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Scotiabank earnings top $1 billion in solid third quarter
Third quarter highlights;
- Earnings per share (diluted) of $0.98 compared to $1.02 last year and
$0.97 last quarter
- Net income of $1.01 billion, versus $1.03 billion last year and
$0.98 billion last quarter
- Return on equity of 21.0%, compared to 21.7% last year
- Productivity ratio of 54.3%, versus 53.0% last yearTORONTO, Aug. 26 /CNW/ - Scotiabank today reported third quarter net
income of $1.01 billion compared with $1.03 billion the same period last year.
Quarter over quarter, net income was up 3% from $980 million, due primarily to
higher net interest income, increased customer-driven revenues and strong
trading results.
Diluted earnings per share were $0.98 compared to $1.02 in the same
period a year ago and $0.97 last quarter. Return on equity remained strong at
21.0%.
"Scotiabank's strategy of diversifying across business lines and
geographies has enabled the Bank to continue to perform well during a
challenging period for the global financial services industry," said President
and CEO Rick Waugh. "Total revenue grew 5% from the same period last year, as
assets increased a strong $54 billion or 13%, with contributions from all
three growth platforms - Domestic Banking, International Banking and Scotia
Capital. These gains were offset by higher provisions for credit losses in
some of our retail portfolios, lower capital markets revenues compared to
record levels for the same period last year and higher expenses to support
growth initiatives. Scotiabank continues to deliver an industry-leading
productivity ratio of 54.3%, reflecting our effective cost management
discipline. Our balance sheet remains strong and our capital ratios are
excellent.
"Domestic Banking reported a record quarter, with total revenue
increasing by 9% compared to a year ago," Mr. Waugh said. "Mortgage growth was
recorded in all sales channels, leading to a gain in market share, while
personal deposits grew 12% to lead the industry in market-share growth. The
business line also benefited from higher wealth management revenues, including
a gain in mutual fund market share for the sixth consecutive quarter and
growth in commercial and small business lending.
"Results in International Banking benefited from continued robust organic
loan growth, particularly in mortgages and credit cards, strong deposit gains
and the positive impact of acquisitions, partly offset by higher taxes and
increased provisions for credit losses.
"Scotia Capital had a strong quarter, benefitting from its diversified
portfolio of businesses, with record revenues in Scotia Waterous and fixed
income, continued strong contributions from ScotiaMocatta and foreign exchange
operations and an increased contribution from its lending businesses. This was
partly offset by lower results in derivatives, which achieved record levels in
the same quarter last year.
"The Bank's risk management culture is enabling us to effectively manage
through a difficult period in world capital markets.
"Our capital position remains strong, allowing the Bank to continue to
pursue strategic acquisitions and ongoing business development opportunities.
"The second half of 2008 is showing improvement compared to the first two
quarters of the fiscal year, with continued asset growth in all three business
lines and a rebound in capital markets activity. While we are on track to
achieve three of our four key financial and operational targets, with slower
global growth it is unlikely that we will meet our EPS growth objectives as
set at the end of last year."Year-to-date performance versus key 2008 financial and operational
objectives was as follows:
1. Target: Earn a return on equity (ROE)(1) of 20 to 23%. For the nine
months Scotiabank earned an ROE of 20.3%.
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 9%.
3. Target: Maintain a productivity ratio of less than 57%. Scotiabank's
ratio was 55.1% for the nine months.
4. Target: Maintain sound capital ratios. At 9.8%, 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
for the three months ended nine months ended
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July 31 April 30 July 31 July 31 July 31
(Unaudited) 2008 2008 2007 2008 2007
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Operating results
($ millions)
Net interest income 1,946 1,873 1,812 5,633 5,382
Net interest income
(TEB(1)) 2,049 1,973 1,913 5,954 5,697
Total revenue 3,374 3,172 3,201 9,385 9,412
Total revenue
(TEB(1)) 3,477 3,272 3,302 9,706 9,727
Provision for credit
losses 159 153 92 423 175
Non-interest expenses 1,889 1,794 1,752 5,352 5,202
Provision for income
taxes 287 209 296 689 859
Provision for income
taxes (TEB(1)) 390 309 397 1,010 1,174
Net income 1,010 980 1,032 2,825 3,091
Net income available
to common
shareholders 978 958 1,016 2,750 3,056
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Operating performance
Basic earnings per
share ($) 0.99 0.97 1.03 2.79 3.09
Diluted earnings per
share ($) 0.98 0.97 1.02 2.77 3.06
Return on equity
(%)(l) 21.0 21.4 21.7 20.3 22.2
Productivity ratio
(%) (TEB(1)) 54.3 54.8 53.0 55.1 53.5
Net interest margin
on total average
assets (%) (TEB(1)) 1.79 1.76 1.86 1.78 1.90
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Balance sheet
information
($ millions)
Cash resources and
securities 124,079 129,749 121,633
Loans and
acceptances 283,742 267,875 233,004
Total assets 462,407 452,573 408,115
Deposits 332,469 322,438 286,985
Preferred shares 2,560 2,210 1,290
Common shareholders'
equity 18,801 18,213 18,377
Assets under
administration 207,433 202,266 198,786
Assets under
management 37,842 32,917 31,031
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Capital measures(2)
Tier 1 capital
ratio (%) 9.8 9.6 9.7
Total capital
ratio (%) 11.5 11.7 10.6
Tangible common
equity to risk-
weighted assets(1)
(%) 7.6 7.5 7.7
Risk-weighted assets
($ millions) 225,801 218,878 219,771
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Credit quality
Net impaired loans(3)
($ millions) 1,009 845 584
General allowance for
credit losses
($ millions) 1,323 1,323 1,298
Net impaired loans as
a % of loans and
acceptances(3) 0.36 0.32 0.25
Specific provision
for credit losses as
a % of average loans
and acceptances
(annualized) 0.23 0.24 0.16 0.22 0.12
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Common share
information
Share price ($)
High 52.51 50.00 54.67 54.00 54.73
Low 41.95 42.00 48.91 41.95 48.80
Close 49.98 47.82 49.45
Shares outstanding
(millions)
Average - Basic 989 986 988 986 990
Average - Diluted 994 992 996 993 999
End of period 990 987 982
Dividends per share
($) 0.49 0.47 0.45 1.43 1.29
Dividend yield (%) 4.1 4.1 3.5 4.0 3.3
Dividend payout
ratio(4) (%) 49.6 48.4 43.7 51.3 41.8
Market capitalization
($ millions) 49,475 47,194 48,578
Book value per common
share ($) 18.99 18.45 18.71
Market value to book
value multiple 2.6 2.6 2.6
Price to earnings
multiple (trailing
4 quarters) 13.4 12.7 12.4
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Other information
Employees(5) 62,209 62,143 57,152
Branches and
offices(5) 2,557 2,529 2,289
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(1) Non-GAAP measure. Further below refer to 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 successGlobal financial markets remained turbulent during the third quarter of
2008. Despite these challenging conditions, Scotiabank's results continued to
improve. Once again, we achieved solid results by executing our strategy,
including our three key business priorities: sustainable revenue growth,
effective capital management and leadership development.
We continued to use our capital to fund both strategic acquisitions and
ongoing business initiatives that support our growth objectives. During the
quarter, we announced a definitive agreement to purchase E(*)TRADE Canada from
its U.S.-based parent for US$442 million. This acquisition will double
Scotiabank's footprint in the Canadian online investing market and further
supports the growth of our wealth management business.
We demonstrated our confidence in the Peruvian market and enhanced our
growth strategy through a number of recent acquisitions, including increasing
our stake in Scotiabank Peru from 78% to 98% by purchasing shares owned by the
Italian bank Intesa Sanpaolo S.p.A.
We also established an agreement with HDFC Bank in India, which will
enable Scotiabank to reach out to people in India who are immigrating to
Canada and, at the same time, provide our customers in Canada with a referral
to one of the leading financial institutions in India.
ScotiaMocatta, the precious metals arm of Scotia Capital, was granted
membership as a Foreign Financial Member of the Shanghai Gold Exchange (SGE),
China's leading precious metals exchange, which will allow us to trade gold,
silver and platinum through ScotiaMocatta's branch in Guangzhou, in southern
China.
While market conditions remain challenging, we continue to be encouraged
by the solid results recorded by our three business lines, our risk management
discipline, and the ability of our great team of people. Through their
feedback to our annual employee survey, ViewPoint, Scotiabank employees around
the world told us they continue to value their employment experience. The 2008
Employee Satisfaction Index (ESI), which measures overall employee
satisfaction, came in at 86% and the Diversity Index (DI), which measures
employee perception of respect and management sensitivity to work/life
demands, is 88%.
As we enter the final months of 2008, we are focused on continuing to
effectively execute our strategies and priorities in order to be
well-positioned for continued growth in 2009.2008 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 relationships 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
- Scotiabank has reached an agreement to purchase E(*)TRADE Canada
subject to regulatory approvals. With $4.7 billion in assets under
administration and 190 employees, E(*)TRADE Canada is a top-ranked
online brokerage, offering a variety of products and services to
retail and institutional investors. The completion of this deal will
double Scotiabank's footprint in the Canadian online investing market
and demonstrates our commitment to grow our wealth management
business and drive revenue growth.
- We launched "Bank The Rest(TM)", an innovative savings program to
help customers increase their savings every time they use their
ScotiaCard. Customers can now turn everyday debit purchases into
savings when they choose to round up their total purchase amount to
the nearest dollar or five dollars, and have the difference deposited
automatically into their Scotiabank Money Master High Interest
Savings account. This program is the first of its kind in Canada,
giving Scotiabank a key competitive advantage.
- As part of the Bank's "Get Growing to a Million" campaign, which
helps small business owners identify strategies to grow their
businesses, we rolled out an innovative way to reach this market
segment. Using a specially-equipped travelling RV, our small business
team is in the middle of a five-month cross-country tour to more than
70 communities across Canada. At each stop we communicate the unique
tools and resources that we've built to help them take their
businesses to the next level.
International Banking
- We continue to build out our distribution footprint in order to
expand our customer base in key markets. During the quarter we opened
22 new branches, including 15 in Mexico. We also opened a
representative office in Turkey.
- In Peru, a key Latin American market, we continue to expand into
complementary businesses with the purchase of a 47.5% interest in
Profuturo, a private Peruvian pension fund. Profuturo is the
country's fourth largest private pension fund, with a 23% market
share by number of customers and a 17% share of revenues. Scotiabank
will be working in partnership with a group of Profuturo's existing
local shareholders to manage the company.
- For the second consecutive year, Scotiabank Jamaica was awarded the
MasterCard Worldwide Global Quality Gold Award for excellence in
operational achievements. The award recognizes exceptional
performance in operations quality.
Scotia Capital
- ScotiaMocatta was granted membership in the Shanghai Gold Exchange,
China's leading precious metals exchange. This is the first time that
a branch of a foreign bank has been given membership.
- Scotia Capital acted as joint bookrunner on a US$1.3 billion multi-
tranche offering of collateral trust bonds by National Rural
Utilities Cooperative Finance Corporation. The transaction was the
largest US dollar bond offering ever led by Scotia Capital.
- Scotia Waterous acted as exclusive financial advisor to Hupecol
Caracara LLC, on its sale of Colombian oilfield assets for
US$920 million to CEPSA Colombia S.A., a wholly owned subsidiary of
Compania Espanola de Petroleos, S.A.
- Scotia Capital acted as exclusive financial advisor to Hecla Mining
Co., on its US$750 million purchase of Rio Tinto's interest in the
Greens Creek silver mine. Associated with the transaction, Scotia
Capital also acted as sole lead arranger and administrative agent on
US$380 million of credit facilities, and provided the interest rate
hedging program.
Employee highlights
- The results of our annual ViewPoint Employee Survey show that
Scotiabank continues to be a global employer of choice, despite a
very challenging business climate. This year, 82% of employees
worldwide participated in the survey, and their feedback indicates
that employee satisfaction remains high, as measured by the two key
indices. The 2008 Employee Satisfaction Index (ESI), which measures
the overall level of satisfaction, came in at 86% and the Diversity
Index (DI), which measures employees' perceptions of respect and
management sensitivity to work/life demands, was 88%.
Community involvement
- Scotiabank was the premier sponsor of the 5th World Conference on
Breast Cancer, held in Winnipeg in June. The conference takes place
every three years to promote networking, public education and
research on this important topic, which affects too many people
around the world. During April and May, Canadian Scotiabank branches
accepted donations for lapel pins to help defray expenses for some
150 delegates who would otherwise have been unable to attend.
Scotiabank matched the funds raised, dollar for dollar, for a total
donation of more than $207,000. Sixty Winnipeg branch employees also
served as conference volunteers.
- Scotiabank El Salvador continued its support of the Salud Escolar
Integral project with Brock University by providing them with the
$120,500 needed to continue their work this year. It is a program
that works with a national university in El Salvador to teach
physical education as an integral part of education in the
Salvadorean school system and allows for the teaching of health,
self-respect and non-violence.
MANAGEMENT'S DISCUSSION & ANALYSIS
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Forward-looking statementsOur 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 $103 million versus
$101 million in the same quarter last year and $100 million last quarter. For
the nine months, the TEB gross-up to net interest income and the provision for
income taxes was $321 million compared to $315 million for the same period
last year.
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.
Operating leverage
The Bank defines operating leverage as the rate of growth in total
revenue on a taxable equivalent basis, less the rate of growth in expenses.
