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Scotiabank reports first quarter earnings of $835 million
First quarter financial measures compared to the same period a year ago:
- Earnings per share (diluted) of $0.82, compared to $1.01
- Net income of $835 million, versus $1,020 million
- Return on equity of 18.3%, compared to 22.1%
- Productivity ratio of 56.5%, versus 53.6%
TORONTO, March 4 /CNW/ - Scotiabank recorded first quarter net income of
$835 million, down $185 million or 18% from the same period last year. Diluted
earnings per share (EPS) were $0.82 compared to $1.01 in the same period a
year earlier, down 19%. Return on equity was 18.3% compared to 22.1% last
year.
"While we had anticipated the first quarter to be difficult, results were
weaker than expected," said Rick Waugh, President and CEO. "This was due
primarily to substantial volatility in global financial markets. Our exposure
to these stressed markets is modest and well diversified, but our portfolios
did experience some valuation writedowns.
"We continued to experience solid core growth in our Domestic and
International Banking platforms, but our results in Scotia Capital were
negatively affected by the market volatility. In Domestic Banking, average
assets rose 14%, driven by growth and increased market share in mortgages,
personal deposits and mutual funds. International Banking also experienced
strong asset growth of seven per cent due to organic growth and our
acquisition in Chile, despite the negative impact of foreign currency
translation. Mexico's earnings contribution was lower this quarter, due
largely to increased loan loss provisions, unusually high taxes, as well as
the negative effect of the stronger Canadian dollar.
"The unsettled capital markets affected certain of the Bank's portfolio
positions and also led to an increase in funding costs, thereby reducing the
Bank's interest margin compared to a year ago. The steep rise of the Canadian
dollar versus the U.S. dollar from 85 cents to par over the past year had the
impact of reducing our foreign currency earnings," Mr. Waugh said. "We also
took prudent actions to ensure our portfolios reflect current market
valuations.
"Notwithstanding the current volatility, particularly in widening credit
spreads, capital markets are expected to improve somewhat in the second half
of the year. Funding costs have begun to improve, asset growth remains strong
in all three of our business lines, and increased attention to managing costs
supports our confidence going forward. As well, the pressure of the rapid rise
of the dollar in 2007 will have a much reduced impact in the second half of
the year, as we anticipate the Canadian dollar to stay within its current
range.
"We are confident that we are taking action to meet the current
challenges head on and, hence, are maintaining the objectives that we
established at the beginning of the year."Year-to-date performance versus our key 2008 financial and operational
objectives was as follows:
1. Target: Earn a return on equity (ROE)(1) of 20 to 23%. For the three
months Scotiabank earned an ROE of 18.3%.
2. Target: Generate growth in earnings per common share (diluted) of 7 to
12%. Our year-over-year growth in earnings per share was negative 19%.
3. Target: Maintain a productivity ratio(1) of less than 57%.
Scotiabank's ratio was 56.5% for the three months.
4. Target: Maintain sound capital ratios. At 9.0%, Scotiabank's Tier 1
capital ratio remains strong by Canadian and international standards.
(1) Refer to non-GAAP measures discussion further below.
FINANCIAL HIGHLIGHTS
As at and for the three months ended
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January 31 October 31 January 31
(Unaudited) 2008 2007 2007
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Operating results ($ millions)
Net interest income 1,814 1,716 1,776
Net interest income (TEB(1)) 1,932 1,932 1,881
Total revenue 2,839 3,078 3,109
Total revenue (TEB(1)) 2,957 3,294 3,214
Provision for credit losses 111 95 63
Non-interest expenses 1,669 1,792 1,724
Provision for income taxes 193 204 277
Provision for income taxes (TEB(1)) 311 420 382
Net income 835 954 1,020
Net income available to common
shareholders 814 938 1,012
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Operating performance
Basic earnings per share ($) 0.83 0.95 1.02
Diluted earnings per share ($) 0.82 0.95 1.01
Return on equity (%)(1) 18.3 21.0 22.1
Productivity ratio (%) (TEB(1)) 56.5 54.4 53.6
Net interest margin on
total average assets (%) (TEB(1)) 1.79 1.87 1.91
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Balance sheet information ($ millions)
Cash resources and securities 130,893 118,030 126,899
Loans and acceptances 260,501 238,685 222,690
Total assets 449,422 411,510 396,470
Deposits 316,797 288,458 277,019
Preferred shares 1,865 1,635 945
Common shareholders' equity 18,128 17,169 18,850
Assets under administration 195,155 195,095 203,067
Assets under management 31,704 31,403 29,158
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Capital measures(2)
Tier 1 capital ratio (%) 9.0 9.3 10.4
Total capital ratio (%) 10.2 10.5 11.7
Tangible common equity
to risk-weighted assets(1) (%) 7.2 7.2 8.4
Risk-weighted assets ($ millions) 234,876 218,337 206,843
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Credit quality
Net impaired loans(3) ($ millions) 689 601 579
General allowance for
credit losses ($ millions) 1,298 1,298 1,323
Net impaired loans as a %
of loans and acceptances(3) 0.26 0.25 0.26
Specific provision for credit
losses as a % of average loans
and acceptances (annualized) 0.18 0.16 0.12
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Common share information
Share price ($)
High 54.00 53.49 53.39
Low 43.10 46.70 48.80
Close 48.19 53.48 50.76
Shares outstanding (millions)
Average - Basic 985 983 991
Average - Diluted 992 991 1,001
End of period 985 984 993
Dividends per share ($) 0.47 0.45 0.42
Dividend yield (%) 3.9 3.6 3.3
Dividend payout ratio(4) (%) 56.9 47.1 41.2
Market capitalization ($ millions) 47,487 52,612 50,397
Book value per common share($) 18.40 17.45 18.99
Market value to book value multiple 2.6 3.1 2.7
Price to earnings multiple
(trailing 4 quarters) 12.5 13.2 13.5
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Other information
Employees(5) 62,002 58,113 54,889
Branches and offices 2,488 2,331 2,225
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(1) Non-GAAP measure. Refer further below for a discussion of these
measures.
(2) Effective November 1, 2007, regulatory capital ratios are determined
in accordance with Basel II rules. Comparative amounts for prior
periods were determined in accordance with Basel I rules.
(3) Net impaired loans are impaired loans less the specific allowance for
credit losses.
(4) Represents common dividends for the period as a percentage of the net
income available to common shareholders for the period.
(5) Certain amounts for prior periods have been restated to include final
numbers for all new acquisitions.MESSAGE TO STAKEHOLDERS
Strategies for success
The first quarter of 2008 was challenging for banks, including
Scotiabank. While Domestic Banking and International Banking experienced solid
core growth, results for Scotia Capital and for the Bank overall were
negatively affected by the turbulence in global financial markets,
particularly credit markets.
We are meeting these challenges by continuing to invest in revenue
generating opportunities, emphasizing our traditional focus on controlling
expenses, and remaining focused on executing our strategy.
Our overarching strategy is to continually build on our current business
model of three strong business lines. We are committed to growing each of our
businesses, while maintaining a high level of diversification. In executing
our strategy, our approach balances the interests of our shareholders,
customers, employees and communities; reflects our core strengths - including
risk and expense management; and concentrates on three key priorities: driving
sustainable revenue growth, effective capital management and leadership
development.
Each of our businesses made demonstrable progress on these priorities
during the quarter, and we have highlighted several key achievements further
below. In particular, we continued to use our capital to fund opportunities
and acquisitions that will further our growth objectives. In this respect, we
closed two previously announced transactions - a $1.0 billion deal to acquire
99.5 per cent of Banco del Desarrollo, Chile's seventh-largest bank, and the
acquisition of a controlling interest in BBVA Crecer AFP, the Dominican
Republic's largest pension fund administrator in number of affiliates, and its
related insurance company, BBVA Seguros.
We are proud that Scotiabank continues to be recognized as one of
Canada's top employers in The Globe and Mail Report on Business Magazine's
annual ranking. And we remained active supporters of the communities where we
live and work.
Overall, we remain confident about the future and, with a strong focus on
executing our strategies, priorities, cost control and growing our three
business platforms, we are confident we are taking action to meet our 2008
objectives.2008 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 57%
- 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
- The Atlantic Customer Contact Centre in Halifax received the Call
Center of the Year award in the Service Quality Measurement North
America ratings, which benchmark more than 300 leading international
contact centres on an annual basis.
- Scotiabank and The Western Union Company, a global leader in money
transfer services, launched a national program to offer international
money transfer services to Scotiabank customers. Our customers in
diverse communities now have the ability to send money to family
members, friends and business colleagues in more than 200 countries
and territories around the world. This is a further step in our
ongoing commitment to meet the unique needs of the multicultural
communities in which we do business.
- The investment performance delivered by Scotia Cassels Investment
Counsel remains among the best in Canada. For the three-year period
through December 31, 2007, 79% of the actively managed, long-term
mutual fund assets advised by Cassels were in the top two quartiles,
as rated by Morningstar.
International Banking
- Scotiabank has been recognized by Global Finance as the Best Trade
Finance Bank in Canada for 2008. This is the second time Scotiabank
has won this award for its wide range of trade-related services and
excellent online systems for importers and exporters.
- We expanded our operations in Guatemala and the Dominican Republic
with the purchase of select assets from Grupo Altas Cumbres (GAC) of
Chile in February. The agreement also includes an option to purchase
GAC's bank in Peru, Banco del Trabajo.
- During the quarter, we continued to expand our distribution network,
opening 29 new locations in Mexico, four in Peru, and three branches
and offices in other key international markets. We also announced the
opening of a representative office in Moscow, Russia.
- Scotiabank Trinidad & Tobago and Scotiabank Turks & Caicos received
the Bank of the Year award from The Banker magazine.
Scotia Capital
- Scotia Capital was named Best Foreign Exchange Bank in Canada for the
fourth year in a row, by Global Finance magazine. The annual award
recognizes the best foreign exchange banks and providers in 82
countries and regions around the world.
- Scotia Waterous acted as exclusive financial advisor to Penn West
Energy Trust on its merger with Canetic Resources Trust. The merger
created the largest conventional oil and gas trust in North America
with an enterprise value of more than $15 billion.
- Scotia Capital acted as financial advisor and placement agent on a
$500 million equity private placement for a Bermuda-based start-up
life reinsurance company, Aurigen Re Capital Limited. Scotia Capital
brought together a truly international group of high-profile investors
with significant expertise in the insurance industry.
- Scotia Capital's newly formed Global Energy Solutions team, working
closely with Scotiabank's International Banking division, acted as
lead hedge arranger and lead hedge advisor for the interest rate
hedging program related to AES Changuinola S.A.'s construction of a
new power plant in Panama. AES is one of the world's largest power
companies. As well, Scotiabank committed US$50 million in credit
facilities towards the project's financing.
Employee highlights
- Scotiabank was named one of Canada's 50 Best Employers for 2008, for
the fourth consecutive year, by The Globe and Mail Report on Business
Magazine. The annual list is based on a national survey conducted by
Hewitt Associates, a global human resources firm, and employee
feedback is a critical component of the study. Scotiabank was the
highest-placed bank, moving from 44th place last year to 19th, and
this recognition helps position the Bank as an employer of choice.
- Scotiabank was also recognized as a Top 125 Training Organization in
2008 for the sixth time and fifth consecutive year by Training
magazine, with a ranking of 14th. The list recognizes exceptional
learning and development programs incorporated by companies around the
world, and is based on a variety of quantitative and qualitative
measurements, including the sizes of the organization, annual revenue,
number of employees, training budget, best practices, leadership
development and new training initiatives.
Community involvement
- Scotiabank donated to Tides Canada Foundation's Great Bear Rainforest
Campaign. The donation supports an innovative, globally significant
sustainability model to protect British Columbia's Great Bear
Rainforest, and will contribute to a permanent conservation endowment
fund that will also benefit First Nations communities.
- Scotiabank announced a contribution of $50,000 to the Canadian Red
Cross Society's Mexico Flood Appeal to support victims of last fall's
torrential rains, flooding and mudslides in the Tabasco region of
Mexico. The Bank also accepted donations through its branch networks
in Canada and Mexico, and established an employee-to-employee account
for Canadian employees who want to support their Mexican colleagues
who have been affected by the natural disaster.MANAGEMENT'S DISCUSSION & ANALYSIS
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Forward-looking statements
Our public communications often include oral or written forward-looking
statements. Statements of this type are included in this document, and may be
included in other filings with Canadian securities regulators or the U.S.
