Table of Contents
Consolidated Financial Statements |
Table of Contents
2022 Scotiabank Annual Report
|
137
Consolidated Financial Statements
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL INFORMATION
The management of The Bank of Nova Scotia (the Bank) is responsible for the integrity and fair presentation of the financial information contained in this Annual Report. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. The consolidated financial statements also comply with the accounting requirements of the Bank Act.
The consolidated financial statements, where necessary, include amounts which are based on the best estimates and judgment of management. Financial information presented elsewhere in this Annual Report is consistent with that shown in the consolidated financial statements.
Management has always recognized the importance of the Bank maintaining and reinforcing the highest possible standards of conduct in all of its actions, including the preparation and dissemination of statements fairly presenting the financial condition of the Bank. In this regard, management has developed and maintains a system of accounting and reporting which provides for the necessary internal controls to ensure that transactions are properly authorized and recorded, assets are safeguarded against unauthorized use or disposition, and liabilities are recognized. The system is augmented by written policies and procedures, the careful selection and training of qualified staff, the establishment of organizational structures providing an appropriate and well-defined division of responsibilities, and the communication of policies and guidelines of Scotiabank’s Code of Conduct throughout the Bank.
Management, under the supervision of and the participation of the President and Chief Executive Officer and the Group Head and Chief Financial Officer, have a process in place to evaluate disclosure controls and procedures and internal control over financial reporting in line with Canadian and U.S. securities regulations.
The system of internal controls is further supported by a professional staff of internal auditors who conduct periodic audits of all aspects of the Bank’s operations. As well, the Bank’s Chief Auditor has full and free access to, and meets periodically with the Audit and Conduct Review Committee of the Board of Directors. In addition, the Bank’s compliance function maintains policies, procedures and programs directed at ensuring compliance with regulatory requirements, including conflict of interest rules.
The Office of the Superintendent of Financial Institutions Canada, which is mandated to protect the rights and interests of the depositors and creditors of the Bank, examines and enquires into the business and affairs of the Bank, as deemed necessary, to determine whether the provisions of the Bank Act are being complied with, and that the Bank is in a sound financial condition.
The Audit and Conduct Review Committee, composed entirely of outside directors, reviews the consolidated financial statements with both management and the independent auditors before such statements are approved by the Board of Directors and submitted to the shareholders of the Bank.
The Audit and Conduct Review Committee reviews and reports its findings to the Board of Directors on all related party transactions that may have a material impact on the Bank.
KPMG LLP, the independent auditors appointed by the shareholders of the Bank, have audited the consolidated financial position of the Bank as at October 31, 2022 and October 31, 2021 and its consolidated financial performance and its consolidated cash flows for each of the years in the
two-year
period ended October 31, 2022 prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board in accordance with Canadian Generally Accepted Auditing Standards and the standards of the Public Company Accounting Oversight Board (United States) and the effectiveness of internal control over financial reporting and have expressed their opinions upon completion of such audits in the reports to the shareholders. The Shareholders’ Auditors have full and free access to, and meet periodically with, the Audit and Conduct Review Committee to discuss their audits, including any findings as to the integrity of the Bank’s accounting, financial reporting and related matters.Brian J. Porter
President and Chief Executive Officer
Raj Viswanathan
Group Head and Chief Financial Officer
Toronto, Canada
November 29, 2022
138
|
2022 Scotiabank Annual Report
(This page intentionally left blank)
2022 Scotiabank Annual Report
|
139
(This page intentionally left blank)
140
|
2022 Scotiabank Annual Report
(This page intentionally left blank)
2022 Scotiabank Annual Report
|
141
Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of The Bank of Nova Scotia
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial position of The Bank of Nova Scotia (the Bank) as of October 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for the years then ended, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Bank as of October 31, 2022 and 2021, and its financial performance and its cash flows for each of the years then ended, in conformity with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Bank’s internal control over financial reporting as of October 31, 2022, based on criteria established in issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated November 29, 2022 expressed an unqualified opinion on the effectiveness of the Bank’s internal control over financial reporting.
Internal Control – Integrated Framework (2013)
Basis for Opinion
These consolidated financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Bank in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the Audit and Conduct Review Committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
(i) Assessment of Allowance for Credit Losses on Financial Assets (ACL)
Refer to Notes 3 and 13 to the consolidated financial statements.
The Bank’s ACL was $5,348 million as at October 31, 2022. The Bank applies a three-stage approach to measure the ACL, using an expected credit loss (ECL) approach as required under IFRS 9 Financial Instruments. The Bank’s ACL calculations are outputs of complex models. The ACL calculation reflects a probability-weighted outcome that considers multiple scenarios based on the Bank’s view of forecasts of future events and economic conditions. The probability of default (PD), loss given default (LGD) and exposure at default (EAD) inputs used to estimate ACL are modeled based on macroeconomic variables that are most closely related with credit losses in the relevant portfolio. The Bank assesses when there has been a significant increase in credit risk subsequent to origination or where the financial asset is in default. If there has been a significant increase in credit risk or the financial asset is in default, lifetime ACL is recorded; otherwise, ACL equal to 12 month expected credit losses is recorded. The estimation of ECL for each stage and the assessment of significant increases in credit risk consider information about past events and current conditions as well as forecasts of future events and economic conditions. The estimation and application of forward-looking information requires significant judgment. Qualitative adjustments or overlays may also be recorded as temporary adjustments using expert credit judgment where the inputs, assumptions and/or models do not capture all relevant risk factors.
We identified the assessment of the ACL as a critical audit matter. Significant auditor judgment was required because there was a high degree of measurement uncertainty due to the significant judgments inherent in the Bank’s methodology such as judgments about forward-looking information. These judgments impact certain inputs, assumptions, qualitative adjustments or overlays, and the determination of when there has been a significant increase in credit risk. The assessment of the ACL also required significant auditor attention and complex auditor judgment to apply and evaluate the results of audit procedures. Further, specialized skills and knowledge, including experience in the industry, were required to apply audit procedures and evaluate the results of those procedures.
The following are the primary procedures we performed to address this critical audit matter. With the involvement of our credit risk and economics professionals with specialized skills, industry knowledge and relevant experience, we evaluated the design and tested the operating effectiveness of certain internal controls related to the Bank’s ACL process. This included internal controls related to: (1) initial and periodic validation and performance monitoring of models used to derive key modeled inputs into the ACL calculation being PD, LGD and EAD; (2) benchmarking of certain macroeconomic variables, model validation associated with the derivation of the remaining variables and the alternative scenarios and review of probability weights used in the ACL models; (3) the methodology to determine whether there has been a significant increase in credit risk; and (4) the methodology and assumptions used in the determination of qualitative adjustments or overlays. Additionally, for
non-retail
loans, we tested certain internal controls related to loan reviews over the determination of loan risk grades. We involved credit risk and economics professionals with specialized skills, industry knowledge and relevant experience who assisted in: (1) evaluating the methodology and models used to derive key modeled inputs into the ACL calculation being PD, LGD and EAD and the determination of whether there has been a significant increase in credit risk; (2) assessing the appropriateness of certain underlying macroeconomic variables against external economic data, evaluating the model used to derive other macroeconomic variables and evaluating the assumptions associated with the alternative economic scenarios and the related probabilities; and (3) assessing the qualitative adjustments or overlays by applying our knowledge of the industry and credit judgment142
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
to evaluate the appropriateness of the Bank’s underlying methodology and assumptions. Additionally, for a selection of
non-retail
loans, we evaluated the Bank’s assigned credit risk ratings to loans against the Bank’s borrower risk rating scale.(ii) Assessment of the Measurement of Fair Value of Certain Financial Instruments
Refer to Notes 3 and 7 to the consolidated financial statements.
The Bank measures $255,794 million of financial assets and $128,785 million of financial liabilities as at October 31, 2022 at fair value on a recurring basis. Where financial instruments trade in inactive markets or when using internal models where observable parameters do not exist, significant management judgment is required for valuation methodologies and model inputs. The valuation techniques used in determining the fair value of financial instruments include internal models and net asset valuations. The significant unobservable inputs used in the Bank’s valuation techniques include General Partner valuations per financial statements (NAVs), interest rate volatility, equity volatility and correlation.
We identified the assessment of the measurement of fair value for certain financial instruments as a critical audit matter. Significant auditor judgment was required because there was a high degree of measurement uncertainty due to significant judgments inherent in the Bank’s valuation methodologies and significant unobservable inputs used to develop the fair value of certain financial assets and financial liabilities. The assessment of the fair value also required significant auditor attention and complex auditor judgment to apply and evaluate the results of audit procedures. Further, specialized skills and knowledge, including experience in the industry, were required to apply audit procedures and evaluate the results of those procedures.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Bank’s processes to determine the fair value of certain financial instruments with the involvement of valuation and information technology professionals with specialized skills, industry knowledge and relevant experience. This included internal controls related to: (1) model validation at inception and periodically; (2) review of NAVs; (3) independent price verification, including assessment of rate sources; and (4) segregation of duties and access controls. With the involvement of valuation professionals with specialized skills, industry knowledge and relevant experience, we tested the fair value of a selection of certain financial instruments. Depending on the nature of the financial instruments, we did this by comparing the NAV to external information or by developing an independent estimate of fair value and comparing it to the fair value determined by the Bank.
(iii) Assessment of Uncertain Tax Provisions
Refer to Notes 3 and 27 to the consolidated financial statements.
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.
We identified the assessment of uncertain tax provisions as a critical audit matter. Significant auditor judgment was required because there was a high degree of measurement uncertainty due to the significant judgments inherent in the Bank’s interpretation of tax law and its best estimate of the ultimate resolution of tax positions. This required significant auditor attention and complex auditor judgment to evaluate the results of audit procedures. Further, specialized skills, industry knowledge, and relevant experience were required to apply audit procedures and evaluate the results of those audit procedures.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Bank’s income tax uncertainties process with the involvement of taxation professionals with specialized skills, industry knowledge and relevant experience. This included internal controls related to the (1) identification of tax uncertainties, including the interpretation of tax law and (2) determination of the best estimate of the provision required to settle these tax uncertainties. We involved tax professionals with specialized skills and knowledge, who assisted in (1) evaluating the Bank’s interpretations of tax laws by developing an independent assessment based on our understanding and interpretation of tax laws and considering its impact on the measurement, if applicable, of the uncertain tax provisions; (2) reading and evaluating advice obtained by the Bank from external specialists, and considering its impact on the measurement, if applicable, of the uncertain tax provisions; and (3) inspecting correspondence and settlement documents with applicable taxation authorities, including assessment of the impact of statutes of limitations.
Chartered Professional Accountants, Licensed Public Accountants
We have served as the Bank’s auditor since 2006 and as joint auditor for 14 years prior to that.
Toronto, Canada
November 29, 2022
2022 Scotiabank Annual Report
|
143
Consolidated Financial Statements
Consolidated Statement of Financial Position | ||||||||||||
As at October 31 ($ millions) | Note | 2022 | 2021 | |||||||||
Assets | ||||||||||||
Cash and deposits with financial institutions | 6 | $ | 65,895 | $ | 86,323 | |||||||
Precious metals | 543 | 755 | ||||||||||
Trading assets | ||||||||||||
Securities | 8 | (a) | 103,547 | 137,148 | ||||||||
Loans | 8 | (b) | 7,811 | 8,113 | ||||||||
Other | 1,796 | 1,051 | ||||||||||
113,154 | 146,312 | |||||||||||
Securities purchased under resale agreements and securities borrowed | 175,313 | 127,739 | ||||||||||
Derivative financial instruments | 10 | 55,699 | 42,302 | |||||||||
Investment securities | 12 | 110,008 | 75,199 | |||||||||
Loans | ||||||||||||
Residential mortgages | 13 | 349,279 | 319,678 | |||||||||
Personal loans | 13 | 99,431 | 91,540 | |||||||||
Credit cards | 13 | 14,518 | 12,450 | |||||||||
Business and government | 13 | 287,107 | 218,944 | |||||||||
750,335 | 642,612 | |||||||||||
Allowance for credit losses | 13 | (e) | 5,348 | 5,626 | ||||||||
744,987 | 636,986 | |||||||||||
Other | ||||||||||||
Customers’ liability under acceptances, net of allowance | 19,494 | 20,404 | ||||||||||
Property and equipment | 16 | 5,700 | 5,621 | |||||||||
Investments in associates | 17 | 2,633 | 2,604 | |||||||||
Goodwill and other intangible assets | 18 | 16,833 | 16,604 | |||||||||
Deferred tax assets | 27 | (c) | 1,903 | 2,051 | ||||||||
Other assets | 19 | 37,256 | 21,944 | |||||||||
83,819 | 69,228 | |||||||||||
$ | 1,349,418 | $ | 1,184,844 | |||||||||
Liabilities | ||||||||||||
Deposits | ||||||||||||
Personal | 20 | $ | 265,892 | $ | 243,551 | |||||||
Business and government | 20 | 597,617 | 511,348 | |||||||||
Financial institutions | 20 | 52,672 | 42,360 | |||||||||
916,181 | 797,259 | |||||||||||
Financial instruments designated at fair value through profit or loss | 9 | 22,421 | 22,493 | |||||||||
Other | ||||||||||||
Acceptances | 19,525 | 20,441 | ||||||||||
Obligations related to securities sold short | 40,449 | 40,954 | ||||||||||
Derivative financial instruments | 10 | 65,900 | 42,203 | |||||||||
Obligations related to securities sold under repurchase agreements and securities lent | 139,025 | 123,469 | ||||||||||
Subordinated debentures | 21 | 8,469 | 6,334 | |||||||||
Other liabilities | 22 | 62,699 | 58,799 | |||||||||
336,067 | 292,200 | |||||||||||
1,274,669 | 1,111,952 | |||||||||||
Equity | ||||||||||||
Common equity | ||||||||||||
Common shares | 24 | (a) | 18,707 | 18,507 | ||||||||
Retained earnings | 53,761 | 51,354 | ||||||||||
Accumulated other comprehensive income (loss) | (7,166 | ) | (5,333 | ) | ||||||||
Other reserves | (152 | ) | 222 | |||||||||
Total common equity | 65,150 | 64,750 | ||||||||||
Preferred shares and other equity instruments | 24 | (b) | 8,075 | 6,052 | ||||||||
Total equity attributable to equity holders of the Bank | 73,225 | 70,802 | ||||||||||
Non-controlling interests in subsidiaries | 31 | (b) | 1,524 | 2,090 | ||||||||
74,749 | 72,892 | |||||||||||
$ | 1,349,418 | $ | 1,184,844 |
Aaron W. Regent | Brian J. Porter | |||
Chairman of the Board | President and Chief Executive Officer |
The accompanying notes are an integral part of these consolidated financial statements.
144
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
Consolidated Statement of Income
For the year ended October 31 ($ millions) | Note | 2022 | 2021 | |||||||||
Revenue | ||||||||||||
Interest income (1) | 32 | |||||||||||
Loans | $ | 29,390 | $ | 23,159 | ||||||||
Securities | 2,877 | 1,467 | ||||||||||
Securities purchased under resale agreements and securities borrowed | 459 | 178 | ||||||||||
Deposits with financial institutions | 832 | 182 | ||||||||||
33,558 | 24,986 | |||||||||||
Interest expense | 32 | |||||||||||
Deposits | 12,794 | 6,465 | ||||||||||
Subordinated debentures | 270 | 180 | ||||||||||
Other | 2,379 | 1,380 | ||||||||||
15,443 | 8,025 | |||||||||||
Net interest income | 18,115 | 16,961 | ||||||||||
Non-interest income | ||||||||||||
Card revenues | 779 | 749 | ||||||||||
Banking services fees | 1,770 | 1,598 | ||||||||||
Credit fees | 1,647 | 1,485 | ||||||||||
Mutual funds | 2,269 | 2,394 | ||||||||||
Brokerage fees | 1,125 | 1,039 | ||||||||||
Investment management and trust | 999 | 994 | ||||||||||
Underwriting and advisory fees | 543 | 724 | ||||||||||
Non-trading foreign exchange fees | 878 | 787 | ||||||||||
Trading revenues | 1,791 | 2,033 | ||||||||||
Net gain on sale of investment securities | 12 | (e) | 74 | 419 | ||||||||
Net income from investments in associated corporations | 17 | 268 | 339 | |||||||||
Insurance underwriting income, net of claims | 433 | 398 | ||||||||||
Other fees and commissions | 650 | 677 | ||||||||||
Other | 75 | 655 | ||||||||||
13,301 | 14,291 | |||||||||||
Total revenue | 31,416 | 31,252 | ||||||||||
Provision for credit losses | 13 | (e) | 1,382 | 1,808 | ||||||||
30,034 | 29,444 | |||||||||||
Non-interest expenses | ||||||||||||
Salaries and employee benefits | 8,836 | 8,541 | ||||||||||
Premises and technology | 2,424 | 2,351 | ||||||||||
Depreciation and amortization | 1,531 | 1,511 | ||||||||||
Communications | 361 | 369 | ||||||||||
Advertising and business development | 480 | 404 | ||||||||||
Professional | 826 | 789 | ||||||||||
Business and capital taxes | 541 | 511 | ||||||||||
Other | 2,103 | 2,142 | ||||||||||
17,102 | 16,618 | |||||||||||
Income before taxes | 12,932 | 12,826 | ||||||||||
Income tax expense | 27 | 2,758 | 2,871 | |||||||||
Net income | $ | 10,174 | $ | 9,955 | ||||||||
Net income attributable to non-controlling interests in subsidiaries | 31 | (b) | 258 | 331 | ||||||||
Net income attributable to equity holders of the Bank | $ | 9,916 | $ | 9,624 | ||||||||
Preferred shareholders and other equity instrument holders | 260 | 233 | ||||||||||
Common shareholders | $ | 9,656 | $ | 9,391 | ||||||||
Earnings per common share (in dollars) | ||||||||||||
Basic | 33 | $ | 8.05 | $ | 7.74 | |||||||
Diluted | 33 | 8.02 | 7.70 | |||||||||
Dividends paid per common share (in dollars) | 24 | (a) | 4.06 | 3.60 |
(1) | Includes interest income on financial assets measured at amortized cost and FVOCI, calculated using the effective interest method, of $32,573 for the year ended October 31, 2022 (October 31, 2021 – $24,547 ) . |
The accompanying notes are an integral part of these consolidated financial statements.
2022 Scotiabank Annual Report
|
145
Consolidated Financial Statements
Consolidated Statement of Comprehensive Income
For the year ended October 31 ($ millions) | 2022 | 2021 | ||||||
Net income | $ | 10,174 | $ | 9,955 | ||||
Other comprehensive income (loss) | ||||||||
Items that will be reclassified subsequently to net income | ||||||||
Net change in unrealized foreign currency translation gains (losses): | ||||||||
Net unrealized foreign currency translation gains (losses) | 3,703 | (4,515 | ) | |||||
Net gains (losses) on hedges of net investments in foreign operations | (1,655 | ) | 1,307 | |||||
Income tax expense (benefit): | ||||||||
Net unrealized foreign currency translation gains (losses) | 28 | (31 | ) | |||||
Net gains (losses) on hedges of net investments in foreign operations | (434 | ) | 343 | |||||
2,454 | (3,520 | ) | ||||||
Net change in fair value due to change in debt instruments measured at fair value through other comprehensive income: | ||||||||
Net gains (losses) in fair value | (4,333 | ) | (1,341 | ) | ||||
Reclassification of net (gains) losses to net income | 2,717 | 522 | ||||||
Income tax expense (benefit): | ||||||||
Net gains (losses) in fair value | (1,108 | ) | (346 | ) | ||||
Reclassification of net (gains) losses to net income | 704 | 127 | ||||||
(1,212 | ) | (600 | ) | |||||
Net change in gains (losses) on derivative instruments designated as cash flow hedges: | ||||||||
Net gains (losses) on derivative instruments designated as cash flow hedges | (10,037 | ) | (1,267 | ) | ||||
Reclassification of net (gains) losses to net income | 3,880 | 176 | ||||||
Income tax expense (benefit): | ||||||||
Net gains (losses) on derivative instruments designated as cash flow hedges | (2,709 | ) | (471 | ) | ||||
Reclassification of net (gains) losses to net income | 1,089 | 186 | ||||||
(4,537 | ) | (806 | ) | |||||
Other comprehensive income (loss) from investments in associates | (344 | ) | 37 | |||||
Items that will not be reclassified subsequently to net income | ||||||||
Net change in remeasurement of employee benefit plan asset and liability: | ||||||||
Actuarial gains (losses) on employee benefit plans | 955 | 1,815 | ||||||
Income tax expense (benefit) | 277 | 480 | ||||||
678 | 1,335 | |||||||
Net change in fair value due to change in equity instruments designated at fair value through other comprehensive income: | ||||||||
Net gains (losses) in fair value | (106 | ) | 532 | |||||
Income tax expense (benefit) | (32 | ) | 124 | |||||
(74 | ) | 408 | ||||||
Net change in fair value due to change in own credit risk on financial liabilities designated under the fair value option: | ||||||||
Change in fair value due to change in own credit risk on financial liabilities designated under the fair value option | 1,958 | (270 | ) | |||||
Income tax expense (benefit) | 514 | (71 | ) | |||||
1,444 | (199 | ) | ||||||
Other comprehensive income (loss) from investments in associates | 2 | 5 | ||||||
Other comprehensive income (loss) | (1,589 | ) | (3,340 | ) | ||||
Comprehensive income | $ | 8,585 | $ | 6,615 | ||||
Comprehensive income (loss) attributable to non-controlling interests | 233 | 125 | ||||||
Comprehensive income attributable to equity holders of the Bank | $ | 8,352 | $ | 6,490 | ||||
Preferred shareholders and other equity instrument holders | 260 | 233 | ||||||
Common shareholders | $ | 8,092 | $ | 6,257 |
The accompanying notes are an integral part of these consolidated financial statements.
146
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
Consolidated Statement of Changes in Equity
Accumulated other comprehensive income (loss) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
($ millions) | Common shares (Note 24) | Retained earnings (1) | Foreign currency translation | Debt instruments FVOCI | Equity instruments FVOCI | Cash flow hedges | Other (2) | Other reserves | Total common equity | Preferred shares and other equity instruments (Note 24) | Total attributable to equity holders | Non- controlling interests in subsidiaries (Note 31(b)) | Total | |||||||||||||||||||||||||||||||||||||||
Balance as at October 31, 2021 | $ | 18,507 | $ | 51,354 | $ | (4,709 | ) | $ | (270 | ) | $ | 291 | $ | (214 | ) | $ | (431 | ) | $ | 222 | $ | 64,750 | $ | 6,052 | $ | 70,802 | $ | 2,090 | $ | 72,892 | ||||||||||||||||||||||
Net income | – | 9,656 | – | – | – | – | – | – | 9,656 | 260 | 9,916 | 258 | 10,174 | |||||||||||||||||||||||||||||||||||||||
Othe r comprehensive income (loss) | – | – | 2,411 | (1,212 | ) | (35 | ) | (4,523 | ) | 1,795 | – | (1,564 | ) | – | (1,564 | ) | (25 | ) | (1,589 | ) | ||||||||||||||||||||||||||||||||
Total comprehensive income | $ | – | $ | 9,656 | $ | 2,411 | $ | (1,212 | ) | $ | (35 | ) | $ | (4,523 | ) | $ | 1,795 | $ | – | $ | 8,092 | $ | 260 | $ | 8,352 | $ | 233 | $ | 8,585 | |||||||||||||||||||||||
Shares/instruments issued | 706 | – | – | – | – | – | – | (18 | ) | 688 | 2,523 | 3,211 | – | 3,211 | ||||||||||||||||||||||||||||||||||||||
Shares repurchased/redeemed | (506 | ) | (2,367 | ) | – | – | – | – | – | – | (2,873 | ) | (500 | ) | (3,373 | ) | – | (3,373 | ) | |||||||||||||||||||||||||||||||||
Dividends and distributions paid to equity holders | – | (4,858 | ) | – | – | – | – | – | – | (4,858 | ) | (260 | ) | (5,118 | ) | (115 | ) | (5,233 | ) | |||||||||||||||||||||||||||||||||
Share-based payments (3) | – | – | – | – | – | – | – | 10 | 10 | – | 10 | – | 10 | |||||||||||||||||||||||||||||||||||||||
Other | – | (24 | ) | (180 | ) | – | (40 | ) | (49 | ) | – | (366 | ) (4) | (659 | ) | – | (659 | ) | (684 | ) (4) | (1,343 | ) | ||||||||||||||||||||||||||||||
Balance as at October 31, 2022 | $ | 18,707 | $ | 53,761 | $ | (2,478 | ) | $ | (1,482 | ) | $ | 216 | $ | (4,786 | ) | $ | 1,364 | $ | (152 | ) | $ | 65,150 | $ | 8,075 | $ | 73,225 | $ | 1,524 | $ | 74,749 | ||||||||||||||||||||||
Balance as at October 31, 2020 | $ | 18,239 | $ | 46,345 | $ | (1,328 | ) | $ | 330 | $ | (163 | ) | $ | 639 | $ | (1,603 | ) | $ | 360 | $ | 62,819 | $ | 5,308 | $ | 68,127 | $ | 2,376 | $ | 70,503 | |||||||||||||||||||||||
Net income | – | 9,391 | – | – | – | – | – | – | 9,391 | 233 | 9,624 | 331 | 9,955 | |||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | – | – | (3,322 | ) | (600 | ) | 460 | (844 | ) | 1,172 | – | (3,134 | ) | – | (3,134 | ) | (206 | ) | (3,340 | ) | ||||||||||||||||||||||||||||||||
Total comprehensive income | $ | – | $ | 9,391 | $ | (3,322 | ) | $ | (600 | ) | $ | 460 | $ | (844 | ) | $ | 1,172 | $ | – | $ | 6,257 | $ | 233 | $ | 6,490 | $ | 125 | $ | 6,615 | |||||||||||||||||||||||
Shares/instruments issued | 268 | – | – | – | – | – | – | (25 | ) | 243 | 2,003 | 2,246 | – | 2,246 | ||||||||||||||||||||||||||||||||||||||
Shares repurchased/redeemed | – | – | – | – | – | – | – | – | – | (1,259 | ) | (1,259 | ) | – | (1,259 | ) | ||||||||||||||||||||||||||||||||||||
Dividends and distributions paid to equity holders | – | (4,371 | ) | – | – | – | – | – | – | (4,371 | ) | (233 | ) | (4,604 | ) | (123 | ) | (4,727 | ) | |||||||||||||||||||||||||||||||||
Share-based payments (3) | – | – | – | – | – | – | – | 7 | 7 | – | 7 | – | 7 | |||||||||||||||||||||||||||||||||||||||
Other | – | (11 | ) | (59 | ) | – | (6 | ) | (9 | ) | – | (120 | ) (4) | (205 | ) | – | (205 | ) | (288 | ) (4) | (493 | ) | ||||||||||||||||||||||||||||||
Balance as at October 31, 2021 | $ | 18,507 | $ | 51,354 | $ | (4,709 | ) | $ | (270 | ) | $ | 291 | $ | (214 | ) | $ | (431 | ) | $ | 222 | $ | 64,750 | $ | 6,052 | $ | 70,802 | $ | 2,090 | $ | 72,892 |
(1) | Includes undistributed retained earnings of $67 (2021 – $60) related to a foreign associated corporation, which is subject to local regulatory restriction. |
(2) | Includes Share from associates, Employee benefits and Own credit risk. |
(3) | Represents amounts on account of share-based payments (refer to Note 26). |
(4) | Includes changes to non-controlling interests arising from business combinations and related transactions (refer to Note 36). |
The accompanying notes are an integral part of these consolidated financial statements.
2022 Scotiabank Annual Report
|
147
Consolidated Financial Statements
Consolidated Statement of Cash Flows
Sources (uses) of cash flows for the year ended October 31 ($ millions) | 2022 | 2021 | ||||||
Cash flows from operating activities | ||||||||
Net income | $ | 10,174 | $ | 9,955 | ||||
Adjustment for: | ||||||||
Net interest income | (18,115 | ) | (16,961 | ) | ||||
Depreciation and amortization | 1,531 | 1,511 | ||||||
Provision for credit losses | 1,382 | 1,808 | ||||||
Equity-settled share-based payment expense | 10 | 7 | ||||||
Net gain on sale of investment securities | (74 | ) | (419 | ) | ||||
Net (gain)/loss on divestitures | 233 | 9 | ||||||
Net income from investments in associated corporations | (268 | ) | (339 | ) | ||||
Income tax expense | 2,758 | 2,871 | ||||||
Changes in operating assets and liabilities: | ||||||||
Trading assets | 37,501 | (33,995 | ) | |||||
Securities purchased under resale agreements and securities borrowed | (41,438 | ) | (14,202 | ) | ||||
Loans | (97,161 | ) | (55,748 | ) | ||||
Deposits | 95,905 | 78,569 | ||||||
Obligations related to securities sold short | (1,292 | ) | 10,078 | |||||
Obligations related to securities sold under repurchase agreements and securities lent | 10,838 | (7,709 | ) | |||||
Net derivative financial instruments | 115 | 2,123 | ||||||
Other, net | (1,404 | ) | (5,300 | ) | ||||
Dividends received | 1,156 | 969 | ||||||
Interest received | 31,931 | 25,425 | ||||||
Interest paid | (13,336 | ) | (8,766 | ) | ||||
Income tax paid | (3,503 | ) | (2,693 | ) | ||||
Net cash from/(used in) operating activities | 16,943 | (12,807 | ) | |||||
Cash flows from investing activities | ||||||||
Interest-bearing deposits with financial institutions | 25,783 | (15,006 | ) | |||||
Purchase of investment securities | (97,736 | ) | (72,259 | ) | ||||
Proceeds from sale and maturity of investment securities | 63,130 | 103,765 | ||||||
Acquisition/divestiture of subsidiaries, associated corporations or business units, net of cash | (549 | ) | (717 | ) | ||||
Property and equipment, net of disposals | (571 | ) | (462 | ) | ||||
Other, net | (1,350 | ) | (624 | ) | ||||
Net cash from/(used in) investing activities | (11,293 | ) | 14,697 | |||||
Cash flows from financing activities | ||||||||
Proceeds from issue of subordinated debentures | 3,356 | – | ||||||
Redemption/repurchase of subordinated debentures | (1,276 | ) | (750 | ) | ||||
Proceeds from preferred shares and other equity instruments issued | 2,523 | 2,003 | ||||||
Redemption of preferred shares | (500 | ) | (1,259 | ) | ||||
Proceeds from common shares issued | 137 | 268 | ||||||
Common shares purchased for cancellation | (2,873 | ) | – | |||||
Cash dividends and distributions paid | (5,118 | ) | (4,604 | ) | ||||
Distributions to non-controlling interests | (115 | ) | (123 | ) | ||||
Payment of lease liabilities | (322 | ) | (344 | ) | ||||
Other, net | (391 | ) | 2,032 | |||||
Net cash from/(used in) financing activities | (4,579 | ) | (2,777 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | 301 | (543 | ) | |||||
Net change in cash and cash equivalents | 1,372 | (1,430 | ) | |||||
Cash and cash equivalents at beginning of year (1) | 9,693 | 11,123 | ||||||
Cash and cash equivalents at end of year (1) | $ | 11,065 | $ | 9,693 |
(1) | Represents cash and non-interest bearing deposits with financial institutions (refer to Note 6). |
The accompanying notes are an integral part of these consolidated financial statements.
148
|
2022 Scotiabank Annual Report
Notes to the 2022 Consolidated Financial Statements |
Table of Contents
Page | Note | |||
150 | 1 | |||
150 | 2 | |||
151 | 3 | |||
164 | 4 | |||
166 | 5 | |||
166 | 6 | |||
166 | 7 | |||
172 | 8 | |||
173 | 9 | |||
174 | 10 | |||
182 | 11 | |||
183 | 12 | |||
186 | 13 | |||
195 | 14 | |||
196 | 15 | |||
198 | 16 | |||
199 | 17 | |||
199 | 18 |
Page | Note | |||
200 | 19 | |||
201 | 20 | |||
201 | 21 | |||
202 | 22 | |||
202 | 23 | |||
203 | 24 | |||
206 | 25 | |||
206 | 26 | |||
209 | 27 | |||
211 | 28 | |||
217 | 29 | |||
219 | 30 | |||
220 | 31 | |||
221 | 32 | |||
221 | 33 | |||
222 | 34 | |||
223 | 35 | |||
230 | 36 |
2022 Scotiabank Annual Report
|
149
Consolidated Financial Statements
1 | Reporting Entity |
The Bank of Nova Scotia (the Bank) is a chartered Schedule I bank under the Bank Act (Canada) (the Bank Act) and is regulated by the Office of the Superintendent of Financial Institutions (OSFI). The Bank is a global financial services provider offering a diverse range of products and services, including personal, commercial, corporate and investment banking. The head office of the Bank is located at 1709 Hollis Street, Halifax, Nova Scotia, Canada and its executive offices are at Scotia Plaza, 44 King Street West, Toronto, Ontario, Canada. The common shares of the Bank are listed on the Toronto Stock Exchange (TSX) and the New York Stock Exchange.
2 | Basis of Preparation |
Statement of compliance
These consolidated financial statements were prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and accounting requirements of OSFI in accordance with Section 308 of the Bank Act. Section 308 states that, except as otherwise specified by OSFI, the financial statements are to be prepared in accordance with IFRS.
The consolidated financial statements for the year ended October 31, 2022 have been approved by the Board of Directors for issue on November 29, 2022.
Certain comparative amounts have been restated to conform with the basis of presentation in the current year.
Basis of measurement
The consolidated financial statements have been prepared on the historical cost basis except for the following material items that are measured at fair value in the Consolidated Statement of Financial Position:
• | Financial assets and liabilities measured at fair value through profit or loss |
• | Financial assets and liabilities designated at fair value through profit or loss |
• | Derivative financial instruments |
• | Equity instruments designated at fair value through other comprehensive income |
• | Debt instruments measured at fair value through other comprehensive income |
Functional and presentation currency
These consolidated financial statements are presented in Canadian dollars, which is the Bank’s functional currency. All financial information presented in Canadian dollars has been rounded to the nearest million unless otherwise stated.
Management’s use of estimates, assumptions and judgments
The Bank’s accounting policies require estimates, assumptions and judgments that relate to matters that are inherently uncertain. The Bank has established procedures to ensure that accounting policies are applied consistently. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimates are revised.
Use of estimates and assumptions
The preparation of these consolidated financial statements, in conformity with IFRS, requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the consolidated financial statements, and other comprehensive income and income and expenses during the reporting period. Estimates made by management are based on historical experience and other factors and assumptions that are believed to be reasonable. Key areas of estimation uncertainty include those relating to the allowance for credit losses, the fair value of financial instruments (including derivatives), corporate income taxes, employee benefits, goodwill and intangible assets, the fair value of all identifiable assets and liabilities as a result of business combinations, impairment of
non-financial
assets and provisions. The Bank has utilized estimates, assumptions and judgments that reflect this uncertainty. While management makes its best estimates and assumptions, actual results could differ from these and other estimates.Significant judgments
In the preparation of these consolidated financial statements, management is required to make significant judgments in the classification and presentation of transactions and instruments and accounting for the Bank’s involvement with other entities.
15
0
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
Significant estimates, assumptions and judgments have been made in the following areas and are discussed as noted in the consolidated financial statements:
Allowance for credit losses | Note 3 Note 13(d) | |
Fair value of financial instruments | Note 3 Note 7 | |
Corporate income taxes | Note 3 Note 27 | |
Employee benefits | Note 3 Note 28 | |
Goodwill and intangible assets | Note 3 Note 18 | |
Fair value of all identifiable assets and liabilities as a result of business combinations | Note 3 Note 36 | |
Impairment of investment securities | Note 3 Note 12 | |
Impairment of non-financial assets | Note 3 Note 16 | |
Structured entities | Note 3 Note 15 | |
De facto control of other entities | Note 3 Note 31 | |
Derecognition of financial assets and liabilities | Note 3 Note 14 | |
Provisions | Note 3 Note 23 |
3 | Significant Accounting Policies |
The significant accounting policies used in the preparation of these consolidated financial statements, including any additional accounting requirements of OSFI, as set out below, have been applied consistently to all periods presented in these consolidated financial statements.
Basis of consolidation
The consolidated financial statements include the assets, liabilities, financial performance and cash flows of the Bank and all of its subsidiaries, after elimination of intercompany transactions and balances. Subsidiaries are defined as entities controlled by the Bank. The Bank’s subsidiaries can be classified as entities controlled through voting interests or structured entities. The Bank consolidates a subsidiary from the date it obtains control. For the Bank to control an entity, all three elements of control should be in existence:
• | 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. |
The Bank does not control an investee when it is acting as an agent. The Bank assesses whether it is an agent by determining whether it is primarily engaged to act on behalf of and for the benefit of another party or parties. The Bank reassesses whether it controls an investee if facts and circumstances indicate that one or more of the elements of control has changed.
Voting-interest subsidiaries
Control is presumed with an ownership interest of more than 50% of the voting rights in an entity unless there are other factors that indicate that the Bank does not control the entity despite having more than 50% of voting rights.
The Bank may consolidate an entity when it owns less than 50% of the voting rights when it has one or more other attributes of power:
• | by virtue of an agreement, over more than half of the voting rights; |
• | to govern the financial and operating policies of the entity under a statute or an agreement; |
• | to appoint or remove the majority of the members of the board of directors or equivalent governing body and control of the entity is by that board or body; or |
• | to govern the financial and operating policies of the entity through the size of its holding of voting rights relative to the size and dispersion of holding of the other vote holders and voting patterns at shareholder meetings (i.e., de facto control). |
Non-controlling
interests are presented within equity in the Consolidated Statement of Financial Position separate from equity attributable to equity holders of the Bank. The net income attributable tonon-controlling
interests is presented separately in the Consolidated Statement of Income. Partial sales and incremental purchases of interests in subsidiaries that do not result in a change of control are accounted for as equity transactions withnon-controlling
interest holders. Any difference between the carrying amount of the interest and the transaction amount is recorded as an adjustment to retained earnings.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 controls an entity 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 consolidates all structured entities that it controls.
2022 Scotiabank Annual Report
|
15
1
Consolidated Financial Statements
Investments in associates
An associate is an entity in which the Bank has significant influence, but not control, over the operating and financial policies of the entity.
Investments in associates are recognized initially at cost, which includes the purchase price and other costs directly attributable to the purchase. Associates are accounted for using the equity method which reflects the Bank’s share of the increase or decrease of the post-acquisition earnings and other movements in the associate’s equity.
Investments in associates are evaluated for impairment at the end of each financial reporting period, or more frequently if events or changes in circumstances indicate the existence of objective evidence of impairment.
For purposes of applying the equity method for an investment that has a different reporting period from the Bank, adjustments are made for the effects of any significant events or transactions that occur between the reporting date of the investment and the reporting date of the Bank.
Joint arrangements
The Bank’s investments in joint arrangements over which the Bank has joint control are classified as either joint operations or joint ventures depending on the contractual rights and obligations of each investor, rather than the legal structure of the joint arrangement.
Similar to accounting for investment in associates, for joint ventures, investments are recognized initially at cost and accounted for using the equity method which reflects the Bank’s share of the increase or decrease of the post-acquisition earnings and other movements in the joint venture’s equity. Investments in joint ventures are evaluated for impairment at the end of each financial reporting period, or more frequently if events or changes in circumstances indicate the existence of objective evidence of impairment.
For joint operations, the Bank recognizes its direct rights to, and its share of jointly held assets, liabilities, revenues and expenses. These have been incorporated in the consolidated financial statements under the appropriate headings.
Translation of foreign currencies
The financial statements of each of the Bank’s foreign operations are measured using its functional currency, being the currency of the primary economic environment of the foreign operation.
Translation gains and losses related to the Bank’s monetary items are recognized in
non-interest
income in the Consolidated Statement of Income. Revenues and expenses denominated in foreign currencies are translated using average exchange rates. Foreign currencynon-monetary
items that are measured at historical cost are translated into the functional currency at historical rates. Foreign currencynon-monetary
items measured at fair value are translated into functional currency using the rate of exchange at the date the fair value was determined. Foreign currency gains and losses onnon-monetary
items are recognized in the Consolidated Statement of Income or Consolidated Statement of Comprehensive Income consistent with the gain or loss on thenon-monetary
item.Unrealized gains and losses arising upon translation of foreign operations, together with any gains or losses arising from hedges of those net investment positions to the extent effective, are credited or charged to net change in unrealized foreign currency translation gains/losses in other comprehensive income in the Consolidated Statement of Comprehensive Income. On disposal or meeting the definition of partial disposal of a foreign operation, an appropriate portion of the translation differences previously recognized in other comprehensive income are recognized in the Consolidated Statement of Income.
Financial assets and liabilities
Recognition and initial measurement
The Bank, on the date of origination or purchase, recognizes loans, debt and equity securities, deposits and subordinated debentures at the fair value of the consideration paid or received.
Regular-way
purchases and sales of financial assets are recognized on the settlement date. All other financial assets and liabilities, including derivatives, are initially recognized on the trade date at which the Bank becomes a party to the contractual provisions of the instrument.The initial measurement of a financial asset or liability is at fair value plus transaction costs that are directly attributable to its purchase or issuance. For instruments measured at fair value through profit or loss, transaction costs are recognized immediately in profit or loss.
Classification and measurement, derecognition, and impairment of financial instruments
Classification and measurement
Classification and measurement of financial assets
Financial assets include both debt and equity instruments, are classified into one of the following measurement categories:
• | Amortized cost; |
• | Fair value through other comprehensive income (FVOCI); |
• | Fair value through profit or loss (FVTPL); |
• | Elected at fair value through other comprehensive income (Equities only); or |
• | Designated at FVTPL |
Debt instruments
Debt instruments, including loans and debt securities, are classified into one of the following measurement categories:
• | Amortized cost; |
• | Fair value through other comprehensive income (FVOCI); |
• | Fair value through profit or loss (FVTPL); or |
• | Designated at FVTPL |
Classification of debt instruments is determined based on:
(i) | The business model under which the asset is held; and |
(ii) | The contractual cash flow characteristics of the instrument. |
1
52
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
Business model assessment
A business model assessment involves determining how financial assets are managed to generate cash flows. The Bank’s business model assessment is based on the following categories:
• | Held to collect: The objective of this business model is to hold assets and collect contractual cash flows. Any sales of the asset are incidental to the objective of the model. |
• | Held to collect and for sale: Both collecting contractual cash flows and sales are integral to achieving the objectives of the business model. |
• | Other business model: The business model is neither held-to-collect held-to-collect |
The Bank assesses the business model at a portfolio level reflective of how groups of assets are managed together to achieve a particular business objective. For the assessment of a business model, the Bank takes into consideration the following factors:
• | How the performance of assets in a portfolio is evaluated and reported to group heads and other key decision makers within the Bank’s business lines; |
• | How compensation is determined for the Bank’s business lines’ management that manages the assets; |
• | How the business lines’ management is compensated for managing the Bank’s assets based on the fair value or the contractual cash flows collected; |
• | Whether the assets are held for trading purposes; |
• | The risks that affect the performance of assets held within a business model and how those risks are managed; and |
• | The frequency and volume of sales in prior periods and expectations about future sales activity. |
Contractual cash flow characteristics assessment
The contractual cash flow characteristics assessment involves assessing the contractual features of an instrument to determine if they give rise to cash flows that are consistent with a basic lending arrangement. Contractual cash flows are consistent with a basic lending arrangement if they represent cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI).
Principal is defined as the fair value of the instrument at initial recognition. Principal may change over the life of the instrument due to repayments or amortization of premium/discount.
Interest is defined as the consideration for the time value of money and the credit risk associated with the principal amount outstanding and for other basic lending risks and costs (liquidity risk and administrative costs), and a profit margin.
If the Bank identifies any contractual features that could significantly modify the cash flows of the instrument such that they are no longer consistent with a basic lending arrangement, the related financial asset is classified and measured at FVTPL.
Debt instruments measured at amortized cost
Debt instruments are measured at amortized cost if they are held within a business model whose objective is to hold for collection of contractual cash flows where those cash flows represent solely payments of principal and interest. After initial measurement, debt instruments in this category are carried at amortized cost. Interest income on these instruments is recognized in interest income using the effective interest rate method. The effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected life of the financial asset to the gross carrying amount of a financial asset. Amortized cost is calculated by taking into account any discount or premium on the acquisition, transaction costs and fees that are an integral part of the effective interest rate.
Impairment on debt instruments measured at amortized cost is calculated using the expected credit loss approach. Loans and debt securities measured at amortized cost are presented net of the allowance for credit losses (ACL) in the Statement of Financial Position.
Debt instruments measured at FVOCI
Debt instruments are measured at FVOCI if they are held within a business model whose objective is to hold for collection of contractual cash flows and for selling financial assets, where the assets’ cash flows represent payments that are solely payments of principal and interest. Subsequent to initial recognition, unrealized gains and losses on debt instruments measured at FVOCI are recorded in other comprehensive income (OCI), unless the instrument is designated in a fair value hedge relationship. When designated in a fair value hedge relationship, any changes in fair value due to changes in the hedged risk are recognized in
Non-interest
income in the Consolidated Statement of Income, along with changes in fair value of the hedging instrument. Upon derecognition, realized gains and losses are reclassified from OCI and recorded inNon-interest
income in the Consolidated Statement of Income. Foreign exchange gains and losses that relate to the amortized cost of the debt instrument are recognized in the Consolidated Statement of Income. Premiums, discounts and related transaction costs are amortized over the expected life of the instrument to Interest income in the Consolidated Statement of Income using the effective interest rate method.Impairment on debt instruments measured at FVOCI is determined using the expected credit loss approach. The ACL on debt instruments measured at FVOCI does not reduce the carrying amount of the asset in the Consolidated Statement of Financial Position, which remains at its fair value. Instead, an amount equal to the allowance that would arise if the assets were measured at amortized cost is recognized in OCI with a corresponding charge to provision for credit losses in the Consolidated Statement of Income. The accumulated allowance recognized in OCI is recycled to the Consolidated Statement of Income upon derecognition of the debt instrument.
Debt instruments measured at FVTPL
Debt instruments are measured at FVTPL if assets:
(i) | are held for trading purposes; |
(ii) | are held as part of a portfolio managed on a fair value basis; or |
(iii) | whose cash flows do not represent payments that are solely payments of principal and interest. |
These instruments are measured at fair value in the Consolidated Statement of Financial Position, with transaction costs recognized immediately in the Consolidated Statement of Income as part of
Non-interest
income. Realized and unrealized gains and losses are recognized as part ofNon-interest
income in the Consolidated Statement of Income.Debt instruments designated at FVTPL
The Bank designates certain debt instruments at FVTPL upon initial recognition, and the designation is irrevocable. The FVTPL designation is available when a fair value is reliably estimated, and doing so eliminates or significantly reduces an accounting mismatch which would otherwise arise.
2022 Scotiabank Annual Report
|
1
53
Consolidated Financial Statements
Debt instruments designated at FVTPL are recorded in the Consolidated Statement of Financial Position at fair value. Changes in fair value are recognized in
Non-interest
income in the Consolidated Statement of Income.Equity instruments
Equity instruments are classified into one of the following measurement categories:
• | Fair value through profit or loss (FVTPL); or |
• | Elected at fair value through other comprehensive income (FVOCI). |
Equity instruments measured at FVTPL
Equity instruments are measured at FVTPL, unless an election is made to designate them at FVOCI upon purchase, with transaction costs recognized immediately in the Consolidated Statement of Income as part of
Non-interest
income. Subsequent to initial recognition, the changes in fair value and dividends received are recognized in the Consolidated Statement of Income.Equity instruments measured at FVOCI
At initial recognition, the Bank has an option to classifybasis.
non-trading
equity instruments at FVOCI. This election is irrevocable and is made on aninstrument-by-instrument
Gains and losses on these instruments, including when derecognized/sold, are recorded in OCI and are not subsequently reclassified to the Consolidated Statement of Income. As such, there is no specific impairment requirement. Dividends received are recorded in Interest income in the Consolidated Statement of Income. Any transaction costs incurred upon purchase of the security are added to the cost basis of the security and are not reclassified to the Consolidated Statement of Income on sale of the security.
Classification and measurement of financial liabilities
Financial liabilities are classified into one of the following measurement categories:
• | Fair value through profit or loss (FVTPL); |
• | Amortized cost; or |
• | Designated at FVTPL. |
Financial liabilities measured at FVTPL
Financial liabilities measured at FVTPL are held principally for the purpose of repurchasing in the near term, or form part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short term profit-taking. Financial liabilities are recognized on a trade date basis and accounted for at fair value, with changes in fair value and any gains or losses recognized in the Consolidated Statement of Income as part of the
non-interest
income. Transaction costs are expensed as incurred.Financial liabilities measured at amortized cost
Deposits, subordinated notes and debentures are accounted for at amortized cost. Interest on deposits, calculated using the effective interest rate method, is recognized as interest expense. Interest on subordinated notes and debentures, including capitalized transaction costs, is recognized using the effective interest rate method as interest expense.
Financial liabilities designated at FVTPL
The Bank designates certain financial liabilities at FVTPL upon initial recognition, and the designation is irrevocable. The FVTPL designation is available when a fair value is reliably estimated.
Financial liabilities are designated at FVTPL when it meets one of the following criteria:
• | The designation eliminates or significantly reduces an accounting mismatch which would otherwise arise; or |
• | A group of financial liabilities are managed and their performance is evaluated on a fair value basis, in line with a documented risk management strategy; or |
• | The financial liability contains one or more embedded derivatives which significantly modify the cash flows otherwise required. |
Financial liabilities designated at FVTPL are recorded in the Consolidated Statement of Financial Position at fair value. Any changes in fair value are recognized in
Non-interest
income in the Consolidated Statement of Income, except for changes in fair value arising from changes in the Bank’s own credit risk which are recognized in OCI. Changes in fair value due to changes in the Bank’s own credit risk are not subsequently reclassified to the Consolidated Statement of Income upon derecognition/extinguishment of the liabilities.Determination of fair value
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 values instruments carried at fair value using quoted market prices, where available. Fair value based on unadjusted quoted market prices for identical instruments in active markets represents a Level 1 valuation. When quoted market prices are not available, the Bank maximizes the use of observable inputs within valuation models. When a fair value is based on all significant market observable inputs, the valuation is classified as Level 2. Valuations that require the significant use of unobservable inputs are considered Level 3.
Inception gains and losses are only recognized where the valuation is dependent on observable market data; otherwise, they are deferred and amortized over the life of the related contract or until the valuation inputs become observable.
IFRS 13,permits a measurement exception that allows an entity to determine the fair value of a group of financial assets and liabilities with offsetting risks based on the sale or transfer of its net exposure to a particular risk (or risks). The Bank has adopted this exception through an accounting policy choice. Consequently, the fair values of certain portfolios of financial instruments are determined based on the net exposure of those instruments to market, credit or funding risk.
Fair Value Measurement
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. These adjustments include those made for credit risk,
bid-offer
spreads, unobservable parameters, funding costs and constraints on prices in inactive or illiquid markets.1
54
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
Derecognition of financial assets and liabilities
Derecognition of financial assets
A financial asset is derecognized when the contractual rights to the cash flows from the asset has expired; or 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; or the Bank has transferred substantially all the risks and rewards of ownership of that asset to an independent third-party. Management determines whether substantially all the risk and rewards of ownership have been transferred by quantitatively comparing the variability in cash flows before and after the transfer. If the variability in cash flows remains significantly similar subsequent to the transfer, the Bank has retained substantially all of the risks and rewards of ownership.
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. Control over the asset is represented by the practical ability to sell the transferred asset. If the Bank retains control over the asset, it will continue to recognize the asset to the extent of its continuing involvement. At times such continuing involvement may be in the form of investment in senior or subordinated tranches of notes issued by
non-consolidated
structured entities.On derecognition of a financial asset, the difference between the carrying amount and the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognized in other comprehensive income is recognized in the Consolidated Statement of Income.
Transfers of financial assets that do not qualify for derecognition are reported as secured financings in the Consolidated Statement of Financial Position.
The derecognition criteria are applied to the transfer of part of an asset, rather than the asset as a whole, only if such part comprises specifically identified cash flows from the asset, a fully proportionate share of the cash flows from the asset, or a fully proportionate share of specifically identified cash flows from the asset.
Derecognition of financial liabilities
A financial liability is derecognized when the obligation under the liability is discharged, canceled or expires. If an existing financial liability is replaced by another from the same counterparty on substantially different terms, or the terms of the existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability at fair value. The difference in the respective carrying amount of the existing liability and the new liability is recognized as a gain/loss in the Consolidated Statement of Income.
Impairment
Scope
The Bank applies a three-stage approach to measure allowance for credit losses, using an expected credit loss approach as required under IFRS 9, for the following categories of financial instruments that are not measured at fair value through profit or loss:
• | Amortized cost financial assets; |
• | Debt securities classified as at FVOCI; |
• | Off-balance sheet loan commitments; and |
• | Financial guarantee contracts. |
Expected credit loss impairment model
The Bank’s allowance for credit losses calculations are outputs of models with a number of underlying assumptions regarding the choice of variable inputs and their interdependencies. The expected credit loss impairment model reflects the present value of all cash shortfalls related to default events either (i) over the following twelve months or (ii) over the expected life of a financial instrument depending on credit deterioration from inception. The allowance for credit losses reflects an unbiased, probability-weighted outcome which considers multiple scenarios based on reasonable and supportable forecasts.