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,
operational and other risks 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 Office of the Superintendent of
Financial Institutions Canada (OSFI).Group Financial Performance and Financial Condition
August 26, 2008Scotiabank's earnings gained momentum this quarter, with net income of
$1,010 million. Although down 2% or $22 million from the same period last
year, net income was up 3% or $30 million from last quarter.
Compared to the same period last year, higher net interest income from
acquisitions and organic asset growth, and increased customer-driven revenues
were more than offset by increased provisions for credit losses, lower capital
markets revenues, higher expenses to support growth initiatives and the
negative impact of foreign currency translation.
Quarter-over-quarter, net income was bolstered mainly by growth in net
interest income, stronger capital markets revenues, higher customer-driven
revenues and increased net gains on non-trading securities. These items were
partly offset by higher compensation-related expenses and the impact of a
higher effective tax rate.
Net income for the nine months was $2,825 million, $266 million or 9%
lower than the same period last year. The higher net interest income from
strong asset growth, the positive net contribution of acquisitions and a lower
effective tax rate were more than offset by higher provisions for credit
losses, lower trading revenues and writedowns on certain structured credit
instruments recorded this year. Higher expenses and the negative impact of
foreign currency translation also contributed to the lower year-to-date net
income.
Total revenue
Total revenue (on a taxable equivalent basis) was $3,477 million this
quarter, up $175 million or 5% from the same period last year and $205 million
or 6% from last quarter. Year-over-year growth reflected higher net interest
income and growth in customer-driven revenues, along with the contributions
from recent acquisitions. These were partly offset by lower capital markets
revenues and the impact of foreign currency translation.
The increase from last quarter was due primarily to increased net
interest income, resulting from asset growth in International and Domestic and
two additional days in the quarter, higher trading revenues and securities
gains and broad-based increases across customer-driven revenue categories.
For the nine months, total revenue of $9,706 million was down $21 million
from the same period last year.
Net interest income
Net interest income (on a taxable equivalent basis) was $2,049 million,
up $136 million or 7% from the same quarter last year and $76 million or 4%
from last quarter.
The increase from last year was driven by asset growth in all business
lines, particularly in retail and corporate loans, including strong
contributions from acquisitions. Partly offsetting these were compression in
the margin and the negative impact of foreign currency translation.
The strong quarter-over-quarter growth in net interest income was due
primarily to continued asset growth, two additional days in the quarter and
the favourable impact of derivatives used for asset/liability management.
Year-to-date net interest income grew to $5,954 million, an increase of
$257 million or 5% from the same period last year. The growth was driven by
solid organic asset growth and the contribution of recent acquisitions, partly
offset by the negative impact of foreign currency translation and compressed
margins, as a result of a relative increase in wholesale funding costs and
losses on derivatives used for asset/liability management.
The Bank's interest margin was 1.79%, compared to 1.86% last year and
1.76% last quarter. Compared to the prior year, the reduction in the margin
was mainly due to the negative impact of fair value changes on derivatives
used for asset/liability management, a change in asset mix, including growth
in lower-yielding variable rate mortgages, and the relative increase in
wholesale funding costs. The margin was slightly up quarter over quarter due
to a decline in trading assets.
Other income
This quarter's other income was $1,428 million, $39 million or 3% higher
than the same period last year. This growth was broad-based across all
categories of customer-driven revenues due to increased customer activity and
including contributions from acquisitions. In addition there was higher
securitization income. These increases were partly offset by lower trading
revenues, compared to the particularly strong revenues realized last year,
lower net gains on non-trading securities and the negative impact of foreign
currency translation.
Compared to the previous quarter, the increase of $129 million or 10% was
due primarily to broad-based growth in customer-driven transactions, strong
investment banking and trading revenues particularly in derivative trading,
and higher net gains on non-trading securities.
For the nine-month period, other income was $3,752 million, a decline of
$278 million or 7% from the same period last year, due primarily to lower
trading revenues, writedowns on certain structured credit instruments recorded
this year, lower underwriting fees, and the negative impact of foreign
currency translation. Partly offsetting these items were increased
customer-driven revenues, and higher mutual fund and securitization income.
Provision for credit losses
The provision for credit losses was $159 million this quarter, up
$67 million from the same period last year and $6 million from last quarter.
The higher level this quarter compared to a year ago was due to higher
provisions in the retail portfolios in International Banking, as well as
provision increases in Scotia Capital and Domestic Banking. Further discussion
on credit risk is provided below.
Non-interest expenses and productivity
Non-interest expenses of $1,889 million this quarter rose $137 million or
8% from last year. The increase was attributable to ongoing business and
growth initiatives, including branch expansions in Canada, Mexico, Chile and
Peru, and the impact of recent acquisitions. In addition there was a
$28 million provision for contractual indemnities related to the Bank's
initial acquisition in Peru. Partly offsetting these increases were the
positive impact of foreign currency translation and lower performance-based
compensation, in line with the decline in trading revenues.
Quarter over quarter, non-interest expenses were up $95 million or 5%.
The increase was due primarily to growth in salaries and benefits expenses and
the indemnity provision in Peru. The rise in salaries and benefits was
reflective of two additional days this quarter, increased performance-based
compensation from stronger trading and volume-related commissionable revenues
and higher stock-based compensation. Partly offsetting these items were lower
professional fees.
For the nine-month period, non-interest expenses were $5,352 million, up
$150 million or 3% from $5,202 million reported last year. The growth was
primarily from acquisitions and ongoing growth initiatives and thus impacted
most categories. These items were partly offset by the positive impact of
foreign currency translation, lower stock-based compensation and lower
performance-based compensation due to lower trading revenues.
The productivity ratio was 54.3% this quarter, compared to 53.0% reported
for the same period last year and 54.8% last quarter. The Bank's operating
leverage this quarter was negative 2.6% compared to the same period last year,
and positive 0.9% over the second quarter. The year-to-date operating leverage
was negative 3.1%, partly as a result of the writedowns on certain structured
credit instruments this year, and lower trading revenues compared to the
particularly strong revenues recorded last year.
Taxes
The effective tax rate for this quarter was 21.7% compared to 21.8% in
the same quarter last year and 17.0% last quarter. The decrease from a year
ago was marginal due primarily to a reduction in the statutory tax rate in
Canada offset by lower levels of income in lower tax rate jurisdictions. The
increase from the previous quarter was driven mainly by reduced tax-exempt
dividend income and lower levels of income in lower tax rate jurisdictions.
The year-to-date effective tax rate was 19.1%, compared to 21.3% for the
same period last year.
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
The specific provision for credit losses was $159 million in the third
quarter, compared to $92 million in the same period last year and $153 million
in the previous quarter.
The provision for credit losses was $99 million in the Domestic Banking
portfolios, up from $77 million in the same quarter last year. The increase
from last year was due to higher provisions in the commercial and retail
portfolios. The change in commercial provisions was related primarily to two
accounts and to increases in small business banking. The retail provisions
were mainly volume related due to Scotia Dealer Advantage, offset partially by
a reduction in provisions for other personal loans. Provisions for credit
losses declined $3 million from last quarter.
International Banking's provision for credit losses was $56 million in
the third quarter, up $31 million compared to the same period last year, but
down $4 million from the prior quarter. The increase from the same quarter
last year was due mainly to retail asset growth, the acquisition in Chile,
higher commercial provisions in the Caribbean and Asia, and an increased
retail delinquency rate in Mexico. Higher retail provisions in Mexico and Peru
were partially offset by larger net commercial recoveries and reversals,
mostly in Mexico. The slight quarter-over-quarter decline in provisions was
primarily attributable to Mexico and Peru, where higher recoveries and
reversals of commercial provisions no longer required, were partially offset
by higher retail provisions.
Scotia Capital's provision for credit losses was $4 million in the third
quarter, compared to net recoveries of $10 million in the third quarter of
last year and net recoveries of $9 million in the second quarter. The increase
from both the third quarter last year and the previous quarter was related
primarily to one new provision in the U.S.
Total net impaired loans, after deducting the allowance for specific
credit losses, were $1,009 million as at July 31, 2008, an increase of
$164 million from last quarter, primarily in International and Scotia Capital.
The general allowance for credit losses was $1,323 million as at July 31,
2008, unchanged from last quarter.
Market risk
Value at Risk (VaR) is a key measure of market risk in the Bank's trading
activities. In the third quarter, the average one-day VaR was $15.8 million
compared to $15.6 million for the same quarter last year as increased interest
rate risk exposures were offset by reduced equity risk. Compared to the second
quarter, the average one-day VaR increased from $14.6 million to $15.8 million
due primarily to a reduction in the diversification benefit between risk
factors.Average for the three months ended
-------------------------------------------------------------------------
Risk factor July 31 April 30 July 31
($ millions) 2008 2008 2007
-------------------------------------------------------------------------
Interest rate $ 13.0 $ 12.8 $ 9.0
Equities 3.5 3.0 8.7
Foreign exchange 0.9 1.3 2.0
Commodities 3.0 3.6 1.3
Diversification (4.6) (6.1) (5.4)
-------------------------------------------------------------------------
All-Bank VaR $ 15.8 $ 14.6 $ 15.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------There were 11 trading loss days in the third quarter, compared to 21 days
in the previous quarter, a reflection of a lower level of market volatility
during the 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 July 31, 2008, liquid assets were $107 billion or 23% of
total assets compared to $112 billion or 25% of total assets at April 30,
2008. The mix of these assets between securities and other liquid assets,
including cash and deposits with banks, was 68% and 32%, respectively
(April 30, 2008 - 70% and 30%, 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 July 31, 2008, total assets pledged
or sold under repurchase agreements were $69 billion, unchanged from April 30,
2008.
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 at July 31, 2008, were $462 billion, up
$50 billion or 12% from October 31, 2007, including a $16 billion positive
impact from foreign currency translation and the acquisition of Banco del
Desarrollo. Growth was widespread across most asset categories, including
retail, commercial and corporate lending. Compared to the prior quarter,
assets grew by $9 billion.
The Bank's loan portfolio grew $45 billion or 20% from October 31, 2007,
including $7 billion from foreign currency translation. On the retail lending
side, domestic residential mortgage growth was $15 billion, before
securi-tization of $3 billion. The International acquisition of Banco del
Desarrollo in Chile contributed $1 billion to the increase in mortgages.
Personal loans were up $7 billion, with all regions experiencing positive
growth.
Business and government loans increased $26 billion from October 31,
2007, or $21 billion excluding the impact of foreign currency translation.
Loans in Scotia Capital were up $11 billion on the corporate lending side as
well as to support trading operations. In International Banking, business and
government loans increased $13 billion. The acquisition of Banco del
Desarrollo contributed $3 billion, and loans in Asia and the Caribbean grew
$5 billion and $2 billion, respectively.
Securities increased by $2 billion from October 31, 2007.
Available-for-sale securities increased $6 billion, offset by a decrease in
trading securities of $4 billion. The decrease in trading securities was
primarily due to a reduction in the size of the equity securities portfolio.
As at July 31, 2008, the unrealized gains on available-for-sale securities
were $207 million (after related derivative and hedge amounts), down $348
million from last quarter, due mainly to sales of securities during the
quarter, decreases in the market value of equity securities and the reduction
in the value of certain debt securities, as credit spreads widened.
Total liabilities were $441 billion as at July 31, 2008, an increase of
$48 billion or 12% from October 31, 2007, including a $17 billion impact from
foreign currency translation.
Total deposits were up $44 billion from October 31, 2007, or 15%,
including $11 billion impact due to foreign currency translation and
$6 billion from the acquisition of Banco del Desarrollo. Personal deposits
increased $12 billion, including $2 billion growth in domestic personal GICs.
Non-retail deposits, including bank, business and government deposits were up
$32 billion, including the impact of foreign currency translation of
$10 billion. This increase was primarily to fund the Bank's strong asset
growth.
Total shareholders' equity rose $2.6 billion from October 31, 2007. The
increase was due primarily to internal capital generation of $1.3 billion, the
issuance of $925 million non-cumulative preferred shares in the first nine
months, and a $146 million increase in accumulated other comprehensive income.
The increase in unrealized exchange gains relating to the Bank's foreign
operations due to the weakening of Canadian dollar was mostly offset by lower
unrealized losses on other components of comprehensive income.Capital management
Implementation of the revised Basel frameworkThe 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. Users of the Advanced Internal Ratings Based Approach (AIRB) 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, transitional capital floors were
introduced for the first two years after full implementation of AIRB. A
minimum capital floor of 90% of the Basel I calculation will apply in the
first year of full approval, and 80% in the second year. Since receiving
regulatory approval in the second quarter, the Bank applies the 90% floor.
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 significant 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 capital requirements for market risk are substantially unchanged for the
Bank.
Capital ratios
The Bank continues to maintain a strong capital position. The Tier 1 and
the Total capital ratios as at July 31, 2008 under Basel II were 9.8% and
11.5%, respectively, compared to 9.6% and 11.7% at April 30, 2008.
The Tier 1 ratio increased by 20 basis points, as internal capital
generation and the issue of $350 million non-cumulative preferred shares more
than offset the impact of an increase in risk-weighted assets from organic
asset growth. The total capital ratio declined by 20 basis points, due
primarily to the planned early redemption of $425 million of subordinated
debentures.
The tangible common equity (TCE) ratio was 7.6% as at July 31, 2008,
compared to 7.5% at April 30, 2008.
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 and 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 existing economic, industry and market conditions.
