The financial information reported in this document is based on the unaudited interim condensed consolidated financial statements for the fourth quarter of fiscal 2019 and on the audited annual consolidated financial statements for the year ended October 31, 2019 and is prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), unless otherwise indicated. IFRS represent Canadian generally accepted accounting principles (GAAP). All amounts are presented in Canadian dollars.

MONTREAL, Dec. 4, 2019 /CNW Telbec/ - For the fourth quarter of 2019, National Bank is reporting net income of $604 million, a 7% increase from $566 million in the fourth quarter of 2018. Fourth-quarter diluted earnings per share stood at $1.67, up 10% from $1.52 in the same quarter of 2018. These increases were driven by net income growth across all the business segments.

For fiscal 2019, the Bank's net income totalled $2,322 million, up $90 million or 4% from $2,232 million in fiscal 2018. Its diluted earnings per share for fiscal 2019 stood at $6.34 versus $5.94 in 2018, a 7% increase owing essentially to growth across most of the business segments, tempered by a slowdown in the Financial Markets segment during the first six months of 2019. The Bank's 2019 net income excluding specified items totalled $2,328 million, up 4% from $2,232 million in 2018. The specified items are described on page 3.

"Fiscal 2019 was another strong year for National Bank. We achieved solid business growth and record profitability. Our credit quality is excellent, our capital ratios are strong, and disciplined cost management remains a priority throughout the organization," said Louis Vachon, President and Chief Executive Officer of National Bank of Canada. "The outlook in Quebec remains favourable and we continue to take advantage of Canada's broader economic soundness. In the current environment, we are comfortable with our positioning and we remain vigilant in balancing our objectives of sustainable growth with prudent risk management. Our overall objective is to position the Bank to perform well through the cycle," added Mr. Vachon.

 

 

Financial Reporting Method                                                               

As stated in Note 1 to its audited annual consolidated financial statements for the year ended October 31, 2019 (the consolidated financial statements), the Bank adopted IFRS 15 on November 1, 2018. As permitted by IFRS 15, the Bank did not restate comparative consolidated financial statements, and Note 1 to the consolidated financial statements presents the impact of IFRS 15 adoption on the Bank's Consolidated Balance Sheet as at November 1, 2018. Since interim consolidated financial statements do not include all of the annual financial statement disclosures required under IFRS, they should be read in conjunction with the audited annual consolidated financial statements and accompanying notes for the year ended October 31, 2019.

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

Non-GAAP Financial Measures

The Bank uses a number of financial measures when assessing its results and measuring overall performance. Some of these financial measures are not calculated in accordance with GAAP, which are based on IFRS. Presenting non-GAAP financial measures helps readers to better understand how management analyzes results, shows the impacts of specified items on the results of the reported periods, and allows readers to assess results without the specified items if they consider such items not to be reflective of the underlying financial performance of the Bank's operations. Securities regulators require companies to caution readers that non-GAAP financial measures do not have standardized meanings under GAAP and therefore may not be comparable to similar measures used by other companies.

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

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

 

 

 

Financial Analysis

This press release should be read in conjunction with the 2019 Annual Report (which includes the audited annual consolidated financial statements and MD&A) available on the Bank's website at nbc.ca. Additional information about the Bank, including the Annual Information Form, can be obtained from the Bank's website at nbc.ca and SEDAR's website at sedar.com.

Consolidated Results

Total Revenues 
For the fourth quarter of 2019, the Bank's total revenues amounted to $1,915 million, up $101 million or 6% from the same quarter of 2018. The Personal and Commercial segment's total revenues were up 3% owing to growth in loan and deposit volumes. The Wealth Management segment's total revenues were up 4% owing to growth in mutual fund revenues and trust service revenues. The Financial Markets segment's revenues were up 14% owing to growth in the Global Markets revenue category, which more than offset a decline in corporate and investment banking revenues. Furthermore, the USSF&I segment's total revenues grew 22%, essentially due to revenue growth at the ABA Bank subsidiary. Total revenues on a taxable equivalent basis and excluding specified items amounted to $2,008 million in the fourth quarter of 2019, up 7% from $1,874 million in the fourth quarter of 2018.

