For the period ended September 30, 2021, unaudited
Context of the Quarterly Financial Report
The Bank of Canada is the nation’s central bank. The Bank’s mandate under the Bank of Canada Act is to promote the economic and financial welfare of Canada. Its activities and operations are undertaken in support of this mandate and not with the objective of generating revenue or profit. The Bank is committed to keeping Canadians informed about its policies, activities and operations.
This discussion has been prepared in accordance with section 131.1 of the Financial Administration Act and follows the guidance outlined in the Treasury Board of Canada’s Directive on Accounting Standards: GC 5200 Crown Corporations Quarterly Financial Report.
Bank management is responsible for the preparation of this report, which was approved by the Audit and Finance Committee of the Board of Directors on November 4, 2021.
This Quarterly Financial Report should be read in conjunction with the condensed interim financial statements included in this report and with the Bank’s Annual Report for 2020. The Annual Report includes a Management Discussion and Analysis (MD&A) for the year ended December 31, 2020. Disclosures and information in the 2020 Annual Report apply to the current quarter unless otherwise updated in this quarterly report.
COVID‑19: What the Bank is doing
Since the start of the COVID‑19 pandemic in March 2020, the Bank has acted in several ways to support the Canadian economy and financial system. When key financial markets became strained, the Bank responded by introducing several new facilities and operations. As market functioning has gradually recovered, some of these facilities and operations have been wound down. During the first three quarters of 2021, the Bank continued its quantitative easing program.1 Refer to www.bankofcanada.ca for more information on these measures.
Managing the balance sheet
| Financial position (in millions of Canadian dollars) |
|||
|---|---|---|---|
| As at | September 30, 2021 | December 31, 2020 | September 30, 2020 |
| Assets | |||
| Loans and receivables | 29,610.1 | 155,323.9 | 170,106.0 |
| Investments | 458,195.8 | 391,764.8 | 362,203.3 |
| Derivatives—indemnity agreements with the Government of Canada | 8,019.2 | - | - |
| All other assets* | 865.7 | 744.7 | 731.6 |
| Total assets | 496,690.8 | 547,833.4 | 533,040.9 |
| Liabilities and equity | |||
| Bank notes in circulation | 111,850.4 | 106,925.0 | 102,984.1 |
| Deposits | 355,737.9 | 436,100.5 | 427,351.1 |
| Securities sold under repurchase agreements | 27,503.1 | 3,000.8 | 532.1 |
| Derivatives—indemnity agreements with the Government of Canada | - | 29.3 | 415.8 |
| Other liabilities | 1,009.3 | 1,199.7 | 1,160.3 |
| Equity | 590.1 | 578.1 | 597.5 |
| Total liabilities and equity | 496,690.8 | 547,833.4 | 533,040.9 |
* All other assets includes Cash and foreign deposits, Capital assets and Other assets.
The Bank’s holdings of financial assets are typically related to its role as the exclusive issuer of Canadian bank notes. However, the current higher levels of assets result largely from activities undertaken as part of the Bank’s monetary policy and financial system functions. The Bank’s assets peaked in the first quarter of 2021 but began to decrease as market conditions improved and the Bank discontinued programs that were introduced in 2020 in response to the shock of COVID‑19. The Bank’s total assets decreased by 9 percent during the first nine months of this year to $496,690.8 million as at September 30, 2021. The main driver of the decline was the maturity of loans and receivables. This was partially offset by continued purchases under the Bank’s Government of Canada Bond Purchase Program (GBPP).
Loans and receivables is composed primarily of securities purchased under resale agreements (SPRAs). SPRAs are high-quality assets acquired through the repo market, in line with the Bank’s framework for market operations and liquidity provision. Normally, the Bank carries out these market operations to manage its balance sheet and offset seasonal fluctuations in the demand for bank notes. Beginning in March 2020, the Bank substantially increased the scale of such operations, with the principal aim of promoting the orderly functioning of Canadian financial markets. Compared with December 31, 2020, loans and receivables decreased by 81 percent to $29,610.1 million as at September 30, 2021. This was the result of market operations maturing and the declining use of term repo operations. The latter has steadily declined since the middle of the first quarter of 2021 and the program was suspended in the second quarter of 2021.