Total derivative notional amounts were $1,485 billion at July 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 and eligible financial collateral, was
$22 billion, compared to $21 billion last year end.
Financial stability forum disclosures
In April 2008, the Financial Stability Forum, based on the request of G7
Ministers and Central Bank Governors, released its report on recent conditions
in the credit market. Among others, a key recommendation of the report was to
enhance transparency by providing enhanced risk disclosures on financial
instruments which markets consider to be higher risk, including off-balance
sheet vehicles and structured products. Based on these recommendations, the
Bank has provided additional disclosures below in the Off-balance sheet
arrangements and Selected credit instruments sections.
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 by the Bank that are not in the ordinary course of business. Processes
for review and approval of these contractual arrangements are unchanged from
last year.
Multi-seller conduits sponsored by the Bank
The Bank sponsors three multi-seller conduits, two of which are
Canadian-based and one in the United States. The Bank earns commercial paper
issuance fees, program management fees and liquidity fees from these
multi-seller conduits which totaled $16 million in the third quarter ($15
million in the previous quarter).
As further described below, the Bank's exposure to these off-balance
sheet conduits primarily consists of liquidity support, program-wide credit
enhancement and temporary holdings of commercial paper. The Bank monitors
these exposures to ensure it is not required to consolidate the assets and
liabilities of the conduit.
Canada
The Bank's primary exposure to the Canadian-based conduits is the
liquidity support provided, with total liquidity facilities of $5.2 billion as
at July 31, 2008 (April 30, 2008 - $6.0 billion). At quarter end, the Bank
held approximately 4% of the total commercial paper issued by these conduits.
The following table presents a summary of assets held by the Bank's two
Canadian multi-seller conduits as at July 31, 2008 and April 30, 2008 by
underlying exposure:As at July 31, 2008
-------------------------------------
Funded Unfunded Total
($ millions) assets commitments exposure(1)
-------------------------------------------------------------------------
Auto loans/leases $ 3,000 $ 192 $ 3,192
Equipment loans 1,063 64 1,127
Trade receivables 203 93 296
Residential mortgages 95 1 96
Retirement savings plan loans 178 4 182
Loans to closed-end mutual funds 164 160 324
-------------------------------------------------------------------------
Total(2) $ 4,703 $ 514 $ 5,217
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at April 30, 2008
-------------------------------------
Funded Unfunded Total
($ millions) assets commitments exposure(1)
-------------------------------------------------------------------------
Auto loans/leases $ 3,629 $ 329 $ 3,958
Equipment loans 1,013 71 1,084
Trade receivables 207 89 296
Residential mortgages 102 2 104
Retirement savings plan loans 204 4 208
Loans to closed-end mutual funds 194 184 378
-------------------------------------------------------------------------
Total(2) $ 5,349 $ 679 $ 6,028
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Exposure to the Bank is through global-style liquidity facilities and
letters of guarantee.
(2) These assets are substantially sourced from Canada.Substantially all of the conduits' assets have been structured to receive
credit enhancements from the sellers, including overcollateralization
protection and cash reserve accounts. Approximately 27% of the funded assets
are externally rated AA- or higher, and the balance of the funded assets have
an equivalent rating of AA- or higher based on the Bank's internal rating
program. There are no non-investment grade rated assets held in these
conduits. The funded assets have a weighted average repayment period of
approximately one year (April 30, 2008 - 1.1 years), with 71% maturing within
three years. There is no exposure to U.S. subprime mortgage risk within these
two conduits.
United States
The Bank's primary exposure to the U.S.-based conduit is the liquidity
support and program-wide credit enhancement provided, with total liquidity
facilities of $11.8 billion as at July 31, 2008 (April 30, 2008 -
$12.2 billion). Program-wide credit enhancement is provided to absorb a
portion of the losses on defaulted assets, if any, in excess of losses
absorbed by deal-specific credit enhancement. At quarter-end, the Bank did not
hold any commercial paper issued by this conduit.
The following table presents a summary of assets held by the Bank's U.S.
multi-seller conduit as at July 31, 2008, and April 30, 2008, by underlying
exposure:As at July 31, 2008
-------------------------------------
Funded Unfunded Total
($ millions) assets commitments exposure(1)
-------------------------------------------------------------------------
Credit card/consumer receivables $ 981 $ 732 $ 1,713
Auto loans/leases 2,849 1,016 3,865
Trade receivables 1,886 1,511 3,397
Loans to closed-end mutual funds 663 578 1,241
Diversified asset-backed securities 806 16 822
CDOs/CLOs(2) 338 - 338
Corporate loans(3) 316 103 419
-------------------------------------------------------------------------
Total(4) $ 7,839 $ 3,956 $ 11,795
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at April 30, 2008
-------------------------------------
Funded Unfunded Total
($ millions) assets commitments exposure(1)
-------------------------------------------------------------------------
Credit card/consumer receivables $ 1,012 $ 675 $ 1,687
Auto loans/leases 2,836 1,108 3,944
Trade receivables 1,552 1,585 3,137
Loans to closed-end mutual funds 634 835 1,469
Diversified asset-backed securities 805 16 821
CDOs/CLOs(2) 332 - 332
Corporate loans(3) 317 506 823
-------------------------------------------------------------------------
Total(4) $ 7,488 $ 4,725 $ 12,213
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Exposure to the Bank is through program-wide credit enhancement and
global-style liquidity facilities.
(2) These assets have an external rating of AA or above.
(3) These assets represent secured loans that are externally rated
investment grade.
(4) These assets are sourced from the U.S.Approximately 20% of the conduit's funded assets are externally rated A
or higher, and a further 70% of the funded assets have an equivalent rating of
A or higher based on the Bank's internal rating program. There are no
non-investment grade assets held in this conduit. The funded assets have a
weighted average repayment period of approximately 1.2 years (April 30, 2008 -
1.1 years), with 75% maturing within five years.
The conduit has investments in two pools of diversified asset-backed
securities. These pools are guaranteed by monoline insurers and are rated
investment grade based on the Bank's internal rating program. The assets
underlying these securities are primarily retail loans, including U.S. home
equity, student loans and residential mortgage-backed securities. Exposure to
U.S. subprime mortgage risk within these securities was approximately
$24 million as at July 31, 2008 (April 30, 2008 - $24 million).
Collateralized debt obligations (CDOs) and collateralized loan
obligations (CLOs) represent five investments averaging $68 million in
externally rated AAA notes issued by synthetic CDOs/CLOs. The credit
protection sold by the CDOs is on a referenced portfolio of corporate debt
which is externally rated investment grade. There is no direct or indirect
risk to U.S. subprime mortgages within these CDOs. The underlying referenced
corporate debt is well diversified with no single weighted average industry
exposure exceeding 16% of the portfolio.
A significant portion of the conduit's assets have been structured to
receive credit enhancements from the sellers, including overcollateralization
protection or cash reserve accounts. Each asset purchased by the conduit has a
deal-specific liquidity facility provided by the Bank in the form of asset
purchase agreements, and is generally structured such that non-defaulted
assets would be purchased by the Bank at the conduit's original cost. In the
future, if any of these assets fall below investment grade levels, the Bank
would likely be required to purchase the assets at the conduit's original cost
under the terms of the asset purchase agreements.
Liquidity facilities provided to non-Bank sponsored conduits
For conduits not administered by the Bank, liquidity facilities totaled
$1.1 billion as at July 31, 2008 (April 30, 2008 - $1.4 billion), of which
$1.1 billion (April 30, 2008 - $1.3 billion) were for U.S. third-party
conduits and none (April 30, 2008 - $30 million) were for Canadian third-party
conduits. The assets of these non-Bank sponsored conduits, which are not
administered by the Bank, are almost entirely consumer auto-based securities.
Approximately 84% of these assets are externally rated AAA, with the balance
of the assets rated investment grade based on the Bank's internal rating
program. The majority of the liquidity facilities have an original committed
term of 364 days, renewable at the option of the Bank. The weighted average
life of the underlying assets of these conduits is approximately two years.
There is no exposure to U.S. subprime mortgage risk.
Funding vehicles
The Bank uses special purpose entities (SPEs) to facilitate
cost-efficient financing of its own operations. The Bank has two such SPEs:
Scotiabank Capital Trust and Scotiabank Subordinated Notes Trust that are VIEs
and are not consolidated on the Bank's balance sheet, as the Bank is not the
primary beneficiary. The Scotiabank Trust Securities and Scotiabank Trust
Subordinated Notes issued by the Trusts are not reported on the Consolidated
Balance Sheet but qualify as regulatory capital. The deposit notes issued by
the Bank to Scotiabank Capital Trust and Scotiabank Subordinated Notes Trust
are reported in Deposits and qualify as regulatory capital. Total deposits
recorded by the Bank as at July 31, 2008 from these trusts were $3.3 billion,
unchanged from the previous quarter. The Bank recorded interest expense of
$49 million on these deposits for the three months ended July 31, 2008,
compared to $49 million for the three months ended April 30, 2008.
Other off-balance sheet arrangements
The Bank may securitize residential mortgages as a means to diversify its
funding sources, as this represents a cost-effective means to fund the growth
in this portfolio. A further $ 1 billion in residential mortgages were
securitized this quarter, bringing the balance of outstanding mortgages
securitized to $11.4 billion as at July 31, 2008, compared to $11.6 billion as
at April 30, 2008.
Guarantees and other indirect commitments increased 4% from October 31,
2007. Fees from guarantees and loan commitment arrangements recorded in other
income were $63 million for the three-month period ended July 31, 2008,
compared to $55 million for the same period a year ago.Selected credit instruments
Mortgage-backed securities
Non-trading portfolioTotal mortgage-backed securities held as available-for-sale securities
represent approximately 1% of the Bank's total assets as at July 31, 2008. The
holdings as at July 31, 2008 and April 30, 2008, were as follows:As at As at
July 31, April 30,
2008 2008
------------------------
Carrying Carrying
($ millions) value value
-------------------------------------------------------------------------
Canadian NHA mortgage-backed securities(1) $ 5,055 $ 5,478
Commercial mortgage-backed securities(2) 113 116
Other residential mortgage-backed securities 48 12
-------------------------------------------------------------------------
Total $ 5,216 $ 5,606
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Canada Mortgage and Housing Corporation provides a guarantee of
timely payment to NHA mortgage-backed security investors.
(2) The assets underlying the commercial mortgage-backed securities
relate to non-Canadian properties.
Exposure to U.S. subprime mortgages risk is nominal.
Trading portfolio
Total mortgage-backed securities held as trading securities represent less
than 0.1% of the Bank's total assets as at July 31, 2008. The holdings as at
July 31, 2008 and April 30, 2008, were as follows:
As at As at
July 31, April 30,
2008 2008
------------------------
Carrying Carrying
($ millions) value value
-------------------------------------------------------------------------
Canadian NHA mortgage-backed securities(1) $ 229 $ 389
Commercial mortgage-backed securities(2) 42 44
-------------------------------------------------------------------------
Total $ 271 $ 433
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Canada Mortgage and Housing Corporation provides a guarantee of
timely payment to NHA mortgage-backed security investors.
(2) The assets underlying the commercial mortgage-backed securities
relate to Canadian properties.Montreal Accord Asset-Backed Commercial Paper (ABCP)
The Bank holds $144 million of Montreal Accord ABCP as available-for-sale
securities, unchanged from the previous quarter. These securities are
currently subject to a restructuring which, if successful, will result in
converting these holdings into longer-dated securities. The Bank's ABCP
carrying value represents approximately 62% of par value. In valuing these
securities, the Bank considers the nature of the underlying assets, the impact
of current credit spreads on the value of similar structured asset type
exposure and other market factors. No net writedowns relating to ABCP were
recorded during this quarter or the prior quarter.
As part of the proposed restructuring plan, the Bank will participate in
a margin funding facility, which is similar to an unfunded loan commitment.Collateralized debt obligations and collateralized loan obligations
Non-trading portfolioThe Bank has CDO and CLO investments in its non-trading portfolio which
are primarily classified as available-for-sale securities. CDOs and CLOs
generally achieve their structured credit exposure either synthetically
through the use of structured credit derivatives, or by investing and holding
corporate loans or bonds. These investments are carried at fair value on the
Bank's Consolidated Balance Sheet. Changes in the fair value of cash-based
CDOs/CLOs are reflected in Other Comprehensive Income, unless there has been
an other-than-temporary decline in fair value which is recorded in net income.
Changes in the fair value of synthetic CDOs/CLOs are reflected in net income.
Substantially all of the referenced assets of the Bank's CDO and CLO
investments are corporate exposures with no U.S. mortgage-backed securities.
These CDOs and CLOs are investment grade carrying a weighted average rating of
AA. More than 65% of these investment holdings are senior tranches with
subordination of 9% or more. Only 8% of the investments are in equity
tranches. The referenced corporate debt exposure in the CDOs and CLOs is well
diversified, with no single industry exceeding 11% of the referenced portfolio
on a weighted average basis.
As at July 31, 2008, the fair value of the Bank's investments in CDOs was
$416 million (April 30, 2008 - $435 million). This portfolio is well
diversified, with an average individual CDO holding of $21 million. During the
current quarter, the Bank recorded a pre-tax loss of $24 million in net income
(April 30, 2008 - $51 million) and a pre-tax loss of $2 million in Other
Comprehensive Income (April 30, 2008 - $26 million), reflecting changes in the
fair value of the CDOs.
