The Bank of Nova Scotia 6K 2019 Q3 Current report | BNS Filing

Exhibit 99.1

LOGO

Q3 2019 Quarterly Report to Shareholders Scotiabank reports third quarter results TORONTO, August 27, 2019 – Scotiabank reported third quarter net income of $1,984 million compared to $1,939 million in the same period last year. Diluted earnings per share were $1.50, compared to $1.55 in the same period a year ago. Return on equity was 11.5% compared to 13.1% a year ago. Adjusting for Acquisition and divestiture-related amounts(1), net income increased 9% to $2,455 million and diluted earnings per share were $1.88 compared to $1.76 last year. Return on equity was 14.3% compared to 14.5% a year ago. “Meaningful progress was made this quarter to reposition the Bank and simplify the operations. As a result, we are better positioned for growth in our key markets. We formalized agreements to reduce our investment in Thailand and announced the divestiture of our operations in Puerto Rico and US Virgin Islands. The repositioning of our international footprint is now substantially complete” said Brian Porter, President and CEO of Scotiabank. “Canadian Banking reported good results this quarter, producing positive operating leverage, margin expansion, and double-digit deposit growth. Canadian Wealth Management earnings grew 20%, with good organic growth and strong contributions from MD Financial and Jarislowsky Fraser. “International Banking delivered another quarter of double-digit earnings growth. The business remains focused on successfully integrating our recent acquisitions while continuing to drive organic growth. We continue to see strong growth in the Pacific Alliance countries, led by Chile and Peru. “The Bank continued to maintain strong capital ratios and reported a Common Equity Tier 1 capital ratio of 11.2%, or 11.7% on a pro-forma basis, including the estimated impact from announced divestitures. This quarter we announced a 3 cent increase in the quarterly dividend to 90 cents per common share, 6% higher than a year ago. “We are pleased that a number of key milestones were achieved this quarter in delivering digital innovations for our customers, including being recognized as the industry leader in mobile banking by J.D. Power and launching our new mobile banking app in Canada. In addition, Tangerine benefitted from our long-term partnership with Maple Leaf Sports and Entertainment as the Official Bank of the 2019 NBA Championships. We remain focused on achieving strong consistent long-term results for our shareholders.” Live audio Web broadcast of the Bank’s analysts’ conference call. See page 74 for details. (1) Refer to Non-GAAP Measures on page 4 for details. Scotiabank

Financial Highlights


	As at and for the three months ended						For the nine months ended
(Unaudited)	July 31 2019		April 30 2019		July 31 2018		July 31 2019		July 31 2018
Operating results($ millions)
Net interest income		4,374		4,193		4,085		12,841		11,971
Non-interest income		3,285		3,610		3,096		10,225		9,356
Total revenue		7,659		7,803		7,181		23,066		21,327
Provision for credit losses		713		873		943		2,274		2,021
Non-interest expenses		4,209		4,046		3,770		12,426		10,994
Income tax expense		753		625		529		1,876		1,859
Net income		1,984		2,259		1,939		6,490		6,453
Net income attributable to common shareholders		1,839		2,125		1,956		6,071		6,247
Operating performance
Basic earnings per share($)		1.51		1.74		1.60		4.96		5.18
Diluted earnings per share ($)		1.50		1.73		1.55		4.94		5.10
Return on equity (%)		11.5		13.8		13.1		13.0		14.7
Productivity ratio(%)		55.0		51.8		52.5		53.9		51.5
Core banking margin(%)⁽¹⁾		2.45		2.45		2.46		2.45		2.46
Financial position information($ millions)
Cash and deposits with financial institutions		45,262		50,121		51,891
Trading assets		131,068		117,140		92,881
Loans		589,243		583,815		548,597
Total assets		1,066,740		1,058,169		946,703
Deposits		722,346		712,282		654,182
Common equity		63,534		63,571		60,752
Preferred shares and other equity instruments		3,884		3,884		4,234
Assets under administration⁽²⁾		547,862		549,775		484,744
Assets under management⁽²⁾		297,105		297,167		253,234
Capital and liquidity measures
Common Equity Tier 1 (CET1) capital ratio(%)		11.2		11.1		11.4
Tier 1 capital ratio(%)		12.3		12.5		12.8
Total capital ratio(%)		14.8		14.7		14.5
Leverage ratio(%)		4.2		4.3		4.9
CET1 risk-weighted assets ($ millions)⁽³⁾		417,058		415,212		411,426
Liquidity coverage ratio (LCR)(%)		123		125		125
Credit quality
Net impaired loans($ millions)		3,559		3,695		3,707
Allowance for credit losses($ millions)⁽⁴⁾		5,273		5,376		5,418
Net impaired loans as a % of loans and acceptances		0.58		0.61		0.65
Provision for credit losses as a % of average net loans and acceptances (annualized)⁽⁵⁾		0.48		0.61		0.69		0.52		0.51
Provision for credit losses on impaired loans as a % of average net loans and acceptances (annualized)⁽⁵⁾		0.52		0.49		0.41		0.49		0.44
Net write-offs as a % of average net loans and acceptances (annualized)		0.50		0.50		0.39		0.50		0.43
Adjusted results⁽¹⁾
Adjusted net income($ millions)		2,455		2,263		2,259		7,009		6,799
Adjusted diluted earnings per share($)		1.88		1.70		1.76		5.32		5.34
Adjusted return on equity (%)		14.3		13.6		14.5		13.9		15.2
Adjusted productivity ratio (%)		51.7		52.3		51.8		52.7		51.1
Adjusted provision for credit losses as a % of average net loans and acceptances (annualized)⁽⁵⁾		0.48		0.51		0.40		0.48		0.41
Common share information
Closing share price($) (TSX)		70.46		73.78		77.09
Shares outstanding(millions)
Average – Basic		1,221		1,224		1,223		1,224		1,207
Average – Diluted		1,251		1,252		1,240		1,253		1,223
End of period		1,220		1,222		1,232
Dividends paid per share($)		0.87		0.87		0.82		2.59		2.43
Dividend yield (%)⁽⁶⁾		4.9		4.8		4.2		4.9		4.1
Market capitalization($ millions) (TSX)		85,993		90,188		94,954
Book value per common share($)		52.06		52.01		49.32
Market value to book value multiple		1.4		1.4		1.6
Price to earnings multiple (trailing 4 quarters)		10.5		10.9		11.3
Other information
Employees (full-time equivalent)⁽²⁾		101,809		100,945		96,473
Branches and offices		3,129		3,147		2,963

(1)

Refer to page 4 for a discussion ofNon-GAAP measures.

(2)

Prior period amounts have been restated to conform with current period presentation.

(3)

In accordance with OSFI’s requirements, effective January 31, 2019, credit valuation adjustment (CVA) risk-weighted assets (RWA) have been fully phased-in. In the prior year, 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 prices for the period.

2 Scotiabank Third Quarter Report 2019

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 period ended July 31, 2019. The MD&A should be read in conjunction with the Bank’s unaudited Condensed Interim Consolidated Financial Statements included in this Report to Shareholders, and the Bank’s 2018 Annual Report. This MD&A is dated August 27, 2019.

Additional information relating to the Bank, including the Bank’s 2018 Annual Report, is available on the Bank’s website at www.scotiabank.com. As well, the Bank’s 2018 Annual Report and Annual Information Form are available on SEDAR at www.sedar.com and on the EDGAR section of the SEC’s website at www.sec.gov.

Contents



Management’s Discussion and Analysis

4		Non-GAAP Measures

10		Group Financial Performance

13		Business Segment Review

22		Geographic Highlights



23		Quarterly Financial Highlights

24		Financial Position

24		Risk Management

37		Capital Management

38		Financial Instruments

38		Off-Balance Sheet Arrangements



39		Regulatory Developments

40		Accounting Policies and Controls

41		Economic Outlook

42		Share Data

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 2018 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 andnon-traditional competitors; exposure related to significant litigation and regulatory matters; the occurrence of natural and unnatural catastrophic events and claims resulting from such events; 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 2018 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 2018 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.

Scotiabank Third Quarter Report 2019 3

MANAGEMENT’S DISCUSSION & ANALYSIS

Non-GAAP Measures

The Bank uses a number of financial measures to assess its performance. Some of these measures are not calculated in accordance with Generally Accepted Accounting Principles (GAAP), which are based on International Financial Reporting Standards (IFRS), are not defined by GAAP and do not have standardized meanings that would ensure consistency and comparability among companies using these or similar measures. The Bank believes that certainnon-GAAP measures are useful in assessing ongoing business performance and provide readers with a better understanding of how management assesses performance. Thesenon-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 tonon-GAAP Adjusted financial results. The financial results have been adjusted for the following:

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

Acquisition-related costs

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

•

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

•

BBVA, Chile (closed Q3, 2018)

•

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

•

MD Financial Management, Canada (closed Q4, 2018)

•

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

•

Banco Cencosud, Peru (closed Q2, 2019)

Day 1 provision for credit losses on acquired performing financial instruments, as required by IFRS 9 and are recorded in the Canadian and International Banking operating segments. 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. The costs for Q2, 2019 relate to Banco Cencosud, Peru and Banco Dominicano del Progreso, Dominican Republic. The costs for Q3, 2018 relate to BBVA, Chile and Citibank, Colombia.

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 and International Banking operating segments.

Net gain/loss on divestitures– relates to the loss on sale of operations in Puerto Rico announced in Q3, 2019, gain on divestiture of Scotia Crecer AFP and Scotia Seguros in the Dominican Republic that closed in Q2, 2019, and the loss on the sale of the insurance and banking operations in El Salvador announced in Q2, 2019. These amounts are recorded in the Other segment.

4 Scotiabank Third Quarter Report 2019

MANAGEMENT’S DISCUSSION & ANALYSIS

Reconciliation of reported and adjusted results and diluted earnings per share


	For the three months ended									For the nine months ended
($ millions)	July 31 2019			April 30 2019			July 31 2018			July 31 2019			July 31 2018
Reported Results
Net interest income	$	4,374		$	4,193		$	4,085		$	12,841		$	11,971
Non-interest income		3,285			3,610			3,096			10,225			9,356
Total revenue		7,659			7,803			7,181			23,066			21,327
Provision for credit losses		713			873			943			2,274			2,021
Non-interest expenses		4,209			4,046			3,770			12,426			10,994
Income before taxes		2,737			2,884			2,468			8,366			8,312
Income tax expense		753			625			529			1,876			1,859
Net income	$	1,984		$	2,259		$	1,939		$	6,490		$	6,453
Net income attributable tonon-controlling interests in subsidiaries (NCI)		120			70			(44	)		301			84
Net income attributable to equity holders		1,864			2,189			1,983			6,189			6,369
Net income attributable to common shareholders		1,839			2,125			1,956			6,071			6,247
*Diluted earnings per share(in dollars)***	$	1.50		$	1.73		$	1.55		$	4.94		$	5.10
Acquisition and divestiture-related amounts
Day 1 provision for credit losses on acquired performing financial instruments⁽¹⁾	$	–		$	151		$	404		$	151		$	404
Integration costs⁽²⁾		43			25			26			99			26
Amortization of Acquisition-related intangible assets, excluding software⁽²⁾		30			28			23			88			59
Acquisition-related costs		73			204			453			338			489
Net loss/(gain) on divestitures⁽³⁾		320			(173	)		–			147			–
Acquisition and divestiture-related amounts(Pre-tax)		393			31			453			485			489
Income tax expense/(benefit)		78			(27	)		(133	)		34			(143	)
Acquisition and divestiture-related amounts (After tax)		471			4			320			519			346
Adjustment attributable to NCI		(5	)		(45	)		(113	)		(55	)		(113	)
Acquisition and divestiture-related amounts (After tax and NCI)	$	466		$	(41	)	$	207		$	464		$	233
Adjusted Results
Net interest income	$	4,374		$	4,193		$	4,085		$	12,841		$	11,971
Non-interest income		3,591			3,437			3,096			10,358			9,356
Total revenue		7,965			7,630			7,181		��	23,199			21,327
Provision for credit losses		713			722			539			2,123			1,617
Non-interest expenses		4,122			3,993			3,721			12,225			10,909
Income before taxes		3,130			2,915			2,921			8,851			8,801
Income tax expense		675			652			662			1,842			2,002
Net income	$	2,455		$	2,263		$	2,259		$	7,009		$	6,799
Net income attributable to NCI		125			115			69			356			197
Net income attributable to equity holders		2,330			2,148			2,190			6,653			6,602
Net income attributable to common shareholders	$	2,305		$	2,084		$	2,163		$	6,535		$	6,480
Adjusted diluted earnings per share
Adjusted net income attributable to common shareholders	$	2,305		$	2,084		$	2,163		$	6,535		$	6,480
Dilutive impact of share-based payment options and others		44			39			31			131			51
Adjusted net income attributable to common shareholders (diluted)	$	2,349		$	2,123		$	2,194		$	6,666		$	6,531
Weighted average number of basic common shares outstanding (millions)		1,221			1,224			1,223			1,224			1,207
Dilutive impact of share-based payment options and others(millions)		30			28			26			29			16
Adjusted weighted average number of diluted common shares outstanding(millions)		1,251			1,252			1,249			1,253			1,223
Adjusted diluted earnings per share *(in dollars)*	$	1.88		$	1.70		$	1.76		$	5.32		$	5.34
*Impact of adjustments on diluted earnings per share(in dollars)***	$	0.38		$	(0.03	)	$	0.21		$	0.38		$	0.24

(1)

Recorded in provision for credit losses.

(2)

Recorded innon-interest expenses.

(3)

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

Scotiabank Third Quarter Report 2019 5

MANAGEMENT’S DISCUSSION & ANALYSIS

Reconciliation of reported and adjusted results and diluted earnings per share by business line


Canadian Banking⁽¹⁾	For the three months ended									For the nine months ended
($ millions)	July 31 2019			April 30 2019			July 31 2018			July 31 2019			July 31 2018
Reported Results
Net interest income	$	2,120		$	1,990		$	2,024		$	6,146		$	5,869
Non-interest income		1,412			1,390			1,349			4,181			4,038
Total revenue		3,532			3,380			3,373			10,327			9,907
Provision for credit losses		240			252			181			725			596
Non-interest expenses		1,723			1,711			1,661			5,164			4,907
Income before taxes		1,569			1,417			1,531			4,438			4,404
Income tax expense		409			369			401			1,157			1,155
Net income	$	1,160		$	1,048		$	1,130		$	3,281		$	3,249
Net income attributable tonon-controlling interests in subsidiaries (NCI)		–			–			–			–			–
Net income attributable to equity holders	$	1,160		$	1,048		$	1,130		$	3,281		$	3,249
Adjustments for Acquisition-related costs
Day 1 provision for credit losses on acquired performing financial instruments⁽²⁾	$	–		$	–		$	–		$	–		$	–
Integration costs⁽³⁾		4			6			3			17			3
Amortization of Acquisition-related intangible assets, excluding software⁽³⁾		14			14			12			42			26
Acquisition-related costs(Pre-tax)		18			20			15			59			29
Income tax expense/(benefit)		(4	)		(6	)		(4	)		(15	)		(8	)
Acquisition-related costs (After tax)		14			14			11			44			21
Adjustment attributable to NCI		–			–			–			–			–
Acquisition-related costs (After tax and NCI)	$	14		$	14		$	11		$	44		$	21
Adjusted Results
Net interest income	$	2,120		$	1,990		$	2,024		$	6,146		$	5,869
Non-interest income		1,412			1,390			1,349			4,181			4,038
Total revenue		3,532			3,380			3,373			10,327			9,907
Provision for credit losses		240			252			181			725			596
Non-interest expenses		1,705			1,691			1,646			5,105			4,878
Income before taxes		1,587			1,437			1,546			4,497			4,433
Income tax expense		413			375			405			1,172			1,163
Net income	$	1,174		$	1,062		$	1,141		$	3,325		$	3,270
Net income attributable to NCI		–			–			–			–			–
Net income attributable to equity holders	$	1,174		$	1,062		$	1,141		$	3,325		$	3,270

(1)

Refer to Business Segment Review on page 13.

(2)

Recorded in provision for credit losses.

(3)

Recorded innon-interest expenses.

6 Scotiabank Third Quarter Report 2019

MANAGEMENT’S DISCUSSION & ANALYSIS


International Banking⁽¹⁾	For the three months ended									For the nine months ended
($ millions)	July 31 2019			April 30 2019			July 31 2018			July 31 2019			July 31 2018
Reported Results
Net interest income	$	2,157		$	2,121		$	1,827		$	6,358		$	5,292
Non-interest income		1,270			1,235			1,026			3,756			3,007
Total revenue		3,427			3,356			2,853			10,114			8,299
Provision for credit losses		476			628			771			1,574			1,455
Non-interest expenses		1,780			1,710			1,510			5,232			4,390
Income before taxes		1,171			1,018			572			3,308			2,454
Income tax expense		269			249			97			744			509
Net income	$	902		$	769		$	475		$	2,564		$	1,945
Net income attributable tonon-controlling interests in subsidiaries (NCI)		121			69			(44	)		301			84
Net income attributable to equity holders	$	781		$	700		$	519		$	2,263		$	1,861
Adjustments for Acquisition-related costs
Day 1 provision for credit losses on acquired performing financial instruments⁽²⁾	$	–		$	151		$	404		$	151		$	404
Integration costs⁽³⁾		39			19			23			82			23
Amortization of Acquisition-related intangible assets, excluding software⁽³⁾		16			14			11			46			33
Acquisition-related costs(Pre-tax)		55			184			438			279			460
Income tax expense/(benefit)		(16	)		(53	)		(129	)		(81	)		(135	)
Acquisition-related costs (After tax)		39			131			309			198			325
Adjustment attributable to NCI		(5	)		(44	)		(113	)		(54	)		(113	)
Acquisition-related costs (After tax and NCI)	$	34		$	87		$	196		$	144		$	212
Adjusted Results
Net interest income	$	2,157		$	2,121		$	1,827		$	6,358		$	5,292
Non-interest income		1,270			1,235			1,026			3,756			3,007
Total revenue		3,427			3,356			2,853			10,114			8,299
Provision for credit losses		476			477			367			1,423			1,051
Non-interest expenses		1,725			1,677			1,476			5,104			4,334
Income before taxes		1,226			1,202			1,010			3,587			2,914
Income tax expense		285			302			226			825			644
Net income	$	941		$	900		$	784		$	2,762		$	2,270
Net income attributable to NCI		126			113			69			355			197
Net income attributable to equity holders	$	815		$	787		$	715		$	2,407		$	2,073

(1)

Refer to Business Segment Review on page 16.

(2)

Recorded in provision for credit losses.

(3)

Recorded innon-interest expenses.

Scotiabank Third Quarter Report 2019 7

MANAGEMENT’S DISCUSSION & ANALYSIS


Other⁽¹⁾	For the three months ended									For the nine months ended
($ millions)	July 31 2019			April 30 2019			July 31 2018			July 31 2019			July 31 2018
Reported Results
Net interest income	$	(240	)	$	(268	)	$	(131	)	$	(722	)	$	(307	)
Non-interest income		(144	)		184			(24	)		37			(27	)
Total revenue		(384	)		(84	)		(155	)		(685	)		(334	)
Provision for credit losses		1			(1	)		1			1			–
Non-interest expenses		113			31			56			198			17
Income before taxes		(498	)		(114	)		(212	)		(884	)		(351	)
Income tax expense/(benefit)		(46	)		(136	)		(105	)		(400	)		(268	)
Net income (loss)	$	(452	)	$	22		$	(107	)	$	(484	)	$	(83	)
Net income attributable tonon-controlling interests in subsidiaries (NCI)		(1	)		1			–			–			–
Net income (loss) attributable to equity holders	$	(451	)	$	21		$	(107	)	$	(484	)	$	(83	)
Adjustments for Net loss/(gain) on divestitures⁽²⁾	$	320		$	(173	)	$	–		$	147		$	–
Income tax expense		98			32			–			130			–
Net loss/(gain) on divestitures (After tax)		418			(141	)		–			277			–
Adjustment attributable to NCI		–			(1	)		–			(1	)		–
Net loss/(gain) on divestitures (After tax and NCI)	$	418		$	(142	)	$	–		$	276		$	–
Adjusted Results
Net interest income	$	(240	)	$	(268	)	$	(131	)	$	(722	)	$	(307	)
Non-interest income		162			11			(24	)		170			(27	)
Total revenue		(78	)		(257	)		(155	)		(552	)		(334	)
Provision for credit losses		1			(1	)		1			1			–
Non-interest expenses		99			31			56			184			17
Income before taxes		(178	)		(287	)		(212	)		(737	)		(351	)
Income tax expense/(benefit)		(144	)		(168	)		(105	)		(530	)		(268	)
Net income (loss)	$	(34	)	$	(119	)	$	(107	)	$	(207	)	$	(83	)
Net income attributable to NCI		(1	)		2			–			1			–
Net income (loss) attributable to equity holders	$	(33	)	$	(121	)	$	(107	)	$	(208	)	$	(83	)

(1)

Refer to Business Segment Review on page 21.

(2)

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

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

International Banking business segment results are analyzed on a constant dollar basis, refer to page 17. 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 three months ended																For the nine months ended
($ millions)	April 30, 2019							July 31, 2018									July 31, 2018
(Taxable equivalent basis)	Reported		Foreign exchange			Constant dollar		Reported			Foreign exchange			Constant dollar			Reported		Foreign exchange			Constant dollar
Net interest income	$	2,121	$	36		$	2,085	$	1,827		$	13		$	1,814		$	5,292	$	(11	)	$	5,303
Non-interest income		1,235		6			1,229		1,026			(7	)		1,033			3,007		9			2,998
Total revenue		3,356		42			3,314		2,853			6			2,847			8,299		(2	)		8,301
Provision for credit losses		628		12			616		771			36			735			1,455		32			1,423
Non-interest expenses		1,710		27			1,683		1,510			18			1,492			4,390		19			4,371
Income tax expense		249		–			249		97			(10	)		107			509		(9	)		518
Net income	$	769	$	3		$	766	$	475		$	(38	)	$	513		$	1,945	$	(44	)	$	1,989
Net income attributable tonon-controlling interest in subsidiaries	$	69	$	(3	)	$	72	$	(44	)	$	1		$	(45	)	$	84	$	2		$	82
Net income attributable to equity holders of the Bank	$	700	$	6		$	694	$	519		$	(39	)	$	558		$	1,861	$	(46	)	$	1,907
Other measures
Average assets ($ billions)	$	203	$	3		$	200	$	164		$	–		$	164		$	159	$	–		$	159
Average liabilities($ billions)	$	156	$	3		$	153	$	129		$	1		$	128		$	123	$	(1	)	$	124

The above table is computed on a basis that is different than the table “Impact of foreign currency translation” in Group Financial Performance on page 10.

8 Scotiabank Third Quarter Report 2019

MANAGEMENT’S DISCUSSION & ANALYSIS

Core banking assets

Core banking assets are average earning assets excluding bankers’ acceptances and average trading assets within Global Banking and Markets.

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 2019, in line with OSFI’s increased Domestic Stability Buffer announced requirements, the Bank increased the capital attributed to its business lines to approximate 10.0% 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 9.5% 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.

Scotiabank Third Quarter Report 2019 9

MANAGEMENT’S DISCUSSION & ANALYSIS

Group Financial Performance

The Bank’s reported net income this quarter was $1,984 million compared to $1,939 million in the same period last year, and $2,259 million last quarter. Diluted earnings per share were $1.50 compared to $1.55 in the same period last year and $1.73 last quarter. Return on equity was 11.5% compared to 13.1% last year and 13.8% last quarter.

Adjusting for Acquisition and divestiture-related amounts of $471 million after-tax ($393 millionpre-tax), including the net loss on the announced divestiture of Puerto Rico of $402 million after-tax ($302 millionpre-tax) this quarter, net income was $2,455 million compared to $2,259 million last year, up 9%. Adjusted diluted earnings per share was $1.88, and increased 7% compared to $1.76 last year. Adjusted return on equity was 14.3% compared to 14.5% a year ago.

Adjusted net income was $2,455 million this quarter compared to $2,263 million last quarter, up 8%. Adjusted diluted earnings per share was $1.88 compared to $1.70 last quarter, and Adjusted return on equity was 14.3% compared to 13.6% last quarter.

Impact of foreign currency translation

The table below reflects the estimated impact of foreign currency translation on key income statement items and is computed on a basis that is different than the table “Constant dollar” inNon-GAAP Measures on page 4.


	Average exchange rate						% Change
For the three months ended	July 31, 2019		April 30, 2019		July 31, 2018		July 31, 2019 vs. April 30, 2019		July 31, 2019 vs. July 31, 2018
U.S dollar/Canadian dollar		0.753		0.751		0.767		0.3%		(1.8)%
Mexican Peso/Canadian dollar		14.421		14.360		15.035		0.4%		(4.1)%
Peruvian Sol/Canadian dollar		2.497		2.485		2.511		0.5%		(0.5)%
Colombian Peso/Canadian dollar		2,454		2,354		2,209		4.2%		11.1%
Chilean Peso/Canadian dollar		519.551		499.097		489.565		4.1%		6.1%

Average exchange rate

% Change

For the nine months ended

July 31, 2019

July 31, 2018

July 31, 2019

vs. July 31, 2018

U.S dollar/Canadian dollar

0.752

0.781

(3.7)%

Mexican Peso/Canadian dollar

14.558

14.874

(2.1)%

Peruvian Sol/Canadian dollar

2.502

2.537

(1.4)%

Colombian Peso/Canadian dollar

2,402

2,254

6.6%

Chilean Peso/Canadian dollar

509.583

485.074

5.1%


	For the three months ended						For the nine months ended
Impact on net income⁽¹⁾($ millions except EPS)	July 31, 2019 vs. July 31, 2018			July 31, 2019 vs. April 30, 2019			July 31, 2019 vs. July 31, 2018
Net interest income	$	(29	)	$	(28	)	$	(21	)
Non-interest income⁽²⁾		(4	)		22			15
Non-interest expenses		31			40			3
Other items (net of tax)		9			(1	)		14
Net income	$	7		$	33		$	11
Earnings per share (diluted)	$	0.01		$	0.03		$	0.01
Impact by business line ($ millions)
Canadian Banking	$	3		$	–		$	7
International Banking⁽²⁾		18			25			4
Global Banking and Markets		(1	)		–			27
Other⁽²⁾		(13	)		8			(27	)
Net income	$	7		$	33		$	11

(1)

Includes the impact of all currencies.

(2)

Includes the impact of foreign currency hedges.

Financial performance commentary

Net income

Q3 2019 vs Q3 2018

Net income was $1,984 million compared to $1,939 million. Adjusting for Acquisition and divestiture-related amounts, net income was $2,455 million compared to $2,259 million, up 9%. Higher net interest income andnon-interest income were partly offset by highernon-interest expenses, provision for credit losses and income taxes.

Q3 2019 vs Q2 2019

Net income was $1,984 million compared to $2,259 million. Adjusting for Acquisition and divestiture-related amounts, net income was $2,455 million compared to $2,263 million, up 8%. Higher net interest income andnon-interest income, and lower provision for credit losses, were partly offset by highernon-interest expenses and income taxes.

10 Scotiabank Third Quarter Report 2019

MANAGEMENT’S DISCUSSION & ANALYSIS

Year-to-date Q3 2019 vsYear-to-date Q3 2018

Net income was $6,490 million compared to $6,453 million. Adjusting for Acquisition and divestiture-related amounts, net income was $7,009 million compared to $6,799 million, up 3%. Higher net interest income andnon-interest income and lower income taxes were partly offset by highernon-interest expenses and provision for credit losses.

Net interest income

Q3 2019 vs Q3 2018

Net interest income was $4,374 million, an increase of $289 million or 7%, primarily from the impact of acquisitions. Also contributing to the increase was growth in credit cards, automotive and commercial loans in Canadian Banking, commercial and retail lending in International Banking as well as higher corporate loans in Global Banking and Markets. These increases were partly offset by lower contribution from asset/liability management activities and the negative impact of foreign currency translation.

The core banking margin was down one basis point to 2.45%. Lower margins in Global Banking and Markets and on asset/liability management activities were mostly offset by improved business mix related to the impact of acquisitions in International Banking, and improvement in Canadian Banking margin.

Q3 2019 vs Q2 2019

Net interest income was $4,374 million, an increase of $181 million or 4%, primarily from growth in residential mortgages, automotive and commercial loans in Canadian Banking, commercial and retail lending in International Banking and the impact of fewer days in the prior quarter. These increases were partly offset by the impact of foreign currency translation.

The core banking margin was flat at 2.45%. Higher margins in Canadian Banking and on asset/liability management activities were offset by lower margins in International Banking and Global Banking and Markets.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

Net interest income was $12,841 million, an increase of $870 million or 7%, mainly from the impact of acquisitions. Also contributing to the increase was growth in commercial and automotive loans in Canadian Banking, commercial and retail lending in International Banking, as well as higher corporate loans in Global Banking and Markets. These increases were partly offset by lower contribution from asset/liability management activities.

The core banking margin was 2.45%, in line with last year. Lower margins in Global Banking and Markets and on asset/liability management activities were mostly offset by improved business mix related to the impact of acquisitions in International Banking, and higher Canadian Banking margin.

Non-interest income

Q3 2019 vs Q3 2018

Non-interest income was $3,285 million, up $189 million or 6%. Adjusting for the Net loss on divestitures,non-interest income increased 16%, with approximately half of this growth from acquisitions. The remaining growth was driven by higher banking and trading revenues. Also contributing were higher income from associated corporations and investment gains. These were partly offset by lower underwriting and advisory fees in Global Banking and Markets, and the impact of the new revenue accounting standard that requires card expenses to be netted against card revenue.

Q3 2019 vs Q2 2019

Non-interest income was down $325 million or 9%. Adjusting for the Net loss on divestitures recorded in the current quarter and the Net gain on divestitures in the prior quarter,non-interest income grew 4%. The growth was driven by higher trading revenues, income from associated corporations and investment gains. These were partly offset by lower underwriting and advisory fees.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

Non-interest income was $10,225 million, up $869 million or 9%. Adjusting for the Net loss on divestitures,non-interest income increased 11%, with approximately three quarters of this growth driven by acquisitions. The remaining growth was driven by higher banking revenues, higher investment gains, as well as higher income from associated corporations. These were partly offset by lower brokerage, underwriting and advisory fees, as well as the impact of the new revenue accounting standard that requires card expenses to be netted against card revenue.

Provision for credit losses

Q3 2019 vs Q3 2018

The provision for credit losses was $713 million, a decrease of $230 million or 24%. Adjusting for the Day 1 provision on acquired performing loans recorded last year, the provision for credit losses increased $174 million or 32%, due primarily to higher retail provisions in line with organic and acquisition driven asset growth. The provision for credit losses ratio was 48 basis points and increased eight basis points on an adjusted basis, due to portfolio mix changes.

Provision on impaired loans was $776 million, up $217 million due primarily to higher retail provisions in line with organic and acquisition driven asset growth primarily in International Banking. The provision for credit losses ratio on impaired loans was 52 basis points, an increase of 11 basis points.

Adjusting for the Day 1 provision on acquired performing loans, provision on performing loans decreased $43 million due primarily to improving retail credit quality, partially offset by the impact of asset growth across both Canadian and International Banking.

Scotiabank Third Quarter Report 2019 11

MANAGEMENT’S DISCUSSION & ANALYSIS

Q3 2019 vs Q2 2019

The provision for credit losses was $713 million, a decrease of $160 million or 18%. Adjusting for the impact of Day 1 provision on acquired performing loans recorded in the prior quarter, the provision for credit losses decreased $9 million or 1%. The provision for credit losses ratio decreased 13 basis points to 48 basis points, or three basis points on an adjusted basis.

Provision on impaired loans increased $76 million, due to higher retail and commercial provisions. The provision for credit losses ratio on impaired loans was 52 basis points, an increase of three basis points.

Adjusting for the impact of Day 1 provision on acquired performing loans, provision on performing loans decreased $85 million mostly in retail portfolios. This was due primarily to strong credit quality and more favourable macroeconomic trends compared to the last quarter.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

The provision for credit losses was $2,274 million, compared to $2,021 million. Adjusting for the impact of Day 1 provision on acquired performing loans, provision for credit losses increased $506 million or 31%. The provision for credit losses ratio increased one basis point to 52 basis points and increased seven basis points to 48 basis points on an adjusted basis.

The provision for credit losses on impaired loans was $2,155 million, an increase of $437 million relating primarily to retail portfolios in International Banking, mainly in Latin America, in line with asset growth. The provision for credit losses ratio on impaired loans was 49 basis points, an increase of five basis points.

