Select a main site category.
News Releases
News Releases
Scotiabank delivers record Q2 earnings
Second quarter highlights compared to the same period a year ago:
- Earnings per share (diluted) of $1.03, an increase of 16% from $0.89
- Net income of $1.04 billion, up 16% from $894 million
- Return on equity of 23.4%, versus 23.2%
- Productivity ratio of 53.8%, improved from 55.3%
Quarterly dividend increased by 3 cents to 45 cents per common share.TORONTO, May 29 /CNW/ - Scotiabank today announced its second consecutive
quarter of record earnings in 2007, with net income rising 16% to
$1,039 million compared with the same period last year. Quarter over quarter,
net income increased $19 million or 2%.
Earnings per share (diluted) was up 16% to $1.03 from $0.89 in the same
period last year, and return on equity remained strong at 23.4%.
"Our strategy of diversification across business lines and by geography
continued to produce solid results," said Scotiabank President and CEO Rick
Waugh. "Domestic Banking, Scotia Capital and International Banking experienced
strong asset growth, resulting in higher net interest income. As well, this
quarter's results benefited from the positive contributions of recent
acquisitions and low levels of credit losses.
"Domestic Banking experienced continued strong growth in several
categories, particularly in mortgages, due to a combination of organic growth
and the acquisition of Maple Trust in 2006, as well as in personal lines of
credit. This was combined with strong contributions from wealth management.
Market share gains were recorded in mortgages, personal term deposits, mutual
funds and business deposits.
"Scotia Capital achieved record results with contributions across most of
its businesses, buoyed by higher client-driven activities. The business line
benefited from a benign credit environment, continued loan recoveries and
provision reversals, and higher interest recoveries compared to the same
period last year.
"The combination of organic growth and acquisitions fuelled solid
year-over-year results in International Banking. We continue to see asset
growth in all regions with the Caribbean benefiting from regional mortgage
campaigns launched in previous quarters. We are also investing in future
growth initiatives, expanding our branch network and launching marketing
initiatives to attract and retain customers.
"We continue to manage our capital prudently, maintaining strong capital
ratios that support ongoing business development opportunities.
"This quarter extends our record of generating shareholder value, and we
are pleased to announce an increase to our quarterly shareholder dividend of
3 cents to 45 cents per common share. Based on our performance in the first
half of the year, we remain on track to achieve our key performance targets
for 2007."Year-to-date performance versus key 2007 financial and operational
objectives was as follows:
1. TARGET: Earn a return on equity (ROE)(1) of 20 to 23%. For the six
months Scotiabank earned an ROE of 23.3%.
2. TARGET: Generate growth in earnings per common share (diluted) of
7 to 12%. Our year-over-year growth in earnings per share was 18%.
3. TARGET: Maintain a productivity ratio(1) of less than 58%.
Scotiabank's ratio was 53.7% for the six months.
4. TARGET: Maintain sound capital ratios. At 10.1%, Scotiabank's Tier 1
capital ratio remains strong by Canadian and international standards.
(1) Refer to non-GAAP measures discussion below.
FINANCIAL HIGHLIGHTS
As at and for the For the
three months ended six months ended
-------------------------------------------------------------------------
April 30 January 31 April 30 April 30 April 30
(Unaudited) 2007 2007 2006 2007 2006
-------------------------------------------------------------------------
Operating results
($ millions)
Net interest income 1,794 1,776 1,531 3,570 3,040
Net interest income
(TEB(1)) 1,903 1,881 1,644 3,784 3,249
Total revenue 3,102 3,109 2,717 6,211 5,451
Total revenue(TEB(1)) 3,211 3,214 2,830 6,425 5,660
Provision for credit
losses 20 63 35 83 110
Non-interest expenses 1,726 1,724 1,565 3,450 3,127
Provision for income
taxes 286 277 200 563 425
Provision for income
taxes(TEB(1)) 395 382 313 777 634
Net income 1,039 1,020 894 2,059 1,746
Net income available to
common shareholders 1,028 1,012 887 2,040 1,731
-------------------------------------------------------------------------
Operating performance
Basic earnings per
share ($) 1.04 1.02 0.90 2.06 1.75
Diluted earnings per
share ($) 1.03 1.01 0.89 2.04 1.73
Return on equity (%)(1) 23.4 23.0 23.2 23.3 22.4(3)
Productivity ratio(%)
(TEB(1)) 53.8 53.6 55.3 53.7 55.2
Net interest margin on
total average assets (%)
(TEB(1)) 1.93 1.91 1.97 1.92 1.97
-------------------------------------------------------------------------
Balance sheet
information
($ millions)
Cash resources and
securities 131,296 126,899 113,842
Loans and
acceptances(2) 226,310 222,690 192,237
Total assets 411,710 396,470 356,979
Deposits 291,603 277,019 247,648
Preferred shares 1,290 945 600
Common shareholders'
equity 18,705 18,850 15,789(3)
Assets under
administration 208,426 203,067 188,508
Assets under management 30,448 29,158 26,936
-------------------------------------------------------------------------
Capital measures
Tier 1 capital ratio (%) 10.1 10.4 10.2
Total capital ratio (%) 11.4 11.7 11.9
Tangible common equity to
risk-weighted
assets(1) (%) 8.0 8.4 8.5(3)
Risk-weighted assets
($ millions) 213,078 206,843 180,112
-------------------------------------------------------------------------
Credit quality
Net impaired loans(4)
($ millions) 579 579 579
General allowance for
credit losses
($ millions) 1,298 1,323 1,330
Net impaired loans as
a % of loans and
acceptances(2)(4) 0.26 0.26 0.30
Specific provision
for credit losses as a %
of average loans and
acceptances
(annualized)(2) 0.08 0.12 0.08 0.10 0.12
-------------------------------------------------------------------------
Common share information
Share price ($)
High 54.73 53.39 48.67 54.73 49.80
Low 49.34 48.80 45.03 48.80 42.89
Close 53.39 50.76 46.52
Shares outstanding
(millions)
Average - Basic 992 991 988 992 989
Average - Diluted 1,001 1,001 1,001 1,001 1,002
End of period 990 993 988
Dividends per share ($) 0.42 0.42 0.36 0.84 0.72
Dividend yield (%) 3.2 3.3 3.1 3.2 3.1
Dividend payout
ratio(5) (%) 40.6 41.2 40.1 40.9 41.1
Market capitalization
($ millions) 52,840 50,397 45,950
Book value per common
share ($) 18.90 18.99 15.98(3)
Market value to book
value multiple 2.8 2.7 2.9
Price to earnings
multiple (trailing
4 quarters) 13.7 13.5 13.9
-------------------------------------------------------------------------
Other information
Employees 54,908 53,937 51,503
Branches and offices 2,242 2,225 2,132
-------------------------------------------------------------------------
(1) Non-GAAP measure. Refer below for a discussion of these measures.
(2) Certain comparative amounts in this quarterly report have been
restated to conform with current period presentation.
(3) Balance sheet figures and related ratios have been restated, where
applicable, for the accounting policy related to stock-based
compensation adopted in 2006. Refer to Note 1 of the interim
consolidated financial statements below for further details.
(4) Net impaired loans are impaired loans less the specific allowance for
credit losses.
(5) Represents common dividends for the period as a percentage of the net
income available to common shareholders for the period.Strategies for success
-------------------------------------------------------------------------
Scotiabank's second quarter results reflect the progress we have made
toward achieving our objectives for 2007 and beyond, and our primary goal: to
be the best Canadian-based international financial services company. We
continue to take a balanced approach to managing our business, with a focus on
executing our strategies to meet the needs of all our stakeholders, and on
three key priorities: sustainable revenue growth, effective management of our
capital and leadership.
Sustainable revenue growth results from both organic growth initiatives
and acquisitions across all three business lines. This quarter, we announced a
number of international acquisitions, including a 10 per cent investment in
Puerto Rico's First BanCorp, and a 24.99 per cent stake in Thanachart Bank,
Thailand's eighth-largest bank and leading automobile lender. We also signed a
strategic co-operation memorandum to explore a minority investment in Bank of
Dalian, China's seventh-largest city commercial bank.
Additionally, we announced the expansion of our presence in Malaysia,
with four new full-service commercial branches; opened a new representative
office in Istanbul, Turkey, to facilitate the expansion of our trade finance,
syndicated lending and correspondent banking businesses in the region; and
launched Scotia Private Client Group in the Bahamas, the first initiative in a
planned expansion of our wealth management services platform across the
Caribbean, Central and Latin America.
In Canada, we finalized our purchase of Travelers Leasing Corporation, a
leading Canadian automobile financing company. We continued to build and
improve our wealth management offering of Scotia Mutual Funds. We also
strengthened our wealth management team by hiring several leading experts into
key senior positions, with a mandate to significantly accelerate growth in the
Bank's asset management business.
Scotia Capital participated in a number of significant deals, including
the largest-ever Maple bond transaction - a $2.5 billion issue by Morgan
Stanley. This was also the largest corporate bond deal in Canada. During the
quarter, the foreign exchange and derivatives teams were also recognized for
their excellence.
We were also proud that Scotiabank was once again recognized by Training
magazine as a top training company. Providing our employees with relevant
training and development opportunities is a critical component of our
commitment to them.
As we enter the second half of fiscal 2007 - a year that marks our 175th
anniversary - we are confident that we can sustain our successes, and continue
to achieve strong results that will meet our balanced goals.2007 Objectives - Our Balanced Scorecard
-------------------------------------------------------------------------
Financial
- Return on equity of 20-23%
- Diluted earnings per share growth of 7-12%
- Long-term shareholder value through increases in dividends and stock
price appreciation
Operational
- Productivity ratio of less than 58%
- Sound ratings
- Strong practices in corporate governance and compliance processes
- Sound capital ratios
Customer
- High levels of customer satisfaction and loyalty
- Deeper relationship with existing customers
- New customer acquisition
People
- High levels of employee satisfaction and engagement
- Enhance diversity of workforce
- Commitment to corporate social responsibility and strong community
involvement
ACHIEVEMENTS
Domestic Banking
- We continued to solidify Scotiabank's status as Canada's leading bank
for excellence in branch service, based on an independent study. As
well, in the second quarter our internal customer service index,
based on independently compiled responses from more than
100,000 customers, increased by another percentage point over the
record results reported at the end of 2006.
- We successfully finalized the acquisition of Travelers Leasing
Corporation (TLC), a leading provider of innovative retail automobile
financing solutions. The TLC acquisition will add new, high-margin
retail lending business to Scotiabank, and further solidifies our
position as a leader in the automobile financing market.
- Our mutual fund business continues to improve and perform well:
- Net sales grew strongly to $1.5 billion year to date, compared to
net redemptions in the same period last year. Assets under
administration grew 7% in the quarter, and our industry market
share increased 7 basis points.
- Mutual fund performance also continued to improve, as one-year
trailing returns to March 31 ranked in the first or second
quartile for 75% of fund assets, placing us in a virtual tie for
top spot with two other banks. Three-year trailing returns by the
same measure were also solid, with 72% of fund assets ranked in
the top two quartiles.
- To further develop and accelerate our fund business, we recently
hired three highly respected and proven senior industry executives
to bolster our investment team. We also hired and deployed a team
of 39 new Investment Sales Coaches, with a mandate to enhance our
branches' ability to identify customer investment needs and win
investment business.
International Banking
- Scotiabank reached an agreement to acquire approximately 25 per cent
of Thanachart Bank, Thailand's eighth-largest bank and the leader in
automotive lending, for approximately $240 million. The transaction
is subject to regulatory approval and is expected to close during the
third quarter.
- Our Costa Rican bank, Banco Interfin, was recently recognized as the
Best Bank in Costa Rica by Global Finance magazine.
- In an effort to make credit facilities more easily available for
small and medium-sized businesses in Jamaica, Scotiabank and
MasterCard Worldwide announced the launch of the Scotiabank
MasterCard Business Card and the Scotiabank/AAdvantage Business
Executive MasterCard card.
Scotia Capital
- Scotia Capital's corporate derivatives team was ranked No. 1 in
Canada for the fifth year in a row by an independent third-party
market survey. The same survey also ranked our foreign exchange team
first in a number of key business indicators, including market
penetration, relationship management and sales coverage.