Securities and Exchange Commission, or in other communications. All such
statements 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. Forward-looking statements may 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. Such 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. Do not unduly rely on forward-looking statements, as a number
of important factors, many of which are beyond our control, 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, including changes in tax laws; 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; fraud by internal or external parties,
including the use of new technologies in unprecedented ways to defraud the
Bank or its customers; consolidation in the Canadian financial services
sector; 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 56 of the Bank's 2007 Annual Report.
The preceding 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 preceding
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 its behalf.
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.
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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 further below. 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 in the current period is $118 million versus
$105 million in the same quarter last year and $216 million last quarter.
For purposes of segmented reporting, a segment's net interest income and
provision for income taxes are 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. The Bank calculates its return on equity using average
common shareholders' equity, including all components of shareholders' equity.
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 (net of taxes). 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's net income was $835 million in the first quarter, a
reduction of $185 million or 18% from the same period a year ago. Higher net
interest income from continued asset growth and lower non-interest expenses
were more than offset by lower trading revenues, and lower gains on
non-trading securities. As well, there was a negative impact of foreign
currency translation, a lower interest margin, a reduced contribution from
Mexico, and a higher provision for credit losses this quarter compared to the
low levels last year.
Net income decreased $119 million or 13% from the fourth quarter, due
primarily to the after-tax gain of $163 million on the Visa reorganization
recognized last quarter, and lower gains on non-trading securities after
writedowns on certain structured credit instruments which exceeded writedowns
last quarter. Partially offsetting these items was an increase in net interest
income from strong asset growth and a reduction in non-interest expenses.
Total revenue
Total revenue (on a taxable equivalent basis) was $2,957 million this
quarter, a decrease of $257 million or 8% from the first quarter last year.
The decline was attributable to many factors, including lower trading
revenues, reduced gains on non-trading securities, changes in the fair value
of derivatives used for asset/liability management that do not qualify as
hedges, and the negative impact of foreign currency translation. These were
partly offset by growth in underlying net interest income, primarily from
strong organic asset growth and acquisitions.
As a result of a substantial widening of credit spreads, particularly on
structured credit instruments, certain of the Bank's non-trading securities
experienced a decline in market value. The investments include collateralized
debt obligations (CDOs), collateralized loan obligations (CLOs), structured
investment vehicles (SIVs), and non-bank asset backed commercial paper (ABCP).
Notwithstanding the Bank's intention to hold these structured credit
instruments for the longer term, the Bank recorded pre-tax writedowns of
$158 million on these investments, including $44 million for non-bank ABCP. As
well, trading revenues included an $80 million loss recorded on a swap
exposure to a monoline insurer. The underlying reference assets of the swaps
are of high quality. Last quarter, the Bank incurred pre-tax losses of
$191 million on structured credit instruments.
Compared to the fourth quarter, total revenue was down $337 million or
10%, due mainly to the pre-tax gain of $202 million recognized on the Visa
reorganization last quarter, lower gains on non-trading securities and lower
tax-exempt dividend income. These were partially offset by higher underlying
net interest income associated with increased asset volumes.
Net interest income
This quarter's net interest income (on a taxable equivalent basis) was
$1,932 million, an increase of $51 million or 3% over the same period last
year. The positive contribution from strong asset growth this past year was
partly offset by the negative impact of foreign currency translation. As well,
the decline in interest rates in the past quarter had a significant negative
impact on fair value of derivatives used for asset/liability management which
do not qualify for hedge accounting treatment.
Compared to the previous quarter, net interest income (on a taxable
equivalent basis) was unchanged, due primarily to a reduction in tax-exempt
dividend income. Excluding this, net interest income rose a substantial
$98 million, due mainly to strong asset growth in the quarter and
contributions from acquisitions, partly offset by a lower margin.
The Bank's net interest margin was 1.79% in the first quarter, compared
to 1.91% in the first quarter of last year and 1.87% last quarter. Compared to
the prior year, the reduction in the margin was due to higher wholesale
funding costs, as well as a change in asset mix, mainly from continued growth
in lower-yielding, but lower-risk, Canadian residential mortgages. The
quarter-over-quarter decrease was due mainly to lower tax-exempt dividend
income.
Other income
Other income was $1,025 million this quarter, a decline of $308 million
or 23% from the first quarter last year. This decrease was driven largely by
trading losses this quarter, in part due to an $80 million reserve on a swap
exposure to a monoline insurer, and weaker equity trading. As well, there were
lower net gains on non-trading securities and a decline in underwriting
revenues. The Bank had revenue growth in credit cards fees and mutual funds,
mainly from higher volumes.
Quarter over quarter, other income was down $337 million or 25%. This was
due primarily to the gain on the Visa reorganization and gain on the sale of
Scotia Capital's bond index business recognized last quarter, along with lower
gains on non-trading securities this quarter. Partly offsetting these factors
were lower trading losses, higher credit fees and credit card revenues
recognized this quarter.
Provision for credit losses
The provision for credit losses was $111 million this quarter, up $48
million from the low levels in the same period last year and a $16 million
increase from last quarter. The increase from last year was attributable to
higher provisions in Domestic and International Banking, and lower net
recoveries in the Scotia Capital portfolio. Further discussion on credit risk
is provided below.
Non-interest expenses and productivity
Non-interest expenses were $1,669 million this quarter, $55 million or 3%
lower than the same period last year. This decrease was primarily from lower
performance-based compensation, due mainly to a decline in trading revenues, a
reduction in stock-based compensation expenses from a lower share price, and
the positive impact of foreign currency translation. There were also declines
in advertising expenditures and business taxes. Offsetting these were the
impact of acquisitions and increasing salaries due to growth initiatives.
Compared to the fourth quarter, non-interest expenses were down $123
million or 7%. This reduction was across most expense categories, as expenses
are seasonally lower in the first quarter. Remuneration and benefit expenses
were up as higher salaries, stock-based compensation and benefit expenses were
only partially offset by lower performance-based compensation.
The productivity ratio, a measure of the Bank's efficiency, was 56.5%,
compared to 53.6% in the same quarter last year and 54.4% 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 negative
4.9% compared to a year ago, driven primarily by the weaker trading results,
lower net gains on non-trading securities, and a reduced net interest margin.
Taxes
The effective tax rate for this quarter was 18.2%, down from 21.0% in the
first quarter last year, but an increase from 17.1% in the fourth quarter. The
decrease from a year ago was due primarily to a reduction in the statutory tax
rate in Canada and higher tax-exempt dividend income. Compared to the previous
quarter, there were lower tax savings from the Bank's foreign operations and
lower tax-exempt dividend income.
Risk management
The Bank's risk management policies and practices are unchanged from
those outlined in pages 56 to 67 of the 2007 Annual Report.
Credit risk
Credit conditions remained stable in most of the Bank's lending markets.
The provision for credit losses was $111 million in the first quarter,
compared to $63 million in the same period last year and $95 million in the
previous quarter.
Scotia Capital had net recoveries of $10 million in the first quarter,
compared to net recoveries of $30 million in the first quarter of last year
and net recoveries of $10 million in the previous quarter. The net recovery in
the current quarter related primarily to provision reversals in the Canadian
and European portfolios, partly offset by a new provision.
Credit losses of $91 million in the Domestic Banking portfolios were up
from $74 million in the same quarter last year and $78 million in the previous
quarter. Retail provisions were higher than the same period last year and the
prior quarter, in line with portfolio growth and increases reflecting the
acquisition of Travelers Leasing. Commercial provisions increased modestly
from very low levels over the same period last year and the previous quarter,
spread over a number of sectors and several small accounts.
International Banking's provision for credit losses was $30 million in
the first quarter, compared to $19 million in the same period last year and
$27 million in the prior quarter. The increase in provision for credit losses
from the same period last year was due mainly to higher provisions in the
retail portfolios, offset partially by higher net recoveries in the commercial
portfolio. The increase in provision for credit losses compared to the
previous quarter was attributable primarily to higher provisions in the Mexico
retail portfolios. Retail provisions in Mexico a year ago and in the previous
quarter benefited from higher reversals for provisions that were no longer
required.
Total net impaired loans, after deducting the allowance for specific
credit losses, were $689 million as at January 31, 2008, an increase of
$88 million from last quarter. The general allowance of $1,298 million was
unchanged from last quarter.
The Bank has both direct and indirect exposures to monoline insurance
companies. The direct credit exposure is to three monolines by way of lending
and derivative facilities. Exposures to two of these monolines are not
significant. The Bank has purchased a CDO tranche from the other monoline; the
CDO tranche is referenced primarily to investment grade corporate and
sovereign names. The mark-to-market exposure to the Bank of this transaction
was $161 million as at January 31, 2008. In the first quarter, the Bank took a
reserve of $80 million against this exposure as a reduction to trading
revenues.
The indirect exposure is in the form of guarantees which provide
enhancement to public finance and other transactions, where the Bank has
provided credit facilities to either the issuers of securities or facilities
which hold such securities. The total of all such facilities is
US$4.4 billion. The securities related to these facilities are primarily rated
investment grade without the guarantee, and represent risk the Bank would take
without the availability of the guarantee.
Market risk
Value at Risk (VaR) is a key measure of market risk in the Bank's trading
activities. In the first quarter, the average one-day VaR was $16.6 million
compared to $9.2 million for the same quarter last year. The change was the
result of increased interest rate, commodity and equity risk exposure as well
as increased market volatility. In the first quarter, the average one-day VaR
was $16.6 million compared to $13.2 million in the previous quarter. The
increase was due to higher interest rate and commodity exposure, partially
offset by reduced equity and foreign exchange risk. The increase in the
interest rate VaR was due primarily to structured credit trading during the
quarter, as well as the impact of increased market volatility noted above. As
at January 31, 2008, VaR had increased to $19.3 million due to structured
credit trading.Average for the three months ended
-------------------------------------------------------------------------
Risk factor January 31 October 31 January 31
($ millions) 2008 2007 2007
-------------------------------------------------------------------------
Interest rate $ 13.8 $ 9.2 $ 7.2
Equities 4.5 6.1 3.6
Foreign exchange 0.9 2.4 1.9
Commodities 2.7 1.5 0.7
Diversification (5.3) (6.0) (4.2)
-------------------------------------------------------------------------
All-Bank VaR $ 16.6 $ 13.2 $ 9.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------There were 13 trading loss days in the first quarter, compared to nine
days 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 January 31, 2008, liquid assets were $114 billion or 25% of
total assets, compared to $103 billion or 25% of total assets as at October
31, 2007. These assets consist of securities, 67%, and cash and deposits with
banks, 33% (October 31, 2007 - 71% and 29%, 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 January 31, 2008, total assets
pledged or sold under repurchase agreements were $73 billion, compared to
$68 billion as at October 31, 2007. The quarter-over-quarter increase was
attributable to higher levels of pledges for securities sold under repurchase
agreements.
Related party transactions
There were no changes to the Bank's procedures and policies for related
party transactions from those outlined on pages 72 and 122 of the 2007 Annual
Report. All transactions with related parties continued to be at market terms
and conditions.
Balance sheet
The Bank's total assets as at January 31, 2008, were $449 billion, up
$38 billion or 9% from October 31, 2007, including an $11 billion impact from
foreign currency translation as the Canadian dollar spot rate declined. The
growth was widespread across most asset categories, including retail,
commercial and corporate lending.
The Bank's loan portfolio grew $21 billion or 9% from October 31, 2007,
including $5 billion from foreign currency translation, primarily in
non-retail lending. On the retail lending side, domestic residential mortgage
growth was $1 billion, after securitization of $2 billion, driven largely by
the continued demand arising from the strong domestic housing market. The
International acquisition of Banco del Desarrollo in Chile contributed
$1 billion to the increase in mortgages this quarter. Personal loans were up
$2 billion from last quarter, with all regions experiencing positive growth.