Provision on performing loans was $119 million, compared to $303 million. Adjusting for the impact of Day 1 provision on acquired performing loans, provision for performing loans increased $69 million due partly to movement of hurricane-related commercial provisions to provision on impaired loans last year. Impact of changes in macroeconomic trends in Canada and asset growth in International Banking were partially offset by improved credit quality primarily across retail.

Non-interest expenses

Q3 2019 vs Q3 2018

Non-interest expenses were $4,209 million, up $439 million or 12%. Adjusting for Acquisition and divestiture-related costs,non-interest expenses grew 11%. Highernon-interest expenses from the impact of acquisitions, partly offset by the impact of the new revenue accounting standard that requires card expenses to be netted against card revenues, contributed approximately 7% of the growth. The remaining 4% increase was due to higher salaries and benefits related to regulatory and technology initiatives and higher depreciation and amortization, performance based compensation, share-based payment and advertising and business development expenses. Partly offsetting were lower professional fees and the positive impact of foreign currency translation.

The productivity ratio was 55.0% compared to 52.5%. Adjusting for Acquisition and divestiture-related amounts, the productivity ratio was 51.7% compared to 51.8%.

Q3 2019 vs Q2 2019

Non-interest expenses were up $163 million or 4%. Adjusting for Acquisition and divestiture-related costs,non-interest expenses were up 3%. This was due to higher salaries and depreciation and amortization. This was partly offset by lower technology costs, other employee benefits expense and the positive impact of foreign currency translation.

The productivity ratio was 55.0% compared to 51.8%. Adjusting for Acquisition and divestiture-related amounts, the productivity ratio was 51.7% compared to 52.3%.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

Non-interest expenses increased $1,432 million or 13%. Adjusting for Acquisition and divestiture-related costs,non-interest expenses grew 12%. The prior year’s remeasurement of an employee benefit liability from certain plan modifications (“benefits remeasurement”), the impact of acquisitions and the impact of the new revenue accounting standard that requires card expenses to be netted against card revenues, contributed to approximately 8% of the growth. The remaining 4% growth was due to investments in technology and regulatory initiatives, higher share-based payment, depreciation and amortization and business and capital taxes. This was partly offset by lower professional fees.

The productivity ratio was 53.9% compared to 51.5%. Adjusting for Acquisition and divestiture-related amounts and the impact of prior year’s benefits remeasurement, the productivity ratio was 52.7% compared to 51.1%.

Operating leverage on a reported basis was negative 4.9%. Adjusting for Acquisition and divestiture-related amounts, operating leverage was negative 3.3%. The benefits remeasurement negatively impacted operating leverage by 2.1%.

Taxes

Q3 2019 vs Q3 2018

The effective tax rate was 27.5%, higher than 21.5% in the same quarter last year, due primarily to higher taxes related to the divestiture of Puerto Rico announced in the quarter. Adjusting for the Acquisition and divestiture-related amounts, the effective tax rate was 21.6% compared to 22.7%.

Q3 2019 vs Q2 2019

The effective tax rate increased to 27.5% from 21.7% last quarter, due primarily to higher taxes related to the divestiture of Puerto Rico announced in the quarter. Adjusting for the Acquisition and divestiture-related amounts, the effective tax rate was 21.6% compared to 22.4%.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

The effective tax rate was 22.4%, unchanged from the prior year. Higher tax benefits in certain jurisdictions and higher tax-exempt income were offset by higher taxes related to the divestiture of foreign operations announced in the quarter.

12 Scotiabank Third Quarter Report 2019

MANAGEMENT’S DISCUSSION & ANALYSIS

Business Segment Review

Business segment results are presented on a taxable equivalent basis, adjusted for the following:

•

The Bank analyzes revenues on a taxable equivalent basis (TEB) for business lines. This methodology grosses uptax-exempt income earned on certain securities reported in either net interest income ornon-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 andnon-interest income arising from both taxable andnon-taxable sources and facilitates a consistent basis of measurement. While other banks may 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 TEBgross-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.


Canadian Banking⁽¹⁾	For the three months ended									For the nine months ended
(Unaudited) ($ millions) (Taxable equivalent basis)	July 31 2019			April 30 2019			July 31 2018			July 31 2019			July 31 2018
Net interest income	$	2,120		$	1,990		$	2,024		$	6,146		$	5,869
Non-interest income⁽²⁾⁽³⁾		1,412			1,390			1,349			4,181			4,038
Total revenue		3,532			3,380			3,373			10,327			9,907
Provision for credit losses		240			252			181			725			596
Non-interest expenses		1,723			1,711			1,661			5,164			4,907
Income tax expense		409			369			401			1,157			1,155
Net income	$	1,160		$	1,048		$	1,130		$	3,281		$	3,249
Net income attributable tonon-controlling interest in subsidiaries		–			–			–			–			–
Net income attributable to equity holders of the Bank	$	1,160		$	1,048		$	1,130		$	3,281		$	3,249
Other financial data and measures
Return on equity		19.5	%		18.4	%		23.0	%		18.7	%		23.3	%
Net interest margin⁽⁴⁾		2.49	%		2.46	%		2.46	%		2.47	%		2.44	%
Provision for credit losses – performing (Stage 1 and 2)	$	(16	)	$	19		$	7		$	7		$	(2	)
Provision for credit losses – impaired (Stage 3)	$	256		$	233		$	174		$	718		$	598
Provision for credit losses as a percentage of average net loans and acceptances (annualized)		0.27	%		0.30	%		0.21	%		0.28	%		0.24	%
Provision for credit losses on impaired loans as a percentage of average net loans and acceptances (annualized)		0.29	%		0.28	%		0.21	%		0.28	%		0.24	%
Net write-offs as a percentage of average net loans and acceptances (annualized)		0.29	%		0.28	%		0.23	%		0.28	%		0.25	%
Assets under administration ($ billions)⁽⁵⁾	$	382		$	381		$	323		$	382		$	323
Assets under management ($ billions)⁽⁵⁾	$	240		$	239		$	195		$	240		$	195
Average assets($ billions)	$	365		$	358		$	344		$	360		$	339
Average liabilities ($ billions)	$	285		$	281		$	254		$	280		$	250

(1)

Refer toNon-GAAP Measures on page 4 for adjusted results.

(2)

Includes income (on a taxable equivalent basis) from investments in associated corporations for the three months ended July 31, 2019 – $16 (April 30, 2019 – $18; July 31, 2018 – $11) and for the nine months ended July 31, 2019 – $47 (July 31, 2018 – $70).

(3)

Includes one additional month of income relating to the Canadian insurance business of $34 (after-tax $25) in the second quarter of 2018.

(4)

Net interest income (TEB) as percentage of average earning assets excluding bankers’ acceptances.

(5)

Prior period amounts have been restated to conform with current period presentation.

Net income

Q3 2019 vs Q3 2018

Net income attributable to equity holders was $1,160 million, an increase of $30 million or 3%. The increase was due primarily to solid asset and deposit growth and the impact of acquisitions, partly offset by highernon-interest expenses and provision for credit losses. Lower gains on sale of real estate impacted earnings growth by 2%.

Q3 2019 vs Q2 2019

Net income attributable to equity holders increased $112 million or 11%. The increase was due primarily to higher net interest income driven by three additional days in the quarter and solid asset and deposit growth, and higher wealth management fees.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

Net income attributable to equity holders increased $32 million or 1%. Adjusting for Acquisition-related costs, net income increased by 2% due primarily to higher revenue driven by solid asset and deposit growth, and the impact of acquisitions, partly offset by highernon-interest expenses and provision for credit losses. Lower gains on sale of real estate, the prior year gain on the reorganization of Interac, and the prior year benefit from the Alignment of the reporting period of the insurance operations with the Bank, impacted earnings growth by 3%.

Average assets

Q3 2019 vs Q3 2018

Average assets grew $21 billion or 6% to $365 billion. The growth included $6 billion or 3% in residential mortgages, $5 billion or 10% in business loans and acceptances, and $2 billion or 3% in personal loans.

Scotiabank Third Quarter Report 2019 13

MANAGEMENT’S DISCUSSION & ANALYSIS

Q3 2019 vs Q2 2019

Average assets grew $7 billion or 2%. The growth included $3 billion or 5% in business loans and acceptances, $3 billion or 1% in residential mortgages, and $1 billion or 2% in personal loans.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

Average assets grew $21 billion or 6% to $360 billion. The growth included $5 billion or 3% in residential mortgages, $5 billion or 10% in business loans and acceptances, and $2 billion or 3% in personal loans.

Average liabilities

Q3 2019 vs Q3 2018

Average liabilities increased $31 billion or 12%, including strong growth of $13 billion or 17% innon-personal deposits and $12 billion or 7% in personal deposits.

Q3 2019 vs Q2 2019

Average liabilities increased $4 billion or 2%, primarily innon-personal deposits.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

Average liabilities increased $30 billion or 12%, including strong growth of $12 billion or 7% in personal deposits and $11 billion or 15% innon-personal deposits.

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

Q3 2019 vs Q3 2018

AUA increased $59 billion to $382 billion or 18% and AUM increased $45 billion or 23% to $240 billion driven by the impact of prior year acquisitions and market appreciation.

Q3 2019 vs Q2 2019

AUA and AUM increased $1 billion due primarily to net sales.

Net interest income

Q3 2019 vs Q3 2018

Net interest income of $2,120 million increased $96 million or 5%, largely reflecting solid asset and deposit growth. The margin improved three basis points to 2.49%, primarily driven by the impact of prior interest rate increases by the Bank of Canada.

Q3 2019 vs Q2 2019

Net interest income increased $130 million or 7%, due primarily to three fewer days in the prior quarter and solid asset and deposit growth. The margin improved three basis points to 2.49%, largely due to improved spreads in retail banking products.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

Net interest income of $6,146 million increased $277 million or 5%, reflecting improved margins and solid growth in assets and deposits. The margin improved three basis points to 2.47%, primarily driven by the impact of prior interest rate increases by the Bank of Canada.

Non-interest income

Q3 2019 vs Q3 2018

Non-interest income of $1,412 million increased $63 million or 5%. Higher wealth management fee income from acquisitions and credit fees were partly offset by reduced net card revenue due to the impact of the new revenue accounting standard and lower gains on sale of real estate.

Q3 2019 vs Q2 2019

Non-interest income increased $22 million or 2% due primarily to higher wealth management fees.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

Non-interest income of $4,181 million increased $143 million or 4%. Higher wealth management fee income from acquisitions and credit fees were partially offset by reduced net card revenue due to the impact of the new revenue accounting standard and lower gains on sale of real estate. The prior year benefitted from the gain on reorganization of Interac and Alignment of reporting period of the insurance operations with the Bank.

14 Scotiabank Third Quarter Report 2019

MANAGEMENT’S DISCUSSION & ANALYSIS

Provision for credit losses

Q3 2019 vs Q3 2018

The provision for credit losses was $240 million, compared to $181 million, up 33%. Provision on impaired loans was $256 million compared to $174 million, up 47% due primarily to higher retail provisions in line with asset growth and also due in part to lower recoveries. The provision for credit losses ratio on impaired loans was 29 basis points, an increase of eight basis points. Provision on performing loans was a net reversal of $16 million, a decrease of $23 million due primarily to improved retail credit quality. The provision for credit losses ratio was 27 basis points, an increase of six basis points due to portfolio mix changes.

Q3 2019 vs Q2 2019

The provision for credit losses was $240 million, down $12 million. Provision on impaired loans was up $23 million due primarily to higher retail provisions. The provision for credit losses ratio on impaired loans was 29 basis points, an increase of one basis point. Provision on performing loans decreased $35 million due primarily to lower retail provisions driven by more favourable macroeconomic forecast and improved credit quality, partially offset by the impact of asset growth. The provision for credit losses ratio was 27 basis points, a decrease of three basis points.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

The provision for credit losses was $725 million, compared to $596 million. Provision on impaired loans was $718 million, up $120 million due primarily to higher retail provisions and lower recoveries. The provision for credit losses ratio on impaired loans was 28 basis points, an increase of four basis points. Provision on performing loans was $7 million, an increase of $9 million as unfavourable changes in macroeconomic trends were mostly offset by improved credit quality. The provision for credit losses ratio was 28 basis points, an increase of four basis points.

Non-interest expenses

Q3 2019 vs Q3 2018

Non-interest expenses were $1,723 million, up $62 million or 4% largely relating to the impact of prior year acquisitions. Higher personnel costs to support business development and regulatory initiatives, and higher marketing-related costs were partly offset by the impact of the new revenue accounting standard.

Q3 2019 vs Q2 2019

Non-interest expenses increased $12 million or 1%, largely driven by three fewer days in the prior quarter.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

Non-interest expenses were $5,164 million, up $257 million or 5%. Adjusting for Acquisition-related costs, non-interest expenses were $5,105 million, up 5% largely relating to the prior year acquisitions. Higher personnel costs to support business development and regulatory initiatives were offset by the impact of the new revenue accounting standard.

Taxes

The effective tax rate of 26.1% was in line with the prior year and the prior quarter.

Scotiabank Third Quarter Report 2019 15

MANAGEMENT’S DISCUSSION & ANALYSIS


International Banking⁽¹⁾	For the three months ended									For the nine months ended
(Unaudited) ($ millions) (Taxable equivalent basis)	July 31 2019			April 30 2019			July 31 2018			July 31 2019			July 31 2018
Net interest income	$	2,157		$	2,121		$	1,827		$	6,358		$	5,292
Non-interest income⁽²⁾⁽³⁾		1,270			1,235			1,026			3,756			3,007
Total revenue		3,427			3,356			2,853			10,114			8,299
Provision for credit losses⁽⁵⁾		476			628			771			1,574			1,455
Non-interest expenses		1,780			1,710			1,510			5,232			4,390
Income tax expense		269			249			97			744			509
Net income	$	902		$	769		$	475		$	2,564		$	1,945
Net income attributable tonon-controlling interest in subsidiaries	$	121		$	69		$	(44	)	$	301		$	84
Net income attributable to equity holders of the Bank	$	781		$	700		$	519		$	2,263		$	1,861
Other financial data and measures
Return on equity		14.1	%		13.1	%		11.2	%		13.9	%		14.5	%
Net interest margin⁽⁴⁾		4.45	%		4.58	%		4.70	%		4.52	%		4.70	%
Provision for credit losses – performing (Stage 1 and 2)⁽⁵⁾	$	(46	)	$	156		$	374		$	129		$	324
Provision for credit losses – impaired (Stage 3)	$	522		$	472		$	397		$	1,445		$	1,131
Provision for credit losses as a percentage of average net loans and acceptances (annualized)		1.24	%		1.71	%		2.58	%		1.41	%		1.71	%
Provision for credit losses on impaired loans as a percentage of average net loans and acceptances (annualized)		1.36	%		1.29	%		1.33	%		1.30	%		1.32	%
Net write-offs as a percentage of average net loans and acceptances (annualized)		1.27	%		1.26	%		1.14	%		1.29	%		1.26	%
Average assets($ billions)	$	206		$	203		$	164		$	202		$	159
Average liabilities($ billions)	$	158		$	156		$	129		$	156		$	123

(1)

Refer toNon-GAAP Measures on page 4 for adjusted results.

(2)

Includes income (on a taxable equivalent basis) from investments in associated corporations for the three months ended July 31, 2019 – $182 (April 30, 2019 – $210; July 31, 2018 – $153) and for the nine months ended July 31, 2019 – $553 (July 31, 2018 – $442).

(3)

Includes one additional month of earnings relating to Peru of $58 (After tax and NCI $41) in the first quarter of 2019. Includes one additional month of earnings related to Chile of $36 (After tax $26) in the second quarter of 2018.

(4)

Net interest income (TEB) as percentage of average earning assets excluding bankers’ acceptances.

(5)

Includes Day 1 provision for credit losses on acquired performing loans for the three months ended July 31, 2019 – nil (April 30, 2019 – $151; July 31, 2018 – $404) and for the nine months ended July 31, 2019 – $151 (July 31, 2018 – $404).

Net income

Q3 2019 vs Q3 2018

Net income attributable to equity holders of $781 million was up $262 million. Adjusting for Acquisition-related costs, net income increased to $815 million, up 14%. This growth was largely driven by higher net interest income due to strong loan growth in the Pacific Alliance countries, the impact of acquisitions, highernon-interest income, and the positive impact of foreign currency translation. This was partly offset by increased provision for credit losses,non-interest expenses and higher income taxes.

Q3 2019 vs Q2 2019

Net income attributable to equity holders increased by $81 million or 12%. Adjusting for Acquisition-related costs, net income increased by $28 million or 4%. The impact of revenue growth and lower income taxes, were partly offset by highernon-interest expenses.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

Net income attributable to equity holders of $2,263 million was up $402 million or 22%. Adjusting for Acquisition-related costs, net income increased to $2,407 million, up 16%. This growth was largely driven by higher net interest income due to strong loan growth in the Pacific Alliance countries, the impact of acquisitions, highernon-interest income, and the positive impact of foreign currency translation, partly offset by increased provision for credit losses andnon-interest expenses.

16 Scotiabank Third Quarter Report 2019

MANAGEMENT’S DISCUSSION & ANALYSIS

Financial Performance on a 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, which is anon-GAAP financial measure (refer toNon-GAAP Measures). The Bank believes that reporting in constant dollar is useful for readers in assessing ongoing business performance. Ratios are on a reported basis.


International Banking⁽¹⁾	For the three months ended							For the nine months ended
(Unaudited) ($ millions) (Taxable equivalent basis)	July 31 2019		April 30 2019		July 31 2018			July 31 2019		July 31 2018
Constant dollars
Net interest income	$	2,157	$	2,085	$	1,814		$	6,358	$	5,303
Non-interest income⁽²⁾⁽³⁾		1,270		1,229		1,033			3,756		2,998
Total revenue		3,427		3,314		2,847			10,114		8,301
Provision for credit losses⁽⁴⁾		476		616		735			1,574		1,423
Non-interest expenses		1,780		1,683		1,492			5,232		4,371
Income tax expense		269		249		107			744		518
Net income on constant dollar basis	$	902	$	766	$	513		$	2,564	$	1,989
Net income attributable tonon-controlling interest in subsidiaries on a constant dollar basis	$	121	$	72	$	(45	)	$	301	$	82
Net income attributable to equity holders of the Bank on a constant dollar basis	$	781	$	694	$	558		$	2,263	$	1,907
Other financial data and measures
Average assets($ billions)	$	206	$	200	$	164		$	202	$	159
Average liabilities($ billions)	$	158	$	153	$	128		$	156	$	124

(1)

Refer toNon-GAAP Measures on page 4 for adjusted results.

(2)

Includes income (on a taxable equivalent basis) from investments in associated corporations for the three months ended July 31, 2019 – $182 (April 30, 2019 – $213; July 31, 2018 – $159) and for the nine months ended July 31, 2019 – $553 (July 31, 2018 – $461).

(3)

Includes one additional month of earnings relating to Peru of $58 (after tax and NCI $41) in the first quarter of 2019. Includes one additional month of earnings relating to Chile of $36 (after tax and NCI $26) in the second quarter of 2018.

(4)

Includes Day 1 provision for credit losses on acquired performing loans for the three months ended July 31, 2019 – nil (April 30, 2019 – $149; July 31, 2018 – $376) and for the nine months ended July 31, 2019 – $151 (July 31, 2018 – $376).

Net income

Q3 2019 vs Q3 2018

Net income attributable to equity holders of $781 million was up $223 million. Adjusting for Acquisition-related costs, net income increased to $815 million, up 11%. This growth was largely driven by higher net interest income due to strong loan growth in the Pacific Alliance countries, the impact of acquisitions, and highernon-interest income. This was partly offset by increased provision for credit losses, and highernon-interest expenses and income taxes.

Q3 2019 vs Q2 2019

Net income attributable to equity holders increased by $87 million or 13%. Adjusting for Acquisition-related costs, net income increased by $36 million or 5%. Higher revenues and lower income taxes, were partly offset by highernon-interest expenses.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

Net income attributable to equity holders of $2,263 million was up $356 million or 19%. Adjusting for Acquisition-related costs, net income increased to $2,407 million, up $311 million or 15%. This growth was largely driven by higher net interest income due to strong loan growth in the Pacific Alliance countries, the impact of acquisitions, and highernon-interest income, partly offset by increased provision for credit losses andnon-interest expenses.

Average assets

Q3 2019 vs Q3 2018

Average assets of $206 billion grew $42 billion or 26%, driven by strong loan growth of 28%, primarily in the Pacific Alliance countries, partly due to acquisitions. Retail and commercial loan growth were 32% and 24%, respectively.

Q3 2019 vs Q2 2019

Average assets increased 3%, driven by good organic loan growth in the Pacific Alliance and the impact of acquisitions in Peru and Dominican Republic. Retail and commercial loan growth were 3% and 2%, respectively.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

Average assets of $202 billion increased $43 billion or 27%, driven by strong 29% loan growth, primarily in the Pacific Alliance, partly due to acquisitions. Retail and commercial loan growth were 31% and 26%, respectively.

Scotiabank Third Quarter Report 2019 17

MANAGEMENT’S DISCUSSION & ANALYSIS

Average liabilities

Q3 2019 vs Q3 2018

Average liabilities of $158 billion increased $30 billion with deposit growth of 18%, primarily in the Pacific Alliance, due in part to acquisitions.

Q3 2019 vs Q2 2019

Average liabilities were up $5 billion driven by deposit growth of 3%.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

Average liabilities of $156 billion increased $32 billion with deposit growth of 18%, primarily in the Pacific Alliance, partly due to acquisitions.

Net interest income

Q3 2019 vs Q3 2018

Net interest income was $2,157 million, up 19% driven by strong retail and commercial loan growth, with approximately three quarters of net interest income growth from acquisitions. Net interest margin decreased 25 basis points to 4.45% due primarily to business mix impact of acquisitions, and margin compression in Mexico.

Q3 2019 vs Q2 2019

Net interest income increased $72 million or 3% driven by good retail and commercial loan growth in the Pacific Alliance countries. Net interest margin decreased by 13 basis points primarily driven by margin compression in Mexico and asset/liability management activities in Latin America, partly offset by the positive business mix impact of acquisitions that closed in the previous quarter.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

Net interest income was $6,358 million, up 20% driven by strong retail and commercial loan growth in the Pacific Alliance countries, of which approximatelytwo-thirds was from acquisitions. The net interest margin decreased 18 basis points to 4.52% driven mainly by the business mix impact of acquisitions.

Non-interest income

Q3 2019 vs Q3 2018

Non-interest income was $1,270 million, up $237 million or 23% of which approximately half was from acquisitions. The remaining increase was driven by higher banking fees, an increased contribution from associated corporations, higher trading revenues and investment gains.

Q3 2019 vs Q2 2019

Non-interest income increased $41 million or 3% from higher trading revenues and investment gains, partially offset by lower banking fees.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

Non-interest income was $3,756 million, up $758 million or 25% of which almost half was due to the impact of acquisitions. The remaining increase was driven by higher banking fees, an increased contribution from associated corporations, higher trading revenues and investment gains.

Provision for credit losses

Q3 2019 vs Q3 2018

The provision for credit losses was $476 million, compared to $735 million, down $259 million or 35%. Adjusting for the impact of Day 1 provision on acquired performing loans, the provision for credit losses of $476 million increased by $117 million, or 33% due to higher retail provisions. Provision on impaired loans increased $134 million to $522 million due to higher retail provisions in line with asset and acquisition-driven growth. The provision for credit losses ratio on impaired loans was 136 basis points, an increase of three basis points. Provision on performing loans was a reversal of $46 million compared to $347 million. Adjusting for the Day 1 provision on acquired performing loans, provision on performing loans decreased $16 million primarily in retail provisions due to more favourable macroeconomic trends and strong credit quality, partially offset by the impact of asset growth. The provision for credit losses ratio was 124 basis points, an increase of one basis point on an adjusted basis.

Q3 2019 vs Q2 2019

The provision for credit losses was $476 million, compared to $616 million. Adjusting for the Day 1 provision on acquired performing loans last quarter, the provision for credit losses increased $9 million. Provision on impaired loans was up $60 million, primarily in retail portfolios, partly as a result of acquisitions and higher recoveries last quarter. The provision for credit losses ratio on impaired loans was 136 basis points, an increase of seven basis points. Provision on performing loans was a reversal of $46 million, compared to $154 million. Adjusting for the Day 1 provision on acquired performing loans, provision on performing loans decreased by $51 million. This was due primarily to lower retail and commercial provisions from improving credit quality and more favourable macroeconomic trends partially offset by the impact of growth in the retail portfolio. The provision for credit losses ratio was 124 basis points, a decrease of six basis points on an adjusted basis.

18 Scotiabank Third Quarter Report 2019

MANAGEMENT’S DISCUSSION & ANALYSIS

Year-to-date Q3 2019 vsYear-to-date Q3 2018

The provision for credit losses was $1,574 million, compared to $1,423 million. Adjusting for the impact of Day 1 provision on acquired performing loans, the provision for credit losses increased $376 million driven by higher retail provisions. Provision on impaired loans was $1,445 million, up $324 million due primarily to organic and acquisition-driven asset growth in the retail portfolio partially offset by lower commercial provisions. The provision for credit losses ratio on impaired loans was 130 basis points, a decrease of two basis points. Adjusting for the impact of Day 1 provision on acquired performing loans, provision on performing loans increased $52 million. This was due to commercial provisions from movement of hurricane-related provisions to provision on impaired loans last year while retail provisions were lower from strong credit quality, partially offset by the impact of asset growth. On an adjusted basis, the provision for credit losses ratio was 127 basis points, an increase of three basis points.

Non-interest expenses

Q3 2019 vs Q3 2018

Non-interest expenses increased $288 million or 19% to $1,780 million, of which about three quarters was driven by acquisitions. The remaining increase was due to business volume growth, higher regulatory costs, and the impact of inflation.

Q3 2019 vs Q2 2019

Non-interest expenses increased $97 million, with a third of the increase relating to acquisitions. The remaining increase was due mostly to business volume growth and seasonality.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

Non-interest expenses increased $861 million or 20% to $5,232 million, of which approximately three quarters was driven by acquisitions. The remaining increase was due to business volume growth, higher regulatory costs, and the impact of inflation.

Taxes

Adjusting for Acquisition-related costs, the effective tax rate increased marginally to 23.2% from 22.3% last year due primarily to higher tax benefits in Mexico in the same quarter last year. Compared to last quarter, the effective tax rate decreased from 25.1% to 23.2% mainly from highernon-taxable revenues this quarter.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

Adjusted for Acquisition-related costs, the effective tax rate increased slightly from 22.1% to 23.0% largely driven by higher tax benefits in Mexico in the same period last year.


Global Banking and Markets	For the three months ended									For the nine months ended
(Unaudited) ($ millions) (Taxable equivalent basis)	July 31 2019			April 30 2019			July 31 2018			July 31 2019			July 31 2018
Net interest income	$	337		$	350		$	365		$	1,059		$	1,117
Non-interest income		747			801			745			2,251			2,338
Total revenue		1,084			1,151			1,110			3,310			3,455
Provision for credit losses		(4	)		(6	)		(10	)		(26	)		(30	)
Non-interest expenses		593			594			543			1,832			1,680
Income tax expense		121			143			136			375			463
Net income	$	374		$	420		$	441		$	1,129		$	1,342
Net income attributable tonon-controlling interest in subsidiaries		–			–			–			–			–
Net income attributable to equity holders of the Bank	$	374		$	420		$	441		$	1,129		$	1,342
Other financial data and measures
Return on equity		12.8	%		15.2	%		15.6	%		13.1	%		16.2	%
Net interest margin⁽¹⁾		1.61	%		1.70	%		1.82	%		1.70	%		1.88	%
Provision for credit losses – performing (Stage 1 and 2)	$	(2	)	$	(2	)	$	2		$	(19	)	$	(19	)
Provision for credit losses – impaired (Stage 3)	$	(2	)	$	(4	)	$	(12	)	$	(7	)	$	(11	)
Provision for credit losses as a percentage of average net loans and acceptances (annualized)		(0.01	)%		(0.02	)%		(0.05	)%		(0.03	)%		(0.05	)%
Provision for credit losses on impaired loans as a percentage of average net loans and acceptances (annualized)		(0.01	)%		(0.02	)%		(0.06	)%		(0.01	)%		(0.02	)%
Net write-offs as a percentage of average net loans and acceptances		0.01	%		0.09	%		-	%		0.03	%		0.04	%
Average assets($ billions)	$	374		$	361		$	311		$	366		$	322
Average liabilities($ billions)	$	306		$	295		$	258		$	300		$	267

(1)

Net interest income (TEB) as percentage of average earning assets excluding bankers’ acceptances.

Net income

Q3 2019 vs Q3 2018

Net income attributable to equity holders was $374 million, a decrease of $67 million or 15%. Lower net interest income, highernon-interest expenses, and lower recovery of provision for credit losses were partially offset by the favourable impact of foreign currency translation, and lower income taxes.

Scotiabank Third Quarter Report 2019 19

MANAGEMENT’S DISCUSSION & ANALYSIS

Q3 2019 vs Q2 2019

Net income attributable to equity holders decreased by $46 million or 11%. Lowernon-interest income, net interest income and recovery of provision for credit losses was partially offset by lower income taxes.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

Net income attributable to equity holders decreased by $213 million or 16%. Lower net interest income,non-interest income and highernon-interest expenses was partly offset by lower income taxes.

Average assets

Q3 2019 vs Q3 2018

Average assets were $374 billion, an increase of $63 billion or 20%. This increase was due primarily to growth in securities purchased under resale agreements, trading securities, business and government loans as well as the impact of foreign currency translation.

Q3 2019 vs Q2 2019

Average assets increased $13 billion or 4% due mainly to growth in trading securities.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

Average assets were $366 billion, an increase of $44 billion or 14% primarily due to growth in securities purchased under resale agreements, business and government loans and trading securities.

Average liabilities

Q3 2019 vs Q3 2018

Average liabilities of $306 billion were higher by $48 billion or 19% due to higher securities sold under repurchase agreements and deposits, as well as the impact of foreign currency translation.

Q3 2019 vs Q2 2019

Average liabilities increased $11 billion or 4% due mainly to higher deposits and securities sold under repurchase agreements.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

Average liabilities were $300 billion, an increase of $33 billion or 12% due to higher securities sold under repurchase agreements and deposits, as well as the impact of foreign currency translation.

Net interest income

Q3 2019 vs Q3 2018

Net interest income of $337 million was down $28 million or 8%. This decline was due mainly to deposit margin compression and the impact of higher funding costs on lending margins, partly offset by higher loan and deposit volumes. The net interest margin decreased 21 basis points to 1.61%.

Q3 2019 vs Q2 2019

Net interest income decreased by $13 million or 4% mainly due to lower deposit margins, partly offset by higher lending margins in Canada and Asia. The net interest margin was lower by nine basis points compared to the prior quarter.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

Net interest income was down by $58 million or 5%. This decline was due to decreased lending margins in most of the regions and lower deposit margins. The net interest margin was down 18 basis points to 1.70%.

Non-interest income

Q3 2019 vs Q3 2018

Non-interest income was $747 million, an increase of $2 million from prior year. Strong growth in equity trading revenues was mostly offset by a decline in underwriting and advisory revenue compared to elevated levels in the prior year.

Q3 2019 vs Q2 2019

Non-interest income was down $54 million or 7%. This decline was due mainly to lower underwriting, advisory fees and lower fixed income trading revenues.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

Non-interest income was down $87 million or 4% driven primarily by lower revenue in the equities business as well as higher underwriting and advisory fees in the prior year. This was partly offset by higher revenue in the fixed income business and higher credit fees.

20 Scotiabank Third Quarter Report 2019

MANAGEMENT’S DISCUSSION & ANALYSIS

Provision for credit losses

Q3 2019 vs Q3 2018

The provision for credit losses increased $6 million due mainly to higher reversals in the US portfolio last year. The provision for credit losses ratio was negative one basis point, an increase of four basis points.

Q3 2019 vs Q2 2019

The provision for credit losses was a net reversal of $4 million, compared to net reversal of $6 million last quarter. Provision on impaired loans had a net reversal of $2 million due primarily to higher reversal of provisions in the Asia Pacific portfolio. The provision for credit losses ratio on impaired loans was negative one basis point, an increase of one basis point. Provision on performing loans was a net reversal of $2 million. The provision for credit losses ratio was negative one basis point, an increase of one basis point.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

The provision for credit losses increased $4 million due mainly to higher impaired loan provision reversals in the US portfolio during the past year. The provision for credit losses ratio was negative three basis points, an increase of two basis points.

Non-interest expenses

Q3 2019 vs Q3 2018

Non-interest expenses of $593 million increased $50 million or 9%. This increase was due to higher compliance and technology investments mainly driven by regulatory requirements, and the unfavourable impact of foreign currency translation.

