2014 Annual Report
What it means to be Canada’s most international bank 1 Financial Highlights
(1) (1) As at and for the fiscal years ended October 31 2014 2013 2012 2011
Operating results ($ millions) Net income 7,298 6,610 6,390 5,330
Operating performance
Diluted earnings per share ($) 5.66 5.11 5.18 4.53 Return on equity (%)(2) 16.1 16.6 19.9 20.3 Productivity ratio (%) (TEB(2)) 52.6 54.0 52.4 53.9
Balance sheet information ($ millions) Total assets 805,666 743,644 668,225 594,423
Capital measures(1)(3)
Common Equity Tier 1 (CET1) ratio (%) 10.8 9.1 n/a n/a Total capital ratio (%) 13.9 13.5 16.7 13.9
Common share information
Annual shareholder return (%) 13.2 21.7 7.6 (0.4) 10-year compound annual return (%) 9.9 10.9 13.0 13.1 Market capitalization ($ millions) (TSX) 83,969 76,612 64,252 57,204 Dividends per share ($) 2.56 2.39 2.19 2.05 Dividend yield (%)(4) 3.8 4.1 4.2 3.7 Book value per common share ($) 36.96 33.23 28.99 24.20 Price to earnings multiple 12.1 12.3 10.3 11.3
(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.
Contents
2 Message from Chairman of the Board 10 Board of Directors 14 Management’s Discussion and Analysis Thomas C. O’Neill 12 Message from Chief Financial Officer 117 Consolidated FinancialStatements 3 Message from President and SeanMcGuckin Chief Executive Officer Brian Porter Getting Kids in the Game 13 Reasons to Invest in Scotiabank – (see inside back cover) 8 Executive Management Team MD&A at a Glance Scotiabank serves more than 21 million customers in over 55 countries 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.
Annual Report Online Alternative formats
Go online for a more detailed For information on how to obtain the version of this report, including annual report in alternative formats, customer videos. please go to: media.scotiabank.com/AR/2014/en http://www.scotiabank.com/ca/ en/0,,379,00.html Message from Thomas O’Neill Chairman of Scotiabank’s 2 the Chairman 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 organizedtoserve customers while reducing structural costs. These are areas we know drive stronger growth and have the greatest impactonshareholder value.
Scotiabank’s proven strategy – well executed by a We welcomed two new Directors to your Board strong management team and more than 86,000 this year: Guillermo Babatz and Nora Aufreiter. employees – contributed to consistent earnings Guillermo’s experience, particularly in Latin growth for all shareholders. America, contributes a unique perspective in light of the Bank’s international footprint. Nora’s GUIDED BY GOVERNANCE industry knowledge, acquired through a lengthy internationalmanagement consulting career Effective corporate governanceisan important focusing on consumer-facing industries, also adds foundation for Scotiabank’s strong performance tremendous value. and is fundamental to our success. Corporate governance provides proper oversight and accountability, strengthens internal and external POSITIONED FOR LONG-TERM SUCCESS relationships, builds trust with our stakeholders and Canada’s banks have once again been named among promotes the long-term interests of shareholders. the soundest in the world by the World Economic Forum. This speaks to the strength and stability of In 2014, your Board expanded its commitment Canada’s banking system, based on a robust risk to diversity. In fact, female directors now culture and well-articulated risk appetite. With represent more than30% of the Board, a Scotiabank’s sound strategy and strong leaders, reflection of our policythat also considers the Ihave every confidencethat we will continue to age, ethnicity and geographical background of build on our 183-yearrecord of success. prospective new members. I would like to thank our President and CEO Brian We also continued our focus on Board independence Porter, his leadership team and the thousands of with 14 of our 15 members independent of the Bank. Scotiabankers around the world who help the Bank’s 21 million customers become financially better off. A HISTORY OF STRONG LEADERSHIP I am truly privileged to work with this team, which I am honoured to succeed your past Chairman, brings commitment and enthusiasm to work each John Mayberry, who retired this year after a 20-year day–and carries it forward to enrich their term as a Board member. John’s leadership and communities. foresight guided us through some exceptionally And finally, thank you, shareholders, for your challenging years for the globalfinancial industry. confidence in us, which helps fuel the momentum I would like to thank John for his leadership and towards an ever brighter future for Canada’s most distinguished service to you. international bank.
2 2014 Scotiabank Annual Report CEO Brian Porter President and 3 Message Chief Executive Officer
Dear Fellow Shareholders,
It is my pleasure to write to you asweembark on Scotiabank’s 184th year, my second as President and CEO of your Bank. 2014 was a productive yearforScotiabank. Before getting into the details, including our financial performance and the important steps we are taking to become anevenbetter bank, I would like to share a few observations about the past year.
Over the past 12 months, I met with many of our which in turn, further enhances the Bank’s shareholders, customers, key stakeholders and growth potential and diversification. In fact, more employees around the world. These interactions thanhalf of the Bank’s earnings are generated in made it clearthattheBank is widely viewed as Canada, with the remainder coming from our having a strong global industry position with operations internationally. Our earnings are excellent opportunities for growth. Our strategy is further diversified between well-balanced clear and well understood. Our customers appreciate businesses and customer segments. the knowledge, expertise and commitment of our For more than 125 years, Scotiabank has people. And there is greatprideinbeing Canada’s successfully operated with a meaningful most international bank. international footprint. Today, we have operations in North America,Latin America, the CANADA’S MOST INTERNATIONAL BANK Caribbean&Central America and parts of Asia. We use this footprint to help our customers in I firmly believe that the combination of Scotiabank’s other markets thathave attractive economic focused strategy and diversified business model, fundamentals and strong growth prospects. which is unique among our competitors, will create Increasingly, we add value to our business long-term value for our shareholders. customers by delivering the full capabilities We have a strong and growing foundation. We are of Scotiabank in key internationalmarkets – the third largest bank in Canadaand among the 25 particularly the four Pacific Alliance countries largest and soundest banks in the world. The Bank’s of Mexico, Peru, Colombiaand Chile. strength in Canada provides a solid foundation for our significant operations in select internationalmarkets,
56% 7% CANADA U.S. % OF INCOME CANADA, U.S. & OTHER INTERNATIONAL
* excluding a notable gain in Q3 2014 37% OTHER INTERNATIONAL
2014 Scotiabank Annual Report 3 Innovative partnerships that offer customers more choice
Our commitment to stakeholders: education in Canadaand providing financial services to In recent years, financial services companies around the vulnerable communities in parts of Latin America. world have experienced several different challenges. We Last year, your Bank continued to invest in communities are proud of our successful trackrecord of balancing the where our customers and Scotiabankers live and work. In interests of our stakeholders, including shareholders, addition to the donations and sponsorships we have made customers, employees and the communities in whichwe supporting charitable and non-profit organizations, live and work. Scotiabank employees volunteered more than 650,000 hours in their communities. We have a strong foundation of integrity, trust, and ethical behaviour in all of our businesses. Our common equity PERFORMANCE VERSUS Tier 1 capitalratio is among the strongest in the world. MEDIUM-TERM OBJECTIVES This financial strength ensures thatweare able to fulfill our In 2014, we measured ourselves against some key fiduciary responsibility of keeping our customers’ financial medium-term financialobjectives. By moving to medium- assets safe. Combined with our unique international term objectives, rather than annualtargets, we signalled footprint, our strong foundation allows us to prudently the importanceweplaceoncreating sustainable, longer- lend to individuals as well as businesses of all sizes. By term shareholder value. doing so, we create jobs, drive economic opportunity and – most importantly – help our customers to be As you will see in this annual report, we performed within financially better off. the ranges of our medium-term financialobjectives. We achieved these results while markets were somewhat In all aspects of your Bank’s operations, our commitment volatile and globaleconomic growth was uneven. These to stakeholders extends far beyond taking deposits and conditions impacted the performance of some of our making loans. We are full participants – and we are businesses in 2014. This year, the Bank’s TotalShareholder committed to having a positive impact – in the countries, Return was13%, less than our Peer Group’s average of societies and communities in which we live and work. The 16%. Our longer term goal is to outperform our Peer Bank employs more than 86,000 people, many in high- Group average in delivering TotalShareholder Return – skill, high-wage positions. In addition, we generate a large whichwas the case for the most recent 5- and 10-year number of indirectjobs in the serviceeconomy. periods. Scotiabank is committed to corporate social responsibility. That commitment extends from our business practices, to OUR OPERATIONS our environmental footprint and to governance. Where we In reviewing our operations, I will first discuss our businesses have the opportunity, the Bank takes a leadership position in Canadaand then will review our international operations, on important social issues, such asAboriginal youth whichreflects 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: pace. Severalheadwinds prevailed across our international We had a good yearinCanada – with strong performances operations, including: in our mortgage and auto lending businesses. And with • A protracted economic slowdown throughout muchof the rebranding and launchofTangerine, we strengthened the Caribbean and Central America, resulting in our leading position in the fast growing direct banking increased provision for credit losses; segment. • Moderated, but still positive, economic growth in key Our increased focus on payments led to double-digit markets such as Peru, Mexico and Chile. During the growth in our credit card business. This growth will be year, these economies adjusted to new government further supported by our new partnership with Canadian policies and financial services regulations; and Tire Corporation. More thanhalf of our new customers • Lower interest rates in Peru, Mexico and Chile, which come to Scotiabank through partnerships and indirect compressed the net interest margin. channels. This includes the SCENE™ program with Cineplex, our NHL partnership, as well as through other In the Caribbean, where we have operated for more than non-branch channels, such as mortgage brokerage and 125 years and are the pre-eminent bank, we have indirect auto lending. considerable experience operating through prolonged economiccycles. To mitigate the impactofcurrent and In recent years, we invested significantly in our wealth expected economicconditions, management took further management capabilities. This year, Scotia Asset steps to optimize our distribution channels in this region. Management continued to demonstrate strong This action will allow us to maintain our leading position, performance with record net sales through the Canadian while balancing customer experience and cost structure. Banking channel and more than70consecutive months of positive net flows. Supported by highly ranked funds and Despite some headwinds in Latin America, we expect the recent launchofScotia Aria Portfolios, Scotia Asset regionaleconomicconditions to improve over the course Management has led the major Canadian banks in market of 2015. We see tremendous long-term potential in this share growth over the past three years. region. As a result, we have sharpened our focus on the We have strong corporate and commercial relationships in four Pacific Alliance countries of Mexico, Peru, Colombia Canada. Our corporate and commercial banking results and Chile. The Pacific Alliancetrading bloc has more than this year were particularly strong, as evidenced by the 210 million people and forms the world’s sixth largest meaningful number of advisory as well asdebt and equity economy. The future for these countries is promising, with underwriting mandates we were awarded. This strong macroeconomic fundamentals and attractive performanceisconsistent with our top tier position in demographics. Each of these markets enjoys a young, these businesses. under-banked and growing population, anincreasingly educated workforce and a growing middle class. These International: attributes are conducive to attractive growth rates for Our international businesses had a solid year, but the year banking products and services. was not without challenges. While we generated strong asset growth, earnings are not yet growing at the same
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 • Consolidated our corporate and commercial lending committed to growing all of our businesses – personal and businesses in Asia with the rest of our wholesale commercial banking, wealth management and insurance, banking businesses in GlobalBanking and Markets. as well as corporate and investment banking and capital This will better align management with our customers markets. In addition to continued organic growth, we will in Asia; also look to prudently deploy capital in these markets • Strengthened our leadership team through more than through selective acquisitions. For example, this past year 280 organizational moves at the Vice-President and in Chile, we announced the acquisition of 51% of above level; and Cencosud S.A.’s financial services business. This transaction will enable us to grow our credit card and consumer • Continued to build greater diversity in the Bank’s lending business significantly and access two million new leadership pipeline, increasing the proportion of customers in Chile. We already have a similar arrangement women in our senior leadership teamto27%.Ona with Cencosud in Colombia. related diversity matter, we are pleased that more than 30% of your Board of Directors is now made up of CREATING LONGER-TERM SHAREHOLDER VALUE women. We also made the difficult decision to take acharge against In 2014, we set out to focus on those areasthat will have our fourth quarter earnings. While this was unusualforthe the greatest impact and drive long-term value creation for Bank, we believe it was a prudent action that will contribute our shareholders. We refer to these areas as our three to the Bank’s future success. focus priorities: Approximately $150 million of that charge related to 1. Being more focused on our customers; reducing about 1,500 positions across all levels of the 2. Enhancing our leadership depth, deployment and organization. About two-thirds of the position reductions diversity; and were efficiency-driven, the result of automating and 3. Being better organized to serve our customers while centralizing the mid-office function in our Canadian reducing structural costs. branches. The remaining one-third related to optimizing Throughout 2014, your Bank made significant progress portions of our international branch network. Collectively, against these priorities. In particular, we: these changes will allow us to be better organized to efficiently serve our customers and deliver cost savings of • Strategically monetized our investment in CI Financial about $120 million annually beginning in 2016. Corp., generating a gain of $555 million which bolstered our common equity Tier 1 capitalratio and LOOKING AHEAD allows us to invest for growth in our businesses; • Reorganized our wealth, insurance and global Economic outlook: transaction banking businesses by integrating these In 2015, we expecttobenefit from our diverse operating operations within the other three business lines. This model, whichisdesignedtomitigate the impactofvolatility simplified our operating model and brought decision- in any one region. We expectthat developed market making closer to our customers; economies will experience uneven growth, led by continued
More than More than
2,000 1,100 INTERNATIONAL CANADA BRANCHES & OFFICES
EMPLOYEES More than More than 50,000 36,000 CANADA INTERNATIONAL
6 2014 Scotiabank Annual Report growth in the U.S. and negligible growth in Europe. We will beina good position to perform within the ranges of expectthat our key internationalmarkets will experience our medium-term performanceobjectives and create improved economic performanceoverthecourse of 2015, longer-term shareholder value. particularly astheyadjust to government reforms and evolving fiscal and monetary policies. ACKNOWLEDGEMENTS Competition: In closing, I would like to thank our 21 million customers around the world for their business. It is a privilege for us to The global financial institutions we compete against have serve our customers well. I also want to thank our generally returned to strength. We are also experiencing shareholders and the Board of Directors for your confidence increased competition in certain geographies and business and continued support. And finally, I want to recognize all segments from new market entrants. Notwithstanding Scotiabankers, more than 86,000 strong, who assist our increased competition, we remain well positioned and are customers to befinancially better off. Together, our future is making the necessary investments in people, processes and exceedingly bright. technology to deliver on the needs of new and existing customers throughout our footprint.
Regulation: The financial services industry has been subjectto increased regulation over the past severalyears, and we are optimistic thatweare through the majority of the MEDIUM-TERM FINANCIAL OBJECTIVES 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 RETURN ON EQUITY of 15-18% 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. EARNINGS PER Continuing to build on a strong foundation: SHARE GROWTH 5-10% 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 ACHIEVE POSITIVE footprint is unique and coveted bymany banks around the OPERATING LEVERAGE world. Throughout your Bank, employees placegreatvalue on working together and they share a genuine desire to serve our customers. We are confident that our strategy is MAINTAIN STRONG CAPITAL RATIOS sound. By executing our strategy well, and making meaningful progress against our focus priorities, the Bank
$470 $117 CANADA U.S. AVERAGE ASSETS BY GEOGRAPHY ($ billions) $196 OTHER INTERNATIONAL
2014 Scotiabank Annual Report 7 Executive 4 Management Team
12 3 4 56 7 8
1. Brian Porter 3. Dieter W. Jentsch 5. Barbara Mason 7. Sean D. McGuckin 8. Deborah M. President and Chief Group Head, Chief Human Executive Vice President Alexander Executive Officer InternationalBanking Resources Officer and Chief Financial Executive VicePresident, Officer General Counsel and 2. Michael Durland 4. Anatol von Hahn 6. Stephen P. Hart Secretary Group Head and Chief Group Head, Chief Risk Officer Executive Officer, Global CanadianBanking Banking and Markets
8 2014 Scotiabank Annual Report 9 10 11 12 13 14 15 16 17
9. Andrew Branion 11. Marian Lawson 13. Robin S. Hibberd 15. James McPhedran 17. Marianne Executive Vice President Executive Vice President, Executive Vice President, Executive Vice President, Hasold-Schilter and Chief Market Risk Global Financial Retail Products and Retail Distribution, Executive Vice President Officer Institutions and Services, Canadian Banking Canadian Banking and Chief Administrative Transaction Banking Officer, International 10. Terry Fryett 14. Kim B. McKenzie 16. James O’Sullivan Banking Executive Vice President 12. Jeffrey C. Heath Executive Vice President, Executive Vice President, and Chief Credit Officer Executive Vice President Information Technology Global Wealth Management and Group Treasurer and Solutions
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 5 Directors
12 34567
1. Thomas C.O’Neill 3. N. Ashleigh Everett 4. John C. Kerr, BOARD OF 7. Guillermo E. Babatz ., LL.D. Chairman of the Board. President, Corporate C.M., O.B.C DIRECTORS Managing Partner Scotiabank director since Secretary and director Corporate director. of Atik Capital, S.C. May 26, 2008. of Royal Canadian HumanResources 6. Nora A. Aufreiter Scotiabank director since Committee Chair. Securities Limited. Corporate director. January 28, 2014. Scotiabank director COMMITTEE Corporate Governance Scotiabank sinceMarch 30, 1999. CHAIRS Committee Chair. director since Scotiabank director 5. Paul D. Sobey August 25, 2014. 2. Ronald A. Brenneman sinceOctober 28, 1997. Corporate director. Corporate director. Audit and Conduct Executive and Risk Review Committee Committee Chair. Chair. Scotiabank Scotiabank director since director since March28, 2000. August 31, 1999.
10 2014 Scotiabank Annual Report 8 9 10 11 12 13 14 15
8. Brian J. Porter 10. C.J. Chen 12. Charles H. Dallara, Ph.D. 14. Barbara S. Thomas President and Chief Counsel to Rajah & Tann Executive Vice Chairman of the Corporate director. Executive Officer of Singapore LLP. Board of Directors of Partners Scotiabank director Scotiabank. Scotiabank Scotiabank director since Group Holding AG and since September 28, 2004. director since April 9, 2013. October 30,1990. Chairman of the Americas. Scotiabank director since 15. Aaron W. Regent 9. Indira V. 11. Susan L. Segal September 23, 2013. Founder and Managing Samarasekera, President and Chief Executive Partner of Magris Resources O.C., Ph.D. Officer of the Americas Society 13. David A. Dodge, O.C. Inc. Scotiabank director President and Vice-Chancellor and Council of the Americas. Senior advisor to Bennett since April 9, 2013. of the University of Alberta. Scotiabank director since Jones. Scotiabank Scotiabank director since December 2, 2011. director since April 8, 2010. May 26, 2008.
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 Sean McGuckin Executive Vice President 6 Message and Chief Financial Officer
Dear Fellow Shareholders,
I ampleasedtointroduceManagement’s Discussion and Analysis (MD&A) for fiscal 2014. Scotiabank is focusing on customers, leadership and being better organizedtoservecustomers while reducing structural costs. This helped us deliver good performance in 2014, with net income of $7,298 million, 10% higher thanlast year’s results, during a time of slower and uneven globalgrowth.
Diluted earnings per share (EPS) were $5.66 this The Bank continues to maintain strong, high-quality year, compared to $5.11 in 2013. Return on equity capital levels, which positions it well for future business (ROE) remained stable at 16.1%, compared to growth. The Basel III all-in common equity Tier 1 ratio was 16.6% last year. We continued to deliver consistent 10.8%, well above last year, reflecting the impactof dividend payments to you, raising the quarterly internally generated capital, the CIgain and prudent dividends twice during the year. As a result, management of asset growth. dividends per share were $2.56 for the year, up 7% We continued to take advantage of selective acquisition from 2013. opportunities. We completed the acquisition of a 20% This year’s earnings included a gain on the sale of a equity interest in Canadian Tire’s financial services majority of Scotiabank’s investment in CI Financial business that will help us grow our customer base and Corp., and charges relating to certain non-recurring provide unique and relevant solutions to customers. We items. Adjusting for these items, and notable items also announced the acquisition of 51% of Cencosud last year, net income grew by$488 million or 7%, S.A.’s financial services business in Chile, the third largest and diluted EPS was $5.43, up 8% compared to retailer in Latin America. This will strengthen our credit $5.04 in 2013. Underlying ROE was 15.5% card offering to customers and increase our scale in compared to 16.3% last year. Chile’s growing consumer lending market. Total revenues (TEB) rose 11% from the prior yearto Scotiabank’s strategy hasenabled us to deliver sound $24.0 billion, or 9%after adjusting for the items results for you in 2014. This is consistent with our proven mentioned above. Net interest income and net fee trackrecord – a total compound annualshareholder and commission revenue both showed solid growth. return of 13% over the last five years and 10% over the last 10 years. In 2015, we will invest in initiatives aimed at Revenue growth continued to outpace expense delivering anexcellent customer experience, which should growth in 2014, which resulted in positive operating drive expanded business activity. With these investments, leverage of 2.0%after adjusting for the above-noted coupled with the Bank’s industry-leading capital levels, the non-recurring items. Bank is well positioned to create even greater value for Total provisions for credit losses were $1.7 billion, our shareholders over the medium and long term. up $415 million from last year, mainly from portfolio The MD&A highlights our 2014 results in more detail and growth and shifting asset mix in International provides our outlook for 2015. Banking and CanadianBanking’s retail portfolio.
12 2014 Scotiabank Annual Report Reasons to invest 7 in Scotiabank MD&A AT A GLANCE
COMMON SHARE INFORMATION(1)
For the years ended October 31 2014 2013(2) 2012(2) 2011 2010 2009 2008 2007 2006 2005 Closing market price per common share ($) 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 annualshareholder 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 Pricetoearnings multiple 12.1 12.3 10.3 11.3 14.0 13.6 13.1 13.2 13.7 13.5
RETURN TO RETURN ON EQUITY(1) COMMON SHAREHOLDERS % SHARE PRICE APPRECIATION PLUS DIVIDENDS Total assets REINVESTED, 2004=100
24 300 16.1% Scotiabank 20 250 S&P/TSX Banks $806 Total Return Index 16 200 S&P/TSX Composite billion Total Return Index 12 150
100 04 06 08 10 12(2) 14 04 06 08 10 12 14
For more information, please see page 19. For more information, please see page 19. Deposits $554 EARNINGS PER SHARE(1) DIVIDEND GROWTH billion
DILUTED, DOLLARS PER SHARE DOLLARS PER SHARE
3 6 $2.56 Loans 5 $5.66 2 4 3 1 2 0 $424 04 06 08 10 12 14 04 06 08 10 12(2) 14 billion
For more information, please see page 19. For more information, please see page 44.
(1) Amounts prior to 2011 calculated under CGAAP. (2) Certain prior period amounts are retrospectively adjusted to reflecttheadoption of new and amended IFRS standards (IFRS10 and IAS19) in 2014 (refer to Note 4 in the consolidated financialstatements). (3) Based on the average of the high and low common share price for the year. (4) Total annualshareholder 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 Below is the index of all these recommendations to facilitate Financial Stability Board in May 2012 with the goal of developing easy reference in the Bank’s annual report and other public disclosure fundamental disclosure principles. On October 29, 2012 the EDTF documents available on www.scotiabank.com/investor relations. published its report, “Enhancing the Risk Disclosures of Banks”, which sets forth recommendations around improving risk disclosures and identifies existing leading practice risk disclosures.
Reference Table for EDTF
Recommendation Pages Supplementary Regulatory Capital Type of risk Number Disclosure MD&A Financial Statements Disclosure 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, 5 The Bank’s Risk Governance’s structure. 65-66 risk management 6 Description of risk culture and procedures applied to support the culture. 67-68 and business 7 Description of key risks from the Bank’s business model. 69-70 model 8 Stress testing use within the Bank’s risk governance and capital management. 68 Capital 9 Pillar 1 capital requirements, and the impact for global systemically important banks. 41-42 173 2 adequacy and 10 a) Regulatory capital components. 43 174 4, 8 risk-weighted b) Reconciliation of the accounting balance sheet to the regulatory balance sheet. 5 assets 11 Flow statement of the movements in regulatory capital since the previous reporting period, 43-44 7, 8 including changes in common equity tier 1, additional tier 1 and tier 2 capital. 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 46, 49 10 asset type. 17 Discussion of Basel III Back-testing requirement including credit risk model performance 48-49 and validation. 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 200-201 remaining contractual maturity at the balance sheet date. 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 80 sheet. 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, 76-80 196-199 limitations, backtesting and validation. 25 Other risk management techniques e.g. stress tests, stressed VaR, tail risk and 76-80 199 market liquidity horizon. Credit risk 26 Analysis of the aggregate credit risk exposures, including details of both personal 29-31, 98-100 159-160, 193-194 17-23(1) and wholesale lending. 12-20 27 Discussion of the policies for identifying impaired loans, defining impairments and 131-132, 161 renegotiated loans, and explaining loan forbearance policies. 28 Reconciliations of the opening and closing balances of impaired loans and impairment 28, 99, 101, 103 161 18-19(1) allowances during the year. 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 Management’s 8 Discussion and Analysis
Table of Contents
16 Forward-looking statements BUSINESS LINES 17 Non-GAAP measures 54 Overview 18 Financial highlights 56 Canadian Banking OVERVIEW 58 International Banking 60 Global Wealth & Insurance 19 Financial results 62 Global Banking & Markets 21 Outlook 64 Other 21 Shareholder returns 21 Impact of foreign currency RISK MANAGEMENT translation 21 Impact of acquisitions 65 Overview 71 Credit risk GROUP FINANCIAL PERFORMANCE 75 Market risk 22 Total revenue 81 Liquidity risk 22 Net interest income 87 Other risks 24 Net fee and commission revenues 87 Operational risk 25 Other operating income 88 Reputational risk 26 Operating expenses 88 Environmental risk 27 Taxes 89 Insurance risk 27 Credit quality 89 Strategic risk 34 Fourth quarter review CONTROLS AND ACCOUNTING POLICIES 36 Summary of quarterly results 37 Financial results review: 2013 90 Controls and procedures vs 2012 90 Critical accounting estimates 96 Future accounting developments GROUP FINANCIAL CONDITION 96 Regulatory developments 40 Statement of financial position 97 Related party transactions 41 Capital management SUPPLEMENTARY DATA 50 Off-balance sheet arrangements 52 Financial instruments 98 Geographic information 52 Selected credit instruments – publically 100 Credit risk known risk items 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- parties, including the use of new technologies in unprecedented ways looking statements. Statements of this type are included in this to defraud the Bank or its customers; increasing cyber security risks document, and may be included in other filings with Canadian which may include theft of assets, unauthorized access to sensitive securities regulators or the U.S. Securities and Exchange Commission, information or operational disruption; consolidation in the Canadian or in other communications. All such statements are made pursuant to financial services sector; competition, both from new entrants and the “safe harbour” provisions of the U.S. Private Securities Litigation established competitors; judicial and regulatory proceedings; acts of Reform Act of 1995 and any applicable Canadian securities legislation. God, such as earthquakes and hurricanes; the possible impact of Forward-looking statements may include, but are not limited to, international conflicts and other developments, including terrorist acts statements made in this Management’s Discussion and Analysis in the and war on terrorism; the effects of disease or illness on local, national Bank’s 2014 Annual Report under the headings “Overview-Outlook,” or international economies; disruptions to public infrastructure, for Group Financial Performance “Outlook,” for each business segment including transportation, communication, power and water; and the “Outlook” and in other statements regarding the Bank’s objectives, Bank’s anticipation of and success in managing the risks implied by the strategies to achieve those objectives, expected financial results foregoing. A substantial amount of the Bank’s business involves (including those in the area of risk management), and the outlook for making loans or otherwise committing resources to specific companies, the Bank’s businesses and for the Canadian, U.S. and global industries or countries. Unforeseen events affecting such borrowers, economies. Such statements are typically identified by words or phrases industries or countries could have a material adverse effect on the such as “believe,” “expect,” “anticipate,” “intent,” “estimate,” Bank’s financial results, businesses, financial condition or liquidity. “plan,” “may increase,” “may fluctuate,” and similar expressions of These and other factors may cause the Bank’s actual performance to future or conditional verbs, such as “will,” “should,” “would” and differ materially from that contemplated by forward-looking “could.” statements. For more information, see the “Risk Management” section By their very nature, forward-looking statements involve numerous starting on page 65 of the Bank’s 2014 Annual Report. assumptions, inherent risks and uncertainties, both general and Material economic assumptions underlying the forward-looking specific, and the risk that predictions and other forward-looking statements contained in this document are set out in the 2014 Annual statements will not prove to be accurate. Do not unduly rely on Report under the heading “Overview-Outlook,” as updated by forward-looking statements, as a number of important factors, many of quarterly reports; and for each business segment “Outlook”. The which are beyond our control, could cause actual results to differ “Outlook” sections in this document are based on the Bank’s views materially from the estimates and intentions expressed in such forward- and the actual outcome is uncertain. Readers should consider the looking statements. These factors include, but are not limited to: the above-noted factors when reviewing these sections. economic and financial conditions in Canada and globally; fluctuations The preceding list of important factors is not exhaustive. When in interest rates and currency values; liquidity; significant market relying on forward-looking statements to make decisions with respect volatility and interruptions; the failure of third parties to comply with to the Bank and its securities, investors and others should carefully their obligations to us and our affiliates; the effect of changes in consider the preceding factors, other uncertainties and potential monetary policy; legislative and regulatory developments in Canada events. The Bank does not undertake to update any forward-looking and elsewhere, including changes in tax laws; the effect of changes to statements, whether written or oral, that may be made from time to our credit ratings; amendments to, and interpretations of, risk-based time by or on its behalf. capital guidelines and reporting instructions and liquidity regulatory Additional information relating to the Bank, including the Bank’s guidance; operational and reputational risks; the risk that the Bank’s Annual Information Form, can be located on the SEDAR website at risk management models may not take into account all relevant factors; www.sedar.com and on the EDGAR section of the SEC’s website at the accuracy and completeness of information the Bank receives on www.sec.gov. 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 December 5, 2014 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
16 2014 Scotiabank Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS |OVERVIEW
Non-GAAP Measures Productivity ratio (TEB) The Bank uses a number of financial measures to assess its performance. Management uses the productivity ratio as a measure of the Bank’s Some of these measures are not calculated in accordance with Generally efficiency. This ratio represents operating expenses as a percentage of total Accepted Accounting Principles (GAAP), which are based on International revenue (TEB). Financial Reporting Standards (IFRS), are not defined by GAAP and do not Return on equity have standardized meanings that would ensure consistency and Return on equity is a profitability measure that presents the net income comparability between companies using these measures. These non-GAAP attributable to common shareholders as a percentage of common measures are used throughout this report and defined below. shareholders’ equity. The Bank calculates its return on equity using average Assets under administration (AUA) common shareholders’ equity. AUA are assets administered by the Bank which are beneficially owned by Regulatory capital ratios clients and therefore not reported on the Bank’s Consolidated Statement Regulatory capital ratios, such as Common Equity Tier 1 (CET1), Tier 1 and of Financial Position. Services provided for AUA are of an administrative Total Capital ratios, have standardized meanings as defined by the Office nature, such as trusteeship, custodial, safekeeping, income collection and of the Superintendent of Financial Institutions, Canada. distribution, securities trade settlements, customer reporting, and other similar services. Taxable equivalent basis Assets under management (AUM) The Bank analyzes net interest income, other operating income, and total revenue on a taxable equivalent basis (TEB). This methodology AUM are assets managed by the Bank on a discretionary basis and in grosses up tax-exempt income earned on certain securities reported in respect of which the Bank earns investment management fees. AUM are either net interest income or other operating income to an equivalent beneficially owned by clients and are therefore not reported on the Bank’s before tax basis. A corresponding increase is made to the provision for Consolidated Statement of Financial Position. Some AUM are also income taxes; hence, there is no impact on net income. Management administered assets and are therefore included in assets under believes that this basis for measurement provides a uniform administration. comparability of net interest income and other operating income Adjusted diluted earnings per share arising from both taxable and non-taxable sources and facilitates a The adjusted diluted earnings per share is calculated by adjusting the consistent basis of measurement. While other banks also use TEB, their diluted earnings per share to add back the non-cash, after-tax methodology may not be comparable to the Bank’s methodology. For amortization of intangible assets related to acquisitions (excluding purposes of segmented reporting, a segment’s revenue and provision software). 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 Economic equity and return on economic equity TEB gross up to net interest income, other operating income, total For internal reporting purposes, the Bank attributes capital to its business revenue, and provision for income taxes are presented below: segments based on their risk profile and uses a methodology that considers credit, market, operational and other risks inherent in each T1 TEB gross up business segment. The amount of risk capital attributed is commonly referred to as economic equity. The economic equity methodology, For the year ended October 31 ($ millions) 2014 2013 2012 models and assumptions are updated annually and applied prospectively. Net interest income $17 $15$17 Return on economic equity for the business segments is calculated as a Other operating income 337 297 271 ratio of net income attributable to common shareholders of the business Total revenue and provision for income taxes $ 354 $ 312 $ 288 segment and the economic equity attributed.
Core banking assets Tax normalization adjustment of net income from associated Core banking assets are average earning assets excluding bankers’ corporations acceptances and total average assets related to the Global Capital Markets For business line performance assessment and reporting, net income business within Global Banking & Markets. from associated corporations, which is an after-tax number, is adjusted to normalize for income taxes. Core banking margin (TEB) This ratio represents net interest income (on a taxable equivalent basis) The tax normalization adjustment grosses up the amount of net income divided by average core banking assets. This is consistent with the Bank’s from associated corporations and normalizes the effective tax rate in Consolidated Statement of Income presentation where net interest income the business lines to better present the contribution of the associated from trading operations is recorded in trading revenues included in other corporations to the business line results. 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.
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 MANAGEMENT’S DISCUSSION AND ANALYSIS |OVERVIEW 19 (1) 14 14 (2) (1) (2) 2014 Scotiabank Annual Report Return on equity Return to common shareholders Earnings per share (diluted) Closing common share price Share price appreciation plus dividends2004=100 reinvested, as at October 31 04 06 08 10 12 14 04 06 08 10 12 14 04 06 08 10 12 Scotiabank Return Index Total S&P/TSX Banks Return Index Total S&P/TSX Composite the adoption of new and amended(IFRS IFRS 10 standards and IAS 19) inthe 2014 consolidated (refer financial to statements) Note 4 in the adoption of new and amended(IFRS IFRS 10 standards and IAS 19) inthe 2014 consolidated (refer financial to statements) Note 4 in 04 06 08 10 12 C3 C4 C1 C2 24 20 16 12 (1) Amounts prior to 2011(2) calculated under Certain CGAAP amounts are retrospectively adjusted to reflect 300 250 200 150 100 6 5 4 3 2 (1) Amounts prior to 2011(2) calculated under Certain CGAAP amounts are retrospectively adjusted to reflect 70 60 50 40 30 Scotiabank had good performance inNet 2014 income with was respect $7,298 to million, itsearnings $688 medium-term per million financial share or objectives. (EPS) 10% were highercompared $5.66 than to as last 16.6% compared year’s last to results. year. $5.11 Diluted inThe 2013. current Return year’s on net Equity income wasof included 16.1% the an Bank’s after-tax holding gain in of$110 CI $555 million Financial million (“restructuring Corp. on charges”), (“the the and disposition”),$155 sale after-tax after-tax million, of impact restructuring or a of charges collectively majority other of 23 notablenon-recurring cents items after-tax per of benefit share of (refer $90 T3).Adjusting million Last for or year’s these 7 net items, cents income net perwere benefited income share $5.43 from grew in as a by International compared $488 Banking. to million15.5% $5.04 or compared in 7% to 2013, and 16.3% an diluted last increase earnings year. ofTotal per 8%. revenues share Underlying on Return a on taxable Equity$23,958 equivalent was million. basis Adjusting (TEB) for rose the 11%of notable from $150 items the million, (refer prior underlying T3) year revenues intranslation to increased 2014 contributed by of approximately 9%. $566 2% The million of positive and this impactNet in growth. of interest 2013 foreign income currency (TEB) increasedgrowth $957 in million core or banking 8% assets tocurrency and $12,322 translation. improved million, margin, primarily including from the favourableNet impact fee of and foreign commission revenueGrowth was was $7,737 primarily million, in up wealth $820commissions. management million Banking fees, or revenue from 12% growth higher year was mutual over broad-based fundOther year. across fees operating all and income revenue brokerage (TEB) categories. wasprior $3,899 year. million, Adjusting an for increase the ofyear notable $570 (refer items million T3), in or the 2014 17% underlying of from increase $566The the in million total operating and provision income $150 for was million credit 5%. Adjusting in losses for the was the prior $1,703 notable million item inAdditional of 2014, loan $62 up loss million $415 provisions (refer million primarily T3),loss from in the parameters last the underlying in year. Caribbean increase the hospitality was Canadian portfolioremainder $353 retail of and million. portfolio the a accounted increase change for reflected in $109 higher millionOperating provisions of expenses in the rose International increase. 8% and The over Canadian2014 last Banking. of year $203 to million $12,601 and million.$808 $74 Adjusting million million for or in the 7%. the notable Thethis prior items negative growth. year in impact The (refer of T3), remaining foreign underlying increase currencybusiness expenses reflects translation growth. higher increased contributed Operating compensation to leverage costs 1% was andabove of positive initiatives noted 2.8%, to items. or support positive 2.0% afterThe adjusting provision for for the income taxesBank’s was overall $2,002 effective million, tax an rate increaseincrease for from in the $1,737 the year million effective was last tax 21.5%proportionately year. rate compared lower The was to benefit due 20.8% from primarily for tax-exempt todisposition 2013. income, higher gain The partially taxes in offset in the by foreign current lower jurisdictions year. taxesThe and on all-in a the Basel III commonyear equity and Tier the 1 regulatory ratio minimum, was in 10.8% part as reflecting at the October impact 31, of 2014, the well disposition above gain. last Overview Financial Results MANAGEMENT’S DISCUSSION AND ANALYSIS
Notable Items There were several notable items in 2014 totaling a net benefit of $290 million ($301 million pre-tax), or approximately 23 cents per share as outlined in the table below.
T3 Notable Items
2014 2013 2012
For the years ended October 31 EPS EPS EPS ($ millions, except EPS) Notes Pre-tax After-tax Impact Pre-tax After-tax Impact Pre-tax After-tax 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 of $30 million ($22 million after tax), to reflect the implied funding cost on (1) Sale of majority of Bank’s holding in CI Financial Corp. uncollateralized derivative instruments. In the third quarter of 2014, the Bank sold a majority of its holding in CI (5) Venezuela Financial Corp. resulting in an after-tax gain of $555 million ($643 million Venezuela has been designated as hyper-inflationary and measures of pre tax) or 45 cents per share. This included an after-tax unrealized gain of exchange controls have been imposed by the Venezuelan government. $152 million on the reclassification of the Bank’s remaining investment in These restrictions have limited the Bank’s ability to repatriate cash and CI Financial Corp. to available-for-sale securities. dividends out of Venezuela. (2) Restructuring charges The Bank’s Venezuelan Bolivar (VEF) exposures include its investment in The Bank recorded restructuring charges of $148 million ($110 million Banco del Caribe, and unremitted dividends and other cash amounts after tax), the majority relating to employee severance charges. These (“monetary assets”) in Venezuela. charges will drive greater operational efficiencies. In Canada, the charges During the year, two new exchange rates have been announced by the relate to recent initiatives to centralize and automate several mid-office Venezuelan government, SICAD 1 (1 USD to 11 VEF) and SICAD II branch functions, as well as reductions in required wealth management (1 USD to 50 VEF). The official exchange rate, as published by the operational support. In International Banking, the charges are primarily for Central Bank of Venezuela, is 1 USD to 6.3 VEF. Currently, the Bank closing or downsizing approximately 120 branches, which will allow us to has concluded that the SICAD II is the most likely rate that will be focus on high-growth markets, minimize branch overlap, and realize available to the Bank for any future remittances. synergies resulting from recent acquisitions. The Bank also made a series of As at October 31, 2014, the Bank has remeasured its net investment changes to simplify its leadership structure and operating model, recorded and monetary assets at the SICAD II rate. As a result, the Bank has in the Other segment. recorded a charge of $47 million in the Consolidated Statement of (3) Provision for credit losses Income representing the revaluation impact on the monetary assets The Bank changed its write-off policy on unsecured bankrupt retail and a reduction in carrying value of the net investment of $129 million accounts in Canada in order to accelerate write-offs upon notification of a has been charged to Other Comprehensive Income. bankruptcy filing. As a result, a charge of $62 million ($46 million after tax) (6) Legal provision was recorded. The Bank recorded a legal provision of approximately $55 million ($40 (4) Funding valuation adjustment million after tax) related to certain ongoing legal claims. During the fourth quarter of 2014, the Bank enhanced the fair value methodology and recognized a funding valuation adjustment (FVA) charge
20 2014 Scotiabank Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS |OVERVIEW 21 2 6 38 22 (10) (22) (25) (65) 2013 2013 0.981 $9 $ 0.01 $1 $71 $9 vs. 2012 4 99 96 85 10 74 (70) (134) 2014 2014 0.918 $ 0.15 $9 $ 182 $ 191 $ 182 vs. 2013 2014 Scotiabank Annual Report (2) (2) ($ millions except EPS) (1) (2) Impact of foreign currency translation Earnings per share (diluted) Impact by business line ($Canadian millions) Banking International Banking Net income Net fees and commission revenues Net interest income Other operating income (1) Includes impact of all(2) currencies. Includes the impact of foreign currency hedges. Impact of Acquisitions There was no significant impact2014 to from the acquisitions. Bank’s reported net income in Impact of Foreign Currency Translation The impact of foreign currencyTable translation 5. on net income is shown in T5 Average exchange rate U.S. dollar/Canadian dollar Global Banking & Markets Other Operating expenses Other items (net of tax) Global Wealth & Insurance Impact on income 4.1 4.2 3.7 3.9 16.8 3.3 (3.9) 20.8 2.39 2.19 2.05 1.96 21.7 7.6 (0.4) 25.7 2013 2012 2011 2010 63.39 54.25 52.53 54.67 8.9 3.8 2.56 13.2 2014 69.02 (1) (2) Shareholder returns stock price for the year. the sum of dividend and share price returns in the table. return (%) price (%) share ($) Total annual shareholder Increase (decrease) in share Closing market price per common Dividends paid ($ per share) Dividend yield (%) (1) Dividend yield is calculated as the dividend paid divided by(2) the average Total of annual the shareholder high return stock assumes price reinvestment and of quarterly the dividends, low and therefore may not equal T4 For the years ended October 31 Shareholder Returns Amidst equity market volatility anddelivered mixed a stock positive performance, total the shareholder Bank 21.7% return in of 2013, 13.2%, as a shown decrease in from The Table total 4. compound annual shareholderover return the on past the five Bank’s years shares This was exceeded 13.1%, the and total 9.9% return overwas of the 9.1% the past over S&P/TSX 10 the Composite years. past Index,shown five which in years Chart and 4. 8.0% over theQuarterly last dividends ten were years, raised as twiceeffective during in the the year second – quarter aquarter. and 3% As a increase a further result, 3% dividends effective7% per in from share the 2013. totaled fourth With $2.56 a forwithin payout the its ratio year, target of up payout 45% range for of theThe 40-50%. year, Bank’s the Return Bank on was Equity16.6% was in 16.1% 2013, for due fiscal in 2014 part compared to to higher capital levels. Outlook The pace of growth inuneven. many Sluggish overseas activity economies in remains the slowrenewed euro and weakness zone in has the been region’s reinforcednascent growth by recovery leader, and Germany. rebound Japan’s inhefty inflation increase have in been consumption pressured taxes bymarket last the economies, spring. Brazil Some and large Russia emerging decelerate for alongside example, lacklustre have global continued growth to commodity and prices, moderating especially oil. Evenhas the posted globe’s more growth moderate leader, output China, international gains trade in and response domestic to efforts reduced property to market. rein in excess credit inIn the contrast, the U.S. economyspending is buoyed regaining by momentum, pent-up with demand, consumer improved increasing household employment, balance and sheets. Industrialbeing output underpinned is by strengthening ordersequipment, for rising machinery oil and and gasinvestments. production, Manufacturing and activity increasing in capital Canadaimproving is conditions benefiting in from the Unitedexchange States rate. as Mexico well and as a apiggybacking number lower-valued on of the Latin improving American U.S. economiescurrencies demand, are providing with an weaker added local boost. Internationally, the drop in oilshould prices help and support longer-term global borrowing activity, costs many as underperforming will regions pro-growth around initiatives the in strengthening world in alongside the the United States.expected The to Bank’s show presence economic in growth, thestrong along markets capital with levels, its will diversification position and and the beyond. Bank to grow earnings in 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS
C5 Net interest income by business line(1) TEB, $ millions GROUP FINANCIAL PERFORMANCE 14000 12000 Total revenue 10000 Total revenue (TEB) was $23,958 million in 2014, an increase of $2,347 million or 11% from the 8000 prior year. Revenue growth benefited from strong growth in net interest income, fee and 6000 4000 commission revenues and the impact of notable items (refer T3) in other operating income. Other 2000 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% 12 13 14 including 2% from the positive impact of foreign currency translation. Canadian Banking International Banking The increase in net interest income (TEB) of $957 million or 8% was due to growth in average Global Wealth & Insurance core banking assets and a widening of the core banking margin, and included a favourable Global Banking & Markets impact of foreign currency translation of $191 million. Higher net interest income in Canadian (1) Excludes Other segment 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. C6 Net fee and commission revenues Net fee and commission revenue was $820 million or 12% higher than last year, including by business line(1) $99 million from the positive impact of foreign currency translation. Strong growth in wealth $ millions management revenues, banking revenues and underwriting and other advisory fees all 10000 contributed to this increase. Wealth management revenues increased from higher mutual fund 8000 fees and brokerage revenues. Growth in banking revenues was widespread with increases in 6000 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 4000 from increased advisory activities in investment banking. 2000 Other operating income (TEB), adjusting for notable items, was up $154 million or 5%. The 12 13 14 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 Canadian Banking corporations mainly due to the disposition. International Banking Global Wealth & Insurance Global Banking & Markets Net Interest Income
(1) Excludes Other segment 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.
C7 Average core banking assets and margin Core asset volumes increased $26 billion or 5% to $515 billion, primarily from $14 billion growth TEB, $ billions in International Banking – mainly retail and commercial loans, $2 billion growth in residential 600 2.5 mortgages in Canada or $6 billion excluding Tangerine run-off portfolio, $5 billion growth in 2.0 consumer auto loans in Canada, and $2 billion growth in corporate lending in the U.S., Europe 450 1.5 and Canada, as well as $3 billion growth in deposits with banks. 300 1.0 The core banking margin was 2.39%, an eight basis point increase from the previous year. The 150 0.5 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
12 13 14 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 Average Core Banking Assets International Banking was offset by the increase in asset volumes. Core Banking Margin (%) 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 C8 Other operating income by business line(1) result of the low rate environment. TEB, $ millions 4000 International Banking margin fell from 4.11% to 4.00% due to narrower margins across all regions. 3000 Global Banking & Markets margin fell primarily due to lower loan origination fees and lower 2000 performing loan spreads in U.S. corporate lending.
1000 Outlook The Bank’s net interest income is expected to increase in 2015 mainly from moderate growth in 12 13 14 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 Canadian Banking International Banking continued focus on volume growth in higher margin products. Global Wealth & Insurance Global Banking & Markets
(1) Excludes Other segment
22 2014 Scotiabank Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS | GROUP FINANCIAL PERFORMANCE 23 rate rate Average Average (4) 2012 balance Interest balance Interest Average Average 2014 Scotiabank Annual Report rate rate Average Average (4) 2013 2012 2013 7.8 0.3 4.37% 7.3 0.4 5.19% (3.3) (2.9) 47.4 46.0 42.6 35.2 80.0 0.2 0.24% 60.1 0.2 0.37% 40.3 0.8 2.20% 34.7 0.9 2.68% 72.1 5.6 7.70% 65.7 4.9 7.49% 10.2 8.8 65.4 72.5 35.7 0.3 0.69% 33.0 0.3 0.80% 77.7 $ 0.3 0.37% 54.5 0.3 0.48% 44.5 0.5 1.02% 36.6 0.4 1.17% 59.4 62.0 212.0 – 183.8 – 105.1 0.1 0.12% 90.8 0.1 0.15% 206.6 7.4 3.59% 167.9 6.5 3.86% 116.9 4.4 3.76% 105.0 4.2 3.99% 314.0 3.5 1.12% 295.5 3.4 1.18% balance Interest $ 55.6 $ 0.3 0.50% $ 56.9 $ 0.3 0.50% balance Interest $748.9 $ 7.5 1.00% $ 659.5 $ 7.2 1.09% $392.3 $ 17.4 4.42% $ 335.7 $15.6 4.65% $673.3 $ 18.8 2.80% $ 578.2 $17.1 2.97% $748.9 $ 18.8 2.52% $ 659.5 $17.1 2.60% $167.2 $ 2.6 1.57% $ 135.4 $ 2.4 1.75% $516.9 $ 6.4 1.24% $ 463.9 $ 6.1 1.32% $646.9 $ 7.5 1.16% $ 562.3 $ 7.2 1.28% $ 748.9 $11.3 $ 659.5 $9.9 Average $ 536.9 $11.3 2.11% $ 475.7 $9.9 2.09% Average $ 489.5 $11.3 2.31% $ 429.7 $9.9 2.31% rate rate Average Average 2014 $12.3 $ 11.3 $ 9.9 2014 5.3 0.2 3.84% (3.6) 47.7 91.1 0.2 0.20% 41.2 0.8 1.91% 79.6 6.1 7.61% 10.4 64.1 38.4 0.3 0.77% 87.3 0.3 0.32% 50.2 0.4 0.72% 54.4 48.0 113.3 0.1 0.12% 210.9 7.6 3.60% 128.5 4.3 3.39% 339.7 3.5 1.02% 232.5 – $ 60.1 $ 0.3 0.44% $415.4 $18.0 4.34% $721.1 $19.4 2.69% $172.6 $ 2.4 1.42% $550.7 $ 6.2 1.13% $693.5 $ 7.1 1.02% balance Interest $795.6 $12.3 $563.1 $12.3 2.19% Average balance Interest Average (1) (2) and net interest income (1) (3) (2) Average balance sheet Net interest income and core banking margin acceptances Personal and credit cards Residential mortgages Allowance for credit losses Business and government Personal Banks Business and government agreements Less: total assets in Global Capital Markets Total average assets and net interest income Assets Deposits with banks Less: non-earning assets and customer’s liability under ($ billions, except percentage amounts) Securities purchases under resale agreements Trading assets (1) Average of daily balances. (2) Refer to non-GAAP measures(3) on page Includes 17. non-controlling interests of(4) $1.2 billion Prior in period 2014, amounts $1.1 have billion been in restated 2013 to and reflect $0.8 current billion period in presentation 2012. (refer to note 4 in the consolidated financial statements). Core banking assets and margin $515.1 $12.3 2.39% T7 TEB For the fiscal years ($ billions) Banking margin on average total assets (1) Taxable equivalent basis. Refer(2) to non-GAAP Net measures interest on income page in 17. Global Capital Markets trading assets is recorded in trading revenues in other operating income. T6 Total liabilities and equityNet interest income $795.6 $ 7.1 0.89% Investment securities Loans: Total loans Total earning assets Customer’s liability under acceptances Other assets Total assetsLiabilities and equity Deposits: $795.6 $19.4 2.43% Total deposits Obligations related to securities sold under repurchase Other interest-bearing liabilities Subordinated debentures Total interest-bearing liabilities Other liabilities including acceptances Equity MANAGEMENT’S DISCUSSION AND ANALYSIS
C9 Sources of net fee and commission revenues T8 Net fee and commission revenues
5% 11% 2014 5% versus 9% For the fiscal years ($ millions) 2014 2013(1) 2012(1) 2013 15% 5% Fee and commission revenues Banking 12% Card revenues $ 933 $ 816 $ 768 14% 13% Deposit and payment services Deposit services 901 865 846 4 18% 7% Other payment services 282 257 237 10 Card revenues Underwriting and $ 1,183 $ 1,122 $ 1,083 5% Deposit and other advisory fees payment services Non-trading foreign Credit fees Credit fees exchange fees Commitment and other credit fees 778 717 690 9 Other banking fees Other fee and Acceptance fees 236 226 207 4 Mutual funds commission revenues Brokerage fees $ 1,014 $ 943 $ 897 8% Investment management and Other $ 609 $ 589 $ 439 3% trust 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 16— $ 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 MANAGEMENT’S DISCUSSION AND ANALYSIS | GROUP FINANCIAL PERFORMANCE 25 6 98 17% 17 13 (14)% (37) 100+ 2014 2013 versus (1) 48 23 7.4% 7.9% 297 271 120338198 115 425 233 2012 2013 2012 1,300 1,299 $ 1,597 $ 1,570 $596$503 (1) 375681 185 448 448 388 228 1,110 297 271 3,032 3,430 92 40 6.1% 2013 337 359 208 $ 1,300 $ 1,299 $ 3,329 $ 3,701 2014 1,114 $ 1,451 $ 415 2014 Scotiabank Annual Report 741 428 474 805 337 2014 3,562 $ 1,114 $ 3,899 (3) (1) (2) Trading revenues (1) Other operating income Note 4 in the consolidated financial statements). 2012 – $1,570 million). securities associated corporations of claims Net gain on sale of investment Net income from investments in Insurance underwriting income, net Other Trading revenues % of total revenues (1) Refer to non-GAAP measures on page 17. T9 For the fiscal years ($ millions) (1) Certain prior period amounts are retrospectively adjusted to reflect the(2) adoption of On IFRS a 10 taxable in equivalent 2014 basis (refer trading to revenues were $1,451(3) million (2013 – Refer $1,597 to non-GAAP million, measures on page 17. T10 TEB For the fiscal years ($ millions) By trading products: Interest rate and credit Equities Taxable equivalent adjustment Total trading revenues (TEB) Total other operating income Taxable equivalent adjustment Total other operating income (TEB) Commodities Foreign exchange Other Sub-total Higher other fee and commissionbrokerage revenues fees were and mainly pension from management non-retail feesFee in and Colombia commission and expenses Peru. roseHigher $42 card million expenses or reflected 14% higher toBanking. transaction $340 volumes million. in Canadian Outlook Continued strong performance is expectedrevenues in in fee 2015, and across commission allmutual categories, fund particularly management in fees card and revenues, brokerage fees. Other operating income Other operating income (TEB) wasmillion $3,899 or million, 17% an from increase 2013. of$566 Adjusting $570 million for and the $150 notable million itemsin in in operating the 2014 income prior of was year $155 (refer million T3), or the 5%. Trading increase revenues of $1,451 millionfor (TEB) the fell impact by of $146 the million.decrease funding Adjusting was valuation $116 adjustment, million, the primarily underlying income. reflecting declines in global fixed Net gains on investment securities$375 were million $741 in million 2013 compared reflecting to strong equity marketsNet this income year. from investments inmillion, associated down corporations from was $681 $428 million2013, last underlying year. earnings Adjusting were for down theimpact $103 gain of million, in the reflecting CI the dispositionBank and in lower Thailand. contributions from Thanachart Insurance underwriting income was $474million million, or an 6% increase due of entirely $26 claims to were International higher Insurance. compared Premiums to and the prior year. Other income of $805 millionprimarily was from higher the by impact $577 of million notable than items 2013, ofOutlook $596 million. Adjusting for the disposition gainbe in lower 2014, in other 2015. operating Declines incomestrong are will levels expected in in 2014, security lower gainspartly contributions from offset from the by associated higher corporations, tradingabove revenues, 2014 which levels are but expected are todemand. subject be to market conditions and customer MANAGEMENT’S DISCUSSION AND ANALYSIS
C10 Expenses T11 Operating expenses and productivity $ millions 2014 14000 versus 12000 For the fiscal years ($ millions) 2014 2013(1) 2012(1) 2013 10000 Salaries and employee benefits 8000 Salaries $ 3,680 $ 3,552 $ 3,231 4% 6000 Performance-based compensation 1,669 1,558 1,477 7 4000 Share-based compensation(2) 270 222 208 22 2000 Other employee benefits 1,124 1,075 886 5 $ 6,743 $ 6,407 $ 5,802 5% 12 13 14 Premises and technology Premises Salaries & employee benefits Net rent 392 378 321 4 Premises & technology Property taxes 82 83 85 (2) Depreciation and amortization Other premises costs 415 400 362 4 Communications & advertising Professional & taxes $ 889 $ 861 $ 768 3% Other Technology $ 1,047 $ 954 $ 839 10% $ 1,936 $ 1,815 $ 1,607 7%
Depreciation and amortization C11 Productivity(1) Depreciation 297 297 277 – operating expenses as a % of revenue (TEB) Amortization of intangible assets 229 219 169 5 60 $ 526 $ 516 $ 446 2% 58 56 Communications $ 417 $ 409 $ 373 2% 54 52 Advertising and business development $ 571 $ 505 $ 450 13% 50
10 11 12(2) 13(2) 14 Professional $ 471 $ 432 $ 340 9%
(1) Amounts prior to 2011 calculated under CGAAP Business and capital taxes (2) Certain amounts are retrospectively adjusted to reflect the Business taxes 276 234 203 18 adoption of new IFRS standards (IFRS 10 and IAS 19) in 2014 Capital taxes 38 40 45 (4) (refer to Note 4 in the consolidated financial statements). $ 314 $ 274 $ 248 15%
Other $ 1,623 $ 1,306 $ 1,170 24%
C12 Direct and indirect taxes(1) Total operating expenses $ 12,601 $ 11,664 $ 10,436 8% $ millions Productivity ratio (TEB)(3) 52.6% 54.0% 52.4% 3000 (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 2500 (refer to Note 4 in the consolidated financial statements). 2000 (2) Excludes Employee Share Ownership Plans. 1500 (3) Taxable equivalent basis. Refer to Non-GAAP measures on page 17. 1000 Operating expenses 500 Total operating expenses in 2014 were $12,601 million, an increase of $937 million or 8% from 10 1112 13 14 last year. Adjusting for the impact of notable items in both 2014 and 2013 of $203 million and Provision for income taxes $74 million, respectively (refer T3), operating expenses increased $808 million or 7%. Foreign Total other taxes currency translation contributed 1% of this increase. (1) Amounts prior to 2011 have been prepared in accordance Salaries and employee benefits were $6,743 million this year, up $336 million or 5%. Adjusting with CGAAP. (2) Amounts for 2013 and 2012 are retrospectively adjusted to for the 2013 notable item of $27 million, salaries increased $155 million or 4% mainly reflecting reflect the adoption of new and amended IFRS standards annual pay increases. Performance-based compensation was up $111 million or 7% from last (IFRS 10 and IAS 19) in 2014 (refer to Note 4 in the year. Commissions in Global Wealth & Insurance were also higher in line with revenue growth. consolidated financial statements). 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 MANAGEMENT’S DISCUSSION AND ANALYSIS | GROUP FINANCIAL PERFORMANCE 27 884 (5) 3 18 55 87 126 38 20 (12) 601 413 296 0.18% 0.22%0.26 0.24% 0.19 0.31 0.23 0.23 1.51 0.24 1.280.52 1.61 0.00 0.49 0.06 0.64 0.04 0.130.25% 0.01 0.27% 0.31% 0.11 0.18% 0.21% 0.25% 0.180.18 0.31 0.23 0.50 2.06 0.28 0.15 1.930.86 0.09 1.88 0.05 0.75 0.09 0.05 0.75 0.03 0.07 0.09 0.11 0.320.00 0.330.32% 0.03 0.36 0.36% (0.02) 0.34% 2013 2012 2011 (0.06) 0.05 0.07 2013 2012 2011 2013 2012 2011 $ 423 $ 419$ $ 478 466 $ 506$ $ 172 592 $ 192 $ 209 $ 781 $$3$3$2 613 $ 509 $ (7) $ 7 $ 27 $26$30$33 $ 1,288 $ 1,152 $ 1,136 8 3 2 4 54 776 247 0.21% 0.25 0.21 1.68 0.15 0.71 0.07 0.25% 0.17 0.24 2.15 0.35 1.01 0.03 0.15 0.33% 0.02 0.40 0.00 0.40% 2014 2014 2014 $ 607 $ 661 $1,031 $2 $9 $1,703 2014 Scotiabank Annual Report (2) (1) as a percentage of average loans and acceptances (1) (2) (1) Provision for credit losses as a percentage of average loans and acceptances Net charge-offs Provisions against impaired loans by business lines impaired loans Canadian Banking Retail Commercial International Banking Retail Commercial Global Wealth & Insurance Global Banking & Markets Canadian Banking Retail Canadian Banking Retail Commercial International Banking Retail Commercial Global Wealth & Insurance Global Banking & Markets Weighted total Weighted subtotal – provisions against Provisions against performing loans Weighted total Asia and Europe (1) Write-offs net of recoveries. (2) Global Corporate and Investment Banking only. (1) Global Corporate and Investment Banking only. T14 For the fiscal years (%) T12 For the fiscal years ($ millions) (1) 2011 amounts have been(2) restated for Latin changes America in includes business Mexico. line structure effective 2011. T13 For the fiscal years (%) Commercial International Banking Caribbean and Central America Latin America Europe Global Wealth & Insurance Global Banking & Markets Canada U.S. Total Provision for credit losses The total provision for credit$415 losses million was from $1,703 the million total in provision 2014,The of up provision $1,288 for million credit in losses 2013. an in increase Canadian of Banking $183 was million $661provisions from million, in $478 the million retail last portfolio year,item which due (refer includes to T3) a higher and $62 $26 millioncapture million recent notable related portfolio to trends updated for loss credit parametersThe cards to provision and for auto credit loans. losses$250 in million International to Banking $1,031 increased million.increased In in the line retail with portfolio, volume provisions credit growth mark when on excluding the the acquired benefitprovisions, portfolio of primarily in the in Banco Mexico, Colpatria. and Higherwere largely retail partly in offset unsecured by term lower loans, portfolio, provisions provisions in were Chile. primarily In higher theAmerica in commercial with the the Caribbean former and reflecting Latin mainly $83 to million a in small provisions number relating provision of this accounts year in includes the a hospitalityamortization net portfolio. of benefit The the of credit $12 mark millioncompared on due to acquired to a loans net net in benefit Colombia ofThe $55 provision million for last credit year. losses$2 in million Global in Wealth 2014, & a Insurance decrease was The of provision $1 for million credit from losses $3$9 in million million Global in in Banking 2013. 2014, & down Marketsyear, by was lower $17 provisions million in from the 2013.higher United In provisions States the in were current Europe somewhat and offset Canada. by Credit Quality Taxes The provision for income taxes$1,737 was million $2,002 last million, year. an The increaseyear Bank’s from was overall 21.5% effective compared tax to rateeffective 20.8% for tax for the rate 2013. was The due increasejurisdictions primarily in and to the a higher proportionately taxes lower inincome, benefit foreign partially from offset tax-exempt by athe lower current tax year. rate on the disposition gain in Outlook The Bank’s consolidated effective taxrange rate of is 21% expected to to 25% be in in 2015. the Adjusting for the notable itemsin of 2013 $203 (refer million T3), in other 2014This expenses and increase were $47 was $161 million due million mostly orincluding to 13% loyalty business higher. reward volume-related point expenses costs, andThe regulatory productivity fees. ratio in 2014previous was year 52.6%, of an 54.0%. improvement Adjusting fromthe for the productivity notable ratio items in in 2014 2014 was andOperating 53.0% 2013, leverage compared was to a 54.0%. positivenotable 2.8% items. or 2.0% after adjusting for the Outlook Adjusting for the notable itemsto in support 2014, business expenses expansion. are The expectedterm focus to productivity will rise and be efficiency on gains achievingenable by long a investing ‘low in cost initiatives by that investments design’ in approach. the This, businesses, coupled both withposition in ongoing the Canada Bank and to internationally, effectively will support growth. MANAGEMENT’S DISCUSSION AND ANALYSIS
C13 Credit losses* T15 Impaired loans by business lines Provisions against impaired loans as a % of average Allowance for loans & acceptances Gross impaired loans credit losses Net impaired loans
0.9 As at October 31 ($ millions) 2014(1) 2013(1) 2014(1) 2013(1) 2014(1) 2013(1) 0.6 Canadian Banking Retail $ 887 $ 756 $ (550) $ (460) $ 337 $ 296 0.3 Commercial 201 256 (183) (195) 18 61 $ 1,088 $ 1,012 $ (733) $ (655) $ 355 $ 357 10 11 12 13 14 International * Amounts prior to 2011 calculated under CGAAP 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 C14 Net impaired loan ratio as a % of loans & acceptances, as at October 31 $ 3,070 $ 2,448 $ (1,460) $ (1,174) $ 1,610 $ 1,274
1.2 Global Wealth & Insurance 0.9 Canada $6$10 $ (2) $ (4) $4$6 0.6 International 3 5 – – 3 5 $9$15 $ (2) $ (4) $7$11 0.3 Global Banking & 1112 13 14 Markets Canada $22 $–$ (3) $–$19 $– U.S. 11 184 – (35) 11 149 Europe – 42 – (25) – 17 $33 $ 226 $ (3) $ (60) $30 $ 166 C15 Gross impaired loans as a % of equity & allowances for credit losses as at Totals $ 4,200 $ 3,701 $ (2,198) $ (1,893) $ 2,002 $ 1,808 October 31 Allowance for 20 credit losses on performing 15 loans (1,272) (1,272) 10 Net impaired 5 loans after allowance on 1112 13 14 performing loans $ 730 $ 536
Impaired loan metrics
Net impaired loans C16 Canadian retail portfolio delinquent loans as a % of total loans As at October 31 ($ millions) 2014(1) 2013(1) 2.0 Gross impaired loans as a % of total allowance for credit losses and shareholders’ equity 7.98% 7.62% 1.5 Net impaired loans as a % of loans and acceptances 0.46% 0.44% 1.0 Allowance against impaired loans as a % of gross impaired loans 52% 51%
0.5 (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. 12 13 14 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 C17 International retail portfolio delinquent loans as a % of total loans increase was mainly attributable to increases in International Banking and Canadian Retail. 10 Allowances in Canadian Banking increased by $78 million, primarily due to higher new provisions in the retail portfolio. 9 In International Banking, allowances increased by $286 million to $1,460 million. The increases 8 were in Latin America (with the exception of Chile) and Caribbean & Central America. 7 Global Banking & Markets’ allowances decreased significantly to $3 million from $60 million, in line with the significant reduction in gross impaired loans. 12 13 14 The collective allowance for credit losses on performing loans remained unchanged at $1,272 million.
28 2014 Scotiabank Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS | GROUP FINANCIAL PERFORMANCE 29 2014 Scotiabank Annual Report The remaining credit mark reducedloss to mark) $41 in million 2014, (mostly from the $204 incurred million in 2013. Tangerine Bank On the Bank’s acquisition ofpurchased Tangerine, loans, to an arrive aggregate at credit thewas mark fair established adjustment value (incurred of of loss $40 the mark million expected of loss $11 mark million of and $29 aloans. million) future There relating were to no $13.9 loans billionpurchased acquired of loan at uninsured portfolio. a As deep at discountremaining the within incurred end the loss of mark October and 31,$2 future 2014, million expected the and loss $18 mark million, were and respectively $23 (October million). 31, 2013 -$7 million Portfolio review Canadian Banking Gross impaired loans in thefrom retail 2013 portfolio or increased 17%. by Provision $131portfolio for million were credit $607 losses million, in up thereflecting $184 Canadian the million retail notable or item, 43% updated fromgrowth loss last and parameters year change and in portfolio productpercentage mix. of The average provision loans for was credit 0.25%, lossesIn compared as the to a Canadian 0.18% commercial last loan year. decreased portfolio, by gross $55 impaired million loans toin $201 the million. Canadian The commercial provision loan for$1 portfolio credit million was losses or $54 2% million, from down last year. International Banking In retail, gross impaired loans$1,858 increased million by during $298 the million year, to Caribbean with & an Central increase America, attributable Peru mainlylosses and to in Mexico. the The retail provision portfolio forlast increased credit year, to with $807 higher million provisions fromloans. in $698 Mexico, million primarily in unsecured term In commercial banking, gross impairedincrease loans of were $324 $1,212 million million, over an regions, the and prior partially year, offset reflected by acrossthe Chile. most commercial The portfolio provision was for $224 credit2013. million losses The in in increase 2014, was versus attributable $83Caribbean mainly million & to in Central higher America provisions and in provision Latin of America, $83 primarily million related for tohospitality a a industry. small number of accounts in the Caribbean Global Wealth & Insurance Global Wealth & Insurance’s overallThe credit provision quality for was credit strong losses inwere was 2014. $9 $2 million. million and gross impaired loans Global Banking & Markets The provision for credit lossesin was 2013. $9 The million provisions in this 2014, year versusGross were $26 impaired primarily million loans in in Europe Global and$193 Banking Canada. million & in Markets 2014 decreased to by decreased $33 by million. $173 Impaired million loans to in$42 $11 the million million U.S. to and nil. in Impaired Europeyear loans decreased over in by year Canada from increased nil by the $22 prior million year. Risk diversification The Bank’s exposures to variouswell countries diversified and (see types T66 of on borrowersshows page are loans 98 and and acceptances T70 by onlargest geography. page Canadian Ontario 100). exposure represents Chart at the 18 33%of of the the total total. exposure Latin and America the hasChart U.S. 10% 19 has shows 5%. loans andpage acceptances 100). by Excluding type loans of to borrowerexposures households, (see were the T70 financial largest on services industry (5.1%),and wholesale real and estate retail and (3.8%), construction (3.5%). Impaired loans Gross impaired loans increased to2014, $4,200 from million $3,701 as million at last October year. 31, Impaired loans in Canadian Bankingin increased the by retail $76 portfolio. million, primarily In International Banking, impaired loanslargely increased due by to $622 increases million inAmerica. Latin America and Caribbean & Central In Global Wealth & Insurance,Impaired impaired loans loans in decreased Global by Banking $6attributable & million. primarily Markets to decreased the by portfolios $193 in million, Net the impaired United loans, States after and deducting Europe. $2,002 the million allowance as for at credit October losses,a 31, were year 2014, ago. an increase of $194As million shown from in Chart 14,acceptances net were impaired 0.46% loans as as at afrom October percentage 0.44% 31, of a 2014, loans year virtually and ago. unchanged Acquisition-related purchased loans All purchased loans are initiallyacquisition, measured with at no fair allowances value for onConsolidated credit the Statement losses date of recorded of Financial in Position the Consequently, on none the of date the of purchased acquisition. impaired loans on are the considered date to of be Bank acquisition. considers In interest arriving rate at mark the and fairThe credit value, interest rate the rate mark mark adjustments. onfixed the interest date rate of loans acquisition and isdifferential captures principally between the set the impact up contractual of for rate thethe of interest prevailing interest rate interest on rate the on loanthe the and remaining loan term. on The the interest dateinterest rate of income mark acquisition in is for the fully Consolidated amortizedexpected Statement into life of of Income the over loan the using the effectiveBanco interest Colpatria method. On the Bank’s acquisition ofan Banco aggregate Colpatria, credit to mark arrive adjustment at(incurred of the loss $549 fair mark million value, of was $385 established $164 million million). and This a adjustment future captures expectedcash management’s loss flow best mark shortfalls estimate of on of thethe loans date over of their acquisition. lifetime as determinedFor at individually assessed loans, theestablished incurred at loss the mark date of of $115Changes acquisition million to is the tracked expected over cash theexpected flows life at of of the these the date loans loan. of fromin acquisition, those the are provision recorded for as credit aIncome. losses charge/recovery As in at the the Consolidated end Statementadjustment of of was October $25 31, million 2014, (October the 31, remainingWhere 2013- credit loans $67 mark are million). not individuallyportfolio assessed approach for is determining taken losses, to a acquisition. determine The losses portfolio at approach the resulted datemark in of of both $270 an million incurred and loss The a incurred future loss expected mark loss is markagainst assessed of the at $164 performance the million. of end the ofexpected loan each cash portfolio, reporting flows and period will an result increaselosses in in in a the recovery Consolidated in Statement provisionthan of for expected Income. credit will Any result cash in flowsfuture additional lower expected provision loss for mark credit is losses.recognized amortized The or into as income the as portfolio lossesexpected of are life. loans An amortizes assessment down is overperiod required its to at determine the the end reasonableness ofrelation of each to the reporting the unamortized acquired balance loan in recognized portfolio. to An the overall extent benefit that isactual the only losses amortized incurred. amount A is charge greaterthe is than amortized recorded the amounts. if As the at actualnot October losses individually 31, exceed assessed, 2014, the on remaining theexpected incurred loans loss loss that mark mark are was and $931, million 2013 and -$80 $7 million million, and respectively $57 (October million). MANAGEMENT’S DISCUSSION AND ANALYSIS
C18 Well diversified in Canada and internationally… Risk mitigation loans and acceptances, October 2014 To mitigate exposures in its performing corporate portfolios, the Bank uses diversification by 5% 6% company, industry and country, with loan sales and credit derivatives used sparingly. In 2014, 1% loans sales totaled $153 million, compared to $161 million in 2013. The largest volume of loan 10% sales in 2014 related to loans in the transportation and media industries. 4% At October 31, 2014, there were no credit derivatives used to mitigate exposures in the 69% 5% 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 Canada Caribbean and mitigate risk as warranted. Hospitality, media and entertainment, and shipping portfolios are United States Central America being closely managed. Mexico Other Latin America Europe 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.
C19 … and in household and business lending Residential mortgages loans & acceptances, October 2014 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 49% 26% 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%). 6% Insured and uninsured mortgages and home equity lines of credit The following table presents amounts of insured and uninsured residential mortgages and home 19% equity lines of credit (HELOCs), by geographic areas.
Corporate Financial and government T16 Insured and uninsured residential mortgages and home equity lines of credit (HELOCs), by geographic areas Personal 2014 Residential mortgages 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 35 years Total Less than 20-24 25-29 30-34 and residential As at October 31 20 years years years years greater 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 MANAGEMENT’S DISCUSSION AND ANALYSIS | GROUP FINANCIAL PERFORMANCE 2013 31 Total (2) Exposure European LTV% credit Total Exposure (1) European Home equity lines of (5) (SFT) and Financing Securities 2014 Scotiabank Annual Report 67.6%61.461.165.765.459.062.0%69.9% 65.6% 68.1 63.0% 64.6 66.7 71.1% 68.0 62.5 65.0% N/A 63.8% N/A Transactions derivatives LTV% (4) Uninsured LTV ratios with For the year ended October 31, 2013 financial For the year ended October 31, 2014 Securities and deposits institutions Residential mortgages 2014 e authorized limit for related HELOCs, divided by the value of the related residential (3) million. es lending and borrowing transactions. Net funded exposure represents all net positive trading positions. Gross and net values are equal as collateral is not posted against these 11,187 11,187 8,370 Undrawn commitments European exposure As a result of thesovereign Bank’s credit broad risk international exposure operations, to theactively a Bank manages number has this of sovereign countries. risk Thecredit by Bank worthiness using of risk the limits sovereign calibratedexposure exposure. to is The the provided current in European Table 19The below. Bank believes that itssized European appropriately exposures relative are to manageable, the are counterparties credit (80% worthiness of of the the exposurescounterparties are based to on investment a grade combinationratings), of and internal are and modest external relativeBank’s to European the exposures capital are levels carried ofusing at the observable amortized Bank. inputs, cost The with or negligible fairwith amounts value unobservable valued inputs using (Level models 3).the There quarter were that no have significant materially events impacted in the Bank’s exposures. (2) Letters of credit and guarantees and Loans and Loan Equivalents Other (1) Loans 8,0458,045 1,839 1,839 11,187 8,102 – 1,900 8,102 31,073 $ 27,749 1,900 19,886 $ 19,379 acceptances European exposure Loan to value ratios exposures. positions after taking into account collateral. Collateral held against derivatives was $2,185 million and collateral held against SFT was $13,823 property, and presented on a weighted average basis for newly originated mortgages and HELOCs. Canada: Atlantic provinces Quebec Ontario Manitoba & Saskatchewan Alberta British Columbia & Territories Canada International Canada International (5) SFT comprise of securities purchased under resale agreements, obligations related to securities sold under repurchase agreements and securiti Net funded exposure (1) There are no individual(2) allowances for Letters credit of losses. credit Gross and and(3) guarantees net are values Undrawn included are commitments as equal represent funded as an exposure(4) collateral estimate as is of they Exposures not the have for posted contractual been securities against amount are issued. these that calculated exposures. may taking be into drawn account upon derivative at positions the where time the of security default is of the an underlying obligor. reference asset and short ($ millions) Less: Undrawn commitments T19 The current European exposure is providedAs below: at October 31 Potential impact on residential mortgageslines and of real credit estate in home the equity event ofThe an Bank economic performs downturn stress testingincreased on levels its of portfolio unemployment, to risingproperty assess interest values the rates, and impact reduction changes of in invariables. other Potential relevant losses macro in economic theeconomic mortgage downturn portfolio scenarios under are such considereddiversified manageable composition given of the the portfolio,exposures, the and high the percentage low of LTVby insured in sound the risk portfolio. management This oversightstrategies. is and further pro-active supported risk mitigation Loans to Canadian condominium developers With respect to loans tohad Canadian loans condominium outstanding developers, of the $978 Bank 31, million 2013 as – at $971 October million). 31,known This 2014 developers is (October who a have high long-term quality relationships portfolio with with the well- Bank. (1) The province represents the(2) location of Includes the only property home in equity Canada. lines of credit (HELOC) under Scotia Total Equity Plan. LTV is calculated based on the sum of residential mortgages and th T18 Loan to value ratios The Canadian residential mortgage portfoliois is 54% 48% (October uninsured 31, (October 2013 31, -57%). 2013 -45%).The The following average table loan-to-value presents (LTV) thecredit ratio weighted during of average the uninsured LTV year, portfolio ratio whichinstitutions, for include by total mortgages geographic newly for areas. originated purchases, uninsured refinances residential with mortgages a and request home for equity additional lines funds of and transfer from other financial Gross exposures 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 3 628 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 Deposits Loans and with loan financial SFT and ($ millions) equivalents institutions Securities derivatives Total Total Greece $ 380 $ – $ 4 $ – $ 384 $ 432 Ireland 37 18 240 – 295 226 Italy 307 1 (41) 4 271 407 Portugal ––6–628 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, exposure of $384 million (October 31, 2013 – $432 million) related Ireland, Italy, Portugal and Spain (GIIPS) – is not significant. As of primarily to secured loans to shipping companies. October 31, 2014, the Bank’s current funded exposure to the GIIPS Securities exposures to European sovereigns and banks (excluding sovereign entities, as well as banks and non-bank financial institutions GIIPS) was $4.9 billion as at October 31, 2014 (October 31, 2013 – and corporations domiciled in these countries, totaled approximately $4.4 billion), predominately related to issuers in France, Germany and $1.3 billion, down from $1.4 billion last year. the United Kingdom. Securities are carried at fair value and Specific to sovereign exposures to GIIPS, the Bank’s exposure to Ireland substantially all holdings have strong market liquidity. included central bank deposits of $18 million and $1 million in trading The majority of the current funded credit exposure is in the form of book securities. The Bank was net long securities in sovereign funded loans which are recorded on an accrual basis. As well, credit exposures to Spain ($79 million) and short to Italy ($10 million). The exposure to clients arises from client-driven derivative transactions and Bank had no sovereign securities holdings of Greece and Portugal. securities financing transactions (reverse repurchase agreements, The Bank had exposures to Italian banks of $268 million, as at repurchase agreements, and securities lending and borrowing). OTC October 31, 2014 (October 31, 2013 – $375 million), primarily related derivative counterparty exposures are recorded on a fair value basis to short-term precious metals trading and lending activities. Greek and security financing transactions are recorded on an accrual basis.
32 2014 Scotiabank Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS | GROUP FINANCIAL PERFORMANCE 33 2014 Scotiabank Annual Report The Bank does not usetechnique credit to default reduce swaps its (CDS) sovereign asbanks debt a and exposures. risk non-bank With mitigation financial respect institutions to may and on corporations, occasion the use Bank CDSSpecific to to partially GIIPS offset as its at fundedprotection October loan on 31, exposures. funded 2014, exposures. the As BankBank part had may of no purchase the CDS or trading sell portfolio,subject CDS. the to All risk exposures, limits including and CDS,independent ongoing are risk monitoring management by department. the Bank’s Like other banks, the Bankfacilities also for provides a settlement variety and of clearing and clients manages in these these intra-day countries exposures. andfunded However, actively exposure the monitors in Bank these has countries no businesses. to retail customers or small Outlook The quality of the Bank’sgiven credit its portfolio low is exposure expected to toglobal areas remain diversification. and strong regions of concern andDomestically, broad retail provision for creditfrom losses asset are growth expected and to changes increase credit in cards the and business auto mix loans, particularlyaligned which for to is our within strategy. our Provisions riskincrease for appetite moderately non-retail and from loans the are unusually expectedInternationally, low to provision levels for experienced credit in losses 2014. asset are growth, expected acquisitions to and increase a from associated reduction with of acquired credit portfolios. mark adjustments – 21 18 273 172 209 370 229 288 2013 $ 524 $ 248 $ 1,856 $ 2,104 $– – 7 (1) 693 346 175 490 313 172 365 2014 $ 496 $ 2,064 $ 2,560 $– – 74 68 647 845 294 782 548 2013 1,069 $ 436 $ 4,043 $ 7,934 $ 8,370 $– – 45 57 87 791 806 2014 1,269 1,056 1,414 Undrawn Commitments Indirect Exposure $ 189 $ 5,662 $ 10,998 $ 11,187 $– Indirect exposures parent company is domiciled in Europe, and above table) associated with entities in European countries. Total Europe Switzerland Other Total Non-GIIPS U.K. Germany France Netherlands Spain Total GIIPS Ireland Italy Portugal T22 As at October 31 Included in the indirect exposurein detailed indirect in securities Table related 22 to wasmillion GIIPS, $452 to $131 million the million United to Kingdom Germany,exposure and $66 by $55 way million of to lettersOctober Switzerland. of Indirect 31, credit 2014 totaled (October $1,839 31, million$43 2013 at million – (October $1,523 31, million), 2013 ofGIIPS. – which Indirect $69 exposure million) is was managed indirectmanagement through exposure framework, the with to Bank’s a credit robust risk counterparty. assessment of the In addition to the totalhad indirect Euro-denominated exposures collateral detailed held in for Tableof non-European 22, $1,371 counterparties the million Bank (October 31, 2013 – $680 million). Undrawn commitments of $11 billionare (October comprised 31, of 2013 unfunded – loan $8.4issue commitments billion) letters and of commitments credit to onlending behalf arrangement. of Total other unfunded banks loan incorporations commitments a in to syndicated Europe bank (excluding GIIPS)October were 31, $7.5 2014 billion (October as 31, at 2014 2013 commitments – related $5.1 to billion). letters As$3.6 of at billion credit October (October with 31, 31, banks 2013 amountedare – to detailed $2.9 further billion). by Undrawn country commitments inThe Table Bank’s 22. indirect exposure isdefined also as: detailed in the table– below securities and where is the exposures are to non-European entities whose – letters of credit or guarantees (included as loan equivalents in the ($ millions) Greece MANAGEMENT’S DISCUSSION AND ANALYSIS
Fourth Quarter Review
Q4 2014 vs. Q4 2013 Other operating income Net income Other operating income (TEB) of $701 million was down $116 million Net income was $1,438 million in the fourth quarter compared to or 14%. Adjusting for the notable items of $77 million (refer T23), $1,676 million in the same quarter last year. Adjusting for the notable other operating income declined by $39 million or 5%. Lower trading items of $265 million (refer T23), net income grew by $27 million or revenues and income from associated corporations were partly offset 2%. Good volume growth, higher interest margins, and the positive by higher net gains on investment securities. impact of foreign currency translation were largely offset by increased provision for credit losses and higher operating expenses. Provision for credit losses The provision for credit losses was $574 million in the fourth quarter Total revenue compared to $321 million in the same period last year. Adjusting for Total revenue (TEB) of $5,848 million was up $371 million or 7% from the notable item of $62 million (refer T23), the provision for credit the same quarter last year. Adjusting for the notable items of losses rose by $191 million. The year-over-year increase was entirely in $77 million (refer T23), total revenue increased by $448 million or 8%. International Banking and Canadian Banking and includes a $62 million The year-over-year increase in revenues reflected higher net interest notable item (refer T23), as well as additional provisions of $26 million income from asset growth and improved interest margin, stronger non- related to Canadian retail accounts and $83 million in International interest revenues, including higher banking fees and wealth Banking for certain accounts in the Caribbean hospitality portfolio. management revenues and the positive impact of foreign currency translation. Partly offsetting was lower income from investment in Operating expenses and productivity associated corporations due to the disposition of CI in June 2014. Operating expenses were $3,361 million in the fourth quarter, an increase of $384 million or 13% over the same quarter last year. Net interest income Notable items of $203 million (refer T3) accounted for just over half of Net interest income (TEB) was $3,105 million, $228 million or 8% the increase. The negative impact of foreign currency translation was higher than the same quarter last year. The increase in net interest 1%. The remaining growth was due mainly to higher salaries and income, including the positive impact of foreign currency translation, benefits from annual pay increases, higher payroll taxes and other was attributable to asset growth in International Banking and Canadian benefits. Other increases were due to increased spend on technology Banking and an increase in the core banking margin. initiatives and higher business taxes in the Caribbean. The productivity ratio in the fourth quarter was 57.5%, up from 54.4% The core banking margin was 2.39%, up from 2.31% last year. The in the same quarter last year. Adjusting for notable items the current increase in the margin was primarily due to higher margins in both quarter ratio was 53.3%. Canadian Banking and International Banking, and lower funding costs as maturing high-rate debentures and deposits were replaced with Taxes funding at lower current rates. 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 Net fee and commission revenues was due primarily to lower tax recoveries partially offset by higher levels Net fee and commission revenue of $2,042 million was up $259 million of tax-exempt income this year. 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.