- Scotia Capital Mexico was awarded the Best Latin American Equity Deal
for 2006 by Latin Finance magazine. We were joint lead arranger and
bookrunner for an innovative MXP$990 million acquisition transaction
to finance the purchase of Controladora Milano S.A. de C.V. by a
leading private equity firm.
- In mergers and acquisitions, Scotia Capital is acting as financial
advisor to Empire Company on the proposed $1 billion privatization of
Sobeys Inc. Scotia Waterous is acting as financial advisor to
Statoil ASA on its $2.2 billion acquisition of North American Oil
Sands Corporation.
- Scotia Capital acted as joint lead arranger on a $2.5 billion Maple
bond issue by Morgan Stanley, the largest ever Maple bond
transaction, as well as the largest corporate bond deal in Canada.
Employee highlights
- Scotiabank was recognized for the fourth consecutive year by Training
magazine as a top training company in the world, continuously
improving its ranking over the last three years. We achieved the best
showing by a Canadian financial institution.
- Grupo Scotiabank was named among Mexico's top 100 workplaces for the
fourth year in a row, according to the annual ranking by the Great
Place to Work Institute. Scotiabank placed first among the country's
financial institutions and third among companies with more than
2,500 employees.
Community involvement
- Scotiabank presented the annual Sheena's Place Breakfast on Feb. 9 in
Toronto. Over the past six years, the breakfast has raised more than
$1 million in support of Sheena's Place, a non-institutional,
non-residential centre offering hope and support to individuals and
groups affected by eating disorders and related issues. More than
$200,000 was raised at this year's event.
- Scotiabank employees were active volunteers at the recent
2007 Cricket World Cup West Indies, which took place over seven weeks
on several Caribbean islands. Scotiabank was the regional official
sponsor of the high-profile event, continuing our long association
with the sport in the region. We continue to be the official bank of
West Indies Cricket, and the exclusive sponsor of Scotiabank Kiddy
Cricket, which has introduced cricket to more than 20,000 children in
14 countries across the Caribbean since 2000.MANAGEMENT'S DISCUSSION & ANALYSIS
-------------------------------------------------------------------------
Forward-looking statements
This document includes forward-looking statements which are made pursuant
to the "safe harbour" provisions of the United States Private Securities
Litigation Reform Act of 1995 and any applicable Canadian securities
legislation. These statements include comments with respect to the Bank's
objectives, strategies to achieve those objectives, expected financial results
(including those in the area of risk management), and the outlook for the
Bank's businesses and for the Canadian, United States and global economies.
Forward-looking statements are typically identified by words or phrases such
as "believe," "expect," "anticipate," "intent," "estimate," "plan," "may
increase," "may fluctuate," and similar expressions of future or conditional
verbs such as "will," "should," "would" and "could."
By their very nature, forward-looking statements involve numerous
assumptions, inherent risks and uncertainties, both general and specific, and
the risk that predictions and other forward-looking statements will not prove
to be accurate. The Bank cautions readers not to place undue reliance on these
statements, as a number of important factors could cause actual results to
differ materially from the estimates and intentions expressed in such
forward-looking statements. These factors include, but are not limited to, the
economic and financial conditions in Canada and globally; fluctuations in
interest rates and currency values; liquidity; the effect of changes in
monetary policy; legislative and regulatory developments in Canada and
elsewhere; operational and reputational risks; the accuracy and completeness
of information the Bank receives on customers and counterparties; the timely
development and introduction of new products and services in receptive
markets; the Bank's ability to expand existing distribution channels and to
develop and realize revenues from new distribution channels; the Bank's
ability to complete and integrate acquisitions and its other growth
strategies; changes in accounting policies and methods the Bank uses to report
its financial condition and the results of its operations, including
uncertainties associated with critical accounting assumptions and estimates;
the effect of applying future accounting changes; global capital markets
activity; the Bank's ability to attract and retain key executives; reliance on
third parties to provide components of the Bank's business infrastructure;
unexpected changes in consumer spending and saving habits; technological
developments; consolidation in the Canadian financial services sector; changes
in tax laws; competition, both from new entrants and established competitors;
judicial and regulatory proceedings; acts of God, such as earthquakes and
hurricanes; the possible impact of international conflicts and other
developments, including terrorist acts and war on terrorism; the effects of
disease or illness on local, national or international economies; disruptions
to public infrastructure, including transportation, communication, power and
water; and the Bank's anticipation of and success in managing the risks
implied by the foregoing. A substantial amount of the Bank's business involves
making loans or otherwise committing resources to specific companies,
industries or countries. Unforeseen events affecting such borrowers,
industries or countries could have a material adverse effect on the Bank's
financial results, businesses, financial condition or liquidity. These and
other factors may cause the Bank's actual performance to differ materially
from that contemplated by forward-looking statements. For more information,
see the discussion starting on page 53 of the Bank's 2006 Annual Report.
The Bank cautions that the foregoing list of important factors is not
exhaustive. When relying on forward-looking statements to make decisions with
respect to the Bank and its securities, investors and others should carefully
consider the foregoing factors, other uncertainties and potential events. The
Bank does not undertake to update any forward-looking statements, whether
written or oral, that may be made from time to time by or on behalf of the
Bank.
The "Outlook" section in this document is based on the Bank's views and
the actual outcome is uncertain. Readers should consider the above-noted
factors when reviewing this section.
-------------------------------------------------------------------------
Additional information relating to the Bank, including the Bank's Annual
Information Form, can be located on the SEDAR website at www.sedar.com and on
the EDGAR section of the SEC's website at www.sec.gov.
Non-GAAP Measures
The Bank uses a number of financial measures to assess its performance.
Some of these measures are not calculated in accordance with Generally
Accepted Accounting Principles (GAAP), are not defined by GAAP and do not have
standardized meanings that would ensure consistency and comparability between
companies using these measures. These non-GAAP measures are used in our
Management's Discussion and Analysis and they are defined below:
Taxable equivalent basis
The Bank analyzes net interest income and total revenues on a taxable
equivalent basis (TEB). This methodology grosses up tax-exempt income earned
on certain securities reported in net interest income to an equivalent before
tax basis. A corresponding increase is made to the provision for income taxes,
hence there is no impact on net income. Management believes that this basis
for measurement provides a uniform comparability of net interest income
arising from both taxable and non-taxable sources and facilitates a consistent
basis of measurement. While other banks also use TEB, their methodology may
not be comparable to the Bank's. The TEB gross-up to net interest income and
to the provision for income taxes for the three months ended April 30, 2007 is
$109 million versus $113 million in the same quarter last year and $105
million last quarter. For the six months ended April 30, 2007, the TEB
gross-up amount is $214 million versus $209 million for the same period last
year.
For purposes of segmented reporting, a segment's net interest income and
provision for income taxes is grossed up by the taxable equivalent amount. The
elimination of the TEB gross-up is recorded in the 'Other' segment.
Productivity ratio (TEB)
Management uses the productivity ratio as a measure of the Bank's
efficiency. This ratio represents non-interest expenses as a percentage of
total revenue on a taxable equivalent basis.
Net interest margin on total average assets (TEB)
This ratio represents net interest income on a taxable equivalent basis
as a percentage of total average assets.
Return on equity
Return on equity is a profitability measure that presents the net income
available to common shareholders as a percentage of the capital deployed to
earn the income. The implementation of the new accounting standards for
financial instruments in the first quarter of 2007 resulted in certain
unrealized gains and losses being reflected in a new component of
shareholders' equity. These items do not have an impact on the reported
earnings in the period. As a result, the Bank calculates its return on equity
using average common shareholders' equity excluding:- unrealized gains/losses on available-for-sale securities, and
- unrealized gains/losses on derivative instruments designated as cash
flow hedges.Economic equity and Return on economic equity
For internal reporting purposes, the Bank allocates capital to its
business segments using a methodology that considers credit, market and
operational risk inherent in each business segment. The amount allocated is
commonly referred to as economic equity.
Return on equity for the business segments is based on the economic
equity allocated to the business segments. The difference between the economic
equity amount required to support the business segments' operations and the
Bank's total equity is reported in the 'Other' segment.
Tangible common equity to risk-weighted assets
Tangible common equity to risk-weighted assets is an important financial
measure for rating agencies and the investing community. Tangible common
equity is total shareholders' equity plus non-controlling interest in
subsidiaries, less preferred shares, unrealized gains/losses on
available-for-sale securities and cash flow hedges, goodwill and other
intangible assets. Tangible common equity is presented as a percentage of
risk-weighted assets.
Regulatory capital ratios, such as Tier 1 and Total capital ratios, have
standardized meanings as defined by the Superintendent of Financial
Institutions Canada.
Group Financial Performance and Financial Condition
Scotiabank continued its strong start to 2007 this quarter, resulting in
record net income for the six months of $2,059 million, $313 million or 18%
higher than the same period last year. The Bank's earnings continued to
benefit from strong asset growth and resultant higher net interest income,
lower provisions for credit losses and the contribution from acquisitions made
in 2006.
This quarter's net income was $1,039 million, up $145 million or 16% from
the same period a year ago, driven primarily from an increase in net interest
income, which benefited from higher interest recoveries this quarter. Net
income rose $19 million or 2% from the prior quarter, due mainly to lower
provisions for credit losses, in part from higher recoveries, partially offset
by reduced securities gains.
Total revenue
This quarter, total revenue (on a taxable equivalent basis) was
$3,211 million, up $381 million or 13% from the same quarter last year. There
was strong growth in net interest income, coupled with broad-based increases
in revenues from customer-driven activities and contributions from recent
acquisitions. Partially offsetting these increases were lower securities
gains.
Total revenue was in line with last quarter, as higher net interest
income from asset growth, and increased transaction-based revenues mostly
offset the impact of three fewer days and lower securities gains this quarter.
For the six months, total revenue of $6,425 million was $765 million or
14% higher than the same period last year.
Net interest income
This quarter's net interest income (on a taxable equivalent basis) was
$1,903 million, up $259 million or 16% over the same quarter last year. The
increase was driven in part by recent acquisitions in Peru and Costa Rica,
higher interest recoveries in the U.S. and continued growth in retail lending
assets. In Canada, retail lending growth was primarily in residential
mortgages and personal lines of credit. Internationally, personal lending
increased in Mexico and across the Caribbean, the latter benefiting from
region-wide mortgage campaigns in prior quarters.
Net interest income grew 1% from the first quarter. The positive
contribution from increased lending volumes and higher interest recoveries,
was mostly offset by the impact of the shorter second quarter and lower gains
from derivatives used for asset/liability management.
For the six months, net interest income rose to $3,784 million, up
$535 million or 16% from the same period last year, driven both by organic
asset growth and the contribution of recent acquisitions.
While the Bank's net interest margin, at 1.93% in the second quarter, was
down from 1.97% in the same quarter of last year, it increased from 1.91% in
the first quarter. The decline in the margin from last year resulted from
narrowing spreads in the Caribbean and Central America, and higher wholesale
funding costs. This quarter, the margin was in line with the previous quarter,
and reflects, in part, higher interest recoveries.
Other income
Other income was $1,308 million this quarter, up 10% or $122 million from
the same quarter last year. The broad-based increase was driven by growth in
the underlying client base, including the impact from recent acquisitions,
particularly in Peru and Costa Rica. There were higher transaction-based fee
revenues, increases in underwriting activities, continued growth in retail
brokerage fees, and a solid rise in mutual fund revenue, resulting from
increased sales and market appreciation. Offsetting this growth were a decline
in securities gains this quarter, and slightly lower trading revenues and
credit fees.
Quarter over quarter, other income was down slightly, due primarily to
lower securities gains.
For the six months, other income was $2,641 million, an increase of
$230 million or 10% from the same period last year. Broad-based increases in
transaction-based revenues and the inclusion of recent acquisitions more than
offset the lower trading revenues as compared to the high levels experienced
across all categories last year.
Provision for credit losses
The provision for credit losses was $20 million this quarter, a decrease
of $15 million from the same period last year and $43 million from last
quarter. The low levels in the second quarter were due to the combination of a
reduction in the general allowance of $25 million and continued net provision
reversals and recoveries in the Scotia Capital portfolio. Further discussion
on credit risk is provided below.