Business and government loans increased $16 billion this quarter, or
$12 billion excluding the impact of foreign currency translation. Loans in
Scotia Capital were up $6 billion, both on the corporate lending side as well
as to support trading operations. Domestic Banking experienced commercial
lending growth of $1 billion. In International Banking, business and
government loans increased $7 billion. The acquisition of Banco del Desarrollo
contributed $4 billion, and Asia and the Caribbean grew $2 billion and $1
billion, respectively.
Interest-bearing deposits with banks grew $6 billion in the quarter, as
the Bank increased its liquid assets.
Securities increased by $6 billion from the previous quarter.
Available-for-sale securities increased $5 billion, primarily in government
and corporate securities. Trading securities increased $1 billion, due almost
entirely to the impact of foreign currency translation. As at January 31,
2008, the unrealized gains on available-for-sale securities were $855 million
(after related derivative and hedge amounts), down $122 million from last
quarter, due mainly to gains realized during the quarter, the impact of
foreign currency translation, and a reduction in the value of certain debt
securities from widening credit spreads.
The available-for-sale securities as at January 31, 2008, included
investments of $1,363 million in collateralized debt obligations
(CDOs)/collateralized loan obligations (CLOs), $144 million in third-party
Canadian asset-backed commercial paper (ABCP) and $23 million in structured
investment vehicles (SIVs). Exposure to U.S. sub-prime mortgage risk in these
securities is nominal.
Total liabilities were $429 billion as at January 31, 2008, an increase
of $37 billion or 9% from October 31, 2007, or $26 billion before the
$11 billion impact of foreign currency translation. As well, there was an
increase in obligations related to repurchase agreements of $5 billion.
Total deposits were up $28 billion or 10%, including $8 billion due to
foreign currency translation. Personal deposits increased $7 billion,
including $1 billion due to the acquisition of Banco del Desarrollo and
$1 billion organic growth in domestic personal GICs. Business and government
deposits were up $15 billion, including the impact of foreign currency
translation of $5 billion, primarily to fund the Bank's strong asset growth in
the quarter. Deposits by banks also increased $6 billion from the previous
quarter, led by the Pacific region with a growth of $5 billion, in part due to
foreign currency translation.
Total shareholders' equity rose $1 billion in the quarter. The increase
was due primarily to strong internal capital generation of $351 million, the
issuance of $230 million non-cumulative preferred shares and $562 million in
accumulated other comprehensive income, due mainly to unrealized foreign
exchange gains relating to the Bank's foreign operations.
Capital management
Implementation of the revised Basel framework
The revised Basel Capital framework (Basel II) became effective for
Canadian banks on November 1, 2007. Basel II is designed to more closely align
regulatory capital requirements with the individual risk profile of banks by
introducing substantive changes to capital requirements for credit risk and an
explicit new capital charge for operational risk.
Under Basel II, there are two main methods for computing credit risk: the
standardized approach, which uses prescribed risk weights; and internal
ratings based approaches, which allow the use of a bank's internal models to
calculate some, or all, of the key inputs into the regulatory capital
calculation. The Advanced Internal Ratings Based Approach (AIRB) users are
required to have sophisticated risk management systems for the calculation of
credit risk regulatory capital and application of this approach could result
in less regulatory capital than the use of the alternative approaches.
Once banks demonstrate full compliance with the AIRB requirements, and
OSFI has approved its use, they may proceed to apply the AIRB approach in
computing capital requirements. However, in order to limit sudden declines in
the capital levels for the industry in aggregate, capital floors were
introduced for the first two years after full implementation of AIRB. A
capital floor of 90% of the Basel I calculation will apply in the first year
of full approval and 80% in the second year, if required.
The Bank received approval, with conditions, from OSFI to use AIRB for
material Canadian, U.S. and European portfolios effective November 1, 2007.
The remaining credit portfolios are targeted for implementation of AIRB in
November 2010. In the interim period, the Bank will use the standardized
approach for these portfolios. As well, the Bank is using the standardized
approach to calculate the operational risk capital requirements. The Bank is
expected to recognize a reduction in capital requirements in the second
quarter of 2008.
Capital ratios
The Bank continues to maintain a solid capital position. The Tier 1 and
the Total capital ratios as at January 31, 2008 under Basel II were 9.0% and
10.2%, respectively, approximately 30 basis points lower than both ratios at
October 31, 2007. The decline in the ratios reflects strong growth in
risk-weighted assets across the business lines, which were only partially
offset by internally generated capital, as well as the issuance of $230
million of non-cumulative preferred shares and $394 million in subordinated
debentures. The implementation of Basel II had minimal impact on the change in
the capital ratios this quarter due to the approval conditions in place.
The tangible common equity (TCE) ratio was 7.2% as at January 31, 2008,
and remained unchanged from October 31, 2007.
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 above.
The methods of determining the fair value of financial instruments are
detailed on pages 69 to 70 of the 2007 Annual Report. 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 $1,484 billion at January 31,
2008, compared to $1,287 billion at October 31, 2007, with the change
occurring across most 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 $27 billion, compared to
$22 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 other
commitments. No material contractual obligations were entered into this
quarter that are not in the ordinary course of business. Processes for review
and approval of these contractual arrangements are unchanged from last year.
During the quarter, the Bank did not enter into any significant new
arrangements with VIEs that are not consolidated by the Bank in its balance
sheet.
The Bank provides liquidity facilities, as well as partial credit
enhancements in certain instances, to commercial paper conduits administered
by the Bank and by third parties. These facilities provide an alternate source
of financing in the event a conduit cannot issue commercial paper or, in some
cases, when certain specified conditions or performance measures are not met.
Liquidity facilities to commercial paper conduits totaled $21.6 billion as at
January 31, 2008, of which $19.9 billion were to off-balance sheet conduits
administered by the Bank. As at January 31, 2008, total commercial paper
outstanding for off-balance sheet conduits administered by the Bank was
$13.5 billion. At quarter end, the Bank held less than 3% of the combined
conduits' outstanding commercial paper. Exposure to U.S. sub-prime mortgage
risk is nominal.
For conduits not administered by the Bank, liquidity facilities totaled
$1.7 billion, of which $1.6 billion were for U.S. third-party conduits and
$95 million were for Canadian third-party conduits. This was down from
$2.4 billion last quarter, mainly as a result of lower facilities to Canadian
third-party conduits.
The Bank may securitize residential mortgages as a means to diversify its
funding sources, as it represents a cost-effective means to fund the growth in
this portfolio. A further $555 million in residential mortgages was
securitized this quarter, bringing the balance of outstanding mortgages
securitized to $11,165 million as at January 31, 2008, versus $11,631 million
at October 31, 2007.
Guarantees and other indirect commitments increased 2% from October 31,
2007. Fees from guarantees and loan commitment arrangements recorded in other
income were $53 million for the three-month period ended January 31, 2008,
compared to $56 million for the same period a year ago.
Common dividend
The Board of Directors, at its meeting on March 3, 2008, approved a
quarterly dividend of 47 cents per common share. This quarterly dividend
applies to shareholders of record as of April 1, 2008, and is payable April
28, 2008.
Outlook
U.S. economic activity has weakened significantly as a result of the
financial fallout from the sub-prime mortgage crisis. Even with an aggressive
easing of monetary policy and substantial fiscal stimulus, the U.S.
performance will likely be very subdued over the balance of 2008. Many
emerging nations in Latin America and Asia will also experience softer overall
growth in the year ahead.
Canadian economic activity has slowed moderately but will be cushioned by
recent monetary and fiscal stimulus, as well as the still buoyant demand for
energy and industrial commodities from emerging nations.
The softer economic conditions, weaker first quarter results and the
continued uncertainty in capital markets, will pose a challenge to the Bank in
achieving its 2008 financial objectives. However, with funding costs beginning
to improve, strong volume growth in our business lines, and the Bank's
increased attention to managing costs, the outlook for the balance of the year
is expected to improve. In addition, the pressure of the rapid rise of the
Canadian dollar in 2007 will have a much reduced impact in the second half of
the year. As a result of the above factors, the Bank is maintaining the
financial objectives established at the beginning of the year and is confident
that action is being taken to achieve the objectives.Business Segment Review
Domestic Banking
For the three months ended
-------------------------------------------------------------------------
(Unaudited) ($ millions) January 31 October 31 January 31
(Taxable equivalent basis)(1) 2008 2007 2007
-------------------------------------------------------------------------
Business segment income
Net interest income $ 991 $ 954 $ 953
Provision for credit losses 91 78 74
Other income 519 663 518
Non-interest expenses 889 927 870
Provision for income taxes 157 173 164
-------------------------------------------------------------------------
Net income $ 373 $ 439 $ 363
Preferred dividends paid 6 5 2
-------------------------------------------------------------------------
Net income available
to common shareholders $ 367 $ 434 $ 361
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on equity(1) 30.6% 37.0% 31.1%
Average assets ($ billions) $ 168 $ 163 $ 146
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer above for discussion of non-GAAP measures.Domestic Banking reported net income available to common shareholders of
$367 million this quarter, an increase of $6 million or 2% from the first
quarter of last year. Compared to the prior quarter, net income available to
common shareholders declined $66 million or 16%. However, excluding the gain
of $92 million (net of applicable taxes) from the global Visa restructuring
reported last quarter, net income available to common shareholders rose by
$25 million or 7%.
The segment contributed 45% of the Bank's total quarterly net income.
Return on equity was 30.6% versus 31.1% last year.
Average assets before securitization rose $22 billion or 14% from the
first quarter last year, due primarily to growth of $15 billion or 16% in
residential mortgages. Strong mortgage growth was recorded in all sales
channels, and resulted in market share gains. Personal revolving credit and
business lending volumes also increased. Personal deposit growth of $8 billion
or 10% led to industry-leading year-over-year market share gains. Growth was
recorded in term deposits as well as chequing and savings. The latter increase
was due mainly to the acquisition of Dundee Bank. Non-personal deposits rose
7% from growth in both non-personal term and current accounts. Compared to the
previous quarter, average assets before securitization rose $5 billion or 3%
led by growth in retail mortgages and commercial lending. Deposits increased
4% from growth in personal term and the impact of the Dundee Bank acquisition.
Total revenue was up $39 million or 3% from the same period last year,
mainly because of strong volume growth. Excluding the Visa gain reported last
quarter, total revenues were largely unchanged as higher net interest income
was offset by a decline in other income.
Net interest income of $991 million was up $38 million or 4% from the
first quarter of last year, driven by strong volume growth in both assets and
deposits. Average volume growth was reported for most products in retail,
small business and commercial banking. The impact of this growth was partially
offset by a decrease in the interest margin, caused by higher short-term
funding rates, increased wholesale funding requirements and the impact of
competitive markets on mortgage and GIC spreads. Compared to last quarter, net
interest income rose by 4%, due to an increase in the spread between prime and
funding costs. The margin increased by 2 basis points, following the recent
decline in interest rates.
Other income was $519 million this quarter, in line with the same quarter
last year. Higher foreign exchange commissions and card revenues were
partially offset by net securities writedowns and a decline in Wealth
Management revenues. The latter declined mainly in full-service brokerage due
to slower markets, partly offset by higher fee-based revenues in mutual funds
and Private Client Group. Compared to the previous quarter, other income fell
by 22%, mainly due to gain on the Visa reorganization recognized last quarter
and net securities writedowns this quarter.
The provision for credit losses was $91 million this quarter, up from
$74 million reported last year and $78 million last quarter. Retail provisions
increased mainly in line with portfolio growth. Auto lending provisions also
increased, reflecting the acquisition of Travelers Leasing. Commercial
provisions increased modestly from low levels last year and last quarter, and
were spread over a number of sectors and several small accounts.