As at July 31, 2008, the fair value of the Bank's investments in CLOs was
$780 million (April 30, 2008 - $789 million). This portfolio is well
diversified with an average individual CLO holding of $8 million. The
reduction in fair value of the CLOs recorded in Other Comprehensive Income
during the third quarter was $20 million pre-tax (April 30, 2008 -
$79 million).
The cumulative unrealized loss recorded in Accumulated Other
Comprehensive Income for cash-based CDOs and CLOs was $183 million as at
July 31, 2008 (April 30, 2008 - $158 million). Although these investments have
experienced a slight decline in credit quality, the Bank has the ability and
intent to hold these securities until there is a recovery of fair value. As
such, these unrealized losses are considered temporary in nature.
A significant portion of the above movements in fair value relating to
CDOs and CLOs reflects changes in asset prices arising from liquidity
challenges rather than a change in underlying credit quality.
The main driver of the value of CDOs and CLOs is changes in credit
spreads. Based on positions held at July 31, 2008, a 10 basis point widening
of relevant credit spreads would result in a pre-tax decrease of approximately
$3 million in income and $5 million in Other Comprehensive Income.
Trading portfolio
The Bank also holds synthetic CDOs in its trading portfolio as a result
of structuring and managing transactions with clients and other financial
institutions. Total CDOs purchased and sold in the trading portfolio as at
July 31, 2008 and April 30, 2008, were as follows:Outstanding As at July 31, 2008
------------------------
Positive/
Notional (negative)
($ millions) amount fair value
-------------------------------------------------------------------------
CDOs - sold protection $ 5,706 $ (1,295)
CDOs - purchased protection $ 5,515 $ 1,110
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Outstanding As at April 30, 2008
------------------------
Positive/
Notional (negative)
($ millions) amount fair value
-------------------------------------------------------------------------
CDOs - sold protection $ 5,887 $ (911)
CDOs - purchased protection $ 5,136 $ 710
-------------------------------------------------------------------------
-------------------------------------------------------------------------To hedge the net exposure, the Bank purchases from or sells CDOs to other
financial institutions, along with purchasing and/or selling index tranches or
single name credit default swaps (CDSs). The main driver of the value of CDOs
is changes in credit spreads. Based on positions held at July 31, 2008, a 10
basis point widening of relevant credit spreads in this portfolio would result
in a pre-tax decrease of approximately $3 million in income.
More than 85% of these CDO exposures are rated investment grade
equivalent. Approximately 96% of the Bank's credit exposure to CDO swap
counterparties are to entities which are externally or internally rated the
equivalent of A- or better, while the balance is fully cash collateralized.
The referenced assets underlying the trading book CDOs are substantially
all corporate exposures, with no mortgage-backed securities.
Structured Investment Vehicles
As at July 31, 2008, the fair value of the Bank's investments in
Structured Investment Vehicles (SIVs) was $11 million, unchanged from last
quarter. The Bank does not sponsor, manage or provide liquidity support to
SIVs.
Exposure to Alt-A
In the U.S., loans are classified as Alt-A when they have higher risk
characteristics such as lower credit scores and/or higher loan-to-value
ratios. As at July 31, 2008, the Bank had insignificant direct and indirect
exposure to U.S. Alt-A loans and securities. In Canada, the Bank does not have
a mortgage program which it considers to be an equivalent of U.S. Alt-A.
Exposure to monoline insurers
The Bank has insignificant direct exposure to monoline insurers. The Bank
has indirect exposures of $2.8 billion (April 30, 2008 - $3.2 billion) in the
form of monoline 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 Bank's
public finance exposures of $1.8 billion (April 30, 2008 - $2.3 billion) are
primarily to U.S. municipalities and states. 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.
More than 85% of these securities are rated A or above.
Other indirect exposures to monoline insurers were $1.0 billion
(April 30, 2008 - $0.9 billion). These exposures are primarily comprised of
$0.8 billion (April 30, 2008 - $0.8 billion) of guarantees by the monolines on
diversified asset-backed securities held by the Bank's U.S. multi-seller
conduit (above). Without these guarantees, certain of the underlying assets of
the diversified asset-backed securities would not be rated investment grade.
In the second quarter, the Bank replaced the credit default protection
previously provided by an insurance monoline with protection from another swap
counterparty which resulted in a small gain being recorded in Other
Income-Trading Revenues in that quarter.
Leveraged loans
The Bank may provide leveraged financing to non-investment grade
customers to facilitate their buyout, acquisition and restructuring
activities. The Bank's exposure to highly leveraged loans awaiting syndication
as at July 31, 2008 and April 30, 2008 was nominal.
Automotive industry exposure
The Bank's loan exposure to the North American and European automotive
industry is comprised of loans to automotive dealers, parts manufacturers,
automotive financing companies, and original equipment manufacturers.
Combined, the total loan exposure was $4.8 billion as at July 31, 2008,
unchanged from last quarter. Approximately 60% of these loan exposures are
rated investment grade either externally or based on the Bank's internal
rating program.
Consumer auto-based securities
The Bank holds $7.1 billion (April 30, 2008 - $7.3 billion) of consumer
auto-based securities which are classified as available-for-sale. These
securities are almost all loan-based securities, with only 3% of these
holdings representing leases. The loan-based securities arise from retail
instalment sales contracts ("loans") which are primarily acquired through a
US$6 billion revolving facility to purchase U.S. consumer auto loans from a
North American automotive finance company. This facility has a remaining
revolving period of approximately two years. This facility was recently
modified to allow the seller to sell to the Bank Canadian-based loans for a
limited period rather than U.S.-based loans. The facility is structured with
credit enhancement in the form of over collateralization provided at the time
of the loan purchases, resulting in no further reliance on the seller for
credit enhancement. The credit enhancement for each subsequent purchase under
the revolving credit facility is a multiple of the most recent pool loss data
for the seller's overall managed portfolio.
The Bank conducts periodic stress tests on the loan-based securities.
Under different stress scenarios, the loss on this U.S. consumer auto
loan-backed securities portfolio is not expected to be material to the Bank's
financial performance. Approximately 80% of these securities are externally
rated AAA and have a weighted average life of approximately two years.
These securities are carried at fair value with the change in fair value
recorded in Other Comprehensive Income. The Bank has recorded a pre-tax
cumulative unrealized loss of $33 million (April 30, 2008 - $38 million) in
Accumulated Other Comprehensive Income. While there has been some
deterioration in credit quality, the unrealized loss was primarily
attributable to wider credit spreads. As the Bank has the ability and intent
to hold these securities until there is a recovery of fair value, these
unrealized losses are considered temporary in nature.
In addition, the Bank provides liquidity facilities to its own sponsored
multi-seller conduits and to non-bank sponsored conduits to support automotive
loan and lease assets held by those conduits. See previous sections on
Multi-seller conduits sponsored by the Bank (above) and Liquidity facilities
provided to non-Bank sponsored conduits (above).
Common dividend
The Board of Directors, at its meeting on August 26, 2008, approved a
quarterly dividend of 49 cents per common share. The quarterly dividend
applies to shareholders of record as of October 7, 2008. This dividend is
payable October 29, 2008.
Outlook
U.S. output growth edged slightly higher in the April-June period,
underpinned by significant monetary and fiscal stimulus as well as sizeable
export gains. However, a renewed loss of momentum is expected in the second
half of the year, as these factors are unlikely to be as supportive going
forward. Despite continued construction-related gains associated with the boom
in commodities and infrastructure projects, Canadian output growth also has
been lowered by the increasing weakness in manufactured exports destined for
the United States. China, India, Russia and a number of Latin American
countries remain the globe's growth leaders, though their prospects have been
reduced by the spreading slowdown internationally.
The second half of 2008 is showing improvement compared to the first two
quarters of the fiscal year, with continued asset growth in all three business
lines and a rebound in capital markets activity. While the Bank is on track to
achieve three of its four key financial and operational targets, with slower
global growth, it is unlikely that the Bank will meet its earnings per share
growth objectives set at the end of last year.Business Segment Review
Domestic Banking
For the For the
three months ended nine months ended
-------------------------------------------------------------------------
(Unaudited)
($ millions)
(Taxable
equivalent July 31 April 30 July 31 July 31 July 31
basis)(1) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Business segment
income
Net interest
income $ 1,122 $ 1,051 $ 1,006 $ 3,164 $ 2,901
Provision for
credit losses 99 102 77 292 217
Other income 564 537 537 1,620 1,585
Non-interest
expenses 914 890 892 2,693 2,632
Provision for
income taxes 210 174 179 541 512
-------------------------------------------------------------------------
Net income $ 463 $ 422 $ 395 $ 1,258 $ 1,125
Preferred
dividends paid 8 6 4 20 9
-------------------------------------------------------------------------
Net income
available to
common
shareholders $ 455 $ 416 $ 391 $ 1,238 $ 1,116
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on
equity(l) 38.5% 35.3% 31.8% 34.8% 31.6%
Average assets
($ billions) $ 177 $ 172 $ 156 $ 172 $ 151
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer above for discussion of non-GAAP measures.Domestic Banking reported record net income available to common
shareholders of $455 million this quarter, up a substantial $64 million or 16%
from the third quarter last year. Compared to last quarter, net income
available to common shareholders increased $39 million or 9%. The segment
contributed 46% of the Bank's total quarterly net income available to common
shareholders. Return on equity was 38.5% versus 31.8% in the same period last
year.
Average assets before securitization rose $21 billion or 14% from the
third quarter last year, due largely to growth of $15 billion or 15% in
residential mortgages. Mortgage growth was recorded in all sales channels, and
resulted in increased market share. Personal revolving credit and business
lending volumes also increased. Personal deposit growth of $9 billion or 12%
resulted in industry-leading year-over-year market share gains. Growth was
recorded in term deposits as well as chequing and savings accounts partially
attributable to the acquisition of Dundee Bank. Non-personal deposits rose 5%.
Compared to last quarter, average assets before securitization rose $5 billion
or 3% from growth in retail mortgages and commercial lending. Deposits
increased 2% from growth in chequing and savings accounts, as well as term
deposits.
Total revenue was up $143 million or 9% from the same period last year,
due mainly to higher net interest income driven by strong volume growth.
Quarter over quarter, total revenues rose by $98 million or 6%, with increases
in both net interest income and other income.
Net interest income of $1,122 million was up $116 million or 11% from the
same quarter last year, due to strong volume growth in both assets and
deposits. Average volume growth was reported for most products in retail,
small business and commercial banking. This growth was partially offset by a
decrease in the interest margin, resulting increased wholesale funding
requirements. Compared to last quarter, net interest income rose by 7% due to
two additional days in the quarter and a margin increase of 3 basis points due
mainly to lower funding costs, partially offset by a decrease in the spread
between prime and funding costs and higher funding requirements.
Other income was $564 million this quarter, an increase of $27 million or
5% versus the same quarter last year, reflecting higher foreign exchange
commissions, transaction service revenues, card revenues and higher wealth
management revenues. The latter arose mainly as a result of higher mutual fund
fees reflecting growth in average assets and higher private client revenues,
partially offset by lower brokerage revenues due to a decline in new issues
and customer trading activity. Compared to last quarter, other income rose by
5% in a number of categories, partly due to seasonality.
The provision for credit losses was $99 million in the Domestic Banking
portfolios, up from $77 million in the same quarter last year. The change from
last year was due to higher provisions in the commercial and retail
portfolios. The increase in commercial provisions was related primarily to two
accounts and to increases in small business banking. The retail provisions
were mainly volume related due to Scotia Dealer Advantage, offset partially by
a reduction in provisions for other personal loans. Provisions for credit
losses declined $3 million from last quarter.
Non-interest expenses were up 2% from the third quarter last year due to
growth initiatives and the impact of acquisitions. Partly offsetting was lower
commission-based compensation. Non-interest expenses rose 3%
quarter-over-quarter, reflecting volume-related growth, increased stock-based
compensation, and higher salaries as a result of two more days this quarter.International Banking
For the For the
three months ended nine months ended
-------------------------------------------------------------------------
(Unaudited)
($ millions)
(Taxable
equivalent July 31 April 30 July 31 July 31 July 31
basis)(1) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Business segment
income
Net interest
income $ 847 $ 797 $ 703 $ 2,375 $ 2,052
Provision for
credit losses 56 60 25 146 74
Other income 389 356 250 1,054 847
Non-interest
expenses 698 615 558 1,881 1,697
Provision for
income taxes 118 107 65 347 152
Non-controlling
interest in net
income of
subsidiaries 29 36 29 96 85
-------------------------------------------------------------------------
Net income $ 335 $ 335 $ 276 $ 959 $ 891
Preferred
dividends paid 14 9 6 30 12
-------------------------------------------------------------------------
Net income
available to
common
shareholders $ 321 $ 326 $ 270 $ 929 $ 879
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on equity(l) 15.8% 17.6% 16.1% 17.5% 18.8%
Average assets
($ billions) $ 81 $ 79 $ 65 $ 77 $ 66
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer above for discussion of non-GAAP measures.International Banking's net income available to common shareholders in
the third quarter was $321 million, an increase of $51 million or 19% from
last year, notwithstanding the $17 million negative impact of foreign currency
translation. This increase reflected strong volume growth throughout the
division and the positive impact of acquisitions, partly offset by higher
taxes in Mexico and increased provisions for credit losses. Net income was
down $5 million or 2% from last quarter.
The segment accounted for 33% of the Bank's net income available to
common shareholders and had a return on equity of 15.8%.