Non-interest expenses and productivity
Non-interest expenses were $1,726 million this quarter, $161 million or
10% higher than the same period last year. The inclusion of recent
acquisitions contributed almost half of the year-over-year growth in expenses.
The remaining increase was primarily in salaries and other employee
benefits, along with higher costs in premises and advertising and promotion to
support ongoing business and growth initiatives. The Bank continued to invest
in future growth through branch expansion in Canada, Mexico and the Caribbean.
Non-interest expenses were slightly up from the first quarter. The impact
of the shorter quarter and the decrease in stock-based compensation expense
was largely offset by increased costs associated with branch expansion.
Year to date, non-interest expenses of $3,450 million increased
$323 million or 10% from the same period last year, primarily from the
inclusion of recent acquisitions and higher salaries and employee benefit
costs from business expansion activities.
The productivity ratio, a measure of the Bank's efficiency, was 53.8%, an
improvement from 55.3% in the same quarter last year but slightly up from
53.6% last quarter. The Bank's operating leverage this quarter - the rate of
growth in total revenue on a tax equivalent basis less the rate of growth in
expenses - was 3.2% year over year, although it was slightly negative quarter
over quarter. On a year-to-date basis, operating leverage was a positive 3.2%.
Taxes
The effective tax rate for this quarter was 21.1%, up from 17.9% in the
same quarter last year and in line with 21.0% in the first quarter. The same
quarter last year benefited from certain securities gains that were taxed at
lower rates, and a higher utilization of previously unrecognized tax loss
carryforwards in Mexico. As well, this quarter was negatively impacted from
announced tax rate reductions, which decreased the value of the Bank's future
tax assets.
The tax rate for the six months was 21.0% compared to 19.2% for the same
period last year.
Risk management
The Bank's risk management policies and practices are unchanged from
those outlined in pages 53 to 63 of the 2006 Annual Report.
Credit risk
The provision for credit losses was $20 million in the second quarter,
compared to $35 million in the same period last year and $63 million in the
previous quarter. This quarter's provision comprised $45 million in specific
provisions and a reduction of $25 million in the general allowance for credit
losses.
The specific provision for credit losses of $45 million in the second
quarter was up from $35 million in the second quarter of last year, but lower
than the $63 million in the previous quarter.
Scotia Capital had provision reversals and recoveries totaling
$51 million in the second quarter, compared to $54 million in the same quarter
last year and $30 million in the previous quarter. The current quarter's
provision reversals and recoveries were primarily in the U.S. portfolio. There
were no new provisions in the quarter.
Credit losses of $66 million in the Domestic portfolios were down from
both the $88 million in the same quarter last year, and the $74 million in the
prior quarter, due primarily to provision reversals in the commercial
portfolio. While retail provisions were higher than a year ago from growth in
the portfolio, they were in line with the first quarter.
International operations had a provision for credit losses of $30 million
in the second quarter, higher than both the $1 million provision in the same
period last year and the $19 million provision in the previous quarter. The
second quarter of 2006 benefited from retail and commercial provision
reversals in the Caribbean and Central America. The quarter-over-quarter
increase was due mainly to higher retail provisions in Mexico as the prior
quarter benefited from higher reversals for provisions no longer required. As
well, there were higher retail provisions in the Caribbean and Peru, primarily
from growth in retail lending assets.
The general allowance for credit losses was reduced by $25 million in the
quarter to $1,298 million as a result of favourable conditions in the economic
environment and the continuing favourable credit quality of the commercial and
corporate portfolio.
Total net impaired loans, after deducting the allowance for specific
credit losses, were $579 million as at April 30, 2007, unchanged from last
quarter and the same quarter last year.
Market risk
Value at Risk (VaR) is a key measure of market risk in the Bank's trading
activities. In the second quarter, the average one-day VaR was $11.3 million
compared to $8.0 million for the same quarter last year, due to higher
interest rate exposure. Compared to the first quarter, the average one-day VaR
increased mainly in equity exposure. The commodities VaR is comprised almost
entirely of precious metals activity.Average for the three months ended
-------------------------------------------------------------------------
Risk factor April 30 January 31 April 30
($ millions) 2007 2007 2006
-------------------------------------------------------------------------
Interest rate $ 7.2 $ 7.2 $ 4.5
Equities 5.2 3.6 5.4
Foreign exchange 1.2 1.9 1.9
Commodities 1.5 0.7 1.4
Diversification (3.8) (4.2) (5.2)
-------------------------------------------------------------------------
All-Bank VaR $ 11.3 $ 9.2 $ 8.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------There were three trading loss days in the second quarter, compared to one
day in the previous quarter. The losses were well within the range predicted
by VaR.
Liquidity risk
The Bank maintains large holdings of liquid assets to support its
operations. These assets generally can be sold or pledged to meet the Bank's
obligations. As at April 30, 2007, liquid assets were $117 billion or 28% of
total assets, compared to $104 billion or 26% of total assets at January 31,
2007. These assets are comprised: 73% securities and 27% cash and deposits
with banks (January 31, 2007 - 74% and 26%, respectively).
In the course of the Bank's day-to-day activities, securities and other
assets are pledged to secure an obligation, participate in clearing or
settlement systems, or operate in a foreign jurisdiction. Securities may also
be sold under repurchase agreements. As at April 30, 2007, total assets
pledged or sold under repurchase agreements were $71 billion, compared to
$68 billion at January 31, 2007. The quarter-over-quarter increase was
attributable to higher levels of pledges for securities borrowing and
securities lending transactions.
Related party transactions
There were no changes to the Bank's procedures and policies for related
party transactions from those outlined on pages 67 and 114 of the 2006 Annual
Report. All transactions with related parties continued to be at market terms
and conditions.
Balance sheet
The Bank's total assets at April 30, 2007, were $412 billion, up
$15 billion or 4% from the prior quarter, primarily from increases in trading
securities and loans, partially offset by the negative impact of foreign
currency translation of $9 billion and lower available-for-sale securities.
Compared to October 31, 2006, assets grew by $33 billion or 9%.
Total securities rose $5 billion from October 31, 2006. Trading
securities increased $9 billion to support customer-driven activity and
trading operations. Partially offsetting the growth in trading securities was
a decline of $4 billion in available-for-sale securities since year end. This
reduction was due primarily to the deconsolidation of a variable interest
entity that was restructured in the quarter. As at April 30, 2007, the
unrealized gains on available-for-sale securities were $1,208 million,
compared to $1,091 million at October 31, 2006, notwithstanding realized gains
of $206 million in the six-month period.
The Bank's loan portfolio grew $13 billion or 6% from October 31, 2006.
Increases were experienced across all lending categories. Mortgages were up
$5 billion, driven by Domestic residential mortgages, which rose $7 billion
(before securitization of $2 billion) due to continued demand arising from the
strong domestic housing market. Business and government loans rose $7 billion,
with almost half of this increase in commercial loans in Domestic Banking and
International Banking, most notably in Asia and the Caribbean and Central
America. As well, Scotia Capital's portfolio was up $3 billion.
Total liabilities were $392 billion as at April 30, 2007, an increase of
$30 billion from October 31, 2006. There was $28 billion growth across deposit
categories, including wholesale deposits to fund the growth in banking and
trading assets. As well, securities sold short, which are used in the trading
activities of Scotia Capital, rose $8 billion.
Total shareholders' equity rose $2 billion from October 31, 2006. The
increase was due primarily to the strong half-year earnings, and the change in
accounting standards for financial instruments, which resulted in after-tax
fair value adjustments of $790 million relating primarily to available-for-
sale securities. There were also $690 million non-cumulative preferred shares
issued in the six-month period.
Capital management
The Bank continues to have strong capital ratios, which support ongoing
business development opportunities through both organic growth and
acquisitions.
The Tier 1 ratio was 10.1% this quarter, a slight decline from 10.2% at
October 31, 2006, as strong levels of internally generated capital, as well as
the issuance of $690 million non-cumulative preferred shares, were more than
offset by higher risk-weighted assets from growth across the business lines.
The tangible common equity (TCE) ratio, which represents common equity
less goodwill and other intangible assets as a percentage of risk-weighted
assets, continued to be strong. This ratio was 8.0% at April 30, 2007,
compared to 8.3% at October 31, 2006.
During the quarter, the Bank purchased 4.4 million common shares at an
average price of $53.52, pursuant to the normal course issuer bid initiated in
the first quarter of 2007. This compares to 1.9 million shares purchased in
the second quarter of last year at an average cost of $45.66. No shares were
purchased in the first quarter.
Financial instruments
Given the nature of the Bank's main business activities, financial
instruments make up a substantial portion of the balance sheet and are
integral to the Bank's business. There are various measures that reflect the
level of risk associated with the Bank's portfolio of financial instruments.
Further discussion of some of these risk measures is included in the Risk
Management section on page 8.
Commencing November 1, 2006, the Bank adopted three new accounting
standards issued by the Canadian Institute of Chartered Accountants (CICA),
which are discussed more fully in Note 1 to the interim consolidated financial
statements below.
The methods of determining the fair value of financial instruments, as
detailed on page 65 of the 2006 Annual Report, are also applicable to
financial instruments not previously carried at fair value. Management's
judgment on valuation inputs is necessary when observable market data is not
available, and management applies judgment in the selection of valuation
models. Uncertainty in these estimates and judgments can affect fair value and
financial results recorded.
During this quarter, changes in the fair value of financial instruments
generally arose from normal economic, industry and market conditions.
Total derivative notional amounts were $1,189 billion at April 30, 2007,
compared to $1,045 billion at October 31, 2006, with broad-based growth in all
derivative categories. The percentage of those derivatives held for trading
and those held for non-trading or asset/liability management was generally
unchanged. The credit equivalent amount after taking into account master
netting arrangements was $21 billion, compared to $14 billion last year end.
Off-balance sheet arrangements
In the normal course of business, the Bank enters into contractual
arrangements that are not required to be consolidated in its financial
statements. These arrangements are primarily in three categories: Variable
Interest Entities (VIEs), securitizations, and guarantees and loan
commitments. No material contractual obligations were entered into this
quarter that were not in the ordinary course of business. Processes for review
and approval of these contractual arrangements remain unchanged from last
year.
During the quarter, the Bank did not enter into any significant new
arrangements with VIEs that were not consolidated by the Bank in its balance
sheet. As a result of a change in the structure of one of the multi-seller
conduits administered by the Bank, it was determined that the Bank was no
longer the primary beneficiary of the VIE. Accordingly, the VIE was no longer
included in the Bank's consolidated balance sheet as at April 30, 2007 and
resulted in a decrease to both available-for-sale securities and other
liabilities of $7 billion. In addition, this resulted in an increase in
indirect credit commitments of $8 billion from the year end.
The Bank may securitize residential mortgages as a means to diversify its
funding sources, as this represents a cost-effective means to fund the growth
in this portfolio. A further $605 million in residential mortgages were
securitized this quarter, bringing the balance of outstanding mortgages
securitized to $11,483 million as at April 30, 2007, versus $11,913 million at
October 31, 2006.
Excluding the impact of the deconsolidation discussed above, guarantees
and other indirect commitments increased 8% from October 31, 2006. Pursuant to
the new CICA accounting standards relating to financial instruments, a
liability is now recorded for the fair value of the obligation assumed at the
inception of certain guarantees.
As at April 30, 2007, the Bank has recorded an increase in other
liabilities of $80 million and a corresponding increase in other assets
relating to the implementation of the new accounting standards as they apply
to guarantees. Fees from guarantees and loan commitment arrangements recorded
in other income were $53 million for the three-month period ended April 30,
2007, compared to $52 million for the same period a year ago.
Common dividend
The Board of Directors, at its meeting on May 29, 2007, approved an
increase in the dividend of 3 cents per common share, for a quarterly dividend
of 45 cents per common share. This quarterly dividend applies to shareholders
of record as of July 3, 2007, and is payable July 27, 2007. The Bank continues
its track record of providing its shareholders with continued dividend growth.
