ENHANCED DISCLOSURE TASK FORCE (EDTF) RECOMMENDATIONS

The Enhanced Disclosure Task Force (EDTF) was established by the Financial Stability Board in May 2012 with the goal of developing fundamental disclosure principles. On October 29, 2012 the EDTF published its report, “Enhancing the Risk Disclosures of Banks”, which sets forth recommendations around improving risk disclosures and identifies existing leading practice risk disclosures.

Below is the index of all these recommendations to facilitate easy reference in the Bank’s annual report and other public disclosure documents available on www.scotiabank.com/investorrelations.

Reference Table for EDTF

			Pages
							Supplementary Regulatory Capital Disclosures
Type of risk	Number	Disclosure	MD&A		Financial Statements
General	1	The index of risks to which the business is exposed.		85-86, 91, 101
	2	The Bank’s risk to terminology, measures and key parameters.		81-84
	3	Top and emerging risks, and the changes during the reporting period.		88-90, 95-100
	4	Discussion on the regulatory development and plans to meet new regulatory ratios.		61-63, 109-110, 126-128
Risk governance, risk management and business model	5	The Bank’s Risk Governance structure.		78-80
	6	Description of risk culture and procedures applied to support the culture.		81-83
	7	Description of key risks from the Bank’s business model.		85-87
	8	Stress testing use within the Bank’s risk governance and capital management.		81-82
Capital Adequacy and risk-weighted assets	9	Pillar 1 capital requirements, and the impact for global systemically important banks.		61-63		217		3-4
	10	a) Regulatory capital components.		64				19-22
		b) Reconciliation of the accounting balance sheet to the regulatory balance sheet.						16-17
	11	Flow statement of the movements in regulatory capital since the previous reporting period, including changes in common equity tier 1, additional tier 1 and tier 2 capital.		65-66				75
	12	Discussion of targeted level of capital, and the plans on how to establish this.		61-63
	13	Analysis of risk-weighted assets by risk type, business, and market risk RWAs.		68-72, 87, 136		187, 241		6, 35-48, 60-62, 66, 78, 84
	14	Analysis of the capital requirements for each Basel asset class.		68-72		187, 235-241		14-15, 35-49, 60-62, 66, 71-74
	15	Tabulate credit risk in the Banking Book.		68-72		236		14-15, 35-49, 71-74
	16	Flow statements reconciling the movements in risk-weighted assets for each risk-weighted asset type.		68-72				50, 65, 77
	17	Discussion of Basel III Back-testing requirement including credit risk model performance and validation.		69-71				51-54, 82
Liquidity Funding	18	Analysis of the Bank’s liquid assets.		107-110
	19	Encumbered and unencumbered assets analyzed by balance sheet category.		109
	20	Consolidated total assets, liabilities and off-balance sheet commitments analyzed by remaining contractual maturity at the balance sheet date.		112-114
	21	Analysis of the Bank’s sources of funding and a description of the Bank’s funding strategy.		111-112
Market Risk	22	Linkage of market risk measures for trading and non-trading portfolios and the balance sheet.		106
	23	Discussion of significant trading and non-trading market risk factors.		102-107		240-241
	24	Discussion of changes in period on period VaR results as well as VaR assumptions, limitations, backtesting and validation.		102-107		240-241
	25	Other risk management techniques e.g. stress tests, stressed VaR, tail risk and market liquidity horizon.		102-107		241
Credit Risk	26	Analysis of the aggregate credit risk exposures, including details of both personal and wholesale lending.		95-100, 130-136		198-199, 237-239		6, 35, 37-48, 60-62
	27	Discussion of the policies for identifying impaired loans, defining impairments and renegotiated loans, and explaining loan forbearance policies.				165-167, 199
	28	Reconciliations of the opening and closing balances of impaired loans and impairment allowances during the year.		97, 130-131, 133, 134		199		32-33
	29	Analysis of counterparty credit risk that arises from derivative transactions.		93-94		185-188		83
	30	Discussion of credit risk mitigation, including collateral held for all sources of credit risk.		93-94, 98
Other risks	31	Quantified measures of the management of operational risk.		72, 115
	32	Discussion of publicly known risk items.		77

14  |  2020 Scotiabank Annual Report

Management’s

Discussion and Analysis

Table of Contents

16	Forward-looking statements
17	Non-GAAP measures
23	Financial highlights
Overview of Performance
24	Financial results: 2020 vs 2019
24	Medium-term objectives
24	Shareholder returns
25	Impact of COVID-19
27	Economic outlook
27	Impact of foreign currency translation
28	Impact of divested operations
Group Financial Performance
29	Net income
29	Net interest income
31	Non-interest income
32	Provision for credit losses
35	Non-interest expenses
36	Provision for income taxes
37	Financial results review: 2019 vs 2018
39	Fourth quarter review
41	Trending analysis
Business Line Overview
42	Overview
45	Canadian Banking
48	International Banking
52	Global Wealth Management
55	Global Banking and Markets
58	Other

Group Financial Condition
60	Statement of financial position
61	Capital management
72	Off-balance sheet arrangements
76	Financial instruments
77	Selected credit instruments – publicly known risk items
Risk Management
78	Risk management framework
91	Credit risk
101	Market risk
107	Liquidity risk
115	Other risks
Controls and Accounting Policies
120	Controls and procedures
120	Critical accounting estimates
125	Future accounting developments
126	Regulatory developments
128	Related party transactions
Supplementary Data
130	Geographic information
132	Credit risk
137	Revenues and expenses
139	Selected quarterly information
140	Ten-year statistical review

2020 Scotiabank Annual Report  |  15

Management’s Discussion and Analysis

FORWARD LOOKING STATEMENTS

From time to time, our public communications often include oral or written forward-looking statements. Statements of this type are included in this document, and may be included in other filings with Canadian securities regulators or the U.S. Securities and Exchange Commission, or in other communications. In addition, representatives of the Bank may include forward-looking statements orally to analysts, investors, the media and others. All such statements are made pursuant to the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities legislation. Forward-looking statements may include, but are not limited to, statements made in this document, the Management’s Discussion and Analysis in the Bank’s 2020 Annual Report under the headings “Outlook” and in other statements regarding the Bank’s objectives, strategies to achieve those objectives, the regulatory environment in which the Bank operates, anticipated financial results, and the outlook for the Bank’s businesses and for the Canadian, U.S. and global economies. Such statements are typically identified by words or phrases such as “believe,” “expect,” “foresee,” “forecast,” “anticipate,” “intend,” “estimate,” “plan,” “goal,” “project,” and similar expressions of future or conditional verbs, such as “will,” “may,” “should,” “would” and “could.”

By their very nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties, which give rise to the possibility that our predictions, forecasts, projections, expectations or conclusions will not prove to be accurate, that our assumptions may not be correct and that our financial performance objectives, vision and strategic goals will not be achieved.

We caution readers not to place undue reliance on these statements as a number of risk factors, many of which are beyond our control and effects of which can be difficult to predict, could cause our actual results to differ materially from the expectations, targets, estimates or intentions expressed in such forward-looking statements.

The future outcomes that relate to forward-looking statements may be influenced by many factors, including but not limited to: general economic and market conditions in the countries in which we operate; changes in currency and interest rates; increased funding costs and market volatility due to market illiquidity and competition for funding; the failure of third parties to comply with their obligations to the Bank and its affiliates; changes in monetary, fiscal, or economic policy and tax legislation and interpretation; changes in laws and regulations or in supervisory expectations or requirements, including capital, interest rate and liquidity requirements and guidance, and the effect of such changes on funding costs; changes to our credit ratings; operational and infrastructure risks; reputational risks; the accuracy and completeness of information the Bank receives on customers and counterparties; the timely development and introduction of new products and services; our ability to execute our strategic plans, including the successful completion of acquisitions and dispositions, including obtaining regulatory approvals; critical accounting estimates and the effect of changes to accounting standards, rules and interpretations on these estimates; global capital markets activity; the Bank’s ability to attract, develop and retain key executives; the evolution of various types of fraud or other criminal behaviour to which the Bank is exposed; disruptions in or attacks (including cyber-attacks) on the Bank’s information technology, internet, network access, or other voice or data communications systems or services; increased competition in the geographic and in business areas in which we operate, including through internet and mobile banking and non-traditional competitors; exposure related to significant litigation and regulatory matters; the occurrence of natural and unnatural catastrophic events and claims resulting from such events; the emergence of widespread health emergencies or pandemics, including the magnitude and duration of the COVID-19 pandemic and its impact on the global economy, financial market conditions and the Bank’s business, results of operations, financial condition and prospects; and the Bank’s anticipation of and success in managing the risks implied by the foregoing. A substantial amount of the Bank’s business involves making loans or otherwise committing resources to specific companies, industries or countries. Unforeseen events affecting such borrowers, industries or countries could have a material adverse effect on the Bank’s financial results, businesses, financial condition or liquidity. These and other factors may cause the Bank’s actual performance to differ materially from that contemplated by forward-looking statements. The Bank cautions that the preceding list is not exhaustive of all possible risk factors and other factors could also adversely affect the Bank’s results, for more information, please see the “Risk Management” section of the Bank’s 2020 Annual Report, as may be updated by quarterly reports.

Material economic assumptions underlying the forward-looking statements contained in this document are set out in the 2020 Annual Report under the headings “Outlook”, as updated by quarterly reports. The “Outlook” sections are based on the Bank’s views and the actual outcome is uncertain. Readers should consider the above-noted factors when reviewing these sections. When relying on forward-looking statements to make decisions with respect to the Bank and its securities, investors and others should carefully consider the preceding factors, other uncertainties and potential events.

Any forward-looking statements contained in this document represent the views of management only as of the date hereof and are presented for the purpose of assisting the Bank’s shareholders and analysts in understanding the Bank’s financial position, objectives and priorities, and anticipated financial performance as at and for the periods ended on the dates presented, and may not be appropriate for other purposes. Except as required by law, the Bank does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by or on its behalf.

Additional information relating to the Bank, including the Bank’s Annual Information Form, can be located on the SEDAR website at www.sedar.com and on the EDGAR section of the SEC’s website at www.sec.gov.

December 1, 2020

16  |  2020 Scotiabank Annual Report

MANAGEMENT’S DISCUSSION & ANALYSIS

The Management’s Discussion and Analysis (MD&A) is provided to enable readers to assess the Bank’s financial condition and results of operations as at and for the year ended October 31, 2020. The MD&A should be read in conjunction with the Bank’s 2020 Consolidated Financial Statements, including the Notes. This MD&A is dated December 1, 2020.

Additional information relating to the Bank, including the Bank’s 2020 Annual Report, are available on the Bank’s website at www.scotiabank.com. As well, the Bank’s 2020 Annual Report and Annual Information Form are available on the SEDAR website at www.sedar.com and on the EDGAR section of the SEC’s website at www.sec.gov.

Non-GAAP Measures

The Bank uses a number of financial measures to assess its performance. Some of these measures are not calculated in accordance with Generally Accepted Accounting Principles (GAAP), which are based on International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), are not defined by GAAP and do not have standardized meanings that would ensure consistency and comparability among companies using these measures. The Bank believes that certain non-GAAP measures are useful in assessing ongoing business performance and provide readers with a better understanding of how management assesses performance. These non-GAAP measures are used throughout this report and defined below.

Adjusted results and diluted earnings per share

The following tables present reconciliations of GAAP Reported financial results to Non-GAAP Adjusted financial results. The financial results have been adjusted for the following:

1. Acquisition and divestiture-related amounts – Acquisition and divestiture-related amounts are defined as:

A. Acquisition-related costs

1. Integration costs – Includes costs that are incurred and relate to integrating the acquired operations and are recorded in the Global Wealth Management and International Banking operating segments. These costs will cease once integration is complete. The costs relate to the following acquisitions:

• Banco Cencosud, Peru (closed Q2, 2019)

• Banco Dominicano del Progreso, Dominican Republic (closed Q2, 2019)

• MD Financial Management, Canada (closed Q4, 2018)

• Jarislowsky, Fraser Limited, Canada (closed Q3, 2018)

• Citibank consumer and small and medium enterprise operations, Colombia (closed Q3, 2018)

• BBVA, Chile (closed Q3, 2018)

2. Day 1 provision for credit losses on acquired performing financial instruments, as required by IFRS 9. The standard does not differentiate between originated and purchased performing loans and as such, requires the same accounting treatment for both. These credit losses are considered Acquisition-related costs in periods where applicable and are recorded in the International Banking segment. The provision for 2019 relates to Banco Cencosud, Peru and Banco Dominicano del Progreso, Dominican Republic. The provision for 2018 relates to BBVA, Chile and Citibank, Colombia.

3. Amortization of Acquisition-related intangible assets, excluding software. These costs relate to the six acquisitions above, as well as prior acquisitions and are recorded in the Canadian Banking, International Banking and Global Wealth Management operating segments.

B. Net (gain)/loss on divestitures – The Bank announced a number of divestitures in accordance with its strategy to reposition the Bank. The net (gain)/loss on divestitures is recorded in the Other segment, and relates to the following divestitures (refer to Note 37 for further details):

• Operations in Antigua and Barbuda (announced Q4, 2020)

• Operations in British Virgin Islands (closed Q3, 2020)

• Operations in Belize (announced Q3, 2020)

• Equity-accounted investment in Thanachart Bank, Thailand (closed Q1, 2020)

• Colfondos AFP, Colombia (closed Q1, 2020)

• Operations in Puerto Rico and USVI (closed Q1, 2020)

• Insurance and banking operations in El Salvador (closed Q1, 2020)

• Banking operations in the Caribbean (closed Q4, 2019)

• Insurance and pension operations in the Dominican Republic (closed Q2, 2019)

2. Valuation-related adjustments, recorded in Q1, 2020 (pre-tax $315 million) – The Bank modified its allowance for credit losses measurement methodology by adding an additional, more severe pessimistic scenario, consistent with developing practice among major international banks in applying IFRS 9, and the Bank’s prudent approach to expected credit loss provisioning. The modification resulted in an increase in provision for credit losses of $155 million which was recorded in Canadian Banking, International Banking, Global Wealth Management and Global Banking and Markets operating segments. The Bank enhanced its fair value methodology primarily relating to uncollateralized OTC derivatives which resulted in a pre-tax charge of $116 million. This charge was recorded in the Global Banking and Markets and Other operating segments. The Bank also recorded an impairment loss in the Other operating segment of $44 million pre-tax, related to one software asset.

2020 Scotiabank Annual Report  |  17

Management’s Discussion and Analysis

T1  Summary of reconciliation of reported and adjusted results by business line

($ millions)	Canadian Banking		International Banking		Global Wealth Management		Global Banking and Markets		Other			Total
	For the year ended October 31, 2020(1)
Reported net income		$2,536		$1,072		$1,262		$1,955		$28			$6,853
Total adjustments (after tax)		68		200		45		79		(284	)		108
Adjusted net income		$2,604		$1,272		$1,307		$2,034		$(256	)		$6,961
Adjusted net income attributable to equity holders		$2,604		$1,148		$1,297		$2,034		$(257	)		$6,826
	For the year ended October 31, 2019(1)
Reported net income		$3,488		$3,138		$1,184		$1,534		$(546	)		$8,798
Total adjustments (after tax)		16		254		49		–		292			611
Adjusted net income		$3,504		$3,392		$1,233		$1,534		$(254	)		$9,409
Adjusted net income attributable to equity holders		$3,504		$2,953		$1,215		$1,534		$(255	)		$8,951
	For the year ended October 31, 2018(1)
Reported net income		$3,559		$2,508		$1,046		$1,758		$(147	)		$8,724
Total adjustments (after tax)		16		364		40		–		–			420
Adjusted net income		$3,575		$2,872		$1,086		$1,758		$(147	)		$9,144
Adjusted net income attributable to equity holders		$ 3,575		$ 2,588		$ 1,072		$ 1,758		$ (147	)		$ 8,846

(1) Refer to Business Line Overview on page 42.

18  |  2020 Scotiabank Annual Report

T2    Reconciliation of reported and adjusted results and diluted earnings per share

	For the year ended October 31, 2020(1)
($ millions)	Canadian Banking			International Banking			Global Wealth Management			Global Banking and Markets			Other			Total
Reported Results
Net interest income	$	7,838		$	7,603		$	575		$	1,435		$	(131	)	$	17,320
Non-interest income		2,461			3,207			4,009			3,947			392			14,016
Total revenue		10,299			10,810			4,584			5,382			261			31,336
Provision for credit losses		2,073			3,613			7			390			1			6,084
Non-interest expenses		4,811			5,943			2,878			2,473			751			16,856
Income before taxes		3,415			1,254			1,699			2,519			(491	)		8,396
Income tax expense		879			182			437			564			(519	)		1,543
Net income	$	2,536		$	1,072		$	1,262		$	1,955		$	28		$	6,853
Net income attributable to non-controlling interests in subsidiaries (NCI)		–			92			10			–			(27	)		75
Net income attributable to equity holders	$	2,536		$	980		$	1,252		$	1,955		$	55		$	6,778
Preferred shareholders and other equity instrument holders																	196
Net income attributable to common shareholders																$	6,582
Diluted earnings per share (in dollars)																$	5.30
Adjustments
Acquisition-related amounts
Integration costs(2)	$	–		$	154		$	23		$	–		$	–		$	177
Amortization of Acquisition-related intangible assets, excluding software(2)		22			47			37			–			–			106
Acquisition-related costs		22			201			60			–			–			283
Allowance for credit losses – Additional scenario(3)		71			77			1			6			–			155
Derivatives valuation adjustment(4)		–			–			–			102			14			116
Net (gain)/loss on divestitures(5)		–			–			–			–			(298	)		(298	)
Impairment charge on software asset(2)		–			–			–			–			44			44
Adjustments (Pre-tax)		93			278			61			108			(240	)		300
Income tax expense/(benefit)		(25	)		(78	)		(16	)		(29	)		(44	)		(192	)
Adjustments (After tax)		68			200			45			79			(284	)		108
Adjustment attributable to NCI		–			(32	)		–			–			(28	)		(60	)
Adjustments (After tax and NCI)	$	68		$	168		$	45		$	79		$	(312	)	$	48
Adjusted Results
Net interest income	$	7,838		$	7,603		$	575		$	1,435		$	(131	)	$	17,320
Non-interest income		2,461			3,207			4,009			4,049			93			13,819
Total revenue		10,299			10,810			4,584			5,484			(38	)		31,139
Provision for credit losses		2,002			3,536			6			384			1			5,929
Non-interest expenses		4,789			5,742			2,818			2,473			692			16,514
Income before taxes		3,508			1,532			1,760			2,627			(731	)		8,696
Income tax expense		904			260			453			593			(475	)		1,735
Net income	$	2,604		$	1,272		$	1,307		$	2,034		$	(256	)	$	6,961
Net income attributable to NCI		–			124			10			–			1			135
Net income attributable to equity holders	$	2,604		$	1,148		$	1,297		$	2,034		$	(257	)	$	6,826
Preferred shareholders and other equity instrument holders																	196
Net income attributable to common shareholders																$	6,630
Adjusted diluted earnings per share
Adjusted net income attributable to common shareholders																$	6,630
Dilutive impact of share-based payment options and others																	38
Adjusted net income attributable to common shareholders (diluted)																$	6,668
Weighted average number of basic common shares outstanding (millions)																	1,212
Dilutive impact of share-based payment options and others (millions)																	31
Adjusted weighted average number of diluted common shares outstanding (millions)																	1,243
Adjusted diluted earnings per share (in dollars)																$	5.36
Impact of adjustments on diluted earnings per share (in dollars)																$	0.06

(1) Refer to Business Line Overview on page 42.

(2) Recorded in non-interest expenses.

(3) Recorded in provision for credit losses.

(4) Recorded in non-interest income.

(5) (Gain)/Loss on divestitures is recorded in non-interest income; costs related to divestitures are recorded in non-interest expenses.

2020 Scotiabank Annual Report  |  19

Management’s Discussion and Analysis

T2  Reconciliation of reported and adjusted results and diluted earnings per share

	For the year ended October 31, 2019(1)
($ millions)	Canadian Banking			International Banking			Global Wealth Management			Global Banking and Markets			Other			Total
Reported Results
Net interest income	$	7,848		$	8,353		$	564		$	1,396		$	(984	)	$	17,177
Non-interest income		2,616			4,366			3,937			3,084			(146	)		13,857
Total revenue		10,464			12,719			4,501			4,480			(1,130	)		31,034
Provision for credit losses		972			2,076			–			(22	)		1			3,027
Non-interest expenses		4,772			6,596			2,905			2,463			1			16,737
Income before taxes		4,720			4,047			1,596			2,039			(1,132	)		11,270
Income tax expense		1,232			909			412			505			(586	)		2,472
Net income	$	3,488		$	3,138		$	1,184		$	1,534		$	(546	)	$	8,798
Net income attributable to non-controlling interests in subsidiaries (NCI)		–			373			18			–			17			408
Net income attributable to equity holders	$	3,488		$	2,765		$	1,166		$	1,534		$	(563	)	$	8,390
Preferred shareholders and other equity instrument holders																	182
Net income attributable to common shareholders																$	8,208
Diluted earnings per share (in dollars)																$	6.68
Adjustments
Acquisition-related amounts
Day 1 provision for credit losses on acquired performing financial instruments (2)	$	–		$	151		$	–		$	–		$	–		$	151
Integration costs(3)		–			151			27			–			–			178
Amortization of Acquisition-related intangible assets, excluding software(3)		22			55			39			–			–			116
Acquisition-related costs		22			357			66			–			–			445
Net (gain)/loss on divestitures(4)		–			–			–			–			148			148
Adjustments (Pre-tax)		22			357			66			–			148			593
Income tax expense/(benefit)		(6	)		(103	)		(17	)		–			144			18
Adjustments (After tax)		16			254			49			–			292			611
Adjustment attributable to NCI		–			(66	)		–			–			16			(50	)
Adjustments (After tax and NCI)	$	16		$	188		$	49		$	–		$	308		$	561
Adjusted Results
Net interest income	$	7,848		$	8,353		$	564		$	1,396		$	(984	)	$	17,177
Non-interest income		2,616			4,366			3,937			3,084			(19	)		13,984
Total revenue		10,464			12,719			4,501			4,480			(1,003	)		31,161
Provision for credit losses		972			1,925			–			(22	)		1			2,876
Non-interest expenses		4,750			6,390			2,839			2,463			(20	)		16,422
Income before taxes		4,742			4,404			1,662			2,039			(984	)		11,863
Income tax expense		1,238			1,012			429			505			(730	)		2,454
Net income	$	3,504		$	3,392		$	1,233		$	1,534		$	(254	)	$	9,409
Net income attributable to NCI		–			439			18			–			1			458
Net income attributable to equity holders	$	3,504		$	2,953		$	1,215		$	1,534		$	(255	)	$	8,951
Preferred shareholders and other equity instrument holders																	182
Net income attributable to common shareholders																$	8,769
Adjusted diluted earnings per share
Adjusted net income attributable to common shareholders																$	8,769
Dilutive impact of share-based payment options and others																	160
Adjusted net income attributable to common shareholders (diluted)																$	8,929
Weighted average number of basic common shares outstanding (millions)																	1,222
Dilutive impact of share-based payment options and others (millions)																	29
Adjusted weighted average number of diluted common shares outstanding (millions)																	1,251
Adjusted diluted earnings per share (in dollars)(5)																$	7.14
Impact of adjustments on diluted earnings per share (in dollars)																$	0.46

(1) Refer to Business Line Overview on page 42.

(2) Recorded in provision for credit losses.

(3) Recorded in non-interest expenses.

(4) Loss/(gain) on divestitures are recorded in non-interest income; costs related to divestitures are recorded in non-interest expenses.

(5) Earnings per share calculations are based on full dollar and share amounts.

20  |  2020 Scotiabank Annual Report

T2    Reconciliation of reported and adjusted results and diluted earnings per share

	For the year ended October 31, 2018(1)
($ millions)	Canadian Banking			International Banking			Global Wealth Management			Global Banking and Markets			Other			Total
Reported Results
Net interest income	$	7,504		$	7,218		$	498		$	1,454		$	(483	)	$	16,191
Non-interest income		2,907			3,475			3,486			3,074			(358	)		12,584
Total revenue		10,411			10,693			3,984			4,528			(841	)		28,775
Provision for credit losses		790			1,868			3			(50	)		–			2,611
Non-interest expenses		4,811			5,700			2,559			2,233			(245	)		15,058
Income before taxes		4,810			3,125			1,422			2,345			(596	)		11,106
Income tax expense		1,251			617			376			587			(449	)		2,382
Net income	$	3,559		$	2,508		$	1,046		$	1,758		$	(147	)	$	8,724
Net income attributable to non-controlling interests in subsidiaries (NCI)		–			162			14			–			–			176
Net income attributable to equity holders	$	3,559		$	2,346		$	1,032		$	1,758		$	(147	)	$	8,548
Preferred shareholders and other equity instrument holders																	187
Net income attributable to common shareholders																$	8,361
Diluted earnings per share (in dollars)																$	6.82
Adjustments
Acquisition-related amounts
Day 1 provision for credit losses on acquired performing financial instruments (2)	$	–		$	404		$	–		$	–		$	–		$	404
Integration costs(3)		–			70			31			–			–			101
Amortization of Acquisition-related intangible assets, excluding software(3)		20			41			25			–			–			86
Acquisition-related costs		20			515			56			–			–			591
Adjustments (Pre-tax)		20			515			56			–			–			591
Income tax expense/(benefit)		(4	)		(151	)		(16	)		–			–			(171	)
Adjustments (After tax)		16			364			40			–			–			420
Adjustment attributable to NCI		–			(122	)		–			–			–			(122	)
Adjustments (After tax and NCI)	$	16		$	242		$	40		$	–		$	–		$	298
Adjusted Results
Net interest income	$	7,504		$	7,218		$	498		$	1,454		$	(483	)	$	16,191
Non-interest income		2,907			3,475			3,486			3,074			(358	)		12,584
Total revenue		10,411			10,693			3,984			4,528			(841	)		28,775
Provision for credit losses		790			1,464			3			(50	)		–			2,207
Non-interest expenses		4,791			5,589			2,503			2,233			(245	)		14,871
Income before taxes		4,830			3,640			1,478			2,345			(596	)		11,697
Income tax expense		1,255			768			392			587			(449	)		2,553
Net income	$	3,575		$	2,872		$	1,086		$	1,758		$	(147	)	$	9,144
Net income attributable to NCI		–			284			14			–			–			298
Net income attributable to equity holders	$	3,575		$	2,588		$	1,072		$	1,758		$	(147	)	$	8,846
Preferred shareholders and other equity instrument holders																	187
Net income attributable to common shareholders																$	8,659
Adjusted diluted earnings per share
Adjusted net income attributable to common shareholders																$	8,659
Dilutive impact of share-based payment options and others																	72
Adjusted net income attributable to common shareholders (diluted)																$	8,731
Weighted average number of basic common shares outstanding (millions)																	1,213
Dilutive impact of share-based payment options and others (millions)																	16
Adjusted weighted average number of diluted common shares outstanding (millions)																	1,229
Adjusted diluted earnings per share (in dollars)(4)																$	7.11
Impact of adjustments on diluted earnings per share (in dollars)																$	0.29

(1) Refer to Business Line Overview on page 42.

(2) Recorded in provision for credit losses.

(3) Recorded in non-interest expenses.

(4) Earnings per share calculations are based on full dollar and share amounts.

2020 Scotiabank Annual Report  |  21

Management’s Discussion and Analysis

Reconciliation of International Banking’s reported results and constant dollar results

International Banking business segment results are analyzed on a constant dollar basis. Under the constant dollar basis, prior period amounts are recalculated using current period average foreign currency rates. The following table presents the reconciliation between reported and constant dollar results for International Banking for prior periods.

For the year ended October 31 ($ millions)	2019						2018
(Taxable equivalent basis)	Reported		Foreign exchange		Constant dollar		Reported		Foreign exchange			Constant dollar
Net interest income	$	8,353	$	500	$	7,853	$	7,218	$	414		$	6,804
Non-interest income		4,366		148		4,218		3,475		118			3,357
Total revenue		12,719		648		12,071		10,693		532			10,161
Provision for credit losses		2,076		142		1,934		1,868		191			1,677
Non-interest expenses		6,596		389		6,207		5,700		353			5,347
Income tax expense		909		21		888		617		(18	)		635
Net Income	$	3,138	$	96	$	3,042	$	2,508	$	6		$	2,502
Net income attributable to non-controlling interest in subsidiaries	$	373	$	35	$	338	$	162	$	6		$	156
Net income attributable to equity holders of the Bank	$	2,765	$	61	$	2,704	$	2,346	$	–		$	2,346
Other measures
Average assets ($ billions)	$	201	$	10	$	191	$	165	$	6		$	159
Average liabilities ($ billions)	$	153	$	9	$	144	$	127	$	6		$	121

The above table is computed on a basis that is different than the table “Impact of foreign currency translation” in Overview of Performance on page 27.

Core banking assets

Core banking assets are average interest earning assets excluding bankers’ acceptances and trading assets.

Core banking margin

This ratio represents net interest income divided by core banking assets.

Return on equity

Return on equity is a profitability measure that presents the net income attributable to common shareholders as a percentage of average common shareholders’ equity.

In the first quarter of 2020, in line with OSFI’s increased Domestic Stability Buffer announced requirements, the Bank increased the capital attributed to its business lines to approximate 10.5% of Basel III common equity capital requirements based on credit, market and operational risks and leverage inherent within each business segment. Previously, capital was attributed based on a methodology that approximated 10.0% of Basel III common equity capital requirements.

Return on equity for the business segments is calculated as a ratio of net income attributable to common shareholders of the business segment and the capital attributed. Prior period returns on equity for the business segments have not been restated.

22  |  2020 Scotiabank Annual Report

T3  Financial highlights

As at and for the years ended October 31	2020(1)			2019(1)			2018
Operating results ($ millions)
Net interest income		17,320			17,177			16,191
Non-interest income		14,016			13,857			12,584
Total revenue		31,336			31,034			28,775
Provision for credit losses		6,084			3,027			2,611
Non-interest expenses		16,856			16,737			15,058
Income tax expense		1,543			2,472			2,382
Net income		6,853			8,798			8,724
Net income attributable to common shareholders		6,582			8,208			8,361
Operating performance
Basic earnings per share ($)		5.43			6.72			6.90
Diluted earnings per share ($)		5.30			6.68			6.82
Return on equity (%)		10.4			13.1			14.5
Productivity ratio (%)		53.8			53.9			52.3
Operating leverage (%)		0.3			(3.3	)		3.0
Core banking margin (%)(2)		2.27			2.44			2.46
Financial position information ($ millions)
Cash and deposits with financial institutions		76,460			46,720			62,269
Trading assets		117,839			127,488			100,262
Loans		603,263			592,483			551,834
Total assets		1,136,466			1,086,161			998,493
Deposits		750,838			733,390			676,534
Common equity		62,819			63,638			61,044
Preferred shares and other equity instruments		5,308			3,884			4,184
Assets under administration		558,594			558,408			517,596
Assets under management		291,701			301,631			280,656
Capital and liquidity measures
Common Equity Tier 1 (CET1) capital ratio (%)		11.8			11.1			11.1
Tier 1 capital ratio (%)		13.3			12.2			12.5
Total capital ratio (%)		15.5			14.2			14.3
Leverage ratio (%)		4.7			4.2			4.5
Risk-weighted assets ($ millions)(3)		417,138			421,185			400,507
Liquidity coverage ratio (LCR) (%)		138			125			124
Credit quality
Net impaired loans ($ millions)		3,096			3,540			3,453
Allowance for credit losses ($ millions)(4)		7,820			5,145			5,154
Gross impaired loans as a % of loans and acceptances		0.81			0.84			0.89
Net impaired loans as a % of loans and acceptances		0.50			0.58			0.60
Provision for credit losses as a % of average net loans and acceptances(5)		0.98			0.51			0.48
Provision for credit losses on impaired loans as a % of average net loans and acceptances(5)		0.56			0.49			0.43
Net write-offs as a % of average net loans and acceptances		0.47			0.50			0.44
Adjusted results(2)
Adjusted net income ($ millions)		6,961			9,409			9,144
Adjusted diluted earnings per share ($)		5.36			7.14			7.11
Adjusted return on equity (%)		10.4			13.9			14.9
Adjusted productivity ratio (%)		53.0			52.7			51.7
Adjusted operating leverage (%)		(0.6	)		(2.1	)		3.7
Adjusted provision for credit losses as a % of average net loans and acceptances(5)		0.95			0.49			0.41
Common share information
Closing share price ($) (TSX)		55.35			75.54			70.65
Shares outstanding (millions)
Average – Basic		1,212			1,222			1,213
Average – Diluted		1,243			1,251			1,229
End of period		1,211			1,216			1,227
Dividends paid per share ($)		3.60			3.49			3.28
Dividend yield (%)(6)		5.8			4.9			4.2
Market capitalization ($ millions) (TSX)		67,055			91,867			86,690
Book value per common share ($)		51.85			52.33			49.75
Market value to book value multiple		1.1			1.4			1.4
Price to earnings multiple (trailing 4 quarters)		10.2			11.2			10.2
Other information
Employees (full-time equivalent)		92,001			101,813			97,021
Branches and offices		2,618			3,109			3,095

(1) The amounts for the year ended October 31, 2020 have been prepared in accordance with IFRS 16; amounts for the years ended October 31, 2020 and October 31, 2019 have been prepared in accordance with IFRS 15; prior year amounts have not been restated (refer to Notes 3 and 4 of the Consolidated Financial Statements).

(2) Refer to page 17 for a discussion of Non-GAAP measures.

(3) In accordance with OSFI’s requirements, effective January 31, 2019, credit valuation adjustment (CVA) RWA have been fully phased-in. In 2018, CVA RWA were calculated using scalars of 0.80, 0.83 and 0.86 to compute the CET1 capital ratio, Tier 1 capital ratio and Total capital ratio, respectively.

(4) Includes allowance for credit losses on all financial assets—loans, acceptances, off-balance sheet exposures, debt securities, and deposits with financial institutions.

(5) Includes provision for credit losses on certain financial assets—loans, acceptances, and off-balance sheet exposures.

(6) Based on the average of the high and low common share price for the year.

2020 Scotiabank Annual Report  |  23

Management’s Discussion and Analysis

OVERVIEW OF PERFORMANCE

Financial Results: 2020 vs 2019

Net income was $6,853 million in 2020, down 22% from $8,798 million in 2019. Diluted earnings per share (EPS) were $5.30 compared to $6.68. Return on equity was 10.4% compared to 13.1%.

Adjusted net income was $6,961 million, down 26% from $9,409 million. This decrease was due mainly to the higher provision for credit losses on performing loans resulting from the impact of COVID-19 market and economic conditions. Adjusted Diluted EPS were $5.36 compared to $7.14 and adjusted Return on equity was 10.4% compared to 13.9%.

Net interest income was $17,320 million, an increase of $143 million or 1%. The negative impact of divested operations of approximately 2% was more than offset by business growth of 3%, driven primarily by increases in earning assets and higher contribution from asset/liability management activities, partly offset by the impact of foreign currency translation. The core banking margin was down 17 basis points to 2.27% from lower margins across all business lines due to impact of central bank rate cuts and changes in business mix, as well as an increased mix of lower-margin high quality liquid assets related to higher liquidity levels.

Non-interest income was $14,016 million, up $159 million or 1%. Adjusted non-interest income was $13,819 million, a decrease of $165 million or 1%. The

impact of divested operations was approximately 6%, offset by business growth of 5%. This growth was driven by higher trading revenues, underwriting and advisory fees, investment gains, and wealth management fees. These were partly offset by lower banking revenues, insurance income, other fees and commissions, and the negative impact of foreign currency translation.

The provision for credit losses was $6,084 million, compared to $3,027 million last year, an increase of $3,057 million. Adjusted provision for credit losses was $5,929 million, compared to $2,876 million, an increase of $3,053 million or 106% due primarily to higher provision on performing loans across all business lines. The provision for credit losses ratio was 98 basis points, up 47 basis points from 51 basis points last year. Adjusted provision for credit losses ratio was 95 basis points, 46 basis points above last year.

Non-interest expenses were $16,856 million, an increase of $119 million or 1%. Adjusted non-interest expenses were $16,514 million, an increase of 1%. Higher salaries and benefits related to regulatory and technology initiatives, charges related to the metals investigations, COVID-19 related costs and other business growth-related expenses were mostly offset by lower advertising and business development expenses, professional fees, the positive impact of foreign currency translation and divested operations. Operating leverage was positive 0.3% on a reported basis and negative 0.6% on an adjusted basis. Excluding the impact of divested operations, operating leverage was positive 1.0%.

The provision for income taxes was $1,543 million, a decrease of $929 million. The effective tax rate was 18.4% compared to 21.9%, due primarily to significantly higher provision for credit losses recorded in entities that operate in higher tax rate jurisdictions and changes in earnings mix across businesses and jurisdictions.

The Basel III Common Equity Tier 1 ratio was 11.8% as at October 31, 2020, compared to 11.1% last year.

Medium-term financial objectives

The following table provides a summary of our 2020 performance against our medium-term financial performance objectives:

	2020 Results
		Reported			Adjusted(1)
Diluted earnings per share growth of 7%+			(20.7	)%		(24.9)%
Return on equity of 14%+			10.4	%		10.4%
Achieve positive operating leverage			Positive 0.3	%		Negative 0.6%
Maintain strong capital ratios			CET1 capital ratio of 11.8	%		CET1 capital ratio of 11.8%

(1) Refer to non-GAAP measures on page 17.

Shareholder Returns   In fiscal 2020, the total shareholder return on the Bank’s shares was negative 22.3%, compared to the total return of the S&P/TSX Composite Index of negative 2.3%.   The total compound annual shareholder return on the Bank’s shares over the past five years was 2.7%, and 4.6% over the past 10 years. This is below the total annual return of the S&P/TSX Composite Index, which was 6.1% over the past five years and 5.2% over the last 10 years.   Dividends per share totaled $3.60 for the year, up 3% from $3.49 in 2019. The dividend payout ratio for the year of 66.3% or 65.8% on an adjusted basis, was above the Bank’s target payout range of 40-50%. On March 13, 2020, OSFI advised federally regulated deposit taking institutions to suspend dividend increases as part of COVID-19 measures. C1  Closing common share price
as at October 30    

24  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Overview of Performance

T4  Shareholder returns

For the years ended October 31	2020			2019		2018
Closing market price per common share ($)		55.35			75.54		70.65
Dividends paid ($ per share)		3.60			3.49		3.28
Dividend yield (%)(1)		5.8			4.9		4.2
Increase (decrease) in share price (%)		(26.7	)		6.9		(15.2	)
Total annual shareholder return (%)(2)		(22.3	)		12.4		(11.6	)

(1) Dividend yield is calculated as the dividend paid divided by the average of the high and low common share price for the year.

(2) Total annual shareholder return assumes reinvestment of quarterly dividends, and therefore may not equal the sum of dividend and share price returns in the table.

C2 Return to common shareholders Share price appreciation plus dividends reinvested, 2010=100

        

Impact of COVID-19

On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. Absent any medical approaches to slow the spread of the virus, governments around the world implemented a number of measures to curtail the outbreak and slow its progression. These included business closures, travel restrictions, quarantines, and limits on public and private gatherings. These measures led to a sharp reduction in economic activity over the March to May period in a large number of developed and emerging economies.

The economic impacts of these measures and uncertainty about the path forward led to severe stresses in financial markets in the early days of the pandemic. To ease strains in funding markets, central banks undertook prompt and large-scale efforts to increase market liquidity. This resulted in sharp cuts in interest rates, quantitative easing programs in some countries, direct lending to businesses, and targeted liquidity injections in various credit product markets. In some countries, regulatory authorities allowed banks to offer deferral programs to customers without requiring them to reclassify affected loans. In addition to these financial measures, fiscal authorities deployed historic amounts of direct support to firms and households including most prominently wage subsidies for firms and generous financial assistance to employees affected by the pandemic. These programs remain in operation in most countries.

As it became clear that measures to slow the spread of the virus were effective, economies were re-opened, leading to a surge in economic activity in those countries. Lower interest rates and direct support measures for firms and households fueled the rebound, as evidenced by the evolution in global consumption observed since economies re-opened. Despite the scale of the rebound observed so far, it will take many quarters to recover lost output. Unemployment remains significantly above pre-pandemic levels in almost all countries. Some sectors will undergo a prolonged adjustment to the behavioral changes caused by the virus, while others have thrived and will continue to do so. We see this unfolding across our footprint. The Bank has demonstrated financial strength and operational resilience despite these events, while protecting the health and safety of employees, and supporting customers.

Despite early success in slowing the spread of COVID-19, the global number of infections has recently risen dramatically. There remains uncertainty about the evolution of the virus, the measures that may be implemented to slow its spread, and the timing of an eventual vaccine, although we are encouraged by recently reported progress towards a vaccine. These factors add to uncertainty surrounding the outlook. It remains clear that substantial policy support remains appropriate globally to help bridge economies to the post-COVID state of the world. Despite this uncertainty, we remain cautiously optimistic that the countries in which we operate will rebound over the next twelve months owing to their strong policy frameworks and the support they have provided to their economies in recent months.

Fiscal and monetary stimulus

Governments have implemented a number of monetary and fiscal stimulus measures to deal with the unprecedented situation.

Central banks in Canada and across the Bank’s footprint have enacted monetary policy measures to support economic activity, including lowering interest rates and additional funding measures.

Interest Rate Reductions

Canada

U.S.

Mexico

Peru

Chile

Colombia

March 1, 2020 – October 31, 2020

150bps

150bps

275bps

200bps

125bps

250bps

As part of Canada’s response to COVID-19, the Government of Canada launched various programs, starting in March 2020, to provide additional funding to financial institutions in order to support lending to the real economy and promote stability of financial markets, including the following:

Program	Program Description
Term Repo	Bank of Canada acquires assets temporarily through repurchase style transactions. Eligible collateral includes NHA MBS, covered bonds and other marketable securities.
Bankers’ Acceptance Purchase Facility	Bank of Canada conducts secondary market asset purchases of Acceptances with a maturity of up to approximately 3 months and subject to a minimum short-term credit rating.
Insured Mortgage Purchase Program	Canada Mortgage and Housing Corporation purchases NHA MBS.
Standing Term Liquidity Facility	Bank of Canada provides secured funding to eligible financial institutions for up to 90 days. The facility is secured by a broad set of collateral including loans and marketable securities.
Secondary Market Asset Purchases	Bank of Canada purchases targeted securities either by way of tender or transactions in the open market.

Outside of Canada, governments in countries in which the Bank operates also announced programs, starting in March 2020, to support lending and liquidity in financial markets. Central Banks across the Pacific Alliance region have developed programs to ensure enough liquidity including increasing both secured and unsecured funding and increasing the range of eligible collateral to secure funding.

Capital and Liquidity measures

OSFI introduced changes to regulations to keep the financial system resilient and well capitalized in response to COVID-19. A suite of temporary adjustments to existing capital and leverage requirements were introduced, including lowering the domestic stability buffer by 125 basis points from 2.25% to 1.0% in March, 2020. For details on capital management measures, refer to the capital management section on page 61.

2020 Scotiabank Annual Report  |  25

Management’s Discussion and Analysis

The Bank has maintained strong capital and liquidity positions with a Common Equity Tier 1 (CET1) ratio of 11.8% as at October 31, 2020 and average Liquidity Coverage Ratio (LCR) of 138% for the year ended October 31, 2020. The Bank continues to ensure that its funding sources are well diversified and bolstered its liquidity position during the second and, to a lesser extent, third and fourth quarters through participation in above listed funding measures for financial institutions announced by governments in Canada and across the footprint.

Pandemic response measures launched by the Bank

Customer Assistance Programs

To support customers, the Bank has implemented a number of customer assistance programs across the footprint.

Canada

Offering of assistance programs largely ended on September 30, 2020. Customers participating in the programs may have deferrals that extend beyond this date. The table below provides a brief description of the nature of these programs and outstanding balances for accounts that remain in active deferral status as of October 31, 2020:

Product	As at October 31, 2020		As at July 31, 2020		As at April 30, 2020		Program Detail
	# of customer accounts (000s)	Amount outstanding ($ MM)	# of customer accounts (000s)	Amount outstanding ($ MM)	# of customer accounts (000s)	Amount outstanding ($ MM)
Residential Mortgages	16	$4,257	137	$38,959	134	$38,010	Up to six months deferral of total payments
Personal Loans	16	612	66	2,316	164	5,494	Up to six months deferral on minimum requirements for line of credit accounts, and total payments on secured and unsecured term loans including auto
Credit Cards	3	18	33	174	73	411	Up to four months deferral on minimum payment requirements
Commercial & Small Business Loans(1)	1	232	7	1,986	10	4,298	Up to three months payment deferral

(1) Prior period amounts have been restated to conform to current period presentation.

For customer accounts where payment deferrals have expired during the year, approximately 97% are current on payments.

The Bank is participating in the following plans as part of the Government of Canada’s COVID-19 Economic Response Plan:

Canada Emergency Wage Subsidy (CEWS)

The Bank is participating in the CEWS by facilitating enrolment in direct deposit where eligible businesses receive a subsidy from the Government of Canada of 75% of employee wages for up to 24 weeks. Businesses are able to re-hire workers previously laid off as a result of COVID-19. The CEWS has been extended until June 2021.

Canada Emergency Business Account (CEBA)

Through the CEBA program the Bank facilitated loans with eligible small business customers and Export Development Canada (EDC). Eligible small business customers received a loan of up to $40,000. The Government has announced an expansion to CEBA which will enable eligible businesses and not-for-profits to access an additional interest free loan of up to $20,000. The application deadline for CEBA has been extended to December 31, 2020.

Business Credit Availability Program (BCAP)

The BCAP provides additional liquidity support to small business and commercial customers through EDC and Business Development Bank of Canada (BDC). The BCAP has been extended until June 2021.

• Under the EDC plan, EDC guarantees an 80% portion of new operating loans made to the export sector as well as domestic companies.

• Under the BCAP, BDC entered into a co-lending facility with the Bank in which BDC purchases an 80% participation in term loans made to eligible small business and commercial customers.

• Under the BCAP Mid-Market Financing Program, BDC will enter into loan syndications with the Bank and underwrite 90% of junior term loans made to eligible medium-sized businesses.

For details on the CEBA and BCAP programs, refer to the off-balance sheet arrangements section on page 72.

International

Offering of assistance programs for retail loans ended on October 31, 2020 and for commercial loans on September 30, 2020 with some exceptions including requirements by local regulators. Customers participating in the programs may have deferrals that extend beyond these

26  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Overview of Performance

dates. The table below provides a brief description of the nature of these programs and outstanding balances for accounts that remain in active deferral status as of October 31, 2020:

Product	As at October 31, 2020		As at July 31, 2020		As at April 30, 2020		Program Detail
	# of customer accounts (000s)	Amount outstanding ($ MM)	# of customer accounts (000s)	Amount outstanding ($ MM)	# of customer accounts (000s)	Amount outstanding ($ MM)
Residential Mortgages	36	$3,699	99	$9,428	94	$9,695	Up to six months deferral of total payments
Personal Loans	152	1,342	727	5,160	1,066	6,690	Up to six months deferral on minimum payment requirements for line of credit accounts, and total payments on secured and unsecured term loans including auto
Credit Cards	299	961	1,504	3,530	1,499	3,433	Up to six months deferral on minimum payment requirements
Commercial & Small Business Loans(1)	0.7	4,600	2	8,000	2	6,300	Up to six months payment deferral, increases in short term liquidity lines, and other amendments

(1) Prior period amounts have been restated to conform to current period presentation.

For customer accounts where payment deferrals have expired during the year, approximately 90% are current on payments.

Economic Outlook

The global resurgence in COVID-19 cases is threatening what had been up to now a powerful post-lockdown rebound in economic activity. While this risk had long been identified, the speed at which the virus has returned is of concern, though policy efforts to slow the spread of the virus are much more targeted than in the first phase of the pandemic. This should limit the economic implications of this phase relative to the onset of the pandemic. We remain of the view that the global recovery will continue through 2021, though it will be slower than the torrid post-lockdown pace observed thus far in the second half of 2020.

Policy support remains critical to the recovery and governments in affected countries continue to deploy, or stand ready to increase, substantial support to firms and households to help manage an extension of the pandemic. This is the case in Canada and many European countries. In the United States, the approach to managing the virus stands in sharp contrast to other economies, as legislators seem unable to agree on additional support to households.

Despite the increase in case loads, economic indicators remain generally strong, though the pace of increase in these indicators is naturally slowing from exaggerated post-lockdown readings. In Canada, the strength remains apparent in retail and home sales, and households continue to benefit from exceptional government support, which has recently been extended, and low interest rates.

Inflationary pressures are expected to remain largely muted across the major economies, leading central banks to keep policy interest rates at current levels for an extended period. While yield curves should steepen a bit given the recovery in economic activity, the need for accommodative financial conditions is likely to prompt central banks to act if longer-term interest rates come under significant upward pressure. There is a risk, however, that lack of clarity over the Fed’s new approach to managing inflation may lead to greater price pressures than currently assessed.

There is now compelling evidence of a post-lockdown economic rebound in the Pacific Alliance countries. Policy support and a gradual return to more normal life in these countries continues to support our view that a strong rebound is set for the second half of 2020, extending into 2021. Prospects are not uniform across the region. Virus control remains a challenge, as seen elsewhere in the world, and uncertainty about ongoing reform efforts and political processes will affect some countries.

Outlook

The Bank’s strategy is expected to deliver better returns for our shareholders in all core markets in the future. While the economic recovery is expected to be staggered, with different countries returning to positive year-over-year economic growth at different times, 2021 is expected to be a transition year towards a return to the full earnings power of the Bank supported by a return to normal provision for credit loss levels. The Bank’s capital position is expected to remain strong in 2021.

Impact of Foreign Currency Translation

The impact of foreign currency translation on net income is shown in the table below.

T5  Impact of foreign currency translation

	2020					2019					2018
For the fiscal years	Average exchange rate		% Change			Average exchange rate		% Change			Average exchange rate		% Change
U.S. Dollar/Canadian Dollar		0.744		(1.2	)%		0.753		(3.2	)%		0.777		1.6	%
Mexican Peso/Canadian Dollar		15.832		8.4	%		14.607		(1.3	)%		14.802		1.3	%
Peruvian Sol/Canadian Dollar		2.569		2.3	%		2.512		(1.0	)%		2.538		1.0	%
Colombian Peso/Canadian Dollar		2,722		11.2	%		2,447		7.7	%		2,272		0.3	%
Chilean Peso/Canadian Dollar		591.712		14.3	%		517.805		5.1	%		492.892		(1.4	)%

2020 Scotiabank Annual Report  |  27

Management’s Discussion and Analysis

Impact on net income(1) ($ millions except EPS)	2020 vs. 2019			2019 vs. 2018			2018 vs. 2017
Net interest income	$	(481	)	$	(52	)	$	(101	)
Non-interest income(2)		(196	)		30			(21	)
Non-interest expenses		397			60			85
Other items (net of tax)		261			22			17
Net income	$	(19	)	$	60		$	(20	)
Earnings per share (diluted)	$	(0.02	)	$	0.05		$	(0.02	)
Impact by business line ($ millions)
Canadian Banking	$	2		$	7		$	(4	)
International Banking(2)		(23	)		51			(42	)
Global Wealth Management		(9	)		–			(4	)
Global Banking and Markets		11			28			(12	)
Other(2)		–			(26	)		42
	$	(19	)	$	60		$	(20	)

(1) Includes impact of all currencies.

(2) Includes the impact of foreign currency hedges.

Impact of Divested Operations

The table below reflects the income earned in each period from divested operations prior to the closing. Refer to Note 37 in the accompanying financial statements for the list of divested operations that have closed.

T6  Impact of divested operations

($ millions)	2020		2019		2018
Net interest income	$	76	$	432	$	440
Non-interest income		72		847		734
Total revenue		148		1,279		1,174
Provision for credit losses		8		11		(40	)
Non-interest expenses		65		404		423
Income before taxes		75		864		791
Income tax expense		15		210		189
Net income	$	60	$	654	$	602
Net income attributable to non-controlling interests (NCI)		–		7		6
Net income attributable to equity holders – relating to divested operations	$	60	$	647	$	596

($ millions except EPS)	2020 vs. 2019			2019 vs. 2018
Net interest income	$	(356	)	$	(8	)
Non-interest income		(775	)		113
Total revenue		(1,131	)		105
Provision for credit losses		(3	)		51
Non-interest expenses		(339	)		(19	)
Income before taxes		(789	)		73
Income tax expense		(195	)		21
Net income	$	(594	)	$	52
Net income attributable to equity holders of the Bank		(587	)		51
Earnings per share (diluted)	$	(0.47	)	$	0.03

28  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Group Financial Performance

GROUP FINANCIAL PERFORMANCE

Net Income

Net income was $6,853 million, down 22% compared to $8,798 million last year. On an adjusted basis, net income was $6,961 million, down 26% from $9,409 million due mainly to higher provision for credit losses resulting from COVID-19 related events.

Net Interest Income

Net interest income was $17,320 million, an increase of $143 million or 1%. The negative impact of divested operations of approximately 2% was more than offset by business growth of 3%, driven primarily by increases in earning assets and higher contribution from asset/liability management activities, partly offset by the impact of foreign currency translation.

Net interest income in Canadian Banking was in line with the previous year as strong asset and deposit growth was offset by margin compression from central bank rate cuts and changes in business mix. Net interest income decreased $750 million or 9% in International Banking, mainly from the negative impact of foreign currency translation (6%) and divested operations (4%). The benefit of loan growth, mainly in Latin America, was offset by margin compression driven by central bank rate cuts. Global Banking and Markets net interest income increased $39 million or 3% from growth in deposits and loans, partly offset by lower lending margins. The Other Segment net interest income increased $853 million or 87% from the higher contribution from asset/liability management activities.

Core banking assets increased $53 billion or 8% to $757 billion. The increase was driven by growth in high quality liquid assets, reflecting higher liquidity levels, increases in corporate loans in Global Banking and Markets, mainly a result of corporate drawdowns, and higher residential mortgages and business loans in Canadian Banking.

The core banking margin was down 17 basis points to 2.27% from lower margins across all business lines due to the impact of central bank rate cuts and changes in business mix, as well as an increased mix of lower-margin high quality liquid assets related to higher liquidity levels.

T7  Net interest income and core banking margin⁽¹⁾

	2020							2019							2018
($ billions, except percentage amounts)	Average balance		Interest		Average rate			Average balance		Interest		Average rate			Average balance		Interest		Average rate
Total average assets and net interest income	$	1,160.6	$	17.3				$	1,056.1	$	17.2				$	945.7	$	16.2
Less: trading related businesses(1)		321.5		0.1					279.5		0.1					234.6		0.1
Banking margin on average total assets	$	839.1	$	17.2		2.05	%	$	776.6	$	17.1		2.21	%	$	711.1	$	16.1		2.26	%
Less: non-earning assets and customers’ liability under acceptances		82.1		–					72.8		–					58.7		–
Core banking assets and margin	$	757.0	$	17.2		2.27	%	$	703.8	$	17.1		2.44	%	$	652.4	$	16.1		2.46	%

(1) Most net interest income from trading assets is recorded in trading revenues in non-interest income.

2020 Scotiabank Annual Report  |  29

Management’s Discussion and Analysis

T8  Average balance sheet⁽¹⁾ and net interest income

	2020								2019								2018
For the fiscal years ($ billions)	Average balance			Interest		Average rate			Average balance			Interest		Average rate			Average balance			Interest		Average rate
Assets
Deposits with financial institutions	$	66.0		$	0.4		0.63	%	$	49.6		$	0.9		1.87	%	$	54.2		$	0.9		1.59	%
Trading assets		128.1			0.4		0.36	%		116.9			0.3		0.25	%		101.6			0.2		0.17	%
Securities purchased under resale agreements and securities borrowed		128.3			0.3		0.22	%		121.0			0.5		0.41	%		94.4			0.4		0.47	%
Investment securities		105.0			1.6		1.50	%		87.5			2.0		2.22	%		79.8			1.6		2.01	%
Loans:
Residential mortgages		273.4			9.2		3.36	%		261.5			9.4		3.59	%		244.2			8.3		3.39	%
Personal loans		96.2			6.1		6.35	%		97.7			6.8		6.98	%		92.1			6.0		6.55	%
Credit cards		16.4			3.2		19.31	%		17.5			3.3		18.76	%		15.1			2.8		18.45	%
Business and government		229.7			8.5		3.71	%		206.3			9.6		4.66	%		177.0			7.9		4.45	%
Allowance for credit losses		(6.1	)							(5.2	)							(5.0	)
Total loans	$	609.6		$	27.0		4.43	%	$	577.8		$	29.1		5.04	%	$	523.4		$	25.0		4.77	%
Total earning assets	$	1,037.0		$	29.7		2.87	%	$	952.8		$	32.8		3.44	%	$	853.4		$	28.1		3.29	%
Customers’ liability under acceptances		16.0								16.3								16.3
Other assets		107.6								87.0								76.0
Total assets	$	1,160.6		$	29.7		2.56	%	$	1,056.1		$	32.8		3.10	%	$	945.7		$	28.1		2.97	%
Liabilities and equity
Deposits(2):
Personal	$	231.4		$	3.2		1.39	%	$	221.0		$	3.8		1.70	%	$	204.5		$	3.3		1.59	%
Business and government		487.3			6.9		1.42	%		448.3			9.1		2.03	%		399.7			6.5		1.64	%
Financial institutions		47.5			0.6		1.25	%		40.2			1.0		2.56	%		42.2			0.7		1.77	%
Total deposits	$	766.2		$	10.7		1.40	%	$	709.5		$	13.9		1.95	%	$	646.4		$	10.5		1.63	%
Obligations related to securities sold under repurchase agreements and securities lent		134.8			0.2		0.17	%		114.6			0.3		0.29	%		96.0			0.3		0.25	%
Subordinated debentures		7.3			0.2		3.28	%		7.5			0.3		3.91	%		5.7			0.2		3.71	%
Other interest-bearing liabilities		69.5			1.3		1.71	%		63.9			1.1		1.74	%		60.1			0.9		1.46	%
Total interest-bearing liabilities	$	977.8		$	12.4		1.27	%	$	895.5		$	15.6		1.74	%	$	808.2		$	11.9		1.47	%
Financial instruments designated at fair value through profit or loss		16.9								11.3								9.5
Other liabilities including acceptances		95.6								79.8								63.9
Equity(3)		70.3								69.5								64.1
Total liabilities and equity	$	1,160.6		$	12.4		1.07	%	$	1,056.1		$	15.6		1.48	%	$	945.7		$	11.9		1.26	%
Net interest income				$	17.3							$	17.2							$	16.2

(1) Average of daily balances.

(2) Prior year amounts have been restated to adjust for financial instruments designated at fair value through profit or loss, previously reported under deposits.

(3) Includes non-controlling interest of $2.5 (2019 – $2.7; 2018 – $1.9).

30  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Group Financial Performance

Non-Interest Income

T9  Non-interest income

For the fiscal years ($ millions)	2020		2019		2018		2020 versus 2019
Banking
Card Revenues(1)	$	789	$	977	$	1,105		(19	)%
Banking services fees		1,540		1,812		1,705		(15	)
Credit fees		1,348		1,316		1,191		2
Total banking revenues	$	3,677	$	4,105	$	4,001		(10	)%
Wealth management
Mutual funds	$	1,945	$	1,849	$	1,714		5	%
Brokerage fees		902		876		895		3
Investment management and trust
Investment management and custody		749		848		551		(12	)
Personal and corporate trust		197		202		181		(2	)
		946		1,050		732		(10	)
Total wealth management revenues	$	3,793	$	3,775	$	3,341		–	%
Underwriting and other advisory		690		497		514		39
Non-trading foreign exchange		708		667		622		6
Trading revenues		2,411		1,488		1,420		62
Net gain on sale of investment securities		607		351		146		73
Net income from investments in associated corporations		242		650		559		(63	)
Insurance underwriting income, net of claims		497		676		686		(26	)
Other fees and commissions		688		949		841		(28	)
Other		703		699		454		1
Total non-interest income	$	14,016	$	13,857	$	12,584		1	%

(1) The amounts for the years ended October 31, 2020 and October 31, 2019 have been prepared in accordance with IFRS 15, prior year amounts have not been restated. (Refer to Notes 3 and 4 in the Consolidated Financial Statements).

C3 Sources of non-interest income

        

Non-interest income was up $159 million or 1% to $14,016 million. Adjusted non-interest income was $13,819 million, a decrease of $165 million or 1%. The impact of divested operations was approximately 6%, offset by growth of 5% driven by higher trading revenues, underwriting and advisory fees, gains on investment securities, and wealth management fees. These were partly offset by lower banking revenues, insurance income, other fees and commissions, and the negative impact of foreign currency translation.

Banking revenues, net of related expenses, were down $428 million or 10% to $3,677 million. The decrease was due to lower card revenues and deposit and payment service fees, driven by lower economic activity due to the pandemic.

Wealth management revenues increased $18 million from higher mutual fund revenues and brokerage fees, partly offset by lower investment management and trust revenues, and the impact of divested operations.

Trading revenues were up $923 million or 62%, mainly from higher revenues from interest rate and credit trading benefiting from market volatility primarily in the second and third quarters.

Net income from investments in associated corporations was down $408 million or 63% primarily due to the divestiture of the Bank’s ownership interest in Thanachart Bank.

Insurance underwriting income decreased $179 million or 26% with lower insurance premiums across both Canadian Banking and International Banking, impacted by divested operations and the effect of the pandemic.