Q3 2019 vs Q2 2019

Non-interest expenses decreased $1 million as lower compensation and benefit costs were mostly offset by higher volume-driven costs in the capital markets business.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

Non-interest expenses increased $152 million or 9% due to higher compliance and technology investments mainly driven by regulatory requirements, higher share-based compensation, and the negative impact of foreign currency translation. This was partly offset by lower performance-based compensation.

Taxes

Q3 2019 vs Q3 2018

The effective tax rate for the quarter was 24.3%, compared to 23.6% due mainly to the change in income mix in certain foreign jurisdictions.

Q3 2019 vs Q2 2019

The effective tax rate for the quarter of 24.3%, compared to 25.5% in prior quarter was due mainly to the change in income mix in certain foreign jurisdictions.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

The effective tax rate was 24.9%, compared to 25.7%. The lower tax rate was due mainly to the change in income mix in certain foreign jurisdictions.


Other⁽¹⁾⁽²⁾	For the three months ended									For the nine months ended
(Unaudited) ($ millions) (Taxable equivalent basis)	July 31 2019			April 30 2019			July 31 2018			July 31 2019			July 31 2018
Business segment income
Net interest income⁽³⁾	$	(240	)	$	(268	)	$	(131	)	$	(722	)	$	(307	)
Non-interest income⁽³⁾⁽⁴⁾		(144	)		184			(24	)		37			(27	)
Total revenue		(384	)		(84	)		(155	)		(685	)		(334	)
Provision for credit losses		1			(1	)		1			1			–
Non-interest expenses		113			31			56			198			17
Income tax expense/(benefit)⁽³⁾		(46	)		(136	)		(105	)		(400	)		(268	)
Net income (loss)	$	(452	)	$	22		$	(107	)	$	(484	)	$	(83	)
Net income attributable tonon-controlling interest in subsidiaries	$	(1	)	$	1		$	–		$	–		$	–
Net income (loss) attributable to equity holders	$	(451	)	$	21		$	(107	)	$	(484	)	$	(83	)
Other measures
Average assets($ billions)	$	116		$	117		$	116		$	116		$	117
Average liabilities($ billions)	$	242		$	238		$	229		$	239		$	234

(1)

Refer toNon-GAAP Measures on page 4 for adjusted results.

(2)

Includes all other smaller operating segments and corporate adjustments, such as the elimination of thetax-exempt incomegross-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)

Includes the elimination of thetax-exempt incomegross-up reported in net interest income,non-interest income and provision for income taxes for the three months ended July 31, 2019 – $48 (April 30, 2019 – $41; July 31, 2018 – $28) and for nine months ended July 31, 2019 – $123 (July 31, 2018 – $81) to arrive at the amounts reported in the Consolidated Statement of Income.

(4)

Income (on a taxable equivalent basis) from investments in associated corporations and the provision for income taxes in each period include the tax normalization adjustments related to thegross-up of income from associated companies for the three months ended July 31, 2019 – $(8) (April 30, 2019 – $(58); July 31, 2018 – $(38)) and for the nine months ended July 31, 2019 – $(111) (July 31, 2018 – $(122)).

Scotiabank Third Quarter Report 2019 21

MANAGEMENT’S DISCUSSION & ANALYSIS

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

Net interest income,non-interest income, and the provision for income taxes in each period include the elimination oftax-exempt incomegross-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 thegross-up of income from associated companies. This adjustment normalizes the effective tax rate in the divisions to better present the contribution of the associated companies to the divisional results.

Q3 2019 vs Q3 2018

Net loss attributable to equity holders was $451 million. Adjusting for the Net loss on divestitures of $418 million, net loss attributable to equity holders was $33 million, compared to $107 million. The lower net loss was due mainly to higher investment gains and lower taxes, partly offset by lower contributions from asset/liability management activities and highernon-interest expenses.

Q3 2019 vs Q2 2019

Net loss attributable to equity holders was $451 million. Adjusting for the Net loss on divestitures in the current period and the Net gain on divestitures in the prior period, the net loss attributable to equity holders was $33 million, compared to $121 million. The lower net loss was due primarily to higher investment gains, higher contributions from asset/liability management activities and lower income taxes, partly offset by highernon-interest expenses.

Year-to-date Q3 2019 vsYear-to-date Q3 2018

Net loss attributable to equity holders was $484 million. Adjusting for the Net loss on divestitures, the net loss attributable to equity holders was $208 million, compared to $83 million. The prior year had lower expenses primarily related to the benefits remeasurement of $150 million ($203 millionpre-tax). The current period also reflects lower contributions from asset/ liability management activities and higher income taxes.

Geographic Highlights


	For the three months ended									For the nine months ended
(Unaudited)		July 31 2019	⁽¹⁾		April 30 2019	⁽¹⁾		July 31 2018	⁽¹⁾		July 31 2019	⁽¹⁾		July 31 2018	⁽¹⁾
Geographic segment income (loss)($ millions)
Canada	$	1,210		$	1,022		$	1,159		$	3,290		$	3,615
United States		186			225			194			587			502
Mexico		136			140			169			458			494
Peru		195			140			190			546			510
Chile		133			126			(20	)		376			179
Colombia		30			31			(36	)		96			8
Caribbean and Central America		(215	)		298			167			277			510
Other international		189			207			160			559			551
Net income (loss) attributable to equity holders of the Bank	$	1,864		$	2,189		$	1,983		$	6,189		$	6,369
Geographic segment adjusted income (loss)($ millions)
Canada	$	1,224		$	1,036		$	1,170		$	3,344		$	3,636
United States		186			225			194			587			502
Mexico		136			140			169			458			494
Peru		197			184			190			593			512
Chile		147			140			115			421			322
Colombia		34			32			23			105			70
Caribbean and Central America		217			186			167			596			511
Other international		189			205			162			549			555
Adjusted net income (loss) attributable to equity holders of the Bank	$	2,330		$	2,148		$	2,190		$	6,653		$	6,602
Average assets($ billions)
Canada	$	611		$	595		$	561		$	599		$	561
United States		148			147			118			147			120
Mexico		39			37			32			37			32
Peru		29			27			24			27			24
Chile		51			52			29			51			27
Colombia		13			14			12			14			12
Caribbean and Central America		42			42			41			42			40
Other international		128			125			118			127			121
Total	$	1,061		$	1,039		$	935		$	1,044		$	937

(1)

Refer to Non-GAAP Measures on page 4 for adjusted results.

22 Scotiabank Third Quarter Report 2019

MANAGEMENT’S DISCUSSION & ANALYSIS

Quarterly Financial Highlights


	For the three months ended
(Unaudited) ($ millions)		July 31 2019	⁽¹⁾		April 30 2019	⁽¹⁾		January 31 2019	⁽¹⁾		October 31 2018		July 31 2018		April 30 2018		January 31 2018		October 31 2017
Reported results
Net interest income	$	4,374		$	4,193		$	4,274		$	4,220	$	4,085	$	3,950	$	3,936	$	3,831
Non-interest income		3,285			3,610			3,330			3,228		3,096		3,108		3,152		2,981
Total revenue	$	7,659		$	7,803		$	7,604		$	7,448	$	7,181	$	7,058	$	7,088	$	6,812
Provision for credit losses		713			873			688			590		943		534		544		536
Non-interest expenses		4,209			4,046			4,171			4,064		3,770		3,726		3,498		3,668
Income tax expense		753			625			498			523		529		621		709		538
Net income	$	1,984		$	2,259		$	2,247		$	2,271	$	1,939	$	2,177	$	2,337	$	2,070
Basic earnings per share($)		1.51			1.74			1.72			1.72		1.60		1.70		1.88		1.66
Diluted earnings per share($)		1.50			1.73			1.71			1.71		1.55		1.70		1.86		1.64
Core banking margin (%)⁽²⁾		2.45			2.45			2.45			2.47		2.46		2.47		2.46		2.44
Effective tax rate(%)		27.5			21.7			18.1			18.7		21.5		22.2		23.3		20.6
Adjusted results⁽²⁾:
Adjusted net income	$	2,455		$	2,263		$	2,291		$	2,345	$	2,259	$	2,190	$	2,350	$	2,084
Adjusted diluted earnings per share	$	1.88		$	1.70		$	1.75		$	1.77	$	1.76	$	1.71	$	1.87	$	1.65

(1)

The amounts for the periods ended July 31, 2019, April 30, 2019 and January 31, 2019 have been prepared in accordance with IFRS 15; prior period amounts have not been restated (refer to Notes 3 and 4 in the condensed interim consolidated financial statements).

(2)

Refer to page 4 for a discussion ofNon-GAAP Measures.

Trending analysis

Net income

The Bank reported strong net income over the past eight quarters. The current quarter’s earnings were reduced by Acquisition and divestiture-related amounts of $471 million ($393 millionpre-tax), and net income in the third quarter of 2018 was reduced by Acquisition and divestiture-related amounts of $320 million ($453 millionpre-tax).

The first quarter of 2018 included an accounting benefit of $150 million ($203 millionpre-tax) from the remeasurement of an employee benefit liability from certain plan modifications.

Net interest income

Net interest income increased through the period, driven by steady growth in retail loans in Canadian and International Banking, commercial loan growth across all three business lines, strong deposit growth, and the impact of acquisitions. Net interest margin has remained relatively stable over the period. The margin was 2.45% this quarter.

The prior quarter’s net interest income was lower due to the impact of three fewer days in the quarter as well as lower contributions from asset/liability management activities.

Non-interest income

Non-interest income in the current quarter was impacted by the Net loss on divestitures of $306 million. The prior quarter included Net gain on divestitures of $173 million.Non-interest income has generally increased through the period, partly driven by acquisitions, the Net gain on divestitures in the prior quarter, and the Alignment of reporting period for certain units within the Bank. Gains on sale of real estate and the sale of investment securities have moderated since 2017. The sale of the Hollis Wealth business in the fourth quarter of 2017 resulted in a gain that quarter and also contributed to lower wealth management fees in that period.

Provision for credit losses

Effective November 1, 2017, the Bank has adopted IFRS 9. Prior period amounts have not been restated and therefore, the provision for credit losses and related ratios are not directly comparable.

The provision for credit losses was $713 million in this quarter. The provision for credit losses ratio was 48 basis points, a decrease of 13 basis points from the prior quarter which included the Day 1 provision on acquired performing loans of $151 million. The third quarter of 2018 included Day 1 provision on acquired performing loans of $404 million.

Non-interest expenses

Non-interest expenses have generally trended upwards over the period, mostly to support business growth, the ongoing impact of acquisitions and the Bank’s investments in technology, regulatory and strategic initiatives. The first quarter of 2018 included a benefits remeasurement of $203 million, reducing that quarter’s expenses.

Income taxes

The effective tax rate was 27.5% this quarter or 21.6% adjusted for Acquisition and divestiture-related amounts. The effective tax rate averaged 22.0% over the period, with a range of 18.1% to 27.5%. Effective tax rates in other quarters were impacted by different levels of income earned in foreign tax jurisdictions, as well as the variability oftax-exempt dividend income.

Scotiabank Third Quarter Report 2019 23

MANAGEMENT’S DISCUSSION & ANALYSIS

Financial Position

The Bank’s total assets as at July 31, 2019 were $1,067 billion, up $68 billion or 7% from October 31, 2018. This increase was primarily in loans, trading securities and securities purchased under resale agreements and securities borrowed, partially offset by a decrease in cash and deposits with financial institutions.

Cash and deposits with financial institutions decreased $17 billion due primarily to lower balances on deposit with central banks, while trading securities increased by $31 billion primarily to hedge client driven transactions. Securities purchased under resale agreements and securities borrowed increased by $15 billion due to increased client demand.

Investment securities increased $4 billion from October 31, 2018 due primarily to higher holdings of corporate debt. As at July 31, 2019, the net unrealized loss on debt securities measured at fair value through other comprehensive income was $25 million, after the impact of qualifying hedges.

Loans increased $37 billion from October 31, 2018. Residential mortgages increased $12 billion due to growth in Canada and Latin America. Personal loans and credit cards grew $4 billion mainly in Latin America and Canada. Business and government loans increased $22 billion due primarily to growth in Canada, Latin America and the U.S.

Total liabilities were $997 billion as at July 31, 2019, up $66 billion or 7% from October 31, 2018.

Total deposits increased $46 billion. Personal deposits grew by $8 billion due primarily to growth in Canada. Business and government deposits grew by $35 billion mainly in the U.S., Canada and Latin America. Deposits from financial institutions increased $3 billion.

Obligations related to securities sold under repurchase agreements and securities lent increased by $19 billion which was in line with higher securities purchased under resale agreements and securities borrowed. Financial instruments designated at fair value through profit or loss increased $3 billion and other liabilities increased $3 billion, while obligations related to securities sold short decreased by $6 billion.

Total shareholders’ equity increased $2,451 million from October 31, 2018. This increase was driven mainly by current year earnings of $6,490 million. Partly offsetting were dividends paid of $3,284 million, the repurchase and cancellation of approximately 10 million common shares of $719 million and the redemption of preferred shares of $300 million.

Risk Management

The Bank’s risk management policies, practices and emerging risks have not substantially changed from those outlined in the Bank’s 2018 Annual Report. For a complete discussion of the risk management policies and practices and additional information on risk factors, refer to the “Risk Management” section in the 2018 Annual Report.

Credit risk

Allowance for credit losses

The total allowance for credit losses as at July 31, 2019 was $5,273 million. The allowance for credit losses on loans was $5,194 million, down $101 million, due primarily to new provisions being offset by write-offs and the impact of foreign currency translation.

The allowance on impaired loans increased $1 million to $1,670 million from last quarter as new provisions were offset by write-offs. The allowance against performing loans was lower at $3,524 million compared to $3,626 million as at April 30, 2019, driven by decreases in retail allowances primarily due to the impact of foreign currency translation.

Impaired loans

Total gross impaired loans as at July 31, 2019 were $5,229 million, down from $5,364 million as at April 30, 2019, due primarily to the impact of foreign currency translation.

Net impaired loans in Canadian Banking were $706 million as at July 31, 2019, a decrease of $1 million from April 30, 2019. International Banking’s net impaired loans were $2,688 million as at July 31, 2019, a decrease of $55 million from April 30, 2019. In Global Banking and Markets, net impaired loans were $165 million as at July 31, 2019, a decrease of $80 million from April 30, 2019 due largely to reversals during the quarter. Net impaired loans as a percentage of loans and acceptances were 0.58% as at July 31, 2019, a decrease of three basis points from last quarter.

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.

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 July 31, 2019, these loans amounted to $382 billion or 63% of the Bank’s total loans and acceptances outstanding (April 30, 2019 – $376 billion or 63%; October 31, 2018 – $366 billion or 64%). Of these, $286 billion or 75% are real estate secured loans (April 30, 2019 – $282 billion or 75%; October 31, 2018 – $274 billion or 75%). The tables below provide more details by portfolios.

24 Scotiabank Third Quarter Report 2019

MANAGEMENT’S DISCUSSION & ANALYSIS

Insured and uninsured mortgages and home equity lines of credit

The following table presents amounts of insured and uninsured residential mortgages and home equity lines of credit (HELOCs), by geographic areas.


	As at July 31, 2019
	Residential mortgages															Home equity lines of credit
	Insured⁽¹⁾					Uninsured					Total					Insured⁽¹⁾					Uninsured					Total
($ millions)	Amount		%			Amount		%			Amount		%			Amount		%			Amount		%			Amount		%
Canada:⁽²⁾
Atlantic provinces	$	5,767		2.6	%	$	5,358		2.4	%	$	11,125		5.0	%	$	–		–	%	$	1,156		5.5	%	$	1,156		5.5	%
Quebec		7,633		3.5			8,736		3.9			16,369		7.4			–		–			951		4.5			951		4.5
Ontario		39,953		18.0			73,753		33.1			113,706		51.1			–		–			11,392		54.0			11,392		54.0
Manitoba & Saskatchewan		5,437		2.4			4,096		1.9			9,533		4.3			1		–			763		3.6			764		3.6
Alberta		17,933		8.1			12,894		5.8			30,827		13.9			–		–			2,940		13.9			2,940		13.9
British Columbia & Territories		13,049		5.8			27,837		12.5			40,886		18.3			–		–			3,902		18.5			3,902		18.5
Canada⁽³⁾	$	89,772		40	%	$	132,674		60	%	$	222,446		100	%	$	1		–	%	$	21,104		100	%	$	21,105		100	%
International		–		–			42,724		100			42,724		100			–		–			–		–			–		–
Total	$	89,772		34	%	$	175,398		66	%	$	265,170		100	%	$	1		–	%	$	21,104		100	%	$	21,105		100	%
	As at April 30, 2019
Canada⁽³⁾	$	91,285		42.0	%	$	125,854		58.0	%	$	217,139		100	%	$	2		–	%	$	21,067		100	%	$	21,069		100	%
International		–		–			43,447		100			43,447		100			–		–			–		–			–		–
Total	$	91,285		35.0	%	$	169,301		65.0	%	$	260,586		100	%	$	2		–	%	$	21,067		100	%	$	21,069		100	%
	As at October 31, 2018
Canada⁽³⁾	$	92,185		43.3	%	$	120,898		56.7	%	$	213,083		100	%	$	2		–	%	$	20,926		100	%	$	20,928		100	%
International		–		–			40,274		100			40,274		100			–		–			–		–			–		–
Total	$	92,185		36.4	%	$	161,172		63.6	%	$	253,357		100	%	$	2		–	%	$	20,926		100	%	$	20,928		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 $3,267 in July 31, 2019 (April 30, 2019 – $3,123; October 31, 2018 – $2,899) of which $2,360 are insured (April 30, 2019 – $2,302; October 31, 2018 – $2,029).

Amortization period ranges for residential mortgages

The following table presents the distribution of residential mortgages by remaining amortization periods, and by geographic areas.


	As at July 31, 2019
	Residential mortgages by amortization period
	Less than 20 years			20-24 years			25-29 years			30-34 years			35 years and greater			Total residential mortgages
Canada		34.0	%		38.9	%		25.9	%		1.1	%		0.1	%		100	%
International		65.5	%		18.3	%		13.8	%		2.3	%		0.1	%		100	%
	As at April 30, 2019
Canada		34.4	%		38.8	%		25.9	%		0.8	%		0.1	%		100	%
International		66.3	%		18.4	%		13.5	%		1.7	%		0.1	%		100	%
	As at October 31, 2018
Canada		33.9	%		38.0	%		27.1	%		0.9	%		0.1	%		100	%
International		65.1	%		18.9	%		13.2	%		2.7	%		0.1	%		100	%

Loan to value ratios

The Canadian residential mortgage portfolio is 60% uninsured (April 30, 2019 – 58%; October 31, 2018 – 57%). The averageloan-to-value (LTV) ratio of the uninsured portfolio is 55% (April 30, 2019 – 55%; October 31, 2018 – 54%).

Scotiabank Third Quarter Report 2019 25

MANAGEMENT’S DISCUSSION & ANALYSIS

The following table presents the weighted average LTV ratio for total newly-originated uninsured residential mortgages and home equity lines of credit, which include mortgages for purchases, refinances with a request for additional funds and transfers from other financial institutions, by geographic areas in the current quarter.


	Uninsured LTV ratios
	For the three months ended July 31, 2019
	Residential mortgages			Home equity lines of credit⁽¹⁾
	LTV%			LTV%
Canada:⁽²⁾
Atlantic provinces		66.6	%		58.8	%
Quebec		64.8			68.7
Ontario		64.0			62.6
Manitoba & Saskatchewan		68.0			62.9
Alberta		67.5			73.1
British Columbia & Territories		62.7			62.5
Canada⁽²⁾		64.1	%		63.6	%
International		73.0	%		n/a
	For the three months ended April 30, 2019
Canada⁽²⁾		64.5	%		61.9	%
International		72.0	%		n/a
	For the three months ended October 31, 2018
Canada⁽²⁾		63.5	%		62.1	%
International		69.2	%		n/a

(1)

Includes all home equity lines of credit (HELOC). 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.

(2)

The province represents the location of the property in Canada.

Potential impact on residential mortgages and real estate home equity lines of credit in the event of an economic downturn

The Bank stresses its mortgage book to determine the impact of a variety of combinations of home price declines, unemployment increases and rising interest rates. It benchmarks the scenarios against experience in various historical downturns to confirm that they are sufficiently robust tests of the portfolio. In stress, there are moderate increases in credit losses and negative impacts on capital ratios but within a level the Bank considers manageable. In practice, the 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.

European exposures

The Bank believes that its European exposures are manageable, are sized appropriately relative to the credit worthiness of the counterparties (90% 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 classified at amortized cost or fair value using observable inputs, with negligible amounts valued using models with unobservable inputs (Level 3). There were no significant events in the quarter that have materially impacted the Bank’s exposures.

The Bank’s exposure to sovereigns was $6.9 billion as at July 31, 2019 (April 30, 2019 – $7.3 billion; October 31, 2018 – $8.5 billion), $5.5 billion to banks (April 30, 2019 – $3.6 billion; October 31, 2018 – $5.8 billion) and $16.7 billion to corporates (April 30, 2019 – $16.9 billion; October 31, 2018 – $15.8 billion).

In addition to exposures detailed in the table below, the Bank had indirect exposures consisting of securities exposures tonon-European entities whose parent company is domiciled in Europe of $1.0 billion as at July 31, 2019 (April 30, 2019 – $0.8 billion; October 31, 2018 – $0.7 billion).

26 Scotiabank Third Quarter Report 2019

MANAGEMENT’S DISCUSSION & ANALYSIS

The Bank’s current European exposure is provided below:


	As at
	July 31, 2019																			April 30 2019		October 31 2018
($ millions)		Loans and loan equivalents	⁽¹⁾		Deposits with financial institutions		Securities	⁽²⁾		SFT and derivatives	⁽³⁾		Funded total			Undrawn commitments	⁽⁴⁾		Total		Total		Total
Greece	$	57		$	–	$	–		$	–		$	57		$	–		$	57	$	114	$	146
Ireland		846			435		40			93			1,414			822			2,236		2,438		2,612
Italy		9			–		(35	)		5			(21	)		159			138		115		148
Portugal		–			–		–			2			2			–			2		6		2
Spain		1,010			18		56			153			1,237			247			1,484		1,214		1,701
Total GIIPS	$	1,922		$	453	$	61		$	253		$	2,689		$	1,228		$	3,917	$	3,887	$	4,609

U.K.	$	8,311		$	2,515	$	807		$	2,202		$	13,835		$	6,151		$	19,986	$	18,950	$	20,003
Germany		1,275			672		880			38			2,865			868			3,733		4,779		4,285
France		1,137			215		418			128			1,898			1,687			3,585		3,451		4,199
Netherlands		762			87		371			115			1,335			1,610			2,945		3,038		2,525
Switzerland		878			12		7			187			1,084			808			1,892		1,811		1,492
Other		2,072			204		2,639			376			5,291			2,346			7,637		7,838		7,988
TotalNon-GIIPS	$	14,435		$	3,705	$	5,122		$	3,046		$	26,308		$	13,470		$	39,778	$	39,867	$	40,492
Total Europe	$	16,357		$	4,158	$	5,183		$	3,299		$	28,997		$	14,698		$	43,695	$	43,754	$	45,101

(1)

Individual allowances for impaired loans are $3. 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 $3,913 as at July 31, 2019 (April 30, 2019 – $3,906; October 31, 2018 – $3,867).

(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 $1,481 and collateral held against SFT was $22,049.

(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.

Market risk

Value at Risk (VaR) is a key measure of market risk in the Bank’s trading activities. VaR includes both general market risk and debt specific risk components. The Bank also calculates a Stressed VaR measure.


	Average for the three months ended
Risk factor ($ millions)	July 31 2019			April 30 2019			July 31 2018
Credit spread plus interest rate	$	9.8		$	9.6		$	11.1
Credit spread		8.1			6.9			8.2
Interest rate		7.2			6.8			8.9
Equities		3.5			3.3			3.8
Foreign exchange		4.0			3.6			2.9
Commodities		2.4			2.1			1.7
Debt specific		3.8			4.3			3.6
Diversification effect		(11.6	)		(11.6	)		(9.9	)
Total VaR	$	11.9		$	11.3		$	13.2
Total Stressed VaR	$	37.3		$	33.7		$	46.9

In the third quarter of 2019, the averageone-day Total VaR increased to $11.9 million from $11.3 million in the previous quarter, primarily driven by increased exposures to credit spreads and equity prices.

The averageone-day Total Stressed VaR increased during the quarter to $37.3 million from $33.7 million in the previous quarter, primarily due to lower yields and declining equity prices. Stressed VaR is calculated using market volatility from aone-year period identified as stressful given the risk profile of the trading portfolio. The current period is the 2008/2009 credit crisis.

There were nil trading loss days in the third quarter, compared to 1 trading loss day the previous quarter. The quality and accuracy of the VaR models is validated by backtesting, which compares daily actual and theoretical profit and loss with the daily output of the VaR model.

Interest rate risk

Interest rate risk is the risk of loss due to the following: changes in the level, slope and curvature of the yield curve; the volatility of interest rates and changes in customer preferences (e.g. mortgage prepayment rates).

Scotiabank Third Quarter Report 2019 27

MANAGEMENT’S DISCUSSION & ANALYSIS

Non-trading interest rate sensitivity

The following table shows thepro-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. 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 to mitigate the risk.



	As at

	July 31, 2019																		April 30, 2019						July 31, 2018

	Net income									Economic value

($ millions)	Canadian dollar			Other currencies			Total			Canadian dollar			Other currencies			Total			Net income			Economic value			Net income			Economic value

+100 bps	$	(264	)	$	(11	)	$	(275	)	$	(836	)	$	(821	)	$	(1,657	)	$	(111	)	$	(1,368	)	$	(53	)	$	(900	)

-100 bps		262			7			269			667			754			1,421			107			1,079			51			832

During the third quarter of 2019, both interest rate sensitivities remained within the Bank’s approved consolidated limits.

The Bank’s 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.

The Bank supplements the immediate rate change impact analysis described above with more sophisticated analyses and tools for actual risk management purposes.

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, while derivatives captured undernon-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 andnon-trading risk measures is provided in the table below.

Market risk linkage to Consolidated Statement of Financial Position of the Bank

As at July 31, 2019

Market risk measure

($ 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

3,572

–

n/a

Trading assets

131,068

130,523

545

–

Interest rate, FX

Financial instruments designated at fair value through profit or loss

–

Interest rate

Derivative financial instruments

36,157

32,283

3,874

–

Interest rate, FX, equity

Investment securities

82,592

–

82,592

–

Interest rate, FX, equity

Loans

589,243

–

589,243

–

Interest rate, FX

Assets not subject to market risk⁽¹⁾

224,095

–

224,095

n/a

Total assets

1,066,740

166,378

676,267

224,095

Deposits

722,346

–

688,431

33,915

Interest rate, FX, equity

Financial instruments designated at fair value through profit or loss

11,536

–

11,536

–

Interest rate, equity

Obligations related to securities sold short

25,669

–

n/a

Derivative financial instruments

37,307

31,772

5,535

–

Interest rate, FX, equity

Trading liabilities⁽²⁾

5,100

–

n/a

Pension and other benefit liabilities

2,993

–

2,993

–

Interest rate, credit spread, equity

Liabilities not subject to market risk⁽³⁾

191,658

–

191,658

n/a

Total liabilities

996,609

62,541

708,495

225,573

(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.

28 Scotiabank Third Quarter Report 2019

MANAGEMENT’S DISCUSSION & ANALYSIS


As at October 31, 2018	Market risk measure
($ 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	$	3,191	$	3,191	$	–	$	–		n/a
Trading assets		100,262		99,650		612		–		Interest rate, FX
Financial instruments designated at fair value through profit or loss		12		–		12		–		Interest rate
Derivative financial instruments		37,558		33,937		3,621		–		Interest rate, FX, equity
Investment securities		78,396		–		78,396		–		Interest rate, FX, equity
Loans		551,834		–		551,834		–		Interest rate, FX
Assets not subject to market risk⁽¹⁾		227,240		–		–		227,240		n/a
Total assets	$	998,493	$	136,778	$	634,475	$	227,240
Deposits	$	676,534	$	–	$	641,791	$	34,743		Interest rate, FX, equity
Financial instruments designated at fair value through profit or loss		8,188		–		8,188		–		Interest rate, equity
Obligations related to securities sold short		32,087		32,087		–		–		n/a
Derivative financial instruments		37,967		32,300		5,667		–		Interest rate, FX, equity
Trading liabilities⁽²⁾		5,019		5,019		–		–		n/a
Pension and other benefit liabilities		1,727		–		1,727		–		Interest rate, credit spread, equity
Liabilities not subject to market risk⁽³⁾		169,291		–		–		169,291		n/a
Total liabilities	$	930,813	$	69,406	$	657,373	$	204,034

(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.

Liquidity risk

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 a framework of policies and limits that are approved by the Board of Directors, as outlined in Note 20 to the Condensed Interim Consolidated Financial Statements and in Note 37 of the Audited Consolidated Financial Statements in the Bank’s 2018 Annual Report. Liquid assets are a key component of this framework.

The determination of the appropriate levels for liquid asset portfolios is based on the amount of liquidity the Bank might need to fund expected cash flows in the normal course of business, as well as what might be required in periods of stress to meet cash outflows. Stress events include periods when there are disruptions in the capital markets or events which may impair the Bank’s access to funding markets or liquidity. The Bank uses stress testing to assess the impact of stress events and to assess the amount of liquid assets that would be required in various stress scenarios.

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 with 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 liquidity which may be obtained 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 July 31, 2019, unencumbered liquid assets were $217 billion (October 31, 2018 – $202 billion). Securities including National Housing Act (NHA) mortgage-backed securities, comprised 82% of liquid assets (October 31, 2018 – 71%). Other unencumbered liquid assets, comprising cash and deposits with central banks, deposits with financial institutions, precious metals and call and short loans were 18% (October 31, 2018 – 29%). The increase in total liquid assets was mainly attributable to growth in the securities portfolio, which was partially offset by a decrease in cash and deposits with central banks and deposits with financial institutions.

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 July 31, 2019. The liquidity value of the portfolio will vary under different stress events as different assumptions are used for the stress scenarios.

Scotiabank Third Quarter Report 2019 29

MANAGEMENT’S DISCUSSION & ANALYSIS

The Bank’s liquid asset pool is summarized in the following table:

As at July 31, 2019

Bank-
owned

liquid assets

Securities

received as
collateral from
securities
financing and
derivative
transactions

Total liquid
assets

Encumbered

liquid assets

Unencumbered

liquid assets

($ millions)

Pledged as
collateral

Other⁽¹⁾

Available as
collateral

Other

Cash and deposits with central banks

34,259

–

34,259

–

10,169

24,090

–

Deposits with financial institutions

11,003

–

11,003

–

10,950

–

Precious metals

3,572

–

3,572

–

3,481

–

Securities:

Canadian government obligations

44,691

11,997

56,688

29,581

–

27,107

–

Foreign government obligations

75,453

75,113

150,566

83,655

–

66,911

–

Other securities

73,968

67,836

141,804

90,201

–

51,603

–

Loans:

NHA mortgage-backed securities⁽²⁾

34,962

–

34,962

3,339

–

31,623

–

Call and short loans

745

–

745

–

745

–

Total

278,653

154,946

433,599

206,776

10,313

216,510

–


	As at October 31, 2018
	Bank- owned liquid assets		Securities received as collateral from securities financing and derivative transactions		Total liquid assets		Encumbered liquid assets				Unencumbered liquid assets
($ millions)	Bank- owned liquid assets				Total liquid assets		Pledged as collateral		Other⁽¹⁾		Available as collateral		Other
Cash and deposits with central banks	$	48,352	$	–	$	48,352	$	–	$	7,906	$	40,446	$	–
Deposits with financial institutions		13,917		–		13,917		–		73		13,844		–
Precious metals		3,191		–		3,191		–		70		3,121		–
Securities:
Canadian government obligations		45,260		11,050		56,310		29,464		–		26,846		–
Foreign government obligations		60,553		63,816		124,369		68,531		–		55,838		–
Other securities		54,786		66,704		121,490		92,280		–		29,210		–
Loans:
NHA mortgage-backed securities⁽²⁾		34,636		–		34,636		2,605		–		32,031		–
Call and short loans		1,047		–		1,047		–		–		1,047		–
Total	$	261,742	$	141,570	$	403,312	$	192,880	$	8,049	$	202,383	$	–

(1)

Assets which are restricted from being used to secure funding for legal or other reasons.

(2)

These mortgage-backed securities, which areavailable-for-sale, are reported as residential mortgage loans on the balance sheet.

A summary of total unencumbered liquid assets held by the parent bank and its branches, and domestic and foreign subsidiaries, is presented below:


	As at
($ millions)	July 31 2019		October 31 2018
The Bank of Nova Scotia (Parent)	$	170,563	$	152,728
Bank domestic subsidiaries		8,489		15,344
Bank foreign subsidiaries		37,458		34,311
Total	$	216,510	$	202,383

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.

