Financial Performance And Regulatory Disclosures Q3 2018-Books Pdf

Financial Performance and Regulatory Disclosures Q3 2018
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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 Financial Performance and Regulatory Disclosures. MBC is a Schedule I federally chartered bank and a wholly owned This document provides information on the Bank s consolidated. subsidiary of The Manufacturers Life Insurance Company MLI a financial performance and includes pertinent disclosures based on the. wholly owned subsidiary of Manulife Financial Corporation MFC Basel Committee on Banking Supervision s BCBS Basel II and III. MFC is a publicly traded financial services group MBC and its wholly frameworks and the Office of the Superintendent of Financial. owned subsidiary Manulife Trust Company MTC provides a wide Institutions OSFI B 6 and B 20 guidelines These disclosures are. range of financial products and services including mortgage and intended to provide market participants with information regarding the. investment loans and deposit products Platinum Canadian Mortgage risk profile of MBC and the application of the Basel regulatory. Trust PCMT and Platinum Canadian Mortgage Trust II PCMT II requirements as well as information related to MBC s residential. were established to provide financing for MBC mortgage products mortgage loans portfolios to enable market participants to evaluate the. through securitization Bank s residential mortgage underwriting standards . The financial data presented in this document represents the. Vision, consolidated financial results for the Bank its subsidiary MTC and. structured entities PCMT and PCMT II , MBC s vision is to improve the wealth of Canadians by providing. efficient and flexible banking solutions and integrating banking into Contents. every client s financial plan Overview 1 , Financial Performance1 2 .
Mission and Values, Key strategic priorities 4 , MFC s mission is to make decisions easier and customers lives better Basel III Pillar 3 Disclosures 6 . MFC s values are the guideposts that help achieve the mission define Credit Risk 7 . who we are and how we work together These values are Market Risk 25 . Liquidity Risk 28 , Obsess about customers Operational Risk 33 . Do the right thing Capital Management 34 , Think big. Get it done together, B20 Disclosures 38 , Own it Glossary 41 . Share your humanity, Manulife Bank of Canada Q3 2018 Financial Performance and Regulatory Disclosures 1 Page.
Financial Performance1, Effective January 1 2018 the Bank adopted IFRS 9 Financial Instruments which replaces the. guidance in IAS 39 Financial Instruments Recognition and Measurement IFRS 9 includes. requirements on 1 Classification and Measurement of financial instruments 2 Impairment of. financial assets and 3 Hedge accounting In conjunction with the adoption of IFRS 9 the Bank. also adopted the OSFI guideline IFRS 9 Financial Instruments and Disclosures which provides. guidance to Federally Regulated Entities on the application of IFRS 9 The OSFI guidelines are. effective for the Bank with the adoption of IFRS 9 on January 1 2018 The Bank applied IFRS 9. on a retrospective basis with no restatement of comparative information Comparative information. for 2017 is reported under IAS 39 and is not comparable to the information presented for 2018 . MBC ended the quarter with assets of 24 3 billion consistent with June 30 2018 and increased. by 1 1 billion or 5 as compared to September 30 2017 The increase over prior year was. primarily driven by an increase in net lending assets driven by actions to broaden the Bank s. distribution channels and enhancement to the Banks retention programs . 1, Regulatory changes economic headwinds and a softening home purchase market continue to. challenge the business environment and increase competitive pressures 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 and reflects the positive impacts of foundational. initiatives and improved retention and customer experience programs . Net income of 35 million for the three months ended September 30 2018 remained flat as. compared to the three months ended June 30 2018 as higher net interest income and lower. operating expenses were offset by lower investment gains Net income decreased 2 million or 5 . as compared to the three months ended September 30 2017 driven by lower net investment gains. and higher operating expenses partially offset by higher net interest income . 1Financial, performance information is provided to enable a reader to assess the Bank s unaudited results of operations and financial condition for the three month period ended. September 30 2018 , Manulife Bank of Canada Q3 2018 Financial Performance and Regulatory Disclosures 2 Page. The Banks efficiency ratio at September 30 2018 of 56 6 was lower as compared with. 58 6 reported in June 30 2018 and higher as compared with 51 3 reported in. September 30 2017 The decrease over prior quarter is primarily driven by higher net. interest income and lower operating expenses partially offset by lower investment gains . The increase over the prior year is due to lower investment gains and higher operating. expenses partially offset by higher net interest income . MBC has no exposure to European sovereign debt or to the sub prime mortgage market . Capital, Basel III Common Equity Tier 1 CET1 ratio Tier 1 capital ratio and Total capital ratio.
