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Scotiabank reports first quarter earnings of $842 million and announces dividend of 49 cents per share
First quarter financial measures compared to the same period a year ago:- Earnings per share (diluted) of $0.80, compared to $0.82
- Net income of $842 million, versus $835 million
- Return on equity of 16.9%, compared to 18.3%
- Productivity ratio of 58.7%, versus 56.5%
- Quarterly dividend maintained at 49 cents per common share
Year-to-date performance versus our 2009 financial and operational
objectives was as follows:
1. Target: Earn a return on equity (ROE)(1) of 16 to 20%. For the three
months Scotiabank earned an ROE of 16.9%.
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 2%.
3. Target: Maintain a productivity ratio(1) of less than 58%.
Scotiabank's ratio was 58.7% for the three months.
4. Target: Maintain strong capital ratios. At 9.5%, Scotiabank's Tier 1
capital ratio remains strong by Canadian and international standards.
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(1) Refer to non-GAAP measures further below.HALIFAX, March 3 /CNW/ - Scotiabank recorded first quarter net income of
$842 million, up $7 million or 1% from the same period last year. Diluted
earnings per share (EPS) were $0.80 compared to $0.82 in the same period a
year earlier. Return on equity was 16.9% compared to 18.3% last year.
"All three of our business lines delivered revenue growth through
increases in volumes, net interest and other income. The business lines
benefitted from broadly diversified revenues and a strong focus on risk and
expense management," said President and CEO Rick Waugh.
"Unfortunately, the impact of unprecedented and volatile financial
markets offset this growth through higher funding and capital costs and
declines in the fair value of our securities portfolio. This environment will
present continuing challenges to achieving some of our growth objectives.
However, our solid core earnings, high level of profitability with a return on
equity of 16.9%, and our strong, increasing capital ratios, provide the
foundation to maintain our targets.
"Canadian Banking continues to perform well in a competitive market. This
quarter's results benefitted from loan growth in mortgages and business
lending. Growth in total personal deposits from business initiatives and
acquisitions led to year-over-year gains in market share. Loan losses have
been manageable, but rose as expected in both the retail and commercial
portfolios compared to the same period last year due to deteriorating economic
conditions.
"Results in International Banking reflect strong deposit and loan growth
in all regions, ongoing contributions from acquisitions - particularly in Peru
and Chile - and the positive impact of foreign currency translation. The
positive revenue growth was offset by increases in retail credit provisions in
Latin America.
"Scotia Capital had record performances in its precious metals, fixed
income and investment banking businesses. The division also benefitted from
robust contributions from foreign exchange, higher loan growth and lending
revenues and low loan losses.
"Our loan portfolios both in Canada and internationally are all
performing within our planned risk tolerances and targets.
"Most importantly, Scotiabank's capital position not only remained strong
but improved over previous periods. In addition, our capital is of a high
quality relative to our global peers.
"This strong combination of profitability and capital strength provides
sustainable support for our dividend, which we are maintaining at 49 cents per
share.
"We are in good shape not only to weather this unprecedented storm, but
to come out in a very strong position, with the ability to capitalize on
growth opportunities relative to many of our global competitors."FINANCIAL HIGHLIGHTS
As at and for the three months ended
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January 31 October 31 January 31
(Unaudited) 2009 2008 2008
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Operating results ($ millions)
Net interest income 1,966 1,941 1,814
Net interest income (TEB(1)) 2,036 2,036 1,932
Total revenue 3,351 2,491 2,839
Total revenue (TEB(1)) 3,421 2,586 2,957
Provision for credit losses 281 207 111
Non-interest expenses 2,010 1,944 1,669
Provision for income taxes 190 2 193
Provision for income taxes (TEB(1)) 260 97 311
Net income 842 315 835
Net income available to common
shareholders 805 283 814
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Operating performance
Basic earnings per share ($) 0.80 0.28 0.83
Diluted earnings per share ($) 0.80 0.28 0.82
Return on equity(1) (%) 16.9 6.0 18.3
Productivity ratio (%) (TEB(1)) 58.7 75.2 56.5
Net interest margin on total average
assets (%) (TEB(1)) 1.53 1.68 1.79
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Balance sheet information ($ millions)
Cash resources and securities 131,380 125,353 130,893
Loans and acceptances 304,278 300,649 260,501
Total assets 509,829 507,625 449,422
Deposits 346,570 346,580 316,797
Preferred shares 3,710 2,860 1,865
Common shareholders' equity 19,103 18,782 18,128
Assets under administration 191,826 203,147 195,155
Assets under management 34,264 36,745 31,704
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Capital measures
Tier 1 capital ratio (%) 9.5 9.3 9.0
Total capital ratio (%) 11.4 11.1 10.2
Tangible common equity to risk-weighted
assets(1) (%) 7.8 7.3 7.2
Risk-weighted assets ($ millions) 239,660 250,591 234,876
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Credit quality
Net impaired loans(2) ($ millions) 1,602 1,191 689
General allowance for credit losses
($ millions) 1,323 1,323 1,298
Net impaired loans as a % of loans and
acceptances(2) 0.53 0.40 0.26
Specific provision for credit losses
as a % of average loans and
acceptances (annualized) 0.37 0.29 0.18
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Common share information
Share price ($)
High 40.68 51.55 54.00
Low 27.35 35.25 43.10
Close 29.67 40.19 48.19
Shares outstanding (millions)
Average - Basic 1,001 990 985
Average - Diluted 1,003 994 992
End of period 1,012 992 985
Dividends per share($) 0.49 0.49 0.47
Dividend yield (%) 5.8 4.5 3.9
Market capitalization ($ millions) 30,039 39,865 47,487
Book value per common share($) 18.87 18.94 18.40
Market value to book value multiple 1.6 2.1 2.6
Price to earnings multiple (trailing
4 quarters) 9.8 13.1 12.5
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Other information
Employees 69,451 69,049 62,002
Branches and offices 2,696 2,672 2,458
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(1) Non-GAAP measure. Refer further below for a discussion of these
measures.