34 2014 Scotiabank Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS | GROUP FINANCIAL PERFORMANCE 35 2014 July 31 2014 Scotiabank Annual Report 643 555 $643 $555 $0.45 $643 $555 $0.45 Pre-tax After-tax EPS Impact For the three months ended ble-for-sale securities. 2014 October 31 Other operating income Other operating income (TEB) wasmillion $701 from million, the a prior reduction quarter,quarters. of mostly The $758 from underlying the decline notable offrom items $38 lower in million trading both or revenues 5% andassociated was net corporations. primarily income Partly from offsetting investment wasinvestment in higher securities. net gains on Provision for credit losses The provision for credit lossescompared was with $574 $398 million million for fromnotable the last item fourth quarter. of quarter Adjusting $62 for millionby the (refer $114 T23), million. provision The for increaseCanadian credit was Banking losses entirely and rose in includes International additionalrelated Banking provisions to and of Canadian $26 retail million accountsBanking and for $83 certain million accounts in in International the Caribbean hospitality portfolio. Operating expenses and productivity Operating expenses were up $221items, million expenses or were 7%. up Adjusting $18professional, for million and notable or advertising 1%. expenses, Higher primarilywere technology, related largely to offset initiatives, by lowercompensation. performance and share-based The productivity ratio was 57.5%quarter. compared Adjusting to for 47.8% notable in items,52.9% the the respectively. previous ratios were 53.3% versus Taxes The effective income tax rate20.3% this last quarter quarter. was The 20.6% increaseto compared in a to the lower effective tax rate rateoffset was on by due the higher primarily disposition levels gain of in tax-exempt the income prior this quarter, quarter. partly (62)(30)(47) (46)(55) (22) (47) (40) – – – – – – – – (148) (110) – – $ – $ – $643 $555 Pre-tax After-tax EPS Impact (1) . Notable Items Provision for credit losses Unsecured bankrupt retail accounts inValuation Canada adjustments Funding valuation adjustment Revaluation of monetary assets in Venezuela Legal provisions TotalBy Consolidated Statement of IncomeTrading line revenuesOther operating income – otherOther operating income/Total revenueProvision for credit lossesOther operating expensesTotal (77) (47) (69) $ (30) (47) $(342) (62) (203) $ (22) $(265) (150) (46) $(0.22) $(342) 643 $(265) $ – 555 $(0.22) – – $ – – – Restructuring charges Gain on sale Sale of majority of holding in CI Financial Corp (1) Includes an after-tax unrealized gain of $152 million ($174 million pre tax) on the reclassification of the Bank’s remaining investment to availa ($ millions, except EPS) T23 Q4 2014 vs. Q3 2014 Net income Net income was $1,438 millionin this the quarter, previous compared quarter. to Adjusting$265 $2,351 for million million this and quarter’s last notable quarter’snet items notable income of gain fell of $93 $555 millionprimarily million or from (refer 5%. higher T23), This provision quarter forincome, over credit and quarter losses, reduced decline lower operating was net incomequarter. interest reflecting The the decrease disposition in last netfees income and was wealth partly management offset revenues. by higher banking Total revenue Total revenue (TEB) was $5,84811% million, from a the reduction previous of quarterquarters. $728 mostly The million due underlying or to decline the inmainly notable total to items revenue lower in of net both $8 interestfrom million margin, investment was trading in due revenues, associated and corporations.entirely net These offset income decreases by were higher bankingand fees, higher wealth net management gains revenues, on investment securities. Net interest income Net interest income (TEB) declinedcore $50 banking million margin to was $3,105 2.39%the million. compared margin The to was 2.41%. primarily The inBanking. decrease Canadian in Banking and International Net fee and commission revenues Net fee and commission revenue4%. was This $2,042 increase million, was up mainlyInternational $80 from Banking million higher and or retail higher banking wealth fees, management mainly revenues. in MANAGEMENT’S DISCUSSION AND ANALYSIS
Summary of Quarterly Results Quarterly Financial Highlights
T24 Quarterly financial highlights For the three months ended
Oct. 31 July 31 April 30 Jan. 31 Oct. 31(1) July 31(1) April 30(1) Jan. 31(1) Oct. 31(1) July 31(1) April 30(1) Jan. 31(1) 2014 2014 2014 2014 2013 2013 2013 2013 2012 2012 2012 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 $555 million. Fourth quarter non-interest revenue was negatively The Bank reported good results throughout 2014 with growth in impacted by notable items of $77 million (refer T23). Banking revenues performance through the first three quarters, followed by a slight trended upward during the year with strong growth in card fees in decline in underlying performance in the fourth quarter resulting mainly Canada and Latin America. Both mutual fund fees and retail brokerage from lower net interest income and lower trading revenues, and higher fees grew steadily throughout the year reflecting higher average assets loan losses. Adjusting for the disposition gain of $555 million (refer under management and assets under administration. Quarterly trading T23), diluted EPS in the third quarter was $1.40. Fourth quarter net revenues reflected the different levels of market opportunities during income was significantly lower as a result of $265 million of notable the year, up in the second quarter, but fell during the third and fourth items (refer T23). quarters below the average of the prior six quarters. The level of net gains on investment securities reflected market opportunities. Net interest income Provision for credit losses Net interest income rose during the first three quarters of the year before declining by $50 million in the fourth quarter from lower net Provision for credit losses increased steadily during the year in both interest margins in Canadian Banking and International Banking. Core Canadian Banking and International Banking reflecting loan volume banking assets increased steadily during 2014 from continuing strong growth and higher loss ratios in both business lines. Provisions in the loan growth in Latin America, in part from the benefit from the impact fourth quarter include a $62 million notable item (refer T23), as well as of foreign currency translation, and consumer auto loan and additional provisions of $26 million related to Canadian retail accounts commercial loan growth in Canadian Banking, as well as corporate and $83 million in International Banking for certain accounts in the loan growth in Global Banking & Markets. Low spread deposits with Caribbean hospitality portfolio. The provision for credit losses in Global banks have increased since the fourth quarter of last year. Banking & Markets continued to be at minimal levels. The core banking margin improved eight basis points from the fourth Operating expenses quarter last year to the fourth quarter this year. The margin increased Operating expenses increased during the year, primarily due to notable during the first two quarters from improved margins in both Canadian items of $203 million (refer T23) in the fourth quarter. Technology Banking and International Banking and the maturity of higher cost costs increased in the third and fourth quarters reflecting a higher level wholesale funding and debentures replaced by wholesale funding at of costs incurred for business expansion and investment in new lower current rates. The margin decreased slightly in the third and initiatives in the latter half of the year. The timing of share and fourth quarters this year from narrower spreads in Canadian and performance based compensation and advertising and business International Banking and higher volumes of low yielding deposits with development costs contributed to the quarterly fluctuations. banks. Canadian Banking’s margin improved during the first three quarters Provision for income taxes from higher mortgage, credit card and credit line spreads and strong The effective tax rate ranged between 20% and 22% reflecting growth in higher spread products, including credit cards and then different levels of income earned in lower tax jurisdictions and the declined slightly in the fourth quarter from lower spread in consumer timing of the benefit of net income from associated corporations. The auto loans and mortgage prepayment income. International Banking’s tax rate declined in the third quarter due to the disposition gain at the margin increased in the first three quarters of 2014 from higher capital gains tax rate and remained steady in the fourth quarter as a spreads across all countries in Latin America and in Asia, and then result of higher tax benefits in certain International jurisdictions and the narrowed slightly in the fourth quarter. Spreads in Global Banking & restructuring charges at higher than average tax rates. Markets corporate lending portfolio declined slightly during each An eight quarter trend in net income and other selected information is quarter from lower spreads in the U.S. Corporate loan portfolio. provided on page 107. 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
36 2014 Scotiabank Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS | GROUP FINANCIAL PERFORMANCE 37 231 196 Total Total 9,949 1,288 1,737 9,676 1,252 1,568 11,664 10,436 $ 11,350 $ 21,299 $ 6,610 $ 6,379 $ 9,970 $ 19,646 $ 6,390 $ 6,194 (1) (1) 2014 Scotiabank Annual Report Markets Other Markets Other Global Banking & Global Banking & of costs incurred and charged to the operating segments. of costs incurred and charged to the operating segments. rest income and other operating income and provision for income taxes for rest income and other operating income and provision for income taxes for & Insurance & Insurance Global Wealth Global Wealth Banking Banking Non-interest income Net fee and commission revenue$671 was million $6,917 or million, 11% up yearapproximately over one-third year. of Acquisitions the accounted increase. for wealth Growth management was fees, primarily from in higherbrokerage mutual commissions. fund Banking asset revenue levels growth and across was all broad-based revenue categories. Other operating income (TEB) was$372 $3,329 million million or a 10% decrease from of real 2012, estate which gains reflected in the 2012. impactan Partly of associated offsetting the corporation was in the 2013. notedgrowth Adjusting gain was for from 11% these reflecting items, higher the securities net and gains insurance on revenues. investment Provision for credit losses The provision for credit lossesfrom increased $1,252 $36 million million in to 2012. 1,288 million Operating expenses Operating expenses rose 12% overApproximately 2012 half to of $11,664 this million. growththe was negative attributable impact to of acquisitions, foreignnoted currency non-recurring translation, items. and The the remaining above to increase support reflects business initiatives growth, higherincreased employee rent benefits due costs to and theleverage sale was of positive Scotia 1.3%, Plaza after ingains adjusting 2012. and for Operating the the above 2012 noted real non-recurring estate items inProvision 2013. for income taxes The Bank’s overall effective income19.7% tax for rate 2012. was The 20.8% increase comparedprimarily in to to the the effective impact tax of rateassets lower was in taxes due 2012. on the sale of real estate International International Banking Banking Canadian Canadian (2) (2) Financial Results Review the year ended October 31, 2012 ($288 million) to arrive at the amounts reported in Consolidated Statement of Income, differences in the actual amount the year ended October 31, 2013 ($312 million) to arrive at the amounts reported in Consolidated Statement of Income, differences in the actual amount Net income attributable to equity holders of the Bank $Net interest income 2,151 $ 1,726 $ 1,207Net income attributable to equity holders of the Bank $ 1,455 $ (160) $ $ 1,798 4,610 $ $ 1,558 4,456 $ $ 1,095 442 $ 1,443 $ 760 $ 300 $ (298) Non-interest incomeTotal revenueProvision for credit lossesNon-interest expensesProvision for income taxesNet incomeNet income attributable to non-controlling interestsNon-interest income –Total 1,554 revenueProvision $ for credit lossesNon-interest 478 expensesProvision 3,583 for income 6,973 taxes 2,498 761 192Net incomeNet income $ $ attributable 781 to 7,421 4,138 non-controlling interests 584 3,587 2,151 39 $ 3,996 2,411 $ 1,918 3 336 2,793 $ 3,580 $ 1,246 – 1,589 (483) 3 $ 1,531 (671) 26 510 506 (57) $ – $ 1,455 3,192 6,141 2,029 642 168 (454) $ 0 (160) $ 613 6,485 3,683 463 3,072 $ 1,801 25 $ 3,514 2,076 $ 1,726 3 2,744 315 $ 3,504 $ – 1,120 1,507 300 $ 30 524 2 (22) $ – 1,443 (376) 100 $ 300 Net interest income $ 5,419 $ 4,923 $ 409 $ 787 $ (188) (2) Taxable equivalent basis. Refer to non-GAAP measures on Page 17. (1) Includes all other smaller operating segments and corporate adjustments, such as the elimination of the tax-exempt gross-up reported in net inte For the year ended October 31, 2012 ($ millions) (1) Includes all other smaller operating segments and corporate adjustments, such as the elimination of the tax-exempt gross-up reported in net inte (2) Taxable equivalent basis. Refer to non-GAAP measures on Page 17. T25 For the year ended October 31, 2013 ($ millions) In order to identify keycommentary business and trends the between related 2013 financial and results 2012, are below. Net income Scotiabank had record results infinancial 2013 objectives. and Net met income or was exceeded3% $6,610 all higher million, of than $220 its last million year’s or (EPS) record were results. $5.11 Diluted as earnings compared perwas to share at $5.18 16.6% in compared 2012. to Return 19.9% onThe last equity 2013 year. net income included$90 a million non-recurring in after-tax International benefit Banking of Thanachart from Life (i) Assurance the Public gain Company onan Ltd. sale associated by of corporation Thanachart in Bank, Thailanda ($150 valuation million adjustment after on tax), acquisition-related lessRico receivables (ii) ($40 in million Puerto after tax)Bank’s and Uruguay (iii) operations a ($20 restructuring million chargenon-recurring after in items tax). the amounted Combined, to these 7income cents benefited per from share. real 2012 estate net per gains share. of Adjusting $708 for million these or$838 items, 61 million net cents or income 15% grew and by compared diluted to earnings $4.57 per in share 2012, werewas an $5.04 a increase as strong of 16.3% 10.3%. compared Underlying to ROE 17.7% inTotal 2012. revenue Total revenues on a taxable2012 equivalent to basis $21,611 (TEB) million. rose Adjusting 8%an for from associated the the corporation above this noted year, gainthe the from positive real impact estate of gains foreign inincreased currency 2012 by translation, and 11%. total revenues Net interest income Net interest income (TEB) increased$11,365 $1,378 million, million primarily or from 14% the to growth contribution in of average acquisitions core and bankingremained assets. unchanged The from core the banking 2012. margin Financial Results Review: 2013 vs. 2012 MANAGEMENT’S DISCUSSION AND ANALYSIS
Financial performance of business lines Canadian Banking compared to 2012. Net income increased due to strong broad-based Canadian Banking’s net income attributable to equity holders was results in both the wealth management and insurance businesses. $2,151 million in 2013, $350 million or 19% higher than in 2012. Growth in wealth management was driven by higher assets under Return on economic equity was 33.4% versus 35.9% in 2012. management (AUM) and assets under administration (AUA) from net sales, improved financial market conditions and the acquisitions of Retail, small business, and commercial banking all generated strong Colfondos in Colombia and AFP Horizonte in Peru. Return on performances. economic equity was 16.7% compared to 13.5% in 2012. Total revenues were $6,973 million, up $832 million or 14% from Total revenues for the year were $3,996 million, an increase of 2012. $482 million or 14% over 2012. The increase in revenues was driven Net interest income increased 18% to $5,419 million. Excluding the by strong growth across the wealth management and insurance impact of Tangerine, the underlying growth in net interest income businesses and from acquisitions. was driven by strong asset and deposit growth. The net interest margin decreased 5 basis points to 2.04% due mainly to the Global Banking & Markets acquisition of Tangerine. Global Banking & Markets reported net income attributable to equity holders of $1,455 million in 2013, a slight increase of $12 million or International Banking 1% from 2012. This result was positively impacted by solid Net income attributable to equity holders increased by $168 million contributions from the diversified client platform. Solid revenue or 11% to $1,726 million including a $90 million after tax benefit growth across the business platform led to record revenues, however from (i) the sale of a subsidiary by an associated corporation in this was mitigated by growth in expenses. Return on economic Thailand ($150 million), less (ii) a valuation adjustment on equity was 27.6% compared to 26.3% in 2012. acquisition-related receivables in Puerto Rico ($40 million), and (iii) a Total revenues during 2013 were a record $3,580 million compared restructuring charge in Uruguay ($20 million). Adjusting for these to $3,504 million in 2012, an increase of 2% as the business items, net income increased by $78 million or 5% driven by continues to benefit from a diversified products and services acquisitions and solid underlying revenue growth, which included an platform. The fixed income, equities and Canadian corporate lending after-tax gain of $25 million on the sale of a non-strategic business businesses experienced record revenues during 2013. Also in Peru. Partly offsetting were higher provision for credit losses, contributing was very strong growth in the corporate lending operating expenses and income taxes. Return on economic equity business in Europe. These were partly offset by declines in the was 14.2% versus 11.9% in 2012. commodities, investment banking, precious metals, U.S. corporate Total revenues of $7,421 million increased 14%. Excluding the lending and foreign exchange businesses. $203 million benefit (on a tax-normalized basis) of the noted gain in an associated corporation in Thailand and the favourable impact of Other foreign exchange translation, revenues rose $632 million or 10%. 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 Net interest income increased 10% driven by solid loan growth and 2012. 2012 net income benefited from $708 million after-tax gains acquisitions. The net interest margin at 4.11% was relatively flat on sale of real estate assets. compared to 4.13% in 2012. Net fee and commission revenues increased 8% to $1,403 million largely driven by the acquisitions and Net interest income, other operating income, and the provision for higher underlying retail and commercial fees. Net income from income taxes in each period include the elimination of tax-exempt associated corporations increased $283 million. Excluding the noted income gross-up. This amount is included in the operating segments, gain (on a tax-normalized basis) in an associated corporation, which are reported on a taxable equivalent basis. The elimination contributions were up $80 million or 21% mainly in Asia. Other was $312 million in 2013, compared to $288 million in 2012. operating income rose 23% to $427 million due mainly to the gain Net income from investments in associated corporations and the on the sale of a non-strategic business in Peru and higher net gains provision for income taxes in each period include the tax on investment securities. normalization adjustments related to the gross-up of income from Global Wealth & Insurance associated corporations. This adjustment normalizes the effective tax rate in the divisions to better present the contribution of the Global Wealth & Insurance reported net income attributable to associated corporations to the divisional results. equity holders of $1,207 million, an increase of $112 million or 10%
38 2014 Scotiabank Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS | GROUP FINANCIAL PERFORMANCE 39 2014 Scotiabank Annual Report Total liabilities were $698 billion$70 as billion at or October 11% 31, fromfrom 2013, October Tangerine. up 31, 2012, including $35 billion Deposits Total deposits increased by $52$33 billion. billion Personal primarily deposits from grew thegovernment by acquisition deposits of increased Tangerine. $20 Business billion,Tangerine and $6 acquisition billion as from well the asU.S. other Deposits growth by in financial Canada institutions and decreased the $1 billion. Other Liabilities Obligations related to securities soldand under securities repurchase lent, agreements as wellshort, as grew obligations by related $21 to billioninstrument securities and liabilities sold $6 decreased billion, $6 respectively. billion,decrease Derivative which in was derivative similar instrument to assets. the Equity Total shareholders’ equity increased $5,7222012. million This from increase October was 31, driven$3,293 by million, internal the capital issuance generation ofcomprised of common of shares $99 of million $1,377 forand million, the $1,278 purchase million of through Colfondos theexercise in Dividend of Colombia Reinvestment options. Plan The and Bankshares the redeemed during $300 the million year. of preferred Accumulated other comprehensive income increaseddue $1,133 mainly million to remeasurement ofliabilities employee and benefit reduced plan unrealized assets foreignBank’s and exchange investments translation in on its the foreign operations. Total liabilities Total assets The Bank’s total assets at$75 October billion 31, or 2013 11% were from$28 $744 October billion billion, 31, related up 2012, to including the approximately acquisition ofCash Tangerine. and deposits with financialmainly institutions to grew increases by in $6 interestwhile billion, bearing precious due deposits metals with decreased central $4inventory. banks, billion Securities due purchased to under lower resalesecurities prices agreements borrowed and and increased by $16 billion. Trading assets Trading assets increased $9 billionsecurities from rose October $10 31, billion 2012. fromand Trading higher U.S. holdings and of Canadian common provincialdecreased equities, government $2 debt. billion Trading due loans mainlytrading to and a lending reduction activities. in precious metals Investment securities Investment securities grew by $1holdings billion of due other mainly foreign to governmentthe increased debt. unrealized As gain at on October available-for-saleof 31, securities, qualifying 2013, after hedges the is impact takenincrease into of account, $89 was million $980 frommainly million, October to an 31, increases 2012. in The commonsecurities change equities, declined was as year due unrealized over gains year. on debt Loans Loans increased $50 billion orResidential 14% mortgages from increased October $34 31, billionacquisition 2012. mainly of from Tangerine. the Personal and$8 credit billion card due loans mainly rose togovernment growth loans in were Canada up and $8America Mexico. billion and Business due Asia. and primarily to growth in Latin Financial Position 2013 vs. 2012 MANAGEMENT’S DISCUSSION AND ANALYSIS
C20 Loan portfolio loans & acceptances, $ billions, as at October 31 GROUP FINANCIAL CONDITION T26 Condensed statement of financial position 480 As at October 31 ($ billions) 2014 2013 2012 400 Assets 320 Cash, deposits with financial institutions and precious metals $ 64.0 $ 62.2 $ 59.7 240 Trading assets 113.2 96.5 87.6 Securities purchased under resale agreements and securities 160 borrowed 93.9 82.5 66.2 80 Investment securities 38.7 34.3 33.4 Loans 424.3 402.2 352.6 Other 71.6 65.9 68.7 12 13 14 Total assets $ 805.7 $ 743.6 $ 668.2 Business & government Liabilities Personal & credit cards Deposits $ 554.0 $ 517.9 $ 465.7 Residential mortgages 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 C21 Deposits Equity $ billions, as at October 31 Common equity 45.0 40.2 34.3 600 Preferred shares 2.9 4.1 4.4 Non-controlling interest in subsidiaries 1.3 1.1 1.0 500 Total equity $ 49.2 $ 45.4 $ 39.7 400 Total liabilities and shareholders’ equity $ 805.7 $ 743.6 $ 668.2 300 200 Statement of Financial Position 100 Assets
12 13 14 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 Banks $40 billion or 5%. Business & government Personal 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 MANAGEMENT’S DISCUSSION AND ANALYSIS | GROUP FINANCIAL CONDITION 41 2014 Scotiabank Annual Report Regulatory capital Capital ratios are a meansfinancial to strength monitor of the banks. capital The adequacycapital three and ratios, primary the Common regulatory Equity risk-based Tierby 1, dividing Tier capital 1 components and by Total, risk-weighted areCapital assets. determined adequacy standards for CanadianCanadian banks regulator, are the regulated Office by of the Institutions the (OSFI). Superintendent These of standards Financial areinternational largely standards consistent set with by theSupervision Basel (BCBS). Committee on Banking Effective November 1, 2012, Canadiancapital banks adequacy are requirements subject as to published thereferred by revised to BCBS as and Basel commonly III.Convergence Basel of III Capital builds Measurement on and theFramework” Capital “International (Basel Standards: II). A Revised As compared to previous standards,on Basel common III equity places by a introducing greaterEquity a emphasis Tier new 1 category (CET1), of which capital,equity consists Common net primarily of of regulatory common deductions. shareholders’ include These goodwill, regulatory intangible adjustments assets (netdeferred of tax deferred assets, tax pension liabilities), assetsinstitutions and over investments certain in thresholds. financial Overall,the the level Basel of III regulatory rules deductions increase relativeBasel to III Basel also II. increases theinvestments level and of deferred risk-weighted tax assets amounts forexposures under significant to defined large thresholds, or unregulatedcriteria, financial derivative institutions exposures meeting to specific centralizedexposures counterparties that and give rise to wrongOn way risk. January 13, 2011, additionalwith guidance respect was to issued requirements by for theof loss BCBS, non-viability. absorbency These of requirements capital were atfor effective the Canadian on point banks. January These 1, rules 2013 inclusion affect in the regulatory eligibility capital of and instrumentsout provide for of for any a non-eligible transition instruments. andshares, All phase- capital of instruments the and Bank’s subordinated currentthese debentures preferred additional do criteria not and meet areJanuary subject 2013. to The phase-out Bank commencing reservesany the capital right instruments to within redeem, the callthe terms or future. of repurchase each offering at anyIn time addition, in OSFI designated thesystemically 6 important largest banks banks (D-SIBs), in increasing Canadaratio its as requirements minimum domestic by capital 1% foris the applicable identified to D-SIBs. all This minimum 1%and capital surcharge Total ratio Capital, requirements by for January CET1,global 1, Tier systemically 2016, 1 important in banks. line The withmaterial Bank the operating is requirements buffer expected for above to the maintainrequirements. minimum a capital ratio To enable banks to meetcontain the transitional new arrangements standards, commencing the January BCBSthrough 1, Basel January 2013, III 1, rules 2019. Transitionalof requirements new result deductions in to a common phase-in qualifying equity capital over instruments 5 over years, 10 phase-outconservation years of buffer and non- over a 4 phase-in years. ofrequired As a to of capital meet January new 2019, minimum banksassets requirements will of: related be Common to Equity risk-weighted Tierconservation 1 buffer ratio of of 2.5%, 4.5% collectively plus8.5%, 7%, a and minimum capital Total Tier capital 1 ratio ratio of of OSFI 10.5%. has issued guidelines, reportingguidance requirements which and are disclosure consistent withdeferral the of Basel the III Basel reforms, III exceptcharges, credit for requiring valuation its they adjustment be (CVA) phased-in relatedJanuary over capital 2014. a In five-year accordance period, with beginning risk-weighted OSFI’s assets requirements, of a 0.57 scalar was forAt used CVA Q3 in and the Q4 first 2014, twoscalars CVA quarters of risk-weighted of 0.57, assets 2014. 0.65 were and calculatedratios, 0.77 using respectively. to compute the CET1, Tier 1 and Total Overview Scotiabank is committed to maintainingthe a risks strong associated capital with base its tocontribute diversified support to businesses. safety Strong for capital the levels and Bank’s support customers, strong foster credit investor ratings. confidence advantage It of also growth allows opportunities the as Bankshareholder they to returns arise take through and increased enhance dividends.management The framework Bank’s includes capital a comprehensiveadequacy internal assessment capital process (ICAAP), aimedBank’s at capital ensuring is that adequate the toits meet strategic current objectives. and Key future components riskssound of and corporate the achieve governance; Bank’s creating ICAAP a include the comprehensive Bank; risk managing appetite and for monitoringprospectively; capital, and both utilizing currently appropriate and financialto metrics capital, which including relate economic risk and regulatory capital measures. Governance and oversight The Bank has a sounddeploy capital and management monitor framework its to available measure, is capital managed and in assess accordance its with adequacy.Management the Capital Policy. Board-approved In Capital addition, theBank’s Board annual reviews capital and plan. approves The the executive Liability management Committee provide and governance senior overmanagement the process. capital The Bank’s Finance,Management Treasury groups and take Global a Risk coordinatedBank’s approach capital to plan. implementing the Risk appetite The risk appetite framework thattolerances establishes in enterprise addition wide to risk capitalManagement targets section are “Risk detailed appetite in framework” theframework on Risk encompasses page medium 65. to The long-termregulatory targets capital with thresholds, respect earnings, to economicbased capital parameters. and These other targets risk- ensurefollowing the overall Bank objectives: achieves exceed the regulatorytargets, and manage internal capital capital levels commensurateBank, with maintain the strong risk credit profile ratings ofshareholders and the with provide acceptable the returns. Bank’s Capital Management Equity Total shareholders’ equity increased $3,8242013. million This from increase October was 31, driven$3,806 by million, internal issuance capital of generation common of through shares the of Dividend $771 Reinvestment million Plan mainly Accumulated and other the comprehensive exercise income of increased options. primarily $561 to million unrealized due foreign currencyinvestments translation in gains its on foreign the operations. Bank’s by These the increases repurchase were and partly cancellation offset $320 of million 4.5 under million the common Normal sharesredeemed Course for $1,150 Issuer million Bid of program. preferred The shares Bank during theOutlook year. Assets and deposits are expectedincreases to spread continue across to all grow business inresidential lines. 2015, mortgages In with is Canada, expected lower to growthlending be in categories. offset Internationally, by lending growth assets inexpected and other to deposits grow. are MANAGEMENT’S DISCUSSION AND ANALYSIS
Commencing the first quarter of 2013, OSFI required Canadian to the Risk Management section on page 65 for further discussion on deposit-taking institutions to fully implement the 2019 Basel III reforms, the Bank’s risk management framework. In managing the Bank’s capital without the transitional phase-in provisions for capital deductions base, close attention is paid to the cost and availability of the various (referred to as ‘all-in’) and achieve a minimum 7% Common Equity types of capital, desired leverage, changes in the assets and risk- Tier 1 target. weighted assets, and the opportunities to profitably deploy capital. The amount of capital required for the business risks being assumed, and to Regulatory developments related to capital meet regulatory requirements, is balanced against the goal of In addition to risk-based capital requirements, the Basel III reforms generating an appropriate return for the Bank’s shareholders. introduced a simpler, non risk-based Leverage ratio requirement to act as a supplementary measure to its risk-based capital requirements. The Capital generation Leverage ratio is defined as a ratio of Basel III Tier 1 capital to a Capital is generated internally through net earnings after dividend leverage exposure measure which includes on-balance sheet assets and payments. As well, capital is generated by the issuance of common off-balance sheet commitments, derivatives and securities financing shares, preferred shares, and Tier 2 subordinated debentures. transactions, as defined within the requirements. Capital utilization In January 2014, the BCBS issued revisions to the Basel III Leverage ratio The Bank deploys capital to support sustainable, long-term revenue and framework. Revisions to the framework related primarily to the net income growth. The growth can be through existing businesses by exposure measure, i.e. the denominator of the ratio, and consist mainly attracting new customers, increasing cross-selling activities to existing of: lower credit conversion factors for certain off-balance sheet customers, adding new products and enhancing sales productivity, or commitments; further clarification on the treatment for derivatives, through acquisitions. All major initiatives to deploy capital are subject to related collateral, and securities financing transactions; additional rigorous analysis, validation of business case assumptions and evaluation requirements for written credit derivatives; and, minimum public of expected benefits. Key financial criteria include impact on earnings disclosure requirements commencing January 2015. The final per share, capital ratios, return on invested capital, expected payback calibration will be completed by 2017, with a view to migrating to a period and internal rate of return based on discounted cash flows. Any Pillar 1 (minimum capital requirement) treatment by January 2018. potential business acquisitions, investments or strategic initiatives are In October 2014, OSFI released its Leverage Requirements Guideline reviewed and approved by the Bank’s Strategic Transaction Executive which outlines the application of the Basel III Leverage ratio in Canada Committee, to ensure effective deployment of capital. and the replacement of the existing Assets-to-Capital Multiple (ACM), effective Q1 2015. Institutions will be expected to maintain a material Regulatory capital ratios operating buffer above the 3% minimum. The Bank expects to meet The Bank continues to maintain strong high quality capital levels which OSFI’s authorized Leverage ratio. Disclosure in accordance with OSFI’s positions it well for future business growth. The Basel III all-in Common September 2014 Public Disclosure Requirements related to Basel III Equity Tier 1 (CET1) ratio as at year end was 10.8%. Increases in the Leverage ratio will be made commencing Q1 2015. CET1 ratio were primarily due to strong internal capital generation, the sale of the Bank’s investment in CI Financial Corp. which significantly Planning, managing and monitoring capital lowered regulatory capital deductions, and prudent management of Capital is managed and monitored based on planned changes in the asset growth. The Bank continued to issue common shares through its Bank’s strategy, identified changes in its operating environment or Dividend Reinvestment (DRIP), stock option and share purchase plans; changes in its risk profile. As part of the Bank’s comprehensive ICAAP, however, the Bank eliminated the 2% discount on the DRIP and sources and uses of capital are continuously measured and monitored initiated share repurchases through its Normal Course Issuer Bid through financial metrics, including regulatory thresholds, and program during the year to manage its capital levels. The Bank’s economic capital. (These results are used in capital planning and investment in Canadian Tire Financial Services in the fourth quarter had strategic decision-making.) a modest impact on its capital position. In addition, redemptions of The Bank’s assessment of capital adequacy is in the context of its non-common capital instruments during the year resulted in Basel III current position and its expected future risk profile and position relative all-in Tier 1 and Total capital ratios of 12.2% and 13.9%, respectively, to its internal targets while considering the potential impact of various as at year end. stress scenarios. Specific scenarios are selected based on the current The Bank’s capital ratios continue to be well in excess of OSFI’s economic conditions and business events facing the Bank. In addition, minimum capital ratios of 7%, 8.5% and 10.5% for CET1, Tier 1 and the Bank’s forward looking capital adequacy assessment includes a Total Capital respectively. These ratios were also strong by international consideration of the results of more severe multi-risk scenarios within standards. its enterprise-wide stress testing. This testing is used to determine the In addition to the regulatory risk-based capital ratios, banks are also extent to which severe, but plausible events, impact the Bank’s capital. subject to a maximum leverage test, the assets-to-capital multiple The Bank sets internal economic and regulatory capital targets to (ACM) as established by OSFI. The ACM is calculated by dividing a ensure the Bank’s available capital is sufficient within the context of its bank’s total assets, including specified off-balance sheet items, such as risk appetite. direct credit substitutes and performance letters of credit, by its total For economic capital, the Bank’s medium-term internal target is that capital. As at October 31, 2014, the Bank’s ACM of 17.1x was well common shareholder’s equity should be at least 100% of required below the regulatory maximum. OSFI has decided to replace the ACM economic capital. However, in the short term, it may be as low as 95% with the Basel III Leverage ratio effective Q1, 2015. of required economic capital and supported by preferred shares. Outlook For regulatory capital, the Bank’s internal target includes an adequate The Bank will continue to have a strong capital position in 2015. buffer over the regulatory minimum ensuring sufficient flexibility for Capital will be prudently managed to support organic growth initiatives future capital deployment and in consideration of the Bank’s risk and selective acquisitions that enhance shareholder returns, while appetite, the volatility of planning assumptions, the results from stress maintaining full compliance with evolving regulatory changes. 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
42 2014 Scotiabank Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS | GROUP FINANCIAL CONDITION 43 CGAAP CGAAP 2014 Scotiabank Annual Report – 3,250 – – – – 409 265 – (2,590) (3,033) (3,099) 71 361 65 (633) 23 (1,634) (3) (717) 48 71 21 (507) (2,181) 9.1% N/A N/A N/A 517 101 (218) 3 971115 454 353 574 482119 168 339 (624) 62 (590) 24 479 966 640 579 sent the actual amounts in the period for regulatory purposes. (147) (280) (752) (535) (379) 17.1x 15.0x 16.6x 17.0x 11.1%13.5% 13.6% 16.7% 12.2% 13.9% 11.8% 13.8% 15.431.9 13.8 29.5 5.9 27.3 10.5 24.0 2013 2012 2011 2010 2013 2012 2011 2010 1,404 4,872 2,657 829 4,0841,4005,841 4,384 2,150 9,893 4,384 2,900 3,975 6,723 3,400 6,790 6,927 7,757 4,043 4,265 240.9 210.0 200.8 180.5 6,422 6,243 5,181 4,239 (4,052) – (67) (43) (1,050) (750) (500) – (3,075) (2,713) (2,416) (2,224) (9,772) (7,840) (6,860) (3,638) (1,928) (577) (1,612) (142) (3,630) ital ratio respectively. 26,359 38,841 42,193 32,533 29,599 31,914 34,436 28,489 25,334 IFRS IFRS vely. $ (3,464)$ (3,352)$38,841 $ 3,712 $ 9,660 $42,193 $ (220) $ 2,934 $ 32,533 $ $ (673) $ 1,011 29,599 $ (1,027) $ 5,948 $ 3,154 $ 1,684 $ 3,045 N/A N/A N/A $42,193$ (1,906) $32,533 $ 29,599 $ 28,588 $ 40,569 $ 34,755 $ 27,932 $ 23,199 $ 288.2 $ 253.3 $ 234.0 $ 215.0 period amounts have not been restated for new and amended IFRS standards as they eporting purposes beginning Q3 2014. period amounts have not been restated for new and amended IFRS standards as they eporting purposes beginning Q3 2014. enefit Pension Fund Assets and other items. r 2 includes eligible collective allowance and excess allowance. Basel II deductions include – – otal regulatory capital on a transitional basis. 64 35 (74) – 941 132 771 410 (3) (970) (502) (265) (320) (710) 2014 Basel III All-in Basel II Basel III All-in Basel II 4,751 7,383 2,583 6,916 3,391 468 180 514 (1,408) (1,224) (1,150) (3,110) 17.1x 12.2% 13.9% 17.3 33.3 10.8% (620) (330) (305) 43,592 38,841 2014 2,934 1,400 4,871 5,519 261.9 33,742 43,592 38,073 (10,482) $ 44,965 $ 312.5 (2) (4) (3) (3) (4)(5) (6) (6) (1) (7) (7) (1) (8) (10) (2) (9) (9) (6) threshold) differences) –Other capital deductions –Other –Significant investments in the common equity of other financial institutions (amount above 10% –Deferred tax assets that rely on future profitability (excluding those arising from temporary Changes in regulatory capital Regulatory capital represent the actual amounts reported in that period for regulatory purposes. 50/50 deduction of certain investments in associated corporations and other items. represent the actual amounts reported in that period for regulatory purposes. Redeemed Changes in Tier 2 Capital Issued Collective allowances eligible for inclusion in Tier 2 and Excess Allowance under AIRB Redeemed Other changes including regulatory adjustments and phase-out of non-qualifying instruments Issued Total capital generated (used) Total capital, end of year Changes in Tier 2 Capital Changes in Additional Tier 1 Capital Other changes including regulatory adjustments and phase-out of non-qualifying instruments Changes in Common Equity Tier 1 Changes in Additional Tier 1 Capital Shares repurchased/redeemed Movements in Accumulated Other Comprehensive Income, excluding Cash Flow Hedges Other Common Equity Tier 1 capitalCommon deductions Equity Tier 1 Preferred shares Total capital ratio Assets to capital multiple Capital instrument liabilities –Other trust securities Tier 1 capital adjustments Eligible collective allowance for inclusionQualifying in Non-controlling Tier interest 2 in and TierOther excess 2 Tier allowance capital 2 (re: of capital subsidiaries IRB adjustments Tier approach) 2 capital Total regulatory capital Risk weighted assets ($ billions) Credit risk Market risk Operational risk CET1 risk-weighted assets (2) The Bank implemented(3) IFRS on Reported November amounts 1, are 2011, based however on amounts OSFI’s related requirements to that regulatory Goodwill capital relating for to prior investments periods in have associates be not classified been as restated goodwill as for they regulatory repre r (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 (4) 2013(5) has been restated for Other(6) presentation CET1 purposes capital deductions under Non-qualifying(7) Basel Tier III 1 all-in and include Tier Other deferred 2 Tier tax capital 1/Tier assets instruments 2 (excluding are capital those subject adjustments arising to under from a the timing phase-out all-in differences) period approach(9) and of include Defined 10 eligible B years. non-controlling For interests(10) fiscal in 2012, Under subsidiaries, excluding Basel in the III, addition, equity asset-to-capital Tie issued multiple for is the calculated by Bank’s dividing acquisition of the Tangerine, Bank’s Tier total 1 assets, including and specific Total off-balance Capital sheet ratios were items, by 12.9% t and 16.0% respecti (2) Amounts(3) for periods 2012 and Reported prior amounts exclude are components based of on accumulated OSFI’s other requirements comprehensive that income Goodwill not relating to eligible for investments Basel in II associates be Tier classified 1 as Capital. goodwill for regulatory r (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 cap T28 (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 T27 Net Tier 1 Capital Tier 2 capital Subordinated debentures, net of amortization For the fiscal years ($ millions) Total capital, beginning of year Implementation of Basel III Changes in Common Equity TierNet 1 Income attributable to CommonDividends Equity paid Holders to of Equity the HoldersShares Bank of issued the Bank As at October 31 ($ millions) Common Equity Tier 1 capital Total Common Equity Change in Non-controlling interest inChange Common in Equity Goodwill of and Subsidiaries other NCIB intangible assets (net of related tax liability) Threshold related deductions Qualifying non-controlling interest in CommonGoodwill Equity and of non-qualifying subsidiaries intangibles, net of deferred tax liabilities Capital ratios Common Equity Tier 1 capitalTier ratio 1 capital ratio Other changes including regulatory adjustments below: Net deferred tax assets (excluding those arising from temporary differences) MANAGEMENT’S DISCUSSION AND ANALYSIS
C22 Tier 1 capital* %, as at October 31 Regulatory Capital Components 14 Bank regulatory capital is divided into three components – Common Equity Tier 1 (CET1), Tier 1 12 capital and Tier 2 capital, depending on their degree of permanency and loss absorbency. All 10 components of capital provide support for banking operations and protect depositors. 8 CET1, consists primarily of common shareholders’ equity, a proration of non-controlling interests, 6 and regulatory deductions. These regulatory deductions include goodwill, intangible assets (net 4 of deferred tax liabilities), deferred tax assets that rely on future profitability, defined-benefit 2 pension fund net assets, shortfall of credit provision to expected losses and significant 1011 12 13 14 investments in the common equity of other financial institutions. * Amounts prior to 2012 are calculated under Basel II and Additional Tier 1 capital consists primarily of qualifying non-cumulative preferred shares or amounts prior to 2011 calculated under CGAAP 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 C23 Dividend growth dollars per share 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 3 internal capital generation has been consistently strong;
2 • $3.7 billion from lower capital deductions, mainly due to the sale of the Bank’s investment in CI Financial Corp.; 1 • $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
04 06 08 10 12 14 Normal Course Issuer Bid; and, • $0.4 billion increase from movements in Accumulated Other Comprehensive Income, including foreign currency translation. Partly offset by: C24 Internally generated capital* • $0.7 billion increase in goodwill primarily from revisions to OSFI’s Capital Adequacy $ billions, for years ended October 31 4.0 Requirements Guideline for the reporting of goodwill related to significant investments, 3.5 including the Bank’s recent investment in Canadian Tire Financial Services, and growth in other 3.0 intangible assets. 2.5 2.0 The Tier 1 capital ratio was also impacted by redemptions of $1.2 billion of preferred shares and 1.5 the Total Capital ratio was further impacted by redemptions of $1.0 billion of subordinated 1.0 debentures. In addition, revisions to OSFI’s Capital Adequacy Requirements Guideline for the 0.5 collective allowance reduced Total Capital by $0.5 billion. 1011 12 13 14 Dividends * Amounts prior to 2011 calculated under CGAAP 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 MANAGEMENT’S DISCUSSION AND ANALYSIS | GROUP FINANCIAL CONDITION 45 (000s) (000s) (000s) 23,355 Number Number Number outstanding outstanding outstanding (%) Yield rate (%) Dividend 2014 Scotiabank Annual Report 66 0.174875 2.80 2,623 345345345 0.281250230 0.281250187 0.328125158 0.350000201 4.50 0.209375149 4.50 0.185500234 5.25 0.225625 5.60 0.163625 13,800 265 3.35 0.239375 13,800 409 2.97 13,800 3.61 0.240625 2.62 9,200 0.231250 3.83 7,498 6,302 650 3.85 8,039 3.70 5,961 9,377 39.01 10,600 16,346 7.802 650 Amount Amount ($ millions) Distribution ($ millions) Dividend $ 15,231 $ 0.66 – 1,216,582 $ 750 $ 28.25 5.650 750 (Scotia BaTS III Series 2009-1). InterestIII is Series payable 2009-1 semi-annually on in the an last amountevery day of fifth of $39.01 anniversary June thereafter per and until Scotia December June BaTS will until 30, be June 2104, reset 30, the at 2019. interest an After rate interest June onplus rate 30, the 7.05%. per 2019 Scotia On annum and BaTS or equal on III after to Series June the2009-1, 2009-1 30, then in 2014, prevailing whole the 5-year or Trust Government in may, of part,below, at Canada subject the its Yield to Scotia option regulatory BaTS redeem approval. III the Under Series Scotiaexchanged the 2009-1, BaTS circumstances automatically III including outlined without Series accrued in the and 12(c) consent unpaid ofShares interest the Series thereon, holder, R would into of be newly the issued Bank. Non-cumulativemay In Preferred be addition, required in to certain invest circumstances, interest holderspreferred paid of shares on Scotia of the BaTS the Scotia III Bank BaTS Series with IIIDeferral 2009-1 non-cumulative Series Preferred dividends 2009-1 Shares). (each in If such a there series series is isBank of an referred would newly-issued automatic to become exchange as the of Bank sole the beneficiary Scotia of BaTS the Preferred Trust. Shares, then the without the consent of the holder,circumstances: into (i) Non-cumulative proceedings Preferred are Shares commenced of for thetakes the Bank control winding-up of in of the the the following Bank Bank; or (ii)Capital its the ratio assets; Superintendent of (iii) less the than Bank 8%; hasprovide or a additional (iv) Tier liquidity the 1 and Superintendent Capital the has ratio Bank directedsuch of elects the direction. less such Bank than automatic to 5% exchange increase or or its a the capital Total Bank or fails to comply with 2009-1 in the event that thepreferred regular shares dividend are is outstanding, not the declared Bank’s onfunds common the of shares. Bank’s the In preferred Trust such shares will a and, be circumstanceTrust payable if the fail to no net to the distributable pay Bank the as semi-annual the2009-1 distributions holder in on of full, the the the Scotia residual Bank BaTS interest will IIa in not Series specified the declare 2006-1 period Trust. dividends and of Should of Scotia time the any BaTS [refer kind III to on Series Notes any 26 of and its 27 preferred – or Restrictions common on shares dividend for payments]. corresponding option for shares. 12 (b) On May 7, 2009, Scotiabank Tier 1 Trust issued 650,000 Scotiabank Tier 1 Securities Series 2009-1 12 (c) The Scotia BaTS II Series 2006-1 and Scotia BaTS III Series 2009-1 may be automatically exchanged, 12 (d) No cash distributions will be payable on the Scotia BaTS II Series 2006-1 and Scotia BaTS III Series (13) Included are 364 thousand(14) stock options During with 2013, tandem certain stock employees appreciation voluntarily rights renounced (Tandem 2,835 SAR) thousand features. Tandem SARs while retaining their (1)(13)(14) (12a,c,d) (12b,c,d) (2)(3)(9) (2)(3)(10) (2)(3)(11) (2) (2) (2) (2) (2)(3)(4) (2)(3)(5) (2)(3)(6) (2)(3)(7) (2)(3)(8) (1) Shares and other instruments common shares and options was 1,216,649 thousand and 23,287 thousand, respectively. in the Bank’s 2014 Annual Report for further details). years thereafter, the dividends, if andGovernment when of declared, Canada will Yield be plus determined 2.05%, by multiplied the by sum $25.00. of the five-year Treasury Bill Yield plus 2.05%, multiplied by $25.00, which will be resetfive quarterly years until thereafter, April the 25, dividends, 2018. ifGovernment and of when Canada declared, Yield will plus be 1.70%, determined multiplied by by the $25.00. sum of theTreasury five-year Bill Yield plus 1.70%, multiplied by $25.00, which will be resetfive quarterly years until thereafter, October the 25, dividends, 2018. ifGovernment and of when Canada declared, Yield will plus be 1.88%, determined multiplied by by the $25.00. sum of theTreasury five-year Bill Yield plus 1.88%, multiplied by $25.00, which will be resetto quarterly the until initial January five-year 25, fixed 2019. ratedetermined period, by and the resetting sum every of five the years five-year thereafter, Government the of dividends Canada will Yield be plusSubsequent 1.00%, to multiplied the by initial $25.00. five-year fixedwill rate be period, determined and by resetting the every sum five$25.00. of years the thereafter, five-year the Government dividends of Canada Yield plus 1.34%, multiplied by 2006-1 (Scotia BaTS II Series 2006-1).non-cumulative The fixed holders cash of distributions Scotia payable BaTS semi-annuallyregulatory II in approval, Series an these 2006-1 amount securities are of may entitled $28.25 be to perregulatory redeemed receive capital security. in changes, With whole or upon in the whole occurrencethereafter or of at in certain the part tax option on or of December Scotiabank 30,security Capital 2011 into Trust. Non-cumulative and The Preferred on holder Shares any has Series distribution thecash S date right dividends of at payable the any semi-annually Bank. time in The to an Series27 exchange amount S – their of shares Restrictions $0.4875 will on per be dividend $25.00 entitled payments].II share to Under Series [refer the 2006-1 to circumstances Notes would outlined 26 be in and automatically 12(c)Preferred exchanged below, Shares without the Series the Scotia T consent BaTS of of thepayable the Bank. semi-annually holder, The in into Series an Non-cumulative T amount shares of willScotia $0.625 be BaTS per entitled II $25.00 to Series share. non-cumulative 2006-1 If cash intosole there dividends Preferred beneficiary is Shares of an Series the automatic T Trust. exchange of of the the Bank, then the Bank would become the Outstanding options granted under the Stock Option Plans to purchase common shares Preferred shares Preferred shares Series 14 Scotiabank Tier 1 Securities – Series 2009-1 issued by Scotiabank Tier 1 Trust Preferred shares Series 15 Preferred shares Series 16 Preferred shares Series 17 Preferred shares Series 18 Preferred shares Series 19 Preferred shares Series 20 Preferred shares Series 21 Preferred shares Series 22 Preferred shares Series 23 Preferred shares Series 32 Trust securities Options Scotiabank Trust Securities – Series 2006-1 issued by Scotiabank Capital Trust (1) Dividends on common shares are paid quarterly. As(2) at November 21, 2014, These shares the are number(3) entitled of to outstanding non-cumulative These preferential preferred cash shares dividends have payable conversion quarterly. features (refer to(4) Note 27 of the Subsequent consolidated to financial the statements initial five-year fixed rate period which ended on April 25, 2013,(5) and resetting every Dividends, five if and when declared, are determined by(6) the sum of the Subsequent three-month to Government the of initial five-year Canada fixed rate period which ended on October 25, 2013,(7) and resetting every Dividends, if and when declared, are determined by(8) the sum of the Subsequent three-month to Government the of initial five-year Canada fixed rate period which ended on January 25, 2014,(9) and resetting every Dividends, if and when declared, are determined by(10) the sum Dividends, of if the and three-month when Government declared, of are Canada for the initial five-year period ending on April 25, 2015.(11) Subsequent Dividends, if and when declared, are for the initial five-year period ending on February 1, 2016. 12 (a) On September 28, 2006, Scotiabank Capital Trust issued 750,000 Scotiabank Trust Securities – Series T30 As at October 31, 2014 Share data Share data and other capital instruments The Bank’s common and preferred sharefeatures, data, are as discussed well in as Notes other 26 capital and instruments, 27 are of shown the in consolidated Table financial 30. statements. Further details, including exchangeability Common shares Preferred shares Series 30 MANAGEMENT’S DISCUSSION AND ANALYSIS
Credit ratings exposures. Common Equity Tier 1 (CET1) RWA increased by Credit ratings affect the Bank’s access to capital markets and $24.2 billion in 2014 to $312.5 billion. The key contributors to the borrowing costs, as well as the terms on which the Bank can conduct change were credit risk of $20.9 billion (including the impact of foreign derivatives and hedging transactions and obtain related borrowings. currency translation of $8.7 billion), market risk of $1.8 billion and The Bank continues to have strong credit ratings. The current ratings operational risk of $1.5 billion. In addition, Tier 1 and Total Capital are AA by DBRS, Aa2 by Moody’s, AA- by Fitch and A+ by Standard RWA increased by $0.8 billion and $2.0 billion, respectively, due to the and Poor’s (S&P). adoption of OSFI prescribed scalars for CVA risk-weighted assets. In July 2014, Moody’s placed the senior debt ratings of several of the CET1 Credit risk-weighted assets Canadian banks on “negative outlook”. In August 2014, Standard & CET1 credit risk-weighted assets of $261.9 billion increased Poor’s took a similar action, changing the outlook for several Canadian $20.9 billion as shown in Table 31 from the following components: banks to “Negative” from “Stable”. These actions are not downgrades, nor do they suggest that downgrades are highly likely to follow. • Underlying business growth added $8.5 billion to RWA largely as a Rather, these changes suggest that, over the next 12-18 months, these result of increases in retail and business lending across all business rating agencies feel that a downgrade is more likely than an upgrade lines. for the Canadian banks. Both rating agencies cited the uncertainty • Improvement in the credit quality of the portfolio resulted in a around the federal government’s proposed new “bail-in” regime for $5.7 billion reduction in RWA. In addition to positive migration of senior unsecured debt as the principal reason for these system-wide exposures to higher ratings, favourable credit experiences resulted in changes in outlook in order to reflect the greater likelihood that such improved risk parameters which are updated at least annually to debt may incur losses in the unlikely event of a distress scenario. account for increased historical data and changes in model In addition, Moody’s placed the Bank’s standalone rating – which estimates/assumptions. assumes no government support – on “negative outlook”. This is also • Model enhancements to retail AIRB models increased RWA by not a downgrade. This change was done primarily because Moody’s $2.3 billion. believes that the Bank’s international business is more risky than its • Methodology and policy changes of $5.0 billion are a result of the Canadian business and is likely to grow more rapidly in the coming phase-in adoption of the Basel III CVA capital requirements based on years. Moody’s also cited the Bank’s plans to grow its unsecured the OSFI prescribed scalar for CET1 RWA of 57% which will increase consumer lending businesses – both in Canada and internationally – as to 100% by 2019. a reason for the change. • Acquisitions/disposals include higher RWA of $2.2 billion due to the The Bank remains confident that it will retain very high credit ratings. impact on threshold deductions from the sale of CI Financial Corp. and the carrying value of the remaining investment. Risk-weighted assets Regulatory capital requirements are based on OSFI’s target minimum • The impact of foreign exchange translation added $8.7 billion mainly percentage of risk-weighted assets (RWA). RWA represent the Bank’s due to the Canadian dollar weakening against the U.S. dollar. The exposure to credit, market and operational risk and are computed by Bank’s structural foreign exchange exposures are managed with the applying a combination of the Bank’s internal credit risk parameters primary objective of ensuring, where practical, that consolidated and OSFI prescribed risk-weights to on- and off-balance sheet 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
Of which Of which Credit risk-weighted assets movement by key driver(1) Counterparty Counterparty ($ millions) Credit Risk Credit Risk Credit Risk 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 AIRB portfolios, the key risk measures used in the quantification of Credit risk measures the risk that a borrower or counterparty will fail to regulatory capital for credit risk include probability of default (PD), loss honour its financial or contractual obligations to the Bank. The Bank given default (LGD) and exposure at default (EAD). uses the Advanced Internal Ratings Based (AIRB) approach under • Probability of default (PD) measures the likelihood that a borrower, Basel III to determine minimum regulatory capital requirements for its with an assigned Internal Grade (IG) code, will default within a one- domestic, U.S. and European credit portfolios, and certain international year time horizon. IG codes are a component of the Bank’s risk non-retail portfolios. The remaining credit portfolios are subject to the rating system described on page 72. Each of the Bank’s internal Standardized approach, which relies on the external credit ratings of borrower IG codes is mapped to a PD estimate. borrowers, if available, to compute regulatory capital for credit risk. For
46 2014 Scotiabank Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS | GROUP FINANCIAL CONDITION 47 (8)(9) RW (%) (2) (7)(9) LGD (%) (3) PD (6)(9) (%) 2013 2014 Scotiabank Annual Report 65 3.0890% – 10.8179% 80 0.3378% – 0.5929% 99-98 0.0000% – 0.0595% ($) RWA (5) 11 18 56.81 42 164 591706 1,326 1,562 20.87 32.23 44 40 224 221 ($) grade Default 27-21 100% 1,527 3,327 100 43 218 4,3373,774 3,241 3,477 1.60 3.11 34 34 75 92 1,030 1,871 10.91 44 182 te IG to PD mapping. Watch list 56,90735,10337,15426,626 643 6,87131,949 9,05229,932 8,472 11,418 0.01 0.08 14,624 0.12 0.15 0.24 15 35 0.32 37 39 39 43 20 1 24 32 36 49 26,53014,466 13,30413,367 9,000 9,260 0.44 0.66 0.95 41 41 39 50 62 69 86,216 – – 15 – obability at default, loss given default and risk-weighting. 284,010 97,466 0.99 34 34 370,226 97,466 0.76 30 26 Exposure Non-Investment at default Investment grade (8)(9) RW (%) average default experience over alow-default reasonable years mix of of the high-default economic and cycle; appropriately reflect conditions observed duringlosses periods are where substantially credit higher than average; and The historical data used forminimum estimating 5-year these AIRB risk requirement measures for exceedsyear PD the AIRB estimates requirement and for the LGD minimumadjustments, and 7- as EAD required estimates. under Further the analytical requirements Basel set III out Framework in and their OSFI’s to Domestic average Implementation estimates Notes, obtained are from applied adjustments historical incorporate data. the These regulatory analytical requirements pertaining to: • Long-run estimation of PD, which requires that PD estimates capture • Downturn estimation for LGD, which requires that LGD estimates (7)(9) LGD (%) PD (6)(9) (%) 2014 (1)(2) ($) RWA (5) ($) 83,446 – – 15 – 302,470 101,484 0.78 35 34 385,916 101,484 0.61 31 26 Exposure at default 959087 33,35285 40,11483 33,212 30,343 6,484 31,433 7,315 8,750 0.07 11,577 0.09 15,552 0.14 0.21 37 0.33 36 37 42 45 19 18 26 38 49 80 27,175 14,914 0.42 44 55 777573 16,25370 16,578 5,223 10,357 4,556 11,180 0.57 4,401 0.83 4,453 1.64 43 3.09 41 38 64 37 67 84 98 604030 500 816 37 1,101 2,003 20.34 33.23 77 44 59.18 47 220 50 245 208 65 815 1,454 10.80 45 178 27-21 1,018 1,467 100 48 144 99-98 61,045 399 0.01 16 1 IG Code and mapping to external rating agencies (1) (4) (10) Non-retail AIRB portfolio exposure by internal rating grade Internal rating scale the event of a borrower’smapped default. to The ranges Bank’s of internal LGD LGDon estimates. grades facility LGD are characteristics grades such are as assignedcoverage seniority, based and collateral other type, structural collateral elements.exposure LGD is for based a on defaulted theusing concept the of present economic value loss of andand repayments, is indirect recoveries calculated expenses. and related direct facility in the event of a borrower’s default. mortgages mortgages • Loss given default (LGD) measures the severity of loss on a facility in • Exposure at default (EAD) measures the expected exposure onAll a three risk measures arewell estimated as using available the external Bank’s benchmarks, historical and data, are as updated on a regular basis. (1) Refer to the Bank’s Quarterly Supplementary Regulatory Capital Disclosures for a more detailed breakdown by asset class, exposure at default, pr (2) Excludes securitization(3) exposures. 2013(4) has been restated for Excludes presentation(5) government purposes. guaranteed residential mortgage After of(6) credit $83.4 risk billion. mitigation. PD(7) – Probability of Default LGD –(8) Loss Given Default including RW certain –(9) conservative Risk factors Weight as per Basel Exposure accord. at(10) default used Gross as defaulted basis exposures, for before estimated any weightings. related allowances. Investment grade Grade T33 As at October 31 ($ millions) (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 separa AAA to AA+ Aaa to Aa1 AAA to AA (high) T32 Equivalent Rating External Rating – S&P External Rating – Moody’s External Rating – DBRS Grade IG Code PD Range Total, excluding residential Non-Investment grade Government guaranteed residential Total CCCCCC- to CC-Default Caa3 to Ca Caa2 - - - - 40 60 20.6759% – 37.0263% 10.8179% – 20.6759% 30 37.0263% – 60.8493% AA to A+A to A-BBB+BBBBBB-BB+BBBB-B+ Aa2B to to A1 B-CCC+ A2 to A3 Baa1 Baa2 Baa3 Ba1 AA Ba2 to A (high) Ba3 B1 A B2 to to A B3 (low) Caa1 BBB (high) BBB BBB (low) BB (high) BB BB (low) B to B (low) B (high) - 95 90 0.0595% – 0.1563% 87 0.0654% – 0.1681% 83 0.1004% 85 – 0.2595% 0.2156% – 0.5342% 0.1472% 70 – 75 0.3723% 77 73 1.6352% – 0.6582% 3.0890% – 0.8292% 0.5293% – 0.6582% 0.8292% – 1.6352% Watch list Default MANAGEMENT’S DISCUSSION AND ANALYSIS
• Downturn estimation for EAD, which requires that EAD estimates Credit risk-weighted assets – Canadian retail appropriately reflect conditions observed during periods of economic The AIRB approach is used to determine minimum regulatory capital downturn; and requirements for the retail credit portfolio. The retail portfolio is • The addition of a margin of conservatism, which is related to the comprised of the following Basel-based pools: likely range of errors based on the identification and quantification • Residential real estate secured exposures consists of conventional of the various sources of uncertainty inherent in historical estimates. and high ratio residential mortgages and all other products opened These risk measures are used in the calculation of regulatory capital under the Scotia Total Equity Plan (STEP), such as loans, credit cards requirements based on formulas specified by the Basel framework. The and secured lines of credit; credit quality distribution of the Bank’s AIRB non-retail portfolio is • Qualifying revolving retail exposures consists of all unsecured credit shown in Table 33. cards and lines of credit; The risk measures are subject to a rigorous back-testing framework • Other retail consists of term loans (secured and unsecured), as well as which uses the Bank’s historical data to ensure that they are credit cards and lines of credit which are secured by assets other than appropriately calibrated. Based on results obtained from the back- real estate. testing process, risk measures are reviewed and re-calibrated on at least an annual basis to ensure that they reflect the implications of new For the AIRB portfolios the following models and parameters are estimated: data, technical advances and other relevant information. • Probability of default (PD) is the likelihood that the facility will default • As PD estimates represent long-run parameters, back-testing is within the next 12 months. performed using historical data spanning at least one full economic • Loss Given Default (LGD) measures the economic loss as a proportion cycle. Realized PDs are back-tested using pre-defined confidence of the defaulted balance. intervals, and the results are then aggregated to provide an overall • Exposure at Default (EAD) is a portion of expected exposures at time assessment of the appropriateness of each PD estimate; of default. • The back-testing for LGD and EAD estimates is conducted from both The data observation period used for PD/EAD/LGD estimates meets the long-run and downturn perspectives, in order to ensure that these five year minimum. Various statistical techniques including predictive estimates are adequately conservative to reflect both long-run and modeling and decision trees were used to develop models. The models downturn conditions. assign accounts into homogenous segments using internal and external Portfolio-level back-testing results, based on a comparison of estimated borrower/facility-level credit experience. Every month exposures are and realized parameters for the four-quarter period ended at July 31, automatically re-rated based on risk and loss characteristics. PD, LGD 2014, are shown in Table 34. During this period the actual experience and EAD estimates are then assigned to each of these segments was significantly better than the estimated risk parameter: incorporating the following regulatory requirements:
T34 Portfolio-level comparison of estimated and actual non-retail percentages • PD incorporates the average long run default experience over an economic cycle. This long run average includes a mix of high and low Estimated(1) Actual default years. Average PD 1.02 0.24 • LGD is adjusted to appropriately reflect economic downturn Average LGD 38.03 27.87 conditions. (2) 61.31 8.80 Average CCF • EAD may also be adjusted to reflect downturn conditions when PD (1) Estimated parameters are based on portfolio averages at Q3/13, whereas actual parameters are based on and EAD are highly correlated. 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 • Sources of uncertainty are reviewed regularly to ensure uncertainties using the sum of the drawn exposure and the committed undrawn exposure multiplied by the estimated CCF. 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 Exposure Exposure at default RWA PD LGD RW at default RWA PD LGD RW Category PD Range ($)(2) ($) (%)(3)(6) (%)(4)(6) (%)(5)(6) ($)(2) ($) (%)(3)(6) (%)(4)(6) (%)(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 MANAGEMENT’S DISCUSSION AND ANALYSIS | GROUP FINANCIAL CONDITION 49 (4)(5) EAD ($) Actual (4)(7) –– EAD Market risk ($) (189) 94 2014 2013 1,986 1,537 Estimated $17,251 $ 15,454 (3)(6) LGD 2014 Scotiabank Annual Report Actual (%) (3)(7) (%) Average (3) (1) Estimated LGD (2) (2)(5) Actual (%) Risk weighted assets movement by key drivers Foreign exchange movements are imbedded within Movement in risk levels. changes (eg. Basel III). ($ millions) RWAs as at beginning ofMovement the in year risk levels $15,454 $ 13,823 Model updates (1) Movement in risk levels are defined as changes in risk(2) due to Model position updates changes are and defined(3) market as movements. updates Methodology to and the policy model is to defined reflect as recent methodology experience, changes change to in the model calculations scope. driven by regulatoryMarket policy risk-weighted assets increased byshown $1.8 in billion Table to 38 $17.3 mainly billionexposure due as in to Global movements Fixed in Income riskIncremental which levels Risk increased related Charge. VaR to and the Operational risk Operational risk is the riskthe of Bank loss, is whether exposed direct due orinadequacy to indirect, or external to failure events, which of human processes, error,Bank procedures, or currently systems the applies or the controls. Standardized The operational Approach risk for capital calculating as perdetermined applicable as Basel the Standards. sum Total of capitalbusiness capital is activities. for The each capital of for eightrelevant each Basel risk activity defined factor, is as the defined producteach by of respective Basel, the business applied activity. to The theapplication Bank gross to has income OSFI submitted of to its use pre- (AMA), the and Advanced plans Measurement to Approach submitAMA, its regulatory full capital application measurement in will fiscalBank’s more 2015. operational directly Under risk reflect environment the throughdistribution the approach use model of which a will loss external use loss internal events, loss scenario events, analysisa and final other operational adjustments risk to regulatory arriverequired capital at regulatory calculation. capital The is impact not on determinableOperational at risk-weighted this assets time. increased byyear $1.5 to billion $33.3 during billion the duewere to no organic material growth operational in risk gross losses income. during There the year. Economic capital Economic capital is a measureBank’s of business the activities. unexpected Economic losses capital inherentBank’s is in ICAAP. also the The a calculation key of metricare economic in subject capital the to relies independent on vetting modelsBank’s and that Model validation Risk as Management required Policy. byprofile Management the to assesses determine its those risk riskseconomic for capital. which the Bank should attribute T38 Methodology and policy Acquisitions and disposalsOtherRWA as at end of the year – – – – Default Rate (2)(7) 31 (%) 397 338 166 112 Average 2013 0.89 0.63 – – – – $ 192 $ 1,236 Estimated PD 46 428 396 130 139 2014 $ 241 $1,380 (1) (8) Insured mortgages Uninsured mortgages 0.53 0.43 15.87 12.44 – – Total market risk capital Estimated and actual loss parameters lines of credit; Residential mortgages Secured lines of credit 0.91 0.24 26.69 17.19 79 72 All bank VaR All bank stressed VaR Incremental risk charge Comprehensive risk measure CRM surcharge Standardized approach (1) Equates to $17,251 million of market risk-weighted assets (2013 – $15,454 million). T37 ($ millions) Total market risk capital Credit risk-weighted assets – International retail International retail credit portfolios followand the consist Standardized of approach the following components: • Residential real estate secured• lending; Qualifying revolving retail exposures consisting of all credit cards• and Other retail consisting of termUnder loans. the standardized approach, insecured general, lending residential products real are estate risk-weightedproducts 35% receive and a other 75% retail risk-weight. Market Risk Market risk is the riskinterest of rates, loss credit from spreads, changes equity incommodity prices, market prices, foreign prices the exchange including correlations rates, between and volatility. them, and their levels of For all material trading portfolios,to the calculate Bank the applies market its risk internalBank’s capital models internal charge. VaR, OSFI Stressed has VaR, approvedComprehensive Incremental the Risk Risk Measure Charge models and forrisk the capital. determination The of attributes market anddescribed parameters in of the these Risk models Measurement are SummaryFor on some page non-material 76. trading portfolios,Standardized the Approach Bank for applies calculating the marketstandardized risk method capital. uses The a “buildingcapital block” charge approach, for with each the risk categoryBelow calculated are separately. the market risk2013. requirements as at October 31, 2014 and (1) Excludes the acquisition of(2) Tangerine. Account weighted aggregation. (3) Default weighted aggregation. (4) EAD is estimated for(5) revolving products Actual only. based on accounts(6) not at Actual default LGD as calculated at based(7) four on quarters 24 Estimates prior month are to recovery based reporting period on(8) date. after the default four Actual and quarters and therefore prior Estimated exclude to LGD any the for recoveries reporting insured received date. mortgages after are the not 24 shown. month Actual period. LGD includes the insurance benefit, whereas Estimated LGD may not. ($ millions) Residential Real Estate secured T36 Qualifying revolving retail exposuresOther retail 1.59 1.47 1.93 72.04 1.29 68.68 464 64.86 456 52.51 9 8 MANAGEMENT’S DISCUSSION AND ANALYSIS
The major risk categories included in economic capital are: Consolidated structured entities • Credit risk measurement is based on the Bank’s internal credit risk The Bank controls its U.S.-based multi-seller conduit and certain ratings for derivatives, corporate and commercial loans, and credit funding and other vehicles and consolidates these structured entities in scoring for retail loans. It is also based on the Bank’s actual the Bank’s consolidated financial statements. experience with recoveries and takes into account differences in term As at October 31, 2014, total assets of consolidated structured entities to maturity, probabilities of default, expected severity of loss in the were $36 billion, compared to $41 billion at the end of 2013. The event of default, and the diversification benefits of certain portfolios. decrease was primarily due to repayments by Scotia Covered Bond • Market risk for economic capital incorporates models consistent with Trust and Scotiabank Covered Bond Guarantor Limited Partnership, and the regulatory basis, with some exclusions, and calibrated to a higher the maturity of the Notes of one of the Bank’s funding vehicles in the 99.95% confidence interval, and models of other market risks, second quarter of the year. In addition, two of the Bank’s funding mainly structural interest rate and foreign exchange risks. vehicles were deconsolidated as a result of the adoption of IFRS 10; • Operational risk for economic capital is based on a model consequently their assets are no longer reflected with the total assets of incorporating actual losses, adjusted for an add-on for regulatory consolidated structured entities. More details of the Bank’s capital. consolidated structured entities are provided in Note 16(a) to the consolidated financial statements on page 163. • Other risks include additional risks for which economic capital is attributed, such as business risk, significant investments, insurance Unconsolidated structured entities risk and real estate risk. There are two primary types of association the Bank has with In addition, the Bank’s measure of economic capital includes a unconsolidated structured entities: diversification benefit which recognizes that all of the above risks will • Canadian multi-seller conduits administered by the Bank, and not occur simultaneously. • Structured finance entities. The Bank also includes the full amount of goodwill and intangible assets in the economic capital amount. The Bank uses its economic The Bank earned total fees of $20 million in 2014, unchanged from capital framework to attribute capital to the business lines, refer to 2013, from certain structured entities in which it had a significant non-GAAP measures, page 17. Table 50 on page 70 shows the interest at the end of the year but did not consolidate. More attribution of economic capital by business line which allows the Bank information with respect to the Bank’s involvement with these to appropriately compare and measure the returns from the business unconsolidated structured entities, including details of liquidity facilities lines, based upon their inherent risk. For further discussion on risk and maximum loss exposure by category is provided below and in management and details on credit, market and operational risks, refer Note 16(b) to the consolidated financial statements on pages 164 and to the Risk Management section. 165.
Off-balance Sheet Arrangements Canadian multi-seller conduits administered by the Bank In the normal course of business, the Bank enters into contractual The Bank sponsors two Canadian-based multi-seller conduits that are arrangements with entities that are either consolidated or not required not consolidated. The Bank earned commercial paper issuance fees, to be consolidated in its financial statements, but could have a current program management fees, liquidity fees and other fees from these or future impact on the Bank’s financial performance or financial multi-seller conduits, which totaled $18 million in 2014, compared to condition. These arrangements can be classified into the following $15 million in 2013. These multi-seller conduits purchase high-quality categories: structured entities, securitizations and guarantees and other financial assets and finance these assets through the issuance of highly commitments. rated commercial paper. As further described below, the Bank’s exposure to these off-balance Structured entities sheet conduits primarily consists of liquidity support and temporary Arrangements with structured entities include structured entities that holdings of commercial paper. Although the Bank has power over the are used to provide a wide range of services to customers, such as relevant activities of the conduits, it has limited exposure to variability structured entities established to allow clients to securitize their financial in returns, which results in the Bank not consolidating the two assets while facilitating cost-efficient financing, and to provide certain Canadian conduits. The Bank has a process to monitor these exposures investment opportunities. The Bank creates, administers and manages and significant events impacting the conduits to ensure there is no personal and corporate trusts on behalf of its customers. The Bank also change in control, which could require the Bank to consolidate the sponsors and actively manages certain structured entities (see discussion assets and liabilities of the conduits at fair value. on other unconsolidated structured entities on page 51). A significant portion of the conduits’ assets have been structured to All structured entities are subject to a rigorous review and approval receive credit enhancements from the sellers, including process to ensure that all relevant risks are properly identified and overcollateralization protection and cash reserve accounts. Each asset addressed. For many of the structured entities that are used to provide purchased by the conduits is supported by a backstop liquidity facility services to customers, the Bank does not guarantee the performance of provided by the Bank in the form of a liquidity asset purchase the structured entities’ underlying assets, and does not absorb any agreement (LAPA). The primary purpose of the backstop liquidity related losses. For other structured entities, such as securitization and facility is to provide an alternative source of financing in the event the investment vehicles, the Bank may be exposed to credit, market, conduits are unable to access the commercial paper market. Under the liquidity or operational risks. The Bank earns fees based on the nature terms of the LAPA, the Bank is not obliged to purchase defaulted of its association with a structured entity. assets.
50 2014 Scotiabank Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS | GROUP FINANCIAL CONDITION 51 2014 Scotiabank Annual Report 2014, these amounted to $26year. billion, These compared instruments to are $24 issued billionto at last secure the the request customer’s of payment athird or Bank party. performance customer The obligations year-over-year to increase a customer reflects activity; a general increase in funding to asset-backed commercial papergeneral conduits market in disruption the prevents event the a commercial conduits paper from or, issuing in someconditions cases, or when performance certain measures specified are not met; Bank enters into many contractscounterparties where for it certain may aspects indemnify of contract dependent its on operations other that parties’ are performance,The or Bank if cannot certain estimate, events in occur. amount all that cases, may the be maximum payable, potentialavailable nor future under the recourse amount provisions of that collateralpayments. would or Historically, mitigate assets the any Bank such haspayments not under made these any indemnities; significant subject to specific conditions, whichcredit represent available undertakings in to the make formamounts of and loans maturities. or As other at financingscommitments October for amounted 31, specific to 2014, $137 these billion,last compared year. to $119 billion Securitizations The Bank securitizes fully insuredthe residential creation mortgage of loans mortgage through backedHousing securities Trust that (CHT) are and/or sold third todoes parties. Canada not The qualify sale for of derecognition suchhousing with mortgages mortgage the pools. exception The of outstanding salesecuritized amount of social of social housing off-balance pools sheet was2014, $1,499 compared million to as $1,590 at million Octobersold last 31, to year. CHT The and/or transferred third mortgages sheet parties along continue with to the be proceeds recognizedMore from on details sale balance have treated been as provided securedfinancial in borrowings. statements Note on 15 Page to 162. the consolidated The Bank securitizes a portionreceivables of (receivables) its on unsecured a personal revolving lineTerm basis of Trust through credit II Hollis (Hollis), Receivables anotes Bank-sponsored to Structured third-party entity. investors Hollis and issues issuance the are Bank, used and to the purchase proceedsoriginated a of by co-ownership such the interest Bank. in The thequalify sale receivables for of derecognition. such Recourse co-ownership of interestpurchased the does interest. note not The holders subordinated is notes limitedentity issued to are by the held the by Structured the2013 Bank. – During $602.4 the million) year, of $602.4 assets million were (October securitized 31, through Hollis. Guarantees and other commitments Guarantees and other commitments areprovides fee-based to products its that customers. the These Bank products can• be categorized Standby as letters follows: of credit and letters of guarantee. As at October 31, • Liquidity facilities. These generally provide an alternate source of • Indemnification contracts. In the ordinary course of business, the • Loan commitments. The Bank has commitments to extend credit, These guarantees and loan commitmentscredit may or expose liquidity the risks, Bank and to and are approval subject processes. to For the the Bank’samounts guaranteed standard represent products, review the the maximum dollar riskdefault of by loss the in guaranteed the parties, eventfor and of recoveries are a under stated total recourse before provisions, anyheld insurance reduction or policies pledged. or collateral Fees from the Bank’s guaranteesrecorded and as loan credit commitment fees arrangements, inof other Income, income were in $465 the million Consolidatedprior in Statement year. 2014, Detailed compared information to on $434is guarantees million disclosed and in in loan the Note commitments 38pages to 189 the to consolidated 191. financial statements on (2) (2) or Total Total מ exposure exposure 2014 2013 Unfunded Unfunded commitments commitments (1) (1) 171880170 556 395 727 3 1,275 173 assets assets Funded Funded $ 1,486 $ 464 $ 1,950 $ 3,018 $ 1,135 $ 4,153 $ 2,707 $ 1,418 $ 4,125 (3) (3) Assets held by Scotiabank-sponsored Canadian-based multi-seller conduits mortgages 1,112 163 1,275 mortgages higher based on the Bank’snon-investment internal grade rating assets program. held There in were2014. these no Approximately conduits 55% as of at the Octoberfalling funded 31, within assets three have years, final and maturities based the on weighted-average cash repayment flows, period, approximatesthe 1.5 U.S. years. subprime There mortgage is risk no within exposure these to two conduits. Structured finance entities The Bank has interests incorporate structured clients finance in entities accessing used cost-efficient tosecuritization financing assist structures. through The their Bank’s maximumstructured exposure finance to entities loss was from $(October 2,833 31, million 2013 as – at $1,257 Octoberreflects million). 31, an The 2014, increase year-over-year in increase thecustomers. financing needs of the Bank’s corporate Other unconsolidated structured entities The Bank sponsors unconsolidated structuredinsignificant entities or in no which interest it at has when the it reporting is date. significantly The involved Bankinception in is of the a the design sponsor structured and entity, formationstructured and at entity the to Bank’s create name an isbacked awareness used by of by the the the Bank’s instruments reputation being considers and other obligation. factors, The such Bank as also obligations its to continuing determine involvement if, and inBank substance, earned the $1,822 Bank million is income aunconsolidated from sponsor. Bank-sponsored its The structured involvement entities with for the October the 31, year 2014 ended (for the$1,585 year million). ended October 31, 2013 – (1) Funded assets are reflected(2) at original Exposure cost, to which the approximates Bank estimated(3) is fair through value. These global-style assets liquidity are facilities. substantially sourced from Canada. Auto loans/leasesTrade receivablesCanadian residential Equipment loans/leases $ 1,385Total 521 – $ 775 $ 197 2,160 – 718 – Trade receivables Canadian residential Equipment loans/leases Total As at October 31 ($ millions) Auto loans/leases T39 The Bank’s primary exposure toliquidity the support Canadian-based provided, conduits with is total the at liquidity October facilities 31, of 2014 $4.1 (October billionyear 31, decrease as 2013 was – due $4.2 to billion).October normal The 31, business year-over- 2014, operations. total As commercial at Canadian-based paper conduits outstanding was for $2.7 the billion$3.0 (October billion) 31, and 2013 the – Bankpaper held issued less by than these 0.5% conduits. ofpurchased Table the and 39 total held presents commercial by a the summaryas Bank’s of at two assets October Canadian 31, multi-seller 2014 conduits and 2013,All by of underlying the exposure. funded assets have at least an equivalent rating of AA As at October 31 ($ millions) MANAGEMENT’S DISCUSSION AND ANALYSIS
Financial instruments The fair value of the Bank’s financial instruments is provided in Note 7 Given the nature of the Bank’s main business activities, financial to the consolidated financial statements (see pages 141 to 143) along instruments make up a substantial portion of the Bank’s financial with a description of how these amounts were determined. position and are integral to the Bank’s business. Assets that are The fair value of the Bank’s financial instruments was favourable when financial instruments include cash resources, securities, securities compared to their carrying value by $1,918 million as at October 31, purchased under resale agreements, loans and customers’ liability 2014 (October 31, 2013 – favourable $337 million). This difference under acceptances. Financial instrument liabilities include deposits, relates to loan assets, deposit liabilities, subordinated debentures and acceptances, obligations related to securities sold under repurchase other liabilities. The year-over-year change in the fair value over agreements, obligations related to securities sold short, subordinated carrying value arose mainly from changes in interest rates. Fair value debentures and capital instrument liabilities. In addition, the Bank uses estimates are based on market conditions as at October 31, 2014, and derivative financial instruments for both trading and hedging purposes. may not be reflective of future fair values. Further information on how fair values are estimated is contained in the section on critical Financial instruments are generally carried at fair value, except for non- accounting estimates on page 91. trading loans and receivables, certain securities and most financial liabilities, which are carried at amortized cost unless designated Disclosures specific to certain financial instruments designated at fair as fair value through profit and loss at inception. value through profit and loss can be found in Note 9 to the consolidated financial statements (see page 150). These designations Unrealized gains and losses on the following items are recorded in were made primarily to significantly reduce accounting mismatches. other comprehensive income: • available-for-sale securities, net of related hedges, Selected credit instruments – publically known risk items • derivatives designated as cash flow hedges, and Mortgage-backed securities • net investment hedges. Non-trading portfolio Gains and losses on available-for-sale securities are recorded in the Total mortgage-backed securities held as available-for-sale securities as Consolidated Statement of Income when realized. Gains and losses on a percent of the Bank’s total assets is insignificant as at October 31, cash flow hedges and net investment hedges are recorded in the 2014, and are shown in Table 40. Exposure to subprime mortgage risk Consolidated Statement of Income when the hedged item affects in the U.S. is nominal. income. All changes in the fair value of derivatives, including embedded Trading portfolio derivatives that must be separately accounted for, are recorded in the Total mortgage-backed securities held as trading securities represent Consolidated Statement of Income, other than those designated as less than 0.25% of the Bank’s total assets as at October 31, 2014, and cash flow and net investment hedges which flow through other are shown in Table 40. comprehensive income. The Bank’s accounting policies for derivatives T40 Mortgage-backed securities and hedging activities are further described in Note 3 to the consolidated financial statements (see pages 129 and 132). 2014 2013 Interest income and expense on non-trading interest-bearing financial As at October 31 Carrying value Non-trading Trading Non-trading Trading instruments are recorded in the Consolidated Statement of Income as ($ millions) portfolio portfolio portfolio portfolio part of net interest income. Credit losses resulting from loans are recorded in the provision for credit losses. Interest income and expense, Canadian NHA as well as gains and losses, on trading securities and trading loans are mortgage-backed recorded in other operating income – trading revenues. Realized gains securities(1) $ – $ 1,431 $ – $ 733 and losses and writedowns for impairment on available-for-sale debt or Commercial mortgage- equity instruments are recorded in net gain on investment securities backed securities 30 132 2(2) 170(3) within other operating income. Other residential Several risks arise from transacting financial instruments, including mortgage-backed credit risk, liquidity risk, operational risk and market risk. Market risk securities 107 473 127 292 arises from changes in market prices and rates including interest rates, credit spreads, foreign exchange rates, equity prices and commodity Total $ 137 $ 2,036 $ 129 $ 1,195 prices. The Bank manages these risks using extensive risk management (1) Canada Mortgage and Housing Corporation provides a guarantee of timely payment to NHA mortgage- policies and practices, including various Board-approved risk backed security investors. management limits. (2) The assets underlying the commercial mortgage-backed securities in the non-trading portfolio relate primarily to non-Canadian properties. A discussion of the Bank’s risk management policies and practices can (3) The assets underlying the commercial mortgage-backed securities in the trading portfolio relate to Canadian be found in the Risk Management section on pages 65 to 89. In properties. addition, Note 39 to the consolidated financial statements on pages 191 to 200 presents the Bank’s exposure to credit risk, liquidity Collateralized debt obligations and collateralized loan obligations risk and market risks arising from financial instruments as well as the Non-trading portfolio Bank’s corresponding risk management policies and procedures. The Bank has collateralized debt obligation (CDO) and collateralized There are various measures that reflect the level of risk associated with loan obligation (CLO) investments in its non-trading portfolio. CDOs the Bank’s portfolio of financial instruments. For example, the interest and CLOs generally achieve their structured credit exposure by rate risk arising from the Bank’s financial instruments can be estimated investing and holding corporate loans or bonds. Cash-based CDOs and by calculating the impact of a 100 basis point increase or decrease in CLOs are classified as loans and are carried at amortized cost. These are interest rates on annual income, and the economic value of assessed for impairment like all other loans. shareholders’ equity, as described on page 78. For trading activities, As at October 31, 2014, the carrying value of cash-based CDOs and Table 53 on page 79 discloses the average one-day Value at Risk by risk CLOs reported as loans on the Consolidated Statement of Financial factor. For derivatives, based on the Bank’s maturity profile of derivative Position was $87 million (October 31, 2013 – $548 million). The fair instruments, only 12% (2013 – 15%) had a term to maturity greater value was $84 million (October 31, 2013 – $535 million). The year- than 5 years. over-year decline was due primarily to disposals and repayments during Note 10 to the consolidated financial statements (see pages 151 to the year. None of these cash-based CDOs and CLOs are classified as 155) provides details about derivatives used in trading and hedging impaired. Substantially all of the referenced assets of the Bank’s CDOs activities, including notional amounts, remaining term to maturity, and CLOs are corporate exposures, without any U.S. mortgage-backed credit risk and fair values. securities.
52 2014 Scotiabank Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS | GROUP FINANCIAL CONDITION 53 2014 Scotiabank Annual Report The change in the notionalmainly amounts to of trades the that CDO matured soldof during protection CDOs the is was year. due due The to changethe tightening in year. in fair Based credit value on spreads positions thatwidening held occurred of at during relevant October credit 31, spreads 2014,pre-tax in a decrease this 50 of portfolio basis approximately would point $0.3 result million in in a netAll income. of the Bank’s creditentities exposure which to are CDO externally swap or counterpartiesequivalent. internally is The rated to referenced investment assets grade underlyingare the substantially trading all book corporate CDOs exposures,securities. with no mortgage-backed Other As at October 31, 2014,leveraged the loans Bank awaiting has syndication, insignificant auction-rate exposureloans, securities, to monoline Alt-A highly insurance type and investmentsvehicles. in structured investment Positive/ fair value (negative) 2013 Amount Notional $ 2,529$ 1,938 $ 31 $ 8 Positive/ fair value (negative) 2014 $ 2,151$ 1,973 $ 50 $ (4) Amount Notional Collateralized debt obligations (CDOs) CDOs – sold protection CDOs – purchased protection As at October 31 Outstanding ($ millions) T41 Trading portfolio The Bank also holds syntheticstructuring CDOs and in managing its transactions trading with portfolioinstitutions. clients as To and a hedge other result its financial of tradingCDOs exposure, to the other Bank financial purchases institutions, orselling along sells index with tranches purchasing or and/or singlemain name driver credit of default the swaps value (CDSs).Total of The CDOs CDOs purchased and and CDSs sold isTable in changes 41 the in below. trading credit portfolio spreads. are shown in 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 C25 Canadian Banking net income(1) Canadian Banking had net income attributable to equity holders of $2,188 million in 2014. Adjusting for notable $ millions items (refer T44), net income grew by 5% to $2,261 million. This was a result of asset and deposit growth and a 2400 2100 widening margin driven mainly from credit cards, mortgages and credit lines, as well as higher non-interest revenues. 1800 Partly offsetting, were higher provisions for credit losses and expenses. Return on economic equity was 31.0% 1500 1200 compared to 33.4% last year. 900 600 300
1213 14
C26 International INTERNATIONAL BANKING Banking net International Banking had net income attributable to equity holders of $1,492 million, a decrease of $234 million income(1) $ millions from last year. Adjusting for the 2014 notable items and the 2013 net notable gain of $90 million (refer T44), net 2000 income fell by $65 million or 4%. The benefits of strong asset growth in Latin America and the positive impact of 1600 foreign currency translation were more than offset by margin compression, lower contribution from associated 1200 corporations and securities gains, and higher provisions for credit losses and expenses. Return on economic equity 800 was 11.7% compared to 14.2% last year. 400
12 13 14
GLOBAL WEALTH & INSURANCE C27 Global Wealth & Insurance net Global Wealth & Insurance reported net income attributable to equity holders in 2014 of $1,831 million, including income(1) the disposition gain of $534 million. Earnings were primarily driven by strong performance across the Wealth and $ millions Insurance businesses. Wealth business benefited from higher Assets under Management and Assets under 2000 Administration reflecting continued growth in net sales and favourable market conditions. Return on economic 1600 equity was 28.2% compared to 16.7% last year, primarily due to the disposition gain. 1200 800
400
12 13 14
C28 Global Banking & GLOBAL BANKING & MARKETS Markets net Global Banking & Markets reported net income attributable to equity holders of $1,459 million in 2014 in line with income(1) $ millions 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 1800 1500 on economic equity increased to 30.4% from 27.6% last year. 1200 900 600 300
12 13 14
(1) Net income attributable to equity holders.
