ZAG BANK BASEL PILLAR 3 AND OTHER REGULATORY DISCLOSURES. March 31, 2018

Transcription

1 ZAG BANK BASEL PILLAR 3 AND OTHER REGULATORY DISCLOSURES March 31, 2018

2 1. OVERVIEW OF ZAG BANK Zag Bank (the Bank ) is a Schedule I federally chartered Canadian bank and a wholly-owned subsidiary of Desjardins Group ( Desjardins ), through Desjardins Financial Holding Inc., a whollyowned subsidiary of the Fédération des caisses Desjardins du Québec, which is collectively controlled by its members the Desjardins Caisses. The Bank s head office is located in Calgary, Alberta. Prior to December 1, 2013, the Bank was a wholly-owned subsidiary of Western Financial Group Inc., a wholly-owned subsidiary of Desjardins Group. In 2014, the Bank changed its name from Bank West to Zag Bank. The name change was approved by the Office of the Superintendent of Financial Institutions Canada (OSFI) on July 22, The incorporating instrument of the Bank was amended in accordance with the Bank Act and the letters patent were effective on October 1, The Bank is a direct bank that provides banking services to individuals and businesses across Canada. Loan products provided by the Bank include consumer loans, mortgages and commercial loans. The Bank offers High Interest Savings Accounts (HISAs) and Guaranteed Investment Certificates (GICs) through third-party brokers and direct-to-consumer, and it is a member of the Canada Deposit Insurance Corporation (CDIC). 2. BASEL PILLAR 3 OVERVIEW The Bank makes this regulatory disclosure in accordance with OSFI s Advisory on Pillar 3 Disclosure Requirements issued in November 2007, pursuant to the Basel Committee on Banking Supervision s Pillar 3 disclosure standards. The Basel framework is structured around 3 pillars: Pillar 1: Minimum Capital Requirements Pillar 2: The Supervisory Review Process Pillar 3: Market Discipline Pillar 3 complements both Pillars 1 and 2, by setting disclosure requirements which allow market participants to assess the risk and capital profiles of Zag Bank. The amounts disclosed in the tables throughout are the balance sheet carrying amounts included in the financial statements of the Bank prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board (the IASB ) and using the accounting policies described therein. This Pillar 3 report is unaudited and is reported in thousands of Canadian dollars, unless otherwise disclosed. 3. CAPITAL The Bank is subject to regulatory capital requirements in accordance with OSFI s Capital Adequacy Requirements Guideline issued in December 2012 to implement Basel III capital rules in Canada. These rules are based on standards issued by the Bank for International Settlements, Basel Committee on Banking Supervision (BCBS). Under Basel III, there are two tiers of capital. Tier 1 capital consists of two components: Common Equity Tier 1 (CET1) and Additional Tier1. Tier 2 capital consists of supplementary capital instruments. Total capital is defined as the sum of Tier 1 and Tier 2 capital. Page 2 of 6

3 Common Equity Tier 1 (CET1) capital includes common shares, retained earnings and accumulated other comprehensive income. CET1 capital also includes regulatory adjustments and deductions for certain items including intangible assets. The Bank currently does not hold any additional Tier 1 or Tier 2 capital instruments. Therefore, the Bank s CET1 is equal to its Tier 1 and Total capital. The Bank is authorized to issue an unlimited number of common shares, without par value. As at March 31, 2018, the number of issued and outstanding common shares was 205,612 thousand. The capital composition of the Bank is shown in the following table: March 31, 2018 All in basis Common shares issued $ 206,676 Retained earnings (deficit) (64,996) Accumulated other comprehensive income 2,055 Common Equity Tier 1 capital before regulatory adjustments 143,735 Cash flow hedge reserves requiring derecognition (2,772) Computer software and other intangible assets (4,523) Deferred tax asset excluding those for temporary differences (18,163) Common Equity Tier 1 (CET1) capital $ 118,277 Tier 1 capital 118,277 Total capital $ 118,277 The Bank calculates and reports capital on an all-in basis, which reflects the complete phase-in of the Basel regulatory adjustments and phase-out of non-qualifying capital instruments that are required by In 2018, capital on a transitional basis, previously reported separately, reached the level of capital on an all-in basis and will no longer be reported. 4. CAPITAL ADEQUACY The Bank s objective is to maintain an adequate level of capital, in line with its risk profile, to support its activities, meet regulatory capital requirements and provide a reasonable return to its shareholder. In order to achieve this objective, the Bank has a capital management framework that includes a Capital Management Policy and an Internal Capital Adequacy Assessment Process ( ICAAP ). The ICAAP is an integrated process that evaluates capital adequacy relative to the Bank s risk appetite and strategy and helps set the internal capital levels acceptable for the Bank. The Bank s capital level underscores its solvency and capacity to cover unexpected losses arising from material risks related to its operations and it allows the Bank to carry on its strategic initiatives while providing depositors and creditors with safeguards. The Board of Directors reviews and approves several capital-related documents on an annual basis, including the Capital Management Policy, the Risk Appetite Policy and Framework, the ICAAP and the strategic plan. The Board s Audit and Risk Committee reviews capital adequacy on a quarterly basis. Management monitors regulatory capital ratios on a continuous basis and these ratios are reported monthly to the Asset and Liability Management Committee (ALCO). The Bank s capital requirements are driven by its risk profile measured by its risk-weighted assets (RWA). The Bank calculates RWA for its exposures to credit risk and operational risk (it does not calculate RWA for market risk as it does not engage in trading activities) and adds them together to Page 3 of 6