This impairment model measures credit loss allowances using a three-stage approach based on the extent of credit deterioration since origination:
• | Stage 1 – Where there has not been a significant increase in credit risk (SIR) since initial recognition of a financial instrument, an amount equal to 12 months expected credit loss is recorded. The expected credit loss is computed using a probability of default occurring over the next 12 months. For those instruments with a remaining maturity of less than 12 months, a probability of default corresponding to remaining term to maturity is used. |
• | Stage 2 – When a financial instrument experiences a SIR subsequent to origination but is not considered to be in default, it is included in Stage 2. This requires the computation of expected credit loss based on the probability of default over the remaining estimated life of the financial instrument. |
• | Stage 3 – Financial instruments that are considered to be in default are included in this stage. Similar to Stage 2, the allowance for credit losses captures the lifetime expected credit losses. |
Measurement of expected credit loss
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.
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, considering 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. |
2022 Scotiabank Annual Report
|
1
55
Consolidated Financial Statements
Forward-looking information
The estimation of expected credit losses for each stage and the assessment of significant increases in credit risk consider information about past events and current conditions as well as reasonable and supportable forecasts of future events and economic conditions. The estimation and application of forward-looking information may require significant judgment.
Macroeconomic factors
In its models, the Bank relies on a broad range of forward-looking economic information as inputs, such as: GDP growth, unemployment rates, central bank interest rates, and house-price indices. The inputs and models used for calculating expected credit losses may not always capture all characteristics of the market at the date of the financial statements. Qualitative adjustments or overlays may be made as temporary adjustments using expert credit judgment.
Multiple forward-looking scenarios
The Bank determines its allowance for credit losses using four probability-weighted forward-looking scenarios. The Bank considers both internal and external sources of information and data in order to achieve unbiased projections and forecasts. The Bank prepares the scenarios using forecasts generated by Scotiabank Economics (SE). The forecasts are created using internal and external models which are modified by SE as necessary to formulate a ‘base case’ view of the most probable future direction of relevant economic variables as well as a representative range of other possible forecast scenarios. The process involves the development of three additional economic scenarios and consideration of the relative probabilities of each outcome.
The ‘base case’ represents the most likely outcome and is aligned with information used by the Bank for other purposes such as strategic planning and budgeting. The other scenarios represent more optimistic and more pessimistic outcomes. The Bank has identified and documented key drivers of credit risk and credit losses for each portfolio of financial instruments and, using an analysis of historical data, has estimated relationships between macroeconomic variables, credit risk, and credit losses.
Assessment of significant increase in credit risk (SIR)
At each reporting date, the Bank assesses whether there has been a significant increase in credit risk for exposures since initial recognition by comparing the risk of default occurring over the remaining expected life from the reporting date and the date of initial recognition. The assessment considers borrower-specific quantitative and qualitative information without consideration of collateral, and the impact of forward-looking macroeconomic factors.
The common assessments for SIR on retail and
non-retail
portfolios include macroeconomic outlook, management judgement, and delinquency and monitoring. Forward-looking macroeconomic factors are a key component of the macroeconomic outlook. The importance and relevance of each specific macroeconomic factor depends on the type of product, characteristics of the financial instruments and the borrower and the geographical region. 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 disasters impacting certain portfolios. With regards to delinquency and monitoring, there is a rebuttable presumption that the credit risk of the financial instrument has increased since initial recognition when contractual payments are more than 30 days overdue.Retail portfolio – 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.
Non-retail
portfolio – The Bank uses a risk rating scale (IG codes) for itsnon-retail
exposures. Allnon-retail
exposures have an IG code assigned that reflects the probability of default of the borrower. Both borrower specific andnon-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.Expected life
When measuring expected credit loss, the Bank considers the maximum contractual period over which the Bank is exposed to credit risk. All contractual terms are considered when determining the expected life, including prepayment, and extension and rollover options. For certain revolving credit facilities, such as credit cards, the expected life is estimated based on the period over which the Bank is exposed to credit risk and how the credit losses are mitigated by management actions.
Presentation of allowance for credit losses in the Statement of Financial Position
• | Financial assets measured at amortized cost: as a deduction from the gross carrying amount of the financial assets; |
• | Debt instruments measured at fair value through other comprehensive income: no allowance is recognized in the Statement of Financial Position because the carrying value of these assets is their fair value. However, the allowance determined is presented in the accumulated other comprehensive income; |
• | Off-balance sheet credit risks include undrawn lending commitments, letters of credit and letters of guarantee: as a provision in other liabilities. |
Modified financial assets
If the terms of a financial asset are modified or an existing financial asset is replaced with a new one, an assessment is made to determine if the existing financial asset should be derecognized. Where a modification does not result in derecognition, the date of origination continues to be used to determine SIR. Where a modification results in derecognition, the new financial asset is recognized at its fair value on the modification date. The modification date is also the date of origination for this new asset.
The Bank may modify the contractual terms of loans for either commercial or credit reasons. The terms of a loan in good standing may be modified for commercial reasons to provide competitive pricing to borrowers. Loans are also modified for credit reasons where the contractual terms are modified to grant a concession to a borrower that may be experiencing financial difficulty.
1
5
6|
2022 Scotiabank Annual Report
Consolidated Financial Statements
For all financial assets modifications of the contractual terms may result in derecognition of the original asset when the changes to the terms of the loans are considered substantial. These terms include interest rate, authorized amount, term, or type of underlying collateral. The original loan is derecognized, and the new loan is recognized at its fair value. The difference between the carrying value of the derecognized asset and the fair value of the new asset is recognized in the Consolidated Statement of Income.
For all loans, performing and credit-impaired, where the modification of terms did not result in the derecognition of the loan, the gross carrying amount of the modified loan is recalculated based on the present value of the modified cash flows discounted at the original effective interest rate and any gain or loss from the modification is recorded in the provision for credit losses line in the Consolidated Statement of Income.
Definition of default
The Bank considers a financial instrument to be in default as a result of one or more loss events that occurred after the date of initial recognition of the instrument and the loss event has a negative impact on the estimated future cash flows of the instrument that can be reliably estimated. This includes events that indicate:
• | significant financial difficulty of the borrower; |
• | default or delinquency in interest or principal payments; |
• | high probability of the borrower entering a phase of bankruptcy or a financial reorganization; |
• | measurable decrease in the estimated future cash flows from the loan or the underlying assets that back the loan. |
The Bank considers that default has occurred and classifies the financial asset as impaired when it is more than 90 days past due, except for credit card receivables that are treated as defaulted when 180 days past due, unless reasonable and supportable information demonstrates that a more lagging default criterion is appropriate.
Write-off
policyThe Bank writes off an impaired financial asset (and the related impairment allowance), either partially or in full, when there is no realistic prospect of recovery. Where financial assets are secured,
write-off
is generally after receipt of any proceeds from the realization of security. In circumstances where the net realizable value of any collateral has been determined and there is no reasonable expectation of further recovery,write-off
may be earlier. Credit card receivables 180 days past due arewritten-off.
In subsequent periods, any recoveries of amounts previously written off are credited to the provision for credit losses in the Consolidated Statement of Income.Purchased loans
All purchased loans are initially measured at fair value on the date of acquisition. As a result, no allowance for credit losses would be recorded in the Consolidated Statement of Financial Position on the date of acquisition. Purchased loans may fit into either of the two categories: Performing loans or Purchased Credit
-
Impaired (PCI) loans.Purchased performing loans follow the same accounting as originated performing loans and are reflected in Stage 1 on the date of the acquisition. They will be subject to a
12-month
allowance for credit losses which is recorded as a provision for credit losses in the Consolidated Statement of Income. The fair value adjustment set up for these loans on the date of acquisition is amortized into interest income over the life of these loans.PCI loans are reflected in Stage 3 and are always subject to lifetime allowance for credit losses. Any changes in the expected cash flows since the date of acquisition are recorded as a charge/recovery in the provision for credit losses in the Consolidated Statement of Income at the end of all reporting periods subsequent to the date of acquisition.
Modification of financial instruments in the context of interest rate benchmark reform – Phase 2 amendments
When the basis for determining the contractual cash flows of a financial asset or financial liability measured at amortized cost is changed as a result of interest rate benchmark reform (IBOR reform), the Bank updates the effective interest rate of the financial asset or financial liability similar to a floating rate financial instrument and does not derecognize or adjust the carrying amount (the practical expedient). The practical expedient is applied only when the modification is required as a direct consequence of IBOR reform, and the new basis for determining the contractual cash flows is economically equivalent to the previous basis. If changes are made to a financial asset or financial liability in addition to changes to the basis for determining the contractual cash flows required by the interest rate benchmark reform, then the Bank sequentially updates the effective interest first to reflect the change required by IBOR reform and then applies its policies on modification or derecognition
of
financial assets and financial liabilities.Offsetting of financial instruments
Financial assets and financial liabilities with the same counterparty are offset, with the net amount reported in the Consolidated Statement of Financial Position, only if there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liabilities simultaneously. When financial assets and financial liabilities are offset in the Consolidated Statement of Financial Position, the related income and expense items will also be offset in the Consolidated Statement of Income, unless specifically prohibited by an applicable accounting standard.
Cash and deposits with financial institutions
Cash and deposits with financial institutions comprise cash, cash equivalents, demand deposits with banks and other financial institutions, and highly liquid investments that are readily convertible to cash, subject to an insignificant risk of changes in value. These investments are those with less than three months maturity from the date of acquisition.
Precious metals
Precious metals are carried at fair value less costs to sell, and any changes in value are credited or charged to
non-interest
income – trading revenues in the Consolidated Statement of Income.Securities purchased and sold under resale agreements
Securities purchased under resale agreements (reverse repurchase agreements) require the purchase of securities by the Bank from a counterparty with an agreement entered to resell the securities at a fixed price at a future date. Since the Bank is reselling the securities at a fixed price at a future date, the risks and rewards have not been transferred to the Bank. The Bank has the right to liquidate the securities purchased in the event of counterparty default.
2022 Scotiabank Annual Report
|
15
7
Consolidated Financial Statements
Whereas securities sold under agreements to repurchase (repurchase agreements) require the sale of securities by the Bank to a counterparty with an agreement entered simultaneously to purchase the securities back at a fixed price at a future date. Since the Bank is purchasing the securities back at a fixed price at a future date, the risks and rewards have not been transferred from the Bank. The counterparty has the right to use the collateral pledged by the Bank in the event of default.
These agreements are treated as collateralized financing arrangements and are initially recognized at amortized cost. The party disbursing the cash takes possession of the securities serving as collateral for the financing and having a market value equal to, or more than, the principal amount loaned. The securities received under reverse repurchase agreements and securities delivered under repurchase agreements are not recognized on, or derecognized from, the Consolidated Statement of Financial Position, unless the risks and rewards of ownership are obtained or relinquished. The related interest income and interest expense are recorded on an accrual basis using the effective interest rate in the Consolidated Statement of Income.
Obligations related to securities sold short
Obligations related to securities sold short arise in dealing and market-making activities where debt securities and equity shares are sold without possessing such securities.
Similarly, if securities purchased under an agreement to resell are subsequently sold to third parties, the obligation to return the securities is recorded as a short sale within obligations related to securities sold short in the Consolidated Statement of Financial Position. These trading liabilities are measured at fair value with any gains or losses included in
non-interest
income – trading revenues in the Consolidated Statement of Income. Interest expense accruing on debt securities sold short is recorded in the Consolidated Statement of Income.Securities lending and borrowing
Securities lending and borrowing transactions are usually collateralized by securities or cash. The transfer of the securities to counterparties is only reflected on the Consolidated Statement of Financial Position if the risks and rewards of ownership are also transferred. For cash collateral advanced or received, the Bank presents these transactions as securities sold under a repurchase agreement or securities purchased under a reverse repurchase agreement, respectively. Interest income on cash collateral paid and interest expense on cash collateral received together with securities lending income and securities borrowing fee are reported in the Consolidated Statement of Income.
Securities borrowed are not recognized on the Consolidated Statement of Financial Position unless they are then sold to third parties, in which case the obligation to return the securities is recorded as a trading liability and measured at fair value with any gains or losses included
in non-interest
income – trading revenues, in the Consolidated Statement of Income.Derivative instruments
Derivative instruments are contracts whose value is derived from interest rates, foreign exchange rates, commodity prices, equity prices or other financial variables. Most derivative instruments can be characterized as interest rate contracts, foreign exchange and gold contracts, commodity contracts, equity contracts or credit contracts. Derivative instruments are either exchange-traded contracts or negotiatedcontracts. Negotiatedcontracts include swaps, forwards and options.
over-the-counter
over-the-counter
The Bank enters into these derivative contracts for trading purposes, as well as to manage its risk exposures (i.e., to manage the Bank’s
non-trading
interest rate, foreign currency and other exposures). Trading activities are undertaken to meet the needs of the Bank’s customers, as well as for the Bank’s own account.Derivatives embedded in other financial liabilities or host contracts are treated as separate stand-alone derivatives when the following conditions are met:
• | their economic characteristics and risks are not closely related to those of the host contract; |
• | a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and |
• | the combined contract is not held for trading or designated at fair value through profit or loss. |
Where an embedded derivative is separable from the host contract but the fair value, as at the acquisition or reporting date, cannot be reliably measured separately, the entire combined contract is measured at fair value. All embedded derivatives are presented on the Consolidated Statement of Financial Position on a combined basis with the host contracts. Changes in fair value of embedded derivatives that are separated from the host contract are recognized in
non-interest
income in the Consolidated Statement of Income.All derivatives, including embedded derivatives that must be separately accounted for, are recorded at fair value in the Consolidated Statement of Financial Position. The determination of the fair value of derivatives includes consideration of credit risk, estimated funding costs and ongoing direct costs over the life of the instruments. Inception gains or losses on derivatives are only recognized where the valuation is dependent on observable market data, otherwise, they are deferred and amortized over the life of the related contract, or until the valuation inputs become observable.
The gains and losses resulting from changes in fair values of trading derivatives are included in
non-interest
income – trading revenues in the Consolidated Statement of Income.Changes in the fair value of
non-trading
derivatives that do not qualify for hedge accounting are recorded in the Consolidated Statement of Income innon-interest
income – other. Where derivative instruments are used to manage the volatility of share-based payment expense, these derivatives are carried at fair value with changes in the fair value in relation to units hedged included innon-interest
expenses – salaries and employee benefits in the Consolidated Statement of Income.Changes in the fair value of derivatives that qualify for hedge accounting are recorded as
non-interest
income – other in the Consolidated Statement of Income for fair value hedges and other comprehensive income in the Consolidated Statement of Comprehensive Income for cash flow hedges and net investment hedges.Hedge accounting
The Bank has elected to continue to apply the hedge accounting requirements of IAS 39. Also, the Bank has implemented the additional hedge accounting disclosures that are required by the IFRS 9 related amendments to IFRS 7.
Financial Instruments: Disclosures
The Bank formally documents all hedging relationships and its risk management objective and strategy for undertaking these hedge transactions at inception. The hedge documentation includes identification of the asset, liability, firm commitment or highly probable forecasted transaction being hedged, the nature of the risk being hedged, the hedging instrument used, and the method used to assess the effectiveness of the hedge.
1
58
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
The Bank also formally assesses, both at each hedge’s inception and on an ongoing basis, whether the hedging instruments are highly effective in offsetting changes in fair value or cash flows of the hedged items within an
80-125%
range. This assessment incorporates a comparison of critical terms of the hedged and hedging item, and regression analysis, in order to determine (i) whether the hedge relationship is expected to be highly effective going forward (i.e. prospective effectiveness assessment) and (ii) whether the hedge was actually highly effective for the designated period (i.e. retrospective effectiveness assessment). In assessing prospective hedge effectiveness for a hedge relationship directly impacted by the IBOR reform, the Bank will assume that the benchmark interest rate is not altered as a result of the IBOR reform. In instances of assessing retrospective hedge effectiveness where a hedge relationship directly impacted by the IBOR reform falls outside of the80-125%
range solely as a result of the IBOR reform, the Bank will continue hedge accounting as long as other hedge accounting requirements are met.Hedge ineffectiveness is measured and recorded in
non-interest
income – other in the Consolidated Statement of Income. When the basis for determining the contractual cash flows of existing hedge relationships changes as a result of the IBOR reform, the Bank updates the hedge documentation without discontinuing the hedging relationship. For cash flow hedges where the interest benchmark changes as a result of the IBOR reform, the Bank deems that the corresponding hedge reserve in OCI is based on the alternative benchmark rate to determine whether the hedged future cash flows are expected to occur. For changes that are in addition to those required by the IBOR reform, the Bank first determines whether the additional changes result in discontinuation of hedge relationships before applying the relief. In addition, when determining the hedged risk, the Bank may designate an alternative benchmark rate risk component that is not currently separately identifiable, as the Bank reasonably expects that the alternative benchmark rate will become separately identifiable within a24-month
period.There are three types of hedges: (i) fair value hedges, (ii) cash flow hedges and (iii) net investment hedges.
Fair value hedges
For fair value hedges, the change in fair value of the hedging instrument is offset in the Consolidated Statement of Income by the change in fair value of the hedged item attributable to the hedged risk. For hedges that are discontinued, the hedged item is no longer adjusted for changes in fair value. The cumulative fair value adjustment of the hedged item is amortized to interest income over its remaining term to maturity or written off to
non-interest
income directly if the hedged item ceases to exist. The Bank uses fair value hedges primarily to convert fixed rate financial instruments to floating rate financial instruments. Hedged items include debt securities, loans, deposit liabilities and subordinated debentures. Hedging instruments include single-currency interest rate swaps and cross-currency interest rate swaps.Cash flow hedges
For cash flow hedges, the change in fair value of the hedging instrument, to the extent effective, is recorded in other comprehensive income until the corresponding gains and losses on the hedged item are recognized in income. For hedges that are discontinued, the cumulative unrealized gain or loss recognized in other comprehensive income is reclassified to interest income and/or salaries and employee benefits as the variability in the cash flows of hedged item affects income. However, if the hedged item is derecognized or the forecasted transaction is no longer expected to occur, the unrealized gain or loss is reclassified immediately to
non-interest
income and/or salaries and employee benefits. The Bank uses cash flow hedges primarily to hedge the variability in cash flows relating to floating rate financial instruments and highly probable forecasted revenues and expenses. Hedged items include debt securities, loans, deposit liabilities, subordinated debentures and highly probable forecasted transactions. Hedging instruments include single-currency interest rate swaps, cross-currency interest rate swaps, total return swaps, foreign currency forwards and foreign currency assets or liabilities.For the Bank’s cash flow hedges of forecasted transactions that are directly affected by the IBOR Reform, it is assumed that the benchmark interest rate will not be altered as a result of the IBOR Reform for purposes of assessing whether the transactions are highly probable or whether the transactions are still expected to occur.
Net investment hedges
For net investment hedges, the change in fair value of the hedging instrument, to the extent effective, is recorded in other comprehensive income until the corresponding cumulative translation adjustments on the hedged net investment are recognized in income. The Bank designates foreign currency liabilities and foreign currency forwards as hedging instruments to manage the foreign currency exposure and impact on capital ratios arising from foreign operations.
Property and equipment
Land is carried at cost. Buildings (including building fittings), equipment, and leasehold improvements are carried at cost less accumulated depreciation and accumulated impairment losses, if any. Cost includes expenditures that are directly attributable to the acquisition of the asset. Depreciation is calculated using the straight-line method over the estimated useful life of the related asset less any residual value as follows: buildings – up to 40 years, building fittings – up to 15 years, equipment 3 to 10 years, and leasehold improvements – lease term determined by the Bank. Depreciation expense is included in the Consolidated Statement of Income under
non-interest
expenses – depreciation and amortization. Depreciation methods, useful lives and residual values are reassessed at each financialyear-end
and adjusted as appropriate.When major components of building and equipment have different useful lives, they are accounted for separately and depreciated over each component’s estimated useful life.
Net gains and losses on disposal are included in
non-interest
income – other in the Consolidated Statement of Income in the year of disposal.Assets
held-for-sale
Non-current
non-financial
assets (and disposal groups) are classifiedas held-for-sale
held-for-sale
Non-current
non-financial
assets classified asheld-for-sale
non-interest
income. Any subsequent increase in the fair value less costs to sell, to the extent this does not exceed the cumulative write-down, is also recognized innon-interest
income, together with any realized gains or losses on disposal.Non-financial
assets acquired in exchange for loans as part of an orderly realization are recorded as assetsheld-for-sale
held-for-use.
held-for-sale,
held-for-use,
2022 Scotiabank Annual Report
|
1
59
Consolidated Financial Statements
Business combinations and goodwill
The Bank follows the acquisition method of accounting for the acquisition of a business. The Bank considers the date on which control is obtained and it legally transfers the consideration for the acquired assets and assumed liabilities of the subsidiary to be the date of acquisition. The cost of an acquisition is measured at the fair value of the consideration paid. The fair value of the consideration transferred by the Bank in a business combination is calculated as the sum of the acquisition date fair value of the assets transferred by the Bank, the liabilities incurred by the Bank to former owners of the acquiree, and the equity interests, including any options, issued by the Bank. The Bank recognizes the acquisition date fair values of any previously held investment in the subsidiary and contingent consideration as part of the consideration transferred in exchange for the acquisition. A gain or loss on any previously held investments of an acquiree is recognized in
non-interest
income – other in the Consolidated Statement of Income.In general, all identifiable assets acquired (including intangible assets) and liabilities assumed (including any contingent liabilities) are measured at the acquisition date fair value. The Bank records identifiable intangible assets irrespective of whether the assets have been recognized by the acquiree before the business combination.
Non-controlling
interests, if any, are recognized at their proportionate share of the fair value of identifiable assets and liabilities, unless otherwise indicated. Where the Bank has an obligation to purchase anon-controlling
interest for cash or another financial asset, a financial liability is recognized based on management’s best estimate of the present value of the redemption amount. Where the Bank has a corresponding option to settle the purchase of anon-controlling
interest by issuing its own common shares, no financial liability is recorded.Any excess of the cost of acquisition over the Bank’s share of the net fair value of the identifiable assets acquired and liabilities assumed is recorded as goodwill. If the cost of acquisition is less than the fair value of the Bank’s share of the identifiable assets acquired and liabilities assumed, the resulting gain is recognized immediately in
non-interest
income – other in the Consolidated Statement of Income.During the measurement period (which is within one year from the acquisition date), the Bank may, on a retrospective basis, adjust the amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date.
The Bank accounts for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received.
Subsequent to acquisition, the Bank accounts for the following assets and liabilities recognized in a business combination as described below:
• | Contingent liabilities, until resolved, are measured at the higher of the amount that would be recognized as a provision or the amount initially recognized, with any change recognized in the Consolidated Statement of Income. |
• | Indemnification assets are measured on the same basis as the item to which the indemnification relates. |
• | Contingent consideration classified as a liability is measured at fair value, with any change recognized in the Consolidated Statement of Income. |
• | Liabilities to non-controlling interest holders when remeasured at the end of each reporting period, a corresponding change is recorded in equity. |
After initial recognition of goodwill in a business combination, goodwill in aggregate is measured at cost less any accumulated impairment losses. Goodwill is not amortized but tested for impairment annually and when circumstances indicate that the carrying value may be impaired.
Goodwill is reviewed at each reporting date to determine whether there is any indication of impairment. 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 (CGUs) that is expected to benefit from the combination. CGUs to which goodwill has been allocated are aggregated so that the level at which impairment is tested 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, operational risks and leverage, consistent with the Bank’s capital attribution for business line performance measurement. 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 of the CGU has been determined using the fair value less costs of disposal method. The estimation of fair value less costs of disposal involves significant judgment in the determination of inputs. In determining fair value less costs of disposal, an appropriate valuation model is used which considers various factors including normalized net income, control premiums and price earnings multiples. These calculations are corroborated by valuation multiples and quoted share prices for publicly traded subsidiaries or other available fair value indicators. An impairment loss is recognized if the carrying amount of the CGU exceeds the recoverable amount. An impairment loss, in respect of goodwill, is not reversed.
Intangible assets
Intangible assets represent identifiable
non-monetary
assets and are acquired either separately or through a business combination or generated internally. The Bank’s intangible assets are mainly comprised of computer software, customer relationships, contract intangibles, core deposit intangibles and fund management contracts.The cost of a separately acquired intangible asset includes its purchase price and directly attributable costs of preparing the asset for its intended use. Intangibles acquired as part of a business combination are initially recognized at fair value.
In respect of internally generated intangible assets, initial measurement includes all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management.
After initial recognition, an intangible asset is carried at its cost less any accumulated amortization and accumulated impairment losses.
Intangible assets that have finite useful lives are initially measured at cost and are amortized on a straight-line basis over their useful lives as follows: computer software – 5 to 10 years; and other intangible assets – 5 to 20 years. Amortization expense is included in the Consolidated Statement of Income under operating expenses – depreciation and amortization. As intangible assets are
non-financial
assets, the impairment model fornon-financial
assets is applied. Intangible assets with indefinite useful lives are not amortized but are tested for impairment annually and when circumstances indicate that the carrying value may be impaired.Impairment of
non-financial
assetsThe carrying amount of the Bank’s
non-financial
assets, other than goodwill and indefinite life intangible assets and deferred tax assets which are separately addressed, is reviewed at each reporting date to determine whether there is any indication of impairment. For the purpose of impairment testing,non-financial
assets that cannot be tested individually are grouped together into the smallest group of assets that generate cash inflows from continuing use that are largely independent from the cash inflows of other assets or groups of assets.16
0
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
If any indication of impairment exists, then the asset’s recoverable amount is estimated. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs of disposal. The Bank’s corporate assets do not generate separate cash inflows. If there is an indication that a corporate asset may be impaired, then the recoverable amount is determined for the CGU to which the corporate asset belongs.
An impairment loss is recognized if the carrying amount of an asset or a CGU exceeds its recoverable amount. Impairment losses of continuing operations are recognized in the Consolidated Statement of Income in those expense categories consistent with the nature of the impaired asset. Impairment losses recognized in prior periods are reassessed at each reporting date for any indication that the loss had 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 asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. Such reversal is recognized in the Consolidated Statement of Income.
Significant judgment is applied in determining the
non-financial
asset’s recoverable amount and assessing whether certain events or circumstances constitute objective evidence of impairment.Corporate income taxes
The Bank follows the balance sheet liability method for corporate income taxes. Under this method, deferred tax assets and liabilities represent the cumulative amount of tax applicable to temporary differences which are the differences between the carrying amount of the assets and liabilities, and their values for tax purposes. Deferred tax assets are recognized only to the extent it is probable that sufficient taxable profits will be available against which the benefit of these deferred tax assets can be utilized.
Deferred tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Deferred and current tax assets and liabilities are only offset when they arise in the same tax reporting group and where the Bank has both the legal right and the intention to settle on a net basis or to realize the asset and settle the liability simultaneously.
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.
Income tax is recognized in the Consolidated Statement of Income except where it relates to items recognized in other comprehensive income or directly in equity, in which case income tax is recognized in the same line as the related item.
Leases
At inception of a contract, the Bank assesses whether a contract is, or contains, a lease. A contract is a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. When the Bank is a lessee it recognizes a(“ROU”) asset and a lease liability except for short-term leases for assets that have a lease term of 12 months or less and leases of low value items. For short-term leases and low value items the Bank recognizes the lease payment associated with these leases as an expense on a straight-line basis over the lease term.
right-of-use
Asset
A ROU is an asset that represents a lessee’s right to use an underlying asset for the lease term. The ROU asset is initially measured at cost, which is based on the initial amount of the lease liability, and any direct costs incurred, any lease payments made at or before the commencement date net of lease incentives received and estimated decommissioning costs.
The ROU asset is subsequently measured at cost less accumulated depreciation and accumulated impairment losses, if any. The ROU asset is depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the ROU asset or the end of the lease term. The depreciation is recorded in Depreciation and amortization in the Consolidated Statement of Income. In addition, the ROU asset is adjusted for certain remeasurements of the lease liability.
Liability
At commencement date, the Bank initially measures the lease liability at the present value of the future lease payments, discounted using the Bank’s incremental borrowing rate that takes into account the Bank’s credit risk and economic environment in which the lease is entered. The lease liability is subsequently measured at amortized cost using the effective interest method. It is
re-measured
if the Bank changes its assessment of whether it will exercise a purchase, extension or termination option. Interest expense is recorded in Interest expense – Other in the Consolidated Statement of Income.When the lease liability isasset has been reduced to zero.
re-measured
in this way, a corresponding adjustment is made to the carrying amount of the ROU asset or is recorded in profit or loss if the carrying amount of theright-of-use
Presentation
The Bank presents ROU assets in Property and equipment and lease liabilities in Other liabilities in the Consolidated Statement of Financial Position.
Determining lease term
The Bank’s expectation of exercising the option to renew a lease is determined by assessing if the Bank is “reasonably certain” to exercise that option. The Bank will be reasonably certain to exercise an option when factors create a significant economic incentive to do so. This assessment considers the following criteria: key locations for its branch network, locations on which the Bank has spent significant capital on renovation work, contribution to profit, value of locations based on current economic environment and the remaining term of existing leases.
Provisions
A provision, including for restructuring, is recognized 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.
2022 Scotiabank Annual Report
|
16
1
Consolidated Financial Statements
The amount recognized as a provision is the Bank’s best estimate of the consideration required to settle the present obligation, taking into account the risks and uncertainties surrounding the obligation. If the effect of the time value of money is considered material, provisions are determined by discounting the expected future cash flows at a
pre-tax
rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. The increase in the provision due to the passage of time is recorded as interest expense – other in the Consolidated Statement of Income.Insurance contracts
Gross premiums for life insurance contracts are recognized as income when due. Gross premiums for
non-life
insurance business, primarily property and casualty, are recognized as income over the term of the insurance contracts. Unearned premiums represent the portion of premiums written in the current year that relate to the period of risk after the reporting date. Insurance claims recoveries are accounted as income in the same period as the related claims.Gross insurance claims for life insurance contracts reflect the cost of all claims arising during the year. Gross insurance claims for property and casualty insurance contracts include paid claims and movements in outstanding claim liabilities. Insurance premiums ceded to reinsurers are accounted as an expense in the same period as the premiums for the direct insurance contracts to which they relate.
Guarantees
A guarantee is a contract that contingently requires the Bank to make specified payments to reimburse the holder for a loss it incurs because a specified debtor failed to make payment when due in accordance with the original or modified terms of a debt instrument. Guarantees include standby letters of credit, letters of guarantee, indemnifications, credit enhancements and other similar contracts. Guarantees that qualify as a derivative are accounted for in accordance with the policy for derivative instruments. For guarantees that do not qualify as a derivative, a liability is recorded for the fair value of the obligation assumed at inception. The fair value of the obligation at inception is generally based on the discounted cash flow of the premium to be received for the guarantee, resulting in a corresponding asset. Subsequent to initial recognition, such guarantees are measured at the higher of the initial amount, less amortization to recognize any fee income earned over the period, and the best estimate of the amount required to settle any financial obligation arising as a result of the guarantee. Any increase in the liability is reported in the Consolidated Statement of Income.
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 provided include post-retirement health care, dental care and life insurance, along with other long-term employee benefits such as long-term disability benefits.
Defined benefit pension plans and other post-retirement benefit plans
The cost of these employee benefits is actuarially determined each year using the projected unit credit method. The calculation uses management’s best estimate of a number of assumptions – including the discount rate, future compensation, health care costs, mortality, as well as the retirement age of employees. 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 U.S. 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.
The Bank’s net asset or liability in respect of employee benefit plans is calculated separately for each plan as the difference between the present value of future benefits earned in respect of service for prior periods and the fair value of plan assets. The net asset or liability is included in other assets and other liabilities, as appropriate, in the Consolidated Statement of Financial Position. When the net amount in the Consolidated Statement of Financial Position is an asset, the recognized asset is limited to the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.
The current service cost, net interest expense (income), past service cost (credit), settlement gain (loss) and administrative expense are recognized in net income. Net interest expense (income) is calculated by applying the discount rate to the net defined benefit asset or liability. When the benefits of a plan are improved (reduced), a past service cost (credit) is recognized immediately in net income.
Remeasurements comprising of actuarial gains and losses, the effect of the asset ceiling and the return on plan assets in excess of or less than the interest income on the fair value of assets are recognized immediately in the Consolidated Statement of Financial Position with a charge or credit to the Statement of Other Comprehensive Income (OCI) in the period in which they occur. Amounts recorded in OCI are not recycled to the Consolidated Statement of Income.
Other long-term employee benefits
Other long-term employee benefits are accounted for similarly to defined benefit pension plans and other post-retirement benefit plans described above, except that remeasurements are recognized in the Consolidated Statement of Income in the period in which they arise.
Defined contribution plans
The costs of such plans are equal to contributions payable by the Bank to employees’ accounts for service rendered during the period and expensed.
Short-term employee benefits
Short-term employee benefits are expensed as the related service is provided and a liability is measured on an undiscounted basis net of payments made.
Interest and similar income and expenses
For all
non-trading
interest-bearing financial instruments, interest income or expense is recorded in net interest income using the effective interest rate. This is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the gross carrying amount of the financial asset or financial liability. The calculation takes into account all the1
62
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses.
For trading financial instruments,changes including related interest income or expense are recorded in
mark-to-market
non-interest
income – trading revenues.The carrying amount of interest-bearing financial instruments, measured at amortized cost or classified as FVOCI, is adjusted if the Bank revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change in carrying amount is recorded as
non-interest
income in the Consolidated Statement of Income.Once the carrying value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognized based on net effective interest rate inherent in the investment.
Loan origination costs are deferred and amortized into interest income using the effective interest method over the expected term of the loan. Loan fees are recognized in interest income over the appropriate lending or commitment period. Mortgage prepayment fees are recognized in interest income when received, unless they relate to a minor modification to the terms of the mortgage, in which case the fees are deferred and amortized using the effective interest method over the remaining period of the original mortgage.
Loan syndication fees are deferred and amortized in interest income over the term of the loan where the yield the Bank retains is less than that of the comparable lenders in the syndicate.
Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred (together with any incremental costs) and recognized as part of the interest income on the loan. When it is unlikely that a loan will be drawn down, the loan commitment fees are recognized in
non-interest
income.Fee and commission revenues
Revenue is recognized once the Bank’s customer has obtained control of the service. The transfer of control occurs when the Bank’s customer has the ability to direct the use of and obtain the benefits of the banking services and the contractual performance obligation to the customer has been satisfied. The Bank records revenue gross of expenses where it is the principal in performing a service to the customer and net of expenses where the Bank is an agent for these services. The assessment of principal or agent requires judgement on the basis of whether the Bank controls the services before they are transferred to the customer. From time to time, the Bank may receive variable consideration such as performance fees. These fees are only recognized when it is highly probable that the Bank will not need to reverse a significant amount of revenue.
Card revenues include interchange fees, annual fees and other card related fees. Interchange fees are calculated as a percentage of the transaction and are recognized on the transaction date. Annual fees are recognized in income over 12 months. Other card fees are transaction-based and are recognized on the transaction date.
The Bank operates various loyalty points programs, which allow customers to accumulate points when using the Bank’s products and services. Loyalty point liabilities are subject to periodic remeasurement to reflect the expected cost of redemption. Where the customer has the option to redeem points for statement credits, the cost of the loyalty program is presented net of card fees. Where points can only be redeemed for goods or services, interchange revenue allocated to the loyalty rewards is recognized when the rewards are redeemed. Reward costs are recorded in
non-interest
expense.Banking services fees consist of fees earned on personal, business and government deposit activities. Personal deposit-related fees consist of account maintenance and various transaction-based services. Business and government deposit-related fees consist of commercial deposit and treasury management services and other cash management services. These fees are recognized on the transaction date or over time as services are provided to the customer.
Credit fees include fees earned for providing letters of credit and guarantee, loan commitments, bankers’ acceptances, and for arranging loan syndications. These fees are recognized on the transaction date or over time as services are provided based on contractual agreements with the customer.
Mutual funds fees include management and administration fees which are earned in the Bank’s wealth management business. These fees are calculated as a percentage of the fund’s net asset value and recognized as the service is provided. From time to time, the Bank may also recognize performance fees from some funds. These fees are only recognized to the extent that it is highly probable that a significant reversal of revenue will not occur.
Brokerage fees relate to fees earned for providing full-service and discount brokerage services to clients. These fees are contractually agreed and can be asset-based or linked to individual transactions. Such fees are recognized as the service is provided to clients or on the trade date.
Investment management and trust fees include administration, trust services and other investment services provided to clients. These fees are contractually agreed upon and can be linked to portfolio values or individual transactions. Such fees are recognized as the service is provided to clients to the extent that it is highly probable that a significant reversal of revenue will not occur.
Underwriting and other advisory fees relate to fees earned for services provided to clients in relation to the placement of debt and equities. Such fees also include services to clients for mergers, acquisitions, financial restructurings and other corporate finance activities. These fees are recognized when the service has been performed and/or contractual milestones are completed. Performance and completion fees are variable consideration and generally contingent on the successful completion of a transaction.
Other fees and commissions include commissions earned on the sale of third party insurance products to the Bank’s customers. Such fees and commissions are recognized when the performance obligation is completed.
Fee and commission expenses
Fee and commission expenses relate to transaction and service fees which are expensed as the services are received.
Dividend income
Dividend income on equity securities is recognized when the Bank’s right to receive payment is established, which is on the
ex-dividend
date for listed equity securities.2022 Scotiabank Annual Report
|
1
63
Consolidated Financial Statements
Share-based payments
Share-based payments awarded to employees are recognized as compensation expense in the Consolidated Statement of Income over the vesting period based on the number of awards expected to vest including the impact of expected forfeitures. For awards that are delivered in tranches, each tranche is considered a separate award and accounted for separately.
Stock appreciation rights and other awards that must be settled for cash are classified as liabilities. Liability-classified awards are
re-measured
to fair value at each reporting date while they remain outstanding, with any changes in fair value recognized in compensation expense in the period. The liability is expensed over the vesting period which incorporates there-measurement
of the fair value and a revised forfeiture rate that anticipates units expected to vest.Plain vanilla options and other awards that must be settled for shares are classified as equity awards. Equity-classified awards are expensed based on the grant date fair value with a corresponding increase to equity – other reserves in the Consolidated Statement of Financial Position. If an option is exercised, both the exercise price proceeds together with the amount recorded in other reserves is credited to equity – common shares in the Consolidated Statement of Financial Position.
For stock appreciation rights and plain vanilla options, the Bank estimates fair value using an option pricing model. The option pricing model requires inputs such as the exercise price of the option, the current share price, the risk free interest rate, expected dividends, expected volatility (calculated using an equal weighting of implied and historical volatility) and specific employee exercise behaviour patterns based on statistical data. For other awards, fair value is the quoted market price of the Bank’s common shares at the reporting date.
Where derivatives are used to economically hedge share-based payment expense, relatedgains and losses are included in
mark-to-market
non-interest
expenses – salaries and employee benefits in the Consolidated Statement of Income.Dividends on shares
Dividends on common and preferred shares and other equity instruments are recognized as a liability and deducted from equity when they are declared and no longer at the discretion of the Bank.
Segment reporting
Management’s internal view is the basis for the determination of operating segments. The operating segments are those whose operating results are regularly reviewed by the Bank’s chief operating decision-maker to make decisions about resources to be allocated to the segment and assess its performance. The Bank has four operating segments: Canadian Banking, International Banking, Global Wealth Management and Global Banking and Markets. The Other category represents smaller operating segments, including Group Treasury and other corporate items, which are not allocated to an operating segment. These segments offer different products and services and are managed separately based on the Bank’s management and internal reporting structure.
The results of these business segments are based upon the internal financial reporting systems of the Bank. The accounting policies used in these segments are generally consistent with those followed in the preparation of the consolidated financial statements by the Bank. The only notable accounting measurement difference is the grossing up of revenues which are
tax-exempt
and income from associate corporations to an equivalentbefore-tax
basis for those affected segments. This change in measurement enables comparison of income arising from taxable andtax-exempt
sources.Given the complexity of the Bank, various estimates and allocation methodologies are used in the preparation of the business segment financial information. The funding value of assets and liabilities is transfer-priced at wholesale market rates, and corporate expenses are allocated to each segment on an equitable basis using various parameters. As well, capital is apportioned to the business segments on a risk-based methodology. Transactions between segments are recorded within segment results as if conducted with a third-party and are eliminated on consolidation.
Earnings per share (EPS)
Basic EPS is computed by dividing net income for the period attributable to the Bank’s common shareholders by the weighted-average number of common shares outstanding during the period.
Diluted EPS is calculated by dividing adjusted net income for the period attributable to common shareholders by the weighted-average number of diluted common shares outstanding for the period. In the calculation of diluted earnings per share, earnings are adjusted for changes in income or expenses that would result from the issuance of dilutive shares. The weighted-average number of diluted common shares outstanding for the period reflects the potential dilution that would occur if options, securities or other contracts that entitle their holders to obtain common shares had been outstanding from the beginning of the period (or a later date) to the end of the period (or an earlier date). Instruments determined to have an antidilutive impact for the period are excluded from the calculation of diluted EPS.
The number of additional shares for inclusion in diluted EPS for share-based payment options is determined using the treasury share method. Under this method, the net number of incremental common shares is determined by assuming thatstock options are exercised and the proceeds are used to purchase common shares at the average market price during the period.
in-the-money
The number of additional shares associated with capital instruments that potentially result in the issuance of common shares is based on the terms of the contract. On occurrence of contingencies as specified in the
Non-Viability
Contingent Capital (NVCC) instruments, the number of additional common shares associated with the NVCC subordinated debentures, NVCC subordinated additional Tier 1 capital notes, NVCC limited recourse capital notes and NVCC preferred shares is based on an automatic conversion formula as set out in the respective prospectus supplements.4 | Interest Rate Benchmark Reform |
Overview
Major interest rate benchmark reviews have been undertaken globally to either reform or phase out certain interbank offered rates (IBORs), including the Canadian Dollar Offered Rate (CDOR). As alternatives to IBORs, regulators have recommended markets begin adopting alternative risk-free rates (RFRs). Further to previous announcements by various regulators, the publication of GBP, JPY, CHF, and EUR LIBORs ceased after December 31, 2021, while most of the USD LIBOR tenors (i.e., overnight,
one-month,
three-month,six-month
and12-month
tenors) continue to be published until June 30, 2023.The Federal Reserve Board and other U.S. agencies have encouraged banks to transition away from USD LIBOR and cease entering new contracts after December 31, 2021, to facilitate an orderly transition. Similarly, OSFI stated that Federally Regulated Financial Institutions (FRFIs) should not enter new transactions using USD LIBOR as a reference rate after December 31, 2021.
1
64
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
On March 15, 2022, the U.S. Federal LIBOR legislation was signed into law establishing a framework for the replacement of USD LIBOR as the benchmark interest rate in existing contracts lacking effective fallback provisions that are difficult to amend before the cessation.
On May 16, 2022, Refinitiv Benchmark Services (UK) Limited (RBSL), the administrator of the CDOR, announced the cessation of the publication of
and three-month CDOR tenors after June 28, 2024, and this was authorized by the Ontario Securities Commission and the Autorité des marchés financiers. This
announcement provides certainty regarding the future of and three-month CDOR tenors and serves to set the fixed spread adjustment that will be
used in industry standard fallback provisions for both derivative and cash products. The Canadian Alternative Reference Rate (CARR) committee has published a detailed
transition roadmap with milestones to guide market participants on the transition away from CDOR across all product types. The CARR also confirmed the intention to move
forward with the development of forward-looking Term CORRA which is expected to become available in Q3 2023. OSFI has also set out expectations for FRFIs, with
transactions linked to CDOR, to transition to new reference rates prior to the cessation date.
one-month,
two-month,
and three-month CDOR tenors after June 28, 2024, and this was authorized by the Ontario Securities Commission and the Autorité des marchés financiers. This
announcement provides certainty regarding the future of
one-month,
two-month,
used in industry standard fallback provisions for both derivative and cash products. The Canadian Alternative Reference Rate (CARR) committee has published a detailed
transition roadmap with milestones to guide market participants on the transition away from CDOR across all product types. The CARR also confirmed the intention to move
forward with the development of forward-looking Term CORRA which is expected to become available in Q3 2023. OSFI has also set out expectations for FRFIs, with
transactions linked to CDOR, to transition to new reference rates prior to the cessation date.
IBOR reform and the associated move from IBORs to RFRs carries systemic and market risks. These risks, such as increased volatility, lack of liquidity and uneven fallback practices, may impact market participants. In addition to these inherent risks, the Bank is exposed to operational risk arising from the renegotiation of contracts, technology readiness to issue and trade products referencing RFRs, and conduct with clients and counterparties.
The Bank has established an enterprise-wide program (the Transition Program) to support the Bank’s transition away from IBORs to RFRs. The focus of the Transition Program is to address risks by identifying the exposures to various IBORs, evaluating the existing contract language in the event the IBORs cease to be published or available, developing the capabilities to issue and trade products referencing RFRs and communicating with clients and counterparties regarding industry developments pertaining to IBOR reform. The Transition Program provides quarterly updates to the Bank’s Regulatory Oversight Committee, and annually, to the Risk Committee of the Board of Directors, regarding the status of transition plans for migrating the Bank’s IBOR-linked products and upgrading systems and processes. The Transition Program continues its efforts on the transition of products referencing USD LIBOR and ensuring the Bank is not building its exposure to USD LIBOR, except as permitted by the regulators. As well, the Transition Program has updated its project plans to align with the CDOR transition roadmap and milestones published by the CARR committee and ensure alignment with OSFI’s expectations for FRFIs.
Non-derivative
The following table reflects the Bank’s IBOR exposure to
non-derivative
one-month,
two-month,
Six-month
Carrying amount | ||||||||||||||||||||||||||||||||
As at October 31, 2022 | As at November 1, 2021 | |||||||||||||||||||||||||||||||
($ millions) | USD LIBOR | CDOR | Other Rates (1) | Total | USD LIBOR | CDOR | Other Rates (1) | Total | ||||||||||||||||||||||||
Maturing after June 30, 2023 | Maturing after June 28, 2024 | Maturing after June 30, 2023 | Maturing after June 30, 2023 | Maturing after June 28, 2024 | Maturing after June 30, 2023 | |||||||||||||||||||||||||||
Non-derivative financial assets(3) | $ | 35,877 | $ | 23,936 | $ | 114 | $ | 59,927 | $ | 38,517 | $ | 11,284 | $ | 102 | $ | 49,903 | ||||||||||||||||
Non-derivative financial liabilities(4) | 1,225 | 23,390 | (2) | – | 24,615 | 1,306 | 13,424 | (2) | – | 14,730 |
(1) | Includes exposures to SGD SOR maturing after June 30, 2023. |
(2) | Excludes the Series 2006-1 Bank Deposit Note of $750 million which is currently at a fixed rate and will subsequently reset to asix-month CDOR based rate after December 31, 2036. |
(3) | Non derivative financial assets include carrying amounts of debt securities, loans and customer’s liability under acceptances (debt securities, loans and customer’s liability under acceptances measured at amortized cost are gross of allowance for credit losses). |
(4) | Non-derivative financial liabilities include carrying amounts of deposits, acceptances, obligations related to securities sold short, subordinated debentures and other liabilities. |
In addition to the exposures noted in the table above, Additional Tier 1 (AT1) capital instruments of $1.56 billion (US$1.25 billion) were reset to three-month USD LIBOR on October 12, 2022.
Derivatives and undrawn commitments
The following table reflects the Bank’s IBOR exposure to derivatives and undrawn commitments as at October 31, 2022, subject to reform that has yet to transition to alternative benchmark rates. The Bank’s IBOR exposure to financial instruments includes USD LIBOR
and SGD SOR
maturing after June 30, 2023, and
one-month,
two-month,
and three-month CDOR maturing after June 28, 2024. These exposures could remain outstanding until IBOR ceases and will thereforetransition in the future.
Notional amount | ||||||||||||||||||||||||||||||||
As at October 31, 2022 | As at November 1, 2021 | |||||||||||||||||||||||||||||||
($ millions) | USD LIBOR | CDOR | Other Rates (1) | Total | USD LIBOR | CDOR | Other Rates (1) | Total | ||||||||||||||||||||||||
Maturing after June 30, 2023 | Maturing after June 28, 2024 | Maturing after June 30, 2023 | Maturing after June 30, 2023 | Maturing after June 28, 2024 | Maturing after June 30, 2023 | |||||||||||||||||||||||||||
Derivatives | ||||||||||||||||||||||||||||||||
Single currency interest rate swaps (2) | $ | 797,296 | $ | 1,025,373 | $ | 962 | $ | 1,823,631 | $ | 600,359 | $ | 574,897 | $ | 918 | $ | 1,176,174 | ||||||||||||||||
Cross currency interest rate swaps (2) | 297,490 | 122,718 | – | 420,208 | 280,968 | 71,047 | – | 352,015 | ||||||||||||||||||||||||
Other (3) | 14,946 | 3,574 | – | 18,520 | 38,078 | 1,355 | – | 39,433 | ||||||||||||||||||||||||
Undrawn commitments | 9,047 | 4,787 | – | 13,834 | 32,454 | 2,875 | 91 | 35,420 |
(1) | Includes exposures to SGD SOR maturing after June 30, 2023. |
(2) | For single currency and/or cross currency interest rate swaps, where both legs are referencing rates directly impacted by the interest rate benchmark reform, the relevant notional amount for both legs are shown separately to reflect the risks relating to the reform for each rate. |
(3) | Other derivatives include futures, forward rate agreements, total return swaps and options. |
2022 Scotiabank Annual Report
|
1
65
Consolidated Financial Statements
Hedging derivatives
The following table reflects the Bank’s IBOR exposure to hedging derivatives as at October 31, 2022, subject to reform that has yet to transition to alternative benchmark rates. The Bank’s IBOR exposure to hedging derivatives include USD LIBOR maturing after
June
30, 2023, and
one-month,
two-month,
and three-month CDOR maturing after June 28, 2024. These exposures will remain outstanding until IBOR ceases and will therefore transition in thefuture.
Notional amount | ||||||||||||||||||||||||
As at October 31, 2022 | As at October 31, 2021 | |||||||||||||||||||||||
($ millions) | USD LIBOR | CDOR (2) | Total | USD LIBOR | CDOR (2) | Total | ||||||||||||||||||
Maturing after June 30, 2023 | Maturing after June 28, 2024 | Maturing after June 30, 2023 | Maturing after June 28, 2024 | |||||||||||||||||||||
Hedging derivatives (1) | $ | 67,934 | $ | 109,253 | $ | 177,187 | $ | 61,936 | $ | 104,175 | $ | 166,111 |
(1) | For cross currency swaps where both legs are referencing rates directly impacted by the interest rate benchmark reform , and a CAD leg is inserted to create two separate hedging relationships, the relevant notional amount for both legs are included in this table. |
(2) | For single currency interest rate swaps, where both legs are referencing rates directly impacted by the interest rate benchmark reform, the relevant notional amount for both legs are shown separately to reflect the risks relating to the reform for each rate. |
5 | 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
The International Accounting Standards Board issued IFRS 17on May 18, 2017, to replace IFRS 4 Insurance Contracts and is effective for annual periods beginning on or after January 1, 2023. IFRS 17 provides a comprehensive principle-based framework for the recognition, measurement, presentation and disclosure of insurance contracts. The standard is to be applied on a full retrospective basis unless impractical, and then either the modified retrospective or fair value method may be used.
Insurance Contracts
Under IFRS 17, groups of insurance contracts will be measured using current probability-weighted fulfillment cash flows and revenue will be recognized as the service is provided over the coverage period, based on the three measurement models as applicable: the general measurement model, the variable fee approach and the premium allocation approach.
For groups of contracts that are measured under the general measurement model and the variable fee approach, the contractual service margin will be recognized at initial recognition as a component of the carrying amount of the insurance contracts. Contractual service margin represents unearned profits to be recognized as coverage is provided in the future. The premium allocation approach will be applied to short duration contracts and results in insurance revenue being recognized over the coverage period systematically. For all measurement models, if the group of contracts is expected to be onerous, the losses will be recognized immediately.
IFRS 17 will be effective for the Bank from November 1, 2023 and is being implemented as a multi-year project for the Bank’s insurance and reinsurance entities. The project has an established governance structure led by the Executive Steering and Project Operations Committees assisted by a Project Management Office. The committees are comprised of representatives from Finance, Insurance Actuarial Services, Technology and the Insurance Business Operations. The Project involves technology implementation, policy and process changes to support the IFRS 17 processes. The Bank continues to assess and formulate the impact of adopting the new standard, including quantification.
6 | Cash and Deposits with Financial Institutions |
As at October 31 ($ millions) | 2022 | 2021 | ||||||
Cash and non-interest-bearing deposits with financial institutions | $ | 11,065 | $ | 9,693 | ||||
Interest-bearing deposits with financial institutions | 54,830 | 76,630 | ||||||
Total | $ | 65,895 | (1) | $ | 86,323 | (1) |
(1) | Net of allowances of $4 |
The Bank is required to maintain balances with central banks, other regulatory authorities and certain counterparties and these amounted to $5,958 million (2021 – $5,719 million) and are included above.
7 | Fair Value of Financial Instruments |
Determination of fair value
The calculation of 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.
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. Where possible, valuations are based on quoted prices or observable inputs obtained from active markets.
Independent Price Verification (IPV) is undertaken to assess 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 of the business. The Bank maintains a list of pricing sources that
1
66
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
are used in the IPV process. These sources include, but are not limited to, brokers, exchanges and pricing services. The valuation policies relating to the IPV process require that all pricing or rate sources used be external to the Bank. At least annually, an independent assessment of pricing or rate sources is performed to determine the market presence or market representative levels.
