Financial Statements of Scotiabank

Description
Mexico-based Divemex has been a Scotiabank customer for about 14 years. The family-owned company produces organic, conventional, green and mini peppers for the North American market and is renowned for bringing fair trade certification to Mexico's horticulture industry.

2014 Annual Report
What it means to be
Canada’s most
international bank
Financial Highlights
1
Operating results
($ millions)
Net income
Operating performance
Diluted earnings per share ($)
Return on equity (%)
(2)
Productivity ratio (%) (TEB
(2)
)
Balance sheet information
($ millions)
Total assets
Capital measures
(1)(3)
Common Equity Tier 1 (CET1) ratio (%)
Total capital ratio (%)
Common share information
Annual shareholder return (%)
10-year compound annual return (%)
Market capitalization ($ millions) (TSX)
Dividends per share ($)
Dividend yield (%)
(4)
Book value per common share ($)
Price to earnings multiple
2014
7,298
5.66
16.1
52.6
805,666
10.8
13.9
13.2
9.9
83,969
2.56
3.8
36.96
12.1
6,610
5.11
16.6
54.0
743,644
9.1
13.5
21.7
10.9
76,612
2.39
4.1
33.23
12.3
2013
n/a
4.2
2012
6,390
5.18
19.9
52.4
668,225
16.7
7.6
13.0
64,252
2.19
28.99
10.3
As at and for the ?scal years ended October 31
(1) (1)
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards
(IFRS10 and IAS19) in 2014 (refer to Note 4 in the consolidated financial statements). Capital measures have not been
restated for the new and amended IFRS standards as they represent the actual amounts in the period for regulatory
purposes.
(2) Non-GAAP measures. Refer to non-GAAP measures on page 17.
(3) Effective November 1, 2012, regulatory capital ratios are determined in accordance with Basel III rules on an all-in
basis (Refer to page 41). Comparative amounts for prior periods were determined in accordance with Basel II rules and
have not been restated.
(4) Based on the average of the high and low common share price for the year.
2011
n/a
3.7
5,330
4.53
20.3
53.9
594,423
13.9
(0.4)
57,204
13.1
2.05
24.20
11.3
Contents
2 Message from Chairman of the Board
Thomas C. O’Neill
3 Message from President and
Chief Executive Officer Brian Porter
8 Executive Management Team
10 Board of Directors
12 Message from Chief Financial Officer
Sean McGuckin
13 Reasons to Invest in Scotiabank –
MD&A at a Glance
14 Management’s Discussion and Analysis
117 Consolidated Financial Statements
Getting Kids in the Game
(see inside back cover)
Mexico-based Divemex has been a Scotiabank customer for
about 14 years. The family-owned company produces organic,
conventional, green and mini peppers for the North American
market and is renowned for bringing fair trade certification
to Mexico’s horticulture industry.
Read more and watch the video at media.scotiabank.com/AR/2014/en.
Shown here: Jorge Beckmann, President, Divemex (centre) with Scotiabankers Joaquin
Gandara (right) and Jorge Cuenca (left) at one of the company’s greenhouses in Jalisco, Mexico.
customers in over 55 countries
Scotiabank serves more than 21 million
Alternative formats Annual Report Online
Go online for a more detailed
version of this report, including
customer videos.
media.scotiabank.com/AR/2014/en
For information on how to obtain the
annual report in alternative formats,
please go to:
http://www.scotiabank.com/ca/
en/0,,379,00.html
Message from
the Chairman
2
Thomas O’Neill
Chairman of Scotiabank’s
Board of Directors
Dear Fellow Shareholders,
We continued to work hard in 2014 to achieve solid results for you. This
year, under Brian Porter’s leadership, the Bank increased its focus on
customers, leadership and talent, and being better organized to serve
customers while reducing structural costs. These are areas we know drive
stronger growth and have the greatest impact on shareholder value.
Scotiabank’s proven strategy – well executed by a
strong management team and more than 86,000
employees – contributed to consistent earnings
growth for all shareholders.
GUIDED BY GOVERNANCE
Effective corporate governance is an important
foundation for Scotiabank’s strong performance
and is fundamental to our success. Corporate
governance provides proper oversight and
accountability, strengthens internal and external
relationships, builds trust with our stakeholders and
promotes the long-term interests of shareholders.
In 2014, your Board expanded its commitment
to diversity. In fact, female directors now
represent more than 30% of the Board, a
reflection of our policy that also considers the
age, ethnicity and geographical background of
prospective new members.
We also continued our focus on Board independence
with 14 of our 15 members independent of the Bank.
A HISTORY OF STRONG LEADERSHIP
I am honoured to succeed your past Chairman,
John Mayberry, who retired this year after a 20-year
term as a Board member. John’s leadership and
foresight guided us through some exceptionally
challenging years for the global financial industry.
I would like to thank John for his leadership and
distinguished service to you.
We welcomed two new Directors to your Board
this year: Guillermo Babatz and Nora Aufreiter.
Guillermo’s experience, particularly in Latin
America, contributes a unique perspective in light
of the Bank’s international footprint. Nora’s
industry knowledge, acquired through a lengthy
international management consulting career
focusing on consumer-facing industries, also adds
tremendous value.
POSITIONED FOR LONG-TERM SUCCESS
Canada’s banks have once again been named among
the soundest in the world by the World Economic
Forum. This speaks to the strength and stability of
Canada’s banking system, based on a robust risk
culture and well-articulated risk appetite. With
Scotiabank’s sound strategy and strong leaders,
I have every confidence that we will continue to
build on our 183-year record of success.
I would like to thank our President and CEO Brian
Porter, his leadership team and the thousands of
Scotiabankers around the world who help the Bank’s
21 million customers become financially better off.
I am truly privileged to work with this team, which
brings commitment and enthusiasm to work each
day – and carries it forward to enrich their
communities.
And finally, thank you, shareholders, for your
confidence in us, which helps fuel the momentum
towards an ever brighter future for Canada’s most
international bank.
2 2014 Scotiabank Annual Report
Brian Porter
President and
Chief Executive Of?cer
CEO
Message
3
Dear Fellow Shareholders,
It is my pleasure to write to you as we embark on Scotiabank’s
184
th
year, my second as President and CEO of your Bank.
2014 was a productive year for Scotiabank. Before getting into
the details, including our financial performance and the important
steps we are taking to become an even better bank, I would like
to share a few observations about the past year.
Over the past 12 months, I met with many of our
shareholders, customers, key stakeholders and
employees around the world. These interactions
made it clear that the Bank is widely viewed as
having a strong global industry position with
excellent opportunities for growth. Our strategy is
clear and well understood. Our customers appreciate
the knowledge, expertise and commitment of our
people. And there is great pride in being Canada’s
most international bank.
CANADA’S MOST INTERNATIONAL BANK
I firmly believe that the combination of Scotiabank’s
focused strategy and diversified business model,
which is unique among our competitors, will create
long-term value for our shareholders.
We have a strong and growing foundation. We are
the third largest bank in Canada and among the 25
largest and soundest banks in the world. The Bank’s
strength in Canada provides a solid foundation for our
significant operations in select international markets,
which in turn, further enhances the Bank’s
growth potential and diversification. In fact, more
than half of the Bank’s earnings are generated in
Canada, with the remainder coming from our
operations internationally. Our earnings are
further diversified between well-balanced
businesses and customer segments.
For more than 125 years, Scotiabank has
successfully operated with a meaningful
international footprint. Today, we have
operations in North America, Latin America, the
Caribbean & Central America and parts of Asia.
We use this footprint to help our customers in
other markets that have attractive economic
fundamentals and strong growth prospects.
Increasingly, we add value to our business
customers by delivering the full capabilities
of Scotiabank in key international markets –
particularly the four Pacific Alliance countries
of Mexico, Peru, Colombia and Chile.
37%
OTHER INTERNATIONAL
56%
CANADA
% OF INCOME
CANADA,
U.S. & OTHER
INTERNATIONAL
U.S.
7%
* excluding a notable gain
in Q3 2014
2014 Scotiabank Annual Report 3
Innovative partnerships that offer
customers more choice
Our commitment to stakeholders:
In recent years, financial services companies around the
world have experienced several different challenges. We
are proud of our successful track record of balancing the
interests of our stakeholders, including shareholders,
customers, employees and the communities in which we
live and work.
We have a strong foundation of integrity, trust, and ethical
behaviour in all of our businesses. Our common equity
Tier 1 capital ratio is among the strongest in the world.
This financial strength ensures that we are able to fulfill our
fiduciary responsibility of keeping our customers’ financial
assets safe. Combined with our unique international
footprint, our strong foundation allows us to prudently
lend to individuals as well as businesses of all sizes. By
doing so, we create jobs, drive economic opportunity
and – most importantly – help our customers to be
financially better off.
In all aspects of your Bank’s operations, our commitment
to stakeholders extends far beyond taking deposits and
making loans. We are full participants – and we are
committed to having a positive impact – in the countries,
societies and communities in which we live and work. The
Bank employs more than 86,000 people, many in high-
skill, high-wage positions. In addition, we generate a large
number of indirect jobs in the service economy.
Scotiabank is committed to corporate social responsibility.
That commitment extends from our business practices, to
our environmental footprint and to governance. Where we
have the opportunity, the Bank takes a leadership position
on important social issues, such as Aboriginal youth
education in Canada and providing financial services to
vulnerable communities in parts of Latin America.
Last year, your Bank continued to invest in communities
where our customers and Scotiabankers live and work. In
addition to the donations and sponsorships we have made
supporting charitable and non-profit organizations,
Scotiabank employees volunteered more than 650,000
hours in their communities.
PERFORMANCE VERSUS
MEDIUM-TERM OBJECTIVES
In 2014, we measured ourselves against some key
medium-term financial objectives. By moving to medium-
term objectives, rather than annual targets, we signalled
the importance we place on creating sustainable, longer-
term shareholder value.
As you will see in this annual report, we performed within
the ranges of our medium-term financial objectives. We
achieved these results while markets were somewhat
volatile and global economic growth was uneven. These
conditions impacted the performance of some of our
businesses in 2014. This year, the Bank’s Total Shareholder
Return was 13%, less than our Peer Group’s average of
16%. Our longer term goal is to outperform our Peer
Group average in delivering Total Shareholder Return –
which was the case for the most recent 5- and 10-year
periods.
OUR OPERATIONS
In reviewing our operations, I will first discuss our businesses
in Canada and then will review our international operations,
which reflects how many of our customers see the Bank.
Scotiabank partnered with Canadian Tire Corporation in
2014, acquiring 20% of the iconic company’s financial
services business and creating opportunities for joint
marketing initiatives aimed at driving new business growth.
The partnership extends across the Company, including
Canadian Tire, Sport Chek and Mark’s.
Read more and watch the video at media.scotiabank.com/
AR/2014/en.
Shown here: Michael Medline, President and CEO, Canadian Tire
Corporation, Limited, at Canadian Tire’s corporate headquarters
in Toronto, Canada.
4 2014 Scotiabank Annual Report
Deep relationships that create growth
Canada:
We had a good year in Canada – with strong performances
in our mortgage and auto lending businesses. And with
the rebranding and launch of Tangerine, we strengthened
our leading position in the fast growing direct banking
segment.
Our increased focus on payments led to double-digit
growth in our credit card business. This growth will be
further supported by our new partnership with Canadian
Tire Corporation. More than half of our new customers
come to Scotiabank through partnerships and indirect
channels. This includes the SCENE
™
program with
Cineplex, our NHL partnership, as well as through other
non-branch channels, such as mortgage brokerage and
indirect auto lending.
In recent years, we invested significantly in our wealth
management capabilities. This year, Scotia Asset
Management continued to demonstrate strong
performance with record net sales through the Canadian
Banking channel and more than 70 consecutive months of
positive net flows. Supported by highly ranked funds and
the recent launch of Scotia Aria Portfolios, Scotia Asset
Management has led the major Canadian banks in market
share growth over the past three years.
We have strong corporate and commercial relationships in
Canada. Our corporate and commercial banking results
this year were particularly strong, as evidenced by the
meaningful number of advisory as well as debt and equity
underwriting mandates we were awarded. This
performance is consistent with our top tier position in
these businesses.
International:
Our international businesses had a solid year, but the year
was not without challenges. While we generated strong
asset growth, earnings are not yet growing at the same
pace. Several headwinds prevailed across our international
operations, including:
• A protracted economic slowdown throughout much of
the Caribbean and Central America, resulting in
increased provision for credit losses;
• Moderated, but still positive, economic growth in key
markets such as Peru, Mexico and Chile. During the
year, these economies adjusted to new government
policies and financial services regulations; and
• Lower interest rates in Peru, Mexico and Chile, which
compressed the net interest margin.
In the Caribbean, where we have operated for more than
125 years and are the pre-eminent bank, we have
considerable experience operating through prolonged
economic cycles. To mitigate the impact of current and
expected economic conditions, management took further
steps to optimize our distribution channels in this region.
This action will allow us to maintain our leading position,
while balancing customer experience and cost structure.
Despite some headwinds in Latin America, we expect
regional economic conditions to improve over the course
of 2015. We see tremendous long-term potential in this
region. As a result, we have sharpened our focus on the
four Pacific Alliance countries of Mexico, Peru, Colombia
and Chile. The Pacific Alliance trading bloc has more than
210 million people and forms the world’s sixth largest
economy. The future for these countries is promising, with
strong macroeconomic fundamentals and attractive
demographics. Each of these markets enjoys a young,
under-banked and growing population, an increasingly
educated workforce and a growing middle class. These
attributes are conducive to attractive growth rates for
banking products and services.
Scotiabank and El Salvador-based Grupo Poma began their
business relationship more than 25 years ago. The family-
owned company now manages a range of businesses,
including real estate and hotel developments across
Latin America, the Caribbean and the U.S.
Read more and watch the video at media.scotiabank.com/
AR/2014/en.
Shown here: Ricardo Poma, Chairman and CEO, Grupo Poma,
at the company’s headquarters in San Salvador, El Salvador.
2014 Scotiabank Annual Report 5
In these priority Latin American countries, we are
committed to growing all of our businesses – personal and
commercial banking, wealth management and insurance,
as well as corporate and investment banking and capital
markets. In addition to continued organic growth, we will
also look to prudently deploy capital in these markets
through selective acquisitions. For example, this past year
in Chile, we announced the acquisition of 51% of
Cencosud S.A.’s financial services business. This transaction
will enable us to grow our credit card and consumer
lending business significantly and access two million new
customers in Chile. We already have a similar arrangement
with Cencosud in Colombia.
CREATING LONGER-TERM SHAREHOLDER VALUE
In 2014, we set out to focus on those areas that will have
the greatest impact and drive long-term value creation for
our shareholders. We refer to these areas as our three
focus priorities:
1. Being more focused on our customers;
2. Enhancing our leadership depth, deployment and
diversity; and
3. Being better organized to serve our customers while
reducing structural costs.
Throughout 2014, your Bank made significant progress
against these priorities. In particular, we:
• Strategically monetized our investment in CI Financial
Corp., generating a gain of $555 million which
bolstered our common equity Tier 1 capital ratio and
allows us to invest for growth in our businesses;
• Reorganized our wealth, insurance and global
transaction banking businesses by integrating these
operations within the other three business lines. This
simplified our operating model and brought decision-
making closer to our customers;
• Consolidated our corporate and commercial lending
businesses in Asia with the rest of our wholesale
banking businesses in Global Banking and Markets.
This will better align management with our customers
in Asia;
• Strengthened our leadership team through more than
280 organizational moves at the Vice-President and
above level; and
• Continued to build greater diversity in the Bank’s
leadership pipeline, increasing the proportion of
women in our senior leadership team to 27%. On a
related diversity matter, we are pleased that more than
30% of your Board of Directors is now made up of
women.
We also made the difficult decision to take a charge against
our fourth quarter earnings. While this was unusual for the
Bank, we believe it was a prudent action that will contribute
to the Bank’s future success.
Approximately $150 million of that charge related to
reducing about 1,500 positions across all levels of the
organization. About two-thirds of the position reductions
were efficiency-driven, the result of automating and
centralizing the mid-office function in our Canadian
branches. The remaining one-third related to optimizing
portions of our international branch network. Collectively,
these changes will allow us to be better organized to
efficiently serve our customers and deliver cost savings of
about $120 million annually beginning in 2016.
LOOKING AHEAD
Economic outlook:
In 2015, we expect to benefit from our diverse operating
model, which is designed to mitigate the impact of volatility
in any one region. We expect that developed market
economies will experience uneven growth, led by continued
BRANCHES
& OFFICES
EMPLOYEES
More than
1,100

CANADA
More than
36,000

CANADA
More than
2,000

INTERNATIONAL
More than
50,000


INTERNATIONAL
6 2014 Scotiabank Annual Report
growth in the U.S. and negligible growth in Europe. We
expect that our key international markets will experience
improved economic performance over the course of 2015,
particularly as they adjust to government reforms and
evolving fiscal and monetary policies.
Competition:
The global financial institutions we compete against have
generally returned to strength. We are also experiencing
increased competition in certain geographies and business
segments from new market entrants. Notwithstanding
increased competition, we remain well positioned and are
making the necessary investments in people, processes and
technology to deliver on the needs of new and existing
customers throughout our footprint.
Regulation:
The financial services industry has been subject to
increased regulation over the past several years, and we
are optimistic that we are through the majority of the
changes. Your Bank has been responsive to changes in
regulation and has invested considerably to adapt to the
new standards. Our liquidity profile is solid and our
common equity Tier 1 ratio is among the strongest in the
world. We are confident that, on balance, new regulations
have made us a stronger bank.
Continuing to build on a strong foundation:
Your Bank has a great foundation to continue to build
from: we have a strong culture; we have a shared pride in
our performance; we have a successful history; and our
footprint is unique and coveted by many banks around the
world. Throughout your Bank, employees place great value
on working together and they share a genuine desire to
serve our customers. We are confident that our strategy is
sound. By executing our strategy well, and making
meaningful progress against our focus priorities, the Bank
will be in a good position to perform within the ranges of
our medium-term performance objectives and create
longer-term shareholder value.
ACKNOWLEDGEMENTS
In closing, I would like to thank our 21 million customers
around the world for their business. It is a privilege for us to
serve our customers well. I also want to thank our
shareholders and the Board of Directors for your confidence
and continued support. And finally, I want to recognize all
Scotiabankers, more than 86,000 strong, who assist our
customers to be financially better off. Together, our future is
exceedingly bright.
MEDIUM-TERM FINANCIAL OBJECTIVES
RETURN ON EQUITY of 15-18%
EARNINGS PER
SHARE GROWTH 5-10%
ACHIEVE POSITIVE
OPERATING LEVERAGE
MAINTAIN STRONG CAPITAL RATIOS
AVERAGE
ASSETS BY
GEOGRAPHY
($ billions)
$
470
CANADA
$
117
U.S.
$
196
OTHER INTERNATIONAL
2014 Scotiabank Annual Report 7
1 2 3 4 5 6 7 8
Executive
Management Team
4
1. Brian Porter
President and Chief
Executive Officer
2. Michael Durland
Group Head and Chief
Executive Officer, Global
Banking and Markets
3. Dieter W. Jentsch
Group Head,
International Banking
4. Anatol von Hahn
Group Head,
Canadian Banking
5. Barbara Mason
Chief Human
Resources Officer
6. Stephen P. Hart
Chief Risk Officer
7. Sean D. McGuckin
Executive Vice President
and Chief Financial
Officer
8. Deborah M.
Alexander
Executive Vice President,
General Counsel and
Secretary
8 2014 Scotiabank Annual Report
10 11 12 13 14 15 16 17 9
9. Andrew Branion
Executive Vice President
and Chief Market Risk
Officer
10. Terry Fryett
Executive Vice President
and Chief Credit Officer
11. Marian Lawson
Executive Vice President,
Global Financial
Institutions and
Transaction Banking
12. Jeffrey C. Heath
Executive Vice President
and Group Treasurer
13. Robin S. Hibberd
Executive Vice President,
Retail Products and
Services, Canadian Banking
14. Kim B. McKenzie
Executive Vice President,
Information Technology
and Solutions
15. James McPhedran
Executive Vice President,
Retail Distribution,
Canadian Banking
16. James O’Sullivan
Executive Vice President,
Global Wealth Management
17. Marianne
Hasold-Schilter
Executive Vice President
and Chief Administrative
Officer, International
Banking
Annual Report Online Go online for a more detailed breakdown of this report, including more information on
Scotiabank’s executive management team.
media.scotiabank.com/AR/2014/en
2014 Scotiabank Annual Report 9
Board of
Directors
5
1 2 3 4 5 6 7
1. Thomas C. O’Neill
Chairman of the Board.
Scotiabank director since
May 26, 2008.
COMMITTEE
CHAIRS
2. Ronald A. Brenneman
Corporate director.
Executive and Risk
Committee Chair.
Scotiabank director since
March 28, 2000.
3. N. Ashleigh Everett
President, Corporate
Secretary and director
of Royal Canadian
Securities Limited.
Corporate Governance
Committee Chair.
Scotiabank director
since October 28, 1997.
4. John C. Kerr,
C.M., O.B.C., LL.D.
Corporate director.
Human Resources
Committee Chair.
Scotiabank director
since March 30, 1999.
5. Paul D. Sobey
Corporate director.
Audit and Conduct
Review Committee
Chair. Scotiabank
director since
August 31, 1999.
BOARD OF
DIRECTORS
6. Nora A. Aufreiter
Corporate director.
Scotiabank
director since
August 25, 2014.
7. Guillermo E. Babatz
Managing Partner
of Atik Capital, S.C.
Scotiabank director since
January 28, 2014.
10 2014 Scotiabank Annual Report
8 9 10 11 12 13 14 15
8. Brian J. Porter
President and Chief
Executive Officer of
Scotiabank. Scotiabank
director since April 9, 2013.
9. Indira V.
Samarasekera,
O.C., Ph.D.
President and Vice-Chancellor
of the University of Alberta.
Scotiabank director since
May 26, 2008.
10. C.J. Chen
Counsel to Rajah & Tann
Singapore LLP.
Scotiabank director since
October 30,1990.
11. Susan L. Segal
President and Chief Executive
Officer of the Americas Society
and Council of the Americas.
Scotiabank director since
December 2, 2011.
12. Charles H. Dallara, Ph.D.
Executive Vice Chairman of the
Board of Directors of Partners
Group Holding AG and
Chairman of the Americas.
Scotiabank director since
September 23, 2013.
13. David A. Dodge, O.C.
Senior advisor to Bennett
Jones. Scotiabank
director since April 8, 2010.
14. Barbara S. Thomas
Corporate director.
Scotiabank director
since September 28, 2004.
15. Aaron W. Regent
Founder and Managing
Partner of Magris Resources
Inc. Scotiabank director
since April 9, 2013.
Annual Report Online Go online for a more detailed breakdown of this report, including more information on
Corporate Governance.
media.scotiabank.com/AR/2014/en
2014 Scotiabank Annual Report 11
CFO
Message
6
Sean McGuckin
Executive Vice President
and Chief Financial Of?cer
Dear Fellow Shareholders,
I am pleased to introduce Management’s Discussion and Analysis
(MD&A) for fiscal 2014. Scotiabank is focusing on customers,
leadership and being better organized to serve customers while
reducing structural costs. This helped us deliver good performance
in 2014, with net income of $7,298 million, 10% higher than last
year’s results, during a time of slower and uneven global growth.
Diluted earnings per share (EPS) were $5.66 this
year, compared to $5.11 in 2013. Return on equity
(ROE) remained stable at 16.1%, compared to
16.6% last year. We continued to deliver consistent
dividend payments to you, raising the quarterly
dividends twice during the year. As a result,
dividends per share were $2.56 for the year, up 7%
from 2013.
This year’s earnings included a gain on the sale of a
majority of Scotiabank’s investment in CI Financial
Corp., and charges relating to certain non-recurring
items. Adjusting for these items, and notable items
last year, net income grew by $488 million or 7%,
and diluted EPS was $5.43, up 8% compared to
$5.04 in 2013. Underlying ROE was 15.5%
compared to 16.3% last year.
Total revenues (TEB) rose 11% from the prior year to
$24.0 billion, or 9% after adjusting for the items
mentioned above. Net interest income and net fee
and commission revenue both showed solid growth.
Revenue growth continued to outpace expense
growth in 2014, which resulted in positive operating
leverage of 2.0% after adjusting for the above-noted
non-recurring items.
Total provisions for credit losses were $1.7 billion,
up $415 million from last year, mainly from portfolio
growth and shifting asset mix in International
Banking and Canadian Banking’s retail portfolio.
The Bank continues to maintain strong, high-quality
capital levels, which positions it well for future business
growth. The Basel III all-in common equity Tier 1 ratio was
10.8%, well above last year, reflecting the impact of
internally generated capital, the CI gain and prudent
management of asset growth.
We continued to take advantage of selective acquisition
opportunities. We completed the acquisition of a 20%
equity interest in Canadian Tire’s financial services
business that will help us grow our customer base and
provide unique and relevant solutions to customers. We
also announced the acquisition of 51% of Cencosud
S.A.’s financial services business in Chile, the third largest
retailer in Latin America. This will strengthen our credit
card offering to customers and increase our scale in
Chile’s growing consumer lending market.
Scotiabank’s strategy has enabled us to deliver sound
results for you in 2014. This is consistent with our proven
track record – a total compound annual shareholder
return of 13% over the last five years and 10% over the
last 10 years. In 2015, we will invest in initiatives aimed at
delivering an excellent customer experience, which should
drive expanded business activity. With these investments,
coupled with the Bank’s industry-leading capital levels, the
Bank is well positioned to create even greater value for
our shareholders over the medium and long term.
The MD&A highlights our 2014 results in more detail and
provides our outlook for 2015.
12 2014 Scotiabank Annual Report
7
Reasons to invest
in Scotiabank
MD&A AT A GLANCE
COMMON SHARE INFORMATION
(1)
For the years ended October 31 2014 2013
(2)
2012
(2)
2011 2010 2009 2008 2007 2006 2005
Closing market price per
common share ($) 69.02 63.39 54.25 52.53 54.67 45.25 40.19 53.48 49.30 42.99
Dividends paid ($ per share) 2.56 2.39 2.19 2.05 1.96 1.96 1.92 1.74 1.50 1.32
Dividend yield (%)
(3)
3.8 4.1 4.2 3.7 3.9 5.4 4.3 3.4 3.3 3.3
Increase (decrease) in share price (%) 8.9 16.8 3.3 (3.9) 20.8 12.6 (24.9) 8.5 14.7 8.6
Total annual shareholder return (%)
(4)
13.2 21.7 7.6 (0.4) 25.7 18.8 (21.6) 12.2 18.4 12.1
Market capitalization ($ millions) (TSX) 83,969 76,612 64,252 57,204 57,016 46,379 39,865 52,612 48,783 42,568
Book value per common share ($) 36.96 33.23 28.99 24.20 22.68 20.55 18.94 17.45 17.13 15.64
Market value to book value multiple 1.9 1.9 1.9 2.2 2.4 2.2 2.1 3.1 2.9 2.7
Price to earnings multiple 12.1 12.3 10.3 11.3 14.0 13.6 13.1 13.2 13.7 13.5
RETURN ON EQUITY
(1)
%
16.1%
04 06 08 10 12
(2)
14
12
16
20
24
For more information, please see page 19.
RETURN TO
COMMON SHAREHOLDERS
SHARE PRICE APPRECIATION PLUS DIVIDENDS
REINVESTED, 2004=100
Scotiabank
S&P/TSX Banks
Total Return Index
S&P/TSX Composite
Total Return Index
04 06 08 10 12 14
100
250
200
150
300
For more information, please see page 19.
Total assets
$806
billion
Deposits
$554
billion
EARNINGS PER SHARE
(1)
DILUTED, DOLLARS PER SHARE
$5.66
04 06 08 10 12
(2)
14
2
3
4
6
5
For more information, please see page 19.
DIVIDEND GROWTH
DOLLARS PER SHARE
$2.56
04 06 08 10 12 14
0
1
2
3
For more information, please see page 44.
Loans
$424
billion
(1) Amounts prior to 2011 calculated under CGAAP.
(2) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS10 and IAS19) in 2014 (refer to Note 4 in the consolidated financial statements).
(3) Based on the average of the high and low common share price for the year.
(4) Total annual shareholder return assumes reinvestment of quarterly dividends, and therefore may not equal the sum of dividend and share price returns in the table.
2014 Scotiabank Annual Report 13
Enhanced Disclosure Task Force (EDTF) Recommendations
The Enhanced Disclosure Task Force (EDTF) was established by the
Financial Stability Board in May 2012 with the goal of developing
fundamental disclosure principles. On October 29, 2012 the EDTF
published its report, “Enhancing the Risk Disclosures of Banks”, which
sets forth recommendations around improving risk disclosures and
identifies existing leading practice risk disclosures.
Below is the index of all these recommendations to facilitate
easy reference in the Bank’s annual report and other public disclosure
documents available on www.scotiabank.com/investor relations.
Reference Table for EDTF
Recommendation Pages
Supplementary
Regulatory
Capital
Disclosure Type of risk Number Disclosure MD&A Financial Statements
General 1 The index of risks to which the business is exposed. 69, 71, 75
2 The Bank’s risk terminology, measures and key parameters. 67
3 Top and emerging risks, and the changes during the reporting period. 30-33, 52-53
4 Discussion on the regulatory development and plans to meet new regulatory ratios. 42, 84, 96-97
Risk governance,
risk management
and business
model
5 The Bank’s Risk Governance’s structure. 65-66
6 Description of risk culture and procedures applied to support the culture. 67-68
7 Description of key risks from the Bank’s business model. 69-70
8 Stress testing use within the Bank’s risk governance and capital management. 68
Capital
adequacy and
risk-weighted
assets
9 Pillar 1 capital requirements, and the impact for global systemically important banks. 41-42 173 2
10 a) Regulatory capital components.
b) Reconciliation of the accounting balance sheet to the regulatory balance sheet.
43 174 4, 8
5
11 Flow statement of the movements in regulatory capital since the previous reporting period,
including changes in common equity tier 1, additional tier 1 and tier 2 capital.
43-44 7, 8
12 Discussion of targeted level of capital, and the plans on how to establish this. 41-42
13 Analysis of risk-weighted assets by risk type, business, and market risk RWAs. 46-49, 70, 107 153, 191-195, 199-200 11-13
14 Analysis of the capital requirements for each Basel asset class. 46-49 153, 191-195 11-20, 24-26
15 Tabulate credit risk in the Banking Book. 46-49 194-195 17-20
16 Flow statements reconciling the movements in risk-weighted assets for each risk-weighted
asset type.
46, 49 10
17 Discussion of Basel III Back-testing requirement including credit risk model performance
and validation.
48-49
Liquidity 18 Analysis of the Bank’s liquid assets. 81-84
Funding 19 Encumbered and unencumbered assets analyzed by balance sheet category. 83-84
20 Consolidated total assets, liabilities and off-balance sheet commitments analyzed by
remaining contractual maturity at the balance sheet date.
200-201
21 Analysis of the Bank’s sources of funding and a description of the Bank’s funding strategy. 84-86
Market risk 22 Linkage of market risk measures for trading and non-trading portfolios and the balance
sheet.
80
23 Discussion of significant trading and non-trading market risk factors. 76-80 196-199
24 Discussion of changes in period on period VaR results as well as VaR assumptions,
limitations, backtesting and validation.
76-80 196-199
25 Other risk management techniques e.g. stress tests, stressed VaR, tail risk and
market liquidity horizon.
76-80 199
Credit risk 26 Analysis of the aggregate credit risk exposures, including details of both personal
and wholesale lending.
29-31, 98-100 159-160, 193-194 17-23
(1)
12-20
27 Discussion of the policies for identifying impaired loans, defining impairments and
renegotiated loans, and explaining loan forbearance policies.
131-132, 161
28 Reconciliations of the opening and closing balances of impaired loans and impairment
allowances during the year.
28, 99, 101, 103 161 18-19
(1)
29 Analysis of counterparty credit risk that arises from derivative transactions. 74 151, 153
30 Discussion of credit risk mitigation, including collateral held for all sources of credit risk. 73, 74
Other risks 31 Quantified measures of the management of operational risk. 49, 87-88
32 Discussion of publicly known risk items. 52-53
(1) In the Supplementary Financial Information Package.
14 2014 Scotiabank Annual Report
8
Management’s
Discussion and Analysis
Table of Contents
16 Forward-looking statements
17 Non-GAAP measures
18 Financial highlights
OVERVIEW
19 Financial results
21 Outlook
21 Shareholder returns
21 Impact of foreign currency
translation
21 Impact of acquisitions
GROUP FINANCIAL PERFORMANCE
22 Total revenue
22 Net interest income
24 Net fee and commission revenues
25 Other operating income
26 Operating expenses
27 Taxes
27 Credit quality
34 Fourth quarter review
36 Summary of quarterly results
37 Financial results review: 2013
vs 2012
GROUP FINANCIAL CONDITION
40 Statement of financial position
41 Capital management
50 Off-balance sheet arrangements
52 Financial instruments
52 Selected credit instruments – publically
known risk items
BUSINESS LINES
54 Overview
56 Canadian Banking
58 International Banking
60 Global Wealth & Insurance
62 Global Banking & Markets
64 Other
RISK MANAGEMENT
65 Overview
71 Credit risk
75 Market risk
81 Liquidity risk
87 Other risks
87 Operational risk
88 Reputational risk
88 Environmental risk
89 Insurance risk
89 Strategic risk
CONTROLS AND ACCOUNTING POLICIES
90 Controls and procedures
90 Critical accounting estimates
96 Future accounting developments
96 Regulatory developments
97 Related party transactions
SUPPLEMENTARY DATA
98 Geographic information
100 Credit risk
105 Revenues and expenses
107 Selected quarterly information
108 Eleven-year statistical review
2014 Scotiabank Annual Report 15
MANAGEMENT’S DISCUSSION AND ANALYSIS
FORWARD LOOKING STATEMENTS
Our public communications often include oral or written forward-
looking statements. Statements of this type are included in this
document, and may be included in other filings with Canadian
securities regulators or the U.S. Securities and Exchange Commission,
or in other communications. All such statements are made pursuant to
the “safe harbour” provisions of the U.S. Private Securities Litigation
Reform Act of 1995 and any applicable Canadian securities legislation.
Forward-looking statements may include, but are not limited to,
statements made in this Management’s Discussion and Analysis in the
Bank’s 2014 Annual Report under the headings “Overview-Outlook,”
for Group Financial Performance “Outlook,” for each business segment
“Outlook” and in other statements regarding the Bank’s objectives,
strategies to achieve those objectives, expected financial results
(including those in the area of risk management), and the outlook for
the Bank’s businesses and for the Canadian, U.S. and global
economies. Such statements are typically identified by words or phrases
such as “believe,” “expect,” “anticipate,” “intent,” “estimate,”
“plan,” “may increase,” “may fluctuate,” and similar expressions of
future or conditional verbs, such as “will,” “should,” “would” and
“could.”
By their very nature, forward-looking statements involve numerous
assumptions, inherent risks and uncertainties, both general and
specific, and the risk that predictions and other forward-looking
statements will not prove to be accurate. Do not unduly rely on
forward-looking statements, as a number of important factors, many of
which are beyond our control, could cause actual results to differ
materially from the estimates and intentions expressed in such forward-
looking statements. These factors include, but are not limited to: the
economic and financial conditions in Canada and globally; fluctuations
in interest rates and currency values; liquidity; significant market
volatility and interruptions; the failure of third parties to comply with
their obligations to us and our affiliates; the effect of changes in
monetary policy; legislative and regulatory developments in Canada
and elsewhere, including changes in tax laws; the effect of changes to
our credit ratings; amendments to, and interpretations of, risk-based
capital guidelines and reporting instructions and liquidity regulatory
guidance; operational and reputational risks; the risk that the Bank’s
risk management models may not take into account all relevant factors;
the accuracy and completeness of information the Bank receives on
customers and counterparties; the timely development and
introduction of new products and services in receptive markets; the
Bank’s ability to expand existing distribution channels and to develop
and realize revenues from new distribution channels; the Bank’s ability
to complete and integrate acquisitions and its other growth strategies;
changes in accounting policies and methods the Bank uses to report its
financial condition and financial performance, including uncertainties
associated with critical accounting assumptions and estimates (See
“Controls and Accounting Policies - Critical accounting estimates” in
the Bank’s 2014 Annual Report, as updated by quarterly reports); the
effect of applying future accounting changes (See “Controls and
Accounting Policies - Future accounting developments” in the Bank’s
2014 Annual Report, as updated by quarterly reports); global capital
markets activity; the Bank’s ability to attract and retain key executives;
reliance on third parties to provide components of the Bank’s business
infrastructure; unexpected changes in consumer spending and saving
habits; technological developments; fraud by internal or external
parties, including the use of new technologies in unprecedented ways
to defraud the Bank or its customers; increasing cyber security risks
which may include theft of assets, unauthorized access to sensitive
information or operational disruption; consolidation in the Canadian
financial services sector; competition, both from new entrants and
established competitors; judicial and regulatory proceedings; acts of
God, such as earthquakes and hurricanes; the possible impact of
international conflicts and other developments, including terrorist acts
and war on terrorism; the effects of disease or illness on local, national
or international economies; disruptions to public infrastructure,
including transportation, communication, power and water; and the
Bank’s anticipation of and success in managing the risks implied by the
foregoing. A substantial amount of the Bank’s business involves
making loans or otherwise committing resources to specific companies,
industries or countries. Unforeseen events affecting such borrowers,
industries or countries could have a material adverse effect on the
Bank’s financial results, businesses, financial condition or liquidity.
These and other factors may cause the Bank’s actual performance to
differ materially from that contemplated by forward-looking
statements. For more information, see the “Risk Management” section
starting on page 65 of the Bank’s 2014 Annual Report.
Material economic assumptions underlying the forward-looking
statements contained in this document are set out in the 2014 Annual
Report under the heading “Overview-Outlook,” as updated by
quarterly reports; and for each business segment “Outlook”. The
“Outlook” sections in this document are based on the Bank’s views
and the actual outcome is uncertain. Readers should consider the
above-noted factors when reviewing these sections.
The preceding list of important factors is not exhaustive. When
relying on forward-looking statements to make decisions with respect
to the Bank and its securities, investors and others should carefully
consider the preceding factors, other uncertainties and potential
events. The Bank does not undertake to update any forward-looking
statements, whether written or oral, that may be made from time to
time by or on its behalf.
Additional information relating to the Bank, including the Bank’s
Annual Information Form, can be located on the SEDAR website at
www.sedar.com and on the EDGAR section of the SEC’s website at
www.sec.gov.
December 5, 2014
16 2014 Scotiabank Annual Report
MANAGEMENT’S DI SCUSSI ON AND ANALYSI S | OVERVIEW
Non-GAAP Measures
The Bank uses a number of financial measures to assess its performance.
Some of these measures are not calculated in accordance with Generally
Accepted Accounting Principles (GAAP), which are based on International
Financial Reporting Standards (IFRS), are not defined by GAAP and do not
have standardized meanings that would ensure consistency and
comparability between companies using these measures. These non-GAAP
measures are used throughout this report and defined below.
Assets under administration (AUA)
AUA are assets administered by the Bank which are beneficially owned by
clients and therefore not reported on the Bank’s Consolidated Statement
of Financial Position. Services provided for AUA are of an administrative
nature, such as trusteeship, custodial, safekeeping, income collection and
distribution, securities trade settlements, customer reporting, and other
similar services.
Assets under management (AUM)
AUM are assets managed by the Bank on a discretionary basis and in
respect of which the Bank earns investment management fees. AUM are
beneficially owned by clients and are therefore not reported on the Bank’s
Consolidated Statement of Financial Position. Some AUM are also
administered assets and are therefore included in assets under
administration.
Adjusted diluted earnings per share
The adjusted diluted earnings per share is calculated by adjusting the
diluted earnings per share to add back the non-cash, after-tax
amortization of intangible assets related to acquisitions (excluding
software).
Economic equity and return on economic equity
For internal reporting purposes, the Bank attributes capital to its business
segments based on their risk profile and uses a methodology that
considers credit, market, operational and other risks inherent in each
business segment. The amount of risk capital attributed is commonly
referred to as economic equity. The economic equity methodology,
models and assumptions are updated annually and applied prospectively.
Return on economic equity for the business segments is calculated as a
ratio of net income attributable to common shareholders of the business
segment and the economic equity attributed.
Core banking assets
Core banking assets are average earning assets excluding bankers’
acceptances and total average assets related to the Global Capital Markets
business within Global Banking & Markets.
Core banking margin (TEB)
This ratio represents net interest income (on a taxable equivalent basis)
divided by average core banking assets. This is consistent with the Bank’s
Consolidated Statement of Income presentation where net interest income
from trading operations is recorded in trading revenues included in other
operating income.
Operating leverage (TEB)
The Bank defines operating leverage as the rate of growth in total revenue
(on a taxable equivalent basis), less the rate of growth in operating
expenses.
Productivity ratio (TEB)
Management uses the productivity ratio as a measure of the Bank’s
efficiency. This ratio represents operating expenses as a percentage of total
revenue (TEB).
Return on equity
Return on equity is a profitability measure that presents the net income
attributable to common shareholders as a percentage of common
shareholders’ equity. The Bank calculates its return on equity using average
common shareholders’ equity.
Regulatory capital ratios
Regulatory capital ratios, such as Common Equity Tier 1 (CET1), Tier 1 and
Total Capital ratios, have standardized meanings as defined by the Office
of the Superintendent of Financial Institutions, Canada.
Taxable equivalent basis
The Bank analyzes net interest income, other operating income, and
total revenue on a taxable equivalent basis (TEB). This methodology
grosses up tax-exempt income earned on certain securities reported in
either net interest income or other operating income to an equivalent
before tax basis. A corresponding increase is made to the provision for
income taxes; hence, there is no impact on net income. Management
believes that this basis for measurement provides a uniform
comparability of net interest income and other operating income
arising from both taxable and non-taxable sources and facilitates a
consistent basis of measurement. While other banks also use TEB, their
methodology may not be comparable to the Bank’s methodology. For
purposes of segmented reporting, a segment’s revenue and provision
for income taxes are grossed up by the taxable equivalent amount. The
elimination of the TEB gross up is recorded in the Other segment. The
TEB gross up to net interest income, other operating income, total
revenue, and provision for income taxes are presented below:
T1 TEB gross up
For the year ended October 31 ($ millions) 2014 2013 2012
Net interest income $ 17 $ 15 $ 17
Other operating income 337 297 271
Total revenue and provision for income taxes $ 354 $ 312 $ 288
Tax normalization adjustment of net income from associated
corporations
For business line performance assessment and reporting, net income
from associated corporations, which is an after-tax number, is adjusted
to normalize for income taxes.
The tax normalization adjustment grosses up the amount of net income
from associated corporations and normalizes the effective tax rate in
the business lines to better present the contribution of the associated
corporations to the business line results.
2014 Scotiabank Annual Report 17
MANAGEMENT’S DISCUSSION AND ANALYSIS
T2 Financial highlights
IFRS CGAAP
As at and for the years ended October 31
(1)
2014 2013
(2)
2012
(2)
2011 2010
Operating results ($ millions)
Net interest income 12,305 11,350 9,970 9,014 8,621
Net interest income (TEB
(3)
) 12,322 11,365 9,987 9,035 8,907
Non-interest revenue 11,299 9,949 9,676 8,296 6,884
Non-interest revenue (TEB
(3)
) 11,636 10,246 9,947 8,562 6,884
Total revenue 23,604 21,299 19,646 17,310 15,505
Total revenue (TEB
(3)
) 23,958 21,611 19,934 17,597 15,791
Provision for credit losses 1,703 1,288 1,252 1,076 1,239
Operating expenses 12,601 11,664 10,436 9,481 8,182
Provision for income taxes 2,002 1,737 1,568 1,423 1,745
Provision for income taxes (TEB
(3)
) 2,356 2,049 1,856 1,710 2,031
Net income 7,298 6,610 6,390 5,330 4,339
Net income attributable to common shareholders 6,916 6,162 5,974 4,965 4,038
Operating performance
Basic earnings per share ($) 5.69 5.15 5.27 4.63 3.91
Diluted earnings per share ($) 5.66 5.11 5.18 4.53 3.91
Adjusted diluted earnings per share
(3)(4)
($) 5.72 5.17 5.23 4.58 3.94
Return on equity
(3)
(%) 16.1 16.6 19.9 20.3 18.3
Productivity ratio (%)(TEB
(3)
) 52.6 54.0 52.4 53.9 51.8
Core banking margin (%)(TEB
(3)
) 2.39 2.31 2.31 2.32 N/A
(5)
Financial position information ($ millions)
Cash and deposits with financial institutions
(6)
56,730 53,338 47,337 38,723 39,530
Trading assets 113,248 96,489 87,596 75,799 N/A
(5)
Loans
(6)
424,309 402,215 352,578 319,056 284,224
Total assets 805,666 743,644 668,225 594,423 526,657
Deposits
(6)(7)
554,017 517,887 465,689 421,234 361,650
Common equity 44,965 40,165 34,335 26,356 23,656
Preferred shares 2,934 4,084 4,384 4,384 3,975
Assets under administration
(3)
427,547 377,766 327,977 297,668 243,817
Assets under management
(3)
164,820 145,470 114,694 102,733 53,532
Capital measures
(2)(8)
Common Equity Tier 1 (CET1) ratio (%) 10.8 9.1 N/A N/A N/A
Tier 1 capital ratio (%) 12.2 11.1 13.6 12.2 11.8
Total capital ratio (%) 13.9 13.5 16.7 13.9 13.8
Assets to capital multiple 17.1 17.1 15.0 16.6 17.0
CET1 risk-weighted assets ($ millions)
(9)
312,473 288,246 253,309 233,970 215,034
Credit quality
Net impaired loans ($ millions)
(10)
2,002 1,808 2,005 1,957 3,044
Allowance for credit losses ($ millions) 3,641 3,273 2,977 2,689 2,787
Net impaired loans as a % of loans and acceptances
(6)(10)
0.46 0.44 0.55 0.60 1.04
Provision for credit losses as a % of average loans and acceptances (annualized)
(6)
0.40 0.32 0.36 0.34 0.45
Common share information
Share price ($)(TSX)
High 74.93 64.10 57.18 61.28 55.76
Low 59.92 52.30 47.54 49.00 44.12
Close 69.02 63.39 54.25 52.53 54.67
Shares outstanding (millions)
Average – Basic 1,214 1,195 1,133 1,072 1,032
Average – Diluted 1,222 1,209 1,160 1,108 1,034
End of period 1,217 1,209 1,184 1,089 1,043
Dividends per share ($) 2.56 2.39 2.19 2.05 1.96
Dividend yield (%)
(11)
3.8 4.1 4.2 3.7 3.9
Market capitalization ($ millions)(TSX) 83,969 76,612 64,252 57,204 57,016
Book value per common share ($) 36.96 33.23 28.99 24.20 22.68
Market value to book value multiple 1.9 1.9 1.9 2.2 2.4
Price to earnings multiple 12.1 12.3 10.3 11.3 14.0
Other information
Employees 86,932 86,690
(7)
81,497 75,362 70,772
Branches and offices 3,288 3,330 3,123 2,926 2,784
(1) Amounts and financial ratios for periods after 2010 were prepared in accordance with International Financial Reporting Standards (IFRS). Amounts and financial ratios for 2010 were prepared in accordance with Canadian
Generally Accepted Accounting Principles (CGAAP).
(2) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4 in the consolidated financial statements). Capital measures have
not been restated for the new and amended IFRS standards as they represent the actual amounts in the period for regulatory purposes.
(3) Refer to page 17 for a discussion of non-GAAP measures.
(4) Amounts for periods before 2013 have been restated to reflect the current period definition. Refer to non-GAAP measures on page 17.
(5) N/A not applicable/not presented under CGAAP.
(6) Amounts and related ratios for 2012 and 2011 have been restated to reflect the current period presentation of deposits with financial institutions and cash collateral on securities borrowed and derivative transactions.
(7) Prior period amounts have been restated to conform with current period presentation.
(8) Effective November 1, 2012 regulatory capital ratios are determined in accordance with Basel III rules on an all-in basis (Refer to page 41). Comparative amounts for prior periods were determined in accordance with Basel II rules
and have not been restated.
(9) As at October 31, 2014, credit valuation adjustment (CVA) risk-weighted assets were calculated using scalars of 0.57, 0.65 and 0.77 to compute CET1, Tier 1 and Total Capital ratios, respectively.
(10) Excludes Federal Deposit Insurance Corporation (FDIC) guaranteed loans related to the acquisition of R-G Premier Bank of Puerto Rico.
(11) Based on the average of the high and low common share price for the year.
18 2014 Scotiabank Annual Report
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Overview
Financial Results
Scotiabank had good performance in 2014 with respect to its medium-term financial objectives.
Net income was $7,298 million, $688 million or 10% higher than last year’s results. Diluted
earnings per share (EPS) were $5.66 as compared to $5.11 in 2013. Return on Equity was 16.1%
compared to 16.6% last year.
The current year’s net income included an after-tax gain of $555 million on the sale of a majority
of the Bank’s holding in CI Financial Corp. (“the disposition”), after-tax restructuring charges of
$110 million (“restructuring charges”), and after-tax impact of other notable items of
$155 million, or collectively 23 cents per share (refer T3). Last year’s net income benefited from a
non-recurring after-tax benefit of $90 million or 7 cents per share in International Banking.
Adjusting for these items, net income grew by $488 million or 7% and diluted earnings per share
were $5.43 as compared to $5.04 in 2013, an increase of 8%. Underlying Return on Equity was
15.5% compared to 16.3% last year.
Total revenues on a taxable equivalent basis (TEB) rose 11% from the prior year to
$23,958 million. Adjusting for the notable items (refer T3) in 2014 of $566 million and in 2013
of $150 million, underlying revenues increased by 9%. The positive impact of foreign currency
translation contributed approximately 2% of this growth.
Net interest income (TEB) increased $957 million or 8% to $12,322 million, primarily from
growth in core banking assets and improved margin, including the favourable impact of foreign
currency translation.
Net fee and commission revenue was $7,737 million, up $820 million or 12% year over year.
Growth was primarily in wealth management fees, from higher mutual fund fees and brokerage
commissions. Banking revenue growth was broad-based across all revenue categories.
Other operating income (TEB) was $3,899 million, an increase of $570 million or 17% from the
prior year. Adjusting for the notable items in 2014 of $566 million and $150 million in the prior
year (refer T3), the underlying increase in operating income was 5%.
The total provision for credit losses was $1,703 million in 2014, up $415 million from last year.
Adjusting for the notable item of $62 million (refer T3), the underlying increase was $353 million.
Additional loan loss provisions primarily in the Caribbean hospitality portfolio and a change in
loss parameters in the Canadian retail portfolio accounted for $109 million of the increase. The
remainder of the increase reflected higher provisions in International and Canadian Banking.
Operating expenses rose 8% over last year to $12,601 million. Adjusting for the notable items in
2014 of $203 million and $74 million in the prior year (refer T3), underlying expenses increased
$808 million or 7%. The negative impact of foreign currency translation contributed to 1% of
this growth. The remaining increase reflects higher compensation costs and initiatives to support
business growth. Operating leverage was positive 2.8%, or positive 2.0% after adjusting for the
above noted items.
The provision for income taxes was $2,002 million, an increase from $1,737 million last year. The
Bank’s overall effective tax rate for the year was 21.5% compared to 20.8% for 2013. The
increase in the effective tax rate was due primarily to higher taxes in foreign jurisdictions and a
proportionately lower benefit from tax-exempt income, partially offset by lower taxes on the
disposition gain in the current year.
The all-in Basel III common equity Tier 1 ratio was 10.8% as at October 31, 2014, well above last
year and the regulatory minimum, in part reflecting the impact of the disposition gain.
C1 Earnings per share (diluted)
(1)
04 06 08 10 12
(2)
14
2
3
4
6
5
(1) Amounts prior to 2011 calculated under CGAAP
(2) Certain amounts are retrospectively adjusted to reflect
the adoption of new and amended IFRS standards
(IFRS 10 and IAS 19) in 2014 (refer to Note 4 in
the consolidated financial statements)
C2 Closing common share price
as at October 31
04 06 08 10 12 14
30
40
50
60
70
C3 Return on equity
(1)
04 06 08 10 12
(2)
14
12
16
20
24
(1) Amounts prior to 2011 calculated under CGAAP
(2) Certain amounts are retrospectively adjusted to reflect
the adoption of new and amended IFRS standards
(IFRS 10 and IAS 19) in 2014 (refer to Note 4 in
the consolidated financial statements)
C4 Return to common shareholders
Share price appreciation plus dividends reinvested,
2004=100
04 06 08 10 12 14
Scotiabank
S&P/TSX Banks Total Return Index
S&P/TSX Composite Total Return Index
100
250
200
150
300
2014 Scotiabank Annual Report 19
MANAGEMENT’S DISCUSSION AND ANALYSIS
Notable Items
There were several notable items in 2014 totaling a net benefit of $290 million ($301 million pre-tax), or approximately 23 cents per share as outlined
in the table below.
T3 Notable Items
2014 2013 2012
For the years ended October 31
($ millions, except EPS) Notes Pre-tax After-tax
EPS
Impact Pre-tax After-tax
EPS
Impact Pre-tax After-tax
EPS
Impact
Gain on sale
Sale of holdings in CI Financial Corp. 1 $ 643 $ 555 $ 0.45 $ – $ – $ – $ – $ – $ –
Sale of subsidiary by Thanachart Bank – – – 150 150 0.12 – – –
Sale of real estate assets – – – – – – 838 708 0.62
Restructuring charges 2 (148) (110) (0.09) (27) (20) (0.02) – – –
Provision for credit losses
Unsecured bankrupt retail accounts in Canada 3 (62) (46) (0.04) – – – – – –
Increase in collective allowance – – – – – – (100) (74) (0.06)
Valuation adjustments
Funding valuation adjustment 4 (30) (22) (0.02) – – – – – –
Revaluation of monetary assets in Venezuela 5 (47) (47) (0.04) – – – – – –
Acquisition-related receivables in Puerto Rico – – – (47) (40) (0.03) – – –
Legal provisions 6 (55) (40) (0.03) – – – – – –
Total $ 301 $ 290 $ 0.23 $ 76 $ 90 $ 0.07 $ 738 $634 $ 0.56
By Business line
Canadian Banking $ (98) $ (73) $ – $ – $ – $ –
International Banking (88) (79) 76 90 – –
Global Wealth & Insurance 604 526 – – – –
Global Banking & Markets (31) (22) – – – –
Other (86) (62) – – 738 634
Total $ 301 $ 290 $ 0.23 $ 76 $ 90 $ 0.07 $ 738 $634 $ 0.56
By Consolidated Statement of Income line
Trading revenues $ (30) $ (22) $ – $ – $ – $ –
Other operating income – other 596 508 150 150 838 708
Other operating income/Total revenue 566 486 – 150 150 – 838 708 –
Provision for credit losses (62) (46) – – (100) (74)
Operating expenses (203) (150) (74) (60) – –
Total $ 301 $ 290 $ 0.23 $ 76 $ 90 $ 0.07 $ 738 $634 $ 0.56
Notes
(1) Sale of majority of Bank’s holding in CI Financial Corp.
In the third quarter of 2014, the Bank sold a majority of its holding in CI
Financial Corp. resulting in an after-tax gain of $555 million ($643 million
pre tax) or 45 cents per share. This included an after-tax unrealized gain of
$152 million on the reclassification of the Bank’s remaining investment in
CI Financial Corp. to available-for-sale securities.
(2) Restructuring charges
The Bank recorded restructuring charges of $148 million ($110 million
after tax), the majority relating to employee severance charges. These
charges will drive greater operational efficiencies. In Canada, the charges
relate to recent initiatives to centralize and automate several mid-office
branch functions, as well as reductions in required wealth management
operational support. In International Banking, the charges are primarily for
closing or downsizing approximately 120 branches, which will allow us to
focus on high-growth markets, minimize branch overlap, and realize
synergies resulting from recent acquisitions. The Bank also made a series of
changes to simplify its leadership structure and operating model, recorded
in the Other segment.
(3) Provision for credit losses
The Bank changed its write-off policy on unsecured bankrupt retail
accounts in Canada in order to accelerate write-offs upon notification of a
bankruptcy filing. As a result, a charge of $62 million ($46 million after tax)
was recorded.
(4) Funding valuation adjustment
During the fourth quarter of 2014, the Bank enhanced the fair value
methodology and recognized a funding valuation adjustment (FVA) charge
of $30 million ($22 million after tax), to reflect the implied funding cost on
uncollateralized derivative instruments.
(5) Venezuela
Venezuela has been designated as hyper-inflationary and measures of
exchange controls have been imposed by the Venezuelan government.
These restrictions have limited the Bank’s ability to repatriate cash and
dividends out of Venezuela.
The Bank’s Venezuelan Bolivar (VEF) exposures include its investment in
Banco del Caribe, and unremitted dividends and other cash amounts
(“monetary assets”) in Venezuela.
During the year, two new exchange rates have been announced by the
Venezuelan government, SICAD 1 (1 USD to 11 VEF) and SICAD II
(1 USD to 50 VEF). The official exchange rate, as published by the
Central Bank of Venezuela, is 1 USD to 6.3 VEF. Currently, the Bank
has concluded that the SICAD II is the most likely rate that will be
available to the Bank for any future remittances.
As at October 31, 2014, the Bank has remeasured its net investment
and monetary assets at the SICAD II rate. As a result, the Bank has
recorded a charge of $47 million in the Consolidated Statement of
Income representing the revaluation impact on the monetary assets
and a reduction in carrying value of the net investment of $129 million
has been charged to Other Comprehensive Income.
(6) Legal provision
The Bank recorded a legal provision of approximately $55 million ($40
million after tax) related to certain ongoing legal claims.
20 2014 Scotiabank Annual Report
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Outlook
The pace of growth in many overseas economies remains slow and
uneven. Sluggish activity in the euro zone has been reinforced by
renewed weakness in the region’s growth leader, Germany. Japan’s
nascent recovery and rebound in inflation have been pressured by the
hefty increase in consumption taxes last spring. Some large emerging
market economies, Brazil and Russia for example, have continued to
decelerate alongside lacklustre global growth and moderating
commodity prices, especially oil. Even the globe’s growth leader, China,
has posted more moderate output gains in response to reduced
international trade and domestic efforts to rein in excess credit in the
property market.
In contrast, the U.S. economy is regaining momentum, with consumer
spending buoyed by pent-up demand, increasing employment, and
improved household balance sheets. Industrial output is
being underpinned by strengthening orders for machinery and
equipment, rising oil and gas production, and increasing capital
investments. Manufacturing activity in Canada is benefiting from
improving conditions in the United States as well as a lower-valued
exchange rate. Mexico and a number of Latin American economies are
piggybacking on the improving U.S. demand, with weaker local
currencies providing an added boost.
Internationally, the drop in oil prices and longer-term borrowing costs
should help support global activity, as will pro-growth initiatives in
many underperforming regions around the world alongside the
strengthening in the United States. The Bank’s presence in the markets
expected to show economic growth, along with its diversification and
strong capital levels, will position the Bank to grow earnings in 2015
and beyond.
Shareholder Returns
Amidst equity market volatility and mixed stock performance, the Bank
delivered a positive total shareholder return of 13.2%, a decrease from
21.7% in 2013, as shown in Table 4.
The total compound annual shareholder return on the Bank’s shares
over the past five years was 13.1%, and 9.9% over the past 10 years.
This exceeded the total return of the S&P/TSX Composite Index, which
was 9.1% over the past five years and 8.0% over the last ten years, as
shown in Chart 4.
Quarterly dividends were raised twice during the year – a 3% increase
effective in the second quarter and a further 3% effective in the fourth
quarter. As a result, dividends per share totaled $2.56 for the year, up
7% from 2013. With a payout ratio of 45% for the year, the Bank was
within its target payout range of 40-50%.
The Bank’s Return on Equity was 16.1% for fiscal 2014 compared to
16.6% in 2013, due in part to higher capital levels.
T4 Shareholder returns
For the years ended October 31 2014 2013 2012 2011 2010
Closing market price per common
share ($) 69.02 63.39 54.25 52.53 54.67
Dividends paid ($ per share) 2.56 2.39 2.19 2.05 1.96
Dividend yield (%)
(1)
3.8 4.1 4.2 3.7 3.9
Increase (decrease) in share
price (%) 8.9 16.8 3.3 (3.9) 20.8
Total annual shareholder
return (%)
(2)
13.2 21.7 7.6 (0.4) 25.7
(1) Dividend yield is calculated as the dividend paid divided by the average of the high stock price and the low
stock price for the year.
(2) Total annual shareholder return assumes reinvestment of quarterly dividends, and therefore may not equal
the sum of dividend and share price returns in the table.
Impact of Foreign Currency Translation
The impact of foreign currency translation on net income is shown in
Table 5.
T5 Impact of foreign currency translation
Average exchange rate 2014 2013
U.S. dollar/Canadian dollar 0.918 0.981
Impact on income
(1)
($ millions except EPS)
2014
vs. 2013
2013
vs. 2012
Net interest income $ 191 $ 71
Net fees and commission revenues 99 38
Other operating income
(2)
96 (25)
Operating expenses (134) (65)
Other items (net of tax) (70) (10)
Net income $ 182 $ 9
Earnings per share (diluted) $ 0.15 $ 0.01
Impact by business line ($ millions)
Canadian Banking $ 9 $ 1
International Banking
(2)
85 22
Global Wealth & Insurance 10 2
Global Banking & Markets 74 6
Other
(2)
4 (22)
$ 182 $ 9
(1) Includes impact of all currencies.
(2) Includes the impact of foreign currency hedges.
Impact of Acquisitions
There was no significant impact to the Bank’s reported net income in
2014 from acquisitions.
2014 Scotiabank Annual Report 21
MANAGEMENT’S DISCUSSION AND ANALYSIS
C5 Net interest income by business line
(1)
TEB, $ millions
12 13 14
8000
10000
6000
4000
2000
14000
12000
Canadian Banking
International Banking
Global Wealth & Insurance
Global Banking & Markets
(1) Excludes Other segment
C6 Net fee and commission revenues
by business line
(1)
$ millions
12
2000
10000
8000
Canadian Banking
International Banking
Global Wealth & Insurance
Global Banking & Markets
4000
6000
13 14
(1) Excludes Other segment
C7 Average core banking assets and margin
TEB, $ billions
12 13 14
450
300
150
600
1.5
1.0
0.5
2.5
2.0
Average Core Banking Assets
Core Banking Margin (%)
C8 Other operating income
by business line
(1)
TEB, $ millions
12 13 14
1000
4000
3000
Canadian Banking
International Banking
Global Wealth & Insurance
Global Banking & Markets
2000
(1) Excludes Other segment
GROUP FINANCIAL PERFORMANCE
Total revenue
Total revenue (TEB) was $23,958 million in 2014, an increase of $2,347 million or 11% from the
prior year. Revenue growth benefited from strong growth in net interest income, fee and
commission revenues and the impact of notable items (refer T3) in other operating income. Other
operating income increased $570 million or 17% from 2013. Adjusting for the notable items in
2014 of $566 million and $150 million in the prior year (refer T3), total revenue growth was 9%
including 2% from the positive impact of foreign currency translation.
The increase in net interest income (TEB) of $957 million or 8% was due to growth in average
core banking assets and a widening of the core banking margin, and included a favourable
impact of foreign currency translation of $191 million. Higher net interest income in Canadian
Banking was driven by an increase in both average earning assets and the margin. International
Banking’s 12% growth in average earning assets was partly offset by a reduction in the margin.
There was strong loan growth in Latin America, including 13% in Mexico and 14% in Colombia.
Net fee and commission revenue was $820 million or 12% higher than last year, including
$99 million from the positive impact of foreign currency translation. Strong growth in wealth
management revenues, banking revenues and underwriting and other advisory fees all
contributed to this increase. Wealth management revenues increased from higher mutual fund
fees and brokerage revenues. Growth in banking revenues was widespread with increases in
credit cards, deposit and payment services, credit fees and cash management fees. Underwriting
and other advisory fees increased primarily from significant growth in equity and debt issues and
from increased advisory activities in investment banking.
Other operating income (TEB), adjusting for notable items, was up $154 million or 5%. The
increase was primarily from higher net gains on investment securities, largely offset by lower
trading revenues, primarily in fixed income, and lower earnings from investments in associated
corporations mainly due to the disposition.
Net Interest Income
Net interest income (TEB) was $12,322 million, an increase of $957 million or 8% from the prior
year, driven primarily by a 5% increase in core earning assets and an eight basis point widening
of the core banking margin.
Core asset volumes increased $26 billion or 5% to $515 billion, primarily from $14 billion growth
in International Banking – mainly retail and commercial loans, $2 billion growth in residential
mortgages in Canada or $6 billion excluding Tangerine run-off portfolio, $5 billion growth in
consumer auto loans in Canada, and $2 billion growth in corporate lending in the U.S., Europe
and Canada, as well as $3 billion growth in deposits with banks.
The core banking margin was 2.39%, an eight basis point increase from the previous year. The
core banking margin benefited from lower funding costs as maturing high-rate debentures and
deposits were replaced with funding at lower current rates and wider margins in Canadian
Banking. Partly offsetting was margin compression in Global Banking & Markets. International
Banking did not have any impact on the Bank’s core margin, as the narrower margin in
International Banking was offset by the increase in asset volumes.
Canadian Banking margin increased five basis points to 2.09%, mainly from higher mortgage,
credit card and credit line spreads, as well as strong growth in higher spread assets, including
credit cards. Partially offsetting were lower spreads on core deposits and business accounts as a
result of the low rate environment.
International Banking margin fell from 4.11% to 4.00% due to narrower margins across all
regions.
Global Banking & Markets margin fell primarily due to lower loan origination fees and lower
performing loan spreads in U.S. corporate lending.
Outlook
The Bank’s net interest income is expected to increase in 2015 mainly from moderate growth in
core banking assets, a wider margin, as well as the impact of acquisitions expected to close in
2015. The core banking margin is expected to benefit from a change in asset mix with a
continued focus on volume growth in higher margin products.
22 2014 Scotiabank Annual Report
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T6 Net interest income and core banking margin
(1)
2014 2013 2012
($ billions, except percentage amounts)
Average
balance Interest
Average
rate
Average
balance Interest
Average
rate
Average
balance Interest
Average
rate
Total average assets and net interest income $795.6 $12.3 $ 748.9 $11.3 $ 659.5 $9.9
Less: total assets in Global Capital Markets
(2)
232.5 – 212.0 – 183.8 –
Banking margin on average total assets $563.1 $12.3 2.19% $ 536.9 $11.3 2.11% $ 475.7 $9.9 2.09%
Less: non-earning assets and customer’s liability under
acceptances 48.0 47.4 46.0
Core banking assets and margin $515.1 $12.3 2.39% $ 489.5 $11.3 2.31% $ 429.7 $9.9 2.31%
(1) Taxable equivalent basis. Refer to non-GAAP measures on page 17.
(2) Net interest income in Global Capital Markets trading assets is recorded in trading revenues in other operating income.
T7 Average balance sheet
(1)
and net interest income
2014 2013
(4)
2012
(4)
TEB
(2)
For the fiscal years ($ billions)
Average
balance Interest
Average
rate
Average
balance Interest
Average
rate
Average
balance Interest
Average
rate
Assets
Deposits with banks $ 60.1 $ 0.3 0.44% $ 55.6 $ 0.3 0.50% $ 56.9 $ 0.3 0.50%
Trading assets 113.3 0.1 0.12% 105.1 0.1 0.12% 90.8 0.1 0.15%
Securities purchases under resale agreements 91.1 0.2 0.20% 80.0 0.2 0.24% 60.1 0.2 0.37%
Investment securities 41.2 0.8 1.91% 40.3 0.8 2.20% 34.7 0.9 2.68%
Loans:
Residential mortgages 210.9 7.6 3.60% 206.6 7.4 3.59% 167.9 6.5 3.86%
Personal and credit cards 79.6 6.1 7.61% 72.1 5.6 7.70% 65.7 4.9 7.49%
Business and government 128.5 4.3 3.39% 116.9 4.4 3.76% 105.0 4.2 3.99%
Allowance for credit losses (3.6) (3.3) (2.9)
Total loans $415.4 $18.0 4.34% $392.3 $ 17.4 4.42% $ 335.7 $15.6 4.65%
Total earning assets $721.1 $19.4 2.69% $673.3 $ 18.8 2.80% $ 578.2 $17.1 2.97%
Customer’s liability under acceptances 10.4 10.2 8.8
Other assets 64.1 65.4 72.5
Total assets $795.6 $19.4 2.43% $748.9 $ 18.8 2.52% $ 659.5 $17.1 2.60%
Liabilities and equity
Deposits:
Personal $172.6 $ 2.4 1.42% $167.2 $ 2.6 1.57% $ 135.4 $ 2.4 1.75%
Business and government 339.7 3.5 1.02% 314.0 3.5 1.12% 295.5 3.4 1.18%
Banks 38.4 0.3 0.77% 35.7 0.3 0.69% 33.0 0.3 0.80%
Total deposits $550.7 $ 6.2 1.13% $516.9 $ 6.4 1.24% $ 463.9 $ 6.1 1.32%
Obligations related to securities sold under repurchase
agreements 87.3 0.3 0.32% 77.7 $ 0.3 0.37% 54.5 0.3 0.48%
Subordinated debentures 5.3 0.2 3.84% 7.8 0.3 4.37% 7.3 0.4 5.19%
Other interest-bearing liabilities 50.2 0.4 0.72% 44.5 0.5 1.02% 36.6 0.4 1.17%
Total interest-bearing liabilities $693.5 $ 7.1 1.02% $646.9 $ 7.5 1.16% $ 562.3 $ 7.2 1.28%
Other liabilities including acceptances 54.4 59.4 62.0
Equity
(3)
47.7 42.6 35.2
Total liabilities and equity $795.6 $ 7.1 0.89% $748.9 $ 7.5 1.00% $ 659.5 $ 7.2 1.09%
Net interest income $12.3 $ 11.3 $ 9.9
(1) Average of daily balances.
(2) Refer to non-GAAP measures on page 17.
(3) Includes non-controlling interests of $1.2 billion in 2014, $1.1 billion in 2013 and $0.8 billion in 2012.
(4) Prior period amounts have been restated to reflect current period presentation (refer to note 4 in the consolidated financial statements).
2014 Scotiabank Annual Report 23
MANAGEMENT’S DISCUSSION AND ANALYSIS
C9 Sources of net fee and commission revenues
11%
15%
13%
12%
7% 18%
5%
9%
5%
5%
Card revenues
Deposit and
payment services
Credit fees
Other banking fees
Mutual funds
Investment
management and
trust
Underwriting and
other advisory fees
Brokerage fees
Non-trading foreign
exchange fees
Other fee and
commission revenues
T8 Net fee and commission revenues
For the fiscal years ($ millions) 2014 2013
(1)
2012
(1)
2014
versus
2013
Fee and commission revenues
Banking
Card revenues $ 933 $ 816 $ 768 14%
Deposit and payment services
Deposit services 901 865 846 4
Other payment services 282 257 237 10
$ 1,183 $ 1,122 $ 1,083 5%
Credit fees
Commitment and other credit fees 778 717 690 9
Acceptance fees 236 226 207 4
$ 1,014 $ 943 $ 897 8%
Other $ 609 $ 589 $ 439 3%
Total banking revenue $ 3,739 $ 3,470 $ 3,187 8%
Wealth management
Mutual funds $ 1,468 $ 1,280 $ 1,125 15%
Brokerage fees 943 848 721 11
Investment management and trust
Investment management and custody 159 150 141 6
Personal and corporate trust 224 215 183 4
383 365 324 5
Total wealth management revenue $ 2,794 $ 2,493 $ 2,170 12%
Underwriting and other advisory $ 712 $ 503 $ 493 42%
Non-trading foreign exchange 420 404 365 4
Other 412 345 293 19
Fee and commission revenues $ 8,077 $ 7,215 $ 6,508 12%
Fee and commission expenses
Card expenses $ 253 $ 221 $ 188 15%
Deposit and payment services expenses 86 76 68 12
Other expenses 1 1 6 —
$ 340 $ 298 $ 262 14%
Net fee and commission revenues $ 7,737 $ 6,917 $ 6,246 12%
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of IFRS 10 in 2014 (refer to Note 4 in the consolidated financial
statements).
Net fee and commission revenues
Net fee and commission revenues were $7,737 million, an increase of $820 million or 12%,
including the positive foreign exchange impact of $99 million.
Card revenues grew $117 million or 14% to $933 million primarily reflecting higher revenues in
Canadian Banking from an increase in transaction-based fees.
Revenues from deposit services were $901 million, up $36 million or 4% over 2013 including the
positive impact of foreign currency translation. Both Canadian Banking and International Banking
contributed to the growth. The increase in other payment services was primarily from
International Banking.
Credit fees were up $71 million or 8% from the prior year. Commitment and other credit fees
were $778 million, up $61 million over 2013. Adjusting for the impact of foreign currency
translation, Canadian Banking contributed to an increase of $20 million and Global Banking &
Markets increased by $11 million in standby commitment fees. Acceptance fees were higher in
both Global Banking & Markets reflecting trade finance activities, and Canadian Banking from
higher volumes.
The increase in mutual fund fees of $188 million or 15% reflects higher average assets under
management due to strong net sales and favourable market conditions.
Brokerage fees were up $95 million or 11% primarily from an increase in fee-based assets in the
full service brokerage business.
Investment management and custody fees increased $9 million or 6%, primarily from higher
assets under management in Global Wealth & Insurance.
Underwriting and other advisory fees were up year over year $209 million, or 42%, primarily
from higher advisory fees in investment banking and from growth in equity and debt
underwriting activity.
Non-trading foreign exchange fees were up $16 million or 4% to $420 million mainly from
higher revenues in International Banking.
24 2014 Scotiabank Annual Report
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Higher other fee and commission revenues were mainly from non-retail
brokerage fees and pension management fees in Colombia and Peru.
Fee and commission expenses rose $42 million or 14% to $340 million.
Higher card expenses reflected higher transaction volumes in Canadian
Banking.
Outlook
Continued strong performance is expected in fee and commission
revenues in 2015, across all categories, particularly in card revenues,
mutual fund management fees and brokerage fees.
Other operating income
Other operating income (TEB) was $3,899 million, an increase of $570
million or 17% from 2013. Adjusting for the notable items in 2014 of
$566 million and $150 million in the prior year (refer T3), the increase
in operating income was $155 million or 5%.
Trading revenues of $1,451 million (TEB) fell by $146 million. Adjusting
for the impact of the funding valuation adjustment, the underlying
decrease was $116 million, primarily reflecting declines in global fixed
income.
Net gains on investment securities were $741 million compared to
$375 million in 2013 reflecting strong equity markets this year.
Net income from investments in associated corporations was $428
million, down from $681 million last year. Adjusting for the gain in
2013, underlying earnings were down $103 million, reflecting the
impact of the CI disposition and lower contributions from Thanachart
Bank in Thailand.
Insurance underwriting income was $474 million, an increase of $26
million or 6% due entirely to International Insurance. Premiums and
claims were higher compared to the prior year.
Other income of $805 million was higher by $577 million than 2013,
primarily from the impact of notable items of $596 million.
Outlook
Adjusting for the disposition gain in 2014, other operating income will
be lower in 2015. Declines are expected in security gains from the
strong levels in 2014, lower contributions from associated corporations,
partly offset by higher trading revenues, which are expected to be
above 2014 levels but are subject to market conditions and customer
demand.
T9 Other operating income
For the fiscal years ($ millions) 2014 2013
(1)
2012
(1)
2014
versus
2013
Trading revenues
(2)
$ 1,114 $ 1,300 $ 1,299 (14)%
Net gain on sale of investment
securities 741 375 185 98
Net income from investments in
associated corporations 428 681 448 (37)
Insurance underwriting income, net
of claims 474 448 388 6
Other 805 228 1,110 100+
Total other operating income 3,562 3,032 3,430 17
Taxable equivalent adjustment 337 297 271 13
Total other operating income (TEB)
(3)
$ 3,899 $ 3,329 $ 3,701 17%
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of IFRS 10 in 2014 (refer to
Note 4 in the consolidated financial statements).
(2) On a taxable equivalent basis trading revenues were $1,451 million (2013 – $1,597 million,
2012 – $1,570 million).
(3) Refer to non-GAAP measures on page 17.
T10 Trading revenues
TEB
(1)
For the fiscal years ($ millions) 2014 2013 2012
By trading products:
Interest rate and credit $ 415 $ 596 $ 503
Equities 92 120 115
Commodities 359 338 425
Foreign exchange 208 198 233
Other 40 48 23
Sub-total 1,114 1,300 1,299
Taxable equivalent adjustment 337 297 271
Total trading revenues (TEB)
(1)
$ 1,451 $ 1,597 $ 1,570
% of total revenues 6.1% 7.4% 7.9%
(1) Refer to non-GAAP measures on page 17.
2014 Scotiabank Annual Report 25
MANAGEMENT’S DISCUSSION AND ANALYSIS
C10 Expenses
$ millions
8000
6000
4000
2000
14000
12000
10000
12 13 14
Professional & taxes
Depreciation and amortization
Premises & technology
Salaries & employee benefits
Other
Communications & advertising
C11 Productivity
(1)
operating expenses as a % of revenue (TEB)
10 11 12
(2)
13
(2)
14
52
50
56
58
54
60
(1) Amounts prior to 2011 calculated under CGAAP
(2) Certain amounts are retrospectively adjusted to reflect the
adoption of new IFRS standards (IFRS 10 and IAS 19) in 2014
(refer to Note 4 in the consolidated financial statements).
C12 Direct and indirect taxes
(1)
$ millions
12 13 10 11 14
2000
2500
1500
1000
500
3000
Provision for income taxes
Total other taxes
(1) Amounts prior to 2011 have been prepared in accordance
with CGAAP.
(2) Amounts for 2013 and 2012 are retrospectively adjusted to
reflect the adoption of new and amended IFRS standards
(IFRS 10 and IAS 19) in 2014 (refer to Note 4 in the
consolidated financial statements).
T11 Operating expenses and productivity
For the fiscal years ($ millions) 2014 2013
(1)
2012
(1)
2014
versus
2013
Salaries and employee benefits
Salaries $ 3,680 $ 3,552 $ 3,231 4%
Performance-based compensation 1,669 1,558 1,477 7
Share-based compensation
(2)
270 222 208 22
Other employee benefits 1,124 1,075 886 5
$ 6,743 $ 6,407 $ 5,802 5%
Premises and technology
Premises
Net rent 392 378 321 4
Property taxes 82 83 85 (2)
Other premises costs 415 400 362 4
$ 889 $ 861 $ 768 3%
Technology $ 1,047 $ 954 $ 839 10%
$ 1,936 $ 1,815 $ 1,607 7%
Depreciation and amortization
Depreciation 297 297 277 –
Amortization of intangible assets 229 219 169 5
$ 526 $ 516 $ 446 2%
Communications $ 417 $ 409 $ 373 2%
Advertising and business development $ 571 $ 505 $ 450 13%
Professional $ 471 $ 432 $ 340 9%
Business and capital taxes
Business taxes 276 234 203 18
Capital taxes 38 40 45 (4)
$ 314 $ 274 $ 248 15%
Other $ 1,623 $ 1,306 $ 1,170 24%
Total operating expenses $ 12,601 $ 11,664 $ 10,436 8%
Productivity ratio (TEB)
(3)
52.6% 54.0% 52.4%
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014
(refer to Note 4 in the consolidated financial statements).
(2) Excludes Employee Share Ownership Plans.
(3) Taxable equivalent basis. Refer to Non-GAAP measures on page 17.
Operating expenses
Total operating expenses in 2014 were $12,601 million, an increase of $937 million or 8% from
last year. Adjusting for the impact of notable items in both 2014 and 2013 of $203 million and
$74 million, respectively (refer T3), operating expenses increased $808 million or 7%. Foreign
currency translation contributed 1% of this increase.
Salaries and employee benefits were $6,743 million this year, up $336 million or 5%. Adjusting
for the 2013 notable item of $27 million, salaries increased $155 million or 4% mainly reflecting
annual pay increases. Performance-based compensation was up $111 million or 7% from last
year. Commissions in Global Wealth & Insurance were also higher in line with revenue growth.
Share-based compensation increased $48 million or 22% largely due to changes in expected
payouts and from the impact of hedging. Pensions and other employee benefits increased $49
million or 5% due to higher payroll taxes and Canadian benefits. These increases were partially
offset by lower pension costs due to changes in actuarial valuations.
Premises costs rose $28 million or 3% to $889 million due to the unfavourable impact of foreign
currency translation and inflation.
Technology costs for the year were $1,047 million, up $93 million or 10% over last year, mainly
reflecting continuing investments in new and ongoing technology projects to support business
growth.
Advertising and business development increased $66 million or 13% to $571 million. The
increase reflected rebranding costs related to Tangerine as well as ongoing and new campaigns
related mainly to the Canadian retail market, including the credit cards growth initiative.
Professional expenses rose $39 million or 9% to $471 million to support initiatives and
technology investments.
Business and capital taxes were $314 million for the year, up $40 million or 15% reflecting
higher deposit insurance in Canada and business taxes mainly in the Caribbean.
26 2014 Scotiabank Annual Report
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Adjusting for the notable items of $203 million in 2014 and $47 million
in 2013 (refer T3), other expenses were $161 million or 13% higher.
This increase was due mostly to business volume-related expenses
including loyalty reward point costs, and regulatory fees.
The productivity ratio in 2014 was 52.6%, an improvement from the
previous year of 54.0%. Adjusting for notable items in 2014 and 2013,
the productivity ratio in 2014 was 53.0% compared to 54.0%.
Operating leverage was a positive 2.8% or 2.0% after adjusting for the
notable items.
Outlook
Adjusting for the notable items in 2014, expenses are expected to rise
to support business expansion. The focus will be on achieving long
term productivity and efficiency gains by investing in initiatives that
enable a ‘low cost by design’ approach. This, coupled with ongoing
investments in the businesses, both in Canada and internationally, will
position the Bank to effectively support growth.
Taxes
The provision for income taxes was $2,002 million, an increase from
$1,737 million last year. The Bank’s overall effective tax rate for the
year was 21.5% compared to 20.8% for 2013. The increase in the
effective tax rate was due primarily to higher taxes in foreign
jurisdictions and a proportionately lower benefit from tax-exempt
income, partially offset by a lower tax rate on the disposition gain in
the current year.
Outlook
The Bank’s consolidated effective tax rate is expected to be in the
range of 21% to 25% in 2015.
Credit Quality
Provision for credit losses
The total provision for credit losses was $1,703 million in 2014, up
$415 million from the total provision of $1,288 million in 2013.
The provision for credit losses in Canadian Banking was $661 million,
an increase of $183 million from $478 million last year, due to higher
provisions in the retail portfolio which includes a $62 million notable
item (refer T3) and $26 million related to updated loss parameters to
capture recent portfolio trends for credit cards and auto loans.
The provision for credit losses in International Banking increased
$250 million to $1,031 million. In the retail portfolio, provisions
increased in line with volume growth when excluding the benefit of the
credit mark on the acquired portfolio in Banco Colpatria. Higher retail
provisions, primarily in Mexico, and largely in unsecured term loans,
were partly offset by lower provisions in Chile. In the commercial
portfolio, provisions were primarily higher in the Caribbean and Latin
America with the former reflecting $83 million in provisions relating
mainly to a small number of accounts in the hospitality portfolio. The
provision this year includes a net benefit of $12 million due to net
amortization of the credit mark on acquired loans in Colombia
compared to a net benefit of $55 million last year.
The provision for credit losses in Global Wealth & Insurance was
$2 million in 2014, a decrease of $1 million from $3 million in 2013.
The provision for credit losses in Global Banking & Markets was
$9 million in 2014, down by $17 million from 2013. In the current
year, lower provisions in the United States were somewhat offset by
higher provisions in Europe and Canada.
T12 Provisions against impaired loans by business lines
For the fiscal years
($ millions) 2014 2013 2012 2011
Canadian Banking
Retail
(1)
$ 607 $ 423 $ 419 $ 466
Commercial 54 55 87 126
$ 661 $ 478 $ 506 $ 592
International Banking
Caribbean and Central America 247 $ 172 $ 192 $ 209
Latin America
(2)
776 601 413 296
Asia and Europe 8 8 8 4
$1,031 $ 781 $ 613 $ 509
Global Wealth & Insurance $ 2 $ 3 $ 3 $ 2
Global Banking & Markets
Canada 3 $ (7) $ 7 $ 27
U.S. 2 38 20 (12)
Europe 4 (5) 3 18
$ 9 $ 26 $ 30 $ 33
Total $1,703 $ 1,288 $ 1,152 $ 1,136
(1) 2011 amounts have been restated for changes in business line structure effective 2011.
(2) Latin America includes Mexico.
T13 Provision for credit losses as a percentage of average loans and acceptances
For the fiscal years (%) 2014 2013 2012 2011
Canadian Banking
Retail 0.25% 0.18% 0.21% 0.25%
Commercial 0.17 0.18 0.31 0.50
0.24 0.18 0.23 0.28
International Banking
Retail 2.15 2.06 1.93 1.88
Commercial 0.35 0.15 0.09 0.09
1.01 0.86 0.75 0.75
Global Wealth & Insurance 0.03 0.05 0.05 0.03
Global Banking & Markets
(1)
0.02 0.07 0.09 0.11
Weighted subtotal – provisions against
impaired loans 0.40 0.32 0.33 0.36
Provisions against performing loans 0.00 0.00 0.03 (0.02)
Weighted total 0.40% 0.32% 0.36% 0.34%
(1) Global Corporate and Investment Banking only.
T14 Net charge-offs
(1)
as a percentage of average loans and acceptances
For the fiscal years (%) 2014 2013 2012 2011
Canadian Banking
Retail 0.21% 0.18% 0.22% 0.24%
Commercial 0.25 0.26 0.31 0.23
0.21 0.19 0.23 0.24
International Banking
Retail 1.68 1.51 1.28 1.61
Commercial 0.15 (0.06) 0.05 0.07
0.71 0.52 0.49 0.64
Global Wealth & Insurance 0.07 0.00 0.06 0.04
Global Banking & Markets
(2)
0.15 0.13 0.01 0.11
Weighted total 0.33% 0.25% 0.27% 0.31%
(1) Write-offs net of recoveries.
(2) Global Corporate and Investment Banking only.
2014 Scotiabank Annual Report 27
MANAGEMENT’S DISCUSSION AND ANALYSIS
C13 Credit losses*
Provisions against impaired loans as a % of average
loans & acceptances
10 11 12 13 14
0.6
0.3
0.9
* Amounts prior to 2011 calculated under CGAAP
C14 Net impaired loan ratio
as a % of loans & acceptances, as at October 31
0.3
0.6
0.9
1.2
11 13 14 12
C15 Gross impaired loans
as a % of equity & allowances for credit losses as at
October 31
11 13 14 12
5
10
15
20
C16 Canadian retail portfolio
delinquent loans as a % of total loans
12 13 14
1.0
0.5
1.5
2.0
C17 International retail portfolio
delinquent loans as a % of total loans
8
7
9
10
12 13 14
T15 Impaired loans by business lines
Gross impaired loans
Allowance for
credit losses Net impaired loans
As at October 31
($ millions) 2014
(1)
2013
(1)
2014
(1)
2013
(1)
2014
(1)
2013
(1)
Canadian Banking
Retail $ 887 $ 756 $ (550) $ (460) $ 337 $ 296
Commercial 201 256 (183) (195) 18 61
$ 1,088 $ 1,012 $ (733) $ (655) $ 355 $ 357
International
Banking
Caribbean and
Central America $ 1,470 $ 1,160 $ (522) $ (454) $ 948 $ 706
Latin America
(2)
1,552 1,237 (915) (700) 637 537
Asia and Europe 48 51 (23) (20) 25 31
$ 3,070 $ 2,448 $ (1,460) $ (1,174) $ 1,610 $ 1,274
Global Wealth &
Insurance
Canada $ 6 $ 10 $ (2) $ (4) $ 4 $ 6
International 3 5 – – 3 5
$ 9 $ 15 $ (2) $ (4) $ 7 $ 11
Global Banking &
Markets
Canada $ 22 $ – $ (3) $ – $ 19 $ –
U.S. 11 184 – (35) 11 149
Europe – 42 – (25) – 17
$ 33 $ 226 $ (3) $ (60) $ 30 $ 166
Totals $ 4,200 $ 3,701 $ (2,198) $ (1,893) $ 2,002 $ 1,808
Allowance for
credit losses on
performing
loans (1,272) (1,272)
Net impaired
loans after
allowance on
performing
loans $ 730 $ 536
Impaired loan metrics
Net impaired loans
As at October 31 ($ millions) 2014
(1)
2013
(1)
Gross impaired loans as a % of total allowance for credit losses and
shareholders’ equity 7.98% 7.62%
Net impaired loans as a % of loans and acceptances 0.46% 0.44%
Allowance against impaired loans as a % of gross impaired loans 52% 51%
(1) Excludes Federal Deposit Insurance Corporation (FDIC) guaranteed loans related to the acquisition of R-G Premier Bank of Puerto Rico.
(2) Latin America includes Mexico.
Allowance for credit losses
The total allowance for credit losses was $3,470 million as at October 31, 2014 (excluding $171
million related to loans covered by FDIC guarantees in R-G Premier Bank of Puerto Rico), up from
$3,165 million (excluding $108 million related to R-G Premier Bank) last year. The $305 million
increase was mainly attributable to increases in International Banking and Canadian Retail.
Allowances in Canadian Banking increased by $78 million, primarily due to higher new provisions
in the retail portfolio.
In International Banking, allowances increased by $286 million to $1,460 million. The increases
were in Latin America (with the exception of Chile) and Caribbean & Central America.
Global Banking & Markets’ allowances decreased significantly to $3 million from $60 million, in
line with the significant reduction in gross impaired loans.
The collective allowance for credit losses on performing loans remained unchanged at $1,272
million.
28 2014 Scotiabank Annual Report
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Impaired loans
Gross impaired loans increased to $4,200 million as at October 31,
2014, from $3,701 million last year.
Impaired loans in Canadian Banking increased by $76 million, primarily
in the retail portfolio.
In International Banking, impaired loans increased by $622 million
largely due to increases in Latin America and Caribbean & Central
America.
In Global Wealth & Insurance, impaired loans decreased by $6 million.
Impaired loans in Global Banking & Markets decreased by $193 million,
attributable primarily to the portfolios in the United States and Europe.
Net impaired loans, after deducting the allowance for credit losses, were
$2,002 million as at October 31, 2014, an increase of $194 million from
a year ago.
As shown in Chart 14, net impaired loans as a percentage of loans and
acceptances were 0.46% as at October 31, 2014, virtually unchanged
from 0.44% a year ago.
Acquisition-related purchased loans
All purchased loans are initially measured at fair value on the date of
acquisition, with no allowances for credit losses recorded in the
Consolidated Statement of Financial Position on the date of acquisition.
Consequently, none of the purchased loans are considered to be
impaired on the date of acquisition. In arriving at the fair value, the
Bank considers interest rate mark and credit rate mark adjustments.
The interest rate mark on the date of acquisition is principally set up for
fixed interest rate loans and captures the impact of the interest rate
differential between the contractual rate of interest on the loan and
the prevailing interest rate on the loan on the date of acquisition for
the remaining term. The interest rate mark is fully amortized into
interest income in the Consolidated Statement of Income over the
expected life of the loan using the effective interest method.
Banco Colpatria
On the Bank’s acquisition of Banco Colpatria, to arrive at the fair value,
an aggregate credit mark adjustment of $549 million was established
(incurred loss mark of $385 million and a future expected loss mark of
$164 million). This adjustment captures management’s best estimate of
cash flow shortfalls on the loans over their lifetime as determined at
the date of acquisition.
For individually assessed loans, the incurred loss mark of $115 million
established at the date of acquisition is tracked over the life of the loan.
Changes to the expected cash flows of these loans from those
expected at the date of acquisition, are recorded as a charge/recovery
in the provision for credit losses in the Consolidated Statement of
Income. As at the end of October 31, 2014, the remaining credit mark
adjustment was $25 million (October 31, 2013- $67 million).
Where loans are not individually assessed for determining losses, a
portfolio approach is taken to determine losses at the date of
acquisition. The portfolio approach resulted in both an incurred loss
mark of $270 million and a future expected loss mark of $164 million.
The incurred loss mark is assessed at the end of each reporting period
against the performance of the loan portfolio, and an increase in
expected cash flows will result in a recovery in provision for credit
losses in the Consolidated Statement of Income. Any cash flows lower
than expected will result in additional provision for credit losses. The
future expected loss mark is amortized into income as losses are
recognized or as the portfolio of loans amortizes down over its
expected life. An assessment is required at the end of each reporting
period to determine the reasonableness of the unamortized balance in
relation to the acquired loan portfolio. An overall benefit is only
recognized to the extent that the amortized amount is greater than the
actual losses incurred. A charge is recorded if the actual losses exceed
the amortized amounts. As at October 31, 2014, on the loans that are
not individually assessed, the remaining incurred loss mark and
expected loss mark was $9 million and $7 million, respectively (October
31, 2013 -$80 million and $57 million).
The remaining credit mark reduced to $41 million (mostly the incurred
loss mark) in 2014, from $204 million in 2013.
Tangerine Bank
On the Bank’s acquisition of Tangerine, to arrive at the fair value of the
purchased loans, an aggregate credit mark adjustment of $40 million
was established (incurred loss mark of $11 million and a future
expected loss mark of $29 million) relating to $13.9 billion of uninsured
loans. There were no loans acquired at a deep discount within the
purchased loan portfolio. As at the end of October 31, 2014, the
remaining incurred loss mark and future expected loss mark were
$2 million and $18 million, respectively (October 31, 2013 -$7 million
and $23 million).
Portfolio review
Canadian Banking
Gross impaired loans in the retail portfolio increased by $131 million
from 2013 or 17%. Provision for credit losses in the Canadian retail
portfolio were $607 million, up $184 million or 43% from last year
reflecting the notable item, updated loss parameters and portfolio
growth and change in product mix. The provision for credit losses as a
percentage of average loans was 0.25%, compared to 0.18% last year.
In the Canadian commercial loan portfolio, gross impaired loans
decreased by $55 million to $201 million. The provision for credit losses
in the Canadian commercial loan portfolio was $54 million, down
$1 million or 2% from last year.
International Banking
In retail, gross impaired loans increased by $298 million to
$1,858 million during the year, with an increase attributable mainly to
Caribbean & Central America, Peru and Mexico. The provision for credit
losses in the retail portfolio increased to $807 million from $698 million
last year, with higher provisions in Mexico, primarily in unsecured term
loans.
In commercial banking, gross impaired loans were $1,212 million, an
increase of $324 million over the prior year, reflected across most
regions, and partially offset by Chile. The provision for credit losses in
the commercial portfolio was $224 million in 2014, versus $83 million in
2013. The increase was attributable mainly to higher provisions in
Caribbean & Central America and Latin America, primarily related to a
provision of $83 million for a small number of accounts in the Caribbean
hospitality industry.
Global Wealth & Insurance
Global Wealth & Insurance’s overall credit quality was strong in 2014.
The provision for credit losses was $2 million and gross impaired loans
were $9 million.
Global Banking & Markets
The provision for credit losses was $9 million in 2014, versus $26 million
in 2013. The provisions this year were primarily in Europe and Canada.
Gross impaired loans in Global Banking & Markets decreased by
$193 million in 2014 to $33 million. Impaired loans in the U.S.
decreased by $173 million to $11 million and in Europe decreased by
$42 million to nil. Impaired loans in Canada increased by $22 million
year over year from nil the prior year.
Risk diversification
The Bank’s exposures to various countries and types of borrowers are
well diversified (see T66 on page 98 and T70 on page 100). Chart 18
shows loans and acceptances by geography. Ontario represents the
largest Canadian exposure at 33% of the total. Latin America has 10%
of the total exposure and the U.S. has 5%.
Chart 19 shows loans and acceptances by type of borrower (see T70 on
page 100). Excluding loans to households, the largest industry
exposures were financial services (5.1%), wholesale and retail (3.8%),
and real estate and construction (3.5%).