Other fees and commissions were down $261 million or 28% mainly due to lower fees in Global Banking and Markets and International Banking.

2020 Scotiabank Annual Report  |  31

Management’s Discussion and Analysis

T10  Trading revenues

For the fiscal years ($ millions)	2020			2019			2018
Trading-related revenue (TEB)(1)
Net interest income	$	112		$	67		$	130
Non-interest income
Trading revenues		2,671			1,652			1,521
Other fees and commissions		205			379			405
Total	$	2,988		$	2,098		$	2,056
Trading-related revenue by product (TEB)
Interest rate and credit	$	1,552		$	644		$	559
Equities		631			696			787
Foreign exchange		396			273			299
Commodities		263			216			230
Other		146			269			181
Total trading-related revenue (TEB)	$	2,988		$	2,098		$	2,056
Taxable equivalent adjustment		(260	)		(164	)		(101	)
Trading-related revenue (Non-TEB)	$	2,728		$	1,934		$	1,955

(1) Trading-related revenue consists of net interest income and non-interest income. Included are unrealized gains and losses on security positions held, realized gains and losses from the purchase and sale of securities, fees and commissions from securities borrowing and lending activities, and gains and losses on trading derivatives. Underwriting and other advisory fees, which are shown separately in the consolidated statement of income, are excluded.

Provision for Credit Losses

The provision for credit losses was $6,084 million, compared to $3,027 million, an increase of $3,057 million from last year. Adjusted provision for credit losses was $5,929 million, compared to $2,876 million, an increase of $3,053 million or 106% due primarily to higher provision for performing loans across all business lines.

The provision for credit losses on impaired loans was $3,468 million, an increase of $569 million from last year. Adjusted provision for credit losses on impaired loans was $3,435 million, an increase of $536 million or 18% due primarily to higher commercial and corporate provisions. The increase is due primarily to new formations in the energy sector and other sectors most impacted by COVID-19, as well as higher retail provisions in International and Canadian Banking. The provision for credit losses ratio on impaired loans was 56 basis points, an increase of seven basis points. Adjusted provision for credit losses ratio on impaired loans increased by six basis points to 55 basis points.

The provision for credit losses on performing loans was $2,616 million, compared to $128 million last year. Adjusted provision for credit losses on performing loans was $2,494 million, compared to a net reversal of $23 million, an increase of $2,517 million. $1,827 million of the increase related to retail, while commercial and corporate performing loan provisions increased by $690 million, across all business lines. The increases were due primarily to the unfavourable macroeconomic outlook driven by the COVID-19 pandemic and its estimated future impact on credit migration as well as the impact of the unfavourable economic conditions in the energy sector and other sectors most impacted by COVID-19.

The provision for credit losses ratio was 98 basis points, up 47 basis points from 51 basis points last year. Adjusted provision for credit losses ratio was 95 basis points, 46 basis points above last year.

32  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Group Financial Performance

T11  Provision for credit losses by business line

	2020								2019(1)
For the fiscal years ($ millions)	Performing (Stage 1 and 2)			Impaired (Stage 3)		Total			Performing (Stage 1 and 2)			Impaired (Stage 3)			Total
Canadian Banking
Retail	$	660		$	927	$	1,587		$	2		$	890		$	892
Commercial		283			203		486			(4	)		84			80
Total		943			1,130		2,073			(2	)		974			972
International Banking
Retail		1,247			1,882		3,129			134			1,728			1,862
Commercial		166			319		485			21			194			215
Total		1,413			2,201		3,614			155			1,922			2,077
Global Wealth Management		5			3		8			1			(1	)		–
Global Banking and Markets		257			133		390			(25	)		4			(21	)
Other		(1	)		1		–			–			–			–
Provision for credit losses on loans, acceptances and off-balance sheet exposures	$	2,617		$	3,468	$	6,085		$	129		$	2,899		$	3,028
International Banking	$	(1	)	$	–	$	(1	)	$	(1	)	$	–		$	(1	)
Global Wealth Management	$	(1	)	$	–	$	(1	)	$	–		$	–		$	–
Global Banking and Markets	$	–		$	–	$	–		$	(1	)	$	–		$	(1	)
Other		1			–		1			1			–			1
Provision for credit losses on debt securities and deposits with banks	$	(1	)	$	–	$	(1	)	$	(1	)	$	–		$	(1	)
Total provision for credit losses	$	2,616		$	3,468	$	6,084		$	128		$	2,899		$	3,027

(1) Amounts for 2019 have been restated to reflect the impact of the establishment of Global Wealth Management as a separate business segment.

T11A  Provisions against impaired financial instruments by business line

For the fiscal years ($ millions)	2020		2019(1)			2018(1)
Canadian Banking
Retail	$	927	$	890		$	759
Commercial		203		84			24
	$	1,130	$	974		$	783
International Banking
Caribbean and Central America	$	319	$	292		$	321
Latin America
Mexico		400		291			239
Peru		484		446			349
Chile		582		403			275
Colombia		322		422			358
Other Latin America		94		68			55
Total Latin America		1,882		1,630			1,276
	$	2,201	$	1,922		$	1,597
Global Wealth Management	$	3	$	(1	)	$	3
Global Banking and Markets
Canada	$	67	$	11		$	(1	)
U.S.		6		(1	)		(6	)
Asia and Europe		61		(6	)		(21	)
	$	134	$	4		$	(28	)
Total	$	3,468	$	2,899		$	2,355

(1) Amounts for 2019 and 2018 have been restated to reflect the impact of the establishment of Global Wealth Management as a separate business segment.

2020 Scotiabank Annual Report  |  33

Management’s Discussion and Analysis

T12  Provision for credit losses as a percentage of average net loans and acceptances⁽¹⁾⁽²⁾

For the fiscal years (%)	2020			2019(3)			2018(3)
Canadian Banking
Retail		0.54	%		0.32	%		0.27	%
Commercial		0.84			0.15			0.08
		0.59			0.29			0.24
International Banking
Retail		4.74			2.57			2.86
Commercial		0.59			0.28			0.27
		2.45			1.40			1.52
Global Wealth Management		0.05			0.00			0.04
Global Banking and Markets		0.35			(0.02	)		(0.06	)
Provisions against impaired loans		0.56			0.49			0.43
Provisions against performing loans		0.42			0.02			0.05
Total		0.98	%		0.51	%		0.48	%

(1) Includes provision for credit losses on certain financial assets—loans, acceptances, and off-balance sheet exposures.

(2) 2019 and 2018 include Day 1 acquisition-related impact in International Banking.

(3) Amounts for 2019 and 2018 have been restated to reflect the impact of the establishment of Global Wealth Management as a separate business segment.

T13  Net write-offs⁽¹⁾ as a percentage of average loans and acceptances

For the fiscal years (%)	2020			2019(2)			2018(2)
Canadian Banking
Retail		0.29	%		0.32	%		0.28	%
Commercial		0.26			0.15			0.09
		0.29			0.29			0.25
International Banking
Retail		2.38			2.50			2.36
Commercial		0.31			0.15			0.23
		1.24			1.29			1.26
Global Wealth Management		–			0.02			0.01
Global Banking and Markets		0.09			0.03			0.03
Total		0.47	%		0.50	%		0.44	%

(1) Write-offs net of recoveries.

(2) Amounts for 2019 and 2018 have been restated to reflect the impact of the establishment of Global Wealth Management as a separate business segment.

34  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Group Financial Performance

Non-Interest Expenses

T14  Non-interest expenses and productivity

For the fiscal years ($ millions)	2020			2019			2018			2020 versus 2019
Salaries and employee benefits
Salaries	$	5,028		$	4,939		$	4,454			2	%
Performance-based compensation		1,738			1,761			1,624			(1	)
Share-based payments		298			278			192			7
Other employee benefits		1,560			1,465			1,185			6
	$	8,624		$	8,443		$	7,455			2	%
Premises and technology
Premises
Occupancy(1)		25			527			477			(95	)
Property taxes		98			95			98			3
Other premises costs(1)		483			458			437			5
	$	606		$	1,080		$	1,012			(44	)%
Technology	$	1,802		$	1,727		$	1,565			4	%
	$	2,408		$	2,807		$	2,577			(14	)%
Depreciation and amortization
Depreciation(1)		797			402			354			98
Amortization of intangible assets		749			651			494			15
	$	1,546		$	1,053		$	848			47	%
Communications	$	418		$	459		$	447			(9	)%
Advertising and business development	$	445		$	625		$	581			(29	)%
Professional	$	753		$	861		$	881			(13	)%
Business and capital taxes
Business taxes		469			471			419			(0	)
Capital taxes		48			44			45			9
	$	517		$	515		$	464			0	%
Other(1)	$	2,145		$	1,974		$	1,805			9	%
Total non-interest expenses	$	16,856		$	16,737		$	15,058			1	%
Productivity ratio		53.8	%		53.9	%		52.3	%

(1) The adoption of IFRS 16 in 2020 resulted in lower Occupancy of $516 million, partly offset by increases in Other premises costs ($15 million), in Depreciation ($399 million) and in Other ($27 million). The total impact lowered non-interest expenses by $75 million in 2020.

C4 Non-interest expenses $ millions

C5 Direct and indirect taxes $ millions

        

2020 Scotiabank Annual Report  |  35

Management’s Discussion and Analysis

Non-interest expenses were $16,856 million, an increase of $119 million or 1%. Adjusted non-interest expenses were $16,514 million, an increase of 1%. Higher salaries and benefits related to regulatory and technology initiatives, charges related to the metals investigations, COVID-19 related costs and other business growth-related expenses were partly offset by lower advertising and business development expenses, professional fees, and the positive impact of foreign currency translation and divested operations.

The Bank’s total technology cost, that includes Technology expenses in Table T14 and those included within Salaries, Professional, Amortization of Intangible Assets and Depreciation, was approximately $3.7 billion, an increase of 4% compared to 2019 and 11.8% of revenues. This reflects our continued investment in modernization and technology, including cybersecurity.

The productivity ratio was 53.8% compared to 53.9%. On an adjusted basis, the productivity ratio was 53.0%, compared to 52.7%.

With the adoption of IFRS 16 in 2020, adjusted non-interest expenses were lower by $75 million and improved the productivity ratio by 0.1%.

Operating leverage was positive 0.3% on a reported basis and negative 0.6% on an adjusted basis. Excluding the impact of divested operations, operating leverage was positive 1.0%.

Provision for Income Taxes

The provision for income tax expense was $1,543 million compared to $2,472 million last year. The effective tax rate was 18.4% compared to 21.9%, due primarily to significantly higher provision for credit losses recorded in entities that operate in higher tax rate jurisdictions and changes in earnings mix across businesses and jurisdictions.

36  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Group Financial Performance

Financial Results Review: 2019 vs. 2018

In order to identify key business trends between 2019 and 2018, commentary and the related financial results are below.

Net income

Net income was $8,798 million in 2019, up 1% from $8,724 million in 2018. Diluted earnings per share (EPS) were $6.68 compared to $6.82. Return on equity was 13.1% compared to 14.5%.

Adjusting for the impact of Acquisition and divestiture-related amounts (refer to Non-GAAP Measures), net income was $9,409 million, up 3% from $9,144 million. Net income was positively impacted by increases in net interest income and non-interest income. Partly offsetting were higher provision for credit losses and higher non-interest expenses. Adjusted Diluted EPS were $7.14 compared to $7.11 and adjusted Return on equity was 13.9% compared to 14.9%.

Net interest income

Net interest income was $17,177 million in 2019, an increase of $986 million or 6%, mainly from the impact of acquisitions. Also contributing to the increase was growth in core banking assets, partly offset by the negative impact of foreign currency translation.

Non-interest income

Non-interest income was $13,857 million in 2019, up $1,273 million or 10%. The impact of acquisitions contributed 6% of the growth. The remaining 4% growth was primarily from higher banking revenues and gains on investments, partly offset by the higher benefit in 2018 from Alignment of reporting periods for certain businesses with the Bank.

Provision for credit losses

The provision for credit losses was $3,027 million, an increase of $416 million from 2018. Adjusting for the Day 1 provision on acquired performing financial instruments recorded in both years, the provision for credit losses increased $669 million or 30% due primarily to higher provisions in the International Banking and Canadian Banking retail portfolios. The provision for credit losses ratio was 51 basis points, up three basis points from 48 basis points in 2018. Adjusting for the Day 1 provision on acquired performing financial instruments, the provision for credit losses ratio was 49 basis points, eight basis points above 2018.

Non-interest expenses

Non-interest expenses were $16,737 million in 2019, an increase of $1,679 million or 11%. Adjusting for Acquisition and divestiture-related amounts, non-interest expenses grew 10%. 2018 remeasurement of an employee benefit liability from certain plan modifications (“benefits remeasurement”), the impact of acquisitions and the new revenue accounting standard that requires card expenses to be netted against card revenues contributed approximately 6% of the growth. The remaining 4% growth was due to investments in technology and regulatory initiatives, higher performance based compensation and share-based payments, partly offset by the positive impact of foreign currency translation.

Income taxes

The provision for income taxes was $2,472 million in 2019, an increase of $90 million. The Bank’s overall effective tax rate for the year was 21.9% compared to 21.5% in 2018. The increase in the effective tax rate was due primarily to higher taxes related to the divestitures of foreign operations.

T15  Financial Results Review

For the year ended October 31, 2019 ($ millions)(1)	Canadian Banking		International Banking		Global Wealth Management		Global Banking and Markets			Other(2)			Total
Net interest income	$	7,848	$	8,353	$	564	$	1,396		$	(984	)	$	17,177
Non-interest income		2,616		4,366		3,937		3,084			(146	)		13,857
Total revenue	$	10,464	$	12,719	$	4,501	$	4,480		$	(1,130	)	$	31,034
Provision for credit losses		972		2,076		–		(22	)		1			3,027
Non-interest expenses		4,772		6,596		2,905		2,463			1			16,737
Income tax expense		1,232		909		412		505			(586	)		2,472
Net income	$	3,488	$	3,138	$	1,184	$	1,534		$	(546)		$	8,798
Net income attributable to non-controlling interests		–		373		18		–			17			408
Net income attributable to equity holders of the Bank	$	3,488	$	2,765	$	1,166	$	1,534		$	(563	)	$	8,390

(1) Taxable equivalent basis. Refer to Glossary.

(2) Includes all other smaller operating segments, including Group Treasury, and corporate adjustments, such as the elimination of the tax-exempt income gross-up reported in net interest income, non-interest income and provision for income taxes for the year ended October 31, 2019 – $181 to arrive at the amounts reported in Consolidated Statement of Income, and differences in the actual amount of costs incurred and charged to the operating segments.

2020 Scotiabank Annual Report  |  37

Management’s Discussion and Analysis

For the year ended October 31, 2018 ($ millions) (1)	Canadian Banking		International Banking		Global Wealth Management		Global Banking and Markets			Other(2)			Total
Net interest income	$	7,504	$	7,218	$	498	$	1,454		$	(483)		$	16,191
Non-interest income		2,907		3,475		3,486		3,074			(358	)		12,584
Total revenue	$	10,411	$	10,693	$	3,984	$	4,528		$	(841	)	$	28,775
Provision for credit losses		790		1,868		3		(50	)		–			2,611
Non-interest expenses		4,811		5,700		2,559		2,233			(245	)		15,058
Income tax expense		1,251		617		376		587			(449	)		2,382
Net income	$	3,559	$	2,508	$	1,046	$	1,758		$	(147	)	$	8,724
Net income attributable to non-controlling interests		–		162		14		–			–			176
Net income attributable to equity holders of the Bank	$	3,559	$	2,346	$	1,032	$	1,758		$	(147	)	$	8,548

(1) Taxable equivalent basis. Refer to Glossary.

(2) Includes all other smaller operating segments, including Group Treasury, and corporate adjustments, such as the elimination of the tax-exempt income gross-up reported in net interest income, non-interest income and provision for income taxes for the year ended October 31, 2018 – $112 to arrive at the amounts reported in Consolidated Statement of Income, and differences in the actual amount of costs incurred and charged to the operating segments.

38  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Group Financial Performance

Fourth Quarter Review

T16  Fourth quarter financial results - reported

	For the three months ended
($ millions)	October 31 2020		July 31 2020			October 31 2019
Reported results
Net interest income	$	4,258	$	4,253		$	4,336
Non-interest income		3,247		3,481			3,632
Total revenue	$	7,505	$	7,734		$	7,968
Provision for credit losses		1,131		2,181			753
Non-interest expenses		4,057		4,018			4,311
Income tax expense		418		231			596
Net income	$	1,899	$	1,304		$	2,308
Net income attributable to non-controlling interests in subsidiaries	$	72	$	(51	)	$	107
Net income attributable to equity holders of the Bank	$	1,827	$	1,355		$	2,201
Preferred shareholders and other equity instrument holders		82		23			64
Common shareholders	$	1,745	$	1,332		$	2,137

T16A  Fourth quarter financial results - adjusted (refer to non-GAAP measures on page 17)

	For the three months ended
($ millions)	October 31 2020		July 31 2020			October 31 2019
Adjusted results
Net interest income	$	4,258	$	4,253		$	4,336
Non-interest income		3,247		3,436			3,626
Total revenue	$	7,505	$	7,689		$	7,962
Provision for credit losses		1,131		2,181			753
Non-interest expenses		4,003		3,951			4,197
Income tax expense		433		249			612
Net income	$	1,938	$	1,308		$	2,400
Net income attributable to non-controlling interests in subsidiaries	$	72	$	(46	)	$	102
Net income attributable to equity holders of the Bank	$	1,866	$	1,354		$	2,298
Preferred shareholders and other equity instrument holders		82		23			64
Common shareholders	$	1,784	$	1,331		$	2,234

Net income

Q4 2020 vs Q4 2019

Net income was $1,899 million compared to $2,308 million. Adjusted net income was $1,938 million compared to $2,400 million, down 19%, due mainly to lower non-interest income and higher provision for credit losses, partially offset by lower non-interest expenses and provision for income taxes.

Q4 2020 vs Q3 2020

Net income was $1,899 million compared to $1,304 million. Adjusted net income was $1,938 million compared to $1,308 million, an increase of 48%, due mainly to lower provision for credit losses, partially offset by lower non-interest income and higher provision for income taxes.

Total revenue

Q4 2020 vs Q4 2019

Revenues were $7,505 million, a decrease of $463 million or 6%. Adjusted revenues were $7,505 million, a decrease of $457 million or 6%, due mainly to lower net interest income and non-interest income, negatively impacted by divested operations.

Q4 2020 vs Q3 2020

Revenues were $7,505 million, a decrease of $229 million or 3%. Adjusted revenues were $7,505 million, a decrease of $184 million or 2%, due mainly to lower non-interest income driven by lower trading revenues.

Net interest income

Q4 2020 vs Q4 2019

Net interest income was $4,258 million, a decrease of $78 million or 2%. Asset growth and higher contribution from asset/liability management activities were more than offset by the negative impact of foreign currency translation and divested operations.

The core banking margin was down 18 basis points to 2.22%, driven by lower margins across all business lines due to the impact of central bank rate cuts and changes in business mix, as well as increased levels of lower-margin liquid assets.

2020 Scotiabank Annual Report  |  39

Management’s Discussion and Analysis

Q4 2020 vs Q3 2020

Net interest income was in line with the previous quarter. Higher contribution from asset/liability management activities was offset by lower asset volume and the negative impact of foreign currency translation.

The core banking margin was up 12 basis points to 2.22%, driven primarily by higher contribution from asset/liability management activities and lower volumes of lower-margin high quality liquid assets. Margins were stable across all business lines.

Non-interest income

Q4 2020 vs Q4 2019

Non-interest income was $3,247 million, down $385 million or 11%. Adjusted non-interest income declined $379 million or 10%. The impact of divestitures was approximately 5%. The remaining 5% decrease was due to lower banking revenues, insurance revenues, other fees and commissions, as well as the negative impact of foreign currency translation. These were partly offset by higher trading revenues.

Q4 2020 vs Q3 2020

Non-interest income was down $234 million or 7%. Adjusted non-interest income decreased by $189 million or 6%, due primarily to lower trading revenues and underwriting and advisory fees, partly offset by higher banking revenues in Canadian and International Banking, and higher wealth management fees.

Provision for credit losses

Q4 2020 vs Q4 2019

The provision for credit losses was $1,131 million, an increase of $378 million or 50%. The provision for credit losses ratio increased 23 basis points to 73 basis points.

The provision on impaired loans was $835 million, compared to $744 million, up $91 million due primarily to higher commercial and corporate loan provisions, partially offset by lower retail provisions. The provision for credit losses ratio on impaired loans was 54 basis points, an increase of five basis points.

The provision on performing loans was $296 million, compared to $9 million, an increase of $287 million of which $167 million related to retail, mainly in International Banking. Commercial and corporate loan provisions increased $120 million across all business lines. The increase is due primarily to the COVID-19 pandemic impact on the performing portfolio driven by the unfavourable macroeconomic outlook and its estimated future impact on credit migration.

Q4 2020 vs Q3 2020

The provision for credit losses was $1,131 million, a decrease of $1,050 million. The provision for credit losses ratio decreased 63 basis points to 73 basis points.

The provision on impaired loans was $835 million, compared to $928 million, a decrease of $93 million or 10%, due primarily to lower retail provisions driven by lower delinquencies and credit migration. The provision for credit losses ratio on impaired loans was 54 basis points, a decrease of four basis points.

The provision for performing loans was $296 million, compared to $1,253 million, a decrease of $957 million of which $752 million related to retail and $205 million related to commercial. The decrease was driven primarily by improving macroeconomic outlook and stabilizing portfolio credit quality.

Non-interest expenses

Q4 2020 vs Q4 2019

Non-interest expenses were $4,057 million, down $254 million or 6%. Adjusted non-interest expenses of $4,003 million declined by 5%, of which 2% related to the impact of divested operations. The remaining 3% decrease was due to lower professional fees, advertising and business development expenses and the positive impact of foreign currency translation, partly offset by the impact of COVID-19 related costs.

The productivity ratio was 54.1%, in line with last year. On an adjusted basis, the productivity ratio was 53.3%, compared to 52.7%.

Q4 2020 vs Q3 2020

Non-interest expenses were up $39 million or 1%. Adjusted non-interest expenses were also up by 1%, due to higher personnel costs and technology, partly offset by the positive impact of foreign currency translation.

The productivity ratio was 54.1% compared to 52.0%. On an adjusted basis, the productivity ratio was 53.3%, compared to 51.4%.

Provision for income taxes

Q4 2020 vs Q4 2019

The effective tax rate was 18.0% compared to 20.5%, due primarily to changes in earnings mix across businesses and jurisdictions.

Q4 2020 vs Q3 2020

The effective tax rate was 18.0% compared to 15.1%, due primarily to significantly higher provision for credit losses recorded in entities that operate in higher tax rate jurisdictions in the prior quarter.

40  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Group Financial Performance

Trending Analysis

T17  Quarterly financial highlights

	For the three months ended
($ millions)	October 31 2020(1)		July 31 2020(1)		April 30 2020 (1)		January 31 2020(1)		October 31 2019		July 31 2019		April 30 2019		January 31 2019
Reported results
Net interest income	$	4,258	$	4,253	$	4,417	$	4,392	$	4,336	$	4,374	$	4,193	$	4,274
Non-interest income		3,247		3,481		3,539		3,749		3,632		3,285		3,610		3,330
Total revenue	$	7,505	$	7,734	$	7,956	$	8,141	$	7,968	$	7,659	$	7,803	$	7,604
Provision for credit losses		1,131		2,181		1,846		926		753		713		873		688
Non-interest expenses		4,057		4,018		4,363		4,418		4,311		4,209		4,046		4,171
Income tax expense		418		231		423		471		596		753		625		498
Net income	$	1,899	$	1,304	$	1,324	$	2,326	$	2,308	$	1,984	$	2,259	$	2,247
Basic earnings per share ($)		1.44		1.10		1.03		1.86		1.76		1.51		1.74		1.72
Diluted earnings per share ($)		1.42		1.04		1.00		1.84		1.73		1.50		1.73		1.71
Core banking margin (%)(2)		2.22		2.10		2.35		2.45		2.40		2.45		2.45		2.45
Effective tax rate (%)		18.0		15.1		24.2		16.8		20.5		27.5		21.7		18.1
Adjusted results(2)
Adjusted net income	$	1,938	$	1,308	$	1,371	$	2,344	$	2,400	$	2,455	$	2,263	$	2,291
Adjusted diluted earnings per share	$	1.45	$	1.04	$	1.04	$	1.83	$	1.82	$	1.88	$	1.70	$	1.75

(1) The amounts for the year ended October 31, 2020 have been prepared in accordance with IFRS 16; prior period amounts have not been restated (refer to Notes 3 and 4 in the consolidated financial statements).

(2) Refer to page 17 for a discussion of non-GAAP measures.

Earnings generally trended upward over the period, until the most recent quarters which were negatively impacted by the COVID-19 pandemic resulting in significantly higher provision for credit losses on performing loans and lower personal and commercial revenue. The Bank reported strong net income in prior periods, with solid growth in revenue, prudent expense management, and stable loan loss provisions, partly offset by the impact of divested operations.

Canadian Banking revenue has generally increased over the period, prior to the COVID-19 pandemic, driven by steady growth in retail and commercial loans partly offset by lower fee income. Results in the recent quarters reflected the impact of the COVID-19 pandemic, with higher provision for credit losses, lower fee revenue and lower net interest margins due to spread compression in a lower interest rate environment.

International Banking results in the recent quarters were negatively impacted by the COVID-19 pandemic, reflecting significantly higher loan loss provisions, margin contraction and lower non-interest income, and the negative impact from divested operations. These were partially offset by lower expenses driven by effective cost management initiatives.

Global Banking and Markets results are mainly driven by market conditions that impact client activity in the corporate and investment banking and capital markets businesses. The strong revenue in the most recent quarters was largely driven by higher trading revenue, as capital markets businesses, especially fixed income trading, benefited from the market opportunities created by the COVID-19 pandemic. This more than offset the impact of higher provision for credit losses driven by the unfavourable macroeconomic outlook and the estimated future impact on credit migration due to the crisis.

Global Wealth Management has delivered steady earnings growth over the past eight quarters. Revenue increase was driven by strong growth in the Canadian asset management and wealth advisory businesses. Expenses were down, resulting from disciplined expense management.

Provision for credit losses

The provision for credit losses increased significantly in the recent quarters due largely to the COVID-19 impact on the macroeconomic outlook, and its estimated future impact on credit migration. The remaining changes were driven by organic and acquisition driven portfolio growth.

Non-interest expenses

Non-interest expenses have steadily declined in the recent quarters reflecting tight expense control during the COVID-19 pandemic. In the prior periods, non-interest expenses generally trended upwards mostly from the ongoing impact of acquisitions, to support business growth, and investments in technology, regulatory and strategic initiatives.

Provision for income taxes

The effective tax rate was 18.0% this quarter and averaged 20.2% over the period, with a range of 15.1% to 27.5%. Effective tax rates were impacted by divested operations, varying levels of provision for credit losses and net income earned in foreign jurisdictions, as well as the variability of tax-exempt dividend income.

2020 Scotiabank Annual Report  |  41

Management’s Discussion and Analysis

BUSINESS LINE OVERVIEW

Reorganization of Business Segments

Effective November 1, 2019, the Bank established Global Wealth Management as a separate business segment. Wealth Management results previously reported in the Canadian Banking and International Banking business segments are now being reported in the new business segment. Prior period comparative information for Canadian Banking and International Banking has been restated to reflect this change.

The Bank now publishes financial information across five business segments including:

• Canadian Banking (excluding Canadian Wealth Management)

• International Banking (excluding International Wealth Management)

• Global Wealth Management (including Canadian Wealth Management and International Wealth Management)

• Global Banking and Markets; and

• Other

Business line results are presented on a taxable equivalent basis, adjusting for the following:

• The Bank analyzes revenue on a taxable equivalent basis (TEB) for business lines. This methodology grosses up tax-exempt income earned on certain securities reported in either net interest income or non-interest income to an equivalent before tax basis. A corresponding increase is made to the provision for income taxes; hence, there is no impact on net income. Management believes that this basis for measurement provides a uniform comparability of net interest income and non-interest income arising from both taxable and non-taxable sources and facilitates a consistent basis of measurement. While other banks also use TEB, their methodology may not be comparable to the Bank’s methodology. A segment’s revenue and provision for income taxes are grossed up by the taxable equivalent amount. The elimination of the TEB gross up is recorded in the Other segment.

• For business line performance assessment and reporting, net income from associated corporations, which is an after-tax number, is adjusted to normalize for income taxes. The tax normalization adjustment grosses up the amount of net income from associated corporations and normalizes the effective tax rate in the business lines to better present the contribution of the associated corporations to the business line results.

• International Banking business segment results are analyzed on a constant dollar basis. Under constant dollar basis, prior period amounts are recalculated using current period average foreign currency rates thereby eliminating the impact of foreign currency translation. The Bank believes that reporting in constant dollar is useful for readers in assessing ongoing business performance.

Below are the results of the Bank’s four business operating segments for 2020.

CANADIAN BANKING

Canadian Banking reported net income attributable to equity holders of $2,536 million in 2020, a decrease of $952 million or 27% compared to prior year. Adjusted net income was $2,604 million, a decrease of $900 million or 26%. The decline was due primarily to higher provision for credit losses on performing loans, lower non-interest income, and higher non-interest expenses. Return on equity was 15.1% compared to 23.2% in the prior year. The adjusted return on equity was 15.5% compared to 23.3% in the prior year.

INTERNATIONAL BANKING

Net income attributable to equity holders was $980 million, a decrease of $1,785 million or 65%. Adjusted net income attributable to equity holders was $1,148 million, down $1,805 million or 61%. The decline was due largely to higher provision for credit losses on performing loans and the impact of divested operations. The remaining decline was due primarily to lower net interest income and non-interest income, partly offset by lower non-interest expenses and income tax expense. Return on equity was 5.0% compared to 13.2% last year. Adjusting return on equity was 5.8% compared to 14.1% last year.

GLOBAL WEALTH MANAGEMENT

Net income attributable to equity holders was $1,252 million, an increase of $86 million or 7%. Adjusted net income attributable to equity holders increased $82 million, also up 7%. The negative impact of divested operations was 1%. The remaining 8% growth was driven by solid AUM growth across our businesses partly offset by higher non-interest expenses, margin compression, and customer relief programs largely impacting our international pensions business. Return on equity was 13.5% compared to 12.7% in the prior year. The adjusted return on equity was 14.0% compared to 13.2% in the prior year.

GLOBAL BANKING AND MARKETS

Global Banking and Markets reported net income attributable to equity holders of $1,955 million, an increase of $421 million or 27% from last year. Adjusted net income was $2,034 million, an increase of $500 million or 33%. Strong performance in capital markets businesses, higher revenue in business banking, and relatively flat expenses, were partly offset by higher provision for credit losses. Return on equity was 14.8% compared to 13.3% last year. The adjusted return on equity was 15.4% compared to 13.3% last year.

42  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Business Line Overview

KEY PERFORMANCE INDICATORS FOR ALL BUSINESS LINES

Management uses a number of key metrics to monitor business line performance:
•  Net income	•  Return on equity	•  Productivity ratio	•  Provision for credit losses ratio

T18  Financial performance - Reported

For the year ended October 31, 2020 ($ millions)(1)	Canadian Banking			International Banking			Global Wealth Management			Global Banking and Markets			Other(2)			Total
Net interest income(3)	$	7,838		$	7,603		$	575		$	1,435		$	(131	)	$	17,320
Non-interest income(3)		2,461			3,207			4,009			3,947			392			14,016
Total revenue(3)		10,299			10,810			4,584			5,382			261			31,336
Provision for credit losses		2,073			3,613			7			390			1			6,084
Non-interest expenses		4,811			5,943			2,878			2,473			751			16,856
Provision for income taxes(3)		879			182			437			564			(519	)		1,543
Net income	$	2,536		$	1,072		$	1,262		$	1,955		$	28		$	6,853
Net income attributable to non-controlling interests in subsidiaries		–			92			10			–			(27	)		75
Net income attributable to equity holders of the Bank	$	2,536		$	980		$	1,252		$	1,955		$	55		$	6,778
Return on equity(%)(4)		15.1	%		5.0	%		13.5	%		14.8	%		–	%		10.4	%
Total average assets ($ billions)	$	359		$	206		$	26		$	412		$	158		$	1,161
Total average liabilities ($ billions)	$	277		$	155		$	39		$	379		$	240		$	1,090

(1) The amounts for the year ended October 31, 2020 have been prepared in accordance with IFRS 16; amounts for the years ended October 31, 2020 and October 31, 2019 have been prepared in accordance with IFRS 15; prior year amounts have not been restated.

(2) The Other category represents smaller operating segments, including Group Treasury, and other corporate adjustments that are not allocated to an operating segment. Corporate adjustments include the net residual in matched maturity transfer pricing, the elimination of the tax-exempt income gross-up reported in net interest income, non-interest income and provision for income taxes, and differences in the actual amount of costs incurred and charged to the operating segments.

(3) Taxable equivalent basis. Refer to Glossary.

(4) Refer to Glossary.

For the year ended October 31, 2019 ($ millions)	Canadian Banking			International Banking			Global Wealth Management			Global Banking and Markets			Other(1)			Total
Net interest income(2)	$	7,848		$	8,353		$	564		$	1,396		$	(984	)	$	17,177
Non-interest income(2)		2,616			4,366			3,937			3,084			(146	)		13,857
Total revenue(2)		10,464			12,719			4,501			4,480			(1,130	)		31,034
Provision for credit losses		972			2,076			–			(22	)		1			3,027
Non-interest expenses		4,772			6,596			2,905			2,463			1			16,737
Provision for income taxes(2)		1,232			909			412			505			(586	)		2,472
Net income	$	3,488		$	3,138		$	1,184		$	1,534		$	(546	)	$	8,798
Net income attributable to non-controlling interests in subsidiaries		–			373			18			–			17			408
Net income attributable to equity holders of the Bank	$	3,488		$	2,765		$	1,166		$	1,534		$	(563	)	$	8,390
Return on equity(%)(3)		23.2	%		13.2	%		12.7	%		13.3	%		–	%		13.1	%
Total average assets ($ billions)	$	340		$	201		$	25		$	372		$	118		$	1,056
Total average liabilities ($ billions)	$	255		$	153		$	32		$	304		$	243		$	987

(1) The Other category represents smaller operating segments, including Group Treasury, and other corporate adjustments that are not allocated to an operating segment. Corporate adjustments include the net residual in matched maturity transfer pricing, the elimination of the tax-exempt income gross-up reported in net interest income, non-interest income and provision for income taxes, and differences in the actual amount of costs incurred and charged to the operating segments.

(2) Taxable equivalent basis. Refer to Glossary.

(3) Refer to Glossary.

For the year ended October 31, 2018 ($ millions)	Canadian Banking			International Banking			Global Wealth Management			Global Banking and Markets			Other(1)			Total
Net interest income(2)	$	7,504		$	7,218		$	498		$	1,454		$	(483	)	$	16,191
Non-interest income(2)		2,907			3,475			3,486			3,074			(358	)		12,584
Total revenue(2)		10,411			10,693			3,984			4,528			(841	)		28,775
Provision for credit losses		790			1,868			3			(50	)		–			2,611
Non-interest expenses		4,811			5,700			2,559			2,233			(245	)		15,058
Provision for income taxes(2)		1,251			617			376			587			(449	)		2,382
Net income	$	3,559		$	2,508		$	1,046		$	1,758		$	(147	)	$	8,724
Net income attributable to non-controlling interests in subsidiaries		–			162			14			–			–			176
Net income attributable to equity holders of the Bank	$	3,559		$	2,346		$	1,032		$	1,758		$	(147	)	$	8,548
Return on equity(%)(3)		25.8	%		13.6	%		17.1	%		16.0	%		–	%		14.5	%
Total average assets ($ billions)	$	327		$	165		$	17		$	321		$	116		$	946
Total average liabilities ($ billions)	$	234		$	127		$	24		$	265		$	232		$	882

(1) The Other category represents smaller operating segments, including Group Treasury, and other corporate adjustments that are not allocated to an operating segment. Corporate adjustments include the net residual in matched maturity transfer pricing, the elimination of the tax-exempt income gross-up reported in net interest income, non-interest income and provision for income taxes, and differences in the actual amount of costs incurred and charged to the operating segments.

(2) Taxable equivalent basis. Refer to Glossary.

(3) Refer to Glossary.

2020 Scotiabank Annual Report  |  43

Management’s Discussion and Analysis

T18A  Financial performance - Adjusted

For the year ended October 31, 2020 ($ millions)(1)	Canadian Banking		International Banking		Global Wealth Management		Global Banking and Markets		Other			Total
Net interest income	$	7,838	$	7,603	$	575	$	1,435	$	(131)		$	17,320
Non-interest income		2,461		3,207		4,009		4,049		93			13,819
Total revenue		10,299		10,810		4,584		5,484		(38	)		31,139
Provision for credit losses		2,002		3,536		6		384		1			5,929
Non-interest expenses		4,789		5,742		2,818		2,473		692			16,514
Provision for income taxes		904		260		453		593		(475	)		1,735
Net income	$	2,604	$	1,272	$	1,307	$	2,034	$	(256	)	$	6,961
Net income attributable to non-controlling interests in subsidiaries		–		124		10		–		1			135
Net income attributable to equity holders of the Bank	$	2,604	$	1,148	$	1,297	$	2,034	$	(257	)	$	6,826

(1) Refer to Non-GAAP Measures for the reconciliation of Reported and Adjusted results.

For the year ended October 31, 2019 ($ millions)(1)	Canadian Banking		International Banking		Global Wealth Management		Global Banking and Markets			Other			Total
Net interest income	$	7,848	$	8,353	$	564	$	1,396		$	(984	)	$	17,177
Non-interest income		2,616		4,366		3,937		3,084			(19	)		13,984
Total revenue		10,464		12,719		4,501		4,480			(1,003)			31,161
Provision for credit losses		972		1,925		–		(22	)		1			2,876
Non-interest expenses		4,750		6,390		2,839		2,463			(20	)		16,422
Provision for income taxes		1,238		1,012		429		505			(730	)		2,454
Net income	$	3,504	$	3,392	$	1,233	$	1,534		$	(254	)	$	9,409
Net income attributable to non-controlling interests in subsidiaries		–		439		18		–			1			458
Net income attributable to equity holders of the Bank	$	3,504	$	2,953	$	1,215	$	1,534		$	(255	)	$	8,951

(1) Refer to Non-GAAP Measures for the reconciliation of Reported and Adjusted results.

For the year ended October 31, 2018 ($ millions)(1)	Canadian Banking		International Banking		Global Wealth Management		Global Banking and Markets			Other			Total
Net interest income	$	7,504	$	7,218	$	498	$	1,454		$	(483	)	$	16,191
Non-interest income		2,907		3,475		3,486		3,074			(358	)		12,584
Total revenue		10,411		10,693		3,984		4,528			(841)			28,775
Provision for credit losses		790		1,464		3		(50	)		–			2,207
Non-interest expenses		4,791		5,589		2,503		2,233			(245	)		14,871
Provision for income taxes		1,255		768		392		587			(449	)		2,553
Net income	$	3,575	$	2,872	$	1,086	$	1,758		$	(147	)	$	9,144
Net income attributable to non-controlling interests in subsidiaries		–		284		14		–			–			298
Net income attributable to equity holders of the Bank	$	3,575	$	2,588	$	1,072	$	1,758		$	(147	)	$	8,846

(1) Refer to Non-GAAP Measures for the reconciliation of Reported and Adjusted results.

44  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Canadian Banking

Canadian Banking

2020 Achievements

Improve sustained business performance

•  Awarded the Best Bank in North America for Innovation in Digital Banking by The Banker magazine, recognizing excellence in financial technology and innovative strategies

•  Ranked #1 for Online Banking Satisfaction in the J.D. Power Canadian Online Banking Study, driven by our commitment to delivering the best customer experience, and focus on providing fast, easy-to-use and secure online banking services through the COVID-19 pandemic

•  Awarded 2020 Retail Banking Security Innovation of the Year by Retail Banker International, recognizing focus and investment in Financial Crimes Risk Management market-leading technology-based capabilities

•  Increased business clients usage of ScotiaConnect, our secure digital cash management and payments banking channel, for a more seamless customer experience

Instill a winning team culture

•  Launched new Canadian Banking Diversity & Inclusion council, with a focus on concrete, results-oriented actions

•  Activated business continuity plans across our businesses, enabling remote working conditions to our employees

•  Supported employee health, well-being and engagement through the pandemic

•  39% women in VP+ roles across the Canadian Bank. Significant progress made in retail sales leadership, achieving >50% gender balance at the Regional VP+ leadership team

•  Introduced two video series, “In Conversation With” and “Canadian Banking Leadership,” to advance internal discussions around the Scotiabank culture, leadership, diversity and inclusion

Superior customer experience

•  Ranked #1 in Customer Satisfaction for response to COVID-19 crisis amongst Canadian business owners, according to the Bond COVID-19 Canadian Client Impact Study

•  Scotiabank ranked #1 in J.D. Power Credit Card Satisfaction amongst the Big 5 banks and Retail Banking ranked #1 in Branch Satisfaction

•  Tangerine ranked #1 in Customer Satisfaction by J.D. Power for the 9th consecutive year and ranked #1 in J.D. Power Credit Card Satisfaction Study overall for the second year in a row

•  Launched ScotiaAdvice+, a comprehensive, new way to elevate the way we deliver advice to our customers

•  Introduced the “Bank Your Way” tool, designed specifically to guide seniors through digital banking and challenges presented by COVID-19 pandemic

•  Kept 97% of Scotiabank branch network open through COVID-19 pandemic in order to continue to serve our customers and provided financial relief to over 370,000 Scotiabank customers across $54 billion in lending products

•  Partnered with Government of Canada and peer financial institutions to provide lending capital of up to $128 million for the Black Entrepreneurship Program

•  On target to support women-led businesses with a commitment to deploy $3 billion in funding in the first three years of The Scotiabank Women Initiative

•  Interac e-Transfer for Business and Real-Time Payments first in market to launch enhanced e-Transfer for business allowing customers to send and receive funds in near real-time

Scale our unique partnership and assets

•  In partnership with MLSE and others, transformed the Scotiabank Arena into Toronto’s largest kitchen, preparing up to 10,000 meals per day for frontline healthcare workers, their families and community agencies throughout COVID-19

•  Introduced new customer benefits for award-winning credit card products with Scotiabank Passport Visa Infinite Card and Scotiabank Gold American Express Card ranked as the best travel cards, and the Scotia Momentum Visa Infinite Card named as the best cash-back credit card

•  Further enhanced branch-based advice offering, with a new customer experience model for Financial Advisors and improved financial planning tools

Business Profile

Canadian Banking provides a full suite of financial advice and banking solutions, supported by an excellent customer experience, to over 11 million Retail, Small Business and Commercial Banking customers. It serves these customers through its network of 952 branches and 3,540 automated banking machines (ABMs), as well as online, mobile and telephone banking, and specialized sales teams. Canadian Banking also provides an alternative self-directed banking solution to over two million Tangerine Bank customers. Canadian Banking is comprised of the following areas:

• Retail banking provides financial advice and solutions along with day-to-day banking products, including debit cards, chequing accounts, credit cards, investments, mortgages, loans and related creditor insurance products to retail customers. Tangerine Bank provides day-to-day banking products, including chequing and saving accounts, credit cards, mortgages, loans and investments to self-directed customers.

• Business banking delivers advice and a full suite of lending, deposit, cash management and trade finance solutions to small, medium and large businesses, including automotive dealers and their customers to whom we provide retail automotive financing solutions.

Strategy

In response to the pandemic, Canadian Banking prioritized providing customer and employee support initiatives throughout 2020. This included prioritizing the health and safety of both customers and employees, supporting Retail and Business Banking customers financially and credit de- risking, while continuing to execute on its long-term strategy to deliver stable, above-market revenue and earnings growth to solidify our top 3 position in Canada across key market share measures.

2020 Scotiabank Annual Report  |  45

Management’s Discussion and Analysis

This long-term strategy remains focused on sustaining growth in businesses and products that deliver higher returns on equity, by building stronger relationships with our customers to increase engagement and loyalty. These efforts are enabled by a high-quality, diverse and highly engaged team of Scotiabank employees.

2021 Priorities

• Improve business performance: Continue to execute on the strategy to deliver consistent and stable long-term earnings growth by enhancing our return on equity across Retail and Business Banking. Sharpened focus on credit risk management and further leverage the Scotia Total Equity Plan program to drive higher secured lending and risk-adjusted returns.

• Deliver a differentiated customer experience: Progress toward becoming the #1 bank for our customers, by providing differentiated focus, service, and advice to drive deeper relationships, loyalty and customer engagement.

• Strengthen our winning team culture: Continue to instill a winning and inclusive culture, with a focus on prioritizing customers and improving sustainable business performance, further strengthening our RESULTS-driven engagement (RESULTS: Revenue, Earnings, Simplify, Urgency, Listen, Trust, Support).

• Accelerate digital enablement: Strengthen digital capabilities across the Bank by accelerating enablement of salesforce to support mobility and virtual advice, while enhancing insight-driven management reporting.

• Leverage unique partnerships and assets: Further utilize our dynamic long-term partnerships and assets, including MLSE (Toronto Maple Leafs & Raptors), SCENE, and Wealth businesses, to generate customer awareness, engagement and growth across the Canadian Banking franchise.

T19  Canadian Banking financial performance

($ millions)	2020(1)			2019(1)(2)			2018(2)
Reported results
Net interest income(3)	$	7,838		$	7,848		$	7,504
Non-interest income(3)(4)		2,461			2,616			2,907
Total revenue(3)		10,299			10,464			10,411
Provision for credit losses		2,073			972			790
Non-interest expenses		4,811			4,772			4,811
Income tax expense		879			1,232			1,251
Net income	$	2,536		$	3,488		$	3,559
Net income attributable to non-controlling interests in subsidiaries		–			–			–
Net income attributable to equity holders of the Bank	$	2,536		$	3,488		$	3,559
Key ratios and other financial data
Return on equity(5)		15.1	%		23.2	%		25.8	%
Productivity(3)		46.7	%		45.6	%		46.2	%
Net interest margin(6)		2.30	%		2.41	%		2.39	%
Provision for credit losses - performing (Stages 1 and 2)	$	943		$	(2	)	$	8
Provision for credit losses - impaired (Stage 3)	$	1,130		$	974		$	782
Provision for credit losses as a percentage of average net loans and acceptances		0.59	%		0.29	%		0.24	%
Provision for credit losses on impaired loans as a percentage of average net loans and acceptances		0.32	%		0.29	%		0.24	%
Net write-offs as a percentage of average net loans and acceptances		0.29	%		0.29	%		0.25	%
Selected Consolidated Statement of Financial Position data (average balances)
Earning assets	$	354,669		$	336,813		$	323,642
Total assets		358,770			340,171			326,719
Deposits		261,172			241,944			222,685
Total liabilities		276,774			255,255			233,512

(1) The amounts for the year ended October 31, 2020 have been prepared in accordance with IFRS 16; amounts for the years ended October 31, 2020 and October 31, 2019 have been prepared in accordance with IFRS 15; prior year amounts have not been restated.

(2) The amounts for the years ended October 31, 2019 and October 31, 2018 have been restated to reflect the impact of the establishment of Global Wealth Management as a separate business segment.

(3) Taxable equivalent basis (TEB).

(4) Includes net income from investments in associated corporations of $56 (2019 – $65; 2018 – $93).

(5) Refer to Glossary.

(6) Net interest income (TEB) as % of average earning assets excluding bankers acceptances.

T19A  Adjusted Canadian Banking financial performance⁽¹⁾

($ millions)	2020		2019		2018
Adjusted results
Net interest income	$	7,838	$	7,848	$	7,504
Non-interest income		2,461		2,616		2,907
Total revenue		10,299		10,464		10,411
Provision for credit losses		2,002		972		790
Non-interest expenses		4,789		4,750		4,791
Income before taxes		3,508		4,742		4,830
Income tax expense		904		1,238		1,255
Net income	$	2,604	$	3,504	$	3,575
Net income attributable to non-controlling interests in subsidiaries (NCI)		–		–		–
Net income attributable to equity holders	$	2,604	$	3,504	$	3,575

(1) Refer to Non-GAAP Measures for the reconciliation of Reported and Adjusted results.

46  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Canadian Banking

Financial Performance

Net income

Canadian Banking reported net income to equity holders of $2,536 million in 2020, a decrease of $952 million or 27% compared to prior year. Adjusted net income was $2,604, a decrease of $900 million or 26%. The decline was due primarily to higher provision for credit losses on performing loans, lower non-interest income, and higher non-interest expenses.

Average assets and liabilities

Average assets grew $19 billion or 5% to $359 billion. The growth included $13 billion or 6% in residential mortgages and $5 billion or 10% in business loans and acceptances, partially offset by declines in credit cards.

Average liabilities increased $22 billion or 8%, including solid growth of $11 billion or 7% in personal deposits and $8 billion or 10% in non-personal deposits.

Revenues

Revenues were $10,299 million, a decrease of $165 million or 2%. The decline was due primarily to lower non-interest income.

Net interest income

Net interest income of $7,838 million was in line with the prior year as strong volume growth was offset by a margin decline of 11 basis points to 2.30%. The margin decline was primarily driven by the rate environment, including interest rate decreases by the Bank of Canada and changes to business mix.

Non-interest income

Non-interest income of $2,461 million decreased $155 million or 6%. The decline was due primarily to lower insurance, banking and foreign exchange fees.

Retail Banking

Total retail banking revenues were $6,971 million, a decrease of $221 million or 3%. Net interest income decreased $64 million or 1%, primarily driven by the rate environment, including interest rate decreases by the Bank of Canada, partially offset by solid volume growth. Non-interest income decreased $157 million or 9%, due primarily to lower insurance and banking fees mainly as a result of a decline in economic activity and transaction volumes and a decrease in foreign exchange fees.

Business Banking

Total business banking revenues increased $56 million or 2% to $3,328 million. Net interest income increased $54 million or 2% due primarily to growth in loans and business operating accounts. This was partially offset by a margin decline mainly driven by the rate environment, including interest rate decreases by the Bank of Canada. Non-interest income of $772 million was in line with the prior year.

Non-interest expenses

Non-interest expenses were $4,811 million, an increase of $39 million or 1%, largely driven by higher personnel and technology costs to support business development, partially offset by lower marketing-related costs.

Provision for credit losses

Provision for credit losses was $2,073 million, compared to $972 million last year, an increase of $1,101 million. Adjusted provision for credit losses increased by $1,030 million to $2,002 million. The provision for credit losses ratio was 59 basis points, an increase of 30 basis points. Adjusted provision for credit losses ratio increased by 28 basis points to 57 basis points.

Provision on impaired loans was $1,130 million, an increase of $156 million. Adjusted provision on impaired loans was up $152 million due primarily to higher commercial provisions. The provision for credit losses ratio on impaired loans was 32 basis points, an increase of three basis points.

Provision on performing loans was $943 million, an increase of $945 million. Adjusted provision on performing loans was up $878 million, mostly related to the unsecured retail and auto portfolio. This is due primarily to the unfavourable macroeconomic outlook in Canada driven by the COVID-19 pandemic and its estimated future impact on credit migration.

Provision for income taxes

The effective tax rate of 25.7% decreased from 26.1% in the prior year.

Outlook

Canadian Banking growth in 2021 is expected to be driven by an increase in both retail and business banking, underpinned by an improving economic environment. Assets and deposits are expected to grow across businesses, with margins expected to remain relatively stable over the next year. Revenues are expected to improve along with the pace of the economic activity, while provisions for credit losses are expected to moderate from the elevated levels in 2020. Key priorities for 2021 will be to strategically invest in our core businesses while maintaining disciplined expense management, which is expected to underpin improved operating leverage. Overall , we expect to deliver solid results in 2021.

C6  Total revenue

        

C7  Total revenue by sub-segment
$ millions

        

C8  Average loans and acceptances
$ billions

        

2020 Scotiabank Annual Report  |  47

Management’s Discussion and Analysis

International Banking

2020 Achievements

Optimize footprint

•  Aligned with our strategy to lead in the Americas, we successfully completed integrations of our acquisitions in Chile, Colombia, and the Dominican Republic.

•  BBVA Chile integration recognized by Euromoney Magazine as Latin America’s Best Bank Transformation.

•  Closed 13 divestitures in non-core markets and businesses during the last two years.

Lead in customer focus and digital

•  Provided financial relief to over 3 million Scotiabank customer accounts across ~$25 billion in lending products, to support our Retail and Small Business customers in International Banking. Currently, ~80% of the cumulative relief balances have expired and of the remaining balances, ~90% remain current.

•  Delivered significant acceleration in Digital; exceeded annual targets for our core Digital metrics, reaching 51% in Digital Sales, 46% in Digital Adoption, and 9% in Branch Transactions in the Pacific Alliance countries.

•  Accelerated deployment of Digital onboarding tools in branches, enabling a superior experience to customers and employees alike.

•  Proactively implemented efficiency initiatives by leveraging Digital to consistently drive expense reductions.

•  Over 90% of our branches remained operational during the pandemic, following strict safety guidelines to ensure continued service for our customers.

•  Recognized by Euromoney Magazine as Best Bank in Chile.

Accelerate growth drivers

•  Delivered strong growth in the Corporate & Commercial business with a loan growth of 13% excluding the impact of divestitures by deepening our relationships with existing high-quality clients. Achieved great progress against peers, ranked: #1 in Syndicated Loans in LATAM, up from #3 in fiscal 2019, and #6 in DCM in LATAM.

•  Demonstrated high deposit growth at 9% excluding the impact of divested operations.

•  Achieved 16% in AUA growth and 18% deposit growth in our International Wealth Business.

Instill a winning team culture

•  Won several awards throughout our international footprint, including Top 20 best workplace across all industries in Latin America by Great Place to Work.

•  Made significant progress on women in leadership, reaching over 30% women representation for the total executive level pool and 50% for the newly appointed executives.

•  Supported employee health, well-being and engagement through the pandemic.

•  Activated business continuity plans across our markets, enabling remote working conditions for our employees.

Business Profile

International Banking has a strong and diverse franchise with more than 10 million Retail, Corporate, and Commercial customers. We are served by a network of more than 1,400 branches, 5,200 ATMs and 22 contact centres. International Banking continues to offer significant potential for the Bank, with a geographical footprint encompassing the Pacific Alliance countries of Mexico, Colombia, Peru and Chile as well as Central America and the Caribbean. The Pacific Alliance countries remain attractive with a combined GDP that is more than double the size of Canada’s, solid macroeconomic fundamentals, attractive demographics and connectivity with Canada and the US.

Strategy

As economic conditions evolved throughout the year, International Banking deployed a series of initiatives to soften the impact of the pandemic and selectively capture opportunities. These included prioritizing the health and safety of our customers and employees, assisting our customers with financial relief, prudently managing credit-risk and sharpening our focus on expense management, while executing on our long-term strategy to be a Leading Bank in the Americas.

Underpinning our long-term strategy is our focus on being the preferred choice for our customers, leveraging digital engagement to deliver superior customer experience while driving operational efficiency and outpacing our competition in our priority businesses. All enabled by a diverse and talented winning team.

2021 Priorities

• Improve business performance: Manage our balance sheet prudently and in accordance to the macro environment, adapting our growth over time as economies in our footprint rebound. Continue managing expenses actively and informed by revenue growth.

• Accelerate growth drivers: Outpace the competition by growing our Corporate and Commercial business in the Pacific Alliance, scaling our Wealth business in close collaboration with Global Wealth Management and leveraging strategic partnerships to accelerate the Insurance business.

• Accelerate Digital Transformation: Further accelerate our digital offerings to lead in customer experience, optimize distribution costs, and enable sales and services capabilities.

• Focused customer strategy: Deliver superior customer experience leveraging digital interaction, while deepening relationships with our retail and commercial clients to achieve best-in-class customer loyalty and engagement.

• Enhance our winning team culture: Continue providing our employees a safe, inclusive, and engaging work environment to attract and retain key talent, while fostering a high performance and results-driven mindset.

48  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    International Banking

T20  International Banking financial performance

($ millions)	2020(1)			2019(1)(2)			2018(2)
Reported results
Net interest income(3)	$	7,603		$	8,353		$	7,218
Non-interest income(3)(4)(5)(6)		3,207			4,366			3,475
Total revenue(3)		10,810			12,719			10,693
Provision for credit losses(7)		3,613			2,076			1,868
Non-interest expenses		5,943			6,596			5,700
Income tax expense(3)		182			909			617
Net income	$	1,072		$	3,138		$	2,508
Net income attributable to non-controlling interests in subsidiaries		92			373			162
Net income attributable to equity holders of the Bank	$	980		$	2,765		$	2,346
Key ratios and other financial data
Return on equity(8)		5.0	%		13.2	%		13.6	%
Productivity(3)		55.0	%		51.9	%		53.3	%
Net interest margin(9)		4.18	%		4.54	%		4.68	%
Provision for credit losses – performing (Stages 1 and 2)	$	1,412		$	154		$	312
Provision for credit losses – impaired (Stage 3)	$	2,201		$	1,922		$	1,556
Provision for credit losses as a percentage of average net loans and acceptances(10)		2.45	%		1.40	%		1.52	%
Provision for credit losses on impaired loans as a percentage of average net loans and acceptances		1.49	%		1.30	%		1.29	%
Net write-offs as a percentage of average net loans and acceptances		1.24	%		1.29	%		1.26	%
Selected Consolidated Statement of Financial Position data (average balances)
Earning assets	$	188,308		$	186,331		$	155,221
Total assets		206,382			200,596			164,959
Deposits		110,668			114,671			100,320
Total liabilities		154,894			152,858			127,191

(1) The amounts for the year ended October 31, 2020 have been prepared in accordance with IFRS 16; amounts for the years ended October 31, 2020 and October 31, 2019 have been prepared in accordance with IFRS 15; prior year amounts have not been restated.

(2) The amounts for the years ended October 31, 2019 and October 31, 2018 have been restated to reflect the impact of the establishment of Global Wealth Management as a separate business segment.

(3) Taxable equivalent basis (TEB).

(4) Includes net income from investments in associated corporations of $243 (2019 – $753; 2018 – $629).

(5) Includes BBVA Chile third quarter 2018 before tax earnings of $21. BBVA Chile fourth quarter earnings have been reflected in all P&L lines.

(6) Includes one additional month of earnings relating to Mexico of $51 (after tax and NCI $37) for the year ended October 31, 2020. Includes one additional month of earnings relating to Peru of $57 (after tax and NCI $41) for the year ended October 31, 2019. Includes one additional month of earnings relating to Thanachart Bank of $30 (after tax and NCI $22), and Chile of $36 (after tax and NCI $26) for the year ended October 31, 2018.

(7) 2019 and 2018 include Day 1 provision for credit losses on acquired performing financial instruments of $151 for the year ended October 31, 2019, and $404 for the year ended October 31, 2018.

(8) Refer to Glossary.

(9) Net interest income (TEB) as % of average earning assets excluding bankers acceptances.

(10) Provision for credit losses as a percentage of average net loans and acceptances adjusted for Day 1 provision for credit losses was 1.19% in 2018 and 1.30% in 2019.

T20A  Adjusted International Banking financial performance⁽¹⁾

($ millions)	2020		2019		2018
Adjusted results
Net interest income	$	7,603	$	8,353	$	7,218
Non-interest income		3,207		4,366		3,475
Total revenue		10,810		12,719		10,693
Provision for credit losses		3,536		1,925		1,464
Non-interest expenses		5,742		6,390		5,589
Income before taxes		1,532		4,404		3,640
Income tax expense		260		1,012		768
Net income	$	1,272	$	3,392	$	2,872
Net income attributable to non-controlling interests (NCI)		124		439		284
Net income attributable to equity holders	$	1,148	$	2,953	$	2,588

(1) Refer to Non-GAAP measures for reconciliation of Reported and Adjusted results.

T21  International Banking – Income from divested operations

($ millions)	2020		2019		2018
Net interest income	$	76	$	430	$	438
Non-interest income		64		734		596
Total revenue		140		1,164		1,034
Provision for credit losses		8		11		(40	)
Non-interest expenses		57		323		338
Income before taxes		75		830		736
Income tax expense		15		200		171
Net income	$	60	$	630	$	565
Net income attributable to non-controlling interests (NCI)		–		–		–
Net income attributable to equity holders – relating to divested operations	$	60	$	630	$	565

2020 Scotiabank Annual Report  |  49

Management’s Discussion and Analysis

Financial Performance

Net income

Net income attributable to equity holders was $980 million, a decrease of $1,785 million or 65%. Adjusted net income attributable to equity holders was $1,148 million, down $1,805 million or 61%. The decline was due largely to a higher provision for credit losses on performing loans and the impact of divested operations. The remaining decline was due primarily to lower net interest income and non-interest income, partially offset by lower non-interest expenses and income tax expense.

Financial Performance on Constant Dollar Basis

The discussion below on the results of operations is on a constant dollar basis that excludes the impact of foreign currency translation, and is a non-GAAP financial measure (refer to Non-GAAP Measures). The Bank believes that reporting in constant dollars is useful to readers in assessing ongoing business performance. Ratios are on a reported basis.