4 determine total RWA. The Bank has adopted the Standardized Approach to calculate capital for credit risk and the Basic Indicator Approach to calculate capital for operational risk. Under Basel III, there are three primary regulatory capital ratios used to assess capital adequacy, Common Equity Tier 1 (CET1), Tier 1 and Total Capital ratios, which are determined by dividing those capital components by risk-weighted assets (RWA). In addition to regulatory capital ratios, Basel III introduced the leverage ratio which has replaced the assets-to-capital multiple. The leverage ratio is calculated by dividing a capital measure by an exposure measure as per OSFI s Leverage Requirements Guideline. The Bank keeps its capital ratios and leverage ratio above the levels required by OSFI and has established target capital ratios significantly higher than the all-in (complete phase-in of the Basel regulatory adjustments and phase-out of non-qualifying capital instruments that are required by 2019) minimum capital ratios, inclusive of the conservation buffer, required by OSFI under Basel III, which has been effective since 2014 (minimum CET1 ratio of 7%, Tier 1 ratio of 8.5% and Total capital ratio of 10.5% of risk-weighted assets). OSFI, however, may require higher capital levels on an institution-specific basis. The components of the Bank s risk-weighted assets and capital ratios are shown in the following table: March 31, 2018 All in basis Risk weighted assets (RWA) Credit risk $ 290,193 Operational risk 12,629 Total risk weighted assets $ 302,822 Credit Valuation Adjustment (CVA) on derivatives $ 12,651 RWA adjusted for CVA on derivatives Common Equity Tier 1 RWA adjusted for CVA on derivatives $ 300,292 Tier 1 RWA adjusted for CVA on derivatives 300,671 Total RWA adjusted for CVA on derivatives 301,051 Regulatory capital ratios Common Equity Tier 1 capital ratio 39.4% Tier 1 capital ratio 39.3% Total capital ratio 39.3% Leverage ratio 1 8.0% Page 4 of 6

5 The components of the Leverage Ratio are detailed in the table below: 1 Leverage rario regulatory elements On balance sheet exposures (excluding derivatives) $ 1,469,361 Derivative exposures $ 17,949 Securities financing transaction exposures $ Off balance sheet exposures at 20% Credit Conversion Factor (CCF) $ 90 Total exposures $ 1,487,400 Tier 1 capital $ 118,277 Leverage ratio 8.0% As with the capital section, the Bank calculates and reports risk-weighted assets and regulatory capital ratios on an all-in basis. The Bank has maintained its capital levels above its regulatory capital requirements throughout the quarter ended March 31, Residential Mortgages The Bank s insured and uninsured residential mortgages outstanding principal by province as at March 31, 2018 is shown below: Province Insured Mortgages Uninsured Mortgages Total Mortgages Quebec $ 527,371 78% $ 242,024 61% $ 769,395 71% Ontario $ 83,426 12% $ 149,600 37% $ 233,026 22% Alberta $ 40,047 6% $ 3,173 1% $ 43,220 4% British Columbia $ 15,857 2% $ 3,057 1% $ 18,914 2% Saskatchewan $ 5,876 1% $ 4 0% $ 5,880 1% Manitoba $ 3,735 1% $ 0% $ 3,735 0% Nova Scotia $ 1,174 0% $ 229 0% $ 1,403 0% New Brunswick $ 978 0% $ 0% $ 978 0% Total $ 678, % $ 398, % $ 1,076, % Page 5 of 6

6 The remaining amortization period of the residential mortgages held by the Bank as at March 31, 2018 was: Remaining Amortization Period 0 to 15 Years $ 29,656 3% 15 to 20 Years 73,074 7% 20 to 25 Years 854,554 79% 25 to 30 Years 118,853 11% 30 to 35 Years 414 0% Total $ 1,076, % The weighted average loan-to-value (LTV) of uninsured residential mortgages acquired in Q by province was: Province at Acquisition Weighted Average LTV Ontario $ 6,606 67% British Columbia % Total $ 7,238 68% The Bank conducted a stress test of its residential mortgage portfolio in 2016 as part of its ICAAP and concluded that no additional capital over its planned requirement for growth was necessary in the event of a severe economic and real estate downturn. This stress test was repeated in 2017 based on the projected June 30, 2018 residential mortgage portfolio level. The results of this stress test will be incorporated in the Bank s next ICAAP. Page 6 of 6