were 13 6 per cent 16 7 per cent and 16 9 per cent respectively as at September 30 . 2018 well in excess of minimum regulatory capital requirements . Risk weighted assets as at September 30 2018 were approximately 7 5 billion an. increase of 0 1 billion or 1 as compared to June 30 2018 The increase was. primarily driven by growth in lending assets higher corporate exposures and an increase. in operational risk Risk weighted assets as at September 30 2018 increased 0 5. billion or 7 as compared with September 30 2017 primarily driven by growth in. lending assets an increase in bank exposures and higher operational risk . Total risk weighted assets, Refer to the Capital Management section for further discussion on regulatory capital capital 7 5 Billion. ratios and risk weighted assets , Total capital, 1 3 Billion. CET1 Capital Ratio, 13 6 , Tier 1 Capital Ratio, 16 7 . Total Capital Ratio, 16 9 , Manulife Bank of Canada Q3 2018 Financial Performance and Regulatory Disclosures 3 Page. Credit ratings, As at September 30 2018 the long term and short term credit ratings remained the same Standard Poor s.
as for the year ended December 31 2017 As at April 27 2018 Standard Poor s Short term rating A 1. reaffirmed Manulife Bank s long term deposit rating of A and its short term deposit rating of. Long term rating A , A 12 As at October 23 2018 DBRS reaffirmed the Bank s long term senior debt and long . term deposit ratings of A high and its short term deposit rating of R 1 middle 3 DBRS. Short term rating R 1 middle ,Key strategic priorities 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 . Retain and deepen customer relationships , Lead in customer experience digital and digitization . Disruptive products and services that aligns to the best interest of our customers . Diversity distribution , Acquire new younger digitally inclined customers . Drive channel efficiencies through digital automation and variable cost model and. Build high performing motivated teams to deliver on growth strategies . 2, 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 ,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 . Manulife Bank of Canada Q3 2018 Financial Performance and Regulatory Disclosures 4 Page. Financial Performance, IFRS 9 1 IAS 39, As at balances Q3 2018 Q2 2018 Q1 2018 Q4 2017 Q3 2017. ASSETS, Cash cash equivalents and restricted cash 2 408 2 605 2 916 2 306 2 623. Debt securities 240 277 247 245 212,Equity securities 183 183 169 227 243.
2 831 3 065 3 332 2 778 3 078,Mortgage loans 19 619 19 390 18 959 18 690 18 356. Other loans 1 788 1 806 1 775 1 737 1 734, 21 407 21 196 20 734 20 427 20 090. Other assets 65 58 66 63 57,Total assets 24 303 24 319 24 132 23 268 23 225. LIABILITIES and EQUITY,Liabilities, Demand deposits 11 784 11 950 11 818 11 902 11 954. Term deposits 7 542 7 417 7 424 6 489 6 354, 19 326 19 367 19 242 18 391 18 308.
Notes payable 3 524 3 523 3 523 3 523 3 425,Other liabilities 188 183 145 135 146. Total liabilities 23 038 23 073 22 910 22 049 21 879. Equity,Issued share capital, Preferred shares 229 229 229 229 154. Common shares 217 217 217 217 217,Contributed surplus 165 165 165 165 157. Retained earnings 654 634 611 603 809,Accumulated other comprehensive income 1 5 9. Total equity 1 265 1 246 1 222 1 219 1 346, Total liabilities and equity 24 303 24 319 24 132 23 268 23 225.
IFRS 9 1 IAS 39 IFRS 9 1 IAS 39, 2018 2017 Fiscal YTD Fiscal. Q3 Q2 Q1 Q4 Q3 2018 2017 2017,Revenue,Interest income 207 193 185 176 169 585 477 653. Interest expense 104 96 89 81 72 289 207 288,Net interest income 103 97 96 95 97 296 270 365. Fee income 10 10 9 10 10 29 30 40, Net losses gains on securities 2 8 11 14 3 5 17 31. Non interest income 8 18 2 24 13 24 47 71,Total revenue 111 115 94 119 110 320 317 436.