Quoted prices are not always available for(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 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 can be 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.
over-the-counter
Where financial instruments trade in inactive markets or when using models where observable parameters do not exist, significant management judgment is required for valuation methodologies and model inputs. Valuations that require the significant use of unobservable inputs are considered Level 3.
The specific inputs and valuation techniques used in determining the fair value of financial instruments are noted below. For Level 3 instruments, additional information is disclosed in the Level 3 sensitivity analysis on page 1.
71
The fair values of cash and deposits with banks, securities purchased under resale agreements and securities borrowed, customers’ liability under acceptances, obligations related to securities sold under repurchase agreements and securities lent, acceptances, and obligations related to securities sold short are assumed to approximate their carrying values, either due to their short-term nature or because they are frequently repriced to current market rates.
Trading loans
Trading loans are comprised of loans for market making, loans that serve as hedges to total return swaps, purchased mortgages pooled for securitization, and precious metal loans. Trading loans for market making or that serve as hedges to loan-based credit total return swaps are valued using consensus prices from Bank approved independent pricing services. Purchased mortgages that are held prior to securitization are valued using inputs observed from the MBS market. Precious metal loans are valued using a discounted cash flow model incorporating observable market inputs, including precious metals spot and forward prices and interest rate curves.
Government issued or guaranteed securities
The fair values of government issued or guaranteed debt securities are primarily based on unadjusted quoted prices in active markets, where available. Where quoted prices in active markets are not available, the fair value is determined by utilizing recent transaction prices, reliable broker quotes, or pricing services, which derive fair values using only observable valuation inputs, which are significant to the fair values.
For securities for which quoted prices are not available, the Bank uses a discounted cash flow method, using the effective yield of a similar instrument adjusted for instrument-specific risk factors that are observable inputs such as credit spread and contracted features.
Corporate and other debt
Corporate and other debt securities are valued using unadjusted quoted prices from independent market data providers or third-party broker quotes from an active market. Where direct prices from active markets are not available, the valuation is performed with a yield-based valuation approach. In some instances, interpolated yields of similar bonds are used to price securities. The Bank uses pricing models with observable inputs from market sources such as credit spread, interest rate curves, and recovery rates. These inputs are verified through an IPV process on a monthly basis.
For certain securities where there is no active market, no consensus market pricing and no indicative or executable independent third-party quotes, the Bank uses pricing by third-party providers or internal pricing models and cannot readily observe the significant inputs used to price such instruments.
Mortgage-backed securities
The fair value of residential mortgage-backed securities is primarily determined using broker quotes and independent market data providers. In limited circumstances, an internal price-based model may be used with the unobservable inputs that are significant to the fair value.
Equity securities
The fair value of equity securities is based on unadjusted quoted prices in active markets, where available. Where equity securities are less frequently traded, the most recent exchange-quoted pricing is used to determine fair value.
For private equity securities, where quoted prices in active markets are not readily available, the fair value is determined as a multiple of the underlying earnings or percentage of underlying net asset value obtained from third-party general partner statements.
Derivatives
Fair values of exchange-traded derivatives are based on unadjusted quoted market prices from an active market. Fair values of(OTC) derivatives or inactive exchange-traded derivatives are determined using pricing models, which take into account observable valuation inputs such as current market and contractual prices of the underlying instruments, as well as time value and yield curve or volatility factors underlying the positions. The determination of the fair value of derivatives includes consideration of credit risk, estimated funding costs and ongoing direct costs over the life of the instruments.
over-the-counter
Derivative products valued using a valuation technique with market-observable inputs mainly include interest rate swaps and options, currency swaps and forward foreign exchange contracts. The most frequently applied valuation techniques include forward pricing and swap models, using present value calculations. The models incorporate various inputs including foreign exchange spot, forward rates and interest rate curves.
Derivative products valued using a valuation technique with significant unobservable inputs, such as volatility, correlation, and forward curves, may include long dated contracts (interest rate swaps, currency swaps, option contracts, commodity contracts and certain credit default swaps) and other derivative products that reference a basket of assets.
2022 Scotiabank Annual Report
|
1
6
7Consolidated Financial Statements
Loans
The estimated fair value of loans carried at amortized cost reflects changes in the general level of interest rates and creditworthiness of borrowers that have occurred since the loans were originated or purchased. The particular valuation methods used are as follows:
• | Canadian fixed rate residential mortgages are fair valued by discounting the expected future contractual cash flows, taking into account expected prepayments and using management’s best estimate of average market interest rates currently offered for mortgages with similar remaining terms. |
• | For fixed rate business and government loans, fair value is determined by discounting the expected future contractual cash flows of these loans at interest rates estimated by using the appropriate currency swap curves for the remaining term, adjusted for a credit mark of the expected losses in the portfolio. |
• | For all other fixed rate loans, fair value is determined by discounting the expected future contractual cash flows of these loans at interest rates estimated by using the appropriate currency swap curves for the remaining term. |
• | For all floating rate loans fair value is assumed to equal book value. |
The fair value of loans is not adjusted for the value of any credit protection the Bank has purchased to mitigate credit risk.
Deposits
The fair values of deposits payable on demand or after notice or floating rate deposits payable on a fixed date is assumed to equal book value.
The estimated fair values of Canadian personal fixed rate deposits payable on a fixed date are fair valued by discounting the expected future contractual cash outflows, using management’s best estimate of average market interest rates currently offered for deposits with similar remaining terms.
Deposits under the Canada Mortgage Bond (CMB) program are fair valued by discounting expected future contractual cash flows using market observable inputs.
For all other fixed rate deposits, fair value is determined by discounting the expected future contractual cash flows of these deposits at interest rates estimated by using the appropriate currency swap curves for the remaining term.
For structured notes containing embedded features that are bifurcated from plain vanilla notes, the fair value of the embedded derivatives is determined using option pricing models with observable inputs similar to other interest rate or equity derivative contracts.
Certain deposits that are designated at FVTPL are structured notes. Their coupon or repayment terms can be linked to the performance of market parameters such as interest rates, equities, and foreign currencies. The fair value of these structured notes is determined using models which incorporate observable market inputs, such as interest rate curves, equity prices, equity volatility and foreign exchange rates. Some structured notes may have significant unobservable inputs to model valuation such as interest rate volatility and equity correlation.
Obligations related to securities sold short
The fair values of these obligations are based on the fair value of the underlying securities, which can include debt or equity securities. The method used to determine fair value is based on the quoted market prices where available in an active market.
Subordinated debentures and other liabilities
The fair values of subordinated debentures, including debentures issued by subsidiaries which are included in other liabilities, are determined by reference to quoted market prices where available or market prices for debt with similar terms and risks. The fair values of other liabilities are determined by the discounted contractual cash flow method with appropriate currency swap curves for the remaining term or market prices for instruments with similar terms and risks.
Fair value of financial instruments
The following table sets out the fair values of financial instruments of the Bank using the valuation methods and assumptions described above. The fair values disclosed do not include
non-financial
assets, such as property and equipment, investments in associates, precious metals, goodwill and other intangible assets.2022 | 2021 | |||||||||||||||
As at October 31 ($ millions) | Total fair value | Total carrying value | Total fair value | Total carrying value | ||||||||||||
Assets: | ||||||||||||||||
Cash and deposits with financial institutions | $ | 65,895 | $ | 65,895 | $ | 86,323 | $ | 86,323 | ||||||||
Trading assets | 113,154 | 113,154 | 146,312 | 146,312 | ||||||||||||
Securities purchased under resale agreements and securities borrowed | 175,313 | 175,313 | 127,739 | 127,739 | ||||||||||||
Derivative financial instruments | 55,699 | 55,699 | 42,302 | 42,302 | ||||||||||||
Investment securities – FVOCI and FVTPL | 86,398 | 86,398 | 57,042 | 57,042 | ||||||||||||
Investment securities – amortized cost | 22,443 | 23,610 | 18,133 | 18,157 | ||||||||||||
Loans | 729,149 | 744,987 | 641,964 | 636,986 | ||||||||||||
Customers’ liability under acceptances | 19,494 | 19,494 | 20,404 | 20,404 | ||||||||||||
Other financial assets | 27,394 | 27,394 | 14,256 | 14,256 | ||||||||||||
Liabilities: | ||||||||||||||||
Deposits | 904,033 | 916,181 | 798,335 | 797,259 | ||||||||||||
Financial instruments designated at fair value through profit or loss | 22,421 | 22,421 | 22,493 | 22,493 | ||||||||||||
Acceptances | 19,525 | 19,525 | 20,441 | 20,441 | ||||||||||||
Obligations related to securities sold short | 40,449 | 40,449 | 40,954 | 40,954 | ||||||||||||
Derivative financial instruments | 65,900 | 65,900 | 42,203 | 42,203 | ||||||||||||
Obligations related to securities sold under repurchase agreements and securities lent | 139,025 | 139,025 | 123,469 | 123,469 | ||||||||||||
Subordinated debentures | 8,038 | 8,469 | 6,733 | 6,334 | ||||||||||||
Other financial liabilities | 45,723 | 46,682 | 39,802 | 40,254 |
16
8
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
Changes in interest rates, credit spreads and liquidity costs are the main cause of changes in the fair value of the Bank’s financial instruments resulting in a favourable or unfavourable variance compared to carrying value. For the Bank’s financial instruments carried at cost or amortized cost, the carrying value is not adjusted to reflect increases or decreases in fair value due to market fluctuations, including those due to interest rate changes. For FVOCI investment securities, derivatives and financial instruments measured at FVTPL or designated as fair value through profit or loss, the carrying value is adjusted regularly to reflect the fair value.
Fair value hierarchy
The following table outlines the fair value hierarchy of instruments carried at fair value on a recurring basis and of instruments not carried at fair value.
2022 | 2021 | |||||||||||||||||||||||||||||||
As at October 31 ($ millions) | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||
Instruments carried at fair value on a recurring basis: | ||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Precious metals (1) | $ | – | $ | 543 | $ | – | $ | 543 | $ | – | $ | 755 | $ | – | $ | 755 | ||||||||||||||||
Trading assets | ||||||||||||||||||||||||||||||||
Loans | – | 7,811 | – | 7,811 | – | 8,113 | – | 8,113 | ||||||||||||||||||||||||
Canadian federal government and government guaranteed debt | 10,139 | 4,595 | – | 14,734 | 9,272 | 3,842 | – | 13,114 | ||||||||||||||||||||||||
Canadian provincial and municipal debt | 4,299 | 5,978 | – | 10,277 | 5,556 | 4,298 | – | 9,854 | ||||||||||||||||||||||||
US treasury and other US agencies’ debt | 11,957 | – | – | 11,957 | 6,760 | 63 | – | 6,823 | ||||||||||||||||||||||||
Other foreign governments’ debt | 15 | 8,287 | – | 8,302 | 129 | 9,559 | – | 9,688 | ||||||||||||||||||||||||
Corporate and other debt | 2,367 | 8,976 | 1 | 11,344 | 2,595 | 9,185 | 40 | 11,820 | ||||||||||||||||||||||||
Equity securities | 46,698 | 224 | 11 | 46,933 | 85,688 | 160 | 1 | 85,849 | ||||||||||||||||||||||||
Other | – | 1,796 | – | 1,796 | – | 1,051 | – | 1,051 | ||||||||||||||||||||||||
$ | 75,475 | $ | 37,667 | $ | 12 | $ | 113,154 | $ | 110,000 | $ | 36,271 | $ | 41 | $ | 146,312 | |||||||||||||||||
Investment securities (2) | ||||||||||||||||||||||||||||||||
Canadian federal government and government guaranteed debt | $ | 4,947 | $ | 6,055 | $ | – | $ | 11,002 | $ | 1,125 | $ | 4,679 | $ | – | $ | 5,804 | ||||||||||||||||
Canadian provincial and municipal debt | 2,029 | 3,400 | – | 5,429 | 1,937 | 3,218 | – | 5,155 | ||||||||||||||||||||||||
US treasury and other US agencies’ debt | 32,412 | 2,824 | – | 35,236 | 11,462 | 2,175 | – | 13,637 | ||||||||||||||||||||||||
Other foreign governments’ debt | 3,217 | 24,487 | – | 27,704 | 67 | 26,605 | 17 | 26,689 | ||||||||||||||||||||||||
Corporate and other debt | 40 | 1,874 | 48 | 1,962 | 10 | 1,319 | 27 | 1,356 | ||||||||||||||||||||||||
Equity securities | 3,210 | 215 | 1,640 | 5,065 | 2,879 | 218 | 1,304 | 4,401 | ||||||||||||||||||||||||
$ | 45,855 | $ | 38,855 | $ | 1,688 | �� | $ | 86,398 | $ | 17,480 | $ | 38,214 | $ | 1,348 | $ | 57,042 | ||||||||||||||||
Derivative financial instruments | ||||||||||||||||||||||||||||||||
Interest rate contracts | $ | – | $ | 15,193 | $ | 17 | $ | 15,210 | $ | – | $ | 13,124 | $ | 1 | $ | 13,125 | ||||||||||||||||
Foreign exchange and gold contracts | – | 32,223 | – | 32,223 | – | 18,293 | – | 18,293 | ||||||||||||||||||||||||
Equity contracts | 332 | 2,209 | 20 | 2,561 | 184 | 3,513 | 21 | 3,718 | ||||||||||||||||||||||||
Credit contracts | – | 780 | – | 780 | – | 245 | – | 245 | ||||||||||||||||||||||||
Commodity contracts | – | 4,912 | 13 | 4,925 | – | 6,921 | – | 6,921 | ||||||||||||||||||||||||
$ | 332 | $ | 55,317 | $ | 50 | $ | 55,699 | $ | 184 | $ | 42,096 | $ | 22 | $ | 42,302 | |||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||
Deposits | $ | – | $ | 15 | $ | – | $ | 15 | $ | – | $ | 175 | $ | – | $ | 175 | ||||||||||||||||
Financial liabilities designated at fair value through profit or loss | – | 22,421 | – | 22,421 | – | 22,354 | 139 | 22,493 | ||||||||||||||||||||||||
Obligations related to securities sold short | 35,059 | 5,387 | 3 | 40,449 | 35,487 | 5,467 | – | 40,954 | ||||||||||||||||||||||||
Derivative financial instruments | ||||||||||||||||||||||||||||||||
Interest rate contracts | – | 22,842 | 12 | 22,854 | – | 13,148 | 15 | 13,163 | ||||||||||||||||||||||||
Foreign exchange and gold contracts | – | 35,634 | – | 35,634 | – | 18,171 | – | 18,171 | ||||||||||||||||||||||||
Equity contracts | 636 | 3,063 | 21 | 3,720 | 307 | 4,737 | 6 | 5,050 | ||||||||||||||||||||||||
Credit contracts | – | 25 | – | 25 | – | 30 | – | 30 | ||||||||||||||||||||||||
Commodity contracts | – | 3,660 | 7 | 3,667 | – | 5,789 | – | 5,789 | ||||||||||||||||||||||||
$ | 636 | $ | 65,224 | $ | 40 | $ | 65,900 | $ | 307 | $ | 41,875 | $ | 21 | $ | 42,203 | |||||||||||||||||
Instruments not carried at fair value (3) : | ||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Investment securities – amortized cost | $ | 2,086 | $ | 20,357 | $ | – | $ | 22,443 | $ | 3,714 | $ | 14,417 | $ | 2 | $ | 18,133 | ||||||||||||||||
Loans (4) | – | – | 407,267 | 407,267 | – | – | 400,565 | 400,565 | ||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||
Deposits (4) | – | 365,134 | – | 365,134 | – | 290,341 | – | 290,341 | ||||||||||||||||||||||||
Subordinated debentures | – | 8,038 | – | 8,038 | – | 6,733 | – | 6,733 | ||||||||||||||||||||||||
Other liabilities | – | 23,679 | 330 | 24,009 | – | 24,414 | 209 | 24,623 |
(1) | The fair value of precious metals is determined based on quoted market prices and forward spot prices, where applicable, less the cost to sell. |
(2) | Excludes debt investment securities measured at amortized cost of $23,610 |
(3) | Represents the fair value of financial assets and liabilities where the carrying amount is not a reasonable approximation of fair value. |
(4) | Represents fixed rate instruments. |
2022 Scotiabank Annual Report
|
1
69
Consolidated Financial Statements
Level 3 instrument fair value changes
Financial instruments categorized as Level 3 as at October 31, 2022, in the fair value hierarchy
comprised of
structured corporate bonds, equity securities, complex derivatives and obligations related to securities sold short.
The following table summarizes the changes in Level 3 instruments carried at fair value for the year ended October 31, 2022.
All positive balances represent assets and negative balances represent liabilities. Consequently, positive amounts indicate purchases of assets or settlements of liabilities and negative amounts indicate sales of assets or issuances of liabilities.
As at October 31, 2022 | ||||||||||||||||||||||||||||||||
($ millions) | Fair value November 1 2021 | Gains/(losses) recorded in income | Gains/(losses) recorded in OCI | Purchases/ Issuances | Sales/ Settlements | Transfers into/out of Level 3 | Fair value October 31 2022 | Change in unrealized gains/(losses) recorded in income for instruments still held (1) | ||||||||||||||||||||||||
Trading assets | ||||||||||||||||||||||||||||||||
Corporate and other debt | $ | 40 | $ | (2 | ) | $ | – | $ | – | $ | (31 | ) | $ | (6 | ) | $ | 1 | $ | – | |||||||||||||
Equity securities | 1 | – | – | 3 | (1 | ) | 8 | 11 | – | |||||||||||||||||||||||
41 | (2 | ) | – | 3 | (32 | ) | 2 | 12 | – | |||||||||||||||||||||||
Investment securities | ||||||||||||||||||||||||||||||||
Other foreign governments’ debt | 17 | – | – | 60 | – | (77 | ) | – | n/a | |||||||||||||||||||||||
Corporate and other debt | 27 | (2 | ) | (14 | ) | 42 | (5 | ) | – | 48 | (3 | ) | ||||||||||||||||||||
Equity securities | 1,304 | 284 | 13 | 261 | (226 | ) | 4 | 1,640 | 284 | |||||||||||||||||||||||
1,348 | 282 | (1 | ) | 363 | (231 | ) | (73 | ) | 1,688 | 281 | ||||||||||||||||||||||
Derivative financial instruments – assets | ||||||||||||||||||||||||||||||||
Interest rate contracts | 1 | 12 | – | 6 | – | (2 | ) | 17 | 12 | |||||||||||||||||||||||
Equity contracts | 21 | (4 | ) | – | 5 | – | (2 | ) | 20 | (2 | ) (2) | |||||||||||||||||||||
Commodity contracts | – | 13 | – | – | – | – | 13 | 13 | ||||||||||||||||||||||||
Derivative financial instruments – liabilities | ||||||||||||||||||||||||||||||||
Interest rate contracts | (15 | ) | (12 | ) | – | – | – | 15 | (12 | ) | (10 | ) (3) | ||||||||||||||||||||
Equity contracts | (6 | ) | (10 | ) | – | (7 | ) | – | 2 | (21 | ) | (6 | ) (2) | |||||||||||||||||||
Commodity contracts | – | (7 | ) | – | – | – | – | (7 | ) | ( 7 | ) | |||||||||||||||||||||
1 | (8 | ) | – | 4 | – | 13 | 10 | – | ||||||||||||||||||||||||
Financial liabilities designated at fair value through profit or loss | (139 | ) | 23 | – | (22 | ) | 12 | 126 | – | – | ||||||||||||||||||||||
Obligations related to securities sold short | – | – | – | (2 | ) | 3 | (4 | ) | (3 | ) | – | |||||||||||||||||||||
Total | $ | 1,251 | $ | 295 | $ | (1 | ) | $ | 346 | $ | (248 | ) | $ | 64 | $ | 1,707 | $ | 281 |
(1) | These amounts represent the gains and losses from fair value changes of Level 3 instruments still held at the end of the period that are recorded in the Consolidated Statement of Income . |
(2) | Certain unrealized gains and losses on derivative assets and liabilities are largely offset by mark-to-market certai n derivative assets and liabilities. |
(3) | Certain unrealized losses on interest rate derivative contracts are largely offset by mark-to-market |
The following table summarizes the changes in Level 3 instruments carried at fair value for the year ended October 31, 2021.
As at October 31, 2021 | ||||||||||||||||||||||||||||
($ millions) | Fair value November 1 2020 | Gains/(losses) recorded in income (1) | Gains/(losses) recorded in OCI | Purchases/ Issuances | Sales/ Settlements | Transfers into/out of Level 3 | Fair value October 31 2021 | |||||||||||||||||||||
Trading assets | $ | 18 | $ | 7 | $ | – | $ | 28 | $ | (94 | ) | $ | 82 | $ | 41 | |||||||||||||
Investment securities | 910 | 288 | 41 | 260 | (180 | ) | 29 | 1,348 | ||||||||||||||||||||
Derivative financial instruments | (12 | ) | (4 | ) | – | (62 | ) | 51 | 28 | 1 | ||||||||||||||||||
Financial liabilities designated at fair value through profit or loss | – | (2 | ) | – | (101 | ) | – | (36 | ) | (139 | ) |
(1) | Gains or losses for items in Level 3 may be offset with losses or gains on related hedges in Level 1 or Level 2. |
Significant transfers
Significant transfers can occur between the fair value hierarchy levels when additional or new information regarding valuation inputs and their refinement and observability becomes available. The Bank recognizes transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.
The following significant transfers made between Levels 1 and 2 were based on whether the fair value was determined using quoted market prices from an active market.
During the year-ended October 31, 2022:
• | Trading assets of $705 |
• | Trading assets of $2,099 |
17
0
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
During the year-ended October 31, 2021:
• | Trading assets of $10,045 million, investment securities of $3,407 million and obligations related to securities sold short of $2,550 million were transferred out of Level 2 into Level 1. |
• | Trading assets of $9,972 million, investment securities of $13,522 million and obligations related to securities sold short of $2,235 million were transferred out of Level 1 into Level 2. |
The following significant transfers made between Levels 2 and 3 were based on whether the fair value was determined using significant unobservable inputs.
During the year-ended October 31, 2022:
• | Investments in other foreign governments’ debt of $ million and financial liabilities designated at fair value through profit or loss of $126 million were transferred out of Level 3 into Level 2. |
During the year-ended October 31, 2021:
• | Trading equity securities of $72 million were transferred out of Level 2 into Level 3. |
Level 3 sensitivity analysis
The table below sets out information about significant unobservable inputs used in measuring financial instruments categorized as Level 3 in the
fair
value hierarchy.Valuation technique | Significant unobservable inputs | Range of estimates for unobservable inputs (1) | Changes in fair value from reasonably possible alternatives ($ millions) | |||||||||||||
Investment securities | General Partner valuations | |||||||||||||||
Private equity securities (2) | Market comparable | per net asset value | 97% | (65)/ 65 | ||||||||||||
Capitalization rate | 3% | |||||||||||||||
Derivative financial instruments | ||||||||||||||||
Interest rate contracts | Option pricing | Interest rate | (1)/ 1 | |||||||||||||
model | volatility | 16% - 93% | ||||||||||||||
Equity contracts | Option pricing | Equity volatility | 2% - 64% | (6)/ 6 | ||||||||||||
model | Correlation | (58%) - 97% | ||||||||||||||
Commodity contracts | Discounted | Forward curves | 4% - 15% | (4)/ 4 |
(1) | The range of estimates represents the actual lowest and highest level inputs used to fair value financial instruments within each financial statement category. |
(2) | The valuation of private equity securities utilizes net asset values as reported by fund managers. Net asset values are not considered observable as the Bank cannot redeem these instruments at such values. The range for net asset values per unit or price per share has not been disclosed for these instruments since the valuations are not model-based. |
The Bank applies judgment in determining unobservable inputs used to calculate the fair value of Level 3 instruments.
The following section discusses the significant unobservable inputs for Level 3 instruments.
General Partner (GP) Valuations per Net Asset Value
Net asset values provided by GPs represent the fair value of investments in private equity securities.
Correlation
Correlation becomes an input into equity derivative pricing when the relationship between price movements of two or more of the underlying assets is relevant.
Volatility
Volatility for equity derivatives is a measure of asset price fluctuation. Interest rate volatility measures variability of a security yield or interest rate. Historic volatility is often calculated as the annualized standard deviation of daily price or yield variation for a given time period. Implied volatility is such that, when input into an option pricing model, returns a value equal to the current market value of the option.
Forward curves
Monthly forward curves for commodity contracts are required inputs to valuation. A portion of the forward curves are unobservable.
2022 Scotiabank Annual Report
|
17
1
Consolidated Financial Statements
8 | Trading Assets |
(a) | Trading securities |
An analysis of the carrying value of trading securities is as follows:
As at October 31, 2022 ($ millions) | Remaining term to maturity | |||||||||||||||||||||||||||
Within three months | Three to twelve months | One to five years | Five to ten years | Over ten years | No specific maturity | Carrying value | ||||||||||||||||||||||
Trading securities: | ||||||||||||||||||||||||||||
Canadian federal government issued or guaranteed debt | $ | 1,072 | $ | 2,581 | $ | 7,089 | $ | 1,934 | $ | 2,057 | $ | 1 | $ | 14,734 | ||||||||||||||
Canadian provincial and municipal debt | 1,906 | 1,839 | 948 | 1,256 | 4,328 | – | 10,277 | |||||||||||||||||||||
U.S. treasury and other U.S. agency debt | 1,216 | 5,224 | 3,277 | 2,000 | 240 | – | 11,957 | |||||||||||||||||||||
Other foreign government debt | 2,610 | 1,643 | 3,545 | 356 | 148 | – | 8,302 | |||||||||||||||||||||
Common shares | – | – | – | – | – | 46,753 | 46,753 | |||||||||||||||||||||
Other | 540 | 1,620 | 5,415 | 2,706 | 1,064 | 179 | 11,524 | |||||||||||||||||||||
Total | $ | 7,344 | $ | 12,907 | $ | 20,274 | $ | 8,252 | $ | 7,837 | $ | 46,933 | $ | 103,547 | ||||||||||||||
Total by currency (in Canadian equivalent): | ||||||||||||||||||||||||||||
Canadian dollar | $ | 3,274 | $ | 5,206 | $ | 10,243 | $ | 4,336 | $ | 6,859 | $ | 27,961 | $ | 57,879 | ||||||||||||||
U.S. dollar | 1,304 | 5,694 | 6,448 | 3,550 | 836 | 12,347 | 30,179 | |||||||||||||||||||||
Mexican peso | 411 | 1,094 | 2,891 | 77 | 64 | 120 | 4,657 | |||||||||||||||||||||
Other currencies | 2,355 | 913 | 692 | 289 | 78 | 6,505 | 10,832 | |||||||||||||||||||||
Total trading securities | $ | 7,344 | $ | 12,907 | $ | 20,274 | $ | 8,252 | $ | 7,837 | $ | 46,933 | $ | 103,547 | ||||||||||||||
As at October 31, 2021 ($ millions) | Remaining term to maturity | |||||||||||||||||||||||||||
Within three months | Three to twelve months | One to five years | Five to ten years | Over ten years | No specific maturity | Carrying value | ||||||||||||||||||||||
Trading securities: | ||||||||||||||||||||||||||||
Canadian federal government issued or guaranteed debt | $ | 868 | $ | 892 | $ | 6,134 | $ | 2,399 | $ | 2,821 | $ | – | $ | 13,114 | ||||||||||||||
Canadian provincial and municipal debt | 778 | 1,434 | 1,829 | 1,215 | 4,598 | – | 9,854 | |||||||||||||||||||||
U.S. treasury and other U.S. agency debt | 61 | 1,097 | 3,366 | 2,123 | 176 | – | 6,823 | |||||||||||||||||||||
Other foreign government debt | 3,226 | 2,000 | 4,022 | 293 | 147 | – | 9,688 | |||||||||||||||||||||
Common shares | – | – | – | – | – | 85,016 | 85,016 | |||||||||||||||||||||
Other | 873 | 1,547 | 5,969 | 2,180 | 1,251 | 833 | 12,653 | |||||||||||||||||||||
Total | $ | 5,806 | $ | 6,970 | $ | 21,320 | $ | 8,210 | $ | 8,993 | $ | 85,849 | $ | 137,148 | ||||||||||||||
Total by currency (in Canadian equivalent): | ||||||||||||||||||||||||||||
Canadian dollar | $ | 2,151 | $ | 2,663 | $ | 9,034 | $ | 4,663 | $ | 8,028 | $ | 28,116 | $ | 54,655 | ||||||||||||||
U.S. dollar | 432 | 1,848 | 7,618 | 3,124 | 717 | 42,386 | 56,125 | |||||||||||||||||||||
Mexican peso | 1,038 | 820 | 2,316 | 17 | 40 | 630 | 4,861 | |||||||||||||||||||||
Other currencies | 2,185 | 1,639 | 2,352 | 406 | 208 | 14,717 | 21,507 | |||||||||||||||||||||
Total trading securities | $ | 5,806 | $ | 6,970 | $ | 21,320 | $ | 8,210 | $ | 8,993 | $ | 85,849 | $ | 137,148 |
(b) | Trading loans |
The following table provides the geographic breakdown of trading loans:
As at October 31 ($ millions) | 2022 | 2021 | ||||||
Trading loans (1)(2) | ||||||||
U.S. (3) | $ | 6,489 | $ | 5,308 | ||||
Europe (4) | 708 | 548 | ||||||
Asia Pacific (4) | – | 15 | ||||||
Canada (4) | 512 | 2,034 | ||||||
Other (4) | 102 | 208 | ||||||
Total | $ | 7,811 | $ | 8,113 |
(1) | Geographic segmentation of trading loans is based upon the location of the ultimate risk of the underlying asset. |
(2) | Loans are primarily denominated in U.S. dollars. |
(3) | Includes trading loans that serve as a hedge to loan-based credit total return swaps of $6,414 |
(4) | These loans are primarily related to short-term precious metals trading and lending activities. |
1
72
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
9 | Financial Instruments Designated at Fair Value Through Profit or Loss |
In accordance with its risk management strategy, the Bank has elected to designate certain senior note liabilities at fair value through profit or loss to reduce an accounting mismatch between fair value changes in these instruments and fair value changes in related derivatives, and where a hybrid financial liability contains one or more embedded derivatives that are not closely related to the host contract. Changes in fair value of financial liabilities arising from the Bank’s own credit risk are recognized in other comprehensive income, without subsequent reclassification to net income.
The cumulative fair value adjustment due to own credit risk is determined at a point in time by comparing the present value of expected future cash flows over the term of these liabilities discounted at the Bank’s effective funding rate, and the present value of expected future cash flows discounted at a benchmark rate.
The following table presents the fair value of financial liabilities designated at fair value through profit or loss and their changes in fair value.
Fair value | Change in fair value | Cumulative change in FV (1) | ||||||||||||||||||||||
As at | For the year ended | |||||||||||||||||||||||
October 31 ($ millions) | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Senior note liabilities (2) | $ | 22,421 | $ | 22,493 | $ | 8,600 | $ | (906 | ) | $ | 7,893 | $ | (707 | ) |
(1) | The cumulative change in fair value is measured from the instruments’ date of initial recognition. |
(2) | Changes in fair value attributable to changes in the Bank’s own credit risk are recorded in other comprehensive income. Other changes in fair value are recorded in non-interest income – trading revenues. The offsetting fair value changes from associated derivatives is also recorded innon-interest income – trading revenues. |
The following tables present the changes in fair value attributabl
e
to changes in the Bank’sown
credit risk for financialliabilities
designated at fair value through profit or loss as well as their contractual maturity and carrying amounts.Senior Note Liabilities | ||||||||||||||||||||
($ millions) | Contractual maturity amount | Carrying Value | Difference between carrying value and contractual maturity amount | Changes in fair value for the period attributable to changes in own credit risk recorded in other comprehensive income | Cumulative changes in fair value attributable to changes in own credit risk (1) | |||||||||||||||
As at October 31, 2022 | $ | 30,314 | $ | 22,421 | $ | 7,893 | $ | 1,958 | $ | 1,229 | ||||||||||
As at October 31, 2021 | $ | 21,786 | $ | 22,493 | $ | (707 | ) | $ | (270 | ) | $ | (729 | ) |
(1) | The cumulative change in fair value is measured from the instruments’ date of initial recognition. |
2022 Scotiabank Annual Report
|
1
73
Consolidated Financial Statements
10 | Derivative Financial Instruments |
(a) | Notional amounts (1) |
The following tabl
e
provides the aggregate notional amounts of derivative financial instruments outstanding by type and segregated between those used by the Bank in its dealer capacity (Trading) and those derivatives designated in hedging relationships. The notional amounts of these contracts represent the derivatives volume outstanding and do not represent the potential gain or loss associated with the market risk or credit risk of such instruments. Credit derivatives within other derivative contracts are comprised primarily of purchased and sold credit default swap transactions. To a lesser extent, this category also includes total return swaps referenced to loans and debt securities. Other derivative contracts – other includes precious metals other than gold, and other commodities including energy and base metal derivatives. 2022 | 2021 | |||||||||||||||||||||||
As at October 31 ($ millions) | Trading | Hedging | Total | Trading | Hedging | Total | ||||||||||||||||||
Interest rate contracts | ||||||||||||||||||||||||
Exchange-traded: | ||||||||||||||||||||||||
Futures | $ | 205,283 | $ | – | $ | 205,283 | $ | 123,348 | $ | – | $ | 123,348 | ||||||||||||
Options purchased | – | – | – | 2,562 | – | 2,562 | ||||||||||||||||||
Options written | – | – | – | 1,000 | – | 1,000 | ||||||||||||||||||
205,283 | – | 205,283 | 126,910 | – | 126,910 | |||||||||||||||||||
Over-the-counter: | ||||||||||||||||||||||||
Forward rate agreements | 305 | – | 305 | 820 | – | 820 | ||||||||||||||||||
Swaps | 365,945 | 30,871 | 396,816 | 336,144 | 27,875 | 364,019 | ||||||||||||||||||
Options purchased | 39,321 | – | 39,321 | 38,298 | – | 38,298 | ||||||||||||||||||
Options written | 44,567 | – | 44,567 | 40,785 | – | 40,785 | ||||||||||||||||||
450,138 | 30,871 | 481,009 | 416,047 | 27,875 | 443,922 | |||||||||||||||||||
Over-the-counter counterparties): | ||||||||||||||||||||||||
Forward rate agreements | 132,691 | – | 132,691 | 219,021 | – | 219,021 | ||||||||||||||||||
Swaps | 5,061,950 | 255,932 | 5,317,882 | 3,708,222 | 289,185 | 3,997,407 | ||||||||||||||||||
Options purchased | – | – | – | – | – | – | ||||||||||||||||||
Options written | – | – | – | – | – | – | ||||||||||||||||||
5,194,641 | 255,932 | 5,450,573 | 3,927,243 | 289,185 | 4,216,428 | |||||||||||||||||||
Total | $ | 5,850,062 | $ | 286,803 | $ | 6,136,865 | $ | 4,470,200 | $ | 317,060 | $ | 4,787,260 | ||||||||||||
Foreign exchange and gold contracts | ||||||||||||||||||||||||
Exchange-traded: | ||||||||||||||||||||||||
Futures | $ | 14,880 | $ | – | $ | 14,880 | $ | 15,798 | $ | – | $ | 15,798 | ||||||||||||
Options purchased | – | – | – | – | – | – | ||||||||||||||||||
Options written | – | – | – | – | – | – | ||||||||||||||||||
14,880 | – | 14,880 | 15,798 | – | 15,798 | |||||||||||||||||||
Over-the-counter: | ||||||||||||||||||||||||
Spot and forwards | 433,314 | 38,737 | 472,051 | 381,737 | 28,642 | 410,379 | ||||||||||||||||||
Swaps | 576,564 | 118,890 | 695,454 | 502,558 | 67,617 | 570,175 | ||||||||||||||||||
Options purchased | 25,783 | – | 25,783 | 16,256 | – | 16,256 | ||||||||||||||||||
Options written | 26,716 | – | 26,716 | 16,495 | – | 16,495 | ||||||||||||||||||
1,062,377 | 157,627 | 1,220,004 | 917,046 | 96,259 | 1,013,305 | |||||||||||||||||||
Over-the-counter counterparties): | ||||||||||||||||||||||||
Spot and forwards | 15,662 | – | 15,662 | 16,627 | – | 16,627 | ||||||||||||||||||
Swaps | – | – | – | – | – | – | ||||||||||||||||||
Options purchased | – | – | – | – | – | – | ||||||||||||||||||
Options written | – | – | – | – | – | – | ||||||||||||||||||
15,662 | – | 15,662 | 16,627 | – | 16,627 | |||||||||||||||||||
Total | $ | 1,092,919 | $ | 157,627 | $ | 1,250,546 | $ | 949,471 | $ | 96,259 | $ | 1,045,730 | ||||||||||||
Other derivative contracts | ||||||||||||||||||||||||
Exchange-traded: | ||||||||||||||||||||||||
Equity | $ | 56,472 | $ | – | $ | 56,472 | $ | 52,335 | $ | – | $ | 52,335 | ||||||||||||
Credit | – | – | – | – | – | – | ||||||||||||||||||
Commodity and other contracts | 30,441 | – | 30,441 | 31,652 | – | 31,652 | ||||||||||||||||||
86,913 | – | 86,913 | 83,987 | – | 83,987 | |||||||||||||||||||
Over-the-counter: | ||||||||||||||||||||||||
Equity | 62,617 | 873 | 63,490 | 92,052 | 965 | 93,017 | ||||||||||||||||||
Credit | 19,957 | – | 19,957 | 20,800 | – | 20,800 | ||||||||||||||||||
Commodity and other contracts | 31,959 | – | 31,959 | 29,476 | – | 29,476 | ||||||||||||||||||
114,533 | 873 | 115,406 | 142,328 | 965 | 143,293 | |||||||||||||||||||
Over-the-counter counterparties): | ||||||||||||||||||||||||
Equity | – | – | – | – | – | – | ||||||||||||||||||
Credit | 7,077 | – | 7,077 | 6,621 | – | 6,621 | ||||||||||||||||||
Commodity and other contracts | 388 | – | 388 | 201 | – | 201 | ||||||||||||||||||
7,465 | – | 7,465 | 6,822 | – | 6,822 | |||||||||||||||||||
Total | $ | 208,911 | $ | 873 | $ | 209,784 | $ | 233,137 | $ | 965 | $ | 234,102 | ||||||||||||
Total notional amounts outstanding | $ | 7,151,892 | $ | 445,303 | $ | 7,597,195 | $ | 5,652,808 | $ | 414,284 | $ | 6,067,092 |
(1) | The notional amounts represent the amount to which a rate or price is applied to determine the amount of cash flows to be exchanged. |
1
74
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
(b) | Remaining term to maturity |
The following table summarizes the remaining term to maturity of the notional amounts of the Bank’s derivative financial instruments by type:
As at October 31, 2022 ($ millions) | Within one year | One to five years | Over five years | Total | ||||||||||||
Interest rate contracts | ||||||||||||||||
Futures | $ | 144,488 | $ | 60,795 | $ | – | $ | 205,283 | ||||||||
Forward rate agreements | 109,569 | 23,122 | 305 | 132,996 | ||||||||||||
Swaps | 2,458,160 | 2,142,509 | 1,114,029 | 5,714,698 | ||||||||||||
Options purchased | 16,599 | 19,841 | 2,881 | 39,321 | ||||||||||||
Options written | 13,897 | 18,045 | 12,625 | 44,567 | ||||||||||||
2,742,713 | 2,264,312 | 1,129,840 | 6,136,865 | |||||||||||||
Foreign exchange and gold contracts | ||||||||||||||||
Futures | 7,334 | 7,342 | 204 | 14,880 | ||||||||||||
Spot and forwards | 452,733 | 27,323 | 7,657 | 487,713 | ||||||||||||
Swaps | 175,690 | 331,270 | 188,494 | 695,454 | ||||||||||||
Options purchased | 18,916 | 6,514 | 353 | 25,783 | ||||||||||||
Options written | 21,698 | 4,675 | 343 | 26,716 | ||||||||||||
676,371 | 377,124 | 197,051 | 1,250,546 | |||||||||||||
Other derivative contracts | ||||||||||||||||
Equity | 78,998 | 40,414 | 550 | 119,962 | ||||||||||||
Credit | 17,124 | 6,602 | 3,308 | 27,034 | ||||||||||||
Commodity and other contracts | 42,464 | 20,027 | 297 | 62,788 | ||||||||||||
138,586 | 67,043 | 4,155 | 209,784 | |||||||||||||
Total | $ | 3,557,670 | $ | 2,708,479 | $ | 1,331,046 | $ | 7,597,195 | ||||||||
As at October 31, 2021 ($ millions) | Within one year | One to five years | Over five years | Total | ||||||||||||
Interest rate contracts | ||||||||||||||||
Futures | $ | 68,444 | $ | 54,787 | $ | 117 | $ | 123,348 | ||||||||
Forward rate agreements | 172,600 | 46,433 | 808 | 219,841 | ||||||||||||
Swaps | 1,461,005 | 1,989,045 | 911,376 | 4,361,426 | ||||||||||||
Options purchased | 22,432 | 15,694 | 2,734 | 40,860 | ||||||||||||
Options written | 17,428 | 14,895 | 9,462 | 41,785 | ||||||||||||
1,741,909 | 2,120,854 | 924,497 | 4,787,260 | |||||||||||||
Foreign exchange and gold contracts | ||||||||||||||||
Futures | 9,032 | 6,382 | 384 | 15,798 | ||||||||||||
Spot and forwards | 399,518 | 21,526 | 5,962 | 427,006 | ||||||||||||
Swaps | 116,067 | 287,705 | 166,403 | 570,175 | ||||||||||||
Options purchased | 12,215 | 3,976 | 65 | 16,256 | ||||||||||||
Options written | 14,373 | 2,115 | 7 | 16,495 | ||||||||||||
551,205 | 321,704 | 172,821 | 1,045,730 | |||||||||||||
Other derivative contracts | ||||||||||||||||
Equity | 102,031 | 43,146 | 175 | 145,352 | ||||||||||||
Credit | 15,554 | 7,810 | 4,057 | 27,421 | ||||||||||||
Commodity and other contracts | 39,966 | 21,182 | 181 | 61,329 | ||||||||||||
157,551 | 72,138 | 4,413 | 234,102 | |||||||||||||
Total | $ | 2,450,665 | $ | 2,514,696 | $ | 1,101,731 | $ | 6,067,092 |
(c) | Credit risk |
As with other financial assets, derivative instruments are subject to credit risk. Credit risk arises from the possibility that counterparties may default on their obligations to the Bank. However, whereas the credit risk of other financial assets is represented by the principal amount net of any applicable allowance for credit losses, the credit risk associated with derivatives is normally a small fraction of the notional amount of the derivative instrument.
Derivative contracts generally expose the Bank to credit loss if changes in market rates affect a counterparty’s position unfavourably and the counterparty defaults on payment. Accordingly, exposure to credit risk of derivatives is represented by the positive fair value of the instrument.
Negotiatedderivatives generally present greater credit exposure than exchange-traded contracts. The net change in the exchange-traded contracts is normally settled daily in cash with the exchange. Holders of these contracts look to the exchange for performance under the contract.
over-the-counter
The Bank strives to limit credit risk by dealing with counterparties that it believes are creditworthy, and investment grade counterparties account for a significant portion of the credit risk exposure arising from the Bank’s derivative transactions as at October 31, 2022. To control credit risk associated with derivatives, the Bank uses similar credit risk management activities and procedures to the approaches used in the lending business in assessing and adjudicating exposure. The Bank utilizes a risk metric, potential future exposure (PFE) for derivatives, to measure utilization
2022 Scotiabank Annual Report
|
1
75
Consolidated Financial Statements
against established credit limits to the counterparty. PFE measures the effect that changes in the market have on derivative exposures throughout the lifetime of the counterparties’ trades. Additionally, PFE considers risk mitigants such as netting and collateralization. PFE limits and utilization for derivatives counterparties are authorized and monitored by the Bank’s risk management unit.
The Bank obtains the benefit of netting by entering into master netting arrangements with counterparties (typically industry standard International Swaps and Derivatives Association (ISDA) 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. In this manner, the credit risk associated with favourable contracts is eliminated by the master netting arrangement to the extent that unfavourable contracts with the same counterparty are not settled before favourable contracts.
Collateralization is typically documented by way of 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 can require one party to post initial margin at the onset of each transaction. CSAs also allow for variation margin to be called if total uncollateralizedexposure exceeds an agreed upon threshold. Such variation margin provisions can be one way (only one party will ever post collateral) orThe CSA will also detail the types of collateral that are acceptable to each party, and the adjustments 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 (see also page 84 of the 2022 Annual Report).
mark-to-market
bi-lateral
(either party may post collateral depending upon which party isin-the-money).
Derivative instruments used by the Bank include credit derivatives in its investment and loan portfolios: credit protection is sold as an alternative to acquiring exposure to bond or loan assets, and bought to manage or mitigate credit exposures.
The following table summarizes the credit exposure of the Bank’s derivative financial instruments. The credit risk amount (CRA) represents the estimated replacement cost, or positive fair value, for all contracts. CRA takes into account master netting or collateral arrangements that have been made
1
. CRA does not reflect actual or expected losses.The credit equivalent amount (CEA) is the exposure at default (EAD) prescribed in the Capital Adequacy Requirements (CAR) Guidelines of the Office of the Superintendent of Financial Institutions (OSFI). The risk-weighted asset is calculated by multiplying the CEA by the capital requirement (K) times 12.5, where K is a function of the probability of default (PD), loss given default (LGD), maturity and prescribed correlation factors. Other derivative contracts – other includes precious metals other than gold, and other commodities, including energy and base metal derivatives.
2022 | 2021 | |||||||||||||||||||||||||||||||||
As at October 31 ($ millions) | Notional amount | Credit risk amount (CRA) (1) | Credit equivalent amount (CEA) (1) | Risk- Weighted Assets | Notional amount | Credit risk amount (CRA) (1) | Credit equivalent amount (CEA) (1) | Risk- Weighted Assets | ||||||||||||||||||||||||||
Interest rate contracts | ||||||||||||||||||||||||||||||||||
Futures | $ | 205,283 | $ | – | $ | 10 | $ | – | $ | 123,348 | $ | – | $ | 18 | $ | 1 | ||||||||||||||||||
Forward rate agreements | 132,996 | 311 | 93 | 55 | 219,841 | 32 | 125 | 68 | ||||||||||||||||||||||||||
Swaps | 5,714,698 | 4,331 | 7,655 | 589 | 4,361,426 | 3,951 | 4,760 | 1,120 | ||||||||||||||||||||||||||
Options purchased | 39,321 | 183 | 179 | 50 | 40,860 | 70 | 44 | 10 | ||||||||||||||||||||||||||
Options written | 44,567 | – | 7 | 1 | 41,785 | – | 11 | 3 | ||||||||||||||||||||||||||
6,136,865 | 4,825 | 7,944 | 695 | 4,787,260 | 4,053 | 4,958 | 1,202 | |||||||||||||||||||||||||||
Foreign exchange and gold contracts | ||||||||||||||||||||||||||||||||||
Futures | 14,880 | – | 253 | 5 | 15,798 | – | 148 | 3 | ||||||||||||||||||||||||||
Spot and forwards | 487,713 | 1,784 | 5,834 | 1,425 | 427,006 | 1,604 | 4,455 | 1,404 | ||||||||||||||||||||||||||
Swaps | 695,454 | 2,147 | 10,330 | 2,273 | 570,175 | 1,128 | 7,287 | 1,660 | ||||||||||||||||||||||||||
Options purchased | 25,783 | 472 | 638 | 172 | 16,256 | 351 | 247 | 118 | ||||||||||||||||||||||||||
Options written | 26,716 | – | 16 | 3 | 16,495 | – | 14 | 2 | ||||||||||||||||||||||||||
1,250,546 | 4,403 | 17,071 | 3,878 | 1,045,730 | 3,083 | 12,151 | 3,187 | |||||||||||||||||||||||||||
Other derivative contracts | ||||||||||||||||||||||||||||||||||
Equity | 119,962 | 636 | 6,534 | 968 | 145,352 | 1,423 | 9,707 | 1,340 | ||||||||||||||||||||||||||
Credit | 27,034 | 271 | 415 | 136 | 27,421 | 197 | 304 | 59 | ||||||||||||||||||||||||||
Commodity and other contracts | 62,788 | 2,636 | 9,057 | 649 | 61,329 | 4,562 | 6,610 | 1,182 | ||||||||||||||||||||||||||
209,784 | 3,543 | 16,006 | 1,753 | 234,102 | 6,182 | 16,621 | 2,581 | |||||||||||||||||||||||||||
Credit Valuation Adjustment | – | – | – | 6,422 | – | – | – | 3,957 | ||||||||||||||||||||||||||
Total derivatives | $ | 7,597,195 | $ | 12,771 | $ | 41,021 | $ | 12,748 | $ | 6,067,092 | $ | 13,318 | $ | 33,730 | $ | 10,927 | ||||||||||||||||||
Amount settled through central counterparties (2) | ||||||||||||||||||||||||||||||||||
Exchange-traded | 307,076 | – | 8,110 | 175 | 226,695 | – | 5,200 | 123 | ||||||||||||||||||||||||||
Over-the-counter | 5,473,700 | – | 4,175 | 83 | 4,239,877 | – | 849 | 17 | ||||||||||||||||||||||||||
$ | 5,780,776 | $ | – | $ | 12,285 | $ | 258 | $ | 4,466,572 | $ | – | $ | 6,049 | $ | 140 |
(1) | The amounts presented are net of collateral and master netting agreements at the product level. The total amounts relating to netting and collateral were $42,929 (2021 – $28,961) for CRA, and $84,431 |
(2) | Amounts are included under total derivatives above. Amounts include exposures settled directly through central counterparties and exposures settled through clearing members of central counterparties. |
1 | Regulatory haircuts prescribed by the OSFI CAR Guidelines are applied to the collateral balances of the CRA measure. |
1
76
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
(d) | Fair value |
The following table summarizes the fair value of derivatives segregated by type and segregated between trading and those derivatives designated in hedging relationships.
As at October 31 ($ millions) | 2022 | 2022 | 2021 | |||||||||||||||||||||||||
Average fair value | Year-end | Year-end (1) | ||||||||||||||||||||||||||
Favourable | Unfavourable | Favourable | Unfavourable | Favourable | Unfavourable | |||||||||||||||||||||||
Trading | ||||||||||||||||||||||||||||
Interest rate contracts | ||||||||||||||||||||||||||||
Forward rate agreements | $ | 121 | $ | 23 | $ | 311 | $ | 48 | $ | 69 | $ | 3 | ||||||||||||||||
Swaps | 9,243 | 10,631 | 8,385 | 8,300 | 9,805 | 9,427 | ||||||||||||||||||||||
Options | 558 | 563 | 1,384 | 571 | 412 | 195 | ||||||||||||||||||||||
9,922 | 11,217 | 10,080 | 8,919 | 10,286 | 9,625 | |||||||||||||||||||||||
Foreign exchange and gold contracts | ||||||||||||||||||||||||||||
Forwards | 6,782 | 5,412 | 8,624 | 7,128 | 4,823 | 4,154 | ||||||||||||||||||||||
Swaps | 12,148 | 12,461 | 15,672 | 16,722 | 9,070 | 10,796 | ||||||||||||||||||||||
Options | 462 | 361 | 795 | 576 | 357 | 259 | ||||||||||||||||||||||
19,392 | 18,234 | 25,091 | 24,426 | 14,250 | 15,209 | |||||||||||||||||||||||
Other derivative contracts | ||||||||||||||||||||||||||||
Equity | 3,555 | 4,041 | 2,560 | 3,648 | 3,677 | 5,049 | ||||||||||||||||||||||
Credit | 487 | 25 | 780 | 25 | 245 | 30 | ||||||||||||||||||||||
Commodity and other contracts | 7,317 | 5,964 | 4,925 | 3,667 | 6,921 | 5,789 | ||||||||||||||||||||||
11,359 | 10,030 | 8,265 | 7,340 | 10,843 | 10,868 | |||||||||||||||||||||||
Trading derivatives’ market valuation | $ | 40,673 | $ | 39,481 | $ | 43,436 | $ | 40,685 | $ | 35,379 | $ | 35,702 | ||||||||||||||||
Hedging | ||||||||||||||||||||||||||||
Interest rate contracts | ||||||||||||||||||||||||||||
Swaps | $ | 5,130 | $ | 13,935 | $ | 2,839 | $ | 3,538 | ||||||||||||||||||||
Foreign exchange and gold contracts | ||||||||||||||||||||||||||||
Forwards | 956 | 1,078 | 461 | 236 | ||||||||||||||||||||||||
Swaps | 6,176 | 10,130 | 3,582 | 2,726 | ||||||||||||||||||||||||
$ | 7,132 | $ | 11,208 | $ | 4,043 | $ | 2,962 | |||||||||||||||||||||
Other derivative contracts | ||||||||||||||||||||||||||||
Equity | $ | 1 | $ | 72 | $ | 41 | $ | 1 | ||||||||||||||||||||
Hedging derivatives’ market valuation | $ | 12,263 | $ | 25,215 | $ | 6,923 | $ | 6,501 | ||||||||||||||||||||
Total derivative financial instruments as per Statement of Financial Position | $ | 55,699 | $ | 65,900 | $ | 42,302 | $ | 42,203 | ||||||||||||||||||||
Less: impact of master netting and collateral (2) | 42,929 | 42,929 | 28,961 | 28,961 | ||||||||||||||||||||||||
Net derivative financial instruments (2) | $ | 12,770 | $ | 22,971 | $ | 13,341 | $ | 13,242 |
(1) | The average fair value of trading derivatives’ market valuation for the year ended October 31, 2021 was: favourable $37,046 and unfavourable $35,339. Average fair value amounts are based on the latest 13 month-end balances. |
(2) | Master netting agreement amounts are based on the capital adequacy criteria of the Basel Committee on Banking Supervision (BCBS) and OSFI. These criteria allow netting where there are legally enforceable contracts which enable net settlement in the event of a default, bankruptcy, liquidation or similar circumstances. |
(e) | Hedging activities |
The Bank manages interest rate risk, foreign currency risk and equity risk through hedge accounting
transactions
.Interest rate risk
Single-currency interest rate swaps are used to hedge interest rat
e
risk exposure. In fair value hedges of interest rate risk, the interest rate exposure from fixed rate assets and liabilities is converted from fixed to floating rate exposure. In cash flow hedges of interest rate risk, the interest rate exposure from floating rate assets and liabilities is converted from floating to fixed rate exposure. The Bank generally hedges interest rate risk only to the extent of benchmark interest rates.Foreign currency risk
In fair value hedges, cross-currency swaps and single-currency interest rate swaps are used to manage foreign currency exposure in conjunction with interest rate exposure. Cross-currency interest rate swaps or a combination of cross-currency basis swaps and single-currency interest rate swaps are mainly used to convert a foreign currency fixed rate exposure to a functional currency floating rate exposure. In hedges of both foreign currency and interest rate exposure, the interest rate risk is generally hedged only to the extent of the benchmark interest rate.