(2) Net impaired loans are impaired loans less the specific allowance
for credit losses.
ACHIEVEMENTS
We are proud that during the most difficult part of the financial crisis,
Scotiabank was identified as one of the top 10 best performing banks in the
world, according to Oliver Wyman's annual shareholder performance index
ranking.
Canadian Banking
- Scotiabank continued to enhance its suite of investment solutions:
- In November, we launched the Scotia Power Savings Account, a new
high interest savings account.
- In January, ScotiaFunds introduced Scotia INNOVA Portfolios, a new
fund-of-funds solution offering five optimized portfolios,
designed for retail customers with at least $50,000 to invest.
- Scotiabank's launch of the new Tax Free Savings Account exceeded
expectations. More than 157,000 new accounts were opened in the
first month, with more than half of these accounts having an
average balance of close to $4,300. The supporting $5,000-a-day
giveaway contest generated more than 107,000 entries.
- With the November launch of Scotia Mortgage Authority, Scotiabank
completed the successful integration of Maple Trust Company and
Scotia Express Services. We are now No. 2 in the broker-originated
mortgage market in Canada, with more than 35% of our total mortgage
volume originating from this channel.
- In December, Scotiabank converted its one millionth account to
paperless banking. In addition to reducing our environmental
footprint, this initiative will reduce annual operating costs by more
than $3 million.
International Banking
- In February, Scotiabank announced the acquisition of an additional
24% of Thanachart Bank, Thailand's eighth-largest bank and leading
automobile lender, for approximately $270 million. We now own 49% of
Thanachart, the regulatory limit for foreign banks in Thailand. This
investment is a great opportunity for us to capitalize on the
strength of the Thai market and on the strong relationship that we
have already built with Thanachart.
- Scotiabank has been recognized by Global Finance magazine as Canada's
Best Trade Finance Bank for 2009. This is the third time that the
Bank has won this award for its wide range of trade-related services
and excellent online systems for importers and exporters.
- We continue to expand our presence in complementary businesses such
as insurance. For example, in December, Scotiabank's Central American
automobile insurance joint venture began operations in El Salvador.
The company, Qualitas Compania de Seguros, S.A., is a joint venture
between Scotiabank and Mexico's largest auto insurer, Qualitas.
Scotia Capital
- Scotia Capital was the sole bookrunner on a $2.3 billion treasury
offering of common shares by Manulife Financial Corporation. The
transaction consisted of a $1.2 billion public offering and a
$1.1 billion private placement.
- Scotia Capital's Global Capital Markets division received recognition
for the performance of two of its businesses:
- In fixed income, we were ranked No. 1 for Corporate Debt
Underwriting (Canada) in Bloomberg's 2008 league tables.
- Our foreign exchange team has been ranked first among Canadian
banks by Global Finance magazine for the fifth consecutive year.
- Our Global Corporate and Investment Banking division was also
recognized in a number of areas:
- Scotia Waterous was ranked No. 1 in the world in 2008 according to
Bloomberg for number of oil and gas M&A deals completed, and No. 2
in the world by deal value.
