury, and other corporate adjustments that are not allocated to an operating segment. Corporate adjustments include the net residual in matched maturity transfer pricing, the elimination of the tax-exempt income gross-up reported in net interest income, non-interest income and provision for income taxes, and differences in the actual amount of costs incurred and charged to the operating segments. |
(2) | Taxable equivalent basis. Refer to Glossary. |
(3) | Refer to Non-GAAP Measures on page 17 for the description of the measure. |
2021 Scotiabank Annual Report | 43
Table of Contents
Management’s Discussion and Analysis
For the year ended October 31, 2019 ($ millions) | Canadian Banking | International Banking | Global Wealth Management | Global Banking and Markets | Other(1) | Total | ||||||||||||||||||
Net interest income(2) | $ | 7,848 | $ | 8,353 | $ | 564 | $ | 1,396 | $ | (984 | ) | $ | 17,177 | |||||||||||
Non-interest income(2) | 2,616 | 4,366 | 3,937 | 3,084 | (146 | ) | 13,857 | |||||||||||||||||
Total revenue(2) | 10,464 | 12,719 | 4,501 | 4,480 | (1,130 | ) | 31,034 | |||||||||||||||||
Provision for credit losses | 972 | 2,076 | – | (22 | ) | 1 | 3,027 | |||||||||||||||||
Non-interest expenses | 4,772 | 6,596 | 2,905 | 2,463 | 1 | 16,737 | ||||||||||||||||||
Provision for income taxes(2) | 1,232 | 909 | 412 | 505 | (586 | ) | 2,472 | |||||||||||||||||
Net income | $ | 3,488 | $ | 3,138 | $ | 1,184 | $ | 1,534 | $ | (546 | ) | $ | 8,798 | |||||||||||
Net income attributable to non-controlling interests in subsidiaries | – | 373 | 18 | – | 17 | 408 | ||||||||||||||||||
Net income attributable to equity holders of the Bank | $ | 3,488 | $ | 2,765 | $ | 1,166 | $ | 1,534 | $ | (563 | ) | $ | 8,390 | |||||||||||
Return on equity(%)(3) | 23.2 | % | 13.2 | % | 12.7 | % | 13.3 | % | – | % | 13.1 | % | ||||||||||||
Total average assets ($ billions) | $ | 340 | $ | 201 | $ | 25 | $ | 372 | $ | 118 | $ | 1,056 | ||||||||||||
Total average liabilities ($ billions) | $ | 255 | $ | 153 | $ | 32 | $ | 304 | $ | 243 | $ | 987 |
(1) | The Other category represents smaller operating segments, including Group Treasury, and other corporate adjustments that are not allocated to an operating segment. Corporate adjustments include the net residual in matched maturity transfer pricing, the elimination of the tax-exempt income gross-up reported in net interest income, non-interest income and provision for income taxes, and differences in the actual amount of costs incurred and charged to the operating segments. |
(2) | Taxable equivalent basis. Refer to Glossary. |
(3) | Refer to Non-GAAP Measures on page 17 for the description of the measure. |
T18A Financial performance – Adjusted
For the year ended October 31, 2021 ($ millions)(1) | Canadian Banking | International Banking | Global Wealth Management | Global Banking and Markets | Other | Total | ||||||||||||||||||
Net interest income | $ | 8,030 | $ | 6,625 | $ | 628 | $ | 1,436 | $ | 242 | $ | 16,961 | ||||||||||||
Non-interest income | 2,868 | 2,993 | 4,752 | 3,587 | 91 | 14,291 | ||||||||||||||||||
Total revenue | 10,898 | 9,618 | 5,380 | 5,023 | 333 | 31,252 | ||||||||||||||||||
Provision for credit losses | 333 | 1,574 | 2 | (100 | ) | (1 | ) | 1,808 | ||||||||||||||||
Non-interest expenses | 4,929 | 5,209 | 3,219 | 2,458 | 512 | 16,327 | ||||||||||||||||||
Provision for income taxes | 1,465 | 648 | 558 | 590 | (313 | ) | 2,948 | |||||||||||||||||
Net income | $ | 4,171 | $ | 2,187 | $ | 1,601 | $ | 2,075 | $ | 135 | $ | 10,169 | ||||||||||||
Net income attributable to non-controlling interests in subsidiaries | �� | 332 | 9 | – | – | 341 | ||||||||||||||||||
Net income attributable to equity holders of the Bank | $ | 4,171 | $ | 1,855 | $ | 1,592 | $ | 2,075 | $ | 135 | $ | 9,828 |
(1) | Refer to Non-GAAP Measures on page 17 for the description of the adjustments. |
For the year ended October 31, 2020 ($ millions)(1) | Canadian Banking | International Banking | Global Wealth Management | Global Banking and Markets | Other | Total | ||||||||||||||||||
Net interest income | $ | 7,838 | $ | 7,603 | $ | 575 | $ | 1,435 | $ | (131 | ) | $ | 17,320 | |||||||||||
Non-interest income | 2,461 | 3,207 | 4,009 | 4,049 | 93 | 13,819 | ||||||||||||||||||
Total revenue | 10,299 | 10,810 | 4,584 | 5,484 | (38 | ) | 31,139 | |||||||||||||||||
Provision for credit losses | 2,002 | 3,536 | 6 | 384 | 1 | 5,929 | ||||||||||||||||||
Non-interest expenses | 4,789 | 5,742 | 2,818 | 2,473 | 692 | 16,514 | ||||||||||||||||||
Provision for income taxes | 904 | 260 | 453 | 593 | (475 | ) | 1,735 | |||||||||||||||||
Net income | $ | 2,604 | $ | 1,272 | $ | 1,307 | $ | 2,034 | $ | (256 | ) | $ | 6,961 | |||||||||||
Net income attributable to non-controlling interests in subsidiaries | – | 124 | 10 | – | 1 | 135 | ||||||||||||||||||
Net income attributable to equity holders of the Bank | $ | 2,604 | $ | 1,148 | $ | 1,297 | $ | 2,034 | $ | (257 | ) | $ | 6,826 |
(1) | Refer to Non-GAAP Measures on page 17 for the description of the adjustments. |
For the year ended October 31, 2019 ($ millions)(1) | Canadian Banking | International Banking | Global Wealth Management | Global Banking and Markets | Other | Total | ||||||||||||||||||
Net interest income | $ | 7,848 | $ | 8,353 | $ | 564 | $ | 1,396 | $ | (984 | ) | $ | 17,177 | |||||||||||
Non-interest income | 2,616 | 4,366 | 3,937 | 3,084 | (19 | ) | 13,984 | |||||||||||||||||
Total revenue | 10,464 | 12,719 | 4,501 | 4,480 | (1,003 | ) | 31,161 | |||||||||||||||||
Provision for credit losses | 972 | 1,925 | – | (22 | ) | 1 | 2,876 | |||||||||||||||||
Non-interest expenses | 4,750 | 6,390 | 2,839 | 2,463 | (20 | ) | 16,422 | |||||||||||||||||
Provision for income taxes | 1,238 | 1,012 | 429 | 505 | (730 | ) | 2,454 | |||||||||||||||||
Net income | $ | 3,504 | $ | 3,392 | $ | 1,233 | $ | 1,534 | $ | (254 | ) | $ | 9,409 | |||||||||||
Net income attributable to non-controlling interests in subsidiaries | – | 439 | 18 | – | 1 | 458 | ||||||||||||||||||
Net income attributable to equity holders of the Bank | $ | 3,504 | $ | 2,953 | $ | 1,215 | $ | 1,534 | $ | (255 | ) | $ | 8,951 |
(1) | Refer to Non-GAAP Measures on page 17 for the description of the adjustments. |
44 | 2021 Scotiabank Annual Report
Table of Contents
Management’s Discussion and Analysis | Canadian Banking
2021 Achievements | ||||
Accelerated business performance
• Achieved strong growth in Business Banking by expanding the frontline team, digitizing the end-to-end credit process and launching client insights and pricing platforms to enable its salesforce.
• Reported record mortgage originations, driven in part by continued channel diversification via an expanded Home Financing Advisor team.
• Expanded programs across all channels to better support mortgage and GIC renewals, as well as leveraged the Scotia Total Equity Plan (STEP) to deepen customer relationships.
• Launched Scotia SelectPay, a new payment solution for Scotiabank credit cards that provides customers with the option to convert purchases made on their credit card into smaller installment payments.
• Launched the Global ETF Portfolios in Tangerine, a new offering that provides customers with simple digital and low-cost investment options.
Winning team culture
• Recognized as one of the Best Workplaces™ in Canada by Great Place to Work®.
• Recognized on Refinitiv’s 2021 Global List of Top 25 Most Diverse and Inclusive Companies.
• The Scotiabank Women Initiative exceeded its commitment to deploy $3 billion in capital to women-led businesses in Canada.
• Awarded the Most Innovative in Data by The Banker’s Global Innovation in Digital Banking Awards 2021, for the second year in a row, recognizing our commitment to use data and analytics to help serve our customers.
• Announced a landmark commitment to Windmill Microlending with a donation of $2.5 million as part of the ScotiaRISE program, which will be directed toward programs that support professionally skilled women immigrants.
Superior customer experience
• Scotiabank ranked #1 in J.D. Power 2021 Canada Online Banking Satisfaction Study for second year in a row, a testament to our commitment to delivering the best customer experience, and focus on fast, easy-to-use and secure online banking services.
• Tangerine ranked #1 in J.D. Power 2021 Canada Retail Banking Satisfaction Study for 10th year in a row.
• ScotiaAdvice+ enhanced our ability to provide comprehensive, relevant advice that is accessible across channels, through a more streamlined customer experience.
• Launched C.MEE, an AI-driven technology that leverages data to enable more positive customer experiences, by analyzing data across customer touchpoints to provide the most relevant advice for our customers.
Digital enablement
• Continued progress with a steady increase in both digital adoption (59% and up 400 bps year-over-year) and unit sales (up 19% over the past year), as well as active digital and mobile users (up 220,000 and 320,000 users, respectively, over the past year).
• Expanded customer digital enablement tools to provide customers more banking options, such as online appointment booking, enhancements to digital mortgage renewals and virtual engagement capabilities with advisors.
• New streamlined business banking front-line technologies aimed to empower relationship managers to have more meaningful client interactions.
Scale our unique partnerships and assets
• Partnered further with Cineplex to bring together the benefits of SCENE with the Scotia Rewards loyalty program, better positioning the Bank for future expansion by providing opportunities for customer and partner expansion.
• Scotiabank was proud to work alongside MLSE, Team Toronto, the City of Toronto and other vaccination partners to host the “Our Winning Shot” clinic at Scotiabank Arena, with a record-breaking 26,000 Canadians vaccinated in a single day.
|
Business Profile
Canadian Banking provides a full suite of financial advice and banking solutions, supported by an excellent customer experience, to over 10 million Retail, Small Business and Commercial Banking customers. It serves these customers through its network of 954 branches and 3,766 automated banking machines (ABMs), as well as online, mobile and telephone banking, and specialized sales teams. Canadian Banking also provides an alternative self-directed banking solution to over 2 million Tangerine Bank customers. Canadian Banking is comprised of the following areas:
• | Retail banking provides financial advice and solutions along with day-to-day banking products, including debit cards, chequing accounts, credit cards, investments, mortgages, loans and related creditor insurance products to retail customers. Tangerine Bank provides day-to-day banking products, including chequing and saving accounts, credit cards, mortgages, loans and investments to self-directed customers. |
• | Business banking delivers advice and a full suite of lending, deposit, cash management and trade finance solutions to small, medium and large businesses, including automotive dealers and their customers to whom we provide retail automotive financing solutions. |
Strategy
Canadian Banking continued to prioritize providing customer and employee support initiatives throughout 2021. This included focusing on the health and safety of both customers and employees, supporting Retail and Business Banking customers financially, while delivering accelerated revenue and earnings growth to solidify our top 3 position in Canada across key market share measures.
Canadian Banking will continue to execute its long-term strategy to deliver stable and consistent earnings, including businesses and products that deliver higher returns on equity. Our ongoing efforts focus on building stronger relationships with our customers to increase engagement and
2021 Scotiabank Annual Report | 45
Table of Contents
Management’s Discussion and Analysis
loyalty, investing in digital and analytics capabilities to understand and anticipate customer needs, and developing a high-quality and diverse team of Scotiabank employees.
2022 Priorities
• | Deliver on our strategic initiatives: Continue to deliver consistent and stable long-term earnings growth by enhancing our return on equity across Retail, Business Banking and Tangerine. |
• | Deliver a differentiated customer experience: Progress toward becoming the #1 bank for our customers, by providing differentiated focus, service, and advice to drive deeper relationships, loyalty and customer engagement. |
• | Strengthen our winning team culture: Continue to instill a winning and inclusive culture, with a focus on prioritizing customers and improving sustainable business performance, further strengthening our RESULTS-driven engagement (RESULTS: Revenue, Earnings, Simplify, Urgency, Listen, Trust, Support). |
• | Diversity & Inclusion: Continue to build an inclusive workplace where our employees from all backgrounds can thrive. |
• | Accelerate data & analytics, technology, and digital capabilities: Strengthen capabilities across data, technology and digital to support salesforce enablement, customer self-serve and assisted experiences, and insight-driven reporting and decision-making. |
• | Leverage unique partnerships and assets: Further utilize and expand our dynamic long-term partnerships and assets, including MLSE, SCENE+ loyalty program, and our Wealth businesses, to generate customer awareness, engagement and growth across the Canadian Banking franchise. |
T19 Canadian Banking financial performance
($ millions) | 2021(1) | 2020(1) | 2019(2) | |||||||||
Reported results | ||||||||||||
Net interest income(3) | $ | 8,030 | $ | 7,838 | $ | 7,848 | ||||||
Non-interest income(3)(4) | 2,868 | 2,461 | 2,616 | |||||||||
Total revenue(3) | 10,898 | 10,299 | 10,464 | |||||||||
Provision for credit losses | 333 | 2,073 | 972 | |||||||||
Non-interest expenses | 4,951 | 4,811 | 4,772 | |||||||||
Income tax expense | 1,459 | 879 | 1,232 | |||||||||
Net income | $ | 4,155 | $ | 2,536 | $ | 3,488 | ||||||
Net income attributable to non-controlling interests in subsidiaries | – | – | – | |||||||||
Net income attributable to equity holders of the Bank | $ | 4,155 | $ | 2,536 | $ | 3,488 | ||||||
Key ratios and other financial data | ||||||||||||
Return on equity(5) | 25.2 | % | 15.1 | % | 23.2 | % | ||||||
Productivity(3)(6) | 45.4 | % | 46.7 | % | 45.6 | % | ||||||
Net interest margin(5) | 2.23 | % | 2.30 | % | 2.41 | % | ||||||
Provision for credit losses – performing (Stages 1 and 2) | $ | (357 | ) | $ | 943 | $ | (2 | ) | ||||
Provision for credit losses – impaired (Stage 3) | $ | 690 | $ | 1,130 | $ | 974 | ||||||
Provision for credit losses as a percentage of average net loans and acceptances(6) | 0.09 | % | 0.59 | % | 0.29 | % | ||||||
Provision for credit losses on impaired loans as a percentage of average net loans and acceptances(6) | 0.18 | % | 0.32 | % | 0.29 | % | ||||||
Net write-offs as a percentage of average net loans and acceptances(6) | 0.19 | % | 0.29 | % | 0.29 | % | ||||||
Selected Consolidated Statement of Financial Position data (average balances) | ||||||||||||
Earning assets(5) | $ | 376,670 | $ | 354,669 | $ | 336,813 | ||||||
Total assets | 380,772 | 358,770 | 340,171 | |||||||||
Deposits | 294,499 | 261,172 | 241,944 | |||||||||
Total liabilities | 313,028 | 276,774 | 255,255 |
(1) | The amounts for the years ended October 31, 2021 and October 31, 2020 have been prepared in accordance with IFRS 16; prior year amounts have not been restated. |
(2) | The amounts for the year ended October 31, 2019 have been restated to reflect the impact of the establishment of Global Wealth Management as a separate business segment. |
(3) | Taxable equivalent basis (TEB). |
(4) | Includes net income from investments in associated corporations of $87 (2020 – $56; 2019 – $65). |
(5) | Refer to Non-GAAP Measures on page 17 for the description of the measure. |
(6) | Refer to Glossary on page 141 for the description of the measure. |
T19A Adjusted Canadian Banking financial performance(1)
($ millions) | 2021 | 2020 | 2019 | |||||||||
Adjusted results | ||||||||||||
Net interest income | $ | 8,030 | $ | 7,838 | $ | 7,848 | ||||||
Non-interest income | 2,868 | 2,461 | 2,616 | |||||||||
Total revenue | 10,898 | 10,299 | 10,464 | |||||||||
Provision for credit losses(2) | 333 | 2,002 | 972 | |||||||||
Non-interest expenses(3) | 4,929 | 4,789 | 4,750 | |||||||||
Income before taxes | 5,636 | 3,508 | 4,742 | |||||||||
Income tax expense | 1,465 | 904 | 1,238 | |||||||||
Net income | $ | 4,171 | $ | 2,604 | $ | 3,504 | ||||||
Net income attributable to non-controlling interests in subsidiaries (NCI) | – | – | – | |||||||||
Net income attributable to equity holders | $ | 4,171 | $ | 2,604 | $ | 3,504 |
(1) | Refer to Non-GAAP Measures on page 17 for the description of the adjustments. |
(2) | Includes adjustment for Allowance for credit losses – Additional scenario of $71 in the first quarter of 2020. |
(3) | Includes adjustment for Amortization of acquisition-related intangible assets, excluding software, of $22 (2020 – $22; 2019 – $22). |
46 | 2021 Scotiabank Annual Report
Table of Contents
Management’s Discussion and Analysis | Canadian Banking
Financial Performance
Net income
Net income attributable to equity holders was $4,155 million, an increase of $1,619 million or 64%. Adjusted net income attributable to equity holders was $4,171 million, an increase of $1,567 million or 60%. The increase was due primarily to lower provision for credit losses and higher revenues, partly offset by higher non-interest expenses.
Average assets and liabilities
Average assets increased $22 billion or 6% to $381 billion. The growth included $21 billion or 10% in residential mortgages and $4 billion or 7% in business loans and acceptances, partially offset by declines of $2 billion or 3% in personal loans and $1 billion or 14% in credit cards.
Average liabilities increased $36 billion or 13% to $313 billion. The growth included $21 billion or 25% in non-personal deposits and $12 billion or 7% in personal deposits.
Revenues
Revenues of $10,898 million increased $599 million or 6%, due to higher non-interest income and net interest income.
Net interest income
Net interest income of $8,030 million increased $192 million or 2%, due primarily to strong loan and deposit growth, partially offset by margin compression. The net interest margin declined seven basis points to 2.23%, primarily driven by changes in business mix and Bank of Canada interest rate cuts in 2020.
Non-interest income
Non-interest income of $2,868 million increased $407 million or 17%. The increase was due primarily to higher banking revenue, elevated private equity gains, and increased mutual fund distribution fees and income from associated corporations.
Retail Banking
Total retail banking revenues were $7,268 million, an increase of $297 million or 4%. Net interest income increased $83 million or 2%, primarily driven by strong volume growth partially offset by margin compression. Non-interest income increased $214 million or 13%, due primarily to higher banking revenue, mutual fund distribution fees, and income from associated corporations.
Business Banking
Total business banking revenues increased $302 million or 9% to $3,630 million. Net interest income increased $109 million or 4% due primarily to growth in business operating accounts, partially offset by margin compression. Non-interest income increased $193 million or 25% due primarily to higher credit fees, elevated private equity gains and increased card revenue.
Non-interest expenses
Non-interest expenses were $4,951 million, up $140 million or 3%, driven mainly by higher technology costs to support business development and higher personnel costs.
Provision for credit losses
The provision for credit losses was $333 million, compared to $2,073 million last year, a decrease of $1,740 million. Adjusted provision for credit losses decreased by $1,669 million. The provision for credit losses ratio was nine basis points, a decrease of 50 basis points. Adjusted provision for credit losses ratio decreased by 48 basis points.
Provision for credit losses on performing loans was a net reversal of $357 million, a decrease of $1,300 million. Adjusted provision for credit losses on performing loans decreased $1,233 million of which $772 million was related to retail and $461 million to commercial. These decreases were driven by the more favourable credit and macroeconomic outlook.
Provision for credit losses on impaired loans was $690 million, a decrease of $440 million. Adjusted provision for credit losses on impaired loans decreased $436 million, due primarily to lower retail provisions driven by lower delinquency. The provision for credit losses ratio on impaired loans was 18 basis points, a decrease of 14 basis points. Adjusted provision for credit losses ratio also decreased by 14 basis points.
Provision for income taxes
The effective tax rate was 26.0% compared to 25.7% in the prior year.
Outlook
Canadian Banking growth is expected to be broad based and supported by improving economic conditions and a rising interest rate environment. Overall asset growth in both retail banking and commercial lending segments is expected to remain strong, with deposit growth moderating from pandemic-influenced highs. Revenue growth is expected to be driven by strong loan growth and higher fee income, while the net interest margin is expected to improve modestly throughout 2022. Provision for credit losses is expected to remain low. Canadian Banking is expected to generate positive operating leverage by maintaining strong expense discipline while continuing to invest in strategic initiatives.
C6 | Total revenue |
C7 | Total revenue by sub-segment $ millions |
C8 | Average loans and acceptances $ billions |
2021 Scotiabank Annual Report | 47
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Management’s Discussion and Analysis
2021 Achievements | ||||
Improved Business Performance
• Captured business opportunities as economies rebounded.
• Delivered strong mortgage growth, followed by positive momentum in commercial lending in the second half of the year.
• Continued improvement in Credit quality, achieving a PCL ratio below pre-COVID levels.
• Prudently managed our expenses supported by significant digital progress and lower Retail distribution cost.
Accelerate Growth Drivers
• In Corporate & Commercial, maintained #1 position in syndicated loans in Latin America and #1 position in Mexico, Peru, Chile and Colombia; received three awards recognizing our performance: Lead Manager of the Year for Social Bonds, Sustainability-linked Bond of the Year from Environmental Finance, and LatAm Power Deal of the Year from Project Finance International.
• Strengthened the strategic partnership in Insurance with BNP Paribas Cardif to provide integrated solutions in the Pacific Alliance countries. The partnership launched 16+ new products including Health in Mexico, Home in Chile, and Life in Peru and Colombia.
Winning Team Culture
• Recognized as the #1 Best Workplace among Financial Services in Latin America by Great Place to Work.
• Recognized as a Top 10 Great Place to Work in 6 countries: Mexico, Chile, Panama, Costa Rica, Dominican Republic and Uruguay.
• Certified in Chile by EquidadCL as a Top Workplace for LGBTQ+ employees for the third year in a row.
• Certified in Peru by PRESENTE as a Top Workplace for LGBTQ+ Employees.
• Awarded a Bronze Lion in Peru at the Cannes Lions International Festival for campaigns on Gender Equality.
Focused Customer Strategy
• Significant progress towards Leading in Customer Experience; Net Promoter Scores (NPS) rebounded to exceed pre-COVID levels across most of our channels and regions.
• Exceeded or met the market in NPS improvements in our key markets.
Accelerate Digital Transformation
• Strong digital progress across the Pacific Alliance: achieved 55% Digital sales, 52% Digital adoption, and 88% Self-Serve Transactions, with a total of 3.9 million Digital customers and 3.3 million mobile customers.
• Scotiabank was recognized as the Most Innovative in Data by The Banker’s Global Innovation in Digital Banking Awards 2021 and Best Digital Initiative in Chile by World Economic Magazine.
• Autonomous Research placed Scotiabank in the top “Sweet Spot – Long Term Winners” quadrant in their annual Digital Banking survey, placing Scotiabank as a top bank among ~60 global peers which achieved significant digital progress during the pandemic.
• Positive customer experience feedback on our new digital offerings including a partnership with Mercado Libre to provide online mortgages in Chile, Digital account opening through branches in Mexico, Digital Fraud Insurance for savings accounts in Colombia, and QR payment and biometric log-in via mobile app in Peru.
• Continued to leverage Digital to capture efficiencies and optimize distribution cost which resulted in a 3% Y/Y reduction in expenses.
|
Business Profile
International Banking is a strong and diverse franchise with nearly 10 million Retail, Corporate and Commercial customers. The geographical footprint encompasses the Pacific Alliance countries of Mexico, Colombia, Peru and Chile, as well as Central America, the Caribbean, and Uruguay. The Bank is well positioned in the Pacific Alliance, providing the connectivity to do business across the Americas through Corporate Banking and Digital leadership. Our core markets in the Pacific Alliance countries demonstrate attractive demographics, opportunity to grow banking penetration, and strong connectivity with Canada and the U.S.
Strategy
As economies in the region rebounded throughout the year, International Banking launched a series of initiatives to strengthen the business, recover profitability, and invest across our footprint to develop its full potential.
Underpinning the long-term strategy is the focus on being the preferred choice for customers, leveraging digital engagement to deliver superior customer experiences, while driving operational efficiency and outpacing the competition in priority businesses, enabled by a diverse and talented winning team.
2022 Priorities
• | Maintain momentum in business performance: Accelerate revenue growth, aligned with the macroenvironment, driven by balanced asset growth and fee income, while actively managing expenses. |
• | Accelerate growth drivers: Outpace the competition by continuing to develop our Retail franchise with a focus on affluent customers and acceleration of the Insurance business, growing our Corporate, Commercial, and Capital Markets businesses in the Pacific Alliance, and scaling the Wealth business in close collaboration with Global Wealth Management. |
• | Lead in Digital & Customer Experience: Leverage digital interaction across the entire customer journey to optimize our distribution costs, gradually enable more complex sales and services capabilities, and achieve best-in-class customer loyalty and engagement. |
• | Continue to foster a winning team culture: Lead in Diversity & Inclusion, providing our employees a safe and engaging work environment to attract and retain key talent, while fostering a high performance and results-driven mindset. |
48 | 2021 Scotiabank Annual Report
Table of Contents
Management’s Discussion and Analysis | International Banking
T20 International Banking financial performance – Reported
($ millions) | 2021(1) | 2020(1) | 2019(2) | |||||||||
Reported results | ||||||||||||
Net interest income(3) | $ | 6,625 | $ | 7,603 | $ | 8,353 | ||||||
Non-interest income(3)(4)(5) | 2,993 | 3,207 | 4,366 | |||||||||
Total revenue(3) | 9,618 | 10,810 | 12,719 | |||||||||
Provision for credit losses | 1,574 | 3,613 | 2,076 | |||||||||
Non-interest expenses | 5,254 | 5,943 | 6,596 | |||||||||
Income tax expense(3) | 635 | 182 | 909 | |||||||||
Net income | $ | 2,155 | $ | 1,072 | $ | 3,138 | ||||||
Net income attributable to non-controlling interests in subsidiaries | 332 | 92 | 373 | |||||||||
Net income attributable to equity holders of the Bank | $ | 1,823 | $ | 980 | $ | 2,765 | ||||||
Key ratios and other financial data | ||||||||||||
Return on equity(6) | 10.4 | % | 5.0 | % | 13.2 | % | ||||||
Productivity(3)(7) | 54.6 | % | 55.0 | % | 51.9 | % | ||||||
Net interest margin(6) | 3.85 | % | 4.18 | % | 4.54 | % | ||||||
Provision for credit losses – performing (Stages 1 and 2) | $ | (1,005 | ) | 1,412 | 154 | |||||||
Provision for credit losses – impaired (Stage 3) | $ | 2,579 | 2,201 | 1,922 | ||||||||
Provision for credit losses as a percentage of average net loans and acceptances(7) | 1.15 | % | 2.45 | % | 1.40 | % | ||||||
Provision for credit losses on impaired loans as a percentage of average net loans and acceptances(7) | 1.88 | % | 1.49 | % | 1.30 | % | ||||||
Net write-offs as a percentage of average net loans and acceptances(7) | 1.89 | % | 1.24 | % | 1.29 | % | ||||||
Selected Consolidated Statement of Financial Position data (average balances) | ||||||||||||
Earning assets(6) | $ | 178,906 | $ | 188,308 | $ | 186,331 | ||||||
Total assets | 194,124 | 206,382 | 200,596 | |||||||||
Deposits | 103,485 | 110,668 | 114,671 | |||||||||
Total liabilities | 148,531 | 154,894 | 152,858 |
(1) | The amounts for the years ended October 31, 2021 and October 31, 2020 have been prepared in accordance with IFRS 16; prior year amounts have not been restated. |
(2) | The amounts for the year ended October 31, 2019 have been restated to reflect the impact of the establishment of Global Wealth Management as a separate business segment. |
(3) | Taxable equivalent basis (TEB). |
(4) | Includes net income from investments in associated corporations of $206 (2020 – $243; 2019 – $753). |
(5) | Includes one additional month of earnings relating to Mexico of $51 (after tax and NCI $37) for the year ended October 31, 2020. Includes one additional month of earnings relating to Peru of $57 (after tax and NCI $41) for the year ended October 31, 2019. |
(6) | Refer to Non-GAAP Measures on page 17 for the description of the measure. |
(7) | Refer to Glossary on page 141 for the description of the measure. |
T20A Adjusted International Banking financial performance(1)
($ millions) | 2021 | 2020 | 2019 | |||||||||
Adjusted results | ||||||||||||
Net interest income | $ | 6,625 | $ | 7,603 | $ | 8,353 | ||||||
Non-interest income | 2,993 | 3,207 | 4,366 | |||||||||
Total revenue | 9,618 | 10,810 | 12,719 | |||||||||
Provision for credit losses(2) | 1,574 | 3,536 | 1,925 | |||||||||
Non-interest expenses(3)(4) | 5,209 | 5,742 | 6,390 | |||||||||
Income before taxes | 2,835 | 1,532 | 4,404 | |||||||||
Income tax expense | 648 | 260 | 1,012 | |||||||||
Net income | $ | 2,187 | $ | 1,272 | $ | 3,392 | ||||||
Net income attributable to non-controlling interests (NCI) | 332 | 124 | 439 | |||||||||
Net income attributable to equity holders | $ | 1,855 | $ | 1,148 | $ | 2,953 |
(1) | Refer to Non-GAAP Measures on page 17 for the description of the adjustments. |
(2) | Includes adjustment for Allowance for credit losses – Additional scenario of $77 in the first quarter of 2020, and Day 1 provision for credit losses on acquired performing financial instruments of $151 for the year ended October 31, 2019. |
(3) | Includes adjustment for Integration costs of $154 in 2020 and $151 in 2019. |
(4) | Includes adjustment for Amortization of acquisition-related intangible assets, excluding software, of $45 (2020 – $47; 2019 – $55). |
2021 Scotiabank Annual Report | 49
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Management’s Discussion and Analysis
T21 International Banking – Income from divested operations-Reported
($ millions) | 2021 | 2020 | 2019 | |||||||||
Net interest income | $ | 23 | $ | 123 | $ | 484 | ||||||
Non-interest income | 13 | 87 | 762 | |||||||||
Total revenue | 36 | 210 | 1,246 | |||||||||
Provision for credit losses | 9 | 27 | 21 | |||||||||
Non-interest expenses | 16 | 88 | 357 | |||||||||
Income before taxes | 11 | 95 | 868 | |||||||||
Income tax expense | 4 | 25 | 213 | |||||||||
Net income | $ | 7 | $ | 70 | $ | 655 | ||||||
Net income attributable to non-controlling interests (NCI) | – | – | – | |||||||||
Net income attributable to equity holders – relating to divested operations | $ | 7 | $ | 70 | $ | 655 |
50 | 2021 Scotiabank Annual Report
Table of Contents
Management’s Discussion and Analysis | International Banking
Financial Performance
Net income
Net income attributable to equity holders was $1,823 million, an increase of $843 million. Adjusted net income attributable to equity holders was $1,855 million, an increase of $707 million. This increase was due largely to lower provision for credit losses and non-interest expenses partially offset by lower revenues, higher income taxes, the impact of divested operations, and the negative impact of foreign currency translation.
Financial Performance on an Adjusted and Constant Dollar Basis
The discussion below on the results of operations is on an adjusted and constant dollar basis. Under the constant dollar basis, prior period amounts are recalculated using current period average foreign currency rates, which is a non-GAAP financial measure (refer to Non-GAAP Measures). The Bank believes that constant dollar is useful for readers in assessing ongoing business performance. Ratios are on a reported basis.
T22 International Banking financial performance on adjusted and constant dollar basis
($ millions) | 2021(1) | 2020(1) | 2019(2) | |||||||||
Net interest income(3) | $ | 6,625 | $ | 7,060 | $ | 7,322 | ||||||
Non-interest income(3)(4) | 2,993 | 3,015 | 3,981 | |||||||||
Total revenue(3) | 9,618 | 10,075 | 11,303 | |||||||||
Provision for credit losses | 1,574 | 3,297 | 1,670 | |||||||||
Non-interest expenses | 5,209 | 5,414 | 5,683 | |||||||||
Income tax expense(3) | 648 | 231 | 890 | |||||||||
Net income on constant dollar basis | $ | 2,187 | $ | 1,133 | $ | 3,060 | ||||||
Net income attributable to non-controlling interests in subsidiaries on a constant dollar basis | 332 | 117 | 382 | |||||||||
Net income attributable to equity holders of the Bank on a constant dollar basis | $ | 1,855 | $ | 1,016 | $ | 2,678 | ||||||
Selected Consolidated Statement of Financial Position data (average balances) | ||||||||||||
Total assets | 194,124 | 194,339 | 179,633 | |||||||||
Total liabilities | 148,531 | 147,335 | 137,005 |
(1) | The amounts for the years ended October 31, 2021 and October 31, 2020 have been prepared in accordance with IFRS 16; prior year amounts have not been restated. |
(2) | The amounts for the year ended October 31, 2019 have been restated to reflect the impact of the establishment of Global Wealth Management as a separate business segment. |
(3) | Taxable equivalent basis (TEB). |
(4) | Includes net income from investments in associated corporations of $206 (2020 – $240; 2019 – $726). |
T22A International Banking – Income from divested operations on a constant dollar basis
($ millions) | 2021 | 2020 | 2019 | |||||||||
Net interest income | $ | 23 | $ | 116 | $ | 456 | ||||||
Non-interest income | 13 | 84 | 733 | |||||||||
Total revenue | 36 | 200 | 1,189 | |||||||||
Provision for credit losses | 9 | 25 | 20 | |||||||||
Non-interest expenses | 16 | 84 | 337 | |||||||||
Income before taxes | 11 | 91 | 832 | |||||||||
Income tax expense | 4 | 25 | 204 | |||||||||
Net income | $ | 7 | $ | 66 | $ | 628 | ||||||
Net income attributable to non-controlling interests (NCI) | – | – | – | |||||||||
Net income attributable to equity holders – relating to divested operations | $ | 7 | $ | 66 | $ | 628 |
Net income
Net income attributable to equity holders was $1,823 million, an increase of $966 million or 113%. Adjusted net income attributable to equity holders was $1,855 million, up $839 million or 83%. The increase was due largely to lower provision for credit losses on performing loans, lower non-interest expenses, offset partially by lower revenues and higher income taxes.
Assets and liabilities
Average assets of $194 billion were in line with last year. Total loans declined by 1%, with commercial down 1% and retail loans down 2%, mainly in the Caribbean and Central America region.
C9 | Total revenue |
C10 | Total revenue by region $ millions |
C11 | Average loans and acceptances $ billions |
C12 | Average earning assets(1) by region $ billions |
(1) | Average earning assets excluding bankers acceptances |
2021 Scotiabank Annual Report | 51
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Management’s Discussion and Analysis
Average liabilities of $149 billion increased $1 billion or 1% driven by higher funding from central banks. Total deposits decreased by 1% due mainly to the impact of divested operations of 2%. This was partly offset by growth in personal deposits.
Revenues
Total revenues were $9,618 million, down $457 million or 5%. The impact of divested operations was 2%. There was also lower net-interest income, investment gains, and card fees, partially offset by higher banking fees and income from associated corporations.
Net Interest Income
Net interest income was $6,625 million, down 6%. The decline was due mainly to margin compression and a 1% decline in loans driven mainly by lower personal loans and credit cards. Net interest margin declined by 33 basis points to 3.85% due primarily to changes in business mix and rate reductions across the footprint. The impact of divested operations on net interest income was 1%.
Non-interest income
Non-interest income was $2,993 million, down 1%. The impact of divested operations on non-interest income was 3%. The growth was driven by higher banking fees and trading revenues, partially offset by lower card fees, and the benefit of one additional month of earnings from the Alignment of the reporting period of Mexico with the Bank (“Alignment of the reporting period”) last year.
Latin America
Total revenues of $7,519 million decreased $170 million from the prior year. Net interest income was down $202 million or 4% due to margin compression, partially offset by loan growth of 1%. Non-interest income was up $32 million or 1%, driven primarily by higher banking fees and trading revenues, partially offset by lower card fees, investment gains and the benefit of one additional month of earnings from the Alignment of the reporting period of Mexico with the Bank (“Alignment of reporting period”) last year.
Caribbean and Central America
Total revenues were $1,927 million, down $275 million or 12% over the last year, with net interest income down $235 million or 15% and non-interest income down $40 million or 6%. The impact of divested operations was 5%. The remaining decrease was driven primarily by margin compression and a decline in loans.
Asia
Total revenues were $170 million, down $14 million or 7% over last year, due largely to the impact of divested operations.
Non-interest expenses
Non-interest expenses were $5,254 million, down $349 million or 6%. On an adjusted basis, non-interest expenses decreased 4% due to the impact of divested operations, lower salaries and employee benefits, technology cost and professional fees.
Provision for credit losses
The provision for credit losses was $1,574 million compared to $3,369 million last year. Adjusted provision for credit losses decreased $1,723 million, driven primarily by lower retail provisions on performing loans. The provision for credit losses ratio was 115 basis points, a decrease of 130 basis points and adjusted provision for credit losses ratio decreased by 125 basis points.
Provision for credit losses on performing loans was a net reversal of $1,005 million, a decrease of $2,311 million. Adjusted provision for credit losses on performing loans decreased $2,266 million, the majority of which related to retail, driven by the more favourable macroeconomic outlook as well as credit migration to impaired loans across most markets.
Provision for credit losses on impaired loans was $2,579 million, an increase of $517 million. Adjusted provision for credit losses on impaired loans was up $542 million due primarily to higher retail provisions, driven by credit migration across most markets. The provision for credit losses ratio on impaired loans was 188 basis points, an increase of 39 basis points and adjusted provision for credit losses ratio increased by 41 basis points.
Provision for income taxes
The effective tax rate was 22.8% compared to 14.5% last year. On an adjusted basis, the effective tax rate was 22.8%, compared to 17.0% last year, due primarily to significantly higher loan loss provisions recorded in entities that operate in higher tax rate jurisdictions last year, partially offset by inflationary adjustments in Mexico and Chile this year.
Outlook
International Banking earnings are expected to grow through 2022 from solid loan and revenue growth, benefitting from improving economic conditions across the footprint. Additionally, central banks are expected to continue raising interest rates across the region that should improve net interest margins through 2022. Provision for credit losses is expected to remain low due to stable business mix and improvement in credit quality. International Banking expects to deliver positive operating leverage through prudent expense management, while continuing to benefit from digital investments, and improving efficiency. The results could be impacted by a potentially stronger Canadian dollar.
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Management’s Discussion and Analysis | Global Wealth Management
2021 Achievements | ||||
Maximize growth in asset management and advisory businesses
• Strong investment results in 1832 Asset Management, with Dynamic Funds having 88% of assets in the top two quartiles over a five year period, as of October, ranking Dynamic Funds #2 vs independent mutual fund companies.
• Record retail mutual fund net sales of approximately $12 billion in Scotia Global Asset Management.
• Stable platforms and client-focused teams in Scotia iTRADE have enabled the business to manage sustained record call volumes and new account growth, leading to higher commission and FX revenues.
Focus on Partnerships
• Continued focus on delivering the entire bank to clients and drive partnerships across our businesses.
• Expanded institutional sales internationally with a focus on value added investment mandates in priority Latin American markets.
• Scotiabank and MD Financial continue to make a meaningful impact in support of Canada’s physicians and the communities they serve through the Canadian Medical Association affinity agreement to support a vibrant medical profession and a healthy population with a focus on physician health and wellness. To date, Scotiabank and MD Financial Management have committed $39.2 million to support physicians, medical learners and the communities they serve across Canada.
Expand international capabilities and offering
• Industry leading Asset Management capabilities with the Mexico Asset Management team ranked as Morningstar’s best Asset Manager in the Equity Funds category and Chile awarded Morningstar’s Best International Funds manager award and coming in second place for Best Balanced Funds manager.
• Scotiabank and Trust (Cayman) won two Captive International Cayman Awards for the Bank of the Year and Letters of Credit and Trusts Provider of the Year.
Select award highlights
• Scotia Global Asset Management was recognized for its strong performance across Dynamic Funds and ScotiaFunds brands by winning 20 Lipper Fund Awards and 41 FundGrade A+ awards for 2020, announced in 2021.
• The Dynamic Funds Contact Centre was ranked #1 for 2020 by Environics.
• Scotia iTRADE tied with RBC and BMO (among bank-owned brokerage firms) receiving a B grade in The Globe and Mail’s Annual Ranking of Online Brokerages.
• Scotia iTRADE ranked #2 among all bank-owned firms in the 2020 Canadian Online Brokerage Firm Experience rankings by Surviscor for the third consecutive year.
• ScotiaMcLeod Investment Portfolios ranked #1, up from #3 in 2020 for Full-Service Brokerage Firms by Total Assets in In-House Managed Wrap Programs.
• Scotia Wealth Management wins Global Finance ‘Best Private Bank’ award in two categories: 1) Best Private Bank for Net Worth between $1 million and $24.9 million (Global Category) and 2) Best Private Bank for Canada (Country Category).
|
Business Profile
Global Wealth Management is focused on delivering comprehensive wealth management advice and solutions to clients across Scotiabank’s footprint. Global Wealth Management serves over 2 million investment fund and advisory clients across 13 countries – administering over $500 billion in assets.
Through organic growth and acquisitions, Global Wealth Management has built a robust client-centric business with comprehensive advice, products, and platforms to meet a broad range of client needs.
Global Wealth Management is comprised of the following businesses:
• | Wealth Management: Online brokerage (Scotia iTRADE), Mobile investment specialists (Scotiabank), Full-service brokerage (ScotiaMcLeod), Trust, Private Banking, Private Investment Counsel (Scotia Wealth Management, Jarislowsky Fraser, and MD Financial Management) |
• | Asset Management: Retail mutual funds (Scotia & Dynamic Funds), Exchange Traded Funds (Scotia & Dynamic Funds), Liquid Alternatives (Dynamic Funds), Institutional funds (Scotia & Jarislowsky Fraser) |
Scotiatrust, ScotiaMcLeod, Scotia iTRADE, Private Banking, Private Investment Counsel, 1832 Asset Management and Dynamic Funds are top performers in key industry metrics.
Strategy
Global Wealth Management continues to execute on its strategic focus on providing clients with strong risk adjusted investment results and financial planning to provide investment solutions to meet their complex needs. The focus continues to be delivering on partnerships and comprehensive advice to best serve clients in the current economic environment and through all market conditions. To best drive that focus, Global Wealth Management is prioritizing investments in digital and investment capabilities, growing our product shelf to serve both retail and institutional clients.
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Management’s Discussion and Analysis
In addition, Global Wealth Management is focused on maximizing our international footprint, including leveraging our institutional management capabilities in priority markets across Latin America.
2022 Priorities
• | Continue product innovation: Drive innovation in products to deliver industry-leading investment capabilities and performance through purpose-built solutions for customers across Global Wealth Management’s brands and channels. |
• | Plan-based, holistic advice: Deliver the entire bank to new and existing clients with complex needs through our Total Wealth strategy. |
• | Invest in digital: Digitally enable sales and advice to support all our distribution channels, including proprietary and 3rd party sales. |
• | Focus on international: Maximize our international footprint by growing the product shelf, and by enhancing internal capabilities in sales and distributions. Invest and grow the International Wealth business by following our retail footprint. |
• | Enhance our winning team culture: Cultivate a talented, diverse workforce, and foster an environment to keep our customers and employees safe, while delivering outstanding results and client experiences. |
T23 Global Wealth Management financial performance
($ millions) | 2021(1) | 2020(1) | 2019 | |||||||||
Reported results | ||||||||||||
Net interest income(2) | $ | 628 | $ | 575 | $ | 564 | ||||||
Non-interest income(2) | 4,752 | 4,009 | 3,937 | |||||||||
Total revenue(2) | 5,380 | 4,584 | 4,501 | |||||||||
Provision for credit losses | 2 | 7 | – | |||||||||
Non-interest expenses | 3,255 | 2,878 | 2,905 | |||||||||
Income tax expense | 549 | 437 | 412 | |||||||||
Net income | $ | 1,574 | $ | 1,262 | $ | 1,184 | ||||||
Net income attributable to non-controlling interests in subsidiaries | 9 | 10 | 18 | |||||||||
Net income attributable to equity holders of the Bank | $ | 1,565 | $ | 1,252 | $ | 1,166 | ||||||
Key ratios and other financial data | ||||||||||||
Return on equity(3) | 16.7 | % | 13.5 | % | 12.7 | % | ||||||
Productivity(2)(4) | 60.5 | % | 62.8 | % | 64.5 | % | ||||||
Selected Consolidated Statement of Financial Position data (average balances) | ||||||||||||
Earning assets(3) | $ | 18,478 | $ | 15,435 | $ | 13,892 | ||||||
Total assets | 28,965 | 26,036 | 24,664 | |||||||||
Deposits | 37,013 | 32,066 | 25,880 | |||||||||
Total liabilities | 44,950 | 38,637 | 31,896 | |||||||||
Other ($ billions) | ||||||||||||
Assets under administration(4)(5) | $ | 597 | $ | 500 | $ | 497 | ||||||
Assets under management(4)(5) | $ | 346 | $ | 290 | $ | 302 |
(1) | The amounts for the years ended October 31, 2021 and October 31, 2020 have been prepared in accordance with IFRS 16; prior year amounts have not been restated. |
(2) | Taxable equivalent basis (TEB). |
(3) | Refer to Non-GAAP Measures on page 17 for the description of the measure. |
(4) | Refer to Glossary on page 141 for the description of the measure. |
(5) | Prior period amounts have been restated to appropriately reflect certain intercompany items. |
T23A Adjusted Global Wealth Management financial performance(1)
($ millions) | 2021 | 2020 | 2019 | |||||||||
Adjusted results | ||||||||||||
Net interest income | $ | 628 | $ | 575 | $ | 564 | ||||||
Non-interest income | 4,752 | 4,009 | 3,937 | |||||||||
Total revenue | 5,380 | 4,584 | 4,501 | |||||||||
Provision for credit losses(2) | 2 | 6 | – | |||||||||
Non-interest expenses(3)(4) | 3,219 | 2,818 | 2,839 | |||||||||
Income before taxes | 2,159 | 1,760 | 1,662 | |||||||||
Income tax expense | 558 | 453 | 429 | |||||||||
Net income | $ | 1,601 | $ | 1,307 | $ | 1,233 | ||||||
Net income attributable to non-controlling interests in subsidiaries (NCI) | 9 | 10 | 18 | |||||||||
Net income attributable to equity holders | $ | 1,592 | $ | 1,297 | $ | 1,215 |
(1) | Refer to Non-GAAP Measures on page 17 for the description of the adjustments. |
(2) | Includes adjustment for Allowance for credit losses – Additional scenario of $1 in the first quarter of 2020. |
(3) | Includes adjustment for Integration costs of $23 in 2020 and $27 in 2019. |
(4) | Includes adjustment for Amortization of acquisition-related intangible assets, excluding software, of $36 (2020 – $37; 2019 – $39). |
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Management’s Discussion and Analysis | Global Wealth Management
Financial Performance
Net income
Net income attributable to equity holders was $1,565 million, an increase of $313 million or 25%. Adjusted net income attributable to equity holders increased $295 million or 23%. The increase was due primarily to higher mutual fund fees from growth in client assets, brokerage revenues from higher customer activity, and elevated performance fees, partially offset by higher volume related expenses.
Assets under management (AUM) and assets under administration (AUA)
Assets under management of $346 billion increased $56 billion or 19%, while assets under administration of $597 billion increased $97 billion or 19%. The growth in AUM and AUA was due primarily to higher net sales and market appreciation.
Revenues
Revenues of $5,380 million were up $796 million or 17%, due primarily to higher mutual fund fees from growth in client assets, brokerage revenues from higher customer activity, higher net interest income from strong loan and deposit growth, and elevated performance fees.
Net interest income
Net interest income of $628 million increased $53 million or 9%, due primarily to strong loan and deposit growth, partially offset by margin compression.
Non-interest income
Non-interest income of $4,752 million increased $743 million or 19%, due primarily to higher mutual fund fees from growth in client assets, brokerage revenues from higher customer activity, and elevated performance fees.
Canada
Revenues of $4,783 million increased $821 million or 21%, due primarily to higher mutual fund fees from growth in client assets, brokerage revenues from higher customer activity, higher net interest income from strong loan and deposit growth, and elevated performance fees.
International
Revenues of $597 million were down $25 million or 4%. The negative impact of foreign currency translation was 6%. The growth of 2% was due primarily to higher brokerage fees, partially offset by the impact of divested operations and the benefit of aligning the reporting period of Mexico with the Bank in the prior year.
Non-interest expenses
Non-interest expenses of $3,255 million were up $377 million or 13%, due largely to higher volume related expenses, variable compensation driven by higher performance fees, and technology costs to support business initiatives.
Provision for credit losses
The provision for credit losses was $2 million compared to $7 million last year, due primarily to lower performing provisions in the Canadian Wealth portfolio, driven by the more favourable macroeconomic outlook. The provision for credit losses ratio was one basis point.
Provision for income taxes
The effective tax rate of 25.8% remained in line with the prior year.
Outlook
Global Wealth Management is well positioned for growth in 2022. This will be underpinned by strong retail mutual fund volume growth driven by active management and multi-brand distribution in Canada; robust growth internationally as we see improved economic activity and strong growth within the Pacific Alliance countries; and continued momentum across our global Advisory businesses as we deliver the entire bank to high net worth clients. Global Wealth Management expects to continue to invest in the business while remaining focused on expense management and delivering positive operating leverage.
C13 | Total revenue |
C14 | Total revenue by sub-segment $ millions |
C15 | Wealth management asset growth $ billions, as at October 31 |
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Management’s Discussion and Analysis
2021 Achievements | ||||
Increase our relevance to our corporate clients and capture more of the non-lending wallet:
• Focused on origination businesses, solidifying areas of strength and growing in select new sectors, such as Healthcare and Technology in the Americas. • Launched the SIDAC Capital Markets platform in Dublin, enabling us to continue connecting Americas clients with services in Europe in a post-Brexit environment. • Launched Global Corporate Access team to better align priority clients with institutional investors to further demonstrate distribution capabilities. • Enhanced our position as a leader in the Environmental, Social, and Governance space by integrating sustainability across departments and product offerings in order to provide innovative sustainable finance solutions for our clients.
Strengthen capital markets offerings:
• Launched ScotiaRED, a new brand that unites technology-driven electronic execution solutions for capital markets clients across geographic footprint. • Launched new suite of Scotia Index Tracker Exchange-Traded Funds, in partnership with Global Wealth Management and Tangerine. • In Canada, launched Janus Public a predictive insights platform for cash equities that provides the sales and trading teams with actionable customer and market behavior insights.
Build on our presence in the Americas:
• Continuous progress on multi-year strategy of creating a top-tier local and cross-border wholesale banking business in the Americas. • Introduced dedicated Latam ECM coverage to further our ability to capitalize on opportunities. • Launched newly enhanced electronic trading capabilities in government bonds across Canada and the US.
Select awards and deal highlights: Awards
• Received the 2021 Risk.net Technology Innovation of the Year Award, for our new risk valuation adjustments (xVA) system. • Recognized as the Best Foreign Exchange Provider in Canada by Global Finance, given to banks that have demonstrated a commitment to FX and expanding their digital tools to help clients execute their trading strategies and achieve price discovery with ease. • Awarded the 2020 Best Sustainable Finance Deal – Corporate in Australia and New Zealand by FinanceAsia, for participation in the Sydney Airport’s AU$600 million two-way ESG U.S. Private Placement. • Recognized with the 2021 Environmental Finance Bond Awards for Lead Manager of the Year – Social Bond (Republic of Chile), and Initiative of the Year (Transition Finance Handbook).
Deal highlights
Joint Bookrunner on a number of notable mandates this year, including: • Manulife Financial’s $2.0 billion 60NC5 limited resource capital note – the largest such offering in Canada • North West Redwater Partnership’s $2.0 billion transaction, the largest corporate transaction in Canadian history • Calgary Airport Authority’s inaugural $2.1B six-tranche offering, the largest inaugural bond offering by a Canadian issuer • TELUS’ $750 million sustainability linked bond, the first sustainability linked bond in Canada • The Republic of Chile’s US$10 billion bond issuances, including tranches denominated in Chilean Pesos, US dollars, and Euros • GFL Environmental’s first equity offering since their IPO, raising total proceeds of US$594 million
Financial Advisor on a number of marquee transactions this year, including: • Brookfield Infrastructure’s sale of its Enwave business through two separate transactions valued at US$4.1 billion • West Fraser Timber’s acquisition of Norbord valued at $4.6 billion • Great Canadian Gaming’s sale to Apollo Global Management valued at $3.7 billion • Endeavour Mining’s acquisition of Teranga Gold valued at $3.0 billion • H&R REIT’s spin-off of Primaris REIT valued at $3.2 billion |
Business Profile
Global Banking and Markets (GBM) provides corporate clients with lending and transaction services, investment banking advice and access to capital markets. GBM is a full-service wholesale bank in the Americas, with operations in 21 countries, serving clients across Canada, the United States, Latin America, Europe and Asia-Pacific.
Strategy
Our goal is to be recognized as the number one Wholesale Bank in the Americas. In order to achieve this goal, our strategy is grounded in three key pillars: Client, Product, and Geography. We are focused on increasing our relevance with our global clients with leading financial advice and solutions and on expanding our full-service corporate offering, with a key focus on the Americas. We are leveraging our regional and institutional capabilities and delivering profitable growth for the bank’s shareholders.