Provision for credit losses on lending assets 1 2 1 2 3 4 5. Non interest expense 63 67 60 71 58 190 171 242, Net income before income tax 48 47 32 47 50 127 142 189. Income tax expense 13 12 8 12 13 33 37 49,Net income 35 35 24 35 37 94 105 140. 1 , Effective January 1 2018 the Bank adopted IFRS 9 The full transitional impact was recognized as an adjustment to to opening retained earnings as of January 1 2018 Comparative information for 2017 is reported under IAS 39 . The tables above are a summary of MBC s unaudited consolidated financial statements and are consistent with the unaudited consolidated financial statements filed with OSFI with classification differences due to summarization of results . Manulife Bank of Canada Q3 2018 Financial Performance and Regulatory Disclosures 5 Page. ,Basel III Pillar 3 Disclosures4, 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 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 or. 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 it Risk. , 4 The financial information included in this Pillar 3 regulatory disclosures below are unaudited and in millions of Canadian dollars unless otherwise stated . Manulife Bank of Canada Q3 2018 Financial Performance and Regulatory Disclosures 6 Page. 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 the Bank 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 Manulife Bank Executive Risk. 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 . 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 Home Equity Line of. Credit HELOC product This can include a client s traditional mortgage loan personal loan lines of credit chequing and savings accounts and credit. Manulife Bank of Canada Q3 2018 Financial Performance and Regulatory Disclosures 7 Page. 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 , As at September 30 2018 the residential mortgage loans portfolio includes 16 4 billion of Manulife One accounts December 31 2017 15 7. billion with the remaining comprising primarily of amortizing 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 currency and maturity dates of assets and liabilities The Bank employs defensive hedging strategies to reduce risks 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 Foreign exchange risk refers to losses that could result from changes in foreign exchange rates arising from assets and liabilities. that are denominated in foreign currency , 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 within 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 derivatives Key variables impacting valuations. include the Banker s Acceptance BA swap rates and foreign currency Inputs to models are consistent with what market participants would use. when pricing the instruments and are deemed observable 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 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 derivatives held as at September 30 2018 . A portion 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 third quarter of 2018 a net loss of 0 04 million net gain. of 0 03 million for the third quarter of 2017 was recognized in income for swaps due to hedge ineffectiveness and a net loss of 0 4 million for. the nine months ended September 30 2018 a net gain of 0 2 million for the nine months ended September 30 2017 . Manulife Bank of Canada Q3 2018 Financial Performance and Regulatory Disclosures 8 Page. 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 19 3 billion third quarter of 2017 18 2 billion and the 2018 average quarterly gross. exposure for other loans was 2 0 billion third quarter of 2017 1 8 billion The average quarterly gross exposure for undrawn commitments. was 9 7 billion third quarter of 2017 9 2 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 . 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 . Manulife Bank of Canada Q3 2018 Financial Performance and Regulatory Disclosures 9 Page. , Summary of Exposure Covered by Eligible Financial Collateral5. Counterparty type Q3 2018 Q2 2018 Q1 2018 Q4 2017 Q3 2017. Loans 1 1 788 1 806 1 775 1 737 1 734, Total exposure covered by credit risk mitigation 1 788 1 806 1 775 1 737 1 734. 1 , The maximum exposure is equal to the loan value advanced to a borrow er as the value of financial collateral exceeds the amount draw n The exposure amounts presented are net of allow ance 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 September 30 2018 was nil December 31 . 2017 nil As at September 30 2018 collateral of 23 million December 31 2017 16 million was posted to its swap counterparties due to. unfavourable derivative positions for the Bank , 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 interest rate shocks As at September 30 2018 the Bank no longer has collateral posting thresholds based on. credit rating downgrade scenarios , , 5 Eligible financial collateral includes cash and deposits as well as qualifying debt securities equities and mutual funds . Manulife Bank of Canada Q3 2018 Financial Performance and Regulatory Disclosures 10 Page. ,Credit quality,Policy applicable from January 1 2018 IFRS 9 . Effective January 1 2018 the Bank adopted IFRS 9 Under IFRS 9 impairment of financial assets classified as amortized cost or fair value. through other comprehensive income FVOCI is to be calculated through an expected credit loss ECL model which replaces the previous. incurred loss model under IAS 39 The IFRS 9 impairment requirements