(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, 2021.

(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 for non-retail exposures and product type for retail exposures.


Exposure at default (1)	As at
	April 30, 2022						January 31 2022		October 31 2021
($ millions)	AIRB		Standardized		Total		Total		Total
By exposure sub-type
Non-retail
Drawn (2)(3)	$	446,169	$	66,748	$	512,917	$	493,548	$	459,902
Undrawn commitments		116,895		3,806		120,701		118,970		117,213
Other exposures (4)		110,511		7,771		118,282		121,331		119,923
Total non-retail	$	673,575	$	78,325	$	751,900	$	733,849	$	697,038
Retail
Drawn (5)	$	271,657	$	99,421	$	371,078	$	360,789	$	345,947
Undrawn commitments		54,321		–		54,321		52,994		51,020
Total retail	$	325,978	$	99,421	$	425,399	$	413,783	$	396,967
Total	$	999,553	$	177,746	$	1,177,299	$	1,147,632	$	1,094,005

(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)

Includes off-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 of non-retail exposures

The Bank’s non-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, 2021.

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 April 30, 2022,

% (January 31, 2022 –

%; October 31, 2021 –

%) of the Canadian residential mortgage portfolio is insured. The average loan-to-value ratio of the uninsured portion of the Canadian residential mortgage portfolio is

47% (January 31, 2022 – 49%; October 31, 2021 – 49%).

Retail standardized portfolio

The retail standardized portfolio of $99 billion as at April 30, 2022 (January 31, 2022 – $97 billion; October 31, 2021 – $91 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, $60 billion (January 31, 2022 – $59 billion; October 31, 2021 – $55 billion) was represented by mortgages and loans secured by residential real estate, mostly with a loan-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.

Scotiabank Second Quarter Report 2022

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).

Non-trading foreign currency risk

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

As at April 30, 2022, a one per cent increase (decrease) in the Canadian dollar against all currencies in which the Bank operates decreases (increases) the Bank’s before-tax annual earnings by approximately $39 million due primarily from exposure to U.S. dollars and Chilean Pesos (January 31, 2022 – $

million; April 30, 2021 – $

million) and the effect of which is not hedged.

A similar change in the Canadian dollar as at April 30, 2022, would increase (decrease) the unrealized foreign currency translation losses in the accumulated other comprehensive income section of shareholders’ equity by approximately $331 million (January 31, 2022 – $329 million; April 30, 2021 – $336 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 6.

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			As at
	April 30, 2022							April 30			January 31			April 30
($ millions)	Average			High		Low		2022			2022			2021
Credit spread plus interest rate	$	10.4		$	13.7	$	7.2	$	10.2		$	14.0		$	10.8
Credit spread		5.7			8.6		4.0		5.5			5.9			4.8
Interest rate		9.6			14.6		7.8		9.6			14.1			13.9
Equities		4.0			6.8		1.7		5.1			2.2			9.4
Foreign exchange		2.0			3.7		1.3		1.8			1.4			3.0
Commodities		2.8			5.6		1.3		5.6			1.7			4.1
Debt specific		2.1			2.6		1.7		2.0			2.0			2.3
Diversification effect		(9.4	)		–		–		(12.0	)		(7.4	)		(13.0	)
Total VaR	$	11.9		$	15.6	$	7.8	$	12.7		$	13.9		$	16.6
Total Stressed VaR	$	26.4		$	41.0	$	16.8	$	25.7		$	24.7		$	37.6

(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 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 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)	April 30 2022		January 31 2022		April 30 2021		April 30 2022		January 31 2022		April 30 2021		April 30 2022		January 31 2022		April 30 2021
Liabilities
Senior note liabilities (2)	$	21,927	$	23,979	$	20,406	$	3,913	$	902	$	197	$	4,108	$	195	$	(350	)

(1)

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

(2)

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 in non-interest income – trading revenues. The offsetting fair value changes from associated derivatives is also recorded in non-interest income – trading revenues.