In cash flow hedges, cross-currency interest rate swaps, single-currency interest rate swaps, foreign currency forwards and foreign currency assets or liabilities are used to manage foreign currency exposure, or a combined foreign currency and interest rate exposure. Cross-currency interest rate swaps are used to offset the foreign currency exposure by exchanging the interest cash flows in one currency to another currency. Single-currency interest rate swaps may be used in conjunction with cross-currency swaps to convert the foreign currency exposure or resulting functional currency exposure from floating to fixed. Foreign currency forwards and foreign currency denominated assets and liabilities are used to offset the exposure arising from highly probable future cash flows, including purchase considerations for business acquisitions and sale proceeds for business divestitures that are denominated in a foreign currency. In hedges of both foreign currency and interest rate exposure, the interest rate risk is generally hedged only to the extent of the benchmark interest rate.
In net investment hedges, the Bank designates foreign currency liabilities and foreign currency forwards as hedging instruments to manage foreign currency exposure. The designated
non-derivative
liabilities are denominated in the functional currency of the net investment, such that the foreign currency translation impact from the net investment will be offset by the foreign currency impact from the designated liabilities. The foreign currency forward contracts are structured to sell the functional currency of the net investment in return for the Bank’s functional currency.2022 Scotiabank Annual Report
|
1
77
Consolidated Financial Statements
Equity risk
Equity risk is created by the Bank’s share-based compensation plans awarded to employees. In cash flow hedges, total return swaps are mainly used to offset the equity exposure by exchanging interest payments for payments based on the returns on the underlying shares.
For all of the risks identified above, the economic relationship and hedge ratio are determined using a qualitative and quantitative assessment. This assessment incorporates comparison of critical terms of the hedged and hedging item, and regression analysis. For regression analysis, a hedging relationship is considered highly effective when all of the following criteria are met: correlation between the variables in the regression is at least 0.8 or greater; slope of the regression is within a The main sources of hedge ineffectiveness include the following:
0.8-1.25
range; and confidence level of the slope is at least 95%.• | The use of different discount curves to value the hedged item and the hedging derivative in fair value hedges, in order to reflect the reduced credit risk of collateralized derivatives; |
• | Differences in key terms such as the underlying reference interest rate tenor, reset/settlement frequency and floating spread between the hedging instruments and the hedged item. |
The Bank has elected to continue to apply the hedge accounting requirements of IAS 39. However, the Bank has implemented the additional hedge accounting disclosures that are required by the IFRS 9 related amendments to IFRS 7 “”.
Financial Instruments: Disclosures
The following table summarizes the notional amounts of derivatives and carrying amounts of cash and deposit liabilities designated as hedging instruments.
2022 | 2021 | |||||||||||||||||||||||||||||||
Notional amounts (1) | Notional amounts (1) | |||||||||||||||||||||||||||||||
Remaining term to maturity | Remaining term to maturity | |||||||||||||||||||||||||||||||
As at October 31 ($ millions) | Within one year | One to five years | Over five years | Total | Within one year | One to five years | Over five years | Total | ||||||||||||||||||||||||
Fair value hedges | ||||||||||||||||||||||||||||||||
Interest rate risk – swaps | $ | 35,535 | $ | 89,709 | $ | 17,588 | $ | 142,832 | $ | 21,850 | $ | 127,350 | $ | 14,489 | $ | 163,689 | ||||||||||||||||
Foreign currency/interest rate risk – swaps | – | – | – | – | – | 11 | – | 11 | ||||||||||||||||||||||||
Cash flow hedges | ||||||||||||||||||||||||||||||||
Interest rate risk – swaps | 18,267 | 69,933 | 34,180 | 122,380 | 34,489 | 62,934 | 28,754 | 126,177 | ||||||||||||||||||||||||
Foreign currency/interest rate risk – swaps | 16,886 | 17,628 | 8,527 | 43,041 | 16,906 | 23,224 | 7,645 | 47,775 | ||||||||||||||||||||||||
Foreign currency risk | ||||||||||||||||||||||||||||||||
Swaps | 47,525 | 89,863 | 28,745 | 166,133 | 29,002 | 54,434 | 14,425 | 97,861 | ||||||||||||||||||||||||
Foreign currency forwards | 14,699 | – | – | 14,699 | 10,510 | – | – | 10,510 | ||||||||||||||||||||||||
Cash | 77 | – | – | 77 | 66 | – | – | 66 | ||||||||||||||||||||||||
Equity risk – total return swaps | 270 | 603 | – | 873 | 316 | 649 | – | 965 | ||||||||||||||||||||||||
Net investment hedges | ||||||||||||||||||||||||||||||||
Foreign currency risk | ||||||||||||||||||||||||||||||||
Foreign currency forwards | 24,038 | – | – | 24,038 | 18,132 | – | – | 18,132 | ||||||||||||||||||||||||
Deposit liabilities | 6,289 | – | – | 6,289 | 5,714 | – | – | 5,714 | ||||||||||||||||||||||||
Total | $ | 163,586 | $ | 267,736 | $ | 89,040 | $ | 520,362 | $ | 136,985 | $ | 268,602 | $ | 65,313 | $ | 470,900 |
(1) | Notional amounts relating to derivatives that are hedging multiple risks in both assets and liabilities are included in more than one category. |
1
7
8|
2022 Scotiabank Annual Report
Consolidated Financial Statements
The following table shows the average rate or price of significant hedging instruments.
2022 | 2021 | |||||||||||||||||||||||
Average rate or price (1) | Average rate or price (1) | |||||||||||||||||||||||
As at October 31 | Fixed interest rate | FX rate | Price | Fixed interest rate | FX rate | Price | ||||||||||||||||||
Fair value hedges | ||||||||||||||||||||||||
Interest rate risk – swaps | 1.83 | % | n/a | n/a | 1.18 | % | n/a | n/a | ||||||||||||||||
Cash flow hedges | ||||||||||||||||||||||||
Interest rate risk – swaps | 2.57 | % | n/a | n/a | 1.22 | % | n/a | n/a | ||||||||||||||||
Foreign currency/interest rate risk – swaps | ||||||||||||||||||||||||
CAD-USD | 1.70 | % | 1.30 | n/a | 1.33 | % | 1.31 | n/a | ||||||||||||||||
Foreign currency risk | ||||||||||||||||||||||||
Swaps | ||||||||||||||||||||||||
CAD-USD | n/a | 1.27 | n/a | n/a | 1.27 | n/a | ||||||||||||||||||
CAD-EUR | n/a | 1.19 | n/a | n/a | 1.50 | n/a | ||||||||||||||||||
CAD-GBP | n/a | 1.56 | n/a | n/a | 1.72 | n/a | ||||||||||||||||||
Foreign currency forwards | ||||||||||||||||||||||||
CAD-USD | n/a | 1.29 | n/a | n/a | 1.26 | n/a | ||||||||||||||||||
Equity price risk – total return swaps | n/a | n/a | $ | 65.85 | n/a | n/a | $ | 71.29 | ||||||||||||||||
Net investment hedges | ||||||||||||||||||||||||
Foreign currency risk – foreign currency forwards | ||||||||||||||||||||||||
CAD-USD | n/a | 1.29 | n/a | n/a | 1.26 | n/a | ||||||||||||||||||
MXN-CAD | n/a | 16.91 | n/a | n/a | 16.77 | n/a | ||||||||||||||||||
PEN-CAD | n/a | 3.07 | n/a | n/a | 3.08 | n/a |
(1) | The average rate or price is calculated in aggregate for all of the Bank’s hedge relationships, including hedges of assets and liabilities. The majority of the Bank’s hedges have a remaining term to maturity of less than 5 years. |
For fair value hedges, the following table contains information related to items designated as hedging instruments, hedged items and ineffectiveness.
Carrying amount of the hedging instruments (1) | Hedge Ineffectiveness (2) | Accumulated amount of fair value hedge adjustment gains/ (losses) on the hedged item (4) | ||||||||||||||||||||||||||||||||||
For the year ended October 31, 2022 ($ millions) | Assets | Liabilities | Gains/(losses) on hedging instrument used to calculate hedge ineffectiveness | Gains/ (losses) on hedged item used to calculate hedge ineffectiveness | Ineffectiveness recorded in non-interest income – other | Carrying amount of the hedged item (3) | Active hedges | Discontinued hedges | ||||||||||||||||||||||||||||
Fair value hedges | ||||||||||||||||||||||||||||||||||||
Interest rate risk – swaps | $ | 4,238 | $ | (4,635 | ) | $ | 1,188 | $ | (1,179 | ) | $ | 9 | ||||||||||||||||||||||||
Investment securities | 2,837 | (2,811 | ) | 26 | $ | 31,325 | $ | (2,500 | ) | $ | 54 | |||||||||||||||||||||||||
Loans | 2,550 | (2,579 | ) | (29 | ) | 111,469 | (1,552 | ) | (1,926 | ) | ||||||||||||||||||||||||||
Deposit liabilities | (3,998 | ) | 4,010 | 12 | (72,004 | ) | 3,997 | 312 | ||||||||||||||||||||||||||||
Subordinated debentures | (201 | ) | 201 | – | (5,354 | ) | 202 | (44 | ) | |||||||||||||||||||||||||||
Foreign currency/interest | ||||||||||||||||||||||||||||||||||||
rate risk – swaps | – | – | – | – | – | |||||||||||||||||||||||||||||||
Investment securities | – | – | – | 80 | – | (1 | ) | |||||||||||||||||||||||||||||
Total | $ | 4,238 | $ | (4,635 | ) | $ | 1,188 | $ | (1,179 | ) | $ | 9 | $ | 65,516 | $ | 147 | $ | (1,605 | ) |
(1) | Comprises unrealized gains/losses and are recorded within derivative financial instruments in assets and liabilities, respectively in the Consolidated Statement of Financial Position. |
(2) | Includes ineffectiveness related to hedges discontinued during the year ended October 31, 2022. |
(3) | This represents the carrying value on the Consolidated Statement of Financial Position and comprises amortized cost before allowance for credit losses, plus fair value hedge adjustment, except for investment securities which are carried at fair value. |
(4) | This represents the accumulated fair value hedge adjustment and is a component of the carrying amount of the hedged item. |
2022 Scotiabank Annual Report
|
17
9
Consolidated Financial Statements
Carrying amount of the hedging instruments (1) | Hedge Ineffectiveness (2) | Accumulated amount of fair value hedge adjustment gains/ (losses) on the hedged item (4) | ||||||||||||||||||||||||||||||||||
For the year ended October 31, 2021 ($ millions) | Assets | Liabilities | Gains/(losses) on hedging instrument used to calculate hedge ineffectiveness | Gains/ (losses) on hedged item used to calculate hedge ineffectiveness | Ineffectiveness recorded in non-interest income – other | Carrying amount of the hedged item (3) | Active hedges | Discontinued hedges | ||||||||||||||||||||||||||||
Fair value hedges | ||||||||||||||||||||||||||||||||||||
Interest rate risk – swaps | $ | 1,868 | $ | (967 | ) | $ | 1,708 | $ | (1,736 | ) | $ | (28 | ) | |||||||||||||||||||||||
Investment securities | 790 | (809 | ) | (19 | ) | $ | 16,315 | $ | 92 | $ | 163 | |||||||||||||||||||||||||
Loans | 2,233 | (2,230 | ) | 3 | 117,009 | (1,339 | ) | 5 | ||||||||||||||||||||||||||||
Deposit liabilities | (1,236 | ) | 1,224 | (12 | ) | (60,444 | ) | 417 | (371 | ) | ||||||||||||||||||||||||||
Subordinated debentures | (79 | ) | 79 | – | (4,692 | ) | (1 | ) | (71 | ) | ||||||||||||||||||||||||||
Foreign currency/interest | ||||||||||||||||||||||||||||||||||||
rate risk – swaps | – | (1 | ) | 3 | (2 | ) | 1 | |||||||||||||||||||||||||||||
Investment securities | 3 | (2 | ) | 1 | 89 | – | (1 | ) | ||||||||||||||||||||||||||||
Total | $ | 1,868 | $ (968 | ) | $ 1,711 | $ | (1,738 | ) | $ (27 | ) | $ 68,277 | $ | (831 | ) | $ | (275 | ) |
(1) | Comprises unrealized gains/losses and are recorded within derivative financial instruments in assets and liabilities, respectively in the Consolidated Statement of Financial Position. |
(2) | Includes ineffectiveness related to hedges discontinued during the year ended October 31, 2021. |
(3) | This represents the carrying value on the Consolidated Statement of Financial Position and comprises amortized cost before allowance for credit losses, plus fair value hedge adjustment, except for investment securities which are carried at fair value. |
(4) | This represents the accumulated fair value hedge adjustment and is a component of the carrying amount of the hedged item. |
For cash flow hedges and net investment hedges, the following table contains information related to items designated as hedging instruments, hedged items and ineffectiveness.
Carrying amount of the hedging instruments (1) | Hedge Ineffectiveness (2) | |||||||||||||||||||||||
For the year ended October 31, 2022 ($ millions) | Assets | Liabilities | Gains/(losses) on hedging instrument used to calculate hedge ineffectiveness | Gains/(losses) on hypothetical derivative used to calculate hedge ineffectiveness (3) | Ineffectiveness recorded in non-interest income – other (4) | |||||||||||||||||||
Cash flow hedges | ||||||||||||||||||||||||
Interest rate risk – swaps | $ | 1,977 | $ | (7,683 | ) | $ | (4,193 | ) | $ | (4,250 | ) | $ | 11 | |||||||||||
Foreign currency/interest rate risk – swaps | 314 | (3,277 | ) | (4,318 | ) | (4,349 | ) | (24 | ) | |||||||||||||||
Foreign currency risk | ||||||||||||||||||||||||
Swaps | 4,777 | (8,470 | ) | (2,592 | ) | (2,589 | ) | (5 | ) | |||||||||||||||
Foreign currency forwards | 678 | (61 | ) | 1,162 | 1,159 | 2 | ||||||||||||||||||
Cash | 72 | – | 22 | 22 | – | |||||||||||||||||||
Equity risk – total return swaps | 1 | (72 | ) | (134 | ) | (134 | ) | – | ||||||||||||||||
7,819 | (19,563 | ) | (10,053 | ) | (10,141 | ) | (16 | ) | ||||||||||||||||
Net investment hedges | ||||||||||||||||||||||||
Foreign currency risk | ||||||||||||||||||||||||
Foreign currency forwards | 278 | (1,017 | ) | (1,343 | ) | (1,343 | ) | – | ||||||||||||||||
Deposit liabilities | n/a | (6,289 | ) | (574 | ) | (574 | ) | – | ||||||||||||||||
278 | (7,306 | ) | (1,917 | ) | (1,917 | ) | – | |||||||||||||||||
Total | $ | 8,097 | $ | (26,869 | ) | $ | (11,970 | ) | $ | (12,058 | ) | $ | (16 | ) |
(1) | Comprises unrealized gains/losses for derivative instruments and are recorded within derivative financial instruments in assets and liabilities, respectively in the Consolidated Statement of Financial Position. |
(2) | Includes ineffectiveness related to hedges discontinued during the year ended October 31, 2022. |
(3) | For cash flow hedges, hypothetical derivatives having critical terms which match those of the underlying hedged item are used to assess hedge ineffectiveness. |
(4) | For cash flow hedges, ineffectiveness is only recognized in the Consolidated Statement of Income when the life-to-date derivative . |
18
0
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
Carrying amount of the hedging instruments (1) | Hedge Ineffectiveness (2) | |||||||||||||||||||||||
For the year ended October 31, 2021 ($ millions) | Assets | Liabilities | Gains/(losses) on hedging instrument used to calculate hedge ineffectiveness | Gains/(losses) on hypothetical derivative used to calculate hedge ineffectiveness (3) | Ineffectiveness recorded in non-interest income – other (4) | |||||||||||||||||||
Cash flow hedges | ||||||||||||||||||||||||
Interest rate risk – swaps | $ | 1,204 | $ | (2,818 | ) | $ | (1,004 | ) | $ | (1,017 | ) | $ | 16 | |||||||||||
Foreign currency/interest rate risk – swaps | 2,428 | (180 | ) | 1,352 | 1,378 | (5 | ) | |||||||||||||||||
Foreign currency risk | ||||||||||||||||||||||||
Swaps | 921 | (2,298 | ) | (1,969 | ) | (1,973 | ) | 1 | ||||||||||||||||
Foreign currency forwards | 25 | (155 | ) | 72 | 69 | 5 | ||||||||||||||||||
Cash | 66 | – | (2 | ) | (2 | ) | – | |||||||||||||||||
Equity risk – total return swaps | 41 | (1 | ) | 330 | 330 | – | ||||||||||||||||||
4,685 | (5,452 | ) | (1,221 | ) | (1,215 | ) | 17 | |||||||||||||||||
Net investment hedges | ||||||||||||||||||||||||
Foreign currency risk | ||||||||||||||||||||||||
Foreign currency forwards | 436 | (81 | ) | 841 | 841 | – | ||||||||||||||||||
Deposit liabilities | n/a | (5,714 | ) | 435 | 435 | – | ||||||||||||||||||
436 | (5,795 | ) | 1,276 | 1,276 | – | |||||||||||||||||||
Total | $ | 5,121 | $ (11,247 | ) | $ 55 | $ 61 | $ 17 |
(1) | Comprises unrealized gains/losses for derivative instruments and are recorded within derivative financial instruments in assets and liabilities, respectively in the Consolidated Statement of Financial Position. |
(2) | Includes ineffectiveness related to hedges discontinued during the year ended October 31, 2021. |
(3) | For cash flow hedges, hypothetical derivatives having critical terms which match those of the underlying hedged item are used to assess hedge ineffectiveness. |
(4) | For cash flow hedges, ineffectiveness is only recognized in the Consolidated Statement of Income when the life-to-date |
For cash flow hedges and net investment hedges, the following table contains information regarding the impacts on the Consolidated Statement of Other Comprehensive Income on a
pre-tax
basis.AOCI gains/ (losses) as at November 1, 2021 | Net gains/ (losses) recognized in OCI | Amount reclassified to net income as the hedged item affects net income (1) | AOCI gains/ (losses) as at October 31, 2022 | Balance in cash flow hedge reserve/unrealized foreign currency translation account as at October 31, 2022 | ||||||||||||||||||||
For the year ended October 31, 2022 ($ millions) | Active hedges | Discontinued hedges | ||||||||||||||||||||||
Cash flow hedges | ||||||||||||||||||||||||
Interest rate risk | $ | (456 | ) | $ | (4,204 | ) | $ | 1,202 | $ | (3,458 | ) | $ | (3,526 | ) | $ | 68 | ||||||||
Foreign currency/interest rate risk | (9 | ) | (4,294 | ) | 2,428 | (1,875 | ) | (2,003 | ) | 128 | ||||||||||||||
Foreign currency risk | 43 | (1,405 | ) | 181 | (1,181 | ) | (1,179 | ) | (2 | ) | ||||||||||||||
Equity risk | 61 | (134 | ) | 69 | (4 | ) | (4 | ) | – | |||||||||||||||
(361 | ) | (10,037 | ) | 3,880 | (6,518 | ) | (6,712 | ) | 194 | |||||||||||||||
Net investment hedges | ||||||||||||||||||||||||
Foreign currency risk | (1,829 | ) | (1,917 | ) | 262 | (3,484 | ) | (3,387 | ) | (97 | ) | |||||||||||||
Total | $ | (2,190 | ) | $ | (11,954 | ) | $ | 4,142 | $ | (10,002 | ) | $ | (10,099 | ) | $ | 97 |
(1) | Amounts reclassified from the cash flow hedge and net investment hedge reserves to net income are recorded in non-interest income-other except for amortization, which is recorded in interest income. |
AOCI gains/ (losses) as at November 1, 2020 | Net gains/ (losses) recognized in OCI | Amount reclassified to net income as the hedged item affects net income (1) | AOCI gains/ (losses) as at October 31, 2021 | Balance in cash flow hedge reserve/unrealized foreign currency translation account as at October 31, 2021 | ||||||||||||||||||||
For the year ended October 31, 2021 ($ millions) | Active hedges | Discontinued hedges | ||||||||||||||||||||||
Cash flow hedges | ||||||||||||||||||||||||
Interest rate risk | $ | 412 | $ | (1,033 | ) | $ | 165 | $ | (456 | ) | $ | (991 | ) | $ | 535 | |||||||||
Foreign currency/interest rate risk | 1,054 | 1,434 | (2,497 | ) | (9 | ) | (192 | ) | 183 | |||||||||||||||
Foreign currency risk | (706 | ) | (1,998 | ) | 2,747 | 43 | 31 | 12 | ||||||||||||||||
Equity risk | (30 | ) | 330 | (239 | ) | 61 | 61 | – | ||||||||||||||||
730 | (1,267 | ) | 176 | (361 | ) | (1,091 | ) | 730 | ||||||||||||||||
Net investment hedges | ||||||||||||||||||||||||
Foreign currency risk | (3,136 | ) | 1,276 | 31 | (1,829 | ) | (1,726 | ) | (103 | ) | ||||||||||||||
Total | $ | (2,406 | ) | $ | 9 | $ | 207 | $ | (2,190 | ) | $ | (2,817 | ) | $ | 627 |
(1) | Amounts reclassified from the cash flow hedge and net investment hedge reserves to net income are recorded in non- interest income-other. |
2022 Scotiabank Annual Report
|
18
1
Consolidated Financial Statements
11 | Offsetting Financial Assets and Financial Liabilities |
The Bank is eligible to present certain financial assets and financial liabilities as listed in the table below on a net basis on the Consolidated Statement of Financial Position pursuant to criteria described in Note 3 – Significant accounting policies.
The following tables provide information on the impact of offsetting on the Bank’s Consolidated Statement of Financial Position, as well as the financial impact of netting for instruments that are subject to enforceable master netting arrangements or similar agreements, but do not qualify for offsetting in the Consolidated Statement of Financial Position, as well as available cash and financial instrument collateral.
As at October 31, 2022 ($ millions) | ||||||||||||||||||||||||
Types of financial assets | Gross amounts of recognized financial instruments | Gross amounts of recognized financial instruments offset in the Consolidated Statement of Financial Position | Net amounts of financial instruments presented in the Consolidated Statement of Financial Position | Related amounts not offset in the Consolidated Statement of Financial Position | Net amount (3) | |||||||||||||||||||
Impact of master netting arrangements or similar agreements (1) | Collateral (2)(4) | |||||||||||||||||||||||
Derivative financial instruments | $ | 55,775 | $ | (76 | ) | $ | 55,699 | $ | (36,519 | ) | $ | (6,132 | ) | $ | 13,048 | |||||||||
Securities purchased under resale agreements and securities borrowed | 230,893 | (55,580 | ) | 175,313 | (16,173 | ) | (151,417 | ) | 7,723 | |||||||||||||||
Total | $ | 286,668 | $ | (55,656 | ) | $ | 231,012 | $ | (52,692 | ) | $ | (157,549 | ) | $ | 20,771 | |||||||||
Types of financial liabilities | ||||||||||||||||||||||||
Derivative financial instruments | $ | 65,976 | $ | (76 | ) | $ | 65,900 | $ | (36,519 | ) | $ | (17,484 | ) | $ | 11,897 | |||||||||
Obligations related to securities sold under repurchase agreements and securities lent | 194,605 | (55,580 | ) | 139,025 | (16,173 | ) | (118,559 | ) | 4,293 | |||||||||||||||
Total | $ | 260,581 | $ | (55,656 | ) | $ | 204,925 | $ | (52,692 | ) | $ | (136,043 | ) | $ | 16,190 |
As at October 31, 2021 ($ millions) | ||||||||||||||||||||||||
Types of financial assets | Gross amounts of recognized financial instruments | Gross amounts of recognized financial instruments offset in the Consolidated Statement of Financial Position | Net amounts of financial instruments presented in the Consolidated Statement of Financial Position | Related amounts not offset in the Consolidated statement of Financial Position | Net amount (3) | |||||||||||||||||||
Impact of master netting arrangements or similar agreements (1) | Collateral (2) | |||||||||||||||||||||||
Derivative financial instruments | $ | 42,489 | $ | (187 | ) | $ | 42,302 | $ | (25,293 | ) | $ | (3,608 | ) | $ | 13,401 | |||||||||
Securities purchased under resale agreements and securities borrowed | 160,621 | (32,882 | ) | 127,739 | (14,823 | ) | (109,981 | ) | 2,935 | |||||||||||||||
Total | $ | 203,110 | $ | (33,069 | ) | $ | 170,041 | $ | (40,116 | ) | $ | (113,589 | ) | $ | 16,336 | |||||||||
Types of financial liabilities | ||||||||||||||||||||||||
Derivative financial instruments | $ | 42,390 | $ | (187 | ) | $ | 42,203 | $ | (25,293 | ) | $ | (6,489 | ) | $ | 10,421 | |||||||||
Obligations related to securities sold under repurchase agreements and securities lent | 156,351 | (32,882 | ) | 123,469 | (14,823 | ) | (103,340 | ) | 5,306 | |||||||||||||||
Total | $ | 198,741 | $ | (33,069 | ) | $ | 165,672 | $ | (40,116 | ) | $ | (109,829 | ) | $ | 15,727 |
(1) | Amounts that are subject to master netting arrangements or similar agreements but were not offset in the Consolidated Statement of Financial Position because they did not meet the net settlement/simultaneous settlement criteria; or because the rights of set off are conditional upon the default of the counterparty only. |
(2) | Cash and financial instrument collateral amounts received or pledged in relation to the total amounts of financial assets and financial liabilities, including those that were not offset in the Consolidated Statement of Financial Position. These amounts are disclosed at fair value and the rights of set off are conditional upon the default of the counterparty. |
(3) | Not intended to represent the Bank’s actual exposure to credit risk, as a variety of credit mitigation strategies are employed in addition to offsetting and collateral arrangements. |
(4) | Derivative financial instruments assets include cash collateral of $4,271million and non-cash collateral of $1,861million. Derivative financial instruments liabilities include cash collateral of $17,215 million and non-cash collateral of $269 million. |
1
82
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
12 | Investment Securities |
The following table presents the carrying amounts of the Bank’s investment securities per measurement category.
As at October 31 ($ millions) | 2022 | 2021 | ||||||
Debt investment securities measured at FVOCI | $ | 81,271 | $ | 52,611 | ||||
Debt investment securities measured at amortized cost | 23,610 | 18,157 | ||||||
Equity investment securities designated at FVOCI | 3,439 | 3,178 | ||||||
Equity investment securities measured at FVTPL | 1,626 | 1,223 | ||||||
Debt investment securities measured at FVTPL | 62 | 30 | ||||||
Total investment securities | $ | 110,008 | $ | 75,199 |
(a) | Debt investment securities measured at fair value through other comprehensive income (FVOCI) |
2022 | 2021 | |||||||||||||||||||||||||||||||
As at October 31 ($ millions) | Cost | Gross unrealized gains | Gross unrealized losses | Fair value | Cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||||||||||||||
Canadian federal government issued or guaranteed debt | $ | 11,372 | $ | 4 | $ | 374 | $ | 11,002 | $ | 5,694 | $ | 135 | $ | 25 | $ | 5,804 | ||||||||||||||||
Canadian provincial and municipal debt | 5,860 | 1 | 432 | 5,429 | 5,202 | 12 | 59 | 5,155 | ||||||||||||||||||||||||
U.S. treasury and other U.S. agency debt | 37,690 | 80 | 2,534 | 35,236 | 13,528 | 188 | 79 | 13,637 | ||||||||||||||||||||||||
Other foreign government debt | 28,794 | 27 | 1,135 | 27,686 | 27,126 | 60 | 515 | 26,671 | ||||||||||||||||||||||||
Other debt | 1,989 | 1 | 72 | 1,918 | 1,339 | 9 | 4 | 1,344 | ||||||||||||||||||||||||
Total | $ | 85,705 | $ | 113 | $ | 4,547 | $ | 81,271 | $ | 52,889 | $ | 404 | $ | 682 | $ | 52,611 |
(b) | Debt investment securities measured at amortized cost |
2022 | 2021 | |||||||||||||||
As at October 31 ($ millions) | Fair Value | Carrying value (1) | Fair Value | Carrying value (1) | ||||||||||||
Canadian federal and provincial government issued or guaranteed debt | $ | 8,684 | $ | 9,024 | $ | 12,310 | $ | 12,372 | ||||||||
U.S. treasury and other U.S. agency debt | 12,212 | 13,042 | 4,712 | 4,687 | ||||||||||||
Other foreign government debt | 1,459 | 1,470 | 970 | 960 | ||||||||||||
Corporate debt | 88 | 74 | 141 | 138 | ||||||||||||
Total | $ | 22,443 | $ | 23,610 | $ | 18,133 | $ | 18,157 |
(1) | Balances are net of allowances of $1 (2021 were not significant). |
(c) | Equity investment securities designated at fair value through other comprehensive income (FVOCI) |
The Bank has designated certain equity securities at FVOCI shown in the following table as these investments are held for strategic purposes.
As at October 31, 2022 ($ millions) | Cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||
Preferred equity instruments | $ | – | $ | – | $ | – | $ | – | ||||||||
Common shares | 3,175 | 487 | 223 | 3,439 | ||||||||||||
Total | $ | 3,175 | $ | 487 | $ | 223 | $ | 3,439 | ||||||||
As at October 31, 2021 ($ millions) | Cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||
Preferred equity instruments | $ | 27 | $ | 4 | $ | 3 | $ | 28 | ||||||||
Common shares | 2,710 | 528 | 88 | 3,150 | ||||||||||||
Total | $ | 2,737 | $ | 532 | $ | 91 | $ | 3,178 |
Dividend income on equity securities designated at FVOCI of $167 million for the year ended October 31, 2022 (2021 – $111 million) has been recognized in interest income.
During the year ended October 31, 2022, the Bank has disposed of certain equity securities designated at FVOCI with a fair value of $958 million (2021 – $1,291 million). These dispositions have resulted in a cumulative gain of $67 million (2021 – gain of $204 million) that remains in OCI.
2022 Scotiabank Annual Report
|
1
83
Consolidated Financial Statements
(d) | An analysis of the carrying value of investment securities is as follows: |
Remaining term to maturity | ||||||||||||||||||||||||||||
As at October 31, 2022 ($ millions) | Within three months | Three to twelve months | One to five years | Five to ten years | Over ten years | No specific maturity | Carrying value | |||||||||||||||||||||
Fair value through other comprehensive income | ||||||||||||||||||||||||||||
Debt instruments | ||||||||||||||||||||||||||||
Canadian federal government issued or guaranteed debt | $ | 2,617 | $ | 2,125 | $ | 4,700 | $ | 675 | $ | 885 | $ | – | $ | 11,002 | ||||||||||||||
Yield (1) % | 1.0 | 2.7 | 2.2 | 2.1 | 0.2 | – | 1.9 | |||||||||||||||||||||
Canadian provincial and municipal debt | 372 | 688 | 2,537 | 1,832 | – | – | 5,429 | |||||||||||||||||||||
Yield (1) % | 1.2 | 1.8 | 2.1 | 2.5 | – | – | 2.1 | |||||||||||||||||||||
U.S. treasury and other U.S. agency debt | 762 | 8,665 | 19,695 | 3,295 | 2,819 | – | 35,236 | |||||||||||||||||||||
Yield (1) % | 2.7 | 1.1 | 2.2 | 2.7 | 2.5 | – | 2.0 | |||||||||||||||||||||
Other foreign government debt | 6,994 | 7,325 | 9,281 | 3,817 | 269 | – | 27,686 | |||||||||||||||||||||
Yield (1) % | 2.1 | 2.2 | 4.3 | 5.0 | 3.4 | – | 3.3 | |||||||||||||||||||||
Other debt | 70 | 101 | 1,527 | 214 | 3 | 3 | 1,918 | |||||||||||||||||||||
Yield (1) % | 9.8 | 2.8 | 4.3 | 3.0 | 5.9 | 4.0 | 4.3 | |||||||||||||||||||||
10,815 | 18,904 | 37,740 | 9,833 | 3,976 | 3 | 81,271 | ||||||||||||||||||||||
Equity instruments | ||||||||||||||||||||||||||||
Preferred equity instruments | – | – | – | – | – | – | – | |||||||||||||||||||||
Common shares | – | – | – | – | – | 3,439 | 3,439 | |||||||||||||||||||||
3,439 | 3,439 | |||||||||||||||||||||||||||
Total FVOCI | 10,815 | 18,904 | 37,740 | 9,833 | 3,976 | 3,442 | 84,710 | |||||||||||||||||||||
Amortized cost | ||||||||||||||||||||||||||||
Canadian federal and provincial government issued or guaranteed debt | 682 | 1,867 | 6,104 | 367 | 4 | – | 9,024 | |||||||||||||||||||||
Yield (1) | 1.0 | 3.1 | 2.9 | 7.2 | 0.0 | – | 3.1 | |||||||||||||||||||||
U.S. treasury and other U.S. agency debt | – | 812 | 149 | 7 | 12,074 | – | 13,042 | |||||||||||||||||||||
Yield (1) | – | 1.3 | 3.1 | 4.0 | 3.5 | – | 3.4 | |||||||||||||||||||||
Other foreign government debt | 81 | 382 | 827 | 138 | 43 | – | 1,471 | |||||||||||||||||||||
Yield (1) | 2.6 | 7.4 | 4.5 | 2.2 | 1.3 | – | 4.8 | |||||||||||||||||||||
Corporate debt | 2 | 52 | (10 | ) | 29 | – | – | 73 | ||||||||||||||||||||
Yield (1) | 2.7 | 3.0 | 3.9 | 2.6 | – | – | 2.9 | |||||||||||||||||||||
765 | 3,113 | 7,070 | 541 | 12,121 | – | 23,610 | ||||||||||||||||||||||
Fair value through profit or loss | ||||||||||||||||||||||||||||
Equity instruments | – | – | – | – | – | 1,626 | 1,626 | |||||||||||||||||||||
Debt instruments | – | – | 54 | 8 | – | – | 62 | |||||||||||||||||||||
Total investment securities | $ | 11,580 | $ | 22,017 | $ | 44,864 | $ | 10,382 | $ | 16,097 | $ | 5,068 | $ | 110,008 | ||||||||||||||
Total by currency (in Canadian equivalent): | ||||||||||||||||||||||||||||
Canadian dollar | $ | 3,546 | $ | 3,968 | $ | 12,560 | $ | 2,440 | $ | 900 | $ | 2,796 | $ | 26,210 | ||||||||||||||
U.S. dollar | 1,031 | 11,856 | 24,810 | 4,921 | 14,866 | 1,998 | 59,482 | |||||||||||||||||||||
Mexican peso | 193 | 496 | 2,695 | 485 | – | 35 | 3,904 | |||||||||||||||||||||
Other currencies | 6,810 | 5,697 | 4,799 | 2,536 | 331 | 239 | 20,412 | |||||||||||||||||||||
Total investment securities | $ | 11,580 | $ | 22,017 | $ | 44,864 | $ | 10,382 | $ | 16,097 | $ | 5,068 | $ | 110,008 |
(1) | Represents the weighted-average yield of fixed income securities. |
1
84
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
Remaining term to maturity | ||||||||||||||||||||||||||||
As at October 31, 2021 ($ millions) | Within three months | Three to twelve months | One to five years | Five to ten years | Over ten years | No specific maturity | Carrying value | |||||||||||||||||||||
Fair value through other comprehensive income | ||||||||||||||||||||||||||||
Debt instruments | ||||||||||||||||||||||||||||
Canadian federal government issued or guaranteed debt | $ | 70 | $ | 474 | $ | 3,717 | $ | 323 | $ | 1,220 | $ | – | $ | 5,804 | ||||||||||||||
Yield (1) % | 0.1 | 0.8 | 0.9 | 1.7 | 2.9 | – | 1.3 | |||||||||||||||||||||
Canadian provincial and municipal debt | 170 | 1,248 | 2,239 | 1,498 | – | – | 5,155 | |||||||||||||||||||||
Yield (1) % | 0.5 | 0.6 | 1.0 | 1.8 | – | – | 1.1 | |||||||||||||||||||||
U.S. treasury and other U.S. agency debt | 147 | 449 | 10,786 | 88 | 2,167 | – | 13,637 | |||||||||||||||||||||
Yield (1) % | 0.1 | 0.1 | 1.2 | 1.4 | 1.4 | – | 1.2 | |||||||||||||||||||||
Other foreign government debt | 7,445 | 7,411 | 9,418 | 2,077 | 320 | – | 26,671 | |||||||||||||||||||||
Yield (1) % | 1.0 | 1.3 | 2.2 | 2.8 | 2.8 | – | 1.7 | |||||||||||||||||||||
Other debt | 78 | 284 | 838 | 129 | 15 | – | 1,344 | |||||||||||||||||||||
Yield (1) % | 0.6 | 1.9 | 1.8 | 0.1 | 5.9 | – | 1.6 | |||||||||||||||||||||
7,910 | 9,866 | 26,998 | 4,115 | 3,722 | – | 52,611 | ||||||||||||||||||||||
Equity instruments | ||||||||||||||||||||||||||||
Preferred equity instruments | – | – | – | – | – | 28 | 28 | |||||||||||||||||||||
Common shares | – | – | – | – | – | 3,150 | 3,150 | |||||||||||||||||||||
3,178 | 3,178 | |||||||||||||||||||||||||||
Total FVOCI | 7,910 | 9,866 | 26,998 | 4,115 | 3,722 | 3,178 | 55,789 | |||||||||||||||||||||
Amortized cost | ||||||||||||||||||||||||||||
Canadian federal and provincial government issued or guaranteed debt | 499 | 3,405 | 8,061 | 402 | 5 | – | 12,372 | |||||||||||||||||||||
Yield (1) | 1.9 | 1.7 | 1.8 | 3.0 | 0.0 | – | 1.9 | |||||||||||||||||||||
U.S. treasury and other U.S. agency debt | 12 | – | 750 | 8 | 3,917 | – | 4,687 | |||||||||||||||||||||
Yield (1) | 0.1 | – | 1.3 | 2.2 | 2.1 | – | 1.9 | |||||||||||||||||||||
Other foreign government debt | 74 | 245 | 329 | 258 | 54 | – | 960 | |||||||||||||||||||||
Yield (1) | (0.0 | ) | (0.4 | ) | 3.4 | 1.1 | 1.2 | – | 1.4 | |||||||||||||||||||
Corporate debt | 9 | 37 | 56 | 36 | – | – | 138 | |||||||||||||||||||||
Yield (1) | 2.1 | 1.8 | 1.9 | 2.7 | – | – | 2.1 | |||||||||||||||||||||
594 | 3,687 | 9,196 | 704 | 3,976 | – | 18,157 | ||||||||||||||||||||||
Fair value through profit or loss | ||||||||||||||||||||||||||||
Equity instruments | – | – | – | – | – | 1,223 | 1,223 | |||||||||||||||||||||
Debt instruments | – | – | 22 | 8 | – | – | 30 | |||||||||||||||||||||
Total investment securities | $ | 8,504 | $ | 13,553 | $ | 36,216 | $ | 4,827 | $ | 7,698 | $ | 4,401 | $ | 75,199 | ||||||||||||||
Total by currency (in Canadian equivalent): | ||||||||||||||||||||||||||||
Canadian dollar | $ | 337 | $ | 4,102 | $ | 13,445 | $ | 2,296 | $ | 1,240 | $ | 2,216 | $ | 23,636 | ||||||||||||||
U.S. dollar | 705 | 3,070 | 16,333 | 924 | 6,090 | 1,911 | 29,033 | |||||||||||||||||||||
Mexican peso | 276 | 919 | 1,858 | 157 | – | 29 | 3,239 | |||||||||||||||||||||
Other currencies | 7,186 | 5,462 | 4,580 | 1,450 | 368 | 245 | 19,291 | |||||||||||||||||||||
Total investment securities | $ | 8,504 | $ | 13,553 | $ | 36,216 | $ | 4,827 | $ | 7,698 | $ | 4,401 | $ | 75,199 |
(1) | Represents the weighted-average yield of fixed income securities. |
(e) | Net gain on sale of investment securities |
The following table presents the net gain on sale of investment securities:
For the year ended October 31 ($ millions) | 2022 | 2021 | ||||||
Debt investment securities m e asured at amortized cost | $ | – | $ | 53 | ||||
Debt investment securities measured at FVOCI | 74 | 366 | ||||||
Net gain on sale of investment securities | $ | 74 | $ | 419 |
2022 Scotiabank Annual Report
|
1
85
Consolidated Financial Statements
13 | Loans, Impair e d Loans and Allowancefor Credit Losses |
(a) | Loans at amortized cost |
2022 | 2021 | |||||||||||||||||||||||
As at October 31 ($ millions) | Gross loans | Allowance for credit losses | Net carrying amount | Gross loans | Allowance for credit losses | Net carrying amount | ||||||||||||||||||
Residential mortgages | $ | 349,279 | $ | 899 | $ | 348,380 | $ | 319,678 | $ | 802 | $ | 318,876 | ||||||||||||
Personal loans | 99,431 | 2,137 | 97,294 | 91,540 | 2,341 | 89,199 | ||||||||||||||||||
Credit cards | 14,518 | 1,083 | 13,435 | 12,450 | 1,211 | 11,239 | ||||||||||||||||||
Business and government | 287,107 | 1,229 | 285,878 | 218,944 | 1,272 | 217,672 | ||||||||||||||||||
Total | $ | 750,335 | $ | 5,348 | $ | 744,987 | $ | 642,612 | $ | 5,626 | $ | 636,986 |
(b) | Loans and acceptances outstanding by geography (1) |
As at October 31 ($ millions) | 2022 | 2021 | ||||||
Canada: | ||||||||
Residential mortgages | $ | 302,486 | $ | 280,169 | ||||
Personal loans | 78,427 | 73,592 | ||||||
Credit cards | 6,970 | 6,213 | ||||||
Business and government | 105,277 | 77,353 | ||||||
493,160 | 437,327 | |||||||
United States: | ||||||||
Personal loans | 2,830 | 1,137 | ||||||
Business and government | 66,680 | 42,295 | ||||||
69,510 | 43,432 | |||||||
Mexico: | ||||||||
Residential mortgages | 13,080 | 9,826 | ||||||
Personal loans | 2,556 | 2,454 | ||||||
Credit cards | 675 | 540 | ||||||
Business and government | 23,744 | 18,902 | ||||||
40,055 | 31,722 | |||||||
Chile: | ||||||||
Residential mortgages | 19,441 | 17,176 | ||||||
Personal loans | 4,766 | 4,680 | ||||||
Credit cards | 2,921 | 2,299 | ||||||
Business and government | 24,197 | 20,806 | ||||||
51,325 | 44,961 | |||||||
Peru: | ||||||||
Residential mortgages | 3,719 | 2,894 | ||||||
Personal loans | 5,025 | 4,536 | ||||||
Credit cards | 942 | 467 | ||||||
Business and government | 12,819 | 11,511 | ||||||
22,505 | 19,408 | |||||||
Colombia: | ||||||||
Residential mortgages | 1,910 | 2,222 | ||||||
Personal loans | 2,115 | 1,967 | ||||||
Credit cards | 1,443 | 1,608 | ||||||
Business and government | 5,541 | 6,205 | ||||||
11,009 | 12,002 | |||||||
Other International: | ||||||||
Residential mortgages | 8,643 | 7,391 | ||||||
Personal loans | 3,712 | 3,174 | ||||||
Credit cards | 1,568 | 1,323 | ||||||
Business and government | 48,848 | 41,872 | ||||||
62,771 | 53,760 | |||||||
Total loans | 750,335 | 642,612 | ||||||
Acceptances (2) | 19,494 | 20,404 | ||||||
Total loans and acceptances (3) | 769,829 | 663,016 | ||||||
Allowance for credit losses | (5,379 | ) | (5,663 | ) | ||||
Total loans and acceptances net of allowance for credit losses | $ | 764,450 | $ | 657,353 |
(1) | Geographic segmentation is based on the location of the property for residential mortgages; otherwise, the residence of the borrower. |
(2) | 0.4% of acceptances reside outside Canada (October 31, 2021 – 1.2%). |
(3) | Loans and acceptances denominated in US dollars were $158,715 (2021 – $112,919), in Chilean pesos $39,418 (2021 – $36,126), Mexican pesos $29,194 (2021 – $23,363), and in other foreign currencies $51,445 (2021 – $46,403). |
1
86
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
(c) | Loan maturities |
As at October 31, 2022 | Remaining term to maturity | Rate sensitivity | ||||||||||||||||||||||||||||||||||||||
($ millions) | Within one year | One to five years | Five to ten years | Over ten years | No specific maturity | Total | Floating | Fixed rate | Non-rate sensitive | Total | ||||||||||||||||||||||||||||||
Residential mortgages | $ | 41,557 | $ | 269,576 | $ | 13,011 | $ | 24,487 | $ | 648 | $ | 349,279 | $ | 114,060 | $ | 232,519 | $ | 2,700 | $ | 349,279 | ||||||||||||||||||||
Personal loans | 15,772 | 37,279 | 5,328 | 1,282 | 39,770 | 99,431 | 41,883 | 56,707 | 841 | 99,431 | ||||||||||||||||||||||||||||||
Credit cards | – | – | – | – | 14,518 | 14,518 | – | 14,518 | – | 14,518 | ||||||||||||||||||||||||||||||
Business and government | 148,094 | 128,114 | 5,334 | 386 | 5,179 | 287,107 | 166,236 | 119,361 | 1,510 | 287,107 | ||||||||||||||||||||||||||||||
Total | $ | 205,423 | $ | 434,969 | $ | 23,673 | $ | 26,155 | $ | 60,115 | $ | 750,335 | $ | 322,179 | $ | 423,105 | $ | 5,051 | $ | 750,335 | ||||||||||||||||||||
Allowance for credit losses | – | – | – | – | (5,348 | ) | (5,348 | ) | – | – | (5,348 | ) | (5,348 | ) | ||||||||||||||||||||||||||
Total loans net of allowance for credit losses | $ | 205,423 | $ | 434,969 | $ | 23,673 | $ | 26,155 | $ | 54,767 | $ | 744,987 | $ | 322,179 | $ | 423,105 | $ | (297 | ) | $ | 744,987 | |||||||||||||||||||
As at October 31, 2021 | Remaining term to maturity | Rate sensitivity | ||||||||||||||||||||||||||||||||||||||
($ millions) | Within one year | One to five years | Five to ten years | Over ten years | No specific maturity | Total | Floating | Fixed rate | Non-rate sensitive | Total | ||||||||||||||||||||||||||||||
Residential mortgages | $ | 38,886 | $ | 247,343 | $ | 12,112 | $ | 19,417 | $ | 1,920 | $ | 319,678 | $ | 83,578 | $ | 233,217 | $ | 2,883 | $ | 319,678 | ||||||||||||||||||||
Personal loans | 15,057 | 33,414 | 5,047 | 1,180 | 36,842 | 91,540 | 37,254 | 53,374 | 912 | 91,540 | ||||||||||||||||||||||||||||||
Credit cards | – | – | – | – | 12,450 | 12,450 | – | 12,450 | – | 12,450 | ||||||||||||||||||||||||||||||
Business and government | 108,405 | 100,319 | 4,973 | 230 | 5,017 | 218,944 | 120,313 | 96,546 | 2,085 | 218,944 | ||||||||||||||||||||||||||||||
Total | $ | 162,348 | $ | 381,076 | $ | 22,132 | $ | 20,827 | $ | 56,229 | $ | 642,612 | $ | 241,145 | $ | 395,587 | $ | 5,880 | $ | 642,612 | ||||||||||||||||||||
Allowance for credit losses | – | – | – | – | (5,626 | ) | (5,626 | ) | – | – | (5,626 | ) | (5,626 | ) | ||||||||||||||||||||||||||
Total loans net of allowance for credit losses | $ | 162,348 | $ | 381,076 | $ | 22,132 | $ | 20,827 | $ | 50,603 | $ | 636,986 | $ | 241,145 | $ | 395,587 | $ | 254 | $ | 636,986 |
(d) | Impaired loans (1)(2) |
2022 | 2021 | |||||||||||||||||||||||
As at October 31 ($ millions) | Gross impaired loans (1) | Allowance for credit losses | Net | Gross impaired loans (1) | Allowance for credit losses | Net | ||||||||||||||||||
Residential mortgages | $ | 1,386 | $ | 406 | $ | 980 | $ | 1,331 | $ | 374 | $ | 957 | ||||||||||||
Personal loans | 848 | 551 | 297 | 833 | 626 | 207 | ||||||||||||||||||
Credit cards | – | – | – | – | – | – | ||||||||||||||||||
Business and government | 2,552 | 678 | 1,874 | 2,292 | 655 | 1,637 | ||||||||||||||||||
Total | $ | 4,786 | $ | 1,635 | $ | 3,151 | $ | 4,456 | $ | 1,655 | $ | 2,801 | ||||||||||||
By geography: | ||||||||||||||||||||||||
Canada | $ | 1,054 | $ | 440 | $ | 614 | $ | 1,090 | $ | 446 | $ | 644 | ||||||||||||
United States | – | – | – | 24 | 4 | 20 | ||||||||||||||||||
Mexico | 1,020 | 294 | 726 | 758 | 269 | 489 | ||||||||||||||||||
Peru | 761 | 352 | 409 | 699 | 350 | 349 | ||||||||||||||||||
Chile | 740 | 202 | 538 | 512 | 180 | 332 | ||||||||||||||||||
Colombia | 301 | 67 | 234 | 418 | 88 | 330 | ||||||||||||||||||
Other International | 910 | 280 | 630 | 955 | 318 | 637 | ||||||||||||||||||
Total | $ | 4,786 | $ | 1,635 | $ | 3,151 | $ | 4,456 | $ | 1,655 | $ | 2,801 |
(1) | Interest income recognized on impaired loans during the year ended October 31, 2022 was $44 (2021 – $53). |
(2) | Additional interest income of approximately $274 would have been recorded if the above loans had not been classified as impaired (2021 – $270). |
2022 Scotiabank Annual Report
|
1
87
Consolidated Financial Statements
(e) | Allowance for credit losses |
(i) | Key inputs and assumptions |
The Bank’s allowance for credit losses is measured using a three-stage approach based on the extent of credit deterioration since origination. The calculation of the Bank’s allowance for credit losses is an output of complex models with a number of underlying assumptions regarding the choice of variable inputs and their interdependencies. Some of the key drivers include the following:
• | Changes in risk ratings of the borrower or instrument reflecting changes in their credit quality; |
• | Changes in the volumes of transactions; |
• | Changes in the forward-looking macroeconomic environment reflected in the variables used in the models such as GDP growth, unemployment rates, commodity prices, and house price indices, which are most closely related with credit losses in the relevant portfolio; |
• | Changes in macroeconomic scenarios and the probability weights assigned to each scenario; and |
• | Borrower migration between the three stages. |
The Bank determines its allowanc
e
for credit losses using four probability-weighted forward-looking scenarios (base case, optimistic, pessimistic and very pessimistic).The Bank considers both internal and external sources of information and data to achieve unbiased projections and forecasts in determining the allowance for credit losses. The Bank prepares the scenarios using forecasts generated by Scotiabank Economics (SE). The forecasts are generated using models whose outputs are modified by SE as necessary to formulate a ‘base case’ view of the most probable future direction of economic developments. The development of the base case and alternative scenarios is overseen by a governance committee that consists of internal stakeholders from across the Bank. The final base case and alternative scenarios reflect significant review and oversight, and incorporate judgment both in the determination of the scenarios’ forecasts and the probability weights that are assigned to them.
(ii) | Key macroeconomic variables |
The inputs and models used for calculating expected credit losses may not always capture all characteristics of the market at the date of the financial statements. Qualitative adjustments or overlays may be made for certain portfolios or geographies as temporary adjustments in circumstances where, in the Bank’s view, the inputs, assumptions, and/or modelling techniques do not capture all relevant risk factors, including the emergence of economic or geopolitical events up to the date of financial statements.
The Bank has applied expert credit judgement in the assessment of underlying credit deterioration and migration of balances to progressive stages. The Bank considered both quantitative and qualitative information in the assessment of significant increase in credit risk.