T22  International Banking financial performance on constant dollar basis

($ millions)	2020(1)		2019(1)(2)		2018(2)
Net interest income(3)	$	7,603	$	7,853	$	6,804
Non-interest income(3)(4)		3,207		4,218		3,357
Total revenue(3)		10,810		12,071		10,161
Provision for credit losses		3,613		1,934		1,677
Non-interest expenses		5,943		6,207		5,347
Income tax expense(3)		182		888		635
Net income on constant dollar basis	$	1,072	$	3,042	$	2,502
Net income attributable to non-controlling interests in subsidiaries on a constant dollar basis		92		338		156
Net income attributable to equity holders of the Bank on a constant dollar basis	$	980	$	2,704	$	2,346
Selected Consolidated Statement of Financial Position data (average balances)
Total assets		206,382		191,152		158,831
Total liabilities		154,894		144,094		120,745

(1) The amounts for the year ended October 31, 2020 have been prepared in accordance with IFRS 16; amounts for the years ended October 31, 2020 and October 31, 2019 have been prepared in accordance with IFRS 15; prior year amounts have not been restated.

(2) The amounts for the years ended October 31, 2019 and October 31, 2018 have been restated to reflect the impact of the establishment of Global Wealth Management as a separate business segment.

(3) Taxable equivalent basis.

(4) Includes net income from investments in associated corporations of $243 (2019 – $771; 2018 – $670).

Net income

Net income attributable to equity holders was $980 million, a decrease of $1,724 million or 64%. Adjusted net income attributable to equity holders was $1,148 million, down $1,729 million or 60%. The decline was due largely to higher provision for credit losses on performing loans and the impact of divested operations. The remaining decline was due primarily to lower non-interest income, partially offset by higher net interest income and lower provision for income taxes.

Assets and liabilities

Average assets of $206 billion increased $15 billion or 8%. Total loan growth was 5%, with strong commercial loan growth of 11% primarily in Latin America offset by a decline in retail loans of 1%. The remaining increase was driven by higher deposits with central banks and investment securities. The impact of divested operations on total loan growth was 5%, retail loans 7% and commercial loans 2%.

Average liabilities of $155 billion increased $11 billion or 7% with deposit growth of 1%. Non-personal deposit growth was 5% while retail deposit declined 5%. The remaining increase was driven by higher funding from central banks. The impact of divested operations on total deposit growth was 8%, non-personal deposits 4% and retail deposits 14%.

Revenues

Total revenues were $10,810 million, down $1,262 million or 10%. The impact of divested operations was 8%. The remaining decline of 2% was due mainly to lower banking, card and insurance fees due to the slowdown in consumer activity partially offset by higher net interest income.

C9   Total revenue

           

C10   Total revenue by region
$ millions

           

C11 Average loans and acceptances
$ billions

           

C12   Average earning assets⁽¹⁾ by region
$ billions

           

(1) Average earning assets excluding bankers acceptances

50  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    International Banking

Latin America

Total revenues of $8,227 million were in line with last year. Net interest income was up $137 million or 2%, driven by loan growth of 12% partially offset by margin compression. Non-interest income was down $129 million or 5%, driven primarily by lower banking and card fees due to the slowdown in consumer activity.

Caribbean and Central America

Total revenues were $2,394 million, down $767 million or 24% over last year, with net interest income down $389 million or 19% and non-interest income down $378 million or 35%. The impact of divested operations was 14%. The remaining decrease of 10% was driven primarily by margin compression, lower banking and card fees due to the slowdown in consumer activity, and lower investment gains.

Asia

Total revenues were $189 million, down $503 million or 73% over last year, due largely to the impact of divested operations.

Non-interest expenses

Non-interest expenses were $5,943 million, down $264 million or 4%. On an adjusted basis, non-interest expenses decreased 5% due to the impact of divested operations, synergies from acquisitions and cost-savings initiatives.

Provision for credit losses

The provision for credit losses was $3,613 million compared to $1,934 million last year. Adjusted provision for credit losses increased $1,745 million primarily driven by higher retail provisions on performing loans. The provision for credit losses ratio was 245 basis points, an increase of 105 basis points. Adjusted provision for credit losses ratio was 240 basis points, an increase of 110 basis points.

Provision on impaired loans was $2,201 million, up $414 million. Adjusted provision on impaired loans was up $386 million due primarily to higher retail provisions driven by higher write-offs in most Pacific Alliance countries, and higher commercial provisions. The provision for credit losses ratio on impaired loans was 149 basis points, an increase of 19 basis points. Adjusted provision for credit losses ratio on impaired loans was 147 basis points, an increase of 17 basis points.

Provision on performing loans was $1,412 million, up $1,265 million. Adjusted provision on performing loans increased $1,359 million, of which $1,218 million related to retail. Commercial performing loan provisions increased by $142 million. This is due primarily to the unfavourable macroeconomic outlook driven by the COVID-19 pandemic and its estimated future impact on credit migration.

Provision for income taxes

The effective tax rate was 14.5%. On an adjusted basis, the effective tax rate was 17.0%, compared to 23.0% last year, due primarily to significantly higher loan loss provisions recorded in entities that operate in higher tax rate jurisdictions, offset by the tax benefits in Mexico last year.

Outlook

With improved economic activity and strong growth of the Pacific Alliance countries key trade partners, US and China, International Banking’s business performance is expected to continue to grow through 2021, building towards its target earnings. Provision for credit losses are expected to moderate as economies recover. The Businesses remain focused on prudent expense management and will continue to benefit from digital investments, while improving efficiency and enhancing customer experience.

2020 Scotiabank Annual Report  |  51

Management’s Discussion and Analysis

Global Wealth Management

2020 Achievements

Maximize growth in asset management and advisory businesses

•  Strong investment results in 1832 Asset Management, with 78% of AUM in the top two quartiles of their peer groups for 5-year returns (as of September 2020)

•  Positive mutual fund net sales in Scotia Global Asset Management with #2 ranking fiscal year to date amongst bank peers

•  Stable platforms and client-focused teams in Scotia iTRADE have enabled the business to manage sustained record call volumes and new account growth, leading to higher commission and FX revenues

•  100% of all Scotia Wealth Management branches remained open to serve customers during the COVID-19 pandemic

Leverage Jarislowsky Fraser and MD Financial to grow in new segments

•  Solid new business development in Jarislowsky Fraser and the addition of new institutional and private client mandates

•  Strong sales momentum in MD Financial

•  Scotia and MD Financial continue to make a meaningful impact in support of Canada’s physicians and the communities they serve through the Canadian Medical Association affinity agreement

•  Scotiabank and MD have committed over $4.5MM in partnership funds to support physician-centric associations and programs during the COVID-19 pandemic and created the Physician Wellness+ Initiative, with $15 million targeted to address the urgent and ongoing health and wellness needs of physicians and medical learners

Expand international capabilities and offering

•  International Wealth Management’s Asset Management teams gained market share within Mexico and moved up to fifth place in terms of market share in Chile

•  Bahamas was recognized as Best Full-Service Wealth Manager by Capital Finance International

Select award highlights

•  Scotia Global Asset Management was recognized for its strong performance by winning seven 2019 Lipper Fund Awards and 27 FundGrade A+ awards

•  Dynamic Funds was named the 2020 Wealth Professional Award for Fund Provider of the Year

•  ScotiaMcLeod ranked #2 bank-owned brokerage firm in the 2020 Investment Executive Brokerage Report Card

•  Jarislowsky Fraser was named one of the 2019 Greenwich Leaders in Canadian Institutional Investment Management Service and received a “straight A” scorecard in the 2020 Principles for Responsible Investment report

•  Mexico’s Scotia Global Asset Management team was recognized by Morningstar as the best overall Asset Management firm for 2019

•  International Wealth Management was recognized by global Finance as 2020 Best Private Bank for business owners in the Caribbean, and Best Private Bank in Cayman Islands, Bahamas, and Peru

Business Profile

Global Wealth Management is focused on delivering comprehensive wealth management advice and solutions to clients across Scotiabank’s footprint. Global Wealth Management serves over 1.5 million investment fund and advisory clients across 14 countries – managing over $500 billion in assets.

Through organic growth and acquisitions, Global Wealth Management has built a robust client-centric business with comprehensive advice, products, and platforms to meet a broad range of client needs.

Global Wealth Management is comprised of the following businesses:

• Advisory: Online brokerage (Scotia iTRADE), Mobile investment specialists (Scotiabank), Full-service brokerage (ScotiaMcLeod), Trust, Private Banking, Private Investment Counsel (Scotia Wealth Management and MD Financial Management)

• Product Manufacturing: Retail mutual funds (Scotia & Dynamic Funds), Exchange Traded Funds (Scotia & Dynamic Funds), Liquid Alternatives (Dynamic Funds), Institutional funds (Scotia & Jarislowsky Fraser)

Scotiatrust, ScotiaMcLeod, Scotia iTRADE, Private Banking, Private Investment Counsel, 1832 Asset Management and Dynamic Funds are top performers in key industry metrics.

Strategy

Global Wealth Management continues to execute on its strategic focus on providing clients with strong risk adjusted investment results and financial planning to provide investment solutions to meet their complex needs. The focus continues to be delivering on partnerships and Total Wealth advice to best serve clients in the current economic environment and through all market conditions. To best drive that focus, Global Wealth Management is prioritizing investments in digital and investment capabilities, growing our product shelf to serve both retail and institutional clients.

In addition, Global Wealth Management is focused on maximizing our international footprint, including leveraging our institutional management capabilities in priority markets across Latin America.

52  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Global Wealth Management

2021 Priorities

• Continue product innovation: Drive innovation in products to deliver industry-leading investment capabilities and performance through purpose-built solutions for customers across Global Wealth Management’s brands and channels.

• Focus on partnerships: Continued focus on Total Wealth to deliver the entire bank to clients and drive partnerships across our businesses. Continued leverage of our acquisitions by expanding our proven Total Wealth approach to both MD Financial and Jarislowsky Fraser.

• Invest in digital: Digitally enable sales and advice to support all our distribution channels, including proprietary and 3rd party sales.

• Leverage institutional capabilities: Expand our institutional sales internationally with a focus on value added investment mandates in priority Latin American markets.

• Focus on international: Maximize our international footprint by growing the product shelf, and by enhancing internal capabilities in sales and distributions. Invest and grow the International Wealth business by following our retail footprint.

• Enhance our winning team culture: Cultivate a talented, diverse workforce, and foster an environment to keep our customers and employees safe, while delivering outstanding results and client experiences.

T23   Global Wealth Management financial performance

($ millions)	2020(1)			2019(1)			2018
Reported results
Net interest income(2)	$	575		$	564		$	498
Non-interest income(2)		4,009			3,937			3,486
Total revenue(2)		4,584			4,501			3,984
Provision for credit losses		7			–			3
Non-interest expenses		2,878			2,905			2,559
Income tax expense		437			412			376
Net income	$	1,262		$	1,184		$	1,046
Net income attributable to non-controlling interests in subsidiaries		10			18			14
Net income attributable to equity holders of the Bank	$	1,252		$	1,166		$	1,032
Key ratios and other financial data
Return on equity(3)		13.5	%		12.7	%		17.1	%
Productivity(2)		62.8	%		64.5	%		64.2	%
Selected Consolidated Statement of Financial Position data (average balances)
Earning assets	$	15,435		$	13,892		$	12,158
Total assets		26,036			24,664			17,260
Deposits		32,066			25,880			21,485
Total liabilities		38,637			31,896			23,672
Other ($ billions)
Assets under administration	$	502		$	497		$	446
Assets under management	$	292		$	302		$	281

(1) The amounts for the year ended October 31, 2020 have been prepared in accordance with IFRS 16; amounts for the years ended October 31, 2020 and October 31, 2019 have been prepared in accordance with IFRS 15; prior year amounts have not been restated.

(2) Taxable equivalent basis (TEB).

(3) Refer to Glossary.

T23A  Adjusted Global Wealth Management financial performance⁽¹⁾

($ millions)	2020		2019		2018
Adjusted results
Net interest income	$	575	$	564	$	498
Non-interest income		4,009		3,937		3,486
Total revenue		4,584		4,501		3,984
Provision for credit losses		6		–		3
Non-interest expenses		2,818		2,839		2,503
Income before taxes		1,760		1,662		1,478
Income tax expense		453		429		392
Net income	$	1,307	$	1,233	$	1,086
Net income attributable to non-controlling interests in subsidiaries (NCI)		10		18		14
Net income attributable to equity holders	$	1,297	$	1,215	$	1,072

(1) Refer to Non-GAAP Measures for the reconciliation of Reported and Adjusted results.

2020 Scotiabank Annual Report  |  53

Management’s Discussion and Analysis

Financial Performance

Net income

Net income attributable to equity holders was $1,252 million, an increase of $86 million or 7%. Adjusted net income attributable to equity holders increased $82 million, also up 7%. The negative impact of divested operations was 1%. The remaining 8% growth was driven by solid AUM growth across our businesses partly offset by higher non-interest expenses, margin compression, and the negative impact of customer relief programs mainly on our international pension earnings.

Assets under management (AUM) and assets under administration (AUA)

Assets under management of $292 billion declined $10 billion or 3%, while assets under administration of $502 billion increased $5 billion or 1%. The negative impact of divested operations was 5% on AUM and 3% on AUA. The remaining growth in AUM and AUA was due primarily to higher net sales and market appreciation.

Revenues

Revenues of $4,584 million were up $83 million or 2%, due primarily to higher net interest income, and growth in mutual fund and brokerage revenues partly offset by lower revenues within our international operations due to the slowdown in consumer activity. The impact of divested operations was 2%.

Net interest income

Net interest income of $575 million increased $11 million or 2%, due primarily to strong deposit growth, partially offset by margin compression.

Non-interest income

Non-interest income of $4,009 million increased $72 million or 2%, due primarily to higher mutual fund and brokerage revenues partly offset by lower revenues within our international operations due to the slowdown in consumer activity. The impact of divested operations was 3%.

Non-interest expenses

Non-interest expenses of $2,878 million were down $27 million or 1%, as the benefit from prior period divested operations and lower communications, travel, and business development expenses were offset by higher volume-related expenses and technology costs to support business development.

Provision for credit losses

The provision for credit losses was $7 million compared to nil last year. The provision for credit losses ratio was five basis points on a reported and adjusted basis.

Provision for income taxes

The effective tax rate was 25.8% compared to 25.7% in the prior year.

Outlook

Global Wealth Management is well positioned for growth in 2021. This will be underpinned by strong volume growth driven by robust active management, multi-brand distribution and leveraging the Jarislowsky Fraser brand and market position to more effectively target the institutional and Ultra High Net Worth segments across the Americas. Key priorities for 2021 include strategically investing in the business while remaining focused on expense management and delivering positive operating leverage.

C13 Total revenue

         

C14 Total revenue by sub-segment
$ millions

         

C15 Wealth management asset growth
$ billions, as at October 31

         

54  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Global Banking and Markets

Global Banking and Markets

2020 Achievements

Increase our relevance to our corporate clients and capture more of the non-lending wallet:

•  Delivered record revenue growth and increased market share as demonstrated by leadership in marquee transactions

•  Joint Bookrunner on the largest-ever IPO of a Canadian company (US$2.2 billion combined IPO for GFL Environmental Inc.)

•  Lead Arranger and Bookrunner on the largest CAD-denominated MBS issuance ever placed in a single offering (C$1.5 billion National Housing Act insured MBS issuance)

•  Continued to drive growth in our non-lending business, resulting in increased multiproduct transactions

Strengthen capital markets offerings:

•  Focused on origination businesses, solidifying areas of strength and growing in select new sectors

•  Prioritized balance sheet to align with higher potential institutional clients

•  Launched the Sustainable Finance Group, ranked #2 for C$ sustainability bonds as at October 31, 2020

Build on our presence in the Americas:

•  Continuous progress on multi-year strategy of creating a top-tier local and cross-border wholesale banking business in the Americas

•  Progress made on peer placement in YTD 2020 in Loans (#1), DCM (#3), and ECM (#4) in Canada as at October 31, 2020

Select awards and deal highlights:

•  M&A Deal of the Year by Power Finance & Risk for TerraForm Power’s acquisition of the Arcadia portfolio from AltaGas.

•  Deal of the Year Awards by LatinFinance: Sovereign Bond of the Year and Local Currency Deal of the Year (Republic of Peru), and Financing Innovation of the Year (Fibra Uno).

•  Global Business Payments awarded Highest Customer Service for First Call Resolution (business banking technical helpdesk) by SQM Group, and Judges Choice for Responsible Innovation in Financial Services by the Digital Finance Institute.

•  Joint Lead Arranger and Joint Bookrunner on financing for the acquisition of Genesee & Wyoming Inc. for US$8.4 billion by Brookfield Infrastructure, Brookfield Infrastructure’s institutional partners and GIC. Acted as an underwriter on US$3.2 billion of credit facilities in connection with the transaction.

•  Joint Bookrunner on a US$8 billion 4-part bond offering and previously on a US$4.5 billion 2-part bond offering, for Broadcom Inc.

•  Exclusive Financial Advisor to Alacer Gold Corp. on its merger with SSR Mining Inc., valued at C$5.5 billion.

•  Joint Bookrunner on GFL Environmental Inc.’s Initial Public Offering (IPO) of US$1.4 billion subordinate voting shares and US$775 million tangible equity units. The combined US$2.2 billion IPO was the largest IPO of a Canadian company in history.

•  Joint Bookrunner in a dual-currency transaction by the Republic of Chile, a reopening of its outstanding Euro-denominated Notes due 2025 for €500 million, and US$1.5 billion due 2031. Also acted as Billing and Delivery agent on the USD tranche of the issue.

•  Joint Lead and Bookrunner on a new C$2 billion 7-year Notes offering for TransCanada Pipelines Limited. This was the largest ever offering by a domestic corporate borrower in the Canadian Debt Capital Markets.

•  Joint Bookrunner for Manulife Financial Corporation on a new C$2 billion dual tranche Subordinated Debt offering. This marked the largest ever CAD-denominated bond offering from a Canadian insurance company.

•  Global Coordinator, Joint Bookrunner and Dealer Manager on a Sustainability-Linked SEC Registered Notes Issuance and an Any-and-All Cascade Tender Offer for Suzano. The new 10-year US$750 million bond offering was the first Sustainability-Linked Bond (SLB) aligned to ICMA’s SLB Principles.

•  Sole Structuring Bank, Joint Lead Arranger and Joint Bookrunner on a ~US$340 million equivalent, multi-currency senior facility for Caoba Inversiones, owned by Celsia Colombia S.A. E.S.P and Cubico Sustainable Investment. This was the first ever structured financing of a portfolio of transmission lines in Colombia.

Business Profile

Global Banking and Markets (GBM) provides corporate clients with lending and transaction services, investment banking advice and access to capital markets. GBM is a full-service wholesale bank in the Americas, with operations in 21 countries, serving clients across Canada, the United States, Latin America, Europe and Asia-Pacific.

Strategy

To be recognized as the leading Wholesale Bank in the Americas, Global Banking and Markets’ strategy is grounded in three key pillars: Client, Product and Geography. We are focused on increasing our relevance with our global clients with leading financial advice and solutions and on expanding our full-service corporate offering, with a key focus on the Americas. We are leveraging our regional and institutional capabilities and delivering profitable growth for our shareholders.

2020 Scotiabank Annual Report  |  55

Management’s Discussion and Analysis

2021 Priorities

• Client Focus: Leverage coverage operating model with aligned sector and product expertise to focus on up-tiering and adding new client relationships.

• Strengthen our capital markets offering: Execute on capital markets client strategy to drive origination, supported by a strong distribution network, and advance electronic trading capabilities to improve client experience and increase competitiveness.

• Build on our presence in the Americas: Deliver Americas strategy, leveraging Europe and Asia for distribution of Americas product and in support of our global corporate clients.

• Continue enabling our winning culture: Attract, develop and retain diverse talent in an inclusive and high-performance environment, while keeping the Bank safe.

T24  Global Banking and Markets financial performance

($ millions)	2020(1)			2019(1)			2018
Net interest income(2)	$	1,435		$	1,396		$	1,454
Non-interest income(2)		3,947			3,084			3,074
Total revenue(2)		5,382			4,480			4,528
Provision for credit losses		390			(22	)		(50	)
Non-interest expenses		2,473			2,463			2,233
Income tax expense(2)		564			505			587
Net income	$	1,955		$	1,534		$	1,758
Net income attributable to non-controlling interests in subsidiaries		–			–			–
Net income attributable to equity holders of the Bank	$	1,955		$	1,534		$	1,758
Key ratios and other financial data
Return on equity(3)		14.8	%		13.3	%		16.0	%
Productivity(2)		45.9	%		55.0	%		49.3	%
Provision for credit losses – performing (Stages 1 and 2)	$	257		$	(26	)	$	(22	)
Provision for credit losses – impaired (Stage 3)	$	133		$	4		$	(28	)
Provision for credit losses as a percentage of average net loans and acceptances		0.35	%		(0.02	)%		(0.06	)%
Provision for credit losses on impaired loans as a percentage of average net loans and acceptances		0.12	%		–	%		(0.03	)%
Net write-offs as a percentage of average net loans and acceptances		0.09	%		0.03	%		0.03	%
Selected Consolidated Statement of Financial Position data (average balances)
Trading assets	$	119,611		$	112,317		$	98,130
Loans and acceptances		103,634			92,977			81,838
Earning assets		366,329			337,589			282,997
Total assets		412,125			371,909			320,850
Deposits		133,536			99,346			86,260
Total liabilities		378,971			304,253			264,983

(1) The amounts for the year ended October 31, 2020 have been prepared in accordance with IFRS 16; amounts for the years ended October 31, 2020 and October 31, 2019 have been prepared in accordance with IFRS 15; prior year amounts have not been restated.

(2) Taxable equivalent basis (TEB).

(3) Refer to Glossary.

T24A  Adjusted Global Banking and Markets financial performance⁽¹⁾

($ millions)	2020		2019			2018
Adjusted results
Net interest income	$	1,435	$	1,396		$	1,454
Non-interest income		4,049		3,084			3,074
Total revenue		5,484		4,480			4,528
Provision for credit losses		384		(22	)		(50	)
Non-interest expenses		2,473		2,463			2,233
Income before taxes		2,627		2,039			2,345
Income tax expense		593		505			587
Net income	$	2,034	$	1,534		$	1,758
Net income attributable to non-controlling interests in subsidiaries (NCI)		–		–			–
Net income attributable to equity holders	$	2,034	$	1,534		$	1,758

(1) Refer to Non-GAAP Measures for the reconciliation of Reported and Adjusted results.

56  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Global Banking and Markets

Financial Performance

Net income

Global Banking and Markets reported net income attributable to equity holders of $1,955 million, an increase of $421 million or 27%. Adjusted net income was $2,034 million, an increase of $500 million or 33%. Higher net interest income, trading revenue and underwriting fees, were partly offset by higher provision for credit losses.

Average assets and liabilities

Average assets increased by $40 billion or 11% to $412 billion this year, mainly due to increases in business loans, securities purchased under resale agreements, trading securities and the impact of foreign currency translation.

Average liabilities increased by $75 billion or 25% to $379 billion this year mainly due to growth in deposits, securities sold under repurchase agreements and the impact of foreign currency translation.

Revenues

Revenues were $5,382 million, an increase of $902 million or 20%. Adjusted revenues were $5,484 million, an increase of $1,004 million or 22%. This growth was due mainly to higher non-interest income driven by increases in fixed income trading revenues, higher net interest income and the favourable impact of foreign currency translation.

Net interest income

Net interest income increased by 3% to $1,435 million, mainly driven by higher deposit and loan volumes, partly offset by lower lending margins.

Non-interest income

Non-interest income of $3,947 million increased by $863 million or 28%. Adjusted non-interest income increased by $965 million or 31%. This growth was due mainly to higher fixed income trading revenues, as well as higher underwriting and credit fees.

Non-interest expense

Non-interest expenses increased slightly by $10 million to $2,473 million. Increases in personnel costs were partly offset by decreases in professional fees and business development expenses.

Provision for credit losses

The provision for credit losses was $390 million, an increase of $412 million from last year while adjusted provision for credit losses was $384 million, an increase of $406 million. The provision for credit losses ratio was 35 basis points, an increase of 37 basis points. On an adjusted basis, the provision for credit losses ratio was also 35 basis points.

Provision on impaired loans was $133 million, up $129 million, due primarily to new formations in the Energy sector. The provision for credit losses ratio on impaired loans was 12 basis points.

Provision on performing loans was $257 million, up $283 million. Adjusted provision on performing loans increased $277 million, driven by the unfavourable economic conditions in the Energy sector and other sectors most impacted by COVID-19, as well as the impact of the unfavourable macroeconomic outlook and its estimated future impact on credit migration.

Provision for income taxes

The effective tax rate was 22.4%, compared to 24.8% the prior year. The adjusted effective tax rate was 22.6%. The lower rate was due mainly to changes in earnings mix across jurisdictions.

Outlook

Global Banking and Markets will continue to execute on its strategy focusing across clients, products and geographies. The Business is uniquely positioned to service clients across the footprint. After a strong performance in 2020, which benefited from market conditions, the Business is operating from a stronger platform and is expected to continue this momentum in 2021. Provisions for credit losses are expected to decline from peak levels in 2020 and the Businesses remain focused on disciplined expense management.

C16 Total revenue

           

C17 Business banking revenue
$ millions

           

C18 Capital markets revenue by business line
$ millions

           

C19 Composition of average assets
$ billions

           

C20 Trading day losses

           

2020 Scotiabank Annual Report  |  57

Management’s Discussion and Analysis

Other

The Other segment includes Group Treasury, smaller operating segments, Net gain/loss on divestitures, and corporate items which are not allocated to a business line.

Financial Performance

T25  Other financial performance

($ millions)	2020(1)			2019(1)(2)			2018(2)
Net interest income(3)	$	(131	)	$	(984	)	$	(483	)
Non-interest income(3)(4)		392			(146	)		(358	)
Total revenue(3)		261			(1,130	)		(841	)
Provision for (recovery of) credit losses		1			1			–
Non-interest expenses		751			1			(245	)
Income tax expense(3)		(519	)		(586	)		(449	)
Net income (loss)	$	28		$	(546	)	$	(147	)
Net income attributable to non-controlling interests in subsidiaries		(27	)		17			–
Net income (loss) attributable to equity holders	$	55		$	(563	)	$	(147	)

(1) The amounts for the year ended October 31, 2020 have been prepared in accordance with IFRS 16; the amounts for the years ended October 31, 2020 and October 31, 2019 have been prepared in accordance with IFRS 15; prior period amounts have not been restated.

(2) The amounts for the years ended October 31, 2019 and October 31, 2018 have been restated to reflect the impact of the establishment of Global Wealth Management as a separate business segment.

(3) Includes the net residual in matched maturity transfer pricing, and the elimination of the tax-exempt income gross-up reported in net interest income, non-interest income, and provision for income taxes in the business segments, which are reported on a taxable equivalent basis.

(4) Includes net income from investments in associated corporations of $(70) in 2020; (2019 – $(178); 2018 – $(177)).

T25A  Adjusted Other financial performance⁽¹⁾

($ millions)	2020			2019			2018
Adjusted results
Net interest income	$	(131	)	$	(984	)	$	(483	)
Non-interest income		93			(19	)		(358	)
Total revenue		(38	)		(1,003	)		(841	)
Provision for credit losses		1			1			–
Non-interest expenses		692			(20	)		(245	)
Income before taxes		(731	)		(984	)		(596	)
Income tax expense		(475	)		(730	)		(449	)
Net income (loss)	$	(256	)	$	(254	)	$	(147	)
Net income (loss) attributable to non-controlling interests (NCI)		1			1			–
Net income (loss) attributable to equity holders	$	(257	)	$	(255	)	$	(147	)

(1) Refer to Non-GAAP measures for reconciliation of Reported and Adjusted results.

Net income

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.

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.

The Other segment reported net income attributable to equity holders of $55 million in 2020. On an Adjusted basis, Other segment had a net loss attributable to equity holders of $257 million compared to $255 million in 2019 as higher net interest income and non-interest revenues were offset by higher expenses.

Revenues

Revenue of $261 million included $298 million from net gains on divestitures. On an adjusted basis, revenues of $(38) million increased $965 million due mainly to lower funding costs resulting from lower interest rates and asset/liability management activities, as well as higher net gains from investment securities.

Non-interest expenses

Non-interest expenses were $751 million. On an adjusted basis, non-interest expenses were $692 million compared to $20 million in 2019. The higher expenses are due mainly to charges related to the metals investigations, increased expenditure on technology and regulatory initiatives, as well as incremental operating costs related to COVID-19.

58  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Other

Financial Performance of Business Lines: 2019 vs. 2018

Canadian Banking

Canadian Banking reported net income attributable to equity holders of $3,488 million in 2019, down 2% from the prior year. Adjusting for Acquisition-related costs, net income was $3,504 million, down 2%.

Lower gains on sale of real estate, the prior year gain on the reorganization of Interac, and benefit from the Alignment of reporting period impacted earnings growth by 3%. The remaining growth of 1% was due primarily to higher revenue driven by solid volume growth and improved margins, and lower non-interest expenses, partially offset by higher provision for credit losses. Return on equity was 23.2%, compared with 25.8% last year. Adjusting for Acquisition-related costs, the return on equity was 23.3%.

International Banking

International Banking reported net income attributable to equity holders of $2,765 million, up $419 million or 18% from last year. Adjusting for Acquisition-related costs, net income attributable to equity holders increased by $365 million or 14% to $2,953 million. Strong results in Latin America, including benefits from acquisitions, and Asia, complemented by good earnings in Caribbean. The impact of acquisitions and divestitures contributed approximately 7% to the adjusted earnings growth. The remaining increase of 7% was driven by strong loan growth in Latin America, higher net interest income and higher non-interest income. This was partly offset by higher provisions for credit losses, non-interest expenses, and income taxes. Return on equity was 13.2% compared to 13.6% last year. Adjusting for Acquisition-related costs, the return on equity was 14.1% compared to 15.0%.

Global Wealth Management

Global Wealth Management reported net income attributable to equity holders of $1,166 million, an increase of $134 million or 13% from the prior year. Adjusting for Acquisition-related costs, net income was $1,215 million, up 13%. Solid AUM growth across our businesses, including benefits from acquisitions contributed to strong growth in 2019. This was partly offset by higher non-interest expenses. The impact of acquisitions and divestitures contributed approximately 7% to the adjusted earnings growth. Return on equity was 12.7%, compared with 17.1% in the prior year. Adjusting for Acquisition-related costs, the return on equity was 13.2%, compared to 17.7%.

Global Banking and Markets

Global Banking and Markets reported net income attributable to equity holders of $1,534 million, a decrease of $224 million or 13% from last year. Lower income from capital markets businesses and higher expenses were partly offset by stronger results in corporate lending, as well as lower provision for credit losses. Return on equity was 13.3% compared to 16.0% last year.

Other

The Other segment had a net loss attributable to equity holders of $563 million in 2019 compared to $147 million in 2018. This was primarily due to the benefits remeasurement of $150 million ($203 million pre-tax).    

2020 Scotiabank Annual Report  |  59

Management’s Discussion and Analysis

GROUP FINANCIAL CONDITION

T26  Condensed statement of financial position

As at October 31 ($ billions)	2020		2019
Assets
Cash, deposits with financial institutions and precious metals	$	77.6	$	50.4
Trading assets		117.8		127.5
Securities purchased under resale agreements and securities borrowed		119.7		131.2
Investment securities		111.4		82.4
Loans		603.3		592.5
Other		106.7		102.2
Total assets	$	1,136.5	$	1,086.2
Liabilities
Deposits	$	750.8	$	733.4
Obligations related to securities sold under repurchase agreements and securities lent		137.8		124.1
Other liabilities		170.0		151.2
Subordinated debentures		7.4		7.3
Total liabilities	$	1,066.0	$	1,016.0
Equity
Common equity		62.8		63.6
Preferred shares and other equity instruments		5.3		3.9
Non-controlling interests in subsidiaries		2.4		2.7
Total equity	$	70.5	$	70.2
Total liabilities and shareholders’ equity	$	1,136.5	$	1,086.2

C21 Loan portfolio loans & acceptances,
$ billions, as at October 31

           

C22 Deposits
$ billions, as at October 31

           

Statement of Financial Position

Assets

The Bank’s total assets as at October 31, 2020 were $1,136 billion, up $50 billion or 5% from October 31, 2019. This increase was primarily in cash and deposits with financial institutions, investment securities and loans, partially offset by decreases in securities purchased under resale agreements and securities borrowed and trading assets.                

Cash and deposits with financial institutions increased $30 billion due primarily to higher balances on deposit with central banks driven by the increase in liquidity. Securities purchased under resale agreements and securities borrowed decreased by $11 billion due mainly to lower customer activity and trading assets decreased $10 billion due to a reduction in trading loans from the metals business wind-down and a decrease in trading securities due to lower client demand.

Investment securities increased $29 billion from October 31, 2019 due primarily to higher holdings of Canadian federal and provincial debt in the liquidity portfolio.    As at October 31, 2020, the net unrealized gain on debt securities measured at fair value through other comprehensive income was $334 million, after the impact of qualifying hedges.

Loans increased $11 billion from October 31, 2019. Residential mortgages increased $17 billion primarily in Canada. Personal loans and credit cards decreased by $8 billion due to lower customer activity. Business and government loans increased $5 billion due to new originations and to support COVID-19 customer financing needs.

Property plant and equipment increased $3 billion due to the adoption of IFRS 16 with an offsetting increase in other liabilities. Investments in associates decreased $3 billion due mainly to the divestiture of Thanachart Bank.

Liabilities

Total liabilities were $1,066 billion as at October 31, 2020, up $50 billion or 5% from October 31, 2019. This increase was primarily in deposits, obligations related to securities sold under repurchase agreements and securities lent and other liabilities.

Total deposits increased $17 billion. Personal deposits grew by $21 billion due primarily to growth in Canada. Business and government deposits grew by $3 billion due mainly to growth in Canada. Deposits from financial institutions decreased $7 billion due mainly to lower demand.

Obligations related to securities sold under repurchase agreements and securities lent increased by $14 billion due mainly to higher participation in the Bank of Canada’s term repo program, partially offset by a decrease in the U.S. Other liabilities increased $8 billion due mainly to IFRS 16 and higher derivative related amounts.

Equity

Total shareholders’ equity increased $311 million from October 31, 2019. The increase was driven mainly by current year earnings of $6,853 million, the issuance of other equity instruments of $1,689 million and changes in securities measured at fair value through other comprehensive income of $208 million. This was partly offset by dividends paid of $4,559 million and a decrease of $2,239 million in the cumulative foreign currency translation amount. Total shareholders’ equity was further impacted by the revaluation of the Bank’s employee benefit plans of $465 million, share buybacks of $414 million, changes in own credit risk on financial liabilities of $298 million, redemption of preferred shares of $265 million and a decrease in non-controlling interests of $201 million due to divestitures and distributions.    

60  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Group Financial Condition

Capital Management

Overview

Scotiabank is committed to maintaining a strong capital base to support the risks associated with its diversified businesses. Strong capital levels contribute to financial safety for the Bank’s customers, foster investor confidence and support strong credit ratings. It also allows the Bank to take advantage of growth opportunities as they arise and enhance shareholder returns through increased dividends. The Bank’s capital management framework includes a comprehensive internal capital adequacy assessment process (ICAAP), aimed at ensuring that the Bank’s capital is adequate to meet current and future risks and achieve its strategic objectives. Key components of the Bank’s ICAAP include sound corporate governance; creating a comprehensive risk appetite for the Bank; managing and monitoring capital, both currently and prospectively; and utilizing appropriate financial metrics which relate risk to capital, including internal capital and regulatory capital measures.

Governance and oversight

The Bank has a sound capital management framework to measure, deploy and monitor its available capital and assess its adequacy. Capital is managed in accordance with the Board-approved Capital Management Policy. In addition, the Board reviews and approves the Bank’s annual capital plan. The Asset-Liability Committee and senior executive management provide governance over the capital management process. The Bank’s Finance, Treasury and Global Risk Management groups take a coordinated approach to implementing the Bank’s capital plan.

Risk appetite

The risk appetite framework that establishes enterprise-wide risk tolerances in addition to capital targets are detailed in the Risk Management section “Risk Appetite”. The framework encompasses medium-term targets with respect to regulatory capital thresholds, earnings and other risk-based parameters. These targets drive behaviour to ensure the Bank achieves the following overall objectives: exceed regulatory and internal capital targets, manage capital levels commensurate with the risk profile of the Bank, maintain strong credit ratings and provide the Bank’s shareholders with acceptable returns.

Regulatory capital

Canadian banks are subject to the revised capital adequacy requirements as published by the Basel Committee on Banking Supervision (BCBS) and commonly referred to as Basel III. Under Basel III, there are three primary risk-based regulatory capital ratios used to assess capital adequacy: Common Equity Tier 1 (CET1), Tier 1 and Total capital, which are determined by dividing those capital components by risk-weighted assets. Basel III also provides guidance on non-viability contingent capital (NVCC). The guidance stipulates that in order to qualify as regulatory capital, non-common share capital instruments must be convertible into common equity upon a trigger event as defined within the guidance. All non-common share capital instruments issued after December 31, 2012, are required to meet these NVCC requirements to qualify as regulatory capital.

The Office of the Superintendent of Financial Institutions, Canada (OSFI) has issued guidelines, reporting requirements and disclosure guidance which are consistent with the international implementation of Basel III. OSFI requires Canadian deposit-taking institutions to meet minimum requirements related to risk-weighted assets of 7%, 8.5% and 10.5% for CET1, Tier 1 and Total Capital ratios, respectively, which includes the capital conservation buffer of 2.5%. OSFI has also designated the Bank a domestic systemically important bank (D-SIB), increasing its minimum capital ratio requirements by 1% across all tiers of capital, in line with the requirements for global systemically important banks. OSFI’s minimum Pillar 1 capital ratio requirements, including the D-SIB 1% surcharge, are 8.0%, 9.5% and 11.5% for Common Equity Tier 1, Tier 1 and Total capital ratios, respectively.

In addition to risk-based capital requirements, the Basel III reforms introduced a simpler, non risk-based Leverage ratio requirement to act as a supplementary measure to its risk-based capital requirements. The Leverage ratio is defined as a ratio of Basel III Tier 1 capital to a leverage exposure measure which includes on-balance sheet assets and off-balance sheet commitments, derivatives and securities financing transactions, as defined within the requirements. OSFI’s Basel III Leverage Ratio Requirements Guideline and Public Disclosure Requirements outline the application and disclosure of the Basel III Leverage ratio in Canada. Institutions are expected to maintain a material operating buffer above the 3% minimum.    

Domestic Stability Buffer

In June 2018, OSFI implemented the Domestic Stability Buffer, to be held by Domestic Systemically Important Banks (D-SIBs) as a Pillar 2 buffer, in addition to the capital conservation buffer requirement of 2.5% and the D-SIB surcharge of 1.0%. Breaches of this buffer will not result in banks being subject to automatic constraints on capital distributions. Instead, OSFI will require a remediation plan to address any shortfall to their minimum. Supervisory interventions pursuant to OSFI’s Guide to Intervention would occur in cases where a remediation plan is not produced or executed in a timely manner satisfactory to OSFI.

The Domestic Stability Buffer ranges between 0 and 2.5% of a bank’s total risk-weighted assets (RWA). OSFI undertakes a review of the buffer on a semi-annual basis, in June and December, and any changes to the buffer are made public, along with supporting rationale. In exceptional circumstances, OSFI may make and announce adjustments to the buffer in-between scheduled review dates.

In December 2019, OSFI announced a 25 basis point increase to its Domestic Stability Buffer to 2.25% of total risk-weighted assets. Subsequently, in response to COVID-19, in March 2020 the Domestic Stability Buffer was reduced to 1.0% of total risk-weighted assets through the remainder of 2020 and until further notice from OSFI.

2020 Scotiabank Annual Report  |  61

Management’s Discussion and Analysis

Total Loss Absorbing Capacity (TLAC)

OSFI has issued its guideline on Total Loss Absorbing Capacity (TLAC), which applies to Canada’s D-SIBs as part of the Federal Government’s bail-in regime. The standards are intended to address the sufficiency of a systemically important bank’s loss absorbing capacity to support its recapitalization in the event of its failure. Effective November 1, 2021, D-SIBs will be required to maintain a minimum risk-based TLAC ratio and a minimum TLAC leverage ratio. TLAC is defined as the aggregate of Tier 1 capital, Tier 2 capital, and other TLAC instruments that are subject to conversion in whole or in part into common shares under the CDIC Act and meet all of the eligibility criteria under the guidelines. The Bank’s minimum TLAC ratio requirements consist of 21.5% of risk-weighted assets (plus the Domestic Stability Buffer requirement) and 6.75% of leverage ratio exposures. OSFI may subsequently vary the minimum TLAC requirements for individual D-SIBs or groups of D-SIBs. Where a D-SIB falls below the minimum TLAC requirements, OSFI may take any measures deemed appropriate, including measures set out in the Bank Act. As at October 31, 2020, the Bank exceeds the OSFI minimum TLAC and TLAC leverage ratios.

Regulatory capital developments during the year in response to COVID-19

During the year, in response to COVID-19, OSFI introduced changes to regulations to keep the financial system resilient and well capitalized. A suite of temporary adjustments to existing capital and leverage requirements were introduced which include the following:

• Announcement of a 125 basis point decrease to the Domestic Stability Buffer (buffer) to 1.0% in March, 2020. OSFI has required that banks not increase their dividends nor execute share buybacks while the decrease in buffer remains in effect. As a result, OSFI’s minimum regulatory capital ratio requirements, including the Domestic Systemically Important Banks (D-SIB) 1.0% surcharge and the Domestic Stability Buffer of 1.0% are 9.0%, 10.5% and 12.5% for CET1, Tier 1 and Total Capital ratios, respectively. In June 2020, OSFI announced that the buffer will remain at 1.0%. OSFI will continue to monitor conditions, vulnerabilities and signs of risks to the banking system, and the impact of COVID-19 policy responses. If conditions warrant, OSFI is prepared to release the buffer further.

• Preferential treatment of performing loans granted payment deferrals; these remain classified as performing loans under OSFI’s Capital Adequacy Requirements (CAR) guideline. This temporary capital treatment remains in place for the duration of the payment deferral, up to a maximum of 6 months (or 3 months if the deferral was granted after August 30, 2020 and before September 30, 2020). Loans granted payment deferrals after September 30, 2020 are not eligible for this temporary capital relief.

• New transitional arrangements for the regulatory capital treatment of expected credit loss provisioning that are available under the Basel Framework, enabling a portion of the allowance that would otherwise be included in Tier 2 capital to instead be included in CET1 capital. The adjustment is measured quarterly as the increase in Stage 1 and Stage 2 allowances relative to their baseline level as at January 31, 2020, tax effected and subject to a scaling factor of 70% in 2020, 50% in 2021, and 25% in 2022.

• Reduction of an institution’s Stressed Value-at-Risk (VaR) multipliers used in the calculation of market risk capital by a factor of 2 and the removal of Funding Valuation Adjustment (FVA) hedges in the calculation of market risk capital, both changes were made effective from the commencement of the second quarter of 2020.

• For institutions using the Internal Ratings-Based (IRB) approach for credit risk, a lowering of OSFI’s regulatory capital floor factor from 75% to 70%, effective from the second quarter of 2020. The 70% factor is expected to remain in place until OSFI’s domestic implementation of the revised Basel III reforms, delayed to the first quarter of 2023.

• For the Leverage ratio, central bank reserves and sovereign-issued securities that qualify as High Quality Liquid Assets (HQLA) under the Liquidity Adequacy Requirements guideline are to be temporarily excluded from the Leverage ratio exposure measure until December 31, 2021.

The Bank has adopted the above changes in line with OSFI’s expectations. In addition, we continue to monitor and prepare for new regulatory capital developments in response to ongoing changes from COVID-19.

Planning, managing and monitoring capital

Capital is managed and monitored based on planned changes in the Bank’s strategy, identified changes in its operating environment or changes in its risk profile. As part of the Bank’s comprehensive ICAAP, sources and uses of capital are continuously measured and monitored through financial metrics, including regulatory thresholds, and internal capital. These results are used in capital planning and strategic decision-making.

The Bank’s assessment of capital adequacy is in the context of its current position and its expected future risk profile and position relative to its internal targets while considering the potential impact of various stress scenarios. Specific scenarios are selected based on the current economic conditions and business events facing the Bank. In addition, the Bank’s forward looking capital adequacy assessment includes a consideration of the results of more severe multi-risk scenarios within its enterprise-wide stress testing. This testing is used to determine the extent to which severe, but plausible events, impact the Bank’s capital.

The Bank sets internal regulatory capital targets to ensure the Bank’s available capital is sufficient within the context of its risk appetite.

The Bank’s internal target includes an adequate buffer over the regulatory minimum ensuring sufficient flexibility for future capital deployment and in consideration of the Bank’s risk appetite, the volatility of planning assumptions, the results from stress testing and contingency planning.

The Bank has a comprehensive risk management framework to ensure that the risks taken while conducting its business activities are consistent with its risk appetite, its impact on capital relative to internal targets, and that there is an appropriate balance between risk and return. Refer to the Risk Management section for further discussion on the Bank’s risk management framework. In managing the Bank’s capital base, close attention is paid to the cost and availability of the various types of capital, desired leverage, changes in the assets and risk-weighted assets, and the opportunities to profitably deploy capital. The amount of capital required for the business risks being assumed, and to meet regulatory requirements, is balanced against the goal of generating an appropriate return for the Bank’s shareholders.

Capital generation

Capital is generated internally through net earnings after dividend payments. As well, capital is generated by the issuance of common shares, preferred shares and other equity instruments, and subordinated debentures, net of redemptions.

Capital deployment

The Bank deploys capital to support sustainable, long-term revenue and net income growth. The growth can be through existing businesses by attracting new customers, increasing cross-selling activities to existing customers, adding new products and enhancing sales productivity, or

62  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Group Financial Condition

through acquisitions. All major initiatives to deploy capital are subject to rigorous analysis, validation of business case assumptions and evaluation of expected benefits. Key financial criteria include impact on earnings per share, capital ratios, return on invested capital, expected payback period and internal rate of return based on discounted cash flows.

Regulatory capital ratios

The Bank continues to maintain strong, high quality capital levels which position it well for resiliency during the COVID-19 pandemic. The CET1 ratio as at October 31, 2020 was 11.8%, an increase of approximately 70 basis points from the prior year due primarily to strong internal capital generation and the impact from the Bank’s divestitures during the year, partly offset by the adoption of regulatory changes, the impact from foreign currency translation on capital requirements, the remeasurement of the employee pension obligations, and share buybacks. The CET1 ratio also benefited 30 basis points from OSFI’s transitional adjustment for the partial inclusion of increases in Stage 1 and Stage 2 expected credit losses (ECL) relative to their pre-crisis baseline levels as at January 31, 2020.

The Bank’s Tier 1 capital ratio was 13.3% as at October 31, 2020, an increase of approximately 110 basis points from the prior year, due primarily to the issuance of US$1.25 billion of Scotiabank additional Tier 1 capital securities and the above noted impacts to the CET1 ratio, partly offset by the redemption of $265 million of preferred shares during the year. The Total capital ratio was 15.5% as at October 31, 2020, an increase of approximately 130 basis points from 2019, due primarily to the above noted changes to the CET1 and Tier 1 capital ratios.

The Leverage ratio was 4.7%, an increase of approximately 50 basis points in 2020 due primarily to OSFI’s temporary Leverage ratio exclusions for central bank reserves and sovereign-issued securities and transitional adjustment for the partial inclusion of ECL, internal capital generation and the issuance of US$1.25 billion of Scotiabank additional Tier 1 capital securities, partly offset by the redemption of $265 million of preferred shares during the year.

The Bank’s capital ratios continue to be well in excess of OSFI’s minimum capital ratio requirements for 2020 of 9.0%, 10.5% and 12.5% for CET1, Tier 1 and Total Capital, respectively. The Bank was well above the OSFI minimum Leverage ratio as at October 31, 2020.

C23  Continuity of Common Equity Tier 1 ratio

(1) Includes the impact from the adoption of IFRS 16 (-10 bps) and transition to OSFI’s new securitization requirements (-8 bps).

(2) Other includes the impact from the remeasurement of the employee pension obligation (-7 bps).

2020 Scotiabank Annual Report  |  63

Management’s Discussion and Analysis

T27  Regulatory capital⁽¹⁾

	Basel III
As at October 31 ($ millions)	2020			2019
Common Equity Tier 1 capital
Total Common Equity	$	62,502		$	63,320
Qualifying non-controlling interest in common equity of subsidiaries		1,769			1,734
ECL transitional adjustment(2)		1,304			–
Goodwill and intangibles, net of deferred tax liabilities(3)		(15,505	)		(16,144	)
Threshold related deductions		–			(907	)
Net deferred tax assets (excluding those arising from temporary differences)		(226	)		(286	)
Other Common Equity Tier 1 capital deductions(4)		(679	)		(1,139	)
Common Equity Tier 1		49,165			46,578
Preferred shares(5)		2,059			2,324
Subordinated additional Tier 1 capital securities (NVCC)		3,249			1,560
Capital instrument liabilities – trust securities(5)		750			750
Other Tier 1 capital adjustments(6)		139			92
Net Tier 1 capital		55,362			51,304
Tier 2 capital
Subordinated debentures, net of amortization(5)		7,355			7,252
Allowance for credit losses eligible for inclusion in Tier 2 and excess allowance (re: IRB approach)(7)		1,647			1,200
Qualifying non-controlling interest in Tier 2 capital of subsidiaries		148			96
Other Tier 2 capital adjustments		–			(2	)
Tier 2 capital		9,150			8,546
Total regulatory capital		64,512			59,850
Risk-weighted assets ($ billions)
Credit risk		362.0			365.4
Market risk		7.3			8.7
Operational risk		47.8			47.1
Risk-weighted assets(8)	$	417.1		$	421.2
Capital ratios
Common Equity Tier 1		11.8	%		11.1	%
Tier 1		13.3	%		12.2	%
Total		15.5	%		14.2	%
Leverage:
Leverage exposures	$	1,170,290		$	1,230,648
Leverage ratio		4.7	%		4.2	%

(1) Regulatory capital ratios are determined in accordance with Basel III rules.

(2) The ECL transitional adjustment was introduced by OSFI in Q2, 2020.

(3) Reported amounts are based on OSFI’s requirements that goodwill relating to investments in associates be classified as goodwill for regulatory reporting purposes.

(4) Other CET1 capital deductions under Basel III include gains/losses due to changes in own credit risk on fair valued liabilities, pension plan assets and other items.

(5) Non-qualifying Tier 1 and Tier 2 capital instruments are subject to a phase-out period of 10 years.

(6) Other Tier 1 capital adjustments under Basel III rules include eligible non-controlling interests in subsidiaries.

(7) Eligible allowances for 2020 and 2019.

(8) OSFI has prescribed a minimum capital floor for institutions that use the advanced internal ratings-based approach for credit risk. The Basel II capital floor add-on is determined by comparing a capital requirement under the Basel II standardized approach for credit risk, in addition to OSFI prescribed requirements for market risk and credit valuation adjustment RWA. A shortfall in the Basel III capital requirement as compared with the Basel II capital floor is added to RWA. Under this Basel II regulatory capital floor requirement, the Bank does not have a capital floor add-on as at October 31, 2020 (October 31, 2019 - nil).

64  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Group Financial Condition

T28  Changes in regulatory capital

	Basel III
For the fiscal years ($ millions)	2020			2019
Total capital, beginning of year	$	59,850		$	57,364
Changes in Common Equity Tier 1
Net income attributable to common equity holders of the Bank		6,582			8,208
Dividends paid to equity holders of the bank		(4,363	)		(4,260	)
Shares issued		59			255
Shares repurchased/redeemed		(414	)		(1,075	)
Gains/losses due to changes in own credit risk on fair valued liabilities		347			(37	)
ECL transitional adjustment(1)		1,304			–
Movements in accumulated other comprehensive income, excluding cash flow hedges		(2,684	)		(1,193	)
Change in non-controlling interest in common equity of subsidiaries		35			105
Change in goodwill and other intangible assets (net of related tax liability)(2)		639			284
Other changes including regulatory adjustments below:		1,082			(152	)
– Deferred tax assets that rely on future profitability (excluding those arising from temporary differences)		60			49
– IFRS 15 impact(3)		–			(58	)
– Significant investments in the common equity of other financial institutions (amount above 10% threshold)		907			(330	)
– Other capital deductions		102			242
– Other		13			(55	)
Changes in Common Equity Tier 1	$	2,587		$	2,135
Changes in Additional Tier 1 Capital
Issued		1,689			–
Redeemed		(265	)		(950	)
Other changes including regulatory adjustments and phase-out of non-qualifying instruments		47			(68	)
Changes in Additional Tier 1 Capital	$	1,471		$	(1,018	)
Changes in Tier 2 Capital
Issued		–			3,250
Redeemed		(9	)		(1,771	)
Allowance for credit losses eligible for inclusion in Tier 2 and Excess Allowance under AIRB(4)		446			(180	)
Other changes including regulatory adjustments and phase-out of non-qualifying instruments		167			70
Changes in Tier 2 Capital	$	604		$	1,369
Total capital generated (used)	$	4,662		$	2,486
Total capital, end of year	$	64,512		$	59,850

(1) The ECL transitional adjustment was introduced by OSFI in Q2, 2020.

(2) Reported amounts are based on OSFI’s requirements that goodwill relating to investments in associates be classified as goodwill for regulatory reporting purposes.

(3) Represents the full transitional impact on retained earnings from the Bank’s adoption of IFRS 15 (Revenue from Contracts with Customers) on November 1, 2018.

(4) Eligible allowances for 2020 and 2019.

2020 Scotiabank Annual Report  |  65

Management’s Discussion and Analysis

Regulatory capital components

The Bank’s regulatory capital is divided into three components – CET1, Tier 1 capital and Tier 2 capital, depending on their degree of permanency and loss absorbency. All components of capital provide support for banking operations and protect depositors.

CET1 consists primarily of common shareholders’ equity, regulatory derived non-controlling interest capital, and prescribed regulatory adjustments or deductions. These regulatory deductions include goodwill, intangible assets (net of deferred tax liabilities), deferred tax assets that rely on future profitability, defined-benefit pension assets, shortfall (if any) of the allowance for credit losses to regulatory parameter-based expected losses and significant investments in the common equity of other financial institutions.

Additional Tier 1 capital consists primarily of qualifying non-cumulative preferred shares, qualifying other equity instruments (as described in Note 24), and non-qualifying preferred shares and innovative Tier 1 instruments subject to phase-out. Tier 2 capital consists mainly of qualifying subordinated debentures, or non-qualifying subordinated debentures subject to phase-out, and any eligible allowances for credit losses.

The Bank’s CET1 capital was $49.2 billion as at October 31, 2020, an increase of $2.6 billion from the prior year primarily due to:

• $2.2 billion growth from internal capital generation, including the impacts on retained earnings from the Bank’s divestitures;

• $2.1 billion from lower regulatory capital deductions, mainly relating to divestiture driven reductions in goodwill and significant investments in banking, financial and insurance entities that are outside the scope of regulatory consolidation; and,

• $1.3 billion from OSFI’s transitional adjustment for the partial inclusion of increases in Stage 1 and Stage 2 expected credit losses.

Partly offset by:

• $2.7 billion decrease from movements in Accumulated Other Comprehensive Income, excluding cash flow hedges, primarily from the impact of foreign currency translation and changes in employee pensions and benefits plans net liability; and,

• $0.4 billion from common share buybacks net of common share issuances under the Bank’s employee share purchase and stock options plans.

The Bank’s Tier 1 capital increased by $4.1 billion, primarily due to the above impacts to CET1 capital and the issuance of US$1.25 billion of subordinated additional Tier 1 capital securities partly offset by the planned redemptions of $265 million of preferred shares during the year. In addition, Total capital increased by $4.7 billion, mainly due to the impacts to CET1 and Tier 1 capital and growth in eligible allowances included in Tier 2 capital.

C24 CET1 capital
%, as at October 31

           

C25 Dividend growth
dollars per share

           

C26 Internally generated capital
$ billions, for years ended October 31

           

Dividends

The annual dividend in 2020 was $3.60, compared to $3.49 in 2019, an increase of 3.2%. The whole year dividend payout ratio on an adjusted basis was 65.8%.

T29   Selected capital management activity

For the fiscal years ($ millions)	2020		2019
Dividends
Common	$	4,363	$	4,260
Preferred and other equity instruments		196		182
Common shares issued(1)		59		255
Common shares repurchased for cancellation under the
Normal Course Issuer Bid(2)		414		1,075
Preferred shares and other equity instruments issued(3)		1,689		–
Preferred shares and other equity instruments redeemed(4)		265		300
Subordinated debentures issued		–		3,250
Maturity, redemption and repurchase of subordinated debentures		9		1,771

(1) Represents primarily cash received for stock options exercised during the year, common shares issued in connection with acquisitions, and common shares issued pursuant to the Dividend and Share Purchase Plan.

(2) Represents reduction to Common shares and Retained earnings (refer to the Consolidated Statement of Changes in Equity).

(3) Represents the issuance of US$1.25 billion USD-denominated fixed rate resetting perpetual subordinated additional Tier 1 capital securities (NVCC), on June 4, 2020.

(4) Represents the redemption of preferred shares series 30 & 31 on April 27, 2020.

Normal Course Issuer Bid

On May 30, 2019, the Bank announced that OSFI and the Toronto Stock Exchange approved a normal course issuer bid (the “2019 NCIB”) pursuant to which it may repurchase for cancellation up to 24 million of the Bank’s common shares. Purchases under the 2019 NCIB commenced on June 4, 2019 and terminated on June 3, 2020. Under the 2019 NCIB, the Bank has cumulatively repurchased and cancelled approximately 11.8 million common shares at an average price of $72.41 per share.

During the year ended October 31, 2020, the Bank repurchased and cancelled approximately 5.6 million common shares (2019 – 15 million) at a volume weighted average price of $73.95 per share (2019 – $71.51) for a total amount of $414 million (2019 – $1,075 million).

On March 13, 2020, OSFI advised federally regulated deposit taking institutions to suspend common share buybacks as part of COVID-19 measures. The Bank does not currently have an active NCIB program.

66  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Group Financial Condition

Share data and other capital instruments

The Bank’s common and preferred share data, as well as other capital instruments, are shown in T30. Further details, including exchangeability features, are discussed in Note 21 and Note 24 of the consolidated financial statements.

T30  Shares and other instruments

As at October 31, 2020	Amount ($ millions)		Dividends declared per share(1)		Number outstanding (000s)		Conversion features
Common shares(2)	$	18,239	$	3.60		1,211,479		n/a
Preferred shares
Preferred shares Series 30(3)		–		0.227500		–		–
Preferred shares Series 31(3)		–		0.331828		–		–
Preferred shares Series 32(4)(5)		279		0.515752		11,162		Series 33
Preferred shares Series 33(4)(6)		130		0.579323		5,184		Series 32
Preferred shares Series 34(4)(7)(8)		350		1.375000		14,000		Series 35
Preferred shares Series 36(4)(7)(9)		500		1.375000		20,000		Series 37
Preferred shares Series 38(4)(7)(10)		500		1.212500		20,000		Series 39
Preferred shares Series 40(4)(7)(11)		300		1.212500		12,000		Series 41
Additional Tier 1 securities	Amount ($ millions)		Distribution(12)		Yield (%)		Number outstanding (000s)
Scotiabank Trust Securities – Series 2006-1 issued by Scotiabank Capital Trust(13a,b)	$	750		28.25		5.650		750
Subordinated additional Tier 1 capital securities (NVCC)	US$	1,250	US$	23.25		4.650		1,250
Subordinated additional Tier 1 capital securities (NVCC)(14)	US$	1,250	US$	12.25		4.900		1,250
NVCC subordinated debentures					Amount ($ millions)		Interest Rate (%)
Subordinated debentures due March 2027					$	1,250		2.58
Subordinated debentures due December 2025(15)						750		3.37
Subordinated debentures due December 2025					US$	1,250		4.50
Subordinated debentures due January 2029						1,750		3.89
Subordinated debentures due July 2029						1,500		2.84
Options							Number outstanding (000s)
Outstanding options granted under the Stock Option Plans to purchase common shares(2)								11,792

(1) Dividends declared from November 1, 2019 to October 31, 2020.

(2) Dividends on common shares are paid quarterly, if and when declared. As at November 20, 2020, the number of outstanding common shares and options was 1,211,691 thousand and 11,580 thousand, respectively.

(3) On April 27, 2020, the Bank redeemed all outstanding Non-cumulative Preferred shares series 30 and Series 31 and paid a dividend of $0.113750 and $0.166480, respectively, per share.

(4) These shares are entitled to non-cumulative preferential cash dividends payable quarterly. These preferred shares have conversion features. Refer to Note 24 of the consolidated financial statements in the Bank’s 2020 Annual Report for further details.

(5) Subsequent to the initial five-year fixed rate period which ended on February 1, 2016, and resetting every five years thereafter, the dividends, if and when declared, will be determined by the sum of the five-year Government of Canada Yield plus 1.34%, multiplied by $25.00.

(6) Dividends, if and when declared, are determined by the sum of the three-month Government of Canada Treasury Bill Yield plus 1.34%, multiplied by $25.00, which will be reset quarterly.

(7) These preferred shares contain Non-Viability Contingent Capital (NVCC) provisions necessary for the shares to qualify as Tier 1 regulatory capital under Basel III. Refer to Note 24 of the consolidated financial statements in the Bank’s 2019 Annual Report for further details.

(8) Subsequent to the initial five-year fixed rate period ending on April 25, 2021, and resetting every five years thereafter, the dividends, if and when declared, will be determined by the sum of the five-year Government of Canada Yield plus 4.51%, multiplied by $25.00.

(9) Subsequent to the initial five-year fixed rate period ending on July 25, 2021, and resetting every five years thereafter, the dividends, if and when declared, will be determined by the sum of the five-year Government of Canada Yield plus 4.72%, multiplied by $25.00.