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Management’s Discussion and Analysis | Global Banking and Markets
2022 Priorities
• | Client Focus: Leverage coverage operating model with aligned sector and product expertise to focus on up-tiering and adding new client relationships. |
• | Strengthen our capital markets offering: Execute on capital markets client strategy to drive origination, supported by a strong distribution network, and advance electronic trading capabilities to improve client experience and increase competitiveness. |
• | Build on our presence in the Americas: Deliver US growth strategy, leveraging Europe and Asia for distribution of Americas product and in support of our global corporate clients. |
• | Continue enabling our winning culture: Attract, develop and retain diverse talent in an inclusive and high-performance environment, while keeping the Bank safe. |
T24 Global Banking and Markets financial performance
($ millions) | 2021(1) | 2020(1) | 2019 | |||||||||
Reported results | ||||||||||||
Net interest income(2) | $ | 1,436 | $ | 1,435 | $ | 1,396 | ||||||
Non-interest income(2) | 3,587 | 3,947 | 3,084 | |||||||||
Total revenue(2) | 5,023 | 5,382 | 4,480 | |||||||||
Provision for credit losses | (100 | ) | 390 | (22 | ) | |||||||
Non-interest expenses | 2,458 | 2,473 | 2,463 | |||||||||
Income tax expense(2) | 590 | 564 | 505 | |||||||||
Net income | $ | 2,075 | $ | 1,955 | $ | 1,534 | ||||||
Net income attributable to non-controlling interests in subsidiaries | – | – | – | |||||||||
Net income attributable to equity holders of the Bank | $ | 2,075 | $ | 1,955 | $ | 1,534 | ||||||
Key ratios and other financial data | ||||||||||||
Return on equity(3) | 16.5 | % | 14.8 | % | 13.3 | % | ||||||
Productivity(2)(4) | 48.9 | % | 45.9 | % | 55.0 | % | ||||||
Provision for credit losses – performing (Stages 1 and 2) | $ | (135 | ) | $ | 257 | $ | (26 | ) | ||||
Provision for credit losses – impaired (Stage 3) | $ | 35 | $ | 133 | $ | 4 | ||||||
Provision for credit losses as a percentage of average net loans and acceptances(4) | (0.10 | )% | 0.35 | % | (0.02 | )% | ||||||
Provision for credit losses on impaired loans as a percentage of average net loans and | ||||||||||||
acceptances(4) | 0.03 | % | 0.12 | % | – | % | ||||||
Net write-offs as a percentage of average net loans and acceptances(4) | 0.05 | % | 0.09 | % | 0.03 | % | ||||||
Selected Consolidated Statement of Financial Position data (average balances) | ||||||||||||
Trading assets | $ | 134,602 | $ | 119,611 | $ | 112,317 | ||||||
Loans and acceptances | 91,809 | 103,634 | 92,977 | |||||||||
Earning assets(3) | 363,889 | 366,329 | 337,589 | |||||||||
Total assets | 400,909 | 412,125 | 371,909 | |||||||||
Deposits | 156,321 | 133,536 | 99,346 | |||||||||
Total liabilities | 385,096 | 378,971 | 304,253 |
(1) | The amounts for the years ended October 31, 2021 and October 31, 2020 have been prepared in accordance with IFRS 16; prior year amounts have not been restated. |
(2) | Taxable equivalent basis (TEB). |
(3) | Refer to Non-GAAP Measures on page 17 for the description of the measure. |
(4) | Refer to Glossary on page 141 for the description of the measure. |
T24A Adjusted Global Banking and Markets financial performance(1)
($ millions) | 2021 | 2020 | 2019 | |||||||||
Adjusted results | ||||||||||||
Net interest income | $ | 1,436 | $ | 1,435 | $ | 1,396 | ||||||
Non-interest income(2) | 3,587 | 4,049 | 3,084 | |||||||||
Total revenue | 5,023 | 5,484 | 4,480 | |||||||||
Provision for credit losses(3) | (100 | ) | 384 | (22 | ) | |||||||
Non-interest expenses | 2,458 | 2,473 | 2,463 | |||||||||
Income before taxes | 2,665 | 2,627 | 2,039 | |||||||||
Income tax expense | 590 | 593 | 505 | |||||||||
Net income | $ | 2,075 | $ | 2,034 | $ | 1,534 | ||||||
Net income attributable to non-controlling interests in subsidiaries (NCI) | – | – | – | |||||||||
Net income attributable to equity holders | $ | 2,075 | $ | 2,034 | $ | 1,534 |
(1) | Refer to Non-GAAP Measures on page 17 for the description of the adjustments. |
(2) | Includes adjustment for derivatives valuation of $102 in the first quarter of 2020. |
(3) | Includes adjustment for Allowance for credit losses – Additional scenario of $6 in the first quarter of 2020. |
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Management’s Discussion and Analysis
Financial Performance
Net income
Global Banking and Markets reported net income attributable to equity holders of $2,075 million, an increase of $120 million or 6%. Adjusted net income increased $41 million or 2% due to higher advisory fees, reversals of provision for credit losses and lower operating expenses, partly offset by lower trading-related revenues.
Average assets and liabilities
Average assets decreased by $11 billion or 3% to $401 billion this year, due mainly to decreases in business loans, securities purchased under resale agreements and the impact of foreign currency translation, partially offset by increases in trading securities.
Average liabilities increased by $6 billion or 2% to $385 billion this year mainly due to growth in deposits, partly offset by decline in securities sold under repurchase agreements and the impact of foreign currency translation.
Revenues
Revenues were $5,023 million, a decrease of $359 million or 7%. Adjusted revenues decreased $461 million or 8% due mainly to lower non-interest income driven by decreases in fixed income trading-related revenue and the negative impact of foreign currency translation, partially offset by higher equities trading-related revenue and higher underwriting and advisory fees.
Net interest income
Net interest income of $1,436 million was in line with the prior year. Higher lending margins were offset by lower loan volumes.
Non-interest income
Non-interest income of $3,587 million decreased by $360 million or 9%. Adjusted non-interest income decreased by $462 million or 11%. This decline was due mainly to lower fixed income trading-related revenues, partially offset by higher equities trading-related revenues and higher advisory fees.
Non-interest expense
Non-interest expenses decreased by $15 million or 1% to $2,458 million driven by lower personnel costs and the favourable impact of foreign currency translation, partly offset by increases in technology costs to support business development.
Provision for credit losses
The provision for credit losses was a net reversal of $100 million, a decrease of $490 million from last year. Adjusted provision for credit losses decreased $484 million. The provision for credit losses ratio decreased 45 basis points to negative ten basis points, and adjusted provision for credit losses ratio also decreased 45 basis points.
Provision for credit losses on performing loans was a net reversal of $135 million, a decrease of $392 million. Adjusted provision for credit losses on performing loans decreased $386 million, driven by the more favourable macroeconomic outlook.
Provision for credit losses on impaired loans was $35 million, a decrease of $98 million, due primarily to lower provisions relating to the Energy portfolio. The provision for credit losses ratio on impaired loans was three basis points, a decrease of nine basis points.
Provision for income taxes
The effective tax rate was 22.1% compared to 22.4% the prior year due mainly to changes in earnings mix across jurisdictions.
Outlook
Global Banking and Markets expects to continue to deliver earnings growth in 2022 as the business leverages a unique platform centered in the Americas to service and strengthen client relationships. The business is focused on achieving strong revenue and loan growth. Provision for credit losses is expected to remain low. Disciplined expense management remains a priority to deliver positive operating leverage.
C16 | Total revenue |
C17 | Business banking revenue $ millions |
C18 | Capital markets revenue by business line $ millions |
C19 | Composition of average assets $ billions |
C20 | Trading day losses |
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Management’s Discussion and Analysis | Other
The Other segment includes Group Treasury, smaller operating segments, Net gain/loss on divestitures, and corporate items which are not allocated to a business line.
Financial Performance
T25 Other financial performance
($ millions) | 2021(1) | 2020(1) | 2019(2) | |||||||||
Reported results | ||||||||||||
Net interest income(3) | $ | 242 | $ | (131 | ) | $ | (984 | ) | ||||
Non-interest income(3)(4) | 91 | 392 | (146 | ) | ||||||||
Total revenue(3) | 333 | 261 | (1,130 | ) | ||||||||
Provision for (recovery of) credit losses | (1 | ) | 1 | 1 | ||||||||
Non-interest expenses | 700 | 751 | 1 | |||||||||
Income tax expense(3) | (362 | ) | (519 | ) | (586 | ) | ||||||
Net income (loss) | $ | (4 | ) | $ | 28 | $ | (546 | ) | ||||
Net income attributable to non-controlling interests in subsidiaries | (10 | ) | (27 | ) | 17 | |||||||
Net income (loss) attributable to equity holders | $ | 6 | $ | 55 | $ | (563 | ) |
(1) | The amounts for the years ended October 31, 2021 and October 31, 2020 have been prepared in accordance with IFRS 16; prior period amounts have not been restated. |
(2) | The amounts for the year ended October 31, 2019 have been restated to reflect the impact of the establishment of Global Wealth Management as a separate business segment. |
(3) | Includes the net residual in matched maturity transfer pricing, and the elimination of the tax-exempt income gross-up reported in net interest income, non-interest income, and provision for income taxes in the business segments, which are reported on a taxable equivalent basis. |
(4) | Includes net income from investments in associated corporations of $29 in 2021 (2020 – $(70); 2019 – $(178)). |
T25A Adjusted Other financial performance(1)
($ millions) | 2021 | 2020 | 2019 | |||||||||
Adjusted results | ||||||||||||
Net interest income | $ | 242 | $ | (131 | ) | $ | (984 | ) | ||||
Non-interest income(2)(3) | 91 | 93 | (19 | ) | ||||||||
Total revenue | 333 | (38 | ) | (1,003 | ) | |||||||
Provision for credit losses | (1 | ) | 1 | 1 | ||||||||
Non-interest expenses(3)(4)(5) | 512 | 692 | (20 | ) | ||||||||
Income before taxes | (178 | ) | (731 | ) | (984 | ) | ||||||
Income tax expense | (313 | ) | (475 | ) | (730 | ) | ||||||
Net income (loss) | $ | 135 | $ | (256 | ) | $ | (254 | ) | ||||
Net income (loss) attributable to non-controlling interests (NCI) | – | 1 | 1 | |||||||||
Net income (loss) attributable to equity holders | $ | 135 | $ | (257 | ) | $ | (255 | ) |
(1) | Refer to Non-GAAP Measures on page 17 for the description of the adjustments. |
(2) | Includes adjustment for derivatives valuation of $14 in the first quarter of 2020. |
(3) | Includes adjustment for Net (gain)/loss on divestitures of $(298) for the year ended October 31, 2020. |
(4) | Includes adjustment for software impairment charge of $44 in the first quarter of 2020. |
(5) | Includes adjustment for restructuring and other provisions of $188 in the fourth quarter of 2021. |
Net income
The Other segment reported net income attributable to equity holders of $6 million in 2021, which includes restructuring and other provisions of $129 million. On an adjusted basis, net income attributable to equity holders was $135 million compared to a loss of $257 million in 2020. The increase of $392 million was due to higher net interest income and lower expenses.
Revenues
Revenue of $333 million increased $72 million from the prior year. On an adjusted basis, revenues increased $371 million due mainly to lower funding costs resulting from lower interest rates and asset/liability management activities.
Non-interest expenses
Non-interest expenses were $700 million, which includes $188 million from restructuring and other provisions this year. On an adjusted basis, non-interest expenses were $512 million compared to $692 million in 2020. The decrease of $180 million is due mainly to metals business charges and higher COVID-19 related costs in the prior year, partially offset by the investment in the SCENE loyalty program in the current year.
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Management’s Discussion and Analysis
Financial Performance of Business Lines: 2020 vs. 2019
Canadian Banking
Canadian Banking reported net income attributable to equity holders of $2,536 million in 2020, a decrease of $952 million or 27% compared to prior year. Adjusted net income was $2,604 million, a decrease of $900 million or 26%. The decline was due primarily to higher provision for credit losses on performing loans, lower non-interest income, and higher non-interest expenses. Return on equity was 15.1% compared to 23.2% in the prior year. Adjusted return on equity was 15.5% compared to 23.3% in the prior year.
International Banking
International Banking reported net income attributable to equity holders of $980 million in 2020, a decrease of $1,785 million or 65%. Adjusted net income attributable to equity holders was $1,148 million in 2020, down $1,805 million or 61%. The negative impact of divested operations was 8%. The remaining decline of 53% was due largely to higher provision for credit losses on performing loans, lower revenues, partially offset by lower expenses and lower income taxes. Return on equity was 5.0% compared to 13.2% last year. Adjusted return on equity was 5.8% compared to 14.1% last year.
Global Wealth Management
Global Wealth Management reported net income attributable to equity holders was $1,252 million, an increase of $86 million or 7%. Adjusted net income attributable to equity holders increased $82 million, also up 7%. The negative impact of divested operations was 1%. The remaining 8% growth was driven by solid AUM growth across our businesses partly offset by higher non-interest expenses, margin compression, and customer relief programs largely impacting our international pensions business. Return on equity was 13.5% compared to 12.7% in the prior year. Adjusted return on equity was 14.0% compared to 13.2% in the prior year.
Global Banking and Markets
Global Banking and Markets reported net income attributable to equity holders of $1,955 million, an increase of $421 million or 27% from the prior year. Adjusted net income was $2,034 million, an increase of $500 million or 33%. Strong performance in capital markets businesses, higher revenue in business banking, and relatively flat expenses, were partly offset by higher provision for credit losses. Return on equity was 14.8% compared to 13.3% last year. Adjusted return on equity was 15.4% compared to 13.3% last year.
Other
The Other segment had a net income attributable to equity holders of $55 million in 2020 compared to a net loss of $563 million in 2019. On an adjusted basis, the Other segment had a net loss attributable to equity holders of $257 million compared to $255 million in 2019 as higher net interest income and non-interest revenues were offset by higher expenses.
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T26 Condensed statement of financial position
As at October 31 ($ billions) | 2021 | 2020 | Change | Volume Change | FX Change | |||||||||||||||
Assets | ||||||||||||||||||||
Cash, deposits with financial institutions and precious metals | $ | 87.1 | $ | 77.6 | 12 | % | 18 | % | (6 | )% | ||||||||||
Trading assets | 146.3 | 117.8 | 24 | 29 | (5 | ) | ||||||||||||||
Securities purchased under resale agreements and securities borrowed | 127.7 | 119.7 | 7 | 12 | (5 | ) | ||||||||||||||
Investment securities | 75.2 | 111.4 | (32 | ) | (28 | ) | (4 | ) | ||||||||||||
Loans | 637.0 | 603.3 | 6 | 9 | (3 | ) | ||||||||||||||
Other | 111.5 | 106.7 | 4 | 8 | (4 | ) | ||||||||||||||
Total assets | $ | 1,184.8 | $ | 1,136.5 | 4 | % | 8 | % | (4 | )% | ||||||||||
Liabilities | ||||||||||||||||||||
Deposits | $ | 797.3 | $ | 750.8 | 6 | % | 10 | % | (4 | )% | ||||||||||
Obligations related to securities sold under repurchase agreements and securities lent | 123.5 | 137.8 | (10 | ) | (5 | ) | (5 | ) | ||||||||||||
Other liabilities | 184.8 | 170.0 | 9 | 13 | (4 | ) | ||||||||||||||
Subordinated debentures | 6.3 | 7.4 | (15 | ) | (14 | ) | (1 | ) | ||||||||||||
Total liabilities | $ | 1,111.9 | $ | 1,066.0 | 4 | % | 8 | % | (4 | )% | ||||||||||
Equity | ||||||||||||||||||||
Common equity(1) | 64.8 | 62.8 | 3 | % | 9 | % | (6 | )% | ||||||||||||
Preferred shares and other equity instruments | 6.0 | 5.3 | 13 | 13 | - | |||||||||||||||
Non-controlling interests in subsidiaries | 2.1 | 2.4 | (13 | ) | (13 | ) | - | |||||||||||||
Total equity | $ | 72.9 | $ | 70.5 | 3 | % | 8 | % | (5 | )% | ||||||||||
Total liabilities and shareholders’ equity | $ | 1,184.8 | $ | 1,136.5 | 4 | % | 8 | % | (4 | )% |
(1) | Includes net impact of foreign currency translation, primarily change in spot rates on the transalation of assets and liabiltes from functional currency to Canandian dollar equivalent. |
C21 | Loan portfolio loans & acceptances, $ billions, as at October 31 |
C22 | Deposits $ billions, as at October 31 |
Statement of Financial Position
Assets
The Bank’s total assets as at October 31, 2021 were $1,185 billion, up $48 billion or 4% from October 31, 2020. This includes the negative impact of foreign currency translation of $42 billion. Cash and deposits with financial institutions were up $10 billion due primarily to higher balances with the U.S. Federal Reserve. Trading securities increased $29 billion due to higher trading and client activity. Investment securities decreased $36 billion primarily to lower holdings of Canadian federal, provincial and U.S. government debt in the liquidity portfolio. Loans increased $34 billion, which includes the negative impact of foreign currency translation of $17 billion. Residential mortgages increased $35 billion primarily in Canada. Business and Government loans increased $1 billion, which includes the negative impact of foreign currency translation of $12 billion. This was partially offset by lower personal loans and credit cards of $5 billion from decreased customer activity. Securities purchased under resale agreements and securities borrowed increased $8 billion due to higher client demand. Customers’ liability under acceptances increased $6 billion.
Liabilities
Total liabilities were $1,112 billion as at October 31, 2021, up $46 billion or 4% from October 31, 2020. This includes the negative impact of foreign currency translation of $39 billion. Total deposits increased $46 billion. Personal deposits of $244 billion decreased $3 billion as underlying growth of $1 billion was more than offset by foreign currency translation. Business and government deposits grew by $47 billion with underlying growth of $66 billion partially offset by foreign currency translation. Deposits by Financial Institutions increased $2 billion. Obligations related to securities sold under repurchase agreements and securities lent decreased by $14 billion due mainly to lower funding through this product. Obligations related to securities sold short increased by $9 billion due mainly to higher trading and client activity. Acceptances increased $6 billion due mainly to higher customer demand. Other liabilities decreased $4 billion due primarily to the revaluation of the Bank’s employee benefit plans and lower collateral requirements.
Equity
Total shareholders’ equity increased $2,389 million from October 31, 2020. Current year earnings of $9,955 million, the revaluation of the Bank’s employee benefit plans of $1,335 million and net issuance of preferred shares and other equity instruments of $744 million were partially off-set by dividends paid of $4,604 million, a decrease of $3,520 million in the cumulative foreign currency translation amount, net increase in losses on derivative instruments designated as cash flow hedges of $806 million, net decrease of $349 million in other components of accumulated other comprehensive income and a decrease in non-controlling interests in subsidiaries of $288 million due mainly to the Bank’s increased ownership in Scotiabank Chile.
Overview
Scotiabank is committed to maintaining a strong capital base to support the risks associated with its diversified businesses. Strong capital levels contribute to financial safety for the Bank’s customers, foster investor confidence and support strong credit ratings. It also allows the Bank to take advantage of growth opportunities as they arise and enhance shareholder returns through increased dividends. The Bank’s capital management framework includes a comprehensive internal capital adequacy assessment process (ICAAP), aimed at ensuring that the Bank’s capital is adequate
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to meet current and future risks and achieve its strategic objectives. Key components of the Bank’s ICAAP include sound corporate governance; creating a comprehensive risk appetite for the Bank; managing and monitoring capital, both currently and prospectively; and utilizing appropriate financial metrics which relate risk to capital, including internal capital and regulatory capital measures.
Governance and oversight
The Bank has a sound capital management framework to measure, deploy and monitor its available capital and assess its adequacy. Capital is managed in accordance with the Board-approved Capital Management Policy. In addition, the Board reviews and approves the Bank’s annual capital plan. The Asset-Liability Committee and senior executive management provide governance over the capital management process. The Bank’s Finance, Treasury and Global Risk Management groups take a coordinated approach to implementing the Bank’s capital plan.
Risk appetite
The risk appetite framework that establishes enterprise-wide risk tolerances in addition to capital targets are detailed in the Risk Management section “Risk Appetite”. The framework encompasses medium-term targets with respect to regulatory capital thresholds, earnings and other risk-based parameters. These targets drive behaviour to ensure the Bank achieves the following overall objectives: exceed regulatory and internal capital targets, manage capital levels commensurate with the risk profile of the Bank, maintain strong credit ratings and provide the Bank’s shareholders with acceptable returns.
Regulatory capital
Canadian banks are subject to the revised capital adequacy requirements as published by the Basel Committee on Banking Supervision (BCBS) and commonly referred to as Basel III. Under Basel III, there are three primary risk-based regulatory capital ratios used to assess capital adequacy: Common Equity Tier 1 (CET1), Tier 1 and Total capital, which are determined by dividing those capital components by risk-weighted assets. Basel III also provides guidance on non-viability contingent capital (NVCC). The guidance stipulates that in order to qualify as regulatory capital, non-common share capital instruments must be convertible into common equity upon a trigger event as defined within the guidance. All non-common share capital instruments issued after December 31, 2012, are required to meet these NVCC requirements to qualify as regulatory capital.
The Office of the Superintendent of Financial Institutions, Canada (OSFI) has issued guidelines, reporting requirements and disclosure guidance which are consistent with the international implementation of Basel III. OSFI requires Canadian deposit-taking institutions to meet minimum requirements related to risk-weighted assets of 7%, 8.5% and 10.5% for CET1, Tier 1 and Total Capital ratios, respectively, which includes the capital conservation buffer of 2.5%. OSFI has also designated the Bank a domestic systemically important bank (D-SIB), increasing its minimum capital ratio requirements by 1% across all tiers of capital, in line with the requirements for global systemically important banks. OSFI’s minimum Pillar 1 capital ratio requirements, including the D-SIB 1% surcharge, are 8.0%, 9.5% and 11.5% for Common Equity Tier 1, Tier 1 and Total capital ratios, respectively.
In addition to risk-based capital requirements, Basel III introduced a simpler, non risk-based Leverage ratio requirement to act as a supplementary measure to its risk-based capital requirements. The Leverage ratio is defined as a ratio of Basel III Tier 1 capital to a leverage exposure measure which includes on-balance sheet assets and off-balance sheet commitments, derivatives and securities financing transactions, as defined within the requirements. OSFI’s Basel III Leverage Ratio Requirements Guideline and Public Disclosure Requirements outline the application and disclosure of the Basel III Leverage ratio in Canada. Institutions are expected to maintain an operating buffer above the 3% minimum.
Domestic Stability Buffer
In June 2018, OSFI implemented the Domestic Stability Buffer, to be held by Domestic Systemically Important Banks (D-SIBs) as a Pillar 2 buffer, in addition to the capital conservation buffer requirement of 2.5% and the D-SIB surcharge of 1.0%. Breaches of this buffer will not result in banks being subject to automatic constraints on capital distributions. Instead, OSFI will require a remediation plan to address any shortfall to their minimum. Supervisory interventions pursuant to OSFI’s Guide to Intervention would occur in cases where a remediation plan is not produced or executed in a timely manner satisfactory to OSFI.
The Domestic Stability Buffer ranges between 0 and 2.5% of a bank’s total risk-weighted assets (RWA). OSFI undertakes a review of the buffer on a semi-annual basis, in June and December, and any changes to the buffer are made public, along with supporting rationale. In exceptional circumstances, OSFI may make and announce adjustments to the buffer in-between scheduled review dates.
In June 2021, OSFI announced a 150 basis point increase to its Domestic Stability Buffer to 2.5% of total risk-weighted assets, effective October 31, 2021. Consequently, OSFI’s minimum regulatory capital ratio requirements, including the D-SIB 1.0% surcharge and its Domestic Stability Buffer are: 10.5%, 12.0% and 14.0% for Common Equity Tier 1, Tier 1 and Total capital ratios, respectively.
Total Loss Absorbing Capacity (TLAC)
OSFI has issued its guideline on Total Loss Absorbing Capacity (TLAC), which applies to Canada’s D-SIBs as part of the Federal Government’s bail-in regime. The standards are intended to address the sufficiency of a systemically important bank’s loss absorbing capacity to support its recapitalization in the event of its failure. Effective November 1, 2021, D-SIBs are required to maintain a minimum risk-based TLAC ratio and a minimum TLAC leverage ratio. TLAC is defined as the aggregate of Tier 1 capital, Tier 2 capital, and other TLAC instruments that are subject to conversion in whole or in part into common shares under the CDIC Act and meet all of the eligibility criteria under the guidelines. The Bank’s minimum TLAC ratio requirements consist of 24.0% of risk-weighted assets (including the Domestic Stability Buffer requirement) and 6.75% of leverage ratio exposures. OSFI may subsequently vary the minimum TLAC requirements for individual D-SIBs or groups of D-SIBs. Where a D-SIB falls below the minimum TLAC requirements, OSFI may take any measures deemed appropriate, including measures set out in the Bank Act. As at October 31, 2021, the Bank exceeds the OSFI minimum TLAC and TLAC leverage ratios.
Regulatory capital developments
In the second quarter of 2020, in response to COVID-19, OSFI introduced changes to regulations to keep the financial system resilient and well capitalized. A suite of temporary adjustments to existing capital and leverage requirements were introduced which include the following:
• | Preferential treatment of performing loans granted payment deferrals; these were classified as performing loans under OSFI’s Capital Adequacy Requirements (CAR) guideline. This temporary capital treatment remained in place for the duration of the payment deferral, up to a maximum of 6 months (or 3 months if the deferral was granted after August 30, 2020 and before September 30, 2020). Loans granted payment deferrals after September 30, 2020 were not eligible for this temporary capital relief. |
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• | New transitional arrangements for the regulatory capital treatment of expected credit loss provisioning that are available under the Basel Framework, enabling a portion of the allowance that would otherwise be included in Tier 2 capital to instead be included in CET1 capital. The adjustment is measured quarterly as the increase in Stage 1 and Stage 2 allowances relative to their baseline level as at January 31, 2020, tax effected and subject to a scaling factor of 70% in 2020, 50% in 2021, and 25% in 2022. |
• | Reduction of an institution’s Stressed Value-at-Risk (VaR) multipliers used in the calculation of market risk capital by a factor of 2 and the removal of Funding Valuation Adjustment (FVA) hedges in the calculation of market risk capital, both changes were made effective from the commencement of the second quarter of 2020. Effective May 1, 2021, the temporary reduction in the Stressed Value at Risk (SVaR) multiplier was returned to pre-pandemic levels. |
• | For institutions using the Internal Ratings-Based (IRB) approach for credit risk, a lowering of OSFI’s regulatory capital floor factor from 75% to 70%, effective from the second quarter of 2020. The 70% factor is expected to remain in place until OSFI’s domestic implementation of the revised Basel III reforms. |
• | For the Leverage ratio, central bank reserves and sovereign-issued securities that qualify as High Quality Liquid Assets (HQLA) under the Liquidity Adequacy Requirements guideline are to be temporarily excluded from the Leverage ratio exposure measure until December 31, 2021. During the year OSFI announced that temporary exclusion of sovereign-issued securities from the Leverage ratio exposure measure will not be extended beyond December 31, 2021; however, OSFI had confirmed that central bank reserves will continue to be excluded from the Leverage ratio exposure measure going forward. As at October 31, 2021, the Bank’s Leverage ratio included a benefit of approximately 20 basis points from the exclusion of sovereign-issued securities from its exposure measure. |
The Bank adopted the above changes in line with OSFI’s expectations and continues to apply them in our regulatory capital and leverage ratio calculations as at October 31, 2021.
In March 2021, OSFI published an update to its July 2020 capital ruling on Limited Recourse Capital Notes (LRCN). The July 2020 capital ruling assessed LRCNs relative to the eligibility criteria set out in the Capital Adequacy Requirements (CAR) guideline, and provided that the LRCNs qualify as Additional Tier 1 regulatory capital, subject to certain limitations and disclosure requirements. The 2021 revisions provide further clarification on the conditions and limitations on LRCNs.
In addition, we continue to monitor and prepare for new regulatory capital developments.
Other Regulatory capital developments
Basel Committee on Banking Supervision – Finalized Basel III Regulatory Capital Reforms
In December 2017, the Group of Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee on Banking Supervision (BCBS), announced that they have agreed on the remaining Basel III reforms. The previously expected implementation year of 2022 was delayed to 2023.
The final Basel III reforms package includes:
• | a revised standardized approach for credit risk; |
• | revisions to the internal ratings-based approach for credit risk; |
• | revisions to the credit valuation adjustment (CVA) framework, including the removal of the internally modelled approach and the introduction of a revised standardized approach; |
• | a revised standardized approach for operational risk, which will replace the existing standardized approaches and the advanced measurement approach; |
• | revisions to the measurement of the leverage ratio and a leverage ratio buffer of 50% of a global systemically important banks’ (G-SIBs) risk-weighted capital buffer for global systemically important banks; and, |
• | an aggregate output floor, which will ensure that banks’ risk-weighted assets (RWAs) generated by internal models are no lower than 72.5% of RWAs as calculated by the Basel III framework’s standardized approaches. Banks will also be required to disclose their RWAs based on these standardized approaches. There is a phase-in period for the 72.5% output floor from 2023 until 2028. |
In March 2021, OSFI released proposed revisions to its Capital Adequacy Requirements Guideline and its Leverage Requirements Guideline, for public consultation until June 4, 2021. OSFI’s requirements are substantially aligned with revised Basel III with some differences, primarily in retail and with respect to an acceleration of the phase-in period of the aggregate output floor to 72.5% by 2026. Based on the latest OSFI announced implementation timelines, revised Basel III requirements are effective Q2 2023, with the exception of CVA and FRTB market risk requirements which are effective Q1 2024. OSFI has also proposed revisions to its Pillar 3 disclosure requirements for implementation in 2023.
The Bank will continue to monitor and prepare for developments impacting regulatory capital requirements.
Planning, managing and monitoring capital
Capital is managed and monitored based on planned changes in the Bank’s strategy, identified changes in its operating environment or changes in its risk profile. As part of the Bank’s comprehensive ICAAP, sources and uses of capital are measured and monitored on an ongoing basis through financial metrics, including regulatory thresholds, and internal capital. These results are used in capital planning and strategic decision-making.
The Bank’s assessment of capital adequacy is in the context of its current position and its expected future risk profile and position relative to its internal targets while considering the potential impact of various stress scenarios. Specific scenarios are selected based on the current economic conditions and business events facing the Bank. In addition, the Bank’s forward looking capital adequacy assessment includes a consideration of the results of more severe multi-risk scenarios within its enterprise-wide stress testing. This testing is used to determine the extent to which severe, but plausible events, impact the Bank’s capital.
The Bank sets internal regulatory capital targets to ensure the Bank’s available capital is sufficient within the context of its risk appetite.
The Bank’s internal target includes an adequate buffer over the regulatory minimum ensuring sufficient flexibility for future capital deployment and in consideration of the Bank’s risk appetite, the volatility of planning assumptions, the results from stress testing and contingency planning.
The Bank has a comprehensive risk management framework to ensure that the risks taken while conducting its business activities are consistent with its risk appetite, its impact on capital relative to internal targets, and that there is an appropriate balance between risk and return. Refer to the Risk Management section for further discussion on the Bank’s risk management framework. In managing the Bank’s capital base, close attention is paid to the cost and availability of the various types of capital, desired leverage, changes in the assets and risk-weighted assets, and the
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opportunities to profitably deploy capital. The amount of capital required for the business risks being assumed, and to meet regulatory requirements, is balanced against the goal of generating an appropriate return for the Bank’s shareholders.
Capital generation
Capital is generated internally through net earnings after dividend payments. As well, capital is generated by the issuance of common shares, preferred shares and other equity instruments, and subordinated debentures, net of redemptions.
Capital deployment
The Bank deploys capital to support sustainable, long-term revenue and net income growth. The growth can be through existing businesses by attracting new customers, increasing cross-selling activities to existing customers, adding new products and enhancing sales productivity, or through acquisitions. All major initiatives to deploy capital are subject to rigorous analysis, validation of business case assumptions and evaluation of expected benefits. Key financial criteria include impact on earnings per share, capital ratios, return on invested capital, expected payback period and internal rate of return based on discounted cash flows.
Regulatory capital ratios
The Bank continues to maintain strong, high quality capital levels which position it well for future business growth and strategic initiatives. The CET1 ratio as at October 31, 2021 was 12.3%, an increase of approximately 50 basis points from the prior year due primarily to strong internal capital generation and the impact from the remeasurement of the employee pension and post-retirement obligations, partly offset by growth in risk-weighted assets, primarily retail mortgages, personal and business lending, a lower CET1 inclusion from declines in Stage 1 and Stage 2 expected credit losses (ECL), OSFI’s reversal of its temporary reduction in the SVaR multiplier, and the impact from foreign currency translation on capital requirements. At year end, the CET1 ratio included a benefit of six basis points (October 31, 2020 – 30 basis points) from OSFI transitional adjustment for the partial inclusion of increases in Stage 1 and Stage 2 expected credit losses (ECL) relative to their pre-crisis baseline levels as at January 31, 2020.
The Bank’s Tier 1 capital ratio was 13.9% as at October 31, 2021, an increase of approximately 60 basis points from the prior year, due primarily to the issuance of $1.25 billion and USD $600 million of Tier 1 qualifying Limited Recourse Capital Notes (LRCN), and the above noted impacts to the CET1 capital ratio, partly offset by the redemptions of $850 million of Basel III compliant NVCC preferred shares, a redemption of $409 million of non-qualifying preferred shares, and other regulatory adjustments.
The Total capital ratio was 15.9% as at October 31, 2021, an increase of approximately 40 basis points from 2020, due primarily to the above noted changes to the Tier 1 capital ratio, partly offset by the redemption of $750 million of subordinated debentures and other regulatory adjustments to Tier 2 capital.
The Leverage ratio was 4.8%, an increase of approximately 10 basis points in 2021 as higher Tier 1 capital was partly offset by growth in the Bank’s on and off-balance sheet assets.
The Bank’s capital ratios continue to be well in excess of OSFI’s minimum capital ratio requirements for 2021 of 10.5%, 12.0% and 14.0% for CET1, Tier 1 and Total Capital, respectively. The Bank was well above the OSFI minimum Leverage ratio as at October 31, 2021.
C23 | Continuity of Common Equity Tier 1 ratio(1) |
(1) | This measure has been disclosed in this document in accordance with OSFI Guideline - Capital Adequacy Requirements (November 2018). |
(2) | Includes ~ 6 bps benefit from OSFI’s partial inclusion of stage 1 and 2 allowances |
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T27 Regulatory capital(1)
Basel III | ||||||||
As at October 31 ($ millions) | 2021 | 2020 | ||||||
Common Equity Tier 1 capital | ||||||||
Total Common Equity(2) | $ | 64,606 | $ | 62,502 | ||||
Qualifying non-controlling interest in common equity of subsidiaries | 1,322 | 1,769 | ||||||
ECL transitional adjustment(3) | 235 | 1,304 | ||||||
Goodwill and intangibles, net of deferred tax liabilities(4) | (15,156 | ) | (15,505 | ) | ||||
Threshold related deductions | – | – | ||||||
Net deferred tax assets (excluding those arising from temporary differences) | (174 | ) | (226 | ) | ||||
Other Common Equity Tier 1 capital deductions(5) | 177 | (679 | ) | |||||
Common Equity Tier 1 | 51,010 | 49,165 | ||||||
Preferred shares(6) | 800 | 2,059 | ||||||
Subordinated additional Tier 1 capital notes (NVCC) | 3,249 | 3,249 | ||||||
Limited recourse capital notes (NVCC) | 2,003 | – | ||||||
Capital instrument liabilities – trust securities(6) | 653 | 750 | ||||||
Other Tier 1 capital adjustments(7) | 200 | 139 | ||||||
Net Tier 1 capital | 57,915 | 55,362 | ||||||
Tier 2 capital | ||||||||
Subordinated debentures, net of amortization(6) | 5,923 | 7,355 | ||||||
Allowance for credit losses eligible for inclusion in Tier 2 and excess allowance (re: IRB approach)(8) | 2,106 | 1,647 | ||||||
Qualifying non-controlling interest in Tier 2 capital of subsidiaries | 157 | 148 | ||||||
Other Tier 2 capital adjustments | – | – | ||||||
Tier 2 capital | 8,186 | 9,150 | ||||||
Total regulatory capital | 66,101 | 64,512 | ||||||
Risk-weighted assets ($ billions)(1) | ||||||||
Credit risk | 358.8 | 362.0 | ||||||
Market risk | 8.1 | 7.3 | ||||||
Operational risk | 49.2 | 47.8 | ||||||
Risk-weighted assets(9) | $ | 416.1 | $ | 417.1 | ||||
Capital ratios(1) | ||||||||
Common Equity Tier 1 | 12.3 | % | 11.8 | % | ||||
Tier 1 | 13.9 | % | 13.3 | % | ||||
Total | 15.9 | % | 15.5 | % | ||||
Leverage(10) | ||||||||
Leverage exposures | $ | 1,201,766 | $ | 1,170,290 | ||||
Leverage ratio | 4.8 | % | 4.7 | % |
(1) | Regulatory capital ratios are determined in accordance with OSFI Guideline – Capital Adequacy Requirements (November 2018). |
(2) | Includes Other Reserves adjusted for regulatory capital purposes. |
(3) | The ECL transitional adjustment was introduced by OSFI in Q2, 2020. |
(4) | Reported amounts are based on OSFI’s requirements that goodwill relating to investments in associates be classified as goodwill for regulatory reporting purposes. |
(5) | Other CET1 capital deductions under Basel III include gains/losses due to changes in own credit risk on fair valued liabilities, pension plan assets and other items. |
(6) | Non-qualifying Tier 1 and Tier 2 capital instruments are subject to a phase-out period of 10 years. |
(7) | Other Tier 1 capital adjustments under Basel III rules include eligible non-controlling interests in subsidiaries. |
(8) | Eligible allowances for 2021 and 2020. |
(9) | OSFI has prescribed a minimum capital floor for institutions that use the advanced internal ratings-based approach for credit risk. The Basel II capital floor add-on is determined by comparing a capital requirement under the Basel II standardized approach for credit risk, in addition to OSFI prescribed requirements for market risk and credit valuation adjustment RWA. A shortfall in the Basel III capital requirement as compared with the Basel II capital floor is added to RWA. Under this Basel II regulatory capital floor requirement, the Bank does not have a capital floor add-on as at October 31, 2021 (October 31, 2020 – nil). |
(10) | This measure has been disclosed in this document in accordance with OSFI Guideline – Leverage Requirements (November 2018). |
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T28 Changes in regulatory capital
Basel III | ||||||||
For the fiscal years ($ millions) | 2021 | 2020 | ||||||
Total capital, beginning of year | $ | 64,512 | $ | 59,850 | ||||
Changes in Common Equity Tier 1 | ||||||||
Net income attributable to common equity holders of the Bank | 9,391 | 6,582 | ||||||
Dividends paid to equity holders of the bank | (4,371 | ) | (4,363 | ) | ||||
Shares issued | 268 | 59 | ||||||
Shares repurchased/redeemed | – | (414 | ) | |||||
Gains/losses due to changes in own credit risk on fair valued liabilities | 222 | 347 | ||||||
ECL transitional adjustment(1) | (1,069 | ) | 1,304 | |||||
Movements in accumulated other comprehensive income, excluding cash flow hedges | (2,356 | ) | (2,684 | ) | ||||
Change in non-controlling interest in common equity of subsidiaries | (447 | ) | 35 | |||||
Change in goodwill and other intangible assets (net of related tax liability)(2) | 349 | 639 | ||||||
Other changes including regulatory adjustments below: | (142 | ) | 1,082 | |||||
– Deferred tax assets that rely on future profitability (excluding those arising from temporary differences) | 52 | 60 | ||||||
– Significant investments in the common equity of other financial institutions (amount above 10% threshold) | – | 907 | ||||||
– Other capital deductions | (220 | ) | 102 | |||||
– Other | 26 | 13 | ||||||
Changes in Common Equity Tier 1 | $ | 1,845 | $ | 2,587 | ||||
Changes in Additional Tier 1 Capital | ||||||||
Issued | 2,003 | 1,689 | ||||||
Redeemed | (1,259 | ) | (265 | ) | ||||
Other changes including regulatory adjustments and phase-out of non-qualifying instruments | (36 | ) | 47 | |||||
Changes in Additional Tier 1 Capital | $ | 708 | $ | 1,471 | ||||
Changes in Tier 2 Capital | ||||||||
Issued | – | – | ||||||
Redeemed | (750 | ) | (9 | ) | ||||
Allowance for credit losses eligible for inclusion in Tier 2 and Excess Allowance under AIRB(3) | 459 | 446 | ||||||
Other changes including regulatory adjustments and phase-out of non-qualifying instruments | (673 | ) | 167 | |||||
Changes in Tier 2 Capital | $ | (964 | ) | $ | 604 | |||
Total capital generated (used) | $ | 1,589 | $ | 4,662 | ||||
Total capital, end of year | $ | 66,101 | $ | 64,512 |
(1) | The ECL transitional adjustment was introduced by OSFI in Q2, 2020. |
(2) | Reported amounts are based on OSFI’s requirements that goodwill relating to investments in associates be classified as goodwill for regulatory reporting purposes. |
(3) | Eligible allowances for 2021 and 2020. |
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Regulatory capital components
The Bank’s regulatory capital is divided into three components – CET1, Additional Tier 1 capital and Tier 2 capital, depending on their degree of permanency and loss absorbency. All components of capital provide support for banking operations and protect depositors.
CET1 consists primarily of common shareholders’ equity, regulatory derived non-controlling interest capital, and prescribed regulatory adjustments or deductions. These regulatory deductions include goodwill, intangible assets (net of deferred tax liabilities), deferred tax assets that rely on future profitability, defined-benefit pension assets, shortfall (if any) of the allowance for credit losses to regulatory parameter-based expected losses and significant investments in the common equity of other financial institutions.
Additional Tier 1 capital consists primarily of qualifying non-cumulative preferred shares, qualifying other equity instruments (as described in Note 24), and non-qualifying preferred shares and innovative Tier 1 instruments subject to phase-out. Tier 2 capital consists mainly of qualifying subordinated debentures, or non-qualifying subordinated debentures subject to phase-out, and any eligible allowances for credit losses.
The Bank’s CET1 capital was $51.0 billion as at October 31, 2021, an increase of $1.8 billion from the prior year primarily due to:
• | $5.0 billion growth from internal capital generation, net of dividends paid; |
• | $0.4 billion from lower regulatory capital deductions, including goodwill and gains/losses in own credit risk on fair valued liabilities; and, |
• | $0.3 billion of share issuances through the stock option and employee share ownership programs. |
Partly offset by:
• | $2.4 billion decrease from movements in Accumulated Other Comprehensive Income, excluding cash flow hedges, primarily from the impact of foreign currency translation net of changes in employee pensions and benefits plans obligations; |
• | $1.1 billion from the reduction in OSFI’s transitional adjustment for the partial inclusion of increases in Stage 1 and Stage 2 expected credit losses; and, |
• | $0.4 billion of lower non-controlling interest regulatory capital. |
The Bank’s Tier 1 capital increased by $2.6 billion, primarily due to the above impacts to CET1 capital and the issuance of $1.25 billion and USD $600 million of Tier 1 qualifying Limited Recourse Capital Notes (LRCN), partly offset by the redemptions of $350 million and $500 million of Basel III compliant NVCC preferred shares, a redemption of $409 million of non-qualifying preferred shares, and other regulatory adjustments.
Total capital increased by $1.6 billion, mainly due to the impacts to CET1 and Tier 1 capital and growth in eligible allowances included in Tier 2 capital, partly offset by the redemption of $750 million of subordinated debentures and other regulatory adjustments to Tier 2 capital.
C24 | CET1 capital %, as at October 31 |
C25 | Dividend growth dollars per share |
C26 | Internally generated capital $ billions, for years ended October 31 |
Dividends
The annual dividend in 2021 was $3.60, same as in 2020. The Board of Directors approved a quarterly dividend of $1.00 per common share, a 10 cent increase, at its meeting on November 29, 2021. This quarterly dividend applies to shareholders of record at the close of business on January 4, 2022, and is payable January 27, 2022.
T29 Selected capital management activity
For the fiscal years ($ millions) | 2021 | 2020 | ||||||
Dividends | ||||||||
Common | $ | 4,371 | $ | 4,363 | ||||
Preferred and other equity instruments | 233 | 196 | ||||||
Common shares issued(1) | 268 | 59 | ||||||
Common shares repurchased for cancellation under the | ||||||||
Normal Course Issuer Bid(2) | – | 414 | ||||||
Preferred shares and other equity instruments issued(3) | 2,003 | 1,689 | ||||||
Preferred shares and other equity instruments redeemed(4) | 1,259 | 265 | ||||||
Maturity, redemption and repurchase of subordinated debentures | 750 | 9 |
(1) | Represents primarily cash received for stock options exercised during the year, common shares issued in connection with acquisitions, and common shares issued pursuant to the Dividend and Share Purchase Plan. |
(2) | Represents reduction to Common shares and Retained earnings (refer to the Consolidated Statement of Changes in Equity). |
(3) | Represents the issuances of $1.25 billion 3.70% fixed rate resetting Limited Recourse Capital Notes (LRCN) Series 1 on June 15, 2021 and US$600 million 3.625% fixed rate resetting Limited Recourse Capital Notes (LRCN) Series 2 on October 7, 2021. |
(4) | Represents the redemptions of Preferred Shares Series 32 & 33 on February 2, 2021, Series 34 on April 26, 2021, and Series 36 on July 26, 2021. |
Normal Course Issuer Bid
During the year ended October 31, 2020, the Bank repurchased and cancelled approximately 5.6 million common shares at a volume weighted average price of $73.95 per share for a total amount of $414 million.
On March 13, 2020, OSFI advised federally regulated deposit taking institutions to suspend common share buybacks as part of COVID-19 measures. As at October 31, 2021, the Bank does not have an active normal course issuer bid and did not repurchase any common shares during the twelve months then ended. On November 4, 2021, OSFI removed the COVID-19 related restrictions and advised that subject to approval, repurchase of common shares can resume.
On November 30, 2021, the Bank announced that OSFI and the Toronto Stock Exchange (TSX) approved a normal course issuer bid (the “2021 NCIB”) pursuant to which it may repurchase for cancellation up to 24 million of the Bank’s common shares. Purchases under the 2021 NCIB may commence on December 2, 2021 and terminate upon earlier of: (i) the Bank purchasing the maximum number of common shares under the 2021 NCIB, (ii) the Bank providing a notice of termination, or (iii) December 1, 2022. On a quarterly basis, the Bank will notify OSFI prior to making purchases.
2021 Scotiabank Annual Report | 67
Table of Contents
Management’s Discussion and Analysis
Share data and other capital instruments
The Bank’s common and preferred share data, as well as other capital instruments, are shown in T30. Further details, including exchangeability features, are discussed in Note 21 and Note 24 of the consolidated financial statements.
T30 Shares and other instruments
As at October 31, 2021 | Amount ($ millions) | Dividends declared per share(1) | Number outstanding (000s) | Conversion features | ||||||||||||
Common shares(2) | $ | 18,507 | $ | 3.60 | 1,215,338 | n/a | ||||||||||
Preferred shares | ||||||||||||||||
Preferred shares Series 32(3) | – | 0.138829 | – | – | ||||||||||||
Preferred shares Series 33(3) | – | 0.100614 | – | – | ||||||||||||
Preferred shares Series 34(4) | – | 0.687500 | – | – | ||||||||||||
Preferred shares Series 36(5) | – | 1.031250 | – | – | ||||||||||||
Preferred shares Series 38(6)(7)(8) | 500 | 1.212500 | 20,000 | Series 39 | ||||||||||||
Preferred shares Series 40(6)(7)(9) | 300 | 1.212500 | 12,000 | Series 41 | ||||||||||||
Additional Tier 1 securities | Amount ($ millions) | Distribution(10) | Yield (%) | Number outstanding (000s) | ||||||||||||
Scotiabank Trust Securities – Series 2006-1 issued by Scotiabank Capital Trust(11a,b) | $ | 750 | 28.25 | 5.650 | 750 | |||||||||||
Subordinated additional Tier 1 capital notes (NVCC)(12) | US$ | 1,250 | US$ | 23.25 | 4.650 | 1,250 | ||||||||||
Subordinated additional Tier 1 capital notes (NVCC)(13) | US$ | 1,250 | US$ | 12.25 | 4.900 | 1,250 | ||||||||||
Limited Recourse Capital Notes Series 1 (NVCC)(13)(14) | $ | 1,250 | 9.25 | 3.700 | 1,250 | |||||||||||
Limited Recourse Capital Notes Series 2 (NVCC)(13)(15) | US$ | 600 | US$ | 9.0625 | 3.625 | 600 | ||||||||||
NVCC subordinated debentures | Amount ($ millions) | Interest Rate (%) | ||||||||||||||
Subordinated debentures due March 2027 | $ | 1,250 | 2.58 | |||||||||||||
Subordinated debentures due December 2025 | US$ | 1,250 | 4.50 | |||||||||||||
Subordinated debentures due January 2029 | 1,750 | 3.89 | ||||||||||||||
Subordinated debentures due July 2029 | 1,500 | 2.84 | ||||||||||||||
Options | Number outstanding (000s) | |||||||||||||||
Outstanding options granted under the Stock Option Plans to purchase common shares(2) |
| 10,459 |
(1) | Dividends declared from November 1, 2020 to October 31, 2021. | |
(2) | Dividends on common shares are paid quarterly, if and when declared. As at November 19, 2021, the number of outstanding common shares and options was 1,215,617 thousand and 10,133 thousand, respectively. | |
(3) | On February 2, 2021, the Bank redeemed all outstanding Non-cumulative Preferred Shares Series 32 and Series 33 at a price equal to $25.00 per share plus dividends declared on January 26, 2021 of $0.009891 per Series 32 share and $0.006976 per Series 33 share. | |
(4) | On April 26, 2021, the Bank redeemed all outstanding Non-cumulative Preferred Shares Series 34 at a price equal to $25.00 per share plus dividends declared on February 23, 2021 of $0.343750 per Series 34 share. | |
(5) | On July 26, 2021, the Bank redeemed all outstanding Non-cumulative Preferred Shares Series 36 at a price equal to $25.00 per share plus dividends declared on June 1, 2021 of $0.343750 per Series 36 share. | |
(6) | These shares are entitled to non-cumulative preferential cash dividends payable quarterly. These preferred shares have conversion features. Refer to Note 24 of the consolidated financial statements in the Bank’s 2021 Annual Report for further details. | |
(7) | These preferred shares contain Non-Viability Contingent Capital (NVCC) provisions necessary to qualify as Tier 1 regulatory capital under Basel III. Refer to Note 24 of the consolidated financial statements in the Bank’s 2021 Annual Report for further details. | |
(8) | Subsequent to the initial five-year fixed rate period ending on January 26, 2022, and resetting every five years thereafter, the dividends, if and when declared, will be determined by the sum of the five-year Government of Canada Yield plus 4.19%, multiplied by $25.00. | |
(9) | Subsequent to the initial five-year fixed rate period ending on January 26, 2024, and resetting every five years thereafter, the dividends, if and when declared, will be determined by the sum of the five-year Government of Canada Yield plus 2.43%, multiplied by $25.00. | |
(10) | Distributions made per face amount of $1,000 or US$1,000 semi-annually or quarterly, as applicable. | |
(11)(a) | On September 28, 2006, Scotiabank Capital Trust issued 750,000 Scotiabank Trust Securities – Series 2006-1 (Scotia BaTS II Series 2006-1). The holders of Scotia BaTS II Series 2006-1 are entitled to receive non-cumulative fixed cash distributions payable semi-annually in an amount of $28.25 per security. With regulatory approval, these securities may be redeemed in whole upon the occurrence of certain tax or regulatory capital changes, or in whole or in part on December 30, 2011 and on any distribution date thereafter at the option of Scotiabank Capital Trust. The holder has the right at any time to exchange their security into Non-cumulative Preferred Shares Series S of the Bank. The Series S shares will be entitled to cash dividends payable semi-annually in an amount of $0.4875 per $25.00 share. Refer to Note 24(c) – Restrictions on payment of dividends and retirement of shares. The Scotia BaTS II Series 2006-1 may be automatically exchanged, without the consent of the holder, into Non-cumulative Preferred Shares Series T of the Bank in the following circumstances: (i) proceedings are commenced for the winding-up of the Bank; (ii) the Superintendent takes control of the Bank or its assets; (iii) the Bank has a Tier 1 Capital ratio of less than 5% or a Total Capital ratio of less than 8%; or (iv) the Superintendent has directed the Bank to increase its capital or provide additional liquidity and the Bank elects such automatic exchange or the Bank fails to comply with such direction. The Series T shares will be entitled to non-cumulative cash dividends payable semi-annually in an amount of $0.625 per $25.00 share. If there is an automatic exchange of the Scotia BaTS II Series 2006-1 into Preferred Shares Series T of the Bank, then the Bank would become the sole beneficiary of the Trust. | |
(11)(b) | No cash distributions will be payable on the Scotia BaTS II Series 2006-1 in the event that the regular dividend is not declared on the Bank’s preferred shares and, if no preferred shares are outstanding, the Bank’s common shares. In such a circumstance the net distributable funds of the Trust will be payable to the Bank as the holder of the residual interest in the Trust. Should the Trust fail to pay the semi-annual distributions on the Scotia BaTS II Series 2006-1 in full, the Bank will not declare dividends, of any kind on any of its preferred or common shares for a specified period of time. Refer to Note 24(c) - Restrictions on payment of dividends and retirement of shares. | |
(12) | Semi-annual distributions are recorded if and when paid. | |
(13) | Quarterly distributions are recorded in each fiscal quarter if and when paid. | |
(14) | On June 15, 2021, the Bank issued $1,250 million 3.70% Fixed Rate Resetting Limited Recourse Capital Notes Series 1 (NVCC) (“LRCN Series 1”). In connection with the issuance of LRCN Series 1, the Bank issued $1,250 million of 3.70% Fixed Rate Resetting Perpetual Subordinated Additional Tier 1 Capital Notes (NVCC) (“the Series 1 AT1 Notes”) at a price of $1,000 per Series 1 AT1 Note, to Scotiabank LRCN Trust, a consolidated entity, to be held as trust assets in connection with the LRCN structure. For more details, refer to Note 24(b) - Preferred shares and other equity instruments. On October 27, 2021, distributions of $13.51 per $1,000.00 per face value of LRCN Series 1 were paid for the first long period from and including June 15, 2021 to, but excluding, October 27, 2021. | |
(15) | On October 7, 2021, the Bank issued US$600 million 3.625% Fixed Rate Resetting Limited Recourse Capital Notes Series 2 (NVCC) (“LRCN Series 2”). In connection with the issuance of LRCN Series 2, the Bank issued US$600 million of 3.625% Fixed Rate Resetting Perpetual Subordinated Additional Tier 1 Capital Notes (NVCC) (“the Series 2 AT1 Notes”) at a price of US$1,000 per Series 2 AT1 Note, to Scotiabank LRCN Trust to be held as trust assets in connection with the LRCN structure. For more details, refer to Note 24(b) - Preferred shares and other equity instruments. |
68 | 2021 Scotiabank Annual Report
Table of Contents
Management’s Discussion and Analysis | Group Financial Condition
Credit ratings
Credit ratings are one of the factors that impact the Bank’s access to capital markets and the terms on which it can conduct derivatives, hedging transactions and borrow funds. The credit ratings and outlook that the rating agencies assign to the Bank are based on their own views and methodologies.
The Bank continues to have strong credit ratings and its deposits and legacy senior debt are rated AA by DBRS, Aa2 by Moody’s, AA by Fitch and A+ by Standard and Poor’s (S&P). The Bank’s bail-inable senior debt is rated AA (low) by DBRS, A2 by Moody’s, AA- by Fitch and A- by S&P. The Bank’s outlook is rated Stable by DBRS, Moody’s and S&P, and Negative by Fitch.
Risk-weighted assets
Regulatory capital requirements are based on OSFI’s target minimum percentage of risk-weighted assets (RWA). RWA represent the Bank’s exposure to credit, market and operational risk and are computed by applying a combination of the OSFI approved Bank’s internal risk models and OSFI prescribed risk weights to on- and off-balance sheet exposures.
As at year end, the Bank’s RWA of $416.1 billion, represents a decrease of approximately $1.0 billion, or 0.2%, from 2020, due primarily to the benefit of foreign currency translation of a stronger Canadian dollar and from improvements in book quality, partly offset by strong organic growth in RWA.
Credit risk-weighted assets
Credit risk-weighted assets decreased by $3.2 billion to $358.8 billion. The key drivers or components of the change are reflected in Table T31, below.