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		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 April 30, 2022	$	26,035	$	21,927	$	4,108		$	787		$	289
As at January 31, 2022	$	24,174	$	23,979	$	195		$	231		$	(498	)
As at April 30, 2021	$	20,056	$	20,406	$	(350	)		$ (140	)	$	(777	)

(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 audited consolidated financial statements in the 2021 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 excludes non-financial assets, such as property and equipment, investments in associates, precious metals, goodwill and other intangible assets.


	As at
	April 30, 2022				January 31, 2022				October 31, 2021
($ 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	$	85,910	$	85,910	$	99,053	$	99,053	$	86,323	$	86,323
Trading assets		133,644		133,644		152,947		152,947		146,312		146,312
Securities purchased under resale agreements and securities borrowed		148,706		148,706		132,714		132,714		127,739		127,739
Derivative financial instruments		54,608		54,608		40,655		40,655		42,302		42,302
Investment securities – fair value		83,788		83,788		64,123		64,123		57,042		57,042
Investment securities – amortized cost		16,107		16,699		17,453		17,576		18,133		18,157
Loans		684,215		689,702		666,622		667,338		641,964		636,986
Customers’ liability under acceptances		19,043		19,043		20,901		20,901		20,404		20,404
Other financial assets		19,349		19,349		14,625		14,625		14,256		14,256
Liabilities:
Deposits		869,308		876,554		848,941		851,045		798,335		797,259
Financial instruments designated at fair value through profit or loss		21,927		21,927		23,979		23,979		22,493		22,493
Acceptances		19,070		19,070		20,934		20,934		20,441		20,441
Obligations related to securities sold short		44,620		44,620		46,133		46,133		40,954		40,954
Derivative financial instruments		57,123		57,123		39,697		39,697		42,203		42,203
Obligations related to securities sold under repurchase agreements and securities lent		131,978		131,978		122,878		122,878		123,469		123,469
Subordinated debentures		8,360		8,447		6,666		6,338		6,733		6,334
Other financial liabilities		41,679		41,949		44,078		44,348		39,802		40,254

(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 for over-the-counter transactions, as well as transactions in inactive or illiquid markets. In these instances, internal models that maximize the use of observable inputs are used to estimate fair value. The chosen valuation technique incorporates all the factors that market participants would take into account in pricing a transaction. When all significant inputs 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 or other valuation techniques. Fair value estimates do not consider forced or liquidation sales.

Where financial instruments trade in inactive markets, illiquid 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 classified as Level 3.

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


							As at
	April 30, 2022								January 31, 2022
($ 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)	$	–	$	1,056	$	–	$	1,056	$	–	$	527	$	–	$	527
Trading assets
Loans		–		8,483		–		8,483		–		8,494		–		8,494
Canadian federal government and government guaranteed debt		7,630		3,716		–		11,346		6,228		3,626		–		9,854
Canadian provincial and municipal debt		4,000		4,608		–		8,608		3,935		5,039		–		8,974
US treasury and other US agencies’ debt		7,552		100		–		7,652		9,601		48		–		9,649
Other foreign governments’ debt		76		9,106		–		9,182		159		8,059		–		8,218
Corporate and other debt		2,667		9,070		1		11,738		2,529		9,191		2		11,722
Equity securities		74,813		71		3		74,887		94,478		123		3		94,604
Other		–		1,748		–		1,748		–		1,432		–		1,432
	$	96,738	$	36,902	$	4	$	133,644	$	116,930	$	36,012	$	5	$	152,947
Investment securities (2)
Canadian federal government and government guaranteed debt	$	5,011	$	4,700	$	–	$	9,711	$	3,992	$	4,412	$	–	$	8,404
Canadian provincial and municipal debt		1,711		3,490		–		5,201		1,336		4,007		–		5,343
US treasury and other US agencies’ debt		33,515		2,019		–		35,534		13,925		2,238		–		16,163
Other foreign governments’ debt		189		26,261		17		26,467		153		27,998		18		28,169
Corporate and other debt		36		1,406		60		1,502		69		1,108		24		1,201
Equity securities		3,659		233		1,481		5,373		3,157		233		1,453		4,843
	$	44,121	$	38,109	$	1,558	$	83,788	$	22,632	$	39,996	$	1,495	$	64,123
Derivative financial instruments
Interest rate contracts	$	–	$	9,923	$	8	$	9,931	$	–	$	12,568	$	2	$	12,570
Foreign exchange and gold contracts		–		26,027		–		26,027		–		16,833		–		16,833
Equity contracts		251		8,273		26		8,550		334		3,964		20		4,318
Credit contracts		–		487		–		487		–		342		–		342
Commodity contracts		–		9,602		11		9,613		–		6,585		7		6,592
	$	251	$	54,312	$	45	$	54,608	$	334	$	40,292	$	29	$	40,655
Liabilities:
Deposits	$	–	$	106	$	–	$	106	$	–	$	174	$	–	$	174
Financial liabilities designated at fair value through profit or loss		–		21,840		87		21,927		–		23,842		137		23,979
Obligations related to securities sold short		38,131		6,487		2		44,620		38,114		8,017		2		46,133