30 Scotiabank Third Quarter Report 2019

MANAGEMENT’S DISCUSSION & ANALYSIS

Encumbered assets

In the course of the Bank’sday-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:

As at July 31, 2019

Bank-owned

assets

Securities received
as collateral from
securities financing and

derivative transactions

Total assets

Encumbered assets

Unencumbered assets

($ millions)

Pledged as
collateral

Other

⁽¹⁾

Available as
collateral

⁽²⁾

Other

⁽³⁾

Cash and deposits with central banks

34,259

–

34,259

–

10,169

24,090

–

Deposits with financial institutions

11,003

–

11,003

–

10,950

–

Precious metals

3,572

–

3,572

–

3,481

–

Liquid securities:

Canadian government obligations

44,691

11,997

56,688

29,581

–

27,107

–

Foreign government obligations

75,453

75,113

150,566

83,655

–

66,911

–

Other liquid securities

73,968

67,836

141,804

90,201

–

51,603

–

Other securities

4,481

4,893

9,374

4,142

–

5,232

Loans classified as liquid assets:

NHA mortgage-backed securities

34,962

–

34,962

3,339

–

31,623

–

Call and short loans

745

–

745

–

745

–

Other loans

567,694

–

567,694

9,635

57,454

13,662

486,943

Other financial assets⁽⁴⁾

175,976

(113,625

)

62,351

4,117

–

58,234

Non-financial assets

39,936

–

39,936

–

39,936

Total

1,066,740

46,214

1,112,954

224,670

67,767

230,172

590,345


	As at October 31, 2018
	Bank-owned assets		Securities received as collateral from securities financing and derivative transactions			Total assets		Encumbered assets					Unencumbered assets
($ millions)	Bank-owned assets					Total assets			Pledged as collateral		Other	⁽¹⁾		Available as collateral	⁽²⁾		Other	⁽³⁾
Cash and deposits with central banks	$	48,352	$	–		$	48,352	$	–	$	7,906		$	40,446		$	–
Deposits with financial institutions		13,917		–			13,917		–		73			13,844			–
Precious metals		3,191		–			3,191		–		70			3,121			–
Liquid securities:
Canadian government obligations		45,260		11,050			56,310		29,464		–			26,846			–
Foreign government obligations		60,553		63,816			124,369		68,531		–			55,838			–
Other liquid securities		54,786		66,704			121,490		92,280		–			29,210			–
Other securities		3,283		5,400			8,683		4,978		–			–			3,705
Loans classified as liquid assets:
NHA mortgage-backed securities		34,636		–			34,636		2,605		–			32,031			–
Call and short loans		1,047		–			1,047		–		–			1,047			–
Other loans		530,485		–			530,485		8,430		59,460			12,864			449,731
Other financial assets⁽⁴⁾		163,209		(92,624	)		70,585		2,619		–			–			67,966
Non-financial assets		39,774		–			39,774		–		–			–			39,774
Total	$	998,493	$	54,346		$	1,052,839	$	208,907	$	67,509		$	215,247		$	561,176

(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 July 31, 2019, total encumbered assets of the Bank were $292 billion (October 31, 2018 – $276 billion). Of the remaining $821 billion (October 31, 2018 – $776 billion) of unencumbered assets, $230 billion (October 31, 2018 – $215 billion) are considered readily available in the normal course of business to secure funding or meet collateral needs as detailed above.

In someover-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 July 31, 2019, the potential adverse impact on derivatives collateral that would result from aone-notch ortwo-notch downgrade of the Bank’s rating below its lowest current rating, was $27 million or $92 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 (LCR) measure is based on a30-day liquidity stress scenario, with assumptions defined in the Office of the Superintendent of Financial Institutions (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%.

HQLA are defined in the LAR Guideline, and are grouped into three main categories, with varying haircuts applied to arrive at the amount included in the total weighted value in the table that follows.

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.

Scotiabank Third Quarter Report 2019 31

MANAGEMENT’S DISCUSSION & ANALYSIS

The following table presents the Bank’s LCR for the quarter ended July 31, 2019, based on the average daily positions in the quarter.


For the quarter ended July 31, 2019 ($ millions)⁽¹⁾	Total unweighted value (Average)⁽²⁾		Total weighted value (Average)⁽³⁾
High-quality liquid assets
Total high-quality liquid assets (HQLA)		*	$	159,929

Cash outflows
Retail deposits and deposits from small business customers, of which:	$	179,844	$	12,873
Stable deposits		75,614		2,450
Less stable deposits		104,230		10,423
Unsecured wholesale funding, of which:		195,027		94,654
Operational deposits (all counterparties) and deposits in networks of cooperative banks		62,327		14,786
Non-operational deposits (all counterparties)		110,659		57,827
Unsecured debt		22,041		22,041
Secured wholesale funding		*		38,384
Additional requirements, of which:		208,939		42,226
Outflows related to derivative exposures and other collateral requirements		27,313		16,876
Outflows related to loss of funding on debt products		3,510		3,510
Credit and liquidity facilities		178,116		21,840
Other contractual funding obligations		1,293		1,182
Other contingent funding obligations⁽⁴⁾		493,525		8,421
Total cash outflows		*	$	197,740

Cash inflows
Secured lending (e.g. reverse repos)	$	139,760	$	27,370
Inflows from fully performing exposures		26,976		17,556
Other cash inflows		22,544		22,544
Total cash inflows	$	189,280	$	67,470
			Total adjusted value⁽⁵⁾

Total HQLA		*	$	159,929
Total net cash outflows		*	$	130,270
Liquidity coverage ratio (%)		*		123	%
For the quarter ended April 30, 2019($ millions)			Total adjusted value⁽⁵⁾
Total HQLA		*	$	158,383
Total net cash outflows		*	$	126,966
Liquidity coverage ratio (%)		*		125	%

*	Disclosure is not required under regulatory guideline.

(1)

Based on the average of daily positions of the 64 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 values include 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, central bank reserves available to the Bank in times of stress and securities with a 0% risk weight, as defined under OSFI Capital Adequacy guidelines.

The decrease in the Bank’s average LCR for the quarter ended July 31, 2019 versus the average of the previous quarter was attributable to normal business activities. The Bank’s significant operating currencies are Canadian and U.S. dollars. The Bank monitors its significant currency exposures in accordance with its liquidity risk management framework and risk appetite.

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 $303 billion as at July 31, 2019 (October 31, 2018 – $289 billion). The increase since October 31, 2018 was primarily driven by personal deposit growth, issuance of subordinated debentures and internal capital generation net of redemption of additional tier 1 securities. A portion of commercial deposits, particularly those of an operating or relationship nature, would be considered part of the Bank’s core funding. Furthermore, core funding is augmented by longer-term wholesale debt issuances (original maturity over 365 days) of $154 billion (October 31, 2018 – $157 billion). Longer-term wholesale debt issuances include medium-term notes, mortgage securitizations, asset-backed securities and covered bonds.

The Bank operates in many different currencies and countries. From a funding perspective, the most significant currencies are Canadian and U.S. dollars. With respect to the Bank’s operations outside Canada, there are different funding strategies depending on the nature of the activities in a country. For those countries where the Bank operates a branch banking subsidiary, the strategy is for the subsidiary to be substantially self-funding in its local market. For other subsidiaries or branches outside Canada where local deposit gathering capability is not sufficient, funding is provided through the wholesale funding activities of the Bank.

32 Scotiabank Third Quarter Report 2019

MANAGEMENT’S DISCUSSION & ANALYSIS

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 funding strategy deployed by wholesale funding centres and the management of associated risks, such as geographic and currency risk, is 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 funding sources. 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, unsecured personal lines of credit through the Halifax Receivables Trust 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. While the Bank includes CMHC securitization programs in its view of wholesale debt issuance, this source of funding does not entail therun-off risk that can be experienced in funding raised from capital markets.

Outside of Canada, short-term wholesale debt is raised through the issuance of negotiable certificates of deposit in the United States, Hong Kong, 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 andnon-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 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, Swiss Stock Exchange and the TokyoPro-Bond Market. 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 is unsecured or partially secured, has an initial or amended term to maturity greater than 400 days and has been assigned a CUSIP or ISIN or similar identification number, 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 July 31, 2019, liabilities subject to conversion under the bail-in regime amounted to $7 billion (October 31, 2018 – nil).

Scotiabank Third Quarter Report 2019 33

MANAGEMENT’S DISCUSSION & ANALYSIS

The table below provides the remaining contractual maturities of funding raised through wholesale funding sources. In the Consolidated Statement of Financial Position, these liabilities are primarily included in Business and Government Deposits.

Wholesale funding sources⁽¹⁾


	As at July 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
Deposit by banks⁽²⁾	$	4,148	$	158	$	537	$	397	$	103	$	5,343	$	4	$	–	$	–	$	5,347
Bearer notes, commercial paper and certificate of deposits		7,528		21,902		22,767		15,170		15,628		82,995		2,606		730		53		86,384
Asset-backed commercial paper⁽³⁾		1,963		3,023		1,023		–		–		6,009		–		–		–		6,009
Senior notes⁽⁴⁾⁽⁵⁾		1,504		3,764		4,995		2,509		5,067		17,839		16,766		26,643		12,055		73,303
Bail-inable notes⁽⁵⁾		–		–		–		–		26		26		1,311		3,762		1,811		6,910
Asset-backed securities		2		14		1		1,292		1		1,310		3,625		1,181		228		6,344
Covered bonds		–		1,980		542		1,848		1,872		6,242		3,346		15,542		2,366		27,496
Mortgage securitization⁽⁶⁾		–		508		601		771		663		2,543		4,315		12,336		4,598		23,792
Subordinated debt⁽⁷⁾		–		–		–		–		–		–		81		153		10,611		10,845
Total wholesale funding sources	$	15,145	$	31,349	$	30,466	$	21,987	$	23,360	$	122,307	$	32,054	$	60,347	$	31,722	$	246,430

Of Which:

Unsecured funding	$	13,180	$	25,824	$	28,299	$	18,076	$	20,824	$	106,203	$	20,768	$	31,288	$	24,530	$	182,789
Secured funding		1,965		5,525		2,167		3,911		2,536		16,104		11,286		29,059		7,192		63,641
	As at October 31, 2018
($ 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
Deposit by banks⁽²⁾	$	1,720	$	196	$	211	$	212	$	116	$	2,455	$	29	$	145	$	32	$	2,661
Bearer notes, commercial paper and certificate of deposits		8,807		14,201		21,517		15,961		7,580		68,066		5,487		666		56		74,275
Asset-backed commercial paper⁽³⁾		2,088		4,697		165		–		–		6,950		–		–		–		6,950
Senior notes⁽⁴⁾⁽⁵⁾		180		2,714		4,070		6,214		5,168		18,346		15,179		36,765		14,298		84,588
Bail-inable notes⁽⁵⁾		–		–		–		–		–		–		–		–		–		–
Asset-backed securities		6		15		47		500		–		568		2,714		1,944		304		5,530
Covered bonds		–		2,910		1,491		–		1,975		6,376		4,312		16,779		1,772		29,239
Mortgage securitization⁽⁶⁾		–		765		316		567		508		2,156		2,388		12,966		4,646		22,156
Subordinated debt⁽⁷⁾		–		–		–		–		–		–		–		237		7,539		7,776
Total wholesale funding sources	$	12,801	$	25,498	$	27,817	$	23,454	$	15,347	$	104,917	$	30,109	$	69,502	$	28,647	$	233,175

Of Which:

Unsecured funding	$	10,707	$	17,111	$	25,798	$	22,387	$	12,864	$	88,867	$	20,695	$	37,813	$	21,925	$	169,300
Secured funding		2,094		8,387		2,019		1,067		2,483		16,050		9,414		31,689		6,722		63,875

(1)

Wholesale funding sources exclude repo transactions and bankers’ acceptances, which are disclosed in the contractual maturities table below. Amounts are based on remaining term to maturity.

(2)

Only includes commercial bank deposits.

(3)

Wholesale funding sources also exclude asset-backed commercial paper (ABCP) issued by certain ABCP conduits that are not consolidated for financial reporting purposes.

(4)

Not subject tobail-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 ofrun-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 $217 billion as at July 31, 2019 (October 31, 2018 – $202 billion) were well in excess of wholesale funding sources which mature in the next twelve months.

34 Scotiabank Third Quarter Report 2019

MANAGEMENT’S DISCUSSION & ANALYSIS

Contractual maturities

The table below provides the maturity of assets and liabilities as well as theoff-balance sheet commitments as at July 31, 2019, based on the contractual maturity date. From a liquidity risk perspective the Bank considers factors other than contractual maturity in the assessment of liquid assets or in determining expected future cash flows. In particular, for securities with a fixed maturity date, the ability and time horizon to raise cash from these securities is more relevant to liquidity management than contractual maturity. For other assets and deposits the Bank uses assumptions about rollover rates to assess liquidity risk for normal course and stress scenarios. Similarly, the Bank uses assumptions to assess the potential drawdown of credit commitments in various scenarios.

As at July 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

36,300

520

293

174

330

271

10,817

48,834

Trading assets

6,184

3,547

5,835

4,168

2,768

9,069

21,313

17,065

61,119

131,068

Financial instruments designated at fair value through profit or loss

–

Securities purchased under resale agreements and securities borrowed

93,763

16,785

6,364

1,373

1,193

–

119,478

Derivative financial instruments

2,190

3,359

1,422

1,701

1,500

5,917

5,999

14,069

–

36,157

Investment securities – FVOCI

3,405

6,668

6,780

3,317

4,701

7,424

15,838

8,064

1,559

57,756

Investment securities – amortized cost

691

983

910

1,529

809

7,318

4,012

7,974

–

24,226

Investment securities – FVTPL

–

610

Loans

37,447

28,918

34,930

30,866

35,359

90,904

225,777

44,465

60,577

589,243

Residential mortgages

4,470

6,365

10,947

12,547

15,998

49,029

132,222

31,234

2,358

⁽¹⁾

265,170

Personal loans

4,498

2,734

3,722

3,426

3,483

12,500

23,751

5,766

38,799

98,679

Credit cards

–

17,933

Business and government

28,479

19,819

20,261

14,893

15,878

29,375

69,804

7,465

6,681

⁽²⁾

212,655

Allowance for credit losses

–

(5,194

)

(5,194

)

Customers’ liabilities under acceptances

11,765

1,799

237

–

13,923

Other assets

–

45,432

Total assets

191,745

62,592

56,771

43,114

46,421

120,806

273,269

91,908

180,114

1,066,740

Liabilities and equity

Deposits

68,831

63,865

57,394

40,580

40,593

46,371

73,593

16,849

314,270

722,346

Personal

9,508

10,637

14,375

12,881

11,045

13,546

12,477

153

138,273

222,895

Non-personal

59,323

53,228

43,019

27,699

29,548

32,825

61,116

16,696

175,997

499,451

Financial instruments designated at fair value through profit or loss

119

459

618

407

871

4,029

1,621

3,412

–

11,536

Acceptances

11,774

1,799

237

–

13,932

Obligations related to securities sold short

259

1,149

1,427

938

421

2,082

6,150

5,606

7,637

25,669

Derivative financial instruments

1,786

3,479

2,630

1,674

1,577

6,555

7,254

12,352

–

37,307

Obligations related to securities sold under repurchase agreements and securities lent

112,971

5,642

947

514

481

–

120,555

Subordinated debentures

–

9,021

–

9,021

Other liabilities

854

1,294

2,219

1,359

1,396

3,392

7,349

6,382

31,998

56,243

Total equity

–

70,131

Total liabilities and equity

196,594

77,687

65,472

45,567

45,366

62,429

95,967

53,622

424,036

1,066,740

Off-balance sheet commitments

Operating leases

116

112

109

400

913

1,058

–

2,826

Credit commitments⁽³⁾

1,925

9,785

11,857

11,685

19,166

24,664

115,532

11,236

–

205,850

Financial guarantees⁽⁴⁾

–

36,012

Outsourcing obligations

183

–

478

(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.

Scotiabank Third Quarter Report 2019 35

MANAGEMENT’S DISCUSSION & ANALYSIS


	As at October 31, 2018
($ 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	$	54,254	$	920	$	284	$	101	$	117	$	326	$	726	$	223	$	8,509		$	65,460
Trading assets		4,792		5,311		3,326		5,463		2,309		7,934		12,765		18,130		40,232			100,262
Financial instruments designated at fair value through profit or loss		–		–		–		–		12		–		–		–		–			12
Securities purchased under resale agreements and securities borrowed		74,522		21,223		5,743		673		337		549		539		432		–			104,018
Derivative financial instruments		3,178		5,517		2,024		2,327		1,446		6,447		6,071		10,548		–			37,558
Investment securities – FVOCI		3,925		6,436		5,852		3,284		3,243		13,139		15,206		4,758		1,305			57,148
Investment securities – amortized cost		452		1,429		1,160		1,501		1,500		4,302		9,465		934		–			20,743
Investment securities – FVTPL		–		–		–		–		–		–		–		–		505			505
Loans		40,463		27,581		28,920		27,246		28,064		93,191		214,017		34,985		57,367			551,834
Residential mortgages		11,496		4,697		8,774		12,014		12,781		53,629		126,934		21,366		1,666	⁽¹⁾		253,357
Personal loans		4,204		2,701		3,528		3,431		3,558		11,712		23,338		5,468		38,079			96,019
Credit cards		–		–		–		–		–		–		–		–		16,485			16,485
Business and government		24,763		20,183		16,618		11,801		11,725		27,850		63,745		8,151		6,202	⁽²⁾		191,038
Allowance for credit losses		–		–		–		–		–		–		–		–		(5,065	)		(5,065	)
Customers’ liabilities under acceptances		13,829		2,082		338		50		30		–		–		–		–			16,329
Other assets		–		–		–		–		–		–		–		–		44,624			44,624
Total assets	$	195,415	$	70,499	$	47,647	$	40,645	$	37,058	$	125,888	$	258,789	$	70,010	$	152,542		$	998,493

Liabilities and equity
Deposits	$	56,965	$	53,331	$	48,661	$	39,716	$	32,753	$	45,262	$	78,295	$	18,313	$	303,238		$	676,534
Personal		8,797		9,415		12,536		9,563		10,241		13,472		11,953		261		138,307			214,545
Non-personal		48,168		43,916		36,125		30,153		22,512		31,790		66,342		18,052		164,931			461,989
Financial instruments designated at fair value through profit or loss		22		77		360		410		523		3,090		1,646		1,969		91			8,188
Acceptances		13,838		2,082		338		50		30		–		–		–		–			16,338
Obligations related to securities sold short		910		972		870		305		1,013		3,896		8,685		7,388		8,048			32,087
Derivative financial instruments		2,520		4,288		1,613		2,716		1,583		6,773		7,699		10,775		–			37,967
Obligations related to securities sold under repurchase agreements and securities lent		96,157		3,466		1,634		–		–		–		–		–		–			101,257
Subordinated debentures		–		–		–		–		–		–		–		5,698		–			5,698
Other liabilities		2,720		592		1,302		422		757		1,784		6,167		5,978		33,022			52,744
Total equity		–		–		–		–		–		–		–		–		67,680			67,680
Total liabilities and equity	$	173,132	$	64,808	$	54,778	$	43,619	$	36,659	$	60,805	$	102,492	$	50,121	$	412,079		$	998,493

Off-balance sheet commitments
Operating leases	$	36	$	72	$	106	$	104	$	102	$	378	$	818	$	880	$	–		$	2,496
Credit commitments⁽³⁾		4,232		5,588		13,438		15,182		22,619		23,906		105,988		6,486		–			197,439
Financial guarantees⁽⁴⁾		–		–		–		–		–		–		–		–		36,423			36,423
Outsourcing obligations		18		36		52		52		52		207		311		–		1			729

(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.

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 ratingsand 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 andA- by S&P. All four credit rating agencies have a stable outlook on the Bank.

There were no changes to the Bank’s credit ratings during the quarter.

36 Scotiabank Third Quarter Report 2019

MANAGEMENT’S DISCUSSION & ANALYSIS

Capital Management

We continue to manage our capital in accordance with the capital management framework as described on pages 55 to 67 of the Bank’s 2018 Annual Report.

Domestic Stability Buffer

In June 2019, OSFI announced a 25 basis point increase to the Domestic Stability Buffer to 2.0% of total risk-weighted assets, effective October 31, 2019. OSFI’s minimum regulatory capital ratio requirements, including the Domestic Systemically Important Banks(D-SIB) 1.0% surcharge and the Domestic Stability Buffer of 2.0%, are 10.0%, 11.5% and 13.5% for Common Equity Tier 1, Tier 1 and Total capital ratios, respectively.

In addition, we continue to monitor and prepare for new regulatory capital developments to ensure compliance with these requirements. There were no new OSFI requirements this quarter.

Capital ratios

The Bank’s various regulatory capital measures consist of the following:


	As at
($ millions)	July 31 2019		April 30 2019		October 31 2018
Common Equity Tier 1 capital	$	46,565	$	46,193	$	44,443
Tier 1 capital		51,371		51,709		50,187
Total regulatory capital		61,546		60,855		57,364
CET1 risk-weighted assets⁽¹⁾⁽²⁾	$	417,058	$	415,212	$	400,507
Tier 1 risk-weighted assets⁽¹⁾⁽²⁾		417,058		415,212		400,680
Total risk-weighted assets⁽¹⁾⁽²⁾		417,058		415,212		400,853
Capital ratios (%):
Common Equity Tier 1 capital ratio		11.2		11.1		11.1
Tier 1 capital ratio		12.3		12.5		12.5
Total capital ratio		14.8		14.7		14.3
Leverage:
Leverage exposures	$	1,211,612	$	1,204,111	$	1,119,099
Leverage ratio(%)		4.2		4.3		4.5

(1)

In accordance with OSFI’s requirements, effective January 31, 2019, CVA risk-weighted assets have been fullyphased-in. In the prior year, CVA RWA were calculated using scalars of 0.80, 0.83 and 0.86 to compute CET1, Tier 1 and Total capital ratios, respectively.

(2)

As at July 31, 2019, April 30, 2019 and October 31, 2018, the Bank did not have a regulatory capital flooradd-on for CET1, Tier 1 and Total capital RWA.

The Bank’s Common Equity Tier 1 capital ratio was 11.2% at July 31, 2019, an increase of approximately 10 basis points from the prior quarter, primarily due to strong internal capital generation which was partly offset by organic growth in risk-weighted assets, the impact from employee pension and post-retirement benefits on accumulated other comprehensive income, and share buybacks under the Bank’s Normal Course Issuer Bid.

The Bank’s Tier 1 capital ratio was 12.3%, a decline of approximately 20 basis points from the prior quarter, primarily due to the redemption of $650 million of Scotiabank Tier 1 Trust Securities, partly offset by the above impacts to the Common Equity Tier 1 (CET1) ratio. In addition, the Total Capital ratio increased by approximately 10 basis points during the quarter to 14.8%, primarily due to the issuance of $1.5 billion of subordinated debentures.

The Bank’s Leverage ratio was 4.2% at July 31, 2019, a decline of approximately 10 basis points from the prior quarter, primarily due to the redemption of Scotiabank Tier 1 Trust Securities noted above and growth from the Bank’s consolidated balance sheet assets.

As at July 31, 2019, the CET1, Tier 1, Total capital and Leverage ratios were well above OSFI’s minimum capital ratios.

Changes in regulatory capital

The Bank’s Common Equity Tier 1 capital was $46.6 billion, as at July 31, 2019, an increase of approximately $0.4 billion during the quarter. Strong internal capital generation of $0.8 billion net of the accounting impact from the announced divestiture of Puerto Rico, and decreases to regulatory capital deductions of $0.8 billion were partly offset by lower accumulated other comprehensive income of $1.0 billion, excluding the impact from cash flow hedges, and share buybacks net of share issuances of $0.2 billion.

Risk-weighted assets

CET1 risk-weighted assets (RWA) increased by $1.8 billion or 0.4% during the quarter to $417.1 billion, due primarily to organic growth in RWA driven by good asset growth across all business lines, partly offset by the impact from foreign currency translation from a stronger Canadian dollar.

Normal Course Issuer Bid

On May 30, 2019, the Bank announced that OSFI and the Toronto Stock Exchange have 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 terminate upon earlier of: (i) the Bank purchasing the maximum number of common shares under the 2019 NCIB, (ii) the Bank providing a notice of termination, or (iii) June 3, 2020. On a quarterly basis, the Bank will notify OSFI prior to making purchases.

On May 29, 2018, the Bank announced that OSFI and the Toronto Stock Exchange (TSX) approved a normal course issuer bid (the “2018 NCIB”) pursuant to which it may repurchase for cancellation up to 24 million of the Bank’s common shares. This 2018 NCIB terminated on June 3, 2019.

During the quarter, the Bank repurchased and cancelled approximately 2.8 million common shares at a volume weighted average price of $70.28 per share for a total amount of $195 million. During the nine months ended July 31, 2019, the Bank repurchased and cancelled approximately 10 million common shares under these plans at a volume weighted average price of $71.66 per share for a total amount of $719 million.

Under the 2018 NCIB, which terminated on June 3, 2019, the Bank cumulatively repurchased and cancelled approximately 14.8 million common shares at an average price of $73.46 per share. Under the 2019 NCIB, the Bank has cumulatively repurchased and cancelled approximately 1.2 million common shares at an average price of $70.24 per share.

Scotiabank Third Quarter Report 2019 37

MANAGEMENT’S DISCUSSION & ANALYSIS

Common dividend

The Board of Directors, at its meeting on August 26, 2019, approved a dividend of 90 cents per share. This quarterly dividend is payable to shareholders of record as of October 1, 2019 on October 29, 2019.

Financial Instruments

Given the nature of the Bank’s main business activities, financial instruments make up a substantial portion of the balance sheet and are integral to the Bank’s business. There are various measures that reflect the level of risk associated with the Bank’s portfolio of financial instruments. Further discussion of some of these risk measures is included in the Risk Management section. The methods of determining the fair value of financial instruments are detailed on page 169 of the Bank’s 2018 Annual Report.

Management’s judgment on valuation inputs is necessary when observable market data is not available, and in the selection of appropriate valuation models. Uncertainty in these estimates and judgments can affect fair value and financial results recorded. During the quarter, changes in the fair value of financial instruments generally arose from normal economic, industry and market conditions.

Many financial instruments are traded products such as derivatives, and are generally transacted under industry standard International Swaps and Derivatives Association (ISDA) master netting agreements with counterparties, which allow for a single net settlement of all transactions covered by that agreement in the event of a default or early termination of the transactions. ISDA agreements are frequently accompanied by an ISDA Credit Support Annex (CSA), the terms of which may vary according to each party’s view of the other party’s creditworthiness. CSAs can require one party to post initial margin at the onset of each transaction. CSAs also allow for variation margin to be called if total uncollateralizedmark-to-market exposure exceeds an agreed upon threshold. Such variation margin provisions can beone-way (only one party will ever post collateral) orbi-lateral (either party may post depending upon which party isin-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 (see also page 85 of the Bank’s 2018 Annual Report).

Total derivative notional amounts were $5,438 billion as at July 31, 2019, compared to $5,466 billion as at April 30, 2019 (October 31, 2018 – $5,334 billion). The quarterly decrease was primarily due to foreign currency translation offset by higher volumes of currency contracts. The total notional amount ofover-the-counter derivatives was $5,203 billion compared to $5,247 billion as at April 30, 2019 (October 31, 2018 – $5,097 billion), of which $3,520 billion was settled through central counterparties as at July 31, 2019 (April 30, 2019 – $3,582 billion; October 31, 2018 – $3,523 billion). The credit equivalent amount, after taking master netting arrangements into account, was $30.2 billion, compared to $28.1 billion at April 30, 2019. The increase was primarily attributable to an increase in the market value of interest rate and currency derivative contracts offset by foreign currency translation.

Selected credit instruments

A complete discussion of selected credit instruments which markets regarded as higher risk during the financial crisis was provided on page 71 of the Bank’s 2018 Annual Report. The Bank’s net exposures have substantially remained unchanged from year end.

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 and guarantees and other commitments.

No material contractual obligations were entered into this quarter by the Bank with the structured entities that are not in the ordinary course of business. During the quarter, Scotiabank Tier 1 Trust, an unconsolidated structured entity of the Bank, was wound up following the redemption of $650 million Scotiabank Tier 1 Securities – Series2009-1. The Bank securitizes a portion of its unsecured personal lines of credit, credit card and auto loan receivables through consolidated structured entities, namely, Halifax Receivables Trust, Trillium Credit Card Trust II and Securitized Term Auto Receivables Trusts. During the quarter the Bank did not enter into any new securitization arrangements but securitized the following receivables in February 2019:

•

$1,792 million of its Canadian credit card receivables (receivables) were securitized on a revolving basis through Trillium Credit Card Trust II (Trillium), a Bank-sponsored consolidated structured entity. Trillium issued Series2019-1 and Series2019-2 Class A senior notes and Class B and Class C subordinated notes to third-party investors. The proceeds of such issuances were used to purchase aco-ownership interest in the receivables originated by the Bank. Recourse of the noteholders is limited to the purchasedco-ownership interest. The sale of suchco-ownership interest did not qualify for derecognition, and therefore the receivables continue to be recognized on the Consolidated Statement of Financial Position.

•

$896 million of its Canadian auto loan receivables were securitized through Securitized Term Auto Receivables Trust2019-1 (START2019-1), a Bank-sponsored consolidated structured entity. START2019-1 issued multiple series of Class A notes to third-party investors and issuedClass A-1 and subordinated notes to the Bank. The proceeds of such issuances are used to purchase a discrete pool of retail indirect auto loan receivables from the Bank on a fully serviced basis. Recourse of the noteholders is limited to the securitized loan receivables. The sale of such receivables did not qualify for derecognition and therefore the receivables continue to be recognized on the Consolidated Statement of Financial Position. The subordinated notes issued by START2019-1 and held by the Bank of $45 million are eliminated upon consolidation.

Processes for review and approval of these contractual arrangements are unchanged from last year.

For a complete discussion of these types of arrangements, please refer to pages 67 to 69 of the Bank’s 2018 Annual Report.

Structured entities

The Bank sponsors two Canadian multi-seller conduits that are not consolidated. These multi-seller conduits purchase high-quality financial assets and finance these assets through the issuance of highly rated 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.

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 $4.0 billion as at July 31, 2019 (October 31, 2018 – $4.0 billion). As at July 31, 2019, total commercial paper outstanding for these conduits was $3.0 billion (October 31, 2018 – $3.2 billion). Funded assets purchased and held by these conduits as at July 31, 2019, as reflected at original cost, were $3.0 billion (October 31, 2018 – $3.2 billion). The fair value of these assets approximates original cost. There has been no significant change in the composition or risk profile of these conduits since October 31, 2018.

38 Scotiabank Third Quarter Report 2019

MANAGEMENT’S DISCUSSION & ANALYSIS

Otheroff-balance sheet arrangements

Guarantees and other indirect commitments increased by 1% from October 31, 2018. The increase is due to higher volumes in undrawn loan commitments. Fees from guarantees and loan commitment arrangements recorded as credit fees innon-interest income – banking were $147 million for the three months ended July 31, 2019, compared to $143 million in the previous quarter.

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 and business units are responsive on a timely basis and business impacts, if any, are minimized.

Total Loss Absorbing Capacity (TLAC)

On April 18, 2018, OSFI issued guidelines on Total Loss Absorbing Capacity (TLAC), which apply to Canada’s Domestic Systemically Important Banks as part of the Federal Government’sbail-in regime. The standards address the sufficiency of a systemically important bank’s loss absorbing capacity in supporting its recapitalization in the event of its failure. OSFI requires systemically important banks to maintain a minimum of 21.5% plus the domestic stability buffer of TLAC eligible instruments relative to their RWAs and 6.75% relative to their leverage exposures. The Bank is required to comply with the minimum TLAC requirements by November 1, 2021 and began disclosing its TLAC ratios as of the first quarter of 2019.

United Kingdom and European Regulatory Reform

The UK gave formal notice of intention to withdraw from the EU on March 29, 2017. Negotiation of the terms of withdrawal are ongoing and the final date for the UK to leave the EU has been extended until October 31, 2019. Withdrawal may be earlier if the UK Parliament ratifies the agreement that has already been negotiated with the EU or if an amended agreement is negotiated and ratified by both the EU and the UK. Political agreement has been reached on a transition period, which would extend until at least December 31, 2020, providing additional time in which to ensure readiness, subject to the overall withdrawal agreement being concluded and ratified. If this occurs, then all EU legislation will continue to apply in the UK during such transition.