Average asset volumes of $81 billion increased $16 billion or 25% from
last year, despite the 5% negative impact of foreign currency translation. The
underlying increase was a result of the acquisition in Chile, a 34% rise in
commercial loans, primarily in Asia, and robust growth in credit cards and
mortgages, up 35% and 25%, respectively. Organic growth in low-cost deposits
was also strong at 7%. Compared to last quarter, average assets increased $2
billion or 3%.
Total revenues were $1,236 million this quarter, an increase of $283
million or 30% from the same period last year, including a $42 million
negative impact of foreign currency translation. Compared to last quarter,
revenues increased $83 million or 7%.
Net interest income was $847 million this quarter, up $144 million or 21%
from the same period last year, notwithstanding the negative foreign currency
translation impact of $29 million. Compared to last quarter, net interest
income increased $50 million or 6%. These increases were driven by very strong
organic loan and deposit growth across the division, as well as the impact of
acquisitions.
Other income increased $139 million or 55% year over year to $389
million, despite the $12 million negative impact of foreign currency
translation. This growth resulted from acquisitions, higher gains on
non-trading securities, including a $40 million gain from an IPO of the
Mexican Stock Exchange, and widespread transaction-driven growth. Compared to
last quarter, other income increased $33 million. The change was mainly due to
the IPO gain in Mexico, offset by the negative impact of the change in fair
value of certain non-trading securities and trading losses in Latin America.
The balance was from strong transaction-driven growth.
The provision for credit losses was $56 million in the third quarter, up
$31 million compared to the same period last year, but down $4 million from
the prior quarter. The increase from the same quarter last year was due mainly
to retail asset growth, the acquisition in Chile, higher commercial provisions
in the Caribbean and Asia, and an increased retail delinquency rate in Mexico.
Higher retail provisions in Mexico and Peru were partially offset by larger
net commercial recoveries and reversals, mostly in Mexico. The slight
quarter-over-quarter decline in provisions was primarily attributable to
Mexico and Peru, where higher recoveries and reversals of commercial
provisions no longer required, were partially offset by higher retail
provisions.
Non-interest expenses were $698 million this quarter, up 25% or $140
million from last year. This included a $17 million favourable impact of
foreign currency translation offset by a $49 million increase from
acquisitions. Higher compensation, premises, advertising, technology and
performance-based expenses were due to ongoing business growth initiatives and
the opening of 132 new branches. In addition, there were $28 million of
provisions under contractual indemnities related to our acquisition in Peru.
Compared to last quarter, expenses increased $83 million or 14%, due mainly to
the same items affecting the year-over-year change and to higher expense
recoveries in Latin America in the prior quarter.
The effective tax rate this quarter was 24.6%, compared to 17.5% in the
same period last year and 22.1% last quarter. The increase from last year was
due to a higher effective tax rate in Mexico from non-deductible items and the
full utilization of tax loss carryforwards. The increase from last quarter was
due primarily to a slightly higher effective rate in Mexico, combined with
lower earnings in low-tax jurisdictions, mainly in Asia.Scotia Capital
For the For the
three months ended nine months ended
-------------------------------------------------------------------------
(Unaudited)
($ millions)
(Taxable
equivalent July 31 April 30 July 31 July 31 July 31
basis)(1) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Business segment
income
Net interest
income $ 269 $ 246 $ 231 $ 789 $ 796
Provision for
credit losses 4 (9) (10) (15) (91)
Other income 383 292 413 806 1,134
Non-interest
expenses 254 243 267 688 788
Provision for
income taxes 97 49 107 179 337
-------------------------------------------------------------------------
Net income $ 297 $ 255 $ 280 $ 743 $ 896
Preferred
dividends paid 6 4 4 14 8
-------------------------------------------------------------------------
Net income
available to
common
shareholders $ 291 $ 251 $ 276 $ 729 $ 888
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on
equity(1) 34.1% 29.6% 27.7% 28.8% 30.5%
Average assets
($ billions) $ 162 $ 167 $ 156 $ 162 $ 153
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer to above for discussion of non-GAAP measures.Scotia Capital contributed strong net income available to common
shareholders of $291 million this quarter, an increase of $15 million or 5%
from the same period last year and up $40 million or 16% from last quarter.
The increase compared to the prior year reflected higher net interest income,
mainly from growth in corporate loans and wider lending margins. This was
somewhat offset by lower trading revenues, as the prior year included a record
level of derivatives revenues. The increase over last quarter is due to
stronger trading revenues, particularly in derivatives and fixed income, and
higher revenues in the investment banking and lending businesses. Return on
equity was very strong at 34.1%, ahead of last year and the prior quarter.
Scotia Capital contributed 30% of the Bank's net income available to common
shareholders.
Total average assets increased 4% over last year to $162 billion. There
was an $8 billion or 25% increase in average corporate loans and acceptances
across all businesses. There was also a $5 billion increase in trading related
assets offset by a reduction in securities purchased under resale agreements.
The decrease of $5 billion or 3% from the last quarter reflects a reduction in
trading securities and securities purchased under resale agreements, offset by
growth in both trading and corporate loans.
Total revenues of $652 million increased $8 million from the third
quarter last year. Increased revenues from our Canadian and U.S. lending
businesses more than offset a modest reduction in Global Capital Markets
revenues. A decrease in derivatives revenues compared to the record level in
the prior year was largely offset by strong growth in our other trading
businesses, including a record quarter for our fixed income business. The $114
million or 21% improvement from last quarter was due to significantly higher
trading revenues in Global Capital Markets, increases in net interest income
and investment banking revenues, and the loss on non-trading securities
incurred in the U.S. last quarter.
Net interest income of $269 million increased 16% over the same period
last year, primarily due to strong corporate loan growth in all regions and
improved lending margins in Canada and the United States. Net interest income
increased 9% compared to last quarter.
Scotia Capital's provision for credit losses was $4 million in the third
quarter, compared to net recoveries of $10 million in the third quarter of
last year and net recoveries of $9 million in the second quarter. The increase
from both the third quarter last year and the previous quarter was related
primarily to one new provision in the U.S.
Other income was $383 million, a decrease of $30 million or 7% from last
year. Global Capital Markets decreased $37 million or 14%, as trading revenues
in derivatives declined from a record level in the prior year. This was
substantially offset by strong trading revenue growth in the foreign exchange,
precious metals, and fixed income trading businesses. Global Corporate and
Investment Banking increased 5% due to higher credit fees in Canada and the
U.S. Compared to last quarter, other income increased $91 million due
primarily to stronger trading revenues in Global Capital Markets and the loss
on non-trading securities in the U.S. in the second quarter. There were also
strong improvements in credit fees and investment banking revenues, including
record revenues in Scotia Waterous.
Non-interest expenses were $254 million this quarter, a $13 million or 5%
decrease from the same period last year, due primarily to lower
performance-based compensation. Compared to last quarter, the increase in
non-interest expenses was driven by higher performance-based compensation,
somewhat offset by lower computer costs.Other(1)
For the For the
three months ended nine months ended
-------------------------------------------------------------------------
(Unaudited)
($ millions)
(Taxable
equivalent July 31 April 30 July 31 July 31 July 31
basis)(2) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Business segment
income
Net interest
income(3) $ (292) $ (221) $ (128) $ (695) $ (367)
Provision for
credit losses - - - - (25)
Other income 92 114 189 272 464
Non-interest
expenses 23 46 35 90 85
Provision for
income taxes(3) (138) (121) (55) (378) (142)
-------------------------------------------------------------------------
Net income $ (85) $ (32) $ 81 $ (135) $ 179
Preferred
dividends paid 4 3 2 11 6
-------------------------------------------------------------------------
Net income (loss)
available to
common
shareholders $ (89) $ (35) $ 79 $ (146) $ 173
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Average assets
($ billions) $ 37 $ 37 $ 32 $ 36 $ 32
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 July 31, 2008 ($103), April 30, 2008 ($100), and
July 31, 2007 ($101), and for the nine months ended July 31, 2008
($321), and July 31, 2007 ($315), to arrive at the amounts reported
in the Consolidated Statement of Income.Net income available to shareholders was negative $89 million in the
third quarter, compared to positive $79 million in the same quarter last year
and negative $35 million in the prior quarter.
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 $103 million this quarter, compared to $101 million in the
same period last year and $100 million in the previous quarter.
Net interest income was negative $292 million this quarter, $164 million
below the same quarter last year, and $71 million below last quarter.
Contributing to this decline was the increased cost of liquidity and hedging
the Bank's interest rate risk in the wholesale markets as a result of current
market conditions. The changes in the fair value of derivatives used for
asset/liability management were unfavourable year over year, but favourable
quarter over quarter.
Other income of $92 million was $97 million lower than last year and
$22 million below last quarter. The decrease compared to last year and last
quarter was mainly attributable to lower gains on non-trading securities. The
decrease year over year was partly offset by higher securiti-zation revenues.
Non-interest expenses were $23 million this quarter, a decrease of $12
million from last year and $23 million from last quarter. The
quarter-over-quarter decrease was largely due to higher legal costs in the
prior quarter.Total
For the For the
three months ended nine months ended
-------------------------------------------------------------------------
(Unaudited) July 31 April 30 July 31 July 31 July 31
($ millions) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Business segment
income
Net interest
income $ 1,946 $ 1,873 $ 1,812 $ 5,633 $ 5,382
Provision for
credit losses 159 153 92 423 175
Other income 1,428 1,299 1,389 3,752 4,030
Non-interest
expenses 1,889 1,794 1,752 5,352 5,202
Provision for
income taxes 287 209 296 689 859
Non-controlling
interest in net
income of
subsidiaries 29 36 29 96 85
-------------------------------------------------------------------------
Net income $ 1,010 $ 980 $ 1,032 $ 2,825 $ 3,091
Preferred
dividends paid 32 22 16 75 35
-------------------------------------------------------------------------
Net income
available to
common
shareholders $ 978 $ 958 $ 1,016 $ 2,750 $ 3,056
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on equity(l) 21.0% 21.4% 21.7%(2) 20.3% 22.2%(2)
Average assets
($ billions) $ 457 $ 455 $ 409 $ 447 $ 402
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 For the
three months ended nine months ended
-------------------------------------------------------------------------
July 31 April 30 July 31 July 31 July 31
(Unaudited) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Net income
available to
common
shareholders
($ millions)
Canada $ 594 $ 552 $ 639 $ 1,640 $ 1,744
United States 38 61 98 121 400
Mexico 94 75 112 232 383
Other
international 313 348 201 913 624
Corporate
adjustments (61) (78) (34) (156) (95)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ 978 $ 958 $ 1,016 $ 2,750 $ 3,056
-------------------------------------------------------------------------
Average assets
($ billions)
Canada $ 291 $ 293 $ 270 $ 289 $ 260
United States 29 29 25 29 30
Mexico 20 20 21 20 21
Other
international 107 102 86 99 83
Corporate
adjustments 10 11 7 10 8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ 457 $ 455 $ 409 $ 447 $ 402
-------------------------------------------------------------------------
Quarterly Financial Highlights
For the three months ended
-------------------------------------------------------------------------
July April Jan. Oct. July April Jan. Oct.
31 30 31 31 31 30 31 31
2008 2008 2008 2007 2007 2007 2007 2006
-------------------------------------------------------------------------
Total revenue
($ millions) $3,374 $3,172 $2,839 $3,078 $3,201 $3,102 $3,109 $2,868
Total revenue
(TEB(1))
($ millions) 3,477 3,272 2,957 3,294 3,302 3,211 3,214 2,999
Net income
($ millions) 1,010 980 835 954 1,032 1,039 1,020 897
Basic earnings
per share ($) 0.99 0.97 0.83 0.95 1.03 1.04 1.02 0.90
Diluted earnings
per share ($) 0.98 0.97 0.82 0.95 1.02 1.03 1.01 0.89
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer above for a discussion of non-GAAP measures.-------------------------------------------------------------------------
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 new significant accounting policies
adopted by the Bank during the third 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.Share Data
-------------------------------------------------------------------------
As at
July 31
(thousands of shares outstanding) 2008
-------------------------------------------------------------------------
Common shares 989,892(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)
Preferred shares Series 18 13,800(8)
Preferred shares Series 20 14,000(9)
-------------------------------------------------------------------------
Series 2000-1 trust securities issued by BNS Capital Trust 500(10)
Series 2002-1 trust securities issued by Scotiabank Capital.
Trust 750(11)
Series 2003-1 trust securities issued by Scotiabank Capital
Trust 750(11)
Series 2006-1 trust securities issued by Scotiabank Capital
Trust 750(11)
-------------------------------------------------------------------------
Scotiabank Trust Subordinated Notes - Series A issued by
Scotiabank Subordinated Notes Trust 1,000(11)
-------------------------------------------------------------------------
Outstanding options granted under the Stock Option Plans to
purchase common shares 24,599(1)(12)
-------------------------------------------------------------------------
(1) As at August 15, 2008, the number of outstanding common shares and
options were 989,923 and 24,422, 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 paid on April 28, 2008, in an amount of
$0.33753 per share.
(8) These shares are entitled to non-cumulative preferential cash
dividends payable quarterly. The initial dividend was paid on
July 29, 2008, in an amount of $0.4315 per share. Dividends, if and
when declared, during the initial five year period ending on
April 25, 2013, will be payable in an amount of $0.3125 per share.
Subsequent to the initial five year fixed rate period, and
resetting every five years thereafter, the dividends will be
determined by the sum of the five year Government of Canada yield
plus 2.05%, multiplied by $25.00.