(10) Subsequent to the initial five-year fixed rate period ending on January 26, 2022, and resetting every five years thereafter, the dividends, if and when declared, will be determined by the sum of the five-year Government of Canada Yield plus 4.19%, multiplied by $25.00.

(11) Subsequent to the initial five-year fixed rate period ending on January 26, 2024, and resetting every five years thereafter, the dividends, if and when declared, will be determined by the sum of the five-year Government of Canada Yield plus 2.43%, multiplied by $25.00

(12) Distributions made per face amount of $1,000 or US$1,000 semi-annually or quarterly, as applicable.

(13)(a) On September 28, 2006, Scotiabank Capital Trust issued 750,000 Scotiabank Trust Securities – Series 2006-1 (Scotia BaTS II Series 2006-1). The holders of Scotia BaTS II Series 2006-1 are entitled to receive non-cumulative fixed cash distributions payable semi-annually in an amount of $28.25 per security. With regulatory approval, these securities may be redeemed in whole upon the occurrence of certain tax or regulatory capital changes, or in whole or in part on December 30, 2011 and on any distribution date thereafter at the option of Scotiabank Capital Trust. The holder has the right at any time to exchange their security into Non-cumulative Preferred Shares Series S of the Bank. The Series S shares will be entitled to cash dividends payable semi-annually in an amount of $0.4875 per $25.00 share. Refer to Note 24(c) – Restrictions on payment of dividends and retirement of shares. The Scotia BaTS II Series 2006-1 may be automatically exchanged, without the consent of the holder, into Non-cumulative Preferred Shares Series T of the Bank in the following circumstances: (i) proceedings are commenced for the winding-up of the Bank; (ii) the Superintendent takes control of the Bank or its assets; (iii) the Bank has a Tier 1 Capital ratio of less than 5% or a Total Capital ratio of less than 8%; or (iv) the Superintendent has directed the Bank to increase its capital or provide additional liquidity and the Bank elects such automatic exchange or the Bank fails to comply with such direction. The Series T shares will be entitled to non-cumulative cash dividends payable semi-annually in an amount of $0.625 per $25.00 share. If there is an automatic exchange of the Scotia BaTS II Series 2006-1 into Preferred Shares Series T of the Bank, then the Bank would become the sole beneficiary of the Trust.

(13)(b) No cash distributions will be payable on the Scotia BaTS II Series 2006-1 in the event that the regular dividend is not declared on the Bank’s preferred shares and, if no preferred shares are outstanding, the Bank’s common shares. In such a circumstance the net distributable funds of the Trust will be payable to the Bank as the holder of the residual interest in the Trust. Should the Trust fail to pay the semi-annual distributions on the Scotia BaTS II Series 2006-1 in full, the Bank will not declare dividends, of any kind on any of its preferred or common shares for a specified period of time. Refer to Note 24(c)—Restrictions on payment of dividends and retirement of shares.

(14) On June 4, 2020, the Bank issued US$1.25 billion 4.90% fixed rate resetting perpetual subordinated additional Tier 1 capital securities (NVCC). Refer to Note 24 (b) Preferred shares and other equity instruments.

(15) On October 20, 2020, the Bank announced its intention to redeem these notes on December 8, 2020 at 100% of their principal amount plus accrued interest to the redemption date.

2020 Scotiabank Annual Report  |  67

Management’s Discussion and Analysis

Credit ratings

Credit ratings are one of the factors that impact the Bank’s access to capital markets and the terms on which it can conduct derivatives, hedging transactions and borrow funds. The credit ratings and outlook that the rating agencies assign to the Bank are based on their own views and methodologies.

The Bank continues to have strong credit ratings and its deposits and legacy senior debt are rated AA by DBRS, Aa2 by Moody’s, AA by Fitch and A+ by Standard and Poor’s (S&P). The Bank’s bail-inable senior debt is rated AA (low) by DBRS, A2 by Moody’s, AA- by Fitch and A- by S&P. The Bank’s outlook is rated Stable by DBRS, Moody’s and S&P, and Negative by Fitch.

On April 3, 2020, Fitch upgraded the Bank’s non-bail in obligations including legacy senior debt, short-term (less than 400 days) senior obligations, derivative counterparty ratings (DCRs) and long-term deposit ratings by one notch to ‘AA’ in recognition of the build-up of total loss absorbing capital (TLAC) and other qualifying junior debt buffers to a level sufficient to recapitalize under an assumed resolution scenario. Along with other Canadian banks, Fitch’s Outlook was revised to Negative from Stable due to the disruption to economic activity and financial markets from the coronavirus pandemic.

Risk-weighted assets

Regulatory capital requirements are based on OSFI’s target minimum percentage of risk-weighted assets (RWA). RWA represent the Bank’s exposure to credit, market and operational risk and are computed by applying a combination of the OSFI approved Bank’s internal risk models and OSFI prescribed risk weights to on- and off-balance sheet exposures.

As at year end, the Bank’s RWA of $417.1 billion, represents a decrease of approximately $4.1 billion, or 1.0%, from 2019, driven by divestitures, improvement in book quality and the benefit from foreign currency translation of a stronger Canadian dollar, partly offset by organic growth in RWA.

Credit risk-weighted assets

Credit risk-weighted assets decreased by $3.4 billion to $362.0 billion. The key drivers or components of the change are reflected in Table T31, below.

T31  Flow statement for Basel III credit risk-weighted assets ($ millions)

	2020						2019
Credit risk-weighted assets movement by key driver ($ millions)	Credit risk			Of which counterparty credit risk			Credit risk			Of which counterparty credit risk
Credit risk-weighted assets as at beginning of year	$	365,431		$	20,126		$	347,096		$	17,543
Book size(1)		15,641			8,798			19,722			1,645
Book quality(2)		(6,396	)		(2,160	)		(2,000	)		(499	)
Model updates(3)		(431	)		(431	)		1,127			169
Methodology and policy(4)		2,106			(7,422	)		1,238			1,238
Acquisitions and disposals		(9,756	)		–			614			–
Foreign exchange movements		(3,792	)		70			(955	)		30
Other		(799	)		–			(1,411	)		–
Credit risk-weighted assets as at end of year	$	362,004		$	18,981		$	365,431		$	20,126

(1) Book size is defined as organic changes in book size and composition (including new business and maturing loans).

(2) Book quality is defined as quality of book changes caused by experience such as underlying customer behaviour or demographics, including changes through model calibrations/realignments.

(3) Model updates are defined as model implementation, change in model scope or any change to address model enhancement.

(4) Methodology and policy is defined as methodology changes to the calculations driven by regulatory policy changes, such as new regulation (e.g. Basel III).

68  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Group Financial Condition

T32  Internal rating scale⁽¹⁾ and mapping to external rating agencies

Equivalent Rating
External Rating – S&P	External Rating – Moody’s	External Rating – DBRS	Grade	IG Code	PD Range(2)
AAA to AA+	Aaa to Aa1	AAA to AA (high)	Investment grade	99-98	0.0000% – 0.0428%
AA to A+	Aa2 to A1	AA to A (high)		95	0.0428% – 0.1159%
A to A-	A2 to A3	A to A (low)		90	0.0512% – 0.1271%
BBB+	Baa1	BBB (high)		87	0.0800% – 0.2027%
BBB	Baa2	BBB		85	0.1143% – 0.2950%
BBB-	Baa3	BBB (low)		83	0.1632% – 0.4293%
BB+	Ba1	BB (high)	Non-Investment grade	80	0.2638% – 0.4731%
BB	Ba2	BB		77	0.4264% – 0.5215%
BB-	Ba3	BB (low)		75	0.5215% – 0.6892%
B+	B1	B (high)		73	0.6892% – 1.3282%
B to B-	B2 to B3	B to B (low)		70	1.3282% – 2.5597%
CCC+	Caa1	–	Watch list	65	2.5597% – 9.3860%
CCC	Caa2	–		60	9.3860% – 17.8585%
CCC- to CC	Caa3 to Ca	–		40	17.8585% – 34.4434%
–	–	–		30	34.4434% – 58.6885%
Default			Default	21	100%

(1) Applies to non-retail portfolio.

(2) PD ranges overlap across IG codes as the Bank utilizes two risk rating systems for its AIRB portfolios and each risk rating system has its own separate IG to PD mapping.

T33  Non-retail AIRB portfolio exposure by internal rating grade⁽¹⁾

As at October 31 ($ millions)		2020										2019
Grade	IG Code	Exposure at default ($)(3)		RWA ($)(4)		PD (%)(5)(8)		LGD (%)(6)(8)		RW (%)(7)(8)		Exposure at default ($)(3)		RWA ($)(4)		PD (%)(5)(8)		LGD (%)(6)(8)		RW (%)(7)(8)
Investment grade(2)	99-98		116,335		964		–		12		1		81,333		920		—		14		1
	95		78,361		7,567		0.05		27		10		55,829		5,780		0.05		32		10
	90		67,164		8,475		0.06		34		13		65,058		10,040		0.07		36		15
	87		63,827		14,022		0.09		40		22		59,294		14,323		0.10		40		24
	85		45,973		15,509		0.15		45		34		49,291		18,101		0.15		46		37
	83		53,969		24,944		0.25		46		46		44,253		19,920		0.23		45		45
Non-Investment grade	80		42,509		21,015		0.31		44		49		48,807		27,178		0.33		45		56
	77		33,708		19,245		0.46		43		57		29,938		17,928		0.47		43		60
	75		25,527		15,576		0.69		41		61		21,049		13,444		0.72		40		64
	73		10,326		7,789		1.33		37		75		8,539		6,505		1.39		36		76
	70		4,555		4,079		2.56		37		90		3,485		3,068		2.68		35		88
Watch list	65		1,224		1,707		9.39		35		139		727		1,202		9.78		42		165
	60		1,801		2,702		17.87		30		150		1,198		1,404		18.47		25		117
	40		506		994		27.13		35		196		616		1,296		29.96		40		210
	30		109		214		55.94		46		196		225		425		57.31		46		189
Default(9)	21		1,555		2,946		100.00		41		189		990		2,727		100.00		42		275
Total			547,449		147,748		0.59		33		27		470,632		144,261		0.55		36		31
Government guaranteed residential mortgages			78,754		–		–		22		–		76,114		–		–		24		–
Total			626,203		147,748		0.52		32		24		546,746		144,261		0.47		34		26

(1) Excludes securitization exposures.

(2) Excludes government guaranteed residential mortgages of $78.8 billion ($76.1 billion in 2019).

(3) After credit risk mitigation.

(4) RWA prior to 6% scaling factor.

(5) PD – Probability of Default.

(6) LGD – Loss Given Default.

(7) RW – Risk Weight.

(8) Exposure at default used as basis for estimated weightings.

(9) Gross defaulted exposures, before any related allowances.

Credit risk-weighted assets – non-retail

Credit risk measures the risk that a borrower or counterparty will fail to honour its financial or contractual obligations to the Bank. The Bank uses the Advanced Internal Ratings Based (AIRB) approach under Basel III to determine minimum regulatory capital requirements for its domestic, U.S. and European credit portfolios, and certain international non-retail portfolios. The remaining credit portfolios are subject to the Standardized approach, which relies on the external credit ratings (e.g. S&P, Moody’s, DBRS, etc.) of borrowers, if available, to compute regulatory capital for credit risk. For the Bank’s Corporate, Bank and Sovereign AIRB portfolios, the key risk measures used in the quantification of regulatory capital for credit risk include probability of default (PD), loss given default (LGD) and exposure at default (EAD).

• Probability of default (PD) measures the likelihood that a borrower, with an assigned Internal Grade (IG) code, will default within a one-year time horizon. IG codes are a component of the Bank’s risk rating system. Each of the Bank’s internal borrower IG codes is mapped to a PD estimate.

2020 Scotiabank Annual Report  |  69

Management’s Discussion and Analysis

• Loss given default (LGD) measures the severity of loss on a facility in the event of a borrower’s default. The Bank’s internal LGD grades are mapped to ranges of LGD estimates. LGD grades are assigned based on facility characteristics such as seniority, collateral type, collateral coverage and other structural elements. LGD for a defaulted exposure is based on the concept of economic loss and is calculated using the present value of repayments, recoveries and related direct and indirect expenses.

• Exposure at default (EAD) measures the expected exposure on a facility at the time of default.

All three risk measures are estimated using the Bank’s historical data, as well as available external benchmarks, and are updated on a regular basis. The historical data used for estimating these risk measures exceeds the minimum five-year AIRB requirement for PD estimates and the minimum seven-year AIRB requirement for LGD and EAD estimates. Further analytical adjustments, as required under the Basel III Framework and OSFI’s requirements set out in its Domestic Implementation Notes, including any input floor requirements, are applied to average estimates obtained from historical data. These analytical adjustments incorporate the regulatory requirements pertaining to:

• Long-run estimation of PD, which requires that PD estimates capture average default experience over a reasonable mix of high-default and low-default years of the economic cycle;

• Downturn estimation for LGD, which requires that LGD estimates appropriately reflect conditions observed during periods where credit losses are substantially higher than average; and

• Downturn estimation for EAD, which requires that EAD estimates appropriately reflect conditions observed during periods of economic downturn; and

• The addition of a margin of conservatism, which is related to the likely range of errors based on the identification and quantification of the various sources of uncertainty inherent in historical estimates.

These risk measures are used in the calculation of regulatory capital requirements based on formulas specified by the Basel framework. The credit quality distribution of the Bank’s AIRB non-retail portfolio is shown in Table T33. Year-over-year, the higher overall portfolio average PD is primarily due to customer ratings changes and increases in defaulted exposures. Reductions in average LGD are mainly from changes in business mix (new vs. maturing business) and parameter recalibrations. Overall, the portfolio decline in average RW is primarily due to a significant increase in exposures to highly rated sovereigns.

The risk measures are subject to a rigorous back-testing framework which uses the Bank’s historical data to ensure that they are appropriately calibrated. Based on results obtained from the back-testing process, risk measures are reviewed, re-calibrated and independently validated on at least an annual basis in order to reflect the implications of new data, technical advances and other relevant information.

• As PD estimates represent long-run parameters, back-testing is performed using historical data spanning at least one full economic cycle. Realized PDs are back-tested using pre-defined confidence intervals, and the results are then aggregated to provide an overall assessment of the appropriateness of each PD estimate;

• The back-testing for LGD and EAD estimates is conducted from both long-run and downturn perspectives, in order to ensure that these estimates are adequately conservative to reflect both long-run and downturn conditions.

Portfolio-level back-testing results, based on a comparison of estimated and realized parameters for the four-quarter period ended at July 31, 2020, are shown in Table T34. During this period the actual experience was more favourable than the estimates as reflected within the risk parameters.

T34  Portfolio-level comparison of estimated and actual non-retail percentages

	Estimated(1)		Actual
Average PD		0.70		0.44
Average LGD		40.16		38.54
Average CCF(2)		48.61		11.47

(1) Estimated parameters are based on portfolio averages at Q3/19, whereas actual parameters are based on averages of realized parameters during the subsequent four quarters.

(2) EAD back-testing is performed through Credit Conversion Factor (CCF) back-testing, as EAD is computed using the sum of the drawn exposure and undrawn exposure multiplied by the estimated CCF.

Credit risk-weighted assets – Canadian retail

The AIRB approach is used to determine minimum regulatory capital requirements for the retail credit portfolio in Canada. The retail portfolio is comprised of the following Basel-based pools:

• Residential real estate secured exposures consist of conventional and high ratio residential mortgages and all other products opened under the Scotia Total Equity Plan (STEP), such as loans, credit cards and secured lines of credit;

• Qualifying revolving retail exposures consists of all unsecured credit cards and lines of credit;

• Other retail consists of term loans (secured and unsecured), as well as credit cards and lines of credit which are secured by assets other than real estate.

For the AIRB portfolios, the following models and parameters are estimated, subject to parameter input floors as required by OSFI:

• Probability of default (PD) is the likelihood that the facility will default within the next 12 months.

• Loss Given Default (LGD) measures the economic loss as a proportion of the defaulted balance.

• Exposure at Default (EAD) is the portion of expected exposures at time of default.

The data observation period used for PD/EAD/LGD estimates meets the five year minimum. Various statistical techniques including predictive modeling and decision trees were used to develop models. The models assign accounts into homogenous segments using internal and external borrower/facility-level credit experience. Every month, exposures are automatically re-rated based on risk and loss characteristics. PD, LGD and EAD estimates are then assigned to each of these segments incorporating the following regulatory requirements:

• PD incorporates the average long run default experience over an economic cycle. This long run average includes a mix of high and low default years.

• LGD is adjusted to appropriately reflect economic downturn conditions.

• EAD may also be adjusted to reflect downturn conditions when PD and EAD are highly correlated.

• Sources of uncertainty are reviewed regularly to ensure uncertainties are identified, quantified and included in calculations so that all parameter estimates reflect appropriate levels of conservatism.

70  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Group Financial Condition

The table below summarizes the credit quality distribution of the Bank’s AIRB retail portfolio as at October 31, 2020.

Year-over-year reductions in the average risk weight are primarily due to a lower portfolio average PD which is mainly from reduced delinquencies, which are partly driven by loan payment deferral programs, and lower revolving credit account utilization rates.

T35  Retail AIRB portfolio exposure by PD range⁽¹⁾

As at October 31 ($ millions)		2020										2019
Category	PD Range	Exposure at default ($)(1)		RWA ($)(2)		PD (%)(3)(6)		LGD (%)(4)(6)		RW (%)(5)(6)		Exposure at default ($)(1)		RWA ($)(2)		PD (%)(3)(6)		LGD (%)(4)(6)		RW (%)(5)(6)
Exceptionally low	0.0000% – 0.0499%		14,985		391		0.04		74		3		12,792		330		0.04		74		3
Very low	0.0500% – 0.1999%		99,114		4,775		0.08		28		5		92,440		4,687		0.09		29		5
Low	0.2000% – 0.9999%		129,345		24,387		0.51		30		19		121,184		24,557		0.52		32		20
Medium low	1.0000% – 2.9999%		20,162		11,150		1.93		52		55		22,015		12,436		1.98		51		56
Medium	3.0000% – 9.9999%		7,698		7,553		5.34		71		98		9,039		8,994		5.41		70		100
High	10.0000% – 19.9999%		631		842		12.16		48		133		886		1,190		12.57		46		134
Extremely high	20.0000% – 99.9999%		1,388		2,275		31.17		62		164		2,107		3,421		32.36		58		162
Default(7)(8)	100%		522		1,982		100.00		78		380		617		–		100.00		81		–
Total			273,845		53,355		0.94		35		19		261,080		55,615		1.17		36		21

(1) After credit risk mitigation.

(2) RWA prior to 6% scaling factor.

(3) PD – Probability of Default.

(4) LGD – Loss Given Default.

(5) RW – Risk Weight.

(6) Exposure at default used as basis for estimated weightings.

(7) Gross defaulted exposures, before any related allowances.

(8) Commencing in Q1 2020, RWA is being calculated on defaulted retail exposures. Previously, the risk impact was reflected in Expected Losses.

All AIRB models and parameters are monitored on a quarterly basis and independently validated annually by the Global Risk Management group. These models are tested to ensure rank ordering and back testing of parameters is appropriate. Comparison of estimated and actual loss parameters for the period ended July 31, 2020 is shown in Table T36. During this period the actual experience was materially more favourable than the estimates as reflected within the risk parameters.

T36  Estimated and actual loss parameters⁽¹⁾

($ millions)	Average estimated PD (%)(2)(7)		Actual default rate (%)(2)(5)		Average estimated LGD (%)(3)(7)		Actual LGD (%)(3)(6)		Estimated EAD ($)(4)(7)		Actual EAD ($)(4)(5)
Residential real estate secured
Residential mortgages
Insured mortgages(8)		0.71		0.43		–		–		–		–
Uninsured mortgages		0.57		0.27		19.00		13.48		–		–
Secured lines of credit		0.37		0.20		28.74		17.66		83		76
Qualifying revolving retail exposures		2.02		1.38		79.33		72.90		705		613
Other retail		1.86		1.29		61.23		55.00		7		7

(1) Estimates and actual values are recalculated to align with new models implemented during the period.

(2) Account weighted aggregation.

(3) Default weighted aggregation.

(4) EAD is estimated for revolving products only.

(5) Actual based on accounts not at default as at four quarters prior to reporting date.

(6) Actual LGD calculated based on 24 month recovery period after default and therefore excludes any recoveries received after the 24 month period.

(7) Estimates are based on the four quarters prior to the reporting date.

(8) Actual and estimated LGD for insured mortgages are not shown. Actual LGD includes the insurance benefit, whereas estimated LGD may not.

Credit risk-weighted assets – International retail

International retail credit portfolios follow the Standardized approach and consist of the following components:

• Residential real estate secured lending; and,

• Other retail, consisting of term loans, credit cards and lines of credit.

Under the standardized approach, in general, residential real estate secured lending products are risk-weighted 35% and other retail products receive a 75% risk-weight.

Market risk

Market risk is the risk of loss from changes in market prices including interest rates, credit spreads, equity prices, foreign exchange rates, and commodity prices, the correlations between them, and their levels of volatility.

For all material trading portfolios, the Bank applies its internal models to calculate the market risk capital charge. OSFI has approved the Bank’s internal VaR, Stressed VaR, Incremental Risk Charge and Comprehensive Risk Measure models for the determination of market risk capital. The attributes and parameters of these models are described in the Risk Measurement Summary.

During the year, OSFI introduced changes to regulations to keep the financial system resilient and well capitalized in response to COVID-19. Included within these changes, OSFI reduced the Bank’s Stressed Value-at-Risk (VaR) multipliers used in the calculation of market risk capital by a factor of 2 and also allowed the removal of Funding Valuation Adjustment (FVA) hedges in the calculation of market risk capital. Both changes were made effective from the commencement of the second quarter of 2020.

In addition, for some non-material trading portfolios, the Bank applies the Standardized Approach for calculating market risk capital. The standardized method uses a “building block” approach, with the capital charge for each risk category calculated separately.

2020 Scotiabank Annual Report  |  71

Management’s Discussion and Analysis

Below are the market risk requirements as at October 31, 2020 and 2019:

T37  Total market risk capital ⁽¹⁾

($ millions)	2020		2019
All-Bank VaR	$	157	$	128
All-Bank stressed VaR(2)		119		430
Incremental risk charge(3)		227		87
Comprehensive risk measure		–		–
Standardized approach		83		49
Total market risk capital	$	586	$	694

(1) Equates to $7,327 million of market risk-weighted assets (2019 – $8,674 million).

(2) OSFI implemented the reduction in the stressed VaR multiplier (by a factor of 2) effective since the second quarter of 2020.

(3) Increase from prior year primarily due to higher fixed income exposures and increased ratings volatility.

T38  Risk-weighted assets movement by key drivers

	Market risk
($ millions)	2020			2019
RWA as at beginning of the year	$	8,674		$	8,357
Movement in risk levels(1)		8,695			145
Model updates(2)		(242	)		172
Methodology and policy(3)		(9,800	)		–
Acquisitions and divestitures		–			–
RWA as at end of the year	$	7,327		$	8,674

(1) Movement in risk levels are defined as changes in risk due to position changes and market movements. Foreign exchange movements are embedded within Movement in risk levels.

(2) Model updates are defined as updates to the model to reflect recent experience, change in model scope.

(3) Methodology and policy is defined as methodology changes to the calculations driven by regulatory policy changes (e.g. Basel III).

Market risk-weighted assets decreased by $1.3 billion to $7.3 billion, as shown in the table above, due primarily to methodology and policy changes from OSFI’s reduction of the stressed VaR multiplier and model updates that were partly offset by movements in risk levels.

Operational risk

Operational risk is the risk of loss, whether direct or indirect, to which the Bank is exposed due to external events, human error, or the inadequacy or failure of processes, procedures, systems or controls.

In January 2020, OSFI revised its capital requirements for operational risk in consideration of the finalized Basel III revisions, requiring that institutions previously approved for the Basel II Advanced Measurement Approach (AMA) for operational risk capital are to report operational risk capital using the existing Basel II Standardized Approach for fiscal years 2020, 2021 and 2022. Consistent with OSFI’s requirements, the Bank applies the Standardized Approach for calculating operational risk capital as per the applicable Basel standards.

Under the Standardized Approach, total capital is determined as the sum of capital for each of eight Basel defined business activities. The capital for each activity is the product of the relevant risk factor, as defined by Basel, applied to the gross income of each respective business activity.

Operational risk-weighted assets increased by $0.7 billion during the year to $47.8 billion primarily due to the growth in calculated gross income, partly offset by the impact from the Bank’s divestitures which closed during the year.

Internal capital

The Bank utilizes economic capital methodologies and measures to calculate internal capital. Internal capital is a measure of the unexpected losses inherent in the Bank’s business activities. The calculation of internal capital relies on models that are subject to independent vetting and validation as required by the Bank’s Model Risk Management Policy.

Management assesses its risk profile to determine those risks for which the Bank should attribute internal capital. The major risk categories included in internal capital are:

• Credit risk measurement is based on the Bank’s internal credit risk ratings for derivatives, corporate and commercial loans, and credit scoring for retail loans. It is also based on the Bank’s actual experience with recoveries and takes into account differences in term to maturity, probabilities of default, expected severity of loss in the event of default, and the diversification benefits of certain portfolios.

• Market risk for internal capital incorporates models consistent with the regulatory basis, with some exclusions, and calibrated to a higher 99.95% confidence interval, and models of other market risks, mainly structural interest rate and foreign exchange risks.

• Operational risk for internal capital is calculated based on an approach consistent with the Bank’s regulatory capital requirements including a conservative forward-looking view of gross income.

• Other risks include additional risks for which internal capital is attributed, such as business risk, significant investments, insurance risk and real estate risk.

In addition, the Bank’s measure of internal capital includes a diversification benefit which recognizes that all of the above risks will not occur simultaneously. The Bank also includes the full amount of goodwill and intangible assets in the internal capital amount.

For further discussion on risk management and details on credit, market and operational risks, refer to the Risk Management section.

Off-Balance Sheet Arrangements

In the normal course of business, the Bank enters into contractual arrangements that are either consolidated or not required to be consolidated in its financial statements, but could have a current or future impact on the Bank’s financial performance or financial condition. These arrangements can be classified into the following categories: structured entities, securitizations, guarantees and other commitments.

72  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Group Financial Condition

Structured entities

Structured entities are designed to accomplish certain well-defined objectives and for which voting or similar rights are not the dominant factor in deciding who controls the entity. The Bank may become involved with structured entities either at the formation stage or at a later date. The Bank controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The Bank’s arrangements with structured entities include:

• Structured entities that are used to provide a wide range of services to customers, such as structured entities established to allow clients to securitize their financial assets while facilitating cost-efficient financing, and to provide certain investment opportunities.

• Structured entities that the Bank sponsors and actively manages (see discussion on other unconsolidated structured entities and securitizations on page 74).

All structured entities are subject to a rigorous review and approval process to ensure that all significant risks are properly identified and addressed. The Bank consolidates all structured entities that it controls. For many of the structured entities that are used to provide services to customers, the Bank does not guarantee the performance of the structured entities’ underlying assets and does not absorb any related losses. For other structured entities, such as securitization and investment vehicles, the Bank may be exposed to credit, market, liquidity or operational risks. Noteholders of securitizations may also be exposed to these risks. The Bank may earn fees based on the nature of its association with a structured entity.

Consolidated structured entities

The Bank controls its U.S. based multi-seller conduit and certain funding and other vehicles, and consolidates these structured entities in the Bank’s consolidated financial statements.

As at October 31, 2020, total assets of consolidated structured entities were $84 billion, compared to $55 billion at the end of 2019. The increase in total assets was primarily due to increased mortgages sold into the Scotiabank Covered Bond Guarantor Limited Partnership in connection with the increased issuance of covered bonds including those used to participate in the Bank of Canada term repo program (see discussion on fiscal and monetary stimulus on page 25). More details of the Bank’s consolidated structured entities are provided in Note 15(a) to the consolidated financial statements.

Unconsolidated structured entities

There are two primary types of association the Bank has with unconsolidated structured entities:

• Canadian multi-seller conduits administered by the Bank, and

• Structured finance entities.

The Bank earned total fees of $30 million in 2020 (October 31, 2019 – $24 million) from certain structured entities in which it had a significant interest at the end of the year but did not consolidate. More information with respect to the Bank’s involvement with these unconsolidated structured entities, including details of liquidity facilities and maximum loss exposure by category is provided below and in Note 15(b) to the consolidated financial statements.

Canadian multi-seller conduits administered by the Bank

The Bank sponsors two Canadian-based multi-seller conduits that are not consolidated. During the year the Bank continued to assess its control conclusion for these conduits and there were no changes to the Bank’s assessment. The Bank earned commercial paper issuance fees, program management fees, liquidity fees and other fees from these multi-seller conduits, which totaled $28 million in 2020, compared to $22 million in 2019. These multi-seller conduits purchase high-quality financial assets and finance these assets through the issuance of highly-rated commercial paper.

As further described below, the Bank’s exposure to these off-balance sheet conduits primarily consists of liquidity support and temporary holdings of commercial paper. Although the Bank has power over the relevant activities of the conduits, it has limited exposure to variability in returns, which results in the Bank not consolidating the two Canadian conduits. The Bank has a process to monitor these exposures and significant events impacting the conduits to ensure there is no change in control, which could require the Bank to consolidate the assets and liabilities of the conduits at fair value.

A significant portion of the conduits’ assets have been structured to receive credit enhancements from the sellers, including overcollateralization protection and cash reserve accounts. Each asset purchased by the conduits is supported by a backstop liquidity facility provided by the Bank in the form of a liquidity asset purchase agreement (LAPA). The primary purpose of the backstop liquidity facility is to provide an alternative source of financing in the event the conduits are unable to access the commercial paper market. Under the terms of the LAPA, in most cases, the Bank is not obliged to purchase defaulted assets.

The Bank’s primary exposure to the Canadian-based conduits is the liquidity support provided, with total liquidity facilities of $4.2 billion as at October 31, 2020 (October 31, 2019 – $3.8 billion). The year-over-year increase was due to normal business operations. As at October 31, 2020, total commercial paper outstanding for the Canadian-based conduits was $3.1 billion (October 31, 2019 – $2.6 billion) and the Bank held 0.1% of the total commercial paper issued by these conduits. Table T39 presents a summary of assets purchased and held by the Bank’s two Canadian multi-seller conduits as at October 31, 2020 and 2019, by underlying exposure.

All of the funded assets have at least an equivalent rating of AA or higher based on the Bank’s internal rating program. Assets held in these conduits were investment grade as at October 31, 2020. Approximately 68% of the funded assets have final maturities falling within four years, and the weighted-average repayment period, based on cash flows, approximates 2.2 years.

T39  Assets held by Bank-sponsored Canadian-based multi-seller conduits

	2020						2019
As at October 31 ($ millions)	Funded assets(1)		Unfunded commitments		Total exposure(2)		Funded assets(1)		Unfunded commitments		Total exposure(2)
Auto loans/leases	$	1,940	$	444	$	2,384	$	1,833	$	652	$	2,485
Trade receivables		186		596		782		259		522		781
Canadian residential mortgages		434		76		510		484		26		510
Equipment rental contracts		537		34		571		–		–		–
Total(3)	$	3,097	$	1,150	$	4,247	$	2,576	$	1,200	$	3,776

(1) Funded assets are reflected at original cost, which approximates estimated fair value.

(2) Exposure to the Bank is through global-style liquidity facilities.

(3) These assets are substantially sourced from Canada.

2020 Scotiabank Annual Report  |  73

Management’s Discussion and Analysis

Structured finance entities

The Bank has interests in structured finance entities used to assist corporate clients in accessing cost-efficient financing through their securitization structures. The Bank’s maximum exposure to loss from structured finance entities was $2,014 million as at October 31, 2020 (October 31, 2019 – $2,194 million). The year-over-year decrease was due to normal business operations.

Other unconsolidated structured entities

The Bank sponsors unconsolidated structured entities including mutual funds, in which it has insignificant or no interest at the reporting date. The Bank is a sponsor when it is significantly involved in the design and formation at inception of the structured entity, and the Bank’s name is used by the structured entity to create an awareness of the instruments being backed by the Bank’s reputation and obligation. The Bank also considers other factors, such as its continuing involvement and obligations to determine if, in substance, the Bank is a sponsor. For the year ended October 31, 2020, the Bank earned $2,165 million income from its involvement with the unconsolidated Bank-sponsored structured entities, all of which is from Bank-sponsored mutual funds (for the year ended October 31, 2019 – $2,190 million).

Securitizations

The Bank securitizes its retail loans, as described further below, as an efficient source of financing its operations.

The Bank securitizes fully insured residential mortgage loans, originated by the Bank and third parties, through the creation of mortgage-backed securities that are sold to Canada Housing Trust (CHT), Canada Mortgage and Housing Corporation (CMHC) or third party investors. The sale of such mortgages does not meet the derecognition requirements, where the Bank retains substantially all of the risks and rewards of ownership of the securitized mortgages. The transferred mortgages continue to be recognized on the Consolidated Statement of Financial Position, along with the proceeds from sale treated as secured borrowings. More details have been provided in Note 14 of the consolidated financial statements.

Third-party originated mortgages purchased by the Bank and social housing mortgage pools originated by the Bank qualify for derecognition where the Bank transfers substantially all of the risks and rewards of ownership to third parties. As at October 31, 2020, the outstanding amount of off-balance sheet securitized third-party originated mortgages was $6,741 million (October 31, 2019 – $2,734 million) and off-balance sheet securitized social housing pools was $870 million (October 31, 2019 – $945 million).

The Bank securitizes a portion of its Canadian personal and small business credit card receivables (receivables) through Trillium Credit Card Trust II (Trillium), a Bank-sponsored structured entity. Trillium issues senior and subordinated notes to investors and previously also issued subordinated notes to the Bank. The proceeds of such issuances are used to purchase co-ownership interests in the receivables originated by the Bank. The sale of such co-ownership interests does not qualify for derecognition and therefore the receivables continue to be recognized on the Bank’s Consolidated Statement of Financial Position. Recourse of the noteholders is limited to the purchased co-ownership interests. During the year, $638 million of receivables were securitized through Trillium (2019 – $1,792 million). As at October 31, 2020, the outstanding Bank-held subordinated notes issued by Trillium were nil (2019 – $134 million, eliminated on consolidation).

The Bank previously securitized a portion of its Canadian unsecured personal lines of credit (receivables) through Halifax Receivables Trust (Halifax), a Bank-sponsored structured entity. Halifax issued Class A notes to third-party investors and subordinated notes to the Bank, proceeds of which were used to purchase co-ownership interests in the receivables originated by the Bank. The sale of such co-ownership interests did not qualify for derecognition and therefore the receivables were recognized on the Bank’s Consolidated Statement of Financial Position. Recourse of the noteholders was limited to the purchased co-ownership interests. The Bank’s outstanding receivables securitized under this program matured in February 2020. As such, as at October 31, 2020, the outstanding Bank-held subordinated notes issued by Halifax were nil (2019 – $102 million, eliminated on consolidation).

The Bank securitizes a portion of its Canadian auto loan receivables (receivables) through Securitized Term Auto Receivables Trust 2017-2, 2018-1, 2018-2, 2019-1 and 2019-CRT (START) Bank-sponsored structured entities. The START entities issue senior and subordinated notes to the Bank and/or third-party investors, and the proceeds of such issuances are used to purchase discrete pools of retail indirect auto loan receivables from the Bank on a fully serviced basis. The sale of such pools does not qualify for derecognition and therefore the receivables continue to be recognized on the Bank’s Consolidated Statement of Financial Position. Recourse of the note holders is limited to the receivables. During the year, assets of $1,392 million were securitized through the START program (2019 – $896 million). As at October 31, 2020, the outstanding senior and subordinated notes issued by the START entities and are held by the Bank of $1,017 million (2019 – $325 million) are eliminated on consolidation.

Guarantees and other commitments

Guarantees and other commitments are fee-based products that the Bank provides to its customers. These products can be categorized as follows:

• Standby letters of credit and letters of guarantee. As at October 31, 2020, these amounted to $35 billion, compared to $36 billion last year. These instruments are issued at the request of a Bank customer to secure the customer’s payment or performance obligations to a third party.

• Liquidity facilities. These generally provide an alternate source of funding to asset-backed commercial paper conduits in the event a general market disruption prevents the conduits from issuing commercial paper or, in some cases, when certain specified conditions or performance measures are not met;

• Indemnification contracts. In the ordinary course of business, the Bank enters into many contracts where it may indemnify contract counterparties for certain aspects of its operations that are dependent on other parties’ performance, or if certain events occur. The Bank cannot estimate, in all cases, the maximum potential future amount that may be payable, nor the amount of collateral or assets available under recourse provisions that would mitigate any such payments. Historically, the Bank has not made any significant payments under these indemnities;

• Loan commitments. The Bank has commitments to extend credit, subject to specific conditions, which represent undertakings to make credit available in the form of loans or other financings for specific amounts and maturities. As at October 31, 2020, these commitments amounted to $235 billion, compared to $212 billion last year. The year-over-year increase is primarily due to an increase in business activity.

These guarantees and loan commitments may expose the Bank to credit or liquidity risks, and are subject to the Bank’s standard review and approval processes. For the guaranteed products, the dollar amounts represent the maximum risk of loss in the event of a total default by the guaranteed parties, and are stated before any reduction for recoveries under recourse provisions, insurance policies or collateral held or pledged.

74  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Group Financial Condition

Fees from the Bank’s guarantees and loan commitment arrangements, recorded as credit fees in non-interest income in the Consolidated Statement of Income, were $622 million in 2020, compared to $588 million in the prior year. Detailed information on guarantees and loan commitments is disclosed in Note 35 in the consolidated financial statements.

Canadian Government Economic Response Plans

The Bank participated in the following plans as part of the Government of Canada’s COVID-19 Economic Response Plan.

Canada Emergency Business Account (CEBA)

Through the CEBA program, the Bank facilitated loans with eligible small business customers and Export Development Canada (EDC).

Eligible small business customers received a loan of up to $40,000. The CEBA loans are derecognized from the Bank’s Consolidated Statement of Financial Position as the program meets the pass-through criteria for derecognition of financial assets under IFRS 9. As at October 31, 2020, loans issued under the CEBA were approximately $3 billion.

Business Credit Availability Program (BCAP)

The BCAP provides additional liquidity support to small business and commercial customers through EDC and Business Development Bank of Canada (BDC).

Under the EDC plan, EDC guarantees an 80% portion of new operating loans made to the export sector as well as domestic companies. Loans guaranteed by EDC continue to be recognized on the Consolidated Statement of Financial Position.

Under the BCAP, BDC entered into a co-lending facility with the Bank in which BDC purchases an 80% participation in term loans made to eligible small business and commercial customers. The portion of loans sold to BDC are derecognized from the Bank’s Consolidated Statement of Financial Position as the program meets the derecognition criteria for a transfer under IFRS 9.

Under the BCAP Mid-Market Financing Program, BDC will enter into loan syndications with the Bank and underwrite 90% of junior term loans made to eligible medium-sized businesses. The portion of the syndicated loans funded by the Bank will be recognized on the Consolidated Statement of Financial Position.

2020 Scotiabank Annual Report  |  75

Management’s Discussion and Analysis

Financial Instruments

Given the nature of the Bank’s main business activities, financial instruments make up a substantial portion of the Bank’s financial position and are integral to the Bank’s business. Assets that are financial instruments include cash resources, securities, securities purchased under resale agreements, loans and customers’ liability under acceptances. Financial instrument liabilities include deposits, acceptances, obligations related to securities sold under repurchase agreements, obligations related to securities sold short, subordinated debentures and capital instrument liabilities. In addition, the Bank uses derivative financial instruments for both trading and hedging purposes.

Financial instruments are generally carried at fair value, except for non-trading loans and receivables, certain securities and most financial liabilities, which are carried at amortized cost unless designated as fair value through profit and loss at inception.

Unrealized gains and losses on the following items are recorded in other comprehensive income (OCI):

• debt instruments measured at fair value through OCI,

• equity instruments measured at fair value through OCI,

• derivatives designated as cash flow hedges, and

• net investment hedges.

Gains and losses on derecognition of debt instruments at FVOCI and impairment provisions are reclassified from OCI to the Consolidated Statement of Income under non-interest income. Gains and losses on derecognition of equity instruments designated at FVOCI are not reclassified from OCI to the consolidated statement of income. Gains and losses on cash flow hedges and net investment hedges are recorded in the Consolidated Statement of Income when the hedged item affects income.

The Bank’s accounting policies for derivatives and hedging activities are further described in Note 3 to the consolidated financial statements.

Interest income and expense on non-trading interest-bearing financial instruments are recorded in the Consolidated Statement of Income as part of net interest income. Credit losses related to loans are recorded in the provision for credit losses in the Consolidated Statement of Income. Interest income and expense, as well as gains and losses, on trading securities and trading loans are recorded in non-interest income – trading revenues.

Several risks arise from transacting financial instruments, including credit risk, liquidity risk, operational risk and market risk. The Bank manages these risks using extensive risk management policies and practices, including various Board-approved risk management limits.

A discussion of the Bank’s risk management policies and practices can be found in the Risk Management section on pages 78 to 119. In addition, Note 36 to the consolidated financial statements presents the Bank’s exposure to credit risk, liquidity risk and market risks arising from financial instruments as well as the Bank’s corresponding risk management policies and procedures.

There are various measures that reflect the level of risk associated with the Bank’s portfolio of financial instruments. For example, the interest rate risk arising from the Bank’s financial instruments can be estimated by calculating the impact of a 100 basis point increase or decrease in interest rates on annual income, and the economic value of shareholders’ equity, as described on page 104. For trading activities, Table T51 discloses the average one-day Value at Risk by risk factor. For derivatives, based on the maturity profile of the notional amount of the Bank’s derivative financial instruments, only 17% (2019 – 18%) had a term to maturity greater than five years.

Note 10 to the consolidated financial statements provides details about derivatives used in trading and hedging activities, including notional amounts, remaining term to maturity, credit risk and fair values.

The fair value of the Bank’s financial instruments is provided in Note 7 to the consolidated financial statements along with a description of how these amounts were determined.

The fair value of the Bank’s financial instruments was favourable when compared to their carrying value by $3.5 billion as at October 31, 2020 (October 31, 2019 – favourable $5 billion). This difference relates mainly to loan assets, deposit liabilities, subordinated debentures and other liabilities. These changes are primarily driven by movements in interest rates and by volume changes. Fair value estimates are based on market conditions as at October 31, 2020, and may not be reflective of future fair values. Further information on how fair values are estimated is contained in the section on critical accounting estimates.

Disclosures specific to certain financial instruments designated at fair value through profit and loss can be found in Note 9 to the consolidated financial statements. These designations were made primarily to significantly reduce accounting mismatches.

76  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Group Financial Condition

Selected Credit Instruments – Publicly Known Risk Items

Mortgage-backed securities

Total mortgage-backed securities held in the Non-trading and Trading portfolios are shown in Table T40.

T40  Mortgage-backed securities

	2020				2019
As at October 31 Carrying value ($ millions)	Non-trading portfolio(1)		Trading portfolio		Non-trading portfolio		Trading portfolio
Canadian NHA mortgage-backed securities(2)	$	6,459	$	2,224	$	3,502	$	2,081
Canadian residential mortgage-backed securities		–		5		–		–
Commercial mortgage-backed securities		–		8		–		11
U.S. Agency mortgage-backed securities(3)		8,539		–		9,452		–
Total	$	14,998	$	2,237	$	12,954	$	2,092

(1) The balances are comprised of securities under the amortized cost and FVOCI measurement categories.

(2) Canada Mortgage and Housing Corporation is a corporation of the Government of Canada that provides a guarantee of timely payment to NHA mortgage-backed security investors.

(3) The Government National Mortgage Association (Ginnie Mae) is a U.S. Government corporation that provides a guarantee of timely payment to U.S. Agency mortgage-backed security investors.

Other

As at October 31, 2020, the Bank has insignificant exposure to highly leveraged loans awaiting syndication, auction-rate securities, Alt-A type loans, monoline insurance and investments in structured investment vehicles.

2020 Scotiabank Annual Report  |  77

Management’s Discussion and Analysis

Risk Management

Effective risk management is fundamental to the success and resilience of the Bank and is recognized as key in the Bank’s overall approach to strategy management. Scotiabank has a strong, disciplined risk culture where managing risk is a responsibility shared by all of the Bank’s employees.

Risk Management Framework

The primary goals of risk management are to ensure that the outcomes of risk-taking activities are consistent with the Bank’s strategies and risk appetite, and that there is an appropriate balance between risk and reward in order to maximize shareholder value. Scotiabank’s Enterprise-Wide Risk Management Framework articulates the foundation for achieving these goals.

This Framework is subject to constant evaluation in order for it to meet the challenges and requirements of the global markets in which the Bank operates, including regulatory standards and industry best practices. The risk management programs of the Bank’s subsidiaries align in all material respects to the Bank’s risk management framework, although the actual execution of their programs may be different.

The Bank’s risk management framework is applied on an enterprise-wide basis and consists of five key elements:

• Risk Governance

• Risk Appetite

• Risk Management Tools

• Risk Identification and Assessment

• Risk Culture

Risk Management Principles

Risk-taking and risk management activities across the enterprise are guided by the following principles:

Balancing Risk and Reward – business and risk decisions are consistent with strategies and risk appetite.

Understand the Risks – all material risks to which the Bank is exposed, including both financial and non-financial, are identified and managed.

Forward Thinking – emerging risks and potential vulnerabilities are proactively identified.

Shared Accountability – every employee is responsible for managing risk.

Customer Focus – understanding our customers and their needs is essential to all business and risk decision-making.

Protect our Brand – all risk-taking activities must be in line with the Bank’s risk appetite, Scotiabank Code of Conduct, values and policy principles.

Controls – maintaining a robust and resilient control environment to protect our stakeholders.

Resilience – being prepared operationally and financially to respond to adverse events.

Compensation – performance and compensation structures reinforce the Bank’s values and promote sound risk taking behaviour.

Risk Governance

Effective risk management begins with effective risk governance.

The Bank has a well-established risk governance structure, with an active and engaged Board of Directors supported by an experienced executive management team. Decision-making is highly centralized through a number of executive and senior risk management committees.

The Bank’s risk management framework is predicated on the three lines of defence model. Within this model

• The First Line of Defence (typically comprised of the business lines and most corporate functions)

• Incurs and owns the risks

• Designs and executes internal controls

• Ensures that the risks generated are identified, assessed, managed and monitored, are within risk appetite, and are in compliance with relevant policies, guidelines and limits

• The Second Line of Defence (typically comprised of control functions such as Global Risk Management and Global Finance)

• Provides independent assessment, oversight and objective challenge to the First Line of Defence, as well as monitoring and control of risk

• Establishes risk appetite, risk limits, policies and frameworks, in accordance with best practice and regulatory requirements

• Measures, monitors and reports on risks taken in relation to limits and risk appetite, and on emerging risks

• The Third Line of Defence (Audit Department) provides enterprise-wide independent, objective assurance over the design and operation of the Bank’s internal control, risk management and governance processes.

All employees are, for some of their activities, risk owners, as all employees are capable of generating reputational and operational risks in their day to day activities and must be held accountable for owning and managing these risks.

78  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Risk Management

Governance Structure

The Bank’s Board of Directors and its Committees provide oversight and governance over the Bank’s Risk Management program which is supported by the President and Chief Executive Officer and Group Head & Chief Risk Officer.

The Board of Directors: as the top of the Bank’s risk management governance structure, provides oversight, either directly or through its committees, to satisfy itself that decision making is aligned with the Bank’s strategies and risk appetite. The Board receives regular updates on the key risks of the Bank – including a quarterly comprehensive summary of the Bank’s risk profile and performance of the portfolio against defined limits – and approves key risk frameworks, policies, and limits.

The Risk Committee of the Board: assists the Board in fulfilling its responsibilities for the review of the Bank’s risk appetite and identifying and monitoring key financial and non-financial risks and the oversight of the promotion and maintenance of a strong risk-aware culture throughout the Bank. The Committee assists the Board by providing oversight of the risk management and anti-money laundering / anti-terrorist finance functions at the Bank. This includes periodically reviewing and approving the Bank’s key risk management frameworks, policies, and limits and satisfying itself that management is operating within the Bank’s Enterprise Risk Appetite Framework. The Committee also oversees the independence of each of these control functions, including the effectiveness of the heads of these functions, as well as the functions themselves.

Audit and Conduct Review Committee of the Board: assists the Board by providing oversight on the effectiveness of the Bank’s system of internal controls. The Committee oversees the integrity of the Bank’s consolidated financial statements and related quarterly results. This includes oversight of climate-change related disclosure as part of the Bank’s financial reporting as well as the external auditor’s qualifications, independence and performance. This Committee assists the Board in fulfilling its oversight responsibilities for setting standards of conduct and ethical behaviour, and the oversight of conduct review and conduct risk management. The Committee also oversees the Bank’s compliance with legal and regulatory requirements, and oversees the Global Finance, Global Compliance and Audit Department functions at the Bank. The Committee also oversees the independence of each of these control functions, including the effectiveness of the heads of these functions, as well as the functions themselves.

Human Resources Committee of the Board: in conjunction with the Risk Committee of the Board, satisfies itself that adequate procedures are in place to identify, assess and manage the risks (including conduct risk) associated with the Bank’s material compensation programs and that such procedures are consistent with the Bank’s risk management programs. The Committee has further responsibilities relating to leadership, succession planning and total rewards.

Corporate Governance Committee of the Board: acts in an advisory capacity to the Board to enhance the Bank’s corporate governance through a continuing assessment of the Bank’s approach to corporate governance and makes policy recommendations.

2020 Scotiabank Annual Report  |  79

Management’s Discussion and Analysis

President and Chief Executive Officer (CEO): reports directly to the Board and is responsible for defining, communicating and implementing the strategic direction, goals and core values for Scotiabank that maximize long term shareholder value and returns, and meeting the needs of the Bank’s other key stakeholders. The CEO oversees the establishment of the Bank’s risk appetite, in collaboration with the CRO and CFO, which is consistent with the Bank’s short and long term strategy, business and capital plans, as well as compensation programs.

Group Head and Chief Risk Officer (CRO): reports jointly to the CEO and the Risk Committee of the Board and is responsible for the overall management of Global Risk Management which includes AML Risk. The CRO and the Group Chief AML Officer each have unfettered access to the Risk Committees of the Board to ensure their independence. As a senior member of the Bank’s executive management team, the CRO participates in strategic decisions related to where and how the Bank will deploy its various sources of capital to meet the performance targets of the business lines.

Global Risk Management (GRM): supports the Bank’s objectives and is mandated to maintain an ongoing and effective enterprise-wide risk management framework that resonates through all levels of the Bank. GRM is responsible for providing effective challenge and reasonable assurance to executive management, the Board of Directors and shareholders that risks are actively identified, managed and communicated to all key stakeholders. GRM’s mission is to ensure that the outcomes of risk-taking activities are consistent with the Bank’s strategies and risk appetite, and that there is an appropriate balance between risk and reward in order to maximize shareholder value.

AML Risk: on an enterprise-wide basis, develops policies, standards and controls to be followed in effectively managing money laundering, terrorist financing, and sanctions risks. AML Risk is responsible for maintaining the program current with Scotiabank needs, industry practice, and AML/ATF and sanctions legal and regulatory requirements, as well as providing risk-based independent oversight of Scotiabank’s compliance with these standards and requirements.

Global Compliance: on an enterprise-wide basis, manages compliance risk which includes regulatory compliance, conduct, and privacy risks throughout Scotiabank. A primary objective of Global Compliance is to take a holistic view of compliance risk to ensure consistency in the application of the Compliance Program, and assurance of outputs from its compliance risk management processes. The head of Global Compliance has unfettered access to the Audit and Conduct Review Committee of the Board to ensure their independence. Global Compliance provides independent oversight of Compliance Risk through the Compliance Program by:

• developing and maintaining compliance frameworks, policies, standards, and procedures;

• effectively challenging compliance risk management in the Bank’s Business Lines and Corporate Functions;

• acting as a consultant and educator on regulatory compliance, internal policies and procedures; and

• being responsible for conducting ongoing risk-based enterprise-wide assessment, governance, monitoring, testing, issues management, regulatory relationship management, regulatory change management, and reporting.

Global Finance: leads enterprise-wide financial strategies which support the Bank’s ability to maximize sustainable shareholder value, and actively manages the reliable and timely reporting of financial information to management, the Board of Directors and shareholders, regulators, as well as other stakeholders. This reporting includes the Bank’s consolidated financial statements and related quarterly and annual results, as well as all financial reporting related regulatory filings. Global Finance executes the Bank’s financial and capital management strategies with appropriate governance and control, while ensuring its processes are efficient and effective.

Business Lines and Corporate Functions: as the first line of defence in the Three Lines of Defence model, own the risks generated by their activities, are accountable for effective management of the risks within their business lines and functions through identifying, assessing, mitigating, monitoring and reporting the risks. Business lines and corporate functions actively design and implement effective internal controls as well as governance activities to manage risk and maintain activities within risk appetite and policies. Further, business lines have processes to be able to effectively identify, assess, monitor and report against allocated risk appetite limits and are in compliance with relevant policies, standards and guidelines.

Audit Department: reports independently to the Audit and Conduct Review Committee of the Board on the design and operating effectiveness of the Bank’s risk management processes. The mission of the Audit Department is to provide enterprise-wide independent, objective assurance over the design and operating effectiveness of the Bank’s internal controls, risk management and governance processes and to provide consulting services designed to improve the Bank’s operations.

80  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Risk Management

Risk Appetite

Effective risk management requires clear articulation of the Bank’s risk appetite and how the Bank’s risk profile will be managed in relation to that appetite.

The Bank’s Enterprise Risk Appetite Framework (RAF) governs the risk activities undertaken by the Bank on an enterprise-wide basis. It articulates the amount and types of risk the Bank is willing to take to achieve its strategic and financial objectives. A clearly articulated and effectively embedded risk appetite supports a strong risk culture and helps to ensure that the Bank stays within the established risk boundaries, while finding an optimal balance between risk and return. The main elements of the Enterprise RAF include the identification of risk capacity, a risk appetite statement, risk appetite metrics, and articulation of the roles and responsibilities of those overseeing the implementation and monitoring of the Enterprise RAF.

Scotiabank’s risk appetite is integrated into the strategic and capital planning process and compensation programs. Roles and responsibilities for development and implementation of the Enterprise RAF are well defined and are embedded in executive management mandates. The RAF is reviewed annually by senior management who recommend it to the Board for approval. Business lines, control functions and key business units and subsidiaries develop their own risk appetite statements, which are aligned with the Bank’s Enterprise RAF.

Risk Appetite Statement

The Bank’s Risk Appetite Statement articulates the aggregate level and types of risk the Bank is willing to accept, or to avoid, in order to achieve its business objectives. It includes qualitative statements as well as quantitative measures and considers all the Bank’s Principal Risks.

The Bank’s Risk Appetite Statement can be summarized as follows:

• The Bank has no appetite for breaches of the Scotiabank Code of Conduct. All Bank employees are responsible for acting in accordance with the Bank’s values and for understanding the limits, policies, procedures and regulations that apply to their activities.

• The Bank favours businesses that generate sustainable, consistent and predictable earnings.

• The Bank limits its risk taking activities to those that are understood and in line with Bank’s risk appetite, risk culture, values and strategic objectives.

• The Bank strives to maintain a robust and resilient control environment to protect its stakeholders and be prepared operationally and financially to respond to adverse events.

• The Bank has no appetite for reputational, legal, or regulatory risk, that would undermine the trust of our stakeholders.

• The Bank aims to maintain a strong capital and liquidity position and optimally allocate capital to support its strategic and financial objectives.

Risk Appetite Metrics

Risk appetite metrics provide clear risk limits, which are critical in implementing effective risk management. Certain risk appetite metrics are supported by management level limit structures and controls, as applicable.

Other components of Scotiabank’s risk appetite metrics:

• Set risk capacity and appetite in relation to regulatory constraints

• Use stress testing to provide forward-looking metrics

• Minimize earnings volatility

• Limit exposure to operational events that can have an impact on earnings, including regulatory fines

• Ensure reputational risk is top of mind and strategy is being executed within operating parameters

Risk Management Tools

Effective risk management includes tools that are guided by the Bank’s Enterprise Risk Appetite Framework and integrated with the Bank’s strategies and business planning processes.

Scotiabank’s risk management framework is supported by a variety of risk management tools that are used together to manage enterprise-wide risks. Risk management tools are regularly reviewed and updated to ensure consistency with risk-taking activities, and relevance to the business and financial strategies of the Bank.

Frameworks, Policies & Limits

Frameworks and Policies

The Bank develops and implements its key risk frameworks and policies in consultation with the Board. Such frameworks and policies and are also subject to the requirements and guidelines of the Office of the Superintendent of Financial Institutions (OSFI), the Bank Act, and the requirements and expectations of other regulators in the jurisdictions and activities in which we conduct business, and in consideration of industry best practices. Framework and policy development and implementation reflect best governance practices which the Bank strives to adhere to at all times. The Bank also provides advice and counsel to its subsidiaries in respect of their risk frameworks and policies to ensure alignment with the Bank, subject to the local regulatory requirements of each subsidiary.

2020 Scotiabank Annual Report  |  81

Management’s Discussion and Analysis

Frameworks and policies apply to specific types of risk or to the activities that are used to measure and control risk exposure. They are based on recommendations from risk management and other control and corporate functions including the Audit Department; Business Lines; and senior and executive management. Industry best practices and regulatory requirements are also factored into the frameworks and policies, are guided by the Bank’s risk appetite, and set the limits and controls within which the Bank and its subsidiaries can operate. Key risk frameworks and policies are supported by standards, procedures, guidelines and manuals.

Limits

Limits govern and control risk-taking activities within the appetite and tolerances established by the Board and executive management. Limits also establish accountability for key tasks in the risk-taking process and establish the level or conditions under which transactions may be approved or executed.

Risk Measurement

The Bank’s measurement of risk is a key component of its risk management framework. The measurement methodologies may apply to a group of risks or a single risk type and are supported by an assessment of qualitative risk factors to ensure the level of risks are within the Bank’s risk appetite. The Bank utilizes various risk techniques such as: models; stress testing; scenario and sensitivity analysis; and back testing using data with forward-looking projections based on plausible and worst case economic and financial market events; to support its risk measurement activities.

Models

The use of quantitative risk methodologies and models is subject to a strong governance framework and includes the application of sound and experienced judgment. The development, design, independent review and testing, and approval of models are subject to formalized policies. The Bank employs models for a number of important risk measurement and management processes including:

• regulatory and internal capital

• internal risk management

• valuation/pricing and financial reporting

• meeting initial margin requirements

• business decision-making for risk management

• stress testing

The Bank’s Model Risk Management Policy (MRMP) describes the overarching principles, policies, and procedures that provide the framework for managing model risk in a sound and prudent manner. These cover all stages of the model risk management cycle, including development, independent pre-implementation review, approval and post-implementation review.

Monitoring and Reporting

The Bank continuously monitors its risk exposures to ensure business activities are operating within approved limits or guidelines, and the Bank’s strategies and risk appetite. Breaches of these limits or guidelines are reported to senior management and/or the Board depending on the limit or guideline.

Risk reporting to senior management and the Board of Directors aggregates measures of risk across products and businesses, across the Bank’s global footprint, and are used to ensure compliance with risk policies, appetite, limits, and guidelines. They also provide a clear statement of the amounts, types, and sensitivities of the various risks in the portfolio. Senior management and the Board use this information to understand the Bank’s risk profile and the performance of the portfolios. A comprehensive summary of the Bank’s risk profile and performance of the portfolio is presented quarterly to the Board of Directors.

Forward-Looking Exercises

Stress Testing

Stress testing programs at both the enterprise-wide level and individual risk level allow the Bank to estimate the potential impact on the Bank’s income and capital resulting from significant changes in market conditions, credit environment, liquidity demands, or other risk factors. Enterprise-wide stress testing is also integrated with both the strategic and financial planning processes, as well as financial crisis management planning. The development, approval and on-going review of the Bank’s stress testing programs are subject to policy, and the oversight of the Stress & Scenarios Committee (SSC) or other management committees as appropriate. The Stress & Scenarios Model Review Committee (SSMRC) was established as a subcommittee of the SSC to review and approve enterprise-wide stress testing models as well as review IFRS 9 models prior to submission for approval to the SSC. Where appropriate, the Board of Directors or the Risk Committee of the Board approves stress testing limits for certain risk factors, and receives reports on performance regularly. Each program is developed with input from a broad base of stakeholders, and results are integrated into management decision making processes for capital, funding, market risk limits, and credit risk appetite. The stress testing programs are designed to capture a number of stress scenarios with differing severities and time horizons.

Other Testing

Other tests are conducted, as required, at the enterprise-wide level and within specific functional areas to test the decision-making processes of the Senior Management team and key personnel, by simulating a potential stress scenario. Simulated stress scenarios may include several complexities and disruptions through which Senior Management are engaged to make certain key decisions. Generally, the objectives of the simulations can include testing (1) the executability of activation protocols, (2) operational readiness, (3) the flexibility of the executive decision-making process, and (4) the process by which actions to be taken are prioritized. The exercises may also be designed to test the applicability and relevance of available data and the timeliness of reporting for decision making under stressed/crisis conditions.

82  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Risk Management

Risk Identification and Assessment

Effective risk management requires a comprehensive process to identify risks and assess their materiality. We define Risk as the potential impact of deviations from expected outcomes on the Bank’s earnings, capital, liquidity, reputation and resilience caused by internal and external vulnerabilities.