Non-interest expenses rose 2% from the first quarter last year, due in
part to the acquisition of Dundee Bank and Travelers Leasing, new branches and
sales staff introduced in 2007, and other growth initiatives. Expenses
declined 4% from last quarter, due to lower project-related spending and
seasonality. These decreases were partially offset by the impact of annual
salary increases and the acquisition of Dundee Bank.International Banking
For the three months ended
-------------------------------------------------------------------------
(Unaudited) ($ millions) January 31 October 31 January 31
(Taxable equivalent basis)(1) 2008 2007 2007
-------------------------------------------------------------------------
Business segment income
Net interest income $ 731 $ 710 $ 670
Provision for credit losses 30 27 19
Other income 309 380 297
Non-interest expenses 568 582 562
Provision for income taxes 122 89 43
Non-controlling interest
in net income of subsidiaries 31 33 25
-------------------------------------------------------------------------
Net income $ 289 $ 359 $ 318
Preferred dividends paid 7 6 2
-------------------------------------------------------------------------
Net income available
to common shareholders $ 282 $ 353 $ 316
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on equity(1) 19.6% 21.3% 22.2%
Average assets ($ billions) $ 70 $ 65 $ 65
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer above for discussion of non-GAAP measures.International Banking's net income available to common shareholders in
the first quarter was $282 million, a decrease of $34 million or 11% from last
year and $71 million or 20% from last quarter. Excluding the $71 million
after-tax gains on the global Visa reorganization, the results were in line
with the prior quarter. The year-over-year decline was due mainly to the
negative impact of foreign currency translation of $39 million; excluding
this, net income was up $5 million. The modest increases reflected strong
volume growth throughout the division; however, the positive impact of
acquisitions was reduced by higher provisions for retail loan losses and taxes
in Mexico, and the change in fair value of certain securities resulting from
widening credit spreads.
The segment accounted for 35% of the Bank's total net income and had a
return on equity of 19.6%.
Average asset volumes of $70 billion increased $5 billion or 7% from last
year, despite the 16% negative impact of foreign currency translation. The
underlying increase was a result of the acquisition in Chile, a 20% rise in
commercial loans, primarily in Asia, and robust growth in mortgages and credit
cards, up 24% and 30%, respectively. Organic growth in low-cost deposits was
also strong at 12%. Compared to last quarter, average assets increased $5
billion or 7%, due to the same factors.
Total revenues were $1,040 million this quarter, an increase of
$73 million or 8% from the same period last year, including a $145 million
negative impact of foreign currency translation. Compared to last quarter,
revenues decreased $50 million, due primarily to the gains on the global Visa
reorganization last quarter.
Net interest income was $731 million this quarter, up $61 million or 9%
from the same period last year and $21 million or 3% above last quarter,
including the negative foreign currency translation impact of $103 million and
$16 million, respectively. The increases were a result of very strong organic
loan growth across the division, as well as the impact of acquisitions. Net
interest margins were up from last year, but below last quarter, due primarily
to declines in Mexico and Peru.
Other income increased $12 million or 4% year-over-year to $309 million,
despite the $42 million negative impact of foreign currency translation. This
growth resulted from acquisitions, higher gains on non-trading securities in
Latin America, and widespread transaction-driven growth, offset by the
negative impact of the change in fair value of certain non-trading securities.
Compared to last quarter, other income decreased $71 million, due to the
$91 million in Visa reorganization gains last quarter. The underlying growth
was a result of the same factors as the year-over-year growth.
The provision for credit losses was $30 million in the first quarter, up
$11 million from the same period last year and $3 million from last quarter.
The increase was due to higher provisions in Mexico, the Caribbean, and
Central America, partly offset by lower provisions in Peru and Asia. Overall,
the division had a credit loss ratio of 27 basis points, in line with the
prior quarter.
Non-interest expenses were $568 million this quarter, up 1% or $6 million
from last year. This included a $72 million favourable impact of foreign
currency translation and a $25 million increase from acquisitions. The
remaining increase was due to higher compensation expenses consistent with
business growth and new branch openings, and increased performance-based
compensation in Mexico. Compared to last quarter, expenses decreased
$14 million or 3%, due to expense recoveries in Latin America, and lower
advertising and premises expenses, partly offset by increased compensation and
benefit expenses.
The effective tax rate this quarter was 27.6%, up from 11.1% in the same
period last year and 18.4% from last quarter. The increases were due to a
higher effective tax rate in Mexico as tax loss carryforwards were fully
utilized, and the estimated value of future benefits from other tax attributes
being reduced. In addition, there were lower earnings in low-tax jurisdictions
this quarter, primarily in Asia, with the prior quarter benefiting from the
lower rate of tax on the Visa gains.Scotia Capital
For the three months ended
-------------------------------------------------------------------------
(Unaudited) ($ millions) January 31 October 31 January 31
(Taxable equivalent basis)(1) 2008 2007 2007
-------------------------------------------------------------------------
Business segment income
Net interest income $ 274 $ 364 $ 269
Provision for credit losses (10) (10) (30)
Other income 131 156 361
Non-interest expenses 191 225 259
Provision for income taxes 33 76 105
-------------------------------------------------------------------------
Net income $ 191 $ 229 $ 296
Preferred dividends paid 4 3 2
-------------------------------------------------------------------------
Net income available
to common shareholders $ 187 $ 226 $ 294
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on equity(1) 22.6% 24.2% 30.7%
Average assets ($ billions) $ 157 $ 150 $ 150
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer above for discussion of non-GAAP measures.Scotia Capital contributed net income available to common shareholders of
$187 million this quarter, a decrease of $107 million or 36% from the same
period last year and down $39 million or 17% from last quarter. The decreases,
compared both to last year and to the previous quarter, were due mainly to
lower trading revenues, partly offset by lower expenses. Return on equity, at
22.6%, was below the strong level last year, which was buoyed by solid trading
performance and interest and loan loss recoveries. Return on equity this
quarter was slightly lower than last quarter's performance. Scotia Capital
contributed 23% to the Bank's overall results.
Total average assets increased 5% over last year to $157 billion. There
was an increase of $6 billion in trading securities and loans to support both
client-driven activities and trading opportunities. In addition, there was a
$4 billion or 12% increase in average corporate loans and acceptances across
all businesses, primarily from growth in investment grade loans. These
increases were partially offset by a net $3 billion reduction in securities
purchased under resale agreements and deposits with banks. The increase of
$7 billion or 5% from the last quarter reflects growth in both trading and
corporate lending assets, partially offset by reduced securities purchased
under resale agreements.
Total revenues of $405 million decreased $225 million or 36% compared to
the first quarter last year. This was from a substantial decline in Global
Capital Markets revenues due to challenging market conditions in derivatives
and equity trading. This included $42 million in losses on structured credit
instruments and $80 million in losses on a swap exposure to a monoline
insurer. There was also a reduction in Global Corporate and Investment Banking
revenues due to lower interest recoveries from impaired loans and lower credit
and advisory fees. The $115 million or 22% decline from last quarter was due
primarily to lower tax-exempt dividend income and equity trading revenues and
lower securities gains in the United States and Europe.
Net interest income of $274 million increased slightly over the same
period last year. A modest increase in interest from trading operations and
loan growth was partly offset by lower loan origination fees and lower
interest recoveries on impaired loans. The decrease from the previous quarter
was due primarily to lower tax-exempt dividend income.
This quarter, net recoveries were $10 million compared to net recoveries
of $30 million in the same period last year and reversals of $10 million last
quarter. Net reversals were realized in Canada and Europe this quarter, and
predominantly in the United States in the comparative periods.
Other income was $131 million, a significant decrease of $230 million or
64% from last year. Global Capital Markets decreased $200 million as trading
revenues in derivatives and equities declined substantially given challenging
market conditions. This included an $80 million writedown on a swap exposure
to a monoline insurer. However, precious metals and fixed income trading
continued to generate solid revenues, while foreign exchange had record
revenues. Global Corporate and Investment Banking declined 20% due to lower
credit and advisory fees and lower securities gains. Compared to last quarter,
other income declined 16% due primarily to lower securities gains. In Global
Capital Markets, record foreign exchange revenues and stronger fixed income
trading substantially offset the gain on the sale of the bond index business
recognized in the prior quarter.
Non-interest expenses were $191 million this quarter, a $68 million or
26% decrease from the same period last year, due primarily to lower
performance-based compensation, signing bonuses and pension and benefits
costs. Compared to last quarter, lower performance-based compensation and
signing bonuses were somewhat offset by higher pension and benefits costs.Other(1)
For the three months ended
-------------------------------------------------------------------------
(Unaudited) ($ millions) January 31 October 31 January 31
(Taxable equivalent basis)(2) 2008 2007 2007
-------------------------------------------------------------------------
Business segment income
Net interest income(3) $ (182) $ (312) $ (116)
Other income 66 163 157
Non-interest expenses 21 58 33
Provision for income taxes(3) (119) (134) (35)
-------------------------------------------------------------------------
Net income $ (18) $ (73) $ 43
Preferred dividends paid 4 2 2
-------------------------------------------------------------------------
Net income (loss) available
to common shareholders $ (22) $ (75) $ 41
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Average assets ($ billions) $ 34 $ 31 $ 30
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 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 January 31, 2008 ($118), October 31, 2007 ($216), and
January 31, 2007 ($105), to arrive at the amounts reported in the
Consolidated Statement of Income.Net income available to common shareholders was a loss of $22 million in
the first quarter, an improvement of $53 million from last quarter, but
$63 million below the same quarter last year.
Net interest income and the provision for income taxes include the
elimination of tax-exempt income gross up. This amount is included in the
operating segments, which are reported on a taxable equivalent basis. The
elimination was $118 million in the first quarter, compared to $216 million
last quarter and $105 million in the same period last year.
Net interest income increased $130 million quarter over quarter, due
mainly to the elimination of a lower tax-exempt gross up. Compared to last
year, net interest income decreased by $66 million as a result of change in
fair value of derivatives used for asset/liability management, and higher
tax-exempt gross up.
Other income of $66 million was $97 million below last quarter and a
decrease of $91 million from last year. These declines primarily reflected
lower gains on non-trading securities including writedowns, partially offset
by higher securitization revenues.
Non-interest expenses were $21 million this quarter, a decline of
$37 million from last quarter and $12 million below last year. The
quarter-over-quarter decrease was due largely to higher litigation expenses in
the prior quarter.Total
For the three months ended
-------------------------------------------------------------------------
January 31 October 31 January 31
(Unaudited) ($ millions) 2008 2007 2007
-------------------------------------------------------------------------
Business segment income
Net interest income $ 1,814 $ 1,716 $ 1,776
Provision for credit losses 111 95 63
Other income 1,025 1,362 1,333
Non-interest expenses 1,669 1,792 1,724
Provision for income taxes 193 204 277
Non-controlling interest
in net income of subsidiaries 31 33 25
-------------------------------------------------------------------------
Net income $ 835 $ 954 $ 1,020
Preferred dividends paid 21 16 8
-------------------------------------------------------------------------
Net income available
to common shareholders $ 814 $ 938 $ 1,012
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on equity(1) 18.3% 21.0% 22.1%(2)
Average assets ($ billions) $ 429 $ 409 $ 391
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer above for a discussion of non-GAAP measures
(2) Certain comparative amounts in this quarterly report have been
restated to conform with current period presentation
Geographic Highlights
For the three months ended
-------------------------------------------------------------------------
January 31 October 31 January 31
(Unaudited) 2008 2007 2007
-------------------------------------------------------------------------
Net income available
to common shareholders
($ millions)
Canada $ 494 $ 560 $ 544
United States 22 97 163
Mexico 63 122 147
Other international 252 237 212
Corporate adjustments (17) (78) (54)
-------------------------------------------------------------------------
$ 814 $ 938 $ 1,012
-------------------------------------------------------------------------
Average assets ($ billions)
Canada $ 285 $ 278 $ 252
United States 29 27 33
Mexico 20 20 22
Other international 86 77 77
Corporate adjustments 9 7 7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ 429 $ 409 $ 391
-------------------------------------------------------------------------
Quarterly Financial Highlights
For the three months ended
-------------------------------------------------------------------------
Jan. Oct. July April Jan. Oct. July April
31 31 31 30 31 31 31 30
2008 2007 2007 2007 2007 2006 2006 2006
-------------------------------------------------------------------------
Total revenue
($ millions) $2,839 $3,078 $3,201 $3,102 $3,109 $2,868 $2,889 $2,717
Total revenue
(TEB(1))
($ millions) 2,957 3,294 3,302 3,211 3,214 2,999 2,989 2,830
Net income
($ millions) 835 954 1,032 1,039 1,020 897 936 894
Basic earnings
per share ($) 0.83 0.95 1.03 1.04 1.02 0.90 0.94 0.90
Diluted earnings
per share ($) 0.82 0.95 1.02 1.03 1.01 0.89 0.93 0.89
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer above for a discussion of non-GAAP measures.