- Scotia Capital ranked No. 1 for 2008 stock sales in Canada,
excluding offerings by parent banks. The Globe and Mail has
recognized Scotia Capital as "the real winner when it comes to
what league tables are supposed to measure: the ability to bring
in business from outside customers."Employee highlights
Scotiabank celebrated its fifth year of recognition as one of Canada's 50
Best Employers. The prestigious annual list, based on a national survey of
employees conducted by Hewitt Associates and published in The Globe and Mail's
Report on Business Magazine, measures employee engagement and placed
Scotiabank 20th of 99 eligible organizations - once again the highest-ranked
bank. This reinforces our position as a global leader in promoting positive
work environments and recognizes Scotiabank as an employer of choice among
Canadians.
Community involvement
Scotiabank and Cricket Canada joined forces in January to launch the
Cricket Canada Scotiabank School Program (CCSSP). CCSSP is dedicated to
teaching and promoting the multinational game of cricket to elementary school
children across Canada. Scotiabank has a longstanding involvement with the
sport. We are the official bank of cricket in Canada and the West Indies.
Since 2000, we have provided training and material to more than 220,000
Caribbean schoolchildren through the Scotiabank Kiddy Cricket program.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Forward-looking statements
Our public communications often include oral or written forward-looking
statements. Statements of this type are included in this document, and may be
included in other filings with Canadian securities regulators or the U.S.
Securities and Exchange Commission, or in other communications. All such
statements are made pursuant to the "safe harbour" provisions of the United
States Private Securities Litigation Reform Act of 1995 and any applicable
Canadian securities legislation. Forward-looking statements may include
comments with respect to the Bank's objectives, strategies to achieve those
objectives, expected financial results (including those in the area of risk
management), and the outlook for the Bank's businesses and for the Canadian,
United States and global economies. Such statements are typically identified
by words or phrases such as "believe," "expect," "anticipate," "intent,"
"estimate," "plan," "may increase," "may fluctuate," and similar expressions
of future or conditional verbs, such as "will," "should," "would" and "could."
By their very nature, forward-looking statements involve numerous
assumptions, inherent risks and uncertainties, both general and specific, and
the risk that predictions and other forward-looking statements will not prove
to be accurate. Do not unduly rely on forward-looking statements, as a number
of important factors, many of which are beyond our control, could cause actual
results to differ materially from the estimates and intentions expressed in
such forward-looking statements. These factors include, but are not limited
to: the economic and financial conditions in Canada and globally; fluctuations
in interest rates and currency values; liquidity; significant market
volatility and interruptions; the failure of third parties to comply with
their obligations to us and our affiliates; the effect of changes in monetary
policy; legislative and regulatory developments in Canada and elsewhere,
including changes in tax laws; the effect of changes to our credit ratings;
operational and reputational risks; the risk that the Bank's risk management
models may not take into account all relevant factors; 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
62 of the Bank's 2008 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" sections in this document are based on the Bank's views and
the actual outcome is uncertain. Readers should consider the above-noted
factors when reviewing these sections.-------------------------------------------------------------------------
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.
2009 Objectives - Our Balanced Scorecard
Financial
- Return on equity of 16-20%
- Diluted earnings per share growth of 7-12%
- Long-term shareholder value through increases in dividends and stock
price appreciation
Operational
- Productivity ratio of less than 58%
- Sound ratings
- Strong practices in corporate governance and compliance processes
- Maintain strong capital ratios
Customer
- High levels of customer satisfaction and loyalty
- Deeper relationship with existing customers
- New customer acquisition
People
- High levels of employee satisfaction and engagement
- Enhance diversity of workforce
- Commitment to corporate social responsibility and strong community
involvement-------------------------------------------------------------------------
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 $70 million versus
$118 million in the same quarter last year and $95 million last quarter.
For purposes of segmented reporting, a segment's net interest income and
provision for income taxes are grossed up by the taxable equivalent amount.
The elimination of the TEB gross up is recorded in the "Other" segment.
Productivity ratio (TEB)
Management uses the productivity ratio as a measure of the Bank's
efficiency. This ratio represents non-interest expenses as a percentage of
total revenue on a taxable equivalent basis.
Net interest margin on total average assets (TEB)
This ratio represents net interest income on a taxable equivalent basis
as a percentage of total average assets.
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 Bank calculates its return on equity using average common
shareholders' equity, including all components of common shareholders' equity.
Economic equity and Return on economic equity
For internal reporting purposes, the Bank attributes capital to its
business segments using a methodology that considers credit, market,
operational and other risks inherent in each business segment. The amount
attributed is commonly referred to as economic equity. Return on equity for
the business segments is based on the economic equity attributed to the
business segments.
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 acquisition-related
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).
