ZAG BANK BASEL PILLAR 3 CAPITAL DISCLOSURE March 31, 2017
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 Holdings Inc., an indirect wholly-owned 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, 2014. The incorporating instrument of the Bank was amended in accordance with the Bank Act and the letters patent were effective on October 1, 2014. 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). Deposit operating accounts will be offered in the near term. 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 Pillars1 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). Page 2 of 6
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. 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, 2017, the number of issued and outstanding common shares was 180,676. The capital composition of the Bank is shown in the following table: March 31, 2017 All in Transitional (in thousands) basis basis Common shares issued $ 180,676 $ 180,676 Retained earnings (deficit) (51,898) (51,898) Accumulated other comprehensive income (610) (488) Common Equity Tier 1 capital before regulatory adjustments 128,168 128,290 Computer software and other intangible assets (5,583) (4,467) Deferred tax asset excluding those for temporary differences (14,649) (11,719) Common Equity Tier 1 (CET1) capital $ 107,936 $ 112,104 Tier 1 capital 107,936 112,104 Total capital $ 107,936 $ 112,104 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 2019. Capital on a transitional basis shown above refers to the phase-in of the Basel supervisory adjustments and phase-out of non-qualifying capital instruments up to March 31, 2016 and is presented for information purposes only. 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 and Planning 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 and Planning 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). Page 3 of 6
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 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, 2017 All in Transitional (in thousands) basis basis Risk weighted assets (RWA) Credit risk $ 266,379 $ 266,379 Operational risk $ 8,322 $ 8,322 Adjustment to RWA for transitional basis $ 4,046 Total risk weighted assets $ 274,701 $ 278,747 Credit Valuation Adjustment (CVA) on derivatives $ 2,085 $ RWA adjusted for CVA on derivatives Common Equity Tier 1 RWA adjusted for CVA on derivatives $ 274,117 $ 278,747 Tier 1 RWA adjusted for CVA on derivatives 274,221 278,747 Total RWA adjusted for CVA on derivatives 274,305 278,747 Regulatory capital ratios Common Equity Tier 1 capital ratio 39.4% 40.2% Tier 1 capital ratio 39.4% 40.2% Total capital ratio 39.3% 40.2% Leverage ratio 1 7.4% 7.4% 1 The leverage ratio implemented in 2015 replaces the assets to capital multiple. Page 4 of 6
As with the capital section, the Bank calculates and reports risk-weighted assets and regulatory capital ratios on an all-in basis. The risk-weighted assets and regulatory capital ratios on a transitional basis are presented for information purposes only. The Bank has maintained its capital levels above its regulatory capital requirements throughout the quarter ended March 31, 2017. Residential Mortgages The Bank s insured and uninsured residential mortgages outstanding principal by province as at March 31, 2017 is shown below: Geographical Breakdown of Residential Mortgages' as at March 31, 2017 (in thousands) Insured Mortgages Uninsured Mortgages Total Mortgages Province Quebec $ 280,444 87% $ 299,985 99% $ 580,429 93% Alberta 19,800 6% 1,448 0% 21,247 3% Ontario 16,674 5% 1,583 1% 18,256 3% Manitoba 1,329 1% 0% 1,329 0% Saskatchewan 1,118 0% 8 0% 1,126 0% Nova Scotia 645 0% 0% 645 0% New Brunswick 511 0% 0% 511 0% British Columbia 2,991 1% 39 0% 3,029 1% Total $ 323,512 100% $ 303,062 100% $ 626,574 100% Page 5 of 6
The remaining amortization period of the residential mortgages held by the Bank as at March 31, 2017 was: (in thousands) Remaining Amortization Period 0 to 15 Years $ 23,633 4% 15 to 20 Years 50,561 8% 20 to 25 Years 532,450 85% 25 to 30 Years 19,510 3% 30 to 35 Years 420 0% Total $ 626,574 100% No uninsured residential mortgages were underwritten or acquired during Q1 2017. 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. Page 6 of 6