The Bank’s models are calibrated to consider past performance and macroeconomic forward-looking variables as inputs. The Bank has generated 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. The global economic outlook has deteriorated over the last year owing to the combined impacts of central bank efforts to tame inflation, the consequences of Russia’s war on Ukraine, pandemic management in China and the impact of higher energy prices. Concerns about potential slowdown and high inflation have led to very volatile financial markets, which have clouded the outlook further. Therefore, the base case scenario is less favourable this year. Relative to the base case, the optimistic scenario features somewhat stronger economic activity. The two pessimistic scenarios were updated around the potential risk of stagflation and recession.
In light of current economic uncertainty, the pessimistic scenarios feature a protracted period of high commodity prices, elevated financial market uncertainty and a further disruption to supply chains. All these elements lead to much higher inflation compared to the base case scenario resulting in a rapid deceleration of growth. In the pessimistic scenario, stagflation is short-lived, while in the very pessimistic scenario, the stagflation shock is strong and persists for a longer period of time.
The Bank increased the weight of the pessimistic scenarios in calculating the allowance for credit losses on performing loans to capture the elevated downside risk and uncertainty to the outlook.
1
88
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
The following tables show certain key macroeconomic variables used to calculate the modelled estimate for the allowance for credit losses. Further
cha
in these variables up to the date of the financial statements is incorporated through expert credit judgment. For the base case, optimistic and pessimistic scenarios, the projections are provided for the next 12 months and for the remaining forecast period, which represents a medium-term view.n
ges
Base Case Scenario | Alternative Scenario – Optimistic | Alternative Scenario – Pessimistic | Alternative Scenario – Very Pessimistic | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
October 31, 2022 | Next 12 Months | Remaining Forecast Period | Next 12 Months | Remaining Forecast Period | Next 12 Months | Remaining Forecast Period | Next 12 Months | Remaining Forecast Period | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Canada | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real GDP growth, y/y % change | 1.2 | 2.1 | 2.4 | 3.1 | -4.8 | 3.7 | -5.9 | 2.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer price index, y/y % | 4.9 | 2.1 | 5.2 | 2.6 | 9.3 | 2.3 | 12.5 | 9.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Unemployment rate, average % | 5.7 | 6.0 | 5.1 | 4.7 | 9.7 | 6.9 | 10.2 | 8.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Bank of Canada overnight rate target, | 3.8 | 2.7 | 4.2 | 4.1 | 5.1 | 3.2 | 5.1 | 3.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
HPI – Housing Price Index, y/y % change | -12.3 | -0.3 | -9.7 | 1.6 | -17.6 | -0.3 | -20.0 | -1.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
USDCAD exchange rate, average | 1.27 | 1.24 | 1.26 | 1.23 | 1.28 | 1.24 | 1.28 | 1.25 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
US | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real GDP growth, y/y % change | 0.6 | 2.1 | 1.3 | 3.0 | -5.1 | 3.7 | -6.5 | 3.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer price index, y/y % | 5.4 | 2.4 | 5.8 | 2.8 | 10.0 | 2.6 | 13.2 | 10.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Target federal funds rate, upper limit, % | 3.5 | 2.7 | 4.7 | 4.5 | 4.8 | 3.3 | 4.8 | 3.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Unemployment rate, average % | 4.3 | 5.0 | 4.2 | 4.6 | 7.9 | 5.7 | 8.3 | 6.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Mexico | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real GDP growth, y/y % change | 1.4 | 2.6 | 1.9 | 3.5 | -4.0 | 4.0 | -5.1 | 2.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Unemployment rate, average % | 3.8 | 3.9 | 3.7 | 3.2 | 7.2 | 4.8 | 7.6 | 6.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Chile | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real GDP growth, y/y % change | -2.0 | 2.4 | -0.8 | 3.6 | -7.3 | 3.9 | -8.4 | 2.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Unemployment rate, average % | 8.6 | 7.6 | 8.0 | 6.5 | 12.2 | 8.3 | 12.9 | 9.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Peru | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real GDP growth, y/y % change | 2.5 | 2.7 | 3.7 | 3.8 | -1.0 | 4.1 | -3.3 | 3.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Unemployment rate, average % | 7.0 | 6.9 | 6.0 | 4.7 | 10.3 | 7.6 | 11.4 | 9.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Colombia | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real GDP growth, y/y % change | 3.9 | 2.6 | 6.5 | 3.6 | 0.4 | 4.0 | -2.0 | 3.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Unemployment rate, average % | 10.7 | 9.9 | 9.0 | 6.7 | 14.0 | 10.7 | 15.1 | 12.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Caribbean | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real GDP growth, y/y % change | 4.4 | 4.0 | 5.0 | 4.9 | 0.5 | 5.2 | -1.0 | 3.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Global | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
WTI oil price, average USD/bbl | 89 | 79 | 95 | 96 | 116 | 83 | 125 | 116 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Copper price, average USD/lb | 3.25 | 3.49 | 3.39 | 3.95 | 3.66 | 3.54 | 3.78 | 3.78 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Global GDP, y/y % change | 2.02 | 2.83 | 2.96 | 3.83 | -3.05 | 4.23 | -4.14 | 3.79 |
2022 Scotiabank Annual Report
|
1
8
9Consolidated Financial Statements
Base Case Scenario | Alternative Scenario – Optimistic | Alternative Scenario – Pessimistic | Alternative Scenario – Very Pessimistic | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
October 31, 2021 | Next 12 Months | Remaining Forecast Period | Next 12 Months | Remaining Forecast Period | Next 12 Months | Remaining Forecast Period | Next 12 Months | Remaining Forecast Period | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Canada | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real GDP growth, y/y % change | 3.4 | 1.9 | 5.3 | 2.8 | -1.3 | 3.1 | -7.4 | 4.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer price index, y/y % | 3.0 | 2.4 | 3.4 | 3.5 | 2.0 | 1.8 | 1.6 | 1.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Unemployment rate, average % | 6.3 | 5.7 | 5.6 | 4.1 | 8.8 | 6.3 | 11.7 | 8.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Bank of Canada overnight rate target, average % | 0.3 | 2.0 | 0.9 | 3.6 | 0.3 | 1.2 | 0.3 | 0.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
HPI – Housing Price Index, y/y % change | 11.1 | 2.1 | 13.2 | 3.9 | 3.9 | 3.3 | -2.7 | 3.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
USDCAD exchange rate, average | 1.24 | 1.21 | 1.23 | 1.20 | 1.28 | 1.21 | 1.30 | 1.24 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
US | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real GDP growth, y/y % change | 5.7 | 1.6 | 7.3 | 2.1 | 2.4 | 2.4 | -1.4 | 3.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer price index, y/y % | 4.0 | 2.5 | 4.5 | 3.1 | 3.3 | 2.3 | 2.6 | 1.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Target federal funds rate, upper limit, average % | 0.3 | 1.8 | 0.8 | 2.8 | 0.3 | 1.1 | 0.3 | 0.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Unemployment rate, average % | 3.8 | 3.5 | 3.4 | 3.2 | 5.6 | 4.1 | 6.8 | 5.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Mexico | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real GDP growth, y/y % change | 2.8 | 1.9 | 4.3 | 2.7 | -0.4 | 2.7 | -4.2 | 3.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Unemployment rate, average % | 4.0 | 4.0 | 3.6 | 3.1 | 6.5 | 4.5 | 9.4 | 6.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Chile | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real GDP growth, y/y % change | 6.7 | 2.2 | 8.8 | 3.1 | 3.4 | 3.1 | -0.5 | 4.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Unemployment rate, average % | 6.5 | 6.2 | 5.9 | 5.6 | 9.0 | 6.7 | 12.0 | 8.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Peru | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real GDP growth, y/y % change | 5.0 | 3.2 | 7.7 | 4.3 | 3.6 | 3.7 | 0.0 | 4.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Unemployment rate, average % | 8.8 | 7.5 | 6.0 | 3.4 | 10.8 | 8.1 | 13.8 | 10.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Colombia | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real GDP growth, y/y % change | 5.0 | 3.5 | 6.8 | 4.8 | 3.6 | 4.0 | 0.0 | 5.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Unemployment rate, average % | 13.7 | 11.2 | 12.0 | 8.2 | 15.6 | 11.8 | 18.6 | 13.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Caribbean | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real GDP growth, y/y % change | 4.9 | 4.1 | 6.2 | 4.9 | 3.9 | 4.6 | 0.3 | 5.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Global | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
WTI oil price, average USD/bbl | 69 | 70 | 75 | 86 | 61 | 67 | 57 | 57 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Copper price, average USD/lb | 4.20 | 4.20 | 4.36 | 4.78 | 3.93 | 4.05 | 3.81 | 3.62 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Global GDP, y/y % change | 5.07 | 3.02 | 6.54 | 3.90 | 2.44 | 3.68 | -0.69 | 4.48 |
(iii) | Sensitivity |
The weighting of these multiple scenarios increased our reported allowance for credit losses for financial assets in Stage 1 and Stage 2, relative to our base case scenario, to $3,847 million (2021 – $4,076 million) from $3,609 million (2021 – $3,998
million). If we were to only use our very pessimistic scenario for the measurement of allowance for credit losses for such assets, our allowance for credit losses on performing financial instruments would be
$1,096 million higher than the reported allowance for credit losses as at October 31, 2022 (2021 – $866 million). Actual results will differ as this does not consider the migration of exposures or incorporate changes that would occur in the portfolio due to risk mitigation actions and other factors.Under our current probability-weighted scenarios, if all of our performing financial assets were in Stage 1, reflecting a 12 month expected loss period, the allowance for credit losses would be $521 million (2021 – $407 million) lower than the reported allowance for credit losses on performing financial assets.
19
0
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
(iv) | Allowance for credit losses |
($ millions) | Balance as at November 1, 2021 | Provision for credit losses | Net write-offs | Other, including foreign currency adjustment | Balance as at October 31, 2022 | |||||||||||||||
Residential mortgages | $ | 802 | $ | 85 | $ | (45 | ) | $ | 57 | $ | 899 | |||||||||
Personal loans | 2,341 | 615 | (863 | ) | 44 | 2,137 | ||||||||||||||
Credit cards | 1,211 | 469 | (612 | ) | 15 | 1,083 | ||||||||||||||
Business and government | 1,374 | 213 | (206 | ) | (13 | ) | 1,368 | |||||||||||||
$ | 5,728 | $ | 1,382 | $ | (1,726 | ) | $ | 103 | $ | 5,487 | ||||||||||
Presented as: | ||||||||||||||||||||
Allowance for credit losses on loans | $ | 5,626 | $ | 5,348 | ||||||||||||||||
Allowance for credit losses on acceptances | 37 | 31 | ||||||||||||||||||
Allowance for credit losses on off-balance sheet exposures | 65 | 108 |
($ millions) | Balance as at November 1, 2020 | Provision for credit losses | Net write-offs | Other, including foreign currency adjustment | Balance as at October 31, 2021 | |||||||||||||||
Residential mortgages | $ | 884 | $ | 91 | $ | (84 | ) | $ | (89 | ) | $ | 802 | ||||||||
Personal loans | 3,155 | 928 | (1,559 | ) | (183 | ) | 2,341 | |||||||||||||
Credit cards | 1,886 | 772 | (1,340 | ) | (107 | ) | 1,211 | |||||||||||||
Business and government | 1,892 | 17 | (375 | ) | (160 | ) | 1,374 | |||||||||||||
$ | 7,817 | $ | 1,808 | $ | (3,358 | ) | $ | (539 | ) | $ | 5,728 | |||||||||
Presented as: | ||||||||||||||||||||
Allowance for credit losses on loans | $ | 7,639 | $ | 5,626 | ||||||||||||||||
Allowance for credit losses on acceptances | 77 | 37 | ||||||||||||||||||
Allowance for credit losses on off-balance sheet exposures | 101 | 65 |
Allowance | for credit losses on loans |
As at October 31, 2022 ($ millions) | Stage 1 | Stage 2 | Stage 3 | Total | ||||||||||||
Residential mortgages | $ | 197 | $ | 296 | $ | 406 | $ | 899 | ||||||||
Personal loans | 665 | 921 | 551 | 2,137 | ||||||||||||
Credit cards | 436 | 647 | – | 1,083 | ||||||||||||
Business and government | 255 | 296 | 678 | 1,229 | ||||||||||||
Total (1) | $ | 1,553 | $ | 2,160 | $ | 1,635 | $ | 5,348 |
(1) | Excludes allowance for credit losses for other financial assets including acceptances, investment securities, deposits with banks, off-balance sheet credit risks and reverse repos which amounted to $151. |
As at October 31, 2021 ($ millions) | Stage 1 | Stage 2 | Stage 3 | Total | ||||||||||||
Residential mortgages | $ | 152 | $ | 276 | $ | 374 | $ | 802 | ||||||||
Personal loans | 644 | 1,071 | 626 | 2,341 | ||||||||||||
Credit cards | 352 | 859 | – | 1,211 | ||||||||||||
Business and government | 186 | 431 | 655 | 1,272 | ||||||||||||
Total (1) | $ | 1,334 | $ | 2,637 | $ | 1,655 | $ | 5,626 |
(1) | Excludes allowance for credit losses for other financial assets including acceptances, investment securities, deposits with banks and off-balance sheet credit risks which amounted to $105. |
2022 Scotiabank Annual Report
|
19
1
Consolidated Financial Statements
The following tabl
e
presents the changes to the allowance for credit losses on loans.As at October 31, 2022 | As at October 31, 2021 | |||||||||||||||||||||||||||||||
($ millions) | Stage 1 | Stage 2 | Stage 3 | Total | Stage 1 | Stage 2 | Stage 3 | Total | ||||||||||||||||||||||||
Residential mortgages | ||||||||||||||||||||||||||||||||
Balance at beginning of the year | $ | 152 | $ | 276 | $ | 374 | $ | 802 | $ | 190 | $ | 302 | $ | 392 | $ | 884 | ||||||||||||||||
Provision for credit losses | ||||||||||||||||||||||||||||||||
Remeasurement (1) | (54 | ) | 43 | 80 | 69 | (143 | ) | 70 | 149 | 76 | ||||||||||||||||||||||
Newly originated or purchased financial assets | 34 | – | – | 34 | 49 | – | – | 49 | ||||||||||||||||||||||||
Derecognition of financial assets and maturities | (5 | ) | (13 | ) | – | (18 | ) | (10 | ) | (24 | ) | – | (34 | ) | ||||||||||||||||||
Changes in models and methodologies | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||
Transfer to (from): | ||||||||||||||||||||||||||||||||
Stage 1 | 65 | (52 | ) | (13 | ) | – | 88 | (74 | ) | (14 | ) | – | ||||||||||||||||||||
Stage 2 | (9 | ) | 46 | (37 | ) | – | (12 | ) | 62 | (50 | ) | – | ||||||||||||||||||||
Stage 3 | – | (19 | ) | 19 | – | – | (32 | ) | 32 | – | ||||||||||||||||||||||
Gross write-offs | – | – | (73 | ) | (73 | ) | – | – | (111 | ) | (111 | ) | ||||||||||||||||||||
Recoveries | – | – | 28 | 28 | – | – | 27 | 27 | ||||||||||||||||||||||||
Foreign exchange and other movements (6) | 14 | 15 | 28 | 57 | (10 | ) | (28 | ) | (51 | ) | (89 | ) | ||||||||||||||||||||
Balance at end of year (2) | $ | 197 | $ | 296 | $ | 406 | $ | 899 | $ | 152 | $ | 276 | $ | 374 | $ | 802 | ||||||||||||||||
Personal loans | ||||||||||||||||||||||||||||||||
Balance at beginning of the year | $ | 644 | $ | 1,071 | $ | 626 | $ | 2,341 | $ | 864 | $ | 1,471 | $ | 820 | $ | 3,155 | ||||||||||||||||
Provision for credit losses | ||||||||||||||||||||||||||||||||
Remeasurement (1) | (579 | ) | 441 | 609 | 471 | (1,119 | ) | 1,023 | 984 | 888 | ||||||||||||||||||||||
Newly originated or purchased financial assets | 338 | – | – | 338 | 525 | – | – | 525 | ||||||||||||||||||||||||
Derecognition of financial assets and maturities | (76 | ) | (118 | ) | – | (194 | ) | (171 | ) | (314 | ) | – | (485 | ) | ||||||||||||||||||
Changes in models and methodologies | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||
Transfer to (from): | ||||||||||||||||||||||||||||||||
Stage 1 | 467 | (457 | ) | (10 | ) | – | 882 | (869 | ) | (13 | ) | – | ||||||||||||||||||||
Stage 2 | (133 | ) | 192 | (59 | ) | – | (253 | ) | 325 | (72 | ) | – | ||||||||||||||||||||
Stage 3 | (5 | ) | (221 | ) | 226 | – | (43 | ) | (487 | ) | 530 | – | ||||||||||||||||||||
Gross write-offs | – | – | (1,116 | ) | (1,116 | ) | – | – | (1,833 | ) | (1,833 | ) | ||||||||||||||||||||
Recoveries | – | – | 253 | 253 | – | – | 274 | 274 | ||||||||||||||||||||||||
Foreign exchange and other movements (6) | 9 | 13 | 22 | 44 | (41 | ) | (78 | ) | (64 | ) | (183 | ) | ||||||||||||||||||||
Balance at end of year (2) | $ | 665 | $ | 921 | $ | 551 | $ | 2,137 | $ | 644 | $ | 1,071 | $ | 626 | $ | 2,341 | ||||||||||||||||
Credit cards | ||||||||||||||||||||||||||||||||
Balance at beginning of the year | $ | 352 | $ | 859 | $ | – | $ | 1,211 | $ | 501 | $ | 1,385 | $ | – | $ | 1,886 | ||||||||||||||||
Provision for credit losses | ||||||||||||||||||||||||||||||||
Remeasurement (1) | (176 | ) | 141 | 449 | 414 | (452 | ) | 299 | 972 | 819 | ||||||||||||||||||||||
Newly originated or purchased financial assets | 146 | – | – | 146 | 117 | – | – | 117 | ||||||||||||||||||||||||
Derecognition of financial assets and maturities | (51 | ) | (40 | ) | – | (91 | ) | (70 | ) | (94 | ) | – | (164 | ) | ||||||||||||||||||
Changes in models and methodologies | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||
Transfer to (from): | ||||||||||||||||||||||||||||||||
Stage 1 | 240 | (240 | ) | – | – | 382 | (382 | ) | – | – | ||||||||||||||||||||||
Stage 2 | (77 | ) | 77 | – | – | (103 | ) | 103 | – | – | ||||||||||||||||||||||
Stage 3 | – | (152 | ) | 152 | – | – | (389 | ) | 389 | – | ||||||||||||||||||||||
Gross write-offs | – | – | (791 | ) | (791 | ) | – | – | (1,543 | ) | (1,543 | ) | ||||||||||||||||||||
Recoveries | – | – | 179 | 179 | – | – | 203 | 203 | ||||||||||||||||||||||||
Foreign exchange and other movements (6) | 2 | 2 | 11 | 15 | (23 | ) | (63 | ) | (21 | ) | (107 | ) | ||||||||||||||||||||
Balance at end of year (2) | $ | 436 | $ | 647 | $ | – | $ | 1,083 | $ | 352 | $ | 859 | $ | – | $ | 1,211 | ||||||||||||||||
Total retail loans | ||||||||||||||||||||||||||||||||
Balance at beginning of the year | $ | 1,148 | $ | 2,206 | $ | 1,000 | $ | 4,354 | $ | 1,555 | $ | 3,158 | $ | 1,212 | $ | 5,925 | ||||||||||||||||
Provision for credit losses | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||
Remeasurement (1) | (809 | ) | 625 | 1,138 | 954 | (1,714 | ) | 1,392 | 2,105 | 1,783 | ||||||||||||||||||||||
Newly originated or purchased financial assets | 518 | – | – | 518 | 691 | – | – | 691 | ||||||||||||||||||||||||
Derecognition of financial assets and maturities | (132 | ) | (171 | ) | – | (303 | ) | (251 | ) | (432 | ) | – | (683 | ) | ||||||||||||||||||
Changes in models and methodologies | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||
Transfer to (from): | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||
Stage 1 | 772 | (749 | ) | (23 | ) | – | 1,352 | (1,325 | ) | (27 | ) | – | ||||||||||||||||||||
Stage 2 | (219 | ) | 315 | (96 | ) | – | (368 | ) | 490 | (122 | ) | – | ||||||||||||||||||||
Stage 3 | (5 | ) | (392 | ) | 397 | – | (43 | ) | (908 | ) | 951 | – | ||||||||||||||||||||
Gross write-offs | – | – | (1,980 | ) | (1,980 | ) | – | – | (3,487 | ) | (3,487 | ) | ||||||||||||||||||||
Recoveries | – | – | 460 | 460 | – | – | 504 | 504 | ||||||||||||||||||||||||
Foreign exchange and other movements (6) | 25 | 30 | 61 | 116 | (74 | ) | (169 | ) | (136 | ) | (379 | ) | ||||||||||||||||||||
Balance at end of year (2) | $ | 1,298 | $ | 1,864 | $ | 957 | $ | 4,119 | $ | 1,148 | $ | 2,206 | $ | 1,000 | $ | 4,354 | ||||||||||||||||
Business and government | ||||||||||||||||||||||||||||||||
Balance at beginning of the year | $ | 212 | $ | 470 | $ | 655 | $ | 1,337 | $ | 478 | $ | 592 | $ | 745 | $ | 1,815 | ||||||||||||||||
Provision for credit losses | ||||||||||||||||||||||||||||||||
Remeasurement (1) | (79 | ) | (36 | ) | 302 | 187 | (262 | ) | 11 | 402 | 151 | |||||||||||||||||||||
Newly originated or purchased financial assets | 310 | – | – | 310 | 325 | – | – | 325 | ||||||||||||||||||||||||
Derecognition of financial assets and maturities | (255 | ) | (89 | ) | (30 | ) | (374 | ) | (320 | ) | (72 | ) | (11 | ) | (403 | ) | ||||||||||||||||
Changes in models and methodologies | 30 | 57 | – | 87 | (4 | ) | (11 | ) | – | (15 | ) | |||||||||||||||||||||
Transfer to (from): | ||||||||||||||||||||||||||||||||
Stage 1 | 118 | (118 | ) | – | – | 66 | (66 | ) | – | – | ||||||||||||||||||||||
Stage 2 | (27 | ) | 29 | (2 | ) | – | (53 | ) | 54 | (1 | ) | – | ||||||||||||||||||||
Stage 3 | – | (8 | ) | 8 | – | – | (9 | ) | 9 | – | ||||||||||||||||||||||
Gross write-offs | – | – | (318 | ) | (318 | ) | – | – | (414 | ) | (414 | ) | ||||||||||||||||||||
Recoveries | – | – | 112 | 112 | – | – | 39 | 39 | ||||||||||||||||||||||||
Foreign exchange and other movements | 13 | 15 | (32 | ) | (4 | ) | (18 | ) | (29 | ) | (114 | ) | (161 | ) | ||||||||||||||||||
Balance at end of period including off-balance sheet exposures(2) | $ | 322 | $ | 320 | $ | 695 | $ | 1,337 | $ | 212 | $ | 470 | $ | 655 | $ | 1,337 | ||||||||||||||||
Less: Allowance for credits losses on off-balance sheet exposures(2)(3) | 67 | 24 | 17 | 108 | 26 | 39 | – | 65 | ||||||||||||||||||||||||
Balance at end of year (2) | $ | 255 | $ | 296 | $ | 678 | $ | 1,229 | $ | 186 | $ | 431 | $ | 655 | $ | 1,272 |
(1) | Includes credit risk changes as a result of significant increases in credit risk, changes in credit risk that did not result in a transfer between stages, changes in model inputs and assumptions and changes due to drawdowns of undrawn commitments. |
(2) | Interest income on impaired loans for residential mortgages, personal loans, credit cards, and business and government loans totaled $274 (2021 – $270). |
(3) | Allowance for credit losses on off-balance sheet exposures is recorded in other liabilities in the Consolidated Statement of Financial Position. |
(4) | Allowance for credit losses on acceptances are recorded against the financial asset in the Consolidated Statement of Financial Position. |
(5) | During the year ended October 31, 2022, the contractual terms of certain financial assets were modified where the modification did not result in derecognition. The carrying value of such loans that were modified in Stage 2 and Stage 3 was $1,567 and $600 respectively, before the modification. |
(6) | Divestitures are included in the foreign exchange and other movements. |
19
2|
2022 Scotiabank Annual Report
Consolidated Financial Statements
(f) | Carrying value of exposures by risk rating |
Residential mortgages | As at October 31, 2022 | As at October 31, 2021 | ||||||||||||||||||||||||||||||
Category of PD grades ($ millions) | Stage 1 | Stage 2 | Stage 3 (1) | Total | Stage 1 | Stage 2 | Stage 3 (1) | Total | ||||||||||||||||||||||||
Very low | $ | 208,526 | $ | 635 | $ | – | $ | 209,161 | $ | 187,163 | $ | 5,610 | $ | – | $ | 192,773 | ||||||||||||||||
Low | 90,745 | 1,172 | – | 91,917 | 69,306 | 1,768 | – | 71,074 | ||||||||||||||||||||||||
Medium | 18,399 | 1,032 | – | 19,431 | 9,170 | 3,690 | – | 12,860 | ||||||||||||||||||||||||
High | 2,759 | 2,680 | – | 5,439 | 904 | 2,284 | – | 3,188 | ||||||||||||||||||||||||
Very high | 53 | 1,429 | – | 1,482 | 16 | 643 | – | 659 | ||||||||||||||||||||||||
Loans not graded (2) | 19,276 | 1,187 | – | 20,463 | 34,122 | 3,671 | – | 37,793 | ||||||||||||||||||||||||
Default | – | – | 1,386 | 1,386 | – | – | 1,331 | 1,331 | ||||||||||||||||||||||||
Total | 339,758 | 8,135 | 1,386 | 349,279 | 300,681 | 17,666 | 1,331 | 319,678 | ||||||||||||||||||||||||
Allowance for credit losses | 197 | 296 | 406 | 899 | 152 | 276 | 374 | 802 | ||||||||||||||||||||||||
Carrying value | $ | 339,561 | $ | 7,839 | $ | 980 | $ | 348,380 | $ | 300,529 | $ | 17,390 | $ | 957 | $ | 318,876 |
(1) | Stage 3 includes purchased or originated credit-impaired loans. |
(2) | Portfolios where the customer account level ‘Probability of Default’ has not been determined have been included in the ‘Loans not graded’ category. |
Personal loans | As at October 31, 2022 | As at October 31, 2021 | ||||||||||||||||||||||||||||||
Category of PD grades ($ millions) | Stage 1 | Stage 2 | Stage 3 (1) | Total | Stage 1 | Stage 2 | Stage 3 (1) | Total | ||||||||||||||||||||||||
Very low | $ | 30,098 | $ | 285 | $ | – | $ | 30,383 | $ | 30,085 | $ | 168 | $ | – | $ | 30,253 | ||||||||||||||||
Low | 27,284 | 685 | – | 27,969 | 25,719 | 574 | – | 26,293 | ||||||||||||||||||||||||
Medium | 8,789 | 1,464 | – | 10,253 | 8,290 | 1,127 | – | 9,417 | ||||||||||||||||||||||||
High | 7,059 | 2,275 | – | 9,334 | 5,686 | 2,307 | – | 7,993 | ||||||||||||||||||||||||
Very high | 81 | 1,655 | – | 1,736 | 82 | 1,157 | – | 1,239 | ||||||||||||||||||||||||
Loans not graded (2) | 17,371 | 1,537 | – | 18,908 | 14,159 | 1,353 | – | 15,512 | ||||||||||||||||||||||||
Default | – | – | 848 | 848 | – | – | 833 | 833 | ||||||||||||||||||||||||
Total | 90,682 | 7,901 | 848 | 99,431 | 84,021 | 6,686 | 833 | 91,540 | ||||||||||||||||||||||||
Allowance for credit losses | 665 | 921 | 551 | 2,137 | 644 | 1,071 | 626 | 2,341 | ||||||||||||||||||||||||
Carrying value | $ | 90,017 | $ | 6,980 | $ | 297 | $ | 97,294 | $ | 83,377 | $ | 5,615 | $ | 207 | $ | 89,199 |
(1) | Stage 3 includes purchased or originated credit-impaired loans. |
(2) | Portfolios where the customer account level ‘Probability of Default’ has not been determined have been included in the ‘Loans not graded’ category. |
Credit cards | As at October 31, 2022 | As at October 31, 2021 | ||||||||||||||||||||||||||||||
Category of PD grades ($ millions) | Stage 1 | Stage 2 | Stage 3 | Total | Stage 1 | Stage 2 | Stage 3 | Total | ||||||||||||||||||||||||
Very low | $ | 1,813 | $ | 47 | $ | – | $ | 1,860 | $ | 1,517 | $ | 76 | $ | – | $ | 1,593 | ||||||||||||||||
Low | 2,756 | 159 | – | 2,915 | 2,288 | 135 | – | 2,423 | ||||||||||||||||||||||||
Medium | 3,434 | 190 | – | 3,624 | 2,666 | 166 | – | 2,832 | ||||||||||||||||||||||||
High | 3,042 | 998 | – | 4,040 | 2,237 | 1,225 | – | 3,462 | ||||||||||||||||||||||||
Very high | 36 | 587 | – | 623 | 21 | 509 | – | 530 | ||||||||||||||||||||||||
Loans not graded (1) | 997 | 459 | – | 1,456 | 1,158 | 452 | – | 1,610 | ||||||||||||||||||||||||
Default | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||
Total | 12,078 | 2,440 | – | 14,518 | 9,887 | 2,563 | – | 12,450 | ||||||||||||||||||||||||
Allowance for credit losses | 436 | 647 | – | 1,083 | 352 | 859 | – | 1,211 | ||||||||||||||||||||||||
Carrying value | $ | 11,642 | $ | 1,793 | $ | – | $ | 13,435 | $ | 9,535 | $ | 1,704 | $ | – | $ | 11,239 |
(1) | Portfolios where the customer account level ‘Probability of Default’ has not been determined have been included in the ‘Loans not graded’ category. |
Undrawn loan commitments – Retail | As at October 31, 2022 | As at October 31, 2021 | ||||||||||||||||||||||||||||||
Category of PD grades ($ millions) | Stage 1 | Stage 2 | Stage 3 | Total | Stage 1 | Stage 2 | Stage 3 | Total | ||||||||||||||||||||||||
Very low | $ | 98,973 | $ | 6 | $ | – | $ | 98,979 | $ | 88,308 | $ | 14 | $ | – | $ | 88,322 | ||||||||||||||||
Low | 19,196 | 9 | – | 19,205 | 17,880 | 12 | – | 17,892 | ||||||||||||||||||||||||
Medium | 7,880 | 44 | – | 7,924 | 6,858 | 36 | – | 6,894 | ||||||||||||||||||||||||
High | 3,700 | 307 | – | 4,007 | 3,103 | 745 | – | 3,848 | ||||||||||||||||||||||||
Very high | 34 | 354 | – | 388 | 24 | 212 | – | 236 | ||||||||||||||||||||||||
Loans not graded (1) | 8,316 | 1,667 | – | 9,983 | 9,126 | 2,204 | – | 11,330 | ||||||||||||||||||||||||
Default | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||
Carrying value | $ | 138,099 | $ | 2,387 | $ | – | $ | 140,486 | $ | 125,299 | $ | 3,223 | $ | – | $ | 128,522 |
(1) | Portfolios where the customer account level ‘Probability of Default’ has not been determined have been included in the ‘Loans not graded’ category. |
2022 Scotiabank Annual Report
|
1
93
Consolidated Financial Statements
Total retail loans | As at October 31, 2022 | As at October 31, 2021 | ||||||||||||||||||||||||||||||
Category of PD grades ($ millions) | Stage 1 | Stage 2 | Stage 3 (1) | Total | Stage 1 | Stage 2 | Stage 3 (1) | Total | ||||||||||||||||||||||||
Very low | $ | 339,410 | $ | 973 | $ | – | $ | 340,383 | $ | 307,073 | $ | 5,868 | $ | – | $ | 312,941 | ||||||||||||||||
Low | 139,981 | 2,025 | – | 142,006 | 115,193 | 2,489 | – | 117,682 | ||||||||||||||||||||||||
Medium | 38,502 | 2,730 | – | 41,232 | 26,984 | 5,019 | – | 32,003 | ||||||||||||||||||||||||
High | 16,560 | 6,260 | – | 22,820 | 11,930 | 6,561 | – | 18,491 | ||||||||||||||||||||||||
Very high | 204 | 4,025 | – | 4,229 | 143 | 2,521 | – | 2,664 | ||||||||||||||||||||||||
Loans not graded (2) | 45,960 | 4,850 | – | 50,810 | 58,565 | 7,680 | – | 66,245 | ||||||||||||||||||||||||
Default | – | – | 2,234 | 2,234 | – | – | 2,164 | 2,164 | ||||||||||||||||||||||||
Total | 580,617 | 20,863 | 2,234 | 603,714 | 519,888 | 30,138 | 2,164 | 552,190 | ||||||||||||||||||||||||
Allowance for credit losses | 1,298 | 1,864 | 957 | 4,119 | 1,148 | 2,206 | 1,000 | 4,354 | ||||||||||||||||||||||||
Carrying value | $ | 579,319 | $ | 18,999 | $ | 1,277 | $ | 599,595 | $ | 518,740 | $ | 27,932 | $ | 1,164 | $ | 547,836 |
(1) | Stage 3 includes purchased or originated credit-impaired loans. |
(2) | Portfolios where the customer account level ‘Probability of Default’ has not been determined have been included in the ‘Loans not graded’ category. |
Business and government loans | As at October 31, 2022 | As at October 31, 2021 | ||||||||||||||||||||||||||||||
Category of PD grades ($ millions) | Stage 1 | Stage 2 | Stage 3 (1) | Total | Stage 1 | Stage 2 | Stage 3 (1) | Total | ||||||||||||||||||||||||
Investment grade | $ | 162,696 | $ | 1,775 | $ | – | $ | 164,471 | $ | 110,786 | $ | 892 | $ | – | $ | 111,678 | ||||||||||||||||
Non-Investment | 105,251 | 9,563 | – | 114,814 | 91,945 | 7,570 | – | 99,515 | ||||||||||||||||||||||||
Watch list | 22 | 2,890 | – | 2,912 | 31 | 3,266 | – | 3,297 | ||||||||||||||||||||||||
Loans not graded (2) | 2,346 | 12 | – | 2,358 | 2,151 | 11 | – | 2,162 | ||||||||||||||||||||||||
Default | – | – | 2,552 | 2,552 | – | – | 2,292 | 2,292 | ||||||||||||||||||||||||
Total | 270,315 | 14,240 | 2,552 | 287,107 | 204,913 | 11,739 | 2,292 | 218,944 | ||||||||||||||||||||||||
Allowance for credit losses | 255 | 296 | 678 | 1,229 | 186 | 431 | 655 | 1,272 | ||||||||||||||||||||||||
Carrying value | $ | 270,060 | $ | 13,944 | $ | 1,874 | $ | 285,878 | $ | 204,727 | $ | 11,308 | $ | 1,637 | $ | 217,672 |
(1) | Stage 3 includes purchased or originated credit-impaired loans. |
(2) | Portfolios where the customer account level ‘Probability of Default’ has not been determined have been included in the ‘Loans not graded’ category. |
Undrawn loan commitments – Business and government | As at October 31, 2022 | As at October 31, 2021 | ||||||||||||||||||||||||||||||
Category of PD grades ($ millions) | Stage 1 | Stage 2 | Stage 3 (1) | Total | Stage 1 | Stage 2 | Stage 3 (1) | Total | ||||||||||||||||||||||||
Investment grade | $ | 222,734 | $ | 1,502 | $ | – | $ | 224,236 | $ | 186,056 | $ | 1,266 | $ | – | $ | 187,322 | ||||||||||||||||
Non-investment | 62,827 | 4,534 | – | 67,361 | 66,009 | 3,786 | – | 69,795 | ||||||||||||||||||||||||
Watch list | 4 | 604 | – | 608 | 12 | 2,160 | – | 2,172 | ||||||||||||||||||||||||
Loans not graded (2) | 4,573 | – | – | 4,573 | 4,155 | – | – | 4,155 | ||||||||||||||||||||||||
Default | – | – | 139 | 139 | – | – | 102 | 102 | ||||||||||||||||||||||||
Total | 290,138 | 6,640 | 139 | 296,917 | 256,232 | 7,212 | 102 | 263,546 | ||||||||||||||||||||||||
Allowance for credit losses | 67 | 24 | 17 | 108 | 26 | 39 | – | 65 | ||||||||||||||||||||||||
Carrying value | $ | 290,071 | $ | 6,616 | $ | 122 | $ | 296,809 | $ | 256,206 | $ | 7,173 | $ | 102 | $ | 263,481 |
(1) | Stage 3 includes purchased or originated credit-impaired loans. |
(2) | Portfolios where the customer account level ‘Probability of Default’ has not been determined have been included in the ‘Loans not graded’ category. |
Total non-retail | As at October 31, 2022 | As at October 31, 2021 | ||||||||||||||||||||||||||||||
Category of PD grades ($ millions) | Stage 1 | Stage 2 | Stage 3 (1) | Total | Stage 1 | Stage 2 | Stage 3 (1) | Total | ||||||||||||||||||||||||
Investment grade | $ | 385,430 | $ | 3,277 | $ | – | $ | 388,707 | $ | 296,842 | $ | 2,158 | $ | – | $ | 299,000 | ||||||||||||||||
Non-investment | 168,078 | 14,097 | – | 182,175 | 157,954 | 11,356 | – | 169,310 | ||||||||||||||||||||||||
Watch list | 26 | 3,494 | – | 3,520 | 43 | 5,426 | – | 5,469 | ||||||||||||||||||||||||
Loans not graded (2) | 6,919 | 12 | – | 6,931 | 6,306 | 11 | – | 6,317 | ||||||||||||||||||||||||
Default | – | – | 2,691 | 2,691 | – | – | 2,394 | 2,394 | ||||||||||||||||||||||||
Total | 560,453 | 20,880 | 2,691 | 584,024 | 461,145 | 18,951 | 2,394 | 482,490 | ||||||||||||||||||||||||
Allowance for credit losses | 322 | 320 | 695 | 1,337 | 212 | 470 | 655 | 1,337 | ||||||||||||||||||||||||
Carrying value | $ | 560,131 | $ | 20,560 | $ | 1,996 | $ | 582,687 | $ | 460,933 | $ | 18,481 | $ | 1,739 | $ | 481,153 |
(1) | Stage 3 includes purchased or originated credit-impaired loans. |
(2) | Portfolios where the customer account level ‘Probability of Default’ has not been determined have been included in the ‘Loans not graded’ category. |
(g) | Loans past due but not impaired (1) |
A loan is considered past due when a counterparty has not made a payment by the contractual due date. The
following
table presents thecarrying
value of loans that are contractually past due but not classified as impaired because they are either less than 90 days past due or fully secured and collection efforts are reasonably expected to result in repayment or restoring it to a current status in accordance with the Bank’s policy. In cases194
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
where borrowers have opted to participate in payment def
e
rral programs, deferral of payments is not considered past due and such loans are not aged further during the deferral period.2022 (2) | 2021 (2) | |||||||||||||||||||||||||||||||
As at October 31 ($ millions) | 31 – 60 days | 61 – 90 days | 91 days and greater (3) | Total | 31 – 60 days | 61 – 90 days | 91 days and greater (3) | Total | ||||||||||||||||||||||||
Residential mortgages | $ | 1,015 | $ | 482 | $ | – | $ | 1,497 | $ | 732 | $ | 327 | $ | – | $ | 1,059 | ||||||||||||||||
Personal loans | 505 | 254 | – | 759 | 411 | 210 | – | 621 | ||||||||||||||||||||||||
Credit cards | 173 | 113 | 249 | 535 | 125 | 83 | 201 | 409 | ||||||||||||||||||||||||
Business and government | 122 | 47 | – | 169 | 124 | 24 | – | 148 | ||||||||||||||||||||||||
Total | $ | 1,815 | $ | 896 | $ | 249 | $ | 2,960 | $ | 1,392 | $ | 644 | $ | 201 | $ | 2,237 |
(1) | Loans past due 30 days or less are not presented in this analysis as they are not administratively considered past due. |
(2) | For loans where payment deferrals were granted, deferred payments are not considered past due and such loans are not aged further during the deferral period. Regular ageing of the loans resumes, after the end of the deferral period. |
(3) | All loans that are over 90 days past due are considered impaired with the exception of credit card receivables which are considered impaired when 180 days past due. |
(h) | Purchased credit-impaired loans |
Certain financial assets including loans are credit-impaired on initial recognition either through acquisition or origination. The following table provides details of such assets:
As at October 31 ($ millions) | 2022 | 2021 | ||||||
Unpaid principal balance (1) | $ | 309 | $ | 303 | ||||
Credit related fair value adjustments | (70 | ) | (68 | ) | ||||
Carrying value | 239 | 235 | ||||||
Stage 3 allowance | (2 | ) | (1 | ) | ||||
Carrying value net of related allowance | $ | 237 | $ | 234 |
(1) | Represents principal amount owed net of write-offs. |
14 | Derecognition of Financial Assets |
Securitization of residential mortgage loans
The Bank securitizes fully insured residential mortgage loans, Bank originated and others, through the creation of mortgage-backed securities (MBS) under the National Housing Act (NHA) MBS program, sponsored by Canada Mortgage and Housing Corporation (CMHC). MBS created under the program are primarily sold to Canada Housing Trust (the Trust), a government sponsored entity, under the Canada Mortgage Bond (CMB) program, and/or third-party investors. The Trust issues securities to third-party investors. The CMHC also previously purchased insured mortgage pools from the Bank under the Insured Mortgage Purchase Program (IMPP).
The sale of mortgages under the above programs does not meet the derecognition requirements, where the Bank retains the
pre-payment
and interest rate risk associated with the mortgages, which represent substantially all the risks and rewards associated with the transferred assets.The transferred mortgages continue to be recognized on the Consolidated Statement of Financial Position as residential mortgage loans. Cash proceeds from the transfer are treated as secured borrowings and included in Deposits – Business and government on the Consolidated Statement of Financial Position.
The following table provides the carrying amount of transferred assets that do not qualify for derecognition and the associated liabilities:
As at October 31 ($ millions) | 2022 (1) | 2021 (1) | ||||||
Assets | ||||||||
Carrying value of residential mortgage loans | $ | 15,032 | $ | 17,145 | ||||
Other related assets (2) | 9,854 | 9,787 | ||||||
Liabilities | ||||||||
Carrying value of associated liabilities | 24,173 | 25,833 |
(1) | The fair value of the transferred assets is $23,379 (2021 – $25,761) and the fair value of the associated liabilities is $23,254 (2021 – $26,021), for a net position of $125 (2021 – $(260)). |
(2) | These include cash held in trust and trust permitted investment assets, including repurchase style transactions of mortgage-backed securities, acquired as part of principal reinvestment account that the Bank is required to maintain in order to participate in the programs. |
Securitization of personal lines of credit, credit cards and auto loans
The Bank securitizes a portion of its credit card and auto loan receivables through consolidated structured entities. These receivables continue to be recognized on the Consolidated Statement of Financial Position as personal loans and credit card loans. For further details, refer to Note 15.
Securities sold under repurchase agreements and securities lent
The Bank enters into transactions, such as repurchase agreements and securities lending agreements, where the Bank transfers assets under agreements to repurchase them on a future date and retains all the substantial risks and rewards associated with the assets. The transferred assets remain on the Consolidated Statement of Financial Position.
2022 Scotiabank Annual Report
|
195
Consolidated Financial Statements
The following table provides the carrying amount of the transferred assets and the associated liabilities:
As at October 31 ($ millions) | 2022 (1) | 2021 (1) | ||||||
Carrying value of assets associated with: | ||||||||
Repurchase agreements (2) | $ | 122,552 | $ | 100,083 | ||||
Securities lending agreements | 52,178 | 59,506 | ||||||
Total | 174,730 | 159,589 | ||||||
Carrying value of associated liabilities (3) | $ | 139,025 | $ | 123,469 |
(1) | The fair value of transferred assets is $174,730 (2021 – $159,589) and the fair value of the associated liabilities is $139,025 (2021 – $123,469), for a net position of $35,705 (2021 – $36,120). |
(2) | Does not include over-collateralization of assets pledged. |
(3) | Liabilities for securities lending arrangements only include amounts related to cash collateral received. In most cases, securities are received as collateral. |
Continuing involvement in transferred financial assets that qualify for derecognition
The Bank issued loans under the Canada Emergency Business Account (CEBA) program. These loans are derecognized from the 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, 2022, the Bank has derecognized $3.9 billion of CEBA loans (October 31, 2021 – $4.3
billion). The Bank retains a continuing involvement in these derecognized loans through its servicing of these loans on behalf of Export Development Canada. The appropriate level of administration fees for servicing the loans has been recognized.
15 | Structured Entities |
(a) | Consolidated structured entities |
U.S. multi-seller conduit
The Bank-sponsored U.S. multi-seller conduit purchases high-quality financial assets from independent third parties (the sellers) funded by the issuance of highly rated asset-backed commercial paper. The sellers continue to service the financial assets and provide credit enhancements through overcollateralization protection and cash reserves.
Each asset purchased by the conduit has a deal-specific liquidity facility provided by the Bank in the form of a Liquidity Asset Purchase Agreement (LAPA). The primary purpose of the LAPA is to provide an alternative source of financing in the event the conduit is unable to access the asset-backed commercial paper market. The administration agent can require the Bank in its capacity as liquidity provider to purchase an interest in the related assets owned by the conduit. The Bank is not obligated to perform under the LAPA agreements in the event the conduit itself is insolvent.
The Bank’s liquidity agreements with the conduit call for the Bank to fund full par value of the assets, including defaulted assets, if any, of the conduit. This facility is available to absorb the losses on defaulted assets, if any, in excess of losses absorbed by deal-specific seller credit enhancements. Further, the Bank holds the subordinated note issued by the conduit.
The Bank’s exposure from the U.S. conduit through the LAPA, including the obligation to purchase defaulted assets and investment in the conduit’s subordinated note, give the Bank the obligation to absorb losses that could potentially be significant to the conduit, which in conjunction with power to direct the conduit’s activities, result in the Bank consolidating the U.S. multi-seller conduit.
The conduit’s assets of $10 billion (2021 – $5 billion) are primarily included in Business and government loans on the Bank’s Consolidated Statement of Financial Position.
There are contractual restrictions on the ability of the Bank’s consolidated U.S. multi-seller conduit to transfer funds to the Bank. The Bank is restricted from accessing the conduit’s assets under the relevant arrangements. The Bank has no rights to the assets owned by the conduit. In the normal course of business, the assets of the conduit can only be used to settle the obligations of the conduit.
Bank funding vehicles and capital vehicles
The Bank uses funding and capital vehicles to facilitate cost-efficient financing of its own operations, including the issuance of covered bonds and notes. Activities of funding structured entities are generally limited to holding an interest in a pool of assets or receivables generated by the Bank. Capital vehicles include Scotiabank LRCN Trust which was established in connection with the Bank’s issuance of qualifying regulatory capital instruments. These structured entities are consolidated due to the Bank’s decision-making power and ability to use that power to affect the Bank’s returns.
Covered bonds
The Bank has a registered covered bond program through which it issues debt that is guaranteed by Scotiabank Covered Bond Guarantor Limited Partnership (the “LP”). Under this program, the LP purchases uninsured residential mortgages from the Bank, which it acquires with funding provided by the Bank.
As at October 31, 2022, $45.9 billion (2021 – $31.3 billion) covered bonds were outstanding and included in Deposits – Business and government on the Consolidated Statement of Financial Position. The Bank’s outstanding covered bonds are denominated in U.S. dollars, Australian dollars, British pounds, Swiss francs and Euros. As at October 31, 2022, assets pledged in relation to these covered bonds were uninsured residential mortgages denominated in Canadian dollars of $51.4 billion (2021 – $34.7 billion). These figures exclude activities in connection with Canadian dollar-denominated covered bonds held by the Bank and that are eliminated upon consolidation or that are transferred to the Bank of Canada as part of its term repo program.
Credit card receivables securitization trust
The Bank securitizes a portion of its Canadian credit card receivables through a Bank-sponsored structured entity. This entity issues senior and subordinated notes to third-party investors and the proceeds of such issuance are used to purchase
co-ownership
interests in credit card receivables originated by the Bank. Recourse of the note holders is limited to the purchased interest.The Bank is responsible for servicing the transferred credit card receivables as well as performing administrative functions for this entity. As at October 31, 2022, US$0.8 billion ($1.1
billion Canadian dollar equivalent) (2021 –
US$1.3 billion, $1.5
billion Canadian dollar equivalent) Class A
196
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
notes; and US$70 million
($95 million Canadian
dollar equivalent
) (2021 – US$109 million, $135 million Canadiandollar equivalent
) subordinated Class B and Class C notes were outstanding and included in Deposits – Business and government on the Consolidated Statement of Financial Position. Asat
October 31, 2022 assets pledged in relation to these notes were credit card receivables, denominated in Canadian dollars, of $1.2 billion (2021 – $1.8 billion).Auto loan receivables securitization trusts
The Bank securitizes a portion of its Canadian auto loan receivables through Bank-sponsored structured entities. The 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. Recourse of the note holders is limited to the auto loan receivables.
The Bank is responsible for servicing the transferred auto loan receivables as well as performing administrative functions for the entities. As at October 31, 2022, the aggregate senior and subordinated notes issued to third parties outstanding and included in Deposits – Business and government on the Consolidated Statement of Financial Position were US$15.7
million
($21.4million
Canadiandollar equivalent
) (2021 – US$200.0 million
, $252.6 million
Canadiandollar equivalent
). As at October 31, 2022, assets pledged in relation to these notes were Canadian auto loan receivables denominated in Canadian dollars of $216.4million
(2021 – $831.1million
).Scotiabank LRCN Trust
The Bank sponsors the Scotiabank LRCN Trust established in connection with the issuance of limited recourse capital notes. As at October 31, 2022, $4,526 million (2021 – $2,003 million) capital notes were outstanding and included in Preferred shares and other equity instruments on the Consolidated Statement of Financial Position. Refer to Note 24(b) – Preferred shares and other equity instruments for further information.
Other
Assets of other consolidated structured entities are comprised of securities, deposits with banks and other assets to meet the Bank’s and customer needs.
(b) | Unconsolidated structured entities |
The following table provides information about other structured entities which the Bank does not control and therefore does not consolidate.
As at October 31, 2022 | ||||||||||||||||
($ millions) | Canadian multi-seller conduits that the Bank administers | Structured finance entities | Capital funding vehicles | Total | ||||||||||||
Total assets on structured entity’s financial statements | $ | 3,773 | $ | 2,304 | $ | 833 | $ | 6,910 | ||||||||
Assets recognized on the Bank’s financial statements | ||||||||||||||||
Trading assets | 35 | 2 | – | 37 | ||||||||||||
Investment securities | – | 885 | 10 | 895 | ||||||||||||
Loans (1) | – | 704 | 59 | 763 | ||||||||||||
35 | 1,591 | 69 | 1,695 | |||||||||||||
Liabilities recognized on the Bank’s financial statements | ||||||||||||||||
Deposits – Business and government | – | – | 833 | 833 | ||||||||||||
– | – | 833 | 833 | |||||||||||||
Bank’s maximum exposure to loss | $ | 3,808 | $ | 1,591 | $ | 69 | $ | 5,468 | ||||||||
As at October 31, 2021 | ||||||||||||||||
($ millions) | Canadian multi-seller conduits that the Bank administers | Structured finance entities | Capital funding vehicles | Total | ||||||||||||
Total assets (on structured entity’s financial statements) | $ | 3,519 | $ | 2,403 | $ | 833 | $ | 6,755 | ||||||||
Assets recognized on the Bank’s financial statements | ||||||||||||||||
Trading assets | 7 | 2 | – | 9 | ||||||||||||
Investment securities | – | 1,124 | 10 | 1,134 | ||||||||||||
Loans (1) | – | 639 | 59 | 698 | ||||||||||||
7 | 1,765 | 69 | 1,841 | |||||||||||||
Liabilities recognized on the Bank’s financial statements | ||||||||||||||||
Deposits – Business and government | – | – | 833 | 833 | ||||||||||||
– | – | 833 | 833 | |||||||||||||
Bank’s maximum exposure to loss | $ | 3,526 | $ | 1,765 | $ | 69 | $ | 5,360 |
(1) | Loan balances are presented net of allowance for credit losses. |
2022 Scotiabank Annual Report
|
197
Consolidated Financial Statements
The Bank’s maximum exposure to loss represents the notional amounts of guarantees, liquidity facilities, and other credit support relationships with the structured entities, the credit risk amount for certain derivative contracts with the entities and the amount invested where the Bank holds an ownership interest in the structured entities. Of the aggregate amount of maximum exposure to loss as at October 31, 2022, the Bank has recorded $1.7 billion (2021 – $1.8 billion), primarily its interest in the structured entities, on its Consolidated Statement of Financial Position.
