AIRB TRANSITION UPDATE A parallel run of our AIRB tools and processes is currently underway. The parallel run allows us to actively use our AIRB tools to assess and manage credit risk, including to estimate risk-adjusted returns on capital to evaluate new lending opportunities, monitor the pro-forma capital requirements of our lending portfolios, perform comprehensive stress testing and scenario analysis, and estimate ECL. The continued use of our AIRB tools and processes, particularly through a period of economic recovery and strong loan growth, has identified components of these tools and processes that we have determined can be improved. We have commenced a process to implement enhancements that we expect will drive efficiencies in the use of our AIRB tools and processes by our teams, and support increased precision in the measurement of credit risk. The enhancements underway will also incorporate changes to adopt the CAR 2023 revisions, once finalized. Based on our comprehensive approach to the resubmission of our application to OSFI, we are confident that we will obtain approval to transition to the AIRB approach. We have weighed the timing of resubmission of our AIRB application against the long-term benefits these enhancements will provide CWB as a model-enabled bank. We will provide further updates on our progress once we finalize the timeframe to resubmit our application, while considering all relevant stakeholders. Our transition to the AIRB approach for regulatory capital purposes is a strategic priority, as it will support our long-term growth and diversification aspirations with a sustainable and scalable operating model. Approval of our application is expected to boost our capital ratios, as risk-weighted assets will be calculated using more risk- sensitive models that reflect our strong underwriting track record. This will put us on more equal footing with our large bank competitors and broaden our addressable market by becoming more competitive on lower risk lending opportunities through improved risk-based pricing capabilities.
BOOK VALUE PER COMMON SHARE
Book value per common share at October 31, 2021 of $33.10 was up 4% from $31.76 last year. Compared to last year, the increase primarily reflects sustained common shareholders’ net income growth partially offset by a decline in AOCI and an increase in common shares outstanding.
FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS
Financial assets include cash resources, securities, securities purchased under resale agreements, loans, derivatives and certain other assets. Financial liabilities include deposits, securities sold under repurchase agreements, derivatives, debt and certain other liabilities.
The use of financial instruments exposes CWB to credit, liquidity and market risk. A discussion of how these are managed can be found in the Risk Management section of our MD&A.
Further information on how the fair value of financial instruments is determined is included in the Financial Instruments Measured at Fair Value discussion in the Accounting Policies and Estimates section of our MD&A.
Income and expenses are classified as to source, either securities or loans for income, and deposits or debt for expense. Gains (losses) on the sale of securities and fair value changes in certain derivatives are classified to non-interest income.
DERIVATIVE FINANCIAL INSTRUMENTS
More detailed information on the nature of derivative financial instruments is shown in Note 11 of the consolidated financial statements for the year ended October 31, 2021. The notional amounts of derivative financial instruments are not reflected on the consolidated balance sheets.
Table 25 - Derivative Financial Instruments ($ thousands)
2021
2020
Notional Amounts Interest rate swaps designated as cash flow hedges (1) Interest rate swaps designated as fair value hedges (2)
$
3,415,000 $
4,458,000
380,143 136,530
335,825 120,840
Foreign exchange contracts not designated as accounting hedges (3)
Equity swaps designated as cash flow hedges (4) Equity swaps not designated as accounting hedges (5)
19,450
20,470
8,886
6,184
Total
$
3,960,009 $
4,941,319
(1) Interest rate swaps designated as accounting cash flow hedges outstanding at October 31, 2021 mature between November 2021 and July 2030. (2) Interest rate swaps designated as accounting fair value hedges outstanding at October 31, 2021 mature between August 2022 and September 2028. (3) Foreign exchange contracts outstanding at October 31, 2021 mature between November 2021 and February 2022. (4) Equity swaps designated as accounting hedges outstanding at October 31, 2021 mature between June 2022 and June 2024. (5) Equity swaps not designated as accounting hedges outstanding at October 31, 2021 mature in June 2022.
The active use of interest rate swap contracts remains an integral component to manage the interest rate gap position. Derivative financial instruments are entered into only for CWB’s own account. We do not act as an intermediary in derivatives markets. Transactions are entered into on t he basis of industry standard contracts with approved counterparties subject to periodic and at least annual review, including an assessment of the credit worthiness of the counterparty. As part of our structural Market Risk Management Policy the use of derivative financial instruments are approved, reviewed and monitored on a regular basis by the Group Asset Liability Committee ( ALCo), and are reviewed and approved by the Board Risk Committee no less than annually.
CWB Financial Group 2021 Annual Report | 41
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