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Group Financial Performance and Financial Condition
Scotiabank's net income was $842 million in the first quarter, an
increase of $7 million or 1% from the same period a year ago. Stable core
earnings supported by acquisitions and asset growth, strong capital markets
revenues, and higher transaction-based income were offset by a lower net
interest margin, increased provisions for credit losses and writedowns on
available-for-sale securities. The positive impact of foreign currency
translation was $106 million year over year.
Net income increased $527 million or 167% from the fourth quarter, due
primarily to the after-tax charges of $642 million related to certain trading
activities and valuation adjustments recorded last quarter. This quarter's
higher capital markets revenues and the positive impact of foreign currency
translation were offset by a lower net interest margin, an increase in
provisions for credit losses, higher compensation-related expenses and the
impact of higher income taxes.
Total revenue
Total revenue (on a taxable equivalent basis) was $3,421 million this
quarter, up $464 million or 16% from the first quarter last year. The increase
was attributable to many factors, including strong broad-based trading
revenues net of derivative trading losses, the positive impact of foreign
currency translation and higher fee-based revenues. These items were partly
offset by writedowns on available-for sale securities from a continued decline
in equity markets, and compression of the net interest margin.
Compared to the fourth quarter, total revenue increased $835 million or
32%, due mainly to the pre-tax charges of $958 million related to certain
trading activities and valuation adjustments recorded last quarter. This
quarter's revenues were buoyed by strong capital markets results, including
record precious metals and fixed income trading, increased securitization
revenues and higher credit and underwriting fees. Partly offsetting these
items were additional writedowns on available-for-sale securities.
Net interest income
This quarter's net interest income (on a taxable equivalent basis) was
$2,036 million, an increase of $104 million or 5% over the same period last
year, including the favourable impact of foreign currency translation of $146
million. The growth in net interest income from acquisitions and strong asset
growth was more than offset by the change in fair value of financial
instruments used for asset/liability management purposes, lower tax-exempt
income and the impact of increased liquidity premiums on funding costs.
Compared to the previous quarter, net interest income (on a taxable
equivalent basis) was unchanged. The favourable impact of foreign currency
translation and the full-quarter benefit of prior-period asset growth, were
offset by a reduction in tax-exempt income and a lower net interest margin.
The Bank's net interest margin was 1.53% in the first quarter, compared
to 1.79% in the same quarter of last year and 1.68% last quarter. Compared to
the prior year, the decline in the margin was due primarily to relatively
higher funding costs reflective of increased liquidity premiums, lower tax-
exempt income, a change in asset mix with the growth in variable rate
mortgages, and an unfavourable change in fair value of financial instruments
used for asset/liability management purposes. These factors were partly offset
by wider spreads in corporate lending. The quarter-over-quarter decrease was
due partly to the competitive pressures on term deposit pricing and the
negative impact of non-rate sensitive retail deposits not repricing in a
falling rate environment. As well, there was lower tax-exempt income, offset
by the continued widening of spreads in corporate lending.
Other income
Other income was $1,385 million this quarter, an increase of $360 million
or 35% from the first quarter last year. The results reflected a strong
contribution from capital market revenues, with record precious metals and
fixed income trading and very strong foreign exchange and institutional equity
results, partially offset by derivative trading losses. The increase in other
income was also driven by higher securitization revenues due to continued
participation in government mortgage purchase programs, the positive impact of
foreign currency translation, and higher underwriting and credit fees from
strong equity and debt origination activities. There was also growth across
most categories of transaction-based revenues from increased customer
activity. These items were partly offset by additional writedowns on
available-for-sale securities this quarter caused by a continued decline in
equity markets. Wealth management revenues were also down due to weaker equity
markets.
Quarter over quarter, other income was up $835 million or 152%, due
primarily to the charges taken in the fourth quarter related to certain
trading activities and valuation adjustments, as well as the factors noted
above.
Provision for credit losses
The provision for credit losses was $281 million this quarter, an
increase of $170 million from the same period last year and $74 million above
last quarter. The higher level this quarter compared to a year ago was due to
higher provisions in the retail portfolios. Further discussion on credit risk
is provided below.
Non-interest expenses and productivity
Non-interest expenses were $2,010 million this quarter, $341 million or
20% over the same quarter last year, including an unfavourable impact of $67
million from foreign currency translation. In addition, recent acquisitions
accounted for approximately $82 million of the growth in non-interest
expenses. The underlying increase of $192 million was partly from higher
performance-based compensation, mainly from growth in Scotia Capital revenues
this quarter. The remaining growth in salaries, premises and technology
reflected the impact of prior period growth initiatives. There was also an
increase in business taxes from the same period last year.
Compared to the fourth quarter, non-interest expenses were up $66 million
or 3%. This change was primarily attributable to higher performance-based
compensation due to growth in trading revenues, increased business and capital
taxes and the unfavourable impact of foreign currency translation. Excluding
these items, non-interest expenses were lower than the previous quarter,
reflecting the Bank's ongoing focus on expense management.