54 2014 Scotiabank Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS | BUSINESS LINES OVERVIEW 55 – – (1) (43) (49) (43) (49) 428 227 16.1% Total Total Total 1,703 7,737 3,134 2,002 23,604 12,601 $$748 796 $12,305 $ 7,298 $ 7,071 (1) Total Total Employee engagement • 2014 Scotiabank Annual Report & Markets Other & Markets Other & Markets Other Global Banking Global Banking Global Banking & Markets Other Loan loss ratio Global Banking • for income taxes, changes in the collective allowance on performing loans, n operating segment. Corporate adjustments include the net residual in matched & Insurance & Insurance & Insurance 2014 2013 Global Wealth Global Wealth Global Wealth –––62– & Insurance Global Wealth Banking Banking Banking International International International – Productivity ratio Banking • 74 300 1,080 1,563 117 777 489 440 616 (320) International 7,436 7,523 5,046 3,813 (214) $5,690 $5,352 $ 446 $ 728 $ 89 Banking Banking Banking Canadian Canadian Canadian Banking Canadian Return on economic equity • (%) 31.0% 11.7% 28.2% 30.4% – (3) (2) (2) (2) (2) Notable Items Impact of IFRS changes and funds transfer pricing methodology enhancements 2014 financial performance Net income maturity transfer pricing, the elimination ofdifferences the in tax-exempt the income actual gross-up amount reported of in costs net incurred interest and income, charged other to operating the income operating and segments, provision and the impact of securitizations. Capital instrument equity holders – – – – – – Non-controlling interests in subsidiaries – 181 46 – – IFRS changesFunds transfer pricing methodology enhancementsIFRS changesFunds (117) transfer pricing methodology enhancements (10) (109) (57) (36) (9) (38) (13) (44) 222 (29) (8) (32) 2 194 11 (6) 3 (15) (1) TotalTotal (153) (23) (138) (65) (7) (27) (50) 225 (47) 193 Management uses a number of key metrics• to monitor business line performance: KEY PERFORMANCE INDICATORS FOR ALL BUSINESS LINES Operating expenses 3,810 4,330 2,727 1,729 5 Provision for credit lossesProvision for income taxes 661 1,031 2 9 – Total average assets ($ billions) $ 280 $ 139 $ 15 $ 283 $ 79 Total average liabilities ($ billions) $ 193 $ 89 $ 20 $ 209 $ 237 (1) 2013 Notable items relate to International Banking. The following is the impact of the 2014 notable items on Business Line results. ReferFor the also year to ended Table October 3, 31 Page ($ 20 millions) for additional details. T44 For the year ended October 31, 2012 ($ millions) Net fee and commission revenues 1,672 1,460(2) Taxable equivalent basis. See(3) non-GAAP measures Non-GAAP on measure. page Return 17. on equity for the business lines is based on economic equity attributed. See non-GAAP measures 3,364 on page 17. 1,522 (281) For the year ended October 31, 2013 ($ millions) T43 Effective fiscal 2014, the Banklines. enhanced The its enhancements funds included transfer a pricingenhancements transfer methodology result of that in higher is reducing regulatory used the liquiditychanges to net costs, have allocate interest and no interest cost a impact income in reduced on and thepage interest the expense Other 26. value Bank’s to segment The for consolidated the and impact certain results. business reducing of deposit Prior the both types. years net these These amounts interest changes have income on also in net been the income retrospectively business attributable adjusted segments. to for These equity IFRS holders changes is described presented on below: (1) The Other category represents smaller operating segments, including Group Treasury, and other corporate adjustments that are not allocated to a Net income / (loss) fromOther investments operating in income associated corporationsTotal revenue – 411 156 – (139) T42 ($ millions) Net interest income Net income attributable to equity holders of the Bank $2,188 $1,492 $1,831 $1,459 $ 101 Net income attributable to non-controlling interest Return on economic equity Net income $2,188 $1,673 $1,877 $1,459 $ 101 Operating expensesNet income before income taxesIncome taxesNet incomeNet income attributable to equity holders of the Bank $ $ (73) (98) $ $ (79) 36 (88) $ $ 526 604 41 (25) $ (73) $ $ $ (22) (9) (31) (79) 11 $ $ (62) (86) $ 526 $ $ 78 290 301 29 $ $ $ 90 78 (22) 86 (9) $ (62) 203 $ (24) 290 72 $ 11 90 (12) RevenuesProvision for credit losses 62 $ – $ (47) $ 615 $ (2) $ – $ 566 $ 150 MANAGEMENT’S DISCUSSION AND ANALYSIS Canadian Banking
Canadian Banking provides a full suite of financial advice and banking solutions, supported by an Business Profile 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 Canadian Banking provides a full suite of Insurance. financial advice and banking solutions, supported by an excellent customer experience, to over 7.8 million Retail, Small 2014 Achievements Business and Commercial Banking customers. • Delivered an industry leading customer experience It serves these customers through its network – Highest Customer Retention Index of the Big 5 Banks (Source: Hay Research International of 1,040 branches and 3,942 automated Switching Study, 2013) banking machines, as well as internet, mobile – #2 in Share-of-Wallet Among All Financial Institutions (Source: Ipsos Reid, Canadian Financial and telephone banking and specialized sales Monitor, 2014) teams. Canadian Banking also provides an • Completed key milestones to transform Retail Banking alternative self-directed banking solution to – 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 almost 2 million Tangerine customers. financial planning software Canadian Banking is comprised of the – First Canadian bank to launch sales capabilities in our Mobile Banking channel following areas: • Made strides in Business Banking – Achieved strongest growth in net new Small Business customers over the past five years Retail and Small Business Banking – Roynat Equity Partners turned an investment in Pineridge Bakery into a record gain provides financial advice, solutions and day- • Expanded our capabilities in payments, investments and deposits to-day banking products, including debit – Achieved double-digit growth in credit cards cards, chequing accounts, credit cards, – Canadian Banking achieved record mutual fund net sales; ScotiaFunds ranked #1 in market investments, mortgages, loans and related share growth and percentage growth in assets over the past three years (Source: IFIC Data) creditor insurance products, to individuals – Recognized as Best Online Deposit, Credit and Investment Product Offerings in North and small businesses. Tangerine provides America by Global Finance, 2014 internet, mobile and telephone banking to • Strengthened our differentiated core businesses self-directed customers. Continued to lead the automotive lending space with double-digit asset growth – Commercial Banking delivers advice and a – 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 full suite of customized lending, deposit, cash provider of new financial products to Canadian Tire customers as part of a wide-reaching management and trade finance solutions to marketing partnership medium and large businesses, including – Formed a partnership with Rogers providing significant multiplatform brand exposure automotive dealers and their customers that – Awarded the prestigious “Best of Show” from the Sponsorship Marketing Council of Canada we provide retail automotive financing for the Scotiabank Community Hockey Program solutions to. • Continued to be a leader in direct banking through Tangerine – Successfully completed rebrand of ING Direct to Tangerine and nearly doubled ABM footprint Strategy via fee free access to the Scotiabank ABM Network – For the third year in a row, Tangerine ranked “Highest in Customer Satisfaction Among the Canadian Banking remains focused on its Midsize Retail Banks” by J.D. Power and Associates(1) three-year strategy to deliver above average (1) The 2014 study based on 17,183 total responses measuring 17 banks and measures opinions of consumers with their primary banking growth in net income and becoming institution. Proprietary study results are based on experiences and perceptions of consumers surveyed May-June 2014. Visit jdpower.com Canada’s most recommended bank. This will be achieved by providing an excellent customer experience and executing on our T45 Canadian Banking financial performance 2015 strategic priorities. Canadian Banking ($ millions) 2014 2013 2012 will deliver on this by focusing on the customer first and delivering on its 2015 Net interest income(1) $ 5,690 $ 5,419 $ 4,610 Net fee and commission revenues 1,672 1,507 1,477 strategic priorities. Net income from investments in associated corporations – 10 3 Other operating income 74 37 51 2015 Priorities Total revenue(1) 7,436 6,973 6,141 • Enhance our retail product and service Provision for credit losses 661 478 506 delivery to deepen customer relationships Operating expenses 3,810 3,583 3,192 • Align Commercial Banking platform to Income taxes 777 761 642 achieve greater market penetration and Net income $ 2,188 $ 2,151 $ 1,801 become the primary banker for our Net income attributable to non-controlling interest – –3customers Net income attributable to equity holders of the Bank $ 2,188 $ 2,151 $ 1,798 • Accelerate development of payments expertise, capabilities and infrastructure; Key ratios leverage partnerships and rewards to Return on economic equity 31.0% 33.4% 35.9% increase market share Productivity 51.2% 51.4% 52.0% • Expand Tangerine to be the direct bank of Net interest margin(2) 2.09% 2.04% 2.09% Provision for credit losses as a percentage of loans and choice for Canadians’ everyday banking acceptances 0.24% 0.18% 0.23% needs • Find better ways to serve our customers, Selected Consolidated Statement of Financial Position data (average balances) while also reducing structural costs Earning assets $ 277,280 $ 270,059 $ 223,904 • Transform wealth advisory offerings to Total assets 280,055 272,488 224,916 better meet the needs of high net worth Deposits 187,256 181,462 146,689 and mass affluent customers, increase Total liabilities 193,177 185,764 150,434 penetration of proprietary products, and Economic equity $ 6,962 $ 6,320 $ 4,918 strengthen primary banking relationships (1) Taxable equivalent basis. • Build scale and integrate capabilities in (2) Net interest income (TEB) as % of average earning assets excluding bankers acceptances. Global Asset Management
56 2014 Scotiabank Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS | CANADIAN BANKING 57 % 77 13 12 14 12 13 14 Average loans and acceptances Total revenue Total revenue by sub-segment $ billions $ millions $ millions 2014 Scotiabank Annual Report % Commercial loans/acceptances Retail loans (except mortgages) Residential mortgages Commercial Banking Retail & Small Business Banking 23 Retail & Small Business Banking Commercial Banking 50 C31 C29 C30 8000 6000 4000 2000 300 250 200 150 100 Financial Performance Canadian Banking’s net income$73 was million $2,188 (refer million T44), inReturn net 2014. on income Adjusting economic was for equity $2,261 theequity was million, notable was 31.0%. $110 items 32.0% Adjusting million of versus for orgenerated 33.4% the 5% solid last notable higher performances. year. items, than Retail return last and on year. small economic business,Assets and and commercial liabilities banking all Average assets rose $8$2 billion billion or and 3% the fromCanadian run-off last Banking of year. recorded $4 Adjusting a billion foror solid of a 5% growth Tangerine decrease in in broker in residential assets originated securitieswell mortgages, of and of as consumer $14 white $2 auto billion label billion lending, or mortgages, or credit 6%. 6%Average cards This in liabilities and reflects business other rose $12 loans personal $7 billion accounts and loans billion of acceptances. as or $1 4%. billion Retail$2 or banking billion 7% experienced or and solid 5% savings growthliabilities in deposits in increased small of chequing by business $5 $2 and billionbillion billion. commercial or or This banking 10%. 4%. was business There partially operating was offset accounts. also by Other growth a of Revenues decline in lower spread GICsTotal of revenues $3 were $7,436 million, upNet $463 interest million income or increasedgrowth 7% 5% and from to a last $5,690 five year. milliondriven basis and by point was higher increase driven mortgage in byproducts. and the good other margin asset personal to and loan 2.09%. deposit spreads, TheNet as margin fee well increase and as was commission growth primarily primarily revenues in due were credit to $1,672 card strong millionsales, growth in card across 2014, revenues several up and categories, $165 commercial including million creditOther higher or fees. operating fees 11%, income from was mutualinvestment $74 fund securities. million, up $37 million mostly dueRetail to & higher Small net Business gains Banking on Total retail and smallfrom business last banking year. revenues Net weregrowth interest $5,712 in income million, mortgages, grew up credit by $327improvement card $188 million in products million or the and or 6% margin. deposits 4%,reflecting Net as and higher fee well was fees and as primarily from commission an driveninvestments mutual revenues eight by in fund increased basis solid associated sales by point corporations and $125Tire increased higher million Financial by credit or Services $5 card 11%, during million revenues.higher the from Net gains year. the income on Other investment from investment operating in securities. income Canadian rose $9Commercial million, Banking mainly from Total commercial banking revenuesinterest increased income $136 rose million by oraccounts. $83 9% Net million to fee or $1,724 and 7% millioncredit commission due in fees. revenues mainly 2014. Net increased to Net income by growthfrom from $40 in last investments million loans year. in or and This associated 12% businessmainly was corporations mainly operating from more decreased from higher than by higher net offset $15 gains by million on a investment $28Operating securities. million expenses increase in other operatingAdjusting income for the notable$191 item million of or $36 5%, milliongrowth primarily (refer initiatives reflecting T44), and business operating salary growth, expensesafter increases. Tangerine were adjusting Operating brand up for leverage transition notable was costs, items. positive 0.3%, orProvision positive for 1.3% credit losses The provision for creditlast losses year. was Adjusting $661 for million,million, the an an notable increase increase item of of (refer $183to $121 T44), million updated million the from loss due provision $478 parameters mainly for million to to credit capture a losses recent change wasProvision portfolio $599 in for trends asset income for mix taxes credit and cards $26The and million effective auto related tax loans. rate was in lineOutlook with the previous year. The outlook for Canadianacross Banking most in businesses, 2015 primarily iscategories driven anticipated are by to expected auto, remain to credit solid,challenged grow card with by in and good intense line commercial loan competition with loans. growth in in the Other 2015, a industry. loan with low Deposit wider rate growthcommercial, spreads environment. will automotive in The continue and mostly margin to deposit lending is be spreads. products, expectedProvisions partly to for offset improve credit by losses competitivemore are pressures normal expected on loan to loss rise ratio reflecting inThe the Commercial. outlook changing for mix the ofwith Wealth asset continued Management growth solid business and growth remains a Bank’s expected positive, existing from subject customer new to base. customer market acquisition, conditions, Investing and to increa MANAGEMENT’S DISCUSSION AND ANALYSIS International Banking
International Banking provides a full range of financial products, solutions and advice to retail Business Profile and commercial customers in select regions outside of Canada. Starting in 2015, International Scotiabank has an international presence Banking will also include International Wealth Management and Insurance. unmatched by other Canadian Banks. The International Banking business line 2014 Achievements encompasses retail and commercial banking operations in 3 regions outside of Canada. • Acquisition of 51% of Cencosud S.A.’s Financial Services Business in Chile pending This business line has operations in Latin regulatory approval. Cencosud is the largest retailer in Chile and the third largest retailer America, the Caribbean and Central America, in Latin America. The company’s financial services business includes approximately 2.5 and Asia. In partnership with our associated million credit cards and more than US$1.2 billion in outstanding balances in Chile. corporations in China, Curacao, Thailand and • Named the 2014 “World’s Best Consumer Internet Bank in Latin America” in 22 of our Venezuela, a full range of personal and countries by Global Finance magazine. commercial financial services is provided to over 14 million customers through a network • Recognized as a Great Place to Work in Chile, Costa Rica, Dominican Republic, El of close to 3,000 branches and offices, over Salvador, Panama, Peru, Puerto Rico and Mexico. 7,700 ABMs, mobile, internet and telephone • Recognized as one of the Top 100 companies with the best employee talent in Colombia banking, in-store banking kiosks and by Merco (Monitor of Corporate Reputation). specialized sales forces. Named the 2014 Business of the Year in Peru by the Peruvian-Canadian Chamber of • Strategy Commerce. The International Banking strategy is aligned Named the 2014 Bank of the Year in the British Virgin Islands, Guyana, Jamaica and • with the All-Bank priorities, with primary Trinidad Tobago by The Banker magazine. focus on the following: th th • Celebrated Scotiabank Jamaica’s 125 and Scotiabank Trinidad and Tobago’s 60 • Acquiring more sustainable and profitable anniversary this year. primary banking customer relationships anchored with core payments solutions, T46 International Banking financial performance which will ultimately drive more deposits and greater cross-sales across the full- ($ millions) 2014 2013 2012 breadth of the Bank’s solution offerings. Net interest income(1) $ 5,352 $ 4,923 $ 4,456 We are focusing on providing our Net fee and commission revenues 1,460 1,403 1,298 customers with the right practical advice Net income from investments in associated corporations 411 668 385 and the right solutions, through the right Other operating income(1) 300 427 346 channels. Total revenue(1) 7,523 7,421 6,485 • Optimizing our operating model and our Provision for credit losses 1,031 781 613 footprint to improve our customer Operating expenses 4,330 4,138 3,683 experience, lower our structural costs, Income taxes(1) 489 584 463 reduce our complexity and ultimately to be more efficient. Net income $ 1,673 $ 1,918 $ 1,726 • Making leadership a competitive Net income attributable to non-controlling interest 181 192 168 advantage by actively acquiring, Net income attributable to equity holders of the Bank $ 1,492 $ 1,726 $ 1,558 developing and engaging a diverse pool of leaders to deepen our bench strength of Key ratios talent. Return on economic equity 11.7% 14.2% 11.9% Productivity(1) 57.6% 55.8% 56.8% 2015 Priorities Net interest margin(2) 4.00% 4.11% 4.13% Provision for credit losses as a percentage of loans and Aligned to our strategy and in addition to the acceptances 1.01% 0.86% 0.75% growth in our core business, our primary focus is on the following 4 key growth initiatives over Selected Consolidated Statement of Financial Position data the next 3-5 years (average balances) • Revamp our Retail Sales & Delivery Earning assets 133,879 $ 119,899 $ 108,048 Platform to ensure we have a consistent Total assets 139,257 121,085 109,135 customer relationship management and Deposits 69,618 61,741 54,305 origination front-end system across our Total liabilities 89,024 78,460 69,884 franchise to drive greater customer Economic equity $ 12,267 $ 11,629 $ 12,429 relationship management, a better (1) Taxable equivalent basis. customer experience and ultimately more (2) Net interest income (TEB) as % of average earning assets excluding bankers acceptances. 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 MANAGEMENT’S DISCUSSION AND ANALYSIS | INTERNATIONAL BANKING 59 by (1) % 14 26.4 13 13 13 % 12 14 % 63.9 12 12 14 Average loans and acceptances Average earning assets Total revenue Total revenue by region region $ billions $ billions $ millions Residential mortgages Retail loans (except mortgages) Business loans/acceptances 9.7 Caribbean and Central America Caribbean and Central Latin America Asia Caribbean and Central America Caribbean and Central Latin America Asia acceptances Caribbean and Central America Latin America Asia 2014 Scotiabank Annual Report 80 60 40 20 80 60 40 20 140 120 100 (1) Average earning assets excluding bankers C34 C35 C32 C33 8000 7000 120 100 6000 5000 4000 3000 2000 1000 Financial Performance Net income attributable toin equity 2014 holders and was $90 $1,492volume million million. growth last Adjusting and year for the (refer thelower positive T44), notable securities impact net items gains, of income of lower foreign waslosses, $79 contributions currency down which million from translation $65 included associated was million a corporations, offsetfourth or $57 and by quarter. 4%. million higher margin Adjusting Revenue charge provision compression, for from related formore the strong primarily credit than notable to offset items, the by slightly Caribbean lower higher hospitality results earningsAssets portfolio in in and in the both Liabilities the Caribbean Latin due America toAverage and higher assets Asia provision of were for $139or credit billion 8% losses. increased excluding 15%, foreign drivenat currency by 12% translation, strong or primarily retail 8% in and excluding Latin commercial foreign AmericaRevenues loan currency and growth translation. Asia. of Deposit 12% growthTotal was revenues strong of $7,523revenues million increased increased $352 1%. million Adjusting or for 5% notableNet including items interest the in income positive 2014 increased impactMexico. and 9% of This 2013 driven foreign was (refer by currency in T44), solidof translation. part loan the offset growth lowering by and of a theincreased interest 3% acquisition 4% rates decline of to in in Credito $1,460 key theNet Familiar million markets net income in largely and interest from driven changes margin associated by intax-normalized from corporations higher asset basis) 4.11% decreased banking mix. last to by fees Net year 4.00% $257contributions across fee in as million. Latin from and an a Adjusting Thanachart America commission associated result for Bank and revenues corporation, thedecreased in Caribbean. contributions notable by Thailand were gain $127 and down (on million, Banco $54gains a or del million on $80 Caribe with investment million in lower securities excludingmanagement Venezuela. and the purposes, Other lower notable partly operating gains items offset income from (refer by financial T44), higher instrumentsLatin due trading used America mainly revenues. for to asset/liability lower net Total revenues of $4,807excluding million the increased impact 6% of fromreflecting foreign last the currency year, impact translation. driven of Net bycommission strong interest strong revenues asset income loan increased growth rose growth by partly $348from of $39 offset million associated 13%, million, by or corporations or a 11%, was 4% lowerVenezuela. down largely net Other $31 driven interest operating million by margin. income due higher(refer Net decreased to T44), banking fee by a due fees. and $87 lower mainly Net million, contributionnon-strategic to income or from business lower $39 Banco in net million del Peru. gains excluding Caribe on the in investmentCaribbean notable securities and items and Central lower America gainsTotal related revenues to increased the 2% salethe to of positive $1,985 a impact million. of Netoffset foreign interest by currency income a translation. rose 6% A $47deposit, decline modest million payment in 1% or and commercial underlying 3% card assets. growthsecurities largely revenues. Fee in gains due Other and retail and to operating commission assets lower income revenues was recoveries was increased in down byAsia Puerto $33 5% Rico. million due due to partly higher Total to lower revenues were $731associated million, corporation down of 21% $203 versusincome million last rose (on year. by a Adjusting $34 tax-normalized forNet million basis), last income or revenues year’s from 11% were notable associated with up gaincontribution corporations, strong $4 from from adjusted growth million. an Thanachart for in Net Bank the lending interest Xi’an in notable assets in Thailand gain, partially China. was decreased offset only $24 by partly million lower offset asOperating spreads. by a expenses a lower higher contributionOperating from Bank expenses of of $4,330items million of increased $41 $192 million millionThe this or underlying year 5% growth versus from reflected $74 lastand the million year. business negative last Adjusting growth. impact year for Operating of (refer the leverage foreign T44), notable was currency expensesProvision slightly translation, increased for negative inflationary $225 credit at increases million losses -0.7%, or adjustingThe 6%. for provision notable for items. creditportfolio, losses provisions in increased International in Bankingthe line increased acquired with $250 portfolio volume million in growthunsecured to Banco when term $1,031 Colpatria. excluding loans, million. Higher the were In retail benefitwere partly the provisions, of primarily offset retail primarily the higher by in credit in lowerrelating Mexico, mark the provisions mainly and on Caribbean in MANAGEMENT’S DISCUSSION AND ANALYSIS Global Wealth & Insurance
Offers wealth management and insurance products and services to retail and institutional clients Business Profile in Canada and internationally. Global Wealth & Insurance (GWI) provides a comprehensive suite of investment, pensions 2014 Achievements Global Wealth & Insurance and insurance advice, solutions, and • Monetized a significant portion of our investment in CI Financial Corp, resulting in an after tax gain management services to high net worth, of $555 million for the Bank (including $534 million in GWI) mass affluent, affluent, mass market and • Expanded institutional asset management by acquiring the remaining Aurion Capital Management institutional clients, as well as advisors, across shares not already owned by the Bank Scotiabank’s unmatched global footprint. • Achieved record net sales for ScotiaFunds through the Canadian Banking channel for second straight year Global Wealth Management is an integrated • Launched fourteen new products in Dynamic Funds, including nine mandates under Dynamic Private business unit composed of asset Investment Pools, and twenty-two new funds launched across Latin America and the Caribbean management and advisory businesses. Asset • Launched the Global Portfolio Advisory Group (GPAG) to provide industry-leading global investment management business is focused on strategies for both developed and emerging markets investment manufacturing and developing • Expanded insurance distribution and footprint in Canada and the English Caribbean innovative investment solutions for both retail • Opened Vancouver Wealth office, housing a private bank and investment advisors targeting the Asian and institutional investors. Our global client- market facing wealth businesses, including private • Bank of Beijing and Scotia Asset Management Ltd. (BOBSAM) joint venture launched: client, online and full service brokerage, • First fund - the largest money-market fund IPO in China ($1.14 billion raised) pensions, institutional client services and an • First fixed income fund ($57 million during IPO) independent advisor channel, are focused on • Scotiabank Bahamas, Barbados and Cayman Islands ranked #1 by Euromoney for select Private providing advice and solutions to clients in Banking and Wealth Management Services Canada and internationally. • Scotia iTRADE named “top pick” in three categories for 2014 in MoneySense magazine’s ranking of Canada’s online brokerages Global Insurance provides clients with four • Colfondos received the 2014 World Finance Pension Fund Award for best pension fund in Colombia main solutions in Canada: creditor, life and • Profuturo AFP recognized by Bolsa de Valores de Lima as a Top 25 Peruvian company; and by health, home and auto and travel. Universidad del Pacifico Graduate School and El Dorado Investments as “Best Investment Manager Internationally, a full range of insurance 2013” for two pension funds solutions – creditor, non-creditor, life and • Scotia Mutual Funds received three A+ awards (2013 Fundata FundGrade A+ Awards), and Scotia health, and property – are offered through a Fondos (Mexico) received three 5-star rankings in the 2014 “Best Funds” annual ranking, published by S&P and Expansión magazine. number of different Scotiabank channels. Global Transaction Banking (GTB) offers 2014 Achievements Global Transaction Banking comprehensive business solutions – cash • Scotiabank received a Visa Service Quality Performance Award for 2013 for GTB’s Commercial Card Program. management, payment services, electronic banking, business deposits, and trade • Scotiabank GTB won Global Finance magazine’s World’s Best Corporate/Institutional Bank 2014 in 16 Latin American and Caribbean countries. services – on a global basis to Scotiabank’s • Scotiabank was named 2013 Best Partner Bank in Trade and Supply Chain Finance in Europe and small business, commercial and corporate Central Asia by the International Finance Corporation, in recognition of GTB’s innovation and customers. GTB also provides correspondent extensive work to support the growth of emerging market trade. banking products and services to other • GTB Mexico received the 2013 JP Morgan Quality Recognition Award for quality in processing financial institutions globally. The financial international wires. results of this unit are included in Canadian Banking, International Banking and Global T47 Global Wealth & Insurance financial performance Banking & Markets.
($ millions) 2014 2013 2012 Effective November 1, 2014, Global Wealth & Net interest income(1) $ 446 $ 409 $ 442 Insurance businesses were integrated into the Net fee and commission revenues 3,364 2,935 2,469 Bank’s three Business Lines: Canadian Net income from investments in associated corporations 156 230 209 Banking, International Banking, and Global Other operating income(1) 1,080 422 394 Banking & Markets. Total revenue(1) 5,046 3,996 3,514 Provision for credit losses 2 33Global Wealth Management continues to be Operating expenses 2,727 2,411 2,076 Income taxes(1) 440 336 315 a key business unit, reporting jointly to Net income $ 1,877 $ 1,246 $ 1,120 Canadian Banking and International Banking. Net income attributable to non-controlling interest 46 39 25 Canadian Insurance and International Net income attributable to equity holders of the Bank $ 1,831 $ 1,207 $ 1,095 Insurance report to Canadian Banking and International Banking, respectively. Global Key ratios Transaction Banking is now managed by Return on economic equity 28.2% 16.7% 13.5% Productivity(1) 54.1% 60.3% 59.1% Global Banking & Markets. 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.
60 2014 Scotiabank Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS | GLOBAL WEALTH & INSURANCE 61 175 150 125 100 75 50 25 (1) % (1) 3 8 12 13 14 12 13 14 Wealth management asset growth GWI revenue $ millions Total revenue $ billions, as at October 31 2014 Scotiabank Annual Report Assets under administration (left scale) Assets under management (right scale) % Wealth Management Insurance 17 50 400 350 300 250 200 150 100 (1) Excludes CI gain and CI contribution C38 C36 5000 4000 3000 2000 1000 (1) Excludes CI gain and CI contribution C37 Global Wealth & Insurance reportedan net increase income of attributable $624 to million equitygain or holders of 52% of $534 compared $1,831 million to million, and lastthese restructuring year. items charge The and of results the $8 included impact millionincome the of (after attributable disposition lower tax) to income (refer equity as T44). holders abusinesses. Adjusting grew result Growth for by of was 13% the driven due disposition, by toAdministration the higher strong (AUA) underlying Assets performance from net under across higher Management all net (AUM)acquisitions. sales, and Return improved Assets on financial under economic market equity conditionsto was and the 28.2% impact compared of to the 16.7% disposition. last year primarilyAssets due Under Management and Assets UnderAUM Administration of $165 billion increasedmarkets $20 and billion strong or net 13% sales.customer from AUA assets last increased and year, $42 improved driven billion financial by or improved markets. 13% financial to $368Revenues billion driven by new Total revenue increased by $1,050includes million the or disposition 26% gain compared and tothese lower the items, contribution same revenues from period increased CI last by Financialinsurance year. $488 Corp. businesses. This million (CI). The or Adjusting year-over-year 13% growth for acrossacquisitions also wealth of benefited management Colfondos from and and the AFP full Horizonte. yearNet impact interest of income the increased bydeposits. $37 million or 9% primarily dueNet to fee growth and in commission loans revenuesstronger and of mutual $3,364 fund million fees, grew higher byyear brokerage $429 impact revenues, million of increased or acquisitions. insurance 15% income mainly andNet due the income to full from associated corporationsCI. was lower from the prior yearOther due operating to income the of disposition $1,080 of gain million and increased insurance by revenue. $658 Last million year’s mostly results due included toWealth a the Management writedown disposition on investment securities. Total revenue of $4,311 million,for increased the $973 disposition million gain or and 29%13%. lower compared Higher contribution to wealth from last management CI, year. revenues revenuesincreased Adjusting were increased brokerage driven by revenues by $411 and strong million the growth or full in year mutual impact funds, Insurance of acquisitions. Total revenue of $735 million,higher increased insurance $77 premiums million and or favourable 12%approximately claims over 17% experience. last of Insurance year, Global revenues mainly Wealth represent in reflecting Insurance 2013. (excluding CI gain and contribution), the sameOperating as expenses Operating expenses for the yearhigher were volume-related $2,727 expenses million, in an line increaseacquisitions, with of and revenue $316 the growth, million restructuring the mainly charge. fullother due The year expenses to remaining impact to increases of drive were the business inthe growth. remuneration notable Operating and items leverage and was the positivewas lower 13.2%. generally net Adjusting flat. income for from an associated corporation, operatingProvision leverage for income taxes The effective tax rate wasnotable 19.0% gain. compared to 21.2% last year mainly due to lower taxes on the Financial Performance MANAGEMENT’S DISCUSSION AND ANALYSIS Global Banking & Markets
Global Banking & Markets (GBM) provides clients with corporate banking, investment banking Business Profile and capital markets solutions. GBM’s products and services are offered to corporate, government and institutional clients in Canada and in select international countries. Global Banking & Markets conducts the Bank’s wholesale banking and capital markets business with corporate, government and institutional 2014 Achievements clients. GBM is a full-service lender and • Exclusive Financial Advisor to Fortis Inc. on its acquisition of UNS Energy Corporation for investment dealer in Canada and Mexico, and approximately US$4.5 billion. Scotiabank underwrote committed bridge facilities, installment offers a wide range of products and services in receipts and Preference Shares to finance the transaction. the United States, Central and South America, • Scotiabank ranked #1 on the Canadian Equity League tables (January 1st to October 31st, 2014), Bloomberg. and select markets in Europe and Asia. More specifically, GBM provides clients with corporate • 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, lending, equity and debt underwriting, mergers and Bookrunner on HKEI’s US$4.7 billion loan. and acquisitions advisory, as well as fixed • Exclusive Financial Advisor on Baytex Energy Corporation’s $2.8 billion acquisition of Aurora Oil income and equity sales, trading and research, & Gas Limited, Sole Underwriter on $2.8 billion bridge loan and credit facilities, and Lead prime brokerage, securitization, foreign Bookrunner on the $1.5 billion equity financing. exchange, energy and rates hedging, and • Scotiabank is acting as Financial Advisor to Manulife Financial Corporation on its approximately precious and base metals sales, trading and $4.0 billion acquisition of Standard Life plc’s Canadian business and was Sole Bookrunner on storage. 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 Strategy Devon Energy Corporation. Scotiabank acted as Joint Lead Arranger and Joint Bookrunner on a GBM’s goal is to build a diversified and US$1.3 billion term loan and Joint Lead Arranger and Bookrunner on a US$1 billion bridge profitable customer-focused business that loan. delivers best-in-class performance versus our • Mandated Lead Arranger in AUD$3.4 billion facilities for East West Link Stage One PPP, a road construction and operation project in Australia. Canadian peers. GBM seeks to achieve sustainable revenue and net income growth • 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 through a strategy focused on maximizing client markets. relationships both in Canada and internationally, • Exclusive Financial Advisor to Encana Corporation on its US$3.1 billion acquisition of Freeport- and expanding business in high-growth regions McMoRan’s oil and gas properties in the Eagle Ford play of South Texas. outside of Canada where we can leverage the • Joint Bookrunner on Unión Andina de Cementos S.A.A.’s (UNACEM) inaugural U.S. dollar Bank’s strong reputation and existing presence. notes offering, raising US$625 million, the largest ever high yield bond issuance from Peru. • Scotiabank was recognized as the Best Corporate/Institutional Internet Bank in 16 Latin 2015 Priorities American countries (2014), by Global Finance. • Enhancing focus on the client: Improving our • Scotiabank received five Infrastructure Financing awards (2014), by LatinFinance. client coverage model and deepening relationships with our most important client T48 Global Banking & Markets financial performance relationships in Canada and internationally. • Strategic lending and alignment: Extending ($ millions) 2014 2013 2012 credit to targeted clients in a more strategic Net interest income(1) $ 728 $ 787 $ 760 manner and aligning our advisory and capital Net fee and commission revenues 1,522 1,268 1,218 Net income from investments in associated corporations – –1markets businesses with that strategic Other operating income(1) 1,563 1,525 1,525 lending. Total revenue(1) 3,813 3,580 3,504 • Expanding in key regions: While continuing to Provision for credit losses 9 26 30 Operating expenses 1,729 1,589 1,507 grow our competitive position in Canada, we Income taxes(1) 616 510 524 will expand our Latin America and Asia-Pacific Net income $ 1,459 $ 1,455 $ 1,443 business, focusing on select local, regional Net income attributable to non-controlling interest – ––and international clients in core sectors and Net income attributable to equity holders of the Bank $ 1,459 $ 1,455 $ 1,443 priority countries. Key ratios • Focusing on core sectors: Continued focus Return on economic equity 30.4% 27.6% 26.3% throughout our businesses and geographies Productivity(1) 45.3% 44.4% 43.0% Net interest margin(2) (3) 2.10% 2.33% 2.44% on the key sectors of Energy, Mining, Provision for credit losses as a percentage of loans and Infrastructure and Financial Services. acceptances(2) 0.02% 0.07% 0.09% • Improving efficiency and effectiveness: Selected Consolidated Statement of Financial Position data (average balances) Prudently managing expenses and risks Trading assets $ 110,653 $ 102,304 $ 88,236 through global oversight and governance, Loans and acceptances 41,739 39,083 33,873 Earning assets 246,354 221,827 183,526 while enhancing infrastructure and Total assets 282,953 250,309 219,100 operational efficiencies. Deposits 51,395 48,300 46,493 Total liabilities 208,962 188,944 164,783 • Developing a talented workforce and Economic equity $ 4,731 $ 5,151 $ 5,358 leadership: Attracting, developing and (1) Taxable equivalent basis. retaining talent and building global leadership (2) Global Corporate and Investment Banking only. capability with diverse business experience. (3) Net interest income (TEB) as % of average earning assets excluding bankers’ acceptances.
62 2014 Scotiabank Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS | GLOBAL BANKING & MARKETS 63 % 49 14 13 13 13 12 14 12 13 14 12 14 Trading day losses Composition of average earning assets Total revenue Global corporate and investment banking revenue Global capital markets revenuebusiness by line $ millions $ billions $ millions 2014 Scotiabank Annual Report % Energy & Agricultural commodities Metals & Foreign Exchange Equities Fixed income Investment banking Lending Other Trading assets Corporate loans and acceptances Global capital markets banking Global corporate and investment 51 8 6 4 2 50 500 500 10 14 12 C43 C42 C39 C40 C41 2000 1500 1000 2500 2000 1500 1000 250 200 150 100 Global Banking & Markets reportedin net 2014, income a attributable slight to increase equitynet of holders income $4 of grew million $1,459 by from million $26 last million year. or Adjusting 2%The for from diversified the last platform notable year. contributed items to (referlending, record T44), dampened results somewhat in by investment challenges bankingeconomic in and equity the Canadian increased other to capital 30.4% markets from groups. 27.6% Return last on Assets year. and Liabilities Average assets increased by $33earning billion assets or which 13% grew to by $283under $25 billion resale billion this agreements or increased year, 11% comprised by toCorporate mainly $13 $246 loans of billion billion and while this acceptances trading year. also securities Securities grew increased purchased by by $2 $7Revenues billion billion. in the U.S., Canada andTotal Europe. revenues during 2014 wereAdjusting a for record the $3,813 notable million items, comparedcontinues revenues to to grew $3,580 benefit by million from $235 last a million,banking, year. diversified an and products increase the and of Canadian services 7%. lending platform.strong The businesses The results business experienced equities, were record investment partly revenues offset duringprecious by 2014. metals declines These businesses. in the fixed income and,Net to interest a income lesser decreased extent, by the and 7% ongoing to spread $728 compression million, in mainlyloan the due volumes US. to and This lower higher was loan spreads partly origination in offset fees Canadian by corporateNet a lending. fee slight and increase commission in revenue corporate fees of in $1,522 investment million banking rose and by higher 20%, underwriting due feesOther mainly in operating to investment income higher banking increased advisory and bylending equities. 2% improved, to and $1,563 there million. were Equities,results securities commodities in gains and the in Canadian fixed U.S. income lending. business. This was partlyOperating offset expenses by lower Operating expenses increased by 9%expenses to grew $1,729 by million 7%. in Performance-related 2014.along and Adjusting with share-based for higher compensation notable technology, were items, salaries theflat and main adjusting benefits drivers for and the support notable costs. items. Operating leverage was Provision for credit losses The provision for credit lossescurrent was year, $9 lower million provisions in in 2014,Europe the down and United by Canada. States $17 were million somewhat from offset 2013. by In higherProvision the provisions for in income taxes The effective tax rate ofto 29.7% higher was taxes higher in than foreign the jurisdictions. prior year byOutlook 3.7%. This was mainly due In 2015, Global Banking &our Markets diversified will business continue platform. to Growth focusregions will on and be providing by driven stable integrating by net our enhancingchallenges income business our due across in customer to Asia. focus market While in volatility, revenuebusiness all any growth platform impact may and should face by be continued a mitigatedportfolio strong by is focus our expected on highly to ancillary diversified grow customerquality further revenue. of in The the 2015 corporate loan with loan portfolio loanlow. should spreads GBM remain expected will strong to actively and remain manage loancontinued stable. risk loss focus Credit exposures provisions on and are expense work expected management toin to to optimize the remain maintain capital. business a There to leading will position productivity also for ratio, be future while a growth. investing Financial Performance 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 MANAGEMENT’S DISCUSSION AND ANALYSIS | RISK MANAGEMENT 65 tion. rovides c ontrol c e framework and c 2014 Scotiabank Annual Report Risk Risks Risk Capacity Stress Testing Governance us on governan Risk Appetite Policies & Limits c Internal Audit systems. Audit Committee. Strong Risk Culture Risk Appetite Statement Key Risk Appetite Measures Risk Management Tools 3 • fun Independent monitoring and oversight • Fo • and Audit findings reported to management Guidelines Processes & Standards Measuring Monitoring & Reporting Credit Market Liquidity Operational Reputational Environmental Strategic Insurance Credit Market Liquidity Operational e to support c Management Executive management, and in particularExecutive the Officer President and and the Chief Chiefrisk Risk management Officer under (CRO), the are oversight responsibleoversees of for the the Global Board. Risk The Management CRO,reports (GRM) who to division the of President the and Bank, access Chief to Executive the Officer Executive but and alsoand Risk has Chief Committee direct Executive of Officer, the CRO, Board.Bank’s and The senior other President and senior executive executives risk chairstructures management the and committees. key Committee accountabilities are outlined on pageGlobal 66. Risk Management (GRM) GRM is responsible for themanagement design framework, and and application is of independent theunits. of Bank’s It the risk provides Bank’s oversight business offoreign credit, exchange market and (including structural structural interest(including rate), model), liquidity, environmental operational and insurance risks. The Bank’s risk management frameworkwide is basis applied and on consists an of enterprise- three• key elements: Risk Governance, • Risk Appetite, and • Risk Management Tools. tive risk management c agement and other control functions (the second line) provide independent e. f-defence model. Within this model, functional Business Line staff and y development, measurement & c onitoring and control of risk. Internal Audit Department (the third line) p ontrols, oversight & monitoring. c hallenge to the first line c ilitate and monitor the c c tive c omplian c e. c es. c y and ti c c Global Risk Management and Other Control Functions of defen reporting, limits & pra implementation of effe poli 2 • Provide obje • Responsible for poli • Independently fa • Independently • Provide training, tools and advi tivities. c s risk ’ ies. c iated with business a c tivities are within the Bank c ise business judgement to evaluate risk. c Business Line/Corporate Function appetite and risk management poli • Own the risks asso • Exer a • Ensure 1 Effective risk management begins with effective risk governance. The Bank has a well-establishedand risk engaged governance Board structure, of with Directors anmanagement supported active team by and an a experienced centralized senior independent risk of management the group business that lines. is through Decision-making a is number highly of centralized senior and executive risk managementThe committees. Board of Directors The Board of Directors, eitherthat directly decision-making or is through aligned its with committeesappetite. the ensures The Bank’s Board strategies approves and key risk frameworks, risk and policies, on limits a and quarterly riskof basis appetite the receives Bank’s a risk comprehensive profile summary goals. and The performance Bank’s of Internal the Audit portfolioBoard department against (through reports defined the independently Audit to and the effectiveness Conduct of Review the Committee) risk on governance the framework. structure and risk management Risk governance Risk management framework The primary goals of riskof management risk-taking are activities to are ensure consistent thatappetite, with the and the outcomes that Bank’s there strategies is andreward an risk in appropriate order balance to between maximize riskwide shareholder and risk returns. management The framework Bank’s provides enterprise- achieving the these foundation goals. for This framework is subject tothe constant challenges evaluation and to requirements ensure of thatBank the it operates, global meets including markets regulatory in standards whichpractices. and the The industry risk best management programsconform of in the all Bank’s material subsidiaries respectsframework, to although the the Bank’s actual risk execution management different. of For their new programs acquisitions, may or be subsidiary situations has where been control recently of established, a management the programs Bank and, assesses if existing necessary, risk make develops improvements an in action a plan timely to fashion. The Bank’s risk management frameworkmanagement is (the predicated first on line) the incuroversight three-lines-o and and own objective the challenge risks, toassurance while the that Global first control Risk line objectives Man of are defence, achieved as by well the as first m and second lines of defence. Effective risk management is fundamentaland to is the recognized success as of a theto core Bank, strategy deliverable management. in Scotiabank the has Bank’smanagement a overall culture strong, approach where disciplined risk risk managementby is all a of responsibility the shared Bank’sdiversification employees. across A business key lines, aspect geographies, ofand products, this industries. culture is RISK MANAGEMENT MANAGEMENT’S DISCUSSION AND ANALYSIS BANK’S RISK GOVERNANCE STRUCTURE
Executive & Risk Board of Directors & Audit & Conduct Committee Board Committees Review Committee
• Board oversight – Risk appetite, strategies, policies • Audit review – Internal Audit reports independently and limits are subject to Board approval. The Board, President and to the Audit and Conduct Review Committee of the directly or through its committees, receives regular Chief Executive Officer Board on the design and effectiveness of risk management updates on the key risks of the Bank. policies, procedures and internal controls.
Operating Liability Strategic Transaction Risk Policy Human Systems Planning & Committee Committee Investment Committee Committee Investment Policy Committee Committee
Stress Testing Senior Credit Market Risk Operational Risk Reputational Risk Committee Committee(s) Management & Policy Committee Committee Committee
• Senior management committee structure is • Business units are responsible and accountable designed to ensure alignment of business Model Review Insurance Risk for managing risks within their portfolios, and objectives, risk tolerance and resources. Committee Committee are allocated capital in line with their risk profiles.
Executive Committees: Senior Management Committees: Operating Committee: sets the Bank’s key strategies, and following Senior Credit Committees: adjudicate credits within prescribed limits Board approval, directs the execution of those strategies; and executes and establish the operating rules and guidelines for the implementation the Bank’s overall risk strategy and monitors and evaluates the Bank’s of credit policies. Separate committees cover commercial, international ongoing financial performance and how risks are managed across the and corporate counterparties, and Canadian and international retail, Bank. small business, and wealth management. Risk Policy Committee: reviews key risk exposures and risk policies, and Market Risk Management and Policy Committee: oversees and adjudicates risk issues referred by the Senior Credit, Market and establishes standards for market, liquidity and insurance risk Reputational Risk committees. management processes within the Bank, including the review and approval of new products, limits, practices and policies for the Bank’s Liability Committee: provides strategic direction in the management of principal trading and treasury activities. global interest rate risk, foreign exchange risk, liquidity and funding risk, trading and investment portfolio decisions, and capital Operational Risk Committee: promotes an enterprise-wide operational management. risk management framework to ensure operational risks are understood, communicated, and appropriate actions are taken to Strategic Transaction Executive Committee: provides advice, counsel mitigate related losses. and decisions on effective allocation and prioritization of resources with respect to the Bank’s portfolio of businesses, and strategic investments Stress Testing Committee: sets overall direction and makes key including mergers and acquisitions, and divestitures. decisions relating to stress testing activities across the Bank, and guides the design, execution, and results assessment of the Enterprise-wide Systems Planning and Policy Committee: reviews and approves Stress Testing program. significant business initiatives involving system and computing investments in excess of designated executive approval limits. Reputational Risk Committee: upon referral from business lines or risk committees, reviews business activities, initiatives, products, services, Human Investment Committee: reviews and approves all major new transactions or processes and recommends either proceeding or not and changing Bank-wide Human Resources objectives, strategies, proceeding, based on an assessment of reputational risk, to ensure that policies and programs including all compensation matters. As well it the Bank is, and is seen to be, acting with high ethical standards. reviews and approves all senior management appointments and the staffing of key positions. 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 MANAGEMENT’S DISCUSSION AND ANALYSIS | RISK MANAGEMENT 67 Stress Testing & Standards Guidelines, Processes 2014 Scotiabank Annual Report s Tool k Management s Ri strategic investments operational risks other risks brand • Diversity, quality and• stability of earnings Focus on core businesses, with disciplined and• selective Maintain capital adequacy • Dedicated attention to credit, market, liquidity, and • Careful consideration of reputational, environmental, and • No tolerance for reputational risks that could affect our Policies appetite and risk profile. employees, shareholders and other key stakeholders. Scotiabankers. & Limits Reporting Monitoring & Measurement, 1. Maintain appropriate financial strength and liquidity 2. Measure, monitor and manage all aspects of the Bank’s risk 3. Meet the needs and expectations of our4. customers, Ensure a deep, diverse and engaged pool5. of talented Operate in an efficient, secure and compliant manner. Risk management techniques are regularly reviewed and updated to ensure consistency with Risk management techniques are regularly reviewed and updated to of the Bank. risk-taking activities, and relevance to the business and financial strategies • directly or through the Board’sAudit Executive and and Conduct Risk Review Committee Committee or (the Board). model development and stress testingmanagement are and/or approved key by risk executive committees. Policies and Limits Policies Apply to specific types ofmeasure risk and or control to risk the exposure. activitiesrecommendations They that from are are risk based used management, on to internaland audit, senior business executive lines, management. Industryregulatory best requirements practices are and also factoredguided into by the the policies. Bank’s Policies risk are within appetite, which and the set Bank the and limits its and• subsidiaries controls can Key operate. risk policies are approved by the Board of Directors, either • Management level risk policies associated with processes such as Limits Control risk-taking activities within theand tolerances senior established executive by management. the Limits Board key also tasks establish in accountability the for risk-takingunder process which and transactions establish may the be level approved or or conditions executed. Risk appetite is supported by the following Core Deliverables: Risk management tools Effective risk management includes tools thatBank’s are Risk guided Appetite by Framework the and integratedstrategies and with the business Bank’s planning processes. Key Risk Appetite Measures Risk Appetite k Appetite Statement s Ri Risk Capacity 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. • The Bank’s Risk Appetite Frameworkappetite consists statement of and a key risk risk capacity,application appetite risk of measures. the Together, risk appetiterisk statement appetite and measures monitoring help of to therisk ensure key boundaries. the The Bank Bank’s stays Credit withinBank’s Risk appropriate risk Appetite appetite further with defines respect the and to other lending, credit counterparty risks credit (such risk, as investments). Effective risk management requires clear articulationBank’s of risk the appetite and how themanaged Bank’s in risk relation profile to will that be appetite. Risk appetite framework Effective risk management requires a strong,pervasive robust, risk and management culture. The business lines are responsibleof for business the plans development that and are execution framework, aligned and with are the accountable Bank’s for riskand the management managing risks these they risks incur. is Understanding plan. a Business fundamental lines element work of in eachto partnership business ensure with that Global risks Risk arising Management and from appropriately their addressed. business are thoroughly evaluated Risk education programs, and documentedjointly policies available and to procedures staff are in the businessDecision-making lines on and risk Global issues Risk is Management. senior highly and centralized. executive The management membership committees of review, responsible approval for and the monitoring ofexposures, transactions includes and business the line related heads risk Global and Risk senior Management. risk The officers flow from these of committees information keeps and senior transactions and to informed executive of management the well risks therisks Bank are faces, aligned and with ensures the thatsenior Bank’s transactions risk risk and officers appetite. and The business interactionrobust, line between with heads constructive at discussions committee and meetingsparticipants objective is in challenge order by to all fullyapplicable identify to and a address transaction. all relevant risks The Bank’s material incentive compensationreflect programs the are Bank’s structured risk to appetite,order with to a achieve substantial stronger portion alignment deferredactivities. with in The the Bank results also of has risk-taking Conduct a to very which stringent all Guidelines staff forrelated must Business compensation attest is on eligible an for annualbreach claw-back basis. of where Performance- compliance there rules is or athere Guidelines material is for a Business material Conduct, misstatement or of if results in the fiscal year of the grant. Risk management culture MANAGEMENT’S DISCUSSION AND ANALYSIS
Guidelines, Processes and Standards Control and audit functions are also established that are independent Guidelines of the organizations whose activities they review, and whose role includes ensuring that all of the components of the risk management Are the directives provided to implement policies as set out above. framework are effective and being implemented on a day to day basis. Generally, they describe the facility types, aggregate facility exposures and conditions under which the Bank is prepared to do business. Stress testing Guidelines ensure the Bank has the appropriate knowledge of clients, products, and markets, and that it fully understands the risks associated The Bank’s stress testing programs draw upon the principles set out with the business it underwrites. Guidelines may change from time to under guidelines issued by the Office of the Superintendent of Financial time, due to market or other circumstances. Risk taking outside of Institutions, in particular: guidelines usually requires approval of the Bank’s Senior Credit • Guideline A-1 Capital Adequacy Requirements (Chapter 9 Stress Committees, Market Risk Management and Policy Committee, or Risk Testing), Policy Committee. • Guideline E-18 Stress Testing – Sound Business and Financial Processes Practices, and Are the activities associated with identifying, evaluating, documenting, • the Internal Capital Adequacy Assessment Process; reporting and controlling risk. as well as international industry groups, in particular: Standards • the Institute of International Finance (Governance for Strengthened Define the breadth and quality of information required to make a Risk Management), and decision, and the expectations in terms of quality of analysis and • the International Monetary Fund (Macrofinancial Stress Testing – presentation. Processes and standards are developed on an enterprise- Principles and Practices), and wide basis, and documented in a series of policies, manuals and handbooks under the purview of GRM. Key processes cover the review • the Bank for International Settlements Principles for sound stress and approval of new products, model validation and stress testing. testing practices and supervision. Stress testing programs at both enterprise-wide level and individual risk Measurement, Monitoring, and Reporting level allow the Bank to estimate the potential impact on income, capital Measurement and liquidity of significant changes in market conditions, credit GRM is responsible for developing and maintaining an appropriate environment, liquidity demands, or other risk factors. Each program is suite of risk management techniques to support the operations of the developed with input from a broad base of stakeholders, and results various business lines, and for supporting the measurement of are integrated into management decision-making processes for capital, economic capital on an enterprise-wide basis. The risk sections explain funding, market risk limits, and credit risk appetite. Enterprise-wide the application of these techniques. stress testing is also integrated with both the strategic and financial Risk measurement techniques include the use of models and stress planning processes. The development, approval and on-going review of testing. The Bank uses models for a range of purposes including the Bank’s stress testing programs are subject to formalized policy, and estimating the value of transactions, risk exposures, credit risk ratings are under the oversight of the Stress Testing Committee. and parameters, and economic and regulatory capital. The use of The following highlight some of the key stress tests that have been quantitative risk methodologies and models is balanced by a strong performed: governance framework and includes the application of sound and • Domestic Retail: The Bank performed a stress test involving a experienced judgement. The development, independent review, and historically unprecedented deterioration in credit quality of domestic approval of models are subject to formalized policies where applicable, households and firms (including a decline of at least 6.6% in real including the oversight of senior management committees such as the GDP, an unemployment rate of 13.3% and a drop in housing prices Model Review Committee for market risk (including counterparty credit of up to 40% with further 20% reductions in Toronto and risk) and liquidity risk models. Vancouver). Regular Monitoring • International: Stress tests conducted include a political and economic Ensures that business activities are within approved limits or guidelines, crisis in Latin America, widespread impairment of Euro nations and are aligned with the Bank’s strategies and risk appetite. Breaches, (including a disorderly default), and a deflationary Asia crisis. if any, of these limits or guidelines are reported to senior management, Despite the severity of the stress tests detailed above, the Bank policy committees, and/or the Board depending on the limit or remained profitable in every instance, throughout the duration of each guideline. stress scenario. Risk Reports Including consideration of a variety of operational risk, strategic risk, Aggregate measures of risk across products and businesses, and are and broad economic stress scenarios, the Bank’s 2014 Enterprise-wide used to ensure compliance with policies, limits, and guidelines. They Stress Testing program made it clear that the Bank’s combination of also provide a clear statement of the amounts, types, and sensitivities adequate capital ratios, credit risk profile, and diversified earnings base of the various risks in the Bank’s portfolios. Senior management and would make it challenging to construct stress scenarios based on the Board use this information to understand the Bank’s risk profile and traditional credit, market, and operational risks that would be of the performance of the portfolios. sufficient severity to question the Bank’s solvency.
68 2014 Scotiabank Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS | RISK MANAGEMENT 69 2014 Scotiabank Annual Report by customer risk rating and security cover); default risks); and readily sold or pledged; horizon; and geographic market. operational risk, regardless of whatever theoutsourced risk to is a internal third to party; the Bank or limit and by comparison ofbenchmark. Bank operational losses with an industry activities, initiatives, products, services, transactions orlack processes, of or suitability from of a products for clients. Quantitative limits/tolerances: • Exposure to a single customer or group of related parties• (limits differentiated Country risk (exposure limits to control transfer/cross-border and sovereign • Industry concentrations (exposure and risk adjusted concentration limits). Quantitative limits/tolerances, such as various VaRand limits, debt investment stress test exposures, results, and equity structuralexchange interest exposures. rate and foreign Quantitative limits/tolerances, such as: • Appropriate hold levels of unencumbered high quality liquid assets that• can be Limits to control the maximum net cash outflow over specified• short-term Diversification of funding by source, type of depositor, instrument, term and • Systematic identification, measurement, mitigation and monitoring of • Minimization of residual operational risk;• and Expressed quantitatively by an aggregate loss event limit, a single event loss • Low tolerance for reputational, legal, or taxation risk arising in business financing only to those projectsand whose borrowers willingness can to demonstrate comply their with ability projects comprehensive are processes developed aimed at in ensuring a that environmental socially management responsible practices. manner and according to sound Strategy report considers linkages between thewith Bank’s the Risk enterprise Appetite strategy, business Framework linestrategies; strategies also and incorporates corporate linkages function to measuringpriorities progress and against implementation. strategic Maintain minimal exposure to insuranceis risk; on where insurance a risks selective are basis taken,assumed to it is achieve diversified stable geographically and sustainable andterm. earnings, by the product, and risk the majority is short- Credit Risk Appetite Collective Allowance Policy for Performing Loans Residential Mortgage Underwriting Policy Management Policy Liquidity Risk and Collateral Management Policy Policy and Framework Internal Control Policy Fiduciary Risk Management Policy Model Risk Management Policy New Products and Services Risk Management Compliance Policy Guidelines for Business Conduct Board of Directors Framework Operational Risk Operational Risk Management Reputational Risk Reputational Risk Policy Environmental Risk Environmental PolicyStrategic Risk Consistency with the Equator Principles by Annual requiring Strategy provisioning Report of to project the Insurance Risk Insurance Risk Policy and Risk TypeCredit Risk Governing Documentation Credit Risk Policy Application to Risk Appetite Market Risk Market and Structural Risk Liquidity and Funding Risk Other Risks Principal risk types The principal risk types, their governing documentation, and their applicability to risk appetite are outlined in the table below. MANAGEMENT’S DISCUSSION AND ANALYSIS
T50 Exposure to risks arising from the activities of the Bank’s businesses
The Bank
Business Canadian International Global Wealth Global Banking Other lines Banking Banking & Insurance & Markets
• Deposits • Deposits • Asset management • Corporate lending • Group Treasury • Accounts • Accounts • Financial advisory • Equity and debt • Other control services services • Insurance - creditor, underwriting functions • Credit and • Credit and life, health, home, • M&A advisory lending lending auto, and travel services • Commercial banking • Commercial banking • Online brokerage • Capital markets Business products & services activities • Payments and cash • Payments and cash • Account services management management • Credit and lending • Foreign exchange • Advisory services • Advisory services • Precious metals • Creditor insurance • Creditor insurance
Balance • Average assets $280 bn • Average assets $139 bn • Average assets $15 bn • Average assets $283 bn • Average assets(1) $79 bn sheet
• Economic Equity $7.0 bn • Economic Equity $12.3 bn • Economic Equity $6.4 bn • Economic Equity $4.7 bn • Economic Equity $4.3 bn • Proportion of Bank 20% • Proportion of Bank 35% • Proportion of Bank 18% • Proportion of Bank 14% • Proportion of Bank 13%
Economic Comprised of: Comprised of: Comprised of: Comprised of: Comprised of: equity(2) • Credit risk 49% • Credit risk 42% • Credit risk 6% • Credit risk 59% • Credit risk 3% • Market risk 11% • Market risk 10% • Market risk 6% • Market risk 15% • Market risk 63% • Operational risk 8% • Operational risk 9% • Operational risk 6% • Operational risk 14% • Operational risk 2% • Other(3) 32% • Other(3) 39% • Other(3) 82% • Other(3) 12% • Other(3) 32%
• RWA $88.5 bn • RWA $110.0 bn • RWA $12.4 bn • RWA $93.5 bn • RWA $8.1 bn • Proportion of Bank 28% • Proportion of Bank 35% • Proportion of Bank 4% • Proportion of Bank 30% • Proportion of Bank 3% Risk- weighted Comprised of: Comprised of: Comprised of: Comprised of: Comprised of: assets(4) • Credit risk 88% • Credit risk 89% • Credit risk 60% • Credit risk 76% • Credit risk 100% • Market risk - % • Market risk 1% • Market risk - % • Market risk 17% • Market risk - % • Operational risk 12% • Operational risk 10% • Operational risk 40% • Operational risk 7% • Operational risk - %
Risk Credit, market, liquidity, operational, reputational, environmental, strategic and insurance risk. profile
(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 MANAGEMENT’S DISCUSSION AND ANALYSIS | RISK MANAGEMENT 71 28 191 2014 Scotiabank Annual Report C17 International retail portfolio – delinquent loans as a % ofC19 total and loans in household andT66 business Loans lending and – acceptances loans by and geography acceptances 28 T41 Collateralized debt obligations (CDOs) 30 98 53 T15 Impaired loans by businessC13 line Credit losses – provisionsacceptances against impaired loans asC14 a Net % impaired of loan average ratioC15 loans as Gross & a impaired % loans of asT67 loans a Gross and % impaired acceptances of loans equity byT68 & geographic Provision allowances segment against for impaired credit loansT69 losses by Cross-border geographic exposure segment to selectT70 countries Loans and acceptances byT71 type Off of balance-sheet borrower credit instrumentsT72 Changes in net impairedT73 loans Provision for credit lossesT74 Provision for credit lossesT75 against Impaired impaired loans loans by by typeT76 type of Total of borrower 28 credit borrower risk exposuresT77 by AIRB geography credit risk exposuresT78 by Total maturity credit risk exposures 28 andAnalysis risk-weighted of assets the aggregate creditthe risk Bank’s exposure insurance including subsidiaries market andsheet 99 risk other (refer exposure, assets Note assets that 39 of fully –financial reconciles Financial statements) to instruments the – balance risk 102 management in 28 the 99 consolidated 99 100 100 104 101 103 103 102 103 Page Tables and charts Page Traditional Non-Retail ProductsCommercial/Corporate Real Estate 73 73 Risk ratingsAdjudicationCredit Risk Mitigation-Collateral/SecurityCredit Risk Mitigation-Collateral/SecurityAdjudicationRisk ratingsCredit Risk Mitigation-Collateral/Security 73 74 74 72 72 74 74 Risk measuresCorporate and commercialTraded productsRetailProvision for credit lossesAllowance 72 for credit lossesImpaired loans 72 73 27 28 T12 74 Provisions T13 against Provision impaired for loans credit by losses business as line a percentage of average loans and acceptances 29 T14 Net charge-offs as a percentage of average loans and acceptances 27 27 27 Acquisition-related purchased loansPortfolio reviewRisk diversificationRisk mitigationOverview of loan portfolioResidential mortgagesLoans to Canadian condominium developersEuropean exposures 29 Financial instruments 31 29 T21 Bank’s C16 exposure Canadian distribution retail by 29 portfolio country – delinquent loans C18 as Well a diversified % in of Canada total and loans internationally 30 – loans and acceptances T19 European exposure 30 30 T20 Funded exposures 52-53 31 T40 T22 Mortgage-backed Indirect securities exposures 30 28 32 31 52 32 33 Credit risk summaryCredit Risk Management Framework Credit Quality 72 27 T2 Financial highlights 18 Index of all credit risk disclosures Credit risk is the riskthe of Bank. loss Credit resulting risk from arises thecounterparties in failure have the of repayment Bank’s a or direct borrower other lending or obligations operations, counterparty to and to the in honour Bank. its its funding, financial investment or and contractual trading obligations activities to where Credit risk MANAGEMENT’S DISCUSSION AND ANALYSIS
Credit risk summary are also used to mitigate the risk of loss due to borrower default. Risk is • Loans and acceptances (Retail and Non-Retail) remained diversified also mitigated through the selective sale of loans. by region, industry and customer. Regional exposure is evenly spread Banking units and Global Risk Management regularly review the across our key markets (Canada 69.0%, United States 5.4%, Mexico various segments of the credit portfolio on an enterprise-wide basis to 3.7% and Other 21.9%). Our largest industry exposure is to Financial assess the impact of economic trends or specific events on the Services, which constitutes 5.1% of overall gross exposures (before performance of the portfolio, and to determine whether corrective consideration of collateral) and was $22 billion, a decrease of $2 action is required. These reviews include the examination of the risk billion from October 31, 2013. These exposures are predominately to factors for particular products, industries and countries. The results of highly rated counterparties and are generally collateralized. these reviews are reported to the Risk Policy Committee and, when • The Bank’s overall loan book as of October 31, 2014 increased to significant, to the Board. $434 billion versus $413 billion as of October 31, 2013, with growth in the portfolio mainly driven by Personal, and Business and Risk measures Government Lending. Residential mortgages were $213 billion as at The credit risk rating systems support the determination of key credit October 31, 2014, with 90% in Canada. The corporate loan book, risk parameter estimates which measure credit and transaction risk. which accounts for 32% of the total loan book, is composed of 61% These risk parameters – probability of default, loss given default and of loans with an investment grade rating as of October 31, 2014, exposure at default are transparent and may be replicated in order to unchanged from October 31, 2013. provide consistency of credit adjudication, as well as minimum lending The effective management of credit risk requires the establishment of standards for each of the risk rating categories. The parameters are an an appropriate credit risk culture. Key credit risk policies and appetite integral part of enterprise-wide policies and procedures encompassing statements are important elements used to create this culture. governance, risk management, and control structure, and are used in various internal and regulatory credit risk quantification calculations. The Board of Directors, either directly or through the Executive and Risk Committee (the Board), reviews and approves the Bank’s Credit Risk The Bank’s credit risk rating system is subject to a rigorous validation, Appetite and Credit Risk Policy on an annual basis: governance and oversight framework. The objectives of this framework are to ensure that: • The objectives of the Credit Risk Appetite are to ensure that: • Credit risk rating methodologies and parameters are appropriately – target markets and product offerings are well defined at both the designed and developed, independently validated, and regularly enterprise-wide and business line levels; reviewed; and – the risk parameters for new underwritings and for the portfolios as • The review and validation processes represent an effective challenge a whole are clearly specified; and to the design and development process. – transactions, including origination, syndication, loan sales and Non-retail credit risk rating methodologies and parameters are hedging, are managed in a manner that is consistent with the reviewed and validated at least annually. Units within Global Risk Bank’s risk appetite. Management are responsible for design and development, validation • The Credit Risk Policy articulates the credit risk management and review, and are functionally independent from the business units framework, including: responsible for originating transactions. Within Global Risk Management, they are also independent from the units involved in risk – key credit risk management principles; rating approval and credit adjudication. – delegation of authority; Internal credit risk ratings and associated risk parameters affect loan – the credit risk management program; pricing, computation of the collective allowance for credit losses, and return on economic capital. – counterparty credit risk management for trading and investment activities; Corporate and commercial – aggregate limits, beyond which credit applications must be Corporate and commercial credit exposure arises in Canadian Banking, escalated to the Board for approval; and International Banking, Global Wealth Insurance and Global Banking & – single name/aggregation exposures, beyond which exposures must Markets business lines. be reported to the Board. Risk ratings Global Risk Management develops the credit risk management The Bank’s risk rating system utilizes internal grade (IG) codes – an framework and policies that detail, among other things, the credit risk 18 point scale used to differentiate the risk of default of borrowers, rating systems and associated parameter estimates; the delegation of and the risk of loss on facilities. The general relationship between the authority for granting credit; the calculation of the allowance for credit Bank’s internal borrower IG codes and external agency ratings is shown losses; and the authorization of write-offs. in Table 32 on page 47. Corporate and commercial credit exposures are segmented by country IG codes are also used to define credit adjudication authority levels and by major industry group. Aggregate credit risk limits for each of appropriate to the size and risk of each credit application. Lower-rated these segments are also reviewed and approved annually by the Board. credits require increasingly more senior management involvement Portfolio management objectives and risk diversification are key factors depending upon the aggregate exposure. Where the decision is beyond in setting these limits. their authority levels, credit units will refer the request – with its Consistent with the Board-approved limits, borrower limits are set recommendation – to a senior credit committee for adjudication. Senior within the context of established lending criteria and guidelines for credit committees also have defined authority levels and, accordingly, individual borrowers, particular industries, countries and certain types forward certain requests to the Risk Policy Committee. In certain cases, of lending, to ensure the Bank does not have excessive concentration in these must be referred to the Executive and Risk Committee of the any single borrower, or related group of borrowers, particular industry Board of Directors. sector or geographic region. Through the portfolio management Adjudication process, loans may be syndicated to reduce overall exposure to a single name. For certain segments of the portfolio, credit derivative contracts Credit adjudication units within Global Risk Management analyze and evaluate all significant credit requests for corporate and commercial
72 2014 Scotiabank Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS | RISK MANAGEMENT 73 2014 Scotiabank Annual Report i. comparableii. sales approach replacement costiii. approach income approach margins are applied to compensatecapped (e.g. at accounts 80% receivable of are value,valuations inventory is at also 50%). increased The when frequencydeteriorating early of financial warning collateral condition signals are of identified. a Borrower’s Borrowers are required to confirmconfirmation adherence of to collateral covenants values including onthe a Bank periodic to basis, provide which early aredeterioration. warning used Periodic signals by inspections of of collateral physical value where collateral appropriate are and performed where reasonableavailable. means of doing so are Bank procedures require verification includingofficers certification during by initial, Banking annual, andvalues/margins/etc. periodic have reviews, been that assessed collateral and,have where been necessary, taken steps to mitigate anyThe decreased Bank collateral does values. not usevaluation automated purposes. valuation Global models Risk (AVMs) Management for valuations (GRM) of performs companies its based own ondiscounted various book factors value, such enterprise as value book etc. value, Commercial/Corporate Real Estate New or updated appraisals arefacility, generally as obtained well at as inception during ofTroubled Loan a Debt Modifications, new Restructure. Loan The Workouts primary and appraisal reason is for if, requiring in a the new or reasonable GRM opinion Real of Estate, the there BankingAdditionally, has Execution none been Unit, of a the material appraisal changepolicies guidelines in should contained value. dissuade within the the Bankfrequently from if requesting an an adverse appraisal change more credit in worthiness, market of conditions, other sponsorship, underwritingexpected. assumptions is realized or Appraisals must be in writingand and analysis must to contain support sufficient the information Moreover, Bank’s in decision rendering to an make opinion theparty of loan. appraisers the are property’s responsible market for value,necessary establishing third to the develop scope credible of assignment work meet results. the The regulatory appraisal and must industrythe requirements type which, of depending property on beingfollowing appraised, three contain approaches any to or value: all of the The appraiser should disclose thevaluation rationale approach. for Furthermore, the the omission appraiser ofthe must any subject disclose property whether was physicallyprovided inspected significant and assistance whether to anyone thereport. person The signing report the should appraisal containassumptions a used presentation in and determining explanation value ofmentioned under the approaches. each of the above Review of every appraisal isReal conducted Estate by to the confirm banking that unitsissues the and for appraisal GRM the identifies specific all asset ofand class, the incorporates location relevant all and appropriate economic valuation environment assumptions. methodologies In and most cases, theproperties banking in units addition also to include what comparable justify is value. included in the appraisal toWhen further third party assessors aresatisfactory used, to they the must Bank. be In accreditedvaluations addition, and via GRM internal validates desktop any estimates thirdor either party discounted based income on valuations. comparables Traded products Traded products are transactions suchcommodities, as repurchase/reverse derivatives, repurchase foreign agreements, exchange, andlending/borrowing. securities Credit risks arising fromdetermined traded with products certainty cannot at be the outset, because during the tenure of a ses a risk-adjusted return on equity statistics; Credit Risk Mitigation – Collateral/Security Traditional Non-Retail Products (e.g. OperatingTerm lines Loans) of Credit, Collateral values are accurately identifiedthe at tenure the of outset a and transaction throughout methodologies. by Collateral using valuation standard estimates evaluation arefrequency conducted that at is a appropriate tovalue the fluctuates, frequency using by the which collateral the type market andIn the addition, Borrower when risk it profile. iscollateral not (e.g. cost accounts effective receivable, to inventory), monitor appropriate highly lending volatile profitability model to ensure thatan the appropriate client return and for transaction a structureand given offers the level large of borrowers risk. in ForGroup International, the reviews the corporate the Loan portfolio, profitability Portfolio model Management benchmarks, results, and together provides with an external opinioneach on transaction the above relative a return minimum and threshold. pricing of Individual credit exposures are regularlyline monitored units by and both Global the Risk business addition, Management a for review any and signs risk ofannually, analysis deterioration. or of In more each frequently borrower for isof higher-risk conducted management, borrowers. an If, account in requires theworkouts the judgement and expertise restructurings, of it specialists will in group be for transferred monitoring to and a resolution. special accounts credit exposures, to ensure thatapproved, risks continually are monitored adequately and assessed, actively properly making managed. process The begins decision- with anindividual assessment borrower of or the counterparty. credit Key riskassessment factors of include: considered the in the • The borrower’s management; • The borrower’s current and projected financial results and credit • The industry in which the• borrower operates; Economic trends; and • Geopolitical risk. Based on this assessment, aborrower risk or rating counterparty, is using assigned the to Bank’s the riskA individual rating separate systems. risk rating isconsideration also additional assigned factors, at such the as facilitystructure, security, level, term seniority taking and of into any claim, otherthe forms amount of of credit potential risk loss mitigationSecurity in that typically the affect takes event the of form areal of default estate, charges of and over the operating inventory, facility. assets receivables, commercial when borrowers; lending and to cash corporate or and securities treasuries lending, for repurchase trading transactions, lines and suchof derivatives. as acceptable The collateral, types and relateddocumented valuation in processes risk are management policies and manuals. Other forms of credit riskin mitigation the include case third of party derivatives guarantees facilities, and, masterInternal netting borrower agreements. and facility riskfirst ratings authorized, are and assigned are when promptly anecessary, re-evaluated facility as and is a adjusted, result if ofor changes business to prospects. the Re-evaluation customer’s is financialin an condition the ongoing context process, of and general isprospects, economic done and changes, event specific risks, industry suchfinancial as results revised and financial extraordinary projections, announcements. interim Management Global is Risk the final arbiter of internalThe risk internal ratings. credit risk ratingsadjudication are limits, also as considered guidelines as for partratings. hold of Single levels the borrower are Bank’s limits tied are tothan much different low lower risk risk for borrowers. higher risk borrowers The credit adjudication process also u MANAGEMENT’S DISCUSSION AND ANALYSIS transaction the dollar value of the counterparty’s obligation to the Bank early identification of problem loans. The Bank’s rigorous credit will be affected by changes in the capital markets (such as changes in underwriting methodology and risk modeling in Canada is more stock prices, interest rates, and exchange rates). The Bank adjudicates customer focused than product focused. The Bank’s view is that a credit exposures arising from transacting in traded products by customer-centric approach provides better risk assessment than considering their current fair value plus an additional component to product-based approaches, and should result in lower loan losses over reflect potential future changes in their mark-to-market value. The time. The adjudication system calculates the maximum debt for which a credit adjudication process also includes an evaluation of potential customer qualifies, allowing customers to choose the products that wrong way risk, which arises when the exposure to a counterparty is satisfy all of their credit needs. International Banking uses a similar positively correlated to the probability of default of that counterparty. approach to risk modeling, adjudication and portfolio management. Credit risk associated with traded products is managed within the same All credit scoring and policy changes are initiated by units within Global credit adjudication process as the lending business. The Bank considers Risk Management that are functionally independent from the business the credit risk arising from lending activities, as well as the potential units responsible for retail portfolios. Risk models and parameters are credit risk arising from transacting in traded products with that also subject to independent validation and review from the units counterparty. involved in the design and development of models. The review process includes referral to the appropriate Senior Credit Committee for Credit risk mitigation – collateral/security approval, where required. Consumer credit portfolios are reviewed Derivatives are generally transacted under industry standard monthly to identify emerging trends in loan quality and to assess International Swaps and Derivatives Association (ISDA) master netting whether corrective action is required. agreements, which allow for a single net settlement of all transactions covered by that agreement in the event of a default or early Risk ratings termination of the transactions. ISDA agreements are frequently The Bank’s consumer risk rating systems are oriented to borrower or accompanied by an ISDA Credit Support Annex (CSA), the terms of transaction risk. Each retail exposure is assigned a risk grade based on which may vary according to each party’s view of the other party’s the customer’s credit history and/or internal credit score. The Bank’s creditworthiness. CSAs can require one party to post initial margin at automated risk rating systems assess the ongoing credit-worthiness of the onset of each transaction. CSAs also allow for variation margin to individual customers on a monthly basis. This process provides for be called if total uncollateralized mark-to-market exposure exceeds an meaningful and timely identification and management of problem agreed upon threshold. Such variation margin provisions can be one- loans. way (only one party will ever post collateral) or bilateral (either party The overall risk ratings system under AIRB approach is subject to may post depending upon which party is in-the-money). The CSA will regular review with ongoing performance monitoring of key also detail the types of collateral that are acceptable to each party, and components. Risk model validations are conducted independently from the haircuts that will be applied against each collateral type. The terms the areas responsible for rating system development and of the ISDA master netting agreements and CSAs are taken into implementation, to ensure effective independence. consideration in the calculation of counterparty credit risk exposure. Customer behavior characteristics which are used as inputs within the For derivative transactions, investment grade counterparties account for Bank’s Basel III AIRB models are consistent with those used by the approximately 92% of the credit risk. Approximately 63% of the Bank’s Canadian consumer risk rating systems. The International Bank’s derivative counterparty exposures are to bank counterparties. portfolios are subject to the Standardized approach at this time. After taking into consideration, where applicable, netting and collateral arrangements, no net credit risk amount arising from traded products Credit risk mitigation – collateral/security transactions with any single counterparty was considered material to The property values for residential real estate secured exposures are the financial position of the Bank as at October 31, 2014. No individual confirmed at origination through either an AVM or a full appraisal (in- exposure to an investment grade bilateral counterparty exceeded person inspection). The appraisal is completed by a third party, Bank $1,020 million and no individual exposure to a corporate counterparty approved appraiser. For monitoring of material portfolios, property exceeded $585 million. values are indexed quarterly to house prices. For loan impairment Retail within the material portfolios, residential property values are re- confirmed using third party AVM’s. Retail credit exposure arises in the Canadian Banking, International and Wealth Management business lines. Where AVM values are used, these AVM values are subject to routine validation through a continuous random sampling process that back- Adjudication tests AVM values against available property appraisals (primarily third The decision-making process for retail loans ensures that credit risks are party AVMs). Where third party appraisals are obtained, the Bank relies adequately assessed, properly approved, continually monitored and on the professional industry accreditation of the appraiser. Samples of actively managed. Generally, credit decisions on consumer loans are approved appraisal reports are reviewed by the Bank’s senior appraisers processed by proprietary adjudication software and are based on risk to ensure consistent appraisal quality and satisfactory appraisal values. ratings, which are generated using predictive credit scoring models. The third party appraisers are selected from a pre-approved list of Bank- vetted appraisers. The Bank’s credit adjudication and portfolio management methodologies are designed to ensure consistent underwriting and
74 2014 Scotiabank Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS | RISK MANAGEMENT 75 2014 Scotiabank Annual Report T51 Interest rate gapT52 Structural interest rate sensitivityC45 Trading revenue distributionC46 Daily trading revenue vs. VaRT20 Funded exposuresT21 Bank’s exposure distribution by countryT41 Collateralized debt obligations (CDOs) 78 78 79 79 32 53 32 Page Tables and charts Page Foreign currency riskInvestment portfolio risksDerivativesStructured transactions 78 78 80 80 Interest rate riskCredit spread riskForeign currency riskEquity riskCommodity riskValue at riskIncremental risk charge andrisk the measure comprehensive Stress testingSensitivity analysisGap analysisInterest rate 76 76 risk 76 76 76 76 77 76 77 77 77-78 C44 Interest rate gap 78 Trading market riskMarket risk linkage to balance sheetDerivative instruments and structured transactionsEuropean exposures 80 Market riskFinancial instruments 80 T54 Market 78-79 risk linkage to balance T53 sheet Total of one-day the VaR Bank by risk factor 31-33 T19 European exposure 52-53 T40 Mortgage-backed securities 80 49 T37 Total market risk capital 79 31 52 49 Index Market risk factorsMarket risk governanceRisk measurement summaryValidation of market risk modelsNon-trading market risk 76 76 76 77 Index of all market risk disclosures Market risk is the risk ofexchange loss rates from and changes commodity in prices), market thedisclosures: prices correlations and between rates them, (including and interest their rates, levels credit of spreads, volatility. equity Below prices, is foreign an index of market risk Market Risk MANAGEMENT’S DISCUSSION AND ANALYSIS
Market risk factors MRMPC establishes specific operating policies and sets limits at the product, portfolio, business unit and business line levels, and for the Interest rate risk Bank in total. Limits are reviewed at least annually. The risk of loss due to changes in the level and/or the volatility of Global Risk Management provides independent oversight of all interest rates. This risk affects instruments such as, but not limited to, significant market risks, supporting the MRMPC and LCO with analysis, debt securities, loans, mortgages, deposits and derivatives. risk measurement, monitoring, reporting, proposals for standards and Interest rate risks are managed through sensitivity, gap, stress testing, support for new product development. To ensure compliance with annual income and VaR limits and mitigated through portfolio policies and limits, market risk exposures are independently monitored diversification and hedges using interest rate derivatives and debt on a continuing basis, either by Global Risk Management, the back securities. offices, or Finance. They provide senior management, business units, the LCO, and the MRMPC with a series of daily, weekly and monthly Credit spread risk reports of market risk exposures by business line and risk type. The risk of loss due to changes in the market price and volatility of The Bank uses a variety of metrics and models to measure and control credit, or the creditworthiness of issuers. This risk is mainly market risk exposures. These measurements are selected based on an concentrated in loan and debt securities portfolios. Risk is managed assessment of the nature of risks in a particular activity. The principal through sensitivity, jump-to-default, stress testing and VaR limits and measurement techniques are Value at Risk (VaR), Incremental Risk mitigated through hedges using credit derivatives. Charge, Comprehensive Risk Measure, stress testing, sensitivity analysis and gap analysis. The use and attributes of each of these techniques Foreign currency risk are noted in the Risk Measurement Summary. The risk of loss resulting from changes in currency exchange rates and exchange rate volatility. Foreign currency denominated debt and other Risk Measurement Summary securities as well as future cash flows in foreign currencies are exposed Value at risk (VaR) to this type of risk. Maximum net trading position, sensitivity, stress VaR is a statistical method of measuring potential loss due to market testing and VaR limits are used to manage foreign currency exposures. risk based upon a common confidence interval and time horizon. The Risk is managed through hedges using foreign exchange positions or Bank calculates VaR daily using a 99% confidence level, and a one-day derivatives. holding period for its trading portfolios. This means that once in every Equity risk 100 days, the trading positions are expected to lose more than the VaR estimate. VaR has two components: general market risk and debt The risk of loss due to changes in prices, volatility or any other equity specific risk. The Bank calculates general market risk VaR using related risk factor of individual equity or equity linked securities. This historical simulation based on 300 days of market data. Obligor specific risk affects instruments such as, but not limited to, equities, exchange risk on debt instruments and credit derivatives not captured in general traded funds, mutual funds, derivatives and other equity linked market risk VaR is calculated through the debt specific risk VaR, which products. Risk is managed through sensitivity, stress testing and VaR uses a Monte Carlo simulation. In addition, the Bank calculates a limits and mitigated through hedges using physical equity and Stressed VaR measure which follows the same basic methodology as derivatives instruments. VaR but is calibrated to a one year stress period. The stress period is Commodity risk determined based on analysis of the trading book’s risk profile against The risk of loss due to changes in prices or volatility of precious metal, historical market data. Stressed VaR complements VaR in that it base metal, energy and agriculture products. Both commodity physical evaluates the impact of market volatility that is outside the VaR’s and derivatives positions are exposed to this risk. Risk is managed historical set. through aggregate and net trading position, sensitivity, stress testing All material risk factors are captured in VaR. Where historical data is and VaR limits and mitigated through hedges using physical commodity not available, proxies are used to establish the relevant volatility for VaR and derivative positions. and Stressed VaR until sufficient data is available. Changes in VaR between reporting periods are generally due to changes in positions, The following maps risk factors to trading and non-trading activities: volatilities and/or correlations between asset classes. VaR is also used to Non-trading evaluate risks arising in certain funding and investment portfolios. Backtesting is also an important and necessary part of the VaR process. Funding Investments The Bank backtests the actual trading profit and loss against the VaR Interest rate risk Interest rate risk result to validate the quality and accuracy of the Bank’s VaR model. The Foreign currency risk Credit spread risk Board reviews VaR and backtesting results quarterly. Foreign currency risk Incremental Risk Charge (IRC) and the Comprehensive Risk Equity risk Measure (CRM) Trading Basel market risk capital requirements include the Incremental Risk Interest rate risk Charge (IRC) and the Comprehensive Risk Measure (CRM) which capture the following: Credit spread risk Foreign currency risk Default risk: This is the potential for direct losses due to an obligor’s Equity risk (equity/bond issuer or counterparty) default as well as the potential for indirect losses that may arise from a default event. Commodity risk 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 Market Risk Governance losses that may arise from a credit migration event. Overview A Monte Carlo model is used to perform default and migration The Board of Directors reviews and approves market risk policies and simulations for the obligors underlying credit derivative and bond limits annually. The Bank’s Liability Committee (LCO) and Market Risk portfolios. In addition, for CRM in correlation trading there is a market Management and Policy Committee (MRMPC) oversee the application simulation model to capture historical price movements. Both IRC and of the framework set by the Board, and monitor the Bank’s market risk CRM are calculated at the 99.9th percentile with a one year liquidity exposures and the activities that give rise to these exposures. The horizon. The Board reviews IRC and CRM results quarterly.
76 2014 Scotiabank Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS | RISK MANAGEMENT 77 2014 Scotiabank Annual Report capture concentration risk that mayportfolio. arise in an undiversified • The use of hypothetical portfolios to ensure that the model is able to The validation process is governedManagement by Policy. the Bank’s Model Risk Non-trading market risk Funding and investment activities Market risk arising from theidentified, Bank’s managed funding and and controlled investment throughmanagement activities the processes. is Bank’s The asset-liability Liability Committeereview meets risks weekly and to opportunities, andeffectiveness evaluate of performance hedging including strategies. the Interest rate risk Interest rate risks in theby non-trading the portfolios interest are rate predominately mismatch driven liability (i.e. exposures. repricing The frequency) largest in exposures thefrom in asset retail the and banking non-trading operations book in arise this Canada. risk The is largest from component positions of shows related a to summary the of retail the mortgagepositions. interest book. rate Table gaps 51 for the Bank’s non-trading Interest rate risk arising frominvestment the activities Bank’s is lending, managed funding in and policies accordance and with global Board-approved limits, whichinterest are income designed and to economic control value theannual of risk income shareholders’ to limit equity. net measures The theinterest effect rates of on a the specified Bank’s changetwelve annual in months, net while interest the income economic overa value the specified limit next change measures in the interest impactnet rates of assets. on These the limits present are valueappetite set of of according the the to Bank’s Bank. the Board-level documentedLiability limit risk Committee utilization and is the reported Board toexceptions on both are a the reported regular according basis. to AnyCompliance the limit Policy Limit of Monitoring the and Bank. Net interest income and thedifferences economic between value yields of earned equity on resultand the from interest Bank’s the rate non-trading paid assets onreflects its mismatch liabilities. between The the difference maturity inthe and yields assets re-pricing partly and characteristics liabilities. of Thisoperations mismatch of is the inherent Bank in and theinterest exposes non-trading rates. it The to Liability adverse Committee changesthe provides in management strategic the of direction level structural for of interestframework rate authorized risk by within the the Board riskmanagement of appetite strategy Directors. is The executed asset/liability byof Group enhancing Treasury net with interest the income objective within establishedGap risk analysis, tolerances. simulation modeling, sensitivityto analysis assess and exposures VaR and are for used The limit Bank’s monitoring interest and rate planning risk purposes. on exposure the calculations earlier are of generally contractual based and re-pricing off-balance or sheet maturity assets of and on-balanceliabilities liabilities, sheet such although as certain credit assets cards and assigned and a deposits maturity without profile a based fixedExpected on maturity prepayments the are from longevity loans of and theare cashable exposure. also investment incorporated products into theshareholders’ exposure equity calculations. is Common assumed to be non-interestTable rate 52 sensitive. shows the after-tax100 impact basis of point an shock immediate over andeconomic a sustained value one of year shareholder’s period equity. ontabulated The annual are interest income based rate and on sensitivities aassumptions static made balance for sheet. management There actions areBased that no on may the mitigate Bank’s risk. interestimmediate rate and positions sustained at 100 year-end basis 2014, point an rise in interest rates across all made within the internal model are appropriate; and hypothetical market conditions Validation of market risk models Prior to the implementation ofvalidation new and market testing risk is models, conducted.model rigorous Validation is is initially conducted developed when andto the when the any model. significant The changes modelsfrequency are are of made also which subject is to determinedalso ongoing by be validation, model triggered the risk for ratings. earliersignificant Models revalidation structural may when changes there in have thecomposition been market of or the changes portfolio. to Modeland the validation additional includes analysis backtesting, such as: • Theoretical review or tests to demonstrate whether assumptions • Impact tests including stress testing that would occur under historical Gap analysis Gap analysis is used tomismatches assess in the the interest Bank’s rate non-tradinginterest sensitivity operations. rate of Under sensitive re-pricing gap assets, analysis, liabilitiesinstruments and are off-balance assigned sheet to definedpricing time dates. periods Products based with on ainterest expected contractual rate re- maturity gap are term assigned baseddate an on and the the shorter next of re-pricingmaturity the date. are contractual Products assigned maturity with an no interestconsumer contractual rate behaviour. gap The based Board on reviews observed gap historical results quarterly. Sensitivity analysis In trading portfolios, sensitivity analysischanges is in used risk to factors, measure includingproducts the prices and effect and portfolios. of volatility, These on measuresand financial apply geographies across and product are types usedreporting. for limit monitoring and management In non-trading portfolios, sensitivity analysischanges assesses in the interest effect rates of onvalue current of earnings shareholders’ and equity. on Itcurrencies the is within economic applied the globally Bank’s to operations.for each The limit of Bank’s and the sensitivity disclosure major analysis purposesnegative is parallel measured shifts through in positive thealso and underlying performs interest sensitivity rate analysis curves. usingcurve The various shifts, Bank non-parallel for interest example: rate curvetwists. steepeners, The curve Board flatteners reviews and sensitivity curve results quarterly. Stress testing A limitation of VaR andhistory Stressed of VaR market is volatility that andrespectively. they a To only specific complement reflect one these the year measures, recent the stress stress impact period, testing that examines abnormally largeof changes prolonged in inactivity market might factors havescenarios and on are periods trading designed portfolios. to Stress includehistorical testing large and shifts theoretical in multi risk riskcapture factors market severe as events. movements well Historical over as scenarios periodsthan that the are one-day significantly holding longer periodCredit captured Crisis in or VaR, the such 1998VaR, as Russian stress the Financial testing 2008 Crisis. provides Similar managementlosses to with due Stressed information to on tail potential events.program In are addition, used the to results verifysufficient from that to the the absorb stress Bank’s these testing market potential risk losses. capitalThe is Bank subjects its tradingmonthly portfolios stress to tests. a The series Bankportfolios of also monthly, daily, evaluates using weekly risk stress and in testsand its based specific investment on market risk events. factor Thecomponent sensitivities stress of testing the program Bank’s is comprehensivewhich an risk complements essential management the framework VaR methodologycontrols and employed other by risk the measures Bank.quarterly. and The Board reviews stress testing results MANAGEMENT’S DISCUSSION AND ANALYSIS currencies and maturities, would increase after-tax net income by hedging strategies. These may include funding the investments in the approximately $179 million over the next 12 months. During fiscal same currency or using other financial instruments, including derivatives. 2014, this measure ranged between $98 million and $183 million. Foreign currency translation gains and losses from net investments in This same increase in interest rates would result in an after-tax decrease foreign operations, net of related hedging activities and tax effects, are in the present value of the Bank’s net assets of approximately $498 recorded in accumulated other comprehensive income within million. During fiscal 2014, this measure ranged between $495 million shareholders’ equity. However, the Bank’s regulatory capital ratios are and $586 million. The directional sensitivity of these two key metrics is not materially affected by these foreign exchange fluctuations because largely determined by the difference in time horizons (annual income the risk-weighted assets of the foreign operations tend to move in a captures the impact over the next twelve months only, whereas similar direction. economic value considers the potential impact of interest rate changes The Bank is also subject to foreign currency translation risk on the on the present value of all future cash flows). The annual income and earnings of its domestic and remitting foreign branch operations. The economic value results are compared to the authorized Board limits. Bank forecasts foreign currency revenues and expenses, which are There were no limit breaches in the reporting period. primarily denominated in U.S. dollars, over a number of future fiscal C44 Interest rate gap quarters. The Liability Committee also assesses economic data trends $ billions, one-year interest rate gap and forecasts to determine if some or all of the estimated future 20 foreign currency revenues and expenses should be hedged. Hedging 10 instruments normally include foreign currency spot and forward contracts, as well as foreign currency options and swaps. Certain of 0 these economic hedges may not qualify for hedge accounting resulting -10 in a potential for a mismatch in the timing of the recognition of economic hedge gains/losses and the underlying foreign earnings -20 10 11 1213 14 translation gains/losses. In accordance with IFRS, foreign currency translation gains and losses relating to monetary and non-monetary Canadian dollar gap items are recorded directly in earnings. Foreign currencies gap As at October 31, 2014, a one percent increase in the Canadian dollar T51 Interest rate gap against all currencies in which the Bank operates decreases the Bank’s Interest rate sensitivity Non- position(1) interest before-tax annual earnings by approximately $49 million in the absence As at October 31, 2014 Within 3to12 Over rate of hedging activity, primarily from exposure to U.S. dollars. A similar ($ billions) 3 months months 1 year sensitive Total change in the Canadian dollar as at October 31, 2014 would increase Canadian dollars the unrealized foreign currency translation losses in the accumulated Assets $ 230.2 $ 42.4 $ 127.2 $ 0.9 $ 400.7 other comprehensive income section of equity by approximately Liabilities $ 220.0 $ 58.6 $ 113.1 $ 9.0 $ 400.7 $260 million, net of hedging. Gap $ 10.2 $ (16.2) $ 14.1 $ (8.1) $– Foreign currencies Investment portfolio risks Assets $ 305.7 $ 24.5 $ 39.3 $ 35.5 $ 405.0 Liabilities $ 285.3 $ 29.1 $ 35.4 $ 55.2 $ 405.0 The Bank holds investment portfolios to meet liquidity and statutory reserve requirements and for investment purposes. These portfolios Gap $ 20.4 $ (4.6) $ 3.9 $ (19.7) $– expose the Bank to interest rate, foreign currency, credit spread and Total equity risks. Debt investments primarily consist of government, agency, Gap $ 30.6 $ (20.8) $ 18.0 $ (27.8) $– and corporate bonds. Equity investments include common and As at October 31, 2013 preferred shares, as well as a diversified portfolio of third-party Gap $ 16.5 $ (16.2) $ 23.0 $ (23.3) $– managed funds. The majority of these securities are valued using prices (1) The above figures reflect the inclusion of off-balance sheet instruments, as well as an estimate of prepayments obtained from external sources. These portfolios are controlled by a on consumer and mortgage loans and cashable GICs. The off-balance sheet gap is included in liabilities. Board-approved policy and limits. T52 Structural interest sensitivity(1) 2014 2013 Trading market risk
Economic Economic The Bank’s policies, processes and controls for trading activities are Value of Value of designed to achieve a balance between pursuing profitable trading As at October 31 Shareholders’ Annual Shareholders’ Annual opportunities and managing earnings volatility within a framework of ($ millions) Equity Income Equity Income sound and prudent practices. Trading activities are primarily customer After-Tax Impact of focused, but also include a proprietary component. 100bp increase in rates Non-trading risk $ (498) $ 179 $ (572) $ 97 Market risk arising from the Bank’s trading activities is managed in 100bp decrease in rates accordance with Board-approved policies, and aggregate VaR and Non-trading risk $ 474 $ (87) $ 420 $ (64) stress testing limits. The quality of the Bank’s VaR is validated by (1) Corresponding with the current low interest rate environment, the Annual Income sensitivity of a 100bp regular backtesting analysis, in which the VaR is compared to both decrease in rates for currencies with rates below 1% are measured using a 25 bps decline. Prior period theoretical profit and loss results based on fixed end of day positions amounts have been restated to reflect this change. and actual reported profit and loss. A VaR at the 99% confidence Foreign currency risk interval is an indication of a 1% probability that losses will exceed the Foreign currency risk in the Bank’s unhedged funding and investment VaR if positions remain unchanged during the next business day. activities arises primarily from the Bank’s net investments in foreign Trading positions are however managed dynamically and, as a result, operations as well as foreign currency earnings in its domestic and actual profit/loss backtesting exceptions are uncommon. During fiscal remitting foreign branch operations. 2014, there was one theoretical profit/loss exception on October 14 The Bank’s foreign currency exposure to its net investments in foreign due to declines in Canadian and US interest rates, and widening credit operations is controlled by a Board-approved limit. This limit considers spreads. There were no actual profit/loss exceptions. factors such as potential volatility to shareholders’ equity as well as the In fiscal 2014, the total one-day VaR for trading activities averaged potential impact on capital ratios from foreign exchange fluctuations. $20.8 million, compared to $17.4 million in 2013. The increase was On a quarterly basis, the Liability Committee reviews the Bank’s foreign due to both higher general market risk and debt specific risk resulting currency net investment exposures and determines the appropriate from increased exposure in the Global Fixed Income portfolio.
78 2014 Scotiabank Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS | RISK MANAGEMENT 79 redit 2013 7.67.4 8.02.5 7.61.5 10.3 2.63.7 14.8 1.2 5.6 6.2 3.0 4.4 2.8 0.9 7.7 0.4 1.2 14.5 13.8 17.3 10.2 (15.9) (13.6) N/A N/A $ 10.9 $ 10.4 $ 15.5 $ 7.0 $ 17.2 $ 17.4$ 33.1 $ 21.8 $ $ 34.3 13.2 $ 41.3 $ 28.2 Year end Avg High Low 2014 Scotiabank Annual Report 2014 8.14.22.2 9.60.9 9.3 12.43.2 2.6 18.1 0.9 7.6 5.9 2.8 4.2 1.9 1.5 5.5 0.4 1.6 20.4 15.8 22.2 11.1 (12.8) (14.5) N/A N/A Q1 Q2 Q3 Q4 Trading revenue Trading 1 day holding period 99%, VaR, $ 8.6 $ 13.1 $ 22.1 $ 8.2 $ 22.5 $$ 20.8 38.7 $ 27.3 $ $ 32.9 16.0 $ 40.3 $ 25.3 Year end Avg High Low Daily trading revenue vs. VaR $ millions, November 1, 2013 to October 31, 2014 5 0 -5 40 35 30 25 20 15 10 -10 -15 -20 -25 -30 C46 8 7 6 $ millions 5 -2 -1 0 1 2 3 4 10 11 12 13 14 15 16 18 20 21 Gain Neutral Loss -3 -4 Trading revenue distribution Year ended October 31, 2014 # of days Total one-day VaR by risk factor -8 9 Credit Spread Interest Rate 5 0 C45 Stressed VaR Results The Bank also calculates avolatility Stressed from VaR a which one-year uses time the period same identified basic as methodology stressful, as given the the VaR. risk However, profile Stressed of VaR the is trading calculated portfolio. using The market current period is the 2008/2009 c crisis surrounding the collapse ofcompared Lehman to Brothers. $34.3 In million fiscal in 2014,movements 2013. the such The total as decrease one-day those was Stressed experienced in VaR in part forBasel the due trading market stressed to activities risk period. positioning averaged capital within $32.9 requirementsdefault the million include and trading the migration portfolio Incremental risk. which Risk On reduced Chargerespectively. October exposure (IRC) The 31, to and CRM 2014 large the surcharge the market Comprehensive was market Risk $139 risk Measure million. capital (CRM) requirementsDescription which for of capture IRC Trading obligor and Revenue CRM Components were andChart $396 graphical 45 million comparison shows and of the $130 VaR distribution million includes to of changes daily daily in P&L trading portfolio revenue value forcalculated as fiscal less well 2014 frequently as and are the Chart pro-rated. impact95% 46 Trading of of compares revenue new trading that averaged trades, days distribution $6.0 commissions, during to millionOctober fees the daily per 15, and year, VaR day, 2014, reserves. lower results. compared and Some than Trading to was components 2013. revenue $6.2 lower of During million than revenue the for the which year, 2013. total are the Revenue VaR largest was of single positive $24.1 day on million trading on loss the was same $7.5 day. million which occurred on T53 ($ millions) Credit Spread plus Interest Rate Equities Foreign Exchange Commodities Debt Specific Diversification Effect All-Bank VaR All-Bank Stressed VaR 25 20 15 10 40 35 30 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
Consolidated Statement of As at Oct 31, 2014 Financial Non-traded Not subject to Primary risk sensitivity of ($ millions) Position Traded Risk risk market risk 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
Consolidated Statement of As at Oct 31, 2013 Financial Non-traded Not subject to Primary risk sensitivity of ($ millions) Position Traded Risk risk market risk 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 Market risk arising from derivatives transactions is subject to the control, reporting and analytical techniques noted above. Additional Derivatives controls and analytical techniques are applied to address certain The Bank uses derivatives to meet customer needs, generate revenues market-related risks that are unique to derivative products. from trading activities, manage market and credit risks arising from its Structured transactions lending, funding and investment activities, and to lower its cost of Structured transactions are specialized transactions that may involve capital. The Bank uses several types of derivative products, including combinations of cash, other financial assets and derivatives designed to interest rate swaps, futures and options, to hedge interest rate risk meet the specific risk management or financial requirements of exposure. Forward contracts, swaps and options are used to manage customers. These transactions are carefully evaluated by the Bank to foreign currency risk exposures. Credit exposures in its lending and identify and address the credit, market, legal, tax, reputational and investment books are managed using credit default swaps. As a dealer, other risks, and are subject to a cross-functional review and sign-off by the Bank markets a range of derivatives to its customers, including trading management, Global Risk Management, Taxation, Finance and interest rate, foreign exchange, equity, commodity and credit Legal departments. Large structured transactions are also subject to derivatives. review by senior risk management committees and evaluated in accordance with the procedures described below in Reputational Risk.