2014 Scotiabank Annual Report 29
MANAGEMENT’S DISCUSSION AND ANALYSIS
C18 Well diversified in Canada and
internationally…
loans and acceptances, October 2014
5%
69%
5%
4%
10%
1%
6%
Canada
United States
Mexico
Latin America
Europe
Caribbean and
Central America
Other
C19 … and in household and business lending
loans & acceptances, October 2014
19%
26%
6%
49%
Corporate
Financial and government
Personal
Residential mortgages
Risk mitigation
To mitigate exposures in its performing corporate portfolios, the Bank uses diversification by
company, industry and country, with loan sales and credit derivatives used sparingly. In 2014,
loans sales totaled $153 million, compared to $161 million in 2013. The largest volume of loan
sales in 2014 related to loans in the transportation and media industries.
At October 31, 2014, there were no credit derivatives used to mitigate exposures in the
portfolios, compared to $31 million (notional amounts) at October 31, 2013.
The Bank actively monitors industry and country concentrations. As is the case with all industry
exposures, the Bank continues to closely follow developing trends and takes additional steps to
mitigate risk as warranted. Hospitality, media and entertainment, and shipping portfolios are
being closely managed.
Overview of loan portfolio – Top and emerging risks
While the Bank has a well-diversified portfolio by product, business and geography. Details of
certain portfolios of current focus are highlighted below.
Residential mortgages
A large portion of the Bank’s lending portfolio is comprised of residential mortgages and
consumer loans, which are well diversified by borrower. As at October 31, these loans accounted
for $297 billion or 68% of the Bank’s total loans and acceptances outstanding (October 31, 2013
- $286 billion or 69%). Of these, $232 billion or 78% are real estate secured loans (October 31,
2013 - $228 billion or 81%).
Insured and uninsured mortgages and home equity lines of credit
The following table presents amounts of insured and uninsured residential mortgages and home
equity lines of credit (HELOCs), by geographic areas.
T16 Insured and uninsured residential mortgages and home equity lines of credit (HELOCs), by geographic areas
2014
Residential mortgages Home equity lines of credit
As at October 31 Insured
(1)
Uninsured Total Insured
(1)
Uninsured Total
($ millions) Amount % Amount % Amount % Amount % Amount % Amount %
Canada:
(2)
Atlantic provinces $ 6,940 3.7 $ 5,168 2.7 $ 12,108 6.4 $ 2 – $ 1,300 6.9 $ 1,302 6.9
Quebec 7,506 4.0 8,065 4.3 15,571 8.3 1 – 1,062 5.6 1,063 5.6
Ontario 47,031 24.9 46,380 24.6 93,411 49.5 3 0.1 9,409 49.5 9,412 49.6
Manitoba &
Saskatchewan 4,639 2.5 3,684 1.9 8,323 4.4 1 – 885 4.7 886 4.7
Alberta 17,396 9.2 11,847 6.3 29,243 15.5 4 – 3,107 16.4 3,111 16.4
British Columbia &
Territories 14,431 7.6 15,755 8.3 30,186 15.9 1 – 3,183 16.8 3,184 16.8
Canada
(3)
$ 97,943 51.9% $ 90,899 48.1%$188,842 100% $12 0.1%$18,946 99.9% $18,958 100%
International – – 23,806 100 23,806 100 – – – – – –
Total $ 97,943 46.1% $114,705 53.9%$212,648 100% $12 0.1%$18,946 99.9% $18,958 100%
2013
Canada $103,295 54.7% $ 85,642 45.3%$188,937 100% $15 0.1%$18,666 99.9% $18,681 100%
International – – 20,928 100 20,928 100 – – – – – –
Total $103,295 49.2% $106,570 50.8%$209,865 100% $15 0.1%$18,666 99.9% $18,681 100%
(1) Default insurance is contractual coverage for the life of eligible facilities whereby the Bank’s exposure to real estate secured lending is protected
against potential shortfalls caused by borrower default. This insurance is provided by either government-backed entities or private mortgage
insurers.
(2) The province represents the location of the property in Canada.
(3) Includes multi-residential dwellings (4+ units) of $1,518 million of which $632 million are insured.
Amortization period ranges for residential mortgages
The following table presents the distribution of residential mortgages by amortization periods,
and by geographic areas.
T17 Distribution of residential mortgages by amortization periods, and by geographic areas
2014
Residential mortgages by amortization
As at October 31
Less than
20 years
20-24
years
25-29
years
30-34
years
35 years
and
greater
Total
residential
mortgage
Canada 34.6% 34.0% 25.1% 6.2% 0.1% 100%
International 66.6% 20.5% 11.5% 1.2% 0.2% 100%
2013
Canada 34.3% 29.4% 26.6% 9.5% 0.2% 100%
International 64.5% 21.2% 12.9% 1.1% 0.3% 100%
30 2014 Scotiabank Annual Report
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Loan to value ratios
The Canadian residential mortgage portfolio is 48% uninsured (October 31, 2013 -45%). The average loan-to-value (LTV) ratio of uninsured portfolio
is 54% (October 31, 2013 -57%).
The following table presents the weighted average LTV ratio for total newly originated uninsured residential mortgages and home equity lines of
credit during the year, which include mortgages for purchases, refinances with a request for additional funds and transfer from other financial
institutions, by geographic areas.
T18 Loan to value ratios
Uninsured LTV ratios
(1)
For the year ended October 31, 2014
Residential mortgages
LTV%
Home equity lines of
credit
(2)
LTV%
Canada:
Atlantic provinces 67.6% 65.6%
Quebec 61.4 68.1
Ontario 61.1 64.6
Manitoba & Saskatchewan 65.7 66.7
Alberta 65.4 68.0
British Columbia & Territories 59.0 62.5
Canada 62.0% 65.0%
International 69.9% N/A
For the year ended October 31, 2013
Canada 63.0% 63.8%
International 71.1% N/A
(1) The province represents the location of the property in Canada.
(2) Includes only home equity lines of credit (HELOC) under Scotia Total Equity Plan. LTV is calculated based on the sum of residential mortgages and the authorized limit for related HELOCs, divided by the value of the related residential
property, and presented on a weighted average basis for newly originated mortgages and HELOCs.
Potential impact on residential mortgages and real estate home equity
lines of credit in the event of an economic downturn
The Bank performs stress testing on its portfolio to assess the impact of
increased levels of unemployment, rising interest rates, reduction in
property values and changes in other relevant macro economic
variables. Potential losses in the mortgage portfolio under such
economic downturn scenarios are considered manageable given the
diversified composition of the portfolio, the high percentage of insured
exposures, and the low LTV in the portfolio. This is further supported
by sound risk management oversight and pro-active risk mitigation
strategies.
Loans to Canadian condominium developers
With respect to loans to Canadian condominium developers, the Bank
had loans outstanding of $978 million as at October 31, 2014 (October
31, 2013 – $971 million). This is a high quality portfolio with well-
known developers who have long-term relationships with the Bank.
European exposure
As a result of the Bank’s broad international operations, the Bank has
sovereign credit risk exposure to a number of countries. The Bank
actively manages this sovereign risk by using risk limits calibrated to the
credit worthiness of the sovereign exposure. The current European
exposure is provided in Table 19 below.
The Bank believes that its European exposures are manageable, are
sized appropriately relative to the credit worthiness of the
counterparties (80% of the exposures are to investment grade
counterparties based on a combination of internal and external
ratings), and are modest relative to the capital levels of the Bank. The
Bank’s European exposures are carried at amortized cost or fair value
using observable inputs, with negligible amounts valued using models
with unobservable inputs (Level 3). There were no significant events in
the quarter that have materially impacted the Bank’s exposures.
T19 European exposure
The current European exposure is provided below:
As at October 31 2014 2013
Loans and Loan Equivalents Other
($ millions)
Loans
and
acceptances
(1)
Letters of
credit and
guarantees
(2)
Undrawn
commitments
(3)
Securities
and deposits
with
financial
institutions
(4)
Securities
Financing
Transactions
(SFT) and
derivatives
(5)
Total
European
Exposure
Total
European
Exposure
Gross exposures 8,045 1,839 11,187 8,102 1,900 31,073 $ 27,749
Less: Undrawn commitments 11,187 11,187 8,370
Net funded exposure 8,045 1,839 – 8,102 1,900 19,886 $ 19,379
(1) There are no individual allowances for credit losses. Gross and net values are equal as collateral is not posted against these exposures.
(2) Letters of credit and guarantees are included as funded exposure as they have been issued.
(3) Undrawn commitments represent an estimate of the contractual amount that may be drawn upon at the time of default of an obligor.
(4) Exposures for securities are calculated taking into account derivative positions where the security is the underlying reference asset and short trading positions. Gross and net values are equal as collateral is not posted against these
exposures.
(5) SFT comprise of securities purchased under resale agreements, obligations related to securities sold under repurchase agreements and securities lending and borrowing transactions. Net funded exposure represents all net positive
positions after taking into account collateral. Collateral held against derivatives was $2,185 million and collateral held against SFT was $13,823 million.
2014 Scotiabank Annual Report 31
MANAGEMENT’S DISCUSSION AND ANALYSIS
T20 Funded exposures
Below are the funded exposures related to all European countries:
As at October 31 2014
(1)
2013
($ millions) Sovereign
(2)
Bank Corporate
(3)
Total Total
Greece $ – $ – $ 384 $ 384 $ 432
Ireland 19 2 274 295 226
Italy (10) 268 13 271 407
Portugal – 3 3 6 28
Spain 79 33 218 330 316
Total GIIPS $ 88 $ 306 $ 892 $ 1,286 $ 1,409
U.K. $ 1,078 $ 1,832 $ 5,162 $ 8,072 $ 6,799
Germany 1,258 527 750 2,535 2,398
France 2,105 631 341 3,077 2,934
Netherlands 42 281 265 588 1,012
Switzerland – 357 612 969 1,945
Other 588 274 2,497 3,359 2,882
Total Non-GIIPS $ 5,071 $ 3,902 $ 9,627 $ 18,600 $ 17,970
Total Europe $ 5,159 $ 4,208 $ 10,519 $ 19,886 $ 19,379
Total Europe as at October 31, 2013 $ 3,540 $ 4,904 $ 10,935 $ 19,379
(1) Amounts in brackets represent net short positions arising from trading transactions.
(2) Includes $397 million (October 31, 2013 – $170 million) in exposures to supra-national agencies.
(3) Corporate includes financial institutions that are not banks.
T21 Bank’s exposure distribution by country
The Bank’s exposures are distributed as follows:
As at October 31 2014
(1)
2013
($ millions)
Loans and
loan
equivalents
Deposits
with
financial
institutions Securities
SFT and
derivatives Total Total
Greece $ 380 $ – $ 4 $ – $ 384 $ 432
Ireland 37 18 240 – 295 226
Italy 307 1 (41) 4 271 407
Portugal – – 6 – 6 28
Spain 237 – 88 5 330 316
Total GIIPS $ 961 $ 19 $ 297 $ 9 $ 1,286 $ 1,409
U.K. $ 4,094 $ 1,432 $ 1,363 $ 1,183 $ 8,072 $ 6,799
Germany 852 317 1,272 94 2,535 2,398
France 563 11 2,363 140 3,077 2,934
Netherlands 307 71 140 70 588 1,012
Switzerland 563 37 320 49 969 1,945
Other 2,544 45 415 355 3,359 2,882
Total Non-GIIPS $ 8,923 $ 1,913 $ 5,873 $ 1,891 $ 18,600 $ 17,970
Total Europe $ 9,884 $ 1,932 $ 6,170 $ 1,900 $ 19,886 $ 19,379
(1) Bracketed amounts represent net short positions arising from trading transactions.
The Bank’s exposure to certain European countries of focus – Greece,
Ireland, Italy, Portugal and Spain (GIIPS) – is not significant. As of
October 31, 2014, the Bank’s current funded exposure to the GIIPS
sovereign entities, as well as banks and non-bank financial institutions
and corporations domiciled in these countries, totaled approximately
$1.3 billion, down from $1.4 billion last year.
Specific to sovereign exposures to GIIPS, the Bank’s exposure to Ireland
included central bank deposits of $18 million and $1 million in trading
book securities. The Bank was net long securities in sovereign
exposures to Spain ($79 million) and short to Italy ($10 million). The
Bank had no sovereign securities holdings of Greece and Portugal.
The Bank had exposures to Italian banks of $268 million, as at
October 31, 2014 (October 31, 2013 – $375 million), primarily related
to short-term precious metals trading and lending activities. Greek
exposure of $384 million (October 31, 2013 – $432 million) related
primarily to secured loans to shipping companies.
Securities exposures to European sovereigns and banks (excluding
GIIPS) was $4.9 billion as at October 31, 2014 (October 31, 2013 –
$4.4 billion), predominately related to issuers in France, Germany and
the United Kingdom. Securities are carried at fair value and
substantially all holdings have strong market liquidity.
The majority of the current funded credit exposure is in the form of
funded loans which are recorded on an accrual basis. As well, credit
exposure to clients arises from client-driven derivative transactions and
securities financing transactions (reverse repurchase agreements,
repurchase agreements, and securities lending and borrowing). OTC
derivative counterparty exposures are recorded on a fair value basis
and security financing transactions are recorded on an accrual basis.
32 2014 Scotiabank Annual Report
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Undrawn commitments of $11 billion (October 31, 2013 – $8.4 billion)
are comprised of unfunded loan commitments and commitments to
issue letters of credit on behalf of other banks in a syndicated bank
lending arrangement. Total unfunded loan commitments to
corporations in Europe (excluding GIIPS) were $7.5 billion as at
October 31, 2014 (October 31, 2013 – $5.1 billion). As at October 31,
2014 commitments related to letters of credit with banks amounted to
$3.6 billion (October 31, 2013 – $2.9 billion). Undrawn commitments
are detailed further by country in Table 22.
The Bank’s indirect exposure is also detailed in the table below and is
defined as:
– securities where the exposures are to non-European entities whose
parent company is domiciled in Europe, and
– letters of credit or guarantees (included as loan equivalents in the
above table) associated with entities in European countries.
Included in the indirect exposure detailed in Table 22 was $452 million
in indirect securities related to GIIPS, $131 million to Germany, $66
million to the United Kingdom and $55 million to Switzerland. Indirect
exposure by way of letters of credit totaled $1,839 million at
October 31, 2014 (October 31, 2013 – $1,523 million), of which
$43 million (October 31, 2013 – $69 million) was indirect exposure to
GIIPS. Indirect exposure is managed through the Bank’s credit risk
management framework, with a robust assessment of the
counterparty.
In addition to the total indirect exposures detailed in Table 22, the Bank
had Euro-denominated collateral held for non-European counterparties
of $1,371 million (October 31, 2013 – $680 million).
T22 Indirect exposures
As at October 31 Undrawn Commitments Indirect Exposure
($ millions) 2014 2013 2014 2013
Greece $ – $ – $ – $ –
Ireland 87 68 (1) 18
Italy 45 74 7 21
Portugal – – – –
Spain 57 294 490 209
Total GIIPS $ 189 $ 436 $ 496 $ 248
U.K. $ 5,662 $ 4,043 693 $ 524
Germany 791 782 313 370
France 1,269 647 346 273
Netherlands 1,056 845 175 172
Switzerland 806 548 172 229
Other 1,414 1,069 365 288
Total Non-GIIPS $ 10,998 $ 7,934 $ 2,064 $ 1,856
Total Europe $ 11,187 $ 8,370 $ 2,560 $ 2,104
The Bank does not use credit default swaps (CDS) as a risk mitigation
technique to reduce its sovereign debt exposures. With respect to
banks and non-bank financial institutions and corporations, the Bank
may on occasion use CDS to partially offset its funded loan exposures.
Specific to GIIPS as at October 31, 2014, the Bank had no CDS
protection on funded exposures. As part of the trading portfolio, the
Bank may purchase or sell CDS. All exposures, including CDS, are
subject to risk limits and ongoing monitoring by the Bank’s
independent risk management department.
Like other banks, the Bank also provides settlement and clearing
facilities for a variety of clients in these countries and actively monitors
and manages these intra-day exposures. However, the Bank has no
funded exposure in these countries to retail customers or small
businesses.
Outlook
The quality of the Bank’s credit portfolio is expected to remain strong
given its low exposure to areas and regions of concern and broad
global diversification.
Domestically, retail provision for credit losses are expected to increase
from asset growth and changes in the business mix particularly for
credit cards and auto loans, which is within our risk appetite and
aligned to our strategy. Provisions for non-retail loans are expected to
increase moderately from the unusually low levels experienced in 2014.
Internationally, provision for credit losses are expected to increase from
asset growth, acquisitions and a reduction of credit mark adjustments
associated with acquired portfolios.
2014 Scotiabank Annual Report 33
MANAGEMENT’S DISCUSSION AND ANALYSIS
Fourth Quarter Review
Q4 2014 vs. Q4 2013
Net income
Net income was $1,438 million in the fourth quarter compared to
$1,676 million in the same quarter last year. Adjusting for the notable
items of $265 million (refer T23), net income grew by $27 million or
2%. Good volume growth, higher interest margins, and the positive
impact of foreign currency translation were largely offset by increased
provision for credit losses and higher operating expenses.
Total revenue
Total revenue (TEB) of $5,848 million was up $371 million or 7% from
the same quarter last year. Adjusting for the notable items of
$77 million (refer T23), total revenue increased by $448 million or 8%.
The year-over-year increase in revenues reflected higher net interest
income from asset growth and improved interest margin, stronger non-
interest revenues, including higher banking fees and wealth
management revenues and the positive impact of foreign currency
translation. Partly offsetting was lower income from investment in
associated corporations due to the disposition of CI in June 2014.
Net interest income
Net interest income (TEB) was $3,105 million, $228 million or 8%
higher than the same quarter last year. The increase in net interest
income, including the positive impact of foreign currency translation,
was attributable to asset growth in International Banking and Canadian
Banking and an increase in the core banking margin.
The core banking margin was 2.39%, up from 2.31% last year. The
increase in the margin was primarily due to higher margins in both
Canadian Banking and International Banking, and lower funding costs
as maturing high-rate debentures and deposits were replaced with
funding at lower current rates.
Net fee and commission revenues
Net fee and commission revenue of $2,042 million was up $259 million
or 15% from last year. This increase was primarily from higher banking
fees, wealth management revenues in mutual funds and brokerage
commissions, as well as growth in underwriting fees and the positive
impact of foreign currency translation.
Other operating income
Other operating income (TEB) of $701 million was down $116 million
or 14%. Adjusting for the notable items of $77 million (refer T23),
other operating income declined by $39 million or 5%. Lower trading
revenues and income from associated corporations were partly offset
by higher net gains on investment securities.
Provision for credit losses
The provision for credit losses was $574 million in the fourth quarter
compared to $321 million in the same period last year. Adjusting for
the notable item of $62 million (refer T23), the provision for credit
losses rose by $191 million. The year-over-year increase was entirely in
International Banking and Canadian Banking and includes a $62 million
notable item (refer T23), as well as additional provisions of $26 million
related to Canadian retail accounts and $83 million in International
Banking for certain accounts in the Caribbean hospitality portfolio.
Operating expenses and productivity
Operating expenses were $3,361 million in the fourth quarter, an
increase of $384 million or 13% over the same quarter last year.
Notable items of $203 million (refer T3) accounted for just over half of
the increase. The negative impact of foreign currency translation was
1%. The remaining growth was due mainly to higher salaries and
benefits from annual pay increases, higher payroll taxes and other
benefits. Other increases were due to increased spend on technology
initiatives and higher business taxes in the Caribbean.
The productivity ratio in the fourth quarter was 57.5%, up from 54.4%
in the same quarter last year. Adjusting for notable items the current
quarter ratio was 53.3%.
Taxes
The effective income tax rate for this quarter was 20.6% compared to
20.3% in the same quarter last year. The increase in the effective rate
was due primarily to lower tax recoveries partially offset by higher levels
of tax-exempt income this year.
34 2014 Scotiabank Annual Report
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Q4 2014 vs. Q3 2014
Net income
Net income was $1,438 million this quarter, compared to $2,351 million
in the previous quarter. Adjusting for this quarter’s notable items of
$265 million and last quarter’s notable gain of $555 million (refer T23),
net income fell $93 million or 5%. This quarter over quarter decline was
primarily from higher provision for credit losses, lower net interest
income, and reduced operating income reflecting the disposition last
quarter. The decrease in net income was partly offset by higher banking
fees and wealth management revenues.
Total revenue
Total revenue (TEB) was $5,848 million, a reduction of $728 million or
11% from the previous quarter mostly due to the notable items in both
quarters. The underlying decline in total revenue of $8 million was due
mainly to lower net interest margin, trading revenues, and net income
from investment in associated corporations. These decreases were
entirely offset by higher banking fees, wealth management revenues,
and higher net gains on investment securities.
Net interest income
Net interest income (TEB) declined $50 million to $3,105 million. The
core banking margin was 2.39% compared to 2.41%. The decrease in
the margin was primarily in Canadian Banking and International
Banking.
Net fee and commission revenues
Net fee and commission revenue was $2,042 million, up $80 million or
4%. This increase was mainly from higher retail banking fees, mainly in
International Banking and higher wealth management revenues.
Other operating income
Other operating income (TEB) was $701 million, a reduction of $758
million from the prior quarter, mostly from the notable items in both
quarters. The underlying decline of $38 million or 5% was primarily
from lower trading revenues and net income from investment in
associated corporations. Partly offsetting was higher net gains on
investment securities.
Provision for credit losses
The provision for credit losses was $574 million for the fourth quarter
compared with $398 million from last quarter. Adjusting for the
notable item of $62 million (refer T23), provision for credit losses rose
by $114 million. The increase was entirely in International Banking and
Canadian Banking and includes additional provisions of $26 million
related to Canadian retail accounts and $83 million in International
Banking for certain accounts in the Caribbean hospitality portfolio.
Operating expenses and productivity
Operating expenses were up $221 million or 7%. Adjusting for notable
items, expenses were up $18 million or 1%. Higher technology,
professional, and advertising expenses, primarily related to initiatives,
were largely offset by lower performance and share-based
compensation.
The productivity ratio was 57.5% compared to 47.8% in the previous
quarter. Adjusting for notable items, the ratios were 53.3% versus
52.9% respectively.
Taxes
The effective income tax rate this quarter was 20.6% compared to
20.3% last quarter. The increase in the effective rate was due primarily
to a lower tax rate on the disposition gain in the prior quarter, partly
offset by higher levels of tax-exempt income this quarter.
T23 Notable Items
For the three months ended
($ millions, except EPS)
October 31
2014
July 31
2014
Pre-tax After-tax EPS Impact Pre-tax After-tax EPS Impact
Gain on sale
Sale of majority of holding in CI Financial Corp.
(1)
$ – $ – $643 $555
Restructuring charges (148) (110) – –
Provision for credit losses
Unsecured bankrupt retail accounts in Canada (62) (46) – –
Valuation adjustments
Funding valuation adjustment (30) (22) – –
Revaluation of monetary assets in Venezuela (47) (47) – –
Legal provisions (55) (40) – –
Total $(342) $(265) $(0.22) $643 $555 $0.45
By Consolidated Statement of Income line
Trading revenues $ (30) $ (22) $ – $ –
Other operating income – other (47) (47) 643 555
Other operating income/Total revenue (77) (69) 643 555
Provision for credit losses (62) (46) – –
Other operating expenses (203) (150) – –
Total $(342) $(265) $(0.22) $643 $555 $0.45
(1) Includes an after-tax unrealized gain of $152 million ($174 million pre tax) on the reclassification of the Bank’s remaining investment to available-for-sale securities.
2014 Scotiabank Annual Report 35
MANAGEMENT’S DISCUSSION AND ANALYSIS
Summary of Quarterly Results
Quarterly Financial Highlights
T24 Quarterly financial highlights
For the three months ended
Oct. 31
2014
July 31
2014
April 30
2014
Jan. 31
2014
Oct. 31
(1)
2013
July 31
(1)
2013
April 30
(1)
2013
Jan. 31
(1)
2013
Oct. 31
(1)
2012
July 31
(1)
2012
April 30
(1)
2012
Jan. 31
(1)
2012
Total revenue ($ millions) $ 5,747 $ 6,487 $ 5,725 $ 5,645 $ 5,400 $ 5,515 $ 5,213 $ 5,171 $ 4,851 $ 5,516 $ 4,692 $ 4,587
Total revenue (TEB
(2)
) ($ millions) 5,848 6,576 5,809 5,725 5,477 5,594 5,295 5,245 4,925 5,593 4,761 4,655
Net income ($ millions) $ 1,438 $ 2,351 $ 1,800 $ 1,709 $ 1,676 $ 1,747 $ 1,582 $ 1,605 $ 1,502 $ 2,050 $ 1,440 $ 1,398
Basic earnings per share ($) 1.10 1.86 1.40 1.33 1.30 1.37 1.23 1.26 1.19 1.70 1.17 1.21
Diluted earnings per share ($) 1.10 1.85 1.39 1.32 1.29 1.36 1.22 1.24 1.18 1.68 1.15 1.18
(1) Amounts for prior periods are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4 in the consolidated financial statements).
(2) Refer to non-GAAP measures on page 17.
Net income
The Bank reported good results throughout 2014 with growth in
performance through the first three quarters, followed by a slight
decline in underlying performance in the fourth quarter resulting mainly
from lower net interest income and lower trading revenues, and higher
loan losses. Adjusting for the disposition gain of $555 million (refer
T23), diluted EPS in the third quarter was $1.40. Fourth quarter net
income was significantly lower as a result of $265 million of notable
items (refer T23).
Net interest income
Net interest income rose during the first three quarters of the year
before declining by $50 million in the fourth quarter from lower net
interest margins in Canadian Banking and International Banking. Core
banking assets increased steadily during 2014 from continuing strong
loan growth in Latin America, in part from the benefit from the impact
of foreign currency translation, and consumer auto loan and
commercial loan growth in Canadian Banking, as well as corporate
loan growth in Global Banking & Markets. Low spread deposits with
banks have increased since the fourth quarter of last year.
The core banking margin improved eight basis points from the fourth
quarter last year to the fourth quarter this year. The margin increased
during the first two quarters from improved margins in both Canadian
Banking and International Banking and the maturity of higher cost
wholesale funding and debentures replaced by wholesale funding at
lower current rates. The margin decreased slightly in the third and
fourth quarters this year from narrower spreads in Canadian and
International Banking and higher volumes of low yielding deposits with
banks.
Canadian Banking’s margin improved during the first three quarters
from higher mortgage, credit card and credit line spreads and strong
growth in higher spread products, including credit cards and then
declined slightly in the fourth quarter from lower spread in consumer
auto loans and mortgage prepayment income. International Banking’s
margin increased in the first three quarters of 2014 from higher
spreads across all countries in Latin America and in Asia, and then
narrowed slightly in the fourth quarter. Spreads in Global Banking &
Markets corporate lending portfolio declined slightly during each
quarter from lower spreads in the U.S. Corporate loan portfolio.
Non-interest income
Underlying non-interest revenues grew steadily during the year, while
the third quarter also included the benefit of the disposition gain of
$555 million. Fourth quarter non-interest revenue was negatively
impacted by notable items of $77 million (refer T23). Banking revenues
trended upward during the year with strong growth in card fees in
Canada and Latin America. Both mutual fund fees and retail brokerage
fees grew steadily throughout the year reflecting higher average assets
under management and assets under administration. Quarterly trading
revenues reflected the different levels of market opportunities during
the year, up in the second quarter, but fell during the third and fourth
quarters below the average of the prior six quarters. The level of net
gains on investment securities reflected market opportunities.
Provision for credit losses
Provision for credit losses increased steadily during the year in both
Canadian Banking and International Banking reflecting loan volume
growth and higher loss ratios in both business lines. Provisions in the
fourth quarter include a $62 million notable item (refer T23), as well as
additional provisions of $26 million related to Canadian retail accounts
and $83 million in International Banking for certain accounts in the
Caribbean hospitality portfolio. The provision for credit losses in Global
Banking & Markets continued to be at minimal levels.
Operating expenses
Operating expenses increased during the year, primarily due to notable
items of $203 million (refer T23) in the fourth quarter. Technology
costs increased in the third and fourth quarters reflecting a higher level
of costs incurred for business expansion and investment in new
initiatives in the latter half of the year. The timing of share and
performance based compensation and advertising and business
development costs contributed to the quarterly fluctuations.
Provision for income taxes
The effective tax rate ranged between 20% and 22% reflecting
different levels of income earned in lower tax jurisdictions and the
timing of the benefit of net income from associated corporations. The
tax rate declined in the third quarter due to the disposition gain at the
capital gains tax rate and remained steady in the fourth quarter as a
result of higher tax benefits in certain International jurisdictions and the
restructuring charges at higher than average tax rates.
An eight quarter trend in net income and other selected information is
provided on page 107.
36 2014 Scotiabank Annual Report
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Financial Results Review: 2013 vs. 2012
In order to identify key business trends between 2013 and 2012,
commentary and the related financial results are below.
Net income
Scotiabank had record results in 2013 and met or exceeded all of its
financial objectives. Net income was $6,610 million, $220 million or
3% higher than last year’s record results. Diluted earnings per share
(EPS) were $5.11 as compared to $5.18 in 2012. Return on equity
was at 16.6% compared to 19.9% last year.
The 2013 net income included a non-recurring after-tax benefit of
$90 million in International Banking from (i) the gain on sale of
Thanachart Life Assurance Public Company Ltd. by Thanachart Bank,
an associated corporation in Thailand ($150 million after tax), less (ii)
a valuation adjustment on acquisition-related receivables in Puerto
Rico ($40 million after tax) and (iii) a restructuring charge in the
Bank’s Uruguay operations ($20 million after tax). Combined, these
non-recurring items amounted to 7 cents per share. 2012 net
income benefited from real estate gains of $708 million or 61 cents
per share. Adjusting for these items, net income grew by
$838 million or 15% and diluted earnings per share were $5.04 as
compared to $4.57 in 2012, an increase of 10.3%. Underlying ROE
was a strong 16.3% compared to 17.7% in 2012.
Total revenue
Total revenues on a taxable equivalent basis (TEB) rose 8% from the
2012 to $21,611 million. Adjusting for the above noted gain from
an associated corporation this year, the real estate gains in 2012 and
the positive impact of foreign currency translation, total revenues
increased by 11%.
Net interest income
Net interest income (TEB) increased $1,378 million or 14% to
$11,365 million, primarily from the contribution of acquisitions and
growth in average core banking assets. The core banking margin
remained unchanged from the 2012.
Non-interest income
Net fee and commission revenue was $6,917 million, up
$671 million or 11% year over year. Acquisitions accounted for
approximately one-third of the increase. Growth was primarily in
wealth management fees, from higher mutual fund asset levels and
brokerage commissions. Banking revenue growth was broad-based
across all revenue categories.
Other operating income (TEB) was $3,329 million a decrease of
$372 million or 10% from 2012, which reflected the impact of the
real estate gains in 2012. Partly offsetting was the noted gain from
an associated corporation in 2013. Adjusting for these items, the
growth was 11% reflecting higher net gains on investment
securities and insurance revenues.
Provision for credit losses
The provision for credit losses increased $36 million to 1,288 million
from $1,252 million in 2012.
Operating expenses
Operating expenses rose 12% over 2012 to $11,664 million.
Approximately half of this growth was attributable to acquisitions,
the negative impact of foreign currency translation, and the above
noted non-recurring items. The remaining increase reflects initiatives
to support business growth, higher employee benefits costs and
increased rent due to the sale of Scotia Plaza in 2012. Operating
leverage was positive 1.3%, after adjusting for the 2012 real estate
gains and the above noted non-recurring items in 2013.
Provision for income taxes
The Bank’s overall effective income tax rate was 20.8% compared to
19.7% for 2012. The increase in the effective tax rate was due
primarily to the impact of lower taxes on the sale of real estate
assets in 2012.
T25 Financial Results Review
For the year ended October 31, 2013 ($ millions)
(2)
Canadian
Banking
International
Banking
Global Wealth
& Insurance
Global Banking &
Markets Other
(1)
Total
Net interest income $ 5,419 $ 4,923 $ 409 $ 787 $ (188) $ 11,350
Non-interest income 1,554 2,498 3,587 2,793 (483) 9,949
Total revenue $ 6,973 $ 7,421 $ 3,996 $ 3,580 $ (671) $ 21,299
Provision for credit losses 478 781 3 26 0 1,288
Non-interest expenses 3,583 4,138 2,411 1,589 (57) 11,664
Provision for income taxes 761 584 336 510 (454) 1,737
Net income $ 2,151 $ 1,918 $ 1,246 $ 1,455 $ (160) $ 6,610
Net income attributable to non-controlling interests – 192 39 – – 231
Net income attributable to equity holders of the Bank $ 2,151 $ 1,726 $ 1,207 $ 1,455 $ (160) $ 6,379
(1) Includes all other smaller operating segments and corporate adjustments, such as the elimination of the tax-exempt gross-up reported in net interest income and other operating income and provision for income taxes for
the year ended October 31, 2013 ($312 million) to arrive at the amounts reported in Consolidated Statement of Income, differences in the actual amount of costs incurred and charged to the operating segments.
(2) Taxable equivalent basis. Refer to non-GAAP measures on Page 17.
For the year ended October 31, 2012 ($ millions)
(2)
Canadian
Banking
International
Banking
Global Wealth
& Insurance
Global Banking &
Markets Other
(1)
Total
Net interest income $ 4,610 $ 4,456 $ 442 $ 760 $ (298) $ 9,970
Non-interest income 1,531 2,029 3,072 2,744 300 9,676
Total revenue $ 6,141 $ 6,485 $ 3,514 $ 3,504 $ 2 $ 19,646
Provision for credit losses 506 613 3 30 100 1,252
Non-interest expenses 3,192 3,683 2,076 1,507 (22) 10,436
Provision for income taxes 642 463 315 524 (376) 1,568
Net income $ 1,801 $ 1,726 $ 1,120 $ 1,443 $ 300 $ 6,390
Net income attributable to non-controlling interests 3 168 25 – – 196
Net income attributable to equity holders of the Bank $ 1,798 $ 1,558 $ 1,095 $ 1,443 $ 300 $ 6,194
(1) Includes all other smaller operating segments and corporate adjustments, such as the elimination of the tax-exempt gross-up reported in net interest income and other operating income and provision for income taxes for
the year ended October 31, 2012 ($288 million) to arrive at the amounts reported in Consolidated Statement of Income, differences in the actual amount of costs incurred and charged to the operating segments.
(2) Taxable equivalent basis. Refer to non-GAAP measures on Page 17.
2014 Scotiabank Annual Report 37
MANAGEMENT’S DISCUSSION AND ANALYSIS
Financial performance of business lines
Canadian Banking
Canadian Banking’s net income attributable to equity holders was
$2,151 million in 2013, $350 million or 19% higher than in 2012.
Return on economic equity was 33.4% versus 35.9% in 2012.
Retail, small business, and commercial banking all generated strong
performances.
Total revenues were $6,973 million, up $832 million or 14% from
2012.
Net interest income increased 18% to $5,419 million. Excluding the
impact of Tangerine, the underlying growth in net interest income
was driven by strong asset and deposit growth. The net interest
margin decreased 5 basis points to 2.04% due mainly to the
acquisition of Tangerine.
International Banking
Net income attributable to equity holders increased by $168 million
or 11% to $1,726 million including a $90 million after tax benefit
from (i) the sale of a subsidiary by an associated corporation in
Thailand ($150 million), less (ii) a valuation adjustment on
acquisition-related receivables in Puerto Rico ($40 million), and (iii) a
restructuring charge in Uruguay ($20 million). Adjusting for these
items, net income increased by $78 million or 5% driven by
acquisitions and solid underlying revenue growth, which included an
after-tax gain of $25 million on the sale of a non-strategic business
in Peru. Partly offsetting were higher provision for credit losses,
operating expenses and income taxes. Return on economic equity
was 14.2% versus 11.9% in 2012.
Total revenues of $7,421 million increased 14%. Excluding the
$203 million benefit (on a tax-normalized basis) of the noted gain in
an associated corporation in Thailand and the favourable impact of
foreign exchange translation, revenues rose $632 million or 10%.
Net interest income increased 10% driven by solid loan growth and
acquisitions. The net interest margin at 4.11% was relatively flat
compared to 4.13% in 2012. Net fee and commission revenues
increased 8% to $1,403 million largely driven by the acquisitions and
higher underlying retail and commercial fees. Net income from
associated corporations increased $283 million. Excluding the noted
gain (on a tax-normalized basis) in an associated corporation,
contributions were up $80 million or 21% mainly in Asia. Other
operating income rose 23% to $427 million due mainly to the gain
on the sale of a non-strategic business in Peru and higher net gains
on investment securities.
Global Wealth & Insurance
Global Wealth & Insurance reported net income attributable to
equity holders of $1,207 million, an increase of $112 million
or 10%
compared to 2012. Net income increased due to strong broad-based
results in both the wealth management and insurance businesses.
Growth in wealth management was driven by higher assets under
management (AUM) and assets under administration (AUA) from net
sales, improved financial market conditions and the acquisitions of
Colfondos in Colombia and AFP Horizonte in Peru. Return on
economic equity was 16.7% compared to 13.5% in 2012.
Total revenues for the year were $3,996 million, an increase of
$482 million or 14% over 2012. The increase in revenues was driven
by strong growth across the wealth management and insurance
businesses and from acquisitions.
Global Banking & Markets
Global Banking & Markets reported net income attributable to equity
holders of $1,455 million in 2013, a slight increase of $12 million or
1% from 2012. This result was positively impacted by solid
contributions from the diversified client platform. Solid revenue
growth across the business platform led to record revenues, however
this was mitigated by growth in expenses. Return on economic
equity was 27.6% compared to 26.3% in 2012.
Total revenues during 2013 were a record $3,580 million compared
to $3,504 million in 2012, an increase of 2% as the business
continues to benefit from a diversified products and services
platform. The fixed income, equities and Canadian corporate lending
businesses experienced record revenues during 2013. Also
contributing was very strong growth in the corporate lending
business in Europe. These were partly offset by declines in the
commodities, investment banking, precious metals, U.S. corporate
lending and foreign exchange businesses.
Other
The Other segment had a net loss attributable to equity holders of
$160 million in 2013, compared to a net income of $300 million in
2012. 2012 net income benefited from $708 million after-tax gains
on sale of real estate assets.
Net interest income, other operating income, and the provision for
income taxes in each period include the elimination of tax-exempt
income gross-up. This amount is included in the operating segments,
which are reported on a taxable equivalent basis. The elimination
was $312 million in 2013, compared to $288 million in 2012.
Net income from investments in associated corporations and the
provision for income taxes in each period include the 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 corporations to the divisional results.
38 2014 Scotiabank Annual Report
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Financial Position 2013 vs. 2012
Total assets
The Bank’s total assets at October 31, 2013 were $744 billion, up
$75 billion or 11% from October 31, 2012, including approximately
$28 billion related to the acquisition of Tangerine.
Cash and deposits with financial institutions grew by $6 billion, due
mainly to increases in interest bearing deposits with central banks,
while precious metals decreased $4 billion due to lower prices and
inventory. Securities purchased under resale agreements and
securities borrowed increased by $16 billion.
Trading assets
Trading assets increased $9 billion from October 31, 2012. Trading
securities rose $10 billion from higher holdings of common equities,
and U.S. and Canadian provincial government debt. Trading loans
decreased $2 billion due mainly to a reduction in precious metals
trading and lending activities.
Investment securities
Investment securities grew by $1 billion due mainly to increased
holdings of other foreign government debt. As at October 31, 2013,
the unrealized gain on available-for-sale securities, after the impact
of qualifying hedges is taken into account, was $980 million, an
increase of $89 million from October 31, 2012. The change was due
mainly to increases in common equities, as unrealized gains on debt
securities declined year over year.
Loans
Loans increased $50 billion or 14% from October 31, 2012.
Residential mortgages increased $34 billion mainly from the
acquisition of Tangerine. Personal and credit card loans rose
$8 billion due mainly to growth in Canada and Mexico. Business and
government loans were up $8 billion due primarily to growth in Latin
America and Asia.
Total liabilities
Total liabilities were $698 billion as at October 31, 2013, up
$70 billion or 11% from October 31, 2012, including $35 billion
from Tangerine.
Deposits
Total deposits increased by $52 billion. Personal deposits grew by
$33 billion primarily from the acquisition of Tangerine. Business and
government deposits increased $20 billion, $6 billion from the
Tangerine acquisition as well as other growth in Canada and the
U.S. Deposits by financial institutions decreased $1 billion.
Other Liabilities
Obligations related to securities sold under repurchase agreements
and securities lent, as well as obligations related to securities sold
short, grew by $21 billion and $6 billion, respectively. Derivative
instrument liabilities decreased $6 billion, which was similar to the
decrease in derivative instrument assets.
Equity
Total shareholders’ equity increased $5,722 million from October 31,
2012. This increase was driven by internal capital generation of
$3,293 million, the issuance of common shares of $1,377 million,
comprised of $99 million for the purchase of Colfondos in Colombia
and $1,278 million through the Dividend Reinvestment Plan and the
exercise of options. The Bank redeemed $300 million of preferred
shares during the year.
Accumulated other comprehensive income increased $1,133 million
due mainly to remeasurement of employee benefit plan assets and
liabilities and reduced unrealized foreign exchange translation on the
Bank’s investments in its foreign operations.
2014 Scotiabank Annual Report 39
MANAGEMENT’S DISCUSSION AND ANALYSIS
C20 Loan portfolio
loans & acceptances, $ billions, as at October 31
12 13 14
240
160
80
480
400
320
Business & government
Personal & credit cards
Residential mortgages
C21 Deposits
$ billions, as at October 31
12 13 14
Banks
Business & government
Personal
100
200
300
400
600
500
GROUP FINANCIAL CONDITION
T26 Condensed statement of financial position
As at October 31 ($ billions) 2014 2013 2012
Assets
Cash, deposits with financial institutions and precious metals $ 64.0 $ 62.2 $ 59.7
Trading assets 113.2 96.5 87.6
Securities purchased under resale agreements and securities
borrowed 93.9 82.5 66.2
Investment securities 38.7 34.3 33.4
Loans 424.3 402.2 352.6
Other 71.6 65.9 68.7
Total assets $ 805.7 $ 743.6 $ 668.2
Liabilities
Deposits $ 554.0 $ 517.9 $ 465.7
Obligations related to securities sold under repurchase
agreements and securities lent 89.0 77.5 57.0
Other liabilities 108.6 97.0 95.7
Subordinated debentures 4.9 5.8 10.1
Total liabilities $ 756.5 $ 698.2 $ 628.5
Equity
Common equity 45.0 40.2 34.3
Preferred shares 2.9 4.1 4.4
Non-controlling interest in subsidiaries 1.3 1.1 1.0
Total equity $ 49.2 $ 45.4 $ 39.7
Total liabilities and shareholders’ equity $ 805.7 $ 743.6 $ 668.2
Statement of Financial Position
Assets
The Bank’s total assets at October 31, 2014 were $806 billion, up $62 billion or 8% from
October 31, 2013. Adjusting for the impact of foreign currency translation, total assets were up
$40 billion or 5%.
Cash and deposits with financial institutions increased $3 billion, due mainly to higher interest
bearing deposits with central banks, while precious metals decreased $2 billion due to lower
prices and inventory. Securities purchased under resale agreements and securities borrowed
increased $11 billion.
Trading Assets
Trading assets increased $17 billion from October 31, 2013 due primarily to an increase in
trading securities of $11 billion from higher holdings of common equities and Canadian
government debt and an increase in trading loans of $3 billion.
Investment Securities
Investment securities grew by $4 billion due mainly to increased holdings of U.S. government
debt for liquidity management purposes. As at October 31, 2014, the unrealized gain on
available-for-sale securities, after the impact of qualifying hedges is taken into account, was $847
million, a decrease of $133 million from October 31, 2013. The decrease was due mainly to
realized gains on sales in 2014.
Loans
Loans increased $22 billion or 5% from October 31, 2013. Adjusting for the impact of foreign
currency translation, loans increased $15 billion or 4%. Residential mortgages increased $3
billion mainly in Latin America and the Caribbean as underlying growth in Canadian residential
mortgages was generally offset by the planned run-off of a component of Tangerine’s mortgage
portfolio. Personal and credit card loans rose $8 billion, due mainly to growth in Canada and
Latin America. Business and government loans were up $11 billion mainly in Canada and Latin
America.
Other Assets
Investments in associates decreased $2 billion due mainly to the partial sale and the reclassification of
the Bank’s remaining holdings in CI Financial Corp. to available-for-sale securities, offset in part by the
acquisition of Canadian Tire’s Financial Services business.
Liabilities
Total liabilities were $756 billion as at October 31, 2014, up $58 billion or 8% from October 31,
2013. Adjusting for the impact of foreign currency translation, total liabilities increased $38 billion or
5%.
Deposits
Total deposits increased by $36 billion, including the impact of foreign currency translation of
$16 billion. Personal deposits grew by $4 billion due primarily to growth in Canada and Latin
America. Business and government deposits increased $29 billion to support asset growth.
Other Liabilities
Obligations related to securities sold under repurchase agreements and securities lent grew by
$11 billion, in part to finance growth in securities purchased under resale agreements and
securities borrowed. Derivative instrument liabilities increased $7 billion, which was similar to the
increase in derivative instrument assets.
40 2014 Scotiabank Annual Report
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Equity
Total shareholders’ equity increased $3,824 million from October 31,
2013. This increase was driven by internal capital generation of
$3,806 million, issuance of common shares of $771 million mainly
through the Dividend Reinvestment Plan and the exercise of options.
Accumulated other comprehensive income increased $561 million due
primarily to unrealized foreign currency translation gains on the Bank’s
investments in its foreign operations. These increases were partly offset
by the repurchase and cancellation of 4.5 million common shares for
$320 million under the Normal Course Issuer Bid program. The Bank
redeemed $1,150 million of preferred shares during the year.
Outlook
Assets and deposits are expected to continue to grow in 2015, with
increases spread across all business lines. In Canada, lower growth in
residential mortgages is expected to be offset by growth in other
lending categories. Internationally, lending assets and deposits are
expected to grow.
Capital Management
Overview
Scotiabank is committed to maintaining a strong capital base to support
the risks associated with its diversified businesses. Strong capital levels
contribute to safety for the Bank’s customers, foster investor confidence
and support strong credit ratings. It also allows the Bank to take
advantage of growth opportunities as they arise and enhance
shareholder returns through increased dividends. The Bank’s capital
management framework includes a comprehensive internal capital
adequacy assessment process (ICAAP), aimed at ensuring that the
Bank’s capital is adequate to meet current and future risks and achieve
its strategic objectives. Key components of the Bank’s ICAAP include
sound corporate governance; creating a comprehensive risk appetite for
the Bank; managing and monitoring capital, both currently and
prospectively; and utilizing appropriate financial metrics which relate risk
to capital, including economic and regulatory capital measures.
Governance and oversight
The Bank has a sound capital management framework to measure,
deploy and monitor its available capital and assess its adequacy. Capital
is managed in accordance with the Board-approved Capital
Management Policy. In addition, the Board reviews and approves the
Bank’s annual capital plan. The Liability Committee and senior
executive management provide governance over the capital
management process. The Bank’s Finance, Treasury and Global Risk
Management groups take a coordinated approach to implementing the
Bank’s capital plan.
Risk appetite
The risk appetite framework that establishes enterprise wide risk
tolerances in addition to capital targets are detailed in the Risk
Management section “Risk appetite framework” on page 65. The
framework encompasses medium to long-term targets with respect to
regulatory capital thresholds, earnings, economic capital and other risk-
based parameters. These targets ensure the Bank achieves the
following overall objectives: exceed regulatory and internal capital
targets, manage capital levels commensurate with the risk profile of the
Bank, maintain strong credit ratings and provide the Bank’s
shareholders with acceptable returns.
Regulatory capital
Capital ratios are a means to monitor the capital adequacy and the
financial strength of banks. The three primary regulatory risk-based
capital ratios, Common Equity Tier 1, Tier 1 and Total, are determined
by dividing capital components by risk-weighted assets.
Capital adequacy standards for Canadian banks are regulated by the
Canadian regulator, the Office of the Superintendent of Financial
Institutions (OSFI). These standards are largely consistent with
international standards set by the Basel Committee on Banking
Supervision (BCBS).
Effective November 1, 2012, Canadian banks are subject to the revised
capital adequacy requirements as published by BCBS and commonly
referred to as Basel III. Basel III builds on the “International
Convergence of Capital Measurement and Capital Standards: A Revised
Framework” (Basel II).
As compared to previous standards, Basel III places a greater emphasis
on common equity by introducing a new category of capital, Common
Equity Tier 1 (CET1), which consists primarily of common shareholders’
equity net of regulatory deductions. These regulatory adjustments
include goodwill, intangible assets (net of deferred tax liabilities),
deferred tax assets, pension assets and investments in financial
institutions over certain thresholds. Overall, the Basel III rules increase
the level of regulatory deductions relative to Basel II.
Basel III also increases the level of risk-weighted assets for significant
investments and deferred tax amounts under defined thresholds,
exposures to large or unregulated financial institutions meeting specific
criteria, derivative exposures to centralized counterparties and
exposures that give rise to wrong way risk.
On January 13, 2011, additional guidance was issued by the BCBS,
with respect to requirements for loss absorbency of capital at the point
of non-viability. These requirements were effective on January 1, 2013
for Canadian banks. These rules affect the eligibility of instruments for
inclusion in regulatory capital and provide for a transition and phase-
out of any non-eligible instruments. All of the Bank’s current preferred
shares, capital instruments and subordinated debentures do not meet
these additional criteria and are subject to phase-out commencing
January 2013. The Bank reserves the right to redeem, call or repurchase
any capital instruments within the terms of each offering at any time in
the future.
In addition, OSFI designated the 6 largest banks in Canada as domestic
systemically important banks (D-SIBs), increasing its minimum capital
ratio requirements by 1% for the identified D-SIBs. This 1% surcharge
is applicable to all minimum capital ratio requirements for CET1, Tier 1
and Total Capital, by January 1, 2016, in line with the requirements for
global systemically important banks. The Bank is expected to maintain a
material operating buffer above the minimum capital ratio
requirements.
To enable banks to meet the new standards, the BCBS Basel III rules
contain transitional arrangements commencing January 1, 2013,
through January 1, 2019. Transitional requirements result in a phase-in
of new deductions to common equity over 5 years, phase-out of non-
qualifying capital instruments over 10 years and a phase-in of a capital
conservation buffer over 4 years. As of January 2019, banks will be
required to meet new minimum requirements related to risk-weighted
assets of: Common Equity Tier 1 ratio of 4.5% plus a capital
conservation buffer of 2.5%, collectively 7%, minimum Tier 1 ratio of
8.5%, and Total capital ratio of 10.5%.
OSFI has issued guidelines, reporting requirements and disclosure
guidance which are consistent with the Basel III reforms, except for its
deferral of the Basel III credit valuation adjustment (CVA) related capital
charges, requiring they be phased-in over a five-year period, beginning
January 2014. In accordance with OSFI’s requirements, a scalar for CVA
risk-weighted assets of 0.57 was used in the first two quarters of 2014.
At Q3 and Q4 2014, CVA risk-weighted assets were calculated using
scalars of 0.57, 0.65 and 0.77 to compute the CET1, Tier 1 and Total
ratios, respectively.
2014 Scotiabank Annual Report 41
MANAGEMENT’S DISCUSSION AND ANALYSIS
Commencing the first quarter of 2013, OSFI required Canadian
deposit-taking institutions to fully implement the 2019 Basel III reforms,
without the transitional phase-in provisions for capital deductions
(referred to as ‘all-in’) and achieve a minimum 7% Common Equity
Tier 1 target.
Regulatory developments related to capital
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. The
Leverage ratio is defined as a ratio of Basel III Tier 1 capital to a
leverage exposure measure which includes on-balance sheet assets and
off-balance sheet commitments, derivatives and securities financing
transactions, as defined within the requirements.
In January 2014, the BCBS issued revisions to the Basel III Leverage ratio
framework. Revisions to the framework related primarily to the
exposure measure, i.e. the denominator of the ratio, and consist mainly
of: lower credit conversion factors for certain off-balance sheet
commitments; further clarification on the treatment for derivatives,
related collateral, and securities financing transactions; additional
requirements for written credit derivatives; and, minimum public
disclosure requirements commencing January 2015. The final
calibration will be completed by 2017, with a view to migrating to a
Pillar 1 (minimum capital requirement) treatment by January 2018.
In October 2014, OSFI released its Leverage Requirements Guideline
which outlines the application of the Basel III Leverage ratio in Canada
and the replacement of the existing Assets-to-Capital Multiple (ACM),
effective Q1 2015. Institutions will be expected to maintain a material
operating buffer above the 3% minimum. The Bank expects to meet
OSFI’s authorized Leverage ratio. Disclosure in accordance with OSFI’s
September 2014 Public Disclosure Requirements related to Basel III
Leverage ratio will be made commencing Q1 2015.
Planning, managing and monitoring capital
Capital is managed and monitored based on planned changes in the
Bank’s strategy, identified changes in its operating environment or
changes in its risk profile. As part of the Bank’s comprehensive ICAAP,
sources and uses of capital are continuously measured and monitored
through financial metrics, including regulatory thresholds, and
economic capital. (These results are used in capital planning and
strategic decision-making.)
The Bank’s assessment of capital adequacy is in the context of its
current position and its expected future risk profile and position relative
to its internal targets while considering the potential impact of various
stress scenarios. Specific scenarios are selected based on the current
economic conditions and business events facing the Bank. In addition,
the Bank’s forward looking capital adequacy assessment includes a
consideration of the results of more severe multi-risk scenarios within
its enterprise-wide stress testing. This testing is used to determine the
extent to which severe, but plausible events, impact the Bank’s capital.
The Bank sets internal economic and regulatory capital targets to
ensure the Bank’s available capital is sufficient within the context of its
risk appetite.
For economic capital, the Bank’s medium-term internal target is that
common shareholder’s equity should be at least 100% of required
economic capital. However, in the short term, it may be as low as 95%
of required economic capital and supported by preferred shares.
For regulatory capital, the Bank’s internal target includes an adequate
buffer over the regulatory minimum ensuring sufficient flexibility for
future capital deployment and in consideration of the Bank’s risk
appetite, the volatility of planning assumptions, the results from stress
testing and contingency planning.
The Bank has a comprehensive risk management framework to ensure
that the risks taken while conducting its business activities are consistent
with its risk appetite, its impact on capital relative to internal targets,
and that there is an appropriate balance between risk and return. Refer
to the Risk Management section on page 65 for further discussion on
the Bank’s risk management framework. In managing the Bank’s capital
base, close attention is paid to the cost and availability of the various
types of capital, desired leverage, changes in the assets and risk-
weighted assets, and the opportunities to profitably deploy capital. The
amount of capital required for the business risks being assumed, and to
meet regulatory requirements, is balanced against the goal of
generating an appropriate return for the Bank’s shareholders.
Capital generation
Capital is generated internally through net earnings after dividend
payments. As well, capital is generated by the issuance of common
shares, preferred shares, and Tier 2 subordinated debentures.
Capital utilization
The Bank deploys capital to support sustainable, long-term revenue and
net income growth. The growth can be through existing businesses by
attracting new customers, increasing cross-selling activities to existing
customers, adding new products and enhancing sales productivity, or
through acquisitions. All major initiatives to deploy capital are subject to
rigorous analysis, validation of business case assumptions and evaluation
of expected benefits. Key financial criteria include impact on earnings
per share, capital ratios, return on invested capital, expected payback
period and internal rate of return based on discounted cash flows. Any
potential business acquisitions, investments or strategic initiatives are
reviewed and approved by the Bank’s Strategic Transaction Executive
Committee, to ensure effective deployment of capital.
Regulatory capital ratios
The Bank continues to maintain strong high quality capital levels which
positions it well for future business growth. The Basel III all-in Common
Equity Tier 1 (CET1) ratio as at year end was 10.8%. Increases in the
CET1 ratio were primarily due to strong internal capital generation, the
sale of the Bank’s investment in CI Financial Corp. which significantly
lowered regulatory capital deductions, and prudent management of
asset growth. The Bank continued to issue common shares through its
Dividend Reinvestment (DRIP), stock option and share purchase plans;
however, the Bank eliminated the 2% discount on the DRIP and
initiated share repurchases through its Normal Course Issuer Bid
program during the year to manage its capital levels. The Bank’s
investment in Canadian Tire Financial Services in the fourth quarter had
a modest impact on its capital position. In addition, redemptions of
non-common capital instruments during the year resulted in Basel III
all-in Tier 1 and Total capital ratios of 12.2% and 13.9%, respectively,
as at year end.
The Bank’s capital ratios continue to be well in excess of OSFI’s
minimum capital ratios of 7%, 8.5% and 10.5% for CET1, Tier 1 and
Total Capital respectively. These ratios were also strong by international
standards.
In addition to the regulatory risk-based capital ratios, banks are also
subject to a maximum leverage test, the assets-to-capital multiple
(ACM) as established by OSFI. The ACM is calculated by dividing a
bank’s total assets, including specified off-balance sheet items, such as
direct credit substitutes and performance letters of credit, by its total
capital. As at October 31, 2014, the Bank’s ACM of 17.1x was well
below the regulatory maximum. OSFI has decided to replace the ACM
with the Basel III Leverage ratio effective Q1, 2015.
Outlook
The Bank will continue to have a strong capital position in 2015.
Capital will be prudently managed to support organic growth initiatives
and selective acquisitions that enhance shareholder returns, while
maintaining full compliance with evolving regulatory changes.
42 2014 Scotiabank Annual Report
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T27 Regulatory capital
(1)
IFRS CGAAP
Basel III All-in Basel II
As at October 31 ($ millions) 2014 2013 2012 2011 2010
Common Equity Tier 1 capital
Total Common Equity
(2)
$ 44,965 $ 40,569 $ 34,755 $ 27,932 $ 23,199
Qualifying non-controlling interest in Common Equity of subsidiaries 514 479 966 640 579
Goodwill and non-qualifying intangibles, net of deferred tax liabilities
(3)
(10,482) (9,772) (7,840) (6,860) (3,638)
Threshold related deductions (305) (3,630)
Net deferred tax assets (excluding those arising from temporary differences)
(4)
(620) (752)
Other Common Equity Tier 1 capital deductions
(4)(5)
(330) (535)
Common Equity Tier 1 33,742 26,359
Preferred shares
(6)
2,934 4,084 4,384 4,384 3,975
Capital instrument liabilities – trust securities
(6)
1,400 1,400 2,150 2,900 3,400
Other Tier 1 capital adjustments
(7)
(3) 71 21 (507) (2,181)
Net Tier 1 Capital 38,073 31,914 34,436 28,489 25,334
Tier 2 capital
Subordinated debentures, net of amortization
(6)
4,871 5,841 9,893 6,723 6,790
Eligible collective allowance for inclusion in Tier 2 and excess allowance (re: IRB approach) 468 971 454 353 574
Qualifying Non-controlling interest in Tier 2 capital of subsidiaries 180 115
Other Tier 2 capital adjustments
(7)
– – (2,590) (3,033) (3,099)
Tier 2 capital 5,519 6,927 7,757 4,043 4,265
Total regulatory capital 43,592 38,841 42,193 32,533 29,599
Risk weighted assets ($ billions)
Credit risk 261.9 240.9 210.0 200.8 180.5
Market risk 17.3 15.4 13.8 5.9 10.5
Operational risk 33.3 31.9 29.5 27.3 24.0
CET1 risk-weighted assets
(8)
$ 312.5 $ 288.2 $ 253.3 $ 234.0 $ 215.0
Capital ratios
Common Equity Tier 1 capital ratio 10.8% 9.1% N/A N/A N/A
Tier 1 capital ratio
(9)
12.2% 11.1% 13.6% 12.2% 11.8%
Total capital ratio
(9)
13.9% 13.5% 16.7% 13.9% 13.8%
Assets to capital multiple
(10)
17.1x 17.1x 15.0x 16.6x 17.0x
(1) Effective November 1, 2012 regulatory capital ratios are determined in accordance with Basel III rules on an all-in basis (Refer to page 41). Prior period amounts have not been restated for new and amended IFRS standards as they
represent the actual amounts reported in that period for regulatory purposes.
(2) Amounts for periods 2012 and prior exclude components of accumulated other comprehensive income not eligible for Basel II Tier 1 Capital.
(3) Reported amounts are based on OSFI’s requirements that Goodwill relating to investments in associates be classified as goodwill for regulatory reporting purposes beginning Q3 2014.
(4) 2013 has been restated for presentation purposes
(5) Other CET1 capital deductions under Basel III all-in include deferred tax assets (excluding those arising from timing differences) and Defined Benefit Pension Fund Assets and other items.
(6) Non-qualifying Tier 1 and Tier 2 capital instruments are subject to a phase-out period of 10 years.
(7) Other Tier 1/Tier 2 capital adjustments under the all-in approach include eligible non-controlling interests in subsidiaries, in addition, Tier 2 includes eligible collective allowance and excess allowance. Basel II deductions include
50/50 deduction of certain investments in associated corporations and other items.
(8) At Q4 2014, CVA risk-weighted assets were calculated using scalars of 0.57, 0.65, and 0.77 for CET1 capital ratio, Tier 1 capital ratio and Total capital ratio respectively.
(9) For fiscal 2012, excluding the equity issued for the Bank’s acquisition of Tangerine, Tier 1 and Total Capital ratios were 12.9% and 16.0% respectively.
(10) Under Basel III, asset-to-capital multiple is calculated by dividing the Bank’s total assets, including specific off-balance sheet items, by total regulatory capital on a transitional basis.
T28 Changes in regulatory capital
(1)
IFRS CGAAP
Basel III All-in Basel II
For the fiscal years ($ millions) 2014 2013 2012 2011 2010
Total capital, beginning of year 38,841 $42,193 $32,533 $ 29,599 $ 28,588
Implementation of Basel III $ (1,906)
Changes in Common Equity Tier 1
Net Income attributable to Common Equity Holders of the Bank 6,916 6,422 6,243 5,181 4,239
Dividends paid to Equity Holders of the Bank (3,110) (3,075) (2,713) (2,416) (2,224)
Shares issued 771 1,404 4,872 2,657 829
Shares repurchased/redeemed (320)
Movements in Accumulated Other Comprehensive Income, excluding Cash Flow Hedges
(2)
410 482 168 (624) (590)
Change in Non-controlling interest in Common Equity of Subsidiaries NCIB 35 119 339 62 24
Change in Goodwill and other intangible assets (net of related tax liability)
(3)
(710) (1,928) (577) (1,612) (142)
Other changes including regulatory adjustments below: 3,391 (379)
–Deferred tax assets that rely on future profitability (excluding those arising from temporary
differences) 132 48
–Significant investments in the common equity of other financial institutions (amount above 10%
threshold) 2,583 (147)
–Other capital deductions 941
–Other (265) (280)
Changes in Common Equity Tier 1 7,383 $ 3,045 N/A N/A N/A
Changes in Additional Tier 1 Capital
Issued – – – 409 265
Redeemed (1,150) (1,050) (750) (500) –
Other changes including regulatory adjustments and phase-out of non-qualifying instruments (74) 23 (1,634) (3) (717)
Changes in Additional Tier 1 Capital (1,224) $ (1,027) $ 5,948 $ 3,154 $ 1,684
Changes in Tier 2 Capital
Issued – – 3,250 – –
Redeemed (970) (4,052) – (67) (43)
Collective allowances eligible for inclusion in Tier 2 and Excess Allowance under AIRB (502) 517 101 (218) 3
Other changes including regulatory adjustments and phase-out of non-qualifying instruments 64 71 361 65 (633)
Changes in Tier 2 Capital (1,408) $ (3,464) $ 3,712 $ (220) $ (673)
Total capital generated (used) 4,751 $ (3,352) $ 9,660 $ 2,934 $ 1,011
Total capital, end of year 43,592 $38,841 $42,193 $ 32,533 $ 29,599
(1) Effective November 1, 2012 regulatory capital ratios are determined in accordance with Basel III rules on an all-in basis (Refer to page 41). Prior period amounts have not been restated for new and amended IFRS standards as they
represent the actual amounts reported in that period for regulatory purposes.
(2) The Bank implemented IFRS on November 1, 2011, however amounts related to regulatory capital for prior periods have not been restated as they represent the actual amounts in the period for regulatory purposes.
(3) Reported amounts are based on OSFI’s requirements that Goodwill relating to investments in associates be classified as goodwill for regulatory reporting purposes beginning Q3 2014.
2014 Scotiabank Annual Report 43
MANAGEMENT’S DISCUSSION AND ANALYSIS
C22 Tier 1 capital
*
%, as at October 31
11 12 10 14 13
4
2
6
14
12
10
8
* Amounts prior to 2012 are calculated under Basel II and
amounts prior to 2011 calculated under CGAAP
C23 Dividend growth
dollars per share
04 06 08 10 12 14
1
2
3
C24 Internally generated capital*
$ billions, for years ended October 31
11 12 10 14 13
1.0
0.5
1.5
2.0
4.0
3.5
3.0
2.5
* Amounts prior to 2011 calculated under CGAAP
Regulatory Capital Components
Bank regulatory capital is divided into three components – Common Equity Tier 1 (CET1), Tier 1
capital and Tier 2 capital, depending on their degree of permanency and loss absorbency. All
components of capital provide support for banking operations and protect depositors.
CET1, consists primarily of common shareholders’ equity, a proration of non-controlling interests,
and regulatory deductions. These regulatory deductions include goodwill, intangible assets (net
of deferred tax liabilities), deferred tax assets that rely on future profitability, defined-benefit
pension fund net assets, shortfall of credit provision to expected losses and significant
investments in the common equity of other financial institutions.
Additional Tier 1 capital consists primarily of qualifying non-cumulative preferred shares or
non-qualifying preferred shares and innovative tier 1 instruments subject to phase-out.
Tier 2 capital consists mainly of qualifying or non-qualifying subordinated debentures subject
to phase-out and the eligible allowances for credit losses.
The Bank’s Common Equity Tier 1 capital was $33.7 billion as at October 31, 2014, an increase
of $7.4 billion from the prior year primarily from:
• $3.8 billion growth from internal capital generation. Over the past 5 years, the Bank’s level of
internal capital generation has been consistently strong;
• $3.7 billion from lower capital deductions, mainly due to the sale of the Bank’s investment in
CI Financial Corp.;
• $0.5 billion increase from common share issuances issued through the Bank’s Dividend
Reinvestment Program and Share Purchase Plans net of share repurchases under the Bank’s
Normal Course Issuer Bid; and,
• $0.4 billion increase from movements in Accumulated Other Comprehensive Income, including
foreign currency translation.
Partly offset by:
• $0.7 billion increase in goodwill primarily from revisions to OSFI’s Capital Adequacy
Requirements Guideline for the reporting of goodwill related to significant investments,
including the Bank’s recent investment in Canadian Tire Financial Services, and growth in other
intangible assets.
The Tier 1 capital ratio was also impacted by redemptions of $1.2 billion of preferred shares and
the Total Capital ratio was further impacted by redemptions of $1.0 billion of subordinated
debentures. In addition, revisions to OSFI’s Capital Adequacy Requirements Guideline for the
collective allowance reduced Total Capital by $0.5 billion.
Dividends
The strong earnings and capital position of the Bank allowed the Bank to increase its dividends
twice in 2014. The annual dividend payout in 2014 was $2.56, compared to $2.39 in 2013, an
increase of 7%. The Bank’s Board has approved target dividend payout ratio of 40-50%.
Adjusting for notable items, in 2014 the dividend payout ratio was 46.9%, compared to 47.1%
in 2013.
T29 Selected capital management activity
For the fiscal years ($ millions) 2014 2013 2012
Dividends
Common $ 3,110 $ 2,858 $ 2,493
Preferred 155 217 220
Common shares issued
(1)(2)
771 1,377 4,803
Common shares repurchased for cancellation under
the Normal Course Issuer Bid
(2)
(56) – –
Preferred shares redeemed
(3)
(1,150) (300) –
Subordinated debentures issued
(4)
– – 3,250
Maturity, redemption and repurchase of subordinated debentures
(4)
(1,000) (4,210) (20)
Issuance/(redemption) of trust securities – (750) (750)
(1) Represents primarily cash received for stock options exercised during the year, common shares issued pursuant to the Dividend and Share Purchase
Plan and shares issued for acquisitions.
(2) For further details, refer to Note 26 of the consolidated financial statements.
(3) For further details, refer to Note 27 of the consolidated financial statements.
(4) For further details, refer to Note 23 of the consolidated financial statements.
Normal Course Issuer Bid
On May 27, 2014, the Bank announced that OSFI and the Toronto Stock Exchange approved its
normal course issuer bid (the “bid”) pursuant to which it may repurchase for cancellation up to
12 million of the Bank’s common shares. The bid will end on the earlier of May 29, 2015, or the
date on which the Bank completes its purchases. During the year ended October 31, 2014, the
Bank repurchased and cancelled 4.5 million common shares under this bid at an average price of
$71.04 per share for a total amount of approximately $320 million.
44 2014 Scotiabank Annual Report
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Share data and other capital instruments
The Bank’s common and preferred share data, as well as other capital instruments, are shown in Table 30. Further details, including exchangeability
features, are discussed in Notes 26 and 27 of the consolidated financial statements.
T30 Shares and other instruments
As at October 31, 2014
Share data
Amount
($ millions) Dividend
Dividend
rate (%)
Number
outstanding
(000s)
Common shares
(1)
$ 15,231 $ 0.66 – 1,216,582
Preferred shares
Preferred shares Series 14
(2)
345 0.281250 4.50 13,800
Preferred shares Series 15
(2)
345 0.281250 4.50 13,800
Preferred shares Series 16
(2)
345 0.328125 5.25 13,800
Preferred shares Series 17
(2)
230 0.350000 5.60 9,200
Preferred shares Series 18
(2)(3)(4)
187 0.209375 3.35 7,498
Preferred shares Series 19
(2)(3)(5)
158 0.185500 2.97 6,302
Preferred shares Series 20
(2)(3)(6)
201 0.225625 3.61 8,039
Preferred shares Series 21
(2)(3)(7)
149 0.163625 2.62 5,961
Preferred shares Series 22
(2)(3)(8)
234 0.239375 3.83 9,377
Preferred shares Series 23
(2)(3)(9)
66 0.174875 2.80 2,623
Preferred shares Series 30
(2)(3)(10)
265 0.240625 3.85 10,600
Preferred shares Series 32
(2)(3)(11)
409 0.231250 3.70 16,346
Trust securities
Amount
($ millions) Distribution
Yield
(%)
Number
outstanding
(000s)
Scotiabank Trust Securities – Series 2006-1 issued by Scotiabank Capital Trust
(12a,c,d)
$ 750 $ 28.25 5.650 750
Scotiabank Tier 1 Securities – Series 2009-1 issued by Scotiabank Tier 1 Trust
(12b,c,d)
650 39.01 7.802 650
Options
Number
outstanding
(000s)
Outstanding options granted under the Stock Option Plans to purchase common shares
(1)(13)(14)
23,355
(1) Dividends on common shares are paid quarterly. As at November 21, 2014, the number of outstanding
common shares and options was 1,216,649 thousand and 23,287 thousand, respectively.
(2) These shares are entitled to non-cumulative preferential cash dividends payable quarterly.
(3) These preferred shares have conversion features (refer to Note 27 of the consolidated financial statements
in the Bank’s 2014 Annual Report for further details).
(4) Subsequent to the initial five-year fixed rate period which ended on April 25, 2013, and resetting every five
years thereafter, the dividends, if and when declared, will be determined by the sum of the five-year
Government of Canada Yield plus 2.05%, multiplied by $25.00.
(5) Dividends, if and when declared, are determined by the sum of the three-month Government of Canada
Treasury Bill Yield plus 2.05%, multiplied by $25.00, which will be reset quarterly until April 25, 2018.
(6) Subsequent to the initial five-year fixed rate period which ended on October 25, 2013, and resetting every
five years thereafter, the dividends, if and when declared, will be determined by the sum of the five-year
Government of Canada Yield plus 1.70%, multiplied by $25.00.
(7) Dividends, if and when declared, are determined by the sum of the three-month Government of Canada
Treasury Bill Yield plus 1.70%, multiplied by $25.00, which will be reset quarterly until October 25, 2018.
(8) Subsequent to the initial five-year fixed rate period which ended on January 25, 2014, and resetting every
five years thereafter, the dividends, if and when declared, will be determined by the sum of the five-year
Government of Canada Yield plus 1.88%, multiplied by $25.00.
(9) Dividends, if and when declared, are determined by the sum of the three-month Government of Canada
Treasury Bill Yield plus 1.88%, multiplied by $25.00, which will be reset quarterly until January 25, 2019.
(10) Dividends, if and when declared, are for the initial five-year period ending on April 25, 2015. Subsequent
to the initial five-year fixed rate period, and resetting every five years thereafter, the dividends will be
determined by the sum of the five-year Government of Canada Yield plus 1.00%, multiplied by $25.00.
(11) Dividends, if and when declared, are for the initial five-year period ending on February 1, 2016.
Subsequent to the initial five-year fixed rate period, and resetting every five years thereafter, the dividends
will be determined by the sum of the five-year Government of Canada Yield plus 1.34%, multiplied by
$25.00.
12 (a) On September 28, 2006, Scotiabank Capital Trust issued 750,000 Scotiabank Trust Securities – Series
2006-1 (Scotia BaTS II Series 2006-1). The holders of Scotia BaTS II Series 2006-1 are entitled to receive
non-cumulative fixed cash distributions payable semi-annually in an amount of $28.25 per security. With
regulatory approval, these securities may be redeemed in whole upon the occurrence of certain tax or
regulatory capital changes, or in whole or in part on December 30, 2011 and on any distribution date
thereafter at the option of Scotiabank Capital Trust. The holder has the right at any time to exchange their
security into Non-cumulative Preferred Shares Series S of the Bank. The Series S shares will be entitled to
cash dividends payable semi-annually in an amount of $0.4875 per $25.00 share [refer to Notes 26 and
27 – Restrictions on dividend payments]. Under the circumstances outlined in 12(c) below, the Scotia BaTS
II Series 2006-1 would be automatically exchanged without the consent of the holder, into Non-cumulative
Preferred Shares Series T of the Bank. The Series T shares will be entitled to non-cumulative cash dividends
payable semi-annually in an amount of $0.625 per $25.00 share. If there is an automatic exchange of the
Scotia BaTS II Series 2006-1 into Preferred Shares Series T of the Bank, then the Bank would become the
sole beneficiary of the Trust.
12 (b) On May 7, 2009, Scotiabank Tier 1 Trust issued 650,000 Scotiabank Tier 1 Securities Series 2009-1
(Scotia BaTS III Series 2009-1). Interest is payable semi-annually in an amount of $39.01 per Scotia BaTS
III Series 2009-1 on the last day of June and December until June 30, 2019. After June 30, 2019 and on
every fifth anniversary thereafter until June 30, 2104, the interest rate on the Scotia BaTS III Series 2009-1
will be reset at an interest rate per annum equal to the then prevailing 5-year Government of Canada Yield
plus 7.05%. On or after June 30, 2014, the Trust may, at its option redeem the Scotia BaTS III Series
2009-1, in whole or in part, subject to regulatory approval. Under the circumstances outlined in 12(c)
below, the Scotia BaTS III Series 2009-1, including accrued and unpaid interest thereon, would be
exchanged automatically without the consent of the holder, into newly issued Non-cumulative Preferred
Shares Series R of the Bank. In addition, in certain circumstances, holders of Scotia BaTS III Series 2009-1
may be required to invest interest paid on the Scotia BaTS III Series 2009-1 in a series of newly-issued
preferred shares of the Bank with non-cumulative dividends (each such series is referred to as Bank
Deferral Preferred Shares). If there is an automatic exchange of the Scotia BaTS Preferred Shares, then the
Bank would become the sole beneficiary of the Trust.
12 (c) The Scotia BaTS II Series 2006-1 and Scotia BaTS III Series 2009-1 may be automatically exchanged,
without the consent of the holder, into Non-cumulative Preferred Shares of the Bank in the following
circumstances: (i) proceedings are commenced for the winding-up of the Bank; (ii) the Superintendent
takes control of the Bank or its assets; (iii) the Bank has a Tier 1 Capital ratio of less than 5% or a Total
Capital ratio of less than 8%; or (iv) the Superintendent has directed the Bank to increase its capital or
provide additional liquidity and the Bank elects such automatic exchange or the Bank fails to comply with
such direction.
12 (d) No cash distributions will be payable on the Scotia BaTS II Series 2006-1 and Scotia BaTS III Series
2009-1 in the event that the regular dividend is not declared on the Bank’s preferred shares and, if no
preferred shares are outstanding, the Bank’s common shares. In such a circumstance the net distributable
funds of the Trust will be payable to the Bank as the holder of the residual interest in the Trust. Should the
Trust fail to pay the semi-annual distributions on the Scotia BaTS II Series 2006-1 and Scotia BaTS III Series
2009-1 in full, the Bank will not declare dividends of any kind on any of its preferred or common shares for
a specified period of time [refer to Notes 26 and 27 – Restrictions on dividend payments].
(13) Included are 364 thousand stock options with tandem stock appreciation rights (Tandem SAR) features.
(14) During 2013, certain employees voluntarily renounced 2,835 thousand Tandem SARs while retaining their
corresponding option for shares.
2014 Scotiabank Annual Report 45
MANAGEMENT’S DISCUSSION AND ANALYSIS
Credit ratings
Credit ratings affect the Bank’s access to capital markets and
borrowing costs, as well as the terms on which the Bank can conduct
derivatives and hedging transactions and obtain related borrowings.
The Bank continues to have strong credit ratings. The current ratings
are AA by DBRS, Aa2 by Moody’s, AA- by Fitch and A+ by Standard
and Poor’s (S&P).
In July 2014, Moody’s placed the senior debt ratings of several of the
Canadian banks on “negative outlook”. In August 2014, Standard &
Poor’s took a similar action, changing the outlook for several Canadian
banks to “Negative” from “Stable”. These actions are not downgrades,
nor do they suggest that downgrades are highly likely to follow.
Rather, these changes suggest that, over the next 12-18 months, these
rating agencies feel that a downgrade is more likely than an upgrade
for the Canadian banks. Both rating agencies cited the uncertainty
around the federal government’s proposed new “bail-in” regime for
senior unsecured debt as the principal reason for these system-wide
changes in outlook in order to reflect the greater likelihood that such
debt may incur losses in the unlikely event of a distress scenario.
In addition, Moody’s placed the Bank’s standalone rating – which
assumes no government support – on “negative outlook”. This is also
not a downgrade. This change was done primarily because Moody’s
believes that the Bank’s international business is more risky than its
Canadian business and is likely to grow more rapidly in the coming
years. Moody’s also cited the Bank’s plans to grow its unsecured
consumer lending businesses – both in Canada and internationally – as
a reason for the change.
The Bank remains confident that it will retain very high credit ratings.
Risk-weighted assets
Regulatory capital requirements are based on OSFI’s target minimum
percentage of risk-weighted assets (RWA). RWA represent the Bank’s
exposure to credit, market and operational risk and are computed by
applying a combination of the Bank’s internal credit risk parameters
and OSFI prescribed risk-weights to on- and off-balance sheet
exposures. Common Equity Tier 1 (CET1) RWA increased by
$24.2 billion in 2014 to $312.5 billion. The key contributors to the
change were credit risk of $20.9 billion (including the impact of foreign
currency translation of $8.7 billion), market risk of $1.8 billion and
operational risk of $1.5 billion. In addition, Tier 1 and Total Capital
RWA increased by $0.8 billion and $2.0 billion, respectively, due to the
adoption of OSFI prescribed scalars for CVA risk-weighted assets.
CET1 Credit risk-weighted assets
CET1 credit risk-weighted assets of $261.9 billion increased
$20.9 billion as shown in Table 31 from the following components:
• Underlying business growth added $8.5 billion to RWA largely as a
result of increases in retail and business lending across all business
lines.
• Improvement in the credit quality of the portfolio resulted in a
$5.7 billion reduction in RWA. In addition to positive migration of
exposures to higher ratings, favourable credit experiences resulted in
improved risk parameters which are updated at least annually to
account for increased historical data and changes in model
estimates/assumptions.
• Model enhancements to retail AIRB models increased RWA by
$2.3 billion.
• Methodology and policy changes of $5.0 billion are a result of the
phase-in adoption of the Basel III CVA capital requirements based on
the OSFI prescribed scalar for CET1 RWA of 57% which will increase
to 100% by 2019.
• Acquisitions/disposals include higher RWA of $2.2 billion due to the
impact on threshold deductions from the sale of CI Financial Corp.
and the carrying value of the remaining investment.
• The impact of foreign exchange translation added $8.7 billion mainly
due to the Canadian dollar weakening against the U.S. dollar. The
Bank’s structural foreign exchange exposures are managed with the
primary objective of ensuring, where practical, that consolidated
capital ratios and the capital ratios of individual banking subsidiaries
are largely protected from the effect of changes in exchange rates.
T31 – Flow statement for Basel III All-in credit risk-weighted assets ($ millions)
2014 2013
Credit risk-weighted assets movement by key driver
(1)
($ millions) Credit Risk
Of which
Counterparty
Credit Risk Credit Risk
Of which
Counterparty
Credit Risk
CET1 Credit risk-weighted assets as at beginning of year $ 240,940 $ 10,471 $ 209,966 $ 6,642
Book size
(2)
8,546 2,283 12,448 799
Book quality
(3)
(5,742) (582) (745) 56
Model updates
(4)
2,272 – – –
Methodology and policy
(5)
5,003 5,003 11,473 2,863
Acquisitions and disposals 2,144 – 3,843 –
Foreign exchange movements 8,724 760 3,955 111
Other – – – –
CET1 Credit risk-weighted assets as at end of year
(6)
$ 261,887 $ 17,935 $ 240,940 $ 10,471
Tier 1 CVA scalar 790 790 – –
Tier 1 Credit risk-weighted assets as at end of year
(6)
262,677 18,725 240,940 10,471
Total CVA scalar 1,186 1,186 – –
Total Credit risk-weighted assets as at end of year
(6)
$ 263,863 $ 19,911 $ 240,940 $ 10,471
(1) Includes counterparty credit risk.
(2) Book size is defined as organic changes in book size and composition (including new business and maturing loans).
(3) Book quality is defined as quality of book changes caused by experience such as underlying customer behaviour or demographics, including changes through model calibrations/realignments.
(4) Model updates are defined as model implementation, change in model scope or any change to address model enhancement.
(5) Methodology and policy is defined as methodology changes to the calculations driven by regulatory policy changes, such as new regulation (e.g. Basel III).
(6) At Q4 2014, risk-weighted assets were calculated using scalars of 0.57, 0.65, and 0.77 to compute CET1 capital ratio, Tier 1 capital ratio and Total capital ratio respectively.
Credit risk-weighted assets – non-retail
Credit risk measures the risk that a borrower or counterparty will fail to
honour its financial or contractual obligations to the Bank. The Bank
uses the Advanced Internal Ratings Based (AIRB) approach under
Basel III to determine minimum regulatory capital requirements for its
domestic, U.S. and European credit portfolios, and certain international
non-retail portfolios. The remaining credit portfolios are subject to the
Standardized approach, which relies on the external credit ratings of
borrowers, if available, to compute regulatory capital for credit risk. For
AIRB portfolios, the key risk measures used in the quantification of
regulatory capital for credit risk include probability of default (PD), loss
given default (LGD) and exposure at default (EAD).
• Probability of default (PD) measures the likelihood that a borrower,
with an assigned Internal Grade (IG) code, will default within a one-
year time horizon. IG codes are a component of the Bank’s risk
rating system described on page 72. Each of the Bank’s internal
borrower IG codes is mapped to a PD estimate.
46 2014 Scotiabank Annual Report
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T32 Internal rating scale
(1)
and mapping to external rating agencies
Equivalent Rating
External Rating – S&P External Rating – Moody’s External Rating – DBRS Grade IG Code PD Range
(2)
AAA to AA+ Aaa to Aa1 AAA to AA (high)
Investment grade
99-98 0.0000% – 0.0595%
AA to A+ Aa2 to A1 AA to A (high) 95 0.0595% – 0.1563%
A to A- A2 to A3 A to A (low) 90 0.0654% – 0.1681%
BBB+ Baa1 BBB (high) 87 0.1004% – 0.2595%
BBB Baa2 BBB 85 0.1472% – 0.3723%
BBB- Baa3 BBB (low) 83 0.2156% – 0.5342%
BB+ Ba1 BB (high)
Non-Investment
grade
80 0.3378% – 0.5929%
BB Ba2 BB 77 0.5293% – 0.6582%
BB- Ba3 BB (low) 75 0.6582% – 0.8292%
B+ B1 B (high) 73 0.8292% – 1.6352%
B to B- B2 to B3 B to B (low) 70 1.6352% – 3.0890%
CCC+ Caa1 -
Watch list
65 3.0890% – 10.8179%
CCC Caa2 - 60 10.8179% – 20.6759%
CCC- to CC Caa3 to Ca - 40 20.6759% – 37.0263%
- - - 30 37.0263% – 60.8493%
Default Default 27-21 100%
(1) Applies to non-retail portfolio
(2) PD ranges overlap across IG codes as the Bank utilizes two risk rating systems for its AIRB portfolios, and each risk rating system has its own separate IG to PD mapping.
T33 Non-retail AIRB portfolio exposure by internal rating grade
(1)(2)
As at October 31 ($ millions) 2014 2013
(3)
Grade
IG Code
Exposure
at default
($)
(5)
RWA
($)
PD
(%)
(6)(9)
LGD
(%)
(7)(9)
RW
(%)
(8)(9)
Exposure
at default
($)
(5)
RWA
($)
PD
(%)
(6)(9)
LGD
(%)
(7)(9)
RW
(%)
(8)(9)
Investment grade
(4)
99-98 61,045 399 0.01 16 1 56,907 643 0.01 15 1
95 33,352 6,484 0.07 37 19 35,103 6,871 0.08 35 20
90 40,114 7,315 0.09 36 18 37,154 9,052 0.12 37 24
87 33,212 8,750 0.14 37 26 26,626 8,472 0.15 39 32
85 30,343 11,577 0.21 42 38 31,949 11,418 0.24 39 36
83 31,433 15,552 0.33 45 49 29,932 14,624 0.32 43 49
Non-Investment grade
80 27,175 14,914 0.42 44 55 26,530 13,304 0.44 41 50
77 16,253 10,357 0.57 43 64 14,466 9,000 0.66 41 62
75 16,578 11,180 0.83 41 67 13,367 9,260 0.95 39 69
73 5,223 4,401 1.64 38 84 4,337 3,241 1.60 34 75
70 4,556 4,453 3.09 37 98 3,774 3,477 3.11 34 92
Watch list 65 815 1,454 10.80 45 178 1,030 1,871 10.91 44 182
60 500 1,101 20.34 44 220 591 1,326 20.87 44 224
40 816 2,003 33.23 47 245 706 1,562 32.23 40 221
30 37 77 59.18 50 208 11 18 56.81 42 164
Default
(10)
27-21 1,018 1,467 100 48 144 1,527 3,327 100 43 218
Total, excluding residential
mortgages 302,470 101,484 0.78 35 34 284,010 97,466 0.99 34 34
Government guaranteed residential
mortgages 83,446 – – 15 – 86,216 – – 15 –
Total 385,916 101,484 0.61 31 26 370,226 97,466 0.76 30 26
(1) Refer to the Bank’s Quarterly Supplementary Regulatory Capital Disclosures for a more detailed breakdown by asset class, exposure at default, probability at default, loss given default and risk-weighting.
(2) Excludes securitization exposures.
(3) 2013 has been restated for presentation purposes.
(4) Excludes government guaranteed residential mortgage of $83.4 billion.
(5) After credit risk mitigation.
(6) PD – Probability of Default
(7) LGD – Loss Given Default including certain conservative factors as per Basel accord.
(8) RW – Risk Weight
(9) Exposure at default used as basis for estimated weightings.
(10) Gross defaulted exposures, before any related allowances.
• Loss given default (LGD) measures the severity of loss on a facility in
the event of a borrower’s default. The Bank’s internal LGD grades are
mapped to ranges of LGD estimates. LGD grades are assigned based
on facility characteristics such as seniority, collateral type, collateral
coverage and other structural elements. LGD for a defaulted
exposure is based on the concept of economic loss and is calculated
using the present value of repayments, recoveries and related direct
and indirect expenses.
• Exposure at default (EAD) measures the expected exposure on a
facility in the event of a borrower’s default.
All three risk measures are estimated using the Bank’s historical data, as
well as available external benchmarks, and are updated on a regular basis.
The historical data used for estimating these risk measures exceeds the
minimum 5-year AIRB requirement for PD estimates and the minimum 7-
year AIRB requirement for LGD and EAD estimates. Further analytical
adjustments, as required under the Basel III Framework and OSFI’s
requirements set out in their Domestic Implementation Notes, are applied
to average estimates obtained from historical data. These analytical
adjustments incorporate the regulatory requirements pertaining to:
• Long-run estimation of PD, which requires that PD estimates capture
average default experience over a reasonable mix of high-default and
low-default years of the economic cycle;
• Downturn estimation for LGD, which requires that LGD estimates
appropriately reflect conditions observed during periods where credit
losses are substantially higher than average; and
2014 Scotiabank Annual Report 47
MANAGEMENT’S DISCUSSION AND ANALYSIS
• Downturn estimation for EAD, which requires that EAD estimates
appropriately reflect conditions observed during periods of economic
downturn; and
• The addition of a margin of conservatism, which is related to the
likely range of errors based on the identification and quantification
of the various sources of uncertainty inherent in historical estimates.
These risk measures are used in the calculation of regulatory capital
requirements based on formulas specified by the Basel framework. The
credit quality distribution of the Bank’s AIRB non-retail portfolio is
shown in Table 33.
The risk measures are subject to a rigorous back-testing framework
which uses the Bank’s historical data to ensure that they are
appropriately calibrated. Based on results obtained from the back-
testing process, risk measures are reviewed and re-calibrated on at least
an annual basis to ensure that they reflect the implications of new
data, technical advances and other relevant information.
• As PD estimates represent long-run parameters, back-testing is
performed using historical data spanning at least one full economic
cycle. Realized PDs are back-tested using pre-defined confidence
intervals, and the results are then aggregated to provide an overall
assessment of the appropriateness of each PD estimate;
• The back-testing for LGD and EAD estimates is conducted from both
long-run and downturn perspectives, in order to ensure that these
estimates are adequately conservative to reflect both long-run and
downturn conditions.
Portfolio-level back-testing results, based on a comparison of estimated
and realized parameters for the four-quarter period ended at July 31,
2014, are shown in Table 34. During this period the actual experience
was significantly better than the estimated risk parameter:
T34 Portfolio-level comparison of estimated and actual non-retail percentages
Estimated
(1)
Actual
Average PD 1.02 0.24
Average LGD 38.03 27.87
Average CCF
(2)
61.31 8.80
(1) Estimated parameters are based on portfolio averages at Q3/13, whereas actual parameters are based on
averages of realized parameters during the subsequent four quarters.
(2) EAD back-testing is performed through Credit Conversion Factor (CCF) back-testing, as EAD is computed
using the sum of the drawn exposure and the committed undrawn exposure multiplied by the estimated CCF.
Credit risk-weighted assets – Canadian retail
The AIRB approach is used to determine minimum regulatory capital
requirements for the retail credit portfolio. The retail portfolio is
comprised of the following Basel-based pools:
• Residential real estate secured exposures consists of conventional
and high ratio residential mortgages and all other products opened
under the Scotia Total Equity Plan (STEP), such as loans, credit cards
and secured lines of credit;
• Qualifying revolving retail exposures consists of all unsecured credit
cards and lines of credit;
• Other retail consists of term loans (secured and unsecured), as well as
credit cards and lines of credit which are secured by assets other than
real estate.
For the AIRB portfolios the following models and parameters are estimated:
• Probability of default (PD) is the likelihood that the facility will default
within the next 12 months.
• Loss Given Default (LGD) measures the economic loss as a proportion
of the defaulted balance.
• Exposure at Default (EAD) is a portion of expected exposures at time
of default.
The data observation period used for PD/EAD/LGD estimates meets the
five year minimum. Various statistical techniques including predictive
modeling and decision trees were used to develop models. The models
assign accounts into homogenous segments using internal and external
borrower/facility-level credit experience. Every month exposures are
automatically re-rated based on risk and loss characteristics. PD, LGD
and EAD estimates are then assigned to each of these segments
incorporating the following regulatory requirements:
• PD incorporates the average long run default experience over an
economic cycle. This long run average includes a mix of high and low
default years.
• LGD is adjusted to appropriately reflect economic downturn
conditions.
• EAD may also be adjusted to reflect downturn conditions when PD
and EAD are highly correlated.
• Sources of uncertainty are reviewed regularly to ensure uncertainties
are identified, quantified and included in calculations so that all
parameter estimates reflect appropriate levels of conservatism.
The table below summarizes the credit quality distribution of the Bank’s AIRB retail portfolio as at October 2014.
T35 Retail AIRB portfolio exposure by internal rating grade
(1)(2)
As at October 31 ($ millions) 2014 2013
Category PD Range
Exposure
at default
($)
(2)
RWA
($)
PD
(%)
(3)(6)
LGD
(%)
(4)(6)
RW
(%)
(5)(6)
Exposure
at default
($)
(2)
RWA
($)
PD
(%)
(3)(6)
LGD
(%)
(4)(6)
RW
(%)
(5)(6)
Exceptionally low 0.0000% – 0.0499% 26,232 408 0.04 27 2 16,578 207 0.03 13 1
Very low 0.0500% – 0.1999% 70,129 3,277 0.12 22 5 87,255 4,410 0.12 28 5
Low 0.2000% – 0.9999% 66,984 14,012 0.47 39 21 46,058 8,890 0.46 37 19
Medium low 1.0000% – 2.9999% 16,215 8,616 1.80 45 53 17,928 8,854 1.70 51 49
Medium 3.0000% – 9.9999% 7,953 6,186 4.94 47 78 10,669 8,095 4.82 41 76
High 10.0000% – 19.9999% 2,307 3,273 12.84 59 142 934 1,452 12.86 61 156
Extremely high 20.0000% – 99.9999% 1,969 3,027 40.40 52 154 2,077 2,570 34.45 36 124
Default
(7)
100% 644 – 100.00 71 – 597 – 100.00 63 –
Total 192,433 38,799 1.47 33 20 182,096 34,478 1.41 32 19
(1) Refer to the Bank’s Quarterly Supplementary Regulatory Capital Disclosures for a more detailed breakdown by asset class, exposure at default, probability at default, loss given default and risk-weighting.
(2) After credit risk mitigation.
(3) PD – Probability of Default.
(4) LGD – Loss Given Default.
(5) RW – Risk Weight.
(6) Exposure at default used as basis for estimated weightings.
(7) Gross defaulted exposures, before any related allowances.
All AIRB models and parameters are monitored on a quarterly basis and independently validated annually by the Global Risk Management group.
These models are tested to ensure rank ordering and back testing of parameters is appropriate as described in the Validation Guidelines. Comparison
of estimated and actual loss parameters for the period ended July 31, 2014 are shown in Table 36. During this period the actual experience was
significantly better than the estimated risk parameters.
48 2014 Scotiabank Annual Report
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T36 Estimated and actual loss parameters
(1)
($ millions)
Average
Estimated PD
(%)
(2)(7)
Actual
Default Rate
(%)
(2)(5)
Average
Estimated LGD
(%)
(3)(7)
Actual
LGD
(%)
(3)(6)
Estimated
EAD
($)
(4)(7)
Actual
EAD
($)
(4)(5)
Residential Real Estate secured
Residential mortgages
Insured mortgages
(8)
0.89 0.63 – – – –
Uninsured mortgages 0.53 0.43 15.87 12.44 – –
Secured lines of credit 0.91 0.24 26.69 17.19 79 72
Qualifying revolving retail exposures 1.59 1.47 72.04 68.68 464 456
Other retail 1.93 1.29 64.86 52.51 9 8
(1) Excludes the acquisition of Tangerine.
(2) Account weighted aggregation.
(3) Default weighted aggregation.
(4) EAD is estimated for revolving products only.
(5) Actual based on accounts not at default as at four quarters prior to reporting date.
(6) Actual LGD calculated based on 24 month recovery period after default and therefore exclude any recoveries received after the 24 month period.
(7) Estimates are based on the four quarters prior to the reporting date.
(8) Actual and Estimated LGD for insured mortgages are not shown. Actual LGD includes the insurance benefit, whereas Estimated LGD may not.