(9) These shares are entitled to non-cumulative preferential cash
dividends payable quarterly. The initial dividend was paid on
July 29, 2008, in an amount of $0.1678 per share. Dividends, if and,
when declared, during the initial five year period ending on
October 25, 2013, will be payable in an amount of $0.3125 per share.
Subsequent to the initial five year fixed rate period, and resetting
every five years thereafter, the dividends will be determined by the
sum of the five year Government of Canada yield plus 1.70%,
multiplied by $25.00.
(10) Reported in capital instrument liabilities in the Consolidated
Balance Sheet.
(11) Reported in deposits in the Consolidated Balance Sheet.
(12) Included are 17,366 stock options with tandem stock appreciation
right (SAR) features.
Further details, including convertibility features, are available in Notes
13, 14 and 16 of the October 31, 2007, consolidated financial statements
presented in the 2007 Annual Report, and Note 5 of this report further below.
Consolidated Statement of Income
For the For the
three months ended nine months ended
-------------------------------------------------------------------------
(Unaudited) July 31 April 30 July 31 July 31 July 31
($ millions) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Interest income
Loans $ 3,888 $ 3,798 $ 3,536 $ 11,511 $ 10,317
Securities 1,193 1,200 1,192 3,561 3,609
Securities
purchased under
resale agreements 170 204 325 603 938
Deposits with banks 249 260 292 828 809
-------------------------------------------------------------------------
5,500 5,462 5,345 16,503 15,673
-------------------------------------------------------------------------
Interest expenses
Deposits 2,904 2,948 2,756 8,930 7,882
Subordinated
debentures 50 36 30 110 93
Capital instrument
liabilities 10 9 14 28 40
Other 590 596 733 1,802 2,276
-------------------------------------------------------------------------
3,554 3,589 3,533 10,870 10,291
-------------------------------------------------------------------------
Net interest
income 1,946 1,873 1,812 5,633 5,382
Provision for
credit losses
(Note 3) 159 153 92 423 175
-------------------------------------------------------------------------
Net interest
income after
provision
for credit
losses 1,787 1,720 1,720 5,210 5,207
-------------------------------------------------------------------------
Other income
Card revenues 102 93 92 290 274
Deposit and payment
services 225 208 208 640 613
Mutual funds 83 78 77 239 218
Investment
management,
brokerage and
trust services 196 189 192 571 575
Credit fees 164 140 143 437 404
Trading revenues 150 123 217 229 517
Investment banking 193 170 184 527 573
Net gain on
securities, other
than trading 90 59 134 169 340
Other 225 239 142 650 516
-------------------------------------------------------------------------
1,428 1,299 1,389 3,752 4,030
-------------------------------------------------------------------------
Net interest and
other income 3,215 3,019 3,109 8,962 9,237
-------------------------------------------------------------------------
Non-interest expenses
Salaries and
employee benefits 1,068 1,005 1,013 3,051 3,020
Premises and
technology 368 359 335 1,054 991
Communications 82 80 76 237 224
Advertising and
business
development 77 78 71 224 217
Professional 55 68 53 168 146
Business and
capital taxes 40 38 37 92 110
Other 199 166 167 526 494
-------------------------------------------------------------------------
1,889 1,794 1,752 5,352 5,202
-------------------------------------------------------------------------
Income before the
undernoted 1,326 1,225 1,357 3,610 4,035
Provision for income
taxes 287 209 296 689 859
Non-controlling
interest in net
income of
subsidiaries 29 36 29 96 85
-------------------------------------------------------------------------
Net income $ 1,010 $ 980 $ 1,032 $ 2,825 $ 3,091
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Preferred dividends
paid 32 22 16 75 35
-------------------------------------------------------------------------
Net income
available to
common
shareholders $ 978 $ 958 $ 1,016 $ 2,750 $ 3,056
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of
common shares
outstanding
(millions):
Basic 989 986 988 986 990
Diluted 994 992 996 993 999
-------------------------------------------------------------------------
Earnings per
common share (in
dollars):
Basic $ 0.99 $ 0.97 $ 1.03 $ 2.79 $ 3.09
Diluted $ 0.98 $ 0.97 $ 1.02 $ 2.77 $ 3.06
-------------------------------------------------------------------------
Dividends per
common share (in
dollars) $ 0.49 $ 0.47 $ 0.45 $ 1.43 $ 1.29
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------
July 31 April 30 October 31 July 31
(Unaudited) ($ millions) 2008 2008 2007 2007
-------------------------------------------------------------------------
Assets
Cash resources
Cash and non-interest-bearing
deposits with banks $ 2,914 $ 2,641 $ 2,138 $ 2,370
Interest-bearing deposits
with banks 25,701 26,178 23,011 23,048
Precious metals 4,281 3,668 4,046 3,358
-------------------------------------------------------------------------
32,896 32,487 29,195 28,776
-------------------------------------------------------------------------
Securities
Trading 56,016 62,138 59,685 63,797
Available-for-sale 34,314 34,322 28,426 28,636
Equity accounted investments 853 802 724 424
-------------------------------------------------------------------------
91,183 97,262 88,835 92,857
-------------------------------------------------------------------------
Securities purchased under
resale agreements 17,774 15,323 22,542 26,834
-------------------------------------------------------------------------
Loans
Residential mortgages 113,830 108,382 102,154 99,000
Personal and credit cards 48,971 45,273 41,734 41,360
Business and government 111,921 104,928 85,500 84,778
-------------------------------------------------------------------------
274,722 258,583 229,388 225,138
Allowance for credit losses
(Note 3) 2,477 2,490 2,241 2,423
-------------------------------------------------------------------------
272,245 256,093 227,147 222,715
-------------------------------------------------------------------------
Other
Customers' liability under
acceptances 11,497 11,782 11,538 10,289
Derivative instruments 23,504 25,638 21,960 16,635
Land, buildings and equipment 2,542 2,506 2,271 2,296
Goodwill 2,134 2,162 1,134 1,140
Other intangible assets 287 263 273 287
Other assets 8,345 9,057 6,615 6,286
-------------------------------------------------------------------------
48,309 51,408 43,791 36,933
-------------------------------------------------------------------------
$ 462,407 $ 452,573 $ 411,510 $ 408,115
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and shareholders' equity
Deposits
Personal $ 112,872 $ 109,994 $ 100,823 $ 98,171
Business and government 191,239 176,878 161,229 156,668
Banks 28,358 35,566 26,406 32,146
-------------------------------------------------------------------------
332,469 322,438 288,458 286,985
-------------------------------------------------------------------------
Other
Acceptances 11,497 11,782 11,538 10,289
Obligations related to
securities sold under
repurchase agreements 29,116 27,446 28,137 31,223
Obligations related to
securities sold short 11,765 15,028 16,039 21,322
Derivative instruments 22,981 24,010 24,689 15,352
Other liabilities 28,725 26,412 21,138 20,248
Non-controlling interest in
subsidiaries 455 588 497 505
-------------------------------------------------------------------------
104,539 105,266 102,038 98,939
-------------------------------------------------------------------------
Subordinated debentures
(Note 4) 3,538 3,946 1,710 1,774
-------------------------------------------------------------------------
Capital instrument liabilities 500 500 500 750
-------------------------------------------------------------------------
Shareholders' equity
Capital stock
Preferred shares (Note 5) 2,560 2,210 1,635 1,290
Common shares and
contributed surplus 3,728 3,643 3,566 3,521
Retained earnings 18,784 18,300 17,460 16,967
Accumulated other
comprehensive income (loss)
(Note 6) (3,711) (3,730) (3,857) (2,111)
-------------------------------------------------------------------------
21,361 20,423 18,804 19,667
-------------------------------------------------------------------------
$ 462,407 $ 452,573 $ 411,510 $ 408,115
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 nine months ended
-------------------------------------------------------------------------
July 31 July 31
(Unaudited) ($ millions) 2008 2007
-------------------------------------------------------------------------
Preferred shares
Balance at beginning of period $ 1,635 $ 600
Issued 925 690
-------------------------------------------------------------------------
Balance at end of period 2,560 1,290
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Common shares and contributed surplus
Balance at beginning of period 3,566 3,425
Issued 163 139
Purchased for cancellation (1) (43)
-------------------------------------------------------------------------
Balance at end of period 3,728 3,521
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 2,825 3,091
Dividends:
Preferred (75) (35)
Common (1,411) (1,278)
Purchase of shares (6) (586)
Other (9) (7)
-------------------------------------------------------------------------
Balance at end of period 18,784 16,967
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 (loss) 146 (473)
-------------------------------------------------------------------------
Balance at end of period (3,711) (2,111)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total shareholders' equity at end of period $ 21,361 $ 19,667
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statement of Comprehensive Income
For the For the
three months ended nine months ended
July 31 July 31 July 31 July 31
(Unaudited) ($ millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Comprehensive income
Net income $ 1,010 $ 1,032 $ 2,825 $ 3,091
-------------------------------------------------------------------------
Other comprehensive income
(loss), net of income taxes
(Note 6) :
Net change in unrealized
foreign currency
translation gains (losses) 193 (465) 993 (531)
Net change in unrealized
losses on
available-for-sale
securities (243) (146) (513) (81)
Net change in gains (losses)
on derivative instruments
designated as cash flow
hedges 69 97 (334) 139
-------------------------------------------------------------------------
Other comprehensive income
(loss) 19 (514) 146 (473)
-------------------------------------------------------------------------
Comprehensive income $ 1,029 $ 518 $ 2,971 $ 2,618
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 For the
three months ended nine months ended
-------------------------------------------------------------------------
Sources (uses) of cash flows July 31 July 31 July 31 July 31
(Unaudited) ($ millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Cash flows from operating
activities
Net income $ 1,010 $ 1,032 $ 2,825 $ 3,091
Adjustments to determine net
cash flows from (used in)
operating activities 208 (7) 424 29
Net accrued interest
receivable and payable 14 (73) 247 (70)
Trading securities 6,511 6,979 4,980 (2,352)
Derivative assets 2,477 (1,180) 1,592 (5,617)
Derivative liabilities (1,134) 1,621 (4,542) 3,110
Other, net 2,940 2,019 4,442 (370)
-------------------------------------------------------------------------
12,026 10,391 9,968 (2,179)
-------------------------------------------------------------------------
Cash flows from financing
activities
Deposits 7,903 314 29,240 28,896
Obligations related to
securities sold under
repurchase agreements 1,196 2,168 (416) (1,894)
Obligations related to
securities sold short (3,301) 109 (4,637) 8,458
Preferred shares issued 350 - 925 690
Common shares issued 82 7 145 92
Common shares
redeemed/purchased for
cancellation (7) (395) (7) (629)
Subordinated debentures
issued - - 2,194 -
Subordinated debentures
redeemed (425) (500) (425) (500)
Cash dividends paid (517) (461) (1,486) (1,313)
Other, net 309 57 1,258 2,814
-------------------------------------------------------------------------
5,590 1,299 26,791 36,614
-------------------------------------------------------------------------
Cash flows from investing
activities
Interest-bearing deposits
with banks 845 178 (776) (6,024)
Securities purchased under
resale agreements (2,229) (1,291) 5,458 (1,587)
Loans, excluding
securitizations (16,290) (11,703) (38,623) (27,934)
Loan securitizations 892 1,321 2,584 2,764
Securities, other than
trading, net (147) (221) (3,051) (1,116)
Land, buildings and
equipment, net of disposals (69) (66) (254) (230)
Other, net(l) (376) - (1,457) (119)
-------------------------------------------------------------------------
(17,374) (11,782) (36,119) (34,246)
-------------------------------------------------------------------------
Effect of exchange rate
changes on cash and cash
equivalents 31 (70) 136 (99)
-------------------------------------------------------------------------
Net change in cash and cash
equivalents 273 (162) 776 90
Cash and cash equivalents at
beginning of period 2,641 2,532 2,138 2,280
-------------------------------------------------------------------------
Cash and cash equivalents at
end of period(2) $ 2,914 $ 2,370 $ 2,914 $ 2,370
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash disbursements made for:
Interest $ 3,627 $ 3,614 $ 10,851 $ 10,860
Income taxes $ 199 $ 220 $ 953 $ 836
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Certain comparative amounts have been reclassified to conform with
current period presentation.
(1) For the three and nine months ended July 31, 2008, comprises
investments in subsidiaries, net of cash and cash equivalents at the
date of acquisition of nil and $37, respectively (July 31, 2007 - nil
and $3, respectively), and net of non-cash consideration of common
shares issued from treasury of nil and nil, respectively
(July 31, 2007 - nil and $15, respectively).
(2) Represents cash and non-interest-bearing deposits with banks.
The accompanying notes are an integral part of these interim consolidated
financial statements.
Notes to the Interim Consolidated Financial Statements (Unaudited)
These interim consolidated financial statements have been prepared in
accordance with Canadian Generally Accepted Accounting Principles (GAAP). They
should be read in conjunction with the consolidated financial statements for
the year ended October 31, 2007. The significant accounting policies used in
the preparation of these interim consolidated financial statements are
consistent with those used in the Bank's year-end audited consolidated
financial statements.
1. Changes in accounting policies
There were no new significant accounting policies adopted in the
current fiscal year. Note 1 to the Bank's 2007 annual audited
consolidated financial statements describes accounting policy
changes.