80 2014 Scotiabank Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS | RISK MANAGEMENT 81 2014 Scotiabank Annual Report plan that specifies an approachactual for and analyzing potential and liquidity responding events. to governance The structure plan for outlines the an management appropriate liquidity and events, monitoring processes of for effectivecommunication, internal and and identifies external potential counterconsidered measures at to various be stages ofmaintained an both event. at A the contingency parent plan level is as well as for majordiversification subsidiaries. of its deposit liabilitiesinstrument, by term source, and type geographic of market. depositor, unencumbered assets that can beborrowings readily under sold stressed or market pledged conditions toevents. or secure The due Bank to also Bank-specific maintainssettlement liquid obligations assets in to payment, support depository its and intra-day clearing systems. • Contingency planning – the Bank maintains a liquidity contingency • Funding diversification – the Bank actively manages the • Core liquidity – the Bank maintains a pool of highly liquid, Liquid assets Liquid assets are a keyBank component holds of these liquidity types management of andneeds assets the for in liquidity sufficient management. quantity to meetLiquid potential assets can be usedrepurchase to transactions generate or cash other either transactions throughused where sale, as these collateral assets to can generate be Liquid cash, assets or include by deposits allowing at thecommercial central asset banks, banks, to call deposits mature. and with othersecurities, short-term precious loans, metals marketable and securitiessecurities received financing as and collateral derivative from transactions.include Liquid borrowing assets capacity do from not central bankMarketable facilities. securities are securities tradedbe in converted active to markets, cash which within can Bank’s a liquidity timeframe management that framework. is Assets inconsidering are accordance a assessed with number the of factors,convert including them the to time cash. it would takeMarketable to securities included in liquidsecurities assets specifically are held comprised as of amanagement liquidity purposes; buffer trading or securities, for which assetGlobal are liability Banking primarily & held Markets; by andfinancing collateral and received derivative for transactions. securities The Bank maintains large holdingssupport of its unencumbered operations. liquid These assets assets to meet generally the can Bank’s be obligations. sold As orliquid at pledged assets October to were 31, $183 2014, billion, unencumbered 31, compared 2013. to The $170 mix billion of asliquid these at assets, liquid October which assets include between cash, securitiesmetals deposits and was with other 68% banks and and 32%, precious 32%, respectively respectively). (October The 31, increase 2013 in –to liquid 68% an assets and increase was in mainly cash attributable unencumbered and liquid deposits securities, with including central mortgage-backed bankswhich securities and are classified as residentialpurposes. mortgage loans for accounting on-balance sheet and off-balance sheetof positions stress; in and circumstances mitigation and contingency plans. – Based on this knowledge, facilitating the development of risk – Helping the Bank to understand the potential behavior of various and forecasts cash inflows andcash outflows, flows including on off-balance a sheet dailyover basis. the Risk maximum is net managed cash byterm outflow a horizons by set (cash currency of gaps), over key a specifiedliquidity limits minimum short- stress level tests. of core liquidity, and oversight of all significant liquidityanalysis, risks, risk supporting measurement, the stress LCO testing, with monitoring and reporting. basis, to evaluate the effectdisruptions of on both the industry-wide Bank’s and liquidity Bank-specific has position. many Liquidity purposes stress including: testing The Bank’s liquidity stress testsfunding consider assumptions, the depositor effect behavior of and changesassets. the in The market Bank value performs of industry liquid which standard are stress reviewed tests, at the senior resultsconsidered levels of in of making the liquidity organization management and decisions. are Effective liquidity risk management isconfidence essential of to depositors maintain and the counterparties,of manage funds the and Bank’s to cost supportcircumstances. core business activities, even under adverse Liquidity risk is managed withinthat the are framework approved of by policies the andon Board limits risk of exposures Directors. and The performance BoardLiability against receives Committee approved reports (LCO) limits. provides The seniorliquidity management risk oversight and of meets weekly toThe review key the elements Bank’s of liquidity the profile. liquidity• risk framework Measurement are: and modeling – the Bank’s liquidity model measures • Reporting – Global Risk Management provides independent • Stress testing – the Bank performs liquidity stress testing on a regular Liquidity risk is the riskfinancial that obligations the in Bank a is timely unableFinancial manner to obligations at meet include reasonable its liabilities prices. todue depositors, under payments derivative contracts, settlementborrowing of and securities repurchase transactions, andinvestment lending commitments. and Liquidity Risk The market risk in theseearned transactions by is providing usually structuring minimal, expertise andOnce and returns executed, by are structured taking transactions credit are risk. ongoing subject credit to reviews the and same marketderivatives risk transactions. analysis This as review other and typesmonitoring analysis of of includes the careful quality ofvaluation the of reference the assets, derivatives and and ongoing reference assets. 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 Unencumbered liquid assets liquid assets
Securities received as collateral from securities As at October 31, 2014 Bank-owned financing and derivative Total liquid Pledged as Available as ($ millions) liquid assets transactions assets collateral Other(1) 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 Unencumbered liquid assets liquid assets
Securities received as collateral from securities As at October 31, 2013 Bank-owned financing and derivative Total liquid Pledged as Available as ($ millions) liquid assets transactions assets collateral Other(1) 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 MANAGEMENT’S DISCUSSION AND ANALYSIS | RISK MANAGEMENT (3) (3) 83 2013 Other Other 21,288 22,388 ment $ 126,376 $ 170,052 (2) (2) 2014 23,583 17,812 collateral collateral Available as Available as $ 141,999 $ 183,394 (1) (1) 2014 Scotiabank Annual Report collateral Other collateral Other Pledged as Pledged as Encumbered assets Unencumbered assets Encumbered assets Unencumbered assets be readily available. These include loans, a portion of which may be used to ediately available. transactions Total assets transactions Total assets Securities received as Securities received as financing and derivative financing and derivative collateral from securities collateral from securities assets assets 976 – 976 – – 976 – 7,2237,2869,759 – – 4,840 7,223 7,286 14,599 – – 3,291 1,441 43 5,782 – 7,243 – – – 11,308 24,678 – 24,678 – – – 24,678 31,55136,95955,86842,286 17,595 41,405 44,195 49,146 78,364 – 100,063 27,059 61,380 52,586 42,286 – – – 22,087 3,686 16,984 47,477 – – – – 38,600 – 123,835 (70,341) 53,494 2,938 – – 50,556 144,019 (86,166) 57,853 2,748 – – 55,105 395,554 – 395,554 11,625 38,435 10,358 335,136 Bank-owned Bank-owned $ 805,666 $ 21,869 $ 827,535 $ 162,375 $ 45,181 $ 193,752 $ 426,227 $ 49,507 $ – $ 49,507 $ – $ 5,262 $ 44,245 $ – (4) (4) Asset encumbrance Total unencumbered liquid assets held by the parent bank and its branches, and domestic and foreign subsidiaries access central bank facilities outside of the normal course or to raise secured funding through the Bank’s secured funding programs. Canadian government obligationsForeign government obligationsOther liquid securities 28,667NHA mortgage-backed securitiesCall and short 30,903 loans 45,546 8,231 49,573 38,327 36,898 34,808 887 69,230 – 23,007 53,809 84,381 45,546 – – 32,292 – 10,810 13,891 15,421 – 887 – – – 52,089 34,736 – – – – 887 – Canadian government obligations Foreign government obligations Other liquid securities NHA mortgage-backed securities Call and short loans Non-financial assetsTotal 25,637 $ 743,644 – $ 15,311 25,637 $ 758,955 $ 135,168 – $ 39,991 $ 180,187 $ – 403,609 – 25,637 Non-financial assets Total (3) Other unencumbered assets are not subject to any restrictions on(4) their use Securities to received secure as funding collateral against or other as financial collateral assets but are the included Bank within would liquid not securities consider and them other to securities. (1) Assets which are restricted(2) from being Assets used that to are secure readily funding available for in legal the or normal other course reasons. of business to secure funding or meet collateral needs including central bank borrowing imm Cash and deposits with centralDeposits banks with financial institutionsPrecious metalsLiquid securities: $ 44,097Other 9,240 securitiesLoans classified as liquid assets: $Other loans –Other financial assets 8,880 – $ 44,097 9,372 $ 9,240 – – 367,007 $ 7,509 4,286 – $ 36,588 8,880 $ 1,626 13,658 – – 7,614 – 2,491 367,007 – 54 – 9,821 8,826 30,802 – – 10,135 11,167 316,249 As at October 31, 2013 ($ millions) systems, or operate in aunencumbered foreign assets jurisdiction. is Securities presented may below: also be pledged under repurchase agreements. A summary of encumbered and Cash and deposits with central banks As at October 31, 2014 ($ millions) Deposits with financial institutions Precious metals Liquid securities: Other securities Loans classified as liquid assets: Other loans Other financial assets T57 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 settle The Bank’s liquidity pool is90% held of across liquid major assets currencies, are mostlyreserve held comprised held by of in the Canadian a Bank’s and foreign corporateliquid U.S. subsidiary office, assets dollars of branches held holdings. the of by As bank the a shown isrelation Bank, foreign above, required to and subsidiary the for minimum Canadian are vast regulatory levels subsidiaries assumed majority purposes, of of to it liquidity the be is required Bank. available assumed and To only to assets the in be held extent limited unavailable within a circumstances. to each liquidity The the entity, Bank rest and/or monitors of jurisdiction. and the ensures Group. compliance Other in T56 As at October 31 ($ millions) A summary of total unencumbered liquid assets held by the parent bank and its branches, and domestic and foreign subsidiaries, is presented below: Bank of Nova Scotia (Parent) Bank domestic subsidiaries Bank foreign subsidiaries Total MANAGEMENT’S DISCUSSION AND ANALYSIS
As of October 31, 2014 total encumbered assets of the Bank were branch banking subsidiary, the strategy is for the subsidiary to be $208 billion (October 31, 2013 – $175 billion). Of the remaining substantially self-funding in its local market. For other subsidiaries or $620 billion (October 31, 2013 – $584 billion) of unencumbered assets, branches outside Canada where local deposit gathering capability is $194 billion (October 31, 2013 – $180 billion) are considered readily not sufficient, funding is provided through the wholesale funding available in the normal course of business to secure funding or meet activities of the Bank. collateral needs as detailed above. From an overall funding perspective the Bank’s objective is to achieve In some over-the-counter derivative contracts, the Bank would be an appropriate balance between the cost and the stability of funding. required to post additional collateral in the event its credit rating was Diversification of funding sources is a key element of the funding downgraded. The Bank maintains access to sufficient collateral to meet strategy. these obligations in the event of a downgrade of its ratings by one or The Bank’s wholesale debt diversification strategy is primarily executed via more of the rating agencies. In the event of a one-notch or two-notch the Bank’s main wholesale funding centres, located in Toronto, New York, downgrade of the Bank’s rating by rating agencies, the Bank has to London and Singapore. The majority of these funds are sourced in provide additional $512 million or $669 million collateral, respectively, Canadian and U.S. dollars. Where required, these funds are swapped to to meet contractual derivative funding or margin requirements. fund assets in different currencies. The funding strategy deployed by Encumbered liquid assets are not considered to be available for liquidity wholesale funding centres and the management of associated risks, such management purposes. Liquid assets which are being employed to as geographic and currency risk, are managed centrally within the hedge derivative positions in trading books or for hedging purposes, framework of policies and limits that are approved by the Board of are considered to be available for liquidity management provided they Directors. meet the criteria discussed in liquid assets above. In the normal course, the Bank uses a mix of unsecured and secured wholesale funding instruments across a variety of markets. The choice of Regulatory developments relating to liquidity instruments and market is based on a number of factors, including relative In January 2013 the Basel Committee on Banking Supervision (BCBS) cost and market capacity as well as an objective of maintaining a diversified finalized its international framework on Liquidity Coverage Ratio (LCR) mix of sources of funding. Market conditions can change over time, requirements. Subsequently, in May 2014, OSFI released its Liquidity impacting cost and capacity in particular markets or instruments. Changing Adequacy Requirements (LAR) which contain the rules for Canadian market conditions can include periods of stress where the availability of Banks including LCR and the Net Cumulative Cash Flow (NCCF). The funding in particular markets or instruments is constrained. In these LCR and NCCF are scheduled for implementation in January 2015. circumstances the Bank would increase its focus on sources of funding in In October 2014, BCBS released its final document on the Net Stable functioning markets and secured funding instruments. Should a period of Funding Ratio (NSFR). NSFR will become a minimum standard by extreme stress exist such that all wholesale funding sources are constrained, 1 January 2018. The Bank continues to monitor developments related the Bank maintains a pool of liquid assets to mitigate its liquidity risk. This to liquidity requirements. pool includes cash, deposits with central banks and securities. In Canada, the Bank raises short- and longer-term wholesale debt Funding through the issuance of senior unsecured deposit notes. Additional The Bank ensures that its funding sources are well diversified. Funding longer-term wholesale debt is generated through the Bank’s Canadian concentrations are regularly monitored and analyzed by type. The Debt and Equity Shelf and the securitization of Canadian insured sources of funding are capital, deposits from retail and commercial residential mortgages through CMHC securitization programs (such as clients sourced through the Canadian and international branch network, Canada Mortgage Bonds and Canadian NHA MBS), and of unsecured deposits from financial institutions as well as wholesale debt issuance. personal lines of credit through the Hollis Receivables Term Trust II Shelf. Capital and personal deposits are key components of the Bank’s core While the Bank includes CMHC securitization programs in its view of funding and these amounted to $231 billion as at October 31, 2014 wholesale debt issuance, this source of funding does not entail the same (October 31, 2013 – $224 billion). The increase since October 31, type of run-off risk that can be experienced in funding raised from 2013, was due primarily to personal deposits and internal capital capital markets. generation. A portion of commercial deposits, particularly those of an Outside of Canada, short-term wholesale debt is raised through operating or relationship nature, would be considered part of the the issuance of negotiable certificates of deposit in the United States, Bank’s core funding. Furthermore, core funding is augmented by Hong Kong and Australia and the issuance of commercial paper in the longer term wholesale debt issuances (original maturity over 1 year) of United States. The Bank operates longer-term wholesale debt issuance $123 billion (October 31, 2013 – $110 billion). Longer term wholesale registered programs in the United States, such as its SEC Registered debt issuances include medium-term notes, deposit notes, mortgage Debt and Equity Shelf and SEC Registered Covered Bond Shelf. As well, securitizations, asset-backed securities and covered bonds. the Bank’s Covered Bond Program is listed with the U.K. Listing The Bank operates in many different currencies and countries. From a Authority. The Bank also raises longer-term funding across a variety of funding perspective, the most significant currencies are Canadian and currencies through its Australian Medium Term Note Programme, U.S. dollars. With respect to the Bank’s operations outside Canada, European Medium Term Note Programme and Singapore Medium there are different funding strategies depending on the nature of the Term Note Programme. activities in a country. For those countries where the Bank operates a
84 2014 Scotiabank Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS | RISK MANAGEMENT 85 1,793 >5 >5 years Total years Total 2-5 2-5 years years 2014 Scotiabank Annual Report 1-2 1-2 years years ms does not impact the funding capacity of the Bank in its own name. losures. cial reporting purposes. of the consolidated financial statements. Amounts are based on remaining term to < 1 Year < 1 Year Sub-Total Sub-Total 9-12 9-12 months months 6-9 6-9 months months 3-6 3-6 months months 1-3 1-3 months months – 616 779 696 392 2,483 3,869 8,526 5,356 20,234 ––––– –93179171 – 1 279 – 1 281 507 794 523 2,105 14 15 17 12 12 70 – 100 5,860 6,030 16 16 53 45 29 159 – – 5,288 5,447 Less Less 5,945 3,226 2,498 696 3,210 15,575 6,630 17,525 8,037 47,767 4,205 1,7381,750 83 1,510 3,483 – 1,327 – 1,369 6,026 9,439 2,482 – 10,129 – 5,116 27,166 – 6,026 9,1113,691 24,4003,127 2,6092,254 33,152 6,266 15,192 32 2,953 – 3,913 2,294 1,408 – 85,768 5,499 – – 8,567 20,139 2,817 1,103 6,332 12,026 6,479 30,448 121 – 2,254 7,317 95,559 – 8,205 69,930 2,158 – 19,096 6,332 than 1 month than 1 month $ 23,616 $ 34,663 $ 39,170 $ 18,331 $ 12,804 $ 128,584 $ 27,319 $ 49,193 $ 20,763 $ 225,859 $ 17,671 $ 31,437 $ 36,672 $ 17,635 $ 9,594 $ 113,009 $ 20,689 $ 31,668 $ 12,726 $ 178,092 $ 7,304 $ 1,104 $ 615 $ 292 $ 364 $ 9,679 $ 90 $ 111 $ 42 $ 9,922 $ 5,417 $ 755 $ 514 $ 104 $ 153 $ 6,943 $ 96 $ 117 $ – $ 7,156 (3) (3) (1) (5) (5) (4) (4) (2) (2) Wholesale funding maturity. notes 486 3,426 2,493 2,116 1,487 10,008 14,275 27,448 3,128 54,859 paper and certificate of deposits 12,666 31,061 26,376 5,183 6,055 81,341 8,274 930 125 90,670 notes paper and certificate of deposits Deposits from banks Total wholesale funding sources $ 26,441 $ 39,853 $ 33,109 $ 8,930 $ 9,297 $ 117,630 $ 32,050 $ 46,318 $ 14,378 $ 210,376 Total wholesale funding sources (2) Only includes commercial bank(3) deposits raised Wholesale by funding Group sources Treasury. also(4) exclude asset-backed Represents commercial residential paper mortgages (ABCP) funded(5) issued through by Canadian Although certain Federal subordinated ABCP Government debentures conduits agency are that sponsored a are programs. component not Funding of consolidated accessed regulatory for through capital, finan such they progra are included in this table in accordance with EDTF recommended disc Of Which: Unsecured fundingSecured funding(1) Wholesale funding sources exclude repo transactions and bankers acceptances, which are disclosed in the contractual maturities table in Note 40 $ 20,470 $ 35,606 5,971 $ 29,501 4,247 $ 7,603 3,608 $ 7,918 1,327 $ 101,098 $ 22,639 1,379 $ 28,589 16,532 $ 9,155 9,411 $ 161,481 17,729 5,223 48,895 As at October 31, 2013 ($ millions) Of Which: Unsecured funding Secured funding As at October 31, 2014 ($ millions) T58 Subordinated debentures The table below provides thethese remaining liabilities contractual are maturities primarily of included funding in raised Business through & wholesale Government funding. Deposits. In the Statement of Financial Position, Deposits from banks Medium term notes and deposit Asset-backed securities Covered bondsMortgage securitization Subordinated debentures 16 999 42 – 10 1,067 5,998 6,809 36 13,910 Bearer deposit notes, commercial Asset-backed commercial paper Asset-backed commercial paper Medium term notes and deposit Asset-backed securities Mortgage securitization Bearer deposit notes, commercial Covered bonds MANAGEMENT’S DISCUSSION AND ANALYSIS
Wholesale funding generally bears a higher risk of run-off in a stressed Two major outsourcing contracts have been entered into by the Bank. environment than other sources of funding. The Bank mitigates this risk Both are cancellable with notice. through funding diversification, ongoing engagement with investors and The largest is a contract with IBM Canada entered into in 2001 to by maintaining a large holding of unencumbered liquid assets. manage the Bank’s domestic computer operations, including data Contractual Obligations centres, branches, Automated Banking Machines, and desktop The Bank’s contractual obligations include contracts and purchase computing environment. The contract was expanded in 2005 to also obligations, including agreements to purchase goods and services, that include the computer operations for the Caribbean & Central America, are enforceable and legally binding on the Bank. Table 59 provides and Mexico. The contract for the Canadian operations, Mexico and aggregated information about the Bank’s contractual obligations related Caribbean & Central America was renewed earlier in 2013, for a to all financial and other liabilities as at October 31, 2014, which affect further 5 year period. the Bank’s liquidity and capital resource needs. The table provides details The second is a three-year contract, with two optional five-year on undiscounted cash flows to maturity. Depending on the nature of renewals, entered into in 2003 with Symcor Inc. to manage the Bank’s these obligations, they may be recorded on- or off-balance sheet. cheque and bill payment processing, including associated statement The Bank leases a large number of its branches, offices and other and report printing activities across Canada. The remaining 5-year locations. The majority of these leases are for a term of five years, with option was exercised in 2010 and runs to the end of 2015. options to renew. The total cost of these leases, net of rental income from subleases, was $392 million in 2014 (2013 - $378 million).
T59 Contractual obligations
As at October 31, 2014 Under 1-2 2-5 Over No Specific ($ millions) 1 year years years 5 years 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 Total capital expenditure in 2014 reflected an increase of $129 million Scotiabank has an ongoing program of capital investment to provide or 27% over 2013. The increase is primarily due to the relocation of the necessary level of technology and real estate resources to service our New York office, improvements in our retail branch network, and our customers and meet new product requirements. All major capital higher technology spending in regulatory, efficiency and customer expenditures go through a rigorous review and approval process. driven projects.
86 2014 Scotiabank Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS | RISK MANAGEMENT 87 , key risk indicators and Business 2014 Scotiabank Annual Report by Global Risk Management’s centralformal operational reviews risk of unit, significant includes units,identify operations and and assess processes operational to risks.for This management program to provides ensure a that basis that key controls risks are have functioning been effectively. identifiedattests Business and to line the management accuracy ofto each mitigate assessment risks and if develops controls actionthese are plans reviews not are identified summarized as and effective.management reported Results and to of the executive Board of Directors. discussed and considered in each risk assessment. view of key risks andplausible provides but management high with impact, insights remote intooccur. operational how Scenario risk analysis events will might alsodistributions assist in in the the Bank’s selection Advanced ofcapital Measurement severity model Approach (discussed (AMA) below). with an early warning systemindicate of that changes an in operational risk risk exposurebreached. appetite that KRIs or may exist tolerance at may the be business line and all-Bank level. program incorporates the impact ofinternal key control business factors environment into and thedivisions regulatory by capital utilizing allocated a to BEICFadjust scorecard. capital The calculations scorecard produced will using bemodel the used and Bank’s to due AMA to capital itsidentifying forward-looking new nature, trends it and also emerging assists risks. with managed and maintained by theGlobal central Risk operational Management, risk captures unit key within losses. information This on data operational is analyzed,and benchmarked significant against metrics, industry then loss reported data the to Board executive of management Directors and toexposures, provide appetites insight and into trends. operational risk manner, due to the natureis of often operational included risk with itself. or Operationalis is risk not a taken by-product on of intentionally. anotherand Tools form measurement for of continue operational risk to risk and evolve management services across industry. the There global are financial twooperational methods risk for regulatory the capital calculation available of Basel to III the – Bank The under StandardizedMeasurement Approach Approach and (AMA). the The Advanced BankStandardized continues Approach to and use will the implementOSFI. AMA, when approved by management and the Board oftrends Directors. from In operational addition risk to loss detailsinformation events, and on reporting risk also and includes controlindustry assessments trends and and scenarios significant completed, events Environment and Internal Control Factorcombination (BEICF) of survey these results. information The sourcesand provides forward-looking both view a of backward operational risk at the Bank. (ORX), an international consortium of banks that share anonymized loss Operational Risk Management Framework The Bank’s Operational Risk Managementintegrated Framework approach sets to out identify, an assess,operational control, risks mitigate across and the report Bank.the The Bank’s following Operational are Risk key Management components Framework: of • The Bank’s risk and control assessment program, which is managed • The Bank has a standard inventory of operational risks• which are The Bank’s scenario analysis program provides a forward looking • The Bank’s Key Risk Indicator (KRI) program provides management • The Business Environment and Internal Control Factors (BEICF) • The Bank’s centralized operational loss event database, which is • Operational risk is difficult to quantify in a fulsome and accurate • Operational risk reporting is provided to the Bank’s senior executive • The Bank is a member of the Operational Riskdata Exchange Association governance and approves annually theManagement Bank’s Policy Operational and Risk Operational Risk Management Framework; business lines and key controlRisk functions, Officer. and This chaired Committee by provides theoversight consistent, Chief of Bank-wide operational risk management; ensure issues are known, discussed,needed managed and and in escalated, a as timely manner; developing and applying methods tomonitor identify, operational assess, risks; manage and and reportingloss on events risks and as to well play asassessment a actual and challenge management role of to operational the risk; business units in their mitigate specific components of operationalpolicies risk, and including processes codifying required to control those specific risks; that significant risks are identifiedcontrols and to assessed, ensure and that for overall testing Internal risk Audit is department at is an also acceptableassessing responsible level. the for The Bank’s auditing Operational and Riskits Management design Framework and and effectiveness. – A senior level Operational Risk Committee comprised of Heads of – Business-line level operational risk committees are in place to – Executive management with clearly defined– areas of A responsibility; central unit in Global Risk Management responsible for: – Independent specialist units responsible for developing methods to – Separation of duties between key– functions; and An independent internal audit department responsible for verifying – The Board of Directors is responsible for sound corporate accountability and clearly defines theoperational roles risk and management. responsibilities The for firstunits, line who of own defence the is risks thesecond in business line their of businesses defence and is operations.Global led The Risk by Management, a with central support riskfunctions from management across control unit the and within Bank. stewardship The third line of defence is Internalcontrol Audit. of the significant operational risks to which they are exposed. In fiscal 2014, operational riskrisk losses appetite. continue to be within the Bank’s Governance and Organization The Bank has developed policies,methodologies processes to and ensure assessment that operationaland risk managed is with appropriately effective identified controls.Bank’s The Operational governing Risk principles Management of Framework the include: • The three lines of defence model helps to ensure proper • The individual business lines are accountable for management and The Bank has a governancethere and is organizational effective structure oversight through and which an in established which risk operational appetite, risk including: is managed to Operational risk is the risk ofwhich loss, the whether Bank direct is or exposed indirect,processes due to or to systems, inadequate human or error, failed orOperational internal external risk events. includes legal and regulatoryprocess risk, and business change risk, fiduciary ortechnology disclosure failure, breaches, financial crime and environmentalexists risk. in It some form in everyOperational Bank risk can business and not function. only resultregulatory in sanctions financial and loss, damage but to also Bank the Bank’s is very reputation. The successful at managingto operational safeguarding risk client with assets a and view preserving shareholder value. Other Risks Operational risk MANAGEMENT’S DISCUSSION AND ANALYSIS
data. This industry data is used to support risk identification, assessment particularly Operational risk, where reference is made to the Bank’s well- and will be used as an input to the Bank’s AMA capital model. established compliance program. All directors, officers and employees Discussion forums within ORX also help to ensure that the Bank is have a responsibility to conduct their activities in accordance with the current of all industry best practices and developments. Scotiabank Guidelines for Business Conduct, and in a manner that • The Bank’s Fraud Management Office, which identifies threats of minimizes reputational risk. While all employees, officers and directors are financial crime, implements systems and processes to mitigate loss expected to protect the reputation of Scotiabank by complying with the and reports on fraud loss activity to senior management. Bank’s Guidelines for Business Conduct, the activities of the Legal, Corporate Secretary, Public, Corporate and Government Affairs and • The Bank’s monitoring of industry events, identifies significant losses Compliance departments, and the Reputational Risk Committee, are incurred at other financial institutions and provides a reference for particularly oriented to the management of reputational risk. reviewing and assessing the Bank’s own risk exposure. In providing credit, advice, or products to customers, or entering into • The compliance risk management program led by Global Compliance associations, the Bank considers whether the transaction, relationship through an established network and associated processes that or association might give rise to reputational risk. The Bank has an include: monitoring regulatory changes; conducting compliance risk established, Board-approved reputational risk policy, as well as policy assessments; implementing policies and procedures; training; and procedures for managing reputational and legal risk related to monitoring and resolving issues; and reporting on the status of structured finance transactions. Global Risk Management plays a compliance and compliance controls to executive management, the significant role in the identification and management of reputational Board of Directors, and regulators as required. risk related to credit underwriting. In addition, the Reputational Risk • The Bank’s New Products and Services Risk Management Policy Committee is available to support Global Risk Management, as well as which describes the general principles applicable to the review, other risk management committees and business units, with their approval and implementation of new products and services within assessment of reputational risk associated with transactions, business Scotiabank and is intended to provide overarching guidance. initiatives, and new products and services. Processes are in place at the all-Bank level and in each business line The Reputational Risk Committee considers a broad array of factors for evaluation of risk in new businesses, services and products. when assessing transactions, so that the Bank meets, and will be seen • The Bank’s Business Continuity Management Department is responsible to meet, high ethical standards. These factors include the extent, and for governance and oversight of the Bank’s business continuity, and outcome, of legal and regulatory due diligence pertinent to the monitors units to ensure compliance with these policies. The Bank’s transaction; the economic intent of the transaction; the effect of the business continuity management policy requires that all business units transaction on the transparency of a customer’s financial reporting; the develop business continuity capabilities for their respective functions. need for customer or public disclosure; conflicts of interest; fairness • The Bank is exposed to ever increasing cyber risks, which may include issues; and public perception. theft of assets, unauthorized access to sensitive information, or The Committee may impose conditions on customer transactions, operational disruption such as breaches of cyber security. With this in including customer disclosure requirements to promote transparency in mind, the Bank has implemented a robust and continuously evolving financial reporting, so that transactions meet Bank standards. In the cyber security program to keep pace with the evolving threats. While event the Committee recommends not proceeding with a transaction the Bank’s computer systems continue to be subject to cyber-attack and the sponsor of the transaction wishes to proceed, the transaction is attempts, the countermeasures in place remain effective. Scotiabank referred to the Risk Policy Committee. 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 Environmental risk implementing additional controls as required, to mitigate these risks. Environmental risk refers to the possibility that environmental • The Bank’s Model Risk Management Policy, which provides the concerns involving Scotiabank or its customers could affect the framework for model review and approval under the oversight of the Bank’s financial performance. Operational Risk Committee. To safeguard the Bank and the interests of its stakeholders, Scotiabank • The Bank’s training programs, including the mandatory Anti-Money has an environmental policy, which is approved by the Bank’s Board of Laundering, Operational Risk and Information Security courses and Directors. The policy guides day-to-day operations, lending practices, examinations which ensure employees are aware and equipped to supplier agreements, the management of real estate holdings and safeguard our customers’ and the Bank’s assets. external reporting practices. It is supplemented by specific policies and • Risk mitigation programs, which use insurance policies to transfer the practices relating to individual business lines. risk of high severity losses, where feasible and appropriate. Environmental risks associated with the business operations of each borrower and any real property offered as security are considered in the Reputational risk Bank’s credit evaluation procedures. This includes an environmental assessment where applicable, and commentary on climate change Reputational risk is the risk that negative publicity regarding where it could have a material impact (including regulatory, physical or Scotiabank’s conduct, business practices or associations, whether reputational impacts) on the borrower. Global Risk Management has true or not, will adversely affect its revenues, operations or primary responsibility for establishing the related policies, processes and customer base, or require costly litigation or other defensive standards associated with mitigating environmental risk in the Bank’s measures. lending activities. Decisions are taken in the context of the risk management framework discussed on page 65. Negative publicity about an institution’s business practices may involve any aspect of its operations, but usually relates to questions of business In the area of project finance, the Equator Principles have been ethics and integrity, or quality of products and services. Negative integrated into the Bank’s internal processes and procedures since publicity and attendant reputational risk frequently arise as a 2006. The Equator Principles help financial institutions determine, assess and manage environmental and social risk. The principles apply by-product of some other kind of risk management control failure. to project finance loans and advisory assignments where total capital Reputational risk is managed and controlled throughout the Bank by costs exceed US$10 million, and to certain project-related corporate codes of conduct, governance practices and risk management programs, loans. The Equator Principles provide safeguards for sensitive projects policies, procedures and training. Many relevant checks and balances are to ensure protection of natural habitats and the rights of indigenous outlined in greater detail under other risk management sections, peoples, as well as safeguards against child and forced labour.
88 2014 Scotiabank Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS | RISK MANAGEMENT 89 2014 Scotiabank Annual Report Strategic risk Strategic risk is the riskineffective, that being the poorly Bank’s executed, business or strategieschanges insufficiently are in resilient the to business environment. The Board of Directors isstrategic ultimately risk, responsible by for adopting oversight a of on strategic an planning annual process basis, and a approving, strategicThe plan Bank for manages the its Bank. strategiccoordinated planning efforts process between through the a Executive seriesBusiness Management of Lines Team, and the the Corporatewide Functions. range These of efforts relevant address considerations a allocation, including business capital initiatives, and strategic resource transactionsstress and testing investments, and alignment withFramework. the These Bank’s considerations Risk are Appetite revieweddisciplined in manner. a The consistent process and involvesManagement input Team from and the from entire the Executive Board ofOn Directors. an annual basis, asummarizes comprehensive the Strategy Bank’s Report key is strategic preparedthe considerations, that President and and is Chief presented Executive by their Officer review to and the approval. Board The ofstrategy effectiveness Directors is of for actively the monitored Bank’s and enterprise scorecard measured process, through which a is balanced reported onThe throughout execution the and year. evaluation ofcritically strategic important plans to within the the Bank’s Bankframework. enterprise-wide is The risk Bank management makes continuousemployees efforts are to aware ensure of that the all employees Bank’s are overall also strategic aware direction, of andrespective the that business strategies line and or objectives corporate forbusiness function. their lines On and an corporate ongoing functions basis,internal identify, the and manage external and considerations assess – the affect including the risk achievement factors of – their thatconsidered strategic could on objectives. an These enterprise-wide matters basis are Management by Team, the which Bank’s makes Executive adjustments, as required. The insurance governance and riskcalibrated management within frameworks each are insurance subsidiarynature commensurate and with materiality the of riskinsurance assumed. business Senior units management has within primary the insurance responsibility risk, for with managing oversight byInsurance Global Risk Risk Committee. Management The through insurance the their company own subsidiaries boards have of directors,actuaries as who well provide as additional independent risk appointed managementThe oversight. insurance companies maintain ato number manage of insurance policies risk. and Sound practices element. product The design vast is majority an of essential that risks is, insured they are do short-term not indiversification involve nature, and long-term product-line pricing diversification guarantees. are Geographic as important well. elements Reinsurance is commonlythe used insurance as risk an exposures. effective Insurance tooleffective risk to underwriting is manage and also claim managed adjudication through monitoring practices, of ongoing experience, and stress-testing scenario analysis. Insurance by nature involves theindividual distribution risks of to products the that issuer transfer the with insurance the premiums expectation earned. of The aprimarily Bank return through is built its exposed into creditor, to life insuranceinsurance and risk and select reinsurance property products. and casualty The Bank is both aand distributor underwriter of of third insurance party risk. insuranceinsurance As products products, a the distributor Bank of earns thirdrisk. fees party The but Bank bears bears no insurance insurance either risk through in direct its underwriting role or as via anInsurance reinsurance. underwriter, risk is the riskexperience of being potential different financial from loss that dueprocess assumed to of in actual the the insurance pricing products. Insurance risk Environmental concerns also play aBank’s prominent real role estate in practices shaping andDepartment the purchasing adheres decisions. to The an Real Environmentalresponsible Estate Compliance management Policy of to the ensure Bank’senvironmental real perspective. estate In holdings addition, from recyclingmanagement an and programs resource are in placebranch in networks. the Internal Bank’s tracking corporate systemsenergy offices are use, and in greenhouse place gas with emissionsSince respect (GHG) 2012, to and GHG paper emissions consumption. dataoffices for has the been branch externally network verified.in and A place corporate variety for of energy, reduction paperBank’s measures and environmental are waste. footprint, In it order hasEnvironmental to developed Paper further an Policy. reduce internal the To ensure it continues tomanner, operate the in Bank an monitors environmentally policyongoing responsible and dialogue legislative with requirements government, through industrycountries and where stakeholders it in operates. Scotiabankenvironmental has organizations, been industry meeting associations with andresponsible socially investment organizations with respectbanks to play the to role help that addressbiodiversity, issues promotion such of as sustainable climate forestryenvironmental change, practices, issues protection and important of other to itswhere customers it and operates. communities The Bankpolicies has in an these ongoing areas. process of reviewingScotiabank its has a number ofservices environmentally to related meet products demand and andinclude: promote an the EcoEnergy “green” Financing economy. programand These designed small to business support customers personal whoenergy wish projects; to an install auto small-scale loandiesel renewable product vehicles; for an hybrid, Energy electric andassists and Agriculture corporate clean Commodities clients group, originate which andhome trade renovation carbon program. credits; and an eco- Environmental Reporting Scotiabank is also a signatoryDisclosure to, Project, and which participant provides in corporateinvestment the disclosure community Carbon to on the greenhouse gaschange emissions management. and For climate further information,Bank’s you annual may Corporate access Social the Responsibilitywww.scotiabank.com/csr/reports. report at MANAGEMENT’S DISCUSSION AND ANALYSIS CONTROLS AND ACCOUNTING POLICIES
Controls and procedures to matters that are inherently uncertain. The policies discussed below are Management’s responsibility for financial information contained in this considered to be particularly important to the presentation of the Bank’s annual report is described on page 116. financial position and results of operations, because changes in the estimates, assumptions and judgements could have a material impact on Disclosure controls and procedures the Bank’s consolidated financial statements. These estimates, The Bank’s disclosure controls and procedures are designed to provide assumptions and judgements are adjusted in the normal course of reasonable assurance that information is accumulated and business to reflect changing underlying circumstances. communicated to the Bank’s management, including the President and Allowance for credit losses Chief Executive Officer and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure. The allowance for credit losses represents management’s best estimate of the probable credit losses in the portfolio of deposits with other As of October 31, 2014, the Bank’s management, with the institutions, loans to borrowers and acceptances. Management participation of the President and Chief Executive Officer and CFO, undertakes regular reviews of credit quality to assess the adequacy of evaluated the effectiveness of its disclosure controls and procedures, as the allowance for credit losses. This process requires the use of defined under the rules adopted by the U.S. Securities and Exchange estimates, assumptions and subjective judgements at many levels. Commission (SEC) and the Canadian securities regulatory authorities, These subjective judgements include identifying credits that are and have concluded that the Bank’s disclosure controls and procedures impaired, and considering factors specific to individual credits, as well are effective. as portfolio characteristics and risks. Changes to these estimates or use Internal control over financial reporting of other reasonable judgements and estimates could directly affect the provision for credit losses. Management of the Bank is responsible for establishing and maintaining adequate internal control over financial reporting. These The allowance for credit losses is comprised of collective and controls include policies and procedures that: individually assessed allowances. • pertain to the maintenance of records that, in reasonable detail, Allowances in respect of individually significant credit exposures are an accurately and fairly reflect the transactions and dispositions of the estimate of probable incurred losses related to existing impaired loans. assets of the Bank; In establishing these allowances applicable to individual credit exposures, management individually assesses each loan for objective • provide reasonable assurance that transactions are recorded as indicators of impairment and forms a judgement as to whether the necessary to permit preparation of financial statements in loan is impaired. Loan impairment is recognized when, in accordance with International Financial Reporting Standards (IFRS) as management’s opinion, there is no longer reasonable assurance that issued by the International Accounting Standards Board (IASB), and interest and principal payments will be collected based on original that receipts and expenditures are being made only in accordance contractual terms. Once a loan is determined to be impaired, with authorizations of management and directors of the Bank; and management estimates its net realizable value by making judgements • provide reasonable assurance regarding prevention or timely relating to the timing of future cash flow amounts, the fair value of any detection of unauthorized acquisition, use or disposition of the underlying security pledged as collateral, costs of realization, Bank’s assets that could have a material effect on the financial observable market prices, and expectations about the future prospects statements. of the borrower and any guarantors. All control systems contain inherent limitations, no matter how well Individual provisions were higher in 2014 than in 2013, driven primarily designed. As a result, the Bank’s management acknowledges that its by higher provisions in International Banking. internal control over financial reporting will not prevent or detect all Management estimates allowances on a collective basis for exposures in misstatements due to error or fraud. In addition, management’s certain homogenous portfolios, including residential mortgages, credit evaluation of controls can provide only reasonable, not absolute, card loans and most personal loans. This collective assessment for these assurance that all control issues that may result in material positions involves estimating the probable losses inherent in the portfolio misstatements, if any, have been detected. by using a formulaic method that considers recent loss experience. Management assessed the effectiveness of internal control over financial An allowance is also determined in respect of probable incurred losses reporting, using the Committee of Sponsoring Organizations of the that are inherent in the portfolio, of performing loans, but have not yet Treadway Commission (COSO) 1992 framework, and based on that been specifically identified on an individual basis. Management assessment concluded that internal control over financial reporting was establishes this allowance on a collective basis through an assessment effective as at October 31, 2014. Commencing 2015, the effectiveness of quantitative and qualitative factors. Using an internally developed of internal control over financial reporting will be assessed using the model, management arrives at an initial quantitative estimate of the Internal Control-Integrated Framework 2013 issued by COSO. collective allowance for the performing portfolio based on numerous Changes in internal control over financial reporting factors, including historical average default probabilities, loss given default rates and exposure at default factors. Material changes in any There have been no changes in the Bank’s internal control over of these parameters or assumptions would affect the range of expected financial reporting that have materially affected, or are reasonably likely credit losses and, consequently, could affect the collective allowance to materially affect, the Bank’s internal control over financial reporting level. For example, if either the probability of default or the loss given during the year ended October 31, 2014. default rates for the non-retail portfolio were independently increased Critical accounting estimates or decreased by 10%, the model would indicate an increase or decrease to the quantitative estimate of approximately $74 million The Bank’s accounting policies are integral to understanding and (2013 – $85 million). The non-retail quantitative estimate in 2014, interpreting the financial results reported in this annual report. Note 3 includes an adjustment in respect of variation and uncertainty in the on pages 126 to 138 summarizes the significant accounting policies historically based credit parameters. used in preparing the Bank’s consolidated financial statements. Certain of these policies require management to make estimates, assumptions A qualitative assessment of the collective allowance is made based on and subjective judgements that are difficult, complex, and often relate observable data, such as: economic trends and business conditions, portfolio concentrations, risk migrations and recent trends in volumes
90 2014 Scotiabank Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS | CONTROLS AND ACCOUNTING POLICIES 91 securities related to sold short Derivatives Obligations 2014 Scotiabank Annual Report Assets Liabilities for-sale Available- securities Derivatives assets 100% 100% 100% 100% 100% Trading Fair value hierarchy of financial instruments carried at fair value markets for identical instruments, observable inputs other than quoted prices for the instruments, or are not based on observable market data. Fair value hierarchy T60 Where possible, valuations are basedinputs on obtained quoted from prices active or markets. observable Independent GRM Price oversees Verification a (IPV) monthly processreliability in and order accuracy to of assess prices the fair and value. inputs The used IPV in process theare is determination independent performed of from by the price business. verificationof The groups pricing Bank that sources maintains that an are approvedinclude, used list but in are the not IPV limited process.services. to, These The brokers, sources valuation dealers policies and relating consensuspricing to pricing or the rate IPV sources process used requirean be that independent external all assessment to of the pricing Bank.by or On GRM rate a to sources periodic determine is basis, market also presence performed orWhere market quoted representative prices levels. are notinactive readily or available, illiquid such markets, as internal forobservable models transactions inputs that in are maximize used the to usemanagement estimate of committee fair within value. GRM An oversees independentongoing the senior validation vetting, of approval valuation and modelsRisk used policies in associated determining with fair model value. Executive development Management are and/or approved key by risk committees. During the fourth quarter ofvaluation 2014, adjustment the (FVA) Bank charge recognized of atax), $30 funding relating million to ($22 its million uncollateralized after has derivative been instruments. recorded This in amount TradingIncome. Income This in change the was Consolidated driven Statementfunding by of was growing an market important evidence component thatuncollateralized of term derivatives. the fair value of In determining fair value forinstruments, certain valuation instruments adjustments or or portfolios reserves of at may a be more required accurate to representation arrive applying of valuation fair reserves value. to The a Bank’ssenior portfolio policy management of of committee. instruments These is reserves approvedcredit include by risk, adjustments a bid-offer for spreads, unobservableprices parameters, in constraints inactive on or illiquidThe markets methodology and for when the applicable calculation fundingat of costs. least valuation annually reserves by are senior reviewed management. Valuation adjustments recorded against theand fair financial value liabilities of totaled financial $113 assets (2013 million – as $118 at million), October net 31,adjustments of 2014, are any due write-offs. mainly These to valuation spreads credit on risk derivative considerations transactions. and bid-offer The Bank discloses the classificationfair of value all in financial a instruments hierarchy carriedvaluation based at hierarchy on is the as determination follows: of fair• value. The Level 1 – fair value is based on unadjusted• quoted prices Level in 2 active – fair value is based on models• using significant Level market- 3 – fair value is based on modelsThe using Bank’s significant assets inputs and that liabilitiesclassified which by are the carried valuation at hierarchy fairpages are value 144 reflected as and in 145. Note The 7by percentage on fair of value each hierarchy asset level and are liability outlined category as follows: Level 1Level 2Level 3 61% 38% 58% 1% 37% 5% 3% 94% 3% 89% 11% 3% 96% – 1% and severity of delinquencies andinherent a in component the for model the and imprecision collective model allowance parameters. quarterly Management to reviews assess the appropriate whether level the in allowance relation is to atrisks the the and size trends of in the portfolio portfolio, quality. inherentThe credit total collective allowance forwas credit $2,856 losses million, as an at increase Octoberincrease of 31, was $252 2014, primarily million due from to aallowance changes year amount in earlier. is credit The primarily quality. attributable Theperforming to collective loans business ($584 and million), government withpersonal the lending remainder and allocated credit to cardsmortgages ($1,752 ($520 million) million). and The residential allocationcards to increased personal year lending over and year, credit retail as methodology a in result determining of the anperforming collective enhancement loans. allowance to These on the amounts forand personal for lending residential and mortgages credit include cards and allowances impaired for loans. both performing As noted above, the individualloans, allowance credit for cards credit and losses mortgages forincurred is personal but formula-based not and yet also identified reflects losses. Fair value of financial instruments All financial instruments are measuredrecognition. at Subsequent fair measurement value of on a initial depends financial on instrument its classification. Non-tradingsecurities loans and and most receivables, financial certain liabilitiesunless are classified carried or at designated amortized as cost available-for-sale fair at value inception. through All profit other andthose financial loss designated instruments, or as including fair valuecarried through at profit fair and value. loss at inception,Fair are value of a financialreceived asset to or sell liability an is asset thetransaction or price between paid market that to participants would transfer in be aabsence, the liability the principal, in most or an advantageous in orderly market its at to the which measurement the date. Bank has access The best evidence of fairprice value in for an a active financial market. instrumentvaluation. Quoted is Quoted market the prices prices quoted are represent not atransactions, always Level as available 1 well for as over-the-counter transactionsthese in instances, inactive internal or models illiquid that markets.inputs maximize In are the used use to of estimate observable incorporates fair all value. the The factors chosen that valuationaccount market technique in participants pricing would a take transaction. into observable, When the all valuation significant is inputs classified are traded as in Level a 2. less Financial active instruments prices, market present have value been of valued cash-flows usingvalue or indicative estimates other market normally valuation do techniques. not Fair Where consider financial forced instruments or trade liquidation in sales. models inactive where markets observable or parameters when do using management not judgement exist, is greater required forthat valuation require purposes. the Valuations significant useLevel of 3. unobservable The inputs calculation are of considered conditions estimated at fair a value specific is point basedreflective in on of time market future and fair therefore values. may notThe be Bank has controls andvaluation processes of in financial place instruments to is ensureRisk appropriately that Management determined. the (GRM) Global is responsibleof for the the Bank’s design risk and management application the framework. Bank’s GRM business is units independent and from and is the overseen Board by of Executive Directors. Management GRM Senior oversee management and committees establish within standardsthat for are risk critical management in processes ensuringand that policies appropriate are valuation in methodologies place for determining fair value. MANAGEMENT’S DISCUSSION AND ANALYSIS
Impairment of investment securities Employee benefits Investment securities are evaluated for impairment at the end of each The Bank sponsors various pension and other benefit plans for eligible reporting date, or more frequently, if events or changes in circumstances employees in Canada, the U.S., and other international operations. The indicate the existence of objective evidence of impairment. pension benefits are generally based on years of service and average In the case of equity instruments classified as available-for-sale, a earnings at retirement. Other benefits generally include post-retirement significant or prolonged decline in the fair value of the security below health care, dental care and life insurance, along with other long-term its original cost is considered in determining whether impairment exists. employee benefits such as long-term disability. In the case of debt instruments classified as available-for-sale and Employee benefit expense and the related benefit obligation are held-to-maturity investment securities, impairment is assessed based on calculated using actuarial methods and certain actuarial assumptions. the same criteria as impairment of loans. These assumptions are based on management’s best estimate and are When a decline in value of available-for-sale debt or equity instrument reviewed and approved annually. The management assumption with is due to impairment, the value of the security is written down to fair the greatest potential impact is the discount rate. This rate is used for value. The losses arising from impairment are reclassified from measuring the benefit obligation and is generally prescribed to be accumulated other comprehensive income and included in net gain on equal to the current yield on long term, high-quality corporate bonds investment securities within other operating income in the with durations similar to the benefit obligation. This discount rate must Consolidated Statement of Income. also be used to determine the annual benefit expense. If the assumed discount rate was 1% lower, the benefit expense for 2014 would have The losses arising from impairment of held-to-maturity investment been $109 million higher. Other key assumptions include future securities are recognized in net gain on investment securities within compensation, health care costs, employee turnover, retirement age other operating income in the Consolidated Statement of Income. and mortality. When making these estimates, management considers Reversals of impairment losses on available-for-sale debt instruments expectations of future economic trends and business conditions, resulting from increases in fair value related to events occurring after including inflation rates as well as other factors, such as plan specific the date of impairment are included in net gain on investment experience and best practices. securities within other operating income in the Consolidated Statement The Bank uses a measurement date of October 31, and based on this of Income, to a maximum of the original impairment charge. Reversals measurement date, the Bank reported a deficit of $624 million in its of impairment on available-for-sale equity instruments are not principal pension plans as disclosed in Note 31 to the consolidated recognized in the Consolidated Statement of Income; increases in fair financial statements on pages 179 to 183. value of such instruments after impairment are recognized in equity. Actual experience that differs from assumptions made by management Reversals of impairment losses on held-to-maturity investment will result in a net actuarial gain or loss recognized immediately in other securities are included in net gain on investment securities within other comprehensive income. operating income in the Consolidated Statement of Income, to a Note 31 on pages 179 to 183 of the 2014 consolidated financial maximum of the amortized cost of the investment before the original statements contains details of the Bank’s employee benefit plans, such impairment charge. as the disclosure of pension and other benefit amounts, management’s As at October 31, 2014, the gross unrealized gains on available-for-sale key assumptions, and a sensitivity analysis of changes in these securities recorded in accumulated other comprehensive income were assumptions on the employee benefit obligation and expense. $1,259 million (2013 – $1,297 million), and the gross unrealized losses were $123 million (2013 – $160 million). Net unrealized gains were Corporate income taxes therefore $1,136 million (2013 – $1,137 million) before hedge Management exercises judgement in determining the provision for amounts. The net unrealized gains after hedge amounts were $847 income taxes and deferred income tax assets and liabilities. The million (2013 – $980 million). provision is based on management’s expectations regarding the income tax consequences of transactions and events during the period. At October 31, 2014, the unrealized loss recorded in accumulated Management interprets the tax legislation for each jurisdiction in which other comprehensive income relating to securities in an unrealized loss the Bank operates and makes assumptions about the expected timing position for more than 12 months was $90 million (2013 – of the reversal of deferred income tax assets and liabilities. If $84 million). This unrealized loss was comprised of $23 million (2013 – management’s interpretations of the legislation differ from those of the $26 million) in debt securities, $59 million (2013 – $44 million) related tax authorities or if the actual timing of the reversals of the deferred to preferred shares and $8 million (2013 – $14 million) related to income tax assets and liabilities is not as anticipated, the provision for common shares. The unrealized losses on the debt securities arose income taxes could increase or decrease in future periods. primarily from changes in interest rates and credit spreads. For debt securities, based on a number of considerations, including underlying Total deferred tax assets related to the Bank’s unused income tax losses credit of the issuers, the Bank expects that future interest and principal from operations arising in prior years were $620 million as at payments will continue to be received on a timely basis in accordance October 31, 2014 (October 31, 2013 – $756 million). The tax related to with the contractual terms of the security. 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 MANAGEMENT’S DISCUSSION AND ANALYSIS | CONTROLS AND ACCOUNTING POLICIES 93 2014 Scotiabank Annual Report government. These restrictions have limitedrepatriate the cash Bank’s and ability dividends to out of Venezuela. As at October 31, 2014,Caribe the of Bank’s $54 total million, net along investmentand with in dividend monetary Banco receivable assets, del was comprising translated of1 at cash USD the to SICAD 50 II VEF. exchangeofficial These rate exchange amounts of rate were of previously 1 measured USD at to the As 6.3 a VEF. result the Bankinvestment recorded in a associates reduction of in $129 theto million carrying OCI. with value The a of Bank corresponding the has decrease million also in recognized the foreign Consolidated exchange Statement lossesincome, of of in Income $47 relation as to other the operating monetary assets. Goodwill For the purpose of impairmentcombination testing, is, goodwill on acquired the in acquisition agroup date, business of allocated cash-generating to units each (CGU) ofthe that the particular are Bank’s acquisition. expected to benefit from Goodwill is not amortized butwhen tested circumstances for indicate impairment that annually the and carrying valueGoodwill may is be reviewed impaired. at eachthere reporting is date any to indication determine of whether allocated impairment. for Each impairment CGU testing to purposes whichwhich reflects goodwill goodwill the is is lowest monitored level for at internal managementThe purposes. carrying amount of theapproved CGU internal is economic determined capital by models. managementvarious These using factors models including consider market risk,other credit relevant risk, business operational risks risk, for and recognized each if CGU. the An carrying impairment amount lossamount. of is The a recoverable CGU amount exceeds is itsof the recoverable disposal greater and of value fair in valuevalue use. less in If costs use either exceeds fair the valuedetermine carrying less the amount, costs other. there of The is disposal recoverable nodetermined or amount need using for to the the fair CGU value hasarriving less been at costs such of value disposal an method.considers appropriate In various valuation factors model including is normalized usedearnings net which multiples income, and price control premium.corroborated These by calculations valuation are multiples, quotedtraded share subsidiaries prices or for other publicly availableimpairment fair loss, value in indicators. respect An of goodwill, isSignificant not judgement reversed. is applied inamounts determining of the the recoverable CGU andcircumstances assessing constitute whether objective certain evidence events of or impairment. Goodwill was assessed for annualas impairment at based July on 31, the 2014 methodology and no impairment was determined toIndefinite exist. life intangible assets Intangible assets with indefinite usefultested lives for are impairment not annually amortized and but the when carrying circumstances value indicate may that beeach impaired. reporting Intangible date assets to are determine reviewedimpairment. whether at there is any indication of The recoverable amount is theand greater value of in fair use. value If lessexceeds either costs the fair of carrying value disposal amount, less there costsValue is of in no disposal use need or method to value is determineamount in used the of use by other. the the intangible Bank asset. toappropriate In determine valuation determining the model value recoverable is in used use,management-approved which an cash considers flow factors projections, such discount as terminal rate growth and rate. An impairmentamount loss of is the recognized intangible if asset theImpairment exceeds carrying losses its recognized recoverable in amount. priorreporting periods period are for reassessed any at indication each that the loss has decreased or no investee; and investor’s returns. situations where the Bank holdsor less involving than potential a voting majority rights; of voting rights dominant factor in deciding whoactivities controls are the directed investee by (i.e., contractual relevant arrangements); Structured entities In the normal course ofstructured business, entities the on Bank behalf enters of intoThese its arrangements structured customers with entities and can for be itscommercial generally own paper categorized purposes. conduits, as Bank multi-seller fundingentities. vehicles Further and details structured are finance providedsheet on arrangements pages section. 50 and 51 in theManagement off-balance is required to exercisestructured judgement entity to should determine be whether consolidated. a understanding This the evaluation arrangements, involves determining whetherthe decisions relevant about activities are made by means of voting rightsstructured or entity. other The Bank controls an investeevariable when returns it from is its exposed, involvement orability with has to the rights, affect investee to those and returns hasthree through the elements its of power control over are: the investee.• The power over the investee; • exposure, or rights, to variable returns from involvement with• the the ability to use power over the investee toThis affect definition the of amount control of applies the to• circumstances when voting rights or similar rights give the Bank power, including • when an investee is designed so that voting rights are not the • involving agency relationships; and • when the Bank has controlThe over Bank specified does assets not of controlcapacity. an an The investee. investee Bank when assesses it whether iswhether it acting it is in is an an primarily agent agent’s engaged byanother to determining party act or on parties. behalf Factors andassessment that for include the the the Bank benefit scope considers of of ininvestee, its this the decision-making rights authority held over by the is other entitled, parties, and the the remuneration Bank’s tointerests exposure which that to it it variability holds of in returns the fromThe investee. other analysis uses both qualitativeand and involves quantitative the analytical use techniques ofenvironment a in number which of the assumptions structured aboutand entity the timing operates business of and future the cash amount flows. The Bank reassesses whether itcircumstances controls indicate an that investee one if or factscontrol more and change. of the three elements of Management is required to exercisechange judgement in to control determine event if has a occurred. During 2014, there were noBank change to in change control its events control thatother conclusion caused structured of the entities. its multi-seller conduits or As described in Note 16pages to 163 the to consolidated 165) financial and statementsarrangements in (on (on the pages discussion 50 of and off-balancecanadian-based 51), sheet multi-seller the conduits Bank that does it notrequired sponsors control to and the be they two consolidated are on not Financial the Position. Bank’s The Consolidated Bank Statement controls of and its consolidates U.S.-based it multi-seller on conduit thePosition. Bank’s Consolidated Statement of Financial Equity investment in hyper-inflationary country Venezuela has been designated asforeign hyper-inflationary exchange and controls measures have of been imposed by the Venezuelan contractual arrangements and determining whether the Bank controls the MANAGEMENT’S DISCUSSION AND ANALYSIS longer exists. An impairment loss is reversed if there has been a change Consolidation (IFRS 10) in the estimates used to determine the recoverable amount. An The new accounting standard, IFRS 10, Consolidated Financial impairment loss is reversed only to the extent that the intangible asset’s Statements, replaced the consolidation guidance in IAS 27, Separate carrying amount does not exceed the carrying amount that would have Financial Statements and SIC-12, Consolidation – Special Purpose been determined if no impairment loss had been recognized. Entities. It introduces a single, principle-based control model for all The recoverable amount is significantly impacted by the discount rate entities as a basis for determining which entities are consolidated and and the terminal value. Significant judgement is applied in determining set out the requirements for the preparation of consolidated financial the intangible asset’s recoverable amount and assessing whether certain statements. events or circumstances constitute objective evidence of impairment. The standard was applied retrospectively allowing for certain practical Intangible assets were assessed for annual impairment based on the exceptions and transitional relief. methodology as at July 31, 2014 and no impairment was determined The adoption of IFRS 10 has resulted primarily in the deconsolidation of to exist. Scotiabank Capital Trust and Scotiabank Tier 1 Trust (together, the “capital trusts”) through which the Bank issues certain regulatory Provisions capital instruments. These entities are designed to pass the Bank’s According to IFRS, the Bank should recognize a provision if, as a result credit risk to the holders of the securities. Therefore the Bank does not of a past event, the Bank has a present legal or constructive obligation have exposure or rights to variable returns from these entities. that can be estimated reliably, and it is probable that an outflow of The Bank consolidates all structured entities that it controls, including economic benefits will be required to settle the obligation. Probable in its U.S.-based multi-seller conduit and certain funding and other this context means more likely than not. vehicles. The impact of the deconsolidation on the consolidated financial Litigation and other statements for prior periods is shown in Table 61. In the ordinary course of business, the Bank and its subsidiaries are Disclosure of interests in other entities (IFRS 12) routinely defendants in, or parties to a number of pending and In conjunction with the adoption of IFRS 10, the Bank has adopted threatened legal actions and proceedings, including actions brought on IFRS 12, Disclosure of Interests in Other Entities, that broadens the behalf of various classes of claimants. In view of the inherent difficulty definition of interests in other entities and requires enhanced of predicting the outcome of such matters, the Bank cannot state what disclosures on both consolidated entities and unconsolidated entities the eventual outcome of such matters will be. However, based on with which the Bank is involved. The relevant incremental disclosures current knowledge, management does not believe that liabilities, if any, have been included in Note 16 of the consolidated financial arising from pending litigation will have a material adverse effect on statements. the Consolidated Statement of Financial Position or results of operations of the Bank. Joint arrangements (IFRS 11) Under the new accounting standard, IFRS 11, Joint Arrangements, the Off-balance sheet credit risks Bank classifies its interests in joint arrangements as either joint The provisions for off-balance sheet credit risks relates primarily to operations or joint ventures depending on the Bank’s rights to the off-balance sheet credit risks such as undrawn lending commitments, assets and obligations for the liabilities of the arrangements. The letters of credit and letters of guarantee. These are collectively assessed adoption of the new accounting standard has no impact on the Bank’s in a manner consistent with the collective allowance for performing assets, liabilities and equity. on-balance sheet credit risks. Fair value measurement (IFRS 13) Recently adopted standards and future accounting IFRS 13 provides a revised definition of fair value and guidance on how developments it should be applied where its use is already required or permitted by other standards within IFRS. In accordance with the transitional Changes in accounting policies during the year provisions, IFRS 13 has been applied prospectively from November 1, The Bank has adopted the following new and amended accounting 2013. The adoption of this new standard did not have an impact on standards issued by the IASB effective November 1, 2013. The changes the Bank’s determination of fair value. However, IFRS 13 required have been applied retrospectively, unless otherwise noted. additional disclosures on fair value measurement which are included in Consequently the new accounting policies used by the Bank have been Note 7. described below. Disclosures-offsetting financial assets and financial liabilities (IFRS 7) Employee benefits (IAS 19) IFRS 7 – Financial Instruments: Disclosures – Offsetting Financial Assets The amended standard IAS 19, Employee Benefits, eliminates the use and Liabilities requires the Bank to disclose gross amounts subject to of the corridor approach (the method previously used by the Bank) and rights of set off, amounts set off, and the related net credit exposure. requires the value of the surplus/deficit of the defined benefit plans to These new disclosures are included in Note 11. be recorded on the Consolidated Statement of Financial Position, with actuarial gains and losses to be recognized immediately in OCI. In Presentation of financial statements (IAS 1) addition, the discount rate to be used for recognizing the net interest IAS 1, Presentation of Financial Statements, requires the separate income/expense is based on the rate at which the liabilities are disclosure of items within other comprehensive income based on discounted and not the expected rate of return on the assets. This will whether or not they will be reclassified into net income in subsequent result in higher expense in the Consolidated Statement of Income in periods. On November 1, 2013, the Bank adopted this presentation on line with the funded status of the plan. The OCI balances will change in a retrospective basis along with the implementation of IAS 19. Changes line with changes in the actuarial gains and losses. on remeasurement of employee benefit plans that are recognized The impact of the adoption of the standard on the consolidated directly in other comprehensive income are not reclassified to the financial statements for prior periods is shown in Table 61. Consolidated Statement of Income in future periods.
94 2014 Scotiabank Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS | CONTROLS AND ACCOUNTING POLICIES 95 IFRS 10 Restated IFRS 10 Restated Consolidation Consolidation 2014 Scotiabank Annual Report IAS 19 IAS 19 benefits benefits Employee Employee 777 – (777) – 650 – (650)743 – – (743) – 1,358 – (1,358) – 2,2604,7601,936 – – 337 (42) 31 – 2,218 4,791 2,273 2,2285,2941,780 – – 158 (14) 32 – 2,214 5,326 1,938 (2,969) – (8) (2,977) 35,29931,753 – 1,00021,978 (180) 24 (27)17,689 35,323 (23) 32,726 – 21,775 – 17,689 29,25531,896 – 17125,315 (243) 12 (20)18,793 29,267 (4) 32,047 – 25,068 – 18,793 11,572 (242) (9) 11,321 10,924 (394) (7) 10,523 291,361 – 2,256 293,617 312,487 – 1,507 313,994 505,575668,044 – 95 – 86 505,575 668,225 569,709743,788 – (236) 92 – 743,644 569,709 reported reported Previously Previously $668,044 $ 95$$ 5.31 5.22 $ 86 $668,225 $ $ 5.27 5.18 $743,788 $(236)$$ 5.19 $ 5.15 92 $743,644 $ $ 5.15 5.11 $ 33,361 $ – $ 15 $ 33,376 $ 34,303 $ – $ 16 $ 34,319 (1) (1) Non-controlling interests in subsidiariesCapital instrument equity holders 966 (11) (9) 946 Non-controlling interests in subsidiariesCapital instrument equity holders 1,155 (7) (10) 1,138 Summary of impact on adoption of new and amended accounting standards Derivative financial instruments Capital instruments Other liabilities Retained earnings Accumulated other comprehensive income (loss)Non-controlling interests (31) (714) – (745) Derivative financial instruments Capital instruments Other liabilities Retained earnings Accumulated other comprehensive income (loss)Non-controlling interests 545 (157) – 388 Investment securities Loans – Business and governmentAllowance for credit losses Property and equipment Investment in associates Deferred tax assets Other assets Deposits – Business and government 111,549 – 99 111,648 Investment securities Loans – Business and governmentProperty and equipment Investment in associates Deferred tax assets Other assets Deposits – Business and government 119,550 – 65 119,615 Liabilities not impacted by changesEquity impacted by changing IFRS accounting standards Equity not impacted by changes Total liabilities and equity Net income for the year ended October 31,Earnings 2012 per share Basic Diluted 266,894 – $ 6,466 $ (41) – $ (35) 266,894 $ 6,390 Liabilities not impacted by changesEquity impacted by changing IFRS accounting standards Equity not impacted by changes Total liabilities and equity Net income for the year ended October 31,Earnings 2013 per share Basic Diluted 322,949 – $ 6,697 $ (68) – $ 322,949 (19) $ 6,610 (1) Includes deposit liabilities designated at fair value through profit or loss of $174 (November 1, 2012 - $157). Assets impacted by changing IFRS accounting standards Assets not impacted by changes Total assets Liabilities impacted by changing IFRS accounting standards As at November 1,($ 2012 millions) Assets impacted by changing IFRS accounting standards Assets not impacted by changes Total assets Liabilities impacted by changing IFRS accounting standards As at October 31,($ 2013 millions) T61 The following tables summarize the impact of the changes: MANAGEMENT’S DISCUSSION AND ANALYSIS
Future accounting developments previous revenue standard IAS 18, Revenue, and the related The Bank actively monitors developments and changes in standards Interpretations on revenue recognition. The standard scopes out from the IASB as well as regulatory requirements from the Canadian contracts that are considered to be lease contracts, insurance contracts Securities Administrators and OSFI. and financial instruments, and as such will impact the businesses that earn fee and commission revenues. The new standard is a control- Effective November 1, 2014 based model as compared to the existing revenue standard which is The IASB issued a number of new or amended standards that are primarily focused on risks and rewards. Under the new standard effective for the Bank as of November 1, 2014. The Bank has revenue is recognized when a customer obtains control of a good or completed its assessment phase and will be able to meet the service. Transfer of control occurs when the customer has the ability to requirements of the new standards in the first quarter of 2015. Based direct the use of and obtain the benefits of the good or service. The on the assessments completed the Bank does not expect the impact of standard is effective for the Bank on November 1, 2017, with early adoption of these standards to be significant. adoption permitted, using either a full retrospective approach or a modified retrospective approach. A majority of the Bank’s revenue Presentation of own credit risk (IFRS 9) generating instruments meets the definition of financial instruments IFRS 9 Financial Instruments, requires an entity choosing to measure a and remains out of scope. The areas of focus for the Bank’s assessment liability at fair value to present the portion of the change in fair value will be fees and commission revenues from wealth management and due to the changes in the entity’s own credit risk in the Consolidated other banking services. Statement of Other Comprehensive Income, rather than within the Effective November 1, 2018 Consolidated Statement of Income. The IASB permits entities to early adopt this requirement prior to the IFRS 9 mandatory effective date of Financial Instruments January 1, 2018. The Bank will early adopt these requirements as of On July 24, 2014, the IASB issued IFRS 9 which will replace IAS 39. The Q1, 2015. standard covers three broad topics: Classification and Measurement, Impairment and Hedging. Levies IFRIC 21, Levies, provides guidance on when to recognize a liability to Classification and Measurement pay a levy imposed by government that is accounted for in accordance The standard uses a single approach to determine whether a financial with IAS 37, Provisions, Contingent Liabilities and Contingent Assets, asset is measured at amortized cost or fair value. Financial assets will be and also for a liability to pay a levy whose timing and amount is certain. measured at fair value through profit or loss unless certain conditions are The interpretation clarifies that an obligating event, as identified by met which permits measurement at amortized cost or at fair value through legislation, would trigger the recognition of a liability to pay a levy. other comprehensive income. Most of the IFRS 9 requirements for financial While the interpretation discusses the timing of the recognition, it does liabilities have been carried forward unchanged from IAS 39. not change the measurement of the amount to be recognized. Impairment Novation of Derivatives and Continuation of Hedge Accounting The standard introduces a new single model for the measurement of This amendment to IAS 39, Financial Instruments: Recognition and impairment losses on all financial instruments subject to impairment Measurement, adds a limited exception to IAS 39 to allow hedge accounting. The expected credit loss (ECL) model replaces the current accounting to continue in a situation where a derivative, which has “incurred loss” model and is based on a forward looking approach. been designated as a hedging instrument, is novated to effect clearing The ECL model contains a “dual stage” approach which is based on with a central counterparty as a result of laws and regulation, if specific the change in credit quality of loans since initial recognition. Under the conditions are met. first stage, an amount equal to 12 months expected credit losses will Presentation be recorded for financial instruments where there has not been a significant increase in credit risk since initial recognition. Under the The amendments to IAS 32, Financial Instruments: Presentation, second stage, an amount equal to the lifetime expected losses will be clarifies the requirements relating to offsetting financial assets and recorded for those financial instruments where there has been a financial liabilities. significant increase in credit risk since initial recognition. Disclosures for Non-financial Assets Hedging The amendment to IAS 36, Impairment of Assets, provides new disclosure requirements relating to the measurement of the recoverable The standard expands the scope of hedged items and hedging items to amount of impaired assets as a result of issuing IFRS 13, Fair Value which hedge accounting can be applied. It changes the effectiveness Measurement. testing requirements and removes the ability to voluntarily discontinue hedge accounting. Effective November 1, 2017 The standard is effective for the Bank on November 1, 2018 on a Revenue from Contracts with Customers retrospective basis with certain exceptions. Early adoption is permitted On May 28, 2014, the IASB issued IFRS 15, Revenue from Contracts and if elected must at a minimum be applied to both the classification with Customers, which provides a single principle based framework to and measurement and impairment models simultaneously. The Bank is be applied to all contracts with customers. IFRS 15 replaces the 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 MANAGEMENT’S DISCUSSION AND ANALYSIS | CONTROLS AND ACCOUNTING POLICIES 97 287 511 $1 $12 $58 2013 $20 2013 $4 $5 223 553 $75 2014 $11 2014 2014 Scotiabank Annual Report Transactions with associates and joint ventures Loans and deposits of key management personnel Guarantees and commitments Deposits Deposits Net income Loans T64 As at and for the year ended October 31 ($ millions) Scotiabank principal pension plan The Bank manages assets of$1.7 $1.8 billion) billion which (October is 31, a 2013assets portion – and of earned the $4 Scotiabank million principal (October pension 31, plan 2013 –Oversight $4 and million) governance in fees. The oversight responsibilities of theCommittee Audit (ACRC) and with Conduct respect Review toreviewing related policies party and transactions practices include forparties identifying that transactions may with materially related affectprocedures the for Bank, ensuring and compliance reviewing with the transactions. the The Bank Bank Act Act for requirements relateddefinition encompass party of a related broader party transactionsBank than has is various set procedures out in ininformation place GAAP. is to The identified ensure and that reported relatedbasis. to party The the ACRC ACRC is on provided aBank’s with semi-annual compliance detailed with reports its that established reflect procedures. the The Bank’s Internal Audit departmentnecessary carries to out provide audit the procedures ACRC as Bank’s with policies reasonable and assurance procedures that to the party identify, transactions authorize are and appropriately report designed related and operating effectively. portion of their fees inimmediately. the Commencing form in of fiscal deferred 2004, stockstock the units options Bank which to no vest non-officer longer directors. grants payments Refer for to further Note details 29 of – these Share-based plans. Loans and deposits of key management personnel T63 As at October 31 ($ millions) Loans In Canada, loans are currentlyat granted market to terms key and management conditions. personnel discontinued Effective the March practice 1, of 2001, granting thepersonnel loans Bank in to Canada key at management reducedto rates. March Any 1, of 2001, these are loans grandfathered granted untilThe prior maturity. Bank’s committed credit exposureby to directors companies totaled controlled $9.4 million2013 as – at $3.5 October million) 31, while 2014(October actual (October 31, utilized 31, 2013 accounts – were $1.3 $3.4 million). million Transactions with associates and joint ventures In the ordinary course ofservices business, and the enters Bank into provides transactions normalrelated with banking corporations its on associated terms and similar other parties. to If those these offered transactions to are non-related not eliminated disclosed on as consolidation, related they party are Bank transactions. and Transactions its between associated the companiesrelated and party joint transactions ventures and also are qualify as as follows: 2 34 $20 $56 2013 3 25 $17 2014 (1) (1) (2) Compensation of the Bank key management personnel Equity-based payment Total $ 45 Pension and other benefits Directors can use some ofcommon all shares of of their the director Bank feesShare at earned Purchase market to Plan. rates buy Non-officer through directors the may Directors’ elect to receive all or a Salaries and cash incentives (1) Expensed during the year (2) Awarded during the year T62 For the year ended October 31 ($ millions) Related party transactions Compensation of key management personnel Compensation of the Bank keyhaving management authority personnel and are responsibility those for persons the planning, activities directing of and the controlling Bank,of directly the or Bank, indirectly, the and President comprisereports and the of Chief directors the Executive President Officer, and certainHeads, Chief direct and Executive the Officer, Chief including Financial Group Officer. Protection Act. The Bank monitorsis these working and to other ensure developments business and impacts,On if February any, 18, are 2014 minimized. theSystem Board (“Federal of Reserve”) Governors in of the theimplement U.S. Federal the approved Reserve enhanced the prudential final standards rulerequirements and to of early sections remediation 165 andholding 166 companies of and the foreign Dodd-Frank banking Actforeign organizations. for banking With bank organizations, respect the to overallstrengthen intent the of regulation the of final the ruleorganizations U.S. is by operations to requiring of home foreign country banking with capital the certification Basel consistent capital framework,comparable home to country U.S. capital standards, stress maintenance tests branches of and a agencies liquidity and buffer establishment forthe of U.S. appointment a of U.S. a risk U.S. committeeensure chief with compliance risk with officer. the The final Bank rule willOn by work December the to 10, effective help 2013, date the ofimplementing Federal July Section Reserve 2016. 619 approved of a Dodd finalVolcker Frank, rule Rule. commonly The known Volcker as Rule the banking imposes entities prohibitions and and their restrictions affiliates on trading in and connection investing with in proprietary orfunds. sponsoring In of the hedge final funds rule, orperiod the private to Federal equity July Reserve 2015. extended The thecompliance Bank conformance with is the currently Volcker working rule to by helpThe July ensure Foreign 2015. Account Tax Compliancedesigned Act to (FATCA) prevent is U.S. U.S. taxpayers legislation the from U.S. using to accounts evade held taxes. outsideregulations, FATCA, of will and require in financial some institutions countries,specified to related accounts report local held annually outside on ofreporting the will U.S. be by made U.S. available taxpayers.either to This directly the or U.S. through Internal local RevenueOECD regulatory Service member agencies. countries A intend number to ofautomated implement other exchange requirements of for information relatingcountries to commencing tax in residents 2016. of Across those Bank our intends entire to global meet network, all the exchange obligations of imposed tax under information FATCA regimes andand in other tax accordance regulations. with Under local the banking office, guidance dedicated of project an teams enterprise in program working each to of meet the all business such linesnegative obligations are impact worldwide on while the minimizing client experience. MANAGEMENT’S DISCUSSION AND ANALYSIS SUPPLEMENTARY DATA
Geographic information
T65 Net income by geographic segment
2014 2013 2012
Other Other Other For the fiscal years Inter- Inter- Inter- ($ millions) Canada U.S. Mexico Peru national Total Canada U.S. Mexico Peru national Total Canada U.S. Mexico Peru 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 MANAGEMENT’S DISCUSSION AND ANALYSIS | SUPPLEMENTARY DATA 99 2010 768 951 475 183 596 Total 2013 1,795 3,928 1,626 3,096 2,472 1,772 2,022 2,011 1,755 2,933 6,407 2,004 5,145 4,582 CGAAP CGAAP $ 7,928 $ 25,408 $ 4,287 $ 9,203 $ 23,084 $ 956 (1) 84 2011 583 501 2014 Total 1,761 1,486 3,323 1,754 2,822 2,670 1,245 2,185 1,999 2,653 1,877 1,016 6,126 2,606 5,254 5,280 $ 9,087 $26,332 $ 9,060 $ 5,384 $25,316 $ 1,014 (1) 2014 Scotiabank Annual Report 2012 IFRS IFRS (1) 38 20 (12) (13) 130246402 89 180 348 145 85 297 168 104 352 184223326 139 145 266 8 152 230 179 250 219 2013 2012 2011 2010 2013 1,946 1,890 1,843 2,497 f ultimate risk. Totals may not add due to rounding. $ 472 $ 515$ 1,288 $ 621 $ 1,152 $ $ 1,136 712 $ 1,323 $ 3,701 $ 3,622 $ 3,401 $ 4,421 $ 1,022 $ 1,182 $ 1,168 $ 1,276 (1) 6 11 subsidiaries 314 423 240 267 528 2014 2014 and affiliates Other 2,336 Investment in $ 4,200 $ 1,116 $662 $ 1,703 securities and other Government deposits Interbank (1) 1,497 87 12 57 344 2 1,387 447 125 112 – 113 $ 11,901 $ 7,657 $ 867 $ 2,014 $ 2,800 $ 1,093 $ 6,260 $ 632 $ 105 $ 75 $ 1,983 $ 6 $ 10,440 $ 4,142 $ – $ 160 $10,522 $ 52 (3) (2) Cross-border exposure to select countries Provision against impaired loans by geographic segment Gross impaired loans by geographic segment Central America Republic $ 800 $ 129 $ 68 $ 14 – $ 3 Asia China $ 3,689 $ 4,342 $ 153 $ 519 $ 359 $ 24 Hong KongMalaysia 1,377 105 956 175 72 – 171 17 – 306 35 32 Canada U.S. Mexico Peru Other International Total T69 IndiaJapanSouth KoreaThailandTurkey 2,123Other 1,854 137 1,000 8 370 632 38 43 – 876 – 89 428 167 – 276 700 53 – – – – 2,134 34 791 60 – 4 – (2) Includes Indonesia, Macau, Singapore,(3) Taiwan and Includes Vietnam. other English and Spanish Caribbean countries, such as Bahamas, Barbados, British Virgin Islands, Trinidad & Tobago, Turks & Caicos. (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 o Panama 2,443 181 25 4 – 1 As at October 31 ($ millions) Loans Trade T68 For the fiscal years ($ millions) (1) Excludes Federal Deposit Insurance Corporation (FDIC) guaranteed loans related to the acquisition of R-G Premier Bank of Puerto Rico. Total Costa RicaEl SalvadorTotal 1,010 446 152 82 – – – – 715 488 – – As at October 31 ($ millions) T67 Latin America BrazilChile $ 2,717 2,712 $ 2,369 727 – – $ 104 – $ 181 $ 2,668 12 19 ColombiaMexicoPeruUruguay 778 1,749 2,254 223 366 427 228 25 – – – – 3 54 – – 1,455 3,022 2,784 335 4 2 14 – OtherTotal Caribbean and Dominican Jamaica 6Other – 64 – 1 – – – 78 – 435 – Total Canada U.S. Mexico Peru Other International 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 MANAGEMENT’S DISCUSSION AND ANALYSIS | SUPPLEMENTARY DATA 101 (9) (36) – 40 30 55 14 (118)79 (80) 221 (313) (91) (66) (130) 179113 185 76 71 152 111 84 71 443 375 349 120 107 (71) (201) (200) (192) (449) (299) (628) (208) (194)(728) – (733) (374) (276) (211) (21) 2013 2012 2011 1,288 1,252 1,076 1,428 1,412 1,082 2,863 2,825 2,790 2014 Scotiabank Annual Report (1,469) (1,298) (1,324) (1,469) (1,298) (1,324) (1,218) (1,183) (1,708) (1,272) (1,272) (1,224) $ 3,701 $ 3,622$ 1,617 $ 3,401 $ 1,406 $ 1,385 $ 1,808 $ 2,005 $ 1,995 $ 1,893 $ 1,617$ 2,005 $ 1,406 $ 1,995 $ 2,329 $ 536 $ 733 $ 771 $ 3,622 $ 3,401 $ 3,714 93 97 87 (69) (32) (11) 223 107 510 499 (338) (463) (141) (305) 2014 1,703 2,299 3,767 (1,897) (1,897) (1,295) (1,027) (1,272) $ 4,200 $ 1,893 $ 2,002 $ 2,198 $ 1,808 $ 730 $ 3,701 (3) (1) (2) Changes in net impaired loans Personal loans Credit cards Business and government Business and government Payments Personal loans Credit cards Residential mortgages Sales Residential mortgages Declassifications New additions Foreign exchange and other Foreign exchange and other Write-offs Balance at end of year Allowance for credit losses on impairedBalance loans at beginning of year Provision for credit losses Recoveries Write-offs Balance at end of year Collective allowance on performing loans Balance at end of year Net impaired loans Balance at beginning of year Net change in gross impaired loans Net change in allowance for credit losses on impaired loans Balance, after deducting collective allowance on performing loans, at end of year (1) Excludes Federal Deposit Insurance(2) Corporation (FDIC) 2011 guaranteed information loans has related been to(3) presented the in acquisition Includes aggregate of $4 for R-G million declassification, Premier transferred payments Bank to/from and of other sales Puerto liabilities in (2013 Rico. “payments”. – $4 million, 2012 – $4 million, 2011 – $8 million). Net additions For the fiscal years ($ millions) Balance at beginning of year T72 Gross impaired loans 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 9106 Mining and primary metals 12 – (1) 1 Utilities 24 10 2 3 Health care 15 5134 Technology and media 32 6716 Chemical – ––– Food and beverage 9 2 (1) 3 Forest products – –74 Other 6 42 41 30 Sovereign – 33– 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 MANAGEMENT’S DISCUSSION AND ANALYSIS | SUPPLEMENTARY DATA 103 Total Total 2013 2013 9,019 36,959 31,856 34,034 30,072 14,653 17,703 17,859 47,622 166,712 119,173 104,366 $ 663,462 $ 301,911 $ 39,325 $ 268,312 $ 570,223 $ 173,719 $ 390,613 (1) losses Net 2013 for credit Total Total Allowance 2014 Scotiabank Annual Report ––– 835 3–3 211 (3) 1556565223 7 12 2851 29 8 8 44 28 23 9 15 42 12 9 3 814776 55 22 34 26 25 42 247 98 149 154 41 113 351 119 232 151 86 65 Gross 1,046 994 52 Retail Other $ 1,385 $ 561 $ 824 $ 2,316 $ 1,332 $ 984 $ 1,270 $ 338 $ 932 exposures (3) 2014 vailable-for-sale equities and other assets. Other 2014 s. exposures ansactions after collateral. ons after collateral. (1) losses Net 6,961 1,229 6,519 14,709 2014 20,138 – – 20,138 61,439 36,797 30,071 128,307 36,192 16,196 – 52,388 Drawn Undrawn Non-Retail 154,437 – – 154,437 for credit Allowance $ 36,048 $ 12,868 $ – $ 48,916 $ 430,397 $ 84,703 $ 83,171 $ 598,271 $ 115,182 $ 17,613 $ 46,581 $ 179,376 2–2 431 11– 625116 2254 2612 9 40 18 25 7 4 36 8 44881482 51 24 4 41 (7) 64 10 41 15 5 10 265 20 245 113 88 25 168 80 88 270 91 179 194 127 67 30,372 3,823 2,993 82 37,270 20,460 944 1,372 11,782 34,558 17,279 1,382 1,519 14,387 34,567 13,962 5,787 9,522 – 29,271 12,461 974 2,659 5,297 21,391 11,473 307 1,032 7,963 20,775 64,690 19,436 32,843 – 116,969 Drawn Undrawn 1,254 1,225 29 Gross $ 61,914 $26,735 $33,969 $283,100 $405,718 $ 1,455 $ 614 $ 841 $ 2,745 $ 1,584 $ 1,161 $ 1,491 $ 359 $ 1,132 (1)(2) (1)(2) (4) Bank Non-bank AIRB credit risk exposures by maturity Total credit risk exposures by geography Impaired loans by type of borrower Utilities Health care Technology and media Chemical Food and beverage Forest products Sovereign Mining and primary metals Other Oil and gas Transportation Automotive Agriculture Hospitality and leisure Other Real estate and construction Latin America Wholesale and retail Financial services Caribbean and Central America Personal loans and credit cards Europe Residential mortgages Total $ 4,200 $ 2,198 $ 2,002 $ 3,701 $ 1,893 $ 1,808 Business and government Total $232,611 $59,388 $85,909 $322,611 $700,519 Personal Revolving credits Other International Over 5 years As at October 31 ($ millions) Total non-retailRetail Less than 1 year One to 5 years $ 183,582 $ 55,639 $ 83,171 $ 322,392 Over 5 years Peru Total retail $ 246,815 $ 29,064 $ – $ 275,879 Total (2) Exposure at default, before(3) credit risk Off-balance mitigation. sheet lending instruments,(4) such as Credit letters cards of and credit, lines letters of of credit guarantee, with securitization, unspecified derivatives maturity. and repo-style transacti (1) Remaining term to maturity of the credit exposure. Includes all credit risk portfolios and excludes available-for-sale equities and other asset T77 As at October 31 ($ millions) (1) Geographic segmentation is based upon the location of the ultimate risk of the credit exposure. Includes all credit risk portfolios and excludes a (2) Amounts represent exposure at(3) default. Includes off-balance sheet lending instruments such as letters of credit, letters of guarantee, derivatives, securitization and repo-style tr (1) Excludes Federal Deposit Insurance Corporation (FDIC) guaranteed loans related to the acquisitionT76 of R-G Premier Bank of Puerto Rico. As at October 31 ($ millions) T75 One to 5 years Non-retail Less than 1 year Mexico U.S. Canada Residual maturity MANAGEMENT’S DISCUSSION AND ANALYSIS
T78 Total credit risk exposures and risk-weighted assets
2014 2013
AIRB Standardized(1) Total Total
CET1 risk- CET1 risk- CET1 risk- Risk- Exposure at weighted Exposure at weighted Exposure at weighted Exposure at weighted As at October 31 ($ millions) Default(2) assets(3) Default(2) assets(3) Default(2) assets(3) Default(2) 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 MANAGEMENT’S DISCUSSION AND ANALYSIS | SUPPLEMENTARY DATA 105 14% 11% 15% 12 15 10 12 0.7 0.7 2014 2013 versus (1) 2012 (1) 2013 versus 2012 277274268819 247 248 252 747 20.8 19.7 27.9 26.6 2013 2014 Scotiabank Annual Report $ 2,556$ 8,347 $ 2,315 $ 7,958 $ 1,737 $ 1,568 2173 (25) (104) (4) (31) 22 (39) (17) 2194 (63) (66) (42) 28 150 (193) (43) 476 151 627 478 (271) 207 218 (176) 42 796112 (516) (89) 280 23 1,023 (734) 289 1,492 (573) 919 2,446 (693) 1,753 Increase (decrease) due to change in: volume rate change Average Average Net $ 2,684 $ (1,017) $ 1,667 $ 1,661 $ (283) $ 1,378 $ (6) $ (2) $ (8) $ 2,684 $ (1,017) $ 1,667 $ 556 $ (301) $ 255 $ 1,023 $ (734) $ 289 312 314 295 921 21.5 28.6 2014 $ 2,923 $ 9,300 $ 2,002 on; 2012 – $1,057 million). fer to Note 4 in the consolidated financial statements). 2014 versus 2013 102721 (5) (38) (121) (11) 5 (100) 18 32 50 3659 (46) (155) (10) (96) 381 (811) (430) 156 33 189 583 (72) 511 426 (477) (51) 289 (346) (57) 392 (581) (189) (106) (29) (135) 1,165 (516) 649 Increase (decrease) due to change in: volume rate change Average Average Net $ 1,246 $ (719) $ 527 $ 865 $ 92 $ 957 $ 23 $ (39) $ (16) $ 1,246 $ (719) $ 527 $ 85 $ (267) $ (182) $ 381 $ (811) $ (430) (2) (3) Provision for income taxes Volume/rate analysis of change in net interest income (1) agreements Total tax rate (%) Net income before income taxes Effective income tax rate (%) (2) Comprising $1,679 million of(3) Canadian taxes Total (2013 income – and $1,403 other million; taxes 2012 as – a $1,258 percentage million) of and net $1,244 income million before of income foreign and taxes other (2013 taxes. – $1,153 milli (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 (re T80 For the fiscal years ($ millions) (1) Refer to non-GAAP measures(2) on page Prior 17. period Totals amounts may have not been add restated due to to conform rounding. with current year presentation. TEB ($ millions) T79 Revenues and Expenses Net interest income Total earning assets Income taxes Provision for income taxes Other taxes Payroll taxes Business and capital taxes Harmonized sales tax and other Total other taxes Total income and other taxes Total interest-bearing liabilities Change in net interest income Assets Deposits with banks Trading assets Securities purchased under resale agreements Investment securities Loans: Residential mortgages Personal loans and credit cards Business and government Total loans Total earning assets Liabilities Deposits: Personal Business and government Banks Total deposits Obligations related to securities sold under repurchase Subordinated debentures Other interest bearing liabilities Total interest bearing liabilities 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 MANAGEMENT’S DISCUSSION AND ANALYSIS | SUPPLEMENTARY DATA 107 (1) 2013 2014 Scotiabank Annual Report Q4 Q3 Q2 Q1 9.1 8.9 8.6 8.2 4.1 4.4 4.4 4.4 4.1 4.2 4.1 4.1 1.9 1.8 1.9 1.9 503 530 514 502 321426 314 451 343 432 310 428 11.113.517.1 11.0 13.8 17.1 10.7 13.6 17.5 10.3 13.5 17.3 1.301.29 1.37 1.36 1.23 1.22 1.26 1.24 40.2 38.6 36.9 35.9 1.3115.8 1.38 17.2 1.23 16.5 1.26 16.8 2.3153.3 2.3396.5 52.2 2.30 101.8 55.2 104.3 2.29 104.5 53.1 76.6 69.8 69.6 69.9 12.3 11.5 10.8 11.0 0.440.31 0.46 0.31 0.45 0.35 0.49 0.32 0.62 0.60 0.60 0.57 54.4 53.7 53.9 53.9 288.2 282.3 280.7 280.1 2,6005,400 2,659 5,515 2,513 5,213 2,474 5,171 1,6761,567 1,747 1,637 1,582 1,467 1,605 1,491 5,4772,977 5,594 3,003 5,295 2,856 5,245 2,828 517.9 507.3377.8145.5 520.0 360.5 134.6 514.7 362.6 135.2 352.1 130.6 1,8083,273 1,874 3,213 1,809 3,220 1,934 3,105 2,874 2,930 2,779 2,767 402.2743.6 397.3 742.5 394.7 754.3 388.7 736.5 33.23 32.12 30.82 30.15 2,8772,526 2,935 2,585 2,782 2,434 2,771 2,404 64.1057.3563.39 60.15 55.101,204 58.01 61.841,210 56.331,209 1,198 58.09 59.20 1,207 52.30 1,203 1,193 58.65 1,213 1,198 1,186 1,204 1,192 fer to Note 4 in the consolidated financial statements). Capital measures have 2014 Q4 Q3 Q2 Q1 2.9 2.9 3.2 3.8 3.8 3.6 4.0 3.9 1.9 2.0 1.9 1.8 475 687 639 555 574374 398 598 375 555 356 475 12.213.917.1 12.3 14.1 16.8 11.3 13.3 17.9 11.2 13.5 17.4 1.101.10 1.86 1.85 1.40 1.39 1.33 1.32 45.0 44.2 43.010.8 42.4 10.9 9.8 9.4 1.1111.9 1.86 20.6 1.40 16.3 1.34 15.4 2.3956.7 2.41 50.0 2.42 59.8 2.35 55.3 84.0 90.1 81.0 74.2 12.1 12.6 12.3 11.7 0.460.53 0.43 0.37 0.45 0.36 0.43 0.34 0.66 0.64 0.64 0.62 57.5 47.8 51.6 54.2 312.5 307.8 300.2 302.1 2,7435,747 3,421 6,487 2,755 5,725 2,717 5,645 1,438 2,351 1,800 1,709 1,343 2,267 1,699 1,607 5,8483,361 6,576 3,140 5,809 2,995 5,725 3,105 554.0 545.1427.5164.8 551.5 421.9 164.8 539.4 419.0 158.8 393.1 153.3 2,0023,641 1,877 3,406 1,941 3,364 1,833 3,361 3,099 3,150 3,051 3,005 113.2424.3805.7 120.4 418.9 791.5 117.7 418.9 791.8 113.0 414.8 782.8 36.96 36.34 35.33 34.87 3,1052,648 3,155 3,337 3,054 2,674 3,008 2,640 74.3964.0569.02 74.93 66.181,217 74.01 66.721,223 59.921,217 1,217 66.60 66.75 1,225 60.56 1,217 1,215 61.10 1,222 1,217 1,209 1,217 1,215 (4) ($) (2) ) ) (2) ($ billions) (4) (2) (2) ) ) (2) ) (2) (2) (2) ) (2) (%) ($ millions) (2) (%) (5) (3) Selected quarterly information not been restated for the new IFRS standards as they represent the actual amounts in the period for regulatory purposes. (annualized) High Low Close Average – Basic Average – Diluted End of period Tier 1 capital ratio (%) Total capital ratio (%) Asset to capital multiple CET1 risk-weighted assets ($ billions) Credit quality Net impaired loans ($ millions) Total revenue Total revenue (TEB Net income Net income attributable to common shareholders Operating performance Basic earnings per share ($) Diluted earnings per share ($) Adjusted diluted earnings per share Operating expenses Provision for income taxes (TEB Provision for credit losses Provision for income taxes Common equity Preferred shares Assets under management Capital measures Common Equity Tier 1 (CET1) capital ratio (%) Allowance for credit losses ($Net millions) impaired loans as a % of loans and acceptances Assets under administration (2) Refer to page 17(3) for a Prior discussion period of amounts non-GAAP have(4) measures. been restated Excludes to Federal conform Deposit with Insurance(5) current Corporation period (FDIC) presentation. Based guaranteed on loans the related average to of the the acquisition high of and R-G low Premier common Bank share of price Puerto for Rico. the period. (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 (re Operating results Net interest income (TEB Return on equity Productivity ratio (%)(TEB As at and for the quarter ended Net interest income T83 Selected Quarterly Information Financial position information Trading assets Loans Total assets Deposits Market capitalization ($ billions) (TSX) Book value per common shareMarket ($) value to book value multiple Cash and deposits with financial institutions Price to earnings multiple (trailing 4 quarters) Non-interest revenue Non-interest revenue (TEB Provision for credit losses as a % of average loans andCommon acceptances share information Share price ($) (TSX) Shares outstanding (millions) Dividends per share ($) Dividend yield Core banking margin (%)(TEB 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 MANAGEMENT’S DISCUSSION AND ANALYSIS | SUPPLEMENTARY DATA 109 2011 (1) 2012 IFRS (1) ––58 – – 138 217 220 216 231 196 91 742 691 745 339 381 369 279 287 275 190 221 221 2014 Scotiabank Annual Report 2013 7,4786,917 7,1893,032 6,2461,288 6,841 3,4308,347 5,727 1,2521,737 2,569 7,958 1,076 1,568 6,753 1,423 6,397 6,117 5,589 1,000 1,045 986 11,350 9,97021,29911,664 19,646 9,014 10,436 17,310 9,481 18,828 17,159 15,855 $ 5.11 $ 5.18 $ 4.53 $ 5.15 $ 5.27 $ 4.63 $ 6,162 $ 5,974 $ 4,965 $ 6,379 $ 6,194 $ 5,181 $ 231 $ 196 $ 149 $ 6,610 $ 6,390 $ 5,330 $ 17,359 $ 15,606 $ 14,373 – – 155 227 858 204 263 921 180 2014 7,235 7,737 3,562 1,703 9,300 2,002 6,173 fer to Note 4 in the consolidated financial statements). 12,305 23,604 12,601 19,540 $ 5.66 $5.69 $ 6,916 $ 7,071 $ 227 $ 7,298 $ 18,176 Consolidated Statement of Income Diluted Basic Common shareholders Preferred shareholders Capital instrument equity holders Non-controlling interests in subsidiaries Earnings per common share (in dollars) Net income attributable to equity holders of the Bank Net income attributable to non-controlling interests Net interest income Net fee and commission revenues Other operating income Total revenue Provision for credit losses Operating expenses Income before taxes Income tax expense Net income Other Capital instruments Interest expense Deposits Subordinated debentures Deposits with financial institutions Securities Securities purchased under resale agreements and securities borrowed (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 (re For the year ended October 31 ($ millions) T85 Revenue Interest income Loans 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 MANAGEMENT’S DISCUSSION AND ANALYSIS | SUPPLEMENTARY DATA 111 2014 Scotiabank Annual Report CGAAP 8,270 10,607 14,742 13,9378,182 11,274 7,919 7,932 7,296 6,476 6,994 6,443 6,043 5,862 16,891 18,935 22,316 21,035 17,682 13,803 12,177 (1) Consolidated Statement of Income – CGAAP BasicDiluted $ $ 3.91 3.91 $ $ 3.32 3.31 $ $ 3.07 3.05 $ $ 4.04 4.01 $ $ 3.59 3.55 $ $ 3.19 3.15 $ $ 2.87 2.82 Preferred shareholdersCommon shareholdersBasicDiluted $ 4,038 201 $ 3,361 186 $ 3,033 107 $ 3,994 1,032 1,034 $ 3,549 51 1,013 1,016 $ 3,184 987 30 $ 993 2,892 989 997 25 1,001 988 16 1,012 998 1,026 1,010 (1) The calculation of earnings per share is based on full dollar and share amounts. Dividends per common share (in dollars) $ 1.96 $ 1.96 $ 1.92 $ 1.74 $ 1.50 $ 1.32 $ 1.10 Interest expense DepositsSubordinated debenturesCapital instrument liabilitiesOtherNet interest incomeProvision for credit lossesNet interest income after provision for creditOther losses incomeNet interest and other incomeNon-interest expenses Salaries and 7,382 employee 289 benefitsOther 37 6,584Income 6,768 before income 285 taxesProvision for income taxes 37Net 1,239 income 8,621 6,944 8,339Net income 1,176 attributable to 166 non-controlling 14,266 interestsNet income attributable 1,744 to equity holders 8,328 37 12,131 of 6,828 the Bank 4,647 $ 1,946 12,713 6,884 116Average number 100 of common 10,850 shares 7,574 outstanding (millions) 630 6,192 4,239 4,344 11,246 53 2,408 $ 6,129 6,084 114 130 8,589 7,098Earnings 5,641 3,547 per 1,745 12,220 common 270 share 4,109 (in 2,918 dollars) $ 4,302 53 4,794 3,535 119 5,755 6,408 134 10,992 5,311 3,140 1,133 3,983 2,502 216 $ $ 5,392 3,950 4,339 3,575 4,790 53 10,170 118 5,871 4,045 112 3,768 $ 691 1,990 3,661 $ 230 4,800 5,226 3,187 9,631 5,701 3,579 164 98 $ 3,488 1,063 1,410 3,259 4,529 4,549 3,011 $ 390 $ 3,209 3,452 71 4,163 872 4,320 4,127 2,675 $ $ 2,908 3,677 75 3,769 847 2,555 $ 3,280 $ 2,410 786 2,983 For the year ended October 31 ($ millions)Interest income LoansSecuritiesSecurities purchased under resale agreementsDeposits with banks 2010 201 2009 2008 390 2007 $ 786 12,171 292 4,227 $ 13,973 2006 1,258 4,090 482 $ 15,832 2005 1,102 $ 4,615 13,985 1,083 $ 2004 11,575 817 4,680 1,112 $ 9,236 4,124 594 881 $ 8,480 3,104 646 2,662 441 T85 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 MANAGEMENT’S DISCUSSION AND ANALYSIS | SUPPLEMENTARY DATA 113 2014 Scotiabank Annual Report –– (3) (25) (2) CGAAP CGAAP – 683 – – – (6) ––––––– ––––––– – 595 ––––111 ––––––– – – (37) (586) (324) (973) (290) ––––––– ––––––– ––––––– –––––––– ––––––– – – (3) – (43) – (26) (61) (84) (29) ––––––– ––––––– ––––––– ––––––– ––––––– 1 (4) (11) (10) – (7) – 25 – – – (1) – – 62 43 (519) 76 – – – (35)(40) (36) (26) N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 201100 186 114 107 119 51 118 30 98 25 71 16 75 278 894 (1,588) (67) – – – 804 1,117 266 184 135 172 117 265 850 1,225 1,035 – 300 – 554100 502 114 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A (251) (799) 261 (2,219) (360) (178) (709) (201) (186) (107) (51) (30) (25) (16) (591) (1,736)(251) 2,368 (799) (2,228) 261 (360) (2,219) (178) (360) (709) (178) (709) 2010 2009 2008 2007 2006 2005 2004 2010 2009 2008 2007 2006 2005 2004 4,239 3,547 3,140 4,045 3,579 3,209 2,908 3,710 2,860 1,635 600 600 300 300 (3,800) (3,596) (3,857) (2,321) (1,961) (1,783) (1,074) (2,023) (1,990) (1,896) (1,720) (1,483) (1,317) (1,110) 19,916 18,549 17,460 15,843 14,126 13,239 11,747 $ 4,088 $ 2,862 $ 3,520 $ 1,944 $ 3,317 $ 3,102 $ 2,274 $ 4,088$ 3,787 $ 2,862 $ 2,562 $ 3,520 $ 3,294 $ 1,944 $ 1,775 $ 3,317 $ 3,189 $ 3,102 $ 3,006 $ 2,274 $ 2,183 $ 4,339 $ 3,661 $ 3,259 $ 4,163 $ 3,677 $ 3,280 $ 2,983 $ 21,932 $ 19,916 $ 18,549 $ 17,460 $ 15,843 $ 14,126 $ 13,239 $ 4,946 $ 3,829 $ 3,566 $ 3,425 $ 3,316 $ 3,228 $ 3,140 $25$–$–$–$–$1$1 $ 23,656 $ 21,062 $ 18,782 $ 17,169 $ 16,947 $ 15,482 $ 14,685 $ (4,051) $ (3,800) $ (3,596) $ (3,857) $ (2,321) $ (1,961) $ (1,783) $ 5,750 $ 4,946 $ 3,829 $ 3,566 $ 3,425 $ 3,316 $ 3,228 $ 3,975 $ 3,710$ $$ 2,860 579 28,210 $ $ $ 25,326 1,635 554 $ $ 22,144 $ 600 502 $ 19,301 $ $ 600 $ 497 17,982 $ $ $ 16,388 300 435 $ 15,265 $ 306 $ 280 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 MANAGEMENT’S DISCUSSION AND ANALYSIS | SUPPLEMENTARY DATA 115 2014 Scotiabank Annual Report CGAAP 3.9 5.4 4.3 3.4 3.3 3.3 3.1 N/AN/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 3.913.9118.351.8 3.320.84 3.31 16.71.73 53.7 3.07 0.71 3.05 16.711.8 1.68 59.413.8 4.04 0.7217.0 4.01 22.0 10.7 1.75 53.7 12.9 3.59 1.03 16.6 3.55 22.1 9.3 1.89 55.3 11.1 3.191.96 1.05 18.0 3.15 20.914.0 1.95 9.3 56.3 10.5 2.87 1.96 1.06 18.2 2.82 19.9 13.6 2.00 10.2 56.9 11.7 1.92 1.05 17.1 13.1 2.10 11.1 13.2 1.74 15.1 13.2 11.5 13.9 1.50 13.8 13.7 1.32 13.5 1.10 13.8 2010 2009 2008 2007 2006 2005 2004 55.7644.1254.671,043 49.19 23.99 45.25 1,025 54.0022.68 35.25 40.19 54.73 9922,784 20.55 46.70 53.485,978 49.80 2,686 984 18.94 41.55 49.30 5,778 44.22 2,672 17.45 36.41 990 42.99 5,609 40.00 2,331 17.13 31.08 990 39.60 5,283 2,191 15.64 1,009 4,937 1,959 14.56 4,449 1,871 4,219 70,772 67,802 69,049 58,113 54,199 46,631 43,928 515,991 513,149 455,539 403,475 350,709 309,374 283,986 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 any evaluation of effectiveness to future periods are subject to the risk for establishing and maintaining adequate internal control over that controls may become inadequate because of changes in financial reporting, and have designed such internal control over conditions, or that the degree of compliance with the policies or financial reporting to provide reasonable assurance regarding the procedures may deteriorate. reliability of financial reporting and the preparation of financial Management has evaluated the design and operation of the Bank’s statements for external purposes in accordance with International internal control over financial reporting as of October 31, 2014, and Financial Reporting Standards as issued by The International has concluded that such internal control over financial reporting is Accounting Standards Board. effective. There are no material weaknesses that have been identified Management has used the Internal Control – Integrated Framework by management in this regard. (1992) to evaluate the effectiveness of internal control over financial KPMG LLP, the independent auditors appointed by the shareholders reporting, which is a recognized and suitable framework developed by of the Bank, who have audited the consolidated financial statements, the Committee of Sponsoring Organizations of the Treadway have also audited internal control over financial reporting and have Commission (COSO). issued their report below. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
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 (2) provide reasonable assurance that transactions are recorded as financial reporting as of October 31, 2014, based on criteria necessary to permit preparation of financial statements in accordance established in Internal Control – Integrated Framework (1992) issued by with generally accepted accounting principles, and that receipts and the Committee of Sponsoring Organizations of the Treadway expenditures of the company are being made only in accordance with Commission (COSO). The Bank of Nova Scotia’s management is authorizations of management and directors of the company; and responsible for maintaining effective internal control over financial (3) provide reasonable assurance regarding prevention or timely reporting and for its assessment of the effectiveness of internal control detection of unauthorized acquisition, use, or disposition of the over financial reporting, included in the accompanying “Management’s company’s assets that could have a material effect on the financial Report on Internal Control over Financial Reporting”. Our responsibility statements. is to express an opinion on The Bank of Nova Scotia’s internal control Because of its inherent limitations, internal control over financial over financial reporting based on our audit. reporting may not prevent or detect misstatements. Also, projections We conducted our audit in accordance with the standards of the of any evaluation of effectiveness to future periods are subject to the Public Company Accounting Oversight Board (United States). Those risk that controls may become inadequate because of changes in standards require that we plan and perform the audit to obtain conditions, or that the degree of compliance with the policies or reasonable assurance about whether effective internal control over procedures may deteriorate. financial reporting was maintained in all material respects. Our audit In our opinion, The Bank of Nova Scotia maintained, in all material included obtaining an understanding of internal control over financial respects, effective internal control over financial reporting as of reporting, assessing the risk that a material weakness exists, and testing October 31, 2014, based on criteria established in Internal Control – and evaluating the design and operating effectiveness of internal Integrated Framework (1992) issued by the Committee of Sponsoring control based on the assessed risk. Our audit also included performing Organizations of the Treadway Commission (COSO). such other procedures as we considered necessary in the We also have audited, in accordance with Canadian generally circumstances. We believe that our audit provides a reasonable basis accepted auditing standards and the standards of the Public Company for our opinion. Accounting Oversight Board (United States), the consolidated A company’s internal control over financial reporting is a process statements of financial position of The Bank of Nova Scotia as at designed to provide reasonable assurance regarding the reliability of October 31, 2014 and October 31, 2013, the consolidated statements financial reporting and the preparation of financial statements for of income, comprehensive income, changes in equity and cash flows external purposes in accordance with generally accepted accounting for each of the years in the three-year period ended October 31, 2014, principles. A company’s internal control over financial reporting and notes, comprising a summary of significant accounting policies and includes those policies and procedures that (1) pertain to the other explanatory information, and our report dated December 5, 2014 maintenance of records that, in reasonable detail, accurately and fairly expressed an unmodified (unqualified) opinion on those consolidated reflect the transactions and dispositions of the assets of the company; financial statements.