Credit risk-weighted assets – International retail
International retail credit portfolios follow the Standardized approach
and consist of the following components:
• Residential real estate secured lending;
• Qualifying revolving retail exposures consisting of all credit cards and
lines of credit;
• Other retail consisting of term loans.
Under the standardized approach, in general, residential real estate
secured lending products are risk-weighted 35% and other retail
products receive a 75% risk-weight.
Market Risk
Market risk is the risk of loss from changes in market prices including
interest rates, credit spreads, equity prices, foreign exchange rates, and
commodity prices, the correlations between them, and their levels of
volatility.
For all material trading portfolios, the Bank applies its internal models
to calculate the market risk capital charge. OSFI has approved the
Bank’s internal VaR, Stressed VaR, Incremental Risk Charge and
Comprehensive Risk Measure models for the determination of market
risk capital. The attributes and parameters of these models are
described in the Risk Measurement Summary on page 76.
For some non-material trading portfolios, the Bank applies the
Standardized Approach for calculating market risk capital. The
standardized method uses a “building block” approach, with the
capital charge for each risk category calculated separately.
Below are the market risk requirements as at October 31, 2014 and
2013.
T37 Total market risk capital
($ millions) 2014 2013
All bank VaR $ 241 $ 192
All bank stressed VaR 428 397
Incremental risk charge 396 338
Comprehensive risk measure 130 166
CRM surcharge 139 112
Standardized approach 46 31
Total market risk capital $1,380 $ 1,236
(1) Equates to $17,251 million of market risk-weighted assets (2013 – $15,454 million).
T38 Risk weighted assets movement by key drivers
Market risk
($ millions) 2014 2013
RWAs as at beginning of the year $15,454 $ 13,823
Movement in risk levels
(1)
1,986 1,537
Model updates
(2)
(189) 94
Methodology and policy
(3)
– –
Acquisitions and disposals – –
Other – –
RWA as at end of the year $17,251 $ 15,454
(1) Movement in risk levels are defined as changes in risk due to position changes and market movements.
Foreign exchange movements are imbedded within Movement in risk levels.
(2) Model updates are defined as updates to the model to reflect recent experience, change in model scope.
(3) Methodology and policy is defined as methodology changes to the calculations driven by regulatory policy
changes (eg. Basel III).
Market risk-weighted assets increased by $1.8 billion to $17.3 billion as
shown in Table 38 mainly due to movements in risk levels related to
exposure in Global Fixed Income which increased VaR and the
Incremental Risk Charge.
Operational risk
Operational risk is the risk of loss, whether direct or indirect, to which
the Bank is exposed due to external events, human error, or the
inadequacy or failure of processes, procedures, systems or controls. The
Bank currently applies the Standardized Approach for calculating
operational risk capital as per applicable Basel Standards. Total capital is
determined as the sum of capital for each of eight Basel defined
business activities. The capital for each activity is the product of the
relevant risk factor, as defined by Basel, applied to the gross income of
each respective business activity. The Bank has submitted its pre-
application to OSFI to use the Advanced Measurement Approach
(AMA), and plans to submit its full application in fiscal 2015. Under
AMA, regulatory capital measurement will more directly reflect the
Bank’s operational risk environment through the use of a loss
distribution approach model which will use internal loss events,
external loss events, scenario analysis and other adjustments to arrive at
a final operational risk regulatory capital calculation. The impact on
required regulatory capital is not determinable at this time.
Operational risk-weighted assets increased by $1.5 billion during the
year to $33.3 billion due to organic growth in gross income. There
were no material operational risk losses during the year.
Economic capital
Economic capital is a measure of the unexpected losses inherent in the
Bank’s business activities. Economic capital is also a key metric in the
Bank’s ICAAP. The calculation of economic capital relies on models that
are subject to independent vetting and validation as required by the
Bank’s Model Risk Management Policy. Management assesses its risk
profile to determine those risks for which the Bank should attribute
economic capital.
2014 Scotiabank Annual Report 49
MANAGEMENT’S DISCUSSION AND ANALYSIS
The major risk categories included in economic capital are:
• Credit risk measurement is based on the Bank’s internal credit risk
ratings for derivatives, corporate and commercial loans, and credit
scoring for retail loans. It is also based on the Bank’s actual
experience with recoveries and takes into account differences in term
to maturity, probabilities of default, expected severity of loss in the
event of default, and the diversification benefits of certain portfolios.
• Market risk for economic capital incorporates models consistent with
the regulatory basis, with some exclusions, and calibrated to a higher
99.95% confidence interval, and models of other market risks,
mainly structural interest rate and foreign exchange risks.
• Operational risk for economic capital is based on a model
incorporating actual losses, adjusted for an add-on for regulatory
capital.
• Other risks include additional risks for which economic capital is
attributed, such as business risk, significant investments, insurance
risk and real estate risk.
In addition, the Bank’s measure of economic capital includes a
diversification benefit which recognizes that all of the above risks will
not occur simultaneously.
The Bank also includes the full amount of goodwill and intangible
assets in the economic capital amount. The Bank uses its economic
capital framework to attribute capital to the business lines, refer to
non-GAAP measures, page 17. Table 50 on page 70 shows the
attribution of economic capital by business line which allows the Bank
to appropriately compare and measure the returns from the business
lines, based upon their inherent risk. For further discussion on risk
management and details on credit, market and operational risks, refer
to the Risk Management section.
Off-balance Sheet Arrangements
In the normal course of business, the Bank enters into contractual
arrangements with entities that are either consolidated or not required
to be consolidated in its financial statements, but could have a current
or future impact on the Bank’s financial performance or financial
condition. These arrangements can be classified into the following
categories: structured entities, securitizations and guarantees and other
commitments.
Structured entities
Arrangements with structured entities include structured entities that
are used to provide a wide range of services to customers, such as
structured entities established to allow clients to securitize their financial
assets while facilitating cost-efficient financing, and to provide certain
investment opportunities. The Bank creates, administers and manages
personal and corporate trusts on behalf of its customers. The Bank also
sponsors and actively manages certain structured entities (see discussion
on other unconsolidated structured entities on page 51).
All structured entities are subject to a rigorous review and approval
process to ensure that all relevant risks are properly identified and
addressed. For many of the structured entities that are used to provide
services to customers, the Bank does not guarantee the performance of
the structured entities’ underlying assets, and does not absorb any
related losses. For other structured entities, such as securitization and
investment vehicles, the Bank may be exposed to credit, market,
liquidity or operational risks. The Bank earns fees based on the nature
of its association with a structured entity.
Consolidated structured entities
The Bank controls its U.S.-based multi-seller conduit and certain
funding and other vehicles and consolidates these structured entities in
the Bank’s consolidated financial statements.
As at October 31, 2014, total assets of consolidated structured entities
were $36 billion, compared to $41 billion at the end of 2013. The
decrease was primarily due to repayments by Scotia Covered Bond
Trust and Scotiabank Covered Bond Guarantor Limited Partnership, and
the maturity of the Notes of one of the Bank’s funding vehicles in the
second quarter of the year. In addition, two of the Bank’s funding
vehicles were deconsolidated as a result of the adoption of IFRS 10;
consequently their assets are no longer reflected with the total assets of
consolidated structured entities. More details of the Bank’s
consolidated structured entities are provided in Note 16(a) to the
consolidated financial statements on page 163.
Unconsolidated structured entities
There are two primary types of association the Bank has with
unconsolidated structured entities:
• Canadian multi-seller conduits administered by the Bank, and
• Structured finance entities.
The Bank earned total fees of $20 million in 2014, unchanged from
2013, from certain structured entities in which it had a significant
interest at the end of the year but did not consolidate. More
information with respect to the Bank’s involvement with these
unconsolidated structured entities, including details of liquidity facilities
and maximum loss exposure by category is provided below and in
Note 16(b) to the consolidated financial statements on pages 164 and
165.
Canadian multi-seller conduits administered by the Bank
The Bank sponsors two Canadian-based multi-seller conduits that are
not consolidated. The Bank earned commercial paper issuance fees,
program management fees, liquidity fees and other fees from these
multi-seller conduits, which totaled $18 million in 2014, compared to
$15 million in 2013. These multi-seller conduits purchase high-quality
financial assets and finance these assets through the issuance of highly
rated commercial paper.
As further described below, the Bank’s exposure to these off-balance
sheet conduits primarily consists of liquidity support and temporary
holdings of commercial paper. Although the Bank has power over the
relevant activities of the conduits, it has limited exposure to variability
in returns, which results in the Bank not consolidating the two
Canadian conduits. The Bank has a process to monitor these exposures
and significant events impacting the conduits to ensure there is no
change in control, which could require the Bank to consolidate the
assets and liabilities of the conduits at fair value.
A significant portion of the conduits’ assets have been structured to
receive credit enhancements from the sellers, including
overcollateralization protection and cash reserve accounts. Each asset
purchased by the conduits is supported by a backstop liquidity facility
provided by the Bank in the form of a liquidity asset purchase
agreement (LAPA). The primary purpose of the backstop liquidity
facility is to provide an alternative source of financing in the event the
conduits are unable to access the commercial paper market. Under the
terms of the LAPA, the Bank is not obliged to purchase defaulted
assets.
50 2014 Scotiabank Annual Report
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The Bank’s primary exposure to the Canadian-based conduits is the
liquidity support provided, with total liquidity facilities of $4.1 billion as
at October 31, 2014 (October 31, 2013 – $4.2 billion). The year-over-
year decrease was due to normal business operations. As at
October 31, 2014, total commercial paper outstanding for the
Canadian-based conduits was $2.7 billion (October 31, 2013 –
$3.0 billion) and the Bank held less than 0.5% of the total commercial
paper issued by these conduits. Table 39 presents a summary of assets
purchased and held by the Bank’s two Canadian multi-seller conduits
as at October 31, 2014 and 2013, by underlying exposure.
All of the funded assets have at least an equivalent rating of AA?or
higher based on the Bank’s internal rating program. There were no
non-investment grade assets held in these conduits as at October 31,
2014. Approximately 55% of the funded assets have final maturities
falling within three years, and the weighted-average repayment period,
based on cash flows, approximates 1.5 years. There is no exposure to
the U.S. subprime mortgage risk within these two conduits.
T39 Assets held by Scotiabank-sponsored Canadian-based multi-seller conduits
As at October 31 ($ millions)
2014
Funded
assets
(1)
Unfunded
commitments
Total
exposure
(2)
Auto loans/leases $ 1,486 $ 464 $ 1,950
Trade receivables 171 556 727
Canadian residential
mortgages 880 395 1,275
Equipment loans/leases 170 3 173
Total
(3)
$ 2,707 $ 1,418 $ 4,125
2013
As at October 31 ($ millions)
Funded
assets
(1)
Unfunded
commitments
Total
exposure
(2)
Auto loans/leases $ 1,385 $ 775 $ 2,160
Trade receivables 521 197 718
Canadian residential
mortgages 1,112 163 1,275
Equipment loans/leases – – –
Total
(3)
$ 3,018 $ 1,135 $ 4,153
(1) Funded assets are reflected at original cost, which approximates estimated fair value.
(2) Exposure to the Bank is through global-style liquidity facilities.
(3) These assets are substantially sourced from Canada.
Structured finance entities
The Bank has interests in structured finance entities used to assist
corporate clients in accessing cost-efficient financing through their
securitization structures. The Bank’s maximum exposure to loss from
structured finance entities was $ 2,833 million as at October 31, 2014,
(October 31, 2013 – $1,257 million). The year-over-year increase
reflects an increase in the financing needs of the Bank’s corporate
customers.
Other unconsolidated structured entities
The Bank sponsors unconsolidated structured entities in which it has
insignificant or no interest at the reporting date. The Bank is a sponsor
when it is significantly involved in the design and formation at
inception of the structured entity, and the Bank’s name is used by the
structured entity to create an awareness of the instruments being
backed by the Bank’s reputation and obligation. The Bank also
considers other factors, such as its continuing involvement and
obligations to determine if, in substance, the Bank is a sponsor. The
Bank earned $1,822 million income from its involvement with the
unconsolidated Bank-sponsored structured entities for the year ended
October 31, 2014 (for the year ended October 31, 2013 –
$1,585 million).
Securitizations
The Bank securitizes fully insured residential mortgage loans through
the creation of mortgage backed securities that are sold to Canada
Housing Trust (CHT) and/or third parties. The sale of such mortgages
does not qualify for derecognition with the exception of sale of social
housing mortgage pools. The outstanding amount of off-balance sheet
securitized social housing pools was $1,499 million as at October 31,
2014, compared to $1,590 million last year. The transferred mortgages
sold to CHT and/or third parties continue to be recognized on balance
sheet along with the proceeds from sale treated as secured borrowings.
More details have been provided in Note 15 to the consolidated
financial statements on Page 162.
The Bank securitizes a portion of its unsecured personal line of credit
receivables (receivables) on a revolving basis through Hollis Receivables
Term Trust II (Hollis), a Bank-sponsored Structured entity. Hollis issues
notes to third-party investors and the Bank, and the proceeds of such
issuance are used to purchase a co-ownership interest in the receivables
originated by the Bank. The sale of such co-ownership interest does not
qualify for derecognition. Recourse of the note holders is limited to the
purchased interest. The subordinated notes issued by the Structured
entity are held by the Bank. During the year, $602.4 million (October 31,
2013 – $602.4 million) of assets were securitized through Hollis.
Guarantees and other commitments
Guarantees and other commitments are fee-based products that the Bank
provides to its customers. These products can be categorized as follows:
• Standby letters of credit and letters of guarantee. As at October 31,
2014, these amounted to $26 billion, compared to $24 billion last
year. These instruments are issued at the request of a Bank customer
to secure the customer’s payment or performance obligations to a
third party. The year-over-year increase reflects a general increase in
customer activity;
• Liquidity facilities. These generally provide an alternate source of
funding to asset-backed commercial paper conduits in the event a
general market disruption prevents the conduits from issuing
commercial paper or, in some cases, when certain specified
conditions or performance measures are not met;
• Indemnification contracts. In the ordinary course of business, the
Bank enters into many contracts where it may indemnify contract
counterparties for certain aspects of its operations that are
dependent on other parties’ performance, or if certain events occur.
The Bank cannot estimate, in all cases, the maximum potential future
amount that may be payable, nor the amount of collateral or assets
available under recourse provisions that would mitigate any such
payments. Historically, the Bank has not made any significant
payments under these indemnities;
• Loan commitments. The Bank has commitments to extend credit,
subject to specific conditions, which represent undertakings to make
credit available in the form of loans or other financings for specific
amounts and maturities. As at October 31, 2014, these
commitments amounted to $137 billion, compared to $119 billion
last year.
These guarantees and loan commitments may expose the Bank to
credit or liquidity risks, and are subject to the Bank’s standard review
and approval processes. For the guaranteed products, the dollar
amounts represent the maximum risk of loss in the event of a total
default by the guaranteed parties, and are stated before any reduction
for recoveries under recourse provisions, insurance policies or collateral
held or pledged.
Fees from the Bank’s guarantees and loan commitment arrangements,
recorded as credit fees in other income in the Consolidated Statement
of Income, were $465 million in 2014, compared to $434 million in the
prior year. Detailed information on guarantees and loan commitments
is disclosed in Note 38 to the consolidated financial statements on
pages 189 to 191.
2014 Scotiabank Annual Report 51
MANAGEMENT’S DISCUSSION AND ANALYSIS
Financial instruments
Given the nature of the Bank’s main business activities, financial
instruments make up a substantial portion of the Bank’s financial
position and are integral to the Bank’s business. Assets that are
financial instruments include cash resources, securities, securities
purchased under resale agreements, loans and customers’ liability
under acceptances. Financial instrument liabilities include deposits,
acceptances, obligations related to securities sold under repurchase
agreements, obligations related to securities sold short, subordinated
debentures and capital instrument liabilities. In addition, the Bank uses
derivative financial instruments for both trading and hedging purposes.
Financial instruments are generally carried at fair value, except for non-
trading loans and receivables, certain securities and most financial
liabilities, which are carried at amortized cost unless designated
as fair value through profit and loss at inception.
Unrealized gains and losses on the following items are recorded in
other comprehensive income:
• available-for-sale securities, net of related hedges,
• derivatives designated as cash flow hedges, and
• net investment hedges.
Gains and losses on available-for-sale securities are recorded in the
Consolidated Statement of Income when realized. Gains and losses on
cash flow hedges and net investment hedges are recorded in the
Consolidated Statement of Income when the hedged item affects
income.
All changes in the fair value of derivatives, including embedded
derivatives that must be separately accounted for, are recorded in the
Consolidated Statement of Income, other than those designated as
cash flow and net investment hedges which flow through other
comprehensive income. The Bank’s accounting policies for derivatives
and hedging activities are further described in Note 3 to the
consolidated financial statements (see pages 129 and 132).
Interest income and expense on non-trading interest-bearing financial
instruments are recorded in the Consolidated Statement of Income as
part of net interest income. Credit losses resulting from loans are
recorded in the provision for credit losses. Interest income and expense,
as well as gains and losses, on trading securities and trading loans are
recorded in other operating income – trading revenues. Realized gains
and losses and writedowns for impairment on available-for-sale debt or
equity instruments are recorded in net gain on investment securities
within other operating income.
Several risks arise from transacting financial instruments, including
credit risk, liquidity risk, operational risk and market risk. Market risk
arises from changes in market prices and rates including interest rates,
credit spreads, foreign exchange rates, equity prices and commodity
prices. The Bank manages these risks using extensive risk management
policies and practices, including various Board-approved risk
management limits.
A discussion of the Bank’s risk management policies and practices can
be found in the Risk Management section on pages 65 to 89. In
addition, Note 39 to the consolidated financial statements on
pages 191 to 200 presents the Bank’s exposure to credit risk, liquidity
risk and market risks arising from financial instruments as well as the
Bank’s corresponding risk management policies and procedures.
There are various measures that reflect the level of risk associated with
the Bank’s portfolio of financial instruments. For example, the interest
rate risk arising from the Bank’s financial instruments can be estimated
by calculating the impact of a 100 basis point increase or decrease in
interest rates on annual income, and the economic value of
shareholders’ equity, as described on page 78. For trading activities,
Table 53 on page 79 discloses the average one-day Value at Risk by risk
factor. For derivatives, based on the Bank’s maturity profile of derivative
instruments, only 12% (2013 – 15%) had a term to maturity greater
than 5 years.
Note 10 to the consolidated financial statements (see pages 151 to
155) provides details about derivatives used in trading and hedging
activities, including notional amounts, remaining term to maturity,
credit risk and fair values.
The fair value of the Bank’s financial instruments is provided in Note 7
to the consolidated financial statements (see pages 141 to 143) along
with a description of how these amounts were determined.
The fair value of the Bank’s financial instruments was favourable when
compared to their carrying value by $1,918 million as at October 31,
2014 (October 31, 2013 – favourable $337 million). This difference
relates to loan assets, deposit liabilities, subordinated debentures and
other liabilities. The year-over-year change in the fair value over
carrying value arose mainly from changes in interest rates. Fair value
estimates are based on market conditions as at October 31, 2014, and
may not be reflective of future fair values. Further information on how
fair values are estimated is contained in the section on critical
accounting estimates on page 91.
Disclosures specific to certain financial instruments designated at fair
value through profit and loss can be found in Note 9 to the
consolidated financial statements (see page 150). These designations
were made primarily to significantly reduce accounting mismatches.
Selected credit instruments – publically known risk items
Mortgage-backed securities
Non-trading portfolio
Total mortgage-backed securities held as available-for-sale securities as
a percent of the Bank’s total assets is insignificant as at October 31,
2014, and are shown in Table 40. Exposure to subprime mortgage risk
in the U.S. is nominal.
Trading portfolio
Total mortgage-backed securities held as trading securities represent
less than 0.25% of the Bank’s total assets as at October 31, 2014, and
are shown in Table 40.
T40 Mortgage-backed securities
As at October 31
Carrying value
($ millions)
2014 2013
Non-trading
portfolio
Trading
portfolio
Non-trading
portfolio
Trading
portfolio
Canadian NHA
mortgage-backed
securities
(1)
$ – $ 1,431 $ – $ 733
Commercial mortgage-
backed securities 30 132 2
(2)
170
(3)
Other residential
mortgage-backed
securities 107 473 127 292
Total $ 137 $ 2,036 $ 129 $ 1,195
(1) Canada Mortgage and Housing Corporation provides a guarantee of timely payment to NHA mortgage-
backed security investors.
(2) The assets underlying the commercial mortgage-backed securities in the non-trading portfolio relate
primarily to non-Canadian properties.
(3) The assets underlying the commercial mortgage-backed securities in the trading portfolio relate to Canadian
properties.
Collateralized debt obligations and collateralized loan obligations
Non-trading portfolio
The Bank has collateralized debt obligation (CDO) and collateralized
loan obligation (CLO) investments in its non-trading portfolio. CDOs
and CLOs generally achieve their structured credit exposure by
investing and holding corporate loans or bonds. Cash-based CDOs and
CLOs are classified as loans and are carried at amortized cost. These are
assessed for impairment like all other loans.
As at October 31, 2014, the carrying value of cash-based CDOs and
CLOs reported as loans on the Consolidated Statement of Financial
Position was $87 million (October 31, 2013 – $548 million). The fair
value was $84 million (October 31, 2013 – $535 million). The year-
over-year decline was due primarily to disposals and repayments during
the year. None of these cash-based CDOs and CLOs are classified as
impaired. Substantially all of the referenced assets of the Bank’s CDOs
and CLOs are corporate exposures, without any U.S. mortgage-backed
securities.
52 2014 Scotiabank Annual Report
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Trading portfolio
The Bank also holds synthetic CDOs in its trading portfolio as a result of
structuring and managing transactions with clients and other financial
institutions. To hedge its trading exposure, the Bank purchases or sells
CDOs to other financial institutions, along with purchasing and/or
selling index tranches or single name credit default swaps (CDSs). The
main driver of the value of CDOs and CDSs is changes in credit spreads.
Total CDOs purchased and sold in the trading portfolio are shown in
Table 41 below.
T41 Collateralized debt obligations (CDOs)
As at October 31
Outstanding ($ millions)
2014 2013
Notional
Amount
Positive/
(negative)
fair value
Notional
Amount
Positive/
(negative)
fair value
CDOs – sold protection $ 2,151 $ 50 $ 2,529 $ 31
CDOs – purchased protection $ 1,973 $ (4) $ 1,938 $ 8
The change in the notional amounts of the CDO sold protection is due
mainly to trades that matured during the year. The change in fair value
of CDOs was due to tightening in credit spreads that occurred during
the year. Based on positions held at October 31, 2014, a 50 basis point
widening of relevant credit spreads in this portfolio would result in a
pre-tax decrease of approximately $0.3 million in net income.
All of the Bank’s credit exposure to CDO swap counterparties is to
entities which are externally or internally rated investment grade
equivalent. The referenced assets underlying the trading book CDOs
are substantially all corporate exposures, with no mortgage-backed
securities.
Other
As at October 31, 2014, the Bank has insignificant exposure to highly
leveraged loans awaiting syndication, auction-rate securities, Alt-A type
loans, monoline insurance and investments in structured investment
vehicles.
2014 Scotiabank Annual Report 53
MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS LINE OVERVIEW
In 2014, the Bank reported its results through four business operating segments. Effective November 1, 2014 for fiscal
2015, the Canadian and International businesses within Global Wealth & Insurance will be included in Canadian
Banking and International Banking’s results respectively. As well, certain Asia business activity currently reported in
International Banking will be included in Global Banking & Markets. Prior period comparative results will be restated.
Below are the results of the Bank’s four business operating segments for 2014.
CANADIAN BANKING
Canadian Banking had net income attributable to equity holders of $2,188 million in 2014. Adjusting for notable
items (refer T44), net income grew by 5% to $2,261 million. This was a result of asset and deposit growth and a
widening margin driven mainly from credit cards, mortgages and credit lines, as well as higher non-interest revenues.
Partly offsetting, were higher provisions for credit losses and expenses. Return on economic equity was 31.0%
compared to 33.4% last year.
C25 Canadian Banking
net income
(1)
$ millions
1800
2100
1500
1200
900
600
300
2400
12 14 13
INTERNATIONAL BANKING
International Banking had net income attributable to equity holders of $1,492 million, a decrease of $234 million
from last year. Adjusting for the 2014 notable items and the 2013 net notable gain of $90 million (refer T44), net
income fell by $65 million or 4%. The benefits of strong asset growth in Latin America and the positive impact of
foreign currency translation were more than offset by margin compression, lower contribution from associated
corporations and securities gains, and higher provisions for credit losses and expenses. Return on economic equity
was 11.7% compared to 14.2% last year.
C26 International
Banking net
income
(1)
$ millions
13 14
1600
1200
800
400
2000
12
GLOBAL WEALTH & INSURANCE
Global Wealth & Insurance reported net income attributable to equity holders in 2014 of $1,831 million, including
the disposition gain of $534 million. Earnings were primarily driven by strong performance across the Wealth and
Insurance businesses. Wealth business benefited from higher Assets under Management and Assets under
Administration reflecting continued growth in net sales and favourable market conditions. Return on economic
equity was 28.2% compared to 16.7% last year, primarily due to the disposition gain.
C27 Global Wealth &
Insurance net
income
(1)
$ millions
13 14
1200
800
400
2000
1600
12
GLOBAL BANKING & MARKETS
Global Banking & Markets reported net income attributable to equity holders of $1,459 million in 2014 in line with
last year. Strong performances in the underwriting and advisory business were partly offset by lower revenues in
fixed income. The increase in revenues was offset by higher performance based-expenses and higher taxes. Return
on economic equity increased to 30.4% from 27.6% last year.
C28 Global Banking &
Markets net
income
(1)
$ millions
14 13
900
1500
1200
600
300
1800
12
(1) Net income attributable to equity holders.
54 2014 Scotiabank Annual Report
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KEY PERFORMANCE INDICATORS FOR ALL BUSINESS LINES
Management uses a number of key metrics to monitor business line performance:
• Net income • Return on economic equity • Productivity ratio • Loan loss ratio • Employee engagement
T42 2014 financial performance
($ millions)
Canadian
Banking
International
Banking
Global Wealth
& Insurance
Global Banking
& Markets Other
(1)
Total
Net interest income
(2)
$5,690 $5,352 $ 446 $ 728 $ 89 $12,305
Net fee and commission revenues 1,672 1,460 3,364 1,522 (281) 7,737
Net income / (loss) from investments in associated corporations – 411 156 – (139) 428
Other operating income
(2)
74 300 1,080 1,563 117 3,134
Total revenue
(2)
7,436 7,523 5,046 3,813 (214) 23,604
Provision for credit losses 661 1,031 2 9 – 1,703
Operating expenses 3,810 4,330 2,727 1,729 5 12,601
Provision for income taxes
(2)
777 489 440 616 (320) 2,002
Net income $2,188 $1,673 $1,877 $1,459 $ 101 $ 7,298
Net income attributable to non-controlling interest
Non-controlling interests in subsidiaries – 181 46 – – 227
Capital instrument equity holders – – – – – –
Net income attributable to equity holders of the Bank $2,188 $1,492 $1,831 $1,459 $ 101 $ 7,071
Return on economic equity
(3)
(%) 31.0% 11.7% 28.2% 30.4% – 16.1%
Total average assets ($ billions) $ 280 $ 139 $ 15 $ 283 $ 79 $ 796
Total average liabilities ($ billions) $ 193 $ 89 $ 20 $ 209 $ 237 $ 748
(1) The Other category represents smaller operating segments, including Group Treasury, and other corporate adjustments that are not allocated to an operating segment. Corporate adjustments include the net residual in matched
maturity transfer pricing, the elimination of the tax-exempt income gross-up reported in net interest income, other operating income and provision for income taxes, changes in the collective allowance on performing loans,
differences in the actual amount of costs incurred and charged to the operating segments, and the impact of securitizations.
(2) Taxable equivalent basis. See non-GAAP measures on page 17.
(3) Non-GAAP measure. Return on equity for the business lines is based on economic equity attributed. See non-GAAP measures on page 17.
Effective fiscal 2014, the Bank enhanced its funds transfer pricing methodology that is used to allocate interest income and expense to the business
lines. The enhancements included a transfer of higher regulatory liquidity costs, and a reduced interest value for certain deposit types. These
enhancements result in reducing the net interest cost in the Other segment and reducing the net interest income in the business segments. These
changes have no impact on the Bank’s consolidated results. Prior years amounts have also been retrospectively adjusted for IFRS changes described on
page 26. The impact of both these changes on net income attributable to equity holders is presented below:
T43 Impact of IFRS changes and funds transfer pricing methodology enhancements
For the year ended October 31, 2013 ($ millions)
Canadian
Banking
International
Banking
Global Wealth
& Insurance
Global Banking
& Markets Other Total
IFRS changes (36) (13) (8) 11 3 (43)
Funds transfer pricing methodology enhancements (117) (10) (57) (38) 222 –
Total (153) (23) (65) (27) 225 (43)
For the year ended October 31, 2012 ($ millions)
Canadian
Banking
International
Banking
Global Wealth
& Insurance
Global Banking
& Markets Other Total
IFRS changes (29) 2 (6) (15) (1) (49)
Funds transfer pricing methodology enhancements (109) (9) (44) (32) 194 –
Total (138) (7) (50) (47) 193 (49)
T44 Notable Items
The following is the impact of the 2014 notable items on Business Line results. Refer also to Table 3, Page 20 for additional details.
2014 2013
(1)
For the year ended October 31 ($ millions)
Canadian
Banking
International
Banking
Global Wealth
& Insurance
Global Banking
& Markets Other Total Total
Revenues $ – $ (47) $ 615 $ (2) $ – $ 566 $ 150
Provision for credit losses 62 – – – – 62 –
Operating expenses 36 41 11 29 86 203 72
Net income before income taxes $ (98) $ (88) $ 604 $ (31) $ (86) $ 301 $ 78
Income taxes (25) (9) 78 (9) (24) 11 (12)
Net income $ (73) $ (79) $ 526 $ (22) $ (62) $ 290 $ 90
Net income attributable to equity holders of the Bank $ (73) $ (79) $ 526 $ (22) $ (62) $ 290 $ 90
(1) 2013 Notable items relate to International Banking.
2014 Scotiabank Annual Report 55
MANAGEMENT’S DISCUSSION AND ANALYSIS
Canadian Banking
Canadian Banking provides a full suite of financial advice and banking solutions, supported by an
excellent customer experience, to retail, and small business and commercial customers in Canada.
Starting in 2015, Canadian Banking will also include Canadian Wealth Management and
Insurance.
2014 Achievements
• Delivered an industry leading customer experience
– Highest Customer Retention Index of the Big 5 Banks (Source: Hay Research International
Switching Study, 2013)
– #2 in Share-of-Wallet Among All Financial Institutions (Source: Ipsos Reid, Canadian Financial
Monitor, 2014)
• Completed key milestones to transform Retail Banking
– Completed significant realignment and cross-country training of salesforce to connect
customers with the right banker to manage all their needs, and launched industry leading
financial planning software
– First Canadian bank to launch sales capabilities in our Mobile Banking channel
• Made strides in Business Banking
– Achieved strongest growth in net new Small Business customers over the past five years
– Roynat Equity Partners turned an investment in Pineridge Bakery into a record gain
• Expanded our capabilities in payments, investments and deposits
– Achieved double-digit growth in credit cards
– Canadian Banking achieved record mutual fund net sales; ScotiaFunds ranked #1 in market
share growth and percentage growth in assets over the past three years (Source: IFIC Data)
– Recognized as Best Online Deposit, Credit and Investment Product Offerings in North
America by Global Finance, 2014
• Strengthened our differentiated core businesses
– Continued to lead the automotive lending space with double-digit asset growth
– Successfully closed a strategic partnership transaction with Canadian Tire Corporation that
includes a 20% equity interest in Canadian Tire Financial Services and became the exclusive
provider of new financial products to Canadian Tire customers as part of a wide-reaching
marketing partnership
– Formed a partnership with Rogers providing significant multiplatform brand exposure
– Awarded the prestigious “Best of Show” from the Sponsorship Marketing Council of Canada
for the Scotiabank Community Hockey Program
• Continued to be a leader in direct banking through Tangerine
– Successfully completed rebrand of ING Direct to Tangerine and nearly doubled ABM footprint
via fee free access to the Scotiabank ABM Network
– For the third year in a row, Tangerine ranked “Highest in Customer Satisfaction Among the
Midsize Retail Banks” by J.D. Power and Associates
(1)
(1) The 2014 study based on 17,183 total responses measuring 17 banks and measures opinions of consumers with their primary banking
institution. Proprietary study results are based on experiences and perceptions of consumers surveyed May-June 2014. Visit jdpower.com
T45 Canadian Banking financial performance
($ millions) 2014 2013 2012
Net interest income
(1)
$ 5,690 $ 5,419 $ 4,610
Net fee and commission revenues 1,672 1,507 1,477
Net income from investments in associated corporations – 10 3
Other operating income 74 37 51
Total revenue
(1)
7,436 6,973 6,141
Provision for credit losses 661 478 506
Operating expenses 3,810 3,583 3,192
Income taxes 777 761 642
Net income $ 2,188 $ 2,151 $ 1,801
Net income attributable to non-controlling interest – – 3
Net income attributable to equity holders of the Bank $ 2,188 $ 2,151 $ 1,798
Key ratios
Return on economic equity 31.0% 33.4% 35.9%
Productivity 51.2% 51.4% 52.0%
Net interest margin
(2)
2.09% 2.04% 2.09%
Provision for credit losses as a percentage of loans and
acceptances 0.24% 0.18% 0.23%
Selected Consolidated Statement of Financial Position data
(average balances)
Earning assets $ 277,280 $ 270,059 $ 223,904
Total assets 280,055 272,488 224,916
Deposits 187,256 181,462 146,689
Total liabilities 193,177 185,764 150,434
Economic equity $ 6,962 $ 6,320 $ 4,918
(1) Taxable equivalent basis.
(2) Net interest income (TEB) as % of average earning assets excluding bankers acceptances.
Business Profile
Canadian Banking provides a full suite of
financial advice and banking solutions,
supported by an excellent customer
experience, to over 7.8 million Retail, Small
Business and Commercial Banking customers.
It serves these customers through its network
of 1,040 branches and 3,942 automated
banking machines, as well as internet, mobile
and telephone banking and specialized sales
teams. Canadian Banking also provides an
alternative self-directed banking solution to
almost 2 million Tangerine customers.
Canadian Banking is comprised of the
following areas:
Retail and Small Business Banking
provides financial advice, solutions and day-
to-day banking products, including debit
cards, chequing accounts, credit cards,
investments, mortgages, loans and related
creditor insurance products, to individuals
and small businesses. Tangerine provides
internet, mobile and telephone banking to
self-directed customers.
Commercial Banking delivers advice and a
full suite of customized lending, deposit, cash
management and trade finance solutions to
medium and large businesses, including
automotive dealers and their customers that
we provide retail automotive financing
solutions to.
Strategy
Canadian Banking remains focused on its
three-year strategy to deliver above average
growth in net income and becoming
Canada’s most recommended bank. This will
be achieved by providing an excellent
customer experience and executing on our
2015 strategic priorities. Canadian Banking
will deliver on this by focusing on the
customer first and delivering on its 2015
strategic priorities.
2015 Priorities
• Enhance our retail product and service
delivery to deepen customer relationships
• Align Commercial Banking platform to
achieve greater market penetration and
become the primary banker for our
customers
• Accelerate development of payments
expertise, capabilities and infrastructure;
leverage partnerships and rewards to
increase market share
• Expand Tangerine to be the direct bank of
choice for Canadians’ everyday banking
needs
• Find better ways to serve our customers,
while also reducing structural costs
• Transform wealth advisory offerings to
better meet the needs of high net worth
and mass affluent customers, increase
penetration of proprietary products, and
strengthen primary banking relationships
• Build scale and integrate capabilities in
Global Asset Management
56 2014 Scotiabank Annual Report
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Financial Performance
Canadian Banking’s net income was $2,188 million in 2014. Adjusting for the notable items of
$73 million (refer T44), net income was $2,261 million, $110 million or 5% higher than last year.
Return on economic equity was 31.0%. Adjusting for the notable items, return on economic
equity was 32.0% versus 33.4% last year. Retail and small business, and commercial banking all
generated solid performances.
Assets and liabilities
Average assets rose $8 billion or 3% from last year. Adjusting for a decrease in securities of
$2 billion and the run-off of $4 billion of Tangerine broker originated and white label mortgages,
Canadian Banking recorded a solid growth in assets of $14 billion or 6%. This reflects $12 billion
or 5% in residential mortgages, consumer auto lending, credit cards and other personal loans as
well as $2 billion or 6% in business loans and acceptances.
Average liabilities rose $7 billion or 4%. Retail banking experienced solid growth in chequing
accounts of $1 billion or 7% and savings deposits of $5 billion or 10%. There was also growth of
$2 billion or 5% in small business and commercial banking business operating accounts. Other
liabilities increased by $2 billion. This was partially offset by a decline in lower spread GICs of $3
billion or 4%.
Revenues
Total revenues were $7,436 million, up $463 million or 7% from last year.
Net interest income increased 5% to $5,690 million and was driven by good asset and deposit
growth and a five basis point increase in the margin to 2.09%. The margin increase was primarily
driven by higher mortgage and other personal loan spreads, as well as growth in credit card
products.
Net fee and commission revenues were $1,672 million in 2014, up $165 million or 11%,
primarily due to strong growth across several categories, including higher fees from mutual fund
sales, card revenues and commercial credit fees.
Other operating income was $74 million, up $37 million mostly due to higher net gains on
investment securities.
Retail & Small Business Banking
Total retail and small business banking revenues were $5,712 million, up $327 million or 6%
from last year. Net interest income grew by $188 million or 4%, and was primarily driven by solid
growth in mortgages, credit card products and deposits as well as an eight basis point
improvement in the margin. Net fee and commission revenues increased by $125 million or 11%,
reflecting higher fees from mutual fund sales and higher credit card revenues. Net income from
investments in associated corporations increased by $5 million from the investment in Canadian
Tire Financial Services during the year. Other operating income rose $9 million, mainly from
higher gains on investment securities.
Commercial Banking
Total commercial banking revenues increased $136 million or 9% to $1,724 million in 2014. Net
interest income rose by $83 million or 7% due mainly to growth in loans and business operating
accounts. Net fee and commission revenues increased by $40 million or 12% mainly from higher
credit fees. Net income from investments in associated corporations decreased by $15 million
from last year. This was more than offset by a $28 million increase in other operating income
mainly from higher net gains on investment securities.
Operating expenses
Adjusting for the notable item of $36 million (refer T44), operating expenses were up
$191 million or 5%, primarily reflecting business growth, Tangerine brand transition costs,
growth initiatives and salary increases. Operating leverage was positive 0.3%, or positive 1.3%
after adjusting for notable items.
Provision for credit losses
The provision for credit losses was $661 million, an increase of $183 million from $478 million
last year. Adjusting for the notable item (refer T44), the provision for credit losses was $599
million, an increase of $121 million due mainly to a change in asset mix and $26 million related
to updated loss parameters to capture recent portfolio trends for credit cards and auto loans.
Provision for income taxes
The effective tax rate was in line with the previous year.
Outlook
The outlook for Canadian Banking in 2015 is anticipated to remain solid, with good loan growth
across most businesses, primarily driven by auto, credit card and commercial loans. Other loan
categories are expected to grow in line with the industry. Deposit growth will continue to be
challenged by intense competition in a low rate environment. The margin is expected to improve
in 2015, with wider spreads in mostly lending products, partly offset by competitive pressures on
commercial, automotive and deposit spreads.
Provisions for credit losses are expected to rise reflecting the changing mix of asset growth and a
more normal loan loss ratio in Commercial.
The outlook for the Wealth Management business remains positive, subject to market conditions,
with continued solid growth expected from new customer acquisition, and increased sales to the
Bank’s existing customer base.
Investing to grow the business through our strategic priorities, while prudently managing
expenses, remains a key priority for the group. Canadian Banking will be targeting positive
operating leverage. The effective tax rate is expected to rise slightly in 2015.
C29 Total revenue
$ millions
Commercial Banking
Retail & Small Business Banking
23%
77%
C30 Total revenue by sub-segment
$ millions
12 14 13
6000
4000
2000
8000
Commercial Banking
Retail & Small Business Banking
C31 Average loans and acceptances
$ billions
12 13 14
200
150
100
50
300
250
Commercial loans/acceptances
Retail loans (except mortgages)
Residential mortgages
2014 Scotiabank Annual Report 57
MANAGEMENT’S DISCUSSION AND ANALYSIS
International Banking
International Banking provides a full range of financial products, solutions and advice to retail
and commercial customers in select regions outside of Canada. Starting in 2015, International
Banking will also include International Wealth Management and Insurance.
2014 Achievements
• Acquisition of 51% of Cencosud S.A.’s Financial Services Business in Chile pending
regulatory approval. Cencosud is the largest retailer in Chile and the third largest retailer
in Latin America. The company’s financial services business includes approximately 2.5
million credit cards and more than US$1.2 billion in outstanding balances in Chile.
• Named the 2014 “World’s Best Consumer Internet Bank in Latin America” in 22 of our
countries by Global Finance magazine.
• Recognized as a Great Place to Work in Chile, Costa Rica, Dominican Republic, El
Salvador, Panama, Peru, Puerto Rico and Mexico.
• Recognized as one of the Top 100 companies with the best employee talent in Colombia
by Merco (Monitor of Corporate Reputation).
• Named the 2014 Business of the Year in Peru by the Peruvian-Canadian Chamber of
Commerce.
• Named the 2014 Bank of the Year in the British Virgin Islands, Guyana, Jamaica and
Trinidad Tobago by The Banker magazine.
• Celebrated Scotiabank Jamaica’s 125
th
and Scotiabank Trinidad and Tobago’s 60
th
anniversary this year.
T46 International Banking financial performance
($ millions) 2014 2013 2012
Net interest income
(1)
$ 5,352 $ 4,923 $ 4,456
Net fee and commission revenues 1,460 1,403 1,298
Net income from investments in associated corporations 411 668 385
Other operating income
(1)
300 427 346
Total revenue
(1)
7,523 7,421 6,485
Provision for credit losses 1,031 781 613
Operating expenses 4,330 4,138 3,683
Income taxes
(1)
489 584 463
Net income $ 1,673 $ 1,918 $ 1,726
Net income attributable to non-controlling interest 181 192 168
Net income attributable to equity holders of the Bank $ 1,492 $ 1,726 $ 1,558
Key ratios
Return on economic equity 11.7% 14.2% 11.9%
Productivity
(1)
57.6% 55.8% 56.8%
Net interest margin
(2)
4.00% 4.11% 4.13%
Provision for credit losses as a percentage of loans and
acceptances 1.01% 0.86% 0.75%
Selected Consolidated Statement of Financial Position data
(average balances)
Earning assets 133,879 $ 119,899 $ 108,048
Total assets 139,257 121,085 109,135
Deposits 69,618 61,741 54,305
Total liabilities 89,024 78,460 69,884
Economic equity $ 12,267 $ 11,629 $ 12,429
(1) Taxable equivalent basis.
(2) Net interest income (TEB) as % of average earning assets excluding bankers acceptances.
Business Profile
Scotiabank has an international presence
unmatched by other Canadian Banks. The
International Banking business line
encompasses retail and commercial banking
operations in 3 regions outside of Canada.
This business line has operations in Latin
America, the Caribbean and Central America,
and Asia. In partnership with our associated
corporations in China, Curacao, Thailand and
Venezuela, a full range of personal and
commercial financial services is provided to
over 14 million customers through a network
of close to 3,000 branches and offices, over
7,700 ABMs, mobile, internet and telephone
banking, in-store banking kiosks and
specialized sales forces.
Strategy
The International Banking strategy is aligned
with the All-Bank priorities, with primary
focus on the following:
• Acquiring more sustainable and profitable
primary banking customer relationships
anchored with core payments solutions,
which will ultimately drive more deposits
and greater cross-sales across the full-
breadth of the Bank’s solution offerings.
We are focusing on providing our
customers with the right practical advice
and the right solutions, through the right
channels.
• Optimizing our operating model and our
footprint to improve our customer
experience, lower our structural costs,
reduce our complexity and ultimately to be
more efficient.
• Making leadership a competitive
advantage by actively acquiring,
developing and engaging a diverse pool of
leaders to deepen our bench strength of
talent.
2015 Priorities
Aligned to our strategy and in addition to the
growth in our core business, our primary focus is
on the following 4 key growth initiatives over
the next 3-5 years
• Revamp our Retail Sales & Delivery
Platform to ensure we have a consistent
customer relationship management and
origination front-end system across our
franchise to drive greater customer
relationship management, a better
customer experience and ultimately more
cross-sales. This will also include self-
service channels such as online and mobile
banking.
• Right-size our network and drive
growth in Mexico to ensure we are well-
positioned to effectively compete for our
target customer segments and build
sustainable scale in this key market.
• Improve our competitive position in
Peru to ensure we remain in a strong
competitive position as global and local
players aggressively ramp up their presence
within the country.
• Reduce our structural costs by
optimizing our operating model, reducing
our complexity and ultimately by being
more efficient.
58 2014 Scotiabank Annual Report
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Financial Performance
Net income attributable to equity holders was $1,492 million. Adjusting for the notable items of $79 million
in 2014 and $90 million last year (refer T44), net income was down $65 million or 4%. Revenue from strong
volume growth and the positive impact of foreign currency translation was offset by margin compression,
lower securities gains, lower contributions from associated corporations, and higher provision for credit
losses, which included a $57 million charge related primarily to the Caribbean hospitality portfolio in the
fourth quarter. Adjusting for the notable items, slightly higher earnings in both Latin America and Asia were
more than offset by lower results in the Caribbean due to higher provision for credit losses.
Assets and Liabilities
Average assets of $139 billion increased 15%, driven by strong retail and commercial loan growth of 12%
or 8% excluding foreign currency translation, primarily in Latin America and Asia. Deposit growth was strong
at 12% or 8% excluding foreign currency translation.
Revenues
Total revenues of $7,523 million increased 1%. Adjusting for notable items in 2014 and 2013 (refer T44),
revenues increased $352 million or 5% including the positive impact of foreign currency translation.
Net interest income increased 9% driven by solid loan growth and the acquisition of Credito Familiar in
Mexico. This was in part offset by a 3% decline in the net interest margin from 4.11% to 4.00% as a result
of the lowering of interest rates in key markets and changes in asset mix. Net fee and commission revenues
increased 4% to $1,460 million largely driven by higher banking fees across Latin America and Caribbean.
Net income from associated corporations decreased by $257 million. Adjusting for the notable gain (on a
tax-normalized basis) last year in an associated corporation, contributions were down $54 million with lower
contributions from Thanachart Bank in Thailand and Banco del Caribe in Venezuela. Other operating income
decreased by $127 million, or $80 million excluding the notable items (refer T44), due mainly to lower net
gains on investment securities and lower gains from financial instruments used for asset/liability
management purposes, partly offset by higher trading revenues.
Latin America
Total revenues of $4,807 million increased 6% from last year, driven by strong loan growth of 13%,
excluding the impact of foreign currency translation. Net interest income rose $348 million or 11%,
reflecting the impact of strong asset growth partly offset by a lower net interest margin. Net fee and
commission revenues increased by $39 million, or 4% largely driven by higher banking fees. Net income
from associated corporations was down $31 million due to a lower contribution from Banco del Caribe in
Venezuela. Other operating income decreased by $87 million, or $39 million excluding the notable items
(refer T44), due mainly to lower net gains on investment securities and lower gains related to the sale of a
non-strategic business in Peru.
Caribbean and Central America
Total revenues increased 2% to $1,985 million. Net interest income rose $47 million or 3% largely due to
the positive impact of foreign currency translation. A modest 1% underlying growth in retail assets was
offset by a 6% decline in commercial assets. Fee and commission revenues increased by 5% due to higher
deposit, payment and card revenues. Other operating income was down $33 million due partly to lower
securities gains and lower recoveries in Puerto Rico.
Asia
Total revenues were $731 million, down 21% versus last year. Adjusting for last year’s notable gain from an
associated corporation of $203 million (on a tax-normalized basis), revenues were up $4 million. Net interest
income rose by $34 million or 11% with strong growth in lending assets partially offset by lower spreads.
Net income from associated corporations, adjusted for the notable gain, decreased $24 million as a lower
contribution from Thanachart Bank in Thailand was only partly offset by a higher contribution from Bank of
Xi’an in China.
Operating expenses
Operating expenses of $4,330 million increased $192 million or 5% from last year. Adjusting for the notable
items of $41 million this year versus $74 million last year (refer T44), expenses increased $225 million or 6%.
The underlying growth reflected the negative impact of foreign currency translation, inflationary increases
and business growth. Operating leverage was slightly negative at -0.7%, adjusting for notable items.
Provision for credit losses
The provision for credit losses in International Banking increased $250 million to $1,031 million. In the retail
portfolio, provisions increased in line with volume growth when excluding the benefit of the credit mark on
the acquired portfolio in Banco Colpatria. Higher retail provisions, primarily in Mexico, and largely in
unsecured term loans, were partly offset by lower provisions in Chile. In the commercial portfolio, provisions
were primarily higher in the Caribbean and Latin America with the former reflecting $83 million in provisions
relating mainly to a small number of accounts in the hospitality portfolio. The provision this year includes a
net benefit of $12 million due to net amortization of the credit mark on acquired loans in Colombia
compared to net benefit of $55 million last year.
Provision for income taxes
The effective tax rate was 22.6% compared to 23.3% last year due primarily to higher tax benefits realized
mainly in Mexico and Chile.
Outlook
International Banking expects to continue to benefit from its diversification, both by geography and product
and by the relatively attractive economic and demographic profiles within the regions where it operates.
While moderated growth in many Latin American countries in 2014 is expected to continue into 2015, loan
growth is expected to remain solid in these key markets. In the Caribbean and Central America, some
pick-up in loan growth is expected, although with mixed trends by geography. Margins are expected to
remain stable and operating leverage positive. Credit provisions in Latin America are projected to increase in
line with asset growth and the reduction of credit mark benefits from past acquisitions. In the Caribbean and
Central America, higher credit provisions will be driven largely by growth in the retail portfolios and the
impact of challenging economic conditions in some regions on the commercial portfolios. Selective and
disciplined acquisitions, primarily in existing markets, will continue to be considered. Overall, International
Banking is well positioned for 2015. Earnings growth is expected to remain moderate in the first half of
2015 and pick up in the latter part of the year as economic conditions improve into 2016.
C32 Total revenue
Caribbean and Central America
Latin America
Asia
9.7%
26.4%
63.9%
C33 Total revenue by region
$ millions
12 14 13
5000
4000
3000
2000
1000
6000
Caribbean and Central America
Latin America
Asia
8000
7000
C34 Average loans and acceptances
$ billions
20
40
60
80
100
120
Residential mortgages
Retail loans (except mortgages)
Business loans/acceptances
12 14 13
C35 Average earning assets
(1)
by
region
$ billions
12 14 13
Caribbean and Central America
Latin America
Asia
20
40
60
80
100
120
140
(1) Average earning assets excluding bankers
acceptances
2014 Scotiabank Annual Report 59
MANAGEMENT’S DISCUSSION AND ANALYSIS
Global Wealth & Insurance
Offers wealth management and insurance products and services to retail and institutional clients
in Canada and internationally.
2014 Achievements Global Wealth & Insurance
• Monetized a significant portion of our investment in CI Financial Corp, resulting in an after tax gain
of $555 million for the Bank (including $534 million in GWI)
• Expanded institutional asset management by acquiring the remaining Aurion Capital Management
shares not already owned by the Bank
• Achieved record net sales for ScotiaFunds through the Canadian Banking channel for second straight
year
• Launched fourteen new products in Dynamic Funds, including nine mandates under Dynamic Private
Investment Pools, and twenty-two new funds launched across Latin America and the Caribbean
• Launched the Global Portfolio Advisory Group (GPAG) to provide industry-leading global investment
strategies for both developed and emerging markets
• Expanded insurance distribution and footprint in Canada and the English Caribbean
• Opened Vancouver Wealth office, housing a private bank and investment advisors targeting the Asian
market
• Bank of Beijing and Scotia Asset Management Ltd. (BOBSAM) joint venture launched:
• First fund - the largest money-market fund IPO in China ($1.14 billion raised)
• First fixed income fund ($57 million during IPO)
• Scotiabank Bahamas, Barbados and Cayman Islands ranked #1 by Euromoney for select Private
Banking and Wealth Management Services
• Scotia iTRADE named “top pick” in three categories for 2014 in MoneySense magazine’s ranking of
Canada’s online brokerages
• Colfondos received the 2014 World Finance Pension Fund Award for best pension fund in Colombia
• Profuturo AFP recognized by Bolsa de Valores de Lima as a Top 25 Peruvian company; and by
Universidad del Pacifico Graduate School and El Dorado Investments as “Best Investment Manager
2013” for two pension funds
• Scotia Mutual Funds received three A+ awards (2013 Fundata FundGrade A+ Awards), and Scotia
Fondos (Mexico) received three 5-star rankings in the 2014 “Best Funds” annual ranking, published
by S&P and Expansión magazine.
2014 Achievements Global Transaction Banking
• Scotiabank received a Visa Service Quality Performance Award for 2013 for GTB’s Commercial Card
Program.
• Scotiabank GTB won Global Finance magazine’s World’s Best Corporate/Institutional Bank 2014 in
16 Latin American and Caribbean countries.
• Scotiabank was named 2013 Best Partner Bank in Trade and Supply Chain Finance in Europe and
Central Asia by the International Finance Corporation, in recognition of GTB’s innovation and
extensive work to support the growth of emerging market trade.
• GTB Mexico received the 2013 JP Morgan Quality Recognition Award for quality in processing
international wires.
T47 Global Wealth & Insurance financial performance
($ millions) 2014 2013 2012
Net interest income
(1)
$ 446 $ 409 $ 442
Net fee and commission revenues 3,364 2,935 2,469
Net income from investments in associated corporations 156 230 209
Other operating income
(1)
1,080 422 394
Total revenue
(1)
5,046 3,996 3,514
Provision for credit losses 2 3 3
Operating expenses 2,727 2,411 2,076
Income taxes
(1)
440 336 315
Net income $ 1,877 $ 1,246 $ 1,120
Net income attributable to non-controlling interest 46 39 25
Net income attributable to equity holders of the Bank $ 1,831 $ 1,207 $ 1,095
Key ratios
Return on economic equity 28.2% 16.7% 13.5%
Productivity
(1)
54.1% 60.3% 59.1%
Selected Consolidated Statement of Financial Position
data (average balances)
Earning assets $ 10,556 $ 10,553 $ 9,638
Total assets 14,867 14,379 13,539
Deposits 18,222 16,789 15,227
Total liabilities 19,625 17,522 15,923
Economic equity $ 6,390 $ 6,965 $ 7,756
Other ($ billions) as at Oct 31
Assets under administration $ 368 $ 326 $ 283
Assets under management $ 165 $ 145 $ 115
(1) Taxable equivalent basis.
Business Profile
Global Wealth & Insurance (GWI) provides a
comprehensive suite of investment, pensions
and insurance advice, solutions, and
management services to high net worth,
mass affluent, affluent, mass market and
institutional clients, as well as advisors, across
Scotiabank’s unmatched global footprint.
Global Wealth Management is an integrated
business unit composed of asset
management and advisory businesses. Asset
management business is focused on
investment manufacturing and developing
innovative investment solutions for both retail
and institutional investors. Our global client-
facing wealth businesses, including private
client, online and full service brokerage,
pensions, institutional client services and an
independent advisor channel, are focused on
providing advice and solutions to clients in
Canada and internationally.
Global Insurance provides clients with four
main solutions in Canada: creditor, life and
health, home and auto and travel.
Internationally, a full range of insurance
solutions – creditor, non-creditor, life and
health, and property – are offered through a
number of different Scotiabank channels.
Global Transaction Banking (GTB) offers
comprehensive business solutions – cash
management, payment services, electronic
banking, business deposits, and trade
services – on a global basis to Scotiabank’s
small business, commercial and corporate
customers. GTB also provides correspondent
banking products and services to other
financial institutions globally. The financial
results of this unit are included in Canadian
Banking, International Banking and Global
Banking & Markets.
Effective November 1, 2014, Global Wealth &
Insurance businesses were integrated into the
Bank’s three Business Lines: Canadian
Banking, International Banking, and Global
Banking & Markets.
Global Wealth Management continues to be
a key business unit, reporting jointly to
Canadian Banking and International Banking.
Canadian Insurance and International
Insurance report to Canadian Banking and
International Banking, respectively. Global
Transaction Banking is now managed by
Global Banking & Markets.
60 2014 Scotiabank Annual Report
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Financial Performance
Global Wealth & Insurance reported net income attributable to equity holders of $1,831 million,
an increase of $624 million or 52% compared to last year. The results included the disposition
gain of $534 million and restructuring charge of $8 million (after tax) (refer T44). Adjusting for
these items and the impact of lower income as a result of the disposition, the underlying net
income attributable to equity holders grew by 13% due to strong performance across all
businesses. Growth was driven by higher Assets under Management (AUM) and Assets under
Administration (AUA) from higher net sales, improved financial market conditions and
acquisitions. Return on economic equity was 28.2% compared to 16.7% last year primarily due
to the impact of the disposition.
Assets Under Management and Assets Under Administration
AUM of $165 billion increased $20 billion or 13% from last year, driven by improved financial
markets and strong net sales. AUA increased $42 billion or 13% to $368 billion driven by new
customer assets and improved financial markets.
Revenues
Total revenue increased by $1,050 million or 26% compared to the same period last year. This
includes the disposition gain and lower contribution from CI Financial Corp. (CI). Adjusting for
these items, revenues increased by $488 million or 13% across wealth management and
insurance businesses. The year-over-year growth also benefited from the full year impact of the
acquisitions of Colfondos and AFP Horizonte.
Net interest income increased by $37 million or 9% primarily due to growth in loans and
deposits.
Net fee and commission revenues of $3,364 million grew by $429 million or 15% mainly due to
stronger mutual fund fees, higher brokerage revenues, increased insurance income and the full
year impact of acquisitions.
Net income from associated corporations was lower from the prior year due to the disposition of
CI.
Other operating income of $1,080 million increased by $658 million mostly due to the disposition
gain and insurance revenue. Last year’s results included a writedown on investment securities.
Wealth Management
Total revenue of $4,311 million, increased $973 million or 29% compared to last year. Adjusting
for the disposition gain and lower contribution from CI, revenues increased by $411 million or
13%. Higher wealth management revenues were driven by strong growth in mutual funds,
increased brokerage revenues and the full year impact of acquisitions.
Insurance
Total revenue of $735 million, increased $77 million or 12% over last year, mainly reflecting
higher insurance premiums and favourable claims experience. Insurance revenues represent
approximately 17% of Global Wealth Insurance (excluding CI gain and contribution), the same as
in 2013.
Operating expenses
Operating expenses for the year were $2,727 million, an increase of $316 million mainly due to
higher volume-related expenses in line with revenue growth, the full year impact of the
acquisitions, and the restructuring charge. The remaining increases were in remuneration and
other expenses to drive business growth. Operating leverage was positive 13.2%. Adjusting for
the notable items and the lower net income from an associated corporation, operating leverage
was generally flat.
Provision for income taxes
The effective tax rate was 19.0% compared to 21.2% last year mainly due to lower taxes on the
notable gain.
C36 GWI revenue
(1)
$ millions
12 13 14
1000
2000
3000
4000
5000
(1) Excludes CI gain and CI contribution
C37 Total revenue
(1)
Insurance
Wealth Management
17%
83%
(1) Excludes CI gain and CI contribution
C38 Wealth management asset growth
$ billions, as at October 31
12 13 14
Assets under management (right scale)
Assets under administration (left scale)
50
100
200
150
400
350
300
250
25
50
75
100
175
150
125
2014 Scotiabank Annual Report 61
MANAGEMENT’S DISCUSSION AND ANALYSIS
Global Banking & Markets
Global Banking & Markets (GBM) provides clients with corporate banking, investment banking
and capital markets solutions. GBM’s products and services are offered to corporate, government
and institutional clients in Canada and in select international countries.
2014 Achievements
• Exclusive Financial Advisor to Fortis Inc. on its acquisition of UNS Energy Corporation for
approximately US$4.5 billion. Scotiabank underwrote committed bridge facilities, installment
receipts and Preference Shares to finance the transaction.
• Scotiabank ranked #1 on the Canadian Equity League tables (January 1st to October 31st,
2014), Bloomberg.
• Co-Lead Manager in HK Electric Investments’ (HKEI) US$3.1 billion Initial Public Offering, the
largest ever investment trust IPO in Hong Kong and largest IPO in Hong Kong in the last year,
and Bookrunner on HKEI’s US$4.7 billion loan.
• Exclusive Financial Advisor on Baytex Energy Corporation’s $2.8 billion acquisition of Aurora Oil
& Gas Limited, Sole Underwriter on $2.8 billion bridge loan and credit facilities, and Lead
Bookrunner on the $1.5 billion equity financing.
• Scotiabank is acting as Financial Advisor to Manulife Financial Corporation on its approximately
$4.0 billion acquisition of Standard Life plc’s Canadian business and was Sole Bookrunner on
the related $1.8 billion equity financing. The proposed transaction is expected to close in Q1
2015.
• Exclusive Financial Advisor to LINN Energy, LLC on its US$2.3 billion acquisition of assets from
Devon Energy Corporation. Scotiabank acted as Joint Lead Arranger and Joint Bookrunner on a
US$1.3 billion term loan and Joint Lead Arranger and Bookrunner on a US$1 billion bridge
loan.
• Mandated Lead Arranger in AUD$3.4 billion facilities for East West Link Stage One PPP, a road
construction and operation project in Australia.
• Joint Lead Manager for Scentre Group on its €2.1 billion multi-tranche and multi-currency bond
issue, one of the largest ever corporate bond issues from Australia into the global debt capital
markets.
• Exclusive Financial Advisor to Encana Corporation on its US$3.1 billion acquisition of Freeport-
McMoRan’s oil and gas properties in the Eagle Ford play of South Texas.
• Joint Bookrunner on Unión Andina de Cementos S.A.A.’s (UNACEM) inaugural U.S. dollar
notes offering, raising US$625 million, the largest ever high yield bond issuance from Peru.
• Scotiabank was recognized as the Best Corporate/Institutional Internet Bank in 16 Latin
American countries (2014), by Global Finance.
• Scotiabank received five Infrastructure Financing awards (2014), by LatinFinance.
T48 Global Banking & Markets financial performance
($ millions) 2014 2013 2012
Net interest income
(1)
$ 728 $ 787 $ 760
Net fee and commission revenues 1,522 1,268 1,218
Net income from investments in associated corporations – – 1
Other operating income
(1)
1,563 1,525 1,525
Total revenue
(1)
3,813 3,580 3,504
Provision for credit losses 9 26 30
Operating expenses 1,729 1,589 1,507
Income taxes
(1)
616 510 524
Net income $ 1,459 $ 1,455 $ 1,443
Net income attributable to non-controlling interest – – –
Net income attributable to equity holders of the Bank $ 1,459 $ 1,455 $ 1,443
Key ratios
Return on economic equity 30.4% 27.6% 26.3%
Productivity
(1)
45.3% 44.4% 43.0%
Net interest margin
(2) (3)
2.10% 2.33% 2.44%
Provision for credit losses as a percentage of loans and
acceptances
(2)
0.02% 0.07% 0.09%
Selected Consolidated Statement of Financial Position data
(average balances)
Trading assets $ 110,653 $ 102,304 $ 88,236
Loans and acceptances 41,739 39,083 33,873
Earning assets 246,354 221,827 183,526
Total assets 282,953 250,309 219,100
Deposits 51,395 48,300 46,493
Total liabilities 208,962 188,944 164,783
Economic equity $ 4,731 $ 5,151 $ 5,358
(1) Taxable equivalent basis.
(2) Global Corporate and Investment Banking only.
(3) Net interest income (TEB) as % of average earning assets excluding bankers’ acceptances.
Business Profile
Global Banking & Markets conducts the Bank’s
wholesale banking and capital markets business
with corporate, government and institutional
clients. GBM is a full-service lender and
investment dealer in Canada and Mexico, and
offers a wide range of products and services in
the United States, Central and South America,
and select markets in Europe and Asia. More
specifically, GBM provides clients with corporate
lending, equity and debt underwriting, mergers
and acquisitions advisory, as well as fixed
income and equity sales, trading and research,
prime brokerage, securitization, foreign
exchange, energy and rates hedging, and
precious and base metals sales, trading and
storage.
Strategy
GBM’s goal is to build a diversified and
profitable customer-focused business that
delivers best-in-class performance versus our
Canadian peers. GBM seeks to achieve
sustainable revenue and net income growth
through a strategy focused on maximizing client
relationships both in Canada and internationally,
and expanding business in high-growth regions
outside of Canada where we can leverage the
Bank’s strong reputation and existing presence.
2015 Priorities
• Enhancing focus on the client: Improving our
client coverage model and deepening
relationships with our most important client
relationships in Canada and internationally.
• Strategic lending and alignment: Extending
credit to targeted clients in a more strategic
manner and aligning our advisory and capital
markets businesses with that strategic
lending.
• Expanding in key regions: While continuing to
grow our competitive position in Canada, we
will expand our Latin America and Asia-Pacific
business, focusing on select local, regional
and international clients in core sectors and
priority countries.
• Focusing on core sectors: Continued focus
throughout our businesses and geographies
on the key sectors of Energy, Mining,
Infrastructure and Financial Services.
• Improving efficiency and effectiveness:
Prudently managing expenses and risks
through global oversight and governance,
while enhancing infrastructure and
operational efficiencies.
• Developing a talented workforce and
leadership: Attracting, developing and
retaining talent and building global leadership
capability with diverse business experience.
62 2014 Scotiabank Annual Report
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Financial Performance
Global Banking & Markets reported net income attributable to equity holders of $1,459 million
in 2014, a slight increase of $4 million from last year. Adjusting for the notable items (refer T44),
net income grew by $26 million or 2% from last year.
The diversified platform contributed to record results in investment banking and Canadian
lending, dampened somewhat by challenges in the other capital markets groups. Return on
economic equity increased to 30.4% from 27.6% last year.
Assets and Liabilities
Average assets increased by $33 billion or 13% to $283 billion this year, comprised mainly of
earning assets which grew by $25 billion or 11% to $246 billion this year. Securities purchased
under resale agreements increased by $13 billion while trading securities increased by $7 billion.
Corporate loans and acceptances also grew by $2 billion in the U.S., Canada and Europe.
Revenues
Total revenues during 2014 were a record $3,813 million compared to $3,580 million last year.
Adjusting for the notable items, revenues grew by $235 million, an increase of 7%. The business
continues to benefit from a diversified products and services platform. The equities, investment
banking, and the Canadian lending businesses experienced record revenues during 2014. These
strong results were partly offset by declines in the fixed income and, to a lesser extent, the
precious metals businesses.
Net interest income decreased by 7% to $728 million, mainly due to lower loan origination fees
and ongoing spread compression in the US. This was partly offset by a slight increase in corporate
loan volumes and higher spreads in Canadian corporate lending.
Net fee and commission revenue of $1,522 million rose by 20%, due mainly to higher advisory
fees in investment banking and higher underwriting fees in investment banking and equities.
Other operating income increased by 2% to $1,563 million. Equities, commodities and Canadian
lending improved, and there were securities gains in U.S. lending. This was partly offset by lower
results in the fixed income business.
Operating expenses
Operating expenses increased by 9% to $1,729 million in 2014. Adjusting for notable items,
expenses grew by 7%. Performance-related and share-based compensation were the main drivers
along with higher technology, salaries and benefits and support costs. Operating leverage was
flat adjusting for the notable items.
Provision for credit losses
The provision for credit losses was $9 million in 2014, down by $17 million from 2013. In the
current year, lower provisions in the United States were somewhat offset by higher provisions in
Europe and Canada.
Provision for income taxes
The effective tax rate of 29.7% was higher than the prior year by 3.7%. This was mainly due
to higher taxes in foreign jurisdictions.
Outlook
In 2015, Global Banking & Markets will continue to focus on providing stable net income across
our diversified business platform. Growth will be driven by enhancing our customer focus in all
regions and by integrating our business in Asia. While revenue growth may face continued
challenges due to market volatility, any impact should be mitigated by our highly diversified
business platform and by a strong focus on ancillary customer revenue. The corporate loan
portfolio is expected to grow further in 2015 with loan spreads expected to remain stable. Credit
quality of the loan portfolio should remain strong and loan loss provisions are expected to remain
low. GBM will actively manage risk exposures and work to optimize capital. There will also be a
continued focus on expense management to maintain a leading productivity ratio, while investing
in the business to position for future growth.
C39 Total revenue
Global corporate and investment banking
Global capital markets
51%
49%
C40 Global corporate and investment
banking revenue
$ millions
12 13 14
Investment banking
Lending
500
1000
1500
2000
C41 Global capital markets revenue by
business line
$ millions
12 14 13
Energy & Agricultural commodities
Metals & Foreign Exchange
Equities
Fixed income
500
1000
1500
2500
2000
C42 Composition of average earning
assets
$ billions
12 14 13
Other
Trading assets
Corporate loans and acceptances
50
100
250
200
150
C43 Trading day losses
13
10
8
6
4
2
14
12
14
2014 Scotiabank Annual Report 63
MANAGEMENT’S DISCUSSION AND ANALYSIS
Other
The Other segment includes Group Treasury, smaller operating segments and other corporate
items which are not allocated to a business line.
Financial performance
The Other segment had a net income attributable to equity holders of $101 million in 2014,
compared to a net loss of $160 million in 2013. This year’s net income was reduced by notable
items of $62 million (refer T44).
Net interest income, other operating income, and the provision for income taxes in each period
include the elimination of tax-exempt income gross-up. This amount is included in the operating
segments, which are reported on a taxable equivalent basis. The elimination was $354 million in
2014, compared to $312 million in 2013.
Net income from investments in associated corporations and the provision for income taxes in
each period include the 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 corporations to the divisional results.
Revenues
Net interest income was $89 million this year, an improvement of $277 million from 2013 mainly
due to higher revenues from asset/liability management activities partly reflecting maturing high-
rate debentures and deposits which were replaced with funding at lower rates.
Net fees and commission revenues was negative $281 million in 2014, compared to negative
$196 million in 2013. The decrease was mainly due to the offset to revenues reported in the
other operating segments. This offset had no impact on the Bank’s consolidated results.
Other operating income was $117 million in 2014, compared to negative $60 million last year.
The increase was almost entirely due to higher net gains of $176 million on investment securities
year over year.
Operating expenses
Adjusting for notable items, operating expenses were a credit of $82 million in 2014, compared
to a credit of $57 million last year. The increase was due to higher inter-segment offsets in 2014
with no impact on the Bank’s consolidated results. Partly offsetting was the business-related tax
recoveries in 2013.
T49 Other financial performance
($ millions) 2014 2013 2012
Net interest income
(1)
$ 89 $ (188) $ (298)
Net fee and commission revenues (281) (196) (216)
Net income from investments in associated corporations (139) (227) (150)
Other operating income
(1)
117 (60) 666
Total revenue
(1)
(214) (671) 2
Provision for (recovery of) credit losses – – 100
Operating expenses 5 (57) (22)
Income taxes
(1)
(320) (454) (376)
Net income $ 101 $ (160) $ 300
Net income attributable to non-controlling interests – – –
Net income attributable to equity holders of the bank $ 101 $ (160) $ 300
(1) Includes the net residual in matched maturity transfer pricing and the elimination of the tax-exempt income gross-up reported in net interest income,
other operating income and provision for income taxes in the business segments.
64 2014 Scotiabank Annual Report
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RISK MANAGEMENT
Effective risk management is fundamental to the success of the Bank,
and is recognized as a core deliverable in the Bank’s overall approach
to strategy management. Scotiabank has a strong, disciplined risk
management culture where risk management is a responsibility shared
by all of the Bank’s employees. A key aspect of this culture is
diversification across business lines, geographies, products,
and industries.
Risk management framework
The primary goals of risk management are to ensure that the outcomes
of risk-taking activities are consistent with the Bank’s strategies and risk
appetite, and that there is an appropriate balance between risk and
reward in order to maximize shareholder returns. The Bank’s enterprise-
wide risk management framework provides the foundation for
achieving these goals.
This framework is subject to constant evaluation to ensure that it meets
the challenges and requirements of the global markets in which the
Bank operates, including regulatory standards and industry best
practices. The risk management programs of the Bank’s subsidiaries
conform in all material respects to the Bank’s risk management
framework, although the actual execution of their programs may be
different. For new acquisitions, or situations where control of a
subsidiary has been recently established, the Bank assesses existing risk
management programs and, if necessary, develops an action plan to
make improvements in a timely fashion.
Risk
Governance
Risk Appetite
Risk Capacity
Risk Appetite Statement
Key Risk Appetite Measures
Risk Management Tools
Policies & Limits
Guidelines Processes & Standards
Measuring Monitoring & Reporting
Stress Testing
Risks
Credit Market Liquidity Operational Reputational Environmental Strategic Insurance
Strong Risk Culture
The Bank’s risk management framework is applied on an enterprise-
wide basis and consists of three key elements:
• Risk Governance,
• Risk Appetite, and
• Risk Management Tools.
The Bank’s risk management framework is predicated on the three-lines-of-defence model. Within this model, functional Business Line staff and
management (the first line) incur and own the risks, while Global Risk Management and other control functions (the second line) provide independent
oversight and objective challenge to the first line of defence, as well as monitoring and control of risk. Internal Audit Department (the third line) provides
assurance that control objectives are achieved by the first and second lines of defence.
1
Business Line/Corporate Function
• Own the risks associated with business activities.
• Exercise business judgement to evaluate risk.
• Ensure activities are within the Bank’s risk
appetite and risk management policies.
2
Global Risk Management and
Other Control Functions
• Independently facilitate and monitor the
implementation of effective risk management
practices.
• Responsible for policy development, measurement &
reporting, limits & controls, oversight & monitoring.
• Provide objective challenge to the first line
of defence.
3
Internal Audit
• Independent monitoring and oversight function.
• Focus on governance framework and control
systems.
• Audit findings reported to management and
Audit Committee.
• Provide training, tools and advice to support
policy and compliance.
Risk governance
Effective risk management begins with effective risk governance.
The Bank has a well-established risk governance structure, with an active
and engaged Board of Directors supported by an experienced senior
management team and a centralized risk management group that is
independent of the business lines. Decision-making is highly centralized
through a number of senior and executive risk management committees.
The Board of Directors
The Board of Directors, either directly or through its committees ensures
that decision-making is aligned with the Bank’s strategies and risk
appetite. The Board approves key risk policies, limits and risk appetite
frameworks, and on a quarterly basis receives a comprehensive summary
of the Bank’s risk profile and performance of the portfolio against defined
goals. The Bank’s Internal Audit department reports independently to the
Board (through the Audit and Conduct Review Committee) on the
effectiveness of the risk governance structure and risk management
framework.
Management
Executive management, and in particular the President and Chief
Executive Officer and the Chief Risk Officer (CRO), are responsible for
risk management under the oversight of the Board. The CRO, who
oversees the Global Risk Management (GRM) division of the Bank,
reports to the President and Chief Executive Officer but also has direct
access to the Executive and Risk Committee of the Board. The President
and Chief Executive Officer, CRO, and other senior executives chair the
Bank’s senior and executive risk management committees. Committee
structures and key accountabilities are outlined on page 66.
Global Risk Management (GRM)
GRM is responsible for the design and application of the Bank’s risk
management framework, and is independent of the Bank’s business
units. It provides oversight of credit, market (including structural
foreign exchange and structural interest rate), liquidity, operational
(including model), environmental and insurance risks.
2014 Scotiabank Annual Report 65
MANAGEMENT’S DISCUSSION AND ANALYSIS
BANK’S RISK GOVERNANCE STRUCTURE
Model Review
Committee
Insurance Risk
Committee
Executive & Risk
Committee
Board of Directors &
Board Committees
Audit & Conduct
Review Committee
President and
Chief Executive Officer
• Board oversight – Risk appetite, strategies, policies
and limits are subject to Board approval. The Board,
directly or through its committees, receives regular
updates on the key risks of the Bank.
• Audit review – Internal Audit reports independently
to the Audit and Conduct Review Committee of the
Board on the design and effectiveness of risk management
policies, procedures and internal controls.
• Business units are responsible and accountable
for managing risks within their portfolios, and
are allocated capital in line with their risk profiles.
• Senior management committee structure is
designed to ensure alignment of business
objectives, risk tolerance and resources.
Senior Credit
Committee(s)
Market Risk
Management & Policy
Committee
Operational Risk
Committee
Reputational Risk
Committee
Stress Testing
Committee
Systems Planning &
Policy Committee
Strategic Transaction
Investment Committee
Liability
Committee
Operating
Committee
Risk Policy
Committee
Human
Investment
Committee
Executive Committees:
Operating Committee: sets the Bank’s key strategies, and following
Board approval, directs the execution of those strategies; and executes
the Bank’s overall risk strategy and monitors and evaluates the Bank’s
ongoing financial performance and how risks are managed across the
Bank.
Risk Policy Committee: reviews key risk exposures and risk policies, and
adjudicates risk issues referred by the Senior Credit, Market and
Reputational Risk committees.
Liability Committee: provides strategic direction in the management of
global interest rate risk, foreign exchange risk, liquidity and funding
risk, trading and investment portfolio decisions, and capital
management.
Strategic Transaction Executive Committee: provides advice, counsel
and decisions on effective allocation and prioritization of resources with
respect to the Bank’s portfolio of businesses, and strategic investments
including mergers and acquisitions, and divestitures.
Systems Planning and Policy Committee: reviews and approves
significant business initiatives involving system and computing
investments in excess of designated executive approval limits.
Human Investment Committee: reviews and approves all major new
and changing Bank-wide Human Resources objectives, strategies,
policies and programs including all compensation matters. As well it
reviews and approves all senior management appointments and the
staffing of key positions.
Senior Management Committees:
Senior Credit Committees: adjudicate credits within prescribed limits
and establish the operating rules and guidelines for the implementation
of credit policies. Separate committees cover commercial, international
and corporate counterparties, and Canadian and international retail,
small business, and wealth management.
Market Risk Management and Policy Committee: oversees and
establishes standards for market, liquidity and insurance risk
management processes within the Bank, including the review and
approval of new products, limits, practices and policies for the Bank’s
principal trading and treasury activities.
Operational Risk Committee: promotes an enterprise-wide operational
risk management framework to ensure operational risks are
understood, communicated, and appropriate actions are taken to
mitigate related losses.
Stress Testing Committee: sets overall direction and makes key
decisions relating to stress testing activities across the Bank, and guides
the design, execution, and results assessment of the Enterprise-wide
Stress Testing program.
Reputational Risk Committee: upon referral from business lines or risk
committees, reviews business activities, initiatives, products, services,
transactions or processes and recommends either proceeding or not
proceeding, based on an assessment of reputational risk, to ensure that
the Bank is, and is seen to be, acting with high ethical standards.
Model Review Committee: oversees model submissions, vetting,
approval, and ongoing review processes primarily for market and
treasury risk models.
Insurance Risk Committee: provides risk management direction and
oversight on the risk taking activities of the Bank’s enterprise-wide
insurance operations.
66 2014 Scotiabank Annual Report
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Risk management culture
Effective risk management requires a strong, robust, and
pervasive risk management culture.
The business lines are responsible for the development and execution
of business plans that are aligned with the Bank’s risk management
framework, and are accountable for the risks they incur. Understanding
and managing these risks is a fundamental element of each business
plan. Business lines work in partnership with Global Risk Management
to ensure that risks arising from their business are thoroughly evaluated
and appropriately addressed.
Risk education programs, and documented policies and procedures are
jointly available to staff in the business lines and Global Risk Management.
Decision-making on risk issues is highly centralized. The membership of
senior and executive management committees responsible for the
review, approval and monitoring of transactions and the related risk
exposures, includes business line heads and senior risk officers from
Global Risk Management. The flow of information and transactions to
these committees keeps senior and executive management well
informed of the risks the Bank faces, and ensures that transactions and
risks are aligned with the Bank’s risk appetite. The interaction between
senior risk officers and business line heads at committee meetings is
robust, with constructive discussions and objective challenge by all
participants in order to fully identify and address all relevant risks
applicable to a transaction.
The Bank’s material incentive compensation programs are structured to
reflect the Bank’s risk appetite, with a substantial portion deferred in
order to achieve stronger alignment with the results of risk-taking
activities. The Bank also has a very stringent Guidelines for Business
Conduct to which all staff must attest on an annual basis. Performance-
related compensation is eligible for claw-back where there is a material
breach of compliance rules or Guidelines for Business Conduct, or if
there is a material misstatement of results in the fiscal year of the grant.
Risk appetite framework
Effective risk management requires clear articulation of the
Bank’s risk appetite and how the Bank’s risk profile will be
managed in relation to that appetite.
The Bank’s Risk Appetite Framework consists of a risk capacity, risk
appetite statement and key risk appetite measures. Together,
application of the risk appetite statement and monitoring of the key
risk appetite measures help to ensure the Bank stays within appropriate
risk boundaries. The Bank’s Credit Risk Appetite further defines the
Bank’s risk appetite with respect to lending, counterparty credit risk,
and other credit risks (such as investments).
• The Bank’s Risk Appetite Framework combines qualitative and quantitative terms of
reference to guide the Bank in determining the amount and types of risk it wishes to
prudently undertake in pursuing the Bank’s strategic and financial objectives.
Risk Appetite
Key Risk
Appetite
Measures
Risk
Capacity
Risk
Appetite
Statement
Risk appetite is supported by the following Core Deliverables:
1. Maintain appropriate financial strength and liquidity
• Diversity, quality and stability of earnings
• Focus on core businesses, with disciplined and selective
strategic investments
• Maintain capital adequacy
2. Measure, monitor and manage all aspects of the Bank’s risk
appetite and risk profile.
• Dedicated attention to credit, market, liquidity, and
operational risks
• Careful consideration of reputational, environmental, and
other risks
• No tolerance for reputational risks that could affect our
brand
3. Meet the needs and expectations of our customers,
employees, shareholders and other key stakeholders.
4. Ensure a deep, diverse and engaged pool of talented
Scotiabankers.
5. Operate in an efficient, secure and compliant manner.
Risk management tools
Effective risk management includes tools that are guided by the
Bank’s Risk Appetite Framework and integrated with the Bank’s
strategies and business planning processes.
• Risk management techniques are regularly reviewed and updated to ensure consistency with
risk-taking activities, and relevance to the business and financial strategies of the Bank.
Risk Management
Tools
Guidelines, Processes
& Standards
Policies
& Limits
Measurement,
Monitoring &
Reporting
Stress
Testing
Policies and Limits
Policies
Apply to specific types of risk or to the activities that are used to
measure and control risk exposure. They are based on
recommendations from risk management, internal audit, business lines,
and senior executive management. Industry best practices and
regulatory requirements are also factored into the policies. Policies are
guided by the Bank’s risk appetite, and set the limits and controls
within which the Bank and its subsidiaries can operate.
• Key risk policies are approved by the Board of Directors, either
directly or through the Board’s Executive and Risk Committee or
Audit and Conduct Review Committee (the Board).
• Management level risk policies associated with processes such as
model development and stress testing are approved by executive
management and/or key risk committees.
Limits
Control risk-taking activities within the tolerances established by the Board
and senior executive management. Limits also establish accountability for
key tasks in the risk-taking process and establish the level or conditions
under which transactions may be approved or executed.
2014 Scotiabank Annual Report 67
MANAGEMENT’S DISCUSSION AND ANALYSIS
Guidelines, Processes and Standards
Guidelines
Are the directives provided to implement policies as set out above.
Generally, they describe the facility types, aggregate facility exposures
and conditions under which the Bank is prepared to do business.
Guidelines ensure the Bank has the appropriate knowledge of clients,
products, and markets, and that it fully understands the risks associated
with the business it underwrites. Guidelines may change from time to
time, due to market or other circumstances. Risk taking outside of
guidelines usually requires approval of the Bank’s Senior Credit
Committees, Market Risk Management and Policy Committee, or Risk
Policy Committee.
Processes
Are the activities associated with identifying, evaluating, documenting,
reporting and controlling risk.
Standards
Define the breadth and quality of information required to make a
decision, and the expectations in terms of quality of analysis and
presentation. Processes and standards are developed on an enterprise-
wide basis, and documented in a series of policies, manuals and
handbooks under the purview of GRM. Key processes cover the review
and approval of new products, model validation and stress testing.
Measurement, Monitoring, and Reporting
Measurement
GRM is responsible for developing and maintaining an appropriate
suite of risk management techniques to support the operations of the
various business lines, and for supporting the measurement of
economic capital on an enterprise-wide basis. The risk sections explain
the application of these techniques.
Risk measurement techniques include the use of models and stress
testing. The Bank uses models for a range of purposes including
estimating the value of transactions, risk exposures, credit risk ratings
and parameters, and economic and regulatory capital. The use of
quantitative risk methodologies and models is balanced by a strong
governance framework and includes the application of sound and
experienced judgement. The development, independent review, and
approval of models are subject to formalized policies where applicable,
including the oversight of senior management committees such as the
Model Review Committee for market risk (including counterparty credit
risk) and liquidity risk models.
Regular Monitoring
Ensures that business activities are within approved limits or guidelines,
and are aligned with the Bank’s strategies and risk appetite. Breaches,
if any, of these limits or guidelines are reported to senior management,
policy committees, and/or the Board depending on the limit or
guideline.
Risk Reports
Aggregate measures of risk across products and businesses, and are
used to ensure compliance with policies, limits, and guidelines. They
also provide a clear statement of the amounts, types, and sensitivities
of the various risks in the Bank’s portfolios. Senior management and
the Board use this information to understand the Bank’s risk profile and
the performance of the portfolios.
Control and audit functions are also established that are independent
of the organizations whose activities they review, and whose role
includes ensuring that all of the components of the risk management
framework are effective and being implemented on a day to day basis.
Stress testing
The Bank’s stress testing programs draw upon the principles set out
under guidelines issued by the Office of the Superintendent of Financial
Institutions, in particular:
• Guideline A-1 Capital Adequacy Requirements (Chapter 9 Stress
Testing),
• Guideline E-18 Stress Testing – Sound Business and Financial
Practices, and
• the Internal Capital Adequacy Assessment Process;
as well as international industry groups, in particular:
• the Institute of International Finance (Governance for Strengthened
Risk Management), and
• the International Monetary Fund (Macrofinancial Stress Testing –
Principles and Practices), and
• the Bank for International Settlements Principles for sound stress
testing practices and supervision.
Stress testing programs at both enterprise-wide level and individual risk
level allow the Bank to estimate the potential impact on income, capital
and liquidity of significant changes in market conditions, credit
environment, liquidity demands, or other risk factors. Each program is
developed with input from a broad base of stakeholders, and results
are integrated into management decision-making processes for capital,
funding, market risk limits, and credit risk appetite. Enterprise-wide
stress testing is also integrated with both the strategic and financial
planning processes. The development, approval and on-going review of
the Bank’s stress testing programs are subject to formalized policy, and
are under the oversight of the Stress Testing Committee.
The following highlight some of the key stress tests that have been
performed:
• Domestic Retail: The Bank performed a stress test involving a
historically unprecedented deterioration in credit quality of domestic
households and firms (including a decline of at least 6.6% in real
GDP, an unemployment rate of 13.3% and a drop in housing prices
of up to 40% with further 20% reductions in Toronto and
Vancouver).
• International: Stress tests conducted include a political and economic
crisis in Latin America, widespread impairment of Euro nations
(including a disorderly default), and a deflationary Asia crisis.
Despite the severity of the stress tests detailed above, the Bank
remained profitable in every instance, throughout the duration of each
stress scenario.
Including consideration of a variety of operational risk, strategic risk,
and broad economic stress scenarios, the Bank’s 2014 Enterprise-wide
Stress Testing program made it clear that the Bank’s combination of
adequate capital ratios, credit risk profile, and diversified earnings base
would make it challenging to construct stress scenarios based on
traditional credit, market, and operational risks that would be of
sufficient severity to question the Bank’s solvency.
68 2014 Scotiabank Annual Report
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Principal risk types
The principal risk types, their governing documentation, and their applicability to risk appetite are outlined in the table below.
Risk Type Governing Documentation Application to Risk Appetite
Credit Risk Credit Risk Policy
Credit Risk Appetite
Collective Allowance Policy for
Performing Loans
Residential Mortgage Underwriting
Policy
Quantitative limits/tolerances:
• Exposure to a single customer or group of related parties (limits differentiated
by customer risk rating and security cover);
• Country risk (exposure limits to control transfer/cross-border and sovereign
default risks); and
• Industry concentrations (exposure and risk adjusted concentration limits).
Market Risk Market and Structural Risk
Management Policy
Quantitative limits/tolerances, such as various VaR limits, stress test results, equity
and debt investment exposures, and structural interest rate and foreign
exchange exposures.
Liquidity and
Funding Risk
Liquidity Risk and Collateral
Management Policy
Quantitative limits/tolerances, such as:
• Appropriate hold levels of unencumbered high quality liquid assets that can be
readily sold or pledged;
• Limits to control the maximum net cash outflow over specified short-term
horizon; and
• Diversification of funding by source, type of depositor, instrument, term and
geographic market.
Other Risks
Operational Risk Operational Risk Management
Policy and Framework
Internal Control Policy
Fiduciary Risk Management Policy
Model Risk Management Policy
New Products and Services Risk
Management
Compliance Policy
• Systematic identification, measurement, mitigation and monitoring of
operational risk, regardless of whatever the risk is internal to the Bank or
outsourced to a third party;
• Minimization of residual operational risk; and
• Expressed quantitatively by an aggregate loss event limit, a single event loss
limit and by comparison of Bank operational losses with an industry
benchmark.
Reputational Risk Reputational Risk Policy
Guidelines for Business Conduct
• Low tolerance for reputational, legal, or taxation risk arising in business
activities, initiatives, products, services, transactions or processes, or from a
lack of suitability of products for clients.
Environmental Risk Environmental Policy Consistency with the Equator Principles by requiring provisioning of project
financing only to those projects whose borrowers can demonstrate their ability
and willingness to comply with comprehensive processes aimed at ensuring that
projects are developed in a socially responsible manner and according to sound
environmental management practices.
Strategic Risk Annual Strategy Report to the
Board of Directors
Strategy report considers linkages between the Bank’s Risk Appetite Framework
with the enterprise strategy, business line strategies and corporate function
strategies; also incorporates linkages to measuring progress against strategic
priorities and implementation.
Insurance Risk Insurance Risk Policy and
Framework
Maintain minimal exposure to insurance risk; where insurance risks are taken, it
is on a selective basis to achieve stable and sustainable earnings, the risk
assumed is diversified geographically and by product, and the majority is short-
term.
2014 Scotiabank Annual Report 69
MANAGEMENT’S DISCUSSION AND ANALYSIS
T50 Exposure to risks arising from the activities of the Bank’s businesses
The Bank
Other
International
Banking
Global Wealth
& Insurance
Global Banking
& Markets
Canadian
Banking
Business
lines
Business
activities
• RWA $88.5 bn
• Proportion of Bank 28%
Comprised of:
• Credit risk 88%
• Market risk - %
• Operational risk 12%
• RWA $110.0 bn
• Proportion of Bank 35%
Comprised of:
• Credit risk 89%
• Market risk 1%
• Operational risk 10%
• RWA $12.4 bn
• Proportion of Bank 4%
Comprised of:
• Credit risk 60%
• Market risk - %
• Operational risk 40%
• RWA $93.5 bn
• Proportion of Bank 30%
Comprised of:
• Credit risk 76%
• Market risk 17%
• Operational risk 7%
Risk-
weighted
assets
(4)
Risk
profile
Credit, market, liquidity, operational, reputational, environmental, strategic and insurance risk.
• Deposits
• Accounts
services
• Credit and
lending
• Commercial banking
• Payments and cash
management
• Advisory services
• Creditor insurance
• Corporate lending
• Equity and debt
underwriting
• M&A advisory
services
• Capital markets
products & services
• Foreign exchange
• Precious metals
• Group Treasury
• Other control
functions
• Asset management
• Financial advisory
• Insurance - creditor,
life, health, home,
auto, and travel
• Online brokerage
• Account services
• Credit and lending
Balance
sheet
• Average assets $139 bn • Average assets $15 bn • Average assets $283 bn • Average assets $280 bn • Average assets
(1)
$79 bn
Economic
equity
(2)
• Deposits
• Accounts
services
• Credit and
lending
• Commercial banking
• Payments and cash
management
• Advisory services
• Creditor insurance
• Economic Equity $7.0 bn
• Proportion of Bank 20%
Comprised of:
• Credit risk 49%
• Market risk 11%
• Operational risk 8%
• Other
(3)
32%
• Economic Equity $12.3 bn
• Proportion of Bank 35%
Comprised of:
• Credit risk 42%
• Market risk 10%
• Operational risk 9%
• Other
(3)
39%
• Economic Equity $6.4 bn
• Proportion of Bank 18%
Comprised of:
• Credit risk 6%
• Market risk 6%
• Operational risk 6%
• Other
(3)
82%
• Economic Equity $4.7 bn
• Proportion of Bank 14%
Comprised of:
• Credit risk 59%
• Market risk 15%
• Operational risk 14%
• Other
(3)
12%
• Economic Equity $4.3 bn
• Proportion of Bank 13%
Comprised of:
• Credit risk 3%
• Market risk 63%
• Operational risk 2%
• Other
(3)
32%
• RWA $8.1 bn
• Proportion of Bank 3%
Comprised of:
• Credit risk 100%
• Market risk - %
• Operational risk - %
(1) Average assets for the Other segment include certain non-earning assets related to the business lines.
(2) Economic equity is reported on a twelve month average basis, consistent with Return on Economic Equity.
(3) Includes economic equity for goodwill and intangibles.
(4) Risk-weighted assets (RWA) are as at October 31, 2014 as measured for regulatory purposes in accordance with the Basel III all-in approach.
70 2014 Scotiabank Annual Report
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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. Credit risk arises in the Bank’s direct lending operations, and in its funding, investment and trading activities where
counterparties have repayment or other obligations to the Bank.
Index of all credit risk disclosures
Page Tables and charts Page
Credit risk summary 72
Credit Risk Management Framework
Risk measures 72
Corporate and commercial 72
Risk ratings 72
Adjudication 72
Credit Risk Mitigation-Collateral/Security 73
Traditional Non-Retail Products 73
Commercial/Corporate Real Estate 73
Traded products 73
Credit Risk Mitigation-Collateral/Security 74
Retail 74
Adjudication 74
Risk ratings 74
Credit Risk Mitigation-Collateral/Security 74
Credit Quality 27 T2 Financial highlights 18
Provision for credit losses 27 T12 Provisions against impaired loans by business line 27
Allowance for credit losses 28 T13 Provision for credit losses as a percentage of average loans and acceptances 27
Impaired loans 29 T14 Net charge-offs as a percentage of average loans and acceptances 27
T15 Impaired loans by business line 28
C13 Credit losses – provisions against impaired loans as a % of average loans &
acceptances 28
C14 Net impaired loan ratio as a % of loans and acceptances 28
C15 Gross impaired loans as a % of equity & allowances for credit losses 28
T67 Gross impaired loans by geographic segment 99
T68 Provision against impaired loans by geographic segment 99
T69 Cross-border exposure to select countries 99
T70 Loans and acceptances by type of borrower 100
T71 Off balance-sheet credit instruments 100
T72 Changes in net impaired loans 101
T73 Provision for credit losses 102
T74 Provision for credit losses against impaired loans by type of borrower 102
T75 Impaired loans by type of borrower 103
T76 Total credit risk exposures by geography 103
T77 AIRB credit risk exposures by maturity 103
T78 Total credit risk exposures and risk-weighted assets 104
Analysis of the aggregate credit risk exposure including market risk exposure, assets of
the Bank’s insurance subsidiaries and other assets that fully reconciles to the balance
sheet (refer Note 39 – Financial instruments – risk management in the consolidated
financial statements) 191
Acquisition-related purchased loans 29
Portfolio review 29 C16 Canadian retail portfolio – delinquent loans as a % of total loans 28
C17 International retail portfolio – delinquent loans as a % of total loans 28
Risk diversification 29 C18 Well diversified in Canada and internationally – loans and acceptances 30
C19 and in household and business lending – loans and acceptances 30
T66 Loans and acceptances by geography 98
Risk mitigation 30
Overview of loan portfolio 30 T19 European exposure 31
Residential mortgages 30 T20 Funded exposures 32
Loans to Canadian condominium developers 31 T21 Bank’s exposure distribution by country 32
European exposures 31 T22 Indirect exposures 33
Financial instruments 52-53 T40 Mortgage-backed securities 52
T41 Collateralized debt obligations (CDOs) 53
2014 Scotiabank Annual Report 71
MANAGEMENT’S DISCUSSION AND ANALYSIS
Credit risk summary
• Loans and acceptances (Retail and Non-Retail) remained diversified
by region, industry and customer. Regional exposure is evenly spread
across our key markets (Canada 69.0%, United States 5.4%, Mexico
3.7% and Other 21.9%). Our largest industry exposure is to Financial
Services, which constitutes 5.1% of overall gross exposures (before
consideration of collateral) and was $22 billion, a decrease of $2
billion from October 31, 2013. These exposures are predominately to
highly rated counterparties and are generally collateralized.