For the year ended October 31, 2019, total revenues amounted to $7,432 million, up $266 million or 4% from $7,166 million in fiscal 2018. The fiscal 2019 revenues include a $79 million gain on disposal of Fiera Capital shares, a $50 million gain on disposal of premises and equipment, and a $33 million loss arising from the remeasurement at fair value of the Bank's investment in NSIA. In the Personal and Commercial segment, total revenues were up 4%, mainly due to growth in loan and deposit volumes as well as to higher card revenues and higher insurance revenues. The increase in total revenues was also driven by higher net interest income in the Wealth Management segment arising from growth in loan and deposit volumes as well as from increases in mutual fund revenues and in trust service revenues. Conversely, revenues from securities brokerage commissions were down given a decrease in transaction volume during the year ended October 31, 2019. In the Financial Markets segment, total revenues were up $7 million year over year despite a slowdown in financial markets activity during the first six months of 2019. Lastly, in the USSF&I segment, total revenues grew 12% owing to expansion in ABA Bank's banking network, whereas revenues from the Credigy subsidiary were down year over year as a result of changes in the loan portfolio mix. Total revenues on a taxable equivalent basis and excluding specified items amounted to $7,666 million for the year ended October 31, 2019, up 3% from $7,411 million in fiscal 2018.

Non-Interest Expenses
For the fourth quarter of 2019, non-interest expenses stood at $1,095 million, a 6% year-over-year increase resulting mainly from higher compensation and employee benefits (in particular variable compensation associated with revenue growth as well as compensation related to the expansion of ABA Bank's banking network). Other factors contributing to the increase in non-interest expenses were higher professional fees and occupancy expense. The other expenses for fourth quarter 2019 include an $11 million charge related to Maple. Non-interest expenses excluding specified items stood at $1,084 million for the quarter ended October 31, 2019, up 5% from $1,036 million in the fourth quarter of 2018.

For the year ended October 31, 2019, non-interest expenses stood at $4,301 million, up 6% year over year. The fiscal 2019 non-interest expenses include $57 million in impairment losses on premises and equipment and on intangible assets, $45 million in provisions for onerous contracts, an $11 million charge related to Maple, and $10 million in severance pay. Other factors contributing to the increase in non-interest expenses were higher compensation and employee benefits, higher occupancy expenses arising mainly from the expansion of ABA Bank's banking network, and higher technology investment expenses incurred as part of the Bank's transformation plan and for business development. Furthermore, other expenses were also up mainly due to expenses related to the activities of the Financial Markets segment and to the charge related to Maple. Non-interest expenses excluding specified items stood at $4,178 million for the year ended October 31, 2019, up 3% from $4,063 million in fiscal 2018.

Provisions for Credit Losses 
For the fourth quarter of 2019, the Bank recorded $89 million in provisions for credit losses compared to $73 million in the fourth quarter of 2018. This increase was due to higher credit loss provisions on personal loans, on credit card receivables, and on loans in the Financial Markets segment. These higher provisions were partly offset by lower credit loss provisions on USSF&I segment loans, essentially attributable to the ABA Bank subsidiary.

For the year ended October 31, 2019, the Bank recorded $347 million in provisions for credit losses, $20 million more than in fiscal 2018. This increase came essentially from higher credit loss provisions on credit card receivables and on loans in the Financial Markets segment, partly offset by lower credit loss provisions on USSF&I segment loans, essentially attributable to the Credigy subsidiary.

Impaired loans include loans classified in Stage 3 of the expected credit loss model and the purchased or originated credit-impaired (POCI) loans of the Credigy subsidiary. As at October 31, 2019, gross impaired loans excluding POCI loans stood at $684 million compared to $630 million as at October 31, 2018. Net impaired loans excluding POCI loans stood at $450 million as at October 31, 2019 compared to $404 million as at October 31, 2018, a $46 million increase related to net impaired loans in the Commercial Banking loan portfolio and the Financial Markets segment. Gross POCI loans stood at $1,166 million as at October 31, 2019, down from $1,576 million as at October 31, 2018 as a result of maturities and repayments of certain portfolios.

Income Taxes 
For the fourth quarter of 2019, income taxes stood at $127 million compared to $139 million in the same quarter of 2018. The fourth-quarter effective income tax rate was 17% versus 20% in the same quarter of 2018. This change in effective tax rate is explained mainly by an increase in income from lower tax rate jurisdictions and by a year-over-year increase in tax-exempt dividend income.