Chartered Professional Accountants, Licensed Public Accountants Toronto, Canada
December 5, 2014
116 2014 Scotiabank Annual Report Consolidated 9 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 FinancialStatements
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 Conduct Review Committee of the Board of Directors. In addition, for the integrity and fair presentation of the financial information the Bank’s compliance function maintains policies, procedures and contained in this Annual Report. The consolidated financialstatements programs directed at ensuring compliance with regulatory have been prepared in accordance with International Financial requirements, including conflict of interest rules. Reporting Standards as issued by the InternationalAccounting The Office of the Superintendent of Financial Institutions Canada, Standards Board. The consolidated financialstatements also comply whichismandated to protect the rights and interests of the depositors with the accounting requirements of the Bank Act. and creditors of the Bank, examines and enquires into the business and The consolidated financialstatements, where necessary, include affairs of the Bank, as deemed necessary, to determine whether the amounts which are based on the best estimates and judgement of provisions of the Bank Act are being complied with, and that the Bank management. Financial information presented elsewhere in this Annual is in a sound financial condition. Report is consistent with that shown in the consolidated financial The Audit and Conduct Review Committee, composed entirely of statements. outside directors, reviews the consolidated financialstatements with Management has always recognized the importance of the Bank both management and the independent auditors before such maintaining and reinforcing the highest possible standards of conduct statements are approved by the Board of Directors and submitted to in all of its actions, including the preparation and dissemination of the shareholders of the Bank. statements fairly presenting the financial condition of the Bank. In this The Audit and Conduct Review Committee reviews and reports its regard, management has developed and maintains a system of findings to the Board of Directors on all related party transactions that accounting and reporting which provides for the necessary internal mayhave a material impact on the Bank. controls to ensure thattransactions are properly authorized and KPMG LLP, the independent auditors appointed by the shareholders recorded, assets are safeguarded against unauthorized use or of the Bank, have audited the consolidated financial position of the disposition, and liabilities are recognized. The system is augmented by Bank as atOctober 31, 2014 and October 31, 2013 and its written policies and procedures, the careful selection and training of consolidated financial performance and its consolidated cash flows for qualified staff, the establishment of organizational structures providing each of the years in the three-year period ended October 31, 2014 an appropriate and well-defined division of responsibilities, and the prepared in accordance with International Financial Reporting communication of policies and guidelines of business conduct Standards as issued by the InternationalAccounting Standards Board in throughout the Bank. accordance with Canadian Generally Accepted Auditing Standards and Management, under the supervision of and the participation of the the standards of the PublicCompany Accounting Oversight Board President and Chief Executive Officer and the Chief Financial Officer, (United States) and the effectiveness of internal control over financial have a process in placetoevaluate disclosure controls and procedures reporting and have expressed their opinion upon completion of such and internal control over financial reporting in line with Canadian and audits in the following report to the shareholders. The Shareholders’ U.S. securities regulations. Auditors have full and free access to, and meet periodically with, the The system of internal controls is further supported by a Audit and Conduct Review Committee to discuss their audits, including professionalstaff of internal auditors who conduct periodicaudits of all any findings as to the integrity of the Bank’s accounting, financial aspects of the Bank’s operations. As well, the Bank’s Chief Auditor has reporting and related matters. full and free access to, and meets periodically with the Audit and
Brian Porter SeanMcGuckin President and Chief Executive Officer Executive Vice-President and Chief Financial Officer
Toronto, Canada December 5, 2014
118 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS c 119 nt to nk of l udits a a a a irly, in ting the re ting the a tober 31, s issued nk of a a a c ted a a bleness of nd its lu t a a a lu a sh flows for a lified) l Report a a rds a ca ’s intern a son udit opinion. sofO a a nd our report a sev a ontrol relev ud or error. In nd a a rds of the Publi onsolid c ted ined in our a tements. oti a a tober 31, 2014 in c l a a c a ludes ev c tes), The B a S c nk Annu edures th nd a a lst c a a b a s well rd. OSO), i a l position of The B a nd the re a c C ve obt a tements present f a i lso in onsolid n oti a sis for our tober 31, 2013 a c a c c a l reporting a c n Internal Control – Integrated a b i a lst tion of the udit pro c a a rds Bo a a i n udit l Reporting St nk of Nov a c a a nd O a n unmodified (unqu a eweh nd its i gement, 2014 S rd (United St n ted fin onsider intern a a c a c ies used nd e with the st a c a a a c n c a ted fin ommittee of Sponsoring n e r period ended O a n a ommission ( a c C a a blished in n C es. An a a y ir present c l Fin ted fin a ord a n a onsolid est a a c te to provide onsolid a dw acc tements, whether due to fr de by m udit eviden c a nd f a tion a ounting St a a a ontrol over fin a ounting poli c umst cc riteri l perform lst l c l reporting. tober 31, 2014 tiveness of The B onsolid c a a a ir i i ssessments, we c c c a acc lA i tion c c c t the tes m a ts, the a c a ppropri a n n a c r n a tO a a tion of the a rs in the three-ye a a udited, in a a ounting Oversight Bo a tion s nd a tements in order to design cc a (1992) issued by the ’s intern ve a aa a l respe e with Intern ember 5, 2014 expressed a teness of te in the ted fin ted fin a c c tions of the Tre sed on the a a a a oti oti a lst n a ient ny A c c a a c nk’s prep a i teri S S ll present lso h a c niz a a a a a a n We believe th h of the ye ounting estim ord king those risk a ted De a omp a ppropri ll m ppropri ac onsolid ontrol over fin onsolid C c acc c Other Matter We opinion on the effe a Nov d a by the Intern a Org fin Opinion In our opinion, the e acc Framework 2014, b the B is suffi c Nov m over e l nd c a ontrol ca re free hof tion of c rd a ble a l l a ac a tion of nts a udits in rds a tements i a nd notes, a a a ted a c r l a a a n son a nd ted a lst a nd other a nd a a a ount i udit eviden a teri c tements tement of the a h intern a cc ir present a n a ome, c in re ies ted our a A a e with c onsolid in c a c c c ted fin a c lst n a a omply with ethi onsolid i a sh flows for e nd f c c c uditing st a l misst ble the prep n ca ondu a a a ted fin a a c ord a s issued by the nd for su oti twe a nd tober 31, 2014, a tion onsolid teri c c a a acc a c a S udit to obt ounting Oversight Bo r a epted a ounting poli tober 31, 2014 rds a rd, re free from m ensed Publi tements of in cc ted fin c a a a c ry to en a a onsolid edures to obt t a acc acc c c nd omprise the a tO udits. We c a a ny A a lly ess nt ud or error. a s h ted depend on our judgment, a c nts, Li ted st a rds Bo c c a n opinion on these ca a a a tements in onsolid a nying nk of Nov a c a rds require th a omp nd losures in the a nges in equity a lst , whi c ount a a a cC i r period ended O n gener h nd tements th cc omp c nd perform the c a a onsolid a a oti a n sed on our c di c l position lA a a acc l Reporting St n lst a S nd dis edures sele a a ry of signifi tement. i a tion. a a c n a i a i c a a a c ome, c n c n n Ca ounting St a a a a ted fin nd pl ssessment of the risks of m cc d a a a summ a l misst lA l Fin n tements b a a mounts bout whether the tes). Those st a a a reholders of The B rds of the Publi udited the a a e with a nk of Nov a ted fin a a Ca c e teri gement determines is ne a a udit involves performing pro n lst tory inform c a rs in the three-ye a tion tion a onsolid nd a a a ve n tement, whether due to fr i a c a a n gement is responsible for the prep a a n c a a a a rtered Profession a n ember 5, 2014 An n ord a luding the tements. The pro tements of fin c tober 31, 2013, the a a c a c a h sm bout the ssur omprising omprehensive in onsolid a Intern c in (United St the ye st Intern the st c these acc a O from m Management’s Responsibility for the ConsolidatedM Financial Statements fin st expl Toronto, De misst Auditors’ Responsibility Our responsibility is to express a We h of The B requirements C To the Sh Independent Auditors’ Report of Registered Public Accounting Firm c CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Financial Position As atOctober 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 atfair 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 atfair 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 CONSOLIDATED FINANCIAL STATEMENTS 121 (1) 2012 l Report a (1) 516 446 503404 493 365 345 293 190 221 279 287 339 381 375681448 185 448 388 742 691 228 1,110 217 220 298 262 409 373 505 450 274 248 432 340 nk Annu 2013 a 2,493 2,170 7,215 6,508 6,407 5,802 1,815 1,607 3,470 3,187 6,397 6,117 1,288 1,252 7,478 7,189 1,300 1,299 3,032 3,430 1,000 1,045 6,917 6,246 8,347 7,958 1,737 1,568 1,306 1,170 b 20,011 18,394 18,828 17,159 11,350 9,970 21,299 19,646 11,664 10,436 a $ 6,379 $ 6,194 $$ 5.15 5.11 $ $ 5.27 5.18 $ 231 $$ 6,162 196 $ 5,974 $ 17,359 $ 15,606 $ 6,610 $ 6,390 oti c 2014 S 526 712 420 340 412 180 263 204 741 428 474 858 805 155 921 417 571 314 471 2014 2,794 8,077 6,743 1,936 3,739 6,173 1,703 7,235 1,114 3,562 7,737 9,300 2,002 1,623 21,901 19,540 12,305 23,604 12,601 $ 7,071 $$ 5.69 5.66 $ 227 $ 6,916 $ 18,176 $ 7,298 nd IAS 19) in 2014 (refer to Note 4). a Note 35 35 36 18, 41 37 37 25 rds (IFRS 10 a nd a mended IFRS st a nd a ries 34(b) doption of new a a t the c urities borrowed c tions 18 nk a a nd se a orpor djusted to refle c a ims a l ted c tively a i c c greements urities 12(d) ome a sso c c ontrolling interests in subsidi a c le a re retrospe a ome, net of tion nge c dvisory a a a h c xes l institutions a mounts a ble to equity holders of the B ble to non- i a a a lt c tement of In mortiz a n a a xes sed under res a hnology tober 31 ($ millions) a c a reholders pit c reholders ome nd other a nd le of investment se h a redit losses 14(b) c a gement c ca ommission revenues a a ttribut ttribut nd business development c c a tions a a a l ted St n nd te ted debentures a nd ca x expense a a ommission expenses nd employee benefits a nd a a tion a c e underwriting in r ended O in prior period a a ding foreign ex a a a c i ome from investments in ome ome in on s a c c n c c c a nd ert a si lth m ries a ommon sh C a ns a urities pur urities ding revenues a ome before t ome t nking l Preferred sh Diluted c C B c a a c c onsolid ommuni a a C Underwriting Non-tr Other Fee Premises Depre We Operating expenses S Interest expense Deposits Subordin Fee and commission revenues B Provision for Deposits with fin Other Net interest in Net g Net in Insur Other Total revenue Se The accompanying notes are an integral part of these consolidated financial statements. Other operating income Tr Net in Earnings per common share (in dollars) (1) Se Revenue Interest income Lo C For the ye Net fee Advertising In In Net income Net in Profession Other Business 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 currencytranslation gains (losses): Net unrealized foreign currencytranslation 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 currencytranslation 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) Actuarialgains (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
CONSOLIDATED FINANCIAL STATEMENTS
h copnigntsaea nerlpr fteecnoiae iaca statements financial consolidated these of part integral an are notes accompanying The
nepoeswieret while employees in a ert c by ed c renoun rily a volunt SARs ndem a tofT ac imp ludes c In (5) e rfrt oe29). Note to (refer res a sh for option orresponding c their ining a
123
ddivestitures. nd a tions a ombin c business from rising a interests ontrolling c non- to nges a h c ludes c In (4)
dIS1)i 04(ee oNt 4). Note to (refer 2014 in 19) IAS nd a 10 (IFRS rds a nd a st IFRS mended a nd a new of doption a the t c refle to djusted a tively c retrospe re a mounts a period prior in a ert C (3)
mns(ee oNt 29). Note to (Refer yments a p sed a re-b a sh of ount acc on mounts a Represents (2)
tion. c restri tory a regul l ca ttolo c subje is h c whi tion, a orpor c ted a i c sso a foreign a to ted a rel $38) – 2012 $43; – (2013 $52 of rnings a e ined a ret undistributed ludes c In (1)
l Report
a
319$2,7 58 9 15 74 5$16$3,3 ,8 879$96$–$39,665 $ – $ 946 $ 38,719 $ 4,384 $ 34,335 $ 166 $ 35 $ (714) $ (135) $ 597 $ (528) $ 21,775 $ 13,139 $ aac sa coe 1 2012 31, October at as Balance (3)
te 58 – – – – – 9 – Other –278 211 67 – 67
(4) (5)
mns–––––––3 8–3 38 – – 38 – 38 38 – – – – – – – yments a p sed a re-b a
Sh nk Annu
a nrligitrss–––––––––––(4 (44) – (44) – – – – – – – – – – – interests ontrolling c
itiuin onon- to Distributions b
a d–––––––––(2)(2)––(220) – – (220) (220) – – – – – – – – – id a p dividends Preferred
oti
d–(,9)––––––(,9)–(,9)––(2,493) – – (2,493) – (2,493) – – – – – – (2,493) – id a p dividends ommon C c
e sud4838–––––(6 ,8 ,8 4,785 – – 4,785 – 4,785 (26) – – – – – 8 4,803 issued res a Sh
oa opeesv income comprehensive Total ,7 6 5 1 76 5$–$564$20$594$10$–$6,084 $ – $ 170 $ 5,914 $ 220 $ 5,694 $ – $ 25 $ (746) $ 116 $ 156 $ 169 $ 5,974 $ – $
2014 S
m ls)––191616(4)2 20 20 2)–(306) – (26) (280) – (280) – 25 (746) 116 156 169 – – (loss) ome c in omprehensive c Other
m ,7 ,7 2 ,9 9 6,390 – 196 6,194 220 5,974 – – – – – – 5,974 – ome c in Net
s8361,7 67 4 21 21 62,4 ,8 06869–31,237 – 609 30,628 4,384 26,244 96 10 32 (251) 441 (697) 18,277 8,336 es c n a l a b ted a Rest
djustment a Opening 14 2––(1)–(1)(7 84 (1,003) (874) (17) (112) – (112) – – 32 – – – (144) – (3)
aac srpre oebr1 2011 1, November reported as Balance ,3 841$(9)$41$(5)$–$1 6$2,5 ,8 070$66$84$32,240 $ 874 $ 626 $ 30,740 $ 4,384 $ 26,356 $ 96 $ 10 $ – $ (251) $ 441 $ (697) $ 18,421 $ 8,336 $
456$2,6 13 0 4)$17 5$13$4,6 ,8 429$118$–$45,387 $ – $ 1,138 $ 44,249 $ 4,084 $ 40,165 $ 193 $ 55 $ $(157) (42) $ 705 $ (173) $ 25,068 $ 14,516 $ aac sa coe 1 2013 31, October at as Balance (3)
te 1)()––––26 – – – – (3) (12) – Other –56 45 11 – 11
(4) (5)
mns–––––––3 6–3 36 – – 36 – 36 36 – – – – – – – yments a p sed a re-b a Sh
nrligitrss–––––––––––(0 (80) – (80) – – – – – – – – – – – interests ontrolling c non- to Distributions
d–––––––––(1)(1)––(217) – – (217) (217) – – – – – – – – – id a p dividends Preferred
d–(,5)––––––(,5)–(,5)––(2,858) – – (2,858) – (2,858) – – – – – – (2,858) – id a p dividends ommon C
e eemd–––––––––(0)(0)––(300) – – (300) (300) – – – – – – – – – redeemed res a sh Preferred
e sud1371–––––(5 ,4 ,4 1,343 – – 1,343 – 1,343 (35) – – – – – 1 1,377 issued res a Sh
oa opeesv income comprehensive Total ,6 5 0 3$57$2 ,9 1 ,1 2 7,742 $ – $ 227 $ 7,515 $ 217 $ 7,298 $ – $ 20 $ 557 $ 93 $ 108 $ 358 $ 6,162 $ – $
m ls)––38189 5 0–116–116()–1,132 – (4) 1,136 – 1,136 – 20 557 93 108 358 – – (loss) ome c in omprehensive c Other
m ,6 ,6 1 ,7 3 6,610 – 231 6,379 217 6,162 – – – – – – 6,162 – ome c in Net
s1,3 175(2)57(3)(1)3 6 4354343,1 4 39,665 – 946 38,719 4,384 34,335 166 35 (714) (135) 597 (528) 21,775 13,139 es c n a l a b ted a Rest
djustment a Opening 23 74 97 97 2)(7)(1,714) (777) (20) (917) – (917) – – (714) – – – (203) – (3)
aac srpre oebr1 2012 1, November reported as Balance 319$2,7 58 9 15 5$16$3,5 ,8 966$96$77$41,379 $ 777 $ 966 $ 39,636 $ 4,384 $ 35,252 $ 166 $ 35 $ – $ (135) $ 597 $ (528) $ 21,978 $ 13,139 $
aac sa coe 1 2014 31, October at as Balance 521$2,0 0 6 4)$(8)$1 7 495$294$4,9 ,1 49,211 $ – $ 1,312 $ 47,899 $ 2,934 $ 44,965 $ 176 $ $113 (480) $ (48) $ 664 $ 700 $ 28,609 $ 15,231 $
Other 4 1)(7 1)1 (17) – (17) (13) – – – – – (4) – (16) – (4)
yments a p sed a re-b a Sh 03 0––30 – – 30 – 30 30 – – – – – – –
nrliginterests ontrolling c non- to Distributions ––––––7)–(76) –(76) ––––––––––
id a p dividends Preferred 15 15 (155) – – (155) (155) – – – – – – – – –
id a p dividends ommon C 310 310 310 (3,110) – – (3,110) – (3,110) – – – – – – (3,110) –
sed/redeemed a h c repur res a Sh 5)(6)––––––(2)(,5)(,7)––(1,470) – – (1,470) (1,150) (320) – – – – – – (264) (56)
e issued res a Sh 7 3)70–70––740 – – 740 – 740 (34) – – – – – 3 771
oa opeesv income comprehensive Total ,1 7 4)$()$(2)$5 ,7 5 ,3 4 7,881 $ – $ 249 $ 7,632 $ 155 $ 7,477 $ – $ 58 $ (323) $ (6) $ (41) $ 873 $ 6,916 $ – $
m (loss) ome c in omprehensive c Other 7 4)()(2)5 6 6 2–583 – 22 561 – 561 – 58 (323) (6) (41) 873 – –
ome c in Net ,1 ,1 5 ,7 2 7,298 – 227 7,071 155 6,916 – – – – – – 6,916 –
es c n a l a b ted a Rest 4562,6 13 0 4)(5)5 9 0154044,4 ,3 45,387 – 1,138 44,249 4,084 40,165 193 55 (157) (42) 705 (173) 25,068 14,516
djustment a Opening 27 17 44 44 1)(4)(1,164) (743) (17) (404) – (404) – – (157) – – – (247) – (3)
aac srpre oebr1 2013 1, November reported as Balance 456$2,1 13 0 4)$–$5 9 059$404$4,5 ,5 4 46,551 $ 743 $ 1,155 $ 44,653 $ 4,084 $ 40,569 $ 193 $ 55 $ – $ (42) $ 705 $ (173) $ 25,315 $ 14,516 $
$millions) ($ tion a nsl a tr equity Nt 26) (Note rnings a e urities c se Nt 27) (Note benefits hedging equity reserves tes a i c sso a Nt 34(b)) (Note Nt )Tot 4) (Note l a
(1) (2)
y c urren c ommon c res a sh ined a Ret le a for-s res a sh Employee flow dpreferred nd a Other from ries a subsidi qiyholders equity
Foreign l a Tot ommon C ble- a il a Av Preferred sh Ca ommon c l a Tot re a Sh neet in interests instrument
ontrolling c Non- l a pit Ca
m (loss) ome c in omprehensive c nrliginterests ontrolling c Non-
e other ted a umul cc A
eetof tement a St ted a onsolid C gsi Equity in nges a h C 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 taxpaid (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 disposalofreal 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 Effectofexchange 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 Page Note 126 1 Reporting entity 168 21 Leases 126 2 Basis of preparation 169 22 Deposits 126 3 Significant accounting 169 23 Subordinated debentures policies 170 24 Other liabilities 138 4 Recently adopted accounting 170 25 Provisions standards 170 26 Common shares 140 5 Future accounting developments 171 27 Preferred shares 141 6 Cash and deposits with financial institutions 173 28 Capitalmanagement 141 7 Fair value of financial instruments 174 29 Share-based payments 149 8 Trading assets 177 30 Corporate income taxes 150 9 Financial instruments designated at 179 31 Employee benefits fair value through profit or loss 183 32 Operating segments 151 10 Derivative financial instruments 186 33 Related party transactions 155 11 Offsetting financial assets and 187 34 Principal subsidiaries and financialliabilities non-controlling interests in 156 12 Investment securities subsidiaries 159 13 Loans 188 35 Fee and commission revenues 161 14 Impaired loans and allowance for 189 36 Trading revenues credit losses 189 37 Earnings per share 162 15 Derecognition of financial assets 189 38 Guarantees and commitments 191 39 Financial instruments – risk 163 16 Structured entities management 165 17 Property and equipment 200 40 Contractualmaturities 166 18 Investments in associates 202 41 Business combinations, other 167 19 Goodwill and other intangible assets acquisitions and divestitures 168 20 Other assets 203 42 Events after the Consolidated Statement of Financial Position date
2014 Scotiabank Annual Report 125 CONSOLIDATED FINANCIAL STATEMENTS
1 Reporting entity (including derivatives), corporate income taxes, employee benefits, the fair value of all identifiable assets and liabilities as a result of business The Bank of Nova Scotia (the Bank) is achartered bank under the Bank combinations, impairment of investment securities, impairment of non- Act(Canada) (the Bank Act). The Bank is a Schedule I Bank under the financial assets and derecognition of financial assets and liabilities. Bank Act and is regulated by the Office of the Superintendent of While management makes its best estimates and assumptions, actual Financial Institutions (OSFI). The Bank is a global financial services results could differ from these and other estimates. Refer to the provider offering a diverse range of products and services, including relevant accounting policies in Note 3 for details on the Bank’s use of personal, commercial, corporate and investment banking. The head estimates and assumptions. office of the Bank is located at 1709 Hollis Street, Halifax, Nova Scotia, Canadaand its executive offices are atScotia Plaza, 44 King Street Significant changes in estimates during the year West, Toronto, Canada. The common shares of the Bank are listed on During the fourth quarter of 2014, the Bank implemented a valuation the Toronto StockExchange and the New York StockExchange. 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 2 Basis of preparation $30 million in the Consolidated Statement of Income.
Statement of compliance Significant judgments These consolidated financialstatements were prepared in accordance In preparation of these consolidated financialstatements, management with International Financial Reporting Standards (IFRS) as issued by is required to make significant judgments in the classification and InternationalAccounting Standards Board (IASB) and accounting presentation of transactions and instruments and accounting for requirements of OSFI in accordance with Section 308 of the Bank Act. involvement with other entities. Section 308 states that, except as otherwise specified by OSFI, the Significant estimates, assumptions and judgments have been made in financialstatements are to be prepared in accordance with IFRS. the following areas and are discussed as noted in the consolidated The consolidated financialstatements for the year ended October 31, financialstatements: 2014 have been approved for issue by the Board of Directors on December 5, 2014. Allowance for credit losses Note 3 – page 131 Note 14 – page 161 Basis of measurement Fair value of financial instruments Note 3 – page 128 The consolidated financialstatements have been prepared on the Note 7 – page 141 historical cost basis except for the following material items that are Corporate income taxes Note 3 – page 134 measured atfair value in the Consolidated Statement of Financial Note 30 – page 177 Position: Employee benefits Note 3 – page 136 Š Financial assets and liabilities held-for-trading Note 31 – page 179 Š Financial assets and liabilities designated atfair value through profit Goodwill and intangible assets Note 3 – page 133 or loss Note 19 – page 167 Š Derivative financial instruments Fair value of all identifiable assets Note 3 – page 133 Š Available-for-sale investment securities and liabilities as a result of Note 41 – page 202 Functional and presentation currency business combination These consolidated financialstatements are presented in Canadian Impairment of investment securities Note 3 – page 130 dollars, which is the Bank’s functional currency. All financial Note 12 – page 156 information presented in Canadian dollars has been rounded to the Impairment of non-financial assets Note 3 – page 134 nearest million unless otherwise stated. Note 17 – page 165
Use of estimates, assumptions and judgments Structured entities Note 3 – page 127 Note 16 – page 163 The Bank’s accounting policies require estimates, assumptions and judgments that relate to matters that are inherently uncertain. The De facto control of other entities Note 3 – page 127 Bank has established procedures to ensure that accounting policies are Note 34 – page 187 applied consistently and that the processes for changing Derecognition of financial assets Note 3 – page 128 methodologies for determining estimates are controlled and occur in a and liabilities Note 15 – page 162 timely and systematic manner. Estimates and underlying assumptions Provisions Note 3 – page 135 are reviewed on an ongoing basis. Revisions to accounting estimates Note 25 – page 170 are recognized in the year in which the estimates are revised and in 3 Significant accounting policies any future years affected. The significant accounting policies used in the preparation of these Use of estimates and assumptions consolidated financialstatements, including any additional accounting The preparation of these consolidated financialstatements, in requirements of OSFI, as set out below, have been applied consistently conformity with IFRS, requires management to make estimates and to all periods presented in these consolidated financialstatements, assumptions that affect the reported amount of assets and liabilities at unless otherwise stated. the date of the financialstatements, 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
126 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS e c se. 127 lso re rties nges a a e, a lue a ts the tion. a h rnings c c y a a re c h a nk a ring the ontrol e c a a ses to ble or te of ludes nk c c a tement ted for ir v a a n c a n the lue is a ined te of loss a a a e tions a s a a is ome. bout the a a se or c a eof c a c lu s a hrefle nk m a tin tf c l Report a a y of the c a a a a t the end of c re nt influen a c rties sh ted St nk h te the existen a quisition e ounting is ies of the entity. a ther th a ca c re ev rrying v ngements isions rd represent a ca tion. ac a c ost th a a urren orded sured a ble to the pur acc ounted for using the ca c t the returns of the c c rr a a h two or more p c nk Annu t a c irment a l poli a re of the joint tive eviden acc nd the differen a b a a urrently exer tes, for joint ventures, ffe tement of In onsolid c i a a s signifi es indi c a a a c lly te of loss of joint i C c rising from the joint a re of the in nd a ontrol. If the ret n c a oti a n ttribut nd the a re a nd other movements in the c c a lue a a lue is re a nk’s foreign oper a a a a ontinued from the d ntly a nd the investment sso h investor, r t nk h c a a tly ted St ost a a l reporting period, or more ca onsent of the p lue c ir v a c ac ined interest on the d e through bo a e c sset, it is me y, being the e of obje se of the post- umst i a a c a nd fin t c c c a c c a nk’s sh 2014 S ted for imp te’s equity. a a l ir a n rnings tf a a ir v re i a c a a a rrying v i ognizes its sh c urred jointly a c lly lu nd it does not result in the B c c c ognized initi h the B a a a t signifi ca n urren h of the B ting onsolid c c urred jointly ssessing whether the B ngement. a osts dire c ngement over whi a a sso c ies nimous tions or joint ventures depending on the rily presumed to exist when the B a C irment. a h fin c in or loss in the l a ac tions of e a c a a a a rr a a a sured ts the B fin rr nt influen nk re ac nt influen re ev ounting is dis a c a re re e over the entity, equity a nges in a e. If the ret a a se or de te of loss of joint ontrol exists only when de a c ca ontrol a c ca a nd the c n a c tion h acc quisition e urren a a te the existen c l voting rights th c re nd 50% of the voting rights. The B c tes tes eis a c lized g ac a a ca a c i i h refle a nd other e of imp lue c nd oblig ognized initi e is ordin c c e. c a environment of the foreign oper bilities held/in ngement. Investments in joint c a a c c ounted for using the equity method whi e between the f a a e c onsidered in n entity in whi tements of e c sso c sso ise signifi rr nt influen c a ir v nt influen a nd expenses in a c a tions, the B acc es indi a sset, it is me a a re re in or loss in the a n unre c ounting for investment in t the end of e te, equity ca l reporting period, or more frequently if events or a ca nd li re a a a lst a a n a re l loss of signifi a loss of joint a i ontrol. Joint i ngement is a a tivities, i.e. those th nt influen a s either joint oper l rights s se pri te is c a c i c onomi re of the in ture of the joint a acc i a a a a a a a c c ts of potenti a c n ontrol, over the oper c i ac ca rr nt influen h c tion nt influen n tive eviden c a c n tu sso tes a c tion of foreign c a a se of the post- a ssets a a ca ca a rto umst nt tion represented by: lized g ry e i ome. a ac a irment. irment c sso a a c a a a c sured using its fun n ble to exer l stru ngement, require the un fin ontinued from the d a a re ir a h fin a nsl a a a orded c ssified a c ving signifi c ve joint nk’s sh Its revenue oper Its a c a a a a a rr ac nd the differen nd other movements in the ontr l ontrol of the onvertible a If there is be B Asso c c c equity method whi Š is dis interest in the former joint venture on the d a de investments Simil signifi e of In Investments in of obje If there is h h relev the pur oper Š prim re imp Joint arrangements A joint For joint oper c holds between 20% be me Tr The fin a leg The effe but not Signifi loss of signifi of signifi imp frequently if events or Investments in in joint venture’s equity. Investments in joint ventures between the f unre Investments in associates An te n ries a a nt ca a te it s a ca t n nd a a te nk a a a e rd of a a tterns luding r gent. c a a c t indi ries a a nother ome a a nd tion s equity nd a n 50% of n c a bilities, a a ge or a a ac mount of a n 50% of the a n investee if a s a a ns a ll of its ybe nd other a a a reholders of the a tors th tions a ac ontrols, in ry from the d t the ac in well-defined rnings. ving more th tion st ting nd ssets, li c c nd voting p a a a a a a a ns a nk m nk’s subsidi re not the domin ac ontrols l Position sep a a re presented within a ffe lf of the voting rights; a c ert ounted for tit a ontrol of the entity is by i nk a a a c a nd the tr c c a ontrolled by the B ttributes of power: a ies of the entity through ies of the entity under c n acc ined e a ll of the three elements of c c tive to the size subsidi ny tr nh a in funding a a nd a re other f a a a ses of interests in subsidi a re ontrol). a a lude the a c a r rights t the form c h ert a nd for the benefit of a c tes c omplish omp a nd preferred sh a c a t one or more of the elements of n investee when it is exposed, or gent by determining whether it is ting poli ting poli s entities nd acc a a a a a n entity, a ontrol l pur a lf of a c a n a de facto a jority of the members of the bo tured entities th n investee when it is exposed, or h te th onsolid tement of Fin a ble returns from involvement with the tements in c ssesses whether it a c sh flows of the B a e: a a ommon a n investee when it is ca n entity when it owns less th ontrolling interests c ontrols c ri n ownership interest of more th djustment to ret a ca onduit nd oper nd oper a c t those returns through its power over the ontrol c nk a a a nge of c rement a a c lst c tion of inter a a c ontrol the entity despite h nd joint ventures. The B l l a ontrolled through voting interests or ontrols the entity. The B te ll stru a n s one or more other i t on beh nd c ontrolling interest holders. Any differen h re defined a c c a a nk re ted St nk h voting or simil mount of the interest a a ffe a c a i i a c a t those returns through its power over the c a a a a ontrols a c c es indi n ac s c ble to lent governing body n entity unless there c e c ac ontrol n n a re designed to a tes a a c a nd in nk to tes c n a a a tured entities either greement, over more th a ffe a a ble returns from its involvement with the investee n ries a a i c tion nk a a a a c a greement; a a ri onsolid a rrying n nged. Non- les onsolid c a a ble returns from its involvement with the investee ged to a a sso fter elimin s entities n ted fin orded bility to ttribut ca C umst a a y nd h a a a a a c iding who a a c a ls ri a c nd for whi c ssesses whether it is nk does not onsolid rties. The B rd or body; or ir a a a s sed multi-seller c a a c a a onsolid bility to ontrol. The B a a nk’s returns. rti reholder meetings (i.e., c ries, c a l perform lude a te. The B a bility to use power over the investee to tors or equiv tions with non- a s the a nk does not nk m nk nk a c es. Subsidi nd a a ppoint or remove the m c i ssified rily eng a tbo a a a a c tives onsolid a tute or c tured entities les. a ac tured entities. The B a ins a a c c n l c a c n c tsh a t the B t do not result in c a ts tor in de ns a nk. P l s rights, to v rty or p s the sis of the B the investee; power over the investee; exposure, or rights, to v a the size of its holdingdispersion of of voting holding rights rel of the other vote holders to govern the fin dire th to st to govern the fin by virtue of a a ter d ontrol is presumed with a a a a a a a nd ex mount is re nd h ontrol should be in existen ontrol h ac ac a The B B Š Š Š be 50% of voting rights. The B from equity Structured entities Stru c a th investee. For the B b a Voting-interest subsidiaries C the voting rights in c equity in the Š a between the Š obt h subsidi tr p f its U.S.-b fin th investee. The B Š stru The prim h voting rights when it h Š vehi B The B involved with stru obje l rights, to v f CONSOLIDATED FINANCIAL STATEMENTS
Translation gains and losses related to the Bank’s monetary items are an accounting policy choice. Consequently, the fair values of certain recognized in other operating income in the Consolidated Statement portfolios of financial instruments are determined based on the net of Income. Revenues and expenses denominated in foreign currencies exposure of those instruments to particularmarket credit or funding are translated using average exchange rates, except for depreciation risk. and amortization of buildings purchased in foreign currency, In determining fair value for certain instruments or portfolios of equipment and leasehold improvements of the Bank, which are instruments, valuation adjustments or reserves may be required to translated using historicalrates. Foreign currency non-monetary items arrive at a more accurate representation of fair value. These that are measured at historical cost are translated into the functional adjustments include those made for credit risk, bid-offer spreads, currency at historicalrates. Foreign currency non-monetary items unobservable parameters, constraints on prices in inactive or illiquid measured atfair value are translated into functional currency using the markets and when applicable funding costs. rate of exchange at the date the fair value was determined. Foreign Derecognition of financial assets and liabilities currencygains and losses on non-monetary items are recognized in the Derecognition of financial assets Consolidated Statement of Income or Consolidated Statement of The derecognition criteriaare applied to the transfer of part of an Comprehensive Income consistent with the gain or loss on the non- asset, rather than the asset as a whole only if suchpart comprises monetary item. specifically identified cash flows from the asset, a fully proportionate Unrealized gains and losses arising upon translation of foreign share of the cash flows from the asset, or a fully proportionate share of operations, together with any gains or losses arising from hedges of specifically identified cash flows from the asset. those net investment positions to the extent effective, are credited or A financial asset is derecognized when the contractual rights to the charged to net change in unrealized foreign currencytranslation gains/ cash flows from the asset has expired; or the Bank transfers the losses in the Consolidated Statement of Comprehensive Income. On contractual rights to receive the cash flows from the financial asset; or disposalorpartial disposalofa foreign operation, resulting in a loss of has assumed an obligation to pay those cash flows to an independent control, an appropriate portion of the translation differences previously third-party; and the Bank hastransferred substantially all the risks and recognized in other comprehensive income are recognized in the rewards of ownership of that asset to an independent third-party. Consolidated Statement of Income. Where substantially all the risks and rewards of ownership of the financial asset are neither retained nor transferred, the Bank Financial assets and liabilities derecognizes the transferred asset only if it has lost control over that Date of recognition asset. Control over the assets is represented by the practical ability to The Bank initially recognizes loans, deposits, subordinated debentures sell the transferred asset. If the Bank retains control over the asset, it and debt securities issued on the date at which they are originated or will continue to recognize the asset to the extent of its continuing purchased. Regular-way purchases and sales of financial assets are involvement. At times such continuing involvement may be in the form recognized on the settlement date. All other financial assets and of investment in senior or subordinated tranches of notes issued by liabilities, including derivatives, are initially recognized on the trade non-consolidated structured entities. date at which the Bank becomes a party to the contractual provisions On derecognition of a financial asset, the difference between the of the instrument. carrying amount and the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and Initial classification and measurement (ii) any cumulative gain or loss thathad been recognized in other The classification of financial assets and liabilities at initialrecognition comprehensive income is recognized in the Consolidated Statement depends on the purpose and intention for which the financial assets of Income. are acquired and liabilities issued and their characteristics. The initial Transfers of financial assets that do not qualify for derecognition are measurement of a financial asset or liability is atfair value. reported assecured financings in the Consolidated Statement of Determination of fair value Finanical Position. Fair value of a financial asset or liability is the pricethat would be Derecognition of financial liabilities received to sell an asset or paid to transfer a liability in an orderly A financialliability is derecognized when the obligation under the transaction between market participants in the principal, or in its liability is discharged, canceled or expires. If an existing financial absence, the most advantageous market to which the Bank has access liability is replaced by another from the same counterparty on at the measurement date. substantially different terms, or the terms of the existing liability are substantially modified, such anexchange or modification is treated as a The Bank values instruments carried atfair value using quoted market derecognition of the originalliability and the recognition of a new prices, where available. Quoted market prices represent a Level 1 liability. The difference in the respective carrying amount of the valuation. When quoted market prices are not available, the Bank existing liability and the new liability is recognized as a gain/loss in the maximizes the use of observable inputs within valuation models. When Consolidated Statement of Income. all significant inputs are observable, the valuation is classified as Level 2. Valuations that require the significant use of unobservable Offsetting of financial instruments inputs are considered Level 3. Financial assets and financialliabilities with the same counterparty are offset, with the net amount reported in the Consolidated Statement of Inception gains and losses are only recognized where the valuation is Financial Position, only if there is currently a legally enforceable right to dependent on observable market data, otherwise, they are deferred offset the recognized amounts and there is an intention to settle on a over the life of the related contract or until the valuation inputs net basis, or to realize the assets and settle the liabilities become observable. simultaneously. When financial assets and financialliabilities are offset IFRS 13 permits a measurement exception that allows an entity to in the Consolidated Statement of Financial Position, the related income determine the fair value of a group of financial assets and liabilities and expense items will also be offset in the Consolidated Statement of with offsetting risks based on the sale or transfer of its net exposure to Income, unless specifically prohibited by an applicable accounting a particular risk (or risks). The Bank has adopted this exception through standard.
128 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS s h a c ir es bly ts 129 a c n ir a ts or re lized t but a rket a ts. ac ny tf ca a sis ac a a ding tement a ac tf a ding ac rties is tively. re a a ted ruing on a a l bility. ter nd gold a luded c nk’s non- a a ding ontr ounter a a a c a a ontr i ted to a surement c c ontr c c nd m acc a ontr a sh tr ustomers, oll ted c re sold ted to c a n sured c l Report c a a rties, in whi a a l Position if ted St a a a nge Ca a a nd a onditions s nnot be reli ding revenues lue with i a ded lly lue is derived c a onsolid a a a c ounterp h ling a res a a ding purposes, ca nk’s redit c n C c sset or li a ombined b a ge the B a c a a a l instruments ir v a sis in the ome, respe ome from tr losely rel a a tisme te, a n ac tive; c c i n c tions rel nk Annu a re met. Subsequent a a c onsolid ted for me a ommission revenues a a tf ac orded nge-tr a re usu lb a n ted over-the- c C s the embedded s ts or b c nsferred. a r a ins or losses in a a a a a a ome – tr a a a a te in h ts for tr ommodities, equity pri c ac tion to return the c ru a nd deriv c rise in de ontr urities to tement of Fin oti a tion ts whose v greement to resell re not ding or design a c ac c c a a a a a a a r ny g acc tions ac lso tr sured ble from the host ontr nd equity sh a a n ts, foreign ex tes, re sep a c a a tive fin orded nd other exposures). Tr a l instruments or host n a ac r ontr a tement of Fin ting in a c a a a a ac tement of In a s fee c i a a re ome. Interest expense ontr ted St ns ts. Negoti y a c a urities is re 2014 S me terms c a nd options. c a c a c n a a ac re then sold to third p a le within oblig re me nd risks ontr re presented on tive nge r ombined re re either ex lisre a a a urities a c a a c a a a a c ted St ding revenues, in the ognized on the lue with s rds h orded in interest expense – other. ted St ome. ount to gener c a a a ontr urren c te a ts, equity c c tives when the following c a ter rties, the oblig c c a nsfer of the se a sed under onsolid urities. orded on a a tive is sep t; ac tives a acc ir v a c c a C a short s a quisition or reporting d h bilities oll urities sold short ac lthough they c c c teristi a re reported t is not held for tr a a tf ac tement of In ontr a hse s onsolid s a bles. Most deriv re re c a ac ac onsolid c a ounter ome – tr re not re ps, forw r C a ts a a ontr te deriv ken to meet the needs of the B id c c C a a a c ri a a a nd borrowing tr ac h r a ge its risk exposures (i.e., to m l instruments l instruments ding li s interest r rds of ownership t the a ontr luded in other oper te, foreign sh. The tr a a nk’s own a a a a a a tement of In tely, the entire onditions requiring sep c c a i i lv ome. sured ted St cc a n eived c a a ted to se c c s ca c tes, foreign ex a a a r nd p tion to return the se ontr c orded i a urities pur a a a n n ting in c c a a a c c a a a s sep lude sw n c a ommodity a l Position, unless they te instrument with the s c tivities where debt se ted on the re undert lue, nd rew ted St onomi terized a a c a i a a nd me a r c stom n embedded deriv tive would meet the definition of urities sold short is re ac c onsolid eived ted a ted over-the- a ts in ts, ac a c ombined a a ed or re c nk enters into these deriv n r tions rel a a C tives embedded in other fin tive fin tive fin c urities or c s for the B rly, if se ir v tions. a a a a ac ac a a a c a n a a a lue through profit or loss. sured sep sep h a urities lending a urities borrowed king tement of In a urities sold short in the urities is re c ding interest r ins or losses in c v the a deriv those of the host c their e tivities bility se the oblig lue. All embedded deriv c c a a onsolid a a nd expenses in the dv nd interest expense s well re tre a a ontr ontr without possessing su m a a Obligations related to securities soldOblig short the f well ac oper Deriv Securities lending and borrowing Se debt se Fees re C Where Š negoti purposes when the risks a a Derivative financial instruments Deriv Š tr in the in other oper St Deriv with the host The B a g Position. These tr only refle li ca v c subsequently sold to third p by se of Fin Se met: Š c be me se Simil se or other fin from interest r l sis; a t n i ome a tives is a a a c c a re a l risks n l rry ome – a osts se se a a sh a ding ome. c c nd i se a ny a ca c a ssets or c a l for the a ome. h a ca tement of h a y n a c l riteri c h onsistent ted in nd losses c e with a nd their ing ssets, a a c a c c lue through c a a i c a tion ognition or a nd the nd rty disbursing a ter sh, c n c n l tegory re those with a a ting in a a a rged to other n ac a a different b gement a i a ins ca ess of, the a a ca ir v a onvertible to c ome. Tr a c nd m lre oll a nt fin ns ted St h a c n c n c a ord a c a a quisition. n instrument a a ca tegy s lue in the a tf orded in other a es the in ac a a bilities, other th a suring the tement of Fin c acc tement of In c dily lue a a te a a lized fin a a tement of In lized g a ir v a a ost. The p a ted a omprises c onsolid re re te of a osts to sell, ged together c nd li t signifi ter ognized from, the a C c a tf a re re sis, in a a nd other fin a c eived under reverse nk on initi ted St a ted St a a redited or n l to, or in ex a c a a a c ssified in this a t a ted St tement of In oll n instrument by instrument ntly redu a group of fin rt of other oper a greements to repur c a a lue, l a nges in v re a nd unre a c a ca ssets s ed; or a a nks a a lue b ted th c a a a h re m sured l a rise from me a lue less mortized urities serving sp l Position, with tr l Position, unless the risks c ir v a a sh flows otherwise required. greements (reverse repur a a c a a a a a y only design onsolid a onsolid i i a ted St lue equ t h es. These investments a urities re ir v rt of ted ca c c C ins one or more embedded deriv ssified subsequent to their initi a C onsolid c a c a c a a l institutions ding ir v a a le n n urities delivered under repur bilities bilities design a f l n C ined or relinquished. The rel a a a c a a a a a i c a a re me ted by the B a c ins or losses on them on tf a a ont nk m lli lli ntly redu re p a n a turity from the d c a a a a rket v a re tre i i osts to sell tes or signifi nt risk of a ognized ca orded nges in f a c c gement or investment str c onsolid a nd se a c umst c a a n n a ca C c re obt m ognized on, or dere h a a ding revenues in the n ir a ted on c rried a a a C n be demonstr bilities c re not re a ned. The se urities sold under nges on tr re re tely in the lized on dispos a a re re orded in the bilities ca c a a ca lu a a a in a c a nd deposits with b h a a lue less tion is determined on ognizing g lue. re ntly modify the tement of Fin tement of Fin sed under res a nd fin nd fin c ving a c a t would otherwise a a bout the group is provided to key m nd li a a a a a a nd ert a ca a a h l instrument a tion elimin nd li re re nd se nd it eev ls c bilities or both whi re not re c tives, greements) a ir v ted or signifi lue ve been design a ome – other in the ome – tr bilities a a ir v a c a i a greements a a a a c c a a a a t to insignifi a a c n a nd h c kes possession of the se ssets ssets a n mount lo tion lli a ted St ted St a tf se ssets th a a a a ir v a a se a a a i a a a l l l a ssets a nd li nd losses re c n three months’ m h h signifi a a a nd deposits with fin a lents, dem a i i h nd design a tment th a ing n sh t lue through profit or loss when one of the following umented risk m c c tions in nsition to IFRS. The B ting in ting in a c c a c a c a c rds of ownership ip a c in deriv a a a a bilities or re ious met n n c ngements ca a n a re elimin nges in f urities pur a c ding ognized immedi ognition. ins ome. a a sh a ding revenues in the a sis: c tre li or The a The fin The design personnel inform do a whi fin perform sh, subje c a c ir v c a onsolid onsolid a a ssets greements rr greements) ert h a Securities purchased and sold underSe resale agreements G oper re Precious metals Pre Position less th C restri profit or loss Š rew Trading assets and liabilities Tr In prin Financial assets and liabilities designatedor at loss fair value through profit Fin re Š b Š oper ca fin the a f met, a C institutions, highly liquid investments th a c tr Fin on tr c equiv (repur due to f those th repur Cash and deposits with financialCa institutions a CONSOLIDATED FINANCIAL STATEMENTS changes in fair value of embedded derivatives are recognized in other Held-to-maturity investment securities operating income – other in the Consolidated Statement of Income. Held-to-maturity investment securities are non-derivative assets with All derivatives, including embedded derivatives that must be separately fixed or determinable payments and fixed maturity that the Bank has accounted for, are recorded atfair value in the Consolidated the positive intent and ability to hold to maturity, and which do not Statement of Financial Position. The determination of the fair value of meet the definition of a loan, are not held-for-trading, and are not derivatives includes consideration of credit risk, estimated funding designated atfair value through profit or loss or as available-for-sale. costs and ongoing direct costs over the life of the instruments. After initialmeasurement, held-to-maturity investment securities are Inception gains or losses on derivatives are only recognized where the carried at amortized cost using the effective interest method, less valuation is dependent on observable market data, otherwise, they are impairment. Amortized cost is calculated by taking into account any deferred over the life of the related contract, or until the valuation discount or premium on acquisition, transaction costs and fees that inputs become observable. are an integralpart of the effective interest rate. The amortization is included in interest income – securities in the Consolidated Statement The gains and losses resulting from changes in fair values of trading of Income. derivatives are included in other operating income – trading revenues in the Consolidated Statement of Income. Asale or reclassification of a more than an insignificant amount of held-to-maturity investments would result in the reclassification of all Changes in the fair value of non-trading derivatives that do not qualify held-to-maturity investments as available-for-sale, and would prevent for hedge accounting are recorded in the Consolidated Statement of the Bank from classifying investment securities as held-to-maturity for Income in other operating income – other. Where derivative the current and the following two financialyears. However, sales and instruments are used to manage the volatility of share-based payment reclassifications in any of the following circumstances would not expense, these derivatives are carried atfair value with changes in the trigger a reclassification: fair value in relation to units hedged included in operating expenses – Š Sales or reclassifications that are so close to maturity that changes in salaries and employee benefits in the Consolidated Statement of the market rate of interest would not have a significant effect on the Income. financial asset’s fair value; Changes in the fair value of derivatives thatqualify for hedge Š Sales or reclassifications after the Bank has collected substantially all accounting are recorded as other operating income – other in the of the asset’s original principal; or Consolidated Statement of Income for fair value hedges and other Š Sales or reclassifications attributable to non-recurring isolated events comprehensive income in the Consolidated Statement of beyond the Bank’s control that could not have been reasonably Comprehensive Income for cash flow hedges and net investment anticipated. hedges. Impairment of investment securities Investment securities Investment securities are evaluated for impairment at the end of Investment securities are comprised of available-for-sale and held-to- each reporting period, or more frequently if events or changes in maturity securities. circumstances indicate the existence of objective evidenceof Available-for-sale investment securities impairment. Available-for-sale investment securities include equity and debt In the case of equity instruments classified as available-for-sale, a securities. Equity investments classified as available-for-sale are those significant or prolonged decline in the fair value of the security below which are neither classified as held-for-trading nor designated atfair its original cost is objective evidence of impairment. In the case of debt value through profit or loss. Debt securities in this category are those instruments classified as available-for-sale and held-to-maturity which are intended to be held for an indefinite period of time and investment securities, impairment is assessed based on the same whichmay be sold in response to needs for liquidity or in response to criteriaas impairment of loans. changes in the market conditions. Available-for-sale investment securities are recorded atfair value with unrealized gains and losses When a decline in value of available-for-sale debt or equity instrument recorded in other comprehensive income. When realized, these gains is due to impairment, the carrying value of the security continues to and losses are reclassified from the Consolidated Statement of reflectfair value. Losses arising from impairment are reclassified from Comprehensive Income and recorded in the Consolidated Statement of accumulated other comprehensive income and included in net gain on Income on an average cost basis. For non-monetary investment investment securities within other operating income in the securities designated as available-for-sale, the gain or loss recognized Consolidated Statement of Income. in other comprehensive income includes any related foreign exchange The losses arising from impairment of held-to-maturity investment gains or losses. Foreign exchange gains and losses that relate to the securities are recognized in net gain on investment securities within amortized cost of an available-for-sale debt security are recognized in other operating income in the Consolidated Statement of Income. the Consolidated Statement of Income. Reversals of impairment losses on available-for-sale debt instruments Premiums, discounts and related transaction costs on available-for-sale resulting from disposals or increases in fair value related to events debt securities are amortized over the expected life of the instrument occurring after the date of impairment are included in net gain on to interest income – securities in the Consolidated Statement of investment securities within other operating income in the Income using the effective interest method. Consolidated Statement of Income, to a maximum of the original Transaction costs on available-for-sale equity securities are initially impairment charge. Reversals of impairment on available-for-sale capitalized and then recognized aspart of the net realized gain/loss on equity instruments are not recognized in the Consolidated Statement subsequent sale of the instrument in the Consolidated Statement of of Income; increases in fair value of such instruments after impairment Income. 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
130 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS l ri a te t n a lly l a a a 131 n yor a a h a c re n sis. c tis rs for tu a a es a e debt n will tive ired, a rrying ludes a c nd the c a di a e c a ac nking of n a nk c a ca ble a ontinuing a rre nd the ustomer a y; su n n c nd a ll a a nth c c ntit a nkrupt tive b a a d of, or p dv a ontr a a c Ca nd in a ted future a yment of the c nd l Report nd r lo c a a a a nd performing a gen ess, he a a urrent nts) lly in a ve not yet been olle h, unless the c result of future nd rs, the lo ys from the d a tis c a a c a nk ns: a a te, a te prob a tion of the a a nt, the B ns a reditors ired in yments; a ac a lly, a tu se of b nd insur irment losses sh flows from lo s being imp s c a a a rre a ns n’s a n portfolios, intern a a a a ca ssu ul a ac a a irment exists ca a l nk Annu mount c a lp ognized using the sh flow to servi l e is represented by a nking a a ph a ting the qu c a c sed upon the intern a b a ca ted ca a a a s imp il lo ip te ontr c ired lo rs. Fin a ul a c ys in c a yment th a ns estim a n. oti redit mitig c a h leg l a c a c a ssessed re b ssified c ient p lly signifi ired, imp te exposure to the a rre a a c ca a l a nis n government a ounting the expe e of imp a a c tive interest r a h a c c ted future h reporting period whether lly ted to result in rep ggreg s c c ssified a ssess them on c a di a a irment for lo tus within 180 d a tive eviden dy a ac l 2014 S lly 90 d a ttention of the B a a c a c lue with the lo k the lo a a n lly in th sis for ggreg ome being re nteed or insured by the te suffi a te a e for performing lo a c a a l effe a ommitments r tu a ac lre ted for imp a c r re used in the a c a a tu n a e. For non-ret rs is a ac tion of the debt is in pro aCa tb c a ul a sis c nd tors: ted by dis ac nth ired. bly expe a tive level. n to be imp n c nk’s a a urity (or other tive eviden l a a a a c a n losses is required. e of imp a te. urrent st ulty of the borrower; a c c ac ired if the lo rre c ontr a ted. Obje c tes (PD) whi a ul olle ca a a llow y in interest or prin c a c nd the likelihood of other a ontr c es or c l a ac son se b olle ny; c a tion; c rd lo meters c re llow a se in the estim a reditors’ a s imp ca ted to performing lo omes to the a onsidered individu ca a a nt present v c a t its origin nd the extent to whi ssets th a r nis ca re inherent in the portfolio but h c l diffi a c ult r a nk a ys in s imp a ired, if not a tive a a a nd a re h borrower; essful repossession. niz a t re a i a es a a c e for lo bility to gener c ome a n a lue of se t a re re a ognized. re omp c lo c c c a cc ac te: l a c a a a c rs is written off. Losses expe a n re evident; n ve not been individu n th a ims a bly estim a se-by- redit a t es rel a a a olle lo a ca bility of the borrower entering a ured, the meters form the b a c irment c a a l sed on the B c ting p ept when it is gu c a s imp t a a sbe a c n a rre tive interest r a c r th ns where obje a a ble de ble v a ssified a a c l reorg aca a a a llow a a llow a onsiders eviden a lly 180 d l nt fin a i t indi a inties c ns th c a liz c a l re not re a ult or delinquen tions; lly identified a sur ting for e ca a bility of Def s determined the lo n a ble d a tu a a a omplexity of determining the ustomer’s a l risk r ys in ys. Any re l effe a a n be reli ring the result nk a ns th a n individu nk pools them into groups to reditor ca yment on c c tive ert ting p a a a a ssified a a tive imp tion efforts a a a c ac a c a c irment losses ll lo ssu with, the B a tions, ex a ca c c ifi yment h l me fin high prob def a p a a a ll c t c a n or in restoring it to ns ns. Allow n is fully se urred losses th nk h or the underlying the re risk r a un Prob signifi a a likelihood of su a a oblig the extent of other to support the the p the sh flows of a a a c a a a p olle a mount. This results in interest in ssesses on ontr onsidering the following f olle omp olle situ The B C events, the B 180 d Collective impairment allowance For lo c c c risk r be origin determined b Intern 365 d a For those lo B spe If c a individu ca Š events th lo in Š lo Š Š Š c a lo Š government, the provin Imp portion of the th observ lo both Individual impairment allowance For Š Š Š te te rk l e nk t a te a ns a a c a a n ted ll a a redit te of n tion n a a a ed to te of nd t a rk is c a a a a c a s a a a te of n tement a a urities redit n ns over a a l Position c tive re st c a a sed lo a redit m c mount is a t the d i dv rk is urred loss a c lly set up a c a future bleness of c a a t the d h orded if the a ding t the d n a onsider ns a nd the loss c c le se pture a a a a c quisition for a ssified ted St a ip a ost using the es for turity or c a a sed by the B nin ca l n c c son ac ted loss m a nd a a sh is sh c result of nges to the a c ome over the a n ted a h a c s the portfolio of c a sh flows will result a ca ca mortized into c blished t of the interest r lue on the d h a a onsiders interest r lso a rk mortized a lls on the lo ca ted will result in rge is re c C a a inst the perform ac te of re not tr a a c a onsolid quisition. a ble-for-s a llow sh flows of the lo a ted losses h ir v n. a g re urred loss m a C n portfolio. An over c nk c ac ted quisition. The a il h ssessment is required a c a ca a a a mortized rk est c blished to c a a a a ome. a ac tf tement of Fin t the v c t a a a a n expe ted or pur a rk is fully s a te of a rket, quisition is prin tive interest method. overy in the provision for irment losses. Lo a tement of In a ognized or a c a lue, no c te of interest on the lo a a ding, held-to-m c te of ac a ired when there is obje a a n on the d a ognized when urred loss m ognized when mounts. a redit m djustments. As ted St a rk. The in sured lr c c ognition of the lo c lue, the B ted a c te m a a sured a a ir v se in expe ted future c sh flow shortf a ptures the imp a a ssessed for determining losses, a h will result in both re re a a a urities, whi a urred. A net a rge/re tive m ns from those expe ted St ted life. An a rk te of tu c ca ca c tion to the lo nin ny imp es origin a ac re c a lre a a a tf ir v re re re re c a a a ac c h a ac lly t the d a a tement of In a a n ost of the investment before the origin a a result of one or more loss events th lly me nd a onsequently none of the pur n redit losses in the a c re me ns, the onsolid a djustment is est a ac a c ns C a te of ppro nk a a nin a h reporting period ired on the d C a s ontr dv mortized a sed a s a a s held-for-tr a redit losses. The future expe c a n to be imp ns a a a ted loss m s losses te on the lo a a onsolid redit m ac t the f c einrel rk ns a c a ken to determine expe a h a sh flows lower th n using the effe c ted St c a a a C l losses in a c nd redit losses. a lo a n re initi nd a te of initi a ca c lue. Debt se a a a rk on the d sed lo ked over the life of the lo a a l nd t on the estim a tu te lo a a a a mortized orded ome ny a ac ognized to the extent th h hist ns ns ssified quisition. a c irment c rk. ac ac ssessed lo a c c nk. Lo eed the ir v a a a a a ns pur rriving rge. a e for l redit m c a ac s determined a ve not been design ac a a a c h reporting period to determine the re c c re not individu onsolid te m a a ted by the B h a n orded in the a omprises of both tf lly C re re ac a c c a future expe sh flows of these lo c te a a a ll pur n imp n the onsiders ome in the a fter the d ppro l between the ns re not quoted in t the end of e sed lo a a a c c a te of ca n portfolio l provision for iling interest r a a lude lo a a a a a ining term. The interest r s a a a c a re not a llow h ted t mortized b e of imp re re a djustments nd nk c a a a c a a a ted life of the lo ted ted loss m a a gement’s best estim a ome while overy in provision for l losses ex irment tive interest method, less quisition is tr onsidered to be imp c ggreg c c h id by the B c c ter th a a c a c c a ns origin ns in urred a a urities or h rk rk n ximum of the ns. ns winds down over its expe ording ac a a tu quisition quisition. The portfolio quisition. In c c a a a a a a borrower. Lo cc re nd th ssessed mortized into in djustment ddition on the d a losses in re of In Purchased loans All pur Loan impairment and allowance for creditThe losses B of the lo net of expe An se a re ac effe ac m gre a Lo lo interest in a is p design expe For individu expe of benefit is only re a the un lo the end of e Where lo portfolio m the rem ac their life time whi a ac a o eviden event h losses in the the prev m Loans Lo imp m The interest r differenti for fixed interest r CONSOLIDATED FINANCIAL STATEMENTS
Š Loss Given Default rates (LGD); and the provision is recorded in the Consolidated Statement of Income as Š Exposure at Default factors (EAD). provision for credit losses.
Funded exposures are multiplied by the borrower’s PD and by the Write-off of loans relevant LGD parameter. Loans (and the related impairment allowance accounts) are normally Committed but undrawn exposures are multiplied by the borrower’s written off, either partially or in full, when there is no realistic prospect PD, by the relevant LGD parameter, and by the relevant EAD parameter. of recovery. Where loans are secured, write-off is generally after A model stress component is also applied to recognize uncertainty in receipt of any proceeds from the realization of security. In the credit risk parameters and the factthat current actual loss rates circumstances where the net realizable value of any collateralhas been may differ from the long term averages included in the model. determined and there is no reasonable expectation of further recovery, write-off maybeearlier. Retail loans Retail loans represented by residential mortgages, credit cards and other Reversals of impairment personalloans are considered by the Bank to be homogeneous groups of If the amount of an impairment loss related to loans decreases in a loans that are not considered individually significant. All homogeneous subsequent period, and the decrease can be related objectively to an groups of loans are assessed for impairment on acollective basis. event occurring after the impairment wasrecognized, the excess is written back by reducing the loan impairment allowance account Mortgages are collectively assessed for impairment, taking into account accordingly. The write-backisrecognized in the provision for credit number of days past due, historical loss experience and incorporating losses in the Consolidated Statement of Income. both quantitative and qualitative factors including the current business and economic environment and the realizable value of collateralto Restructured loans determine the appropriate level of the collective impairment allowance. Restructured loans include loans where the Bank has renegotiated the A roll rate methodology is used to determine impairment losses on a original terms of a loanbygranting aconcession to the borrower collective basis for credit cards and other personalloans because (concessions). These concessions include interest rate adjustments, individualloan assessment is impracticable. Under this methodology, deferral or extension of principal or interest payments and forgiveness loans with similar credit characteristics are grouped into ranges of a portion of principal or interest. Once the terms of the loanhave according to the number of days past due and statistical analysis is been renegotiated and agreed upon with the borrower the loanis used to estimate the likelihood thatloans in eachrange will progress considered a restructured loan. The investment in the loan is reduced through the various stages of delinquency and ultimately prove as of the date of the restructuring to the amount of the net expected irrecoverable. This methodology employs statistical analyses of cash flows receivable under the modified terms, discounted at the historicaldataand experience of delinquency and default to estimate original effective interest rate inherent in the loan. The loanisno the amount of loans that will eventually be written off as a result of longer considered past due and the reduction in the carrying value the events not identifiable on an individualloanbasis. When the of the loanisrecognized as acharge for loan impairment in the portfolio size is small or when information is insufficient or not reliable Consolidated Statement of Income in the period in which the loan enough to adopt a roll rate methodology, the Bank adopts a basic is restructured. In other cases, restructuring maybeconsidered formulaicapproachbased on historical loss rate experience. substantial enough to result in recognition of a new loan.
Performing loans Customer’s liability under acceptances Over and above the individually assessed and retail roll rate allowances, The Bank’s potentialliability under acceptances is reported as a liability loans that were subject to individual assessment for which no evidence in the Consolidated Statement of Financial Position. The Bank has of impairment existed, are grouped together according to their credit equivalent claims against its customers in the event of acall on these risk characteristics for the purpose of reassessing them on acollective commitments, which are reported as an asset. Fees earned are basis. This reflects impairment losses that the Bank hasincurred as a reported in fee and commission revenues – banking fees in the result of events thathave occurred but where the individual loss has Consolidated Statement of Income. not been identified. Hedge accounting The collective impairment allowance for suchloans is determined after The Bank formally documents all hedging relationships and its risk taking into account: management objective and strategy for undertaking these hedge Š historical loss experience in portfolios of similar credit risk transactions atinception. The hedge documentation includes characteristics (for example, by industry sector, loangrade or product); identification of the asset, liability, firm commitment or highly probable Š the estimated period between impairment occurring and the loss forecasted transaction being hedged, the nature of the risk being being identified and evidenced by the establishment of an hedged, the hedging instrument used and the method used to assess appropriate allowance against the individualloan; and the effectiveness of the hedge. The Bank also formally assesses, both Š management’s experienced judgment as to whether current ateach hedge’s inception and on an ongoing basis, whether the economicand credit conditions are suchthat the actual level of hedging instruments are highly effective in offsetting changes in fair inherent losses at the reporting date is likely to be greater or less value or cash flows of hedged items. Hedge ineffectiveness is thanthat suggested by historical experience. As soon as information measured and recorded in other operating income – other in the becomes available which identifies losses on individualloans within Consolidated Statement of Income. the group, those loans are removed from the group and assessed on There are three types of hedges: (i) fair value hedges, (ii) cash flow an individualbasis for impairment. hedges and (iii) net investment hedges.
Provision for credit losses on off-balance sheet positions Fair value hedges A provision is set up for the Bank’s off-balance sheet positions and For fair value hedges, the change in fair value of the hedging recorded in other liabilities on the Consolidated Statement of Financial instrument is offset in the Consolidated Statement of Income by the Position. The process to determine the provision for off-balance sheet change in fair value of the hedged item attributable to the hedged risk. positions is similar to the methodology used for loans. Any change in The Bank utilizes fair value hedges primarily to convert fixed rate
132 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS ir n a a lue te a te 133 ted a n a a lue a le is a ir lly sed ve se a a s the a a ome, re a a ir v a ssets) h a c n a a ome. h ip a c ny nge for tion. a ir v c c c ssified a portion of a a a bilities a re l re h ted a tement of a quired in a onsolid lue (less ssumed is se in the f c c a a ssets held- a l Report a a bility b ssets h a C rt of a ting in ac ords tion a ul a a n the f re of the net le re ngible a a c re nd their s a c tion for the a nd li a a a l a t the f ir v c ombin a lli sset, a a lues of le if they lue of the lo nsferred by the a a ry to be the d c eed the sp te on whi a a a ca a a l. i sset a a ted St c le or a a l c a bilities) r. a a tion to pur a bilities a nk re tely in other overed prin a a n i bilities, unless a r ir v lue of the tement of In ontingent a a nd f a t their proportion c nk Annu c ns a a a a a c ontinuing use. These a nk’s sh a a onsider a a n ounting for the sured c c a quired b onsider a fin a tion is a c ssets in the ny options, issued by the l groups) ssets tr ondition luding int nd te f rrying v nd li orresponding option to nsferred in ex a ac nd li ome – other in the a a a a a c acc simil c a a a onsolid a s held-for-s oti c a s ca n oblig c a ted St a C ac orded. a a ry s held-for-s a c mount s s a a s a a ognized lue. The B a ssets a ontingent li c ombin a a ssets nge for lo onsidered held-for-use, onsiders the d tion tr quisition is less th c nk to former owners of the luding c ting in ls the a quired c a lue of the c nother fin n through tive of whether the a a c 2014 S a a ssified ssets held-for-s tion a c h a a ac nsfers the ir v nk h nd dispos ac ny quired (in ny previously held investments of a a nk h ble c nner a a l onsolid ognized in other oper lue of the re re a ur within one ye a nk quisition d ca a a a a rrying ognized immedi a ble ognized c s c a mount will be re a ir v C ac a c c a a quisition is me bilities of the subsidi cc a bility is re a ac ca te f a ome. a sset is ome. Any subsequent in te of the present v h equ lly tr sh or ir v ontrolling interest by issuing its own ssifi a ac ssets c ins or losses on dispos c a onsider ny, ost of c a c a ther th a a business a a lli c l c a quisition over the B ssets ( ssets ca n lso re a me m ognized in the c ssets a a luding a a a a i quiree before the business a c le in their present a in is re ac c c l l orded te f rrying a sset does not meet the requirement to be a ble nd goodwill c a a ac a n non- ble to o quisition method of i i for ssets irrespe a a id. The f a ca a a ting in quired in ex c c a le, the a urred by the B ble tion r ries. The B a l Position. Any subsequent write-down to f a ost whi a ac lized g te s ssumed li n n c a a nk in a c in or loss on a nd it leg ac a a a ost of a a i ac a re re a a rt of the t ognizes the quisition d ost of c c lue of identifi a re presented within other a c c a le ns n tions a re of the identifi a riteri tement of In nd ac se of a a a a quired ted. Where the B tion p c a a a a ngible ny re sp lly ssets a ssumed (in ir v a ined h a ognized in other oper ac a ca a a tion nd quisition d a le if their mount. Where the B a c ome – other in the c a nk re res, no fin l a a le tr ourse of business. ll identifi a bilities in a c a a a t the lower of their t the c a ac a a i osts to sell, to the extent this does not ex osts to sell is re nd the equity interests, in liz s goodwill. If the s ssets l a a c c c ombin ted St a ontrolling interest is re tion a a l, a a nk’s sh c gement’s best estim a n a ognized by the c a a ble int a ess of the a ounted for in the s onsider a c tive write-down, is a c nk follows the bilities c n a quisition. A g lue of the identifi ontrolling interests, if urrent non-fin urrent non-fin ting in ontrolling interest for ble for immedi a a a c c c quisition. The a c a a acc sured initi sured sured ac re of the f il tement of Fin a a a orded ome, in other oper nsferred by the B ac nk. The B nk, the li a quiree is re lue less lue less a quired quisition of subsidi quiree, a c ir v c onsolid a a a ssumed, the resulting g v nd ssets meet the s held-for-s nd li ommon sh umul a a onsidered highly prob ontrol is obt osts to sell) onsidered held-for-s onsider a a oper tr of the Any ex Non- sh Non- of the B of c C ac c v In v St c settle the pur the a a been re re ac c redemption c me c identifi ac on m previously held investment in thec subsidi me through a a orderly re for-use. If the f me a The B non- the non- B ac B sum of the Assets held-for-s Non- together with Non-fin In gener otherwise indi the norm Business t s a te a h rof ny a ps c ny. a a l a nd a re a a rds i nd a ight- rily to tion a ted c te. re a tions. a a tion. a a a a n i lude a ssessed ns, a nk rs. c c ac te sw ul a a ting a a lues a c losure ted over l a ns a c a bilities sset less bilities. i a y forw ses in whi y interest r tement of ca omprehensive omprehensive a a ost less c a lv ome or for c ve different djustments on te fin c re re c c a c c mortiz a ppropri a ca a a a t a a yli in investment a ome in the ye ted c ble to the a s te experts to lin y exposure c a ted depre a a a urities, lo c a urren nd urren tions. tion a tion is c lues te. ted St c ert irment losses, if a c ting r a a y interest r a a a a c ome. The B i lue of the hedging a a c ble properties rried c nd depre c urren a l est a lv ted using the str ted useful life of nsl a c r a nd residu urren a a ca e to these tr a a umul l instruments. Hedged ttribut tion a ross- c a nd equipment on the c ximum of 15 ye ir v ns, deposit li a a rs, building fittings – a c ul a i hniques. In i djusted a a lue of the hedging a sehold improvements – term re lre urren a c sh flow hedges prim c c c tely l a a acc a a a c onsolid ppropri m n a tly orded in other orded in other ted imp omp ca a ps, r C ca c a c c luded in other oper a tive tr sted revenues. Hedged items nk holds tement of In a c nd losses on the hedged item is a a nd equipment h ir v nd nd foreign s c a ting to flo a a a nd equity se a a a a a ca a ross- nd le a luding building fittings), nd residu c l Position. tion te a nge in f c nd foreign a ins te fin a ognized in in a umul a re in i ost less a urities, lo te sw c a a re dire umul tion is c c a h c lu rs, a ps, a ted St c te, extern a c l n ted debentures. Hedging instruments r-end t a i a a acc a tions of a t tive, is re tive, is re a a bilities a a c a rds nge in f ge the foreign c c a nk utilizes ble fore djusted a a le debt re re a ac a a a a ted useful life of the rel ting r a nd a h rds. n luded in the irment losses. Depre a lye a a yli ns c a c a a te sw a sh flows rel ted useful life. c a rising from foreign oper i rried nd l period up to a a ounted for sep c a a a onsolid ppropri ca le debt se ca n y forw sted revenues. Hedging instruments in a C tion y interest r a ognized v c a lue of the investment property for dis acc c a s c ca i ting expenses – depre urren tios y forw a a ble-for-s sehold improvements c sset. Depre rket tr a c c a ost. Buildings (in re presented in property tion methods, useful lives nd subordin a a re ted imp orresponding g orresponding a a r-end c a il a a a h fin tement of Fin ome. The B c c a lr ir v i a urren t lue is determined by referen a c a tion or for both. The B c a bility in a urren s follows: buildings – 40 ye h c v a a ges, ac a c c a a omponents of building i y interest r a a ight-line method over the estim nd highly prob ble-for-s urren nd le lye ri c c c pit ble fore a a a c te a ent m a ir v umul a i a il nd losses on dispos c a a ca lue c bilities nd equipment a a ted St jor rried ted depre a n v a a lude a tion expense is in tion methods, useful lives a acc ppre a ludes expenditures th a a l instruments to flo c tes foreign a urren a ca l. a lv i i c nk eng a rs. Depre rs, equipment 3 to 10 ye ins a c omponent’s estim a i c a c ton l sh flow hedges, the ble, f ny a se plus one renew a a a c c a a a a ps, foreign ac n ca es of re il h h fin umul ssessed ognized in in ome until the lude lude single- ome until the ome under oper ome – other in the a c a a nd is quisition of the pit a c c c c c c c onsolid ost in nd v nd foreign ac ac a using the str a 40 ye a in Depre Investment property is Net investment hedges For net investment hedges, the equipment, of le instrument, to the extent effe a Property Land, buildings and equipment L 15 ye Cash flow hedges For C pri hedging instruments to m imp residu properties whi single- e in Net g ac line method over the estim sw determine the f purposes by using re useful lives, they highly prob in C ca The B the hedged net investment design e When m instruments in dispos Investment property Investment property is property held either for rent re Depre in hedge the v acc items in deposit li In instrument, to the extent effe re fin CONSOLIDATED FINANCIAL STATEMENTS
During the measurement period (which is within one year from the The cost of a separately acquired intangible asset includes its purchase acquisition date), the Bank may, on a retrospective basis, adjust the price and directly attributable costs of preparing the asset for its amounts recognized at the acquisition date to reflect new information intended use. Intangibles acquired aspart of a business combination obtained about facts and circumstances that existed asofthe are initially recognized atfair value. acquisition date. In respect of internally generated intangible assets, cost includes all The Bank accounts for acquisition-related costs as expense in the directly attributable costs necessary to create, produce, and prepare periods in which the costs are incurred and the services are received. the asset to be capable of operating in the manner intended by Subsequent to acquisition, the Bank accounts for the following assets management. and liabilities recognized in a business combination as described below: After initialrecognition, an intangible asset is carried at its cost less any Š Contingent liabilities, until resolved, are measured at the higher of accumulated amortization and accumulated impairment losses. the amount that would be recognized as a provision or the amount Intangible assets thathave finite useful lives are initially measured at initially recognized, with any change recognized in the Consolidated cost and are amortized on a straight-line basis over their useful lives as Statement of Income. follows: computer software – 5 to 10 years; and other intangible Š Indemnification assets are measured on the same basis as the item assets – 5 to 20 years. Amortization expense is included in the to which the indemnification relates. Consolidated Statement of Income under operating expenses – Š Contingent consideration classified as a liability is measured atfair depreciation and amortization. As intangible assets are considered to value, with any change recognized in the Consolidated Statement be non-financial assets, the impairment model for non-financial assets of Income. is applied. Intangible assets with indefinite useful lives are not Š Liabilities to non-controlling interest holders when remeasured at amortized but are tested for impairment annually and when the end of each reporting period, acorresponding change is circumstances indicate that the carrying value may be impaired. recorded in equity. Impairment of non-financial assets After initialrecognition of goodwill in a business combination, The carrying amount of the Bank’s non-financial assets, other than goodwill in aggregate is measured at cost less any accumulated goodwill and indefinite life intangible assets and deferred tax assets impairment losses. Goodwill is not amortized but tested for which are separately addressed, is reviewed ateach reporting date to impairment annually and when circumstances indicate that the determine whether there is any indication of impairment. For the carrying value may be impaired. purpose of impairment testing, non-financial assets that cannot be Goodwill is reviewed ateach reporting date to determine whether there tested individually are grouped together into the smallest group of is any indication of impairment. For the purpose of impairment testing, assets that generate cash inflows from continuing use that are largely goodwill acquired in a business combination is, on the acquisition date, independent from the cash inflows of other assets or groups of assets. allocated to each of the Bank’s group of cash-generating units (CGUs) If any indication of impairment exists then the asset’s recoverable that is expected to benefit from the combination. CGUs to which amount is estimated. The recoverable amount of an asset or CGU is goodwill has been allocated are aggregated so that the level at which the greater of its value in use and its fair value less costs of disposal. impairment is tested reflects the lowest level at which goodwill is The Bank’s corporate assets do not generate separate cash inflows. If monitored for internalmanagement purposes. Goodwill impairment, at there is an indication that acorporate asset may be impaired, then the a standalone subsidiary level, may not in itself result in an impairment at recoverable amount is determined for the CGU to which the corporate the consolidated Bank level. asset belongs. The carrying amount of the CGU is determined by management using An impairment loss is recognized if the carrying amount of an asset or approved internaleconomiccapital models. These models consider aCGU exceeds its recoverable amount. Impairment losses of various factors including credit risk, market risk, operational risk and continuing operations are recognized in the Consolidated Statement of other relevant business risks for each CGU. The recoverable amount is Income in those expense categories consistent with the nature of the the greater of fair value less costs of disposal and value in use. If either impaired asset. Impairment losses recognized in prior periods are fair value less costs of disposalorvalue in use exceeds the carrying reassessed ateach reporting date for any indication that the loss had amount, there is no need to determine the other. The recoverable decreased or no longer exists. An impairment loss is reversed if there amount of the CGU has been determined using the fair value less costs has been achange in the estimates used to determine the recoverable of disposal method. The estimation of fair value less costs of disposal amount. An impairment loss is reversed only to the extent that the involves significant judgment in the determination of inputs. In asset’s carrying amount does not exceed the carrying amount that determining fair value less costs of disposal, an appropriate valuation would have been determined, net of depreciation or amortization, if model is used which considers various factors including normalized net no impairment loss had been recognized. Such reversalisrecognized in income, control premiums and priceearnings multiples. These the Consolidated Statement of Income. calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value Significant judgment is applied in determining the non-financial asset’s indicators. An impairment loss is recognized if the carrying amount of recoverable amount and assessing whether certain events or the CGU exceeds the recoverable amount. An impairment loss, in circumstances constitute objective evidence of impairment. respect of goodwill, is not reversed. Corporate income taxes Intangible assets The Bank follows the balance sheet liability method for corporate Intangible assets represent identifiable non-monetary assets and are income taxes. Under this method, deferred tax assets and liabilities acquired either separately or through a business combination or represent the cumulative amount of tax applicable to temporary generated internally. The Bank’s intangible assets are mainly comprised differences which are the differences between the carrying amount of of computer software, customer relationships, core deposit intangibles the assets and liabilities, and their values for tax purposes. Deferred tax and fund management contracts. assets are recognized only to the extent it is probable that sufficient
134 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS e t ll a x c re a a s a a 135 n nd h a c a a t sured s rily ome a ll risks ts. rt of a a c a ted urred. a pre-t te of ord a c a ining ost of ac a tion th non- ome. a c a king into ognized tion t do not l result of a lly sin c tion ntee, sp c t a a acc a a ounted ke them a a lue of a a a a a a ac tion. If the re me a r a bility. The orresponding ontr l Report s orded lue of the a a a a c nti a ns c a acc a tion in t the ognized a r a l, provisions nk ret ac a c nd re c a a a tion. tion, t a lized re ir v a a a a ktr a tion for ustomize buildings ntees th tive oblig ts to m ntees teri c ognized lue of estim c a re re eded to reinsurers sh flows n outflow of s the premiums for a pit ac ims for property ac r c a a nd movements in me time, sh flow of the to the li c r nk Annu a ac a a se. a a e business prim a a te. a ts refle tement of In l a ca ca a ns c t c nk’s best estim ca c ins subst a b a seb a a n a ounted for in a ac a te to the period of risk ifi ome through e a re re ognized if, de to a overies ontr c a t the oblig ims. c onstru ims c c a c lue of the oblig c a oti c hgu ome over the term of the c a a ktr n c acc a l l c c ontr a ts c c ge of time is re le le se ted St ac t rel c nd other simil ble th a le is deferred re a a a ir v a ac nd losses a a lor ounted redit, letters of gu id a a e sin a ss a c a c me period t results in the B ims re c a a ted ntee, resulting in h they rel seb onsidered m orded for the f a ted future a a e premiums a c n a a c c n expense in the period in whi a l c 2014 S rth c r a ontr osts. At the s c a a ins tive a n c c sehold improvements over their ssessments of the time v a ting le a s sed property into its origin e a turing, is re a onsolid a a e a in on s c a le le c lude p ements c a lue th C a n se, if required, is le ognition, su c c n s a a inties surrounding the oblig c a ny g te, the risks spe n provision is the B ognized a deriv a r. Gross insur s the rel a ining term of the le a a rket a c a ts to whi ognized to refle ognized in net in a a nd it is prob a a present leg a a bility is re ny g c re investments m c ts in lre a rned premiums represent the portion of urrent ye lized le eption. The f s ac a a ert a s a a tive instruments. For gu c a c a li c a rket v sed on the dis a ac a ognized s re re a a ndby letters of a c a se, a ome. Where the s pit bly, re re a te. Insur ontr tin c a bilities. Insur a lify a ppropri a c lue of money is a ontr ca a a a ims for life insur ir m lty a lly b ounting the expe redit enh c n expense in the s nd un e eived for the gu urrent m re re a a a nk h tive, c a c ts ts. Une a l c ele c a bility is re c e a a a me period c c se (where the buyer/lessor ret n a osts s c tf ognized su osts to bring ac im li ac luding for restru tqu a a n lude st c upied under oper a a c ts e a n c c a a c a ted reli l y for deriv nk enters into c c ca tion required to settle the present oblig a ses cc c a c a n a a sehold improvements ssumed deriv tions, urred. fin t the end of the le ontr ontr a a a c benefits will be required to settle the oblig nd sset c c a a a ca rds of ownership), ome over the rem a a ting le es o t insur c tely in net in nd, where s tion of the e e a c rising during the ye lle l c t refle a c a a a c c a tement ounted i a a a tement a ted useful life. nding tion ntees ntees in i ntees th re in n a n se in the provision due to the p ting le c lty insur a mount re a a c a a a a t of the time v onsider a a a a ble for their intended purpose. The present v a a a r r r c c lify n acc a sehold improvements ount the risks a a a eption is gener ome in the s re ims a a st event, the B onomi n be estim su a te th c c c a a n oper nd rew re c fter the reporting d sset. Subsequent to initi nd offi l orresponding li ondition a c premium to be re in in net in Gross insur oblig when due. Gross premiums for non-life insur oper Sale and lease-back Where the B they effe results in qu Gross premiums for life insur Gu Gu indemnifi acc in Insur the dire the The depre c a a immedi with the poli in interest expense – other in the money a e Reinst the tot a r outst ca c fin premiums written in the determined by dis ca estim Provisions A provision, in suit reinst insur property Gu a p Leasehold improvements Le a s t a n a it in a a ount c ssets s nd a c a nd a a a ussion, sis over ome in nsfer lue of c te of re ome a c ognized a l Position. te used in a c a s both the a tit c lize the ted a r a nging a i a a a ognized ognized in sed on ting rising under te impli a c c de using the c c ted or ssified a l Position a a a n rr s property a ted to be a a mount of the ble in l i a re otherwise ognized over a c a ac ls nsfer nk h t the end of a c a c c a es when the a a x a a id b yments is the ount r n c re dere re re entives h a omprehensive a c a nd a re orresponding a re m xisre a c ognized over the onsolid c c ight-line b c a a a n expense on a c nd presented within htr h do not tr a C ls a c c a lso re a se p rrying sis or to re sset or, if lower, the nt periodi tement of In sis over the period of re expe a s str l Position. When se in a a a a a a a a ognized ssets ting a ca se. a re only offset when they a x positions th bilities in the c ses i ble through the dis ommen a re a a ome t a c a c a a a a es pply to t c l to the present v h the benefit of these n urred. sed c a t the interest r onst h a urred in negoti c tement of Fin c a net b a eiv a ome is re c c sed ele ted to be p re reviewed in t x positions under dis luded within property a ted St nd ele lly re sured using en c c c c c a a a a a ac c a a a ontingent rent a se in n sset. Le tement of Fin n yments. The nd where the B h ognized C a bilities re in a a ert a c c a a ca ight-line b a a c ted to se in re in a ting c ted St l Position. The dis h osts in a h is equ a greements whi greements whi inst whi uthorities, or whi sis. c ognized in other neously. ontingent rent c a c a ounted dded to the re me c rds of ownership, with or without rds of ownership re initi i a a c a s fin a a str se p a ry differen c onsolid re re a a t C nd li a a c a a g n expense on a ted St a c x a a se, the le ele a C n a a ome – other in the a urred in negoti a c a re lue of the le l expense a h they c ssets c s se. se term, whi n inty. These provisions a a a luded in other li tement of Fin c ses tors, whi mount expe a a a a ble a c a a a t the risk of t a ble tes expe onsolid a ele l dire ted into the re ac c se a a ssets l use of the ir v bilities y c a nd rew nd rew ssified C a lue of the minimum le ert a il a a ttern refle a a n a a a sed ele c a a ted item. l ca xr onsolid l with t a ting in a x ight-line b osts in c a nt f v c a a a a p c a a C ted St yments, dis n a bility simult a se. Fin ognized whi ls p n be utilized. nk’s a t a a fin a c a a nd li re a orpor c ognized on a ognized str tion is in tes to items re a x reporting group a ca ting le c a c c ppe a te of the it in the le a a tely refle ted t a a tion of rent a ustomers under ustomers under c a tement of Fin a se p c ins provisions for un h those tempor ognized in the l to the f c c ome. Initi ac a a c ll relev a c tly in equity, in whi c a s the rel sis over the le tto l dire urrent t re in a c ssets ll the risks ll the risks c a ssets a onsolid c a me t nd re se rent a sed on ses. The le ble is re l title, int a a a a a a a redu C a a a nd the intention to settle on a a n oper x x se oblig se a nd a a lue of the minimum le lly lly a te impli ted St xisre a ome is re sed to sed to ppropri a a a eiv a a a s a a c a a a a c sset a ontrols the physi rs in whi a ting the present v nk m se term. se term on se in other oper se. Initi nd settle the li c nti nti ntively en te leg re re subje ele ele ting le a me line ting le lin pplied to the le a a a a a a a a a a c c a a a a a a a a mount equ l right ble profits will be nging ted n n ul ight-line b ses h reporting period. ept where it rel tement of In a ns in the a overed or settled. a sed ome or dire se term b ome t c a a a a nk’s best estim a l a c c a te x a c c a a onsolid a nd equipment in the rise in the s ac ssessment of rr udit, dispute, or n sset nd onsidered to involve un a a lo Rent ultim expense in the periods in whi a equipment on the B a Oper interest r ca the le Bank as a lessee Assets held under fin subst Deferred re the s Bank as a lessor Assets le Le oper e C fin le the le the ye c B a present v a St tre in believes a a the le lessee ex return on the net investment in theAssets fin le subst a Deferred t The B deferred t subst r held a the le fin the minimum le str le In leg t CONSOLIDATED FINANCIAL STATEMENTS at the higher of the initial amount, less amortization to recognize any Short-term employee benefits fee income earned over the period, and the best estimate of the Short-term employee benefits are expensed as the related serviceis amount required to settle any financial obligation arising as a result of provided and a liability is measured on an undiscounted basis net of the guarantee. Any increase in the liability is reported in the payments made. Consolidated Statement of Income. Recognition of income and expenses Employee benefits Revenue is recognized to the extent that it is probable that the The Bank provides pension and other benefit plans for eligible economic benefits will flow to the Bank and the revenue canbe employees in Canada, the United States and other international reliably measured. The following specificcriteria must also be met operations. Pension benefits are predominantly offered in the form of before revenue is recognized: defined benefit pension plans (generally based on an employee’s Interest and similar income and expenses length of service and the final five years’ average salary), with some For all interest-bearing financial instruments, including those held-for- pension benefits offered in the form of defined contribution pension trading or designated atfair value through profit or loss, interest plans (where the Bank’s contribution is fixed and there is no legalor income or expense is recorded in net interest income using the constructive obligation to pay further amounts). Other benefits effective interest rate. This is the rate thatexactly discounts estimated provided include post-retirement health care, dental care and life future cash payments or receipts through the expected life of the insurance, along with other long-term employee benefits such as long- financial instrument or a shorter period, where appropriate, to the net term disability benefits. carrying amount of the financial asset or financialliability. The Defined benefit pension plans and other post-retirement benefit plans calculation takes into account all the contractual terms of the financial The cost of these employee benefits is actuarially determined eachyear instrument (for example, prepayment options) and includes any fees or using the projected unit credit method. The calculation uses incremental costs that are directly attributable to the instrument and management’s best estimate of a number of assumptions – including are an integralpart of the effective interest rate, but not future credit the discount rate, future compensation, health care costs, mortality, as losses. well as the retirement age of employees. The discount rate is based on The carrying amount of interest-bearing financial instruments, the yield at the reporting date on high quality corporate bonds that measured at amortized cost or classified as available-for-sale, is have maturity dates approximating the terms of the Bank’s obligations. adjusted if the Bank revises its estimates of payments or receipts. The This discount rate must also be used to determine the annual benefit adjusted carrying amount is calculated based on the original effective expense. interest rate and the change in carrying amount is recorded as other The Bank’s net asset or liability in respect of employee benefit plans is operating income in the Consolidated Statement of Income. calculated separately for eachplan as the difference between the Once the carrying value of a financial asset or a group of similar present value of future benefits earned in respect of service for prior financial assets has been reduced due to an impairment loss, interest periods and the fair value of plan assets. The net asset or liability is income continues to be recognized based on net effective interest rate included in other assets and other liabilities, as appropriate, in the inherent in the investment. Consolidated Statement of Financial Position. When the net amount in Loan origination costs are deferred and amortized into interest income the Consolidated Statement of Financial Position is an asset, the using the effective interest method over the expected term of the loan. recognized asset is limited to the present value of any economic Loan fees are recognized in interest income over the appropriate benefits available in the form of refunds from the plan or reductions in lending or commitment period. Mortgage prepayment fees are future contributions to the plan. recognized in interest income when received, unless they relate to a The current service cost, net interest expense (income) and past service minor modification to the terms of the mortgage, in which case the cost are recognized in net income. Net interest income or expense is fees are deferred and amortized using the effective interest method calculated by applying the discount rate used to measure the over the remaining period of the original mortgage. obligation at the beginning of the annual period to the net defined Loan syndication fees are recognized when no other services are benefit asset or liability. When the benefits of a plan are improved required of the Bank and the fees are non-refundable unless the yield (reduced), a past service cost (credit) is recognized immediately in net we retain is less thanthatofcomparable lenders in the syndicate. In income. such cases, an appropriate portion will be deferred and amortized in Remeasurements comprising of actuarialgains and losses, the effectof interest income over the term of the loan. the asset ceiling and the change in the return on plan assets are Loan commitment fees for loans that are likely to be drawn down and recognized immediately in the Consolidated Statement of Financial other credit related fees are deferred (together with any incremental Position with acharge or credit to the Statement of Comprehensive costs) and recognized aspart of the effective interest on the loan. Income (OCI) in the period in which they occur. Amounts recorded in When it is unlikely that a loan will be drawn down, the loan OCI are not recycled to the Consolidated Statement of Income. commitment fees are recognized over the commitment period on a Other long-term employee benefits straight-line basis. Other long-term employee benefits are accounted for similarto Interest income and interest expense from trading operations are defined benefit pension plans and other post-retirement benefit plans presented in trading revenues, in the Consolidated Statement of described above except that remeasurements are recognized in the Income. Consolidated Statement of Income in the period in which they arise.