The productivity ratio, a measure of the Bank's efficiency, was 58.7%,
compared to 56.5% in the same quarter last year and 75.2% last quarter. The
Bank's operating leverage this quarter was negative 4.7% compared to a year
ago, driven primarily by higher non-interest expenses and lower tax-exempt
income.
Taxes
The effective tax rate for this quarter was 17.9%, slightly down from
18.2% in the first quarter last year, but up from 0.6% in the fourth quarter.
The decrease from a year ago was due primarily to a reduction in the statutory
tax rate in Canada and a higher level of income in lower tax rate
jurisdictions, offset by lower tax-exempt income. The low tax rate in the
previous quarter arose from the charges taken in the fourth quarter, which
were in higher tax jurisdictions.
Risk management
The Bank's risk management policies and practices are unchanged from
those outlined in pages 62 to 76 of the 2008 Annual Report.
Credit risk
The specific provision for credit losses was $281 million this quarter,
compared to $111 million in the same period last year and $207 million in the
previous quarter.
The provision for credit losses was $155 million in the Canadian Banking
portfolios, up from $91 million in the same quarter last year and $107 million
in the previous quarter. Retail provisions increased year over year due
primarily to higher volumes in the indirect automotive portfolio including
Scotia Dealer Advantage. Provisions related to commercial and small business
banking were also up modestly year over year. The increase from the previous
quarter was due primarily to increased retail provisions in Scotia Dealer
Advantage and to last quarter's higher level of recoveries in other personal
loans.
International Banking's provision for credit losses was $116 million this
quarter, compared to $30 million in the same period last year, and $90 million
in the prior quarter. The increase from the same quarter last year was due
largely to acquisition-related retail asset growth in Peru and Chile, and to
higher retail provisions in Mexico. The increase from the prior quarter was
attributable to higher provisions in the retail portfolios, mainly in Peru and
Chile, and a new provision related to one commercial account in Mexico. These
increases were partially offset by a higher level of net reversals and
recoveries in the commercial portfolios.
Scotia Capital's provision for credit losses was $10 million this
quarter, unchanged from last quarter, but above the net reversals of $10
million in the first quarter of last year.
Total net impaired loans, after deducting the allowance for specific
credit losses, were $1,602 million as at January 31, 2009, an increase of $411
million from last quarter. The increase was largely attributable to the
commercial and retail portfolios in International Banking and to Canadian
Banking's retail portfolio. The general allowance for credit losses was $1,323
million as at January 31, 2009, unchanged from last quarter. However, the
general allowance may be increased during the year if the negative trends in
economic and business conditions continue.
Automotive industry exposure
The Bank's direct (corporate and commercial) loan exposure to the North
American and European automotive industry comprised the following:As at
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January 31, October 31,
($ billions) 2009 2008
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Original equipment manufacturers
(OEM) $0.6 $0.5
Financing and leasing 1.2 1.2
Parts manufacturers 0.8 0.7
Dealers 3.0 2.8
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Total $5.6 $5.2
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-------------------------------------------------------------------------Approximately 54% of this exposure is rated investment grade, either
externally or based on the Bank's internal rating program, and loans are
typically senior in the capital structure of the borrowers. The loss ratio -
loan losses as a percentage of average loan exposures - on this portfolio was
two basis points for the first quarter of 2009, compared to nine basis points
for the fourth quarter of 2008.
The Bank is actively managing its exposure to this sector. Regular stress
tests are performed on this exposure, covering a number of different
scenarios, including the potential default of a North American OEM. In
addition, the Bank has focused on large multi-dealer relationships and parts
manufacturing customers with geographic and OEM diversity, and has contained
its exposure to North American OEMs.
Consumer auto-based securities
The Bank holds $7.2 billion (October 31, 2008 - $7.8 billion) of consumer
auto-based securities which are classified as available-for-sale. These
securities are almost all loan-based securities, with only 2% 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. and Canadian consumer auto loans
from a North American automotive finance company. This facility has a
remaining revolving period of approximately two years, and was modified last
year to allow the seller for a limited period to sell Canadian-based loans to
the Bank, 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. For each subsequent purchase under the revolving credit facility,
the credit enhancement 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 within the Bank's risk tolerance. Approximately
82% 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 $297 million in accumulated other comprehensive
income (AOCI) (October 31, 2008 - $272 million). 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 the
intent to hold these securities until there is a recovery in fair value, which
may be at maturity, these unrealized losses are considered temporary in
nature.