Investments increased by 17 percent to $458,195.8 million as at September 30, 2021. This increase was driven mainly by the following movements within the Bank’s holdings:
- Government of Canada securities, which include treasury bills, nominal bonds and Real Return Bonds, increased by $42,774.8 million during the nine-month period. An increase of $90,738.2 million in Government of Canada bonds was partially offset by a decrease of $47,963.4 million in treasury bills, largely as a result of maturities. This growth reflects the continuation of the GBPP, combined with the increase in the Government of Canada’s issuance of bonds. As the Bank continues to monitor the strength of the recovery, it will adjust the pace of net purchases of Government of Canada bonds as required.
- The Bank engages in security repurchase operations. These provide a temporary source of Government of Canada securities on an overnight basis to market participants. They also improve the availability of the Bank’s holdings of Government of Canada securities. The volume of securities repo operations continued to grow during the first nine months of 2021, resulting in an increase of $24,484.3 million compared with December 31, 2020.
Derivatives—indemnity agreements with the Government of Canada refers to the indemnity agreements that were put in place to allow the Bank to support provincial and corporate bond markets as well as the Government of Canada bond market. Losses resulting from the sale of assets within the GBPP, the Corporate Bond Purchase Program and the Provincial Bond Purchase Program are indemnified by the Government of Canada, whereas gains on disposal are remitted to the government. The $8,019.2 million balance represents the fair value of the derivatives associated with the net unrealized losses on these assets as at September 30, 2021. Long-term bond yields rose in the first three quarters of 2021, compared with the same period in 2020, as the outlook for the economy improved. This resulted in a decrease in the fair value of the assets held by the Bank, which in turn led to an increase in unrealized losses on those same assets.
Bank notes in circulation represents approximately 23 percent (20 percent as at December 31, 2020) of the Bank’s total liabilities. The value of bank notes in circulation increased by 5 percent to $111,850.4 million as at September 30, 2021, reflecting an increase in demand as well as seasonal variations.
Deposits consists of Government of Canada deposits, deposits by members of Payments Canada and other deposits. The balance declined by 18 percent to $355,737.9 million as at September 30, 2021 compared with December 31, 2020. While deposits are normally maintained at a lower level, they now represent the largest liability on the Bank’s balance sheet. This change stems from the purchase programs the Bank implemented in 2020 to support the Canadian economy and financial system. This balance has declined, as compared with December 31, 2020, reflecting the tapering of the Bank’s extraordinary market operations.
Securities sold under repurchase agreements increased to $27,503.1 million as at September 30, 2021 compared with December 31, 2020. This liability represents the repurchase price for security repo operations undertaken to support the functioning of financial markets. Security repo operations provide a temporary source of Government of Canada nominal bonds and treasury bills to primary dealers to support liquidity in the securities financing market.
Equity includes $5.0 million of authorized share capital, a $25.0 million statutory reserve and a special reserve of $100.0 million. The special reserve is meant to offset potential unrealized valuation losses due to changes in the fair value of the Bank’s investments that are not covered by an indemnity agreement. Equity also includes an actuarial gains reserve of $16.3 million as at September 30, 2021. This reserve accumulates the net actuarial gains and losses recognized on the Bank’s post-employment defined-benefit plans that the Bank recognizes following the transition to International Financial Reporting Standards in 2010. The largest reserve held by the Bank is the investment revaluation reserve, which sits at $443.8 million as at September 30, 2021. It represents the unrealized fair value gains in the Bank’s investment in the Bank for International Settlements (BIS).