Share Data
As at
-------------------------------------------------------------------------
January 31
(thousands of shares outstanding) 2008
-------------------------------------------------------------------------
Common shares 985,418(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)
Preferred shares Series 16 13,800(6)
Preferred shares Series 17 9,200(7)
-------------------------------------------------------------------------
Series 2000-1 trust securities issued by BNS Capital Trust 500(8)
Series 2002-1 trust securities
issued by Scotiabank Capital Trust 750(9)
Series 2003-1 trust securities
issued by Scotiabank Capital Trust 750(9)
Series 2006-1 trust securities
issued by Scotiabank Capital Trust 750(9)
-------------------------------------------------------------------------
Scotiabank Trust Subordinated Notes
- Series A issued by Scotiabank Subordinated Notes Trust 1,000(9)
-------------------------------------------------------------------------
Outstanding options granted under the
Stock Option Plans to purchase common shares 28,461(1)(10)
-------------------------------------------------------------------------
(1) As at February 19, 2008, the number of outstanding common shares and
options were 985,518 and 28,360, 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.
(5) These shares are entitled to non-cumulative preferential cash
dividends payable quarterly in an amount of $0.28125 per share.
(6) These shares are entitled to non-cumulative preferential cash
dividends payable quarterly in an amount of $0.328125 per share,
except for the initial dividend paid on January 29, 2008, which was
in an amount of $0.39195 per share.
(7) These shares are entitled to non-cumulative preferential cash
dividends payable quarterly in an amount of $0.35 per share except
for the initial dividend, if and when declared, will be payable on
April 28, 2008, which will be payable in an amount of $0.33753 per
share.
(8) Reported in capital instrument liabilities in the Consolidated
Balance Sheet.
(9) Reported in deposits in the Consolidated Balance Sheet.
(10) Included are 17,712 stock options with tandem stock appreciation
right (SAR) features.
Further details, including convertibility features, are available in Notes
13, 14 and 16 of the October 31, 2007 consolidated financial statements
presented in the 2007 Annual Report, and Note 5 further below.Accounting Policies and Estimates
The interim consolidated financial statements have been prepared in
accordance with Canadian Generally Accepted Accounting Principles (GAAP). See
Note 1 to the 2007 annual consolidated financial statements for more
information about the significant accounting principles used to prepare the
financial statements. There were no significant accounting policies adopted by
the Bank during the first quarter of 2008.
The key assumptions and bases for estimates that management has made
under GAAP, and their impact on the amounts reported in the interim
consolidated financial statements and notes, remain substantially unchanged
from those described in our 2007 Annual Report.INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Income
For the three months ended
-------------------------------------------------------------------------
January 31 October 31 January 31
(Unaudited) ($ millions) 2008 2007 2007
-------------------------------------------------------------------------
Interest income
Loans $ 3,825 $ 3,668 $ 3,377
Securities 1,168 1,071 1,131
Securities purchased
under resale agreements 229 320 330
Deposits with banks 319 303 251
-------------------------------------------------------------------------
5,541 5,362 5,089
-------------------------------------------------------------------------
Interest expense
Deposits 3,078 2,968 2,526
Subordinated debentures 24 23 33
Capital instrument liabilities 9 13 13
Other 616 642 741
-------------------------------------------------------------------------
3,727 3,646 3,313
-------------------------------------------------------------------------
Net interest income 1,814 1,716 1,776
Provision for credit losses (Note 3) 111 95 63
-------------------------------------------------------------------------
Net interest income after
provision for credit losses 1,703 1,621 1,713
-------------------------------------------------------------------------
Other income
Card revenues 95 92 93
Deposit and payment services 207 204 206
Mutual funds 78 78 68
Investment management,
brokerage and trust services 186 185 188
Credit fees 133 126 132
Trading revenues (44) (67) 149
Investment banking 164 164 194
Net gain on securities, other than trading 20 148 127
Other 186 432 176
-------------------------------------------------------------------------
1,025 1,362 1,333
-------------------------------------------------------------------------
Net interest and other income 2,728 2,983 3,046
-------------------------------------------------------------------------
Non-interest expenses
Salaries and employee benefits 978 963 1,003
Premises and technology 327 362 327
Communications 75 76 73
Advertising and business development 69 94 76
Professional 45 81 45
Business and capital taxes 14 33 39
Other 161 183 161
-------------------------------------------------------------------------
1,669 1,792 1,724
-------------------------------------------------------------------------
Income before the undernoted 1,059 1,191 1,322
Provision for income taxes 193 204 277
Non-controlling interest in
net income of subsidiaries 31 33 25
-------------------------------------------------------------------------
Net income $ 835 $ 954 $ 1,020
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Preferred dividends paid 21 16 8
-------------------------------------------------------------------------
Net income available
to common shareholders $ 814 $ 938 $ 1,012
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of common
shares outstanding (millions):
Basic 985 983 991
Diluted 992 991 1,001
-------------------------------------------------------------------------
Earnings per common share (in dollars):
Basic $ 0.83 $ 0.95 $ 1.02
Diluted $ 0.82 $ 0.95 $ 1.01
-------------------------------------------------------------------------
Dividends per common share (in dollars) $ 0.47 $ 0.45 $ 0.42
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Certain comparative amounts have been reclassified to conform with
current period presentation.
The accompanying notes are an integral part of these interim consolidated
financial statements.
Consolidated Balance Sheet
As at
-------------------------------------------------------------------------
January 31 October 31 January 31
(Unaudited) ($ millions) 2008 2007 2007
-------------------------------------------------------------------------
Assets
Cash resources
Cash and non-interest-bearing
deposits with banks $ 2,816 $ 2,138 $ 2,508
Interest-bearing deposits with banks 29,431 23,011 20,277
Precious metals 4,164 4,046 3,599
-------------------------------------------------------------------------
36,411 29,195 26,384
-------------------------------------------------------------------------
Securities
Trading 60,702 59,685 64,307
Available-for-sale 32,992 28,426 36,037
Equity accounted investments 788 724 171
-------------------------------------------------------------------------
94,482 88,835 100,515
-------------------------------------------------------------------------
Securities purchased
under resale agreements 20,362 22,542 24,129
-------------------------------------------------------------------------
Loans
Residential mortgages 105,532 102,154 92,055
Personal and credit cards 43,513 41,734 39,757
Business and government 101,389 85,500 83,067
-------------------------------------------------------------------------
250,434 229,388 214,879
Allowance for credit losses (Note 3) 2,451 2,241 2,620
-------------------------------------------------------------------------
247,983 227,147 212,259
-------------------------------------------------------------------------
Other
Customers' liability under acceptances 12,518 11,538 10,431
Derivative instruments 25,217 21,960 12,529
Land, buildings and equipment 2,460 2,271 2,344
Goodwill 1,266 1,134 1,121
Other intangible assets 273 273 317
Other assets 8,450 6,615 6,441
-------------------------------------------------------------------------
50,184 43,791 33,183
-------------------------------------------------------------------------
$449,422 $411,510 $396,470
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and shareholders' equity
Deposits
Personal $108,219 $100,823 $ 96,823
Business and government 175,772 161,229 148,995
Banks 32,806 26,406 31,201
-------------------------------------------------------------------------
316,797 288,458 277,019
-------------------------------------------------------------------------
Other
Acceptances 12,518 11,538 10,431
Obligations related to securities
sold under repurchase agreements 32,967 28,137 29,612
Obligations related
to securities sold short 13,570 16,039 18,201
Derivative instruments 25,046 24,689 12,106
Other liabilities 25,333 21,138 25,725
Non-controlling interest in subsidiaries 548 497 491
-------------------------------------------------------------------------
109,982 102,038 96,566
-------------------------------------------------------------------------
Subordinated debentures (Note 4) 2,150 1,710 2,340
-------------------------------------------------------------------------
Capital instrument liabilities 500 500 750
-------------------------------------------------------------------------
Shareholders' equity
Capital stock
Preferred shares (Note 5) 1,865 1,635 945
Common shares and contributed surplus 3,614 3,566 3,520
Retained earnings 17,809 17,460 16,376
Accumulated other
comprehensive income (loss) (Note 6) (3,295) (3,857) (1,046)
-------------------------------------------------------------------------
19,993 18,804 19,795
-------------------------------------------------------------------------
$449,422 $411,510 $396,470
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Certain comparative amounts have been reclassified to conform with
current period presentation.
The accompanying notes are an integral part of these interim consolidated
financial statements.
Consolidated Statement of Changes in Shareholders' Equity
For the three months ended
-------------------------------------------------------------------------
January 31 January 31
(Unaudited) ($ millions) 2008 2007
-------------------------------------------------------------------------
Preferred shares
Balance at beginning of period $ 1,635 $ 600
Issued 230 345
-------------------------------------------------------------------------
Balance at end of period 1,865 945
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Common shares and contributed surplus
Common shares
Balance at beginning of period 3,566 3,425
Issued 48 95
-------------------------------------------------------------------------
Balance at end of period 3,614 3,520
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings
Balance at beginning of period 17,460 15,843
Cumulative effect of adopting
new accounting policies - (61)(1)
-------------------------------------------------------------------------
17,460 15,782
Net income 835 1,020
Dividends:
Preferred (21) (8)
Common (463) (416)
Other (2) (2)
-------------------------------------------------------------------------
Balance at end of period 17,809 16,376
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
Balance at beginning of period (3,857) (2,321)
Cumulative effect of adopting
new accounting policies - 683(1)
Other comprehensive income 562 592
-------------------------------------------------------------------------
Balance at end of period (3,295) (1,046)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total shareholders' equity at end of period $ 19,993 $ 19,795
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statement of Comprehensive Income
For the three months ended
-------------------------------------------------------------------------
January 31 January 31
(Unaudited) ($ millions) 2008 2007
-------------------------------------------------------------------------
Comprehensive income
Net income $ 835 $ 1,020
-------------------------------------------------------------------------
Other comprehensive income (loss),
net of income taxes (Note 6):
Net change in unrealized
foreign currency translation losses 885 522
Net change in unrealized gains
on available-for-sale securities (60) 48
Net change in gains (losses) on derivative
instruments designated as cash flow hedges (263) 22
-------------------------------------------------------------------------
Other comprehensive income 562 592
-------------------------------------------------------------------------
Comprehensive income $ 1,397 $ 1,612
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Certain comparative amounts have been reclassified to conform with
current period presentation.
(1) Refer to Note 1 for discussion of new accounting policies related to
financial instruments adopted in the first quarter of 2007.
The accompanying notes are an integral part of these interim consolidated
financial statements.
Condensed Consolidated Statement of Cash Flows
For the three months ended
-------------------------------------------------------------------------
Sources (uses) of cash flows January 31 January 31
(Unaudited) ($ millions) 2008 2007
-------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 835 $ 1,020
Adjustments to determine net cash flows
from (used in) operating activities 239 (49)
Net accrued interest receivable and payable 244 118
Trading securities (331) (1,192)
Derivative assets (1,127) 181
Derivative liabilities (1,742) (1,178)
Other, net 854 (162)
-------------------------------------------------------------------------
(1,028) (1,262)
-------------------------------------------------------------------------
Cash flows from financing activities
Deposits 17,330 7,407
Obligations related to securities
sold under repurchase agreements 4,229 (4,636)
Obligations related to securities sold short (2,766) 4,650
Preferred shares issued 230 345
Common shares issued 36 65
Subordinated debentures issued 394 -
Cash dividends paid (484) (424)
Other, net 1,426 923
-------------------------------------------------------------------------
20,395 8,330
-------------------------------------------------------------------------
Cash flows from investing activities
Interest-bearing deposits with banks (5,179) (1,537)
Securities purchased under resale agreements 2,537 1,576
Loans, excluding securitizations (13,510) (7,749)
Loan securitizations 550 848
Securities, other than trading, net (2,035) 166
Land, buildings and equipment, net of disposals (95) (120)
Other, net(1) (1,046) (82)
-------------------------------------------------------------------------
(18,778) (6,898)
-------------------------------------------------------------------------
Effect of exchange rate changes
on cash and cash equivalents 89 58
-------------------------------------------------------------------------
Net change in cash and cash equivalents 678 228
Cash and cash equivalents at beginning of period 2,138 2,280
-------------------------------------------------------------------------
Cash and cash equivalents at end of period(2) $ 2,816 $ 2,508
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash disbursements made for:
Interest $ 3,653 $ 3,794
Income taxes $ 331 $ 283
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Certain comparative amounts have been reclassified to conform with
current period presentation.