Outlook
International economic conditions remained positive, with particularly
strong growth in the markets where we are active. Despite a slowdown in the
U.S., the country's exports continue to drive moderate growth. In Canada,
resource-rich regions are benefiting from strong exports, while manufacturing-
dominated provinces are being negatively affected by the U.S. slowdown and
competitive issues. Overall, we anticipate these conditions to continue and
provide a favourable operating environment for our activities in Canada and
internationally.
The high level of recoveries recorded in the first six months of the year
are not expected to be sustained, however, the Bank is very well positioned to
achieve its whole year 2007 objectives.Business Segment Review
Domestic Banking
For the For the
three months ended six months ended
-------------------------------------------------------------------------
(Unaudited)($ millions)
(Taxable equivalent April 30 January 31 April 30 April 30 April 30
basis)(1) 2007 2007 2006 2007 2006
-------------------------------------------------------------------------
Business segment income
Net interest income $ 942 $ 953 $ 884 $ 1,895 $ 1,793
Provision for credit
losses 66 74 88 140 152
Other income 530 518 485 1,048 957
Non-interest expenses 870 870 845 1,740 1,678
Provision for income
taxes 169 164 138 333 291
-------------------------------------------------------------------------
Net income $ 367 $ 363 $ 298 $ 730 $ 629
Preferred dividends
paid 3 2 2 5 4
-------------------------------------------------------------------------
Net income available to
common shareholders $ 364 $ 361 $ 296 $ 725 $ 625
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on equity(1) 32.0% 31.1% 27.3% 31.6% 28.9%
Average assets
($ billions) $ 149 $ 146 $ 132 $ 148 $ 131
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer to above for discussion of non-GAAP measures.Domestic Banking, which includes Wealth Management, reported strong net
income available to common shareholders of $364 million this quarter, an
increase of $68 million or 23% from the second quarter last year. Results were
on par with the first quarter, despite three fewer days in the quarter. The
segment contributed 35% of the Bank's total quarterly net income. Return on
equity increased to 32.0% from 27.3% last year and 31.1% last quarter.
Average assets before securitization rose 13% compared to the same
quarter last year, due primarily to growth of $14 billion or 17% in
residential mortgages. Strong mortgage growth was recorded in all sales
channels, including Maple Trust which accounted for half of the growth, and
resulted in increased market share. Personal revolving credit and business
lending volumes also increased. Market share of retail deposits was up as
volumes grew 6%, mainly in term deposits. Non-personal current accounts rose
10%. Quarter over quarter, average assets before securitization rose 2% and
deposits increased 1% for mainly the reasons noted above.
Total revenue was up $103 million or 8% from the same quarter last year,
mainly as a result of strong volume growth and higher fee income related to
wealth management activities. Total revenue was in line with the first
quarter.
Net interest income of $942 million was up $58 million or 7% from the
same period last year, driven by strong volume growth in both assets and
deposits. Average volume growth was reported for most products, including
mortgages, personal lines of credit, personal deposits, small business loans
and deposits, commercial loans, acceptances, and non-personal deposits. The
impact of this growth was partially offset by a decrease in the interest
margin. The decline in the margin was caused by higher funding costs due to
the impact of rising rates in the first half of fiscal 2006, a persistently
flat interest rate yield curve and growth in relatively lower spread products
due to customer demand. Quarter over quarter, net interest income fell by 1%,
reflecting three fewer days in the second quarter, partially offset by asset
and deposit growth.
The provision for credit losses was $66 million this quarter, down both
from $88 million reported in the second quarter last year and $74 million last
quarter. This was due to several small reversals in the commercial portfolio
this quarter. Retail provisions increased year over year from growth in the
portfolio.
Other income was $530 million this quarter, an increase of $45 million or
9% compared to the same quarter last year, reflecting strong growth in wealth
management revenues, as well as increases in retail and small business
banking. Wealth management revenues were at a record level this quarter with
strong retail brokerage revenues from higher customer activity and new issues.
As well, mutual fund revenues increased from higher average balances,
resulting from strong net sales and market appreciation. In addition, there
were increases in personal and non-personal transaction service revenues and
card revenues. On a quarter-over-quarter basis, other income increased 2%.
Non-interest expenses rose 3% from the second quarter last year due
mainly to business growth, including acquisitions and additions to the branch
network and sales force. There were also normal salary increases, higher
performance-based compensation and increased advertising expenses. Partly
offsetting were lower pension and benefit expenses due in part to higher
returns from increased pension asset levels. Quarter over quarter, expenses
were unchanged.International Banking
For the For the
three months ended six months ended
-------------------------------------------------------------------------
(Unaudited)($ millions)
(Taxable equivalent April 30 January 31 April 30 April 30 April 30
basis)(1) 2007 2007 2006 2007 2006
-------------------------------------------------------------------------
Business segment income
Net interest income $ 679 $ 670 $ 542 $ 1,349 $ 1,071
Provision for credit
losses 30 19 1 49 28
Other income 300 297 220 597 435
Non-interest expenses 577 562 443 1,139 895
Provision for income
taxes 44 43 25 87 35
Non-controlling interest
in net income of
subsidiaries 31 25 23 56 43
-------------------------------------------------------------------------
Net income $ 297 $ 318 $ 270 $ 615 $ 505
Preferred dividends
paid 4 2 2 6 4
-------------------------------------------------------------------------
Net income available to
common shareholders $ 293 $ 316 $ 268 $ 609 $ 501
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on equity(1) 18.7% 22.2% 26.2% 20.4% 24.5%
Average assets
($ billions) $ 69 $ 65 $ 54 $ 67 $ 53
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer to above for discussion of non-GAAP measures.International Banking's net income available to common shareholders in
the second quarter of 2007 was $293 million, an increase of $25 million or 9%
from last year, but $23 million or 7% lower than last quarter. The year-over-
year increase was due to the contribution of the recent acquisitions in Peru,
Costa Rica, Dominican Republic and Jamaica, as well as strong organic growth.
Higher loan losses and a higher effective tax rate partially offset the
increases. The decline from last quarter was due primarily to higher loan loss
provisions in Mexico which benefited from higher reversals in the prior
quarter, and higher expenses in Mexico and the Caribbean. International
Banking accounted for 29% of the Bank's total net income and had a return on
equity of 18.7%.
Average asset volumes of $69 billion increased $15 billion or 29% from
last year. Excluding the $6 billion contributed by recent acquisitions,
volumes were up $9 billion or 19%. This was a result of organic loan growth of
26%, driven by credit cards and mortgages which rose 29% and 24%,
respectively, as well as 18% growth in commercial loans primarily in Asia and
the Caribbean and Central America. Compared to last quarter, average assets
increased $4 billion or 6%, due in part to $1 billion from the acquisition in
Jamaica. Organic growth of $3 billion was driven by 16% higher commercial
loans in Asia and a 4% increase in mortgages.
Total revenues were $979 million this quarter, an increase of
$217 million or 29% from last year and up $12 million or 1% from last quarter.
Major contributors to the year-over-year growth were acquisitions in Peru,
Caribbean and Central America, as well as strong organic asset and deposit
growth in Mexico, the Caribbean and Asia. The quarter-over-quarter increase
was primarily in the Caribbean and Peru.
Net interest income was $679 million this quarter, up $137 million or 25%
from last year, due to strong loan growth across the segment, as well as the
impact of recent acquisitions. Compared to last quarter, net interest income
grew $9 million or 1%, driven by strong loan growth in Mexico, Asia and the
Caribbean. Interest margins were down from last year, and, to a lesser extent,
from last quarter. Excluding the net losses from derivatives used for
asset/liability management, margins were down only slightly year over year,
primarily in the Caribbean and Central America, and were flat quarter over
quarter.
The provision for credit losses was $30 million in the second quarter,
$29 million higher than the same period last year, which was favourably
impacted by provision reversals in the Caribbean and Central America, combined
with low provisions in the other regions. Quarter over quarter, provisions
were up $11 million, due mainly to higher retail provisions in Mexico as the
prior quarter benefited from higher reversals for provisions no longer
required. As well, there were higher retail provisions in the Caribbean and
Peru, primarily from growth in retail lending assets.
Other income increased $80 million or 36% from last year to $300 million.
This was partly a result of recent acquisitions. In addition, there was growth
in customer-driven transaction revenues in Mexico and the Caribbean and
Central America. Compared to last quarter, other income increased $3 million
due to growth in Mexico, partly offset by lower other income in Chile and
Peru.
Non-interest expenses were $577 million this quarter, up 30% or
$134 million from last year and $15 million or 3% from last quarter. Almost
half of the year-over-year increase was due to the inclusion of recent
acquisitions in Peru and the Caribbean and Central America. Approximately one-
third of the increase was due to ongoing business growth initiatives,
including the opening of over 50 new branches in Mexico. In addition, there
were normal salary increases, higher performance-based compensation and
pension costs. The increase from last quarter reflects higher performance-
based compensation in Scotiabank Mexico, due to the finalization of year-end
payouts in the first quarter of 2007, the opening of 11 new branches in
Mexico, as well as ongoing business growth initiatives in the Caribbean.
The effective tax rate this quarter was 12%, up from 8% in the same
period last year, and marginally higher than the 11% last quarter. The
increase from last year was due to growth in earnings in higher tax
jurisdictions and an increased effective tax rate in Mexico. The latter was
due to more tax loss carryforwards available for utilization last year, and
more income was earned this year in subsidiaries without tax loss
carryforwards.Scotia Capital
For the For the
three months ended six months ended
-------------------------------------------------------------------------
(Unaudited)($ millions)
(Taxable equivalent April 30 January 31 April 30 April 30 April 30
basis)(1) 2007 2007 2006 2007 2006
-------------------------------------------------------------------------
Business segment income
Net interest income $ 296 $ 269 $ 229 $ 565 $ 438
Provision for credit
losses (51) (30) (54) (81) (70)
Other income 360 361 351 721 762
Non-interest expenses 262 259 253 521 507
Provision for income
taxes 125 105 104 230 226
-------------------------------------------------------------------------
Net income $ 320 $ 296 $ 277 $ 616 $ 537
Preferred dividends
paid 2 2 1 4 3
-------------------------------------------------------------------------
Net income available to
common shareholders $ 318 $ 294 $ 276 $ 612 $ 534
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on equity(1) 33.4% 30.7% 35.4% 32.0% 33.8%
Average assets
($ billions) $ 153 $ 150 $ 128 $ 152 $ 121
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer to above for discussion of non-GAAP measures.Scotia Capital earned record net income available to common shareholders
of $318 million, $42 million or 15% ahead of the same period last year, and
$24 million or 8% higher than last quarter. This represents 31% of the Bank's
overall results this quarter. Return on equity at 33.4% was slightly lower
than the strong results achieved in the second quarter last year, but above
last quarter's 30.7%.
Total average assets increased 19% to $153 billion over the second
quarter last year. Securities and loans in our trading business rose
$15 billion to support both client-driven activity and trading opportunities.
In addition, there was a $6 billion or 24% increase in corporate lending.
Canada experienced growth in corporate loans and acceptances of $2 billion or
20% over the second quarter last year. There was also $3 billion or 37% growth
in the U.S. The increase in total assets compared to the prior quarter was due
to growth in trading securities.
Total revenues of $656 million were $76 million or 13% higher than the
same quarter last year, due mainly to growth in Global Corporate and
Investment Banking. This was due to increased lending volumes, higher interest
recoveries on impaired loans, and growth in investment banking revenues,
including new issue, merger and acquisition (M&A) and advisory fees. Global
Capital Markets revenues were also up modestly from last year, with continued
strong results in the precious metals business, and a solid quarter in fixed
income. The $26 million or 4% increase in revenues from last quarter reflected
the impact of higher interest recoveries on impaired loans, and improved
results in investment banking.
Net interest income of $296 million was well above last year due to
higher interest recoveries from impaired loans, increased current account
deposits, higher loan volumes, somewhat offset by tighter credit margins, and
higher interest from trading operations. The increase from last quarter
reflected primarily higher interest recoveries from impaired loans.
This quarter, loan loss reversals and recoveries were $51 million,
compared to $54 million in the same period last year and $30 million last
quarter. Net reversals were realized primarily in the U.S. this quarter and
last quarter, and in both the U.S. and Europe in the second quarter of last
year. There were no new provisions during the quarter.