2. Sales of loans through securitizations
The Bank securitizes residential mortgages through the creation of
mortgage-backed securities. No credit losses are expected, as the
mortgages are insured. For the quarter ended July 31, 2008, the key
weighted-average assumptions used to measure the fair value at the
dates of securitization were a prepayment rate of 20%, an excess
spread of 1.5% and a discount rate of 3.9%. The following table
summarizes the Bank's sales:
For the For the
three months ended nine months ended
-------------------------------------------------------------------------
July 31 April 30 July 31 July 31 July 31
($ millions) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Net cash
proceeds(1) $ 892 $ 1,142 $ 1,321 $ 2,584 $ 2,764
Retained interest 32 37 28 85 77
Retained servicing
liability (5) (6) (9) (15) (20)
-------------------------------------------------------------------------
919 1,173 1,340 2,654 2,821
Residential
mortgages
securitized 900 1,142 1,351 2,597 2,817
-------------------------------------------------------------------------
Net gain (loss) on
sale $ 19 $ 31 $ (11) $ 57 $ 4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Excludes insured mortgages which were securitized and retained by the
Bank of $157 for the three months ended July 31, 2008 (April 30, 2008
- $555; July 31, 2007 - $1,008), and $2,063 for the nine months ended
July 31, 2008 (July 31, 2007 - $1,716) As at July 31, 2008, the
outstanding balance of mortgage-backed securities was $4,850, and
these assets have been classified as available-for-sale securities.
3. Impaired loans and allowance for credit losses
(a) Impaired loans
As at
-------------------------------------------------------------------------
July 31 April 30 October 31
2008 2008 2007
-------------------------------------------------------------------------
Specific
($ millions) Gross allowance(l) Net Net Net
-------------------------------------------------------------------------
-------------------------------------------------------------------------
By loan type:
Residential
mortgages $ 542 $ 162 $ 380 $ 237 $ 203
Personal and
credit cards 618 551 67 168 51
Business and
government 1,003 441 562 440 347
-------------------------------------------------------------------------
Total $ 2,163 $ 1,154 $ 1,009 $ 845 $ 601
-------------------------------------------------------------------------
-------------------------------------------------------------------------
By geography:
Canada $ 308 $ 309 $ 231
United States 72 4 4
Other Inter-
national 629 532 366
-------------------------------------------------------------------------
Total $ 1,009 $ 845 $ 601
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The specific allowance for impaired loans evaluated on an individual
basis totalled $441 (April 30, 2008 - $464; October 31, 2007 - $383).
(b) Allowance for credit losses
The following table summarizes the change in the allowance for credit
losses.
For the For the
three months ended nine months ended
-------------------------------------------------------------------------
July 31 April 30 July 31 July 31 July 31
($ millions) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Balance at
beginning of
period $ 2,498 $ 2,462 $ 2,516 $ 2,252 $ 2,618
Write offs (218) (190) (179) (602) (483)
Recoveries 52 51 38 154 137
Provision for
credit losses(4) 159 153 92 423 175
Other, including
foreign exchange
adjustment (6) 22 (34) 258 (14)
-------------------------------------------------------------------------
Balance at the end
of period(1)(2)(3) $ 2,485 $ 2,498 $ 2,433 $ 2,485 $ 2,433
-------------------------------------------------------------------------
(1) As at July 31, 2008, includes $143 of specific allowance and $25 of
general allowances relating to acquisition of a new subsidiary (April
30, 2008 - $149 and $25, respectively; July 31, 2007 - $37 and $16,
respectively), which may change as the valuation of the acquired loan
assets is finalized.
(2) As at July 31, 2008, $8 has been recorded in other liabilities (April
30, 2008 - $8; July 31, 2007 - $10).
(3) As at July 31, 2008, the general allowance for credit losses was
$1,323 (April 30, 2008 - $1,323; July 31, 2007 - $1,298).
(4) For the three and nine months ended July 31, 2008, net of reduction
in general allowance of nil. (For the three and nine months ended
July 31, 2007, net of reduction in general allowance of nil and $25,
respectively.)
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.
Subordinated debentures totaling $1,700 million were issued on
March 27, 2008, and will mature on March 27, 2018. Interest is
payable semi-annually in arrears, commencing on September 29, 2008,
at 4.99% per annum up until March 27, 2013. From March 27, 2013,
until maturity, interest is payable at an annual rate equal to the
90-day Bankers' Acceptance Rate plus 2.00%, payable quarterly in
arrears commencing on June 27, 2013. The subordinated notes 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 totalling (Yen)10 billion were issued on
April 9, 2008, and will mature on April 9, 2038. Interest is payable
semi-annually in arrears, commencing on October 9, 2008, at an annual
interest rate of 3.37%. The subordinated debentures are redeemable by
the Bank on April 9, 2018, with the prior written approval of the
Superintendent of Financial Institutions Canada. The subordinated
debentures qualify as Tier 2B capital.
On July 22, 2008, the Bank redeemed all of its $425 million 5.65%
subordinated debentures due July 22, 2013 at par plus accrued
interest to the redemption date.
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. In the second quarter, the Bank
received regulatory approval to move to the 90% floor.
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
-------------------------------------------------------------------------
July 31 April 30 October 31
(unaudited)($ millions) 2008 2008 2007(1)
-------------------------------------------------------------------------
Shareholders' equity per Consolidated
Balance Sheet $ 21,361 $ 20,423 $ 18,804
Capital instrument liabilities - trust
securities 2,750 2,750 2,750
Non-controlling interest in subsidiaries 455 588 497
Goodwill deduction (2,134) (2,162) (1,134)
Components of accumulated other
comprehensive income excluded from
Tier 1 capital 155 (19) (692)
Other capital deductions(2) (512) (507) -
-------------------------------------------------------------------------
Tier 1 capital $ 22,075 $ 21,073 $ 20,225
-------------------------------------------------------------------------
Qualifying subordinated debentures,
net of amortization 3,234 3,659 1,452
Capital instrument liabilities - trust
subordinated notes 1,000 1,000 1,000
Other net capital items(3) (265) (144) 304
-------------------------------------------------------------------------
Tier 2 capital $ 3,969 $ 4,515 $ 2,756
-------------------------------------------------------------------------
Total regulatory capital $ 26,044 $ 25,588 $ 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
ratios for all reported periods. OSFI has also prescribed an asset-
to-capital leverage multiple; the Bank was in compliance with this
threshold for all reported periods.
Significant capital transactions
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, paid on April
28, 2008, was $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.
Series 18 non-cumulative 5-year rate reset preferred shares totaling
$300 million and $45 million were issued on March 25, 2008, and
March 27, 2008, respectively. Holders are entitled to receive fixed
non-cumulative preferential cash dividends payable quarterly, if and
when declared, in an amount of $0.3125 per share for the initial
five-year fixed rate period ending on April 25, 2013. The initial
dividend, in an amount of $0.4315 per share, was paid on July 29,
2008. Subsequent to the initial five year fixed rate period, and
resetting every five years thereafter, the dividends will be
determined by the sum of the five-year Government of Canada yield
plus 2.05%, multiplied by $25.00. Holders of Series 18 preferred
shares have the option to convert their shares into an equal number
of Series 19 non-cumulative floating rate preferred shares on April
26, 2013, and on April 26 every five years thereafter. Series 19
preferred shares are entitled to receive floating rate non-cumulative
preferential cash dividends, if and when declared, in an amount per
share equal to the sum of the T-Bill rate plus 2.05%, multiplied by
$25.00. If the Bank determines that, after giving effect to any
Election Notices received, there would be less than 1,000,000 Series
18 preferred shares issued and outstanding on the applicable Series
18 Conversion Date, all of the issued and outstanding Series 18
preferred shares will automatically be converted on such Series 18
Conversion Date into an equal number of Series 19 preferred shares.
With prior written approval of the Superintendent of Financial
Institutions Canada, Series 18 preferred shares and, if applicable,
Series 19 preferred shares, are redeemable by the Bank. These shares
are redeemable at $25.00 per share on April 26, 2013, and every five
years thereafter. On all other dates beginning April 26, 2013, Series
19 preferred shares are redeemable at $25.00 per share plus a
redemption premium of $0.50 per share. These preferred shares qualify
as Tier 1 capital.
Series 20 non-cumulative five-year rate reset preferred shares
totaling $350 million were issued on June 10, 2008. Holders are
entitled to receive fixed non-cumulative preferential cash dividends
payable quarterly, if and when declared, in an amount of $0.3125 per
share for the initial five-year fixed rate period ending on October
25, 2013. The initial dividend was paid on July 29, 2008, in the
amount of $0.1678 per share. Subsequent to the initial five-year
fixed rate period, and resetting every five years thereafter, the
dividends will be determined by the sum of the five-year Government
of Canada yield plus 1.70%, multiplied by $25.00. Holders of Series
20 preferred shares have the option to convert their shares into an
equal number of Series 21 non-cumulative floating rate preferred
shares on October 26, 2013, and on October 26 every five years
thereafter. Series 21 preferred shares are entitled to receive
floating rate non-cumulative preferential cash dividends, if and when
declared, in an amount per share equal to the sum of the T-Bill rate
plus 1.70%, multiplied by $25.00. If the Bank determines that, after
giving effect to any Election Notices received, there would be less
than 1,000,000 Series 20 preferred shares issued and outstanding on
the applicable Series 20 Conversion Date, all of the issued and
outstanding Series 20 preferred shares will automatically be
converted on such Series 20 Conversion Date into an equal number of
Series 21 preferred shares. With prior written approval of the
Superintendent of Financial Institutions Canada, Series 20 preferred
shares and, if applicable, Series 21 preferred shares, are redeemable
by the Bank. These shares are redeemable at $25.00 per share on
October 26, 2013, and every 5 years thereafter. On all other dates
beginning October 26, 2013, Series 21 preferred shares are redeemable
at $25.00 per share plus a redemption premium of $0.50 per share.
These preferred shares qualify as Tier 1 capital.
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 first quarter.
In the third quarter of 2008, the Bank initiated a new 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 April 30, 2008. The bid will terminate on the
earlier of January 11, 2009, or the date the Bank completes its
purchases. During the third quarter, the Bank purchased 125,000
common shares pursuant to this bid.
The Bank issued 803,060 shares from Treasury in the third quarter as
part of the Bank's Shareholder Dividend and Share Purchase Plan.
These additional common shares were issued at an average price of
$48.88 per share.
6. Accumulated other comprehensive income (loss)
The components of accumulated other comprehensive income (loss) as at
July 31, 2008, and other comprehensive income (loss) for the nine
months then ended were as follows:
Accumulated other comprehensive income (loss)
As at and for the nine months ended
-------------------------------------------------------------------------
Opening Net Ending Opening
balance change balance balance
-------------------------------------------------------------------------
October 31 July 31 October 31
2007 2008 2006
-------------------------------------------------------------------------
($ millions)
Unrealized foreign
currency
translation gains
(losses), net of
hedging activities $ (4,549) $ 993 $(3,556)(1) $ (2,321)
Unrealized gains
(losses) on
available-for-sale
securities, net of
hedging activities 639 (513) 126(2) -
Gains (losses) on
derivative
instruments
designated as
cash flow hedges 53 (334) (281)(3) -
-------------------------------------------------------------------------
Accumulated other
comprehensive
income (loss) $ (3,857) $ 146 $ (3,711) $ (2,321)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at and for the nine months ended
-----------------------------------------------------------
Transition Net Ending
amount change balance
-----------------------------------------------------------
November 1 July 31
2006 2007
($ millions)
Unrealized foreign
currency
translation gains
(losses), net of
hedging activities $ - $ (531) $(2,852)(l)
Unrealized gains
(losses) on
available-for-sale
securities, net of
hedging activities 706 (81) 625(2)
Gains (losses) on
derivative
instruments
designated as
cash flow hedges (23) 139 116(3)
-----------------------------------------------------------
Accumulated other
comprehensive
income (loss) $ 683 $ (473) $ (2,111)
-----------------------------------------------------------
-----------------------------------------------------------
(1) Net of income tax expense of$546 (July 31, 2007 - nil).
(2) Net of income tax expense of $81 (July 31, 2007 - $355). Also, the
net unrealized gain as at July 31, 2008 includes unrealized losses of
$574 (July 31, 2007 - $200) after tax on the available-for-sale
securities.
(3) Net of income tax benefit of $132 (July 31, 2007 - expense of $57).
Other comprehensive income (loss)
The following table summarizes the changes in the components of other
comprehensive income (loss).
For the For the
three months ended nine months ended
-------------------------------------------------------------------------
July 31 July 31 July 31 July 31
($ millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Net change in unrealized
foreign currency translation
losses
Net unrealized foreign
currency translation gains
(losses)(1) $ 279 $ (742) $ 1,602 $ (859)
Net gains (losses) on hedges
of net investments in
self-sustaining foreign
operations(2) (86) 277 (609) 328
-------------------------------------------------------------------------
193 (465) 993 (531)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net change in unrealized gains
on available-for-sale
securities
Net unrealized gains (losses)
on available-for-sale
securities(3) (213) (118) (356) 23
Reclassification of net gains
to net income(4) (30) (28) (157) (104)
-------------------------------------------------------------------------
(243) (146) (513) (81)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net change in gains (losses)
on derivative instruments
designated as cash flow
hedges
Net gains (losses) on
derivative instruments
designated as cash flow
hedges(5) 187 (129) 487 5
Reclassification of net
(gains) losses to net
income(6) (118) 226 (821) 134
-------------------------------------------------------------------------
69 97 (334) 139
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other comprehensive income
$ 19 $ (514) $ 146 $ (473)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For the three and nine months ended July 31, 2008, net of income
expense of nil (July 31, 2007 - nil).