• The Bank’s overall loan book as of October 31, 2014 increased to
$434 billion versus $413 billion as of October 31, 2013, with growth
in the portfolio mainly driven by Personal, and Business and
Government Lending. Residential mortgages were $213 billion as at
October 31, 2014, with 90% in Canada. The corporate loan book,
which accounts for 32% of the total loan book, is composed of 61%
of loans with an investment grade rating as of October 31, 2014,
unchanged from October 31, 2013.
The effective management of credit risk requires the establishment of
an appropriate credit risk culture. Key credit risk policies and appetite
statements are important elements used to create this culture.
The Board of Directors, either directly or through the Executive and Risk
Committee (the Board), reviews and approves the Bank’s Credit Risk
Appetite and Credit Risk Policy on an annual basis:
• The objectives of the Credit Risk Appetite are to ensure that:
– target markets and product offerings are well defined at both the
enterprise-wide and business line levels;
– the risk parameters for new underwritings and for the portfolios as
a whole are clearly specified; and
– transactions, including origination, syndication, loan sales and
hedging, are managed in a manner that is consistent with the
Bank’s risk appetite.
• The Credit Risk Policy articulates the credit risk management
framework, including:
– key credit risk management principles;
– delegation of authority;
– the credit risk management program;
– counterparty credit risk management for trading and investment
activities;
– aggregate limits, beyond which credit applications must be
escalated to the Board for approval; and
– single name/aggregation exposures, beyond which exposures must
be reported to the Board.
Global Risk Management develops the credit risk management
framework and policies that detail, among other things, the credit risk
rating systems and associated parameter estimates; the delegation of
authority for granting credit; the calculation of the allowance for credit
losses; and the authorization of write-offs.
Corporate and commercial credit exposures are segmented by country
and by major industry group. Aggregate credit risk limits for each of
these segments are also reviewed and approved annually by the Board.
Portfolio management objectives and risk diversification are key factors
in setting these limits.
Consistent with the Board-approved limits, borrower limits are set
within the context of established lending criteria and guidelines for
individual borrowers, particular industries, countries and certain types
of lending, to ensure the Bank does not have excessive concentration in
any single borrower, or related group of borrowers, particular industry
sector or geographic region. Through the portfolio management
process, loans may be syndicated to reduce overall exposure to a single
name. For certain segments of the portfolio, credit derivative contracts
are also used to mitigate the risk of loss due to borrower default. Risk is
also mitigated through the selective sale of loans.
Banking units and Global Risk Management regularly review the
various segments of the credit portfolio on an enterprise-wide basis to
assess the impact of economic trends or specific events on the
performance of the portfolio, and to determine whether corrective
action is required. These reviews include the examination of the risk
factors for particular products, industries and countries. The results of
these reviews are reported to the Risk Policy Committee and, when
significant, to the Board.
Risk measures
The credit risk rating systems support the determination of key credit
risk parameter estimates which measure credit and transaction risk.
These risk parameters – probability of default, loss given default and
exposure at default are transparent and may be replicated in order to
provide consistency of credit adjudication, as well as minimum lending
standards for each of the risk rating categories. The parameters are an
integral part of enterprise-wide policies and procedures encompassing
governance, risk management, and control structure, and are used in
various internal and regulatory credit risk quantification calculations.
The Bank’s credit risk rating system is subject to a rigorous validation,
governance and oversight framework. The objectives of this framework
are to ensure that:
• Credit risk rating methodologies and parameters are appropriately
designed and developed, independently validated, and regularly
reviewed; and
• The review and validation processes represent an effective challenge
to the design and development process.
Non-retail credit risk rating methodologies and parameters are
reviewed and validated at least annually. Units within Global Risk
Management are responsible for design and development, validation
and review, and are functionally independent from the business units
responsible for originating transactions. Within Global Risk
Management, they are also independent from the units involved in risk
rating approval and credit adjudication.
Internal credit risk ratings and associated risk parameters affect loan
pricing, computation of the collective allowance for credit losses, and
return on economic capital.
Corporate and commercial
Corporate and commercial credit exposure arises in Canadian Banking,
International Banking, Global Wealth Insurance and Global Banking &
Markets business lines.
Risk ratings
The Bank’s risk rating system utilizes internal grade (IG) codes – an
18 point scale used to differentiate the risk of default of borrowers,
and the risk of loss on facilities. The general relationship between the
Bank’s internal borrower IG codes and external agency ratings is shown
in Table 32 on page 47.
IG codes are also used to define credit adjudication authority levels
appropriate to the size and risk of each credit application. Lower-rated
credits require increasingly more senior management involvement
depending upon the aggregate exposure. Where the decision is beyond
their authority levels, credit units will refer the request – with its
recommendation – to a senior credit committee for adjudication. Senior
credit committees also have defined authority levels and, accordingly,
forward certain requests to the Risk Policy Committee. In certain cases,
these must be referred to the Executive and Risk Committee of the
Board of Directors.
Adjudication
Credit adjudication units within Global Risk Management analyze and
evaluate all significant credit requests for corporate and commercial
72 2014 Scotiabank Annual Report
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credit exposures, to ensure that risks are adequately assessed, properly
approved, continually monitored and actively managed. The decision-
making process begins with an assessment of the credit risk of the
individual borrower or counterparty. Key factors considered in the
assessment include:
• The borrower’s management;
• The borrower’s current and projected financial results and credit
statistics;
• The industry in which the borrower operates;
• Economic trends; and
• Geopolitical risk.
Based on this assessment, a risk rating is assigned to the individual
borrower or counterparty, using the Bank’s risk rating systems.
A separate risk rating is also assigned at the facility level, taking into
consideration additional factors, such as security, seniority of claim,
structure, term and any other forms of credit risk mitigation that affect
the amount of potential loss in the event of a default of the facility.
Security typically takes the form of charges over inventory, receivables,
real estate, and operating assets when lending to corporate and
commercial borrowers; and cash or treasuries for trading lines such as
securities lending, repurchase transactions, and derivatives. The types
of acceptable collateral, and related valuation processes are
documented in risk management policies and manuals.
Other forms of credit risk mitigation include third party guarantees and,
in the case of derivatives facilities, master netting agreements.
Internal borrower and facility risk ratings are assigned when a facility is
first authorized, and are promptly re-evaluated and adjusted, if
necessary, as a result of changes to the customer’s financial condition
or business prospects. Re-evaluation is an ongoing process, and is done
in the context of general economic changes, specific industry
prospects, and event risks, such as revised financial projections, interim
financial results and extraordinary announcements. Global Risk
Management is the final arbiter of internal risk ratings.
The internal credit risk ratings are also considered as part of the Bank’s
adjudication limits, as guidelines for hold levels are tied to different risk
ratings. Single borrower limits are much lower for higher risk borrowers
than low risk borrowers.
The credit adjudication process also uses a risk-adjusted return on equity
profitability model to ensure that the client and transaction structure offers
an appropriate return for a given level of risk. For the corporate portfolio,
and the large borrowers in International, the Loan Portfolio Management
Group reviews the profitability model results, together with external
benchmarks, and provides an opinion on the relative return and pricing of
each transaction above a minimum threshold.
Individual credit exposures are regularly monitored by both the business
line units and Global Risk Management for any signs of deterioration. In
addition, a review and risk analysis of each borrower is conducted
annually, or more frequently for higher-risk borrowers. If, in the judgement
of management, an account requires the expertise of specialists in
workouts and restructurings, it will be transferred to a special accounts
group for monitoring and resolution.
Credit Risk Mitigation – Collateral/Security
Traditional Non-Retail Products (e.g. Operating lines of Credit,
Term Loans)
Collateral values are accurately identified at the outset and throughout
the tenure of a transaction by using standard evaluation
methodologies. Collateral valuation estimates are conducted at a
frequency that is appropriate to the frequency by which the market
value fluctuates, using the collateral type and the Borrower risk profile.
In addition, when it is not cost effective to monitor highly volatile
collateral (e.g. accounts receivable, inventory), appropriate lending
margins are applied to compensate (e.g. accounts receivable are
capped at 80% of value, inventory at 50%). The frequency of collateral
valuations is also increased when early warning signals of a Borrower’s
deteriorating financial condition are identified.
Borrowers are required to confirm adherence to covenants including
confirmation of collateral values on a periodic basis, which are used by
the Bank to provide early warning signals of collateral value
deterioration. Periodic inspections of physical collateral are performed
where appropriate and where reasonable means of doing so are
available.
Bank procedures require verification including certification by Banking
officers during initial, annual, and periodic reviews, that collateral
values/margins/etc. have been assessed and, where necessary, steps
have been taken to mitigate any decreased collateral values.
The Bank does not use automated valuation models (AVMs) for
valuation purposes. Global Risk Management (GRM) performs its own
valuations of companies based on various factors such as book value,
discounted book value, enterprise value etc.
Commercial/Corporate Real Estate
New or updated appraisals are generally obtained at inception of a new
facility, as well as during Loan Modifications, Loan Workouts and
Troubled Debt Restructure. The primary reason for requiring a new
appraisal is if, in the reasonable opinion of the Banking Execution Unit,
or GRM Real Estate, there has been a material change in value.
Additionally, none of the appraisal guidelines contained within the
policies should dissuade the Bank from requesting an appraisal more
frequently if an adverse change in market conditions, sponsorship,
credit worthiness, of other underwriting assumptions is realized or
expected.
Appraisals must be in writing and must contain sufficient information
and analysis to support the Bank’s decision to make the loan.
Moreover, in rendering an opinion of the property’s market value, third
party appraisers are responsible for establishing the scope of work
necessary to develop credible assignment results. The appraisal must
meet the regulatory and industry requirements which, depending on
the type of property being appraised, contain any or all of the
following three approaches to value:
i. comparable sales approach
ii. replacement cost approach
iii. income approach
The appraiser should disclose the rationale for the omission of any
valuation approach. Furthermore, the appraiser must disclose whether
the subject property was physically inspected and whether anyone
provided significant assistance to the person signing the appraisal
report. The report should contain a presentation and explanation of the
assumptions used in determining value under each of the above
mentioned approaches.
Review of every appraisal is conducted by the banking units and GRM
Real Estate to confirm that the appraisal identifies all of the relevant
issues for the specific asset class, location and economic environment
and incorporates all appropriate valuation methodologies and
assumptions. In most cases, the banking units also include comparable
properties in addition to what is included in the appraisal to further
justify value.
When third party assessors are used, they must be accredited and
satisfactory to the Bank. In addition, GRM validates any third party
valuations via internal desktop estimates either based on comparables
or discounted income valuations.
Traded products
Traded products are transactions such as derivatives, foreign exchange,
commodities, repurchase/reverse repurchase agreements, and securities
lending/borrowing. Credit risks arising from traded products cannot be
determined with certainty at the outset, because during the tenure of a
2014 Scotiabank Annual Report 73
MANAGEMENT’S DISCUSSION AND ANALYSIS
transaction the dollar value of the counterparty’s obligation to the Bank
will be affected by changes in the capital markets (such as changes in
stock prices, interest rates, and exchange rates). The Bank adjudicates
credit exposures arising from transacting in traded products by
considering their current fair value plus an additional component to
reflect potential future changes in their mark-to-market value. The
credit adjudication process also includes an evaluation of potential
wrong way risk, which arises when the exposure to a counterparty is
positively correlated to the probability of default of that counterparty.
Credit risk associated with traded products is managed within the same
credit adjudication process as the lending business. The Bank considers
the credit risk arising from lending activities, as well as the potential
credit risk arising from transacting in traded products with that
counterparty.
Credit risk mitigation – collateral/security
Derivatives are generally transacted under industry standard
International Swaps and Derivatives Association (ISDA) master netting
agreements, which allow for a single net settlement of all transactions
covered by that agreement in the event of a default or early
termination of the transactions. ISDA agreements are frequently
accompanied by an ISDA Credit Support Annex (CSA), the terms of
which may vary according to each party’s view of the other party’s
creditworthiness. CSAs 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 uncollateralized mark-to-market exposure exceeds an
agreed upon threshold. Such variation margin provisions can be one-
way (only one party will ever post collateral) or bilateral (either party
may post depending upon which party is in-the-money). The CSA will
also detail the types of collateral that are acceptable to each party, and
the haircuts that will be applied against each collateral type. The terms
of the ISDA master netting agreements and CSAs are taken into
consideration in the calculation of counterparty credit risk exposure.
For derivative transactions, investment grade counterparties account for
approximately 92% of the credit risk. Approximately 63% of the
Bank’s derivative counterparty exposures are to bank counterparties.
After taking into consideration, where applicable, netting and collateral
arrangements, no net credit risk amount arising from traded products
transactions with any single counterparty was considered material to
the financial position of the Bank as at October 31, 2014. No individual
exposure to an investment grade bilateral counterparty exceeded
$1,020 million and no individual exposure to a corporate counterparty
exceeded $585 million.
Retail
Retail credit exposure arises in the Canadian Banking, International and
Wealth Management business lines.
Adjudication
The decision-making process for retail loans ensures that credit risks are
adequately assessed, properly approved, continually monitored and
actively managed. Generally, credit decisions on consumer loans are
processed by proprietary adjudication software and are based on risk
ratings, which are generated using predictive credit scoring models.
The Bank’s credit adjudication and portfolio management
methodologies are designed to ensure consistent underwriting and
early identification of problem loans. The Bank’s rigorous credit
underwriting methodology and risk modeling in Canada is more
customer focused than product focused. The Bank’s view is that a
customer-centric approach provides better risk assessment than
product-based approaches, and should result in lower loan losses over
time. The adjudication system calculates the maximum debt for which a
customer qualifies, allowing customers to choose the products that
satisfy all of their credit needs. International Banking uses a similar
approach to risk modeling, adjudication and portfolio management.
All credit scoring and policy changes are initiated by units within Global
Risk Management that are functionally independent from the business
units responsible for retail portfolios. Risk models and parameters are
also subject to independent validation and review from the units
involved in the design and development of models. The review process
includes referral to the appropriate Senior Credit Committee for
approval, where required. Consumer credit portfolios are reviewed
monthly to identify emerging trends in loan quality and to assess
whether corrective action is required.
Risk ratings
The Bank’s consumer risk rating systems are oriented to borrower or
transaction risk. Each retail exposure is assigned a risk grade based on
the customer’s credit history and/or internal credit score. The Bank’s
automated risk rating systems assess the ongoing credit-worthiness of
individual customers on a monthly basis. This process provides for
meaningful and timely identification and management of problem
loans.
The overall risk ratings system under AIRB approach is subject to
regular review with ongoing performance monitoring of key
components. Risk model validations are conducted independently from
the areas responsible for rating system development and
implementation, to ensure effective independence.
Customer behavior characteristics which are used as inputs within the
Bank’s Basel III AIRB models are consistent with those used by the
Bank’s Canadian consumer risk rating systems. The International
portfolios are subject to the Standardized approach at this time.
Credit risk mitigation – collateral/security
The property values for residential real estate secured exposures are
confirmed at origination through either an AVM or a full appraisal (in-
person inspection). The appraisal is completed by a third party, Bank
approved appraiser. For monitoring of material portfolios, property
values are indexed quarterly to house prices. For loan impairment
within the material portfolios, residential property values are re-
confirmed using third party AVM’s.
Where AVM values are used, these AVM values are subject to routine
validation through a continuous random sampling process that back-
tests AVM values against available property appraisals (primarily third
party AVMs). Where third party appraisals are obtained, the Bank relies
on the professional industry accreditation of the appraiser. Samples of
approved appraisal reports are reviewed by the Bank’s senior appraisers
to ensure consistent appraisal quality and satisfactory appraisal values.
The third party appraisers are selected from a pre-approved list of Bank-
vetted appraisers.
74 2014 Scotiabank Annual Report
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Market Risk
Market risk is the risk of loss from changes in market prices and rates (including interest rates, credit spreads, equity prices, foreign
exchange rates and commodity prices), the correlations between them, and their levels of volatility. Below is an index of market risk
disclosures:
Index of all market risk disclosures
Index Page Tables and charts Page
Market risk factors 76
Interest rate risk 76
Credit spread risk 76
Foreign currency risk 76
Equity risk 76
Commodity risk 76
Market risk governance 76
Risk measurement summary 76
Value at risk 76
Incremental risk charge and the comprehensive
risk measure 76
Stress testing 77
Sensitivity analysis 77
Gap analysis 77
Validation of market risk models 77
Non-trading market risk
Interest rate risk 77-78 C44 Interest rate gap 78
T51 Interest rate gap 78
T52 Structural interest rate sensitivity 78
Foreign currency risk 78
Investment portfolio risks 78
Trading market risk 78-79 T53 Total one-day VaR by risk factor 79
C45 Trading revenue distribution 79
C46 Daily trading revenue vs. VaR 79
Market risk linkage to balance sheet 80 T54 Market risk linkage to balance sheet of the Bank 80
Derivative instruments and structured transactions 80
Derivatives 80
Structured transactions 80
European exposures 31-33 T19 European exposure 31
T20 Funded exposures 32
T21 Bank’s exposure distribution by country 32
Market risk 49 T37 Total market risk capital 49
Financial instruments 52-53 T40 Mortgage-backed securities 52
T41 Collateralized debt obligations (CDOs) 53
2014 Scotiabank Annual Report 75
MANAGEMENT’S DISCUSSION AND ANALYSIS
Market risk factors
Interest rate risk
The risk of loss due to changes in the level and/or the volatility of
interest rates. This risk affects instruments such as, but not limited to,
debt securities, loans, mortgages, deposits and derivatives.
Interest rate risks are managed through sensitivity, gap, stress testing,
annual income and VaR limits and mitigated through portfolio
diversification and hedges using interest rate derivatives and debt
securities.
Credit spread risk
The risk of loss due to changes in the market price and volatility of
credit, or the creditworthiness of issuers. This risk is mainly
concentrated in loan and debt securities portfolios. Risk is managed
through sensitivity, jump-to-default, stress testing and VaR limits and
mitigated through hedges using credit derivatives.
Foreign currency risk
The risk of loss resulting from changes in currency exchange rates and
exchange rate volatility. Foreign currency denominated debt and other
securities as well as future cash flows in foreign currencies are exposed
to this type of risk. Maximum net trading position, sensitivity, stress
testing and VaR limits are used to manage foreign currency exposures.
Risk is managed through hedges using foreign exchange positions or
derivatives.
Equity risk
The risk of loss due to changes in prices, volatility or any other equity
related risk factor of individual equity or equity linked securities. This
risk affects instruments such as, but not limited to, equities, exchange
traded funds, mutual funds, derivatives and other equity linked
products. Risk is managed through sensitivity, stress testing and VaR
limits and mitigated through hedges using physical equity and
derivatives instruments.
Commodity risk
The risk of loss due to changes in prices or volatility of precious metal,
base metal, energy and agriculture products. Both commodity physical
and derivatives positions are exposed to this risk. Risk is managed
through aggregate and net trading position, sensitivity, stress testing
and VaR limits and mitigated through hedges using physical commodity
and derivative positions.
The following maps risk factors to trading and non-trading activities:
Non-trading
Funding Investments
Interest rate risk
Foreign currency risk
Interest rate risk
Credit spread risk
Foreign currency risk
Equity risk
Trading
Interest rate risk
Credit spread risk
Foreign currency risk
Equity risk
Commodity risk
Market Risk Governance
Overview
The Board of Directors reviews and approves market risk policies and
limits annually. The Bank’s Liability Committee (LCO) and Market Risk
Management and Policy Committee (MRMPC) oversee the application
of the framework set by the Board, and monitor the Bank’s market risk
exposures and the activities that give rise to these exposures. The
MRMPC establishes specific operating policies and sets limits at the
product, portfolio, business unit and business line levels, and for the
Bank in total. Limits are reviewed at least annually.
Global Risk Management provides independent oversight of all
significant market risks, supporting the MRMPC and LCO with analysis,
risk measurement, monitoring, reporting, proposals for standards and
support for new product development. To ensure compliance with
policies and limits, market risk exposures are independently monitored
on a continuing basis, either by Global Risk Management, the back
offices, or Finance. They provide senior management, business units,
the LCO, and the MRMPC with a series of daily, weekly and monthly
reports of market risk exposures by business line and risk type.
The Bank uses a variety of metrics and models to measure and control
market risk exposures. These measurements are selected based on an
assessment of the nature of risks in a particular activity. The principal
measurement techniques are Value at Risk (VaR), Incremental Risk
Charge, Comprehensive Risk Measure, stress testing, sensitivity analysis
and gap analysis. The use and attributes of each of these techniques
are noted in the Risk Measurement Summary.
Risk Measurement Summary
Value at risk (VaR)
VaR is a statistical method of measuring potential loss due to market
risk based upon a common confidence interval and time horizon. The
Bank calculates VaR daily using a 99% confidence level, and a one-day
holding period for its trading portfolios. This means that once in every
100 days, the trading positions are expected to lose more than the VaR
estimate. VaR has two components: general market risk and debt
specific risk. The Bank calculates general market risk VaR using
historical simulation based on 300 days of market data. Obligor specific
risk on debt instruments and credit derivatives not captured in general
market risk VaR is calculated through the debt specific risk VaR, which
uses a Monte Carlo simulation. In addition, the Bank calculates a
Stressed VaR measure which follows the same basic methodology as
VaR but is calibrated to a one year stress period. The stress period is
determined based on analysis of the trading book’s risk profile against
historical market data. Stressed VaR complements VaR in that it
evaluates the impact of market volatility that is outside the VaR’s
historical set.
All material risk factors are captured in VaR. Where historical data is
not available, proxies are used to establish the relevant volatility for VaR
and Stressed VaR until sufficient data is available. Changes in VaR
between reporting periods are generally due to changes in positions,
volatilities and/or correlations between asset classes. VaR is also used to
evaluate risks arising in certain funding and investment portfolios.
Backtesting is also an important and necessary part of the VaR process.
The Bank backtests the actual trading profit and loss against the VaR
result to validate the quality and accuracy of the Bank’s VaR model. The
Board reviews VaR and backtesting results quarterly.
Incremental Risk Charge (IRC) and the Comprehensive Risk
Measure (CRM)
Basel market risk capital requirements include the Incremental Risk
Charge (IRC) and the Comprehensive Risk Measure (CRM) which
capture the following:
Default risk: This is the potential for direct losses due to an obligor’s
(equity/bond issuer or counterparty) default as well as the potential for
indirect losses that may arise from a default event.
Credit migration risk: This is the potential for direct losses due to a
credit rating downgrade or upgrade as well as the potential for indirect
losses that may arise from a credit migration event.
A Monte Carlo model is used to perform default and migration
simulations for the obligors underlying credit derivative and bond
portfolios. In addition, for CRM in correlation trading there is a market
simulation model to capture historical price movements. Both IRC and
CRM are calculated at the 99.9th percentile with a one year liquidity
horizon. The Board reviews IRC and CRM results quarterly.
76 2014 Scotiabank Annual Report
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Stress testing
A limitation of VaR and Stressed VaR is that they only reflect the recent
history of market volatility and a specific one year stress period,
respectively. To complement these measures, stress testing examines
the impact that abnormally large changes in market factors and periods
of prolonged inactivity might have on trading portfolios. Stress testing
scenarios are designed to include large shifts in risk factors as well as
historical and theoretical multi risk market events. Historical scenarios
capture severe movements over periods that are significantly longer
than the one-day holding period captured in VaR, such as the 2008
Credit Crisis or the 1998 Russian Financial Crisis. Similar to Stressed
VaR, stress testing provides management with information on potential
losses due to tail events. In addition, the results from the stress testing
program are used to verify that the Bank’s market risk capital is
sufficient to absorb these potential losses.
The Bank subjects its trading portfolios to a series of daily, weekly and
monthly stress tests. The Bank also evaluates risk in its investment
portfolios monthly, using stress tests based on risk factor sensitivities
and specific market events. The stress testing program is an essential
component of the Bank’s comprehensive risk management framework
which complements the VaR methodology and other risk measures and
controls employed by the Bank. The Board reviews stress testing results
quarterly.
Sensitivity analysis
In trading portfolios, sensitivity analysis is used to measure the effect of
changes in risk factors, including prices and volatility, on financial
products and portfolios. These measures apply across product types
and geographies and are used for limit monitoring and management
reporting.
In non-trading portfolios, sensitivity analysis assesses the effect of
changes in interest rates on current earnings and on the economic
value of shareholders’ equity. It is applied globally to each of the major
currencies within the Bank’s operations. The Bank’s sensitivity analysis
for limit and disclosure purposes is measured through positive and
negative parallel shifts in the underlying interest rate curves. The Bank
also performs sensitivity analysis using various non-parallel interest rate
curve shifts, for example: curve steepeners, curve flatteners and curve
twists. The Board reviews sensitivity results quarterly.
Gap analysis
Gap analysis is used to assess the interest rate sensitivity of re-pricing
mismatches in the Bank’s non-trading operations. Under gap analysis,
interest rate sensitive assets, liabilities and off-balance sheet
instruments are assigned to defined time periods based on expected re-
pricing dates. Products with a contractual maturity are assigned an
interest rate gap term based on the shorter of the contractual maturity
date and the next re-pricing date. Products with no contractual
maturity are assigned an interest rate gap based on observed historical
consumer behaviour. The Board reviews gap results quarterly.
Validation of market risk models
Prior to the implementation of new market risk models, rigorous
validation and testing is conducted. Validation is conducted when the
model is initially developed and when any significant changes are made
to the model. The models are also subject to ongoing validation, the
frequency of which is determined by model risk ratings. Models may
also be triggered for earlier revalidation when there have been
significant structural changes in the market or changes to the
composition of the portfolio. Model validation includes backtesting,
and additional analysis such as:
• Theoretical review or tests to demonstrate whether assumptions
made within the internal model are appropriate;
• Impact tests including stress testing that would occur under historical
and hypothetical market conditions
• The use of hypothetical portfolios to ensure that the model is able to
capture concentration risk that may arise in an undiversified
portfolio.
The validation process is governed by the Bank’s Model Risk
Management Policy.
Non-trading market risk
Funding and investment activities
Market risk arising from the Bank’s funding and investment activities is
identified, managed and controlled through the Bank’s asset-liability
management processes. The Liability Committee meets weekly to
review risks and opportunities, and evaluate performance including the
effectiveness of hedging strategies.
Interest rate risk
Interest rate risks in the non-trading portfolios are predominately driven
by the interest rate mismatch (i.e. repricing frequency) in the asset and
liability exposures. The largest exposures in the non-trading book arise
from retail banking operations in Canada. The largest component of
this risk is from positions related to the retail mortgage book. Table 51
shows a summary of the interest rate gaps for the Bank’s non-trading
positions.
Interest rate risk arising from the Bank’s lending, funding and
investment activities is managed in accordance with Board-approved
policies and global limits, which are designed to control the risk to net
interest income and economic value of shareholders’ equity. The
annual income limit measures the effect of a specified change in
interest rates on the Bank’s annual net interest income over the next
twelve months, while the economic value limit measures the impact of
a specified change in interest rates on the present value of the Bank’s
net assets. These limits are set according to the documented risk
appetite of the Bank. Board-level limit utilization is reported to both the
Liability Committee and the Board on a regular basis. Any limit
exceptions are reported according to the Limit Monitoring and
Compliance Policy of the Bank.
Net interest income and the economic value of equity result from the
differences between yields earned on the Bank’s non-trading assets
and interest rate paid on its liabilities. The difference in yields partly
reflects mismatch between the maturity and re-pricing characteristics of
the assets and liabilities. This mismatch is inherent in the non-trading
operations of the Bank and exposes it to adverse changes in the level of
interest rates. The Liability Committee provides strategic direction for
the management of structural interest rate risk within the risk appetite
framework authorized by the Board of Directors. The asset/liability
management strategy is executed by Group Treasury with the objective
of enhancing net interest income within established risk tolerances.
Gap analysis, simulation modeling, sensitivity analysis and VaR are used
to assess exposures and for limit monitoring and planning purposes.
The Bank’s interest rate risk exposure calculations are generally based
on the earlier of contractual re-pricing or maturity of on-balance sheet
and off-balance sheet assets and liabilities, although certain assets and
liabilities such as credit cards and deposits without a fixed maturity are
assigned a maturity profile based on the longevity of the exposure.
Expected prepayments from loans and cashable investment products
are also incorporated into the exposure calculations. Common
shareholders’ equity is assumed to be non-interest rate sensitive.
Table 52 shows the after-tax impact of an immediate and sustained
100 basis point shock over a one year period on annual income and
economic value of shareholder’s equity. The interest rate sensitivities
tabulated are based on a static balance sheet. There are no
assumptions made for management actions that may mitigate risk.
Based on the Bank’s interest rate positions at year-end 2014, an
immediate and sustained 100 basis point rise in interest rates across all
2014 Scotiabank Annual Report 77
MANAGEMENT’S DISCUSSION AND ANALYSIS
currencies and maturities, would increase after-tax net income by
approximately $179 million over the next 12 months. During fiscal
2014, this measure ranged between $98 million and $183 million.
This same increase in interest rates would result in an after-tax decrease
in the present value of the Bank’s net assets of approximately $498
million. During fiscal 2014, this measure ranged between $495 million
and $586 million. The directional sensitivity of these two key metrics is
largely determined by the difference in time horizons (annual income
captures the impact over the next twelve months only, whereas
economic value considers the potential impact of interest rate changes
on the present value of all future cash flows). The annual income and
economic value results are compared to the authorized Board limits.
There were no limit breaches in the reporting period.
C44 Interest rate gap
$ billions, one-year interest rate gap
10 11 12 14 13
-20
Canadian dollar gap
Foreign currencies gap
-10
0
10
20
T51 Interest rate gap
Interest rate sensitivity
position
(1)
As at October 31, 2014
($ billions)
Within
3 months
3 to 12
months
Over
1 year
Non-
interest
rate
sensitive Total
Canadian dollars
Assets $ 230.2 $ 42.4 $ 127.2 $ 0.9 $ 400.7
Liabilities $ 220.0 $ 58.6 $ 113.1 $ 9.0 $ 400.7
Gap $ 10.2 $ (16.2) $ 14.1 $ (8.1) $ –
Foreign currencies
Assets $ 305.7 $ 24.5 $ 39.3 $ 35.5 $ 405.0
Liabilities $ 285.3 $ 29.1 $ 35.4 $ 55.2 $ 405.0
Gap $ 20.4 $ (4.6) $ 3.9 $ (19.7) $ –
Total
Gap $ 30.6 $ (20.8) $ 18.0 $ (27.8) $ –
As at October 31, 2013
Gap $ 16.5 $ (16.2) $ 23.0 $ (23.3) $ –
(1) The above figures reflect the inclusion of off-balance sheet instruments, as well as an estimate of prepayments
on consumer and mortgage loans and cashable GICs. The off-balance sheet gap is included in liabilities.
T52 Structural interest sensitivity
(1)
2014 2013
As at October 31
($ millions)
Economic
Value of
Shareholders’
Equity
Annual
Income
Economic
Value of
Shareholders’
Equity
Annual
Income
After-Tax Impact of
100bp increase in rates
Non-trading risk $ (498) $ 179 $ (572) $ 97
100bp decrease in rates
Non-trading risk $ 474 $ (87) $ 420 $ (64)
(1) Corresponding with the current low interest rate environment, the Annual Income sensitivity of a 100bp
decrease in rates for currencies with rates below 1% are measured using a 25 bps decline. Prior period
amounts have been restated to reflect this change.
Foreign currency risk
Foreign currency risk in the Bank’s unhedged funding and investment
activities arises primarily from the Bank’s net investments in foreign
operations as well as foreign currency earnings in its domestic and
remitting foreign branch operations.
The Bank’s foreign currency exposure to its net investments in foreign
operations is controlled by a Board-approved limit. This limit considers
factors such as potential volatility to shareholders’ equity as well as the
potential impact on capital ratios from foreign exchange fluctuations.
On a quarterly basis, the Liability Committee reviews the Bank’s foreign
currency net investment exposures and determines the appropriate
hedging strategies. These may include funding the investments in the
same currency or using other financial instruments, including derivatives.
Foreign currency translation gains and losses from net investments in
foreign operations, net of related hedging activities and tax effects, are
recorded in accumulated other comprehensive income within
shareholders’ equity. However, the Bank’s regulatory capital ratios are
not materially affected by these foreign exchange fluctuations because
the risk-weighted assets of the foreign operations tend to move in a
similar direction.
The Bank is also subject to foreign currency translation risk on the
earnings of its domestic and remitting foreign branch operations. The
Bank forecasts foreign currency revenues and expenses, which are
primarily denominated in U.S. dollars, over a number of future fiscal
quarters. The Liability Committee also assesses economic data trends
and forecasts to determine if some or all of the estimated future
foreign currency revenues and expenses should be hedged. Hedging
instruments normally include foreign currency spot and forward
contracts, as well as foreign currency options and swaps. Certain of
these economic hedges may not qualify for hedge accounting resulting
in a potential for a mismatch in the timing of the recognition of
economic hedge gains/losses and the underlying foreign earnings
translation gains/losses. In accordance with IFRS, foreign currency
translation gains and losses relating to monetary and non-monetary
items are recorded directly in earnings.
As at October 31, 2014, a one percent increase in the Canadian dollar
against all currencies in which the Bank operates decreases the Bank’s
before-tax annual earnings by approximately $49 million in the absence
of hedging activity, primarily from exposure to U.S. dollars. A similar
change in the Canadian dollar as at October 31, 2014 would increase
the unrealized foreign currency translation losses in the accumulated
other comprehensive income section of equity by approximately
$260 million, net of hedging.
Investment portfolio risks
The Bank holds investment portfolios to meet liquidity and statutory
reserve requirements and for investment purposes. These portfolios
expose the Bank to interest rate, foreign currency, credit spread and
equity risks. Debt investments primarily consist of government, agency,
and corporate bonds. Equity investments include common and
preferred shares, as well as a diversified portfolio of third-party
managed funds. The majority of these securities are valued using prices
obtained from external sources. These portfolios are controlled by a
Board-approved policy and limits.
Trading market risk
The Bank’s policies, processes and controls for trading activities are
designed to achieve a balance between pursuing profitable trading
opportunities and managing earnings volatility within a framework of
sound and prudent practices. Trading activities are primarily customer
focused, but also include a proprietary component.
Market risk arising from the Bank’s trading activities is managed in
accordance with Board-approved policies, and aggregate VaR and
stress testing limits. The quality of the Bank’s VaR is validated by
regular backtesting analysis, in which the VaR is compared to both
theoretical profit and loss results based on fixed end of day positions
and actual reported profit and loss. A VaR at the 99% confidence
interval is an indication of a 1% probability that losses will exceed the
VaR if positions remain unchanged during the next business day.
Trading positions are however managed dynamically and, as a result,
actual profit/loss backtesting exceptions are uncommon. During fiscal
2014, there was one theoretical profit/loss exception on October 14
due to declines in Canadian and US interest rates, and widening credit
spreads. There were no actual profit/loss exceptions.
In fiscal 2014, the total one-day VaR for trading activities averaged
$20.8 million, compared to $17.4 million in 2013. The increase was
due to both higher general market risk and debt specific risk resulting
from increased exposure in the Global Fixed Income portfolio.
78 2014 Scotiabank Annual Report
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T53 Total one-day VaR by risk factor
2014 2013
($ millions) Year end Avg High Low Year end Avg High Low
Credit Spread plus Interest Rate $ 8.6 $ 13.1 $ 22.1 $ 8.2 $ 10.9 $ 10.4 $ 15.5 $ 7.0
Credit Spread 8.1 9.6 12.4 7.6 7.6 8.0 10.3 5.6
Interest Rate 4.2 9.3 18.1 4.2 7.4 7.6 14.8 4.4
Equities 2.2 2.6 5.9 1.5 2.5 2.6 6.2 0.9
Foreign Exchange 0.9 0.9 1.9 0.4 1.5 1.2 2.8 0.4
Commodities 3.2 2.8 5.5 1.6 3.7 3.0 7.7 1.2
Debt Specific 20.4 15.8 22.2 11.1 14.5 13.8 17.3 10.2
Diversification Effect (12.8) (14.5) N/A N/A (15.9) (13.6) N/A N/A
All-Bank VaR $ 22.5 $ 20.8 $ 27.3 $ 16.0 $ 17.2 $ 17.4 $ 21.8 $ 13.2
All-Bank Stressed VaR $ 38.7 $ 32.9 $ 40.3 $ 25.3 $ 33.1 $ 34.3 $ 41.3 $ 28.2
Stressed VaR Results
The Bank also calculates a Stressed VaR which uses the same basic methodology as the VaR. However, Stressed VaR is calculated using market
volatility from a one-year time period identified as stressful, given the risk profile of the trading portfolio. The current period is the 2008/2009 credit
crisis surrounding the collapse of Lehman Brothers. In fiscal 2014, the total one-day Stressed VaR for trading activities averaged $32.9 million
compared to $34.3 million in 2013. The decrease was in part due to positioning within the trading portfolio which reduced exposure to large market
movements such as those experienced in the stressed period.
Basel market risk capital requirements include the Incremental Risk Charge (IRC) and the Comprehensive Risk Measure (CRM) which capture obligor
default and migration risk. On October 31, 2014 the market risk capital requirements for IRC and CRM were $396 million and $130 million
respectively. The CRM surcharge was $139 million.
Description of Trading Revenue Components and graphical comparison of VaR to daily P&L
Chart 45 shows the distribution of daily trading revenue for fiscal 2014 and Chart 46 compares that distribution to daily VaR results. Trading revenue
includes changes in portfolio value as well as the impact of new trades, commissions, fees and reserves. Some components of revenue which are
calculated less frequently are pro-rated. Trading revenue averaged $6.0 million per day, compared to $6.2 million for 2013. Revenue was positive on
95% of trading days during the year, lower than 2013. During the year, the largest single day trading loss was $7.5 million which occurred on
October 15, 2014, and was lower than the total VaR of $24.1 million on the same day.
C45 Trading revenue distribution
Year ended October 31, 2014
Gain
Neutral
Loss
-3 -4 -8 9 8 7 6
$ millions
5 -2 -1 0 1 2 3 4 10 11 12 13 14 15 16 18 20 21
0
5
10
15
20
25
40
35
30
# of days
C46 Daily trading revenue vs. VaR
$ millions, November 1, 2013 to October 31, 2014
Trading revenue
VaR, 99%, 1 day holding period
Q1 Q2 Q3 Q4
-30
-20
-25
-15
-10
-5
0
5
10
15
20
30
25
40
35
2014 Scotiabank Annual Report 79
MANAGEMENT’S DISCUSSION AND ANALYSIS
Market risk linkage to Consolidated Statement of Financial Position
Trading assets and liabilities are marked to market daily and included in traded risk measures such as VaR. Derivatives risk related to Global Banking &
Market activities is captured under trading risk measures while derivatives used in asset/liability management are in the non-traded risk category. A
comparison of Consolidated Statement of Financial Position items which are covered under the trading and non-trading risk measures is provided in
Table 54 below.
T54 Market risk linkage to Consolidated Statement of Financial Position of the Bank
Market Risk Measure
As at Oct 31, 2014
($ millions)
Consolidated
Statement of
Financial
Position Traded Risk
Non-traded
risk
Not subject to
market risk
Primary risk sensitivity of
non-traded risk
Precious metals $ 7,286 $ 7,286 $ – $ – n/a
Trading assets 113,248 113,248 – – n/a
Financial instruments designated at fair value through profit or loss 111 – 111 – Interest rate
Derivative financial instruments 33,439 31,401 2,038 – Interest rate, FX, equity
Investment securities 38,662 – 38,662 – Interest rate, equity
Loans 424,309 – 424,309 – Interest rate, FX
Assets not subject to market risk
(1)
188,611 – – 188,611 n/a
Total assets $ 805,666 $ 151,935 $ 465,120 $ 188,611
Deposits $ 554,017 $ – $ 526,929 $ 27,088 Interest rate, FX, equity
Financial instruments designated at fair value through profit or loss 465 – 465 – Interest rate, equity
Obligations related to securities sold short 27,050 27,050 – – n/a
Derivative financial instruments 36,438 34,992 1,446 – Interest rate, FX
Trading liabilites
(2)
4,571 4,571 – – n/a
Pension and other benefit liabilities 2,095 – 2,095 – Interest rate, credit spread
Liabilities not subject to market risk
(3)
131,819 – – 131,819 n/a
Total liabilities $ 756,455 $ 66,613 $ 530,935 $ 158,907
(1) Includes goodwill, intangibles, other assets and securities purchased under resale agreements and securities borrowed.
(2) Gold and silver certificates and bullion included in other liabilities.
(3) Includes obligations related to securities sold under repurchase agreements and securities lent and other liabilities.
Market Risk Measure
As at Oct 31, 2013
($ millions)
Consolidated
Statement of
Financial
Position Traded Risk
Non-traded
risk
Not subject to
market risk
Primary risk sensitivity of
non-traded risk
Precious metals $ 8,880 $ 8,880 $ – $ – n/a
Trading assets 96,489 96,489 – – n/a
Financial instruments designated at fair value through profit or loss 106 – 106 – Interest rate
Derivative financial instruments 24,503 23,147 1,356 – Interest rate, FX, equity
Investment securities 34,319 – 34,319 – Interest rate, equity
Loans 402,215 – 402,215 – Interest rate, FX
Assets not subject to market risk
(1)
177,132 – – 177,132 n/a
Total assets $ 743,644 $ 128,516 $ 437,996 $ 177,132
Deposits $ 517,887 $ – $ 495,456 $ 22,431 Interest rate, FX, equity
Financial instruments designated at fair value through profit or loss 174 – 174 – Interest rate
Obligations related to securities sold short 24,977 24,977 – – n/a
Derivative financial instruments 29,267 28,262 1,005 – Interest rate, FX
Trading liabilites
(2)
3,622 3,622 – – n/a
Pension and other benefit liabilities 1,680 – 1,680 – Interest rate, credit spread
Liabilities not subject to market risk
(3)
120,650 – – 120,650 n/a
Total liabilities $ 698,257 $ 56,861 $ 498,315 $ 143,081
(1) Includes goodwill, intangibles, other assets and securities purchased under resale agreements and securities borrowed.
(2) Gold and silver certificates and bullion included in other liabilities.
(3) Includes obligations related to securities sold under repurchase agreements and securities lent and other liabilities.
Derivative instruments and structured transactions
Derivatives
The Bank uses derivatives to meet customer needs, generate revenues
from trading activities, manage market and credit risks arising from its
lending, funding and investment activities, and to lower its cost of
capital. The Bank uses several types of derivative products, including
interest rate swaps, futures and options, to hedge interest rate risk
exposure. Forward contracts, swaps and options are used to manage
foreign currency risk exposures. Credit exposures in its lending and
investment books are managed using credit default swaps. As a dealer,
the Bank markets a range of derivatives to its customers, including
interest rate, foreign exchange, equity, commodity and credit
derivatives.
Market risk arising from derivatives transactions is subject to the
control, reporting and analytical techniques noted above. Additional
controls and analytical techniques are applied to address certain
market-related risks that are unique to derivative products.
Structured transactions
Structured transactions are specialized transactions that may involve
combinations of cash, other financial assets and derivatives designed to
meet the specific risk management or financial requirements of
customers. These transactions are carefully evaluated by the Bank to
identify and address the credit, market, legal, tax, reputational and
other risks, and are subject to a cross-functional review and sign-off by
trading management, Global Risk Management, Taxation, Finance and
Legal departments. Large structured transactions are also subject to
review by senior risk management committees and evaluated in
accordance with the procedures described below in Reputational Risk.
80 2014 Scotiabank Annual Report
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The market risk in these transactions is usually minimal, and returns are
earned by providing structuring expertise and by taking credit risk.
Once executed, structured transactions are subject to the same
ongoing credit reviews and market risk analysis as other types of
derivatives transactions. This review and analysis includes careful
monitoring of the quality of the reference assets, and ongoing
valuation of the derivatives and reference assets.
Liquidity Risk
Liquidity risk is the risk that the Bank is unable to meet its
financial obligations in a timely manner at reasonable prices.
Financial obligations include liabilities to depositors, payments
due under derivative contracts, settlement of securities
borrowing and repurchase transactions, and lending and
investment commitments.
Effective liquidity risk management is essential to maintain the
confidence of depositors and counterparties, manage the Bank’s cost
of funds and to support core business activities, even under adverse
circumstances.
Liquidity risk is managed within the framework of policies and limits
that are approved by the Board of Directors. The Board receives reports
on risk exposures and performance against approved limits. The
Liability Committee (LCO) provides senior management oversight of
liquidity risk and meets weekly to review the Bank’s liquidity profile.
The key elements of the liquidity risk framework are:
• Measurement and modeling – the Bank’s liquidity model measures
and forecasts cash inflows and outflows, including off-balance sheet
cash flows on a daily basis. Risk is managed by a set of key limits
over the maximum net cash outflow by currency over specified short-
term horizons (cash gaps), a minimum level of core liquidity, and
liquidity stress tests.
• Reporting – Global Risk Management provides independent
oversight of all significant liquidity risks, supporting the LCO with
analysis, risk measurement, stress testing, monitoring and reporting.
• Stress testing – the Bank performs liquidity stress testing on a regular
basis, to evaluate the effect of both industry-wide and Bank-specific
disruptions on the Bank’s liquidity position. Liquidity stress testing
has many purposes including:
– Helping the Bank to understand the potential behavior of various
on-balance sheet and off-balance sheet positions in circumstances
of stress; and
– Based on this knowledge, facilitating the development of risk
mitigation and contingency plans.
The Bank’s liquidity stress tests consider the effect of changes in
funding assumptions, depositor behavior and the market value of liquid
assets. The Bank performs industry standard stress tests, the results of
which are reviewed at senior levels of the organization and are
considered in making liquidity management decisions.
• Contingency planning – the Bank maintains a liquidity contingency
plan that specifies an approach for analyzing and responding to
actual and potential liquidity events. The plan outlines an appropriate
governance structure for the management and monitoring of
liquidity events, processes for effective internal and external
communication, and identifies potential counter measures to be
considered at various stages of an event. A contingency plan is
maintained both at the parent level as well as for major subsidiaries.
• Funding diversification – the Bank actively manages the
diversification of its deposit liabilities by source, type of depositor,
instrument, term and geographic market.
• Core liquidity – the Bank maintains a pool of highly liquid,
unencumbered assets that can be readily sold or pledged to secure
borrowings under stressed market conditions or due to Bank-specific
events. The Bank also maintains liquid assets to support its intra-day
settlement obligations in payment, depository and clearing systems.
Liquid assets
Liquid assets are a key component of liquidity management and the
Bank holds these types of assets in sufficient quantity to meet potential
needs for liquidity management.
Liquid assets can be used to generate cash either through sale,
repurchase transactions or other transactions where these assets can be
used as collateral to generate cash, or by allowing the asset to mature.
Liquid assets include deposits at central banks, deposits with
commercial banks, call and other short-term loans, marketable
securities, precious metals and securities received as collateral from
securities financing and derivative transactions. Liquid assets do not
include borrowing capacity from central bank facilities.
Marketable securities are securities traded in active markets, which can
be converted to cash within a timeframe that is in accordance with the
Bank’s liquidity management framework. Assets are assessed
considering a number of factors, including the time it would take to
convert them to cash.
Marketable securities included in liquid assets are comprised of
securities specifically held as a liquidity buffer or for asset liability
management purposes; trading securities, which are primarily held by
Global Banking & Markets; and collateral received for securities
financing and derivative transactions.
The Bank maintains large holdings of unencumbered liquid assets to
support its operations. These assets generally can be sold or pledged to
meet the Bank’s obligations. As at October 31, 2014, unencumbered
liquid assets were $183 billion, compared to $170 billion as at October
31, 2013. The mix of these liquid assets between securities and other
liquid assets, which include cash, deposits with banks and precious
metals was 68% and 32%, respectively (October 31, 2013 – 68% and
32%, respectively). The increase in liquid assets was mainly attributable
to an increase in cash and deposits with central banks and
unencumbered liquid securities, including mortgage-backed securities
which are classified as residential mortgage loans for accounting
purposes.
2014 Scotiabank Annual Report 81
MANAGEMENT’S DISCUSSION AND ANALYSIS
The carrying values outlined in the liquid asset table are consistent with the carrying values in the Bank’s Statement of Financial Position as at
October 31, 2014. The liquidity value of the portfolio will vary under different stress events as different assumptions are used for the stress scenarios.
The Bank’s liquid asset pool is summarized in the following table:
T55 Liquid asset pool
Encumbered
liquid assets
Unencumbered
liquid assets
As at October 31, 2014
($ millions)
Bank-owned
liquid assets
Securities received as
collateral from securities
financing and derivative
transactions
Total liquid
assets
Pledged as
collateral Other
(1)
Available as
collateral Other
Cash and deposits with central banks $ 49,507 – $ 49,507 – $ 5,262 $ 44,245 –
Deposits with financial institutions 7,223 – 7,223 – 1,441 5,782 –
Precious metals 7,286 – 7,286 – 43 7,243 –
Securities
Canadian government obligations 31,551 17,595 49,146 27,059 – 22,087 –
Foreign government obligations 36,959 41,405 78,364 61,380 – 16,984 –
Other securities 55,868 44,195 100,063 52,586 – 47,477 –
Loans
NHA mortgage-backed securities
(2)
42,286 – 42,286 3,686 – 38,600 –
Call and short loans 976 – 976 – – 976 –
Total $ 231,656 $ 103,195 $ 334,851 $ 144,711 $ 6,746 $ 183,394 –
Encumbered
liquid assets
Unencumbered
liquid assets
As at October 31, 2013
($ millions)
Bank-owned
liquid assets
Securities received as
collateral from securities
financing and derivative
transactions
Total liquid
assets
Pledged as
collateral Other
(1)
Available as
collateral Other
Cash and deposits with central banks $ 44,097 $ – $ 44,097 $ – $ 7,509 $ 36,588 $ –
Deposits with financial institutions 9,240 – 9,240 – 1,626 7,614 –
Precious metals 8,880 – 8,880 – 54 8,826 –
Securities
Canadian government obligations 28,667 8,231 36,898 23,007 – 13,891 –
Foreign government obligations 30,903 38,327 69,230 53,809 – 15,421 –
Other securities 49,573 34,808 84,381 32,292 – 52,089 –
Loans
NHA mortgage-backed securities
(2)
45,546 – 45,546 10,810 – 34,736 –
Call and short loans 887 – 887 – – 887 –
Total $ 217,793 $ 81,366 $ 299,159 $ 119,918 $ 9,189 $ 170,052 $ –
(1) Assets which are restricted from being used to secure funding for legal or other reasons.
(2) These mortgage-backed securities, which are available for sale, are reported as residential mortgage loans on the balance sheet.
82 2014 Scotiabank Annual Report
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A summary of total unencumbered liquid assets held by the parent bank and its branches, and domestic and foreign subsidiaries, is presented below:
T56 Total unencumbered liquid assets held by the parent bank and its branches, and domestic and foreign subsidiaries
As at October 31
($ millions) 2014 2013
Bank of Nova Scotia (Parent) $ 141,999 $ 126,376
Bank domestic subsidiaries 23,583 21,288
Bank foreign subsidiaries 17,812 22,388
Total $ 183,394 $ 170,052
The Bank’s liquidity pool is held across major currencies, mostly comprised of Canadian and U.S. dollars holdings. As shown above, the vast majority
90% of liquid assets are held by the Bank’s corporate office, branches of the Bank, and Canadian subsidiaries of the Bank. To the extent a liquidity
reserve held in a foreign subsidiary of the bank is required for regulatory purposes, it is assumed to be unavailable to the rest of the Group. Other
liquid assets held by a foreign subsidiary are assumed to be available only in limited circumstances. The Bank monitors and ensures compliance in
relation to minimum levels of liquidity required and assets held within each entity, and/or jurisdiction.
Encumbered assets
In the course of the Bank’s day-to-day activities, securities and other assets are pledged to secure an obligation, participate in clearing or settlement
systems, or operate in a foreign jurisdiction. Securities may also be pledged under repurchase agreements. A summary of encumbered and
unencumbered assets is presented below:
T57 Asset encumbrance
Encumbered assets Unencumbered assets
As at October 31, 2014
($ millions)
Bank-owned
assets
Securities received as
collateral from securities
financing and derivative
transactions Total assets
Pledged as
collateral Other
(1)
Available as
collateral
(2)
Other
(3)
Cash and deposits with central banks $ 49,507 $ – $ 49,507 $ – $ 5,262 $ 44,245 $ –
Deposits with financial institutions 7,223 – 7,223 – 1,441 5,782 –
Precious metals 7,286 – 7,286 – 43 7,243 –
Liquid securities:
Canadian government obligations 31,551 17,595 49,146 27,059 – 22,087 –
Foreign government obligations 36,959 41,405 78,364 61,380 – 16,984 –
Other liquid securities 55,868 44,195 100,063 52,586 – 47,477 –
Other securities 9,759 4,840 14,599 3,291 – – 11,308
Loans classified as liquid assets:
NHA mortgage-backed securities 42,286 – 42,286 3,686 – 38,600 –
Call and short loans 976 – 976 – – 976 –
Other loans 395,554 – 395,554 11,625 38,435 10,358 335,136
Other financial assets
(4)
144,019 (86,166) 57,853 2,748 – – 55,105
Non-financial assets 24,678 – 24,678 – – – 24,678
Total $ 805,666 $ 21,869 $ 827,535 $ 162,375 $ 45,181 $ 193,752 $ 426,227
Encumbered assets Unencumbered assets
As at October 31, 2013
($ millions)
Bank-owned
assets
Securities received as
collateral from securities
financing and derivative
transactions Total assets
Pledged as
collateral Other
(1)
Available as
collateral
(2)
Other
(3)
Cash and deposits with central banks $ 44,097 $ – $ 44,097 $ – $ 7,509 $ 36,588 $ –
Deposits with financial institutions 9,240 – 9,240 – 1,626 7,614 –
Precious metals 8,880 – 8,880 – 54 8,826 –
Liquid securities:
Canadian government obligations 28,667 8,231 36,898 23,007 – 13,891 –
Foreign government obligations 30,903 38,327 69,230 53,809 – 15,421 –
Other liquid securities 49,573 34,808 84,381 32,292 – 52,089 –
Other securities 9,372 4,286 13,658 2,491 – – 11,167
Loans classified as liquid assets:
NHA mortgage-backed securities 45,546 – 45,546 10,810 – 34,736 –
Call and short loans 887 – 887 – – 887 –
Other loans 367,007 – 367,007 9,821 30,802 10,135 316,249
Other financial assets
(4)
123,835 (70,341) 53,494 2,938 – – 50,556
Non-financial assets 25,637 – 25,637 – – – 25,637
Total $ 743,644 $ 15,311 $ 758,955 $ 135,168 $ 39,991 $ 180,187 $ 403,609
(1) Assets which are restricted from being used to secure funding for legal or other reasons.
(2) Assets that are readily available in the normal course of business to secure funding or meet collateral needs including central bank borrowing immediately available.
(3) Other unencumbered assets are not subject to any restrictions on their use to secure funding or as collateral but the Bank would not consider them to be readily available. These include loans, a portion of which may be used to
access central bank facilities outside of the normal course or to raise secured funding through the Bank’s secured funding programs.
(4) Securities received as collateral against other financial assets are included within liquid securities and other securities.
2014 Scotiabank Annual Report 83
MANAGEMENT’S DISCUSSION AND ANALYSIS
As of October 31, 2014 total encumbered assets of the Bank were
$208 billion (October 31, 2013 – $175 billion). Of the remaining
$620 billion (October 31, 2013 – $584 billion) of unencumbered assets,
$194 billion (October 31, 2013 – $180 billion) are considered readily
available in the normal course of business to secure funding or meet
collateral needs as detailed above.
In some over-the-counter derivative contracts, the Bank would be
required to post additional collateral in the event its credit rating was
downgraded. The Bank maintains access to sufficient collateral to meet
these obligations in the event of a downgrade of its ratings by one or
more of the rating agencies. In the event of a one-notch or two-notch
downgrade of the Bank’s rating by rating agencies, the Bank has to
provide additional $512 million or $669 million collateral, respectively,
to meet contractual derivative funding or margin requirements.
Encumbered liquid assets are not considered to be available for liquidity
management purposes. Liquid assets which are being employed to
hedge derivative positions in trading books or for hedging purposes,
are considered to be available for liquidity management provided they
meet the criteria discussed in liquid assets above.
Regulatory developments relating to liquidity
In January 2013 the Basel Committee on Banking Supervision (BCBS)
finalized its international framework on Liquidity Coverage Ratio (LCR)
requirements. Subsequently, in May 2014, OSFI released its Liquidity
Adequacy Requirements (LAR) which contain the rules for Canadian
Banks including LCR and the Net Cumulative Cash Flow (NCCF). The
LCR and NCCF are scheduled for implementation in January 2015.
In October 2014, BCBS released its final document on the Net Stable
Funding Ratio (NSFR). NSFR will become a minimum standard by
1 January 2018. The Bank continues to monitor developments related
to liquidity requirements.
Funding
The Bank ensures that its funding sources are well diversified. Funding
concentrations are regularly monitored and analyzed by type. The
sources of funding are capital, deposits from retail and commercial
clients sourced through the Canadian and international branch network,
deposits from financial institutions as well as wholesale debt issuance.
Capital and personal deposits are key components of the Bank’s core
funding and these amounted to $231 billion as at October 31, 2014
(October 31, 2013 – $224 billion). The increase since October 31,
2013, was due primarily to personal deposits and internal capital
generation. A portion of commercial deposits, particularly those of an
operating or relationship nature, would be considered part of the
Bank’s core funding. Furthermore, core funding is augmented by
longer term wholesale debt issuances (original maturity over 1 year) of
$123 billion (October 31, 2013 – $110 billion). Longer term wholesale
debt issuances include medium-term notes, deposit notes, mortgage
securitizations, asset-backed securities and covered bonds.
The Bank operates in many different currencies and countries. From a
funding perspective, the most significant currencies are Canadian and
U.S. dollars. With respect to the Bank’s operations outside Canada,
there are different funding strategies depending on the nature of the
activities in a country. For those countries where the Bank operates a
branch banking subsidiary, the strategy is for the subsidiary to be
substantially self-funding in its local market. For other subsidiaries or
branches outside Canada where local deposit gathering capability is
not sufficient, funding is provided through the wholesale funding
activities of the Bank.
From an overall funding perspective the Bank’s objective is to achieve
an appropriate balance between the cost and the stability of funding.
Diversification of funding sources is a key element of the funding
strategy.
The Bank’s wholesale debt diversification strategy is primarily executed via
the Bank’s main wholesale funding centres, located in Toronto, New York,
London and Singapore. The majority of these funds are sourced in
Canadian and U.S. dollars. Where required, these funds are swapped to
fund assets in different currencies. The funding strategy deployed by
wholesale funding centres and the management of associated risks, such
as geographic and currency risk, are managed centrally within the
framework of policies and limits that are approved by the Board of
Directors.
In the normal course, the Bank uses a mix of unsecured and secured
wholesale funding instruments across a variety of markets. The choice of
instruments and market is based on a number of factors, including relative
cost and market capacity as well as an objective of maintaining a diversified
mix of sources of funding. Market conditions can change over time,
impacting cost and capacity in particular markets or instruments. Changing
market conditions can include periods of stress where the availability of
funding in particular markets or instruments is constrained. In these
circumstances the Bank would increase its focus on sources of funding in
functioning markets and secured funding instruments. Should a period of
extreme stress exist such that all wholesale funding sources are constrained,
the Bank maintains a pool of liquid assets to mitigate its liquidity risk. This
pool includes cash, deposits with central banks and securities.
In Canada, the Bank raises short- and longer-term wholesale debt
through the issuance of senior unsecured deposit notes. Additional
longer-term wholesale debt is generated through the Bank’s Canadian
Debt and Equity Shelf and the securitization of Canadian insured
residential mortgages through CMHC securitization programs (such as
Canada Mortgage Bonds and Canadian NHA MBS), and of unsecured
personal lines of credit through the Hollis Receivables Term Trust II Shelf.
While the Bank includes CMHC securitization programs in its view of
wholesale debt issuance, this source of funding does not entail the same
type of run-off risk that can be experienced in funding raised from
capital markets.
Outside of Canada, short-term wholesale debt is raised through
the issuance of negotiable certificates of deposit in the United States,
Hong Kong and Australia and the issuance of commercial paper in the
United States. The Bank operates longer-term wholesale debt issuance
registered programs in the United States, such as its SEC Registered
Debt and Equity Shelf and SEC Registered Covered Bond Shelf. As well,
the Bank’s Covered Bond Program is listed with the U.K. Listing
Authority. The Bank also raises longer-term funding across a variety of
currencies through its Australian Medium Term Note Programme,
European Medium Term Note Programme and Singapore Medium
Term Note Programme.
84 2014 Scotiabank Annual Report
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The table below provides the remaining contractual maturities of funding raised through wholesale funding. In the Statement of Financial Position,
these liabilities are primarily included in Business & Government Deposits.
T58 Wholesale funding
(1)
As at October 31, 2014
($ millions)
Less
than 1
month
1-3
months
3-6
months
6-9
months
9-12
months
Sub-Total
< 1 Year
1-2
years
2-5
years
>5
years Total
Deposits from banks
(2)
$ 5,417 $ 755 $ 514 $ 104 $ 153 $ 6,943 $ 96 $ 117 $ – $ 7,156
Bearer deposit notes, commercial
paper and certificate of deposits 9,111 24,400 33,152 15,192 3,913 85,768 8,567 1,103 121 95,559
Asset-backed commercial paper
(3)
3,691 2,609 32 – – 6,332 – – – 6,332
Medium term notes and deposit
notes 3,127 6,266 2,953 2,294 5,499 20,139 12,026 30,448 7,317 69,930
Asset-backed securities – 1 279 – 1 281 507 794 523 2,105
Covered bonds 2,254 – 1,408 – 2,817 6,479 2,254 8,205 2,158 19,096
Mortgage securitization
(4)
– 616 779 696 392 2,483 3,869 8,526 5,356 20,234
Subordinated debentures
(5)
16 16 53 45 29 159 – – 5,288 5,447
Total wholesale funding sources $ 23,616 $ 34,663 $ 39,170 $ 18,331 $ 12,804 $ 128,584 $ 27,319 $ 49,193 $ 20,763 $ 225,859
Of Which:
Unsecured funding $ 17,671 $ 31,437 $ 36,672 $ 17,635 $ 9,594 $ 113,009 $ 20,689 $ 31,668 $ 12,726 $ 178,092
Secured funding 5,945 3,226 2,498 696 3,210 15,575 6,630 17,525 8,037 47,767
As at October 31, 2013
($ millions)
Less
than 1
month
1-3
months
3-6
months
6-9
months
9-12
months
Sub-Total
< 1 Year
1-2
years
2-5
years
>5
years Total
Deposits from banks
(2)
$ 7,304 $ 1,104 $ 615 $ 292 $ 364 $ 9,679 $ 90 $ 111 $ 42 $ 9,922
Bearer deposit notes, commercial
paper and certificate of deposits 12,666 31,061 26,376 5,183 6,055 81,341 8,274 930 125 90,670
Asset-backed commercial paper
(3)
4,205 1,738 83 – – 6,026 – – – 6,026
Medium term notes and deposit
notes 486 3,426 2,493 2,116 1,487 10,008 14,275 27,448 3,128 54,859
Asset-backed securities – – – – – – 931 791 71 1,793
Covered bonds 16 999 42 – 10 1,067 5,998 6,809 36 13,910
Mortgage securitization
(4)
1,750 1,510 3,483 1,327 1,369 9,439 2,482 10,129 5,116 27,166
Subordinated debentures
(5)
14 15 17 12 12 70 – 100 5,860 6,030
Total wholesale funding sources $ 26,441 $ 39,853 $ 33,109 $ 8,930 $ 9,297 $ 117,630 $ 32,050 $ 46,318 $ 14,378 $ 210,376
Of Which:
Unsecured funding $ 20,470 $ 35,606 $ 29,501 $ 7,603 $ 7,918 $ 101,098 $ 22,639 $ 28,589 $ 9,155 $ 161,481
Secured funding 5,971 4,247 3,608 1,327 1,379 16,532 9,411 17,729 5,223 48,895
(1) Wholesale funding sources exclude repo transactions and bankers acceptances, which are disclosed in the contractual maturities table in Note 40 of the consolidated financial statements. Amounts are based on remaining term to
maturity.
(2) Only includes commercial bank deposits raised by Group Treasury.
(3) Wholesale funding sources also exclude asset-backed commercial paper (ABCP) issued by certain ABCP conduits that are not consolidated for financial reporting purposes.
(4) Represents residential mortgages funded through Canadian Federal Government agency sponsored programs. Funding accessed through such programs does not impact the funding capacity of the Bank in its own name.
(5) Although subordinated debentures are a component of regulatory capital, they are included in this table in accordance with EDTF recommended disclosures.
2014 Scotiabank Annual Report 85
MANAGEMENT’S DISCUSSION AND ANALYSIS
Wholesale funding generally bears a higher risk of run-off in a stressed
environment than other sources of funding. The Bank mitigates this risk
through funding diversification, ongoing engagement with investors and
by maintaining a large holding of unencumbered liquid assets.
Contractual Obligations
The Bank’s contractual obligations include contracts and purchase
obligations, including agreements to purchase goods and services, that
are enforceable and legally binding on the Bank. Table 59 provides
aggregated information about the Bank’s contractual obligations related
to all financial and other liabilities as at October 31, 2014, which affect
the Bank’s liquidity and capital resource needs. The table provides details
on undiscounted cash flows to maturity. Depending on the nature of
these obligations, they may be recorded on- or off-balance sheet.
The Bank leases a large number of its branches, offices and other
locations. The majority of these leases are for a term of five years, with
options to renew. The total cost of these leases, net of rental income
from subleases, was $392 million in 2014 (2013 - $378 million).
Two major outsourcing contracts have been entered into by the Bank.
Both are cancellable with notice.
The largest is a contract with IBM Canada entered into in 2001 to
manage the Bank’s domestic computer operations, including data
centres, branches, Automated Banking Machines, and desktop
computing environment. The contract was expanded in 2005 to also
include the computer operations for the Caribbean & Central America,
and Mexico. The contract for the Canadian operations, Mexico and
Caribbean & Central America was renewed earlier in 2013, for a
further 5 year period.
The second is a three-year contract, with two optional five-year
renewals, entered into in 2003 with Symcor Inc. to manage the Bank’s
cheque and bill payment processing, including associated statement
and report printing activities across Canada. The remaining 5-year
option was exercised in 2010 and runs to the end of 2015.
T59 Contractual obligations
As at October 31, 2014
($ millions)
Under
1 year
1-2
years
2-5
years
Over
5 years
No Specific
Maturity
(1)
Total
Deposits $ 217,013 $ 45,523 $ 65,982 $ 14,988 $ 210,976 $ 554,482
Acceptances 9,876 – – – – 9,876
Obligations related to securities sold short 1,635 3,912 7,645 10,924 2,934 27,050
Derivative financial instruments 8,382 4,232 8,656 15,168 – 36,438
Obligations related to securities sold under repurchased agreements 88,953 – – – – 88,953
Subordinated debentures – – – 4,871 – 4,871
Capital instrument liabilities – – – – – –
Other liabilities 1,535 1,948 2,999 3,387 24,916 34,785
Subtotal $ 327,394 $ 55,615 $ 85,282 $ 49,338 $ 238,826 $ 756,455
Operating leases 310 261 550 577 – 1,698
Credit commitments
(2)
46,967 13,821 73,224 3,424 5 137,441
Financial guarantees
(3)
– – – – 27,137 27,137
Outsourcing obligations 228 161 286 1 1 677
Total $ 374,899 $ 69,858 $ 159,342 $ 53,340 $ 265,969 $ 923,408
(1) Includes deposits on demand and on notice.
(2) Includes the undrawn component of committed credit and liquidity facilities.
(3) Includes outstanding balances of guarantees, standby letters of credit and commercial letters of credit which may expire undrawn.
Capital Expenditures
Scotiabank has an ongoing program of capital investment to provide
the necessary level of technology and real estate resources to service
our customers and meet new product requirements. All major capital
expenditures go through a rigorous review and approval process.
Total capital expenditure in 2014 reflected an increase of $129 million
or 27% over 2013. The increase is primarily due to the relocation of
our New York office, improvements in our retail branch network, and
higher technology spending in regulatory, efficiency and customer
driven projects.
86 2014 Scotiabank Annual Report
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Other Risks
Operational risk
Operational risk is the risk of loss, whether direct or indirect, to
which the Bank is exposed due to inadequate or failed internal
processes or systems, human error, or external events.
Operational risk includes legal and regulatory risk, business
process and change risk, fiduciary or disclosure breaches,
technology failure, financial crime and environmental risk. It
exists in some form in every Bank business and function.
Operational risk can not only result in financial loss, but also
regulatory sanctions and damage to the Bank’s reputation. The
Bank is very successful at managing operational risk with a view
to safeguarding client assets and preserving shareholder value.
In fiscal 2014, operational risk losses continue to be within the Bank’s
risk appetite.
Governance and Organization
The Bank has developed policies, processes and assessment
methodologies to ensure that operational risk is appropriately identified
and managed with effective controls. The governing principles of the
Bank’s Operational Risk Management Framework include:
• The three lines of defence model helps to ensure proper
accountability and clearly defines the roles and responsibilities for
operational risk management. The first line of defence is the business
units, who own the risks in their businesses and operations. The
second line of defence is led by a central risk management unit within
Global Risk Management, with support from control and stewardship
functions across the Bank. The third line of defence is Internal Audit.
• The individual business lines are accountable for management and
control of the significant operational risks to which they are exposed.
The Bank has a governance and organizational structure through which
there is effective oversight and in which operational risk is managed to
an established risk appetite, including:
– The Board of Directors is responsible for sound corporate
governance and approves annually the Bank’s Operational Risk
Management Policy and Operational Risk Management Framework;
– A senior level Operational Risk Committee comprised of Heads of
business lines and key control functions, and chaired by the Chief
Risk Officer. This Committee provides consistent, Bank-wide
oversight of operational risk management;
– Business-line level operational risk committees are in place to
ensure issues are known, discussed, managed and escalated, as
needed and in a timely manner;
– Executive management with clearly defined areas of responsibility;
– A central unit in Global Risk Management responsible for:
developing and applying methods to identify, assess, manage and
monitor operational risks; and reporting on risks as well as actual
loss events and to play a challenge role to the business units in their
assessment and management of operational risk;
– Independent specialist units responsible for developing methods to
mitigate specific components of operational risk, including codifying
policies and processes required to control those specific risks;
– Separation of duties between key functions; and
– An independent internal audit department responsible for verifying
that significant risks are identified and assessed, and for testing
controls to ensure that overall risk is at an acceptable level. The
Internal Audit department is also responsible for auditing and
assessing the Bank’s Operational Risk Management Framework and
its design and effectiveness.
Operational Risk Management Framework
The Bank’s Operational Risk Management Framework sets out an
integrated approach to identify, assess, control, mitigate and report
operational risks across the Bank. The following are key components of
the Bank’s Operational Risk Management Framework:
• The Bank’s risk and control assessment program, which is managed
by Global Risk Management’s central operational risk unit, includes
formal reviews of significant units, operations and processes to
identify and assess operational risks. This program provides a basis
for management to ensure that key risks have been identified and
that controls are functioning effectively. Business line management
attests to the accuracy of each assessment and develops action plans
to mitigate risks if controls are not identified as effective. Results of
these reviews are summarized and reported to executive
management and the Board of Directors.
• The Bank has a standard inventory of operational risks which are
discussed and considered in each risk assessment.
• The Bank’s scenario analysis program provides a forward looking
view of key risks and provides management with insights into how
plausible but high impact, remote operational risk events might
occur. Scenario analysis will also assist in the selection of severity
distributions in the Bank’s Advanced Measurement Approach (AMA)
capital model (discussed below).
• The Bank’s Key Risk Indicator (KRI) program provides management
with an early warning system of changes in risk exposure that may
indicate that an operational risk appetite or tolerance may be
breached. KRIs exist at the business line and all-Bank level.
• The Business Environment and Internal Control Factors (BEICF)
program incorporates the impact of key business environment and
internal control factors into the regulatory capital allocated to
divisions by utilizing a BEICF scorecard. The scorecard will be used to
adjust capital calculations produced using the Bank’s AMA capital
model and due to its forward-looking nature, it also assists with
identifying new trends and emerging risks.
• The Bank’s centralized operational loss event database, which is
managed and maintained by the central operational risk unit within
Global Risk Management, captures key information on operational
losses. This data is analyzed, benchmarked against industry loss data
and significant metrics, then reported to executive management and
the Board of Directors to provide insight into operational risk
exposures, appetites and trends.
• Operational risk is difficult to quantify in a fulsome and accurate
manner, due to the nature of operational risk itself. Operational risk
is often included with or is a by-product of another form of risk and
is not taken on intentionally. Tools for operational risk management
and measurement continue to evolve across the global financial
services industry. There are two methods for the calculation of
operational risk regulatory capital available to the Bank under
Basel III – The Standardized Approach and the Advanced
Measurement Approach (AMA). The Bank continues to use the
Standardized Approach and will implement AMA, when approved by
OSFI.
• Operational risk reporting is provided to the Bank’s senior executive
management and the Board of Directors. In addition to details and
trends from operational risk loss events, reporting also includes
information on risk and control assessments and scenarios completed,
industry trends and significant events, key risk indicators and Business
Environment and Internal Control Factor (BEICF) survey results. The
combination of these information sources provides both a backward
and forward-looking view of operational risk at the Bank.
• The Bank is a member of the Operational Riskdata Exchange Association
(ORX), an international consortium of banks that share anonymized loss
2014 Scotiabank Annual Report 87
MANAGEMENT’S DISCUSSION AND ANALYSIS
data. This industry data is used to support risk identification, assessment
and will be used as an input to the Bank’s AMA capital model.
Discussion forums within ORX also help to ensure that the Bank is
current of all industry best practices and developments.
• The Bank’s Fraud Management Office, which identifies threats of
financial crime, implements systems and processes to mitigate loss
and reports on fraud loss activity to senior management.
• The Bank’s monitoring of industry events, identifies significant losses
incurred at other financial institutions and provides a reference for
reviewing and assessing the Bank’s own risk exposure.
• The compliance risk management program led by Global Compliance
through an established network and associated processes that
include: monitoring regulatory changes; conducting compliance risk
assessments; implementing policies and procedures; training;
monitoring and resolving issues; and reporting on the status of
compliance and compliance controls to executive management, the
Board of Directors, and regulators as required.
• The Bank’s New Products and Services Risk Management Policy
which describes the general principles applicable to the review,
approval and implementation of new products and services within
Scotiabank and is intended to provide overarching guidance.
Processes are in place at the all-Bank level and in each business line
for evaluation of risk in new businesses, services and products.
• The Bank’s Business Continuity Management Department is responsible
for governance and oversight of the Bank’s business continuity, and
monitors units to ensure compliance with these policies. The Bank’s
business continuity management policy requires that all business units
develop business continuity capabilities for their respective functions.
• The Bank is exposed to ever increasing cyber risks, which may include
theft of assets, unauthorized access to sensitive information, or
operational disruption such as breaches of cyber security. With this in
mind, the Bank has implemented a robust and continuously evolving
cyber security program to keep pace with the evolving threats. While
the Bank’s computer systems continue to be subject to cyber-attack
attempts, the countermeasures in place remain effective. Scotiabank
has not experienced material breaches of cyber security. The Bank
continues to actively monitor this risk, leveraging external threat
intelligence, internal monitoring, reviewing best practices and
implementing additional controls as required, to mitigate these risks.
• The Bank’s Model Risk Management Policy, which provides the
framework for model review and approval under the oversight of the
Operational Risk Committee.
• The Bank’s training programs, including the mandatory Anti-Money
Laundering, Operational Risk and Information Security courses and
examinations which ensure employees are aware and equipped to
safeguard our customers’ and the Bank’s assets.
• Risk mitigation programs, which use insurance policies to transfer the
risk of high severity losses, where feasible and appropriate.
Reputational risk
Reputational risk is the risk that negative publicity regarding
Scotiabank’s conduct, business practices or associations, whether
true or not, will adversely affect its revenues, operations or
customer base, or require costly litigation or other defensive
measures.
Negative publicity about an institution’s business practices may involve
any aspect of its operations, but usually relates to questions of business
ethics and integrity, or quality of products and services. Negative
publicity and attendant reputational risk frequently arise as a
by-product of some other kind of risk management control failure.
Reputational risk is managed and controlled throughout the Bank by
codes of conduct, governance practices and risk management programs,
policies, procedures and training. Many relevant checks and balances are
outlined in greater detail under other risk management sections,
particularly Operational risk, where reference is made to the Bank’s well-
established compliance program. All directors, officers and employees
have a responsibility to conduct their activities in accordance with the
Scotiabank Guidelines for Business Conduct, and in a manner that
minimizes reputational risk. While all employees, officers and directors are
expected to protect the reputation of Scotiabank by complying with the
Bank’s Guidelines for Business Conduct, the activities of the Legal,
Corporate Secretary, Public, Corporate and Government Affairs and
Compliance departments, and the Reputational Risk Committee, are
particularly oriented to the management of reputational risk.
In providing credit, advice, or products to customers, or entering into
associations, the Bank considers whether the transaction, relationship
or association might give rise to reputational risk. The Bank has an
established, Board-approved reputational risk policy, as well as policy
and procedures for managing reputational and legal risk related to
structured finance transactions. Global Risk Management plays a
significant role in the identification and management of reputational
risk related to credit underwriting. In addition, the Reputational Risk
Committee is available to support Global Risk Management, as well as
other risk management committees and business units, with their
assessment of reputational risk associated with transactions, business
initiatives, and new products and services.
The Reputational Risk Committee considers a broad array of factors
when assessing transactions, so that the Bank meets, and will be seen
to meet, high ethical standards. These factors include the extent, and
outcome, of legal and regulatory due diligence pertinent to the
transaction; the economic intent of the transaction; the effect of the
transaction on the transparency of a customer’s financial reporting; the
need for customer or public disclosure; conflicts of interest; fairness
issues; and public perception.
The Committee may impose conditions on customer transactions,
including customer disclosure requirements to promote transparency in
financial reporting, so that transactions meet Bank standards. In the
event the Committee recommends not proceeding with a transaction
and the sponsor of the transaction wishes to proceed, the transaction is
referred to the Risk Policy Committee.
Environmental risk
Environmental risk refers to the possibility that environmental
concerns involving Scotiabank or its customers could affect the
Bank’s financial performance.
To safeguard the Bank and the interests of its stakeholders, Scotiabank
has an environmental policy, which is approved by the Bank’s Board of
Directors. The policy guides day-to-day operations, lending practices,
supplier agreements, the management of real estate holdings and
external reporting practices. It is supplemented by specific policies and
practices relating to individual business lines.
Environmental risks associated with the business operations of each
borrower and any real property offered as security are considered in the
Bank’s credit evaluation procedures. This includes an environmental
assessment where applicable, and commentary on climate change
where it could have a material impact (including regulatory, physical or
reputational impacts) on the borrower. Global Risk Management has
primary responsibility for establishing the related policies, processes and
standards associated with mitigating environmental risk in the Bank’s
lending activities. Decisions are taken in the context of the risk
management framework discussed on page 65.
In the area of project finance, the Equator Principles have been
integrated into the Bank’s internal processes and procedures since
2006. The Equator Principles help financial institutions determine,
assess and manage environmental and social risk. The principles apply
to project finance loans and advisory assignments where total capital
costs exceed US$10 million, and to certain project-related corporate
loans. The Equator Principles provide safeguards for sensitive projects
to ensure protection of natural habitats and the rights of indigenous
peoples, as well as safeguards against child and forced labour.
88 2014 Scotiabank Annual Report
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Environmental concerns also play a prominent role in shaping the
Bank’s real estate practices and purchasing decisions. The Real Estate
Department adheres to an Environmental Compliance Policy to ensure
responsible management of the Bank’s real estate holdings from an
environmental perspective. In addition, recycling and resource
management programs are in place in the Bank’s corporate offices and
branch networks. Internal tracking systems are in place with respect to
energy use, greenhouse gas emissions (GHG) and paper consumption.
Since 2012, GHG emissions data for the branch network and corporate
offices has been externally verified. A variety of reduction measures are
in place for energy, paper and waste. In order to further reduce the
Bank’s environmental footprint, it has developed an internal
Environmental Paper Policy.
To ensure it continues to operate in an environmentally responsible
manner, the Bank monitors policy and legislative requirements through
ongoing dialogue with government, industry and stakeholders in
countries where it operates. Scotiabank has been meeting with
environmental organizations, industry associations and socially
responsible investment organizations with respect to the role that
banks play to help address issues such as climate change, protection of
biodiversity, promotion of sustainable forestry practices, and other
environmental issues important to its customers and communities
where it operates. The Bank has an ongoing process of reviewing its
policies in these areas.
Scotiabank has a number of environmentally related products and
services to meet demand and promote the “green” economy. These
include: an EcoEnergy Financing program designed to support personal
and small business customers who wish to install small-scale renewable
energy projects; an auto loan product for hybrid, electric and clean
diesel vehicles; an Energy and Agriculture Commodities group, which
assists corporate clients originate and trade carbon credits; and an eco-
home renovation program.
Environmental Reporting
Scotiabank is also a signatory to, and participant in the Carbon
Disclosure Project, which provides corporate disclosure to the
investment community on greenhouse gas emissions and climate
change management. For further information, you may access the
Bank’s annual Corporate Social Responsibility report at
www.scotiabank.com/csr/reports.
Insurance risk
The Bank is both a distributor of third party insurance products
and underwriter of insurance risk. As a distributor of third party
insurance products, the Bank earns fees but bears no insurance
risk. The Bank bears insurance risk in its role as an underwriter,
either through direct underwriting or via reinsurance.
Insurance risk is the risk of potential financial loss due to actual
experience being different from that assumed in the pricing
process of the insurance products.
Insurance by nature involves the distribution of products that transfer
individual risks to the issuer with the expectation of a return built into
the insurance premiums earned. The Bank is exposed to insurance risk
primarily through its creditor, life and select property and casualty
insurance and reinsurance products.
The insurance governance and risk management frameworks are
calibrated within each insurance subsidiary commensurate with the
nature and materiality of risk assumed. Senior management within the
insurance business units has primary responsibility for managing
insurance risk, with oversight by Global Risk Management through the
Insurance Risk Committee. The insurance company subsidiaries have
their own boards of directors, as well as independent appointed
actuaries who provide additional risk management oversight.
The insurance companies maintain a number of policies and practices
to manage insurance risk. Sound product design is an essential
element. The vast majority of risks insured are short-term in nature,
that is, they do not involve long-term pricing guarantees. Geographic
diversification and product-line diversification are important elements
as well. Reinsurance is commonly used as an effective tool to manage
the insurance risk exposures. Insurance risk is also managed through
effective underwriting and claim adjudication practices, ongoing
monitoring of experience, and stress-testing scenario analysis.
Strategic risk
Strategic risk is the risk that the Bank’s business strategies are
ineffective, being poorly executed, or insufficiently resilient to
changes in the business environment.
The Board of Directors is ultimately responsible for oversight of
strategic risk, by adopting a strategic planning process and approving,
on an annual basis, a strategic plan for the Bank.
The Bank manages its strategic planning process through a series of
coordinated efforts between the Executive Management Team, the
Business Lines and the Corporate Functions. These efforts address a
wide range of relevant considerations including capital and resource
allocation, business initiatives, strategic transactions and investments,
stress testing and alignment with the Bank’s Risk Appetite
Framework. These considerations are reviewed in a consistent and
disciplined manner. The process involves input from the entire Executive
Management Team and from the Board of Directors.
On an annual basis, a comprehensive Strategy Report is prepared that
summarizes the Bank’s key strategic considerations, and is presented by
the President and Chief Executive Officer to the Board of Directors for
their review and approval. The effectiveness of the Bank’s enterprise
strategy is actively monitored and measured through a balanced
scorecard process, which is reported on throughout the year.
The execution and evaluation of strategic plans within the Bank is
critically important to the Bank’s enterprise-wide risk management
framework. The Bank makes continuous efforts to ensure that all
employees are aware of the Bank’s overall strategic direction, and that
employees are also aware of the strategies and objectives for their
respective business line or corporate function. On an ongoing basis, the
business lines and corporate functions identify, manage and assess the
internal and external considerations – including risk factors – that could
affect the achievement of their strategic objectives. These matters are
considered on an enterprise-wide basis by the Bank’s Executive
Management Team, which makes adjustments, as required.
2014 Scotiabank Annual Report 89
MANAGEMENT’S DISCUSSION AND ANALYSIS
CONTROLS AND ACCOUNTING POLICIES
Controls and procedures
Management’s responsibility for financial information contained in this
annual report is described on page 116.
Disclosure controls and procedures
The Bank’s disclosure controls and procedures are designed to provide
reasonable assurance that information is accumulated and
communicated to the Bank’s management, including the President and
Chief Executive Officer and Chief Financial Officer (CFO), as
appropriate, to allow timely decisions regarding required disclosure.
As of October 31, 2014, the Bank’s management, with the
participation of the President and Chief Executive Officer and CFO,
evaluated the effectiveness of its disclosure controls and procedures, as
defined under the rules adopted by the U.S. Securities and Exchange
Commission (SEC) and the Canadian securities regulatory authorities,
and have concluded that the Bank’s disclosure controls and procedures
are effective.
Internal control over financial reporting
Management of the Bank is responsible for establishing and
maintaining adequate internal control over financial reporting. These
controls include policies and procedures that:
• pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
assets of the Bank;
• provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with International Financial Reporting Standards (IFRS) as
issued by the International Accounting Standards Board (IASB), and
that receipts and expenditures are being made only in accordance
with authorizations of management and directors of the Bank; and
• provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
Bank’s assets that could have a material effect on the financial
statements.
All control systems contain inherent limitations, no matter how well
designed. As a result, the Bank’s management acknowledges that its
internal control over financial reporting will not prevent or detect all
misstatements due to error or fraud. In addition, management’s
evaluation of controls can provide only reasonable, not absolute,
assurance that all control issues that may result in material
misstatements, if any, have been detected.
Management assessed the effectiveness of internal control over financial
reporting, using the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) 1992 framework, and based on that
assessment concluded that internal control over financial reporting was
effective as at October 31, 2014. Commencing 2015, the effectiveness
of internal control over financial reporting will be assessed using the
Internal Control-Integrated Framework 2013 issued by COSO.
Changes in internal control over financial reporting
There have been no changes in the Bank’s internal control over
financial reporting that have materially affected, or are reasonably likely
to materially affect, the Bank’s internal control over financial reporting
during the year ended October 31, 2014.
Critical accounting estimates
The Bank’s accounting policies are integral to understanding and
interpreting the financial results reported in this annual report. Note 3
on pages 126 to 138 summarizes the significant accounting policies
used in preparing the Bank’s consolidated financial statements. Certain
of these policies require management to make estimates, assumptions
and subjective judgements that are difficult, complex, and often relate
to matters that are inherently uncertain. The policies discussed below are
considered to be particularly important to the presentation of the Bank’s
financial position and results of operations, because changes in the
estimates, assumptions and judgements could have a material impact on
the Bank’s consolidated financial statements. These estimates,
assumptions and judgements are adjusted in the normal course of
business to reflect changing underlying circumstances.
Allowance for credit losses
The allowance for credit losses represents management’s best estimate
of the probable credit losses in the portfolio of deposits with other
institutions, loans to borrowers and acceptances. Management
undertakes regular reviews of credit quality to assess the adequacy of
the allowance for credit losses. This process requires the use of
estimates, assumptions and subjective judgements at many levels.
These subjective judgements include identifying credits that are
impaired, and considering factors specific to individual credits, as well
as portfolio characteristics and risks. Changes to these estimates or use
of other reasonable judgements and estimates could directly affect the
provision for credit losses.
The allowance for credit losses is comprised of collective and
individually assessed allowances.
Allowances in respect of individually significant credit exposures are an
estimate of probable incurred losses related to existing impaired loans.
In establishing these allowances applicable to individual credit
exposures, management individually assesses each loan for objective
indicators of impairment and forms a judgement as to whether the
loan is impaired. Loan impairment is recognized when, in
management’s opinion, there is no longer reasonable assurance that
interest and principal payments will be collected based on original
contractual terms. Once a loan is determined to be impaired,
management estimates its net realizable value by making judgements
relating to the timing of future cash flow amounts, the fair value of any
underlying security pledged as collateral, costs of realization,
observable market prices, and expectations about the future prospects
of the borrower and any guarantors.
Individual provisions were higher in 2014 than in 2013, driven primarily
by higher provisions in International Banking.
Management estimates allowances on a collective basis for exposures in
certain homogenous portfolios, including residential mortgages, credit
card loans and most personal loans. This collective assessment for these
positions involves estimating the probable losses inherent in the portfolio
by using a formulaic method that considers recent loss experience.
An allowance is also determined in respect of probable incurred losses
that are inherent in the portfolio, of performing loans, but have not yet
been specifically identified on an individual basis. Management
establishes this allowance on a collective basis through an assessment
of quantitative and qualitative factors. Using an internally developed
model, management arrives at an initial quantitative estimate of the
collective allowance for the performing portfolio based on numerous
factors, including historical average default probabilities, loss given
default rates and exposure at default factors. Material changes in any
of these parameters or assumptions would affect the range of expected
credit losses and, consequently, could affect the collective allowance
level. For example, if either the probability of default or the loss given
default rates for the non-retail portfolio were independently increased
or decreased by 10%, the model would indicate an increase or
decrease to the quantitative estimate of approximately $74 million
(2013 – $85 million). The non-retail quantitative estimate in 2014,
includes an adjustment in respect of variation and uncertainty in the
historically based credit parameters.
A qualitative assessment of the collective allowance is made based on
observable data, such as: economic trends and business conditions,
portfolio concentrations, risk migrations and recent trends in volumes
90 2014 Scotiabank Annual Report
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and severity of delinquencies and a component for the imprecision
inherent in the model and model parameters. Management reviews the
collective allowance quarterly to assess whether the allowance is at the
appropriate level in relation to the size of the portfolio, inherent credit
risks and trends in portfolio quality.
The total collective allowance for credit losses as at October 31, 2014,
was $2,856 million, an increase of $252 million from a year earlier. The
increase was primarily due to changes in credit quality. The collective
allowance amount is primarily attributable to business and government
performing loans ($584 million), with the remainder allocated to
personal lending and credit cards ($1,752 million) and residential
mortgages ($520 million). The allocation to personal lending and credit
cards increased year over year, as a result of an enhancement to the
retail methodology in determining the collective allowance on
performing loans. These amounts for personal lending and credit cards
and for residential mortgages include allowances for both performing
and impaired loans.
As noted above, the individual allowance for credit losses for personal
loans, credit cards and mortgages is formula-based and also reflects
incurred but not yet identified losses.
Fair value of financial instruments
All financial instruments are measured at fair value on initial
recognition. Subsequent measurement of a financial instrument
depends on its classification. Non-trading loans and receivables, certain
securities and most financial liabilities are carried at amortized cost
unless classified or designated as fair value through profit and loss or
available-for-sale at inception. All other financial instruments, including
those designated as fair value through profit and loss at inception, are
carried at fair value.
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 best evidence of fair value for a financial instrument is the quoted
price in an active market. Quoted market prices represent a Level 1
valuation. Quoted prices are not always available for over-the-counter
transactions, as well as transactions in inactive or illiquid markets. In
these instances, internal models that maximize the use of observable
inputs are used to estimate fair value. The chosen valuation technique
incorporates all the factors that market participants would take into
account in pricing a transaction. When all significant inputs are
observable, the valuation is classified as Level 2. Financial instruments
traded in a less active market have been valued using indicative market
prices, present value of cash-flows or other valuation techniques. Fair
value estimates normally do not consider forced or liquidation sales.
Where financial instruments trade in inactive markets or when using
models where observable parameters do not exist, greater
management judgement is required for valuation purposes. Valuations
that require the significant use of unobservable inputs are considered
Level 3. The calculation of estimated fair value is based on market
conditions at a specific point in time and therefore may not be
reflective of future fair values.
The Bank has controls and processes in place to ensure that the
valuation of financial instruments is appropriately determined. Global
Risk Management (GRM) is responsible for the design and application
of the Bank’s risk management framework. GRM is independent from
the Bank’s business units and is overseen by Executive Management
and the Board of Directors. Senior management committees within
GRM oversee and establish standards for risk management processes
that are critical in ensuring that appropriate valuation methodologies
and policies are in place for determining fair value.
Where possible, valuations are based on quoted prices or observable
inputs obtained from active markets. GRM oversees a monthly
Independent Price Verification (IPV) process in order 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 from the business. The Bank maintains an approved list
of pricing sources that are used in the IPV process. These sources
include, but are not limited to, brokers, dealers and consensus pricing
services. The valuation policies relating to the IPV process require that all
pricing or rate sources used be external to the Bank. On a periodic basis,
an independent assessment of pricing or rate sources is also performed
by GRM to determine market presence or market representative levels.
Where quoted prices are not readily available, such as for transactions in
inactive or illiquid markets, internal models that maximize the use of
observable inputs are used to estimate fair value. An independent senior
management committee within GRM oversees the vetting, approval and
ongoing validation of valuation models used in determining fair value.
Risk policies associated with model development are approved by
Executive Management and/or key risk committees.
During the fourth quarter of 2014, the Bank recognized a funding
valuation adjustment (FVA) charge of $30 million ($22 million after
tax), relating to its uncollateralized derivative instruments. This amount
has been recorded in Trading Income in the Consolidated Statement of
Income. This change was driven by growing market evidence that term
funding was an important component of the fair value of
uncollateralized derivatives.
In determining fair value for certain instruments or portfolios of
instruments, valuation adjustments or reserves may be required to arrive
at a more accurate representation of fair value. The Bank’s policy of
applying valuation reserves to a portfolio of instruments is approved by a
senior management committee. These reserves include adjustments for
credit risk, bid-offer spreads, unobservable parameters, constraints on
prices in inactive or illiquid markets and when applicable funding costs.
The methodology for the calculation of valuation reserves are reviewed
at least annually by senior management.
Valuation adjustments recorded against the fair value of financial assets
and financial liabilities totaled $113 million as at October 31, 2014,
(2013 – $118 million), net of any write-offs. These valuation
adjustments are due mainly to credit risk considerations and bid-offer
spreads on derivative transactions.
The Bank discloses the classification of all financial instruments carried at
fair value in a hierarchy based on the determination of fair value. The
valuation hierarchy is as follows:
• Level 1 – fair value is based on unadjusted quoted prices in active
markets for identical instruments,
• Level 2 – fair value is based on models using significant market-
observable inputs other than quoted prices for the instruments, or
• Level 3 – fair value is based on models using significant inputs that
are not based on observable market data.
The Bank’s assets and liabilities which are carried at fair value as
classified by the valuation hierarchy are reflected in Note 7 on
pages 144 and 145. The percentage of each asset and liability category
by fair value hierarchy level are outlined as follows:
T60 Fair value hierarchy of financial instruments carried at fair value
Assets Liabilities
Fair value
hierarchy
Trading
assets
Available-
for-sale
securities Derivatives
Obligations
related to
securities
sold short Derivatives
Level 1 61% 58% 3% 89% 3%
Level 2 38% 37% 94% 11% 96%
Level 3 1% 5% 3% – 1%
100% 100% 100% 100% 100%
2014 Scotiabank Annual Report 91
MANAGEMENT’S DISCUSSION AND ANALYSIS
Impairment of investment securities
Investment securities are evaluated for impairment at the end of each
reporting date, or more frequently, if events or changes in circumstances
indicate the existence of objective evidence of impairment.