T31 Flow statement for Basel III credit risk-weighted assets ($ millions)
2021 | 2020 | |||||||||||||||
Credit risk-weighted assets movement by key driver ($ millions) | Credit risk | Of which counterparty credit risk | Credit risk | Of which counterparty credit risk | ||||||||||||
Credit risk-weighted assets as at beginning of year | $ | 362,004 | $ | 18,981 | $ | 365,431 | $ | 20,126 | ||||||||
Book size(1) | 22,859 | (1,850 | ) | 15,641 | 8,798 | |||||||||||
Book quality(2) | (10,586 | ) | (743 | ) | (6,396 | ) | (2,160 | ) | ||||||||
Model updates(3) | 569 | (983 | ) | (431 | ) | (431 | ) | |||||||||
Methodology and policy(4) | 2,315 | 3,770 | 2,106 | (7,422 | ) | |||||||||||
Acquisitions and disposals | (418 | ) | – | (9,756 | ) | – | ||||||||||
Foreign exchange movements | (17,372 | ) | (1,129 | ) | (3,792 | ) | 70 | |||||||||
Other | (589 | ) | – | (799 | ) | – | ||||||||||
Credit risk-weighted assets as at end of year | $ | 358,782 | $ | 18,046 | $ | 362,004 | $ | 18,981 |
(1) | Book size is defined as organic changes in book size and composition (including new business and maturing loans). |
(2) | Book quality is defined as quality of book changes caused by experience such as underlying customer behaviour or demographics, including changes through model calibrations/realignments. |
(3) | Model updates are defined as model implementation, change in model scope or any change to address model enhancement. |
(4) | Methodology and policy is defined as methodology changes to the calculations driven by regulatory policy changes, such as new regulation (e.g. Basel III). |
T32 Internal rating scale(1) and mapping to external rating agencies
Equivalent Rating | ||||||||||
External Rating – S&P | External Rating – Moody’s | External Rating – DBRS | Grade | IG Code | PD Range(2) | |||||
AAA to AA+ | Aaa to Aa1 | AAA to AA (high) | Investment grade | 99-98 | 0.0000% – 0.0428% | |||||
AA to A+ | Aa2 to A1 | AA to A (high) | 95 | 0.0428% – 0.1159% | ||||||
A to A- | A2 to A3 | A to A (low) | 90 | 0.0512% – 0.1271% | ||||||
BBB+ | Baa1 | BBB (high) | 87 | 0.0800% – 0.2027% | ||||||
BBB | Baa2 | BBB | 85 | 0.1143% – 0.2950% | ||||||
BBB- | Baa3 | BBB (low) | 83 | 0.1632% – 0.4293% | ||||||
BB+ | Ba1 | BB (high) | Non-Investment grade | 80 | 0.2638% – 0.4731% | |||||
BB | Ba2 | BB | 77 | 0.4264% – 0.5215% | ||||||
BB- | Ba3 | BB (low) | 75 | 0.5215% – 0.6892% | ||||||
B+ | B1 | B (high) | 73 | 0.6892% – 1.3282% | ||||||
B to B- | B2 to B3 | B to B (low) | 70 | 1.3282% – 2.5597% | ||||||
CCC+ | Caa1 | – | Watch list | 65 | 2.5597% – 9.3860% | |||||
CCC | Caa2 | – | 60 | 9.3860% – 17.8585% | ||||||
CCC- to CC | Caa3 to Ca | – | 40 | 17.8585% – 34.4434% | ||||||
– | – | – | 30 | 34.4434% – 58.6885% | ||||||
Default | Default | 21 | 100% |
(1) | Applies to non-retail portfolio. |
(2) | PD ranges overlap across IG codes as the Bank utilizes two risk rating systems for its AIRB portfolios and each risk rating system has its own separate IG to PD mapping. |
2021 Scotiabank Annual Report | 69
Table of Contents
Management’s Discussion and Analysis
T33 Non-retail AIRB portfolio exposure by internal rating grade(1)
As at October 31 ($ millions) | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||
Grade | IG Code | Exposure ($)(3) | RWA ($)(4) | PD (%)(5)(8) | LGD (%)(6)(8) | RW (%)(7)(8) | Exposure ($)(3) | RWA ($)(4) | PD (%)(5)(8) | LGD (%)(6)(8) | RW (%)(7)(8) | |||||||||||||||||||||||||||||||
Investment grade(2) | 99-98 | 106,517 | 501 | – | 9 | – | 116,335 | 964 | – | 12 | 1 | |||||||||||||||||||||||||||||||
95 | 58,652 | 5,703 | 0.05 | 30 | 10 | 78,361 | 7,567 | 0.05 | 27 | 10 | ||||||||||||||||||||||||||||||||
90 | 72,172 | 9,898 | 0.07 | 36 | 14 | 67,164 | 8,475 | 0.06 | 34 | 13 | ||||||||||||||||||||||||||||||||
87 | 64,562 | 14,851 | 0.09 | 40 | 23 | 63,827 | 14,022 | 0.09 | 40 | 22 | ||||||||||||||||||||||||||||||||
85 | 52,838 | 17,462 | 0.15 | 45 | 33 | 45,973 | 15,509 | 0.15 | 45 | 34 | ||||||||||||||||||||||||||||||||
83 | 56,540 | 25,822 | 0.24 | 46 | 46 | 53,969 | 24,944 | 0.25 | 46 | 46 | ||||||||||||||||||||||||||||||||
Non-Investment grade | 80 | 47,700 | 22,337 | 0.31 | 42 | 47 | 42,509 | 21,015 | 0.31 | 44 | 49 | |||||||||||||||||||||||||||||||
77 | 33,774 | 18,315 | 0.45 | 42 | 54 | 33,708 | 19,245 | 0.46 | 43 | 57 | ||||||||||||||||||||||||||||||||
75 | 22,822 | 13,659 | 0.69 | 40 | 60 | 25,527 | 15,576 | 0.69 | 41 | 61 | ||||||||||||||||||||||||||||||||
73 | 8,449 | 5,968 | 1.33 | 35 | 71 | 10,326 | 7,789 | 1.33 | 37 | 75 | ||||||||||||||||||||||||||||||||
70 | 2,814 | 2,348 | 2.56 | 36 | 83 | 4,555 | 4,079 | 2.56 | 37 | 90 | ||||||||||||||||||||||||||||||||
Watch list | 65 | 1,302 | 1,819 | 9.38 | 37 | 140 | 1,224 | 1,707 | 9.39 | 35 | 139 | |||||||||||||||||||||||||||||||
60 | 1,625 | 2,343 | 17.87 | 29 | 144 | 1,801 | 2,702 | 17.87 | 30 | 150 | ||||||||||||||||||||||||||||||||
40 | 696 | 1,922 | 27.74 | 51 | 276 | 506 | 994 | 27.13 | 35 | 196 | ||||||||||||||||||||||||||||||||
30 | 92 | 152 | 56.61 | 44 | 165 | 109 | 214 | 55.94 | 46 | 196 | ||||||||||||||||||||||||||||||||
Default(9) | 21 | 1,228 | 2,535 | 100.00 | 42 | 206 | 1,555 | 2,946 | 100.00 | 41 | 189 | |||||||||||||||||||||||||||||||
Total | 531,783 | 145,635 | 0.54 | 33 | 27 | 547,449 | 147,748 | 0.59 | 33 | 27 | ||||||||||||||||||||||||||||||||
Government guaranteed residential mortgages | 73,044 | – | – | 21 | – | 78,754 | – | – | 22 | – | ||||||||||||||||||||||||||||||||
Total | 604,827 | 145,635 | 0.47 | 32 | 24 | 626,203 | 147,748 | 0.52 | 32 | 24 |
(1) | Excludes securitization exposures. |
(2) | Excludes government guaranteed residential mortgages of $73.0 billion ($78.8 billion in 2020). |
(3) | After credit risk mitigation. |
(4) | RWA prior to 6% scaling factor. |
(5) | PD – Probability of Default. |
(6) | LGD – Loss Given Default. |
(7) | RW – Risk Weight. |
(8) | Exposure at default used as basis for estimated weightings. |
(9) | Gross defaulted exposures, before any related allowances. |
Credit risk-weighted assets – non-retail
Credit risk measures the risk that a borrower or counterparty will fail to honour its financial or contractual obligations to the Bank. The Bank uses the Advanced Internal Ratings Based (AIRB) approach under Basel III to determine minimum regulatory capital requirements for its domestic, U.S. and European credit portfolios, and certain international non-retail portfolios. The remaining credit portfolios are subject to the Standardized approach, which relies on the external credit ratings (e.g. S&P, Moody’s, DBRS, etc.) of borrowers, if available, to compute regulatory capital for credit risk. For the Bank’s Corporate, Bank and Sovereign AIRB portfolios, the key risk measures used in the quantification of regulatory capital for credit risk include probability of default (PD), loss given default (LGD) and exposure at default (EAD).
• | Probability of default (PD) measures the likelihood that a borrower, with an assigned Internal Grade (IG) code, will default within a one-year time horizon. IG codes are a component of the Bank’s risk rating system. Each of the Bank’s internal borrower IG codes is mapped to a PD estimate. |
• | Loss given default (LGD) measures the severity of loss on a facility in the event of a borrower’s default. LGD segments are determined based on facility characteristics such as seniority, collateral type, collateral coverage and other structural elements. Each LGD segment is assigned a LGD estimate. LGD is based on the concept of economic loss and is calculated using the present value of repayments, recoveries and related direct and indirect expenses. |
• | Exposure at default (EAD) measures the expected exposure on a facility at the time of default. |
All three risk measures are estimated using the Bank’s historical data, as well as available external benchmarks, and are updated on a regular basis. The historical data used for estimating these risk measures exceeds the minimum five-year AIRB requirement for PD estimates and the minimum seven-year AIRB requirement for LGD and EAD estimates. Further adjustments, as required under the Basel III Framework and OSFI’s requirements set out in its Domestic Implementation Notes, including any input floor requirements, are applied to average estimates obtained from historical data. These adjustments incorporate the regulatory requirements pertaining to:
• | Long-run estimation of PD, which requires that PD estimates capture average default experience over a reasonable mix of high-default and low-default years of the economic cycle; |
• | Downturn estimation for LGD, which requires that LGD estimates appropriately reflect conditions observed during periods where credit losses are substantially higher than average; and |
• | Downturn estimation for EAD, which requires that EAD estimates appropriately reflect conditions observed during periods of economic downturn; and |
• | The addition of a margin of conservatism, which is related to the likely range of errors based on the identification and quantification of the various sources of uncertainty inherent in historical estimates. |
These risk measures are used in the calculation of regulatory capital requirements based on formulas specified by the Basel framework. The credit quality distribution of the Bank’s AIRB non-retail portfolio is shown in Table T33. Year-over-year, the lower overall portfolio average PD is primarily due to decreases in defaulted exposures and customer ratings changes. In addition, portfolio average LGD and RW were generally flat year-over-year.
70 | 2021 Scotiabank Annual Report
Table of Contents
Management’s Discussion and Analysis | Group Financial Condition
The risk measures are subject to a rigorous back-testing framework which uses the Bank’s historical data to ensure that they are appropriately calibrated. Based on results obtained from the back-testing process, risk measures are reviewed, re-calibrated and independently validated on at least an annual basis in order to reflect the implications of new data, technical advances and other relevant information.
• | As PD estimates represent long-run parameters, back-testing is performed using historical data spanning at least one full economic cycle. Realized PDs are back-tested using pre-defined confidence intervals, and the results are then aggregated to provide an overall assessment of the appropriateness of each PD estimate; |
• | The back-testing for LGD and EAD estimates is conducted from both long-run and downturn perspectives, in order to ensure that these estimates are adequately conservative to reflect both long-run and downturn conditions. |
Portfolio-level back-testing results, based on a comparison of estimated and realized parameters for the four-quarter period ended at July 31, 2021, are shown in Table T34. During this period the actual experiences for PD and CCF were significantly more favourable than the estimates as reflected within the risk parameters. For LGD, actual results are a reflection of the accounts that defaulted during the observation while the estimated LGD is an overall portfolio average LGD parameter for all accounts and of all risk profiles.
T34 Portfolio-level comparison of estimated and actual non-retail percentages
Estimated(1) | Actual | |||||||
Average PD | 0.60 | 0.22 | ||||||
Average LGD | 39.86 | 42.95 | ||||||
Average CCF(2) | 48.70 | 18.15 |
(1) | Estimated parameters are based on portfolio averages at Q3/20, whereas actual parameters are based on averages of realized parameters during the subsequent four quarters. |
(2) | EAD back-testing is performed through Credit Conversion Factor (CCF) back-testing, as EAD is computed using the sum of the drawn exposure and undrawn exposure multiplied by the estimated CCF. |
Credit risk-weighted assets – Canadian retail
The AIRB approach is used to determine minimum regulatory capital requirements for the retail credit portfolio in Canada. The retail portfolio is comprised of the following Basel-based pools:
• | Residential real estate secured exposures consist of conventional and high ratio residential mortgages and all other products opened under the Scotia Total Equity Plan (STEP), such as loans, credit cards and secured lines of credit; |
• | Qualifying revolving retail exposures consist of all unsecured credit cards and lines of credit; |
• | Other retail consists of term loans (secured and unsecured), as well as credit cards and lines of credit which are secured by assets other than real estate. |
For the AIRB portfolios, the following models and parameters are estimated, subject to parameter input floors as required by OSFI:
• | Probability of default (PD) is the likelihood that the facility will default within the next 12 months. |
• | Loss Given Default (LGD) measures the economic loss as a proportion of the defaulted balance. |
• | Exposure at Default (EAD) is the portion of expected exposures at time of default. |
The data observation period used for PD/EAD/LGD estimates meets the five year minimum. Various statistical techniques including predictive modeling and decision trees were used to develop models. The models assign accounts into homogenous segments using internal and external borrower/facility-level credit experience. Every month, exposures are automatically re-rated based on risk and loss characteristics. PD, LGD and EAD estimates are then assigned to each of these segments incorporating the following regulatory requirements:
• | PD incorporates the average long run default experience over an economic cycle. This long run average includes a mix of high and low default years. |
• | LGD is adjusted to appropriately reflect economic downturn conditions. |
• | EAD may also be adjusted to reflect downturn conditions when PD and EAD are highly correlated. |
• | Sources of uncertainty are reviewed regularly to ensure uncertainties are identified, quantified and included in calculations so that all parameter estimates reflect appropriate levels of conservatism. |
The table below summarizes the credit quality distribution of the Bank’s AIRB retail portfolio as at October 31, 2021.
Year-over-year reductions in the average risk weight are primarily due to a lower portfolio average PD which is due primarily to reduced delinquencies and lower revolving credit account utilization rates. In addition, the lower portfolio average LGD is mainly from an increasing mix of loans secured by residential real estate.
T35 Retail AIRB portfolio exposure by PD range(1)
As at October 31 ($ millions) | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||
Category | PD Range | Exposure at default ($)(1) | RWA ($)(2) | PD (%)(3)(6) | LGD (%)(4)(6) | RW (%)(5)(6) | Exposure at default ($)(1) | RWA ($)(2) | PD (%)(3)(6) | LGD (%)(4)(6) | RW (%)(5)(6) | |||||||||||||||||||||||||||||||
Exceptionally low | 0.0000% – 0.0499% | 91,426 | 1,973 | 0.04 | 25 | 2 | 14,985 | 391 | 0.04 | 74 | 3 | |||||||||||||||||||||||||||||||
Very low | 0.0500% – 0.1999% | 106,994 | 7,824 | 0.17 | 27 | 7 | 99,114 | 4,775 | 0.08 | 28 | 5 | |||||||||||||||||||||||||||||||
Low | 0.2000% – 0.9999% | 77,215 | 20,487 | 0.67 | 39 | 27 | 129,345 | 24,387 | 0.51 | 30 | 19 | |||||||||||||||||||||||||||||||
Medium low | 1.0000% – 2.9999% | 20,744 | 10,861 | 1.75 | 50 | 52 | 20,162 | 11,150 | 1.93 | 52 | 55 | |||||||||||||||||||||||||||||||
Medium | 3.0000% – 9.9999% | 7,316 | 7,382 | 5.26 | 71 | 101 | 7,698 | 7,553 | 5.34 | 71 | 98 | |||||||||||||||||||||||||||||||
High | 10.0000% – 19.9999% | 917 | 1,186 | 15.49 | 53 | 129 | 631 | 842 | 12.16 | 48 | 133 | |||||||||||||||||||||||||||||||
Extremely high | 20.0000% – 99.9999% | 863 | 1,446 | 37.02 | 56 | 168 | 1,388 | 2,275 | 31.17 | 62 | 164 | |||||||||||||||||||||||||||||||
Default(7)(8) | 100% | 430 | 1,882 | 100.00 | 71 | 438 | 522 | 1,982 | 100.00 | 78 | 380 | |||||||||||||||||||||||||||||||
Total | 305,905 | 53,041 | 0.78 | 32 | 17 | 273,845 | 53,355 | 0.94 | 35 | 19 |
(1) | After credit risk mitigation. |
(2) | RWA prior to 6% scaling factor. |
(3) | PD – Probability of Default. |
(4) | LGD – Loss Given Default. |
(5) | RW – Risk Weight. |
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(6) | Exposure at default used as basis for estimated weightings. |
(7) | Gross defaulted exposures, before any related allowances. |
(8) | Commencing in Q1 2020, RWA is being calculated on defaulted retail exposures. Previously, the risk impact was reflected in Expected Losses. |
All AIRB models and parameters are monitored on a quarterly basis and independently validated annually by the Global Risk Management group. These models are tested to ensure rank ordering and back testing of parameters is appropriate. Comparison of estimated and actual loss parameters for the period ended July 31, 2021 is shown in Table T36. During this period the actual experience was either in-line with or materially more favourable than the estimates as reflected by the risk parameters.
T36 Estimated and actual loss parameters(1)
($ millions) | Average estimated PD | Actual default rate | Average estimated LGD | Actual LGD | Estimated EAD | Actual EAD | ||||||||||||||||||
Residential real estate secured | ||||||||||||||||||||||||
Residential mortgages | ||||||||||||||||||||||||
Insured mortgages(8) | 0.55 | 0.29 | – | – | – | – | ||||||||||||||||||
Uninsured mortgages | 0.47 | 0.18 | 17.54 | 12.94 | – | – | ||||||||||||||||||
Secured lines of credit | 0.28 | 0.11 | 31.19 | 19.70 | 49 | 46 | ||||||||||||||||||
Qualifying revolving retail exposures | 1.70 | 0.88 | 82.67 | 76.60 | 475 | 418 | ||||||||||||||||||
Other retail | 1.61 | 0.80 | 60.18 | 60.31 | 8 | 8 |
(1) | Estimates and actual values are recalculated to align with new models implemented during the period. |
(2) | Account weighted aggregation. |
(3) | Default weighted aggregation. |
(4) | EAD is estimated for revolving products only. |
(5) | Actual based on accounts not at default as at four quarters prior to reporting date. |
(6) | Actual LGD calculated based on 24 month recovery period after default and therefore excludes any recoveries received after the 24 month period. |
(7) | Estimates are based on the four quarters prior to the reporting date. |
(8) | Actual and estimated LGD for insured mortgages are not shown. Actual LGD includes the insurance benefit, whereas estimated LGD may not. |
Credit risk-weighted assets – International retail
International retail credit portfolios follow the Standardized approach and consist of the following components:
• | Residential real estate secured lending; and, |
• | Other retail, consisting of term loans, credit cards and lines of credit. |
Under the standardized approach, in general, residential real estate secured lending products are risk-weighted 35% and other retail products receive a 75% risk-weight.
Market risk
Market risk is the risk of loss from changes in market prices including interest rates, credit spreads, equity prices, foreign exchange rates, and commodity prices, the correlations between them, and their levels of volatility.
For all material trading portfolios, the Bank applies its internal models to calculate the market risk capital charge. OSFI has approved the Bank’s internal VaR, Stressed VaR, Incremental Risk Charge and Comprehensive Risk Measure models for the determination of market risk capital. The attributes and parameters of these models are described in the Risk Measurement Summary.
In addition, for some non-material trading portfolios, the Bank applies the Standardized Approach for calculating market risk capital. The standardized method uses a “building block” approach, with the capital charge for each risk category calculated separately.
In the second quarter of 2020, OSFI temporarily reduced the Bank’s Stressed Value-at-Risk (VaR) multipliers used in the calculation of market risk capital by a factor of 2. In addition, OSFI allowed the removal of Funding Valuation Adjustment (FVA) hedges in the calculation of market risk capital. Effective May 1, 2021, the temporary reduction in the Stressed Value at Risk (SVaR) multiplier was returned to pre-pandemic levels.
Below are the market risk requirements as at October 31, 2021 and 2020:
T37 Total market risk capital (1)
($ millions) | 2021 | 2020 | ||||||
All-Bank VaR | $ | 93 | $ | 157 | ||||
All-Bank stressed VaR(2) | 353 | 119 | ||||||
Incremental risk charge | 150 | 227 | ||||||
Comprehensive risk measure | – | – | ||||||
Standardized approach | 53 | 83 | ||||||
Total market risk capital | $ | 649 | $ | 586 |
(1) | Equates to $8,112 million of market risk-weighted assets (2020 – $7,327 million). |
(2) | Increase from prior year primarily from OSFI’s return of the stressed VaR multiplier to pre-pandemic levels. |
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T38 Risk-weighted assets movement by key drivers
Market risk | ||||||||
($ millions) | 2021 | 2020 | ||||||
RWA as at beginning of the year | $ | 7,327 | $ | 8,674 | ||||
Movement in risk levels(1) | (1,803 | ) | 8,695 | |||||
Model updates(2) | (538 | ) | (242 | ) | ||||
Methodology and policy(3) | 3,134 | (9,800 | ) | |||||
Acquisitions and divestitures | (8 | ) | – | |||||
RWA as at end of the year | $ | 8,112 | $ | 7,327 |
(1) | Movement in risk levels are defined as changes in risk due to position changes and market movements. Foreign exchange movements are embedded within Movement in risk levels. |
(2) | Model updates are defined as updates to the model to reflect recent experience, change in model scope. |
(3) | Methodology and policy is defined as methodology changes to the calculations driven by regulatory policy changes (e.g. Basel III). |
Market risk-weighted assets increased by $0.8 billion to $8.1 billion, as shown in the table above, due primarily to methodology and policy changes arising from the reversal of OSFI’s temporary reduction of the stressed VaR multiplier during COVID-19, partly offset by movements in risk levels and model updates.
Operational risk
Operational risk is the risk of loss, whether direct or indirect, to which the Bank is exposed due to external events, human error, or the inadequacy or failure of processes, procedures, systems or controls.
In January 2020, OSFI revised its capital requirements for operational risk in consideration of the finalized Basel III revisions, requiring that institutions previously approved for the Basel II Advanced Measurement Approach (AMA) for operational risk capital are to report operational risk capital using the existing Basel II Standardized Approach for fiscal years 2020, 2021 and 2022. Consistent with OSFI’s requirements, the Bank applies the Standardized Approach for calculating operational risk capital as per the applicable Basel standards.
Under the Standardized Approach, total capital is determined as the sum of capital for each of eight Basel defined business activities. The capital for each activity is the product of the relevant risk factor, as defined by Basel, applied to the gross income of each respective business activity, as defined by OSFI Guideline – Capital Adequacy Requirements (November 2018).
Operational risk-weighted assets increased by $1.4 billion during the year to $49.2 billion primarily due to the growth in the Bank’s gross income.
Internal capital
The Bank utilizes economic capital methodologies and measures to calculate internal capital. Internal capital is a measure of the unexpected losses inherent in the Bank’s business activities. The calculation of internal capital relies on models that are subject to independent vetting and validation as required by the Bank’s Model Risk Management Policy.
Management assesses its risk profile to determine those risks for which the Bank should attribute internal capital. The major risk categories included in internal capital are:
• | Credit risk measurement is based on the Bank’s internal credit risk ratings for derivatives, corporate and commercial loans, and credit scoring for retail loans. It is also based on the Bank’s actual experience with recoveries and takes into account differences in term to maturity, probabilities of default, expected severity of loss in the event of default, and the diversification benefits of certain portfolios. |
• | Market risk for internal capital incorporates models consistent with the regulatory basis, with some exclusions, and calibrated to a higher 99.95% confidence interval, and models of other market risks, mainly structural interest rate and foreign exchange risks. |
• | Operational risk for internal capital is calculated based on an approach consistent with the Bank’s regulatory capital requirements including a conservative forward-looking view of gross income. |
• | Other risks include additional risks for which internal capital is attributed, such as business risk, significant investments, insurance risk and real estate risk. |
In addition, the Bank’s measure of internal capital includes a diversification benefit which recognizes that all of the above risks will not occur simultaneously. The Bank also includes the full amount of goodwill and intangible assets in the internal capital amount.
For further discussion on risk management and details on credit, market and operational risks, refer to the Risk Management section.
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Management’s Discussion and Analysis
Off-Balance Sheet Arrangements
In the normal course of business, the Bank enters into contractual arrangements that are either consolidated or not required to be consolidated in its financial statements, but could have a current or future impact on the Bank’s financial performance or financial condition. These arrangements can be classified into the following categories: structured entities, securitizations, guarantees and other commitments.
Structured entities
Structured entities are designed to accomplish certain well-defined objectives and for which voting or similar rights are not the dominant factor in deciding who controls the entity. The Bank may become involved with structured entities either at the formation stage or at a later date. The Bank controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The Bank’s arrangements with structured entities include:
• | Structured entities that are used to provide a wide range of services to customers, such as structured entities established to allow clients to securitize their financial assets while facilitating cost-efficient financing, and to provide certain investment opportunities. |
• | Structured entities that the Bank sponsors and actively manages. |
All structured entities are subject to a rigorous review and approval process to ensure that all significant risks are properly identified and addressed. The Bank consolidates all structured entities that it controls. For many of the structured entities that are used to provide services to customers, the Bank does not guarantee the performance of the structured entities’ underlying assets and does not absorb any related losses. For other structured entities, such as securitization and investment vehicles, the Bank may be exposed to credit, market, liquidity or operational risks. Noteholders of securitizations may also be exposed to these risks. The Bank may earn fees based on the nature of its association with a structured entity.
Consolidated structured entities
The Bank controls its U.S. based multi-seller conduit and certain funding and other vehicles, and consolidates these structured entities in the Bank’s consolidated financial statements.
As at October 31, 2021, total assets of consolidated structured entities were $87 billion, compared to $84 billion at the end of 2020. The increase in total assets was due primarily to increased mortgages sold into the Scotiabank Covered Bond Guarantor Limited Partnership, and the formation of Scotiabank LRCN Trust in connection with the issuance of limited recourse capital notes. More details of the Bank’s consolidated structured entities are provided in Note 15(a) to the consolidated financial statements.
Unconsolidated structured entities
There are two primary types of association the Bank has with unconsolidated structured entities:
• | Canadian multi-seller conduits administered by the Bank, and |
• | Structured finance entities. |
The Bank earned total fees of $38 million in 2021 (October 31, 2020 – $30 million) from certain structured entities in which it had a significant interest at the end of the year but did not consolidate. More information with respect to the Bank’s involvement with these unconsolidated structured entities, including details of liquidity facilities and maximum loss exposure by category is provided below and in Note 15(b) to the consolidated financial statements.
Canadian multi-seller conduits administered by the Bank
The Bank sponsors two Canadian-based multi-seller conduits that are not consolidated. During the year the Bank continued to assess its control conclusion for these conduits and there were no changes to the Bank’s assessment. The Bank earned commercial paper issuance fees, program management fees, liquidity fees and other fees from these multi-seller conduits, which totaled $36 million in 2021, compared to $28 million in 2020. These multi-seller conduits purchase high-quality financial assets and finance these assets through the issuance of highly-rated commercial paper.
As further described below, the Bank’s exposure to these off-balance sheet conduits primarily consists of liquidity support and temporary holdings of commercial paper. Although the Bank has power over the relevant activities of the conduits, it has limited exposure to variability in returns, which results in the Bank not consolidating the two Canadian conduits. The Bank has a process to monitor these exposures and significant events impacting the conduits to ensure there is no change in control, which could require the Bank to consolidate the assets and liabilities of the conduits at fair value.
A significant portion of the conduits’ assets have been structured to receive credit enhancements from the sellers, including overcollateralization protection and cash reserve accounts. Each asset purchased by the conduits is supported by a backstop liquidity facility provided by the Bank in the form of a liquidity asset purchase agreement (LAPA). The primary purpose of the backstop liquidity facility is to provide an alternative source of financing in the event the conduits are unable to access the commercial paper market. Under the terms of the LAPA, in most cases, the Bank is not obliged to purchase defaulted assets.
The Bank’s primary exposure to the Canadian-based conduits is the liquidity support provided, with total liquidity facilities of $4.9 billion as at October 31, 2021 (October 31, 2020 – $4.2 billion). The year-over-year increase was due to normal business operations. As at October 31, 2021, total commercial paper outstanding for the Canadian-based conduits was $3.5 billion (October 31, 2020 – $3.1 billion) and the Bank held 0.2% of the total commercial paper issued by these conduits. Table T39 presents a summary of assets purchased and held by the Bank’s two Canadian multi-seller conduits as at October 31, 2021 and 2020, by underlying exposure.
All of the funded assets have at least an equivalent rating of AA or higher based on the Bank’s internal rating program. Assets held in these conduits were investment grade as at October 31, 2021. Approximately 73% of the funded assets have final maturities falling within four years, and the weighted-average repayment period, based on cash flows, approximates 2.1 years.
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T39 Assets held by Bank-sponsored Canadian-based multi-seller conduits
2021 | 2020 | |||||||||||||||||||||||
As at October 31 ($ millions) | Funded assets(1) | Unfunded commitments | Total exposure(2) | Funded assets(1) | Unfunded commitments | Total exposure(2) | ||||||||||||||||||
Auto loans/leases | $ | 2,541 | $ | 474 | $ | 3,015 | $ | 1,940 | $ | 444 | $ | 2,384 | ||||||||||||
Trade receivables | 130 | 647 | 777 | 186 | 596 | 782 | ||||||||||||||||||
Canadian residential mortgages | 250 | 260 | 510 | 434 | 76 | 510 | ||||||||||||||||||
Equipment rental contracts | 560 | 11 | 571 | 537 | 34 | 571 | ||||||||||||||||||
Other | 38 | 31 | 69 | – | – | – | ||||||||||||||||||
Total(3) | $ | 3,519 | $ | 1,423 | $ | 4,942 | $ | 3,097 | $ | 1,150 | $ | 4,247 |
(1) | Funded assets are reflected at original cost, which approximates estimated fair value. |
(2) | Exposure to the Bank is through global-style liquidity facilities. |
(3) | These assets are substantially sourced from Canada. |
Structured finance entities
The Bank has interests in structured finance entities used to assist corporate clients in accessing cost-efficient financing through their securitization structures. The Bank’s maximum exposure to loss from structured finance entities was $1,765 million as at October 31, 2021 (October 31, 2020 – $2,014 million). The year-over-year decrease was due to normal business operations.
Other unconsolidated structured entities
The Bank sponsors unconsolidated structured entities including mutual funds, in which it has insignificant or no interest at the reporting date. The Bank is a sponsor when it is significantly involved in the design and formation at inception of the structured entity, and the Bank’s name is used by the structured entity to create an awareness of the instruments being backed by the Bank’s reputation and obligation. The Bank also considers other factors, such as its continuing involvement and obligations to determine if, in substance, the Bank is a sponsor. For the year ended October 31, 2021, the Bank earned $2,604 million income from its involvement with the unconsolidated Bank-sponsored structured entities, all of which is from Bank-sponsored mutual funds (for the year ended October 31, 2020 – $2,165 million).
Securitizations
The Bank securitizes its retail loans, as described further below, as an efficient source of financing its operations.
The Bank securitizes fully insured residential mortgage loans, originated by the Bank and third parties, through the creation of mortgage-backed securities that are sold to Canada Housing Trust (CHT), Canada Mortgage and Housing Corporation (CMHC) or third party investors. The sale of such mortgages does not meet the derecognition requirements where the Bank retains substantially all of the risks and rewards of ownership of the securitized mortgages. The transferred mortgages continue to be recognized on the Consolidated Statement of Financial Position, along with the proceeds from sale treated as secured borrowings. More details have been provided in Note 14 of the consolidated financial statements.
Third-party originated mortgages purchased by the Bank and social housing mortgage pools originated by the Bank qualify for derecognition where the Bank transfers substantially all of the risks and rewards of ownership to third parties. As at October 31, 2021, the outstanding amount of off-balance sheet securitized third-party originated mortgages was $10,289 million (October 31, 2020 – $6,741 million) and off-balance sheet securitized social housing pools was $804 million (October 31, 2020 – $870 million).
The Bank securitizes a portion of its Canadian personal and small business credit card receivables (receivables) through Trillium Credit Card Trust II (Trillium), a Bank-sponsored structured entity. Trillium issues senior and subordinated notes to investors. The proceeds of such issuances are used to purchase co-ownership interests in the receivables originated by the Bank. The sale of such co-ownership interests does not qualify for derecognition and therefore the receivables continue to be recognized on the Bank’s Consolidated Statement of Financial Position. Recourse of the noteholders is limited to the purchased co-ownership interests. During the year, $1,075 million receivables were securitized through Trillium (2020 – $638 million).
The Bank securitizes a portion of its Canadian auto loan receivables (receivables) through Securitized Term Auto Receivables Trust (START entities) 2018-2, 2019-1 and 2019-CRT Bank-sponsored structured entities. The START entities issue senior and subordinated notes to the Bank and/or third-party investors, and the proceeds of such issuances are used to purchase discrete pools of retail indirect auto loan receivables from the Bank on a fully serviced basis. The sale of such pools does not qualify for derecognition and therefore the receivables continue to be recognized on the Bank’s Consolidated Statement of Financial Position. Recourse of the note holders is limited to the receivables. During the year, no receivables were securitized through the START entities (2020 – $1,392 million). As at October 31, 2021, the outstanding senior and subordinated notes issued by the START entities and held by the Bank of $499 million (2020 – $1,017 million) are eliminated on consolidation.
Guarantees and other commitments
Guarantees and other commitments are fee-based products that the Bank provides to its customers. These products can be categorized as follows:
• | Standby letters of credit and letters of guarantee. As at October 31, 2021, these amounted to $37 billion, compared to $35 billion last year. These instruments are issued at the request of a Bank customer to secure the customer’s payment or performance obligations to a third party. |
• | Liquidity facilities. These generally provide an alternate source of funding to asset-backed commercial paper conduits in the event a general market disruption prevents the conduits from issuing commercial paper or, in some cases, when certain specified conditions or performance measures are not met; |
• | Indemnification contracts. In the ordinary course of business, the Bank enters into many contracts where it may indemnify contract counterparties for certain aspects of its operations that are dependent on other parties’ performance, or if certain events occur. The Bank cannot estimate, in all cases, the maximum potential future amount that may be payable, nor the amount of collateral or assets available under recourse provisions that would mitigate any such payments. Historically, the Bank has not made any significant payments under these indemnities; |
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• | Loan commitments. The Bank has commitments to extend credit, subject to specific conditions, which represent undertakings to make credit available in the form of loans or other financings for specific amounts and maturities. As at October 31, 2021, these commitments amounted to $240 billion, compared to $235 billion last year. The year-over-year increase is primarily due to an increase in business activity, partially offset by foreign currency translation. |
These guarantees and loan commitments may expose the Bank to credit or liquidity risks, and are subject to the Bank’s standard review and approval processes. For the guaranteed products, the dollar amounts represent the maximum risk of loss in the event of a total default by the guaranteed parties, and are stated before any reduction for recoveries under recourse provisions, insurance policies or collateral held or pledged.
Fees from the Bank’s guarantees and loan commitment arrangements, recorded as credit fees in non-interest income in the Consolidated Statement of Income, were $643 million in 2021, compared to $622 million in the prior year. Detailed information on guarantees and loan commitments is disclosed in Note 35 in the consolidated financial statements.
Canadian Government Economic Response Plans
The Bank participated in the following plans as part of the Government of Canada’s COVID-19 Economic Response Plan.
Canada Emergency Business Account (CEBA)
Through the CEBA program, the Bank facilitated loans with eligible small business customers and Export Development Canada (EDC).
Eligible small business customers received a loan of up to $60,000. The CEBA loans are derecognized from the Bank’s Consolidated Statement of Financial Position as the program meets the pass-through criteria for derecognition of financial assets under IFRS 9. As at October 31, 2021, loans issued under the CEBA were approximately $4.3 billion (October 31, 2020 – $3.0 billion).
Business Credit Availability Program (BCAP)
The BCAP provides additional liquidity support to small business and commercial customers through EDC and Business Development Bank of Canada (BDC). As at October 31, 2021, loans issued under the BCAP were $160 million (October 31, 2020 – $95 million).
Under the EDC plan, EDC guarantees an 80% portion of new operating loans made to the export sector as well as domestic companies. Loans guaranteed by EDC continue to be recognized on the Consolidated Statement of Financial Position.
Under the BCAP, BDC entered into a co-lending facility with the Bank in which BDC purchases an 80% participation in term loans made to eligible small business and commercial customers. The portion of loans sold to BDC are derecognized from the Bank’s Consolidated Statement of Financial Position as the program meets the derecognition criteria for a transfer under IFRS 9.
Under the BCAP Mid-Market Financing Program, BDC enters into loan syndications with the Bank and underwrites 90% of junior term loans made to eligible medium-sized businesses. The portion of the syndicated loans funded by the Bank is recognized on the Consolidated Statement of Financial Position.
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Management’s Discussion and Analysis | Group Financial Condition
Given the nature of the Bank’s main business activities, financial instruments make up a substantial portion of the Bank’s financial position and are integral to the Bank’s business. Assets that are financial instruments include cash resources, securities, securities purchased under resale agreements, loans and customers’ liability under acceptances. Financial instrument liabilities include deposits, acceptances, obligations related to securities sold under repurchase agreements, obligations related to securities sold short, subordinated debentures and capital instrument liabilities. In addition, the Bank uses derivative financial instruments for both trading and hedging purposes.
Financial instruments are generally carried at fair value, except for non-trading loans and receivables, certain securities and most financial liabilities, which are carried at amortized cost unless designated as fair value through profit and loss at inception.
Unrealized gains and losses on the following items are recorded in other comprehensive income (OCI):
• | debt instruments measured at fair value through OCI, |
• | equity instruments measured at fair value through OCI, |
• | derivatives designated as cash flow hedges, and |
• | net investment hedges. |
Gains and losses on derecognition of debt instruments at FVOCI are reclassified from OCI to the Consolidated Statement of Income under non-interest income. Gains and losses on derecognition of equity instruments designated at FVOCI are not reclassified from OCI to the Consolidated Statement of Income. Gains and losses on cash flow hedges and net investment hedges are recorded in the Consolidated Statement of Income when the hedged item affects income.
The Bank’s accounting policies for derivatives and hedging activities are further described in Note 3 to the consolidated financial statements.
Interest income and expense on non-trading interest-bearing financial instruments are recorded in the Consolidated Statement of Income as part of net interest income. Credit losses related to loans are recorded in the provision for credit losses in the Consolidated Statement of Income. Interest income and expense, as well as gains and losses, on trading securities and trading loans are recorded in non-interest income – trading revenues.
Several risks arise from transacting financial instruments, including credit risk, liquidity risk, operational risk and market risk. The Bank manages these risks using extensive risk management policies and practices, including various Board-approved risk management limits.
A discussion of the Bank’s risk management policies and practices can be found in the Risk Management section on pages 79 to 117. In addition, Note 36 to the consolidated financial statements presents the Bank’s exposure to credit risk, liquidity risk and market risks arising from financial instruments as well as the Bank’s corresponding risk management policies and procedures.
There are various measures that reflect the level of risk associated with the Bank’s portfolio of financial instruments. For example, the interest rate risk arising from the Bank’s financial instruments can be estimated by calculating the impact of a 100 basis point increase or decrease in interest rates on annual income, and the economic value of shareholders’ equity, as described on page 101. For trading activities, Table T51 discloses the average one-day Value at Risk by risk factor. For derivatives, based on the maturity profile of the notional amount of the Bank’s derivative financial instruments, only 18% (2020 – 17%) had a term to maturity greater than five years.
Note 10 to the consolidated financial statements provides details about derivatives used in trading and hedging activities, including notional amounts, remaining term to maturity, credit risk and fair values.
The fair value of the Bank’s financial instruments is provided in Note 7 to the consolidated financial statements along with a description of how these amounts were determined.
The fair value of the Bank’s financial instruments was favourable when compared to their carrying value by $3.9 billion as at October 31, 2021 (October 31, 2020 – favourable $3.5 billion). This difference relates mainly to loan assets, deposit liabilities, subordinated debentures and other liabilities. These changes are primarily driven by movements in interest rates and by volume changes. Fair value estimates are based on market conditions as at October 31, 2021, and may not be reflective of future fair values. Further information on how fair values are estimated is contained in the section on critical accounting estimates.
Disclosures specific to certain financial instruments designated at fair value through profit and loss can be found in Note 9 to the consolidated financial statements. These designations were made primarily to significantly reduce accounting mismatches.
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Management’s Discussion and Analysis
Selected Credit Instruments – Publicly Known Risk Items
Mortgage-backed securities
Total mortgage-backed securities held in the Non-trading and Trading portfolios are shown in Table T40.
T40 Mortgage-backed securities
2021 | 2020 | |||||||||||||||
As at October 31 Carrying value ($ millions) | Non-trading portfolio(1) | Trading portfolio | Non-trading portfolio(1) | Trading portfolio | ||||||||||||
Canadian NHA mortgage-backed securities(2) | $ | 7,006 | $ | 2,022 | $ | 6,459 | $ | 2,224 | ||||||||
Canadian residential mortgage-backed securities | – | – | – | 5 | ||||||||||||
Commercial mortgage-backed securities | – | – | – | 8 | ||||||||||||
U.S. Agency mortgage-backed securities(3) | 6,134 | – | 8,539 | – | ||||||||||||
Total | $ | 13,140 | $ | 2,022 | $ | 14,998 | $ | 2,237 |
(1) | The balances are comprised of securities under the amortized cost and FVOCI measurement categories. |
(2) | Canada Mortgage and Housing Corporation is a corporation of the Government of Canada that provides a guarantee of timely payment to NHA mortgage-backed security investors. |
(3) | The Government National Mortgage Association (Ginnie Mae) is a U.S. Government corporation that provides a guarantee of timely payment to U.S. Agency mortgage-backed security investors. |
Other
As at October 31, 2021, the Bank has insignificant exposure to highly leveraged loans awaiting syndication, auction-rate securities, Alt-A type loans, monoline insurance and investments in structured investment vehicles.
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Management’s Discussion and Analysis | Risk Management
Effective risk management is fundamental to the success and resilience of the Bank and is recognized as key in the Bank’s overall approach to strategy management. Scotiabank has a strong, disciplined risk culture where managing risk is a responsibility shared by all of the Bank’s employees.
The primary goals of risk management are to ensure that the outcomes of risk-taking activities are consistent with the Bank’s strategies and risk appetite, and that there is an appropriate balance between risk and reward in order to maximize shareholder value. Scotiabank’s Enterprise-Wide Risk Management Framework articulates the foundation for achieving these goals.
This Framework is subject to constant evaluation in order for it to meet the challenges and requirements of the global markets in which the Bank operates, including regulatory standards and industry best practices. The risk management programs of the Bank’s subsidiaries align in all material respects to the Bank’s risk management framework, although the actual execution of their programs may be different. They are designed to identify, assess, and mitigate threats and vulnerabilities to which the Bank is exposed and serve to enhance its overall resilience.
The Bank’s risk management framework is applied on an enterprise-wide basis and consists of five key elements:
• | Risk Governance |
• | Risk Appetite |
• | Risk Management Tools |
• | Risk Identification and Assessment |
• | Risk Culture |
Risk Management Principles
Risk-taking and risk management activities across the enterprise are guided by the following principles:
Balancing Risk and Reward – business and risk decisions are consistent with strategies and risk appetite.
Understand the Risks – all material risks to which the Bank is exposed, including both financial and non-financial, are identified and managed.
Forward Thinking – emerging risks and potential vulnerabilities are proactively identified and managed.
Shared Accountability – every employee is responsible for managing risk.
Customer Focus – understanding our customers and their needs is essential to all business and risk decision-making.
Protect our Brand – all risk-taking activities must be in line with the Bank’s risk appetite, Scotiabank Code of Conduct, values and policy principles.
Controls – maintaining a robust and resilient control environment to protect our stakeholders.
Resilience – being prepared operationally and financially to respond to adverse events.
Compensation – performance and compensation structures reinforce the Bank’s values and promote sound risk taking behaviour taking into account the compensation-related regulatory environment.
Risk Governance
Effective risk management begins with effective risk governance.
The Bank has a well-established risk governance structure, with an active and engaged Board of Directors supported by an experienced executive management team. Decision-making is highly centralized through a number of executive and senior risk management committees.
The Bank’s risk management framework is predicated on the three lines of defence model. Within this model
• | The First Line of Defence (typically comprised of the business lines and most corporate functions) |
• | Incurs and owns the risks |
• | Designs and executes internal controls |
• | Ensures that the risks generated are identified, assessed, managed and monitored, are within risk appetite, and are in compliance with relevant policies, guidelines and limits |
• | The Second Line of Defence (typically comprised of control functions such as Global Risk Management and Global Finance) |
• | Provides independent assessment, oversight, and objective challenge to the First Line of Defence, as well as monitoring and control of risk |
• | Establishes risk appetite, risk limits, policies, and frameworks, in accordance with best practice and regulatory requirements |
• | Measures, monitors, and reports on risks taken in relation to limits and risk appetite, and on emerging risks |
• | The Third Line of Defence (Audit Department) provides enterprise-wide independent, objective assurance over the design and operation of the Bank’s internal control, risk management and governance processes |
All employees are, for some of their activities, risk owners, as all employees are capable of generating reputational and operational risks in their day to day activities and are held accountable for owning and managing these risks.
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Governance Structure
The Bank’s Board of Directors and its Committees provide oversight and governance over the Bank’s Risk Management program which is supported by the President and Chief Executive Officer and Chief Risk Officer.
The Board of Directors: as the top of the Bank’s risk management governance structure, provides oversight, either directly or through its committees, to satisfy itself that decision making is aligned with the Bank’s strategies and risk appetite. The Board receives regular updates on the key risks of the Bank – including a quarterly comprehensive summary of the Bank’s risk profile and performance of the portfolio against defined limits – and approves key risk policies, frameworks, and limits.
The Risk Committee of the Board: assists the Board in fulfilling its responsibilities for the review of the Bank’s risk appetite and identifying and monitoring key financial and non-financial risks and the oversight of the promotion and maintenance of a strong risk culture throughout the Bank. The Committee assists the Board by providing oversight of the risk management and anti-money laundering (AML) functions at the Bank. This includes periodically reviewing and approving the Bank’s key risk management policies, frameworks, and limits and satisfying itself that management is operating within the Bank’s Enterprise Risk Appetite Framework. The Committee oversees the Bank’s environmental, social, and governance (ESG) risks, including climate change risk. The Committee also oversees the independence of each of these control functions, including the effectiveness of the heads of these functions, as well as the functions themselves.
Audit and Conduct Review Committee of the Board: assists the Board by providing oversight on the effectiveness of the Bank’s system of internal controls. The Committee oversees the integrity of the Bank’s consolidated financial statements and related quarterly results. This includes oversight of climate-change related disclosure as part of the Bank’s financial reporting of ESG matters as well as the external auditor’s qualifications, independence and performance. This Committee assists the Board in fulfilling its oversight responsibilities for setting standards of conduct and ethical behaviour, and the oversight of conduct review, risk culture and conduct risk management. The Committee also oversees the Bank’s compliance with legal and regulatory requirements, and oversees the Global Finance, Global Compliance and Audit Department functions at the Bank. The Committee also oversees the independence of each of these control functions, including the effectiveness of the heads of these functions, as well as the functions themselves.
Human Capital and Compensation Committee of the Board: in conjunction with the Risk Committee of the Board, satisfies itself that adequate procedures are in place to identify, assess and manage the risks (including conduct risk) associated with the Bank’s material compensation programs and that such procedures are consistent with the Bank’s risk management programs. The Committee has further responsibilities relating to leadership, succession planning and total rewards.
Corporate Governance Committee of the Board: acts in an advisory capacity to the Board to enhance the Bank’s corporate governance through a continuing assessment of the Bank’s approach to corporate governance and makes policy recommendations in support of the Bank’s purpose, culture and strategy.
President and Chief Executive Officer (CEO): reports directly to the Board and is responsible for defining, communicating and implementing the strategic direction, goals and core values for Scotiabank that maximize long term shareholder value and returns, and meeting the needs of the Bank’s other key stakeholders. The CEO oversees the establishment of the Bank’s risk appetite, in collaboration with the CRO and CFO, which is consistent with the Bank’s short and long term strategy, business and capital plans, as well as compensation programs.
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Chief Risk Officer (CRO): reports jointly to the CEO and the Risk Committee of the Board and is responsible for the overall management of Global Risk Management which includes Enterprise Risk Governance and Financial Crimes Risk Management (FCRM). The CRO and the head of FCRM also have unfettered access to the Risk Committee of the Board to ensure their independence. As a senior member of the Bank’s executive management team, the CRO participates in strategic decisions related to where and how the Bank will deploy its various sources of capital to meet the performance targets of the business lines.
Global Risk Management (GRM): supports the Bank’s objectives and is mandated to maintain an ongoing and effective enterprise-wide risk management framework that resonates through all levels of the Bank. GRM is responsible for providing effective challenge and reasonable assurance to executive management, the Board of Directors and shareholders that risks are actively identified, managed and communicated to all key stakeholders. GRM’s mission is to ensure that the outcomes of risk taking activities optimize and protect long-term value by using data-driven insight and partnership to drive business impact.
Global Compliance: on an enterprise-wide basis, manages compliance risk which includes regulatory compliance, conduct, and privacy risks throughout Scotiabank. A primary objective of Global Compliance is to take a holistic view of compliance risk to ensure consistency in the application of the Compliance Program, and assurance of outputs from its compliance risk management processes. Global Compliance provides independent oversight of Compliance risk through the Compliance Program by:
• | developing and maintaining compliance frameworks, policies, standards, and procedures; |
• | effectively challenging compliance risk management in the Bank’s Business Lines and managing Compliance risk in Corporate Functions through the adoption of a reliance model; |
• | acting as a consultant and educator on regulatory compliance, internal policies and procedures; and |
• | being responsible for conducting ongoing risk-based enterprise-wide assessment, monitoring, testing, issues management, regulatory relationship management, and reporting. |
Financial Crimes Risk Management (FCRM): on an enterprise-wide basis, develops AML/ATF and sanctions policies and control standards to be followed in effectively controlling money laundering, terrorist financing, and sanctions risks. The AML Risk group within FCRM is responsible for maintaining the AML/ATF and sanctions program current with Scotiabank needs, industry practice, and AML/ATF and sanctions legal and regulatory requirements, as well as providing risk-based independent oversight of Scotiabank’s compliance with these standards and requirements. FCRM also provides oversight and objective challenge to the Bank’s risk of fraud.
Global Finance: leads enterprise-wide financial strategies which support the Bank’s ability to maximize sustainable shareholder value, and actively manages the reliable and timely reporting of financial information to management, the Board of Directors and shareholders, regulators, as well as other stakeholders. This reporting includes the Bank’s consolidated financial statements and related quarterly and annual results, as well as all financial reporting related regulatory filings. Global Finance executes the Bank’s financial and capital management strategies with appropriate governance and control, while ensuring its processes are efficient and effective.
Business Lines and Corporate Functions: as the first line of defence in the Three Lines of Defence model, own the risks generated by their activities, are accountable for effective management of the risks within their business lines and functions through identifying, assessing, mitigating, monitoring and reporting the risks. Business lines and corporate functions actively design and implement effective internal controls as well as governance activities to manage risk and maintain activities within risk appetite and policies. Further, business lines have processes to be able to effectively identify, assess, monitor and report against allocated risk appetite limits and are in compliance with relevant policies, standards and guidelines.
Audit Department: reports independently to the Audit and Conduct Review Committee of the Board on the design and operating effectiveness of the Bank’s risk management processes. The mission of the Audit Department is to provide enterprise-wide independent, objective assurance of the Bank’s internal controls, risk management and governance processes and to provide advisory consulting services to improve the Bank’s operations.
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Risk Appetite
Effective risk management requires clear articulation of the Bank’s risk appetite and how the Bank’s risk profile will be managed in relation to that appetite.
The Bank’s Enterprise Risk Appetite Framework (RAF) articulates the amount and types of risk the Bank is willing to take to achieve its strategic and financial objectives. The RAF consists of risk capacity, risk appetite statement, risk appetite metrics, and roles and responsibilities of those overseeing the implementation and monitoring of the RAF. Together, the application of these components helps to ensure the Bank stays within the appropriate risk boundaries, finds an optimal balance between risk and return, and supports a strong risk culture.
Scotiabank’s risk appetite is integrated into the strategic and capital planning process and compensation programs. The RAF is reviewed at least annually and is approved by the Bank’s Board. Business lines, key subsidiaries, control functions and key business units develop their own risk appetite frameworks and/or risk appetite statements, which are aligned with the Bank’s RAF.
Risk Appetite Statement
The Bank’s Risk Appetite Statement articulates the aggregate level and types of risk the Bank is willing to accept, or to avoid, in order to achieve its business objectives. It includes qualitative statements as well as quantitative measures and considers all the Bank’s Principal Risks.
The Bank’s Risk Appetite Statement can be summarized as follows:
• | The Bank has no appetite for breaches of the Scotiabank Code of Conduct. Bank officers and employees are expected to conduct business and interact with others in a legal, compliant and ethical manner while upholding the Bank’s corporate values. |
• | The Bank favours businesses that generate sustainable, consistent and predictable earnings. |
• | The Bank limits its risk taking activities to those that are understood and in line with the Bank’s risk appetite, risk culture, values and strategic objectives. |
• | The Bank strives to maintain a robust and resilient control environment to protect its stakeholders and be prepared operationally and financially to respond to adverse events. |
• | The Bank has no appetite for reputational, legal, or regulatory risk, that would undermine the trust of the Bank’s stakeholders. |
• | The Bank aims to maintain a strong capital and liquidity position and optimally allocate capital to support its strategic and financial objectives. |
Risk Appetite Metrics
Risk appetite metrics provide clear risk limits, which are critical in implementing an effective risk management framework. Risk appetite metrics are supported by management level limit structures and controls, as applicable.
Other components of Scotiabank’s risk appetite metrics:
• | Set risk capacity and appetite in relation to regulatory constraints |
• | Use stress testing to provide forward-looking metrics |
• | Minimize earnings volatility |
• | Limit exposure to operational events that can have an impact on earnings, including regulatory fines |
• | Ensure reputational risk is top of mind and strategy is being executed within operating parameters |
Risk Management Tools
Effective risk management includes tools that are guided by the Bank’s Enterprise Risk Appetite Framework and integrated with the Bank’s strategies and business planning processes.
Scotiabank’s risk management framework is supported by a variety of risk management tools that are used individually and/or jointly to manage enterprise-wide risks. Risk management tools are regularly reviewed and updated to ensure consistency with risk-taking activities, and relevance to the business and financial strategies of the Bank.
Frameworks, Policies and Limits
Frameworks and Policies
The Bank develops and implements its key risk frameworks and policies in consultation with the Board. Such frameworks and policies are also subject to the requirements and guidelines of the Office of the Superintendent of Financial Institutions (OSFI), the Bank Act, the requirements and expectations of other regulators in the jurisdictions and activities in which we conduct business, and in consideration of industry best practices. Frameworks and policies apply to specific types of risk or to the activities that are used to measure and control risk exposure. They are developed in consultation with various stakeholders across risk management and other control and corporate functions, business lines and the Audit Department. Their development and implementation are guided by the Bank’s risk appetite, good governance and set the limits and controls within which the Bank and its subsidiaries can operate. The Bank also provides advice and counsel to its subsidiaries in respect of their risk frameworks and policies to ensure alignment with the Bank, subject to the local regulatory requirements of each subsidiary.
Key risk frameworks and policies may be supported by standards, procedures, guidelines and manuals.
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Limits
Limits govern and control risk-taking activities within the appetite and tolerances established by the Board and executive management. Limits also establish accountability for key tasks in the risk-taking process and establish the level or conditions under which transactions may be approved or executed.
Risk Measurement
The Bank’s measurement of risk is a key component of its risk management framework. The measurement methodologies may apply to a group of risks or a single risk type and are supported by an assessment of qualitative risk factors to ensure the level of risks are within the Bank’s risk appetite. The Bank utilizes various risk techniques such as: models; stress testing; scenario and sensitivity analysis; and back testing using data with forward-looking projections based on plausible and worst case economic and financial market events; to support its risk measurement activities.
Models
The use of quantitative risk methodologies and models is subject to a strong governance framework and includes the application of sound and experienced judgment. The development, design, independent review and testing, and approval of models are subject to formalized policies. The Bank employs models for a number of important risk measurement and management processes including:
• | regulatory and internal capital |
• | internal risk management |
• | valuation/pricing and financial reporting |
• | meeting initial margin requirements |
• | business decision-making for risk management |
• | stress testing |
The Bank’s Model Risk Management Policy (MRMP) describes the overarching principles, policies, and procedures that provide the framework for managing model risk in a sound and prudent manner. These cover all stages of the model risk management cycle, including development, independent pre-implementation review, approval and post-implementation review.
