Financial Performance and Regulatory Disclosures
Q2 2015
Caution regarding forward-looking statements
This document contains certain forward-looking statements with respect to Manulife Bank of Canada’s (“MBC” or the “Bank”) financial condition,
results of operations and business. Forward-looking statements can generally be identified by words such as “will,” “expects,” “believes,” “seeks,”
“estimates,” “potential,” “possible,” “targeting,” and variations of these words and similar expressions.
Forward-looking statements involve inherent risks and uncertainties and, therefore, undue reliance should not be placed on them. Readers are
cautioned that a number of factors could cause actual results to differ, in some instances materially, from those anticipated or implied in any
forward-looking statement. These factors include changes in general economic conditions in the market in which MBC operates, changes to
government policy and regulation, and factors specific to MBC.
The forward-looking statements in this document are, unless otherwise indicated, as of the date they are made. MBC makes no commitment to
revise or update any forward-looking statements.
Overview
About Manulife Bank of Canada
MBC is a Schedule I federally chartered bank and a wholly owned
subsidiary of The Manufacturers Life Insurance Company (“MLI”), a
wholly owned subsidiary of Manulife Financial Corporation (“MFC”).
MFC is a publicly traded financial services group. MBC and its wholly
owned subsidiary, Manulife Trust Company (“MTC”), provide a wide
range of financial products and services including mortgage and
investment loans, and deposit products. Platinum Canadian Mortgage
Trust (“PCMT”) was established to provide financing for MBC mortgage
products through securitization.
Vision
MBC’s vision is to improve the wealth of Canadians by providing
efficient and flexible banking solutions and integrating banking into
every client’s financial plan.
Financial Performance and Regulatory Disclosures
This document provides information on consolidated MBC financial
performance and includes pertinent disclosures based on the Basel
Committee on Banking Supervision’s (“BCBS”) Basel II and III
frameworks and the Office of the Superintendent of Financial
Institutions (“OSFI”) final B-6 and B-20 guidelines. These disclosures
are intended to provide market participants with information regarding
the risk profile of MBC and the application of Basel regulatory
requirements as well as information related to MBC’s residential
mortgage loans portfolios to enable market participants to evaluate the
Bank’s residential mortgage underwriting standards.
The financial data presented in this document represents the
consolidated financial results for MBC, its subsidiary, MTC, and
structured entity PCMT.
Contents
Overview
Values
MFC’s values guide all the activities at MBC, from strategic planning to
day-to-day decision making, to the manner in which its customers and
other stakeholders are treated. Represented by the acronym PRIDE,
the Bank’s values are:
Professionalism
Real Value to Customers
Integrity
Demonstrated Financial Strength
Employer of Choice
1
2
Financial Performance1
Key strategic priorities ............................................................... 4
Basel III Pillar 3 Disclosures
6
Credit Risk .................................................................................. 7
Market Risk ................................................................................ 20
Liquidity Risk .............................................................................. 22
Operational Risk ........................................................................ 26
Capital Management ................................................................. 27
B20 Disclosures
33
Glossary
36
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
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Financial Performance1
MBC ended the quarter with assets of $21.7 billion, a decrease of $1.6 billion, or 7% as compared to
June 30, 2014, driven by a drop in the Bank's excess liquidity position, as a result of the finalization of
OSFI's Liquidity Adequacy Requirements guideline. Assets decreased by $0.5 billion or 2% as
compared to March 31, 2015, primarily due to a decrease in short term liquidity assets driven by a
reduction in excess liquidity.
1
The business environment continued to be challenging with slowing retail loan demand as both
consumers and industry adjust to the introduction of government policies designed to slow the growth of
consumer debt levels together with macro-economic challenges arising from lower oil prices. The
Bank’s record of stable earnings is an indication of the success of its unique business model, which
offers Canadians efficient and flexible banking solutions, through their financial advisors, to support and
complement their broader financial plans.
Total Assets
(in C$ billions)
23.3
Q2 14
23.5
Q3 14
21.9
22.2
Q4 14
Q1 15
21.7
Q2 15
Net income of $37 million for the three months ended June 30, 2015, increased $14 million, or 61%, as
compared to the three months ended June 30, 2014. Net income of $70 million for the six months
ended June 30, 2015, increased by $19 million, or 37%, as compared to the six months ended June 30,
2014. The increase in net income compared to prior year reflects the impact of improved net interest
margins driven by reduced liquidity levels, selective liability repricing and a reduction to the special onetime provision for probable credit losses. Net income increased $4 million, or 12%, as compared to the
three months ended March 31, 2015 primarily impacted by improved net interest margins driven by
reduced liquidity levels and selective liability repricing, partially offset by a decline in net lending assets.
Total revenue for the three months ended June 30, 2015 of $93 million and the six months ended June
30, 2015 of $181 was higher by $6 million (or 7%) and $16 million (or 10%) respectively as compared to
the three months and the six months ended June 30, 2014, due to improved net interest margins with
reduced liquidity levels and selective liability repricing. Total revenue increased by $5 million or 6%, as
compared to the three months ended March 31, 2015, primarily due to improved net interest margins as
a result of reduced liquidity levels and selective liability repricing, partially offset by lower net lending
assets.
Quarterly Net Income
(in C$ millions)
40
32
33
37
23
Q2 14
Q3 14
Q4 14
Q1 15
Q2 15
1
Financial performance information is provided to enable a reader to assess the Bank’s results of operations and financial
condition for the three month period ended June 30, 2015.
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
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Non-interest expense for the three months ended June 30, 2015 was $45 million, an increase of $2
million, or 5% as compared to the three months ended June 30, 2014. Non-interest expense for the six
months ended June 30, 2015 was $87 million, an increase of $4 million, or 5% as compared to the six
months ended June 30, 2014. The increase in non-interest expense for 2015 is primarily due to
business growth and the ongoing strengthening of operational infrastructure and risk management
practices. Non-interest expense increased by $3 million or 7%, as compared to the three months ended
March 31, 2015, driven primarily by the timing of marketing, consulting and travel/conference expenses
partially offset by the capitalization of information system projects.
Efficiency Ratio2
48.2%
49.3%
46.8%
46.9%
46.5%
Q2 14
Q3 14
Q4 14
Q1 15
Q2 15
The Banks’ efficiency ratio of 46.9% was lower, as compared with 48.2% reported in the second quarter
of 2014, driven by higher net interest margins, partially offset by lower investment gains. The Bank’s
efficiency ratio of 46.9% remained stable to the efficiency ratio reported in the first quarter of 2015 of
46.8%.
MBC has no exposure to European sovereign debt or to the sub-prime mortgage market.
Capital2
Basel III Common Equity Tier 1 (“CET1”) ratio, Tier 1 capital ratio and Total capital ratio were 19.8 per
cent, 22.3 per cent and 23.6 per cent, respectively, as at June 30, 2015 (based on the “all in”
methodology), well in excess of minimum regulatory capital requirements.
Effective Q1 2015, the Bank has amended the terms of the preferred shares to include the Non-viable
Contingent Capital (“NVCC”) clause. The Bank's preferred shares are no longer subject to transitional
phase-out, as the preferred shares meet all the requirements for inclusion of Regulatory Capital under
OSFI’s CAR Guideline.
Risk weighted assets as at June 30, 2015 of approximately $6.1 billion increased 1% or $0.1 billion as
compared to June 30, 2014. The increase was primarily due to growth in lending volumes. Risk
weighted assets as at June 30, 2015 were flat as compared with March 31, 2015.
Refer to the Capital Management section for further discussion on regulatory capital, capital ratios and
risk weighted assets.
Total risk-weighted assets
~$ 6.1 Billion
Total capital
~$ 1.4 Billion
CET1 Capital Ratio
19.8%
Tier 1 Capital Ratio
22.3%
Total Capital Ratio
23.6%
2
Beginning Q4, 2014, to align to industry standards and IFRS, the efficiency ratio now excludes the amortization of acquisition
costs previously included in operating expenses.
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Credit ratings
As at June 30, 2015, the long-term and short-term credit ratings remained the same as in the year ended
December 31, 2014. As at April 2, 2015, DBRS has reaffirmed the Bank’s long-term deposit rating of A
3
(high) and its short-term deposit rating of R-1 (middle) . As at October 10, 2014, Standard & Poor’s has
4
reaffirmed Manulife Bank’s long-term deposit rating A+ and its short-term deposit rating of A-1 .
Standard & Poor's
Short-term rating
A-1
Long-term rating
A+
DBRS
Key strategic priorities
Short-term rating
R-1 (middle)
Long-term rating
A(high)
MBC continues to focus on strengthening and growing its core business and customer service, while
expanding into complementary products and services to meet a broader range of customer needs. The
Bank’s priorities include:






Focus on strengthening distribution capabilities and mobile banking force;
Continue to enhance its risk management framework;
Expand product and service offerings to meet diverse client needs;
Continue to develop and maintain sustainable and diversified sources of funding and liquidity;
Continuously improve its technology, operations, and customer service; and
Continue to strengthen its brand.
During the second quarter of 2015 the Bank announced the planned installation of approximately 830
automated banking machines (“ABMs”) in select Mac’s Couche-Tard and Circle K locations across
Canada. The expanded ABM network will provide the Bank’s customers with greater access to
financial services and surcharge-free withdrawals. In addition to offering greater access to MBC
customers, the new ABMs will be a part of The EXCHANGE® Network, a network of banks and credit
unions that provide surcharge-free deposits and withdrawals to members’ customers at more than
3,300 locations. The ABM deployment is expected to be complete by the end of the third quarter of
2015.
3
Long-term debt rated A is “of satisfactory credit quality and protection of interest and principal is still substantial.” A is the third-highest rating out of ten. Each rating category (except
AAA and D) is denoted by the subcategories “high” and “low”. The absence of either a “high” or “low” designation indicates the rating is in the “middle” of the category. Short-term debt
rated R-1 (middle) is of “superior credit quality and typically exemplifies above-average strength in key areas of consideration for the timely repayment of short-term liabilities.” The
rating R-1 (middle) is the second-highest rating out of 10.
4
Long-term debt rated A has “strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances.” A is the third
highest rating out of 10. A short-term issuer credit rating of A-1 denotes “a strong capacity to meet its financial commitments.” A-1 is Standard & Poor‘s highest short term rating
category.