also apply to certain undrawn loan commitments and financial. guarantees6 The Bank s financial instruments in scope of the impairment requirements include the Bank s lending assets and off balance sheet. commitments debt securities and other financial assets measured at FVOCI . ECL allowances represent credit losses that reflect an unbiased and probability weighted estimate determined by evaluating a range of possible. outcomes and includes forward looking information The inclusion of forward looking information generally results in earlier recognition of credit. losses under IFRS 9 as compared to IAS 39 ECLs are calculated on an individual basis or a collective basis depending on the nature of the. underlying portfolio Changes in the required ECL allowance are recorded in the provision for credit losses in the Consolidated Statements of. Income , The ECL model measures credit losses using a three stage approach7 . Stage 1 is comprised of all performing financial instruments which have not experienced a significant increase in credit risk SICR since. initial recognition The determination of SICR varies by product and considers the relative change in the risk of default since origination 12 . month ECLs are recognized for all Stage 1 financial instruments 12 month ECLs represent the portion of lifetime ECLs that result from default. events possible within 12 months of the reporting date . ,6, The ECL for off balance sheet commitments and undrawn facilities is reported in other liabilities in the Bank s Consolidated Statements of Financial Position . 7, Financial instruments can migrate in both directions through the stages of the impairment model .
Manulife Bank of Canada Q3 2018 Financial Performance and Regulatory Disclosures 11 Page. , Stage 2 is comprised of all non impaired financial instruments which have experienced a SICR since original recognition which is not. considered to be in default Full lifetime ECLs are recognized which represent ECLs that result from all possible default events over the. remaining lifetime of the financial instrument The remaining lifetime is generally based on a financial instrument s remaining contractual life . except for certain revolving products where remaining lifetime is based on the period over which the Bank expects to be exposed to credit. losses , Stage 3 is comprised of financial instruments identified as credit impaired Full lifetime ECLs are recognized for Stage 3 financial instruments . ECLs are measured under four probability weighted macroeconomic scenarios which measure the difference between all contractual cash flows. that are due to the Bank in accordance with the contract and all the cash flows that the entity expects to receive discounted at the original. effective interest rate This includes consideration of past events current market conditions and reasonable supportable information about future. economic conditions The estimation and application of forward looking information and the assessment of SICR requires significant judgement . Forward looking macroeconomic variables used in the models are the variables which are most closely related with credit losses in the relevant. portfolio The ECL calculations also include the following elements . The probability of default PD an estimate of the likelihood of default over a given time horizon . The loss given default LGD an estimate of the loss arising in the case where a default occurs at a given time It is based on the difference. between the contractual cash flows due and those the lender expects to receive including from the realization of collateral net of expected. costs of realization and any amounts legally required to be paid to the borrowers and other credit enhancements that are integral to the. contract terms and, The exposure at default EAD an estimate of the exposure at a future default date considering expected changes in the exposure after the. reporting date , Financial instruments are written off either partially or in full against the related allowance for credit losses when there is no realistic prospect of. recovery in respect of those amounts In subsequent periods any recoveries of amounts previously written off are credited to the provision for. credit losses , Manulife Bank of Canada Q3 2018 Financial Performance and Regulatory Disclosures 12 Page.
,Policy applicable before January 1 2018 IAS 39 , The Bank classifies a loan as impaired when in the opinion of management there is objective evidence of impairment due to one or more loss. events that have occurred after initial recognition of the loan with a negative impact on the estimated future cash flows of a loan Objective. evidence of impairment includes indications that the borrower is experiencing significant financial difficulties or a default or delinquency has. occurred Generally 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 Government of Canada guaranteed loans 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 objective. evidence of impairment as a result of one or more loss events that have occurred after initial recognition of the loan with a negative impact on the. estimated future cash flows of a loan 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 PD LGD and EAD . 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 Q3 2018 Financial Performance and Regulatory Disclosures 13 Page.

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