Defined contribution plans The cost of suchplans are equaltocontributions payable by the Bank to employees’ accounts for service rendered during the period and expensed.
136 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS 137 tion bility l ome ir ting te ted to ting a c ca a tion is a es. a a n re li a lly ts or gement c re a a ca ca a c ted to a a nk. The a nd ting ssifi n nk’s a ted s ies used in a llo a ted to be nd a ca c a a c l a a c a sis using l ssifi ted orpor c ts nd ement, these tion of a a a llo c a l Report ustomers to c l a ffe c a re a te a ted to c c a nd servi ts sold or a rison of in hief oper tion a i nd tion right where a c ca c a c ssets a tes res with no softhe s four oper a a nk’s m ble b i a a a sed on the f a a ts yment expense, a llo a c luding Group llow a rds expe c ognized a c sso a onsolid a a c nk. a omp nk’s tes, tion of the business nk Annu C rds ounted produ a h c w a es to be a a e is the grossing up of nk h a c ounting poli a c ry renoun ppre luded in oper r c a re those whose c b a rkets. The other onsider lue of a c nking, Glob a a a w a sed p a re re c sed upon the intern a a n equit te of points to be a a acc a k a re not tements by the B bles a a oti sis for those c a a pproved by the B rket r c a lB a rd, results in es. rious estim re in lue of points is gener a a ed a options, b c h a res a a re-b a nk’s produ c re b x to equity – other reserves in lst c ms, whi a sed on the B l Position. This re a a a xb a w re pportioned to the business ome from a a e. The B a a i a a c a a a i c ir v sis for the determin tion le m c c nill a a nk. The n a a 2014 S n nk, v bout resour n a a a nking & M ted from equity when they a a lis a a ted t retion of the B ndem sto a c ting segments, in a c a tely b te. nd in a i a t in v a a a c ted between the produ lB ting segments r nd losses pit a onsistent with those followed in the nking revenues when the points a surement en a es for the mix of a a a c a h segment on surement differen ca c a ca sso ted fin isions a onditions. t wholes lue of the ture. rly reviewed by the B spl a a c te items, whi re used in the prep lue. The f ac x-exempt sour gement judgment is involved in determining lly llo c a a ins sb c a a tion. The funding v re dedu a a a a a orresponding option for sh a a lent before-t a a t the dis a a il pri c a n nd preferred sh in ller oper a nd a ir v nking, Intern ement d ed lty points progr a a a a lue of the renoun ir v a l view is the b c c a a nd Glob a ged sep x-exempt a lue of the points issued is deferred in other a ke de nd t a tement of Fin a a a a a nd employee benefits in the a orpor ement of ert onsolid ll f a re used to hedge sh n rket g c c a c ted to e nB nd points issued, with the nge in me c ir v ssess its perform a re regul e, a a a te to be used in the estim a a te. Subsequent to the volunt a a eived is ir v a c ins the re t a bility re gener l inform n equiv res a ca ble ognized c a ome. a omplexity of the B h ounting me lent ret a a a a n di a a a tes loy a c c i c c ries a tto psed. M a a ounted for ommon x llo a c nd h a c nsfer-pri a ted St re m c l n a a n then be redeemed for free or dis tives c a acc n a a a a meters. As well, a ker to m a l to their f t the f acc l reporting stru ca a a re Ca rk-to-m a ted from equity when they a nd re nd no longer a r nd other tion re rued li ry renoun a c te points when they use the B a ble nd a a a re a a a a a ement d a l reporting systems of the B a tion of the tions to c s of the renoun nk oper a acc a a i a ting segments. The oper gement’s intern r ting results ting segment. These segments offer different produ tion methodologies a es rendered es, subje es onsolid red c use of the a a a a a lth & Insur c c c sury sured rds a C rd. Interim dividends n ted m nge in the over l ca ision-m a n umul tement of In a a a a a sed on equiv c ca c a a bilities is tr lue tegory represents sm rious p bilities a a onsider a n employee ret w llo rising from t nd dedu nd intern h a a a orpor a a c redeemed. The f b A volunt li points equ oper St segment fin servi C de Segment reporting M expenses – s a v a servi The points Bo Tre ca rel only not revenues whi a Be a We v Where deriv me renoun the segments. This redeemed or l the redemption r acc redeemed. Dividends on sh Dividends on segments: expenses the segment of the The results of these business segments these segments prep c Customer loyalty programs The B li oper de a fin servi oper . t lue nd a a l a a sset a res a a i l in a c ome c nd rd a ir v a lue i re c a s ifi nd n a riteri a nge of s the re se to c a . For a c a in c a a a eeds a a a ert e fees w n a a le of c nk’s ome over t c ome, a a t tion of ted using h a ir v re c a a c a c a a ac c a re re- n option te ted to vest re expensed ld ul a a bility redited to a c tion right, both ted to vest. c a r c nd spe n option is e pro a l a c sh. These ca a c a i a res in the ognized diverse r c rds th se or s dvisory fees. rds ca nd servi ca tion rights a c tion rights give the rds a a a a a a a tisti sep a a i h n be divided into the i w w e, the risk free a c c e of the B c a rued li w a c a tility) sured to f ppre nd blished. tement of Fin ise pri c ca orresponding a rds expe re re a a c a tility ( a a period of time a t must be settled for tement of In lue using c ognized in tion tement of Fin a a re linked to a a ommission in acc a a c k a surement of the f a a nding. If ppre ppre w c ngement of the c ac a bility is expensed over the a a t a a re pri a l vol te while they rem ome a ir v a orresponding in a ognized in interest in ns a eived. c k rr ssified t must be settled for sh k ommon sh a ted St ca c rket pri ting in the negoti a c ssified c tes units expe a a a sed on st c c l a rds th lue re a a ted St a lude a ac a ted St ted vol l c gement re re-me a a c a onsidered c a c ip ip a es over a res or settle in c tes f w c c c n a re re in outst a ir v a l Position. yment is est a a te. s the a ndem sto rds th rti a nd a a nti te to tr a a i a a a bility- urrent sh a a a onsolid c urities or the pur es a he is c h w nd histori tterns b c t n c onsolid ompletion of the underlying C c ndem sto onsolid c tes the re-me lue with a a a urities is re a a c ing model requires inputs su a n fter fulfilling the C a orded in other reserves is a ted forfeitures. For C c c h reporting d a a ised, both the exer c c eive p c nk estim ise for sh rded to employees c rds. Equity- ir v ac nd other c tion rights, sto a bilities a nges in f a te th ustomers. Fee in a a htr a a ting or p ommission revenues from rty, su a i c a w orpor nd other m te c w a a viour p c h bilities. Li c elling the t a ac a a a a sli c eeds together with the c a te f s the servi nd other res in the redited to equity – a c sed on the number of tely. omponents of fees th a n nd lue is the quoted m a c a a ognized c a a t of expe a ny sli hin mount re a lue r c ppre ted dividends, expe ca ognized on c a a a a a c a re te while they rem t the reporting d ac res or other se c hes, e third-p tement of Fin nt d tegories: t period. These fees in a a a ir v a c k e pro a a ustody ise beh a yments a a c ir v c n ca tion rights ssified c re re c s equity k options with t a a a a a a c a xes i res l re re nk’s right to re options, the B options ome on equity se n option is exer rns fee e of the option, the c c a a a e ssified a c a a c a c a a tion expense in the period. The li tion expense in the rds, f te, expe ted St l ommon sh ommission expenses rel n re ise pri a a a sed p a c a c c a a l weighting of implied c re expensed nill a nill ppre rned for the provision of servi tion for tion. Fees or w ted t a nk e a a ssified a nding, with re revised forfeiture r a rising from negoti a a a ndem sto gement, a es it provides to its i a ise pri ised, thereby nd a a ac ac a l h a a c a c k sured to f c c a c re-b c ing model. The option pri h reporting d c ounted for sep rued over th n a in v in v luding the imp ns ns c a sed on the gr sh quisition of sh a c a a onsolid a a a sso n equ nd ac re ompens ommon sh ompens Pl C a Position. For t employee exer a ca together with the equity – employee the right to exer the exer interest r acc Sto Employee sto exer delivered in tr Position. If when the B Share-based payments Sh Dividend income Dividend in exer a pri tr ac in b equity – other reserves in the whi c vesting period whi pl c the vesting period b Fees m Fee and commission expenses Fee perform outst me e c acc Fees e a businesses, tr options other Fee and commission revenues The B servi following two CONSOLIDATED FINANCIAL STATEMENTS segments on a risk-based methodology. Transactions between Entities. It introduces a single, principle-based control model for all segments are recorded within segment results asifconducted with a entities as a basis for determining which entities are consolidated and third-party and are eliminated on consolidation. set out the requirements for the preparation of consolidated financial statements. Earnings per share (EPS) Basic EPS is computed by dividing net income for the period The standard was applied retrospectively allowing for certain practical attributable to the Bank’s common shareholders by the weighted- exceptions and transitional relief. average number of common shares outstanding during the period. The adoption of IFRS 10 has resulted primarily in the deconsolidation of Scotiabank Capital Trust and Scotiabank Tier 1 Trust (together, the Diluted EPS is calculated by dividing adjusted net income for the period “capital trusts”) through which the Bank issues certain regulatory attributable to common shareholders by the weighted-average number capital instruments. These entities are designed to pass the Bank’s of diluted common shares outstanding for the period. In the credit risk to the holders of the securities. Therefore the Bank does not calculation of diluted earnings per share, earnings are adjusted for have exposure or rights to variable returns from these entities. changes in income or expenses that would result from the issuanceof dilutive shares. The weighted-average number of diluted common The impact of the deconsolidation on the Consolidated Financial shares outstanding for the period reflects the potential dilution that Statements for prior periods is shown in the table at the end of this would occur if options, securities or other contracts that entitle their note. holders to obtain common shares had been outstanding from the Disclosure of interests in other entities (IFRS 12) beginning of the period (or a later date) to the end of the period (or an In conjunction with the adoption of IFRS 10, the Bank has adopted earlier date). Instruments determined to have an antidilutive impact for IFRS 12, Disclosure of Interests in Other Entities,that broadens the the period are excluded from the calculation of diluted EPS. definition of interests in other entities and requires enhanced Earnings are adjusted by the after-tax amount of distributions related disclosures on both consolidated entities and unconsolidated entities to dilutive capital instruments recognized in the period. For tandem with which the Bank is involved. The relevant incremental disclosures stock appreciation rights that are carried asliabilities, the after-tax re- have been included in Note 16. measurement included in salaries and employee benefits expense, net of related hedges, is adjusted to reflect the expense had these rights Joint arrangements (IFRS 11) been equity-classified. Under the new accounting standard, IFRS 11, Joint Arrangements, the Bank classifies its interests in joint arrangements as either joint The number of additionalshares for inclusion in diluted EPS for share- operations or joint ventures depending on the Bank’s rights to the based payment options is determined using the treasury share method. assets and obligations for the liabilities of the arrangements. The Under this method, the net number of incremental common shares is adoption of the new accounting standard hadnoimpact on the Bank’s determined by assuming that in-the-money stock options are exercised assets, liabilities and equity. and the proceeds are used to purchase common shares at the average market price during the period. Fair value measurement (IFRS 13) IFRS 13 provides a revised definition of fair value and guidance on how The number of additionalshares associated with capital instruments it should be applied where its use is already required or permitted by that potentially result in the issuanceofcommon shares is based on other standards within IFRS. In accordance with the transitional the terms of the contract. provisions, IFRS 13 has been applied prospectively from November 1, 2013. The adoption of this new standard did not have an impacton 4 Recently adopted accounting standards the Bank’s determination of fair value. However, IFRS 13 required Changes in accounting policies during the year additional disclosures on fair value measurement which are included in The Bank has adopted the following new and amended accounting Note 7. standards issued by the IASB effective November 1, 2013. The changes Disclosures-offsetting financial assets and financial liabilities (IFRS 7) have been applied retrospectively, unless otherwise noted. IFRS 7 requires the Bank to disclose gross amounts subject to rights of Employee benefits (IAS 19) set off, amounts set off, and the related net credit exposure. These The amended standard IAS 19, Employee Benefits, eliminates the use new disclosures are included in Note 11. of the corridor approach (the method previously used by the Bank) and Presentation of financial statements (IAS 1) requires the value of the surplus/deficit of the defined benefit plans to IAS 1, Presentation of Financial Statements, requires the separate be recorded on the Consolidated Statement of Financial Position, with disclosure of items within other comprehensive income based on actuarialgains and losses to be recognized immediately in OCI. In whether or not they will be reclassified into net income in subsequent addition, the discount rate to be used for recognizing the net interest periods. On November 1, 2013, the Bank adopted this presentation on income/expense is based on the rate at which the liabilities are a retrospective basis along with the implementation of amended discounted and not the expected rate of return on the assets. This will IAS 19. Changes on remeasurement of employee benefit plans that are result in higher expense in the Consolidated Statement of Income in recognized directly in other comprehensive income are not reclassified line with the funded status of the plan. The OCIbalances will change to the Consolidated Statement of Income in future periods. in line with changes in the actuarialgains and losses. The impact of the adoption of the standard on the Consolidated FinancialStatements 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
138 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS l. 139 a ted ted a a teri a tement of l Report a a s not m a ted St a tion tion a a nk Annu rds w IFRS 10 Rest IFRS 10 Rest a a b a onsolid nd onsolid onsolid C a C C oti c 2014 S tely in the a r IAS 19 IAS 19 a benefits benefits Employee Employee nges in the other st a 650 – (650) – h c 2,2604,7601,936 – – 337 (42) 31 – 2,218 4,791 2,273 2,2285,2941,780 – – 158 (14) 32 – 2,214 5,326 1,938 1,358 – (1,358) – re presented sep reported reported 11,572 (242) (9) 11,321 10,924 (394) (7) 10,523 31,753 1,00021,978 (180) (27) 32,726 (23) 21,775 31,896 171 (20) 32,047 25,315 (243) (4) 25,068 a Previously Previously 668,044 95 86 668,225 743,788 (236) 92 743,644 291,361 – 2,256 293,617 312,487 – 1,507 313,994 h $ 33,361 $ – $ 15 $ 33,376 $ 34,303 $ – $ 16 $ 34,319 $$ 5.31 5.22 $ $ 5.27 5.18 $668,044$ $ 6,466 95 $ (41) $ 86 $ (35) $668,225 $ 6,390 $$ 5.19 5.15 $ $ 5.15 5.11 $743,788$ $(236) 6,697 $ $ (68) 92 $ (19) $743,644 $ 6,610 c t of the ac rds a nd IFRS 10. The imp nd a a ounting st acc nges in IAS 19 a h c mended a ries 966 (11) (9) 946 ries 1,155 (7) (10) 1,138 t of the nd lue through profit or loss of $174 (November 1, 2012 - $157), whi a a a a ome (loss) (31) (714) – (745) ome (loss) 545 (157) – 388 ac c c (1) (1) ir v a tf a ted a nges 266,894 – – 266,894 nges 322,949 – – 322,949 rize the imp a a a h h nges 505,575 – – 505,575 nges 569,709 – – 569,709 nges 17,689 – – 17,689 nges 18,793 – – 18,793 c c rter. doption of new a a a a tes tes nd government nd government omprehensive in omprehensive in a a h h h h a a a a c c i i c c c c c c nd government 111,549 – 99 111,648 nd government 119,550 – 65 119,615 l instruments 35,299 – 24 35,323 l instruments 29,255 – 12 29,267 a a a a i i bilities design redit losses (2,969) – (8) (2,977) c c ton sso sso ted by ted by a urities urities c ssets ssets n n a a c c a a a a ac ac ac bles summ ted by ted by ted by ted by rnings rnings a x x l instrument equity holders 777 – (777) – l instrument equity holders 743 – (743) – ontrolling interests in subsidi ontrolling interests in subsidi a a nd equipment nd equipment a a a a ac ac ted other ted other ac ac c c e for a a a a bilities bilities c ssets ssets pit pit a a n l instruments l instruments a a l Position this qu tive fin tive fin ontrolling interests ontrolling interests a a a a a a c c i Ca Non- Ca Non- ined e ined e c umul umul ns – Business ns – Business ry of imp a a n pit pit a a a tober 31, 2013 ($ millions) a ludes deposit li cc cc c c Deposits – Business Lo Allow Property Investment in Deferred t Other Lo Property Investment in Deferred t Other Deposits – Business Investment se Investment se Deriv Ca Other li A Non- Ret Deriv Ca Other li Ret A Non- Fin c c t November 1, 2012 ($ millions) tO bilities not imp bilities not imp a a si si a a a a The following t Assets not imp Liabilities impacted by changing IFRS accounting standards Total assets (1) In Assets not imp Liabilities impacted by changing IFRS accounting standards As Assets impacted by changing IFRS accounting standards Total assets Assets impacted by changing IFRS accounting standards As Summ Diluted Equity not imp Li Total liabilities and equity Net income for the year ended OctoberEarnings 31, per 2012 share B Equity impacted by changing IFRS accounting standards Li Diluted Equity impacted by changing IFRS accounting standards Equity not imp Total liabilities and equity Net income for the year ended OctoberEarnings 31, per 2013 share B CONSOLIDATED FINANCIAL STATEMENTS
5 Future accounting developments contracts that are considered to be lease contracts, insurance contracts The Bank actively monitors developments and changes in standards and financial instruments, and assuch will impact the businesses that from the IASB as well as regulatory requirements from the Canadian earn fee and commission revenues. The new standard is acontrol- Securities Administrators and OSFI. based model as compared to the existing revenue standard whichis primarily focused on risks and rewards. Under the new standard, Effective November 1, 2014 revenue is recognized when acustomer obtains control of a good or The IASB issued a number of new or amended standards that are service. Transfer of control occurs when the customer has the ability to effective for the Bank as of November 1, 2014. The Bank has direct the use of and obtain the benefits of the good or service. The completed its assessment phase and will be able to meet the standard is effective for the Bank on November 1, 2017, with early requirements of the new standards in the first quarter of 2015. Based adoption permitted, using either a full retrospective approachora on the assessments completed, the Bank does not expect the impactof modified retrospective approach. A majority of the Bank’s revenue adoption of these standards to be significant. generating instruments meets the definition of financial instruments and remains out of scope. The areasoffocus for the Bank’s assessment Presentation of own credit risk (IFRS 9) will be fees and commission revenues from wealth management and IFRS 9, Financial Instruments, requires an entity choosing to measure a other banking services. liability atfair 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 Effective November 1, 2018 Statement of Other Comprehensive Income, rather than within the Financial Instruments Consolidated Statement of Income. The IASB permits entities to early On July 24, 2014, the IASB issued IFRS 9 which will replace IAS 39. The adopt this requirement prior to the IFRS 9 mandatory effective date of standard covers three broad topics: Classification and Measurement, January 1, 2018. The Bank will early adopt these requirements asof Impairment and Hedging. Q1, 2015. Classification and Measurement Levies The standard uses a single approach to determine whether a financial IFRIC 21, Levies, provides guidance on when to recognize a liability to asset is measured at amortized cost or fair value. Financial assets will be pay a levy imposed by government thatisaccounted for in accordance measured atfair value through profit or loss unless certain conditions with IAS 37, Provisions, Contingent Liabilities and Contingent Assets, are met which permits measurement at amortized cost or atfair value and also for a liability to pay a levy whose timing and amount is certain. through other comprehensive income. Most of the IFRS 9 requirements The interpretation clarifies that an obligating event, as identified by the for financialliabilities have been carried forward unchanged from legislation, would trigger the recognition of a liability to pay a levy. IAS 39. While the interpretation discusses the timing of the recognition, it does not change the measurement of the amount to be recognized. Impairment The standard introduces a new single model for the measurement of Novation of Derivatives and Continuation of Hedge Accounting impairment losses on all financial instruments subject to impairment This amendment to IAS 39, Financial Instruments: Recognition and accounting. The expected credit loss (ECL) model replaces the current Measurement, adds a limited exception to allow hedge accounting to “incurred loss” model and is based on a forward looking approach. continue in a situation where a derivative, whichhas been designated The ECL model contains a “dualstage” approach whichisbased on as a hedging instrument, is novated to effect clearing with acentral the change in credit quality of loans since initialrecognition. Under the counterparty as a result of laws and regulation, if specificconditions first stage, an amount equal to 12 months expected credit losses will are met. be recorded for financial instruments where there has not been a significant increase in credit risk since initialrecognition. Under the Presentation second stage, an amount equal to the lifetime expected losses will be The amendments to IAS 32, Financial Instruments: Presentation, recorded for those financial instruments where there has been a clarifies the requirements relating to offsetting financial assets and significant increase in credit risk since initialrecognition. financialliabilities. Hedging Disclosures for Non-financial assets The amendment to IAS 36, Impairment of Assets, provides new The standard expands the scope of hedged items and hedging items to disclosure requirements relating to the measurement of the recoverable which hedge accounting canbeapplied. It changes the effectiveness amount of impaired assets as a result of issuing IFRS 13, Fair Value testing requirements and removes the ability to voluntarily discontinue Measurement. hedge accounting.
Effective November 1, 2017 The standard is effective for the Bank on November 1, 2018 on a retrospective basis with certain exceptions. Early adoption is permitted Revenue from Contracts with Customers and if elected must at a minimum be applied to both the classification On May 28, 2014, the IASB issued IFRS 15, Revenue from Contracts and measurement and impairment models simultaneously. The Bank is with Customers, which provides a single principle-based framework to currently assessing the impactofadopting this new standard. 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
140 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS s a ing re rty 141 rd c nd h a a a nd a c e a es 2013 rket es c tive c ined ble. urves, l pri a rily c rket is d t serve n c a a a a ble a a a a ac ounted 47,889 il e a c multiple of urities a c te ble, su c v $ 5,449 $ 53,338 a a is used nd forw a a onsensus dis l Report a urities il s ns th c a a es from es in c lue is a a t a lued using a c ing servi c sis. ing servi a v a c a c a ssets obt a r instrument rse a redit spre a ir v a c re less frequently re v a ls spot s 2014 ble d a dily a mount to nk Annu a lue is determined by urities is prim ding lo a a a rket, no a a nk uses c a simil a il d, f d, interest r a b re used to pri ps a h 50,902 rty broker quotes. Where a a a a a ing is used to determine a a c nteed debt se v a rkets, where ir v nd independent m c h (Level 2). In some a a $ 56,730 $ 5,828 tive. Where the m a oti monthly b a a r ble independent third-p urities c re verified through a ac rket inputs used to pri c lued using pri a a st ac ked se a tive m a es for simil a rty providers or intern a ious met re not re ut c a c ac nd these tors su ac c a lue is determined a tive m urities sed on quoted pri ing models with observ ppro r bonds re v ac a redit spre c a c ded, the B a a 2014 S a c ge of underlying ac a tements (Level 3). ess on l return sw ge-b ble, the f a a s c tive yield of a ir v a a rkets rties a c rket pri a il a risk f a tion a a ent h es, broker quotes, or pri a es in c v c c nge-quoted pri c urities c luding pre pproved independent pri rket is more a lu a ifi tive or exe c nteed se c sed model is used (Level 3). a a tively tr a c wide bid-offer spre h a rtner st a urities is b ca r l mortg c tion pro tive m ing by third-p rty broker quotes providers or third-p nk uses pri a ac redit tot c a a a es su nk c a a c a onsistently, the l urves (Level 2). Other tr a c ounterp ac a e-b lp c t c lu c dily observe the m c sed v re not tion pri a a a a ble. Where equity se urities a a sed te urities, the f in c a ac ent ex c ble a a il a re not ted yields of simil c l pri es es in a a a ns a a c c il rnings or per v a ing V t ert rket d a a nd no indi n-b a c c a ble inputs, in tes (Level 2). These inputs rket sour v a a a yield-b sed on quoted m nnot re es from B tures (Level 2). nk uses pri a urities where there is no ked se a a a a c rty gener a c a a nd ca a nd other debt se ac nd other debt sed on quoted pri ent tr ing a a a a c lue of equity se lue of residenti lues of government issued or gu c n intern urities a a a nd c a in se te equity se te te a re not nd interest r a ge-b ted fe overy r a a a es, interpol urities th c a a a ir v ir v ir v lue. Where there is c c rily b ac a a a providers, where the m a ert n a tive, c es es a h instruments (Level 3). a urities (Level 2). The B rket-observ rket pri rkets, where ded, the most re c c t c sh flow method, using the effe c ir v a a a ac orpor orpor a a uthorities djusted for instrument-spe s hedges to lo nd re onsensus pri ontr a a inst se inputs from m The f determined b verified with a models su Mortg f pri ca a c pri quotes, the B tr independent m (Level 2). For se (Level 2). Government issued or gu m m determined using third-p d in Equity se The f m C utilizing re For the underlying e from third-p Independent Pri for priv a c C Where quoted pri The f prim (Level 2). Where quoted pri tory a c te re ifi a a rket ies c a yof t use c e ble sed lues. tive a tions c a bility ac a a ca a ting spe nd a hnique es or ca h a es used a c ur c ed or lu c a c ir v ke into c a l es th Level 1 rkets. In t a a onsidered pproxim a c t the a a acc i c a a nd a tion poli nks, other regul c a orpor tion a a n re c tion te ter a nd a re independent a lu a a a te sour lb a ture or be lu rily gold es, a l institutions a lue. The IPV ounter a a re not limited to, lu a t c a a a c ustomers’ li urities pur i a a a n ing sour c c nt inputs to models c onsider for a c n ir v onditions c bility entr tes. rkets or when using nts would t ca lued using indi a c a a c a a ssumed to a a ept n independent a tely determined. ing or r es represent tive of future f ip urities sold under ls (prim a es. The v c a c ble inputs l instrument is the quoted c c tion purposes. V sed on quoted pri c e to ensure th a nks, se c hosen v re acc re v rket a a a a rkets. Independent Pri tive or illiquid m a i c s Level 2. Fin a a rti a rket r losed in the Level 3 sensitivity lude, but a ac c sis, a tive m lu list of pri a c a ll signifi c ac ximize the use of observ ll pri n a a es with tion of f a a a a a re b sh flow model in ac lly do not b c a l institutions a t a rket n ppropri rket pri a c tion groups th ca i a a fin hniques used in determining the a a es in a ins tm l c tive m ble for over-the- ing servi c ted to se ssess the reli re noted below. For Level 3 ious met rket p c a ca es is performed to determine m a a a ssified c n a a a c a a lue. The c sh-flows or other v ac a il a urities borrowed, sed on m a l tions int urrent m a c a c urities lent, tion is dis de in in esses in pl ca a c y not be refle v a in b tions in in meters do not exist, gre c tm tive levels. c a a tive m periodi a a ir v a a a a lu ounted tion te tes norm r a ac a a ac e verifi c tion. When a a a lue for ys ken to c int te sour ring deposits with fin nd se a ns tions rel a a nk m lu a a a te to pre ac a te f ed to nd se urities sold short dis a lue of a tion is a lue is b a nt use of unobserv a c c a a nd deposits with b lue less a nd pro a lw l models th a a ir v ns ess require th tors th a ined from a a ble p l inform a a ca c a a a onsensus pri lu str a a a c nk. On a a rket. Quoted m ac l instruments is ir v tr l instruments nd v ess. These sour sh ir v a a a a a a c i i a a lue estim ing or r ca c c nd a c eoff es, oblig a n n lues, either due to their short-term n re not c c rket represent ted to se s they rel a l instruments tr a ded in ontrols a ing a nd therefore m s well ir v n ll the f a ddition a a greements ge 147. a c a c a i les. tive m a a a es, intern a a a a greements s c lers inputs lued using a c es ring deposits with fin a ble, the v es, present v ns ns a a tion of f ac n a c a n l to the B c le tion of f lues of a c a a a a ept tes a a a a a n se ifi a ul re used to estim a eorm ble inputs obt a c nd inputs used in the determin tion (IPV) is undert rrying v re v tions, c a nd non-interest-be nk h nk is required to m c tion s a l acc h a tober 31 ($ millions) ir v a tions rel re frequently repri lue of fin gement judgment is required for v a a a c a c Fair value of financial instruments Cash and deposits with financial institutions tion of fin tion. Where possible, v ca ca a a ac a a ess is performed by pri l a ca a a lysis on p es ein ting to the IPV pro c a t require the signifi ount in pri tO rket pri ding lo ding lo n hniques. F orpor sh ns c c a a a lu lu a c a a a a ir v c a re observ ssessment of pri n a a a te m Tr instruments tr from the business. The B used in the IPV pro brokers, de they a pro inputs their pri these inst oblig acc Verifi The best eviden pri tr v Quoted pri a presen observ The B be extern repur in $4,628 million (2013 – $4,510 million). point in time rel instruments, a under Tot v Interest-be The B 7 Determin Ca The 6 As silver) Tr liquid m Where fin models where observ th Level 3. The spe f The f under res CONSOLIDATED FINANCIAL STATEMENTS
Income funds and hedge funds Š For fixed rate business and government loans, fair value is The fair value of income funds and hedge funds is based on observable determined by discounting the expected future contractual cash quoted prices where available. Where quoted or active market prices flows of these loans at interest rates estimated by using the are unavailable, the last available Net Asset Value, fund statements and appropriate currencyswap curves for the remaining term, adjusted other financial information available from third-party fund managers at for acredit mark of the expected losses in the portfolio (Level 3). the fund level are used in arriving at the fair value. These inputs are not Š For all other fixed rate loans, fair value is determined by discounting considered observable because we cannot redeem these funds at Net the expected future contractual cash flows of these loans at interest Asset Value (Level 3). rates estimated by using the appropriate currencyswap curves for Derivatives the remaining term (Level 3). Fair values of exchange-traded derivatives are based on quoted market Š For all floating rate loans, potential adjustments for credit spread prices. Fair values of over-the-counter (OTC) derivatives or inactive changes are not considered when estimating fair values. Therefore, exchange-traded derivatives are determined using pricing models, fair value is assumed to equal book value. whichtake into account input factors such as current market and Deposits contractual prices of the underlying instruments, as well as time value The fair values of deposits payable on demand or after noticeor and yield curve or volatility factors underlying the positions (Level 2). floating rate deposits payable on a fixed date are not adjusted for The determination of the fair value of derivatives includes consideration credit spread changes. Therefore, fair value is assumed to equal book of credit risk, estimated funding costs and ongoing direct costs over the value for these types of deposits. life of the instruments. The estimated fair values of Canadian personal fixed rate deposits Derivative products valued using a valuation technique with market- payable on a fixed date are fair valued by discounting the expected observable inputs mainly include interest rate swaps and options, future contractual cash outflows, using management’s best estimate of currencyswaps and forward foreign exchange contracts. The most average market interest rates currently offered for deposits with similar frequently applied valuation techniques include forward pricing and remaining terms (Level 2). swap models, using present value calculations. The models incorporate various inputs including foreign exchange spot and forward rates and Deposits under the Canada Mortgage Bond (CMB) program are fair interest rate curves (Level 2). valued by discounting expected future contractual cash flows using market observable inputs (Level 2). Derivative products valued using a valuation technique with significant unobservable inputs are long dated contracts (interest rate swaps, For all other fixed rate deposits, fair value is determined by discounting currencyswaps, forward foreign exchange contracts, option contracts the expected future contractual cash flows of these deposits at interest and certain credit default swaps) and other derivative products that rates estimated by using the appropriate currencyswap curves for the reference a basket of assets, commodities or currencies. These models remaining term (Level 2). incorporate certain non-observable inputs such as volatility and For structured deposit notes containing embedded features that are correlation (Level 3). bifurcated from the deposit notes, the fair value of the embedded derivatives is determined using option pricing models with inputs Loans similar to other interest rate or equity derivative contracts (Level 2). The The estimated fair value of loans carried at amortized cost reflects fair value of certain embedded derivatives is determined using net asset changes in the general level of interest rates and credit worthiness of values (Level 3). borrowers thathave occurred since the loans were originated or purchased. The particularvaluation methods used are as follows: Subordinated debentures and other liabilities Š Canadian fixed rate residential mortgages are fair valued by The fair values of subordinated debentures, including debentures discounting the expected future contractual cash flows, taking into issued by subsidiaries which are included in other liabilities, are account expected prepayments and using management’s best determined by reference to quoted market prices where available or estimate of average market interest rates currently offered for market prices for debt with similar terms and risks (Level 2). The fair mortgages with similar remaining terms (Level 3). values of other liabilities is determined by the discounted contractual cash flow method with appropriate currencyswap curves for the remaining term (Level 2).
142 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS 143 ble/ ble) – a a nd a l a vour vour lue i a a c a F rly to n a bove. The l Report a (Unf ir v a a a sf a nd fin l ribed ls, goodwill a a c lue a (1) nk Annu a Tot ted v a rrying a b ca a djusted regul tives 2013 a a oti c luding those due to interest c ious met c lue is a l 2014 S ir a a ssumptions des lue f a a tions, in Tot 106 106 – v 174 174 tes, pre a urities, deriv a 6,059 5,841 (218) 8,557 8,557 – c i nd tu c rrying v 10,556 10,556 – 77,508 77,508 – 24,50334,319 24,503 34,319 – – 26,208 26,208 – 82,533 82,533 – 29,267 29,267 – 24,977 24,977 – 96,489 96,489 – 10,556 10,556 – c a 404,710 402,215 2,495 519,827 517,887 (1,940) ca $ 53,338 $ 53,338 $ – sso a ding purposes or design rket flu a a ble/ ble) a a lue. nd loss, the a tion methods vour vour a a a a F ir v lu a a (Unf lue due to m nges. For investment se a a h l t the f a c ir v c lue a a Tot v te rrying a ca in f refle through profit instruments held for tr r 2014 nk using the v a nd equipment, investments in a in a l ses ir a a a lue f rrying a Tot 111 111 – 465 465 – v re ca c s property 9,8767,029 9,876 7,029 – – 5,073 4,871 (202) 9,876 9,876 – doption of IFRS 10 in 2014 (refer to Note 4). a a 88,953 88,953 – 33,43938,662 33,439 38,662 – – 21,668 21,218 (450) 93,866 93,866 – 36,438 36,438 – 27,050 27,050 – mortized re the m a 428,616 424,309 4,307 113,248 113,248 – 555,754 554,017 (1,737) h a c $ 56,730 $ 56,730 $ – t the red to c a l instruments ses or de osts a i ost or l instruments of the B c a c c a se i n re t omp a c a c ssets, su c a h n a c e a l nd c tin a i a c n c rried a djusted to refle n ri a nk’s fin a ca a lue through a nd liquidity a a tively lues of fin ir v ble v c ds a a a a es lue through profit c greements a tf ir v a n a a a vour ir v l institutions le djusted to refle a a a lude non-fin a lue of the B i a c ted ept l instruments a c re retrospe tf a a a n i a redit spre a c ir v acc c urities sold under repur urities sold short n a c c a ted a urities lent tes, mounts c ble or unf a l instruments a lue is not a a i a l instruments l instruments c ssets. bilities a a sed under res nk’s fin ssets a i i n a ble sets out the f nd se a ted to se ted to se c c vour a a a a urities a a a h losed do not in a n n l lli bility under c f c c a a a a a i i nges in the f a c c rrying v a ssets design es ted debentures n n h ngible ssets c a ca a a a c a in prior period a l n l instruments design a a a a nd deposits with fin tions rel tions rel i i lue of fin tober 31 ($ millions) tive fin tive fin lues dis a c urities borrowed a c a c a ert a a a c nges in interest r n n C ept ns greements urities pur tO ding a a a sh bilities: a a se or loss c profit or loss a lue. For the B use of ir v ir v a ustomers’ li cc h a ost, the a a a Other fin C Subordin Investment se Lo c Other fin other int Deriv v Se Oblig resulting in Deriv ca Fin f Oblig Tr A C (1) Assets: Ca As The following t F Fin Deposits Li CONSOLIDATED FINANCIAL STATEMENTS
Fair value hierarchy The following table outlines the fair value hierarchy of instruments carried atfair value on a recurring basis and of instruments not carried atfair value.
As atOctober 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 CONSOLIDATED FINANCIAL STATEMENTS l 145 a l Report a nk Annu a b a oti c 2014 S lue. a rkets. ir v a a – 953 13 966 – 5,039 23 5,062 – 11,225 – 11,225 –– 265,139 – 239,070 – 239,070 265,139 – 6,059 – 6,059 – 9,382 – 9,382 tive m ac 242461 785 874 302 7 1,329 1,342 464371 2,503 828 745 1 3,712 1,200 tion of f a Level 1 Level 2 Level 3 Tot 2,391 217 1,113 3,721 1,068 – – 1,068 29,468 214 84 29,766 es in c $ 705 $ 23,351 $ 447 $ 24,503 $ 18,604 $ 13,529 $ 2,014 $ 34,147 $ 836 $ 27,647 $ 784 $ 29,267 $$$ – 22,441 – $ $ 2,536 $ 25 174 $ $ $ – 937 – $ $ 24,997 $ 962 174 $ – $ 8,880 $ –$ 60,927 $$ $ 8,880 43,079 – $ 1,363 $ $ 69 105,369 $ 37 $ 106 pproxim a ble es. a c tober 31, 2013. son c a re sed on quoted pri a a nd O rd spot pri a a nd forw a mount is not a es c doption of IFRS 10 in 2014 (refer to Note 4). lue. a a rrying tured deposit notes. tober 31, 2014 c rket pri ca ir v c a a t the c tO a tes f nteed debt 11,587 – – 11,587 nteed debt $ 6,874 $ 245 $ – $ 7,119 a a a r r a a ted from stru lue of these positions is determined b ca l debt 988 2,275 – 3,263 pproxim tured deposit notes. a a c a bilities where the sed on quoted m djusted to refle ip a surements ir v a a lue c a a a nd li (6) a turity of $172. tives bifur tively a a c rrying v lue me ts 2 8,846 37 8,885 ts 1 7,505 – 7,506 ted from stru ssets rkets 112 37 – 149 a nd muni turity $ – $ 172 $ – $ 172 ca l debt – 6,697 – 6,697 a ca a a a ac ac l a s a ies’ debt 12,239 – – 12,239 ies’ debt 2,622 173 – 2,795 a nd government gu nd government gu i ir v ip c c c a a a c n l positions. The f ls is determined b re retrospe ontr ontr surements a a a a c c re held-to-m a gen gen a a a tives bifur h c a urring f (4) se met a c urities – 116 12 128 nd muni lue of fin mounts ious met lue me c a a a c ts $ – $ 11,893 $ 88 $ 11,981 ts $ – $ 11,772 $ 15 $ 11,787 te instruments a ($ millions) nd gold nd gold l l government a a a a a ir v ac ac (1) i i ted emerging m a (2) l government l government ir v c c a rily of b a a a nd hedge funds 163 4,093 1,248 5,504 a urities – Held to m ting r ts ts ts ts a ked se nge nge c ontr ontr a nd other US nd other US a a c c lue of pre ac ac ac ac nd other debt 219 10,878 31 11,128 nd other debt 1,211 5,083 487 6,781 ac a a h h a a a c c ted debt te te mounts represent embedded deriv urities urities (5) a a ir v c c a a bilities (7)(8) in prior period te te n provin n provin n feder n feder urring f a ontr ontr ontr ontr ge-b a a sury sury a a a a a a c c c c c ludes investments whi ludes embedded deriv ludes flo tober 31, 2013 a a a (7) (3) c c c c di di di di onsists prim ert a a a a C C ns ns tO ome funds n n n n a a a c redit orpor orpor redit Liabilities: Deposits Equity C Other (6) Represents the f Derivative financial instruments Interest r Foreign ex (5) These Equity se (4) Ex Other In Equity se Mortg Other foreign governments’ debtC 6,183 1,092 – 7,275 Other foreign governments’ debtBonds of design C 4,406 5,383 402 10,191 US tre (3) US tre (8) Ex Instruments not carried at fair value: Equity C Other Ca (7) Ex There were no non-re Ca (2) The f Financial liabilities designated at fair valueObligations through related profit to or securities loss sold short Derivative financial instruments Interest r Foreign ex Trading assets Lo Ca Financial assets designated at fair value throughInvestment profit securities or loss Non-re (1) Lo Assets: Investment se Ca As Instruments carried at fair valueAssets: on a recurring basis: Precious metals Liabilities: Deposits Subordin Other li 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 atfair 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 Change in unrealized gains/(losses) recorded in Fair value Gains/(losses) Gains/(losses) Transfers Fair value income for November 1 recorded in recorded in Purchases/ Sales/ into/(out of) October 31 instruments ($ millions) 2013 income(1) OCI(2) Issuances Settlements Level 3 2014 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 disposalof 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 aneconomic 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 atfair value for the year ended October 31, 2013.
As atOctober 31, 2013(1) Fair value Gains/(losses) Gains/(losses) Transfers Fair value November 1 recorded in recorded Purchases/ Sales/ into/(out of) October 31 ($ millions) 2012 income(2) in OCI Issuances Settlements Level 3 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 atfair value through profit or loss. (4) These amounts represent embedded derivatives bifurcated from structured deposit notes.
146 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS 147 ir a bly lue a a tives a ir v son a a ltern ($ millions) a gers. Net a s not been n l Report a a a from re nges in f a re h h possible a C s Level 3 in the f nk Annu a a b e per sh tegory. (1) a c ca 6% (45)/41 oti c 100% 50 bps s reported by fund m tegorized a ble inputs tement 1% - 2% a tes (weighted a 6% - 71% ca a 2014 S 66% - 95% 68% - 91% (11)/6 lues lst -77% - 98% (6)/6 a a i c n lues per unit or pri a a sset v a nge of estim h fin a ge) for unobserv sset v ac R a a l instruments ver a a i c n a nge for net e e 100% (1)/1 a d nt e 95% – te te te c c a c a a a ca tion 59% - 91% (4)/4 tion tion tion 68% - 91% – tility Pri rtner tility 14% - 167% – a a a a tured notes, utilize net a a c a suring fin ble inputs l instruments within e a Signifi tements a lP tion r a tions per vol i a ount r a lues. The r orrel orrel orrel orrel a c a c a c c c c n lu liz a redit spre Interest r lst k a a hv a Dis C c i c v ult ult ult c Equity vol unobserv a a a pit Gener n ted from stru tsu lue fin a a a Ca ca Def fin ir v a Single sto tives, bifur a ble inputs used in me a ble ing ing sed Def sed Pri sed sedsed Pri sed. rket hnique sed Def a c c a a a a a a c r a a a model model ounted sh flow eb eb eb c c c c ca tion te a omp Dis nt unobserv c lu nd embedded deriv a nnot redeem these instruments Model b ca a ca nd highest level inputs used to f re not model-b nk a a a tions a s the B l lowest lu a bout signifi a a a tu ble ac a tion e the v a c urities Pri te equity, hedge fund investments lysis onsidered observ c a c a ts Option pri tes represents the a n ac a urities M c (2) re not ts Model b ts Option pri ked se a ontr hy. c ac ac nd other debt Pri nd other debt Model b ac c tion of priv r a a a lues te a a lu nge of estim a te te a a ontr ontr ge-b a a losed for these instruments sin c c tober 31, 2014 V a ble below sets out inform c c a sset v te equity se dis a a tO a lue hier redit orpor orpor a (2) The v C Priv Mortg v Equity Derivative financial instruments Interest r C Investment securities Other foreign governments’ debt Pri (1) The r As Trading assets C The t Level 3 sensitivity CONSOLIDATED FINANCIAL STATEMENTS
The Bank applies judgment in determining unobservable inputs used to For the Bank’s investment securities, the impactofapplying these other calculate the fair value of Level 3 instruments. reasonably possible inputs is a potentialgain of $48 million and a The following section discusses the significant unobservable inputs for potential loss of $57 million (October 31, 2013 – potentialgain of $3 Level 3 instruments and assesses the potential effectthat achange in million and a potential loss of $3 million) recorded through other each unobservable input mayhave on the fair value measurement. comprehensive income until the security is sold or becomes impaired. For the Bank’s trading securities, derivative instruments and obligations Correlation related to securities sold short, the impactofapplying these other Correlation in acredit derivative or debt instrument refers to the reasonably possible assumptions is a potential net gain of $10 million likelihood of a single default causing a succession of defaults. It affects and a potential net loss of $10 million (October 31, 2013 – potential the distribution of the defaults throughout the portfolio and therefore gain of $16 million and a potential loss of $16 million). affects the valuation of instruments such as collateralized debt obligation tranches. A higher correlation mayincrease or decrease fair A sensitivity analysis has not been performed on certain equity value depending on the seniority of the instrument. investments not quoted in an active market that are hedged with total return swaps. Correlation becomes an input into equity derivative pricing when the relationship between price movements of two or more of the Significant transfers underlying assets is relevant. Significant transfers canoccur between the fair value hierarchy levels due to additional or new information regarding valuation inputs and Discount rate their observability. The Bank recognizes transfers between levels of the The discount rate is an interest rate used to bring future values of cash fair value hierarchy as of the end of the reporting period during which flows into the present when considering the time value of money. The the change hasoccurred. The following significant transfers were made discount rate at any given time is the sum of the current risk free rate among Levels 1, 2 and 3 for the year ended October 31, 2014: 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 Derivative assets of $632 million were transferred from Level 3 to the fair value of an instrument, and vice versa. Level 2 and derivative assets of $602 million were transferred from Level 2 to Level 3. Derivative liabilities of $328 million were transferred Credit spread from Level 2 to Level 3 and derivative liabilities of $238 million were A credit spread represents the risk premium associated with an transferred from Level 3 to Level 2. instrument thathas a higher credit risk as compared to a benchmark All transfers were as a result of new information being obtained debt instrument (usually a government bond) with a similarmaturity. regarding the observability of inputs used in the valuation. An increase in the credit spreadonan asset will result in a decrease in fair value, and vice versa. The following significant transfers were made among Levels 1, 2 and 3 for the year ended October 31, 2013: GeneralPartner (GP) Valuations per statements Derivatives of $34 million were transferred from Level 2 to Level 3 Asset values provided by GPs represent the fair value of investments in during the year as new information obtained considered the inputs to private equity funds. be unobservable. Volatility Investment securities of $31 million were transferred from Level 2 to Volatility is a measure of security price fluctuation. Historic volatility is Level 3 during the year as a result of market data becoming often calculated as the annualized standard deviation of daily price unobservable, while $60 million wastransferred from Level 3 to Level 1 variation for a given time period. Implied volatility is volatility, when as a result of securities becoming quoted in an active market. 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 maybeuncertainty 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 impactonfair value of these Level 3 instruments.
148 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS 149 – – (5) lue a $3 $8 v 2013 rrying value Ca ognized Carrying c l Report a ognized. – – c (3) $– $3 2014 c c ifi ifi c c turity turity nk Annu a a a m m b a No spe No spe oti c rs rs ognized), the profit is re y 1 profit) is not re a a 2014 S c a ye ye Over ten Over ten l profit (D a rs rs a a ye ye turity turity a a ble, initi re disposed of (dere a Five to ten Five to ten a rs rs a a ining term to m ining term to m a a rket observ a One to One to five ye five ye re m a twelve twelve months months Three to Three to ll the inputs a h not – – – – – 40,204 40,204 s follows: c 54 365 4,525 2,699 3,333 – 10,976 a 723 1,605 6,604 1,903 1,735 – 12,570 743 1,575 7,710 3,930 3,356 3,013 20,327 218 216 573 80 60 475 1,622 months months 1,809 1,363 3,773 1,483 1,806 – 10,234 1,158 1,310 4,016 1,358 1,679 6,281 15,802 1,323 1,530 2,161 869 1,648 – 7,531 $ 5,131 $ 5,978 $ 22,841 $ 10,849 $ 10,360 $ 40,204 $ 95,363 $ 3,012 $ 2,877 $ 10,542 $ 5,481 $ 5,265 $ 30,435 $ 57,612 $ 1,222 $ 1,115 $ 5,778 $ 3,895 $ 1,838 $ – $ 13,848 $ 5,131 $ 5,978 $ 22,841 $ 10,849 $ 10,360 $ 40,204 $ 95,363 Within three Within three ome during the period c urities is c hniques for whi tions c ding se ac lent): lent): a a a tement of In ns ies’ debt 299 1,220 7,337 1,475 1,908 – 12,239 ies’ debt a a l debt 882 1,175 1,787 1,122 1,731 – 6,697 l debt ble over the life of the instruments or when the instruments c c tion te a a a a nd nd ip ip r a a lu c c gen gen a lue of tr n equiv n equiv a ted St a a a a a a di di a a r n n a t use v nd muni nd muni a nteed debt $ 2,117 $ 929 $ 5,107 $ 1,201 $ 2,233 $ – $ 11,587 nteed debt ome observ Ca Ca rrying v a a onsolid c a a l l r r C ca urities a a a a i i ts th c tober 31 ($ millions) l government l government urities $ 5,918 $ 5,668 $ 22,956 $ 6,646 $ 7,738 $ 35,270 $ 84,196 urities c c y (in y (in c c c c a a r $ 3,798 $ 2,673 $ 10,606 $ 3,120 $ 4,257 $ 29,135 $ 53,589 r c c nd other U.S. nd other U.S. a a ies 606 462 1,695 1,439 1,336 2,766 8,304 ies res – – – – – 35,270 35,270 res a a c c a a t end of ye t beginning of ye urities: urities: a a c c urren urren s s r 637 1,942 10,016 1,978 2,134 2,905 19,612 r ding se c c sury sury a a ding se ding se a a r ended O n doll n doll n provin n provin n feder n feder a l of profit or loss on new tr a urren urren a a lysis of the a a a a a a a a n peso 877 591 639 109 11 464 2,691 n peso e e c c tober 31, 2013 ($ millions) Rem tober 31, 2014 ($ millions) Rem a a c c c c ome. Trading assets di di di di di di ca ca n ltr llby $ 5,918 $ 5,668 $ 22,956 $ 6,646 $ 7,738 $ 35,270 $ 84,196 l lby ltr c n n a a a a a a ognized in the a a a a a a a tO tO ding se ding se a a n n n n n n y 1 profit l c l government gu government gu a a )Tr a a ommon sh ommon sh a a a a Tot Other foreign governments’ debtC Tot Ca 1,587Mexi 946 1,842 1,553 1,347 – 7,275 OtherTot U.S. doll Other 1,033 1,398 6,883 1,295 519 – 11,128 Other foreign governments’ debt C Other Tot Tot Ca U.S. doll Tot Instruments disposed B U.S. tre U.S. tre Mexi Other Re Ca When the inputs be in in Deferr Ca Ca Tr As Ca Tr An As 8 ( For the ye B D For those produ CONSOLIDATED FINANCIAL STATEMENTS
(b) Trading loans The following table provides the geographic breakdown of trading loans:
As atOctober 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 atfair value through profit or loss, which are carried atfair 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 atfair 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 atOctober 31, 2014, the Bank was contractually obligated to pay $483 to the holders of the note atmaturity (2013 – $176).
150 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS l 151 a ts h nged. ac ls other c a a h c ontr c l Report lesser extent, a a ious met c ted between those nk Annu redit risk of su a a c b a tions. To sh flows to be ex oti ac ludes pre c 2013 c mounts of these ca ns a a l nd segreg a a rket risk or ptr 2014 S a a –– – –– – –– – –– – –– – –– – –– – –– – –– – 3– 3 3– 3 mount of 23 – 23 ding Hedging Tot ts – other in a a ult sw a ac 2,4612,050 – – 2,461 2,050 7,114 – 7,114 6,711 – 6,711 7,120 – 7,120 2,935 – 2,935 2,494 – 2,494 57,192 – 57,192 52,916 – 52,916 72,392 – 72,392 70,383 – 70,383 37,397 – 37,397 51,52953,54140,776 – – – 51,529 53,541 40,776 160,749 – 160,749 462,901 34,878 497,779 862,553 59,145 921,698 185,757 20,541 206,298 680,053 59,145 739,198 272,633 14,337 286,970 148,556 – 148,556 152,170 – 152,170 ontr 1,326,419 20,065 1,346,484 1,487,168 20,065 1,507,233 nding by type c a $ 2,501,891 $ 79,210 $ 2,581,101 $ 469,612 $ 34,878 $ 504,490 $ 6,688 $ – $ 6,688 $ 209,217$ 3,180,720 $ $ 114,088 $ – 3,294,808 $ 209,217 $ 2,012 $ – $ 2,012 $ 146,741 $ – $ 146,741 ted with the m redit def a i c tive c a tionships. The notion a lTr sso a a nd sold a pplied to determine the sed a a in or loss l instruments outst h a a c i eis c lg c n a urities. Other deriv ted in hedging rel a c a tives. a rily of pur te or pri tive fin a a a r 2014 a l deriv nd debt se a h a tives design c a ns a se met –– – –– – –– – –– – –– – –– – a 11 – 11 64 – 64 ding Hedging Tot 345 – 345 334 – 334 735 – 735 512 – 512 omprised prim a c 3,083 – 3,083 2,308 – 2,308 3,276 – 3,276 4,730 – 4,730 4,523 – 4,523 mounts of deriv ed to lo nd b 16,622 – 16,622 18,757 – 18,757 32,582 – 32,582 54,647 – 54,647 44,017 – 44,017 98,49849,887 – – 98,498 49,887 82,512 – 82,512 31,294 – 31,294 31,953 – 31,953 c a re a 567,049 – 567,049 671,550 44,127 715,677 673,303 47,291 720,594 235,281 30,705 265,986 605,342 47,291 652,633 430,878 13,422 444,300 148,551 – 148,551 269,385 – 269,385 l a mount to whi a a 2,394,336 46,129 2,440,465 2,961,385 46,129 3,007,514 nd those deriv ts a $ 3,904,073 $ 93,420 $ 3,997,493 $ 676,625 $ 44,127 $ 720,752 $ 4,666 $ – $ 4,666 $ 251,572$ 4,832,270 $ $ 137,547 $ – 4,969,817 $ 251,572 $ 15,986 $ – $ 15,986 $ 206,138 $ – $ 206,138 nd do not represent the potenti ac a ps referen ding) ontr a c a te notion l l l a a a a nding a luding energy tive c a ity (Tr entr entr entr ts c c c ggreg ac ac a p l return sw nding ca a a ontr c mounts represent the ler a a l ts a ommodities in ac c ludes tot ts ounter ounter ounter ounter ounter ounter tives volume outst c nd gold c c c c c c a a rds rds ac sed sed sed sed sed sed ontr greements greements mounts a a a a a a a a c ble provides the a a mounts outst a h h h h h h a nk in its de lso in a l c c c c c c nge ontr a a l te te ded: ded: ded: a tives within Other deriv a c rties): rties): rties): tive a nd other a a a a a a a a a h a a ounter (settled through ounter (settled through ounter (settled through ounter: ounter: ounter: c te c c c c c c a nd forw nd forw rd r rd r a a a a ps ps ps ps tegory tober 31 ($ millions) Tr nge-tr nge-tr nge-tr c a a a a Derivative financial instruments a a a l l l l notion ca redit: over-the- redit: over-the- redit: over-the- ounterp ounterp ounterp a a a a n gold, h h h tO Sw Options pur Options written c Spot Sw Options pur Options written c Forw Options pur Options written Options pur Options written Sw c Equity: over-the- C Other Sw Futures Options pur Options written Spot Other Forw Equity: over-the- C Other Equity: over-the- C Futures Options pur Options written a c c c a ) Notion redit deriv a C Tot Foreign ex Over-the- Tot Other deriv instruments. The notion Over-the- represent the deriv Over-the- used by the B this Over-the- Tot Tot Over-the- th Ex Over-the- As Ex Ex Interest r The following t 10 ( 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 atOctober 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 atOctober 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 Negotiated over-the-counter derivatives often present greater credit As with other financial assets, derivative instruments are subjectto exposure thanexchange-traded contracts. The net change in the credit risk. Credit risk arises from the possibility that counterparties may exchange-traded contracts is normally settled daily in cash with the default on their obligations to the Bank. However, whereas the credit exchange. Holders of these contracts look to the exchange for risk of other financial assets is represented by the principal amount net performance under the contract. of any applicable allowance for credit losses, the credit risk associated The Bank strives to limit credit risk by dealing with counterparties thatit with derivatives is normally a small fraction of the notional amount of believes are creditworthy, and investment grade counterparties account the derivative instrument. for a significant portion of the credit risk exposure arising from the Derivative contracts generally expose the Bank to credit loss if changes Bank’s derivative transactions as atOctober 31, 2014. To control credit in market rates affect acounterparty’s position unfavourably and the risk associated with derivatives, the Bank uses the same credit risk counterparty defaults on payment. Accordingly, exposure to credit risk management activities and procedures that are used in the lending of derivatives is represented by the positive fair value of the instrument. business in assessing and adjudicating potential credit exposure. The Bank applies limits to each counterparty, measures exposure as the
152 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS (2) ll a – 153 ts – a Risk ac Assets ted ge 74 of Weighted c redit a tives in its ngements ontr ult (LGD), nk’s c formul lue, for a c a a a n a ommodities, a rr (2) a c l Report RA) a lso p a s ring members of ir v dd-on for ted by l tive EA) C a a lent a a redit a a a a C a ( le C l or expe mount c ul n a a ter c AR) Guideline of a l sed on a equiv C a redit deriv tu ca nk Annu c nd other ssets, while oll a ac mount ( a c a b (1) a t a (2) n c eis redit exposures. l were $24,502 (2013 – c a tion is sold lude c oti a RA plus c c n RA) 2013 c tion. C a C ter l ( te a mount a a a n gold, a mount is b redit risk ost, or positive f tives. a oll tors. Other deriv a nk in c C c a ult (PD), loss given def redit risk redit exposure of the B a a c ac 2014 S c nd a y Requirements ( l requirement (K) times 12.5, where K ster netting or redit prote redit risk exposure (see a EA) is the dd-on l deriv c a ac c ement tion f a a C a pit mount ge or mitig nd exposures settled through ac ls other th 2,4842,050 16 – 47 – 13 – 6,688 – – – a RA does not refle a rty a l a ca 77,49788,929 539 955 3,273 7,409 587 1,434 42,791 460 4,017 1,775 55,410 – – – 60,127 13 54 16 rizes the a n C a a 209,217 1,954 14,699 3,796 286,970206,298 1,338 916 3,946504,490 4,171 1,067 2,270 1,181 8,164 2,261 233,141 8 883 29 212,422 – 5,668 113 a bility of def orrel ount m rties c a se met urrent period present 2,581,101 2,154 9,576 1,789 2,085,682 2,133 8,639 1,744 1,514,353 – 4,637 93 l Adequ a c a mount ( a ting to netting Notion a $ 146,741 $ – $ – $ – $ 1,726,775 $ – $ 10,305 $ 206 $ 3,294,808 $ 6,378 $ 32,439 $ 7,846 ted repl acc a nd a pit a ious met ounterp n portfolios: de. The ribed nd b c l instruments. The c a c a Ca (3) a EA by the lent ounterp a l Report). t 0.57. ble summ i c quire exposure to bond or lo a C a c a l a ET1 Risk a n ac C a nd lo Assets mounts rel king into a a entr tion of l a nd pres c sed-in Weighted a a a a ludes pre l future exposure. The tion of the prob c ul ts t c a ve been m tive to c tion is bought to m tives instruments used by the B l tive fin a a sph c redit equiv ac ribed in the a a a (2) c c ca fun th turity luding energy a a EA) a c lent ltern redit ontr C a tly through ( potenti losses. The prote th in a other in the 2014 Annu Deriv investment c m the represents the estim is multiplying the the Superintendent. The risk-weighted b deriv The following t pres C c mount tives w a a t level. The tot c equiv (2) 2014 t h RA) lso a C t the produ ble ( a ac a mount a rk-to- a redit risk a tion C doption of IFRS 10 in 2014 (refer to Note 4) ET1 RWA for deriv tion in a SAs a redit tion. vour a C ri C a a C ster netting a rd overed by a nd uses n require one – – – 5,632 – – – liz a c re not settled t the a lized m lude exposures settled dire greements a tion of the hv a c c greements), ca a a c a nd tion. a ording to e mount a ter onsider l depending upon djustments th 3,1472,642 19 – 69 – 19 – 4,666 – 232 5 a rty ter a ac c l n ISDA tions a a il the types of a 57,923 548 1,405 374 66,608 860 5,726 2,260 50,710 – – – 47,916 18 106 125 a SAs a acc a a 127,041 1,582 11,863 1,702 251,572 2,990 18,994 4,336 444,311265,986 2,451 1,495 6,303720,752 6,190 3,965 1,565 1,426 12,794 3,015 599,631 106 459 23 372,613 – 9,247 185 ns oll ted with f C ac oll ter c a ry EA. ngement to the extent a 3,997,493 1,982 10,648 1,644 3,093,098 1,858 9,053 1,475 3,012,382 – 6,072 121 c i a a ns a C c rty will ever post yof a rr $ 206,138 $ – $ 1,030 $ 21 $ 3,384,995 $ – $ 15,319 $ 306 $ 4,969,817 $ 8,937 $ 42,436 $ 14,627 nd oll rly termin ster netting a htr a yv a nd the a a c tion Adjustment to a lun lso det sso ounterp djusted to refle a a a ken into ac tion (ISDA) a ll tr a a c a lu a a a i bove. Amounts in a lly industry st c a nd m hm rty, a me re t c l future exposure, l a ca tively y post a a a c a ult or e a l type. The terms of the ISDA tives a redit V SA will a ter a s netting hp ts C a lled if tot a C redit risk SAs reditworthiness. ac def ac y (only one p ster netting ter c oll h c ca C c rty m a a a c a umented by w l tives Asso (3) l deriv a c greed upon threshold. Su a a a rties (typi oll a re retrospe ontr nd a c t the onset of e a c a rty’s a n a h tive 2014, ts with the s entr ts. ble to e a c c lly do a re net of ac ts ac ac a nner, the ca rgin lue plus potenti rgin to be a ac nd Deriv a ept mounts l (either p a a eeds ounterp n be one w a a nd $39,276 (2013 – $31,039) for hniques, su a ts ontr c c nd gold ontr a c ted by the m inst e c c ca a lm rties. acc ir v single net settlement of SA), the terms of whi rds a ac sed sed a ontr ps ter a luded under tot a greements a a (4) a a c greements g a c C a a RA, a re ded h h a a ble tion Adjustment ble C ins the benefit of netting by entering into m a c c a tion m nge a ontr a a a te a t ounter re in a c rties tion te tive tion is typi lSw a c a a lu ri tives a h a a a a ounterp a a a c te c vour rty is in-the-money). The vour liz l a nd forw rd r lth l) or bi-l pplied in prior period mounts presented nge-tr a a a a a llow for a ts is elimin a a a a a a tions. In this m tion a nk obt a ps ps tober 31 ($ millions) Notion a greement in the event of h a c a a ac ter ert ac hp h a entr ter ter c l deriv redit V redit a ngements with $18,125) for c C c c a a ounterp t t unf a tO rgin provisions ster netting rket exposure ex ns a rty to post initi rty’s view of the other p Other C C Equity Sw Options pur Options written Spot Futures Options written Sw Options pur Over-the- Forw Ex c Futures a a a a a a oll a a a rr llow for v oll oll redit mitig ontr urrent positive f tr p th p Support Annex ( (4) Amounts c whi whi (3) As per OSFI guideline, effe Other deriv c Intern before f C m Foreign ex The B a m m th c c (2) The will be a (1) Tot Amount settled through As Interest r c 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 atOctober 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: impactofmaster 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 criteriaallow netting where there are legally enforceable contracts whichenable net settlement in the event of a default, bankruptcy, liquidation or similar circumstances. (e) Hedging activities The Bank’s hedging activities thatqualify 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 atOctober 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 atOctober 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.
154 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS ; a (4) (4) 155 n n rs rs a a a a y riteri c tive c a mount mount lify for a a five ye five ye a rty. More th More th a ngements. urren Net Net s the a c l Report a rr a t were not offset s follows: a a a l ognized over a rds the neg l Position rs rs c ounterp a a a a c re i ter (3) a c (3) l s well a l a n a a neous settlement oll nk Annu a a c ter a ter a a b Within one Within one ome to five ye to five ye a nd oll c oll tement tement ult of the a C C a a a oti luding those th c c l pledged tow l. a a r r ted st ted st l Position, l position l position a a a a ter a a a i i i a c c ter c n n sted revenue is re a r r 2014 S oll mounts not offset mounts not offset a a n greements, but do not qu (2) (2) tement of Fin a a c a a bilities, in a a a ca tof tof a oll onsolid onsolid tement of In r sh c (3,230) (9,649) (77) c c (5,992) (11,515) (2,287) ac ac l upon the def lli ted ted a a of fin of fin a a a a ca i $ (883) $ (8,323) $ – $ (5,373) $(10,850) $ 76 $ 2,347 $ 1,326 $ 77 $ 619 $ 665 $ 2,363 or simil or simil c Imp Imp ngements ngements Rel Rel n Within one ye Within one ye a a ted St ster netting ster netting ddition to offsetting in the in the a greements greements rr rr a a a a a a a a ted St m m nd the a ondition a c urred. Fore nd fin c a re tement of Fin a tively. l instrument onsolid a c a sin C i ted ted ssets onsolid a c a a ssets a a n C bilities l l a a a i a re employed in ngements or simil i ted St l position l position c a lli c tement of tement of a mounts of mounts of a a a n i i a a a n i a a onsolid onsolid c c a a rr c c c st st t the n n ssets respe n a use they did not meet the net settlement/simult a a a fin a nd fin ognized Net Net ac presented in the presented in the sis on the ca tegies c a fin fin fin a a onsolid sh l instruments of $1,268 C a re re i ca l l c a nd other net b nd the rights of set off a a tion str nd imp n i i a a mounts of fin c c ted ted a a a a a a a n n nk’s ble l a a a ster netting a lue a ur il a a l position l position a bilities tement of tement of cc mounts of mounts of a a tive fin i i v a a a ir v a a onsolid onsolid c c a ry items a a c c st st n n ssets offset in a a a redit mitig s a tf bilities offset in c ble m a a a the the rty only. ognized fin ognized fin fin fin a li bilities on ies. Gross Gross a c c e c a re re c ted to o tive interest method over the life of the underlying instrument. Foreign lli c tion to the tot losed c a a greements. c riety of i s well a lues of deriv a c a v a r ounterp n c a a a greements but were not offset be re dis s ssets a a a a re expe bilities r rket v l t to enfor a e sheet monet mounts mounts orded within other li a ognized ognized a a a c a a i c c c c 97,656 (8,703) 88,953 (13,183) (68,168) 7,602 ounting poli lli c n a n 102,569 (8,703) 93,866 (13,183) (75,697) 4,986 nd fin i t of offsetting on the B a a c a ult of the l of re of re n re re acc a mounts ac l Position, a $ 147,691 $ (22,300) $ 125,391 $ (33,061) $ (71,725) $ 20,605 $ 149,605 $ (22,300) $ 127,305 $ (33,061) $ (80,546) $ 13,698 $ 50,035 $ (13,597) $ 36,438 $ (19,878) $ (3,557) $ 13,003 $ 47,036 $ (13,597) $ 33,439 $ (19,878) $ (4,849) $ 8,712 fin a Gross Gross a a a redit risk, i fin nt c c re subje n ssets ca a a ngements or simil a eived or pledged in rel t a l c a rr a i a c ngements or simil ognized using the effe inst the positive m n a c a l upon the def a rr g a a ted hedged items a l exposure to a l Position. These a mounts re a tion on the imp i a tu sh flows of on-b c a l in fin greements n a ac eived a ster netting a urities lent l instruments of $493 ca a tement of Fin c ondition a c a a i c ter ert le c a (5) (5) lre nk’s c n a re a ster netting a a oll a a c sh flows is re ble m ter a nd se a ted St e a ca tes. c urities sold under a oll a c ribed in Note 3 – Signifi c tive fin ttom c a c tement of Fin bilities bilities a sh a a ted to future ssets ssets (1) ca sh flows of design des a a a h it rel l instrument l instruments l instruments onsolid (1) a ca a c a a ted St i sed under res C i i re subje bles provide inform c a a ted to se a c c bilities a greements n t of netting for instruments th a h t ssets a n n a a a a c riteri rket of deriv a a ac lli l a c a a ted to interest i i se c c l 2014, the a onsolid a urities borrowed use the rights of set off n n nd fin t to offsetting, enfor C c h a a ca a c ca l imp c nd losses rel nt to nk is eligible to present a tions rel sh flows sh flows rk to m tober 31, 2014 ($ millions) tober 31, 2014 ($ millions) tober 31, 2014 ($ millions) tober 31, 2013 ($ millions) tive fin tive fin i sh a a a c c c c a a Offsetting financial assets and financial liabilities c a a l l ca ca Ca or be m in the n nd se urities pur a a tO tO tO tO ome rel sh outflows from li sh outflows from li sh inflows from sh inflows from a ins a repur c a a a a c a (5) For fis (3) (4) Not intended to represent the B Tot fin The following t the period to whi g pursu (2) Amounts th Tot Net In Net Oblig Se Types of fin (1) Subje Deriv As Ca Types of fin Deriv As 11 The B Ca As Ca Ca As Cash flow hedges The period when offsetting in the CONSOLIDATED FINANCIAL STATEMENTS
As atOctober 31, 2013 ($ millions) Related amounts not offset in the consolidated statement of financial position Gross amounts of Net amounts of recognized financial financial assets Impactof liabilities offset in presented in the master netting Gross amounts the consolidated consolidated arrangements of recognized statement of statement of or similar Types of financial assets(1) financial assets financial position financial position 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 atOctober 31, 2013 ($ millions) Related amounts not offset in the consolidated statement of financial position Gross amounts of Net amounts of recognized financial financialliabilities Impactof assets offset in presented in the master netting Gross amounts the consolidated consolidated arrangements of recognized statement of statement of or similar Types of financialliabilities(1) financialliabilities financial position financial position 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 subjecttomaster 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 financialliabilities, including those that were not offset in the Consolidated Statement of Financial Position. These amounts are disclosed atfair 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 collateralreceived 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)Ananalysis of the carrying value of investment securities is as follows:
Remaining term to maturity Within Three to One to No three twelve five Five to Over ten specific Carrying As atOctober 31, 2014 ($ millions) months months years ten years years maturity 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 Totalbycurrency (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.
156 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS 157 lue lue lue le a a a a v rrying ir v ir v a a Ca l Report in of ble-for-s a a a il a c v No ifi a c lized lized lized g turity Gross Gross nk Annu a a losses F losses F a a a spe m b a unre unre in on a oti c net unre rs ins ins a lized g a a a lized lized a g g Gross Gross 2014 S a a ye Over ten unre unre ses to a re c rs a ost ost 39 7 1 45 C C Five to 413 15 44 384 412 15 59 368 turity ten ye 6,6652,627 276 761 32 51 6,909 3,337 6,2186,666 113,097 128 3 871 7 6,226 35 6,787 3,933 3,284 20 1 3,303 a 10,940 60 17 10,983 ount. The net unre $ 37,360 $ 1,259 $ 123 $ 38,496 $ 6,704 $ 147 $ – $ 6,851 acc rs a s follows: five ye a ining term to m One to a ken into Rem a in of $1,137 million) de a urities is c le se twelve months a Three to lifying hedges is t a ome. ble-for-s doption of IFRS 10 in 2014 (refer to Note 4). doption of IFRS 10 in 2014 (refer to Note 4). c a a a three il Within a months tofqu v t the t the c c a ac urities. c urities of $1,136 million (2013 – g c nteed debt $ 7,036 $ 84 $ 1 $ 7,119 nteed debt omprehensive In ome se a a fter the imp djusted to refle djusted to refle C c r r a a a a a le se nd losses on a a tively tively c c lent): ins a a rkets 116 34 1 149 rkets rkets 5 51 10 – 83 – 149 ies’ debt 2,845 4 7 2,842 ies’ debt ies’ debt 166 592 2,077 – 7 – 2,842 l debt 3,240 27 4 3,263 l debt l debt 71 112 2,794 279 7 – 3,263 ted Other c c c a a a ble-for-s a a a a a ip ip ip il c c c a gen gen gen n equiv ge yield of fixed in re retrospe re retrospe v a a a lized g a a a a umul a a urities $ 33,010 $ 1,297 $ 160 $ 34,147 urities urities 4,481 6,403 16,181 2,373 988 3,721 34,147 di ver cc c c c a a in of $980 million) n a in on nd muni nd muni nd muni mounts mounts Ca le se le se le se a a a a urities $ 4,481 $ 6,412 $ 16,324 $ 2,387 $ 994 $ 3,721 $ 34,319 urities $ 4,481 $ 6,412 $ 16,324 $ 2,387 $ 994 $ 3,721 $ 34,319 a a a a a ($ millions) ($ millions) c c l l l a a a (1) (1) i i i ted emerging m ted emerging m ted emerging m l government issued or gu l government issued or gu l government issued or c c c a a a y (in le a a a r $ 622 $ 1,257 $ 5,824 $ 1,176 $ 26 $ 1,513 $ 10,418 c orded in A nd other U.S. nd other U.S. nd other U.S. a lized g a ies 2,608 3,895 3,092 899 438 534 11,466 c res res res – – – – – 3,337 3,337 lysis of unre a a a res res res – – – – – 384 384 c a a a a a a a a turity ble-for-s ble-for-s ble-for-s n a a a a %% 9.1 4.2 6.5 2.9 9.3 2.1 – 3.8 10.2 2.6 – – 8.5 2.5 %%%% 0.9 0.3 2.8 – 3.0 2.1 1.8 0.1 1.4 2.2 2.5 0.4 1.6 2.6 4.3 3.2 – 7.5 – 0.3 – 7.1 2.0 – 1.5 – 0.4 3.3 urren r 594 1,248 5,587 312 530 1,629 9,900 a il il il c sury sury sury a in prior period in prior period n provin n provin n doll n provin n feder n feder n feder nteed debt $ 607 $ 1,126 $ 4,117 $ 1,268 $ 1 $ – $ 7,119 a a a urren a a a (2) (2) (2) (2) (2) (2) a a a a a a a a a n peso 657 12 1,821 – – 45 2,535 a v v v c tober 31, 2013 tober 31, 2013 tober 31, 2014 ($ millions) r ble-for-s a a a c c c di di di di di di di ert ert a ca a l l l investment se lby l investment se l a a a a a a a C C il a a a a a a tO tO tO urities is re n n n n n n n a Yield Yield a Yield Yield Yield Yield gu a a c ommon sh ommon sh ommon sh Preferred sh C Tot Other debt Other foreign governments’ debtBonds of design 10,068 96 20 10,144 U.S. tre Other foreign governments’ debt Bonds of design Other debt Preferred sh C Tot U.S. tre Tot $847 million (2013 – g se Ca Ca As (2) Represents the weighted- Tot Ca Mexi U.S. doll Other Held-to-m Other foreign governments’ debtTot – 9 143 14 6 – 172 Tot C Other debtPreferred sh 861 1,174 4,339 104 431 – 6,909 Ca U.S. tre Other foreign governments’ debtBonds of design 2,771 3,348 2,844 722 459 – 10,144 (1) The net unre As Ca Ca As (1) (b) An Av Ca CONSOLIDATED FINANCIAL STATEMENTS
(c)Ananalysis of available-for-sale securities with continuous unrealized losses:
Less than twelve months Twelve months or greater Total
Unrealized Unrealized Unrealized As atOctober 31, 2014 ($ millions) Cost Fair value losses Cost Fair value losses Cost Fair value 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
Unrealized Unrealized Unrealized As atOctober 31, 2013 ($ millions) Cost Fair value losses Cost Fair value losses Cost Fair value 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 atOctober 31, 2014, the cost of 409 (2013 – 630) available-for-sale Investment securities are considered to be impaired only if objective securities exceeded their fair value by $123 million (2013 – evidence indicates one or more loss events have occurred and have $160 million). This unrealized loss is recorded in accumulated other affected the estimated future cash flows after considering available comprehensive income aspart of unrealized gains (losses) on available- collateral. for-sale securities. Of the 409 (2013 – 630) investment securities, 113 Collateral is not generally obtained directly from the issuers of debt (2013 – 148) have been in an unrealized loss position continuously for securities. However, certain debt securities maybecollateralized by more than a year, amounting to an unrealized loss of $90 million specifically identified assets that would be obtainable in the event of (2013 – $84 million). 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 evidenceof 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).
158 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS 159 (2) nd in a 2013 4,426 2,871 3,817 7,753 9,813 6,633 3,223 6,634 1,065 1,374 2,997 5,508 2,270 1,518 4,369 4,163 (3,273) 44,796 59,035 13,066 11,375 58,848 33,641 10,556 18,585 19,959 12,874 405,488 416,044 281,426 l Report $ 412,771 $ 188,937 a nk Annu 2014 a b 4,809 4,498 3,354 9,092 6,908 7,794 3,596 1,240 7,196 9,876 1,109 3,360 2,434 1,896 5,409 4,561 a (3,641) 43,752 59,261 10,700 13,903 13,286 38,561 65,542 22,389 15,965 23,498 oti 427,950 437,826 292,945 c $ 434,185 $ 188,842 n pesos $10,256 (2013 – $9,702), 2014 S a hile C e of the borrower. c n pesos $12,972 (2013 – $10,626), ca ges; otherwise, the residen a l mortg a doption of IFRS 10 in 2014 (refer to Note 4). a (1) phy t the c a n losses a es for lo djusted to refle rs were $80,597 (2013 – $76,348), in Mexi a c a n tion of the property for residenti a ca nding by geogr tively c a llow . a a d a n ted in U.S. doll a Ca sed on the lo re retrospe es outst a (4) a c n es net of es c c a rds rds rds rds rds rds rds n n a a ca ca ca ca ca ca ca tion is b mounts ept ies $35,721 (2013 – $31,807). ges ges ges ges ges ges es denomin a a c c a a a a a a ept ept n l: a acc a redit redit redit redit redit redit redit acc acc urren c c c c c c c redit losses ept c c nd segment tion nd nd acc l mortg l mortg l mortg l mortg l mortg l mortg nd government nd nd government nd (3) nd government nd government nd nd government nd nd government nd government nd nd nd a c a a a a a a a a a a a a a a a a a a a a a a a tes: es l l l l l l l nd phi : c a e for ns a a a a a a a a a ns ns ns a in prior period c n a : a a a a n a ns a tober 31 ($ millions) o: a a c Loans d ert c llo llo llo a other foreign C ept a a a tO n Business Residenti Business Residenti Person Business Residenti Person Business Residenti Business Business Business Residenti Residenti a Person Person Person Person Person )Lo cc olombi hile: a Tot A (4) Lo (3) 1% of borrowers reside outside Other Intern Tot (2) Peru: C Tot (1) Geogr Allow As Ca 13 ( Mexi C United St CONSOLIDATED FINANCIAL STATEMENTS
(b) Loans and acceptances by type of borrower
2014 2013(1) As atOctober 31 ($ millions) Balance % of totalBalance % of total Residential mortgages $ 212,648 48.6% $ 209,865 50.5% Personalloans & 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) Totalloans 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 centralbanks, regional and local governments, supra-national agencies.
(c)Loanmaturities
As atOctober 31, 2014 Remaining term to maturity Rate sensitivity
Within One to Five to Over No specific Non-rate ($ millions) one year five years ten years ten years maturity Total Floating Fixed 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) Totalloans 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 atOctober 31, 2013(1) Remaining term to maturity Rate sensitivity
Within One to Five to Over No specific Non-rate ($ millions) one year five years ten years ten years maturity Total Floating(2) Fixed rate(2) 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 Totalloans $ 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) Totalloans 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.
160 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS r r t t a a a a 161 52 e e ye ye c c 149 108 932 2013 2013 (108) (499) n n end of end of a a 3,165 1,296 1,272 2,430 l l a a B B $ 2,322 $ 363 $ 1,808 $ 2,929 $ 824 $ 1,893 $ 3,273 mounted to a ns $527 r a r were $27 l Report a a a (3) (4) (4) y y e c c c rd lo n redit a ca 171 2014 2014 c losses Net (171) (357) luding luding c c urren urren 3,470 1,272 2,331 2013 c c for nk Annu djustment djustment Allow redit a $ 2,160 $ 2,688 $ 2,198 $ 3,641 a a c b a nd $263 million, nd a Other, in Other, in foreign foreign a oti l c (1) a tured during the ye tured during the ye ns c c a ired a lo Gross 1,2701,046 338 994 2014 S imp redit redit c c losses losses $ 3,701 $ 1,893 $ 1,808 $ 1,385 $ 561 ns restru ns restru a a Provision Provision o. for for c ted to person ca ired lo 2013 2014 llo ired lo a a a 11 29 ssets. a ome of $287 million 1,613 1,132 c inder a $ 378 $ 2,002 $ 841 overies overies sis. nk of Puerto Ri c c a a Re Re (3) (4) (4) e tive b c c n (1) (1) orded in other redit a l interest in c c losses Net olle a 2014 ns. for ac a Allow tely re a r a ddition a (1) ns is sep a ssessed on ired s $18 (2013 – $19). a a lo Gross a quisition of R-G Premier B C r Write-offs r Write-offs t t mounted to $6 (2013 – $8). Non-imp a a a a 1,254 1,225 1,491 359 a orded ac imp 88 – – 16 4 108 e e c r (3) ns is c c 108 – 18 35 10 171 a $ 1,455 $$ 614 4,200 $ 2,198 $ 2,002 a n n s performing lo of ye of ye a a ns $584 (2013 –$953) with the rem 3,165 (1,897) 492 1,668 42 3,470 2,604 (1,559) 399 1,403 9 2,856 l l a a a a ired beginning beginning B B ve re rd lo a $ 561 $ (338) $ 93 $ 265 $ 33 $ 614 $ 2,977 $ (1,469) $ 443 $ 1,288 $ 34 $ 3,273 $ 3,273 $ (1,897) $ 510 $ 1,703 $ 52 $ 3,641 a ssessed. ca ble from FDI a ted to the a a mounted to $373 (2013 – $101). Write-offs of imp lly ssified eiv a a a c redit tober 31, 2014 w r l c c a c ns rel a nd a l tured during the ye s the re nk would h c mounted to $113 (2013 – $166). a nd government lo a a a a r r ended O nteed lo a ns is individu ns were a a a r a a st due but not imp ns restru a a nd person )gu a C redit losses tured during the ye c ired lo c ns p a ges ired lo a a a ble to business a e for nd 2013, the B c tion (FDI ns during the ye a n a a nd lo a ns restru tured during the ye nd government lo l mortg a a c a ttribut a a ns llow ges $161 (2013 – $190). orpor ns a a ns ns 2,889 (1,469) 443 1,272 30 3,165 ns a ired lo a C a a a a ired lo ns e ns is a c a a ns restru n a ns, if these imp a l mortg a a mount of a nteed lo ired lo nteed lo nteed lo nteed lo e ired lo tober 31, 2014 redit losses a (2) (2) (2) a a a a c a c r r r rds r (1)(2) c ll business portfolios, imp n ired lo l a a a a a ns ns ns a a a ca l a a a ognized on imp ns ges c a gu gu gu a gu a nd residenti le portfolios, imp l Deposit Insur redit losses for residenti redit losses for business C C C a lb a tion e for a c c redit losses nd sm nk C lue inst imp inst performing lo a a c a c e for performing lo redit a a c a a c il n ip tes ome re n a g g c c a a a e for e for djustments nteed lo nteed lo nteed lo a a rs ended O ired lo c c l FDI l mortg nd government nd phy: a a a a a a n n e for e e r r r l $ 469 $ (201) $ 111 $ 155 $ 27 $ 561 l a a a a a a a a llow c c c a a a a a l d a n n n a ludes Feder a tively, on imp lue rrying v tober 31 ($ millions) tober 31 ($ millions) tober 31 ($ millions) tober 31 ($ millions) tive 2,420 (1,268) 332 1,117 3 2,604 tive a a a c c c c c gu gu gu id prin c Impaired loans and allowance for credit losses a c c n l before FDI l before FDI l l before FDI l a ca $8 (2013 – $22). (2013 – $129) (2013 – $22). Non-imp For the ret a a a a a tO tO tO tO C C C Ca United St Other Intern a a a a ir v ) Imp ) Tot olle olle a c a (3) The (2) This represents the gross (4) Allow respe FDI FDI (3) Allow Tot Tot C C FDI By geogr Tot As As As Tot F Allow ( As R-G Premier B Unp (1) For the wholes Represented by: Allow Net Individu Individu For the ye (b) Allow (1) Interest in Residenti Tot (2) Ex Allow Business 14 ( Person CONSOLIDATED FINANCIAL STATEMENTS
Loans purchased aspart 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 atOctober 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 – $366 million) from the FDIC included in Other assets in the Consolidated Statement of Financial Position. (d) Loans past due but not impaired(1) Aloanisconsidered past due when acounterparty has not made a payment by the contractual due date. The following table presents the carrying value of loans that are contractually past due but not classified as impaired because they are either less than90days past due or fully secured and collection efforts are reasonably expected to result in repayment, or restoring it to acurrent status in accordance with the Bank’s policy.