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Financial Performance
As at balances
(Canadian $ in millions, unaudited)
ASSETS
Cash, cash equivalents and restricted cash
Debt securities
Equity securities
$
$
$
Mortgage loans
Other loans
$
$
$
Other assets
Total assets
LIABILITIES and EQUITY
Liabilities
Demand deposits
Term deposits
$
$
Notes payable
Other liabilities
Subordinated debt
Total liabilities
Equity
Issued share capital
Preferred shares
Common shares
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Total equity
Total liabilities and equity
$
$
$
$
2015
(Canadian $ in millions, unaudited)
Revenue
Interest income
Interest expense
Net interest income
Non-interest income
Total revenue
Provision for credit losses on lending assets
Non-interest expense
Net income before income tax
Income tax expense
Net income
Q1 2015
Q2 2015
Q1
Q2
$
$
$
$
$
165
82
83
10
93
(1)
45
49
12
37
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
10,858
7,179
18,037
2,099
123
68
20,327
$
154
212
109
888
8
1,371
21,698
$
$
$
$
$
2014
Q3
Q4
163
86
77
11
88
1
42
45
12
33
1,995
104
209
2,308
17,570
1,750
19,320
70
21,698
183
97
86
13
99
(1)
46
54
14
40
$
$
$
$
$
2,387
109
214
2,710
17,640
1,770
19,410
74
22,194
Q4 2014
$
$
$
$
$
$
11,003
7,561
18,564
2,099
117
68
20,848
$
154
212
109
854
17
1,346
22,194
$
$
$
$
$
2,058
128
210
2,396
17,654
1,772
19,426
78
21,900
Q3 2014
$
$
$
$
$
$
11,312
7,072
18,384
1,999
130
68
20,581
$
154
212
109
822
22
1,319
21,900
$
$
$
$
$
Q2 2014
3,395
445
200
4,040
17,639
1,786
19,425
79
23,544
$
11,810
8,046
19,856
2,041
129
235
22,261
$
154
212
109
785
23
1,283
23,544
$
$
$
$
$
$
$
$
$
$
Fiscal YTD
Q2
176
101
75
10
85
(1)
43
43
11
32
$
$
$
$
$
2015
176
102
74
13
87
13
43
31
8
23
$
$
$
$
$
$
$
$
$
$
11,629
8,060
19,689
2,041
115
235
22,080
154
212
109
755
25
1,255
23,335
Fiscal
2014
2014
328
168
160
21
181
87
94
24
70
3,322
378
192
3,892
17,548
1,811
19,359
84
23,335
349
203
146
19
165
14
83
68
17
51
$
$
$
$
$
708
401
307
42
349
12
172
165
42
123
The tables above are a summary of MBC's consolidated financial statements and are consistent with the consolidated financial statements filed with OSFI with classification differences due to summarization of results.
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Basel III Pillar 3 Disclosures 5
MBC is a Schedule I bank regulated by OSFI. MTC is a federally incorporated trust company licensed to operate in Canada with full trust and loan
company powers under the Trust and Loan Companies Act (Canada) and is also regulated by OSFI. Canadian Deposit-taking Institutions are
subject to OSFI’s revised Capital Adequacy Requirements (“CAR”) guideline, which reflects the capital requirements that have been approved by
the BCBS reform commonly referred to as Basel III. OSFI’s capital requirements are applied at the consolidated MBC level. Refer to the Capital
Management section for further details.
Regulatory approaches used to determine capital requirements
Credit risk
Banks are permitted a choice of two methodologies in determining the capital requirements for credit risk: the Internal Ratings Based (“IRB”)
Approach or the Standardized Approach. Under the IRB Approach, banks are permitted to determine risk weightings for on and off-balance sheet
exposures using internal risk formulas. The Standardized Approach requires banks to use assessments from qualifying rating agencies to
determine risk weightings. MBC and MTC apply the Standardized Approach when determining capital requirements for credit risk.
Market risk
Market risk capital is calculated using one of two methodologies: the Standardized Approach or Internal Models. MBC and MTC utilize the
Standardized Approach, as applicable.
Operational risk
Banks are permitted to apply one of three approaches to calculate capital requirements for operational risk. The Basic Indicator Approach requires
banks to hold operational risk capital equal to the average over the previous three years of a fixed percentage of positive annual gross income.
The Standardized Approach divides the bank’s business activities into eight business lines. For each business line, gross income is multiplied by
an assigned factor, and the total capital charge is calculated as the three year average of the simple summation of regulatory capital charges
across the business lines in each year. The Advanced Measurement Approach uses a bank’s own internal operational risk measurement system
based on prescribed quantitative and qualitative criteria to determine capital requirements and is subject to supervisory approval. MBC and MTC
collectively apply the Basic Indicator Approach to determine operational risk capital requirements.
The following sections outline the Bank’s risk management framework and include pertinent disclosures under Basel III Pillar 3 and under OSFI
Guideline B-6 Liquidity Principles and B-20 Residential Mortgage Underwriting Practices and Procedures for MBC and MTC.
5
The financial information included in this Pillar 3 regulatory disclosures below are unaudited and in millions of Canadian dollars, unless otherwise stated.
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Credit Risk
Credit risk is the risk of loss due to the inability or unwillingness of a borrower or counterparty to fulfil its payment obligations.
Key risk factors
Credit risk is one of the most significant risks to MBC’s business, and exists in its lending activities, investment activities and derivative
transactions.
Risk management strategy
Policies establish exposure limits by borrower, quality rating, industry, and geographic region. The Bank currently does not participate in the credit
derivative market and does not have exposure to credit default swaps. The Chief Risk Officer (“CRO”) and the Senior Credit Committee set out
objectives related to the overall quality and diversification of lending portfolios and establish criteria for the selection of counterparties and
intermediaries. The CRO monitors compliance with all credit policies and limits.
The Bank establishes policies and procedures to provide an independent assessment of the existence, quality and value of the credit portfolios, the
integrity of the credit process, and to promote the detection of related problems. Internal audit performs periodic assessments of compliance with credit
policies and procedures of credit granting and investment originating units.
The Board of Directors of both MBC and MTC (“Board of Directors”) are responsible for reviewing and approving all key credit risk management
policies. A review system sensitized to prescribed total credit exposure and risk rating thresholds is in place and is maintained with the intent that:






The borrower’s current financial condition is known;
Collateral security is adequate and enforceable relative to the borrower’s current circumstances;
Credits are in compliance with covenants and margins;
Early identification and classification of at risk credit is possible;
Current information regarding the quality of the loan portfolio is available; and
Higher risk credits are reviewed in order to assess the risk of default.
The Bank’s risk rating systems are designed to assess and monitor credit risk. The risk assessment and monitoring processes for the lending
portfolio and derivatives contracts are described below.
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Lending portfolio
MBC’s flagship product, Manulife One, is an all-in-one banking solution that combines a client’s savings and borrowings into one HELOC product. This
can include a client’s traditional mortgage loan, personal loan, lines of credit, chequing and savings accounts, and credit card debt. The Proactive
Account Monitoring (“PAM”) program is a client engagement program that uses predictive indicators of potential default to select accounts for proactive
remediation. High risk clients are contacted before they enter arrears and are encouraged to undertake actions to reduce their borrowing and maintain
their good standing.
For loans and mortgages, an internal risk rating is assigned ranging from “1 and 2 – little or no risk” to “8 – doubtful.” The internal risk ratings reflect
the credit quality of the lending assets. All lending assets that MBC originates are assigned a risk rating. During the first quarter of 2015, the Bank’s
internal risk rating process was enhanced. The new process applies a higher degree of conservatism when individual client credit scores and loan-tovalue (“LTV”) ratios fall below a minimum threshold. This has resulted in a significant shift for mortgage and other loans from category 2 and 3 to
category 4 in the first and second quarter of 2015. MBC’s entire portfolio of mortgage and other loans categorized by internal risk ratings is disclosed
at the end of this section (Credit Risk).
As at June 30, 2015 the residential mortgage loans portfolio includes $15.6 billion of Manulife One accounts (December 31, 2014 - $15.8 billion),
with the remaining comprising primarily of conventional residential mortgage loans. Insured mortgages are insured against loss caused by
borrower default under a loan secured by real property. Insurance is provided by the Canada Mortgage and Housing Corporation (“CMHC”) or
other authorized insurers.
Derivative counterparties
Derivative financial instrument contracts are entered into for asset-liability management purposes to better match the cash flows resulting from different
re-pricing or maturity dates of assets and liabilities. The Bank employs defensive hedging strategies to reduce structural interest rate risk in the banking
book.
Interest rate risk is the risk that changing interest rates will adversely impact MBC’s financial results. The Bank primarily uses vanilla interest rate
swaps, where fixed and floating interest payments based on a specified amount of notional principal for a specified time period are exchanged with a
swap counterparty. As at June 30, 2015, the majority of the interest rate swaps are designated as fair value hedges designed to hedge the interest rate
risk of guaranteed investment certificates (“GIC”) and other term deposits.
MBC limits the types of authorized derivatives and application strategies. Approval is required from MBC’s Asset Liability Committee (“ALCO”) and
MFC’s Global ALCO for derivative application strategies and they regularly monitor hedge effectiveness. Counterparties are required to post collateral
to cover positive market positions (refer to the Collateral Management section of this document). The derivative counterparty exposure is measured as
net potential credit exposure, which takes into consideration mark-to-market values of all transactions with each counterparty and net of any collateral
held. Market standard valuation methodologies are used for over the counter (“OTC”) interest rate swaps. Key variables impacting valuations
include the Banker’s Acceptance (“BA”) and swap rates. Inputs to models are consistent with what market participants would use when pricing the
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
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instruments. Observable inputs can be corroborated by market data and include interest rates and BA swap curves and volatilities. Inputs that are
not observable in the market or cannot be derived principally from, or corroborated by, observable market data include broker quotes and inputs
that are outside the observable portion of the interest rate curve. These unobservable inputs may involve significant management judgment or
estimation. It should be noted that even when unobservable, inputs are based on assumptions deemed appropriate given the circumstances and
consistent with what market participants would use when pricing such instruments. The Bank has not used unobservable inputs in the valuation of
OTC interest rate swaps held as at June 30, 2015.
The credit risk of both the counterparty and MBC are considered in determining the fair value for all OTC derivatives after taking into account the
effects of netting agreements and collateral arrangements.
The majority of the swaps qualify as fair value hedges for accounting purposes. Accordingly, the gains or losses recognized on derivatives are
offset by the corresponding gains or losses recognized on the hedged items in income. In the second quarter of 2015, a net gain of $0.02 million
(net gain of $0.05 million for the second quarter of 2014) was recognized in income for swaps due to hedge ineffectiveness and a net gain of $0.04
million for the six months ended June 30, 2015 (a net gain of $0.35 million for the six months ended June 30, 2014).
Risk control and mitigation
Diversification
MBC’s credit risk governance policies require an acceptable level of diversification. Limits are in place for several portfolio dimensions including
industry, geography, single-name concentrations and transaction-specific limits. Although the Bank’s credit portfolio is heavily weighted to
Canadian residential mortgage and other loans, the portfolio is well-diversified geographically within Canada. Credit risk exposures are monitored
for concentration risk and such findings are reported to the Board of Directors, the Risk Committee and MLI’s credit risk management department
on a quarterly basis. Quantitative tables at the end of this section break down MBC’s major credit exposure by counterparty, location and residual
contractual maturities.