For the year ended October 31, 2019, the effective income tax rate stood at 17% compared to 20% in fiscal 2018. This change in effective income tax rate was due to the same reasons as those provided for the quarter as well as to a realization of capital gains taxed at a lower rate.

Results by Segment

The Bank carries out its activities in four business segments: Personal and Commercial, Wealth Management, Financial Markets, and U.S. Specialty Finance and International. For presentation purposes, other operating activities, certain non-recurring items and Treasury activities are grouped in the Other heading. Each reportable segment is distinguished by services offered, type of clientele, and marketing strategy.

 

 

In the Personal and Commercial segment, net income totalled $270 million in the fourth quarter of 2019, up 5% from $257 million in the fourth quarter of 2018. The segment's total revenues increased by $27 million or 3%, mainly because of growth in net interest income, which rose $25 million in the fourth quarter of 2019. The net interest income growth was driven by higher personal and commercial loan and deposit volumes but was tempered by a narrowing of the net interest margin, which was 2.23% in the fourth quarter of 2019 versus 2.25% in the fourth quarter of 2018, a decrease arising mainly from deposit margins.

Personal Banking's fourth-quarter total revenues rose $15 million year over year, as net interest income was up owing to growth in loan and deposit volumes. As for Commercial Banking's fourth-quarter total revenues, they rose $12 million, as net interest income was up owing to growth in loan and deposit volumes during the fourth quarter of 2019. These increases were tempered by a decrease in revenues generated by derivative financial instruments and bankers' acceptances.

For the fourth quarter of 2019, the segment's non-interest expenses posted a $4 million or 1% year-over-year increase, a slight increase due to disciplined cost management. At 51.4%, the efficiency ratio for the fourth quarter of 2019 improved by 1.1 percentage points when compared to the same quarter last year. The segment's provisions for credit losses stood at $59 million, a $7 million year-over-year increase that was mainly due to higher provisions on credit card receivables and on non-impaired Personal Banking loans.

For the year ended October 31, 2019, the Personal and Commercial segment's net income totalled $1,027 million, up 8% from $952 million in fiscal 2018. The segment's fiscal 2019 revenues were also up, rising 4% year over year. Growth in Personal Banking's total revenues came from higher loan and deposit volumes, tempered by a narrowing of loan margins, as well as from higher card revenues and from an increase in insurance revenues to reflect revisions to actuarial reserves. Growth in Commercial Banking's total revenues was driven by higher loan and deposit volumes as well as by increases in revenues from bankers' acceptances, and from derivative financial instruments. For the year ended October 31, 2019, the segment's non-interest expenses rose $34 million or 2% year over year. This increase was mainly attributable to higher operations support charges, to the amortization expense related to the segment's activities as well as to higher compensation and employee benefits. The segment's fiscal 2019 contribution increased $109 million or 7%. At 52.6% for the year ended October 31, 2019, the efficiency ratio improved by 1.3 percentage points versus fiscal 2018. The fiscal 2019 provisions for credit losses were up $9 million compared to the same period in 2018, mainly due to higher credit loss provisions on credit card receivables.

 

 

In the Wealth Management segment, net income totalled $130 million in the fourth quarter of 2019, a 10% increase from $118 million in the same quarter of 2018. The segment's fourth-quarter total revenues on a taxable equivalent basis amounted to $446 million, up $19 million or 4% from $427 million in the fourth quarter of 2018. This increase was mainly driven by higher fee-based revenues, which rose 6% owing to growth in assets under administration and under management due to net inflows into various solutions and to stronger year-over-year stock market performance during the fourth quarter of 2019. Transaction-based and other revenues rose $4 million as a result of higher insurance commission revenues. As for the segment's net interest income on a taxable equivalent basis, it remained stable compared to the fourth quarter of 2018, as growth in loan and deposit volumes was offset by lower deposit margins.

For the fourth quarter of 2019, non-interest expenses stood at $269 million, a 1% year-over-year increase attributable mainly to the higher variable compensation associated with the revenue growth within the segment. The fourth-quarter efficiency ratio on a taxable equivalent basis was 60.3%, improving 2.2 percentage points from fourth quarter 2018. The segment's provisions for credit losses were nil in the fourth quarters of both 2019 and 2018.