There remains a possibility that the UK will leave the EU on or before October 31, 2019 without having a withdrawal agreement in place (aso-called “hard” Brexit).

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.

Regulatory Initiatives Impacting Financial Services in Canada

On July 25, 2019, the Financial Consumer Agency of Canada (FCAC) released a new voluntary principles-based Code of Conduct for the delivery of banking services to seniors, defined as an individual in Canada who is 60 years of age or older and who is transacting fornon-business purposes. The Code is to be adopted on publication, with additional timelines starting in January 2020. The FCAC will monitor compliance with the Code. Industry consultation continues with the Canadian Bankers Association (CBA) and Department of Finance regarding the interpretation of the new Federal Consumer Protection Framework (BillC-86). The new consumer protection framework and regulations are expected to be implemented by the fall of 2021, although no date has been formally set.

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.

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 aG-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 aphase-in period for the 72.5% output floor from January 1, 2022 until January 2027.

In July 2018, OSFI issued a discussion paper seeking views from interested stakeholders on its proposed policy direction and its timelines for implementation of the final Basel III reforms in Canada. OSFI supports the changes proposed within the final Basel III reforms and intends to implement them domestically, while also considering the adjustments required to recognize the unique characteristics of the Canadian market, improving risk sensitivity and providing the right incentives, while promoting the safety and soundness of deposit taking institutions in consideration of level playing field and competitiveness issues. As part of these adjustments, OSFI is considering eliminating the BCBS’ transitional provisions for the output floor, setting the output floor at 72.5% commencing the first quarter of 2022. Responses to the questions raised within the discussion paper were due to OSFI by October 19, 2018. The Bank will continue to monitor and prepare for developments impacting regulatory capital requirements.

Regulatory Capital Pillar 3 Disclosure Requirements

In December 2018, the Basel Committee on Banking Supervision (BCBS) issued an update to its Pillar 3 disclosure requirements framework, as the third phase of the Committee’s disclosure project, which builds on the first and second phases, published by the Committee in January 2015 and March 2017, respectively. The third phase is primarily to address changes in disclosure requirements from the Basel III reforms finalized in December 2017, as well as other disclosure requirements related to asset encumbrance, capital distribution constraints, and the scope of disclosure requirements across resolution groups.

In June 2019, the BCBS finalized its revisions to the Pillar 3 disclosure requirements for the revised leverage ratio standards effective in Q1 2022. The announced changes are primarily for the inclusion of average values of securities financing transactions within the revised disclosure requirements.

OSFI’s disclosure guidelines for the implementation of the second and third phases of the Committee disclosure project are awaited.

Scotiabank Third Quarter Report 2019 39

MANAGEMENT’S DISCUSSION & ANALYSIS

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. The NSFR becomes a minimum standard in OSFI’s liquidity framework in January 2020 with public disclosure required by the first quarter of 2021.

Reforms to Interest Rate Benchmarks

LIBOR is the most widely referenced interest benchmark rate across the globe for derivatives, bonds, loans and other floating rate instruments; however, there is aregulator-led push to transition the market from LIBOR to alternative risk-free, or nearly risk-free, rates that are based on actual overnight transactions. The UK’s Financial Conduct Authority announced in 2017 that it will no longer persuade or compel panel banks to make the submissions required to calculate LIBOR. As a result, UK and US regulators have warned the industry they will need to be prepared for LIBOR to be discontinued at the end of 2021. Derivatives, floating rate notes and other financial contracts whose terms extend beyond 2021, and that refer to LIBOR as the reference rate, will be impacted. The Bank is evaluating its exposure to LIBOR, as well as the impact of the transition on systems and processes. In addition, the Bank is closely monitoring guidance issued by accounting standard setters with respect to the accounting implications of the transition.

Use of the Advance Measurement Approach for Operational Risk Capital

In July 2019, OSFI revised its capital requirements for operational risk in consideration of the final Basel III revisions published by the Basel Committee on Banking Supervision in December 2017. Effective Q1 2021, institutions will be required to use the revised Basel III Standardized Approach for operational risk.

In the interim, for fiscal year 2020, institutions currently approved for the Basel II Advanced Measurement Approach (AMA) for operational risk capital are to report using the existing Basel II Standardized Approach (TSA). As the Bank’s AMA requirements are floored at TSA requirements, the impact from the adoption of the interim 2020 requirement is not material to the Bank.

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 will apply the updated guidelines starting in January 2020, consistent with OSFI’s requirement.

Volcker Rule Amendments

The proposed Volcker rule amendments were approved on August 20, 2019, by the FDIC and the OCC (approval from the Federal Reserve, CFTC and SEC is expected shortly). As anticipated, the final amendments will relax regulatory burden on financial institutions, including foreign banking organizations such as the Bank. The amendments take effect on January 1, 2020, with 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.

Accounting Policies and Controls

Accounting policies and estimates

The condensed interim consolidated financial statements have been prepared in accordance with IAS 34,Interim Financial Reporting, using International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The significant accounting policies used in the preparation of the condensed interim consolidated financial statements are consistent with those used in the Bank’s audited consolidated financial statements for the year ended October 31, 2018 as described in Note 3 of the Bank’s 2018 annual consolidated financial statements, except for changes to the accounting for revenue from contracts with customers as a result of adopting IFRS 15,Revenue from Contracts with Customers discussed in Note 3 and 4 of the condensed interim consolidated financial statements.

Future accounting developments

There are no significant updates to the future accounting developments disclosed in Note 5 of the Bank’s audited consolidated financial statements in the 2018 Annual Report, other than the following:

IFRS 16 – Leases

In January 2016, the IASB issued IFRS 16 Leases (“IFRS 16”), which will replace IAS 17, Leases (“IAS 17”), requiring a lessee to recognize an asset for the right to use the leased item and a liability for the present value of its future lease payments. IFRS 16 will result in all operating leases being recorded on the Bank’s balance sheet as aright-of-use (“ROU”) asset with a corresponding lease liability. The Bank will also recognize amortization expense on the ROU asset and interest expense on the lease liability in the statement of income. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17.

IFRS 16 is effective for the Bank on November 1, 2019. The Bank plans to adopt IFRS 16 by adjusting the Consolidated Statement of Financial Position on the date of adoption with no restatement of comparative periods.

The most significant impact to the Bank will be related to property leases that are currently classified as operating leases being recorded on the balance sheet. The Bank has substantially completed the assessment of its lease portfolio and is modifying its processes, controls and lease accounting systems. The Bank continues to assess the decisions required in the key areas of judgment such as lease term and use of appropriate discount rates. The quantitative impact upon adoption will be finalized by the end of this fiscal year.

40 Scotiabank Third Quarter Report 2019

MANAGEMENT’S DISCUSSION & ANALYSIS

IFRS 17 – Insurance Contracts

The Bank is required to adopt IFRS 17 Insurance Contracts (“IFRS 17”) on November 1, 2021. The standard will impact the Bank’s Canadian and International insurance businesses. The standard impacts the recognition and measurement of insurance contracts.

The IASB issued an exposure draft on June 26, 2019 proposing some amendments to IFRS 17, including a proposal to defer the effective date, by one year, to annual periods on or after January 1, 2022. The Bank is assessing the proposed amendments and will continue to monitor developments related to the standard.

Changes in internal control over financial reporting

There have been no changes in the Bank’s internal control over financial reporting during the three months ended July 31, 2019, that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting.

Related party transactions

There were no changes to the Bank’s procedures and policies for related party transactions from those outlined in the Bank’s 2018 Annual Report. All transactions with related parties continued to be at market terms and conditions.

Economic Outlook

Downside risks to the global economy are materializing. It appears likely that the trade conflict between the United States and China will extend well into 2020. This would see higher tariffs imposed on Chinese exports to the U.S. and a range of additional retaliatory measures imposed on both sides of the Pacific. The conflict also risks degenerating into a currency war. The elevation in trade tensions is generating significant concern in the broader global economy, with a number of central banks now cutting rates in response to increased uncertainty and weaker growth prospects.

While Canadian growth remains solid in light of strong population growth, very accommodative monetary policy, strengthening activity in the housing market, and still-strong business and consumer confidence, Canada cannot remain immune to higher uncertainty and lower global growth. Commodity prices are well below levels seen earlier this year, imparting a negative impulse to this important block of the Canadian economy. Inflation remains at the Bank of Canada’s target and, with wages now rising at the strongest pace since 2009, inflationary pressures may be on the rise. Despite this, mounting risks to the outlook may prompt the Bank of Canada to join other central banks and cut policy rates by 50 basis points over the next two quarters as it insures against these risks.

U.S. economic activity is decelerating following a year of generally strong growth. This reflects lower fiscal stimulus as the impact of the early-2018 fiscal stimulus package wanes, but also the expected impact of increased uncertainty associated with the trade situation. The Federal Reserve is expected to cut its policy rates by another 50 basis points, for a total easing of 75 basis points, as U.S. growth is expected to slow to 2.5% this year, from 2.9% in 2018, and then to 1.6% in 2020.

The trade tensions between China and the U.S. are being felt in the Pacific Alliance countries (PAC), as the price of important regional commodities has fallen sharply this year. Adding to these issues are challenges in executing key reforms, and the outlook for the region has deteriorated, even though growth prospects for PAC countries in general remain much more solid than those in advanced economies. The impact of these developments is felt most strongly in Chile and Peru, where growth is expected to slow to around 3% from the 4% seen in 2018, and Mexico, where growth is expected to fall below 1% this year. In Colombia, growth is still expected to exceed that observed in 2018.

Scotiabank Third Quarter Report 2019 41

MANAGEMENT’S DISCUSSION & ANALYSIS

Share Data


As at July 31, 2019	Amount *($ millions)*		Dividends declared per share⁽¹⁾		Number outstanding (000s)		Conversion feature
Common shares⁽²⁾	$	18,295	$	0.90		1,220,446		n/a
Preferred shares
Preferred shares Series 30⁽³⁾		154		0.113750		6,143		Series 31
Preferred shares Series 31⁽³⁾		111		0.167679		4,457		Series 30
Preferred shares Series 32⁽³⁾		279		0.128938		11,162		Series 33
Preferred shares Series 33⁽³⁾		130		0.189104		5,184		Series 32
Preferred shares Series 34⁽³⁾⁽⁴⁾		350		0.343750		14,000		Series 35
Preferred shares Series 36⁽³⁾⁽⁴⁾		500		0.343750		20,000		Series 37
Preferred shares Series 38⁽³⁾⁽⁴⁾		500		0.303125		20,000		Series 39
Preferred shares Series 40⁽³⁾⁽⁴⁾		300		0.303125		12,000		Series 41

Additional Tier 1 securities	Amount *($ millions)*		Distribution		Yield *(%)*		Number outstanding *(000s)*
Scotiabank Trust Securities –Series 2006-1 issued by Scotiabank Capital Trust⁽⁵⁾	$	750	$	28.25		5.650		750
Scotiabank Tier 1 Securities – Series2009-1 issued by Scotiabank Tier 1 Trust⁽⁵⁾⁽⁶⁾		–		–		–		–
Subordinated additional Tier 1 capital securities (NVCC)⁽⁴⁾⁽⁷⁾	US$	1,250	US$	23.25		4.650		1,250

NVCC Subordinated debentures⁽⁴⁾					Amount *($ millions)*		Interest rate (%)
Subordinated debentures due March 2027					$	1,250		2.58
Subordinated debentures due December 2025						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⁾								12,224

(1)

Dividends on common shares are paid quarterly, if and when declared. Dividends declared as at August 27, 2019. The Board of Directors, at its meeting on August 26, 2019, approved a dividend of 90 cents per share payable to shareholders of record as of October 1, 2019 on October 29, 2019.

(2)

As at August 16 , 2019, the number of outstanding common shares and options were 1,219,547 thousand and 12,207 thousand, respectively.

(3)

These preferred shares are entitled tonon-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 2018 Annual Report for further details.

(4)

These securities containNon-Viability Contingent Capital (NVCC) provisions necessary to qualify as regulatory capital under Basel III. The Bank’s 2018 Annual Report describes the conditions under which the conversion occurs and the conversion mechanics of NVCC Subordinated Debentures (Note 21), NVCC Subordinated additional Tier 1 capital securities (Note 24) and NVCC Preferred Shares (Note 24). The maximum number of common shares issuable on conversion of NVCC subordinated debentures, NVCC subordinated additional Tier 1 capital securities, and NVCC preferred shares as at July 31, 2019 would be 2,812 million common shares based on the floor price and excluding the impact of any accrued and unpaid interest and any declared but unpaid dividends.

(5)

These securities have exchange features. Refer to Table 27 in the Bank’s 2018 Annual Report for further details.

(6)

On June 30, 2019, the 7.802% Scotiabank Tier 1Securities – Series 2009-1 issued by Scotiabank Tier 1 Trust were redeemed for 100% of their principal amount, together with accrued and unpaid interest to the redemption date.

(7)

Semi-annual distributions are recorded in the second and fourth fiscal quarters, if and when paid.

For further details on outstanding securities of the Bank, including convertibility features, refer to Notes 21, 24 and 26 of the Bank’s consolidated financial statements in the 2018 Annual Report.

42 Scotiabank Third Quarter Report 2019

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Condensed Interim Consolidated Financial Statements (unaudited)

TABLE OF CONTENTS



44	Condensed Interim Consolidated Financial Statements

49	Notes to the Condensed Interim Consolidated Financial Statements

	49	Note 1 - Reporting entity

	49	Note 2 - Basis of preparation

	49	Note 3 - Significant accounting policies

	50	Note 4 -Transition to IFRS 15

	50	Note 5 -Future accounting developments

	50	Note 6 - Cash and deposits with financial institutions

	51	Note 7 -Investment securities

	52	Note 8 -Loans, impaired loans and allowance for credit losses

	58	Note 9 - Derecognition of financial assets



		59		Note 10 - Investments in associates

		60		Note 11 - Deposits

		60		Note 12 - Capital and financing transactions

		61		Note 13 -Capital management

		61		Note 14 -Share-based payments

		61		Note 15 - Employee benefits

		62		Note 16 - Operating segments

		65		Note 17 - Interest income and expense

		65		Note 18 -Trading revenues

		65		Note 19- Earnings per share

		65		Note 20 - Financial instruments

		72		Note 21 - Corporate income taxes

		72		Note 22 -Acquisitions and divestitures

Scotiabank Third Quarter Report 2019 43

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statement of Financial Position


		As at
(Unaudited) ($ millions)	Note		July 31 2019		April 30 2019		October 31 2018
Assets
Cash and deposits with financial institutions	6	$	45,262	$	50,121	$	62,269
Precious metals			3,572		3,543		3,191
Trading assets
Securities			115,988		103,125		85,474
Loans			14,158		13,104		14,334
Other			922		911		454
			131,068		117,140		100,262
Financial instruments designated at fair value through profit or loss	20(b)		13		14		12
Securities purchased under resale agreements and securities borrowed			119,478		126,090		104,018
Derivative financial instruments			36,157		31,358		37,558
Investment securities	7		82,592		85,146		78,396
Loans
Residential mortgages	8		265,170		260,586		253,357
Personal loans	8		98,679		97,874		96,019
Credit cards	8		17,933		17,730		16,485
Business and government	8		212,655		212,920		191,038
			594,437		589,110		556,899
Allowance for credit losses	8(c)		5,194		5,295		5,065
			589,243		583,815		551,834
Other
Customers’ liability under acceptances, net of allowance			13,923		12,823		16,329
Property and equipment			2,634		2,722		2,684
Investments in associates	10		5,496		5,303		4,850
Goodwill and other intangible assets			17,612		17,825		17,719
Deferred tax assets			1,706		2,069		1,938
Other assets			17,984		20,200		17,433
			59,355		60,942		60,953
Total assets		$	1,066,740	$	1,058,169	$	998,493
Liabilities
Deposits
Personal	11	$	222,895	$	224,933	$	214,545
Business and government	11		456,806		443,707		422,002
Financial institutions	11		42,645		43,642		39,987
			722,346		712,282		676,534
Financial instruments designated at fair value through profit or loss	20(b)		11,536		10,919		8,188
Other
Acceptances			13,932		12,833		16,338
Obligations related to securities sold short			25,669		29,957		32,087
Derivative financial instruments			37,307		33,176		37,967
Obligations related to securities sold under repurchase agreements and securities lent			120,555		124,331		101,257
Subordinated debentures	12		9,021		7,554		5,698
Other liabilities			56,243		56,870		52,744
			262,727		264,721		246,091
Total liabilities			996,609		987,922		930,813
Equity
Common equity
Common shares	12		18,295		18,284		18,234
Retained earnings			43,682		43,056		41,414
Accumulated other comprehensive income (loss)			1,187		1,836		992
Other reserves			370		395		404
Total common equity			63,534		63,571		61,044
Preferred shares and other equity instruments	12		3,884		3,884		4,184
Total equity attributable to equity holders of the Bank			67,418		67,455		65,228
Non-controlling interests in subsidiaries			2,713		2,792		2,452
Total equity			70,131		70,247		67,680
Total liabilities and equity		$	1,066,740	$	1,058,169	$	998,493

The accompanying notes are an integral part of these condensed interim consolidated financial statements.

44 Scotiabank Third Quarter Report 2019

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statement of Income


		For the three months ended									For the nine months ended
(Unaudited) ($ millions)	Note		July 31 2019	⁽¹⁾		April 30 2019	⁽¹⁾		July 31 2018			July 31 2019	⁽¹⁾		July 31 2018
Revenue Interest income⁽²⁾
Loans		$	7,490		$	7,164		$	6,332		$	21,745		$	18,114
Securities			593			567			446			1,676			1,283
Securities purchased under resale agreements and securities borrowed			126			140			118			396			317
Deposits with financial institutions			231			230			235			715			633
	17		8,440			8,101			7,131			24,532			20,347
Interest expense
Deposits			3,574			3,485			2,735			10,394			7,481
Subordinated debentures			77			73			55			211			159
Other			415			350			256			1,086			736
	17		4,066			3,908			3,046			11,691			8,376
Net interest income			4,374			4,193			4,085			12,841			11,971
Non-interest income
Card revenues			240			248			271			732			805
Banking services fees			445			461			404			1,339			1,232
Credit fees			325			322			312			971			883
Mutual funds			472			454			425			1,373			1,275
Brokerage fees			217			217			222			650			668
Investment management and trust			259			271			191			787			523
Underwriting and other advisory			110			149			145			351			411
Non-trading foreign exchange			171			175			158			506			464
Trading revenues	18		397			386			305			1,112			1,050
Net gain on sale of investment securities			118			86			35			226			136
Net income from investments in associated corporations			190			170			126			489			390
Insurance underwriting income, net of claims			165			169			158			518			517
Other fees and commissions			231			245			206			728			613
Other⁽³⁾			(55	)		257			138			443			389
			3,285			3,610			3,096			10,225			9,356
Total revenue			7,659			7,803			7,181			23,066			21,327
Provision for credit losses			713			873			943			2,274			2,021
			6,946			6,930			6,238			20,792			19,306
Non-interest expenses
Salaries and employee benefits			2,138			2,026			1,879			6,328			5,483
Premises and technology			697			702			637			2,095			1,882
Depreciation and amortization			276			258			212			782			615
Communications			113			119			106			341			324
Advertising and business development			162			150			130			451			399
Professional			197			203			215			618			611
Business and capital taxes			130			122			117			389			351
Other			496			466			474			1,422			1,329
			4,209			4,046			3,770			12,426			10,994
Income before taxes			2,737			2,884			2,468			8,366			8,312
Income tax expense	21		753			625			529			1,876			1,859
Net income		$	1,984		$	2,259		$	1,939		$	6,490		$	6,453
Net income attributable tonon-controlling interests in subsidiaries			120			70			(44	)		301			84
Net income attributable to equity holders of the Bank		$	1,864		$	2,189		$	1,983		$	6,189		$	6,369
Preferred shareholders and other equity instrument holders			25			64			27			118			122
Common shareholders		$	1,839		$	2,125		$	1,956		$	6,071		$	6,247
Earnings per common share(in dollars)
Basic	19	$	1.51		$	1.74		$	1.60		$	4.96		$	5.18
Diluted	19		1.50			1.73			1.55			4.94			5.10
Dividends paid per common share(in dollars)			0.87			0.87			0.82			2.59			2.43

(1)

The amounts for the periods ended July 31, 2019 and April 30, 2019 have been prepared in accordance with IFRS 15; prior period amounts have not been restated (refer to Notes 3 and 4).

(2)

Includes interest income on financial assets measured at amortized cost and FVOCI, calculated using the effective interest method, of $8,348 for the three months ended July 31, 2019 (April 30, 2019 – $8,019; July 31, 2018 – $7,080) and for the nine months ended July 31, 2019 – $24,290 (July 31, 2018 – $20,200).

(3)

For the periods ended July 31, 2019 and April 30, 2019, includes Net gain/(loss) on divestitures. Refer to Note 22 for further details.

The accompanying notes are an integral part of these condensed interim consolidated financial statements.

Scotiabank Third Quarter Report 2019 45

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statement of Comprehensive Income


	For the three months ended									For the nine months ended
(Unaudited) ($ millions)	July 31 2019			April 30 2019			July 31 2018			July 31 2019			July 31 2018
Net income	$	1,984		$	2,259		$	1,939		$	6,490		$	6,453
Other comprehensive income (loss)
Items that will be reclassified subsequently to net income
Net change in unrealized foreign currency translation gains (losses):
Net unrealized foreign currency translation gains (losses)		(1,093	)		628			43			340			346
Net gains (losses) on hedges of net investments in foreign operations		220			(350	)		(203	)		(314	)		(227	)
Income tax expense (benefit):
Net unrealized foreign currency translation gains (losses)		(10	)		5			(5	)		2			(4	)
Net gains (losses) on hedges of net investments in foreign operations		58			(92	)		(56	)		(82	)		(60	)
		(921	)		365			(99	)		106			183
Net change in fair value due to change in debt instruments measured at fair value through other comprehensive income:
Net gains (losses) in fair value		412			247			(33	)		1,102			(449	)
Reclassification of net (gains) losses to net income		(366	)		(196	)		(10	)		(933	)		184
Income tax expense (benefit):
Net gains (losses) in fair value		104			51			(7	)		280			(107	)
Reclassification of net (gains) losses to net income		(99	)		(39	)		(2	)		(248	)		46
		41			39			(34	)		137			(204	)
Net change in gains (losses) on derivative instruments designated as cash flow hedges:
Net gains (losses) on derivative instruments designated as cash flow hedges		(842	)		(136	)		(801	)		(257	)		(323	)
Reclassification of net (gains) losses to net income		1,324			127			643			1,077			(26	)
Income tax expense (benefit):
Net gains (losses) on derivative instruments designated as cash flow hedges		(223	)		(37	)		(212	)		(69	)		(84	)
Reclassification of net (gains) losses to net income		349			34			171			282			(7	)
		356			(6	)		(117	)		607			(258	)
Other comprehensive income (loss) from investments in associates		25			38			(3	)		82			40
Items that will not be reclassified subsequently to net income
Net change in remeasurement of employee benefit plan asset and liability:
Actuarial gains (losses) on employee benefit plans		(475	)		(236	)		212			(1,171	)		315
Income tax expense (benefit)		(130	)		(54	)		56			(303	)		88
		(345	)		(182	)		156			(868	)		227
Net change in fair value due to change in equity instruments designated at fair value through other comprehensive income:
Net gains (losses) in fair value		35			19			29			85			99
Income tax expense (benefit)		8			4			7			20			21
		27			15			22			65			78
Net change in fair value due to change in own credit risk on financial liabilities designated under the fair value option:
Change in fair value due to change in own credit risk on financial liabilities designated under the fair value option		6			(43	)		30			(7	)		16
Income tax expense (benefit)		2			(12	)		9			(2	)		5
		4			(31	)		21			(5	)		11
Other comprehensive income (loss) from investments in associates		–			–			–			(3	)		(7	)
Other comprehensive income (loss)		(813	)		238			(54	)		121			70
Comprehensive income (loss)	$	1,171		$	2,497		$	1,885		$	6,611		$	6,523
Comprehensive income (loss) attributable tonon-controlling interests		(44	)		59			(68	)		227			136
Comprehensive income (loss) attributable to equity holders of the Bank		1,215			2,438			1,953			6,384			6,387
Preferred shareholders and other equity instrument holders		25			64			27			118			122
Common shareholders	$	1,190		$	2,374		$	1,926		$	6,266		$	6,265

The accompanying notes are an integral part of these condensed interim consolidated financial statements.

46 Scotiabank Third Quarter Report 2019

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statement of Changes in Equity


							Accumulated other comprehensive income (loss)
(Unaudited) ($ millions)	Common shares			Retained earnings⁽¹⁾			Foreign currency translation		Available- for-sale securities		Debt instruments FVOCI			Equity instruments FVOCI			Cash flow hedges			Other⁽²⁾			Other reserves			Total common equity			Preferred shares and other equity instruments			Total attributable to equity holders			Non- controlling interests in subsidiaries			Total
Balance as at October 31, 2018	$	18,234		$	41,414		$	1,441	$	–	$	(68	)	$	(126	)	$	(121	)	$	(134	)	$	404		$	61,044		$	4,184		$	65,228		$	2,452		$	67,680
Cumulative effect of adopting IFRS 15⁽³⁾		–			(58	)		–		–		–			–			–			–			–			(58	)		–			(58	)		–			(58	)
Balance as at November 1, 2018	$	18,234		$	41,356		$	1,441	$	–	$	(68	)	$	(126	)	$	(121	)	$	(134	)	$	404		$	60,986		$	4,184		$	65,170		$	2,452		$	67,622
Net income		–			6,071			–		–		–			–			–			–			–			6,071			118			6,189			301			6,490
Other comprehensive income (loss)		–			–			164		–		137			41			654			(801	)		–			195			–			195			(74	)		121
Total comprehensive income	$	–		$	6,071		$	164	$	–	$	137		$	41		$	654		$	(801	)	$	–		$	6,266		$	118		$	6,384		$	227		$	6,611
Shares issued		211			–			–		–		–			–			–			–			(31	)		180			–			180			–			180
Shares repurchased/redeemed		(150	)		(569	)		–		–		–			–			–			–			–			(719	)		(300	)		(1,019	)		–			(1,019	)
Dividends and distributions paid to equity holders		–			(3,166	)		–		–		–			–			–			–			–			(3,166	)		(118	)		(3,284	)		(131	)		(3,415	)
Share-based payments⁽⁴⁾		–			–			–		–		–			–			–			–			6			6			–			6			–			6
Other		–			(10	)		–		–		–			–			–			–			(9	)		(19	)		–			(19	)		165	⁽⁵⁾		146
Balance as at July 31, 2019	$	18,295		$	43,682		$	1,605	$	–	$	69		$	(85	)	$	533		$	(935	)	$	370		$	63,534		$	3,884		$	67,418		$	2,713		$	70,131

Balance as at October 31, 2017	$	15,644		$	38,117		$	1,861	$	(46)	$	–		$	–		$	235		$	(473	)	$	116		$	55,454		$	4,579		$	60,033		$	1,592		$	61,625
Cumulative effect of adopting IFRS 9		–			(564	)		–		46		184			(179	)		–			–			–			(513	)		–			(513	)		(97	)		(610	)
Balance as at November 1, 2017	$	15,644		$	37,553		$	1,861	$	–	$	184		$	(179	)	$	235		$	(473	)	$	116		$	54,941		$	4,579		$	59,520		$	1,495		$	61,015
Net income		–			6,247			–		–		–			–			–			–			–			6,247			122			6,369			84			6,453
Other comprehensive income (loss)		–			–			146		–		(204	)		69			(257	)		264			–			18			–			18			52			70
Total comprehensive income	$	–		$	6,247		$	146	$	–	$	(204	)	$	69		$	(257	)	$	264		$	–		$	6,265		$	122		$	6,387		$	136		$	6,523
Shares issued		2,692			–			–		–		–			–			–			–			(17	)		2,675			–			2,675			–			2,675
Shares repurchased/redeemed		(44	)		(208	)		–		–		–			–			–			–			–			(252	)		(345	)		(597	)		–			(597	)
Dividends and distributions paid to equity holders		–			(2,942	)		–		–		–			–			–			–			–			(2,942	)		(122	)		(3,064	)		(80	)		(3,144	)
Share-based payments⁽⁴⁾		–			–			–		–		–			–			–			–			6			6			–			6			–			6
Other		–			2			–		–		–			–			–			–			57			59			–			59			797	⁽⁵⁾		856
Balance as at July 31, 2018	$	18,292		$	40,652		$	2,007	$	–	$	(20	)	$	(110	)	$	(22	)	$	(209	)	$	162		$	60,752		$	4,234		$	64,986		$	2,348		$	67,334

(1)

Includes undistributed retained earnings of $62 (July 31, 2018 – $60) related to a foreign associated corporation, which is subject to local regulatory restriction.

(2)

Includes Share from associates, Employee benefits and Own credit risk.

(3)

Refer to Note 4 for a summary of the adjustments on initial application of IFRS 15.

(4)

Represents amounts on account of share-based payments (refer to Note 14).

(5)

Includes changes tonon-controlling interests arising from business combinations and related transactions.

The accompanying notes are an integral part of these condensed interim consolidated financial statements.

Scotiabank Third Quarter Report 2019 47

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statement of Cash Flows


(Unaudited) ($ millions)		For the three months ended						For the nine months ended
Sources (uses) of cash flows	July 31 2019			July 31 2018			July 31 2019			July 31 2018
Cash flows from operating activities
Net income	$	1,984		$	1,939		$	6,490		$	6,453
Adjustment for:
Net interest income		(4,374	)		(4,085	)		(12,841	)		(11,971	)
Depreciation and amortization		276			212			782			615
Provision for credit losses		713			943			2,274			2,021
Equity-settled share-based payment expense		1			1			6			6
Net gain on sale of investment securities		(118	)		(35	)		(226	)		(136	)
Net loss on divestitures⁽¹⁾		302			–			129			–
Net income from investments in associated corporations		(190	)		(126	)		(489	)		(390	)
Income tax expense		753			529			1,876			1,859
Changes in operating assets and liabilities:
Trading assets		(16,188	)		7,561			(31,620	)		7,510
Securities purchased under resale agreements and securities borrowed		4,582			(57	)		(15,963	)		11,307
Loans		(11,567	)		(8,680	)		(36,406	)		(23,686	)
Deposits		18,271			(1,984	)		45,677			14,861
Obligations related to securities sold short		(3,558	)		(1,871	)		(6,077	)		(3,976	)
Obligations related to securities sold under repurchase agreements and securities lent		(1,776	)		(9,837	)		19,495			(14,851	)
Net derivative financial instruments		(1,394	)		1,018			462			779
Other, net⁽¹⁾		1,434			(114	)		(630	)		(1,183	)
Dividends received		137			83			355			242
Interest received		8,594			7,015			24,409			20,025
Interest paid		(4,245	)		(2,874	)		(11,520	)		(8,200	)
Income tax paid⁽¹⁾		(674	)		(598	)		(2,273	)		(1,779	)
Net cash from/(used in) operating activities⁽¹⁾		(7,037	)		(10,960	)		(16,090	)		(494	)
Cash flows from investing activities
Interest-bearing deposits with financial institutions		5,014			11,032			19,163			8,498
Purchase of investment securities		(22,724	)		(20,824	)		(67,536	)		(66,526	)
Proceeds from sale and maturity of investment securities		24,735			23,072			65,110			63,231
Acquisition/sale of subsidiaries, associated corporations or business units, net of cash acquired		–			(2,405	)		(36	)		(2,405	)
Property and equipment, net of disposals		66			(106	)		(38	)		(221	)
Other, net		(417	)		(89	)		(431	)		(505	)
Net cash from/(used in) investing activities		6,674			10,680			16,232			2,072
Cash flows from financing activities
Proceeds from issue of subordinated debentures		1,500			–			3,250			–
Redemption/repayment of subordinated debentures		(4	)		–			(18	)		(233	)
Redemption of preferred shares		–			–			(300	)		(345	)
Proceeds from common shares issued		53			1,718			211			1,814
Common shares purchased for cancellation		(196	)		(74	)		(719	)		(252	)
Cash dividends and distributions paid		(1,087	)		(1,038	)		(3,284	)		(3,064	)
Distributions tonon-controlling interests		(39	)		(23	)		(131	)		(80	)
Other, net⁽¹⁾		1,178			291			2,336			692
Net cash from/(used in) financing activities⁽¹⁾		1,405			874			1,345			(1,468	)
Effect of exchange rate changes on cash and cash equivalents		(154	)		18			64			63
Net change in cash and cash equivalents		888			612			1,551			173
Cash and cash equivalents at beginning of period⁽²⁾		9,660			7,386			8,997			7,825
Cash and cash equivalents at end of period⁽²⁾	$	10,548		$	7,998		$	10,548		$	7,998

(1)

Prior periods amounts have been restated to conform with current period presentation.