The average quarterly gross exposure for mortgages was $17.6 billion (second quarter of 2014 - $17.3 billion) and the average quarterly gross
exposure for other loans was $1.8 billion (second quarter of 2014 - $1.8 billion). The average quarterly gross exposure for undrawn commitments
was $7.7 billion (second quarter of 2014 – $7.5 billion).
Lending portfolio
In the normal course of business, various indirect commitments are outstanding that are not reflected on the Consolidated Statements of Financial
Position, including commitments to extend credit in the form of loans or other financing for specific amounts and maturities. These financial
commitments are subject to normal credit standards, financial controls and monitoring procedures.
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Collateral management
Collateral is an integral part of the Bank’s credit risk mitigation in its lending portfolio. The purpose of collateral for credit risk mitigation is to
minimize losses that would otherwise be incurred, and the Bank generally requires borrowers to pledge collateral when the Bank advances credit.
Residential real estate and liquid investments are examples of acceptable collateral.
Summary of Exposure Covered by Eligible Financial Collateral
Counterparty type
(Canadian $ millions)
Bank (1)
Loans (2)
Total exposure covered by credit risk mitigation
(1)
(2)
6
Q1 2015
Q2 2015
$
$
19
1,750
1,769
$
$
31
1,770
1,801
Q4 2014
$
$
35
1,772
1,807
Q3 2014
$
$
41
1,786
1,827
Includes exposures to deposit taking institutions, securities firms and certain public sector entities.
The maximum exposure is equal to the loan value advanced to a borrower as the value of financial collateral exceeds the amount drawn. The exposure amounts presented are net of allowance for credit losses.
Derivatives
The Bank has established policies and limits for managing credit risk exposures that may arise with counterparties when entering into derivative
transactions. Gross derivative counterparty exposure is measured as the total fair value (including accrued interest) of all outstanding contracts in
gain positions excluding any offsetting contracts in negative positions and the impact of collateral on hand.
The Bank limits the risk of credit losses from derivative counterparties by:



Establishing a minimum acceptable counterparty credit rating from external rating agencies;
Entering into master netting arrangements which permit the offsetting of contracts in a loss position in the case of a counterparty default; and
Entering into Credit Support Annex (“CSA”) agreements, whereby collateral must be provided when the exposure exceeds a certain threshold.
The collateral pledged from or to counterparties are primarily investments in the form of government and agency securities. The Bank pledges
investments as collateral when the derivative mark-to-market position is negative. When the derivative mark-to-market position is positive, the
counterparty is required to pledge investments as collateral. Pledging starts at a certain threshold for each counterparty in accordance with the
terms of the CSA. The net market value position of the collateral posted by swap counterparties as at June 30, 2015 was $19 million (December
31, 2014 – $35 million). MBC was not required to post collateral to its swap counterparties as at June 30, 2015 and December 31, 2014 due to
favourable derivative positions for the Bank.
6
Eligible financial collateral includes cash and deposits as well as qualifying debt securities, equities and mutual funds.
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The Bank monitors the encumbrances of liquid assets as part of its Liquidity Risk Management Framework. This is accomplished by stress testing
collateral requirements based on credit rating downgrades and interest rate shocks. As at June 30, 2015 and December 31, 2014, due to the
positive market value of the swaps, the Bank would not be subject to any collateral requirements in the test scenarios where MBC’s credit rating is
modified by up to two downgrades.
Credit quality
The Bank classifies a loan as impaired when, in the opinion of management, there is no longer reasonable assurance that principal or interest will
be collected in accordance with the contractual terms. Loans are deemed impaired when contractual payments are more than 90 days past due,
except for uninsured mortgage loans, which are classified as impaired at 180 days past due and Government of Canada guaranteed loans, which
are classified as impaired at 365 days past due. When mortgage and other loans are impaired, contractual interest is no longer accrued.
Contractual interest accruals are resumed once the contractual payments are no longer in arrears and are considered current.
The Bank maintains allowances which, in management’s opinion, should be adequate to absorb credit-related losses in MBC’s lending portfolio.
Individual allowances are recorded when, due to identified conditions specific to a particular loan, management believes there is no longer
reasonable assurance of the full collection of principal and interest. On a quarterly basis, the Bank assesses whether any objective evidence of
impairment exists for any individually assessed loan. The amount of individual allowance is measured as the difference between the asset’s
carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate and reduced by
estimated costs of collection. Expected future cash flows are typically determined in reference to the fair value of collateral security underlying the
mortgage and other loans (net of expected costs of realization and any amounts legally required to be paid to the borrowers) or observable market
prices for the mortgage and other loans, if available.
A collective allowance is established to cover any impairment that is considered to have occurred in the existing portfolio but cannot be determined
on an item-by-item basis. The allowance covers the Bank’s core business lines where prudent assessment by the Bank and existing economic
and portfolio conditions indicate that losses may be incurred. In making this judgment, management considers observable factors such as
economic trends and business conditions, portfolio concentrations, trends in volumes and severity of delinquencies and management’s current
assessment of factors that may affect the condition of the portfolio. The allowance for losses that are incurred but cannot be determined on an
item-by-item basis is calculated using credit risk models that consider probability of default, loss given default and exposure at default.
The provision for loan losses is charged to income by an amount necessary to bring the allowance for credit losses to a level determined
appropriate by management.
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
11| Page
Mortgages and Other Loans by Risk Category
Q2 2015(2)
(Canadian $ millions)
Mortgage loans
1 and 2 (1)
3
4 or higher
Total mortgage loans
Other loans
1 and 2 (1)
3
4 or higher
Total other loans
Total
1 and 2 (1)
3
4 or higher
Total mortgage and other loans
$
$
$
$
$
$
Q1 2015(2)
8,032
7,255
2,283
17,570
$
195
1,076
479
1,750
$
8,227
8,331
2,762
19,320
$
$
$
$
Q4 2014
8,243
6,323
3,074
17,640
$
173
1,027
570
1,770
$
8,416
7,350
3,644
19,410
$
$
$
$
Q3 2014
9,043
8,513
98
17,654
$
390
1,353
29
1,772
$
9,433
9,866
127
19,426
$
$
$
$
Q2 2014
9,002
8,549
88
17,639
$
406
1,345
35
1,786
$
9,408
9,894
123
19,425
$
$
9,230
8,223
95
17,548
398
1,367
46
1,811
$
$
9,628
9,590
141
19,359
(1)
The internal risk ratings reflect the credit quality of the lending assets. Insured loans and loans with strong collateral are primarily included in this risk category. Presently, rating 1 criterion is not applicable to the Bank, therefore, ratings 1 & 2 have been
combined.
(2)
During the first quarter of 2015, the Bank enhanced their internal risk rating process to include additional risk factors. This has resulted in a shift for mortgage and other loans from category 2 and 3 to category 4 in the first and second quarter of 2015.
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
12| Page
Fair Value of Derivative Instruments and Net Derivative Exposure
(Canadian $ millions)
Interest rate swaps
Less: accrued interest
Total
Q2 2015
Collateral
held
Fair value
Net (1)
$
$
30
21
9
$
$
Net derivative
exposure
19
19
$
31
31
$
35
35
$
41
41
$
44
44
$
$
11
11
Q1 2015
Interest rate swaps
Less: accrued interest
Total
$
$
42
29
13
$
$
$
11
11
Q4 2014
Interest rate swaps
Less: accrued interest
Total
$
$
45
32
13
$
$
$
10
10
Q3 2014
Interest rate swaps
Less: accrued interest
Total
$
$
50
33
17
$
$
9
9
$
Q2 2014
Interest rate swaps
Less: accrued interest
Total
(1)
$
$
54
32
22
$
$
$
10
10
Net reflects contractual netting at default. Net amount equals the gross positive fair value as there are no offsetting negative positions held.
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
13| Page
Gross Credit Exposure (9)
Drawn (1)
(Canadian $ millions)
By geographic location
Country (5)
Canada
United States
Province (5)
Canada
Ontario
British Columbia
Alberta
Quebec
Saskatchewan
Manitoba
Atlantic provinces
Total exposure
By counterparty
Manulife One
Residential mortgages
Financial institution (6)
Corporate
Personal loans
Sovereign (7)
Other (8)
Total exposure
By contractual maturity
Within 1 year
1 to 5 years
Over 5 years
No specific maturity
Total exposure
Undrawn (2)
Q2 2015
Other
off-balance
Debt
securities
sheet (3)
OTC (4)
Drawn (1)
Total
Undrawn (2)
Q1 2015
Other
off-balance
Debt
securities
sheet (3)
OTC (4)
Total
$
-
$
-
$
-
$
60
5
$
30
-
$
90
5
$
-
$
-
$
-
$
68
7
$
42
-
$
110
7
$
7,363
2,959
2,625
4,005
862
414
1,110
19,338
$
3,130
1,266
1,040
1,436
342
163
358
7,735
$
9
23
3
7
1
1
2
46
$
26
5
8
104
$
30
$
10,502
4,274
3,668
5,453
1,205
578
1,478
27,253
$
7,379
2,999
2,663
3,965
881
420
1,122
19,429
$
3,062
1,249
1,029
1,418
339
164
359
7,620
$
9
22
6
7
1
1
2
48
$
26
8
109
$
42
$
10,450
4,296
3,698
5,390
1,221
585
1,491
27,248
15,624
1,919
283
1,512
19,338
$
7,479
64
192
7,735
$
46
46
$
13
5
26
60
104
$
30
30
$
23,103
1,983
43
288
1,704
26
106
27,253
$
15,757
1,862
281
1,529
19,429
$
7,397
49
174
7,620
$
48
48
$
13
8
26
62
109
$
42
42
$
$
$
$
$
$
829
3,397
43
15,069
19,338
$
$
$
$
457
7,278
7,735
$
$
$
$
46
46
$
$
$
$
73
31
104
$
$
$
$
26
4
30
$
$
$
$
1,385
3,432
43
22,393
27,253
$
$
$
$
612
3,484
53
15,280
19,429
$
$
$
$
363
7,257
7,620
(1)
The amount of credit risk exposure resulting from loans advanced to a borrower. The exposure amounts presented in the above tables are gross of allowance for credit losses.
(2)
The amount of credit risk exposure resulting from the unutilized portion of an authorized credit line or unfunded committed credit facility. These commitments have no fixed maturity dates.
(3)
Other off-balance sheet items include letters of credit and indemnities.
(4)
Includes OTC derivatives.
(5)
Geographic information is based upon address of property mortgaged for mortgage loans and based upon residence of borrower for other loans.
(6)
Includes exposures to deposit taking institutions, contractual institutions and investment institutes.
(7)
Includes exposures to governments, central banks and certain public sector entities.
(8)
Other includes securitized investments in bonds and Residential Mortgage Backed Securities.
(9)
Gross credit risk exposure is before credit risk mitigants. This table excludes equity exposures.