Canadian multi-seller conduits that the Bank administers
The Bank sponsors two Canadian multi-seller conduits. The conduits purchase assets from independent third parties (the sellers) funded by the issuance of asset-backed commercial paper. The sellers continue to service the assets and provide credit enhancements through overcollateralization protection and cash reserves. The Bank has no rights to these assets as they are available to support the obligations of the respective programs but manages for a fee the commercial paper selling programs. To ensure timely repayment of the commercial paper, each asset pool financed by the multi-seller conduits has a deal-specific LAPA with the Bank. Pursuant to the terms of the LAPA, the Bank as the liquidity provider is obligated to purchase
non-defaulted
assets, transferred by the conduit at the conduit’s original cost as reflected in the table above. In most cases, the liquidity agreements do not require the Bank to purchase defaulted assets. Additionally, the Bank has not provided any program-wide credit enhancement to these conduits. The Bank provides additional liquidity facilities to these multi-seller conduits to a maximum amount of $2.6 billion (2021 – $1.4 billion) based on future asset purchases by these conduits.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.
Structured finance entities
The Bank has interests in structured entities used to assist corporate clients in accessing cost-efficient financing through their securitization structures. The Bank may act as an administrator, an investor or a combination of both in these types of structures.
Capital funding vehicles
These entities are designed to pass the Bank’s credit risk to the holders of the securities. Therefore, the Bank does not have exposure or rights to variable returns from these unconsolidated entities.
(c) | Other unconsolidated Bank-sponsored 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 entities, and the Bank’s name is used by the structured entities 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.As at October 31, 2022, the bank earned $2,486 million (2021 – $2,604 million) in revenue from unconsolidated Bank-sponsored mutual fund entities.
16 | Property and Equipment |
($ millions) | Land & Building | Equipment | Technology Assets | Leasehold Improvements | Right-of-use Assets | Total | ||||||||||||||||||
Cost | ||||||||||||||||||||||||
Balance as at October 31, 2020 | $ | 1,619 | $ | 1,936 | $ | 2,386 | $ | 1,660 | $ | 3,786 | $ | 11,387 | ||||||||||||
Acquisitions | – | – | – | – | – | – | ||||||||||||||||||
Additions | 126 | 111 | 92 | 74 | 456 | 859 | ||||||||||||||||||
Disposals | (49 | ) | (47 | ) | (32 | ) | (51 | ) | (132 | ) | (311 | ) | ||||||||||||
Foreign currency adjustments and other | (127 | ) | (94 | ) | (36 | ) | (34 | ) | (107 | ) | (398 | ) | ||||||||||||
Balance as at October 31, 2021 | $ | 1,569 | $ | 1,906 | $ | 2,410 | $ | 1,649 | $ | 4,003 | $ | 11,537 | ||||||||||||
Acquisitions | – | – | – | – | – | – | ||||||||||||||||||
Additions | 102 | 110 | 169 | 160 | 215 | 756 | ||||||||||||||||||
Disposals | (56 | ) | (59 | ) | (20 | ) | (47 | ) | (98 | ) | (280 | ) | ||||||||||||
Foreign currency adjustments and other | 62 | 405 | (354 | ) | 33 | 77 | 223 | |||||||||||||||||
Balance as at October 31, 2022 | $ | 1,677 | $ | 2,362 | $ | 2,205 | $ | 1,795 | $ | 4,197 | $ | 12,236 | ||||||||||||
Accumulated depreciation | ||||||||||||||||||||||||
Balance as at October 31, 2020 | $ | 620 | $ | 1,471 | $ | 1,970 | $ | 1,024 | $ | 405 | $ | 5,490 | ||||||||||||
Depreciation | 42 | 98 | 155 | 95 | 379 | 769 | ||||||||||||||||||
Disposals | (30 | ) | (32 | ) | (31 | ) | (37 | ) | (35 | ) | (165 | ) | ||||||||||||
Foreign currency adjustments and other | (35 | ) | (73 | ) | (34 | ) | (23 | ) | (13 | ) | (178 | ) | ||||||||||||
Balance as at October 31, 2021 | $ | 597 | $ | 1,464 | $ | 2,060 | $ | 1,059 | $ | 736 | $ | 5,916 | ||||||||||||
Depreciation | 37 | 83 | 153 | 98 | 378 | 749 | ||||||||||||||||||
Disposals | (24 | ) | (59 | ) | (16 | ) | (51 | ) | (59 | ) | (209 | ) | ||||||||||||
Foreign currency adjustments and other | 27 | 289 | (264 | ) | 11 | 17 | 80 | |||||||||||||||||
Balance as at October 31, 2022 | $ | 637 | $ | 1,777 | $ | 1,933 | $ | 1,117 | $ | 1,072 | $ | 6,536 | ||||||||||||
Net book value | ||||||||||||||||||||||||
Balance as at October 31, 2021 | $ | 972 | $ | 442 | $ | 350 | $ | 590 | $ | 3,267 | $ | 5,621 | (1) | |||||||||||
Balance as at October 31, 2022 | $ | 1,040 | $ | 585 | $ | 272 | $ | 678 | $ | 3,125 | $ | 5,700 | (1) |
(1) | Includes $36 |
198
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
17 | Investments in Associates |
The Bank had significant investments in the following associates:
2022 | 2021 | |||||||||||||||||||||||
As at October 31 ($ millions) | Country of incorporation | Nature of business | Ownership percentage | Date of financial statements (1) | Carrying value | Carrying value | ||||||||||||||||||
Canadian Tire’s Financial Services business (CTFS) (2) | Canada | Financial Services | 20.00 | % | September 30, 2022 | $ | 579 | $ | 549 | |||||||||||||||
Bank of Xi’an Co. Ltd. (3) | China | Banking | 18.11 | % | September 30, 2022 | 1,007 | 968 | |||||||||||||||||
Maduro & Curiel’s Bank N.V. (4) | Curacao | Banking | 48.10 | % | September 30, 2022 | 438 | 366 |
(1) | Represents the date of the most recent financial statements. Where available, financial statements prepared by the associates’ management or other published information is used to estimate the change in the Bank’s interest since the most recent financial statements. |
(2) | Canadian Tire has an option to sell to the Bank up to an additional 29% equity interest until the end of the 10th anniversary (October 1, 2024) at the then fair value, that can be settled, at the Bank’s discretion, by issuance of common shares or cash. After October 1, 2024 for a period of six months, the Bank has the option to sell its equity interest back to Canadian Tire at the then fair value. |
(3) | Based on the quoted price on the Shanghai Stock Exchange, the Bank’s investment in Bank of Xi’an Co. Ltd was $489 as at October 31, 2022 (October 31, 2021 – $671). The market value of the investment has remained below the carrying amount. The Bank performed an impairment test as at October 31, 2022 using a value in use (“VIU”), discounted cash flow model. The Bank concluded that there is no impairment as at October 31, 2022. |
(4) | The local regulator requires financial institutions to set aside reserves for general banking risks. These reserves are not required under IFRS, and represent undistributed retained earnings related to a foreign associated corporation, which are subject to local regulatory restrictions. As of October 31, 2022 these reserves amounted to $67 (2021 - $60). |
Summarized financial information of the B
a
nk’s significant associates are as follows.For the twelve months ended (1) | As at October 31, 2022 | |||||||||||||||
($ millions) | Revenue | Net income | Total assets | Total liabilities | ||||||||||||
Canadian Tire’s Financial Services business (CTFS) | $ | 1,260 | $ | 399 | $ | 6,870 | $ | 5,629 | ||||||||
Bank of Xi’an Co. Ltd. | 1,306 | 497 | 67,864 | 62,489 | ||||||||||||
Maduro & Curiel’s Bank N.V. | 324 | 99 | 7,181 | 6,288 |
For the twelve months ended (1) | As at October 31, 2021 | |||||||||||||||
($ millions) | Revenue | Net income | Total assets | Total liabilities | ||||||||||||
Canadian Tire’s Financial Services business (CTFS) | $ | 1,098 | $ | 437 | $ | 7,832 | $ | 6,722 | ||||||||
Bank of Xi’an Co. Ltd. | 1,402 | 541 | 65,006 | 59,828 | ||||||||||||
Maduro & Curiel’s Bank N.V. | 304 | 67 | 6,183 | 5,438 |
(1) | Based on the most recent available financial statements. |
18 | Goodwill and Other Intangible Assets |
Goodwill
The changes in the carrying amounts of goodwill by cash-generating unit (CGU) are as follows:
($ millions) | Canadian Banking | Global Wealth Management | Global Banking and Markets | Latin America | Caribbean and Central America | Total | ||||||||||||||||||
Balance as at October 31, 2020 | $ | 1,690 | $ | 3,614 | $ | 240 | $ | 2,832 | $ | 903 | $ | 9,279 | ||||||||||||
Acquisitions | – | – | – | – | – | – | ||||||||||||||||||
Dispositions | – | – | – | – | – | – | ||||||||||||||||||
Foreign currency adjustments and other | – | (34 | ) | (9 | ) | (315 | ) | (73 | ) | (431 | ) | |||||||||||||
Balance as at October 31, 2021 | 1,690 | 3,580 | 231 | 2,517 | 830 | 8,848 | ||||||||||||||||||
Acquisitions | – | – | – | – | – | – | ||||||||||||||||||
Dispositions | – | – | – | – | – | – | ||||||||||||||||||
Foreign currency adjustments and other | – | 19 | 12 | (116 | ) | 111 | 26 | |||||||||||||||||
Balance as at October 31, 2022 | $ | 1,690 | $ | 3,599 | $ | 243 | $ | 2,401 | $ | 941 | $ | 8,874 |
Impairment testing of goodwill
Goodwill acquired in business combinations is allocated to each of the Bank’s group of CGUs that are expected to benefit from the synergies of the particular acquisition. Goodwill is assessed for impairment annually or more frequently if events or circumstances occur that may result in the recoverable amount of the CGU falling below its carrying value.
The Bank determines the carrying value of the CGU using a regulatory capital approach based on credit, market, operational risks and leverage, consistent with the Bank’s capital attribution for business line performance measurement. The recoverable amount is the higher of fair value less costs of disposal and value in use. The recoverable amount for the CGU has been determined using the fair value less costs of disposal method. In arriving at such value for the CGU, the Bank has used price earnings (P/E) multiples applied to normalized net income for the last four quarters as of the test date. A control premium is added based on a five year weighted average acquisition premium paid for comparable companies, and costs of disposal are deducted from the fair value of the CGU. The resulting recoverable amount determined for the CGU is then compared to its respective carrying amount to identify any impairment. P/E multiples ranging from 9.0 to 12.0 times (2021 – 10.0 to 12.5 times) have been used.
2022 Scotiabank Annual Report
|
199
Consolidated Financial Statements
The fair value less costs of disposal of the CGU is sensitive to changes in net income, P/E multiples and control premiums.
Goodwill
was assessed for annual impairment as at July 31, 2022 and July 31, 2021 and no
impairment was determined to exist.
Management believes that reasonable negative changes in any one key assumption used to determine the recoverable amount of the CGU would not result in an impairment. No significant negative changes were noted as of October 31, 2022.
Intangible assets
Intangible assets consist of assets with indefinite and finite useful lives. Indefinite life intangible assets consist substantially of fund management contracts. The fund management contracts are for the managem
e
nt of open-ended funds. Finite life intangible assets include assets such as computer software, customer relationships and core deposit intangibles.Finite life | Indefinite life | |||||||||||||||||||||
($ millions) | Computer software | Other intangibles | Fund management contracts (1) | Other intangibles | Total | |||||||||||||||||
Cost | ||||||||||||||||||||||
Balance as at October 31, 2020 | $ | 4,991 | $ | 1,973 | $ | 4,415 | $ | 166 | $ | 11,545 | ||||||||||||
Acquisitions | 2 | – | – | – | 2 | |||||||||||||||||
Additions | 861 | – | – | – | 861 | |||||||||||||||||
Disposals | (7 | ) | – | – | – | (7 | ) | |||||||||||||||
Foreign currency adjustments and other | (149 | ) | (106 | ) | – | – | (255 | ) | ||||||||||||||
Balance as at October 31, 2021 | $ | 5,698 | $ | 1,867 | $ | 4,415 | $ | 166 | $ | 12,146 | ||||||||||||
Acquisitions | – | – | – | – | – | |||||||||||||||||
Additions | 987 | – | – | – | 987 | |||||||||||||||||
Disposals | (2 | ) | – | – | – | (2 | ) | |||||||||||||||
Foreign currency adjustments and other | 4 | 8 | – | – | 12 | |||||||||||||||||
Balance as at October 31, 2022 | $ | 6,687 | $ | 1,875 | $ | 4,415 | $ | 166 | $ | 13,143 | ||||||||||||
Accumulated amortization | ||||||||||||||||||||||
Balance as at October 31, 2020 | $ | 2,581 | $ | 1,228 | $ | – | $ | – | $ | 3,809 | ||||||||||||
Amortization | 639 | 103 | – | – | 742 | |||||||||||||||||
Disposals | (5 | ) | – | – | – | (5 | ) | |||||||||||||||
Foreign currency adjustments and other | (98 | ) | (58 | ) | – | – | (156 | ) | ||||||||||||||
Balance as at October 31, 2021 | $ | 3,117 | $ | 1,273 | $ | – | $ | – | $ | 4,390 | ||||||||||||
Amortization | 685 | 97 | – | – | 782 | |||||||||||||||||
Disposals | (1 | ) | – | – | – | (1 | ) | |||||||||||||||
Foreign currency adjustments and other | 8 | 5 | – | – | 13 | |||||||||||||||||
Balance as at October 31, 2022 | $ | 3,809 | $ | 1,375 | $ | – | $ | – | $ | 5,184 | ||||||||||||
Net book value | ||||||||||||||||||||||
As at October 31, 2021 | $ | 2,581 | (2) | $ | 594 | $ | 4,415 | $ | 166 | $ | 7,756 | |||||||||||
As at October 31, 2022 | $ | 2,878 | (2) | $ | 500 | $ | 4,415 | $ | 166 | $ | 7,959 |
(1) | Fund management contracts are attributable to HollisWealth Inc. (formerly DundeeWealth Inc.), MD Financial Management Inc., and Jarislowsky Fraser Limited. |
(2) | Computer software comprises of purchased software of $337 (2021 – $380), internally generated software of $1,555 (2021 – $1,405), and in process software not subject to amortization of $986 (2021 – $797). |
Impairment testing of indefinite life intangible assets
Indefinite life intangible assets are not amortized and are assessed for impairment annually or more frequently if events or changes in circumstances indicate that the asset may be impaired. Impairment is assessed by comparing the carrying value of the indefinite life intangible asset to its recoverable amount. The recoverable amount of the fund management contracts is based on a value in use approach using the multi-period excess earnings method. This approach uses cash flow projections from management-approved financial budgets which include key assumptions related to market appreciation, net sales of funds, and operating margins taking into consideration past experience and market expectations. The forecast cash flows cover a10 to 12%)
5-year
period, with a terminal growth rate of4.5
% (2021 – 3 to 5%)applied thereafter. These cash flows have been discounted at 10% (2021 –
.
Indefinite life intangible assets were assessed for annual impairment as at July 31, 2022 and July 31, 2021 and no impairment was determined to
exist.
Management believes that reasonable negative changes in any one key assumption used to determine the recoverable amount would not result in an impairment. No significant negative changes were noted as of October 31, 2022.
19 | Other Assets |
As at October 31 ($ millions) | 2022 | 2021 | ||||||
Accrued interest | $ | 3,710 | $ | 2,155 | ||||
Accounts receivable and prepaids | 1,715 | 2,201 | ||||||
Current tax assets | 3,349 | 1,722 | ||||||
Margin deposit derivatives | 15,656 | 5,990 | ||||||
Segregated fund assets | 1,795 | 2,197 | ||||||
Pension assets (Note 28) | 1,052 | 456 | ||||||
Receivable from brokers, dealers and clients | 4,608 | 2,997 | ||||||
Other | 5,371 | 4,226 | ||||||
Total | $ | 37,256 | $ | 21,944 |
20
0
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
20 | Deposits |
2022 | 2021 | |||||||||||||||||||||||
Payable on demand (1) | ||||||||||||||||||||||||
As at October 31 ($ millions) | Interest- bearing | Non-interest- bearing | Payable after notice (2) | Payable on a fixed date (3) | Total | |||||||||||||||||||
Personal | $ | 6,997 | $ | 9,973 | $ | 155,503 | $ | 93,419 | $ | 265,892 | $ | 243,551 | ||||||||||||
Business and government | 164,843 | 35,466 | 41,459 | 355,849 | 597,617 | 511,348 | ||||||||||||||||||
Financial institutions | 13,395 | 1,367 | 1,952 | 35,958 | 52,672 | 42,360 | ||||||||||||||||||
Total | $ | 185,235 | $ | 46,806 | $ | 198,914 | (4) | $ | 485,226 | $ | 916,181 | $ | 797,259 | |||||||||||
Recorded in: | ||||||||||||||||||||||||
Canada | $ | 131,358 | $ | 27,810 | $ | 165,234 | $ | 318,575 | $ | 642,977 | $ | 571,254 | ||||||||||||
United States | 42,304 | 121 | 844 | 61,715 | 104,984 | 87,626 | ||||||||||||||||||
United Kingdom | – | – | 415 | 23,828 | 24,243 | 17,232 | ||||||||||||||||||
Mexico | – | 6,581 | 9,203 | 16,057 | 31,841 | 24,259 | ||||||||||||||||||
Peru | 5,717 | 243 | 5,648 | 4,831 | 16,439 | 14,520 | ||||||||||||||||||
Chile | 1,518 | 4,770 | 155 | 15,662 | 22,105 | 20,631 | ||||||||||||||||||
Colombia | 41 | 506 | 4,209 | 3,455 | 8,211 | 9,184 | ||||||||||||||||||
Other International | 4,297 | 6,775 | 13,206 | 41,103 | 65,381 | 52,553 | ||||||||||||||||||
Total (5) | $ | 185,235 | $ | 46,806 | $ | 198,914 | $ | 485,226 | $ | 916,181 | $ | 797,259 |
(1) | Deposits payable on demand include all deposits for which we do not have the right to notice of withdrawal, generally chequing accounts. |
(2) | Deposits payable after notice include all deposits for which we require notice of withdrawal, generally savings accounts. |
(3) | All deposits that mature on a specified date, generally term deposits, guaranteed investments certificates and similar instruments. |
(4) | Includes $156 non-interest bearing deposits. |
(5) | Deposits denominated in U.S. dollars amount to $326,041 |
The following table pres
e
nts the maturity schedule for term deposits in Canada greater than $100,000(1)
.($ millions) | Within three months | Three to six months | Six to twelve months | One to five years | Over five years | Total | ||||||||||||||||||
As at October 31, 2022 | $ | 53,656 | $ | 36,035 | $ | 62,891 | $ | $ | 21,440 | $ | 284,037 | |||||||||||||
As at October 31, 2021 | $ | 34,829 | $ | 24,372 | $ | 30,918 | $ | 90,433 | $ | 20,688 | $ | 201,240 |
(1) | The majority of foreign term deposits are in excess of $100,000. |
21 | Subordinated Debentures |
These debentures are direct, unsecured obligations of the Bank and are subordinate to the claims of the Bank’s depositors and other creditors. The Bank, where appropriate, enters into interest rate and cross-currency swaps to hedge the related risks.
As at October 31 ($ millions) | 2022 | 2021 | ||||||||||||
Maturity date | Interest rate (%) | Terms (1) | Carrying value (2) | Carrying value (2) | ||||||||||
June 2025 | 8.90 | Redeemable at any time. | $ | 253 | $ | 255 | ||||||||
December 2025 (3) | 4.50 | US$1,250 million. Interest will be payable semi-annually in arrears on June 16 and December 16 of each year, until maturity in December 2025. | 1,690 | 1,547 | ||||||||||
March 2027 (3) | 2.58 | On March 30, 2022, the Bank redeemed these notes at 100% of their principal amount plus accrued interest to the redemption date. | – | 1,156 | ||||||||||
January 2029 (3) | 3.89 | Redeemable on or after January 18, 2024. After January 18, 2024, interest will be payable at an annual rate equal to the three-month bankers’ acceptance rate plus 1.58%. | 1,770 | 1,771 | ||||||||||
July 2029 (3) | 2.836 | Redeemable on or after July 3, 2024. After July 3, 2024, interest will be payable at an annual rate equal to the three-month bankers’ acceptance rate plus 1.18%. | 1,459 | 1,510 | ||||||||||
August 2085 (4) | Floating | US$57 million bearing interest at a floating rate of the offered rate for six-month US$ LIBOR plus 0.125%. Redeemable on any interest payment date. | 78 | 95 | ||||||||||
May 2037 (3) | 4.588 | US$1,250 million. Redeemable between April 12, 2027, and May 4, 2032. On May 4, 2032, interest will reset at the then prevailing 5-year US treasury rate plus 2.050%. | 1,644 | – | ||||||||||
May 2032 (3) | 3.934 | Redeemable on or after May 3, 2027. After May 3, 2027, interest will be payable quarterly at the then prevailing three-month bankers’ acceptance rate plus 1.52%. | 1,575 | – | ||||||||||
$ | 8,469 | $ | 6,334 |
(1) | In accordance with the provisions of the Capital Adequacy Guideline of the Superintendent, all redemptions are subject to regulatory approval and subject to the terms in the relevant prospectus. |
(2) | The carrying value of subordinated debentures may differ from par value due to the impact of fair value hedges used for managing interest rate risk and subordinated debentures held for market-making purposes. |
(3) | These debentures contain non-viability contingent capital (NVCC) provisions. Under such NVCC provisions, outstanding debentures are convertible into a variable number of common shares if OSFI announces that the Bank has ceased, or is about to cease, to be viable, or if a federal or provincial government in Canada publicly announces that the Bank has accepted or agreed to accept a capital injection, or equivalent support, from the federal government or any provincial government or political subdivision or agent thereof without which the Bank would have been determined by OSFI to benon-viable. If such a conversion were to occur, the debentures would be converted into common shares pursuant to an automatic conversion formula defined as 150% of the par value plus accrued and unpaid interest divided by the conversion price. The conversion price is based on the greater of: (i) a floor price of $5.00 or, where applicable, the US dollar equivalent of $5.00 (subject to, in each case, adjustments in certain events as set out in the respective prospectus supplements), and (ii) the current market price of the Bank’s common shares at the time of the trigger event(10-day weighted average), where applicable converted from CAD to USD. |
(4) | During the year, the Bank purchased for cancellation approximately US$19 million subordinated debentures due 2085. |
2022 Scotiabank Annual Report
|
20
1
Consolidated Financial Statements
22 | Other Liabilities |
As at October 31 ($ millions) | 2022 | 2021 | ||||||
Accrued interest | $ | 3,612 | $ | 1,454 | ||||
Lease liabilities (1) | 3,323 | 3,413 | ||||||
Accounts payable and accrued expenses | 6,995 | 6,508 | ||||||
Current tax liabilities | 464 | 1,344 | ||||||
Deferred tax liabilities (Note 27) | 1,100 | 1,149 | ||||||
Gold and silver certificates and bullion | 372 | 417 | ||||||
Margin and collateral accounts | 9,029 | 7,313 | ||||||
Segregated fund liabilities | 1,795 | 2,197 | ||||||
Payables to brokers, dealers and clients | 1,957 | 958 | ||||||
Provisions (Note 23) | 287 | 296 | ||||||
Allowance for credit losses on off-balance sheet exposures(Note 13) | 108 | 65 | ||||||
Pension liabilities (Note 28) | 549 | 661 | ||||||
Other liabilities of subsidiaries and structured entities | 25,010 | 25,221 | ||||||
Other | 8,098 | 7,803 | ||||||
Total | $ | 62,699 | $ | 58,799 |
(1) | Represents discounted value of lease liabilities. |
The table below sets out a maturity analysis of undiscounted lease liabiliti
e
s showing the lease payments to be made after the reporting date:As at October 31 ($ millions) | 2022 | 2021 | ||||||
Within 1 year | $ | 425 | $ | 420 | ||||
1 to 2 years | 414 | 404 | ||||||
2 to 3 years | 404 | 391 | ||||||
3 to 4 years | 387 | 380 | ||||||
4 to 5 years | 373 | 359 | ||||||
After 5 years | 1,962 | 2,105 | ||||||
Total | $ | 3,965 | $ | 4,059 |
23 | Provisions |
($ millions) | ||||
As at November 1, 2020 | $ | 125 | ||
Provisions made during the year | 306 | |||
Provisions utilized / released during the year | (135 | ) | ||
Balance as at October 31, 2021 | $ | 296 | ||
Provisions made during the year | 149 | |||
Provisions utilized / released during the year | (158 | ) | ||
Balance as at October 31, 2022 | $ | 287 |
Restructuring
The Bank recorded a restructuring charge of $85 million,
pr
related to the strategic decision to realign the Bank’s Global Banking and Markets businesses in Asia Pacific to focus on select banking and capital markets activities in the region. The charge also included the cost of reducing Canadian and international full-time technology employees, driven by our ongoing technology modernization and digital transformation. These changes 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 and our evolving geographical focus. This charge was recorded in the Other operating segment.im
arily
Prior Year
In the prior year, the Bank recorded a restructuring charge of $126 million, 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.
Legal
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. However, based on current knowledge, management does not believe that liabilities, if any, arising from pending litigation or regulatory proceedings will have a material adverse effect on the Consolidated Statement of Financial Position or results of operations of the Bank.
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
2
02
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
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.
The Bank, through its Peruvian subsidiary, is engaged in legal actions related to certain value-added tax assessed amounts and associated interest totaling $165 million, which arose from certain client transactions which occurred prior to the Bank’s acquisition of the subsidiary. The legal action in Peru related to the original assessed amount continues. In November 2021, the Peruvian Constitutional Court dismissed the matter relating to the accrued interest for procedural reasons. With respect to this interest component, in October 2022, the Bank filed a request for arbitration against the Republic of Peru before the International Centre for the Settlement of Investment Disputes, pursuant to the provisions of the Canada-Peru Free Trade Agreement. The claim arises out of the Constitutional Court of Peru’s inequitable treatment of Scotiabank Peru’s rights in breach of the Canada-Peru Free Trade Agreement. The Bank is confident that it will be successful in these matters and intends to continue to defend its position. Accordingly, no amounts have been accrued in the consolidated financial statements.
Prior Years
In the prior year, the Bank recorded settlement and litigation provisions in the amount of $62 million in connection with the Bank’s former metals business. These provisions were recorded in the Other operating segment.
On August 19, 2020, the Bank entered into a Deferred Prosecution Agreement (“DPA”) with the U.S. Department of Justice (the “DOJ”). Additionally, the Commodity Futures Trading Commission (the “CFTC”) issued three separate orders against the Bank (collectively, the “Orders”). The DPA and the Orders (together, the “Resolutions”) resolve the DOJ’s and CFTC’s investigations into the Bank’s activities and trading practices in the metals markets and related conduct as well as pre-trade mid-market marks and related swap dealer compliance issues.
Under the terms of the Resolutions, the Bank made aggregate payments to the DOJ and CFTC of approximately $127.5 million (USD) and has agreed to retain an independent compliance monitor, which the Bank engaged on April 1, 2021. Under one of the orders, the CFTC will defer proceedings to suspend or revoke the Bank’s provisional registration as a swap dealer subject to the Bank’s implementation of a remediation plan, among other conditions, which the Bank is carrying out under the oversight of the independent compliance monitor, which commenced its engagement in April 2021, and which is expected to last three years under the terms of the Resolutions.
24 | Common shares, preferred shares and other equity instruments |
(a) | Common shares |
Authorized:
An unlimited number of common shares without nominal or par value.
Issued and fully
paid:
2022 | 2021 | |||||||||||||||
As at October 31 ($ millions) | Number of shares | Amount | Number of shares | Amount | ||||||||||||
Outstanding at beginning of year | 1,215,337,523 | $ | 18,507 | 1,211,479,297 | $ | 18,239 | ||||||||||
Issued in relation to share-based payments, net (Note 26) | 1,951,372 | 136 | 3,016,072 | 200 | ||||||||||||
Issued in relation to the acquisition of a subsidiary or associated corporation | 7,000,000 | 570 | 842,154 | 68 | ||||||||||||
Repurchased for cancellation under the Normal Course Issuer Bid | (32,913,800 | ) | (506 | ) | – | – | ||||||||||
Outstanding at end of year | 1,191,375,095 | (1) | $ | 18,707 | 1,215,337,523 | (1) | $ | 18,507 |
(1) | In the normal course of business, the Bank’s regulated Dealer subsidiary purchases and sells the Bank’s common shares to facilitate trading/institutional client activity. During fiscal 2022, the number of such shares bought and sold was 17,757,599 (2021 – 18,532,448). |
Dividend
The dividends paid on common shares in fiscal 2022 and 2021 were $4,858 million ($4.06 per share) and $4,371 million ($3.60 per share), respectively. The Board of Directors approved a quarterly dividend of $1.03 per common share at its meeting on November 28, 2022. This quarterly dividend applies to shareholders of record at the close of business on
January 4, 2023
, and is payableJanuary 27, 2023
. Refer to Note 24(c) – Restriction on payment of dividends and retirement of shares.Normal Course Issuer Bid
On November 30, 2021, the Bank announced that OSFI and the Toronto Stock Exchange (TSX) approved its normal course issuer bid (the “2022 NCIB”) pursuant to which it may repurchase for cancellation up to 24 million of the Bank’s common shares.
On March 28, 2022, the Bank announced that OSFI and the Toronto Stock Exchange (TSX) approved an amendment to the 2022 NCIB (the “2022 NCIB Amendment”) to increase the number of common shares that the Bank may repurchase for cancellation from 24 million to 36 million. Purchases under the 2022 NCIB commenced on December 2, 2021, and will terminate upon earlier of: (i) the Bank purchasing the maximum number of common shares under the 2022 NCIB Amendment, (ii) the Bank providing a notice of termination, or (iii) December 1, 2022.
During the year ended October 31, 2022, the Bank repurchased and cancelled approximately 32.9 million common shares at a volume weighted average price of $87.28 per share for a total amount of $2,873 million.
2022 Scotiabank Annual Report
|
2
03
Consolidated Financial Statements
Non-viability
The maximum number of common shares issuable on conversion of NVCC subordinated debentures, NVCC subordinated additional tier 1 capital notes, including those issued to Scotiabank LRCN Trust as recourse assets in respect of NVCC limited recourse capital notes, and NVCC preferred shares as at October 31, 2022 would be 4,580 million common shares (2021 – 3,246 million common shares) based on the floor price and excluding the impact of any accrued and unpaid interest and any declared but unpaid dividends (refer to Note 21 – Subordinated debentures and Note 24(b) – Preferred shares and other equity instruments for further details).
(b) | Preferred shares and other equity instruments |
Preferred shares
Authorized:
An unlimited number of preferred shares without nominal or par value.
Issued and fully paid:
2022 | 2021 | |||||||||||||||||||||||||||||||
As at October 31 ($ millions) | Number of shares | Amount | Dividends declared per share (1) | Conversion feature | Number of shares | Amount | Dividends declared per share | Conversion feature | ||||||||||||||||||||||||
NVCC Preferred shares: (a) | ||||||||||||||||||||||||||||||||
Series 32 (b) | – | – | – | – | – | – | 0.138829 | Series 33 | ||||||||||||||||||||||||
Series 33 (b) | – | – | – | – | – | – | 0.100614 | Series 32 | ||||||||||||||||||||||||
Series 34 (c) | – | – | – | – | – | – | 0.687500 | Series 35 | ||||||||||||||||||||||||
Series 36 (d) | – | – | – | – | – | – | 1.031250 | Series 37 | ||||||||||||||||||||||||
Series 38 (e) | – | – | 0.303125 | Series 39 | 20,000,000 | 500 | 1.212500 | Series 39 | ||||||||||||||||||||||||
Series 40 (f) | 12,000,000 | 300 | 1.212500 | Series 41 | 12,000,000 | 300 | 1.212500 | Series 41 | ||||||||||||||||||||||||
Total preferred shares | 12,000,000 | $ | 300 | 32,000,000 | $ | 800 |
(1) | Dividends declared from November 1, 2021 to October 31, 2022. |
Terms of NVCC preferred shares
First issue date | Issue price | Initial dividend | Initial dividend payment date | Rate reset spread | Redemption date | Redemption price | ||||||||||||||||||||||
NVCC Preferred shares (a) : | ||||||||||||||||||||||||||||
Series 38 (e) | September 16, 2016 | 25.00 | 0.441800 | January 27, 2017 | 4.19 | % | January 27, 2022 | 25.00 | ||||||||||||||||||||
Series 40 (f) | October 12, 2018 | 25.00 | 0.362100 | January 29, 2019 | 2.43 | % | January 27, 2024 | 25.00 |
(a) | Non-cumulative preferential cash dividends on all series are payable quarterly, as and when declared by the Board. Dividends on theNon-cumulative 5-Year Rate Reset Preferred Shares Non Viability Contingent Capital (NVCC) (Series 40) are payable at the applicable rate for the initial five-year fixed rate period ending one day prior to the redemption date. Subsequent to the initial five-year fixed rate period, and resetting every five years thereafter, the dividend on such Rate Reset Preferred Shares will be determined by the sum of the5-year Government of Canada Yield plus the indicated rate reset spread, multiplied by $25.00. If outstanding,non-cumulative preferential cash dividends on the Series 41 are payable quarterly, as and when declared by the Board. Dividends on theNon-cumulative 5-Year Rate Reset Preferred Shares NVCC (Series 41) are payable, at a rate equal to the sum of the three month Government of Canada Treasury Bill rate plus the rate reset spread of the converted preferred shares, multiplied by $25.00. For each of the years presented, the Bank paid all of thenon-cumulative preferred share dividends. |
(b) | 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. |
(c) | 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. |
(d) | 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. |
(e) | On January 27, 2022 the Bank redeemed all outstanding Non-cumulative Preferred Shares Series 38 at a price equal to $25.00 per share plus dividends declared on November 30, 2021 of $0.3031250 per Series 38 share. |
(f) | Holders of Non-cumulative 5-Year Rate Reset Preferred Shares Series 40 (NVCC) will have the option to convert shares into an equal number of Non-cumulative Floating Rate Preferred Shares Series 41 (NVCC) on January 27, 2024, and on January 27 every five years thereafter. If outstanding, holders of Non-cumulative Floating Rate Reset Preferred Shares Series 41 (NVCC) will have the option to convert shares into an equal number of Non-cumulative 5-Year Rate Reset Preferred Shares Series 40 (NVCC) on January 27, 2029, and on January 27 every five years thereafter. With respect to Series 40 and 41, if the Bank determines that, after giving effect to any Election Notices received, there would be less than 1,000,000 preferred shares of such Series issued and outstanding on an applicable conversion date, then all of the issued and outstanding preferred shares of such Series will automatically be converted into an equal number of the preferred shares of the other relevant Series. With regulatory approval, Series 40 preferred shares may be redeemed by the Bank on January 27, 2024 and every five years thereafter, and for Series 41 preferred shares, if outstanding, on January 27, 2029 and every five years thereafter, at $25.00 per share, together with declared and unpaid dividends. |
Under
e
ase, to be viable, or if a federal or provincial government in Canada publicly announces that the Bank has accepted or agreed to accept a capital injection, or equivalent support, from the federal government or any provincial government or political subdivision or agent thereof without which the Bank would have been determined by OSFI to be
non-viable.
If such a conversion were
to occur, NVCC preferred shares Series 40 and 41, if outstanding, would be converted into common shares pursuant to an automatic conversion formula defined as 100% times the share value of $25.00 plus declared and unpaid dividends divided by the conversion price. The conversion price is based on the greater of: (i) a floor price of $5.00 or (subject to adjustments in certain events as set out in their respective prospectus supplements), and (ii) the current market price of the Bank’s common shares at the time of the trigger event(10-day
weighted average).2
04
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
Other equity instruments
Other equity instruments are comprised of NVCC additional Tier 1 qualifying regulatory capital notes:
2022 | 2021 | |||||||||||||||||||||||||||||||||||||||
First issue date/Series number | Notional Amount (millions) | Next reset date | Interest rate | Interest rate after reset | Next redemption date | Redemption frequency after reset (1) | Amount | Distributions paid per Note (2) | Amount | Distributions paid per Note (2) | ||||||||||||||||||||||||||||||
Subordinated Additional Tier 1 Capital Notes (3)(4) | ||||||||||||||||||||||||||||||||||||||||
October 12, 2017 | US$ | 1,250 | January 12, 2023 | 6.56714 | % | LIBOR +2.648 | (5) % | January 12, 2023 | Quarterly | $ | 1,560 | US$ | 46.50 | $ | 1,560 | US$ | 46.50 | |||||||||||||||||||||||
June 4, 2020 | US$ | 1,250 | June 4, 2025 | 4.900 | % | UST +4.551 | (6) % | June 4, 2025 | Every five years | $ | 1,689 | US$ | 49.00 | $ | 1,689 | US$ | 49.00 | |||||||||||||||||||||||
Limited Recourse Capital Notes (3)( 7) | ||||||||||||||||||||||||||||||||||||||||
Series 1 (8) | $ | 1,250 | July 27, 2026 | 3.700 | % | GOC +2.761 | (9) % | June 27, 2026 | Every five years | $ | 1,250 | $ | 37.00 | $ | 1,250 | $ | 13.51 | |||||||||||||||||||||||
Series 2 (10) | US$ | 600 | October 27, 2026 | 3.625 | % | UST +2.613 | (6) % | October 27, 2026 | Quarterly | $ | 753 | US$ | 38.26 | $ | 753 | US$ | – | |||||||||||||||||||||||
Series 3 (11) | $ | 1,500 | July 27, 2027 | 7.023 | % | GOC +3.95 | (9) % | June 27, 2027 | Every five years | $ | 1,500 | $ | 25.45 | $ | – | $ | – | |||||||||||||||||||||||
Series 4 (12) | US$ | 750 | October 27, 2027 | 8.625 | % | UST +4.389 | (6) % | October 27, 2027 | Quarterly | $ | 1,023 | US$ | – | $ | – | US$ | – | |||||||||||||||||||||||
Total other equity instruments | $ | 7,775 | $ | 5,252 |
(1) | Each security is redeemable at the sole discretion of the Bank on the first res et date and every quarter or five years, as applicable, thereafter. Limited Recourse Capital Notes (LRCN) Series 1 and Series 3 are also redeemable in the one month period preceding each reset date. The securities are also redeemable following a regulatory or tax event, as described in the offering documents. All redemptions are subject to regulatory consent and occur at a redemption price of par plus accrued and unpaid interest (unless canceled, where applicable). |
(2) | Distributions paid from November 1 to October 31 in the relevant fiscal year per face amount of $1,000 or US$1,000, as applicable. |
(3) | The securities rank pari passu to each other and are the Bank’s direct unsecured obligations, ranking subordinate to Bank’s other subordinated indebtedness. |
(4) | While interest is payable on the securities when it becomes due, the Bank may, at its sole discretion and with notice, cancel interest payments. Refer to Note 24(c) – Restriction on payment of dividends and retirement of shares. |
(5) | Three-month US$ LIBOR. |
(6) | The then-prevailing five-year U.S. Treasury Rate. |
(7) | Interest on LRCN is non-deferrable, however, non-payment of interest that is not cured within five business days results in a Recourse Event. A Recourse Event of the respective Series occurs if (a) there is non-payment in cash by the Bank of the principal amount, together with any accrued and unpaid interest, on the maturity date, (b) there is non-payment in cash of interest which is not cured within 5 business days, (c) there is non-payment in cash of the redemption price in connection with the redemption of the LRCNs, (d) an event of default occurs (i.e. bankruptcy, insolvency, or liquidation of the Bank), or (e) there is an NVCC Trigger Event. Upon the occurrence of a Recourse Event, the noteholder’s sole recourse will be limited to their proportionate share of the Series’ respective assets held in Scotiabank LRCN Trust, a consolidated entity, which consist initially of the respective AT1 Notes or, following an NVCC Trigger Event, common shares. Refer to Note 24(c) – Restriction on payment of dividends and retirement of shares. |
(8) | 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 Fixed Rate Resetting Perpetual Subordinated Additional Tier 1 Capital Notes (NVCC) (“the Series 1 AT1 Notes”) to Scotiabank LRCN Trust to be held as trust assets in connection with the LRCN structure. |
(9) | The then-prevailing five-year Government of Canada yield. |
(10) | 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 Fixed Rate Resetting Perpetual Subordinated Additional Tier 1 Capital Notes (NVCC) (“the Series 2 AT1 Notes”) to Scotiabank LRCN Trust to be held as trust assets in connection with the LRCN structure. |
(11) | On June 16, 2022, the Bank issued $1,500 million 7.023% Fixed Rate Resetting Limited Recourse Capital Notes Series 3 (NVCC) (“LRCN Series 3”). In connection with the issuance of LRCN Series 3, the Bank issued $1,500 million of Fixed Rate Resetting Perpetual Subordinated Additional Tier 1 Capital Notes (NVCC) (“the Series 3 AT1 Notes”) to Scotiabank LRCN Trust to be held as trust assets in connection with the LRCN structure. |
(12) | On October 25, 2022, the Bank issued US$750 million 8.625% Fixed Rate Resetting Limited Recourse Capital Notes Series 4 (NVCC) (“LRCN Series 4”). In connection with the issuance of LRCN Series 4, the Bank issued US$750 million of Fixed Rate Resetting Perpetual Subordinated Additional Tier 1 Capital Notes (NVCC) (“the Series 4 AT1 Notes”) to Scotiabank LRCN Trust to be held as trust assets in connection with the LRCN structure. |
Contractual NVCC provisions contained in the Bank’s Subordinated Additional Tier 1 Capital Notes, including those issued to Scotiabank LRCN Trust as recourse assets in respect of the LRCNs, trigger conversion of these securities into a variable number of common shares if OSFI announces that the Bank has ceased, or is about to cease, to be viable, or if a federal or provincial government in Canada publicly announces that the Bank has accepted or agreed to accept a capital injection, or equivalent support, from the federal government or any provincial government or political subdivision or agent thereof without which the Bank would have been determined by OSFI to be If such a conversion were to occur, outstanding Subordinated Additional Tier 1 Capital Notes (NVCC), would be converted into common shares pursuant to an automatic conversion formula defined as 125% of the par value plus accrued and unpaid interest divided by the conversion price. The conversion price is based on the greater of: (i) $5.00 (subject to adjustments in certain events and converted to US dollar-equivalent, where applicable, each as set out in their respective prospectus supplements), and (ii) the current market price of the Bank’s common shares at the time of the trigger event weighted average and converted to US dollar-equivalent, where applicable). U.S. dollar equivalents of the floor price and the current market price, where applicable, are based on the CAD/USD exchange rate on the day prior to the trigger event.
non-viable.
(10-day
The notes above have been determined to be compound instruments that have both equity and liability features. At inception, the fair value of the liability component is initially measured with any residual amount assigned to the equity component. On the respective dates of issuance, the Bank has assigned an insignificant value to each liability component of the notes and, as a result, the proceeds received upon issuance of the notes have been presented as equity. The Bank will continue to monitor events that could impact the value of the liability component.
During the year ended October 31, 2022, the Bank paid aggregate distributions on these notes of $239 million (2021 – $162 million), net of income taxes of $30 million (2021 – $4 million), based on exchange rates in effect on the payment dates
, where applicable.
2022 Scotiabank Annual Report
|
2
05
Consolidated Financial Statements
(c) | Restrictions on payment of dividends and retirement of shares |
Under the Bank Act, the Bank is prohibited from declaring any dividends on its common or preferred shares or redeeming, purchasing or otherwise retiring such shares when the Bank is, or would be placed by such a declaration or retirement, in contravention of the capital adequacy, liquidity or any other regulatory directives issued under the Bank Act.
In the event that applicable cash distributions on any of the Scotiabank Trust Securities are not paid on a regular distribution date, the Bank has undertaken not to declare dividends of any kind on its preferred or common shares until such distributions are made in full or the twelfth month following the
non-payment
of such distributions. Similarly, should the Bank fail to declare regular dividends on any of its directly issued and outstanding preferred or common shares, cash distributions will also not be made on any of the Scotiabank Trust Securities.In the event that distributions are not paid in full on the Bank’s Subordinated Additional Tier 1 Capital Notes (NVCC), including those issued as recourse assets in respect of LRCNs to Scotiabank LRCN Trust where the trustee has not waived such distributions or no longer holds the respective AT1 Notes, the Bank has undertaken not to declare dividends on its common or preferred shares or redeem, purchase or otherwise retire such shares until the month commencing after such distributions have been made in full.
In the event that dividends to which preferred shareholders are then entitled have not been paid or sufficient funds have not been set aside to do so, the Bank has undertaken not to declare dividends on its common shares or redeem, purchase or otherwise retire its common shares.
On March 13, 2020, OSFI advised federally regulated deposit taking institutions to suspend buybacks and increases to dividends in respect of its common shares as part of
COVID-19
measures. On November 4, 2021, OSFI removed theCOVID-19
related restrictions and advised that such institutions may increase regular dividends and, subject to approval, repurchase common shares.Currently, the above limitations do not restrict the payment of dividends on or retirement of preferred or common shares.
25 | Capital Management |
The primary regulator over the Bank’s consolidated capital adequacy is the Office of the Superintendent of Financial Institutions, Canada (OSFI). The capital adequacy regulations in Canada are largely consistent with international standards set by the Basel Committee on Banking Supervision (BCBS). OSFI requires Canadian deposit-taking institutions to fully implement the 2019 Basel III reforms and achieve minimums of 7%, 8.5% and 10.5% for CET1, Tier 1 and Total Capital, respectively. OSFI has also designated the Bank as a domestic systemically important bank
(D-SIB),
increasing its minimum capital ratio requirements by 1% across all tiers of capital effective January 1, 2016, in line with the requirements for global systemically important banks.In addition, OSFI expects
D-SIBs
to hold a 2.5% Domestic Stability Buffer, as at October 31, 2022. This results in current targets for CET1, Tier 1 and Total Capital ratios of 10.5%, 12.0% and 14.0%, respectively. In addition to risk-based capital requirements, the Basel III reforms introduced a simpler, non risk-based Leverage ratio requirement to act as a supplementary measure to its risk-based capital requirements. Institutions are expected to maintain a material operating buffer above the 3% minimum.The Bank’s regulatory capital ratios were as follows:
As at October 31 ($ millions) | 2022 | 2021 | ||||||
Capital (1) | ||||||||
Common Equity Tier 1 capital | $ | 53,081 | $ | 51,010 | ||||
Net Tier 1 capital | 61,262 | 57,915 | ||||||
Total regulatory capital | 70,710 | 66,101 | ||||||
Total loss absorbing capacity (TLAC) (2) | 126,565 | 115,681 | ||||||
Risk-weighted assets/exposures used in calculation of capital ratios | ||||||||
Risk-weighted assets (1) | $ | 462,448 | $ | 416,105 | ||||
Leverage exposures ( 3 ) | 1,445,619 | 1,201,766 | ||||||
Regulatory ratios (1) | ||||||||
Common Equity Tier 1 capital ratio | 11.5 | % | 12.3 | % | ||||
Tier 1 capital ratio | 13.2 | % | 13.9 | % | ||||
Total capital ratio | 15.3 | % | 15.9 | % | ||||
Total loss absorbing capacity ratio (2) | 27.4 | % | 27.8 | % | ||||
Leverage ratio (3) | 4.2 | % | 4.8 | % | ||||
Total loss absorbing capacity leverage ratio (2) | 8.8 | % | 9.6 | % |
(1) | This measure has been disclosed in this document in accordance with OSFI Guideline – Capital Adequacy Requirements (November 2018). |
(2) | This measure has been disclosed in this document in accordance with OSFI Guideline – Total Loss Absorbing Capacity (September 2018). Results for October 31, 2021 are shown for comparative purposes and were not a regulatory requirement. |
(3) | This measure has been disclosed in this document in accordance with OSFI Guideline – Leverage Requirements (November 2018). |
The Bank exceeded the OSFI target capital ratios as at October 31, 2022.
26 | Share-Based Payments |
(a) | Stock option plans |
The Bank grants stock options as part of the employee Stock Option Plan as well as stand-alone stock appreciation rights (SARs). Options to purchase common shares and/or to receive an equivalent cash payment, as applicable, may be granted to select employees at an exercise price of the higher of the closing price of the Bank’s common shares on the TSX on the trading day prior to the grant date or the volume weighted average trading price for the five trading days immediately preceding the grant date.
2
06
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
Stock options granted since December 2014 vest 50% at the end of the third year and 50% at the end of the fourth year. This change is prospective and does not impact prior period grants. Stock options are exercisable no later than 10 years after the grant date. In the event that the expiry date falls within an insider trading blackout period, the expiry date will be extended for 10 business days after the end of the blackout period.
An additional 12 million common shares have been reserved for issuance under the Bank’s employee Stock Option Plan as approved by the shareholders at the Annual General Meeting held in April 2022. There is a total of 141 million common shares which have been reserved for issuance under the Bank’s employee Stock Option Plan of which
117 million common shares have been issued as a result of the exercise of options and 10 million common shares are committed under outstanding options, leaving 14 million common shares available for issuance as options. Outstanding options expire on dates ranging from December 10, 2022 to December 9, 2031.The cost of these options is recognized on a graded vesting basis except where the employee is eligible to retire prior to a tranche’s vesting date, in which case the cost is recognized between the grant date and the date the employee is eligible to retire.
The Stock Option Plan includes:
• | Stock options |
Employee stock options granted are equity-classified stock options which call for settlement in shares.
The amount recorded in equity – other reserves for vested stock options as at October 31, 2022 was $104 million (2021 – $111 million).
In 2022, an expense of $10 million (2021 – $7 million) was recorded in salaries and employee benefits in the Consolidated Statement of Income. As at October 31, 2022, future unrecognized compensation cost for
non-vested
stock options was $7 million (2021 – $6 million) which is to be recognized over a weighted-average period of 2.07 years (2021 – 2.02 years).• | Stock appreciation rights |
Stand-alone SARs are granted instead of stock options to select employees in countries where local laws may restrict the Bank from issuing shares. When a SAR is exercised, the Bank pays the appreciation amount in cash equal to the rise in the market price of the Bank’s common shares since the grant date.
During fiscal 2022, 85,136 SARs were granted (2021 – 90,392) and as at October 31, 2022, 558,053 SARs were outstanding (2021 – 578,643), of which
552,272 SARs were vested (2021 – 571,575).
552,272 SARs were vested (2021 – 571,575).
The share-based payment liability recognized for vested SARs as at October 31, 2022 was $2 million (2021 – $7 million). The corresponding intrinsic value of this liability as at October 31, 2022 was $5 million (2021 – $7 million).
In 2022, a benefit of $3 million (2021 – benefit of $1 million) was recorded in salaries and employee benefits in the Consolidated Statement of Income. This benefit is net of
$0.1 million
losses
arising from derivatives used to manage the volatility of share-based payments (2021 – $12 million gains).
Determination of fair values
The share-based payment liability and corresponding expense for SARs were quantified using the Black-Scholes option pricing model with the following assumptions and resulting fair value per award:
As at October 31 | 2022 | 2021 | ||||||
Assumptions | ||||||||
Risk-free interest rate% | 3.31% - 5.00% | 0.59% - 1.53% | ||||||
Expected dividend yield | 5.98% | 4.34% | ||||||
Expected price volatility | 17.64% - 27.09% | 15.12% - 23.51% | ||||||
Expected life of option | 0.05 - 6.11 years | 0.00 - 6.12 years | ||||||
Fair value | ||||||||
Weighted-average fair value | $ | 4.79 | $ | 14.46 |
The share-based payment expense for stock options, was quantified using the Black-Scholes option pricing model on the date of grant. The fiscal 2022 and 2021 stock option grants were fair valued using the following weighted-average assumptions and resulting fair value per award:
2022 Grant | 2021 Grant | |||||||
Assumptions | ||||||||
Risk-free interest rate % | 1.42% | 0.58% | ||||||
Expected dividend yield | 4.11% | 5.10% | ||||||
Expected price volatility | 17.67% | 19.41% | ||||||
Expected life of option | 6.7 Years | 6.8 Years | ||||||
Fair value | ||||||||
Weighted-average fair value | $ | 7.54 | $ | 4.60 |
The risk-free rate is based on Canadian treasury bond rates interpolated for the maturity equal to the expected life until exercise of the options. Expected dividend yield is based on historical dividend payout. Expected price volatility is determined based on the historical volatility for comp
e
nsation. For accounting purposes, an average of the market consensus implied volatility for traded options on our common shares and the historical volatility is used.2022 Scotiabank Annual Report
|
2
07
Consolidated Financial Statements
Details of the Bank’s Employee Stock Option Plan are as follows
(1)
:2022 | 2021 | |||||||||||||||
As at October 31 | Number of stock options (000’s) | Weighted average exercise price | Number of stock options (000’s) | Weighted average exercise price | ||||||||||||
Outstanding at beginning of year | 10,458 | $ | 69.08 | 11,792 | $ | 66.44 | ||||||||||
Granted | 1,716 | 85.46 | 1,876 | 74.34 | ||||||||||||
Exercised as options | (1,951 | ) | 62.04 | (3,016 | ) | 53.50 | ||||||||||
Exercised as SARs | (133 | ) | 67.37 | (59 | ) | 61.30 | ||||||||||
Forfeited | (183 | ) | 74.30 | (127 | ) | 70.23 | ||||||||||
Expired | – | – | (8 | ) | 61.55 | |||||||||||
Outstanding at end of year (2) | 9,907 | $ | 73.24 | 10,458 | $ | 69.08 | ||||||||||
Exercisable at end of year (2) | 4,304 | $ | 70.24 | 5,252 | $ | 65.85 | ||||||||||
Available for grant | 14,546 | 3,945 |
Options Outstanding | Options Exercisable | |||||||||||||||||||
As at October 31, 2022 | Number of stock options (000’s) | Weighted average remaining contractual life (years) | Weighted average exercise price | Number of stock options (000’s) | Weighted average exercise price | |||||||||||||||
Range of exercise prices | ||||||||||||||||||||
$55.63 to $68.32 | 2,030 | 1.76 | $ | 63.24 | 2,030 | $ | 63.24 | |||||||||||||
$68.36 to $74.34 | 5,353 | 6.57 | $ | 71.84 | 1,437 | $ | 73.39 | |||||||||||||
$74.35 to $85.46 | 2,524 | 7.62 | $ | 84.25 | 837 | $ | 81.81 | |||||||||||||
9,907 | 5.85 | $ | 73.24 | 4,304 | $ | 70.24 |
(1) | Excludes SARs. |
(2) | Includes 1,287,242 options originally issued under HollisWealth plans (2021 – nil). |
(b) | Employee share ownership plans |
Eligible employees can contribute up to a specified percentage of salary towards the purchase of common shares of the Bank. In general, the Bank matches
50-60%
of eligible contributions, depending on the region, up to a maximum dollar amount, which is expensed in salaries and employee benefits. During 2022, the Bank’s contributions totalled $80 million (2021 – $74 million). Contributions, which are used to purchase common shares in the open market, do not result in a subsequent expense to the Bank from share price appreciation.As at October 31, 2022, an aggregate of 19 million common shares were held under the employee share ownership plans (2021 – 18 million). The shares in the employee share ownership plans are considered outstanding for computing the Bank’s basic and diluted earnings per share.