Forward-Looking Exercises
Stress Testing
Stress testing programs at both the enterprise-wide level and individual risk level allow the Bank to estimate the potential impact on the Bank’s performance resulting from significant changes in market conditions, credit environment, liquidity demands, or other risk factors. Enterprise-wide stress testing is also integrated with both the strategic and financial planning processes, as well as financial crisis management planning. The development, approval and on-going review of the Bank’s stress testing programs are subject to policy, and the oversight of the Stress & Scenarios Committee (SSC) or other management committees as appropriate. Where appropriate, the Board of Directors or the Risk Committee of the Board approves stress testing limits for certain risk factors and receives reports on performance regularly. Each program is developed with input from a broad base of stakeholders, and results are integrated into management decision making processes for capital adequacy and/or allocation, funding requirements and strategy, risk appetite setting and limit determinations. The stress testing programs are designed to capture a number of stress scenarios with differing severities and time horizons.
Other tests are conducted, as required, at the enterprise-wide level and within specific functional areas to test the decision-making processes of the Senior Management team and key personnel, by simulating a potential stress scenario. Simulated stress scenarios may include several complexities and disruptions through which Senior Management are engaged to make certain key decisions. Generally, the objectives of the simulations can include testing (1) the executability of activation protocols, (2) operational readiness, (3) the flexibility of the executive decision-making process, and (4) the process by which actions to be taken are prioritized. The exercises may also be designed to test the applicability and relevance of available data and the timeliness of reporting for decision making under stressed/crisis conditions.
Monitoring and Reporting
The Bank continuously monitors its risk exposures to ensure business activities are operating within approved limits, thresholds or guidelines. Risk owners are responsible for identifying and reporting breaches of early warning thresholds and risk appetite limits or any other deteriorating trends in risk profile, as well as highlighting evolving external risk factors, to senior management and/or the Board, as appropriate.
Regular ongoing risk reporting to senior management and the Board of Directors aggregates measures of risk across products and businesses, across the Bank’s global footprint, and are used to ensure compliance with risk appetite, policies, limits, and guidelines. They also provide a clear statement of the types, amounts, and sensitivities of the various risks in the portfolio. Senior management and the Board use this information to understand the Bank’s risk profile and the performance of the portfolios. A comprehensive summary of the Bank’s risk profile and performance of the portfolio is presented quarterly to the Board of Directors.
Risk Identification and Assessment
Effective risk management requires a comprehensive process to identify risks and assess their materiality. We define Risk as the potential impact of deviations from expected outcomes on the Bank’s earnings, capital, liquidity, reputation and resilience caused by internal and external vulnerabilities.
Risk identification and assessment is performed on an ongoing basis through the following:
• | Transactions – risks, including credit and market exposures, are assessed by the business lines as risk owners with GRM providing review and effective challenge, as applicable |
• | Monitoring – risks are identified by constantly monitoring and reporting current trends and analysis, top and emerging risks and internal and external significant adverse events impacting the Bank |
• | New Products and Services – new or significant change to products, services and/or supporting technology are assessed for potential risks through the New Initiatives Risk Assessment Program |
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• | Strategic Investments – investment transactions are thoroughly reviewed for risks and are approved by the Operating Committee with advice and counsel from the Strategic Transactions and Investment Committee (STIC) who provides direction and guidance on effective allocation and prioritization of resources |
On an annual basis, the Bank undergoes a Bank-wide risk assessment that identifies the material risks faced by the Bank for the Internal Capital Adequacy Assessment Process (ICAAP) and the determination of internal capital. This process evaluates the risks and determines the pervasiveness of the risk across multiple business lines, the significance of the risk to a specific business line, the likelihood and potential impact of the risk and whether the risk may cause unexpected losses in income and therefore would be mitigated by internal capital. The process also reviews other evolving and emerging risks and includes qualitative considerations such as strategic, economic and environmental risk factors. The identified risks are ascribed a rating of how probable and impactful they may be and are used as an important input in the ICAAP process and the determination of internal capital.
As part of this annual risk assessment process the Bank’s Principal Risks for the year are identified through consultation with various risk owners and/or stakeholders and confirmed by the Risk Policy Committee.
Principal Risk Types
The Bank’s Principal Risk types are reviewed annually as part of the Assessment of Risks process to determine that they adequately reflect the Bank’s risk profile. Principal Risks are defined as:
Those risks which management considers of primary importance: i) having a significant impact or influence on the Bank’s primary business and revenue generating activities (Financial Risks) or ii) inherent in the Bank’s business and can have significant negative strategic, business, financial and/or reputational consequences (Non-Financial Risks (i.e. Core Risks)).
Principal Risks are assessed on an annual basis considering, amongst other things, the following factors:
• | Potential impact (direct or indirect) on the Bank’s financial results, operations, and strategy |
• | Effect on the Bank’s long term prospects and ongoing viability |
• | Regulatory focus and/or social concern |
• | Short to mid-term macroeconomic and market environment |
• | Financial and human resources required to manage and monitor the risk |
• | Establishment of key risk indicators, performance indicators or management limits to monitor and control the risk |
• | Peer identification and global best practices |
• | Regular monitoring and reporting to the Board on the risk is warranted |
Once a Principal Risk has been identified, governance structures and mechanisms must be in place for that risk:
• | Committee governance structures have been established to manage the risk |
• | Dedicated 2nd line resources are in place providing effective challenge |
• | Frameworks and supporting policies, procedures and guidelines have been developed and implemented to manage the risk as appropriate |
• | Risk appetite limits have been established supported by management limits, early warning thresholds and key risk indicators as appropriate for the risk |
• | Adequate and effective monitoring and reporting has been established to the Board, executive and senior management, including from subsidiaries |
• | Board and executive management have clear roles and responsibilities in relation to risk identification, assessment, measurement, monitoring and reporting to support effective governance and oversight |
Principal Risks are categorized into two main groups:
Financial Risks:
Credit, Liquidity, Market
These are risks that are directly associated with the Bank’s primary business and revenue generating activities. The Bank understands these risks well and takes them on to generate sustainable, consistent and predictable earnings. Financial risks are generally quantifiable and are relatively predictable. The Bank has a higher risk appetite for financial risks which are a fundamental part of doing business; but only when they are well understood, within established limits, and meet the desired risk and return profile.
Non-Financial Risks (i.e. Core Risks):
Compliance, Cyber Security & Information Technology (IT), Data, Environmental, Model, Money Laundering / Terrorist Financing and Sanctions, Operational, Reputational, Strategic
These are risks that are inherent in our business and can have significant negative strategic, business, financial and/or reputational consequences if not managed properly. In comparison to financial risks, Core Risks are less predictable and more difficult to define and measure. The Bank has low risk appetite for Core Risks and mitigates these accordingly.
Significant Adverse Events
A Significant Adverse Event (SAE) is an internally or externally occurring event that may have a material impact on the Bank’s financial performance, reputation, regulatory compliance, or operations. The Bank identifies, monitors and responds to internal significant adverse events through various functions including the Enterprise Crisis Management (ECM) unit who acts as the crisis coordinator when the most severe events threaten and/or impact Scotiabank’s global operations. Externally occurring events are monitored and assessed in a decentralized manner dependent on the relevant risk type.
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Risk Culture
Effective risk management requires a strong, robust, and pervasive risk culture where every Bank employee is a risk manager and is responsible for managing risks.
The Bank’s risk culture is influenced by numerous factors including the interdependent relationship amongst the Bank’s risk governance structure, risk appetite, strategy, organizational culture, and risk management tools.
A strong risk culture is a key driver of conduct. It promotes behaviours that align to the Bank’s values and enables employees to identify risk taking activities that are beyond the established risk appetite.
The Bank’s Risk Culture program is based on four indicators of a strong risk culture:
1. Tone from the Top – Leading by example including clear and consistent communication on risk behaviour expectations, the importance of Scotiabank’s values, and fostering an environment where everyone has ownership and responsibility for “doing the right thing”.
2. Accountability – All employees are accountable for risk management. There is an environment of open communication where employees feel safe to speak-up and raise concerns without fear of retaliation and consequences for not adhering to the desired behaviours.
3. Risk Management – Risk taking activities are consistent with the Bank’s strategies and risk appetite. Risk appetite considerations are embedded in key decision making processes.
4. People Management – Performance and compensation structures encourage desired behaviours and reinforce the Bank’s values and risk culture. Employees are rewarded for ‘how’ results are achieved in addition to ‘what’ is achieved. |
Other elements that influence and support the Bank’s risk culture:
• | Scotiabank Code of Conduct (our “Code”): describes standards of conduct required of all directors, officers, and employees of the Bank. This includes an annual Code acknowledgement that they have read and complied with our Code and all applicable Scotiabank policies and procedures; and reported any breaches or suspected breach in accordance with the provisions set out in our Code or policy respectively. |
• | Values: Respect – Value Every Voice; Integrity – Act with Honour; Accountability – Make it Happen; Passion – Be Your Best |
• | Communication: the Bank actively communicates risk appetite, and how it relates to Scotiabankers, to promote a sound risk culture |
• | Compensation: programs are structured to comply with compensation-related principles and regulations and discourage behaviours that are not aligned with the Bank’s values and Scotiabank Code of Conduct, and ensure that such behaviours are not rewarded |
• | Training: risk culture is continually reinforced by providing effective and informative mandatory and non-mandatory training modules for all employees on a variety of risk management topics |
• | Decision-making on risk issues is highly centralized: the flow of information and transactions to senior and executive committees keeps management well informed of the risks the Bank faces and ensures that transactions and risks are aligned with the Bank’s risk appetite |
• | Employee goals: all employees across the Bank have a risk goal assigned to them annually |
• | Executive Mandates: all Executives across the Bank have risk management responsibilities within their mandates |
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T41 Exposure to risks arising from the activities of the Bank’s businesses
(1) | Average assets for the Other segment include certain non-earning assets related to the business lines. |
(2) | Attributed Capital is a combination of regulatory: (i) Risk-based capital and (ii) Leverage capital. Attributed Capital is reported on a quarterly average basis. |
(3) | Includes Attributed Capital for significant investments, goodwill, intangibles and leverage capital. |
(4) | Risk-weighted assets (RWA) are as at October 31, 2021 as measured for regulatory purposes in accordance with the Basel III approach. |
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Top and emerging risks
The Bank is exposed to a variety of top and emerging risks. These risks can potentially adversely affect the Bank’s business strategies, financial performance and reputation. As part of our risk management approach, we proactively identify, assess, review, monitor and manage a broad range of top and emerging risks and undertake appropriate risk mitigation strategies.
A listing of top and emerging risks is generated using a comprehensive risk identification approach whereby information is gathered and consolidated from various sources including external research, Senior Management, and internal country/subsidiary risk reporting. External research is compiled from peer financial institution analysis and prominent sources for evaluating global risks. The results of this research, in conjunction with Senior Management’s experience and the Bank’s internal country/subsidiary risk reporting, help identify the Bank’s top and emerging risks, which, along with mitigation strategies, are summarized and reported to Senior Management and the Board of Directors on a quarterly basis.
The Bank’s top and emerging risks are as follows:
Environmental, Social and Governance
Environmental, Social and Governance (ESG) risk has the potential to impact the Bank in several ways. Emerging policy/regulatory action on ESG can elevate the Bank’s reputational, legal and regulatory compliance risks. Environmental risk, specifically climate change, can impact the Bank’s profitability through credit losses. Severe weather can damage the Bank’s properties and disrupt operations. However, climate change also creates new opportunities to invest in sustainable finance initiatives. For further details please refer to the Environmental Risk section on page 114. Social and governance risk has the potential to elevate the Bank’s reputational risk in the event that the Bank fails to meet increasing expectations to address social and environmental challenges and demonstrate exemplary governance. Scotiabank’s commitment to manage our business responsibly, ethically, consider ESG attributes and operate in compliance with laws and regulations is reflected in several key policies and commitments.
Scotiabank’s Code of Conduct describes the standards of conduct and responsibilities expected of employees, contingent workers, directors and officers of Scotiabank across our global operations. Mandatory training and attestation to the Code are required on an annual basis. Our Supplier Code of Conduct sets expectations for all current and prospective suppliers. It was updated in 2020 to reflect expectations related to supplier diversity and equity, environmental stewardship and climate change, data protection, anti-bribery and corruption and anti-money laundering.
Scotiabank aligns its human rights approach with the framework prescribed by the UN Guiding Principles on Human Rights. In 2021, the Bank worked with an independent organization to assess our Human Rights Statement and evaluate progress against the Bank’s 2017-2020 priorities. This process involved internal and external stakeholder engagement to identify new and emerging issues and further address our most salient human rights impacts, risks and opportunities to inform an updated Human Rights Statement in 2021. The Bank publishes Anti-slavery and Human Trafficking statements outlining the Bank’s processes to avoid slavery and human trafficking relevant to Modern Slavery legislation.
We are committed to being an inclusive employer and to address barriers to full accessibility and inclusion in the Bank. Scotiabank renewed several diversity and inclusion goals in 2020, stating targets to improve the representation of women, Black, Indigenous, People of Colour and those with disabilities in management and the overall workforce. We are a signatory to the UN Global Compact, and a founding member of Partnership for Global LGBTI Equality, a coalition of organizations committed to accelerating LGBTI equality and inclusion globally.
Cyber security and Information Technology risk
Cyber Security and Information Technology risks continue to impact financial institutions and other businesses in Canada and around the globe. Under COVID-19, the threat landscape has continued to evolve. Threat actors are adapting to this changing environment and continue to increase in sophistication, severity and prevalence as adversaries use ever evolving technologies and attack methodologies. These threat actors (individuals, organized crime rings and nation state sponsored) continue to target financial institutions to steal data, money or to disrupt operations.
Customer data may be used for extortion with ransomware data disclosure threats, and frauds may be perpetrated compromising bank accounts or breach payment systems.
The technology environment of the Bank, its customers and the third parties providing services may be subject to attacks, breaches or other compromises. The financial institutions’ supply chain is often an attractive target as it can provide a trusted entry point to their environment. The Bank proactively monitors and manages the risks and constantly updates and refines programs as threats emerge to minimize disruptions and keep systems and information protected. Investments in controls to further improve the Bank’s security posture continues. In addition, the Bank has purchased insurance coverage to help mitigate against certain potential losses associated with cyber incidents.
Money laundering, terrorist financing and sanctions compliance
Scotiabank is subject to the expanding and ever-evolving anti-money laundering/anti-terrorist financing and economic sanctions laws and regulations internationally across the Bank’s footprint. Money laundering, terrorist financing, and economic sanctions violations represent material risk to the Bank including regulatory, legal, financial and reputational exposure. In the case of economic sanctions, the trend towards retaliatory sanctions laws and regulations and anti-blocking statutes in certain jurisdictions increases the potential for situations to arise involving conflicts of law, due to the Bank’s global footprint.
The nature of financial crime threats faced by Scotiabank is also constantly evolving. Pandemic related fraud and customers affected by ransomware attacks are but a few recent examples. The Bank’s AML Risk program seeks to respond to changing threats in a timely manner, consistent with a risk-based approach.
Legal and compliance risk
The Bank is subject to extensive regulation in the jurisdictions in which it operates. Although the Bank continually monitors and evaluates the potential impact of regulatory developments to assess the impact on our businesses and to implement any necessary changes, regulators and private parties may challenge our compliance. Failure to comply with legal and regulatory requirements may result in fines, penalties, litigation, regulatory sanctions, enforcement actions and limitations or prohibitions from engaging in business activities, all of which may negatively impact the Bank’s financial performance and its reputation. In addition, day-to-day compliance with existing laws and regulations has involved and will continue to involve significant resources, including requiring the Bank to take actions or incur greater costs than anticipated, which may negatively
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impact the Bank’s financial performance. Such changes could also adversely impact the Bank’s business strategies or limit its product or service offerings, or enhance the ability of the Bank’s competitors to offer their own products and services that rival the Bank’s. Regulators have also evidenced an increased focus on risks associated with conduct, privacy, data and model risk, and operational resilience. This focus could lead to more regulatory or other enforcement actions including for practices which may historically have been considered acceptable. Regulators across the Bank’s geographic footprint continue to focus on ensuring operational resilience of regulated firms and that consumers are protected. Regulatory environment experienced a shift away from regulatory forbearance to increased regulatory reporting obligations and information requests with respect to certain subjects, such as customer assistance programs, liquidity, trade reporting and market conduct.
The Bank continues to monitor and respond to global regulatory developments relating to a broad spectrum of topics, such that control and business units are responsive on a timely basis and business impacts, if any, are minimized.
For additional information on some of the key regulatory developments that have the potential of impacting the Bank’s operations, see “Regulatory Developments” on page 122.
Macroeconomic uncertainty
Macroeconomic uncertainties stemming from the evolving pandemic and the re-opening process, including high headline and core inflation, continue to affect the global economic recovery and related market sentiment. As always, in the short run, a market shock could potentially impact the Bank’s trading and non-trading activities and revenues. Over a longer period of time, more broadly based macroeconomic effects from such shocks could potentially affect the Bank’s exposures to particular customers and market segments. The COVID-19 pandemic has had disruptive effects in Canada including through elevated rates of unemployment and ongoing changes in the broader macroeconomic environment. Conditions have eased since the onset of activity restrictions in Q2 2020, and some sectors have regained pre-pandemic levels of economic output and employment, while others remain impaired. These developments have created a challenging situation for many Canadian households, especially those where income levels are low and/or debt ratios are high. While lower interest rates have reduced average debt-service ratios, successive waves of the pandemic, rising consumer prices, increasing housing costs, and uncertain employment prospects continue to leave many Canadian households vulnerable to further economic disruptions. The Bank proactively adjusts lending strategies across all markets and portfolios to reflect changes in the risk profile of its customers, with due consideration given to public-policy efforts to mitigate uncertainties and provide temporary relief to Canadians. Steps have been taken to expand collections capabilities to enable the Bank to support customers who are experiencing acute or prolonged financial distress. The Bank also performs ongoing stress tests on its current portfolios and continues to enhance risk management capabilities through investments in technology and analytics.
Technology innovation and disruption
Ongoing technology innovation continues to impact the financial services industry and its customers, and with COVID-19, the pace of digital adoption and business disruption models has accelerated. Global regulators continue to push for increased competition with open banking, in addition to, non-traditional new participants entering certain segments of the market and challenging the position of financial institutions. New participants are disrupting the traditional Bank operating model with the use of advanced technologies, agile delivery methodologies and analytical tools offering a highly customized user experience with lower fixed costs which has the potential to impact revenues and costs in certain areas of the Bank’s businesses. In response to increased customer demands, needs and expectations, the Bank has embarked on a multi-year digital transformation with the aspiration to be a digital leader in the financial services industry. To support this strategy the Bank has opened digital factories in Toronto and its key international focus markets, in Mexico, Peru, Chile and Colombia to contribute to financial innovation, while continuing to monitor for evolving risks in new technology tools. Investments in agile, analytics and digital technology have supported the Banks’ response to the pandemic, its shifting portfolio and addressing customer needs faster and with greater insight. The agile delivery methodology provides the process mechanisms to adapt to disruption events, conduct trade-off assessments and shift priorities and/or resources in a disciplined manner, which in turn supports resiliency in operating practices. To further support the Bank’s digital strategy, in 2021 the Bank launched technology hubs in Ottawa and Vancouver to support the recruitment of diverse technology talent. Throughout the pandemic, the Bank has proven that it can be digital and provide leading customer experience.
Third party service providers
The Bank continues to enhance third party risk assessment and governance to ensure a solid risk management framework to support engagements with third party service providers. Regulatory maturation in third party and outsourcing management is introducing new areas of focus, including cloud technology, fourth parties, and operational resilience. This strengthened control environment adds to the Bank’s heightened risk management practices to protect the Bank and its clients from supplier impacts on operations, privacy and reputation. Enhanced monitoring is in place across the enterprise to manage critical suppliers and to detect pandemic-related issues. The Bank continues to enhance the resources, capabilities and accountabilities of third party risk management areas within the first and second lines of defence.
Geopolitical risk
Geopolitical risks, including regional political volatility, may give rise to increased strategic and business risk for the Bank. Additionally, increased international collaboration on tax rates, as well as greater need for additional tax revenue to help fund local economic recovery efforts, could result in new tax reforms or revenue practices resulting in increased tax costs. Predicting where new geopolitical disruptions could occur or the economic consequences of such events is difficult; however, the Bank’s stress testing program assists in evaluating the potential impact of severe conditions, whether where human induced or caused by other circumstances. Management’s strong understanding of local political landscapes and the macroeconomic environments in which the Bank operates, combined with the Bank’s business model and diversified geographic footprint, serve as ongoing mitigants to these risks.
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Principal Risks – Financial
Credit risk is the risk of loss resulting from the failure of a borrower or counterparty to honour its financial or contractual obligations to the Bank. Credit risk arises in the Bank’s direct lending operations, and in its funding, investment and trading activities where counterparties have repayment or other obligations to the Bank.
Credit risk summary
• | The Bank’s overall loan book as of October 31, 2021 increased to $663 billion versus $625 billion as of October 31, 2020, with growth reflected in Personal, and Business and Government lending. Residential mortgages were $320 billion as of October 31, 2021, with 88% in Canada. The corporate loan book, which accounts for 36% of the total loan book, is composed of 57% of loans with an investment grade rating as of October 31, 2021, compared to 37% of the total loan book in October 31, 2020. |
• | Loans and acceptances (Personal, and Business and Government lending) remained diversified by region, industry and customer. Regional exposure is spread across our key markets (Canada 69%, United States 7%, Chile 7%, Mexico 5% and Other 12%). Financial Services constitutes 5% of overall gross exposures (before consideration of collateral) and was $34 billion, an increase of $4 billion from October 31, 2020. These exposures are predominately to highly rated counterparties and are generally collateralized. |
The effective management of credit risk requires the establishment of an appropriate risk culture. Key credit risk policies and appetite statements are important elements used to create this culture.
The Board of Directors, either directly or through the Risk Committee (the Board), reviews and approves the Bank’s Credit Risk Appetite limits annually and Credit Risk Policy limits biennially.
• | The objectives of the Credit Risk Appetite are to ensure that: |
– | target markets and product offerings are well defined at both the enterprise-wide and business line levels; |
– | the risk parameters for new underwritings and for the portfolios as a whole are clearly specified; and |
– | transactions, including origination, syndication, loan sales and hedging, are managed in a manner that is consistent with the Bank’s risk appetite. |
• | The Credit Risk Policy articulates the credit risk management framework, including: |
– | credit risk management policies; |
– | delegation of authority; |
– | the credit risk management program; |
– | credit risk management for trading and investment activities; and |
– | Single Name and Aggregate limits, beyond which credit applications must be escalated to the Board for approval. |
GRM develops the credit risk management framework and policies that detail, among other things, the credit risk rating systems and associated parameter estimates; the delegation of authority for granting credit; the calculation of the allowance for credit losses; and the authorization of write-offs.
Corporate and commercial credit exposures are segmented by country and by major industry group. Aggregate credit risk limits for each of these segments are also reviewed and approved biennially by the Board. Portfolio management objectives and risk diversification are key factors in setting these limits.
Consistent with the Board-approved limits, borrower limits are set within the context of established lending criteria and guidelines for individual borrowers, particular industries, countries and certain types of lending, to ensure the Bank does not have excessive concentration in any single borrower, or related group of borrowers, particular industry sector or geographic region. Through the portfolio management process, loans may be syndicated to reduce overall exposure to a single name. For certain segments of the portfolio, credit derivative contracts are also used to mitigate the risk of loss due to borrower default. Risk is also mitigated through the selective sale of loans.
Banking units and GRM regularly review the various segments of the credit portfolio on an enterprise-wide basis to assess the impact of economic trends or specific events on the performance of the portfolio, and to determine whether corrective action is required. These reviews include the examination of the risk factors for particular products, industries and countries. The results of these reviews are reported to the Risk Policy Committee and, when significant, to the Board.
Risk measures
The Bank’s credit risk rating systems support the determination of key credit risk parameter estimates (Probability of Default (PD), Loss-Given-Default (LGD) and Exposure at Default (EAD)) that are applicable to both Retail and Business Banking portfolios and are designed to measure credit risk. The parameters are an integral part of enterprise-wide policies and procedures encompassing governance, risk management, and control structure, and are used in various internal and regulatory credit risk quantification calculations.
The Bank’s credit risk rating system is subject to a comprehensive validation, governance and oversight framework. The objectives of this framework are to ensure that:
• | Credit risk rating methodologies and parameters are appropriately designed and developed, independently validated, and regularly reviewed; and |
• | The review and validation processes represent an effective challenge to the design and development process. |
The Bank’s credit risk rating methodologies and parameters are reviewed and validated at least annually. Units within GRM are responsible for design, and development of credit risk rating methodologies and parameters. Separate units within GRM are responsible for validation and review. The operation of these separate units are functionally independent from the business units responsible for originating exposures. Within GRM, these units are also independent from the units involved in risk rating approval and credit adjudication.
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Business Banking credit risk ratings and associated risk parameters affect lending decisions, and loan pricing. Both Business Banking and Retail Banking’s credit risk rating systems affect the computation of the allowance for credit losses, and regulatory capital.
Corporate and commercial
Corporate and commercial credit exposure arises in the Bank’s business lines.
Risk ratings
The Bank’s risk rating system utilizes internal grade (IG) ratings – a 17 point scale used to differentiate the risk of default of borrowers, and the risk of loss on facilities. The general relationship between the Bank’s IG ratings and external agency ratings is shown in table T32.
IG ratings are also used to define credit adjudication authority levels appropriate to the size and risk of each credit application. Lower-rated credits require increasingly more senior management involvement depending upon the aggregate exposure. Where a credit exceeds the authority delegated to a credit unit, credit units will refer the request – with its recommendation – to a senior credit committee for adjudication. In certain cases, these must be referred to the Risk Committee of the Board of Directors.
Adjudication
Credit adjudication units within GRM analyze and evaluate all significant credit requests for corporate and commercial credit exposures, to ensure that risks are adequately assessed, properly approved, continually monitored and actively managed. The decision-making process begins with an assessment of the credit risk of the individual borrower or counterparty. Key factors considered in the assessment include:
• | The borrower’s management; |
• | The borrower’s current and projected financial results and credit statistics; |
• | The industry in which the borrower operates; |
• | Economic trends; and |
• | Geopolitical risk. |
Based on this assessment, a risk rating is assigned to the individual borrower or counterparty, using the Bank’s risk rating systems.
A separate risk rating is also assigned at the facility level, taking into consideration additional factors, such as security, seniority of claim, structure, term and any other forms of credit risk mitigation that affect the amount of potential loss in the event of a default of the facility. Security typically takes the form of charges over inventory, receivables, real estate, and operating assets when lending to corporate and commercial borrowers; and cash or treasuries for trading lines such as securities lending, repurchase transactions, and derivatives. The types of acceptable collateral, and related valuation processes are documented in risk management policies and manuals.
Other forms of credit risk mitigation include third party guarantees and, in the case of derivatives facilities, master netting agreements.
Internal borrower and facility risk ratings are assigned when a facility is first authorized, and are promptly re-evaluated and adjusted, if necessary, as a result of changes to the customer’s financial condition or business prospects. Re-evaluation is an ongoing process, and is done in the context of general economic changes, specific industry prospects, and event risks, such as revised financial projections, interim financial results and extraordinary announcements.
The internal credit risk ratings are also considered as part of the Bank’s adjudication limits, as guidelines for hold levels are tied to different risk ratings. Single borrower limits are much lower for higher risk borrowers than low risk borrowers.
The credit adjudication process also uses a risk-adjusted return on equity profitability model to ensure that the client and transaction structure offers an appropriate return for a given level of risk. For the corporate portfolio, and the large borrowers in International, the Loan Portfolio Management Group reviews the profitability model results, together with external benchmarks, and provides an opinion on the relative return and pricing of each transaction above a minimum threshold.
Individual credit exposures are regularly monitored by both the business line units and GRM for any signs of deterioration. In addition, the business line units and GRM conduct a review and risk analysis of each borrower annually, or more frequently for higher-risk borrowers. If, in the judgement of management, an account requires the expertise of specialists in workouts and restructurings, it will be transferred to a special accounts management group for monitoring and resolution.
Credit Risk Mitigation – Collateral/Security
Traditional Non-Retail Products (e.g. Operating lines of Credit, Term Loans)
Collateral values are accurately identified at the outset and throughout the tenure of a transaction by using standard evaluation methodologies. Collateral valuation estimates are conducted at a frequency that is appropriate to the frequency by which the market value fluctuates, using the collateral type and the borrower risk profile.
In addition, when it is not cost effective to monitor highly volatile collateral (e.g. accounts receivable, inventory), appropriate lending margins are applied to compensate (e.g. accounts receivable are capped at 80% of value, inventory at 50%). The frequency of collateral valuations is also increased when early warning signals of a borrower’s deteriorating financial condition are identified.
Borrowers are required to confirm adherence to covenants including confirmation of collateral values on a periodic basis, which are used by the Bank to provide early warning signals of collateral value deterioration. Periodic inspections of physical collateral are performed where appropriate and where reasonable means of doing so are available.
Bank procedures require verification including certification by banking officers during initial, annual, and periodic reviews, that collateral values/margins/etc. have been assessed and, where necessary, steps have been taken to mitigate any decreased collateral values.
The Bank does not use automated valuation models (AVMs) for valuation purposes for traditional non-retail products. GRM performs its own valuations of companies based on various factors such as book value, discounted book value, enterprise value etc.
Commercial/Corporate Real Estate
New or updated appraisals are generally obtained at inception of a new facility, as well as during loan modifications, loan workouts and troubled debt restructure. The primary reason for requiring a new appraisal is if, in the reasonable opinion of the banking execution unit, or GRM, there has
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been a material change in value. Additionally, none of the appraisal guidelines contained within the policies should dissuade the Bank from requesting an appraisal more frequently if an adverse change in market conditions, sponsorship, credit worthiness, or other underwriting assumptions is realized or expected.
Appraisals must be in writing and must contain sufficient information and analysis to support the Bank’s decision to make the loan. Moreover, in rendering an opinion of the property’s market value, third party appraisers are responsible for establishing the scope of work necessary to develop credible assignment results. The appraisal must meet the regulatory and industry requirements which, depending on the type of property being appraised, contain any or all of the following three approaches to value:
i. | comparable sales approach |
ii. | replacement cost approach |
iii. | income approach |
The appraiser must disclose the rationale for the omission of any valuation approach. Furthermore, the appraiser must disclose whether the subject property was physically inspected and whether anyone provided significant assistance to the person signing the appraisal report. The report must contain a presentation and explanation of the assumptions used in determining value under each of the above mentioned approaches.
Review of every appraisal is conducted by the banking units and GRM to confirm that the appraisal identifies all of the relevant issues for the specific asset class, location and economic environment and incorporates all appropriate valuation methodologies and assumptions. In most cases, the banking units also include comparable properties in addition to what is included in the appraisal to further justify value.
When third party assessors are used, they must be accredited and satisfactory to the Bank. In addition, GRM validates any third party valuations via internal desktop estimates either based on comparables or discounted income valuations.
Traded products
Traded products are transactions such as OTC derivatives (including foreign exchange and commodity based transactions), Securities Financing Transactions (including repurchase/reverse repurchase agreements, and securities lending/borrowing), and on-exchange futures. Credit risks arising from traded products cannot be determined with certainty at the outset, because during the tenure of a transaction the dollar value of the counterparty’s obligation to the Bank will be affected by changes in the capital markets (such as changes in stock prices, interest rates, and exchange rates). The Bank adjudicates credit exposures arising from transacting in traded products by considering their current fair value plus an additional component to reflect potential future changes in their mark-to-market value. The credit adjudication process also includes an evaluation of potential wrong-way risk, which arises when the exposure to a counterparty is positively correlated to the probability of default of that counterparty.
Credit risk associated with traded products is managed within the same credit adjudication process as the lending business. The Bank considers the credit risk arising from lending activities, as well as the potential credit risk arising from transacting in traded products with that counterparty.
Credit risk mitigation – collateral/security
Derivatives are generally transacted under industry standard International Swaps and Derivatives Association (ISDA) master netting agreements, which allow for a single net settlement of all transactions covered by that agreement in the event of a default or early termination of the transactions. ISDA agreements are frequently accompanied by an ISDA Credit Support Annex (CSA), the terms of which may vary according to each party’s view of the other party’s creditworthiness. CSAs and regulation in some jurisdictions can require both parties to post initial margin (regulatory and non-regulatory). CSAs also allow for variation margin to be called if total uncollateralized mark-to-market exposure exceeds an agreed upon threshold. Such variation margin provisions can be one-way (only one party will ever post collateral) or bilateral (either party may post depending upon which party is in-the-money). The CSA will also detail the types of collateral that are acceptable to each party, and the haircuts that will be applied against each collateral type. The terms of the ISDA master netting agreements and CSAs are taken into consideration in the calculation of counterparty credit risk exposure.
For derivative transactions, investment grade counterparties account for approximately 84% (October 31, 2020 – 79%) of the credit risk. Approximately 29% (October 31, 2020 – 23%) of the Bank’s derivative counterparty exposures are to bank counterparties. After taking into consideration, where applicable, netting and collateral arrangements, no net credit risk amount arising from traded products transactions with any single counterparty was considered material to the financial position of the Bank as at October 31, 2021. No individual exposure to an investment grade bilateral counterparty exceeded $1,068 million (October 31, 2020 – $1,181 million) and no individual exposure to a corporate counterparty exceeded $539 million (October 31, 2020 – $420 million).
Retail
Retail credit exposures arise in the Canadian Banking and International Banking business lines.
Adjudication
The decision-making process for retail loans ensures that credit risks are adequately assessed, properly approved, continually monitored and actively managed. Generally, credit decisions on consumer loans are processed by proprietary adjudication software and are based on risk ratings, which are generated using predictive credit scoring models.
The Bank’s credit adjudication and portfolio management methodologies are designed to ensure consistent underwriting and early identification of problem loans in line with our risk appetite. The Bank’s rigorous credit underwriting and retail risk modeling methodologies are more customer focused than product focused. The Bank’s view is that a customer-centric approach provides better risk assessment than product-based approaches, a more consistent experience to the customer, and should result in lower loan losses over time.
All credit scoring and policy changes are initiated by units within GRM that are functionally independent from the business units responsible for retail portfolios. Risk models and parameters are also subject to independent validation and review from the units involved in the design and development of models. The review process includes referral to the appropriate Senior Credit Committee for approval, where required. Consumer credit portfolios are reviewed at least monthly to identify emerging trends in loan quality and to assess whether corrective action is required.
Risk ratings
The Bank’s consumer risk rating systems are oriented to borrower or transaction risk. Each retail exposure is assigned a risk grade based on the customer’s credit history and/or internal credit score. The Bank’s automated risk rating systems assess the ongoing credit-worthiness of individual customers on a monthly basis. This process provides for meaningful and timely identification and management of problem loans.
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The risk rating system under the AIRB approach is subject to regular review and ongoing performance monitoring of key components. Risk model validations are conducted independently from the areas responsible for rating system development and implementation, to ensure effective independence in design and performance review.
Customer behavior characteristics which are used as inputs within the Bank’s Basel III AIRB models are consistent with those used by the Bank’s Canadian consumer risk rating systems. The International portfolios are subject to the Standardized approach at this time.
Credit risk mitigation – collateral/security
The property values for residential real estate secured exposures are confirmed at origination through a variety of validation methodologies, including AVM and full appraisal’s (in-person inspection). The appraisal is completed by a third party, Bank approved appraiser. For monitoring of material portfolios, property values are indexed quarterly to house prices. For loan impairment within material portfolios, residential property values are re-confirmed using third party AVM’s.
Where AVM values are used, these AVM values are subject to routine validation through a continuous random sampling process that back-tests AVM values against available property appraisals (primarily third party AVMs). Where third party appraisals are obtained, the Bank relies on the professional industry accreditation of the appraiser. Samples of approved appraisal reports are reviewed by the Bank’s senior appraisers to ensure consistent appraisal quality and satisfactory appraisal values. The third party appraisers are selected from a pre-approved list of Bank-vetted appraisers.
Credit Quality
IFRS 9 Financial Instruments requires the incorporation of past events, current conditions and reasonable and supportable forward-looking information over the life of existing exposures to measure expected credit losses. Furthermore, to assess significant increases in credit risk, IFRS 9 requires that entities assess changes in the risk of a default occurring over the expected life of a financial instrument when determining staging.
The Bank’s models are calibrated to consider past performance and macroeconomic forward-looking variables as inputs in the framework described below. Expert credit judgement may be made in circumstances where, in the Bank’s view, the inputs, assumptions, and/or modelling techniques do not capture all relevant risk factors. Expert credit judgement continues to be applied to consider the exceptional circumstances of COVID-19, including consideration of the significant government assistance programs, both domestically and internationally. Consistent with the requirements of IFRS 9, the Bank has considered both quantitative and qualitative information in the assessment of significant increase in risk.
The Bank generates a forward-looking base case scenario and three alternate forward-looking scenarios (one optimistic and two pessimistic) as key inputs into the expected credit loss provisioning models. Compared to the base case scenario, the recovery in the optimistic scenario is stronger, while in the pessimistic scenarios it is delayed. The pessimistic scenario featuring a W-shaped recovery includes a renewed virus wave impacting growth in late 2021 and into 2022. The more severe pessimistic front-loaded scenario, with an L-shaped recovery, also features a contraction in late 2021 with a subdued rebound delayed to late 2022.
While the base case scenario shows continued strong growth economy-wide, growth and employment in individual industries is expected to show considerable heterogeneity, many industries either have already fully recovered or are expected to fully recover to the pre-pandemic level, over the course of the next few quarters. In contrast, the activity in a few sectors is expected to remain below the pre-pandemic levels for some time despite strong growth. This industry-level pattern is referred to as a K-shaped recovery, and while not explicitly simulated in the base case scenario, it is incorporated through the consideration of significant increase in risk through expert credit judgement.
The table below shows a comparison of projections for the next 12 months, as at October 31, 2021, and October 31, 2020, of select macroeconomic variables that impact the expected credit loss calculations (see page 197 for all key variables):
T42 Select macroeconomic variable projections
Base Case Scenario | Alternative Scenario - Optimistic | Alternative Scenario - Pessimistic | Alternative Scenario - Pessimistic Front Loaded | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Next 12 months | As at October 31 2021 | As at October 31 2020 | As at October 31 2021 | As at October 31 2020 | As at October 31 2021 | As at October 31 2020 | As at October 31 2021 | As at October 31 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Canada | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real GDP growth, y/y % change | 3.4 | 3.1 | 5.3 | 4.7 | -1.3 | -2.0 | -7.4 | -10.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Unemployment rate, average % | 6.3 | 7.3 | 5.6 | 6.7 | 8.8 | 9.9 | 11.7 | 14.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
US | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real GDP growth, y/y % change | 5.7 | 2.5 | 7.3 | 3.6 | 2.4 | -0.5 | -1.4 | -7.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Unemployment rate, average % | 3.8 | 6.3 | 3.4 | 6.1 | 5.6 | 8.1 | 6.8 | 10.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Global | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
WTI oil price, average USD/bbl | 69 | 48 | 75 | 52 | 61 | 42 | 57 | 37 |
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The table below shows a quarterly breakdown of the projections for the above macroeconomic variables, as at October 31, 2021 and October 31, 2020, under the base case scenario:
T43 Quarterly breakdown of macroeconomic variables
Base Case Scenario | ||||||||||||||||||||||||||||||||||||||||
Calendar Quarters | Average October 31 2021 | Calendar Quarters | Average October 31 | |||||||||||||||||||||||||||||||||||||
Next 12 months | Q4 2021 | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2020 | Q1 2021 | Q2 2021 | Q3 2021 | ||||||||||||||||||||||||||||||||
Canada | ||||||||||||||||||||||||||||||||||||||||
Real GDP growth, y/y % change | 3.1 | 2.6 | 3.9 | 4.1 | 3.4 | -3.9 | -0.4 | 12.9 | 3.7 | 3.1 | ||||||||||||||||||||||||||||||
Unemployment rate, average % | 7.0 | 6.5 | 6.0 | 5.7 | 6.3 | 8.1 | 7.1 | 6.9 | 6.9 | 7.3 | ||||||||||||||||||||||||||||||
US | ||||||||||||||||||||||||||||||||||||||||
Real GDP growth, y/y % change | 6.7 | 6.3 | 5.5 | 4.2 | 5.7 | -3.7 | -1.1 | 9.9 | 4.8 | 2.5 | ||||||||||||||||||||||||||||||
Unemployment rate, average % | 4.6 | 4.0 | 3.5 | 3.1 | 3.8 | 7.7 | 6.6 | 5.8 | 5.4 | 6.3 | ||||||||||||||||||||||||||||||
Global | ||||||||||||||||||||||||||||||||||||||||
WTI oil price, average USD/bbl | 70 | 69 | 69 | 69 | 69 | 45 | 48 | 50 | 51 | 48 |
T44 Allowance for credit losses by business line
As at October 31 ($ millions) | 2021 | 2020 | ||||||
Canadian Banking | ||||||||
Retail | $ | 1,863 | $ | 2,051 | ||||
Commercial | 380 | 558 | ||||||
$ | 2,243 | $ | 2,609 | |||||
International Banking | ||||||||
Retail | ||||||||
Caribbean | $ | 524 | $ | 716 | ||||
Mexico | 474 | 576 | ||||||
Peru | 538 | 1,242 | ||||||
Chile | 541 | 584 | ||||||
Colombia | 319 | 638 | ||||||
Other | 81 | 106 | ||||||
Commercial | 730 | 860 | ||||||
$ | 3,207 | $ | 4,722 | |||||
Global Wealth Management | $ | 21 | $ | 19 | ||||
Global Banking and Markets | $ | 155 | $ | 289 | ||||
Allowance for credit losses on loans | $ | 5,626 | $ | 7,639 | ||||
Allowance for credit losses on: | ||||||||
Acceptances | $ | 37 | $ | 77 | ||||
Off-balance sheet exposures | 65 | 101 | ||||||
Debt securities and deposits with financial institutions | 3 | 3 | ||||||
Total Allowance for credit losses | $ | 5,731 | $ | 7,820 |
Allowance for credit losses
The total allowance for credit losses as at October 31, 2021 was $5,731 million, compared to $7,820 million in the prior year. The allowance for credit losses for loans was $5,626 million, down $2,013 million from October 31, 2020. The decrease was due primarily to lower loan provisions for performing loans, and the favourable impact of foreign currency translation.
The allowance for credit losses against performing loans was $3,971 million compared to $5,682 million as at October 31, 2020. The decrease was due primarily to lower performing loan provisions, driven by credit migration to impaired and higher write-offs related to the International Banking retail portfolio, reversals due to the more favourable macroeconomic outlook, and the impact of foreign currency translation.
The allowance for credit losses on impaired loans decreased to $1,655 million from $1,957 million as at October 31, 2020 (refer to T45). The decrease was due primarily to higher write-offs and lower formations related to the International Banking retail portfolio, and the favourable impact of foreign currency translation.
The allowance for credit losses on impaired loans in Canadian Banking decreased by $39 million to $436 million, due primarily to lower retail and commercial loan provisions (refer to T45). In International Banking, the allowance for credit losses on impaired loans decreased by $242 million to $1,171 million, due primarily to higher write-offs and lower formations related to the retail portfolio, as well as the favourable impact of foreign currency translation. In Global Banking and Markets, the allowance for credit loss for impaired loans decreased by $22 million to $39 million, due primarily to higher write-offs and lower formations.
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T45 Impaired loans by business line
2021 | 2020 | |||||||||||||||||||||||
As at October 31 ($ millions) | Gross impaired loans | Allowance for credit | Net impaired loans | Gross impaired loans | Allowance for credit | Net impaired loans | ||||||||||||||||||
Canadian Banking | ||||||||||||||||||||||||
Retail | $ | 614 | $ | 300 | $ | 314 | $ | 707 | $ | 326 | $ | 381 | ||||||||||||
Commercial | 327 | 136 | 191 | 342 | 149 | 193 | ||||||||||||||||||
$ | 941 | $ | 436 | $ | 505 | $ | 1,049 | $ | 475 | $ | 574 | |||||||||||||
International Banking | ||||||||||||||||||||||||
Caribbean and Central America | $ | 744 | $ | 200 | $ | 544 | $ | 878 | $ | 254 | $ | 624 | ||||||||||||
Latin America | ||||||||||||||||||||||||
Mexico | 758 | 269 | 489 | 570 | 222 | 348 | ||||||||||||||||||
Peru | 694 | 347 | 347 | 824 | 498 | 326 | ||||||||||||||||||
Chile | 512 | 180 | 332 | 775 | 233 | 542 | ||||||||||||||||||
Colombia | 418 | 88 | 330 | 459 | 102 | 357 | ||||||||||||||||||
Other Latin America | 144 | 87 | 57 | 170 | 104 | 66 | ||||||||||||||||||
Total Latin America | 2,526 | 971 | 1,555 | 2,798 | 1,159 | 1,639 | ||||||||||||||||||
$ | 3,270 | $ | 1,171 | $ | 2,099 | $ | 3,676 | $ | 1,413 | $ | 2,263 | |||||||||||||
Global Wealth Management | $ | 26 | $ | 9 | $ | 17 | $ | 26 | $ | 8 | $ | 18 | ||||||||||||
Global Banking and Markets | ||||||||||||||||||||||||
Canada | $ | 134 | $ | 7 | $ | 127 | $ | 57 | $ | 5 | $ | 52 | ||||||||||||
U.S. | 24 | 4 | 20 | 116 | 4 | 112 | ||||||||||||||||||
Asia and Europe | 61 | 28 | 33 | 129 | 52 | 77 | ||||||||||||||||||
$ | 219 | $ | 39 | $ | 180 | $ | 302 | $ | 61 | $ | 241 | |||||||||||||
Totals | $ | 4,456 | $ | 1,655 | $ | 2,801 | $ | 5,053 | $ | 1,957 | $ | 3,096 |
Impaired loan metrics
Net impaired loans | ||||||||
As at October 31 ($ millions) | 2021 | 2020 | ||||||
Net impaired loans as a % of loans and acceptances(1) | 0.42 | % | 0.50 | % | ||||
Allowance against impaired loans as a % of gross impaired loans(1) | 37 | % | 39 | % |
(1) | Refer to Glossary on page 141 for the description of the measure. |
Impaired loans
Gross impaired loans decreased to $4,456 million as at October 31, 2021, from $5,053 million last year (refer to T70). The decrease was due primarily to the impact of foreign currency translation.
Impaired loans in Canadian Banking decreased by $108 million, due primarily to write-offs in Retail Banking, and lower formations. In International Banking, impaired loans decreased by $406 million, due primarily to the impact of foreign currency translation, write-offs and lower formations in the retail portfolio. Impaired loans in Global Banking and Markets decreased by $83 million, due primarily to write-offs and lower formations. Impaired loans in Global Wealth Management are unchanged from last year. The gross impaired loan ratio was 67 basis points as at October 31, 2021, a decrease of 14 basis points.
Net impaired loans, after deducting the allowance for credit losses, were $2,801 million as at October 31, 2021, a decrease of $295 million from the prior year. Net impaired loans as a percentage of loans and acceptances were 0.42% as at October 31, 2021, a decrease of eight basis points from 0.50% last year.
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Portfolio review
Canadian Banking
Gross impaired loans in the retail portfolio decreased by $93 million or 13% from last year, due primarily to write-offs and lower formations. The allowance for credit losses on impaired loans in the retail portfolio was $300 million, down $26 million or 8% from last year due to higher write-offs and lower formations.
In the commercial loan portfolio, gross impaired loans decreased by $15 million to $327 million due to lower formations. The allowance for credit losses on impaired loans was $136 million, down $13 million or 9% from last year.
International Banking
In the retail portfolio, gross impaired loans decreased by $262 million to $1,537 million, due primarily to the impact of foreign currency translation, write-offs and lower formations. The allowance for credit losses on impaired loans in the retail portfolio was $697 million, down $186 million or 21% from last year, due primarily to the impact of foreign currency translation and higher write-offs.
In the commercial portfolio, gross impaired loans were $1,733 million, a decrease of $144 million over the last year, due primarily to the impact of foreign currency translation. The allowance for credit losses on impaired loans was $474 million, down $56 million or 11% from last year, due primarily to the impact of foreign currency translation.
Global Wealth Management
Gross impaired loans in Global Wealth Management were $26 million, unchanged from last year. The allowance for credit losses on impaired loans was $9 million, up $1 million from last year.
Global Banking and Markets
Gross impaired loans in Global Banking and Markets decreased by $83 million to $219 million, due primarily to write-offs and lower formations. The allowance for credit losses on impaired loans was $39 million, down $22 million or 36% from last year, due primarily to write-offs and lower formations.
Risk diversification
The Bank’s exposure to various countries and types of borrowers are well diversified (see T64 and T68). Chart C27 shows loans and acceptances by geography. Ontario represents the largest Canadian exposure at 37% of the total. Latin America was 18% of the total exposure and the U.S. was 7%.
Chart C28 shows loans and acceptances by type of borrower (see T68). Excluding loans to households, the largest industry exposures were financial services (5% including banks and non-banks), real estate and construction (7%), wholesale and retail (4%), and utilities (3%).
Risk mitigation
To mitigate exposures in its performing corporate portfolios, the Bank uses diversification by company, industry, and country, with loan sales and credit derivatives used sparingly. In 2021, loan sales totaled $124 million, compared to $724 million in 2020. The largest volume of loan sales in 2021 related to loans in the energy industry. As at October 31, 2021, no credit derivatives were used to mitigate loan exposures in the portfolios (October 31, 2020 – nil). The Bank actively monitors industry and country concentrations. As is the case with all industry exposures, the Bank continues to closely follow developing trends and takes additional steps to mitigate risk as warranted.
Overview of loan portfolio
The Bank has a well-diversified portfolio by product, business and geography. Details of certain portfolios of current focus are highlighted below.
Real estate secured lending
A large portion of the Bank’s lending portfolio is comprised of residential mortgages and consumer loans, which are well diversified by borrower. As at October 31, 2021, these loans accounted for $424 billion or 64% of the Bank’s total loans and acceptances outstanding (October 31, 2020 – $393 billion or 63%). Of these, $340 billion or 80% are real estate secured loans (October 31, 2020 – $306 billion or 78%). The tables below provide more details by portfolios.
C27 | Well diversified in Canada and internationally... loans and acceptances, October 2021 |
C28 | ... and in household and business lending loans and acceptances, October 2021 |
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Insured and uninsured residential mortgages and home equity lines of credit
The following table presents amounts of insured and uninsured residential mortgages and home equity lines of credit (HELOCs), by geographic area.
T46 Insured and uninsured residential mortgages and HELOCs, by geographic areas(1)
2021 | ||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgages | Home equity lines of credit | |||||||||||||||||||||||||||||||||||||||||||||||
As at October 31 | Insured (2) | Uninsured | Total | Insured (2) | Uninsured | Total | ||||||||||||||||||||||||||||||||||||||||||
($ millions) | Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | ||||||||||||||||||||||||||||||||||||
Canada:(3) | ||||||||||||||||||||||||||||||||||||||||||||||||
Atlantic provinces | $ | 5,344 | 1.9 | $ | 6,194 | 2.2 | $ | 11,538 | 4.1 | $ | – | – | $ | 1,033 | 5.1 | $ | 1,033 | 5.1 | ||||||||||||||||||||||||||||||
Quebec | 8,136 | 2.9 | 10,900 | 3.9 | 19,036 | 6.8 | – | – | 964 | 4.7 | 964 | 4.7 | ||||||||||||||||||||||||||||||||||||
Ontario | 37,014 | 13.2 | 114,688 | 40.9 | 151,702 | 54.1 | – | – | 11,445 | 55.9 | 11,445 | 55.9 | ||||||||||||||||||||||||||||||||||||
Manitoba & Saskatchewan | 5,585 | 2.0 | 4,807 | 1.7 | 10,392 | 3.7 | – | – | 659 | 3.2 | 659 | 3.2 | ||||||||||||||||||||||||||||||||||||
Alberta | 17,769 | 6.3 | 14,918 | 5.4 | 32,687 | 11.7 | – | – | 2,574 | 12.6 | 2,574 | 12.6 | ||||||||||||||||||||||||||||||||||||
British Columbia & Territories | 12,538 | 4.5 | 42,276 | 15.1 | 54,814 | 19.6 | – | – | 3,789 | 18.5 | 3,789 | 18.5 | ||||||||||||||||||||||||||||||||||||
Canada(4) | $ | 86,386 | 30.8 | % | $ | 193,783 | 69.2 | % | $ | 280,169 | 100 | % | $ | – | – | % | $ | 20,464 | 100 | % | $ | 20,464 | 100 | % | ||||||||||||||||||||||||
International | – | – | 39,509 | 100 | 39,509 | 100 | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||
Total | $ | 86,386 | 27.0 | % | $ | 233,292 | 73.0 | % | $ | 319,678 | 100 | % | $ | – | – | % | $ | 20,464 | 100 | % | $ | 20,464 | 100 | % | ||||||||||||||||||||||||
2020 | ||||||||||||||||||||||||||||||||||||||||||||||||
Canada(4) | $ | 93,684 | 38.2 | % | $ | 151,360 | 61.8 | % | $ | 245,044 | 100 | % | $ | 1 | – | % | $ | 20,978 | 100 | % | $ | 20,979 | 100 | % | ||||||||||||||||||||||||
International | – | – | 39,640 | 100 | 39,640 | 100 | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||
Total | $ | 93,684 | 32.9 | % | $ | 191,000 | 67.1 | % | $ | 284,684 | 100 | % | $ | 1 | – | % | $ | 20,978 | 100 | % | $ | 20,979 | 100 | % |
(1) | The measures in this section have been disclosed in this document in accordance with OSFI Guideline – B20 - Residential Mortgage Underwriting Practices and Procedures (January 2018). |
(2) | Default insurance is contractual coverage for the life of eligible facilities whereby the Bank’s exposure to real estate secured lending is protected against potential shortfalls caused by borrower default. This insurance is provided by either government-backed entities or private mortgage insurers. |
(3) | The province represents the location of the property in Canada. |
(4) | Includes multi-residential dwellings (4+ units) of $3,783 (October 31, 2020 – $3,671) of which $2,793 are insured (October 31, 2020 – $2,630). |
Amortization period ranges for residential mortgages
The following table presents the distribution of residential mortgages by remaining amortization periods, and by geographic areas.
T47 Distribution of residential mortgages by remaining amortization periods, and by geographic areas(1)
2021 | ||||||||||||||||||||||||
Residential mortgages by remaining amortization periods | ||||||||||||||||||||||||
As at October 31 | Less than 20 years | 20-24 years | 25-29 years | 30-34 years | 35 years and greater | Total residential mortgage | ||||||||||||||||||
Canada | 29.9 | % | 38.5 | % | 30.1 | % | 1.3 | % | 0.2 | % | 100 | % | ||||||||||||
International | 62.7 | % | 17.4 | % | 15.6 | % | 4.3 | % | – | % | 100 | % | ||||||||||||
2020 | ||||||||||||||||||||||||
Canada | 33.5 | % | 37.5 | % | 27.6 | % | 1.2 | % | 0.2 | % | 100 | % | ||||||||||||
International | 64.9 | % | 17.4 | % | 14.4 | % | 3.2 | % | 0.1 | % | 100 | % |
(1) | The measures in this section have been disclosed in this document in accordance with OSFI Guideline – B20 - Residential Mortgage Underwriting Practices and Procedures (January 2018). |
Loan to value ratios
The Canadian residential mortgage portfolio is 69% uninsured (October 31, 2020 – 62%). The average loan-to-value (LTV) ratio of the uninsured portfolio is 49% (October 31, 2020 – 52%).
The following table presents the weighted average LTV ratio for total newly originated uninsured residential mortgages and home equity lines of credit during the year, which include mortgages for purchases, refinances with a request for additional funds and transfers from other financial institutions, by geographic areas.