In the case of equity instruments classified as available-for-sale, a
significant or prolonged decline in the fair value of the security below
its original cost is considered in determining whether impairment exists.
In the case of debt instruments classified as available-for-sale and
held-to-maturity investment securities, impairment is assessed based on
the same criteria as impairment of loans.
When a decline in value of available-for-sale debt or equity instrument
is due to impairment, the value of the security is written down to fair
value. The losses arising from impairment are reclassified from
accumulated other comprehensive income and included in net gain on
investment securities within other operating income in the
Consolidated Statement of Income.
The losses arising from impairment of held-to-maturity investment
securities are recognized in net gain on investment securities within
other operating income in the Consolidated Statement of Income.
Reversals of impairment losses on available-for-sale debt instruments
resulting from increases in fair value related to events occurring after
the date of impairment are included in net gain on investment
securities within other operating income in the Consolidated Statement
of Income, to a maximum of the original impairment charge. Reversals
of impairment on available-for-sale equity instruments are not
recognized in the Consolidated Statement of Income; increases in fair
value of such instruments after impairment are recognized in equity.
Reversals of impairment losses on held-to-maturity investment
securities are included in net gain on investment securities within other
operating income in the Consolidated Statement of Income, to a
maximum of the amortized cost of the investment before the original
impairment charge.
As at October 31, 2014, the gross unrealized gains on available-for-sale
securities recorded in accumulated other comprehensive income were
$1,259 million (2013 – $1,297 million), and the gross unrealized losses
were $123 million (2013 – $160 million). Net unrealized gains were
therefore $1,136 million (2013 – $1,137 million) before hedge
amounts. The net unrealized gains after hedge amounts were $847
million (2013 – $980 million).
At October 31, 2014, the unrealized loss recorded in accumulated
other comprehensive income relating to securities in an unrealized loss
position for more than 12 months was $90 million (2013 –
$84 million). This unrealized loss was comprised of $23 million (2013 –
$26 million) in debt securities, $59 million (2013 – $44 million) related
to preferred shares and $8 million (2013 – $14 million) related to
common shares. The unrealized losses on the debt securities arose
primarily from changes in interest rates and credit spreads. For debt
securities, based on a number of considerations, including underlying
credit of the issuers, the Bank expects that future interest and principal
payments will continue to be received on a timely basis in accordance
with the contractual terms of the security.
Employee benefits
The Bank sponsors various pension and other benefit plans for eligible
employees in Canada, the U.S., and other international operations. The
pension benefits are generally based on years of service and average
earnings at retirement. Other benefits generally include post-retirement
health care, dental care and life insurance, along with other long-term
employee benefits such as long-term disability.
Employee benefit expense and the related benefit obligation are
calculated using actuarial methods and certain actuarial assumptions.
These assumptions are based on management’s best estimate and are
reviewed and approved annually. The management assumption with
the greatest potential impact is the discount rate. This rate is used for
measuring the benefit obligation and is generally prescribed to be
equal to the current yield on long term, high-quality corporate bonds
with durations similar to the benefit obligation. This discount rate must
also be used to determine the annual benefit expense. If the assumed
discount rate was 1% lower, the benefit expense for 2014 would have
been $109 million higher. Other key assumptions include future
compensation, health care costs, employee turnover, retirement age
and mortality. When making these estimates, management considers
expectations of future economic trends and business conditions,
including inflation rates as well as other factors, such as plan specific
experience and best practices.
The Bank uses a measurement date of October 31, and based on this
measurement date, the Bank reported a deficit of $624 million in its
principal pension plans as disclosed in Note 31 to the consolidated
financial statements on pages 179 to 183.
Actual experience that differs from assumptions made by management
will result in a net actuarial gain or loss recognized immediately in other
comprehensive income.
Note 31 on pages 179 to 183 of the 2014 consolidated financial
statements contains details of the Bank’s employee benefit plans, such
as the disclosure of pension and other benefit amounts, management’s
key assumptions, and a sensitivity analysis of changes in these
assumptions on the employee benefit obligation and expense.
Corporate income taxes
Management exercises judgement in determining the provision for
income taxes and deferred income tax assets and liabilities. The
provision is based on management’s expectations regarding the income
tax consequences of transactions and events during the period.
Management interprets the tax legislation for each jurisdiction in which
the Bank operates and makes assumptions about the expected timing
of the reversal of deferred income tax assets and liabilities. If
management’s interpretations of the legislation differ from those of the
tax authorities or if the actual timing of the reversals of the deferred
income tax assets and liabilities is not as anticipated, the provision for
income taxes could increase or decrease in future periods.
Total deferred tax assets related to the Bank’s unused income tax losses
from operations arising in prior years were $620 million as at
October 31, 2014 (October 31, 2013 – $756 million). 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 amounted to $338 million (2013 –
$279 million). The amount related to unrecognized tax losses was
$38 million, which will expire as follows: $20 million in 2018 and
beyond and $18 million have no fixed expiry date.
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.
Note 30 on pages 177 to 179 of the 2014 consolidated financial
statements contains further details with respect to the Bank’s provisions
for income taxes.
92 2014 Scotiabank Annual Report
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Structured entities
In the normal course of business, the Bank enters into arrangements with
structured entities on behalf of its customers and for its own purposes.
These structured entities can be generally categorized as multi-seller
commercial paper conduits, Bank funding vehicles and structured finance
entities. Further details are provided on pages 50 and 51 in the off-balance
sheet arrangements section.
Management is required to exercise judgement to determine whether a
structured entity should be consolidated. This evaluation involves
understanding the arrangements, determining whether decisions about
the relevant activities are made by means of voting rights or other
contractual arrangements and determining whether the Bank controls the
structured entity.
The Bank controls an investee when it is exposed, or has rights, to
variable returns from its involvement with the investee and has the
ability to affect those returns through its power over the investee. The
three elements of control are:
• power over the investee;
• exposure, or rights, to variable returns from involvement with the
investee; and
• the ability to use power over the investee to affect the amount of the
investor’s returns.
This definition of control applies to circumstances
• when voting rights or similar rights give the Bank power, including
situations where the Bank holds less than a majority of voting rights
or involving potential voting rights;
• when an investee is designed so that voting rights are not the
dominant factor in deciding who controls the investee (i.e., relevant
activities are directed by contractual arrangements);
• involving agency relationships; and
• when the Bank has control over specified assets of an investee.
The Bank does not control an investee when it is acting in an agent’s
capacity. The Bank assesses whether it is an agent by determining
whether it is primarily engaged to act on behalf and for the benefit of
another party or parties. Factors that the Bank considers in this
assessment include the scope of its decision-making authority over the
investee, the rights held by other parties, the remuneration to which it
is entitled, and the Bank’s exposure to variability of returns from other
interests that it holds in the investee.
The analysis uses both qualitative and quantitative analytical techniques
and involves the use of a number of assumptions about the business
environment in which the structured entity operates and the amount
and timing of future cash flows.
The Bank reassesses whether it controls an investee if facts and
circumstances indicate that one or more of the three elements of
control change.
Management is required to exercise judgement to determine if a
change in control event has occurred.
During 2014, there were no change in control events that caused the
Bank to change its control conclusion of its multi-seller conduits or
other structured entities.
As described in Note 16 to the consolidated financial statements (on
pages 163 to 165) and in the discussion of off-balance sheet
arrangements (on pages 50 and 51), the Bank does not control the two
canadian-based multi-seller conduits that it sponsors and they are not
required to be consolidated on the Bank’s Consolidated Statement of
Financial Position. The Bank controls its U.S.-based multi-seller conduit
and consolidates it on the Bank’s Consolidated Statement of Financial
Position.
Equity investment in hyper-inflationary country
Venezuela has been designated as hyper-inflationary and measures of
foreign exchange controls have been imposed by the Venezuelan
government. These restrictions have limited the Bank’s ability to
repatriate cash and dividends out of Venezuela.
As at October 31, 2014, the Bank’s total net investment in Banco del
Caribe of $54 million, along with monetary assets, comprising of cash
and dividend receivable was translated at the SICAD II exchange rate of
1 USD to 50 VEF. These amounts were previously measured at the
official exchange rate of 1 USD to 6.3 VEF.
As a result the Bank recorded a reduction in the carrying value of the
investment in associates of $129 million with a corresponding decrease
to OCI. The Bank has also recognized foreign exchange losses of $47
million in the Consolidated Statement of Income as other operating
income, in relation to the monetary assets.
Goodwill
For the purpose of impairment testing, goodwill acquired in a business
combination is, on the acquisition date, allocated to each of the Bank’s
group of cash-generating units (CGU) that are expected to benefit from
the particular acquisition.
Goodwill is not amortized but tested for impairment annually and
when circumstances indicate that the carrying value may be impaired.
Goodwill is reviewed at each reporting date to determine whether
there is any indication of impairment. Each CGU to which goodwill is
allocated for impairment testing purposes reflects the lowest level at
which goodwill is monitored for internal management purposes.
The carrying amount of the CGU is determined by management using
approved internal economic capital models. These models consider
various factors including market risk, credit risk, operational risk, and
other relevant business risks for each CGU. An impairment loss is
recognized if the carrying amount of a CGU exceeds its recoverable
amount. The recoverable amount is the greater of fair value less costs
of disposal and value in use. If either fair value less costs of disposal or
value in use exceeds the carrying amount, there is no need to
determine the other. The recoverable amount for the CGU has been
determined using the fair value less costs of disposal method. In
arriving at such value an appropriate valuation model is used which
considers various factors including normalized net income, price
earnings multiples and control premium. These calculations are
corroborated by valuation multiples, quoted share prices for publicly
traded subsidiaries or other available fair value indicators. An
impairment loss, in respect of goodwill, is not reversed.
Significant judgement is applied in determining the recoverable
amounts of the CGU and assessing whether certain events or
circumstances constitute objective evidence of impairment.
Goodwill was assessed for annual impairment based on the methodology
as at July 31, 2014 and no impairment was determined to exist.
Indefinite life intangible assets
Intangible assets with indefinite useful lives are not amortized but
tested for impairment annually and when circumstances indicate that
the carrying value may be impaired. Intangible assets are reviewed at
each reporting date to determine whether there is any indication of
impairment.
The recoverable amount is the greater of fair value less costs of disposal
and value in use. If either fair value less costs of disposal or value in use
exceeds the carrying amount, there is no need to determine the other.
Value in use method is used by the Bank to determine the recoverable
amount of the intangible asset. In determining value in use, an
appropriate valuation model is used which considers factors such as
management-approved cash flow projections, discount rate and
terminal growth rate. An impairment loss is recognized if the carrying
amount of the intangible asset exceeds its recoverable amount.
Impairment losses recognized in prior periods are reassessed at each
reporting period for any indication that the loss has decreased or no
2014 Scotiabank Annual Report 93
MANAGEMENT’S DISCUSSION AND ANALYSIS
longer exists. An impairment loss is reversed if there has been a change
in the estimates used to determine the recoverable amount. An
impairment loss is reversed only to the extent that the intangible asset’s
carrying amount does not exceed the carrying amount that would have
been determined if no impairment loss had been recognized.
The recoverable amount is significantly impacted by the discount rate
and the terminal value. Significant judgement is applied in determining
the intangible asset’s recoverable amount and assessing whether certain
events or circumstances constitute objective evidence of impairment.
Intangible assets were assessed for annual impairment based on the
methodology as at July 31, 2014 and no impairment was determined
to exist.
Provisions
According to IFRS, the Bank should recognize a provision if, as a result
of a past event, the Bank has a present legal or constructive obligation
that can be estimated reliably, and it is probable that an outflow of
economic benefits will be required to settle the obligation. Probable in
this context means more likely than not.
Litigation and other
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 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 will have a material adverse effect on
the Consolidated Statement of Financial Position or results of
operations of the Bank.
Off-balance sheet credit risks
The provisions for off-balance sheet credit risks relates primarily to
off-balance sheet credit risks such as undrawn lending commitments,
letters of credit and letters of guarantee. These are collectively assessed
in a manner consistent with the collective allowance for performing
on-balance sheet credit risks.
Recently adopted standards and future accounting
developments
Changes in accounting policies during the year
The Bank has adopted the following new and amended accounting
standards issued by the IASB effective November 1, 2013. The changes
have been applied retrospectively, unless otherwise noted.
Consequently the new accounting policies used by the Bank have been
described below.
Employee benefits (IAS 19)
The amended standard IAS 19, Employee Benefits, eliminates the use
of the corridor approach (the method previously used by the Bank) and
requires the value of the surplus/deficit of the defined benefit plans to
be recorded on the Consolidated Statement of Financial Position, with
actuarial gains and losses to be recognized immediately in OCI. In
addition, the discount rate to be used for recognizing the net interest
income/expense is based on the rate at which the liabilities are
discounted and not the expected rate of return on the assets. This will
result in higher expense in the Consolidated Statement of Income in
line with the funded status of the plan. The OCI balances will change in
line with changes in the actuarial gains and losses.
The impact of the adoption of the standard on the consolidated
financial statements for prior periods is shown in Table 61.
Consolidation (IFRS 10)
The new accounting standard, IFRS 10, Consolidated Financial
Statements, replaced the consolidation guidance in IAS 27, Separate
Financial Statements and SIC-12, Consolidation – Special Purpose
Entities. It introduces a single, principle-based control model for all
entities as a basis for determining which entities are consolidated and
set out the requirements for the preparation of consolidated financial
statements.
The standard was applied retrospectively allowing for certain practical
exceptions and transitional relief.
The adoption of IFRS 10 has resulted primarily in the deconsolidation of
Scotiabank Capital Trust and Scotiabank Tier 1 Trust (together, the
“capital trusts”) through which the Bank issues certain regulatory
capital instruments. 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 entities.
The Bank consolidates all structured entities that it controls, including
its U.S.-based multi-seller conduit and certain funding and other
vehicles.
The impact of the deconsolidation on the consolidated financial
statements for prior periods is shown in Table 61.
Disclosure of interests in other entities (IFRS 12)
In conjunction with the adoption of IFRS 10, the Bank has adopted
IFRS 12, Disclosure of Interests in Other Entities, that broadens the
definition of interests in other entities and requires enhanced
disclosures on both consolidated entities and unconsolidated entities
with which the Bank is involved. The relevant incremental disclosures
have been included in Note 16 of the consolidated financial
statements.
Joint arrangements (IFRS 11)
Under the new accounting standard, IFRS 11, Joint Arrangements, the
Bank classifies its interests in joint arrangements as either joint
operations or joint ventures depending on the Bank’s rights to the
assets and obligations for the liabilities of the arrangements. The
adoption of the new accounting standard has no impact on the Bank’s
assets, liabilities and equity.
Fair value measurement (IFRS 13)
IFRS 13 provides a revised definition of fair value and guidance on how
it should be applied where its use is already required or permitted by
other standards within IFRS. In accordance with the transitional
provisions, IFRS 13 has been applied prospectively from November 1,
2013. The adoption of this new standard did not have an impact on
the Bank’s determination of fair value. However, IFRS 13 required
additional disclosures on fair value measurement which are included in
Note 7.
Disclosures-offsetting financial assets and financial liabilities
(IFRS 7)
IFRS 7 – Financial Instruments: Disclosures – Offsetting Financial Assets
and Liabilities requires the Bank to disclose gross amounts subject to
rights of set off, amounts set off, and the related net credit exposure.
These new disclosures are included in Note 11.
Presentation of financial statements (IAS 1)
IAS 1, Presentation of Financial Statements, requires the separate
disclosure of items within other comprehensive income based on
whether or not they will be reclassified into net income in subsequent
periods. On November 1, 2013, the Bank adopted this presentation on
a retrospective basis along with the implementation of IAS 19. Changes
on remeasurement of employee benefit plans that are recognized
directly in other comprehensive income are not reclassified to the
Consolidated Statement of Income in future periods.
94 2014 Scotiabank Annual Report
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T61 Summary of impact on adoption of new and amended accounting standards
The following tables summarize the impact of the changes:
As at October 31, 2013
($ millions)
Previously
reported
Employee
benefits
IAS 19
Consolidation
IFRS 10 Restated
Assets impacted by changing IFRS accounting standards
Investment securities $ 34,303 $ – $ 16 $ 34,319
Loans – Business and government 119,550 – 65 119,615
Property and equipment 2,228 – (14) 2,214
Investment in associates 5,294 – 32 5,326
Deferred tax assets 1,780 158 – 1,938
Other assets 10,924 (394) (7) 10,523
Assets not impacted by changes 569,709 – – 569,709
Total assets 743,788 (236) 92 743,644
Liabilities impacted by changing IFRS accounting standards
Deposits – Business and government
(1)
312,487 – 1,507 313,994
Derivative financial instruments 29,255 – 12 29,267
Capital instruments 650 – (650) –
Other liabilities 31,896 171 (20) 32,047
Liabilities not impacted by changes 322,949 – – 322,949
Equity impacted by changing IFRS accounting standards
Retained earnings 25,315 (243) (4) 25,068
Accumulated other comprehensive income (loss) 545 (157) – 388
Non-controlling interests
Non-controlling interests in subsidiaries 1,155 (7) (10) 1,138
Capital instrument equity holders 743 – (743) –
Equity not impacted by changes 18,793 – – 18,793
Total liabilities and equity $743,788 $(236) $ 92 $743,644
Net income for the year ended October 31, 2013 $ 6,697 $ (68) $ (19) $ 6,610
Earnings per share
Basic $ 5.19 $ 5.15
Diluted $ 5.15 $ 5.11
As at November 1, 2012
($ millions)
Previously
reported
Employee
benefits
IAS 19
Consolidation
IFRS 10 Restated
Assets impacted by changing IFRS accounting standards
Investment securities $ 33,361 $ – $ 15 $ 33,376
Loans – Business and government 111,549 – 99 111,648
Allowance for credit losses (2,969) – (8) (2,977)
Property and equipment 2,260 – (42) 2,218
Investment in associates 4,760 – 31 4,791
Deferred tax assets 1,936 337 – 2,273
Other assets 11,572 (242) (9) 11,321
Assets not impacted by changes 505,575 – – 505,575
Total assets 668,044 95 86 668,225
Liabilities impacted by changing IFRS accounting standards
Deposits – Business and government
(1)
291,361 – 2,256 293,617
Derivative financial instruments 35,299 – 24 35,323
Capital instruments 1,358 – (1,358) –
Other liabilities 31,753 1,000 (27) 32,726
Liabilities not impacted by changes 266,894 – – 266,894
Equity impacted by changing IFRS accounting standards
Retained earnings 21,978 (180) (23) 21,775
Accumulated other comprehensive income (loss) (31) (714) – (745)
Non-controlling interests
Non-controlling interests in subsidiaries 966 (11) (9) 946
Capital instrument equity holders 777 – (777) –
Equity not impacted by changes 17,689 – – 17,689
Total liabilities and equity $668,044 $ 95 $ 86 $668,225
Net income for the year ended October 31, 2012 $ 6,466 $ (41) $ (35) $ 6,390
Earnings per share
Basic $ 5.31 $ 5.27
Diluted $ 5.22 $ 5.18
(1) Includes deposit liabilities designated at fair value through profit or loss of $174 (November 1, 2012 - $157).
2014 Scotiabank Annual Report 95
MANAGEMENT’S DISCUSSION AND ANALYSIS
Future accounting developments
The Bank actively monitors developments and changes in standards
from the IASB as well as regulatory requirements from the Canadian
Securities Administrators and OSFI.
Effective November 1, 2014
The IASB issued a number of new or amended standards that are
effective for the Bank as of November 1, 2014. The Bank has
completed its assessment phase and will be able to meet the
requirements of the new standards in the first quarter of 2015. Based
on the assessments completed the Bank does not expect the impact of
adoption of these standards to be significant.
Presentation of own credit risk (IFRS 9)
IFRS 9 Financial Instruments, requires an entity choosing to measure a
liability at fair value to present the portion of the change in fair value
due to the changes in the entity’s own credit risk in the Consolidated
Statement of Other Comprehensive Income, rather than within the
Consolidated Statement of Income. The IASB permits entities to early
adopt this requirement prior to the IFRS 9 mandatory effective date of
January 1, 2018. The Bank will early adopt these requirements as of
Q1, 2015.
Levies
IFRIC 21, Levies, provides guidance on when to recognize a liability to
pay a levy imposed by government that is accounted for in accordance
with IAS 37, Provisions, Contingent Liabilities and Contingent Assets,
and also for a liability to pay a levy whose timing and amount is certain.
The interpretation clarifies that an obligating event, as identified by
legislation, would trigger the recognition of a liability to pay a levy.
While the interpretation discusses the timing of the recognition, it does
not change the measurement of the amount to be recognized.
Novation of Derivatives and Continuation of Hedge Accounting
This amendment to IAS 39, Financial Instruments: Recognition and
Measurement, adds a limited exception to IAS 39 to allow hedge
accounting to continue in a situation where a derivative, which has
been designated as a hedging instrument, is novated to effect clearing
with a central counterparty as a result of laws and regulation, if specific
conditions are met.
Presentation
The amendments to IAS 32, Financial Instruments: Presentation,
clarifies the requirements relating to offsetting financial assets and
financial liabilities.
Disclosures for Non-financial Assets
The amendment to IAS 36, Impairment of Assets, provides new
disclosure requirements relating to the measurement of the recoverable
amount of impaired assets as a result of issuing IFRS 13, Fair Value
Measurement.
Effective November 1, 2017
Revenue from Contracts with Customers
On May 28, 2014, the IASB issued IFRS 15, Revenue from Contracts
with Customers, which provides a single principle based framework to
be applied to all contracts with customers. IFRS 15 replaces the
previous revenue standard IAS 18, Revenue, and the related
Interpretations on revenue recognition. The standard scopes out
contracts that are considered to be lease contracts, insurance contracts
and financial instruments, and as such will impact the businesses that
earn fee and commission revenues. The new standard is a control-
based model as compared to the existing revenue standard which is
primarily focused on risks and rewards. Under the new standard
revenue is recognized when a customer obtains control of a good or
service. Transfer of control occurs when the customer has the ability to
direct the use of and obtain the benefits of the good or service. The
standard is effective for the Bank on November 1, 2017, with early
adoption permitted, using either a full retrospective approach or a
modified retrospective approach. A majority of the Bank’s revenue
generating instruments meets the definition of financial instruments
and remains out of scope. The areas of focus for the Bank’s assessment
will be fees and commission revenues from wealth management and
other banking services.
Effective November 1, 2018
Financial Instruments
On July 24, 2014, the IASB issued IFRS 9 which will replace IAS 39. The
standard covers three broad topics: Classification and Measurement,
Impairment and Hedging.
Classification and Measurement
The standard uses a single approach to determine whether a financial
asset is measured at amortized cost or fair value. Financial assets will be
measured at fair value through profit or loss unless certain conditions are
met which permits measurement at amortized cost or at fair value through
other comprehensive income. Most of the IFRS 9 requirements for financial
liabilities have been carried forward unchanged from IAS 39.
Impairment
The standard introduces a new single model for the measurement of
impairment losses on all financial instruments subject to impairment
accounting. The expected credit loss (ECL) model replaces the current
“incurred loss” model and is based on a forward looking approach.
The ECL model contains a “dual stage” approach which is based on
the change in credit quality of loans since initial recognition. Under the
first stage, an amount equal to 12 months expected credit losses will
be recorded for financial instruments where there has not been a
significant increase in credit risk since initial recognition. Under the
second stage, an amount equal to the lifetime expected losses will be
recorded for those financial instruments where there has been a
significant increase in credit risk since initial recognition.
Hedging
The standard expands the scope of hedged items and hedging items to
which hedge accounting can be applied. It changes the effectiveness
testing requirements and removes the ability to voluntarily discontinue
hedge accounting.
The standard is effective for the Bank on November 1, 2018 on a
retrospective basis with certain exceptions. Early adoption is permitted
and if elected must at a minimum be applied to both the classification
and measurement and impairment models simultaneously. The Bank is
currently assessing the impact of adopting this new standard.
Regulatory developments
The Bank continues to respond to global regulatory developments,
such as capital and liquidity requirements under the Basel Committee
on Banking Supervision global standards (Basel III), over-the-counter
derivatives reform, consumer protection measures and specific financial
reforms, such as the Dodd-Frank Wall Street Reform and Consumer
96 2014 Scotiabank Annual Report
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Protection Act. The Bank monitors these and other developments and
is working to ensure business impacts, if any, are minimized.
On February 18, 2014 the Board of Governors of the Federal Reserve
System (“Federal Reserve”) in the U.S. approved the final rule to
implement the enhanced prudential standards and early remediation
requirements of sections 165 and 166 of the Dodd-Frank Act for bank
holding companies and foreign banking organizations. With respect to
foreign banking organizations, the overall intent of the final rule is to
strengthen the regulation of the U.S. operations of foreign banking
organizations by requiring home country capital certification consistent
with the Basel capital framework, home country capital stress tests
comparable to U.S. standards, maintenance of a liquidity buffer for U.S.
branches and agencies and establishment of a U.S. risk committee with
the appointment of a U.S. chief risk officer. The Bank will work to help
ensure compliance with the final rule by the effective date of July 2016.
On December 10, 2013, the Federal Reserve approved a final rule
implementing Section 619 of Dodd Frank, commonly known as the
Volcker Rule. The Volcker Rule imposes prohibitions and restrictions on
banking entities and their affiliates in connection with proprietary
trading and investing in or sponsoring of hedge funds or private equity
funds. In the final rule, the Federal Reserve extended the conformance
period to July 2015. The Bank is currently working to help ensure
compliance with the Volcker rule by July 2015.
The Foreign Account Tax Compliance Act (FATCA) is U.S. legislation
designed to prevent U.S. taxpayers from using accounts held outside of
the U.S. to evade taxes. FATCA, and in some countries, related local
regulations, will require financial institutions to report annually on
specified accounts held outside of the U.S. by U.S. taxpayers. This
reporting will be made available to the U.S. Internal Revenue Service
either directly or through local regulatory agencies. A number of other
OECD member countries intend to implement requirements for
automated exchange of information relating to tax residents of those
countries commencing in 2016. Across our entire global network, the
Bank intends to meet all obligations imposed under FATCA and other
exchange of tax information regimes in accordance with local banking
and tax regulations. Under the guidance of an enterprise program
office, dedicated project teams in each of the business lines are
working to meet all such obligations worldwide while minimizing
negative impact on the client experience.
Related party transactions
Compensation of key management personnel
Compensation 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, including Group
Heads, and the Chief Financial Officer.
T62 Compensation of the Bank key management personnel
For the year ended October 31
($ millions) 2014 2013
Salaries and cash incentives
(1)
$ 17 $ 20
Equity-based payment
(2)
25 34
Pension and other benefits
(1)
3 2
Total $ 45 $ 56
(1) Expensed during the year
(2) Awarded during the year
Directors can use some of all of their director fees earned to buy
common shares of the Bank at market rates through the Directors’
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. Commencing in fiscal 2004, the Bank no longer grants
stock options to non-officer directors. Refer to Note 29 – Share-based
payments for further details of these plans.
Loans and deposits of key management personnel
T63 Loans and deposits of key management personnel
As at October 31
($ millions) 2014 2013
Loans $ 4 $ 1
Deposits $ 5 $ 12
In Canada, loans are currently granted to key management personnel
at market terms and conditions. Effective March 1, 2001, the Bank
discontinued the practice of granting loans to key management
personnel in Canada at reduced rates. Any of these loans granted prior
to March 1, 2001, are grandfathered until maturity.
The Bank’s committed credit exposure to companies controlled
by directors totaled $9.4 million as at October 31, 2014 (October 31,
2013 – $3.5 million) while actual utilized accounts were $3.4 million
(October 31, 2013 – $1.3 million).
Transactions with associates and joint ventures
In the ordinary course of business, the Bank provides normal banking
services and enters into transactions with its associated and other
related corporations on terms similar to those offered to non-related
parties. If these transactions are eliminated on consolidation, they are
not disclosed as related party transactions. Transactions between the
Bank and its associated companies and joint ventures also qualify as
related party transactions and are as follows:
T64 Transactions with associates and joint ventures
As at and for the year ended October 31 ($ millions) 2014 2013
Net income $ 11 $ 20
Loans 553 511
Deposits 223 287
Guarantees and commitments $ 75 $ 58
Scotiabank principal pension plan
The Bank manages assets of $1.8 billion (October 31, 2013 –
$1.7 billion) which is a portion of the Scotiabank principal pension plan
assets and earned $4 million (October 31, 2013 – $4 million) in fees.
Oversight and governance
The oversight responsibilities of the Audit and Conduct Review
Committee (ACRC) with respect to related party transactions include
reviewing policies and practices for identifying transactions with related
parties that may materially affect the Bank, and reviewing the
procedures for ensuring compliance with the Bank Act for related party
transactions. The Bank Act requirements encompass a broader
definition of related party transactions than is set out in GAAP. The
Bank has various procedures in place to ensure that related party
information is identified and reported to the ACRC on a semi-annual
basis. The ACRC is provided with detailed reports that reflect the
Bank’s compliance with its established procedures.
The Bank’s Internal Audit department carries out audit procedures as
necessary to provide the ACRC with reasonable assurance that the
Bank’s policies and procedures to identify, authorize and report related
party transactions are appropriately designed and operating effectively.
2014 Scotiabank Annual Report 97
MANAGEMENT’S DISCUSSION AND ANALYSIS
SUPPLEMENTARY DATA
Geographic information
T65 Net income by geographic segment
2014 2013 2012
For the fiscal years
($ millions) Canada U.S. Mexico Peru
Other
Inter-
national Total Canada U.S. Mexico Peru
Other
Inter-
national Total Canada U.S. Mexico Peru
Other
Inter-
national Total
Net interest income $6,219 $440 $1,180 $935 $3,576 $12,350 $5,706 $461 $1,048 $895 $3,325 $11,435 $4,747 $527 $846 $832 $3,127 $10,079
Net fee and commission
revenues 5,282 451 495 454 1,344 8,026 4,588 459 452 416 1,204 7,119 4,226 422 416 376 977 6,417
Net income from
investments in
associated corporations 156 – – 6 405 567 239 – 4 5 659 907 214 – 3 4 377 598
Other operating income 1,633 359 104 74 917 3,087 904 287 122 72 948 2,333 1,472 275 58 24 986 2,815
Provision for credit losses 662 6 240 267 528 1,703 472 38 130 246 402 1,288 515 20 89 180 348 1,152
Operating expenses 6,986 513 1,154 645 3,399 12,697 6,441 464 1,050 628 3,230 11,813 5,770 412 857 587 2,914 10,540
Provision for income
taxes 1,156 237 35 175 497 2,100 956 190 61 166 510 1,883 856 286 34 156 367 1,699
Net income $4,486 $494 $ 350 $382 $1,818 $ 7,530 $3,568 $515 $ 385 $348 $1,994 $ 6,810 $3,518 $506 $343 $313 $1,838 $ 6,518
Corporate adjustments
(1)
(232) (200) (128)
$ 7,298 $ 6,610 $ 6,390
Net income attributable
to:
Non-controlling
interests 227 231 196
Preferred shareholders 155 217 220
Common shareholders $ 6,916 $ 6,162 $ 5,974
(1) The adoption of the standard on business combinations results in a change in the definition of net income to exclude non-controlling interests.
T66 Loans and acceptances by geography
(1)
IFRS CGAAP Percentage mix
As at October 31 ($ billions) 2014 2013 2012 2011 2010 2014 2010
Canada
Atlantic provinces $ 25.5 $ 19.2 $ 17.3 $ 15.7 $ 17.0 5.8% 6.0%
Quebec 27.7 25.3 22.3 20.5 17.7 6.3 6.2
Ontario 145.1 145.6 123.7 109.7 101.7 33.1 36.0
Manitoba and Saskatchewan 15.1 13.1 11.5 10.4 6.6 3.4 2.3
Alberta 46.3 42.4 36.7 33.9 21.7 10.6 7.7
British Columbia 43.0 46.3 39.4 36.1 21.1 9.8 7.5
302.7 291.9 250.9 226.3 185.8 69.0 65.7
U.S. 23.5 20.0 20.7 16.7 21.1 5.4 7.5
Mexico 16.0 12.9 10.7 10.3 10.1 3.7 3.6
Other International
Latin America 41.6 36.8 33 28.5 23.4 9.5% 8.3%
Europe 6.3 6.4 6.0 8.7 6.5 1.5 2.3
Caribbean and Central America 27.7 27.0 25.9 17.8 18.8 6.3 6.6
Asia and Other 20.0 21.1 17.2 21.1 17.0 4.6 6.0
95.6 91.3 82.1 76.1 65.7 21.9 23.2
$ 437.8 $ 416.1 $ 364.4 $ 329.4 $ 282.7 100.0% 100.0%
Total allowance for loan losses
(2)
(3.6) (3.3) (3.0) (2.7) (1.4)
Total loans and acceptances net of
allowance for loan losses $ 434.2 $ 412.8 $ 361.4 $ 326.7 $ 281.3
(1) 2011 and 2012 have been restated as follows: deposits with non-bank financial institutions are now excluded (previously classified as loans); loan facilities drawn by way of letters of credit are now excluded; and letters of credit
facilities drawn by way of loans are now included. Periods prior to 2011 reflect balances as at September 30, and General Allowances as at October 31.
(2) Total allowance includes a collective allowance on performing loans of $1,272 million.
98 2014 Scotiabank Annual Report
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T67 Gross impaired loans by geographic segment
IFRS CGAAP
As at October 31 ($ millions) 2014
(1)
2013
(1)
2012
(1)
2011
(1)
2010
Canada $ 1,116 $ 1,022 $ 1,182 $ 1,168 $ 1,276
U.S. 11 184 139 8 179
Mexico 314 223 145 152 250
Peru 423 326 266 230 219
Other International 2,336 1,946 1,890 1,843 2,497
Total $ 4,200 $ 3,701 $ 3,622 $ 3,401 $ 4,421
(1) Excludes Federal Deposit Insurance Corporation (FDIC) guaranteed loans related to the acquisition of R-G Premier Bank of Puerto Rico.
T68 Provision against impaired loans by geographic segment
IFRS CGAAP
For the fiscal years ($ millions) 2014 2013 2012 2011 2010
Canada $ 662 $ 472 $ 515 $ 621 $ 712
U.S. 6 38 20 (12) (13)
Mexico 240 130 89 145 168
Peru 267 246 180 85 104
Other International 528 402 348 297 352
Total $ 1,703 $ 1,288 $ 1,152 $ 1,136 $ 1,323
T69 Cross-border exposure to select countries
(1)
As at
October 31
($ millions) Loans Trade
Interbank
deposits
Government
and other
securities
Investment in
subsidiaries
and affiliates Other
2013
Total
2014
Total
Asia
China $ 3,689 $ 4,342 $ 153 $ 519 $ 359 $ 24 $ 9,087 $ 7,928
Hong Kong 1,377 105 72 171 – 35 1,761 1,795
India 2,123 1,000 – 167 – 34 3,323 3,928
Japan 137 38 89 700 – 791 1,754 768
Malaysia 956 175 – 17 306 32 1,486 1,626
South Korea 1,854 632 – 276 – 60 2,822 3,096
Thailand 8 43 428 53 2,134 4 2,670 2,472
Turkey 370 876 – – – – 1,245 1,772
Other
(2)
1,387 447 125 112 – 113 2,185 2,022
Total $ 11,901 $ 7,657 $ 867 $ 2,014 $ 2,800 $ 1,093 $26,332 $ 25,408
Latin America
Brazil $ 2,717 $ 2,369 – $ 104 $ 181 $ 12 $ 5,384 $ 4,287
Chile 2,712 727 – – 2,668 19 6,126 6,407
Colombia 778 366 – 3 1,455 4 2,606 2,004
Mexico 1,749 427 – 54 3,022 2 5,254 5,145
Peru 2,254 228 – – 2,784 14 5,280 4,582
Uruguay 223 25 – – 335 – 583 475
Other 6 – – – 78 – 84 183
Total $ 10,440 $ 4,142 $ – $ 160 $10,522 $ 52 $25,316 $ 23,084
Caribbean and
Central America
Dominican
Republic $ 800 $ 129 $ 68 $ 14 – $ 3 $ 1,014 $ 956
Jamaica 64 1 – – 435 – 501 596
Other
(3)
1,497 87 12 57 344 2 1,999 2,011
Costa Rica 1,010 152 – – 715 – 1,877 1,755
El Salvador 446 82 – – 488 – 1,016 951
Panama 2,443 181 25 4 – 1 2,653 2,933
Total $ 6,260 $ 632 $ 105 $ 75 $ 1,983 $ 6 $ 9,060 $ 9,203
(1) Cross-border exposure represents a claim, denominated in a currency other than the local one, against a borrower in a foreign country on the basis of ultimate risk. Totals may not add due to rounding.
(2) Includes Indonesia, Macau, Singapore, Taiwan and Vietnam.
(3) Includes other English and Spanish Caribbean countries, such as Bahamas, Barbados, British Virgin Islands, Trinidad & Tobago, Turks & Caicos.
2014 Scotiabank Annual Report 99
MANAGEMENT’S DISCUSSION AND ANALYSIS
Credit Risk
T70 Loans and acceptances by type of borrower
(1)
2014
As at October 31 ($ billions) Balance % of total 2013 2012
(1)
Residential mortgages $ 212.6 48.6% $ 209.9 $ 175.6
Personal loans and credit cards 84.2 19.2 76.0 68.3
Personal $ 296.8 67.8% $ 285.9 $ 243.9
Financial services
Non-bank $ 13.4 3.1% $ 11.7 $ 13.0
Bank
(2)
8.9 2.0 12.1 7.8
Wholesale and retail 16.6 3.8 14.1 13.4
Real estate and construction 15.5 3.5 14.2 12.2
Oil and gas 12.8 2.9 10.4 9.8
Transportation 8.1 1.9 7.8 8.1
Automotive 8.1 1.9 7.4 6.6
Agriculture 7.1 1.6 6.1 5.7
Hospitality and leisure 3.6 0.8 3.4 3.6
Mining and primary metals 6.0 1.4 4.7 3.2
Utilities 5.9 1.3 4.4 5.3
Health care 3.5 0.8 3.6 3.5
Technology and media 5.4 1.2 5.3 5.2
Chemical 1.4 0.3 1.3 1.2
Food and beverage 3.9 0.9 3.1 2.5
Forest products 1.3 0.3 1.5 1.3
Other
(3)
15.3 3.5 14.9 13.8
Sovereign
(4)
4.2 1.0 4.2 4.3
Business and government $ 141.0 32.2% $ 130.2 $ 120.6
$ 437.8 100.0% $ 416.1 $ 364.4
Total allowance for loan losses (3.6) (3.3) (3.0)
Total loans and acceptances net of allowance for loan losses $ 434.2 $ 412.8 $ 361.4
(1) 2012 amounts have been restated as follows: deposits with non-bank financial institutions are now excluded (previously classified as loans); loan facilities drawn by way of letters of credit are now excluded; and letters of credit
facilities drawn by way of loans are now included.
(2) Deposit taking institutions and securities firms.
(3) Other related to $6.5 in financing products, $1.3 in services and $1.2 in wealth management.
(4) Includes central banks, regional and local governments, and supra-national agencies.
T71 Off balance-sheet credit instruments
IFRS CGAAP
As at October 31 ($ billions) 2014 2013 2012 2011 2010
Commitments to extend credit
(1)
$ 137.3 $ 118.8 $ 109.9 $ 104.7 $ 103.6
Standby letters of credit and letters of guarantee 26.0 24.2 22.1 21.1 20.4
Securities lending, securities purchase commitments and other 38.9 28.3 16.2 14.2 14.0
Total $ 202.2 $ 171.3 $ 148.2 $ 140.0 $ 138.0
(1) Excludes commitments which are unconditionally cancellable at the Bank’s discretion at any time.
100 2014 Scotiabank Annual Report
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T72 Changes in net impaired loans
For the fiscal years ($ millions) 2014 2013 2012 2011
Gross impaired loans
(1)
Balance at beginning of year $ 3,701 $ 3,622 $ 3,401 $ 3,714
Net additions
(2)
New additions 3,767 2,863 2,825 2,790
Declassifications (32) (208) (194) –
Payments (1,295) (1,218) (1,183) (1,708)
Sales (141) (9) (36) –
2,299 1,428 1,412 1,082
Write-offs
Residential mortgages (69) (91) (66) (130)
Personal loans (1,027) (728) (733) (374)
Credit cards (463) (449) (299) (628)
Business and government (338) (201) (200) (192)
(1,897) (1,469) (1,298) (1,324)
Foreign exchange and other 97 120 107 (71)
Balance at end of year $ 4,200 $ 3,701 $ 3,622 $ 3,401
Allowance for credit losses on impaired loans
Balance at beginning of year $ 1,893 $ 1,617 $ 1,406 $ 1,385
Provision for credit losses 1,703 1,288 1,252 1,076
Write-offs (1,897) (1,469) (1,298) (1,324)
Recoveries
Residential mortgages 87 40 30 55
Personal loans 223 179 185 71
Credit cards 107 113 76 152
Business and government 93 111 84 71
510 443 375 349
Foreign exchange and other
(3)
(11) 14 (118) (80)
Balance at end of year $ 2,198 $ 1,893 $ 1,617 $ 1,406
Net impaired loans
Balance at beginning of year $ 1,808 $ 2,005 $ 1,995 $ 2,329
Net change in gross impaired loans 499 79 221 (313)
Net change in allowance for credit losses on impaired loans (305) (276) (211) (21)
Balance at end of year $ 2,002 $ 1,808 $ 2,005 $ 1,995
Collective allowance on performing loans (1,272) (1,272) (1,272) (1,224)
Balance, after deducting collective allowance on performing loans, at end of year $ 730 $ 536 $ 733 $ 771
(1) Excludes Federal Deposit Insurance Corporation (FDIC) guaranteed loans related to the acquisition of R-G Premier Bank of Puerto Rico.
(2) 2011 information has been presented in aggregate for declassification, payments and sales in “payments”.
(3) Includes $4 million transferred to/from other liabilities (2013 – $4 million, 2012 – $4 million, 2011 – $8 million).
2014 Scotiabank Annual Report 101
MANAGEMENT’S DISCUSSION AND ANALYSIS
T73 Provision for credit losses
For the fiscal years ($ millions) 2014 2013 2012 2011
Gross provisions $ 2,312 $ 1,829 $ 1,637 $ 1,653
Reversals (99) (98) (110) (168)
Recoveries (510) (443) (375) (349)
Net provision for credit losses on impaired loans 1,703 1,288 1,152 1,136
Collective provision (reversals) on performing loans – – 100 (60)
Total net provision for credit losses $ 1,703 $ 1,288 $ 1,252 $ 1,076
T74 Provision for credit losses against impaired loans by type of borrower
For the fiscal years ($ millions) 2014 2013 2012 2011
Residential mortgages $ – $ 117 $ 112 $ 176
Personal loans and credit cards 1,414 1,004 875 760
Personal $ 1,414 $ 1,121 $ 987 $ 936
Financial services
Non-bank 5 – – (7)
Bank – – 1 –
Wholesale and retail 58 36 30 23
Real estate and construction 61 43 25 29
Oil and gas 3 18 4 48
Transportation 12 (11) 5 43
Automotive 1 – 2 (2)
Agriculture 7 4 17 (1)
Hospitality and leisure 44 9 10 6
Mining and primary metals 12 – (1) 1
Utilities 24 10 2 3
Health care 15 5 13 4
Technology and media 32 6 7 16
Chemical – – – –
Food and beverage 9 2 (1) 3
Forest products – – 7 4
Other 6 42 41 30
Sovereign – 3 3 –
Business and government $ 289 $ 167 $ 165 $ 200
Total provisions against impaired loans $ 1,703 $ 1,288 $ 1,152 $ 1,136
102 2014 Scotiabank Annual Report
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T75 Impaired loans by type of borrower
2014
(1)
2013
(1)
As at October 31 ($ millions) Gross
Allowance
for credit
losses Net Gross
Allowance
for credit
losses Net
Residential mortgages $ 1,491 $ 359 $ 1,132 $ 1,270 $ 338 $ 932
Personal loans and credit cards 1,254 1,225 29 1,046 994 52
Personal $ 2,745 $ 1,584 $ 1,161 $ 2,316 $ 1,332 $ 984
Financial services
Non-bank 15 5 10 3 – 3
Bank 1 1 – 2 1 1
Wholesale and retail 194 127 67 151 86 65
Real estate and construction 270 91 179 351 119 232
Oil and gas 44 51 (7) 81 55 26
Transportation 88 24 64 47 22 25
Automotive 14 4 10 8 3 5
Agriculture 82 41 41 76 34 42
Hospitality and leisure 168 80 88 154 41 113
Mining and primary metals 62 22 40 15 7 8
Utilities 265 20 245 56 12 44
Health care 51 26 25 56 28 28
Technology and media 16 9 7 52 29 23
Chemical 2 – 2 – – –
Food and beverage 54 18 36 23 8 15
Forest products 4 3 1 12 9 3
Other 113 88 25 247 98 149
Sovereign 12 4 8 51 9 42
Business and government $ 1,455 $ 614 $ 841 $ 1,385 $ 561 $ 824
Total $ 4,200 $ 2,198 $ 2,002 $ 3,701 $ 1,893 $ 1,808
(1) Excludes Federal Deposit Insurance Corporation (FDIC) guaranteed loans related to the acquisition of R-G Premier Bank of Puerto Rico.
T76 Total credit risk exposures by geography
(1)(2)
2014 2013
Non-Retail
As at October 31 ($ millions) Drawn Undrawn
Other
exposures
(3)
Retail Total Total
Canada $ 61,914 $26,735 $33,969 $283,100 $405,718 $ 390,613
U.S. 64,690 19,436 32,843 – 116,969 104,366
Mexico 11,473 307 1,032 7,963 20,775 17,859
Peru 12,461 974 2,659 5,297 21,391 17,703
Other International
Europe 13,962 5,787 9,522 – 29,271 30,072
Caribbean and Central America 17,279 1,382 1,519 14,387 34,567 34,034
Latin America 20,460 944 1,372 11,782 34,558 31,856
Other 30,372 3,823 2,993 82 37,270 36,959
Total $232,611 $59,388 $85,909 $322,611 $700,519 $ 663,462
(1) Geographic segmentation is based upon the location of the ultimate risk of the credit exposure. Includes all credit risk portfolios and excludes available-for-sale equities and other assets.
(2) Amounts represent exposure at default.
(3) Includes off-balance sheet lending instruments such as letters of credit, letters of guarantee, derivatives, securitization and repo-style transactions after collateral.
T77 AIRB credit risk exposures by maturity
(1)(2)
As at October 31 ($ millions) 2014 2013
Residual maturity Drawn Undrawn
Other
exposures
(3)
Total Total
Non-retail
Less than 1 year $ 115,182 $ 17,613 $ 46,581 $ 179,376 $ 173,719
One to 5 years 61,439 36,797 30,071 128,307 119,173
Over 5 years 6,961 1,229 6,519 14,709 9,019
Total non-retail $ 183,582 $ 55,639 $ 83,171 $ 322,392 $ 301,911
Retail
Less than 1 year $ 36,048 $ 12,868 $ – $ 48,916 $ 39,325
One to 5 years 154,437 – – 154,437 166,712
Over 5 years 20,138 – – 20,138 14,653
Revolving credits
(4)
36,192 16,196 – 52,388 47,622
Total retail $ 246,815 $ 29,064 $ – $ 275,879 $ 268,312
Total $ 430,397 $ 84,703 $ 83,171 $ 598,271 $ 570,223
(1) Remaining term to maturity of the credit exposure. Includes all credit risk portfolios and excludes available-for-sale equities and other assets.
(2) Exposure at default, before credit risk mitigation.
(3) Off-balance sheet lending instruments, such as letters of credit, letters of guarantee, securitization, derivatives and repo-style transactions after collateral.
(4) Credit cards and lines of credit with unspecified maturity.
2014 Scotiabank Annual Report 103
MANAGEMENT’S DISCUSSION AND ANALYSIS
T78 Total credit risk exposures and risk-weighted assets
2014 2013
AIRB Standardized
(1)
Total Total
As at October 31 ($ millions)
Exposure at
Default
(2)
CET1 risk-
weighted
assets
(3)
Exposure at
Default
(2)
CET1 risk-
weighted
assets
(3)
Exposure at
Default
(2)
CET1 risk-
weighted
assets
(3)
Exposure at
Default
(2)
Risk-
weighted
assets
Non-retail
Corporate
Drawn $ 89,287 $ 50,298 $ 41,334 $ 39,942 $ 130,621 $ 90,240 $ 116,209 $ 82,203
Undrawn 43,395 18,682 3,687 3,632 47,082 22,314 45,758 21,547
Other
(4)
29,099 8,951 2,579 2,545 31,678 11,496 24,902 9,520
161,781 77,931 47,600 46,119 209,381 124,050 186,869 113,270
Bank
Drawn 23,360 6,022 2,523 1,478 25,883 7,500 28,186 9,509
Undrawn 10,895 3,331 59 25 10,954 3,356 12,463 3,968
Other
(4)
8,096 1,398 99 88 8,195 1,486 11,361 2,071
42,351 10,751 2,681 1,591 45,032 12,342 52,010 15,548
Sovereign
Drawn 70,935 4,589 5,172 269 76,107 4,858 69,594 5,013
Undrawn 1,349 139 3 1 1,352 140 1,568 234
Other
(4)
805 33 – – 805 33 4,837 84
73,089 4,761 5,175 270 78,264 5,031 75,999 5,331
Total Non-retail
Drawn 183,582 60,909 49,029 41,689 232,611 102,598 213,989 96,725
Undrawn 55,639 22,152 3,749 3,658 59,388 25,810 59,789 25,749
Other
(4)
38,000 10,382 2,678 2,633 40,678 13,015 41,100 11,675
$ 277,221 $ 93,443 $ 55,456 $ 47,980 $ 332,677 $ 141,423 $ 314,878 $ 134,149
Retail
(5)
.
Retail residential mortgages
Drawn $ 187,364 $ 9,053 $ 23,977 $ 10,713 $ 211,341 $ 19,766 $ 209,581 $ 18,956
Undrawn – – – – – – – –
187,364 9,053 23,977 10,713 211,341 19,766 209,581 18,956
Secured lines of credit
Drawn 19,115 4,487 – – 19,115 4,487 18,241 4,802
Undrawn 12,209 1,282 – – 12,209 1,282 12,856 1,419
31,324 5,769 – – 31,324 5,769 31,097 6,221
Qualifying retail revolving
exposures (QRRE)
Drawn 16,011 9,356 – – 16,011 9,356 15,174 7,105
Undrawn 16,196 2,105 – – 16,196 2,105 12,900 1,672
32,207 11,461 – – 32,207 11,461 28,074 8,777
Other retail
Drawn 24,325 12,355 22,755 16,493 47,080 28,848 40,499 24,412
Undrawn 659 161 – – 659 161 735 90
24,984 12,516 22,755 16,493 47,739 26,009 41,234 24,502
Total retail
Drawn 246,815 35,251 46,732 27,206 293,547 62,457 283,495 55,275
Undrawn 29,064 3,548 – – 29,064 3,548 26,491 3,181
$ 275,879 $ 38,799 $ 46,732 $ 27,206 $ 322,611 $ 66,005 $ 309,986 $ 58,456
Securitization exposures 19,922 4,561 60 60 19,982 4,621 17,975 7,049
Trading derivatives 25,249 8,041 – – 25,249 8,041 20,623 6,977
CVA derivatives – – – 5,632 – 5,632 – –
Subtotal $ 598,271 $ 144,844 $ 102,248 $ 80,878 $ 700,519 $ 225,722 $ 663,462 $ 206,631
Equities 4,269 4,269 – – 4,269 4,269 3,728 3,728
Other assets – – 52,288 23,065 52,288 23,065 55,910 22,250
Total credit risk, before scaling
factor $ 602,540 $ 149,113 $ 154,536 $ 103,943 $ 757,076 $ 253,056 $ 723,100 $ 232,609
Add-on for 6% scaling factor
(6)
– 8,831 – – – 8,831 – 8,331
Total credit risk $ 602,540 $ 157,944 $ 154,536 $ 103,943 $ 757,076 $ 261,887 $ 723,100 $ 240,940
(1) Net of specific allowances for credit losses.
(2) Outstanding amount for on-balance sheet exposures and loan equivalent amount for off-balance sheet exposures, before credit risk mitigation.
(3) At Q4 2014, CVA risk-weighted assets were calculated using scalars of 0.57, 0.65, and 0.77 to compute CET1 capital ratio, Tier 1 capital ratio and Total capital ratio respectively.
(4) Other exposures include off-balance sheet lending instruments, such as letters of credit, letters of guarantee, non-trading derivatives and repo-style exposures, after collateral.
(5) During the year, the Bank implemented new retail probability of default (PD), exposure at default (EAD) and loss given default (LGD) models for credit cards, lines of credit and real estate secured revolving credit.
(6) Basel Committee imposed scaling factor (6%) on risk-weighted assets for Internal ratings-based credit risk portfolios.
104 2014 Scotiabank Annual Report
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Revenues and Expenses
T79 Volume/rate analysis of change in net interest income
TEB
(1)
($ millions)
Increase (decrease) due to change in:
2014 versus 2013
Increase (decrease) due to change in:
2013 versus 2012
Average Average Net Average Average Net
volume rate change volume rate change
Net interest income
Total earning assets $ 1,246 $ (719) $ 527 $ 2,684 $ (1,017) $ 1,667
Total interest-bearing liabilities 381 (811) (430) 1,023 (734) 289
Change in net interest income $ 865 $ 92 $ 957 $ 1,661 $ (283) $ 1,378
Assets
Deposits with banks $ 23 $ (39) $ (16) $ (6) $ (2) $ (8)
Trading assets 10 (5) 5 21 (25) (4)
Securities purchased under resale agreements 27 (38) (11) 73 (104) (31)
Investment securities 21 (121) (100) 150 (193) (43)
Loans:
Residential mortgages 156 33 189 1,492 (573) 919
Personal loans and credit cards 583 (72) 511 476 151 627
Business and government 426 (477) (51) 478 (271) 207
Total loans 1,165 (516) 649 2,446 (693) 1,753
Total earning assets $ 1,246 $ (719) $ 527 $ 2,684 $ (1,017) $ 1,667
Liabilities
Deposits:
Personal $ 85 $ (267) $ (182) $ 556 $ (301) $ 255
Business and government 289 (346) (57) 218 (176) 42
Banks 18 32 50 22 (39) (17)
Total deposits 392 (581) (189) 796 (516) 280
Obligations related to securities sold under repurchase
agreements 36 (46) (10) 112 (89) 23
Subordinated debentures (106) (29) (135) 21 (63) (42)
Other interest bearing liabilities 59 (155) (96) 94 (66) 28
Total interest bearing liabilities $ 381 $ (811) $ (430) $ 1,023 $ (734) $ 289
(1) Refer to non-GAAP measures on page 17. Totals may not add due to rounding.
(2) Prior period amounts have been restated to conform with current year presentation.
T80 Provision for income taxes
For the fiscal years ($ millions) 2014 2013
(1)
2012
(1)
2014
versus
2013
Income taxes
Provision for income taxes $ 2,002 $ 1,737 $ 1,568 15%
Other taxes
Payroll taxes 312 277 247 12
Business and capital taxes 314 274 248 15
Harmonized sales tax and other 295 268 252 10
Total other taxes 921 819 747 12
Total income and other taxes
(2)
$ 2,923 $ 2,556 $ 2,315 14%
Net income before income taxes $ 9,300 $ 8,347 $ 7,958 11%
Effective income tax rate (%) 21.5 20.8 19.7 0.7
Total tax rate (%)
(3)
28.6 27.9 26.6 0.7
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4 in the consolidated financial statements).
(2) Comprising $1,679 million of Canadian taxes (2013 – $1,403 million; 2012 – $1,258 million) and $1,244 million of foreign taxes (2013 – $1,153 million; 2012 – $1,057 million).
(3) Total income and other taxes as a percentage of net income before income and other taxes.
2014 Scotiabank Annual Report 105
MANAGEMENT’S DISCUSSION AND ANALYSIS
T81 Assets under administration and management
($ billions) 2014 2013 2012 2011
Assets under administration
Personal
Retail brokerage $ 148.8 $ 132.9 $ 117.6 $ 108.1
Investment management and trust 95.1 85.2 79.9 72.6
243.9 218.1 197.5 180.7
Mutual funds 122.5 106.8 82.2 73.5
Institutional 61.1 52.9 48.3 43.5
Total $ 427.5 $ 377.8 $ 328.0 $ 297.7
Assets under management
Personal $ 35.7 $ 29.7 $ 24.3 $ 18.4
Mutual funds 110.6 96.5 73.8 67.7
Institutional 18.5 19.3 16.6 16.6
Total $ 164.8 $ 145.5 $ 114.7 $ 102.7
T82 Fees paid to the shareholders’ auditors
For the fiscal years ($ millions) 2014 2013 2012 2011
Audit services $ 24.6 $ 24.4 $ 20.7 $ 18.9
Audit-related services 0.6 1.2 0.5 1.4
Tax services outside of the audit scope – 0.1 0.1 0.1
Other non-audit services 0.7 0.4 0.5 0.5
Total $ 25.9 $ 26.1 $ 21.8 $ 20.9
106 2014 Scotiabank Annual Report
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Selected Quarterly Information
T83 Selected quarterly information
2014 2013
(1)
As at and for the quarter ended Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
Operating results ($ millions)
Net interest income 3,099 3,150 3,051 3,005 2,874 2,930 2,779 2,767
Net interest income (TEB
(2)
) 3,105 3,155 3,054 3,008 2,877 2,935 2,782 2,771
Non-interest revenue 2,648 3,337 2,674 2,640 2,526 2,585 2,434 2,404
Non-interest revenue (TEB
(2)
) 2,743 3,421 2,755 2,717 2,600 2,659 2,513 2,474
Total revenue 5,747 6,487 5,725 5,645 5,400 5,515 5,213 5,171
Total revenue (TEB
(2)
) 5,848 6,576 5,809 5,725 5,477 5,594 5,295 5,245
Provision for credit losses 574 398 375 356 321 314 343 310
Operating expenses 3,361 3,140 2,995 3,105 2,977 3,003 2,856 2,828
Provision for income taxes 374 598 555 475 426 451 432 428
Provision for income taxes (TEB
(2)
) 475 687 639 555 503 530 514 502
Net income 1,438 2,351 1,800 1,709 1,676 1,747 1,582 1,605
Net income attributable to common shareholders 1,343 2,267 1,699 1,607 1,567 1,637 1,467 1,491
Operating performance
Basic earnings per share ($) 1.10 1.86 1.40 1.33 1.30 1.37 1.23 1.26
Diluted earnings per share ($) 1.10 1.85 1.39 1.32 1.29 1.36 1.22 1.24
Adjusted diluted earnings per share
(2)
($) 1.11 1.86 1.40 1.34 1.31 1.38 1.23 1.26
Return on equity
(2)
(%) 11.9 20.6 16.3 15.4 15.8 17.2 16.5 16.8
Productivity ratio (%)(TEB
(2)
) 57.5 47.8 51.6 54.2 54.4 53.7 53.9 53.9
Core banking margin (%)(TEB
(2)
) 2.39 2.41 2.42 2.35 2.31 2.33 2.30 2.29
Financial position information ($ billions)
Cash and deposits with financial institutions 56.7 50.0 59.8 55.3 53.3 52.2 55.2 53.1
Trading assets 113.2 120.4 117.7 113.0 96.5 101.8 104.3 104.5
Loans 424.3 418.9 418.9 414.8 402.2 397.3 394.7 388.7
Total assets 805.7 791.5 791.8 782.8 743.6 742.5 754.3 736.5
Deposits
(3)
554.0 545.1 551.5 539.4 517.9 507.3 520.0 514.7
Common equity 45.0 44.2 43.0 42.4 40.2 38.6 36.9 35.9
Preferred shares 2.9 2.9 3.2 3.8 4.1 4.4 4.4 4.4
Assets under administration
(2)
427.5 421.9 419.0 393.1 377.8 360.5 362.6 352.1
Assets under management
(2)
164.8 164.8 158.8 153.3 145.5 134.6 135.2 130.6
Capital measures
Common Equity Tier 1 (CET1) capital ratio (%) 10.8 10.9 9.8 9.4 9.1 8.9 8.6 8.2
Tier 1 capital ratio (%) 12.2 12.3 11.3 11.2 11.1 11.0 10.7 10.3
Total capital ratio (%) 13.9 14.1 13.3 13.5 13.5 13.8 13.6 13.5
Asset to capital multiple 17.1 16.8 17.9 17.4 17.1 17.1 17.5 17.3
CET1 risk-weighted assets ($ billions) 312.5 307.8 300.2 302.1 288.2 282.3 280.7 280.1
Credit quality
Net impaired loans ($ millions)
(4)
2,002 1,877 1,941 1,833 1,808 1,874 1,809 1,934
Allowance for credit losses ($ millions) 3,641 3,406 3,364 3,361 3,273 3,213 3,220 3,105
Net impaired loans as a % of loans and acceptances
(4)
0.46 0.43 0.45 0.43 0.44 0.46 0.45 0.49
Provision for credit losses as a % of average loans and acceptances
(annualized) 0.53 0.37 0.36 0.34 0.31 0.31 0.35 0.32
Common share information
Share price ($) (TSX)
High 74.39 74.93 66.72 66.75 64.10 60.15 61.84 59.20
Low 64.05 66.18 59.92 60.56 57.35 55.10 56.33 52.30
Close 69.02 74.01 66.60 61.10 63.39 58.01 58.09 58.65
Shares outstanding (millions)
Average – Basic 1,217 1,217 1,215 1,209 1,204 1,198 1,193 1,186
Average – Diluted 1,223 1,225 1,222 1,217 1,210 1,207 1,213 1,204
End of period 1,217 1,217 1,217 1,215 1,209 1,203 1,198 1,192
Dividends per share ($) 0.66 0.64 0.64 0.62 0.62 0.60 0.60 0.57
Dividend yield
(5)
(%) 3.8 3.6 4.0 3.9 4.1 4.2 4.1 4.1
Market capitalization ($ billions) (TSX) 84.0 90.1 81.0 74.2 76.6 69.8 69.6 69.9
Book value per common share ($) 36.96 36.34 35.33 34.87 33.23 32.12 30.82 30.15
Market value to book value multiple 1.9 2.0 1.9 1.8 1.9 1.8 1.9 1.9
Price to earnings multiple (trailing 4 quarters) 12.1 12.6 12.3 11.7 12.3 11.5 10.8 11.0
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4 in the consolidated financial statements). Capital measures have
not been restated for the new IFRS standards as they represent the actual amounts in the period for regulatory purposes.
(2) Refer to page 17 for a discussion of non-GAAP measures.
(3) Prior period amounts have been restated to conform with current period presentation.
(4) Excludes Federal Deposit Insurance Corporation (FDIC) guaranteed loans related to the acquisition of R-G Premier Bank of Puerto Rico.
(5) Based on the average of the high and low common share price for the period.
2014 Scotiabank Annual Report 107
MANAGEMENT’S DISCUSSION AND ANALYSIS
Eleven-Year Statistical Review
T84 Consolidated Statement of Financial Position
IFRS
As at October 31 ($ millions) 2014 2013
(1)
2012
(1)
2011
Assets
Cash and deposits with financial institutions $ 56,730 $ 53,338 $ 47,337 $ 38,723
Precious metals 7,286 8,880 12,387 9,249
Trading assets
Securities 95,363 84,196 74,639 62,192
Loans 14,508 11,225 12,857 13,607
Other 3,377 1,068 100 –
113,248 96,489 87,596 75,799
Financial instruments designated at fair value through profit or loss 111 106 197 375
Securities purchased under resale agreements and securities borrowed 93,866 82,533 66,189 47,181
Derivative financial instruments 33,439 24,503 30,338 37,322
Investment securities 38,662 34,319 33,376 30,176
Loans
Residential mortgages 212,648 209,865 175,630 161,685
Personal and credit cards 84,204 76,008 68,277 63,317
Business and government 131,098 119,615 111,648 96,743
427,950 405,488 355,555 321,745
Allowance for credit losses 3,641 3,273 2,977 2,689
424,309 402,215 352,578 319,056
Other
Customers’ liability under acceptances 9,876 10,556 8,932 8,172
Property and equipment 2,272 2,214 2,218 2,504
Investments in associates 3,461 5,326 4,791 4,434
Goodwill and other intangible assets 10,884 10,704 8,692 7,639
Deferred tax assets 1,763 1,938 2,273 2,214
Other assets 9,759 10,523 11,321 11,579
38,015 41,261 38,227 36,542
$ 805,666 $ 743,644 $ 668,225 $ 594,423
Liabilities
Deposits
Personal $ 175,163 $ 171,048 $ 138,051 $ 133,025
Business and government
(2)
342,367 313,820 293,460 262,833
Financial institutions 36,487 33,019 34,178 25,376
554,017 517,887 465,689 421,234
Financial instruments designated at fair value through profit or loss
(2)
465 174 157 101
Other
Acceptances 9,876 10,556 8,932 8,172
Obligations related to securities sold short 27,050 24,977 18,622 15,450
Derivative financial instruments 36,438 29,267 35,323 40,236
Obligations related to securities sold under repurchase agreements and securities lent 88,953 77,508 56,968 38,216
Subordinated debentures 4,871 5,841 10,143 6,923
Capital instruments – – – 2,003
Other liabilities 34,785 32,047 32,726 29,848
201,973 180,196 162,714 140,848
756,455 698,257 628,560 562,183
Equity
Common equity
Common shares 15,231 14,516 13,139 8,336
Retained earnings 28,609 25,068 21,775 18,421
Accumulated other comprehensive income (loss) 949 388 (745) (497)
Other reserves 176 193 166 96
Total common equity 44,965 40,165 34,335 26,356
Preferred shares 2,934 4,084 4,384 4,384
Total equity attributable to equity holders of the Bank 47,899 44,249 38,719 30,740
Non-controlling interests
Non-controlling interests in subsidiaries 1,312 1,138 946 626
Capital instrument equity holders – – – 874
Total equity 49,211 45,387 39,665 32,240
$ 805,666 $ 743,644 $ 668,225 $ 594,423
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4 in the consolidated financial statements).
(2) Prior period amounts have been restated to conform with current period presentation.
108 2014 Scotiabank Annual Report
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T85 Consolidated Statement of Income
IFRS
For the year ended October 31 ($ millions) 2014 2013
(1)
2012
(1)
2011
Revenue
Interest income
Loans $ 18,176 $ 17,359 $ 15,606 $ 14,373
Securities 921 1,000 1,045 986
Securities purchased under resale agreements and securities borrowed 180 190 221 221
Deposits with financial institutions 263 279 287 275
19,540 18,828 17,159 15,855
Interest expense
Deposits 6,173 6,397 6,117 5,589
Subordinated debentures 204 339 381 369
Capital instruments – – – 138
Other 858 742 691 745
7,235 7,478 7,189 6,841
Net interest income 12,305 11,350 9,970 9,014
Net fee and commission revenues 7,737 6,917 6,246 5,727
Other operating income 3,562 3,032 3,430 2,569
Total revenue 23,604 21,299 19,646 17,310
Provision for credit losses 1,703 1,288 1,252 1,076
Operating expenses 12,601 11,664 10,436 9,481
Income before taxes 9,300 8,347 7,958 6,753
Income tax expense 2,002 1,737 1,568 1,423
Net income $ 7,298 $ 6,610 $ 6,390 $ 5,330
Net income attributable to non-controlling interests $ 227 $ 231 $ 196 $ 149
Non-controlling interests in subsidiaries 227 231 196 91
Capital instrument equity holders – – – 58
Net income attributable to equity holders of the Bank $ 7,071 $ 6,379 $ 6,194 $ 5,181
Preferred shareholders 155 217 220 216
Common shareholders $ 6,916 $ 6,162 $ 5,974 $ 4,965
Earnings per common share (in dollars)
Basic $ 5.69 $ 5.15 $ 5.27 $ 4.63
Diluted $ 5.66 $ 5.11 $ 5.18 $ 4.53
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4 in the consolidated financial statements).
2014 Scotiabank Annual Report 109
MANAGEMENT’S DISCUSSION AND ANALYSIS
T84 Consolidated Balance Sheet – CGAAP
CGAAP
As at October 31 ($ millions) 2010 2009 2008 2007 2006 2005 2004
Assets
Cash resources $ 46,027 $ 43,278 $ 37,318 $ 29,195 $ 23,376 $ 20,505 $ 17,155
Securities
Trading 64,684 58,067 48,292 59,685 62,490 50,007 43,056
Available-for-sale 47,228 55,699 38,823 28,426 – – –
Investment – – – – 32,870 23,285 15,576
Equity accounted investments 4,651 3,528 920 724 142 167 141
116,563 117,294 88,035 88,835 95,502 73,459 58,773
Securities purchased under resale agreements 27,920 17,773 19,451 22,542 25,705 20,578 17,880
Loans
Residential mortgages 120,482 101,604 115,084 102,154 89,590 75,520 69,018
Personal and credit cards 62,548 61,048 50,719 41,734 39,058 34,695 30,182
Business and government 103,981 106,520 125,503 85,500 76,733 62,681 57,384
287,011 269,172 291,306 229,388 205,381 172,896 156,584
Allowance for credit losses 2,787 2,870 2,626 2,241 2,607 2,469 2,696
284,224 266,302 288,680 227,147 202,774 170,427 153,888
Other
Customers’ liability under acceptances 7,616 9,583 11,969 11,538 9,555 7,576 7,086
Derivative instruments 26,852 25,992 44,810 21,960 12,098 12,867 15,488
Land, buildings and equipment 2,450 2,372 2,449 2,061 2,103 1,836 1,823
Other assets 15,005 13,922 14,913 8,232 7,893 6,777 7,119
51,923 51,869 74,141 43,791 31,649 29,056 31,516
$ 526,657 $ 496,516 $ 507,625 $ 411,510 $ 379,006 $ 314,025 $ 279,212
Liabilities and shareholders’ equity
Deposits
Personal $ 128,850 $ 123,762 $ 118,919 $ 100,823 $ 93,450 $ 83,953 $ 79,020
Business and government 210,687 203,594 200,566 161,229 141,072 109,389 94,125
Banks 22,113 23,063 27,095 26,406 29,392 24,103 22,051
361,650 350,419 346,580 288,458 263,914 217,445 195,196
Other
Acceptances 7,616 9,583 11,969 11,538 9,555 7,576 7,086
Obligations related to securities sold under
repurchase agreements 40,286 36,568 36,506 28,137 33,470 26,032 19,428
Obligations related to securities sold short 21,519 14,688 11,700 16,039 13,396 11,250 7,585
Derivative instruments 31,990 28,806 42,811 24,689 12,869 13,004 16,002
Other liabilities 28,947 24,682 31,063 21,138 24,799 18,983 13,785
130,358 114,327 134,049 101,541 94,089 76,845 63,886
Subordinated debentures 5,939 5,944 4,352 1,710 2,271 2,597 2,615
Capital instrument liabilities 500 500 500 500 750 750 2,250
Shareholders’ equity
Preferred shares 3,975 3,710 2,860 1,635 600 600 300
Common shareholders’ equity
Common shares and contributed surplus 5,775 4,946 3,829 3,566 3,425 3,317 3,229
Retained earnings 21,932 19,916 18,549 17,460 15,843 14,126 13,239
Accumulated other comprehensive income
(loss) (4,051) (3,800) (3,596) (3,857) (2,321) (1,961) (1,783)
Total common shareholders’ equity 23,656 21,062 18,782 17,169 16,947 15,482 14,685
Total equity attributable to equity holders of
the Bank 27,631 24,772 21,642 18,804 17,547 16,082 14,985
Non-controlling interests 579 554 502 497 435 306 280
Total shareholders’ equity 28,210 25,326 22,144 19,301 17,982 16,388 15,265
$ 526,657 $ 496,516 $ 507,625 $ 411,510 $ 379,006 $ 314,025 $ 279,212
110 2014 Scotiabank Annual Report
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T85 Consolidated Statement of Income – CGAAP
CGAAP
For the year ended October 31 ($ millions) 2010 2009 2008 2007 2006 2005 2004
Interest income
Loans $ 12,171 $ 13,973 $ 15,832 $ 13,985 $ 11,575 $ 9,236 $ 8,480
Securities 4,227 4,090 4,615 4,680 4,124 3,104 2,662
Securities purchased under resale agreements 201 390 786 1,258 1,102 817 594
Deposits with banks 292 482 1,083 1,112 881 646 441
16,891 18,935 22,316 21,035 17,682 13,803 12,177
Interest expense
Deposits 6,768 8,339 12,131 10,850 8,589 5,755 4,790
Subordinated debentures 289 285 166 116 130 134 112
Capital instrument liabilities 37 37 37 53 53 53 164
Other 1,176 1,946 2,408 2,918 2,502 1,990 1,410
8,270 10,607 14,742 13,937 11,274 7,932 6,476
Net interest income 8,621 8,328 7,574 7,098 6,408 5,871 5,701
Provision for credit losses 1,239 1,744 630 270 216 230 390
Net interest income after provision for credit losses 7,382 6,584 6,944 6,828 6,192 5,641 5,311
Other income 6,884 6,129 4,302 5,392 4,800 4,529 4,320
Net interest and other income 14,266 12,713 11,246 12,220 10,992 10,170 9,631
Non-interest expenses
Salaries and employee benefits 4,647 4,344 4,109 3,983 3,768 3,488 3,452
Other 3,535 3,575 3,187 3,011 2,675 2,555 2,410
8,182 7,919 7,296 6,994 6,443 6,043 5,862
Income before income taxes 6,084 4,794 3,950 5,226 4,549 4,127 3,769
Provision for income taxes 1,745 1,133 691 1,063 872 847 786
Net income $ 4,339 $ 3,661 $ 3,259 $ 4,163 $ 3,677 $ 3,280 $ 2,983
Net income attributable to non-controlling interests $ 100 $ 114 $ 119 $ 118 $ 98 $ 71 $ 75
Net income attributable to equity holders of the Bank 4,239 3,547 3,140 4,045 3,579 3,209 2,908
Preferred shareholders 201 186 107 51 30 25 16
Common shareholders $ 4,038 $ 3,361 $ 3,033 $ 3,994 $ 3,549 $ 3,184 $ 2,892
Average number of common shares outstanding
(millions)
Basic 1,032 1,013 987 989 988 998 1,010
Diluted 1,034 1,016 993 997 1,001 1,012 1,026
Earnings per common share (in dollars)
(1)
Basic $ 3.91 $ 3.32 $ 3.07 $ 4.04 $ 3.59 $ 3.19 $ 2.87
Diluted $ 3.91 $ 3.31 $ 3.05 $ 4.01 $ 3.55 $ 3.15 $ 2.82
Dividends per common share (in dollars) $ 1.96 $ 1.96 $ 1.92 $ 1.74 $ 1.50 $ 1.32 $ 1.10
(1) The calculation of earnings per share is based on full dollar and share amounts.
2014 Scotiabank Annual Report 111
MANAGEMENT’S DISCUSSION AND ANALYSIS
T86 Consolidated Statement of Changes in Equity
IFRS
For the year ended October 31 ($ millions) 2014 2013
(1)
2012
(1)
2011
Common shares
Balance at beginning of year $ 14,516 $ 13,139 $ 8,336 $ 5,750
Issued 771 1,377 4,803 2,586
Purchased for cancellation (56) – – –
Balance at end of year $ 15,231 $ 14,516 $ 13,139 $ 8,336
Retained earnings
Balance at beginning of year 25,315 21,978 18,421 21,932
IFRS adjustment (247) (203) (144) (6,248)
Restated balances 25,068 21,775 18,277 15,684
Adjustments – – – –
Net income attributable to common shareholders of the Bank
(4)
6,916 6,162 5,974 4,965
Dividends: Preferred
(5)
– – – –
Common (3,110) (2,858) (2,493) (2,200)
Purchase of shares for cancellation and premium on redemption (264) – – –
Other (1) (11) 17 (28)
Balance at end of year $ 28,609 $ 25,068 $ 21,775 $ 18,421
Accumulated other comprehensive income (loss)
Balance at beginning of year 545 (31) (497) (4,051)
IFRS adjustment (157) (714) 32 4,320
Restated balances 388 (745) (465) 269
Cumulative effect of adopting new accounting policies – – – –
Other comprehensive income (loss) 561 1,133 (280) (766)
Balance at end of year $ 949 $ 388 $ (745) $ (497)
Other reserves
(7)
Balance at beginning of year 193 166 96 25
Share-based payments 30 36 38 46
Other (47) (9) 32 25
Balance at end of year $ 176 $ 193 $ 166 $ 96
Total common equity $ 44,965 $ 40,165 $ 34,335 $ 26,356
Preferred shares
Balance at beginning of year 4,084 4,384 4,384 3,975
Net income attributable to preferred shareholders of the Bank
(4)
155 217 220 216
Preferred dividends
(5)
(155) (217) (220) (216)
Issued – – – 409
Redeemed (1,150) (300) – –
Balance at end of year $ 2,934 $ 4,084 $ 4,384 $ 4,384
Non-controlling interests
Balance at beginning of year 1,155 1,743 1,500 579
IFRS adjustment (17) (797) (891) 936
Restated balances 1,138 946 609 1,515
Net income attributable to non-controlling interests 227 231 196 149
Distributions to non-controlling interests (76) (80) (44) (181)
Effect of foreign exchange and others 23 41 185 17
Balance at end of year $ 1,312 $ 1,138 $ 946 $ 1,500
Total equity at end of year $ 49,211 $ 45,387 $ 39,665 $ 32,240
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4 in the consolidated financial statements).
(2) Relates to the adoption of new financial instruments accounting standards under CGAAP.
(3) Relates to the adoption of new stock-based compensation accounting standard under CGAAP.
(4) Under CGAAP, net income attributable to preferred shareholders was included in retained earnings.
(5) Under IFRS, preferred dividends are recorded as a reduction to preferred shareholders’ equity. Under CGAAP, dividends are a reduction to retained earnings.
(6) Relates to the adoption of the new accounting standard for impairment and classification of financial instruments under CGAAP.
(7) Under CGAAP, amounts represent Contributed Surplus.
T87 Consolidated Statement of Comprehensive Income
IFRS
For the year ended October 31 ($ millions) 2014 2013
(1)
2012
(1)
2011
Net income $ 7,298 $ 6,610 $ 6,390 $ 5,330
Other comprehensive income (loss), net of income taxes:
Net change in unrealized foreign currency translation gains (losses) 889 346 149 (697)
Net change in unrealized gains (losses) on available-for-sale securities (38) 110 151 (169)
Net change in gains (losses) on derivative instruments designated as cash flow hedges (6) 93 116 105
Net change in remeasurement of employee benefit plan asset and liability
(2)
(320) 563 (747) –
Other comprehensive income from investments in associates 58 20 25 –
Other comprehensive income (loss) 583 1,132 (306) (761)
Comprehensive income $ 7,881 $ 7,742 $ 6,084 $ 4,569
Comprehensive income attributable to:
Common shareholders of the Bank $ 7,477 $ 7,298 $ 5,694 $ 4,199
Preferred shareholders of the Bank 155 217 220 216
Non-controlling interests in subsidiaries 249 227 170 96
Capital instrument equity holders – – – 58
$ 7,881 $ 7,742 $ 6,084 $ 4,569
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4 in the consolidated financial statements).
(2) Amounts recorded for remeasurement of employee benefits plan assets and liabilities will not be reclassified to the Consolidated Statement of Income.
112 2014 Scotiabank Annual Report
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CGAAP
2010 2009 2008 2007 2006 2005 2004
$ 4,946 $ 3,829 $ 3,566 $ 3,425 $ 3,316 $ 3,228 $ 3,140
804 1,117 266 184 135 172 117
– – (3) (43) (26) (84) (29)
$ 5,750 $ 4,946 $ 3,829 $ 3,566 $ 3,425 $ 3,316 $ 3,228
19,916 18,549 17,460 15,843 14,126 13,239 11,747
– – – – – – –
– – – – – – –
– – – (61)
(2)
(25)
(3)
– –
4,239 3,547 3,140 4,045 3,579 3,209 2,908
(201) (186) (107) (51) (30) (25) (16)
(2,023) (1,990) (1,896) (1,720) (1,483) (1,317) (1,110)
– – (37) (586) (324) (973) (290)
1 (4) (11) (10) – (7) –
$ 21,932 $ 19,916 $ 18,549 $ 17,460 $ 15,843 $ 14,126 $ 13,239
(3,800) (3,596) (3,857) (2,321) (1,961) (1,783) (1,074)
– – – – – – –
– – – – – – –
– 595
(6)
– 683 – – –
(251) (799) 261 (2,219) (360) (178) (709)
$ (4,051) $ (3,800) $ (3,596) $ (3,857) $ (2,321) $ (1,961) $ (1,783)
– – – – 1 1 1
25 – – – (1) – –
– – – – – – –
$ 25 $ – $ – $ – $ – $ 1 $ 1
$ 23,656 $ 21,062 $ 18,782 $ 17,169 $ 16,947 $ 15,482 $ 14,685
3,710 2,860 1,635 600 600 300 300
– – – – – – –
– – – – – – –
265 850 1,225 1,035 – 300 –
– – – – – – –
$ 3,975 $ 3,710 $ 2,860 $ 1,635 $ 600 $ 600 $ 300
554 502 N/A N/A N/A N/A N/A
– – – – – – –
– – – – – – –
100 114 N/A N/A N/A N/A N/A
(35) (36) N/A N/A N/A N/A N/A
(40) (26) N/A N/A N/A N/A N/A
$ 579 $ 554 $ 502 $ 497 $ 435 $ 306 $ 280
$ 28,210 $ 25,326 $ 22,144 $ 19,301 $ 17,982 $ 16,388 $ 15,265
CGAAP
2010 2009 2008 2007 2006 2005 2004
$ 4,339 $ 3,661 $ 3,259 $ 4,163 $ 3,677 $ 3,280 $ 2,983
(591) (1,736) 2,368 (2,228) (360) (178) (709)
278 894 (1,588) (67) – – –
62 43 (519) 76 – – –
– – – – – – –
– – – – – – –
(251) (799) 261 (2,219) (360) (178) (709)
$ 4,088 $ 2,862 $ 3,520 $ 1,944 $ 3,317 $ 3,102 $ 2,274
$ 3,787 $ 2,562 $ 3,294 $ 1,775 $ 3,189 $ 3,006 $ 2,183
201 186 107 51 30 25 16
100 114 119 118 98 71 75
– – – – – – –
$ 4,088 $ 2,862 $ 3,520 $ 1,944 $ 3,317 $ 3,102 $ 2,274
2014 Scotiabank Annual Report 113
MANAGEMENT’S DISCUSSION AND ANALYSIS
T88 Other statistics
IFRS
For the year ended October 31 2014 2013
(1)
2012
(1)
2011
Operating performance
Basic earnings per share ($) 5.69 5.15 5.27 4.63
Diluted earnings per share ($) 5.66 5.11 5.18 4.53
Return on equity (%)
(2)
16.1 16.6 19.9 20.3
Productivity ratio (%)(TEB
(2)
) 52.6 54.0 52.4 53.9
Return on assets (%) 0.92 0.88 0.97 0.91
Core banking margin (%)(TEB
(2)
) 2.39 2.31 2.31 2.32
Net interest margin on total average assets (%)(TEB) N/A N/A N/A N/A
Capital measures
(3)
Common Equity Tier 1 (CET1) capital ratio (%) 10.8 9.1 N/A N/A
Tier 1 capital ratio (%) 12.2 11.1 13.6 12.2
Total capital ratio (%) 13.9 13.5 16.7 13.9
Assets to capital multiple 17.1 17.1 15.0 16.6
Common share information
Share price ($) – (TSX):
High 74.93 64.10 57.18 61.28
Low 59.92 52.30 47.54 49.00
Close 69.02 63.39 54.25 52.53
Number of shares outstanding (millions) 1,217 1,209 1,184 1,089
Dividends per share ($) 2.56 2.39 2.19 2.05
Dividend yield (%)
(4)
3.8 4.1 4.2 3.7
Price to earnings multiple
(5)
12.1 12.3 10.3 11.3
Book value per common share ($) 36.96 33.23 28.99 24.20
Other information
Average total assets ($ millions) 795,641 748,901 659,538 586,101
Number of branches and offices 3,288 3,330 3,123 2,926
Number of employees 86,932 86,690
(6)
81,497 75,362
Number of automated banking machines 8,732 8,471 7,341 6,260
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4 in the consolidated financial statements). Capital measures have
not been restated for the new IFRS standards as they represent the actual amounts in the period for regulatory purposes.
(2) Refer to page 17 for a discussion of non-GAAP measures.
(3) Effective November 1, 2012, regulatory capital ratios are determined in accordance with Basel III rules as an all-in basis (refer page 41). Comparative amounts for period, 2012-2007 were determined in accordance with Basel II
rules. Amounts prior to 2007 were determined in accordance with Basel I rules and have not been restated.
(4) Based on the average of the high and low common share price for the year.
(5) Based on the closing common share price.
(6) Restated to conform with current period presentation.
114 2014 Scotiabank Annual Report
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3.91 3.32 3.07 4.04 3.59 3.19 2.87
3.91 3.31 3.05 4.01 3.55 3.15 2.82
18.3 16.7 16.7 22.0 22.1 20.9 19.9
51.8 53.7 59.4 53.7 55.3 56.3 56.9
0.84 0.71 0.72 1.03 1.05 1.06 1.05
N/A N/A N/A N/A N/A N/A N/A
1.73 1.68 1.75 1.89 1.95 2.00 2.10
N/A N/A N/A N/A N/A N/A N/A
11.8 10.7 9.3 9.3 10.2 11.1 11.5
13.8 12.9 11.1 10.5 11.7 13.2 13.9
17.0 16.6 18.0 18.2 17.1 15.1 13.8
55.76 49.19 54.00 54.73 49.80 44.22 40.00
44.12 23.99 35.25 46.70 41.55 36.41 31.08
54.67 45.25 40.19 53.48 49.30 42.99 39.60
1,043 1,025 992 984 990 990 1,009
1.96 1.96 1.92 1.74 1.50 1.32 1.10
3.9 5.4 4.3 3.4 3.3 3.3 3.1
14.0 13.6 13.1 13.2 13.7 13.5 13.8
22.68 20.55 18.94 17.45 17.13 15.64 14.56
515,991 513,149 455,539 403,475 350,709 309,374 283,986
2,784 2,686 2,672 2,331 2,191 1,959 1,871
70,772 67,802 69,049 58,113 54,199 46,631 43,928
5,978 5,778 5,609 5,283 4,937 4,449 4,219
2014 Scotiabank Annual Report 115
MANAGEMENT’S DISCUSSION AND ANALYSIS
Management’s Report on Internal Control Over Financial Reporting
The management of The Bank of Nova Scotia (the Bank) is responsible
for establishing and maintaining adequate internal control over
financial reporting, and have designed such internal control over
financial reporting to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with International
Financial Reporting Standards as issued by The International
Accounting Standards Board.
Management has used the Internal Control – Integrated Framework
(1992) to evaluate the effectiveness of internal control over financial
reporting, which is a recognized and suitable framework developed by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Management has evaluated the design and operation of the Bank’s
internal control over financial reporting as of October 31, 2014, and
has concluded that such internal control over financial reporting is
effective. There are no material weaknesses that have been identified
by management in this regard.
KPMG LLP, the independent auditors appointed by the shareholders
of the Bank, who have audited the consolidated financial statements,
have also audited internal control over financial reporting and have
issued their report below.
Brian Porter Sean McGuckin
President and Chief Executive Officer Executive Vice President and
Chief Financial Officer
Toronto, Canada
December 5, 2014
Report of Independent Registered Public Accounting Firm
To the Shareholders of The Bank of Nova Scotia
We have audited The Bank of Nova Scotia’s internal control over
financial reporting as of October 31, 2014, based on criteria
established in Internal Control – Integrated Framework (1992) issued by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Bank of Nova Scotia’s management is
responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying “Management’s
Report on Internal Control over Financial Reporting”. Our responsibility
is to express an opinion on The Bank of Nova Scotia’s internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, The Bank of Nova Scotia maintained, in all material
respects, effective internal control over financial reporting as of
October 31, 2014, based on criteria established in Internal Control –
Integrated Framework (1992) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with Canadian generally
accepted auditing standards and the standards of the Public Company
Accounting Oversight Board (United States), the consolidated
statements of financial position of The Bank of Nova Scotia as at
October 31, 2014 and October 31, 2013, the consolidated statements
of income, comprehensive income, changes in equity and cash flows
for each of the years in the three-year period ended October 31, 2014,
and notes, comprising a summary of significant accounting policies and
other explanatory information, and our report dated December 5, 2014
expressed an unmodified (unqualified) opinion on those consolidated
financial statements.
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
December 5, 2014
116 2014 Scotiabank Annual Report
9
Consolidated
Financial Statements
Table of Contents
118 Management’s Responsibility for Financial Information
119 Independent Auditors’ Report of Registered Public Accounting Firm
120 Consolidated Statement of Financial Position
121 Consolidated Statement of Income
122 Consolidated Statement of Comprehensive Income
123 Consolidated Statement of Changes in Equity
124 Consolidated Statement of Cash Flows
125 Notes to the 2014 Consolidated Financial Statements
2014 Scotiabank Annual Report 117
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 judgement 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 business conduct
throughout the Bank.
Management, under the supervision of and the participation of the
President and Chief Executive Officer and the 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, 2014 and October 31, 2013 and its
consolidated financial performance and its consolidated cash flows for
each of the years in the three-year period ended October 31, 2014
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 opinion upon completion of such
audits in the following report 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 Porter
President and Chief Executive Officer
Sean McGuckin
Executive Vice-President
and Chief Financial Officer
Toronto, Canada
December 5, 2014
118 2014 Scotiabank Annual Report
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Independent Auditors’ Report of Registered Public Accounting Firm
To the Shareholders of The Bank of Nova Scotia
We have audited the accompanying consolidated financial statements
of The Bank of Nova Scotia, which comprise the consolidated
statements of financial position as at October 31, 2014 and
October 31, 2013, the consolidated statements of income,
comprehensive income, changes in equity and cash flows for each of
the years in the three-year period ended October 31, 2014, and notes,
comprising a summary of significant accounting policies and other
explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of
these consolidated financial statements in accordance with
International Financial Reporting Standards as issued by the
International Accounting Standards Board, and for such internal control
as management determines is necessary to enable the preparation of
consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our audits in
accordance with Canadian generally accepted auditing standards and
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free
from material misstatement.
An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on our judgment,
including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In
making those risk assessments, we consider internal control relevant to
the Bank’s preparation and fair presentation of the consolidated
financial statements in order to design audit procedures that are
appropriate in the circumstances. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of
accounting estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits
is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in
all material respects, the consolidated financial position of The Bank of
Nova Scotia as at October 31, 2014 and October 31, 2013 and its
consolidated financial performance and its consolidated cash flows for
each of the years in the three-year period ended October 31, 2014 in
accordance with International Financial Reporting Standards as issued
by the International Accounting Standards Board.
Other Matter
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), The Bank of
Nova Scotia’s internal control over financial reporting as of October 31,
2014, based on the criteria established in Internal Control – Integrated
Framework (1992) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated December 5, 2014 expressed an unmodified (unqualified)
opinion on the effectiveness of The Bank of Nova Scotia’s internal
control over financial reporting.
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
December 5, 2014
2014 Scotiabank Annual Report 119
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Financial Position
As at October 31 ($ millions) Note 2014 2013
(1)
Assets
Cash and deposits with financial institutions 6 $ 56,730 $ 53,338
Precious metals 7,286 8,880
Trading assets
Securities 8(a) 95,363 84,196
Loans 8(b) 14,508 11,225
Other 3,377 1,068
113,248 96,489
Financial instruments designated at fair value through profit or loss 9 111 106
Securities purchased under resale agreements and securities borrowed 93,866 82,533
Derivative financial instruments 10 33,439 24,503
Investment securities 12 38,662 34,319
Loans
Residential mortgages 13 212,648 209,865
Personal and credit cards 13 84,204 76,008
Business and government 13 131,098 119,615
427,950 405,488
Allowance for credit losses 14(b) 3,641 3,273
424,309 402,215
Other
Customers’ liability under acceptances 9,876 10,556
Property and equipment 17 2,272 2,214
Investments in associates 18 3,461 5,326
Goodwill and other intangible assets 19 10,884 10,704
Deferred tax assets 30(c) 1,763 1,938
Other assets 20 9,759 10,523
38,015 41,261
$ 805,666 $ 743,644
Liabilities
Deposits
Personal 22 $ 175,163 $ 171,048
Business and government
(2)
22 342,367 313,820
Financial institutions 22 36,487 33,019
554,017 517,887
Financial instruments designated at fair value through profit or loss
(2)
9 465 174
Other
Acceptances 9,876 10,556
Obligations related to securities sold short 27,050 24,977
Derivative financial instruments 10 36,438 29,267
Obligations related to securities sold under repurchase agreements and securities lent 88,953 77,508
Subordinated debentures 23 4,871 5,841
Other liabilities 24 34,785 32,047
201,973 180,196
756,455 698,257
Equity
Common equity
Common shares 26 15,231 14,516
Retained earnings 28,609 25,068
Accumulated other comprehensive income (loss) 949 388
Other reserves 176 193
Total common equity 44,965 40,165
Preferred shares 27 2,934 4,084
Total equity attributable to equity holders of the Bank 47,899 44,249
Non-controlling interests in subsidiaries 34(b) 1,312 1,138
49,211 45,387
$ 805,666 $ 743,644
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4).
(2) Prior period amounts have been reclassified to conform with current period presentation.
Thomas C. O’Neill Brian Porter
Chairman of the Board President and Chief Executive Officer
The accompanying notes are an integral part of these consolidated financial statements.
120 2014 Scotiabank Annual Report
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Consolidated Statement of Income
For the year ended October 31 ($ millions) Note 2014 2013
(1)
2012
(1)
Revenue
Interest income
Loans $ 18,176 $ 17,359 $ 15,606
Securities 921 1,000 1,045
Securities purchased under resale agreements and securities borrowed 180 190 221
Deposits with financial institutions 263 279 287
19,540 18,828 17,159
Interest expense
Deposits 6,173 6,397 6,117
Subordinated debentures 204 339 381
Other 858 742 691
7,235 7,478 7,189
Net interest income 12,305 11,350 9,970
Fee and commission revenues
Banking 35 3,739 3,470 3,187
Wealth management 35 2,794 2,493 2,170
Underwriting and other advisory 712 503 493
Non-trading foreign exchange 420 404 365
Other 412 345 293
8,077 7,215 6,508
Fee and commission expenses 340 298 262
Net fee and commission revenues 7,737 6,917 6,246
Other operating income
Trading revenues 36 1,114 1,300 1,299
Net gain on sale of investment securities 12(d) 741 375 185
Net income from investments in associated corporations 18 428 681 448
Insurance underwriting income, net of claims 474 448 388
Other 18, 41 805 228 1,110
3,562 3,032 3,430
Total revenue 23,604 21,299 19,646
Provision for credit losses 14(b) 1,703 1,288 1,252
21,901 20,011 18,394
Operating expenses
Salaries and employee benefits 6,743 6,407 5,802
Premises and technology 1,936 1,815 1,607
Depreciation and amortization 526 516 446
Communications 417 409 373
Advertising and business development 571 505 450
Professional 471 432 340
Business and capital taxes 314 274 248
Other 25 1,623 1,306 1,170
12,601 11,664 10,436
Income before taxes 9,300 8,347 7,958
Income tax expense 2,002 1,737 1,568
Net income $ 7,298 $ 6,610 $ 6,390
Net income attributable to non-controlling interests in subsidiaries 34(b) $ 227 $ 231 $ 196
Net income attributable to equity holders of the Bank $ 7,071 $ 6,379 $ 6,194
Preferred shareholders 155 217 220
Common shareholders $ 6,916 $ 6,162 $ 5,974
Earnings per common share (in dollars)
Basic 37 $ 5.69 $ 5.15 $ 5.27
Diluted 37 $ 5.66 $ 5.11 $ 5.18
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4).
The accompanying notes are an integral part of these consolidated financial statements.