(2)

Represents cash andnon-interest-bearing deposits with financial institutions (refer to Note 6).

The accompanying notes are an integral part of these condensed interim consolidated financial statements.

48 Scotiabank Third Quarter Report 2019

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)

1.	Reporting entity

The Bank of Nova Scotia (the Bank) is a chartered bank under the Bank Act (Canada) (the Bank Act). The Bank is a Schedule I Bank under the Bank Act and is regulated by the Office of the Superintendent of Financial Institutions (OSFI). The Bank is a global financial services provider offering a diverse range of products and services, including personal, commercial, corporate and investment banking. The head office of the Bank is located at 1709 Hollis Street, Halifax, Nova Scotia, Canada and its executive offices are at Scotia Plaza, 44 King Street West, Toronto, Canada. The common shares of the Bank are listed on the Toronto Stock Exchange and the New York Stock Exchange.

2.	Basis of preparation

Statement of compliance

These condensed interim consolidated financial statements of the Bank have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and accounting requirements of OSFI in accordance with Section 308 of the Bank Act. Section 308 states that except as otherwise specified by OSFI, the financial statements are to be prepared in accordance with IFRS.

These condensed interim consolidated financial statements were prepared in accordance with International Accounting Standard 34,Interim Financial Reporting (IAS 34) and do not include all of the information required for full annual financial statements. These condensed interim consolidated financial statements should be read in conjunction with the Bank’s annual audited consolidated financial statements for the year ended October 31, 2018.

The condensed interim consolidated financial statements for the quarter ended July 31, 2019 have been approved by the Board of Directors for issue on August 27, 2019.

Certain comparative amounts have been restated to conform with the basis of presentation in the current period.

Basis of measurement

The condensed interim consolidated financial statements have been prepared on the historical cost basis except for the following material items that are measured at fair value in the Consolidated Statement of Financial Position:

•

Financial assets and liabilities measured at fair value through profit or loss

•

Financial assets and liabilities designated at fair value through profit or loss

•

Derivative financial instruments

•

Equity instruments designated at fair value through other comprehensive income

•

Debt instruments measured at fair value through other comprehensive income

Functional and presentation currency

These condensed interim consolidated financial statements are presented in Canadian dollars, which is the Bank’s functional currency. All financial information presented in Canadian dollars has been rounded to the nearest million unless otherwise stated.

Use of estimates and judgments

The preparation of financial statements, in conformity with IFRS, requires management to make estimates, apply judgments and make assumptions that affect the reported amount of assets and liabilities at the date of the condensed interim consolidated financial statements, and income and expenses during the reporting period. Estimates made by management are based on historical experience and other assumptions that are believed to be reasonable. Key areas where management has made difficult, complex or subjective judgments, often as a result of matters that are inherently uncertain, include those relating to the allowance for credit losses, the fair value of financial instruments (including derivatives), corporate income taxes, employee benefits, the fair value of all identifiable assets and liabilities as a result of business combinations, impairment ofnon-financial assets and derecognition of financial assets and liabilities. While management makes its best estimates and assumptions, actual results could differ from these estimates and assumptions.

3.	Significant accounting policies

These condensed interim consolidated financial statements should be read in conjunction with the Bank’s audited consolidated financial statements for the year ended October 31, 2018.

The significant accounting policies used in the preparation of these condensed interim consolidated financial statements are consistent with those used in the Bank’s audited consolidated financial statements for the year ended October 31, 2018, as described in Note 3 of the Bank’s consolidated financial statements in the 2018 Annual Report, except for changes to the accounting for revenue from contracts with customers as a result of adopting IFRS 15,Revenue from Contracts with Customers(IFRS 15). The significant accounting policies below have been updated for those items scoped in line with IFRS 15.

Card revenues include interchange fees, annual fees and other card related fees. Interchange fees are recognized in connection with the customer’s purchase of goods and services and are calculated as a percentage of the transaction amount as established by the payment network. Interchange fees are recognized on the transaction date. The Bank presents interchange fees net of network association costs incurred and reward costs for associated cards where the customer has the option to redeem points for statement credits or the Bank is acting as an agent. Annual fees are recognized in income over 12 months. Other card fees are transaction-based and are recognized on the transaction date.

Banking services fees consist of fees earned on personal, business and government deposit activities. Personal deposit-related fees consist of account maintenance and various transaction-based services. Business and government deposit-related fees consist of commercial deposit and treasury management services and other cash management services. These fees are recognized on the transaction date or over time as services are provided to the customer.

Scotiabank Third Quarter Report 2019 49

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Mutual funds fees include management and administration fees which are earned in our wealth management business. These fees are calculated as a percentage of the fund’s net asset value and recognized as the service is provided. From time to time, the Bank may also recognize performance fees from some funds. These fees are only recognized to the extent that it is highly probable that a significant reversal of revenue will not occur.

Brokerage fees relate to fees earned for providing full-service and discount brokerage services to clients. These fees are contractually agreed and can be asset-based or linked to individual transactions. Such fees are recognized as the service is provided to clients or on the trade date.

Investment management and trust fees include administration, trust services and other investment services provided to clients. These fees are contractually agreed and can be linked to portfolio values or individual transactions. Such fees are recognized as the service is provided to clients to the extent that it is highly probable that a significant reversal of revenue will not occur.

Underwriting and other advisory fees relate to fees earned for services provided to clients in relation to placement of debt and equities. Such fees also include services to clients for mergers, acquisitions, financial restructurings and other corporate finance activities. These fees are recognized when the service has been performed and/or contractual milestones are completed. Performance and completion fees are variable consideration and generally contingent on the successful completion of a transaction.

Other fees and commissions include commissions earned on the sale of third party insurance products to the Bank’s customers. Such fees and commissions are recognized when the performance obligation is completed.

4.	Transition to IFRS 15

On November 1, 2018, the Bank adopted IFRS 15,Revenue from Contracts with Customers, which specifies how and when revenue is recognized, but does not impact income recognition related to financial instruments in scope of IFRS 9. The new standard replaces the previous standard IAS 18Revenue and provides a single, principles-based five-step model to be applied to all contracts with customers and to determine whether the performance obligation is to provide the service itself (i.e., act as a principal) or to arrange another party to provide the service (i.e., act as an agent).

The Bank adopted IFRS 15 using the modified retrospective approach and accordingly, comparative periods have not been restated. The Bank recorded a cumulative-effect adjustment to decrease opening retained earnings on November 1, 2018 of $58 million (net of tax). This adjustment relates to certain costs that are no longer eligible for deferral under the new standard and the remeasurement of certain liabilities at fulfilment cost. For the nine months ended July 31, 2019, the impact of IFRS 15 was a decrease innon-interest income andnon-interest expenses of approximately $155 million (six months ended April 30, 2019 – $105 million), representing certain loyalty rewards previously recorded innon-interest expenses and now being recorded as a reduction tonon-interest income.

5.	Future accounting developments

IFRS 16 –Leases

In January 2016, the IASB issued IFRS 16Leases (“IFRS 16”), which will replace IAS 17Leases (IAS 17), requiring a lessee to recognize an asset for the right to use the leased item and a liability for the present value of its future lease payments. IFRS 16 will result in all operating leases being recorded on the Bank’s balance sheet as aright-of-use (“ROU”) asset with a corresponding lease liability. The Bank will also recognize amortization expense on the ROU asset and interest expense on the lease liability in the statement of income. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17.

IFRS 17 –Insurance Contracts

6.	Cash and deposits with financial institutions


	As at
($ millions)	July 31 2019			April 30 2019			October 31 2018
Cash andnon-interest-bearing deposits with financial institutions	$	10,548		$	9,660		$	8,997
Interest-bearing deposits with financial institutions		34,714			40,461			53,272
Total	$	45,262	⁽¹⁾	$	50,121	⁽¹⁾	$	62,269	⁽¹⁾

(1)

Net of impairment allowances of $3 (April 30, 2019 – $4; October 31, 2018 – $3).

The Bank is required to maintain balances with central banks, other regulatory authorities and certain counterparties and these amounted to $10,396 million (April 30, 2019 – $9,755 million; October 31, 2018 – $8,886 million) and are included above.

50 Scotiabank Third Quarter Report 2019

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

7.	Investment securities

The following table presents the carrying amounts of the Bank’s investment securities per measurement category.


	As at
($ millions)	July 31 2019		April 30 2019		October 31 2018
Debt investment securities measured at FVOCI	$	56,197	$	59,159	$	55,843
Debt investment securities measured at amortized cost		24,226		23,932		20,743
Equity investment securities designated at FVOCI		1,559		1,500		1,305
Equity investment securities measured at FVTPL		610		555		505
Total investment securities	$	82,592	$	85,146	$	78,396

(a)

Debt investment securities measured at fair value through other comprehensive income (FVOCI)


As at July 31, 2019 ($ millions)	Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Canadian federal government issued or guaranteed debt	$	10,690	$	198	$	12	$	10,876
Canadian provincial and municipal debt		2,894		31		7		2,918
U.S. treasury and other U.S. agency debt		17,880		302		8		18,174
Other foreign government debt		19,950		124		17		20,057
Other debt		4,156		26		10		4,172
Total	$	55,570	$	681	$	54	$	56,197

As at April 30, 2019 ($ millions)	Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Canadian federal government issued or guaranteed debt	$	8,774	$	147	$	6	$	8,915
Canadian provincial and municipal debt		2,995		20		11		3,004
U.S. treasury and other U.S. agency debt		22,546		196		37		22,705
Other foreign government debt		18,806		72		32		18,846
Other debt		5,694		16		21		5,689
Total	$	58,815	$	451	$	107	$	59,159


As at October 31, 2018 ($ millions)	Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Canadian federal government issued or guaranteed debt	$	8,903	$	38	$	50	$	8,891
Canadian provincial and municipal debt		4,403		3		54		4,352
U.S. treasury and other U.S. agency debt		19,298		6		163		19,141
Other foreign government debt		20,022		49		81		19,990
Other debt		3,503		6		40		3,469
Total	$	56,129	$	102	$	388	$	55,843

(b)

Debt investment securities measured at amortized cost


	As at
	July 31, 2019				April 30, 2019				October 31, 2018
($ millions)	Fair value		Carrying value⁽¹⁾		Fair value		Carrying value⁽¹⁾		Fair value		Carrying value⁽¹⁾
Canadian federal and provincial government issued or guaranteed debt	$	5,278	$	5,317	$	5,806	$	5,859	$	6,530	$	6,681
U.S. treasury and other U.S. agency debt		3,726		3,766		4,002		4,074		4,321		4,462
Other foreign government debt		2,487		2,488		2,990		3,006		3,086		3,131
Corporate debt		12,827		12,655		11,022		10,993		6,379		6,469
Total	$	24,318	$	24,226	$	23,820	$	23,932	$	20,316	$	20,743

(1)

Balances are net of impairment allowances of $1 (April 30, 2019 – nil; October 31, 2018 – $1).

Scotiabank Third Quarter Report 2019 51

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(c)

Equity investment securities designated as at fair value through other comprehensive income (FVOCI)

The Bank has designated certain instruments, shown in the following table, as equity securities FVOCI, as these investments are expected to be held for the long-term for strategic purposes.


As at July 31, 2019 ($ millions)	Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Preferred equity instruments	$	145	$	2	$	50	$	97
Common shares		1,280		193		11		1,462
Total	$	1,425	$	195	$	61	$	1,559


As at April 30, 2019 ($ millions)	Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Preferred equity instruments	$	145	$	2	$	48	$	99
Common shares		1,243		172		14		1,401
Total	$	1,388	$	174	$	62	$	1,500


As at October 31, 2018 ($ millions)	Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Preferred equity instruments	$	334	$	–	$	54	$	280
Common shares		937		126		38		1,025
Total	$	1,271	$	126	$	92	$	1,305

8.	Loans, impaired loans and allowance for credit losses

(a)

Loans at amortized cost

As at

July 31, 2019

($ millions)

Gross
carrying
amount

Allowance for
credit losses

Net
carrying
amount

Residential mortgages

265,170

721

264,449

Personal loans

98,679

2,098

96,581

Credit cards

17,933

1,293

16,640

Business and government

212,655

1,082

211,573

Total

594,437

5,194

589,243


	As at
	April 30, 2019						October 31, 2018
($ millions)	Gross carrying amount		Allowance for credit losses		Net carrying amount		Gross carrying amount		Allowance for credit losses		Net carrying amount
Residential mortgages	$	260,586	$	734	$	259,852	$	253,357	$	678	$	252,679
Personal loans		97,874		2,117		95,757		96,019		2,109		93,910
Credit cards		17,730		1,360		16,370		16,485		1,213		15,272
Business and government		212,920		1,084		211,836		191,038		1,065		189,973
Total	$	589,110	$	5,295	$	583,815	$	556,899	$	5,065	$	551,834

52 Scotiabank Third Quarter Report 2019

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(b)

Impaired loans⁽¹⁾⁽²⁾

As at

July 31, 2019

($ millions)

Gross
impaired
loans

Allowance for
credit losses

Net

Residential mortgages

1,910

364

1,546

Personal loans

1,091

628

463

Credit cards

–

Business and government

2,228

678

1,550

Total

5,229

1,670

3,559

By geography:

Canada

1,078

373

705

United States

Mexico

479

190

289

Peru

638

340

298

Chile

816

192

624

Colombia

546

152

394

Other international

1,575

412

1,163

Total

5,229

1,670

3,559


	As at
	April 30, 2019						October 31, 2018
($ millions)	Gross impaired loans		Allowance for credit losses		Net		Gross impaired loans		Allowance for credit losses		Net
Residential mortgages	$	1,922	$	368	$	1,554	$	1,797	$	360	$	1,437
Personal loans		1,131		627		504		1,069		644		425
Credit cards		–		–		–		–		–		–
Business and government		2,311		674		1,637		2,264		673		1,591
Total	$	5,364	$	1,669	$	3,695	$	5,130	$	1,677	$	3,453
By geography:
Canada	$	1,078	$	371	$	707	$	999	$	381	$	618
United States		129		17		112		80		25		55
Mexico		463		188		275		359		164		195
Peru		639		325		314		581		317		264
Chile		842		172		670		753		158		595
Colombia		578		154		424		619		159		460
Other international		1,635		442		1,193		1,739		473		1,266
Total	$	5,364	$	1,669	$	3,695	$	5,130	$	1,677	$	3,453

(1)

Interest income recognized on impaired loans during the three months ended July 31, 2019 was $13 (April 30, 2019 – $12; October 31, 2018 – $12).

(2)

Additional interest income of approximately $98 would have been recorded if the above loans had not been classified as impaired (April 30, 2019 – $100; October 31, 2018 – $93).

(c)

Allowance for credit losses

Key inputs and assumptions

The Bank’s allowance calculations are outputs of complex models with a number of underlying assumptions regarding the choice of variable inputs. Some of the key drivers include the following:

•

Changes in risk ratings of the borrower or instrument reflecting changes in their credit quality;

•

Changes in the volumes of transactions;

•

Changes in the forward-looking macroeconomic environment reflected in the variables used in the models such as GDP growth, unemployment rates, commodity prices, and house price indices, which are most closely related with credit losses in the relevant portfolio;

•

Changes in macroeconomic scenarios and the probability weights assigned to each scenario; and

•

Borrower migration between the three stages which can result from changes to any of the above inputs and assumptions.

Scotiabank Third Quarter Report 2019 53

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


Allowance for credit losses
($ millions)	Balance as at October 31 2018		Provision for credit losses		Net write-offs			Other, including foreign currency adjustment		Balance as at July 31 2019
Residential mortgages	$	678	$	83	$	(51	)	$	11	$	721
Personal loans		2,109		1,109		(1,160	)		40		2,098
Credit cards		1,213		887		(815	)		8		1,293
Business and government		1,147		195		(167	)		(24)		1,151
	$	5,147	$	2,274	$	(2,193	)	$	35	$	5,263
Presented as:
Allowance for credit losses on loans	$	5,065								$	5,194
Allowance for credit losses on acceptances⁽¹⁾		8									8
Allowance for credit losses onoff-balance sheet exposures⁽²⁾		74									61

(1)

Allowance for credit losses on acceptances are recorded against the financial asset in the Consolidated Statement of Financial Position.

(2)

Allowance for credit losses on off-balance sheet exposures is recorded in other liabilities in the Consolidated Statement of Financial Position.


($ millions)	Balance as at October 31 2017		Provision for credit losses		Net write-offs			Other, including foreign currency adjustment			Balance as at July 31 2018
Residential mortgages	$	717	$	102	$	(60	)	$	4		$	763
Personal loans		1,879		1,077		(861	)		41			2,136
Credit cards		1,163		671		(624	)		49			1,259
Business and government		1,261		181		(171	)		(21	)		1,250
	$	5,020	$	2,031	$	(1,716	)	$	73		$	5,408
Presented as:
Allowance for credit losses on loans	$	4,920									$	5,323
Allowance for credit losses on acceptances⁽¹⁾		16										8
Allowance for credit losses onoff-balance sheet exposures⁽²⁾		84										77

(1)

Allowance for credit losses on acceptances are recorded against the financial asset in the Consolidated Statement of Financial Position.

(2)

Allowance for credit losses on off-balance sheet exposures is recorded in other liabilities in the Consolidated Statement of Financial Position.

Allowance for credit losses on loans

As at July 31, 2019

($ millions)

Stage 1

Stage 2

Stage 3

Total

Residential mortgages

127

230

364

721

Personal loans

602

868

628

2,098

Credit cards

443

850

–

1,293

Business and government

159

245

678

1,082

Total⁽¹⁾

1,331

2,193

1,670

5,194

(1)

Excludes allowance for credit losses for other financial assets including acceptances, investment securities, deposits with banks andoff-balance sheet credit risks amounted to $79.


	As at October 31, 2018
($ millions)	Stage 1		Stage 2		Stage 3		Total
Residential mortgages	$	112	$	206	$	360	$	678
Personal loans		578		887		644		2,109
Credit cards		401		812		–		1,213
Business and government		132		260		673		1,065
Total⁽¹⁾	$	1,223	$	2,165	$	1,677	$	5,065

(1)

Excludes allowance for credit losses for other financial assets including acceptances, investment securities, deposits with banks andoff-balance sheet credit risks amounted to $89.


	As at July 31, 2018
($ millions)	Stage 1		Stage 2		Stage 3		Total
Residential mortgages	$	156	$	193	$	414	$	763
Personal loans		712		816		608		2,136
Credit cards		471		788		–		1,259
Business and government		154		258		753		1,165
Total⁽¹⁾	$	1,493	$	2,055	$	1,775	$	5,323

(1)

Excludes allowance for credit losses for other financial assets including acceptances, investment securities, deposits with banks andoff-balance sheet credit risks amounted to $93.

54 Scotiabank Third Quarter Report 2019

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the changes to the allowance for credit losses on loans.


	As at and for the three months ended																								As at and for the nine months ended
	July 31, 2019												April 30, 2019												July 31, 2019
($ millions)	Stage 1			Stage 2			Stage 3			Total			Stage 1			Stage 2			Stage 3			Total			Stage 1			Stage 2			Stage 3			Total
Residential mortgages
Balance at beginning of period	$	129		$	237		$	368		$	734		$	121		$	226		$	362		$	709		$	112		$	206		$	360		$	678
Provision for credit losses
Remeasurement⁽¹⁾		(25	)		1			36			12			(17	)		7			27			17			(66	)		16			92			42
Newly originated or purchased financial assets		14			–			–			14			12			–			–			12			49			–			–			49
Derecognition of financial assets and maturities		–			(2	)		–			(2	)		–			(2	)		–			(2	)		(1	)		(7	)		–			(8	)
Changes in models and methodologies		–			–			–			–			–	��		–			–			–			–			–			–			–
Transfer to (from):
Stage 1		13			(13	)		–			–			15			(13	)		(2	)		–			40			(37	)		(3	)		–
Stage 2		(3	)		25			(22	)		–			(3	)		27			(24	)		–			(11	)		80			(69	)		–
Stage 3		–			(11	)		11			–			–			(10	)		10			–			–			(30	)		30			–
Gross write-offs		–			–			(27	)		(27	)		–			–			(23	)		(23	)		–			–			(70	)		(70	)
Recoveries		–			–			6			6			–			–			11			11			–			–			19			19
Foreign exchange and other movements		(1	)		(7	)		(8	)		(16	)		1			2			7			10			4			2			5			11
Balance at end of period⁽²⁾	$	127		$	230		$	364		$	721		$	129		$	237		$	368		$	734		$	127		$	230		$	364		$	721
Personal loans
Balance at beginning of period	$	609		$	881		$	627		$	2,117		$	596		$	875		$	640		$	2,111		$	578		$	887		$	644		$	2,109
Provision for credit losses
Remeasurement⁽¹⁾		(157	)		130			342			315			(155	)		138			300			283			(464	)		408			946			890
Newly originated or purchased financial assets		112			–			–			112			123			–			–			123			353			–			–			353
Derecognition of financial assets and maturities		(21	)		(26	)		–			(47	)		(20	)		(23	)		–			(43	)		(60	)		(74	)		–			(134	)
Changes in models and methodologies		–			–			–			–			–			–			–			–			–			–			–			–
Transfer to (from):
Stage 1		121			(118	)		(3	)		–			110			(107	)		(3	)		–			339			(332	)		(7	)		–
Stage 2		(50	)		69			(19	)		–			(48	)		70			(22	)		–			(144	)		205			(61	)		–
Stage 3		(1	)		(83	)		84			–			(1	)		(79	)		80			–			(3	)		(241	)		244			–
Gross write-offs		–			–			(459	)		(459	)		–			–			(438	)		(438	)		–			–			(1,377	)		(1,377	)
Recoveries		–			–			75			75			–			–			70			70			–			–			217			217
Foreign exchange and other movements		(11	)		15			(19	)		(15	)		4			7			–			11			3			15			22			40
Balance at end of period⁽²⁾	$	602		$	868		$	628		$	2,098		$	609		$	881		$	627		$	2,117		$	602		$	868		$	628		$	2,098
Credit cards
Balance at beginning of period	$	458		$	902		$	–		$	1,360		$	410		$	802		$	–		$	1,212		$	401		$	812		$	–		$	1,213
Provision for credit losses
Remeasurement⁽¹⁾		(66	)		84			205			223			(141	)		220			204			283			(275	)		412			579			716
Newly originated or purchased financial assets		48			–			–			48			171			–			–			171			265			–			–			265
Derecognition of financial assets and maturities		(15	)		(17	)		–			(32	)		(15	)		(16	)		–			(31	)		(44	)		(50	)		–			(94	)
Changes in models and methodologies		–			–			–			–			–			–			–			–			–			–			–			–
Transfer to (from):
Stage 1		62			(62	)		–			–			63			(63	)		–			–			194			(194	)		–			–
Stage 2		(35	)		35			–			–			(32	)		32			–			–			(99	)		99			–			–
Stage 3		–			(70	)		70			–			–			(71	)		71			–			–			(211	)		211			–
Gross write-offs		–			–			(334	)		(334	)		–			–			(335	)		(335	)		–			–			(981	)		(981	)
Recoveries		–			–			56			56			–			–			55			55			–			–			166			166
Foreign exchange and other movements		(9	)		(22	)		3			(28	)		2			(2	)		5			5			1			(18	)		25			8
Balance at end of period⁽²⁾	$	443		$	850		$	–		$	1,293		$	458		$	902		$	–		$	1,360		$	443		$	850		$	–		$	1,293

Scotiabank Third Quarter Report 2019 55

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


	As at and for the three months ended																								As at and for the nine months ended
	July 31, 2019												April 30, 2019												July 31, 2019
($ millions)	Stage 1			Stage 2			Stage 3			Total			Stage 1			Stage 2			Stage 3			Total			Stage 1			Stage 2			Stage 3			Total
Business and government
Balance at beginning of period	$	198		$	274		$	675		$	1,147		$	197		$	272		$	679		$	1,148		$	173		$	291		$	675		$	1,139
Provision for credit losses
Remeasurement⁽¹⁾		(5	)		4			75			74			(8	)		13			64			69			(30	)		30			208			208
Newly originated or purchased financial assets		50			–			–			50			41			–			–			41			130			–			–			130
Derecognition of financial assets and maturities		(40	)		(6	)		(3	)		(49	)		(38	)		(4	)		(8	)		(50	)		(105	)		(18	)		(18	)		(141	)
Changes in models and methodologies		(2	)		(2	)		–			(4	)		–			–			–			–			(2	)		(2	)		–			(4	)
Transfer to (from):
Stage 1		9			(9	)		–			–			7			(7	)		–			–			47			(47	)		–			–
Stage 2		(3	)		4			(1	)		–			(3	)		3			–			–			(11	)		14			(3	)		–
Stage 3		–			(1	)		1			–			–			(3	)		3			–			–			(6	)		6			–
Gross write-offs		–			–			(70	)		(70	)		–			–			(67	)		(67	)		–			–			(202	)		(202	)
Recoveries		–			–			8			8			–			–			11			11			–			–			35			35
Foreign exchange and other movements		(4	)		(2	)		(7	)		(13	)		2			–			(7	)		(5	)		1			–			(23	)		(22	)
Balance at end of period includingoff-balance sheet exposures⁽²⁾	$	203		$	262		$	678		$	1,143		$	198		$	274		$	675		$	1,147		$	203		$	262		$	678		$	1,143
Less: Allowance for credits losses onoff-balance sheet exposures⁽²⁾		(44	)		(17	)		–			(61	)		(41	)		(21	)		(1	)		(63	)		(44	)		(17	)		–			(61	)
Balance at end of period⁽²⁾	$	159		$	245		$	678		$	1,082		$	157		$	253		$	674		$	1,084		$	159		$	245		$	678		$	1,082

(1)

Includes credit risk changes as a result of significant increases in credit risk, changes in credit risk that did not result in a transfer between stages, changes in model inputs and assumptions and changes due to drawdowns of undrawn commitments.

(2)

Interest income on impaired loans for residential mortgages, personal and credit cards, and business and government loans totaled $98 (April 30, 2019 – $100).

(3)

Includes allowance for credit losses or purchased or originated credit-impaired loans. Refer to Note 8(f).

(d)	Carrying value of exposures by risk rating


Residential mortgages	As at July 31, 2019								As at October 31, 2018
Category of PD grades($ millions)	Stage 1		Stage 2		Stage 3⁽¹⁾		Total		Stage 1		Stage 2		Stage 3⁽¹⁾		Total
Very low	$	150,010	$	442	$	–	$	150,452	$	146,461	$	307	$	–	$	146,768
Low		59,090		526		–		59,616		58,154		378		–		58,532
Medium		13,893		1,109		–		15,002		11,689		972		–		12,661
High		1,639		3,211		–		4,850		1,615		3,515		–		5,130
Very high		13		1,766		–		1,779		25		1,779		–		1,804
Loans not graded⁽²⁾		27,684		3,877		–		31,561		23,139		3,526		–		26,665
Default		–		–		1,910		1,910		–		–		1,797		1,797
Total	$	252,329	$	10,931	$	1,910	$	265,170	$	241,083	$	10,477	$	1,797	$	253,357
Allowance for credit losses		127		230		364		721		112		206		360		678
Carrying value	$	252,202	$	10,701	$	1,546	$	264,449	$	240,971	$	10,271	$	1,437	$	252,679

(1)

Stage 3 includes purchased or originated credit impaired loans.

(2)

Portfolios where the customer account level ‘Probability of Default’ has not been determined have been included in the ‘Loans not graded’ category.


Personal loans	As at July 31, 2019								As at October 31, 2018
Category of PD grades($ millions)	Stage 1		Stage 2		Stage 3⁽¹⁾		Total		Stage 1		Stage 2		Stage 3⁽¹⁾		Total
Very low	$	30,218	$	112	$	–	$	30,330	$	30,660	$	66	$	–	$	30,726
Low		26,812		323		–		27,135		26,039		151		–		26,190
Medium		8,604		439		–		9,043		8,315		402		–		8,717
High		6,953		3,650		–		10,603		6,686		3,647		–		10,333
Very high		47		1,513		–		1,560		58		1,362		–		1,420
Loans not graded⁽²⁾		16,559		2,358		–		18,917		15,452		2,112		–		17,564
Default		–		–		1,091		1,091		–		–		1,069		1,069
Total	$	89,193	$	8,395	$	1,091	$	98,679	$	87,210	$	7,740	$	1,069	$	96,019
Allowance for credit losses		602		868		628		2,098		578		887		644		2,109
Carrying value	$	88,591	$	7,527	$	463	$	96,581	$	86,632	$	6,853	$	425	$	93,910

(1)

Stage 3 includes purchased or originated credit impaired loans.

(2)

Portfolios where the customer account level ‘Probability of Default’ has not been determined have been included in the ‘Loans not graded’ category.

56 Scotiabank Third Quarter Report 2019

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


Credit cards	As at July 31, 2019								As at October 31, 2018
Category of PD grades($ millions)	Stage 1		Stage 2		Stage 3		Total		Stage 1		Stage 2		Stage 3		Total
Very low	$	1,448	$	11	$	–	$	1,459	$	1,418	$	5	$	–	$	1,423
Low		2,516		21		–		2,537		2,436		14		–		2,450
Medium		3,536		58		–		3,594		3,358		71		–		3,429
High		3,267		1,542		–		4,809		2,929		1,455		–		4,384
Very high		41		766		–		807		37		697		–		734
Loans not graded⁽¹⁾		3,304		1,423		–		4,727		2,906		1,159		–		4,065
Default		–		–		–		–		–		–		–		–
Total	$	14,112	$	3,821	$	–	$	17,933	$	13,084	$	3,401	$	–	$	16,485
Allowance for credit losses		443		850		–		1,293		401		812		–		1,213
Carrying value	$	13,669	$	2,971	$	–	$	16,640	$	12,683	$	2,589	$	–	$	15,272

(1)

Portfolios where the customer account level ‘Probability of Default’ has not been determined have been included in the ‘Loans not graded’ category.

Undrawn loan commitments – Retail

As at July 31, 2019

As at October 31, 2018

Category of PD grades($ millions)

Stage 1

Stage 2

Stage 3

Total

Stage 1

Stage 2

Stage 3

Total

Very low

75,936

–

75,936

72,321

–

72,321

Low

17,446

–

17,447

16,531

–

16,533

Medium

6,532

–

6,623

6,029

–

6,108

High

2,879

722

–

3,601

2,631

670

–

3,301

Very high

321

–

345

367

–

393

Loans not graded⁽¹⁾

11,356

2,706

–

14,062

14,774

3,364

–

18,138

Default

–

Carrying value

114,173

3,841

–

118,014

112,312

4,482

–

116,794

(1)

Portfolios where the customer account level ‘Probability of Default’ has not been determined have been included in the ‘Loans not graded’ category.


Business and government loans	As at July 31, 2019								As at October 31, 2018
Grade ($ millions)	Stage 1		Stage 2		Stage 3⁽¹⁾		Total		Stage 1		Stage 2		Stage 3⁽¹⁾		Total
Investment grade	$	102,927	$	1,136	$	–	$	104,063	$	87,047	$	3,770	$	–	$	90,817
Non-investment grade		94,904		6,474		–		101,378		83,730		9,706		–		93,436
Watch list		71		3,000		–		3,071		130		2,689		–		2,819
Loans not graded⁽²⁾		1,907		8		–		1,915		1,050		652		–		1,702
Default		–		–		2,228		2,228		–		–		2,264		2,264
Total	$	199,809	$	10,618	$	2,228	$	212,655	$	171,957	$	16,817	$	2,264	$	191,038
Allowance for credit losses		159		245		678		1,082		132		260		673		1,065
Carrying value	$	199,650	$	10,373	$	1,550	$	211,573	$	171,825	$	16,557	$	1,591	$	189,973

(1)

Stage 3 includes purchased or originated credit impaired loans.

(2)

Portfolios where the customer account level ‘Probability of Default’ has not been determined have been included in the ‘Loans not graded’ category.


Undrawn loan commitments – Business and government	As at July 31, 2019								As at October 31, 2018
Grade ($ millions)	Stage 1		Stage 2		Stage 3⁽¹⁾		Total		Stage 1		Stage 2		Stage 3⁽¹⁾		Total
Investment grade	$	173,208	$	725	$	–	$	173,933	$	159,880	$	1,663	$	–	$	161,543
Non-investment grade		53,280		3,838		–		57,118		56,001		3,445		–		59,446
Watch list		18		939		–		957		81		977		–		1,058
Loans not graded⁽²⁾		1,650		148		–		1,798		2,178		28		–		2,206
Default		–		–		149		149		–		–		4		4
Total	$	228,156	$	5,650	$	149	$	233,955	$	218,140	$	6,113	$	4	$	224,257
Allowance for credit losses		44		17		–		61		41		31		2		74
Carrying value	$	228,112	$	5,633	$	149	$	233,894	$	218,099	$	6,082	$	2	$	224,183

(1)

Stage 3 includes purchased or originated credit impaired loans.