For the year ended October 31, 2019, the Wealth Management segment's net income totalled $499 million, up 8% from $464 million in fiscal 2018. The segment's fiscal 2019 total revenues on a taxable equivalent basis amounted to $1,743 million, up 3% from $1,689 million in fiscal 2018. Its fiscal 2019 net interest income on a taxable equivalent basis was up 5% owing to growth in loan and deposit volumes. An increase in fee-based revenues was driven by growth in assets under administration and under management due to net inflows into various solutions and to stronger stock market performance in fiscal 2019. As for transaction-based and other revenues, they remained stable at $260 million for fiscal years 2019 and 2018. The fiscal 2019 non-interest expenses stood at $1,067 million compared to $1,058 million in fiscal 2018, for an increase resulting from higher compensation and employee benefits and from higher operations support charges related to the segment's initiatives. At 61.2%, the efficiency ratio on a taxable equivalent basis for the year ended October 31, 2019 improved from 62.6% in fiscal 2018.

Assets under administration and under management increased by $80.3 billion or 17% from a year ago, due to net inflows into various solutions and to strong stock market performance in fiscal 2019. 

 

 

In the Financial Markets segment, net income totalled $205 million in the fourth quarter of 2019 compared to $192 million in the fourth quarter of 2018, and total revenues on a taxable equivalent basis amounted to $495 million, rising 14% from $436 million in the fourth quarter of 2018. Fourth-quarter Global Markets revenues grew 28% year over year, as revenues from equity securities and from fixed-income securities were up 40% and 22%, respectively, whereas revenues from commodities and foreign exchange activities were down 17%. Fourth-quarter revenues from corporate and investment banking services were down 3% compared to the fourth quarter of 2018 as higher revenues from banking services and capital markets activity was offset by a decrease in merger and acquisition activity. 

For the fourth quarter of 2019, the segment's non-interest expenses stood at $206 million, an 18% year-over-year increase attributable essentially to higher variable compensation arising from revenue growth in the fourth quarter of 2019 as well as to the segment's higher technology investment and business development expenses. At 41.6%, the efficiency ratio on a taxable equivalent basis compares to 39.9% in the fourth quarter of 2018. The segment's fourth-quarter provisions for credit losses stood at $10 million, whereas no provisions were recorded in the same quarter of 2018, for an increase that comes from both provisions on impaired loans and non-impaired loans.

For the year ended October 31, 2019, the segment's net income totalled $717 million, down 6% from fiscal 2018. Its fiscal 2019 total revenues on a taxable equivalent basis amounted to $1,750 million compared to $1,743 million in fiscal 2018. Revenues from the Global Markets category posted year-over-year growth of 7%, with revenues from equity securities and from fixed-income securities each rising 8%, tempered by a 3% decrease in revenues from commodities and foreign exchange activities. As for the fiscal 2019 revenues from corporate and investment banking services, they were down 4% year over year given a slowdown in capital markets activities as well as to a decrease in merger and acquisition activity in fiscal 2019. Lastly, higher gains on investments and other revenues had been recorded during the year ended October 31, 2018.

For the year ended October 31, 2019, the segment's non-interest expenses rose $46 million or 7% year over year, as there were increases in compensation and employee benefits, in expenses related to technological investments and business development, and in operations support charges. The segment's fiscal 2019 efficiency ratio on a taxable equivalent basis was 42.5% compared to 40.0% in fiscal 2018. It recorded $30 million in provisions for credit losses for the year ended October 31, 2019 compared to $4 million in fiscal 2018, for an increase that relates mainly to credit loss provisions on impaired loans.

 

 

In the USSF&I segment, net income totalled $78 million in the fourth quarter of 2019, up 42% from $55 million in the same quarter of 2018. The segment's fourth-quarter total revenues amounted to $192 million compared to $158 million in the fourth quarter of 2018. A 58% year-over-year increase in revenues at the ABA Bank subsidiary, driven by sustained growth in loan and deposit volumes, was tempered by lower year-over-year revenues at the Credigy subsidiary as a result of changes in the loan portfolio mix.

For the fourth quarter of 2019, the segment's non-interest expenses stood at $74 million, a $9 million year-over-year increase attributable mainly to ABA Bank's growing banking network. The segment recorded $20 million in provisions for credit losses in the fourth quarter of 2019 compared to $22 million in the same quarter of 2018, a decrease stemming from the credit loss provisions recorded by the ABA Bank subsidiary.