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T48 Loan to value ratios(1)
Uninsured LTV ratios(2) | ||||||||||
For the year ended October 31, 2021 | ||||||||||
Residential mortgages LTV% | Home equity lines of credit(3) LTV% | |||||||||
Canada: | ||||||||||
Atlantic provinces | 67.7 | % | 62.8 | % | ||||||
Quebec | 66.3 | 71.0 | ||||||||
Ontario | 64.3 | 63.6 | ||||||||
Manitoba & Saskatchewan | 70.0 | 63.1 | ||||||||
Alberta | 69.1 | 72.2 | ||||||||
British Columbia & Territories | 64.8 | 63.3 | ||||||||
Canada | 65.0 | % | 64.4 | % | ||||||
International | 73.3 | % | n/a | |||||||
For the year ended October 31, 2020 | ||||||||||
Canada | 64.6 | % | 64.2 | % | ||||||
International | 73.2 | % | n/a |
(1) | The measures in this section have been disclosed in this document in accordance with OSFI Guideline – B20 - Residential Mortgage Underwriting Practices and Procedures (January 2018). |
(2) | The province represents the location of the property in Canada. |
(3) | Includes all HELOCs. For Scotia Total Equity Plan HELOC’s, LTV is calculated based on the sum of residential mortgages and the authorized limit for related HELOCs, divided by the value of the related residential property, and presented on a weighted average basis for newly originated mortgages and HELOCs. |
Potential impact on residential mortgages and real estate home equity lines of credit in the event of an economic downturn
The Bank undertakes regular stress testing of its mortgage book to determine the impact of various combinations of home price declines and unemployment increases. Those results continue to show that credit losses and impacts on capital ratios are within a level the Bank considers manageable. In addition, the Bank has undertaken extensive all-Bank scenario analyses to assess the impact to the enterprise of different scenarios related to COVID-19 and is confident that it has the financial resources to withstand even a very negative outlook. In practice, the mortgage portfolio is robust to such scenarios due to the low LTV of the book, the high proportion of insured exposures and the diversified composition of the portfolio.
Loans to Canadian condominium developers
The Bank had loans outstanding to Canadian condominium developers of $1,775 million as at October 31, 2021 (October 31, 2020 – $1,447 million). This is a high quality portfolio with well-known developers who have long-term relationships with the Bank.
European exposures
The Bank believes that its European exposures are manageable, are sized appropriately relative to the credit worthiness of the counterparties (94% of the exposures are to investment grade counterparties based on a combination of internal and external ratings), and are modest relative to the capital levels of the Bank. The Bank’s European exposures are certified at amortized cost or fair value using observable inputs, with negligible amounts valued using models with unobservable inputs (Level 3). There were no significant events during the year that materially impacted the Bank’s exposures.
The Bank’s exposure to sovereigns was $12.1 billion as at October 31, 2021 (October 31, 2020 – $12.6 billion), $3.9 billion to banks (October 31, 2020 – $4.4 billion) and $14.2 billion to corporates (October 31, 2020 – $14.6 billion).
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In addition to exposures detailed in the table below, the Bank had indirect exposures consisting of securities exposures to non-European entities whose parent company is domiciled in Europe of $0.2 billion as at October 31, 2021 (October 31, 2020 – $0.3 billion).
The Bank’s current European exposure is distributed as follows:
T49 Bank’s exposure distribution by country
As at October 31 | 2021 | 2020 | ||||||||||||||||||||||||||||||
($ millions) | Loans and loan equivalents(1) | Deposits with financial institutions | Securities(2) | SFT and derivatives(3) | Funded Total | Undrawn Commitments(4) | Total | Total | ||||||||||||||||||||||||
Greece | $ | – | $ | – | $ | – | $ | – | $ | – | $ | – | $ | – | $ | – | ||||||||||||||||
Ireland | 846 | 613 | 21 | 280 | 1,760 | 702 | 2,462 | 2,608 | ||||||||||||||||||||||||
Italy | 6 | – | (3 | ) | 8 | 11 | 186 | 197 | 322 | |||||||||||||||||||||||
Portugal | – | – | – | 1 | 1 | – | 1 | 3 | ||||||||||||||||||||||||
Spain | 849 | 2 | 72 | 40 | 963 | 516 | 1,479 | 1,390 | ||||||||||||||||||||||||
Total GIIPS | $ | 1,701 | $ | 615 | $ | 90 | $ | 329 | $ | 2,735 | $ | 1,404 | $ | 4,139 | $ | 4,323 | ||||||||||||||||
U.K. | $ | 7,454 | $ | 5,372 | $ | 958 | $ | 2,535 | $ | 16,319 | $ | 6,745 | $ | 23,064 | $ | 30,772 | ||||||||||||||||
Germany | 313 | 77 | 1,936 | 80 | 2,406 | 1,004 | 3,410 | 3,559 | ||||||||||||||||||||||||
France | 979 | 47 | 860 | 64 | 1,950 | 1,901 | 3,851 | 4,168 | ||||||||||||||||||||||||
Netherlands | 520 | 129 | 883 | 341 | 1,873 | 953 | 2,826 | 3,106 | ||||||||||||||||||||||||
Switzerland | 874 | 20 | 5 | 118 | 1,017 | 1,041 | 2,058 | 2,018 | ||||||||||||||||||||||||
Other | 773 | 504 | 2,159 | 440 | 3,876 | 2,202 | 6,078 | 6,385 | ||||||||||||||||||||||||
Total Non-GIIPS | $ | 10,913 | $ | 6,149 | $ | 6,801 | $ | 3,578 | $ | 27,441 | $ | 13,846 | $ | 41,287 | $ | 50,008 | ||||||||||||||||
Total Europe | $ | 12,614 | $ | 6,764 | $ | 6,891 | $ | 3,907 | $ | 30,176 | $ | 15,250 | $ | 45,426 | $ | 54,331 | ||||||||||||||||
As at October 31, 2020 | $ | 13,907 | $ | 7,049 | $ | 6,945 | $ | 3,764 | $ | 31,665 | $ | 22,666 | $ | 54,331 |
(1) | Individual allowances for credit losses are $1. Letters of credit and guarantees are included as funded exposure as they have been issued. Included in loans and loans equivalent are letters of credit and guarantees which total $3,525 as at October 31, 2021 (October 31, 2020 – $4,069). |
(2) | Exposures for securities are calculated taking into account derivative positions where the security is the underlying reference asset and short trading positions, with net short positions in brackets. |
(3) | SFT comprise of securities purchased under resale agreements, obligations related to securities sold under repurchase agreements and securities lending and borrowing transactions. Gross and net funded exposures represent all net positive positions after taking into account collateral. Collateral held against derivatives was $4,326 and collateral held against SFT was $35,269. |
(4) | Undrawn commitments represent an estimate of the contractual amount that may be drawn upon by the obligor and include commitments to issue letters of credit on behalf of other banks in a syndicated bank lending arrangement. |
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Management’s Discussion and Analysis | Risk Management
Market risk is the risk of loss from changes in market prices and rates (including interest rates, credit spreads, equity prices, foreign exchange rates and commodity prices), the correlations between them, and their levels of volatility. Market risk includes trading risk, investment risk, structural interest rate risk and structural foreign exchange risk. Below is an index of market risk disclosures:
Market risk factors
Interest rate risk
The risk of loss due to changes in the level and/or the volatility of interest rates. This risk affects instruments such as, but not limited to, debt securities, loans, mortgages, deposits and derivatives.
Interest rate risks are managed through sensitivity analysis (including economic value of equity and net interest income), stress testing, and VaR limits and mitigated through portfolio diversification and hedges using interest rate derivatives and debt securities.
Credit spread risk
The risk of loss due to changes in the market price and volatility of credit, or the creditworthiness of issuers. This risk is mainly concentrated in loan and debt securities portfolios. Risk is managed through sensitivity, jump-to-default, stress testing and VaR limits and mitigated through hedges using credit derivatives.
Foreign currency risk
The risk of loss resulting from changes in currency exchange rates and exchange rate volatility. Foreign currency denominated debt and other securities as well as future cash flows in foreign currencies are exposed to this type of risk. Risk is managed through maximum net trading position, sensitivity, stress testing and VaR limits and mitigated through hedges using foreign exchange positions and derivatives.
Equity risk
The risk of loss due to changes in prices, volatility or any other equity related risk factor of individual equity or equity linked securities. This risk affects instruments such as, but not limited to, equities, exchange traded funds, mutual funds, derivatives and other equity linked products. Risk is managed through sensitivity, stress testing and VaR limits and mitigated through hedges using physical equity and derivatives instruments.
Commodity risk
The risk of loss due to changes in prices or volatility of precious metal, base metal, energy and agriculture products. Both physical commodity and derivatives positions are exposed to this risk. Risk is managed through aggregate and net trading position, sensitivity, stress testing and VaR limits and mitigated through hedges using physical commodity and derivative positions.
The following maps risk factors to trading and non-trading activities:
Non-trading Funding | Investments | Trading | ||
Interest rate risk Foreign currency risk | Interest rate risk Credit spread risk Foreign currency risk Equity risk | Interest rate risk Credit spread risk Foreign currency risk Equity risk Commodity risk |
Market risk governance
Overview
The Board of Directors reviews and approves market risk policies and limits annually. The Bank’s Asset-Liability Committee (ALCO) and Market Risk Management and Policy Committee (MRMPC) oversee the application of the framework set by the Board, and monitor the Bank’s market risk exposures and the activities that give rise to these exposures. The MRMPC establishes specific operating policies and sets limits at the product, portfolio, business unit and business line levels, and for the Bank in total. Limits are reviewed at least annually.
Global Risk Management provides independent oversight of all significant market risks, supporting the MRMPC and ALCO with analysis, risk measurement, monitoring, reporting, proposals for standards and support for new product development. To ensure compliance with policies and limits, market risk exposures are independently monitored on a continuing basis, either by Global Risk Management, the back offices, or Finance. They provide senior management, business units, the ALCO, and the MRMPC with a series of daily, weekly and monthly reports of market risk exposures by business line and risk type.
The Bank uses a variety of metrics and models to measure and control market risk exposures. These measurements are selected based on an assessment of the nature of risks in a particular activity. The principal measurement techniques are Value at Risk (VaR), Incremental Risk Charge, stress testing, and sensitivity analysis. The use and attributes of each of these techniques are noted in the Risk Measurement Summary.
Risk measurement summary
Value at risk (VaR)
VaR is a statistical method of measuring potential loss due to market risk based upon a common confidence interval and time horizon. The Bank calculates VaR daily using a 99% confidence level, and a one-day holding period for its trading portfolios. This means that once in every 100 days, the trading positions are expected to lose more than the VaR estimate. VaR has two components: general market risk and debt specific risk. The Bank calculates general market risk VaR using historical simulation based on 300 days of market data. Obligor specific risk on debt instruments and credit derivatives not captured in general market risk VaR is calculated through the debt specific risk VaR, which uses historical resampling. In addition, the Bank calculates a Stressed VaR measure which follows the same basic methodology as VaR but is calibrated to a one year stressed period. The stressed period is determined based on analysis of the trading book’s risk profile against historical market data. Stressed VaR complements VaR in that it evaluates the impact of market volatility that is outside the VaR’s historical set.
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All material risk factors are captured in VaR. Where historical data is not available, proxies are used to establish the relevant volatility for VaR and Stressed VaR until sufficient data is available. Changes in VaR between reporting periods are generally due to changes in positions, volatilities and/or correlations between asset classes. VaR is also used to evaluate risks arising in certain funding and investment portfolios. Backtesting is also an important and necessary part of the VaR process. The Bank backtests the actual trading profit and loss against the VaR result to validate the quality and accuracy of the Bank’s VaR model. The Board reviews VaR results quarterly.
Incremental Risk Charge (IRC)
Basel market risk capital requirements includes IRC which captures the following:
Default risk: This is the potential for direct losses due to an obligor’s (bond issuer or counterparty) default.
Credit migration risk: This is the potential for direct losses due to a credit rating downgrade or upgrade.
A Monte Carlo model is used to perform default and migration simulations for the obligors underlying credit derivative and bond portfolios. IRC is calculated at the 99.9th percentile with a one year liquidity horizon. The Board reviews IRC results quarterly.
Stress testing
A limitation of VaR and Stressed VaR is that they only reflect the recent history of market volatility and a specific one year stressed period, respectively. To complement these measures, stress testing examines the impact that abnormally large changes in market factors and periods of prolonged inactivity might have on trading portfolios. Stress testing scenarios are designed to include large shifts in risk factors as well as historical and theoretical multi risk market events. Historical scenarios capture severe movements over periods that are significantly longer than the one-day holding period captured in VaR, such as the 2008 Credit Crisis or the 1998 Russian Financial Crisis. Similar to Stressed VaR, stress testing provides management with information on potential losses due to tail events. In addition, the results from the stress testing program are used to verify that the Bank’s market risk capital is sufficient to absorb these potential losses.
The Bank subjects its trading portfolios to a series of daily, weekly and monthly stress tests. The Bank also evaluates risk in its investment portfolios monthly, using stress tests based on risk factor sensitivities and specific market events. The stress testing program is an essential component of the Bank’s comprehensive risk management framework which complements the VaR methodology and other risk measures and controls employed by the Bank.
Sensitivity analysis
In trading portfolios, sensitivity analysis is used to measure the effect of changes in risk factors, including prices and volatility, on financial products and portfolios. These measures apply across product types and geographies and are used for limit monitoring and management reporting.
In non-trading portfolios, sensitivity analysis assesses the effect of changes in interest rates on current earnings and on the economic value of shareholders’ equity. It is applied globally to each of the major currencies within the Bank’s operations. The Bank’s sensitivity analysis for limit and disclosure purposes is measured through positive and negative parallel shifts in the underlying interest rate curves. These calculations are based on models that consider a number of inputs and are on a constant balance sheet and make no assumptions for management actions that may mitigate the risks. The Bank also performs sensitivity analysis using various non-parallel interest rate curve shifts, for example: curve steepeners, curve flatteners and curve twists.
Validation of market risk models
Prior to the implementation of new market risk models, rigorous validation and testing is conducted. Validation is conducted when the model is initially developed and when any significant changes are made to the model. The models are also subject to ongoing validation, the frequency of which is determined by model risk ratings. Models may also be triggered for earlier revalidation when there have been significant structural changes in the market or changes to the composition of the portfolio. Model validation includes backtesting, and additional analysis such as:
• | Theoretical review or tests to demonstrate whether assumptions made within the internal model are appropriate; and |
• | Impact tests including stress testing that would occur under historical and hypothetical market conditions. |
The validation process is governed by the Bank’s Model Risk Management Policy.
Non-trading market risk
Funding and investment activities
Market risk arising from the Bank’s funding and investment activities is identified, managed and controlled through the Bank’s asset-liability management processes. The Asset-Liability Committee meets monthly to review risks and opportunities, and evaluate performance including the effectiveness of hedging strategies.
Interest rate risk
Interest rate risk arising from the Bank’s lending, funding and investment activities is managed in accordance with Board-approved policies and global limits, which are designed to control the risk to net interest income and economic value of shareholders’ equity. The net interest income limit measures the effect of a specified change in interest rates on the Bank’s annual net interest income over the next twelve months, while the economic value limit measures the impact of a specified change in interest rates on the present value of the Bank’s net assets. These limits are set according to the documented risk appetite of the Bank. Board-level limit utilization is reported to both the Asset-Liability Committee and the Board on a regular basis. Any limit exceptions are reported according to the Limit Monitoring and Compliance Policy of the Bank.
Net interest income and the economic value of equity result from the differences between yields earned on the Bank’s non-trading assets and interest rate paid on its liabilities. The difference in yields partly reflects mismatch between the maturity and re-pricing characteristics of the assets and liabilities. This mismatch is inherent in the non-trading operations of the Bank and exposes it to adverse changes in the level of interest rates. The Asset-Liability Committee provides strategic direction for the management of structural interest rate risk within the risk appetite framework authorized by the Board of Directors. The asset/liability management strategy is executed by Group Treasury with the objective of protecting and enhancing net interest income within established risk tolerances.
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Management’s Discussion and Analysis | Risk Management
Simulation modeling, sensitivity analysis and VaR are used to assess exposures and for limit monitoring and planning purposes. The Bank’s interest rate risk exposure calculations are generally based on the earlier of contractual re-pricing or maturity of on-balance sheet and off-balance sheet assets and liabilities, although certain assets and liabilities such as credit cards and deposits without a fixed maturity are assigned a maturity profile based on the longevity of the exposure. Expected prepayments from loans and cashable investment products are also incorporated into the exposure calculations.
Table T50 shows the pro-forma after-tax impact on the Bank’s net interest income over the next twelve months and economic value of shareholders’ equity of an immediate and sustained 100 basis points increase and 25 basis points decrease in interest rate across major currencies as defined by the Bank. The interest rate sensitivities tabulated are based on models that consider a number of inputs and are on a constant balance sheet. There are no assumptions made for management actions that may mitigate risk. Based on the Bank’s interest rate positions at year-end 2021, an immediate and sustained 100 basis point increase in interest rates across all major currencies and maturities would increase after-tax net interest income by approximately $157 million over the next 12 months, assuming no further management actions. During fiscal 2021, this measure ranged between $157 million and $321 million. Corresponding with the current low interest rate environment, starting in Q2, 2020, the net interest income and economic value for a downward shock scenario are measured using 25 basis points decline rather than 100 basis points previously, to account for certain rates being floored at zero.
This same increase in interest rates would result in an after-tax decrease in the present value of the Bank’s net assets of approximately $866 million. During fiscal 2021, this measure ranged between increase of $19 million and decrease of $866 million. The directional sensitivity of these two key metrics is largely determined by the difference in time horizons (net interest income captures the impact over the next twelve months only, whereas economic value considers the potential impact of interest rate changes on the present value of all future cash flows). The net interest income and economic value results are compared to the authorized Board limits. Both interest rate sensitivities remained within the Bank’s approved consolidated limits in the reporting period.
T50 Structural interest sensitivity
2021 | 2020 | |||||||||||||||
As at October 31 ($ millions) | Economic Value of Shareholders’ Equity | Net Interest Income | Economic Value of Shareholders’ Equity | Net Interest Income | ||||||||||||
After-tax impact of | ||||||||||||||||
100bp increase in rates | ||||||||||||||||
Non-trading risk | $ | (866) | $ | 157 | $ | (510 | ) | $ | 134 | |||||||
25bp decrease in rates | ||||||||||||||||
Non-trading risk | $ | 154 | $ | (47 | ) | $ | 63 | $ | (38 | ) |
Foreign currency risk
Foreign currency risk in the Bank’s unhedged funding and investment activities arises primarily from the Bank’s net investments in foreign operations as well as foreign currency earnings in its domestic and remitting foreign branch operations.
The Bank’s foreign currency exposure to its net investments in foreign operations is controlled by a Board-approved limit. This limit considers factors such as potential volatility to shareholders’ equity as well as the potential impact on capital ratios from foreign exchange fluctuations. On a monthly basis, the Asset-Liability Committee reviews the Bank’s foreign currency net investment exposures and determines the appropriate hedging strategies. These may include funding the investments in the same currency or using other financial instruments, including derivatives.
Foreign currency translation gains and losses from net investments in foreign operations, net of related hedging activities and tax effects, are recorded in accumulated other comprehensive income within shareholders’ equity. However, the Bank’s regulatory capital ratios are not materially affected by these foreign exchange fluctuations because the risk-weighted assets of the foreign operations tend to move in a similar direction.
The Bank is also subject to foreign currency translation risk on the earnings of its domestic and remitting foreign branch operations. The Bank forecasts foreign currency revenues and expenses, over a number of future fiscal quarters. The Asset-Liability Committee also assesses economic data trends and forecasts to determine if some or all of the estimated future foreign currency revenues and expenses should be hedged. Hedging instruments normally include foreign currency spot and forward contracts, as well as foreign currency options and swaps. Certain of these economic hedges may not qualify for hedge accounting resulting in a potential for a mismatch in the timing of the recognition of economic hedge gains/losses and the underlying foreign earnings translation gains/losses. In accordance with IFRS, foreign currency translation gains and losses relating to monetary and non-monetary items are recorded directly in earnings.
As at October 31, 2021, a one percent increase (decrease) in the Canadian dollar against all currencies in which the Bank operates decreases (increases) the Bank’s before-tax annual earnings by approximately $61 million (October 31, 2020 – $66 million) in the absence of hedging activity, primarily from the exposure to U.S. dollars.
Investment portfolio risks
The Bank holds investment portfolios to meet liquidity and statutory reserve requirements and for investment purposes. These portfolios expose the Bank to interest rate, foreign currency, credit spread and equity risks. Debt investments primarily consist of government, agency, and corporate bonds. Equity investments include common and preferred shares, as well as a diversified portfolio of third-party managed funds. The majority of these securities are valued using prices obtained from external sources. These portfolios are controlled by a Board-approved policy and limits.
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Trading market risk
The Bank’s policies, processes and controls for trading activities are designed to achieve a balance between pursuing profitable trading opportunities and managing earnings volatility within a framework of sound and prudent practices. Trading activities are primarily customer focused.
Market risk arising from the Bank’s trading activities is managed in accordance with Board-approved policies, and aggregate VaR and stress testing limits. The quality of the Bank’s VaR is validated by regular backtesting analysis, in which the VaR is compared to both theoretical profit and loss results based on fixed end of day positions and actual reported profit and loss. A VaR at the 99% confidence interval is an indication of a 1% probability that losses will exceed the VaR if positions remain unchanged during the next business day. Trading positions are however managed dynamically and, as a result, actual profit/loss backtesting exceptions are not uncommon.
In fiscal 2021, the total one-day VaR for trading activities averaged $14.1 million, compared to $23.9 million in 2020. The decrease of average one-day VaR was due to improved market conditions as economies gradually recover from the COVID-19 crisis.
T51 Market risk measures
2021 | 2020 | |||||||||||||||||||||||||||||||||||
($ millions) | Year end | Avg | High | Low | Year end | Avg | High | Low | ||||||||||||||||||||||||||||
Credit Spread plus Interest Rate | $ | 10.3 | $ | 11.9 | $ | 23.2 | $ | 4.5 | $ | 11.5 | $ | 22.1 | $ | 60.8 | $ | 9.4 | ||||||||||||||||||||
Credit Spread | 2.0 | 5.4 | 12.7 | 0.5 | 11.1 | 18.5 | 55.0 | 6.2 | ||||||||||||||||||||||||||||
Interest Rate | 11.5 | 12.2 | 22.0 | 4.6 | 11.4 | 11.2 | 18.0 | 4.8 | ||||||||||||||||||||||||||||
Equities | 6.7 | 5.9 | 20.8 | 2.2 | 3.1 | 6.5 | 27.4 | 1.8 | ||||||||||||||||||||||||||||
Foreign Exchange | 2.0 | 2.7 | 5.7 | 1.4 | 4.6 | 3.5 | 10.3 | 1.4 | ||||||||||||||||||||||||||||
Commodities | 1.3 | 3.9 | 8.7 | 1.0 | 5.0 | 5.4 | 9.1 | 2.2 | ||||||||||||||||||||||||||||
Debt Specific | 1.5 | 2.8 | 5.1 | 1.5 | 5.2 | 5.9 | 14.1 | 2.5 | ||||||||||||||||||||||||||||
Diversification Effect | (8.6 | ) | (13.1 | ) | n/a | n/a | (14.8 | ) | (19.5 | ) | n/a | n/a | ||||||||||||||||||||||||
All-Bank VaR | $ | 13.2 | $ | 14.1 | $ | 32.8 | $ | 7.9 | $ | 14.6 | $ | 23.9 | $ | 63.6 | $ | 10.1 | ||||||||||||||||||||
All-Bank Stressed VaR | $ | 36.1 | $ | 36.2 | $ | 50.5 | $ | 22.0 | $ | 37.0 | $ | 38.7 | $ | 61.3 | $ | 14.9 | ||||||||||||||||||||
Incremental Risk Charge | $ | 159.5 | $ | 152.8 | $ | 295.0 | $ | 112.8 | $ | 233.2 | $ | 197.3 | $ | 334.9 | $ | 78.2 |
The Bank also calculates a Stressed VaR which uses the same basic methodology as the VaR. However, Stressed VaR is calculated using market volatility from a one-year time period identified as stressful, given the risk profile of the trading portfolio. Throughout 2021, the Stressed VaR was calculated using the 2008/2009 credit crisis period, surrounding the collapse of Lehman Brothers. In fiscal 2021, the total one-day Stressed VaR for trading activities averaged $36.2 million compared to $38.7 million in 2020.
In fiscal 2021, the average IRC decreased to $152.8 million from $197.3 million in 2020. The lower IRC utilization was also due to economy recovery.
Description of trading revenue components and graphical comparison of VaR to daily P&L
Chart C29 shows the distribution of daily trading revenue for fiscal 2021 and Chart C30 compares that distribution to daily VaR results. Trading revenue includes changes in portfolio value as well as the impact of new trades, commissions, fees and reserves. Some components of revenue which are calculated less frequently are pro-rated. Trading revenue averaged $12.3 million per day, decreased from $13.9 million in 2020. Revenue was positive on 99.2% of trading days during the year, which was better than the level in 2020 as market condition improved. During the year, the largest single day trading loss was $11.4 million which occurred on October 27, 2021, and was smaller than the total VaR of $11.8 million on the same day.
C29 | Trading revenue distribution Year ended October 31, 2021 |
C30 | Daily trading revenue vs. VaR $ millions, November 1, 2020 to October 31, 2021 |
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Market risk linkage to Consolidated Statement of Financial Position
Trading assets and liabilities are marked to market daily and included in trading risk measures such as VaR. Derivatives captured under trading risk measures are related to the activities of Global Banking and Markets, whiles derivatives captured under non-trading risk measures comprise those used in asset/liability management and designated in a hedge relationship. A comparison of Consolidated Statement of Financial Position items which are covered under the trading and non-trading risk measures is provided in the table below.
T52 Market risk linkage to Consolidated Statement of Financial Position of the Bank
Market Risk Measure | ||||||||||||||||||||
As at October 31, 2021 ($ millions) | Consolidated Statement of Financial Position | Trading Risk | Non- trading risk | Not subject to market risk | Primary risk sensitivity of non-trading risk | |||||||||||||||
Precious metals | $ | 755 | $ | 755 | $ | – | $ | – | n/a | |||||||||||
Trading assets | 146,312 | 146,238 | 74 | – | Interest rate, FX | |||||||||||||||
Derivative financial instruments | 42,302 | 35,379 | 6,923 | – | Interest rate, FX, equity | |||||||||||||||
Investment securities | 75,199 | – | 75,199 | – | Interest rate, FX, equity | |||||||||||||||
Loans | 636,986 | – | 636,986 | – | Interest rate, FX | |||||||||||||||
Assets not subject to market risk (1) | 283,290 | – | – | 283,290 | n/a | |||||||||||||||
Total assets | $ | 1,184,844 | $ | 182,372 | $ | 719,182 | $ | 283,290 | ||||||||||||
Deposits | $ | 797,259 | $ | – | $ | 751,862 | $ | 45,397 | Interest rate, FX, equity | |||||||||||
Financial instruments designated at fair value through profit or loss | 22,493 | – | 22,493 | – | Interest rate, equity | |||||||||||||||
Obligations related to securities sold short | 40,954 | 40,954 | – | – | n/a | |||||||||||||||
Derivative financial instruments | 42,203 | 35,702 | 6,501 | – | Interest rate, FX, equity | |||||||||||||||
Trading liabilities(2) | 417 | 417 | – | – | n/a | |||||||||||||||
Retirement and other benefit liabilities | 1,820 | – | 1,820 | – | Interest rate, credit spread, equity | |||||||||||||||
Liabilities not subject to market risk (3) | 206,806 | – | – | 206,806 | n/a | |||||||||||||||
Total liabilities | $ | 1,111,952 | $ | 77,073 | $ | 782,676 | $ | 252,203 |
(1) | Includes goodwill, intangibles, other assets and securities purchased under resale agreements and securities borrowed. |
(2) | Gold and silver certificates and bullion included in other liabilities. |
(3) | Includes obligations related to securities sold under repurchase agreements and securities lent and other liabilities. |
Market Risk Measure | ||||||||||||||||||||
As at October 31, 2020 ($ millions) | Consolidated Statement of Financial Position | Trading Risk | Non-trading risk | Not subject to market risk | Primary risk sensitivity of non-trading risk | |||||||||||||||
Precious metals | $ | 1,181 | $ | 1,181 | $ | – | $ | – | n/a | |||||||||||
Trading assets | 117,839 | 117,492 | 347 | – | Interest rate, FX | |||||||||||||||
Derivative financial instruments | 45,065 | 39,294 | 5,771 | – | Interest rate, FX, equity | |||||||||||||||
Investment securities | 111,389 | – | 111,389 | – | Interest rate, FX, equity | |||||||||||||||
Loans | 603,263 | – | 603,263 | – | Interest rate, FX | |||||||||||||||
Assets not subject to market risk (1) | 257,729 | – | – | 257,729 | n/a | |||||||||||||||
Total assets | $ | 1,136,466 | $ | 157,967 | $ | 720,770 | $ | 257,729 | ||||||||||||
Deposits | $ | 750,838 | $ | – | $ | 709,850 | $ | 40,988 | Interest rate, FX, equity | |||||||||||
Financial instruments designated at fair value through profit or loss | 18,899 | – | 18,899 | – | Interest rate, equity | |||||||||||||||
Obligations related to securities sold short | 31,902 | 31,902 | – | – | n/a | |||||||||||||||
Derivative financial instruments | 42,247 | 36,038 | 6,209 | – | Interest rate, FX, equity | |||||||||||||||
Trading liabilities(2) | 1,112 | 1,112 | – | – | n/a | |||||||||||||||
Retirement and other benefit liabilities | 3,464 | – | 3,464 | – | Interest rate, credit spread, equity | |||||||||||||||
Liabilities not subject to market risk (3) | 217,501 | – | – | 217,501 | n/a | |||||||||||||||
Total liabilities | $ | 1,065,963 | $ | 69,052 | $ | 738,422 | $ | 258,489 |
(1) | Includes goodwill, intangibles, other assets and securities purchased under resale agreements and securities borrowed. |
(2) | Gold and silver certificates and bullion included in other liabilities. |
(3) | Includes obligations related to securities sold under repurchase agreements and securities lent and other liabilities. |
Derivative instruments and structured transactions
Derivatives
The Bank uses derivatives to meet customer needs, generate revenues from trading activities, manage market and credit risks arising from its lending, funding and investment activities, and to lower its cost of capital. The Bank uses several types of derivative products, including interest rate swaps, futures and options, to hedge interest rate risk exposure. Forward contracts, swaps and options are used to manage foreign currency risk exposures. Credit exposures in its lending and investment books may be managed using credit default swaps. As a dealer, the Bank markets a range of derivatives to its customers, including interest rate, foreign exchange, equity, commodity and credit derivatives.
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Market risk arising from derivatives transactions is subject to the control, reporting and analytical techniques noted above. Additional controls and analytical techniques are applied to address certain market-related risks that are unique to derivative products.
Structured transactions
Structured transactions are specialized transactions that may involve combinations of cash, other financial assets and derivatives designed to meet the specific risk management or financial requirements of customers. These transactions are carefully evaluated by the Bank to identify and address the credit, market, legal, tax, reputational and other risks, and are subject to a cross-functional review and sign-off by Trading Management, Global Risk Management, Taxation, Finance and Legal departments. Large structured transactions are also subject to review by senior risk management committees and evaluated in accordance with the procedures described below in Reputational Risk.
The market risk in these transactions is usually minimal, and returns are earned by providing structuring expertise and by taking credit risk. Once executed, structured transactions are subject to the same ongoing credit reviews and market risk analysis as other types of derivatives transactions. This review and analysis includes careful monitoring of the quality of the reference assets, and ongoing valuation of the derivatives and reference assets.
Liquidity risk is the risk that the Bank is unable to meet its financial obligations in a timely manner at reasonable prices. Financial obligations include liabilities to depositors, payments due under derivative contracts, settlement of securities borrowing and repurchase transactions, and lending and investment commitments.
Effective liquidity risk management is essential to maintain the confidence of depositors and counterparties, manage the Bank’s cost of funds and to support core business activities, even under adverse circumstances.
Liquidity risk is managed within the framework of policies and limits that are approved by the Board of Directors. The Board receives reports on risk exposures and performance against approved limits. The Asset-Liability Committee (ALCO) provides senior management oversight of liquidity risk.
The key elements of the liquidity risk framework are:
• | Measurement and modeling – the Bank’s liquidity model measures and forecasts cash inflows and outflows, including off-balance sheet cash flows on a daily basis. Risk is managed by a set of key limits over the maximum net cash outflow by currency over specified short-term horizons (cash gaps), a minimum level of core liquidity, and liquidity stress tests. |
• | Reporting – Global Risk Management provides independent oversight of all significant liquidity risks, supporting the ALCO with analysis, risk measurement, stress testing, monitoring and reporting. |
• | Stress testing – the Bank performs liquidity stress testing on a regular basis, to evaluate the effect of both industry-wide and Bank-specific disruptions on the Bank’s liquidity position. Liquidity stress testing has many purposes including: |
– | Helping the Bank understand the potential behavior of various on-balance sheet and off-balance sheet positions in circumstances of stress; and |
– | Based on this knowledge, facilitating the development of risk mitigation and contingency plans. |
The Bank’s liquidity stress tests consider the effect of changes in funding assumptions, depositor behavior and the market value of liquid assets. The Bank performs industry standard stress tests, the results of which are reviewed at senior levels of the organization and are considered in making liquidity management decisions.
• | Contingency planning – the Bank maintains a liquidity contingency plan that specifies an approach for analyzing and responding to actual and potential liquidity events. The plan outlines an appropriate governance structure for the management and monitoring of liquidity events, processes for effective internal and external communication, and identifies potential counter measures to be considered at various stages of an event. A contingency plan is maintained both at the parent-level as well as for major subsidiaries. |
• | Funding diversification – the Bank actively manages the diversification of its deposit liabilities by source, type of depositor, instrument, term and geography. |
• | Core liquidity – the Bank maintains a pool of highly liquid, unencumbered assets that can be readily sold or pledged to secure borrowings under stressed market conditions or due to Bank-specific events. The Bank also maintains liquid assets to support its intra-day settlement obligations in payment, depository and clearing systems. |
Liquid assets
Liquid assets are a key component of liquidity management and the Bank holds these types of assets in sufficient quantity to meet potential needs for liquidity management.
Liquid assets can be used to generate cash either through sale, repurchase transactions or other transactions where these assets can be used as collateral to generate cash, or by allowing the asset to mature. Liquid assets include deposits at central banks, deposits with financial institutions, call and other short-term loans, marketable securities, precious metals and securities received as collateral from securities financing and derivative transactions. Liquid assets do not include borrowing capacity from central bank facilities.
Marketable securities are securities traded in active markets, which can be converted to cash within a timeframe that is in accordance with the Bank’s liquidity management framework. Assets are assessed considering a number of factors, including the expected time it would take to convert them to cash.
Marketable securities included in liquid assets are comprised of securities specifically held as a liquidity buffer or for asset liability management purposes; trading securities, which are primarily held by Global Banking and Markets; and collateral received for securities financing and derivative transactions.
The Bank maintains large holdings of unencumbered liquid assets to support its operations. These assets generally can be sold or pledged to meet the Bank’s obligations. As at October 31, 2021 unencumbered liquid assets were $246 billion (October 31, 2020 – $250 billion). Securities including NHA mortgage-backed securities, comprised 67% of liquid assets (October 31, 2020 – 72%). Other unencumbered liquid assets, comprising cash
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and deposits with central banks, deposits with financial institutions, precious metals and call and short loans, were 33% (October 31, 2020 – 28%). The decrease in liquid assets was mainly attributable to a decrease in Canadian and foreign government obligations, NHA mortgage-backed securities, and deposits with financial institutions, partially offset by an increase in cash and deposits with central banks and other liquid securities.
The carrying values outlined in the liquid asset table are consistent with the carrying values in the Bank’s Consolidated Statement of Financial Position as at October 31, 2021. The liquidity value of the portfolio will vary under different stress events as different assumptions are used for the stress scenarios.
The Bank’s liquid asset pool is summarized in the following table:
T53 Liquid asset pool
Encumbered liquid assets | Unencumbered liquid assets | |||||||||||||||||||||||||||||||
As at October 31, 2021 ($ millions) | Bank-owned liquid assets | Securities received as collateral from securities financing and derivative transactions | Total liquid assets | Pledged as collateral | Other(1) | Available as collateral | Other | |||||||||||||||||||||||||
Cash and deposits with central banks | $ | 77,695 | $ | – | $ | 77,695 | $ | – | $ | 5,858 | $ | 71,837 | $ | – | ||||||||||||||||||
Deposits with financial institutions | 8,628 | – | 8,628 | – | 197 | 8,431 | – | |||||||||||||||||||||||||
Precious metals | 755 | – | 755 | – | – | 755 | – | |||||||||||||||||||||||||
Securities: | ||||||||||||||||||||||||||||||||
Canadian government obligations | 47,772 | 20,311 | 68,083 | 30,490 | – | 37,593 | – | |||||||||||||||||||||||||
Foreign government obligations | 62,288 | 81,296 | 143,584 | 77,571 | – | 66,013 | – | |||||||||||||||||||||||||
Other securities | 98,476 | 69,368 | 167,844 | 128,979 | – | 38,865 | – | |||||||||||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||
NHA mortgage-backed securities | 30,153 | – | 30,153 | 8,114 | – | 22,039 | – | |||||||||||||||||||||||||
Call and short loans | 20 | – | 20 | – | – | 20 | – | |||||||||||||||||||||||||
Total | $ | 325,787 | $ | 170,975 | $ | 496,762 | $ | 245,154 | $ | 6,055 | $ | 245,553 | $ | – | ||||||||||||||||||
Encumbered liquid assets | Unencumbered liquid assets | |||||||||||||||||||||||||||||||
As at October 31, 2020 ($ millions) | Bank-owned liquid assets | Securities received as collateral from securities financing and derivative transactions | Total liquid assets | Pledged as collateral | Other(1) | Available as collateral | Other | |||||||||||||||||||||||||
Cash and deposits with central banks | $ | 66,252 | $ | – | $ | 66,252 | $ | – | $ | 7,019 | $ | 59,233 | $ | – | ||||||||||||||||||
Deposits with financial institutions | 10,208 | – | 10,208 | – | 74 | 10,134 | – | |||||||||||||||||||||||||
Precious metals | 1,181 | – | 1,181 | – | – | 1,181 | – | |||||||||||||||||||||||||
Securities: | ||||||||||||||||||||||||||||||||
Canadian government obligations | 74,943 | 14,890 | 89,833 | 37,991 | – | 51,842 | – | |||||||||||||||||||||||||
Foreign government obligations | 71,686 | 79,032 | 150,718 | 83,117 | – | 67,601 | – | |||||||||||||||||||||||||
Other securities | 69,470 | 78,238 | 147,708 | 114,867 | – | 32,841 | – | |||||||||||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||
NHA mortgage-backed securities | 35,267 | – | 35,267 | 8,010 | – | 27,257 | – | |||||||||||||||||||||||||
Call and short loans | 165 | – | 165 | – | – | 165 | – | |||||||||||||||||||||||||
Total | $ | 329,172 | $ | 172,160 | $ | 501,332 | $ | 243,985 | $ | 7,093 | $ | 250,254 | $ | – |
(1) | Assets which are restricted from being used to secure funding for legal or other reasons. |
A summary of total unencumbered liquid assets held by the parent bank and its branches, and domestic and foreign subsidiaries, is presented below:
T54 Total unencumbered liquid assets held by the parent bank and its branches, and domestic and foreign subsidiaries
As at October 31 ($ millions) | 2021 | 2020 | ||||||
The Bank of Nova Scotia (Parent) | $ | 185,903 | $ | 192,490 | ||||
Bank domestic subsidiaries | 18,267 | 14,517 | ||||||
Bank foreign subsidiaries | 41,383 | 43,247 | ||||||
Total | $ | 245,553 | $ | 250,254 |
The Bank’s liquidity pool is held across major currencies, mostly comprised of Canadian and U.S. dollar holdings. As shown above, the vast majority (83%) of liquid assets are held by the Bank’s corporate office, branches of the Bank, and Canadian subsidiaries of the Bank. To the extent a liquidity reserve held in a foreign subsidiary of the Bank is required for regulatory purposes, it is assumed to be unavailable to the rest of the Group. Other liquid assets held by a foreign subsidiary are assumed to be available only in limited circumstances. The Bank monitors and ensures compliance in relation to minimum levels of liquidity required and assets held within each entity, and/or jurisdiction.
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Encumbered assets
In the course of the Bank’s day-to-day activities, securities and other assets are pledged to secure an obligation, participate in clearing or settlement systems, or operate in a foreign jurisdiction. Securities are also pledged under repurchase agreements. A summary of encumbered and unencumbered assets is presented below:
T55 Asset encumbrance
Encumbered assets | Unencumbered assets | |||||||||||||||||||||||||||||||
As at October 31, 2021 ($ millions) | Bank-owned assets | Securities received as collateral from securities financing and derivative | Total assets | Pledged as collateral | Other(1) | Available as collateral(2) | Other(3) | |||||||||||||||||||||||||
Cash and deposits with central banks | $ | 77,695 | $ | – | $ | 77,695 | $ | – | $ | 5,858 | $ | 71,837 | $ | – | ||||||||||||||||||
Deposits with financial institutions | 8,628 | – | 8,628 | – | 197 | 8,431 | – | |||||||||||||||||||||||||
Precious metals | 755 | – | 755 | – | – | 755 | – | |||||||||||||||||||||||||
Liquid securities: | ||||||||||||||||||||||||||||||||
Canadian government obligations | 47,772 | 20,311 | 68,083 | 30,490 | – | 37,593 | – | |||||||||||||||||||||||||
Foreign government obligations | 62,288 | 81,296 | 143,584 | 77,571 | – | 66,013 | – | |||||||||||||||||||||||||
Other liquid securities | 98,476 | 69,368 | 167,844 | 128,979 | – | 38,865 | – | |||||||||||||||||||||||||
Other securities | 3,811 | 13,254 | 17,065 | 6,028 | – | – | 11,037 | |||||||||||||||||||||||||
Loans classified as liquid assets: | ||||||||||||||||||||||||||||||||
NHA mortgage-backed securities | 30,153 | – | 30,153 | 8,114 | – | 22,039 | – | |||||||||||||||||||||||||
Call and short loans | 20 | – | 20 | – | – | 20 | – | |||||||||||||||||||||||||
Other loans | 614,926 | – | 614,926 | 5,964 | 65,647 | 10,527 | 532,788 | |||||||||||||||||||||||||
Other financial assets(4) | 194,100 | (111,892 | ) | 82,208 | 6,651 | – | – | 75,557 | ||||||||||||||||||||||||
Non-financial assets | 46,220 | – | 46,220 | – | – | – | 46,220 | |||||||||||||||||||||||||
Total | $ | 1,184,844 | $ | 72,337 | $ | 1,257,181 | $ | 263,797 | $ | 71,702 | $ | 256,080 | $ | 665,602 | ||||||||||||||||||
Encumbered assets | Unencumbered assets | |||||||||||||||||||||||||||||||
As at October 31, 2020 ($ millions) | Bank-owned assets | Securities received as collateral from securities financing and derivative | Total assets | Pledged as collateral | Other(1) | Available as collateral(2) | Other(3) | |||||||||||||||||||||||||
Cash and deposits with central banks | $ | 66,252 | $ | – | $ | 66,252 | $ | – | $ | 7,019 | $ | 59,233 | $ | – | ||||||||||||||||||
Deposits with financial institutions | 10,208 | – | 10,208 | – | 74 | 10,134 | – | |||||||||||||||||||||||||
Precious metals | 1,181 | – | 1,181 | – | – | 1,181 | – | |||||||||||||||||||||||||
Liquid securities: | ||||||||||||||||||||||||||||||||
Canadian government obligations | 74,943 | 14,890 | 89,833 | 37,991 | – | 51,842 | – | |||||||||||||||||||||||||
Foreign government obligations | 71,686 | 79,032 | 150,718 | 83,117 | – | 67,601 | – | |||||||||||||||||||||||||
Other liquid securities | 69,470 | 78,238 | 147,708 | 114,867 | – | 32,841 | – | |||||||||||||||||||||||||
Other securities | 3,621 | 7,794 | 11,415 | 3,227 | – | – | 8,188 | |||||||||||||||||||||||||
Loans classified as liquid assets: | ||||||||||||||||||||||||||||||||
NHA mortgage-backed securities | 35,267 | – | 35,267 | 8,010 | – | 27,257 | – | |||||||||||||||||||||||||
Call and short loans | 165 | – | 165 | – | – | 165 | – | |||||||||||||||||||||||||
Other loans | 576,183 | – | 576,183 | 7,640 | 81,780 | 17,702 | 469,061 | |||||||||||||||||||||||||
Other financial assets(4) | 182,671 | (109,231 | ) | 73,440 | 6,182 | – | – | 67,258 | ||||||||||||||||||||||||
Non-financial assets | 44,819 | – | 44,819 | – | – | – | 44,819 | |||||||||||||||||||||||||
Total | $ | 1,136,466 | $ | 70,723 | $ | 1,207,189 | $ | 261,034 | $ | 88,873 | $ | 267,956 | $ | 589,326 |
(1) | Assets which are restricted from being used to secure funding for legal or other reasons. |
(2) | Assets that are readily available in the normal course of business to secure funding or meet collateral needs including central bank borrowing immediately available. |
(3) | Other unencumbered assets are not subject to any restrictions on their use to secure funding or as collateral but the Bank would not consider them to be readily available. These include loans, a portion of which may be used to access central bank facilities outside of the normal course or to raise secured funding through the Bank’s secured funding programs. |
(4) | Securities received as collateral against other financial assets are included within liquid securities and other securities. |
As of October 31, 2021 total encumbered assets of the Bank were $335 billion (October 31, 2020 – $350 billion). Of the remaining $922 billion (October 31, 2020 – $857 billion) of unencumbered assets, $256 billion (October 31, 2020 – $268 billion) are considered readily available in the normal course of business to secure funding or meet collateral needs as detailed above.
In some over-the-counter derivative contracts, the Bank would be required to post additional collateral or receive less collateral in the event its credit rating was downgraded. The Bank maintains access to sufficient collateral to meet these obligations in the event of a downgrade of its ratings by one or more of the rating agencies. As at October 31, 2021 the potential adverse impact on derivatives collateral that would result from a one-notch or two-notch downgrade of the Bank’s rating below its lowest current rating was $20 million or $258 million, respectively.
Encumbered liquid assets are not considered to be available for liquidity management purposes. Liquid assets which are used to hedge derivative positions in trading books or for hedging purposes are considered to be available for liquidity management provided they meet the criteria discussed in liquid assets above.
Liquidity coverage ratio
The Liquidity Coverage Ratio measure (LCR) is based on a 30-day liquidity stress scenario, with assumptions defined in the OSFI Liquidity Adequacy Requirements (LAR) Guideline. The LCR is calculated as the ratio of high quality liquid assets (HQLA) to net cash outflows. The Bank is subject to a regulatory minimum LCR of 100%.
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OSFI’s LAR stipulates that banks must maintain an adequate level of unencumbered HQLA that can be converted into cash to meet liquidity needs over a 30 calendar day horizon under a pre-defined significantly severe liquidity stress scenario. The LCR-prescribed liquidity stress scenario includes assumptions for asset haircuts, deposit run-off, wholesale rollover rates, and outflow rates for commitments.
HQLA are grouped into three categories: Level 1, Level 2A and Level 2B, based on guidelines from the LAR. Level 1 HQLA receive no haircuts, and includes cash, deposits with central banks, central bank reserves available to the Bank in times of stress, and securities with a 0% risk weight. Level 2A and 2B include HQLA of lesser quality and attracts haircuts ranging from 15%-50%.
The total weighted values for net cash outflows for the next 30 days are derived by applying the assumptions specified in the LAR Guideline to specific items, including loans, deposits, maturing debt, derivative transactions and commitments to extend credit.
The following table presents the Bank’s average LCR for the quarter ended October 31, 2021 based on the average daily position in the quarter.
T56 Bank’s average LCR(1)
For the quarter ended October 31, 2021 ($ millions)(2) | Total unweighted value (Average)(3) | Total weighted value | ||||||
High-quality liquid assets | ||||||||
Total high-quality liquid assets (HQLA) | * | $ | 197,528 | |||||
Cash outflows | ||||||||
Retail deposits and deposits from small business customers, of which: | $ | 233,649 | 19,888 | |||||
Stable deposits | 97,185 | 3,139 | ||||||
Less stable deposits | 136,464 | 16,749 | ||||||
Unsecured wholesale funding, of which: | 260,381 | 110,255 | ||||||
Operational deposits (all counterparties) and deposits in networks of cooperative banks | 108,591 | 25,886 | ||||||
Non-operational deposits (all counterparties) | 131,737 | 64,316 | ||||||
Unsecured debt | 20,053 | 20,053 | ||||||
Secured wholesale funding | * | 51,470 | ||||||
Additional requirements, of which: | 237,127 | 52,441 | ||||||
Outflows related to derivative exposures and other collateral requirements | 34,918 | 25,543 | ||||||
Outflows related to loss of funding on debt products | 4,686 | 4,686 | ||||||
Credit and liquidity facilities | 197,523 | 22,213 | ||||||
Other contractual funding obligations | 1,605 | 1,454 | ||||||
Other contingent funding obligations(5) | 441,674 | 6,102 | ||||||
Total cash outflows | * | $ | 241,609 | |||||
Cash inflows | ||||||||
Secured lending (e.g. reverse repos) | $ | 182,135 | $ | 45,580 | ||||
Inflows from fully performing exposures | 25,485 | 15,973 | ||||||
Other cash inflows | 21,257 | 21,257 | ||||||
Total cash inflows | $ | 228,877 | $ | 82,810 | ||||
Total adjusted value(6) | ||||||||
Total HQLA | * | $ | 197,528 | |||||
Total net cash outflows | * | $ | 158,799 | |||||
Liquidity coverage ratio (%) | * | 124 | % | |||||
For the quarter ended October 31, 2020 ($ millions) | Total adjusted value(6) | |||||||
Total HQLA | * | $ | 209,777 | |||||
Total net cash outflows | * | $ | 151,897 | |||||
Liquidity coverage ratio (%) | * | 138 | % |
* | Disclosure is not required under regulatory guideline. |
(1) | This measure has been disclosed in this document in accordance with OSFI Guideline – Public Disclosure Requirements for Domestic Systemically Important Banks on Liquidity Coverage Ratio (April 2015). |
(2) | Based on the average daily positions of the 61 business days in the quarter. |
(3) | Unweighted values represent outstanding balances maturing or callable within the next 30 days. |
(4) | Weighted values represent balances calculated after the application of HQLA haircuts or inflow and outflow rates, as prescribed by the OSFI Liquidity Adequacy Requirements (LAR) guidelines. |
(5) | Total unweighted value includes uncommitted credit and liquidity facilities, guarantees and letters of credit, outstanding debt securities with remaining maturity greater than 30 days, and other contractual cash outflows. |
(6) | Total adjusted value represents balances calculated after the application of both haircuts and inflow and outflow rates and any applicable caps. |
HQLA is substantially comprised of Level 1 assets (as defined in the LAR guideline), such as cash, deposits with central banks available to the Bank in times of stress, and highly rated securities issued or guaranteed by governments, central banks and supranational entities.
The decrease in the Bank’s average LCR for the quarter ended October 31, 2021 versus the quarter ended October 31, 2020 was attributable to repayments under the Bank of Canada Term Repo Program and growth in loans and mortgages, partially offset by growth in deposits. The Bank monitors its significant currency exposures, Canadian and U.S. dollars, in accordance with its liquidity risk management framework and risk appetite.
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Net stable funding ratio
The Net Stable Funding Ratio (NSFR) requires institutions to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet exposures. It is calculated as the ratio of available stable funding (ASF) to required stable funding (RSF), with assumptions defined in the OSFI LAR Guideline. The Bank is subject to a regulatory minimum NSFR of 100%.
ASF is defined as the portion of capital and liabilities expected to be reliable over the time horizons considered by the NSFR. RSF is a function of the liquidity characteristics and residual maturities of the various assets held by the bank as well as those of its off-balance sheet exposures.
The total weighted values for ASF and RSF included in the table that follows are derived by applying the assumptions specified in the LAR Guideline to balance sheet items, including capital instruments, wholesale funding, deposits, loans and mortgages, securities, derivatives and commitments to extend credit.
The following table presents the Bank’s NSFR as at October 31, 2021.
T57 Bank’s NSFR(1)
Unweighted Value by Residual Maturity | Weighted value(3) | |||||||||||||||||||
As at October 31, 2021 ($ millions) | No maturity(2) | < 6 months | 6-12 months | ³ 1 year | ||||||||||||||||
Available Stable Funding (ASF) Item |
| |||||||||||||||||||
Capital: | $ | 77,328 | $ | – | $ | – | $ | 901 | $ | 78,229 | ||||||||||
Regulatory capital | 77,328 | – | – | – | 77,328 | |||||||||||||||
Other capital instruments | – | – | – | 901 | 901 | |||||||||||||||
Retail deposits and deposits from small business customers: | 211,106 | 53,222 | 12,462 | 22,692 | 274,483 | |||||||||||||||
Stable deposits | 92,730 | 15,582 | 4,210 | 5,823 | 112,719 | |||||||||||||||
Less stable deposits | 118,376 | 37,640 | 8,252 | 16,869 | 161,764 | |||||||||||||||
Wholesale funding: | 180,643 | 282,147 | 49,398 | 99,098 | 267,850 | |||||||||||||||
Operational deposits | 93,627 | 7,013 | – | – | 50,320 | |||||||||||||||
Other wholesale funding | 87,016 | 275,134 | 49,398 | 99,098 | 217,530 | |||||||||||||||
Liabilities with matching interdependent assets | – | 2,051 | 1,648 | 21,869 | – | |||||||||||||||
Other liabilities: | 66,220 | 66,492 | 20,725 | |||||||||||||||||
NSFR derivative liabilities | 9,321 | |||||||||||||||||||
All other liabilities and equity not included in the above categories | 66,220 | 35,714 | 1,464 | 19,993 | 20,725 | |||||||||||||||
Total ASF | $ | 641,287 | ||||||||||||||||||
Required Stable Funding (RSF) Item |
| |||||||||||||||||||
Total NSFR high-quality liquid assets (HQLA) | $ | 30,528 | ||||||||||||||||||
Deposits held at other financial institutions for operational purposes | $ | 1,906 | $ | – | $ | – | $ | – | $ | 953 | ||||||||||
Performing loans and securities: | 99,908 | 159,289 | 54,663 | 449,415 | 490,313 | |||||||||||||||
Performing loans to financial institutions secured by Level 1 HQLA | 106 | 47,231 | 3,977 | – | 4,501 | |||||||||||||||
Performing loans to financial institutions secured by non-Level 1 HQLA and unsecured performing loans to financial institutions | 2,886 | 58,281 | 9,172 | 11,908 | 26,206 | |||||||||||||||
Performing loans to non-financial corporate clients, loans to retail and small business customers, and loans to sovereigns, central banks and PSEs, of which: | 46,896 | 46,399 | 25,761 | 183,053 | 229,534 | |||||||||||||||
With a risk weight of less than or equal to 35% under the Basel II standardised approach for credit risk | – | 265 | 308 | 2,661 | 2,016 | |||||||||||||||
Performing residential mortgages, of which: | 20,008 | 6,100 | 15,062 | 247,970 | 198,065 | |||||||||||||||
With a risk weight of less than or equal to 35% under the Basel II standardised approach for credit risk | 20,008 | 5,908 | 14,938 | 235,407 | 187,229 | |||||||||||||||
Securities that are not in default and do not qualify as HQLA, including exchange-traded equities | 30,012 | 1,278 | 691 | 6,484 | 32,007 | |||||||||||||||
Assets with matching interdependent liabilities(4) | – | 2,051 | 1,648 | 21,869 | – | |||||||||||||||
Other assets: | 1,807 | 101,369 | 42,804 | |||||||||||||||||
Physical traded commodities, including gold | 1,807 | 1,536 | ||||||||||||||||||
Assets posted as initial margin for derivative contracts and contributions to default funds of CCPs | 3,233 | 2,748 | ||||||||||||||||||
NSFR derivative assets | 7,777 | – | ||||||||||||||||||
NSFR derivative liabilities before deduction of variation margin posted | 17,756 | 888 | ||||||||||||||||||
All other assets not included in the above categories | – | 34,975 | – | 37,628 | 37,632 | |||||||||||||||
Off-balance sheet items | 412,300 | 16,123 | ||||||||||||||||||
Total RSF | $ | 580,721 | ||||||||||||||||||
Net Stable Funding Ratio (%) | 110 | % |
(1) | This measure has been disclosed in this document in accordance with OSFI Guideline – Net Stable Funding Ratio Disclosure Requirements (January 2021). |
(2) | Items in the “no maturity” time bucket do not have a stated maturity. These may include, but are not limited to, items such as capital with perpetual maturity, non-maturity deposits, short positions, open maturity positions, non-HQLA equities, and physical traded commodities. |
(3) | Weighted values represent balances calculated after the application of ASF and RSF rates, as prescribed by the OSFI Liquidity Adequacy Requirement (LAR) guideline. |
(4) | Interdependent assets and liabilities are primarily comprised of transactions related to the Canada Mortgage Bond program. |
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Weighted value | ||||||||||||||||||||
As at July 31, 2021 ($ millions) | ||||||||||||||||||||
Total ASF | $ | 634,952 | ||||||||||||||||||
Total RSF | 566,866 | |||||||||||||||||||
Net stable funding ratio (%) | 112 | % |
Available stable funding is primarily provided by the Bank’s large pool of retail, small business and corporate customer deposits; secured and unsecured wholesale funding and capital. Required stable funding primarily originates from the Bank’s loan and mortgage portfolio, securities holdings, off-balance sheet items and other assets.