Other
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. For details, see sections on
Multi-seller conduits sponsored by the Bank (further below) and Liquidity
facilities provided to non-Bank sponsored conduits (further below).
Market risk
Value at Risk (VaR) is a key measure of market risk in the Bank's trading
activities. In the first quarter, the average one-day VaR was $21.7 million
compared to $16.6 million for the same quarter last year. The change was
primarily the result of increased interest rate risk, as well as the effect of
greater market volatility compared to a year ago. Compared to the fourth
quarter, the average one-day VaR increased to $21.7 million from $20.1
million, due primarily to increased interest rate risk, which was partially
offset by reduced equity risk.Average for the three months ended
-------------------------------------------------------------------------
Risk factor January 31 October 31 January 31
($ millions) 2009 2008 2008
-------------------------------------------------------------------------
Interest rate $ 19.7 $ 16.9 $ 13.8
Equities 5.3 7.9 4.5
Foreign exchange 2.3 1.5 0.9
Commodities 3.9 3.0 2.7
Diversification effect (9.5) (9.2) (5.3)
-------------------------------------------------------------------------
All-Bank VaR $ 21.7 $ 20.1 $ 16.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------There were eight trading loss days in the first quarter, compared to 13
days in the previous quarter. The losses were well within the range predicted
by VaR.
Liquidity risk
The Bank maintains large holdings of liquid assets to support its
operations. These assets generally can be sold or pledged to meet the Bank's
obligations. As at January 31, 2009, liquid assets were $108 billion (October
31, 2008 - $106 billion), equal to 21% of total assets (October 31, 2008 -
21%). The mix of these assets between securities and other liquid assets,
including cash and deposits with banks, was 67% and 33%, respectively (October
31, 2008 - 64% and 36%, respectively).
In the course of the Bank's day-to-day activities, securities and other
assets are pledged to secure an obligation, participate in clearing or
settlement systems, or operate in a foreign jurisdiction. Securities may also
be sold under repurchase agreements. As at January 31, 2009, total assets
pledged or sold under repurchase agreements were $91 billion (October 31, 2008
- $82 billion). The quarter-over-quarter increase was due to an increase in
pledges to the Federal Reserve Bank and pledges relating to securities
borrowed and lent.
Related party transactions
There were no changes to the Bank's procedures and policies for related
party transactions from those outlined on pages 82 and 134 of the 2008 Annual
Report. All transactions with related parties continued to be at market terms
and conditions.
Balance sheet
The Bank's total assets at January 31, 2009, were $510 billion, up $2
billion due to the positive impact from foreign currency translation. Growth
in securities and loans were offset by reductions in cash resources and
securities purchased under resale agreements.
Total securities increased by $10 billion from October 31, 2008. Equity
accounted investments increased $2 billion due to the purchase of a
significant interest in CI Financial Corp. (CI Financial). Trading securities
increased $2 billion, due primarily to higher holdings of Canadian government
debt securities, offset by continued reductions in the size of the equity
securities portfolio. Available-for-sale securities were up $5 billion due to
higher holdings of Canadian government debt securities.
As at January 31, 2009, the unrealized loss on available-for-sale
securities was $1,573 million, an increase of $345 million from last quarter.
This was due mainly to declines in the value of corporate debt and equity
securities, offset by increases in market values of Canadian and foreign
government debt securities.
The Bank's loan portfolio grew $2 billion or 1% from October 31, 2008,
due substantially to the positive impact of $2 billion from foreign currency
translation. On the retail lending side, residential mortgage growth in
Canadian Banking of $1 billion was offset by securitization of $5 billion
related to the Bank's participation in the Canadian government's CMB and
Insured Mortgage Purchase Program. Personal loans were up $1 billion,
primarily in Canada. Business and government loans increased $5 billion from
October 31, 2008, due mainly to growth in corporate lending.
Total liabilities were $487 billion as at January 31, 2009, an increase
of $1 billion from October 31, 2008, including a $2 billion impact from
foreign currency translation. Personal deposits increased by $4 billion, due
to growth in GICs and high interest savings accounts in Canada and in
international locations, particularly Peru. This growth was offset by
reductions in deposits by businesses, governments and banks.
Total shareholders' equity increased $1.2 billion from October 31, 2008.
The increase was due primarily to internal capital generation of $304 million
and the issuance of $1.5 billion of common and preferred shares, offset by an
increase of $650 million in accumulated other comprehensive losses. The latter
was mostly due to higher unrealized losses on available-for-sale securities
including hedges.