(2)

Portfolios where the customer account level ‘Probability of Default’ has not been determined have been included in the ‘Loans not graded’ category.

(e)	Loans past due but not impaired⁽¹⁾

A loan is considered past due when a counterparty has not made a payment by the contractual due date. The following table presents the carrying value of loans that are contractually past due but not classified as impaired because they are either less than 90 days past due or fully secured and collection efforts are reasonably expected to result in repayment, or restoring it to a current status in accordance with the Bank’s policy.

As at July 31, 2019

($ millions)

31-60
days

61-90
days

91 days
and greater⁽²⁾

Total

Residential mortgages

1,241

548

–

1,789

Personal loans

606

332

–

938

Credit cards

282

173

409

864

Business and government

180

–

228

Total

2,309

1,101

409

3,819

Scotiabank Third Quarter Report 2019 57

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


	As at April 30, 2019
($ millions)	31-60 days		61-90 days		91 days and greater⁽²⁾		Total
Residential mortgages	$	1,285	$	559	$	–	$	1,844
Personal loans		654		344		–		998
Credit cards		277		187		402		866
Business and government		232		134		–		366
Total	$	2,448	$	1,224	$	402	$	4,074

	As at October 31, 2018
($ millions)	31-60 days		61-90 days		91 days and greater⁽²⁾		Total
Residential mortgages	$	1,290	$	521	$	–	$	1,811
Personal loans		609		322		–		931
Credit cards		231		154		353		738
Business and government		167		40		–		207
Total	$	2,297	$	1,037	$	353	$	3,687

(1)

Loans past due 30 days or less are not presented in this analysis as they are not administratively considered past due.

(2)

All loans that are over 90 days past due are considered impaired with the exception of credit card receivables which are considered impaired when 180 days past due.

(f)

Purchased credit-impaired loans

Certain financial assets including loans are credit-impaired on initial recognition.

The following table provides details of such assets:


	As at
($ millions)	July 31 2019			April 30 2019			October 31 2018
Unpaid principal balance⁽¹⁾	$	500		$	538		$	548
Credit related fair value adjustments		(134	)		(150	)		(168	)
Carrying value		366			388			380
Stage 3 allowance		(8	)		–			–
Carrying value net related allowance	$	358		$	388		$	380

(1)

Represents principal amount owed net of write-offs.

9.	Derecognition of financial assets

Securitization of residential mortgage loans

The Bank securitizes fully insured residential mortgage loans, Bank originated and others, through the creation of mortgage backed securities (MBS) under the National Housing Act (NHA) MBS program, sponsored by Canada Mortgage Housing Corporation (CMHC). MBS created under the program are sold to Canada Housing Trust (the Trust), a government sponsored entity under the Canada Mortgage Bond (CMB) program, and/or to third-party investors. The Trust issues securities to third-party investors.

The sale of mortgages under the above program does not meet the derecognition requirements, where the Bank retains thepre-payment and interest rate risks associated with the mortgages, which represents substantially all the risk and rewards associated with the transferred assets.

The transferred mortgages continue to be recognized on the Consolidated Statement of Financial Position as residential mortgage loans. Cash proceeds from the transfer are treated as secured borrowings and included in Deposits – Business and government on the Consolidated Statement of Financial Position.

The following table provides the carrying amount of transferred assets that do not qualify for derecognition and the associated liabilities:


	As at
($ millions)	July 31 2019⁽¹⁾		April 30 2019⁽¹⁾		October 31 2018⁽¹⁾
Assets
Carrying value of residential mortgage loans	$	20,765	$	21,110	$	20,498
Other related assets⁽²⁾		4,193		3,285		2,679
Liabilities
Carrying value of associated liabilities	$	22,512	$	21,994	$	21,459

(1)

The fair value of the transferred assets is $25,364 (April 30, 2019 – $24,723; October 31, 2018 – $23,237) and the fair value of the associated liabilities is $24,683 (April 30, 2019 – $23,822; October 31, 2018 – $22,468) for a net position of $681 (April 30, 2019 – $901; October 31, 2018 – $769).

(2)

These include cash held in trust and trust permitted investment assets acquired as part of the principal reinvestment account that the Bank is required to maintain in order to participate in the programs.

58 Scotiabank Third Quarter Report 2019

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Securitization of personal lines of credit, credit cards and auto loans

The Bank securitizes a portion of its unsecured personal lines of credit, credit card and auto loan receivables through consolidated structured entities. These receivables continue to be recognized on the Consolidated Statement of Financial Position as personal and credit cards loans.

During the second quarter, the Bank securitized the following receivables:

•

$1,792 million of the Bank’s Canadian credit card receivables were securitized in February 2019, on a revolving basis through Trillium Credit Card Trust II (Trillium), a Bank-sponsored consolidated structured entity. As at July 31, 2019, US $1,359 million ($1,793 million Canadian dollars) Class A senior notes and Class B and Class C subordinated notes were outstanding and included in Deposits – Business and government on the Consolidated Statement of Financial Position. As at July 31, 2019, assets pledged in relation to these notes were credit card receivables, denominated in Canadian dollars, of $1,936 million.

•

$896 million of the Bank’s Canadian auto loan receivables were securitized in February 2019, through Securitized Term Auto Receivables Trust2019-1 (START2019-1), a Bank-sponsored consolidated structured entity. As at July 31, 2019, US $472 million ($624 million Canadian dollars) START2019-1 Class A notes that were issued to third party investors were outstanding and included in Deposits – Business and government on the Consolidated Statement of Financial Position. As at July 31, 2019, assets pledged in relation to these notes were Canadian auto loan receivables, denominated in Canadian dollars, of $740 million.

Securities sold under repurchase agreements and securities lent

The Bank enters into transactions, such as repurchase agreements and securities lending agreements, where the Bank transfers assets under agreements to repurchase them on a future date and retains all the substantial risks and rewards associated with the assets. The transferred securities remain on the Consolidated Statement of Financial Position along with the cash collateral received from the counterparty that is classified as deposit liabilities.

The following table provides the carrying amount of the transferred assets and the associated liabilities:


	As at
($ millions)	July 31 2019⁽¹⁾		April 30 2019⁽¹⁾		October 31 2018⁽¹⁾
Carrying value of securities associated with:
Repurchase agreements⁽²⁾	$	107,139	$	106,895	$	82,816
Securities lending agreements		48,531		51,554		49,718
Total		155,670		158,449		132,534
Carrying value of associated liabilities⁽³⁾	$	120,555	$	124,331	$	101,257

(1)

The fair value of transferred assets is $155,670 (April 30, 2019 – $158,449; October 31, 2018 – $132,534) and the fair value of the associated liabilities is $120,555 (April 30, 2019 – $124,331; October 31, 2018 – $101,257), for a net position of $35,115 (April 30, 2019 – $34,118; October 31, 2018 –$31,277).

(2)

Does not include over-collateralization of assets pledged.

(3)

Liabilities for securities lending arrangements only include amounts related to cash collateral received. In most cases, securities are received as collateral.

10.	Investments in associates

The Bank had significant investments in the following associates:

As at

July 31
2019

April 30
2019

October 31
2018

($ millions)

Country of
incorporation

Nature of
business

Ownership
percentage

Date of financial
statements⁽¹⁾

Carrying
value

Thanachart Bank Public Company Limited⁽²⁾

Thailand

Banking

49.00

July 31, 2019

3,452

3,266

2,961

Canadian Tire’s Financial Services

Financial

business (CTFS)⁽³⁾

Canada

Services

20.00

June 30, 2019

519

521

518

Bank of Xi’an Co. Ltd.⁽⁴⁾

China

Banking

17.99

June 30, 2019

817

848

772

Maduro & Curiel’s Bank N.V.⁽⁵⁾

Curacao

Banking

48.10

June 30, 2019

321

322

304

(1)

Represents the date of the most recent financial statements made available to the Bank by the associates’ management.

(2)

Refer to Note 22 - Acquisitions and Divestitures.

(3)

Under the agreement Canadian Tire has an option to sell to the Bank up to an additional 29% equity interest within the next 10 years at the then fair value, that can be settled, at the Bank’s discretion, by issuance of common shares or cash. After 10 years, for a period of six months, the Bank has the option to sell its equity interest back to Canadian Tire at the then fair value.

(4)

Based on the quoted price on the Shanghai Stock Exchange, the Bank’s investment in Bank of Xi’an Co. Ltd. was $1,081 as at July 31, 2019.

(5)

The local regulator requires financial institutions to set aside reserves for general banking risks. These reserves are not required under IFRS, and represent undistributed retained earnings related to a foreign associated corporation, which are subject to local regulatory restrictions. As of July 31, 2019, these reserves amounted to $62 (April 30, 2019 – $63; October 31, 2018 – $62).

Scotiabank Third Quarter Report 2019 59

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

11.

Deposits

As at

July 31, 2019

April 30
2019

October 31
2018

Payable on demand⁽¹⁾

Payable
after
notice⁽²⁾

($ millions)

Interest-
bearing

Non-interest-
bearing

Payable on a
fixed date⁽³⁾

Total

Total

Personal

6,567

8,065

123,641

84,622

222,895

224,933

214,545

Business and government

104,319

24,651

39,208

288,628

456,806

443,707

422,002

Financial institutions

5,582

1,062

1,175

34,826

42,645

43,642

39,987

116,468

33,778

164,024

⁽⁴⁾

408,076

722,346

712,282

676,534

Recorded in:

Canada

84,718

16,851

126,951

262,413

490,933

481,177

472,798

United States

19,888

6,029

50,276

76,262

73,708

59,938

United Kingdom

–

273

18,001

18,274

18,683

16,847

Mexico

4,534

7,335

12,076

23,955

24,487

21,151

Peru

4,857

111

4,476

8,733

18,177

17,955

15,213

Chile

3,166

3,819

147

15,599

22,731

24,790

24,180

Colombia

548

4,567

4,690

9,847

9,949

9,543

Other International

3,787

7,846

14,246

36,288

62,167

61,533

56,864

Total⁽⁵⁾

116,468

33,778

164,024

408,076

722,346

712,282

676,534

(1)

Deposits payable on demand include all deposits for which we do not have the right to notice of withdrawal, generally chequing accounts.

(2)

Deposits payable after notice include all deposits for which we require notice of withdrawal, generally savings accounts.

(3)

All deposits that mature on a specified date, generally term deposits, guaranteed investments certificates and similar instruments.

(4)

Includes $137 (April 30, 2019 – $133; October 31, 2018 – $141) ofnon-interest-bearing deposits.

(5)

Deposits denominated in U.S. dollars amount to $249,722 (April 30, 2019 – $237,027; October 31, 2018 – $219,195), deposits denominated in Chilean pesos amount to $21,012 (April 30, 2019 – $22,610; October 31, 2018 – $22,731), deposits denominated in Mexican pesos amount to $20,173 (April 30, 2019 – $20,863; October 31, 2018 – $18,341) and deposits denominated in other foreign currencies amount to $83,772 (April 30, 2019 – $84,606; October 31, 2018 – $79,582).

The following table presents the maturity schedule for term deposits in Canada greater than $100,000⁽¹⁾.


($ millions)	Within three months		Three to six months		Six to twelve months		One to five years		Over five years		Total
As at July 31, 2019	$	48,111	$	24,313	$	40,746	$	93,713	$	13,664	$	220,547
As at April 30, 2019	$	46,113	$	22,925	$	32,412	$	99,940	$	14,948	$	216,338
As at October 31, 2018	$	36,670	$	23,913	$	42,830	$	99,734	$	19,872	$	223,019

(1)

The majority of foreign term deposits are in excess of $100,000.

12.	Capital and financing transactions

Subordinated debentures

Cancellation

During the nine months ended July 31, 2019, the Bank purchased for cancellation approximately US $16 million floating rate subordinated capital debentures due August, 2085.

Issuance

On July 3, 2019, the Bank issued $1.5 billion subordinated debentures due July 3, 2029. On or after July 3, 2024, the debentures are redeemable at par plus accrued and unpaid interest. Interest will be payable semi-annually at a rate of 2.836% per annum until July 3, 2024 and thereafter payable quarterly until July 3, 2029 at the Three-month Bankers’ Acceptance rate plus 1.18%. The debentures containnon-viability contingent capital (NVCC) provisions necessary for the debentures to qualify as Tier 2 regulatory capital.

On January 18, 2019, the Bank issued $1.75 billion subordinated debentures due January 18, 2029. On or after January 18, 2024, the debentures are redeemable at par plus accrued and unpaid interest. Interest will be payable semi-annually at a rate of 3.89% per annum until January 18, 2024 and thereafter payable quarterly until January 18, 2029 at the Three-month Bankers’ Acceptance rate plus 1.58%. The debentures contain NVCC provisions necessary for the debentures to qualify as Tier 2 regulatory capital.

Additional Tier 1 Securities

60 Scotiabank Third Quarter Report 2019

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Preferred shares

On January 28, 2019, the Bank redeemed all outstandingNon-Cumulative Preferred Shares Series 22 and 23 at their par value of $234 million and $66 million, respectively, together with all declared and unpaid dividends.

Common shares

Normal Course Issuer Bid

13.	Capital management

The Bank’s regulatory capital and leverage position were as follows:


	As at
($ millions)	July 31 2019⁽¹⁾			April 30 2019⁽¹⁾			October 31 2018⁽¹⁾
Capital
Common Equity Tier 1 capital	$	46,565		$	46,193		$	44,443
Net Tier 1 capital		51,371			51,709			50,187
Total regulatory capital		61,546			60,855			57,364
Risk-weighted assets/exposures used in calculation of capital ratios
CET1 risk-weighted assets⁽¹⁾⁽²⁾	$	417,058		$	415,212		$	400,507
Tier 1 risk-weighted assets⁽¹⁾⁽²⁾		417,058			415,212			400,680
Total risk-weighted assets⁽¹⁾⁽²⁾		417,058			415,212			400,853
Leverage exposures		1,211,612			1,204,111			1,119,099
Capital ratios
Common Equity Tier 1 capital ratio		11.2	%		11.1	%		11.1	%
Tier 1 capital ratio		12.3	%		12.5	%		12.5	%
Total capital ratio		14.8	%		14.7	%		14.3	%
Leverage ratio		4.2	%		4.3	%		4.5	%

(1)

In accordance with OSFI’s requirements, effective January 31, 2019, CVA risk-weighted assets have been fullyphased-in. In the prior year, 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.

(2)

As at July 31, 2019, April 30, 2019, and October 31, 2018, the Bank did not have a regulatory capital flooradd-on for CET1, Tier 1 and Total capital RWA.

The Bank substantially exceeded the OSFI minimum capital ratios as at July 31, 2019, including the Domestic Stability Buffer requirement.

14.	Share-based payments

During the first quarter, the Bank granted 1,548,832 options with an exercise price of $72.28 per option and a weighted average fair value of $5.02 to selected employees, under the terms of the Employee Stock Option Plan. These stock options vest 50% at the end of the third year and 50% at the end of the fourth year. Options granted prior to December 2014 vest evenly over a four-year period.

The Bank recorded an increase to equity – other reserves of $1 million and $6 million for the three months and nine months ended July 31, 2019 (July 31, 2018 – $1 million and $6 million) as a result of equity-classified share-based payment expense.

15.	Employee benefits

Employee benefits include pensions, other post-retirement benefits, and post-employment benefits. The following table summarizes the expenses for the Bank’s principal plans⁽¹⁾.


	For the three months ended
	Pension plans								Other benefit plans
($ millions)	July 31 2019			April 30 2019			July 31 2018		July 31 2019			April 30 2019			July 31 2018
Defined benefit service cost	$	73		$	71		$	83	$	(1	)	$	7		$	7
Interest on net defined benefit (asset) liability		(1	)		1			2		13			13			11
Other		4			4			3		(7	)		1			(5	)
Defined benefit expense	$	76		$	76		$	88	$	5		$	21		$	13
Defined contribution expense	$	15		$	15		$	10	$	3			n/a			n/a
Increase (decrease) in other comprehensive income related to employee benefits⁽²⁾	$	(433	)	$	(219	)	$	223	$	(42	)	$	(17	)		$ (11	)

Scotiabank Third Quarter Report 2019 61

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


	For the nine months ended
	Pension plans					Other benefit plans
($ millions)	July 31 2019			July 31 2018		July 31 2019			July 31 2018
Defined benefit service cost⁽³⁾	$	220		$	249	$	13		$	(170	)
Interest on net defined benefit (asset) liability		(2	)		6		39			36
Other		12			9		(5	)		(8	)
Defined benefit expense	$	230		$	264	$	47		$	(142	)
Defined contribution expense	$	44		$	30	$	3			n/a
Increase (decrease) in other comprehensive income related to employee benefits⁽²⁾	$	(1,047	)	$	288	$	(124	)	$	27

(1)

Other plans operated by certain subsidiaries of the Bank are not considered material and are not included in this note.

(2)

Changes in discount rates and return on plan assets are reviewed and updated on a quarterly basis. In the absence of legislated changes, all other assumptions are updated annually.

(3)

The service cost for other benefit plans includes a decrease of $203 million in the first quarter of fiscal 2018, related to modifications to the Bank’s post-retirement benefits plan.

16.	Operating segments

Scotiabank is a diversified financial services institution that provides a wide range of financial products and services to retail, commercial and corporate customers around the world. The Bank’s businesses are grouped into three business lines: Canadian Banking, International Banking and Global Banking and Markets. The results of these business segments are based upon the internal financial reporting systems of the Bank. The accounting policies used in these segments are generally consistent with those followed in the preparation of the consolidated financial statements as disclosed in Note 3 of the Bank’s audited consolidated financial statements in the 2018 Annual Report. Notable accounting measurement differences are:

•

tax normalization adjustments related to thegross-up of income from associated corporations. This adjustment normalizes the effective tax rate in the divisions to better present the contribution of the associated companies to the divisional results.

•

the grossing up oftax-exempt net interest income andnon-interest income to an equivalentbefore-tax basis for those affected segments. This change in measurement enables comparison of net interest income andnon-interest income arising from taxable andtax-exempt sources.

Scotiabank’s results, and average assets and liabilities, allocated by these operating segments, are as follows:

For the three months ended July 31, 2019

Taxable equivalent basis ($ millions)

Canadian
Banking

International
Banking

Global
Banking and
Markets

Other⁽¹⁾⁽²⁾

Total

Net interest income⁽³⁾

2,120

2,157

337

(240

)

4,374

Non-interest income⁽⁴⁾⁽⁵⁾

1,412

1,270

747

(144

)

3,285

Total revenues

3,532

3,427

1,084

(384

)

7,659

Provision for credit losses

240

476

)

713

Non-interest expenses

1,723

1,780

593

113

4,209

Provision for income taxes

409

269

121

(46

)

753

Net income

1,160

902

374

(452

)

1,984

Net income attributable tonon-controlling interests in subsidiaries

–

121

–

)

120

Net income attributable to equity holders of the Bank

1,160

781

374

(451

)

1,864

Represented by:

Net income attributable to equity holders of the Bank – relating to divested operations⁽⁶⁾

–

Net income attributable to equity holders of the Bank – relating to operations other than divested operations

1,160

781

374

(451

)

1,864

Average assets($ billions)

365

206

374

116

1,061

Average liabilities($ billions)

285

158

306

242

991

(1)

Includes all other smaller operating segments and corporate adjustments, such as the elimination of thetax-exempt incomegross-up reported in net interest income andnon-interest income and provision for income taxes of $48 to arrive at the amounts reported in the Consolidated Statement of Income, differences in the actual amount of costs incurred and charged to the operating segments.

(2)

Net income attributable to equity holders includes Net loss on divestitures of $418(pre-tax $320).

(3)

Interest income is reported net of interest expense as management relies primarily on net interest income as a performance measure.

(4)

Card revenues, Banking services fees, and Investment management and trust fees are mainly earned in Canadian and International Banking. Mutual fund and Brokerage fees are primarily earned in Canadian Banking with the remainder being earned in International Banking. Underwriting and other advisory fees are predominantly earned in Global Banking and Markets.

(5)

Includes income (on a taxable equivalent basis) from investments in associated corporations for Canadian Banking – $16; International Banking – $182 and Other – $(8).

(6)

Excludes gain/(loss) recognized on divestitures, which is recorded in the Other segment. Refer to Note 22 for further details.

62 Scotiabank Third Quarter Report 2019

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


	For the three months ended April 30, 2019
Taxable equivalent basis ($ millions)	Canadian Banking		International Banking		Global Banking and Markets			Other⁽¹⁾⁽²⁾			Total
Net interest income⁽³⁾	$	1,990	$	2,121	$	350		$	(268	)	$	4,193
Non-interest income⁽⁴⁾⁽⁵⁾		1,390		1,235		801			184			3,610
Total revenues		3,380		3,356		1,151			(84	)		7,803
Provision for credit losses		252		628		(6	)		(1	)		873
Non-interest expenses		1,711		1,710		594			31			4,046
Provision for income taxes		369		249		143			(136	)		625
Net income	$	1,048	$	769	$	420		$	22		$	2,259
Net income attributable tonon-controlling interests in subsidiaries	$	–	$	69	$	–		$	1		$	70
Net income attributable to equity holders of the Bank	$	1,048	$	700	$	420		$	21		$	2,189
Represented by:
Net income attributable to equity holders of the Bank – relating to divested operations⁽⁶⁾		–		8		–			–			8
Net income attributable to equity holders of the Bank – relating to operations other than divested operations		1,048		692		420			21			2,181
Average assets($ billions)	$	358	$	203	$	361		$	117		$	1,039
Average liabilities($ billions)	$	281	$	156	$	295		$	238		$	970

(1)

Includes all other smaller operating segments and corporate adjustments, such as the elimination of thetax-exempt incomegross-up reported in net interest income andnon-interest income and provision for income taxes of $41 to arrive at the amounts reported in the Consolidated Statement of Income, differences in the actual amount of costs incurred and charged to the operating segments.

(2)

Net income attributable to equity holders includes Net gain on divestitures of $142(pre-tax $173).

(3)

Interest income is reported net of interest expense as management relies primarily on net interest income as a performance measure.

(4)

(5)

Includes income (on a taxable equivalent basis) from investments in associated corporations for Canadian Banking – $18; International Banking – $210 and Other – $(58).

(6)

Earnings from pension and related insurance business in the Dominican Republic divested in the current period. Refer to Note 22 for further details. These amounts exclude gain/(loss) recognized on divestitures, which is recorded in the Other segment.


	For the three months ended July 31, 2018
Taxable equivalent basis ($ millions)	Canadian Banking		International Banking			Global Banking and Markets			Other⁽¹⁾			Total
Net interest income⁽²⁾	$	2,024	$	1,827		$	365		$	(131	)	$	4,085
Non-interest income⁽³⁾⁽⁴⁾		1,349		1,026			745			(24	)		3,096
Total revenues		3,373		2,853			1,110			(155	)		7,181
Provision for credit losses		181		771			(10	)		1			943
Non-interest expenses		1,661		1,510			543			56			3,770
Provision for income taxes		401		97			136			(105	)		529
Net income	$	1,130	$	475		$	441		$	(107	)	$	1,939
Net income attributable tonon-controlling interests in subsidiaries	$	–	$	(44	)	$	–		$	–		$	(44	)
Net income attributable to equity holders of the Bank	$	1,130	$	519		$	441		$	(107	)	$	1,983
Represented by:
Net income attributable to equity holders of the Bank – relating to divested operations⁽⁵⁾		–		5			–			–			5
Net income attributable to equity holders of the Bank – relating to operations other than divested operations		1,130		514			441			(107	)		1,978
Average assets($ billions)	$	344	$	164		$	311		$	116		$	935
Average liabilities($ billions)	$	254	$	129		$	258		$	229		$	870

(1)

Includes all other smaller operating segments and corporate adjustments, such as the elimination of thetax-exempt incomegross-up reported in net interest income andnon-interest income and provision for income taxes of $28 to arrive at the amounts reported in the Consolidated Statement of Income, differences in the actual amount of costs incurred and charged to the operating segments.

(2)

Interest income is reported net of interest expense as management relies primarily on net interest income as a performance measure.

(3)

(4)

Includes income (on a taxable equivalent basis) from investments in associated corporations for Canadian Banking – $11; International Banking – $153 and Other – $(38).

(5)

Earnings from pension and related insurance business in the Dominican Republic divested in the second quarter of 2019. Refer to Note 22 for further details. These amounts exclude gain/(loss) recognized on divestitures, which is recorded in the Other segment.

Scotiabank Third Quarter Report 2019 63

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the nine months ended July 31, 2019

Taxable equivalent basis ($ millions)

Canadian
Banking

International
Banking

Global
Banking and
Markets

Other⁽¹⁾⁽²⁾

Total

Net interest income⁽³⁾

6,146

6,358

1,059

(722)

12,841

Non-interest income⁽⁴⁾⁽⁵⁾

4,181

3,756

2,251

10,225

Total revenues

10,327

10,114

3,310

(685

)

23,066

Provision for credit losses

725

1,574

(26

)

2,274

Non-interest expenses

5,164

5,232

1,832

198

12,426

Provision for income taxes

1,157

744

375

(400

)

1,876

Net income

3,281

2,564

1,129

(484

)

6,490

Net income attributable tonon-controlling interests in subsidiaries

–

301

–

301

Net income attributable to equity holders of the Bank

3,281

2,263

1,129

(484

)

6,189

Represented by:

Net income attributable to equity holders of the Bank – relating to divested operations⁽⁶⁾

–

Net income attributable to equity holders of the Bank – relating to operations other than divested operations

3,281

2,251

1,129

(484

)

6,177

Average assets($ billions)

360

202

366

116

1,044

Average liabilities($ billions)

280

156

300

239

975

(1)

Includes all other smaller operating segments and corporate adjustments, such as the elimination of thetax-exempt incomegross-up reported in net interest income andnon-interest income and provision for income taxes of $123 to arrive at the amounts reported in the Consolidated Statement of Income, differences in the actual amount of costs incurred and charged to the operating segments.

(2)

Net income attributable to equity holders includes Net loss on divestitures of $276(pre-tax $147).

(3)

Interest income is reported net of interest expense as management relies primarily on net interest income as a performance measure.

(4)

(5)

Includes income (on a taxable equivalent basis) from investments in associated corporations for Canadian Banking – $47; International Banking – $553 and Other – $(111).

(6)


	For the nine months ended July 31, 2018
Taxable equivalent basis ($ millions)	Canadian Banking		International Banking		Global Banking and Markets			Other⁽¹⁾			Total
Net interest income⁽²⁾	$	5,869	$	5,292	$	1,117		$	(307	)	$	11,971
Non-interest income⁽³⁾⁽⁴⁾		4,038		3,007		2,338			(27	)		9,356
Total revenues		9,907		8,299		3,455			(334	)		21,327
Provision for credit losses		596		1,455		(30	)		–			2,021
Non-interest expenses		4,907		4,390		1,680			17			10,994
Provision for income taxes		1,155		509		463			(268	)		1,859
Net income	$	3,249	$	1,945	$	1,342		$	(83	)	$	6,453
Net income attributable tonon-controlling interests in subsidiaries	$	–	$	84	$	–		$	–		$	84
Net income attributable to equity holders of the Bank	$	3,249	$	1,861	$	1,342		$	(83	)	$	6,369
Represented by:
Net income attributable to equity holders of the Bank – relating to divested operations⁽⁵⁾		–		25		–			–			25
Net income attributable to equity holders of the Bank – relating to operations other than divested operations		3,249		1,836		1,342			(83	)		6,344
Average assets ($ billions)	$	339	$	159	$	322		$	117		$	937
Average liabilities($ billions)	$	250	$	123	$	267		$	234		$	874

(1)

Includes all other smaller operating segments and corporate adjustments, such as the elimination of thetax-exempt incomegross-up reported in net interest income andnon-interest income and provision for income taxes of $81 to arrive at the amounts reported in the Consolidated Statement of Income, differences in the actual amount of costs incurred and charged to the operating segments.

(2)

Interest income is reported net of interest expense as management relies primarily on net interest income as a performance measure.

(3)

(4)

Includes income (on a taxable equivalent basis) from investments in associated corporations for Canadian Banking – $70; International Banking – $442 and Other – $(122).

(5)

64 Scotiabank Third Quarter Report 2019

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

17.	Interest income and expense


	For the three months ended												For the nine months ended
	July 31, 2019				April 30, 2019				July 31, 2018				July 31, 2019				July 31, 2018
($ millions)	Interest income		Interest expense		Interest income		Interest expense		Interest income		Interest expense		Interest income		Interest expense		Interest income		Interest expense
Measured at amortized cost⁽¹⁾	$	7,970	$	4,055	$	7,641	$	3,892	$	6,781	$	3,004	$	23,181	$	11,658	$	19,335	$	8,289
Measured at FVOCI⁽¹⁾		378		–		378		–		299		–		1,109		–		865		–
		8,348		4,055		8,019		3,892		7,080		3,004		24,290		11,658		20,200		8,289
Other⁽²⁾		92		11		82		16		51		42		242		33		147		87
Total	$	8,440	$	4,066	$	8,101	$	3,908	$	7,131	$	3,046	$	24,532	$	11,691	$	20,347	$	8,376

(1)

The interest income/expense on financial assets/liabilities are calculated using the effective interest method.

(2)

Includes dividend income on equity securities designated at FVOCI.

18.	Trading revenues

The following table presents details of trading revenues.


	For the three months ended						For the nine months ended
($ millions)	July 31 2019		April 30 2019		July 31 2018		July 31 2019		July 31 2018
Interest rate and credit	$	45	$	81	$	72	$	133	$	232
Equities		124		123		58		370		310
Commodities		57		45		50		170		185
Foreign exchange		64		59		72		207		223
Other		107		78		53		232		100
Total	$	397	$	386	$	305	$	1,112	$	1,050

19.	Earnings per share


	For the three months ended							For the nine months ended
($ millions)	July 31 2019		April 30 2019		July 31 2018			July 31 2019		July 31 2018
Basic earnings per common share
Net income attributable to common shareholders	$	1,839	$	2,125	$	1,956		$	6,071	$	6,247
Weighted average number of common shares outstanding(millions)		1,221		1,224		1,223			1,224		1,207
Basic earnings per common share⁽¹⁾ (in dollars)	$	1.51	$	1.74	$	1.60		$	4.96	$	5.18
Diluted earnings per common share
Net income attributable to common shareholders	$	1,839	$	2,125	$	1,956		$	6,071	$	6,247
Dilutive impact of share-based payment options and others⁽²⁾		40		37		(39	)		121		(5	)
Net income attributable to common shareholders (diluted)	$	1,879	$	2,162	$	1,917		$	6,192	$	6,242
Weighted average number of common shares outstanding(millions)		1,221		1,224		1,223			1,224		1,207
Dilutive impact of share-based payment options and others⁽²⁾(millions)		30		28		17			29		16
Weighted average number of diluted common shares outstanding(millions)		1,251		1,252		1,240			1,253		1,223
Diluted earnings per common share⁽¹⁾ (in dollars)	$	1.50	$	1.73	$	1.55		$	4.94	$	5.10

(1)

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

(2)

Certain tandem stock appreciation rights or options as well as acquisition-related put/call options that the Bank may settle at its own discretion by issuing common shares were not included in the calculation of diluted earnings per share as they were anti-dilutive.

20.	Financial instruments

(a) Risk management

The Bank’s principal business activities result in a balance sheet that consists primarily of financial instruments. In addition, the Bank uses derivative financial instruments for both trading and hedging purposes. The principal financial risks that arise from transacting financial instruments include credit risk, liquidity risk and market risk. The Bank’s framework to monitor, evaluate and manage these risks is consistent with that in place as at October 31, 2018.

(i) 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 exposures disclosed below are presented based on the Basel framework utilized by the Bank. The Bank uses the Advanced Internal Ratings-Based approach (AIRB) for all material Canadian, U.S. and European portfolios, and for a significant portion of the international corporate and commercial portfolios. The remaining portfolios, including other international portfolios, are treated under the standardized approach. Under the AIRB approach, the Bank uses internal risk parameter estimates, based on historical experience.

Under the standardized approach, credit risk is estimated using the risk weights as prescribed by the Basel framework, either based on credit assessments by external rating agencies or based on the counterparty type fornon-retail exposures and product type for retail exposures.