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
$
$
$
$
48
48
$
$
$
$
46
63
109
$
$
$
$
31
11
42
$
$
$
$
23,154
1,911
55
289
1,703
26
110
27,248
1,052
3,558
53
22,585
27,248
14| Page
Gross Credit Exposure (9) (Continued)
Drawn (1)
(Canadian $ millions)
By geographic location
Country (5)
Canada
United States
Province (5)
Canada
Ontario
British Columbia
Alberta
Quebec
Saskatchewan
Manitoba
Atlantic provinces
Total exposure
By counterparty
Manulife One
Residential mortgages
Financial institution (6)
Corporate
Personal loans
Sovereign (7)
Other (8)
Total exposure
By contractual maturity
Within 1 year
1 to 5 years
Over 5 years
No specific maturity
Total exposure
Undrawn (2)
Q4 2014
Other
off-balance
Debt
securities
sheet (3)
OTC (4)
Drawn (1)
Total
Undrawn (2)
Q3 2014
Other
off-balance
Debt
securities
sheet (3)
OTC (4)
Total
$
-
$
-
$
-
$
74
-
$
45
-
$
119
-
$
-
$
-
$
-
$
1,264
-
$
50
-
$
1,314
-
$
7,401
3,006
2,682
3,920
890
424
1,123
19,446
$
3,019
1,237
1,016
1,397
335
161
358
7,523
$
9
23
6
6
1
1
2
48
$
26
28
128
$
45
$
10,429
4,292
3,704
5,323
1,226
586
1,511
27,190
$
7,490
3,009
2,683
3,841
892
419
1,113
19,447
$
3,003
1,231
1,031
1,380
336
163
358
7,502
$
10
22
6
6
1
1
2
48
$
160
76
45
35
51
1,631
$
50
$
10,663
4,338
3,765
5,227
1,229
618
1,524
28,678
15,784
1,850
288
1,524
19,446
$
7,326
47
150
7,523
$
48
48
$
8
47
73
128
$
45
45
$
23,110
1,897
53
288
1,674
47
121
27,190
$
15,818
1,803
276
1,550
19,447
$
7,308
51
143
7,502
$
48
48
$
1,078
367
186
1,631
$
50
50
$
$
$
$
$
$
827
3,191
56
15,372
19,446
$
$
$
$
307
7,216
7,523
$
$
$
$
48
48
$
$
$
$
42
78
8
128
$
$
$
$
25
20
45
$
$
$
$
1,201
3,289
64
22,636
27,190
$
$
$
$
825
3,072
43
15,507
19,447
$
$
$
$
384
7,118
7,502
(1)
The amount of credit risk exposure resulting from loans advanced to a borrower. The exposure amounts presented in the above tables are gross of allowance for credit losses.
(2)
The amount of credit risk exposure resulting from the unutilized portion of an authorized credit line or unfunded committed credit facility. These commitments have no fixed maturity dates.
(3)
Other off-balance sheet items include letters of credit and indemnities.
(4)
Includes OTC derivatives.
(5)
Geographic information is based upon address of property mortgaged for mortgage loans and based upon residence of borrower for other loans.
(6)
Includes exposures to deposit taking institutions, contractual institutions and investment institutes.
(7)
Includes exposures to governments, central banks and certain public sector entities.
(8)
Other includes securitized investments in bonds and Residential Mortgage Backed Securities.
(9)
Gross credit risk exposure is before credit risk mitigants. This table excludes equity exposures.
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
$
$
$
$
48
48
$
$
$
$
1,462
169
1,631
$
$
$
$
23
27
50
$
$
$
$
23,126
1,854
1,128
276
1,693
367
234
28,678
2,694
3,268
43
22,673
28,678
15| Page
Gross Credit Exposure (9) (Continued)
Drawn (1)
(Canadian $ millions)
By geographic location
Country (5)
Canada
United States
Province (5)
Canada
Ontario
British Columbia
Alberta
Quebec
Saskatchewan
Manitoba
Atlantic provinces
Total exposure
By counterparty
Manulife One
Residential mortgages
Financial institution (6)
Corporate
Personal loans
Sovereign (7)
Other (8)
Total exposure
By contractual maturity
Within 1 year
1 to 5 years
Over 5 years
No specific maturity
Total exposure
Undrawn (2)
Q2 2014
Other
off-balance
Debt
securities
sheet (3)
OTC (4)
Total
$
-
$
-
$
-
$
1,063
-
$
54
-
$
1,117
-
$
7,342
3,066
2,722
3,798
916
421
1,118
19,383
$
2,990
1,233
1,024
1,372
344
168
356
7,487
$
10
26
5
6
1
1
2
51
$
159
252
125
35
20
1,654
$
54
$
10,501
4,577
3,876
5,211
1,261
590
1,496
28,629
$
$
$
$
$
15,763
1,767
274
1,579
19,383
799
2,935
47
15,602
19,383
$
$
$
$
$
7,267
62
158
7,487
474
7,013
7,487
$
$
$
$
$
51
51
51
51
$
$
$
$
$
810
591
253
1,654
1,480
174
1,654
$
$
$
$
$
54
54
21
33
54
$
$
$
$
$
23,030
1,829
864
274
1,737
591
304
28,629
2,774
3,142
47
22,666
28,629
(1)
The amount of credit risk exposure resulting from loans advanced to a borrower. The exposure amounts presented in the above tables are gross of allowance for credit losses.
(2)
The amount of credit risk exposure resulting from the unutilized portion of an authorized credit line or unfunded committed credit facility. These commitments have no fixed maturity dates.
(3)
Other off-balance sheet items include letters of credit and indemnities.
(4)
Includes OTC derivatives.
(5)
Geographic information is based upon address of property mortgaged for mortgage loans and based upon residence of borrower for other loans.
(6)
Includes exposures to deposit taking institutions, contractual institutions and investment institutes.
(7)
Includes exposures to governments, central banks and certain public sector entities.
(8)
Other includes securitized investments in bonds and Residential Mortgage Backed Securities.
(9)
Gross credit risk exposure is before credit risk mitigants. This table excludes equity exposures.
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
16| Page
Loan Impairment by Counterparty and by Geographic Area
(Canadian $ millions)
By geographic location
Province (1)
Canada
Ontario
British Columbia
Alberta
Quebec
Saskatchewan
Manitoba
Atlantic provinces
Total
Gross
Total past
impaired
due or
loans
impaired
Q1 2015
Past-due but not impaired
Less
90 days
Total pastthan
and
due but not
90 days
greater
impaired
15
8
4
23
4
2
4
60
$
19
11
7
44
6
3
6
96
$
37
21
2
60
$
67
25
4
96
$
Q2 2015
Past-due but not impaired
Less
90 days
Total pastthan
and
due but not
90 days
greater
impaired
$
$
9
6
3
16
3
1
3
41
$
22
17
2
41
$
$
6
2
1
7
1
1
1
19
$
15
4
19
$
$
By counterparty
Manulife One
Residential mortgages
Personal loans
Total
$
(Canadian $ millions)
Q3 2014
Past-due but not impaired
Less
90 days
Total pastthan
and
due but not
90 days
greater
impaired
$
By geographic location
Province (1)
Canada
Ontario
British Columbia
Alberta
Quebec
Saskatchewan
Manitoba
Atlantic provinces
Total
By counterparty
Manulife One
Residential mortgages
Personal loans
Total
(1)
$
$
$
$
11
7
3
15
3
2
4
45
30
12
3
45
$
$
$
$
$
5
4
2
9
1
2
23
17
6
23
$
$
$
$
$
16
11
5
24
4
2
6
68
47
18
3
68
$
$
4
3
3
21
2
1
2
36
$
30
4
2
36
$
$
$
$
$
15
4
7
16
4
2
6
54
$
32
18
4
54
$
$
$
2
2
2
6
2
1
2
17
$
15
2
17
$
$
$
Gross
Total past
impaired
due or
loans
impaired
Q4 2014
Past-due but not impaired
Less
90 days Total pastthan
and
due but not
90 days
greater
impaired
Gross
Total past
impaired
due or
loans
impaired
17
6
9
22
6
3
8
71
$
23
9
10
44
7
4
11
108
$
18
10
5
28
6
2
9
78
$
47
20
4
71
$
74
25
9
108
$
57
16
5
78
$
$
$
6
3
1
22
1
1
3
37
$
27
5
5
37
$
$
$
Gross
Total past
impaired
due or
loans
impaired
Q2 2014
Past-due but not impaired
Less
90 days
Total pastthan
and
due but not
90 days
greater
impaired
Gross
Total past
impaired
due or
loans
impaired
$
$
$
$
$
$
4
4
2
16
1
3
30
21
5
4
30
$
$
$
$
20
15
7
40
5
2
9
98
68
23
7
98
$
$
$
16
7
5
21
2
1
4
56
36
17
3
56
$
$
$
$
4
4
1
8
1
3
21
16
5
21
$
$
$
$
20
11
6
29
3
1
7
77
52
22
3
77
$
$
$
4
5
2
13
2
26
21
3
2
26
$
$
$
$
$
$
14
5
3
19
4
2
6
53
$
35
13
5
53
$
$
$
4
5
2
9
2
3
25
$
22
3
25
$
$
$
$
$
5
2
1
19
1
1
2
31
$
22
5
4
31
$
$
$
23
12
6
47
7
3
11
109
79
21
9
109
24
16
8
42
3
1
9
103
73
25
5
103
Based upon address of property mortgaged for mortgage loans and residence of borrowers for other loans.
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
17| Page
Allowances by Counterparty and by Geographic Area
Q1 2015
Allowance
Q2 2015
Allowance
(Canadian $ millions)
By geographic location
Country (1)
Canada
Province (1)
Canada
Ontario
British Columbia
Quebec
Atlantic provinces
Total
By counterparty
Manulife One
Personal loans
Other
Total
Individual Collective
(2)
Total
Individual
Collective
Q4 2014
Allowance
(2)
Total
Individual Collective
Q3 2014
Allowance
(2)
Total
Individual
Q2 2014
Allowance
Collective (2)
Total
Individual
Collective (2)
Total
$
-
$
13
$
13
$
-
$
14
$
14
$
-
$
16
$
16
$
-
$
19
$
19
$
-
$
21
$
21
$
1
3
1
5
$
13
$
1
3
1
18
$
1
1
2
1
5
$
14
$
1
1
2
1
19
$
1
2
1
4
$
16
$
1
2
1
20
$
1
1
1
3
$
19
$
1
1
1
22
$
1
1
1
3
$
21
$
1
1
1
24
3
3
$
$
$
$
4
1
5
$
$
$
13
13
$
$
$
$
$
4
1
13
18
$
4
1
5
$
$
$
14
14
(1)
Based upon address of property mortgaged for mortgage loans and residence of borrowers for other loans.
(2)
Allowance has been calculated based on the portfolio and is not split by province.