(1) For the three months ended January 31, 2008, comprises investments
in subsidiaries, net of cash and cash equivalents at the date of
acquisition of $35 (January 31, 2007 - $3), and net of non-cash
consideration of common shares issued from treasury of nil
(January 31, 2007 - $4).
(2) Represents cash and non-interest-bearing deposits with banks.
The accompanying notes are an integral part of these interim consolidated
financial statements.
Notes to the Interim Consolidated Financial Statements (Unaudited)
These interim consolidated financial statements have been prepared in
accordance with Canadian Generally Accepted Accounting Principles (GAAP). They
should be read in conjunction with the consolidated financial statements for
the year ended October 31, 2007. The significant accounting policies used in
the preparation of these interim consolidated financial statements are
consistent with those used in the Bank's year-end audited consolidated
financial statements.
1. Changes in accounting policies
There were no new accounting policies adopted in the current fiscal
year. Note 1 to the Bank's 2007 annual audited consolidated financial
statements describes accounting policy changes.
2. Sales of loans through securitizations
The Bank securitizes residential mortgages through the creation of
mortgage-backed securities. No credit losses are expected, as the
mortgages are insured. For the quarter ended January 31, 2008, the
key weighted-average assumptions used to measure the fair value at
the dates of securitization were a prepayment rate of 20%, an excess
spread of 1.1% and a discount rate of 4.3%. The following table
summarizes the Bank's sales.
For the three months ended
---------------------------------------------------------------------
January 31 October 31 January 31
($ millions) 2008 2007 2007
---------------------------------------------------------------------
Net cash proceeds(1) $ 550 $ 992 $ 848
Retained interest 16 21 32
Retained servicing liability (4) (7) (7)
---------------------------------------------------------------------
562 1,006 873
Residential mortgages securitized 555 1,010 861
---------------------------------------------------------------------
Net gain (loss) on sale $ 7 $ (4) $ 12
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Excludes insured mortgages which were securitized and retained by
the Bank of $1,351 for the three months ended January 31, 2008
(October 31, 2007 - $1,267; January 31, 2007 - $526). As at
January 31, 2008, the outstanding balance of mortgage-backed
securities was $5,523, and these assets have been classified as
available-for-sale securities.
3. Impaired loans and allowance for credit losses
(a) Impaired loans
As at
---------------------------------------------------------------------
January 31 October 31
2008 2007
---------------------------------------------------------------------
Specific
($ millions) Gross allowance(1) Net Net
---------------------------------------------------------------------
By loan type:
Residential mortgages $ 457 $ 157 $ 300 $ 203
Personal and
credit cards 524 503 21 51
Business and
government 861 493 368 347
---------------------------------------------------------------------
Total $ 1,842 $ 1,153 $ 689 $ 601
---------------------------------------------------------------------
---------------------------------------------------------------------
By geography:
Canada $ 280 $ 231
United States 10 4
Other International 399 366
---------------------------------------------------------------------
Total $ 689 $ 601
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) The specific allowance for impaired loans evaluated on an
individual basis totalled $494 (October 31, 2007 - $383).
(b) Allowance for credit losses
The following table summarizes the change in the allowance for
credit losses.
For the three months ended
---------------------------------------------------------------------
January 31 October 31 January 31
($ millions) 2008 2007 2007
---------------------------------------------------------------------
Balance at beginning of period $ 2,252 $ 2,433 $ 2,618
Write-offs (194) (215) (168)
Recoveries 51 49 34
Provision for credit losses 111 95 63
Other, including foreign
exchange adjustment 242 (110) 84
---------------------------------------------------------------------
Balance at the end
of period(1)(2)(3) $ 2,462 $ 2,252 $ 2,631
---------------------------------------------------------------------
(1) As at January 31, 2008, includes $177 of specific allowance
relating to acquisitions of new subsidiaries (October 31, 2007 -
$54; January 31, 2007 - $26), which may change as the valuation
of the acquired loan assets is finalized.
(2) As at January 31, 2008, $11 has been recorded in other
liabilities (October 31, 2007 - $11; January 31, 2007 - $11).
(3) As at January 31, 2008, the general allowance for credit losses
was $1,298 (October 31, 2007 - $1,298; January 31, 2007 -
$1,323).
4. Subordinated debentures
Subordinated debentures totaling $300 million were issued on
January 31, 2008, and will mature on January 31, 2018. Interest is
payable semi-annually in arrears, commencing on July 31, 2008, at
5.30% per annum until January 31, 2013. From January 31, 2013, until
maturity, interest is payable at an annual rate equal to the 90-day
Bankers' Acceptance Rate plus 1.90%, payable quarterly commencing
April 30, 2013. The subordinated debentures are redeemable by the
Bank, at any time subject to written approval of the Superintendent
of Financial Institutions Canada.
The subordinated debentures qualify as Tier 2B capital.
Subordinated debentures totaling (Yen)10 billion were issued on
November 20, 2007, and will mature on November 20, 2037. Interest is
payable semi-annually in arrears, commencing on May 20, 2008, at an
annual rate of 3.015%. The subordinated debentures are redeemable by
the Bank on November 20, 2017, with the prior written approval of the
Superintendent of Financial Institutions Canada. The subordinated
debentures qualify as Tier 2B capital.
5. Capital management
The Bank has a capital management process in place to measure, deploy
and monitor its available capital and assess its adequacy. This
capital management process aims to achieve three major objectives:
exceed regulatory thresholds and meet longer-term internal capital
targets, maintain strong credit ratings and provide the Bank's
shareholders with acceptable returns.
Capital is managed in accordance with the Board-approved Capital
Management Policy. Senior executive management develop the capital
strategy and oversee the capital management processes of the Bank.
The Bank's Finance, Group Treasury and Global Risk Management (GRM)
groups are key in implementing the Bank's capital strategy and
managing capital. Capital is managed using both regulatory capital
measures and internal metrics.
Although the Bank is subject to several capital regulations in the
different business lines and countries in which the Bank operates,
capital adequacy is managed on a consolidated Bank basis. The Bank
also takes measures to ensure its subsidiaries meet or exceed local
regulatory capital requirements. The primary regulator of its
consolidated capital adequacy is the Office of the Superintendent
of Financial Institutions Canada (OSFI). The capital adequacy
regulations in Canada are largely consistent with international
standards set by the Bank for International Settlements. A revised
Basel Capital Framework (Basel II) was adopted by the Bank and other
Canadian banks effective this fiscal year.
Effective November 1, 2007, regulatory capital ratios are determined
in accordance with the revised capital framework, based on the
International Convergence of Capital Measurement and Capital
Standards: A Revised Framework, commonly known as Basel II. Changes
to the computation of regulatory capital from the previous framework
(Basel I) are primarily the amount and categorization of prescribed
inclusions and deductions from capital, such as the calculation of
the eligible allowance deduction and the deduction for specified
corporations (such as insurance entities and associated
corporations), which is now split between two categories of capital.
In addition, the computation of risk-weighted assets was revised to
more closely align risk weight parameters with the individual risk
profile of banks by introducing substantive changes to prescribed
risk weights for credit risk exposures, including the use of
internally derived credit risk parameters, and introducing an
explicit new risk weight for operational risk. Capital requirements
for market risk were generally unchanged.
Once banks demonstrate full compliance with the AIRB requirements,
and OSFI has approved its use, they may proceed to apply the AIRB
approach in computing capital requirements. However, in order to
limit sudden declines in the capital levels for the industry in
aggregate, capital floors were introduced for the first two years
after full implementation of AIRB. A capital floor of 90% of the
Basel I calculation will apply in the first year of full approval and
80% in the second year, if required.
The Bank received approval, with conditions, from OSFI to use AIRB
for material Canadian, U.S. and European portfolios effective
November 1, 2007. The remaining credit portfolios are targeted to
implement AIRB in November 2010. In the interim period, the Bank will
use the standardized approach for these portfolios. As well, the Bank
is using the standardized approach to calculate the operational risk
capital requirements.
Total regulatory capital is composed of Tier 1 and Tier 2 capital
as follows:
As at
---------------------------------------------------------------------
January 31 October 31
(unaudited) ($ millions) 2008(1) 2007(1)
---------------------------------------------------------------------
Shareholders' equity per
Consolidated Balance Sheet $ 19,993 $ 18,804
Add: Capital instrument liabilities
- trust securities 2,750 2,750
Non-controlling interest in subsidiaries 548 497
Less: Goodwill (1,266) (1,134)
Components of Accumulated other
comprehensive income excluded
from Tier 1 capital (369) (692)
Other capital deductions(2) (490) -
---------------------------------------------------------------------
Tier 1 capital $ 21,166 $ 20,225
---------------------------------------------------------------------
Qualifying subordinated debentures,
net of amortization 1,859 1,452
Capital instrument liabilities - trust
subordinated notes 1,000 1,000
Other net capital items(3) (151) 304
---------------------------------------------------------------------
Tier 2 capital $ 2,708 $ 2,756
---------------------------------------------------------------------
Total regulatory capital $ 23,874 $ 22,981
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Effective November 1, 2007, regulatory capital is determined in
accordance with Basel II. The comparative amounts as at
October 31, 2007, were determined in accordance with Basel I.
(2) Comprised primarily of 50% of investments in certain specified
corporations acquired after January 1, 2007. Prior to November 1,
2007, 100% of investments in certain specified corporations was
deducted from Tier 2 capital; commencing November 1, 2007, those
acquired after January 1, 2007, are now split 50:50 between
Tier 1 and Tier 2.
(3) Comprised mainly of eligible allowance for credit losses and net
after-tax unrealized gain on available-for-sale securities less
prescribed deductions including investments in specified
corporations.
The two primary regulatory capital ratios used to assess capital
adequacy are Tier 1 and Total capital ratios, which are determined by
dividing those capital components by risk-weighted assets. Risk-
weighted assets are computed by applying a combination of the Bank's
internal credit risk parameters and OSFI prescribed risk weights to
on-and off-balance sheet exposures.
The regulatory minimum ratios prescribed by OSFI are 7% for Tier 1
capital and 10% for Total capital. The Bank exceeded these minimum
ratio thresholds as at January 31, 2008. OSFI has also prescribed an
asset-to-capital leverage maximum of 20:1. The Bank was in compliance
with this threshold as at January 31, 2008.
Significant capital transactions
In the first quarter of 2007, the Bank initiated a normal course
issuer bid to purchase up to 20 million of the Bank's common shares.
This represented approximately 2% of the Bank's common shares
outstanding as at December 31, 2007. The bid terminated on
January 11, 2008. The Bank did not purchase any common shares
pursuant to this bid during the quarter.
Series 17 non-cumulative preferred shares totaling $230 million were
issued on January 31, 2008 and are entitled to non-cumulative
preferential cash dividends payable quarterly, if and when declared,
in an amount per share of $0.35. The initial dividend, if and when
declared, will be payable on April 28, 2008, and will be $0.33753 per
share. With regulatory approval, the shares may be redeemed by the
Bank on or after April 26, 2013, at $26.00 per share, together with
declared and unpaid dividends to the date then fixed for redemption,
and thereafter at annually declining premiums until April 26, 2017,
following which no redemption premium is payable. These preferred
shares qualify as Tier 1 capital.