Other income was $360 million or 3% higher than last year. Global
Corporate and Investment Banking increased 8%, reflecting primarily higher
investment banking revenues. Other income from Global Capital Markets'
businesses was unchanged from last year. Compared to last quarter, other
income decreased by $1 million as lower corporate banking fees and equity
trading revenues were almost offset by higher M&A and advisory revenues.
Non-interest expenses were $262 million, a modest 3% increase from the
same quarter last year, primarily due to higher salaries and technology costs,
partially offset by lower benefits and performance-related compensation.
Compared to last quarter, expenses were up $3 million, as higher performance-
based compensation was largely offset by signing bonuses paid in the first
quarter to expand specialist expertise.Other(1)
For the For the
three months ended six months ended
-------------------------------------------------------------------------
(Unaudited)($ millions)
(Taxable equivalent April 30 January 31 April 30 April 30 April 30
basis)(2) 2007 2007 2006 2007 2006
-------------------------------------------------------------------------
Business segment income
Net interest income(3) $ (123) $ (116) $ (124) $ (239) $ (262)
Provision for credit
losses (25) - - (25) -
Other income 118 157 130 275 257
Non-interest expenses 17 33 24 50 47
Provision for income
taxes(3) (52) (35) (67) (87) (127)
-------------------------------------------------------------------------
Net income $ 55 $ 43 $ 49 $ 98 $ 75
Preferred dividends
paid 2 2 2 4 4
-------------------------------------------------------------------------
Net income available to
common shareholders $ 53 $ 41 $ 47 $ 94 $ 71
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Average assets
($ billions) $ 33 $ 30 $ 29 $ 31 $ 27
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes all other smaller operating segments and corporate
adjustments, such as the elimination of the tax-exempt income
gross-up reported in net interest income and provision for income
taxes, differences in the actual amount of costs incurred and charged
to the operating segments, and the impact of securitizations.
(2) Refer to above for a discussion of non-GAAP measures.
(3) Includes the elimination of the tax-exempt income gross-up reported
in net interest income and provision for income taxes for the
three months ended April 30, 2007 ($109), January 31, 2007 ($105),
and April 30, 2006 ($113), and for the six months ended April 30,
2007 ($214), and April 30, 2006 ($209), to arrive at the amounts
reported in the Consolidated Statement of Income.Net income available to common shareholders was $53 million in the second
quarter, $6 million higher than the same quarter last year, and $12 million
above last quarter. These increases related primarily to the reduction in the
general allowance this quarter, partly offset by lower securities gains.
Total revenues declined $11 million from the same quarter last year and
$46 million from last quarter. Net interest income was in line with both last
year and the prior quarter. Included in net interest income is the elimination
of the tax-exempt income gross-up that is included in the operating segments'
results which report on a taxable equivalent basis. The elimination was
$109 million in the second quarter, compared to $113 million last year, and
$105 million in the prior quarter.
Other income decreased by $12 million from the same quarter last year,
due mainly to gains realized on the Bank's Shinsei holdings last year. The
quarter-over-quarter decrease of $39 million reflects lower securities gains,
partially offset by higher securitization revenues.
Non-interest expenses were lower than both the same period last year and
the previous quarter. The lower expense level was due in part to lower
performance-based compensation.Total
For the For the
three months ended six months ended
-------------------------------------------------------------------------
(Unaudited) April 30 January 31 April 30 April 30 April 30
($ millions) 2007 2007 2006 2007 2006
-------------------------------------------------------------------------
Business segment income
Net interest income $ 1,794 $ 1,776 $ 1,531 $ 3,570 $ 3,040
Provision for credit
losses 20 63 35 83 110
Other income 1,308 1,333 1,186 2,641 2,411
Non-interest expenses 1,726 1,724 1,565 3,450 3,127
Provision for income
taxes 286 277 200 563 425
Non-controlling interest
in net income of
subsidiaries 31 25 23 56 43
-------------------------------------------------------------------------
Net income $ 1,039 $ 1,020 $ 894 $ 2,059 $ 1,746
Preferred dividends
paid 11 8 7 19 15
-------------------------------------------------------------------------
Net income available to
common shareholders $ 1,028 $ 1,012 $ 887 $ 2,040 $ 1,731
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on equity(1) 23.4% 23.0% 23.2% 23.3% 22.4%
Average assets
($ billions) $ 404 $ 391 $ 343 $ 398 $ 332
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer to above for a discussion of non-GAAP measures.
Geographic Highlights
For the For the
three months ended six months ended
-------------------------------------------------------------------------
April 30 January 31 April 30 April 30 April 30
(Unaudited) 2007 2007 2006 2007 2006
-------------------------------------------------------------------------
Net income available to
common shareholders
($ millions)
Canada $ 561 $ 544 $ 465 $ 1,105 $ 1,006
United States 139 163 120 302 177
Mexico 124 147 130 271 269
Other international 211 212 195 423 319
Corporate adjustments (7) (54) (23) (61) (40)
-------------------------------------------------------------------------
$ 1,028 $ 1,012 $ 887 $ 2,040 $ 1,731
-------------------------------------------------------------------------
Average assets
Canada $ 256 $ 252 $ 220 $ 254 $ 215
United States 32 33 32 33 30
Mexico 22 22 21 22 20
Other international 85 77 64 81 62
Corporate adjustments 9 7 6 8 5
-------------------------------------------------------------------------
$ 404 $ 391 $ 343 $ 398 $ 332
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarterly Financial Highlights
For the three months ended
-------------------------------------------------------------------------
April Jan. Oct. July April Jan. Oct. July
30 31 31 31 30 31 31 31
2007 2007 2006 2006 2006 2006 2005 2005
-------------------------------------------------------------------------
Total revenue
($ millions) $3,102 $3,109 $2,868 $2,889 $2,717 $2,734 $2,660 $2,608
Total revenue
(TEB(1))
($ millions) 3,211 3,214 2,999 2,989 2,830 2,830 2,735 2,689
Net income
($ millions) 1,039 1,020 897 936 894 852 811 784
Basic earnings
per share ($) 1.04 1.02 0.90 0.94 0.90 0.85 0.81 0.78
Diluted earnings
per share ($) 1.03 1.01 0.89 0.93 0.89 0.84 0.80 0.77
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer above for a discussion of non-GAAP measures.
Share Data
As at
-------------------------------------------------------------------------
April 30
(thousands of shares outstanding) 2007
-------------------------------------------------------------------------
Common shares 989,697(1)
-------------------------------------------------------------------------
Preferred shares Series 12 12,000(2)
Preferred shares Series 13 12,000(3)
Preferred shares Series 14 13,800(4)
Preferred shares Series 15 13,800(5)
-------------------------------------------------------------------------
Class A preferred shares issued by Scotia Mortgage
Investment Corporation 250(6)
-------------------------------------------------------------------------
Series 2000-1 trust securities issued by BNS
Capital Trust 500(6)
Series 2002-1 trust securities issued by Scotiabank
Capital Trust 750(7)
Series 2003-1 trust securities issued by Scotiabank
Capital Trust 750(7)
Series 2006-1 trust securities issued by Scotiabank
Capital Trust 750(7)
-------------------------------------------------------------------------
Outstanding options granted under the Stock Option Plans
to purchase common shares 29,329(1)(8)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) As at May 18, 2007, the number of outstanding common shares and
options were 989,732 and 29,306, respectively. The number of other
securities disclosed in this table were unchanged.
(2) These shares are entitled to non-cumulative preferential cash
dividends payable quarterly in an amount of $0.328125 per share.
(3) These shares are entitled to non-cumulative preferential cash
dividends payable quarterly in an amount of $0.30 per share.
(4) These shares are entitled to non-cumulative preferential cash
dividends payable quarterly in an amount of $0.28125 per share,
except for the initial dividend paid on April 26, 2007, which was in
an amount of $0.28356 per share.
(5) These shares are entitled to non-cumulative preferential cash
dividends payable quarterly in an amount of $0.28125 per share,
except for the initial dividend payable on July 27, 2007, which will
be payable in an amount of $0.34829 per share.
(6) Reported in capital instrument liabilities in the Consolidated
Balance Sheet.
(7) Reported in deposits in the Consolidated Balance Sheet.
(8) Included are 16,339 stock options with tandem stock appreciation
right (SAR) features.Further details, including convertibility features, are available in
Notes 13, 14 and 15 of the October 31, 2006 consolidated financial statements
presented in the 2006 Annual Report, and Note 5 of this report.
Accounting Policies and Estimates
The interim consolidated financial statements have been prepared in
accordance with Canadian Generally Accepted Accounting Principles (GAAP). See
Note 1 to the 2006 annual consolidated financial statements for more
information about the significant accounting principles used to prepare the
financial statements.
The Bank's interim consolidated financial statements have been affected
by the implementation of three new CICA accounting standards, namely Financial
Instruments - Recognition and Measurement, Hedges and Comprehensive Income.
The changes, and the impact of these changes on the Bank's consolidated
financial statements, are described in Note 1 to the interim consolidated
financial statements. Consistent with the requirements of the new accounting
standards, the Bank has not restated any prior period as a result of adopting
the accounting changes, but has recorded certain transitional amounts that
represent the cumulative effect of adjustments relating to prior periods. As
required, unrealized foreign currency translation losses have been
reclassified to accumulated other comprehensive income (loss) within
shareholders' equity for prior periods.
The key assumptions and bases for estimates that management has made
under GAAP, and their impact on the amounts reported in the interim
consolidated financial statements and notes, remain substantially unchanged
from those described in our 2006 Annual Report.Consolidated Statement of Income
For the For the
three months ended six months ended
-------------------------------------------------------------------------
April 30 January 31 April 30 April 30 April 30
(Unaudited)($ millions) 2007(1) 2007(1) 2006 2007(1) 2006
-------------------------------------------------------------------------
Interest income
Loans $ 3,404 $ 3,377 $ 2,648 $ 6,781 $ 5,223
Securities 1,286 1,131 998 2,417 1,895
Securities purchased
under resale
agreements 283 330 254 613 492
Deposits with banks 266 251 210 517 394
-------------------------------------------------------------------------
5,239 5,089 4,110 10,328 8,004
-------------------------------------------------------------------------
Interest expense
Deposits 2,600 2,526 1,942 5,126 3,732
Subordinated debentures 30 33 31 63 66
Capital instrument
liabilities 13 13 13 26 26
Other 802 741 593 1,543 1,140
-------------------------------------------------------------------------
3,445 3,313 2,579 6,758 4,964
-------------------------------------------------------------------------
Net interest income 1,794 1,776 1,531 3,570 3,040
Provision for credit
losses (Note 3) 20 63 35 83 110
-------------------------------------------------------------------------
Net interest income
after provision for
credit losses 1,774 1,713 1,496 3,487 2,930
-------------------------------------------------------------------------
Other income
Card revenues 89 93 71 182 146
Deposit and payment
services 199 206 183 405 372
Mutual funds 73 68 60 141 118
Investment management,
brokerage and trust
services 195 188 175 383 336
Credit fees 129 132 132 261 263
Trading revenues 151 149 157 300 400
Investment banking 195 194 162 389 317
Net gain on available-
for-sale securities(2) 79 127 108 206 202
Other 198 176 138 374 257
-------------------------------------------------------------------------
1,308 1,333 1,186 2,641 2,411
-------------------------------------------------------------------------
Net interest and other
income 3,082 3,046 2,682 6,128 5,341
-------------------------------------------------------------------------
Non-interest expenses
Salaries and employee
benefits 1,004 1,003 928 2,007 1,862
Premises and technology 329 327 298 656 579
Communications 75 73 67 148 131
Advertising and
business development 70 76 53 146 100
Professional 48 45 38 93 70
Business and capital
taxes 34 39 23 73 60
Other 166 161 158 327 325
-------------------------------------------------------------------------
1,726 1,724 1,565 3,450 3,127
-------------------------------------------------------------------------
Income before the
undernoted 1,356 1,322 1,117 2,678 2,214
Provision for income
taxes 286 277 200 563 425
Non-controlling
interest in net income
of subsidiaries 31 25 23 56 43
-------------------------------------------------------------------------
Net income $ 1,039 $ 1,020 $ 894 $ 2,059 $ 1,746
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Preferred dividends
paid 11 8 7 19 15
-------------------------------------------------------------------------
Net income available to
common shareholders $ 1,028 $ 1,012 $ 887 $ 2,040 $ 1,731
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of
common shares
outstanding (millions):
Basic 992 991 988 992 989
Diluted 1,001 1,001 1,001 1,001 1,002
-------------------------------------------------------------------------
Earnings per common
share (in dollars):
Basic $ 1.04 $ 1.02 $ 0.90 $ 2.06 $ 1.75
Diluted $ 1.03 $ 1.01 $ 0.89 $ 2.04 $ 1.73
-------------------------------------------------------------------------
Dividends per common
share (in dollars) $ 0.42 $ 0.42 $ 0.36 $ 0.84 $ 0.72
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Certain comparative amounts have been reclassified to conform with
current period presentation.