(c) | Other share-based payment plans |
Other share-based payment plans use notional units that are valued based on the Bank’s common share price on the TSX. Most grants of units accumulate dividend equivalents in the form of additional units based on the dividends paid on the Bank’s common shares. These plans are settled in cash and, as a result, are liability-classified. Fluctuations in the Bank’s share price change the value of the units, which affects the Bank’s share-based payment expense. As described below, the value of the Performance Share Units also varies based on Bank performance. Upon exercise or redemption, payments are made to the employees with a corresponding reduction in the accrued liability.
In 2022, an aggregate expense of $328 million (2021 – $218 million) was recorded in salaries and employee benefits in the Consolidated Statement of Income for these plans. This expense includes
losses
from derivatives used to manage the volatility of share-based payments of $120 million (2021 – $306 million gains).
As at October 31, 2022, the share-based payment liability recognized for vested awards under these plans was $763 million (2021 – $887 million).
Details of these other share-based payment plans are as follows:
Deferred Stock Unit Plan (DSU)
Under the DSU Plan, senior executives may elect to receive all or a portion of their cash bonus under the Annual Incentive Plan (which is expensed for the year awarded in salaries and employee benefits in the Consolidated Statement of Income) in the form of deferred stock units which vest immediately. In addition the DSU plan allows for eligible executives of the Bank to participate in grants that are not allocated from the Annual Incentive Plan election. These grants are subject to specific vesting schedules. Units are redeemable in cash only when an executive ceases to be a Bank employee, and must be redeemed by December 31 of the year following that event. As at October 31, 2022, there were 1,890,117 units (2021 – 1,496,911) awarded and outstanding of which 2,760,706 units were vested (2021 – 1,095,062).
Directors’ Deferred Stock Unit Plan (DDSU)
Under the DDSU Plan,
non-officer
directors of the Bank may elect to receive all or a portion of their fee for that fiscal year (which is expensed by the Bank in other expenses in the Consolidated Statement of Income) in the form of deferred stock units which vest immediately. Units are redeemable in cash, only following resignation or retirement, and must be redeemed by December 31 of the year following that event. As at October 31, 2022, there were 289,646 units outstanding (2021 – 245,138).Restricted Share Unit Plan (RSU)
Under the RSU Plan, select employees receive an award of restricted share units which, for the majority of grants, vest at the end of three years. There are certain grants that provide for a graduated vesting schedule. Upon vesting, all RSU units are paid in cash to the employee. The share-based payment expense is recognized evenly over the vesting period except where the employee is eligible to retire prior to the vesting date in which case, the expense is recognized between the grant date and the date the employee is eligible to retire. As at October 31, 2022, there were 5,200,515 units (2021 – 4,342,698) awarded and outstanding of which 3,390,197 were vested (2021 – 2,929,298).
2
08
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
Performance Share Unit Plan (PSU)
Eligible executives receive an award of performance share units which, for the majority of grants, vest at the end of three years. Certain grants provide for a graduated vesting schedule which includes a specific performance factor calculation. PSU awards are subject to performance criteria measured over a three-year period whereby a multiplier factor is applied which impacts the incremental number of units due to employees. The three-year performance measures include return on equity compared to target and total shareholder return relative to a comparator group selected prior to the granting of the award. The Bank uses a probability-weighted-average of potential outcomes to estimate the multiplier impact. The share-based payment expense is recognized over the vesting period except where the employee is eligible to retire prior to the vesting date; in which case, the expense is recognized between the grant date and the date the employee is eligible to retire. This expense varies based on changes in the Bank’s share price and the Bank’s performance compared to the performance measures. Upon vesting, the units are paid in cash to the employee. As at October 31, 2022, there were 7,525,441 units (2021 – 8,693,704) outstanding subject to performance criteria, of which 11,759,971 units were vested (2021 – 6,467,053).
27 | Corporate Income Taxes |
Corporate income taxes recorded in the Bank’s consolidated financial statements for the years ended October 31 are as follows:
(a) | Components of income tax provision |
For the year ended October 31 ($ millions) | 2022 | 2021 | ||||||
Provision for income taxes in the Consolidated Statement of Income: | ||||||||
Current income taxes: | ||||||||
Domestic: | ||||||||
Federal | $ | 1,779 | $ | 1,105 | ||||
Provincial | 1,190 | 824 | ||||||
Adjustments related to prior periods | (251 | ) | (27 | ) | ||||
Foreign | 897 | 726 | ||||||
Adjustments related to prior periods | (86 | ) | (24 | ) | ||||
3,529 | 2,604 | |||||||
Deferred income taxes: | ||||||||
Domestic: | ||||||||
Federal | (543 | ) | 32 | |||||
Provincial | (341 | ) | 8 | |||||
Foreign | 113 | 227 | ||||||
(771 | ) | 267 | ||||||
Total provision for income taxes in the Consolidated Statement of Income | $ | 2,758 | $ | 2,871 | ||||
Provision for income taxes in the Consolidated Statement of Changes in Equity: | ||||||||
Current income taxes | $ | (2,651 | ) | $ | 435 | |||
Deferred income taxes | 945 | (100 | ) | |||||
(1,706 | ) | 335 | ||||||
Reported in: | ||||||||
Other Comprehensive Income | (1,671 | ) | 341 | |||||
Retained earnings | (35 | ) | (6 | ) | ||||
Other reserves | – | – | ||||||
Total provision for income taxes in the Consolidated Statement of Changes in Equity | (1,706 | ) | 335 | |||||
Total provision for income taxes | $ | 1,052 | $ | 3,206 | ||||
Provision for income taxes in the Consolidated Statement of Income includes: | ||||||||
Deferred tax expense (benefit) relating to origination/reversal of temporary differences | $ | (771 | ) | $ | 269 | |||
Deferred tax expense (benefit) of tax rate changes | – | (2 | ) | |||||
$ | (771 | ) | $ | 267 |
2022 Scotiabank Annual Report
|
2
09
Consolidated Financial Statements
(b) | Reconciliation to statutory rate |
Income tax
e
s in the Consolidated Statement of Income vary from the amounts that would be computed by applying the composite federal and provincial statutory income tax rate for the following reasons:2022 | 2021 | |||||||||||||||
For the year ended October 31 ($ millions) | Amount | Percent of pre-tax income | Amount | Percent of pre-tax income | ||||||||||||
Income taxes at Canadian statutory rate | $ | 3,394 | 26.2 | % | $ | 3,364 | 26.2 | % | ||||||||
Increase (decrease) in income taxes resulting from: | ||||||||||||||||
Lower average tax rate applicable to subsidiaries and foreign branches | (375 | ) | (2.9 | ) | (245 | ) | (1.9 | ) | ||||||||
Tax-exempt income from securities | (284 | ) | (2.2 | ) | (236 | ) | (1.8 | ) | ||||||||
Deferred income tax effect of substantively enacted tax rate changes | – | – | (2 | ) | – | |||||||||||
Other, net | 23 | 0.2 | (10 | ) | (0.1 | ) | ||||||||||
Total income taxes and effective tax rate | $ | 2,758 | 21.3 | % | $ | 2,871 | 22.4 | % |
(c) | Deferred taxes |
Significant components of the Bank’s deferred tax assets and liabilities are as follows:
Statement of Income | Statement of Financial Position | |||||||||||||||
For the year ended | As at | |||||||||||||||
October 31 ($ millions) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Deferred tax assets: | ||||||||||||||||
Loss carryforwards | $ | (904 | ) | $ | 52 | $ | 1,079 | $ | 174 | |||||||
Allowance for credit losses | (17 | ) | 405 | 969 | 922 | |||||||||||
Deferred compensation | 42 | (77 | ) | 199 | 241 | |||||||||||
Deferred income | 192 | 88 | 54 | 254 | ||||||||||||
Property and equipment | (60 | ) | (106 | ) | 359 | 364 | ||||||||||
Pension and other post-retirement benefits | 10 | (28 | ) | 234 | 522 | |||||||||||
Securities | (65 | ) | (21 | ) | 433 | 323 | ||||||||||
Lease liabilities | (31 | ) | 59 | 946 | 875 | |||||||||||
Cash flow hedges | – | – | – | 49 | ||||||||||||
Other | (81 | ) | (119 | ) | 380 | 663 | ||||||||||
Total deferred tax assets | $ | (914 | ) | $ | 253 | $ | 4,653 | $ | 4,387 | |||||||
Deferred tax liabilities: | ||||||||||||||||
Cash flow hedges | $ | – | $ | – | $ | 159 | $ | 34 | ||||||||
Deferred compensation | (7 | ) | (16 | ) | 148 | 131 | ||||||||||
Deferred income | (7 | ) | (8 | ) | 40 | 14 | ||||||||||
Property and equipment | 135 | 94 | 810 | 808 | ||||||||||||
Pension and other post-retirement benefits | (12 | ) | (9 | ) | 106 | 97 | ||||||||||
Securities | (54 | ) | 14 | 236 | 179 | |||||||||||
Investment in subsidiaries and associates | (14 | ) | (40 | ) | 126 | 122 | ||||||||||
Intangible assets | 37 | 53 | 1,613 | 1,774 | ||||||||||||
Other | (221 | ) | (102 | ) | 612 | 326 | ||||||||||
Total deferred tax liabilities | $ | (143 | ) | $ | (14 | ) | $ | 3,850 | $ | 3,485 | ||||||
Net deferred tax assets (liabilities) (1) | $ | (771 | ) | $ | $ | $ | 902 |
(1) | For Consolidated Statement of Financial Position presentation, deferred tax assets and liabilities are assessed by legal entity. As a result, the net deferred tax assets of $803 (2021 – $902) are represented by deferred tax assets of $1,903 (2021 – $2,051), and deferred tax liabilities of $1,100 (2021 – $1,149) on the Consolidated Statement of Financial Position. |
The major changes to net deferred taxes were as follows:
For the year ended October 31 ($ millions) | 2022 | 2021 | ||||||
Balance at beginning of year | $ | 902 | $ | 1,112 | ||||
Deferred tax benefit (expense) for the year recorded in income | 771 | (267 | ) | |||||
Deferred tax benefit (expense) for the year recorded in equity | (945 | ) | 100 | |||||
Disposed in divestitures | – | – | ||||||
Other | 75 | (43 | ) | |||||
Balance at end of year | $ | 803 | $ | 902 |
21
0
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
The tax related to temporary differences, unused tax losses and unused tax credits for which no deferred tax asset is recognized in the Consolidated Statement of Financial Position amounts to $30 million (October 31, 2021 – $24 million). The amount related to unrecognized losses is $30 million, which will expire as follows: $25 million between 2023 and 2032 and $5 million has no expiry.
Included in the net deferred tax asset are tax benefits of $1,420 million (2021 – $164 million)
that relate to tax losses incurred in Canadian or foreign operations in either the current or the preceding year. In determining if it is appropriate to recognize these tax benefits, the Bank relied on projections of future taxable profits.
The amount of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures for which deferred tax liabilities have not been recognized at October 31, 2022 is approximately $41 billion (2021 – $34 billion).
Canadian Tax Matters
The Bank received reassessments totaling $1,506
million of tax and interest as a result of the Canada Revenue Agency (CRA) denying the tax deductibility of certain Canadian dividends received during the 2011-2017 taxation
years
. The circumstances of the dividends subject to these reassessments are similar to those prospectively addressed by tax rules introduced in 2015 and 2018. The Bank has filed a Notice of Appeal with the Tax Court of Canada against the federal reassessment in respect of its 2011 taxation year.A subsidiary of the Bank has received withholding tax assessments from the CRA in respect of certain of its securities lending transactions for its 2014-2017 taxation years totaling
$470 million of tax, penalties, and interest.
In respect of both matters the Bank is confident that its tax filing position was appropriate and in accordance with the relevant provisions of the Income Tax Act (Canada) and intends to vigorously defend its position.
2022 Proposed Canadian Federal Tax Measures
On August 9, 2022, the Department of Finance released draft legislative proposals relating to tax measures announced in the Federal Budget on April 7, 2022. These tax measures include the Canada Recovery Dividend (“CRD”) under which the Bank will pay a
one-time
15% tax on “taxable income” in excess of $1 billion, as well as an increase of 1.5% to the Bank’s corporate income tax rate on its future taxable income above $100 million. The draft legislation provided more detail on the basis for the CRD, including that “taxable income” will be based on the average taxable income for the 2020 and 2021 taxation years. The CRD will be payable in equal amounts over five years.On November 4, 2022, the Fall Economic Statement Implementation Act (Bill C-32) containing these measures was introduced into the legislature for the first reading. On November 22, 2022, Bill C-32 completed its second legislative reading.
The impact of these proposed tax measures has not been recognized in the Bank’s financial results as at October 31, 2022 as they are not substantively enacted, which would only occur after the third legislative reading. Once substantively enacted, an income tax expense will be recognized in the Bank’s Consolidated Statement of Income for the entire CRD obligation. The CRD payable is estimated at approximately $640 million.
28 | Employee Benefits |
The Bank sponsors a number of employee benefit plans, including pensions (defined benefit and defined contribution) and other benefit plans (post-retirement benefits and other long-term employee benefits) for most of its employees globally. The information presented below relates to the Bank’s principal plans; other plans operated by certain subsidiaries of the Bank are not considered material and are not included in these disclosures.
Global pension plans
The principal pension plans include plans in Canada, US, Mexico, UK, Ireland, Jamaica, Trinidad & Tobago and other countries in the Caribbean in which the Bank operates. The Bank has a strong and well defined governance structure to manage these global obligations. The investment policy for each principal plan is reviewed periodically and all plans are in good standing with respect to legislation and local regulations.
Actuarial valuations for funding purposes for the Bank’s funded pension plans are conducted as required by applicable legislation. The purpose of the actuarial valuation is to determine the funded status of the plans on a going-concern and statutory basis and to determine the required contributions. The plans are funded in accordance with applicable pension legislation and the Bank’s funding policies such that future benefit promises based on plan provisions are well secured. The assumptions used for the funding valuations are set by independent plan actuaries on the basis of the requirements of the local actuarial standards of practice and statutes.
Scotiabank Pension Plan (Canada)
The most significant pension plan is the Scotiabank Pension Plan (SPP) in Canada, which includes a closed defined benefit (DB) component. Employees hired in Canada on or after May 1, 2018, participate in a defined contribution (DC) component only. As the administrator of the SPP, the Bank has established a well-defined governance structure and policies to maintain compliance with legislative and regulatory requirements under OSFI and the Canada Revenue Agency. The Bank appoints a number of committees to oversee and make decisions related to the administration of the SPP. Certain committees are also responsible for the investment of the assets of the SPP Fund and for monitoring the investment managers and performance.
• | The Human Capital and Compensation Committee (HCOB) of the Board approves the charter of the Pension Administration and Investment Committee (PAIC), reviews reports, and approves the investment policy. The HCOB also reviews and recommends any amendments to the SPP to the Board of Directors. |
• | PAIC is responsible for recommending the investment policy to the HCOB, for appointing and monitoring investment managers, and for reviewing auditor and actuary reports. PAIC also monitors the administration of member pension benefits. PAIC has independent member representation on the committee. |
• | The Scotiabank Master Trust Committee (MTC) invests assets in accordance with the investment policy and all applicable legislation. The MTC assigns specific mandates to investment managers. |
• | The Capital Accumulation Plans (CAP) Committee is responsible for the administration and investment of the DC component of the SPP including the selection and monitoring of investment options available to DC participants. |
2022 Scotiabank Annual Report
|
21
1
Consolidated Financial Statements
Actuarial valuations for funding purposes for the SPP are conducted on an annual basis. The most recent funding valuation was conducted as of November 1, 202
1
. Contributions are being made to the SPP in accordance with this valuation and are shown in the table in b) below. The assumptions used for the funding valuation are set by independent plan actuaries on the basis of the requirements of the Canadian Institute of Actuaries and applicable regulation.Other benefit plans
The principal other benefit plans include plans in Canada, US, Mexico, Uruguay, UK, Jamaica, Trinidad & Tobago, Colombia and other countries in the Caribbean in which the Bank operates. The most significant other benefit plans provided by the Bank are in Canada.
Key assumptions
The financial information reported below in respect of pension and other benefit plans is based on a number of assumptions. 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 continues to be the same as the rate used to determine the defined benefit obligation. Other assumptions set by management are determined in reference to market conditions, plan-level experience, best practices and future expectations. The key weighted-average assumptions used by the Bank for the measurement of the benefit obligation and benefit expense for all of the Bank’s principal plans are summarized in the table in f) below.
Risk management
The Bank’s defined benefit pension plans and other benefit plans expose the Bank to a number of risks. Some of the more significant risks include interest rate risk, investment risk, longevity risk and health care cost increases, among others. These risks could result in higher defined benefit expense and a higher defined benefit obligation to the extent that:
• | there is a decline in discount rates; and/or |
• | plan assets returns are less than expected; and/or |
• | plan members live long e r than expected; and/or |
• | health care costs are higher than assumed. |
In addition to the governance structure and policies in place, the Bank manages risks by regularly monitoring market developments and asset investment performance. The Bank also monitors regulatory and legislative changes along with demographic trends and revisits the investment strategy and/or plan design as warranted.
a) | Relative size of plan obligations and assets |
Pension plans | Other benefit plans | |||||||||||||||||||
Canada | ||||||||||||||||||||
For the year ended October 31, 2022 | SPP | Other | International | Canada | International | |||||||||||||||
Percentage of total benefit obligations | 72 | % | 15 | % | 13 | % | 52 | % | 48 | % | ||||||||||
Percentage of total plan assets | 74 | % | 11 | % | 15 | % | 0 | % | 100 | % | ||||||||||
Percentage of total benefit expense (1) | 74 | % | 25 | % | 1 | % | 31 | % | 69 | % |
Pension plans | Other benefit plans | |||||||||||||||||||
Canada | ||||||||||||||||||||
For the year ended October 31, 2021 | SPP | Other | International | Canada | International | |||||||||||||||
Percentage of total benefit obligations | 72 | % | 15 | % | 13 | % | 56 | % | 44 | % | ||||||||||
Percentage of total plan assets | 75 | % | 10 | % | 15 | % | 0 | % | 100 | % | ||||||||||
Percentage of total benefit expense (1) | 78 | % | 21 | % | 1 | % | 31 | % | 69 | % |
(1) | Excludes non-routine benefit expense items such as past service costs, curtailment charges and settlement charges. |
b) | Cash contributions and payments |
The table below shows the cash contributions and payments made by the Bank to its principal plans in 2022, and the prior year.
Contributions to the principal plans for the year ended October 31 ($ millions) | 2022 | 2021 | ||||||
Defined benefit pension plans (cash contributions to fund the plans, including paying beneficiaries under the unfunded pension arrangements) | ||||||||
SPP (excluding DC provision) | $ | 184 | $ | 320 | ||||
All other plans | 80 | 85 | ||||||
Other benefit plans (cash contributions mainly in the form of benefit payments to beneficiaries) | 59 | 73 | ||||||
Defined contribution pension and other benefit plans (cash contributions) | 126 | 103 | ||||||
Total contributions (1) | $ | 449 | $ | 581 |
(1) | Based on preliminary estimates, the Bank expects to make contributions of $16 to the SPP (excluding the DC provision), $76 to all other defined benefit pension plans, $67 to other benefit plans and $136 to all defined contribution plans for the year ending October 31, 202 3 . |
2
12
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
c) | Funded and unfunded plans |
The excess (deficit) of the fair value of assets over the benefit obligation at the end of the year includes the following amounts for plans that are wholly unfunded and plans that are wholly or partly funded.
Pension plans | Other benefit plans | |||||||||||||||
As at October 31 ($ millions) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Benefit obligation | ||||||||||||||||
Benefit obligation of plans that are wholly unfunded | $ | 353 | $ | 438 | $ | 902 | $ | 1,058 | ||||||||
Benefit obligation of plans that are wholly or partly funded | 7,277 | 9,146 | 221 | 244 | ||||||||||||
Funded status | ||||||||||||||||
Benefit obligation of plans that are wholly or partly funded | $ | 7,277 | $ | 9,146 | $ | 221 | $ | 244 | ||||||||
Fair value of assets | 8,309 | 9,464 | 116 | 143 | ||||||||||||
Excess (deficit) of fair value of assets over benefit obligation of wholly or partly funded plans | $ | 1,032 | $ | 318 | $ | (105 | ) | $ | (101 | ) | ||||||
Benefit obligation of plans that are wholly unfunded | 353 | 438 | 902 | 1,058 | ||||||||||||
Excess (deficit) of fair value of assets over total benefit obligation | $ | 679 | $ | (120 | ) | $ | (1,007 | ) | $ | (1,159 | ) | |||||
Effect of asset limitation and minimum funding requirement | (176 | ) | (85 | ) | – | – | ||||||||||
Net asset (liability) at end of year | $ | 503 | $ | (205 | ) | $ (1,007 | ) | $ | (1,159 | ) |
2022 Scotiabank Annual Report
|
2
13
Consolidated Financial Statements
d) | Financial information |
The following tabl
e
s present financial information related to the Bank’s principal plans.Pension plans | Other benefit plans | |||||||||||||||
For the year ended October 31 ($ millions) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Change in benefit obligation | ||||||||||||||||
Benefit obligation at beginning of year | $ | 9,584 | $ | 10,349 | $ | 1,302 | $ | 1,420 | ||||||||
Current service cost | 281 | 339 | 22 | 24 | ||||||||||||
Interest cost on benefit obligation | 335 | 269 | 61 | 56 | ||||||||||||
Employee contributions | 25 | 24 | – | – | ||||||||||||
Benefits paid | (457 | ) | (450 | ) | (89 | ) | (81 | ) | ||||||||
Actuarial loss (gain) | (2,234 | ) | (857 | ) | (226 | ) | (63 | ) | ||||||||
Past service cost | 34 | 37 | (1 | ) | (1 | ) | ||||||||||
Business acquisition | – | 2 | – | (2 | ) | |||||||||||
Settlements | – | (34 | ) | (2 | ) | (14 | ) | |||||||||
Foreign exchange | 62 | (95 | ) | 56 | (37 | ) | ||||||||||
Benefit obligation at end of year | $ | 7,630 | $ | 9,584 | $ | 1,123 | $ | 1,302 | ||||||||
Change in fair value of assets | ||||||||||||||||
Fair value of assets at beginning of year | 9,464 | 8,541 | 143 | 158 | ||||||||||||
Interest income on fair value of assets | 363 | 257 | 13 | 13 | ||||||||||||
Return on plan assets in excess of (less than) interest income on fair value of assets | (1,402 | ) | 854 | (24 | ) | – | ||||||||||
Employer contributions | 264 | 405 | 59 | 73 | ||||||||||||
Employee contributions | 25 | 24 | – | – | ||||||||||||
Benefits paid | (457 | ) | (450 | ) | (89 | ) | (81 | ) | ||||||||
Administrative expenses | (12 | ) | (16 | ) | – | – | ||||||||||
Business acquisition | – | – | – | – | ||||||||||||
Settlements | – | (34 | ) | (2 | ) | (14 | ) | |||||||||
Foreign exchange | 64 | (117 | ) | 16 | (6 | ) | ||||||||||
Fair value of assets at end of year | $ | 8,309 | $ | 9,464 | $ | 116 | $ | 143 | ||||||||
Funded status | ||||||||||||||||
Excess (deficit) of fair value of assets over benefit obligation at end of year | 679 | (120 | ) | (1,007 | ) | (1,159 | ) | |||||||||
Effect of asset limitation and minimum funding requirement (1) | (176 | ) | (85 | ) | – | – | ||||||||||
Net asset (liability) at end of year | $ | 503 | $ | (205 | ) | $ | (1,007 | ) | $ | (1,159 | ) | |||||
Recorded in: | ||||||||||||||||
Other assets in the Bank’s Consolidated Statement of Financial Position | 1,052 | 456 | 1 | – | ||||||||||||
Other liabilities in the Bank’s Consolidated Statement of Financial Position | (549 | ) | (661 | ) | (1,008 | ) | (1,159 | ) | ||||||||
Net asset (liability) at end of year | $ | 503 | $ | (205 | ) | $ (1,007 | ) | $ | (1,159 | ) | ||||||
Annual benefit expense | ||||||||||||||||
Current service cost | 281 | 339 | 22 | 24 | ||||||||||||
Net interest expense (income) | (20 | ) | 23 | 48 | 43 | |||||||||||
Administrative expenses | 15 | 14 | – | – | ||||||||||||
Past service costs | 34 | 37 | (1 | ) | (1 | ) | ||||||||||
Amount of settlement (gain) loss recognized | – | – | – | – | ||||||||||||
Remeasurement of other long-term benefits | – | – | (9 | ) | (6 | ) | ||||||||||
Benefit expense (income) recorded in the Consolidated Statement of Income | $ | 310 | $ | 413 | $ | 60 | $ | 60 | ||||||||
Defined contribution benefit expense | $ | 125 | $ | 102 | $ | 1 | $ | 1 | ||||||||
Remeasurements | ||||||||||||||||
(Return) on plan assets in excess of interest income on fair value of assets | 1,402 | (854 | ) | 24 | – | |||||||||||
Actuarial loss (gain) on benefit obligation | (2,234 | ) | (857 | ) | (217 | ) | (57 | ) | ||||||||
Change in the asset limitation | 70 | (47 | ) | – | – | |||||||||||
Remeasurements recorded in OCI | $ | (762 | ) | $ | (1,758 | ) | $ | (193 | ) | $ | (57 | ) | ||||
Total benefit cost | $ | (327 | ) | $ | (1,243 | ) | $ | (132 | ) | $ | 4 | |||||
Additional details on actual return on assets and actuarial (gains) and losses | ||||||||||||||||
Actual return on assets (net of administrative expenses) | $ | (1,051 | ) | $ | 1,095 | $ | (11 | ) | $ | 13 | ||||||
Actuarial (gains) and losses from changes in demographic assumptions | – | 8 | 3 | 8 | ||||||||||||
Actuarial (gains) and losses from changes in financial assumptions | (2,256 | ) | (973 | ) | (219 | ) | (63 | ) | ||||||||
Actuarial (gains) and losses from changes in experience | 22 | 108 | (10 | ) | (8 | ) | ||||||||||
Additional details on fair value of pension plan assets invested | ||||||||||||||||
In Scotiabank securities (stock, bonds) | 58 | 60 | – | – | ||||||||||||
In property occupied by Scotiabank | 4 | 4 | – | – | ||||||||||||
Change in asset ceiling/onerous liability | ||||||||||||||||
Asset ceiling /onerous liability at end of prior year | 85 | 134 | – | – | ||||||||||||
Interest expense | 8 | 11 | – | – | ||||||||||||
Remeasurements | 70 | (47 | ) | – | – | |||||||||||
Foreign exchange | 13 | (13 | ) | – | – | |||||||||||
Asset ceiling /onerous liability at end of year | $ | 176 | $ | 85 | $ | – | $ | – |
(1) | The recognized asset is limited by the present value of economic benefits available from a reduction in future contributions to a plan and from the ability to pay plan expenses from the fund. |
2
14
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
e) | Maturity profile of the defined benefit obligation |
The weighted average duration of the total benefit obligation at October 31, 2022 is 12.9 years (2021 – 15.0
years).
Pension plans | Other benefit plans | |||||||||||||||
For the year ended October 31 | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Disaggregation of the benefit obligation (%) | ||||||||||||||||
Canada | ||||||||||||||||
Active members | 49 | % | 53 | % | 3 | % | 4 | % | ||||||||
Inactive and retired members | 51 | % | 47 | % | 97 | % | 96 | % | ||||||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Mexico | ||||||||||||||||
Active members | 26 | % | 21 | % | 40 | % | 43 | % | ||||||||
Inactive and retired members | 74 | % | 79 | % | 60 | % | 57 | % | ||||||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
United States | ||||||||||||||||
Active members | 42 | % | 45 | % | 36 | % | 40 | % | ||||||||
Inactive and retired members | 58 | % | 55 | % | 64 | % | 60 | % | ||||||||
Total | 100 | % | 100 | % | 100 | % | 100 | % |
f) | Key assumptions (%) |
The key weighted-averag
e
assumptions used by the Bank for the measurement of the benefit obligation and benefit expense for all of the Bank’s principal plans are summarized as follows:Pension plans | Other benefit plans | |||||||||||||||
For the year ended October 31 | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Benefit obligation at end of year | ||||||||||||||||
Discount rate – all plans | 5.77 | % | 3.73 | % | 7.01 | % | 4.94 | % | ||||||||
Discount rate – Canadian plans only | 5.41 | % | 3.50 | % | 5.40 | % | 3.28 | % | ||||||||
Rate of increase in future compensation (1)(2) | 3.90 | % | 2.97 | % | 4.67 | % | 4.30 | % | ||||||||
Benefit expense (income) for the year | ||||||||||||||||
Discount rate – All plans | ||||||||||||||||
Discount rate for defined benefit obligations | 4.24 | % | 3.30 | % | 4.94 | % | 4.44 | % | ||||||||
Discount rate for net interest cost | 3.81 | % | 2.78 | % | 4.65 | % | 4.13 | % | ||||||||
Discount rate for service cost | 4.43 | % | 3.45 | % | 5.17 | % | 4.71 | % | ||||||||
Discount rate for interest on service cost | 3.98 | % | 2.96 | % | 5.07 | % | 4.54 | % | ||||||||
Discount rate – Canadian plans only | ||||||||||||||||
Discount rate for defined benefit obligations | 4.08 | % | 3.05 | % | 3.28 | % | 2.57 | % | ||||||||
Discount rate for net interest cost | 3.59 | % | 2.47 | % | 2.82 | % | 2.11 | % | ||||||||
Discount rate for service cost | 4.18 | % | 3.16 | % | 3.64 | % | 2.94 | % | ||||||||
Discount rate for interest on service cost | 3.70 | % | 2.65 | % | 3.46 | % | 2.66 | % | ||||||||
Rate of increase in future compensation (1)(2) | 2.79 | % | 2.74 | % | 4.30 | % | 4.31 | % | ||||||||
Health care cost trend rates at end of year | ||||||||||||||||
Initial rate | n/a | n/a | 5.67 | % | 5.68 | % | ||||||||||
Ultimate rate | n/a | n/a | 4.86 | % | 4.75 | % | ||||||||||
Year ultimate rate reached | n/a | n/a | 2040 | 2040 | ||||||||||||
Assumed life expectancy in Canada (years) | ||||||||||||||||
Life expectancy at 65 for current pensioners – male | 23.5 | 23.5 | 23.5 | 23.5 | ||||||||||||
Life expectancy at 65 for current pensioners – female | 24.6 | 24.6 | 24.6 | 24.6 | ||||||||||||
Life expectancy at 65, for future pensioners currently aged 45 – male | 24.5 | 24.4 | 24.5 | 24.4 | ||||||||||||
Life expectancy at 65, for future pensioners currently aged 45 – female | 25.5 | 25.5 | 25.5 | 25.5 | ||||||||||||
Assumed life expectancy in Mexico (years) | �� | |||||||||||||||
Life expectancy at 65 for current pensioners – male | 21.6 | 21.5 | 21.6 | 21.5 | ||||||||||||
Life expectancy at 65 for current pensioners – female | 23.9 | 23.9 | 23.9 | 23.9 | ||||||||||||
Life expectancy at 65, for future pensioners currently aged 45 – male | 21.6 | 21.6 | 21.6 | 21.6 | ||||||||||||
Life expectancy at 65, for future pensioners currently aged 45 – female | 24.0 | 24.0 | 24.0 | 24.0 | ||||||||||||
Assumed life expectancy in United States (years) | ||||||||||||||||
Life expectancy at 65 for current pensioners – male | 21.9 | 21.8 | 21.9 | 21.8 | ||||||||||||
Life expectancy at 65 for current pensioners – female | 23.3 | 23.3 | 23.3 | 23.3 | ||||||||||||
Life expectancy at 65, for future pensioners currently aged 45 – male | 23.3 | 23.2 | 23.3 | 23.2 | ||||||||||||
Life expectancy at 65, for future pensioners currently aged 45 – female | 24.7 | 24.6 | 24.7 | 24.6 |
(1) | The weighted-average rates of increase in future compensation shown for other benefit plans do not include Canadian flexible post-retirement benefits plans established in fiscal 2005, as they are not impacted by future compensation increases. |
(2) | The weighted average rates of increase in future compensation shown only consider long-term rates. In some regions, higher rates of increase are assumed in the short term but are not included in the weighted average rates disclosed. |
2022 Scotiabank Annual Report
|
2
15
Consolidated Financial Statements
g) | Sensitivity analysis |
The sensitivity analysis represents the impact of a change in a single assumption with other assumptions left unchanged. For purposes of the sensitivity analysis, the present value of the defined benefit obligation has been calculated using the projected unit credit method at the end of the reporting period, which is the same as that applied in calculating the defined benefit obligation recognized in the statement of financial position.
Pension plans | Other benefit plans | |||||||||||||||
For the year ended October 31, 2022 ($ millions) | Benefit obligation | Benefit expense | Benefit obligation | Benefit expense | ||||||||||||
Impact of the following changes: | ||||||||||||||||
1% decrease in discount rate | $ | 1,123 | $ | 102 | $ | 136 | $ | 3 | ||||||||
0.25% increase in rate of increase in future compensation | 58 | 4 | – | – | ||||||||||||
1% increase in health care cost trend rate | n/a | n/a | 102 | 12 | ||||||||||||
1% decrease in health care cost trend rate | n/a | n/a | (84 | ) | (9 | ) | ||||||||||
1 year increase in Canadian life expectancy | 128 | 10 | 15 | 1 | ||||||||||||
1 year increase in Mexican life expectancy | 3 | – | 3 | – | ||||||||||||
1 year increase in the United States life expectancy | 2 | – | 2 | – |
h) | Assets |
The Bank’s principal pension plans’ assets are generally invested with the long-term objective of maximizing overall expected returns, at an acceptable level of risk relative to the benefit obligation. A key factor in managing long-term investment risk is asset mix. Investing the pension assets across different asset classes and geographic regions helps to mitigate risk and to minimize the impact of declines in any single asset class, particular region or type of investment. Investment managers – including related-party managers – are typically hired and assigned specific mandates within each asset class.
Pension plan asset mix guidelines are set for the long term and are documented in each plan’s investment policy. Asset mix policy typically also reflects the nature of the plan’s benefit obligations. Legislation places certain restrictions on asset mix – for example, there are usually limits on concentration in any one investment. Other concentration and quality limits are also set forth in the investment policies. Derivatives are not a significant component of the investment strategy and cannot be used without specific authorization; currently, the main use of derivatives is for currency hedging. Asset mix guidelines are reviewed at least once each year, and adjusted, where appropriate, based on market conditions and opportunities. However, large asset class shifts are not common, and typically reflect a change in the pension plan’s situation (e.g. plan amendments) and/or in the investment strat
e
gy. Actual asset mix is reviewed regularly and rebalancing back to target asset mix is considered – as needed – generally on a semi-annual basis. The Bank’s other benefit plans are generally not funded, with the exception of certain programs in Mexico.The tables below show the weighted-average actual and target ass
e
t allocations for the Bank’s principal plans at October 31, by asset category.Pension plans | Other benefit plans | |||||||||||||||
Asset category % | Actual 2022 | Actual 2021 | Actual 2022 | Actual 2021 | ||||||||||||
Cash and cash equivalents | 4 | % | 4 | % | – | % | – | % | ||||||||
Equity investments | ||||||||||||||||
Quoted in an active market | 38 | % | 34 | % | 37 | % | 42 | % | ||||||||
Non quoted | 5 | % | 11 | % | – | % | – | % | ||||||||
43 | % | 45 | % | 37 | % | 42 | % | |||||||||
Fixed income investments | ||||||||||||||||
Quoted in an active market | 4 | % | 6 | % | 58 | % | 58 | % | ||||||||
Non quoted | 36 | % | 35 | % | – | % | – | % | ||||||||
40 | % | 41 | % | 58 | % | 58 | % | |||||||||
Property | ||||||||||||||||
Quoted in an active market | – | % | – | % | 5 | % | – | % | ||||||||
Non quoted | 1 | % | 1 | % | – | % | – | % | ||||||||
1 | % | 1 | % | 5 | % | – | % | |||||||||
Other | ||||||||||||||||
Quoted in an active market | – | % | – | % | – | % | – | % | ||||||||
Non quoted | 12 | % | 9 | % | – | % | – | % | ||||||||
12 | % | 9 | % | – | % | – | % | |||||||||
Total | 100 | % | 100 | % | 100 | % | 100 | % |
Target asset allocation at October 31, 2022 Asset category % | Pension plans | Other benefit plans | ||||||
Cash and cash equivalents | – | % | – | % | ||||
Equity investments | 42 | % | 38 | % | ||||
Fixed income investments | 44 | % | 57 | % | ||||
Property | 1 | % | 5 | % | ||||
Other | 13 | % | – | % | ||||
Total | 100 | % | 100 | % |
2
16
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
29 | Operating Segments |
Scotiabank is a diversified financial services institution that provides a wide range of financial products and services to retail, commercial and corporate customers around the world. The Bank’s businesses are grouped into four business lines: Canadian Banking, International Banking, Global Banking and Markets and Global Wealth Management. Other smaller business segments are included in the Other segment. The results of these business segments are based upon the internal financial reporting systems of the Bank. The accounting policies used in these segments are generally consistent with those followed in the preparation of the consolidated financial statements as disclosed in Note 3. Notable accounting measurement differences are:
• | tax normalization adjustments related to the gross-up of income from associated corporations. This adjustment normalizes the effective tax rate in the divisions to better present the contribution of the associated companies to the divisional results. |
• | the grossing up of tax-exempt net interest income andnon-interest income to an equivalentbefore-tax basis for those affected segments. |
These differences in measurement enable comparison of net interest income and
non-interest
income arising from taxable andtax-exempt
sources.Scotiabank’s results, and average assets and liabilities, allocated by these operating segments, are as follows:
For the year ended October 31, 2022 | ||||||||||||||||||||||||
Taxable equivalent basis ($ millions) | Canadian Banking | International Banking | Global Wealth Management | Global Banking and Markets | Other (1) | Total | ||||||||||||||||||
Net interest income ( 2 ) | $ | 9,001 | $ | 6,900 | $ | 764 | $ | 1,630 | $ | (180 | ) | $ | 18,115 | |||||||||||
Non-interest income( 3 )(4 ) | 3,029 | 2,827 | 4,617 | 3,542 | (714 | ) | 13,301 | |||||||||||||||||
Total revenues | 12,030 | 9,727 | 5,381 | 5,172 | (894 | ) | 31,416 | |||||||||||||||||
Provision for credit losses | 209 | 1,230 | 6 | (66 | ) | 3 | 1,382 | |||||||||||||||||
Depreciation and amortization | 628 | 503 | 183 | 172 | 45 | 1,531 | ||||||||||||||||||
Non-interest expenses | 4,760 | 4,709 | 3,076 | 2,502 | 524 | 15,571 | ||||||||||||||||||
Income tax expense | 1,670 | 618 | 551 | 653 | (734 | ) | 2,758 | |||||||||||||||||
Net income | $ | $ | 2,667 | $ | 1,565 | $ | 1,911 | $ | (732 | ) | $ | 10,174 | ||||||||||||
Net income attributable to non-controlling interests in subsidiaries | – | 249 | 9 | – | – | 258 | ||||||||||||||||||
Net income attributable to equity holders of the Bank | 4,763 | 2,418 | 1,556 | 1,911 | (732 | ) | 9,916 | |||||||||||||||||
Average assets ($ billions) | 430 | 207 | 33 | 445 | 167 | 1,282 | ||||||||||||||||||
Average liabilities ($ billions) | 332 | 152 | 47 | 414 | 263 | 1,208 |
(1) | Includes all other smaller operating segments and corporate adjustments, such as the elimination of the tax-exempt incomegross-up reported in net interest income andnon-interest income and provision for income taxes for the year ended October 31, 2022 amounting to $375 to arrive at the amounts reported in the Consolidated Statement of Income, differences in the actual amount of costs incurred and charged to the operating segments. |
(2) | Interest income is reported net of interest expense as management relies primarily on net interest income as a performance measure. |
( 3 ) | Card revenues and Banking services fees are mainly earned in Canadian and International Banking. Mutual fund, Brokerage fees and Investment management and trust fees are primarily earned in Global Wealth Management. Underwriting and other advisory fees are predominantly earned in Global Banking and Markets. |
( 4 ) | Includes net income (on a taxable equivalent basis) from investments in associated corporations for Canadian Banking – $64; International Banking – $250; Global Wealth Management – $14 and Other – $(60). |
For the year ended October 31, 2021 | ||||||||||||||||||||||||
Taxable equivalent basis ($ millions) | Canadian Banking | International Banking | Global Wealth Management | Global Banking and Markets | Other (1) | Total | ||||||||||||||||||
Net interest income ( 2 ) | $ | 8,030 | $ | 6,625 | $ | 628 | $ | 1,436 | $ | 242 | $ | 16,961 | ||||||||||||
Non-interest income( 3 )(4 ) | 2,868 | 2,993 | 4,752 | 3,587 | 91 | 14,291 | ||||||||||||||||||
Total revenues | 10,898 | 9,618 | 5,380 | 5,023 | 333 | 31,252 | ||||||||||||||||||
Provision for credit losses | 333 | 1,574 | 2 | (100 | ) | (1 | ) | 1,808 | ||||||||||||||||
Depreciation and amortization | 618 | 517 | 178 | 156 | 42 | 1,511 | ||||||||||||||||||
Non-interest expenses | 4,333 | 4,737 | 3,077 | 2,302 | 658 | 15,107 | ||||||||||||||||||
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 | – | 332 | 9 | – | (10 | ) | 331 | |||||||||||||||||
Net income attributable to equity holders of the Bank | 4,155 | 1,823 | 1,565 | 2,075 | 6 | 9,624 | ||||||||||||||||||
Average assets ($ billions) | 381 | 194 | 29 | 401 | 152 | 1,157 | ||||||||||||||||||
Average liabilities ($ billions) | 313 | 149 | 45 | 385 | 193 | 1,085 |
(1) | Includes all other smaller operating segments and corporate adjustments, such as the elimination of the tax-exempt incomegross-up reported in net interest income andnon-interest income and provision for income taxes for the year ended October 31, 2021 amounting to $310 to arrive at the amounts reported in the Consolidated Statement of Income, differences in the actual amount of costs incurred and charged to the operating segments. |
(2) | Interest income is reported net of interest expense as management relies primarily on net interest income as a performance measure. |
( 3 ) | Card revenues and Banking services fees are mainly earned in Canadian and International Banking. Mutual fund, Brokerage fees and Investment management and trust fees are primarily earned in Global Wealth Management. Underwriting and other advisory fees are predominantly earned in Global Banking and Markets. |
( 4 ) | Includes net income (on a taxable equivalent basis) from investments in associated corporations for Canadian Banking – $87; International Banking – $206; Global Wealth Management – $17 and Other – $29. |
2022 Scotiabank Annual Report
|
2
17
Consolidated Financial Statements
Geographical segmentation
The following table summarizes the Bank’s financial results by geographic region. Revenues and expenses which have not been allocated back to specific operating business lines are reflected in corporate adjustments.
For the year ended October 31, 2022 ($ millions) (1) | Canada | United States | Mexico | Peru | Chile | Colombia | Caribbean and Central America | Other International | Total | |||||||||||||||||||||||||||
Net interest income | $ | 9,827 | $ | 945 | $ | 1,736 | $ | 1,171 | $ | 1,604 | $ | 631 | $ | 1,436 | $ | 765 | $ | 18,115 | ||||||||||||||||||
Non-interest income(1) | 8,149 | 1,103 | 748 | 422 | 538 | 388 | 719 | 1,234 | 13,301 | |||||||||||||||||||||||||||
Total revenues (2) | 17,976 | 2,048 | 2,484 | 2,155 | 1,999 | |||||||||||||||||||||||||||||||
Provision for credit losses | 180 | (13 | ) | 232 | 342 | 221 | 216 | 175 | 29 | 1,382 | ||||||||||||||||||||||||||
Non-interest expenses | 9,928 | 1,040 | 1,223 | 628 | 870 | 682 | 1,335 | 1,396 | 17,102 | |||||||||||||||||||||||||||
Income tax expense | 1,697 | 260 | 196 | 173 | 95 | 39 | 150 | 148 | 2,758 | |||||||||||||||||||||||||||
Subtotal | 6,171 | 761 | 833 | 450 | 956 | 82 | 495 | 426 | 10,174 | |||||||||||||||||||||||||||
Net income attributable to non-controlling interests insubsidiaries | 1 | – | 19 | 6 | 104 | 35 | 93 | – | 258 | |||||||||||||||||||||||||||
Net income attributable to equity holders of the Bank | $ | 6,170 | $ | 761 | $ | 814 | $ | 444 | $ | 852 | $ | 47 | $ | 402 | $ | 426 | $ | 9,916 | ||||||||||||||||||
Total average assets ($ billions) | $ | 765 | $ | 207 | $ | 46 | $ | 27 | $ | 53 | $ | 14 | $ | 32 | $ | 138 | $ | 1,282 |
(1) | Includes net income from investments in associated corporations for Canada – $4, Peru – $7, Chile – $9, Caribbean and Central America – $90, and Other International – $158. |
(2) | Revenues are attributed to countries based on where services are performed or assets are recorded. |
For the year ended October 31, 2021 ($ millions) (1) | Canada | United States | Mexico | Peru | Chile | Colombia | Caribbean and Central America | Other International | Total | |||||||||||||||||||||||||||
Net interest income | $ | 9,182 | $ | 742 | $ | 1,668 | $ | 1,186 | $ | 1,507 | $ | 692 | $ | 1,345 | $ | 639 | $ | 16,961 | ||||||||||||||||||
Non-interest income(1) | 9,190 | 953 | 714 | 531 | 666 | 383 | 664 | 1,190 | 14,291 | |||||||||||||||||||||||||||
Total revenues (2) | 18,372 | 1,695 | 2,382 | 1,717 | 2,173 | 1,075 | 2,009 | 1,829 | 31,252 | |||||||||||||||||||||||||||
Provision for credit losses | 255 | (33 | ) | 334 | 586 | 205 | 195 | 221 | 45 | 1,808 | ||||||||||||||||||||||||||
Non-interest expenses | 9,627 | 915 | 1,202 | 662 | 943 | 682 | 1,343 | 1,244 | 16,618 | |||||||||||||||||||||||||||
Income tax expense | 1,909 | 120 | 184 | 104 | 204 | 80 | 103 | 167 | 2,871 | |||||||||||||||||||||||||||
Subtotal | 6,581 | 693 | 662 | 365 | 821 | 118 | 342 | 373 | 9,955 | |||||||||||||||||||||||||||
Net income attributable to non-controlling interests insubsidiaries | (10 | ) | – | 14 | 2 | 200 | 48 | 77 | – | 331 | ||||||||||||||||||||||||||
Net income attributable to equity holders of the Bank | $ | 6,591 | $ | 693 | $ | 648 | $ | 363 | $ | 621 | $ | 70 | $ | 265 | $ | 373 | $ | 9,624 | ||||||||||||||||||
Total average assets ($ billions) | $ | 695 | $ | 167 | $ | 41 | $ | 27 | $ | 53 | $ | 13 | $ | 30 | $ | 131 | $ | 1,157 |
(1) | Includes net income from investments in associated corporations for Canada – $117, Peru – $10, Chile – $(15), Caribbean and Central America – $46, and Other International – $181. |
(2) | Revenues are attributed to countries based on where services are performed or assets are recorded. |
2
18
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
30 | Related Party Transactions |
Compensation of key management personnel of the Bank
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Bank, directly or indirectly, and comprise the directors of the Bank, the President and Chief Executive Officer, certain direct reports of the President and Chief Executive Officer and Group Heads.
For the year ended October 31 ($ millions) | 2022 | 2021 | ||||||
Salaries and cash incentives (1) | $ | 24 | $ | 21 | ||||
Equity-based payment (2) | 36 | 30 | ||||||
Pension and other benefits (1) | 4 | 3 | ||||||
Total | $ | 64 | $ | 54 |
(1) | Expensed during the year. |
(2) | Awarded during the year. |
Direc
t
ors 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 for further details of these plans.Loans and deposits of key management personnel
As at October 31 ($ millions) | 2022 | 2021 | ||||||
Loans | $ | 11 | $ | 11 | ||||
Deposits | $ | 5 | $ | 5 |
The Bank’s committed credit exposure to companies controlled by directors totaled $264.0 million as at October 31, 2022 (2021 – $252.8 million), while actual utilized amounts were $188.4 million (2021 – $189.6 million).
Transactions with associates and joint ventures
In the ordinary course of business, the Bank provides normal banking services and enters into transactions with its associated and other related corporations on terms similar to those offered to
non-related
parties. If these transactions are eliminated on consolidation, they are not disclosed as related party transactions. Transactions between the Bank and its associated companies and joint ventures also qualify as related party transactions and were recorded as follows: As at and for the year ended October 31 ($ millions) | 2022 | 2021 | ||||||
Net income / (loss) | $ | (29 | ) | $ | (85 | ) | ||
Loans | 205 | 191 | ||||||
Deposits | 286 | 229 | ||||||
Guarantees and commitments | 96 | 154 |
Scotiabank principal pension plan
The Bank manages assets of $4.9 billion (2021 – $4.7 billion) which is a portion of the Scotiabank principal pension plan assets and earned $6.4 million (2021 – $6.6 million) in fees.
2022 Scotiabank Annual Report
|
2
19
Consolidated Financial Statements
31 | Principal Subsidiaries and Non-Controlling Interests in Subsidiaries |
(a) | Principal subsidiaries (1) |
The following table presents certain operating subsidiaries the Bank owns, directly or indirectly. All of these subsidiaries are included in the Bank’s consolidated financial statements.
Carrying value of shares | ||||||||||
As at October 31 ($ millions) | Principal office | 2022 | 2021 | |||||||
Canadian | ||||||||||
1832 Asset Management L.P. | Toronto, Ontario | $ | 3,785 | $ | 2,680 | |||||
BNS Investments Inc. | Toronto, Ontario | 15,750 | 15,200 | |||||||
Montreal Trust Company of Canada | Montreal, Quebec | |||||||||
The Bank of Nova Scotia Trust Company | Toronto, Ontario | 214 | 185 | |||||||
National Trust Company | Stratford, Ontario | 374 | 366 | |||||||
Roynat Inc. | Calgary, Alberta | 594 | 518 | |||||||
Scotia Capital Inc. | Toronto, Ontario | 3,215 | 2,818 | |||||||
Scotia Dealer Advantage Inc. | Burnaby, British Columbia | 867 | 729 | |||||||
Scotia Mortgage Corporation | Toronto, Ontario | 810 | 750 | |||||||
Scotia Securities Inc. | Toronto, Ontario | 63 | 53 | |||||||
Tangerine Bank | Toronto, Ontario | 3,827 | 3,405 | |||||||
Jarislowsky, Fraser Limited | Montreal, Quebec | 988 | 1,027 | |||||||
MD Financial Management Inc. | Ottawa, Ontario | 2,781 | 2,761 | |||||||
International | ||||||||||
Scotiabank Colpatria S.A. (51%) | Bogota, Colombia | 842 | 995 | |||||||
BNS International (Bahamas) Limited | Nassau, Bahamas | 17,180 | 17,543 | |||||||
BNS Asia Limited | Singapore | |||||||||
The Bank of Nova Scotia Trust Company (Bahamas) Limited | Nassau, Bahamas | |||||||||
Grupo BNS de Costa Rica, S.A. | San Jose, Costa Rica | |||||||||
Scotiabank & Trust (Cayman) Ltd. | Grand Cayman, Cayman Islands | |||||||||
Scotiabank (Bahamas) Limited | Nassau, Bahamas | |||||||||
Scotiabank (Ireland) Designated Activity Company | Dublin, Ireland | |||||||||
Grupo Financiero Scotiabank Inverlat, S.A. de C.V. (97.4%) | Mexico City, Mexico | 5,960 | 4,714 | |||||||
Nova Scotia Inversiones Limitada | Santiago, Chile | 6,114 | 5,173 | |||||||
Scotiabank Chile S.A. (99.79%) | Santiago, Chile | |||||||||
Scotia Holdings (US) Inc. (2) | New York, New York | |||||||||
Scotia Capital (USA) Inc. (2)(3) | New York, New York | |||||||||
Scotiabank Brasil S.A. Banco Multiplo | Sao Paulo, Brazil | 788 | 280 | |||||||
Scotiabank Caribbean Holdings Ltd. | Bridgetown, Barbados | 1,550 | 1,630 | |||||||
Scotia Group Jamaica Limited (71.8%) | Kingston, Jamaica | |||||||||
The Bank of Nova Scotia Jamaica Limited | Kingston, Jamaica | |||||||||
Scotiabank Trinidad and Tobago Limited (50.9%) | Port of Spain, Trinidad and Tobago | |||||||||
Integra Properties Ltd, S.A. (formerly Scotiabank (Panama) S.A.) | Panama City, Panama | |||||||||
Scotiabank Uruguay S.A. | Montevideo, Uruguay | 478 | 440 | |||||||
Scotiabank Europe plc | London, United Kingdom | 2,478 | 2,273 | |||||||
Scotia Peru Holdings S.A. | Lima, Peru | 4,961 | 4,277 | |||||||
Scotiabank Peru S.A.A. (99.31%) | Lima, Peru | |||||||||
Profuturo AFP S.A. | Lima, Peru | |||||||||
Scotiabank Republica Dominicana, S.A. – Banco Multiple (99.80%) | Santo Domingo, Dominican Republic | 906 | 775 | |||||||
Scotiabank (Barbados) Limited | Bridgetown, Barbados | 273 | 235 |
(1) | The Bank (or immediate parent of an entity) owns 100% of the outstanding voting shares of each subsidiary unless otherwise noted. |
(2) | The carrying value of this subsidiary is included with that of its parent, BNS Investments Inc. |
(3) | The carrying value of this subsidiary is included with that of its parent, Scotia Holdings (US) Inc. |
Subsidiaries may have a different reporting date from that of the Bank of October 31. Dates may differ for a variety of reasons including local reporting requirements or tax laws. In accordance with our accounting policies, for the purpose of inclusion in the consolidated financial statements of the Bank, adjustments are made where significant for subsidiaries with different reporting dates.