$
$
$
4
1
14
19
$
$
$
3
1
4
$
$
$
16
16
$
$
$
$
3
1
16
20
$
$
3
3
$
$
$
19
19
$
$
$
3
19
22
$
$
$
$
21
21
$
$
$
$
3
21
24
Provision for Credit Losses (1)
2014
Q3
2015
Other
(2)
Q1
Q2
(Canadian $ millions)
$
(1)
$
Q4
1
$
(1)
$
(1)
Provision represents charge to Consolidated Statements of Income for the period. It has been calculated based on the portfolio and is not split by counterparties.
(2)
A special one-time provision for probable credit losses was booked in Q2 2014.
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
Fiscal YTD
Q2
(1)
$
2014
2015
13
$
-
$
14
18| Page
Individual Allowances for Impairment on Mortgages and Loans
Balance, beginning of period
Impairment loss for the period:
Write-offs
Provision for credit losses
Balance, end of period
2014
2015
Q2
(Canadian $ millions)
Q1
$
5
$
5
Q4
$
4
$
(2)
3
5
Q3
$
3
$
(1)
2
4
Q2
$
3
$
(1)
1
3
$
3
$
(1)
1
3
Collective Allowance for Impairment on Mortgages and Loans
Balance, beginning of period
Provision for credit losses(1)
Balance, end of period
(1)
2014
2015
Q2
(Canadian $ millions)
$
$
Q1
14
(1)
13
$
$
Q4
16
(2)
14
$
$
Q3
19
(3)
16
$
$
Q2
21
(2)
19
$
$
9
12
21
A special one-time provision for probable credit losses was booked in Q2 2014.
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
19| Page
Market Risk
Market risk is the risk of loss resulting from market price volatility, interest rate changes and adverse foreign currency rate movements.
Market price volatility relates to changes in the prices of publicly traded equities and to impacts of interest rate movements on the
lending portfolio.
Governance structure
The Board of Directors annually review and approve the capital, liquidity, foreign exchange, interest rate risk and investment management policies.
The Board of Directors have ultimately delegated the responsibility for the strategic management of market, interest rate and liquidity risks to
ALCO. The ALCO risk management strategy addresses the interest rate risk arising between asset returns and supporting liabilities and is
designed to keep potential losses stemming from these risks within acceptable limits. Actual investment positions and risk exposures are
monitored to ensure policy guidelines and limits are adhered to. Positions are reported to ALCO on a monthly basis and to MFC’s Global ALCO on
a quarterly basis. The Bank invests in common equities based on limits set within the Investment Policy.
Available-for-sale securities
MBC holds equity and debt instruments that have been classified as available-for-sale (“AFS”) based on management’s intentions. As at June 30,
2015 the Bank held $209 million (December 31, 2014 – $210 million) of publicly traded AFS equity securities. The AFS equity securities are
measured initially at their fair values plus directly attributable transaction costs, and are subsequently presented in the Consolidated Statements of
Financial Position at their fair values using published bid prices.
Unrealized gains and losses on AFS securities are recorded, net of taxes, in accumulated other comprehensive income (“AOCI”). Unrealized
foreign currency translation gains and losses on monetary AFS securities are recorded immediately in income. Premiums or discounts on
purchases of AFS debt securities are amortized over the terms to maturity on an effective interest rate basis. When AFS securities are sold, the
unrealized gains (net of unrealized losses) are transferred from AOCI to the Consolidated Statements of Income. As at June 30, 2015, the total
pre-tax unrealized gains recorded in AOCI related to AFS securities was $11 million (December 31, 2014 - $30 million). The cumulative realized
gains arising from the sale of AFS securities for the three months ended June 30, 2015 was $5 million (for the three months ended June 30, 2014
- $8 million) and for the six months ending June 30, 2015 was $11 million (for six months ended June 30, 2014 - $9 million).
MBC holds mortgage backed securities (“MBS”) and asset backed securities (“ABS”), which are classified as AFS debt investments, and recorded
at market values. MBC manages securitization exposures related to short-term and long-term investments to approved limits and rating
requirements specified by investment policy guidelines. These securitization positions are managed using a combination of market standard
systems and third party data providers to monitor performance data and manage risks associated with the investments. All securitization
exposures are included in the banking book. All of the Bank’s investments in securitizations held as at June 30, 2015 and December 31, 2014 are
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
20| Page
in National Housing Act Mortgage Backed Securities (“NHA MBS”) rated AAA by an External Credit Assessment Institutions (“ECAI”). Refer to the
liquidity risk section of this document for quantitative disclosures of the securitization exposures in the banking book.
For debt issues, the ECAI ratings are used for managing market risk and, if not available, MLI’s internal risk ratings are used. When ratings from more
than one approved agency are available for a single issue, the priority sequence of rating agencies is Standard & Poor’s (“S&P”), Moody’s Investor
Service, DBRS, Fitch Rating Services, and the parent company’s internal risk rating.
Interest rate risk
Interest rate risk is identified using a variety of techniques and measures that are primarily based on projecting asset and liability cash flows under
a range of current and future interest rate and market return scenarios. MBC uses traditional asset-liability management techniques as well as
quantitative methods to stress test the asset-liability portfolio.
MBC applies monthly sensitivity analysis to specifically assess interest rate risk. The results of the analyses are reviewed by ALCO to determine
whether they are within prescribed limits for sensitivity of net interest income to changes in the yield curve. The following table shows the
sensitivity of MBC’s consolidated pre-tax net interest income to interest rate risk over the next 12 months.
Interest Rate Risk
7
100 basis point rate increase
200 basis point rate increase
100 basis point rate decrease
200 basis point rate decrease (2)
Q1 2015 (1)
Q2 2015 (1)
(Canadian $ millions)
$
18
37
(17)
(17)
$
23
47
(21)
(21)
$
18
36
(18)
(18)
Q2 2014 (1)
Q3 2014 (1)
Q4 2014 (1)
$
21
41
(20)
(20)
(1)
The interest sensitivity assumes that the Bank moves all bank administered rates for lending and deposits directly with market rates. The Bank has the ability to mitigate margin impact through its administered rates.
(2)
The floor of zero on government rates and corporate spreads causes the 200 basis point decrease to have the same impact as the 100 basis point decrease due to the current low interest rate environment.
$
21
42
(21)
(21)
Derivatives are used to manage interest rate risk. To mitigate the unique risks associated with the use of derivatives, the Bank has specific risk
management policies and processes. The policies include limits on the maximum exposure on derivative transactions, authorized types of
derivatives and derivative applications, delegated authorization limits for specific personnel and collateral management. The policies also require
pre-approval of all derivative application strategies and regular monitoring of the effectiveness of the strategies employed.
7
A parallel movement in interest rates includes a change in government, swap and corporate rates, with a floor of zero on government rates and corporate spreads.
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
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Liquidity Risk
Liquidity risk is the risk of not having access to sufficient funds or liquid assets to meet both expected and unexpected cash and
collateral demands.
At least annually, the Board of Directors review and approve the liquidity management policy and review the liquidity contingency plan, which
define the main framework for managing liquidity risk. Risk tolerances and limits are determined by the Board of Directors. The liquidity
contingency plan outlines various liquidity statuses based on name specific and market-wide stress events and includes a step-by-step action plan
to be followed under each liquidity status.
Liquidity stress testing is done on a monthly basis to monitor the liquidity risk tolerance. This is achieved by running an extreme but plausible
stress scenario model. The assumptions of this model, which management believes to be more conservative than those specified under Basel III,
are determined based on client type, insurance coverage, account size and distribution channel. The Bank’s Treasury department ensures that the
stress model and assumptions are reviewed and submitted to ALCO for approval at least annually. The Bank’s Treasury department runs
regulatory stress scenarios such as the Liquidity Coverage Ratio (“LCR”) and Net Cumulative Cash Flow (“NCCF”) as additional monitoring tools.
To meet anticipated liquidity needs in both stable and stressed conditions, the Bank’s Treasury department actively manages liquidity risk. The
liquidity risk management processes are designed to enable the payment of the Bank’s obligations as they come due, under both normal and
adverse circumstances. Liquid assets include unencumbered assets that are marketable, can be pledged as security for borrowings, and can be
converted to cash in a timeframe that meets liquidity requirements. The Bank’s liquid assets as at June 30, 2015 were $3.6 billion (17 per cent of
total assets) compared to $3.5 billion as at December 31, 2014 (16 per cent of total assets).
In January 2013, the BCBS released its final rules for LCR, with phased in timelines for compliance, starting with a minimum of 60% coverage in
2015 and increasing by 10% annually to 100% in 2019. However, OSFI has required 100% coverage effective January 1, 2015, which has been
classified within the new OSFI Liquidity Adequacy Requirements (“LAR”) guideline finalized on May 31, 2014. The minimum LCR target was
exceeded by the Bank during the first half of 2015.
Governance structure
The Liquidity Management Policy is reviewed and approved by the Board of Directors. The policy establishes risk tolerances and limits and govern
activities that may have an impact on the Bank’s liquidity position. The Board of Directors delegate oversight of liquidity management to ALCO.
The Treasurer reports to ALCO and is responsible for executing the liquidity management policy and overseeing treasury operations. The
Treasurer assesses whether appropriate resources are available for meeting the policy objectives. Periodically, the Treasurer evaluates the
effectiveness of the Bank’s Treasury department, taking into consideration internal or external factors such as the evolving regulatory environment,
emerging risks and other factors.
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
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Funding
The Bank’s main source of funding comes from retail deposits. MBC diversifies funding across source, channel, product and term by offering
registered and non-registered retail savings accounts, GIC and secured and unsecured wholesale term funding. Funding diversification is
monitored and reported to ALCO and the Board of Directors. The Bank’s ability to securitize high quality residential mortgage loans has provided a
key source of diversified funding and contingent liquidity. Securitization funding provides the Bank with long-term funding at very attractive interest
rates. Refer to the Securitization section below for details on the securitization programs.
In 2010, MBC created a wholly owned subsidiary, MTC, which has been a strong source of deposit funding totalling $1.8 billion as at June 30,
2015 (December 31, 2014 - $1.9 billion).
Securitization
MBC acts in the capacity of sponsor, originator, servicer, and provider of credit enhancement for its securitization programs. Mortgage loans
purchased by MBC from a third party are serviced by a third party mortgage servicer. In addition, MBC also invests in short and long-term
investment grade asset-backed securities. The sections below provide an overview of the Bank’s securitization programs.
PCMT securitization program
MBC has created a program (PCMT) to securitize certain Manulife One accounts. Eligibility criteria are defined in the program documentation and
include Manulife One accounts that are insured by CMHC. These accounts are pooled by MBC and undivided co-ownership interests in the
receivables of the pool are then sold to PCMT in exchange for cash. PCMT funds the purchase of the co-ownership interests by issuing term
notes. Collateralized term notes are rated AAA by S&P and DBRS. The pool of Manulife One accounts supporting the notes is legally isolated from
MBC’s assets and the cash flows generated from the pool are used to provide interest and principal payments on the term notes.