(1) Refer to Note 1 for impact of new accounting policies related to
financial instruments adopted in the first quarter of 2007.
(2) Prior to November 1, 2006, the net gain was related to securities
classified as investment securities. Refer to Note 1 for further
details.
The accompanying notes are an integral part of these interim consolidated
financial statements.
Consolidated Balance Sheet
As at
-------------------------------------------------------------------------
April 30 January 31 October 31 April 30
(Unaudited)($ millions) 2007(1) 2007(1) 2006 2006
-------------------------------------------------------------------------
Assets
Cash resources
Cash and non-interest-bearing
deposits with banks $ 2,532 $ 2,508 $ 2,280 $ 2,055
Interest-bearing deposits with
banks 23,967 20,277 17,734 19,592
Precious metals 4,623 3,599 3,362 4,020
-------------------------------------------------------------------------
31,122 26,384 23,376 25,667
-------------------------------------------------------------------------
Securities
Trading 71,547 64,307 62,490 58,417
Available-for-sale(2) 28,627 36,208 33,012 29,758
-------------------------------------------------------------------------
100,174 100,515 95,502 88,175
-------------------------------------------------------------------------
Securities purchased under
resale agreements 25,867 24,129 25,705 22,208
-------------------------------------------------------------------------
Loans
Residential mortgages 94,706 92,055 89,590 81,575
Personal and credit cards 40,408 39,757 39,058 36,857
Business and government 83,424 83,067 76,733 67,407
-------------------------------------------------------------------------
218,538 214,879 205,381 185,839
Allowance for credit losses
(Note 3) 2,505 2,620 2,607 2,706
-------------------------------------------------------------------------
216,033 212,259 202,774 183,133
-------------------------------------------------------------------------
Other
Customers' liability under
acceptances 10,277 10,431 9,555 9,104
Trading derivatives' market
valuation 14,313 10,688 10,369 16,685
Land, buildings and equipment 2,308 2,344 2,256 2,178
Goodwill 1,176 1,121 873 639
Other intangible assets 301 317 294 269
Other assets 10,139 8,282 8,302 8,921
-------------------------------------------------------------------------
38,514 33,183 31,649 37,796
-------------------------------------------------------------------------
$411,710 $396,470 $379,006 $356,979
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and shareholders'
equity
Deposits
Personal $ 97,218 $ 96,823 $ 93,450 $ 90,718
Business and government 157,919 148,995 141,072 124,363
Banks 36,466 31,201 29,392 32,567
-------------------------------------------------------------------------
291,603 277,019 263,914 247,648
-------------------------------------------------------------------------
Other
Acceptances 10,277 10,431 9,555 9,104
Obligations related to
securities sold under
repurchase agreements 29,577 29,612 33,470 29,960
Obligations related to
securities sold short 21,521 18,201 13,396 10,961
Trading derivatives' market
valuation 12,214 11,039 11,211 15,746
Other liabilities 22,976 26,792 26,457 23,766(3)
Non-controlling interest in
subsidiaries 496 491 435 387
-------------------------------------------------------------------------
97,061 96,566 94,524 89,924(3)
-------------------------------------------------------------------------
Subordinated debentures 2,301 2,340 2,271 2,268
-------------------------------------------------------------------------
Capital instrument liabilities 750 750 750 750
-------------------------------------------------------------------------
Shareholders' equity
Capital stock
Preferred shares 1,290 945 600 600
Common shares and contributed
surplus 3,539 3,520 3,425 3,363
Retained earnings 16,763 16,376 15,843 14,884(3)
Accumulated other comprehensive
income (loss)(1) (1,597) (1,046) (2,321) (2,458)
-------------------------------------------------------------------------
19,995 19,795 17,547 16,389(3)
-------------------------------------------------------------------------
$411,710 $396,470 $379,006 $356,979
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Certain comparative amounts have been reclassified to conform with
current period presentation.
(1) Refer to Note 1 for impact of new accounting policies related to
financial instruments adopted in the first quarter of 2007.
(2) Prior to November 1, 2006, these securities were classified as
investment securities. Refer to Note 1 for further details.
(3) Refer to Note 1 for the accounting policy related to stock-based
compensation adopted in 2006.
The accompanying notes are an integral part of these interim consolidated
financial statements.
Consolidated Statement of Changes in Shareholders' Equity
For the six months ended
-------------------------------------------------------------------------
April 30 April 30
(Unaudited) ($ millions) 2007 2006
-------------------------------------------------------------------------
Preferred shares
Balance at beginning of period $ 600 $ 600
Issued 690 -
-------------------------------------------------------------------------
Balance at end of period 1,290 600
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Common shares and contributed surplus
Common shares:
Balance at beginning of period 3,425 3,316
Issued 130 65
Purchased for cancellation (16) (19)
-------------------------------------------------------------------------
Balance at end of period 3,539 3,362
Contributed surplus: Fair value of stock options - 1
-------------------------------------------------------------------------
Total 3,539 3,363
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings
Balance at beginning of period 15,843 14,126
Cumulative effect of adopting new accounting policies (61)(1) (25)(2)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
15,782 14,101
Net income 2,059 1,746
Dividends: Preferred (19) (15)
Common (833) (712)
Purchase of shares (218) (236)
Other (8) -
-------------------------------------------------------------------------
Balance at end of period 16,763 14,884
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other comprehensive income (loss)(1)
Balance at beginning of period (2,321) (1,961)
Cumulative effect of adopting new accounting policies 683 -
Other comprehensive income (loss) 41 (497)
-------------------------------------------------------------------------
Balance at end of period (1,597) (2,458)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total shareholders' equity at end of period $ 19,995 $ 16,389
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statement of Comprehensive Income(1)
For the For the
three months ended six months ended
-------------------------------------------------------------------------
April 30 April 30 April 30 April 30
(Unaudited) ($ millions) 2007 2006 2007 2006
-------------------------------------------------------------------------
Comprehensive income
Net income $ 1,039 $ 894 $ 2,059 $ 1,746
-------------------------------------------------------------------------
Other comprehensive income
(loss), net of income taxes:
Net change in unrealized
foreign currency translation
losses (588) (257) (66) (497)
Net change in unrealized
gains on available-for-sale
securities 17 - 65 -
Net change in gains on
derivative instruments
designated as cash flow
hedges 20 - 42 -
-------------------------------------------------------------------------
Other comprehensive income
(loss) (551) (257) 41 (497)
-------------------------------------------------------------------------
Comprehensive income $ 488 $ 637 $ 2,100 $ 1,249
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Certain comparative amounts have been reclassified to conform with
current period presentation.
(1) Refer to Note 1 for impact of new accounting policies related to
financial instruments adopted in the first quarter of 2007.
(2) Refer to Note 1 for the accounting policy related to stock-based
compensation adopted in 2006.
The accompanying notes are an integral part of these interim consolidated
financial statements.
Condensed Consolidated Statement of Cash Flows
For the For the
three months ended six months ended
-------------------------------------------------------------------------
Sources (uses) of
cash flows April 30 April 30 April 30 April 30
(Unaudited) ($ millions) 2007 2006 2007 2006
-------------------------------------------------------------------------
Cash flows from operating
activities
Net income $ 1,039 $ 894 $ 2,059 $ 1,746
Adjustments to determine net
cash flows from (used in)
operating activities 85 (38) 36 (81)
Net accrued interest receivable
and payable (115) 37 120 (60)
Trading securities (8,139) (7,165) (9,331) (9,331)
Trading derivatives' market
valuation, net (2,805) (1,606) (3,099) (493)
Other, net (1,373) (314) (2,355) (1,556)
-------------------------------------------------------------------------
(11,308) (8,192) (12,570) (9,775)
-------------------------------------------------------------------------
Cash flows from financing
activities
Deposits 21,175 17,204 28,582 30,096
Obligations related to
securities sold under
repurchase agreements 574 5,825 (4,062) 5,001
Obligations related to
securities sold short 3,699 444 8,349 (230)
Preferred shares issued 345 - 690 -
Common shares issued 20 28 85 56
Common shares redeemed/purchased
for cancellation (234) (87) (234) (255)
Subordinated debentures redeemed - (300) - (300)
Cash dividends paid (428) (363) (852) (727)
Other, net 1,834 453 2,757 896
-------------------------------------------------------------------------
26,985 23,204 35,315 34,537
-------------------------------------------------------------------------
Cash flows from investing
activities
Interest-bearing deposits with
banks (4,665) (700) (6,202) (4,082)
Securities purchased under
resale agreements (1,872) (2,469) (296) (2,250)
Loans, excluding
securitizations (8,482) (7,337) (16,231) (11,613)
Loan securitizations 595 698 1,443 1,132
Available-for-sale securities,
net(1) (1,061) (3,552) (895) (6,466)
Land, buildings and equipment,
net of disposals (44) (54) (164) (102)
Other, net(2) (37) (1,759) (119) (1,759)
-------------------------------------------------------------------------
(15,566) (15,173) (22,464) (25,140)
-------------------------------------------------------------------------
Effect of exchange rate changes
on cash and cash equivalents (87) (28) (29) (68)
-------------------------------------------------------------------------
Net change in cash and cash
equivalents 24 (189) 252 (446)
Cash and cash equivalents at
beginning of period 2,508 2,244 2,280 2,501
-------------------------------------------------------------------------
Cash and cash equivalents at
end of period(3) $ 2,532 $ 2,055 $ 2,532 $ 2,055
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash disbursements made for:
Interest $ 3,452 $ 2,422 $ 7,246 $ 4,749
Income taxes $ 333 $ 293 $ 616 $ 567
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Certain comparative amounts have been reclassified to conform with
current period presentation.
(1) Prior to November 1, 2006, this related to securities classified as
investment securities. Refer to Note 1 for further details.
(2) For the three and six months ended April 30, 2007, comprises
investments in subsidiaries, net of cash and cash equivalents at the
date of acquisition of nil and $3, respectively (April 30, 2006 -
$137), and net of non-cash consideration of common shares issued from
treasury of $11 and $15, respectively (April 30, 2006 - nil).
(3) Represents cash and non-interest-bearing deposits with banks.
The accompanying notes are an integral part of these interim consolidated
financial statements.
Notes to the Interim Consolidated Financial Statements (Unaudited)
These interim consolidated financial statements have been prepared in
accordance with Canadian Generally Accepted Accounting Principles (GAAP). They
should be read in conjunction with the consolidated financial statements for
the year ended October 31, 2006. The significant accounting policies used in
the preparation of these interim consolidated financial statements are
consistent with those used in the Bank's year-end audited consolidated
financial statements, except as discussed in Note 1.
1. Changes in accounting policies
Current year changes
Commencing November 1, 2006, the Bank adopted three new CICA
accounting standards: (i) Financial Instruments - Recognition and
Measurement, (ii) Hedges and (iii) Comprehensive Income. The main
requirements of these new standards, the related accounting policies
subsequently adopted by the Bank and the resulting financial
statement impact are further discussed below.
Prior periods have not been restated as a result of implementing the
new accounting standards. As required, unrealized foreign currency
translation gains/losses on net investments in self-sustaining
foreign operations have been reclassified to accumulated other
comprehensive income (loss) for prior periods. The Bank has recorded
a net reduction of $61 million (net of income tax benefit of
$31 million) to opening fiscal 2007 retained earnings for the
cumulative prior period effect arising on adoption of the new
accounting standards. This transition impact arose primarily from
recognizing in retained earnings the deferred gains and losses on
transition date relating to certain previously discontinued hedges.