Risk Assessment

Risk identification and assessment is performed on an ongoing basis through the following:

• Transactions – risks, including credit and market exposures, are assessed by the business lines and reviewed by GRM, as applicable

• Monitoring – risks are identified by constantly monitoring and reporting current trends and analysis

• New Products and Services – new products and services are assessed for potential risks through a standardized process

• Strategic Investments – investment transactions are thoroughly reviewed for risks and are approved by the Operating Committee Strategic Transactions and Investment Committee (STIC) who provides direction and guidance on effective allocation and prioritization of resources

On an annual basis, the Bank undergoes a Bank-wide risk assessment that identifies the material risks faced by the Bank for the Internal Capital Adequacy Assessment Process (ICAAP) and the determination of internal capital. This process evaluates the risks and determines the pervasiveness of the risk across multiple business lines, the significance of the risk to a specific business line, the likelihood and potential impact of the risk and whether the risk may cause unexpected losses in income and therefore would be mitigated by internal capital. The process also reviews other evolving and emerging risks and includes qualitative considerations such as strategic, economic and environmental risk factors. The identified risks are ascribed a rating of how probable and impactful they may be and are used as an important input in the ICAAP process and the determination of internal capital.

As part of this annual risk assessment process the Bank’s Principal Risks for the year are identified and confirmed by Executive Management.

Principal Risk Types

The Bank’s Principal Risk types are reviewed annually as part of the Assessment of Risks process to determine that they adequately reflect the Bank’s risk profile. Principal Risks are defined as:

Those risks which management considers of primary importance: i) having a significant impact or influence on the Bank’s primary business and revenue generating activities (Financial Risks) or ii) inherent in the Bank’s business and can have significant negative strategic, business, financial and/or reputational consequences (Non-Financial Risks).

Principal Risks are assessed on an annual basis considering, amongst other things, the following factors:

• Potential impact (direct or indirect) on the Bank’s financial results, operations, management and strategy

• Effect on the Bank’s long term prospects and ongoing viability

• Regulatory focus and/or social concern

• Short to mid-term macroeconomic and market environment

• Financial and human resources required to manage and monitor the risk

• Establishment of key risk indicators, performance indicators or management limits to monitor and control the risk

• Peer identification and global best practices

• Regular monitoring and reporting to the Board on the risk is warranted

Once a Principal Risk has been identified, governance structures and mechanisms must be in place for that risk:

• Committee governance structures have been established to manage the risk

• Dedicated 2^nd line resources are in place providing effective challenge

• Frameworks and supporting policies, procedures and guidelines have been developed and implemented to manage the risk as appropriate

• Risk appetite limits have been established supported by management limits, early warning thresholds and key risk indicators as appropriate for the risk

• Adequate and effective monitoring and reporting has been established to the Board, executive and senior management, including from subsidiaries

• Board and executive management have clear roles and responsibilities in relation to risk identification, assessment, measurement, monitoring and reporting in order to support effective governance and oversight

Principal risks are categorized into two main groups:

Financial Risks:

Credit, Liquidity, Market

These are risks that are directly associated with the Bank’s primary business and revenue generating activities. The Bank understands these risks well and takes them on in order to generate sustainable, consistent and predictable earnings. Financial risks are generally quantifiable and are relatively predictable. The Bank has higher risk appetite for financial risks which are considered to be a fundamental part of doing business; but only when they are well understood, within established limits, and meet the desired risk and return profile.

Non-Financial Risks:

Compliance, Data, Environmental, Information Technology & Cyber Security, Model, Money Laundering / Terrorist Financing and Sanctions, Operational, Reputational, Strategic

These are risks that are inherent in the Bank’s business and can have significant negative strategic, business, financial and/or reputational consequences if not managed properly. In comparison to financial risks, Core Risks are less predictable and more difficult to define and measure. The Bank has low risk appetite for Non-Financial Risks and mitigates these accordingly.

2020 Scotiabank Annual Report  |  83

Management’s Discussion and Analysis

Risk Culture

Effective risk management requires a strong, robust, and pervasive risk management culture where every Bank employee is a risk manager and is responsible for managing risks.

The Bank’s risk culture is influenced by numerous factors including the interdependent relationship amongst the Bank’s risk governance structure, risk appetite, strategy, organizational culture, and risk management tools.   A strong risk culture promotes behaviours that align to the Bank’s values, supports sound risk taking and enables employees to identify risk taking activities that are beyond the established risk appetite.   The Bank’s Risk Culture Program is based on four indicators of a strong risk culture:   1. Tone at the Top – Leading by example including clear and consistent communication on risk behaviour expectations, the importance of Scotiabank’s values, and fostering an environment where everyone has ownership and responsibility for “doing the right thing”.   2.  Accountability – All employees are accountable for risk management. There is an environment of open communication where employees feel safe to speak-up and raise concerns without fear of retaliation and consequences for not adhering to the desired behaviours.   3.  Risk Management – Risk taking activities are consistent with the Bank’s strategies and risk appetite. Risk appetite considerations are embedded in key decision making processes.   4.  People Management – Performance and compensation structures encourage desired behaviours and reinforce the Bank’s values and risk culture.

Other elements that influence and support the Bank’s risk culture:

• Scotiabank Code of Conduct: describes standards of conduct to which all directors, officers, and employees must adhere and attest to on an annual basis.

• Values: Integrity – Act With Honour; Respect – Value Every Voice; Accountability – Make It Happen; Passion – Be Your Best.

• Communication: the Bank actively communicates risk appetite, and how it relates to Scotiabankers, to promote a sound risk culture.

• Compensation: programs are structured to discourage behaviours that are not aligned with the Bank’s values and Scotiabank Code of Conduct, and ensure that such behaviours are not rewarded.

• Training: risk culture is continually reinforced by providing effective and informative mandatory and non-mandatory training modules for all employees on a variety of risk management topics.

• Decision-making on risk issues is highly centralized: the flow of information and transactions to senior and executive committees keeps management well informed of the risks the Bank faces and ensures that transactions and risks are aligned with the Bank’s risk appetite.

• Executive Mandates: all Executives across the Bank have risk management responsibilities within their mandates.

84  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Risk Management

Principal Risk Types

Risk Type	Key Governing Documentation	Ways that they support Risk Appetite
Financial Risks
Credit Risk	•  Credit Risk Summary Framework •  Credit Risk Policy •  Credit Risk Appetite •  Residential Mortgage Underwriting Policy	Quantitative limits, such as: Credit Risk Appetite limits at the all-Bank level and Business Line level; Exposure to a single counterparty or group of related parties; Country risk; and Industry concentrations.
Market Risk	•  Market and Structural Risk Summary Framework •  Market and Structural Risk Management Policy	Quantitative limits, such as: Value at Risk (VaR); Stress test results; Debt investment exposures; and Structural interest rate and foreign exchange exposures.
Liquidity Risk	•  Liquidity Risk Management Summary Framework •  Liquidity Risk and Collateral Management Policy •  Liquidity Stress Testing Framework	Quantitative limits, such as: Liquidity Coverage Ratio (LCR); Net Stable Funding Ratio (NSFR); Minimum amounts of high quality liquid assets that can be readily sold or pledged to provide contingent liquidity; Limits to control the maximum net cash outflow over a specified horizon; and minimize concentration through diversification of funding source.
Non-Financial Risks
Money Laundering & Terrorist Financing and Sanctions Risks	•  AML/ATF Policy •  Sanctions Policy	The Bank has no appetite for knowingly allowing its products or services to be used to facilitate money laundering, terrorist financing, human trafficking, or any activity that is prohibited by applicable laws and regulations. The Bank has no appetite for any business activity or services to Clients that are prohibited by sanctions laws and regulations, or for the changing, manipulation, or stripping of data with an intent to avoid sanctions obligation.
Operational Risk	•  Operational Risk Management Summary Framework •  Operational Risk Management Policy and Framework •  Internal Control Policy •  New Initiative Risk Management Policy •  Global Third Party Risk Management Policy •  Financial Crisis Management Planning policies & framework	Operational risk appetite expresses how much residual risk the Bank is willing to tolerate and is expressed quantitatively by an aggregate loss event limit, a single event loss limit, and a variety of limits for individual categories of operational risk.
Information Technology & Cyber Security Risk	•  IT & Cyber Security Risk Management Policy and Framework •  Information Security Policy •  Information Security Governance Framework •  Cybersecurity Policy •  Enterprise Portfolio Management & Project Governance Policy •  Information Technology and Information Security Risk Management Summary Framework	The Bank has established minimum expectations and requirements for the systematic identification, measurement, mitigation and monitoring of IT and Cyber Security risk, including requirements for the protection of information throughout its lifecycle.

2020 Scotiabank Annual Report  |  85

Management’s Discussion and Analysis

Compliance Risk	•  Compliance Risk Summary Framework •  Risk Culture & Conduct Risk Summary Framework •  Risk Culture & Conduct Risk Management Framework •  Conduct Risk Management Policy •  Anti-Bribery and Anti-Corruption Policy •  Global Compliance Risk Management Policy •  Privacy Risk Management Framework •  Scotiabank Code of Conduct	The Compliance Risk Appetite benchmark, expressed as an all-Bank residual compliance risk rating, is based on the results from the Compliance Risk and Control Assessment.
Environmental Risk	•  Environmental Policy	The Bank has policies and procedures in place to ensure that it provides loans to borrowers that demonstrate an ability and willingness to practice sound environmental risk management.
Data Risk	•  Data Risk Summary Framework •  Data Risk Framework •  Scotiabank Data Management & Governance Policy	The Framework and the Policy outline the governance, committee structure, roles and responsibilities, risk appetite, and high-level descriptions of the programs, processes, and controls for governing data risk. They set out principles creating accountability for management and governance of the Bank’s data.
Model Risk	•  Model Risk Management Policy	The Bank has key model risk metrics in place which along with governing policies and procedures, support the management of model risk in a sound and prudent manner.
Reputational Risk	•  Reputational Risk Policy	No appetite for reputational, legal, or taxation risk arising in business activities, initiatives, products, services, transactions or processes, or from a lack of suitability of products for clients.
Strategic Risk	•  Annual Strategy Report to the Board of Directors	Strategy report considers linkages between the Bank’s Enterprise Risk Appetite Framework with the enterprise strategy, business line strategies and corporate function strategies.

86  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Risk Management

T41  Exposure to risks arising from the activities of the Bank’s businesses

(1) Average assets for the Other segment include certain non-earning assets related to the business lines.

(2) Attributed Capital is a combination of regulatory: (i) Risk-based capital and (ii) Leverage capital. Attributed Capital is reported on a quarterly average basis.

(3) Includes Attributed Capital for significant investments, goodwill, intangibles and leverage capital.

(4) Risk-weighted assets (RWA) are as at October 31, 2020 as measured for regulatory purposes in accordance with the Basel III approach.

2020 Scotiabank Annual Report  |  87

Management’s Discussion and Analysis

Top and emerging risks

The Bank is exposed to a variety of top and emerging risks. These risks can potentially adversely affect the Bank’s business strategies, financial performance and reputation. As part of our risk management approach, we proactively identify, assess, review, monitor and manage a broad range of top and emerging risks and undertake appropriate risk mitigation strategies.

We assess top and emerging risks in terms of impact and timeframe and use a combined bottom-up and top-down approach when considering risks. Risks are identified and discussed with Senior Management and reported quarterly to the Risk Committee and the Board of Directors. Action plans are in place to mitigate top and emerging risks and are adjusted as required on an ongoing basis.

The Bank’s top and emerging risks are as follows:

Geopolitical risk and macroeconomic uncertainty

Geopolitical risks, including trade tensions, could affect volatility in foreign exchange and capital markets globally. This affects all participants in these markets. In the short run, a market shock could potentially impact the Bank’s trading and non-trading market activities and revenues. Over a longer period of time, the more broadly based macroeconomic effects could potentially impact the Bank’s exposures to customers and market segments impacted by those shocks. Although it is difficult to predict where new geopolitical disruption will occur or economic consequences of trade-related events, the Bank’s stress testing program assists in evaluating the potential impact of severe conditions, whether caused by geopolitical or other circumstances. Management’s strong understanding of the local political landscapes and macroeconomic environments in which the Bank operates, combined with the Bank’s business model and diversified geographic footprint, serve as ongoing mitigants to this risk.

Money laundering, terrorist financing and sanctions compliance

Money laundering, terrorist financing and sanctions compliance continues to receive significant attention as nations attempt to deal with the harmful legal, economic, and social consequences of criminal activities. Governments, law enforcement agencies, and regulators around the world employ a variety of means, including establishing regulatory requirements on financial institutions, to curtail the ability of criminal and terrorist elements to profit from, or finance, their activities. It is widely recognized that financial institutions are uniquely positioned and possess the means to assist in the fight against money laundering, terrorist financing, and criminal activity (including anti-trafficking and exploitation) through prevention, detection, deterrence and the exchange/reporting of information.

Scotiabank is subject to the expanding and constantly evolving anti-money laundering/anti-terrorist financing and economic sanctions, laws and regulations internationally across the Bank’s global footprint. Money laundering, terrorist financing, and economic sanctions violations represent material risk to the Bank including regulatory, legal, financial and reputational exposure.

The Bank is committed to sustaining secure financial systems in the countries in which it maintains a presence by taking the necessary action, using a risk tailored approach. The Bank’s AML Risk program includes policies, procedures and control standards relating to client identification and due diligence, transaction monitoring, payment and name screening, investigating and reporting of suspicious activity, and evaluation of new products and services to prevent and/or detect activities that may pose risk to the Bank. The AML Risk program also facilitates an annual enterprise-wide AML/ATF and Sanctions risk assessment process and ensures that all employees, including Executive Management, and the Board of Directors undergo initial and ongoing AML/ATF and Sanctions training.

Information Technology and cyber security risk

Technology, information and cyber security risks continue to impact financial institutions and other businesses in Canada and around the globe. Under COVID-19, the threat landscape has changed. Threat actors are adapting to the changing environment and continue to increase in sophistication, severity and prevalence as adversaries use ever evolving technologies and attack methodologies. The technology environment of the Bank, its customers and the third parties providing services to the Bank, may be subject to attacks, breaches or other compromises. Incidents like these can result in disruption to operations, misappropriation or unauthorized release of confidential, financial or personal information, and reputational damage, among other things. The Bank proactively monitors and manages the risks and constantly updates and refines programs as threats emerge to minimize disruptions and keep systems and information protected. In addition, the Bank has purchased insurance coverage to help mitigate against certain potential losses associated with cyber incidents.

Technology innovation and disruption

Ongoing technology innovation continues to impact the financial services industry and its customers, and with COVID-19, the pace of digital adoption has accelerated. Global regulators continue to push for increased competition with open banking, in addition to, non-traditional new participants entering certain segments of the market and challenging the position of financial institutions. New participants are disrupting the traditional Bank operating model with the use of advanced technologies, agile delivery methodologies and analytical tools offering a highly customized user experience with lower fixed costs which has the potential to impact revenues and costs in certain areas of the Bank’s businesses. In response to increased customer demands, needs and expectations, the Bank has embarked on a multi-year digital transformation with the aspiration to be a digital leader in the financial services industry. To support this strategy the Bank has opened digital factories in Toronto and its key international focus markets, in Mexico, Peru, Chile and Colombia to contribute to financial innovation, while continuing to monitor for evolving risks in new technology tools. Investments in agile, analytics and digital technology have supported the Banks’ response to the pandemic, its shifting portfolio and addressing customer needs faster and with greater insight. The agile delivery methodology provides the process mechanisms to adapt to disruption events, conduct trade-off assessments and shift priorities and/or resources in a disciplined manner, which in turn supports resiliency in operating practices. Throughout the pandemic, the Bank has proven that it can be digital and provide leading customer experience.

Third party service providers

As the Bank continues to expand its ecosystem of third party service providers, the Bank is enhancing its third party risk management oversight and governance. There is an increased regulatory focus on third party services and risk governance. There is a growing dependency on the effectiveness of the control environment in place at vendors to limit the impacts of vendor availability and security incidents on the Bank’s operations, intellectual property, and reputation. Additionally, third party service providers to those third parties (i.e. fourth party vendors) can also fall victim to systems, data and privacy breaches if their control environments fail to operate effectively. Any such breaches could impact the Bank, if the Bank’s data is shared with such third parties in the course of their provision of services to the Bank. Enhanced monitoring is in place across the enterprise, to detect potential emerging third party liquidity issues. The Bank continues to enhance the resources, capabilities and accountabilities of third party risk management areas within the first and second line of defence areas.

88  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Risk Management

Legal and compliance risk

The Bank is subject to extensive regulation in the jurisdictions in which it operates. Although the Bank continually monitors and evaluates the potential impact of regulatory developments to assess the impact on our businesses and to implement any necessary changes, regulators and private parties may challenge our compliance. Failure to comply with legal and regulatory requirements may result in fines, penalties, litigation, regulatory sanctions, enforcement actions and limitations or prohibitions from engaging in business activities, all of which may negatively impact the Bank’s financial performance and its reputation. In addition, day-to-day compliance with existing laws and regulations has involved and will continue to involve significant resources, including requiring the Bank to take actions or incur greater costs than anticipated, which may negatively impact the Bank’s financial performance. Such changes could also adversely impact the Bank’s business strategies or limit its product or service offerings, or enhance the ability of the Bank’s competitors to offer their own products and services that rival the Bank’s. Regulators have also evidenced an increased focus on risks associated with conduct, privacy, model risk, and operational resilience. This focus could lead to more regulatory or other enforcement actions including for practices which may historically have been considered acceptable. Regulators across the Bank’s geographic footprint continue to focus on ensuring operational resilience of regulated firms and that consumers are protected. Regulatory environment experienced a shift away from regulatory forbearance to increased regulatory reporting obligations and information requests with respect to certain subjects, such as customer assistance programs, liquidity, trade reporting and market conduct.

The Bank continues to monitor and respond to global regulatory developments relating to a broad spectrum of topics, such that control and business units are responsive on a timely basis and business impacts, if any, are minimized.

For additional information on some of the key regulatory developments that have the potential of impacting the Bank’s operations, see “Regulatory Developments” on page 126.

Canadian household indebtedness

The COVID-19 pandemic has had disruptive effects in Canada including increased unemployment levels and changes to the macroeconomic environment. Volatility and unemployment levels have eased since the spike in Q2 2020 but continue to remain elevated. With the slowdown in economic activity, this has resulted in widespread job-related income losses, creating a challenging situation for many Canadian households, especially those that are highly indebted. While lower interest rates are reducing debt service costs, the recent housing price rebound, and high levels of unemployment continue to leave Canadian households vulnerable. The Bank proactively adjusts lending strategies across all markets and portfolios to reflect any change in risk profile, while considering government support programs available for temporary relief and customers enrolled in the Bank’s customer relief programs. Additional steps have been taken to expand collections capabilities to enable the Bank to support customers that are experiencing prolonged or acute financial distress. The Bank also performs stress tests considering these sensitivities and continues to enhance risk management capabilities through investments in technology and analytics.

Climate change

Climate change has the potential to impact the Bank’s Retail and Business Banking profitability through credit losses. Severe weather can damage Bank properties and disrupt operations. Emerging policy/regulatory actions on climate can elevate the Bank’s reputational, legal and regulatory compliance risks. There are also climate change and sustainable finance opportunities to invest in. For further details on the Bank’s Climate Change Strategy and actions taken, please refer to the Environmental risk section on page 116.

Model Risk

Model risk continues to receive increasing regulatory focus given growing adoption of analytics-driven insights across financial institutions. Regulatory guidelines for model risk set out expectations for the establishment of an enterprise-wide risk management framework, including policies and procedures to identify, assess and manage the risks inherent in any model. The Bank proactively monitors and manages the risks associated with the development and use of models. It has an enterprise-wide model risk management policy in place, supported by appropriate processes and procedures, that support the identification and management of material risks associated with models. The Bank also continues to enhance model risk governance practices, processes and controls to effectively monitor and mitigate risks.

Pandemic Risk

On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. Governments and regulatory bodies in affected areas have imposed a number of measures designed to contain the outbreak, including government-mandated social distancing measures, travel restrictions, quarantines, and stay at home directives. The breadth and depth of the impact of COVID-19 on the global economy and financial markets continues to evolve with disruptive effects in countries in which the Bank operates and the global economy. While some of the Government and Regulatory measures have been eased across regions and the economy has started to recover, subsequent spikes in the virus have caused some measures to be reinstated and future economic activity to be uncertain. COVID-19 continues to impact the Bank’s employees, customers and communities, impacting the Bank’s operations, financial results and present and future risks to the Bank’s businesses. The Bank is closely monitoring the potential effects and impact of the pandemic, which is an evolving situation.

The COVID-19 pandemic has had disruptive effects in Canada and other countries in which the Bank operates and the global economy more widely, as well as causing increased volatility and disruption in financial markets, interruption to supply chains, increased unemployment levels and changes to the macroeconomic environment. Volatility and unemployment levels have eased since the spike in Q2 2020, however, continue to remain elevated. The disruptive effects of the pandemic have contributed to economic slowdowns both domestically and globally, leading to lower GDP growth, and concerns about a prolonged Canadian recession and the sustainability of Canadian household indebtedness. For most industrialized economies, including Canada, economic activity is not expected to return to the 2019 levels until early 2022.

Governments and central banks around the world, including Canada, have taken, and are continuing to take, significant measures to provide economic assistance to individual households and businesses, stabilize the markets, and support economic growth. While many of these measures have been relaxed, the resurgence in the spread of COVID-19 has caused certain restrictions to be reimposed and the Bank’s participation directly or on behalf of customers and clients in these programs may face challenges, including increased risk of client disputes, negative publicity, exposure to litigation, or government and regulatory scrutiny, all of which could increase the Bank’s operational, legal and compliance costs and damage to its reputation. The effectiveness of these programs will depend on the duration and scale of COVID-19 and will vary by region and industry, with varying degrees of benefit to the Bank’s customers.

2020 Scotiabank Annual Report  |  89

Management’s Discussion and Analysis

In addition to the impact that the COVID-19 pandemic has on the Bank’s business, it may also continue to increase financial stress on the Bank’s customers. This could lead to increased pressure on our individual customers, as well as on the financial performance of the Bank’s small business, commercial and corporate clients in conjunction with operational constraints due to the impacts of social distancing, including but not limited to continued closures or reduced operating hours, lost sales opportunities and/or increased operating costs. A substantial amount of the Bank’s business involves making loans or otherwise committing resources to borrowers, including individuals, companies in various industries and governments. The COVID-19 pandemic’s impact on such borrowers could have significant adverse effects on the Bank’s financial results, businesses, financial condition or liquidity, including influencing the recognition of credit losses in our loan portfolios and increasing our allowance for credit losses, particularly if businesses remain closed or operate at reduced capacities and as more customers are expected to draw on their lines of credit or seek additional loans to help finance their businesses.

The COVID-19 pandemic has and may continue to result in disruptions to the Bank’s customers and the way in which the Bank conducts business. This includes the closure of certain branches, increased staff working off premise, and changes to operations due to higher volumes of client request, as well as disruptions to key suppliers of the Bank’s goods and services. Although the Bank has initiated work from home arrangements and restricted business travel of the Bank’s workforce, if significant portions of the Bank’s workforce, including key personnel, are unable to work effectively because of illness, government actions, or other restrictions in connection with the pandemic, the impact of the pandemic on the Bank’s businesses and operations could be exacerbated.

The Bank has put in place proactive measures to manage the heightened risks caused by COVID-19, including risks relating to privacy, third party, credit, and business continuity. There are Government Relief Programs and Bank relief measures in place to protect customers against adverse economic conditions caused by the Pandemic. Refer to the impact of COVID-19 section on page 25 for further details on the relief programs in place.

90  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Risk Management

Credit Risk

Credit risk is the risk of loss resulting from the failure of a borrower or counterparty to honour its financial or contractual obligations to the Bank. Credit risk arises in the Bank’s direct lending operations, and in its funding, investment and trading activities where counterparties have repayment or other obligations to the Bank.

Index of all credit risk disclosures

	Page		Tables and charts	Page
Credit risk summary		92
Credit Risk Management Framework
Risk measures		92
Corporate and commercial		92
Risk ratings		92
Adjudication		93
Credit Risk Mitigation-Collateral/Security		93
Traditional Non-Retail Products		93
Commercial/Corporate Real Estate		93
Traded products		94
Credit Risk Mitigation-Collateral/Security		94
Retail		94
Adjudication		94
Risk ratings		94
Credit Risk Mitigation-Collateral/Security		94
Credit Quality		95	T3 Financial highlights		23
Allowance for credit losses		96	T12 Provision for credit losses as a percentage of average loans and acceptances		34
Impaired loans		97	T13 Net charge-offs as a percentage of average loans and acceptances		34
			T65 Gross impaired loans by geographic segment		131
			T66 Provision against impaired financial instruments by geographic segment		131
			T67 Cross-border exposure to select countries		131
			T68 Loans and acceptances by type of borrower		132
			T69 Off-balance sheet credit instruments		132
			T70 Changes in net impaired loans		133
			T71 Provision for credit losses		133
			T72 Provision for credit losses against impaired financial instruments by type of borrower		134
			T73 Impaired loans by type of borrower		134
			T74 Total credit risk exposures by geography		135
			T75 AIRB credit risk exposures by maturity		135
			T76 Total credit risk exposures and risk-weighted assets		136
			Analysis of the aggregate credit risk exposure including market risk exposure, assets of the Bank’s insurance subsidiaries and other assets that fully reconciles to the balance sheet (refer Note 36 – Financial instruments – risk management in the consolidated financial statements)		235
Portfolio review		97
Risk diversification		98	C27 Well diversified in Canada and internationally – loans and acceptances		98
			C28 and in household and business lending – loans and acceptances		98
			T64 Loans and acceptances by geography		130
Risk mitigation		98
Real estate secured lending		98	T49 Bank’s exposure distribution by country		100
Loans to Canadian condominium developers		100
European exposures		100
Financial instruments		76	T40 Mortgage-backed securities		77

2020 Scotiabank Annual Report  |  91

Management’s Discussion and Analysis

Credit risk summary

• The Bank’s overall loan book as of October 31, 2020 increased to $625 billion versus $611 billion as of October 31, 2019, with growth reflected in Personal, and Business and Government lending. Residential mortgages were $285 billion as of October 31, 2020, with 86% in Canada. The corporate loan book, which accounts for 37% of the total loan book, is composed of 55% of loans with an investment grade rating as of October 31, 2020, unchanged from October 31, 2019.

• Loans and acceptances (Retail and Non-Retail) remained diversified by region, industry and customer. Regional exposure is spread across our key markets (Canada 66%, United States 7%, Chile 8%, Mexico 5% and Other 14%). Financial Services constitutes 4.8% of overall gross exposures (before consideration of collateral) and was $30 billion, an increase of $4 billion from October 31, 2019. These exposures are predominately to highly rated counterparties and are generally collateralized.

The effective management of credit risk requires the establishment of an appropriate risk culture. Key credit risk policies and appetite statements are important elements used to create this culture.

The Board of Directors, either directly or through the Risk Committee (the Board), reviews and approves the Bank’s Credit Risk Appetite limits annually and Credit Risk Policy limits biennially.

• The objectives of the Credit Risk Appetite are to ensure that:

– target markets and product offerings are well defined at both the enterprise-wide and business line levels;

– the risk parameters for new underwritings and for the portfolios as a whole are clearly specified; and

– transactions, including origination, syndication, loan sales and hedging, are managed in a manner that is consistent with the Bank’s risk appetite.

• The Credit Risk Policy articulates the credit risk management framework, including:

– key credit risk management principles;

– delegation of authority;

– the credit risk management program;

– counterparty credit risk management for trading and investment activities; and

– aggregate limits, beyond which credit applications must be escalated to the Board for approval.

GRM develops the credit risk management framework and policies that detail, among other things, the credit risk rating systems and associated parameter estimates; the delegation of authority for granting credit; the calculation of the allowance for credit losses; and the authorization of write-offs.

Corporate and commercial credit exposures are segmented by country and by major industry group. Aggregate credit risk limits for each of these segments are also reviewed and approved annually by the Board. Portfolio management objectives and risk diversification are key factors in setting these limits.

Consistent with the Board-approved limits, borrower limits are set within the context of established lending criteria and guidelines for individual borrowers, particular industries, countries and certain types of lending, to ensure the Bank does not have excessive concentration in any single borrower, or related group of borrowers, particular industry sector or geographic region. Through the portfolio management process, loans may be syndicated to reduce overall exposure to a single name. For certain segments of the portfolio, credit derivative contracts are also used to mitigate the risk of loss due to borrower default. Risk is also mitigated through the selective sale of loans.

Banking units and GRM regularly review the various segments of the credit portfolio on an enterprise-wide basis to assess the impact of economic trends or specific events on the performance of the portfolio, and to determine whether corrective action is required. These reviews include the examination of the risk factors for particular products, industries and countries. The results of these reviews are reported to the Risk Policy Committee and, when significant, to the Board.

Risk measures

The credit risk rating systems support the determination of key credit risk parameter estimates which measure credit and transaction risk. These risk parameters – probability of default, loss given default and exposure at default are transparent and may be replicated in order to provide accuracy and consistency of credit adjudication, as well as minimum lending standards for each of the risk rating categories. The parameters are an integral part of enterprise-wide policies and procedures encompassing governance, risk management, and control structure, and are used in various internal and regulatory credit risk quantification calculations.

The Bank’s credit risk rating system is subject to a rigorous validation, governance and oversight framework. The objectives of this framework are to ensure that:

• Credit risk rating methodologies and parameters are appropriately designed and developed, independently validated, and regularly reviewed; and

• The review and validation processes represent an effective challenge to the design and development process.

Non-retail credit risk rating methodologies and parameters are reviewed and validated at least annually. Units within GRM are responsible for design and development, validation and review, and are functionally independent from the business units responsible for originating transactions. Within GRM, they are also independent from the units involved in risk rating approval and credit adjudication.

Internal credit risk ratings and associated risk parameters affect lending decisions, loan pricing, computation of the collective allowance for credit losses, and return on equity.

Corporate and commercial

Corporate and commercial credit exposure arises in the Bank’s business lines.

Risk ratings

The Bank’s risk rating system utilizes internal grade (IG) ratings – an 18 point scale used to differentiate the risk of default of borrowers, and the risk of loss on facilities. The general relationship between the Bank’s IG ratings and external agency ratings is shown in table T32.

92  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Risk Management

IG ratings are also used to define credit adjudication authority levels appropriate to the size and risk of each credit application. Lower-rated credits require increasingly more senior management involvement depending upon the aggregate exposure. Where the decision is beyond their authority levels, credit units will refer the request – with its recommendation – to a senior credit committee for adjudication. In certain cases, these must be referred to the Risk Committee of the Board of Directors.

Adjudication

Credit adjudication units within GRM analyze and evaluate all significant credit requests for corporate and commercial credit exposures, to ensure that risks are adequately assessed, properly approved, continually monitored and actively managed. The decision-making process begins with an assessment of the credit risk of the individual borrower or counterparty. Key factors considered in the assessment include:

• The borrower’s management;

• The borrower’s current and projected financial results and credit statistics;

• The industry in which the borrower operates;

• Economic trends; and

• Geopolitical risk.

Based on this assessment, a risk rating is assigned to the individual borrower or counterparty, using the Bank’s risk rating systems.

A separate risk rating is also assigned at the facility level, taking into consideration additional factors, such as security, seniority of claim, structure, term and any other forms of credit risk mitigation that affect the amount of potential loss in the event of a default of the facility. Security typically takes the form of charges over inventory, receivables, real estate, and operating assets when lending to corporate and commercial borrowers; and cash or treasuries for trading lines such as securities lending, repurchase transactions, and derivatives. The types of acceptable collateral, and related valuation processes are documented in risk management policies and manuals.

Other forms of credit risk mitigation include third party guarantees and, in the case of derivatives facilities, master netting agreements.

Internal borrower and facility risk ratings are assigned when a facility is first authorized, and are promptly re-evaluated and adjusted, if necessary, as a result of changes to the customer’s financial condition or business prospects. Re-evaluation is an ongoing process, and is done in the context of general economic changes, specific industry prospects, and event risks, such as revised financial projections, interim financial results and extraordinary announcements.

The internal credit risk ratings are also considered as part of the Bank’s adjudication limits, as guidelines for hold levels are tied to different risk ratings. Single borrower limits are much lower for higher risk borrowers than low risk borrowers.

The credit adjudication process also uses a risk-adjusted return on equity profitability model to ensure that the client and transaction structure offers an appropriate return for a given level of risk. For the corporate portfolio, and the large borrowers in International, the Loan Portfolio Management Group reviews the profitability model results, together with external benchmarks, and provides an opinion on the relative return and pricing of each transaction above a minimum threshold.

Individual credit exposures are regularly monitored by both the business line units and GRM for any signs of deterioration. In addition, the business line units and GRM conduct a review and risk analysis of each borrower annually, or more frequently for higher-risk borrowers. If, in the judgement of management, an account requires the expertise of specialists in workouts and restructurings, it will be transferred to a special accounts group for monitoring and resolution.

Credit Risk Mitigation – Collateral/Security

Traditional Non-retail Products (e.g. Operating lines of Credit, Term Loans)

Collateral values are accurately identified at the outset and throughout the tenure of a transaction by using standard evaluation methodologies. Collateral valuation estimates are conducted at a frequency that is appropriate to the frequency by which the market value fluctuates, using the collateral type and the borrower risk profile.

In addition, when it is not cost effective to monitor highly volatile collateral (e.g. accounts receivable, inventory), appropriate lending margins are applied to compensate (e.g. accounts receivable are capped at 80% of value, inventory at 50%). The frequency of collateral valuations is also increased when early warning signals of a borrower’s deteriorating financial condition are identified.

Borrowers are required to confirm adherence to covenants including confirmation of collateral values on a periodic basis, which are used by the Bank to provide early warning signals of collateral value deterioration. Periodic inspections of physical collateral are performed where appropriate and where reasonable means of doing so are available.

Bank procedures require verification including certification by banking officers during initial, annual, and periodic reviews, that collateral values/margins/etc. have been assessed and, where necessary, steps have been taken to mitigate any decreased collateral values.

The Bank does not use automated valuation models (AVMs) for valuation purposes for traditional non-retail products. GRM performs its own valuations of companies based on various factors such as book value, discounted book value, enterprise value etc.

Commercial/Corporate Real Estate

New or updated appraisals are generally obtained at inception of a new facility, as well as during loan modifications, loan workouts and troubled debt restructure. The primary reason for requiring a new appraisal is if, in the reasonable opinion of the banking execution unit, or GRM, there has been a material change in value. Additionally, none of the appraisal guidelines contained within the policies should dissuade the Bank from requesting an appraisal more frequently if an adverse change in market conditions, sponsorship, credit worthiness, or other underwriting assumptions is realized or expected.

Appraisals must be in writing and must contain sufficient information and analysis to support the Bank’s decision to make the loan. Moreover, in rendering an opinion of the property’s market value, third party appraisers are responsible for establishing the scope of work necessary to develop credible assignment results. The appraisal must meet the regulatory and industry requirements which, depending on the type of property being appraised, contain any or all of the following three approaches to value:

i. comparable sales approach

ii. replacement cost approach

iii. income approach

2020 Scotiabank Annual Report  |  93

Management’s Discussion and Analysis

The appraiser must disclose the rationale for the omission of any valuation approach. Furthermore, the appraiser must disclose whether the subject property was physically inspected and whether anyone provided significant assistance to the person signing the appraisal report. The report must contain a presentation and explanation of the assumptions used in determining value under each of the above mentioned approaches.

Review of every appraisal is conducted by the banking units and GRM to confirm that the appraisal identifies all of the relevant issues for the specific asset class, location and economic environment and incorporates all appropriate valuation methodologies and assumptions. In most cases, the banking units also include comparable properties in addition to what is included in the appraisal to further justify value.

When third party assessors are used, they must be accredited and satisfactory to the Bank. In addition, GRM validates any third party valuations via internal desktop estimates either based on comparables or discounted income valuations.

Traded products

Traded products are transactions such as OTC derivatives (including foreign exchange and commodity based transactions), Securities Financing Transactions (including repurchase/reverse repurchase agreements, and securities lending/borrowing), and on-exchange futures. Credit risks arising from traded products cannot be determined with certainty at the outset, because during the tenure of a transaction the dollar value of the counterparty’s obligation to the Bank will be affected by changes in the capital markets (such as changes in stock prices, interest rates, and exchange rates). The Bank adjudicates credit exposures arising from transacting in traded products by considering their current fair value plus an additional component to reflect potential future changes in their mark-to-market value. The credit adjudication process also includes an evaluation of potential wrong-way risk, which arises when the exposure to a counterparty is positively correlated to the probability of default of that counterparty.

Credit risk associated with traded products is managed within the same credit adjudication process as the lending business. The Bank considers the credit risk arising from lending activities, as well as the potential credit risk arising from transacting in traded products with that counterparty.

Credit risk mitigation – collateral/security

Derivatives are generally transacted under industry standard International Swaps and Derivatives Association (ISDA) master netting agreements, which allow for a single net settlement of all transactions covered by that agreement in the event of a default or early termination of the transactions. ISDA agreements are frequently accompanied by an ISDA Credit Support Annex (CSA), the terms of which may vary according to each party’s view of the other party’s creditworthiness. CSAs and regulation in some jurisdictions can require both parties to post initial margin (regulatory and non-regulatory). CSAs also allow for variation margin to be called if total uncollateralized mark-to-market exposure exceeds an agreed upon threshold. Such variation margin provisions can be one-way (only one party will ever post collateral) or bilateral (either party may post depending upon which party is in-the-money). The CSA will also detail the types of collateral that are acceptable to each party, and the haircuts that will be applied against each collateral type. The terms of the ISDA master netting agreements and CSAs are taken into consideration in the calculation of counterparty credit risk exposure.

For derivative transactions, investment grade counterparties account for approximately 79% of the credit risk. Approximately 23% of the Bank’s derivative counterparty exposures are to bank counterparties. After taking into consideration, where applicable, netting and collateral arrangements, no net credit risk amount arising from traded products transactions with any single counterparty was considered material to the financial position of the Bank as at October 31, 2020. No individual exposure to an investment grade bilateral counterparty exceeded $1,181 million and no individual exposure to a corporate counterparty exceeded $420 million.

Retail

Retail credit exposures arise in the Canadian Banking and International Banking business lines.

Adjudication

The decision-making process for retail loans ensures that credit risks are adequately assessed, properly approved, continually monitored and actively managed. Generally, credit decisions on consumer loans are processed by proprietary adjudication software and are based on risk ratings, which are generated using predictive credit scoring models.

The Bank’s credit adjudication and portfolio management methodologies are designed to ensure consistent underwriting and early identification of problem loans in line with our risk appetite. The Bank’s rigorous credit underwriting and retail risk modeling methodologies are more customer focused than product focused. The Bank’s view is that a customer-centric approach provides better risk assessment than product-based approaches, a more consistent experience to the customer, and should result in lower loan losses over time.

All credit scoring and policy changes are initiated by units within GRM that are functionally independent from the business units responsible for retail portfolios. Risk models and parameters are also subject to independent validation and review from the units involved in the design and development of models. The review process includes referral to the appropriate Senior Credit Committee for approval, where required. Consumer credit portfolios are reviewed at least monthly to identify emerging trends in loan quality and to assess whether corrective action is required.

Risk ratings

The Bank’s consumer risk rating systems are oriented to borrower or transaction risk. Each retail exposure is assigned a risk grade based on the customer’s credit history and/or internal credit score. The Bank’s automated risk rating systems assess the ongoing credit-worthiness of individual customers on a monthly basis. This process provides for meaningful and timely identification and management of problem loans.

The risk rating system under the AIRB approach is subject to regular review and ongoing performance monitoring of key components. Risk model validations are conducted independently from the areas responsible for rating system development and implementation, to ensure effective independence in design and performance review.

Customer behavior characteristics which are used as inputs within the Bank’s Basel III AIRB models are consistent with those used by the Bank’s Canadian consumer risk rating systems. The International portfolios are subject to the Standardized approach at this time.

Credit risk mitigation – collateral/security

The property values for residential real estate secured exposures are confirmed at origination through a variety of validation methodologies, including AVM and full appraisal’s (in-person inspection). The appraisal is completed by a third party, Bank approved appraiser. For monitoring of material portfolios, property values are indexed quarterly to house prices. For loan impairment within material portfolios, residential property values are re-confirmed using third party AVM’s.

94  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Risk Management

Where AVM values are used, these AVM values are subject to routine validation through a continuous random sampling process that back-tests AVM values against available property appraisals (primarily third party AVMs). Where third party appraisals are obtained, the Bank relies on the professional industry accreditation of the appraiser. Samples of approved appraisal reports are reviewed by the Bank’s senior appraisers to ensure consistent appraisal quality and satisfactory appraisal values. The third party appraisers are selected from a pre-approved list of Bank-vetted appraisers.

Credit Quality

Impact of COVID-19

The COVID-19 pandemic’s significant impact to economies around the world, with regions in different stages of lockdown and re-opening, resulted in continued uncertainty on timing of recovery. This required additional considerations to determine the allowance for credit losses this year.

IFRS 9 requires the consideration of past events, current conditions and reasonable and supportable forward-looking information over the life of the exposure to measure expected credit losses. Furthermore, to assess significant increase in credit risk, the Standard requires that entities assess changes in the risk of a default occurring over the expected life of a financial instrument when determining staging. The IASB and global regulators issued guidance for entities, consistent with IFRS 9, to consider the exceptional circumstances of the COVID-19 pandemic. This includes consideration of significant government support and the high degree of uncertainty around historical long-term economic trends used in determining reasonable and supportable forward-looking information.

The Bank’s models are calibrated to consider past performance and macroeconomic forward-looking variables as inputs as further described below. Expert credit judgement is applied to consider the exceptional circumstances this period, including consideration of the significant government assistance programs, both domestically and internationally, in the assessment of underlying credit deterioration and migration of balances to progressive stages.

Consistent with requirements of IFRS 9, the Bank considered both quantitative and qualitative information in the assessment of significant increase in risk. First time utilization of a payment deferral program was not considered an immediate trigger, in keeping with IASB and regulatory guidance, for an account to migrate to a progressive stage, given the purpose of these programs is to provide temporary cashflow relief to the Bank’s customers. Early observations of payment behaviour of expiries for this year were considered in the assessment of the longer-term probability of the customers’ ability to pay, a key input in determining migration.

The Bank has generated a forward-looking base case scenario and three alternate forward-looking scenarios (one optimistic and two pessimistic scenarios) as key inputs into the expected credit loss provisioning models. In these scenarios the Bank considered recovery time periods ranging from more immediate (V shape), mid-term (W shape) to longer-term (L shape) periods. This year, the Bank increased the weight of the pessimistic scenarios in calculating the allowance for credit losses. The pessimistic scenario features a W-shaped recovery with a delay to the re-opening of the economy, which results in a deeper contraction in 2020 with growth rebounding in 2021. The more severe pessimistic front loaded scenario, with an L-shaped recovery, sees continued contraction into the first half of 2021 before availability of a vaccine, leading to contraction across all markets in 2020 and 2021.

The base case scenario expects the overall economy to trace a gradual V shape recovery, even though growth and employment in individual industries are expected to show considerable heterogeneity. While some industries are expected to fully recover over the course of the next few quarters, others are expected to languish below the pre-pandemic levels. This industry-level pattern of activity is referred to as a K-shaped recovery, and while not explicitly simulated in the base case scenario, it is incorporated through the consideration of significant increase in risk through expert credit judgement.

The table below shows a comparison of projections for the next 12 months, as at October 31, 2020, and October 31, 2019, of select macroeconomic variables that impact the expected credit loss calculations (see page 200 for all key variables):

T42  Select macroeconomic variable projections

	Base Case Scenario				Alternative Scenario - Optimistic				Alternative Scenario - Pessimistic				Alternative Scenario - Pessimistic Front Loaded
Next 12 months	As at October 31 2020		As at October 31 2019		As at October 31 2020		As at October 31 2019		As at October 31 2020		As at October 31 2019		As at October 31 2020(1)		As at October 31 2019
Canada
Real GDP growth, y/y % change		3.1		1.9		4.7		2.4		-2.0		1.3		-10.8		n/a
Unemployment rate, average %		7.3		5.8		6.7		5.6		9.9		6.1		14.1		n/a
US
Real GDP growth, y/y % change		2.5		1.8		3.6		2.3		-0.5		1.4		-7.4		n/a
Unemployment rate, average %		6.3		3.9		6.1		3.7		8.1		4.0		10.5		n/a
Global
WTI oil price, average USD/bbl		48		54		52		56		42		53		37		n/a

(1) Scenario added in Q1, 2020

2020 Scotiabank Annual Report  |  95

Management’s Discussion and Analysis

The table below shows a quarterly breakdown of the projections for the above macroeconomic variables, as at October 31, 2020 and October 31, 2019, under the base case scenario:

T43  Quarterly breakdown of macroeconomic variables

	Base Case Scenario
	Calendar Quarters								Average October 31 2020		Calendar Quarters								Average* October 31 2019
Next 12 months	Q4 2020		Q1 2021		Q2 2021		Q3 2021				Q4 2019		Q1 2020		Q2 2020		Q3 2020
Canada
Real GDP growth, y/y % change		-3.9		-0.4		12.9		3.7		3.1		1.8		2.3		1.8		1.8		1.9
Unemployment rate, average %		8.1		7.1		6.9		6.9		7.3		5.8		5.9		5.9		5.9		5.8
US
Real GDP growth, y/y % change		-3.7		-1.1		9.9		4.8		2.5		2.1		1.7		1.5		1.3		1.8
Unemployment rate, average %		7.7		6.6		5.8		5.4		6.3		3.9		3.9		4.0		4.0		3.9
Global
WTI oil price, average USD/bbl		45		48		50		51		48		56		53		54		56		54

* Average for October 31, 2019 computed over 2019Q3 – 2020Q2.

T44  Allowance for credit losses by business line

As at October 31 ($ millions)	2020		2019
Canadian Banking
Retail	$	2,051	$	1,342
Commercial		558		253
	$	2,609	$	1,595
International Banking
Retail
Caribbean	$	716	$	576
Mexico		576		413
Peru		1,242		654
Chile		584		533
Colombia		638		405
Other		106		77
Commercial		860		715
	$	4,722	$	3,373
Global Wealth Management	$	19	$	5
Global Banking and Markets	$	289	$	104
Allowance for credit losses on loans	$	7,639	$	5,077
Allowance for credit losses on:
Acceptances	$	77	$	6
Off-balance sheet exposures		101		56
Debt securities and deposits with financial institutions		3		6
Total Allowance for credit losses	$	7,820	$	5,145

Allowance for credit losses

The Bank revised its allowance for credit losses (ACL) methodology in Q1, 2020, by adding an additional, more severe pessimistic forward-looking scenario. In periods prior to Q1, 2020, the Bank determined its ACL using three probability-weighted forward-looking scenarios. The base case represents the most likely outcome and the other scenarios represent more optimistic and pessimistic outcomes, to which probabilities are assigned.

The total allowance for credit losses as at October 31, 2020 was $7,820 million. The allowance for credit losses for loans was $7,639 million, up $2,562 million from October 31, 2019. The increase was due primarily to higher retail and commercial loan provision for performing loans.

The allowance for credit loss on impaired loans increased to $1,957 million from $1,595 million as at October 31, 2019 due primarily to higher provisions in International Retail. Allowances for impaired loans in Canadian Banking increased by $112 million to $475 million, due primarily to higher retail and commercial loan provisions. In International Banking, allowances for impaired loans increased by $222 million to $1,413 million, primarily in the retail portfolio. In Global Banking and Markets, allowances for impaired loans increased by $24 million to $61 million, due primarily to new formations in the energy sector.

The allowance for credit loss against performing loans was higher at $5,682 million compared to $3,482 million as at October 31, 2019. The increase was due primarily to higher retail and commercial loan provisions driven by the unfavourable macroeconomic outlook related mainly to higher unemployment, lower GDP, unfavourable economic conditions, and their estimated future impact on credit migration.

96  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Risk Management

T45  Impaired loans by business line

	2020						2019
As at October 31 ($ millions)	Gross impaired loans		Allowance for credit losses		Net impaired loans		Gross impaired loans		Allowance for credit losses		Net impaired loans
Canadian Banking
Retail	$	707	$	326	$	381	$	878	$	265	$	613
Commercial		342		149		193		209		98		111
	$	1,049	$	475	$	574	$	1,087	$	363	$	724
International Banking
Caribbean and Central America	$	878	$	254	$	624	$	1,197	$	265	$	932
Latin America
Mexico		570		222		348		485		178		307
Peru		824		498		326		642		332		310
Chile		775		233		542		844		180		664
Colombia		459		102		357		505		151		354
Other Latin America		170		104		66		128		85		43
Total Latin America		2,798		1,159		1,639		2,604		926		1,678
	$	3,676	$	1,413	$	2,263	$	3,801	$	1,191	$	2,610
Global Wealth Management	$	26	$	8	$	18	$	10	$	4	$	6
Global Banking and Markets
Canada	$	57	$	5	$	52	$	41	$	8	$	33
U.S.		116		4		112		94		5		89
Asia and Europe		129		52		77		102		24		78
	$	302	$	61	$	241	$	237	$	37	$	200
Totals	$	5,053	$	1,957	$	3,096	$	5,135	$	1,595	$	3,540

Impaired loan metrics

	Net impaired loans
As at October 31 ($ millions)	2020			2019
Net impaired loans as a % of loans and acceptances		0.50	%		0.58	%
Allowance against impaired loans as a % of gross impaired loans		39	%		31	%

Impaired loans

Gross impaired loans decreased to $5,053 million as at October 31, 2020, from $5,135 million last year. Impaired loans in Canadian Banking decreased by $38 million, due primarily to lower new formations in retail banking. In International Banking, impaired loans decreased by $125 million, mainly driven by lower delinquency and credit migration in retail portfolio, partially offset by new formations in the commercial portfolio. Impaired loans in Global Banking and Markets increased by $65 million, driven by new formations primarily in the energy sector. Impaired loans in Global Wealth Management increased by $16 million from last year.

Net impaired loans, after deducting the allowance for credit losses, were $3,096 million as at October 31, 2020, a decrease of $444 million from a year ago. Net impaired loans as a percentage of loans and acceptances were 0.50% as at October 31, 2020, a decrease of eight basis points from 0.58% a year ago.

Portfolio review

Canadian Banking

Gross impaired loans in the retail portfolio decreased by $171 million or 19% from last year, due primarily to lower delinquency and credit migration due to payment deferrals. The allowance for credit losses on impaired loans in the retail portfolio was $326 million, up $61 million or 23% from last year.

In the commercial loan portfolio, gross impaired loans increased by $133 million to $342 million, due to new formations partially offset by write-offs. The allowance for credit losses on impaired loans was $149 million, up $51 million or 52% from last year due primarily to new provisions related to new formations.

International Banking

In the retail portfolio, gross impaired loans decreased by $247 million to $1,799 million, due primarily to lower delinquency and credit migration due to payment deferrals. The allowance for credit losses on impaired loans in the retail portfolio was $883 million, increased by $232 million or 36% from last year, driven in part due to timing of write offs.

In the commercial portfolio, gross impaired loans were $1,877 million, an increase of $122 million over the last year, due primarily to new formations partially offset by write-offs. The allowance for credit losses on impaired loans was $530 million, decreased by $10 million or 2% from last year.

Global Wealth Management

Gross impaired loans in Global Wealth Management increased by $16 million to $26 million. The allowance for credit losses on impaired loans was $8 million, increased by $4 million from last year.

2020 Scotiabank Annual Report  |  97

Management’s Discussion and Analysis

Global Banking and Markets

Gross impaired loans in Global Banking and Markets increased by $65 million to $302 million, driven by new formations primarily in the energy sector partially offset by write-offs. The allowance for credit losses on impaired loans was $61 million, increased by $24 million or 65% from last year due primarily to new provisions related to new formations.

Risk diversification

The Bank’s exposure to various countries and types of borrowers are well diversified (see T64 and T68). Chart C27 shows loans and acceptances by geography. Ontario represents the largest Canadian exposure at 35% of the total. Latin America was 20% of the total exposure and the U.S. was 7%.

Chart C28 shows loans and acceptances by type of borrower (see T68). Excluding loans to households, the largest industry exposures were financial services (4.8% including banks and non-banks), real estate and construction (6.0%), wholesale and retail (4.2%), and technology and media (2.7%).

Risk mitigation

To mitigate exposures in its performing corporate portfolios, the Bank uses diversification by company, industry, and country, with loan sales and credit derivatives used sparingly. In 2020, loan sales totaled $724 million, compared to $8 million in 2019. The largest volume of loan sales in 2020 related to loans in the utilities industry. As at October 31, 2020, no credit derivatives were used to mitigate exposures in the portfolios down from October 31, 2019 ($13 million). The Bank actively monitors industry and country concentrations. As is the case with all industry exposures, the Bank continues to closely follow developing trends and takes additional steps to mitigate risk as warranted.

Overview of loan portfolio

The Bank has a well-diversified portfolio by product, business and geography. Details of certain portfolios of current focus are highlighted below.

Energy

The Bank’s outstanding loan exposure to commercial and corporate companies in the Energy sector was $16.4 billion as at October 31, 2020 (October 31, 2019 – $16.6 billion), reflecting approximately 2.6% (October 31, 2019 – 2.7%) of the Bank’s total loan portfolio, of which $8.5 billion is related to oil field services and exploration and production. In addition, the Bank has related undrawn Energy loan commitments of $13.5 billion as at October 31, 2020 (October 31, 2019 – $13.4 billion). The Bank has recorded credit losses on impaired loans of $104 million or 0.64% of outstanding loan exposure relating to the Energy sector during the year. Approximately 51% of the Bank’s outstanding Energy loan exposure is investment grade. Management’s focus pertains to non-investment grade accounts in the upstream and oil fields services subsectors. The Bank continues to consider the impact of lower Energy prices in its ongoing stress testing program.

Real estate secured lending

A large portion of the Bank’s lending portfolio is comprised of residential mortgages and consumer loans, which are well diversified by borrower. As at October 31, 2020, these loans accounted for $393 billion or 63% of the Bank’s total loans and acceptances outstanding (October 31, 2019 – $385 billion or 63%). Of these, $306 billion or 78% are real estate secured loans (October 31, 2019 – $289 billion or 75%). The tables below provide more details by portfolios.

C27 Well diversified in Canada and internationally... loans and acceptances, October 2020

C28 …and in household and business lending loans and acceptances, October 2020

98  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Risk Management

Insured and uninsured residential mortgages and home equity lines of credit

The following table presents amounts of insured and uninsured residential mortgages and home equity lines of credit (HELOCs), by geographic area.

T46  Insured and uninsured residential mortgages and HELOCs, by geographic areas

	2020
	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	$	5,779		2.3		$	5,327		2.2		$	11,106		4.5		$	–		–		$	1,109		5.3		$	1,109		5.3
Quebec		8,444		3.5			8,431		3.4			16,875		6.9			–		–			957		4.6			957		4.6
Ontario		41,574		17.0			87,480		35.7			129,054		52.7			–		–			11,506		54.8			11,506		54.8
Manitoba & Saskatchewan		5,658		2.3			4,124		1.7			9,782		4.0			–		–			716		3.4			716		3.4
Alberta		18,458		7.5			12,935		5.3			31,393		12.8			1		–			2,794		13.3			2,795		13.3
British Columbia & Territories		13,771		5.6			33,063		13.5			46,834		19.1			–		–			3,896		18.6			3,896		18.6
Canada(3)	$	93,684		38.2	%	$	151,360		61.8	%	$	245,044		100	%	$	1		–	%	$	20,978		100	%	$	20,979		100	%
International		–		–			39,640		100			39,640		100			–		–			–		–			–		–
Total	$	93,684		32.9	%	$	191,000		67.1	%	$	284,684		100	%	$	1		–	%	$	20,978		100	%	$	20,979		100	%
	2019
Canada(3)	$	87,905		38.8	%	$	138,704		61.2	%	$	226,609		100	%	$	1		–	%	$	21,034		100	%	$	21,035		100	%
International		–		–			41,560		100			41,560		100			–		–			–		–			–		–
Total	$	87,905		32.8	%	$	180,264		67.2	%	$	268,169		100	%	$	1		–	%	$	21,034		100	%	$	21,035		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 $3,671 (October 31, 2019 – $3,365) of which $2,630 are insured (October 31, 2019 – $2,424).

Amortization period ranges for residential mortgages

The following table presents the distribution of residential mortgages by remaining amortization periods, and by geographic areas.

T47  Distribution of residential mortgages by remaining amortization periods, and by geographic areas

	2020
	Residential mortgages by remaining amortization periods
As at October 31	Less than 20 years			20-24 years			25-29 years			30-34 years			35 years and greater			Total residential mortgage
Canada		33.5	%		37.5	%		27.6	%		1.2	%		0.2	%		100	%
International		64.9	%		17.4	%		14.4	%		3.2	%		0.1	%		100	%
	2019
Canada		33.7	%		38.4	%		26.8	%		1.0	%		0.1	%		100	%
International		65.9	%		17.3	%		13.7	%		3.0	%		0.1	%		100	%

Loan to value ratios

The Canadian residential mortgage portfolio is 62% uninsured (October 31, 2019 – 61%). The average loan-to-value (LTV) ratio of the uninsured portfolio is 52% (October 31, 2019 – 55%).

The following table presents the weighted average LTV ratio for total newly originated uninsured residential mortgages and home equity lines of credit during the year, which include mortgages for purchases, refinances with a request for additional funds and transfers from other financial institutions, by geographic areas.

T48  Loan to value ratios

		Uninsured LTV ratios(1)
		For the year ended October 31, 2020
	Residential mortgages LTV%			Home equity lines of credit(2) LTV%
Canada:
Atlantic provinces		67.0	%		63.8	%
Quebec		67.4			72.3
Ontario		64.1			63.1
Manitoba & Saskatchewan		68.6			61.9
Alberta		66.9			74.0
British Columbia & Territories		64.1			63.3
Canada		64.6	%		64.2	%
International		73.2	%		n/a
		For the year ended October 31, 2019
Canada		64.5	%		63.0	%
International		71.4	%		n/a

(1) The province represents the location of the property in Canada.

(2) Includes all HELOCs. For Scotia Total Equity Plan HELOC’s, LTV is calculated based on the sum of residential mortgages and the authorized limit for related HELOCs, divided by the value of the related residential property, and presented on a weighted average basis for newly originated mortgages and HELOCs.

2020 Scotiabank Annual Report  |  99

Management’s Discussion and Analysis

Potential impact on residential mortgages and real estate home equity lines of credit in the event of an economic downturn

The Bank undertakes regular stress testing of its mortgage book to determine the impact of various combinations of home price declines and unemployment increases. Those results continue to show that credit losses and impacts on capital ratios are within a level the Bank considers manageable. In addition, the Bank has undertaken extensive all-Bank scenario analyses to assess the impact to the enterprise of different scenarios related to COVID-19 and is confident that it has the financial resources to withstand even a very negative outlook. In practice, the mortgage portfolio is robust to such scenarios due to the low LTV of the book, the high proportion of insured exposures and the diversified composition of the portfolio.

Loans to Canadian condominium developers

With respect to loans to Canadian condominium developers, the Bank had loans outstanding of $1,447 million as at October 31, 2020 (October 31, 2019 – $1,461 million). This is a high quality portfolio with well-known developers who have long-term relationships with the Bank.

European exposures

The Bank believes that its European exposures are manageable, are sized appropriately relative to the credit worthiness of the counterparties (91% of the exposures are to investment grade counterparties based on a combination of internal and external ratings), and are modest relative to the capital levels of the Bank. The Bank’s European exposures are certified at amortized cost or fair value using observable inputs, with negligible amounts valued using models with unobservable inputs (Level 3). There were no significant events during the year that materially impacted the Bank’s exposures.

The Bank’s exposure to sovereigns was $12.6 billion as at October 31, 2020 (October 31, 2019 – $6.7 billion), $4.4 billion to banks (October 31, 2019 – $6.5 billion) and $14.6 billion to corporates (October 31, 2019 – $18.4 billion).

In addition to exposures detailed in the table below, the Bank had indirect exposures consisting of securities exposures to non-European entities whose parent company is domiciled in Europe of $0.3 billion as at October 31, 2020 (October 31, 2019 – $0.5 billion).

The Bank’s current European exposure is distributed as follows:

T49  Bank’s exposure distribution by country

As at October 31	2020															2019
($ millions)	Loans and loan equivalents(1)		Deposits with financial institutions		Securities(2)			SFT and derivatives(3)		Funded Total		Undrawn Commitments(4)		Total		Total
Greece	$	–	$	–	$	–		$	–	$	–	$	–	$	–	$	54
Ireland		1,412		558		(33	)		217		2,154		454		2,608		2,760
Italy		113		–		(3	)		9		119		203		322		167
Portugal		–		–		–			3		3		–		3		17
Spain		959		1		77			60		1,097		293		1,390		1,564
Total GIIPS	$	2,484	$	559	$	41		$	289	$	3,373	$	950	$	4,323	$	4,562
U.K.	$	6,825	$	5,819	$	1,022		$	2,305	$	15,971	$	14,801	$	30,772	$	23,830
Germany		581		282		1,852			32		2,747		812		3,559		3,202
France		1,206		93		923			171		2,393		1,775		4,168		3,193
Netherlands		643		120		1,005			295		2,063		1,043		3,106		3,301
Switzerland		769		17		(11	)		167		942		1,076		2,018		1,910
Other		1,399		159		2,113			505		4,176		2,209		6,385		7,196
Total Non-GIIPS	$	11,423	$	6,490	$	6,904		$	3,475	$	28,292	$	21,716	$	50,008	$	42,632
Total Europe	$	13,907	$	7,049	$	6,945		$	3,764	$	31,665	$	22,666	$	54,331	$	47,194
As at October 31, 2019	$	18,226	$	3,799	$	5,745		$	3,870	$	31,640	$	15,554	$	47,194

(1) Individual allowances for credit losses are $24. Letters of credit and guarantees are included as funded exposure as they have been issued. Included in loans and loans equivalent are letters of credit and guarantees which total $4,069 as at October 31, 2020 (October 31, 2019 – $4,008).