Derivative financial instruments
Interest rate contracts		–		17,835		7		17,842		–		13,494		17		13,511
Foreign exchange and gold contracts		–		27,261		–		27,261		–		17,374		–		17,374
Equity contracts		524		2,904		6		3,434		364		3,069		4		3,437
Credit contracts		–		27		–		27		–		26		–		26
Commodity contracts		–		8,553		6		8,559		–		5,341		8		5,349
	$	524	$	56,580	$	19	$	57,123	$	364	$	39,304	$	29	$	39,697

(1)

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

(2)

Excludes debt investment securities measured at amortized cost of $16,699 (January 31, 2022 – $17,576).


	As at October 31, 2021
($ millions)	Level 1		Level 2		Level 3		Total
Instruments carried at fair value on a recurring basis:
Assets:
Precious metals (1)	$	–	$	755	$	–	$	755
Trading assets
Loans		–		8,113		–		8,113
Canadian federal government and government guaranteed debt		9,272		3,842		–		13,114
Canadian provincial and municipal debt		5,556		4,298		–		9,854
US treasury and other US agencies’ debt		6,760		63		–		6,823
Other foreign governments’ debt		129		9,559		–		9,688
Corporate and other debt		2,595		9,185		40		11,820
Equity securities		85,688		160		1		85,849
Other		–		1,051		–		1,051
	$	110,000	$	36,271	$	41	$	146,312
Investment securities (2)
Canadian federal government and government guaranteed debt	$	1,125	$	4,679	$	–	$	5,804
Canadian provincial and municipal debt		1,937		3,218		–		5,155
US treasury and other US agencies’ debt		11,462		2,175		–		13,637
Other foreign governments’ debt		67		26,605		17		26,689
Corporate and other debt		10		1,319		27		1,356
Equity securities		2,879		218		1,304		4,401
	$	17,480	$	38,214	$	1,348	$	57,042
Derivative financial instruments
Interest rate contracts	$	–	$	13,124	$	1	$	13,125
Foreign exchange and gold contracts		–		18,293		–		18,293
Equity contracts		184		3,513		21		3,718
Credit contracts		–		245		–		245
Commodity contracts		–		6,921		–		6,921
	$	184	$	42,096	$	22	$	42,302
Liabilities:
Deposits	$	–	$	175	$	–	$	175
Financial liabilities designated at fair value through profit or loss		–		22,354		139		22,493
Obligations related to securities sold short		35,487		5,467		–		40,954

Derivative financial instruments
Interest rate contracts		–		13,148		15		13,163
Foreign exchange and gold contracts		–		18,171		–		18,171
Equity contracts		307		4,737		6		5,050
Credit contracts		–		30		–		30
Commodity contracts		–		5,789		–		5,789
	$	307	$	41,875	$	21	$	42,203

(1)

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

(2)

Excludes debt investment securities measured at amortized cost of $18,157.