6. Accumulated other comprehensive income (loss)
The components of accumulated other comprehensive income (loss) as at
January 31, 2008, and other comprehensive income (loss) for the three
months then ended were as follows:
Accumulated other comprehensive income (loss)
As at and for the three months ended
---------------------------------------------------------------------
Opening Net Ending
balance change balance
---------------------------------------------------------------------
October 31 January 31
($ millions) 2007 2008
---------------------------------------------------------------------
Unrealized foreign
currency translation
gains (losses),
net of hedging
activities $ (4,549) $ 885 $(3,664)(1)
Unrealized gains
(losses) on
available-for-sale
securities, net of
hedging activities 639 (60) 579(2)
Gains (losses)
on derivative
instruments
designated as
cash flow hedges 53 (263) (210)(3)
---------------------------------------------------------------------
Accumulated other
comprehensive
income (loss) $ (3,857) $ 562 $ (3,295)
---------------------------------------------------------------------
---------------------------------------------------------------------
As at and for the three months ended
---------------------------------------------------------------------
Opening Transition Net Ending
balance amount change balance
---------------------------------------------------------------------
October 31 November 1 January 31
($ millions) 2006 2006 2007
---------------------------------------------------------------------
Unrealized foreign
currency translation
gains (losses),
net of hedging
activities $ (2,321) $ - $ 522 $(1,799)(1)
Unrealized gains
(losses) on
available-for-sale
securities, net of
hedging activities - 706 48 754(2)
Gains (losses)
on derivative
instruments
designated as
cash flow hedges - (23) 22 (1)(3)
---------------------------------------------------------------------
Accumulated other
comprehensive
income (loss) $ (2,321) $ 683 $ 592 $ (1,046)
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Net of income tax expense of $333 (January 31, 2007 - nil).
(2) Net of income tax expense of $276 (January 31, 2007 - $414).
Also, the balance as at January 31, 2008 includes unrealized
losses of $277 (January 31, 2007 - $150) after tax on the
available-for-sale securities.
(3) Net of income tax benefit of $100 (January 31, 2007 - $1).
Other comprehensive income (loss)
The following table summarizes the changes in the components of other
comprehensive income (loss).
For the three months ended
---------------------------------------------------------------------
January 31 January 31
($ millions) 2008 2007
---------------------------------------------------------------------
Net change in unrealized foreign currency
translation losses
Net unrealized foreign currency
translation gains(1) $ 1,141 $ 892
Net losses on hedges of net investments in
self-sustaining foreign operations(2) (256) (370)
---------------------------------------------------------------------
885 522
---------------------------------------------------------------------
---------------------------------------------------------------------
Net change in unrealized gains on
available-for-sale securities
Net unrealized gains on available-for-sale
securities(3) 8 124
Reclassification of net gains to net income(4) (68) (76)
---------------------------------------------------------------------
(60) 48
---------------------------------------------------------------------
---------------------------------------------------------------------
Net change in gains (losses) on derivative
instruments designated as cash flow hedges
Net gains on derivative instruments designated
as cash flow hedges(5) 278 247
Reclassification of net gains to net income(6) (541) (225)
---------------------------------------------------------------------
(263) 22
---------------------------------------------------------------------
---------------------------------------------------------------------
Other comprehensive income $ 562 $ 592
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Net of income tax expense of nil (January 31, 2007 - nil).
(2) Net of income tax benefit of $94 (January 31, 2007 - nil).
(3) Net of income tax benefit of $46 (January 31, 2007 -
expense of $73).
(4) Net of income tax benefit of $16 (January 31, 2007 - $41).
(5) Net of income tax expense of $126 (January 31, 2007 - $125).
(6) Net of income tax benefit of $251 (January 31, 2007 - $113).
7. Financial instruments
Financial risk management
The Bank's principal business activities result in a balance sheet
that consists primarily of financial instruments. In addition, the
Bank uses derivative financial instruments for both trading and
asset/liability management purposes. The Bank has a comprehensive
risk management framework to monitor, evaluate and manage the
principal risks assumed in conducting its activities. The risks that
arise from transacting financial instruments include credit risk,
liquidity risk, operational risk and market risk. The Bank manages
these risks using extensive risk management policies and practices,
including various Board-approved risk management limits and
techniques.
The Bank's risk management framework has four main components, as
follows:
- Policies are defined for the Bank's risk tolerance and set the
limits and controls within which the Bank and its subsidiaries can
operate. These policies also reflect the requirements of
regulatory authorities and are approved by the Bank's Board of
Directors, either directly or through the Executive and Risk
Committee.
- Guidelines are developed to clarify risk limits and conditions
under which the Bank's risk policies are implemented.
- Processes are implemented to identify, evaluate, document, report
and control risk. Standards define the breadth and quality of
information required to make a decision.
- Compliance with risk policies, limits and guidelines is measured,
monitored and reported to ensure consistency against defined
goals.
Credit risk
Credit risk is the risk of loss resulting from the failure of a
borrower or counterparty to honour its financial or contractual
obligations to the Bank. The Board of Directors, either directly or
through the Executive and Risk Committee, reviews and approves the
Bank's credit risk strategy and credit risk policy on an annual
basis. The credit risk strategy defines target markets and risk
tolerances that are developed at an all-Bank level, and then further
refined at the business line level. The objectives of the credit risk
strategy are to ensure that, for the Bank, including the individual
business lines:
- target markets and product offerings are well defined,
- the risk parameters for new underwritings and for the portfolios
as a whole are clearly specified, and
- transactions, including origination, syndication, loan sales and
hedging, are managed in a manner to ensure the goals for the
overall portfolio are met.
Credit risk management policies are developed by Global Risk
Management (GRM) and detail, among other things, the credit rating
systems and associated parameter estimates, the delegation of
authority for granting credit, calculating the allowance for credit
losses and authorizing writeoffs. These form an integral part of
enterprise-wide policies and procedures that encompass governance,
risk management and control structure.
The Bank's credit risk rating systems are designed to support the
determination of key credit risk parameter estimates which measure
credit and transaction risk. For non-retail exposures, parameters are
associated with each credit facility through the assignment of
borrower and transaction ratings. Borrower risk is evaluated using
methodologies that are specific to particular industry sectors and/or
business lines. The risk associated with facilities of a given
borrower is assessed by considering the facilities' structural and
collateral-related elements. For retail portfolios, each exposure has
been assigned to a particular pool (real estate secured, other retail
- term lending, unsecured revolving) and within each pool to a risk
grade. This process provides for a meaningful differentiation of
risk, and allows for appropriate and consistent estimation of loss
characteristics at the pool and risk grade level.
Credit quality of financial assets
The Bank's portfolio is well diversified by industry, and there has
not been a significant change in concentrations of credit risk since
October 31, 2007.
(a) Corporate and commercial
Credit decisions are made based upon an assessment of the credit risk
of the individual borrower or counterparty.
Key factors considered in the assessment include: the borrower's
current and projected financial results and credit statistics; the
industry in which the borrower operates; economic trends;
geopolitical risk; and the borrower's management. Banking units and
GRM also review the credit quality of the credit portfolio across the
organization on a regular basis to assess whether economic trends or
specific events may affect the performance of the portfolio.
As at January 31, 2008, a significant portion of the authorized
corporate and commercial lending portfolio was internally rated at a
rating that would generally equate to an investment grade rating by
external rating agencies.
(b) Retail
The Bank's credit underwriting methodology and risk modeling in
Canada is customer rather than product focused. Generally, decisions
on consumer loans are based on risk ratings, which are generated
using predictive scoring models. Individual credit requests are
processed by proprietary adjudication software designed to calculate
the maximum debt for which a customer qualifies.
As at January 31, 2008, the amount of retail loans that were past due
but not impaired was not significant.
Derivative instruments
The Bank uses credit derivatives in its investment and loan
portfolios. Credit protection is sold as an alternative to acquire
exposure to bond or loan assets, while credit protection is bought to
manage credit exposures.
To control credit risk associated with derivatives, the Bank uses the
same credit risk management activities and procedures that are used
in the lending business in assessing and adjudicating potential
credit exposure. The Bank applies limits to each counterparty,
measures exposure as the current fair value plus potential future
exposure, and uses credit mitigation techniques, such as netting and
collateralization. Investment grade counterparties account for a
significant portion of the credit risk amount arising from the Bank's
derivative transactions.
Collateral
(a) Collateral held
In the normal course of business, the Bank receives collateral on
certain transactions to reduce its exposure to counterparty credit
risk. The Bank is normally permitted to sell or repledge the
collateral it receives on securities borrowing and lending and
derivative transactions, under terms that are common and customary to
standard lending, and stock borrowing and lending activities.
(b) Collateral pledged
In the normal course of business, securities and other assets are
pledged to secure an obligation, participate in clearing or
settlement systems, or operate in a foreign jurisdiction. As at
January 31, 2008, total assets pledged were $40 billion (October 31,
2007 - $40 billion). Asset pledging transactions are conducted under
terms that are common and customary to standard lending, and stock
borrowing and lending activities. Standard risk management controls
are applied with respect to asset pledging.
Liquidity risk
Liquidity risk is the risk that the Bank is unable to meet its
financial obligations in a timely manner at reasonable prices. The
Bank's liquidity risk is managed within the framework of policies and
limits approved by the Board of Directors. The Board receives reports
on risk exposures and performance against approved limits. The
Liability Committee (LCO) provides senior management oversight of
liquidity risk and meets weekly to review the Bank's liquidity
profile.
The key elements of the Bank's liquidity risk framework include: (i)
liquidity risk measurement and modeling, including limits on maximum
net cash outflow by currency over specified short-term horizons; (ii)
diversification of the Bank's funding sources; (iii) maintaining a
pool of highly liquid, unencumbered assets that can be readily sold
or pledged to secure borrowings; (iv) liquidity stress testing; and
(v) liquidity contingency planning.
Liquidity profile
The Bank maintains large holdings of liquid assets to support its
operations, as shown in the table below. These assets generally can
be sold or pledged to meet the Bank's obligations.
The Bank prudently diversifies its wholesale funding activities by
using a number of different funding programs to access the global
financial markets and manage its maturity profile, as appropriate.
Risk management controls are applied with respect to funding and
liquidity management.
Liquid Assets As at
---------------------------------------------------------------------
January 31
($ millions) 2008
---------------------------------------------------------------------
Canadian dollar liquid assets $ 676
Cash and deposits with the Bank of Canada 4,983
Deposits with other banks 52,856
---------------------------------------------------------------------
Securities $ 58,515
---------------------------------------------------------------------
Foreign currency liquid assets
Cash and deposits with the Bank of Canada $ 4,798
Deposits with other banks 25,954
Securities 23,567
Call and short loans 1,191
---------------------------------------------------------------------
$ 55,510
---------------------------------------------------------------------
Total liquid assets
Cash and deposits with the Bank of Canada $ 5,474
Deposits with other banks 30,937
Securities 76,423
Call and short loans 1,191
---------------------------------------------------------------------
Liquid assets as a % of total assets $114,025
---------------------------------------------------------------------
---------------------------------------------------------------------
25.4%
---------------------------------------------------------------------
---------------------------------------------------------------------
Contractual maturities
The table below shows the contractual maturities of certain of the
Bank's financial liabilities. The Bank's deposit liabilities shown
below are those recorded in Canada and the United States which
amounted to $241 billion, representing 76% of the Bank's total
deposits.
Payable on a fixed date
---------------------------
Less One Greater
Payable Payable than to than
on after one five five
($ millions) demand notice year years years Total
---------------------------------------------------------------------
Deposits $ 26,710 $ 38,900 $120,885 $ 48,622 $ 6,181 $241,298
Subordinated
debentures - - 256 - 1,894 2,150
Capital
instrument
liabilities - - - - 500 500
---------------------------------------------------------------------
Total $ 26,710 $ 38,900 $121,141 $ 48,622 $ 8,575 $243,948
---------------------------------------------------------------------
---------------------------------------------------------------------
Deposits
The Bank's foreign operations have their own liquidity management
frameworks that are similar to the Bank's framework. Local deposits
are managed from a liquidity risk perspective based on the local
management frameworks and regulatory requirements.
Commitments to extend credit
In the normal course of business, the Bank enters into commitments to
extend credit in the form of loans or other financings for specific
amounts and maturities, subject to specific conditions. These
commitments, which are not reflected on the Consolidated Balance
Sheet, are subject to normal credit standards, financial controls and
monitoring procedures. As at January 31, 2008, the majority of
commitments to extend credit had a remaining term to maturity of less
than one year.
Derivative instruments
The Bank is subject to liquidity risk relating to its use of
derivatives to meet customer needs, generate revenues from trading
activities, manage market and credit risks arising from its lending,
funding and investment activities, and lower its cost of capital.
More than half of the notional value of the Bank's derivative
instruments mature within one year, while 87% mature within five
years.