For the year ended October 31, 2019, the USSF&I segment's net income totalled $279 million, up 26% from $222 million in fiscal 2018. The segment's fiscal 2019 total revenues amounted to $715 million compared to $639 million in fiscal 2018, a 12% increase due mainly to a $111 million or 58% year-over-year increase in the revenues from the ABA Bank subsidiary, partly offset by a $44 million or 10% decrease in Credigy's revenues.

The segment's fiscal 2019 non-interest expenses stood at $285 million, a $34 million year-over-year increase attributable to ABA Bank's growing banking network. As for the non-interest expenses of the Credigy subsidiary, they were down slightly. For the year ended October 31, 2019, the segment recorded $80 million in provisions for credit losses, $14 million less than in fiscal 2018. This decrease was mainly due to lower credit loss provisions recorded by the Credigy subsidiary following repayments and maturities of certain loan portfolios, whereas the credit loss provisions recorded by the ABA Bank subsidiary remained relatively stable at $12 million.

 

 

For the Other heading of segment results, there was a net loss of $79 million in the fourth quarter of 2019 compared to a net loss of $56 million in the fourth quarter of 2018. This change in net loss came mainly from an increase in non-interest expenses, in particular a charge related to Maple, and from a higher tax rate related to the non-recoverable portion of foreign tax credits. Net loss excluding specified items stood at $71 million for the quarter ended October 31, 2019 compared to a $56 million net loss in the fourth quarter of 2018.

For the year ended October 31, 2019, net loss stood at $200 million compared to a net loss of $170 million in fiscal 2018. This change in net loss was partly due to a lower contribution from treasury activities during fiscal 2019 arising in part from the impact of market volatility on the Bank's asset/liability management portfolio during the first quarter of 2019. The specified items recorded for fiscal 2019 had a $6 million unfavourable impact on the net income recorded in the Other heading of segment results. Net loss excluding specified items stood at $194 million for the year ended October 31, 2019 compared to a $170 million net loss in fiscal 2018.

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

Consolidated Balance Sheet

 

 

Assets
As at October 31, 2019, the Bank had total assets of $281.5 billion, a 7% or $19.0 billion increase from $262.5 billion as at October 31, 2018. Cash and deposits with financial institutions, totalling $13.7 billion as at October 31, 2019, increased $0.9 billion or 7% since October 31, 2018, mainly due to ABA Bank's deposits with financial institutions. Securities rose $12.4 billion since October 31, 2018, partly due to a $6.0 billion or 11% increase in securities at fair value through profit or loss, attributable to a $13.5 billion increase in equity securities and to a $1.3 billion increase in securities issued or guaranteed by U.S. Treasury, other U.S. agencies and other foreign governments. These increases were tempered by a $4.2 billion decrease in securities issued or guaranteed by the Canadian government and a $3.9 billion decrease in securities issued or guaranteed by Canadian provincial and municipal governments. Securities other than those measured at fair value through profit or loss were up $6.4 billion, essentially due to a $2.1 billion increase in securities issued or guaranteed by the Canadian government, to a $3.5 billion increase in securities issued or guaranteed by U.S. Treasury, other U.S. agencies, and other foreign governments, and to a $0.8 billion increase in other debt securities. Securities purchased under reverse repurchase agreements and securities borrowed decreased by $0.5 billion, mainly related to the activities of the Financial Markets segment. 

Totalling $153.3 billion as at October 31, 2019, loans and acceptances, net of allowances, rose $7.2 billion or 5% since October 31, 2018. The following table provides a breakdown of the main loan and acceptance portfolios.

 

 

When compared to October 31, 2018, residential mortgages (including home equity lines of credit) were up $4.4 billion or 6% due to sustained demand for mortgage credit and business growth at the ABA Bank subsidiary; personal loans were down $1.3 billion, partly due to changes in the composition of Credigy's loan portfolio; and credit card receivables remained stable. Loans and acceptances to business and government rose $4.1 billion or 8%, mainly due to growth in Commercial Banking and Credigy subsidiary activities.

Liabilities
As at October 31, 2019, the Bank had total liabilities of $266.3 billion compared to $248.1 billion as at October 31, 2018.

The Bank's total deposit liability stood at $189.6 billion as at October 31, 2019 compared to $170.8 billion as at October 31, 2018, an $18.8 billion increase arising essentially from growth in business and government deposits. The table on the following page provides a breakdown of total personal savings.

