Glossary

Adjusted Assets

Used in the calculation of the assets-to-capital multiple and includes on-balance sheet assets plus standby letters of credit and guarantees.

Allowance for Credit Losses

An amount set aside and deemed adequate by management to absorb potential credit-related losses in the Bank’s portfolio of loans, acceptances, guarantees, letters of credit, deposits with other banks and derivatives. Allowances for credit losses can be specific or general and are accounted for as deductions from the related assets in the financial statements.

Assets under Administration and under Management

Assets administered and/or managed by a financial institution that are beneficially owned by clients and are therefore not reported on the balance sheet of the financial institution.

Average Earning Assets

This amount represents the daily or monthly average balance over a one-year period of deposits with other banks, loans and securities.

Banker’s Acceptance (BA)

A bill of exchange or negotiable instrument drawn by the borrower for payment at maturity and accepted by a bank. BAs constitute a guarantee of payment by the bank and can be traded in the money market. The bank earns a “stamping fee” for providing this guarantee.

Basis Point

One one-hundredth of a percentage point.

Counterparty

The opposite side of a transaction, typically the Bank’s corporate or commercial customers or another financial institution. Counterparty risk refers to the risk that the counterparty will not be able to meet its financial obligations under the terms of the contract or transaction it has entered into.

Derivatives

A derivative is a contract whose value is derived from interest rates, foreign exchange rates, or equity or commodity prices. Use of derivatives allows for the transfer, modification or reduction of current or expected risks from changes in interest rates, foreign exchange rates and equity and commodity prices. See also individual definitions of forwards and futures, forward rate agreements, options and swaps.

Earnings at Risk

The impact on net income over the following 12 months of a one-time change in market rates/prices.

Economic Value at Risk

The impact on the value of the Bank’s assets and liabilities of a change in market rates/prices.

Forwards and Futures

Contractual commitments to either buy or sell a specified currency or financial instrument on a specified future date at a specified price. Forwards are customized contracts transacted in the over-the-counter market. Futures are transacted in standardized amounts on regulated exchanges and are subject to daily cash margining.

Forward Rate Agreement (FRA)

A type of derivative obliging two parties to make a cash settlement at a future date for the difference between a contracted rate of interest and the current market rate, based on a notional amount. An FRA can act as a hedge against future movements in market interest rates.

Guarantees and Standby Letters of Credit

Primarily represent a bank’s obligation to make payments to third parties on behalf of its clients if its clients are unable to make the required payments or meet other contractual requirements.

Hedge

A risk management technique used to neutralize/manage interest rate or foreign currency exchange exposures arising from normal banking operations.

Impaired Loans

Loans are classified as impaired when, in the opinion of management, there is no longer reasonable assurance of the timely collection of principal and interest. Interest on impaired loans is only recognized as interest revenue when management has reasonable assurance of the timely collection of the full amount of principal and interest.

Innovative Tier 1 Capital

The Office of the Superintendent of Financial Institutions Canada (OSFI) allows banks to issue instruments which qualify as “Innovative” Tier 1 capital. In order to qualify, these instruments have to be issued indirectly through a special purpose vehicle, they have to be permanent in nature and free of any fixed charges, the bank has to absorb any losses and must account for them on an equity basis. They cannot comprise more than 15% of net Tier 1 Capital and cannot exceed, in aggregate, 25% of innovative and perpetual preferred shares.

Margining

Margins for futures contracts are money or securities used as an initial deposit as assurance that the contract will be fulfilled. Margining refers to adjustments made to the initial deposit as market movement causes the fair value of the instrument to fluctuate, possibly requiring additional deposits to be placed with the exchange.

Mark-to-Market

Valuation at market rates, as of the balance sheet date, of securities and derivatives held for trading purposes.

Net Economic Profit (NEP)

Cash net income available to common shareholders less a charge for capital.

Net Interest Income

The difference between what a bank earns on assets such as loans and securities and what it pays on liabilities such as deposits and subordinated debt.

Net Interest Margin

Average net interest margin is the ratio of net interest income to average earning assets.

Notional Amount

The amount considered as principal when calculating interest and other payments for derivative contracts. This amount traditionally does not change hands under the terms of a derivative contract.

Off-Balance Sheet Financial Instruments

An asset or liability that is not recorded on the balance sheet, but has the potential to produce positive or negative cash flows in the future. A variety of products offered to clients can be classified as off-balance sheet and they fall into two broad categories: (i) credit-related arrangements, which provide clients with liquidity protection, and
(ii) derivatives.

Options

Contractual agreements that convey the right, but not the obligation, to either buy or sell a specific amount of a financial instrument at a fixed price either at a fixed future date or at any time within a fixed future period.

Over-the-Counter (OTC)

Trading that occurs outside of organized or regulated securities exchanges, carried out by broker-dealers who communicate with one another by telephone and quotation terminals. Prices on OTC instruments are negotiated between buying and selling brokers. Certain OTC instruments are traded in accordance with rules prescribed by self-regulating bodies.

Provision for Credit Losses

A charge to income which represents an expense deemed adequate by management given the composition of a bank’s credit portfolios, their probability of default, the economic environment and the allowance for credit losses already established. Specific provisions are established to reduce the book value of specific assets (primarily loans) to establish the amount expected to be recovered on the loans. A country risk provision is established for loans to and securities of countries identified by OSFI that have restructured or experienced difficulties in servicing all or part of their external debt to commercial banks. A general provision for loan losses is established in recognition of the fact that not all of the impairment in a loan portfolio can be specifically identified on a loan-by-loan basis.