The Bank’s NSFR as at October 31, 2021 was lower than the previous quarter end primarily due to higher RSF from mortgage and loan growth partially offset by higher ASF from wholesale funding.
Funding
The Bank ensures that its funding sources are well diversified. Funding concentrations are regularly monitored and analyzed by type. The sources of funding are capital, deposits from retail and commercial clients sourced through the Canadian and international branch network, deposits from financial institutions as well as wholesale debt issuances.
Capital and personal deposits are key components of the Bank’s core funding and these amounted to $324 billion as at October 31, 2021 (October 31, 2020 – $325 billion). A portion of commercial deposits, particularly those of an operating or relationship nature, are also considered part of the Bank’s core funding. Furthermore, core funding is augmented by longer term wholesale debt issuances (original maturity over 1 year) of $177 billion (October 31, 2020 – $168 billion). Longer term wholesale debt issuances include senior notes, mortgage securitizations, asset-backed securities and covered bonds.
The Bank operates in many different currencies and countries. From a funding perspective, the most significant currencies are Canadian and U.S. dollars. With respect to the Bank’s operations outside Canada, there are different funding strategies depending on the nature of the activities in each country. For those countries where the Bank operates a branch banking subsidiary, the strategy is for the subsidiary to be substantially self-funding in its local market. For other subsidiaries or branches outside Canada where local deposit gathering capability is not sufficient, funding is provided through the wholesale funding activities of the Bank.
From an overall funding perspective, the Bank’s objective is to achieve an appropriate balance between the cost and the stability of funding. Diversification of funding sources is a key element of the funding strategy.
The Bank’s wholesale debt diversification strategy is primarily executed via the Bank’s main wholesale funding centres, located in Toronto, New York, London and Singapore. The majority of these funds are sourced in Canadian and U.S. dollars. Where required, these funds are swapped to fund assets in different currencies. The funding strategy deployed by wholesale funding centres and the management of associated risks, such as geographic and currency risk, are managed centrally within the framework of policies and limits that are approved by the Board of Directors.
In the normal course, the Bank uses a mix of unsecured and secured wholesale funding instruments across a variety of markets. The choice of instruments and markets is based on a number of factors, including relative cost, market capacity and diversification of funding. Market conditions can change over time, impacting cost and capacity in particular markets or instruments. Changing market conditions can include periods of stress where the availability of funding in particular markets or instruments is constrained. In these circumstances the Bank would increase its focus on sources of funding in functioning markets and secured funding instruments. Should a period of extreme stress exist such that all wholesale funding sources are constrained, the Bank maintains a pool of liquid assets to mitigate its liquidity risk. This pool includes cash, deposits with central banks and securities.
In Canada, the Bank raises short and longer-term wholesale debt through the issuance of senior unsecured notes. Additional longer-term wholesale debt may be generated through the Bank’s Canadian Debt and Equity Shelf, the securitization of Canadian insured residential mortgages through CMHC programs (such as Canada Mortgage Bonds), uninsured residential mortgages through the Bank’s Covered Bond Program, retail credit card receivables through the Trillium Credit Card Trust II program, retail indirect auto loan receivables through the Securitized Term Auto Receivables Trust program and unsecured personal lines of credit through the Halifax Receivables Trust program. CMHC securitization programs, while included in the Bank’s view of wholesale debt issuance, do not entail the run-off risk that can be experienced in funding raised from capital markets.
Outside of Canada, short-term wholesale debt may be raised through the issuance of negotiable certificates of deposit in the United States, Hong Kong, the United Kingdom, and Australia and the issuance of commercial paper in the United States. The Bank operates longer-term wholesale debt issuance registered programs in the United States, such as its SEC Registered Debt and Equity Shelf, and non-registered programs, such as the securitization of retail indirect auto loan receivables through the Securitized Term Auto Receivables Trust program and retail credit card receivables through the Trillium Credit Card Trust II program. The Bank may issue its Covered Bond Program (listed with the U.K. Listing Authority and the Swiss Stock Exchange), in Europe, the United Kingdom, the United States, Australia and Switzerland. The Bank also raises longer-term funding across a variety of currencies through its Australian Medium Term Note Programme, European Medium Term Note Programme (listed with the U.K. Listing Authority and the Swiss Stock Exchange) and Singapore Medium Term Note Programme (listed with the Singapore Exchange and the Taiwan Exchange).
The Department of Finance’s bail-in regulations under the Canada Deposit Insurance Corporation (CDIC) Act and the Bank Act, became effective September 23, 2018. Senior long-term debt issued by the Bank on or after September 23, 2018, that has an original term greater than 400 days and is marketable, subject to certain exceptions, is subject to the Canadian Bank Recapitalization (Bail-in) regime. Under the Bail-in regime, in circumstances when the Superintendent of Financial Institutions has determined that a bank may no longer be viable, the Governor in Council may, upon a recommendation of the Minister of Finance that they are of the opinion that it is in the public interest to do so, grant an order directing the CDIC to convert all or a portion of certain shares and liabilities of that bank into common shares. As at October 31, 2021, issued and outstanding liabilities of $50 billion (October 31, 2020 – $33 billion) were subject to conversion under the bail-in regime.
During 2020, the Bank accessed programs of central banks launched or amended in response to COVID-19 to supplement its funding. During the current year, the majority of the liquidity that the Bank accessed under these programs was repaid.
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The table below provides the remaining contractual maturities of funding raised through wholesale funding. In the Consolidated Statement of Financial Position, these liabilities are primarily included in Business & Government Deposits.
T58 Wholesale funding(1)
As at October 31, 2021 ($millions) | Less than 1 month | 1-3 months | 3-6 months | 6-9 months | 9-12 months | Sub-Total < 1 Year | 1-2 years | 2-5 years | >5 years | Total | ||||||||||||||||||||||||||||||
Deposits from banks(2) | $ | 1,348 | $ | 302 | $ | 220 | $ | 151 | $ | 348 | $ | 2,369 | $ | 166 | $ | – | $ | – | $ | 2,535 | ||||||||||||||||||||
Bearer deposit notes, commercial paper and short-term certificate of deposits | 5,030 | 11,249 | 15,037 | 18,439 | 12,169 | 61,924 | 537 | 162 | 48 | 62,671 | ||||||||||||||||||||||||||||||
Asset-backed commercial paper(3) | 1,328 | 2,248 | 965 | – | – | 4,541 | – | – | – | 4,541 | ||||||||||||||||||||||||||||||
Senior notes(4)(5) | 3 | 2,254 | 6,029 | 1,283 | 4,476 | 14,045 | 8,144 | 5,224 | 10,385 | 37,798 | ||||||||||||||||||||||||||||||
Bail-inable notes(5) | – | 77 | 127 | 1 | – | 205 | 14,421 | 21,827 | 13,207 | 49,660 | ||||||||||||||||||||||||||||||
Asset-backed securities | – | 606 | – | – | – | 606 | 752 | 604 | 85 | 2,047 | ||||||||||||||||||||||||||||||
Covered bonds | – | 1,789 | – | – | 1,788 | 3,577 | 7,412 | 15,206 | 5,055 | 31,250 | ||||||||||||||||||||||||||||||
Mortgage securitization(6) | – | 669 | 1,382 | 928 | 720 | 3,699 | 6,154 | 11,008 | 4,590 | 25,451 | ||||||||||||||||||||||||||||||
Subordinated debentures(7) | 26 | – | 49 | �� | – | 49 | 124 | – | 1,931 | 6,352 | 8,407 | |||||||||||||||||||||||||||||
Total wholesale funding sources | $ | 7,735 | $ | 19,194 | $ | 23,809 | $ | 20,802 | $ | 19,550 | $ | 91,090 | $ | 37,586 | $ | 55,962 | $ | 39,722 | $ | 224,360 | ||||||||||||||||||||
Of Which: | ||||||||||||||||||||||||||||||||||||||||
Unsecured funding | $ | 6,408 | $ | 13,882 | $ | 21,462 | $ | 19,874 | $ | 17,041 | $ | 78,667 | $ | 23,268 | $ | 29,144 | $ | 29,992 | $ | 161,071 | ||||||||||||||||||||
Secured funding | 1,327 | 5,312 | 2,347 | 928 | 2,509 | 12,423 | 14,318 | 26,818 | 9,730 | 63,289 | ||||||||||||||||||||||||||||||
As at October 31, 2020 ($millions) | Less than 1 month | 1-3 months | 3-6 months | 6-9 months | 9-12 months | Sub-Total < 1 Year | 1-2 years | 2-5 years | >5 years | Total | ||||||||||||||||||||||||||||||
Deposits from banks(2) | $ | 1,084 | $ | 439 | $ | 88 | $ | 36 | $ | 1 | $ | 1,648 | $ | – | $ | – | $ | – | $ | 1,648 | ||||||||||||||||||||
Bearer deposit notes, commercial paper and short-term certificate of deposits | 5,813 | 9,539 | 10,475 | 6,856 | 4,567 | 37,250 | 953 | 346 | 67 | 38,616 | ||||||||||||||||||||||||||||||
Asset-backed commercial paper(3) | 606 | 2,307 | 400 | – | – | 3,313 | – | – | – | 3,313 | ||||||||||||||||||||||||||||||
Senior notes(4)(5) | 144 | 5,642 | 4,822 | 3,843 | 923 | 15,374 | 14,753 | 12,109 | 10,337 | 52,573 | ||||||||||||||||||||||||||||||
Bail-inable notes(5) | – | 1,362 | – | – | – | 1,362 | 214 | 21,980 | 9,397 | 32,953 | ||||||||||||||||||||||||||||||
Asset-backed securities | – | 1,811 | 12 | – | – | 1,823 | 956 | 542 | 254 | 3,575 | ||||||||||||||||||||||||||||||
Covered bonds | – | – | 3,330 | – | 5,804 | 9,134 | 3,879 | 13,396 | 4,086 | 30,495 | ||||||||||||||||||||||||||||||
Mortgage securitization(6) | 212 | 1,558 | 243 | 2,161 | 413 | 4,587 | 3,700 | 14,058 | 5,076 | 27,421 | ||||||||||||||||||||||||||||||
Subordinated debentures(7) | 69 | – | – | – | – | 69 | 79 | 389 | 8,818 | 9,355 | ||||||||||||||||||||||||||||||
Total wholesale funding sources | $ | 7,928 | $ | 22,658 | $ | 19,370 | $ | 12,896 | $ | 11,708 | $ | 74,560 | $ | 24,534 | $ | 62,820 | $ | 38,035 | $ | 199,949 | ||||||||||||||||||||
Of Which: | ||||||||||||||||||||||||||||||||||||||||
Unsecured funding | $ | 7,110 | $ | 16,982 | $ | 15,385 | $ | 10,735 | $ | 5,491 | $ | 55,703 | $ | 15,999 | $ | 34,824 | $ | 28,619 | $ | 135,145 | ||||||||||||||||||||
Secured funding | 818 | 5,676 | 3,985 | 2,161 | 6,217 | 18,857 | 8,535 | 27,996 | 9,416 | 64,804 |
(1) | Wholesale funding sources exclude repo transactions and bankers acceptances, which are disclosed in the T59 Contractual maturities. Amounts are based on remaining term to maturity. |
(2) | Only includes commercial bank deposits. |
(3) | Wholesale funding sources also exclude asset-backed commercial paper issued by certain ABCP conduits that are not consolidated for financial reporting purposes. |
(4) | Not subject to bail-in. |
(5) | Includes Structured notes issued to institutional investors. |
(6) | Represents residential mortgages funded through Canadian Federal Government agency sponsored programs. Funding accessed through such programs does not impact the funding capacity of the Bank in its own name. |
(7) | Although subordinated debentures are a component of regulatory capital, they are included in this table in accordance with EDTF recommended disclosures. |
Wholesale funding generally bears a higher risk of run-off in a stressed environment than other sources of funding. The Bank mitigates this risk through funding diversification, ongoing engagement with investors and by maintaining a large holding of unencumbered liquid assets. Unencumbered liquid assets of $246 billion as at October 31, 2021 (October 31, 2020 – $250 billion) were well in excess of wholesale funding sources that mature in the next twelve months.
Contractual maturities and obligations
The table below provides the maturity of assets and liabilities as well as the off-balance sheet commitments as at October 31, 2021, based on the contractual maturity date.
From a liquidity risk perspective the Bank considers factors other than contractual maturity in the assessment of liquid assets or in determining expected future cash flows. In particular, for securities with a fixed maturity date, the ability and time horizon to raise cash from these securities is more relevant to liquidity management than contractual maturity. For other assets and deposits the Bank uses assumptions about rollover rates to assess liquidity risk for normal course and stress scenarios. Similarly, the Bank uses assumptions to assess the potential drawdown of credit commitments in various scenarios.
The Bank’s contractual obligations include contracts and purchase obligations, including agreements to purchase goods and services that are enforceable, legally binding on the Bank and affect the Bank’s liquidity and capital resource needs. The Bank leases a large number of its branches, offices and other locations. The majority of these leases are for a term of five years, with options to renew.
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T59 Contractual maturities
As at October 31, 2021 | ||||||||||||||||||||||||||||||||||||||||
($ millions) | Less than one month | One to three months | Three to six months | Six to nine months | Nine to twelve months | One to two years | Two to five years | Over five years | No specific maturity | Total | ||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||
Cash and deposits with financial institutions and precious metals | $ | 78,205 | $ | 539 | $ | 312 | $ | 162 | $ | 273 | $ | 397 | $ | 792 | $ | 655 | $ | 5,743 | $ | 87,078 | ||||||||||||||||||||
Trading assets | 1,880 | 4,353 | 2,734 | 2,558 | 1,687 | 6,768 | 19,130 | 20,323 | 86,879 | 146,312 | ||||||||||||||||||||||||||||||
Securities purchased under resale agreements and securities borrowed | 96,026 | 17,969 | 9,870 | 2,446 | 1,428 | – | – | – | – | 127,739 | ||||||||||||||||||||||||||||||
Derivative financial instruments | 2,744 | 4,335 | 3,267 | 1,677 | 1,493 | 11,995 | 4,451 | 12,340 | – | 42,302 | ||||||||||||||||||||||||||||||
Investment securities – FVOCI | 3,387 | 4,523 | 4,848 | 3,096 | 1,923 | 12,366 | 14,656 | 7,846 | 3,144 | 55,789 | ||||||||||||||||||||||||||||||
Investment securities – amortized cost | 18 | 578 | 1,267 | 1,544 | 878 | 3,334 | 5,821 | 4,717 | – | 18,157 | ||||||||||||||||||||||||||||||
Investment securities – FVTPL | – | – | – | – | – | – | – | – | 1,253 | 1,253 | ||||||||||||||||||||||||||||||
Loans | 43,467 | 31,233 | 27,834 | 30,467 | 29,347 | 94,083 | 286,993 | 42,959 | 50,603 | 636,986 | ||||||||||||||||||||||||||||||
Residential mortgages | 2,453 | 4,264 | 7,536 | 12,387 | 12,246 | 47,790 | 199,553 | 31,529 | 1,920 | (1) | 319,678 | |||||||||||||||||||||||||||||
Personal loans | 3,472 | 2,195 | 3,188 | 3,099 | 3,103 | 11,309 | 22,105 | 6,227 | 36,842 | 91,540 | ||||||||||||||||||||||||||||||
Credit cards | – | – | – | – | – | – | – | – | 12,450 | 12,450 | ||||||||||||||||||||||||||||||
Business and government | 37,542 | 24,774 | 17,110 | 14,981 | 13,998 | 34,984 | 65,335 | 5,203 | 5,017 | (2) | 218,944 | |||||||||||||||||||||||||||||
Allowance for credit losses | – | – | – | – | – | – | – | – | (5,626 | ) | (5,626 | ) | ||||||||||||||||||||||||||||
Customers’ liabilities under acceptances | 15,094 | 4,099 | 850 | 225 | 136 | – | – | – | – | 20,404 | ||||||||||||||||||||||||||||||
Other assets | – | – | – | – | – | – | – | – | 48,824 | 48,824 | ||||||||||||||||||||||||||||||
Total assets | 240,821 | 67,629 | 50,982 | 42,175 | 37,165 | 128,943 | 331,843 | 88,840 | 196,446 | 1,184,844 | ||||||||||||||||||||||||||||||
Liabilities and equity | ||||||||||||||||||||||||||||||||||||||||
Deposits | $ | 63,207 | $ | 49,447 | $ | 44,953 | $ | 33,565 | $ | 29,960 | $ | 42,800 | $ | 61,816 | $ | 22,742 | $ | 448,769 | $ | 797,259 | ||||||||||||||||||||
Personal | 10,156 | 13,051 | 13,358 | 7,345 | 6,168 | 6,512 | 8,263 | 102 | 178,596 | 243,551 | ||||||||||||||||||||||||||||||
Non-personal | 53,051 | 36,396 | 31,595 | 26,220 | 23,792 | 36,288 | 53,553 | 22,640 | 270,173 | 553,708 | ||||||||||||||||||||||||||||||
Financial instruments designated at fair value through profit or loss | 86 | 306 | 1,069 | 817 | 983 | 4,302 | 2,613 | 12,317 | – | 22,493 | ||||||||||||||||||||||||||||||
Acceptances | 15,131 | 4,099 | 850 | 225 | 136 | – | – | – | – | 20,441 | ||||||||||||||||||||||||||||||
Obligations related to securities sold short | 473 | 312 | 956 | 324 | 594 | 2,312 | 11,388 | 7,481 | 17,114 | 40,954 | ||||||||||||||||||||||||||||||
Derivative financial instruments | 2,228 | 3,668 | 2,150 | 2,663 | 2,622 | 11,051 | 5,352 | 12,469 | – | 42,203 | ||||||||||||||||||||||||||||||
Obligations related to securities sold under repurchase agreements and securities lent | 104,216 | 9,109 | 6,126 | 3,826 | 87 | – | 105 | – | – | 123,469 | ||||||||||||||||||||||||||||||
Subordinated debentures | – | – | – | – | – | – | 1,797 | 4,500 | 37 | 6,334 | ||||||||||||||||||||||||||||||
Other liabilities | 4,650 | 1,514 | 2,122 | 1,124 | 2,931 | 5,176 | 8,783 | 6,573 | 25,926 | 58,799 | ||||||||||||||||||||||||||||||
Total equity | – | – | – | – | – | – | – | – | 72,892 | 72,892 | ||||||||||||||||||||||||||||||
Total liabilities and equity | 189,991 | 68,455 | 58,226 | 42,544 | 37,313 | 65,641 | 91,854 | 66,082 | 564,738 | 1,184,844 | ||||||||||||||||||||||||||||||
Off-Balance sheet commitments | ||||||||||||||||||||||||||||||||||||||||
Credit commitments(3) | $ | 6,340 | $ | 7,526 | $ | 17,894 | $ | 24,323 | $ | 19,567 | $ | 34,056 | $ | 122,565 | $ | 7,514 | $ | – | $ | 239,785 | ||||||||||||||||||||
Financial guarantees(4) | – | – | – | – | – | – | – | – | 38,598 | 38,598 | ||||||||||||||||||||||||||||||
Outsourcing obligations(5) | 19 | 38 | 56 | 56 | 56 | 224 | 260 | 46 | – | 755 |
(1) | Includes primarily impaired mortgages. |
(2) | Includes primarily overdrafts and impaired loans. |
(3) | Includes the undrawn component of committed credit and liquidity facilities. |
(4) | Includes outstanding balances of guarantees, standby letters of credit and commercial letters of credit which may expire undrawn. |
(5) | The Bank relies on outsourcing arrangements for certain support and/or business functions, including, but not limited to, computer operations and cheque and bill payment processing. |
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T59 Contractual maturities
As at October 31, 2020 | ||||||||||||||||||||||||||||||||||||||||
($ millions) | Less than one month | One to three months | Three to six months | Six to nine months | Nine to twelve months | One to two years | Two to five years | Over five years | No specific maturity | Total | ||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||
Cash and deposits with financial institutions and precious metals | $ | 65,983 | $ | 469 | $ | 471 | $ | 225 | $ | 187 | $ | 496 | $ | 904 | $ | 767 | $ | 8,139 | $ | 77,641 | ||||||||||||||||||||
Trading assets | 2,312 | 4,412 | 4,426 | 1,752 | 2,135 | 6,366 | 21,720 | 16,856 | 57,860 | 117,839 | ||||||||||||||||||||||||||||||
Securities purchased under resale | 83,584 | 21,620 | 10,059 | 2,765 | 1,719 | – | – | – | – | 119,747 | ||||||||||||||||||||||||||||||
Derivative financial instruments | 2,026 | 4,140 | 623 | 2,156 | 2,312 | 8,141 | 7,242 | 18,425 | – | 45,065 | ||||||||||||||||||||||||||||||
Investment securities – FVOCI | 2,755 | 5,041 | 6,941 | 3,213 | 6,374 | 10,179 | 34,214 | 7,948 | 1,832 | 78,497 | ||||||||||||||||||||||||||||||
Investment securities – amortized cost | 1,196 | 1,707 | 4,155 | 2,787 | 931 | 4,337 | 7,626 | 8,905 | – | 31,644 | ||||||||||||||||||||||||||||||
Investment securities – FVTPL | – | – | – | – | – | – | – | – | 1,248 | 1,248 | ||||||||||||||||||||||||||||||
Loans | 42,908 | 28,913 | 31,072 | 32,724 | 31,159 | 92,194 | 248,377 | 42,114 | 53,802 | 603,263 | ||||||||||||||||||||||||||||||
Residential mortgages | 2,938 | 5,271 | 9,009 | 13,400 | 13,458 | 49,948 | 158,050 | 30,012 | 2,598 | (1) | 284,684 | |||||||||||||||||||||||||||||
Personal loans | 2,827 | 1,605 | 3,290 | 3,227 | 4,358 | 11,053 | 23,137 | 5,279 | 38,982 | 93,758 | ||||||||||||||||||||||||||||||
Credit cards | – | – | – | – | – | – | – | – | 14,797 | 14,797 | ||||||||||||||||||||||||||||||
Business and government | 37,143 | 22,037 | 18,773 | 16,097 | 13,343 | 31,193 | 67,190 | 6,823 | 5,064 | (2) | 217,663 | |||||||||||||||||||||||||||||
Allowance for credit losses | – | – | – | – | – | – | – | – | (7,639 | ) | (7,639 | ) | ||||||||||||||||||||||||||||
Customers’ liabilities under acceptances | 11,756 | 1,986 | 439 | 30 | 17 | – | – | – | – | 14,228 | ||||||||||||||||||||||||||||||
Other assets | – | – | – | – | – | – | – | – | 47,294 | 47,294 | ||||||||||||||||||||||||||||||
Total assets | 212,520 | 68,288 | 58,186 | 45,652 | 44,834 | 121,713 | 320,083 | 95,015 | 170,175 | 1,136,466 | ||||||||||||||||||||||||||||||
Liabilities and equity | ||||||||||||||||||||||||||||||||||||||||
Deposits | $ | 65,249 | $ | 47,997 | $ | 53,315 | $ | 38,786 | $ | 23,698 | $ | 39,350 | $ | 73,007 | $ | 20,614 | $ | 388,822 | $ | 750,838 | ||||||||||||||||||||
Personal | 10,231 | 13,741 | 15,088 | 11,626 | 6,192 | 11,691 | 9,861 | 216 | 167,489 | 246,135 | ||||||||||||||||||||||||||||||
Non-personal | 55,018 | 34,256 | 38,227 | 27,160 | 17,506 | 27,659 | 63,146 | 20,398 | 221,333 | 504,703 | ||||||||||||||||||||||||||||||
Financial instruments designated at fair value through profit or loss | 195 | 305 | 779 | 1,029 | 470 | 4,781 | 2,332 | 9,008 | – | 18,899 | ||||||||||||||||||||||||||||||
Acceptances | 11,833 | 1,986 | 439 | 30 | 17 | – | – | – | – | 14,305 | ||||||||||||||||||||||||||||||
Obligations related to securities sold short | 161 | 397 | 611 | 275 | 463 | 1,749 | 6,236 | 8,713 | 13,297 | 31,902 | ||||||||||||||||||||||||||||||
Derivative financial instruments | 2,017 | 3,916 | 670 | 2,188 | 2,887 | 8,499 | 6,338 | 15,732 | – | 42,247 | ||||||||||||||||||||||||||||||
Obligations related to securities sold under repurchase agreements and securities lent | 107,391 | 5,496 | 7,407 | 8,382 | 1,593 | 7,494 | – | – | – | 137,763 | ||||||||||||||||||||||||||||||
Subordinated debentures | – | – | – | – | – | – | – | 7,405 | – | 7,405 | ||||||||||||||||||||||||||||||
Other liabilities | 635 | 1,391 | 1,575 | 1,417 | 1,572 | 6,319 | 10,876 | 6,424 | 32,395 | 62,604 | ||||||||||||||||||||||||||||||
Total equity | – | – | – | – | – | – | – | – | 70,503 | 70,503 | ||||||||||||||||||||||||||||||
Total liabilities and equity | 187,481 | 61,488 | 64,796 | 52,107 | 30,700 | 68,192 | 98,789 | 67,896 | 505,017 | 1,136,466 | ||||||||||||||||||||||||||||||
Off-Balance sheet commitments | ||||||||||||||||||||||||||||||||||||||||
Credit commitments(3) | $ | 5,374 | $ | 13,010 | $ | 22,643 | $ | 24,764 | $ | 20,386 | $ | 34,638 | $ | 108,929 | $ | 5,625 | $ | – | $ | 235,369 | ||||||||||||||||||||
Financial guarantees(4) | – | – | – | – | – | – | – | – | 35,519 | 35,519 | ||||||||||||||||||||||||||||||
Outsourcing obligations(5) | 20 | 40 | 58 | 57 | 57 | 210 | 451 | 57 | – | 950 |
(1) | Includes primarily impaired mortgages. |
(2) | Includes primarily overdrafts and impaired loans. |
(3) | Includes the undrawn component of committed credit and liquidity facilities. |
(4) | Includes outstanding balances of guarantees, standby letters of credit and commercial letters of credit which may expire undrawn. |
(5) | The Bank relies on outsourcing arrangements for certain support and/or business functions, including, but not limited to, computer operations and cheque and bill payment processing. |
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Principal Risks – Non-Financial
Money Laundering, Terrorist Financing and Sanctions Risk
Money Laundering, Terrorist Financing (ML/TF) and Sanctions risks are the susceptibility of Scotiabank to be used by individuals or organizations to launder the proceeds of crime, finance terrorism, or violate economic sanctions. They also include the risk that Scotiabank does not conform to applicable Anti-Money Laundering (AML)/Anti-Terrorist Financing (ATF) or Sanctions legislation or does not apply adequate controls reasonably designed to deter and detect ML/TF and sanctions violations or to file any required regulatory reports.
Money laundering, terrorist financing, and sanctions risks are managed throughout the Bank via the operation of the Bank’s AML/ATF and Sanctions program (“the AML/ATF Program”). The Board appointed Group Chief Anti-Money Laundering Officer, who is also the head of Financial Crime Risk Management (FCRM) is responsible for the AML/ATF Program, which includes development and application of compliance policies, procedures, assessing the risk of money laundering, terrorist-financing or sanctions violations, and maintaining an ongoing compliance training program. The review of effectiveness is supplemented by an independent assessment conducted by the Audit Department. FCRM establishes enterprise standards to assess customers for money laundering, terrorist financing and sanctions risk.
The Bank conducts an annual self-assessment of the ML/TF and sanctions risks inherent in its business units, as well as assessment of the control measures in place to manage those risks. The process is led by the Bank’s AML Risk unit and the results shared with the Bank’s Senior Management. All active employees are provided with mandatory AML/ATF and Sanctions training on an annual basis. The Bank performs Customer Due Diligence sufficient to form a reasonable belief that it knows the true identity of its customers, including in the case of an entity, its material ultimate beneficial owners.
The Bank will not maintain anonymous accounts, nor will it maintain accounts for shell banks. Consistent with a risk-based approach, the Bank assesses the risks of its customers and, where appropriate, conducts enhanced due diligence on those who are considered higher risk. The Bank also conducts ongoing risk tailored monitoring of its customers to detect and report suspicious transactions and activity, and conducts customer and transaction screening against terrorist, sanctions, and other designated watch-lists.
Operational Risk
Operational risk is the risk of loss resulting from people, inadequate or failed processes and systems, or from external events. Operational risk includes third party risk management and legal risk but excludes strategic risk and reputational risk. It also exists in some form in each of the Bank’s business and support activities, and third parties to whom activities have been outsourced. It can result in financial loss, regulatory sanctions and damage to the Bank’s reputation. Operational risk management refers to the discipline of systematic identification, assessment, measurement, mitigation, monitoring, and reporting of operational risk.
The Bank’s Operational Risk Management Framework outlines the Bank’s structured approach for effective management of enterprise-wide operational risk in a manner consistent with best practices and regulatory requirements. The Framework consists of the following key components:
Governance
Risk Committee Governance. The Bank recognizes operational risk as a distinct risk management discipline, managed enterprise-wide, in a globally coordinated manner, and in compliance with local regulations. Governance of operational risk is aligned with the Bank’s overarching committee governance structure.
Policies, Frameworks, and Methodologies. Operational risk management is governed by various policies, frameworks, and methodologies established for effective identification, measurement and management of operational risks across the Bank.
Risk Appetite
The operational risk appetite articulates the amount and type of risk the Bank is willing to take to achieve its strategic and financial objectives and consists of a mixture of qualitative statements and quantitative measures with limits where appropriate.
Risk Identification and Assessment
Risk identification and assessment is a critical part of effectively managing operational risk. Risks are identified, classified, and assessed, and their potential impact is evaluated and reported to management and the Board. Operational risk management tools and programs are in place to support the identification and assessment of operational risk with each having their defined methodology and/or standards. The key tools include an Operational Risk Dictionary, Risk and Control Self-Assessments (RCSA), Scenario Analysis, and New Initiatives Risk Assessment.
Risk Measurement
Operational Risk Events. The goal of Operational Risk Event reporting is to manage, mitigate and monitor operational risk within the organization. The data captured provides meaningful information for assessing and mitigating operational risk exposure at the Bank as a result of event root cause analysis and evaluation of internal controls. Timely, accurate and complete reporting of Operational Risk Event data assists the Bank in maintaining a strong risk culture and promotes transparency of the financial impact of Operational Risk Events by aggregating losses and monitoring performance to indicate whether the Bank is operating within its risk appetite.
Operational Risk Capital. Operational risk capital refers to regulatory and internal capital which is quantified as a reserve for unexpected losses resulting from operational risk. Operational risk capital is a component of the total amount of risk capital that the Bank holds.
Risk Mitigation
Controls are identified and assessed through the various Operational Risk Management tools. In cases where controls are deemed deficient a remedial action will be required, which in turn will help to mitigate residual risk. Operational risk response decisions include mitigation, transfer, acceptance, and avoidance of operational risks.
Risk Monitoring, Analytics, and Reporting
The Bank has processes in place for the ongoing monitoring of operational risk. These monitoring activities can provide an early warning of emerging issues, triggering timely management response. In addition, these activities allow for review and analysis of the risk profile in relation to risk appetite or other key indicators to identify when events may be approaching or exceeding thresholds, requiring action and/or escalation.
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Operational risk data is collected in risk systems and used for reporting. Operational risk reporting facilitates distribution and escalation of operational risk information to the relevant parties and provides stakeholders involved in operational risk management activities access to reliable data in a consistent and timely manner to support risk-based decision making.
Cyber Security and Information Technology (IT) Risk
IT Risk is the risk of financial loss, disruption or damage to reputation from a failure of information technology systems. Cyber Security risks are the unique IT risks faced as a result of using interconnected systems and digital technologies.
The Cyber Security and IT risk landscape continues to evolve across the financial industry. The increasing use of online delivery channels and mobile devices to perform financial transactions exposes the bank to operational disruptions due to multiple factors: human errors, fraud, infrastructure failures, issues with our business partners, among others. These events may increase costs or may negatively impact the Bank’s operational environment, our customers and other third parties.
The Board of Directors approves the Information Technology and Information Security Risk Framework, which along with its respective policies and other frameworks are focused on safeguarding the Bank and its customers’ information, ensuring the Bank’s IT environment is reliable, secure, resilient and robust in support of our business objectives.
Significant efforts are directed towards risk management activities, reinforcing industry standards and best practices across the enterprise. The Bank continues to expand its cyber security capabilities to defend against potential threats and minimize the impact to the business, including the activities to reinforce the Bank’s resilience to events caused by factors out of the Bank’s control. The dependency on third parties and the potential risks they bring to the continuity of our business activities is a key area of focus. Regulatory oversight of technology and cyber security risk continues to increase, demanding stronger controls to keep the financial ecosystem secure and in line with the evolving threat landscape.
The Bank continuously monitors and reports metrics and Key Risk Indicators to the Board of Directors, its Risk Committee and other management committees. Information security awareness campaigns are conducted periodically, including annual mandatory training sessions on information security and operational risk to all our employees, reinforcing our risk culture.
Compliance Risk
Compliance Risk is the risk of an activity not being conducted in conformity with applicable laws, rules, regulations and prescribed practices (“regulatory requirements”), as well as compliance related internal policies and procedures, and ethical standards expected by regulators, customers, investors, employees and other stakeholders. Compliance Risk includes Regulatory Compliance Risk, Conduct Risk, and Privacy Risk.
The Bank conducts business in many jurisdictions around the world and provides a wide variety of financial products and services through its various lines of business and operations. It is subject to, and must comply with, many and changing Regulations by governmental agencies, supervisory authorities and self-regulatory organizations in all the jurisdictions in which the Bank operates. The regulatory bar is constantly rising with Regulations being more vigorously enforced and new Regulations being enacted. The bar of public expectations is also constantly rising. Regulators and customers expect the Bank and its employees will operate its business in compliance with applicable laws and will refrain from unethical practices.
Compliance risk is managed on an enterprise-wide basis throughout the Bank via the operation of the Scotiabank Compliance Program (“the Program”) which is led by the Bank’s Chief Compliance Officer (CCO) who is responsible for overseeing Compliance Risk Management within the Bank. The CCO is responsible for assessing the adequacy of, adherence to and effectiveness of the Program, as well as for the development and application of written compliance policies and procedures that are kept up to date and approved by senior management, assessing and documenting compliance risks, developing and maintaining a written compliance training program, which in each case is performed either directly or indirectly by other departments within the Bank in coordination with Global Compliance. This program and these ancillary activities are subject to the Audit Department’s periodic review to assess the effectiveness of the Program.
The Board-approved Compliance Risk Summary Framework describes the general policies and principles applicable to compliance risk management within Scotiabank and encompasses the Bank’s Regulatory Compliance Management Framework (RCMF) as contemplated by OSFI Guideline E-13. The Compliance Risk Summary Framework is an integral part of the enterprise-wide framework, policies and procedures that collectively articulate the Bank’s governance and control structure. Other more specifically focused compliance risk management policies and procedures may be developed within the Compliance Risk Summary Framework where necessary or appropriate.
Environmental Risk
Environmental risk refers to the possibility that environmental concerns involving Scotiabank or its stakeholders could affect the Bank’s performance. The Bank considers climate change as a type of Environmental Risk.
The Bank is exposed to environmental risks through its physical operations and its lending and investment activities. To safeguard the Bank and the interests of its stakeholders, Scotiabank has an environmental policy, which is approved by the Bank’s Board of Directors. The policy guides day-to-day operations, lending practices, supplier agreements, the management of real estate holdings and external reporting practices. It is supplemented by specific policies and practices relating to individual business lines. Additionally, the Bank has implemented an environmental risk management framework that describes the key processes in place to identify, assess, measure, monitor and report on its environmental risk exposure.
Environmental risks associated with the business operations of each borrower and any real property offered as security are considered in the Bank’s credit evaluation procedures. This includes an environmental risk assessment where applicable, and commentary on the potential impact of climate change (including physical or transition risk impacts) on the borrower. Global Risk Management has primary responsibility for establishing the related policies, processes and standards associated with mitigating environmental risk in the Bank’s lending activities. Decisions are taken in the context of the risk management framework.
In the area of project finance, the Equator Principles have been integrated into the Bank’s internal processes and procedures since 2006. The Equator Principles help financial institutions determine, assess, manage and report environmental and social risk. The principles apply to project finance loans and advisory assignments where total capital costs exceed US$10 million, and to certain project-related corporate loans, bridge loans, and project-related refinance and project-related acquisition finance loans. The Equator Principles provide safeguards for sensitive projects
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to ensure protection of natural habitats and the rights of indigenous peoples, as well as safeguards against the use of child and forced labour. The Bank has adopted the fourth version of Equator Principles (EP4), which came into effect on October 1, 2020.
The Bank’s environmental policy plays a prominent role in guiding the reduction of the Bank’s environmental footprint. The Real Estate Department adheres to an Environmental Compliance Policy to ensure responsible management of the Bank’s real estate holdings from an environmental perspective. In addition, a variety of reduction measures are in place for energy, paper and waste in the Bank’s corporate offices and branch networks. Internal tracking systems are in place with respect to energy use, greenhouse gas emissions (GHG) and paper consumption. Since 2012, GHG emissions data for the branch network and corporate offices has been externally verified.
To continue operations in an environmentally responsible manner, the Bank monitors policy and legislative requirements through ongoing dialogue with government, industry and stakeholders in countries where it operates. Scotiabank has been meeting with environmental organizations, industry associations and socially responsible investment organizations with respect to the role that banks can play to help address issues such as climate change, protection of biodiversity, promotion of sustainable forestry practices, implementing the recommendations of the Task Force on Climate-related Financial Disclosure, and other environmental issues important to its customers and communities where it operates. The Bank has an ongoing process of reviewing its practices in these areas.
Scotiabank has a number of environmentally focused products and services, including: an EcoEnergy Financing program designed to support personal and small business customers who wish to install small-scale renewable energy projects; and an auto loan product for hybrid, electric and clean diesel vehicles. As well, Scotiabank has the Commodities Derivatives group, which assists corporate clients by providing liquidity and hedge solutions in the carbon market.
Environmental Reporting
Scotiabank is a signatory to and participant in key global initiatives that advance transparency and disclosures in sustainability. The Bank’s annual Environmental, Social and Governance (ESG) Report reflects several global sustainability disclosure standards, frameworks, and initiatives including, but not limited to: the Task Force on Climate-related Financial Disclosures (TCFD), CDP (formerly Carbon Disclosure Project), the Partnership for Carbon Accounting Financials (PCAF), the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), the UN Global Compact (UNGC), and the Sustainable Development Goals (SDGs). ESG reporting indices for disclosures are found with the ESG Report on Scotiabank’s website under Responsibility & Social Impact, ESG Publications and Policies.
Climate Change Risks – Taskforce on Climate Related Financial Disclosures (TCFD)
In 2018, Scotiabank announced its support of the Financial Stability Board Task Force on Climate-related Financial Disclosures. The implementation of the recommendations across Scotiabank is a multi-year journey.
Governance
Board Oversight
As the topic of climate change requires a multidisciplinary approach, the risks and opportunities it poses to the Bank are addressed by the Board of Directors and its committees. The Board of Directors approved the Bank’s Climate Change Strategy in October 2019. In addition, the following Board committees provide ongoing oversight.
• | Risk Committee: Provides oversight of key risks, including those affected by climate change. This includes review (and, where appropriate, recommendation to the Board for approval) of risk appetite limits and policy-oriented documents addressing credit risk, environmental risk, and operational risk as well as reporting on potentially material climate change risks. |
• | Corporate Governance Committee: Provides oversight of the ESG strategy, of which climate change is a key priority, and the annual ESG Report. |
• | Audit & Conduct Review Committee: Provides oversight of climate change-related disclosure in the Bank’s financial reporting, including its Annual Report. |
Management’s Role
The Board of Directors is supported by the President and Chief Executive Officer (CEO) and Chief Risk Officer (CRO). The CRO has delegated their authority over the oversight of environmental and social risk to the Enterprise Core Risk Committee (ECRC) and its sub-committees. The Environmental & Social Risk Committee (ESRC), a sub-committee of ECRC, has primary responsibility for oversight of environmental risk. The ESRC provides effective oversight and challenge of the Bank’s management of environmental and social risks. Its responsibilities include monitoring of the environmental risk profile, recommending approval of relevant environmental risk frameworks, policies, risk appetite statements and limits to the ECRC. It reports to the ECRC on risk related matters and to the Corporate ESG Committee on all other matters. The purpose of the Corporate ESG Committee is to assist the Bank in achieving its ESG objectives by providing strategic guidance and advice on the Bank’s ESG priorities, commitments, and disclosures to the Bank’s Operating Committee.
Strategy
In 2021, the Bank committed to establishing bank-wide, quantitative, time-bound targets for reducing GHG emissions associated with our underwriting and lending activities. Once such targets are established, the bank will report annually on plans and progress towards achieving these targets. Furthermore, the Bank joined the Net Zero Banking Alliance (NZBA), which reinforced the Bank’s commitment in playing a significant role to finance the climate transition and support collaborative approaches between the public and private sectors to reach the goal of net-zero by 2050.
In addition, the Bank in 2019 committed to mobilizing $100 billion by 2025 to reduce the impacts of climate change. This includes lending, investing, finance and advisory services, as well as investments in the Bank’s direct operations and communities where it operates, to help the Bank capitalize on the global transition to a low-carbon future. This commitment is supported by the creation of new products and services, as well as the issuance of our Green Bond (USD$500 million 3.5 year senior unsecured) in 2019 and our Sustainability Bond (USD$1 billion 3 year senior unsecured) in 2021. The Sustainable Finance Group within Global Banking and Markets continues to grow and works closely with Scotiabank partner teams to provide financial solutions and advice across sustainable finance products to corporate, financial, public sector and institutional clients across our global footprint.
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Risk Management
The Bank considers environmental risk (including climate change risks) as a principal risk type. Climate change risk is a component of environmental risk. Climate change risk refers to the possibility that climate change issues associated with Scotiabank or its customers could negatively affect the Bank’s performance by giving rise to or heighten credit, reputational, operational or legal risk. Climate change risks could be in the form of physical or transition risk. Examples of physical risk considerations include severe weather (e.g. floods, hurricanes, extreme cold or heat). Examples of transition risk considerations include policy/regulatory actions such as subsidies, taxes or increased fuel costs, as well as changing market conditions.
The Bank utilizes a comprehensive environmental risk management process where the identification, assessment and management of climate change risk is done through due diligence as part of the overall existing environmental risk assessment and credit adjudication processes.
Highlights in 2021 include the following:
• | Integration of new Climate Commitments into existing risk frameworks |
• | Implemented and approved an Environmental Risk Management Framework, which includes a standalone, climate-related risk appetite statement. The framework provides an overview of the key governance components that are in place to ensure that the Bank effectively manages its exposure to Environmental Risks in a manner that is consistent with industry standards and best practices and regulatory requirements. |
• | Updated Bank-wide credit policies to include restrictions on coal and the Arctic National Wildlife Refuge. More information can be found on the Bank’s ESG publications and policies website. |
• | Integration of climate change risk assessment (CCRA) at the sector and borrower-levels |
• | The Bank standardized the process of performing CCRAs for all business banking borrowers, updated internal systems to track CCRAs, and provided training for banking and credit officers. |
• | The CCRA process evaluates both the physical and transition risks a client may face, and their awareness and response (Quality of Management) to such risks. The Bank assessed its exposure to the sectors with the highest vulnerability to physical and transition climate risk drivers. The CCRA compliments the sector sensitivity analysis by capturing borrower level mitigation factors such as geography, location of assets, and climate-specific management strategies. The CCRA and climate sector vulnerability results have been included within industry reviews to assess climate risk drivers and determine their potential materiality. |
• | Knowledge building on climate change risk and scenario analysis |
• | A module on climate change risk is delivered in the annual mandatory environmental risk training for all banking officers and credit adjudicators. |
• | The Bank is developing a methodology for scenario analysis the Bank’s business and retail banking portfolios. The methodology includes both physical and transition risks and uses internationally recognized climate change scenarios and models. |
• | External collaboration with peers |
• | Scotiabank is a participant in industry groups to develop consistent methodologies and metrics for TCFD reporting. |
• | Scotiabank is a participant in the United National Environment Program – Finance Initiative (UNEP FI) TCFD stage 3 pilot. The pilot is meant to harmonize industry-wide approaches for climate scenario analysis in bank lending portfolios. |
• | Scotiabank is involved in the initiative to create a Canadian Transition Finance set of Principles and Transition Taxonomy. |
• | Scotiabank is a member of the Institute of International Finance (IIF) Sustainable Finance Working Group |
• | Established a $1.25 million five-year partnership with the Institute for Sustainable Finance at Queen’s University to support education, professional training, research, and outreach to advance Canada’s leadership in sustainable finance |
Metrics and Targets
Scotiabank sets, monitors, and reports on climate change related performance and targets annually in Scotiabank’s ESG Report. As part of Scotiabank’s Climate Commitments, the Bank is tracking the initiatives that underlie its commitment as part of the metrics and targets it has adopted pursuant to these Commitments, including a target to reduce operational GHG emissions and to mobilize $100 billion to reduce the impacts of climate change.
Additionally, the Bank introduced an Environmental Performance Metric (EPM) that was included in the Enterprise Risk Appetite Framework as a risk appetite metric. The EPM is a composite measure of environmental risk based on sub-metrics which informs on reputational, credit, and operational categories. The metric will be internally reported quarterly, in accordance with other risk appetite metrics.
The process to calculate the Bank’s credit exposures to high-carbon sectors is under development.
Data Risk
Data risk is the exposure to the adverse financial and non-financial consequences (e.g., revenue loss, reputational risk, regulatory risk, sub-optimal management decisions) caused by mismanagement, misunderstanding or misuse of the Bank’s data assets. This risk may arise from a lack of data risk awareness; insufficient data risk oversight, governance and controls; inadequate data management and poor data quality; inferior data security and protection; and inappropriate, unintended or unethical data usage.
Data risk is inherent to the Bank’s business, and when issues arise affecting the Bank’s critical data, this can have significant negative strategic, business, financial, regulatory and/or reputational consequences. The Bank continues to evolve its data risk appetite statement, risk culture and expected ethical behaviours, with regards to data. A key area of focus is the ongoing implementation of data management and data-related risk management requirements. Key risk indicators are communicated through risk monitoring, assessment, and reporting activities.
The Data Risk Management Framework (DRMF) outlines the overarching guiding principles for data risk management and defines the governance structure of the enterprise data risk management program, recognizing the collaborative nature of data risk management and oversight. The Data Risk Management Policy (DRMP) categorizes and explains risks associated with data throughout the data lifecycle; outlines interaction model, roles and responsibilities for key stakeholders involved in managing the data risk across the organization; and sets out best practice principles for data
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management and governance. The organizational units that participate in data risk management and/or data risk-related oversight as part of their mandates (e.g., Data Office, Cyber Security and Information Technology Risk, Privacy, etc.) align their respective frameworks, policies, standards and/or procedures with DRMF and DRMP.
Model Risk
Model risk is the risk of adverse financial (e.g., capital, losses, revenue) and reputational consequences arising from the design, development, implementation and/or use of a model. It can originate from inappropriate specifications; incorrect parameter estimates; flawed hypotheses and/or assumptions; mathematical computation errors; inaccurate, inappropriate or incomplete data; inappropriate, improper or unintended usage; and inadequate monitoring and/or controls.
The Bank’s Model Risk Management Policy (MRMP) describes the overarching principles, policies, and procedures that provide the framework for managing model risk. All models, whether developed by the Bank or vendor-supplied, that meet the Bank’s model definition are covered by this Policy. The MRMP also clearly defines roles and responsibilities for key stakeholders involved in the model risk management cycle. Organizational units involved in the Model Risk Management Cycle have unit-level procedures, where appropriate, governing those stages of the cycle that they are responsible for. The Enterprise Core Risk Committee (ECRC) provides oversight over the management of model risk and approves the MRMP.
Reputational Risk
Reputational risk is the risk that negative publicity regarding Scotiabank’s conduct, business practices or associations, whether true or not, will adversely affect its revenues, operations or customer base, or require costly litigation or other defensive measures.
Negative publicity about an institution’s business practices may involve any aspect of its operations, but usually relates to questions of business ethics and integrity, or quality of products and services. Such negative publicity has an impact on the Bank’s brand and reputation.
Negative publicity and related reputational risk frequently arise as a by-product of some other kind of risk management control failure such as compliance and operational risks. In some cases, reputational risk can arise through no direct fault of an institution, but indirectly as a ripple-effect of an association or problems arising within the industry or external environment.
Reputational risk is managed and controlled throughout the Bank by the Scotiabank Code of Conduct (Code), governance practices and risk management programs, policies, procedures and training. Many relevant checks and balances are outlined in greater detail under other risk management sections, particularly Operational Risk, where reference is made to the Bank’s well-established compliance program. All directors, officers and employees have a responsibility to conduct their activities in accordance with the Code, and in a manner that minimizes reputational risk and safeguards the Bank’s reputation. While all employees, officers and directors are expected to protect the reputation of Scotiabank by complying with the Code, the activities of the Legal, Global Tax, Corporate Secretary, Global Communications, AML Risk, Global Compliance and Global Risk Management departments, and the Reputational Risk Committee, are particularly oriented to the management of reputational risk.
In providing credit, advice, or products to customers, or entering into associations, the Bank considers whether the transaction, relationship or association might give rise to reputational risk. The Bank has a Reputational Risk Policy, as well as policy and procedures for managing reputational and legal risk related to structured finance transactions. Global Risk Management plays a significant role in the identification and management of reputational risk related to credit underwriting. In addition, the Reputational Risk Committee is available to support Global Risk Management, as well as other risk management committees and business units, with their assessment of reputational risk associated with transactions, business initiatives, new products and services and sales practice issues.
The Reputational Risk Committee considers a broad array of factors when assessing transactions, so that the Bank meets, and will be seen to meet, high ethical standards. These factors include the extent, and outcome, of legal and regulatory due diligence pertinent to the transaction; the economic intent of the transaction; the effect of the transaction on the transparency of a customer’s financial reporting; the need for customer or public disclosure; conflicts of interest; fairness issues; and public perception. The Reputational Risk Committee also holds quarterly meetings to review activities in the quarter, review metrics and discuss any emerging trends or themes.
The Reputational Risk Committee may impose conditions on customer transactions, including customer disclosure requirements to promote transparency in financial reporting, so that transactions meet Bank standards. In the event the Committee recommends not proceeding with a transaction and the sponsor of the transaction wishes to proceed, the transaction is referred to the Risk Policy Committee.
Strategic Risk
Strategic risk is the risk that the enterprise, business lines or corporate functions will make strategic choices that are ineffective or insufficiently resilient to changes in the business environment, or poorly execute such strategies.
The Board is ultimately responsible for oversight of strategic risk, by ensuring a robust strategic planning process and approving, on an annual basis, the strategic plan for the Bank. The Annual Strategy Report to the Board of Directors considers linkages between the Bank’s Enterprise Risk Appetite Framework with the enterprise strategy, business line strategies and how the corporate functions support the Business Lines. The strategic planning process is managed by Enterprise Strategy.
The execution and evaluation of strategic plans is a fundamental element of the Risk Management Framework. On an ongoing basis, Heads of Business Lines and Control Functions identify, manage, and assess the internal and external risks that could impede achievement of, or progress of, strategic objectives. The executive management team regularly meets to evaluate the effectiveness of the Bank’s strategic plan, and consider what amendments, if any, are required.
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Controls and Accounting Policies
Management’s responsibility for financial information contained in this annual report is described on page 146.
Disclosure controls and procedures
The Bank’s disclosure controls and procedures are designed to provide reasonable assurance that information is accumulated and communicated to the Bank’s management, including the President and Chief Executive Officer and the Group Head and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of October 31, 2021, the Bank’s management, with the participation of the President and Chief Executive Officer and the Group Head and Chief Financial Officer, evaluated the effectiveness of its disclosure controls and procedures, as defined under the rules adopted by the U.S. Securities and Exchange Commission (SEC) and the Canadian securities regulatory authorities, and have concluded that the Bank’s disclosure controls and procedures are effective.
Internal control over financial reporting
Management of the Bank is responsible for establishing and maintaining adequate internal control over financial reporting. These controls include policies and procedures that:
• | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Bank; |
• | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the Bank; and |
• | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Bank’s assets that could have a material effect on the financial statements. |
All control systems contain inherent limitations, no matter how well designed. As a result, the Bank’s management acknowledges that its internal control over financial reporting will not prevent or detect all misstatements due to error or fraud. In addition, management’s evaluation of controls can provide only reasonable, not absolute, assurance that all control issues that may result in material misstatements, if any, have been detected.
Management assessed the effectiveness of internal control over financial reporting, using the Internal Control-Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and based on that assessment concluded that internal control over financial reporting was effective as of October 31, 2021.
Changes in internal control over financial reporting
During the year ended October 31, 2021, there have been no changes in the Bank’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting.
Critical Accounting Policies and Estimates
The Bank’s accounting policies are integral to understanding and interpreting the financial results reported in this annual report. Note 3 to the consolidated financial statements, summarizes the significant accounting policies used in preparing the Bank’s consolidated financial statements. Certain of these policies require management to make estimates, assumptions and subjective judgements that are difficult, complex, and often relate to matters that are inherently uncertain. The policies discussed below are considered to be particularly important to the presentation of the Bank’s financial position and results of operations, as changes in the estimates, assumptions and judgements could have a material impact on the Bank’s consolidated financial statements. These estimates, assumptions and judgements are adjusted in the normal course of business to reflect changing underlying circumstances.
Allowance for credit losses
The allowance for credit losses, using an expected credit loss approach as required under IFRS 9, is estimated using complex models and incorporates inputs, assumptions and techniques that involve a high degree of management judgment. Under IFRS 9 expected credit loss methodology, an allowance is recorded for expected credit losses on financial assets regardless of whether there has been an actual loss event. The Bank recognizes an allowance at an amount equal to 12 month expected credit losses, if the credit risk at the reporting date has not increased significantly since initial recognition (Stage 1). When a financial asset experiences a significant increase in credit risk subsequent to origination but is not considered to be in default, it is included in Stage 2 and subject to lifetime expected credit losses. Financial assets that are in default are included in Stage 3. Similar to Stage 2, the allowance for credit losses for Stage 3 financial assets captures the lifetime expected credit losses.