MBC’s continuing involvement includes servicing the pool of Manulife One accounts and performing an administrative role for PCMT. MBC also
provides credit enhancements to PCMT in the form of cash reserve accounts in the amount of $10 million (December 31, 2014 – $10 million),
over-collateralization of the pool and excess spread consisting of excess cash receipts that are only attributable to MBC after the periodic
obligations of PCMT have been met. The restricted cash will be drawn upon only in the event of insufficient cash flows from the underlying pool to
satisfy the obligations of PCMT. MBC also provides loans to PCMT to pay for upfront transaction costs. These loans are subordinate to all notes
issued by PCMT.
The PCMT securitization program diversifies MBC’s funding capabilities by providing an additional source of funds. The availability of multiple
funding channels enhances MBC’s ability to obtain low cost funds and provides increased liquidity. During the three month and six month periods
ended June 30, 2015 and year ended December 31, 2014, no secured term notes have been issued. As at June 30, 2015, term notes of $2 billion
(December 31, 2014 - $2 billion) are outstanding.
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
23| Page
In the March 2013 budget release, the federal government proposed the prohibition of any taxpayer backed insured mortgages as collateral in
securitization vehicles that are not sponsored by CMHC. In the 2015 budget, the federal government re-affirmed its intent to legislate this change.
The Department of Finance has released a new draft of the proposed regulations. However, the finalization of the regulations and timeline for
implementation have not been released by the Department of Finance at this time.
NHA MBS securitization program
MBC securitizes insured amortizing Canadian residential mortgage loans through the creation of MBS pools under the NHA MBS program and
either holds them on the Consolidated Statements of Financial Position or sells them to third party investors. MBC expects to continue to issue
NHA MBS in volumes consistent with the growth of insurable mortgage assets, subject to CMHC allocations of guarantees for new market NHA
MBS. The entire amount of securitized mortgage loans remains on the Bank’s Consolidated Statements of Financial Position as at June 30, 2015.
CMB securitization program
MBC completed a new funding initiative in March 2015, participating in the CMHC sponsored CMB program. The CMB program represents the
lowest cost funding alternative for the Bank’s insured amortizing mortgage products. CMB issuances are backed by NHA MBS pools and the
payment structure consists of semi-annual coupon payments and a bullet payment at maturity. At issuance of CMB, a secured borrowing liability is
created and loans backing the CMB remain on the Bank’s Consolidated Statement of Financial Position.
Securitization accounting
MBC’s securitization programs do not meet derecognition requirements. Manulife One accounts securitized through PCMT remain on MBC’s
Consolidated Statements of Financial Position as the Bank retains the pre-payment and interest rate risk associated with these accounts, which
represents substantially all of the risks and rewards associated with the transferred assets. These transactions are accounted for as secured
financing transactions and MBC continues to recognize the accounts as assets and records a secured borrowing liability (i.e. notes payable, which
is accounted for at amortized cost). Interest income on the assets and interest expense on the notes payable are recorded using the effective
interest rate method. Transactions under the PCMT program are consolidated with MBC.
Mortgage loans securitized through the NHA MBS program also remain on MBC’s Consolidated Statements of Financial Position as the Bank
retains the pre-payment, interest rate and other price risks. MBC also retains the interest spread between the securities and the underlying
mortgage assets. If MBC creates an NHA MBS security without selling it, a liability is not recognized. All securitization exposures are included in
the banking book.
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
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Capital treatment for securitization exposures
As discussed in the Regulatory Capital and Capital Ratios section of this document, MBC utilizes the Standardized Approach to assign risk
weightings to assets, including mortgages entered into the NHA MBS and PCMT programs that do not qualify for de-recognition as detailed above,
as well as securitization exposures resulting from short-term and long-term investments. For securitization exposures resulting from short-term
and long-term investments, the Bank assigns credit assessments from OSFI authorized ECAI for purposes of calculating risk-weighted assets.
Summary of Securitized Assets (1)
Securitization program
(Canadian $ millions)
Manulife One securitization
Securitized mortgages
Restricted cash
Total Manulife One securitization
NHA MBS unsold (2)
Sold to CMB
Total
$
$
$
Investment in securitized assets
(Canadian $ millions)
NHA MBS
Asset-backed commercial paper
Total
(1)
These are securitized mortgages.
(2)
When a security is created but remains unsold, no liability is recognized.
Q1 2015
Q2 2015
2,000
10
2,010
1,475
98
3,583
$
$
$
$
60
60
$
$
$
Q1 2015
Q2 2015
$
2,000
10
2,010
1,482
100
3,592
Q4 2014
$
$
62
62
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
2,000
10
2,010
1,293
3,303
Q3 2014
$
$
$
Q4 2014
$
$
73
73
2,042
10
2,052
1,031
3,083
Q2 2014
$
$
$
Q3 2014
$
$
186
455
641
2,042
10
2,052
880
2,932
Q2 2014
$
$
253
542
795
25| Page
Operational Risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, systems failures, human performance failures
or from external events.
Key risk factors
Operational risk is inherent in all of MBC’s business activities and encompasses a broad range of risks including regulatory compliance failures,
legal disputes, technology failures, business interruption, information security and privacy failures, ineffective human resource management,
processing errors, modeling errors, ineffective business integration, theft and fraud, and damage to physical assets. Exposures can take the form
of financial losses, regulatory sanctions, loss of competitive positioning and damage to reputation. Operational risk is embedded in all of the
practices used to manage other risks such as credit risk, market risk and liquidity risk. If not managed effectively, operational risk can impact the
ability to manage these key risks.
Risk management strategy
MBC’s Operational Risk Management Policy and Framework outline the governance structure, risk appetite, the level of risk tolerance, and set the
foundation for mitigating operational risks. This base is strengthened by the establishment of appropriate internal controls and systems and by
seeking to retain trained and competent people throughout the organization. Risk management programs have been established across functional
business areas for specific operational risks that could materially impact the ability to do business or negatively impact the reputations of MBC,
MTC, and PCMT.
Business area managers are accountable for the day-to-day management of the operational risks inherent in their operations. Business and
functional areas perform risk control self-assessments to identify, document and assess inherent operational risks and the effectiveness of internal
controls. The Bank’s CRO and the MBC Operational Risk Management Team provide independent oversight of risk taking and risk mitigation
activities across the enterprise. Key risk indicators are monitored and provide early warnings of emerging control issues. Business area managers
proactively modify procedures where emerging control issues are identified.
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
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Capital Management
MBC’s Capital Management Framework provides the policies and processes for defining, measuring and strategically managing capital in a coordinated consistent manner. Within this framework, the Bank utilizes an internal capital adequacy assessment process, which informs strategies
for achieving capital targets in a manner consistent with the Bank’s risk assessments and business plans. The capital management framework
together with related policies, enables MBC to review its risk profile from a regulatory capital viewpoint with the intent of ensuring that capital
levels:




Remain sufficient to support the Bank’s risk profile and outstanding commitments;
Exceed minimum regulatory capital requirements by an acceptable margin;
Are capable of withstanding a severe but plausible economic downturn stress scenario; and
Remain consistent with strategic and operational goals, shareholder and rating agency expectations.
In the assessment of capital adequacy, the Bank adopts regulatory capital definitions and measures. To maintain or adjust the capital structure,
the Bank may issue new shares or subordinated debt, adjust the dividend payment to its shareholders, or return capital to shareholders.
The Board of Directors approves the capital plan annually. The Capital Management Committee (“CMC”), which is comprised of executive
members of the management team, meets on a regular basis in order to provide oversight of operational capital management. This includes
reviews and recommendations of capital management policies for approval by the Board of Directors.
The adequacy of capital is assessed by considering capital requirements necessary to offset unexpected losses arising from credit risk, market
risk and operational risk. The minimum regulatory capital that the Bank is required to hold is determined by OSFI. MBC’s approach to capital
management is aligned to support its business model and strategic direction.
Regulatory capital
Capital levels for banks are regulated pursuant to guidelines issued by OSFI, which are based on standards issued by the Bank for International
Settlements. In December 2010, the BCBS issued “Basel III: A global regulatory framework for more resilient banks and banking systems” (“Basel
III”) which focuses on improving the banking industry’s ability to absorb shocks from financial and economic stress through increased quality and
quantity of capital requirements, measures to reduce build-up of excessive leverage and pro-cyclicality in the banking sector, and new liquidity
standards. Capital instruments issued by MBC are required to meet qualifying criteria before inclusion in the relevant capital category.
To enable banks to meet the new standards, Basel III contains transitional arrangements commencing January 1, 2013. Firstly, eligible nonqualifying capital instruments will be phased out from capital over 10 years. Secondly, applicable regulatory adjustments to capital will be phasedin over five years. Under these rules, all applicable regulatory adjustments are multiplied by a factor beginning with 0% in 2013, 20% in 2014, 40%
in 2015, through to 100% in 2018, representing the percentage to be deducted from capital each year. The portion of the CET1 regulatory
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
27| Page
adjustments not deducted from CET1, Additional Tier 1 or Tier 2 capital during the transitional period will continue to be subject to previous
regulatory treatment.
Effective January 1, 2013, as the Bank implemented OSFI’s CAR guideline, qualifying Additional Tier 1 and Tier 2 capital instruments are required
to include a NVCC clause, under which these instruments are converted to common shares at an OSFI prescribed trigger event. These
requirements are designed to ensure loss absorbency of capital at the point of non-viability. At implementation, the Bank’s preferred shares and
subordinated debt did not include the NVCC clause and were subject to the transitional phase-out over 10 years. Phase-out impacts under Basel
III provisions for 2013 and 2014 were negated through two capital rebalancing transactions. Effective Q1 2015, the Bank has amended the terms
of the preferred shares to include the NVCC clause. The Bank's preferred shares are no longer subject to transitional phase-out, as the preferred
shares meet all the requirements for inclusion of Regulatory Capital under OSFI’s CAR Guideline.
The Bank has obtained the consent and approval from OSFI for an additional redemption and cancellation of $50 million of subordinated debt
effective December 31, 2015.
Effective January 1, 2015, the Leverage Ratio has replaced the ACM as the new leverage measure for Banks in Canada, as mandated by OSFI.
MBC’s capital is comprised of the following capital instruments:
Common Equity Tier 1
Common shares - MBC is authorized to issue an unlimited number of voting, non-redeemable common shares without nominal or par value. The
Bank had 1,725,476 common shares outstanding as at June 30, 2015 (December 31, 2014 – 1,725,476) issued to MLI.