The impact of the changes to net income for this quarter was a net
decrease of $8 million after tax (January 31, 2007 - a net increase
of $8 million after tax).
The most significant balance sheet categories impacted on November 1,
2006, as a result of these new standards were as follows:
---------------------------------------------------------------------
$ millions
Increase/
Balance sheet category (Decrease) Explanation
---------------------------------------------------------------------
Available-for-sale To record these securities at
securities $ 1,091 fair value
---------------------------------------------------------------------
To record future taxes on the
Future tax assets components of accumulated other
(Other assets) $ (369) comprehensive income
---------------------------------------------------------------------
After-tax impact on opening
retained earnings resulting from
Retained earnings $ (61) adoption of new standards
---------------------------------------------------------------------
After-tax impact related to net
unrealized gains on available-
Accumulated other for-sale securities and cash
comprehensive income $ 683 flow hedges
---------------------------------------------------------------------
(i) Financial Instruments - Recognition and Measurement
The new standards require all financial assets and financial
liabilities to be carried at fair value in the Consolidated Balance
Sheet, except the following, which are carried at amortized cost
unless designated as held for trading upon initial recognition: loans
and receivables, securities designated as held-to-maturity and non-
trading financial liabilities. The methods used by the Bank in
determining the fair value of financial instruments are unchanged as
a result of implementing these new accounting standards.
The standards require unrealized gains and losses on financial assets
that are held as available-for-sale to be recorded in other
comprehensive income until realized, at which time they will be
recorded in the Consolidated Statement of Income. The Bank has
classified all investment securities at November 1, 2006 as
available-for-sale. As such, the related unrealized gains and losses
on these securities are recorded in accordance with these
requirements. Available-for-sale equity securities which do not have
a quoted market price will continue to be recorded at cost.
Available-for-sale securities are still subject to a regular review
for losses that are other than temporary. If a security is assessed
to have a loss that is other than temporary, the security is written
down to fair value. The change in accounting policy related to other
than temporary impairment was not material. The Bank accounts for the
purchase and sale of securities using settlement date accounting for
purposes of both the Consolidated Balance Sheet and the Consolidated
Statement of Income.
Realized and unrealized gains and losses on financial assets and
liabilities that are held for trading will continue to be recorded in
the Consolidated Statement of Income.
All derivatives, including embedded derivatives that must be
separately accounted for, are now recorded at fair value in the
Consolidated Balance Sheet. This primarily impacts asset/liability
management derivatives which meet hedge accounting criteria as these
were previously accounted for on an accrual basis. These hedging
derivatives are now recorded in other assets and other liabilities.
In addition, under the new accounting standards, inception gains or
losses will no longer be recognized on derivative instruments where
the valuation is dependant on unobservable market data. In such
instances, the inception gain or loss will be deferred over the life
of the related contract, or until the valuation inputs become
observable.
Pursuant to the new requirements, a liability will be recorded for
the fair value of the obligation assumed at the inception of certain
guarantees. The guarantees affected include standby letters of
credit, letters of guarantee, credit enhancements and other similar
contracts. The fair value of the obligation at inception is normally
based on the discounted cash flow of the premium to be received for
the guarantee, resulting in a corresponding asset. The Bank has
recorded an increase in other liabilities of $78 million as at
November 1, 2006 and a corresponding increase in other assets
relating to these guarantees.
The Bank's accounting policy is to capitalize transaction costs
relating to non-trading financial assets and non-trading financial
liabilities and, where applicable, these amounts are recognized in
net interest income over the expected life of the instrument.
Items designated as trading
Under the new accounting standards, the Bank has elected to designate
certain portfolios of assets and liabilities as trading, as further
described below.
The Bank's trading operations transact credit derivatives for
customers. The Bank may purchase the underlying loan(s) from another
counterparty to economically hedge the derivative exposure. By
classifying these loans as trading, the fair value changes will be
recorded in income along with the fair value changes of the
derivative. As a result, the Bank significantly reduces or eliminates
an accounting mismatch between the two instruments. The fair value of
these traded loans is based on quoted market prices. The fair value
of these loans was $4.7 billion as at April 30, 2007 and $3.3 billion
as at November 1, 2006. The change in fair value that was recorded
through trading income during the quarter was a gain of $94 million
(January 31, 2007 - $110 million), and was entirely offset by changes
in the fair value of the related credit derivatives.
The Bank's trading operations purchase loan assets in specifically
authorized portfolios for which performance is evaluated on a fair
value basis. The fair value of these traded loans is based on quoted
market prices. The fair value of these loans was $210 million as at
April 30, 2007 and $164 million as at November 1, 2006. The change in
fair value that was recorded through trading income during the
quarter was a gain of $4 million (January 31, 2007 - $5 million).
The Bank has classified certain deposit note liabilities containing
extension features as trading in order to significantly reduce an
accounting mismatch between these liabilities and fair value changes
in related derivatives. The fair value of these deposit note
liabilities, including the extension feature, is determined by
discounting expected cash flows, using current market rates offered
for similar instruments. The fair value of these liabilities was
$807 million as at April 30, 2007 and $785 million as at November 1,
2006. The change in fair value that was recorded through net interest
income on these deposit note liabilities during the quarter was a
loss of $1 million (January 31, 2007 - gain of $2 million), virtually
all of which was due to changes in market interest rates. There was
no change in fair value attributable to the credit risk.
(ii) Hedges
The criteria specifying when a derivative instrument may be accounted
for as a hedge has not changed substantially. There are three main
types of hedges: (i) fair value hedges, (ii) cash flow hedges and
(iii) net investment hedges. Previously, derivatives that met hedge
accounting criteria were accounted for on an accrual basis.
In a fair value hedge, the change in fair value of the hedging
derivative is offset in the Consolidated Statement of Income by the
change in fair value of the hedged item relating to the hedged risk.
The Bank utilizes fair value hedges primarily to convert fixed rate
financial assets and liabilities to floating rate. The main financial
instruments designated in fair value hedging relationships include
bond assets, loans, deposit liabilities and subordinated debentures.
In a cash flow hedge, the change in fair value of the hedging
derivative is recorded in other comprehensive income, to the extent
it is effective, until the hedged item affects the Consolidated
Statement of Income. The Bank utilizes cash flow hedges primarily to
convert floating rate deposit liabilities to fixed rate. Accumulated
other comprehensive income arising from cash flow hedges was a gain
of $19 million (after tax) as at April 30, 2007. The reclassification
from accumulated other comprehensive income to earnings over the next
12 months as a result of outstanding cash flow hedges is not expected
to be material. As at April 30, 2007, the maximum length of cash flow
hedges outstanding was less than seven years.
In a net investment hedge, the change in fair value of the hedging
instrument, to the extent it is effective, is recorded directly in
other comprehensive income. These amounts are recognized in income
when the corresponding cumulative translation adjustments from the
self-sustaining foreign operation are recognized in income.
Any hedge ineffectiveness is measured and recorded in current period
net interest income in the Consolidated Statement of Income.
Previously, hedge ineffectiveness was generally recognized in the
Consolidated Statement of Income over the life of the hedging
relationship. The Bank recorded a loss of $6 million during the
quarter (January 31, 2007 - gain of $12 million), of which $5 million
(January 31, 2007 - gain of $9 million) related to cash flow hedges,
due to the ineffective portion of designated hedges. When either a
fair value or cash flow hedge is discontinued, any cumulative
adjustment to either the hedged item or other comprehensive income is
recognized in income over the remaining term of the original hedge,
or when the hedged item is derecognized.
There were no significant changes to the Bank's risk management
policies and hedging activities as a result of the new accounting
standards.
(iii) Comprehensive Income
A new Statement of Comprehensive Income now forms part of the Bank's
consolidated financial statements and displays current period net
income and other comprehensive income.
Accumulated other comprehensive income (loss) is a separate component
of shareholders' equity. The Consolidated Statement of Comprehensive
Income reflects changes in accumulated other comprehensive income,
including changes in unrealized gains and losses on available-for-
sale assets, as well as changes in the fair value of derivatives
designated as cash flow hedges, to the extent they are effective.
Unrealized foreign currency translation amounts arising from self-
sustaining foreign operations and the impact of any related hedges,
previously reported separately in the Consolidated Statement of
Changes in Shareholders' Equity, now form part of accumulated other
comprehensive income (loss).
The components of accumulated other comprehensive income (loss) as at
and for the period ended April 30, 2007, and other comprehensive
income (loss) for the three and six months then ended were as
follows.
Accumulated other comprehensive income (loss)
As at and for the six months ended
---------------------------------------------------------------------
Opening Transition Net Ending
balance amount change balance
-----------------------------------------------
October 31 November 1 April 30
($ millions) 2006 2006 2007
---------------------------------------------------------------------
Unrealized foreign
currency translation
losses, net of
hedging activities $(2,321) $ - $ (66) $(2,387)(1)
Unrealized gains on
available-for-sale
securities, net of
hedging activities - 706 65 771(2)
Gains (losses) on
derivative
instruments
designated as cash
flow hedges - (23) 42 19(3)
---------------------------------------------------------------------
Accumulated other
comprehensive income
(loss) $(2,321) $ 683 $ 41 $(1,597)
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------
Opening Net Ending
balance change balance
-----------------------------------
October 31 April 30
($ millions) 2005 2006
---------------------------------------------------------
Unrealized foreign $(1,961) $ (497) $(2,458)(1)
currency translation
losses, net of
hedging activities
Unrealized gains on
available-for-sale
securities, net of
hedging activities - - -
Gains (losses) on
derivative
instruments
designated as cash
flow hedges - - -
---------------------------------------------------------
Accumulated other
comprehensive income
(loss) $(1,961) $ (497) $(2,458)
---------------------------------------------------------
---------------------------------------------------------
(1) Net of income tax expense of nil.
(2) Net of income tax expense of $427. Also, the balance as at
April 30, 2007 includes unrealized losses of $147 after tax on
the available-for-sale securities.
(3) Net of income tax expense of $8.
Other comprehensive income (loss)
The following table summarizes the changes in the components of other
comprehensive income (loss).
For the For the
three months ended six months ended
---------------------------------------------------------------------
April 30 April 30 April 30 April 30
($ millions) 2007 2006 2007(6) 2006
---------------------------------------------------------------------
Net change in unrealized
foreign currency
translation losses
Unrealized foreign
currency translation
losses(1) $ (1,009) $ (331) $ (117) $ (775)
Gains on hedges of net
investments in self-
sustaining foreign
operations(1) 421 74 51 278
---------------------------------------------------------------------
(588) (257) (66) (497)
---------------------------------------------------------------------
---------------------------------------------------------------------
Net change in unrealized
gains on available-for-
sale securities
Unrealized gains on
available-for-sale
securities(2) 70 - 141 -
Reclassification of net
realized gains to net
income(3) (53) - (76) -
---------------------------------------------------------------------
17 - 65 -
---------------------------------------------------------------------
---------------------------------------------------------------------
Net change in gains on
derivative instruments
designated as cash flow
hedges
Gains (losses) on derivative
instruments designated as
cash flow hedges(4) (113) - 134 -
Reclassification of gains
and losses to net income(5) 133 - (92) -
---------------------------------------------------------------------
20 - 42 -
---------------------------------------------------------------------
---------------------------------------------------------------------
Other comprehensive income
(loss) $ (551) $ (257) $ 41 $ (497)
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) For the three and six months ended April 30, 2007, net of income
tax expense of nil (April 30, 2006 - nil).
(2) For the three and six months ended April 30, 2007, net of income
tax expense of $36 and $82, respectively.
(3) For the three and six months ended April 30, 2007, net of income
tax benefit of $23 and $37, respectively.
(4) For the three and six months ended April 30, 2007, net of income
tax benefit of $58 and income tax expense of $67, respectively.
(5) For the three and six months ended April 30, 2007, net of income
tax expense of $67 and income tax benefit of $46, respectively.
(6) The prior quarter's amounts included herein have been
reclassified to conform with the current period presentation.