Results of operations
| Results of operations (in millions of Canadian dollars) |
||||
|---|---|---|---|---|
| For the three-month period ended September 30 | For the nine-month period ended September 30 | |||
| 2021 | 2020 | 2021 | 2020 | |
| Interest revenue | 1,033.5 | 962.1 | 2,991.2 | 2,432.6 |
| Interest expense | (219.5) | (252.5) | (683.2) | (555.5) |
| Net interest revenue | 814.0 | 709.6 | 2,308.0 | 1,877.1 |
| Dividend revenue | - | - | 8.7 | - |
| Other revenue | 2.1 | 1.6 | 5.2 | 4.6 |
| Total income | 816.1 | 711.2 | 2,321.9 | 1,881.7 |
| Expenses | (176.6) | (161.7) | (521.5) | (460.7) |
| Net income | 639.5 | 549.5 | 1,800.4 | 1,421.0 |
| Other comprehensive income (loss) | 57.9 | 37.9 | 391.5 | (127.9) |
| Comprehensive income | 697.4 | 587.4 | 2,191.9 | 1,293.1 |
Comprehensive income increased by 19 percent in the third quarter of 2021 and by 70 percent in the first nine months of 2021, compared with the same periods in 2020. The main drivers for this growth were the increased revenue from a larger amount of financial assets held by the Bank throughout the periods and changes in the discount rates used to value the Bank’s net defined-benefit plans.2
Interest revenue depends on current market conditions, their impact on the interest-bearing assets held on the Bank’s balance sheet, and the volume and blend of these assets. The Bank’s primary sources of interest revenue are interest earned on its investments and interest earned on SPRAs. In the third quarter and in the first nine months of 2021, interest revenue increased by $71.4 million (or 7 percent) and $558.6 million (or 23 percent), respectively, over the comparable three- and nine-month periods in 2020. This increase was due to the greater volume of assets held by the Bank throughout the first three quarters of 2021.
Interest expense consists mainly of interest incurred on deposits held by the Bank. In the third quarter, interest expense decreased by $33.0 million (or 13 percent) compared with the same period in 2020 due to fluctuations in deposits held at the Bank. During the first nine months of 2021, interest expense increased by $127.7 million (or 23 percent) compared with the same period in 2020. The increase was primarily the result of a larger average amount of deposits being held at the Bank, offset by the reduction in the Bank’s policy interest rate in the first quarter of 2020.
Dividend revenue increased by $8.7 million in the first nine months of 2021 compared with the same period in 2020. The BIS did not declare a dividend in 2020 but did in the second quarter of 2021.
Expenses for the third quarter and the first nine months of 2021 increased by 9 percent and 13 percent, respectively, compared with the same periods in 2020. For the most part, this reflects increases in staff costs and in expenditures related to bank notes.
- Staff costs increased by $8.9 million (or 11 percent) and $29.8 million (or 12 percent) for the three- and nine-month periods, respectively, compared with the same periods in 2020 as a result of the following changes:
- Benefit costs associated with the Bank’s defined-benefit plans increased by $18.5 million (20 percent) in the first nine months of the year, mainly because of a decrease in the discount rates used for their calculation.3
- Salary costs also increased by $11.3 million (7 percent) in the first nine months of the year as a result of new positions being filled for strategic initiatives and the annual compensation adjustment.
- Bank note research, production and processing expenses were $1.3 million (or 7 percent) higher in the third quarter and $22.2 million (or 64 percent) higher in the first nine months of the year compared with the same periods in 2020. This increase was driven by higher volumes of bank notes being printed. The timing of bank note production varies from one year to the next based on the annual production plan.
Other comprehensive income for the third quarter and the first nine months of 2021 was $57.9 million and $391.5 million, respectively. For the third quarter, it consists of remeasurement gains of $55.4 million on the Bank’s defined-benefit plans due to an increase in the discount rate as well as an increase of $2.5 million in the fair value of the Bank’s investment in the BIS. For the nine-month period ended September 30, 2021, other comprehensive income consisted of remeasurement gains of $395.8 million, offset by a decrease of $4.3 million in the fair value of the Bank’s investment in the BIS.
