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Earnings Assessment Criteria
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Role of Earnings
Earnings absorb normal and expected losses in each period and provide a source of financial support by contributing to the provincially regulated financial institution’s (“PRFI”) capital and its ability to access liquidity externally.
Earnings Performance
The following statements describe the rating categories used in assessing a PRFI’s earnings and its ability to continue to generate earnings required to ensure its long-term viability. The adequacy of a PRFI’s earnings will be evaluated in the context of the nature, scope, complexity, and risk profile of the PRFI. This evaluation considers quality, quantity, and volatility of earnings.
| Strong | The PRFI has consistent earnings performance, producing returns that significantly contribute to its long-term viability, and there is no undue reliance on non-recurring sources of income or on the income of subsidiaries to enhance earnings. Although there is some exposure to earnings volatility, the outlook for the next 12 months remains positive. |
| Acceptable | The PRFI has satisfactory earnings performance, producing returns that contribute to its long-term viability, and there is no undue reliance on non-recurring sources of income or subsidiaries’ income to enhance earnings. Although there is exposure to earnings volatility, the outlook for the next 12 months remains positive. |
| Needs Improvement | The PRFI has inconsistent earnings performance, with returns that may at times be inadequate to ensure its long-term viability. It may occasionally depend on non-recurring sources of income or subsidiaries’ income to show a profit. There is exposure to significant earnings volatility and the earnings outlook for the next 12 months is uncertain. |
| Weak | The PRFI has consistently recorded operating losses or earnings that are insufficient to ensure its long-term viability. It may be heavily dependent on non-recurring sources of income or subsidiaries’ income to show a profit. The earnings outlook for the next 12 months is expected to remain negative. |
Earnings Criteria
The following statements describe the criteria for assessing a PRFI’s earnings performance. The application and weighting of the individual criteria will depend on the nature, scope, complexity, and risk profile of the PRFI, and will be assessed collectively in evaluating its ability to generate earnings required for long-term viability.
| Essential Elements | Criteria |
|---|---|
| 1. Historical Trends, Level, and Composition | 1.1 Adequacy of earnings relative to the risk profile of the PRFI. 1.2 Earnings contribution from volatile and non-volatile sources of income. 1.3 Trend and volatility of earnings. 1.4 Level of and reasons for earnings variances compared to plan. 1.5 Extent to which sources of income are diversified. 1.6 Extent to which earnings are from non-recurring sources of income or subsidiaries. |
| 2. Peer Comparison Group | 2.1 Probability and earnings trends compared to its peers. |
| 3. Future Outlook | 3.1 Vulnerability of earnings to competition. 3.2 Extent to which the PRFI’s earnings may be affected by an economic downturn or market event. 3.3 Extent to which the PRFI’s earnings ensure its long-term viability. |