Prior year change
In the third quarter of 2006, the Bank early adopted a CICA Abstract
dealing with the accounting for stock-based compensation for
employees eligible to retire before the vesting date. This Abstract
required that: i) compensation costs attributable to stock-based
compensation awards granted to employees who are eligible to retire
on the grant date be fully recognized on the grant date; and
ii) compensation costs attributable to stock-based compensation
awards granted to employees who will become eligible to retire during
the vesting period be recognized over the time frame between the
grant date and the date of retirement eligibility. Previously, these
costs were recognized by the Bank over the vesting period of the
award.
The Bank did not restate net income for any particular prior quarter,
as it was not material to any particular quarter or annual period,
and recorded an adjustment of $25 million (net of income tax benefit
of $13 million) to opening fiscal 2006 retained earnings for the
cumulative effect on prior years arising from this change in
accounting policy.
2. Sales of loans through securitizations
The Bank securitizes residential mortgages through the creation of
mortgage-backed securities. No credit losses are expected, as the
mortgages are insured. For the quarter ended April 30, 2007, the key
weighted-average assumptions used to measure the fair value at the
dates of securitization were a prepayment rate of 20%, an excess
spread of 1.0% and a discount rate of 4.1%. The following table
summarizes the Bank's sales.
For the For the
three months ended six months ended
---------------------------------------------------------------------
April 30 January 31 April 30 April 30 April 30
($ millions) 2007 2007 2006 2007 2006
---------------------------------------------------------------------
Net cash
proceeds(1) $ 595 $ 848 $ 698 $ 1,443 $ 1,132
Retained interest 17 32 22 49 33
Retained servicing
liability (4) (7) (6) (11) (8)
---------------------------------------------------------------------
608 873 714 1,481 1,157
Residential
mortgages
securitized 605 861 712 1,466 1,149
---------------------------------------------------------------------
Net gain on sale $ 3 $ 12 $ 2 $ 15 $ 8
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Excludes insured mortgages which were securitized and retained by
the Bank of $182 for the three months ended April 30, 2007
(January 31, 2007 - $526; April 30, 2006 - $246), and $708 for
the six months ended April 30, 2007 (April 30, 2006 - $514). As
at April 30, 2007, the outstanding balance of mortgage-backed
securities was $2,562, and these assets have been classified as
available-for-sale securities.
3. Allowance for credit losses
The following table summarizes the change in the allowance for credit
losses.
For the For the
three months ended six months ended
---------------------------------------------------------------------
April 30 January 31 April 30 April 30 April 30
($ millions) 2007 2007 2006 2007 2006
---------------------------------------------------------------------
Balance at
beginning of
period $ 2,631 $ 2,618 $ 2,445 $ 2,618 $ 2,475
Write-offs (136) (168) (120) (304) (251)
Recoveries 64 34 56 98 95
Provision for
credit losses 20(4) 63 35 83 110
Other, including
foreign exchange
adjustment (63) 84 301 21 288
---------------------------------------------------------------------
Balance at the
end of
period(1)(2)(3) $ 2,516 $ 2,631 $ 2,717 $ 2,516 $ 2,717
---------------------------------------------------------------------
(1) As at April 30, 2007, includes $43 of specific and general
allowances relating to acquisitions of new subsidiaries
(January 31, 2007 - $26; April 30, 2006 - $342), which may change
as the valuation of the acquired loan assets is finalized.
(2) As at April 30, 2007, $11 has been recorded in other liabilities
(January 31, 2007 - $11; April 30, 2006 - $11).
(3) As at April 30, 2007, the general allowance for credit losses was
$1,298 (January 31, 2007 - $1,323; April 30, 2006 - $1,330).
(4) Net of reduction in general allowance of $25.
4. Variable interest entities
On April 30, 2007, one of the multi-seller conduits administered by
the Bank issued a subordinated note to an unrelated party that will
absorb the majority of the expected losses. It was determined that
the Bank was no longer the primary beneficiary and as a result, the
variable interest entity (VIE) was no longer recorded in the Bank's
Consolidated Balance Sheet as at April 30, 2007. This deconsolidation
resulted in a decrease to both available-for-sale securities and
other liabilities of $7 billion, and an increase in indirect credit
commitments of $8 billion.
5. Significant capital transactions
In the first quarter of 2007, the Bank initiated a new normal course
issuer bid to purchase up to 20 million of the Bank's common shares.
This represents approximately 2% of the Bank's common shares
outstanding as at December 31, 2006. The bid will terminate on the
earlier of January 11, 2008, or the date on which the Bank completes
its purchases. For the three and six months ended April 30, 2007, the
Bank purchased 4.4 million common shares at an average cost of
$53.52.
The Bank issued $345 million, or 13.8 million shares, of Series 15
Non-cumulative preferred shares during the second quarter of 2007.
The initial issuance of 12 million shares was completed on April 5,
2007, with the remaining 1.8 million shares issued on April 17, 2007.
The Series 15 preferred shares are entitled to non-cumulative
preferential cash dividends, payable quarterly in an amount per share
of $0.28125. The initial dividend, payable on July 27, 2007, will be
$0.34829 per share. With regulatory approval, the shares may be
redeemed by the Bank on or after July 27, 2012 at $25.00 per share,
together with declared and unpaid dividends to the date then fixed
for redemption, and thereafter at annually declining premiums until
July 27, 2016, following which no redemption premium is payable.
These preferred shares qualify as Tier 1 capital.
The Bank issued $345 million, or 13.8 million shares, of Series 14
Non-cumulative preferred shares during the first quarter of 2007. The
Series 14 preferred shares are entitled to non-cumulative
preferential cash dividends payable quarterly in an amount per share
of $0.28125. The initial dividend, paid on April 26, 2007, was
$0.28356 per share. With regulatory approval, the shares may be
redeemed by the Bank on or after April 26, 2012 at $26.00 per share,
together with declared and unpaid dividends to the date then fixed
for redemption, and thereafter at annually declining premiums until
April 27, 2016, following which no redemption premium is payable.
These preferred shares qualify as Tier 1 capital.
6. Employee future benefits
Employee future benefits include pensions and other post-retirement
benefits, post-employment benefits and compensated absences. The
following table summarizes the expenses for the Bank's principal
plans(1).
For the For the
three months ended six months ended
---------------------------------------------------------------------
April 30 January 31 April 30 April 30 April 30
($ millions) 2007 2007 2006 2007 2006
---------------------------------------------------------------------
Benefit expenses
Pension plans $ 7 $ 9 $ 22 $ 16 $ 46
Other benefit
plans 30 30 32 60 63
---------------------------------------------------------------------
$ 37 $ 39 $ 54 $ 76 $ 109
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Other plans operated by certain subsidiaries of the Bank are not
considered material and are not included in this note.
7. Segmented results of operations
Scotiabank is a diversified financial services institution that
provides a wide range of financial products and services to retail,
commercial and corporate customers around the world. The Bank is
organized into three main operating segments: Domestic Banking,
International Banking and Scotia Capital. Results for these operating
segments are presented in the Business segment income tables above.
8. Acquisitions
During the second quarter of 2007, the Bank reached an agreement to
acquire 24.99% of Thanachart Bank for approximately $240 million. The
transaction is subject to regulatory approval and is expected to
close during the third quarter.
During the fourth quarter of 2006, the Bank completed the acquisition
of Corporacion Interfin, the parent company of Banco Interfin in
Costa Rica, for $325 million. Total assets at acquisition were
approximately $1.6 billion, with the majority of the assets being
loans. In the first quarter, the estimated total goodwill of
$247 million and other intangible assets of $35 million were recorded
in the Consolidated Balance Sheet. These amounts may be refined as
the Bank completes its valuation of the assets acquired and
liabilities assumed.
9. Subsequent event
Subsequent to the quarter, the Bank announced its intention to redeem
on July 16, 2007 all of its $500 million, 6.25% debentures due
July 2012, at par plus accrued and unpaid interest.
Direct deposit service
Shareholders may have dividends deposited directly into accounts held at
financial institutions which are members of the Canadian Payments Association.
To arrange direct deposit service, please write to the Transfer Agent.
Dividend and Share Purchase Plan
Scotiabank's dividend reinvestment and share purchase plan allows common
and preferred shareholders to purchase additional common shares by reinvesting
their cash dividend without incurring brokerage or administrative fees.
As well, eligible shareholders may invest up to $20,000 each fiscal year
to purchase additional common shares of the Bank. Debenture holders may apply
interest on fully registered Bank subordinated debentures to purchase
additional common shares. All administrative costs of the plan are paid by the
Bank.
For more information on participation in the plan, please contact the
Transfer Agent.
Dividend dates for 2007
Record and payment dates for common and preferred shares, subject to
approval by the Board of Directors.
Record Date Payment Date
January 2 January 29
April 3 April 26
July 3 July 27
October 2 October 29
Duplicated communication
If your shareholdings are registered under more than one name or address,
multiple mailings will result. To eliminate this duplication, please write to
the Transfer Agent to combine the accounts.
Website
For information relating to Scotiabank and its services, visit us at our
website: www.scotiabank.com.
Conference call and Web broadcast
The quarterly results conference call will take place on May 29, 2007, at
2:30 p.m. EDT and is expected to last approximately one hour. Interested
parties are invited to access the call live, in listen-only mode, by
telephone, toll-free, at 1-800-733-7571 (please call five to 15 minutes in
advance). In addition, an audio webcast, with accompanying slide presentation,
may be accessed via the Investor Relations page of www.scotiabank.com.
Following discussion of the results by Scotiabank executives, there will be a
question and answer session. Listeners are invited to submit questions by e-
mail to investor.relations@scotiabank.com.
A telephone replay of the conference call will be available from May 29,
2007, to June 12, 2007, by calling (416) 640-1917 and entering the
identification code 21228443 followed by the number sign. The archived audio
webcast will be available on the Bank's website for three months.
-------------------------------------------------------------------------
CONTACT INFORMATION
Investors:
Financial analysts, portfolio managers and other investors requiring
financial information, please contact Investor Relations, Finance Department:
Scotiabank
Scotia Plaza, 44 King Street West
Toronto, Ontario, Canada M5H 1H1
Telephone: (416) 866-5982
Fax: (416) 866-7867
E-mail: investor.relations@scotiabank.com
Media:
For other information and for media enquiries, please contact the Public,
Corporate and Government Affairs Department at the above address.
Telephone: (416) 866-3925
Fax: (416) 866-4988
E-mail: corpaff@scotiabank.com
Shareholders:
For enquiries related to changes in share registration or address,
dividend information, lost share certificates, estate transfers, or to advise
of duplicate mailings, please contact the Bank's Transfer Agent:
Computershare Trust Company of Canada
100 University Avenue, 9th Floor
Toronto, Ontario, Canada M5J 2Y1
Telephone: 1-877-982-8767
Fax: 1-888-453-0330
E-mail: service@computershare.com
Co-Transfer Agent (U.S.A.)
Computershare Trust Company N.A.
350 Indiana Street
Golden, Colorado 80401 U.S.A.
Telephone: 1-800-962-4284
For other shareholder enquiries, please contact the Finance Department:
Scotiabank
Scotia Plaza, 44 King Street West
Toronto, Ontario, Canada M5H 1H1
Telephone: (416) 866-4790
Fax: (416) 866-4048
E-mail: corporate.secretary@scotiabank.com
Rapport trimestriel disponible en français
Le Rapport annuel et les états financiers de la Banque sont publiés en
français et en anglais et distribués aux actionnaires dans la version de leur
choix. Si vous préférez que la documentation vous concernant vous soit
adressée en français, veuillez en informer Relations publiques,Affaires de la
société et Affaires gouvernementales, La Banque de Nouvelle-Ecosse, Scotia
Plaza, 44, rue King Ouest, Toronto (Ontario), Canada M5H 1H1, en joignant, si
possible, l'étiquette d'adresse, afin que nous puissions prendre note du
changement.
The Bank of Nova Scotia is incorporated in Canada with limited liability.%SEDAR: 00001289EF %CIK: 0000009631
For further information:
For further information: Kevin Harraher, Vice-President, Investor Relations, (416) 866-5982; Frank Switzer, Director, Public Affairs, (416) 866-7238