Additional Tier 1 Capital
Non-cumulative preferred shares - MBC is authorized to issue an unlimited number of non-voting, redeemable preferred shares (subject to
regulatory approval) entitled to non-cumulative dividends at a predetermined dividend rate, issuable in series, without nominal or par value. As at
June 30, 2015, the Bank has issued and outstanding series G to J totaling 154,000 preferred shares to related entities within MFC (December 31,
2014 – 154,000), which as at June 30, 2015 were qualifying capital and excluded from the transitional phase-out. The dividend rates on these
preferred shares range from 5% to 6.25% per annum.
Tier 2 Capital Instruments
Subordinated debt - Subordinated debt have been issued at par to related entities within MFC and contain a floating rate of interest ranging from
BA rate + 1.61% to BA rate + 1.93% per annum with maturity dates ranging from 2022 to 2025. As at June 30, 2015, the Bank had $68 million
subordinated debt (December 31, 2014 – $68 million), which were non-qualifying capital eligible for transitional phase-out.
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
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Basel III Regulatory Capital (Transitional Basis) (1)
(Canadian $ millions except as noted)
Common Equity Tier 1 capital: instruments, reserves and regulatory adjustments
1 Directly issued qualifying common share capital plus related stock surplus
2 Retained earnings
3 Accumulated other comprehensive income (and other reserves)
28 Regulatory adjustments applied to Common Equity Tier 1
29 Common Equity Tier 1 capital (CET1)
Additional Tier 1 capital: instruments and regulatory adjustments
33 Directly issued capital instruments subject to phase out from Additional Tier 1
43 Regulatory adjustments applied to Additional Tier 1
44 Additional Tier 1 capital (AT1)
45 Tier 1 capital (T1 = CET1 + AT1)
Q1 2015
Q2 2015
$
$
321 $
888
8
(2)
1,215 $
Q4 2014
321 $
854
17
(1)
1,191 $
321
822
22
1,165
$
154
154
1,345
$
154
154
1,319
$
$
$
$
68
9
77
154
154
1,369
$
$
$
68
9
77
$
68
9
77
59 Total Capital (TC = T1 +T2)
$
1,446
$
1,422
$
60 Total risk weighted assets
$
6,121
$
6,128
$
Tier 2 capital: instruments, provisions and regulatory adjustments
47 Directly issued capital instruments subject to phase out from Tier 2
50 Eligible allowances
58 Tier 2 capital (T2)
$
$
$
$
Capital ratios (%)
61 Common Equity Tier 1
62 Tier 1
63 Total Capital
Capital Instruments subject to phase-out arrangements
82 Current cap on AT1 instruments subject to phase out arrangements2
83 Amounts excluded from AT1 due to cap
84 Current cap on T2 instruments subject to phase out arrangements
85 Amounts excluded from T2 due to cap
$
$
$
68
-
$
$
19.4%
21.9%
23.2%
19.9%
22.4%
23.6%
$
Q3 2014
68
-
$
$
$
$
$
154 $
(2)
152 $
1,281 $
321
755
25
1,101
154
(1)
153
1,254
$
$
235
9
244
$
235
21
256
1,396
$
1,525
$
1,510
5,983
$
6,213
$
6,058
19.5%
22.0%
23.3%
$
321
785
23
1,129
Q2 2014
154
68
-
18.2%
20.6%
24.6%
$
(1)
Allows for certain adjustments to CET1, the largest of which being goodwill and intangible assets and the threshold deductions to be phased in over a period of five years starting in 2014, while retaining the phase out
(2)
During the first quarter of 2015, the Bank amended the terms of the preferred shares to include the NVCC criteria. The Bank's preferred shares are no longer subject to transitional phase-out, as the preferred
154
235
-
18.2%
20.7%
24.9%
$
154
235
-
rules for non-regulatory capital instruments.
shares meet all the requirements for inclusion of Regulatory Capital under the OSFI CAR Guideline.
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
29| Page
Basel III Regulatory Capital (All-in Basis) (1)
(Canadian $ millions except as noted)
Common Equity Tier 1 capital: instruments, reserves and regulatory adjustments
1 Directly issued qualifying common share capital plus related stock surplus
2 Retained earnings
3 Accumulated other comprehensive income (and other reserves)
28 Total regulatory adjustments to Common Equity Tier 1
29 Common Equity Tier 1 capital (CET1)
Q1 2015
Q2 2015
Q4 2014
Q3 2014
Q2 2014
$
321 $
888
8
(4)
1,213 $
$
$
$
154
154
1,367
$
$
$
154
154
1,343
$
$
$
154
154
1,317
$
$
$
154
154
1,282
$
$
$
154
154
1,254
$
$
$
235
9
244
$
$
68
9
77
$
$
68
9
77
$
$
68
9
77
$
235
21
256
59 Total Capital (TC = T1 +T2)
$
1,444
$
1,420
$
1,394
$
1,526
$
1,510
60 Total risk weighted assets
$
6,118
$
6,126
$
5,981
$
6,211
$
6,056
Additional Tier 1 capital: instruments and regulatory adjustments
33 Directly issued capital instruments subject to phase out from Additional Tier 1
44 Additional Tier 1 capital (AT1)
45 Tier 1 capital (T1 = CET1 + AT1)
Tier 2 capital: instruments, provisions and regulatory adjustments
47 Directly issued capital instruments subject to phase out from Tier 2
50 Eligible allowances
58 Tier 2 capital (T2)
$
321 $
854
17
(3)
1,189 $
321 $
822
22
(2)
1,163 $
321 $
785
23
(1)
1,128 $
321
755
25
(1)
1,100
Capital ratios (%)
61 Common Equity Tier 1
62 Tier 1
63 Total Capital
19.8%
22.3%
23.6%
19.4%
21.9%
23.2%
19.5%
22.0%
23.3%
18.2%
20.7%
24.6%
18.2%
20.7%
24.9%
National Target - All-in Basis
69 National Common Equity Tier 1 minimum ratio (if different from Basel III minimum)
70 Tier 1 capital all-in target ratio
71 Total capital all-in target ratio
7%
8.5%
10.5%
7%
8.5%
10.5%
7%
8.5%
10.5%
7%
8.5%
10.5%
7%
8.5%
10.5%
(1)
Capital calculated to include all of the regulatory adjustments that will be required by 2019 but retaining the phase-out rules of non-qualifying capital.
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
30| Page
Risk-weighted Assets (All-in Basis)
Residential mortgages (3)
Bank
Other loans
Sovereign
Equity
Other
Total credit risk
Operational and market risk
Credit Valuation Adjustment (Phase-in)
Total risk-weighted assets
$
$
$
17,620
2,034
1,921
26
209
109
21,919
n.a.
n.a.
21,919
$
$
$
3,345
407
1,513
209
37
5,511
607
6,118
Q4 2014
Exposure
Risk-weighted
amount (1)
assets (2)
Q1 2015
Exposure
Risk-weighted
amount (1)
assets (2)
Q2 2015
Exposure
Risk-weighted
amount (1)
assets (2)
(Canadian $ millions, except
where indicated)
$
$
$
17,679
2,439
1,931
26
214
108
22,397
n.a.
n.a.
22,397
$
$
$
3,277
488
1,523
214
31
5,533
593
6,126
$
$
$
17,617
2,114
1,856
46
210
106
21,949
n.a.
n.a.
21,949
$
$
$
3,254
423
1,468
4
210
33
5,392
590
(1)
5,981
Q3 2014
Exposure
Risk-weighted
amount (1)
assets (2)
$
$
$
17,602
2,886
1,870
367
200
670
23,595
n.a.
n.a.
23,595
$
$
$
3,239
577
1,481
10
200
123
5,630
582
(1)
6,211
(1)
Total exposure represents exposure at default which is the expected gross exposure upon the default of an obligor. This amount is before any specific allowances or partial write-offs and does not reflect the impact of
credit risk mitigation and collateral held.
(2)
Numbers are calculated using the standardized approach per the guidelines issued by OSFI under the Basel III “All-in” framework methodology.
(3)
Residential mortgages include Manulife One.
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
Q2 2014
Exposure
Risk-weighted
amount (1)
assets (2)
$
$
$
17,338
2,373
1,901
591
192
1,022
23,417
n.a.
n.a.
23,417
$
$
$
2,966
475
1,498
4
192
339
5,474
583
(1)
6,056
31| Page
Leverage Ratio Common Disclosure on an “All-in” Basis1
(Canadian $ millions except as noted)
On-balance sheet exposures
1 On-balance sheet items excluding derivatives and SFTs
2 Asset amounts deducted in determining Basel III “all-in” Tier 1 capital
3 Total on-balance sheet exposures (excluding derivatives and SFTs) (sum of lines 1 and 2)
Derivative exposures
4 Replacement cost associated with all derivative transactions (i.e. net of eligible cash variation margin)
11 Total derivative exposures (sum of lines 4 to 10)
Q2 2015
Q1 2015
21,667
(4)
21,663
22,153
(3)
22,150
31
31
44
44
Other off-balance sheet exposures
17 Off-balance sheet exposure at gross notional amount
18 (Adjustments for conversion to credit equivalent amounts)
19 Off-balance sheet items (sum of lines 17 and 18)
7,798
(6,874)
924
7,618
(6,724)
894
Capital and Total Exposures
20 Tier 1 capital
21 Total Exposures (sum of lines 3, 11, 16 and 19)
1,367
22,618
1,343
23,088
Leverage Ratios
22 Basel III leverage ratio
(1)
6.0%
5.8%
Under the public disclosure requirements related to the Basel III Leverage Ratio, MBC as a non Domestic Systemically Important Bank (D-SIB) is only required to provide a breakdown of the leverage ratio regulatory elements
on an “all-in” basis. As such no disclosure is required on a transitional basis and any difference would be immaterial.
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
32| Page
B20 Disclosures
Residential mortgage loans and Manulife One
8
MBC had $1.9 billion residential mortgage loans of which $1.4 billion (74%) were insured and $0.5 billion (26%) were uninsured. In addition, the
Bank had $15.6 billion of Manulife One loans of which $6.9 billion (44%) were insured and $8.7 billion (56%) uninsured. Overall as at June 30,
2015, MBC had $17.5 billion in residential mortgage and Manulife One mortgage loans of which $8.3 billion (47%) were insured. All residential
mortgage loans and Manulife One mortgage loans were originated in Canada. The table outlining the residential mortgage loans and Manulife One
9
portfolios by geographic region and type is included in the quantitative disclosures below.
Residential mortgage loans and Manulife One (fixed10) portfolios by amortization period
A summary of MBC’s residential mortgage loans and Manulife One (fixed) by remaining amortization
the mortgage agreement is presented in the quantitative section below.
11
period based on the contractual terms of
Average loan-to-value (LTV) ratio: newly originated and acquired
The LTV ratio factors in the amount of collateral value that supports the loan in comparison to the loan value. The table below in the quantitative
12
disclosures provides a summary of the weighted average LTV ratio by geographic region and type for newly originated and acquired uninsured
mortgage loans and HELOCs (including refinances with increase in funds or limits) during the current period.