Capital management
Scotiabank is committed to maintaining a solid capital base to support
the risks associated with its diversified businesses. The Bank's capital
management framework includes a comprehensive internal capital adequacy
assessment process (ICAAP), aimed at ensuring that the Bank's capital is more
than adequate to meet current and future risks and achieve its strategic
objectives. Key components of the Bank's ICAAP include sound corporate
governance; establishing risk-based capital targets; managing and monitoring
capital, both currently and prospectively; and utilizing appropriate financial
metrics which relate risk to capital, including regulatory capital measures.
The Bank's capital management practices were unchanged from those outlined on
pages 38 to 42 of the 2008 Annual Report.
Capital ratios
The Bank continues to maintain a strong capital position. The Tier 1 and
the Total capital ratios as at January 31, 2009, were 9.5% and 11.4%,
respectively, compared to 9.3% and 11.1% at October 31, 2008.
The increase in the Tier 1 and Total Capital ratios this quarter was
largely the result of reductions in risk weighted assets and higher capital
issuances, including $667 million common shares, $850 million preferred shares
and $1 billion subordinated debentures. These more than offset the deduction
related to the Bank's strategic investment in CI Financial. The reduction in
risk weighted assets was primarily a result of changes to certain models for
the calculation of market and credit risk capital requirements, as approved by
Office of the Superintendent Financial Institutions Canada (OSFI) and
management actions.
The tangible common equity (TCE) ratio at 7.8% was also up quarter over
quarter and continues to be strong relative to other major global banks.
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 78 to 79 of the 2008 Annual Report. Management's judgment on
valuation inputs is necessary when observable market data is not available,
and in the selection of valuation models. Uncertainty in these estimates and
judgments can affect fair value and financial results recorded.
During this quarter, changes in the fair value of financial instruments
generally arose from normal economic, industry and market conditions.
Total derivative notional amounts were $1,484 billion at January 31,
2009, compared to $1,562 billion at October 31, 2008, with the reduction
occurring mainly in foreign exchange derivative contracts. The percentage of
derivatives held for trading and those held for non-trading or asset liability
management was generally unchanged. The credit equivalent amount, after taking
into account master netting arrangements, was $27.9 billion, compared to $28.5
billion last year end.
Selected credit instruments
Mortgage-backed securities
Non-trading portfolio
Total mortgage-backed securities held as available-for-sale securities
represent approximately 1% of the Bank's total assets as at January 31, 2009,
and are shown in the table below. Exposure to U.S. subprime mortgage risk is
nominal.
Trading portfolio
Total mortgage-backed securities held as trading securities represent
less than 0.1% of the Bank's total assets as at January 31, 2009, and are
shown in the table below.Mortgage-backed securities
As at January 31, 2009
---------------------------
Non-trading Trading
Carrying value ($ millions) portfolio portfolio
-------------------------------------------------------------------------
Canadian NHA mortgage-backed
securities(1) $ 6,858 $ 253
Commercial mortgage-backed securities 104(2) 45(3)
Other residential mortgage-backed securities 112 -
-------------------------------------------------------------------------
Total $ 7,074 $ 298
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at October 31, 2008
---------------------------
Non-trading Trading
Carrying value ($ millions) portfolio portfolio
-------------------------------------------------------------------------
Canadian NHA mortgage-backed
securities(1) $ 6,294 $ 184
Commercial mortgage-backed securities 123(2) 47(3)
Other residential mortgage-backed securities 55 -
-------------------------------------------------------------------------
Total $ 6,472 $ 231
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 in
the non-trading portfolio relate to non-Canadian properties.
(3) The assets underlying the commercial mortgage-backed securities in
the trading portfolio relate to Canadian properties.Montreal Accord Asset-Backed Commercial Paper (ABCP)
During the quarter, ABCP subject to the Montreal Accord was restructured.
This restructuring resulted in conversion of the Bank's ABCP holdings into
longer-dated securities which are classified as available-for-sale. The Bank
received four classes of notes (89% of face value) with an effective maturity
of 2017, as well as 13 classes of tracking notes linked to specific underlying
assets (11% of face value). Approximately 80% of the new notes are comprised
of A-rated Class A-1 and A-2 notes. The Bank did not record a net gain or loss
on the exchange of its Montreal Accord ABCP as the fair value of the new notes
acquired was consistent with the carrying value of the Montreal Accord ABCP
($144 million). The Bank's carrying value represents approximately 62% of par
value. In valuing these securities, the Bank considers the probability of
collateral calls, the nature of the underlying assets, the impact of current
credit spreads on the value of similar asset-type exposure and other market
factors.
As part of the restructuring, the Bank participated in a margin funding
facility, which is recorded as an unfunded loan commitment. The Bank's portion
of the margin funding facility is $200 million.
Collateralized debt obligations and collateralized loan obligations
Non-trading portfolio
The Bank has collateralized debt obligation (CDO) and collateralized loan
obligation (CLO) investments in its nontrading 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
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.