The main drivers in allowance for credit loss changes that are subject to significant judgment include the following:
• | Determination of point-in-time parameters such as probability of default (PD), loss given default (LGD) and exposure at default (EAD). |
• | Forecast of macroeconomic variables for multiple scenarios and probability weighting of the scenarios. |
• | Assessment of significant increase in credit risk. |
Qualitative adjustments or overlays may also be made as temporary adjustments using expert credit judgment in circumstances where, in the Bank’s view, the existing regulatory guidance, inputs, assumptions, and/or modelling techniques do not capture all relevant risk factors. In consideration of exceptional circumstances of COVID-19, the models in isolation may not capture all the uncertainty as well as the impact of the public support programs by the governments and central banks. The use of management overlays may require significant judgment that may impact the amount of allowance recognized.
Measurement of expected credit losses
The probability of default (PD), exposure at default (EAD), and loss given default (LGD) inputs used to estimate expected credit losses are modelled based on macroeconomic variables that are most closely related with credit losses in the relevant portfolio.
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Details of these statistical parameters/inputs are as follows:
• | PD – The probability of default is an estimate of the likelihood of default over a given time horizon. A default may only happen at a certain time over the remaining estimated life, if the facility has not been previously derecognized and is still in the portfolio. |
• | EAD – The exposure at default is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of principal and interest, whether scheduled by contract or otherwise, expected drawdowns on committed facilities, and accrued interest from missed payments. |
• | LGD – The loss given default is an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, including from the realization of any collateral. It is usually expressed as a percentage of the EAD. |
Forward-looking macroeconomic scenarios
The Bank uses a broad range of forward-looking economic information as inputs to its models of expected credit losses and the related allowance. These include real GDP, unemployment rates, central bank interest rates, and house-price indices. The allowance is determined using four probability-weighted, forward-looking scenarios. The Bank revised its allowance for credit losses (ACL) methodology in Q1, 2020, by adding an additional, more severe pessimistic forward-looking scenario. The Bank considers both internal and external sources of information and data in order to create unbiased projections and forecasts. The Bank prepares the scenarios using forecasts generated by Scotiabank Economics (SE). The forecasts are generated using both internally and externally developed models whose outputs are modified by SE as necessary to formulate a ‘base case’ view of the most probable future direction of economic developments; SE also develops a representative range of other alternative possible forecast scenarios. More specifically, the process involves the development of three additional economic scenarios to which relative probabilities are assigned. The development of the baseline and alternative scenarios is overseen by a governance committee that consists of internal stakeholders from across the Bank. The final baseline and alternative scenarios reflect significant review and oversight, and may incorporate judgment both in the determination of the scenarios’ forecasts and the probability weights that are assigned to them.
Significant Increase in credit risk (SIR)
The assessment of SIR since origination of a financial asset considers borrower-specific quantitative and qualitative information without consideration of collateral, and the impact of forward-looking information. Quantitative models may not always be able to capture all reasonable and supportable information that may indicate a significant increase in credit risk. Qualitative factors may be assessed to supplement the gap. Examples of situations include changes in adjudication criteria for a particular group of borrowers; changes in portfolio composition and natural disaster events impacting certain portfolios.
For retail exposures, a significant increase in credit risk cannot be assessed using forward-looking information at an individual account level. Therefore, the assessment must be done at the segment level. Segment migration thresholds exist for each PD model by product which considers the proportionate change in PD as well as the absolute change in PD. The thresholds used for PD migration are reviewed and assessed at least annually, unless there is a significant change in credit risk management practices in which case the review is brought forward.
For Non-retail exposures the Bank uses an internal risk rating scale (IG codes) for its non-retail exposures. All non-retail exposures have an IG code assigned that reflects the probability of default of the borrower. Both borrower specific and non-borrower specific (i.e. macroeconomic) forward-looking information is considered and reflected in the IG rating. Significant increase in credit risk is evaluated based on the migration of the exposures among IG codes.
Fair value of financial instruments
All financial instruments are measured at fair value on initial recognition. Subsequent measurement of a financial instrument depends on its classification. The contractual cash flow characteristics of a financial instrument and the business model under which it is held determines such classification. Non-trading loans and receivables, certain securities and most financial liabilities are carried at amortized cost unless classified or designated as fair value through profit and loss or fair value through other comprehensive income at inception.
The fair value of a financial asset or liability is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal, or in its absence, the most advantageous market to which the Bank has access at the measurement date.
The Bank discloses the classification of all financial instruments carried at fair value in a hierarchy based on the determination of fair value. The best evidence of fair value for a financial instrument is the quoted price in an active market. Fair value based on unadjusted quoted market prices for identical instruments in active markets represents a Level 1 valuation. Quoted prices are not always available for over-the-counter (OTC) transactions, as well as transactions in inactive or illiquid markets. OTC transactions are valued using internal models that maximize the use of observable inputs are used to estimate fair value. The chosen valuation technique incorporates all the factors that market participants would take into account in pricing a transaction. When a fair value is based on all significant market observable inputs, the valuation is classified as Level 2. Financial instruments traded in a less active market have been valued using indicative market prices, the present value of cash flows or other valuation techniques. Fair value estimates normally do not consider forced or liquidation sales. Where financial instruments trade in inactive markets or when using models where observable parameters do not exist, significant management judgement is required for valuation methodologies and model inputs. Valuations that require the significant use of unobservable inputs are considered Level 3. The calculation of estimated fair value is based on market conditions at a specific point in time and therefore may not be reflective of future fair values.
The Bank has controls and processes in place to ensure that the valuation of financial instruments is appropriately determined. Global Risk Management (GRM) is responsible for the design and application of the Bank’s risk management framework. GRM is independent of the Bank’s business units and is overseen by Executive Management and the Board of Directors. Senior management committees within GRM oversee and establish standards for risk management processes that are critical in ensuring that appropriate valuation methodologies and policies are in place for determining fair value.
Where possible, valuations are based on quoted prices or observable inputs obtained from active markets. GRM oversees a monthly Independent Price Verification (IPV) process to ensure the reliability and accuracy of prices and inputs used in the determination of fair value. The IPV process is performed by price verification groups that are independent from the business. The Bank maintains an approved list of pricing sources that are used in the IPV process. These sources include, but are not limited to, brokers, dealers and consensus pricing services. The valuation policies relating to the IPV process require that all pricing or rate sources be external to the Bank. On a periodic basis, an independent assessment of pricing or rate sources is also performed by GRM to determine market presence or market representative levels.
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Where quoted prices are not readily available, such as for transactions in over-the-counter markets, internal models that maximize the use of observable inputs are used to estimate fair value. An independent second line model risk management function within GRM oversees the vetting, approval and ongoing validation of valuation models used in determining fair value. Model development and validation processes are governed by the Bank’s Model Risk Management Policy.
In determining fair value for certain instruments or portfolios of instruments, valuation adjustments or reserves may be required to arrive at a more accurate representation of fair value. The Bank’s policy of applying valuation reserves to a portfolio of instruments is approved by a senior management committee. These reserves include adjustments for credit risk, bid-offer spreads, unobservable parameters, constraints on prices in inactive or illiquid markets and when applicable funding costs. The methodology for the calculation of valuation reserves are reviewed at least annually by senior management.
Valuation adjustments recorded against the fair value of financial assets and financial liabilities totaled $212 million as at October 31, 2021 (2020 – $469 million), net of any write-offs. The majority of the year-over-year change is due to the tightening of counterparty credit spreads during the year.
As at October 31, 2021, a net funding valuation adjustment (FVA) representing an excess of funding benefit adjustment over funding cost adjustment of $139 million (2020 – $108 million), pre-tax, was recorded for uncollateralized derivative instruments.
Employee benefits
The Bank provides pension and other benefit plans for eligible employees in Canada and internationally. Pension benefits are offered in the form of defined benefit pension plans (generally based on an employee’s length of service and earnings), and in the form of defined contribution pension plans (where the Bank’s contribution is fixed and there is no legal or constructive obligation to pay further amounts). Other benefits include post-retirement health care, dental care and life insurance, along with other long-term employee benefits such as long-term disability benefits.
The employee benefit expenses and the related benefit obligation are calculated using actuarial methods and certain actuarial assumptions. These assumptions are based on management’s best estimate and are reviewed and approved annually. The most significant assumption is the discount rate used to determine the defined benefit obligation, which is set by reference to the yields on high quality corporate bonds that have durations that match the terms of the Bank’s obligations. Separate discount rates are used to determine the annual benefit expense in Canada and the US. These rates are determined with reference to the yields on high quality corporate bonds with durations that match the various components of the annual benefit expense. The discount rate used to determine the annual benefit expense for all other plans is the same as the rate used to determine the defined benefit obligation. Other key assumptions include future compensation, health care costs, employee turnover, retirement age and mortality. When making these estimates, management considers expectations of future economic trends and business conditions, including inflation rates as well as other factors, such as plan specific experience and best practices.
Actual experience that differs from assumptions made by management will result in a net actuarial gain or loss recognized immediately in other comprehensive income except for other long-term employee benefits where they are recognized in the Consolidated Statement of Income.
Note 28 contains details of the Bank’s employee benefit plans, such as the disclosure of pension and other benefit amounts, management’s key assumptions, and a sensitivity analysis of changes in these assumptions on the employee benefit obligation and expense.
Corporate income taxes
Management exercises judgment in determining the provision for income taxes and deferred income tax assets and liabilities. The provision is based on management’s expectations regarding the income tax consequences of transactions and events during the period. Management interprets the tax legislation for each jurisdiction in which the Bank operates and makes assumptions about the expected timing of the reversal of deferred income tax assets and liabilities. If management’s interpretations of the legislation differ from those of the tax authorities or if the actual timing of the reversals of the deferred income tax assets and liabilities is not as anticipated, the provision for income taxes could increase or decrease in future periods.
The Bank maintains provisions for uncertain tax positions that it believes appropriately reflect the risk of tax positions under discussion, audit, dispute, or appeal with tax authorities, or which are otherwise considered to involve uncertainty. These provisions are made using the Bank’s best estimate of the amount expected to be paid based on an assessment of all relevant factors, which are reviewed at the end of each reporting period. It is possible that additional liability and income tax expense could arise in the future, depending on the acceptance of the Bank’s tax positions by the relevant tax authorities in the jurisdictions in which the Bank operates.
Note 27 of the 2021 consolidated financial statements contains further details with respect to the Bank’s provisions for income taxes.
Structured entities
In the normal course of business, the Bank enters into arrangements with structured entities on behalf of its customers and for its own purposes. These structured entities can be generally categorized as multi-seller commercial paper conduits, Bank funding vehicles and structured finance entities. Further details are provided in the Off-balance sheet arrangements section on page 74.
Management is required to exercise judgement to determine whether a structured entity should be consolidated. This evaluation involves understanding the arrangements, determining whether decisions about the relevant activities are made by means of voting rights or other contractual arrangements, and determining whether the Bank controls the structured entity.
The Bank controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The three elements of control are:
• | power over the investee; |
• | exposure, or rights, to variable returns from involvement with the investee; and |
• | the ability to use power over the investee to affect the amount of the Bank’s returns. |
This definition of control applies to circumstances:
• | when voting rights or similar rights give the Bank power, including situations where the Bank holds less than a majority of voting rights or involving potential voting rights; |
• | when an investee is designed so that voting rights are not the dominant factor in deciding who controls the investee (i.e., relevant activities are directed by contractual arrangements); |
• | involving agency relationships; and |
• | when the Bank has control over specified assets of an investee. |
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The Bank does not control an investee when it is acting in an agent’s capacity. The Bank assesses whether it is an agent by determining whether it is primarily engaged to act on behalf and for the benefit of another party or parties. Factors that the Bank considers in this assessment include the scope of its decision-making authority over the investee, the rights held by other parties, the remuneration to which it is entitled, and the Bank’s exposure to variability of returns from other interests that it holds in the investee. The analysis uses both qualitative and quantitative analytical techniques and involves the use of a number of assumptions about the business environment in which the structured entity operates and the amount and timing of future cash flows. The Bank reassesses whether it controls an investee if facts and circumstances indicate that one or more of the three elements of control change. Management is required to exercise judgement to determine if a change in control event has occurred. During 2021, there were no change in control events that caused the Bank to change its control conclusion of its multi-seller conduits or other structured entities.
As described in Note 15 to the consolidated financial statements and in the discussion of off-balance sheet arrangements, the Bank does not control the two Canadian-based multi-seller conduits that it sponsors and they are not required to be consolidated on the Bank’s Consolidated Statement of Financial Position. The Bank controls its U.S.-based multi-seller conduit and consolidates it on the Bank’s Consolidated Statement of Financial Position.
Goodwill
For the purpose of impairment testing, goodwill acquired in a business combination is, on the acquisition date, allocated to each of the Bank’s group of cash-generating units (CGU) that are expected to benefit from the particular acquisition.
Goodwill is not amortized but tested for impairment annually and when circumstances indicate that the carrying value may be impaired. At each reporting date, goodwill is reviewed to determine whether there is any indication of impairment. Each CGU to which goodwill is allocated for impairment testing purposes reflects the lowest level at which goodwill is monitored for internal management purposes.
The Bank determines the carrying value of the CGU using a regulatory capital approach based on credit, market, and operational risks, and leverage, consistent with the Bank’s capital attribution for business line performance measurement. An impairment loss is recognized if the carrying amount of a CGU exceeds its recoverable amount. The recoverable amount is the greater of fair value less costs of disposal and value in use. If either fair value less costs of disposal or value in use exceeds the carrying amount, there is no need to determine the other. The recoverable amount for the CGU has been determined using the fair value less costs of disposal method. In arriving at such value an appropriate valuation model is used which considers various factors including normalized net income, price earnings multiples and control premium. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators. An impairment loss, in respect of goodwill, is not reversed.
Significant judgement is applied in determining the recoverable amounts of the CGU and assessing whether certain events or circumstances constitute objective evidence of impairment.
Goodwill was assessed for annual impairment based on the methodology as at July 31, 2021, and no impairment was determined to exist. Additionally, there were no impairment indicators noted as of October 31, 2021.
Indefinite life intangible assets
Intangible assets with indefinite useful lives are not amortized but tested for impairment annually and when circumstances indicate that the carrying value may be impaired. Intangible assets are reviewed at each reporting date to determine whether there is any indication of impairment.
The recoverable amount is the greater of fair value less costs of disposal and value in use. If either fair value less costs of disposal or value in use exceeds the carrying amount, there is no need to determine the other. Value in use method is used by the Bank to determine the recoverable amount of the intangible asset. In determining value in use, an appropriate valuation model is used which considers factors such as management-approved cash flow projections, discount rate and terminal growth rate. An impairment loss is recognized if the carrying amount of the intangible asset exceeds its recoverable amount. Impairment losses recognized in prior periods are reassessed at each reporting period for any indication that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the intangible asset’s carrying amount does not exceed the carrying amount that would have been determined if no impairment loss had been recognized.
The recoverable amount is significantly impacted by the discount rate and the terminal value. Significant judgement is applied in determining the intangible asset’s recoverable amount and assessing whether certain events or circumstances constitute objective evidence of impairment.
Intangible assets were assessed for annual impairment based on the methodology as at July 31, 2021, and no impairment was determined to exist. Additionally, there were no impairment indicators noted as of October 31, 2021.
Derecognition of financial assets
Financial assets are derecognized when the contractual rights to the cash flows from the asset have expired, which occurs with repayment by the borrower or upon substantial modification of the asset terms. Assets are also derecognized when the Bank transfers the contractual rights to receive the cash flows from the financial asset, or has assumed an obligation to pay those cash flows to an independent third-party, and the Bank has transferred substantially all the risks and rewards of ownership of that asset to an independent third-party.
Management must apply judgement in determining whether a modification of the terms of the financial asset is considered to be substantial. For loans, this includes the nature of the modification and the extent of changes to terms including interest rate, authorized amount, term or type of underlying collateral.
Management must also apply judgement in determining, based on specific facts and circumstances, whether the Bank has retained or transferred substantially all the risks and rewards of ownership of the financial asset. Where substantially all the risks and rewards of ownership of the financial asset are neither retained nor transferred, the Bank derecognizes the transferred asset only if it has lost control over that asset. If the Bank retains control over the asset, it will continue to recognize the asset to the extent of its continuing involvement.
The majority of assets transferred under repurchase agreements, securities lending agreements, securitizations of fully insured Canadian residential mortgages, and securitizations of personal lines of credit, credit cards and auto loans do not qualify for derecognition. The Bank continues to record the transferred assets on the Consolidated Statement of Financial Position as secured financings.
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Further information on derecognition of financial assets can be found in Note 14 of the consolidated financial statements.
Provisions
The Bank recognizes a provision if, as a result of a past event, the Bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Probable in this context means more likely than not. Significant judgement is required in determining whether a present obligation exists and in estimating the probability, timing, and amount of any future outflows.
In the ordinary course of business, the Bank and its subsidiaries are routinely defendants in, or parties to a number of pending and threatened legal actions and regulatory proceedings, including actions brought on behalf of various classes of claimants. In view of the inherent difficulty of predicting the outcome of such matters, the Bank cannot state what the eventual outcome of such matters will be.
Legal provisions are established when it becomes probable that the Bank will incur an expense related to a legal action and the amount can be reliably estimated. Such provisions are recorded at the best estimate of the amount required to settle any obligation related to these legal actions as at the balance sheet date, taking into account the risks and uncertainties surrounding the obligation. Management and internal and external experts are involved in estimating any amounts that may be required. The actual costs of resolving these claims may vary significantly from the amount of the legal provisions. The Bank’s estimate involves significant judgement, given the varying stages of the proceedings, the fact that the Bank’s liability, if any, has yet to be determined and the fact that the underlying matters will change from time to time. As such, there is a possibility that the ultimate resolution of those legal actions may be material to the Bank’s consolidated results of operations for any particular reporting period.
Future Accounting Developments
The Bank actively monitors developments and changes in accounting standards from the IASB, as well as requirements from the other regulatory bodies, including OSFI. The Bank is currently assessing the impact of adoption of new standards issued by the IASB on its consolidated financial statements and also evaluating the alternative elections available on transition.
Effective November 1, 2023
Insurance contracts
On May 18, 2017, the IASB issued IFRS 17 Insurance Contracts, which provides a comprehensive principle-based framework for the measurement and presentation of all insurance contracts. The new standard will replace IFRS 4 Insurance Contracts and requires insurance contracts to be measured using current fulfillment cash flows and for revenue to be recognized as the service is provided over the coverage period. The standard is required to be adopted retrospectively; if this is impractical, the modified retrospective or fair value method may be used.
On June 25, 2020, the IASB issued amendments to IFRS 17. The amendments are designed to make it easier for companies to explain their financial performance, reduce costs due to simplification of some requirements in the standard and ease transition by deferring the effective date of the standard by two years. The standard will be effective as of November 1, 2023 for the Bank. The Bank continues to monitor developments related to the standard and industry discussions on the application of the standard.
The implementation of IFRS 17 is a multi-year project consisting of technology implementation and policy and process changes. The project has an established structure and governance along with a Project Management Office to assist the Executive Steering and Project Operations Committees. The committees are comprised of representatives from Global Finance, Global Insurance Actuarial Services, Information Technology and the Insurance Business Operation. The Bank has selected its technology partner in implementing the system to capture data and prepare additional disclosures, including for the separate insurance legal entity financial statements, under the new standard. The Bank continues to assess and formulate the actuarial and accounting policies under IFRS 17 to quantify the impact of adopting the new standard.
The Bank continues to monitor and respond to global regulatory developments relating to a broad spectrum of topics, in order to ensure that control functions and business lines are responsive on a timely basis and business impacts, if any, are minimized. A high-level summary of some of the key regulatory developments that have the potential of impacting the Bank’s operations is included in the Legal and compliance risk section of this MD&A and below, as may be updated by quarterly reports.
Regulatory Initiatives Impacting Financial Services in Canada
On September 22, 2021, Quebec’s Act to Modernize Legislative Provisions respecting the Protection of Personal Information received royal assent and will come into force over the next three years. This law reforms the Quebec private-sector privacy act. It is modeled after the initial versions of GDPR, and introduced key changes, including increased enforcement powers for the Commission d’accès à l’information, significant new monetary penalties for non-compliance, risk assessments for data transfers outside Quebec, mandatory breach notification and record keeping, and itemized express consent requirements. The Bank is engaging business stakeholders and key groups to consider the law’s application.
The Consumer Privacy Protection Act (Bill C11) did not proceed when the federal election was called on September 20, 2021. It is expected that a substantially similar bill will be introduced in the near future.
The Governments of Ontario, British Columbia and Alberta opened public consultations regarding the introduction of new privacy legislation (in the case of Ontario), and amendments to the current private sector privacy statutes (in British Columbia and Alberta). The Bank’s response to these consultations is being coordinated through the Canada Bankers Association.
The Commodity Futures Trading Commission (CFTC) Position Limit and Cross-Border Rules
The CFTC has adopted final rules addressing the cross-border application of certain swap dealer provisions of the Commodity Exchange Act, which supersede prior CFTC interpretive guidance and staff advisories. The final rule addresses the cross-border application of the registration thresholds and certain requirements applicable to swap dealers and major swap participants; and establishes a formal process for requesting comparability determinations for such requirements from the CFTC. The Bank has implemented changes ahead of the September 14, 2021 compliance date.
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The CFTC has approved final position limit rules for twenty-five commodity derivatives and their linked cash-settled futures, options on futures, and economically equivalent swaps. The compliance dates are tiered between January 2022 and January 2023. The Bank is on track with the implementation.
The Securities Exchange Commission (SEC) SBSD Registration and Compliance Date
The SEC has published a series of compliance dates for entities who are Security-Based Swap Dealers (SBSDs) and Major Security-Based Swap Participants as part of its SBSD regulations. On August 6, 2021, firms were required to determine if they had surpassed a de minimis threshold of dealing activity in security-based swaps, which determines whether firms have a registration requirement. Firms who surpassed this de minimis threshold were required to register with the SEC as a SBSD by no later than November 1, 2021. Several new rules apply to firms upon their registration as a SBSD. These rules include security-based swap margin, segregation, recordkeeping and reporting, business conduct, trade acknowledgment and risk mitigation rules. Additionally, November 8, 2021 was the compliance deadline to start trade reporting to a Security-Based Swap Data Repository.
The Bank conditionally registered with the SEC as a SBSD on November 1, 2021. While a majority of the SEC requirements became effective on November 1 and November 8, the SBSD Regulatory Project will continue to operate to work towards the future security-based swap trade reporting compliance dates and to achieve the Target Operating Model to implement certain strategic solutions for the program.
Canadian Anti-Money Laundering (AML) Regulations
The Bank has taken measures to comply with the requirements under Canada’s amended Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and regulations that took effect on June 1, 2021 in alignment with FINTRAC’s announcements, and continues to work proactively to implement the remainder of the new regime with the aim of protecting the Canadian financial system and our communities.
Advisory Committee on Open Banking
On August 4, 2021, the Minister of Finance released the Advisory Committee on Open Banking’s final report. The Advisory Committee’s report provides a road map for the Government of Canada to create and launch an open banking system by January 2023 and makes recommendations on how to modernize the Canadian financial services sector and implement a secure open banking system. The Committee suggests a two-staged open banking implementation plan, an initial low-risk open banking system to be designed and implemented by January 2023, followed by a period of ongoing evolution and administration of the system. To ensure open banking is available to as many Canadians as possible, the Advisory Committee recommends that all federally regulated banks be required to participate in the first phase of open banking in Canada. Provincially regulated financial institutions such as credit unions should have the opportunity to join on a voluntary basis. The Minister of Finance has not announced any next steps beyond the release of the Advisory Committee’s report. The Bank is actively monitoring these developments and has established a committee that is responsible for leading engagements with key groups, including the Government of Canada, to discuss and provide feedback on the development of a regulatory framework for open banking.
Non-GAAP and Other Financial Measures Disclosure
On May 27, 2021, the Canadian Securities Administrators (CSA) published National Instrument 52-112 Non-GAAP and Other Financial Measures Disclosure (NI 52-112) and its related companion policy (the Companion Policy), which provides binding disclosure requirements for non-GAAP (generally accepted accounting principles) and certain other financial measures. NI 52-112 and the Companion Policy replaces the existing CSA guidance on non-GAAP financial measure disclosure, and governs how issuers present non-GAPP financial measures, non-GAAP ratios, and other financial measures, including capital management measures, supplementary financial measures and “total of segments” measures. The new requirements are intended to provide additional information to help investors understand the context of such measures in the Bank’s public disclosures. NI 52-112 applies to disclosures by reporting issuers for financial years ending on or after October 15, 2021. The Bank has implemented all requirements in its year-end disclosure documents, including this MD&A.
Interest Rate Benchmark Reform
In July 2017, the UK Financial Conduct Authority (FCA), which began regulating the London Interbank Offered Rate (LIBOR) in 2013, announced that after December 31, 2021, it would stop making efforts to sustain the rate. The FCA and regulators in other jurisdictions have urged markets to transition away from the use of LIBOR and other interbank offered rates (IBORs), including the Canadian Dollar Offered Rate (CDOR), in favour of alternative risk-free rates (RFRs). RFRs are overnight rates that differ inherently from LIBOR and other interbank offered rates, lacking a term structure and a credit component. In July 2021, the Alternative Reference Rate Committee (ARRC) announced its formal recommendation of the CME Group’s forward-looking Secured Overnight Financing Rate (SOFR) term rates to introduce an alternative to USD LIBOR based on an overnight rate but with a term structure. The ARRC’s recommendation marks the completion of the ARRC’s Paced Transition Plan, the series of specific steps established by the ARRC in 2017 to encourage the adoption of SOFR.
On March 5, 2021, the FCA confirmed that the publication of most tenors of USD LIBOR (i.e., overnight, one-month, three-month, six-month and 12-month LIBOR) ceases immediately following a final publication on June 30, 2023. The scheduled cessation date for GBP, JPY, CHF and EUR LIBOR, and the one-week and two-month tenors of USD LIBOR remains December 31, 2021.
The announcement provides certainty regarding the future of the various LIBOR currencies and tenors. It also serves to set the fixed spread adjustment that will be used in industry standard fallback provisions for both derivative and cash products. While the most widely used USD LIBOR tenors will continue to be published in their current form until June 30, 2023, the Federal Reserve Board has advised that banks should no longer write USD LIBOR linked contracts after December 31, 2021, and sooner, where practicable. Similarly, on June 22, 2021, OSFI stated that Federally Regulated Financial Institutions should stop using USD LIBOR as a reference rate as soon as possible and should not enter into transactions using USD LIBOR as a reference rate after December 31, 2021.
On November 16, 2021, the FCA confirmed that it will allow the temporary use of “synthetic” sterling and yen LIBOR rates in all legacy LIBOR contracts, other than cleared derivatives, that have not been amended by December 31, 2021.
The Bank has established an enterprise-wide program (the Transition Program) to ensure a smooth transition from LIBOR and other IBORs to RFRs. The Transition Program is focusing on identifying and quantifying our exposures to various IBORs, providing the capability to trade products referencing alternative RFRs and evaluating our existing contract language when the LIBOR ceases to exist. The Bank considers transition risks as part of a comprehensive change program to ensure that systems, processes and strategy provide for a smooth transition from the use of legacy rates and supports trading in RFRs.
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In developing transition strategies, the Transition Program has integrated into its plans recommendations from industry groups and regulatory bodies, such as the ARRC in the US and the FCA regarding the timing of key transition activities, such as ceasing to issue certain LIBOR-based products and incorporating fallback language in specific instruments.
The Bank continues to work towards meeting the regulatory and industry-wide recommended milestones on cessation of LIBOR and work with clients and counterparties to issue products based on RFRs where viable.
The International Accounting Standards Board (IASB) has approached the impact of Interest Rate Benchmark Reform on financial reporting in two phases. Phase 1 addressed issues affecting financial reporting in the period before the replacement of an existing interest rate benchmark with an alternative RFR; and Phase 2 focused on issues that might affect financial reporting when an existing interest rate benchmark is replaced with an RFR. The IASB issued the Phase 1 and Phase 2 amendments in September 2019 and August 2020, respectively. The Bank adopted the Phase 1 amendments effective November 1, 2019, and early adopted the Phase 2 amendments effective November 1, 2020.
Further information on interest rate benchmark reform can be found in Note 4 of the consolidated financial statements.
Compensation of key management personnel
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Bank, directly or indirectly, and comprise the directors of the Bank, the President and Chief Executive Officer, certain direct reports of the President and Chief Executive Officer and Group Heads.
T60 Compensation of the Bank key management personnel
For the year ended October 31 ($ millions) | 2021 | 2020 | ||||||
Salaries and cash incentives(1) | $ | 21 | $ | 19 | ||||
Equity-based payment(2) | 30 | 30 | ||||||
Pension and other benefits(1) | 3 | 6 | ||||||
Total | $ | 54 | $ | 55 |
(1) | Expensed during the year. |
(2) | Awarded during the year. |
Directors can use some or all of their director fees earned to buy common shares of the Bank at market rates through the Director’s Share Purchase Plan. Non-officer directors may elect to receive all or a portion of their fees in the form of deferred stock units which vest immediately. Refer to Note 26 – Share-based payments for further details of these plans.
T61 Loans and deposits of key management personnel
Loans are currently granted to key management personnel at market terms and conditions.
As at October 31 ($ millions) | 2021 | 2020 | ||||||
Loans | $ | 11 | $ | 15 | ||||
Deposits | $ | 5 | $ | 11 |
The Bank’s committed credit exposure to companies controlled by directors totaled $252.8 million as at October 31, 2021 (October 31, 2020 – $177.6 million) while actual utilized accounts were $189.6 million (October 31, 2020 – $115.9 million).
Transactions with associates and joint ventures
In the ordinary course of business, the Bank provides normal banking services and enters into transactions with its associated and other related corporations on terms similar to those offered to non-related parties. If these transactions are eliminated on consolidation, they are not disclosed as related party transactions. Transactions between the Bank and its associated companies and joint ventures also qualify as related party transactions and are as follows:
T62 Transactions with associates and joint ventures
As at and for the year ended October 31 ($ millions) | 2021 | 2020 | ||||||
Net income / (loss) | $ | (85 | ) | $ | (75 | ) | ||
Loans | 191 | 203 | ||||||
Deposits(1) | 229 | 234 | ||||||
Guarantees and commitments | $ | 154 | $ | 23 |
(1) | Prior period amount has been restated to conform with current period presentation. |
Scotiabank principal pension plan
The Bank manages assets of $4.7 billion (October 31, 2020 – $4.1 billion) which is a portion of the Scotiabank principal pension plan assets and earned $6.6 million (October 31, 2020 – $7.2 million) in fees.
Oversight and governance
The oversight responsibilities of the Audit and Conduct Review Committee (ACRC) with respect to related party transactions include reviewing policies and practices for identifying transactions with related parties that may materially affect the Bank, and reviewing the procedures for ensuring compliance with the Bank Act for related party transactions. The Bank Act requirements encompass a broader definition of related party transactions than is set out in IFRS. The Bank has various procedures in place to ensure that related party information is identified and reported to the ACRC on a semi-annual basis. The ACRC is provided with detailed reports that reflect the Bank’s compliance with its established procedures.
The Bank’s Internal Audit department carries out audit procedures as necessary to provide the ACRC with reasonable assurance that the Bank’s policies and procedures to identify, authorize and report related party transactions are appropriately designed and operating effectively.
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T63 Net income by geographic segment
2021 | 2020 | 2019(2) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
For the fiscal years ($ millions) | Canada | U.S. | Mexico | Peru | Chile | Colombia | Caribbean and Central America | Other Inter- national | Total | Canada | U.S. | Mexico | Peru | Chile | Colombia | Caribbean and Central America | Other Inter- national | Total | Canada | U.S. | Mexico | Peru | Chile | Colombia | Caribbean and Central America | Other Inter- national | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 9,182 | $ | 742 | $ | 1,668 | $ | 1,186 | $ | 1,507 | $ | 692 | $ | 1,345 | $ | 639 | $ | 16,961 | $ | 8,515 | $ | 763 | $ | 1,661 | $ | 1,705 | $ | 1,415 | $ | 812 | $ | 1,734 | $ | 715 | $ | 17,320 | $ | 7,630 | $ | 720 | $ | 1,684 | $ | 1,576 | $ | 1,613 | $ | 1,017 | $ | 2,143 | $ | 794 | $ | 17,177 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-interest income | 9,190 | 953 | 714 | 531 | 666 | 383 | 664 | 1,190 | 14,291 | 8,085 | 1,375 | 724 | 605 | 677 | 449 | 753 | 1,348 | 14,016 | 7,304 | 1,189 | 671 | 790 | 806 | 567 | 1,048 | 1,482 | 13,857 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Provision for credit losses | 255 | (33 | ) | 334 | 586 | 205 | 195 | 221 | 45 | 1,808 | 2,271 | 128 | 644 | 971 | 639 | 666 | 570 | 195 | 6,084 | 981 | (16 | ) | 335 | 523 | 436 | 362 | 352 | 54 | 3,027 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-interest expenses | 9,627 | 915 | 1,202 | 662 | 943 | 682 | 1,343 | 1,244 | 16,618 | 8,952 | 1,080 | 1,298 | 827 | 973 | 813 | 1,589 | 1,324 | 16,856 | 8,275 | 870 | 1,306 | 846 | 1,166 | 920 | 1,933 | 1,421 | 16,737 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income tax expense | 1,909 | 120 | 184 | 104 | 204 | 80 | 103 | 167 | 2,871 | 967 | 192 | 98 | 116 | 78 | (74 | ) | 45 | 121 | 1,543 | 1,082 | 267 | 121 | 248 | 185 | 117 | 324 | 128 | 2,472 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | 6,581 | 693 | 662 | 365 | 821 | 118 | 342 | 373 | 9,955 | 4,410 | 738 | 345 | 396 | 402 | (144 | ) | 283 | 423 | 6,853 | 4,596 | 788 | 593 | 749 | 632 | 185 | 582 | 673 | 8,798 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income attributable to non-controlling interests in subsidiaries | (10 | ) | – | 14 | 2 | 200 | 48 | 77 | – | 331 | (28 | ) | – | 7 | 16 | 91 | (87 | ) | 76 | – | 75 | 1 | – | 14 | (11 | ) | 179 | 124 | 101 | – | 408 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income attributable to equity holders of the Bank | $ | 6,591 | $ | 693 | $ | 648 | $ | 363 | $ | 621 | $ | 70 | $ | 265 | $ | 373 | $ | 9,624 | $ | 4,438 | $ | 738 | $ | 338 | $ | 380 | $ | 311 | $ | (57 | ) | $ | 207 | $ | 423 | $ | 6,778 | $ | 4,595 | $ | 788 | $ | 579 | $ | 760 | $ | 453 | $ | 61 | $ | 481 | $ | 673 | $ | 8,390 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Adjustments(1) | 169 | – | – | 6 | 20 | – | 4 | 5 | 204 | (76 | ) | – | 7 | 8 | 48 | 22 | 28 | 11 | 48 | 58 | – | – | 50 | 72 | 79 | 296 | 6 | 561 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Adjusted net income (loss) attributable to equity holders of the Bank(1) | $ | 6,760 | $ | 693 | $ | 648 | $ | 369 | $ | 641 | $ | 70 | $ | 269 | $ | 378 | $ | 9,828 | $ | 4,362 | $ | 738 | $ | 345 | $ | 388 | $ | 359 | $ | (35 | ) | $ | 235 | $ | 434 | $ | 6,826 | $ | 4,653 | $ | 788 | $ | 579 | $ | 810 | $ | 525 | $ | 140 | $ | 777 | $ | 679 | $ | 8,951 |
(1) | Refer to Non-GAAP Measures on page 17. |
(2) | Prior period amounts have been restated to conform with current period presentation. |
T64 Loans and acceptances by geography
As at October 31 ($ billions) | 2021 | 2020 | 2019 | |||||||||
Canada | ||||||||||||
Atlantic provinces | $ | 21.6 | $ | 21.5 | $ | 22.1 | ||||||
Quebec | 34.3 | 31.7 | 30.6 | |||||||||
Ontario | 246.9 | 217.7 | 203.0 | |||||||||
Manitoba and Saskatchewan | 19.6 | 18.2 | 17.9 | |||||||||
Alberta | 53.5 | 53.7 | 53.5 | |||||||||
British Columbia | 81.8 | 71.3 | 66.5 | |||||||||
457.7 | 414.1 | 393.6 | ||||||||||
U.S. | 43.4 | 44.0 | 44.3 | |||||||||
Mexico | 31.7 | 31.3 | 31.9 | |||||||||
Peru | 19.4 | 22.1 | 21.7 | |||||||||
Chile | 45.0 | 46.9 | 45.6 | |||||||||
Colombia | 12.0 | 10.9 | 11.7 | |||||||||
Other International | ||||||||||||
Latin America | 11.1 | 11.3 | 10.2 | |||||||||
Europe | 9.1 | 9.5 | 9.1 | |||||||||
Caribbean and Central America | 20.6 | 23.3 | 30.2 | |||||||||
Asia and Other | 13.0 | 11.7 | 13.2 | |||||||||
53.8 | 55.8 | 62.7 | ||||||||||
$ | 663.0 | $ | 625.1 | $ | 611.5 | |||||||
Total allowance for credit losses | (5.7 | ) | (7.7 | ) | (5.1 | ) | ||||||
Total loans and acceptances net of allowance for credit losses | $ | 657.3 | $ | 617.4 | $ | 606.4 |
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T65 Gross impaired loans by geographic segment
As at October 31 ($ millions) | 2021 | 2020 | 2019 | |||||||||
Canada | $ | 1,090 | $ | 1,127 | $ | 1,133 | ||||||
U.S. | 24 | 116 | 94 | |||||||||
Mexico | 758 | 570 | 485 | |||||||||
Peru | 699 | 824 | 642 | |||||||||
Chile | 512 | 775 | 844 | |||||||||
Colombia | 418 | 459 | 505 | |||||||||
Other International | 955 | 1,182 | 1,432 | |||||||||
Total | $ | 4,456 | $ | 5,053 | $ | 5,135 |
T66 Provision against impaired financial instruments by geographic segment
For the fiscal years ($ millions) | 2021 | 2020 | 2019 | |||||||||
Canada | $ | 705 | $ | 1,198 | $ | 984 | ||||||
U.S. | 2 | 6 | (1 | ) | ||||||||
Mexico | 450 | 400 | 291 | |||||||||
Peru | 1,061 | 484 | 446 | |||||||||
Chile | 181 | 582 | 403 | |||||||||
Colombia | 522 | 322 | 422 | |||||||||
Other International | 385 | 476 | 354 | |||||||||
Total | $ | 3,306 | $ | 3,468 | $ | 2,899 |
T67 Cross-border exposure to select countries(1)
As at October 31 ($ millions) | Loans | Trade | Interbank deposits | Government and other securities | Investment in subsidiaries and affiliates | Other | 2021 Total | 2020 Total | ||||||||||||||||||||||||
Asia | ||||||||||||||||||||||||||||||||
China | $ | 746 | $ | 1,937 | $ | 506 | $ | 1,030 | $ | 74 | $ | 15 | $ | 4,308 | $ | 4,480 | ||||||||||||||||
India | 1,361 | 169 | – | – | – | 6 | 1,536 | 1,360 | ||||||||||||||||||||||||
Singapore | 3,776 | 147 | 110 | – | – | 26 | 4,059 | 2,896 | ||||||||||||||||||||||||
Hong Kong | 1,432 | 22 | 12 | 37 | – | 37 | 1,540 | 1,892 | ||||||||||||||||||||||||
Japan | 387 | 65 | 8 | 4,292 | – | 13 | 4,765 | 4,961 | ||||||||||||||||||||||||
Others(2) | 467 | 1 | 62 | – | 459 | 20 | 1,009 | 1,451 | ||||||||||||||||||||||||
Total | $ | 8,169 | $ | 2,341 | $ | 698 | $ | 5,359 | $ | 533 | $ | 117 | $ | 17,217 | $ | 17,040 | ||||||||||||||||
Latin America | ||||||||||||||||||||||||||||||||
Chile | $ | 3,964 | $ | 1,093 | $ | 2,667 | $ | 266 | $ | 5,188 | $ | 316 | $ | 13,494 | $ | 14,492 | ||||||||||||||||
Mexico | 4,534 | 209 | – | 551 | 4,714 | 139 | 10,147 | 9,805 | ||||||||||||||||||||||||
Brazil | 7,664 | 1,423 | – | 12 | 267 | 355 | 9,721 | 9,819 | ||||||||||||||||||||||||
Peru | 2,834 | 87 | – | 102 | 4,234 | 139 | 7,396 | 9,552 | ||||||||||||||||||||||||
Colombia | 3,158 | 329 | – | 133 | 1,039 | 27 | 4,686 | 3,507 | ||||||||||||||||||||||||
Others(3) | 100 | 8 | – | – | 469 | – | 577 | 646 | ||||||||||||||||||||||||
Total | $ | 22,254 | $ | 3,149 | $ | 2,667 | $ | 1,064 | $ | 15,911 | $ | 976 | $ | 46,021 | $ | 47,821 | ||||||||||||||||
Caribbean and Central America | ||||||||||||||||||||||||||||||||
Panama | $ | 4,311 | $ | 21 | $ | 59 | $ | 86 | $ | 189 | $ | 14 | $ | 4,680 | $ | 4,731 | ||||||||||||||||
Costa Rica | 1,109 | 53 | – | – | 969 | 8 | 2,139 | 2,688 | ||||||||||||||||||||||||
Dominican Republic | 938 | 154 | 21 | – | 775 | 11 | 1,899 | 2,089 | ||||||||||||||||||||||||
Others(4) | 945 | 76 | – | – | 1,329 | – | 2,350 | 2,769 | ||||||||||||||||||||||||
Total | $ | 7,303 | $ | 304 | $ | 80 | $ | 86 | $ | 3,262 | $ | 33 | $ | 11,068 | $ | 12,277 | ||||||||||||||||
As at October 31, 2021 | $ | 37,726 | $ | 5,794 | $ | 3,445 | $ | 6,509 | $ | 19,706 | $ | 1,126 | $ | 74,306 | ||||||||||||||||||
As at October 31, 2020 | $ | 38,395 | $ | 5,295 | $ | 3,727 | $ | 6,884 | $ | 21,179 | $ | 1,658 | $ | 77,138 |
(1) | Cross-border exposure represents a claim, denominated in a currency other than the local one, against a borrower in a foreign country on the basis of ultimate risk. |
(2) | Includes Indonesia, Macau, Malaysia, South Korea, Thailand and Taiwan. |
(3) | Includes Venezuela and Uruguay. |
(4) | Includes other Caribbean countries, such as Bahamas, Barbados, Jamaica, Trinidad & Tobago, and Turks & Caicos. |
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T68 Loans and acceptances by type of borrower
As at October 31 ($ billions) | 2021 | 2020 | 2019 | |||||||||
Residential mortgages | $ | 319.7 | $ | 284.7 | $ | 268.2 | ||||||
Personal loans | 91.5 | 93.7 | 98.6 | |||||||||
Credit cards | 12.5 | 14.8 | 17.8 | |||||||||
Personal | $ | 423.7 | $ | 393.2 | $ | 384.6 | ||||||
Financial services | ||||||||||||
Non-bank | $ | 29.4 | $ | 25.7 | $ | 28.8 | ||||||
Bank(1) | 4.4 | 4.2 | 5.2 | |||||||||