2014 Scotiabank Annual Report 121
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Comprehensive Income
For the year ended October 31 ($ millions) 2014 2013
(1)
2012
(1)
Net income $ 7,298 $ 6,610 $ 6,390
Other comprehensive income (loss)
Net change in unrealized foreign currency translation gains (losses):
Net unrealized foreign currency translation gains (losses) 1,607 687 85
Net gains (losses) on hedges of net investments in foreign operations (943) (469) (33)
Income tax expense (benefit):
Net unrealized foreign currency translation gains (losses) 25 (1) (62)
Net gains (losses) on hedges of net investments in foreign operations (250) (127) (35)
889 346 149
Net change in unrealized gains (losses) on available-for-sale securities:
Net unrealized gains (losses) on available-for-sale securities 801 378 331
Reclassification of net (gains) losses to net income
(2)
(934) (289) (176)
Income tax expense (benefit):
Net unrealized gains (losses) on available-for-sale securities 186 79 58
Reclassification of net (gains) losses to net income (281) (100) (54)
(38) 110 151
Net change in gains (losses) on derivative instruments designated as cash flow hedges:
Net gains (losses) on derivative instruments designated as cash flow hedges 441 280 32
Reclassification of net (gains) losses to net income (447) (155) 124
Income tax expense (benefit):
Net gains (losses) on derivative instruments designated as cash flow hedges 137 85 3
Reclassification of net (gains) losses to net income (137) (53) 37
(6) 93 116
Net change in remeasurement of employee benefit plan asset and liability:
(3)
Actuarial gains (losses) on employee benefit plans (432) 774 (1,024)
Income tax expense (benefit) (112) 211 (277)
(320) 563 (747)
Other comprehensive income from investments in associates 58 20 25
Other comprehensive income (loss) 583 1,132 (306)
Comprehensive income $ 7,881 $ 7,742 $ 6,084
Comprehensive income attributable to non-controlling interests $ 249 $ 227 $ 170
Comprehensive income attributable to equity holders of the Bank $ 7,632 $ 7,515 $ 5,914
Preferred shareholders 155 217 220
Common shareholders $ 7,477 $ 7,298 $ 5,694
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4).
(2) Includes amounts related to qualifying hedges.
(3) Amounts recorded for remeasurement of employee benefits plan assets and liabilities will not be reclassified to the Consolidated Statement of Income.
The accompanying notes are an integral part of these consolidated financial statements.
122 2014 Scotiabank Annual Report
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2014 Scotiabank Annual Report 123
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Cash Flows
Sources (uses) of cash flows for the year ended October 31 ($ millions) 2014 2013
(1)
2012
(1)
Cash flows from operating activities
Net income $ 7,298 $ 6,610 $ 6,390
Adjustment for:
Net interest income (12,305) (11,350) (9,970)
Depreciation and amortization 526 516 446
Provisions for credit losses 1,703 1,288 1,252
Equity-settled share-based payment expense 30 36 38
Net gain on sale of investment securities (741) (375) (185)
Realized gain on sale of an investment in an associate (469) – –
Unrealized gain on reclassification of an investment in an associate (174) – –
Net income from investments in associated corporations (428) (681) (448)
Gain on sale of property and equipment (33) (50) (864)
Provision for income taxes 2,002 1,737 1,568
Changes in operating assets and liabilities:
Trading assets (13,848) (6,793) (11,976)
Securities purchased under resale agreements and securities borrowed (7,526) (9,866) (19,514)
Loans (16,785) (16,006) (29,559)
Deposits 20,224 6,028 36,109
Obligations related to securities sold short 1,506 5,458 3,560
Obligations related to assets sold under repurchase agreements and securities lent 7,306 17,455 18,955
Net derivative financial instruments (1,147) 282 2,203
Other, net 7,214 4,758 (575)
Dividends received 1,063 1,139 1,026
Interest received 18,438 18,011 16,229
Interest paid (7,509) (7,688) (7,386)
Income tax paid (1,401) (1,555) (1,006)
Net cash from/(used in) operating activities 4,944 8,954 6,293
Cash flows from investing activities
Interest-bearing deposits with financial institutions 213 (4,079) (6,557)
Purchase of investment securities (47,328) (47,894) (34,856)
Proceeds from sale and maturity of investment securities 44,876 52,652 31,778
Acquisition/sale of subsidiaries, associated corporations or business units, net of cash acquired 2,045 (3,439) (458)
Proceeds from disposal of real estate assets – – 1,407
Other property and equipment, net of disposals (277) (180) (435)
Other, net (115) (324) (298)
Net cash from/(used in) investing activities (586) (3,264) (9,419)
Cash flows from financing activities
Proceeds from subordinated debentures – – 3,250
Redemption/repayment of subordinated debentures (1,000) (4,210) (20)
Redemption of preferred shares (1,150) (300) –
Proceeds from common shares issued 753 1,256 4,200
Common shares purchased for cancellation (320) – –
Cash dividends paid (3,265) (3,075) (2,713)
Distributions to non-controlling interests (76) (80) (44)
Other, net 872 30 283
Net cash from/(used in) financing activities (4,186) (6,379) 4,956
Effect of exchange rate changes on cash and cash equivalents 207 102 (88)
Net change in cash and cash equivalents 379 (587) 1,742
Cash and cash equivalents at beginning of year
(2)
5,449 6,036 4,294
Cash and cash equivalents at end of year
(2)
$ 5,828 $ 5,449 $ 6,036
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4).
(2) 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.
124 2014 Scotiabank Annual Report
Notes to the
2014 Consolidated
Financial Statements
Table of Contents
Page Note
126 1 Reporting entity
126 2 Basis of preparation
126 3 Significant accounting
policies
138 4 Recently adopted accounting
standards
140 5 Future accounting developments
141 6 Cash and deposits
with financial institutions
141 7 Fair value of financial instruments
149 8 Trading assets
150 9 Financial instruments designated at
fair value through profit or loss
151 10 Derivative financial instruments
155 11 Offsetting financial assets and
financial liabilities
156 12 Investment securities
159 13 Loans
161 14 Impaired loans and allowance for
credit losses
162 15 Derecognition of financial assets
163 16 Structured entities
165 17 Property and equipment
166 18 Investments in associates
167 19 Goodwill and other intangible assets
168 20 Other assets
Page Note
168 21 Leases
169 22 Deposits
169 23 Subordinated debentures
170 24 Other liabilities
170 25 Provisions
170 26 Common shares
171 27 Preferred shares
173 28 Capital management
174 29 Share-based payments
177 30 Corporate income taxes
179 31 Employee benefits
183 32 Operating segments
186 33 Related party transactions
187 34 Principal subsidiaries and
non-controlling interests in
subsidiaries
188 35 Fee and commission revenues
189 36 Trading revenues
189 37 Earnings per share
189 38 Guarantees and commitments
191 39 Financial instruments – risk
management
200 40 Contractual maturities
202 41 Business combinations, other
acquisitions and divestitures
203 42 Events after the Consolidated
Statement of Financial Position date
2014 Scotiabank Annual Report 125
CONSOLIDATED FINANCIAL STATEMENTS
1 Reporting entity
The Bank of Nova Scotia (the Bank) is a chartered bank under the Bank
Act (Canada) (the Bank Act). The Bank is a Schedule I Bank under 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, Canada. The common shares of the Bank are listed on
the Toronto Stock Exchange 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
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,
2014 have been approved for issue by the Board of Directors on
December 5, 2014.
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:
Š Financial assets and liabilities held-for-trading
Š Financial assets and liabilities designated at fair value through profit
or loss
Š Derivative financial instruments
Š Available-for-sale investment securities
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.
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 and that the processes for changing
methodologies for determining estimates are controlled and occur in a
timely and systematic manner. 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 and in
any future years affected.
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 financial statements, and income and expenses during
the reporting period. Estimates made by management are based on
historical experience and other 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, the
fair value of all identifiable assets and liabilities as a result of business
combinations, impairment of investment securities, impairment of non-
financial assets and derecognition of financial assets and liabilities.
While management makes its best estimates and assumptions, actual
results could differ from these and other estimates. Refer to the
relevant accounting policies in Note 3 for details on the Bank’s use of
estimates and assumptions.
Significant changes in estimates during the year
During the fourth quarter of 2014, the Bank implemented a valuation
adjustment (Funding Valuation Adjustment – FVA) to reflect the
implied funding cost on uncollateralized derivative instruments. This
implementation resulted in an FVA charge in trading income of
$30 million in the Consolidated Statement of Income.
Significant judgments
In 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
involvement with other entities.
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 – page 131
Note 14 – page 161
Fair value of financial instruments Note 3 – page 128
Note 7 – page 141
Corporate income taxes Note 3 – page 134
Note 30 – page 177
Employee benefits Note 3 – page 136
Note 31 – page 179
Goodwill and intangible assets Note 3 – page 133
Note 19 – page 167
Fair value of all identifiable assets
and liabilities as a result of
business combination
Note 3 – page 133
Note 41 – page 202
Impairment of investment securities Note 3 – page 130
Note 12 – page 156
Impairment of non-financial assets Note 3 – page 134
Note 17 – page 165
Structured entities Note 3 – page 127
Note 16 – page 163
De facto control of other entities Note 3 – page 127
Note 34 – page 187
Derecognition of financial assets
and liabilities
Note 3 – page 128
Note 15 – page 162
Provisions Note 3 – page 135
Note 25 – page 170
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,
unless otherwise stated.
126 2014 Scotiabank Annual Report
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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
and exclude associates and joint ventures. 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. The Bank controls an investee when it is exposed, or
has rights, to variable returns from its involvement with the investee
and has the ability to affect those returns through its power over the
investee. For the Bank to control an entity, all of the three elements of
control should be in existence:
Š power over the investee;
Š exposure, or rights, to variable returns from involvement with the
investee; and
Š 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. Non-controlling interests are presented within
equity in the Consolidated Statement of Financial Position separate
from equity attributable to common and preferred shareholders of the
Bank. Partial sales and incremental purchases of interests in subsidiaries
that do not result in a change of control are accounted for as equity
transactions with non-controlling interest holders. Any difference
between the carrying amount of the interest and the transaction
amount is recorded as an adjustment to retained earnings.
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:
Š by virtue of an agreement, over more than half of the voting rights;
Š to govern the financial and operating policies of the entity under a
statute or an agreement;
Š 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
Š 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).
Structured entities
Structured entities are designed to accomplish certain well-defined
objectives and for which voting or similar rights are not the dominant
factor in deciding who controls the entity. The Bank may become
involved with structured entities either at the formation stage or at a
later date. The Bank controls an investee when it is exposed, or has
rights, to variable returns from its involvement with the investee and
has the ability to affect those returns through its power over the
investee.
The Bank consolidates all structured entities that it controls, including
its U.S.-based multi-seller conduit and certain funding and other
vehicles.
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.
Significant influence is ordinarily presumed to exist when the Bank
holds between 20% and 50% of the voting rights. The Bank may also
be able to exercise significant influence through board representation.
The effects of potential voting rights that are currently exercisable or
convertible are considered in assessing whether the Bank has
significant influence.
Investments in associates are recognized initially at cost that 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.
If there is a loss of significant influence and the investment ceases to
be an associate, equity accounting is discontinued from the date of
loss of significant influence. If the retained interest on the date of loss
of significant influence is a financial asset, it is measured at fair value
and the difference between the fair value and the carrying value is
recorded as an unrealized gain or loss in the Consolidated Statement
of Income.
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.
Joint arrangements
A joint arrangement is an arrangement over which two or more parties
have joint control. Joint control exists only when decisions about the
relevant activities, i.e. those that significantly affect the returns of the
arrangement, require the unanimous consent of the parties sharing the
control of the arrangement. Investments in joint arrangements 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.
For joint operations, the Bank recognizes its share of the joint
operation represented by:
Š Its assets and liabilities held/incurred jointly
Š Its revenue and expenses incurred jointly arising from the joint
operation
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.
If there is a loss of joint control and it does not result in the Bank
having significant influence over the entity, equity accounting is
discontinued from the date of loss of joint control. If the retained
interest in the former joint venture on the date of loss of joint control
is a financial asset, it is measured at fair value and the difference
between the fair value and the carrying value is recorded as an
unrealized gain or loss in the Consolidated Statement of Income.
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.
2014 Scotiabank Annual Report 127
CONSOLIDATED FINANCIAL STATEMENTS
Translation gains and losses related to the Bank’s monetary items are
recognized in other operating income in the Consolidated Statement
of Income. Revenues and expenses denominated in foreign currencies
are translated using average exchange rates, except for depreciation
and amortization of buildings purchased in foreign currency,
equipment and leasehold improvements of the Bank, which are
translated using historical rates. Foreign currency non-monetary items
that are measured at historical cost are translated into the functional
currency at historical rates. Foreign currency non-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 on non-monetary items are recognized in the
Consolidated Statement of Income or Consolidated Statement of
Comprehensive Income consistent with the gain or loss on the non-
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 the Consolidated Statement of Comprehensive Income. On
disposal or partial disposal of a foreign operation, resulting in a loss of
control, 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
Date of recognition
The Bank initially recognizes loans, deposits, subordinated debentures
and debt securities issued on the date at which they are originated or
purchased. 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.
Initial classification and measurement
The classification of financial assets and liabilities at initial recognition
depends on the purpose and intention for which the financial assets
are acquired and liabilities issued and their characteristics. The initial
measurement of a financial asset or liability is at fair value.
Determination of fair value
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. Quoted market prices represent a Level 1
valuation. When quoted market prices are not available, the Bank
maximizes the use of observable inputs within valuation models. When
all significant inputs are observable, 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
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 particular market credit or funding
risk.
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, constraints on prices in inactive or illiquid
markets and when applicable funding costs.
Derecognition of financial assets and liabilities
Derecognition of financial assets
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.
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; and the Bank has transferred substantially all the risks and
rewards of ownership of that asset to an independent third-party.
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 assets 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
Finanical Position.
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. 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.
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 currently 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.
128 2014 Scotiabank Annual Report
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Cash and deposits with financial institutions
Cash and deposits with financial institutions comprises cash, cash
equivalents, demand deposits with banks and other financial
institutions, highly liquid investments that are readily convertible to
cash, subject to insignificant risk of changes in value and may carry
restrictions in certain circumstances. 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 fair value less costs to sell are credited or charged to other
operating income – trading revenues in the Consolidated Statement of
Income.
Trading assets and liabilities
Trading assets and liabilities are measured at fair value in the
Consolidated Statement of Financial Position, with transaction costs
recognized immediately in the Consolidated Statement of Income.
Gains and losses realized on disposal and unrealized gains and losses
due to fair value changes on trading assets and liabilities, other than
certain derivatives, are recognized as part of other operating income –
trading revenues in the Consolidated Statement of Income. Trading
assets and liabilities are not reclassified subsequent to their initial
recognition.
Financial assets and liabilities designated at fair value through profit
or loss
Financial assets and financial liabilities classified in this category are
those that have been designated by the Bank on initial recognition or
on transition to IFRS. The Bank may only designate an instrument at
fair value through profit or loss when one of the following criteria is
met, and designation is determined on an instrument by instrument
basis:
Š The designation eliminates or significantly reduces the inconsistent
treatment that would otherwise arise from measuring the assets or
liabilities or recognizing gains or losses on them on a different basis;
or
Š The assets and liabilities are part of a group of financial assets,
financial liabilities or both which are managed together and their
performance evaluated on a fair value basis, in accordance with a
documented risk management or investment strategy and the
information about the group is provided to key management
personnel and it can be demonstrated that significant financial risks
are eliminated or significantly reduced; or
Š The financial instrument contains one or more embedded derivatives
which significantly modify the cash flows otherwise required.
Financial assets and financial liabilities designated at fair value through
profit or loss are recorded in the Consolidated Statement of Financial
Position at fair value. Changes in fair value, are recorded in other
operating income – other in the Consolidated Statement of Income.
Securities purchased and sold under resale agreements
Securities purchased under resale agreements (reverse repurchase
agreements) and securities sold under agreements to repurchase
(repurchase agreements) are treated as collateralized financing
arrangements and are recorded 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 in excess of, 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 income
and interest expense are recorded on an accrual basis 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 other operating income – trading revenues
in the Consolidated Statement of Income. Interest expense accruing on
debt securities sold short is recorded in interest expense – other.
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. Cash
advanced or received as collateral is recorded as an asset or liability.
Fees received and paid are reported as fee and commission revenues
and expenses in the Consolidated Statement of Income, respectively.
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 other operating income – trading revenues, in the Consolidated
Statement of Income.
Derivative financial instruments
Derivative financial instruments are contracts whose value is derived
from interest rates, foreign exchange rates, commodities, equity prices
or other financial variables. Most derivative financial instruments can
be characterized as interest rate contracts, foreign exchange and gold
contracts, commodity contracts, equity contracts or credit contracts.
Derivative financial instruments are either exchange-traded contracts or
negotiated over-the-counter contracts. Negotiated over-the-counter
contracts include swaps, forwards and options.
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 to generate income from trading
operations.
Derivatives embedded in other financial instruments or host contracts
are treated as separate derivatives when the following conditions are
met:
Š their economic characteristics and risks are not closely related to
those of the host contract;
Š a separate instrument with the same terms as the embedded
derivative would meet the definition of a derivative; and
Š 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 a combined basis
with the host contracts although they are separated for measurement
purposes when conditions requiring separation are met. Subsequent
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changes in fair value of embedded derivatives are recognized in other
operating income – other 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 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 other operating 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 in other operating 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 in operating 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 other operating 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.
Investment securities
Investment securities are comprised of available-for-sale and held-to-
maturity securities.
Available-for-sale investment securities
Available-for-sale investment securities include equity and debt
securities. Equity investments classified as available-for-sale are those
which are neither classified as held-for-trading nor designated at fair
value through profit or loss. Debt securities in this category are those
which are intended to be held for an indefinite period of time and
which may be sold in response to needs for liquidity or in response to
changes in the market conditions. Available-for-sale investment
securities are recorded at fair value with unrealized gains and losses
recorded in other comprehensive income. When realized, these gains
and losses are reclassified from the Consolidated Statement of
Comprehensive Income and recorded in the Consolidated Statement of
Income on an average cost basis. For non-monetary investment
securities designated as available-for-sale, the gain or loss recognized
in other comprehensive income includes any related foreign exchange
gains or losses. Foreign exchange gains and losses that relate to the
amortized cost of an available-for-sale debt security are recognized in
the Consolidated Statement of Income.
Premiums, discounts and related transaction costs on available-for-sale
debt securities are amortized over the expected life of the instrument
to interest income – securities in the Consolidated Statement of
Income using the effective interest method.
Transaction costs on available-for-sale equity securities are initially
capitalized and then recognized as part of the net realized gain/loss on
subsequent sale of the instrument in the Consolidated Statement of
Income.
Held-to-maturity investment securities
Held-to-maturity investment securities are non-derivative assets with
fixed or determinable payments and fixed maturity that the Bank has
the positive intent and ability to hold to maturity, and which do not
meet the definition of a loan, are not held-for-trading, and are not
designated at fair value through profit or loss or as available-for-sale.
After initial measurement, held-to-maturity investment securities are
carried at amortized cost using the effective interest method, less
impairment. Amortized cost is calculated by taking into account any
discount or premium on acquisition, transaction costs and fees that
are an integral part of the effective interest rate. The amortization is
included in interest income – securities in the Consolidated Statement
of Income.
A sale or reclassification of a more than an insignificant amount of
held-to-maturity investments would result in the reclassification of all
held-to-maturity investments as available-for-sale, and would prevent
the Bank from classifying investment securities as held-to-maturity for
the current and the following two financial years. However, sales and
reclassifications in any of the following circumstances would not
trigger a reclassification:
Š Sales or reclassifications that are so close to maturity that changes in
the market rate of interest would not have a significant effect on the
financial asset’s fair value;
Š Sales or reclassifications after the Bank has collected substantially all
of the asset’s original principal; or
Š Sales or reclassifications attributable to non-recurring isolated events
beyond the Bank’s control that could not have been reasonably
anticipated.
Impairment of investment securities
Investment securities are evaluated for impairment at the end of
each reporting period, or more frequently if events or changes in
circumstances indicate the existence of objective evidence of
impairment.
In the case of equity instruments classified as available-for-sale, a
significant or prolonged decline in the fair value of the security below
its original cost is objective evidence of impairment. In the case of debt
instruments classified as available-for-sale and held-to-maturity
investment securities, impairment is assessed based on the same
criteria as impairment of loans.
When a decline in value of available-for-sale debt or equity instrument
is due to impairment, the carrying value of the security continues to
reflect fair value. Losses arising from impairment are reclassified from
accumulated other comprehensive income and included in net gain on
investment securities within other operating income in the
Consolidated Statement of Income.
The losses arising from impairment of held-to-maturity investment
securities are recognized in net gain on investment securities within
other operating income in the Consolidated Statement of Income.
Reversals of impairment losses on available-for-sale debt instruments
resulting from disposals or increases in fair value related to events
occurring after the date of impairment are included in net gain on
investment securities within other operating income in the
Consolidated Statement of Income, to a maximum of the original
impairment charge. Reversals of impairment on available-for-sale
equity instruments are not recognized in the Consolidated Statement
of Income; increases in fair value of such instruments after impairment
are recognized in equity.
Reversals of impairment losses on held-to-maturity investment
securities are included in net gain on investment securities within other
operating income in the Consolidated Statement of Income, to a
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maximum of the amortized cost of the investment before the original
impairment charge.
Loans
Loans include loans and advances originated or purchased by the Bank
which are not classified as held-for-trading, held-to-maturity or
designated at fair value. Debt securities, which are not trading
securities or have not been designated as available-for-sale securities
and that are not quoted in an active market, are also classified as
loans.
Loans originated by the Bank are recognized when cash is advanced to
a borrower. Loans purchased are recognized when cash consideration
is paid by the Bank. Loans are measured at amortized cost using the
effective interest method, less any impairment losses. Loans are stated
net of allowance for credit losses.
Purchased loans
All purchased loans are initially measured at fair value on the date of
acquisition. In arriving at the fair value, the Bank considers interest rate
mark adjustments and credit mark adjustments. As a result of
recording all purchased loans at fair value, no allowances for credit
losses are recorded in the Consolidated Statement of Financial Position
on the date of acquisition. Consequently none of the purchased loans
are considered to be impaired on the date of acquisition.
The interest rate mark on the date of acquisition is principally set up
for fixed interest rate loans and captures the impact of the interest rate
differential between the contractual rate of interest on the loan and
the prevailing interest rate on the loan on the date of acquisition for
the remaining term. The interest rate mark is fully amortized into
interest income in the Consolidated Statement of Income over the
expected life of the loan using the effective interest method.
An aggregate credit mark adjustment is established to capture
management’s best estimate of cash flow shortfalls on the loans over
their life time as determined at the date of acquisition. The credit mark
adjustment comprises of both an incurred loss mark and a future
expected loss mark.
For individually assessed loans, the credit mark established at the date
of acquisition is tracked over the life of the loan. Changes to the
expected cash flows of these loans from those expected at the date of
acquisition are recorded as a charge/recovery in the provision for credit
losses in the Consolidated Statement of Income.
Where loans are not individually assessed for determining losses, a
portfolio approach is taken to determine expected losses at the date of
acquisition. The portfolio approach will result in both an incurred loss
mark and a future expected loss mark. The incurred loss mark is
assessed at the end of each reporting period against the performance
of the loan portfolio and an increase in expected cash flows will result
in recovery in provision for credit losses in the Consolidated Statement
of Income while any cash flows lower than expected will result in an
additional provision for credit losses. The future expected loss mark is
amortized into income as losses are recognized or as the portfolio of
loans winds down over its expected life. An assessment is required at
the end of each reporting period to determine the reasonableness of
the unamortized balance in relation to the loan portfolio. An overall
benefit is only recognized to the extent that the amortized amount is
greater than the actual losses incurred. A net charge is recorded if the
actual losses exceed the amortized amounts.
Loan impairment and allowance for credit losses
The Bank considers a loan to be impaired when there is objective
evidence of impairment as a result of one or more loss events that
occurred after the date of initial recognition of the loan and the loss
event has an impact on the estimated future cash flows of the loan
that can be reliably estimated. Objective evidence is represented by
observable data that comes to the attention of the Bank and includes
events that indicate:
Š significant financial difficulty of the borrower;
Š a default or delinquency in interest or principal payments;
Š a high probability of the borrower entering a phase of bankruptcy or
a financial reorganization;
Š a measurable decrease in the estimated future cash flows from loan
or the underlying assets that back the loan.
If a payment on a loan is contractually 90 days in arrears, the loan will
be classified as impaired, if not already classified as such, unless the
loan is fully secured, the collection of the debt is in process, and the
collection efforts are reasonably expected to result in repayment of the
loan or in restoring it to a current status within 180 days from the date
a payment has become contractually in arrears. Finally, a loan that is
contractually 180 days in arrears is classified as impaired in all
situations, except when it is guaranteed or insured by the Canadian
government, the provinces or a Canadian government agency; such
loans are classified as impaired if the loan is contractually in arrears for
365 days. Any credit card loan that has a payment that is contractually
180 days in arrears is written off. Losses expected as a result of future
events, are not recognized.
The Bank considers evidence of impairment for loans and advances at
both an individual and collective level.
Individual impairment allowance
For all loans that are considered individually significant, the Bank
assesses on a case-by-case basis at each reporting period whether an
individual allowance for loan losses is required.
For those loans where objective evidence of impairment exists and the
Bank has determined the loan to be impaired, impairment losses are
determined based on the Bank’s aggregate exposure to the customer
considering the following factors:
Š the customer’s ability to generate sufficient cash flow to service debt
obligations;
Š the extent of other creditors’ commitments ranking ahead of, or pari
passu with, the Bank and the likelihood of other creditors continuing
to support the company;
Š the complexity of determining the aggregate amount and ranking of
all creditor claims and the extent to which legal and insurance
uncertainties are evident; and
Š the realizable value of security (or other credit mitigants) and
likelihood of successful repossession.
Impairment losses are calculated by discounting the expected future
cash flows of a loan at its original effective interest rate, and
comparing the resultant present value with the loan’s current carrying
amount. This results in interest income being recognized using the
original effective interest rate.
Collective impairment allowance
For loans that have not been individually assessed as being impaired,
the Bank pools them into groups to assess them on a collective basis.
Collective allowances are calculated for impaired loans and performing
loans. Allowances related to performing loans estimate probable
incurred losses that are inherent in the portfolio but have not yet been
specifically identified as impaired.
Internal risk rating parameters are used in the calculation of the
collective impairment allowance. For non-retail loan portfolios, internal
risk rating parameters form the basis for calculating the quantitative
portion of the collective allowance for performing loans:
Š Probability of Default rates (PD) which are based upon the internal
risk rating for each borrower;
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Š Loss Given Default rates (LGD); and
Š Exposure at Default factors (EAD).
Funded exposures are multiplied by the borrower’s PD and by the
relevant LGD parameter.
Committed but undrawn exposures are multiplied by the borrower’s
PD, by the relevant LGD parameter, and by the relevant EAD parameter.
A model stress component is also applied to recognize uncertainty in
the credit risk parameters and the fact that current actual loss rates
may differ from the long term averages included in the model.
Retail loans
Retail loans represented by residential mortgages, credit cards and other
personal loans are considered by the Bank to be homogeneous groups of
loans that are not considered individually significant. All homogeneous
groups of loans are assessed for impairment on a collective basis.
Mortgages are collectively assessed for impairment, taking into account
number of days past due, historical loss experience and incorporating
both quantitative and qualitative factors including the current business
and economic environment and the realizable value of collateral to
determine the appropriate level of the collective impairment allowance.
A roll rate methodology is used to determine impairment losses on a
collective basis for credit cards and other personal loans because
individual loan assessment is impracticable. Under this methodology,
loans with similar credit characteristics are grouped into ranges
according to the number of days past due and statistical analysis is
used to estimate the likelihood that loans in each range will progress
through the various stages of delinquency and ultimately prove
irrecoverable. This methodology employs statistical analyses of
historical data and experience of delinquency and default to estimate
the amount of loans that will eventually be written off as a result of
the events not identifiable on an individual loan basis. When the
portfolio size is small or when information is insufficient or not reliable
enough to adopt a roll rate methodology, the Bank adopts a basic
formulaic approach based on historical loss rate experience.
Performing loans
Over and above the individually assessed and retail roll rate allowances,
loans that were subject to individual assessment for which no evidence
of impairment existed, are grouped together according to their credit
risk characteristics for the purpose of reassessing them on a collective
basis. This reflects impairment losses that the Bank has incurred as a
result of events that have occurred but where the individual loss has
not been identified.
The collective impairment allowance for such loans is determined after
taking into account:
Š historical loss experience in portfolios of similar credit risk
characteristics (for example, by industry sector, loan grade or product);
Š the estimated period between impairment occurring and the loss
being identified and evidenced by the establishment of an
appropriate allowance against the individual loan; and
Š management’s experienced judgment as to whether current
economic and credit conditions are such that the actual level of
inherent losses at the reporting date is likely to be greater or less
than that suggested by historical experience. As soon as information
becomes available which identifies losses on individual loans within
the group, those loans are removed from the group and assessed on
an individual basis for impairment.
Provision for credit losses on off-balance sheet positions
A provision is set up for the Bank’s off-balance sheet positions and
recorded in other liabilities on the Consolidated Statement of Financial
Position. The process to determine the provision for off-balance sheet
positions is similar to the methodology used for loans. Any change in
the provision is recorded in the Consolidated Statement of Income as
provision for credit losses.
Write-off of loans
Loans (and the related impairment allowance accounts) are normally
written off, either partially or in full, when there is no realistic prospect
of recovery. Where loans 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.
Reversals of impairment
If the amount of an impairment loss related to loans decreases in a
subsequent period, and the decrease can be related objectively to an
event occurring after the impairment was recognized, the excess is
written back by reducing the loan impairment allowance account
accordingly. The write-back is recognized in the provision for credit
losses in the Consolidated Statement of Income.
Restructured loans
Restructured loans include loans where the Bank has renegotiated the
original terms of a loan by granting a concession to the borrower
(concessions). These concessions include interest rate adjustments,
deferral or extension of principal or interest payments and forgiveness
of a portion of principal or interest. Once the terms of the loan have
been renegotiated and agreed upon with the borrower the loan is
considered a restructured loan. The investment in the loan is reduced
as of the date of the restructuring to the amount of the net expected
cash flows receivable under the modified terms, discounted at the
original effective interest rate inherent in the loan. The loan is no
longer considered past due and the reduction in the carrying value
of the loan is recognized as a charge for loan impairment in the
Consolidated Statement of Income in the period in which the loan
is restructured. In other cases, restructuring may be considered
substantial enough to result in recognition of a new loan.
Customer’s liability under acceptances
The Bank’s potential liability under acceptances is reported as a liability
in the Consolidated Statement of Financial Position. The Bank has
equivalent claims against its customers in the event of a call on these
commitments, which are reported as an asset. Fees earned are
reported in fee and commission revenues – banking fees in the
Consolidated Statement of Income.
Hedge accounting
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. 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 hedged items. Hedge ineffectiveness is
measured and recorded in other operating income – other in the
Consolidated Statement of Income.
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.
The Bank utilizes fair value hedges primarily to convert fixed rate
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financial instruments to floating rate financial instruments. Hedged
items include available-for-sale debt and equity securities, loans,
deposit liabilities and subordinated debentures. Hedging instruments
include single-currency interest rate swaps, cross-currency interest rate
swaps, foreign currency forwards and foreign currency liabilities.
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 is
recognized in income. The Bank utilizes cash flow hedges primarily to
hedge the variability in cash flows relating to floating rate financial
instruments and highly probable forecasted revenues. Hedged items
include available-for-sale debt securities, loans, deposit liabilities and
highly probable forecasted revenues. Hedging instruments include
single-currency interest rate swaps, cross-currency interest rate swaps
and foreign currency forwards.
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, buildings 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 – 40 years, building fittings –
15 years, equipment 3 to 10 years, and leasehold improvements – term
of lease plus one renewal period up to a maximum of 15 years.
Depreciation expense is included in the Consolidated Statement of
Income under operating expenses – depreciation and amortization.
Depreciation methods, useful lives and residual values are reassessed at
each financial year-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 other operating
income – other in the Consolidated Statement of Income in the year of
disposal.
Investment property
Investment property is property held either for rental income or for
capital appreciation or for both. The Bank holds certain investment
properties which are presented in property and equipment on the
Consolidated Statement of Financial Position.
Investment property is carried at cost less accumulated depreciation
and any accumulated impairment losses. Depreciation is calculated
using the straight-line method over the estimated useful life of
40 years. Depreciation methods, useful lives and residual values are
reassessed at each financial year-end and adjusted as appropriate.
The Bank engages, as appropriate, external real estate experts to
determine the fair value of the investment property for disclosure
purposes by using recognized valuation techniques. In cases in which
prices of recent market transactions of comparable properties are
available, fair value is determined by reference to these transactions.
Assets held-for-sale
Non-current non-financial assets (and disposal groups) are classified
as held-for-sale if their carrying amount will be recovered principally
through a sale transaction rather than through continuing use. These
assets meet the criteria for classification as held-for-sale if they are
available for immediate sale in their present condition and their sale is
considered highly probable to occur within one year.
Non-current non-financial assets classified as held-for-sale are
measured at the lower of their carrying amount and fair value (less
costs to sell) and are presented within other assets in the Consolidated
Statement of Financial Position. Any subsequent write-down to fair
value less costs to sell is recognized in the Consolidated Statement of
Income, in other operating 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 in other operating 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 assets held-for-sale or assets held-
for-use. If the acquired asset does not meet the requirement to be
considered held-for-sale, the asset is considered held-for-use,
measured initially at cost which equals the carrying value of the loan
and accounted for in the same manner as a similar asset acquired in
the normal course of business.
Business combinations and goodwill
The Bank follows the acquisition method of accounting for the
acquisition of subsidiaries. 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 other operating 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 a
non-controlling interest for cash or another financial asset, a portion of
the non-controlling interest is recognized as a financial liability 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 a non-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 other
operating income – other in the Consolidated Statement of Income.
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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 expense 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:
Š 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.
Š Indemnification assets are measured on the same basis as the item
to which the indemnification relates.
Š Contingent consideration classified as a liability is measured at fair
value, with any change recognized in the Consolidated Statement
of Income.
Š 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. Goodwill impairment, at
a standalone subsidiary level, may not in itself result in an impairment at
the consolidated Bank level.
The carrying amount of the CGU is determined by management using
approved internal economic capital models. These models consider
various factors including credit risk, market risk, operational risk and
other relevant business risks for each CGU. 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, 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, 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, cost 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 considered to
be non-financial assets, the impairment model for non-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 assets
The 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.
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
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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.
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
Bank as a lessor
Assets leased to customers under agreements which transfer
substantially all the risks and rewards of ownership, with or without
ultimate legal title, are classified as finance leases and presented within
loans in the Consolidated Statement of Financial Position. When assets
held are subject to a finance lease, the leased assets are derecognized
and a receivable is recognized which is equal to the present value of
the minimum lease payments, discounted at the interest rate implicit in
the lease. Initial direct costs incurred in negotiating and arranging a
finance lease are incorporated into the receivable through the discount
rate applied to the lease. Finance lease income is recognized over the
lease term based on a pattern reflecting a constant periodic rate of
return on the net investment in the finance lease.
Assets leased to customers under agreements which do not transfer
substantially all the risks and rewards of ownership are classified as
operating leases. The leased assets are included within property and
equipment on the Bank’s Consolidated Statement of Financial Position.
Rental income is recognized on a straight-line basis over the period of
the lease in other operating income – other in the Consolidated
Statement of Income. Initial direct costs incurred in negotiating and
arranging an operating lease are added to the carrying amount of the
leased asset and recognized as an expense on a straight-line basis over
the lease term.
Bank as a lessee
Assets held under finance leases are initially recognized as property
and equipment in the Consolidated Statement of Financial Position at
an amount equal to the fair value of the leased asset or, if lower, the
present value of the minimum lease payments. The corresponding
finance lease obligation is included in other liabilities in the
Consolidated Statement of Financial Position. The discount rate used in
calculating the present value of the minimum lease payments is the
interest rate implicit in the lease. Contingent rentals are recognized as
expense in the periods in which they are incurred.
Operating lease rentals payable are recognized as an expense on a
straight-line basis over the lease term, which commences when the
lessee controls the physical use of the asset. Lease incentives are
treated as a reduction of rental expense and are also recognized over
the lease term on a straight-line basis. Contingent rentals arising under
operating leases are recognized as an expense in the period in which
they are incurred.
Sale and lease-back
Where the Bank enters into a sale leaseback transaction for a non-
financial asset at fair market value that results in the Bank retaining
an operating lease (where the buyer/lessor retains substantially all risks
and rewards of ownership), any gains and losses are recognized
immediately in net income. Where the sale leaseback transaction
results in a finance lease, any gain on sale is deferred and recognized
in net income over the remaining term of the lease.
Leasehold improvements
Leasehold improvements are investments made to customize buildings
and offices occupied under operating lease contracts to make them
suitable for their intended purpose. The present value of estimated
reinstatement costs to bring a leased property into its original
condition at the end of the lease, if required, is capitalized as part of
the total leasehold improvements costs. At the same time, a
corresponding liability is recognized to reflect the obligation incurred.
Reinstatement costs are recognized in net income through
depreciation of the capitalized leasehold improvements over their
estimated useful life.
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.
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
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
2014 Scotiabank Annual Report 135
CONSOLIDATED FINANCIAL STATEMENTS
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, the United States and other international
operations. Pension benefits are predominantly offered in the form of
defined benefit pension plans (generally based on an employee’s
length of service and the final five years’ average salary), with some
pension benefits offered 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 discount rate is based on
the yield at the reporting date on high quality corporate bonds that
have maturity dates approximating the terms of the Bank’s obligations.
This discount rate must also be used to determine the annual benefit
expense.
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) and past service
cost are recognized in net income. Net interest income or expense is
calculated by applying the discount rate used to measure the
obligation at the beginning of the annual period 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 change in the return on plan assets are
recognized immediately in the Consolidated Statement of Financial
Position with a charge or credit to the Statement of 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 similar 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 cost 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.
Recognition of income and expenses
Revenue is recognized to the extent that it is probable that the
economic benefits will flow to the Bank and the revenue can be
reliably measured. The following specific criteria must also be met
before revenue is recognized:
Interest and similar income and expenses
For all interest-bearing financial instruments, including those held-for-
trading or designated at fair value through profit or loss, 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 net
carrying amount of the financial asset or financial liability. The
calculation takes into account all the 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.
The carrying amount of interest-bearing financial instruments,
measured at amortized cost or classified as available-for-sale, 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 other
operating 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 recognized when no other services are
required of the Bank and the fees are non-refundable unless the yield
we retain is less than that of comparable lenders in the syndicate. In
such cases, an appropriate portion will be deferred and amortized in
interest income over the term of the loan.
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 effective interest on the loan.
When it is unlikely that a loan will be drawn down, the loan
commitment fees are recognized over the commitment period on a
straight-line basis.
Interest income and interest expense from trading operations are
presented in trading revenues, in the Consolidated Statement of
Income.
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Fee and commission revenues
The Bank earns fee and commission revenues from a diverse range of
services it provides to its customers. Fee income can be divided into the
following two categories:
Fees earned for the provision of services over a period of time are
accrued over that period. These fees include commission income, asset
management, custody and other management and advisory fees.
Fees arising from negotiating or participating in the negotiation of a
transaction for a third-party, such as the arrangement of the
acquisition of shares or other securities or the purchase or sale of
businesses, are recognized on completion of the underlying
transaction. Fees or components of fees that are linked to a certain
performance are recognized after fulfilling the corresponding criteria.
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 in interest income
when the Bank’s right to receive payment is established.
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 the re-measurement of the fair value
and a revised forfeiture rate that anticipates units expected to vest.
Employee stock options with tandem stock appreciation rights give the
employee the right to exercise for shares or settle in cash. These
options are classified as liabilities and are re-measured to fair value at
each reporting date while they remain outstanding. If an option is
exercised, thereby cancelling the tandem stock appreciation right, both
the exercise price proceeds together with the accrued liability and
associated taxes are credited to equity – common shares in the
Consolidated Statement of Financial Position.
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 tandem stock appreciation rights, 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 hedge share-based payment expense,
related mark-to-market gains and losses are included in operating
expenses – salaries and employee benefits in the Consolidated
Statement of Income.
A voluntary renouncement of a tandem stock appreciation right where
an employee retains the corresponding option for shares with no
change in the overall fair value of the award, results in a reclassification
of the accrued liability and associated tax to equity – other reserves in
the Consolidated Statement of Financial Position. This reclassification is
measured at the fair value of the renounced awards as of the
renouncement date. Subsequent to the voluntary renouncement, these
awards are accounted for as plain vanilla options, based on the fair
value as of the renouncement date.
Customer loyalty programs
The Bank operates loyalty points programs, which allow customers to
accumulate points when they use the Bank’s products and services.
The points can then be redeemed for free or discounted products or
services, subject to certain conditions.
Consideration received is allocated between the products sold or
services rendered and points issued, with the consideration allocated to
points equal to their fair value. The fair value of points is generally
based on equivalent retail prices for the mix of awards expected to be
redeemed. The fair value of the points issued is deferred in other
liabilities and recognized as banking revenues when the points are
redeemed or lapsed. Management judgment is involved in determining
the redemption rate to be used in the estimate of points to be
redeemed.
Dividends on shares
Dividends on common and preferred shares are recognized as a liability
and deducted from equity when they are approved by the Bank’s
Board. Interim dividends are 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 & Insurance, and Global Banking & 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 equivalent before-tax basis for those affected
segments. This change in measurement enables comparison of income
arising from taxable and tax-exempt sources.
Because of 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
2014 Scotiabank Annual Report 137
CONSOLIDATED FINANCIAL STATEMENTS
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.
Earnings are adjusted by the after-tax amount of distributions related
to dilutive capital instruments recognized in the period. For tandem
stock appreciation rights that are carried as liabilities, the after-tax re-
measurement included in salaries and employee benefits expense, net
of related hedges, is adjusted to reflect the expense had these rights
been equity-classified.
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 that in-the-money stock options are exercised
and the proceeds are used to purchase common shares at the average
market price during the period.
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.
4 Recently adopted accounting standards
Changes in accounting policies during the year
The Bank has adopted the following new and amended accounting
standards issued by the IASB effective November 1, 2013. The changes
have been applied retrospectively, unless otherwise noted.
Employee benefits (IAS 19)
The amended standard IAS 19, Employee Benefits, eliminates the use
of the corridor approach (the method previously used by the Bank) and
requires the value of the surplus/deficit of the defined benefit plans to
be recorded on the Consolidated Statement of Financial Position, with
actuarial gains and losses to be recognized immediately in OCI. In
addition, the discount rate to be used for recognizing the net interest
income/expense is based on the rate at which the liabilities are
discounted and not the expected rate of return on the assets. This will
result in higher expense in the Consolidated Statement of Income in
line with the funded status of the plan. The OCI balances will change
in line with changes in the actuarial gains and losses.
The impact of the adoption of the standard on the Consolidated
Financial Statements for prior periods is shown in the table at the end
of this note.
Consolidated financial statements (IFRS 10)
The new accounting standard, IFRS 10, Consolidated Financial
Statements, replaced the consolidation guidance in IAS 27, Separate
Financial Statements and SIC-12, Consolidation – Special Purpose
Entities. It introduces a single, principle-based control model for all
entities as a basis for determining which entities are consolidated and
set out the requirements for the preparation of consolidated financial
statements.
The standard was applied retrospectively allowing for certain practical
exceptions and transitional relief.
The adoption of IFRS 10 has resulted primarily in the deconsolidation
of Scotiabank Capital Trust and Scotiabank Tier 1 Trust (together, the
“capital trusts”) through which the Bank issues certain regulatory
capital instruments. 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 entities.
The impact of the deconsolidation on the Consolidated Financial
Statements for prior periods is shown in the table at the end of this
note.
Disclosure of interests in other entities (IFRS 12)
In conjunction with the adoption of IFRS 10, the Bank has adopted
IFRS 12, Disclosure of Interests in Other Entities, that broadens the
definition of interests in other entities and requires enhanced
disclosures on both consolidated entities and unconsolidated entities
with which the Bank is involved. The relevant incremental disclosures
have been included in Note 16.
Joint arrangements (IFRS 11)
Under the new accounting standard, IFRS 11, Joint Arrangements, the
Bank classifies its interests in joint arrangements as either joint
operations or joint ventures depending on the Bank’s rights to the
assets and obligations for the liabilities of the arrangements. The
adoption of the new accounting standard had no impact on the Bank’s
assets, liabilities and equity.
Fair value measurement (IFRS 13)
IFRS 13 provides a revised definition of fair value and guidance on how
it should be applied where its use is already required or permitted by
other standards within IFRS. In accordance with the transitional
provisions, IFRS 13 has been applied prospectively from November 1,
2013. The adoption of this new standard did not have an impact on
the Bank’s determination of fair value. However, IFRS 13 required
additional disclosures on fair value measurement which are included in
Note 7.
Disclosures-offsetting financial assets and financial liabilities (IFRS 7)
IFRS 7 requires the Bank to disclose gross amounts subject to rights of
set off, amounts set off, and the related net credit exposure. These
new disclosures are included in Note 11.
Presentation of financial statements (IAS 1)
IAS 1, Presentation of Financial Statements, requires the separate
disclosure of items within other comprehensive income based on
whether or not they will be reclassified into net income in subsequent
periods. On November 1, 2013, the Bank adopted this presentation on
a retrospective basis along with the implementation of amended
IAS 19. Changes on remeasurement of employee benefit plans that are
recognized directly in other comprehensive income are not reclassified
to the Consolidated Statement of Income in future periods.
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Summary of impact on adoption of new and amended accounting standards
The following tables summarize the impact of the changes in IAS 19 and IFRS 10. The impact of the changes in the other standards was not material.
As at October 31, 2013 ($ millions)
Previously
reported
Employee
benefits
IAS 19
Consolidation
IFRS 10 Restated
Assets impacted by changing IFRS accounting standards
Investment securities $ 34,303 $ – $ 16 $ 34,319
Loans – Business and government 119,550 – 65 119,615
Property and equipment 2,228 – (14) 2,214
Investment in associates 5,294 – 32 5,326
Deferred tax assets 1,780 158 – 1,938
Other assets 10,924 (394) (7) 10,523
Assets not impacted by changes 569,709 – – 569,709
Total assets 743,788 (236) 92 743,644
Liabilities impacted by changing IFRS accounting standards
Deposits – Business and government
(1)
312,487 – 1,507 313,994
Derivative financial instruments 29,255 – 12 29,267
Capital instruments 650 – (650) –
Other liabilities 31,896 171 (20) 32,047
Liabilities not impacted by changes 322,949 – – 322,949
Equity impacted by changing IFRS accounting standards
Retained earnings 25,315 (243) (4) 25,068
Accumulated other comprehensive income (loss) 545 (157) – 388
Non-controlling interests
Non-controlling interests in subsidiaries 1,155 (7) (10) 1,138
Capital instrument equity holders 743 – (743) –
Equity not impacted by changes 18,793 – – 18,793
Total liabilities and equity $743,788 $(236) $ 92 $743,644
Net income for the year ended October 31, 2013 $ 6,697 $ (68) $ (19) $ 6,610
Earnings per share
Basic $ 5.19 $ 5.15
Diluted $ 5.15 $ 5.11
As at November 1, 2012 ($ millions)
Previously
reported
Employee
benefits
IAS 19
Consolidation
IFRS 10 Restated
Assets impacted by changing IFRS accounting standards
Investment securities $ 33,361 $ – $ 15 $ 33,376
Loans – Business and government 111,549 – 99 111,648
Allowance for credit losses (2,969) – (8) (2,977)
Property and equipment 2,260 – (42) 2,218
Investment in associates 4,760 – 31 4,791
Deferred tax assets 1,936 337 – 2,273
Other assets 11,572 (242) (9) 11,321
Assets not impacted by changes 505,575 – – 505,575
Total assets 668,044 95 86 668,225
Liabilities impacted by changing IFRS accounting standards
Deposits – Business and government
(1)
291,361 – 2,256 293,617
Derivative financial instruments 35,299 – 24 35,323
Capital instruments 1,358 – (1,358) –
Other liabilities 31,753 1,000 (27) 32,726
Liabilities not impacted by changes 266,894 – – 266,894
Equity impacted by changing IFRS accounting standards
Retained earnings 21,978 (180) (23) 21,775
Accumulated other comprehensive income (loss) (31) (714) – (745)
Non-controlling interests
Non-controlling interests in subsidiaries 966 (11) (9) 946
Capital instrument equity holders 777 – (777) –
Equity not impacted by changes 17,689 – – 17,689
Total liabilities and equity $668,044 $ 95 $ 86 $668,225
Net income for the year ended October 31, 2012 $ 6,466 $ (41) $ (35) $ 6,390
Earnings per share
Basic $ 5.31 $ 5.27
Diluted $ 5.22 $ 5.18
(1) Includes deposit liabilities designated at fair value through profit or loss of $174 (November 1, 2012 - $157), which are presented separately in the Consolidated Statement of
Financial Position this quarter.
2014 Scotiabank Annual Report 139
CONSOLIDATED FINANCIAL STATEMENTS
5 Future accounting developments
The Bank actively monitors developments and changes in standards
from the IASB as well as regulatory requirements from the Canadian
Securities Administrators and OSFI.
Effective November 1, 2014
The IASB issued a number of new or amended standards that are
effective for the Bank as of November 1, 2014. The Bank has
completed its assessment phase and will be able to meet the
requirements of the new standards in the first quarter of 2015. Based
on the assessments completed, the Bank does not expect the impact of
adoption of these standards to be significant.
Presentation of own credit risk (IFRS 9)
IFRS 9, Financial Instruments, requires an entity choosing to measure a
liability at fair value to present the portion of the change in fair value
due to the changes in the entity’s own credit risk in the Consolidated
Statement of Other Comprehensive Income, rather than within the
Consolidated Statement of Income. The IASB permits entities to early
adopt this requirement prior to the IFRS 9 mandatory effective date of
January 1, 2018. The Bank will early adopt these requirements as of
Q1, 2015.
Levies
IFRIC 21, Levies, provides guidance on when to recognize a liability to
pay a levy imposed by government that is accounted for in accordance
with IAS 37, Provisions, Contingent Liabilities and Contingent Assets,
and also for a liability to pay a levy whose timing and amount is certain.
The interpretation clarifies that an obligating event, as identified by the
legislation, would trigger the recognition of a liability to pay a levy.
While the interpretation discusses the timing of the recognition, it does
not change the measurement of the amount to be recognized.
Novation of Derivatives and Continuation of Hedge Accounting
This amendment to IAS 39, Financial Instruments: Recognition and
Measurement, adds a limited exception to allow hedge accounting to
continue in a situation where a derivative, which has been designated
as a hedging instrument, is novated to effect clearing with a central
counterparty as a result of laws and regulation, if specific conditions
are met.
Presentation
The amendments to IAS 32, Financial Instruments: Presentation,
clarifies the requirements relating to offsetting financial assets and
financial liabilities.
Disclosures for Non-financial assets
The amendment to IAS 36, Impairment of Assets, provides new
disclosure requirements relating to the measurement of the recoverable
amount of impaired assets as a result of issuing IFRS 13, Fair Value
Measurement.
Effective November 1, 2017
Revenue from Contracts with Customers
On May 28, 2014, the IASB issued IFRS 15, Revenue from Contracts
with Customers, which provides a single principle-based framework to
be applied to all contracts with customers. IFRS 15 replaces the
previous revenue standard IAS 18, Revenue, and the related
Interpretations on revenue recognition. The standard scopes out
contracts that are considered to be lease contracts, insurance contracts
and financial instruments, and as such will impact the businesses that
earn fee and commission revenues. The new standard is a control-
based model as compared to the existing revenue standard which is
primarily focused on risks and rewards. Under the new standard,
revenue is recognized when a customer obtains control of a good or
service. Transfer of control occurs when the customer has the ability to
direct the use of and obtain the benefits of the good or service. The
standard is effective for the Bank on November 1, 2017, with early
adoption permitted, using either a full retrospective approach or a
modified retrospective approach. A majority of the Bank’s revenue
generating instruments meets the definition of financial instruments
and remains out of scope. The areas of focus for the Bank’s assessment
will be fees and commission revenues from wealth management and
other banking services.
Effective November 1, 2018
Financial Instruments
On July 24, 2014, the IASB issued IFRS 9 which will replace IAS 39. The
standard covers three broad topics: Classification and Measurement,
Impairment and Hedging.
Classification and Measurement
The standard uses a single approach to determine whether a financial
asset is measured at amortized cost or fair value. Financial assets will be
measured at fair value through profit or loss unless certain conditions
are met which permits measurement at amortized cost or at fair value
through other comprehensive income. Most of the IFRS 9 requirements
for financial liabilities have been carried forward unchanged from
IAS 39.
Impairment
The standard introduces a new single model for the measurement of
impairment losses on all financial instruments subject to impairment
accounting. The expected credit loss (ECL) model replaces the current
“incurred loss” model and is based on a forward looking approach.
The ECL model contains a “dual stage” approach which is based on
the change in credit quality of loans since initial recognition. Under the
first stage, an amount equal to 12 months expected credit losses will
be recorded for financial instruments where there has not been a
significant increase in credit risk since initial recognition. Under the
second stage, an amount equal to the lifetime expected losses will be
recorded for those financial instruments where there has been a
significant increase in credit risk since initial recognition.
Hedging
The standard expands the scope of hedged items and hedging items to
which hedge accounting can be applied. It changes the effectiveness
testing requirements and removes the ability to voluntarily discontinue
hedge accounting.
The standard is effective for the Bank on November 1, 2018 on a
retrospective basis with certain exceptions. Early adoption is permitted
and if elected must at a minimum be applied to both the classification
and measurement and impairment models simultaneously. The Bank is
currently assessing the impact of adopting this new standard.
140 2014 Scotiabank Annual Report
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6 Cash and deposits with financial institutions
As at October 31 ($ millions) 2014 2013
Cash and non-interest-bearing deposits with financial institutions $ 5,828 $ 5,449
Interest-bearing deposits with financial institutions 50,902 47,889
Total $ 56,730 $ 53,338
The Bank is required to maintain balances with central banks, other regulatory authorities and certain counterparties and these amount to
$4,628 million (2013 – $4,510 million).
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 best evidence of fair value for a financial instrument is the quoted
price in an active market. Quoted market prices represent 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
from the business. The Bank maintains a list of pricing sources that are
used in the IPV process. These sources include, but are not limited to,
brokers, dealers and consensus pricing services. The valuation policies
relating to the IPV process require that all pricing or rate sources used
be external to the Bank. On a periodic basis, an independent
assessment of pricing or rate sources is performed to determine market
presence or market representative levels.
Quoted prices are not always available for over-the-counter
transactions, as well as transactions in inactive or illiquid markets. In
these instances, internal models that maximize the use of observable
inputs are used to estimate fair value. The chosen valuation technique
incorporates all the factors that market participants would take into
account in pricing a transaction. When all significant inputs to models
are observable, the valuation is classified as Level 2. Financial
instruments traded in a less active market are valued using indicative
market prices, present value of cash-flows or other valuation
techniques. Fair value estimates normally do not consider forced or
liquidation sales.
Where financial instruments trade in inactive markets or when using
models where observable parameters do not exist, greater
management judgment is required for valuation purposes. 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 147.
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 as they relate to precious metals (primarily gold and
silver) are valued using a discounted cash flow model incorporating
market-observable inputs, including precious metals spot and forward
prices and interest rate curves (Level 2). Other trading loans that serve
as hedges to loan-based credit total return swaps are valued using
consensus prices from Bank approved independent pricing services
(Level 2).
Government issued or guaranteed securities
The fair values of government issued or guaranteed debt securities are
primarily based on quoted prices in active markets, where available.
Where quoted prices are not available, the fair value is determined by
utilizing recent transaction prices, broker quotes, or pricing services
(Level 2).
For securities that are not actively traded, the Bank uses a discounted
cash flow method, using the effective yield of a similar instrument
adjusted for instrument-specific risk factors such as credit spread and
contracted features (Level 2).
Corporate and other debt
Corporate and other debt securities are valued using prices from
independent market data providers or third-party broker quotes. Where
prices are not available consistently, the last available data is used and
verified with a yield-based valuation approach (Level 2). In some
instances, interpolated yields of similar bonds are used to price
securities (Level 2). The Bank uses pricing models with observable
inputs from market sources such as credit spread, interest rate curves,
and recovery rates (Level 2). These inputs are verified through an
Independent Pricing Valuation 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 market inputs used to price
such instruments (Level 3).
Mortgage-backed securities
The fair value of residential mortgage-backed securities is primarily
determined using third-party broker quotes and independent market
data providers, where the market is more active. Where the market is
inactive, an internal price-based model is used (Level 3).
Equity securities
The fair value of equity securities is based on 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. Where there is a wide bid-offer spread, fair value is
determined based on quoted market prices for similar securities
(Level 2).
Where quoted prices in active markets are not readily available, such as
for private equity securities, the fair value is determined as a multiple of
the underlying earnings or percentage of underlying assets obtained
from third-party general partner statements (Level 3).
2014 Scotiabank Annual Report 141
CONSOLIDATED FINANCIAL STATEMENTS
Income funds and hedge funds
The fair value of income funds and hedge funds is based on observable
quoted prices where available. Where quoted or active market prices
are unavailable, the last available Net Asset Value, fund statements and
other financial information available from third-party fund managers at
the fund level are used in arriving at the fair value. These inputs are not
considered observable because we cannot redeem these funds at Net
Asset Value (Level 3).
Derivatives
Fair values of exchange-traded derivatives are based on quoted market
prices. Fair values of over-the-counter (OTC) derivatives or inactive
exchange-traded derivatives are determined using pricing models,
which take into account input factors 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 (Level 2).
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.
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 and forward rates and
interest rate curves (Level 2).
Derivative products valued using a valuation technique with significant
unobservable inputs are long dated contracts (interest rate swaps,
currency swaps, forward foreign exchange contracts, option contracts
and certain credit default swaps) and other derivative products that
reference a basket of assets, commodities or currencies. These models
incorporate certain non-observable inputs such as volatility and
correlation (Level 3).
Loans
The estimated fair value of loans carried at amortized cost reflects
changes in the general level of interest rates and credit worthiness of
borrowers that have occurred since the loans were originated or
purchased. The particular valuation methods used are as follows:
Š 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 (Level 3).
Š 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 (Level 3).
Š 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 (Level 3).
Š For all floating rate loans, potential adjustments for credit spread
changes are not considered when estimating fair values. Therefore,
fair value is assumed to equal book value.
Deposits
The fair values of deposits payable on demand or after notice or
floating rate deposits payable on a fixed date are not adjusted for
credit spread changes. Therefore, fair value is assumed to equal book
value for these types of deposits.
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 (Level 2).
Deposits under the Canada Mortgage Bond (CMB) program are fair
valued by discounting expected future contractual cash flows using
market observable inputs (Level 2).
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 (Level 2).
For structured deposit notes containing embedded features that are
bifurcated from the deposit notes, the fair value of the embedded
derivatives is determined using option pricing models with inputs
similar to other interest rate or equity derivative contracts (Level 2). The
fair value of certain embedded derivatives is determined using net asset
values (Level 3).
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 (Level 2). The fair
values of other liabilities is determined by the discounted contractual
cash flow method with appropriate currency swap curves for the
remaining term (Level 2).
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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.
2014 2013
(1)
As at October 31 ($ millions)
Total
fair
value
Total
carrying
value
Favourable/
(Unfavourable)
Total
fair
value
Total
carrying
value
Favourable/
(Unfavourable)
Assets:
Cash and deposits with financial institutions $ 56,730 $ 56,730 $ – $ 53,338 $ 53,338 $ –
Trading assets 113,248 113,248 – 96,489 96,489 –
Financial assets designated at fair value through profit
or loss 111 111 – 106 106 –
Securities purchased under resale agreements and
securities borrowed 93,866 93,866 – 82,533 82,533 –
Derivative financial instruments 33,439 33,439 – 24,503 24,503 –
Investment securities 38,662 38,662 – 34,319 34,319 –
Loans 428,616 424,309 4,307 404,710 402,215 2,495
Customers’ liability under acceptances 9,876 9,876 – 10,556 10,556 –
Other financial assets 7,029 7,029 – 8,557 8,557 –
Liabilities:
Deposits 555,754 554,017 (1,737) 519,827 517,887 (1,940)
Financial instruments designated at fair value through
profit or loss 465 465 – 174 174 –
Acceptances 9,876 9,876 – 10,556 10,556 –
Obligations related to securities sold short 27,050 27,050 – 24,977 24,977 –
Derivative financial instruments 36,438 36,438 – 29,267 29,267 –
Obligations related to securities sold under repurchase
agreements and securities lent 88,953 88,953 – 77,508 77,508 –
Subordinated debentures 5,073 4,871 (202) 6,059 5,841 (218)
Other financial liabilities 21,668 21,218 (450) 26,208 26,208 –
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of IFRS 10 in 2014 (refer to Note 4).
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 investment securities, derivatives and financial
instruments held for trading purposes or designated as fair value
through profit and loss, the carrying value is adjusted regularly to
reflect the fair value.
2014 Scotiabank Annual Report 143
CONSOLIDATED FINANCIAL STATEMENTS
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.
As at October 31, 2014 ($ millions) Level 1 Level 2 Level 3 Total
Instruments carried at fair value on a recurring basis:
Assets:
Precious metals
(1)
$ – $ 7,286 $ – $ 7,286
Trading assets
Loans – 14,508 – 14,508
Canadian federal government and government guaranteed debt 13,848 – – 13,848
Canadian provincial and municipal debt – 7,531 – 7,531
US treasury and other US agencies’ debt 9,212 1,764 – 10,976
Other foreign governments’ debt 8,004 2,230 – 10,234
Corporate and other debt 85 12,453 32 12,570
Income funds and hedge funds 144 2,946 1,282 4,372
Equity securities 35,564 217 51 35,832
Other
(2)
3,377 – – 3,377
$70,234 $ 48,935 $ 1,365 $120,534
Financial assets designated at fair value through profit or loss $ – $ 90 $ 21 $ 111
Investment securities
(3)
Canadian federal government and government guaranteed debt $ 5,520 $ 1,331 $ – $ 6,851
Canadian provincial government and municipal debt 803 2,500 – 3,303
US treasury and other US agencies’ debt 6,096 130 – 6,226
Other foreign governments’ debt 5,793 4,779 411 10,983
Bonds of designated emerging markets – 45 – 45
Corporate and other debt 889 5,260 500 6,649
Mortgage-backed securities – 99 39 138
Equity securities 3,087 208 1,006 4,301
$22,188 $ 14,352 $ 1,956 $ 38,496
Derivative financial instruments
Interest rate contracts $ – $ 12,668 $ 146 $ 12,814
Foreign exchange and gold contracts 2 14,996 – 14,998
Equity contracts 237 1,547 573 2,357
Credit contracts – 970 4 974
Other 875 1,380 41 2,296
$ 1,114 $ 31,561 $ 764 $ 33,439
Liabilities:
Deposits
(4)
$ – $ 136 $ 1,011 $ 1,147
Financial liabilities designated at fair value through profit or loss $ – $ 465 $ – $ 465
Obligations related to securities sold short $24,025 $ 3,025 $ – $ 27,050
Derivative financial instruments
Interest rate contracts $ – $ 13,003 $ 52 $ 13,055
Foreign exchange and gold contracts 3 13,927 – 13,930
Equity contracts 463 1,711 456 2,630
Credit contracts – 3,947 2 3,949
Other 579 2,295 – 2,874
$ 1,045 $ 34,883 $ 510 $ 36,438
Instruments not carried at fair value
(5)
:
Assets:
Investment securities – Held to maturity $ – $ 166 $ – $ 166
Loans
(6)
– – 248,177 248,177
Liabilities:
Deposits
(6)(7)
– 267,343 – 267,343
Subordinated debt – 5,073 – 5,073
Other liabilities – 10,318 – 10,318
(1) The fair value of precious metals is determined based on quoted market prices and forward spot prices.
(2) Consists primarily of base metal positions. The fair value of these positions is determined based on quoted prices in active markets.
(3) Excludes investments which are held-to-maturity of $166.
(4) These amounts represent embedded derivatives bifurcated from structured deposit notes.
(5) Represents the fair value of financial assets and liabilities where the carrying amount is not a reasonable approximation of fair value.
(6) Excludes floating rate instruments as carrying value approximates fair value.
(7) Excludes embedded derivatives bifurcated from structured deposit notes.
144 2014 Scotiabank Annual Report
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As at October 31, 2013
(1)
($ millions) Level 1 Level 2 Level 3 Total
Instruments carried at fair value on a recurring basis:
Assets:
Precious metals
(2)
$ – $ 8,880 $ – $ 8,880
Trading assets
Loans – 11,225 – 11,225
Canadian federal government and government guaranteed debt 11,587 – – 11,587
Canadian provincial and municipal debt – 6,697 – 6,697
US treasury and other US agencies’ debt 12,239 – – 12,239
Other foreign governments’ debt 6,183 1,092 – 7,275
Corporate and other debt 219 10,878 31 11,128
Income funds and hedge funds 163 4,093 1,248 5,504
Equity securities 29,468 214 84 29,766
Other
(3)
1,068 – – 1,068
$ 60,927 $ 43,079 $ 1,363 $ 105,369
Financial assets designated at fair value through profit or loss $ – $ 69 $ 37 $ 106
Investment securities
(4)
Canadian federal government and government guaranteed debt $ 6,874 $ 245 $ – $ 7,119
Canadian provincial government and municipal debt 988 2,275 – 3,263
US treasury and other US agencies’ debt 2,622 173 – 2,795
Other foreign governments’ debt 4,406 5,383 402 10,191
Bonds of designated emerging markets 112 37 – 149
Corporate and other debt 1,211 5,083 487 6,781
Mortgage-backed securities – 116 12 128
Equity securities 2,391 217 1,113 3,721
$ 18,604 $ 13,529 $ 2,014 $ 34,147
Derivative financial instruments
Interest rate contracts $ – $ 11,893 $ 88 $ 11,981
Foreign exchange and gold contracts 2 8,846 37 8,885
Equity contracts 242 785 302 1,329
Credit contracts – 953 13 966
Other 461 874 7 1,342
$ 705 $ 23,351 $ 447 $ 24,503
Liabilities:
Deposits
(5)
$ – $ 25 $ 937 $ 962
Financial liabilities designated at fair value through profit or loss $ – $ 174 $ – $ 174
Obligations related to securities sold short $ 22,441 $ 2,536 $ – $ 24,997
Derivative financial instruments
Interest rate contracts $ – $ 11,772 $ 15 $ 11,787
Foreign exchange and gold contracts 1 7,505 – 7,506
Equity contracts 464 2,503 745 3,712
Credit contracts – 5,039 23 5,062
Other 371 828 1 1,200
$ 836 $ 27,647 $ 784 $ 29,267
Instruments not carried at fair value:
(6)
Assets:
Investment securities – Held to maturity $ – $ 172 $ – $ 172
Loans
(7)
– – 239,070 239,070
Liabilities:
Deposits
(7)(8)
– 265,139 – 265,139
Subordinated debt – 6,059 – 6,059
Other liabilities – 9,382 – 9,382
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of IFRS 10 in 2014 (refer to Note 4).
(2) The fair value of precious metals is determined based on quoted market prices and forward spot prices.
(3) Consists primarily of base metal positions. The fair value of these positions is determined based on quoted prices in active markets.
(4) Excludes investments which are held-to-maturity of $172.
(5) These amounts represent embedded derivatives bifurcated from structured deposit notes.
(6) Represents the fair value of financial assets and liabilities where the carrying amount is not a reasonable approximation of fair value.
(7) Excludes floating rate instruments as carrying value approximates fair value.
(8) Excludes embedded derivatives bifurcated from structured deposit notes.
Non-recurring fair value measurements
There were no non-recurring fair value measurements at October 31, 2014 and October 31, 2013.
2014 Scotiabank Annual Report 145
CONSOLIDATED FINANCIAL STATEMENTS
Level 3 instrument fair value changes
Financial instruments categorized as Level 3 in the fair value hierarchy comprise certain illiquid government bonds, highly-structured corporate bonds,
mortgage-backed securities, illiquid investments in funds, private equity securities, income funds, hedge funds, complex derivatives, and embedded
derivatives in structured deposit notes.
The following tables summarize changes in Level 3 instruments carried at fair value for the year ended October 31, 2014.
All positive balances represent assets and negative balances represent liabilities. Consequently, positive amounts indicate purchases of assets or
settlement of liabilities and negative amounts indicate sales of assets or issuances of liabilities.
As at October 31, 2014
($ millions)
Fair value
November 1
2013
Gains/(losses)
recorded in
income
(1)
Gains/(losses)
recorded in
OCI
(2)
Purchases/
Issuances
Sales/
Settlements
Transfers
into/(out of)
Level 3
Fair value
October 31
2014
Change in
unrealized
gains/(losses)
recorded in
income for
instruments
still held
(3)
Trading assets
Corporate and other debt $ 31 $ 1 $ – $ – $ – $ – $ 32 $ –
Income funds and hedge funds 1,285 101 – 75 (158) – 1,303 95
(4)
Equity securities 84 5 – 46 (84) – 51 6
1,400 107 – 121 (242) – 1,386 101
Investment securities
Other foreign governments’ debt 402 26 8 536 (561) – 411 –
Corporate and other debt 487 157 (115) 314 (343) – 500 –
Mortgage-backed securities 12 1 – 29 (3) – 39 –
Equity securities 1,113 276 (57) 111 (437) – 1,006 –
2,014 460 (164) 990 (1,344) – 1,956 –
Derivative financial instruments-assets
Interest rate contracts 88 45 – 21 (8) – 146 45
Foreign exchange and gold contracts 37 (7) – – – (30) – –
Equity contracts 302 155 – 310 (194) – 573 36
(5)
Credit contracts 13 (9) – – – – 4 (9)
Other 7 7 – 30 (3) – 41 3
Derivative financial instruments – liabilities
Interest rate contracts (15) (8) – (33) 4 – (52) (8)
Equity contracts (745) (237) – (25) 641 (90) (456) (71)
(5)
Credit contracts (23) 13 – – 8 – (2) 6
Other (1) – – – 1 – – –
(337) (41) – 303 449 (120) 254 2
Deposits
(6)
(937) (74) – – – – (1,011) (74)
(4)
Total 2,140 452 (164) 1,414 (1,137) (120) 2,585 29
(1) Gains and losses on trading assets and all derivative financial instruments are included in trading revenues in the Consolidated Statement of Income. Gains and losses on disposal of
investment securities are included in net gain on sale of investment securities in the Consolidated Statement of Income.
(2) Gains and losses from fair value changes of investment securities are presented in the net change in unrealized gains (losses) on available-for-sale securities in the Consolidated
Statement of Shareholder’s Equity – Accumulated Other Comprehensive Income.
(3) 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.
(4) The unrealized gain on income funds and hedge funds units is mostly offset by the mark-to-market changes in an equity-linked note and certain other derivative instruments in
structured transactions. Both gains and offsetting losses are included in trading revenues in the Consolidated Statement of Income.
(5) Certain unrealized gains and losses on derivative assets and liabilities are largely offset by mark-to-market changes on other instruments included in trading revenues in the
Consolidated Statement of Income, since these instruments act as an economic hedge to certain derivative assets and liabilities.
(6) These amounts represent embedded derivatives bifurcated from structured deposit notes.
The following table summarizes the changes in Level 3 instruments carried at fair value for the year ended October 31, 2013.
As at October 31, 2013
(1)
($ millions)
Fair value
November 1
2012
Gains/(losses)
recorded in
income
(2)
Gains/(losses)
recorded
in OCI
Purchases/
Issuances
Sales/
Settlements
Transfers
into/(out of)
Level 3
Fair value
October 31
2013
Trading assets
(3)
$ 1,405 $ 198 $ – $ 74 $ (275) $ (2) $ 1,400
Investment securities 1,837 89 59 781 (723) (29) 2,014
Derivative financial instruments (438) (35) 1 4 97 34 (337)
Deposits
(4)
(847) (90) – – – – (937)
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of IFRS 10 in 2014 (refer to Note 4).
(2) Gains and losses for items in Level 3 may be offset with losses and gains on related hedges in Level 1 or Level 2.
(3) Trading assets include an insignificant amount of financial assets designated at fair value through profit or loss.
(4) These amounts represent embedded derivatives bifurcated from structured deposit notes.
146 2014 Scotiabank Annual Report
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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.
As at October 31, 2014 Valuation technique
Significant
unobservable inputs
Range of estimates (weighted
average) for unobservable inputs
(1)
Changes in fair value
from reasonably
possible alternatives
($ millions)
Trading assets
(2)
Corporate and other debt Model based Default correlation 68% - 91% –
Investment securities
Other foreign governments’ debt Price based Price 100% (1)/1
Corporate and other debt Price based
Discounted
cash flow
Model based
Price
Discount rate
Credit spread
Default correlation
66% - 95%
1% - 2%
50 bps
68% - 91% (11)/6
Mortgage-backed securities Price based Price 95% –
Private equity securities Market
comparable
General Partner
valuations per
financial statements
Capitalization rate
100%
6% (45)/41
Derivative financial instruments
Interest rate contracts Option pricing
model
Interest rate
volatility 14% - 167% –
Equity contracts Option pricing
model
Equity volatility
Single stock correlation
6% - 71%
-77% - 98% (6)/6
Credit contracts Model based Default correlation 59% - 91% (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, hedge fund investments and embedded derivatives, bifurcated from structured notes, utilize 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.
2014 Scotiabank Annual Report 147
CONSOLIDATED FINANCIAL STATEMENTS
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 and assesses the potential effect that a change in
each unobservable input may have on the fair value measurement.
Correlation
Correlation in a credit derivative or debt instrument refers to the
likelihood of a single default causing a succession of defaults. It affects
the distribution of the defaults throughout the portfolio and therefore
affects the valuation of instruments such as collateralized debt
obligation tranches. A higher correlation may increase or decrease fair
value depending on the seniority of the instrument.
Correlation becomes an input into equity derivative pricing when the
relationship between price movements of two or more of the
underlying assets is relevant.
Discount rate
The discount rate is an interest rate used to bring future values of cash
flows into the present when considering the time value of money. The
discount rate at any given time is the sum of the current risk free rate
and a risk premium. The riskier the cash flows, the higher the risk
premium. An increase in the discount rate would result in a decrease in
the fair value of an instrument, and vice versa.
Credit spread
A credit spread represents the risk premium associated with an
instrument that has a higher credit risk as compared to a benchmark
debt instrument (usually a government bond) with a similar maturity.
An increase in the credit spread on an asset will result in a decrease in
fair value, and vice versa.
General Partner (GP) Valuations per statements
Asset values provided by GPs represent the fair value of investments in
private equity funds.
Volatility
Volatility is a measure of security price fluctuation. Historic volatility is
often calculated as the annualized standard deviation of daily price
variation for a given time period. Implied volatility is volatility, when
input into an option pricing model, that returns a value equal to the
current market value of the option.
Changes in fair value from reasonably possible alternatives
The fair value of Level 3 instruments is determined using
management’s judgements about the appropriate value of
unobservable inputs. Due to the unobservable nature of the inputs
used, there may be uncertainty about the valuation of Level 3
instruments. Management has used reasonably possible alternative
assumptions to determine the sensitivity of these inputs and the
resulting potential impact on fair value of these Level 3 instruments.
For the Bank’s investment securities, the impact of applying these other
reasonably possible inputs is a potential gain of $48 million and a
potential loss of $57 million (October 31, 2013 – potential gain of $3
million and a potential loss of $3 million) recorded through other
comprehensive income until the security is sold or becomes impaired.
For the Bank’s trading securities, derivative instruments and obligations
related to securities sold short, the impact of applying these other
reasonably possible assumptions is a potential net gain of $10 million
and a potential net loss of $10 million (October 31, 2013 – potential
gain of $16 million and a potential loss of $16 million).
A sensitivity analysis has not been performed on certain equity
investments not quoted in an active market that are hedged with total
return swaps.
Significant transfers
Significant transfers can occur between the fair value hierarchy levels
due to additional or new information regarding valuation inputs and
their observability. The Bank recognizes transfers between levels of the
fair value hierarchy as of the end of the reporting period during which
the change has occurred. The following significant transfers were made
among Levels 1, 2 and 3 for the year ended October 31, 2014:
Derivative assets of $632 million were transferred from Level 3 to
Level 2 and derivative assets of $602 million were transferred from
Level 2 to Level 3. Derivative liabilities of $328 million were transferred
from Level 2 to Level 3 and derivative liabilities of $238 million were
transferred from Level 3 to Level 2.
All transfers were as a result of new information being obtained
regarding the observability of inputs used in the valuation.
The following significant transfers were made among Levels 1, 2 and 3
for the year ended October 31, 2013:
Derivatives of $34 million were transferred from Level 2 to Level 3
during the year as new information obtained considered the inputs to
be unobservable.
Investment securities of $31 million were transferred from Level 2 to
Level 3 during the year as a result of market data becoming
unobservable, while $60 million was transferred from Level 3 to Level 1
as a result of securities becoming quoted in an active market.
148 2014 Scotiabank Annual Report
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Day 1 profit
For those products that use valuation techniques for which not all the inputs are market observable, initial profit (Day 1 profit) is not recognized.
When the inputs become observable over the life of the instruments or when the instruments are disposed of (derecognized), the profit is recognized
in income.
For the year ended October 31 ($ millions) 2014 2013
Balance as at beginning of year $ 3 $ 8
Deferral of profit or loss on new transactions – –
Recognized in the Consolidated Statement of Income during the period (3) (5)
Instruments disposed – –
Balance as at end of year $ – $ 3
8 Trading assets
(a) Trading securities
An analysis of the carrying value of trading securities is as follows:
As at October 31, 2014 ($ 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 and
government guaranteed debt $ 1,222 $ 1,115 $ 5,778 $ 3,895 $ 1,838 $ – $ 13,848
Canadian provincial and municipal debt 1,323 1,530 2,161 869 1,648 – 7,531
U.S. treasury and other U.S. agencies’ debt 54 365 4,525 2,699 3,333 – 10,976
Other foreign governments’ debt 1,809 1,363 3,773 1,483 1,806 – 10,234
Common shares – – – – – 40,204 40,204
Other 723 1,605 6,604 1,903 1,735 – 12,570
Total $ 5,131 $ 5,978 $ 22,841 $ 10,849 $ 10,360 $ 40,204 $ 95,363
Total by currency (in Canadian equivalent):
Canadian dollar $ 3,012 $ 2,877 $ 10,542 $ 5,481 $ 5,265 $ 30,435 $ 57,612
U.S. dollar 743 1,575 7,710 3,930 3,356 3,013 20,327
Mexican peso 218 216 573 80 60 475 1,622
Other currencies 1,158 1,310 4,016 1,358 1,679 6,281 15,802
Total trading securities $ 5,131 $ 5,978 $ 22,841 $ 10,849 $ 10,360 $ 40,204 $ 95,363
As at October 31, 2013 ($ 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 and
government guaranteed debt $ 2,117 $ 929 $ 5,107 $ 1,201 $ 2,233 $ – $ 11,587
Canadian provincial and municipal debt 882 1,175 1,787 1,122 1,731 – 6,697
U.S. treasury and other U.S. agencies’ debt 299 1,220 7,337 1,475 1,908 – 12,239
Other foreign governments’ debt 1,587 946 1,842 1,553 1,347 – 7,275
Common shares – – – – – 35,270 35,270
Other 1,033 1,398 6,883 1,295 519 – 11,128
Total $ 5,918 $ 5,668 $ 22,956 $ 6,646 $ 7,738 $ 35,270 $ 84,196
Total by currency (in Canadian equivalent):
Canadian dollar $ 3,798 $ 2,673 $ 10,606 $ 3,120 $ 4,257 $ 29,135 $ 53,589
U.S. dollar 637 1,942 10,016 1,978 2,134 2,905 19,612
Mexican peso 877 591 639 109 11 464 2,691
Other currencies 606 462 1,695 1,439 1,336 2,766 8,304
Total trading securities $ 5,918 $ 5,668 $ 22,956 $ 6,646 $ 7,738 $ 35,270 $ 84,196
2014 Scotiabank Annual Report 149
CONSOLIDATED FINANCIAL STATEMENTS
(b) Trading loans
The following table provides the geographic breakdown of trading loans:
As at October 31 ($ millions) 2014 2013
Trading loans
(1)(2)
U.S.
(3)
$ 8,266 $ 5,941
Europe
(4)
2,408 2,485
Asia Pacific
(4)
2,957 1,854
Canada
(4)
123 97
Other
(4)
754 848
Total $14,508 $11,225
(1) Geographic segmentation of trading loans is based upon the location of the ultimate risk of the underlying asset.
(2) Loans denominated in U.S. dollars.
(3) Includes trading loans that serve as a hedge to loan-based credit total return swaps of $5,437 (2013 – $3,220), while the remaining relates to short-term precious metals trading
and lending activities.
(4) These loans are primarily related to short-term precious metals trading and lending activities.
9 Financial instruments designated at fair value through profit or loss
The Bank has elected to designate certain portfolios of assets and liabilities at fair value through profit or loss, which are carried at fair value with
changes in fair values recorded in the Consolidated Statement of Income.
These portfolios include:
– certain investments, in order to significantly reduce an accounting mismatch between fair value changes in these assets and fair value changes in
related derivatives.
– certain deposit note liabilities containing extension and equity linked features, in order to significantly reduce an accounting mismatch between
fair value changes in these liabilities and fair value changes in related derivatives.
The following table presents the fair value of financial assets and liabilities designated at fair value through profit or loss and their changes in fair
value.
Fair value Change in fair value
(1)
Cumulative change in FV
As at For the year ended
October 31 ($ millions) 2014 2013 2014 2013 2014 2013
Investment securities $ 111 $ 106 $ – $ 6 $ 13 $ 13
Deposit note liabilities
(2)
465 174 16 10 18 2
(1) These gain and/or loss amounts are recorded in other operating income – other.
(2) As at October 31, 2014, the Bank was contractually obligated to pay $483 to the holders of the note at maturity (2013 – $176).
150 2014 Scotiabank Annual Report
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10 Derivative financial instruments
(a) Notional amounts
The following table provides the aggregate notional amounts of derivative financial instruments outstanding by type and segregated between those
used by the Bank in its dealer capacity (Trading) and those derivatives designated in hedging relationships. The notional amounts of these contracts
represent the derivatives volume outstanding and do not represent the potential gain or loss associated with the market risk or credit risk of such
instruments. The notional amounts represent the amount to which a rate or price is applied to determine the amount of cash flows to be exchanged.
Credit derivatives within Other derivative contracts are comprised primarily of purchased and sold credit default swap transactions. To a lesser extent,
this category also includes total return swaps referenced to loans and debt securities. Other derivative contracts – other includes precious metals other
than gold, and other commodities including energy and base metal derivatives.
2014 2013
As at October 31 ($ millions) Trading Hedging Total Trading Hedging Total
Interest rate contracts
Exchange-traded:
Futures $ 206,138 $ – $ 206,138 $ 146,741 $ – $ 146,741
Options purchased 31,294 – 31,294 2,935 – 2,935
Options written 31,953 – 31,953 2,494 – 2,494
269,385 – 269,385 152,170 – 152,170
Over-the-counter:
Forward rate agreements 32,582 – 32,582 72,392 – 72,392
Swaps 605,342 47,291 652,633 680,053 59,145 739,198
Options purchased 16,622 – 16,622 57,192 – 57,192
Options written 18,757 – 18,757 52,916 – 52,916
673,303 47,291 720,594 862,553 59,145 921,698
Over-the-counter (settled through central
counterparties):
Forward rate agreements 567,049 – 567,049 160,749 – 160,749
Swaps 2,394,336 46,129 2,440,465 1,326,419 20,065 1,346,484
Options purchased – – – – – –
Options written – – – – – –
2,961,385 46,129 3,007,514 1,487,168 20,065 1,507,233
Total $ 3,904,073 $ 93,420 $ 3,997,493 $ 2,501,891 $ 79,210 $ 2,581,101
Foreign exchange and gold contracts
Exchange-traded:
Futures $ 4,666 $ – $ 4,666 $ 6,688 $ – $ 6,688
Options purchased 64 – 64 23 – 23
Options written – – – – – –
4,730 – 4,730 6,711 – 6,711
Over-the-counter:
Spot and forwards 430,878 13,422 444,300 272,633 14,337 286,970
Swaps 235,281 30,705 265,986 185,757 20,541 206,298
Options purchased 3,083 – 3,083 2,461 – 2,461
Options written 2,308 – 2,308 2,050 – 2,050
671,550 44,127 715,677 462,901 34,878 497,779
Over-the-counter (settled through central
counterparties):
Spot and forwards 11 – 11 – – –
Swaps – – – – – –
Options purchased – – – – – –
Options written 334 – 334 – – –
345 – 345 – – –
Total $ 676,625 $ 44,127 $ 720,752 $ 469,612 $ 34,878 $ 504,490
Other derivative contracts
Exchange-traded:
Equity: over-the-counter $ 15,986 $ – $ 15,986 $ 2,012 $ – $ 2,012
Credit: over-the-counter – – – – – –
Other 82,512 – 82,512 51,529 – 51,529
98,498 – 98,498 53,541 – 53,541
Over-the-counter:
Equity: over-the-counter 49,887 – 49,887 40,776 – 40,776
Credit: over-the-counter 54,647 – 54,647 70,383 – 70,383
Other 44,017 – 44,017 37,397 – 37,397
148,551 – 148,551 148,556 – 148,556
Over-the-counter (settled through central
counterparties):
Equity: over-the-counter 735 – 735 3 – 3
Credit: over-the-counter 3,276 – 3,276 7,114 – 7,114
Other 512 – 512 3 – 3
4,523 – 4,523 7,120 – 7,120
Total $ 251,572 $ – $ 251,572 $ 209,217 $ – $ 209,217
Total notional amounts outstanding $ 4,832,270 $ 137,547 $ 4,969,817 $ 3,180,720 $ 114,088 $ 3,294,808
2014 Scotiabank Annual Report 151
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, 2014 ($ millions) Within one year One to five years Over five years Total
Interest rate contracts
Futures $ 205,986 $ 71 $ 81 $ 206,138
Forward rate agreements 423,781 175,099 751 599,631
Swaps 1,189,834 1,378,480 524,784 3,093,098
Options purchased 43,987 – 3,929 47,916
Options written 46,033 – 4,677 50,710
1,909,621 1,553,650 534,222 3,997,493
Foreign exchange and gold contracts
Futures 4,421 245 – 4,666
Spot and forwards 397,044 46,484 783 444,311
Swaps 46,395 148,764 70,827 265,986
Options purchased 2,420 727 – 3,147
Options written 2,317 325 – 2,642
452,597 196,545 71,610 720,752
Other derivative contracts
Equity 40,211 25,595 802 66,608
Credit 17,729 37,676 2,518 57,923
Other 81,465 45,099 477 127,041
139,405 108,370 3,797 251,572
Total $ 2,501,623 $ 1,858,565 $ 609,629 $ 4,969,817
As at October 31, 2013 ($ millions) Within one year One to five years Over five years Total
Interest rate contracts
Futures $ 70,954 $ 75,658 $ 129 $ 146,741
Forward rate agreements 177,554 55,587 – 233,141
Swaps 637,811 1,020,130 427,741 2,085,682
Options purchased 51,010 8,298 819 60,127
Options written 45,329 8,344 1,737 55,410
982,658 1,168,017 430,426 2,581,101
Foreign exchange and gold contracts
Futures 2,057 4,631 – 6,688
Spot and forwards 274,546 11,595 829 286,970
Swaps 34,362 114,192 57,744 206,298
Options purchased 2,115 369 – 2,484
Options written 1,824 226 – 2,050
314,904 131,013 58,573 504,490
Other derivative contracts
Equity 34,467 7,631 693 42,791
Credit 44,777 30,832 1,888 77,497
Other 44,316 43,996 617 88,929
123,560 82,459 3,198 209,217
Total $ 1,421,122 $ 1,381,489 $ 492,197 $ 3,294,808
(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.
Negotiated over-the-counter derivatives often 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.
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, 2014. To control credit
risk associated with derivatives, the Bank uses the same credit risk
management activities and procedures that are used in the lending
business in assessing and adjudicating potential credit exposure. The
Bank applies limits to each counterparty, measures exposure as the
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current positive fair value plus potential future exposure, and uses
credit mitigation techniques, such as netting and collateralization.
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 uncollateralized mark-to-
market exposure exceeds an agreed upon threshold. Such variation
margin provisions can be one way (only one party will ever post
collateral) or bi-lateral (either party may post collateral depending upon
which party is in-the-money). The CSA will also detail the types of
collateral that are acceptable to each party, and the 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 74 of
the 2014 Annual Report).
Derivatives instruments used by the Bank include credit derivatives in its
investment and loan portfolios: credit protection is sold as an
alternative to acquire exposure to bond or loan assets, while credit
protection is 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 taking into account master netting or collateral arrangements
that have been made. The CRA does not reflect actual or expected
losses.
The credit equivalent amount (CEA) is the CRA plus an add-on for
potential future exposure. The add-on amount is based on a formula
prescribed in the Capital Adequacy Requirements (CAR) Guideline of
the Superintendent. The risk-weighted balance 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.
2014 2013
(1)
As at October 31 ($ millions) Notional amount
Credit risk
amount
(CRA)
(2)
Credit
equivalent
amount
(CEA)
(2)
CET1
Risk
Weighted
Assets
(3)
Notional amount
Credit risk
amount
(CRA)
(2)
Credit
equivalent
amount
(CEA)
(2)
Risk
Weighted
Assets
(2)
Interest rate contracts
Futures $ 206,138 $ – $ 1,030 $ 21 $ 146,741 $ – $ – $ –
Forward rate agreements 599,631 106 459 23 233,141 8 883 29
Swaps 3,093,098 1,858 9,053 1,475 2,085,682 2,133 8,639 1,744
Options purchased 47,916 18 106 125 60,127 13 54 16
Options written 50,710 – – – 55,410 – – –
3,997,493 1,982 10,648 1,644 2,581,101 2,154 9,576 1,789
Foreign exchange and gold contracts
Futures 4,666 – 232 5 6,688 – – –
Spot and forwards 444,311 2,451 6,303 1,565 286,970 1,338 3,946 1,067
Swaps 265,986 1,495 6,190 1,426 206,298 916 4,171 1,181
Options purchased 3,147 19 69 19 2,484 16 47 13
Options written 2,642 – – – 2,050 – – –
720,752 3,965 12,794 3,015 504,490 2,270 8,164 2,261
Other derivative contracts
Equity 66,608 860 5,726 2,260 42,791 460 4,017 1,775
Credit 57,923 548 1,405 374 77,497 539 3,273 587
Other 127,041 1,582 11,863 1,702 88,929 955 7,409 1,434
251,572 2,990 18,994 4,336 209,217 1,954 14,699 3,796
Credit Valuation Adjustment
(3)
– – – 5,632 – – – –
Total derivatives $ 4,969,817 $ 8,937 $ 42,436 $ 14,627 $ 3,294,808 $ 6,378 $ 32,439 $ 7,846
Amount settled through central
counterparties
(4)
Exchange-traded 372,613 – 9,247 185 212,422 – 5,668 113
Over-the-counter 3,012,382 – 6,072 121 1,514,353 – 4,637 93
$ 3,384,995 $ – $ 15,319 $ 306 $ 1,726,775 $ – $ 10,305 $ 206
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of IFRS 10 in 2014 (refer to Note 4) and current period presentation.
(2) The amounts presented are net of collateral and master netting agreements at the product level. The total amounts relating to netting and collateral were $24,502 (2013 –
$18,125) for CRA, and $39,276 (2013 – $31,039) for CEA.
(3) As per OSFI guideline, effective 2014, Credit Valuation Adjustment to CET1 RWA for derivatives was phased-in at 0.57.
(4) Amounts are included under total derivatives above. Amounts include exposures settled directly through central counterparties and exposures settled through clearing members of
central counterparties.
2014 Scotiabank Annual Report 153
CONSOLIDATED FINANCIAL STATEMENTS
(d) Fair value
The following table summarizes the fair value of derivatives segregated by type and segregated between trading and those derivatives designated in
hedging relationships.
As at October 31 ($ millions) 2014 2014 2013
(1)
Average fair value
(2)
Year-end fair value Year-end fair value
Favourable Unfavourable Favourable Unfavourable Favourable Unfavourable
Trading
Interest rate contracts
Forward rate agreements $ 59 $ 11 $ 113 $ 4 $ 36 $ 25
Swaps 11,406 11,189 11,908 12,374 11,116 10,901
Options 101 148 119 152 72 110
11,566 11,348 12,140 12,530 11,224 11,036
Foreign exchange and gold contracts
Forwards 4,575 4,154 7,573 6,423 3,930 3,618
Swaps 5,043 4,757 6,055 6,534 4,247 3,488
Options 85 46 50 53 79 41
9,703 8,957 13,678 13,010 8,256 7,147
Other derivative contracts
Equity 1,701 2,991 2,346 2,631 1,323 3,713
Credit 931 4,646 910 3,948 969 5,166
Other 1,928 1,560 2,327 2,873 1,375 1,200
4,560 9,197 5,583 9,452 3,667 10,079
Trading derivatives’ market valuation $ 25,829 $ 29,502 $ 31,401 $ 34,992 $ 23,147 $ 28,262
Hedging
Interest rate contracts
Swaps $ 696 $ 494 $ 701 $ 528
Foreign exchange and gold contracts
Forwards 77 273 153 165
Swaps 1,265 679 502 312
1,342 952 655 477
Hedging derivatives’ market valuation $ 2,038 $ 1,446 $ 1,356 $ 1,005
Total derivative financial instruments as per Statement of
Financial Position $ 33,439 $ 36,438 $ 24,503 $ 29,267
Less: impact of master netting and collateral
(3)
24,502 24,502 18,125 18,125
Net derivative financial instruments
(3)
$ 8,937 $ 11,936 $ 6,378 $ 11,142
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of IFRS 10 in 2014 (refer to Note 4) and current period presentation.
(2) The average fair value of trading derivatives’ market valuation for the year ended October 31, 2013 was: favourable $26,874 and unfavourable $30,938. Average fair value
amounts are based on the latest 13 month-end balances.
(3) Master netting agreement amounts are based on the capital adequacy criteria of the Basel Committee on Banking Supervision (BCBS) and OSFI. These criteria allow netting where
there are legally enforceable contracts which enable net settlement in the event of a default, bankruptcy, liquidation or similar circumstances.
(e) Hedging activities
The Bank’s hedging activities that qualify for hedge accounting consist of fair value hedges, cash flow hedges, and net investment hedges.
Ineffectiveness of hedge relationships
Due to the ineffective portion of designated hedges, the Bank recorded the following amounts in other operating income – other:
For the year ended October 31 ($ millions) 2014 2013
Fair value hedges
Gain (loss) recorded on hedged items $ 55 $ 441
Gain (loss) recorded on hedging instruments (74) (445)
Ineffectiveness $ (19) $ (4)
Cash flow hedges
Ineffectiveness $ (2) $ 9
Net investment hedges
Ineffectiveness – –
Hedging instruments
Market valuation is disclosed by the type of relationship:
2014 2013
As at October 31 ($ millions) Favourable Unfavourable Favourable Unfavourable
Derivatives designated in fair value hedging relationships
(1)
$ 791 $ 566 $ 687 $ 570
Derivatives designated in cash flow hedging relationships 1,183 632 532 274
Derivatives designated in net investment hedging relationships
(1)
64 248 137 161
Total derivatives designated in hedging relationships $ 2,038 $ 1,446 $ 1,356 $ 1,005
(1) As at October 31, 2014, the fair value of non-derivative instruments designated as net investment hedges and fair value hedges was $6,666 (2013 – $6,009). These non-derivative
hedging instruments are presented as deposits – financial institutions on the Consolidated Statement of Financial Position.
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Cash flow hedges
The period when cash flows of designated hedged items are expected to occur and impact the Consolidated Statement of Income are as follows:
As at October 31, 2014 ($ millions) Within one year
Within one
to five years
More than
five years
Cash inflows from assets $ 619 $ 665 $ 2,363
Cash outflows from liabilities (5,992) (11,515) (2,287)
Net cash flows $ (5,373) $(10,850) $ 76
As at October 31, 2013 ($ millions) Within one year
Within one
to five years
More than
five years
Cash inflows from assets $ 2,347 $ 1,326 $ 77
Cash outflows from liabilities (3,230) (9,649) (77)
Net cash flows $ (883) $ (8,323) $ –
Income related to interest cash flows is recognized using the effective interest method over the life of the underlying instrument. Foreign currency
gains and losses related to future cash flows of on-balance sheet monetary items are recognized as incurred. Forecasted revenue is recognized over
the period to which it relates.