 

 

As at October 31, 2019, personal deposits stood at $60.1 billion, rising $4.4 billion since October 31, 2018, essentially due to the Bank's initiatives to increase this type of deposit as well as to growth at the ABA Bank subsidiary. As at October 31, 2019, total personal savings amounted to $233.0 billion, up from $211.5 billion as at October 31, 2018. Overall, off-balance-sheet personal savings stood at $172.9 billion as at October 31, 2019, rising $17.1 billion or 11% from a year ago given net inflows in brokerage operations and stronger stock market performance.

Business and government deposits grew $15.0 billion since October 31, 2018, reaching $125.3 billion as at October 31, 2019. This increase came from business growth at Commercial Banking, treasury funding activity, including $3.5 billion in deposits subject to bank recapitalization (bail-in) conversion regulations, corporate financing activities, and issuances of structured notes. Other liabilities stood at $76.0 billion, declining 1% since October 31, 2018, essentially due to a $5.0 billion decrease in obligations related to securities sold short, partly offset by a $1.9 billion increase in obligations related to securities sold under repurchase agreements and securities loaned, a $0.9 billion increase in derivative financial instruments, and a $1.2 billion increase in liabilities related to transferred receivables.

Equity
As at October 31, 2019, equity attributable to the Bank's shareholders was $14.8 billion, up $0.8 billion since October 31, 2018. This increase came from net income net of dividends, tempered by remeasurements of pension plans and other post-employment benefit plans, by a net change in gains (losses) on cash flow hedges, and by repurchases of common shares for cancellation, factors which themselves were partly offset by issuances of common shares under the Stock Option Plan and the impact of shares purchased or sold for trading.

Acquisition

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

Event After the Consolidated Balance Sheet Date

On November 19, 2019, the Bank paid 7.7 million euros to the German tax authorities in relation to the Maple case. This payment was made upon a final tax claim of the tax authorities against the insolvency administrator that was approved by the Maple GmbH creditor assembly. As at October 31, 2019, a provision of $11 million was recorded to reflect this adjusting event after the Consolidated Balance Sheet date. For additional information, refer to the Contingent Liabilities section on page 13.

Income Taxes

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

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

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

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

Contingent Liabilities

Maple Financial Group Inc.
The Bank has a 24.9% equity interest in Maple Financial Group Inc. (Maple), a privately owned Canadian company that operated through direct and indirect wholly owned subsidiaries in Canada, Germany, the United Kingdom and the United States.

Maple Bank GmbH (Maple GmbH), an indirect wholly owned subsidiary of Maple, has been the subject of an investigation into alleged tax irregularities by German prosecutors since September 2015 and, to the Bank's knowledge, that investigation is ongoing. The Bank understands that the investigation is focusing on selected trading activities by Maple GmbH and some of its former employees, primarily during taxation years 2006 to 2010. The German authorities have alleged that these trading activities, often referred to as "cum/ex trading," violated German tax laws. Neither the Bank nor its employees were involved in these trading activities and, to the Bank's knowledge, are not the subject of this investigation. At that time, the Bank announced that if it were determined that portions of the dividends it received from Maple could be reasonably attributed to tax fraud by Maple GmbH, arrangements would be made to repay those amounts to the relevant authority.

On February 6, 2016, the German Federal Financial Supervisory Authority, BaFin, placed a moratorium on the business activities of Maple GmbH preventing it from carrying out its normal business activities. In August 2016, Maple filed for bankruptcy under applicable Canadian laws, and a trustee was appointed to administer the company. Similar proceedings were initiated for each of Maple's other material subsidiaries in their home jurisdictions. In light of the situation, the Bank wrote off the carrying value of its equity interest in Maple in an amount of $164 million ($145 million net of income taxes) during the first quarter of 2016. The $164 million write-off of the equity interest in this associate was recognized in the Non-interest income – Other item of the Consolidated Statement of Income for the year ended October 31, 2016 and was reported in the Financial Markets segment.

While there has not yet been a determination of tax fraud on the part of Maple GmbH or its employees, in the insolvency proceedings of Maple GmbH the German finance office issued a declaration about the result of the tax audit at Maple GmbH and about the relevant tax consequences of the cum/ex trading and concluded a final tax claim of the tax authorities against the insolvency administrator. This claim was approved by the Maple GmbH creditor assembly.  