Wholesale and retail | 26.8 | 26.1 | 27.6 | |||||||||
Real estate and construction | 44.8 | 37.7 | 32.4 | |||||||||
Energy(2) | 10.0 | 12.4 | 13.3 | |||||||||
Transportation | 9.3 | 10.4 | 9.5 | |||||||||
Automotive | 10.3 | 12.6 | 14.0 | |||||||||
Agriculture | 15.8 | 14.6 | 13.3 | |||||||||
Hospitality and leisure | 4.1 | 5.1 | 4.4 | |||||||||
Mining | 4.3 | 6.3 | 6.8 | |||||||||
Metals | 2.4 | 2.2 | 2.9 | |||||||||
Utilities(2) | 18.9 | 16.6 | 14.1 | |||||||||
Health care | 5.5 | 6.0 | 6.1 | |||||||||
Technology and media | 15.9 | 16.7 | 13.4 | |||||||||
Chemicals | 1.5 | 1.7 | 2.4 | |||||||||
Food and beverage | 9.8 | 8.5 | 8.5 | |||||||||
Forest products | 2.0 | 2.4 | 3.1 | |||||||||
Other(3) | 18.7 | 17.6 | 16.0 | |||||||||
Sovereign(4) | 5.4 | 5.1 | 5.1 | |||||||||
Business and government | $ | 239.3 | $ | 231.9 | $ | 226.9 | ||||||
$ | 663.0 | $ | 625.1 | $ | 611.5 | |||||||
Total allowance for credit losses | (5.7 | ) | (7.7 | ) | (5.1 | ) | ||||||
Total loans and acceptances net of allowance for credit losses | $ | 657.3 | $ | 617.4 | $ | 606.4 |
(1) | Deposit taking institutions and securities firms. |
(2) | Prior periods have been restated to conform to the current presentation. |
(3) | Other related to $1.3 in financing products, $2.6 in services and $6.3 in wealth management (2020 – $1.7, $2.8, and $4.5 respectively). |
(4) | Includes central banks, regional and local governments, and supranational agencies. |
T69 Off-balance sheet credit instruments
As at October 31 ($ billions) | 2021 | 2020 | 2019 | |||||||||
Commitments to extend credit(1) | $ | 239.8 | $ | 235.4 | $ | 211.9 | ||||||
Standby letters of credit and letters of guarantee | 37.3 | 34.8 | 35.6 | |||||||||
Securities lending, securities purchase commitments and other | 61.8 | 54.9 | 52.2 | |||||||||
Total | $ | 338.9 | $ | 325.1 | $ | 299.7 |
(1) | Excludes commitments which are unconditionally cancellable at the Bank’s discretion at any time. |
2021 Scotiabank Annual Report | 127
Table of Contents
Management’s Discussion and Analysis
T70 Changes in net impaired loans
For the fiscal years ($ millions) | 2021 | 2020 | 2019 | |||||||||
Gross impaired loans | ||||||||||||
Balance at beginning of year | $ | 5,053 | $ | 5,135 | $ | 5,130 | ||||||
Net additions | ||||||||||||
New additions | 4,154 | 4,362 | 4,213 | |||||||||
Acquisition-related | – | – | 18 | |||||||||
Declassifications | (62 | ) | (96 | ) | (45 | ) | ||||||
Payments | (375 | ) | (435 | ) | (469 | ) | ||||||
Sales | (10 | ) | (10 | ) | (58 | ) | ||||||
3,707 | 3,821 | 3,659 | ||||||||||
Write-offs | ||||||||||||
Residential mortgages | (111 | ) | (97 | ) | (99 | ) | ||||||
Personal loans | (1,833 | ) | (1,611 | ) | (1,818 | ) | ||||||
Credit cards | (1,543 | ) | (1,163 | ) | (1,325 | ) | ||||||
Business and government | (414 | ) | (534 | ) | (274 | ) | ||||||
(3,901 | ) | (3,405 | ) | (3,516 | ) | |||||||
Foreign exchange and other | (403 | ) | (498 | ) | (138 | ) | ||||||
Balance at end of year | $ | 4,456 | $ | 5,053 | $ | 5,135 | ||||||
Allowance for credit losses on financial instruments | ||||||||||||
Balance at beginning of year | $ | 1,957 | $ | 1,595 | $ | 1,677 | ||||||
Provision for credit losses | 3,306 | 3,468 | 2,899 | |||||||||
Write-offs | (3,901 | ) | (3,405 | ) | (3,516 | ) | ||||||
Recoveries | ||||||||||||
Residential mortgages | 27 | 18 | 26 | |||||||||
Personal loans | 274 | 230 | 285 | |||||||||
Credit cards | 203 | 188 | 218 | |||||||||
Business and government | 39 | 28 | 45 | |||||||||
543 | 464 | 574 | ||||||||||
Foreign exchange and other | (250 | ) | (165 | ) | (39 | ) | ||||||
Balance at end of year | $ | 1,655 | $ | 1,957 | $ | 1,595 | ||||||
Net impaired loans | ||||||||||||
Balance at beginning of year | $ | 3,096 | $ | 3,540 | $ | 3,453 | ||||||
Net change in gross impaired loans | (597 | ) | (82 | ) | 5 | |||||||
Net change in allowance for credit losses on impaired financial instruments | 302 | (362 | ) | 82 | ||||||||
Balance at end of year | $ | 2,801 | $ | 3,096 | $ | 3,540 |
T71 Provision for credit losses
For the fiscal years ($ millions) | 2021 | 2020 | 2019 | |||||||||
New provisions | $ | 3,912 | $ | 4,031 | $ | 3,599 | ||||||
Reversals | (63 | ) | (99 | ) | (126 | ) | ||||||
Recoveries | (543 | ) | (464 | ) | (574 | ) | ||||||
Provision for credit losses on impaired financial instruments (Stage 3) | 3,306 | 3,468 | 2,899 | |||||||||
Provision for credit losses – performing (Stage 1 and 2) | (1,498 | ) | 2,616 | 128 | ||||||||
Total Provision for credit losses | $ | 1,808 | $ | 6,084 | $ | 3,027 |
128 | 2021 Scotiabank Annual Report
Table of Contents
Management’s Discussion and Analysis | Supplementary Data
T72 Provision for credit losses against impaired financial instruments by type of borrower
For the fiscal years ($ millions) | 2021 | 2020 | 2019 | |||||||||
Residential mortgages | $ | 117 | $ | 192 | $ | 59 | ||||||
Personal loans | 1,429 | 1,651 | 1,480 | |||||||||
Credit cards | 1,361 | 968 | 1,078 | |||||||||
Personal | 2,907 | 2,811 | 2,617 | |||||||||
Financial services | ||||||||||||
Non-bank | 2 | 5 | – | |||||||||
Bank | – | – | – | |||||||||
Wholesale and retail | 126 | 137 | 85 | |||||||||
Real estate and construction | 51 | 72 | 48 | |||||||||
Energy | 15 | 104 | – | |||||||||
Transportation | 25 | 64 | 8 | |||||||||
Automotive | 1 | 17 | 13 | |||||||||
Agriculture | 24 | 48 | 20 | |||||||||
Hospitality and leisure | 7 | 1 | – | |||||||||
Mining | – | 1 | 1 | |||||||||
Metals | 31 | 29 | 7 | |||||||||
Utilities | 6 | 15 | 14 | |||||||||
Health care | 10 | 49 | 24 | |||||||||
Technology and media | 17 | 23 | 16 | |||||||||
Chemicals | 1 | 1 | – | |||||||||
Food and beverage | 19 | 25 | 25 | |||||||||
Forest products | 28 | 12 | 5 | |||||||||
Other | 35 | 52 | 19 | |||||||||
Sovereign | 1 | 2 | (3 | ) | ||||||||
Business and government | 399 | 657 | 282 | |||||||||
Provision for credit losses on impaired financial instruments | $ | 3,306 | $ | 3,468 | $ | 2,899 |
T73 Impaired loans by type of borrower
2021 | 2020 | |||||||||||||||||||||||||||
As at October 31 ($ millions) | Gross | Allowance for credit losses | Net | Gross | Allowance for credit losses | Net | ||||||||||||||||||||||
Residential mortgages | $ | 1,331 | $ | 374 | $ | 957 | $ | 1,490 | $ | 392 | $ | 1,098 | ||||||||||||||||
Personal loans | 833 | 626 | 207 | 1,032 | 820 | 212 | ||||||||||||||||||||||
Credit cards | – | – | – | – | – | – | ||||||||||||||||||||||
Personal | $ | 2,164 | $ | 1,000 | $ | 1,164 | $ | 2,522 | $ | 1,212 | $ | 1,310 | ||||||||||||||||
Financial services | ||||||||||||||||||||||||||||
Non-bank | 34 | 6 | 28 | 44 | 9 | 35 | ||||||||||||||||||||||
Bank | 2 | 2 | – | 2 | 2 | – | ||||||||||||||||||||||
Wholesale and retail | 473 | 209 | 264 | 516 | 229 | 287 | ||||||||||||||||||||||
Real estate and construction | 339 | 67 | 272 | 268 | 62 | 206 | ||||||||||||||||||||||
Energy(1) | 86 | 18 | 68 | 260 | 47 | 213 | ||||||||||||||||||||||
Transportation | 79 | 21 | 58 | 183 | 53 | 130 | ||||||||||||||||||||||
Automotive | 36 | 20 | 16 | 47 | 25 | 22 | ||||||||||||||||||||||
Agriculture | 207 | 72 | 135 | 263 | 98 | 165 | ||||||||||||||||||||||
Hospitality and leisure | 85 | 7 | 78 | 20 | 2 | 18 | ||||||||||||||||||||||
Mining | 21 | 2 | 19 | 30 | 3 | 27 | ||||||||||||||||||||||
Metals | 96 | 35 | 61 | 120 | 39 | 81 | ||||||||||||||||||||||
Utilities(1) | 129 | 4 | 125 | 129 | 6 | 123 | ||||||||||||||||||||||
Health care | 68 | 25 | 43 | 68 | 22 | 46 | ||||||||||||||||||||||
Technology and media | 58 | 20 | 38 | 34 | 10 | 24 | ||||||||||||||||||||||
Chemicals | 6 | 3 | 3 | 6 | 2 | 4 | ||||||||||||||||||||||
Food and beverage | 91 | 34 | 57 | 112 | 45 | 67 | ||||||||||||||||||||||
Forest products | 94 | 25 | 69 | 28 | 11 | 17 | ||||||||||||||||||||||
Other | 166 | 81 | 85 | 162 | 75 | 87 | ||||||||||||||||||||||
Sovereign | 222 | 4 | 218 | 239 | 5 | 234 | ||||||||||||||||||||||
Business and government | $ | 2,292 | $ | 655 | $ | 1,637 | $ | 2,531 | $ | 745 | $ | 1,786 | ||||||||||||||||
Total | $ | 4,456 | $ | 1,655 | $ | 2,801 | $ | 5,053 | $ | 1,957 | $ | 3,096 |
(1) | Prior periods have been restated to conform to the current presentation. |
2021 Scotiabank Annual Report | 129
Table of Contents
Management’s Discussion and Analysis
T74 Total credit risk exposures by geography(1)(2)
2021 | 2020 | |||||||||||||||||||||||||||
Non-Retail | ||||||||||||||||||||||||||||
As at October 31 ($ millions) | Drawn | Undrawn | Other exposures(3) | Retail | Total | Total | ||||||||||||||||||||||
Canada | $ | 134,334 | $ | 57,420 | $ | 38,100 | $ | 409,894 | $ | 639,748 | $ | 621,409 | ||||||||||||||||
U.S. | 109,493 | 40,452 | 44,479 | – | 194,424 | 188,210 | ||||||||||||||||||||||
Chile | 25,136 | 1,449 | 4,070 | 24,122 | 54,777 | 56,738 | ||||||||||||||||||||||
Mexico | 22,264 | 1,483 | 2,476 | 12,199 | 38,422 | 39,187 | ||||||||||||||||||||||
Peru | 16,319 | 1,134 | 2,976 | 7,723 | 28,152 | 33,931 | ||||||||||||||||||||||
Colombia | 7,102 | 534 | 1,073 | 5,737 | 14,446 | 13,123 | ||||||||||||||||||||||
Other International | ||||||||||||||||||||||||||||
Europe | 21,091 | 7,116 | 18,972 | – | 47,179 | 51,770 | ||||||||||||||||||||||
Caribbean and Central America | 14,616 | 1,411 | 981 | 10,665 | 27,673 | 31,420 | ||||||||||||||||||||||
Latin America (other) | 11,742 | 1,241 | 513 | 584 | 14,080 | 13,647 | ||||||||||||||||||||||
Other | 23,815 | 4,973 | 6,283 | 33 | 35,104 | 34,789 | ||||||||||||||||||||||
Total | $ | 385,912 | $ | 117,213 | $ | 119,923 | $ | 470,957 | $ | 1,094,005 | $ | 1,084,224 | ||||||||||||||||
As at October 31, 2020 | $ | 406,724 | $ | 115,420 | $ | 120,903 | $ | 441,177 | $ | 1,084,224 |
(1) | Geographic segmentation is based upon the location of the ultimate risk of the credit exposure. Includes all credit risk portfolios and excludes equities and other assets. |
(2) | Amounts represent exposure at default. |
(3) | Includes off-balance sheet lending instruments such as letters of credit, letters of guarantee, derivatives, securitization and repo-style transactions after collateral. |
T75 AIRB credit risk exposures by maturity(1)(2)
2021 | 2020 | |||||||||||||||||||||||
Residual maturity as at October 31 ($ millions) | Drawn | Undrawn | Other exposures(3) | Total | Total | |||||||||||||||||||
Non-retail | ||||||||||||||||||||||||
Less than 1 year | $ | 174,909 | $ | 35,047 | $ | 80,094 | $ | 290,050 | $ | 295,172 | ||||||||||||||
One to 5 years | 129,437 | 75,518 | 26,019 | 230,974 | 238,071 | |||||||||||||||||||
Over 5 years | 17,332 | 3,158 | 6,050 | 26,540 | 32,344 | |||||||||||||||||||
Total non-retail | $ | 321,678 | $ | 113,723 | $ | 112,163 | $ | 547,564 | $ | 565,587 | ||||||||||||||
Retail | ||||||||||||||||||||||||
Less than 1 year | $ | 26,316 | $ | 23,664 | $ | – | $ | 49,980 | $ | 54,638 | ||||||||||||||
One to 5 years | 249,195 | – | – | 249,195 | 215,271 | |||||||||||||||||||
Over 5 years | 16,230 | – | – | 16,230 | 14,892 | |||||||||||||||||||
Revolving credits(4) | 37,134 | 27,356 | – | 64,490 | 68,978 | |||||||||||||||||||
Total retail | $ | 328,875 | $ | 51,020 | $ | – | $ | 379,895 | $ | 353,779 | ||||||||||||||
Total | $ | 650,553 | $ | 164,743 | $ | 112,163 | $ | 927,459 | $ | 919,366 | ||||||||||||||
As at October 31, 2020 | $ | 643,835 | $ | 164,695 | $ | 110,836 | $ | 919,366 |
(1) | Remaining term to maturity of the credit exposure. Includes all credit risk portfolios and excludes equity securities and other assets. |
(2) | Exposure at default, before credit risk mitigation. |
(3) | Off-balance sheet lending instruments, such as letters of credit, letters of guarantee, securitization, derivatives and repo-style transactions after collateral. |
(4) | Credit cards and lines of credit with unspecified maturity. |
130 | 2021 Scotiabank Annual Report
Table of Contents
Management’s Discussion and Analysis | Supplementary Data
T76 Total credit risk exposures and risk-weighted assets
2021 | 2020 | |||||||||||||||||||||||||||||||||||
AIRB | Standardized(1) | Total | Total | |||||||||||||||||||||||||||||||||
As at October 31 ($ millions) | Exposure at Default(2) | Risk- weighted assets | Exposure at Default(2) | Risk- weighted assets | Exposure at Default(2) | Risk- weighted assets | Exposure at Default(2) | Risk- weighted assets | ||||||||||||||||||||||||||||
Non-retail | ||||||||||||||||||||||||||||||||||||
Corporate | ||||||||||||||||||||||||||||||||||||
Drawn | $ | 171,497 | $ | 79,338 | $ | 52,545 | $ | 48,717 | $ | 224,042 | $ | 128,055 | $ | 222,347 | $ | 132,409 | ||||||||||||||||||||
Undrawn | 108,300 | 39,390 | 3,475 | 3,391 | 111,775 | 42,781 | 105,623 | 38,432 | ||||||||||||||||||||||||||||
Other(3) | 59,914 | 12,488 | 2,423 | 2,417 | 62,337 | 14,905 | 55,828 | 14,970 | ||||||||||||||||||||||||||||
339,711 | 131,216 | 58,443 | 54,525 | 398,154 | 185,741 | 383,798 | 185,811 | |||||||||||||||||||||||||||||
Bank | ||||||||||||||||||||||||||||||||||||
Drawn | 15,737 | 2,794 | 3,048 | 2,466 | 18,785 | 5,260 | 20,977 | 5,199 | ||||||||||||||||||||||||||||
Undrawn | 4,662 | 1,026 | 15 | 15 | 4,677 | 1,041 | 8,785 | 1,154 | ||||||||||||||||||||||||||||
Other(3) | 8,494 | 924 | 1 | 1 | 8,495 | 925 | 11,051 | 1,405 | ||||||||||||||||||||||||||||
28,893 | 4,744 | 3,064 | 2,482 | 31,957 | 7,226 | 40,813 | 7,758 | |||||||||||||||||||||||||||||
Sovereign | ||||||||||||||||||||||||||||||||||||
Drawn | 134,444 | 3,928 | 8,641 | 737 | 143,085 | 4,665 | 163,400 | 6,174 | ||||||||||||||||||||||||||||
Undrawn | 761 | 72 | – | – | 761 | 72 | 1,012 | 103 | ||||||||||||||||||||||||||||
Other(3) | 1,163 | 38 | 15 | 15 | 1,178 | 53 | 4,550 | 52 | ||||||||||||||||||||||||||||
136,368 | 4,038 | 8,656 | 752 | 145,024 | 4,790 | 168,962 | 6,329 | |||||||||||||||||||||||||||||
Total Non-retail | ||||||||||||||||||||||||||||||||||||
Drawn | 321,678 | 86,060 | 64,234 | 51,920 | 385,912 | 137,980 | 406,724 | 143,782 | ||||||||||||||||||||||||||||
Undrawn | 113,723 | 40,488 | 3,490 | 3,406 | 117,213 | 43,894 | 115,420 | 39,689 | ||||||||||||||||||||||||||||
Other(3) | 69,571 | 13,450 | 2,439 | 2,433 | 72,010 | 15,883 | 71,429 | 16,427 | ||||||||||||||||||||||||||||
$ | 504,972 | $ | 139,998 | $ | 70,163 | $ | 57,759 | $ | 575,135 | $ | 197,757 | $ | 593,573 | $ | 199,898 | |||||||||||||||||||||
Retail | ||||||||||||||||||||||||||||||||||||
Retail residential mortgages | ||||||||||||||||||||||||||||||||||||
Drawn | $ | 261,655 | $ | 19,114 | $ | 54,617 | $ | 21,458 | $ | 316,272 | $ | 40,572 | $ | 281,362 | $ | 38,655 | ||||||||||||||||||||
261,655 | 19,114 | 54,617 | 21,458 | 316,272 | 40,572 | 281,362 | 38,655 | |||||||||||||||||||||||||||||
Secured lines of credit | ||||||||||||||||||||||||||||||||||||
Drawn | 20,278 | 2,938 | – | – | 20,278 | 2,938 | 20,922 | 3,834 | ||||||||||||||||||||||||||||
Undrawn | 19,984 | 897 | – | – | 19,984 | 897 | 18,292 | 1,002 | ||||||||||||||||||||||||||||
40,262 | 3,835 | – | – | 40,262 | 3,835 | 39,214 | 4,836 | |||||||||||||||||||||||||||||
Qualifying retail revolving exposures | ||||||||||||||||||||||||||||||||||||
Drawn | 14,415 | 7,958 | – | – | 14,415 | 7,958 | 14,598 | 8,330 | ||||||||||||||||||||||||||||
Undrawn | 27,356 | 3,111 | – | – | 27,356 | 3,111 | 31,264 | 3,530 | ||||||||||||||||||||||||||||
41,771 | 11,069 | – | – | 41,771 | 11,069 | 45,862 | 11,860 | |||||||||||||||||||||||||||||
Other retail | ||||||||||||||||||||||||||||||||||||
Drawn | 32,527 | 17,317 | 36,445 | 26,869 | 68,972 | 44,186 | 71,460 | 44,608 | ||||||||||||||||||||||||||||
Undrawn | 3,680 | 1,706 | – | – | 3,680 | 1,706 | 3,279 | 1,043 | ||||||||||||||||||||||||||||
36,207 | 19,023 | 36,445 | 26,869 | 72,652 | 45,892 | 74,739 | 45,651 | |||||||||||||||||||||||||||||
Total retail | ||||||||||||||||||||||||||||||||||||
Drawn | 328,875 | 47,327 | 91,062 | 48,327 | 419,937 | 95,654 | 388,342 | 95,427 | ||||||||||||||||||||||||||||
Undrawn | 51,020 | 5,714 | – | – | 51,020 | 5,714 | 52,835 | 5,575 | ||||||||||||||||||||||||||||
$ | 379,895 | $ | 53,041 | $ | 91,062 | $ | 48,327 | $ | 470,957 | $ | 101,368 | $ | 441,177 | $ | 101,002 | |||||||||||||||||||||
Securitization exposures | 16,727 | 3,024 | 4,238 | 1,329 | 20,965 | 4,353 | 25,200 | 5,555 | ||||||||||||||||||||||||||||
Trading derivatives | 25,865 | 5,637 | 1,083 | 1,034 | 26,948 | 6,671 | 24,274 | 6,886 | ||||||||||||||||||||||||||||
CVA derivatives | – | 3,957 | – | – | – | 3,957 | – | 5,330 | ||||||||||||||||||||||||||||
Subtotal | $ | 927,459 | $ | 205,657 | $ | 166,546 | $ | 108,449 | $ | 1,094,005 | $ | 314,106 | $ | 1,084,224 | $ | 318,671 | ||||||||||||||||||||
Equities | 4,563 | 4,436 | – | – | 4,563 | 4,436 | 3,109 | 2,931 | ||||||||||||||||||||||||||||
Other assets(4) | – | – | 61,737 | 28,054 | 61,737 | 28,054 | 56,401 | 28,160 | ||||||||||||||||||||||||||||
Total credit risk, before scaling factor | $ | 932,022 | $ | 210,093 | $ | 228,283 | $ | 136,503 | $ | 1,160,305 | $ | 346,596 | $ | 1,143,734 | $ | 349,762 | ||||||||||||||||||||
Add-on for 6% scaling factor(5) | – | 12,186 | – | – | – | 12,186 | – | 12,242 | ||||||||||||||||||||||||||||
Total credit risk | $ | 932,022 | $ | 222,279 | $ | 228,283 | $ | 136,503 | $ | 1,160,305 | $ | 358,782 | $ | 1,143,734 | $ | 362,004 |
(1) | Portfolios under the Standardized Approach are reported net of specific allowances for credit losses, and effective 2021, net of collateral amounts treated under the Comprehensive Approach. |
(2) | Outstanding amount for on-balance sheet exposures and loan equivalent amount for off-balance sheet exposures, before credit risk mitigation. |
(3) | Other exposures include off-balance sheet lending instruments, such as letters of credit, letters of guarantee, non-trading derivatives and repo-style exposures, after collateral. |
(4) | Other assets include amounts related to central counterparties. |
(5) | Basel Committee imposed a scaling factor (6%) on risk-weighted assets for Internal Ratings-Based credit risk portfolios. |
2021 Scotiabank Annual Report | 131
Table of Contents
Management’s Discussion and Analysis
T77 Volume/rate analysis of change in net interest income
Increase (decrease) due to change in: 2021 versus 2020 | Increase (decrease) due to change in: 2020 versus 2019 | |||||||||||||||||||||||
($ millions) | Average volume | Average rate | Net change | Average volume | Average rate | Net change | ||||||||||||||||||
Net interest income | ||||||||||||||||||||||||
Total earning assets | $ | (545 | ) | $ | (4,181 | ) | $ | (4,726 | ) | $ | 1,957 | $ | (5,029 | ) | $ | (3,072 | ) | |||||||
Total interest-bearing liabilities | 284 | (4,651 | ) | (4,367 | ) | 1,300 | (4,515 | ) | (3,215 | ) | ||||||||||||||
Change in net interest income | $ | (829 | ) | $ | 470 | $ | (359 | ) | $ | 657 | $ | (514 | ) | $ | 143 | |||||||||
Assets | ||||||||||||||||||||||||
Deposits with banks | $ | 60 | $ | (292 | ) | $ | (232 | ) | $ | 307 | $ | (821 | ) | $ | (514 | ) | ||||||||
Trading assets | 53 | (201 | ) | (148 | ) | 28 | 140 | 168 | ||||||||||||||||
Securities purchased under resale agreements | (19 | ) | (89 | ) | (108 | ) | 30 | (246 | ) | (216 | ) | |||||||||||||
Investment securities | (193 | ) | (227 | ) | (420 | ) | 390 | (761 | ) | (371 | ) | |||||||||||||
Loans: | ||||||||||||||||||||||||
Residential mortgages | 886 | (796 | ) | 90 | 426 | (634 | ) | (208 | ) | |||||||||||||||
Personal loans | (266 | ) | (730 | ) | (996 | ) | (108 | ) | (607 | ) | (715 | ) | ||||||||||||
Credit cards | (602 | ) | (292 | ) | (894 | ) | (212 | ) | 90 | (122 | ) | |||||||||||||
Business and government | (464 | ) | (1,554 | ) | (2,018 | ) | 1,096 | (2,190 | ) | (1,094 | ) | |||||||||||||
Total loans | (446 | ) | (3,372 | ) | (3,818 | ) | 1,202 | (3,341 | ) | (2,139 | ) | |||||||||||||
Total earning assets | $ | (545 | ) | $ | (4,181 | ) | $ | (4,726 | ) | $ | 1,957 | $ | (5,029 | ) | $ | (3,072 | ) | |||||||
Liabilities | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Personal | $ | 194 | $ | (1,419 | ) | $ | (1,225 | ) | $ | 176 | $ | (721 | ) | $ | (545 | ) | ||||||||
Business and government | 34 | (2,798 | ) | (2,764 | ) | 791 | (2,952 | ) | (2,161 | ) | ||||||||||||||
Banks | (38 | ) | (239 | ) | (277 | ) | 186 | (620 | ) | (434 | ) | |||||||||||||
Total deposits | 190 | (4,456 | ) | (4,266 | ) | 1,153 | (4,293 | ) | (3,140 | ) | ||||||||||||||
Obligations related to securities sold under repurchase agreements | (32 | ) | (65 | ) | (97 | ) | 58 | (152 | ) | (94 | ) | |||||||||||||
Subordinated debentures | (24 | ) | (36 | ) | (60 | ) | (8 | ) | (46 | ) | (54 | ) | ||||||||||||
Other interest-bearing liabilities | 150 | (94 | ) | 56 | 97 | (24 | ) | 73 | ||||||||||||||||
Total interest-bearing liabilities | $ | 284 | $ | (4,651 | ) | $ | (4,367 | ) | $ | 1,300 | $ | (4,515 | ) | $ | (3,215 | ) |
T78 Provision for income and other taxes
For the fiscal years ($ millions) | 2021 | 2020 | 2019 | 2021 versus 2020 | ||||||||||||
Income taxes | ||||||||||||||||
Income tax expense | $ | 2,871 | $ | 1,543 | $ | 2,472 | 86.1 | % | ||||||||
Other taxes | ||||||||||||||||
Payroll taxes | 407 | 437 | 439 | (6.9 | ) | |||||||||||
Business and capital taxes | 511 | 517 | 515 | (1.2 | ) | |||||||||||
Harmonized sales tax and other | 404 | 388 | 386 | 4.1 | ||||||||||||
Total other taxes | 1,322 | 1,342 | 1,340 | (1.5 | ) | |||||||||||
Total income and other taxes(1) | $ | 4,193 | $ | 2,885 | $ | 3,812 | 45.3 | % | ||||||||
Net income before income taxes | $ | 12,826 | $ | 8,396 | $ | 11,270 | 52.8 | % | ||||||||
Effective income tax rate (%)(2) | 22.4 | 18.4 | 21.9 | 4.0 | ||||||||||||
Total tax rate (%)(3) | 29.6 | 29.6 | 30.2 | – |
(1) | Comprising $2,754 of Canadian taxes (2020 – $1,658; 2019 – $1,998) and $1,439 of foreign taxes (2020 – $1,227; 2019 – $1,814). |
(2) | Refer to Glossary on page 141 for the description of the measure. |
(3) | Total income and other taxes as a percentage of net income before income and other taxes. |
132 | 2021 Scotiabank Annual Report
Table of Contents
Management’s Discussion and Analysis | Supplementary Data
T79 Assets under administration and management(1)
($ billions) | 2021 | 2020 | 2019 | |||||||||
Assets under administration | ||||||||||||
Personal | ||||||||||||
Retail brokerage | $ | 201.0 | $ | 152.6 | $ | 153.6 | ||||||
Investment management and trust | 144.7 | 130.6 | 121.6 | |||||||||
345.7 | 283.2 | 275.2 | ||||||||||
Mutual funds | 225.2 | 195.5 | 205.3 | |||||||||
Institutional | 82.0 | 78.2 | 77.9 | |||||||||
Total(2) | $ | 652.9 | $ | 556.9 | $ | 558.4 | ||||||
Assets under management | ||||||||||||
Personal | $ | 76.3 | $ | 58.9 | $ | 57.7 | ||||||
Mutual funds | 206.9 | 179.3 | 188.6 | |||||||||
Institutional | 62.6 | 51.6 | 55.3 | |||||||||
Total(2) | $ | 345.8 | $ | 289.8 | $ | 301.6 |
(1) | Refer to Glossary on page 141 for the description of the measure. |
(2) | Prior period amounts have been restated to appropriately reflect certain intercompany items. |
T80 Changes in assets under administration and management(1)
As at October 31 ($ billions) | 2021 | 2020 | 2019 | |||||||||
Assets under administration | ||||||||||||
Balance at beginning of year | $ | 556.9 | $ | 558.4 | $ | 517.6 | ||||||
Net inflows (outflows)(2) | 31.0 | 3.3 | 6.9 | |||||||||
Impact of market changes, including foreign currency translation | 65.0 | (4.8 | ) | 33.9 | ||||||||
Balance at end of year(3) | $ | 652.9 | $ | 556.9 | $ | 558.4 |
(1) | Refer to Glossary on page 141 for the description of the measure. |
(2) | Includes impact of business acquisitions/dispositions of nil (2020 – $(13.9); 2019 – $(3.1)). |
(3) | Prior period amounts have been restated to appropriately reflect certain intercompany items. |
As at October 31 ($ billions) | 2021 | 2020 | 2019 | |||||||||
Assets under management | ||||||||||||
Balance at beginning of year | $ | 289.8 | $ | 301.6 | $ | 280.6 | ||||||
Net inflows (outflows)(1) | 9.5 | (12.4 | ) | 13.8 | ||||||||
Impact of market changes, including foreign currency translation | 46.5 | 0.6 | 7.2 | |||||||||
Balance at end of year(2) | $ | 345.8 | $ | 289.8 | $ | 301.6 |
(1) | Includes impact of business acquisitions/dispositions of nil (2020 – (13.9); 2019 – nil). |
(2) | Prior period amounts have been restated to appropriately reflect certain intercompany items. |
T81 Fees paid to the shareholders’ auditors
For the fiscal years ($ millions) | 2021 | 2020 | 2019 | |||||||||
Audit services | $ | 25.9 | $ | 25.6 | $ | 32.6 | ||||||
Audit-related services | 2.1 | 2.9 | 1.3 | |||||||||
Tax services outside of the audit scope | – | – | – | |||||||||
Other non-audit services | 0.4 | 0.3 | 0.5 | |||||||||
Total | $ | 28.4 | $ | 28.8 | $ | 34.4 |
2021 Scotiabank Annual Report | 133
Table of Contents
Management’s Discussion and Analysis
Selected Quarterly Information
T82 Selected quarterly information
2021 | 2020 | |||||||||||||||||||||||||||||||
As at and for the quarter ended | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||||||||||
Operating results ($ millions) | ||||||||||||||||||||||||||||||||
Net interest income | 4,217 | 4,217 | 4,176 | 4,351 | 4,258 | 4,253 | 4,417 | 4,392 | ||||||||||||||||||||||||
Non-interest income | 3,470 | 3,540 | 3,560 | 3,721 | 3,247 | 3,481 | 3,539 | 3,749 | ||||||||||||||||||||||||
Total revenue | 7,687 | 7,757 | 7,736 | 8,072 | 7,505 | 7,734 | 7,956 | 8,141 | ||||||||||||||||||||||||
Provision for credit losses | 168 | 380 | 496 | 764 | 1,131 | 2,181 | 1,846 | 926 | ||||||||||||||||||||||||
Non-interest expenses | 4,271 | 4,097 | 4,042 | 4,208 | 4,057 | 4,018 | 4,363 | 4,418 | ||||||||||||||||||||||||
Income tax expense | 689 | 738 | 742 | 702 | 418 | 231 | 423 | 471 | ||||||||||||||||||||||||
Net income | 2,559 | 2,542 | 2,456 | 2,398 | 1,899 | 1,304 | 1,324 | 2,326 | ||||||||||||||||||||||||
Net income attributable to common shareholders | 2,411 | 2,426 | 2,289 | 2,265 | 1,745 | 1,332 | 1,243 | 2,262 | ||||||||||||||||||||||||
Operating performance | ||||||||||||||||||||||||||||||||
Basic earnings per share ($) | 1.98 | 2.00 | 1.89 | 1.87 | 1.44 | 1.10 | 1.03 | 1.86 | ||||||||||||||||||||||||
Diluted earnings per share ($) | 1.97 | 1.99 | 1.88 | 1.86 | 1.42 | 1.04 | 1.00 | 1.84 | ||||||||||||||||||||||||
Return on equity (%)(1) | 14.8 | 15.0 | 14.8 | 14.2 | 11.0 | 8.3 | 7.9 | 14.2 | ||||||||||||||||||||||||
Productivity ratio (%)(1) | 55.6 | 52.8 | 52.2 | 52.1 | 54.1 | 52.0 | 54.8 | 54.3 | ||||||||||||||||||||||||
Net interest margin (%)(2) | 2.17 | 2.23 | 2.26 | 2.27 | 2.22 | 2.10 | 2.35 | 2.45 | ||||||||||||||||||||||||
Financial position information ($ billions) | ||||||||||||||||||||||||||||||||
Cash and deposits with financial institutions | 86.3 | 75.9 | 52.0 | 89.5 | 76.5 | 59.0 | 103.9 | 69.3 | ||||||||||||||||||||||||
Trading assets | 146.3 | 141.1 | 144.2 | 141.8 | 117.8 | 123.8 | 121.5 | 144.7 | ||||||||||||||||||||||||
Loans | 637.0 | 627.7 | 608.2 | 603.6 | 603.3 | 613.4 | 625.2 | 592.3 | ||||||||||||||||||||||||
Total assets | 1,184.8 | 1,163.4 | 1,125.2 | 1,164.1 | 1,136.5 | 1,169.9 | 1,247.1 | 1,154.0 | ||||||||||||||||||||||||
Deposits | 797.3 | 794.4 | 756.7 | 769.0 | 750.8 | 768.0 | 797.7 | 763.9 | ||||||||||||||||||||||||
Common equity | 64.8 | 64.7 | 63.5 | 63.4 | 62.8 | 62.9 | 64.3 | 63.5 | ||||||||||||||||||||||||
Preferred shares and other equity instruments | 6.0 | 5.3 | 4.5 | 5.3 | 5.3 | 5.3 | 3.6 | 3.9 | ||||||||||||||||||||||||
Assets under administration(1)(3) | 652.9 | 636.4 | 622.8 | 598.1 | 556.9 | 556.9 | 530.4 | 552.8 | ||||||||||||||||||||||||
Assets under management(1)(3) | 345.8 | 340.8 | 328.7 | 311.7 | 289.8 | 291.8 | 276.9 | 296.2 | ||||||||||||||||||||||||
Capital and liquidity measures | ||||||||||||||||||||||||||||||||
Common Equity Tier 1 (CET1) capital ratio (%) | 12.3 | 12.2 | 12.3 | 12.2 | 11.8 | 11.3 | 10.9 | 11.4 | ||||||||||||||||||||||||
Tier 1 capital ratio (%) | 13.9 | 13.7 | 13.6 | 13.6 | 13.3 | 12.8 | 11.9 | 12.5 | ||||||||||||||||||||||||
Total capital ratio (%) | 15.9 | 15.7 | 15.7 | 15.7 | 15.5 | 14.9 | 14.0 | 14.6 | ||||||||||||||||||||||||
Leverage ratio (%) | 4.8 | 4.8 | 4.7 | 4.7 | 4.7 | 4.6 | 4.4 | 4.0 | ||||||||||||||||||||||||
Risk-weighted assets ($ billions) | 416.1 | 414.2 | 404.7 | 406.8 | 417.1 | 430.5 | 446.2 | 420.7 | ||||||||||||||||||||||||
Liquidity coverage ratio (LCR) (%) | 124 | 123 | 129 | 129 | 138 | 141 | 132 | 127 | ||||||||||||||||||||||||
Net stable funding ratio (NSFR) (%) | 110 | 112 | 112 | 115 | n/a | n/a | n/a | n/a | ||||||||||||||||||||||||
Credit quality | ||||||||||||||||||||||||||||||||
Net impaired loans ($ millions) | 2,801 | 2,976 | 3,178 | 3,285 | 3,096 | 3,361 | 3,473 | 3,233 | ||||||||||||||||||||||||
Allowance for credit losses ($ millions)(4) | 5,731 | 6,232 | 6,893 | 7,810 | 7,820 | 7,403 | 6,079 | 5,095 | ||||||||||||||||||||||||
Gross impaired loans as a % of loans and acceptances(1) | 0.67 | 0.73 | 0.81 | 0.84 | 0.81 | 0.81 | 0.78 | 0.77 | ||||||||||||||||||||||||
Net impaired loans as a % of loans and acceptances(1) | 0.42 | 0.46 | 0.50 | 0.52 | 0.50 | 0.53 | 0.53 | 0.52 | ||||||||||||||||||||||||
Provision for credit losses as a % of average net loans and acceptances (annualized)(1)(5) | 0.10 | 0.24 | 0.33 | 0.49 | 0.73 | 1.36 | 1.19 | 0.61 | ||||||||||||||||||||||||
Provision for credit losses on impaired loans as a % of average net loans and acceptances (annualized)(1)(5) | 0.31 | 0.53 | 0.80 | 0.49 | 0.54 | 0.58 | 0.56 | 0.55 | ||||||||||||||||||||||||
Net write-offs as a % of average net loans and acceptances (annualized)(1) | 0.34 | 0.62 | 0.76 | 0.43 | 0.41 | 0.47 | 0.47 | 0.54 | ||||||||||||||||||||||||
Adjusted results(2) | ||||||||||||||||||||||||||||||||
Adjusted net income ($ millions) | 2,716 | 2,560 | 2,475 | 2,418 | 1,938 | 1,308 | 1,371 | 2,344 | ||||||||||||||||||||||||
Adjusted diluted earnings per share ($) | 2.10 | 2.01 | 1.90 | 1.88 | 1.45 | 1.04 | 1.04 | 1.83 | ||||||||||||||||||||||||
Adjusted return on equity (%) | 15.6 | 15.1 | 14.9 | 14.4 | 11.3 | 8.3 | 8.2 | 13.9 | ||||||||||||||||||||||||
Adjusted productivity ratio (%) | 52.8 | 52.5 | 51.9 | 51.8 | 53.3 | 51.4 | 54.0 | 53.4 | ||||||||||||||||||||||||
Adjusted provision for credit losses as a % of average net loans and acceptances(5) | 0.10 | 0.24 | 0.33 | 0.49 | 0.73 | 1.36 | 1.19 | 0.51 | ||||||||||||||||||||||||
Common share information | ||||||||||||||||||||||||||||||||
Closing share price ($) (TSX) | 81.14 | 77.87 | 78.27 | 68.20 | 55.35 | 55.01 | 55.80 | 72.28 | ||||||||||||||||||||||||
Shares outstanding (millions) | ||||||||||||||||||||||||||||||||
Average – Basic | 1,215 | 1,215 | 1,213 | 1,212 | 1,211 | 1,211 | 1,212 | 1,214 | ||||||||||||||||||||||||
Average – Diluted | 1,224 | 1,223 | 1,223 | 1,237 | 1,246 | 1,245 | 1,222 | 1,247 | ||||||||||||||||||||||||
End of period | 1,215 | 1,215 | 1,214 | 1,212 | 1,211 | 1,211 | 1,211 | 1,213 | ||||||||||||||||||||||||
Dividends paid per share ($) | 0.90 | 0.90 | 0.90 | 0.90 | 0.90 | 0.90 | 0.90 | 0.90 | ||||||||||||||||||||||||
Dividend yield (%)(1) | 4.5 | 4.5 | 4.9 | 5.7 | 6.4 | 6.5 | 5.9 | 4.9 | ||||||||||||||||||||||||
Market capitalization ($ billions) (TSX) | 98.6 | 94.6 | 95.0 | 82.7 | 67.1 | 66.6 | 67.6 | 87.7 | ||||||||||||||||||||||||
Book value per common share ($)(1) | 53.28 | 53.26 | 52.29 | 52.28 | 51.85 | 51.91 | 53.05 | 52.33 | ||||||||||||||||||||||||
Market value to book value multiple(1) | 1.5 | 1.5 | 1.5 | 1.3 | 1.1 | 1.1 | 1.1 | 1.4 | ||||||||||||||||||||||||
Price to earnings multiple (trailing 4 quarters)(1) | 10.5 | 10.8 | 12.4 | 12.5 | 10.2 | 9.6 | 9.1 | 10.5 |
(1) | Refer to Glossary on page 141 for the description of the measure. |
(2) | Refer to page 17 for a discussion of non-GAAP measures. |
(3) | Prior period amounts have been restated to appropriately reflect certain intercompany items. |
(4) | Includes allowance for credit losses on all financial assets – loans, acceptances, off-balance sheet exposures, debt securities, and deposits with financial institutions. |
(5) | Includes provision for credit losses on certain financial assets – loans, acceptances and off-balance sheet exposures. |
134 | 2021 Scotiabank Annual Report
Table of Contents
Management’s Discussion and Analysis | Supplementary Data
T83 Condensed Consolidated Statement of Financial Position
As at October 31 ($ millions) | 2021(1) | 2020(1) | 2019(1) | 2018(1) | 2017 | 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||
Cash, deposits with financial institutions and Precious metals | $ | 87,078 | $ | 77,641 | $ | 50,429 | $ | 65,460 | $ | 65,380 | $ | 54,786 | $ | 84,477 | $ | 64,016 | $ | 62,218 | $ | 59,724 | ||||||||||||||||||||
Trading assets | 146,312 | 117,839 | 127,488 | 100,262 | 98,464 | 108,561 | 99,140 | 113,248 | 96,489 | 87,596 | ||||||||||||||||||||||||||||||
Securities purchased under resale agreements and securities borrowed | 127,739 | 119,747 | 131,178 | 104,018 | 95,319 | 92,129 | 87,312 | 93,866 | 82,533 | 66,189 | ||||||||||||||||||||||||||||||
Investment securities | 75,199 | 111,389 | 82,359 | 78,396 | 69,269 | 72,919 | 43,216 | 38,662 | 34,319 | 33,376 | ||||||||||||||||||||||||||||||
Loans, net of allowance | 636,986 | 603,263 | 592,483 | 551,834 | 504,369 | 480,164 | 458,628 | 424,309 | 402,215 | 352,578 | ||||||||||||||||||||||||||||||
Other(2) | 111,530 | 106,587 | 102,224 | 98,523 | 82,472 | 87,707 | 83,724 | 71,565 | 65,870 | 68,762 | ||||||||||||||||||||||||||||||
$ | 1,184,844 | $ | 1,136,466 | $ | 1,086,161 | $ | 998,493 | $ | 915,273 | $ | 896,266 | $ | 856,497 | $ | 805,666 | $ | 743,644 | $ | 668,225 | |||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||
Deposits | $ | 797,259 | $ | 750,838 | $ | 733,390 | $ | 676,534 | $ | 625,367 | $ | 611,877 | $ | 600,919 | $ | 554,017 | $ | 517,887 | $ | 465,689 | ||||||||||||||||||||
Obligations related to securities sold under repurchase agreements and securities lent | 123,469 | 137,763 | 124,083 | 101,257 | 95,843 | 97,083 | 77,015 | 88,953 | 77,508 | 56,968 | ||||||||||||||||||||||||||||||
Subordinated debentures | 6,334 | 7,405 | 7,252 | 5,698 | 5,935 | 7,633 | 6,182 | 4,871 | 5,841 | 10,143 | ||||||||||||||||||||||||||||||
Other(2) | 184,890 | 169,957 | 151,244 | 147,324 | 126,503 | 121,852 | 118,902 | 108,614 | 97,021 | 95,760 | ||||||||||||||||||||||||||||||
1,111,952 | 1,065,963 | 1,015,969 | 930,813 | 853,648 | 838,445 | 803,018 | 756,455 | 698,257 | 628,560 | |||||||||||||||||||||||||||||||
Common equity | 64,750 | 62,819 | 63,638 | 61,044 | 55,454 | 52,657 | 49,085 | 44,965 | 40,165 | 34,335 | ||||||||||||||||||||||||||||||
Preferred shares and other equity instruments | 6,052 | 5,308 | 3,884 | 4,184 | 4,579 | 3,594 | 2,934 | 2,934 | 4,084 | 4,384 | ||||||||||||||||||||||||||||||
Non-controlling interests in subsidiaries | 2,090 | 2,376 | 2,670 | 2,452 | 1,592 | 1,570 | 1,460 | 1,312 | 1,138 | 946 | ||||||||||||||||||||||||||||||
Total equity | 72,892 | 70,503 | 70,192 | 67,680 | 61,625 | 57,821 | 53,479 | 49,211 | 45,387 | 39,665 | ||||||||||||||||||||||||||||||
$ | 1,184,844 | $ | 1,136,466 | $ | 1,086,161 | $ | 998,493 | $ | 915,273 | $ | 896,266 | $ | 856,497 | $ | 805,666 | $ | 743,644 | $ | 668,225 |
(1) | The amounts for the years ended October 31, 2018 to October 31, 2021 have been prepared in accordance with IFRS 9; prior period amounts have not been restated. |
(2) | The amounts for the years ended October 31, 2021 and October 31, 2020 have been prepared in accordance with IFRS 16; prior year amounts have not been restated. |
T84 Condensed Consolidated Statement of Income
For the year ended October 31 ($ millions) | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||||||||||
Net interest income(1)(2) | $ | 16,961 | $ | 17,320 | $ | 17,177 | $ | 16,191 | $ | 15,035 | $ | 14,292 | $ | 13,092 | $ | 12,305 | $ | 11,350 | $ | 9,970 | ||||||||||||||||||||
Non-interest income(1)(3) | 14,291 | 14,016 | 13,857 | 12,584 | 12,120 | 12,058 | 10,957 | 11,299 | 9,949 | 9,676 | ||||||||||||||||||||||||||||||
Total revenue | 31,252 | 31,336 | 31,034 | 28,775 | 27,155 | 26,350 | 24,049 | 23,604 | 21,299 | 19,646 | ||||||||||||||||||||||||||||||
Provision for credit losses(1) | 1,808 | 6,084 | 3,027 | 2,611 | 2,249 | 2,412 | 1,942 | 1,703 | 1,288 | 1,252 | ||||||||||||||||||||||||||||||
Non-interest expenses(2)(3) | 16,618 | 16,856 | 16,737 | 15,058 | 14,630 | 14,540 | 13,041 | 12,601 | 11,664 | 10,436 | ||||||||||||||||||||||||||||||
Income before taxes | 12,826 | 8,396 | 11,270 | 11,106 | 10,276 | 9,398 | 9,066 | 9,300 | 8,347 | 7,958 | ||||||||||||||||||||||||||||||
Income tax expense | 2,871 | 1,543 | 2,472 | 2,382 | 2,033 | 2,030 | 1,853 | 2,002 | 1,737 | 1,568 | ||||||||||||||||||||||||||||||
Net income | $ | 9,955 | $ | 6,853 | $ | 8,798 | $ | 8,724 | $ | 8,243 | $ | 7,368 | $ | 7,213 | $ | 7,298 | $ | 6,610 | $ | 6,390 | ||||||||||||||||||||
Net income attributable to non-controlling interests in subsidiaries | 331 | 75 | 408 | 176 | 238 | 251 | 199 | 227 | 231 | 196 | ||||||||||||||||||||||||||||||
Net income attributable to equity holders of the Bank | $ | 9,624 | $ | 6,778 | $ | 8,390 | $ | 8,548 | $ | 8,005 | $ | 7,117 | $ | 7,014 | $ | 7,071 | $ | 6,379 | $ | 6,194 | ||||||||||||||||||||
Preferred shareholders and other equity instrument holders | 233 | 196 | 182 | 187 | 129 | 130 | 117 | 155 | 217 | 220 | ||||||||||||||||||||||||||||||
Common shareholders | $ | 9,391 | $ | 6,582 | $ | 8,208 | $ | 8,361 | $ | 7,876 | $ | 6,987 | $ | 6,897 | $ | 6,916 | $ | 6,162 | $ | 5,974 |
(1) | The amounts for the years ended October 31, 2018 to October 31, 2021 have been prepared in accordance with IFRS 9; prior year amounts have not been restated. |
(2) | The amounts for the years ended October 31, 2021 and October 31, 2020 have been prepared in accordance with IFRS 16; prior year amounts have not been restated. |
(3) | The amounts for the years ended October 31, 2019 to October 31, 2021 have been prepared in accordance with IFRS 15; prior year amounts have not been restated. |
2021 Scotiabank Annual Report | 135
Table of Contents
Management’s Discussion and Analysis
T85 Consolidated Statement of Changes in Equity
For the year ended October 31 ($ millions) | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||||||||
Common shares | ||||||||||||||||||||||||||||
Balance at beginning of year | $ | 18,239 | $ | 18,264 | $ | 18,234 | $ | 15,644 | $ | 15,513 | $ | 15,141 | $ | 15,231 | ||||||||||||||
Issued | 268 | 59 | 255 | 2,708 | 313 | 391 | 104 | |||||||||||||||||||||
Purchased for cancellation | – | (84 | ) | (225 | ) | (118 | ) | (182 | ) | (19 | ) | (194 | ) | |||||||||||||||
Balance at end of year | $ | 18,507 | $ | 18,239 | $ | 18,264 | $ | 18,234 | $ | 15,644 | $ | 15,513 | $ | 15,141 | ||||||||||||||
Retained earnings | ||||||||||||||||||||||||||||
Balance at beginning of year | 46,345 | 44,439 | 41,414 | 38,117 | 34,752 | 31,316 | 28,609 | |||||||||||||||||||||
IFRS adjustment | – | – | (58 | ) | (564 | ) | – | – | – | |||||||||||||||||||
Restated balances | 46,345 | 44,439 | 41,356 | 37,553 | 34,752 | 31,316 | 28,609 | |||||||||||||||||||||
Net income attributable to common shareholders of the Bank | 9,391 | 6,582 | 8,208 | 8,361 | 7,876 | 6,987 | 6,897 | |||||||||||||||||||||
Common dividends | (4,371 | ) | (4,363 | ) | (4,260 | ) | (3,985 | ) | (3,668 | ) | (3,468 | ) | (3,289 | ) | ||||||||||||||
Purchase of shares for cancellation and premium on redemption | – | (330 | ) | (850 | ) | (514 | ) | (827 | ) | (61 | ) | (761 | ) | |||||||||||||||
Other | (11 | ) | 17 | (15 | ) | (1 | ) | (16 | ) | (22 | ) | (140 | )(1) | |||||||||||||||
Balance at end of year | $ | 51,354 | $ | 46,345 | $ | 44,439 | $ | 41,414 | $ | 38,117 | $ | 34,752 | $ | 31,316 | ||||||||||||||
Accumulated other comprehensive income (loss) | ||||||||||||||||||||||||||||
Balance at beginning of year | (2,125 | ) | 570 | 992 | 1,577 | 2,240 | 2,455 | 949 | ||||||||||||||||||||
IFRS adjustment | – | – | – | 51 | – | – | – | |||||||||||||||||||||
Restated balances | (2,125 | ) | 570 | 992 | 1,628 | 2,240 | 2,455 | 949 | ||||||||||||||||||||
Cumulative effect of adopting new accounting policies | – | – | – | – | – | – | (5 | )(2) | ||||||||||||||||||||
Other comprehensive income (loss) | (3,134 | ) | (2,668 | ) | (422 | ) | (693 | ) | (663 | ) | (215 | ) | 1,511 | |||||||||||||||
Other | (74 | ) | (27 | ) | – | 57 | – | – | – | |||||||||||||||||||
Balance at end of year | $ | (5,333 | ) | $ | (2,125 | ) | $ | 570 | $ | 992 | $ | 1,577 | $ | 2,240 | $ | 2,455 | ||||||||||||
Other reserves | ||||||||||||||||||||||||||||
Balance at beginning of year | 360 | 365 | 404 | 116 | 152 | 173 | 176 | |||||||||||||||||||||
Share-based payments(3) | 7 | 5 | 7 | 6 | 8 | 7 | 14 | |||||||||||||||||||||
Other | (145 | ) | (10 | ) | (46 | ) | 282 | (44 | ) | (28 | ) | (17 | ) | |||||||||||||||
Balance at end of year | $ | 222 | $ | 360 | $ | 365 | $ | 404 | $ | 116 | $ | 152 | $ | 173 | ||||||||||||||
Total common equity | $ | 64,750 | $ | 62,819 | $ | 63,638 | $ | 61,044 | $ | 55,454 | $ | 52,657 | $ | 49,085 | ||||||||||||||
Preferred shares and other equity instruments | ||||||||||||||||||||||||||||
Balance at beginning of year | 5,308 | 3,884 | 4,184 | 4,579 | 3,594 | 2,934 | 2,934 | |||||||||||||||||||||
Net income attributable to preferred shareholders and other equity instrument holders of the Bank | 233 | 196 | 182 | 187 | 129 | 130 | 117 | |||||||||||||||||||||
Preferred and other equity instrument dividends | (233 | ) | (196 | ) | (182 | ) | (187 | ) | (129 | ) | (130 | ) | (117 | ) | ||||||||||||||
Issued | 2,003 | 1,689 | – | 300 | 1,560 | 1,350 | – | |||||||||||||||||||||
Redeemed | (1,259 | ) | (265 | ) | (300 | ) | (695 | ) | (575 | ) | (690 | ) | – | |||||||||||||||
Balance at end of year | $ | 6,052 | $ | 5,308 | $ | 3,884 | $ | 4,184 | $ | 4,579 | $ | 3,594 | $ | 2,934 | ||||||||||||||
Non-controlling interests | ||||||||||||||||||||||||||||
Balance at beginning of year | 2,376 | 2,670 | 2,452 | 1,592 | 1,570 | 1,460 | 1,312 | |||||||||||||||||||||
IFRS adjustment | – | – | – | (97 | ) | – | – | – | ||||||||||||||||||||
Restated balances | 2,376 | 2,670 | 2,452 | 1,495 | 1,570 | 1,460 | 1,312 | |||||||||||||||||||||
Net income attributable to non-controlling interests | 331 | 75 | 408 | 176 | 238 | 251 | 199 | |||||||||||||||||||||
Distributions to non-controlling interests | (123 | ) | (148 | )�� | (150 | ) | (199 | ) | (133 | ) | (116 | ) | (86 | ) | ||||||||||||||
Effect of foreign exchange and others | (494 | ) | (221 | ) | (40 | ) | 980 | (83 | ) | (25 | ) | 35 | ||||||||||||||||
Balance at end of year | $ | 2,090 | $ | 2,376 | $ | 2,670 | $ | 2,452 | $ | 1,592 | $ | 1,570 | $ | 1,460 | ||||||||||||||
Total equity at end of year | $ | 72,892 | $ | 70,503 | $ | 70,192 | $ | 67,680 | $ | 61,625 | $ | 57,821 | $ | 53,479 |
(1) | Includes retrospective adjustments primarily related to foreign currency translation on Allowance for Credit Losses with respect to periods prior to 2013 ($152). |
(2) | To reflect the adoption of the own credit risk provisions of IFRS 9 pertaining to financial liabilities designated at fair value through profit or loss. |
(3) | Represents amounts on account of share-based payments (refer to Note 26 in the consolidated financial statements). |
T86 Consolidated Statement of Comprehensive Income
For the year ended October 31 ($ millions) | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||||||||
Net income | $ | 9,955 | $ | 6,853 | $ | 8,798 | $ | 8,724 | $ | 8,243 | $ | 7,368 | $ | 7,213 | ||||||||||||||
Other comprehensive income (loss), net of income taxes: | ||||||||||||||||||||||||||||
Items that will be reclassified subsequently to net income | ||||||||||||||||||||||||||||
Net change in unrealized foreign currency translation gains (losses) | (3,520 | ) | (2,239 | ) | (819 | ) | (606 | ) | (1,259 | ) | 396 | 1,855 | ||||||||||||||||
Net change in unrealized gains (losses) on available-for-sale securities (debt and equity)(1) | n/a | n/a | n/a | n/a | (55 | ) | (172 | ) | (480 | ) | ||||||||||||||||||
Net change in fair value due to change in debt instruments measured at fair value through other comprehensive income(1) | (600 | ) | 293 | 105 | (252 | ) | n/a | n/a | n/a | |||||||||||||||||||
Net change in gains (losses) on derivative instruments designated as cash flow hedges | (806 | ) | (32 | ) | 708 | (361 | ) | (28 | ) | 258 | 55 | |||||||||||||||||
Other comprehensive income (loss) from investments in associates | 37 | (2 | ) | 103 | 66 | 56 | 31 | (9 | ) | |||||||||||||||||||
Items that will not be reclassified subsequently to net income | ||||||||||||||||||||||||||||
Net change in remeasurement of employee benefit plan asset and liability | 1,335 | (465 | ) | (815 | ) | 318 | 592 | (716 | ) | (1 | ) | |||||||||||||||||
Net change in fair value due to change in equity instruments designated at fair value through other comprehensive income(1) | 408 | (85 | ) | 95 | 60 | n/a | n/a | n/a | ||||||||||||||||||||
Net change in fair value due to change in own credit risk on financial liabilities designated under the fair value option(2) | (199 | ) | (298 | ) | 8 | (22 | ) | (21 | ) | (16 | ) | 15 | ||||||||||||||||
Other comprehensive income (loss) from investments in associates | 5 | (8 | ) | (10 | ) | (7 | ) | 6 | (10 | ) | 1 | |||||||||||||||||
Other comprehensive income (loss) | (3,340 | ) | (2,836 | ) | (625 | ) | (804 | ) | (709 | ) | (229 | ) | 1,436 | |||||||||||||||
Comprehensive income | $ | 6,615 | $ | 4,017 | $ | 8,173 | $ | 7,920 | $ | 7,534 | $ | 7,139 | $ | 8,649 | ||||||||||||||
Comprehensive income (loss) attributable to: | ||||||||||||||||||||||||||||
Common shareholders of the Bank | $ | 6,257 | $ | 3,914 | $ | 7,786 | $ | 7,668 | $ | 7,213 | $ | 6,772 | $ | 8,408 | ||||||||||||||
Preferred shareholders and other equity instrument holders of the Bank | 233 | 196 | 182 | 187 | 129 | 130 | 117 | |||||||||||||||||||||
Non-controlling interests in subsidiaries | 125 | (93 | ) | 205 | 65 | 192 | 237 | 124 | ||||||||||||||||||||
$ | 6,615 | $ | 4,017 | $ | 8,173 | $ | 7,920 | $ | 7,534 | $ | 7,139 | $ | 8,649 |
(1) | The amounts for the years ended October 31, 2018 to October 31, 2021 have been prepared in accordance with IFRS 9; prior period amounts have not been restated. |
(2) | In accordance with the transition requirements for the own credit risk provisions of IFRS 9, prior year comparatives have not been restated for the adoption of this standard in 2015. |
136 | 2021 Scotiabank Annual Report
Table of Contents
Management’s Discussion and Analysis | Supplementary Data
2014 | 2013 | 2012 | ||||||||||||
$ | 14,516 | $ | 13,139 | $ | 8,336 | |||||||||
771 | 1,377 | 4,803 | ||||||||||||
(56 | ) | – | – | |||||||||||
$ | 15,231 | $ | 14,516 | $ | 13,139 | |||||||||
25,315 | 21,978 | 18,421 | ||||||||||||
(247 | ) | (203 | ) | (144 | ) | |||||||||
25,068 | 21,775 | 18,277 | ||||||||||||
6,916 | 6,162 | 5,974 | ||||||||||||
(3,110 | ) | (2,858 | ) | (2,493 | ) | |||||||||
(264 | ) | – | – | |||||||||||
(1 | ) | (11 | ) | 17 | ||||||||||
$ | 28,609 | $ | 25,068 | $ | 21,775 | |||||||||
545 | (31 | ) | (497 | ) | ||||||||||
(157 | ) | (714 | ) | 32 | ||||||||||
388 | (745 | ) | (465 | ) | ||||||||||
– | – | – | ||||||||||||
561 | 1,133 | (280 | ) | |||||||||||
– | – | – | ||||||||||||
$ | 949 | $ | 388 | $ | (745 | ) | ||||||||
193 | 166 | 96 | ||||||||||||
30 | 36 | 38 | ||||||||||||
(47 | ) | (9 | ) | 32 | ||||||||||
$ | 176 | $ | 193 | $ | 166 | |||||||||
$ | 44,965 | $ | 40,165 | $ | 34,335 | |||||||||
4,084 | 4,384 | 4,384 | ||||||||||||
| 155 | 217 | 220 | |||||||||||
(155 | ) | (217 | ) | (220 | ) | |||||||||
– | – | – | ||||||||||||
(1,150 | ) | (300 | ) | – | ||||||||||
$ | 2,934 | $ | 4,084 | $ | 4,384 | |||||||||
1,155 | 1,743 | 1,500 | ||||||||||||
(17 | ) | (797 | ) | (891 | ) | |||||||||
1,138 | 946 | 609 | ||||||||||||
227 | 231 | 196 | ||||||||||||
(76 | ) | (80 | ) | (44 | ) | |||||||||
23 | 41 | 185 | ||||||||||||
$ | 1,312 | $ | 1,138 | $ | 946 | |||||||||
$ | 49,211 | $ | 45,387 | $ | 39,665 |
2014 | 2013 | 2012 | ||||||||||||
$ | 7,298 | $ | 6,610 | $ | 6,390 | |||||||||
889 | 346 | 149 | ||||||||||||
(38 | ) | 110 | 151 | |||||||||||
| n/a | n/a | n/a | |||||||||||
(6 | ) | 93 | 116 | |||||||||||
60 | 20 | 25 | ||||||||||||
(320 | ) | 563 | (747 | ) | ||||||||||
| n/a | n/a | n/a | |||||||||||
| n/a | n/a | n/a | |||||||||||
(2 | ) | – | – | |||||||||||
583 | 1,132 | (306 | ) | |||||||||||
$ | 7,881 | $ | 7,742 | $ | 6,084 | |||||||||
$ | 7,477 | $ | 7,298 | $ | 5,694 | |||||||||
155 | 217 | 220 | ||||||||||||
249 | 227 | 170 | ||||||||||||
$ | 7,881 | $ | 7,742 | $ | 6,084 |
2021 Scotiabank Annual Report | 137
Table of Contents
Management’s Discussion and Analysis
T87 Other statistics
For the year ended October 31 | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||||||||
Operating performance | ||||||||||||||||||||||||||||
Basic earnings per share ($) | 7.74 | 5.43 | 6.72 | 6.90 | 6.55 | 5.80 | 5.70 | |||||||||||||||||||||
Diluted earnings per share ($) | 7.70 | 5.30 | 6.68 | 6.82 | 6.49 | 5.77 | 5.67 | |||||||||||||||||||||
Return on equity (%)(1) | 14.7 | 10.4 | 13.1 | 14.5 | 14.6 | 13.8 | 14.6 | |||||||||||||||||||||
Productivity ratio (%)(1) | 53.2 | 53.8 | 53.9 | 52.3 | 53.9 | 55.2 | 54.2 | |||||||||||||||||||||
Return on assets (%)(1) | 0.86 | 0.59 | 0.83 | 0.92 | 0.90 | 0.81 | 0.84 | |||||||||||||||||||||
Net interest margin (%)(2) | 2.23 | 2.27 | 2.44 | 2.46 | 2.46 | 2.38 | 2.39 | |||||||||||||||||||||
Capital measures(1)(3) | ||||||||||||||||||||||||||||
Common Equity Tier 1 (CET1) capital ratio (%) | 12.3 | 11.8 | 11.1 | 11.1 | 11.5 | 11.0 | 10.3 | |||||||||||||||||||||
Tier 1 capital ratio (%) | 13.9 | 13.3 | 12.2 | 12.5 | 13.1 | 12.4 | 11.5 | |||||||||||||||||||||
Total capital ratio (%) | 15.9 | 15.5 | 14.2 | 14.3 | 14.9 | 14.6 | 13.4 | |||||||||||||||||||||
Leverage ratio (%) | 4.8 | 4.7 | 4.2 | 4.5 | 4.7 | 4.5 | 4.2 | |||||||||||||||||||||
Common share information | ||||||||||||||||||||||||||||
Closing share price ($) (TSX) | 81.14 | 55.35 | 75.54 | 70.65 | 83.28 | 72.08 | 61.49 | |||||||||||||||||||||
Number of shares outstanding (millions) | 1,215 | 1,211 | 1,216 | 1,227 | 1,199 | 1,208 | 1,203 | |||||||||||||||||||||
Dividends paid per share ($) | 3.60 | 3.60 | 3.49 | 3.28 | 3.05 | 2.88 | 2.72 | |||||||||||||||||||||
Dividend yield (%)(1)(4) | 5.2 | 5.8 | 4.9 | 4.2 | 4.0 | 4.7 | 4.4 | |||||||||||||||||||||
Price to earnings multiple (trailing 4 quarters)(1) | 10.5 | 10.2 | 11.2 | 10.2 | 12.7 | 12.4 | 10.8 | |||||||||||||||||||||
Book value per common share ($)(1) | 53.28 | 51.85 | 52.33 | 49.75 | 46.24 | 43.59 | 40.80 | |||||||||||||||||||||
Other information | ||||||||||||||||||||||||||||
Average total assets ($ millions) | 1,157,213 | 1,160,584 | 1,056,063 | 945,683 | 912,619 | 913,844 | 860,607 | |||||||||||||||||||||
Number of branches and offices | 2,518 | 2,618 | 3,109 | 3,095 | 3,003 | 3,113 | 3,177 | |||||||||||||||||||||
Number of employees | 89,488 | 91,447 | (5) | 101,380 | (5) | 97,021 | (5) | 87,761 | (5) | 88,901 | 89,214 | |||||||||||||||||
Number of automated banking machines | 8,610 | 8,791 | 9,391 | 9,029 | 8,140 | 8,144 | 8,191 |
(1) | Refer to Glossary on page 141 for the description of the measure. |
(2) | Refer to page 17 for a discussion of non-GAAP measures. |
(3) | Effective November 1, 2012, regulatory capital ratios are determined in accordance with Basel III rules. Comparative amounts for 2012 were determined in accordance with Basel II rules. |
(4) | Based on the average of the high and low common share price for the year. |
(5) | Amounts have been restated to conform with current period presentation. |
138 | 2021 Scotiabank Annual Report
Table of Contents
Management’s Discussion and Analysis | Supplementary Data
2014 | 2013 | 2012 | ||||||||||||
5.69 | 5.15 | 5.27 | ||||||||||||
5.66 | 5.11 | 5.18 | ||||||||||||
16.1 | 16.6 | 19.9 | ||||||||||||
53.4 | 54.8 | 53.1 | ||||||||||||
0.92 | 0.88 | 0.97 | ||||||||||||
2.39 | 2.31 | 2.31 | ||||||||||||
10.8 | 9.1 | n/a | ||||||||||||
12.2 | 11.1 | 13.6 | ||||||||||||
13.9 | 13.5 | 16.7 | ||||||||||||
n/a | n/a | n/a | ||||||||||||
69.02 | 63.39 | 54.25 | ||||||||||||
1,217 | 1,209 | 1,184 | ||||||||||||
2.56 | 2.39 | 2.19 | ||||||||||||
3.8 | 4.1 | 4.2 | ||||||||||||
12.1 | 12.3 | 10.3 | ||||||||||||
36.96 | 33.23 | 28.99 | ||||||||||||
795,641 | 748,901 | 659,538 | ||||||||||||
3,288 | 3,330 | 3,123 | ||||||||||||
86,932 | 86,690 | 81,497 | ||||||||||||
8,732 | 8,471 | 7,341 |
2021 Scotiabank Annual Report | 139