Looking ahead through 2021
| The Bank’s 2021 plan (in millions of Canadian dollars) |
||||
|---|---|---|---|---|
| 2021 budget | 2021 forecast | |||
| For the year ended December 31 | $ | % | $ | % |
| Core expenditures | 401 | 54 | 399 | 55 |
| Bank note production | 84 | 11 | 81 | 11 |
| New mandates | 22 | 3 | 10 | 2 |
| Sustaining resilience operations | 51 | 7 | 50 | 7 |
| Deferred employee benefits (net of allocations) | 53 | 7 | 60 | 8 |
| Strategic investment programs | 138 | 18 | 126 | 17 |
| Other provisions | 1 | - | 1 | - |
| Total expenditures* | 750 | 100 | 727 | 100 |
*Total expenditures includes capital expenditures and repayments of lease liabilities and excludes depreciation.
The year 2021 represents the last year of the Bank’s 2019–21 medium-term plan (MTP), Leading in the New Era. The Bank’s financial management framework is designed to enable decision making related to the allocation of resources to achieve the Bank’s objectives and mitigate risks in a prudent fiscal manner. The framework balances the need to be fiscally responsible in the public sector environment and the need to invest in the Bank’s people and tools.4
Core expenditures, which reflects the cost of ongoing operations for the Bank’s core functions, is anchored on a commitment of 2 percent growth between the 2020 and 2021 budgets, or zero real growth, consistent with inflation averaging 2 percent, the midpoint of the Bank’s inflation-control target range of 1 to 3 percent. The Bank’s other expenditures are identified separately and excluded from the MTP’s commitment to the growth of core expenditures. They include the costs of developing and producing bank notes, the development costs related to new legislative amendments from the Parliament of Canada, incremental operating costs resulting from the implementation of resilience investments, and an annual evergreening provision for information technology to sustain the Bank’s resilience posture. Other costs include investments to continue to keep pace with industry-led modernizations and to reduce risk.
Operational highlights and changes
The following describes any significant changes in personnel, operations and programs that have occurred since June 30, 2021.
Board of Directors, Governing Council and Senior Management
On July 12, 2021, the Bank announced that Carolyn Rogers was appointed Senior Deputy Governor of the Bank of Canada for a seven-year term, effective December 15, 2021. Ms. Rogers succeeds Carolyn A. Wilkins, who resigned from the Bank on December 9, 2020.
On July 21, 2021, the Bank announced that Sharon Kozicki was appointed Deputy Governor of the Bank of Canada, effective August 2, 2021.
On July 28, 2021, the Bank announced that Ron Morrow was appointed Executive Director – Retail Payments Supervision, effective August 9, 2021.
Stephanie Bowman resigned from the Board of Directors effective August 20, 2021.
Risk analysis
The “Risk Management” section of the MD&A for the year ended December 31, 2020, outlines the Bank’s risk management framework and risk profile. It also reviews the key areas of risk—strategic, operational, financial, and environment- and climate-related. The financial risks are discussed further in the notes to the December 31, 2020, financial statements, which are included in the Bank’s Annual Report for 2020. Note 4 to the condensed interim financial statements for September 30, 2021, also provides an update on the financial risks. Although the pandemic has triggered more than the usual financial risks and volatility for some of the assets the Bank holds, the risks identified in the MD&A remain the key risks for the Bank.
Condensed interim financial statements
- 1. Refer to the Bank of Canada explainer, “Understanding quantitative easing,” for more details.[←]
- 2. The net defined-benefit liabilities are measured using the discount rate in effect as at the period end. The rate applicable to the net defined-benefit liabilities as at September 30, 2021, ranged from 2.6 to 3.5 percent (1.9 to 2.7 percent as at December 31, 2020). See Note 9 to the condensed interim financial statements for more information.[←]
- 3. Benefit costs for a given period are based on the discount rate as at December 31 of the preceding year (e.g., the rate at December 31, 2020, was used to calculate the benefit expenses for 2021). Discount rates and related benefit costs share an inverse relationship: as rates decrease, benefit expenses increase (and vice versa). The discount rates used to calculate the pension benefit plans and other benefit plan expenses ranged from 2.9 to 3.2 percent for 2020 and from 1.9 to 2.7 percent for 2021. This decrease will result in increased benefit costs for 2021, all else being equal.[←]
- 4. The Bank’s forecasts for its operations do not include projections of net income and financial position. Such projections would require assumptions about interest rates, which could be interpreted as a signal of future monetary policy.[←]