The Bank has been in contact with the German prosecutors, who have confirmed that, in their view based upon the evidence they have considered since the occurrence of the insolvency, the Bank was not involved in any respect with the alleged tax fraud undertaken by Maple GmbH nor was it negligent in failing to identify that alleged fraud. Further to discussions between the Bank and the German prosecutors concerning the amounts deemed attributable to the alleged tax fraud, the Bank paid 7.7 million euros to the German tax authorities on November 19, 2019.

The Bank has been engaging in discussions with the bankruptcy and insolvency administrators of relevant Maple entities regarding potential claims they may assert against Maple's former shareholders in relation to the insolvency of Maple and its subsidiaries. The Bank does not see a legal basis for any such liability but is nevertheless continuing discussions at this time. If any payments are required, they are not expected to be material to the Bank's financial position.

Litigation

In the normal course of business, the Bank and its subsidiaries are involved in various claims relating, among other matters, to loan portfolios, investment portfolios and supplier agreements, including court proceedings, investigations or claims of a regulatory nature, class actions or other legal remedies of varied natures.

More specifically, the Bank is involved as a defendant in class actions instituted by consumers contesting, inter alia, certain transaction fees or who wish to avail themselves of certain legislative provisions relating to consumer protection. The recent developments in the main legal proceedings involving the Bank are as follows:

Watson
In 2011, a class action was filed in the Supreme Court of British Columbia against Visa Corporation Canada (Visa) and MasterCard International Incorporated (MasterCard) (the Networks) as well as National Bank and a number of other Canadian financial institutions. A similar action was also initiated in Quebec, Ontario, Alberta and Saskatchewan. In each of the actions, the Networks and financial institutions are alleged to have been involved in a price-fixing system to maintain and increase the fees paid by merchants on transactions executed using the credit cards of the Networks. In so doing, they would notably be in breach of the Competition Act. An unspecified amount of compensatory and punitive damages is being claimed. In 2017, a settlement was reached with the plaintiffs; in 2018 it was approved by the trial courts in each of the five jurisdictions where the action was initiated. The rulings approving the settlement are now the subject of appeal proceedings in multiple jurisdictions.

Defrance
On January 21, 2019, the Quebec Superior Court authorized a class action against the Bank and several other Canadian financial institutions. The originating application was served to the Bank on April 23, 2019. The class action was initiated on behalf of consumers residing in Quebec. The plaintiffs allege that non-sufficient funds charges, billed by all of the defendants when a payment order is refused due to non-sufficient funds, are illegal and prohibited by the Consumer Protection Act. The plaintiffs are claiming, in the form of damages, the repayment of these charges as well as punitive damages.

It is impossible to determine the outcome of the claims instituted or which may be instituted against the Bank and its subsidiaries. The Bank estimates, based on the information at its disposal, that while the amount of contingent liabilities pertaining to these claims, taken individually or in the aggregate, could have a material impact on the Bank's consolidated results of operation for a particular period, it would not have a material adverse impact on the Bank's consolidated financial position.

Capital Management

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

 

 

Dividends
On December 3, 2019, the Board of Directors declared regular dividends on the various series of first preferred shares and a dividend of 71 cents per common share, up 3 cents or 4%, payable on February 1, 2020 to shareholders of record on December 30, 2019. 

 

 

 

 

Income Taxes – Other Comprehensive Income

The following table presents the income tax expense or recovery for each component of other comprehensive income.

 

 

 

 

Segment Disclosures
(unaudited) (millions of Canadian dollars)

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

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

Personal and Commercial 
The Personal and Commercial segment encompasses the banking, financing, and investing services offered to individuals, advisors and businesses as well as insurance operations.

Wealth Management
The Wealth Management segment comprises investment solutions, trust services, banking services, lending services and other wealth management solutions offered through internal and third-party distribution networks.

Financial Markets
The Financial Markets segment encompasses corporate banking and investment banking and financial solutions for large and mid-size corporations, public sector organizations, and institutional investors. The segment is also active in proprietary trading and investment activities for the Bank.

U.S. Specialty Finance and International (USSF&I)
The USSF&I segment encompasses the specialty finance expertise provided by the Credigy subsidiary; the activities of the ABA Bank subsidiary, which offers financial products and services to individuals and businesses in Cambodia; and the activities of targeted investments in certain emerging markets.