2014(2)(3) 2013(2)(3) 91 days 91 days 31 - 60 61 - 90 and 31 - 60 61 - 90 and As atOctober 31 ($ millions) days days greater Total days days 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 sale of mortgages under the above programs does not meet the The Bank securitizes fully insured residential mortgage loans, Bank derecognition requirements, as the Bank retains the pre-payment and originated and others, through the creation of mortgage backed interest rate risk associated with the mortgages, which represents securities (MBS) under the National Housing Act (NHA) MBS program, substantially all the risk and rewards associated with the transferred sponsored by Canada Mortgage Housing Corporation (CMHC). MBS assets. created under the program are sold to Canada Housing Trust (the The transferred mortgages continue to be recognized on the Trust), a government sponsored entity, under the Canada Mortgage Consolidated Statement of Financial Position as residential mortgage Bond (CMB) program and/or third-party investors. The Trust issues loans. Cash proceeds from the transfer are treated assecured securities to third-party investors. 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 atOctober 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 – $(683)). (2) These include cash held in trust and trust permitted investment assets acquired aspart of principal reinvestment account that the Bank is required to maintain in order to participate in the programs. Securitization of personal loans The Bank securitizes a portion of its unsecured personal line of credit receivables on a revolving basis through aconsolidated structured entity. The receivables continue to be recognized on the Consolidated Statement of Financial Position as personalloans. For further details, see Note 16. Securities sold under repurchase agreements and securities lent The Bank enters into transactions, such as repurchase agreements and securities lending agreements, where the Bank transfers assets under agreements to repurchase them on a future date and retains all the substantial risks and rewards associated with the assets. The transferred assets remain on the Consolidated Statement of Financial Position. The following table provides the carrying amount of the transferred assets and the associated liabilities:
As atOctober 31 ($ 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 collateralreceived. In most cases, securities are received as collateral.
162 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS t a l nd 163 a i a bles c ses a n rs s well a re used redit bilities ision- a a a ted a h c a c eiv nk’s overed a ted in nd c c lli nd a c ted by the a h a a a a c ntor nk’s returns. quires with bles sed interest. tion to these $ 39,781 a a l Report a r a a insured h it issues (2) a ac a h c nk’s de l Position. As l Position. The C nk issues debt c eiv l line of a a a a c i i a 2013 hit tion to these (1) c c omprised of c a MH n n t the B c c tement of Fin a a C bles origin re denomin nk Annu ssets Tot a 196 61 ted in U.S. doll m, the LP pur re quires with funding a a a eeds of whi a luded in Deposits – rtnership a ffe l a a c m in whi b c a a a ses ac a a eiv 34,436 33,645 m, the B a c nk, whi a tured entity. Hollis issues h oti a ted St nsferred re c $ 5,988 $ 6,075 $ 40,620 c c ssets to meet the B hit overed Bond Trust (the a a nd in ured person tober 31, 2013 – $13.2 sis through Hollis Re c a a c tion to these notes were $1.2 c a overed Bond Gu nk, pro tober 31, 2013 – $0.5 billion) tober 31, 2013 – nil) nk. a c c a a aC C ssets pledged in rel ted due to the B tober 31, 2013 – $14.2 billion). a a tement of Fin tement of Fin 2014 S c re denomin oti tober 31, 2013 – nil). a a nk c c a onsolid nding a overed bonds nk, whi tured entities tions for Hollis. The subordin C a c bilities Tot b ing the tr a ssets pledged in rel c ntor Limited P c luded in Deposits – Business a nd other a c luded in Deposits – Business a a tion trust c a r c nd the B lli a ted St ted St onsolid a a a revolving b oti c ges from the B a a c $ 34,837 a a overed bond progr nk. nding nks m, the Trust pur tion. c nd in re a a overed bond progr a a a nd in uritiz nk-sponsored stru tive fun a ted stru a c nteed by S a c a a a l a re held by the B 2014 B r portion of its unse a (1) a ms onsolid onsolid a a tober 31, 2014, overed bonds a bility to use the power to a ssets pledged in rel l mortg C C c onsolid c a a c a bles) on nk. nding ssets Tot ges from the B 122 – nding a nteed by S a a a a redit se rty investors tO a l onsolid a nd c nk’s outst a dministr registered r a a c tisgu o-ownership interest in the re tober 31, 2014, eiv a 29,416 28,457 a a a a c c a nding Tot overed Bond Gu nk’s glob uritizes s ac a $ 35,943 $ 6,405 $ 6,380 c a C ted. a tured entities tO rtnership (the “LP”). Under this progr nd government on the c a tober 31, 2013 – $0.6 billion). a ourse of the note holders is limited to the pur l mortg se rs. As a c a c re off-set on nk a tisgu a tober 31, 2014, $1.0 billion (O tober 31, 2014, $12.2 billion (O tober 31, 2014, $5.3 billion (O overed bonds were outst a overed Bond Trust l line of a c c c c a a h bles (re nk h nk is responsible for servi nk se a c b h a a a a ustomer needs. c a aC c tO tO tO urities, deposits with b king power a a a eiv onsolid tober 31, 2014, nk. Re nk’s outst oti oti c c a c c overed bond progr a a nd s performing c c overed bonds were $12.9 billion (O overed bonds were $5.8 billion (O se a a notes issued by Hollis billion (O Other Assets of other The B debt th to pur B The B residenti O S c c Person Euros. As “Trust”). Under the progr Position. The B U.S. doll re Term Trust II (Hollis), notes to third-p The B B to investors th C S Under the B government on the Business uninsured residenti Limited P m notes were outst As billion) provided by the B As bonds were outst government on the funding provided by the B As These stru nk a E n t the B h nt a a C c a ca ility rket. a lity ac redit nk. The c a ulted nk the overed nk to ssets ing of onduit. a ny, of a a s liquidity sh c a a c C a nd notes. ted notes a n redit onduit nk’s PW a nt to the a ca a c c per m a se nk a ted seller ca ity a a a doption of IFRS 10 (refer to Note 4). h nd c onduit’s b per. The sellers nk’s ac a l Position. lp c liquidity f a nd government c a a a ifi p a a bles Term a i i c ssets, if c a c c tured entities th ient fin a lp oti ses high-qu redit ca ifi ll for the B n c c t the c a c m-wide a c tion i kstop liquidity c eiv a greements, in whi ing in the event the a t the c h c c ca a c c l-spe c nk. ac ssets, the B sset pur ssets under the relev n a lly limited to holding ssets of the a nk of $29.2 billion (2013 – $34.3 billion) whi a ulted a a a a l-spe lly be signifi a a ssets owned by the overed bonds ommer a ted to perform under the a a c onduit. a c progr ost-effi a c nk in its c LAPA nsfer funds to the B de a a ommer bout stru onduit a rties (the sellers) funded by ted notes, give the B c c bility of the B a c ulted a te a a eof ked a a tion prote nd provide dministers ifi a bsorb the losses on def c e of fin s a a c a a c nd holds the subordin djusted to refle n ac onduit pur a liquidity n interest in the rel re gener onduit’s nd Hollis Re a ilit ked ting the U.S. multi-seller c a tement of Fin a a c a tion liz a luded in business a onduit through the LAPA, a a onduit itself is insolvent. a a nk luding def ted by the B c ac ac c c c a se a se def bsorbed by de ssets a ould potenti a ter tively sset-b a a ble to tions of the c c h a h a l a a sset-spe overed Bond Trust, S c nk provides onduit to tr c t ted St nk is not oblig rily in onduit tive sour a il onduit h a c a i ry purpose of the b a oll sset-b c a a onsolid a a c a les to f c c a a n require the B c tions on the t the B v s no rights to the aC c rtnership n c ssets, in a a a essing the tured entities a a tion with power to dire ca a c oti c nk ted ltern ourse of business, the bles gener c ess the a onduit’s subordin re retrospe a a tured entities acc c a luding the issu c a c nk h l onsolid re prim c greements with the n l restri a a a gent acc ility is C eiv a E) to the a tion to pur ess of losses a a les onjun c nk in the form of a c C c ac c sed by the lude S e the fin a tu onduit th a c c ted stru ble provides inform c mounts nk’s onduit. The B h lue of the ssets ac a a tion onduit. bsorb losses th a c a c ble to a a ted from tions, in c a hin a a c c a ntor Limited P rv les in nk is obliged to pur e of highly r ontr a a c ny, in ex ssets from independent third p a r c c ted U.S. multi-seller a a ssets or re a n in prior a l a a re a ements through over ement (PW ements. Further, the B greements in the event the onsolid nk’s exposure from the U.S. nk uses funding vehi nk’s liquidity nk-sponsored U.S. multi-seller a sset pur tober 31 ($ millions) c c c a ludes instruments issued by other entities of the B tion to i a a a a a c dministr a onduit’s c Structured entities C ert c n n a n onduit. This f l a c ngements. The B c C a a a n h a tO ns on the B ility is to provide luding the oblig a a tivities of these stru nk funding vehi nk is restri a se the B tivities, result in the B ) a c c a a ac nd investment in the greement (LAPA). The prim ssets, if rr ontinue to servi onduit is un onduit, whi onduit. In the norm onsolid ac a owned by the c ca provider to perform under its There reserves. E The enh Bond Gu lo These vehi The in issued by the The B c c only be used to settle the oblig Bank funding vehicles The B its own oper c ac enh c a oblig Other Tot fund full p enh a the a B f B a (2) LAPA The B provided by the B U.S. multi-seller conduit The B (1) In As U.S. multi-seller The following t 16 ( fin the issu Trust II. A pool of 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
Canadian multi-seller Structured Capital conduits that the finance funding As atOctober 31 ($ millions) Bank administers entities vehicles Other Total Total assets (on structured entity’s financialstatements) $ 2,707 $ 12,165 $ 1,520 $ 945 $ 17,337
Assets recognized on the Bank’s financialstatements 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 financialstatements 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) Canadian multi-seller Structured Capital conduits that the finance funding As atOctober 31 ($ millions) Bank administers entities vehicles Other Total Total assets (on structured entity’s financialstatements) $ 3,018 $ 2,383 $1,520 $ 1,008 $ 7,929
Assets recognized on the Bank’s financialstatements 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 financialstatements 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) Loanbalances 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 Canadian multi-seller conduits that the Bank administers of guarantees, liquidity facilities, and other credit support relationships The Bank sponsors two Canadian multi-seller conduits. The conduits with the structured entities, the credit risk amount for certain derivative purchase assets from independent third parties (the sellers) funded by contracts with the entities and the amount invested where the Bank the issuanceofasset-backed commercialpaper. The sellers continue to holds an ownership interest in the structured entities. Of the aggregate service the assets and provide credit enhancements through amount of maximum exposure to loss as atOctober 31, 2014, the Bank overcollateralization protection and cash reserves. The Bank hasno hasrecorded $3.1 billion (2013 – $1.5 billion), primarily its interest in rights to these assets as they are available to support the obligations of the structured entities, on its Consolidated Statement of Financial the respective programs, but manages for a fee the commercialpaper Position. selling programs. To ensure timely repayment of the commercialpaper,
164 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS (2) (2) l l 165 a a nk a ss the ximum s a a a s its h nd a in ged a a l Report a h a c n gement of ert nk’s m lized debt a a sed by $1.5 c a a a n a sponsor when it is a l Trust oti ged nies Tot re ter c a a a a c S a nk sponsored n tured entities to nd m sehold tors, su a nk Annu c a a a 2013 pit a oll M omp Le lth m ac b c C re designed to p a a Ca nk is a nk issues a improvements Tot a ted B oti c a nk urities. Therefore the B l funds a ble returns from these entities. c a b (1) a nd trust fees. a ri a a h the B 2014 S oti c te. The B ged funds, tober 31, 2013 – $3 million), fee onsolid c c c a a tured entities. The B c n $ 1,565 $ 20 $ 1,585 nd government in a onsiders other f a c gement a me is used by the stru lso n l Funds tion of S a a a a a Consolidated Financial Statements, onsidered mutu c nk a ommission revenue – we c nk nd other stru nk’s n a a a onsolid t the reporting d c nd a l investments. These entities a a ome of $4 million (O pit a c ve exposure or rights to v oti ged tion. The B nies Tot ca a nd the B 11830 –11118 –– 36 (23) 184 (152) (57) 77 (232) 297 – 53 173 71 297 – (19) (96) (30) (145) ––– – – 5 103 59 56 223 c a a a nd Buildings Equipment a S ludes investments in m nd investment m n nd fee 11 25 26 25 87 10 10811 165 168 47 177 330 94 450 a nk Tier 1 Trust through whi (22) (152) (118) (31) (323) a c redit risk to the holders of the se (40) (155) (148) (41) (384) a L a 2014 a c M omp tory tion entities, b doption of IFRS 10, C a $ – $ 715 $ 2,815 $ 753 $ 4,283 $ 266 $ 1,687 $ 3,378 $ 1,224 $ 6,555 $ 266 $ 972 $ 563 $ 471 $ 2,272 $ – $ 691 $$ 2,772 284 $ $ 958 725 $ $ 4,188 551 $ 421 $ 2,214 $ 300 $ 1,647$ $ 284 3,274 $ 1,649 $ 1,078 $ 3,323 $ 6,299 $$ 1,146 – $ 6,402 $ 685 $ 2,717 $ 679 $ 4,081 a result, Deposits – Business ge a sponsor. The B a a a a nk’s oti nd oblig a c a nt or no interest exposure to loss is limited to its net investment in these funds. oblig Capital funding vehicles The B does not h As billion (2013 – $1.5 billion). Other Other in regul S resulted in the de (1) nk-sponsored entities. ca nk is a a tion tured entities, a c ted B $ 1,804 $ 18 $ 1,822 c a omprised of interest in l fund, broker ifi c a e, the B s insignifi c s c a tion te a n ted to a a nt to a a nk’s reput a doption of IFRS 10 in 2014 (refer to Note 4). l-spe onsolid a ses by hw a c a l liquidity h results hith a ssets. c redit c uritiz c a t the a h c orpor c de a c c t the a c luding mutu s tober 31, 2013 – $110 million) eption of the stru c mount of c c a nk. Pursu ulted ssist a ddition a a a a onduit tin m-wide sset pur tivities of the c a a ked by the B onduits. a c ac bove. The liquidity ac tober 31, 2013 – $1,585 million) from its involvement with the un n a se def c ximum a nt a tion onduits h a a djusted to refle a h c di a ble c m a a ny progr n a tober 31, 2014, whi bility in returns, whi a tured entities in whi nk provides c ing through their se a c tively Ca a tober 31, 2014. c ri c c tion on revenue from un n a nd form a a sed on future a tions to determine if, in subst nsferred by the s the liquidity provider is oblig a tO nk to pur nd trusts. a a nk-sponsored entities a a a a a (1) (1) (1) (1) (1) ted stru nd other nd other nd other – (28) (22) 5 (45) nd other (9) (57) (57) (4) (127) ted in the t tured entities used to a onduits to a a a a nk c nking of $141 million (O r ended O c c re retrospe a ient fin a a a c ted B ssets, tr ting the two nd oblig s not provided greement (LAPA) with the B a a a a onduits. The B a s refle a c onsolid a tion ed by the multi-seller s power over the relev c mounts a c se a i ost-effi a a n nk h c c ost ulted a tober 31, 2013 – $1,472 million), in h a djustments djustments djustments djustments c a c c a a a a onsolid l onsolid nk h tober 31, 2012 tober 31, 2014 tober 31, 2013 tober 31, 2014 tober 31, 2013 tober 31, 2013 tober 31, 2014 tober 31, 2012 ble provides inform l funds, other funds c y y y y a c c c c c c c c c a a a c c c c s limited exposure to v reness of the instruments being b a a essing s sponsored entities s interests in stru tO tO tO tO tO tO tO tO rned revenue of $1,822 million (O lue a a a a a a a a a a a w a ted depre a lly, the B sset pur s s s s s s s s acc (1) urren urren urren urren nk not a tion tion a a a a a a a a a a in prior period ntly involved in the design c c c c n ls ls ls ls a a a a ement to these i i onduits. se non-def nies nk h nk e nk sponsors un a a a a a e e e e e e e e sset pool fin tober 31 ($ millions) Funds c ludes $41 (2013 – $36) of investment property. ludes mutu c c c ca a a a a a c c c c c c c c c ommission revenue – b a c c Property and equipment ert n tures. tured entities for the ye h c n n n n n n n n te C a c c umul c h tO a a a a a a a a a ilities to these multi-seller quisitions quisitions l l l l l l l l a cc ost c c a a a a a a a a greements do not require the B nd ac ) Other un ontinuing involvement lients in re onduit’s origin onduits, it h omp ac c stru c Addition enh Structured finance entities The B a B c $1,677 million (O the terms of the LAPA, thepur B c $1.4 billion (2013 – $1.1 billion) b Although the B these in the B B B Net book v B A The following t a B liquidity f c (2) In Dispos Foreign B Dispos Foreign c Foreign (1) B signifi As stru ($ millions) C B 17 Revenue (1) In The B c The B e Depre A Additions Dispos Foreign A Additions Dispos Depre CONSOLIDATED FINANCIAL STATEMENTS
18 Investments in associates
The Bank had significant investments in the following associates:
2014 2013
Country of Ownership Date of financial Carrying Carrying As atOctober 31 ($ millions) incorporation Nature of business percentage statement(1) value value Wealth CI Financial Corp.(2) Canada Management n/a n/a $ – $ 2,577 Thanachart Bank PublicCompany 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 financialstatements. Where available, financialstatements 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 financialstatements. (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 thatdate, the remaining retained interest was classified as available-for-sale equity and recorded atfair 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 atOctober 31, 2014 CTFS had total assets of $5,351 and totalliabilities 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 generalbanking risks. These reserves are not required under IFRS, and represent undistributed retained earnings related to a foreign associated corporation, which are subjecttolocal regulatory restrictions. As of October 31, 2014 these reserves amounted to $52 (2013 – $43; 2012 – $38).
Summarized financial information of the Bank’s significant associates are as follows.
For the twelve months ended and as at September 30, 2014(1)
Net ($ millions) Revenue income Total assets Totalliabilities CI Financial Corp.(2) $ n/a $ n/a $ n/a $ n/a Thanachart Bank PublicCompany 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)
Net ($ millions) Revenue income Total assets Totalliabilities CI Financial Corp. $ 1,535 $ 405 $ 2,986 $ 1,218 Thanachart Bank PublicCompany 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 financialstatements. (2) As a result of the partialsale 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 As a result the Bank recorded a reduction in the carrying value of the foreign exchange controls have been imposed by the Venezuelan investment in associates of $129 million with acorresponding decrease government. These restrictions have limited the Bank’s ability to to other comprehensive income. The Bank has also recognized foreign repatriate cash and dividends out of Venezuela. exchange losses of $47 million in the Consolidated Statement of As atOctober 31, 2014, the Bank’s total net investment in Banco del Income as other operating income, in relation to the monetary assets. Caribe of $54 million, along with monetary assets, comprising of cash and dividend receivable wastranslated at the SICAD II exchange rate of 1 USD to 50 VEF. These amounts were previously measured at the officialexchange rate of 1 USD to 6.3 VEF.
166 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS l l a 167 – – a a nd 17 a 373 229 Tot te, nges GU a a tive omputer ge h C c c a c ny one key tto nging s c osts of a a a c ver l Report gement a a h a c nd n 112 c a (1) (1) a ifi Other ac nges in P ngibles Tot t July 31, 2014 a s of the test d re not subje GU. The resulting a nk Annu a h a a nies, a ssets su mount of the C c s int a b a a red to its respe a a ve been used. a r weighted a l a n oti a tive rters ca ble GU is sensitive to a nd c omp a a a ils. a lude c C ess softw a –– –– –– – – omp c (1) entr lly of fund m c c ts C a ribbe irment Ameri ble ac a five ye over lue of the Ca a irment. P/E multiples r nti s determined to exist. c a gement 2014 S r a a a a a a ble neg ontr n c l of the a ssets in a ontrol premiums. ir v l imp nd in pro a a c st four qu a a a a ca omp son tin c nd a a ny imp sed on L a Fund m nnu a a irment. a irment w a Ameri ngible tre a a a onsist subst id for c a – ––– ––– n imp dded b a a osts of dispos ted from the f ome for the l c l Other ssets c c a ngibles a a te & ssessed for nd no imp a $ 524$ 441 $ 2,325 $ 2,325 $ 67 $ 67 $ 3,837 $ 3,975 nking a ). Refer to Note 41 for further det a int Glob a mount determined is then a s B a d a a re of $481 (2013 – $396), lue less orpor Investment n ngible re dedu mount to identify a ome, P/E multiples a C (2) (2) a a a ble c Finite life Indefinite life Ca – – – 710 l re a (8) – – – (8) (4) – – – (4) (1) 12 s follows: lized net in a 79 243 – – 322 a ir v gement believes th a a 293 2 – – 295 372 1 143 86 a a l l n nk of over re a a omputer rrying quisition premium p softw a a c ted softw a .). ssumption used to determine the re C ontrol premium is $ 629 $ 790 $ – $ – $ 1,419 $ 1,771 $ 1,231 $ 2,325 $ 67 $ 5,394 $ 1,142 a pit c rkets M in net in from 10 to 18 times (2013The – f 7 to 14 times) h ca c norm dispos re would not result in July 31, 2013 Goodwill w a ac a Glob Ca M GU) lth In C a lly gener a e c lth y n a a a ir 277 – – 29 – – 1,620 a nk (formerly ING B nd a lWe ting unit ( a tm a rrying a a h of the & Insur ca mount is gement of open-ended funds. Finite life int Glob ac a onsider a l risk c ur th n irment a ngerine B a a lue for the gement using ble a cc . (formerly, DundeeWe a pplied to a a c (1) sh-gener a ngibles. n tion – 9 8 9 (37) 53 – 42 –––––––– n a a a a ca hv ted to e es o di c lue in use. The c lth In a over nking ca nd finite useful lives. Indefinite life int a a n a c n B a a Ca tsu llo lling below its $ 1,633 $ 2,292 $ 100 $ 123 $ 2,041 $ 720 $ – $ 6,909 a a a nd v quisition of T re of $251 (2013 – $175), intern re for the m a a ac a umst l c a ssessed for imp ts GU f ir a c rriving C ac tions is rket risk, oper GU. The re a ore deposit int a a ble to HollisWe c C ted to benefit from the synergies a sed softw c s been determined using the f a h ontr a h l models. These models nd c c a ac a rnings (P/E) multiples a ttribut ombin nd other nd other – (9) 5 5 (14) 21 – 8 pit a c a a GU is determined by m GU h mounts of goodwill by nd other nd other (20) (4) – – (24) nd othernd other (10) (4) – – (14) re expe ee osts of dispos re ssets with indefinite a a a a a C C c a c a a cca t redit risk, m mount of the l method. In ts gement a c a a a ac tionships n a a rrying tion omprises of pur ble ontr onomi tober 31, 2012 is due to the c a a lue less c c ca c quisition. Goodwill is a djustments djustments onsist of s used pri GUs th re luding djustments djustments djustments djustments a a a le c a c ac C tober 31, 2014 tober 31, 2013 $ 1,633 $ 2,283 $ 92 $ 114 $ 2,078 $ 667 $ – $ 6,867 tober 31, 2012 $ 319 $ 2,015 $ 87 $ 109 $ 2,063 $ 646 $ – $ 5,239 a a a a a ir v y y over tober 31, 2014 tober 31, 2012 $ 1,056 $ 977 $ 2,325 $ 67 $ 4,425 tober 31, 2014 tober 31, 2012 $ 377 $ 595 $ – $ – $ 972 tober 31, 2013 $ 1,400 $ 1,218 $ 2,325 $ 67 $ 5,010 tober 31, 2013 $ 479 $ 694 $ – $ – $ 1,173 c c c r y y y y c c c a c c c c c c mount of the a mortiz c c c c mount for the a gement a nk h tO tO tO ul a a quired in business nt business risks for e ssets ssets tO tO tO tO tO tO lue a c osts of dispos a a a ustomer rel tion of $410 (2013 – $350). n tors in a a a a a a a a a a nge from O c c a a ac s s s ted a urren urren rti s s s s s s tion Expense 116 103 – – 219 tion Expense urren urren urren urren ble ac a a a a h c c tober 31, 2013 $ 921 tober 31, 2014 a a a nges in the a a a a c c c c a a ts. The fund m c a ls ls ls ls c c re, a e e e rrying lly or more frequently if events or a a a a e e e e e e a c c c h Goodwill and other intangible assets ac c c c c c c a omputer softw irment testing of goodwill mortiz ca c n n n tO tO n n n n n n a C ngible ngible a umul a a a over a a a a a a a a a a quisitions quisitions 1,314 l l nk’s group of l quisitions quisitions l l l l l l rious f lue. lue less c GU, the B c c ost c cc c a a a a a a a a a a pproved intern nnu a a ontr a v v The a result in the re c a C v Int B of the p re the higher of f Int A B Foreign B other relev Foreign ($ millions) B Net book v As (2) (1) Fund m C B A Additions Dispos Foreign Goodwill A Imp (1) The Foreign softw ($ millions) B Goodwill The 19 As Additions Foreign Foreign Dispos B A B Amortiz Dispos Dispos B A B Amortiz 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 whichinclude 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 thatreasonable 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 atOctober 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 broadrange of technology, industrial equipment and commercial companies to provide customized finance programmes to assist manufacturers, dealers and distributors of assets. Financelease receivables are included within loans. The Bank’s net investment in financelease receivables was as follows:
Gross investment in Future Present value of financelease finance minimum lease As atOctober 31, 2014 ($ millions) receivables income 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
Gross investment in Future Present value of financelease finance minimum lease As atOctober 31, 2013 ($ millions) receivables income 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 residualvalue of $71 million (2013 – $66 million) had been accrued, and the accumulated allowance for uncollectible minimum lease payments receivable amounted to $17 million (2013 – $16 million). (b) As Lessee Operating lease commitments The Bank leases various offices, branches and other premises under non-cancellable operating lease arrangements. The leases have various terms, escalation and renewal rights. There are no contingent rents payable. The Bank also leases equipment under non-cancellable lease arrangements. Where the Bank is the lessee, the future minimum lease payment under non-cancellable operating leases are as follows:
As atOctober 31 ($ 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 CONSOLIDATED FINANCIAL STATEMENTS (2) (1) l 169 a lue a 148 265 107 108 v 2013 2013 rrying 1,501 6,578 5,723 1,000 1,712 Ca 44,064 10,552 11,907 10,779 33,019 77,685 $ 5,841 $ 1,000 313,820 l Report $ 171,048 $ 517,887 $ 350,599 $ 517,887 a reditors. The (2) c nd deposits lue a l a rs Tot a v 2014 rrying a t to the terms in the nk Annu Over Ca c turity. a a b 7,450 5,785 a five ye m 43,916 11,701 13,668 13,296 84,710 nd other oti c a c ifi nd subje $ 554,017 $ 373,491 c a l lue a a 160 160 250 264 100 99 101 99 rs a rv 2014 S 1,500 1,501 1,000 1,000 1,750 1,748 a a te Tot P pprov a One to a $ 4,861 $ 4,871 $–$– five ye ble on tory a fixed d a y nk’s depositors a a P nd with no spe e $ 343,041 $ 554,017 . a c (1) n ble mount to $12,444 (2013 – $10,480) a rs, a a t to regul n one month, one to three months, three to six a y c (2) a Six to e a te for ept c a fter ounting. nkers’ a a acc noti ims of the B n pesos ny interest acc ted risks. re subje ble te plus a a 2014 l a ca a a yb twelve months a y c n $100,000 a a a P er c nkers’ a n ble on a rs, over five ye a ter th a yb tober 18, 2019, a ted in Mexi c a ted to hedge turities of less th ept a te to the a a a months ring ll redemptions gre a acc a te of the offered r l to the 90-d a Three to six a be a d a nd a n Non-interest ps to hedge the rel nkers’ ting r a Ca a a te equ djustments rel l to the 90-d re subordin a a a ry 22, 2016, interest will be p flo h provides m a yb ysw a lr rs, two to five ye c a a c a a ble on dem months t a nd nu y a ring a a a a P doption of IFRS 10 in 2014 (refer to Note 4). doption of IFRS 10 in 2014 (refer to Note 4). te equ nnu Within three $ 38,844 $ 12,097 $ 15,731 $ 75,451 $ 7,878 $ 150,001 a a a urren be a 5,176 3,096 2,005 26,210 36,487 Interest- nk lue due to c 49,744 19,318 29,951 243,354 342,367 a a lr n tober 18, 2017. After O a a c rv t the t the $ 60,117 $ 26,984 $ 123,875 $ 5,197 $ 4,570 $ 91,919 $ 73,477 $ 175,163 ble on November 20, 2017. ble on April 9, 2018. t c c a a a ross- a l to the 90-d c nnu a a fter O fter August 3, 2017. After August 3, 2017, interest r deposits plus 0.125%. Redeem ble ring interest nd n a a a a y Guideline of the Superintendent, a a a y ac t ny time. ny time. After J a te a a a te equ ture for deposits whi a tions of the B t t a te plus 1.14%. c a a a y differ from p a djusted to refle djusted to refle hedule for term deposits in lr a ble te. ring deposits. a a c a a a a ess of $100,000. l Adequ er y c a ble on or ble on or ble ble c a a a a a n pit nnu tively tively a mount to $49,836 (2013 – $44,612). c c a a Ca (1) turity s turity stru n re in ex mount to $201,891 (2013 – $182,115) deposits denomin ept a ured oblig a a ies a yment d a te plus 1.255%. c c a t a rs interest will be p r p 5.85%. will be p six-month Eurodoll acc a lm a a ted debentures m urren re retrospe re retrospe a c tu a a t, unse ac c (2) te, enters into interest r ting US$142 million be ontr a a mounts mounts l c a a te (%) Terms a re dire ted in U.S. doll a Interest r a a tus. c ble presents the m lue of subordin tion a a a ppropri e with the provisions of the c a tes n ted in other foreign a a a a nd government jority of foreign term deposits rrying v a a a te nt prospe ord tober 31, 2013 in prior period in prior period o l institutions a l a d c a a ca c a a a i tober 31 ($ millions) tober 31 ($ millions) ludes $104 (2013 – $103) of non-interest be acc ry 2021 6.65 Redeem c c c c Subordinated debentures Deposits n ert ert (3) a l l tO n olombi hile denomin relev C C orded in: a a tO tO a a tober 2024 3.036 Redeem nk, where c turity d Other Intern C C Peru Mexi United Kingdom a Ca United St a nu c a a a O Tot The contractual maturities of the debentures are summarized in Note 40. August 2022 2.898 Redeem November 2037 3.015 JPY ¥10 billion. Redeem June 2025April 2038 8.90 3.37 Redeem JPY ¥10 billion. Redeem (2) The August 2085 Flo The following t Tot (3) Deposits denomin Fin months, six to nine months, nine to twelve months, one to two ye (2) In As (1) In April 2019 4.94 Redeemed on April 15, 2014. (2) These debentures B As M J (1) The m 23 As at October 31, 2014As $ 42,801 $ 13,907 $ 23,338 $ 75,987 $14,110 $ 170,143 ($ millions) Refer to Note 40 for (1) Business Re Person 22 CONSOLIDATED FINANCIAL STATEMENTS
24 Other liabilities
As atOctober 31 ($ millions) 2014 2013(1) Accrued interest $ 1,920 $ 1,897 Accounts payable and accrued expenses 5,265 5,653 Current taxliabilities 1,009 830 Deferred taxliabilities (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
Off-balance sheet ($ millions) credit risks Restructuring Other Total As at November 1, 2012 $ 184 $ 2 $ 179 $ 365 Provisions made during the year – 405191 Provisions used or no longer required during the year – (20) (89) (109) Balance as atOctober 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 $148 million wasrecorded in other operating expenses, primarily relating to employee severance costs.
Other Other primarily includes provisions related to litigation reserves. In the ordinary course of business, the Bank and its subsidiaries are routinely defendants in or parties to a number of pending and threatened legal actions and proceedings, including actions brought on behalf of various classes of claimants. In view of the inherent difficulty of predicting the outcome of suchmatters, the Bank cannot state what the eventual outcome of such matters will be. However, based on current knowledge, management does not believe thatliabilities, if any arising from pending litigation will have a material adverse effect on the Consolidated Statement of Financial Position or results of operations of the Bank.
26 Common shares
Authorized: An unlimited number of common shares without nominalorparvalue. Issued and fully paid:
2014 2013 As atOctober 31 ($ 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 atOctober 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 suchshares bought and sold was 13,033,821 (2013 – 13,559,563).
170 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS e e c c 171 ses. re), pri a nd a a h 25.50 25.75 25.50 25.75 25.50 25.50 25.50 c ry 6, ge pri a a Redemption sed a nu ver a h l Report a c a rlier of te n a a a –– 2013 t sofJ res Amount tely $320 million. a a a a rterly dividend of nd the Toronto a a ember 4, 2014. This nk Annu c tion up to 12 million nk repur nd 2013 were a ord qu ompletes its pur a a a b ry 2, 2016 25.00 c c a a a ry 27, 2015 ry 26, 2019ry 26, 2019 ry 26, 25.00 2014 25.00 ell 9,200,0007,497,6636,302,3378,039,268 230 5,960,732 187 158 201 149 a a a a c oti July 28, 2015 t OSFI nk pproxim 12,000,00013,800,00013,800,000 $13,800,000 300 345 345 345 10,000,00013,000,00011,000,00010,600,000 250 16,345,767 325 275 265 409 12,000,000 300 c ry 29, 2014 to ry 26, 2014 to n April 27, 2015 April 27, 2015 April 26, 2018 a tober 26, 2018 tober 26, 2018 25.00 a a 163,345,767 $ 4,084 nu nu nu nu a a c c a a a a ca J J tober 26, 2013 to O nu nu c a a ourse issuer bid (the “bid”) ed th pproved c 2014 S c a l res in 2014 h the B a se for a res under this bid nd $2,858 million ($2.39 per sh c a a a reholders of re mount of h te Redemption d tors a c a a c l nnoun t its meeting on De re) a a a a ry 28, 2015. res. The bid will end on the e Dividend a re reset r tober 31, 2014, the B tot a nk c a te on whi a y repur a ommon sh nu a a c ommon sh a –$ – –– –– –– c 2014 rd of Dire res Amount Number of sh te a pplies to sh a a a re for ble J pproved its norm hitm id on a a a c a y ommon sh l dividend r ended O a ommon sh a c yment d a c a 9,200,0007,497,6636,302,3378,039,268 230 5,960,732 187 9,376,944 158 2,623,056 201 149 234 66 nge p Initi 13,800,00013,800,00013,800,000 345 345 345 10,600,00016,345,767 265 409 a ry 29, 2008 – J ry 29, 2014ry 28, 2009 1.70% O 1.88% J 117,345,767 $ 2,934 Number of sh ourse Issuer Bid h a a a nk’s c C a nd is p y 27, 2014, the B nt to whi l nu nu nu a tively. The Bo a a a a a a c elled 4.5 million kEx ents per rterly dividend c c y 29, 2015, or the d c a n a l pursu of $71.04 per sh Sto On M Norm ca 2015, $3,110 million ($2.56 per sh During the ye qu Dividend The dividends p M 66 of the B respe a Initi dividend lue. a l t nk a c rv a a b pit nk e ve a c a a r ca a pri Issue oti ny of the c lorp id unless a 25.00 0.348290 July 27, 2007 – July 29, 2014 to 25.00 0.431500 July 29, 2008 2.05% April 26, 2018 25.00 ny a a a nk is, or a te, the B re regul te res. a ring a de on a a l a a l c c ny of the S nnot be p tions do not restri a a vention of the ca tives issued under the a c re then entitled h ry 1, 2011 25.00 0.215410 April 27, 2011 1.34% Febru a h 15, 2005 25.00 0.440500 July 27, 2005h 25, 2008 – July 29, 2014 25.00 h 27, 2008 il to de a side to do so. ry 28, 2011 ry 31, 2008 25.00 0.337530 April 28, 2008ry 26, 2014 – 25.00ry 21, April 2009 0.173875 28, 2014ry to 30, 2009 25.00 25.00 April 28, 0.415240 2014 0.376710 April 1.88% 28, 2009 J April 28, 2009 4.14% 4.46% April 26, 2014 April 26, 2014 25.00 25.00 ry 24, 2007 25.00 0.283560 April 26, 2007 – April 28, 2014 to ny kind on its preferred or c c c a nding preferred or a a a a a a a r r r a ontr ommon sh a a a a c April 17, 2007 c res when the B res without nomin tober 12, 2007 25.00 0.391950 J tober 26, 2013 25.00 0.167875 J nu nu nu nu nu a a M ember 12, 2008 25.00 0.586500 April 28, 2009 3.84% J c c lso not be m nk f a a a a a r distribution d c a a a tory dire Febru a reholders re dividends a tion, in a regul a r ve been set a a re Issue d l a a sh distributions on ommon sh c urrently, these limit c re dividends of ca tly issued outst C nk is prohibited from de de a yments c l a id on per sh a Dividends a c a ble h ommon sh ny other regul rly, should the B 0.3906250.2406250.231250 J Febru April 12, 2010 25.00 0.282200 July 28, 2010 1.00% April 26, 2015 25.00 0.2812500.3281250.350000 April O 5, 2007 0.209375 J 0.185500 M 0.2256250.163625 April 26, 20130.239375 O 25.00 June0.174875 10, 2008 September 9, 0.189250 2008 25.000.390600 J 25.000.390625 0.167800 De July 0.482900 29, 2013 J J July 29, 2008 2.05% April 1.70% 26, 2013 to O 0.3000000.281250 M J res c c a ca a a res urities. h preferred sh a c c sh distributions will t, the B ient funds h id: ppli c c a a ca re not p t a a ny of its dire ) ed by su ddition, c a nk A res res: res, res. Simil a ) a a a ac ken not to de a a a (l) (b)(m) (b)(n) (b)(f) (b)(g) (b)(g) (b)(h) (b)(h) (b)(i) (b)(i) (j) (k) ( (b)( (b)(d) (b)(e) a ) ) a c (i) (j) (k) (l) (m) (n) (g) (g) (h) (h) (i) ( ( (d) (e) (f) urities y, liquidity or nk Trust Se t. In id or suffi nd fully p c a c a l preferred sh a tions on dividend p yment of dividends on preferred or tober 31 ($ millions) ac b a c c Preferred shares a a An unlimited number of preferred sh tO nk A s undert Series 14 Series 15 Series 16 Series 17 Series 26 Series 28 Series 30 Series 32 Tot Series 18 Series 19 Series 20 Series 21 Series 22 Series 13 Series 23 Series 24 a oti a a ll dividends to whi dequ c ommon sh ommon sh In the event th a been p B a Series 16 the p dividends on c S dividends on its preferred or would be pl Series 17 Series 22 Series 21 Series 18 Series 23 Series 24 Series 26 Series 15 Series 20 Terms of preferred sh Trust Se h c Series 13 Preferred sh Issued Preferred sh 27 Authorized: Under the B Restri As Series 32 Series 28 Series 30 Series 14 Series 19 CONSOLIDATED FINANCIAL STATEMENTS
(a) Series 13 Non-cumulative Preferred Shares were redeemed on (g) Holders of Series 18 Non-cumulative 5-YearRate Reset Preferred July 29, 2014 at $25.00 per share, together with declared and Shares will have the option to convert shares into an equal number unpaid dividends. of Series 19 non-cumulative floating rate preferred shares on (b) Non-cumulative preferential cash dividends on Series 14, 15, 16, April 26, 2018 and on April 26 every five years thereafter. With 17, 18, 19, 20, 21, 22, 23, 30 and 32 are payable quarterly, as and regulatory approval, Series 18 preferred shares may be redeemed when declared by the Board. Dividends on the Non-cumulative 5- by the Bank on April 26, 2018 and every five years thereafter, YearRate Reset Preferred Shares (Series 18, 20, 22, 30 and 32) are respectively, at $25.00 per share, together with declared and payable at the applicable rate for the initial five-year fixed rate unpaid dividends. With regulatory approval, the Series 19 non- period ending one day prior to the redemption date. Subsequent cumulative preferred shares may be redeemed by the Bank at to the initial five-year fixed rate period, and resetting every five (i) $25.00 together with all declared and unpaid dividends to the years thereafter, the dividend on all Rate Reset Preferred Shares date fixed for redemption in the case of redemptions on April 26, will be determined by the sum of the 5-year Government of 2018 and on April 26 every five years thereafter, or (ii) $25.50 Canada Yield plus the indicated dividend reset rate, multiplied by together with all declared and unpaid dividends to the date on any $25.00. If outstanding, non-cumulative preferential cash dividends other date fixed for redemption on any other date on or after on the Series 19, 21, 23, 31 and 33 are payable quarterly, as and April 26, 2013. when declared by the Board. Dividends on the Non-cumulative 5- (h) Holders of Series 20 Non-cumulative 5-YearRate Reset Preferred yearRate Reset Preferred Shares (Series 19, 21, 23, 31 and 33) are Shares will have the option to convert shares into an equal number payable, in an amount per share equal to the sum of the T-Bill of Series 21 non-cumulative floating rate preferred shares on Rate plus the dividend reset rate of the converted preferred shares, October 26, 2018, and on October 26 every five years thereafter. multiplied by $25.00. Holders of Fixed Rate Reset Preferred Shares With regulatory approval, Series 20 preferred shares maybe will have the option to convert shares into an equal number of the redeemed by the Bank on October 26, 2018, and every five years relevant series of Floating Rate Preferred Shares on the applicable thereafter, respectively, at $25.00 per share, together with Rate Reset Series conversion date and every five years thereafter. If declared and unpaid dividends. With regulatory approval, the the Bank determines that, after giving effecttoany Election Series 21 non-cumulative preferred shares may be redeemed by Notices received, there would be less than 1,000,000 Series 18, the Bank at (i) $25.00 together with all declared and unpaid 20, 22, 30 or 32 preferred shares issued and outstanding on the dividends to the date fixed for redemption in the case of applicable conversion date, all of the issued and outstanding Series redemptions on October 26, 2018 and on October 26 every five 18, 20, 22, 30 or 32 preferred shares will be automatically years thereafter, or (ii) $25.50 together with all declared and converted on the applicable conversion date into an equal number unpaid dividends to the date on any other date fixed for of Series 19, 21, 23, 31 or 33 preferred shares. redemption on any other date on or after October 26, 2013. (c) With regulatory approval, the Series 14 Non-cumulative Preferred (i) Holders of Series 22 Non-cumulative 5-YearRate Reset Preferred Shares may be redeemed by the Bank during the period Shares will have the option to convert shares into an equal number commencing April 28, 2014 and ending April 27, 2015, at $25.50 of Series 23 non-cumulative floating rate preferred shares on per share, together with declared and unpaid dividends to the January 26, 2019, and on January 26 every five years thereafter. date then fixed for redemption and $25.25 per share if redeemed With regulatory approval, Series 22 preferred shares maybe during the period commencing April 28, 2015 until April 26, 2016, redeemed by the Bank on January 26, 2019, and every five years following which no redemption premium is payable. thereafter, respectively, at $25.00 per share, together with (d) With regulatory approval, the Series 15 Non-cumulative Preferred declared and unpaid dividends. With regulatory approval, the Shares may be redeemed by the Bank during the period Series 23 non-cumulative preferred shares may be redeemed by commencing July 29, 2014 and ending July 28, 2015, at $25.50 the Bank at (i) $25.00 together with all declared and unpaid per share, together with declared and unpaid dividends to the dividends to the date fixed for redemption in the case of date then fixed for redemption and $25.25 per share if redeemed redemptions on January 26, 2019 and on January 26 every five during the period commencing July 29, 2015 until July 26, 2016, years thereafter, or (ii) $25.50 together with all declared and following which no redemption premium is payable. unpaid dividends to the date on any other date fixed for (e) With regulatory approval, the Series 16 Non-cumulative Preferred redemption on any other date on or after January 26, 2014. Shares may be redeemed by the Bank during the period (j) Series 24 Non-cumulative 5-YearRate Reset Preferred Shares were commencing January 29, 2014 and ending January 27, 2015 at redeemed on January 26, 2014, at $25.00 per share, together $25.75 per share, together with declared and unpaid dividends to with all declared and unpaid dividends. the date then fixed for redemption at $25.50 per share if (k) Series 26 Non-cumulative 5-YearRate Reset Preferred Shares were redeemed during the period commencing January 28, 2015 and redeemed on April 26, 2014, at $25.00 per share, together with ending January 26, 2016, and $25.25 per share if redeemed all declared and unpaid dividends. during the period commencing January 27, 2016 until January 26, (l) Series 28 Non-cumulative 5-YearRate Reset Preferred Shares were 2017, following which no redemption premium is payable. redeemed on April 26, 2014, at $25.00 per share, together with (f) With regulatory approval, the Series 17 Non-cumulative Preferred all declared and unpaid dividends. Shares may be redeemed by the Bank during the period (m) Holders of Series 30 Non-cumulative 5-YearRate Reset Preferred commencing April 28, 2014 and ending April 27, 2015 at$25.75 Shares will have the option to convert shares into an equal number per share, together with declared and unpaid dividends to the of Series 31 non-cumulative floating rate preferred shares on date then fixed for redemption at $25.50 per share if redeemed April 26, 2015, and on April 26 every five years thereafter. With during the period commencing April 28, 2015 and ending regulatory approval, Series 30 preferred shares may be redeemed April 26, 2016, and $25.25 per share if redeemed during the by the Bank on April 26, 2015, and for Series 31 preferred shares, period commencing April 27, 2016 until April 25, 2017, following if applicable, on April 26, 2020 and every five years thereafter, which no redemption premium is payable. respectively, at $25.00 per share, together with declared and unpaid dividends.
172 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS nd a l a 173 a nk ll of a lly l a r a tio of rs a lized a ngible sing rket te the a a ca pit se-in of a tings tio will l a a a tio, a n a se-in pit a a nk’s a a hieve tion of a a re Ca ul a sel tory nd a ssess the c ca c nks in l lr lR onsists b a l ac a a eed to a a a c a a rph rs. ins c tion five-ye a t rely on l Report lph a ca a a a h n, U.S., rket risk a a tio re unre a a nd redit risk: the pit ter th c ribed risk tory a a l systemi a redit, m c a a ommon equity. a tively 7%. omponents by tory c a a c c ombin ssets, shortf ca ted risk c ont di c a lr 5ye y pro a c hto rter of 2013. In a l nd Tot a a rgest b ca a a a n ac a a ontrolling interests. ac olle nsition c pit ed Intern ddition, new or c ssets th nk Annu ll-in’), ET1) pit c a Ca a nk will be required a a a tively. ca l C n ontinues to sel III ET1, whi a e with the AIRB b nt investments in the c ca x c l, by no l a a a c a lude goodwill, int C nks (D-SIBs), in s‘ sed out over 10 ye e with OSFI’s sed regul ssets (RWA) of 0.57, 0.65 redit risk regul a ry 1, 2013, through a omputing l requirements. The B sed-in over c n ca a a a c c a a a c l, a a oti a pplying nk n teri c a llow the use of pit nd OSFI pres a a ommon Equity Tier 1 r a a sed in over 4 ye nu a ve sophisti pit a a ted the 6 l ribed risk weights; rds, B nt b C a ommon equity pit a ET1, Tier 1 Ca c omponents to h a a a c ca l ord C c c ll, of the key inputs into the ompli nt portion of intern ca rdized Appro tio, respe a nk’s exposure to l a c nd a a ry risk-b y, a tions of 2014 S a ll minimum ing J ca a nd signifi acc a tion of AIRB in the future. In 2012, a c a lr a ommittee’s revised m king institutions to fully implement ac nd meters BS rules the B pit mounts for non- tio will be 10.5%. a ul a ca C a a l institutions. In rget, by the first qu a a c C r l djustments in a ca a nd Tot i te full pit a luded in a lr l hes, whi lly import signifi c a a omputed by sel ca tion buffer, the minimum Tier 1 r c ed ppli a a e sheet exposures. Under the B pproved its use, they m dequ in methods for omputing h uses pres n tion buffer of 2.5%, c ca a a tegory of c ble to a a l requirements result in ac c bilities, deferred t ca a a c c a a a l redit risk for m tions (referred to ommen a a n l pit VA risk-weighted s c c a ca c ca re tory l portfolio. The B a a ommon Equity Tier 1 ( te some, or a l C a reholders’ equity net of regul a tion. Users of the Adv re required to h a a ted losses xli ry 2014. In C i a Ca a a a ppro hin c pit a a c l ul ppli re three prim n deposit-t a tio requirements by 1% for the identified D-SIBs. ddition l requirements. onserv ul nd a h, whi nd for c l instruments will be ph a new a ac a a onserv l a c a ca c systemi nd redu a nsition nu a redit risk p a l l dedu c tion buffer will be ph nd Tot l a a di ac c rs for a a c lr nk uses the St a ET1, Tier 1 ca l a a re two m a sed rges, requiring they be ph pit a l a ca ompute a a nd pit a l a C a a a c n l a ppro ed pit nks demonstr ca pit ssets represent the B h omponents in nd off-b ommer ngements a nd OSFI h ommon equity t ca rge is tio ssets. ca ssess c a l risk pit h (AIRB) a pit c a c c ppro a re determined by dividing those a c a a a a a Ca a dvisory letter, OSFI design ca ca l l a bility, defined-benefit pension fund net a ca pit ommon sh nks. rr nks to meet the new st h a ac urities a a sel III reforms in 2013, without the tr lr a onserv c eb c a a a c ry 2019, under the B nd h nd the Tot c a tions a aca l risk c ca l a c a tings-b tion c a l pit pit a s domesti a sel III, there a a lifying a pit n portfolios a nt b nu te a ca ca a l models to lr ble b rdized a a aa a nk implemented the B nk’s intern tory ca pit l. On a a ry 1, 2019. Tr ry 1, 2016, in line with the requirements for glob tion rily of gement systems for the a a d a a a ining portfolios for the h 2013 a a a a a a a c a ca ted r n nd luding the n nsition mework there mework. The B sel III introdu sed Appro a pit a a tios, whi nu tios used to nu c a a a a a a nd oper pply the AIRB djustments. These regul ssets net of deferred t nd 0.77 were used for orpor ommon equity of other fin redit provision to expe a a a a the B requirements, s rem to meet new minimum requirements of: 4.5% plus period, beginning J its minimum the B weights to on- As of J c the m rel Non-qu risk-weighted B Ca a Europe new dedu r B M provisions for minimum 7% Risk-weighted To en losses on se uses the AIRB to J regul r the 2019 B J import c revised a requirements, intern oper Under B be 8.5%, OSFI required requirements for a a future profit c intern Tier 1 This 1% sur prim ca tr fr st fr a In l l a l t nk a a c nd a l nk’s VA) l l nk pit l a b a a nk. pit l a a nk i a ve nd a C a a c tions in ca a fter. a a r tion ca ca a n a pit pit a l number a pit oti y. This tes, tives: a ny of the a tegy c id unless a c ca ybe sure, a ca a Ca ny ac a res on a a l a gement nd a a nk is, or rds: A Revised nd every five a a eed lo a a l str a y regul c tory sis. The B t to the revised n n equ te, the B rs there a rds set by the re regul c res. a a dequ a a a ring a ac nd BS de on a a res m djustment ( a l levels a l jor obje nk oper a tions in the a sel III reforms, a a pit a l a C c re, together with a a a a te Reset Preferred etome c nd tor of its pproved a esses of the B nd for Series 33 ca nk b ny of the S a a nnot be p a a tions do not restri pit lSt c a ac a a nd provide the B dequ a vention of the a ll of the non- tion ca tives issued under the a a ca rR a lst a rd- re subje c l Risk M a re then entitled h l res into a a a pit a nk’s a a l regul ry 2, 2021 a il to de a ssess its BS). side to do so. lu h the B ny kind on its preferred or nk id a ge a a a a ted B nding preferred or a a c C te preferred sh a a a gement develop the a ontr Ca ommon sh pit a a ry regul a a tion c n c nks pit res when the B e of the Superintendent of ess in pl a ries meet or ex n a a nd a ca a c c lso not be m nk f a nd a r distribution d a ca hieve four m a a nk p a a l tory dire l ry 2, 2016, gement pro a tive 5-Ye ry 2 every five ye nd Glob redit v nb a a a ac ting r a a c a a a a sel III builds on the “Intern onvert sh a reholders onsolid t $25.00 per sh n re dividends c a pit a tion, in di a a a ged using both regul regul a a tings, m a ac e with the Bo ca r s published by the B utive m n ve been set onsistent with the B sury a e of the Superintendent of Fin a n c c umul a a ble, on Febru lm sel III l c a c a nd meet longer-term intern ims to a c n sh distributions on a a c urrently, these limit a (OSFI). The a Ca l, Series 32 preferred sh tive flo y is the Offi a s. ca ble ountries in whi surement gement pro re dividends of re tively, t to sever a ca a tly issued outst c C c a sel III. B a a a nk is prohibited from de pit de a c a c c ac il l a a d ble returns. n id on redit r ord ess a a c ppli ca lism ged on a h a a re dividends. nk on Febru a c c nd v ble nd on Febru a c a a n a a sB h id dividends. ommon sh a nking Supervision (B ny other regul a lMe a rly, should the B umul n c a acc c a pprov a a ca a c lm a dequ ept l metri a pit a Ca l of the B urities. a a s issued guidelines, reporting requirements h preferred sh onsistent with intern a c a c l c a pit sh distributions will rs presented, the B t, the B ient funds h y. Senior exe Ca e whi ve the option to acc ppli a res, if pit a c e, Group Tre c c c ommon or preferred sh a a ca l requirements. The prim fter, respe c a re not p l. Ca nk is subje tory sel II). The Offi c n t re key in implementing the B y requirements yism a a a pit a n ged in a a a in strong nd unp a sures to ensure its subsidi a a ny of its dire a a ed by su ddition, aca a a tory thresholds rgely a ac ac ca a nk A pit n pit te with the risk profile of the B res, res. Simil gement pro a a a s eof a ac ken not to de a a a a a ry 2, 2016, int a nd intern c ca ca a n a a a red nd oversee the re l ted a urities a a nd monitor its y, liquidity or nk Trust Se dequ dequ res will h a l t. In rs there l Institutions id or suffi c a ommittee on B a tive preferred sh a a c a c h of the ye a a a nk’s Fin nk h aa lism kes me i yment of dividends on preferred or ac tory a l l lm b gement Poli C ging a a c a a Capital management d a a tive November 1, 2012, ac a a a a ye de preferred sh With regul redeemed by the B Febru of Series 33 non- Sh a a sures a n c losure guid tegy reholders with n ept for its deferr eed regul n a mework” (B a c n pit sel nk A s undert a a pit c c pit pit oti a a rgets, m a onvergen a a a ll dividends to whi lso t dequ c ommonly referred to onsolid ommensur ommon sh umul ommon sh a C c Trust Se c In the event th Restrictions on dividend payments Under the B ca Effe m a been p c sh a regul ex (GRM) groups B The B B ex t dis Although the B different business lines ca ca Institutions (OSFI) h Ca str a me Fr M the p dividends on c S For e c deploy Fin dividends on its would be pl h c 28 The B (n) Holders of Series 32 Non- Ca CONSOLIDATED FINANCIAL STATEMENTS
In addition to risk-based capital requirements, the Basel III reforms requirements for written credit derivatives; and, minimum public introduced a simpler, non risk-based Leverage ratio requirement to act disclosure requirements commencing January 2015. The final as a supplementary measure to its risk-based capital requirements. The calibration will be completed by 2017, with a view to migrating to a Leverage ratio is defined as a ratio of Basel III Tier 1 capitaltoa Pillar 1 (minimum capital requirement) treatment by January 2018. Leverage exposure measure whichincludes on-balance sheet assets and In October 2014, OSFI released its Leverage Requirements Guideline off-balance sheet commitments, derivatives and securities financing which outlines the application of the Basel III Leverage ratio in Canada transactions, as defined within the requirements. and the replacement of the existing Assets-to-Capital Multiple (ACM), In January 2014, the BCBS issued revisions to the Basel III Leverage effective Q1 2015. Institutions will be expected to maintain a material Ratio framework. Revisions to the framework related primarily to the operating buffer above the 3% minimum. The Bank expects to meet exposure measure, i.e. the denominator of the ratio, and consist mainly OSFI’s authorized Leverage ratio. Disclosure in accordance with OSFI’s of: lower credit conversion factors for certain off-balance sheet September 2014 Public Disclosure Requirements related to Basel III commitments; further clarification on the treatment for derivatives, Leverage Ratio will be made commencing Q1 2015. related collateral, and securities financing transactions; additional The Bank’s Common Equity Tier 1, Tier 1 and Total Capital are composed of the following:
2014 2013(1) As atOctober 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 taxliabilities(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 Capitalratio 10.8% 13.0% 9.1% 13.0% Tier 1 capitalratio 12.2% 13.0% 11.1% 13.0% Total capitalratio 13.9% 14.7% 13.5% 14.8% Assets to capital multiple(7) 17.1x 17.1x 17.1x 17.1x (1) Capitalmeasures 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 approachinclude defined pension plan assets and other items. For the transitional approach, deductions include: Common Equity Tier 1 all-in deductions multiplied by an annualtransitionalfactor (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 subjecttoa phase-out period of 10 years. Amounts reported for regulatory capitalmay be less than as reported on the Consolidated Statement of Financial Position. (5) Other Tier 1/Tier 2 capital adjustments under the all-in approachinclude 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 capitalratio, Tier 1 capitalratio and Total capitalratio, 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 capitalona transitional basis. The Bank substantially exceeded the OSFI capitaltargets as atOctober 31, 2014. OSFI has also prescribed a maximum assets to capital leverage multiple and the Bank wasincompliance with this threshold as atOctober 31, 2014.
29 Share-based payments (a) Stock option plans less than the volume weighted average price on the TSX for the five The Bank grants stock options, tandem stock appreciation rights trading days immediately preceding the grant date. (Tandem SARs) and stand-alone stock appreciation rights (SARs) aspart Options vest evenly over a four-year period and are exercisable no later of the Employee Stock Option Plan. Options to purchase common than10years after the date of the grant. In the event that the expiry shares and/or to receive an equivalent cash payment, as applicable, date falls within an insider trading blackout period, the expiry date will maybegranted to selected employees at an exercise price not less than be extended for 10 business days after the end of the blackout period. the closing price of the Bank’s common shares on the Toronto Stock As approved by the shareholders, a total of 129 million common shares Exchange (TSX) on the day prior to the date of the grant. As well, for have been reserved for issuance under the Bank’s Employee Stock grants made beginning December 2005, the exercise price must not be Option Plan of which 93.7 million common shares have been issued as
174 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS rs nd ted ted 175 a e t a c nt a nd c s rs ge a res a ge a k a a a eof a s a c 2013 ted c a 3.70% c ver a ise pri rket ver c 1.74% 3.84% ted nk from a a yment of a 23.58% a 2013 Gr a exer 6.23 ye l Report rket pri $ 8.15 yout. Expe a a holes option tes interpol a ssumptions tility for c Weighted ys the a ommon sh a a 1.06% – 1.58% sed p tober 31, 2014 t the B a c 0.02 – 4.33 ye onsolid a nding (2013 – c rising from nd 2013 sto c ise of the options. k-S a 13.54% – 25.58% a C a c 2013 $ 14.81 l vol tO ac ntified using the ge of the m nk Annu nk p re-b k a a ins a a ca a c a (7) 53.42 te. k options to sele a b s a (36) 30.67 (51) 51.68 c a y restri a ver a l 2014 rd: a l dividend p oti 3,982 55.63 nted (2013 – 296,824) sury bond r a (3,390) 37.90 2014 c 23,111 $ 46.30 23,60913,82515,819 $ 49.09 $ 46.25 k options, i.e., without nt d a 3.70% ca n a ca w c a a bility 2.02% 3.65% a luded g ws m a orresponding expense for SARs ognized for vested SARs 21.45% d of sto c options (000’s) a c 2014 Grant c tility of sh ised, the B n tre a Number of sto a ll c a 2014 S l to the rise in the m 6.07 years a nd $ 8.85 ted life until exer di ca tures, were qu ded options on our a c e the gr a 0.98% – 1.40% a lue per a nt. The fis c n a a 0.05 – 4.35 years e ntified using the Bl sed on the histori bility re 15.12% – 22.82% c ge a a a Ca a $ 16.45 ir v sed on histori sh equ bility lue of this li nted inste a a a rd: ge the vol ver a a ca res sin a ise pri a a SAR is exer squ lued using the following weighted- v c lue lue a ing model with the following n a a w c te of gr a a a c s $27 million (2013 – $27 million). The lues a nd employee benefits in the a tility for tr a a a ounting purposes, a sed on exer tility is used. re gr yment li a ir v l to the expe h 1,744,867 SARs were vested (2013 – 1,896,242). ir v ir v a a a a a c a ndem SAR fe a a ir v yment li yment expense for sto te% te % tility tility acc ome. This benefit in a a Weighted a a ries a a a a c ountries where lo a tion rights l vol mount in tures, w l c ge f ge f a a a lue per sed p a i te is b a a ca ommon sh 2014 c a nd resulting f a a l 2014, 233,120 SARs were gr c e vol e vol res. When benefit of $1 million (2013 – benefit of $3 million) w a sed p sed p c c k a –– ver ver a a ca c a ir v tion a a turity equ nts were f tion of f tion. For tober 31, 2014, 1,852,484 SARs were outst lone SARs a re-b a ppre (50) 44.35 tility is determined b a a a i c a a a nk’s a tives used to m a (104) 54.78 holes option pri c re-b re-b a a c 3,242 63.98 k a a lue lue (3,342) 45.31 tober 31 tO 23,609 $49.09 12,731 23,35514,344 $51.68 $48.08 ted dividend yield is b ted life of option ted life of option ted dividend yield ted dividend yield ted pri ted pri c c tement of In nd- s $31 million (2013 – $29 million). orded in s a a tober 31, 2014 w a c c c c c c c a c a a k-S c e vol ing model on the d ppre s orresponding intrinsi tO c c deriv St re a issuing sh w In 2014, employees in c St O Sto $14 million (2013 – $17 million). 2,007,718), of whi The sh ndem SAR fe During fis the B a a ir v ir v options (000’s) ac ssumptions nd options with T nd the histori a ompens a a onsensus implied vol Number of sto resulting f Bl c a option gr a pri pri for the m Expe ▪ Determin The sh The risk-free r F Weighted- Expe Expe F Weighted- c a T Assumptions Risk-free interest r Expe Assumptions Risk-free interest r Expe Expe As Expe The sh nd re a a nt : a k k re res ndem c res lue of (1) c a a a a a sis ognized ted s ted he’s v orded in a c sset of ndem ommon a c a a c c c a a n tober 31, ndem SARs, ndem SARs. a x bility- c a a tement of tives used to sre a tr a a a a s follows weighted- a res, or to tO s $8 million a a onsolid a a ed T a tions of sto res. As these C ommon sh c s re a nd the rel c a ca a ted St a ember 2009, a c rs). ember 3, 2004 to n h reporting period. ded vesting b a e, c a nding options expire on h provide the employee a c ac a ember 9, 2023. bility ac eive the intrinsi gr c a c nd deferred t te a a ving 12.6 million a ed 2,835,008 T yments of $5 million (2013 – ll for settlement in sh onsolid ognized between the gr ontinue to be li rily renoun a k options w c a c c c C a ognized over rising from deriv ca ognized for vested T kes pl k option for sh c lue a c a c h s $184 million (2013 – a c a tober 31, 2014, 363,775 T k Option Pl sed p nd 22.8 million c ins s $7 million (2013 – $11 million). c ir v a ssified to equity – other reserves. The a a a tober 31, 2014, future unre a tion t a r tures. ost is re lue of this li l c tO a c a a c a bility re ognized on a nd thereby re v rily renoun re-b nted beginning De nted between De s options. Outst c lu a ndem SARs, whi rs (2013 – 1.58 ye a tO a a a a a a c a ndem SARs a a ise the sto onsidered to be modifi (3) a e histobere c c r luded g lude: c c tion rights (4) c c a se the r n ve T a nding options, le orresponding option for sh sh. As i ember 3, 2014 to De a sured to f nd employee benefits in the a ndem SARs c a a k options whi c ca c a a a c ca yment li h a ns in nding (2013 – 643,851). ise of options re not c nding T a tility of sh ome. As c a a tober 31, 2014 w a ost for non-vested sto ries orded in equity – other reserves for vested sto ppre a c c ndem SARs fe r, no employees volunt c c ndem SARs a a k options gr k options gr nt l nk’s Employee Sto a tober 31, 2014 w a a te the employee is eligible to retire. c c a sed p a a k c ndem SARs a tO t beginning of ye t end of ye a c a benefit of $1 million (2013 – $2 million) w a nd re-me a a bility of $36 million for 2013 t end of ye tion n expense of $30 million (2013 – $34 million) w ble for issu ining their ve T ssified sto a a tO s a e to either exer a a a nd employee benefits in the a s $8 million (2013 – $12 million). ement of T a sT a s options a a ements a c l k option in il a te, in whi c a re-b a a c c c s a a a (2) k option pl (2) v ge the vol a nging from De ble mount re ge period of 1.71 ye orresponding intrinsi ise the T ining outst (2) c hoi a a a k options nding nding a c a c a tober 31 a nd the d c ries ble for gr c rued li c n a a tement of In orded in s ost of these options is re ome. This benefit in ised ised is ssified a a a ndem sto ils of the B l c a a c c c c c a il nted a a ver res l ompens a ept where the employee is eligible to retire prior to tO a te tes r a options under IFRS, no rev In 2013, employees volunt renoun while ret In 2014, 2014 w During the ye acc SARs The $15 million). Renoun $180 million). In 2014, re do not h The options The sh SARs were outst m T equity- the sto In Sto Employee sto exer c (2013 – $9 million) whi c a Employee sto November 1, 2009 h s $10 million for 2013 were re rem St the a a c result of the exer a a ommitted under outst vesting d ▪ d The sto Forfeited d The ex ▪ Det Exer sh Expired Outst Gr Exer Outst a c As Exer Av CONSOLIDATED FINANCIAL STATEMENTS
Options Outstanding Options Exercisable Weighted average Number of stock remaining Weighted average Number of stock Weighted average As atOctober 31, 2014 options (000’s) contractual life (years) exercise price options (000’s) 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 1,600,374 units were vested (2013 – 1,887,092). Eligible employees can contribute up to a specified percentage of salary Directors’ Deferred Stock Unit Plan (DDSU) towards the purchase of common shares of the Bank. In general, the Under the DDSU Plan, non-officer directors of the Bank may electto Bank matches 50% of eligible contributions, up to a maximum dollar receive all or a portion of their fee for that fiscalyear (whichis amount, which is expensed in salaries and employee benefits. During expensed by the Bank in other expenses in the Consolidated Statement 2014, the Bank’s contributions totalled $30 million (2013 – $30 of Income) in the form of deferred stock units which vest immediately. million). Contributions, which are used to purchase common shares in Units are redeemable in cash, only following resignation or retirement, the open market, do not result in a subsequent expense to the Bank and must be redeemed by December 31 of the year following that from share price appreciation. event. As atOctober 31, 2014, there were 333,315 units outstanding As atOctober 31, 2014, an aggregate of 19 million common shares (2013 – 358,859). were held under the employee share ownership plans (2013 – 20 million). The shares in the employee share ownerships plans are Restricted Share Unit Plan (RSU) considered outstanding for computing the Bank’s basicand diluted Under the RSU Plan, selected employees receive an award of restricted earnings per share. 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 (c) Other share-based payment plans schedule. Upon vesting all RSU units are paid in cash to the employee. Other share-based payment plans use notional units that are valued The share-based payment expense is recognized evenly over the vesting based on the Bank’s common share price on the TSX. These units period except where the employee is eligible to retire prior to the accumulate dividend equivalents in the form of additional units based vesting date in which case, the expense is recognized between the grant on the dividends paid on the Bank’s common shares. These plans are date and the date the employee is eligible to retire. As atOctober 31, settled in cash and, as a result, are liability-classified. Fluctuations in the 2014, there were 2,346,330 units (2013 –2,337,448) awarded and Bank’s share price change the value of the units, which affects the outstanding of which 1,659,401 were vested (2013 –1,581,071). Bank’s share-based payment expense. As described below, the value of a portion of the PerformanceShare Unit notional units also varies PerformanceShare Unit Plan (PSU) based on Bank performance. Upon exercise or redemption, payments Eligible executives receive an award of performanceshare units that are made to the employees with acorresponding reduction in the vest at the end of three years. A portion of the PSU awards are subject accrued liability. to performance criteria measured over a three-year period whereby a multiplier factor is applied which impacts the incremental number of In 2014, an aggregate expense of $242 million (2013 – $192 million) outstanding shares due to employees. The three-year performance wasrecorded in salaries and employee benefits in the Consolidated measures include return on equity compared to target and total Statement of Income for these plans. This expense was net of gains shareholder return relative to acomparator group selected prior to the arising from derivatives used to manage the volatility of share-based granting of the award. The Bank uses a probability-weighted-average payment of $92 million (2013 – $144 million). of potential outcomes to estimate the multiplier impact. The share- As atOctober 31, 2014, the share-based payment liability recognized based payment expense is recognized over the vesting period except for vested awards under these plans was $901 million (2013 – where the employee is eligible to retire prior to the vesting date; in $840 million). which case, the expense is recognized between the grant date and the Details of these other share-based payment plans are as follows: date the employee is eligible to retire. This expense varies based on changes in the Bank’s share price and the Bank’s performance Deferred Stock Unit Plan (DSU) compared to the performancemeasures. Upon vesting, the units are Under the DSU Plan, senior executives may electtoreceive all or a paid in cash to the employee. As atOctober 31, 2014, there were portion of their cash bonus under the AnnualIncentive Plan (whichis 9,409,639 units (2013 – 9,570,495) outstanding subjectto expensed for the year awarded in salaries and employee benefits in the performance criteria, of which 8,011,356 units were vested (2013 – Consolidated Statement of Income) in the form of deferred stock units 7,872,540). which vest immediately. In addition the DSU plan allows for eligible executives of the Bank to participate in grants that are not allocated Deferred PerformancePlan from the AnnualIncentive Plan election. These grants are subjectto Under the Deferred PerformancePlan, a portion of the bonus received specific vesting schedules. Units are redeemable in cash only when an by GlobalBanking & Markets employees (whichisaccrued and executive ceases to be a Bank employee, and must be redeemed by expensed in the year to which it relates) is allocated to qualifying December 31 of the year following that event. As atOctober 31, 2014, employees in the form of units. These units are subsequently paid in there were 1,600,374 units awarded and outstanding of which cash to the employees over each of the following three years. Changes
176 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS (1) ns. 177 a orded 2012 sed c e a c n in h blished a a c ommon s a c a ert l Report c ns sin a quisition of nk weighted- a a d est (1) mount re ns w a ac lth pur a nd no future 127 5 (2) a a (8) 12 (3) – a re bonus retention a 3827 290 182 66 499 12 20 94 (330) a (13) (21) (47) (19) 108 (312) 856 784 376 200 207108 (265) (312) 2013 lth h nk Annu 1,671 1,069 onsidered to be a tober 31, 2013, future a c nd employee benefits in c b $ 1,737 $ 1,568 $ 1,845 $ 1,256 $ 66 $ 499 $ 460 $ 94 $ (99) $ (47) $ 118 $ 559 a a re tO a oti ognized. In 2013, a c ries c onverted to B tober 31, 2014 there were a ns ognized over c c l 1 5 4 c a res held in trust for these pl s follows: a (3) 66 15 59 rds for these pl a a (70) tO 141 222 865 423 2014 a (422) (432) (174) (422) a 2014 S nted under these pl lth, HollisWe re 1,780 w rd pl a a a a ome. As a tober 31, 2014, the c $ 2,002 $ 1,580 $ 222 $565 $(248) $ 163 w ns whereby HollisWe c rds were a a a gers. At the time of the osts were re osts for non-vested sh sh. As orded in s a tO c c w nd IAS 19) in 2014 (refer to Note 4). c histobere n a ommon sh ca a a c a rs. c rd pl a tober 31 a sre nd tion tion c a nk w a a a a a tement of In rds. As ve not been gr a a a nd retention rds (IFRS 10 w es a a urities a c rket to be held in trust for the benefit of c ompens ompens a nd rds h c c quisition of HollisWe ted St a rs ended O a a nd portfolio m a ac w a s $1 million, whi a lth, the retention ssified a a sed retention a l re bonus es a c ry 1, 2011. a c ry differen ognized ognized a onsolid ge period of 0.97 ye a c c rds w a C res, other se res in the m re-b a a a a mended IFRS st w ver a sh employees HollisWe sh sh the expense of $2 million w Prior to the in equity-other reserves for vested $5 million (2013 – $13unre million). In 2014, no expense unre a Febru The sh equity- Retention nil (2013 – 133,318) B a nd a ry differen a nd tempor tements for the ye a a ludes: nges in Equity c re a ome lst a lth, c h a a i C c redits nner c sury or n nges in Equity: nted a rket a a a ome in ome: a tement x a ns lth sh l of tempor doption of new c c h a ns in the a a a a a a C blished me m a res to be a t the ted fin a c ted St rds were tement of In tement of a a a a a d est w x losses, t a yment pl a a a tion/revers re bonus pl tement of In tement of In tement of a a tions in the m a a a ted St ted St ve not been gr onsolid a ns res were issued from lth h onsolid a a c a nges – (5) (41) ted entities (formerly a a a quisition of HollisWe a C a ommon sh tu sed p h c a ac djusted to refle c a ac ted St ted St ted St nk’s rds h ognized t nd 1,596 a a a a rd Pl a te c a oti re-b onsolid onsolid a nd rel a w lth to be issued from tre c a a C C tively nts. The sh a a S nted but not yet vested were xr c re expensed in the s a nding from the HollisWe a ting to origin a a a ommon sh a lth a ip c x provision a onsolid onsolid onsolid c a C C C rise from flu rti res, a a a ry 1, 2011. ssified sh tober 31, 2014, there were 21,739 (2013 h a re bonus a c re retrospe xes in the xes xes in the c l a a ome t were gr a a a orded in the B c rds outst ome t c nk of Nov a c ry 1, 2011, HollisWe a tO c a a a w res of HollisWe a xes in the xes in the xes in the e Febru a bility- a a a ome t ome t ome t xes nd Retention Aw mounts c ns (2013 – 35,114) rds th a xes re c c c xes rket. At the time of the a ommon sh a a a a a a xes: a c ted to prior periods ted to prior periods xes: a a a w a a tober 31 ($ millions) sury. As ome t ome t ome t c res ns for eligible p ns sin a c c c a ome t a nk’s a rnings quisition of HollisWe ome t x expense (benefit) rel x expense (benefit) of t x benefit of previously unre re bonus ome t c a a c c a a a a lth) on Febru ome t ac ommon sh a l l c ome t c omprehensive In c a a ns. During 2014, 17,615 i i re Bonus : : nk’s other li l l nd employee benefits expense in the C a lue of the units, whi c c r ended O in prior period te in c c a a a a a a a a re bonus a omponents of in sed in the m ined e a a a ome. Corporate income taxes C ert c l provision for in l provision for in l provision for in h ommon sh urrent in sury for these pl C ries e of the B c re bonus pl a a a a a c Deferred t Provin Feder Adjustments rel Adjustments rel C Other reserves Provin Ret Feder Deferred in Other Deferred t Deferred t C a l ) urrent in orpor s the B onverted into 377,516 B a a Provision for in Provision for in Foreign Deferred in Domesti Tot Tot issued from tre bonus pl – 40,950) sh the sh c Foreign Tot pur of In permitted C Domesti s sh under these pl Reported in: DundeeWe forfeited (2013 – 3,038). Sh (1) Provision for in ( For the ye 30 C a (d) Sh Prior to the in the v tre pri 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 provincialstatutory income taxrate for the following reasons:
2014 2013(1) 2012(1) Percent Percent Percent of pre-tax of pre-tax of pre-tax For the year ended October 31 ($ millions) Amount income Amount income Amount income Income taxes atstatutory rate $ 2,439 26.2% $ 2,185 26.2% $ 2,099 26.4% Increase (decrease) in income taxes resulting from: Lower average taxrate 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 taxrate changes –– (5) (0.1) (41) (0.5) Other, net (48) (0.5) 21 0.3 (76) (1.0) Totalincome taxes and effective taxrate $ 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 taxrate remained consistent with 2013. The change in the statutory taxrates between 2013 and 2012 was primarily due to the reduction in the Canadian federal and provincialtaxrates. (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 taxliabilities: 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 taxliabilities $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 taxliabilities 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 yearrecorded in income (222) (66) Deferred tax benefit (expense) for the yearrecorded 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 Included in the net deferred tax asset are tax benefits of $1 million tax credits for which no deferred tax asset is recognized in the (2013 – $49 million) thathave been recognized in certain Canadian Consolidated Statement of Financial Position amounts to $338 million and foreign subsidiaries thathave incurred losses in either the current (2013 – $279 million). The amount related to unrecognized tax losses is or the preceding year. In determining if it is appropriate to recognize $38 million, which will expire as follows: $20 million in 2018 and these tax benefits, the Bank relied on projections of future taxable beyond and $18 million have no fixed expiry date. profits.
178 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS s lth 179 nk h a n- a eto c sset a . a t c tion. a nt a a ted on nd a d ted c a ca ns a c n nd a nd nk’s n surement a nd he tm a a a a a tion to the a di a e, the B Ca ssets in ondu a gement l Report ondu a ries were not c lso be used to a a n , the US, ac c a nd other a tory a ble legisl n ble in b) below. s a a re a d Ca onditions, pl a a re in ca a a c nd revisits the tions th a ble future. At the n tes. The most go a a a t of pension ll of the B a de to the SPP in a tions. The key ppli c re set by independent nk Annu a Ca nk a tion from a ies in pl ) invests a a a t rket a a h is set by referen nted. c te must ould result in higher ssumptions. The most b tion w c C a ll c ssumptions set by a a nk for the me c a a nd/or a a a a rr a nd/or trends lu a oti ns in tion a es of $38.7 billion (2013 – c a nd other benefit pl tion. c a nk oper a nd c d & Tob a rket developments a a a a nd poli lu sw a etom ount r ted; te, whi ble in f) below. a a y phi c a c c ted; ns a a nd/or c a re being m c a a a ssumed. lso monitors regul re shown in the t 2014 S lude pl ve represent a a a ture number of c tes to investment m a h the B , Trinid c ommittees. n a te bonds with dur tes; c a ommittee (MT ble regul ount r c n expe a nd future expe nk a a nd ry differen ca c i a n expe C a a a a nd higher defined benefit oblig ca nk’s investment in subsidi a n design a ns in a ent funding v a bilities in line with these requirements. a a a es c e stru m a both h m ns provided by the B c c a ppli orpor tion a nd benefit expense for ti rized in the t n ount r c tions. This dis nd a sed on c C xli a n in whi a c a a a a a ontributions ifi a sis of the requirements of the a ac rly monitoring m lu c e. The B a te risk, investment risk, longevity risk C a re less th nd a lity c a number of risks. Some of the more signifi ster Trust a a nd/or pl tion reported below in respe a l benefit expense. Other mong others. These risks n re higher th re b tion long with demogr a a ble tempor a ssumptions used by the B a e will not reverse in the foresee a a a a a a a ribbe a c a x ted to the B ries ns ns a a re summ a Ca y, the UK, J a nnu line in dis ge a ses, nd the MT tegy nk M osts re determined in referen a tions for funding purposes for the SPP a a e, best pr c rt a a c tu a a a nk to nges c a ssigns spe a sis. The most re c s deferred t a a b e with the investment poli re l other benefit pl ns l inform de ssumption is the dis a Ca lu a c re a h ver c a a a a a ries on the b i c a a n e with this v gement t: Ca lb c a ca ip c a a a oti ssets returns ry differen lv a c nt other benefit pl nt n lpl n c lude interest r n a a tu a a a nk’s defined benefit pension pl c a a tive lth ri ca ca o, Urugu ost in ges risks by regul gement ord a ssumptions used for the funding v ssumptions n members live longer th n ac ip a a c c a a a a a nnu a a c ddition to the govern ord n n a n ognized tu a The MT independent members on the firms. PAI acc he The S pl there is pl re c a a a c n ountries in the $32.7 billion) rel re a end of the ye Other benefit pl The prin Institute of A pl A m tempor the defined benefit oblig The In Key The fin other benefit pl the yields on high qu weighted- of the benefit oblig prin Risk m The B expose the B risks in Š signifi signifi of November 1, 2013. acc level experien Š investment str Š extent th Š Š c determine the m investment perform legisl defined benefit expense ca Mexi ll C a a ns nd tes l o, nk a a a a in i lso c nd a c a ri a a ble a nd well nd for n (SPP) a ble ns on a ert l ture re a x a lly sso tu nd for y to the a c c a tor of the a ca a y. The HR a tions. The c ca luding t future ca a isions ac c a c c a l ommittee re not pproves the t the y. The B ppli a c a a gers, C tory ountries in the ca ries, a e stru a strong c a nd lo a hth c ted by ured. The n rd e. a a nd c nd other benefit ns, in c n a l oblig ke de a c a a a a a s a a nk’s pension pl , the US, Mexi dministr n l ble th a a a a a a ommittees a d tus of the pl tion e with nk Pension Pl c a a ies su c ognized for t lso monitors the a a tion presented below c c n teri nd m nd regul tion. The purpose of the n nk h b re set by independent in a nd other ns oper a a a a a a a a a a a Ca Ca re well se ontrols the timing of the a oti ert Revenue Agen ) of the Bo ord nd Investment c c go tive n. As the C C a a a a ontribution) a tions n is reviewed periodi d nd perform t to legisl acc ssets of the SPP Fund ns in c nk a ge these glob mendments to the SPP to the a a c a nd it is prob a a a a a ble legisl n lu a tion n nd to determine the required tes. The B a lpl a a e ca a a ny Ca a c ) ns; other pl onsidered m a gers nd other long-term employee benefits) n is the S d & Tob c a a well-defined govern ip pproves the investment poli a sis lly. The inform a a a ppli c lude pl d a ry reports. PAI n a a a nk’s funding poli n provisions a c a a a lpl a a tute. ommending the investment poli n e with legisl a a nd c c tu nd defined ommittee (HR nd the nk oper a a ip n re funded in Ca a re not a ture to m C ns in ac h prin c a a tion of the SPP. nd monitoring investment m c a , Trinid sis of the requirements of the lo a rising on investments in subsidi a re not required to be re ommittees to oversee ry differen a a n( ac nd st a tutory b es ommends blished c a a ca ns a nd a losures. c i c a a nk number of employee benefit pl nding with respe a a nd the B c a a es a sed on pl e a a ompli c ns e stru c a m h the B c nt pension pl c a ti c a s est tors. n nd st y for e nk’s prin nd re s required by ca c a dministr c bilities a a ac a a a tions for funding purposes for the B tion tion is to determine the funded st a a uditor a a defined benefit pension pl a tion of member pension benefits. ppointing a n Resour nd, J l pension pl lu a a a a lu xli ern a nk h a number of ted a ries on the b , c a a c a a a ip a n in whi nk Pension Pl ry differen lv c ries of the B lv is responsible for re ), reviews reports, a d on a a tu a re in good st l of the tempor , for a a nk sponsors rds of pr a c C tions. rd of Dire l pension pl b ri a rter of the Pension Administr a C a a ri Employee benefits C n a ac a a a ondu a a ies to ensure a c c ted to the tes to the B lso reviews dministr h n ns ns (post-retirement benefits nd luded in these dis ribbe tu Ca a a PAI Bo HR a (PAI c The Hum a reviewing oti tu a a c a a c re ssumptions used for the funding v ppoints nd interests in joint ventures if the B c ontributions. The pl Š st a pl regul A pl benefit promises b a pension legisl Š a a revers investment poli c monitoring the investment m requirements under OSFI the UK, Irel responsible for the investment of the SPP, the B poli The most signifi in Glob The prin in defined govern going- rel S tempor pensions (defined benefit pl for most of its employees glob 31 The B Deferred t subsidi Ca ac rel 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 totalplan 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 totalplan 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 principalplans in 2014, and the two prior years.
Contributions to the principalplans 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 $21 to defined contribution plans for the year ending October 31, 2015. c) Funded and unfunded plans The excess (deficit) of the fair value of assets over the benefit obligation at the end of the yearincludes the following amounts for plans that are wholly unfunded and plans that are wholly or partly funded.
Pension plans Other benefit plans As atOctober 31 ($ 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) Effectofasset 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 CONSOLIDATED FINANCIAL STATEMENTS 181 l Report n expenses from ns a a a –– –– –– –– –– –– –– –– 3 (24) 3 (24) (8) 2 ypl 54 59 32 1 21 22 45 63 15 1 10 4 59 56 75 81 a (87) 86 (46) 70 (24) (37) (13) (53) (61) (59) (61) (59) (68) 34 2013 2012 nk Annu (1,178) (1,190) a $45$63 $(1,178) $(1,190) $78$61 $ 10 $ (3) $13$24 $–$– $ 42 $ 128 $ 311 $ 286 $–$– $ 332 $ 311 $(1,178) $(1,190) $ 1,501 $ 1,405 $ (36) $ 67 $(1,178) $(1,190) $ 1,510 $ 1,501 b a bility to p a oti c – – – – – 5 7 7 (5) 59 27 25 41 31 11 11 46 35 84 (26) (41) (66) (18) (23) (66) 102 2014 2014 S (1,278) $41 $19 $(1,278) $107 $ (8) $36 $– $126 $ 332 $– $ 341 $(1,278) $ 1,510 $(1,278) $ 1,619 nd from the a n a pl a ns Other benefit pl a –– –– –19 –– –– –19 43 ontributions to (7) (20) c 50 15 62 1,063 89 28 19 13 – – – 18 (6) 18 17 1862 17 1,063 (53) (13) (77) (130) 174 141 276 311 247 183 747 93 403 338 314 313 2013 2012 (201) 894 (502) (1,290) (397) (345) (397) (345) $ 247 $ 183 $ (738) $ 957 $ (370) $(1,201) $ (747) $ (93) $ 297 $ 217 $1,023 $ 404 $ 132 $ 89 $ (422) $ 1,187 $5,607 $ 5,213 $ 509 $ 429 $6,647 $ 5,607 $ (370) $(1,201) $6,678 $ 5,434 $ (293) $(1,071) $6,940 $ 6,678 Pension pl ns. a tion in future – – – – 4 c (8) 15 54 32 21 61 63 21 21 lpl (19) (76) (19) 645 731 334 262 310 343 342 731 2014 a (817) (393) (393) redu ip c a $ 262 $413 $ (700) $ (310) $258 $644 $ 117 $692 $6,647 $ 556 $7,323 $ (700) $6,940 $ (624) $7,947 r a ssets ble from a a ssets nk’s prin nd il a a a a l v a a i l Position c ins) a lue of n i t end of ye (1) a a lue of a ssumptions c a tement of a n a l(g ssumptions a ir v benefits ca a a a ir v c tion ssumptions ri a ted to the B e a a phi a a c a l ted St tu a i a onomi c c ac ssets invested n a a ome on f tement of Fin tion rel nd c n ome on f a a a a c tement of Fin onsolid lue of e a a C ssets ted St r a r a a tion l inform a nges in fin nges in demogr nges in experien ted St ognized a a a a a c a i c h h h I c c ssets c nk n r r r a nd minimum funding requirement r a a C a ssets over benefit oblig onsolid a a a a b tion a C a ess of interest in orded in the a k, bonds) c onsolid ess of interest in c c lue of pension pl l return on c oti C a tion in) loss re nd minimum funding requirement a c lue of tion a a a ssets ome) nk’s a a tu a c lue of ir v a a a nk’s ac ir v orded in O a t beginning of ye t end of ye tion a ome) re t end of ye t end of ye tion c t beginning of ye t end of ye ir v a a a c a a a a a ssets a ssets in ex nd losses from nd losses from nd losses from sset is limited by the present v urities (sto lue of a in) on benefit oblig in) a a a a a ssets in ex ost ost tober 31 ($ millions) bles present fin c sset limit a c a a c c a ils on ils on f a upied by S a n ost a a ssets ssets nge nge tion tion e e a n c osts ost ir v cc c c a a ins) ins) ins) a a a a bility) bility) a it) of f c c a a a a a a h h ontributions ontributions c id id nk se tus ontributions ome on f l inform c c c c sset limit e e c a a c l det l det a a ognized ontribution benefit expense a c ost on benefit oblig c a i c a a bilities in the B c b l(g l loss (g l(g l(g l loss (g r ended O c c ssets in the B a a a a a a a a surements re surements surement of other long-term benefits l benefit expense n lue of lue of a ri ri ri l return on ri ri a a a a a sset (li sset (li ome a a tof a a a a oti a a l benefit c a a nge in the nge in benefit oblig nge in f c the fund. c orded in: a ess (defi a a a tu tu tu tu tu tu c st servi Position In losses st servi ir v ir v c urrent servi c c h c c urrent servi h c h c a a a a Net interest expense (in P A C Annu Net Reme A Reme (Return) on pl A C A Other li Addition A Interest in Amount of settlement (g Tot Reme Benefit expense (in For the ye In property o Addition F Return on pl Ex Funded st Re Other Net (1) The re C Defined Benefit oblig C d) Fin The following t In S Employer Foreign ex Effe Interest Foreign ex Benefit oblig C Benefits p Settlements F Employee Settlements Benefits p A Employee P CONSOLIDATED FINANCIAL STATEMENTS e) Maturity profile of the defined benefit obligation The weighted average duration of the total benefit obligation atOctober 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 principalplans 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 – Canadianplans 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 – Canadianplans 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 Initialrate 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 expectancyinCanada (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 asthat applied in calculating the defined benefit obligation recognized in the statement of financial position.
Pension plans Other benefit plans
Benefit Benefit Benefit Benefit For the year ended October 31, 2014 ($ millions) obligation expense obligation 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 8891– 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) 1yearincrease in Canadian life expectancy 115 7 23 1 h) Assets places certain restrictions on asset mix – for example, there are usually The Bank’s principal pension plans’ assets are generally invested with limits on concentration in any one investment. Other concentration and the long-term objective of maximizing overall expected returns, at an quality limits are also set forth in the investment policies. The use of acceptable level of risk relative to the benefit obligation. A key factor in derivativesisgenerally prohibited without specificauthorization; managing long-term investment risk is asset mix. Investing the pension currently, the main use of derivativesisforcurrency hedging. Asset mix assets in different asset classes and geographic regions helps to guidelines are reviewed atleast onceeachyear, and adjusted, where mitigate risk and to minimize the impactofdeclines in any single asset appropriate, based on market conditions and opportunities. However, class, particular region or type of investment. Investment management large asset class shifts are rare, and typically reflect achange in the firms – including related-party managers – are typically hired and pension plan’s situation (e.g. a plan termination). Actual asset mix is assigned specific mandates within each asset class. reviewed regularly, and rebalancing backtotarget asset mix is Pension plan asset mix guidelines are set for the long term, and are considered – as needed – generally on a semi-annualbasis. The Bank’s documentedineachplan’s investment policy. Asset mix policytypically other benefit plans are generally not funded; the assets reflected for also reflects the nature of the plan’s benefit obligations. Legislation these other benefit plans are related to programs in Canadaand Mexico.