MBC had a conservative and high quality residential mortgage loans portfolio with 74% (December 31, 2014 – 74%) of residential mortgage loans
and 44% (December 31, 2014 – 47%) of Manulife One insured as at June 30, 2015. The Bank regularly monitors the credit quality of its portfolio
and has implemented a program (PAM) where the Bank proactively takes corrective actions prior to loans going into arrears. The Bank also
performs stress tests in order to assess the expected losses on the portfolio in a scenario of a severe shock to the real estate market. The tests
indicate that MBC is well positioned to absorb credit losses resulting from conditions assumed in the stress tests.
8
Insured mortgage loans and Manulife One accounts refer to mortgage loans and accounts whereby the exposure to default is mitigated by insurance through the CMHC or other
private mortgage default insurers.
9
Region is based upon address of property mortgaged.
10
Fixed represents the amortizing portion of the Manulife One account.
11
Remaining amortization is the difference between the contractual amortization and the time elapsed since origination.
12
Region is based upon address of property mortgaged.
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
33| Page
B20 - Mortgages by Province
(Canadian $ millions, except where indicated)
Insured (2)
Q2 2015
Total
Uninsured (2)
Residential mortgages (1)
Alberta
$
Atlantic provinces
British Columbia
Manitoba
Ontario
Québec
Saskatchewan
Total
$
276
83
115
16
430
437
72
1,429
$
Manulife One
Alberta
Atlantic provinces
British Columbia
Manitoba
Ontario
Québec
Saskatchewan
Total
1,206
428
1,364
158
2,356
1,043
333
6,888
$
$
$
Insured (2)
$
$
277
79
111
15
424
363
69
1,338
$
Manulife One
Alberta
Atlantic provinces
British Columbia
Manitoba
Ontario
Québec
Saskatchewan
Total
1,329
460
1,497
174
2,647
1,144
373
7,624
$
$
$
989
487
1,069
197
3,556
2,067
371
8,736
$
$
$
$
$
42
24
29
5
138
211
16
465
$
932
462
1,025
186
3,300
1,920
369
8,194
$
$
$
Insured (2)
313
106
144
21
580
667
88
1,919
16%
6%
8%
1%
30%
34%
5%
100%
$
2,195
915
2,433
355
5,912
3,110
704
15,624
14%
6%
16%
2%
38%
20%
4%
100%
$
Q3 2014
Total
Uninsured (2)
Residential mortgages (1)
Alberta
$
Atlantic provinces
British Columbia
Manitoba
Ontario
Québec
Saskatchewan
Total
$
$
37
23
29
5
150
230
16
490
Total %
Total %
$
$
281
82
115
15
438
414
72
1,417
$
1,255
441
1,414
166
2,463
1,086
352
7,177
$
Insured (2)
319
103
140
20
562
574
85
1,803
18%
6%
8%
1%
31%
31%
5%
100%
$
2,261
922
2,522
360
5,947
3,064
742
15,818
14%
6%
16%
2%
38%
19%
5%
100%
$
$
$
Q1 2015
Total
Uninsured (2)
$
$
37
23
26
5
128
210
16
445
$
970
483
1,059
194
3,475
2,028
371
8,580
$
$
$
318
105
141
20
566
624
88
1,862
17%
6%
8%
1%
30%
33%
5%
100%
$
2,225
924
2,473
360
5,938
3,114
723
15,757
14%
6%
16%
2%
38%
20%
4%
100%
$
Q2 2014
Total
Uninsured (2)
275
75
108
14
412
335
66
1,285
$
1,374
473
1,538
178
2,746
1,170
392
7,871
$
$
$
40
25
29
5
142
206
18
465
881
434
988
178
3,091
1,811
355
7,738
$
$
$
$
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
Insured (2)
Total %
$
$
(1)
Total %
315
100
137
19
554
541
84
1,750
18%
6%
8%
1%
32%
30%
5%
100%
2,255
907
2,526
356
5,837
2,981
747
15,609
15%
6%
16%
2%
37%
19%
5%
100%
Q4 2014
Total
Uninsured (2)
279
80
113
16
429
379
71
1,367
$
1,283
448
1,449
169
2,534
1,108
360
7,351
$
$
$
39
25
29
5
145
224
16
483
$
959
474
1,041
194
3,409
1,985
371
8,433
$
$
$
Total %
318
105
142
21
574
603
87
1,850
17%
6%
8%
1%
31%
32%
5%
100%
2,242
922
2,490
363
5,943
3,093
731
15,784
14%
6%
16%
2%
37%
20%
5%
100%
Residential mortgages exclude Manulife One accounts.
(2)
The amounts presented for residential mortgages and Manulife One
are gross of allowance for credit losses. Q2'14 amounts exclude DAC.
34| Page
B20 - Average LTV Ratios
(4)
Q2 2015
Average LTV ratio %
Alberta
Atlantic provinces
British Columbia
Manitoba
Ontario
Quebec
Saskatchewan
Average
Average LTV ratio %
Alberta
Atlantic provinces
British Columbia
Manitoba
Ontario
Quebec
Saskatchewan
Average
(1)
Residential
Manulife One
(3)
(3)
Fixed
mortgages (2) Revolving
72%
76%
63%
0%
72%
66%
74%
68%
58%
58%
57%
60%
57%
58%
59%
57%
61%
61%
57%
61%
59%
59%
60%
59%
11%
11%
8%
11%
12%
12%
10%
11%
Q4 2014
(1)
Residential
Manulife One
(3)
(3)
Fixed
mortgages (2) Revolving
Total
13%
13%
9%
8%
13%
12%
12%
12%
Q3 2014
(1)
Residential
Manulife One
(3)
(3)
(2)
Revolving
Fixed
mortgages
75%
75%
72%
68%
70%
68%
70%
70%
(4)
Q1 2015
71%
71%
66%
68%
70%
70%
71%
69%
74%
72%
74%
73%
67%
67%
73%
68%
59%
60%
56%
61%
57%
58%
61%
58%
13%
11%
9%
8%
12%
12%
9%
12%
Q2 2014
(1)
Residential
Manulife One
(3)
(3)
(2)
Revolving
Fixed
mortgages
Total
72%
72%
65%
72%
71%
71%
70%
70%
73%
75%
67%
64%
71%
65%
76%
68%
(1)
Manulife One comprising of both revolving and fixed components is secured by the same collateral (residential property).
(2)
LTV is calculated using the outstanding amount and weighted by the outstanding amount of each loan.
61%
60%
58%
60%
58%
59%
61%
59%
11%
13%
8%
12%
11%
11%
10%
11%
(1)
Residential
Manulife One
(3)
(3)
Fixed
mortgages (2) Revolving
Total
72%
71%
65%
69%
69%
70%
70%
70%
65%
75%
73%
57%
69%
68%
66%
69%
59%
60%
56%
59%
57%
58%
62%
58%
12%
12%
8%
11%
12%
14%
10%
12%
Total
71%
72%
64%
70%
69%
72%
72%
70%
Total
72%
73%
66%
72%
69%
70%
71%
70%
(3)
LTV is calculated based on the authorized limit for revolving component and outstanding amount for the fixed component of Manulife One accounts and weighted by the total borrowing limit for each account. For the revolving component of Manulife One
accounts, the average LTV ratio based on the outstanding amount and weighted by total outstanding amount for Manulife One accounts is 50% compared to 57% based on the authorized limits for the three month period ended June 30, 2015 and 52%
compared to 59% based on the authorized limits for the three month period ended June 30, 2014.
(4)
The LTV ratio on our total residential mortgage portfolio, including HELOCs was 50% as at June 30, 2015 (December 31, 2014 – 50%). This calculation is weighted by mortgage balances and adjusted for property values based on the Teranet – National
Bank National Composite House Price Index.
B20 - Mortgages by Amortization Period
Q2 2015
Less than 20 years
20-25 years
25-30 years
30 years and greater
Total
30%
47%
21%
2%
100%
Residential mortgages
Q1 2015
Q4 2014
Q3 2014
31%
47%
20%
2%
100%
31%
46%
21%
2%
100%
Q2 2014
Q2 2015
34%
41%
22%
3%
100%
31%
40%
27%
2%
100%
32%
44%
21%
3%
100%
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
Manulife One (fixed)
Q1 2015
Q4 2014
31%
40%
27%
2%
100%
31%
40%
27%
2%
100%
Q3 2014
Q2 2014
32%
39%
26%
3%
100%
33%
39%
25%
3%
100%
35| Page
Glossary
Basel III framework



Pillar 1 – CAR: Outlines methodologies to calculate capital and set minimum capital requirements;
Pillar 2 – Supervisory Review: Requires banks to maintain a formal internal capital adequacy assessment process, subject to supervisory review; and
Pillar 3 – Market Discipline: Complements other pillars by providing enhanced public disclosures to enable market participants to understand the risk profile of
the bank and assess the application of Basel III capital requirements.
Risk weighted assets (“RWA”)
Under Basel III, OSFI requires banks to meet minimum risk-based capital requirements for exposures to credit risk, operational risk and market risk where there
are significant trading activities. Risk-weighted assets are calculated for each of these types of risks and added together to determine total risk weighted assets.
Common Equity Tier 1 (“CET1”) capital
Comprised mainly of common shares, retained earnings and AOCI, net of applicable regulatory adjustments.
Additional Tier 1 capital
Consists of Tier 1 instruments issued that do not meet the criteria of CET1, contributed surplus from the issuance of instruments not included in CET1, instruments
issued by consolidated subsidiaries not included in CET1, net of applicable regulatory adjustments.
Tier 2 capital
Consists of eligible general allowances, accumulated net after-tax unrealized gain on AFS equity securities reported in accumulated other comprehensive income,
and subordinated debt, net of applicable regulatory adjustments.
Capital ratios
Regulatory capital ratios are calculated by dividing CET1, Tier 1 and Total Capital by risk-weighted assets. In addition to the CET1, Tier 1 and Total Capital Ratios,
Canadian banks are required to ensure that the Leverage Ratio meets a minimum level prescribed by OSFI. All items that are deducted from capital are excluded
from total assets.
Leverage ratio
The Leverage Ratio has replaced the Asset-to-capital multiple (“ACM”) as the new leverage measure for Banks in Canada, as mandated by OSFI. The Leverage
Ratio is calculated by dividing the Bank’s Tier 1 Capital by the Total Exposure measure. The Total Exposure measure is the sum of the following exposures: (a)
on-balance sheet exposures; (b) derivative exposures; (c) securities financing transaction (“SFT”) exposures; and (d) off-balance sheet (“OBS”) items.
Efficiency ratio
The ratio represents total money expensed to earn a dollar of revenue i.e. a ratio of expense to revenue. A low ratio indicates that the Bank has been efficiently
utilizing its resources.
Manulife Bank of Canada | Q2 2015 Financial Performance and Regulatory Disclosures
36| Page