Other
This heading encompasses treasury activities, liquidity management, Bank funding, asset/liability management activities, certain non-recurring items, and the unallocated portion of corporate services.  

 

 

Caution Regarding Forward-Looking Statements

From time to time, the Bank makes written and oral forward-looking statements, such as those contained in the Economic Review and Outlook section of the 2019 Annual Report, in other filings with Canadian securities regulators, and in other communications, for the purpose of describing the economic environment in which the Bank will operate during fiscal 2020 and the objectives it hopes to achieve for that period. These forward-looking statements are made in accordance with current securities legislation in Canada and the United States. They include, among others, statements with respect to the economy—particularly the Canadian and U.S. economies—market changes, observations regarding the Bank's objectives and its strategies for achieving them, Bank-projected financial returns and certain risks faced by the Bank. These forward-looking statements are typically identified by future or conditional verbs or words such as "outlook," "believe," "anticipate," "estimate," "project," "expect," "intend," "plan," and similar terms and expressions.

By their very nature, such forward-looking statements require assumptions to be made and involve inherent risks and uncertainties, both general and specific. Assumptions about the performance of the Canadian and U.S. economies in 2020 and how that will affect the Bank's business are among the main factors considered in setting the Bank's strategic priorities and objectives and in determining its financial targets, including provisions for credit losses. In determining its expectations for economic growth, both broadly and in the financial services sector in particular, the Bank primarily considers historical economic data provided by the Canadian and U.S. governments and their agencies.

There is a strong possibility that express or implied projections contained in these forward-looking statements will not materialize or will not be accurate. The Bank recommends that readers not place undue reliance on these statements, as a number of factors, many of which are beyond the Bank's control, could cause actual future results, conditions, actions or events to differ significantly from the targets, expectations, estimates or intentions expressed in the forward-looking statements. These factors include credit risk, market risk, liquidity and funding risk, operational risk, regulatory compliance risk, reputation risk, strategic risk and environmental risk; all of which are described in more detail in the Risk Management section beginning on page 58 of the 2019 Annual Report, and more specifically, general economic environment and financial market conditions in Canada, the United States and certain other countries in which the Bank conducts business, including regulatory changes affecting the Bank's business; changes in the accounting policies the Bank uses to report its financial condition, including uncertainties associated with assumptions and critical accounting estimates; tax laws in the countries in which the Bank operates, primarily Canada and the United States (including the U.S. Foreign Account Tax Compliance Act (FATCA)); changes to capital and liquidity guidelines and to the manner in which they are to be presented and interpreted; changes to the credit ratings assigned to the Bank; and potential disruptions to the Bank's information technology systems, including evolving cyberattack risk.

The foregoing list of risk factors is not exhaustive. Additional information about these factors can be found in the Risk Management section of the 2019 Annual Report. Investors and others who rely on the Bank's forward-looking statements should carefully consider the above factors as well as the uncertainties they represent and the risk they entail. Except as required by law, the Bank does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time, by it or on its behalf.

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

Information for Shareholders and Investors
Disclosure of Fourth Quarter 2019 Results

Conference Call

• A conference call for analysts and institutional investors will be held on Wednesday, December 4, 2019 at 1:00 p.m. EST.
• Access by telephone in listen-only mode: 1-800-806-5484 or 416-340-2217. The access code is 7294581#.
• A recording of the conference call can be heard until January 1, 2020 by dialing 1-800-408-3053 or 905-694-9451. The access code is 9842774#.

Webcast

• The conference call will be webcast live at nbc.ca/investorrelations.
• A recording of the webcast will also be available on National Bank's website after the call.

Financial Documents

• The Press Release (which includes the quarterly consolidated financial statements) is available at all times on National Bank's website at nbc.ca/investorrelations.
• The Press Release, theSupplementary Financial Information, the Supplementary Regulatory Capital and Pillar 3 Disclosure, and a slide presentation will be available on the Investor Relations page of National Bank's website the morning of the conference call.
• The 2019 Annual Report (which includes the audited annual consolidated financial statements and management's discussion and analysis) will also be available on National Bank's website.
• The Report to Shareholders for the first quarter ended January 31, 2020 will be available on February 27, 2020 (subject to approval by the Bank's Board of Directors).

 

SOURCE National Bank of Canada

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