182 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS l l l 183 a a a ns a tu c 2012 ome A ribed x- c c tive a ns a a r ontribution a c tegory. l nd t l Report lizes the a –% –% –% –% a a 2% 3% a nd other ca tu 44% 40% 29% 30% 25% 27% 44% 40% 54% 57% a c 2013 omp 100% 100% A nges des c nking will be ble sis for those a a a a sset x h a ome c a lB nk Annu c xb rison of net interest l results. a a l a a a a ns Other benefit pl b –% –% 2% a a rkets Other Tot rkets Other Tot tu 46% 28% 24% 46% 52% nking nking a a c 2014 tion –% 2% a a 6% –% 100% oti A a 31% 52% 63% 46% omp c lB lB c 100% 100% &M &M a a nd expense to the business djustment norm a a ted to the gross-up of in Pension pl in deposit types. These ble Glob Glob l a rising from t tober 31, by a a a c a 2014 S tu ome lent before-t rkets. Prior period c 2012 ert c a a djusted for IFRS A tO c a a e e ome c c lth lth c n n a a ome in the business segments. These ns Other benefit pl ns a a nies to the division tions. This nd M a c a l a a a a tively n equiv 1% 1% 4% 5% 3% 1% lWe lWe lue for c a a a tu x-exempt net interest in 48% 49% 20% 19% 24% 25% 68% 68% 28% 30% lpl a c surement en 2013 a 100% 100% & Insur & Insur a ting in djustments rel A a omp a a ip c Glob Glob orpor te interest in nking c c Pension pl a ca te in the divisions to better present the ted. ted a tion l ome to a lB urrently reported in Intern llo ted a a a c i 4% 6% 3% c l l a a a xr c a a tu i 42% 22% 23% 64% 29% es in me liz c a 2014 c c 100% a A es. ed interest v nking nking tion tion nk’s prin sso c c a a a a a sso a tivity B B ting in a tive t ted segments. a nd other oper ac lso been retrospe c c a a Intern Intern redu ing the net interest in x norm c ffe a a ve effe from of the a oper t is used to a a luded in Glob ome nd ble to equity holders is presented below: c c n n a a a a results will be rest in –t business exempt sour – the grossing up of t These differen in di di nd redu a a nking nking tions for the B a n n a a B B osts, ca Ca Ca c ttribut mounts h a a llo a l rs’ a a l ome a wide l sset c i a c a a n ted a a ing methodology th lly a c a re grouped tory liquidity rget ller business a nd a nd a a a a l re: nking, Glob in Asi ted fin a a i a a a onsolid nd t c tprovides c a a lB es nsfer pri re gener ert l c a a c a nking nges on net in a a a ost in the Other segment tu c h ted results. Prior ye tion onsolid c ommer a a c nB ac c a l businesses of Glob nk’s businesses il, l reporting systems of the di rkets. Other sm a ge a a tion of the a a a a i a n c r n a onsolid tion ver a c Ca a nsfer of higher regul ngesnges (117) (10) (109) (57) (9) (38) (44) 222 – (32) 194 – es institution th a ed its funds tr a c a a tive November 1, 2014 tively. As well, c c h h tr c es to ret lfin n c c surement differen nking, Intern c a nk’s a a a a a nking & M t of both these lservi a a nB i ac luded in nd Intern c a ing the net interest lB c a n c a luded di nk enh a nd servi c a n a a losedinNote3ofthe ies used in these segments n a rket rket c c ts a a di t on the B c Ca ounting me a round the world. The B tober 31, 2014 ac n lents lents sdis nd Glob c a a a acc a a Ca e will be in tO ing methodology ing methodology tive m tive m ting segments effe e c ements in a c c a c tober 31, 2012 ($ millions) tober 31, 2013 ($ millions) ble c l produ luded in the Other segment. The results of these business n c c nking’s results respe ac ac sed upon the intern n a c a n a diversified fin a a i a ge 138. The imp n n a tion c l 2014, the B ounting poli a a a a n ca lB sh equiv sh equiv ve no imp ca tements a a re b re in ustomers llo a a acc c ca ca a a a nsfer pri nsfer pri ome investments ome investments r ended O r ended O nk is nges (29) 2 (6) (15) (1) (49) nges (36) (13) (8) 11 3 (43) a a lst a a te c c ements result in redu tion a l 2015, the a a nd nd a c bles below shows the weighted- a tegory % tegory % sset a i b h h a a Operating segments a a n tive fis c ca a c c lth & Insur ca ca lth & Insur l ll (153) (23) (138) (65) (7) (27) (50) 225 (43) (47) 193 (49) l nges to oper c a n nges h a a a a a a a rting on p tements. Not sh sh a nk. The a Non quoted Quoted in Non quoted Quoted in oti nge of fin rget a a h a c h orpor onsistent with those followed in the prep a a segments st c lines. The enh segments enh Intern We We Other Tot fin st Asset Effe Tot Tot Funds tr C In fis IFRS Funds tr For the ye For the ye IFRS S 32 Ca T Asset Equity investments Fixed in Ca The t Equity Investments c into four business lines: B c r Fixed in Other – Non quoted Tot CONSOLIDATED FINANCIAL STATEMENTS
Scotiabank’s results, and average assets, allocated by these operating segments, are as follows:
For the year ended October 31, 2014
Canadian International GlobalWealth GlobalBanking Taxable equivalent basis ($ millions) Banking Banking & Insurance &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 ($354) to arrive at the amounts reported in the Consolidated Statement of Income, differences in the actual amount of costs incurred and charged to the operating segments. (2) Interest revenue is reported net of interest expense asmanagement relies primarily on net interest income as a performancemeasure.
For the year ended October 31, 2013(1)
Canadian International GlobalWealth GlobalBanking Taxable equivalent basis ($ millions) Banking Banking & Insurance &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 ($312), to arrive at the amounts reported in the Consolidated Statement of Income, differences in the actual amount of costs incurred and charged to the operating segments.
For the year ended October 31, 2012(1)
Canadian International GlobalWealth GlobalBanking Taxable equivalent basis ($ millions) Banking Banking & Insurance &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 CONSOLIDATED FINANCIAL STATEMENTS l l l 185 a a a 13 26 27 196 227 231 (128) (200) (232) lue for lue for a a kto nd nd a a ac $ 7,071 $ 6,379 $ 6,390 $ 6,194 $ 7,298 $ 6,610 $ 749 $659 $ 796 l Report a ted b l Tot l Tot l Tot ed interest v ed interest v a a a ca c c llo tion tion tion nk Annu Other Other Other a a a a redu redu a b a a a nd nd Intern Intern Intern oti a a c osts osts c c 2014 S ve not been a hh c nd IAS 19) in 2014 (refer to Note 4) nd IAS 19) in 2014 (refer to Note 4) a a tory liquidity tory liquidity a a o Peru o Peru o Peru c c c rds (IFRS 10 rds (IFRS 10 a a nd nd a a nd expenses whi a nsfer of higher regul nsfer of higher regul a a tes Mexi tes Mexi tes Mexi tr tr a a a a a St St St United United United mended IFRS st mended IFRS st lude lude a a c c orded. orded. orded. nd nd c c c a a a a a re re re re re re d d d region. Revenues a a a a a a ements in ements in n n n c 662 6 240 267 528 1,703 156 – – 6 405 567 c c n n Ca Ca Ca 6,9861,156 513 237 1,154 35 645 175 3,399 12,697 497 2,100 5,2821,633 451 359 495 104 454 74 1,344 917 8,026 3,087 a a phi ssets ssets ssets 13,290 1,250 1,779 1,469 6,242 24,030 a a a a $ 470 $ 117 $ 24 $ 17 $ 155 $ 783 $ 434 $ 110 $ 21 $ 15 $ 143 $ 723 $ 378 $ 91 $ 20 $ 12 $ 131 $ 632 $ 3,518 $ 506 $ 343 $ 313 $ 1,838 $ 6,518 $ 3,568 $ 515 $ 385 $ 348 $ 1,994 $ 6,810 $ 4,486 $ 494 $ 350 $ 382 $ 1,818 $ 7,530 $ 6,219 $ 440 $ 1,180 $ 935 $ 3,576 $ 12,350 doption of new doption of new a a ries ries ries djustments. a a a a t (i) the t (i) the c c te re performed or re performed or re performed or a a a a de in 2014. The enh de in 2014. The enh a a es es es l results by geogr tions tions 214 – 3 4 377 598 tions 239 – 4 5 659 907 nk nk nk c c c a a a a a a a i orpor c c n a orpor orpor orpor djusted to refle djusted to refle c c c a a djustments djustments djustments ted in a a a c ted ted ted te te te nk’s fin tively tively a a a i i i c c a a a a c c c sed on where servi sed on where servi sed on where servi ing methodologies m ing methodologies m c c a a a sso sso sso re refle a a a a orpor orpor orpor ontrolling interests in subsidi ontrolling interests in subsidi ontrolling interests in subsidi c c c c c c ($ millions) ($ millions) re retrospe re retrospe nsfer pri nsfer pri (2) (2) a a (1) rizes the B a a ountries b ountries b ountries b a c c c luding luding luding tion c c c xes 856 286 34 156 367 1,699 xes xes 956 190 61 166 510 1,883 a a a a mounts mounts ble to equity holders of the B ble to equity holders of the B ble to equity holders of the B a a ble to non- ble to non- ble to non- a a a ome 1,472 275 58 24 986 2,815 ome 904 287 122 72 948 2,333 ome a a a c c c tober 31, 2012 tober 31, 2013 tober 31, 2014 ($ millions) ble summ ttributed to ttributed to ttributed to ome t ome t ome t c c c ssets, in ssets, in ssets ($ billions) ssets ($ billions) ssets ($ billions) ssets, in a ome $ 4,747 $ 527 $ 846 $ 832 $ 3,127 $ 10,079 ome $ 5,706 $ 461 $ 1,048 $ 895 $ 3,325 $ 11,435 ome a a a c c c a a redit losses 515 20 89 180 348 1,152 redit losses redit losses 472 38 130 246 402 1,288 a a a a c c c ting business lines ommission revenues ommission revenues 4,226 422 416 376 977 6,417 ommission revenues 4,588 459 452 416 1,204 7,119 ttribut ttribut ttribut c c c re re re l segment ttribut ttribut ttribut a c c c ements to funds tr ements to funds tr ting in ting in ting in a a a djustments djustments djustments djustments djustments djustments a a a a a a c c ge ge ge ge ge ge a a a a a a a a a ca n n a a a a a a a a l revenues 10,659 1,224 1,323 1,236 5,467 19,909 l revenues 11,437 1,207 1,626 1,388 6,136 21,794 l revenues nd nd nd r ended O r ended O r ended O in prior period in prior period te te te te te te a a a oper a a a in deposit types. in deposit types. phi a a a a a a a a a a a ome ome ome ome ome ome ome from investments in ome from investments in ome from investments in a a ver ver ver ver ver ver ome ome ome a c ting expenses 5,770 412 857 587 2,914 10,540 ting expenses ting expenses 6,441 464 1,050 628 3,230 11,813 c c c c c c c c c c c c a a a a a a ert ert a a a Tot Tot Tot ert ert l l l l l ifi l c c (ii) enh (ii) enh C C c a a a a a a orpor orpor orpor orpor orpor orpor Tot Tot Tot C C C Tot Tot Net in Net in Tot Net in C Net in Net in Net in Net in Net in C Net in Oper Provision for in C Other oper Provision for spe Oper Provision for in Oper Provision for in Provision for Other oper Provision for Net in Other oper (2) (2) Net in Net in Net fee (1) Revenues For the ye Net interest in Net fee (1) Revenues Net fee For the ye Net interest in (1) Revenues Net interest in For the ye Geogr The following t CONSOLIDATED FINANCIAL STATEMENTS
33 Related party transactions Share Purchase Plan. Non-officer directors may electtoreceive all or a portion of their fees in the form of deferred stock units which vest Compensation of key management personnel of the Bank immediately. Refer to Note 29 for further details of these plans. Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Loans and deposits of key management personnel Bank, directly or indirectly, and comprise the directors of the Bank, the Chief Executive Officer (CEO), certain direct reports of the CEO As atOctober 31 ($ millions) 2014 2013 including Group Heads and the Chief Financial Officer. Loans $4 $1 Deposits $5 $12 For the year ended October 31 ($ millions) 2014 2013 Salaries and cash incentives(1) $17 $20 In Canada,loans are currently granted to key management personnel Equity-based payment(2) 25 34 atmarket terms and conditions. Effective March 1, 2001, the Bank Pension and other benefits(1) 3 2 discontinued the practiceofgranting loans to key management Total $45 $56 personnel in Canadaat reduced rates. Any of these loans granted prior to March 1, 2001, are grandfathered until maturity. (1) Expensed during the year. (2) Awarded during the year. The Bank’s committed credit exposure to companies controlled by directors totaled $9.4 million as atOctober 31, 2014 (2013 – Directors can use some or all of their director fees earned to buy $3.5 million), while actual utilized amounts were $3.4 million (2013 – common shares of the Bank atmarket rates through the Directors’ $1.3 million).
Transactions with associates and joint ventures In the ordinary course of business, the Bank provides normalbanking services and enters into transactions with its associated and other related corporations on terms similar to those offered to non-related parties. If these transactions are eliminated on consolidation, they are not disclosed as related party transactions. Transactions between the Bank and its associated companies and joint ventures also qualify as related party transactions and were recorded as follows:
As at and for the year ended October 31 ($ 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) whichisa portion of the Scotiabank principal pension plan assets and earned $4 million (October 31, 2013 – $4 million) in fees.
186 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS 187 96 52 47 291 158 589 286 148 427 863 296 267 937 640 483 822 373 2013 res 2,560 2,452 1,996 1,241 2,700 3,869 3,267 1,045 a 11,604 $ 11,707 ting a l Report nk’s a a lue of sh a jor oper 16 49 a 344 104 181 695 306 174 488 820 335 357 538 435 858 810 2014 rrying v nk Annu a 2,784 2,491 2,110 1,271 3,022 1,069 3,728 3,329 1,327 Ca b 12,731 a ludes m $ 11,824 oti c c luded in the B c re in 2014 S a nds a ries go a a os Isl c i nds a Ca a nd Tob n Isl a a nd a dor a d y a ysi o a , B.V.I. a o ym c a lv dos a l a c ca olumbi a a a a c a s s s s Ca C Ri ca ca ca rb i i i a a a a rio hin zil s s a a rio rio rio rio rio rio rio rio rio rio rio rio a a a a n, m m m m a a a a a a a a a a a a a a a C a m m m a a a a ry unless otherwise noted. The listing in nd hile hile les, Turks ost in, Trinid a a a a a h h h h a e C C olombi a C i ym a a a a dor, El S c tly. All of these subsidi l, Quebe c C a c ity, Belize n, Puerto Ri a , Ca lley, Anguill ulo, Br lv C a Lumpur, M go, go, a by, British l offi o, D.F., Mexi u, B u, B u, B u, B a pore a a a a a c a , Peru a a a a a a h subsidi l tford, Ont d Town, Tortol nd ip a c ss a ss ss ss a a a n Jose, nti oP nti nS nJu ac a a a a a a a a a a S London, United Kingdom Montre Prin New York, New York Houston, Tex . c . tly or indire res of e c c a lIn a pit aCa oti c nding voting sh nk owns, dire a a rent, BNS Investments In rent, S a a s) Limited N a ries the B t of its p t of its p m a a a a .V. (97.4%) Mexi h C a l subsidi ny Toronto, Ont ny (B a a a S.A. (51%) Bogot ip a luded with th luded with th l Limited N c a c c t, S.A. de a d Limited Kingston, J a a omp omp tri n a ca C C n entity) owns 100% of the outst i Limited Sing tion a a a ry is in ry is in nds) Limited Ro a dKu Ca a a a olp d Limited (77.0%) Kingston, J a go Limited (50.9%) Port of Sp a n) Ltd. Gr m os) Ltd. Providen a a ny Toronto, Ont c a a . Burn i , S.A. S Asi Trust J Trust a ca c o Multiplo S i (1) nk Inverl c rent of ca C a a a a ca tion Toronto, Ont a tements. a ym Intern Berh Ca ny of oS a n n (3) ny Str a (2) a b a c . Ri . a m a a a a oti oti oti oti Limited The V a s) Limited N ries c omp c Ca a Limited (71.8%) Kingston, J ge In c c c c a nd te p nd Tob a a lst c a C a S S S S a n Holdings Ltd. Bridgetown, B oti oti a a oti . Toronto, Ont a . Toronto, Ont m . Toronto, Ont c c i a ca omp e c dor, S.A. (99.3%) S c a a a a ost nd) Limited Dublin, Irel nt l Limited N i c orpor nk Toronto, Ont omp c c a d S S c a C a a a a gement L.P. Toronto, Ont a . Toronto, Ont a C C n h C n . Houston, Tex Multib a a a ble presents the prin lv c lue of this subsidi lue of this subsidi . Toronto, Ont a a c m a hile (99.6%) S a a a a n c oIn sil S.A. B a a ribbe nB y Holdings S.A. Montevideo, Urugu ge c C a In a tion iero S l (USA) In lIn a nk Toronto, Ont a a tri a c Inversiones Limit l subsidi c l a a a Ca a di n a l Trust a nk nk (British Virgin Isl nk Anguill nk (B nk (Hong Kong) Limited Hong Kong, nk & Trust ( nk (Turks n nk (Irel nk (Belize) Ltd. Belize . Toronto, Ont a ler Adv ries only. l Trust a urities In lth In a a a a a a a a a a a a c ted fin pit a pit a nk (or immedi nk of Nov nk of Nov nk of Nov nk of Nov rrying v rrying v a c Investments J ip a n nk Trinid nk nk Peru S.A.A. (97.8%) Lim nk Europe pl nk Br nk El S nk de Puerto Ri a b b b b b b b b b b olp a n a oti a a a l Trust c ca ca a a a a a a a a a a a a a a a a a a a tion c nk of Nov nk of Nov C a Se Mortg Holdings (US) In Urugu Life Insur De Intern Group J tIn tober 31 ($ millions) Ca b b b b b b b a S a a c Principal subsidiaries and non-controlling interests in subsidiaries a di tion o aCa a a a a a a a a a a a a a aCa a a oti oti oti oti oti oti oti oti oti oti oti a a a subsidi c c c c c c c c c c c c tO tion n n The B Grupo BNS de S S S N S S S S S ngerine B The B The B Montre a S S The B S oti oti oti oti oti oti oti oti oti oti oti oti oti oti oti oti oti ) Prin a a c c c c c c c c c c c c a c c c c c onsolid a (3) The S S S S The B S S The B Nov S S S S (2) The S Grupo Fin S Hollis T N S S As HollisWe 1832 Asset M S B BNS Investments In S S (1) The B Intern RoyN c Ca The following t 34 ( CONSOLIDATED FINANCIAL STATEMENTS
Subsidiaries mayhave 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 taxlaws. In accordance with our accounting policies, for the purpose of inclusion in the consolidated financialstatements 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 Net income Net income attributable to Dividends attributable to Dividends Non-controlling Non-controlling non-controlling paid to non-controlling paid to Non-controlling interests in interests in interests in non-controlling interests in non-controlling October 31 ($ millions) interest % subsidiaries subsidiaries subsidiaries interest subsidiaries 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, atfair market value that can be settled at the Bank’s discretion, by issuanceofcommon 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 Total comprehensive Total ($ millions) Revenue income Total assets liabilities Banco Colpatria Multibanca Colpatria S.A. $1,009 $237 $11,259 $10,203 Scotia Group Jamaica Limited 340 119 4,157 3,215 Scotiabank Trinidad and Tobago Limited 228 146 3,756 3,015
As at and for the year ended October 31, 2013 Total comprehensive Total ($ millions) Revenue income Total assets 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 Totalbanking 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 Totalwealth 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 CONSOLIDATED FINANCIAL STATEMENTS (1) (1) (1) l l 189 a a nd 557 2013 2012 2012 ter a a yments ement 4,411 5,705 a re of ndem c oll ny of these nk p c a a a a $ 24,201 king to l Report a a mount of future ximum potenti a a (1) (1) M ourse or t the B 3 (21) 823 64 c a nk Trust 48 23 18 54 a 198 233 338 425 120 115 2013 2013 ntified. As m b ontrolling interest a nk Annu 1,195 1,133 1,195 1,133 1,209 1,160 c a n undert (1) l a rnings per sh a a b a $ 1,300 $ 1,299 $596$503 $ 6,162 $ 5,974 $ 6,162 $ 5,974 $ 6,183 $ 6,007 $ 5.11 $ 5.18 $ 5.15 $ 5.27 t of the renoun oti a c tions th 578 2014 ac yment options, T oti yments c ca 4,125 6,303 a a p overy under re nnot be qu c – – 8 8 tion to non- $ 26,024 40 92 ca a t 208 359 2014 2014 sed p a mount of future ximum potenti 2014 S a a a 1,214 1,214 1,222 M ngements. $ 1,114 $ 415 $ 6,916 $ 6,916 $ 6,924 $ 5.66 $ 5.69 a re-b rr ntees represent res in rel a a a a nd indemnifi ntees th l instruments (S r t on the diluted e a a a nd IAS 19) in 2014 (refer to Note 4). r a a a ac pit nti-dilutive. tofsh a ca ntees ac a ommon sh in r c a a onsider the possibility of re c rds (IFRS 10 ert a c ludes other gu c nd s they were a a ted losses from these nding. The imp tof c rious gu re a a nd ex a ac a retion by issuing ourse of business. Gu c c bove does not l a nk’s expe ntified a a a ur. The v mended IFRS st ludes the dilutive imp a c cc rnings per sh a nd a nbequ t its own dis a lso in ca t a yments listed a a y settle redit risk, or the B tion ludes the dilutive imp c a a c ified events o tions in the norm ntees th ul tion of diluted e c a c a r l ca nk m doption of new doption of IFRS 10 in 2014 (refer to Note 4). a re presented below: ul a a a c a s $0.03 (2013 – $0.02; 2012 – $0.03). ca l a ca ed by employees (2013 – 2,835,008) (refer to Note 29). The imp in spe c mounts. a t the t the mount of future p a t the B rties c c re. a a nd 2012 in a a l re ert a a a c sh requirements, ca nd indemnifi nding (millions) nd sh a a luded in the a c rily renoun r a a rs) reholders a a ntee djusted to refle djusted to refle rty when rs) ntees a a a a nding (millions) nding (millions) a re for 2013 rnings per sh ximum potenti r a a a ding revenues. re not in r a a a a (millions) res outst a a tp tive of future yments represents those gu a reholders reholders nd other third p a a a a a tively tively ca (3) a (in doll ny c c a tion rights or options th (in doll (2) t of these instruments w a i (3) sed on full doll c nd others nd others nd the m re ommon sh (2) ac ils of tr a omp res outst res outst a a a a c c a a a re ppre a re b re not indi a a ted a re retrospe re retrospe ommon sh ustomers rnings per sh a ommon sh ommon sh k a a i res due to: c c nd Series 2003-1) for the periods these instruments were outst yment to th c a c c c a a a ble to nd letters of gu wn upon a p tions mount of future p l to the diluted e a sso a a a a rious types of gu a a ome due to: l mounts ndem SARs were volunt ul a n ommon sh a c a c s nil (2013 – $0.02; 2012 – $0.06). The mounts mounts ge sh a ommon sh ommon sh l a c ble to ble to t to its a a a a teri c c ke ndem sto ommon sh a a c redit ca a a a ttribut c c redit yment options yment options a re ver bove c tober 31 ($ millions) tober 31 ($ millions) a a ble presents det a a a c c a r, no T nge nd a ttribut ttribut nts of t a a ome ntees a a ilities a tions l interest in s not m c h sed p sed p tion of diluted e rty to m a a c rnings per a a a te r a ximum potenti ac a ca a a l instruments l instruments a a ntees will not be dr r ended O r ended O in gr in prior period in prior period ul rnings per a a a a a nd other options. The imp a a a c ome ome r a nk enters into v l tober 31 ($ millions) tive instruments a re-b re-b c c a ge number of ge number of ge number of diluted rnings per sh e a c Guarantees and commitments Earnings per share Trading revenues ert pit pit ert ert a a a ddition a a a a l ca c provisions, the a gu C C C urities – Series 2002-1 a tO ndby letters of si c Sh Ca Ca Sh a )Gu a ommodities a nother p a in 2013 w (3) During the ye B Adjustments to SARs, these instruments w Other Foreign ex Diluted e Se Tot Equities C Aver Adjustments to net in Aver (2) E As (1) The m St The B 38 ( The provides with respe (1) Basic earnings per common share Net in 37 For the ye (1) Diluted earnings per common share Net in Adjusted in Interest r The following t For the ye 36 Aver Liquidity f Deriv Indemnifi a CONSOLIDATED FINANCIAL STATEMENTS
(i) Standby letters of credit and letters of guarantee written option contracts are normally referenced to interest rates, Standby letters of credit and letters of guarantee are written foreign exchange rates, commodity prices or equity prices. Typically, a undertakings by the Bank, at the request of the customer, to provide corporate or government entity is the counterparty to the written credit assuranceofpayment to a third-party regarding the customer’s derivative and option contracts that meet the characteristicsof obligations and liabilities to that third-party. These guarantees guarantees described above. The maximum potential amount of future represent an irrevocable obligation of the Bank to pay the third-party payments disclosed in the table above relates to written credit beneficiary against presentation of a documentary demand conforming derivatives, puts and floors. However, these amounts exclude certain with the terms and conditions specified therein, without investigation derivatives contracts, such as written caps, as the nature of these as to the validity of the beneficiary’s claim against the customer. contracts prevents quantification of the maximum potential amount of Generally, the term of these guarantees does not exceed four years. future payments. As atOctober 31, 2014, $515 million (2013 – The types and amounts of collateralsecurity held by the Bank for these $234 million) wasincluded in derivative instrument liabilities in the guarantees is generally the same as for loans. As atOctober 31, 2014, Consolidated Statement of Financial Position with respect to these $4 million (2013 – $3 million) wasincluded in other liabilities in the derivative instruments. Consolidated Statement of Financial Position with respect to these (iv) Indemnifications guarantees. In the ordinary course of business, the Bank enters into many contracts (ii) Liquidity facilities which contain indemnification provisions, such as purchase contracts, The Bank provides backstop liquidity facilities to asset-backed service agreements, trademark licensing agreements, escrow commercialpaper conduits, administered by the Bank and by third arrangements, sales of assets or businesses, outsourcing agreements, parties. These facilities generally provide an alternative sourceof leasing arrangements, clearing system arrangements, securities lending financing in the event market disruption prevents the conduit from agency agreements and structured transactions. In certain types of issuing commercialpaper or, in some cases, when certain specified arrangements, the Bank may in turn obtain indemnifications from other conditions or performancemeasures are not met. These facilities parties to the arrangement or mayhave access to collateral under generally have a term of up to three years. Of the $4,125 million recourse provisions. In many cases, there are no pre-determined (2013 – $4,411 million) in backstop liquidity facilities provided to asset- amounts or limits included in these indemnification provisions and the backed commercialpaper conduits, 100% (2013 – 94%) is committed occurrenceofcontingent events that will trigger payment under them liquidity for the Bank’s sponsored conduits. is difficult to predict. Therefore, the Bank cannot estimate in all cases the maximum potential future amount thatmaybepayable, nor the (iii) Derivative instruments amount of collateralorassets available under recourse provisions that The Bank enters into written credit derivative contracts under which a would mitigate any suchpayments. Historically, the Bank has not made counterparty is compensated for losses on a specified referenced asset, any significant payments under these indemnities. As atOctober 31, typically a loan or bond, if certain events occur. The Bank also enters 2014, $3 million (2013 – $3 million) wasincluded in other liabilities in into written option contracts under which acounterparty is granted the the Consolidated Statement of Financial Position with respectto right, but not the obligation, to sell a specified quantity of a financial indemnifications. instrument at a pre-determined price on or before a set date. These
(b) Other indirect commitments –Securities lending transactions under which the Bank, acting as In the normal course of business, various other indirect commitments principaloragent, agrees to lend securities to a borrower. The are outstanding which are not reflected on the Consolidated Statement borrower must fully collateralize the security loan at all times. The of Financial Position. These mayinclude: market value of the collateral is monitored relative to the amounts – Commercial letters of credit which require the Bank to honour due under the agreements, and where necessary, additional drafts presented by a third-party when specificactivities are collateral is obtained; and completed; –Security purchase commitments which require the Bank to fund – Commitments to extend credit which represent undertakings to future investments. make credit available in the form of loans or other financings for These financial instruments are subject to normal credit standards, specificamounts and maturities, subject to specificconditions; financial controls and monitoring procedures.
The table below provides a detailed breakdown of the Bank’s other indirect commitments expressed in terms of the contractual amounts of the related commitment or contract which are not reflected on the Consolidated Statement of Financial Position.
As atOctober 31 ($ 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.
190 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS (1) sel 191 ting e, a h de redit a c a tions. re c 685 2013 n ac c rt of a nd sure a r pool a 3,605 5,773 1,507 1,069 ing a nd a a a c 68,868 26,992 14,197 54,917 a lp ul ppro e for a les c a c greements. te ls for the a l Report $ 108,770 $25 $ 177,638 a a n redit risk hme rti re provided t, for the a a meters c a c a a nd risk gr redit risk r a tion of a ns c a se sed p r a sed on the B a ss govern ured revolving) a a a a ted elements. For a a c h ssessed by tto llow a n integr c nt outsour c a tives a a ppropri a nk Annu tes whi a ca 2014 nd for the portfolios omp ssignment of borrower a l-rel nks in foreign jurisdi a c a a b tion, lo a a tings b 4,029 6,895 1,925 1,340 1,207 ted using methodologies nd/or business lines. The ess provides for a t the business line level. a a 80,335 20,394 18,764 82,888 c a lb ca a t the pool ter a oti lr lu ten re well defined; a a c $137,467 $25 $217,802 a a a a ssigned to s re to ensure th tes, the deleg a entr tors oll c a c a llows for c tion of the c il exposures, p re presented b a a a tions. nd a ting to deriv re designed to support the ul a a a nd ac 2014 S meter estim c es. The signifi nner to ensure the go nd a teristi tegy l a ture. tion, syndi ns c a a r l a s been c a de. This pro ed intern a ilities of given borrower is ac a ca a edures th a c a m r re sold under repur c ac a t offerings n mong other things, the ified; a a ility through the a il – term lending, unse c tur c a a h a c tive tr l business lines: c nk i.e. exposures subje ac meter estim a a dv r industry se a ed servi a a a risk gr r c nd pro losed below a redit risk rel ul a urities a tion of write-offs. It forms c c rly spe ting systems c ged in ontrol stru c redit, the ilities of a redit risk p a a ess to the f a c redit f redit risk str re met. tion of risk, c rti nd deriv c c c nd then further refined a a n nd produ ies luding origin ac le a a a a a acc h exposure h c c c ted p h y sets out, nd ilities’ stru a c tings. Borrower risk is ev i ils on a tion risk. For non-ret ac ing ve tion of loss re ac meters for new underwritings c a ac a c a nting to p a a a uthoriz ac n re m a r h pool to a c ured, other ret a nk uses the rkets a a sso c a ns a ifi a ac redit risk r ). a tions, in c tion r c c nk level, ted with f ting to outsour ll portfolio tion of key a a a ac tives of the gement nd ac i whole luding the individu a a te se c a c a c a nd the ns nd tr a ns n urities fin ted with e ll-B e. nk’s rget m a c redit risk exposures a a l. The B a a s a re spe c a a a i redit risk poli bilities. As well, se sso a over hedging, C a a ts, rel c ningful differenti c a a il portfolios, e l est n t a a mework utilized by the B a a nk, in pit ac a redit risk exposures dis a a t nd tr sso nd within e uthority for gr redit onsidering the f onsistent estim The obje The systems determin c a ret c risk m The B ca in Note 10( (i) C fr level. Further det –tr th risk c – the risk p enterprise-wide poli a –t losses a me (re a B a inst li ontr a c g a ble with noti a tion. utory nd depositories, or pledged to h a c re shown below. ell a re a l c nk’s ourse of business in se t urities lent a a n a c i c a l nk’s c nd a ca tions tions a ppetite, n a nd turity, redit risk re pledged a a l a sured, a c ac ac a re a nk uses tivities a i nd se a onsistent a c lity of ns ns a re c ac a a n a utive borrower or a ument, report a nd how these c nd re developed tions to the nd hedging c ssets a greements yment systems y a a e sheet th tive fin a a a nd its inst defined a a c a onditions under rtment c ted a t a a sis. The c nk’s risk a a n a a g a tive tr tive tr nd qu in long-term exe se a (2) urrent period present l a a nd p a a rket risk. The B tion a c a nk nd a ding a te, do lb m (Note 16) a a ting fin y a h nd hedging purposes. l oblig a a b a a a rties through norm c c ert ilure of a a es th a ac c a nd dth lu a c ring pproved by the B ining term to m a tu a a ddition, the B n a nd other ils of rel a ns nnu a nk’s deriv nd m a a a a le a ac a a a c ding re h the B ge these risks is l instruments greements ded deriv redit risk poli a n a c nd guidelines is me urities borrowed, a ounterp a c a a a i c onsisten onform with c a ision; n t the requirements of ontr c c (2) c te in ounter deriv c a c c ies a n c sed on utiliz nd det urities se nd c ies define the B a ip a c nd depositories a de a a ms (Note 15) c nks c a rify risk limits re implemented; tly or through the Exe a h a a nge-tr rd on lor tives used in tr a rti a gement (GRM) dep c ted to l c nd m a a a a a rise from tr a a i c nd risk toler a lb ts h mounts, rem a c ke n tivities result in ing b ve entered into ted to se tegy a ssets eived from c a ies a nd refle a c n t a c ies, limits a a a a overed bond progr c rd); te ac l a progr ac a a c c a a a rds define the bre re provided in Note 7. Note 10 provides l instruments. In lue of fin C a entr a a a lu l rel te, i c tober 31, 2013: rkets onditions of the B a a urities sold under repur a c ontr ries h c a c nd ble pri c nd repur gement poli n c a ir v MH a ontrols within whi ve been rest a a ter nd a a l Risk M a a c C ve been re ri tO tion to tion to over-the- tion to ex a a a n nd lues of deriv l risks th redit risk, liquidity risk a a a a a a a yment systems a a c a i l business oll s a nd tors, either dire n oper th redit risk str c c rget m a a l instruments for both tr c a a nk’s risk poli c utory ir v n a nd reported to ensure ve v a s ca uthorities. These poli re developed to a ip i ourse of business, se c e a a (2) re implemented to identify, ev a a ted to se a a a c c pproved by the Bo c luding notion lude lue of pledged e with risk poli a a mounts h a c c rily of fin a ac n a c a d nk’s a a ry ries n tion required to m a l fin ils on the f nd f ssets th ssets pledged in order to p a a a a a a nd its subsidi n a tory a a a ommittee, (the Bo nd rty to honour its fin ontrol risk. St a a a h the B C ip esses c a ls. rd of Dire c tinpl Ca c c a a a redit risk ssets pledged nk nk’s prin tions rel rrying v tober 31 ($ millions) ludes ludes tive fin nd ompli a a a c a c c C Financial instruments – risk management (3) a a whi Risk go Bo monitored regul c subsidi inform set the limits l l ils on the terms ring systems, p ca ngements h tegy defines t a a a a tO mework to monitor, ev a nk. The B nk of a a tivities. ) ) Assets pledged redit risk is the risk of loss resulting from the f le a a a mounts were determined rr redit risk, onsists prim ounterp a c Tot Tot Oblig Other – pro with th Assets pledged in rel Assets pledged under fr c instruments in – guidelines Assets pledged in rel str instruments in det a (3) In The prin Further det Assets pledged a reviewed deriv B developed by its Glob c The – (2) In Assets pledged in rel ac ( C c 39 The B The B (d) Other exe (1) Prior period Foreign governments Assets pledged to: B In the ordin As ( – extensive risk m C CONSOLIDATED FINANCIAL STATEMENTS
(AIRB) for all material Canadian, U.S., European portfolios, and – LGD: Measures the severity of loss on a facility in the event of a effective 2011 for a significant portion of all international corporate borrower’s default, expressed as a percentage of exposure at and commercial portfolios. The remaining portfolios, including other default. individual portfolios, are treated under the standardized approach. Under the standardized approach, credit risk is estimated using the risk Under the AIRB approach, the Bank uses internal risk parameter weights as prescribed by the Basel framework either based on credit estimates, based on historical experience, for probability of default assessments by externalrating agencies or based on the counterparty (PD), loss given default (LGD) and exposure at default (EAD), as defined type for non-retail exposures and product type for retail exposures. below: Standardized risk weights also takes into account other factors such – EAD: Generally represents the expected gross exposure – as specific provisions for defaulted exposures, eligible collateral, and outstanding amount for on-balance sheet exposure and loan loan-to-value for real estate secured retail exposures. 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.
As atOctober 31 ($ millions) 2014 2013
Exposure at default(1) Undrawn Other Category Drawn(2) commitments 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 personalloans. (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.
192 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS l a 193 l Tot a ry 9,876 tto a Tot c 212,648 l Report (1) (1) a re subje s presented in a 2,272 2,272 3,461 3,461 a (2,780) (3,641) h 10,884 10,884 10,841 11,522 c nk Annu a redit risk exposures on b c a tegories oti ries. c ca 7,286 – 7,286 3,377 – 3,377 a 95,363 – 95,363 redit risk exposure summ c 2014 S nd IAS 19) in 2014. tto tto e sheet. The e subsidi ges. ges. Also Also a c c c a a c rket Risk Exposures rket Risk Exposures n n 8,465 6,043 – 14,508 a a a a redit Risk All Other redit Risk All Other l subje subje C C a sel III exposure a luded on the rds (IFRS 10 c a rdized exposures. rdized exposures. a a nk’s insur nd a rious B a lso provides other exposures whi nd nd a tely insured mortg tely insured mortg a a a a a tion to the b a re not in a ili rket risks. rket risks. c C C a a ns for st ns for st a a on OT OT tives Equity tives Equity c a a ssets ddition, it nd m nd m mended IFRS st a re a a a a ssets of the B ired lo ired lo a a Deriv Deriv luded in the v a a redit risk exposures nd c ll a c redit redit a luding 90% of priv luding 90% of priv c c c c re in nd tions tions a tto tto nd other inst imp inst imp a Other Exposures M Other Exposures M c c ed to a a a t ac ac c g g tion in tion in a a a ns ns a a tements. In Repo-style Repo-style a a tion. a a es es ssets Tr Tr c c a redit risk with n n lst orpor orpor a a doption of new c –––– ––132 –––– –– –––– ––– –––– a C C i a c tion tion re not subje re not subje a a a a n nd llow llow ding a a a a a h h tegories th t the c c ross-referen redit Risk Exposures Other Exposures redit Risk Exposures Other Exposures c uritiz uritiz c ca C C c c in tr rket urities (equities) a a c ge Housing ge Housing a a sset nd net of nd net of ert a il Se il Se ssets whi ssets whi a a c a a a a urrent period present c tegories re ttom Mortg Mortg c a ca a a djusted to refle d d a a a ll other ll other e sheet (1) (1) a a n n c sset n wn wn a Ca Ca ge 192 of these fin nd nd a a il Ret il Ret tively a –– –––– – –– –––– – –– –––– –– –– –––– –– –– –––– –– –– –––– – – 82,417 1,776 – – – – – 11 84,204 –– – – – – 93,866 – – 33,439 – – 31,405 – – – – – 33,439 93,866 l a a a a a c Dr Dr 72 – – – – 39 – – – 111 onform with a c ls, investment se 312–––– 539142–––– (774) – – – – – – – (2,499) (3,273) (861) – a 9,876 – 8,465 – ssets ssets re not subje a a 86,729 123,039 – – – – – – 97 209,865 84,973 127,543 33,417 – – – – 4,230 – – 1,015 38,662 a Non-ret nteed by nteed by 124,800 – 6,277 – – – – – 21 131,098 ns for AIRB exposures ns for AIRB exposures a a h a a r r $ 54,774 $ – $ – $ – $ – $ – $ – $ – $ 1,956 $ 56,730 $316,055 $210,102 $8,053 $93,866 $33,439 $4,269 $39,870 $112,069 $27,813 $805,666 l Position ble on p c a a ries’ ries’ a a ssified to i a a a c l ious met c n redit risk exposures ry t ired lo ired lo c ir ir l l le le a c a a a ve been retrospe ssets) 1,741 172 – – – – – – 10,548 12,461 ssets) a a a a ges gu ges gu a a i i a pping of on-b a a a a c c a tf tf x x n n e subsidi e subsidi (3) (3) a a (4)(5) ssets whi a a c c a a a n n sh, pre a a inst imp inst imp (2) (2) ve been re rds – 74,068 1,933 – – – – – 7 76,008 rds ngibles ngibles ted ted a a a a a ca g g urities urities a a mounts h ca ca a a c c tes – – – – – – – – 5,326 5,326 tes a s ges ges a a a a a i i es es c c l instruments – – – – 24,503 – 23,147 – – 24,503 l instruments c c h tement of Fin a a n n sed under res sed under res redit redit c nk’s insur nk’s insur redit losses redit losses i i a a a nd se nd se c c a a a a c c c c mounts h sso sso luded from the a a urities 29,309 – 225 – – 3,691 – – 1,094 34,319 urities h h a bility under bility under n n a a ls – – – – – – – 8,880 – 8,880 ls c c c c c nd/or other a a a a a a llow llow nd nd l mortg l mortg es es 10,556 – – – – – – – – 10,556 a a a a a a a c c nd other int nd other int ssets design ssets design ted St l l nd equipment – – – – – – – – 2,214 2,214 nd equipment n n luding Deferred t luding Deferred t a a ssets ssets es for es for a a a a a a a ssets su a a c c in prior period a a c c l l a a n n a a nd deposits with fin nd deposits with fin tober 31, 2013 ($ millions) tober 31, 2014 ($ millions) Non-ret ble below provides m i i ludes $86.2 billion in mortg ludes $83.4 billion in mortg ludes the B ludes the B tive fin tive fin ns ns 7,812 – – – – – 7,812 3,413 – 11,225 c c a a urities urities – – – – – – – 84,195 1 84,196 a a ept ept c c c c c c ert a in redit risk exposure summ a a c a c a lue through profit or loss 69 – – – – 37 – – – 106 lue through profit or loss l l $300,286 $197,279 $7,969 $82,734 $24,503 $3,728 $30,959 $97,556 $29,589 $743,644 ious met ious met c n n C a ssets – – – – – – – – 10,704 10,704 ssets greements ns: greements ns: a urities pur urities pur a tO tO a a rket risk ding c ding c a a sh sh a a acc Se Lo institutions $ 51,274 $ – $ – $ – $ – $ – $ – $ – $ 2,064 $ 53,338 Se Lo Other – – – – – – – 1,068 – 1,068 institutions Person Person acc a a Other v c Business & government 113,570 – 5,811 201 – – – – 33 119,615 Business & government c v a a Residenti borrowed – – – 82,533 – – – – – 82,533 a borrowed a Residenti a ble. Also ex a a onsolid ustomers’ li ustomers’ li ert a (4) m the (3) Gross of (3) Gross of The t t (5) Prior period (2) In (2) In c C As (1) In Tr Ca Pre Tr (1) In Fin As Ca Pre C C Property Investment in Goodwill Other (in Property Investment in Goodwill Other (in Tot Fin Se Allow Allow Tot Se Deriv Lo Investment se Deriv Investment se Lo CONSOLIDATED FINANCIAL STATEMENTS
(ii) Credit quality of non-retail exposures Credit decisions are made based upon an assessment of the credit risk The Bank’s non-retail portfolio is well diversified by industry. As at of the individual borrower or counterparty. Key factors considered in October 31, 2014, and October 31, 2013, a significant portion of the the assessment include: the borrower’s management; the borrower’s authorized corporate and commercial lending portfolio was internally current and projected financial results and credit statistics; the industry assessed at a grade that would generally equate to an investment in which the borrower operates; economic trends; and geopolitical risk. grade rating by externalrating agencies. There has not been a Banking units and Global Risk Management also review the credit significant change in concentrations of credit risk sinceOctober 31, quality of the credit portfolio across the organization on a regularbasis 2013. to assess whether economic trends or specific events may affect the performance of the portfolio.
Internalgrades (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 externalrating agencies:
Cross referencing of internalratings to externalratings(1) Equivalent ExternalRating InternalGrade S&P Moody’s DBRS InternalGrade 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-toCC Caa3toCa – 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 internalgrades is shown in the table below:
2014 2013
Exposure at Default(1) As atOctober 31 ($ millions) Undrawn Other Category of internalgrades IG Code Drawn commitments 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.
194 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS nd nd l nd 195 a a a l s essed l a a aa c a ged 597 934 2013 a i d rd. The a c a 2,077 a ve ter n ted il pplied inst n a n 87,255 46,058 17,928 10,669 a re a a a a a a rge rily in a ils the g a a ommon oll re pro nge for Ca l nk’s liquidity a ssified a re c c a l Report a $ 182,096 $ 16,578 a a a a a h l e te the s $114 billion c c re c nd other ssets a a a ross n a ) det nd is m nk’s ret a ul t c a re gener a a urities lending ac l Tot c a a lue of l ns to a c tober 31, 2013 – a ring or settlement tober 31, 2014, a h c nk w ing, c ontrols tivities. Asset nk Annu a ge portfolio is insured ca c c es. The B a c a a le c n ac b te. nd were ll lo c l is held prim a a a a a a ontrols rket v pproved by the Bo nd other c O) provides senior oti quired in ex a redit requests sofO a a ble to meet its fin c te c ter C a a a ac nd perform te in l a lifies. The B ble pri l mortg a a a a a gement a te m oll tings, whi tion. Note 38( a ip ppropri re distributed a c c a l est n c greements, se a a tively sm urities fin ss: urities a son a 2014 S ssets a gement c a c s a il Tot rti a ns a l a a a re designed to a nd limits a nk is un c ddition, l n sset pledging se h, the portfolios inherently h a ted under terms th a a a a s $353 million (O ret tio of the uninsured portion of the i a a a c tre c Other a a c a h ommittee (L n pproxim c ies tive, se C a a ustomer qu c a rd risk m tion, p nk’s lue r ondu a a a t the B ac c a sed on risk r nner tion. In a nking residenti a a nge for lo foreign jurisdi nd h a bility re a ca tion softw c a a a number of rel omprised of re a h c c re b ca nb a rd deriv n-to-v n oblig a a a a a de by exposure oring models. Individu (1) di y be sold or repledged by the B ountries. As su te in tions. c a inly le or held for use lifying sset pledging. ns tions nd c a ult a a a timely m a a djudi a a a a ac lue of non-fin ourse of business, se n revolving ure a ac a c a tober 31, 2014 w Qu ge lo c mework of poli tivities. St ns l tm c a t to extensive risk m a Ca ns tive s ry t def a a a tto c onsist of c ac a a a c c tO hPDgr eives reports on risk exposures ver nge of quired in ex l pledged a ry to st c tober 31, 2014, the nd extent of the B a a a ac c a tion with reverse repur a s ac rrying v tions in c tive tr a gement oversight of liquidity risk through its weekly meetings. ter a a a tO onsumer lo ca a rd re Exposure tober 31, 2013 – $91 billion). This epted th c ximum debt for whi n a redit ns a ture c c a a a wide r oll 2014 Line of a pproved limits. The Li nd the ustom onne acc As $374 million) m lo a m Assets The with respe borrowing systems, or oper oblig risk is subje within the fr Bo portfolio is 54%. pledging tr n In the norm pledged to se (b) Liquidity risk Liquidity risk is the risk th m portfolios number of borrowers. The portfolios c C either held for s on using predi by propriet a 52% of the a deriv high degree of diversifi c (O ured c te se a re rty a a l est ges lit a a a Re rties isions a ured by ter c c a il AIRB exposure within e l l a l for these ounterp $103,918 $31,324 $32,207 $24,984 $192,433 oll a a a c c nd sovereign omprised of ns se a tober 31, c lly, de a lue of the ter c ounterp a urities lending, a a c c tober 31, 2014 nk n region. l c re to non- a redit to oll a a greement under tio of below 80%. ca i c c nge Mortg nd lo a a c a 100% 213 50 225 156 644 tO a nk must return rket v a h nk’s intern te, b a a a tive, se s rkets. The following a nk must return the ac ry to a lue r a nd risk modeling in a ges a a a a a ommer used. Gener ssets reside with the tober 31, 2013 – lm to e tin Ameri c n region, a c C a orpor e its exposure to a c tober 31, 2014 c c nd lines of se the B ca c a te/ ifi n-to-v pit s the right to sell or repledge tfo ustom distribution of the ret c a ca omprised of residenti a a c c nd L c l on deriv ca tO a greed upon with the pledgor. h lo a a rds a s a 0.0000% – 0.0499%0.0500% – $ 0.1999% 19,4500.2000% – 0.9999% 48,8911.0000% – $ 2.9999% 27,5283.0000% – 9.9999% 13,146 – 3,060 11,247 3,764 $ 6,376 6,824 6,235 11,036 $ 406 – 1,268 17,173 3,398 $ 26,232 2,259 70,129 66,984 3,522 1,930 16,215 7,953 c tion, the B sed on the B a a s n a a ca nk h ter a a 20.0000% – 99.9999% 434 298 709 528 1,969 10.0000% – 19.9999% 578 348 1,380 1 2,307 orpor a a C tin Ameri n produ a oll a c redit onditions rties b ribbe c c a ted to the nd L l to the pledgor. a il exposures Ca a rdized exposures, $24 billion (O a a l is required when the m ns, nd l is pledged. eives rds of the pledged a lly permitted to sell or repledge the eives, in whi a a a n a c ther th c a a s represented by mortg tion. ter a a a a nd a ter llo ter eeds thresholds a te, mostly with a ounterp a c a nd other exposures to tion of the oblig oll a c ble below provides tions rel a nk re rdized portfolio rdized portfolio c litre oll rdized portfolio of $47 billion a ribbe oll mounted to $56 billion (O il st a a a ac a tions: c a ac des PD r lity of ret c nd rew ourse of business, to redu lthough this right is spe a a inly in the de ssets, unless the B l a a c l est a a a l a Ca wn ac a ble nd nd a ter ns tisf l rdized portfolio a nd a redit underwriting methodology a a a a a a tion ex a a a a r ustomer r nk is norm c ns l ret lly Low c a a rties a a ter ac lre a oll h the in the t redit risk mitig nd ls, m a l held il st il st a c a c is c il st a a a a a eives, a ns ges, person a t nk’s c a tober 31 ($ millions) oll redit qu a a omp a a c d ter tr pledgor. c pledged the C C ult whi re il AIRB portfolio l il st a a a mples of the terms tober 31, 2013 – $42 billion) w a a ding systems. a wn, undr eption tO inly in the n a c a c a a tegory of (PD) gr a oll nd other tr ounterp redit risk, the B – Addition types of tr – The risks ex Ret The d – Upon s Tot (iv) investment gr gr (iii) The B Def Extremely High Of the tot 2013 –$21 billion) w residenti m a In the norm Very Low Low Medium Low Medium High individu c $52 billion). Exposures to most c C Ca – The B Ca (1) After Ret The ret mortg Ex As Non-ret Non-ret dr (O CONSOLIDATED FINANCIAL STATEMENTS
The key elements of the Bank’s liquidity risk management framework (i) Commitments to extend credit include: In the normal course of business, the Bank enters into commitments to – liquidity risk measurement and management limits, including limits extend credit in the form of loans or other financings for specific on maximum net cash outflow by currency over specified short- amounts and maturities, subject to specificconditions. These term horizons; commitments, which are not reflected on the Consolidated Statement – prudent diversification of its wholesale funding activities by using a of Financial Position, are subject to normal credit standards, financial number of different funding programs to access the global controls and monitoring procedures. As atOctober 31, 2014 and financialmarkets and manage its maturity profile, as appropriate; October 31, 2013, the majority of commitments to extend credit had a –large holdings of liquid assets to support its operations, which can remaining term to maturity of less than one year. generally be sold or pledged to meet the Bank’s obligations; (ii) Derivative instruments – liquidity stress testing, including Bank-specific, global-systemic, The Bank is subject to liquidity risk relating to its use of derivatives to and combination systemic/specific scenarios; and meet customer needs, generate revenues from trading activities, – liquidity contingencyplanning. manage market and credit risks arising from its lending, funding and The Bank’s foreign operations have liquidity management frameworks investment activities, and lower its cost of capital. The maturity profile that are similar to the Bank’s framework. Local deposits are managed of the notional amounts of the Bank’s derivative instruments is from a liquidity risk perspective based on the localmanagement summarized in Note 10(b). frameworks and regulatory requirements.
(c)Market risk under various scenarios is particularly important for managing risk in Market risk arises from changes in market prices and rates (including the deposit, lending and investment products the Bank offers to its interest rates, credit spreads, equity prices, foreign exchange rates and retail customers. Gap analysis is used to assess the interest rate commodity prices), the correlations between them, and their levels of sensitivity of the Bank’s retail, wholesale banking and international volatility. Market risk is subject to extensive risk management controls, operations. Under gap analysis, interest rate-sensitive assets, liabilities and is managed within the framework of market risk policies and limits and derivative instruments are assigned to defined time periods, on the approved by the Board. The LCO and Market Risk Management and earlier of contractual repricing or maturity dates on the basis of Policy Committee oversee the application of the framework set by the expected repricing dates. Board, and monitor the Bank’s market risk exposures and the activities that give rise to these exposures. (i) Non-trading interest rate risk Interest rate risk, inclusive of credit spread risk, is the risk of loss due to The Bank uses a variety of metrics and models to measure and control the following: changes in the level, slope and curvature of the yield market risk exposures. The measurements used are selected based on curve; the volatility of interest rates; mortgage prepayment rates; an assessment of the nature of risks in a particular activity. The changes in the market priceofcredit; and the creditworthiness of a principalmeasurement techniques are Value at Risk (VaR), stress particular issuer. The Bank actively manages its interest rate exposures testing, sensitivity analysis and simulation modeling, and gap analysis. with the objective of enhancing net interest income within established The Board reviews results from these metricsquarterly. Models are risk tolerances. Interest rate risk arising from the Bank’s funding and independently validated internally prior to implementation and are investment activities is managed in accordance with Board-approved subject to formal periodic review. policies and global limits, which are designed to control the risk to net VaRisa statisticalmeasure that estimates the potential loss in value of interest income and economic value of shareholders’ equity. The the Bank’s trading positions due to adverse market movements over a income limit measures the effectofa specified shift in interest rates on defined time horizon with a specified confidence level. The quality of the Bank’s annual net income over the next twelve months, while the the Bank’s VaRisvalidated by regularback testing analysis, in which economic value limit measures the impactofa specified change in the VaRiscompared to theoretical and actual profit and loss results. interest rates on the present value of the Bank’s net assets. Interest rate To complement VaR, the Bank also uses stress testing to examine the exposures in individual currencies are also controlled by gap limits. impactthat abnormally large swings in market factors and periods of prolonged inactivity might have on trading portfolios. The stress testing Interest rate sensitivity gap program is designed to identify key risks and ensure that the Bank’s The following table summarizes carrying amounts of assets, liabilities capital can absorb potential losses from abnormal events. The Bank and equity, and derivative instrument notional amounts in order to subjects its trading portfolios to a series of stress tests on a daily, arrive at the Bank’s interest rate gapbased on the earlier of contractual weekly and monthly basis. repricing or maturity dates. To arrive at the Bank’s view of its effective In trading portfolios, sensitivity analysis is used to measure the effectof interest rate gap, adjustments are made to factor in expected mortgage changes in risk factors, including prices and volatility, on financial and loan repayments based on historicalpatterns and reclassify the products and portfolios. In non-trading portfolios, sensitivity analysis Bank’s trading instruments to the immediately rate sensitive and within assesses the effectofchanges in interest rates on current earnings and 3 months categories. Consumer behaviour assumptions are used to on the economic value of shareholders’ equity. Simulation modeling reclassify certain non-maturity assets and liabilities.
196 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS l 197 a 38,662 71,454 81,099 49,211 424,309 $– l Report a ns. (2) (3) (4) (4) (4) a te a te lo nk Annu a a sensitive Tot b Non-r a oti c mple, prime r rs a a 2014 S sis, for ex a te b a rs Over 5 ye a One to 5ye Three to 12 months nge in the underlying interest r a h ac Within 3 months ns. a urrently with c on c (1) – – 160 4,447 264 – 4,871 – 11,496 6,476 13,863 3,073 3,754 – 2,236 2,763 (8,482) 2,816 667 – – 197 84 101 83 – 465 – – – – – 71,454 – – 12 60 – 39 111 – 373 265 2,296 – 46,277 –– 18,957 – 8,825 – 21,252 20,652 – 43,562 113,248 – 7,286 7,286 nge 29 164 1,441 11,557 10,925 2,934 27,050 tely a a 832 2,773 520 2,861 2,904 71,209 h ounted investments. c acc 45,254 30,721 6,950 – – 6,028 88,953 85,371 20,559 (16,697) (55,415) (6,511) (27,307) – 24,816 42,495 6,885 1,118 – 18,552 93,866 20,064 191,325 50,287 145,056 16,093 1,484 tes te sensitive e on performing lo a Immedi a c r $ 46,206 $ (15,571) $ (20,885) $ 9,338 $ 8,709 $ (27,797) $ – $ (39,165) $ (36,130) $ (4,188) $ 64,753 $15,220 $ (490) $ – $ 83,464$ 76,514 $ 276,638 $ 280,776 $ 72,619 $ 70,150 $181,352 $ 86,855 $39,818 $13,238 $ 151,775$122,629 $ $ 805,666 $ 26,484 (39,165) $ 315,004 $ $ 554,017 (38,366) $ 79,570 $ (6,951) $108,117 $ 73,235 $27,414 $12,404 $ 152,932 $ $ 805,666 (1,157) $ – $ 38,584 $ 12,365 $ 134 $ 3 $ – $ 5,644 $ 56,730 n a llow nd equity lue lue a a a a tive ir v ir v res, c a a a tf tf olle urities lent c a a c l institutions le p p $ 41,056 $ (24,604) $ (16,147) $ 16,487 $ 6,470 $ (23,262) a a ing i a a ted ted c c a a n nd se a a urities sold under urities sold short l instruments whose interest r c c ns, less the res, preferred sh a a i a urities borrowed c c n l instruments. p ted repri a a i c a c ired lo n a sed under res a nd se a ted to se ted to se te sensitivity g te sensitivity g greements urities a a a h a a ommon sh ls a c c c a se e sheet g ted debentures a c ssets a h bilities a n l instruments design l instruments design c ssets a a a a nd deposits with fin tions rel tions rel l i i a tober 31, 2013 ($ millions) tober 31, 2014 ($ millions) ludes non-fin ludes net imp a c c a a c c a c c l interest r l interest r ious met n n greements ns urities pur a a tO tO c ding a a sh repur contractual repricing through profit or loss a through profit or loss c a a a a Subordin Other li (4) In (2) Represents (3) In Tot Oblig Investment se Interest rate sensitivity gap based on Adjustment to expe Oblig Se Lo Total assets Deposits Fin Equity Total liabilities and equity On-balance sheet gap Off-b As Tot (1) Represents those fin Other Ca As Pre Tr Fin 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:
Immediately Within Three to One to Over Non-rate As atOctober 31, 2014 (%) rate sensitive 3 months 12 months 5years 5years 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 atfair 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 Financialliabilities designated atfair 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
Immediately Within Three to One to Over Non-rate As atOctober 31, 2013 (%) rate sensitive 3 months 12 months 5years 5years 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 atfair 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 Financialliabilities designated atfair 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 contractualrates. (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-formaafter-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 atOctober 31 2014 2013 Net income Economic value of equity
Canadian Other Canadian Other Net Economic value ($ millions) dollar currencies Total dollar currencies Total income 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 annualincome 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 well as the potential impactoncapitalratios from foreign exchange forward rates, and the volatility of currencyexchange rates. Non- fluctuations. On a quarterly basis, the Liability Committee (LCO) reviews trading foreign currency risk, also referred to as structural foreign the Bank’s exposures to these net investments. The Bank may fully or exchange risk, arises primarily from Bank’s net investments in self- partially hedge this exposure by funding the investments in the same sustaining foreign operations and is controlled by a Board-approved currency, or by using other financial instruments, including derivatives. limit. This limit considers potential volatility to shareholders’ equity as
198 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS (1) a 199 nk’s y ge of a te. nk 46 a 3.7 2.5 1.5 7.6 7.4 a tions a a a 428 396 130 139 re s well ged by 14.5 a a a ding sed on (15.9) a nt a a ding lu n R by risk a $1,380 $ 241 a ustomer a $ 33.1 $ 17.2 $ 10.9 a a gement c ged in nd equity- nd dv one-d a a a a mework of a nk uses e units on l Report n ppropri a n tober 31, 2013 a a c a a nd v tivities rily a c tion b re m a te. The B ble tr fr n a luding a ke a a s a hes a nk’s V a ac nd c tO a O. Group a a c ys, the tr a e with the B a a ily a c C a n a ding nk Annu tion R, the B l simul a re prim a a R estim rket ni b ac a ca ord a a a gers to t rket d e level, nd loss reporting, tivities is m a c a a urities is shown in Note 12. oti nd n acc ac c c rm nd limits, in a risk V a tility within a a portion of equity a e, GRM or fin c tion of the L tivities c omponent. ul a n the V c ifi c c ies ding tion a c ac c a onfiden a rti e in every 100 d rket in ry 2014 S c ontrols for tr a c dire a a lu k offi rked-to-m c a tober 31, 2014 l fund m c a c ding R using histori a ac le equity se gement a a rnings vol nd ble below shows the B t, on nk’s tr a a 99% a a tegi a a a n re m a e between pursuing profit gement of a a a c a propriet e reporting to business unit m lso provide profit n es. Tr n c a r ended O a c a rked-to-m a pproved poli ns th l a n esses . For debt spe a ti ging e a a a c a a a t ble-for-s b nk’s equity investment portfolios ac ge High Low As rket risk V n a a a rd- a lude a a a il gement for ev ily using tion. The t a re m c ted to lose more th a a a a a c v ompli n Aver For the ye lm gers’ expertise in p a c nd stress testing limits. a ies, pro a a tes the m rket d a nd m c hieve ies. Positions a n a lso in a c ted d R a a rising from the B ac a a a sury under the str re expe ul lue of a e with Bo sis. These units rlo simul a c a c a utive m l nd limit 3.2 2.8 5.5 1.6 0.9 0.9 1.9 0.4 2.2 2.6 5.9 1.5 8.14.2 9.6 9.3 12.4 18.1 7.6 4.2 te V nd prudent pr n ding portfolio risk m c jority of the B a Ca a ts. ys of m 20.4 15.8 22.2 11.1 tes gener a nk’s poli a a ca rb a ir v (12.8) (14.5) N/A N/A c a a a R tion poli a a $ 38.7 $ 32.9 $40.3 $25.3 $ 22.5 $ 20.8 $27.3 $16.0 $ 8.6 $ 13.1 $22.1 $ 8.2 sury deleg a a ul ted portfolios to other extern rket risk ord ding portfolios a used, but tor: c Ris a l lu c a a a re independently reviewed by b ggreg nd exe sV a ac ca positions regul holding period. This me a these fund m Tr v rel V a Tre fo Group Tre The m opportunities sound a acc 300 d Monte designed to The f produ a M f (iv) Tr The B As at October 31, 2014 es. nd nd e ted lue c a a c a a rs. R, a a tes rd l equity a a ssesses a re equity risk, a ged funds. a s. tion losses in a c c O a n rs, ifi y revenues se) in the a tober 31, 2014. C nd preferred a c c a c nsl ps. a nk oper rnings by rnings of its a a nd forw re a a a teristi a c tO rty m tion of equity by a ytr le ac urren c a r c s a c tober 31, 2014 would nd spe a a c a nd sw h a se (de tegories: gener ommon h the B y spot nnu c rters. The L a c tO c cc es, a urren l equity instrument’s pri ca a a pproved portfolio, V c re c a ome se ifi a x s c c c a a ted in U.S. doll lqu lude a rd- r urren ssets. n instrument or portfolio’s v c y risk on the e a a a c a ca c dverse movements in equity pri y options ide on the portion of the estim ent in a c ies in whi c c nd expenses to hedge. Hedging rily from exposure to U.S. doll c a a l requirements n individu n doll RM) tober 31, 2013 – $224 million), net of urren a a a c c tober 31, 2013 – $47 million) in the C urren lized foreign c di te ge this risk, foreign c pit urren a a a nk’s before-t a c ssified into two one per rily denomin a n ca sts to de n a ll l a a a sure ( lude foreign omprehensive in c a ca Ca c ll level of equity pri a c l tivity, prim a ontrolled by Bo a y revenues h c c ac R R inst rge t ac pit diversified portfolio of third-p a a s foreign a lly in t portion of a re c t to foreign re prim a a a a g rket risk h a ca c ses) the B a d number of future fis nd fore a c a s se) the unre a a urren h r a h a ppro a te c c c a nge re a aa tions. To m a ted other re nge in the t c a ding equity risk a a t is determined by entity-spe rge d plus interest r c c R R a a s well h a l risk a a a tely $49 million (O tely $260 million (O a a e risk is often a h c d a tion effe ifi h a a c h refers to the sensitivity of c c rket risk s well c c tober 31, 2014, c n doll re the m tes to $17.3 billion of risk-weighted r ca a a ts, c umul a e of hedging rdized a a nk is exposed to equity risk through its equity investment nk is subje ses (in a redit spre nges in the over ted over se (de c nk V nk stressed V nk stressed V nk V a a a a di ac c a a h refers to th a a a Interest r a C lm tO a tility th acc h c re res, a nd a re a rement n c c a onomi a c c ommodities omprehensive risk me RM sur redit spre bsen pproxim pproxim c ontr in a a A simil The B c vol to whi instruments norm de Equity pri risk, whi future foreign Debt spe Diversifi Below a Equity risk is the risk of loss due to hedging. (iii) Non-tr e Foreign ex C All-B Tot All-B Ca the stress-test limits. Equity investments in sh In C C St All-B proje Equities expenses, whi ($ millions) portfolios, whi (1) Equ ($ millions) All-B C As The B foreign oper CONSOLIDATED FINANCIAL STATEMENTS
(d) Operational risk Operational risk is the risk of loss, whether direct or indirect, to which Bank’s business and support activities, and can result in financial loss, the Bank is exposed due to inadequate or failed internal processes or regulatory sanctions and damage to the Bank’s reputation. The Bank systems, human error, or external events. Operational risk includes legal has developed policies, processes and assessment methodologies to and regulatory risk, business process and change risk, fiduciary or ensure that operational risk is appropriately identified and managed disclosure breaches, technology failure, financial crime and with effective controls with a view to safeguarding client assets and environmental risk. Operational risk, in some form, exists in each of the preserving shareholder value.
40 Contractual maturities
The table below provides the maturity of assets and liabilities as well as from these securities is more relevant to liquidity management than the off-balance sheet commitments based on the contractualmaturity contractualmaturity. For other assets and deposits the Bank uses date. From a liquidity risk perspective the Bank considers factors other assumptions about rollover rates to assess liquidity risk for normal than contractualmaturity in the assessment of liquid assets or in course and stress scenarios. Similarly, the Bank uses assumptions to determining expected future cash flows. In particular, for securities assess the potentialdrawdown of credit commitments in various with a fixed maturity date, the ability and time horizon to raise cash scenarios.
As at October 31, 2014 Less One to Three Six to Nine to One to Two Over No than one three to six nine twelve two to five five specific ($ millions) month months months months months years years years 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 Financialguarantees(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 whichmay expire undrawn.
200 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS l a 201 174 209,865 119,615 l Report a (2) (3) c – No ifi c turity Tot a spe m (3,273) (3,273) 45,387 45,387 30,705 30,705 26,002 26,002 nk Annu a b a oti c rs a five Over ye 130 5,841 – 5,841 2014 S – rs a nd IAS 19) in 2014 (refer to Note 4). ye a wn. a Two to five rs rds (IFRS 10 6 (1) a a two y expire undr ye a nd One to a hm c tober 31, 2013 c – redit whi tO c a twelve mended IFRS st Nine to months a As nd a l letters of a i c Six to ommer c nine months doption of new nd a ilities. a ac t the redit c c months Three to six nd liquidity f a 24 11 3 djusted to refle redit months ndby letters of c a a ns. a One to three tively c – ––––– – –– ––––– – – –––––1158–37106 ––––– – –– ––––– – –– ––––– – –– ntees, st ommitted ired lo a Less r c a a n one month ges. a 3,042 3,143 9,637 11,671 12,060 11,728 64,194 2,670 5 118,150 a th re retrospe nd imp a a es of gu c fts n rd 4,499 1,337 1,885 2,345 1,827 6,152 13,629 4,326 40,008 76,008 a a l omponent of lue lue ired mortg a ca c a a a mounts ges 3,748 4,190 5,967 12,255 10,658 50,964 103,975 16,661 1,447 ls $ 48,721 $ 1,173 $ 163 $ 44 $ 13 $ 66 $ 40 $ 10 $ 11,988 $ 62,218 (4) (5) a a a tions 20 39 61 59 59 228 445 2 1 914 es 8,114 2,312 129 1 – – – – – 10,556 wn ir v ir v l l redit a a c a a a a sed c redit i i n greement nding b a c ted to ted to rily overdr rily imp c c a l 51,034 51,832 37,745 10,669 12,335 32,870 45,947 7,803 96,604 346,839 a tf tf greements a ntees urities 1,598 2,883 3,073 2,103 1,235 5,321 11,002 3,383 3,721 34,319 a a a a h n n bilities a a a a a c ses $ 24 $ 51 $ 75 $ 71 $ 68 $ 245 $ 506 $ 499 $ – $ 1,539 c r a a a le l mortg nd nd a ept a a e for a a a se ious met c es 8,114 2,312 129 1 – – – – – 10,556 ted debentures l 8,693 8,440 8,400 7,900 7,205 17,902 17,051 190 95,267 171,048 l l institutions ted ted a c urities lent 56,290 14,104 4,256 434 2,419 5 – – – 77,508 urities borrowed 61,155 12,902 5,735 1,513 1,154 74 – – – 82,533 ssets 5,698 6,588 2,551 2,845 1,722 8,055 16,200 16,495 36,335 96,489 c n ing oblig a a a a a a c c acc h bilities 406 601 228 192 247 856 3,736 3,009 22,772 32,047 i in prior period a a c l instruments l instruments lgu n ommitments c ssets c a a a a a a c nd deposits with tions rel tions rel i i i a tive fin tive fin ludes outst ludes the undr ludes prim ludes prim ting le n a urities sold under urities sold short 406 32 1,009 209 792 3,434 10,601 6,011 2,483 24,977 a c c a c c c c c ert a a a a losses government 15,324 15,278 11,344 8,371 8,509 15,548 35,837 4,510 4,894 l equity c c n n n C ept ns 23,571 20,805 19,196 22,971 20,994 72,664 153,441 25,497 43,076 402,215 nd se nd se nd pre urities pur a ding a a a sh a Residenti instruments 924 1,712 1,182 764 1,025 2,373 6,766 9,757 – 24,503 commitments a a through profit or loss se repur under res c through profit or loss design instruments 1,065 1,812 1,609 1,248 1,128 3,313 9,106 9,986 – 29,267 design Person Non-person se Business under a fin Person Allow a redit ustomers’ li cc (5) In C Lo Investment se (4) In Off-Balance sheet Oper Tot Other li Subordin Deriv Se Oblig (3) In Liabilities and equity Deposits $ 59,727 $ 60,272 $ 46,145 $ 18,569 $ 19,540 $ 50,772 $ 62,998 $ 7,993 $ 191,871 $ 517,887 Fin Other Deriv Tr Fin C (2) In Oblig (1) Assets Ca ($ millions) Outsour Fin A CONSOLIDATED FINANCIAL STATEMENTS
41 Business combinations, other acquisitions and divestitures
Current Year
Canadian acquisition International acquisition
Canadian Tire Financial Services Cencosud Administradora de Tarjetas S.A. On October 1, 2014, the Bank acquired a 20% equity interest in On June 20, 2014, the Bank announced the acquisition of a 51% Canadian Tire’s Financial Services business (CTFS), for $500 million in controlling interest in Cencosud Administradora de Tarjetas S.A., and cash. Acquisition-related expenses of $5 million were capitalized aspart certain other smaller entities (collectively, CAT), from Cencosud S.A. of the carrying value of the investment. Under the agreement Canadian (Cencosud), for approximately $300 million in cash. CAT is the financial Tire has an option to sell to the Bank up to an additional 29% equity services business of Cencosud and distributes credit cards and interest within the next 10 years at the then fair value, that canbe consumer loans in Chile. The Bank and Cencosud have also entered settled, at the Bank’s discretion, by issuanceofcommon shares or cash. into a 15 yearpartnership agreement to manage the credit card After 10 years, for a period of six months, the Bank has the option to business and provide additional products and services to customers of sell its equity interest backtoCanadian Tire at the then fair value. The both organizations. The transaction is subjecttocustomary closing Bank has also provided a funding commitment to CTFS of $2.25 billion conditions and regulatory approvals in Chile and Canadaand is for financing credit card receivables. This investment will be accounted expected to close in the first quarter of 2015. The transaction, after for under the equity method of accounting. closing, will result in the consolidation of CAT’s assets and liabilities in the Bank’s consolidated financialstatements. As part of the acquisition, Canadian divestiture the Bank has committed to fund 100% of CAT’s loan portfolio which Sale of investment in CI Financial Corp. includes approximately $1.3 billion in outstanding balances in Chile. If On June 17, 2014 the Bank sold 82.8 million shares of its investment in the partnership agreement is not renewed at the end of the 15 year CI Financial Corp. (representing 29.1% ownership) at a price of $31.60 term, the Bank’s funding to CAT shall be re-paid and Cencosud has the per share. On thatdate, the remaining holdings of 21.8 million shares, right to reacquire the 51% controlling interest in CAT from the Bank at representing 7.7% ownership, were reclassified to available-for-sale the then fair market value. securities atmarket value. The total pre-taxgain of $643 million, is included in other operating income – other.
202 2014 Scotiabank Annual Report CONSOLIDATED FINANCIAL STATEMENTS 203 62 20 21 687 236 313 te l a 4,552 1,314 a i 30,808 c n $ 38,270 $ 3,126 $ 40,082 $ 37,029 $ 582 a l Report a ount within t the d c a sh flow ca ted fin a nk Annu ember 5, 2014. a c te of se while supporting the b a nking business segment. a a t deep dis a a rk of $29 million). This oti a onsolid c c s determined nB a a di quired a tements n 2014 S a ac Ca lst ted loss m ns a c nk’s funding b i a c a n a tives. c gement’s best estim a rt of the n a a ted fin future expe a dens the B ns over their lifetime a a tors reviewed the 2014 a n portfolio. c uthorized them for issue on De a a nd a ptures m onsolid nk forms p nd ll growth obje c a ca a a sed lo a lof h rd of Dire a c lls on the lo a quisition bro a quisition. There were no lo ac tements ac nk’s over ngerine B a a a djustment st The Bo the pur Approv The of T shortf a of $11 million B urities lent 492 c nk) a nd se ssets 1,812 a a re redit nd is a c rk nd a ts. a a c ngerine B l te ngible pproved a a a a a rgely rterly a a greements a urities borrowed 3,550 ggreg nded T c a se a ry 6, 2015, a (subsequently n a h luding int urred loss m ngibles, softw a a c c c a d nu nd se re. This qu a a a ns, a n a tJ tion of $3,126 million. rily offers person a ember 4, 2014, a Ca a c s a bilities, in sed lo blished (in a a a nd future growth prospe nk of h ord a c a greements. Goodwill l c greements onsider ommon sh quired 100% of the issued ore deposit int c a a c nd li nk, prim (subsequently rebr c s est l a a ac l institutions a a le a sh a a d i nsferred tu c tform nk a ca a a a n n te to ac ssets a a a urities sold under repur ents per Ca c rtered b c a res of ING B ontr t its meeting on De tion tr ble c a h nk) for lue of the pur a a a c reholders of re rily rel a a quisition a a nk of n l instruments l instruments quisition ($ millions) a ac a ir v a a sed under res i i ac tors, a di a ted to se c c c a urities a h n n onsider c ts. c n a a c c red ssets ry 28, 2015. ommon sh a ngerine B a l a c se nd equipment a c ssets prim a a aCa bilities rising on a pplies to sh nu lue of identifi ngerines’s unique pl h ssets ognized on a a a a nd deposits with fin a c c a tions rel a tive fin tive fin r rd of Dire a a a a a a djustment of $40 million w nding ngible ir v ns urities pur a rterly dividend of 66 ts T Events after the Consolidated Statement of Financial Position date nded T sh a a a lue re ble J a c c a a a ngible a rk sh pur bilities a quisition of ING B y nking produ Other li Oblig Property Deposits Int Other Deriv ngerine, Investment se Lo Deriv Ca Se a qu ir v c a a a nd other benefits from a a Net f m To determine the f refle Int a p b Li dividend T Goodwill Ca rebr Dividend de The Bo 42 a F Assets Canadian acquisition A Prior ye On November 15, 2012, the B outst Shareholder Information Valuation Day Price For Canadianincome tax purposes, The Bank of Nova Scotia’s common Annual Meeting stockwas quoted at $31.13 per share on Valuation Day, December 22, Shareholders are invited to attend the 183rd Annual Meeting of 1971. This is equivalent to $2.594 after adjusting for the two-for-one Holders of Common Shares, to be held on April 9, 2015, at the Shaw stock split in 1976, the three-for-one stock split in 1984, and the two- Centre (formerly the OttawaConvention Centre), 55 Colonel By Drive, for-one stock split in 1998. The stock dividend in 2004 did not affect Ottawa, Ontario, Canada, beginning at 9:30 a.m. (local time). The the Valuation Day amount. The stockreceived aspart of the 2004 record date for determining shareholders entitled to receive noticeof stock dividend is not included in the pre-1972 pool. and to vote at the meeting will be the close of business on February 10, 2015. Duplicated Communication Some registered holders of The Bank of Nova Scotia shares might Shareholdings and Dividends receive more than one copy of shareholder mailings, such as this Information regarding your shareholdings and dividends maybe Annual Report. Every effort is made to avoid duplication; however, if obtained by contacting the transfer agent. you are registered with different names and/or addresses, multiple Direct Deposit Service mailings may result. If you receive, but do not require, more than one Shareholders mayhave dividends deposited directly into accounts held mailing for the same ownership, please contact the transfer agent to at financial institutions which are members of the CanadianPayments combine the accounts. Association. To arrange direct deposit service, please write to the Credit Ratings transfer agent. SENIOR LONG-TERM DEBT/DEPOSITS Dividend and Share Purchase Plan Scotiabank’s dividend reinvestment and share purchase plan allows DBRS AA common and preferred shareholders to purchase additional common FitchAA- shares by reinvesting their cash dividend without incurring brokerage or Moody’s Aa2 administrative fees. As well, eligible shareholders may invest up to Standard & Poor’s A+ $20,000 each fiscalyear to purchase additional common shares of the Bank. All administrative costs of the plan are paid by the Bank. For SHORT TERM DEPOSITS/COMMERCIAL PAPER more information on participation in the plan, please contact the DBRS R-1(high) transfer agent. Fitch F1+ Listing of Shares Moody’s P-1 Common shares of the Bank are listed for trading on the Toronto and Standard & Poor’s A-1 New York stockexchanges. Series 14, Series 15, Series 16, Series 17, Series 18, Series 19, Series 20, SUBORDINATED DEBT Series 21, Series 22, Series 23, Series 30 and Series 32 preferred shares DBRS AA(low) of the Bank are listed on the Toronto StockExchange. FitchA+ Stock Symbols Moody’s A2 TICKER CUSIP Standard & Poor’s A - STOCK SYMBOL NO. Common shares BNS 064149 10 7 NON-CUMULATIVE PREFERRED SHARES Series 14, Preferred BNS.PR.L 064149 78 4 DBRS Pfd-2(high) Series 15, Preferred BNS.PR.M 064149 77 6 Moody’s Baa1(hyb) Series 16, Preferred BNS.PR.N 064149 76 8 Standard & Poor’s BBB/P-2*
Series 17, Preferred BNS.PR.O 064149 75 0 *Canadianscale Series 18, Preferred BNS.PR.P 064149 74 3 In July 2014, Moody’s placed the senior debt ratings of several of the Series 19, Preferred BNS.PR.A 064149 73 5 Canadianbanks on “negative outlook”. In August 2014, Standard & Series 20, Preferred BNS.PR.Q 064149 72 7 Poor’s took a similar action, changing the outlook for several Canadian Series 21, Preferred BNS.PR.B 064149 71 9 banks to “Negative” from “Stable”. Both rating agencies cited the Series 22, Preferred BNS.PR.R 064149 69 3 uncertainty around the federal government’s proposed new “bail-in” Series 23, Preferred BNS.PR.C 064149 68 5 regime for senior unsecured debt as the principalreason for these Series 30, Preferred BNS.PR.Y 064149 63 6 system-wide changes in outlook in order to reflect the greater Series 32, Preferred BNS.PR.Z 064149 61 0 likelihood thatsuch debt mayincur losses in the unlikely event of a distress scenario. Dividend Dates for 2015 Record and payment dates for common and preferred shares, subject In addition, Moody’s placed the Bank’s standalone rating – which to approval by the Board of Directors. assumes no government support – on “negative outlook”. This change was done primarily because Moody’s believes that the Bank’s RECORD DATE PAYMENT DATE international business is more risky than its Canadian business and is January 6 January 28 likely to grow more rapidly in the coming years. Moody’s also cited the April 7 April 28 Bank’s plans to grow its unsecured consumer lending businesses – both July 7 July 29 in Canadaand internationally – as a reason for the change. October 6 October 28 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 Impaired Loans: Loans on which the Bank no longer hasreasonable management’s opinion, is adequate to absorb all incurred credit-related assurance as to the timely collection of interest and principal, or where losses in the Bank’s portfolio of loans. It includes individual and acontractualpayment is past due for a prescribed period or the collective allowances. customer is declared to be bankrupt. Excludes Federal Deposit Insurance Corporation (FDIC)guaranteed loans. Assets Under Administration and Management: Assets owned by customers, for which the Bank provides management and custodial Marked-To-Market: The valuation of certain financial instruments at services. These assets are not reported on the Bank’s Consolidated fair value asoftheConsolidated Statement of Financial Position date. Statement of Financial Position. Core Banking Margin: This ratio represents net interest income (on a Bankers’ Acceptances (BAs): Negotiable, short-term debt securities, taxable equivalent basis) on average earning assets excluding bankers guaranteed for a fee by the issuer’s bank. acceptances and total average assets relating to the Global Capital markets business within GlobalBanking & Markets. This is consistent Basis Point: A unit of measure defined as one-hundredth of one with the factthat net interest from trading operations is recorded in per cent. trading revenues included in other operating income.
Capital: Consists of common shareholders’ equity, non-cumulative Notional Principal Amounts: The contract or principal amounts used preferred shares, capital instruments and subordinated debentures. It to determine payments for certain off-balance sheet instruments and can support asset growth, provide against loan losses and protect derivatives, such as FRAs, interest rate swaps and cross-currencyswaps. depositors. The amounts are termed “notional” because they are not usually exchanged themselves, serving only as the basis for calculating Covered Bonds: Debt obligations of the Bank for which the payment amounts thatdochange hands. of all amounts of interest and principal are unconditionally and irrevocably guaranteed by a limited partnership or trust and secured by Off-Balance Sheet Instruments: These are indirect credit a pledge of the covered bond portfolio. The assets in the covered bond commitments, including undrawn commitments to extend credit and portfolio held by the limited partnership or trust consist of first lien derivative instruments. Canadian uninsured residential mortgages or first lien Canadian residential mortgages insured under CMHC Mortgage Insurance, Operating leverage: This ratio measures the rate of growth in total respectively, and their related security interest. revenue (on a taxable equivalent basis) less the rate of growth in operating expenses. Derivative Products: Financial contracts whose value is derived from an underlying price, interest rate, exchange rate or price index. Options: Contracts between buyer and seller giving the buyer of the Forwards, options and swaps are all derivative instruments. option the right, but not the obligation, to buy (call) or sell (put) a specified commodity, financial instrument or currency at a set priceor Fair Value: The pricethat would be received to sell an asset or paid to rate on or before a specified future date. transfer a liability in an orderly transaction between market participants in the principal, or in its absence, the most advantageous market to OSFI: The Office of the Superintendent of Financial Institutions which the Bank has access at the measurement date. Canada, the regulator of Canadianbanks.
Foreign Exchange Contracts: Commitments to buy or sell a specified Productivity Ratio: Management uses the productivity ratio as a amount of foreign currencyona set date and at a predetermined rate measure of the Bank’s efficiency. This ratio represents operating of exchange. expenses as a percentage of total revenue (TEB). A lower ratio indicates improved productivity. Forward Rate Agreement (FRA): A contract between two parties, whereby a designated interest rate, applied to a notional principal Repos: Repos is short for “obligations related to securities sold under amount, is locked in for a specified period of time. The difference repurchase agreements” – a short-term transaction where the Bank between the contracted rate and prevailing market rate is paid in cash sells assets, normally government bonds, to aclient and simultaneously on the settlement date. These agreements are used to protect against, agrees to repurchase them on a specified date and at a specified price. or take advantage of, future interest rate movements. It is a form of short-term funding.
Futures: Commitments to buy or sell designated amounts of Return on Equity (ROE): Net income attributable to common commodities, securities or currencies on a specified date at a shareholders, expressed as a percentage of average common predetermined price. Futures are traded on recognized exchanges. shareholders’ equity. Gains and losses on these contracts are settled daily, based on closing market prices. Reverse Repos: Reverse repos is short for “securities purchased under resale agreements” – a short-term transaction where the Bank Hedging: Protecting against price, interest rate or foreign exchange purchases assets, normally government bonds, from aclient and exposures by taking positions that are expected to reacttomarket simultaneously agrees to resell them on a specified date and at a conditions in an offsetting manner. 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 Taxable Equivalent Basis (TEB): The Bank analyzes net interest credit risk, market risk and operational risk, which are computed under income, other operating income, and total revenue on a taxable the Basel III Framework. Risk-weighted assets for credit risk are equivalent basis (TEB). This methodology grosses up tax-exempt income calculated using formulas specified by the Basel III Framework. The earned on certain securities reported in either net interest income or formulas are based on the degree of credit risk for each class of other operating income to an equivalent before taxbasis. A counterparty. Off-balance sheet instruments are converted to on corresponding increase is made to the provision for income taxes; balance sheet equivalents, using specified conversion factors, before hence, there is no impact on net income. Management believes that the appropriate risk measurements are applied. The Bank uses both this basis for measurement provides a uniform comparability of net internal models and standardized approaches to calculate market risk interest income and other operating income arising from both taxable capital and standardized approachtocalculate operational risk capital. and non-taxable sources and facilitates aconsistent basis of These capital requirements are converted to risk weighted assets measurement. While other banks also use TEB, their methodology may equivalent by multiplying by a 12.5 factor. not be comparable to the Bank’s methodology. For purposes of segmented reporting, a segment’s revenue and provision for income Securitization: The process by which financial assets (typically loans) taxes are grossed up by the taxable equivalent amount. The elimination are transferred to a trust, which normally issues a series of different of the TEB gross up is recorded in the Other segment. classes of asset-backed securities to investors to fund the purchase of loans. Common Equity Tier 1 (CET1), Tier 1 and Total Capital Ratios: Under Basel III, there are three primary regulatory capitalratios used to Structured Entities: A structured entity is defined as an entity created assess capital adequacy, CET1, Tier 1 and Total capitalratios, which are to accomplish a narrow and well-defined objective. A structured entity determined by dividing those capital components by their respective maytake the form of acorporation, trust, partnership or risk-weighted assets. unincorporated entity. Structured entities are often created with legal Basel III introduced a new category of capital, CET1, which consists arrangements that impose strict and sometimes permanent limits on primarily of common shareholders’ equity net of regulatory the decision-making powers of their governing board, trustee or adjustments. These regulatory adjustments include goodwill, intangible management over the operations of the entity. assets net of deferred taxliabilities, deferred tax assets that rely on future probability, defined-benefit pension fund net assets, shortfall of Standby Letters of Credit and Letters of Guarantee: Written credit provision to expected losses and significant investments in undertakings by the Bank, at the request of the customer, to provide common equity of other financial institution. assuranceofpayment to a third-party regarding the customer’s obligations and liabilities to that third-party. Tier 1 includes CET1 and additional Tier 1 capital which consists primarily of qualifying non-cumulative preferred shares and non- Structured Credit Instruments: A wide range of financial products qualifying instruments subjecttophase-out. Tier 2 capital consists whichincludes Collateralized Debt Obligations, Collateralized Loan mainly of qualifying subordinated or non-qualifying debentures subject Obligations, Structured Investment Vehicles, and Asset-Backed to phase-out and the eligible allowances for credit losses. Securities. These instruments represent investments in pools of credit- related assets, whose values are primarily dependent on the Value At Risk (VaR): An estimate of the potential loss that might performance of the underlying pools. result from holding a position for a specified period of time, with a given level of statistical confidence. Swaps: Interest rate swaps are agreements to exchange streams of interest payments, typically one at a floating rate, the other at a fixed Yield Curve: Agraph showing the term structure of interest rates, rate, over a specified period of time, based on notional principal plotting the yields of similarquality bonds by term to maturity. amounts. Cross-currencyswaps are agreements to exchange payments in different currencies over predetermined periods of time.
206 2014 Scotiabank Annual Report Basel III Glossary Credit Risk Parameters Exposure Sub-types
Exposure at Default (EAD): Generally represents the expected gross Drawn: Outstanding amounts for loans, leases, acceptances, deposits exposure – outstanding amount for on-balance sheet exposure and with banks and available-for-sale debt securities. loan equivalent amount for off-balance sheet exposure at default. Undrawn: Unutilized portion of an authorized committed credit lines. Probability of Default (PD): Measures the likelihood that a borrower will default within a one-year time horizon, expressed as a percentage. Other Exposures
Loss Given Default (LGD): Measures the severity of loss on a facility Repo-Style Transactions: Reverse repurchase agreements (reverse in the event of a borrower’s default, expressed as a percentage of repos) and repurchase agreements (repos), securities lending and exposure at default. borrowing.
OTC Derivatives: Over-the-counter derivatives contracts refers to Exposure Types financial instruments which are traded through a dealer network rather than through anexchange. Non-retail
Other Off-balance Sheet: Direct credit substitutes, such asstandby Corporate: Defined as a debt obligation of acorporation, partnership, letters of credit and guarantees, trade letters of credit, and or proprietorship. performance letters of credit and guarantees.
Bank: Defined as a debt obligation of a bank or bank equivalent Exchange-Traded Derivative Contracts: Exchange-traded derivative (including certain public sector entities (PSEs) treated asbank contracts are derivative contracts (e.g., futures contracts and options) equivalent exposures). that are transacted on an organized futures exchange. These include futures contracts (both long and short positions), purchased options Sovereign: Defined as a debt obligation of a sovereign, centralbank, and written options. certain multi development banks and certain PSEs treated as sovereign.
Qualifying Central Counterparty (QCCP): Alicensed central Securitization: On-balance sheet investments in asset-backed counterparty is considered “qualifying” when it is compliant with the securities, mortgage bac ked securities, collateralized loan obligations International Organization of Securities Commissions (IOSCO) standards and collateralized debt obligations, off-balance sheet liquidity lines to and is able to assist clearing member banks in properly capitalizing for Bank’s own sponsored and third-party conduits and credit CCP exposures. enhancements. Asset Value Correlation Multiplier (AVC): Basel III hasincreased the Retail risk-weights on exposures to certain Financial Institutions (FIs) relative to the non-financial corporate sector by introducing anAVC. The Residential Mortgage: Loans to individuals against residential correlation factor in the risk-weight formula is multiplied by this AVC property (four units or less). 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 Secured Lines Of Credit: Revolving personal lines of credit secured by unregulated FIs. residentialreal estate. Specific Wrong-Way Risk (WWR): Specific Wrong-Way Risk arises Qualifying Revolving Retail Exposures (QRRE): Credit cards and when the exposure to a particular counterparty is positively correlated unsecured line of credit for individuals. with the probability of default of the counterparty due to the nature of the transactions with the counterparty. Other Retail: All other personalloans.
2014 Scotiabank Annual Report 207 Additional information
CORPORATE HEADQUARTERS FOR FURTHER INFORMATION
Scotiabank Customer Service Centre Scotia Plaza 1-800-4-SCOTIA 44 King Street West, Toronto, Ontario Canada M5H 1H1 Finance Department Tel: (416) 866-6161 Scotiabank E-mail: [email protected] 44 King Street West, Toronto, Ontario Canada M5H 1H1 Tel: (416) 866-4790 Fax: (416) 866-4048 E-mail: [email protected]
FinancialAnalysts, 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
Publicand 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 Photo courtesy Mark Reed
Photo courtesy Maximiliano Troncoso Maximiliano Troncoso Getting kids in the game Supporting youth sports around the world
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.
Hockey matters to Scotiabank because it matters to In Chile, the Bank also launched its first Campeonato Canadians. We proudly support over 5,000 minor hockey Nacional Infantil Scotiabank (Kids’ National Championship), teams across the country through the Scotiabank a soccer tournament that brings together 160 teams of Community Hockey Sponsorship Program. In 2014, children to compete for a chance to win a trip to Italy to Scotiabank and Canadian Tire also teamed up to help keep play with the Juventus Football Club. Partnering with more than 10 outdoor skating rinks in Toronto, Canada, renowned Chilean soccer player and program ambassador, open during March Break, helping families stay active and Marcelo Salas, the sponsorship demonstrates just one on the ice. example of the many youth soccer academies, leagues and tournaments Scotiabank supports across Latin America. A footprint that helps customers compete
SERVING OVER 55 Countries worldwide
more than TOTAL NET $ million INCOME 7,298 million 21 CUSTOMERS GLOBALLY
st CANADA’S th Canadian bank BANKS NAMED 1TO BE NAMED WORLD’S BEST SOUNDEST IN 7year MULTINATIONAL WORKPLACE THE WORLD in a row
BEST CORPORATE/ % PRODUCTIVITY INSTITUTIONAL 16 International RATIO INTERNET BANK IN Markets 52.6
$ EARNINGS RETURN % PER SHARE ON EQUITY 16.1 5.66 (diluted)
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