22
0
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
(b) | Non-controlling interests in subsidiaries |
The Bank’s significant
non-controlling
interests in subsidiaries are comprised of the following entities:As at and for the year ended | ||||||||||||||||||||
2022 | 2021 | |||||||||||||||||||
Non-controlling interest % | Non-controlling interests in subsidiaries | Dividends paid to non-controlling interest | Non-controlling interests in subsidiaries | Dividends paid to non-controlling interest | ||||||||||||||||
Scotiabank Chile S.A. | 0.21 | % (1) | $ | 227 | $ | 27 | $ | 790 | $ | 55 | ||||||||||
Scotiabank Colpatria S.A. (2) | 49.0 | % | 332 | 12 | 405 | – | ||||||||||||||
Scotia Group Jamaica Limited | 28.2 | % | 279 | 10 | 261 | 12 | ||||||||||||||
Scotiabank Trinidad and Tobago Limited | 49.1 | % | 413 | 52 | 367 | 56 | ||||||||||||||
Other | 0.1% 49.0% | – (3) | 273 | 14 | 267 | – | ||||||||||||||
Total | $ | 1,524 | $ | 115 | $ | 2,090 | $ | 123 |
(1) | The Bank increased its ownership in Scotiabank Chile S.A. in 2022 by acquiring an additional 16.8% stake from the non-controlling shareholder. Refer to Note 36 for details. |
(2) | Non-controlling interest holders for Scotiabank Colpatria S.A. have a right to sell their holding to the Bank after the end of 7th anniversary (January 17, 2019) and at subsequentpre-agreed intervals, into the future, at fair market value that can be settled at the Bank’s discretion, by issuance of common shares or cash. |
(3) | Range of non-controlling interest % for other subsidiaries. |
Summarized financial information of the Bank’s subsidiaries with significant
non-controlling
interests are as follows:As at and for the year ended October 31, 2022 | As at and for the year ended October 31, 2021 | |||||||||||||||||||||||||||||||
($ millions) | Revenue | Total comprehensive income (loss) | Total assets | Total liabilities | Revenue | Total comprehensive income (loss) | Total assets | Total liabilities | ||||||||||||||||||||||||
Total | $ | 3,849 | $ | 880 | $ | 93,880 | $ | 85,754 | $ | 3,875 | $ | 6 | $ | 86,317 | $ | 78,973 |
32 | Interest Income and Expense |
For the year ended October 31 ($ millions) | 2022 | 2021 | ||||||||||||||
Interest income | Interest expense | Interest income | Interest expense | |||||||||||||
Measured at amortized cost (1) | $ | 31,036 | $ | 15,273 | $ | 23,831 | $ | 7,844 | ||||||||
Measured at FVOCI (1) | 1,537 | – | 716 | – | ||||||||||||
32,573 | 15,273 | 24,547 | 7,844 | |||||||||||||
Other | 985 | (2) | 170 | (3) | 439 | (2) | 181 | (3) | ||||||||
Total | $ | 33,558 | $ | 15,443 | $ | 24,986 | $ | 8,025 |
(1) | The interest income/expense on financial assets/liabilities are calculated using the effective interest method. |
(2) | Includes dividend income on equity securities. |
(3) | The interest on lease liabilities was $107 |
33 | Earnings Per Share |
For the year ended October 31 ($ millions) | 2022 | 2021 | ||||||
Basic earnings per common share | ||||||||
Net income attributable to common shareholders | $ | 9,656 | $ | 9,391 | ||||
Weighted average number of common shares outstanding (millions) | 1,199 | 1,214 | ||||||
Basic earnings per common share (1) (in dollars) | $ | 8.05 | $ | 7.74 | ||||
Diluted earnings per common share | ||||||||
Net income attributable to common shareholders | $ | 9,656 | $ | 9,391 | ||||
Dilutive impact of share-based payment options and others (2) | 36 | 43 | ||||||
Net income attributable to common shareholders (diluted) | $ | 9,692 | $ | 9,434 | ||||
Weighted average number of common shares outstanding (millions) | 1,199 | 1,214 | ||||||
Dilutive impact of share-based payment options and others (2) (millions) | 9 | 11 | ||||||
Weighted average number of diluted common shares outstanding (millions) | 1,208 | 1,225 | ||||||
Diluted earnings per common share (1) (in dollars) | $ | 8.02 | $ | 7.70 |
(1) | Earnings per share calculations are based on full dollar and share amounts. |
(2) | Certain options as well as acquisition-related put/call options that the Bank may settle at its own discretion by issuing common shares were not included in the calculation of diluted earnings per share as they were anti-dilutive. |
2022 Scotiabank Annual Report
|
22
1
Consolidated Financial Statements
34 | Guarantees, Commitments and Pledged Assets |
(a) | Guarantees |
The Bank enters into various types of guarantees and indemnifications in the normal course of business. Guarantees represent an undertaking to another party to make a payment to that party when certain specified events occur. The various guarantees and indemnifications that the Bank provides with respect to its customers and other third parties are presented below:
2022 | 2021 | |||||||
As at October 31 ($ millions) | Maximum potential amount of future payments (1) | Maximum potential amount of future payments (1) | ||||||
Standby letters of credit and letters of guarantee | $ | 41,977 | $ | 37,277 | ||||
Liquidity facilities | 6,361 | 4,942 | ||||||
Indemnifications | 926 | 1,306 |
(1) | The maximum potential amount of future payments represents those guarantees that can be quantified and excludes other guarantees that cannot be quantified. As many of these guarantees will not be drawn upon and the maximum potential amount of future payments listed above does not consider the possibility of recovery under recourse or collateral provisions, the above amounts are not indicative of future cash requirements, credit risk, or the Bank’s expected losses from these arrangements. |
(i) | Standby letters of credit and letters of guarantee |
Standby letters of credit and letters of guarantee are irrevocable undertakings by the Bank on behalf of a customer, to make payments to a third party in the event that the customer is unable to meet its obligations to the third party. Generally, the term of these guarantees does not exceed four years. The types and amounts of collateral security held by the Bank for these guarantees is generally the same as for loans.
(ii) | Liquidity facilities |
The Bank’s backstop liquidity facilities are committed liquidity and provided to asset-backed commercial paper conduits, administered by the Bank. These facilities generally provide an alternative source of financing in the event market disruption prevents the conduit from issuing commercial paper or, in some cases, when certain specified conditions or performance measures are not met. These facilities generally have a term of up to three years.
(iii) | Indemnifications |
In the ordinary course of business, the Bank enters into many contracts which contain indemnification provisions, such as purchase contracts, service agreements, trademark licensing agreements, director / officer contracts, escrow arrangements, sales of assets or businesses, outsourcing agreements, leasing arrangements, clearing system arrangements, securities lending agency agreements and structured transactions. The Bank cannot estimate the maximum potential future amount that may be payable. The Bank has not made any significant payments under such indemnifications.
(b) | Other indirect commitments |
In the normal course of business, various other indirect commitments are outstanding which are not reflected on the Consolidated Statement of Financial Position. These may include:
• | Commercial letters of credit which require the Bank to honour drafts presented by a third-party when specific activities are completed; |
• | Commitments to extend credit which represent undertakings to make credit available in the form of loans or other financings for specific amounts and maturities, subject to specific conditions; |
• | Securities lending transactions under which the Bank, acting as principal or agent, agrees to lend securities to a borrower. The borrower must fully collateralize the security loan at all times. The market value of the collateral is monitored relative to the amounts due under the agreements, and where necessary, additional collateral is obtained; and |
• | Security purchase commitments which require the Bank to fund future investments. |
These financial instruments are subject to normal credit standards, financial controls and monitoring procedures.
The table below provides a detailed breakdown of the Bank’s other indirect commitments expressed in terms of the contractual amounts of the related commitment or contract which are not reflected on the Consolidated Statement of Financial Position.
As at October 31 ($ millions) | 2022 | 2021 | ||||||
Commercial letters of credit | $ | 1,219 | $ | 1,320 | ||||
Commitments to extend credit (1) | ||||||||
Original term to maturity of one year or less | 81,641 | 74,053 | ||||||
Original term to maturity of more than one year | 186,067 | 165,726 | ||||||
Securities lending | 52,178 | 59,506 | ||||||
Securities purchase and other commitments | 1,105 | 1,040 | ||||||
Total | $ | 322,210 | $ | 301,645 |
(1) | Includes liquidity facilities. |
2
22
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
(c) | Assets pledged and repurchase agreements |
In the ordinary course of business, securities and other assets are pledged against liabilities. As well, securities are sold under repurchase agreements. The carrying value of pledged assets and details of related activities are shown below.
As at October 31 ($ millions) | 2022 | 2021 | ||||||
Assets pledged to: | ||||||||
Bank of Canada (1) | $ | 168 | $ | 184 | ||||
Foreign governments and central banks (1) | 2,015 | 2,589 | ||||||
Clearing systems, payment systems and depositories (1) | 1,628 | 1,345 | ||||||
Assets pledged in relation to exchange-traded derivative transactions | 8,972 | 6,105 | ||||||
Assets pledged in relation to over-the-counter | 29,658 | 16,018 | ||||||
Assets pledged as collateral related to securities borrowing and lending | 133,363 | 160,794 | ||||||
Assets pledged in relation to covered bond program (Note 15) (2) | 51,446 | 34,683 | ||||||
Assets pledged in relation to other securitization programs (Note 15) | 1,397 | 2,680 | ||||||
Assets pledged under CMHC programs (Note 14) | 24,886 | 26,932 | ||||||
Other | 969 | 1,140 | ||||||
Total assets pledged | $ | 254,502 | $ | 252,470 | ||||
Obligations related to securities sold under repurchase agreements (3) | 122,552 | 100,083 | ||||||
Total (4) | $ | 377,054 | $ | 352,553 |
(1) | Includes assets pledged in order to participate in clearing and payment systems and depositories, or pledged to have access to the facilities of central banks in foreign jurisdictions. |
(2) | Excludes mortgages related to covered bonds held by the Bank or pledged to the Bank of Canada as part of its term repo program. |
(3) | Includes the Bank of Canada term repo program. |
(4) | Includes assets that have been received from counterparties through normal course of business in securities financing and derivative transactions. |
(d) | Other executory contracts |
Effective July 2018, the Bank has entered into an $800 million contract for naming rights of an arena for 20 years.
The Bank and its subsidiaries have also entered into other long-term executory contracts, relating to outsourced services. The significant outsourcing arrangements have variable pricing based on utilization and are cancellable with notice.
35 | Financial Instruments – Risk Management |
The Bank’s principal business activities result in a balance sheet that consists primarily of financial instruments. In addition, the Bank uses derivative financial instruments for both trading and hedging purposes. The principal financial risks that arise from transacting financial instruments include credit risk, liquidity risk and market risk. The Bank’s framework to monitor, evaluate and manage these risks is consistent with that in place as at October 31, 2022:
• | extensive risk management policies define the Bank’s risk appetite, set the limits and controls within which the Bank and its subsidiaries can operate, and reflect the requirements of regulatory authorities. These policies are approved by the Bank’s Board of Directors, either directly or through the Risk Committee of the Board, (the Board); |
• | guidelines are developed to clarify risk limits and conditions under which the Bank’s risk policies are implemented; |
• | processes are implemented to identify, evaluate, document, report and control risk. Standards define the breadth and quality of information required to make a decision; and |
• | compliance with risk policies, limits and guidelines is measured, monitored and reported to ensure consistency against defined goals. |
Further details on the fair value of financial instruments and how these amounts were determined are provided in Note 7. Note 10 provides details on the terms and conditions of the Bank’s derivative financial instruments including notional amounts, remaining term to maturity, credit risk, and fair values of derivatives used in trading and hedging activities.
(a) | Credit risk |
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. The Bank’s Credit Risk Appetite and Credit Risk Policy are developed by its Global Risk Management (GRM) department and limits are reviewed and approved by the Board on an annual and biennial basis, respectively. The Credit Risk Appetite defines target markets and risk tolerances that are developed at an
all-Bank
level, and then further refined at the business line level. The objectives of the Credit Risk Appetite are to ensure that, for the Bank, including the individual business lines:• | target markets and product offerings are well defined; |
• | 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 to ensure the goals for the overall portfolio are met. |
The Credit Risk Policy sets out, among other things, the credit risk rating systems and associated parameter estimates, the delegation of authority for granting credit, and the calculation of allowance for credit losses. It forms an integral part of enterprise-wide policies and procedures that encompass governance, risk management and control structure.
The Bank’s credit risk rating systems are designed to support the determination of key credit risk parameter estimates which measure credit and transaction risk. For
non-retail
exposures, parameters are associated with each credit facility through the assignment of borrower and facility ratings. Borrower risk is evaluated using methodologies that are specific to particular industry sectors and/or business lines. The risk associated with facilities of a given borrower is assessed by considering the facilities’ structural and collateral-related elements. For retail portfolios, product specific models assign accounts into homogeneous segments using internal and external borrower/facility-level credit experience. This process provides for a meaningful differentiation of risk and allows for appropriate and consistent estimation of loss characteristics at the model and segment level. Further details on credit risk relating to derivatives are provided in Note 10(c).2022 Scotiabank Annual Report
|
2
23
Consolidated Financial Statements
(i) | Credit risk exposures |
Credit risk exposures disclosed below are presented based on the Basel framework utilized by the Bank i.e. exposures subject to credit risk capital. The Bank uses the Advanced Internal Ratings Based approach (AIRB) for all material Canadian, U.S., European portfolios, and for a significant portion of all international corporate and commercial portfolios. The remaining portfolios, including other individual portfolios, are treated under the standardized approach. Under the AIRB approach, the Bank uses internal risk parameter estimates, based on historical experience and appropriate margin of conservatism, for probability of default (PD), loss given default (LGD) and exposure at default (EAD).
Under the standardized approach, credit risk is estimated using the risk weights as prescribed by the Basel framework either based on credit assessments by external rating agencies or based on the counterparty type forfor real estate secured retail exposures.
non-retail
exposures and product type for retail exposures. Standardized risk weights also take into account other factors such as specific provisions for defaulted exposures, eligible collateral, andloan-to-value
As at October 31 ($ millions) | 2022 | 2021 | ||||||||||||||||||
Exposure at default (1) | ||||||||||||||||||||
Category | Drawn (2) | Undrawn commitments | Other exposures (3) | Total | Total | |||||||||||||||
By counterparty type | ||||||||||||||||||||
Non-retail | ||||||||||||||||||||
AIRB portfolio | ||||||||||||||||||||
Corporate | $ | 233,214 | $ | 123,347 | $ | 96,865 | $ | 453,426 | $ | 372,462 | ||||||||||
Bank | 16,812 | 4,739 | 15,874 | 37,425 | 35,792 | |||||||||||||||
Sovereign | 223,678 | 1,170 | 9,308 | 234,156 | 213,300 | |||||||||||||||
473,704 | 129,256 | 122,047 | 725,007 | 621,554 | ||||||||||||||||
Standardized portfolio | ||||||||||||||||||||
Corporate (4) | 48,804 | 2,879 | 8,183 | 59,866 | 63,647 | |||||||||||||||
Bank | 3,752 | 26 | 10 | 3,788 | 3,064 | |||||||||||||||
Sovereign | 8,718 | 34 | 231 | 8,983 | 8,773 | |||||||||||||||
61,274 | 2,939 | 8,424 | 72,637 | 75,484 | ||||||||||||||||
Total non-retail | $ | 534,978 | $ | 132,195 | $ | 130,471 | $ | 797,644 | $ | 697,038 | ||||||||||
Retail | ||||||||||||||||||||
AIRB portfolio | ||||||||||||||||||||
Real estate secured | 232,133 | 22,435 | – | 254,568 | 227,927 | |||||||||||||||
Qualifying revolving | 16,018 | 30,417 | – | 46,435 | 41,771 | |||||||||||||||
Other retail | 33,696 | 4,214 | – | 37,910 | 36,207 | |||||||||||||||
$ | 281,847 | $ | 57,066 | $ | – | $ | 338,913 | $ | 305,905 | |||||||||||
Standardized portfolio | ||||||||||||||||||||
Real estate secured | 63,054 | – | – | 63,054 | 54,617 | |||||||||||||||
Other retail (4) | 47,242 | 847 | – | 48,089 | 36,445 | |||||||||||||||
110,296 | 847 | – | 111,143 | 91,062 | ||||||||||||||||
Total retail | $ | 392,143 | $ | 57,913 | $ | – | $ | 450,056 | $ | 396,967 | ||||||||||
Total | $ | 927,121 | $ | 190,108 | $ | 130,471 | $ | 1,247,700 | $ | 1,094,005 | ||||||||||
By geography ( 5 ) | ||||||||||||||||||||
Canada | $ | 549,356 | $ | 119,722 | $ | 40,971 | $ | 710,049 | $ | 639,748 | ||||||||||
United States | 146,109 | 50,517 | 51,046 | 247,672 | 194,424 | |||||||||||||||
Chile | 54,234 | 1,326 | 4,968 | 60,528 | 54,777 | |||||||||||||||
Mexico | 45,988 | 1,522 | 3,283 | 50,793 | 38,422 | |||||||||||||||
Peru | 27,789 | 1,147 | 3,240 | 32,176 | 28,152 | |||||||||||||||
Colombia | 11,951 | 384 | 956 | 13,291 | 14,446 | |||||||||||||||
Other International | ||||||||||||||||||||
Europe | 21,158 | 7,459 | 17,539 | 46,156 | 47,179 | |||||||||||||||
Caribbean | 29,482 | 1,487 | 1,088 | 32,057 | 27,673 | |||||||||||||||
Latin America (other) | 17,649 | 1,336 | 1,905 | 20,890 | 14,080 | |||||||||||||||
All other | 23,405 | 5,208 | 5,475 | 34,088 | 35,104 | |||||||||||||||
Total | $ | 927,121 | $ | 190,108 | $ | 130,471 | $ | 1,247,700 | $ | 1,094,005 |
(1) | Exposure at default is presented after credit risk mitigation. Exposures exclude equity securities and other assets. Portfolios under the Standardized Approach are reported net of specific allowances for credit losses and net of collateral amounts treated under the Comprehensive Approach. |
(2) | Non-retail drawn includes loans, acceptances, deposits with financial institutions and FVOCI debt securities. Retail drawn includes residential mortgages, credit cards, lines of credit, and other personal loans. |
(3) | Non-retail other exposures includeoff-balance sheet lending instruments such as letters of credit, letters of guarantees, securitizations including $32.3 |
(4) | During the year, certain small business loans were reclassified from Non-retail to Retail based on regulatory definitions. The prior period has not been restated. |
(5) | Geographic segmentation is based upon the location of the ultimate risk of the credit exposure. |
22
4
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
Consolidated Statement of Financial Position asset categories cross-referenced to credit risk exposures
The table below provides mapping of
on-balance
sheet asset categories that are included in the various Basel III exposure categories as presented in the credit risk exposure summary table of these consolidated financial statements. In addition, it also provides other exposures which are subject to market risk and/or other assets which are not subject to market and credit risk with a reconciliation to the Consolidated Statement of Financial Position. The credit risk exposures on certain assets such as cash, precious metals, investment securities (equities) and other assets are not includedin
the credit risk exposure summary table. Also excluded from the credit risk exposures are certain trading assets and all assets of the Bank’s insurance subsidiaries.Credit Risk Exposures | Other Exposures | |||||||||||||||||||||||||||||||||||||||||||||||
Drawn | Other Exposures | Market Risk Exposures | ||||||||||||||||||||||||||||||||||||||||||||||
As at October 31, 2022 ($ millions) | Non-retail | Retail | Securitization | Repo-style Transactions | OTC Derivatives | Equity | Also subject to Credit Risk | All Other (1) | Total | |||||||||||||||||||||||||||||||||||||||
Cash and deposits with financial institutions | $ | 62,551 | $ | – | $ | – | $ | – | $ | – | $ | – | $ | – | $ | – | $ | 3,344 | $ | 65,895 | ||||||||||||||||||||||||||||
Precious metals | – | – | – | – | – | – | – | 543 | – | 543 | ||||||||||||||||||||||||||||||||||||||
Trading assets | ||||||||||||||||||||||||||||||||||||||||||||||||
Securities | (4 | ) | – | – | – | – | – | – | 103,551 | – | 103,547 | |||||||||||||||||||||||||||||||||||||
Loans | 408 | – | – | – | – | – | 367 | 7,403 | – | 7,811 | ||||||||||||||||||||||||||||||||||||||
Other | – | – | – | – | – | – | – | 1,796 | – | 1,796 | ||||||||||||||||||||||||||||||||||||||
Financial assets designated at fair value through profit or | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||
Securities purchased under resale agreements and | – | – | – | 175,313 | – | – | – | – | – | 175,313 | ||||||||||||||||||||||||||||||||||||||
Derivative financial instruments | – | – | – | – | 55,699 | – | 43,436 | – | – | 55,699 | ||||||||||||||||||||||||||||||||||||||
Investment securities | 108,516 | – | – | – | – | 5,081 | – | – | (3,589 | ) | 110,008 | |||||||||||||||||||||||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgages (2) | 76,607 | 272,588 | – | – | – | – | – | – | 84 | 349,279 | ||||||||||||||||||||||||||||||||||||||
Personal loans | – | 96,074 | 3,350 | – | – | – | – | – | 7 | 99,431 | ||||||||||||||||||||||||||||||||||||||
Credit cards | – | 13,126 | 372 | – | – | – | – | – | 1,020 | 14,518 | ||||||||||||||||||||||||||||||||||||||
Business & government | 267,921 | 10,395 | 9,675 | – | – | – | – | – | (884 | ) | 287,107 | |||||||||||||||||||||||||||||||||||||
Allowances for credit losses (3) | (514 | ) | (817 | ) | – | – | – | – | – | – | (4,017 | ) | (5,348 | ) | ||||||||||||||||||||||||||||||||||
Customers’ liability under acceptances | 19,525 | – | – | – | – | – | – | – | (31 | ) | 19,494 | |||||||||||||||||||||||||||||||||||||
Property and equipment | – | – | – | – | – | – | – | – | 5,700 | 5,700 | ||||||||||||||||||||||||||||||||||||||
Investment in associates | – | – | – | – | – | 56 | – | – | 2,577 | 2,633 | ||||||||||||||||||||||||||||||||||||||
Goodwill and other intangibles assets | – | – | – | – | – | – | – | – | 16,833 | 16,833 | ||||||||||||||||||||||||||||||||||||||
Other (including Deferred tax assets) | 2,401 | 991 | – | 106 | – | – | – | – | 35,661 | 39,159 | ||||||||||||||||||||||||||||||||||||||
Total | $ | 537,411 | $ | 392,357 | $ | 13,397 | $ | 175,419 | $ | 55,699 | $ | 5,137 | $ | 43,803 | $ | 113,293 | $ | 56,705 | $ | 1,349,418 |
(1) | Includes the Bank’s insurance subsidiaries’ assets and all other assets which are not subject to credit and market risks. |
(2) | Includes $75.8 and federally backed privately insured mortgages. |
(3) | Amounts for AIRB exposures are reported gross of allowances and amounts for standardized exposures are reported net of allowances. |
Credit Risk Exposures | Other Exposures | |||||||||||||||||||||||||||||||||||||||||||||||
Drawn | Other Exposures | Market Risk Exposures | ||||||||||||||||||||||||||||||||||||||||||||||
As at October 31, 2021 ($ millions) | Non-retail | Retail | Securitization | Repo-style Transactions | OTC Derivatives | Equity | Also subject to Credit Risk | All Other (1) | Total | |||||||||||||||||||||||||||||||||||||||
Cash and deposits with financial institutions | $ | 83,176 | $ | – | $ | – | $ | – | $ | – | $ | – | $ | – | $ | – | $ | 3,147 | $ | 86,323 | ||||||||||||||||||||||||||||
Precious metals | – | – | – | – | – | – | – | 755 | – | 755 | ||||||||||||||||||||||||||||||||||||||
Trading assets | ||||||||||||||||||||||||||||||||||||||||||||||||
Securities | 1 | – | – | – | – | – | – | 137,147 | – | 137,148 | ||||||||||||||||||||||||||||||||||||||
Loans | 470 | – | – | – | – | – | 397 | 7,643 | – | 8,113 | ||||||||||||||||||||||||||||||||||||||
Other | – | – | – | – | – | – | – | 1,051 | – | 1,051 | ||||||||||||||||||||||||||||||||||||||
Financial assets designated at fair value through profit or loss | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||
Securities purchased under resale agreements and securities borrowed | – | – | – | 127,739 | – | – | – | – | – | 127,739 | ||||||||||||||||||||||||||||||||||||||
Derivative financial instruments | – | – | – | – | 42,302 | – | 35,379 | – | – | 42,302 | ||||||||||||||||||||||||||||||||||||||
Investment securities | 70,193 | – | – | – | – | 4,373 | – | – | 633 | 75,199 | ||||||||||||||||||||||||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgages (2) | 77,773 | 241,833 | – | – | – | – | – | – | 72 | 319,678 | ||||||||||||||||||||||||||||||||||||||
Personal loans | – | 89,518 | 2,015 | – | – | – | – | – | 7 | 91,540 | ||||||||||||||||||||||||||||||||||||||
Credit cards | – | 10,842 | 136 | – | – | – | – | – | 1,472 | 12,450 | ||||||||||||||||||||||||||||||||||||||
Business & government | 208,967 | 4,025 | 5,861 | – | – | – | – | – | 91 | 218,944 | ||||||||||||||||||||||||||||||||||||||
Allowances for credit losses (3) | (552 | ) | (759 | ) | – | – | – | – | – | – | (4,315 | ) | (5,626 | ) | ||||||||||||||||||||||||||||||||||
Customers’ liability under acceptances | 20,441 | – | – | – | – | – | – | – | (37 | ) | 20,404 | |||||||||||||||||||||||||||||||||||||
Property and equipment | – | – | – | – | – | – | – | – | 5,621 | 5,621 | ||||||||||||||||||||||||||||||||||||||
Investment in associates | – | – | – | – | – | 46 | – | – | 2,558 | 2,604 | ||||||||||||||||||||||||||||||||||||||
Goodwill and other intangibles assets | – | – | – | – | – | – | – | – | 16,604 | 16,604 | ||||||||||||||||||||||||||||||||||||||
Other (including Deferred tax assets) | 1,772 | 659 | – | 2 | – | – | – | – | 21,562 | 23,995 | ||||||||||||||||||||||||||||||||||||||
Total | $ | 462,241 | $ | 346,118 | $ | 8,012 | $ | 127,741 | $ | 42,302 | $ | 4,419 | $ | 35,776 | $ | 146,596 | $ | 47,415 | $ | 1,184,844 |
(1) | Includes the Bank’s insurance subsidiaries’ assets and all other assets which are not subject to credit and market risks. |
(2) | Includes $78.1 billion in mortgages guaranteed by Canada Mortgage Housing Corporation and federally backed privately insured mortgages. |
(3) | Amounts for AIRB exposures are reported gross of allowances and amounts for standardized exposures are reported net of allowances. |
2022 Scotiabank Annual Report
|
2
25
Consolidated Financial Statements
(ii) | Credit quality of non-retail exposures |
Credit decisions are made based upon 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. Banking units and Global Risk Management also review the credit quality of the credit portfolio across the organization on a regular basis to assess whether economic trends or specific events may affect the performance of the portfolio.
The Bank’s
non-retail
portfolio is well diversified by industry. As at October 31, 2022, and October 31, 2021, a significant portion of the authorized corporate and commercial lending portfolio was internally assessed at a grade that would generally equate to an investment grade rating by external rating agencies. There has not been a significant change in concentrations of credit risk since October 31, 2021.Internal grades (IG) are used to differentiate the risk of default of a borrower. The following table cross references the Bank’s internal borrower grades with equivalent ratings categories utilized by external rating agencies:
Cross referencing of internal ratings to external ratings (1) | ||||||||||||
Equivalent External Rating | ||||||||||||
S&P | Moody’s | DBRS | Internal Grade | Internal Grade Code | PD Range (2) | |||||||
AAA to AA+ | Aaa to Aa1 | AAA to AA (high) | 99 – 98 | 0.0000% – 0.0551% | ||||||||
AA to A+ | Aa2 to A1 | AA to A (high) | 95 | 0.0551% – 0.0651% | ||||||||
A to A- | A2 to A3 | A to A (low) | Investment grade | 90 | 0.0651% – 0.0748% | |||||||
BBB+ | Baa1 | BBB (high) | 87 | 0.0748% – 0.1028% | ||||||||
BBB | Baa2 | BBB | 85 | 0.1028% – 0.1552% | ||||||||
BBB- | Baa3 | BBB (low) | 83 | 0.1552% – 0.2151% | ||||||||
BB+ | Ba1 | BB (high) | 80 | 0.2151% – 0.2983% | ||||||||
BB | Ba2 | BB | 77 | 0.2983% – 0.5617% | ||||||||
BB- | Ba3 | BB (low) | Non-Investment grade | 75 | 0.5617% – 1.1570% | |||||||
B+ | B1 | B (high) | 73 | 1.1570% – 1.9519% | ||||||||
B to B- | B2 to B3 | B to B (low) | 70 | 1.9519% – 4.7225% | ||||||||
CCC+ | Caa1 | – | 65 | 4.7225% – 12.1859% | ||||||||
CCC | Caa2 | – | Watch list | 60 | 12.1859% – 23.8197% | |||||||
CCC- to CC | Caa3 to Ca | – | 40 | 23.8197% – 42.1638% | ||||||||
– | – | – | 30 | 42.1638% – 100.0000% | ||||||||
Default | Default | 21 | 100% |
(1) | Applies to non-retail portfolio. |
(2) | PD Ranges as at October 31, 2022. The Range does not include the upper boundary for the row. |
Non-retail
AIRB portfolioThe credit quality of the
non-retail
AIRB portfolio, expressed in terms of risk categories of borrower internal grades is shown in the table below:2022 | 2021 | |||||||||||||||||||||||
Exposure at Default (1) | ||||||||||||||||||||||||
As at October 31 ($ millions) Category of internal grades | IG Code | Drawn | Undrawn commitments | Other exposures (2) | Total | Total | ||||||||||||||||||
Investment grade | 99 – 98 | $ | 117,445 | $ | 1,986 | $ | 19,133 | $ | 138,564 | $ | 116,190 | |||||||||||||
95 | 32,559 | 12,484 | 25,532 | 70,575 | 62,265 | |||||||||||||||||||
90 | 28,263 | 21,482 | 28,470 | 78,215 | 75,537 | |||||||||||||||||||
87 | 43,848 | 24,277 | 17,063 | 85,188 | 64,634 | |||||||||||||||||||
85 | 36,912 | 21,943 | 14,236 | 73,091 | 52,838 | |||||||||||||||||||
83 | 50,728 | 20,387 | 7,754 | 78,869 | 56,540 | |||||||||||||||||||
Non-Investment grade | 80 | 34,036 | 14,691 | 4,130 | 52,857 | 47,700 | ||||||||||||||||||
77 | 27,388 | 6,381 | 2,519 | 36,288 | 33,774 | |||||||||||||||||||
75 | 19,556 | 3,709 | 2,447 | 25,712 | 22,822 | |||||||||||||||||||
73 | 6,137 | 1,263 | 448 | 7,848 | 8,449 | |||||||||||||||||||
70 | 2,022 | 449 | 121 | 2,592 | 2,814 | |||||||||||||||||||
Watch list | 65 | 300 | 14 | 81 | 395 | 1,302 | ||||||||||||||||||
60 | 740 | 39 | 9 | 788 | 1,626 | |||||||||||||||||||
40 | 744 | 98 | 39 | 881 | 696 | |||||||||||||||||||
30 | 52 | 2 | – | 54 | 92 | |||||||||||||||||||
Default | 21 | 1,107 | 51 | 62 | 1,220 | 1,228 | ||||||||||||||||||
Total | $ | 401,837 | $ | 129,256 | $ | 122,044 | $ | 653,137 | $ | 548,507 | ||||||||||||||
Government guaranteed residential mortgages (3) | 71,867 | – | – | 71,867 | 73,044 | |||||||||||||||||||
Total | $ | 473,704 | $ | 129,256 | $ | 122,044 | $ | 725,004 | $ | 621,551 |
(1) | After credit risk mitigation. |
(2) | Includes off-balance sheet lending instruments such as letters of credit, letters of guarantee, securitizations excluding $3.5 million first loss protection (2021 – $3.5 million), derivatives and repo-style transactions (reverse repurchase agreements, repurchase agreements and securities lending and borrowing), net of related collateral. |
(3) | These exposures are classified as sovereign exposures and are included in the non-retail category. |
2
26
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
Non-retail
standardized portfolioThe of the borrower, if available, to compute regulatory capital for credit risk. Exposures are risk weighted based on prescribed percentages and a mapping process as defined within OSFI’s Capital Adequacy Requirements Guideline.
non-retail
standardized portfolio relies on external credit ratings (e.g. S&P, Moody’s, DBRS, etc.)
Non-retail
standardized portfolio as at October 31, 2022 comprised of drawn, undrawn and other exposures to corporate, bank and sovereign counterparties amounted to $73 billion (October 31, 2021 – $75 billion). Within this portfolio, the majority of Corporate/Commercial exposures are to unrated counterparties, mainly in Canada and the Pacific Alliance countries.(iii) | Credit quality of retail exposures |
The Bank’s retail portfolios consist of a number of relatively small loans to a large number of borrowers. The portfolios are distributed across Canada and a wide range of countries. As such, the portfolios inherently have a high degree of diversification. In addition, as of October 31, 2022, 28% of the Canadian banking residential mortgage portfolio is insured and the averageratio of the uninsured portion of the portfolio is 49%.
loan-to-value
Retail AIRB portfolio
The data in the table below provides a distribution of the retail AIRB exposure within each PD range by asset class:
As at October 31 ($ millions) | 2022 | 2021 | ||||||||||||||||||||||||||
Exposure at default (1) | ||||||||||||||||||||||||||||
Real estate secured | ||||||||||||||||||||||||||||
Category of (PD) grades | PD range | Mortgages | HELOC | Qualifying revolving | Other retail | Total | Total | |||||||||||||||||||||
Exceptionally Low | 0.0000% – 0.0499% | $ | 63,677 | $ | 24,644 | $ | 12,865 | $ | 853 | $ | 102,039 | $ | 91,426 | |||||||||||||||
Very Low | 0.0500% – 0.1999% | 87,387 | 14,544 | 11,085 | 5,358 | 118,374 | 106,994 | |||||||||||||||||||||
Low | 0.2000% – 0.9999% | 48,158 | 4,522 | 12,018 | 20,145 | 84,843 | 77,215 | |||||||||||||||||||||
Medium Low | 1.0000% – 2.9999% | 9,569 | – | 5,522 | 7,157 | 22,248 | 20,744 | |||||||||||||||||||||
Medium | 3.0000% – 9.9999% | 729 | 430 | 4,160 | 3,335 | 8,654 | 7,316 | |||||||||||||||||||||
High | 10.0000% – 19.9999% | 263 | 72 | 223 | 565 | 1,123 | 917 | |||||||||||||||||||||
Extremely High | 20.0000% – 99.9999% | 328 | 47 | 452 | 336 | 1,163 | 863 | |||||||||||||||||||||
Default | 100% | 143 | 55 | 110 | 161 | 469 | 430 | |||||||||||||||||||||
Total | $ | 210,254 | $ | 44,314 | $ | 46,435 | $ | 37,910 | $ | 338,913 | $ | 305,905 |
(1) | After credit risk mitigation. |
Retail standardized portfolio
The retail standardized portfolio of $111 billion as at October 31, 2022 (2021 – $91 billion) was comprised of residential mortgages, personal loans, credit cards and lines of credit to individuals, mainly in the Latin American and Caribbean region.ratio of below 80%.
Commencing in the third quarter, small business loans of $7 billion have been included as other regulatory retail.
Of the total retail standardized exposures, $63 billion (2021 – $55 billion) was represented by mortgages and loans secured by residential real estate, mostly with aloan-to-value
(iv) | Collateral |
Collateral held
In the normal course of business, to reduce its exposure to counterparty credit risk, the Bank receives collateral for capital markets related activities. The following are examples of the terms and conditions customary to collateral for these types of transactions:
• | The risks and rewards of the pledged assets reside with the pledgor. |
• | Additional collateral is required when the market value of the transaction exceeds thresholds agreed upon with the pledgor. |
• | The Bank is normally permitted to sell or repledge the collateral it receives, although this right is specific to each agreement under which the collateral is pledged. |
• | Upon satisfaction of the obligation, the Bank must return the pledged assets, unless the Bank has the right to sell or repledge the collateral it receives, in which case the Bank must return comparable collateral to the pledgor. |
As at October 31, 2022, the approximate market value of cash and securities collateral accepted that may be sold or repledged by the Bank was $259 billion (2021 – $192 billion). This collateral is held primarily in connection with reverse repurchase agreements, margin loans, securities lending and derivative transactions. The Bank also borrows securities under standard securities borrowing agreements that it is able to
re-pledge.
Including these borrowed securities, the approximate market value of securities collateral accepted that may be sold orre-pledged
was $273 billion (2021 – $227 billion), of which approximately $58 billion was not sold orre-pledged
(2021 – $55 billion).Collateral pledged
In the normal course of business, securities and other assets are pledged to secure an obligation, participate in clearing or settlement systems, or operate in a foreign jurisdiction. Note 3
4
(c) details the nature and extent of the Bank’s asset pledging activities. Asset pledging transactions are conducted under terms that are common and customary to standard derivative, securities financing, and other borrowing activities. Standard risk management controls are applied with respect to asset pledging.Assets acquired in exchange for loans
The carrying value of assets acquired in exchange for loans as at October 31, 2022 was $274 million (2021 – $257 million) mainly comprised of real estate and was classified as either held for sale or held for use as appropriate.
2022 Scotiabank Annual Report
|
2
27
Consolidated Financial Statements
(b) | Liquidity risk |
Liquidity risk is the risk that the Bank is unable to meet its financial obligations in a timely manner at reasonable prices. The Bank’s liquidity risk is subject to extensive risk management controls and is managed within the framework of policies and limits approved by the Board. 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 Bank’s liquidity risk management framework include:
• | liquidity risk measurement and management limits, including limits on maximum net cash outflow by currency over specified short-term horizons; |
• | prudent diversification of its wholesale funding activities by using a number of different funding programs to access the global financial markets and manage its maturity profile, as appropriate; |
• | large holdings of liquid assets to support its operations, which can generally be sold or pledged to meet the Bank’s obligations; |
• | liquidity stress testing, including Bank-specific, global-systemic, and combination systemic/Bank-specific scenarios; and |
• | liquidity contingency planning. |
The Bank’s foreign operations have liquidity management frameworks that are similar to the Bank’s framework. Local deposits are managed from a liquidity risk perspective based on the local management frameworks and regulatory requirements.
(i) | Commitments to extend credit |
In the normal course of business, the Bank enters into commitments to extend credit in the form of loans or other financings for specific amounts and maturities, subject to specific conditions. These commitments, which are not reflected on the Consolidated Statement of Financial Position, are subject to normal credit standards, financial controls and monitoring procedures.
(ii) | Derivative instruments |
The Bank is subject to liquidity risk relating to its use of derivatives to meet customer needs, generate revenues from trading activities, manage market and credit risks arising from its lending, funding and investment activities, and lower its cost of capital. The maturity profile of the notional amounts of the Bank’s derivative instruments is summarized in Note 10(b).
(c) | Market risk |
Market risk arises 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 is subject to extensive risk management controls, and is managed within the framework of market risk policies and limits approved by the Board. The ALCO and Market Risk Management and Policy Committee 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 Bank uses a variety of metrics and models to measure and control market risk exposures. The measurements used are selected based on an assessment of the nature of risks in a particular activity. The principal measurement techniques are Value at Risk (VaR), stress testing, sensitivity analysis and simulation modeling. The Board reviews results from these metrics quarterly. Models are independently validated internally prior to implementation and are subject to formal periodic review.
VaR is a statistical measure that estimates the potential loss in value of the Bank’s trading positions due to adverse market movements over a defined time horizon with a specified confidence level. The quality of the Bank’s VaR is validated by regular back testing analysis, in which the VaR is compared to theoretical and actual profit and loss results. To complement VaR, the Bank also uses stress testing to examine the impact that abnormally large swings in market factors and periods of prolonged inactivity might have on trading portfolios. The stress testing program is designed to identify key risks and ensure that the Bank’s capital can absorb potential losses from abnormal events. The Bank subjects its trading portfolios to a series of stress tests on a daily, weekly and monthly basis.
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. In
non-trading
portfolios, sensitivity analysis assesses the effect of changes in interest rates on current earnings and on the economic value of equity. Simulation modeling under various scenarios is particularly important for managing risk in the deposit, lending and investment products the Bank offers to its retail customers.(i) | Non-trading interest rate risk |
Interest rate risk is the risk of loss due to the following: changes in the level, slope and curvature of the yield curve; the volatility of interest rates and changes in customer preferences (e.g. mortgage prepayment rates). The Bank actively manages its interest rate exposures with the objective of protecting and enhancing net interest income within established risk tolerances. Interest rate risk arising from the Bank’s 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 equity. The income limit measures the effect of a specified shift 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 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 risk.
Interest rate sensitivity
Based on the Bank’s interest rate positions, the following table shows the
pro-forma
pre-tax
impact on the Bank’s net interest income over the next twelve months and economic value of equity of an immediate and sustained 100 basis points increase and decrease in interest rates across major currencies as defined by the Bank. Corresponding with the current interest rate environment, the net interest income and economic value for a down shock scenario are measured using 100 basis points decline. 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 to mitigate the risk.As at October 31 ($ millions) | 2022 | 2021 (1) | ||||||||||||||||||||||||||||||||
Net interest income | Economic value of equity | |||||||||||||||||||||||||||||||||
Canadian dollar | Other currencies | Total | Canadian dollar | Other currencies | Total | Net interest income | Economic value of equity | |||||||||||||||||||||||||||
100 bp increase | $ | (118 | ) | $ | (222 | ) | $ | (340 | ) | $ | (800 | ) | $ | (1,221 | ) | $ | (2,021 | ) | 100 bp increase | $ | 212 | $ | (1,173 | ) | ||||||||||
100 bp decrease | $ | 127 | $ | 199 | $ | 326 | $ | 606 | $ | 1,053 | $ | 1,659 | 25 bp decrease | $ | (64 | ) | $ | 209 |
(1) | Prior period amounts have been restated to conform with current period presentation. |
2
28
|
2022 Scotiabank Annual Report
Consolidated Financial Statements
(ii) | Non-trading foreign currency risk |
Foreign currency risk is the risk of loss due to changes in spot and forward rates, and the volatility of currency exchange rates.
Non-trading
foreign currency risk, also referred to as structural foreign exchange risk, arises primarily from the Bank’s net investments in self-sustaining foreign operations and is controlled by a Board-approved limit. This limit considers potential volatility to shareholders’ equity as well as the potential impact on capital ratios from foreign exchange fluctuations. On a quarterly basis, the Asset-Liability Committee (ALCO) reviews the Bank’s exposures to these net investments. The Bank may fully or partially hedge this exposure by funding the investments in the same currency, or by using other financial instruments, including derivatives.The Bank is subject to foreign currency risk on the earnings of its foreign operations. To manage this risk, foreign currency revenues and expenses, which are primarily denominated in U.S. dollars, are projected over a number of future fiscal quarters. The ALCO assesses economic data and forecasts to decide on the portion of the estimated future foreign currency revenues and expenses to hedge. Hedging instruments normally include foreign currency spot and forward contracts, as well as foreign currency options and swaps.
As at October 31, 2022, a one percent increase (decrease) in the Canadian dollar against all currencies in which the Bank operates decreases (increases) the Bank’sly $308 million (2021 – $321 million), net of hedging.
before-tax
annual earnings by approximately $55 million (October 31, 2021 – $43million) in the absence of hedging activity, due primarily from exposure to U.S. dollars. A similar change in the Canadian dollar as at October 31, 2022 would increase (decrease) the unrealized foreign currency translation losses in the accumulated other comprehensive income in equity by approximate
(iii) | Non-trading equity risk |
Equity risk is the risk of loss due to adverse movements in equity prices. Equity price risk is often classified into two categories: general equity risk, which refers to the sensitivity of an instrument or portfolio’s value to changes in the overall level of equity prices, and specific equity risk, which refers to that portion of an individual equity instrument’s price volatility that is determined by entity-specific characteristics.
The Bank is exposed to equity risk through its equity investment portfolios, which are controlled by Board-approved portfolio and VaR limits. Equity investments include common and preferred shares, as well as a diversified portfolio of third-party managed funds.
The majority of the Bank’s equity investment portfolios are managed by Group Treasury under the strategic direction of the ALCO. Group Treasury delegates the management of a portion of equity and equity-related portfolios to other external fund managers to take advantage of these fund managers’ expertise in particular market niches and products.
The fair value of equity securities designated at FVOCI is shown in Note 12.
(iv) | Trading portfolio risk management |
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 limits, including aggregate VaR and stress testing limits.
Trading portfolios arein accordance with the Bank’s valuation policies. Positions aredaily and valuations are independently reviewed by back office, GRM or finance units on a regular basis. These units also provide profit and loss reporting, as well as VaR and limit compliance reporting to business unit management and executive management for evaluation and action as appropriate. VaR is calculated daily using a 99% confidence level, and a
marked-to-market
marked-to-market
one-day
holding period. This means that, once in every 100 days, the trading positions are expected to lose more than the VaR estimate. The Bank calculates general market risk VaR using historical simulation based on 300 days of market data. For debt specific risk VaR, the Bank useshistorical
resampling. The table below shows the Bank’s VaR by risk factor:For the year ended October 31, 2022 | ||||||||||||||||||||
($ millions) | As at October 31, 2022 | Average | High | Low | As at October 31, 2021 | |||||||||||||||
Credit spread plus interest rate | $ | 9.3 | $ | 12.0 | $ | 19.0 | $ | 7.2 | $ | 10.3 | ||||||||||
Credit spread | 7.7 | 5.3 | 9.6 | 2.0 | 2.0 | |||||||||||||||
Interest rate | 8.4 | 11.4 | 19.6 | 5.7 | 11.5 | |||||||||||||||
Equities | 3.4 | 4.0 | 6.8 | 1.7 | 6.7 | |||||||||||||||
Foreign exchange | 1.5 | 2.1 | 5.3 | 0.8 | 2.0 | |||||||||||||||
Commodities | 5.2 | 3.1 | 5.8 | 1.0 | 1.3 | |||||||||||||||
Debt specific | 4.6 | 2.3 | 4.6 | 1.6 | 1.5 | |||||||||||||||
Diversification effect | (10.6 | ) | (10.0 | ) | n/a | n/a | (8.6 | ) | ||||||||||||
All-Bank | $ | 13.4 | $ | 13.5 | $ | 20.4 | $ | 7.8 | $ | 13.2 | ||||||||||
All-Bank | $ | 27.4 | $ | 30.9 | $ | 58.4 | $ | 16.8 | $ | 36.1 |
Below are the market risk capital requirements as at October 31, 2022.
($ millions) | ||||
All-Bank VaR | $ | 131 | ||
All-Bank stressed VaR | 324 | |||
Incremental risk charge | 345 | |||
Standardized approach | 66 | |||
Total market risk capital | $ | 866 | ( 1 ) |
(1) | Equates to $10,820 million of risk-weighted assets (October 31, 2021 – $8,112 million). |
2022 Scotiabank Annual Report
|
2
29
Consolidated Financial Statements
(d) | 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. 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.
36 | Acquisitions and Divestitures |
Acquisitions
Scotiabank Chile
In the second quarter, the Bank completed the acquisition of an addition
billion from the
o 99.8%. The purchase consideration was comprised of cash of $650 million and the issuance of 7 million common shares valued at $569 million. The increase in ownership was effective February 27, 2022. This transaction was accounted for as a capital transaction through shareholders’ equity and did not result in a change to the carrying value of the assets and liabilities of the subsidiarynon-controlling
interest shareholders, increasing its ownership tAs at the date of acquisition, the transaction negatively impacted the Bank’s CET1 ratio by 11 basis points. Scotiabank Chile forms part of the International Banking business segment.
Completed acquisition impacting 2021
Scotiabank Chile
On May 12, 2021, the Bank increased its ownership in Scotiabank Chile through the acquisition of an additional 7.0
% stake from the
$481 million, resulting in ownership of 83%non-controlling
interest shareholder forin Scotiabank Chile. This transaction was accounted for as a capital transaction through shareholders’ equity and did not result in a change to the carrying value of the assets and liabilities of the subsidiary or the Bank’s associated goodwill.
The transaction negatively impacted Scotiabank’s CET1 ratio by six basis points. Scotiabank Chile forms part of the International Banking business segment.
Divestitures
Closed divestitures impacting the current fiscal year
Banco del Caribe, C.A (“BDC”) and Inversiones Americana del Caribe (IAC), B.V. (“IAC”), Venezuela
On October 26, 2022, the Bank completed the sale of its 26.8%
interest in BDC and its
23.4%
interest in IAC subject to customary closing conditions.
The investments held by the Bank in BDC and IAC, were classified as investments in associates. The carrying value of the Bank’s interest in these investments of $73 million was derecognized on the date of close and a net loss of approximately $227 million
after
was recorded in-tax
n
on-interest income-o
ther and reported in the Other segment.The net loss includes $
million of cumulative foreign currency translation losses that have been reclassified from accumulated other comprehensive income to the Consolidated Statement of Income. The capital impact of these transactions was not significant.
Thanachart Insurance Public Company Limited (“TNI”) and Thanachart Securities Public Company Limited (“TNS”), Thailand
On October 27, 2022, the Bank completed the sale of its interest in TNI and TNS.
The investments held by the Bank in TNI and TNS were classified as investments in associates. The carrying value of the Bank’s interest in these investments of $134
million was derecognized on the date of close. The financial and capital impacts of this transaction were not significant.
Wind down of operations in India and Malaysia
The Bank has made the decision to wind down its operations in India and Malaysia as part of the realignment of Global Banking and Markets business in the Asia Pacific region. The Bank has recorded a total loss of
$102
million after tax in non-interest income-other representing the reclassification of cumulative foreign currency translation losses net of hedges, from accumulated other comprehensive income to the Consolidated Statement of Income. The capital impact of this transaction was not significant.
Closed divestitures impacting the prior fiscal year
2021
Operations in Belize
On March 31, 2021, the Bank completed the sale of its 100% interest in Scotiabank (Belize) Ltd. to Caribbean Investment Holdings Limited, upon receiving regulatory approvals and satisfying closing conditions.
All assets and liabilities related to this operation were derecognized on the closing date. The net impact to the Bank of this transaction was not significant.
Operations in Antigua and Barbuda
On September 1, 2021, the Bank announced that it has completed the sale of its banking operations in Antigua and Barbuda to Eastern Caribbean Amalgamated Bank Limited, upon receiving regulatory approvals and satisfying closing conditions.
All assets and liabilities related to this operation were derecognized on the closing date. The net impact to the Bank of this transaction is not significant.
Divestiture previously announced that will no longer impact the Bank’s financial results
Operations in Guyana
On June 9, 2022, the Bank announced that the agreement for the sale of its banking operations in Guyana to First Citizens Bank Limited, initially signed on March 3, 2021, has expired and has therefore been terminated in accordance with its terms.
23
0
|
2022 Scotiabank Annual Report