(2) Exposures for securities are calculated taking into account derivative positions where the security is the underlying reference asset and short trading positions, with net short positions in brackets.

(3) SFT comprise of securities purchased under resale agreements, obligations related to securities sold under repurchase agreements and securities lending and borrowing transactions. Gross and net funded exposures represent all net positive positions after taking into account collateral. Collateral held against derivatives was $3,183 and collateral held against SFT was $29,543.

(4) Undrawn commitments represent an estimate of the contractual amount that may be drawn upon by the obligor and include commitments to issue letters of credit on behalf of other banks in a syndicated bank lending arrangement.

100  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Risk Management

Market Risk

Market risk is the risk of loss from changes in market prices and rates (including interest rates, credit spreads, equity prices, foreign exchange rates and commodity prices), the correlations between them, and their levels of volatility. Market risk includes trading risk, investment risk, structural interest rate risk and structural foreign exchange risk. Below is an index of market risk disclosures:

Index of all market risk disclosures

Index	Page		Tables and charts	Page
Market risk factors		102
Interest rate risk		102
Credit spread risk		102
Foreign currency risk		102
Equity risk		102
Commodity risk		102
Market risk governance		102
Risk measurement summary		102
Value at risk		102
Incremental risk charge		103
Stress testing		103
Sensitivity analysis		103
Validation of market risk models		103
Non-trading market risk		103
Interest rate risk		103-104
Foreign currency risk		104	T50 Structural interest sensitivity		104
Investment portfolio risks		104
Trading market risk		104	T51 Market risk measures		105
			C29 Trading revenue distribution		105
			C30 Daily trading revenue vs. VaR		105
Market risk linkage to Consolidated Statement of Financial Position		106	T52 Market risk linkage to Consolidated Statement of Financial Position of the Bank		106
Derivative instruments and structured transactions		106
Derivatives		106-107
Structured transactions		107
European exposures		100	T49 Bank’s exposure distribution by country		100
Market risk		71-72	T37 Total market risk capital		72
Financial instruments		76	T40 Mortgage-backed securities		77

2020 Scotiabank Annual Report  |  101

Management’s Discussion and Analysis

Market risk factors

Interest rate risk

The risk of loss due to changes in the level and/or the volatility of interest rates. This risk affects instruments such as, but not limited to, debt securities, loans, mortgages, deposits and derivatives.

Interest rate risks are managed through sensitivity analysis (including economic value of equity and net interest income), stress testing, and VaR limits and mitigated through portfolio diversification and hedges using interest rate derivatives and debt securities.

Credit spread risk

The risk of loss due to changes in the market price and volatility of credit, or the creditworthiness of issuers. This risk is mainly concentrated in loan and debt securities portfolios. Risk is managed through sensitivity, jump-to-default, stress testing and VaR limits and mitigated through hedges using credit derivatives.

Foreign currency risk

The risk of loss resulting from changes in currency exchange rates and exchange rate volatility. Foreign currency denominated debt and other securities as well as future cash flows in foreign currencies are exposed to this type of risk. Risk is managed through maximum net trading position, sensitivity, stress testing and VaR limits and mitigated through hedges using foreign exchange positions and derivatives.

Equity risk

The risk of loss due to changes in prices, volatility or any other equity related risk factor of individual equity or equity linked securities. This risk affects instruments such as, but not limited to, equities, exchange traded funds, mutual funds, derivatives and other equity linked products. Risk is managed through sensitivity, stress testing and VaR limits and mitigated through hedges using physical equity and derivatives instruments.

Commodity risk

The risk of loss due to changes in prices or volatility of precious metal, base metal, energy and agriculture products. Both physical commodity and derivatives positions are exposed to this risk. Risk is managed through aggregate and net trading position, sensitivity, stress testing and VaR limits and mitigated through hedges using physical commodity and derivative positions.

The following maps risk factors to trading and non-trading activities:

Non-trading Funding	Investments	Trading
Interest rate risk Foreign currency risk	Interest rate risk Credit spread risk Foreign currency risk Equity risk	Interest rate risk Credit spread risk Foreign currency risk Equity risk Commodity risk

Market risk governance

Overview

The Board of Directors reviews and approves market risk policies and limits annually. The Bank’s Asset-Liability Committee (ALCO) and Market Risk Management and Policy Committee (MRMPC) oversee the application of the framework set by the Board, and monitor the Bank’s market risk exposures and the activities that give rise to these exposures. The MRMPC establishes specific operating policies and sets limits at the product, portfolio, business unit and business line levels, and for the Bank in total. Limits are reviewed at least annually.

Global Risk Management provides independent oversight of all significant market risks, supporting the MRMPC and ALCO with analysis, risk measurement, monitoring, reporting, proposals for standards and support for new product development. To ensure compliance with policies and limits, market risk exposures are independently monitored on a continuing basis, either by Global Risk Management, the back offices, or Finance. They provide senior management, business units, the ALCO, and the MRMPC with a series of daily, weekly and monthly reports of market risk exposures by business line and risk type.

The Bank uses a variety of metrics and models to measure and control market risk exposures. These measurements are selected based on an assessment of the nature of risks in a particular activity. The principal measurement techniques are Value at Risk (VaR), Incremental Risk Charge, stress testing, and sensitivity analysis. The use and attributes of each of these techniques are noted in the Risk Measurement Summary.

Risk measurement summary

Value at risk (VaR)

VaR is a statistical method of measuring potential loss due to market risk based upon a common confidence interval and time horizon. The Bank calculates VaR daily using a 99% confidence level, and a one-day holding period for its trading portfolios. This means that once in every 100 days, the trading positions are expected to lose more than the VaR estimate. VaR has two components: general market risk and debt specific risk. The Bank calculates general market risk VaR using historical simulation based on 300 days of market data. Obligor specific risk on debt instruments and credit derivatives not captured in general market risk VaR is calculated through the debt specific risk VaR, which uses historical resampling. In addition, the Bank calculates a Stressed VaR measure which follows the same basic methodology as VaR but is calibrated to a one year stressed period. The stressed period is determined based on analysis of the trading book’s risk profile against historical market data. Stressed VaR complements VaR in that it evaluates the impact of market volatility that is outside the VaR’s historical set.

All material risk factors are captured in VaR. Where historical data is not available, proxies are used to establish the relevant volatility for VaR and Stressed VaR until sufficient data is available. Changes in VaR between reporting periods are generally due to changes in positions, volatilities and/or correlations between asset classes. VaR is also used to evaluate risks arising in certain funding and investment portfolios. Backtesting is also an important and necessary part of the VaR process. The Bank backtests the actual trading profit and loss against the VaR result to validate the quality and accuracy of the Bank’s VaR model. The Board reviews VaR results quarterly.

102  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Risk Management

Incremental Risk Charge (IRC)

Basel market risk capital requirements includes IRC which captures the following:

Default risk: This is the potential for direct losses due to an obligor’s (equity/bond issuer or counterparty) default.

Credit migration risk: This is the potential for direct losses due to a credit rating downgrade or upgrade.

A Monte Carlo model is used to perform default and migration simulations for the obligors underlying credit derivative and bond portfolios. IRC is calculated at the 99.9th percentile with a one year liquidity horizon. The Board reviews IRC results quarterly.

Stress testing

A limitation of VaR and Stressed VaR is that they only reflect the recent history of market volatility and a specific one year stressed period, respectively. To complement these measures, stress testing examines the impact that abnormally large changes in market factors and periods of prolonged inactivity might have on trading portfolios. Stress testing scenarios are designed to include large shifts in risk factors as well as historical and theoretical multi risk market events. Historical scenarios capture severe movements over periods that are significantly longer than the one-day holding period captured in VaR, such as the 2008 Credit Crisis or the 1998 Russian Financial Crisis. Similar to Stressed VaR, stress testing provides management with information on potential losses due to tail events. In addition, the results from the stress testing program are used to verify that the Bank’s market risk capital is sufficient to absorb these potential losses.

The Bank subjects its trading portfolios to a series of daily, weekly and monthly stress tests. The Bank also evaluates risk in its investment portfolios monthly, using stress tests based on risk factor sensitivities and specific market events. The stress testing program is an essential component of the Bank’s comprehensive risk management framework which complements the VaR methodology and other risk measures and controls employed by the Bank.

Sensitivity analysis

In trading portfolios, sensitivity analysis is used to measure the effect of changes in risk factors, including prices and volatility, on financial products and portfolios. These measures apply across product types and geographies and are used for limit monitoring and management reporting.

In non-trading portfolios, sensitivity analysis assesses the effect of changes in interest rates on current earnings and on the economic value of shareholders’ equity. It is applied globally to each of the major currencies within the Bank’s operations. The Bank’s sensitivity analysis for limit and disclosure purposes is measured through positive and negative parallel shifts in the underlying interest rate curves. These calculations are based on models that consider a number of inputs and are on a constant balance sheet and make no assumptions for management actions that may mitigate the risks. The Bank also performs sensitivity analysis using various non-parallel interest rate curve shifts, for example: curve steepeners, curve flatteners and curve twists.

Validation of market risk models

Prior to the implementation of new market risk models, rigorous validation and testing is conducted. Validation is conducted when the model is initially developed and when any significant changes are made to the model. The models are also subject to ongoing validation, the frequency of which is determined by model risk ratings. Models may also be triggered for earlier revalidation when there have been significant structural changes in the market or changes to the composition of the portfolio. Model validation includes backtesting, and additional analysis such as:

• Theoretical review or tests to demonstrate whether assumptions made within the internal model are appropriate; and

• Impact tests including stress testing that would occur under historical and hypothetical market conditions.

The validation process is governed by the Bank’s Model Risk Management Policy.

Non-trading market risk

Funding and investment activities

Market risk arising from the Bank’s funding and investment activities is identified, managed and controlled through the Bank’s asset-liability management processes. The Asset-Liability Committee meets monthly to review risks and opportunities, and evaluate performance including the effectiveness of hedging strategies.

Interest rate risk

Interest rate risk arising from the Bank’s lending, funding and investment activities is managed in accordance with Board-approved policies and global limits, which are designed to control the risk to net interest income and economic value of shareholders’ equity. The net interest income limit measures the effect of a specified change in interest rates on the Bank’s annual net interest income over the next twelve months, while the economic value limit measures the impact of a specified change in interest rates on the present value of the Bank’s net assets. These limits are set according to the documented risk appetite of the Bank. Board-level limit utilization is reported to both the Asset-Liability Committee and the Board on a regular basis. Any limit exceptions are reported according to the Limit Monitoring and Compliance Policy of the Bank.

Net interest income and the economic value of equity result from the differences between yields earned on the Bank’s non-trading assets and interest rate paid on its liabilities. The difference in yields partly reflects mismatch between the maturity and re-pricing characteristics of the assets and liabilities. This mismatch is inherent in the non-trading operations of the Bank and exposes it to adverse changes in the level of interest rates. The Asset-Liability Committee provides strategic direction for the management of structural interest rate risk within the risk appetite framework authorized by the Board of Directors. The asset/liability management strategy is executed by Group Treasury with the objective of protecting and enhancing net interest income within established risk tolerances.

Simulation modeling, sensitivity analysis and VaR are used to assess exposures and for limit monitoring and planning purposes. The Bank’s interest rate risk exposure calculations are generally based on the earlier of contractual re-pricing or maturity of on-balance sheet and off-balance sheet assets and liabilities, although certain assets and liabilities such as credit cards and deposits without a fixed maturity are assigned a maturity profile based on the longevity of the exposure. Expected prepayments from loans and cashable investment products are also incorporated into the exposure calculations.

2020 Scotiabank Annual Report  |  103

Management’s Discussion and Analysis

Table T50 shows the pro-forma after-tax impact on the Bank’s net interest income over the next twelve months and economic value of shareholders’ equity of an immediate and sustained 100 basis points increase and decrease in interest rate across major currencies as defined by the Bank. The interest rate sensitivities tabulated are based on models that consider a number of inputs and are on a constant balance sheet. There are no assumptions made for management actions that may mitigate risk. Based on the Bank’s interest rate positions at year-end 2020, an immediate and sustained 100 basis point increase in interest rates across all major currencies and maturities would increase after-tax net interest income by approximately $134 million over the next 12 months, assuming no further management actions. During fiscal 2020, this measure ranged between loss of $197 million and gain of $190 million. Corresponding with the current low interest rate environment, starting in Q2, 2020, the net interest income and economic value for a downward shock scenario are measured using 25 basis points decline rather than 100 basis points previously, to account for certain rates being floored at zero.

This same increase in interest rates would result in an after-tax decrease in the present value of the Bank’s net assets of approximately $510 million. During fiscal 2020, this measure ranged between $83 million and $1,205 million. The directional sensitivity of these two key metrics is largely determined by the difference in time horizons (net interest income captures the impact over the next twelve months only, whereas economic value considers the potential impact of interest rate changes on the present value of all future cash flows). The net interest income and economic value results are compared to the authorized Board limits. Both interest rate sensitivities remained within the Bank’s approved consolidated limits in the reporting period.

T50  Structural interest sensitivity

	2020						2019
As at October 31 ($ millions)	Economic Value of Shareholders’ Equity		Net Interest Income				Economic Value of Shareholders’ Equity			Net Interest Income
After-tax impact of						After-tax impact of
100bp increase in rates						100bp increase in rates
Non-trading risk	$	(510)	$	134		Non-trading risk	$	(1,448	)	$	(273	)
25bp decrease in rates						100bp decrease in rates
Non-trading risk	$	63	$	(38	)	Non-trading risk	$	1,173		$	267

Foreign currency risk

Foreign currency risk in the Bank’s unhedged funding and investment activities arises primarily from the Bank’s net investments in foreign operations as well as foreign currency earnings in its domestic and remitting foreign branch operations.

The Bank’s foreign currency exposure to its net investments in foreign operations is controlled by a Board-approved limit. This limit considers factors such as potential volatility to shareholders’ equity as well as the potential impact on capital ratios from foreign exchange fluctuations. On a monthly basis, the Asset-Liability Committee reviews the Bank’s foreign currency net investment exposures and determines the appropriate hedging strategies. These may include funding the investments in the same currency or using other financial instruments, including derivatives.

Foreign currency translation gains and losses from net investments in foreign operations, net of related hedging activities and tax effects, are recorded in accumulated other comprehensive income within shareholders’ equity. However, the Bank’s regulatory capital ratios are not materially affected by these foreign exchange fluctuations because the risk-weighted assets of the foreign operations tend to move in a similar direction.

The Bank is also subject to foreign currency translation risk on the earnings of its domestic and remitting foreign branch operations. The Bank forecasts foreign currency revenues and expenses, over a number of future fiscal quarters. The Asset-Liability Committee also assesses economic data trends and forecasts to determine if some or all of the estimated future foreign currency revenues and expenses should be hedged. Hedging instruments normally include foreign currency spot and forward contracts, as well as foreign currency options and swaps. Certain of these economic hedges may not qualify for hedge accounting resulting in a potential for a mismatch in the timing of the recognition of economic hedge gains/losses and the underlying foreign earnings translation gains/losses. In accordance with IFRS, foreign currency translation gains and losses relating to monetary and non-monetary items are recorded directly in earnings.

As at October 31, 2020, a one percent increase (decrease) in the Canadian dollar against all currencies in which the Bank operates decreases (increases) the Bank’s before-tax annual earnings by approximately $66 million (October 31, 2019 – $64 million) in the absence of hedging activity, primarily from the exposure to U.S. dollars.

Investment portfolio risks

The Bank holds investment portfolios to meet liquidity and statutory reserve requirements and for investment purposes. These portfolios expose the Bank to interest rate, foreign currency, credit spread and equity risks. Debt investments primarily consist of government, agency, and corporate bonds. Equity investments include common and preferred shares, as well as a diversified portfolio of third-party managed funds. The majority of these securities are valued using prices obtained from external sources. These portfolios are controlled by a Board-approved policy and limits.

Trading market risk

The Bank’s policies, processes and controls for trading activities are designed to achieve a balance between pursuing profitable trading opportunities and managing earnings volatility within a framework of sound and prudent practices. Trading activities are primarily customer focused.

Market risk arising from the Bank’s trading activities is managed in accordance with Board-approved policies, and aggregate VaR and stress testing limits. The quality of the Bank’s VaR is validated by regular backtesting analysis, in which the VaR is compared to both theoretical profit and loss results based on fixed end of day positions and actual reported profit and loss. A VaR at the 99% confidence interval is an indication of a 1% probability that losses will exceed the VaR if positions remain unchanged during the next business day. Trading positions are however managed dynamically and, as a result, actual profit/loss backtesting exceptions are uncommon.

104  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Risk Management

In fiscal 2020, the total one-day VaR for trading activities averaged $23.9 million, compared to $12.4 million in 2019. The significant increase of average one-day VaR was due to volatile market conditions during February to May period, as a result of the COVID-19 pandemic, but the increase was partially offset by favourable temporary capital rule changes by OSFI.

T51  Market risk measures

	2020										2019
($ millions)	Year end			Avg			High		Low		Year end			Avg			High		Low
Credit Spread plus Interest Rate	$	11.5		$	22.1		$	60.8	$	9.4	$	13.8		$	11.1		$	17.5	$	7.7
Credit Spread		11.1			18.5			55.0		6.2		8.0			7.7			11.2		3.8
Interest Rate		11.4			11.2			18.0		4.8		7.2			7.8			12.6		5.1
Equities		3.1			6.5			27.4		1.8		3.4			3.5			8.1		1.0
Foreign Exchange		4.6			3.5			10.3		1.4		2.7			3.5			7.0		1.5
Commodities		5.0			5.4			9.1		2.2		3.1			2.3			4.7		1.3
Debt Specific		5.2			5.9			14.1		2.5		3.3			3.9			5.9		2.0
Diversification Effect		(14.8	)		(19.5	)		n/a		n/a		(10.9	)		(11.9	)		n/a		n/a
All-Bank VaR	$	14.6		$	23.9		$	63.6	$	10.1	$	15.4		$	12.4		$	17.9	$	9.2
All-Bank Stressed VaR	$	37.0		$	38.7		$	61.3	$	14.9	$	45.9		$	40.1		$	60.6	$	26.7
Incremental Risk Charge	$	233.2		$	197.3		$	334.9	$	78.2	$	80.0		$	108.9		$	208.8	$	79.4

The Bank also calculates a Stressed VaR which uses the same basic methodology as the VaR. However, Stressed VaR is calculated using market volatility from a one-year time period identified as stressful, given the risk profile of the trading portfolio. Throughout most of 2020, the Stressed VaR was calculated using the 2008/2009 credit crisis period, surrounding the collapse of Lehman Brothers. However, for a brief period, (from end of Q3 to early Q4), the Stressed VaR was calculated using the 2019/2020 period, which reflects increased volatility due to the COVID-19 pandemic. In fiscal 2020, the total one-day Stressed VaR for trading activities averaged $38.7 million compared to $40.1 million in 2019.

In fiscal 2020, the average IRC increased to $197.3 million from $108.9 million in 2019. The noticeable increase was primarily driven by increased fixed income positions and rating volatilities occurred since March 2020.

Description of trading revenue components and graphical comparison of VaR to daily P&L

Chart C29 shows the distribution of daily trading revenue for fiscal 2020 and Chart C30 compares that distribution to daily VaR results. Trading revenue includes changes in portfolio value as well as the impact of new trades, commissions, fees and reserves. Some components of revenue which are calculated less frequently are pro-rated. Trading revenue averaged $13.9 million per day, compared to $9.8 million in 2019. Revenue was positive on 96.1% of trading days during the year, which was lower than the level in 2019 due to heightened market volatility in March. During the year, the largest single day trading loss was $23.1 million which occurred on March 31, 2020, and was smaller than the total VaR of $50.1 million on the same day.

C29 Trading revenue distribution Year ended October 31, 2020

           

C30 Daily trading revenue vs. VaR $ millions, November 1, 2019 to October 31, 2020

          

2020 Scotiabank Annual Report  |  105

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 trading risk measures such as VaR. Derivatives captured under trading risk measures are related to the activities of Global Banking and Markets, whiles derivatives captured under non-trading risk measures comprise those used in asset/liability management and designated in a hedge relationship. A comparison of Consolidated Statement of Financial Position items which are covered under the trading and non-trading risk measures is provided in the table below.

T52  Market risk linkage to Consolidated Statement of Financial Position of the Bank

	Market Risk Measure
As at October 31, 2020 ($ millions)	Consolidated Statement of Financial Position		Trading Risk		Non- trading risk		Not subject to market risk		Primary risk sensitivity of non-trading risk
Precious metals	$	1,181	$	1,181	$	–	$	–		n/a
Trading assets		117,839		117,492		347		–		Interest rate, FX
Derivative financial instruments		45,065		39,294		5,771		–		Interest rate, FX, equity
Investment securities		111,389		–		111,389		–		Interest rate, FX, equity
Loans		603,263		–		603,263		–		Interest rate, FX
Assets not subject to market risk (1)		257,729		–		–		257,729		n/a
Total assets	$	1,136,466	$	157,967	$	720,770	$	257,729
Deposits	$	750,838	$	–	$	709,850	$	40,988		Interest rate, FX, equity
Financial instruments designated at fair value through profit or loss		18,899		–		18,899		–		Interest rate, equity
Obligations related to securities sold short		31,902		31,902		–		–		n/a
Derivative financial instruments		42,247		36,038		6,209		–		Interest rate, FX, equity
Trading liabilities(2)		1,112		1,112		–		–		n/a
Retirement and other benefit liabilities		3,464		–		3,464		–		Interest rate, credit spread, equity
Liabilities not subject to market risk (3)		217,501		–		–		217,501		n/a
Total liabilities	$	1,065,963	$	69,052	$	738,422	$	258,489

(1) Includes goodwill, intangibles, other assets and securities purchased under resale agreements and securities borrowed.

(2) Gold and silver certificates and bullion included in other liabilities.

(3) Includes obligations related to securities sold under repurchase agreements and securities lent and other liabilities.

	Market Risk Measure
As at October 31, 2019 ($ millions)	Consolidated Statement of Financial Position		Trading Risk		Non-trading risk		Not subject to market risk		Primary risk sensitivity of non-trading risk
Precious metals	$	3,709	$	3,709	$	–	$	–		n/a
Trading assets		127,488		126,846		642		–		Interest rate, FX
Derivative financial instruments		38,119		34,489		3,630		–		Interest rate, FX, equity
Investment securities		82,359		–		82,359		–		Interest rate, FX, equity
Loans		592,483		–		592,483		–		Interest rate, FX
Assets not subject to market risk (1)		242,003		–		–		242,003		n/a
Total assets	$	1,086,161	$	165,044	$	679,114	$	242,003
Deposits	$	733,390	$	–	$	699,462	$	33,928		Interest rate, FX, equity
Financial instruments designated at fair value through profit or loss		12,235		–		12,235		–		Interest rate, equity
Obligations related to securities sold short		30,404		30,404		–		–		n/a
Derivative financial instruments		40,222		34,820		5,402		–		Interest rate, FX, equity
Trading liabilities(2)		4,124		4,124		–		–		n/a
Retirement and other benefit liabilities		2,956		–		2,956		–		Interest rate, credit spread, equity
Liabilities not subject to market risk (3)		192,638		–		–		192,638		n/a
Total liabilities	$	1,015,969	$	69,348	$	720,055	$	226,566

(1) Includes goodwill, intangibles, other assets and securities purchased under resale agreements and securities borrowed.

(2) Gold and silver certificates and bullion included in other liabilities.

(3) Includes obligations related to securities sold under repurchase agreements and securities lent and other liabilities.

Derivative instruments and structured transactions

Derivatives

The Bank uses derivatives to meet customer needs, generate revenues from trading activities, manage market and credit risks arising from its lending, funding and investment activities, and to lower its cost of capital. The Bank uses several types of derivative products, including interest rate swaps, futures and options, to hedge interest rate risk exposure. Forward contracts, swaps and options are used to manage foreign currency risk exposures. Credit exposures in its lending and investment books are managed using credit default swaps. As a dealer, the Bank markets a range of derivatives to its customers, including interest rate, foreign exchange, equity, commodity and credit derivatives.

106  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Risk Management

Market risk arising from derivatives transactions is subject to the control, reporting and analytical techniques noted above. Additional controls and analytical techniques are applied to address certain market-related risks that are unique to derivative products.

Structured transactions

Structured transactions are specialized transactions that may involve combinations of cash, other financial assets and derivatives designed to meet the specific risk management or financial requirements of customers. These transactions are carefully evaluated by the Bank to identify and address the credit, market, legal, tax, reputational and other risks, and are subject to a cross-functional review and sign-off by Trading Management, Global Risk Management, Taxation, Finance and Legal departments. Large structured transactions are also subject to review by senior risk management committees and evaluated in accordance with the procedures described below in Reputational Risk.

The market risk in these transactions is usually minimal, and returns are earned by providing structuring expertise and by taking credit risk. Once executed, structured transactions are subject to the same ongoing credit reviews and market risk analysis as other types of derivatives transactions. This review and analysis includes careful monitoring of the quality of the reference assets, and ongoing valuation of the derivatives and reference assets.

Liquidity Risk

Liquidity risk is the risk that the Bank is unable to meet its financial obligations in a timely manner at reasonable prices. Financial obligations include liabilities to depositors, payments due under derivative contracts, settlement of securities borrowing and repurchase transactions, and lending and investment commitments.

Effective liquidity risk management is essential to maintain the confidence of depositors and counterparties, manage the Bank’s cost of funds and to support core business activities, even under adverse circumstances.

Liquidity risk is managed within the framework of policies and limits that are approved by the Board of Directors. The Board receives reports on risk exposures and performance against approved limits. The Asset-Liability Committee (ALCO) provides senior management oversight of liquidity risk.

The key elements of the liquidity risk framework are:

• Measurement and modeling – the Bank’s liquidity model measures and forecasts cash inflows and outflows, including off-balance sheet cash flows on a daily basis. Risk is managed by a set of key limits over the maximum net cash outflow by currency over specified short-term horizons (cash gaps), a minimum level of core liquidity, and liquidity stress tests.

• Reporting – Global Risk Management provides independent oversight of all significant liquidity risks, supporting the ALCO with analysis, risk measurement, stress testing, monitoring and reporting.

• Stress testing – the Bank performs liquidity stress testing on a regular basis, to evaluate the effect of both industry-wide and Bank-specific disruptions on the Bank’s liquidity position. Liquidity stress testing has many purposes including:

– Helping the Bank understand the potential behavior of various on-balance sheet and off-balance sheet positions in circumstances of stress; and

– Based on this knowledge, facilitating the development of risk mitigation and contingency plans.

The Bank’s liquidity stress tests consider the effect of changes in funding assumptions, depositor behavior and the market value of liquid assets. The Bank performs industry standard stress tests, the results of which are reviewed at senior levels of the organization and are considered in making liquidity management decisions.

• Contingency planning – the Bank maintains a liquidity contingency plan that specifies an approach for analyzing and responding to actual and potential liquidity events. The plan outlines an appropriate governance structure for the management and monitoring of liquidity events, processes for effective internal and external communication, and identifies potential counter measures to be considered at various stages of an event. A contingency plan is maintained both at the parent-level as well as for major subsidiaries.

• Funding diversification – the Bank actively manages the diversification of its deposit liabilities by source, type of depositor, instrument, term and geography.

• Core liquidity – the Bank maintains a pool of highly liquid, unencumbered assets that can be readily sold or pledged to secure borrowings under stressed market conditions or due to Bank-specific events. The Bank also maintains liquid assets to support its intra-day settlement obligations in payment, depository and clearing systems.

Liquid assets

Liquid assets are a key component of liquidity management and the Bank holds these types of assets in sufficient quantity to meet potential needs for liquidity management.

Liquid assets can be used to generate cash either through sale, repurchase transactions or other transactions where these assets can be used as collateral to generate cash, or by allowing the asset to mature. Liquid assets include deposits at central banks, deposits with financial institutions, call and other short-term loans, marketable securities, precious metals and securities received as collateral from securities financing and derivative transactions. Liquid assets do not include borrowing capacity from central bank facilities.

Marketable securities are securities traded in active markets, which can be converted to cash within a timeframe that is in accordance with the Bank’s liquidity management framework. Assets are assessed considering a number of factors, including the expected time it would take to convert them to cash.

Marketable securities included in liquid assets are comprised of securities specifically held as a liquidity buffer or for asset liability management purposes; trading securities, which are primarily held by Global Banking and Markets; and collateral received for securities financing and derivative transactions.

The Bank maintains large holdings of unencumbered liquid assets to support its operations. These assets generally can be sold or pledged to meet the Bank’s obligations. As at October 31, 2020, unencumbered liquid assets were $250 billion (October 31, 2019 – $211 billion). Securities including NHA mortgage-backed securities, comprised 72% of liquid assets (October 31, 2019 – 80%). Other unencumbered liquid assets, comprising cash

2020 Scotiabank Annual Report  |  107

Management’s Discussion and Analysis

and deposits with central banks, deposits with financial institutions, precious metals and call and short loans, were 28% (October 31, 2019 – 20%). The increase in liquid assets was mainly attributable to an increase in cash and deposits with central banks and Canadian and foreign government obligations, partially offset by a decrease in other liquid securities, NHA mortgage-backed securities, precious metals, deposits with financial institutions, and call and short loans.

The carrying values outlined in the liquid asset table are consistent with the carrying values in the Bank’s Consolidated Statement of Financial Position as at October 31, 2020. The liquidity value of the portfolio will vary under different stress events as different assumptions are used for the stress scenarios.

The Bank’s liquid asset pool is summarized in the following table:

T53  Liquid asset pool

							Encumbered liquid assets				Unencumbered liquid assets
As at October 31, 2020 ($ millions)	Bank-owned liquid assets		Securities received as collateral from securities financing and  derivative transactions		Total liquid assets		Pledged as collateral		Other(1)		Available as collateral		Other
Cash and deposits with central banks	$	66,252	$	–	$	66,252	$	–	$	7,019	$	59,233	$	–
Deposits with financial institutions		10,208		–		10,208		–		74		10,134		–
Precious metals		1,181		–		1,181		–		–		1,181		–
Securities:
Canadian government obligations		74,943		14,890		89,833		37,991		–		51,842		–
Foreign government obligations		71,686		79,032		150,718		83,117		–		67,601		–
Other securities		69,470		78,238		147,708		114,867		–		32,841		–
Loans:
NHA mortgage-backed securities(2)		35,267		–		35,267		8,010		–		27,257		–
Call and short loans		165		–		165		–		–		165		–
Total	$	329,172	$	172,160	$	501,332	$	243,985	$	7,093	$	250,254	$	–
							Encumbered liquid assets				Unencumbered liquid assets
As at October 31, 2019 ($ millions)	Bank-owned liquid assets		Securities received as collateral from securities financing and derivative transactions		Total liquid assets		Pledged as collateral		Other(1)		Available as collateral		Other
Cash and deposits with central banks	$	36,068	$	–	$	36,068	$	–	$	9,604	$	26,464	$	–
Deposits with financial institutions		10,652		–		10,652		–		71		10,581		–
Precious metals		3,709		–		3,709		–		58		3,651		–
Securities:
Canadian government obligations		42,508		19,622		62,130		31,798		–		30,332		–
Foreign government obligations		70,101		78,904		149,005		90,617		–		58,388		–
Other securities		78,422		78,415		156,837		106,179		–		50,658		–
Loans:
NHA mortgage-backed securities(2)		33,571		–		33,571		3,602		–		29,969		–
Call and short loans		525		–		525		–		–		525		–
Total	$	275,556	$	176,941	$	452,497	$	232,196	$	9,733	$	210,568	$	–

(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 Consolidated Statement of Financial Position.

A summary of total unencumbered liquid assets held by the parent bank and its branches, and domestic and foreign subsidiaries, is presented below:

T54  Total unencumbered liquid assets held by the parent bank and its branches, and domestic and foreign subsidiaries

As at October 31 ($ millions)	2020		2019
The Bank of Nova Scotia (Parent)	$	192,490	$	153,584
Bank domestic subsidiaries		14,517		17,667
Bank foreign subsidiaries		43,247		39,317
Total	$	250,254	$	210,568

The Bank’s liquidity pool is held across major currencies, mostly comprised of Canadian and U.S. dollar holdings. As shown above, the vast majority (83%) of liquid assets are held by the Bank’s corporate office, branches of the Bank, and Canadian subsidiaries of the Bank. To the extent a liquidity reserve held in a foreign subsidiary of the Bank is required for regulatory purposes, it is assumed to be unavailable to the rest of the Group. Other liquid assets held by a foreign subsidiary are assumed to be available only in limited circumstances. The Bank monitors and ensures compliance in relation to minimum levels of liquidity required and assets held within each entity, and/or jurisdiction.

108  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Risk Management

Encumbered assets

In the course of the Bank’s day-to-day activities, securities and other assets are pledged to secure an obligation, participate in clearing or settlement systems, or operate in a foreign jurisdiction. Securities are also pledged under repurchase agreements. A summary of encumbered and unencumbered assets is presented below:

T55  Asset encumbrance

								Encumbered assets				Unencumbered assets
As at October 31, 2020 ($ millions)	Bank-owned assets		Securities received as collateral from securities financing and derivative transactions			Total assets		Pledged as collateral		Other(1)		Available as collateral(2)		Other(3)
Cash and deposits with central banks	$	66,252	$	–		$	66,252	$	–	$	7,019	$	59,233	$	–
Deposits with financial institutions		10,208		–			10,208		–		74		10,134		–
Precious metals		1,181		–			1,181		–		–		1,181		–
Liquid securities:
Canadian government obligations		74,943		14,890			89,833		37,991		–		51,842		–
Foreign government obligations		71,686		79,032			150,718		83,117		–		67,601		–
Other liquid securities		69,470		78,238			147,708		114,867		–		32,841		–
Other securities		3,621		7,794			11,415		3,227		–		–		8,188
Loans classified as liquid assets:
NHA mortgage-backed securities		35,267		–			35,267		8,010		–		27,257		–
Call and short loans		165		–			165		–		–		165		–
Other loans		576,183		–			576,183		7,640		81,780		17,702		469,061
Other financial assets(4)		182,671		(109,231	)		73,440		6,182		–		–		67,258
Non-financial assets		44,819		–			44,819		–		–		–		44,819
Total	$	1,136,466	$	70,723		$	1,207,189	$	261,034	$	88,873	$	267,956	$	589,326
								Encumbered assets				Unencumbered assets
As at October 31, 2019 ($ millions)	Bank-owned assets		Securities received as collateral from securities financing and derivative transactions			Total assets		Pledged as collateral		Other(1)		Available as collateral(2)		Other(3)
Cash and deposits with central banks	$	36,068	$	–		$	36,068	$	–	$	9,604	$	26,464	$	–
Deposits with financial institutions		10,652		–			10,652		–		71		10,581		–
Precious metals		3,709		–			3,709		–		58		3,651		–
Liquid securities:
Canadian government obligations		42,508		19,622			62,130		31,798		–		30,332		–
Foreign government obligations		70,101		78,904			149,005		90,617		–		58,388		–
Other liquid securities		78,422		78,415			156,837		106,179		–		50,658		–
Other securities		3,992		5,633			9,625		4,329		–		–		5,296
Loans classified as liquid assets:
NHA mortgage-backed securities		33,571		–			33,571		3,602		–		29,969		–
Call and short loans		525		–			525		–		–		525		–
Other loans		572,216		–			572,216		9,102		54,814		13,293		495,007
Other financial assets(4)		189,802		(119,889	)		69,913		5,433		–		–		64,480
Non-financial assets		44,595		–			44,595		–		–		–		44,595
Total	$	1,086,161	$	62,685		$	1,148,846	$	251,060	$	64,547	$	223,861	$	609,378

(1) Assets which are restricted from being used to secure funding for legal or other reasons.

(2) Assets that are readily available in the normal course of business to secure funding or meet collateral needs including central bank borrowing immediately available.

(3) Other unencumbered assets are not subject to any restrictions on their use to secure funding or as collateral but the Bank would not consider them to be readily available. These include loans, a portion of which may be used to access central bank facilities outside of the normal course or to raise secured funding through the Bank’s secured funding programs.

(4) Securities received as collateral against other financial assets are included within liquid securities and other securities.

As of October 31, 2020 total encumbered assets of the Bank were $350 billion (October 31, 2019 – $316 billion). Of the remaining $857 billion (October 31, 2019 – $833 billion) of unencumbered assets, $268 billion (October 31, 2019 – $224 billion) are considered readily available in the normal course of business to secure funding or meet collateral needs as detailed above.

In some over-the-counter derivative contracts, the Bank would be required to post additional collateral or receive less collateral in the event its credit rating was downgraded. The Bank maintains access to sufficient collateral to meet these obligations in the event of a downgrade of its ratings by one or more of the rating agencies. As at October 31, 2020 the potential adverse impact on derivatives collateral that would result from a one-notch or two-notch downgrade of the Bank’s rating below its lowest current rating was $19 million or $133 million, respectively.

Encumbered liquid assets are not considered to be available for liquidity management purposes. Liquid assets which are used to hedge derivative positions in trading books or for hedging purposes are considered to be available for liquidity management provided they meet the criteria discussed in liquid assets above.

Liquidity coverage ratio

The Liquidity Coverage Ratio measure (LCR) is based on a 30-day liquidity stress scenario, with assumptions defined in the OSFI Liquidity Adequacy Requirements (LAR) Guideline. The LCR is calculated as the ratio of high quality liquid assets (HQLA) to net cash outflows. The Bank is subject to a regulatory minimum LCR of 100%.

2020 Scotiabank Annual Report  |  109

Management’s Discussion and Analysis

OSFI’s LAR stipulates that banks must maintain an adequate level of unencumbered HQLA that can be converted into cash to meet liquidity needs over a 30 calendar day horizon under a pre-defined significantly severe liquidity stress scenario. The LCR-prescribed liquidity stress scenario includes assumptions for asset haircuts, deposit run-off, wholesale rollover rates, and outflow rates for commitments.

HQLA are grouped into three categories: Level 1, Level 2A and Level 2B, based on guidelines from the LAR. Level 1 HQLA receive no haircuts, and includes cash, deposits with central banks, central bank reserves available to the Bank in times of stress, and securities with a 0% risk weight. Level 2A and 2B include HQLA of lesser quality and attracts haircuts ranging from 15%-50%.

The total weighted values for net cash outflows for the next 30 days are derived by applying the assumptions specified in the LAR Guideline to specific items, including loans, deposits, maturing debt, derivative transactions and commitments to extend credit.

The following table presents the Bank’s average LCR for the quarter ended October 31, 2020 based on the average daily position in the quarter.

T56  Bank’s average LCR

For the quarter ended October 31, 2020 ($ millions)(1)	Total unweighted value (Average)(2)		Total weighted value (Average)(3)
High-quality liquid assets
Total high-quality liquid assets (HQLA)		*	$	209,777
Cash outflows
Retail deposits and deposits from small business customers, of which:	$	211,956		17,997
Stable deposits		89,784		2,891
Less stable deposits		122,172		15,106
Unsecured wholesale funding, of which:		231,102		104,319
Operational deposits (all counterparties) and deposits in networks of cooperative banks		87,409		20,822
Non-operational deposits (all counterparties)		122,730		62,534
Unsecured debt		20,963		20,963
Secured wholesale funding		*		47,692
Additional requirements, of which:		232,234		50,241
Outflows related to derivative exposures and other collateral requirements		43,786		25,711
Outflows related to loss of funding on debt products		2,642		2,642
Credit and liquidity facilities		185,806		21,888
Other contractual funding obligations		1,362		1,250
Other contingent funding obligations(4)		460,982		8,924
Total cash outflows		*	$	230,423
Cash inflows
Secured lending (e.g. reverse repos)	$	155,378	$	35,873
Inflows from fully performing exposures		25,336		16,055
Other cash inflows		26,598		26,598
Total cash inflows	$	207,312	$	78,526
			Total adjusted value(5)
Total HQLA		*	$	209,777
Total net cash outflows		*	$	151,897
Liquidity coverage ratio (%)		*		138	%
For the quarter ended October 31, 2019 ($ millions)			Total adjusted value(5)
Total HQLA		*	$	165,088
Total net cash outflows		*	$	132,125
Liquidity coverage ratio (%)		*		125	%

* Disclosure is not required under regulatory guideline.

(1) Based on the average daily positions of the 62 business days in the quarter.

(2) Unweighted values represent outstanding balances maturing or callable within the next 30 days.

(3) Weighted values represent balances calculated after the application of HQLA haircuts or inflow and outflow rates, as prescribed by the OSFI LAR guidelines.

(4) Total unweighted value includes uncommitted credit and liquidity facilities, guarantees and letters of credit, outstanding debt securities with remaining maturity greater than 30 days, and other contractual cash outflows.

(5) Total adjusted value represents balances calculated after the application of both haircuts and inflow and outflow rates and any applicable caps.

HQLA is substantially comprised of Level 1 assets (as defined in the LAR guideline), such as cash, deposits with central banks available to the Bank in times of stress, and highly rated securities issued or guaranteed by governments, central banks and supranational entities.

The increase in the Bank’s average LCR for the quarter ended October 31, 2020 versus the quarter ended October 31, 2019 was attributable to central bank actions to support the Canadian economy and financial systems and deposit growth, partially offset by lower wholesale funding. The Bank monitors its significant currency exposures, Canadian and U.S. dollars, in accordance with its liquidity risk management framework and risk appetite.

110  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Risk Management

Funding

The Bank ensures that its funding sources are well diversified. Funding concentrations are regularly monitored and analyzed by type. The sources of funding are capital, deposits from retail and commercial clients sourced through the Canadian and international branch network, deposits from financial institutions as well as wholesale debt issuances.

Capital and personal deposits are key components of the Bank’s core funding and these amounted to $325 billion as at October 31, 2020 (October 31, 2019 – $303 billion). The increase since October 31, 2019, was primarily due to personal deposit growth. A portion of commercial deposits, particularly those of an operating or relationship nature, are also considered part of the Bank’s core funding. Furthermore, core funding is augmented by longer term wholesale debt issuances (original maturity over 1 year) of $168 billion (October 31, 2019 – $164 billion). Longer term wholesale debt issuances include senior notes, mortgage securitizations, asset-backed securities and covered bonds.

The Bank operates in many different currencies and countries. From a funding perspective, the most significant currencies are Canadian and U.S. dollars. With respect to the Bank’s operations outside Canada, there are different funding strategies depending on the nature of the activities in each country. For those countries where the Bank operates a branch banking subsidiary, the strategy is for the subsidiary to be substantially self-funding in its local market. For other subsidiaries or branches outside Canada where local deposit gathering capability is not sufficient, funding is provided through the wholesale funding activities of the Bank.

From an overall funding perspective, the Bank’s objective is to achieve an appropriate balance between the cost and the stability of funding. Diversification of funding sources is a key element of the funding strategy.

The Bank’s wholesale debt diversification strategy is primarily executed via the Bank’s main wholesale funding centres, located in Toronto, New York, London and Singapore. The majority of these funds are sourced in Canadian and U.S. dollars. Where required, these funds are swapped to fund assets in different currencies. The funding strategy deployed by wholesale funding centres and the management of associated risks, such as geographic and currency risk, are managed centrally within the framework of policies and limits that are approved by the Board of Directors.

In the normal course, the Bank uses a mix of unsecured and secured wholesale funding instruments across a variety of markets. The choice of instruments and markets is based on a number of factors, including relative cost and market capacity as well as an objective of maintaining a diversified mix of sources of funding. Market conditions can change over time, impacting cost and capacity in particular markets or instruments. Changing market conditions can include periods of stress where the availability of funding in particular markets or instruments is constrained. In these circumstances the Bank would increase its focus on sources of funding in functioning markets and secured funding instruments. Should a period of extreme stress exist such that all wholesale funding sources are constrained, the Bank maintains a pool of liquid assets to mitigate its liquidity risk. This pool includes cash, deposits with central banks and securities.

In Canada, the Bank raises short- and longer-term wholesale debt through the issuance of senior unsecured notes. Additional longer-term wholesale debt may be generated through the Bank’s Canadian Debt and Equity Shelf, the securitization of Canadian insured residential mortgages through CMHC securitization programs (such as Canada Mortgage Bonds), uninsured residential mortgages through the Bank’s Covered Bond Program, retail credit card receivables through the Trillium Credit Card Trust II program and retail indirect auto loan receivables through the Securitized Term Auto Receivables Trust program. Prior to maturities in February 2020, unsecured personal lines of credit were securitized through the Halifax Receivables Trust program. While the Bank includes CMHC securitization programs in its view of wholesale debt issuance, this source of funding does not entail the run-off risk that can be experienced in funding raised from capital markets.

Outside of Canada, short-term wholesale debt may be raised through the issuance of negotiable certificates of deposit in the United States, Hong Kong, the United Kingdom, and Australia and the issuance of commercial paper in the United States. The Bank operates longer-term wholesale debt issuance registered programs in the United States, such as its SEC Registered Debt and Equity Shelf, and non-registered programs, such as the securitization of retail indirect auto loan receivables through the Securitized Term Auto Receivables Trust program and the securitization of retail credit card receivables through the Trillium Credit Card Trust II program. The Bank’s Covered Bond Program is listed with the U.K. Listing Authority, and the Bank may issue under the program in Europe, the United Kingdom, the United States, Australia and Switzerland. The Bank also raises longer-term funding across a variety of currencies through its Australian Medium Term Note Programme, European Medium Term Note Programme and Singapore Medium Term Note Programme. The Bank’s European Medium Term Note Programme is listed with the U.K. Listing Authority, and the Swiss Stock Exchange. The Bank’s Singapore Medium Term Note Programme is listed with the Singapore Exchange and the Taiwan Exchange.

The Department of Finance’s bail-in regulations under the Canada Deposit Insurance Corporation (CDIC) Act and the Bank Act, became effective September 23, 2018. Senior long-term debt issued by the Bank on or after September 23, 2018, that has an original term greater than 400 days and is marketable, subject to certain exceptions, is subject to the Canadian Bank Recapitalization (Bail-in) regime. Under the Bail-in regime, in circumstances when the Superintendent of Financial Institutions has determined that a bank may no longer be viable, the Governor in Council may, upon a recommendation of the Minister of Finance that they are of the opinion that it is in the public interest to do so, grant an order directing the CDIC to convert all or a portion of certain shares and liabilities of that bank into common shares. As at October 31, 2020, issued and outstanding liabilities of $33 billion (October 31, 2019 – $11 billion) were subject to conversion under the bail-in regime.

Starting from the second quarter of 2020, the Bank accessed programs of central banks launched or amended in response to COVID-19 to supplement its funding. Further details of these programs are outlined as part of the Bank’s Impact of COVID-19 disclosures on page 25 of this report.

2020 Scotiabank Annual Report  |  111

Management’s Discussion and Analysis

The table below provides the remaining contractual maturities of funding raised through wholesale funding. In the Consolidated Statement of Financial Position, these liabilities are primarily included in Business & Government Deposits.

T57  Wholesale funding⁽¹⁾

As at October 31, 2020 ($millions)	Less than 1 month		1-3 months		3-6 months		6-9 months		9-12 months		Sub-Total < 1 Year		1-2 years		2-5 years		>5 years		Total
Deposits from banks(2)	$	1,084	$	439	$	88	$	36	$	1	$	1,648	$	–	$	–	$	–	$	1,648
Bearer deposit notes, commercial paper and short-term certificate of deposits		5,813		9,539		10,475		6,856		4,567		37,250		953		346		67		38,616
Asset-backed commercial paper(3)		606		2,307		400		–		–		3,313		–		–		–		3,313
Senior notes(4)(5)		144		5,642		4,822		3,843		923		15,374		14,753		12,109		10,337		52,573
Bail-inable notes(5)		–		1,362		–		–		–		1,362		214		21,980		9,397		32,953
Asset-backed securities		–		1,811		12		–		–		1,823		956		542		254		3,575
Covered bonds		–		–		3,330		–		5,804		9,134		3,879		13,396		4,086		30,495
Mortgage securitization(6)		212		1,558		243		2,161		413		4,587		3,700		14,058		5,076		27,421
Subordinated debentures(7)		69		–		–		–		–		69		79		389		8,818		9,355
Total wholesale funding sources	$	7,928	$	22,658	$	19,370	$	12,896	$	11,708	$	74,560	$	24,534	$	62,820	$	38,035	$	199,949
Of Which:
Unsecured funding	$	7,110	$	16,982	$	15,385	$	10,735	$	5,491	$	55,703	$	15,999	$	34,824	$	28,619	$	135,145
Secured funding		818		5,676		3,985		2,161		6,217		18,857		8,535		27,996		9,416		64,804
As at October 31, 2019 ($millions)	Less than 1 month		1-3 months		3-6 months		6-9 months		9-12 months		Sub-Total < 1 Year		1-2 years		2-5 years		>5 years		Total
Deposits from banks(2)	$	3,284	$	596	$	566	$	198	$	268	$	4,912	$	–	$	–	$	–	$	4,912
Bearer deposit notes, commercial paper and short-term certificate of deposits		6,590		18,923		27,866		24,778		13,497		91,654		2,139		717		62		94,572
Asset-backed commercial paper(3)		1,096		3,069		1,324		–		–		5,489		–		–		–		5,489
Senior notes(4)(5)		1,372		3,842		2,533		5,080		3,520		16,347		14,114		25,609		11,636		67,706
Bail-inable notes(5)		–		–		–		26		–		26		1,314		6,568		2,920		10,828
Asset-backed securities		2		12		1,290		–		791		2,095		2,466		1,176		210		5,947
Covered bonds		–		545		1,844		1,882		–		4,271		8,979		10,171		2,379		25,800
Mortgage securitization(6)		–		601		771		663		353		2,388		4,376		12,675		4,486		23,925
Subordinated debentures(7)		–		–		–		–		–		–		78		156		9,121		9,355
Total wholesale funding sources	$	12,344	$	27,588	$	36,194	$	32,627	$	18,429	$	127,182	$	33,466	$	57,072	$	30,814	$	248,534
Of Which:
Unsecured funding	$	11,246	$	23,361	$	30,965	$	30,082	$	17,285	$	112,939	$	17,645	$	33,050	$	23,739	$	187,373
Secured funding		1,098		4,227		5,229		2,545		1,144		14,243		15,821		24,022		7,075		61,161

(1) Wholesale funding sources exclude repo transactions and bankers acceptances, which are disclosed in the T58 Contractual maturities. Amounts are based on remaining term to maturity.

(2) Only includes commercial bank deposits.

(3) Wholesale funding sources also exclude asset-backed commercial paper issued by certain ABCP conduits that are not consolidated for financial reporting purposes.

(4) Not subject to bail-in.

(5) Includes Structured notes issued to institutional investors.

(6) Represents residential mortgages funded through Canadian Federal Government agency sponsored programs. Funding accessed through such programs does not impact the funding capacity of the Bank in its own name.

(7) Although subordinated debentures are a component of regulatory capital, they are included in this table in accordance with EDTF recommended disclosures.

Wholesale funding generally bears a higher risk of run-off in a stressed environment than other sources of funding. The Bank mitigates this risk through funding diversification, ongoing engagement with investors and by maintaining a large holding of unencumbered liquid assets. Unencumbered liquid assets of $250 billion as at October 31, 2020 (October 31, 2019 – $211 billion) were well in excess of wholesale funding sources that mature in the next twelve months.

Contractual maturities and obligations

The table below provides the maturity of assets and liabilities as well as the off-balance sheet commitments as at October 31, 2020, based on the contractual maturity date.

From a liquidity risk perspective the Bank considers factors other than contractual maturity in the assessment of liquid assets or in determining expected future cash flows. In particular, for securities with a fixed maturity date, the ability and time horizon to raise cash from these securities is more relevant to liquidity management than contractual maturity. For other assets and deposits the Bank uses assumptions about rollover rates to assess liquidity risk for normal course and stress scenarios. Similarly, the Bank uses assumptions to assess the potential drawdown of credit commitments in various scenarios.

The Bank’s contractual obligations include contracts and purchase obligations, including agreements to purchase goods and services that are enforceable, legally binding on the Bank and affect the Bank’s liquidity and capital resource needs. The Bank leases a large number of its branches, offices and other locations. The majority of these leases are for a term of five years, with options to renew.

112  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Risk Management

T58  Contractual maturities

	As at October 31, 2020
($ millions)	Less than one month		One to three months		Three to six months		Six to nine months		Nine to twelve months		One to two years		Two to five years		Over five years		No specific maturity			Total
Assets
Cash and deposits with financial institutions and precious metals	$	65,983	$	469	$	471	$	225	$	187	$	496	$	904	$	767	$	8,139		$	77,641
Trading assets		2,312		4,412		4,426		1,752		2,135		6,366		21,720		16,856		57,860			117,839
Securities purchased under resale agreement and securities borrowed		83,584		21,620		10,059		2,765		1,719		–		–		–		–			119,747
Derivative financial instruments		2,026		4,140		623		2,156		2,312		8,141		7,242		18,425		–			45,065
Investment securities – FVOCI		2,755		5,041		6,941		3,213		6,374		10,179		34,214		7,948		1,832			78,497
Investment securities – amortized cost		1,196		1,707		4,155		2,787		931		4,337		7,626		8,905		–			31,644
Investment securities – FVTPL		–		–		–		–		–		–		–		–		1,248			1,248
Loans		42,908		28,913		31,072		32,724		31,159		92,194		248,377		42,114		53,802			603,263
Residential mortgages		2,938		5,271		9,009		13,400		13,458		49,948		158,050		30,012		2,598	(1)		284,684
Personal loans		2,827		1,605		3,290		3,227		4,358		11,053		23,137		5,279		38,982			93,758
Credit cards		–		–		–		–		–		–		–		–		14,797			14,797
Business and government		37,143		22,037		18,773		16,097		13,343		31,193		67,190		6,823		5,064	(2)		217,663
Allowance for credit losses		–		–		–		–		–		–		–		–		(7,639	)		(7,639	)
Customers’ liabilities under acceptances		11,756		1,986		439		30		17		–		–		–		–			14,228
Other assets		–		–		–		–		–		–		–		–		47,294			47,294
Total assets		212,520		68,288		58,186		45,652		44,834		121,713		320,083		95,015		170,175			1,136,466
Liabilities and equity
Deposits	$	65,249	$	47,997	$	53,315	$	38,786	$	23,698	$	39,350	$	73,007	$	20,614	$	388,822		$	750,838
Personal		10,231		13,741		15,088		11,626		6,192		11,691		9,861		216		167,489			246,135
Non-personal		55,018		34,256		38,227		27,160		17,506		27,659		63,146		20,398		221,333			504,703
Financial instruments designated at fair value through profit or loss		195		305		779		1,029		470		4,781		2,332		9,008		–			18,899
Acceptances		11,833		1,986		439		30		17		–		–		–		–			14,305
Obligations related to securities sold short		161		397		611		275		463		1,749		6,236		8,713		13,297			31,902
Derivative financial instruments		2,017		3,916		670		2,188		2,887		8,499		6,338		15,732		–			42,247
Obligations related to securities sold under repurchase agreements and securities lent		107,391		5,496		7,407		8,382		1,593		7,494		–		–		–			137,763
Subordinated debentures		–		–		–		–		–		–		–		7,405		–			7,405
Other liabilities		635		1,391		1,575		1,417		1,572		6,319		10,876		6,424		32,395			62,604
Total equity		–		–		–		–		–		–		–		–		70,503			70,503
Total liabilities and equity		187,481		61,488		64,796		52,107		30,700		68,192		98,789		67,896		505,017			1,136,466
Off-Balance sheet commitments
Credit commitments(3)		5,374		13,010		22,643		24,764		20,386		34,638		108,929		5,625		–			235,369
Financial guarantees(4)		–		–		–		–		–		–		–		–		35,519			35,519
Outsourcing obligations(5)		16		31		44		43		43		41		–		–		–			218

(1) Includes primarily impaired mortgages.

(2) Includes primarily overdrafts and impaired loans.

(3) Includes the undrawn component of committed credit and liquidity facilities.

(4) Includes outstanding balances of guarantees, standby letters of credit and commercial letters of credit which may expire undrawn.

(5) The Bank relies on outsourcing arrangements for certain support and/or business functions, including, but not limited to, computer operations and cheque and bill payment processing. Outsourcing partners include, among others, IBM Canada and Symcor Inc.

2020 Scotiabank Annual Report  |  113

Management’s Discussion and Analysis

	As at October 31, 2019
($ millions)	Less than one month		One to three months		Three to six months		Six to nine months		Nine to twelve months		One to two years		Two to five years		Over five years		No specific maturity			Total
Assets
Cash and deposits with financial institutions and precious metals	$	35,392	$	696	$	462	$	239	$	181	$	426	$	796	$	685	$	11,552		$	50,429
Trading assets		4,519		6,856		5,349		2,646		2,486		7,280		19,849		16,474		62,029			127,488
Securities purchased under resale agreement and securities borrowed		92,411		26,942		8,859		2,483		483		–		–		–		–			131,178
Derivative financial instruments		2,145		3,363		1,219		1,692		1,748		6,556		5,841		15,555		–			38,119
Investment securities – FVOCI		4,347		4,967		5,157		4,730		1,487		10,887		14,995		11,587		1,561			59,718
Investment securities – amortized cost		298		723		1,512		869		1,159		6,917		3,399		6,968		–			21,845
Investment securities – FVTPL		–		–		–		–		–		–		–		–		796			796
Loans		37,312		31,178		34,801		34,026		31,746		88,939		229,317		44,620		60,544			592,483
Residential mortgages		3,432		5,980		12,031		15,555		13,318		49,618		134,923		30,921		2,391	(1)		268,169
Personal loans		4,097		2,652		3,752		3,711		3,525		12,667		23,556		5,737		38,934			98,631
Credit cards		–		–		–		–		–		–		–		–		17,788			17,788
Business and government		29,783		22,546		19,018		14,760		14,903		26,654		70,838		7,962		6,508	(2)		212,972
Allowance for credit losses		–		–		–		–		–		–		–		–		(5,077	)		(5,077	)
Customers’ liabilities under acceptances		12,072		1,486		297		27		14		–		–		–		–			13,896
Other assets		–		–		–		–		–		–		–		–		50,209			50,209
Total assets		188,496		76,211		57,656		46,712		39,304		121,005		274,197		95,889		186,691			1,086,161
Liabilities and equity
Deposits	$	73,415	$	59,827	$	60,036	$	51,468	$	35,723	$	45,624	$	69,082	$	18,219	$	319,996		$	733,390
Personal		9,486		11,138		14,479		12,287		12,380		11,277		11,257		562		141,934			224,800
Non-personal		63,929		48,689		45,557		39,181		23,343		34,347		57,825		17,657		178,062			508,590
Financial instruments designated at fair value through profit or loss		229		410		398		829		826		4,028		1,844		3,671		–			12,235
Acceptances		12,077		1,486		297		27		14		–		–		–		–			13,901
Obligations related to securities sold short		892		871		704		305		422		1,771		5,626		6,658		13,155			30,404
Derivative financial instruments		2,210		4,374		1,859		1,621		1,956		8,659		6,437		13,106		–			40,222
Obligations related to securities sold under repurchase agreements and securities lent		114,864		5,496		2,930		793		–		–		–		–		–			124,083
Subordinated debentures		–		–		–		–		–		–		–		7,252		–			7,252
Other liabilities		3,410		1,581		1,154		871		964		3,821		6,452		5,952		30,277			54,482
Total equity		–		–		–		–		–		–		–		–		70,192			70,192
Total liabilities and equity		207,097		74,045		67,378		55,914		39,905		63,903		89,441		54,858		433,620			1,086,161
Off-Balance sheet commitments
Operating leases	$	38	$	76	$	112	$	109	$	106	$	387	$	894	$	1,011	$	–		$	2,733
Credit commitments(3)		4,289		5,264		15,370		16,398		14,745		28,007		119,308		8,493		–			211,874
Financial guarantees(4)		–		–		–		–		–		–		–		–		36,387			36,387
Outsourcing obligations(5)		18		36		52		52		52		173		154		–		1			538

(1) Includes primarily impaired mortgages.

(2) Includes primarily overdrafts and impaired loans.

(3) Includes the undrawn component of committed credit and liquidity facilities.

(4) Includes outstanding balances of guarantees, standby letters of credit and commercial letters of credit which may expire undrawn.

(5) The Bank relies on outsourcing arrangements for certain support and/or business functions, including, but not limited to, computer operations and cheque and bill payment processing. Outsourcing partners include, among others, IBM Canada and Symcor Inc.

114  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Risk Management

Other Risks

Money Laundering, Terrorist Financing and Sanctions Risk

Money Laundering, Terrorist Financing (ML/TF) and Sanctions risk is the susceptibility of Scotiabank to be used by individuals or organizations to launder the proceeds of crime, finance terrorism, or violate economic sanctions. It also includes the risk that Scotiabank does not conform to applicable Anti-Money Laundering (“AML”) / Anti-Terrorist Financing (“ATF”) or Sanctions legislation, or does not apply adequate controls reasonably designed to deter and detect ML/TF and sanctions violations or to file any required regulatory reports.