Scotiabank Third Quarter Report 2019 65

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


Exposure at default⁽¹⁾	As at
	July 31, 2019						April 30 2019		October 31 2018
($ millions)	AIRB		Standardized		Total		Total		Total
By exposuresub-type
Non-retail
Drawn⁽²⁾⁽³⁾	$	364,762	$	62,734	$	427,496	$	434,552	$	425,009
Undrawn commitments		92,883		3,938		96,821		96,803		92,303
Other exposures⁽⁴⁾		93,538		10,595		104,133		107,021		105,232
Totalnon-retail	$	551,183	$	77,267	$	628,450	$	638,376	$	622,544
Retail
Drawn⁽⁵⁾	$	203,445	$	93,647	$	297,092	$	289,269	$	278,605
Undrawn commitments		49,735		–		49,735		48,371		48,085
Total retail	$	253,180	$	93,647	$	346,827	$	337,640	$	326,690
Total	$	804,363	$	170,914	$	975,277	$	976,016	$	949,234

(1)

After credit risk mitigation and excludes equity securities and other assets.

(2)

Non-retail AIRB drawn exposures include government guaranteed and privately insured mortgages.

(3)

Non-retail drawn includes loans, bankers’ acceptances, deposits with financial institutions and FVOCI debt securities.

(4)

Includesoff-balance sheet lending instruments such as letters of credit, letters of guarantee, securitizations,over-the-counter derivatives and repo-style transactions net of related collateral.

(5)

Retail drawn includes residential mortgages, credit cards, lines of credit and other personal loans.

Credit quality ofnon-retail exposures

The Bank’snon-retail portfolio is well diversified by industry. A significant portion of the authorized corporate and commercial lending portfolio was internally assessed at a grade that would generally equate to an investment grade rating by external rating agencies. There has not been a significant change in concentrations of credit risk since October 31, 2018.

Credit quality of retail exposures

The Bank’s retail portfolios consist of a number of relatively small loans to a large number of borrowers. The portfolios are distributed across Canada and a wide range of countries. As such, the portfolios inherently have a high degree of diversification. In addition, as of July 31, 2019, 40% (April 30, 2019 – 42%; October 31, 2018 – 43%) of the Canadian residential mortgage portfolio is insured. The averageloan-to-value ratio of the uninsured portion of the Canadian residential mortgage portfolio is 55% (April 30, 2019 – 55%; October 31, 2018 – 54%).

Retail standardized portfolio

The retail standardized portfolio of $94 billion as at July 31, 2019 (April 30, 2019 – $94 billion; October 31, 2018 – $87 billion), was comprised of residential mortgages, personal loans, credit cards and lines of credit to individuals, mainly in Latin America and the Caribbean. Of the total retail standardized exposures, $48 billion (April 30, 2019 – $49 billion; October 31, 2018 – $45 billion) was represented by mortgages and loans secured by residential real estate, mostly with aloan-to-value ratio of below 80%.

(ii) Liquidity risk

Liquidity risk is the risk that the Bank is unable to meet its financial obligations in a timely manner at reasonable prices. The Bank’s liquidity risk is subject to extensive risk management controls and is managed within the framework of policies and limits approved by the Board. The Board receives reports on risk exposures and performance against approved limits. The Asset/Liability Committee (ALCO) provides senior management oversight of liquidity risk.

The key elements of the Bank’s liquidity risk management framework include:

•

liquidity risk measurement and management limits, including limits on maximum net cash outflow by currency over specified short-term horizons;

•

prudent diversification of its wholesale funding activities by using a number of different funding programs to access the global financial markets and manage its maturity profile, as appropriate;

•

large holdings of liquid assets to support its operations, which can generally be sold or pledged to meet the Bank’s obligations;

•

liquidity stress testing, including Bank-specific, global-systemic, and combination systemic/specific scenarios; and

•

liquidity contingency planning.

The Bank’s foreign operations have liquidity management frameworks that are similar to the Bank’s framework. Local deposits are managed from a liquidity risk perspective based on the local management frameworks and regulatory requirements.

(iii) Market risk

Market risk arises from changes in market prices and rates (including interest rates, credit spreads, equity prices, foreign exchange rates and commodity prices), the correlations among them, and their levels of volatility.

Interest rate risk

Interest rate risk is the risk of loss due to the following: changes in the level, slope and curvature of the yield curve; the volatility of interest rates and changes in customers’ preferences (e.g. mortgage prepayment rates).

66 Scotiabank Third Quarter Report 2019

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Non-trading foreign currency risk

Foreign currency risk is the risk of loss due to changes in spot and forward rates.

As at July 31, 2019, a one per cent increase (decrease) in the Canadian dollar against all currencies in which the Bank operates decreases (increases) the Bank’sbefore-tax annual earnings by approximately $64 million (April 30, 2019 – $69 million; July 31, 2018 – $62 million) in the absence of hedging activity, primarily from exposure to U.S. dollars. The Bank hedges a portion of this foreign currency risk.

A similar change in the Canadian dollar as at July 31, 2019, would decrease (increase) the unrealized foreign currency translation gains in the accumulated other comprehensive income section of shareholders’ equity by approximately $382 million (April 30, 2019 – $386 million; July 31, 2018 – $371 million), net of hedging.

Non-trading equity risk

Equity risk is the risk of loss due to adverse movements in equity prices. The Bank is exposed to equity risk through its investment equity portfolios. The fair value of investment equity securities is shown in Note 7.

Trading portfolio risk management

The table below shows the Bank’s VaR by risk factor along with Stressed VaR:

For the three months ended

As at

July 31, 2019

July 31

2019

April 30

2019

July 31

2018

($ millions)

Average

High

Low

Credit spread plus interest rate

9.8

14.4

7.7

8.9

8.5

7.7

Credit spread

8.1

10.6

5.3

8.7

6.2

6.8

Interest rate

7.2

10.3

5.1

6.3

6.5

7.8

Equities

3.5

7.8

1.0

2.7

4.1

2.7

Foreign exchange

4.0

6.0

2.5

4.2

3.1

3.4

Commodities

2.4

3.5

1.3

3.3

2.6

1.6

Debt specific

3.8

4.8

2.0

3.3

3.7

3.4

Diversification effect

(11.6

)

n/a

(11.3

)

(12.0

)

(7.3

)

Total VaR

11.9

15.7

9.2

11.1

10.0

11.5

Total Stressed VaR

37.3

48.9

26.7

27.3

32.0

41.0

(iv) Operational risk

Operational risk is the risk of loss, whether direct or indirect, to which the Bank is exposed due to inadequate or failed internal processes or systems, human error, or external events. Operational risk includes legal and regulatory risk, business process and change risk, fiduciary or disclosure breaches, cyber risks, technology failure, financial crime and environmental risk. It exists in some form in every Bank business and function.

Operational risk can not only result in financial loss, but also regulatory sanctions and damage to the Bank’s reputation. The Bank has developed policies, processes and assessment methodologies to ensure that operational risk is appropriately identified and managed with effective controls.

(b) Financial instruments designated at fair value through profit or loss

In accordance with its risk management strategy, the Bank has elected to designate certain investments and senior note liabilities at fair value through profit or loss to reduce an accounting mismatch between fair value changes in these instruments and fair value changes in related derivatives, and where a hybrid financial liability contains one or more embedded derivatives that are not closely related to the host contract. Changes in fair value of financial liabilities arising from the Bank’s own credit risk are recognized in other comprehensive income, without subsequent reclassification to net income.

The cumulative fair value adjustment due to own credit risk is determined at a point in time by comparing the present value of expected future cash flows over the term of these liabilities discounted at the Bank’s effective funding rate, and the present value of expected future cash flows discounted under a benchmark rate.

The following table presents the fair value of assets and liabilities designated at fair value through profit or loss and their changes in fair value.


	Fair value						Change in fair value						Cumulative change in fair value⁽¹⁾
	As at						For the three months ended								As at
($ millions)	July 31 2019		April 30 2019		July 31 2018		July 31 2019		April 30 2019		July 31 2018		July 31 2019		April 30 2019		July 31 2018
Assets
Investment securities⁽²⁾	$	13	$	14	$	15	$	–	$	–	$	–	$	–	$	–	$	–
Liabilities
Senior note liabilities⁽³⁾	$	11,536	$	10,919	$	7,652	$	(18)	$	(774)	$	(99)	$	(190)	$	(172)	$	94

(1)

The cumulative change in fair value is measured from the instruments’ date of initial recognition.

(2)

Changes in fair value are recorded innon-interest income – other.

(3)

Changes in fair value attributable to changes in the Bank’s own credit risk are recorded in other comprehensive income. Other changes in fair value are recorded innon-interest income – trading revenues.

Scotiabank Third Quarter Report 2019 67

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the changes in fair value attributable to changes in the Bank’s own credit risk for financial liabilities designated at fair value through profit or loss as well as their contractual maturity and carrying amounts.


	Senior note liabilities
($ millions)		Contractual maturity amount	⁽¹⁾		Carrying value		Difference between carrying value and contractual maturity amount			Changes in fair value for the three month period attributable to changes in own credit risk recorded in other comprehensive income			Cumulative changes in fair value due to changes in own credit risk	⁽¹⁾
As at July 31, 2019	$	11,346		$	11,536	$	(190)		$	6		$	(73	)
As at April 30, 2019	$	10,747		$	10,919	$	(172	)	$	(43	)	$	(79	)
As at July 31, 2018	$	7,746		$	7,652	$	94		$	30		$	(20	)

(1)

The cumulative change in fair value is measured from the instruments’ date of initial recognition.

Fair value of financial instruments

The calculation of fair value is based on market conditions at a specific point in time and therefore may not be reflective of future fair values. The Bank has controls and processes in place to ensure that the valuation of financial instruments is appropriately determined.

Refer to Note 7 of the Bank’s consolidated financial statements in the 2018 Annual Report for the valuation techniques used to fair value its significant financial assets and liabilities.

The following table sets out the fair values of financial instruments of the Bank and excludesnon-financial assets, such as property and equipment, investments in associates, precious metals, goodwill and other intangible assets.


	As at
	July 31, 2019				April 30, 2019				October 31, 2018
($ millions)	Total fair value		Total carrying value		Total fair value		Total carrying value		Total fair value		Total carrying value
Assets:
Cash and deposits with financial institutions	$	45,262	$	45,262	$	50,121	$	50,121	$	62,269	$	62,269
Trading assets		131,068		131,068		117,140		117,140		100,262		100,262
Financial instruments designated at fair value through profit or loss		13		13		14		14		12		12
Securities purchased under resale agreements and securities borrowed		119,478		119,478		126,090		126,090		104,018		104,018
Derivative financial instruments		36,157		36,157		31,358		31,358		37,558		37,558
Investment securities – other		58,366		58,366		61,214		61,214		57,653		57,653
Investment securities – amortized cost		24,318		24,226		23,820		23,932		20,316		20,743
Loans		595,696		589,243		588,619		583,815		553,758		551,834
Customers’ liability under acceptances		13,923		13,923		12,823		12,823		16,329		16,329
Other financial assets		11,237		11,237		12,761		12,761		10,913		10,913
Liabilities:
Deposits		723,894		722,346		712,949		712,282		674,535		676,534
Financial instruments designated at fair value through profit or loss		11,536		11,536		10,919		10,919		8,188		8,188
Acceptances		13,932		13,932		12,833		12,833		16,338		16,338
Obligations related to securities sold short		25,669		25,669		29,957		29,957		32,087		32,087
Derivative financial instruments		37,307		37,307		33,176		33,176		37,967		37,967
Obligations related to securities sold under repurchase agreements and securities lent		120,555		120,555		124,331		124,331		101,257		101,257
Subordinated debentures		9,314		9,021		7,801		7,554		5,627		5,698
Other financial liabilities		37,532		36,948		38,030		37,601		35,432		34,805

(d) Fair value hierarchy

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. Where possible, valuations are based on quoted prices or observable inputs obtained from active markets.

Quoted prices are not always available forover-the-counter transactions, as well as transactions in inactive or illiquid markets. In these instances, internal models that maximize the use of observable inputs are used to estimate fair value. The chosen valuation technique incorporates all the factors that market participants would take into account in pricing a transaction. When all significant inputs to models are observable, the valuation is classified as Level 2. Financial instruments traded in a less active market are valued using indicative market prices, present value of cash flows or other valuation techniques. Fair value estimates do not consider forced or liquidation sales.

Where financial instruments trade in inactive markets or when using models where observable parameters do not exist, greater management judgment is required for valuation purposes. Valuations that require the significant use of unobservable inputs are considered as Level 3.

68 Scotiabank Third Quarter Report 2019

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The following table outlines the fair value hierarchy and instruments carried at fair value on a recurring basis.


	As at
	July 31, 2019								April 30, 2019
($ millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2			Level 3		Total
Instruments carried at fair value on a recurring basis:
Assets:
Precious metals⁽¹⁾	$	–	$	3,571	$	1	$	3,572	$	–	$	3,504		$	39	$	3,543
Trading assets
Loans		–		14,158		–		14,158		–		13,104			–		13,104
Canadian federal government and government guaranteed debt		13,374		1,557		–		14,931		13,514		1,789			–		15,303
Canadian provincial and municipal debt		–		7,776		–		7,776		–		6,892			–		6,892
US treasury and other US agencies’ debt		12,544		–		–		12,544		10,974		–			–		10,974
Other foreign governments’ debt		6,746		2,981		–		9,727		3,793		2,847			–		6,640
Corporate and other debt		2		10,788		14		10,804		3		9,714			15		9,732
Income funds		40		–		–		40		35		–			–		35
Equity securities		59,987		179		–		60,166		52,830		719			–		53,549
Other⁽²⁾		922		–		–		922		911		–			–		911
	$	93,615	$	41,010	$	15	$	134,640	$	82,060	$	38,569		$	54	$	120,683
Financial assets designated at fair value through profit or loss	$	13	$	–	$	–	$	13	$	14	$	–		$	–	$	14
Investment securities⁽³⁾
Canadian federal government and government guaranteed debt		8,202		2,674		–		10,876		6,350		2,565			–		8,915
Canadian provincial and municipal debt		228		2,690		–		2,918		241		2,763			–		3,004
US treasury and other US agencies’ debt		17,686		488		–		18,174		22,198		507			–		22,705
Other foreign governments’ debt		10,035		9,991		31		20,057		8,284		10,531			31		18,846
Corporate and other debt		261		1,431		19		1,711		188		1,698			16		1,902
Mortgage-backed securities		–		2,461		–		2,461		–		3,787			–		3,787
Equity securities		1,098		260		811		2,169		1,033		246			776		2,055
	$	37,510	$	19,995	$	861	$	58,366	$	38,294	$	22,097		$	823	$	61,214
Derivative financial instruments
Interest rate contracts	$	–	$	13,720	$	12	$	13,732	$	–	$	10,459		$	29	$	10,488
Foreign exchange and gold contracts		2		18,971		–		18,973		2		16,773			–		16,775
Equity contracts		837		699		1		1,537		778		890			2		1,670
Credit contracts		–		192		–		192		–		189			–		189
Commodity contracts		43		1,680		–		1,723		8		2,228			–		2,236
	$	882	$	35,262	$	13	$	36,157	$	788	$	30,539		$	31	$	31,358
Liabilities:
Deposits⁽⁴⁾	$	–	$	77	$	–	$	77	$	–	$	(51	)	$	–	$	(51	)
Financial liabilities designated at fair value through profit or loss		–		11,536		–		11,536		–		10,919			–		10,919
Obligations related to securities sold short		22,170		3,499		–		25,669		25,327		4,630			–		29,957
Derivative financial instruments
Interest rate contracts		–		12,786		22		12,808		–		10,580			20		10,600
Foreign exchange and gold contracts		8		19,558		–		19,566		1		16,502			–		16,503
Equity contracts		887		1,647		–		2,534		865		2,629			2		3,496
Credit contracts		–		49		–		49		–		56			–		56
Commodity contracts		–		2,350		–		2,350		–		2,521			–		2,521
	$	895	$	36,390	$	22	$	37,307	$	866	$	32,288		$	22	$	33,176

(1)

The fair value of precious metals is determined based on quoted market prices and forward spot prices, where applicable.

(2)

Represents energy related assets.

(3)

Excludes debt investment securities measured at amortized cost of $24,226 (April 30, 2019-$23,932).

(4)

These amounts represent embedded derivatives bifurcated from structured notes.

Scotiabank Third Quarter Report 2019 69

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


	As at October 31, 2018
($ millions)	Level 1		Level 2			Level 3		Total
Instruments carried at fair value on a recurring basis:
Assets:
Precious metals⁽¹⁾	$	–	$	3,175		$	16	$	3,191
Trading assets
Loans		–		14,334			–		14,334
Canadian federal government and government guaranteed debt		13,003		–			–		13,003
Canadian provincial and municipal debt		–		10,159			–		10,159
US treasury and other US agencies’ debt		7,164		–			–		7,164
Other foreign governments’ debt		4,610		1,833			–		6,443
Corporate and other debt		3		8,984			18		9,005
Income funds		29		–			–		29
Equity securities		39,513		158			–		39,671
Other⁽²⁾		454		–			–		454
	$	64,776	$	38,643		$	34	$	103,453
Financial assets designated at fair value through profit or loss	$	12	$	–		$	–	$	12
Investment securities⁽³⁾
Canadian federal government and government guaranteed debt		6,373		2,518			–		8,891
Canadian provincial and municipal debt		366		3,986			–		4,352
US treasury and other US agencies’ debt		18,472		669			–		19,141
Other foreign governments’ debt		10,457		9,485			48		19,990
Corporate and other debt		732		1,818			13		2,563
Mortgage-backed securities		–		906			–		906
Equity securities		838		263			709		1,810
	$	37,238	$	19,645		$	770	$	57,653
Derivative financial instruments
Interest rate contracts	$	–	$	8,927		$	112	$	9,039
Foreign exchange and gold contracts		5		22,197			–		22,202
Equity contracts		797		1,556			8		2,361
Credit contracts		–		349			–		349
Commodity contracts		92		3,515			–		3,607
	$	894	$	36,544		$	120	$	37,558
Liabilities:
Deposits⁽⁴⁾	$	–	$	(401	)	$	–	$	(401	)
Financial liabilities designated at fair value through profit or loss		–		8,188			–		8,188
Obligations related to securities sold short		24,563		7,524			–		32,087
Derivative financial instruments
Interest rate contracts		–		11,012			74		11,086
Foreign exchange and gold contracts		–		20,537			–		20,537
Equity contracts		1,057		1,884			5		2,946
Credit contracts		–		70			–		70
Commodity contracts		34		3,294			–		3,328
	$	1,091	$	36,797		$	79	$	37,967

(1)

The fair value of precious metals is determined based on quoted market prices and forward spot prices.

(2)

Represents energy related assets.

(3)

Excludes debt investment securities measured at amortized cost of $20,743.

(4)

These amounts represent embedded derivatives bifurcated from structured notes.

70 Scotiabank Third Quarter Report 2019

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Level 3 instrument fair value changes

Financial instruments categorized as Level 3 as at July 31, 2019, in the fair value hierarchy comprise certain precious metals, certain foreign government bonds, structured corporate bonds, investments in private equity securities and complex derivatives.

The following table summarizes the changes in Level 3 instruments carried at fair value for the three months ended July 31, 2019.

All positive balances represent assets and negative balances represent liabilities. Consequently, positive amounts indicate purchases of assets or settlements of liabilities and negative amounts indicate sales of assets or issuances of liabilities.


	As at July 31, 2019
($ millions)		Fair value, beginning of the quarter			Gains/ (losses) recorded in income			Gains/ (losses) recorded in OCI		Purchases/ Issuances			Sales/ Settlements			Transfers into/out of Level 3			Fair value, end of the quarter			Changes in unrealized gains/(losses) recorded in income for instruments still held	⁽¹⁾
Precious metals	$	39		$	–		$	–	$	–		$	(38	)	$	–		$	1		$	–
		39			–			–		–			(38	)		–			1			–
Trading assets
Corporate and other debt		15			–			–		–			(1	)		–			14			–
		15			–			–		–			(1	)		–			14			–
Investment securities
Other foreign governments’ debt		31			–			–		–			–			–			31			n/a
Corporate and other debt		16			–			3		–			–			–			19			n/a
Equity securities		776			7			8		46			(26	)		–			811			7
		823			7			11		46			(26	)		–			861			7
Derivative financial instruments – assets
Interest rate contracts		29			(12	)		–		–			(5	)		–			12			(12	)
Equity contracts		2			–			–		–			–			(1	)		1			–	⁽²⁾
Derivative financial instruments – liabilities
Interest rate contracts		(20	)		(7	)		–		(1	)		6			–			(22	)		(7	)⁽³⁾
Equity contracts		(2	)		–			–		–			–			2			–			–	⁽²⁾
		9			(19	)		–		(1	)		1			1			(9	)		(19	)
Total	$	886		$	(12	)	$	11	$	45		$	(64	)	$	1		$	867		$	(12	)

(1)

These amounts represent the gains and losses from fair value changes of Level 3 instruments still held at the end of the period that are recorded in the Consolidated Statement of Income.

(2)

Certain unrealized gains and losses on derivative assets and liabilities are largely offset bymark-to-market changes on other instruments included in trading revenues in the Consolidated Statement of Income, since these instruments act as an economic hedge to certain derivative assets and liabilities.

(3)

Certain unrealized losses on interest rate derivative contracts are largely offset bymark-to-market changes on embedded derivatives on certain deposit liabilities in the Consolidated Statement of Income.

The following tables summarize the changes in Level 3 instruments carried at fair value for the three months ended April 30, 2019 and October 31, 2018:


	As at April 30, 2019
($ millions)		Fair value, beginning of the quarter		Gains/ (losses) recorded in income	⁽¹⁾		Gains/ (losses) recorded in OCI		Purchases/ Issuances	Sales/ Settlements			Transfers into/ out of Level 3			Fair value, end of the quarter
Precious metals	$	14	$	–		$	–	$	25	$ –		$	–		$	39
Trading assets		18		–			–		–	(7	)		4			15
Investment securities		749		5			17		92	(36	)		(4	)		823
Derivative financial instruments		9		(2	)		–		–	–			2			9

(1)

Gains or losses for items in Level 3 may be offset with losses or gains on related hedges in Level 1 or Level 2.


	As at October 31, 2018
($ millions)		Fair value, beginning of the quarter		Gains/ (losses) recorded in income	⁽¹⁾		Gains/ (losses) recorded in OCI		Purchases/ Issuances		Sales/ Settlements			Transfers into/ out of Level 3			Fair value, end of the quarter
Precious metals	$	11	$	–		$	–	$	5	$	–		$	–		$	16
Trading assets		20		–			–		–		(2	)		–			18
Investment securities		750		9			–		70		(39	)		(20	)		770
Derivative financial instruments		28		2			–		–		–			11			41

(1)

Gains or losses for items in Level 3 may be offset with losses or gains on related hedges in Level 1 or Level 2.

Scotiabank Third Quarter Report 2019 71

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Significant transfers

Significant transfers can occur between the fair value hierarchy levels when additional or new information regarding valuation inputs and their refinement and observability become available. The Bank recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred.

There were no significant transfers into and out of Level 3 during the three months ended July 31, 2019, April 30, 2019 and October 31, 2018.

Level 3 sensitivity

The Bank applies judgment in determining unobservable inputs used to calculate the fair value of Level 3 instruments.

Refer to Note 7 of the Bank’s audited consolidated financial statements for the year ended October 31, 2018 for a description of the significant unobservable inputs for Level 3 instruments and the potential effect that a change in each unobservable input may have on the fair value measurement. There have been no significant changes to the Level 3 sensitivities during the quarter.

21.	Corporate income taxes

In November 2016, the Bank received a federal reassessment of $179 million for tax and interest as a result of the Canada Revenue Agency denying the tax deductibility of certain Canadian dividends received during the 2011 taxation year. In August 2017, the Bank received a reassessment of $185 million for tax and interest for the 2012 taxation year. The circumstances of the dividends subject to the reassessments are similar to those prospectively addressed by recently enacted rules which had been introduced in the 2015 Canadian federal budget. In June 2018, the Bank received a reassessment for $211 million for tax and interest in respect of the same circumstances for the 2013 taxation year. 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 vigorously defend its position.

22.	Acquisitions and divestitures

Acquisitions

Acquisitions that closed during the prior period

Banco Dominicano del Progreso, Dominican Republic

On March 1, 2019, the Bank completed the previously announced acquisition of 97.44% of Banco Dominicano del Progreso, Dominican Republic after receiving regulatory approvals. The acquired business forms part of the International Banking business segment.

On acquisition, approximately $1.8 billion of assets (mainly loans) and $1.4 billion of liabilities (mainly deposits) were recorded. Subsequent adjustments during the measurement period will occur as the Bank completes its estimation of fair values of assets acquired including intangibles, and liabilities assumed.

Banco Cencosud, Peru

On March 1, 2019, the Bank completed the acquisition of 51% of the controlling interest of Banco Cencosud, Peru after receiving regulatory approvals. The acquired business forms part of the International Banking business segment.

On acquisition, approximately $0.4 billion of assets (mainly loans) and $0.3 billion of liabilities (mainly deposits) were recorded. Subsequent adjustments during the measurement period will occur as the Bank completes its estimation of fair values of assets acquired including intangibles, and liabilities assumed.

Divestitures

Announced divestiture impacting the current period

Operations in Puerto Rico and the U.S. Virgin Islands

On June 26, 2019, the Bank announced the sale of its operations in Puerto Rico and the U.S. Virgin Islands to Oriental Bank, a subsidiary of OFG Bancorp.

As this transaction has met the accounting requirements of assets held for sale, a loss of $402 million after tax, that primarily represents the carrying value of goodwill relating to this business, has been recorded this quarter inNon-interest income – Other and reported in the Other segment. This transaction is subject to regulatory approvals and closing conditions.

Announced divestiture impacting the prior period

Insurance and banking operations in El Salvador

On February 8, 2019, the Bank announced that it has reached an agreement under which the Bank will sell its banking and insurance operations in El Salvador, including Scotiabank El Salvador, its subsidiaries and Scotia Seguros, subject to regulatory approval and closing conditions.

As this transaction has met the accounting requirements of assets held for sale, a loss of approximately $132 million after tax, that primarily represents the carrying value of goodwill relating to this business, was recorded in the second quarter inNon-interest income – Other and reported in the Other segment. The transaction is expected to close before the end of the fiscal year.

Closed divestiture impacting the prior period

Scotia Crecer AFP and Scotia Seguros – pension and insurance businesses in the Dominican Republic

On April 30, 2019, the Bank completed the sale of Scotia Crecer AFP and Scotia Seguros, its pension and related insurance businesses in the Dominican Republic, upon receiving regulatory approvals and satisfying closing conditions. All assets and liabilities in relation to this business have been derecognized on the date of close and a net gain of approximately $273 million after tax was recorded in the second quarter inNon-interest income – Other and reported in the Other segment.

72 Scotiabank Third Quarter Report 2019

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Divestitures previously announced not yet impacting the Bank’s financial results

Insurance and banking operations in the Caribbean

On November 27, 2018, the Bank announced its subsidiaries in Jamaica and Trinidad & Tobago will sell their insurance operations. The Bank will partner with the buyer to provide an expanded suite of insurance products and services to customers in Jamaica and Trinidad & Tobago.

On November 27, 2018, the Bank also announced it has entered into an agreement with another party to sell its banking operations in ninenon-core markets in the Caribbean (Anguilla, Antigua, Dominica, Grenada, Guyana, St. Kitts & Nevis, St. Lucia, St. Maarten, St. Vincent & the Grenadines).

These divestitures are subject to regulatory approvals and closing conditions.

Thanachart Bank, Thailand

On August 8, 2019, the Bank announced that it has signed agreements with ING Groep N.V., Thanachart Bank Public Company Limited (“TBank”) and TMB Bank Public Company Limited (“TMB”) that largely follow the memorandum of understanding announced on February 26, 2019. The carrying value of the Bank’s 49% interest in TBank was $3.45 billion as at July 31, 2019.

Upon closing and pursuant to these agreements, the Bank will sell its interest in TBank in exchange for cash and shares in TMB (and ultimately the new bank resulting from the subsequent merger of TMB and TBank (“the Merged Bank”)). Based on current values, this would result in the Bank owning approximately 6% of the Merged Bank.

The announced transaction is subject to customary closing conditions, including regulatory approvals, and othernon-customary closing conditions which are particular to the many parties involved. The transaction is expected to close in Q1 2020.

Upon closing, the Bank will record a gain of approximately $300 million after tax, subject to closing adjustments including fair values and foreign exchange rates prevailing at the date of closing, and the Bank’s common equity Tier 1 (CET1) ratio will increase by approximately 25 basis points.

The Bank will continue to retain 49% interest in two TBank subsidiaries that are not part of these signed agreements.

Scotiabank Third Quarter Report 2019 73

SHAREHOLDER INFORMATION

Direct deposit service

Shareholders may have dividends deposited directly into accounts held at financial institutions which are members of the Canadian Payments Association. To arrange direct deposit service, please write to the transfer agent.

Dividend and Share Purchase Plan

Scotiabank’s dividend reinvestment and share purchase plan allows common and preferred shareholders to purchase additional common shares by reinvesting their cash dividend without incurring brokerage or administrative fees.

As well, eligible shareholders may invest up to $20,000 each fiscal year to purchase additional common shares of the Bank. All administrative costs of the plan are paid by the Bank.

For more information on participation in the plan, please contact the transfer agent.

Dividend dates for 2019

Record and payment dates for common and preferred shares, subject to approval by the Board of Directors.


Record Date		Payment Date
January 2, 2019		January 29, 2019
April 2, 2019		April 26, 2019
July 2, 2019		July 29, 2019
October 1, 2019		October 29, 2019

Annual Meeting

The Annual Meeting for fiscal year 2019 is scheduled for April 7, 2020, in Toronto, Ontario, Canada.

Normal Course Issuer Bid

A copy of the Notice of Intention to commence the Normal Course Issuer Bid is available without charge by contacting the Investor Relations Department at416-775-0798 or investor.relations@scotiabank.com.

Website

For information relating to Scotiabank and its services, visit us at our website: www.scotiabank.com.

Conference call and Web broadcast

The quarterly results conference call will take place on August 27, 2019, at 8:15 am EDT and is expected to last approximately one hour. Interested parties are invited to access the call live, in listen-only mode, by telephone at647-484-0473 or toll-free, at1-800-289-0459 using ID 350989# (please call shortly before 8:15 am EDT). In addition, an audio webcast, with accompanying slide presentation, may be accessed via the Investor Relations page of www.scotiabank.com.

Following discussion of the results by Scotiabank executives, there will be a question and answer session. A telephone replay of the conference call will be available from August 27, 2019, to September 11, 2019, by calling647-436-0148 or1-888-203-1112 (North America toll-free) and entering the access code 3040720#. The archived audio webcast will be available on the Bank’s website for three months.

Contact information

Investors:

Financial Analysts, Portfolio Managers and other Institutional Investors requiring financial information, please contact Investor Relations, Finance Department:

Scotiabank

Scotia Plaza, 44 King Street West

Toronto, Ontario, Canada M5H 1H1

Telephone:(416) 775-0798

E-mail: investor.relations@scotiabank.com

Media:

For media enquiries, please contact the Global Communications Department at the above address.

Telephone: (416)775-0828

E-mail: corporate.communications@scotiabank.com

Shareholders:

For enquiries related to changes in share registration or address, dividend information, lost share certificates, estate transfers, or to advise of duplicate mailings, please contact the Bank’s transfer agent:

Computershare Trust Company of Canada

100 University Avenue, 8th Floor

Toronto, Ontario, Canada M5J 2Y1

Telephone:1-877-982-8767

Fax:1-888-453-0330

E-mail: service@computershare.com

74 Scotiabank Third Quarter Report 2019

SHAREHOLDER INFORMATION

Co-Transfer Agent (U.S.A.)

Computershare Trust Company N.A.

250 Royall Street

Canton, MA 02021, U.S.A.

Telephone:1-800-962-4284

For other shareholder enquiries, please contact the Corporate Secretary’s Department:

Scotiabank

Scotia Plaza, 44 King Street West

Toronto, Ontario, Canada M5H 1H1

Telephone:(416) 866-3672

E-mail: corporate.secretary@scotiabank.com

Rapport trimestriel disponible en français

Le Rapport annuel et les états financiers de la Banque sont publiés en français et en anglais et distribués aux actionnaires dans la version de leur choix. Si vous préférez que la documentation vous concernant vous soit adressée en français, veuillez en informer Relations publiques, Affaires de la société et Affaires gouvernementales, La Banque de Nouvelle-Écosse, Scotia Plaza, 44, rue King Ouest, Toronto (Ontario), Canada M5H 1H1, en joignant, si possible, l’étiquette d’adresse, afin que nous puissions prendre note du changement.

Scotiabank Third Quarter Report 2019 75


The Bank of Nova Scotia is incorporated in Canada with limited liability.

The Bank of Nova Scotia (BNS) 6-K2019 Q3 Current report (foreign)