Level 3 instrument fair value changes

Financial instruments categorized as Level 3 as at April 30, 2022, in the fair value hierarchy comprise certain foreign government bonds, structured corporate bonds, equity securities, complex derivatives, financial liabilities designated at fair value through profit or loss and obligations related to securities sold short.

The following table summarizes the changes in Level 3 instruments carried at fair value for the three months ended April 30,

2022.

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 April 30, 2022
($ 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)
Trading assets
Corporate and other debt	$	2		$	(2	)	$	–		$	–		$	–		$	1		$	1		$	(2	)
Equity securities		3			–			–			2			–			(2	)		3			–
		5			(2	)		–			2			–			(1	)		4			(2	)
Investment securities
Other foreign governments’ debt		18			–			(1	)		–			–			–			17			n/a
Corporate and other debt		24			–			(6	)		42			–			–			60			–
Equity securities		1,453			58			4			74			(103	)		(5	)		1,481			58
		1,495			58			(3	)		116			(103	)		(5	)		1,558			58
Derivative financial instruments – assets
Interest rate contracts		2			6			–			–			–			–			8			6
Equity contracts		20			4			–			1			–			1			26			4	(2)
Commodity contracts		7			4			–			–			–			–			11			4

Derivative financial instruments – liabilities
Interest rate contracts		(17	)		(5	)		–			–			–			15			(7	)		(5	) (3)
Equity contracts		(4	)		(1	)		–			(1	)		–			–			(6	)		(1	) (2)
Commodity contracts		(8	)		2			–			–			–			–			(6	)		2
		–			10			–			–			–			16			26			10

Financial liabilities designated at fair value through profit or loss		(137	)		25			–			(22	)		–			47			(87	)		7

Obligations related to securities sold short		(2	)		–			–			–			–			–			(2	)		–
Total	$	1,361		$	91		$	(3)		$	96		$	(103)		$	57		$	1,499		$	73

(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 by mark-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 by mark-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 January 31, 2022 and October 31, 2021.


	As at January 31, 2022
($ 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
Trading assets	$	41		$	–		$	–	$	–	$	(31	)	$	(5	)	$	5
Investment securities		1,348			66			5		102		(30	)		4			1,495
Derivative financial instruments		1			(3	)		–		–		–			2			–
Financial liabilities designated at fair value through profit or loss		(139	)		2			–		–		–			–			(137	)
Obligations related to securities sold short		–			–			–		–		–			(2)			(2	)

(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, 2021
($ 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
Trading assets	$	4		$	(1	)	$	–	$	28		$	–		$	10		$	41
Investment securities		1,190			83			28		78			(32	)		1			1,348
Derivative financial instruments		(35	)		4			–		(12)			51			(7	)		1
Financial liabilities designated at fair value through profit or loss		(119	)		–			–		(20	)		–			–			(139	)

(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.

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 at the end of the reporting period during which the change has occurred.

The following significant transfers made between Level 1 and 2, were based on whether the fair value was determined using quoted market prices from an active market.

During the three months ended April 30, 2022:

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Trading assets of $1,191 million, investment securities of $475 million and obligations related to securities sold short of $624 million were transferred out of Level 2 into Level 1.

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Trading assets of $1,306 million, investment securities of $463 million and obligations related to securities sold short of $361 million were transferred out of Level 1 into Level 2.

During the three months ended January 31, 2022:

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Trading assets of $629 million, investment securities of $1,484 million and obligations related to securities sold short of $43 million were transferred out of Level 2 into Level 1.

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Trading assets of $2,034 million, investment securities of $754 million and obligations related to securities sold short of $1,171 million were transferred out of Level 1 into Level 2.

During the three months ended October 31, 2021:

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Trading assets of $9,455 million, investment securities of $3,407 million and obligations related to securities sold short of $2,550 million were transferred out of Level 2 into Level 1.

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Trading assets of $9,972 million, investment securities of $13,474 million and obligations related to securities sold short of $2,235 million were transferred out of Level 1 into Level 2.

There were no significant transfers into and out of Level 3 during the three months ended April 30, 2022, January 31, 2022 and October 31, 2021.

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, 2021 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.