Market risk
Market risk arises from changes in market prices and rates (including
interest rates, credit spreads, equity prices, foreign exchange rates
and commodity prices), the correlations among them, and their levels
of volatility. The Board of Directors reviews and approves market
risk policies and limits annually. The LCO and Market Risk Management
and Policy Committee (MRMPC) oversee the application of the framework
set by the Board, and monitor the Bank's market risk exposures and
the activities that give rise to these exposures.
The Bank uses a variety of metrics and models to measure and control
market risk exposures. The measurements used are selected based on an
assessment of the nature of risks in a particular activity. The
principal measurement techniques are Value at Risk (VaR), stress
testing, sensitivity analysis and simulation modeling, and gap
analysis. Models are independently validated prior to implementation
and are subject to formal periodic review.
VaR is a statistical measure that estimates the potential loss in
value of the Bank's trading positions due to adverse market movements
over a defined time horizon with a specified confidence level. To
complement VaR, the Bank also uses stress testing to examine the
impact that abnormally large swings in market factors and periods of
prolonged inactivity might have on trading portfolios. The stress
testing program is designed to identify key risks and ensure that the
Bank's capital can easily absorb potential losses from abnormal
events. The Bank subjects its trading portfolios to more than
75 stress tests on a daily basis, and more than 250 stress tests on a
monthly basis.
Sensitivity analysis assesses the effect of changes in interest rates
on current earnings, other comprehensive income and on the economic
value of assets and liabilities. Simulation modeling under various
scenarios is particularly important for managing risk in the deposit,
lending and investment products the Bank offers to its retail
customers. Gap analysis is used to assess the interest rate
sensitivity of the Bank's retail, wholesale banking and international
operations. Under gap analysis, interest rate-sensitive assets,
liabilities and derivative instruments are assigned to defined time
periods on the basis of expected repricing dates.
Interest rate risk
Interest rate risk, inclusive of credit spread risk, is the risk of
loss due to: changes in the level, slope and curvature of the yield
curve; the volatility of interest rates; mortgage prepayment rates;
changes in the market price of credit; and the creditworthiness of a
particular issuer. The Bank actively manages its interest rate
exposures with the objective of enhancing net interest income within
established risk tolerances. Interest rate risk arising from the
Bank's funding and investment activities is managed in accordance
with Board-approved policies and global limits, which are designed to
control the risk to income and economic value of shareholders'
equity. The income limit measures the effect of a specified shift in
interest rates on the Bank's annual net income and comprehensive
income, while the economic value limit measures the impact of a
specified change in interest rates on the present value of the Bank's
net assets. Interest rate exposures in individual currencies are also
controlled by gap limits.
The following table shows the breakdown of the Canadian dollar and
foreign currency interest rate gaps as at January 31, 2008:
Interest rate gap
---------------------------------------------------------------------
Interest rate Cumu-
position(1) lative
Less Three less Greater Non-
As at January than to than than interest
31, 2008 three twelve one one rate
($ millions) months months year year sensitive
---------------------------------------------------------------------
Canadian dollars $ 12,960 $ (9,989) $ 2,971 $ 5,034 $ (8,005)
---------------------------------------------------------------------
Foreign currencies $ (8,092) $ 9,123 $ 1,031 $ 15,941 $(16,972)
---------------------------------------------------------------------
Total gap $ 4,868 $ (866) $ 4,002 $ 20,975 $(24,977)
---------------------------------------------------------------------
(1) The above figures reflect the inclusion of derivative
instruments, as well as an estimate of prepayments on consumer
and mortgage loans and cashable GICs.
Based on the Bank's interest rate positions as at January 31, 2008,
an immediate and sustained 100 basis point rise in interest rates
across all currencies and maturities would increase after-tax net
income by approximately $124 million over the next 12 months. A
similar rise in interest rates would increase after-tax other
comprehensive income by approximately $22 million and decrease
economic value of shareholders' equity by approximately $548 million.
Foreign currency risk
Foreign currency risk is the risk of loss due to changes in spot and
forward rates, and the volatility of currency exchange rates. The
Bank's exposure to its net investments in self-sustaining foreign
operations is controlled by a Board-approved limit. This limit
considers potential volatility to shareholders' equity as well as the
potential impact on capital ratios from foreign exchange
fluctuations. On a quarterly basis, the LCO reviews the Bank's
exposures to these net investments. The Bank may fully or partially
hedge this exposure by funding the investments in the same currency,
or by using other financial instruments, including derivatives.
The Bank is subject to foreign currency risk on the earnings of its
foreign operations. To manage this risk, foreign currency revenues
and expenses, which are primarily denominated in U.S. dollars, are
projected over a number of future fiscal quarters. The LCO assesses
economic data and forecasts to decide on the portion of the estimated
future foreign currency revenues and expenses to hedge. Hedging
instruments normally include foreign currency spot and forward
contracts, as well as foreign currency options and swaps.
In the absence of hedging activity, a one per cent increase
(decrease) in the Canadian dollar against all the currencies in which
the Bank operates, decreases (increases) the Bank's annual earnings
by approximately $34 million before tax, primarily from exposure to
U.S. dollars. A similar change in the Canadian dollar would increase
(decrease) the unrealized foreign currency translation losses in the
accumulated other comprehensive income section of shareholders'
equity by approximately $145 million, net of hedging.
Equity risk
Equity risk is the risk of loss due to adverse movements in equity
prices. Equity risk is often classified into two categories: general
equity risk, which refers to the sensitivity of an instrument or
portfolio's value to changes in the overall level of equity prices,
and issuer-specific risk.
The Bank is exposed to equity risk through its equity investment
portfolios, which are controlled by Board-approved limits. Equity
investments include common and preferred shares, as well as a
diversified portfolio of third-party managed funds. Equity securities
are held for liquidity and/or longer-term capital appreciation, or
attractive after-tax yields.
The majority of the Bank's equity investment portfolios are managed
by Group Treasury under the strategic direction of the LCO. Group
Treasury delegates the management of a portion of equity and equity-
related portfolios to Scotia Cassels Investment Counsel Limited and
other external fund managers to take advantage of these fund
managers' expertise in particular market niches and products.
The fair value of available-for-sale equity securities was
$3,223 million as at January 31, 2008.
Trading portfolio risk management
The Bank's policies, processes and controls for trading activities
are designed to achieve a balance between pursuing profitable trading
opportunities and managing earnings volatility within a framework of
sound and prudent practices. Trading activities are primarily
customer focused, but also include a proprietary component.
Market risk arising from the Bank's trading activities is managed in
accordance with Board-approved policies and aggregate VaR and stress
testing limits. The quality of the Bank's VaR is validated by regular
back testing analysis, in which the VaR is compared to theoretical
and actual profit and loss results. The Board reviews VaR and stress
testing results quarterly.
Trading portfolios are marked to market in accordance with the Bank's
valuation policies. Positions are marked to market daily and
valuations are independently reviewed by back office or GRM units on
a regular basis. These units also provide profit and loss reporting,
as well as VaR and limit compliance reporting to business unit
management and executive management for evaluation and action as
appropriate. VaR is calculated daily using a 99% confidence level, a
one-day holding period and historical simulations based on 300 days
of market data. This means that, on average, the trading book may
lose more than the VaR about once every 100 days.
The table below shows the Bank's VaR by risk factor:
One-day VaR by risk factor
---------------------------------------------------------------------
As at For the three months ended
January 31, January 31, 2008
($ millions) 2008 Average High Low
---------------------------------------------------------------------
Interest rate 16.7 13.8 18.5 9.8
Equities 2.8 4.5 7.4 2.5
Foreign exchange 0.6 0.9 1.9 0.4
Commodities 3.4 2.7 3.6 1.9
Diversification (4.2) (5.3) n/a n/a
All-Bank VaR 19.3 16.6 20.5 12.5
---------------------------------------------------------------------
Hedges
There are three main types of hedges for accounting purposes: (i)
fair value hedges, (ii) cash flow hedges and (iii) net investment
hedges.
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 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. The reclassification from accumulated
other comprehensive income to earnings over the next 12 months as a
result of outstanding cash flow hedges is expected to be a net loss
of approximately $99 million (after tax). As at January 31, 2008, 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, 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
income in the Consolidated Statement of Income. The Bank recorded a
loss of $6 million during the quarter (October 31, 2007 - $18 million
loss; January 31, 2007 - $12 million gain), of which a loss of
$4 million (October 31, 2007 - $23 million loss; January 31, 2007 -
$9 million gain) 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.
Items designated as trading
The Bank has elected to designate certain portfolios of assets and
liabilities as trading which are carried at fair value with changes
in fair values recorded in income.
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. As a
result, the Bank significantly reduces or eliminates an accounting
mismatch between the two instruments. The fair value of these loans
was $6.4 billion as at January 31, 2008 (October 31, 2007 -
$4.1 billion; January 31, 2007 - $4.6 billion). The change in fair
value that was recorded through trading income was a loss of
$280 million for the three months ended January 31, 2008 (October 31,
2007 - $112 million gain; January 31, 2007 - $110 million gain).
These changes in fair value were entirely offset by the 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 loans was $110 million as at
January 31, 2008 (October 31, 2007 - $151 million; January 31, 2007 -
$152 million). The change in fair value recorded through trading
income was a loss of $3 million for the three months ended
January 31, 2008 (October 31, 2007 - $3 million gain; January 31,
2007 - $5 million gain).
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 liabilities was
$766 million as at January 31, 2008 (October 31, 2007 - $847 million;
January 31, 2007 - $847 million). The change in fair value, which is
substantially attributable to changes in interest rates, recorded
through net interest income was a loss of $10 million for the three
months ended January 31, 2008 (October 31, 2007 - $11 million loss;
January 31, 2007 - $2 million gain). These changes in fair value were
substantially offset by the change in fair value of the related
derivatives. The Bank is contractually obligated to pay $764 million
to the holders of the notes at maturity.
8. Employee future benefits
Employee future benefits include pensions and other post-retirement
benefits, post-employment benefits and compensated absences. The
following table summarizes the expenses for the Bank's principal
plans(1).
For the three months ended
---------------------------------------------------------------------
January 31 October 31 January 31
($ millions) 2008 2007 2007
---------------------------------------------------------------------
Benefit expenses
Pension plans $ 1 $ (4) $ 9
Other benefit plans 29 19 30
---------------------------------------------------------------------
$ 30 $ 15 $ 39
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Other plans operated by certain subsidiaries of the Bank are not
considered material and are not included in this note.
9. 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.
10. Acquisitions
The Bank completed the acquisition of Chile's Banco del Desarrollo on
November 26, 2007, through the acquisition of 99.5 per cent of the
outstanding shares for $1.0 billion. Total assets at acquisition were
approximately $5.6 billion, mainly comprised of loans. The Bank will
combine the operations of Banco del Desarrollo with its existing
Scotiabank Sud Americano banking operations. Given the recentness of
the acquisition, the Bank has not completed its assessment and
valuation of the assets acquired and liabilities assumed for Banco
del Desarrollo. As a result, the amount of the purchase price in
excess of the carrying value of the assets and liabilities has not
been fully allocated to the acquired assets and liabilities assumed
in the Consolidated Balance Sheet. The excess purchase price over the
net book value of $804 million is recorded in Other Assets - Other in
the consolidated balance sheet pending finalization of the purchase
price allocation.
The Bank completed an 18% equity investment in DundeeWealth Inc. for
$348 million on September 28, 2007, with the right to acquire up to
20% after November 1, 2008. The investment is a combination of voting
and convertible non-voting shares issued out of treasury by
DundeeWealth Inc. This investment is accounted for under the equity
method of accounting. The Bank has not completed its valuation of the
assets acquired and liabilities assumed.SHAREHOLDER & INVESTOR INFORMATION
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 2008
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 1 April 28
July 2 July 29
October 7 October 29Annual Meeting date for fiscal 2008
The Annual Meeting of Shareholders of the Bank for the fiscal year
ending October 31, 2008, will be held in Halifax, Nova Scotia, at 10:00 a.m.,
on Tuesday, March 3, 2009.
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 March 4, 2008,
at 9:00 a.m. EST 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 1-800-733-7560 (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 March 4,
2008, to March 18, 2008, by calling (416) 640-1917 and entering the
identification code 21262348 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.comRapport 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; Ann DeRabbie, Public Affairs, (416) 933-1344