Regulatory Capital Ratios

The percentage of risk-weighted assets supported by capital, as defined by OSFI under the framework of risk-based capital standards developed by the Bank for International Settlements. These ratios are labeled Tier 1 and Tier 2. Tier 1 capital is considered to be more permanent, consisting of common shares together with any qualifying non-cumulative preferred shares less unamortized goodwill. Tier 2 capital consists of other preferred shares, subordinated debentures and general allowances to certain prescribed limits. Assets-to-capital multiple is adjusted assets divided by total capital.

Replacement Cost of Derivative Contracts

The cost of replacing a derivative contract that has a positive fair value at current market rates should a counterparty fail to settle.

Return on Common Shareholders’ Equity (ROE)

This represents net income, less preferred share dividends, expressed as a percentage of average common shareholders’ equity. Cash-based ROE eliminates the impact in accounting treatment for business acquisitions in Canada and the United States and adjusts net income by adding back amortization of goodwill and intangible assets. Equity is not adjusted to exclude goodwill and intangible assets.

Risk

Country Risk

Also known as sovereign risk, it is the risk that economic or political change in a country may impact repayments to creditor banks. This risk is considered higher for certain emerging market and lesser-developed countries specifically identified by OSFI.

Credit Risk

The potential for loss due to the failure of a counterparty or borrower to meet its financial obligations. Credit risk arises from traditional lending activity, from settling payments between financial institutions and from providing products that create replacement risk. Replacement risk arises when a counterparty’s commitments to us are determined by reference to the changing values of contractual commitments.

Foreign Exchange Risk

Possible losses resulting from exchange rate movements. A foreign currency devaluation, for example, could result in losses on an overseas investment.

Interest Rate Risk

The potential impact on the bank’s earnings and economic value due to changes in interest rates. Rising interest rates could, for example, increase funding costs and reduce the net interest margin earned on a fixed yield mortgage portfolio.

Liquidity Risk

The risk of being unable to meet financial commitments, under all circumstances, without having to raise funds at unreasonable prices or sell assets on a forced basis.

Market Risk

The potential for loss arising from potential adverse changes in underlying market factors, including interest and foreign exchange rates, equity and commodity prices, spread and basis risk.

Operational Risk

The risk of loss resulting from a breakdown in, for example, communications, information or transactional processing or legal/compliance issues, due to technology/systems or procedural failures, human errors, disasters or criminal activity. The Bank’s definition of operational risk consists of two main components, operations risk and business/event risks.

Replacement Risk

The risk that a financial contract will need to be replaced in the open market at a cost to the bank/enterprise.

Risk Adjusted Return on Capital (RAROC)

A measurement tool that enables management to allocate capital, and the related cost of capital, in respect of credit, market and operational risk by type of transaction, client and line of business. This facilitates the deployment of capital to business units that can provide the maximum shareholder value on the capital invested.

Risk-Weighted Assets

Used in the calculation of risk-based capital ratios. The face amount of assets is discounted using predetermined risk-weighting factors in order to reflect a comparable risk per dollar among all types of assets. By adjusting notional values to balance sheet (or credit) equivalents and then applying appropriate risk-weighting factors, risks inherent in off-balance sheet instruments are recognized.

Securities Purchased under Resale Agreements

A type of transaction that involves the purchase of a security, normally a government bond, with the commitment by the buyer to resell the security to the original seller at a specified price on a specified date in the future.

Securities Sold under Repurchase Agreements

A type of transaction where a security is sold with the commitment by the seller to repurchase the security at a specified price and time.

Securities Sold but not yet Purchased

A transaction in which the seller sells securities it does not own. The seller borrows the securities in order to deliver them to the purchaser. At a later date, the seller buys identical securities in the market to replace the borrowed securities. On the balance sheet, this category represents our obligation to deliver securities that we did not own at the time of sale.

Securitization

Securitizing assets involves selling financial assets to trusts or special purpose vehicles that are independent from the Bank; it serves as an effective balance sheet management tool by reducing or eliminating the need to hold capital against risk-weighted assets, enabling capital to be reduced or redeployed to alternative revenue-generating purposes, and serves as an effective liquidity management tool by diversifying funding sources.

Spread

The difference between two product rates, typically an asset and a liability.

Swaps

Contractual agreements between two parties to exchange a series of cash flows. For interest rate swaps, counterparties generally exchange fixed and floating rate interest payments based on a notional value in a single currency. For cross-currency interest rate swaps, principal amounts and fixed and floating rate interest payments are exchanged in different currencies.

Taxable Equivalent Basis (TEB) Adjustment

An addition to interest income to gross up the tax-exempt income earned on certain securities (primarily loan substitute securities) to an amount which, had it been taxable at the statutory rate, would result in the same after-tax net income as appears in the financial statements. This results in a better reflection of the pre-tax economic yield of these assets and facilitates uniform measurement and comparison of net interest income.

Total Shareholder Return (TSR)

This amount is calculated as the annualized total return on an investment in our common shares made at the beginning of a designated period, usually one or five years. Total return on common shares includes the effect of a change in the share price and assumes that dividends received on common shares are reinvested in additional common shares.

Value at Risk (VaR)

VaR measures the adverse impact on the value of a portfolio, over a specified time period, of potential changes in market rates and prices. VaR is usually measured at a 99% confidence interval and assumes that changes in rates and prices are correlated.

Volatility

A term which generally refers to a measure of price variance, usually the standard deviation of returns from a security or a portfolio of securities over a specified period of time.