Money laundering, terrorist financing, and sanctions risks are managed throughout the Bank via the operation of the Bank’s AML/ATF and Sanctions program (“the Program”). The Board appointed Group Chief Anti-Money Laundering Officer is responsible for the design and operation of the Program, including development and application of written policies, procedures, and standards that are kept up to date and approved by senior management, assessing and documenting money laundering, terrorist-financing or sanctions risks, developing and maintaining an ongoing training program, and review of the effectiveness of the Program. The review of effectiveness is supplemented by an independent assessment conducted by the Audit Department. The Group Chief Anti-Money Laundering Officer has unfettered access to, and direct communication with, the Bank’s Senior Management and the Board.

The Bank conducts an annual self-assessment of the ML/TF and sanctions risks inherent in its business units, as well as assessment of the control measures in place to manage those risks. The process is led by the Bank’s AML Risk unit and the results shared with the Bank’s Senior Management. All active employees are provided with mandatory AML/ATF and Sanctions training on an annual basis. The Bank performs Customer Due Diligence sufficient to form a reasonable belief that it knows the true identity of its customers, including in the case of an entity, its material ultimate beneficial owners.

The Bank will not maintain anonymous accounts, nor will it maintain accounts for shell banks. Consistent with a risk-based approach, the Bank assesses the risks of its customers and, where appropriate, conducts enhanced due diligence on those who are considered higher risk. The Bank also conducts ongoing risk tailored monitoring of its customers to detect and report suspicious transactions and activity, and conducts customer and transaction screening against terrorist, sanctions, and other designated watch-lists.

Operational Risk

Operational risk is the risk of loss resulting from people, inadequate or failed processes and systems, or from external events. Operational risk includes third party risk management and legal risk but excludes strategic risk and reputational risk. It also exists in some form in each of the Bank’s business and support activities, and third parties to whom activities have been outsourced. It can result in financial loss, regulatory sanctions and damage to the Bank’s reputation.

The Bank’s Operational Risk Management Framework outlines the Bank’s structured approach for effective management of enterprise-wide operational risk in a manner consistent with best practices and regulatory requirements. The Framework consists of the following key components:

Governance

Risk Committee Governance. The Bank recognizes operational risk as a distinct risk management discipline, managed enterprise-wide, in a globally coordinated manner, and in compliance with local regulations. Governance of operational risk is aligned with the Bank’s overarching committee governance structure.

Policies, Frameworks, and Methodologies. Operational risk management is governed by various policies, frameworks, and methodologies established for effective identification, measurement and management of operational risks across the Bank.

Risk Appetite

The operational risk appetite articulates the amount and type of risk the Bank is willing to take to achieve its strategic and financial objectives and consists of a mixture of qualitative statements and quantitative measures with limits where appropriate.

Risk Identification and Assessment

Risk identification and assessment is a critical part of effectively managing operational risk. Risks are identified, classified, and assessed, and their potential impact is evaluated and reported to management and the Board. Operational risk management tools and programs are in place to support the identification and assessment of operational risk with each having their defined methodology and/or standards. The key tools include an Operational Risk Dictionary, Risk and Control Self-Assessments (RCSA), Scenario Analysis, and New Initiatives Risk Assessment.

Risk Measurement

Operational Risk Events. The goal of Operational Risk Event reporting is to manage, mitigate and monitor operational risk within the organization. The data captured provides meaningful information for assessing and mitigating operational risk exposure at the Bank as a result of event root cause analysis and evaluation of internal controls. Timely, accurate and complete reporting of Operational Risk Event data assists the Bank in maintaining a strong risk culture and promotes transparency of the financial impact of Operational Risk Events by aggregating losses and monitoring performance to indicate whether the Bank is operating within its risk appetite.

Operational Risk Capital. Operational risk capital refers to regulatory and internal capital which is quantified as a reserve for unexpected losses resulting from operational risk. Operational risk capital is a component of the total amount of risk capital that the Bank holds.

Risk Mitigation

Controls are identified and assessed through the various Operational Risk Management tools. In cases where controls are deemed deficient a remedial action will be required, which in turn will help to mitigate residual risk. Operational risk response decisions include mitigation, transfer, acceptance, and avoidance of operational risks.

Risk Monitoring, Analytics, and Reporting

The Bank has processes in place for the ongoing monitoring of operational risk. These monitoring activities can provide an early warning of emerging issues, triggering timely management response. In addition, these activities allow for review and analysis of the risk profile in relation to

2020 Scotiabank Annual Report  |  115

Management’s Discussion and Analysis

risk appetite or other key indicators to identify when events may be approaching or exceeding thresholds, requiring action and/or escalation. Operational risk data is collected in risk systems and used for reporting. Operational risk reporting facilitates distribution and escalation of operational risk information to the relevant parties and provides stakeholders involved in operational risk management activities access to reliable data in a consistent and timely manner to support risk-based decision making.

Information Technology (IT) & Cyber Security Risk

IT Risk is the risk of financial loss, disruption or damage to reputation from some sort of failure of information technology systems. Cyber Security risks are a subset of unique IT risks faced as a result of using interconnected systems and digital technologies.

IT and Cyber Security risks continue to evolve across the financial industry. The increasing use of online delivery channels and mobile devices to perform financial transactions expose the bank to operational disruptions due to multiple factors such as: human errors, frauds, infrastructure failures, issues with our business partners, among others. Those events may increase costs or may negatively impact the Bank’s operational environment, our customers and other third parties.

The Board of Directors approves the IT and Cyber Security Risk Management, Cyber Security and Information Security policies, which along with the respective frameworks are focused on safeguarding the Bank’s and its customers’ information, ensuring the Bank’s IT environment is reliable, secure, resilient and robust in supporting our business objectives.

Significant efforts are directed on risk management activities in line with industry standards and best practices. The Bank continues to expand its cyber security capabilities to defend against potential threats and minimize the impact to the business, including the activities to reinforce the Bank’s resilience to events caused by factors out of the Bank’s control. The dependency on third parties and the potential risks they bring to the continuity of our business activities is a key area of focus. Increased regulatory oversight of IT and Cyber Security risk management practices is expected going forward.

The Bank continuously monitors metrics and Key Risk Indicators, which are regularly reported to the Board of Directors, its Risk Committee and other management committees who oversee the performance of the associated risk thresholds. Information security awareness campaigns are conducted periodically, including annual mandatory training sessions on information security and operational risk to all our employees, reinforcing our risk culture.

Compliance Risk

Compliance Risk is the risk of an activity not being conducted in conformity with applicable laws, rules, regulations and prescribed practices (“regulatory requirements”), as well as compliance related internal policies and procedures, and ethical standards expected by regulators, customers, investors, employees and other stakeholders.

The Bank conducts business in many jurisdictions around the world and provides a wide variety of financial products and services through its various lines of business and operations. It is subject to, and must comply with, many and changing Regulations by governmental agencies, supervisory authorities and self-regulatory organizations in all the jurisdictions in which the Bank operates. The regulatory bar is constantly rising with Regulations being more vigorously enforced and new Regulations being enacted. The bar of public expectations is also constantly rising. Regulators and customers expect the Bank and its employees will operate its business in compliance with applicable laws and will refrain from unethical practices.

Compliance risk is managed on an enterprise-wide basis throughout the Bank via the operation of the Scotiabank Compliance Program (“the Program”) which is led by the Bank’s Chief Compliance Officer (CCO) who is responsible for overseeing Compliance Risk Management within the Bank. The CCO is responsible for assessing the adequacy of, adherence to and effectiveness of the Program, as well as for the development and application of written compliance policies and procedures that are kept up to date and approved by senior management, assessing and documenting compliance risks, developing and maintaining a written compliance training program, which in each case is performed either directly or indirectly by other departments within the Bank in coordination with Global Compliance. This program and these ancillary activities are subject to the Audit Department’s periodic review to assess the effectiveness of the Program.

The Board-approved Compliance Risk Summary Framework describes the general policies and principles applicable to compliance risk management within Scotiabank and encompasses the Bank’s Regulatory Compliance Management Framework (RCMF) as contemplated by OSFI Guideline E-13. The Compliance Risk Summary Framework is an integral part of the enterprise-wide framework, policies and procedures that collectively articulate the Bank’s governance and control structure. Other more specifically focused compliance risk management policies and procedures may be developed within the Compliance Risk Summary Framework where necessary or appropriate.

Environmental Risk

Environmental risk refers to the possibility that environmental concerns involving Scotiabank or its customers could affect the Bank’s performance. The Bank considers climate change as a type of Environmental Risk.

To safeguard the Bank and the interests of its stakeholders, Scotiabank has an environmental policy, which is approved by the Bank’s Board of Directors. The policy guides day-to-day operations, lending practices, supplier agreements, the management of real estate holdings and external reporting practices. It is supplemented by specific policies and practices relating to individual business lines.

Environmental risks associated with the business operations of each borrower and any real property offered as security are considered in the Bank’s credit evaluation procedures. This includes an environmental risk assessment where applicable, and commentary on the potential impact of climate change (including physical or transition risk impacts) on the borrower. Global Risk Management has primary responsibility for establishing the related policies, processes and standards associated with mitigating environmental risk in the Bank’s lending activities. Decisions are taken in the context of the risk management framework.

In the area of project finance, the Equator Principles have been integrated into the Bank’s internal processes and procedures since 2006. The Equator Principles help financial institutions determine, assess, manage and report environmental and social risk. The principles apply to project finance loans and advisory assignments where total capital costs exceed US$10 million, and to certain project-related corporate loans, bridge loans, and project-related refinance and project-related acquisition finance loans. The Equator Principles provide safeguards for sensitive projects to ensure protection of natural habitats and the rights of indigenous peoples, as well as safeguards against the use of child and forced labour. The bank has adopted the fourth version of Equator Principles (EP4), which came into effect on October 1, 2020

116  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Risk Management

The Bank’s Environmental Policy plays a prominent role in guiding the reduction of the Bank’s environmental footprint. The Real Estate Department adheres to an Environmental Compliance Policy to ensure responsible management of the Bank’s real estate holdings from an environmental perspective. In addition, a variety of reduction measures are in place for energy, paper and waste in the Bank’s corporate offices and branch networks. Internal tracking systems are in place with respect to energy use, greenhouse gas emissions (GHG) and paper consumption. Since 2012, GHG emissions data for the branch network and corporate offices has been externally verified.

To continue operations in an environmentally responsible manner, the Bank monitors policy and legislative requirements through ongoing dialogue with government, industry and stakeholders in countries where it operates. Scotiabank has been meeting with environmental organizations, industry associations and socially responsible investment organizations with respect to the role that banks can play to help address issues such as climate change, protection of biodiversity, promotion of sustainable forestry practices, implementing the recommendations of the Task Force on Climate-related Financial Disclosure, and other environmental issues important to its customers and communities where it operates. The Bank has an ongoing process of reviewing its practices in these areas.

Scotiabank has a number of environmentally focused products and services, including: an EcoEnergy Financing program designed to support personal and small business customers who wish to install small-scale renewable energy projects; and an auto loan product for hybrid, electric and clean diesel vehicles. As well, Scotiabank has the Commodities Derivatives group, which assists corporate clients by providing liquidity and hedge solutions in the carbon market.

Environmental Reporting

Scotiabank is also a signatory to, and participant in the Carbon Disclosure Project, which provides corporate disclosure to the investment community on greenhouse gas emissions and climate change management. Further information is available in the Bank’s annual Environmental, Social and Governance (ESG) Report.

Climate Change Risks – Taskforce on Climate Related Financial Disclosures (TCFD)

In 2018, Scotiabank announced its support of the Financial Stability Board Task Force on Climate-related Financial Disclosures. The implementation of the recommendations across Scotiabank is a multi-year journey.

In 2019, the Board of Directors approved an updated climate change strategy. Scotiabank’s Climate Commitments detail the Bank’s approach to addressing the risks and opportunities arising from climate change. These five commitments are detailed in an external position statement.

Governance

Board Oversight

As the topic of climate change requires a multidisciplinary approach, the risks and opportunities it poses to the Bank are addressed by the Board of Directors and its committees. The Board of Directors approved the Bank’s Climate Change Strategy in October 2019. In addition, the following Board committees provide ongoing oversight.

• Risk Committee: Provides oversight of key risks, including those affected by climate change. This includes review (and, where appropriate, recommendation to the Board for approval) of risk appetite limits and policy-oriented documents addressing credit risk, environmental risk, and operational risk as well as reporting on potentially material climate change risks.

• Corporate Governance Committee: Provides oversight of the ESG strategy, of which climate change is a key priority, and the annual ESG Report.

• Audit & Conduct Review Committee: Provides oversight of climate change-related disclosure in the Bank’s financial reporting, including its Annual Report.

Management’s Role

The management of climate change risk is ultimately overseen by the Group Head and Chief Risk Officer, who reports directly to the CEO and has unfettered access to the Risk Committee of the Board. This is aided through a Climate Change Steering Committee made up of senior officers across the business lines and control/stewardship functions. The Committee meets monthly and is accountable for monitoring of progress against climate change targets.

Responsibility for implementing Scotiabank’s climate change commitments lies with teams across several business lines and functional units across the bank. Climate change considerations are integrated into credit applications and industry reviews, through climate-related risk policies and procedures, specialized tools and training to banking officers and credit adjudicators. A cross-functional working group meets regularly to support the day to day implementation and tracking of the climate change strategy.

Strategy

Scotiabank recognizes that climate change is significantly impacting natural systems and communities across the globe and poses a significant risk to the global economy and society as a whole. Efforts to address climate change will require significant mobilization of capital from public and private sources worldwide.

Through Scotiabank’s Climate Commitments the Bank committed to mobilizing $100 billion by 2025 to reduce the impacts of climate change. This includes lending, investing, finance and advisory, as well as investments in the Bank’s direct operations and communities where it operates, and will help the Bank capitalize on the financial opportunity of the transition to a low-carbon economy. This commitment is supported by the Scotiabank Green and Transition Taxonomy and includes the creation of new products and services, including the issuance of our Green Bond (USD$500 million 3.5 year senior unsecured) in 2019. It has also led to enhanced integration of climate risk assessments in the credit adjudication process and further commitments to decarbonize the Bank’s own operations. In 2020, Scotiabank launched a Sustainable Finance Group within Global Banking and Markets to help further the Climate Commitments. This group works closely with Scotiabank partner teams to provide financial solutions and advice across sustainable finance products to corporate, financial, public sector and institutional clients across our global footprint.

Risk Management

The Bank considers environmental risk (including climate-change risks) as a principal risk type. Climate-change risk refers to the possibility that climate change issues associated with Scotiabank or its customers could ultimately affect Bank performance by giving rise to credit, reputational,

2020 Scotiabank Annual Report  |  117

Management’s Discussion and Analysis

operational or legal risk. Climate-change risks could be in the form of physical or transition risk. Examples of physical risk considerations include severe weather (e.g. floods, hurricanes, extreme cold or heat). Examples of transition risk considerations include policy/regulatory actions such as subsidies, taxes or increased fuel costs, as well as changing market conditions.

The Bank utilizes a comprehensive environmental risk management process where the identification, assessment and management of climate change risk is done through due diligence as part of the overall existing environmental risk assessment and credit adjudication processes. Highlights in 2020 include the following:

– Integration of new Climate Commitments into existing risk frameworks

• The credit due diligence process was enhanced to specifically identify transition and physical risks and opportunities for business lending.

• Development has begun for a standalone climate change risk framework, risk appetite statement, and metrics.

– Integration of climate change risk assessment (CCRA) at the sector and borrower-levels

• A sector sensitivity methodology was developed that identifies key physical and transition risk drivers to determine potential material risks and opportunities. Environment and climate change risk assessment and mitigation is now a standard part of each annual industry review.

• The Bank standardized the process of performing CCRAs for all business borrowers, updated internal systems to track CCRAs, and provided training for banking and credit officers.

• The CCRA process evaluates both the physical (acute and chronic) and transition (reputational, market, technology, legal and compliance) risks a client may face, and their awareness and response (Quality of Management) to such risks. This process will also support data collection to enable the Bank to effectively understand, mitigate and manage climate change risks across sectors and geographies and will support stress testing and scenario planning of our business banking loan book.

– Knowledge building on climate change risk and scenario-analysis

• A module on climate change risk was delivered in the annual mandatory environmental risk training for all banking officers and credit adjudicators.

• The Bank is developing a methodology for stress testing the Bank’s business and retail banking portfolios, leveraging the data collected from the CCRA, at the sectoral and business level according to various internationally recognized climate change scenarios and models.

– External collaboration with peers

• Scotiabank is a participant in industry groups to develop consistent methodologies and metrics for TCFD reporting.

• Scotiabank supported Waterloo’s Intact Centre on Climate Adaptation report Factoring Climate Risk into Financial Valuation. The report provides practical guidance to better incorporate climate risk into the commercial real estate and transmission and distribution sectors.

• Scotiabank is a participant in the United National Environment Program – Finance Initiative (UNEP FI) TCFD pilot to harmonize industry-wide approaches for climate scenario analysis in bank lending portfolios. Scotiabank also provided case study commentary towards the UNEP FI Climate Risk Governance and Applications external publication.

• Scotiabank is involved in the initiative to create a Canadian Transition Finance set of Principles and Transition Taxonomy.

• Scotiabank is a member of the Institute of International Finance (IIF) Sustainable Finance Working Group.

Metrics and Targets

Scotiabank sets, monitors and reports on climate change related performance and targets annually in Scotiabank’s Environmental, Social and Governance Report. The Bank also reports to CDP. As part of Scotiabank’s Climate Commitments, the Bank is tracking the initiatives that underlie its commitment as part of the metrics and targets it has adopted pursuant to these Commitments, including a target to reduce operational GHG emissions and to mobilize $100 billion to reduce the impacts of climate change.

The implementation of CCRA in the Business Banking loan book will provide the Bank with the data necessary to support stress testing and scenario planning. The data obtained has helped the Bank develop sound metric fundamentals as we continue to finalize the process to calculate the Bank’s credit exposures to high-carbon sectors.

Data Risk

Data risk is the risk, whether direct or indirect, to data that is used to support the Bank’s ability to make informed decisions and develop accurate reporting and analytics for the Bank, including the Board, senior management and regulators, or for customer facing and/or marketing purposes. Risks to which the Bank is exposed include data management, data taxonomy, metadata, breaches or data that is incomplete, inaccurate, invalid, untimely and/or inaccessible.

Data is considered one of the Bank’s most strategic assets and the volume, value and type of data found within the Bank has exponentially increased in recent years. Enhanced rigor towards data management is a concentrated focus for the Bank with the increase in regulatory demands. The Data, Cyber and IT Risk Committee approves the Data Risk Framework and Data Management and Governance Policy. The goals of the framework and policy are to ensure oversight and management of critical Bank-wide data, and to provide governance, oversight, control structure and accountabilities to enable greater enterprise coordination and consistency.

The Data and AI Risk (DAIR) team is responsible for oversight of enterprise data risk. In partnership with the Data Office, DAIR oversees and standardizes data management and data governance practices in establishing reliable, reusable and scalable data. As data is produced and consumed by different business lines and geographies across the Bank, an effective, collaborative and holistic approach to data risk management is required to minimize reputational, regulatory and financial risk.

118  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Risk Management

Model Risk

Model risk is the risk of adverse financial (e.g., capital, losses, revenue) and reputational consequences arising from the design, development, implementation and/or use of a model. It can originate from inappropriate specifications; incorrect parameter estimates; flawed hypotheses and/or assumptions; mathematical computation errors; inaccurate, inappropriate or incomplete data; inappropriate, improper or unintended usage; and inadequate monitoring and/or controls.

The Bank’s Model Risk Management Policy (MRMP) describes the overarching principles, policies, and procedures that provide the framework for managing model risk. All models, whether developed by the Bank or vendor-supplied, that meet the Bank’s model definition are covered by this Policy. The MRMP also clearly defines roles and responsibilities for key stakeholders involved in the model risk management cycle. Organizational units involved in the Model Risk Management Cycle have unit-level procedures, where appropriate, governing those stages of the cycle that they are responsible for. The Enterprise Core Risk Committee provides oversight over the Bank’s framework for managing model risk and approves the MRMP.

Reputational Risk

Reputational risk is the risk that negative publicity regarding Scotiabank’s conduct, business practices or associations, whether true or not, will adversely affect its revenues, operations or customer base, or require costly litigation or other defensive measures.

Negative publicity about an institution’s business practices may involve any aspect of its operations, but usually relates to questions of business ethics and integrity, or quality of products and services. Such negative publicity has an impact on the Bank’s brand and reputation.

Negative publicity and related reputational risk frequently arise as a by-product of some other kind of risk management control failure such as compliance and operational risks. In some cases, reputational risk can arise through no direct fault of an institution, but indirectly as a ripple-effect of an association or problems arising within the industry or external environment.

Reputational risk is managed and controlled throughout the Bank by the Scotiabank Code of Conduct (Code), governance practices and risk management programs, policies, procedures and training. Many relevant checks and balances are outlined in greater detail under other risk management sections, particularly Operational Risk, where reference is made to the Bank’s well-established compliance program. All directors, officers and employees have a responsibility to conduct their activities in accordance with the Code, and in a manner that minimizes reputational risk and safeguards the Bank’s reputation. While all employees, officers and directors are expected to protect the reputation of Scotiabank by complying with the Code, the activities of the Legal, Global Tax, Corporate Secretary, Global Communications, AML Risk, Global Compliance and Global Risk Management departments, and the Reputational Risk Committee, are particularly oriented to the management of reputational risk.

In providing credit, advice, or products to customers, or entering into associations, the Bank considers whether the transaction, relationship or association might give rise to reputational risk. The Bank has a Reputational Risk Policy, as well as policy and procedures for managing reputational and legal risk related to structured finance transactions. Global Risk Management plays a significant role in the identification and management of reputational risk related to credit underwriting. In addition, the Reputational Risk Committee is available to support Global Risk Management, as well as other risk management committees and business units, with their assessment of reputational risk associated with transactions, business initiatives, new products and services and sales practice issues.

The Reputational Risk Committee considers a broad array of factors when assessing transactions, so that the Bank meets, and will be seen to meet, high ethical standards. These factors include the extent, and outcome, of legal and regulatory due diligence pertinent to the transaction; the economic intent of the transaction; the effect of the transaction on the transparency of a customer’s financial reporting; the need for customer or public disclosure; conflicts of interest; fairness issues; and public perception. The Reputational Risk Committee also holds quarterly meetings to review activities in the quarter, review metrics and discuss any emerging trends or themes.

The Reputational Risk Committee may impose conditions on customer transactions, including customer disclosure requirements to promote transparency in financial reporting, so that transactions meet Bank standards. In the event the Committee recommends not proceeding with a transaction and the sponsor of the transaction wishes to proceed, the transaction is referred to the Risk Policy Committee.

Strategic Risk

Strategic risk is the risk that the enterprise, business lines or corporate functions will make strategic choices that are ineffective or insufficiently resilient to changes in the business environment, or poorly execute such strategies.

The Board is ultimately responsible for oversight of strategic risk, by adopting a strategic planning process and approving, on an annual basis, a strategic plan for the Bank. Enterprise Strategy manages the strategic planning process.

The execution and evaluation of strategic plans is a fundamental element of the Risk Management Framework.

On an ongoing basis, Heads of Business Lines and Control Functions identify, manage, and assess the internal and external risks that could impede achievement of, or progress of, strategic objectives. The executive management team regularly meets to evaluate the effectiveness of the Bank’s strategic plan, and consider what amendments, if any, are required.

2020 Scotiabank Annual Report  |  119

Management’s Discussion and Analysis

Controls and Accounting Policies

Controls and Procedures

Management’s responsibility for financial information contained in this annual report is described on page 148.

Disclosure controls and procedures

The Bank’s disclosure controls and procedures are designed to provide reasonable assurance that information is accumulated and communicated to the Bank’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of October 31, 2020, the Bank’s management, with the participation of the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, evaluated the effectiveness of its disclosure controls and procedures, as defined under the rules adopted by the U.S. Securities and Exchange Commission (SEC) and the Canadian securities regulatory authorities, and have concluded that the Bank’s disclosure controls and procedures are effective.

Internal control over financial reporting

Management of the Bank is responsible for establishing and maintaining adequate internal control over financial reporting. These controls include policies and procedures that:

• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Bank;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the Bank; and

• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Bank’s assets that could have a material effect on the financial statements.

All control systems contain inherent limitations, no matter how well designed. As a result, the Bank’s management acknowledges that its internal control over financial reporting will not prevent or detect all misstatements due to error or fraud. In addition, management’s evaluation of controls can provide only reasonable, not absolute, assurance that all control issues that may result in material misstatements, if any, have been detected.

Management assessed the effectiveness of internal control over financial reporting, using the Internal Control-Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and based on that assessment concluded that internal control over financial reporting was effective as of October 31, 2020.

Changes in internal control over financial reporting

There have been no changes in the Bank’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting.

Critical Accounting Estimates

The Bank’s accounting policies are integral to understanding and interpreting the financial results reported in this annual report. Note 3 to the consolidated financial statements, summarizes the significant accounting policies used in preparing the Bank’s consolidated financial statements. Certain of these policies require management to make estimates, assumptions and subjective judgements that are difficult, complex, and often relate to matters that are inherently uncertain. The policies discussed below are considered to be particularly important to the presentation of the Bank’s financial position and results of operations, because changes in the estimates, assumptions and judgements could have a material impact on the Bank’s consolidated financial statements. These estimates, assumptions and judgements are adjusted in the normal course of business to reflect changing underlying circumstances.

Allowance for credit losses

The allowance for credit losses, using an expected credit loss approach as required under IFRS 9, is estimated using complex models and incorporates inputs, assumptions and techniques that involve a high degree of management judgment. Under IFRS 9 expected credit loss methodology, an allowance is recorded for expected credit losses on financial assets regardless of whether there has been an actual loss event. The Bank recognizes an allowance at an amount equal to 12 month expected credit losses, if the credit risk at the reporting date has not increased significantly since initial recognition (Stage 1). When a financial asset experiences a significant increase in credit risk subsequent to origination but is not considered to be in default, it is included in Stage 2 and subject to lifetime expected credit losses. Financial assets that are in default are included in Stage 3. Similar to Stage 2, the allowance for credit losses for Stage 3 financial assets captures the lifetime expected credit losses.

The main drivers in allowance for credit loss changes that are subject to significant judgment include the following:

• Determination of point-in-time parameters such as probability of default (PD), loss given default (LGD) and exposure at default (EAD).

• Forecast of macroeconomic variables for multiple scenarios and probability weighting of the scenarios.

• Assessment of significant increase in credit risk.

In the current economic environment resulting from COVID-19, the models in isolation may not capture all the uncertainty as well as the impact of the public support programs by the governments and central banks. Therefore, management has applied significant expert credit judgment in the determination of the allowance for credit losses.

Measurement of expected credit losses

The probability of default (PD), exposure at default (EAD), and loss given default (LGD) inputs used to estimate expected credit losses are modelled based on macroeconomic variables that are most closely related with credit losses in the relevant portfolio.

120  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Controls and Accounting Policies

Details of these statistical parameters/inputs are as follows:

• PD – The probability of default is an estimate of the likelihood of default over a given time horizon. A default may only happen at a certain time over the remaining estimated life, if the facility has not been previously derecognized and is still in the portfolio.

• EAD – The exposure at default is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of principal and interest, whether scheduled by contract or otherwise, expected drawdowns on committed facilities, and accrued interest from missed payments.

• LGD – The loss given default is an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, including from the realization of any collateral. It is usually expressed as a percentage of the EAD.

Forward-looking macroeconomic scenarios

The Bank uses a broad range of forward-looking economic information as inputs to its models of expected credit losses and the related allowance. These include real GDP, unemployment rates, central bank interest rates, and house-price indices. The allowance is determined using four probability-weighted, forward-looking scenarios. The Bank revised its allowance for credit losses (ACL) methodology in Q1, 2020, by adding an additional, more severe pessimistic forward-looking scenario. The Bank considers both internal and external sources of information and data in order to create unbiased projections and forecasts. The Bank prepares the scenarios using forecasts generated by Scotiabank Economics (SE). The forecasts are generated using both internally and externally developed models whose outputs are modified by SE as necessary to formulate a ‘base case’ view of the most probable future direction of economic developments; SE also develops a representative range of other alternative possible forecast scenarios. More specifically, the process involves the development of three additional economic scenarios to which relative probabilities are assigned. The development of the baseline and alternative scenarios is overseen by a governance committee that consists of internal stakeholders from across the Bank. The final baseline and alternative scenarios reflect significant review and oversight, and may incorporate judgment both in the determination of the scenarios’ forecasts and the probability weights that are assigned to them. Qualitative adjustments or overlays may also be made as temporary adjustments using expert credit judgment in circumstances where, in the Bank’s view, the existing regulatory guidance, inputs, assumptions, and/or modelling techniques do not capture all relevant risk factors. The use of management overlays may require significant judgment that may impact the amount of allowance recognized.

Significant Increase in credit risk (SIR)

The assessment of SIR since origination of a financial asset considers borrower-specific quantitative and qualitative information without consideration of collateral, and the impact of forward-looking information. Quantitative models may not always be able to capture all reasonable and supportable information that may indicate a significant increase in credit risk. Qualitative factors may be assessed to supplement the gap. Examples of situations include changes in adjudication criteria for a particular group of borrowers; changes in portfolio composition and natural disaster events impacting certain portfolios.

For retail exposures, a significant increase in credit risk cannot be assessed using forward looking information at an individual account level. Therefore, the assessment must be done at the segment level. Segment migration thresholds exist for each PD model by product which considers the proportionate change in PD as well as the absolute change in PD. The thresholds used for PD migration are reviewed and assessed at least annually, unless there is a significant change in credit risk management practices in which case the review is brought forward.

For Non-retail exposures the Bank uses an internal risk rating scale (IG codes) for its non-retail exposures. All non-retail exposures have an IG code assigned that reflects the probability of default of the borrower. Both borrower specific and non-borrower specific (i.e. macroeconomic) forward looking information is considered and reflected in the IG rating. Significant increase in credit risk is evaluated based on the migration of the exposures among IG codes.

Fair value of financial instruments

All financial instruments are measured at fair value on initial recognition. Subsequent measurement of a financial instrument depends on its classification. The contractual cash flow characteristics of a financial instrument and the business model under which it is held determines such classification. Non-trading loans and receivables, certain securities and most financial liabilities are carried at amortized cost unless classified or designated as fair value through profit and loss or fair value through other comprehensive income at inception.

Fair value of a financial asset or liability is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal, or in its absence, the most advantageous market to which the Bank has access at the measurement date.

The best evidence of fair value for a financial instrument is the quoted price in an active market. Unadjusted quoted market prices for identical instruments represent a Level 1 valuation. Quoted prices are not always available for over-the-counter transactions, as well as transactions in inactive or illiquid markets. In these instances, internal models that maximize the use of observable inputs are used to estimate fair value. The chosen valuation technique incorporates all the factors that market participants would take into account in pricing a transaction. When all significant inputs are observable, the valuation is classified as Level 2. Financial instruments traded in a less active market have been valued using indicative market prices, present value of cash flows or other valuation techniques. Fair value estimates normally do not consider forced or liquidation sales. Where financial instruments trade in inactive markets or when using models where observable parameters do not exist, significant management judgement is required for valuation purposes such as multiple of the underlying earnings, pricing by third party providers, discount rates, volatilities and correlations. Valuations that require the significant use of unobservable inputs are considered Level 3. The calculation of estimated fair value is based on market conditions at a specific point in time and therefore may not be reflective of future fair values. The Bank has considered current market conditions due to COVID-19 and assessed the impact of any unobservable inputs and has applied significant judgement in selection of those inputs to determine the fair value of financial instruments.

The Bank has controls and processes in place to ensure that the valuation of financial instruments is appropriately determined. Global Risk Management (GRM) is responsible for the design and application of the Bank’s risk management framework. GRM is independent from the Bank’s business units and is overseen by Executive Management and the Board of Directors. Senior management committees within GRM oversee and establish standards for risk management processes that are critical in ensuring that appropriate valuation methodologies and policies are in place for determining fair value.

2020 Scotiabank Annual Report  |  121

Management’s Discussion and Analysis

Where possible, valuations are based on quoted prices or observable inputs obtained from active markets. GRM oversees a monthly Independent Price Verification (IPV) process in order to assess the reliability and accuracy of prices and inputs used in the determination of fair value. The IPV process is performed by price verification groups that are independent from the business. The Bank maintains an approved list of pricing sources that are used in the IPV process. These sources include, but are not limited to, brokers, dealers and consensus pricing services. The valuation policies relating to the IPV process require that all pricing or rate sources used be external to the Bank. On a periodic basis, an independent assessment of pricing or rate sources is also performed by GRM to determine market presence or market representative levels.

Where quoted prices are not readily available, such as for transactions in inactive or illiquid markets, internal models that maximize the use of observable inputs are used to estimate fair value. An independent senior management committee within GRM oversees the vetting, approval and ongoing validation of valuation models used in determining fair value. Risk policies associated with model development are approved by Executive Management and/or key risk committees.

In determining fair value for certain instruments or portfolios of instruments, valuation adjustments or reserves may be required to arrive at a more accurate representation of fair value. The Bank’s policy of applying valuation reserves to a portfolio of instruments is approved by a senior management committee. These reserves include adjustments for credit risk, bid-offer spreads, unobservable parameters, constraints on prices in inactive or illiquid markets and when applicable funding costs. The methodology for the calculation of valuation reserves are reviewed at least annually by senior management.

Valuation adjustments recorded against the fair value of financial assets and financial liabilities totaled $470 million as at October 31, 2020, (2019 – $175 million), net of any write-offs. Majority of the year-over-year change is due primarily to the widening of counterparty credit spreads during the year and the enhancement of valuation adjustment methodology relating to uncollateralized OTC derivative instruments.

As at October 31, 2020, a net funding valuation adjustment (FVA) representing an excess of funding benefit adjustment over funding cost adjustment of $108 million, pre-tax, was recorded for uncollateralized derivative instruments. In the prior year, a net valuation adjustment (excess of debit valuation adjustment (DVA) over funding cost adjustment) of $177 million, pre-tax, was recorded for uncollateralized derivative instruments.

The Bank discloses the classification of all financial instruments carried at fair value in a hierarchy based on the determination of fair value. The valuation hierarchy is as follows:

• Level 1 – fair value is based on unadjusted quoted prices in active markets for identical instruments,

• Level 2 – fair value is based on models using significant market-observable inputs other than quoted prices for the instruments, or

• Level 3 – fair value is based on models using significant inputs that are not based on observable market data.

The Bank’s assets and liabilities which are carried at fair value as classified by the valuation hierarchy are reflected in Note 7. The percentage of each asset and liability category by fair value hierarchy level are outlined as follows:

T59  Fair value hierarchy of financial instruments carried at fair value

	Assets									Liabilities
Fair value hierarchy As at October 31, 2020	Trading assets (incl. precious metals)			Investment securities			Derivatives			Obligations related to securities sold short			Derivatives
Level 1		69	%		38	%		1	%		80	%		1	%
Level 2		31	%		61	%		99	%		20	%		99	%
Level 3		-	%		1	%		-	%		-	%		-	%
		100	%		100	%		100	%		100	%		100	%

Employee benefits

The Bank provides pension and other benefit plans for eligible employees in Canada and internationally. Pension benefits are offered in the form of defined benefit pension plans (generally based on an employee’s length of service and average earnings at retirement), and in the form of defined contribution pension plans (where the Bank’s contribution is fixed and there is no legal or constructive obligation to pay further amounts). Other benefits include post-retirement health care, dental care and life insurance, along with other long-term employee benefits such as long-term disability benefits.

The employee benefit expenses and the related benefit obligation are calculated using actuarial methods and certain actuarial assumptions. These assumptions are based on management’s best estimate and are reviewed and approved annually. The most significant assumption is the discount rate used to determine the defined benefit obligation, which is set by reference to the yields on high quality corporate bonds that have durations that match the terms of the Bank’s obligations. Separate discount rates are used to determine the annual benefit expense in Canada and the US. These rates are determined with reference to the yields on high quality corporate bonds with durations that match the various components of the annual benefit expense. The discount rate used to determine the annual benefit expense for all other plans is the same as the rate used to determine the defined benefit obligation. If the assumed discount rates were 1% lower, the benefit expense for 2020 would have been $124 million higher. Other key assumptions include future compensation, health care costs, employee turnover, retirement age and mortality. When making these estimates, management considers expectations of future economic trends and business conditions, including inflation rates as well as other factors, such as plan specific experience and best practices.

The Bank uses a measurement date of October 31, and based on this measurement date, the Bank reported a deficit of $1,808 million (2019 – $1,268 million) in its principal pension plans and a deficit of $1,262 million (2019 – $1,264 million) in its principal other benefit plans, which are typically unfunded, as at October 31, 2020, as disclosed in Note 28 to the consolidated financial statements.

Actual experience that differs from assumptions made by management will result in a net actuarial gain or loss recognized immediately in other comprehensive income except for other long-term employee benefits where they are recognized in the Consolidated Statement of Income.

Note 28 contains details of the Bank’s employee benefit plans, such as the disclosure of pension and other benefit amounts, management’s key assumptions, and a sensitivity analysis of changes in these assumptions on the employee benefit obligation and expense.

122  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Controls and Accounting Policies

Corporate income taxes

Management exercises judgment in determining the provision for income taxes and deferred income tax assets and liabilities. The provision is based on management’s expectations regarding the income tax consequences of transactions and events during the period. Management interprets the tax legislation for each jurisdiction in which the Bank operates and makes assumptions about the expected timing of the reversal of deferred income tax assets and liabilities. If management’s interpretations of the legislation differ from those of the tax authorities or if the actual timing of the reversals of the deferred income tax assets and liabilities is not as anticipated, the provision for income taxes could increase or decrease in future periods.

Total deferred tax assets related to the Bank’s unused income tax losses from operations arising in prior years were $226 million as at October 31, 2020 (2019 – $286 million). The tax related to temporary differences, unused tax losses and unused tax credits for which no deferred tax asset is recognized in the Consolidated Statement of Financial Position amounted to $15 million (2019 – $40 million). The amount related to unrecognized tax losses was $15 million, which will expire as follows: $6 million in 2021, and $9 million in 2023.

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.

Since 2016, the Bank has received reassessments totalling $808 million of tax and interest as a result of the Canada Revenue Agency denying the tax deductibility of certain Canadian dividends received during the 2011-2014 taxation years. In June 2020, the Bank was reassessed for $217 million of tax and interest in respect of certain Canadian dividends received during the 2015 taxation year. The circumstances of the dividends subject to these reassessments are similar to those prospectively addressed by rules introduced in 2015 and 2018. The Bank is confident that its tax filing position was appropriate and in accordance with the relevant provisions of the Income Tax Act (Canada) and intends to vigourously defend its position.

Note 27 of the 2020 consolidated financial statements contains further details with respect to the Bank’s provisions for income taxes.

Structured entities

In the normal course of business, the Bank enters into arrangements with structured entities on behalf of its customers and for its own purposes. These structured entities can be generally categorized as multi-seller commercial paper conduits, Bank funding vehicles and structured finance entities. Further details are provided in the Off-balance sheet arrangements section.

Management is required to exercise judgement to determine whether a structured entity should be consolidated. This evaluation involves understanding the arrangements, determining whether decisions about the relevant activities are made by means of voting rights or other contractual arrangements, and determining whether the Bank controls the structured entity.

The Bank controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The three elements of control are:

• power over the investee;

• exposure, or rights, to variable returns from involvement with the investee; and

• the ability to use power over the investee to affect the amount of the Bank’s returns.

This definition of control applies to circumstances:

• when voting rights or similar rights give the Bank power, including situations where the Bank holds less than a majority of voting rights or involving potential voting rights;

• when an investee is designed so that voting rights are not the dominant factor in deciding who controls the investee (i.e., relevant activities are directed by contractual arrangements);

• involving agency relationships; and

• when the Bank has control over specified assets of an investee.

The Bank does not control an investee when it is acting in an agent’s capacity. The Bank assesses whether it is an agent by determining whether it is primarily engaged to act on behalf and for the benefit of another party or parties. Factors that the Bank considers in this assessment include the scope of its decision-making authority over the investee, the rights held by other parties, the remuneration to which it is entitled, and the Bank’s exposure to variability of returns from other interests that it holds in the investee.

The analysis uses both qualitative and quantitative analytical techniques and involves the use of a number of assumptions about the business environment in which the structured entity operates and the amount and timing of future cash flows.

The Bank reassesses whether it controls an investee if facts and circumstances indicate that one or more of the three elements of control change.

Management is required to exercise judgement to determine if a change in control event has occurred.

During 2020, there were no change in control events that caused the Bank to change its control conclusion of its multi-seller conduits or other structured entities.

As described in Note 15 to the consolidated financial statements and in the discussion of off-balance sheet arrangements, the Bank does not control the two Canadian-based multi-seller conduits that it sponsors and they are not required to be consolidated on the Bank’s Consolidated Statement of Financial Position. The Bank controls its U.S.-based multi-seller conduit and consolidates it on the Bank’s Consolidated Statement of Financial Position.

Goodwill

For the purpose of impairment testing, goodwill acquired in a business combination is, on the acquisition date, allocated to each of the Bank’s group of cash-generating units (CGU) that are expected to benefit from the particular acquisition.

Goodwill is not amortized but tested for impairment annually and when circumstances indicate that the carrying value may be impaired.

Goodwill is reviewed at each reporting date to determine whether there is any indication of impairment. Each CGU to which goodwill is allocated for impairment testing purposes reflects the lowest level at which goodwill is monitored for internal management purposes.

2020 Scotiabank Annual Report  |  123

Management’s Discussion and Analysis

The Bank determines the carrying value of the CGU using a regulatory capital approach based on credit, market, and operational risks, and leverage, consistent with the Bank’s capital attribution for business line performance measurement. An impairment loss is recognized if the carrying amount of a CGU exceeds its recoverable amount. The recoverable amount is the greater of fair value less costs of disposal and value in use. If either fair value less costs of disposal or value in use exceeds the carrying amount, there is no need to determine the other. The recoverable amount for the CGU has been determined using the fair value less costs of disposal method. In arriving at such value an appropriate valuation model is used which considers various factors including normalized net income, price earnings multiples and control premium. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators. An impairment loss, in respect of goodwill, is not reversed.

Significant judgement is applied in determining the recoverable amounts of the CGU and assessing whether certain events or circumstances constitute objective evidence of impairment. The goodwill recoverability assessment required a higher degree of judgement in order to take the uncertainty of the economic environment created by the COVID-19 pandemic into consideration.

Goodwill was assessed for annual impairment based on the methodology as at July 31, 2020, and no impairment was determined to exist. Additionally, there were no impairment indicators noted as of October 31, 2020.

Indefinite life intangible assets

Intangible assets with indefinite useful lives are not amortized but tested for impairment annually and when circumstances indicate that the carrying value may be impaired. Intangible assets are reviewed at each reporting date to determine whether there is any indication of impairment.

The recoverable amount is the greater of fair value less costs of disposal and value in use. If either fair value less costs of disposal or value in use exceeds the carrying amount, there is no need to determine the other. Value in use method is used by the Bank to determine the recoverable amount of the intangible asset. In determining value in use, an appropriate valuation model is used which considers factors such as management-approved cash flow projections, discount rate and terminal growth rate. An impairment loss is recognized if the carrying amount of the intangible asset exceeds its recoverable amount. Impairment losses recognized in prior periods are reassessed at each reporting period for any indication that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the intangible asset’s carrying amount does not exceed the carrying amount that would have been determined if no impairment loss had been recognized.

The recoverable amount is significantly impacted by the discount rate and the terminal value. Significant judgement is applied in determining the intangible asset’s recoverable amount and assessing whether certain events or circumstances constitute objective evidence of impairment. The indefinite life intangible asset recoverability assessment required a higher degree of judgement in order to take the uncertainty of the economic environment created by the COVID-19 pandemic into consideration.

Intangible assets were assessed for annual impairment based on the methodology as at July 31, 2020, and no impairment was determined to exist. Additionally, there were no impairment indicators noted as of October 31, 2020.

Derecognition of financial assets

Financial assets are derecognized when the contractual rights to the cash flows from the asset have expired, which occurs with repayment by the borrower or upon substantial modification of the asset terms. Assets are also derecognized when the Bank transfers the contractual rights to receive the cash flows from the financial asset, or has assumed an obligation to pay those cash flows to an independent third-party, and the Bank has transferred substantially all the risks and rewards of ownership of that asset to an independent third-party.

Management must apply judgement in determining whether a modification of the terms of the financial asset is considered to be substantial. For loans, this includes the nature of the modification and the extent of changes to terms including interest rate, authorized amount, term or type of underlying collateral.

Management must also apply judgement in determining, based on specific facts and circumstances, whether the Bank has retained or transferred substantially all the risks and rewards of ownership of the financial asset. Where substantially all the risks and rewards of ownership of the financial asset are neither retained nor transferred, the Bank derecognizes the transferred asset only if it has lost control over that asset. If the Bank retains control over the asset, it will continue to recognize the asset to the extent of its continuing involvement.

The majority of assets transferred under repurchase agreements, securities lending agreements, securitizations of fully insured Canadian residential mortgages, and securitizations of personal lines of credit, credit cards and auto loans do not qualify for derecognition. The Bank continues to record the transferred assets on the Consolidated Statement of Financial Position as secured financings.

In relation to the Bank’s participation in the Government of Canada’s Emergency Business Account (CEBA) and Business Credit Availability Program (BCAP), the Bank used judgment to determine if the derecognition requirements for financial assets under IFRS 9 are met.

Further information on derecognition of financial assets can be found in Note 14 of the consolidated financial statements.

Provisions

The Bank recognizes a provision if, as a result of a past event, the Bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Probable in this context means more likely than not. Significant judgement is required in determining whether a present obligation exists and in estimating the probability, timing, and amount of any future outflows.

In the ordinary course of business, the Bank and its subsidiaries are routinely defendants in, or parties to a number of pending and threatened legal actions and regulatory proceedings, including actions brought on behalf of various classes of claimants. In view of the inherent difficulty of predicting the outcome of such matters, the Bank cannot state what the eventual outcome of such matters will be.

Legal provisions are established when it becomes probable that the Bank will incur an expense related to a legal action and the amount can be reliably estimated. Such provisions are recorded at the best estimate of the amount required to settle any obligation related to these legal actions as at the balance sheet date, taking into account the risks and uncertainties surrounding the obligation. Management and internal and external experts are involved in estimating any amounts that may be required. The actual costs of resolving these claims may vary significantly from the amount of the legal provisions. The Bank’s estimate involves significant judgement, given the varying stages of the proceedings, the fact that the

124  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Controls and Accounting Policies

Bank’s liability, if any, has yet to be determined and the fact that the underlying matters will change from time to time. As such, there is a possibility that the ultimate resolution of those legal actions may be material to the Bank’s consolidated results of operations for any particular reporting period.

Leases

IFRS 16 requires the Bank to make judgments that affect the calculation of the lease liabilities and right-of-use assets. The key judgements include: determining the lease term based on the terms in the contract and determining the interest rate used for discounting of future cash flows.

Determining lease term

The Bank’s expectation of exercising the option to renew a lease is determined by assessing if the Bank is “reasonably certain” to exercise that option. The Bank will be reasonably certain to exercise an option when factors create a significant economic incentive to do so. This assessment requires a significant level of judgement as it is based on current expectations of future decisions.

The Bank considers the following criteria when determining whether it has an economic incentive that makes it reasonably certain to exercise an option: key locations for its branch network, locations on which the Bank has spent significant capital on renovation work, contribution to profit, value of locations based on current economic environment and the remaining term of existing leases.

The lease term begins at the commencement date i.e. the starting date on which Bank has the right to use the asset. The lease term may differ from the natural expiration date when renewal/termination options are available. The Bank must exclude from the lease term periods covered by termination options where it is reasonably certain that the Bank will exercise the termination option. Similarly, the Bank must include renewal periods in the lease term when the Bank is reasonably certain to exercise the renewal option.

The lease term has an impact on the calculation of the right-of-use (“ROU”) asset and the lease liability; the longer the lease term, the higher the ROU asset and the related lease liability. Changes in the economic environment may impact the Bank’s assessment of lease term, and any changes in the estimate of lease terms may have a material impact on the Bank’s ROU assets and lease liabilities.

Discount rate

At commencement date, the Bank measures the lease liability at the present value of the future lease payments, discounted using the Bank’s incremental borrowing rate. The Bank considers a broad range of factors to determine the appropriate discount rate. These include the Bank’s credit risk, term of the lease, and the economic environment in which the lease is entered into. The Bank’s incremental borrowing rate considers cost of funding raised through wholesale debt issuances including senior unsecured notes. For the leases entered into by the Bank’s subsidiaries in international countries, the discount rates are specific to the countries that the leases are entered into. The Bank considers both internal and external sources of information, data and estimates in order to create the discount rate curve. The use of estimates result in significant judgement applied in determining the appropriate discount rate.

Future Accounting Developments

The Bank actively monitors developments and changes in accounting standards from the IASB, as well as requirements from the other regulatory bodies, including OSFI. The Bank is currently assessing the measurement impact of the adoption of new standards issued by the IASB will have on its consolidated financial statements and also evaluating the alternative elections available on transition.

Effective November 1, 2020

Definition of business

On October 22, 2018, the IASB issued a narrow-scope amendment to IFRS 3 Business Combination. The amendments will help companies determine whether an acquisition is of a business or a group of assets. Distinguishing between a business and a group of assets is important because an acquirer recognizes goodwill only when acquiring a business. The amendments apply to transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2020. Earlier adoption is permitted. The amendments will apply prospectively to new transactions occurring after November 1, 2020.

Effective November 1, 2021

Interest rate benchmark reform

On August 27, 2020, the IASB issued Interest Rate Benchmark Reform – Phase 2, Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 (the “amendments”). The amendments introduce a practical expedient to account for a change in the basis for determining the contractual cash flows of financial instruments that are impacted by interest rate benchmark reform (“IBOR reform”). Under the practical expedient, the Bank will not derecognize or adjust the carrying amount of financial instruments for modifications required by IBOR reform, but will instead update the effective interest rate to reflect the change in the interest rate benchmark. The practical expedient will be applied when the modification is required as a direct consequence of IBOR reform, and the new basis for determining the contractual cash flows is economically equivalent to the previous basis. A similar practical expedient will be applied for lessees when accounting for lease modifications is impacted by IBOR reform. In conjunction, the amendments also provide relief from specific hedge accounting requirements, such that existing hedge relationships directly impacted by IBOR reform will not be subject to discontinuation, and new hedging relationships that do not qualify under the current standards will be permitted, if changes to the hedge relationships are within the scope of the amendments.

Under the amendments, additional disclosures are required in the financial statements to outline the effect of the reform on the financial instruments and risk management strategy. The amendments are effective for the Bank from November 1, 2021, with earlier application permitted. The amendments apply retrospectively, but the Bank is not required to restate comparative information. The Bank is currently assessing the impact and disclosure requirements from the amendments.

Effective November 1, 2023

Insurance contracts

On May 18, 2017, the IASB issued IFRS 17 Insurance Contracts, which provides a comprehensive principle-based framework for the measurement and presentation of all insurance contracts. The new standard will replace IFRS 4 Insurance Contracts and requires insurance contracts to be measured using current fulfillment cash flows and for revenue to be recognized as the service is provided over the coverage period. The standard is required to be adopted retrospectively; if this is impractical, the modified retrospective or fair value method may be used.

2020 Scotiabank Annual Report  |  125

Management’s Discussion and Analysis

On June 25, 2020, the IASB issued amendments to IFRS 17 Insurance Contracts. The amendments are designed to make it easier for companies to explain their financial performance, reduce costs due to simplification of some requirements in the standard and ease transition by deferring the effective date of the standard by two years. The standard will be effective as of November 1, 2023 for the Bank. As part of its ongoing implementation project for the standard, the Bank will consider the amendments on the scope, recognition, measurement and presentation of insurance contracts. The Bank continues to monitor developments related to the standard and industry discussions on the application of the standard.

The implementation of IFRS 17 is a multi-year project consisting of technology upgrades and policy and process changes. The project structure and governance has been established along with a Project Management Office to assist the Executive Steering and Project Operations Committees. The committees are comprised of representatives from Global Finance, Global Insurance Actuarial Services, Information Technology and the Insurance Business Operation. The Bank will require new technology to manage the insurance business and prepare additional disclosures, for the separate insurance legal entity financial statements, under the new standard. The Bank continues to assess and formulate the accounting policies under IFRS 17 in order to quantify the impact of the new standard.

Regulatory Developments

The Bank continues to monitor and respond to global regulatory developments relating to a broad spectrum of topics, in order to ensure that control functions and business lines are responsive on a timely basis and business impacts, if any, are minimized. A high-level summary of some of the key regulatory developments that have the potential of impacting the Bank’s operations is included in the Legal and compliance risk section of the Bank’s 2020 Annual Report and below, as may be updated by quarterly reports.

Regulatory Response to COVID-19

In March 2020, the Government of Canada and financial institution regulators introduced many new measures and economic relief initiatives to keep the financial system resilient and well capitalized in response to COVID-19. The Bank is actively monitoring these measures and initiatives and participating in certain government and regulatory programs. For more detail on such programs and initiatives and the impact on the Bank’s operations, see page 25.

Regulators across the Bank’s geographic footprint continue to focus on ensuring operational resilience of regulated firms and that consumers are protected. Regulatory environment experienced increased focus from some regulators with respect to trade reporting, market conduct and cyber security.

Regulatory Initiatives Impacting Financial Services in Canada

Changes to the Canada Deposit Insurance Corporation Act will strengthen and modernize deposit protection. Some of the changes include extending CDIC coverage to foreign currency deposits and deposits with terms greater than 5 years, eliminating coverage for travellers’ cheques and introducing new requirements for deposits held in trust. The changes occur in two phases. The Bank implemented phase 1 by April 2020. The Ministry of Finance delayed implementation of Phase 2 from April 30, 2021 to April 30, 2022 due to the impact of COVID-19. The Bank is on track to implement.

The Canadian Securities Administrators published what they refer to as Client Focused Reforms in 2019 seeking to enhance the client-registrant relationship, with key areas of focus related to Know Your Client (KYC), Know Your Product (KYP), suitability, conflicts of interest and relationship disclosure. A new “Plain Language” Rulebook (PLR) published by Investment Industry Regulatory Organization of Canada is intended to make the rules easier to understand as well as introducing a number of substantive changes. The Bank’s Wealth Management businesses will have to enhance processes and documentation to address the changes. As a result of COVID-19 challenges, the in-force date is now December 31, 2021 for all elements other than the conflict of interest provisions, which are in force June 30, 2021.

The Federal Consumer Protection Framework (Bill C86), introduced in 2018, applies to federally regulated financial institutions and focuses on strengthening consumer protection provisions and includes requirements intended to encourage responsible business conduct and fair treatment of consumers. A Canadian Banking program project is underway to address the new requirements.

The Canadian Securities Authorities ban on trailing commissions for order-execution-only dealers will take effect on June 1, 2022. This is the same time that rules will take effect in all provinces and territories except Ontario which implement a ban on deferred sales charges on mutual funds. Operational impacts on mutual fund manager and order-execution-only firms are significant and will require collaboration among industry participants.

The Commodity Futures Trading Commission (CFTC) Position Limit and Cross-Border Rules

The CFTC has adopted final rules addressing the cross-border application of certain swap dealer provisions of the Commodity Exchange Act. The cross-border application of U.S. swap provisions is a critical component of the Bank’s compliance program. The Bank is on track of implementing changes effective September 14, 2021.

The CFTC has approved final position limit rules for twenty-five commodity derivatives and their linked cash-settled futures, options on futures, and economically equivalent swaps. The compliance dates are tiered between January 2022 and January 2023. The Bank is assessing the scope and impact.

United Kingdom and European Regulatory Reform

The UK formally left the EU on January 31, 2020. Political agreement has been reached on a transition period, which will extend until December 31, 2020. All EU legislation will continue to apply in the UK during such transition period.

The UK’s exit from the EU may result in significant changes in law(s), which may impact the Bank’s business, financial condition and/or results of operations and could adversely impact the Bank’s cost of funding in Europe. The Bank continually monitors developments to prepare for changes that have the potential to impact its operations in the UK and elsewhere in Europe and is developing and revising its contingency plans accordingly.

Basel Committee on Banking Supervision – Finalized Basel III reforms

In December 2017, the Group of Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee on Banking Supervision (BCBS), announced that they have agreed on an output floor of 72.5% and have finalized the remaining Basel III reforms.

126  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Controls and Accounting Policies

The final Basel III reform package includes: a revised standardized approach for credit risk; revisions to the internal ratings-based approach for credit risk; revisions to the credit valuation adjustment (CVA) framework, including the removal of the internally modelled approach and the introduction of a revised standardized approach; a revised standardized approach for operational risk, which will replace the existing standardized approaches and the advanced measurement approaches; revisions to the measurement of the leverage ratio and a leverage ratio buffer for global systemically important banks (G-SIBs), which will take the form of a Tier 1 capital buffer set at 50% of a G-SIB’s risk-weighted capital buffer; and an aggregate output floor, which will ensure that banks’ risk-weighted assets (RWAs) generated by internal models are no lower than 72.5% of RWAs as calculated by the Basel III framework’s standardized approaches. Banks will also be required to disclose their RWAs based on these standardized approaches. Implementation of the new Basel III standards will be required in 2022. This includes the Fundamental Review of the Trading Book (FRTB) rules, which represents a delay from 2020. There is a phase-in period for the 72.5% output floor from January 1, 2022 until January 2027.

In March 2020, the GHOS announced a delay in the international implementation of the Basel III reform package. The delay was introduced to provide additional operational capacity for banks and supervisors to respond to immediate financial stability priorities resulting from COVID-19 on the global banking system. In line with that extension, OSFI is deferring the implementation date for the final set of Basel III reforms published by the BCBS in December 2017 to Q1, 2023. This includes revisions to the Standardized Approach and Internal Ratings-Based Approach to credit risk, the operational risk framework, and the leverage ratio framework, as well as the introduction of the new capital floor. Consistent with this delay, OSFI’s implementation date of the revised Pillar 3 disclosure requirements as finalized by the BCBS in December 2018, which include the second and third phases of the BCBS’ Pillar 3 disclosure project, will be delayed until Q1, 2023 at the earliest. In addition, OSFI’s implementation date of the final set of revisions to the BCBS market risk framework (FRTB) published in January 2019 is being delayed until Q1, 2024. This extended timeline recognizes the complexity of the FRTB framework and the required infrastructure enhancements needed to adhere to it. OSFI’s implementation date of revised credit valuation adjustment risk framework is also being delayed to Q1, 2024.

The Bank will continue to monitor and prepare for developments impacting regulatory capital requirements.

Regulatory developments relating to liquidity

The Net Stable Funding Ratio (NSFR) is aimed at reducing structural funding risk by requiring banks to fund their activities with sufficiently stable sources of funding. As part of OSFI’s liquidity framework, a minimum NSFR requirement of 100% was implemented for January 2020. Public disclosure of this ratio is required commencing the first quarter of 2021.

Interest Rate Benchmark Reform

In July 2017, the UK Financial Conduct Authority (FCA), which began regulating the London Interbank Offered Rate (LIBOR) in 2013, announced that after December 31, 2021, it would stop making efforts to sustain the rate. As the administrator of LIBOR, the FCA, and regulators in other jurisdictions, have urged markets to transition away from the use of LIBOR and other interbank offered rates (IBORs) in favour of alternative risk-free rates (RFRs). RFRs differ inherently from LIBOR and other interbank offered rates, lacking both a term structure and a credit component. These differences add complexity to the transition, resulting in the fact that some markets, such as those based on new rates like the Secured Overnight Funding Rate, have been slower to develop.

The Bank has established an enterprise-wide program (the Transition Program), aimed at ensuring a smooth transition from LIBOR and other IBORs to RFRs. The Transition Program has been focused on identifying and quantifying our exposures to various interest rate benchmarks, providing the capability to trade products referencing alternative RFRs and evaluating our existing contract amendment language in the event LIBOR ceases to exist. The Transition Program is also reviewing contracts that reference LIBOR and other IBORs, with due consideration for those extending beyond the end of 2021 and is assessing its technology to ensure that it is fit for use in connection with RFRs. In summary, the Bank’s approach contemplates transition risks as part of a comprehensive program of change to ensure that systems, processes and strategy provide for a smooth transition from the use of legacy rates and supports trading in alternative reference rates.

In developing these transition strategies, the Transition Program has integrated into its plans recommendations from industry groups and regulatory bodies, such as the Alternative Reference Rate Committee in the US and the FCA regarding timing of key transition activities, such as ceasing to issue certain LIBOR-based products, and incorporating fallback language in specific instruments. In light of COVID-19, the FCA granted firms more time to meet certain targets, particularly in the lending sector, providing that LIBOR-based lending was acceptable (in certain limited circumstances) until the end of Q1, 2021. The FCA did also state, however, that despite COVID-19, firms should continue to work from the presumption that LIBOR – in its current form – would not be available after the end of 2021. The Bank is keeping apprised of recent developments involving the ICE Benchmark Administrator, the FCA and the Federal Reserve Board regarding the future of certain LIBOR tenors and currencies, and in particular for USD LIBOR, as well as any guidance from relevant regulatory agencies to cease issuance of LIBOR products in 2021. The Bank’s transition efforts reflect these revised regulatory recommendations, including technological readiness to issue and trade RFR-based products, preparing to amend and transition legacy contracts and transactions, and supporting clients through active engagement on the subject of rate reform. The Bank adhered to the ISDA IBOR Fallbacks Protocol on October 22, 2020, lending its support to this important industry tool in the transition of legacy derivatives products.