11 Offsetting financial assets and financial liabilities
The Bank is eligible to present certain financial assets and financial liabilities 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, 2014 ($ millions)
Types of financial assets
(1)
Gross amounts
of recognized
financial assets
Gross amounts of
recognized financial
liabilities offset in
the consolidated
statement of
financial position
Net amounts of
financial assets
presented in the
consolidated
statement of
financial position
Related amounts not offset
in the consolidated statement
of financial position
Impact of
master netting
arrangements
or similar
agreements
(2)
Collateral
(3)
Net amount
(4)
Derivative financial instruments
(5)
$ 47,036 $ (13,597) $ 33,439 $ (19,878) $ (4,849) $ 8,712
Securities purchased under resale agreements
and securities borrowed 102,569 (8,703) 93,866 (13,183) (75,697) 4,986
Total $ 149,605 $ (22,300) $ 127,305 $ (33,061) $ (80,546) $ 13,698
As at October 31, 2014 ($ millions)
Types of financial liabilities
(1)
Gross amounts
of recognized
financial liabilities
Gross amounts of
recognized financial
assets offset in
the consolidated
statement of
financial position
Net amounts of
financial liabilities
presented in the
consolidated
statement of
financial position
Related amounts not offset
in the consolidated statement
of financial position
Impact of
master netting
arrangements
or similar
agreements
(2)
Collateral
(3)
Net amount
(4)
Derivative financial instruments
(5)
$ 50,035 $ (13,597) $ 36,438 $ (19,878) $ (3,557) $ 13,003
Obligations related to securities sold under
repurchase agreements and securities lent 97,656 (8,703) 88,953 (13,183) (68,168) 7,602
Total $ 147,691 $ (22,300) $ 125,391 $ (33,061) $ (71,725) $ 20,605
(1) Subject to offsetting, enforceable master netting arrangements or similar agreements.
(2) Amounts that are subject to master netting arrangements or similar agreements but were not offset 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.
(3) 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.
(4) 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.
(5) For fiscal 2014, the cash collateral received against the positive market values of derivative financial instruments of $1,268 and the cash collateral pledged towards the negative
mark to market of derivative financial instruments of $493 are recorded within other liabilities and other assets respectively.
2014 Scotiabank Annual Report 155
CONSOLIDATED FINANCIAL STATEMENTS
As at October 31, 2013 ($ millions)
Types of financial assets
(1)
Gross amounts
of recognized
financial assets
Gross amounts of
recognized financial
liabilities offset in
the consolidated
statement of
financial position
Net amounts of
financial assets
presented in the
consolidated
statement of
financial position
Related amounts not offset
in the consolidated statement
of financial position
Impact of
master netting
arrangements
or similar
agreements
(2)
Collateral
(3)
Net amount
(4)
Derivative financial instruments
(5)
$ 31,948 $ (7,445) $ 24,503 $ (15,689) $ (2,512) $ 6,302
Securities purchased under resale agreements
and securities borrowed 87,313 (4,780) 82,533 (12,636) (58,946) 10,951
Total $ 119,261 $ (12,225) $ 107,036 $ (28,325) $ (61,458) $ 17,253
As at October 31, 2013 ($ millions)
Types of financial liabilities
(1)
Gross amounts
of recognized
financial liabilities
Gross amounts of
recognized financial
assets offset in
the consolidated
statement of
financial position
Net amounts of
financial liabilities
presented in the
consolidated
statement of
financial position
Related amounts not offset
in the consolidated statement
of financial position
Impact of
master netting
arrangements
or similar
agreements
(2)
Collateral
(3)
Net amount
(4)
Derivative financial instruments
(5)
$ 36,712 $ (7,445) $ 29,267 $ (15,689) $ (3,029) $ 10,549
Obligations related to securities sold under
repurchase agreements and securities lent 82,288 (4,780) 77,508 (12,636) (58,343) 6,529
Total $ 119,000 $ (12,225) $ 106,775 $ (28,325) $ (61,372) $ 17,078
(1) Subject to offsetting, enforceable master netting arrangements or similar agreements.
(2) Amounts that are subject to master netting arrangements or similar agreements but were not offset 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.
(3) 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.
(4) 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.
(5) For fiscal 2013, the cash collateral received against the positive market values of derivative financial instruments of $706 and the cash collateral pledged towards the negative mark
to market of derivative financial instruments of $456 are recorded within other liabilities and other assets respectively.
12 Investment securities
Investment securities includes held-to-maturity securities and available-for-sale securities.
(a) An analysis of the carrying value of investment securities is as follows:
Remaining term to maturity
As at October 31, 2014 ($ millions)
Within
three
months
Three to
twelve
months
One to
five
years
Five to
ten years
Over ten
years
No
specific
maturity
Carrying
value
Available-for-sale
Canadian federal government issued or guaranteed
debt $ 11 $ 237 $ 4,205 $ 1,310 $ 1,088 $ – $ 6,851
Yield
(1)
% 1.0 2.8 1.7 2.5 1.5 – 1.8
Canadian provincial and municipal debt – 202 2,614 480 7 – 3,303
Yield
(1)
% – 1.7 1.5 1.8 3.2 – 1.5
U.S. treasury and other U.S. agencies’ debt 321 637 5,261 – 7 – 6,226
Yield
(1)
% – – 0.6 – 0.3 – 0.5
Other foreign governments’ debt 2,179 3,784 3,905 661 454 – 10,983
Yield
(1)
% 2.0 2.2 3.5 6.1 6.3 – 3.0
Bonds of designated emerging markets 7 – 11 27 – – 45
Yield
(1)
% 10.7 – 12.4 4.4 – – 7.8
Other debt 1,003 1,406 3,734 497 147 – 6,787
Yield
(1)
% 3.0 1.9 1.5 1.2 2.5 – 1.8
Preferred shares – – – – – 368 368
Common shares – – – – – 3,933 3,933
Total available-for-sale securities 3,521 6,266 19,730 2,975 1,703 4,301 38,496
Held-to-maturity
Other foreign governments’ debt – – 146 20 – – 166
Total investment securities $ 3,521 $ 6,266 $ 19,876 $ 2,995 $ 1,703 $ 4,301 $ 38,662
Total by currency (in Canadian equivalent):
Canadian dollar $ 13 $ 263 $ 6,249 $ 1,352 $ 1,110 $ 1,938 $ 10,925
U.S. dollar 549 1,681 7,781 267 150 1,736 12,164
Mexican peso 332 92 2,170 126 85 44 2,849
Other currencies 2,627 4,230 3,676 1,250 358 583 12,724
Total investment securities $ 3,521 $ 6,266 $ 19,876 $ 2,995 $ 1,703 $ 4,301 $ 38,662
(1) Represents the weighted-average yield of fixed income securities.
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Remaining term to maturity
As at October 31, 2013
(1)
($ millions)
Within
three
months
Three to
twelve
months
One to
five
years
Five to
ten years
Over ten
years
No
specific
maturity
Carrying
value
Available-for-sale
Canadian federal government issued or
guaranteed debt $ 607 $ 1,126 $ 4,117 $ 1,268 $ 1 $ – $ 7,119
Yield
(2)
% 0.9 2.8 1.8 2.5 2.6 – 2.0
Canadian provincial and municipal debt 71 112 2,794 279 7 – 3,263
Yield
(2)
% 0.3 3.0 1.4 1.6 3.2 – 1.5
U.S. treasury and other U.S. agencies’ debt 166 592 2,077 – 7 – 2,842
Yield
(2)
% – 0.1 0.4 – 0.3 – 0.4
Other foreign governments’ debt 2,771 3,348 2,844 722 459 – 10,144
Yield
(2)
% 2.1 2.2 4.3 7.5 7.1 – 3.3
Bonds of designated emerging markets 5 51 10 – 83 – 149
Yield
(2)
% 9.1 6.5 9.3 – 10.2 – 8.5
Other debt 861 1,174 4,339 104 431 – 6,909
Yield
(2)
% 4.2 2.9 2.1 3.8 2.6 – 2.5
Preferred shares – – – – – 384 384
Common shares – – – – – 3,337 3,337
Total available-for-sale securities 4,481 6,403 16,181 2,373 988 3,721 34,147
Held-to-maturity
Other foreign governments’ debt – 9 143 14 6 – 172
Total investment securities $ 4,481 $ 6,412 $ 16,324 $ 2,387 $ 994 $ 3,721 $ 34,319
Total by currency (in Canadian equivalent):
Canadian dollar $ 622 $ 1,257 $ 5,824 $ 1,176 $ 26 $ 1,513 $ 10,418
U.S. dollar 594 1,248 5,587 312 530 1,629 9,900
Mexican peso 657 12 1,821 – – 45 2,535
Other currencies 2,608 3,895 3,092 899 438 534 11,466
Total investment securities $ 4,481 $ 6,412 $ 16,324 $ 2,387 $ 994 $ 3,721 $ 34,319
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of IFRS 10 in 2014 (refer to Note 4).
(2) Represents the weighted-average yield of fixed income securities.
(b) An analysis of unrealized gains and losses on available-for-sale securities is as follows:
As at October 31, 2014 ($ millions) Cost
Gross
unrealized
gains
Gross
unrealized
losses Fair value
Canadian federal government issued or guaranteed debt $ 6,704 $ 147 $ – $ 6,851
Canadian provincial and municipal debt 3,284 20 1 3,303
U.S. treasury and other U.S. agencies’ debt 6,218 11 3 6,226
Other foreign governments’ debt 10,940 60 17 10,983
Bonds of designated emerging markets 39 7 1 45
Other debt 6,666 128 7 6,787
Preferred shares 412 15 59 368
Common shares 3,097 871 35 3,933
Total available-for-sale securities $ 37,360 $ 1,259 $ 123 $ 38,496
As at October 31, 2013
(1)
($ millions) Cost
Gross
unrealized
gains
Gross
unrealized
losses Fair value
Canadian federal government issued or guaranteed debt $ 7,036 $ 84 $ 1 $ 7,119
Canadian provincial and municipal debt 3,240 27 4 3,263
U.S. treasury and other U.S. agencies’ debt 2,845 4 7 2,842
Other foreign governments’ debt 10,068 96 20 10,144
Bonds of designated emerging markets 116 34 1 149
Other debt 6,665 276 32 6,909
Preferred shares 413 15 44 384
Common shares 2,627 761 51 3,337
Total available-for-sale securities $ 33,010 $ 1,297 $ 160 $ 34,147
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of IFRS 10 in 2014 (refer to Note 4).
The net unrealized gain on available-for-sale securities of $1,136 million (2013 – gain of $1,137 million) decreases to a net unrealized gain of
$847 million (2013 – gain of $980 million) after the impact of qualifying hedges is taken into account. The net unrealized gain on available-for-sale
securities is recorded in Accumulated Other Comprehensive Income.
2014 Scotiabank Annual Report 157
CONSOLIDATED FINANCIAL STATEMENTS
(c) An analysis of available-for-sale securities with continuous unrealized losses:
Less than twelve months Twelve months or greater Total
As at October 31, 2014 ($ millions) Cost Fair value
Unrealized
losses Cost Fair value
Unrealized
losses Cost Fair value
Unrealized
losses
Canadian federal government issued or
guaranteed debt $ 359 $ 359 $ – $ 80 $ 80 $ – $ 439 $ 439 $ –
Canadian provincial and municipal debt 100 100 – 109 108 1 209 208 1
U.S. treasury and other U.S. agencies’ debt 293 293 – 10 7 3 303 300 3
Other foreign governments’ debt 2,033 2,028 5 338 326 12 2,371 2,354 17
Bonds of designated emerging markets 7 7 – 11 10 1 18 17 1
Other debt 1,161 1,160 1 184 178 6 1,345 1,338 7
Preferred shares 1 1 – 392 333 59 393 334 59
Common shares 779 752 27 93 85 8 872 837 35
Total available-for-sale securities $ 4,733 $ 4,700 $ 33 $ 1,217 $ 1,127 $ 90 $ 5,950 $ 5,827 $ 123
Less than twelve months Twelve months or greater Total
As at October 31, 2013 ($ millions) Cost Fair value
Unrealized
losses Cost Fair value
Unrealized
losses Cost Fair value
Unrealized
losses
Canadian federal government issued or
guaranteed debt $ 712 $ 711 $ 1 $ – $ – $ – $ 712 $ 711 $ 1
Canadian provincial and municipal debt 500 496 4 – – – 500 496 4
U.S. treasury and other U.S. agencies’ debt 458 454 4 50 47 3 508 501 7
Other foreign governments’ debt 3,832 3,814 18 134 132 2 3,966 3,946 20
Bond of designated emerging markets 16 15 1 – – – 16 15 1
Other debt 1,394 1,383 11 547 526 21 1,941 1,909 32
Preferred shares 6 6 – 390 346 44 396 352 44
Common shares 513 476 37 72 58 14 585 534 51
Total available-for-sale securities $ 7,431 $ 7,355 $ 76 $ 1,193 $ 1,109 $ 84 $ 8,624 $ 8,464 $ 160
As at October 31, 2014, the cost of 409 (2013 – 630) available-for-sale
securities exceeded their fair value by $123 million (2013 –
$160 million). This unrealized loss is recorded in accumulated other
comprehensive income as part of unrealized gains (losses) on available-
for-sale securities. Of the 409 (2013 – 630) investment securities, 113
(2013 – 148) have been in an unrealized loss position continuously for
more than a year, amounting to an unrealized loss of $90 million
(2013 – $84 million).
Investment securities are considered to be impaired only if objective
evidence indicates one or more loss events have occurred and have
affected the estimated future cash flows after considering available
collateral.
Collateral is not generally obtained directly from the issuers of debt
securities. However, certain debt securities may be collateralized by
specifically identified assets that would be obtainable in the event of
default.
Investment securities are evaluated for impairment at the end of each
reporting date, or more frequently, if events or changes in
circumstances indicate the existence of objective evidence of
impairment.
(d) Net gain on sale of investment securities
An analysis of net gain on sale of investment securities is as follows:
For the year ended October 31 ($ millions) 2014 2013 2012
Net realized gains or losses $ 755 $ 433 $ 281
Impairment losses
(1)
14 58 96
Net gain on sale of investment securities $ 741 $ 375 $ 185
(1) Impairment losses are comprised of $2 from equity securities (2013 – $28; 2012 – $74) and $12 from other debt securities (2013 – $30; 2012 – $22).
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13 Loans
(a) Loans and acceptances outstanding by geography
(1)
As at October 31 ($ millions) 2014 2013
(2)
Canada:
Residential mortgages $ 188,842 $ 188,937
Personal and credit cards 65,542 58,848
Business and government 38,561 33,641
292,945 281,426
United States:
Personal and credit cards 1,109 1,374
Business and government 22,389 18,585
23,498 19,959
Mexico:
Residential mortgages 5,409 4,369
Personal and credit cards 3,360 2,997
Business and government 7,196 5,508
15,965 12,874
Chile:
Residential mortgages 4,561 4,163
Personal and credit cards 2,434 2,270
Business and government 6,908 6,633
13,903 13,066
Peru:
Residential mortgages 1,896 1,518
Personal and credit cards 3,596 3,223
Business and government 7,794 6,634
13,286 11,375
Colombia:
Residential mortgages 1,240 1,065
Personal and credit cards 3,354 2,871
Business and government 4,498 3,817
9,092 7,753
Other International:
Residential mortgages 10,700 9,813
Personal and credit cards 4,809 4,426
Business and government 43,752 44,796
59,261 59,035
Total loans 427,950 405,488
Acceptances
(3)
9,876 10,556
Total loans and acceptances
(4)
437,826 416,044
Allowance for credit losses (3,641) (3,273)
Total loans and acceptances net of allowances for loan losses $ 434,185 $ 412,771
(1) Geographic segmentation is based on the location of the property for residential mortgages; otherwise, the residence of the borrower.
(2) Certain prior period amounts are retrospectively adjusted to reflect the adoption of IFRS 10 in 2014 (refer to Note 4).
(3) 1% of borrowers reside outside Canada.
(4) Loans and acceptances denominated in U.S. dollars were $80,597 (2013 – $76,348), in Mexican pesos $12,972 (2013 – $10,626), Chilean pesos $10,256 (2013 – $9,702), and in
other foreign currencies $35,721 (2013 – $31,807).
2014 Scotiabank Annual Report 159
CONSOLIDATED FINANCIAL STATEMENTS
(b) Loans and acceptances by type of borrower
2014 2013
(1)
As at October 31 ($ millions) Balance % of total Balance % of total
Residential mortgages $ 212,648 48.6% $ 209,865 50.5%
Personal loans & credit cards 84,204 19.2 76,008 18.3
Personal $ 296,852 67.8% $ 285,873 68.8%
Financial services
Non-Bank 13,364 3.1 11,658 2.8
Bank
(2)
8,922 2.0 12,063 2.9
Wholesale and retail 16,580 3.8 14,117 3.4
Real estate and construction 15,510 3.5 14,210 3.4
Oil and gas 12,853 2.9 10,353 2.5
Transportation 8,125 1.9 7,794 1.9
Automotive 8,122 1.9 7,346 1.8
Agriculture 7,084 1.6 6,113 1.5
Hospitality and leisure 3,567 0.8 3,440 0.8
Mining and primary metals 6,013 1.4 4,723 1.1
Utilities 5,860 1.3 4,438 1.0
Health care 3,494 0.8 3,641 0.9
Technology and media 5,420 1.2 5,266 1.3
Chemical 1,361 0.3 1,286 0.3
Food and beverage 3,883 0.9 3,133 0.7
Forest products 1,333 0.3 1,448 0.3
Other
(3)
15,268 3.5 14,897 3.6
Sovereign
(4)
4,215 1.0 4,245 1.0
Business and government $ 140,974 32.2% $ 130,171 31.2%
$ 437,826 100.0% $ 416,044 100.0%
Total allowance for loan losses (3,641) (3,273)
Total loans and acceptances net of allowance for loan losses $ 434,185 $ 412,771
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of IFRS 10 in 2014 (refer to Note 4).
(2) Deposit taking institutions and securities firms.
(3) Other relates to $6,488 in financing products (October 31, 2013 – $5,740), $1,287 in services (October 31, 2013 – $851), and $1,228 in wealth management (October 31, 2013 –
$965).
(4) Includes central banks, regional and local governments, supra-national agencies.
(c) Loan maturities
As at October 31, 2014 Remaining term to maturity Rate sensitivity
($ 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 $ 47,008 $ 145,539 $ 10,308 $ 8,087 $ 1,706 $ 212,648 $ 53,747 $ 156,985 $ 1,916 $ 212,648
Personal and credit cards 11,735 25,183 4,144 859 42,283 84,204 38,046 45,091 1,067 84,204
Business and government 64,786 56,487 4,351 363 5,111 131,098 87,162 41,794 2,142 131,098
Total $ 123,529 $ 227,209 $ 18,803 $ 9,309 $ 49,100 $ 427,950 $ 178,955 $ 243,870 $ 5,125 $ 427,950
Allowance for credit losses – – – – (3,641) (3,641) – – (3,641) (3,641)
Total loans net of allowance
for credit losses $ 123,529 $ 227,209 $ 18,803 $ 9,309 $ 45,459 $ 424,309 $ 178,955 $ 243,870 $ 1,484 $ 424,309
As at October 31, 2013
(1)
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
(2)
Fixed rate
(2)
Non-rate
sensitive Total
Residential mortgages $ 36,818 $ 154,939 $ 9,700 $ 6,961 $ 1,447 $ 209,865 $ 50,463 $ 157,551 $ 1,851 $ 209,865
Personal and credit cards 11,893 19,781 3,387 939 40,008 76,008 37,154 37,911 943 76,008
Business and government 58,826 51,385 4,070 440 4,894 119,615 76,392 41,113 2,110 119,615
Total loans $ 107,537 $ 226,105 $ 17,157 $ 8,340 $ 46,349 $ 405,488 $ 164,009 $ 236,575 $ 4,904 $ 405,488
Allowance for credit losses – – – – (3,273) (3,273) – – (3,273) (3,273)
Total loans net of allowance
for credit losses $ 107,537 $ 226,105 $ 17,157 $ 8,340 $ 43,076 $ 402,215 $ 164,009 $ 236,575 $ 1,631 $ 402,215
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of IFRS 10 in 2014 (refer to Note 4).
(2) Certain amounts have been reclassified to conform with current year classification.
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14 Impaired loans and allowance for credit losses
(a) Impaired loans
(1)(2)
2014 2013
As at October 31 ($ millions)
Gross
impaired
loans
(1)
Allowance
for credit
losses Net
Gross
impaired
loans
(1)
Allowance
for credit
losses Net
Business and government $ 1,455 $ 614
(3)
$ 841 $ 1,385 $ 561
(3)
$ 824
Residential mortgages 1,491 359
(4)
1,132 1,270 338
(4)
932
Personal and credit cards 1,254 1,225
(4)
29 1,046 994
(4)
52
Total $ 4,200 $ 2,198 $ 2,002 $ 3,701 $ 1,893 $ 1,808
By geography:
Canada $ 378 $ 363
United States 11 149
Other International 1,613 1,296
Total $ 2,002 $ 1,808
(1) Interest income recognized on impaired loans during the year ended October 31, 2014 was $18 (2013 – $19).
(2) Excludes Federal Deposit Insurance Corporation (FDIC) guaranteed loans related to the acquisition of R-G Premier Bank of Puerto Rico.
(3) Allowance for credit losses for business and government loans is individually assessed.
(4) Allowance for credit losses for residential mortgages and personal and credit card loans is assessed on a collective basis.
For the years ended October 31, 2014 and 2013, the Bank would have recorded additional interest income of $287 million and $263 million,
respectively, on impaired loans, if these impaired loans were classified as performing loans.
(b) Allowance for credit losses
2014
As at October 31 ($ millions)
Balance at
beginning
of year Write-offs
(1)
Recoveries
Provision
for credit
losses
Other, including
foreign currency
adjustment
Balance at
end of
year
Individual $ 561 $ (338) $ 93 $ 265 $ 33 $ 614
Collective 2,604 (1,559) 399 1,403 9 2,856
Total before FDIC guaranteed loans 3,165 (1,897) 492 1,668 42 3,470
FDIC guaranteed loans
(2)
108 – 18 35 10 171
$ 3,273 $ (1,897) $ 510 $ 1,703 $ 52 $ 3,641
2013
As at October 31 ($ millions)
Balance at
beginning
of year Write-offs
(1)
Recoveries
Provision
for credit
losses
Other, including
foreign currency
adjustment
Balance at
end of
year
Individual $ 469 $ (201) $ 111 $ 155 $ 27 $ 561
Collective 2,420 (1,268) 332 1,117 3 2,604
Total before FDIC guaranteed loans 2,889 (1,469) 443 1,272 30 3,165
FDIC guaranteed loans
(2)
88 – – 16 4 108
$ 2,977 $ (1,469) $ 443 $ 1,288 $ 34 $ 3,273
2014 2013
Represented by:
Allowance against impaired loans $ 2,198 $ 1,893
Allowance against performing loans and loans past due but not impaired
(3)
1,272 1,272
Total before FDIC guaranteed loans 3,470 3,165
FDIC guaranteed loans
(2)
171 108
$ 3,641 $ 3,273
(1) For the wholesale portfolios, impaired loans restructured during the year amounted to $373 (2013 – $101). Write-offs of impaired loans restructured during the year were $27
(2013 – $22). Non-impaired loans restructured during the year amounted to $113 (2013 – $166).
For the retail and small business portfolios, impaired loans restructured during the year amounted to $6 (2013 – $8). Non-impaired loans restructured during the year amounted to
$8 (2013 – $22).
(2) This represents the gross amount of allowance for credit losses as the receivable from FDIC is separately recorded in other assets.
(3) The allowance for performing loans is attributable to business and government loans $584 (2013 –$953) with the remainder allocated to personal and credit card loans $527
(2013 – $129) and residential mortgages $161 (2013 – $190).
(c) Total FDIC guaranteed loans
As at October 31 ($ millions) 2014 2013
R-G Premier Bank
Unpaid principal balance $ 2,688 $ 2,929
Fair value adjustments (357) (499)
Net carrying value 2,331 2,430
Allowance for credit losses (171) (108)
$ 2,160 $ 2,322
2014 Scotiabank Annual Report 161
CONSOLIDATED FINANCIAL STATEMENTS
Loans purchased as part of the acquisition of R-G Premier Bank of Puerto Rico are subject to loss share agreements with the FDIC. Under this
agreement, the FDIC guarantees 80% of loan losses. The provision for credit losses in the Consolidated Statement of Income related to these loans is
reflected net of the amount expected to be reimbursed by the FDIC. Allowance for credit losses in the Consolidated Statement of Financial Position is
reflected on a gross basis. As at October 31, 2014, the carrying value of loans guaranteed by the FDIC was $2.2 billion (2013 – $2.3 billion) with a net
receivable of $275 million (2013 – $366 million) from the FDIC included in Other assets in the Consolidated Statement of Financial Position.
(d) Loans past due but not impaired
(1)
A loan is considered past due when a counterparty has not made a payment by the contractual due date. The following table presents the carrying
value of loans that are contractually past due but not classified as impaired because they are either less than 90 days past due or fully secured and
collection efforts are reasonably expected to result in repayment, or restoring it to a current status in accordance with the Bank’s policy.
2014
(2)(3)
2013
(2)(3)
As at October 31 ($ millions)
31 - 60
days
61 - 90
days
91 days
and
greater Total
31 - 60
days
61 - 90
days
91 days
and
greater Total
Residential mortgages $ 1,253 $ 483 $ 153 $ 1,889 $ 1,248 $ 496 $ 180 $ 1,924
Personal and credit cards 591 298 48 937 506 241 49 796
Business and government 140 57 233 430 209 81 172 462
Total $ 1,984 $ 838 $ 434 $ 3,256 $ 1,963 $ 818 $ 401 $ 3,182
(1) Loans past due 30 days or less are not presented in this analysis as they are not administratively considered past due.
(2) Excludes Federal Deposit Insurance Corporation (FDIC) guaranteed loans related to the acquisition of R-G Premier Bank of Puerto Rico.
(3) These loans would be considered in the determination of an appropriate level of collective allowances despite not being individually classified as impaired.
15 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 Housing Corporation (CMHC). MBS
created under the program are 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 sale of mortgages under the above programs does not meet the
derecognition requirements, as the Bank retains the pre-payment and
interest rate risk associated with the mortgages, which represents
substantially all the risk 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) 2014
(1)
2013
(1)
Assets
Carrying value of residential mortgage loans $ 17,969 $ 15,832
Other related assets
(2)
2,425 11,160
Liabilities
Carrying value of associated liabilities 20,414 27,289
(1) The fair value of the transferred assets is $20,430 (2013 – $26,894) and the fair value of the associated liabilities is $20,791 (2013 – $27,577), for a net position of $(361) (2013 –
$(683)).
(2) These include cash held in trust and trust permitted investment assets acquired as part of principal reinvestment account that the Bank is required to maintain in order to participate
in the programs.
Securitization of personal loans
The Bank securitizes a portion of its unsecured personal line of credit receivables on a revolving basis through a consolidated structured entity. The
receivables continue to be recognized on the Consolidated Statement of Financial Position as personal loans. For further details, see Note 16.
Securities sold under repurchase agreements and securities lent
The Bank enters into transactions, such as repurchase agreements and securities lending agreements, where the Bank transfers assets under
agreements to repurchase them on a future date and retains all the substantial risks and rewards associated with the assets. The transferred assets
remain on the Consolidated Statement of Financial Position.
The following table provides the carrying amount of the transferred assets and the associated liabilities:
As at October 31 ($ millions) 2014
(1)
2013
(1)
Carrying value of assets associated with:
Repurchase agreements
(2)
$ 80,335 $ 68,868
Securities lending agreements 37,110 25,609
Total 117,445 94,477
Carrying value of associated liabilities
(3)
$ 88,953 $ 77,508
(1) The fair value of transferred assets is $117,445 (October 31, 2013 – $94,477) and the fair value of the associated liabilities is $88,953 (October 31, 2013 – $77,508), for a net
position of $28,492 (October 31, 2013 – $16,969).
(2) Does not include over-collateralization of assets pledged.
(3) Liabilities for securities lending arrangements only include amounts related to cash collateral received. In most cases, securities are received as collateral.
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16 Structured entities
(a) Consolidated structured entities
The following table provides information about structured entities that the Bank consolidated.
2014 2013
(2)
As at October 31 ($ millions) Total assets Total liabilities Total assets Total liabilities
U.S. multi-seller conduit that the Bank administers $ 6,405 $ 6,380 $ 5,988 $ 6,075
Bank funding vehicles 29,416 28,457 34,436 33,645
Other 122 – 196 61
Total $ 35,943
(1)
$ 34,837 $ 40,620
(1)
$ 39,781
(1) Includes instruments issued by other entities of the Bank of $29.2 billion (2013 – $34.3 billion) which are off-set on consolidation.
(2) Certain prior amounts are retrospectively adjusted to reflect the adoption of IFRS 10 (refer to Note 4).
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 backstop liquidity
facility 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 perform under its asset-specific LAPA agreements, in which
case the Bank is obliged 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 provides a program-wide credit
enhancement (PWCE) to the conduit and holds the subordinated notes
issued by the conduit.
The Bank’s exposure from the U.S. conduit through the LAPA,
including the obligation to purchase defaulted assets, the Bank’s PWCE
and investment in the conduit’s subordinated notes, 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 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
The Bank uses funding vehicles to facilitate cost-efficient financing of
its own operations, including the issuance of covered bonds and notes.
These vehicles include Scotia Covered Bond Trust, Scotiabank Covered
Bond Guarantor Limited Partnership and Hollis Receivables Term
Trust II.
Activities of these structured entities are generally limited to holding a
pool of assets or receivables generated by the Bank.
These structured entities are consolidated due to the Bank’s decision-
making power and ability to use the power to affect the Bank’s returns.
Covered bond programs
Scotia Covered Bond Trust
Under the Bank’s global covered bond program, the Bank issues debt
to investors that is guaranteed by Scotia Covered Bond Trust (the
“Trust”). Under the program, the Trust purchases CMHC insured
residential mortgages from the Bank, which it acquires with funding
provided by the Bank.
As at October 31, 2014, $12.2 billion (October 31, 2013 – $13.2
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. As at October 31, 2014, assets pledged in relation to these
covered bonds were $12.9 billion (October 31, 2013 – $14.2 billion).
Scotiabank Covered Bond Guarantor Limited Partnership
The Bank has a registered covered bond program in 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, 2014, $5.3 billion (October 31, 2013 – nil) 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 and
Euros. As at October 31, 2014, assets pledged in relation to these
covered bonds were $5.8 billion (October 31, 2013 – nil).
Personal line of credit securitization trust
The Bank securitizes a portion of its unsecured personal line of credit
receivables (receivables) on a revolving basis through Hollis Receivables
Term Trust II (Hollis), a Bank-sponsored structured entity. Hollis issues
notes to third-party investors and the Bank, proceeds of which are used
to purchase a co-ownership interest in the receivables originated by the
Bank. Recourse of the note holders is limited to the purchased interest.
The Bank is responsible for servicing the transferred receivables as well
as performing administrative functions for Hollis. The subordinated
notes issued by Hollis are held by the Bank.
As at October 31, 2014, $1.0 billion (October 31, 2013 – $0.5 billion)
notes were outstanding and included in Deposits – Business and
government on the Consolidated Statement of Financial Position. As at
October 31, 2014, assets pledged in relation to these notes were $1.2
billion (October 31, 2013 – $0.6 billion).
Other
Assets of other consolidated structured entities are comprised of
securities, deposits with banks and other assets to meet the Bank’s
and customer needs.
2014 Scotiabank Annual Report 163
CONSOLIDATED FINANCIAL STATEMENTS
(b) Unconsolidated structured entities
The following table provides information about other structured entities in which the Bank has a significant interest but does not control and
therefore does not consolidate. A significant interest is generally considered to exist where the Bank is exposed to 10% or more of the unconsolidated
structured entities maximum exposure to loss.
2014
As at October 31 ($ millions)
Canadian multi-seller
conduits that the
Bank administers
Structured
finance
entities
Capital
funding
vehicles Other Total
Total assets (on structured entity’s financial statements) $ 2,707 $ 12,165 $ 1,520 $ 945 $ 17,337
Assets recognized on the Bank’s financial statements
Trading assets 13 422 – 52 487
Investment securities – 1,487 15 79 1,581
Loans
(1)
– 924 52 56 1,032
13 2,833 67 187 3,100
Liabilities recognized on the Bank’s financial statements
Deposits – Business and government – – 1,488 – 1,488
– – 1,488 – 1,488
Bank’s maximum exposure to loss $ 2,707 $ 2,833 $ 67 $ 187 $ 5,794
2013
(2)
As at October 31 ($ millions)
Canadian multi-seller
conduits that the
Bank administers
Structured
finance
entities
Capital
funding
vehicles Other Total
Total assets (on structured entity’s financial statements) $ 3,018 $ 2,383 $1,520 $ 1,008 $ 7,929
Assets recognized on the Bank’s financial statements
Trading assets 13 – – 50 63
Investment securities – 123 32 62 217
Loans
(1)
– 1,114 57 100 1,271
13 1,237 89 212 1,551
Liabilities recognized on the Bank’s financial statements
Deposits – Business and government – – 1,488 – 1,488
– – 1,488 – 1,488
Bank’s maximum exposure to loss $ 3,018 $ 1,257 $ 89 $ 212 $ 4,576
(1) Loan balances are presented net of allowance for credit losses.
(2) Certain prior amounts are retrospectively adjusted to reflect the adoption of IFRS 10 (refer to Note 4).
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, 2014, the Bank
has recorded $3.1 billion (2013 – $1.5 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,
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each asset pool financed by the multi-seller conduits has a deal-specific
liquidity asset purchase agreement (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. 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
$1.4 billion (2013 – $1.1 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.
Capital funding vehicles
The adoption of IFRS 10, Consolidated Financial Statements, has
resulted in the deconsolidation of Scotiabank Capital Trust and
Scotiabank Tier 1 Trust through which the Bank issues certain
regulatory capital investments. 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 entities.
As a result, Deposits – Business and government increased by $1.5
billion (2013 – $1.5 billion).
Other
Other includes investments in managed funds, collateralized debt
obligation entities, and other structured entities. The Bank’s maximum
exposure to loss is limited to its net investment in these funds.
c) Other unconsolidated Bank-sponsored entities
The Bank sponsors unconsolidated structured entities in which it has insignificant or no interest at the reporting date. The Bank is a sponsor when it is
significantly involved in the design and formation at inception of the structured entities, and the Bank’s name is used by the structured entities to
create an awareness of the instruments being backed by the Bank’s reputation and obligation. The Bank also considers other factors, such as its
continuing involvement and obligations to determine if, in substance, the Bank is a sponsor. The Bank considered mutual funds and managed
companies as sponsored entities at October 31, 2014.
The following table provides information on revenue from unconsolidated Bank-sponsored entities.
2014 2013
As at October 31 ($ millions) Funds
(1)
Scotia
Managed
Companies Total Funds
(1)
Scotia
Managed
Companies Total
Revenue $ 1,804 $ 18 $ 1,822 $ 1,565 $ 20 $ 1,585
(1) Includes mutual funds, other funds and trusts.
The Bank earned revenue of $1,822 million (October 31, 2013 – $1,585 million) from its involvement with the unconsolidated Bank sponsored
structured entities for the year ended October 31, 2014, which was comprised of interest income of $4 million (October 31, 2013 – $3 million), fee
and commission revenue – banking of $141 million (October 31, 2013 – $110 million) and fee and commission revenue – wealth management of
$1,677 million (October 31, 2013 – $1,472 million), including mutual fund, brokerage and investment management and trust fees.
17 Property and equipment
($ millions) Land Buildings Equipment
Leasehold
improvements Total
Cost
Balance as at October 31, 2012
(1)
$ 300 $ 1,647 $ 3,274 $ 1,078 $ 6,299
Acquisitions 5 103 59 56 223
Additions 10 108 165 47 330
Disposals (22) (152) (118) (31) (323)
Foreign currency adjustments and other (9) (57) (57) (4) (127)
Balance as at October 31, 2013
(1)
$ 284 $ 1,649 $ 3,323 $ 1,146 $ 6,402
Acquisitions – – – – –
Additions 11 168 177 94 450
Disposals (40) (155) (148) (41) (384)
Foreign currency adjustments and other 11 25 26 25 87
Balance as at October 31, 2014 $ 266 $ 1,687 $ 3,378 $ 1,224 $ 6,555
Accumulated depreciation
Balance as at October 31, 2012
(1)
$ – $ 685 $ 2,717 $ 679 $ 4,081
Depreciation – 53 173 71 297
Disposals
(1)
– (19) (96) (30) (145)
Foreign currency adjustments and other – (28) (22) 5 (45)
Balance as at October 31, 2013
(1)
$ – $ 691 $ 2,772 $ 725 $ 4,188
Depreciation – 36 184 77 297
Disposals – (23) (152) (57) (232)
Foreign currency adjustments and other – 11 11 8 30
Balance as at October 31, 2014 $ – $ 715 $ 2,815 $ 753 $ 4,283
Net book value
Balance as at October 31, 2013
(1)
$ 284 $ 958 $ 551 $ 421 $ 2,214
(2)
Balance as at October 31, 2014 $ 266 $ 972 $ 563 $ 471 $ 2,272
(2)
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of IFRS 10 in 2014 (refer to Note 4).
(2) Includes $41 (2013 – $36) of investment property.
2014 Scotiabank Annual Report 165
CONSOLIDATED FINANCIAL STATEMENTS
18 Investments in associates
The Bank had significant investments in the following associates:
2014 2013
As at October 31 ($ millions)
Country of
incorporation Nature of business
Ownership
percentage
Date of financial
statement
(1)
Carrying
value
Carrying
value
CI Financial Corp.
(2)
Canada
Wealth
Management n/a n/a $ – $ 2,577
Thanachart Bank Public Company Limited Thailand Banking 49.0% September 30, 2014 2,134 1,921
Canadian Tire’s Financial Services business
(CTFS)
(3)
Canada Financial Services 20.0% October 01, 2014 509 –
Bank of Xi’an Co. Ltd.
(4)
China Banking 19.0% September 30, 2014 359 291
Maduro & Curiel’s Bank N.V.
(5)
Curacao Banking 48.2% September 30, 2014 221 191
Banco del Caribe Venezuela Banking 26.6% September 30, 2014 54 156
(1) Represents the date of the most recent published 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 published financial statements.
(2) On June 17, 2014, the Bank sold 82,800,000 shares (representing 29.1% ownership interest) of CI Financial Corp. through a public offering. As a result, the Bank no longer has the
ability to exercise significant influence and does not account for the remaining investment in CI Financial Corp. based on the equity method. On that date, the remaining retained
interest was classified as available-for-sale equity and recorded at fair value based on the quoted market price (refer to Note 41).
(3) On October 1, 2014, the Bank acquired a 20% equity interest in Canadian Tire’s Financial Services business (CTFS). As at October 31, 2014 CTFS had total assets of $5,351 and
total liabilities of $4,387.
(4) The Bank has the ability to exercise significant influence through its representation on the Board of Directors.
(5) 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, 2014 these reserves amounted to $52 (2013 – $43;
2012 – $38).
Summarized financial information of the Bank’s significant associates are as follows.
For the twelve months ended and as at September 30, 2014
(1)
($ millions) Revenue
Net
income Total assets Total liabilities
CI Financial Corp.
(2)
$ n/a $ n/a $ n/a $ n/a
Thanachart Bank Public Company Limited 1,488 336 34,124 30,571
Bank of Xi’an Co. Ltd. 695 299 25,259 23,558
Maduro & Curiel’s Bank N.V. 291 86 4,117 3,642
Banco del Caribe 1,160 107 16,728 15,106
For the twelve months ended and as at September 30, 2013
(1)
($ millions) Revenue
Net
income Total assets Total liabilities
CI Financial Corp. $ 1,535 $ 405 $ 2,986 $ 1,218
Thanachart Bank Public Company Limited 1,988 502 34,047 30,887
Bank of Xi’an Co. Ltd. 520 245 19,795 18,479
Maduro & Curiel’s Bank N.V. 264 84 3,512 3,100
Banco del Caribe 754 142 10,141 9,202
(1) Based on the most recent available financial statements.
(2) As a result of the partial sale of CI Financial Corp. by the Bank on June 17, 2014, the Bank no longer has the ability to exercise significant influence and does not account for the
remaining investment based on the equity method.
Investment in Banco del Caribe
Venezuela has been designated as hyper-inflationary and measures of
foreign exchange controls have been imposed by the Venezuelan
government. These restrictions have limited the Bank’s ability to
repatriate cash and dividends out of Venezuela.
As at October 31, 2014, the Bank’s total net investment in Banco del
Caribe of $54 million, along with monetary assets, comprising of cash
and dividend receivable was translated at the SICAD II exchange rate of
1 USD to 50 VEF. These amounts were previously measured at the
official exchange rate of 1 USD to 6.3 VEF.
As a result the Bank recorded a reduction in the carrying value of the
investment in associates of $129 million with a corresponding decrease
to other comprehensive income. The Bank has also recognized foreign
exchange losses of $47 million in the Consolidated Statement of
Income as other operating income, in relation to the monetary assets.
166 2014 Scotiabank Annual Report
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19 Goodwill and other intangible assets
Goodwill
The changes in the carrying amounts of goodwill by cash-generating unit (CGU) are as follows:
($ millions)
Canadian
Banking
Global Wealth
& Insurance
Global
Capital
Markets
Global
Corporate &
Investment
Banking
Latin
America
Caribbean
and
Central
America Pacific Total
Balance as at October 31, 2012 $ 319 $ 2,015 $ 87 $ 109 $ 2,063 $ 646 $ – $ 5,239
Acquisitions 1,314
(1)
277 – – 29 – – 1,620
Foreign currency adjustments and other – (9) 5 5 (14) 21 – 8
Balance as at October 31, 2013 $ 1,633 $ 2,283 $ 92 $ 114 $ 2,078 $ 667 $ – $ 6,867
Acquisitions – – – – – – – –
Foreign currency adjustments and other – 9 8 9 (37) 53 – 42
Balance as at October 31, 2014 $ 1,633 $ 2,292 $ 100 $ 123 $ 2,041 $ 720 $ – $ 6,909
(1) The change from October 31, 2012 is due to the acquisition of Tangerine Bank (formerly ING Bank of Canada). Refer to Note 41 for further details.
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 carrying amount of the CGU is determined by management using
approved internal economic capital models. These models consider
various factors including credit risk, market risk, operational risk and
other relevant business risks for each CGU. 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 is then compared to its respective
carrying amount to identify any impairment. P/E multiples ranging
from 10 to 18 times (2013 – 7 to 14 times) have been used.
The fair value less costs of disposal of the CGU is sensitive to changes
in net income, P/E multiples and control premiums.
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.
Goodwill was assessed for annual impairment as at July 31, 2014 and
July 31, 2013 and no impairment was determined to exist.
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 management 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, 2012 $ 1,056 $ 977 $ 2,325 $ 67 $ 4,425
Acquisitions 79 243 – – 322
Additions 293 2 – – 295
Disposals (8) – – – (8)
Foreign currency adjustments and other (20) (4) – – (24)
Balance as at October 31, 2013 $ 1,400 $ 1,218 $ 2,325 $ 67 $ 5,010
Acquisitions – – – – –
Additions 372 1 – – 373
Disposals – – – (1) (1)
Foreign currency adjustments and other (1) 12 – 1 12
Balance as at October 31, 2014 $ 1,771 $ 1,231 $ 2,325 $ 67 $ 5,394
Accumulated amortization
Balance as at October 31, 2012 $ 377 $ 595 $ – $ – $ 972
Amortization Expense 116 103 – – 219
Disposals (4) – – – (4)
Foreign currency adjustments and other (10) (4) – – (14)
Balance as at October 31, 2013 $ 479 $ 694 $ – $ – $ 1,173
Amortization Expense 143 86 – – 229
Disposals – – – – –
Foreign currency adjustments and other 7 10 – – 17
Balance as at October 31, 2014 $ 629 $ 790 $ – $ – $ 1,419
Net book value
As at October 31, 2013 $ 921
(2)
$ 524 $ 2,325 $ 67 $ 3,837
As at October 31, 2014 $ 1,142
(2)
$ 441 $ 2,325 $ 67 $ 3,975
(1) Fund management contracts are attributable to HollisWealth Inc. (formerly, DundeeWealth Inc.).
(2) Computer software comprises of purchased software of $251 (2013 – $175), internally generated software of $481 (2013 – $396), and in process software not subject to
amortization of $410 (2013 – $350).
2014 Scotiabank Annual Report 167
CONSOLIDATED FINANCIAL STATEMENTS
Impairment testing of intangible assets
Indefinite life intangible assets are not amortized and are assessed for impairment annually or more frequently if events or changes in circumstances
indicate that the asset may be impaired. Impairment is assessed by comparing the carrying value of the indefinite life intangible asset to its recoverable
amount. The recoverable amount of the fund management contracts is based on a value in use approach using the multi-period excess earnings
method. This approach uses cash flow projections from management-approved financial budgets which include key assumptions related to market
appreciation, net sales of funds, and operating margins taking into consideration past experience and market expectations. The forecast cash flows
cover a 5-year period, with a terminal growth rate of 4.5% (2013 – 4.5%) applied thereafter. These cash flows have been discounted at a rate of
10% (2013 – 10%). Management believes that reasonable negative changes in any one key assumption used to determine the recoverable amount
would not result in an impairment.
Indefinite life intangible assets were assessed for annual impairment as at July 31, 2014 and July 31, 2013 and no impairment was determined to
exist.
20 Other assets
As at October 31 ($ millions) 2014 2013
(1)
Accrued interest $ 1,690 $ 1,643
Accounts receivable 1,172 1,073
Current tax assets 565 539
Pension assets (Note 31) 117 132
Receivable from brokers, dealers and clients 945 1,222
Receivable from the Federal Deposit Insurance Corporation 275 366
Other 4,995 5,548
Total $ 9,759 $ 10,523
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4).
21 Leases
(a) As Lessor
Finance lease receivables
The Bank offers asset-based lending and works with a broad range of technology, industrial equipment and commercial companies to provide
customized finance programmes to assist manufacturers, dealers and distributors of assets.
Finance lease receivables are included within loans. The Bank’s net investment in finance lease receivables was as follows:
As at October 31, 2014 ($ millions)
Gross
investment in
finance lease
receivables
Future
finance
income
Present value of
minimum lease
payments receivable
Within one year $ 1,410 $ 190 $ 1,220
After one year but not more than five years 3,177 342 2,835
More than five years 298 55 243
Total $ 4,885 $ 587 $ 4,298
As at October 31, 2013 ($ millions)
Gross
investment in
finance lease
receivables
Future
finance
income
Present value of
minimum lease
payments receivable
Within one year $ 1,368 $ 174 $ 1,194
After one year but not more than five years 3,021 314 2,707
More than five years 277 34 243
Total $ 4,666 $ 522 $ 4,144
At October 31, 2014, unguaranteed residual value of $71 million (2013 – $66 million) had been accrued, and the accumulated allowance for
uncollectible minimum lease payments receivable amounted to $17 million (2013 – $16 million).
(b) As Lessee
Operating lease commitments
The Bank leases various offices, branches and other premises under non-cancellable operating lease arrangements. The leases have various terms,
escalation and renewal rights. There are no contingent rents payable. The Bank also leases equipment under non-cancellable lease arrangements.
Where the Bank is the lessee, the future minimum lease payment under non-cancellable operating leases are as follows:
As at October 31 ($ millions) 2014 2013
Within one year $ 310 $ 289
After one year but not more than five years 811 751
More than five years 577 499
Total $ 1,698 $ 1,539
The total of future minimum sublease payments to be received under non-cancellable subleases at the reporting date is $16 million (2013 –
$16 million).
Building rent expense, included in premises and technology expense in the Consolidated Statement of Income, was $392 million (2013 –
$378 million).
168 2014 Scotiabank Annual Report
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22 Deposits
2014 2013
(1)
Payable on demand
As at October 31 ($ millions)
Interest-
bearing
Non-interest
bearing
Payable after
notice
Payable on a
fixed date Total
Personal $ 5,197 $ 4,570 $ 91,919 $ 73,477 $ 175,163 $ 171,048
Business and government 49,744 19,318 29,951 243,354 342,367 313,820
Financial institutions 5,176 3,096 2,005 26,210 36,487 33,019
Total $ 60,117 $ 26,984 $ 123,875
(2)
$ 343,041 $ 554,017 $ 517,887
Recorded in:
Canada $ 373,491 $ 350,599
United States 84,710 77,685
United Kingdom 13,296 10,779
Mexico 13,668 11,907
Peru 11,701 10,552
Chile 5,785 5,723
Colombia 7,450 6,578
Other International 43,916 44,064
Total
(3)
$ 554,017 $ 517,887
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of IFRS 10 in 2014 (refer to Note 4).
(2) Includes $104 (2013 – $103) of non-interest bearing deposits.
(3) Deposits denominated in U.S. dollars amount to $201,891 (2013 – $182,115) deposits denominated in Mexican pesos amount to $12,444 (2013 – $10,480) and deposits
denominated in other foreign currencies amount to $49,836 (2013 – $44,612).
Refer to Note 40 for contractual maturity structure for deposits which provides maturities of less than one month, one to three months, three to six
months, six to nine months, nine to twelve months, one to two years, two to five years, over five years, and with no specific maturity.
The following table presents 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, 2014 $ 42,801 $ 13,907 $ 23,338 $ 75,987 $14,110 $ 170,143
As at October 31, 2013
(2)
$ 38,844 $ 12,097 $ 15,731 $ 75,451 $ 7,878 $ 150,001
(1) The majority of foreign term deposits are in excess of $100,000.
(2) Certain prior period amounts are retrospectively adjusted to reflect the adoption of IFRS 10 in 2014 (refer to Note 4).
23 Subordinated debentures
These debentures are direct, unsecured obligations of the Bank and are subordinate to the claims of the Bank’s depositors and other creditors. The
Bank, where appropriate, enters into interest rate and cross-currency swaps to hedge the related risks.
As at October 31 ($ millions) 2014 2013
Maturity date
Interest
rate (%) Terms
(1)
Par value
Carrying
value
(2)
Carrying
value
(2)
April 2019 4.94 Redeemed on April 15, 2014. $ – $ – $ 1,000
January 2021 6.65 Redeemable at any time. After January 22, 2016, interest will be payable
at an annual rate equal to the 90-day bankers’ acceptance rate plus
5.85%. 1,000 1,000 1,000
August 2022 2.898 Redeemable on or after August 3, 2017. After August 3, 2017, interest
will be payable at an annual rate equal to the 90-day bankers’ acceptance
rate plus 1.255%. 1,500 1,501 1,501
October 2024 3.036 Redeemable on or after October 18, 2017. After October 18, 2019,
interest will be payable at an annual rate equal to the 90-day bankers’
acceptance rate plus 1.14%. 1,750 1,748 1,712
June 2025 8.90 Redeemable at any time. 250 264 265
November 2037 3.015 JPY ¥10 billion. Redeemable on November 20, 2017. 100 99 107
April 2038 3.37 JPY ¥10 billion. Redeemable on April 9, 2018. 101 99 108
August 2085 Floating US$142 million bearing interest at a floating rate of the offered rate for
six-month Eurodollar deposits plus 0.125%. Redeemable on any interest
payment date. 160 160 148
$ 4,861 $ 4,871 $ 5,841
(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 adjustments related to hedge accounting.
The contractual maturities of the debentures are summarized in Note 40.
2014 Scotiabank Annual Report 169
CONSOLIDATED FINANCIAL STATEMENTS
24 Other liabilities
As at October 31 ($ millions) 2014 2013
(1)
Accrued interest $ 1,920 $ 1,897
Accounts payable and accrued expenses 5,265 5,653
Current tax liabilities 1,009 830
Deferred tax liabilities (Note 30) 454 591
Gold and silver certificates and bullion 4,571 3,622
Margin and collateral accounts 5,078 3,417
Payables to brokers, dealers and clients 293 499
Provisions for off-balance sheet credit risks and other (Note 25) 518 347
Pension liabilities (Note 31) 817 502
Other liabilities of subsidiaries and structured entities 10,020 9,661
Other 4,840 5,028
Total $ 34,785 $ 32,047
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4).
25 Provisions
($ millions)
Off-balance sheet
credit risks Restructuring Other Total
As at November 1, 2012 $ 184 $ 2 $ 179 $ 365
Provisions made during the year – 40 51 91
Provisions used or no longer required during the year – (20) (89) (109)
Balance as at October 31, 2013 $ 184 $ 22 $ 141 $ 347
Provisions made during the year – 148 116 264
Provisions used or no longer required during the year – (34) (59) (93)
Balance as at October 31, 2014 $ 184 $ 136 $ 198 $ 518
Off-balance sheet credit risks
The provision for off-balance sheet credit risks relates primarily to off-balance sheet credit risks such as undrawn lending commitments, letters of
credit and letters of guarantee. These are collectively assessed in a manner consistent with the collective allowance for performing on-balance sheet
credit risks.
Restructuring
During fiscal 2014, the Bank initiated certain restructuring initiatives in order to improve the Bank’s customers’ experience, reduce costs in a
sustainable manner, and to achieve greater operational efficiencies. As a result, in order to implement these initiatives, in the fourth quarter of 2014, a
charge of $148 million was recorded in other operating expenses, primarily relating to employee severance costs.
Other
Other primarily includes provisions related to litigation reserves. In the ordinary course of business, the Bank and its subsidiaries are routinely
defendants in or parties to a number of pending and threatened legal actions and proceedings, including actions brought on behalf of various classes
of claimants. In view of the inherent difficulty of predicting the outcome of such matters, the Bank cannot state what the eventual outcome of such
matters will be. However, based on current knowledge, management does not believe that liabilities, if any arising from pending litigation will have a
material adverse effect on the Consolidated Statement of Financial Position or results of operations of the Bank.
26 Common shares
Authorized:
An unlimited number of common shares without nominal or par value.
Issued and fully paid:
2014 2013
As at October 31 ($ millions) Number of shares Amount Number of shares Amount
Outstanding at beginning of year 1,208,588,989 $ 14,516 1,184,368,672 $ 13,139
Issued under Shareholder Dividend and Share Purchase Plan
(1)
8,849,647 574 19,005,803 1,100
Issued in relation to share-based payments, net (Note 29) 3,493,491
(2)
187 3,500,283
(2)
178
Issued in relation to the acquisition of a subsidiary or associated corporation 150,118 10 1,714,231 99
(3)
Repurchased for cancellation under the Normal Course Issuer Bid (4,500,000) (56) – –
Outstanding at end of year 1,216,582,245
(4)
$ 15,231 1,208,588,989
(4)
$ 14,516
(1) On January 28, 2014, the Board approved an additional 7,900,000 common shares to be reserved for future issue under the terms of the Shareholder Dividend and Share Purchase
Plan (the “Plan”). As at October 31, 2014, there were 10,048,041 common shares held in reserve for issuance under the Plan.
(2) 133,318 shares held by the Bank in relation to cancelled share-based payment plans were released in 2014.
(3) Issued in relation to the acquisition of Colfondos SA on December 19, 2012.
(4) 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
2014, the number of such shares bought and sold was 13,033,821 (2013 – 13,559,563).
170 2014 Scotiabank Annual Report
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Restrictions on dividend payments
Under the Bank Act, the Bank is prohibited from declaring any
dividends on its preferred or common shares when the Bank is, or
would be placed by such a declaration, in contravention of the capital
adequacy, liquidity or any other regulatory directives issued under the
Bank Act. In addition, common share dividends cannot be paid unless
all dividends to which preferred shareholders are then entitled have
been paid or sufficient funds have been set aside to do so.
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. Similarly, should the Bank fail to declare regular
dividends on any of its directly issued outstanding preferred or
common shares, cash distributions will also not be made on any of the
Scotiabank Trust Securities. Currently, these limitations do not restrict
the payment of dividends on preferred or common shares.
Dividend
The dividends paid on common shares in 2014 and 2013 were
$3,110 million ($2.56 per share) and $2,858 million ($2.39 per share),
respectively. The Board of Directors approved a quarterly dividend of
66 cents per common share at its meeting on December 4, 2014. This
quarterly dividend applies to shareholders of record as of January 6,
2015, and is payable January 28, 2015.
Normal Course Issuer Bid
On May 27, 2014, the Bank announced that OSFI and the Toronto
Stock Exchange approved its normal course issuer bid (the “bid”)
pursuant to which it may repurchase for cancellation up to 12 million
of the Bank’s common shares. The bid will end on the earlier of
May 29, 2015, or the date on which the Bank completes its purchases.
During the year ended October 31, 2014, the Bank repurchased and
cancelled 4.5 million common shares under this bid at an average price
of $71.04 per share for a total amount of approximately $320 million.
27 Preferred shares
Authorized:
An unlimited number of preferred shares without nominal or par value.
Issued and fully paid:
2014 2013
As at October 31 ($ millions) Number of shares Amount Number of shares Amount
Preferred shares:
Series 13
(a)
– $ – 12,000,000 $ 300
Series 14
(b)(c)
13,800,000 345 13,800,000 345
Series 15
(b)(d)
13,800,000 345 13,800,000 345
Series 16
(b)(e)
13,800,000 345 13,800,000 345
Series 17
(b)(f)
9,200,000 230 9,200,000 230
Series 18
(b)(g)
7,497,663 187 7,497,663 187
Series 19
(b)(g)
6,302,337 158 6,302,337 158
Series 20
(b)(h)
8,039,268 201 8,039,268 201
Series 21
(b)(h)
5,960,732 149 5,960,732 149
Series 22
(b)(i)
9,376,944 234 12,000,000 300
Series 23
(b)(i)
2,623,056 66 – –
Series 24
(j)
– – 10,000,000 250
Series 26
(k)
– – 13,000,000 325
Series 28
(l)
– – 11,000,000 275
Series 30
(b)(m)
10,600,000 265 10,600,000 265
Series 32
(b)
16,345,767 409 16,345,767 409
Total preferred shares 117,345,767 $ 2,934 163,345,767 $ 4,084
Terms of preferred shares
Dividends
per share Issue date
Issue
price
Initial
dividend
Initial dividend
payment date
Dividend
reset rate Redemption date
Redemption
price
Preferred shares
Series 13
(a)
0.300000 March 15, 2005 25.00 0.440500 July 27, 2005 – July 29, 2014 25.00
Series 14
(c)
0.281250 January 24, 2007 25.00 0.283560 April 26, 2007 – April 28, 2014 to
April 27, 2015
25.50
Series 15
(d)
0.281250 April 5, 2007
April 17, 2007
25.00 0.348290 July 27, 2007 – July 29, 2014 to
July 28, 2015
25.50
Series 16
(e)
0.328125 October 12, 2007 25.00 0.391950 January 29, 2008 – January 29, 2014 to
January 27, 2015
25.75
Series 17
(f)
0.350000 January 31, 2008 25.00 0.337530 April 28, 2008 – April 28, 2014 to
April 27, 2015
25.75
Series 18
(g)
0.209375 March 25, 2008
March 27, 2008
25.00 0.431500 July 29, 2008 2.05% April 26, 2018 25.00
Series 19
(g)
0.185500 April 26, 2013 25.00 0.189250 July 29, 2013 2.05% April 26, 2013 to
April 26, 2018
25.50
Series 20
(h)
0.225625 June 10, 2008 25.00 0.167800 July 29, 2008 1.70% October 26, 2018 25.00
Series 21
(h)
0.163625 October 26, 2013 25.00 0.167875 January 29, 2014 1.70% October 26, 2013 to
October 26, 2018
25.50
Series 22
(i)
0.239375 September 9, 2008 25.00 0.482900 January 28, 2009 1.88% January 26, 2019 25.00
Series 23
(i)
0.174875 January 26, 2014 25.00 0.173875 April 28, 2014 1.88% January 26, 2014 to
January 26, 2019
25.50
Series 24
(j)
0.390600 December 12, 2008 25.00 0.586500 April 28, 2009 3.84% January 26, 2014 25.00
Series 26
(k)
0.390625 January 21, 2009 25.00 0.415240 April 28, 2009 4.14% April 26, 2014 25.00
Series 28
(l)
0.390625 January 30, 2009 25.00 0.376710 April 28, 2009 4.46% April 26, 2014 25.00
Series 30
(m)
0.240625 April 12, 2010 25.00 0.282200 July 28, 2010 1.00% April 26, 2015 25.00
Series 32

0.231250 February 1, 2011 25.00 0.215410 April 27, 2011 1.34% February 2, 2016 25.00
February 28, 2011
2014 Scotiabank Annual Report 171
CONSOLIDATED FINANCIAL STATEMENTS
(a) Series 13 Non-cumulative Preferred Shares were redeemed on
July 29, 2014 at $25.00 per share, together with declared and
unpaid dividends.
(b) Non-cumulative preferential cash dividends on Series 14, 15, 16,
17, 18, 19, 20, 21, 22, 23, 30 and 32 are payable quarterly, as and
when declared by the Board. Dividends on the Non-cumulative 5-
Year Rate Reset Preferred Shares (Series 18, 20, 22, 30 and 32) 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 all Rate Reset Preferred Shares
will be determined by the sum of the 5-year Government of
Canada Yield plus the indicated dividend reset rate, multiplied by
$25.00. If outstanding, non-cumulative preferential cash dividends
on the Series 19, 21, 23, 31 and 33 are payable quarterly, as and
when declared by the Board. Dividends on the Non-cumulative 5-
year Rate Reset Preferred Shares (Series 19, 21, 23, 31 and 33) are
payable, in an amount per share equal to the sum of the T-Bill
Rate plus the dividend reset rate of the converted preferred shares,
multiplied by $25.00. Holders of Fixed Rate Reset Preferred Shares
will have the option to convert shares into an equal number of the
relevant series of Floating Rate Preferred Shares on the applicable
Rate Reset Series conversion date and every five years thereafter. If
the Bank determines that, after giving effect to any Election
Notices received, there would be less than 1,000,000 Series 18,
20, 22, 30 or 32 preferred shares issued and outstanding on the
applicable conversion date, all of the issued and outstanding Series
18, 20, 22, 30 or 32 preferred shares will be automatically
converted on the applicable conversion date into an equal number
of Series 19, 21, 23, 31 or 33 preferred shares.
(c) With regulatory approval, the Series 14 Non-cumulative Preferred
Shares may be redeemed by the Bank during the period
commencing April 28, 2014 and ending April 27, 2015, at $25.50
per share, together with declared and unpaid dividends to the
date then fixed for redemption and $25.25 per share if redeemed
during the period commencing April 28, 2015 until April 26, 2016,
following which no redemption premium is payable.
(d) With regulatory approval, the Series 15 Non-cumulative Preferred
Shares may be redeemed by the Bank during the period
commencing July 29, 2014 and ending July 28, 2015, at $25.50
per share, together with declared and unpaid dividends to the
date then fixed for redemption and $25.25 per share if redeemed
during the period commencing July 29, 2015 until July 26, 2016,
following which no redemption premium is payable.
(e) With regulatory approval, the Series 16 Non-cumulative Preferred
Shares may be redeemed by the Bank during the period
commencing January 29, 2014 and ending January 27, 2015 at
$25.75 per share, together with declared and unpaid dividends to
the date then fixed for redemption at $25.50 per share if
redeemed during the period commencing January 28, 2015 and
ending January 26, 2016, and $25.25 per share if redeemed
during the period commencing January 27, 2016 until January 26,
2017, following which no redemption premium is payable.
(f) With regulatory approval, the Series 17 Non-cumulative Preferred
Shares may be redeemed by the Bank during the period
commencing April 28, 2014 and ending April 27, 2015 at $25.75
per share, together with declared and unpaid dividends to the
date then fixed for redemption at $25.50 per share if redeemed
during the period commencing April 28, 2015 and ending
April 26, 2016, and $25.25 per share if redeemed during the
period commencing April 27, 2016 until April 25, 2017, following
which no redemption premium is payable.
(g) Holders of Series 18 Non-cumulative 5-Year Rate Reset Preferred
Shares will have the option to convert shares into an equal number
of Series 19 non-cumulative floating rate preferred shares on
April 26, 2018 and on April 26 every five years thereafter. With
regulatory approval, Series 18 preferred shares may be redeemed
by the Bank on April 26, 2018 and every five years thereafter,
respectively, at $25.00 per share, together with declared and
unpaid dividends. With regulatory approval, the Series 19 non-
cumulative preferred shares may be redeemed by the Bank at
(i) $25.00 together with all declared and unpaid dividends to the
date fixed for redemption in the case of redemptions on April 26,
2018 and on April 26 every five years thereafter, or (ii) $25.50
together with all declared and unpaid dividends to the date on any
other date fixed for redemption on any other date on or after
April 26, 2013.
(h) Holders of Series 20 Non-cumulative 5-Year Rate Reset Preferred
Shares will have the option to convert shares into an equal number
of Series 21 non-cumulative floating rate preferred shares on
October 26, 2018, and on October 26 every five years thereafter.
With regulatory approval, Series 20 preferred shares may be
redeemed by the Bank on October 26, 2018, and every five years
thereafter, respectively, at $25.00 per share, together with
declared and unpaid dividends. With regulatory approval, the
Series 21 non-cumulative preferred shares may be redeemed by
the Bank at (i) $25.00 together with all declared and unpaid
dividends to the date fixed for redemption in the case of
redemptions on October 26, 2018 and on October 26 every five
years thereafter, or (ii) $25.50 together with all declared and
unpaid dividends to the date on any other date fixed for
redemption on any other date on or after October 26, 2013.
(i) Holders of Series 22 Non-cumulative 5-Year Rate Reset Preferred
Shares will have the option to convert shares into an equal number
of Series 23 non-cumulative floating rate preferred shares on
January 26, 2019, and on January 26 every five years thereafter.
With regulatory approval, Series 22 preferred shares may be
redeemed by the Bank on January 26, 2019, and every five years
thereafter, respectively, at $25.00 per share, together with
declared and unpaid dividends. With regulatory approval, the
Series 23 non-cumulative preferred shares may be redeemed by
the Bank at (i) $25.00 together with all declared and unpaid
dividends to the date fixed for redemption in the case of
redemptions on January 26, 2019 and on January 26 every five
years thereafter, or (ii) $25.50 together with all declared and
unpaid dividends to the date on any other date fixed for
redemption on any other date on or after January 26, 2014.
(j) Series 24 Non-cumulative 5-Year Rate Reset Preferred Shares were
redeemed on January 26, 2014, at $25.00 per share, together
with all declared and unpaid dividends.
(k) Series 26 Non-cumulative 5-Year Rate Reset Preferred Shares were
redeemed on April 26, 2014, at $25.00 per share, together with
all declared and unpaid dividends.
(l) Series 28 Non-cumulative 5-Year Rate Reset Preferred Shares were
redeemed on April 26, 2014, at $25.00 per share, together with
all declared and unpaid dividends.
(m) Holders of Series 30 Non-cumulative 5-Year Rate Reset Preferred
Shares will have the option to convert shares into an equal number
of Series 31 non-cumulative floating rate preferred shares on
April 26, 2015, and on April 26 every five years thereafter. With
regulatory approval, Series 30 preferred shares may be redeemed
by the Bank on April 26, 2015, and for Series 31 preferred shares,
if applicable, on April 26, 2020 and every five years thereafter,
respectively, at $25.00 per share, together with declared and
unpaid dividends.
172 2014 Scotiabank Annual Report
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Holders of Series 32 Non-cumulative 5-Year Rate Reset Preferred
Shares will have the option to convert shares into an equal number
of Series 33 non-cumulative floating rate preferred shares on
February 2, 2016, and on February 2 every five years thereafter.
With regulatory approval, Series 32 preferred shares may be
redeemed by the Bank on February 2, 2016, and for Series 33
preferred shares, if applicable, on February 2, 2021 and every five
years thereafter, respectively, at $25.00 per share, together with
declared and unpaid dividends.
Restrictions on dividend payments
Under the Bank Act, the Bank is prohibited from declaring any
dividends on its common or preferred shares when the Bank is, or
would be placed by such a declaration, in contravention of the capital
adequacy, liquidity or any other regulatory directives issued under the
Bank Act. In addition, common share dividends cannot be paid unless
all dividends to which preferred shareholders are then entitled have
been paid or sufficient funds have been set aside to do so.
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. Similarly, should the Bank fail to declare regular
dividends on any of its directly issued outstanding preferred or
common shares, cash distributions will also not be made on any of the
Scotiabank Trust Securities. Currently, these limitations do not restrict
the payment of dividends on preferred or common shares.
For each of the years presented, the Bank paid all of the non-
cumulative preferred share dividends.
28 Capital management
The Bank has a capital management process in place to measure,
deploy and monitor its available capital and assess its adequacy. This
capital management process aims to achieve four major objectives:
exceed regulatory thresholds and meet longer-term internal capital
targets, maintain strong credit ratings, manage capital levels
commensurate with the risk profile of the Bank and provide the Bank’s
shareholders with acceptable returns.
Capital is managed in accordance with the Board-approved Capital
Management Policy. Senior executive management develop the capital
strategy and oversee the capital management processes of the Bank.
The Bank’s Finance, Group Treasury and Global Risk Management
(GRM) groups are key in implementing the Bank’s capital strategy and
managing capital. Capital is managed using both regulatory capital
measures and internal metrics.
Although the Bank is subject to several capital regulations in the
different business lines and countries in which the Bank operates,
capital adequacy is managed on a consolidated Bank basis. The Bank
also takes measures to ensure its subsidiaries meet or exceed local
regulatory capital requirements. The primary regulator of its
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).
Effective November 1, 2012, Canadian banks are subject to the revised
capital adequacy requirements as published by the BCBS and
commonly referred to as Basel III. Basel III builds on the “International
Convergence of Capital Measurement and Capital Standards: A Revised
Framework” (Basel II). The Office of the Superintendent of Financial
Institutions (OSFI) has issued guidelines, reporting requirements and
disclosure guidance which are consistent with the Basel III reforms,
except for its deferral of the Basel III credit valuation adjustment (CVA)
related capital charges, requiring they be phased-in over a five-year
period, beginning January 2014. In accordance with OSFI’s
requirements, scalars for CVA risk-weighted assets (RWA) of 0.57, 0.65
and 0.77 were used for Common Equity Tier 1 (CET1) capital ratio,
Tier 1 capital ratio and Total capital ratio, respectively.
Under Basel III, there are three primary risk-based regulatory capital
ratios used to assess capital adequacy, CET1, Tier 1 and Total Capital
ratios, which are determined by dividing those capital components by
risk-weighted assets.
Basel III introduced a new category of capital, CET1, which consists
primarily of common shareholders’ equity net of regulatory
adjustments. These regulatory adjustments include goodwill, intangible
assets net of deferred tax liabilities, deferred tax assets that rely on
future profitability, defined-benefit pension fund net assets, shortfall of
credit provision to expected losses and significant investments in the
common equity of other financial institutions. In addition, new or
revised capital components included in common equity are unrealized
losses on securities and reduced amounts for non-controlling interests.
To enable banks to meet the new standards, Basel III contains
transitional arrangements commencing January 1, 2013, through
January 1, 2019. Transitional requirements result in a 5 year phase-in of
new deductions and additional capital components to common equity.
Non-qualifying capital instruments will be phased out over 10 years and
the capital conservation buffer will be phased in over 4 years.
As of January 2019, under the BCBS rules the Bank will be required
to meet new minimum requirements of: Common Equity Tier 1 ratio of
4.5% plus a capital conservation buffer of 2.5%, collectively 7%.
Including the capital conservation buffer, the minimum Tier 1 ratio will
be 8.5%, and the Total Capital ratio will be 10.5%.
OSFI required Canadian deposit-taking institutions to fully implement
the 2019 Basel III reforms in 2013, without the transitional phase-in
provisions for capital deductions (referred to as ‘all-in’), and achieve a
minimum 7% common equity target, by the first quarter of 2013. In a
March 2013 advisory letter, OSFI designated the 6 largest banks in
Canada as domestic systemically important banks (D-SIBs), increasing
its minimum capital ratio requirements by 1% for the identified D-SIBs.
This 1% surcharge is applicable to all minimum capital ratio
requirements for CET1, Tier 1 and Total Capital, by no later than
January 1, 2016, in line with the requirements for global systemically
important banks.
Risk-weighted assets represent the Bank’s exposure to credit, market
and operational risk and are computed by applying a combination of
the Bank’s internal credit risk parameters and OSFI prescribed risk
weights to on-and off-balance sheet exposures. Under the Basel
framework there are two main methods for computing credit risk: the
standardized approach, which uses prescribed risk weights; and
internal ratings-based approaches, which allow the use of a bank’s
internal models to calculate some, or all, of the key inputs into the
regulatory capital calculation. Users of the Advanced Internal Ratings
Based Approach (AIRB) are required to have sophisticated risk
management systems for the calculations of credit risk regulatory
capital. Once banks demonstrate full compliance with the AIRB
requirements, and OSFI has approved its use, they may proceed to
apply the AIRB approach in computing capital requirements. The Bank
uses the AIRB to compute credit risk for material Canadian, U.S.,
European portfolios and for a significant portion of international
corporate and commercial portfolio. The Bank continues to assess the
remaining portfolios for the application of AIRB in the future. In 2012,
the Bank implemented the Basel Committee’s revised market risk
framework. The Bank uses the Standardized Approach to calculate the
operational risk capital requirements.
2014 Scotiabank Annual Report 173
CONSOLIDATED FINANCIAL STATEMENTS
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. The
Leverage ratio is defined as a ratio of Basel III Tier 1 capital to a
Leverage exposure measure which includes on-balance sheet assets and
off-balance sheet commitments, derivatives and securities financing
transactions, as defined within the requirements.
In January 2014, the BCBS issued revisions to the Basel III Leverage
Ratio framework. Revisions to the framework related primarily to the
exposure measure, i.e. the denominator of the ratio, and consist mainly
of: lower credit conversion factors for certain off-balance sheet
commitments; further clarification on the treatment for derivatives,
related collateral, and securities financing transactions; additional
requirements for written credit derivatives; and, minimum public
disclosure requirements commencing January 2015. The final
calibration will be completed by 2017, with a view to migrating to a
Pillar 1 (minimum capital requirement) treatment by January 2018.
In October 2014, OSFI released its Leverage Requirements Guideline
which outlines the application of the Basel III Leverage ratio in Canada
and the replacement of the existing Assets-to-Capital Multiple (ACM),
effective Q1 2015. Institutions will be expected to maintain a material
operating buffer above the 3% minimum. The Bank expects to meet
OSFI’s authorized Leverage ratio. Disclosure in accordance with OSFI’s
September 2014 Public Disclosure Requirements related to Basel III
Leverage Ratio will be made commencing Q1 2015.
The Bank’s Common Equity Tier 1, Tier 1 and Total Capital are composed of the following:
2014 2013
(1)
As at October 31 ($ millions) All-in Transitional All-in Transitional
Total Common Equity $ 44,965 $ 44,965 $ 40,569 $ 40,569
Qualifying non-controlling interests in common equity of subsidiaries 514 – 479 –
Goodwill and non-qualifying intangibles, net of deferred tax liabilities
(2)
(10,482) – (9,772) –
Threshold related deductions (305) – (3,630) –
Net deferred tax assets (excluding those arising from temporary differences) (620) – (752) –
Other Common Equity Tier 1 adjustments
(3)
(330) (3,253) (535) (2,548)
Common Equity Tier 1 Capital $ 33,742 $ 41,712 $ 26,359 $ 38,021
Preferred Shares
(4)
2,934 2,934 4,084 4,084
Capital instrument liabilities – trust securities
(4)
1,400 1,400 1,400 1,400
Other Tier 1 capital adjustments
(5)
(3) (4,334) 71 (5,484)
Net Tier 1 Capital $ 38,073 $ 41,712 $ 31,914 $ 38,021
Subordinated debentures, net of amortization
(4)
4,871 4,871 5,841 5,841
Other Tier 2 capital adjustments
(5)
648 517 1,086 (504)
Total regulatory capital $ 43,592 $ 47,100 $ 38,841 $ 43,358
CET1 risk-weighted assets
(6)
$ 312,473 $ 319,936 $ 288,246 $ 293,252
Tier 1 risk-weighted assets
(6)
313,263 319,936 288,246 293,252
Total risk-weighted assets
(6)
$ 314,449 $ 319,936 $ 288,246 $ 293,252
Capital ratios
Common Equity Tier 1 Capital ratio 10.8% 13.0% 9.1% 13.0%
Tier 1 capital ratio 12.2% 13.0% 11.1% 13.0%
Total capital ratio 13.9% 14.7% 13.5% 14.8%
Assets to capital multiple
(7)
17.1x 17.1x 17.1x 17.1x
(1) Capital measures for 2013 have not been restated for the new and amended IFRS standards as they represent the actual amounts in the period for regulatory purposes.
(2) Reported amounts are based on OSFI’s requirements that goodwill relating to investments in associates be classified as goodwill for regulatory reporting purposes beginning Q3 2014.
(3) Other Common Equity Tier 1 capital adjustments under the all-in approach include defined pension plan assets and other items. For the transitional approach, deductions include:
Common Equity Tier 1 all-in deductions multiplied by an annual transitional factor (20% in 2014; 0% in 2013) and an adjustment for Additional Tier 1 deductions for which there is
insufficient Additional Tier 1 capital.
(4) Non-qualifying Tier 1 and Tier 2 capital instruments are subject to a phase-out period of 10 years. Amounts reported for regulatory capital may be less than as reported on the
Consolidated Statement of Financial Position.
(5) Other Tier 1/Tier 2 capital adjustments under the all-in approach include eligible non-controlling interests in subsidiaries; in addition, Tier 2 includes eligible collective allowance and
excess allowance. For the transitional approach, other Tier 1/Tier 2 capital adjustments include the amount of the Common Equity Tier 1 regulatory adjustment not deducted that
were Tier 1/Tier 2 deductions under Basel II (such as 50% of significant investments in financial institutions).
(6) For 2014, the CVA risk-weighted assets were calculated using scalars of 0.57, 0.65 and 0.77 to compute CET1 capital ratio, Tier 1 capital ratio and Total capital ratio, respectively.
(7) As prescribed by OSFI, asset-to-capital multiple is calculated by dividing the Bank’s total assets, including specific off-balance sheet items, by total regulatory capital on a transitional
basis.
The Bank substantially exceeded the OSFI capital targets as at October 31, 2014. OSFI has also prescribed a maximum assets to capital leverage
multiple and the Bank was in compliance with this threshold as at October 31, 2014.
29 Share-based payments
(a) Stock option plans
The Bank grants stock options, tandem stock appreciation rights
(Tandem SARs) and stand-alone stock appreciation rights (SARs) as part
of the Employee Stock Option Plan. Options to purchase common
shares and/or to receive an equivalent cash payment, as applicable,
may be granted to selected employees at an exercise price not less than
the closing price of the Bank’s common shares on the Toronto Stock
Exchange (TSX) on the day prior to the date of the grant. As well, for
grants made beginning December 2005, the exercise price must not be
less than the volume weighted average price on the TSX for the five
trading days immediately preceding the grant date.
Options vest evenly over a four-year period and are exercisable no later
than 10 years after the date of the grant. 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.
As approved by the shareholders, a total of 129 million common shares
have been reserved for issuance under the Bank’s Employee Stock
Option Plan of which 93.7 million common shares have been issued as
174 2014 Scotiabank Annual Report
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a result of the exercise of options and 22.8 million common shares are
committed under outstanding options, leaving 12.6 million common
shares available for issuance as options. Outstanding options expire on
dates ranging from December 3, 2014 to December 9, 2023.
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 plans include:
? Tandem stock appreciation rights
Employee stock options granted between December 3, 2004 to
November 1, 2009 have Tandem SARs, which provide the employee
the choice to either exercise the stock option for shares, or to
exercise the Tandem SARs and thereby receive the intrinsic value of
the stock option in cash. As at October 31, 2014, 363,775 Tandem
SARs were outstanding (2013 – 643,851).
The share-based payment liability recognized for vested Tandem
SARs as at October 31, 2014 was $7 million (2013 – $11 million).
The corresponding intrinsic value of this liability as at October 31,
2014 was $8 million (2013 – $12 million).
In 2014, a benefit of $1 million (2013 – $2 million) was recorded in
salaries and employee benefits in the Consolidated Statement of
Income. This benefit included gains arising from derivatives used to
manage the volatility of share-based payments of $5 million (2013 –
$15 million).
Renouncement of Tandem SARs
During the year, no employees voluntarily renounced Tandem SARs.
In 2013, employees voluntarily renounced 2,835,008 Tandem SARs,
while retaining their corresponding option for shares. As these
renouncements are not considered to be modifications of stock
options under IFRS, no revaluation takes place, and the related
accrued liability of $36 million for 2013 and deferred tax asset of
$10 million for 2013 were reclassified to equity – other reserves. The
remaining outstanding Tandem SARs continue to be liability-
classified and re-measured to fair value at each reporting period.
? Stock options
Employee stock options granted beginning December 2009, are
equity-classified stock options which call for settlement in shares and
do not have Tandem SARs features.
The amount recorded in equity – other reserves for vested stock
options as at October 31, 2014 was $184 million (2013 –
$180 million).
In 2014, an expense of $30 million (2013 – $34 million) was
recorded in salaries and employee benefits in the Consolidated
Statement of Income. As at October 31, 2014, future unrecognized
compensation cost for non-vested stock options was $8 million
(2013 – $9 million) which is to be recognized over a weighted-
average period of 1.71 years (2013 – 1.58 years).
? Stock appreciation rights
Stand-alone SARs are granted instead of stock options to selected
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 2014, 233,120 SARs were granted (2013 – 296,824) and
as at October 31, 2014, 1,852,484 SARs were outstanding (2013 –
2,007,718), of which 1,744,867 SARs were vested (2013 – 1,896,242).
The share-based payment liability recognized for vested SARs as at
October 31, 2014 was $27 million (2013 – $27 million). The
corresponding intrinsic value of this liability as at October 31, 2014
was $31 million (2013 – $29 million).
In 2014, a benefit of $1 million (2013 – benefit of $3 million) was
recorded in salaries and employee benefits in the Consolidated
Statement of Income. This benefit included gains arising from
derivatives used to manage the volatility of share-based payment of
$14 million (2013 – $17 million).
Determination of fair values
The share-based payment liability and corresponding expense for SARs
and options with Tandem SAR features, were quantified using the
Black-Scholes option pricing model with the following assumptions and
resulting fair value per award:
As at October 31 2014 2013
Assumptions
Risk-free interest rate% 0.98% – 1.40% 1.06% – 1.58%
Expected dividend yield 3.70% 3.70%
Expected price volatility 15.12% – 22.82% 13.54% – 25.58%
Expected life of option 0.05 – 4.35 years 0.02 – 4.33 years
Fair value
Weighted-average fair value $ 16.45 $ 14.81
The share-based payment expense for stock options, i.e., without
Tandem SAR features, was quantified using the Black-Scholes option
pricing model on the date of grant. The fiscal 2014 and 2013 stock
option grants were fair valued using the following weighted-average
assumptions and resulting fair value per award:
2014 Grant 2013 Grant
Assumptions
Risk-free interest rate % 2.02% 1.74%
Expected dividend yield 3.65% 3.84%
Expected price volatility 21.45% 23.58%
Expected life of option 6.07 years 6.23 years
Fair value
Weighted-average fair value $ 8.85 $ 8.15
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
compensation. For accounting purposes, an average of the market
consensus implied volatility for traded options on our common shares
and the historical volatility is used.
Details of the Bank’s Employee Stock Option Plan are as follows
(1)
:
2014 2013
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 23,609 $49.09 23,111 $ 46.30
Granted
(2)
3,242 63.98 3,982 55.63
Exercised as options (3,342) 45.31 (3,390) 37.90
Exercised as Tandem SARs (50) 44.35 (36) 30.67
Forfeited
(2)
(104) 54.78 (51) 51.68
Expired
(2)
– – (7) 53.42
Outstanding at end of year
(3)
23,355 $51.68 23,609 $ 49.09
Exercisable at end of year
(4)
14,344 $48.08 13,825 $ 46.25
Available for grant 12,731 15,819
2014 Scotiabank Annual Report 175
CONSOLIDATED FINANCIAL STATEMENTS
Options Outstanding Options Exercisable
As at October 31, 2014
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
$27.24 to $33.89 2,605 4.05 $ 33.82 2,605 $ 33.82
$38.19 to $46.02 885 0.94 $ 44.86 873 $ 44.94
$47.39 to $52.00 7,663 5.55 $ 49.39 5,813 $ 49.21
$52.57 to $63.98 12,202 7.14 $ 57.43 5,053 $ 54.67
23,355 6.04 $ 51.68 14,344 $ 48.08
(1) Excludes SARs.
(2) Excludes renouncement of Tandem SARs by employees while retaining their corresponding option for shares.
(3) Includes outstanding options of 363,775 Tandem SARs (2013 – 643,851) and 578,672 options originally issued under HollisWealth plans (2013 – 712,714).
(4) Includes exercisable options of 363,775 Tandem SARs (2013 – 643,851) and 416,517 options originally issued under HollisWealth plans (2013 – 370,922).
(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% of eligible contributions, up to a maximum dollar
amount, which is expensed in salaries and employee benefits. During
2014, the Bank’s contributions totalled $30 million (2013 – $30
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, 2014, an aggregate of 19 million common shares
were held under the employee share ownership plans (2013 –
20 million). The shares in the employee share ownerships 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. These 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
a portion of the Performance Share Unit notional 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 2014, an aggregate expense of $242 million (2013 – $192 million)
was recorded in salaries and employee benefits in the Consolidated
Statement of Income for these plans. This expense was net of gains
arising from derivatives used to manage the volatility of share-based
payment of $92 million (2013 – $144 million).
As at October 31, 2014, the share-based payment liability recognized
for vested awards under these plans was $901 million (2013 –
$840 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, 2014,
there were 1,600,374 units awarded and outstanding of which
1,600,374 units were vested (2013 – 1,887,092).
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, 2014, there were 333,315 units outstanding
(2013 – 358,859).
Restricted Share Unit Plan (RSU)
Under the RSU Plan, selected 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,
2014, there were 2,346,330 units (2013 –2,337,448) awarded and
outstanding of which 1,659,401 were vested (2013 –1,581,071).
Performance Share Unit Plan (PSU)
Eligible executives receive an award of performance share units that
vest at the end of three years. A portion of the 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
outstanding shares 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, 2014, there were
9,409,639 units (2013 – 9,570,495) outstanding subject to
performance criteria, of which 8,011,356 units were vested (2013 –
7,872,540).
Deferred Performance Plan
Under the Deferred Performance Plan, a portion of the bonus received
by Global Banking & Markets employees (which is accrued and
expensed in the year to which it relates) is allocated to qualifying
employees in the form of units. These units are subsequently paid in
cash to the employees over each of the following three years. Changes
176 2014 Scotiabank Annual Report
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in the value of the units, which arise from fluctuations in the market
price of the Bank’s common shares, are expensed in the same manner
as the Bank’s other liability-classified share-based payment plans in the
salaries and employee benefits expense in the Consolidated Statement
of Income.
(d) Share Bonus and Retention Award Plans
Prior to the acquisition of HollisWealth and related entities (formerly
DundeeWealth) on February 1, 2011, HollisWealth had established
share bonus plans for eligible participants. The share bonus plans
permitted common shares of HollisWealth to be issued from treasury or
purchased in the market. At the time of the acquisition of HollisWealth,
the share bonus awards that were granted but not yet vested were
converted into 377,516 Bank of Nova Scotia common shares to be
issued from treasury. As at October 31, 2014, there were 21,739 (2013
– 40,950) share bonus awards outstanding from the HollisWealth share
bonus plans. During 2014, 17,615 common shares were issued from
treasury for these plans (2013 – 35,114) and 1,596 awards were
forfeited (2013 – 3,038). Share bonus awards have not been granted
under these plans since February 1, 2011.
Prior to the acquisition of HollisWealth, HollisWealth had established
share-based retention award plans whereby HollisWealth purchased
shares in the market to be held in trust for the benefit of certain
employees and portfolio managers. At the time of the acquisition of
HollisWealth, the retention awards were converted to Bank common
shares, other securities and cash. As at October 31, 2014 there were
nil (2013 – 133,318) Bank common shares held in trust for these plans.
Retention awards have not been granted under these plans since
February 1, 2011.
The share bonus and retention award plans are considered to be
equity-classified awards. As at October 31, 2014, the amount recorded
in equity-other reserves for vested awards for these plans was
$5 million (2013 – $13 million). In 2014, no expense and no future
unrecognized compensation costs were recognized. In 2013, an
expense of $2 million was recorded in salaries and employee benefits in
the Consolidated Statement of Income. As at October 31, 2013, future
unrecognized compensation costs for non-vested share bonus retention
awards was $1 million, which is to be recognized over a weighted-
average period of 0.97 years.
30 Corporate income taxes
Corporate income taxes recorded in the Bank’s consolidated financial statements for the years ended October 31 are as follows:
(a) Components of income tax provision
For the year ended October 31 ($ millions) 2014 2013
(1)
2012
(1)
Provision for income taxes in the Consolidated Statement of Income:
Current income taxes:
Domestic:
Federal $ 565 $ 460 $ 94
Provincial 423 376 200
Adjustments related to prior periods (70) (8) 12
Foreign 865 856 784
Adjustments related to prior periods (3) (13) (21)
1,780 1,671 1,069
Deferred income taxes:
Domestic:
Federal 141 38 290
Provincial 66 27 182
Foreign 15 1 27
222 66 499
Total provision for income taxes in the Consolidated Statement of Income $ 2,002 $ 1,737 $ 1,568
Provision for income taxes in the Consolidated Statement of Changes in Equity:
Current income taxes $ (248) $ (99) $ (47)
Deferred income taxes (174) 207 (265)
(422) 108 (312)
Reported in:
Other Comprehensive Income (432) 94 (330)
Retained earnings 4 (3) –
Common shares 1 5 (2)
Other reserves 5 12 20
Total provision for income taxes in the Consolidated Statement of Changes in Equity (422) 108 (312)
Total provision for income taxes $ 1,580 $ 1,845 $ 1,256
Provision for income taxes in the Consolidated Statement of Income includes:
Deferred tax expense (benefit) relating to origination/reversal of temporary differences $ 163 $ 118 $ 559
Deferred tax expense (benefit) of tax rate changes – (5) (41)
Deferred tax benefit of previously unrecognized tax losses, tax credits and temporary differences 59 (47) (19)
$ 222 $ 66 $ 499
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4).
2014 Scotiabank Annual Report 177
CONSOLIDATED FINANCIAL STATEMENTS
(b) Reconciliation to statutory rate
Income taxes 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:
2014 2013
(1)
2012
(1)
For the year ended October 31 ($ millions) Amount
Percent
of pre-tax
income Amount
Percent
of pre-tax
income Amount
Percent
of pre-tax
income
Income taxes at statutory rate $ 2,439 26.2% $ 2,185 26.2% $ 2,099 26.4%
Increase (decrease) in income taxes resulting from:
Lower average tax rate applicable to subsidiaries and foreign branches (177) (1.9) (250) (3.0) (229) (2.9)
Tax-exempt income from securities (212) (2.3) (214) (2.6) (185) (2.3)
Deferred income tax effect of substantively enacted tax rate changes – – (5) (0.1) (41) (0.5)
Other, net (48) (0.5) 21 0.3 (76) (1.0)
Total income taxes and effective tax rate $ 2,002 21.5% $ 1,737 20.8% $ 1,568 19.7%
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4).
In 2014, the statutory tax rate remained consistent with 2013. The change in the statutory tax rates between 2013 and 2012 was primarily due to the
reduction in the Canadian federal and provincial tax rates.
(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) 2014 2013
(1)
2014 2013
(1)
Deferred tax assets:
Loss carryforwards $ 138 $ 46 $ 620 $ 756
Allowance for credit losses (63) (33) 669 600
Deferred compensation (45) 18 254 228
Deferred income (6) 3 282 239
Property and equipment 92 (27) 91 164
Pension and other post-retirement benefits (2) 31 683 533
Securities 144 7 145 186
Other 46 111 290 379
Total deferred tax assets $ 304 $ 156 $ 3,034 $ 3,085
Deferred tax liabilities:
Deferred income $ 6 $ 37 $ 75 $ 61
Property and equipment 13 13 64 56
Pension and other post-retirement benefits 38 35 132 108
Securities 9 (43) 60 62
Intangible assets 33 (16) 881 932
Other (17) 64 513 519
Total deferred tax liabilities $ 82 $ 90 $ 1,725 $ 1,738
Net deferred tax assets (liabilities)
(2)
$ 222 $ 66 $ 1,309 $ 1,347
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4).
(2) 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 $1,309 (2013
– $1,347) are represented by deferred tax assets of $1,763 (2013 – $1,938), and deferred tax liabilities of $454 (2013 – $591) on the Consolidated Statement of Financial Position.
The major changes to net deferred taxes were as follows:
For the year ended October 31 ($ millions) 2014 2013
(1)
Balance at beginning of year $ 1,347 $ 1,707
Deferred tax benefit (expense) for the year recorded in income (222) (66)
Deferred tax benefit (expense) for the year recorded in equity 174 (207)
Acquired in business combinations – (52)
Other 10 (35)
Balance at end of year $ 1,309 $ 1,347
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4).
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 $338 million
(2013 – $279 million). The amount related to unrecognized tax losses is
$38 million, which will expire as follows: $20 million in 2018 and
beyond and $18 million have no fixed expiry date.
Included in the net deferred tax asset are tax benefits of $1 million
(2013 – $49 million) that have been recognized in certain Canadian
and foreign subsidiaries that have incurred losses 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.
178 2014 Scotiabank Annual Report
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Deferred tax liabilities are not required to be recognized for taxable
temporary differences arising on investments in subsidiaries, associates
and interests in joint ventures if the Bank controls the timing of the
reversal of the temporary difference and it is probable that the
temporary difference will not reverse in the foreseeable future. At the
end of the year taxable temporary differences of $38.7 billion (2013 –
$32.7 billion) related to the Bank’s investment in subsidiaries were not
recognized as deferred tax liabilities in line with these requirements.
31 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, the US, Mexico,
the 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 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 statute.
Scotiabank Pension Plan (Canada)
The most significant pension plan is the Scotiabank Pension Plan (SPP)
in Canada, a defined benefit pension plan. As the administrator of the
SPP, the Bank has established a well-defined governance structure and
policies to ensure 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.
Š The Human Resources Committee (HRC) of the Board approves the
charter of the Pension Administration and Investment Committee
(PAIC), reviews reports, and approves the investment policy. The HRC
also reviews and recommends any amendments to the SPP to the
Board of Directors.
Š PAIC is responsible for recommending the investment policy to the
HRC, for appointing and monitoring investment managers, and for
reviewing auditor and actuary reports. PAIC also monitors the
administration of member pension benefits.
Š 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 management
firms. PAIC and the MTC both have representation from
independent members on the committees.
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, 2013. 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, the US,
Mexico, Uruguay, the UK, Jamaica, Trinidad & Tobago 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 are based on a number of assumptions. The most
significant assumption is the discount rate, which is set by reference to
the yields on high quality corporate bonds with durations that match
the defined benefit obligations. This discount rate must also be used to
determine the annual benefit expense. 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:
Š there is a decline in discount rates; and/or
Š plan assets returns are less than expected; and/or
Š plan members live longer than expected; and/or
Š 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.
2014 Scotiabank Annual Report 179
CONSOLIDATED FINANCIAL STATEMENTS
a) Relative size of plan obligations and assets
Pension plans Other benefit plans
Canada
For the year ended October 31, 2014 SPP Other International Canada International
Percentage of total benefit obligations 73% 10% 17% 64% 36%
Percentage of total plan assets 77% 5% 18% 21% 79%
Percentage of total benefit expense 78% 18% 4% 60% 40%
Pension plans Other benefit plans
Canada
For the year ended October 31, 2013 SPP Other International Canada International
Percentage of total benefit obligations 74% 10% 16% 67% 33%
Percentage of total plan assets 77% 5% 18% 30% 70%
Percentage of total benefit expense 76% 14% 10% 61% 39%
b) Cash contributions and payments
The table below shows the cash contributions and payments made by the Bank to its principal plans in 2014, and the two prior years.