(2) For the three and nine months ended July 31, 2008, net of income tax
benefit of $28 and expense of $119, respectively. (July 31, 2007 -
nil and nil respectively).
(3) For the three and nine months ended July 31, 2008, net of income tax
benefit of $83 and $187, respectively (July 31, 2007 - benefit of $56
and expense of $26, respectively).
(4) For the three and nine months ended July 31, 2008, net of income tax
expense of $22 and $70, respectively (July 31, 2007 - expense of $17
and $54, respectively).
(5) For the three and nine months ended July 31, 2008, net of income tax
expense of $85 and $223, respectively (July 31, 2007 - benefit of $64
and expense of $3, respectively).
(6) For the three and nine months ended July 31, 2008, net of income tax
expense of $54 and $380, respectively (July 31, 2007 - benefit of
$113 and $67, respectively).
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 principal financial risks
that arise from transacting financial instruments include credit
risk, liquidity risk and market risk. The Bank has a comprehensive
risk management framework to monitor, evaluate and manage these
risks. This risk management framework has four main components, as
follows:
- extensive risk management policies define the Bank's risk
appetite, set the limits and controls within which the Bank and
its subsidiaries can operate, and reflect the requirements of
regulatory authorities. These policies are approved by the Bank's
Board of Directors, either directly or through the Executive and
Risk Committee, (the Board);
- 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; and
- 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 Bank's credit risk strategy and credit
risk policy are developed by Global Risk Management (GRM) and are
reviewed and approved by the Board 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 denned;
- 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.
The credit risk policy sets out, among other things, the credit risk
rating systems and associated parameter estimates, the delegation of
authority for granting credit, the calculation of the allowance for
credit losses and the authorization of writeoffs. It forms 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 levels.
Credit quality of financial assets
The Bank's non-retail portfolio is well diversified by industry, and
there has not been a significant change in concentrations of credit
risk since October 31, 2007.
The Bank's retail portfolios consist of a number of relatively small
loans to a large number of borrowers. The portfolios are distributed
across Canada and a wide range of countries. As such, the portfolios
inherently have a high degree of diversification.
(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
management; the borrower's current and projected financial results
and credit statistics; the industry in which the borrower operates;
economic trends; and geopolitical risk. 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 July 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 July 31, 2008, the amount of retail loans that were past due
but not impaired was not significant.
Derivative instruments
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 exposure arising from the
Bank's derivative transactions as at July 31, 2008.
Derivative instruments used by the Bank include credit derivatives in
its investment and loan portfolios: credit protection is sold as an
alternative to acquiring exposure to bond or loan assets, while
credit protection is bought to manage or mitigate credit exposures.
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 under terms that are common and customary to
standard derivative, securities borrowing and lending, and other
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 July
31, 2008, total assets pledged were $43 billion (April 30, 2008 - $46
billion; October 31, 2007 - $40 billion). Asset pledging transactions
are conducted under terms that are common and customary to standard
derivative, securities borrowing and lending, and other lending
activities. Standard risk management controls are applied with
respect to asset pledging.
Liquidity risk
Liquidity risk is the risk that the Bank is unable to meet its
financial obligations in a timely manner at reasonable prices. The
Bank's liquidity risk is subject to extensive risk management
controls and is managed within the framework of policies and limits
approved by the Board. The Board receives reports on risk exposures
and performance against approved limits. The Liability Committee
(LCO) provides senior management oversight of liquidity risk through
its weekly meetings.
The key elements of the Bank's liquidity risk management framework
include:
- liquidity risk measurement and management limits, including limits
on maximum net cash outflow by currency over specified short-term
horizons;
- prudent diversification of its wholesale funding activities by
using a number of different funding programs to access the global
financial markets and manage its maturity profile, as appropriate;
- large holdings of liquid assets to support its operations, (see
table below) which can generally be sold or pledged to meet the
Bank's obligations;
- liquidity stress testing, including Bank-specific, Canada-
systemic, and global-systemic scenarios; and
- liquidity contingency planning.
Liquid assets
As at
--------------------------------
July 31
2008
-------------------------------------------------------------------------
Canadian Foreign
($ millions) dollar currency Total
-------------------------------------------------------------------------
Cash and deposits with the Bank of
Canada $ 743 $ 4,931 $ 5,674
Deposits with other banks 3,668 23,554 27,222
Securities 50,925 22,488 73,413
Call and short loans - 919 919
-------------------------------------------------------------------------
$ 55,336 $ 51,892 $107,228
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liquid assets as a % of total assets 23.2%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contractual maturities
The table below shows the contractual maturities of certain of the
Bank's financial liabilities as at July 31, 2008. The Bank's deposit
liabilities shown below are those recorded in Canada and the United
States, which amounted to $256 billion, representing 77% of the
Bank's total deposits.
Payable on a fixed date
------------------------------
Greater
Payable Payable Less One to than
on after than one five five
($ millions) demand notice year years years Total
-------------------------------------------------------------------------
Deposits $ 18,927 $ 7,298 $157,706 $ 61,972 $ 9,710 $255,613
Subordinated
debentures - - 257 - 3,281 3,538
Capital
instrument
liabilities - - - - 500 500
-------------------------------------------------------------------------
Total $ 18,927 $ 7,298 $157,963 $ 61,972 $ 13,491 $259,651
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Deposits
The Bank's foreign operations have 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 July 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. As
at July 31, 2008, more than half of the notional value of the Bank's
derivative instruments mature within one year, while 85% 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. Market risk is subject to extensive risk management
controls, and is managed within the framework of market risk policies
and limits approved by the Board. The LCO and Market Risk Management
and Policy Committee 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. The Board reviews results from these metrics quarterly.
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 (see
Trading portfolio risk management further below). 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. 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 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
earlier of contractual repricing or maturity dates based on expected
repricing dates.
Interest rate risk
Interest rate risk, inclusive of credit spread risk, is the risk of
loss due to the following: 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,
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.
Based on the Bank's interest rate positions as at July 31, 2008, the
following table shows the potential after-tax impact on the Bank's
net income over the next 12 months and economic value of
shareholders' equity of an immediate and sustained 100 basis point
increase and decrease in interest rates across all currencies.
Interest rate sensitivity
---------------------------------------------------------------------
Economic
value
($ millions) Net income of equity
---------------------------------------------------------------------
100 bp increase $ 14 $ (153)
---------------------------------------------------------------------
100 bp decrease $ (75) $ 190
---------------------------------------------------------------------
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.
As at July 31, 2008, a one per cent increase (decrease) in the
Canadian dollar against all currencies in which the Bank operates
decreases (increases) the Bank's before-tax annual earnings by
approximately $37 million in the absence of hedging activity,
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 $162 million
as at July 31, 2008, net of hedging.
Equity risk
Equity risk is the risk of loss due to adverse movements in equity
prices. Equity price 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 specific equity risk, which refers to that portion of an
individual equity instrument's price volatility that is determined by
entity-specific characteristics.
The Bank is exposed to equity risk through its equity investment
portfolios, which are controlled by Board-approved portfolio, VaR,
and stress-test limits. Equity investments include common and
preferred shares, as well as a diversified portfolio of third-party
managed funds.
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 $3,221
million as at July 31, 2008.
Trading portfolio risk management
The Bank's policies, processes and controls for trading activities
are designed to achieve a balance between pursuing profitable trading
opportunities and managing earnings volatility within a framework of
sound and prudent practices. Trading activities are primarily
customer focused, but also include a proprietary component.
Market risk arising from the Bank's trading activities is managed in
accordance with Board-approved policies and limits, including
aggregate VaR and stress testing limits.
Trading portfolios are marked to market in accordance with the Bank's
valuation policies. Positions are marked to market daily and
valuations are independently reviewed by back office or GRM units on
a regular basis. These units also provide profit and loss reporting,
as well as VaR and limit compliance reporting to business unit
management and executive management for evaluation and action as
appropriate. VaR is calculated daily using a 99% confidence level, a
one-day holding period and historical simulations based on 300 days
of market data. This means that, on average, the trading book may
lose more than the VaR about once every 100 days.
The table below shows the Bank's VaR by risk factor:
One-day VaR by risk factor
---------------------------------------------------------------------
As at For the three months ended
July 31, July 31, 2008
($ millions) 2008 Average High Low
---------------------------------------------------------------------
Interest rate 12.9 13.0 16.6 10.8
Equities 2.9 3.5 4.6 2.7
Foreign exchange 1.0 0.9 1.8 0.6
Commodities 2.9 3.0 3.4 2.5
Diversification (4.3) (4.6) n/a n/a
---------------------------------------------------------------------
All-Bank VaR 15.4 15.8 17.5 13.9
---------------------------------------------------------------------
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 $122 million (after tax). As at July 31, 2008, the
maximum length of cash flow hedges outstanding was less than
10 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
gain of $17 million during the three months ended July 31, 2008
(July 31, 2007 - gain of $ 1 million), of which a gain of $6 million
(July 31, 2007 - loss of $1 million) related to cash flow hedges, due
to the ineffective portion of designated hedges. For the nine months
ended July 31, 2008, the Bank recorded a gain of $14 million (July
31, 2007 - gain of $7 million) of which a gain of $ 13 million
(July 31, 2007 - gain of $3 million) related to cash flow 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 $8.6 billion as at July 31, 2008 (April 30, 2008 - $7.5 billion;
October 31, 2007 - $4.1 billion). The change in fair value that was
recorded through trading income for the three and nine months ended
July 31, 2008 was a loss of $5 million (July 31, 2007 - loss of
$82 million) and a loss of $232 million (July 31, 2007 - gain of
$122 million), respectively. These changes in fair value were
substantially 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 $64 million as at July
31, 2008 (April 30, 2008 - $83 million; October 31, 2007 - $151
million). The change in fair value that was recorded through trading
income for the three and nine months ended July 31, 2008, was a loss
of less than $1 million (July 31, 2007 - loss of $1 million) and a
loss of $3 million (July 31, 2007 - gain of $8 million),
respectively.
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
$404 million of as at July 31, 2008 (April 30, 2008 - $573 million;
October 31, 2007 - $847 million). The change in fair value that was
recorded through net interest income for the three and nine months
ended July 31, 2008 was a gain of less than $1 million (July 31, 2007
- gain of $14 million) and a loss of $13 million (July 31, 2007 -
gain of $15 million), respectively. The change in fair value, which
is mainly attributable to changes in interest rates, was
substantially offset by the change in fair value of the related
derivatives. At July 31, 2008, the Bank is contractually obligated to
pay $401 million to the holders of the notes at maturity (April 30,
2008 - $569 million; October 31, 2007 - $853 million).
8. Employee future benefits
Employee future benefits include pensions and other post-retirement
benefits, post-employment benefits and compensated absences. The
following table summarizes the expenses for the Bank's principal
plans(1):
For the For the
three months ended nine months ended
-------------------------------------------------------------------------
July 31 April 30 July 31 July 31 July 31
($ millions) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Benefit expenses
Pension plans $ - $ 1 $ 5 $ 2 $ 21
Other benefit plans 29 30 30 88 90
-------------------------------------------------------------------------
$ 29 $ 31 $ 35 $ 90 $ 111
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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
On May 13, 2008, the Bank agreed with Intesa Sanpaolo S.p.A. to
acquire its shares and other interests in Scotiabank Peru for
approximately $230 million, which increases the Bank's ownership in
Scotiabank Peru from 78% to 98%. This transaction was accounted for
this quarter and resulted in an increase in goodwill of approximately
$63 million. There is also a reduction in non-controlling interest in
subsidiaries of $164 million. The purchase price allocation may be
refined as the Bank completes its valuation of the assets acquired
and liabilities assumed.
In 2007, the Bank acquired an equity interest in Dundee Wealth Inc.
Under the acquisition agreement the Bank had a right to acquire
additional shares in the secondary market up to a 19.9% ownership
interest. During the third quarter, the Bank exercised this right and
acquired additional shares bringing its ownership to approximately
19.4%. This investment is accounted for under the equity method.
On July 14, 2008, the Bank announced its agreement with E(*)TRADE
Financial Corporation to acquire 100% of E(*)TRADE Canada for US
$442 million. The transaction is subject to regulatory approval and
is expected to close during the fourth quarter.
The Bank completed the acquisition of Chile's Banco del Desarrollo on
November 26, 2007, through the acquisition of 99.5% of the
outstanding shares for $1.0 billion Canadian dollar equivalent (CDE).
Total assets at acquisition were approximately CDE $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. Based on acquisition date fair values,
approximately CDE $797 million has been allocated to the estimated
value of goodwill acquired. The purchase price allocation may be
refined as the Bank completes 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 29(*) July 4 (Preferred Shares Series 20)
Annual 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 August 26, 2008,
at 2:00 p.m. EDT and is expected to last approximately one hour. Interested
parties are invited to access the call live, in listen-only mode, by
telephone, toll-free, at 1-800-733-7571 (please call five to 15 minutes in
advance). In addition, an audio webcast, with accompanying slide presentation,
may be accessed via the Investor Relations page of www.scotiabank.com.
Following discussion of the results by Scotiabank executives, there will be a
question and answer session. Listeners are invited to submit questions by
e-mail to investor.relations@scotiabank.com.
A telephone replay of the conference call will be available from
August 26, 2008, to September 9, 2008, by calling (416) 640-1917 and entering
the identification code 21280123 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; Frank Switzer, Public Affairs, (416) 886-7238