The International Accounting Standards Board (IASB) has approached the impact of Interest Rate Benchmark Reform on financial reporting in two phases. Phase one addresses issues affecting financial reporting in the period before the replacement of an existing interest rate benchmark with an alternative RFR; and phase two focuses on issues that might affect financial reporting when an existing interest rate benchmark is replaced with an RFR. The IASB issued the phase one amendments in September 2019 and the Bank adopted it effective November 1, 2019. The IASB issued the phase two amendments in August 2020, which will be effective for the Bank on November 1, 2021, with early application permitted.

2020 Scotiabank Annual Report  |  127

Management’s Discussion and Analysis

Use of the Advance Measurement Approach for Operational Risk Capital

In January 2020, OSFI revised its capital requirements for operational risk in consideration of the final Basel III revisions published by the BCBS in December 2017. Effective Q1 2023, institutions will be required to use the revised Basel III Standardized Approach for operational risk. OSFI has plans for further consultation related to the 2023 domestic implementation of the final Basel III reforms.

In the interim, for fiscal years 2020, 2021 and 2022, institutions previously approved for the Basel II Advanced Measurement Approach (AMA) for operational risk capital are to report using the existing Basel II Standardized Approach (TSA).

Regulatory Developments Relating to Interest Rate Risk

In May 2019, OSFI updated its guidelines on Interest Rate Risk in the Banking Book (IRRBB), a risk control framework to identify, assess and manage interest rate risk. The Bank has implemented in 2020, consistent with OSFI’s requirement.

Volcker Rule Amendments

The proposed Volcker rule amendments have now been approved by each of the five U.S. regulators responsible for this legislation (i.e. FDIC, OCC, Federal Reserve, CFTC & SEC). As anticipated, the final amendments will reduce the regulatory burden on certain financial institutions, including foreign banking organizations such as the Bank. The amendments take effect on January 1, 2020, with full compliance required by January 1, 2021.

Canadian Anti-Money Laundering (AML) Regulations

In July 2019, amendments to Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act regulations were released following extensive industry consultation. Amendments will take effect in a phased approach, with the majority coming into effect by June 2021. These changes aim to improve the effectiveness of Canada’s anti-money laundering and counter-terrorism financing regime, and to improve compliance with international standards. New regulations will require the Bank to implement changes to processes, technology and data, to satisfy Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) reporting requirements. The Bank is proactively working to implement the new regime with the aim to protect the Canadian financial system and our communities.

Metals Investigations

Scotiabank has entered into a Deferred Prosecution Agreement (“DPA”) with the U.S. Department of Justice (the “DOJ”). Additionally, the Commodity Futures Trading Commission (the “CFTC”) issued three separate orders against Scotiabank (collectively, the “Orders”). The DPA and the Orders (together, the “Resolutions”) resolve the DOJ’s and CFTC’s previously disclosed investigations into Scotiabank’s activities and trading practices in the metals markets and related conduct as well as pre-trade mid-market marks and related swap dealer compliance issues.

Under the terms of the Resolutions, the Bank made aggregate payments to the DOJ and CFTC of approximately $127.5 million (USD) and has agreed to retain an independent compliance monitor. Under one of the orders, the CFTC will defer proceedings to suspend or revoke the Bank’s provisional registration as a swap dealer subject to the Bank’s implementation of a remediation plan, among other conditions.

Related Party Transactions

Compensation of key management personnel

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Bank, directly or indirectly, and comprise the directors of the Bank, the President and Chief Executive Officer, certain direct reports of the President and Chief Executive Officer and Group Heads.

T60  Compensation of the Bank key management personnel

For the year ended October 31 ($ millions)	2020		2019
Salaries and cash incentives(1)	$	19	$	17
Equity-based payment(2)		30		25
Pension and other benefits(1)		6		5
Total	$	55	$	47

(1) Expensed during the year.

(2) Awarded during the year.

Directors can use some or all of their director fees earned to buy common shares of the Bank at market rates through the Director’s Share Purchase Plan. Non-officer directors may elect to receive all or a portion of their fees in the form of deferred stock units which vest immediately. Refer to Note 26 – Share-based payments for further details of these plans.

T61  Loans and deposits of key management personnel

Loans are currently granted to key management personnel at market terms and conditions.

As at October 31 ($ millions)	2020		2019
Loans	$	15	$	14
Deposits	$	11	$	9

The Bank’s committed credit exposure to companies controlled by directors totaled $177.6 million as at October 31, 2020 (October 31, 2019 – $18.9 million) while actual utilized accounts were $115.9 million (October 31, 2019 – $3.3 million).

128  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Controls and Accounting Policies

Transactions with associates and joint ventures

In the ordinary course of business, the Bank provides normal banking services and enters into transactions with its associated and other related corporations on terms similar to those offered to non-related parties. If these transactions are eliminated on consolidation, they are not disclosed as related party transactions. Transactions between the Bank and its associated companies and joint ventures also qualify as related party transactions and are as follows:

T62  Transactions with associates and joint ventures

As at and for the year ended October 31 ($ millions)	2020		2019
Net income / (loss)		$  (75)	$	(68	)
Loans		203		327
Deposits		159		194
Guarantees and commitments	$	23	$	16

Scotiabank principal pension plan

The Bank manages assets of $4.1 billion (October 31, 2019 – $4.1 billion) which is a portion of the Scotiabank principal pension plan assets and earned $7.2 million (October 31, 2019 – $7.2 million) in fees.

Oversight and governance

The oversight responsibilities of the Audit and Conduct Review Committee (ACRC) with respect to related party transactions include reviewing policies and practices for identifying transactions with related parties that may materially affect the Bank, and reviewing the procedures for ensuring compliance with the Bank Act for related party transactions. The Bank Act requirements encompass a broader definition of related party transactions than is set out in IFRS. The Bank has various procedures in place to ensure that related party information is identified and reported to the ACRC on a semi-annual basis. The ACRC is provided with detailed reports that reflect the Bank’s compliance with its established procedures.

The Bank’s Internal Audit department carries out audit procedures as necessary to provide the ACRC with reasonable assurance that the Bank’s policies and procedures to identify, authorize and report related party transactions are appropriately designed and operating effectively.

2020 Scotiabank Annual Report  |  129

Management’s Discussion and Analysis

Supplementary Data

Geographic Information

T63    Net income by geographic segment

	2020																				2019(1)																				2018(1)
For the fiscal years ($ millions)	Canada			U.S.		Mexico		Peru		Chile		Colombia			Caribbean and Central America		Other Inter- national		Total		Canada		U.S.			Mexico		Peru			Chile		Colombia		Caribbean and Central America		Other Inter- national		Total		Canada		U.S.			Mexico		Peru		Chile		Colombia		Caribbean and Central America		Other Inter- national		Total
Net interest income	$	8,515		$	763	$	1,661	$	1,705	$	1,415	$	812		$	1,734	$	715	$	17,320	$	7,630	$	720		$	1,684	$	1,576		$	1,613	$	1,017	$	2,143	$	794	$	17,177	$	7,780	$	691		$	1,561	$	1,378	$	1,117	$	839	$	2,028	$	797	$	16,191
Non-interest income		8,085			1,375		724		605		677		449			753		1,348		14,016		7,304		1,189			671		790			806		567		1,048		1,482		13,857		6,805		843			613		662		565		484		968		1,644		12,584
Provision for credit losses		2,271			128		644		971		639		666			570		195		6,084		981		(16	)		335		523			436		362		352		54		3,027		802		(34	)		239		351		498		511		211		33		2,611
Non-interest expenses		8,952			1,080		1,298		827		973		813			1,589		1,324		16,856		8,275		870			1,306		846			1,166		920		1,933		1,421		16,737		7,683		701			1,196		770		837		723		1,795		1,353		15,058
Income tax expense		967			192		98		116		78		(74	)		45		121		1,543		1,082		267			121		248			185		117		324		128		2,472		1,310		220			76		235		51		39		175		276		2,382
Subtotal		4,410			738		345		396		402		(144	)		283		423		6,853		4,596		788			593		749			632		185		582		673		8,798		4,790		647			663		684		296		50		815		779		8,724
Net income attributable to non-controlling interests in subsidiaries		(28	)		0		7		16		91		(87	)		76		0		75		1		–			14		(11	)		179		124		101		–		408		–		–			17		12		28		16		102		1		176
Net income attributable to equity holders of the Bank	$	4,438		$	738	$	338	$	380	$	311	$	(57	)	$	207	$	423	$	6,778	$	4,595	$	788		$	579	$	760		$	453	$	61	$	481	$	673	$	8,390	$	4,790	$	647		$	646	$	672	$	268	$	34	$	713	$	778	$	8,548
Adjustments		(76	)		0		7		8		48		22			28		11		48		58		–			–		50			72		79		296		6		561		52		–			–		4		172		63		3		4		298
Adjusted net income (loss) attributable to equity holders of the Bank	$	4,362		$	738	$	345	$	388	$	359	$	(35	)	$	235	$	434	$	6,826	$	4,653	$	788		$	579	$	810		$	525	$	140	$	777	$	679	$	8,951	$	4,842	$	647		$	646	$	676	$	440	$	97	$	716	$	782	$	8,846

(1) Prior period amounts have been restated to conform with current period presentation.

T64  Loans and acceptances by geography

As at October 31 ($ billions)	2020			2019			2018
Canada
Atlantic provinces	$	21.5		$	22.1		$	21.9
Quebec		31.7			30.6			29.3
Ontario		217.7			203.0			185.7
Manitoba and Saskatchewan		18.2			17.9			17.3
Alberta		53.7			53.5			52.8
British Columbia		71.3			66.5			60.5
		414.1			393.6			367.5
U.S.		44.0			44.3			41.8
Mexico		31.3			31.9			27.5
Peru		22.1			21.7			20.1
Chile		46.9			45.6			43.8
Colombia		10.9			11.7			11.6
Other International
Latin America		11.3			10.2			8.8
Europe		9.5			9.1			9.4
Caribbean and Central America		23.3			30.2			31.1
Asia and Other		11.7			13.2			11.6
		55.8			62.7			60.9
	$	625.1		$	611.5		$	573.2
Total allowance for credit losses		(7.7	)		(5.1	)		(5.1	)
Total loans and acceptances net of allowance for credit losses	$	617.4		$	606.4		$	568.1

130  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Supplementary Data

T65  Gross impaired loans by geographic segment

As at October 31 ($ millions)	2020		2019		2018
Canada	$	1,127	$	1,133	$	999
U.S.		116		94		80
Mexico		570		485		359
Peru		824		642		581
Chile		775		844		753
Colombia		459		505		619
Other International		1,182		1,432		1,739
Total	$	5,053	$	5,135	$	5,130

T66  Provision against impaired financial instruments by geographic segment

For the fiscal years ($ millions)	2020		2019			2018
Canada	$	1,198	$	984		$	785
U.S.		6		(1	)		(6	)
Mexico		400		291			239
Peru		484		446			349
Chile		582		403			275
Colombia		322		422			358
Other International		476		354			355
Total	$	3,468	$	2,899		$	2,355

T67  Cross-border exposure to select countries⁽¹⁾

As at October 31 ($ millions)	Loans		Trade		Interbank deposits		Government and other securities		Investment in subsidiaries and affiliates		Other		2020 Total		2019 Total
Asia
China	$	1,134	$	1,750	$	491	$	1,015	$	65	$	25	$	4,480	$	5,184
India		1,293		59		–		–		–		8		1,360		1,812
Thailand		200		4		–		–		182		3		389		3,919
Singapore		2,784		1		13		–		–		98		2,896		2,049
Hong Kong		1,765		22		53		40		–		12		1,892		1,787
Japan		360		54		39		4,494		–		14		4,961		5,424
Others(2)		650		–		61		–		332		19		1,062		1,684
Total	$	8,186	$	1,890	$	657	$	5,549	$	579	$	179	$	17,040	$	21,859
Latin America
Chile	$	4,481	$	1,173	$	2,687	$	295	$	5,270	$	586	$	14,492	$	13,395
Mexico		4,193		191		–		610		4,320		491		9,805		9,696
Brazil		7,787		1,492		6		11		282		241		9,819		9,025
Peru		3,587		80		–		165		5,615		105		9,552		9,121
Colombia		2,065		220		–		164		1,051		7		3,507		2,953
Others(3)		126		16		–		–		504		–		646		670
Total	$	22,239	$	3,172	$	2,693	$	1,245	$	17,042	$	1,430	$	47,821	$	44,860
Caribbean and Central America
Panama	$	4,267	$	31	$	58	$	90	$	284	$	1	$	4,731	$	5,040
Costa Rica		1,560		43		–		–		1,062		23		2,688		3,142
Dominican Republic		937		4		316		–		808		24		2,089		1,753
Others(4)		1,206		155		3		–		1,404		1		2,769		3,779
Total	$	7,970	$	233	$	377	$	90	$	3,558	$	49	$	12,277	$	13,714
As at October 31, 2020	$	38,395	$	5,295	$	3,727	$	6,884	$	21,179	$	1,658	$	77,138
As at October 31, 2019	$	37,039	$	6,250	$	3,249	$	6,944	$	25,056	$	1,895	$	80,433

(1) Cross-border exposure represents a claim, denominated in a currency other than the local one, against a borrower in a foreign country on the basis of ultimate risk.

(2) Includes Indonesia, Macau, Malaysia, South Korea, and Taiwan.

(3) Includes Venezuela and Uruguay.

(4) Includes other English and Spanish Caribbean countries, such as Bahamas, Barbados, Jamaica, Trinidad & Tobago, and Turks & Caicos.

2020 Scotiabank Annual Report  |  131

Management’s Discussion and Analysis

Credit Risk

T68  Loans and acceptances by type of borrower

As at October 31 ($ billions)	2020			2019			2018
Residential mortgages	$	284.7		$	268.2		$	253.4
Personal loans		93.7			98.6			96.0
Credit cards		14.8			17.8			16.5
Personal	$	393.2		$	384.6		$	365.9
Financial services
Non-bank	$	25.7		$	28.8		$	24.6
Bank(1)		4.2			5.2			4.5
Wholesale and retail		26.1			27.6			25.1
Real estate and construction		37.7			32.4			29.2
Energy(2)		16.4			16.6			14.8
Transportation		10.4			9.5			9.3
Automotive		12.6			14.0			14.7
Agriculture		14.6			13.3			11.5
Hospitality and leisure		5.1			4.4			4.0
Mining		6.3			6.8			5.5
Metals		2.2			2.9			3.0
Utilities		12.6			10.8			9.7
Health care		6.0			6.1			5.4
Technology and media		16.7			13.4			12.3
Chemicals(2)		1.7			2.4			1.9
Food and beverage		8.5			8.5			7.9
Forest products		2.4			3.1			1.9
Other(3)		17.6			16.0			16.9
Sovereign(4)		5.1			5.1			5.1
Business and government	$	231.9		$	226.9		$	207.3
	$	625.1		$	611.5		$	573.2
Total allowance for credit losses		(7.7	)		(5.1	)		(5.1	)
Total loans and acceptances net of allowance for credit losses	$	617.4		$	606.4		$	568.1

(1) Deposit taking institutions and securities firms.

(2) Prior periods have been restated to conform to the current presentation.

(3) Other related to $1.7 in financing products, $2.8 in services and $4.5 in wealth management (2019 – $1.1, $2.8, and $3.4 respectively).

(4) Includes central banks, regional and local governments, and supranational agencies.

T69  Off-balance sheet credit instruments

As at October 31 ($ billions)	2020		2019		2018
Commitments to extend credit(1)	$	235.4	$	211.9	$	197.4
Standby letters of credit and letters of guarantee		34.8		35.6		35.4
Securities lending, securities purchase commitments and other		54.9		52.2		53.7
Total	$	325.1	$	299.7	$	286.5

(1) Excludes commitments which are unconditionally cancellable at the Bank’s discretion at any time.

132  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Supplementary Data

T70  Changes in net impaired loans⁽¹⁾

For the fiscal years ($ millions)	2020			2019			2018
Gross impaired loans
Balance at beginning of year	$	5,135		$	5,130		$	5,070
Net additions
New additions		4,362			4,213			3,871
Acquisition-related		–			18			233
Declassifications		(96	)		(45	)		(168	)
Payments		(435	)		(469	)		(722	)
Sales		(10	)		(58	)		(72	)
		3,821			3,659			3,142
Write-offs
Residential mortgages		(97	)		(99	)		(219	)
Personal loans		(1,611	)		(1,818	)		(1,441	)
Credit cards		(1,163	)		(1,325	)		(1,104	)
Business and government		(534	)		(274	)		(276	)
		(3,405	)		(3,516	)		(3,040	)
Foreign exchange and other		(498	)		(138	)		(42	)
Balance at end of year	$	5,053		$	5,135		$	5,130
Allowance for credit losses on financial instruments
Balance at beginning of year	$	1,595		$	1,677		$	1,756
Provision for credit losses		3,468			2,899			2,355
Write-offs		(3,405	)		(3,516	)		(3,040	)
Recoveries
Residential mortgages		18			26			96
Personal loans		230			285			275
Credit cards		188			218			250
Business and government		28			45			68
		464			574			689
Foreign exchange and other		(165	)		(39	)		(83	)
Balance at end of year	$	1,957		$	1,595		$	1,677
Net impaired loans
Balance at beginning of year	$	3,540		$	3,453		$	3,314
Net change in gross impaired loans		(82	)		5			60
Net change in allowance for credit losses on impaired financial instruments		(362	)		82			79
Balance at end of year	$	3,096		$	3,540		$	3,453

(1) Excludes loans acquired under the Federal Deposit Insurance Corporation (FDIC) guarantee related to the acquisition of R-G Premier Bank of Puerto Rico, prior to 2018.

T71  Provision for credit losses

For the fiscal years ($ millions)	2020			2019			2018
New provisions	$	4,031		$	3,599		$	3,267
Reversals		(99	)		(126	)		(223	)
Recoveries		(464	)		(574	)		(689	)
Provision for credit losses on impaired financial instruments (Stage 3)		3,468			2,899			2,355
Provision for credit losses – performing (Stage 1 and 2)		2,616			128			256
Total Provision for credit losses	$	6,084		$	3,027		$	2,611

2020 Scotiabank Annual Report  |  133

Management’s Discussion and Analysis

T72  Provision for credit losses against impaired financial instruments by type of borrower

For the fiscal years ($ millions)	2020		2019			2018
Residential mortgages	$	192	$	59		$	91
Personal loans		1,651		1,480			1,198
Credit cards		968		1,078			833
Personal		2,811		2,617			2,122
Financial services
Non-bank		5		–			1
Bank		–		–			–
Wholesale and retail		137		85			92
Real estate and construction		72		48			48
Energy		104		–			(33	)
Transportation		64		8			8
Automotive		17		13			9
Agriculture		48		20			15
Hospitality and leisure		1		–			(5	)
Mining		1		1			(1	)
Metals		29		7			(7	)
Utilities		15		14			20
Health care		49		24			12
Technology and media		23		16			7
Chemicals		1		–			1
Food and beverage		25		25			17
Forest products		12		5			5
Other		52		19			(6	)
Sovereign		2		(3	)		50
Business and government		657		282			233
Provision for credit losses on impaired financial instruments	$	3,468	$	2,899		$	2,355

T73  Impaired loans by type of borrower

	2020						2019
As at October 31 ($ millions)	Gross		Allowance for credit losses		Net		Gross		Allowance for credit losses		Net
Residential mortgages	$	1,490	$	392	$	1,098	$	1,830	$	325	$	1,505
Personal loans		1,032		820		212		1,094		591		503
Credit cards		–		–		–		–		–		–
Personal	$	2,522	$	1,212	$	1,310	$	2,924	$	916	$	2,008
Financial services
Non-bank		44		9		35		42		11		31
Bank		2		2		–		2		2		–
Wholesale and retail		516		229		287		370		182		188
Real estate and construction		268		62		206		344		84		260
Energy		279		49		230		155		13		142
Transportation		183		53		130		150		45		105
Automotive		47		25		22		49		25		24
Agriculture		263		98		165		250		69		181
Hospitality and leisure		20		2		18		2		1		1
Mining		30		3		27		39		7		32
Metals		120		39		81		56		28		28
Utilities		110		4		106		35		21		14
Health care		68		22		46		92		22		70
Technology and media		34		10		24		33		11		22
Chemicals		6		2		4		14		5		9
Food and beverage		112		45		67		154		63		91
Forest products		28		11		17		47		11		36
Other		162		75		87		137		75		62
Sovereign		239		5		234		240		4		236
Business and government	$	2,531	$	745	$	1,786	$	2,211	$	679	$	1,532
Total	$	5,053	$	1,957	$	3,096	$	5,135	$	1,595	$	3,540

134  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Supplementary Data

T74  Total credit risk exposures by geography⁽¹⁾⁽²⁾

	2020										2019
	Non-Retail
As at October 31 ($ millions)	Drawn		Undrawn		Other exposures(3)		Retail		Total		Total
Canada	$	155,326	$	52,851	$	37,653	$	375,579	$	621,409	$	549,233
U.S.		103,091		40,036		45,083		–		188,210		176,036
Chile		26,441		1,418		4,202		24,677		56,738		53,521
Mexico		22,800		1,175		3,005		12,207		39,187		37,969
Peru		20,233		949		3,459		9,290		33,931		32,954
Colombia		5,615		348		981		6,179		13,123		13,673
Other International
Europe		22,871		11,200		17,699		–		51,770		45,885
Caribbean and Central America		15,924		1,720		1,160		12,616		31,420		38,636
Latin America (other)		11,588		1,077		392		590		13,647		12,402
Other		22,835		4,646		7,269		39		34,789		33,215
Total	$	406,724	$	115,420	$	120,903	$	441,177	$	1,084,224	$	993,524
As at October 31, 2019	$	352,244	$	100,161	$	110,492	$	430,627	$	993,524

(1) Geographic segmentation is based upon the location of the ultimate risk of the credit exposure. Includes all credit risk portfolios and excludes equities and other assets.

(2) Amounts represent exposure at default.

(3) Includes off-balance sheet lending instruments such as letters of credit, letters of guarantee, derivatives, securitization and repo-style transactions after collateral.

T75  AIRB credit risk exposures by maturity⁽¹⁾⁽²⁾

	2020								2019
Residual maturity as at October 31 ($ millions)	Drawn		Undrawn		Other exposures(3)		Total		Total
Non-retail
Less than 1 year	$	175,335	$	42,177	$	77,660	$	295,172	$	240,217
One to 5 years		145,976		67,858		24,237		238,071		212,909
Over 5 years		21,580		1,825		8,939		32,344		34,307
Total non-retail	$	342,891	$	111,860	$	110,836	$	565,587	$	487,433
Retail
Less than 1 year	$	33,067	$	21,571	$	–	$	54,638	$	61,736
One to 5 years		215,271		–		–		215,271		192,344
Over 5 years		14,892		–		–		14,892		15,488
Revolving credits(4)		37,714		31,264		–		68,978		68,923
Total retail	$	300,944	$	52,835	$	–	$	353,779	$	338,491
Total	$	643,835	$	164,695	$	110,836	$	919,366	$	825,924
As at October 31, 2019	$	578,331	$	147,134	$	100,459	$	825,924

(1) Remaining term to maturity of the credit exposure. Includes all credit risk portfolios and excludes equity securities and other assets.

(2) Exposure at default, before credit risk mitigation.

(3) Off-balance sheet lending instruments, such as letters of credit, letters of guarantee, securitization, derivatives and repo-style transactions after collateral.

(4) Credit cards and lines of credit with unspecified maturity.

2020 Scotiabank Annual Report  |  135

Management’s Discussion and Analysis

T76  Total credit risk exposures and risk-weighted assets

	2020												2019
	AIRB				Standardized(1)				Total				Total
As at October 31 ($ millions)	Exposure at Default(2)		Risk- weighted assets		Exposure at Default(2)		Risk- weighted assets		Exposure at Default(2)		Risk- weighted assets		Exposure at Default(2)		Risk- weighted assets
Non-retail
Corporate
Drawn	$	169,334	$	83,795	$	53,013	$	48,614	$	222,347	$	132,409	$	225,411	$	133,725
Undrawn		102,141		35,033		3,482		3,399		105,623		38,432		96,710		37,299
Other(3)		53,085		12,248		2,743		2,722		55,828		14,970		50,261		14,287
		324,560		131,076		59,238		54,735		383,798		185,811		372,382		185,311
Bank
Drawn		18,472		3,294		2,505		1,905		20,977		5,199		21,786		5,311
Undrawn		8,714		1,083		71		71		8,785		1,154		2,607		559
Other(3)		10,989		1,343		62		62		11,051		1,405		9,844		1,210
		38,175		5,720		2,638		2,038		40,813		7,758		34,237		7,080
Sovereign
Drawn		155,085		5,297		8,315		877		163,400		6,174		105,047		4,499
Undrawn		1,005		97		7		6		1,012		103		844		122
Other(3)		4,550		52		–		–		4,550		52		2,992		65
		160,640		5,446		8,322		883		168,962		6,329		108,883		4,686
Total Non-retail
Drawn		342,891		92,386		63,833		51,396		406,724		143,782		352,244		143,535
Undrawn		111,860		36,213		3,560		3,476		115,420		39,689		100,161		37,980
Other(3)		68,624		13,643		2,805		2,784		71,429		16,427		63,097		15,562
	$	523,375	$	142,242	$	70,198	$	57,656	$	593,573	$	199,898	$	515,502	$	197,077
Retail
Retail residential mortgages
Drawn	$	233,647	$	20,023	$	47,715	$	18,632	$	281,362	$	38,655	$	265,100	$	40,483
		233,647		20,023		47,715		18,632		281,362		38,655		265,100		40,483
Secured lines of credit
Drawn		20,922		3,834		–		–		20,922		3,834		21,130		3,846
Undrawn		18,292		1,002		–		–		18,292		1,002		18,524		1,102
		39,214		4,836		–		–		39,214		4,836		39,654		4,948
Qualifying retail revolving exposures
Drawn		14,598		8,330		–		–		14,598		8,330		16,046		9,198
Undrawn		31,264		3,530		–		–		31,264		3,530		29,839		3,806
		45,862		11,860		–		–		45,862		11,860		45,885		13,004
Other retail
Drawn		31,777		15,593		39,683		29,015		71,460		44,608		77,508		49,327
Undrawn		3,279		1,043		–		–		3,279		1,043		2,480		776
		35,056		16,636		39,683		29,015		74,739		45,651		79,988		50,103
Total retail
Drawn		300,944		47,780		87,398		47,647		388,342		95,427		379,784		102,854
Undrawn		52,835		5,575		–		–		52,835		5,575		50,843		5,684
	$	353,779	$	53,355	$	87,398	$	47,647	$	441,177	$	101,002	$	430,627	$	108,538
Securitization exposures		19,318		3,497		5,882		2,058		25,200		5,555		23,305		1,967
Trading derivatives		22,894		5,506		1,380		1,380		24,274		6,886		24,090		8,040
CVA derivatives		–		5,330		–		–		–		5,330		–		6,537
Subtotal	$	919,366	$	209,930	$	164,858	$	108,741	$	1,084,224	$	318,671	$	993,524	$	322,159
Equities		3,109		2,931		–		–		3,109		2,931		2,279		2,136
Other assets(4)		–		–		56,401		28,160		56,401		28,160		61,320		29,033
Total credit risk, before scaling factor	$	922,475	$	212,861	$	221,259	$	136,901	$	1,143,734	$	349,762	$	1,057,123	$	353,328
Add-on for 6% scaling factor(5)		–		12,242		–		–		–		12,242		–		12,103
Total credit risk	$	922,475	$	225,103	$	221,259	$	136,901	$	1,143,734	$	362,004	$	1,057,123	$	365,431

(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) Other exposures include off-balance sheet lending instruments, such as letters of credit, letters of guarantee, non-trading derivatives and repo-style exposures, after collateral.

(4) Other assets include amounts related to central counterparties.

(5) Basel Committee imposed a scaling factor (6%) on risk-weighted assets for Internal Ratings-Based credit risk portfolios.

136  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Supplementary Data

Revenues and Expenses

T77  Volume/rate analysis of change⁽¹⁾ in net interest income

	Increase (decrease) due to change in: 2020 versus 2019									Increase (decrease) due to change in: 2019 versus 2018
($ millions)	Average volume			Average rate			Net change			Average volume			Average rate			Net change
Net interest income
Total earning assets	$	1,957		$	(5,029	)	$	(3,072	)	$	2,938		$	1,779		$	4,717
Total interest-bearing liabilities		1,300			(4,515	)		(3,215	)		1,191			2,539			3,730
Change in net interest income	$	657		$	(514	)	$	143		$	1,747		$	(760	)	$	987
Assets
Deposits with banks	$	307		$	(821	)	$	(514	)	$	(73	)	$	142		$	69
Trading assets		28			140			168			25			96			121
Securities purchased under resale agreements		30			(246	)		(216	)		126			(70	)		56
Investment securities		390			(761	)		(371	)		155			191			346
Loans:
Residential mortgages		426			(634	)		(208	)		586			510			1,096
Personal loans		(108	)		(607	)		(715	)		373			420			793
Credit cards		(212	)		90			(122	)		443			55			498
Business and government		1,096			(2,190	)		(1,094	)		1,303			435			1,738
Total loans		1,202			(3,341	)		(2,139	)		2,705			1,420			4,125
Total earning assets	$	1,957		$	(5,029	)	$	(3,072	)	$	2,938		$	1,779		$	4,717
Liabilities
Deposits:
Personal	$	176		$	(721	)	$	(545	)	$	261		$	243		$	504
Business and government		791			(2,952	)		(2,161	)		797			1,746			2,543
Banks		186			(620	)		(434	)		(36	)		316			280
Total deposits		1,153			(4,293	)		(3,140	)		1,022			2,305			3,327
Obligations related to securities sold under repurchase agreements		58			(152	)		(94	)		47			41			88
Subordinated debentures		(8	)		(46	)		(54	)		66			15			81
Other interest-bearing liabilities		97			(24	)		73			56			178			234
Total interest-bearing liabilities	$	1,300			$  (4,515)			$  (3,215)		$	1,191		$	2,539		$	3,730

(1) Prior year amounts have been restated to adjust for financial instruments designated at fair value through profit or loss, previously reported under deposits.

T78  Provision for income taxes

For the fiscal years ($ millions)	2020		2019		2018		2020 versus 2019
Income taxes
Income tax expense	$	1,543	$	2,472	$	2,382		(37.6	)%
Other taxes
Payroll taxes		437		439		390		(0.5	)
Business and capital taxes		517		515		464		0.4
Harmonized sales tax and other		388		386		437		0.5
Total other taxes		1,342		1,340		1,291		0.1
Total income and other taxes(1)	$	2,885	$	3,812	$	3,673		(24.3	)%
Net income before income taxes	$	8,396	$	11,270	$	11,106		(25.5	)%
Effective income tax rate (%)		18.4		21.9		21.5		(3.5	)
Total tax rate (%)(2)		29.6		30.2		29.6		(0.6	)

(1) Comprising $1,658 of Canadian taxes (2019 – $1,998; 2018 – $2,218) and $1,227 of foreign taxes (2019 – $1,814; 2018 – $1,455).

(2) Total income and other taxes as a percentage of net income before income and other taxes.

2020 Scotiabank Annual Report  |  137

Management’s Discussion and Analysis

T79  Assets under administration and management

($ billions)	2020		2019		2018
Assets under administration
Personal
Retail brokerage	$	154.3	$	153.6	$	146.5
Investment management and trust		130.6		121.6		113.9
		284.9		275.2		260.4
Mutual funds		195.5		205.3		187.5
Institutional		78.2		77.9		69.7
Total	$	558.6	$	558.4	$	517.6
Assets under management
Personal	$	60.8	$	57.7	$	54.7
Mutual funds		179.3		188.6		173.0
Institutional		51.6		55.3		52.9
Total	$	291.7	$	301.6	$	280.6

T80  Changes in assets under administration and management

As at October 31 ($ billions)	2020			2019		2018
Assets under administration
Balance at beginning of year	$	558.4		$	517.6	$	470.2
Net inflows (outflows)(1)		5.0			6.9		53.1
Impact of market changes, including foreign currency translation		(4.8	)		33.9		(5.7	)
Balance at end of year(2)	$	558.6		$	558.4	$	517.6

(1) Includes impact of business acquisitions/dispositions of $(13.9) (2019 – $(3.1); 2018 – $49.2).

(2) Prior period amounts have been restated to conform with current period presentation.

As at October 31 ($ billions)	2020			2019		2018
Assets under management
Balance at beginning of year	$	301.6		$	280.6	$	206.7
Net inflows (outflows)(1)		(10.5	)		13.8		72.8
Impact of market changes, including foreign currency translation		0.6			7.2		1.1
Balance at end of year(2)	$	291.7		$	301.6	$	280.6

(1) Includes impact of business acquisitions/dispositions of $(13.9) (2019 – nil; 2018 – $76.0).

(2) Prior period amounts have been restated to conform with current period presentation.

T81  Fees paid to the shareholders’ auditors

For the fiscal years ($ millions)	2020		2019		2018
Audit services	$	25.6	$	32.6	$	28.7
Audit-related services		2.9		1.3		1.0
Tax services outside of the audit scope		–		–		–
Other non-audit services		0.3		0.5		0.4
Total	$	28.8	$	34.4	$	30.1

138  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Supplementary Data

Selected Quarterly Information

T82  Selected quarterly information

	2020								2019
As at and for the quarter ended	Q4		Q3		Q2		Q1		Q4		Q3		Q2		Q1
Operating results ($ millions)
Net interest income		4,258		4,253		4,417		4,392		4,336		4,374		4,193		4,274
Non-interest income		3,247		3,481		3,539		3,749		3,632		3,285		3,610		3,330
Total revenue		7,505		7,734		7,956		8,141		7,968		7,659		7,803		7,604
Provision for credit losses		1,131		2,181		1,846		926		753		713		873		688
Non-interest expenses		4,057		4,018		4,363		4,418		4,311		4,209		4,046		4,171
Income tax expense		418		231		423		471		596		753		625		498
Net income		1,899		1,304		1,324		2,326		2,308		1,984		2,259		2,247
Net income attributable to common shareholders		1,745		1,332		1,243		2,262		2,137		1,839		2,125		2,107
Operating performance
Basic earnings per share ($)		1.44		1.10		1.03		1.86		1.76		1.51		1.74		1.72
Diluted earnings per share ($)		1.42		1.04		1.00		1.84		1.73		1.50		1.73		1.71
Return on equity (%)		11.0		8.3		7.9		14.2		13.3		11.5		13.8		13.5
Productivity ratio (%)		54.1		52.0		54.8		54.3		54.1		55.0		51.8		54.9
Core banking margin (%)(1)		2.22		2.10		2.35		2.45		2.40		2.45		2.45		2.45
Financial position information ($ billions)
Cash and deposits with financial institutions		76.5		59.0		103.9		69.3		46.7		45.3		50.1		52.9
Trading assets		117.8		123.8		121.5		144.7		127.5		131.1		117.1		107.0
Loans		603.3		613.4		625.2		592.3		592.5		589.2		583.8		566.1
Total assets		1,136.5		1,169.9		1,247.1		1,154.0		1,086.2		1,066.7		1,058.2		1,034.3
Deposits		750.8		768.0		797.7		763.9		733.4		722.3		712.3		690.9
Common equity		62.8		62.9		64.3		63.5		63.6		63.5		63.6		62.5
Preferred shares and other equity instruments		5.3		5.3		3.6		3.9		3.9		3.9		3.9		3.9
Assets under administration		558.6		558.4		530.9		553.9		558.4		547.9		549.8		521.9
Assets under management		291.7		293.4		278.0		297.1		301.6		297.1		297.2		281.5
Capital and liquidity measures
Common Equity Tier 1 (CET1) capital ratio (%)		11.8		11.3		10.9		11.4		11.1		11.2		11.1		11.1
Tier 1 capital ratio (%)		13.3		12.8		11.9		12.5		12.2		12.3		12.5		12.5
Total capital ratio (%)		15.5		14.9		14.0		14.6		14.2		14.8		14.7		14.6
Leverage ratio (%)		4.7		4.6		4.4		4.0		4.2		4.2		4.3		4.4
Risk-weighted assets ($ billions)		417.1		430.5		446.2		420.7		421.2		417.1		415.2		408.6
Liquidity coverage ratio (LCR) (%)		138		141		132		127		125		123		125		128
Credit quality
Net impaired loans ($ millions)		3,096		3,361		3,473		3,233		3,540		3,559		3,695		3,607
Allowance for credit losses ($ millions)(2)		7,820		7,403		6,079		5,095		5,145		5,273		5,376		5,199
Gross impaired loans as a % of loans and acceptances		0.81		0.81		0.78		0.77		0.84		0.86		0.89		0.90
Net impaired loans as a % of loans and acceptances		0.50		0.53		0.53		0.52		0.58		0.58		0.61		0.61
Provision for credit losses as a % of average net loans and acceptances (annualized)(3)		0.73		1.36		1.19		0.61		0.50		0.48		0.61		0.47
Provision for credit losses on impaired loans as a % of average net loans and acceptances (annualized)(3)		0.54		0.58		0.56		0.55		0.49		0.52		0.49		0.47
Net write-offs as a % of average net loans and acceptances (annualized)		0.41		0.47		0.47		0.54		0.49		0.50		0.50		0.50
Adjusted results(1)
Adjusted net income ($ millions)		1,938		1,308		1,371		2,344		2,400		2,455		2,263		2,291
Adjusted diluted earnings per share ($)		1.45		1.04		1.04		1.83		1.82		1.88		1.70		1.75
Adjusted return on equity (%)		11.3		8.3		8.2		13.9		13.8		14.3		13.6		13.7
Adjusted productivity ratio (%)		53.3		51.4		54.0		53.4		52.7		51.7		52.3		54.1
Adjusted provision for credit losses as a % of average net loans and acceptances(3)		0.73		1.36		1.19		0.51		0.50		0.48		0.51		0.47
Common share information
Closing share price ($) (TSX)		55.35		55.01		55.80		72.28		75.54		70.46		73.78		74.80
Shares outstanding (millions)
Average – Basic		1,211		1,211		1,212		1,214		1,218		1,221		1,224		1,226
Average – Diluted		1,246		1,245		1,222		1,247		1,260		1,251		1,252		1,255
End of period		1,211		1,211		1,211		1,213		1,216		1,220		1,222		1,226
Dividends paid per share ($)		0.90		0.90		0.90		0.90		0.90		0.87		0.87		0.85
Dividend yield (%)(4)		6.4		6.5		5.9		4.9		5.0		4.9		4.8		4.8
Market capitalization ($ billions) (TSX)		67.1		66.6		67.6		87.7		91.9		86.0		90.2		91.7
Book value per common share ($)		51.85		51.91		53.05		52.33		52.33		52.06		52.01		51.01
Market value to book value multiple		1.1		1.1		1.1		1.4		1.4		1.4		1.4		1.5
Price to earnings multiple (trailing 4 quarters)		10.2		9.6		9.1		10.5		11.2		10.5		10.9		11.1

(1) Refer to page 17 for a discussion of non-GAAP measures.

(2) Includes allowance for credit losses on all financial assets – loans, acceptances, off-balance sheet exposures, debt securities, and deposits with financial institutions.

(3) Includes provision for credit losses on certain financial assets – loans, acceptances and off-balance sheet exposures.

(4) Based on the average of the high and low common share price for the period.

2020 Scotiabank Annual Report  |  139

Management’s Discussion and Analysis

Ten-Year Statistical Review

T83  Consolidated Statement of Financial Position

As at October 31 ($ millions)	2020(1)			2019(1)		2018(1)		2017		2016		2015		2014		2013		2012			2011
Assets
Cash and deposits with financial institutions	$	76,460		$	46,720	$	62,269	$	59,663	$	46,344	$	73,927	$	56,730	$	53,338	$	47,337		$	38,723
Precious metals		1,181			3,709		3,191		5,717		8,442		10,550		7,286		8,880		12,387			9,249
Trading assets
Securities		108,331			112,664		85,474		78,652		87,287		78,380		95,363		84,196		74,639			62,192
Loans		8,352			13,829		14,334		17,312		19,421		18,341		14,508		11,225		12,857			13,607
Other		1,156			995		454		2,500		1,853		2,419		3,377		1,068		100			–
		117,839			127,488		100,262		98,464		108,561		99,140		113,248		96,489		87,596			75,799
Financial instruments designated at fair value through profit or loss		–			–		12		13		221		320		111		106		197			375
Securities purchased under resale agreements and securities borrowed		119,747			131,178		104,018		95,319		92,129		87,312		93,866		82,533		66,189			47,181
Derivative financial instruments		45,065			38,119		37,558		35,364		41,657		41,003		33,439		24,503		30,338			37,322
Investment securities		111,389			82,359		78,396		69,269		72,919		43,216		38,662		34,319		33,376			30,176
Loans
Residential mortgages		284,684			268,169		253,357		236,916		222,888		217,498		212,648		209,865		175,630			161,685
Personal loans		93,758			98,631		96,019		89,227		86,110		–		–		–		–			–
Credit cards		14,797			17,788		16,485		14,104		13,392		–		–		–		–			–
Personal and credit cards		–			–		–		–		–		91,477		84,204		76,008		68,277			63,317
Business and government		217,663			212,972		191,038		168,449		162,400		153,850		131,098		119,615		111,648			96,743
		610,902			597,560		556,899		508,696		484,790		462,825		427,950		405,488		355,555			321,745
Allowance for credit losses		7,639			5,077		5,065		4,327		4,626		4,197		3,641		3,273		2,977			2,689
		603,263			592,483		551,834		504,369		480,164		458,628		424,309		402,215		352,578			319,056
Other
Customers’ liability under acceptances, net of allowance		14,228			13,896		16,329		13,560		11,978		10,296		9,876		10,556		8,932			8,172
Property and equipment(2)		5,897			2,669		2,684		2,381		2,520		2,286		2,272		2,214		2,218			2,504
Investments in associates		2,475			5,614		4,850		4,586		4,299		4,033		3,461		5,326		4,791			4,434
Goodwill and other intangible assets		17,015			17,465		17,719		12,106		12,141		11,449		10,884		10,704		8,692			7,639
Deferred tax assets		2,185			1,570		1,938		1,713		2,021		2,034		1,763		1,938		2,273			2,214
Other assets		19,722			22,891		17,433		12,749		12,870		12,303		9,759		10,523		11,321			11,579
		61,522			64,105		60,953		47,095		45,829		42,401		38,015		41,261		38,227			36,542
	$	1,136,466		$	1,086,161	$	998,493	$	915,273	$	896,266	$	856,497	$	805,666	$	743,644	$	668,225		$	594,423
Liabilities
Deposits
Personal	$	246,135		$	224,800	$	214,545	$	200,030	$	199,302	$	190,044	$	175,163	$	171,048	$	138,051		$	133,025
Business and government		464,619			461,851		422,002		384,988		372,303		375,144		342,367		313,820		293,460			262,833
Financial institutions		40,084			46,739		39,987		40,349		40,272		35,731		36,487		33,019		34,178			25,376
		750,838			733,390		676,534		625,367		611,877		600,919		554,017		517,887		465,689			421,234
Financial instruments designated at fair value through profit or loss		18,899			12,235		8,188		4,663		1,459		1,486		465		174		157			101
Other
Acceptances		14,305			13,901		16,338		13,560		11,978		10,296		9,876		10,556		8,932			8,172
Obligations related to securities sold short		31,902			30,404		32,087		30,766		23,312		20,212		27,050		24,977		18,622			15,450
Derivative financial instruments		42,247			40,222		37,967		34,200		42,387		45,270		36,438		29,267		35,323			40,236
Obligations related to securities sold under repurchase agreements and securities lent		137,763			124,083		101,257		95,843		97,083		77,015		88,953		77,508		56,968			38,216
Subordinated debentures		7,405			7,252		5,698		5,935		7,633		6,182		4,871		5,841		10,143			6,923
Capital instruments		–			–		–		–		–		–		–		–		–			2,003
Other liabilities(2)		62,604			54,482		52,744		43,314		42,716		41,638		34,785		32,047		32,726			29,848
		296,226			270,344		246,091		223,618		225,109		200,613		201,973		180,196		162,714			140,848
		1,065,963			1,015,969		930,813		853,648		838,445		803,018		756,455		698,257		628,560			562,183
Equity
Common equity
Common shares		18,239			18,264		18,234		15,644		15,513		15,141		15,231		14,516		13,139			8,336
Retained earnings		46,345			44,439		41,414		38,117		34,752		31,316		28,609		25,068		21,775			18,421
Accumulated other comprehensive income (loss)		(2,125	)		570		992		1,577		2,240		2,455		949		388		(745	)		(497	)
Other reserves		360			365		404		116		152		173		176		193		166			96
Total common equity		62,819			63,638		61,044		55,454		52,657		49,085		44,965		40,165		34,335			26,356
Preferred shares and other equity instruments		5,308			3,884		4,184		4,579		3,594		2,934		2,934		4,084		4,384			4,384
Total equity attributable to equity holders of the Bank		68,127			67,522		65,228		60,033		56,251		52,019		47,899		44,249		38,719			30,740
Non-controlling interests
Non-controlling interests in subsidiaries		2,376			2,670		2,452		1,592		1,570		1,460		1,312		1,138		946			626
Capital instrument equity holders		–			–		–		–		–		–		–		–		–			874
Total equity		70,503			70,192		67,680		61,625		57,821		53,479		49,211		45,387		39,665			32,240
	$	1,136,466		$	1,086,161	$	998,493	$	915,273	$	896,266	$	856,497	$	805,666	$	743,644	$	668,225		$	594,423

(1) The amounts for the years ended October 31, 2020, October 31, 2019 and October 31, 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated.

(2) The amounts for the year ended October 31, 2020 have been prepared in accordance with IFRS 16; prior year amounts have not been restated (refer to Notes 3 and 4).

140  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Supplementary Data

T84  Consolidated Statement of Income

For the year ended October 31 ($ millions)	2020		2019		2018		2017		2016		2015		2014		2013		2012		2011
Revenue
Interest income(1)
Loans	$	26,977	$	29,116	$	24,991	$	21,719	$	20,419	$	18,912	$	18,176	$	17,359	$	15,606	$	14,373
Securities		2,035		2,238		1,771		1,403		1,237		922		921		1,000		1,045		986
Securities purchased under resale agreements and securities borrowed		286		502		446		283		158		161		180		190		221		221
Deposits with financial institutions		414		928		859		522		394		292		263		279		287		275
		29,712		32,784		28,067		23,927		22,208		20,287		19,540		18,828		17,159		15,855
Interest expense
Deposits		10,731		13,871		10,544		7,878		6,793		6,070		6,173		6,397		6,117		5,589
Subordinated debentures		240		294		214		226		232		187		204		339		381		369
Capital instruments		–		–		–		–		–		–		–		–		–		138
Other(2)		1,421		1,442		1,118		788		891		938		858		742		691		745
		12,392		15,607		11,876		8,892		7,916		7,195		7,235		7,478		7,189		6,841
Net interest income		17,320		17,177		16,191		15,035		14,292		13,092		12,305		11,350		9,970		9,014
Non-interest income(1)(3)		14,016		13,857		12,584		12,120		12,058		10,957		11,299		9,949		9,676		8,296
Total revenue		31,336		31,034		28,775		27,155		26,350		24,049		23,604		21,299		19,646		17,310
Provision for credit losses(1)		6,084		3,027		2,611		2,249		2,412		1,942		1,703		1,288		1,252		1,076
Non-interest expenses(2)(3)		16,856		16,737		15,058		14,630		14,540		13,041		12,601		11,664		10,436		9,481
Income before taxes		8,396		11,270		11,106		10,276		9,398		9,066		9,300		8,347		7,958		6,753
Income tax expense		1,543		2,472		2,382		2,033		2,030		1,853		2,002		1,737		1,568		1,423
Net income	$	6,853	$	8,798	$	8,724	$	8,243	$	7,368	$	7,213	$	7,298	$	6,610	$	6,390	$	5,330
Net income attributable to non-controlling interests	$	75	$	408	$	176	$	238	$	251	$	199	$	227	$	231	$	196	$	149
Non-controlling interests in subsidiaries		75		408		176		238		251		199		227		231		196		91
Capital instrument equity holders		–		–		–		–		–		–		–		–		–		58
Net income attributable to equity holders of the Bank	$	6,778	$	8,390	$	8,548	$	8,005	$	7,117	$	7,014	$	7,071	$	6,379	$	6,194	$	5,181
Preferred shareholders and other equity instrument holders		196		182		187		129		130		117		155		217		220		216
Common shareholders	$	6,582	$	8,208	$	8,361	$	7,876	$	6,987	$	6,897	$	6,916	$	6,162	$	5,974	$	4,965
Earnings per common share (in dollars)
Basic	$	5.43	$	6.72	$	6.90	$	6.55	$	5.80	$	5.70	$	5.69	$	5.15	$	5.27	$	4.63
Diluted	$	5.30	$	6.68	$	6.82	$	6.49	$	5.77	$	5.67	$	5.66	$	5.11	$	5.18	$	4.53
Dividends per common share (in dollars)	$	3.60	$	3.49	$	3.28	$	3.05	$	2.88	$	2.72	$	2.56	$	2.39	$	2.19	$	2.05

(1) The amounts for the years ended October 31, 2020, October 31, 2019 and October 31, 2018 have been prepared in accordance with IFRS 9; prior year amounts have not been restated.

(2) The amounts for the year ended October 31, 2020 have been prepared in accordance with IFRS 16; prior year amounts have not been restated (refer to Notes 3 and 4 in the consolidated financial statements).

(3) The amounts for the years ended October 31, 2020 and October 31, 2019 have been prepared in accordance with IFRS 15; prior year amounts have not been restated (refer to Notes 3 and 4 in the consolidated financial statements).

2020 Scotiabank Annual Report  |  141

Management’s Discussion and Analysis

T85  Consolidated Statement of Changes in Equity

For the year ended October 31 ($ millions)	2020			2019			2018			2017			2016			2015			2014
Common shares
Balance at beginning of year	$	18,264		$	18,234		$	15,644		$	15,513		$	15,141		$	15,231		$	14,516
Issued		59			255			2,708			313			391			104			771
Purchased for cancellation		(84	)		(225	)		(118	)		(182	)		(19	)		(194	)		(56	)
Balance at end of year	$	18,239		$	18,264		$	18,234		$	15,644		$	15,513		$	15,141		$	15,231
Retained earnings
Balance at beginning of year		44,439			41,414			38,117			34,752			31,316			28,609			25,315
IFRS adjustment		–			(58	)(1)		(564	)		–			–			–			(247	)
Restated balances		44,439			41,356			37,553			34,752			31,316			28,609			25,068
Net income attributable to common shareholders of the Bank		6,582			8,208			8,361			7,876			6,987			6,897			6,916
Common dividends		(4,363	)		(4,260	)		(3,985	)		(3,668	)		(3,468	)		(3,289	)		(3,110	)
Purchase of shares for cancellation and premium on redemption		(330	)		(850	)		(514	)		(827	)		(61	)		(761	)		(264	)
Other		17			(15	)		(1	)		(16	)		(22	)		(140	)(2)		(1	)
Balance at end of year	$	46,345		$	44,439		$	41,414		$	38,117		$	34,752		$	31,316		$	28,609
Accumulated other comprehensive income (loss)
Balance at beginning of year		570			992			1,577			2,240			2,455			949			545
IFRS adjustment		–			–			51			–			–			–			(157	)
Restated balances		570			992			1,628			2,240			2,455			949			388
Cumulative effect of adopting new accounting policies		–			–			–			–			–			(5	)(3)		–
Other comprehensive income (loss)		(2,668	)		(422	)		(693	)		(663	)		(215	)		1,511			561
Other		(27	)		–			57			–			–			–			–
Balance at end of year	$	(2,125	)	$	570		$	992		$	1,577		$	2,240		$	2,455		$	949
Other reserves
Balance at beginning of year		365			404			116			152			173			176			193
Share-based payments(4)		5			7			6			8			7			14			30
Other		(10	)		(46	)		282			(44	)		(28	)		(17	)		(47	)
Balance at end of year	$	360		$	365		$	404		$	116		$	152		$	173		$	176
Total common equity	$	62,819		$	63,638		$	61,044		$	55,454		$	52,657		$	49,085		$	44,965
Preferred shares and other equity instruments
Balance at beginning of year		3,884			4,184			4,579			3,594			2,934			2,934			4,084
Net income attributable to preferred shareholders and other equity instrument holders of the Bank		196			182			187			129			130			117			155
Preferred and other equity instrument dividends		(196	)		(182	)		(187	)		(129	)		(130	)		(117	)		(155	)
Issued		1,689			–			300			1,560			1,350			–			–
Redeemed		(265	)		(300	)		(695	)		(575	)		(690	)		–			(1,150	)
Balance at end of year	$	5,308		$	3,884		$	4,184		$	4,579		$	3,594		$	2,934		$	2,934
Non-controlling interests
Balance at beginning of year		2,670			2,452			1,592			1,570			1,460			1,312			1,155
IFRS adjustment		–			–			(97	)		–			–			–			(17	)
Restated balances		2,670			2,452			1,495			1,570			1,460			1,312			1,138
Net income attributable to non-controlling interests		75			408			176			238			251			199			227
Distributions to non-controlling interests		(148	)		(150	)		(199	)		(133	)		(116	)		(86	)		(76	)
Effect of foreign exchange and others		(221	)		(40	)		980			(83	)		(25	)		35			23
Balance at end of year	$	2,376		$	2,670		$	2,452		$	1,592		$	1,570		$	1,460		$	1,312
Total equity at end of year	$	70,503		$	70,192		$	67,680		$	61,625		$	57,821		$	53,479		$	49,211

(1) Refer to Note 4 in the consolidated financial statements.

(2) Includes retrospective adjustments primarily related to foreign currency translation on Allowance for Credit Losses with respect to periods prior to 2013 ($152).

(3) To reflect the adoption of the own credit risk provisions of IFRS 9 pertaining to financial liabilities designated at fair value through profit or loss.

(4) Represents amounts on account of share-based payments (refer to Note 26 in the consolidated financial statements).

T86  Consolidated Statement of Comprehensive Income

For the year ended October 31 ($ millions)	2020			2019			2018			2017			2016			2015			2014
Net income	$	6,853		$	8,798		$	8,724		$	8,243		$	7,368		$	7,213		$	7,298
Other comprehensive income (loss), net of income taxes:
Items that will be reclassified subsequently to net income
Net change in unrealized foreign currency translation gains (losses)		(2,239	)		(819	)		(606	)		(1,259	)		396			1,855			889
Net change in unrealized gains (losses) on available-for-sale securities (debt and equity)(1)		n/a			n/a			n/a			(55	)		(172	)		(480	)		(38	)
Net change in fair value due to change in debt instruments measured at fair value through other comprehensive income(1)		293			105			(252	)		n/a			n/a			n/a			n/a
Net change in gains (losses) on derivative instruments designated as cash flow hedges		(32	)		708			(361	)		(28	)		258			55			(6	)
Other comprehensive income (loss) from investments in associates		(2	)		103			66			56			31			(9	)		60
Items that will not be reclassified subsequently to net income
Net change in remeasurement of employee benefit plan asset and liability		(465	)		(815	)		318			592			(716	)		(1	)		(320	)
Net change in fair value due to change in equity instruments designated at fair value through other comprehensive income(1)		(85	)		95			60			n/a			n/a			n/a			n/a
Net change in fair value due to change in own credit risk on financial liabilities designated under the fair value option(2)		(298	)		8			(22	)		(21	)		(16	)		15			n/a
Other comprehensive income (loss) from investments in associates		(8	)		(10	)		(7	)		6			(10	)		1			(2	)
Other comprehensive income (loss)		(2,836	)		(625	)		(804	)		(709	)		(229	)		1,436			583
Comprehensive income	$	4,017		$	8,173		$	7,920		$	7,534		$	7,139		$	8,649		$	7,881
Comprehensive income (loss) attributable to:
Common shareholders of the Bank	$	3,914		$	7,786		$	7,668		$	7,213		$	6,772		$	8,408		$	7,477
Preferred shareholders and other equity instrument holders of the Bank		196			182			187			129			130			117			155
Non-controlling interests in subsidiaries		(93	)		205			65			192			237			124			249
Capital instrument equity holders		–			–			–			–			–			–			–
	$	4,017		$	8,173		$	7,920		$	7,534		$	7,139		$	8,649		$	7,881

(1) The amounts for the years ended October 31, 2020, October 31, 2019 and October 31, 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been restated.

(2) In accordance with the transition requirements for the own credit risk provisions of IFRS 9, prior year comparatives have not been restated for the adoption of this standard in 2015.

142  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Supplementary Data

2013			2012			2011
$	13,139		$	8,336		$	5,750
	1,377			4,803			2,586
	–			–			–
$	14,516		$	13,139		$	8,336
	21,978			18,421			21,932
	(203	)		(144	)		(6,248	)
	21,775			18,277			15,684
	6,162			5,974			4,965
	(2,858	)		(2,493	)		(2,200	)
	–			–			–
	(11	)		17			(28	)
$	25,068		$	21,775		$	18,421
	(31	)		(497	)		(4,051	)
	(714	)		32			4,320
	(745	)		(465	)		269
	–			–			–
	1,133			(280	)		(766	)
	–			–			–
$	388		$	(745	)	$	(497	)
	166			96			25
	36			38			46
	(9	)		32			25
$	193		$	166		$	96
$	40,165		$	34,335		$	26,356
	4,384			4,384			3,975
	217			220			216
	(217	)		(220	)		(216	)
	–			–			409
	(300	)		–			–
$	4,084		$	4,384		$	4,384
	1,743			1,500			579
	(797	)		(891	)		936
	946			609			1,515
	231			196			149
	(80	)		(44	)		(181	)
	41			185			17
$	1,138		$	946		$	1,500
$	45,387		$	39,665		$	32,240

2013		2012			2011
$	6,610	$	6,390		$	5,330
	346		149			(697	)
	110		151			(169	)
	n/a		n/a			n/a
	93		116			105
	20		25			–
	563		(747	)		–
	n/a		n/a			n/a
	n/a		n/a			n/a
	–		–			–
	1,132		(306	)		(761	)
$	7,742	$	6,084		$	4,569
$	7,298	$	5,694		$	4,199
	217		220			216
	227		170			96
	–		–			58
$	7,742	$	6,084		$	4,569

2020 Scotiabank Annual Report  |  143

Management’s Discussion and Analysis

T87  Other statistics

For the year ended October 31	2020		2019		2018			2017			2016		2015		2014
Operating performance
Basic earnings per share ($)		5.43		6.72		6.90			6.55			5.80		5.70		5.69
Diluted earnings per share ($)		5.30		6.68		6.82			6.49			5.77		5.67		5.66
Return on equity (%)		10.4		13.1		14.5			14.6			13.8		14.6		16.1
Productivity ratio (%)		53.8		53.9		52.3			53.9			55.2		54.2		53.4
Return on assets (%)		0.59		0.83		0.92			0.90			0.81		0.84		0.92
Core banking margin (%)(1)		2.27		2.44		2.46			2.46			2.38		2.39		2.39
Capital measures(2)
Common Equity Tier 1 (CET1) capital ratio (%)		11.8		11.1		11.1			11.5			11.0		10.3		10.8
Tier 1 capital ratio (%)		13.3		12.2		12.5			13.1			12.4		11.5		12.2
Total capital ratio (%)		15.5		14.2		14.3			14.9			14.6		13.4		13.9
Leverage ratio (%)		4.7		4.2		4.5			4.7			4.5		4.2		n/a
Common share information
Closing share price ($) (TSX)		55.35		75.54		70.65			83.28			72.08		61.49		69.02
Number of shares outstanding (millions)		1,211		1,216		1,227			1,199			1,208		1,203		1,217
Dividends paid per share ($)		3.60		3.49		3.28			3.05			2.88		2.72		2.56
Dividend yield (%)(3)		5.8		4.9		4.2			4.0			4.7		4.4		3.8
Price to earnings multiple (trailing 4 quarters)		10.2		11.2		10.2			12.7			12.4		10.8		12.1
Book value per common share ($)		51.85		52.33		49.75			46.24			43.59		40.80		36.96
Other information
Average total assets ($ millions)		1,160,584		1,056,063		945,683			912,619			913,844		860,607		795,641
Number of branches and offices		2,618		3,109		3,095			3,003			3,113		3,177		3,288
Number of employees		92,001		101,813		97,021	(4)		87,761	(4)		88,901		89,214		86,932
Number of automated banking machines		8,791		9,391		9,029			8,140			8,144		8,191		8,732

(1) Refer to page 17 for a discussion of non-GAAP measures.

(2) Effective November 1, 2012, regulatory capital ratios are determined in accordance with Basel III rules. Comparative amounts for 2012 and 2011 were determined in accordance with Basel II rules.

(3) Based on the average of the high and low common share price for the year.

(4) Amounts have been restated to conform with current period presentation.

144  |  2020 Scotiabank Annual Report

Management’s Discussion and Analysis    |    Supplementary Data

2013		2012		2011
	5.15		5.27		4.63
	5.11		5.18		4.53
	16.6		19.9		20.3
	54.8		53.1		54.8
	0.88		0.97		0.91
	2.31		2.31		2.32
	9.1		n/a		n/a
	11.1		13.6		12.2
	13.5		16.7		13.9
	n/a		n/a		n/a
	63.39		54.25		52.53
	1,209		1,184		1,089
	2.39		2.19		2.05
	4.1		4.2		3.7
	12.3		10.3		11.3
	33.23		28.99		24.20
	748,901		659,538		586,101
	3,330		3,123		2,926
	86,690		81,497		75,362
	8,471		7,341		6,260

2020 Scotiabank Annual Report  |  145