Contributions to the principal plans for the year ended October 31 ($ millions) 2014 2013 2012
Defined benefit pension plans (cash contributions to fund the plans, including paying benefits to beneficiaries
under the unfunded pension arrangements)
– SPP $ 268 $ 331 $ 252
– All other plans 75 72 86
Other benefit plans (cash contributions mainly in the form of benefit payments to beneficiaries) 46 59 56
Defined contribution pension plans (cash contributions) 21 19 13
Total contributions
(1)
$ 410 $ 481 $ 407
(1) Based on preliminary estimates, the Bank expects to make contributions of $243 to the SPP, $57 to all other defined benefit pension plans, $44 to other benefit plans and $21 to
defined contribution plans for the year ending October 31, 2015.
c) Funded and unfunded plans
The excess (deficit) of the fair value of assets over the benefit obligation at the end of the year includes the following amounts for plans that are
wholly unfunded and plans that are wholly or partly funded.
Pension plans Other benefit plans
As at October 31 ($ millions) 2014 2013 2012 2014 2013 2012
Benefit obligation
Benefit obligation of plans that are wholly unfunded $ 376 $ 342 $ 339 $ 1,201 $ 1,121 $ 1,132
Benefit obligation of plans that are wholly or partly funded 7,571 6,598 6,339 418 389 369
Funded Status
Benefit obligation of plans that are wholly or partly funded $ 7,571 $ 6,598 $ 6,339 $ 418 $ 389 $ 369
Fair value of assets 7,323 6,647 5,607 341 332 311
Excess (deficit) of fair value of assets over benefit obligation of
wholly or partly funded plans $ (248) $ 49 $ (732) $ (77) $ (57) $ (58)
Benefit obligation of plans that are wholly unfunded $ 376 $ 342 $ 339 $ 1,201 $ 1,121 $ 1,132
Excess (deficit) of fair value of assets over total benefit obligation $ (624) $ (293) $ (1,071) $ (1,278) $ (1,178) $ (1,190)
Effect of asset limitation and minimum funding requirement (76) (77) (130) – – –
Net asset (liability) at end of year $ (700) $ (370) $ (1,201) $ (1,278) $ (1,178) $ (1,190)
180 2014 Scotiabank Annual Report
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d) Financial information
The following tables present financial information related to the Bank’s principal plans.
Pension plans Other benefit plans
For the year ended October 31 ($ millions) 2014 2013 2012 2014 2013 2012
Change in benefit obligation
Benefit obligation at beginning of year $6,940 $6,678 $ 5,434 $ 1,510 $ 1,501 $ 1,405
Current service cost 262 247 183 41 45 63
Interest cost on benefit obligation 342 314 313 84 75 81
Employee contributions 21 18 17 – – –
Benefits paid (393) (397) (345) (66) (61) (59)
Actuarial loss (gain) 731 62 1,063 35 (68) 34
Past service cost (19) – 19 7 3 (24)
Settlements – – – (23) – –
Foreign exchange 63 18 (6) 31 15 1
Benefit obligation at end of year $7,947 $6,940 $ 6,678 $ 1,619 $ 1,510 $ 1,501
Change in fair value of assets
Fair value of assets at beginning of year $6,647 $5,607 $ 5,213 $ 332 $ 311 $ 286
Interest income on fair value of assets 334 276 311 25 21 22
Return on plan assets in excess of interest income on fair value of assets 310 747 93 11 (8) 2
Employer contributions 343 403 338 46 59 56
Employee contributions 21 18 17 – – –
Benefits paid (393) (397) (345) (66) (61) (59)
Settlements – – – (18) – –
Foreign exchange 61 (7) (20) 11 10 4
Fair value of assets at end of year $7,323 $6,647 $ 5,607 $ 341 $ 332 $ 311
Funded status
Excess (deficit) of fair value of assets over benefit obligation at end of year $ (624) $ (293) $(1,071) $(1,278) $(1,178) $(1,190)
Effect of asset limitation and minimum funding requirement
(1)
(76) (77) (130) – – –
Net asset (liability) at end of year $ (700) $ (370) $(1,201) $(1,278) $(1,178) $(1,190)
Recorded in:
Other assets in the Bank’s Consolidated Statement of Financial Position $ 117 $ 132 $ 89 $ – $ – $ –
Other liabilities in the Bank’s Consolidated Statement of Financial
Position (817) (502) (1,290) (1,278) (1,178) (1,190)
Net asset (liability) at end of year $ (700) $ (370) $(1,201) $(1,278) $(1,178) $(1,190)
Annual benefit expense
Current service cost $ 262 $ 247 $ 183 $ 41 $ 45 $ 63
Net interest expense (income) 15 50 15 59 54 59
Past service costs (19) – 19 7 3 (24)
Amount of settlement (gain) loss recognized – – – (5) – –
Remeasurement of other long-term benefits – – – 5 (24) (37)
Benefit expense (income) recorded in the Consolidated Statement of
Income $ 258 $ 297 $ 217 $ 107 $ 78 $ 61
Remeasurements
(Return) on plan assets in excess of interest income on fair value of assets $ (310) $ (747) $ (93) $ (8) $ 10 $ (3)
Actuarial loss (gain) on benefit obligation 731 62 1,063 27 (46) 70
Change in the asset limitation and minimum funding requirement (8) (53) (13) – – –
Remeasurements recorded in OCI $ 413 $ (738) $ 957 $ 19 $ (36) $ 67
Defined contribution benefit expense 21 19 13 – – –
Total benefit cost $ 692 $ (422) $ 1,187 $ 126 $ 42 $ 128
Additional details on actual return on assets and actuarial (gains) and
losses
Actual return on assets $ 644 $1,023 $ 404 $ 36 $ 13 $ 24
Actuarial (gains) and losses from changes in demographic assumptions 54 174 141 (26) 32 1
Actuarial (gains) and losses from changes in financial assumptions 645 (201) 894 102 (87) 86
Actuarial (gains) and losses from changes in experience assumptions 32 89 28 (41) (13) (53)
Additional details on fair value of pension plan assets invested
In Scotiabank securities (stock, bonds) $ 556 $ 509 $ 429 $ – $ – $ –
In property occupied by Scotiabank 4 4 3 – – –
(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.
2014 Scotiabank Annual Report 181
CONSOLIDATED FINANCIAL STATEMENTS
e) Maturity profile of the defined benefit obligation
The weighted average duration of the total benefit obligation at October 31, 2014 is 14.7 years (2013 – 14.5 years, 2012 – 17.3 years).
f) Key assumptions (%)
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 as follows:
Pension plans Other benefit plans
For the year ended October 31 2014 2013 2012 2014 2013 2012
Benefit obligation at end of year
Discount rate – all plans 4.46% 5.04% 4.80% 5.24% 5.56% 5.00%
Discount rate – Canadian plans only 4.20% 4.80% 4.60% 4.12% 4.80% 4.50%
Rate of increase in future compensation
(1)
2.77% 2.84% 2.80% 4.51% 4.49% 4.40%
Benefit expense (income) for the year
Discount rate – all plans 5.04% 4.80% 5.90% 5.56% 5.00% 5.90%
Discount rate – Canadian plans only 4.80% 4.60% 5.70% 4.80% 4.50% 5.50%
Rate of increase in future compensation
(1)
2.84% 2.80% 3.30% 4.49% 4.40% 4.60%
Health care cost trend rates at end of year
Initial rate n/a n/a n/a 6.37% 6.51% 6.60%
Ultimate rate n/a n/a n/a 5.02% 4.98% 4.90%
Year ultimate rate reached n/a n/a n/a 2029 2029 2029
Assumed life expectancy in Canada (years)
Life expectancy at 65 for current pensioners – male 23.0 22.4 21.0 23.0 22.4 21.0
Life expectancy at 65 for current pensioners – female 24.2 23.8 23.4 24.2 23.8 23.4
Life expectancy at 65, for future pensioners currently aged 45 – male 24.0 23.3 22.5 24.0 23.3 22.5
Life expectancy at 65, for future pensioners currently aged 45 – female 25.1 24.6 24.2 25.1 24.6 24.2
(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.
g) Sensitivity analysis
The sensitivity analysis presented below may not represent the actual change in obligation as changes in assumptions may be somewhat correlated.
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, 2014 ($ millions)
Benefit
obligation
Benefit
expense
Benefit
obligation
Benefit
expense
Impact of the following changes:
1% decrease in discount rate $ 1,242 $ 89 $ 268 $ 20
0.25% increase in rate of increase in future compensation 88 9 1 –
1% increase in health care cost trend rate n/a n/a 155 18
1% decrease in health care cost trend rate n/a n/a (123) (14)
1 year increase in Canadian life expectancy 115 7 23 1
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 in 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 management
firms – 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. The use of
derivatives is generally prohibited 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 rare, and typically reflect a change in the
pension plan’s situation (e.g. a plan termination). 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; the assets reflected for
these other benefit plans are related to programs in Canada and
Mexico.
182 2014 Scotiabank Annual Report
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The tables below shows the weighted-average actual and target asset allocations for the Bank’s principal plans at October 31, by asset category.
Pension plans Other benefit plans
Asset category %
Actual
2014
Actual
2013
Actual
2012
Actual
2014
Actual
2013
Actual
2012
Cash and cash equivalents 4% 1% 1% 2% 2% 3%
Equity Investments
Quoted in an active market 42% 48% 49% 46% 44% 40%
Non quoted 22% 20% 19% –% –% –%
64% 68% 68% 46% 44% 40%
Fixed income investments
Quoted in an active market 6% 4% 5% 28% 29% 30%
Non quoted 23% 24% 25% 24% 25% 27%
29% 28% 30% 52% 54% 57%
Other – Non quoted 3% 3% 1% –% –% –%
Total 100% 100% 100% 100% 100% 100%
Target asset allocation at October 31, 2014
Asset category % Pension plans Other benefit plans
Cash and cash equivalents –% 2%
Equity investments 63% 46%
Fixed income investments 31% 52%
Other 6% –%
Total 100% 100%
32 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
Wealth & Insurance and Global Banking & Markets. 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 of the consolidated financial
statements. 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 and other
operating income to an equivalent before-tax basis for those
affected segments.
These differences in measurement enable comparison of net interest
income and other operating income arising from taxable and tax-
exempt sources.
Effective fiscal 2014, the Bank enhanced its funds transfer pricing methodology that is used to allocate interest income and expense to the business
lines. The enhancements included a transfer of higher regulatory liquidity costs, and a reduced interest value for certain deposit types. These
enhancements result in reducing the net interest cost in the Other segment and reducing the net interest income in the business segments. These
changes have no impact on the Bank’s consolidated results. Prior years’ amounts have also been retrospectively adjusted for IFRS changes described
starting on page 138. The impact of both these changes on net income attributable to equity holders is presented below:
For the year ended October 31, 2013 ($ millions)
Canadian
Banking
International
Banking
Global Wealth
& Insurance
Global Banking
& Markets Other Total
IFRS changes (36) (13) (8) 11 3 (43)
Funds transfer pricing methodology changes (117) (10) (57) (38) 222 –
Total (153) (23) (65) (27) 225 (43)
For the year ended October 31, 2012 ($ millions)
Canadian
Banking
International
Banking
Global Wealth
& Insurance
Global Banking
& Markets Other Total
IFRS changes (29) 2 (6) (15) (1) (49)
Funds transfer pricing methodology changes (109) (9) (44) (32) 194 –
Total (138) (7) (50) (47) 193 (49)
Changes to operating segments effective November 1, 2014
In fiscal 2015, the Canadian and International businesses of Global
Wealth & Insurance will be included in Canadian Banking and
International Banking’s results respectively. As well, certain Asia
business activity currently reported in International Banking will be
included in Global Banking and Markets. Prior period comparative
results will be restated.
2014 Scotiabank Annual Report 183
CONSOLIDATED FINANCIAL STATEMENTS
Scotiabank’s results, and average assets, allocated by these operating segments, are as follows:
For the year ended October 31, 2014
Taxable equivalent basis ($ millions)
Canadian
Banking
International
Banking
Global Wealth
& Insurance
Global Banking
& Markets Other
(1)
Total
Net interest income
(2)
$ 5,690 $ 5,352 $ 446 $ 728 $ 89 $ 12,305
Net fee and commission revenues 1,672 1,460 3,364 1,522 (281) 7,737
Net income from investments in associated corporations – 411 156 – (139) 428
Other operating income 74 300 1,080 1,563 117 3,134
Total revenues 7,436 7,523 5,046 3,813 (214) 23,604
Provision for credit losses 661 1,031 2 9 – 1,703
Depreciation and amortization 151 189 35 55 10 440
Other operating expenses 3,659 4,141 2,692 1,674 (5) 12,161
Provision for income taxes 777 489 440 616 (320) 2,002
Net income $ 2,188 $ 1,673 $ 1,877 $ 1,459 $ 101 $ 7,298
Net income attributable to non-controlling interests in
subsidiaries – 181 46 – – 227
Net income attributable to equity holders of the Bank $ 2,188 $ 1,492 $ 1,831 $ 1,459 $ 101 $ 7,071
Average assets ($ billions) $ 280 $ 139 $ 15 $ 283 $ 79 $ 796
Average liabilities ($ billions) $ 193 $ 89 $ 20 $ 209 $ 237 $ 748
(1) Includes all other smaller operating segments and corporate adjustments, such as the elimination of the tax-exempt income gross-up reported in net interest income and other
operating income and provision for income taxes for the year ended October 31, 2014 ($354) to arrive at the amounts reported in the Consolidated Statement of Income,
differences in the actual amount of costs incurred and charged to the operating segments.
(2) Interest revenue is reported net of interest expense as management relies primarily on net interest income as a performance measure.
For the year ended October 31, 2013
(1)
Taxable equivalent basis ($ millions)
Canadian
Banking
International
Banking
Global Wealth
& Insurance
Global Banking
& Markets Other
(2)
Total
Net interest income $ 5,419 $ 4,923 $ 409 $ 787 $ (188) $ 11,350
Net fee and commission revenues 1,507 1,403 2,935 1,268 (196) 6,917
Net income from investments in associated corporations 10 668 230 – (227) 681
Other operating income 37 427 422 1,525 (60) 2,351
Total revenues 6,973 7,421 3,996 3,580 (671) 21,299
Provision for credit losses 478 781 3 26 – 1,288
Depreciation and amortization 189 205 67 53 6 520
Other operating expenses 3,394 3,933 2,344 1,536 (63) 11,144
Provision for income taxes 761 584 336 510 (454) 1,737
Net income $ 2,151 $ 1,918 $ 1,246 $ 1,455 $ (160) $ 6,610
Net income attributable to non-controlling interests in
subsidiaries – 192 39 – – 231
Net income attributable to equity holders of the Bank $ 2,151 $ 1,726 $ 1,207 $ 1,455 $ (160) $ 6,379
Average assets ($ billions) $ 272 $ 121 $ 14 $ 250 $ 92 $ 749
Average liabilities ($ billions) $ 186 $ 78 $ 17 $ 189 $ 236 $ 706
(1) Certain prior period amounts are retrospectively adjusted to reflect (i) the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4), and
(ii) enhancements to funds transfer pricing methodologies made in 2014. The enhancements include a transfer of higher regulatory liquidity costs and a reduced interest value for
certain deposit types.
(2) Includes all other smaller operating segments and corporate adjustments, such as the elimination of the tax-exempt income gross-up reported in net interest income and other
operating income and provision for income taxes for the year ended October 31, 2013 ($312), to arrive at the amounts reported in the Consolidated Statement of Income,
differences in the actual amount of costs incurred and charged to the operating segments.
For the year ended October 31, 2012
(1)
Taxable equivalent basis ($ millions)
Canadian
Banking
International
Banking
Global Wealth
& Insurance
Global Banking
& Markets Other
(2)
Total
Net interest income $ 4,610 $ 4,456 $ 442 $ 760 $ (298) $ 9,970
Net fee and commission revenues 1,477 1,298 2,469 1,218 (216) 6,246
Net income from investments in associated corporations 3 385 209 1 (150) 448
Other operating income 51 346 394 1,525 666 2,982
Total revenues 6,141 6,485 3,514 3,504 2 19,646
Provision for credit losses 506 613 3 30 100 1,252
Depreciation and amortization 148 181 63 53 5 450
Other operating expenses 3,044 3,502 2,013 1,454 (27) 9,986
Provision for income taxes 642 463 315 524 (376) 1,568
Net income $ 1,801 $ 1,726 $ 1,120 $ 1,443 $ 300 $ 6,390
Net income attributable to non-controlling interests in
subsidiaries 3 168 25 – – 196
Net income attributable to equity holders of the Bank $ 1,798 $ 1,558 $ 1,095 $ 1,443 $ 300 $ 6,194
Average assets ($ billions) $ 225 $ 109 $ 14 $ 219 $ 92 $ 659
Average liabilities ($ billions) $ 150 $ 70 $ 16 $ 165 $ 223 $ 624
(1) Certain prior period amounts are retrospectively adjusted to reflect (i) the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4), and (ii)
enhancements to funds transfer pricing methodologies made in 2014. The enhancements include a transfer of higher regulatory liquidity costs and a reduced interest value for
certain deposit types.
(2) Includes all other smaller operating segments and corporate adjustments, such as the elimination of the tax-exempt income gross-up reported in net interest income and other
operating income and provision for income taxes for the year ended October 31, 2012 ($288), to arrive at the amounts reported in the Consolidated Statement of Income,
differences in the actual amount of costs incurred and charged to the operating segments.
184 2014 Scotiabank Annual Report
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Geographical segmentation
(1)
The following table summarizes the Bank’s financial results by geographic region. Revenues and expenses which have not been allocated back to
specific operating business lines are reflected in corporate adjustments.
For the year ended October 31, 2014 ($ millions) Canada
United
States Mexico Peru
Other
International Total
Net interest income $ 6,219 $ 440 $ 1,180 $ 935 $ 3,576 $ 12,350
Net fee and commission revenues 5,282 451 495 454 1,344 8,026
Net income from investments in associated corporations 156 – – 6 405 567
Other operating income 1,633 359 104 74 917 3,087
Total revenues 13,290 1,250 1,779 1,469 6,242 24,030
Provision for credit losses 662 6 240 267 528 1,703
Operating expenses 6,986 513 1,154 645 3,399 12,697
Provision for income taxes 1,156 237 35 175 497 2,100
$ 4,486 $ 494 $ 350 $ 382 $ 1,818 $ 7,530
Corporate adjustments (232)
Net income $ 7,298
Net income attributable to non-controlling interests in subsidiaries 227
Net income attributable to equity holders of the Bank $ 7,071
Total average assets ($ billions) $ 470 $ 117 $ 24 $ 17 $ 155 $ 783
Corporate adjustments 13
Total average assets, including corporate adjustments $ 796
(1) Revenues are attributed to countries based on where services are performed or assets are recorded.
For the year ended October 31, 2013
(2)
($ millions) Canada
United
States Mexico Peru
Other
International Total
Net interest income $ 5,706 $ 461 $ 1,048 $ 895 $ 3,325 $ 11,435
Net fee and commission revenues 4,588 459 452 416 1,204 7,119
Net income from investments in associated corporations 239 – 4 5 659 907
Other operating income 904 287 122 72 948 2,333
Total revenues 11,437 1,207 1,626 1,388 6,136 21,794
Provision for credit losses 472 38 130 246 402 1,288
Operating expenses 6,441 464 1,050 628 3,230 11,813
Provision for income taxes 956 190 61 166 510 1,883
$ 3,568 $ 515 $ 385 $ 348 $ 1,994 $ 6,810
Corporate adjustments (200)
Net income $ 6,610
Net income attributable to non-controlling interests in subsidiaries 231
Net income attributable to equity holders of the Bank $ 6,379
Total average assets ($ billions) $ 434 $ 110 $ 21 $ 15 $ 143 $ 723
Corporate adjustments 26
Total average assets, including corporate adjustments $ 749
(1) Revenues are attributed to countries based on where services are performed or assets are recorded.
(2) Certain prior period amounts are retrospectively adjusted to reflect (i) the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4) and
(ii) enhancements to funds transfer pricing methodologies made in 2014. The enhancements include a transfer of higher regulatory liquidity costs and a reduced interest value for
certain deposit types.
For the year ended October 31, 2012
(2)
($ millions) Canada
United
States Mexico Peru
Other
International Total
Net interest income $ 4,747 $ 527 $ 846 $ 832 $ 3,127 $ 10,079
Net fee and commission revenues 4,226 422 416 376 977 6,417
Net income from investments in associated corporations 214 – 3 4 377 598
Other operating income 1,472 275 58 24 986 2,815
Total revenues 10,659 1,224 1,323 1,236 5,467 19,909
Provision for credit losses 515 20 89 180 348 1,152
Operating expenses 5,770 412 857 587 2,914 10,540
Provision for income taxes 856 286 34 156 367 1,699
$ 3,518 $ 506 $ 343 $ 313 $ 1,838 $ 6,518
Corporate adjustments (128)
Net income $ 6,390
Net income attributable to non-controlling interests in subsidiaries 196
Net income attributable to equity holders of the Bank $ 6,194
Total average assets ($ billions) $ 378 $ 91 $ 20 $ 12 $ 131 $ 632
Corporate adjustments 27
Total average assets, including corporate adjustments $ 659
(1) Revenues are attributed to countries based on where services are performed or assets are recorded.
(2) Certain prior period amounts are retrospectively adjusted to reflect (i) the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4) and
(ii) enhancements to funds transfer pricing methodologies made in 2014. The enhancements include a transfer of higher regulatory liquidity costs and a reduced interest value for
certain deposit types.
2014 Scotiabank Annual Report 185
CONSOLIDATED FINANCIAL STATEMENTS
33 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
Chief Executive Officer (CEO), certain direct reports of the CEO
including Group Heads and the Chief Financial Officer.
For the year ended October 31 ($ millions) 2014 2013
Salaries and cash incentives
(1)
$ 17 $ 20
Equity-based payment
(2)
25 34
Pension and other benefits
(1)
3 2
Total $ 45 $ 56
(1) Expensed during the year.
(2) Awarded during the year.
Directors can use some or all of their director fees earned to buy
common shares of the Bank at market rates through the Directors’
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 29 for further details of these plans.
Loans and deposits of key management personnel
As at October 31 ($ millions) 2014 2013
Loans $ 4 $ 1
Deposits $ 5 $ 12
In Canada, loans are currently granted to key management personnel
at market terms and conditions. Effective March 1, 2001, the Bank
discontinued the practice of granting loans to key management
personnel in Canada at reduced rates. Any of these loans granted prior
to March 1, 2001, are grandfathered until maturity.
The Bank’s committed credit exposure to companies controlled by
directors totaled $9.4 million as at October 31, 2014 (2013 –
$3.5 million), while actual utilized amounts were $3.4 million (2013 –
$1.3 million).
Transactions with associates and joint ventures
In the ordinary course of business, the Bank provides normal banking services and enters into transactions with its associated and other related
corporations on terms similar to those offered to non-related parties. If these transactions are eliminated on consolidation, they are not disclosed as
related party transactions. Transactions between the Bank and its associated companies and joint ventures also qualify as related party transactions
and were recorded as follows:
As at and for the year ended October 31 ($ millions) 2014 2013 2012
Net income $ 11 $ 20 $ 21
Loans 553 511 451
Deposits 223 287 572
Guarantees and commitments 75 58 49
The Bank manages assets of $1.8 billion (October 31, 2013 – $1.7 billion) which is a portion of the Scotiabank principal pension plan assets and
earned $4 million (October 31, 2013 – $4 million) in fees.
186 2014 Scotiabank Annual Report
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34 Principal subsidiaries and non-controlling interests in subsidiaries
(a) Principal subsidiaries
(1)
The following table presents the principal subsidiaries the Bank owns, directly or indirectly. All of these subsidiaries are included in the Bank’s
consolidated financial statements.
Carrying value of shares
As at October 31 ($ millions) Principal office 2014 2013
Canadian
BNS Investments Inc. Toronto, Ontario $ 11,824 $ 11,707
Montreal Trust Company of Canada Montreal, Quebec
Hollis Canadian Bank Toronto, Ontario 858 822
HollisWealth Inc. Toronto, Ontario 3,728 3,869
Tangerine Bank Toronto, Ontario 3,329 3,267
National Trustco Inc. Toronto, Ontario 538 640
The Bank of Nova Scotia Trust Company Toronto, Ontario
National Trust Company Stratford, Ontario
RoyNat Inc. Toronto, Ontario 49 47
1832 Asset Management L.P. Toronto, Ontario 810 373
Scotia Capital Inc. Toronto, Ontario 1,327 1,045
Scotia Dealer Advantage Inc. Burnaby, British Columbia 357 267
Scotia Life Insurance Company Toronto, Ontario 174 148
Scotia Mortgage Corporation Toronto, Ontario 695 589
Scotia Securities Inc. Toronto, Ontario 16 52
International
Banco Colpatria Multibanca Colpatria S.A. (51%) Bogota, Colombia 1,271 1,241
The Bank of Nova Scotia Berhad Kuala Lumpur, Malaysia 306 286
The Bank of Nova Scotia International Limited Nassau, Bahamas 12,731 11,604
Grupo BNS de Costa Rica, S.A. San Jose, Costa Rica
The Bank of Nova Scotia Asia Limited Singapore
The Bank of Nova Scotia Trust Company (Bahamas) Limited Nassau, Bahamas
Scotiabank & Trust (Cayman) Ltd. Grand Cayman, Cayman Islands
Scotiabank (Bahamas) Limited Nassau, Bahamas
Scotiabank (British Virgin Islands) Limited Road Town, Tortola, B.V.I.
Scotiabank (Hong Kong) Limited Hong Kong, China
Scotiabank (Ireland) Limited Dublin, Ireland
Scotiabank (Turks and Caicos) Ltd. Providenciales, Turks and Caicos Islands
Grupo Financiero Scotiabank Inverlat, S.A. de C.V. (97.4%) Mexico, D.F., Mexico 3,022 2,700
Nova Scotia Inversiones Limitada Santiago, Chile 2,491 2,452
Scotiabank Chile (99.6%) Santiago, Chile
Scotia Capital (USA) Inc.
(2)
New York, New York
Scotia Group Jamaica Limited (71.8%) Kingston, Jamaica 435 483
The Bank of Nova Scotia Jamaica Limited Kingston, Jamaica
Scotia Investments Jamaica Limited (77.0%) Kingston, Jamaica
Scotia Holdings (US) Inc.
(3)
Houston, Texas
Scotiabanc Inc. Houston, Texas
Scotia International Limited Nassau, Bahamas 820 863
Scotiabank Anguilla Limited The Valley, Anguilla
Scotia Uruguay Holdings S.A. Montevideo, Uruguay 335 296
Scotiabank Brasil S.A. Banco Multiplo Sao Paulo, Brazil 181 158
Scotiabank Caribbean Holdings Ltd. Bridgetown, Barbados 104 96
Scotiabank (Belize) Ltd. Belize City, Belize
Scotiabank de Puerto Rico San Juan, Puerto Rico 1,069 937
Scotiabank El Salvador, S.A. (99.3%) San Salvador, El Salvador 488 427
Scotiabank Europe plc London, United Kingdom 2,110 1,996
Scotiabank Peru S.A.A. (97.8%) Lima, Peru 2,784 2,560
Scotiabank Trinidad and Tobago Limited (50.9%) Port of Spain, Trinidad and Tobago 344 291
(1) The Bank (or immediate parent of an entity) owns 100% of the outstanding voting shares of each subsidiary unless otherwise noted. The listing includes major operating
subsidiaries only.
(2) The carrying value of this subsidiary is included with that of its parent, Scotia Capital Inc.
(3) The carrying value of this subsidiary is included with that of its parent, BNS Investments Inc.
2014 Scotiabank Annual Report 187
CONSOLIDATED FINANCIAL STATEMENTS
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.
(b) Non-controlling interests in subsidiaries
The Bank’s significant non-controlling interests in subsidiaries are comprised of the following entities:
As at For the year ended
2014 2013 2014 2013
October 31 ($ millions)
Non-controlling
interest %
Non-controlling
interests in
subsidiaries
Non-controlling
interests in
subsidiaries
Net income
attributable to
non-controlling
interests in
subsidiaries
Dividends
paid to
non-controlling
interest
Net income
attributable to
non-controlling
interests in
subsidiaries
Dividends
paid to
non-controlling
interest
Banco Colpatria Multibanca
Colpatria S.A.
(1)
49.0% $ 518 $ 423 $125 $21 $ 129 $ 31
Scotia Group Jamaica
Limited 28.2% 245 226 31 16 33 16
Scotiabank Trinidad and
Tobago Limited 49.1% 294 260 45 30 44 24
Other 0.1% - 49.0%
(2)
255 229 26 9 25 9
Total $1,312 $ 1,138 $227 $76 $ 231 $ 80
(1) Non-controlling interest holders for Banco Colpatria Multibanca Colpatria S.A. have a right to sell their holding to the Bank after the end of 7th anniversary (January 17, 2019) and
at subsequent pre-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.
(2) 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, 2014
($ millions) Revenue
Total
comprehensive
income Total assets
Total
liabilities
Banco Colpatria Multibanca Colpatria S.A. $1,009 $237 $11,259 $10,203
Scotia Group Jamaica Limited 340 119 4,157 3,215
Scotiabank Trinidad and Tobago Limited 228 146 3,756 3,015
As at and for the year ended October 31, 2013
($ millions) Revenue
Total
comprehensive
income Total assets
Total
liabilities
Banco Colpatria Multibanca Colpatria S.A. $ 917 $ 263 $ 10,516 $ 8,862
Scotia Group Jamaica Limited 350 118 3,902 3,164
Scotiabank Trinidad and Tobago Limited 204 92 3,223 2,684
35 Fee and commission revenues
The following table presents details of banking revenues and wealth management revenues in fee and commission revenues.
For the year ended October 31 ($ millions) 2014 2013
(1)
2012
(1)
Banking
Card revenues $ 933 $ 816 $ 768
Deposit and payment services 1,183 1,122 1,083
Credit fees 1,014 943 897
Other 609 589 439
Total banking revenues $ 3,739 $ 3,470 $ 3,187
Wealth management
Mutual funds $ 1,468 $ 1,280 $ 1,125
Brokerage fees 943 848 721
Investment management and trust 383 365 324
Total wealth management revenues $ 2,794 $ 2,493 $ 2,170
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4).
188 2014 Scotiabank Annual Report
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36 Trading revenues
The following table presents details of trading revenues.
For the year ended October 31 ($ millions) 2014 2013
(1)
2012
(1)
Interest rate and credit $ 415 $ 596 $ 503
Equities 92 120 115
Commodities 359 338 425
Foreign exchange 208 198 233
Other 40 48 23
Total $ 1,114 $ 1,300 $ 1,299
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of IFRS 10 in 2014 (refer to Note 4).
37 Earnings per share
For the year ended October 31 ($ millions) 2014 2013
(1)
2012
(1)
Basic earnings per common share
Net income attributable to common shareholders $ 6,916 $ 6,162 $ 5,974
Average number of common shares outstanding (millions) 1,214 1,195 1,133
Basic earnings per common share
(2)
(in dollars) $ 5.69 $ 5.15 $ 5.27
Diluted earnings per common share
Net income attributable to common shareholders $ 6,916 $ 6,162 $ 5,974
Adjustments to net income due to:
(3)
Capital instruments – 18 54
Share-based payment options and others 8 3 (21)
Adjusted income attributable to common shareholders $ 6,924 $ 6,183 $ 6,007
Average number of common shares outstanding (millions) 1,214 1,195 1,133
Adjustments to average shares due to:
(3)
(millions)
Capital instruments – 8 23
Share-based payment options and others 8 6 4
Average number of diluted common shares outstanding (millions) 1,222 1,209 1,160
Diluted earnings per common share
(2)
(in dollars) $ 5.66 $ 5.11 $ 5.18
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4).
(2) Earnings per share calculations are based on full dollar and share amounts.
(3) Certain grants of tandem stock appreciation rights or options that the Bank may settle at its own discretion by issuing common shares in relation to non-controlling interest and
additional interest in an associated company are not included in the calculation of diluted earnings per share as they were anti-dilutive.
The calculation of diluted earnings per share for 2013 and 2012 includes the dilutive impact of certain capital instruments (Scotiabank Trust
Securities – Series 2002-1 and Series 2003-1) for the periods these instruments were outstanding. The impact on the diluted earnings per share of
these instruments was nil (2013 – $0.02; 2012 – $0.06). The calculation also includes the dilutive impact of share-based payment options, Tandem
SARs, and other options. The impact of these instruments was $0.03 (2013 – $0.02; 2012 – $0.03).
During the year, no Tandem SARs were voluntarily renounced by employees (2013 – 2,835,008) (refer to Note 29). The impact of the renouncement
in 2013 was not material to the diluted earnings per share.
38 Guarantees and commitments
(a) Guarantees
The Bank enters into various types of guarantees and indemnifications in the normal course of business. Guarantees represent an undertaking to
another party to make a payment to that party when certain specified events occur. The various guarantees and indemnifications that the Bank
provides with respect to its customers and other third parties are presented below:
2014 2013
As at October 31 ($ millions)
Maximum potential
amount of future
payments
(1)
Maximum potential
amount of future
payments
(1)
Standby letters of credit and letters of guarantee $ 26,024 $ 24,201
Liquidity facilities 4,125 4,411
Derivative instruments 6,303 5,705
Indemnifications 578 557
(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.
2014 Scotiabank Annual Report 189
CONSOLIDATED FINANCIAL STATEMENTS
(i) Standby letters of credit and letters of guarantee
Standby letters of credit and letters of guarantee are written
undertakings by the Bank, at the request of the customer, to provide
assurance of payment to a third-party regarding the customer’s
obligations and liabilities to that third-party. These guarantees
represent an irrevocable obligation of the Bank to pay the third-party
beneficiary against presentation of a documentary demand conforming
with the terms and conditions specified therein, without investigation
as to the validity of the beneficiary’s claim against the customer.
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. As at October 31, 2014,
$4 million (2013 – $3 million) was included in other liabilities in the
Consolidated Statement of Financial Position with respect to these
guarantees.
(ii) Liquidity facilities
The Bank provides backstop liquidity facilities to asset-backed
commercial paper conduits, administered by the Bank and by third
parties. 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. Of the $4,125 million
(2013 – $4,411 million) in backstop liquidity facilities provided to asset-
backed commercial paper conduits, 100% (2013 – 94%) is committed
liquidity for the Bank’s sponsored conduits.
(iii) Derivative instruments
The Bank enters into written credit derivative contracts under which a
counterparty is compensated for losses on a specified referenced asset,
typically a loan or bond, if certain events occur. The Bank also enters
into written option contracts under which a counterparty is granted the
right, but not the obligation, to sell a specified quantity of a financial
instrument at a pre-determined price on or before a set date. These
written option contracts are normally referenced to interest rates,
foreign exchange rates, commodity prices or equity prices. Typically, a
corporate or government entity is the counterparty to the written credit
derivative and option contracts that meet the characteristics of
guarantees described above. The maximum potential amount of future
payments disclosed in the table above relates to written credit
derivatives, puts and floors. However, these amounts exclude certain
derivatives contracts, such as written caps, as the nature of these
contracts prevents quantification of the maximum potential amount of
future payments. As at October 31, 2014, $515 million (2013 –
$234 million) was included in derivative instrument liabilities in the
Consolidated Statement of Financial Position with respect to these
derivative instruments.
(iv) 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, escrow
arrangements, sales of assets or businesses, outsourcing agreements,
leasing arrangements, clearing system arrangements, securities lending
agency agreements and structured transactions. In certain types of
arrangements, the Bank may in turn obtain indemnifications from other
parties to the arrangement or may have access to collateral under
recourse provisions. In many cases, there are no pre-determined
amounts or limits included in these indemnification provisions and the
occurrence of contingent events that will trigger payment under them
is difficult to predict. Therefore, the Bank cannot estimate in all cases
the maximum potential future amount that may be payable, nor the
amount of collateral or assets available under recourse provisions that
would mitigate any such payments. Historically, the Bank has not made
any significant payments under these indemnities. As at October 31,
2014, $3 million (2013 – $3 million) was included in other liabilities in
the Consolidated Statement of Financial Position with respect to
indemnifications.
(b) Other indirect commitments
In the normal course of business, various other indirect commitments
are outstanding which are not reflected on the Consolidated Statement
of Financial Position. These may include:
– Commercial letters of credit which require the Bank to honour
drafts presented by a third-party when specific activities are
completed;
– Commitments to extend credit which represent undertakings to
make credit available in the form of loans or other financings for
specific amounts and maturities, subject to specific conditions;
– Securities lending transactions under which the Bank, acting as
principal or agent, agrees to lend securities to a borrower. The
borrower must fully collateralize the security loan at all times. The
market value of the collateral is monitored relative to the amounts
due under the agreements, and where necessary, additional
collateral is obtained; and
– Security purchase commitments which require the Bank to fund
future investments.
These financial instruments are subject to normal credit standards,
financial controls and monitoring procedures.
The table below provides a detailed breakdown of the Bank’s other indirect commitments expressed in terms of the contractual amounts of the
related commitment or contract which are not reflected on the Consolidated Statement of Financial Position.
As at October 31 ($ millions) 2014 2013
(1)
Commercial letters of credit $ 1,113 $ 1,801
Commitments to extend credit
(2)
Original term to maturity of one year or less 53,236 44,312
Original term to maturity of more than one year 83,981 74,472
Securities lending 37,110 25,609
Securities purchase and other commitments 720 855
Total $176,160 $ 147,049
(1) 2013 has been restated for presentation purposes.
(2) Includes liquidity facilities, net of credit enhancements.
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(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) 2014 2013
(1)
Assets pledged to:
Bank of Canada
(2)
$ 25 $ 25
Foreign governments and central banks
(2)
1,340 685
Clearing systems, payment systems and depositories
(2)
1,207 1,069
Assets pledged in relation to exchange-traded derivative transactions 1,925 1,507
Assets pledged as collateral related to securities borrowed, and securities lent 82,888 54,917
Assets pledged in relation to over-the-counter derivative transactions 6,895 5,773
Assets pledged in relation to covered bond program (Note 16) 18,764 14,197
Assets pledged under CMHC programs (Note 15) 20,394 26,992
Other 4,029 3,605
Total assets pledged $137,467 $ 108,770
Obligations related to securities sold under repurchase agreements 80,335 68,868
Total
(3)
$217,802 $ 177,638
(1) Prior period amounts have been restated to conform with current period presentation.
(2) 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.
(3) Includes assets that have been received from counterparties through normal course of business in securities financing and derivative transactions.
(d) Other executory contracts
The Bank and its subsidiaries have entered into certain long-term executory contracts, relating to outsourced services. The significant outsourcing
arrangements have variable pricing based on utilization and are cancellable with notice.
39 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, 2013:
– 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 Executive and
Risk Committee, (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 strategy and credit risk policy are
developed by its Global Risk Management (GRM) department and are
reviewed and approved by the Board on an annual basis. The credit risk
strategy 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 strategy 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, the calculation of the allowance for credit
losses and the authorization of write-offs. 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 transaction 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, each exposure has been assigned to a particular pool
(real estate secured, other retail – term lending, unsecured revolving)
and within each pool to a risk grade. This process provides for a
meaningful differentiation of risk, and allows for appropriate and
consistent estimation of loss characteristics at the pool and risk grade
level. Further details on credit risk relating to derivatives are provided
in Note 10(c).
(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
2014 Scotiabank Annual Report 191
CONSOLIDATED FINANCIAL STATEMENTS
(AIRB) for all material Canadian, U.S., European portfolios, and
effective 2011 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, for probability of default
(PD), loss given default (LGD) and exposure at default (EAD), as defined
below:
– EAD: Generally represents the expected gross exposure –
outstanding amount for on-balance sheet exposure and loan
equivalent amount for off-balance sheet exposure.
– PD: Measures the likelihood that a borrower will default within
a 1-year time horizon, expressed as a percentage.
– LGD: Measures the severity of loss on a facility in the event of a
borrower’s default, expressed as a percentage of exposure at
default.
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 for non-retail exposures and product type for retail exposures.
Standardized risk weights also takes into account other factors such
as specific provisions for defaulted exposures, eligible collateral, and
loan-to-value for real estate secured retail exposures.
As at October 31 ($ millions) 2014 2013
Exposure at default
(1)
Category Drawn
(2)
Undrawn
commitments
Other
exposures
(3)
Total Total
By counterparty type
Non-retail
AIRB portfolio
Corporate $ 89,287 $ 43,395 $ 58,768 $ 191,450 $ 169,243
Bank 23,360 10,895 19,598 53,853 59,771
Sovereign 154,381 1,349 4,805 160,535 159,113
267,028 55,639 83,171 405,838 388,127
Standardized portfolio
Corporate 41,334 3,687 2,639 47,660 43,044
Bank 2,523 59 99 2,681 2,854
Sovereign 5,172 3 – 5,175 5,667
49,029 3,749 2,738 55,516 51,565
Total non-retail $ 316,057 $ 59,388 $ 85,909 $ 461,354 $ 439,692
Retail
(4)
AIRB portfolio
Real estate secured $ 123,033 $ 12,209 $ – $ 135,242 $ 133,276
Qualifying revolving 16,011 16,196 – 32,207 28,074
Other retail 24,325 659 – 24,984 20,746
163,369 29,064 – 192,433 182,096
Standardized portfolio
Real estate secured 23,977 – – 23,977 21,186
Other retail 22,755 – – 22,755 20,488
46,732 – – 46,732 41,674
Total retail $ 210,101 $ 29,064 $ – $ 239,165 $ 223,770
Total $ 526,158 $ 88,452 $ 85,909 $ 700,519 $ 663,462
By geography
(5)
Canada $ 315,950 $ 55,799 $ 33,969 $ 405,718 $ 390,613
United States 64,690 19,436 32,843 116,969 104,366
Mexico 19,436 307 1,032 20,775 17,859
Other International
Europe 13,962 5,787 9,522 29,271 30,072
Caribbean 31,666 1,382 1,519 34,567 34,034
Latin America (excluding Mexico) 50,000 1,918 4,031 55,949 49,559
All other 30,454 3,823 2,993 37,270 36,959
Total $ 526,158 $ 88,452 $ 85,909 $ 700,519 $ 663,462
(1) Exposure at default is presented after credit risk mitigation. Exposures exclude available-for-sale equity securities and other assets.
(2) Non-retail drawn includes loans, acceptances, deposits with banks and available-for-sale debt securities. Retail drawn includes residential mortgages, credit cards, lines of credit, and
other personal loans.
(3) Non-retail other exposures include off-balance sheet lending instruments such as letters of credit, letters of guarantees, securitizations including first loss protection of $154
(October 31, 2013 - $304), derivatives and repo-style transactions (reverse repurchase agreements, repurchase agreements, securities lending and securities borrowing), net of
related collateral. Not applicable for retail exposures.
(4) During the year, the Bank implemented new retail probability of default (PD), exposure at default (EAD) and loss given default (LGD) models for credit-cards, lines of credit and real
estate secured revolving credit.
(5) Geographic segmentation is based upon the location of the ultimate risk of the credit exposure.
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Consolidated Statement of Financial Position asset categories cross-referenced to credit risk exposures
The table below provides mapping of on-balance sheet asset categories that are included in the various Basel III exposure categories as presented in
the credit risk exposure summary table on page 192 of these financial statements. In addition, it also provides other exposures which are subject to
market risk and/or other assets which are not subject to market and credit risk with a reconciliation to the balance sheet. The credit risk exposures on
certain assets such as cash, precious metals, investment securities (equities) and other assets are not included on the credit risk exposure summary
table. Also excluded from the credit risk exposures are certain trading assets and all assets of the Bank’s insurance subsidiaries.
Credit Risk Exposures Other Exposures
Drawn
(1)
Other Exposures Market Risk Exposures
As at October 31, 2014 ($ 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 $ 54,774 $ – $ – $ – $ – $ – $ – $ – $ 1,956 $ 56,730
Precious metals – – – – – – – 7,286 – 7,286
Trading assets
Securities – – – – – – – 95,363 – 95,363
Loans 8,465 – – – – – 8,465 6,043 – 14,508
Other – – – – – – – 3,377 – 3,377
Financial assets designated at fair
value through profit or loss 72 – – – – 39 – – – 111
Securities purchased under resale
agreements and securities
borrowed – – – 93,866 – – – – – 93,866
Derivative financial instruments – – – – 33,439 – 31,405 – – 33,439
Investment securities 33,417 – – – – 4,230 – – 1,015 38,662
Loans:
Residential mortgages
(2)
84,973 127,543 – – – – – – 132 212,648
Personal and credit cards – 82,417 1,776 – – – – – 11 84,204
Business & government 124,800 – 6,277 – – – – – 21 131,098
Allowances for credit losses
(3)
(861) – – – – – – – (2,780) (3,641)
Customers’ liability under
acceptances 9,876 – – – – – – – – 9,876
Property and equipment – – – – – – – – 2,272 2,272
Investment in associates – – – – – – – – 3,461 3,461
Goodwill and other intangibles
assets – – – – – – – – 10,884 10,884
Other (including Deferred tax assets) 539 142 – – – – – – 10,841 11,522
Total $316,055 $210,102 $8,053 $93,866 $33,439 $4,269 $39,870 $112,069 $27,813 $805,666
(1) Includes the Bank’s insurance subsidiaries’ assets and all other assets which are not subject to credit and market risks.
(2) Includes $83.4 billion in mortgages guaranteed by Canada Mortgage Housing Corporation including 90% of privately insured mortgages.
(3) Gross of allowances against impaired loans for AIRB exposures and net of allowances against impaired loans for standardized exposures.
Credit Risk Exposures Other Exposures
Drawn
(1)
Other Exposures Market Risk Exposures
As at October 31, 2013 ($ millions)
(4)(5)
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 $ 51,274 $ – $ – $ – $ – $ – $ – $ – $ 2,064 $ 53,338
Precious metals – – – – – – – 8,880 – 8,880
Trading assets
Securities – – – – – – – 84,195 1 84,196
Loans 7,812 – – – – – 7,812 3,413 – 11,225
Other – – – – – – – 1,068 – 1,068
Financial assets designated at fair
value through profit or loss 69 – – – – 37 – – – 106
Securities purchased under resale
agreements and securities
borrowed – – – 82,533 – – – – – 82,533
Derivative financial instruments – – – – 24,503 – 23,147 – – 24,503
Investment securities 29,309 – 225 – – 3,691 – – 1,094 34,319
Loans:
Residential mortgages
(2)
86,729 123,039 – – – – – – 97 209,865
Personal and credit cards – 74,068 1,933 – – – – – 7 76,008
Business & government 113,570 – 5,811 201 – – – – 33 119,615
Allowances for credit losses
(3)
(774) – – – – – – – (2,499) (3,273)
Customers’ liability under
acceptances 10,556 – – – – – – – – 10,556
Property and equipment – – – – – – – – 2,214 2,214
Investment in associates – – – – – – – – 5,326 5,326
Goodwill and other intangibles
assets – – – – – – – – 10,704 10,704
Other (including Deferred tax assets) 1,741 172 – – – – – – 10,548 12,461
Total $300,286 $197,279 $7,969 $82,734 $24,503 $3,728 $30,959 $97,556 $29,589 $743,644
(1) Includes the Bank’s insurance subsidiaries’ assets and all other assets which are not subject to credit and market risks.
(2) Includes $86.2 billion in mortgages guaranteed by Canada Mortgage Housing Corporation including 90% of privately insured mortgages.
(3) Gross of allowances against impaired loans for AIRB exposures and net of allowances against impaired loans for standardized exposures.
(4) Certain prior period amounts have been retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014.
(5) Prior period amounts have been reclassified to conform with current period presentation.
2014 Scotiabank Annual Report 193
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, 2014, and October 31, 2013, 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,
2013.
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% – 0.0595%
AA to A+ Aa2 to A1 AA to A (high) 95 0.0595% – 0.1563%
A to A- A2 to A3 A to A (low) Investment grade 90 0.0654% – 0.1681%
BBB+ Baa1 BBB (high) 87 0.1004% – 0.2595%
BBB Baa2 BBB 85 0.1472% – 0.3723%
BBB- Baa3 BBB (low) 83 0.2156% – 0.5342%
BB+ Ba1 BB (high) 80 0.3378% – 0.5929%
BB Ba2 BB 77 0.5293% – 0.6582%
BB- Ba3 BB (low) Non-Investment grade 75 0.6582% – 0.8292%
B+ B1 B (high) 73 0.8292% – 1.6352%
B to B- B2 to B3 B to B (low) 70 1.6352% – 3.0890%
CCC+ Caa1 – 65 3.0890% – 10.8179%
CCC Caa2 – Watch list 60 10.8179% – 20.6759%
CCC- to CC Caa3 to Ca – 40 20.6759% – 37.0263%
– – – 30 37.0263% – 60.8493%
Default Default 27 – 21 100%
(1) Applies to non-retail portfolio.
(2) PD ranges overlap across IG codes as the Bank utilizes two risk rating systems for its AIRB portfolios, and each risk rating system has its own separate IG to PD mapping.
Non-retail AIRB portfolio
The credit quality of the non-retail AIRB portfolio, expressed in terms of risk categories of borrower internal grades is shown in the table below:
2014 2013
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 $ 55,401 $ 1,186 $13,335 $ 69,922 $ 63,434
95 13,083 7,923 18,964 39,970 41,649
90 16,170 9,845 18,079 44,094 40,705
87 15,072 9,233 8,907 33,212 26,808
85 15,579 7,900 7,092 30,571 32,495
83 17,738 7,256 6,439 31,433 30,065
Non-Investment grade 80 17,803 6,202 3,170 27,175 26,564
77 11,564 2,758 1,996 16,318 14,466
75 10,516 2,222 3,840 16,578 13,446
73 3,826 758 639 5,223 4,336
70 4,018 178 360 4,556 3,774
Watch list 65 613 78 124 815 1,030
60 413 43 44 500 591
40 769 30 17 816 706
30 36 – 1 37 11
Default 27 – 21 981 27 10 1,018 1,527
Total, excluding residential mortgages $183,582 $55,639 $83,017 $322,238 $ 301,607
Government guaranteed residential mortgages
(3)
83,446 – – 83,446 86,216
Total $267,028 $55,639 $83,017 $405,684 $ 387,823
(1) After credit risk mitigation.
(2) Includes off-balance sheet lending instruments such as letters of credit, letters of guarantee, securitizations, excluding first loss protection of $154 (October 31, 2013 – $304),
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.
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Non-retail standardized portfolio
Non-retail standardized portfolio as at October 31, 2014 comprised of
drawn, undrawn and other exposures to corporate, bank and sovereign
counterparties amounted to $56 billion (October 31, 2013 –
$52 billion). Exposures to most Corporate/Commercial counterparties
mainly in the Caribbean and Latin American region, are to non-
investment grade counterparties based on the Bank’s internal
grading systems.
(iii) Credit quality of retail exposures
The Bank’s credit underwriting methodology and risk modeling in
Canada is customer rather than product focused. Generally, decisions
on consumer loans are based on risk ratings, which are generated
using predictive scoring models. Individual credit requests are processed
by proprietary adjudication software designed to calculate the
maximum debt for which a customer qualifies. The Bank’s retail
portfolios consist of a number of relatively small loans to a large
number of borrowers. The portfolios are distributed across Canada and
a wide range of countries. As such, the portfolios inherently have a
high degree of diversification. In addition, as of October 31, 2014,
52% of the Canadian banking residential mortgage portfolio is insured
and the average loan-to-value ratio of the uninsured portion of the
portfolio is 54%.
Retail AIRB portfolio
The data in the table below provides a distribution of the retail AIRB exposure within each PD grade by exposure class:
As at October 31 ($ millions) 2014 2013
Exposure at default
(1)
Real estate secured
Category of (PD) grades PD range Mortgages
Line of
credit
Qualifying
revolving
Other
retail Total Total
Exceptionally Low 0.0000% – 0.0499% $ 19,450 $ – $ 6,376 $ 406 $ 26,232 $ 16,578
Very Low 0.0500% – 0.1999% 48,891 13,146 6,824 1,268 70,129 87,255
Low
0.2000% – 0.9999% 27,528 11,247 11,036 17,173 66,984 46,058
Medium Low 1.0000% – 2.9999% 3,060 6,235 3,398 3,522 16,215 17,928
Medium
3.0000% – 9.9999% 3,764 – 2,259 1,930 7,953 10,669
High 10.0000% – 19.9999% 578 348 1,380 1 2,307 934
Extremely High 20.0000% – 99.9999% 434 298 709 528 1,969 2,077
Default 100% 213 50 225 156 644 597
Total $103,918 $31,324 $32,207 $24,984 $192,433 $ 182,096
(1) After credit risk mitigation.
Retail standardized portfolio
The retail standardized portfolio of $47 billion as at October 31, 2014
(October 31, 2013 – $42 billion) was comprised of residential
mortgages, personal loans, credit cards and lines of credit to
individuals, mainly in the Caribbean and Latin American region.
Of the total retail standardized exposures, $24 billion (October 31,
2013 –$21 billion) was represented by mortgages and loans secured by
residential real estate, mostly with a loan-to-value ratio of below 80%.
(iv) Collateral
Collateral held
In the normal course of business, to reduce its exposure to counterparty
credit risk, the Bank receives collateral on derivative, securities lending,
and other transactions related to the capital markets. 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, 2014, the approximate market value of collateral
accepted that may be sold or repledged by the Bank was $114 billion
(October 31, 2013 – $91 billion). This collateral is held primarily in
connection with reverse repurchase agreements, securities lending and
derivative transactions.
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 38(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 non-financial assets acquired in exchange for
loans as at October 31, 2014 was $353 million (October 31, 2013 –
$374 million) mainly comprised of real estate and were classified as
either held for sale or held for use as appropriate.
(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 Liability Committee (LCO) provides senior
management oversight of liquidity risk through its weekly meetings.
2014 Scotiabank Annual Report 195
CONSOLIDATED FINANCIAL STATEMENTS
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/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. As at October 31, 2014 and
October 31, 2013, the majority of commitments to extend credit had a
remaining term to maturity of less than one year.
(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 LCO 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, and gap analysis.
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 shareholders’ 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. Gap analysis is used to assess the interest rate
sensitivity of the Bank’s retail, wholesale banking and international
operations. Under gap analysis, interest rate-sensitive assets, liabilities
and derivative instruments are assigned to defined time periods, on the
earlier of contractual repricing or maturity dates on the basis of
expected repricing dates.
(i) Non-trading interest rate risk
Interest rate risk, inclusive of credit spread 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; mortgage prepayment rates;
changes in the market price of credit; and the creditworthiness of a
particular issuer. The Bank actively manages its interest rate exposures
with the objective of 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 shareholders’ equity. The
income limit measures the effect of a specified shift in interest rates on
the Bank’s annual net 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. Interest rate
exposures in individual currencies are also controlled by gap limits.
Interest rate sensitivity gap
The following table summarizes carrying amounts of assets, liabilities
and equity, and derivative instrument notional amounts in order to
arrive at the Bank’s interest rate gap based on the earlier of contractual
repricing or maturity dates. To arrive at the Bank’s view of its effective
interest rate gap, adjustments are made to factor in expected mortgage
and loan repayments based on historical patterns and reclassify the
Bank’s trading instruments to the immediately rate sensitive and within
3 months categories. Consumer behaviour assumptions are used to
reclassify certain non-maturity assets and liabilities.
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As at October 31, 2014 ($ millions)
Immediately
rate sensitive
(1)
Within
3 months
Three to
12 months
One to
5 years Over 5 years
Non-rate
sensitive Total
Cash and deposits with financial institutions $ 38,584 $ 12,365 $ 134 $ 3 $ – $ 5,644 $ 56,730
Precious metals – – – – – 7,286 7,286
Trading assets – 18,957 8,825 21,252 20,652 43,562 113,248
Financial instruments designated at fair value
through profit or loss – – 12 60 – 39 111
Securities purchased under resale
agreements and securities borrowed 24,816 42,495 6,885 1,118 – 18,552 93,866
Investment securities – 11,496 6,476 13,863 3,073 3,754
(2)
38,662
Loans 20,064 191,325 50,287 145,056 16,093 1,484
(3)
424,309
Other assets – – – – – 71,454
(4)
71,454
Total assets $ 83,464 $ 276,638 $ 72,619 $181,352 $39,818 $ 151,775 $805,666
Deposits $ 76,514 $ 280,776 $ 70,150 $ 86,855 $13,238 $ 26,484 $554,017
Financial instruments designated at fair value
through profit or loss – 197 84 101 83 – 465
Obligations related to securities sold short 29 164 1,441 11,557 10,925 2,934 27,050
Obligations related to securities sold under
repurchase agreements and securities lent 45,254 30,721 6,950 – – 6,028 88,953
Subordinated debentures – – 160 4,447 264 – 4,871
Other liabilities 832 2,773 520 2,861 2,904 71,209
(4)
81,099
Equity – 373 265 2,296 – 46,277
(4)
49,211
Total liabilities and equity $122,629 $ 315,004 $ 79,570 $108,117 $27,414 $ 152,932 $805,666
On-balance sheet gap $ (39,165) $ (38,366) $ (6,951) $ 73,235 $12,404 $ (1,157) $ –
Off-balance sheet gap – 2,236 2,763 (8,482) 2,816 667 –
Interest rate sensitivity gap based on
contractual repricing $ (39,165) $ (36,130) $ (4,188) $ 64,753 $15,220 $ (490) $ –
Adjustment to expected repricing 85,371 20,559 (16,697) (55,415) (6,511) (27,307) –
Total interest rate sensitivity gap $ 46,206 $ (15,571) $ (20,885) $ 9,338 $ 8,709 $ (27,797) $ –
As at October 31, 2013 ($ millions)
Total interest rate sensitivity gap $ 41,056 $ (24,604) $ (16,147) $ 16,487 $ 6,470 $ (23,262) $ –
(1) Represents those financial instruments whose interest rates change concurrently with a change in the underlying interest rate basis, for example, prime rate loans.
(2) Represents common shares, preferred shares, and equity accounted investments.
(3) Includes net impaired loans, less the collective allowance on performing loans.
(4) Includes non-financial instruments.
2014 Scotiabank Annual Report 197
CONSOLIDATED FINANCIAL STATEMENTS
Average effective yields by the earlier of the contractual repricing or maturity dates
The following tables summarize average effective yields, by the earlier of the contractual repricing or maturity dates, for the following interest rate-
sensitive financial instruments:
As at October 31, 2014 (%)
Immediately
rate sensitive
Within
3 months
Three to
12 months
One to
5 years
Over
5 years
Non-rate
sensitive Total
Cash and deposits with financial institutions 0.3% 1.0% 1.0% –% –% –% 0.4%
Precious metals – – – – – – –
Trading assets – 1.9 2.1 2.8 3.1 – 2.6
Financial assets designated at fair value through profit or loss – – 5.6 8.4 – – 7.9
Securities purchased under resale agreements and securities
borrowed 0.4 0.7 0.6 0.8 – – 0.6
Investment securities
(1)
– 3.0 2.2 1.9 3.4 – 2.5
Loans
(2)
4.8 3.9 4.3 4.3 5.9 – 4.2
Deposits
(3)
0.9 0.9 1.5 2.3 2.9 – 1.3
Financial liabilities designated at fair value through profit or loss – 1.7 3.3 – 1.1 – 1.5
Obligations related to securities sold short 0.2 1.3 0.4 1.6 2.9 – 2.1
Obligations related to securities sold under repurchase agreements
and securities lent
(3)
0.3 1.1 0.3 – – – 0.6
Subordinated debentures
(3)
– – 0.5 3.8 8.9 – 4.0
(4)
Other liabilities 2.5 4.1 3.0 4.3 4.4 – 4.1
As at October 31, 2013 (%)
Immediately
rate sensitive
Within
3 months
Three to
12 months
One to
5 years
Over
5 years
Non-rate
sensitive Total
Cash and deposits with financial institutions 0.3% 1.2% 0.5% –% –% –% 0.5%
Precious metals – – – – – – –
Trading assets – 1.0 1.6 3.0 3.9 – 2.7
Financial assets designated at fair value through profit or loss – – – 7.9 – – 7.9
Securities purchased under resale agreements and securities
borrowed 0.4 0.7 0.5 1.2 – – 0.6
Investment securities
(1)
1.5 3.1 2.5 2.3 3.3 – 2.7
Loans
(2)
4.5 3.8 4.7 4.2 6.0 – 4.2
Deposits
(3)
1.1 0.9 1.7 2.2 3.9 – 1.3
Financial liabilities designated at fair value through profit or loss – 2.7 2.3 2.7 2.8 – 2.8
Obligations related to securities sold short – 0.2 0.4 1.9 3.1 – 2.0
Obligations related to securities sold under repurchase agreements
and securities lent
(3)
0.2 1.4 0.3 – – – 0.7
Subordinated debentures
(3)
– – 4.4 4.4 3.7 – 4.2
(4)
Other liabilities 2.6 4.0 1.7 4.0 4.5 – 3.7
(1) Yields are based on cost or amortized cost and contractual interest or stated dividend rates adjusted for amortization of premiums and discounts. Yields on tax-exempt securities
have not been computed on a taxable equivalent basis.
(2) Yields are based on book values, net of allowance for credit losses, and contractual interest rates, adjusted for the amortization of any unearned income.
(3) Yields are based on book values and contractual rates.
(4) After adjusting for the impact of related derivatives, the yield was 3.7% (2013 – 3.9%).
Interest rate sensitivity
Based on the Bank’s interest rate positions, the following table shows the pro-forma after-tax impact on the Bank’s net income over the next twelve
months and economic value of shareholders’ equity of an immediate and sustained 100 and 200 basis point increase and decrease in interest rates
across major currencies as defined by the Bank.
As at October 31 2014 2013
Net income Economic value of equity
($ millions)
Canadian
dollar
Other
currencies Total
Canadian
dollar
Other
currencies Total
Net
income
Economic value
of equity
100 bp increase $ 47 $ 132 $ 179 $ (355) $ (143) $ (498) $ 97 $ (572)
100 bp decrease
(1)
$ (47) $ (40) $ (87) $ 263 $ 211 $ 474 $ (64) $ 420
200 bp increase $ 95 $ 265 $ 360 $ (780) $ (279) $ (1,059) $ 194 $ (1,242)
200 bp decrease
(1)
$ (95) $ (50) $ (145) $ 382 $ 526 $ 908 $ (114) $ 691
(1) Corresponding with the current low interest rate environment, the annual income sensitivity to a decline in rates, for currencies with rates below 1%, is measured using a 25 bp
decline. Prior period amounts have been restated to reflect this change.
(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 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 Liability Committee (LCO) 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.
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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 LCO 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, 2014, a one percent increase (decrease) in the
Canadian dollar against all currencies in which the Bank operates
decreases (increases) the Bank’s before-tax annual earnings by
approximately $49 million (October 31, 2013 – $47 million) in the
absence of hedging activity, primarily from exposure to U.S. dollars.
A similar change in the Canadian dollar as at October 31, 2014 would
increase (decrease) the unrealized foreign currency translation losses in
the accumulated other comprehensive income section of equity by
approximately $260 million (October 31, 2013 – $224 million), net of
hedging.
(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, VaR, and
stress-test 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 LCO. 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 available-for-sale equity securities 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, but also include a proprietary component.
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 are marked-to-market in accordance with the Bank’s
valuation policies. Positions are marked-to-market daily 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 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 uses a
Monte Carlo simulation. The table below shows the Bank’s VaR by risk
factor:
For the year ended October 31, 2014
($ millions) As at October 31, 2014 Average High Low As at October 31, 2013
Credit spread plus interest rate $ 8.6 $ 13.1 $22.1 $ 8.2 $ 10.9
Credit spread 8.1 9.6 12.4 7.6 7.6
Interest rate 4.2 9.3 18.1 4.2 7.4
Equities 2.2 2.6 5.9 1.5 2.5
Foreign exchange 0.9 0.9 1.9 0.4 1.5
Commodities 3.2 2.8 5.5 1.6 3.7
Debt specific 20.4 15.8 22.2 11.1 14.5
Diversification effect (12.8) (14.5) N/A N/A (15.9)
All-Bank VaR $ 22.5 $ 20.8 $27.3 $16.0 $ 17.2
All-Bank stressed VaR $ 38.7 $ 32.9 $40.3 $25.3 $ 33.1
Below are the market risk capital requirements as at October 31, 2014.
($ millions)
All-Bank VaR $ 241
All-Bank stressed VaR 428
Incremental risk charge 396
Comprehensive risk measure (CRM) 130
CRM surcharge 139
Standardized approach 46
Total market risk capital $1,380
(1)
(1) Equates to $17.3 billion of risk-weighted assets.
2014 Scotiabank Annual Report 199
CONSOLIDATED FINANCIAL STATEMENTS
(d) Operational risk
Operational risk is the risk of loss, whether direct or indirect, to which
the Bank is exposed due to inadequate or failed internal processes or
systems, human error, or external events. Operational risk includes legal
and regulatory risk, business process and change risk, fiduciary or
disclosure breaches, technology failure, financial crime and
environmental risk. Operational risk, in some form, exists in each of the
Bank’s business and support activities, and can result in financial loss,
regulatory sanctions and damage to the Bank’s reputation. The Bank
has developed policies, processes and assessment methodologies to
ensure that operational risk is appropriately identified and managed
with effective controls with a view to safeguarding client assets and
preserving shareholder value.
40 Contractual maturities
The table below provides the maturity of assets and liabilities as well as
the off-balance sheet commitments based on the contractual maturity
date. From a liquidity risk perspective the Bank considers factors other
than contractual maturity in the assessment of liquid assets or in
determining expected future cash flows. In particular, for securities
with a fixed maturity date, the ability and time horizon to raise cash
from these securities is more relevant to liquidity management than
contractual maturity. For other assets and deposits the Bank uses
assumptions about rollover rates to assess liquidity risk for normal
course and stress scenarios. Similarly, the Bank uses assumptions to
assess the potential drawdown of credit commitments in various
scenarios.
As at October 31, 2014
($ millions)
Less
than one
month
One to
three
months
Three
to six
months
Six to
nine
months
Nine to
twelve
months
One to
two
years
Two
to five
years
Over
five
years
No
specific
maturity Total
Assets
Cash and deposits with financial
institutions and precious metals $49,912 $ 1,312 $ 398 $ 125 $ 715 $ 125 $ 394 $ 2 $ 11,033 $ 64,016
Trading assets 5,038 6,068 2,921 2,628 3,051 8,707 16,124 25,143 43,568 113,248
Financial instruments designated at
fair value through profit or loss – – – 12 – 60 – – 39 111
Securities purchased under resale
agreement and securities
borrowed 71,611 14,251 3,604 2,134 1,148 1,118 – – – 93,866
Derivative financial instruments 2,216 2,582 1,430 1,059 1,011 3,559 6,922 14,660 – 33,439
Investment securities 1,846 1,674 2,951 1,740 1,577 10,071 9,805 4,697 4,301 38,662
Loans 25,495 21,343 25,828 27,558 23,305 71,750 155,459 28,112 45,459 424,309
Residential mortgages 2,589 3,983 12,441 15,686 12,309 47,999 97,540 18,395 1,706
(1)
212,648
Personal and credit cards 2,719 1,530 2,239 2,797 2,450 7,735 17,448 5,003 42,283 84,204
Business and government 20,187 15,830 11,148 9,075 8,546 16,016 40,471 4,714 5,111
(2)
131,098
Allowance for credit losses – – – – – – – – (3,641) (3,641)
Customers’ liabilities under
acceptances 7,778 2,032 65 1 – – – – – 9,876
Other assets – – – – – – – – 28,139 28,139
Liabilities and equity
Deposits $53,612 $58,296 $52,802 $ 29,330 $ 22,930 $ 45,523 $ 65,793 $14,755 $210,976 $ 554,017
Personal 7,261 7,401 8,334 8,319 7,850 16,763 17,292 257 101,686 175,163
Non-personal 46,351 50,895 44,468 21,011 15,080 28,760 48,501 14,498 109,290 378,854
Financial instruments designated at
fair value through profit or loss 3 23 17 – – – 187 235 – 465
Acceptances 7,778 2,032 65 1 – – – – – 9,876
Obligations related to securities
sold short 34 159 990 269 183 3,912 7,645 10,924 2,934 27,050
Derivative financial instruments 2,156 2,629 1,266 1,386 945 4,232 8,656 15,168 – 36,438
Obligations related to securities
sold under repurchase
agreements and securities lent 73,074 8,929 2,280 1,586 3,084 – – – – 88,953
Subordinated debentures – – – – – – – 4,871 – 4,871
Other liabilities 372 489 398 184 92 1,948 2,999 3,387 24,916 34,785
Total equity – – – – – – – – 49,211 49,211
Off-Balance sheet commitments
Operating leases $ 25 $ 53 $ 78 $ 78 $ 76 $ 261 $ 550 $ 577 $ – $ 1,698
Credit commitments
(3)
5,062 4,165 9,950 13,315 14,475 13,821 73,224 3,424 5 137,441
Financial guarantees
(4)
– – – – – – – – 27,137 27,137
Outsourcing obligations 19 38 57 57 57 161 286 1 1 677
(1) Includes primarily impaired mortgages.
(2) Includes primarily overdrafts and impaired loans.
(3) Includes the undrawn component of committed credit and liquidity facilities.
(4) Includes outstanding balances of guarantees, standby letters of credit and commercial letters of credit which may expire undrawn.
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(1)
($ millions)
Less
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month
One to three
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Three to six
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Six to
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Nine to
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One to
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Two to five
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Over
five
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No
specific
maturity Total
Assets
Cash and deposits with
financial institutions
and precious metals $ 48,721 $ 1,173 $ 163 $ 44 $ 13 $ 66 $ 40 $ 10 $ 11,988 $ 62,218
Trading assets 5,698 6,588 2,551 2,845 1,722 8,055 16,200 16,495 36,335 96,489
Financial instruments
designated at fair value
through profit or loss – – – – – 11 58 – 37 106
Securities purchased
under resale agreement
and securities borrowed 61,155 12,902 5,735 1,513 1,154 74 – – – 82,533
Derivative financial
instruments 924 1,712 1,182 764 1,025 2,373 6,766 9,757 – 24,503
Investment securities 1,598 2,883 3,073 2,103 1,235 5,321 11,002 3,383 3,721 34,319
Loans 23,571 20,805 19,196 22,971 20,994 72,664 153,441 25,497 43,076 402,215
Residential mortgages 3,748 4,190 5,967 12,255 10,658 50,964 103,975 16,661 1,447
(2)
209,865
Personal and credit card 4,499 1,337 1,885 2,345 1,827 6,152 13,629 4,326 40,008 76,008
Business and
government 15,324 15,278 11,344 8,371 8,509 15,548 35,837 4,510 4,894
(3)
119,615
Allowance for credit
losses – – – – – – – – (3,273) (3,273)
Customers’ liabilities
under acceptances 8,114 2,312 129 1 – – – – – 10,556
Other assets – – – – – – – – 30,705 30,705
Liabilities and equity
Deposits $ 59,727 $ 60,272 $ 46,145 $ 18,569 $ 19,540 $ 50,772 $ 62,998 $ 7,993 $ 191,871 $ 517,887
Personal 8,693 8,440 8,400 7,900 7,205 17,902 17,051 190 95,267 171,048
Non-personal 51,034 51,832 37,745 10,669 12,335 32,870 45,947 7,803 96,604 346,839
Financial instruments
designated at fair value
through profit or loss – 24 11 3 – 6 – 130 – 174
Acceptances 8,114 2,312 129 1 – – – – – 10,556
Obligations related to
securities sold short 406 32 1,009 209 792 3,434 10,601 6,011 2,483 24,977
Derivative financial
instruments 1,065 1,812 1,609 1,248 1,128 3,313 9,106 9,986 – 29,267
Obligations related to
securities sold under
repurchase agreements
and securities lent 56,290 14,104 4,256 434 2,419 5 – – – 77,508
Subordinated debentures – – – – – – – 5,841 – 5,841
Other liabilities 406 601 228 192 247 856 3,736 3,009 22,772 32,047
Total equity – – – – – – – – 45,387 45,387
Off-Balance sheet
commitments
Operating leases $ 24 $ 51 $ 75 $ 71 $ 68 $ 245 $ 506 $ 499 $ – $ 1,539
Credit commitments
(4)
3,042 3,143 9,637 11,671 12,060 11,728 64,194 2,670 5 118,150
Financial guarantees
(5)
– – – – – – – – 26,002 26,002
Outsourcing obligations 20 39 61 59 59 228 445 2 1 914
(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4).
(2) Includes primarily impaired mortgages.
(3) Includes primarily overdrafts and impaired loans.
(4) Includes the undrawn component of committed credit and liquidity facilities.
(5) Includes outstanding balances of guarantees, standby letters of credit and commercial letters of credit which may expire undrawn.
2014 Scotiabank Annual Report 201
CONSOLIDATED FINANCIAL STATEMENTS
41 Business combinations, other acquisitions and divestitures
Current Year
Canadian acquisition
Canadian Tire Financial Services
On October 1, 2014, the Bank acquired a 20% equity interest in
Canadian Tire’s Financial Services business (CTFS), for $500 million in
cash. Acquisition-related expenses of $5 million were capitalized as part
of the carrying value of the investment. Under the agreement Canadian
Tire has an option to sell to the Bank up to an additional 29% equity
interest within the next 10 years at the then fair value, that can be
settled, at the Bank’s discretion, by issuance of common shares or cash.
After 10 years, 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. The
Bank has also provided a funding commitment to CTFS of $2.25 billion
for financing credit card receivables. This investment will be accounted
for under the equity method of accounting.
Canadian divestiture
Sale of investment in CI Financial Corp.
On June 17, 2014 the Bank sold 82.8 million shares of its investment in
CI Financial Corp. (representing 29.1% ownership) at a price of $31.60
per share. On that date, the remaining holdings of 21.8 million shares,
representing 7.7% ownership, were reclassified to available-for-sale
securities at market value. The total pre-tax gain of $643 million, is
included in other operating income – other.
International acquisition
Cencosud Administradora de Tarjetas S.A.
On June 20, 2014, the Bank announced the acquisition of a 51%
controlling interest in Cencosud Administradora de Tarjetas S.A., and
certain other smaller entities (collectively, CAT), from Cencosud S.A.
(Cencosud), for approximately $300 million in cash. CAT is the financial
services business of Cencosud and distributes credit cards and
consumer loans in Chile. The Bank and Cencosud have also entered
into a 15 year partnership agreement to manage the credit card
business and provide additional products and services to customers of
both organizations. The transaction is subject to customary closing
conditions and regulatory approvals in Chile and Canada and is
expected to close in the first quarter of 2015. The transaction, after
closing, will result in the consolidation of CAT’s assets and liabilities in
the Bank’s consolidated financial statements. As part of the acquisition,
the Bank has committed to fund 100% of CAT’s loan portfolio which
includes approximately $1.3 billion in outstanding balances in Chile. If
the partnership agreement is not renewed at the end of the 15 year
term, the Bank’s funding to CAT shall be re-paid and Cencosud has the
right to reacquire the 51% controlling interest in CAT from the Bank at
the then fair market value.
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Prior year
Canadian acquisition
Acquisition of ING Bank of Canada (subsequently rebranded Tangerine Bank)
On November 15, 2012, the Bank acquired 100% of the issued and
outstanding common shares of ING Bank of Canada (subsequently
rebranded Tangerine Bank) for cash consideration of $3,126 million.
Tangerine, a Canadian chartered bank, primarily offers personal
banking products.
Tangerine Bank forms part of the Canadian Banking business segment.
The acquisition broadens the Bank’s funding base while supporting the
Bank’s overall growth objectives.
Fair value recognized on acquisition ($ millions)
Assets
Cash and deposits with financial institutions $ 582
Securities purchased under resale agreements and securities borrowed 3,550
Derivative financial instruments 21
Investment securities 4,552
Loans 30,808
Property and equipment 20
Intangible assets 236
Other assets 313
$ 40,082
Liabilities
Deposits $ 37,029
Derivative financial instruments 62
Obligations related to securities sold under repurchase agreements and securities lent 492
Other liabilities 687
$ 38,270
Net fair value of identifiable assets and liabilities, including intangible assets 1,812
Goodwill arising on acquisition 1,314
Cash purchase consideration transferred $ 3,126
Intangible assets primarily relate to core deposit intangibles, software
and other benefits from contractual agreements. Goodwill largely
reflects Tangerines’s unique platform and future growth prospects.
To determine the fair value of the purchased loans, an aggregate credit
mark adjustment of $40 million was established (incurred loss mark
of $11 million and a future expected loss mark of $29 million). This
adjustment captures management’s best estimate of cash flow
shortfalls on the loans over their lifetime as determined at the date
of acquisition. There were no loans acquired at deep discount within
the purchased loan portfolio.
42 Events after the Consolidated Statement of Financial Position date
Dividend declared
The Board of Directors, at its meeting on December 4, 2014, approved
a quarterly dividend of 66 cents per common share. This quarterly
dividend applies to shareholders of record as at January 6, 2015, and is
payable January 28, 2015.
Approval of consolidated financial statements
The Board of Directors reviewed the 2014 consolidated financial
statements and authorized them for issue on December 5, 2014.
2014 Scotiabank Annual Report 203
Shareholder Information
Annual Meeting
Shareholders are invited to attend the 183rd Annual Meeting of
Holders of Common Shares, to be held on April 9, 2015, at the Shaw
Centre (formerly the Ottawa Convention Centre), 55 Colonel By Drive,
Ottawa, Ontario, Canada, beginning at 9:30 a.m. (local time). The
record date for determining shareholders entitled to receive notice of
and to vote at the meeting will be the close of business on February 10,
2015.
Shareholdings and Dividends
Information regarding your shareholdings and dividends may be
obtained by contacting the transfer agent.
Direct Deposit Service
Shareholders may have dividends deposited directly into accounts held
at financial institutions which are members of the Canadian Payments
Association. To arrange direct deposit service, please write to the
transfer agent.
Dividend and Share Purchase Plan
Scotiabank’s dividend reinvestment and share purchase plan allows
common and preferred shareholders to purchase additional common
shares by reinvesting their cash dividend without incurring brokerage or
administrative fees. As well, eligible shareholders may invest up to
$20,000 each fiscal year to purchase additional common shares of the
Bank. All administrative costs of the plan are paid by the Bank. For
more information on participation in the plan, please contact the
transfer agent.
Listing of Shares
Common shares of the Bank are listed for trading on the Toronto and
New York stock exchanges.
Series 14, Series 15, Series 16, Series 17, Series 18, Series 19, Series 20,
Series 21, Series 22, Series 23, Series 30 and Series 32 preferred shares
of the Bank are listed on the Toronto Stock Exchange.
Stock Symbols
STOCK
TICKER
SYMBOL
CUSIP
NO.
Common shares BNS 064149 10 7
Series 14, Preferred BNS.PR.L 064149 78 4
Series 15, Preferred BNS.PR.M 064149 77 6
Series 16, Preferred BNS.PR.N 064149 76 8
Series 17, Preferred BNS.PR.O 064149 75 0
Series 18, Preferred BNS.PR.P 064149 74 3
Series 19, Preferred BNS.PR.A 064149 73 5
Series 20, Preferred BNS.PR.Q 064149 72 7
Series 21, Preferred BNS.PR.B 064149 71 9
Series 22, Preferred BNS.PR.R 064149 69 3
Series 23, Preferred BNS.PR.C 064149 68 5
Series 30, Preferred BNS.PR.Y 064149 63 6
Series 32, Preferred BNS.PR.Z 064149 61 0
Dividend Dates for 2015
Record and payment dates for common and preferred shares, subject
to approval by the Board of Directors.
RECORD DATE PAYMENT DATE
January 6 January 28
April 7 April 28
July 7 July 29
October 6 October 28
Valuation Day Price
For Canadian income tax purposes, The Bank of Nova Scotia’s common
stock was quoted at $31.13 per share on Valuation Day, December 22,
1971. This is equivalent to $2.594 after adjusting for the two-for-one
stock split in 1976, the three-for-one stock split in 1984, and the two-
for-one stock split in 1998. The stock dividend in 2004 did not affect
the Valuation Day amount. The stock received as part of the 2004
stock dividend is not included in the pre-1972 pool.
Duplicated Communication
Some registered holders of The Bank of Nova Scotia shares might
receive more than one copy of shareholder mailings, such as this
Annual Report. Every effort is made to avoid duplication; however, if
you are registered with different names and/or addresses, multiple
mailings may result. If you receive, but do not require, more than one
mailing for the same ownership, please contact the transfer agent to
combine the accounts.
Credit Ratings
SENIOR LONG-TERM DEBT/DEPOSITS
DBRS AA
Fitch AA -
Moody’s Aa2
Standard & Poor’s A+
SHORT TERM DEPOSITS/COMMERCIAL PAPER
DBRS R-1(high)
Fitch F1+
Moody’s P-1
Standard & Poor’s A-1
SUBORDINATED DEBT
DBRS AA(low)
Fitch A+
Moody’s A2
Standard & Poor’s A -
NON-CUMULATIVE PREFERRED SHARES
DBRS Pfd-2(high)
Moody’s Baa1(hyb)
Standard & Poor’s BBB/P-2*
*Canadian scale
In July 2014, Moody’s placed the senior debt ratings of several of the
Canadian banks on “negative outlook”. In August 2014, Standard &
Poor’s took a similar action, changing the outlook for several Canadian
banks to “Negative” from “Stable”. Both rating agencies cited the
uncertainty around the federal government’s proposed new “bail-in”
regime for senior unsecured debt as the principal reason for these
system-wide changes in outlook in order to reflect the greater
likelihood that such debt may incur losses in the unlikely event of a
distress scenario.
In addition, Moody’s placed the Bank’s standalone rating – which
assumes no government support – on “negative outlook”. This change
was done primarily because Moody’s believes that the Bank’s
international business is more risky than its Canadian business and is
likely to grow more rapidly in the coming years. Moody’s also cited the
Bank’s plans to grow its unsecured consumer lending businesses – both
in Canada and internationally – as a reason for the change.
The Bank remains confident that it will retain very high credit ratings.
204 2014 Scotiabank Annual Report
Glossary
Allowance for Credit Losses: An allowance set aside which, in
management’s opinion, is adequate to absorb all incurred credit-related
losses in the Bank’s portfolio of loans. It includes individual and
collective allowances.
Assets Under Administration and Management: Assets owned by
customers, for which the Bank provides management and custodial
services. These assets are not reported on the Bank’s Consolidated
Statement of Financial Position.
Bankers’ Acceptances (BAs): Negotiable, short-term debt securities,
guaranteed for a fee by the issuer’s bank.
Basis Point: A unit of measure defined as one-hundredth of one
per cent.
Capital: Consists of common shareholders’ equity, non-cumulative
preferred shares, capital instruments and subordinated debentures. It
can support asset growth, provide against loan losses and protect
depositors.
Covered Bonds: Debt obligations of the Bank for which the payment
of all amounts of interest and principal are unconditionally and
irrevocably guaranteed by a limited partnership or trust and secured by
a pledge of the covered bond portfolio. The assets in the covered bond
portfolio held by the limited partnership or trust consist of first lien
Canadian uninsured residential mortgages or first lien Canadian
residential mortgages insured under CMHC Mortgage Insurance,
respectively, and their related security interest.
Derivative Products: Financial contracts whose value is derived from
an underlying price, interest rate, exchange rate or price index.
Forwards, options and swaps are all derivative instruments.
Fair Value: 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.
Foreign Exchange Contracts: Commitments to buy or sell a specified
amount of foreign currency on a set date and at a predetermined rate
of exchange.
Forward Rate Agreement (FRA): A contract between two parties,
whereby a designated interest rate, applied to a notional principal
amount, is locked in for a specified period of time. The difference
between the contracted rate and prevailing market rate is paid in cash
on the settlement date. These agreements are used to protect against,
or take advantage of, future interest rate movements.
Futures: Commitments to buy or sell designated amounts of
commodities, securities or currencies on a specified date at a
predetermined price. Futures are traded on recognized exchanges.
Gains and losses on these contracts are settled daily, based on closing
market prices.
Hedging: Protecting against price, interest rate or foreign exchange
exposures by taking positions that are expected to react to market
conditions in an offsetting manner.
Impaired Loans: Loans on which the Bank no longer has reasonable
assurance as to the timely collection of interest and principal, or where
a contractual payment is past due for a prescribed period or the
customer is declared to be bankrupt. Excludes Federal Deposit
Insurance Corporation (FDIC) guaranteed loans.
Marked-To-Market: The valuation of certain financial instruments at
fair value as of the Consolidated Statement of Financial Position date.
Core Banking Margin: This ratio represents net interest income (on a
taxable equivalent basis) on average earning assets excluding bankers
acceptances and total average assets relating to the Global Capital
markets business within Global Banking & Markets. This is consistent
with the fact that net interest from trading operations is recorded in
trading revenues included in other operating income.
Notional Principal Amounts: The contract or principal amounts used
to determine payments for certain off-balance sheet instruments and
derivatives, such as FRAs, interest rate swaps and cross-currency swaps.
The amounts are termed “notional” because they are not usually
exchanged themselves, serving only as the basis for calculating
amounts that do change hands.
Off-Balance Sheet Instruments: These are indirect credit
commitments, including undrawn commitments to extend credit and
derivative instruments.
Operating leverage: This ratio measures the rate of growth in total
revenue (on a taxable equivalent basis) less the rate of growth in
operating expenses.
Options: Contracts between buyer and seller giving the buyer of the
option the right, but not the obligation, to buy (call) or sell (put) a
specified commodity, financial instrument or currency at a set price or
rate on or before a specified future date.
OSFI: The Office of the Superintendent of Financial Institutions
Canada, the regulator of Canadian banks.
Productivity Ratio: Management uses the productivity ratio as a
measure of the Bank’s efficiency. This ratio represents operating
expenses as a percentage of total revenue (TEB). A lower ratio indicates
improved productivity.
Repos: Repos is short for “obligations related to securities sold under
repurchase agreements” – a short-term transaction where the Bank
sells assets, normally government bonds, to a client and simultaneously
agrees to repurchase them on a specified date and at a specified price.
It is a form of short-term funding.
Return on Equity (ROE): Net income attributable to common
shareholders, expressed as a percentage of average common
shareholders’ equity.
Reverse Repos: Reverse repos is short for “securities purchased under
resale agreements” – a short-term transaction where the Bank
purchases assets, normally government bonds, from a client and
simultaneously agrees to resell them on a specified date and at a
specified price. It is a form of short-term collateralized lending.
2014 Scotiabank Annual Report 205
Risk-Weighted Assets: Comprised of three broad categories including
credit risk, market risk and operational risk, which are computed under
the Basel III Framework. Risk-weighted assets for credit risk are
calculated using formulas specified by the Basel III Framework. The
formulas are based on the degree of credit risk for each class of
counterparty. Off-balance sheet instruments are converted to on
balance sheet equivalents, using specified conversion factors, before
the appropriate risk measurements are applied. The Bank uses both
internal models and standardized approaches to calculate market risk
capital and standardized approach to calculate operational risk capital.
These capital requirements are converted to risk weighted assets
equivalent by multiplying by a 12.5 factor.
Securitization: The process by which financial assets (typically loans)
are transferred to a trust, which normally issues a series of different
classes of asset-backed securities to investors to fund the purchase of
loans.
Structured Entities: A structured entity is defined as an entity created
to accomplish a narrow and well-defined objective. A structured entity
may take the form of a corporation, trust, partnership or
unincorporated entity. Structured entities are often created with legal
arrangements that impose strict and sometimes permanent limits on
the decision-making powers of their governing board, trustee or
management over the operations of the entity.
Standby Letters of Credit and Letters of Guarantee: Written
undertakings by the Bank, at the request of the customer, to provide
assurance of payment to a third-party regarding the customer’s
obligations and liabilities to that third-party.
Structured Credit Instruments: A wide range of financial products
which includes Collateralized Debt Obligations, Collateralized Loan
Obligations, Structured Investment Vehicles, and Asset-Backed
Securities. These instruments represent investments in pools of credit-
related assets, whose values are primarily dependent on the
performance of the underlying pools.
Swaps: Interest rate swaps are agreements to exchange streams of
interest payments, typically one at a floating rate, the other at a fixed
rate, over a specified period of time, based on notional principal
amounts. Cross-currency swaps are agreements to exchange payments
in different currencies over predetermined periods of time.
Taxable Equivalent Basis (TEB): The Bank analyzes net interest
income, other operating income, and total revenue on a taxable
equivalent basis (TEB). This methodology grosses up tax-exempt income
earned on certain securities reported in either net interest income or
other operating income to an equivalent before tax basis. A
corresponding increase is made to the provision for income taxes;
hence, there is no impact on net income. Management believes that
this basis for measurement provides a uniform comparability of net
interest income and other operating income arising from both taxable
and non-taxable sources and facilitates a consistent basis of
measurement. While other banks also use TEB, their methodology may
not be comparable to the Bank’s methodology. For purposes of
segmented reporting, a segment’s revenue and provision for income
taxes are grossed up by the taxable equivalent amount. The elimination
of the TEB gross up is recorded in the Other segment.
Common Equity Tier 1 (CET1), Tier 1 and Total Capital Ratios:
Under Basel III, there are three primary regulatory capital ratios used to
assess capital adequacy, CET1, Tier 1 and Total capital ratios, which are
determined by dividing those capital components by their respective
risk-weighted assets.
Basel III introduced a new category of capital, CET1, which consists
primarily of common shareholders’ equity net of regulatory
adjustments. These regulatory adjustments include goodwill, intangible
assets net of deferred tax liabilities, deferred tax assets that rely on
future probability, defined-benefit pension fund net assets, shortfall of
credit provision to expected losses and significant investments in
common equity of other financial institution.
Tier 1 includes CET1 and additional Tier 1 capital which consists
primarily of qualifying non-cumulative preferred shares and non-
qualifying instruments subject to phase-out. Tier 2 capital consists
mainly of qualifying subordinated or non-qualifying debentures subject
to phase-out and the eligible allowances for credit losses.
Value At Risk (VaR): An estimate of the potential loss that might
result from holding a position for a specified period of time, with a
given level of statistical confidence.
Yield Curve: A graph showing the term structure of interest rates,
plotting the yields of similar quality bonds by term to maturity.
206 2014 Scotiabank Annual Report
Basel III Glossary
Credit Risk Parameters
Exposure at Default (EAD): Generally represents the expected gross
exposure – outstanding amount for on-balance sheet exposure and
loan equivalent amount for off-balance sheet exposure at default.
Probability of Default (PD): Measures the likelihood that a borrower
will default within a one-year time horizon, expressed as a percentage.
Loss Given Default (LGD): Measures the severity of loss on a facility
in the event of a borrower’s default, expressed as a percentage of
exposure at default.
Exposure Types
Non-retail
Corporate: Defined as a debt obligation of a corporation, partnership,
or proprietorship.
Bank: Defined as a debt obligation of a bank or bank equivalent
(including certain public sector entities (PSEs) treated as bank
equivalent exposures).
Sovereign: Defined as a debt obligation of a sovereign, central bank,
certain multi development banks and certain PSEs treated as sovereign.
Securitization: On-balance sheet investments in asset-backed
securities, mortgage backed securities, collateralized loan obligations
and collateralized debt obligations, off-balance sheet liquidity lines to
Bank’s own sponsored and third-party conduits and credit
enhancements.
Retail
Residential Mortgage: Loans to individuals against residential
property (four units or less).
Secured Lines Of Credit: Revolving personal lines of credit secured by
residential real estate.
Qualifying Revolving Retail Exposures (QRRE): Credit cards and
unsecured line of credit for individuals.
Other Retail: All other personal loans.
Exposure Sub-types
Drawn: Outstanding amounts for loans, leases, acceptances, deposits
with banks and available-for-sale debt securities.
Undrawn: Unutilized portion of an authorized committed credit lines.
Other Exposures
Repo-Style Transactions: Reverse repurchase agreements (reverse
repos) and repurchase agreements (repos), securities lending and
borrowing.
OTC Derivatives: Over-the-counter derivatives contracts refers to
financial instruments which are traded through a dealer network rather
than through an exchange.
Other Off-balance Sheet: Direct credit substitutes, such as standby
letters of credit and guarantees, trade letters of credit, and
performance letters of credit and guarantees.
Exchange-Traded Derivative Contracts: Exchange-traded derivative
contracts are derivative contracts (e.g., futures contracts and options)
that are transacted on an organized futures exchange. These include
futures contracts (both long and short positions), purchased options
and written options.
Qualifying Central Counterparty (QCCP): A licensed central
counterparty is considered “qualifying” when it is compliant with the
International Organization of Securities Commissions (IOSCO) standards
and is able to assist clearing member banks in properly capitalizing for
CCP exposures.
Asset Value Correlation Multiplier (AVC): Basel III has increased the
risk-weights on exposures to certain Financial Institutions (FIs) relative
to the non-financial corporate sector by introducing an AVC. The
correlation factor in the risk-weight formula is multiplied by this AVC
factor of 1.25 for all exposures to regulated FIs whose total assets are
greater than or equal to US $100 billion and all exposures to
unregulated FIs.
Specific Wrong-Way Risk (WWR): Specific Wrong-Way Risk arises
when the exposure to a particular counterparty is positively correlated
with the probability of default of the counterparty due to the nature of
the transactions with the counterparty.
2014 Scotiabank Annual Report 207
Additional information
CORPORATE HEADQUARTERS FOR FURTHER INFORMATION
Scotiabank Customer Service Centre
Scotia Plaza
44 King Street West, Toronto, Ontario
Canada M5H 1H1
Tel: (416) 866-6161
E-mail: [email protected]
1-800-4-SCOTIA
Finance Department
Scotiabank
44 King Street West, Toronto, Ontario
Canada M5H 1H1
Tel: (416) 866-4790
Fax: (416) 866-4048
E-mail: [email protected]
Financial Analysts, Portfolio Managers and other Institutional Investors
Tel: (416) 775-0798
Fax: (416) 866-7867
E-mail: [email protected]
Online
For product, corporate, financial and shareholder information: scotiabank.com
Public and Corporate Affairs
Scotiabank
44 King Street West, Toronto, Ontario
Canada M5H 1H1
Tel: (416) 866-6161
Fax: (416) 866-4988
E-mail: [email protected]
Shareholder Services
Transfer Agent and Registrar Main Agent
Computershare Trust Company of Canada
100 University Avenue, 8th Floor, Toronto, Ontario
Canada M5J 2Y1
Tel: 1-877-982-8767
Fax: 1-888-453-0330
E-mail: [email protected]
Co-transfer Agent (U.S.A.)
Computershare Trust Company N.A.
250 Royall Street, Canton, MA 02021, U.S.A.
Tel: 1-800-962-4284
208 2014 Scotiabank Annual Report
Working together to serve customers is a fundamental part of Scotiabank’s culture. We are proud to
help encourage the same values of working together among youth. Through sponsorships and our
Bright Future philanthropic program, Scotiabank focuses on making sports accessible to young
people around the world.
Supporting youth sports around the world
Hockey matters to Scotiabank because it matters to
Canadians. We proudly support over 5,000 minor hockey
teams across the country through the Scotiabank
Community Hockey Sponsorship Program. In 2014,
Scotiabank and Canadian Tire also teamed up to help keep
more than 10 outdoor skating rinks in Toronto, Canada,
open during March Break, helping families stay active and
on the ice.
In Chile, the Bank also launched its first Campeonato
Nacional Infantil Scotiabank (Kids’ National Championship),
a soccer tournament that brings together 160 teams of
children to compete for a chance to win a trip to Italy to
play with the Juventus Football Club. Partnering with
renowned Chilean soccer player and program ambassador,
Marcelo Salas, the sponsorship demonstrates just one
example of the many youth soccer academies, leagues and
tournaments Scotiabank supports across Latin America.
Photo courtesy Mark Reed
Photo courtesy Maximiliano Troncoso
Getting kids in the game
Photo courtesy Maximiliano Troncoso
A footprint that
helps customers compete
55 Countries
SERVING OVER
worldwide
more than
21
million
$
7,298
million
TOTAL NET
INCOME
TO BE NAMED WORLD’S BEST
MULTINATIONAL WORKPLACE
1
st
Canadian bank
CUSTOMERS GLOBALLY
CANADA’S
BANKS NAMED
SOUNDEST IN
THE WORLD
7
th
year
in a row
BEST CORPORATE/
INSTITUTIONAL
INTERNET BANK IN
International
Markets
16
PRODUCTIVITY
RATIO
$
5.66
EARNINGS
PER SHARE
(diluted)
RETURN
ON EQUITY 16.1
%
52.6
%
9464618
®
Registered trademark of The Bank of Nova Scotia.

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