As at January 31, 2009, the remaining exposure to CDOs was $421 million
(October 31, 2008 - $420 million), of which $99 million is included in
accumulated other comprehensive income (AOCI) (October 31, 2008 - $83
million). The quarter-over-quarter change was due primarily to the impact of
foreign currency translation and the purchase of additional subordination,
which were offset by current fair value changes. This portfolio is well
diversified, with an average individual CDO holding of $15 million, and no
single industry exceeding 21% of the referenced portfolio on a weighted
average basis. Based on their carrying values, these CDOs have a weighted
average rating of AA. More than 14% of these investment holdings are senior
tranches with subordination of 10% or more, and 21% of the investments are in
equity tranches.
During the current quarter, the Bank recorded a pre-tax loss of $25
million in net income (three months ended October 31, 2008 - $364 million) and
a pre-tax loss of $16 million in other comprehensive income (three months
ended October 31, 2008 - $20 million), reflecting changes in the fair value of
the CDOs. These pre-tax losses were driven by the continuing widening of
credit spreads and some reduction in subordination levels.
As at January 31, 2009, the fair value of the Bank's investments in CLOs
was $535 million (October 31, 2008 - $660 million), net of $597 million
recorded in AOCI (October 31, 2008 - $436 million). This portfolio is well
diversified with an average individual CLO holding of $6 million, and no
single industry exceeding 13% of the referenced portfolio on a weighted
average basis. These CLOs are primarily investment grade and have a weighted
average rating of AA. More than 94% of these investment holdings are senior
tranches with subordination of 10% or more. Only 2% of the investments are in
equity tranches. During the current quarter, the Bank recorded a pre-tax loss
of $6 million in net income (three months ended October 31, 2008 - $33
million) and a pre-tax loss of $161 million in other comprehensive income
(three months ended October 31, 2008 - $238 million), reflecting changes in
the fair value of the CLOs. The above movements in fair value relating to CLOs
reflect changes in asset prices arising mainly from liquidity pressures and
some change in underlying credit quality of the loans. Although these
investments have experienced a decline in fair value, the Bank has the ability
and the intent to hold these securities until there is a recovery in fair
value, which may be at maturity. These unrealized losses are considered
temporary in nature.
The key drivers of the change in fair value of CDOs and CLOs are changes
in credit spreads and the remaining levels of subordination. Based on
positions held at January 31, 2009, a 50 basis point widening of relevant
credit spreads would result in a pre-tax decrease of approximately $15 million
in income and $14 million in other comprehensive income.Trading portfolio
The Bank also holds synthetic CDOs in its trading portfolio as a result of
structuring and managing transactions with clients and other financial
institutions. Total CDOs purchased and sold in the trading portfolio were as
follows:
As at January 31, 2009
---------------------------
Positive/
Notional (negative)
Outstanding ($ millions) amount fair value
-------------------------------------------------------------------------
CDOs - sold protection $ 6,620 $ (2,974)
CDOs - purchased protection $ 6,612 $ 3,401
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at October 31, 2008
---------------------------
Positive/
Notional (negative)
Outstanding ($ millions) amount fair value
-------------------------------------------------------------------------
CDOs - sold protection $ 6,647 $ (3,368)
CDOs - purchased protection $ 6,550 $ 3,187
-------------------------------------------------------------------------
-------------------------------------------------------------------------To hedge its trading exposures, the Bank purchases 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/CDSs is changes in credit spreads. Based on positions held at January 31,
2009, a 50 basis point widening of relevant credit spreads in this portfolio
would result in a pre-tax increase of less than $1 million in income.
Approximately 60% of these CDO exposures are investment grade equivalent.
Over 94% of the Bank's credit exposure to CDO swap counterparties is to
entities which are externally or internally rated investment grade equivalent.
The referenced assets underlying the trading book CDOs are substantially all
corporate exposures, with no mortgage-backed securities.
Exposure to monoline insurers
The Bank has insignificant direct exposure to monoline insurers. The Bank
has indirect exposures of $2.2 billion (October 31, 2008 - $2.8 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 $1.0 billion (October 31, 2008 - $1.5
billion) are primarily to U.S. municipalities and states. Approximately 93% of
these securities are rated investment grade without the guarantee, and
represent risk the Bank would take without the availability of the guarantee.
Other indirect exposures to monoline insurers were $1.2 billion (October
31, 2008 - $1.3 billion). These exposures are primarily comprised of $0.9
billion (October 31, 2008 - $0.9 billion) of guarantees by the monolines on
diversified asset-backed securities held by the Bank's U.S. multi-seller
conduit (as discussed below in the section on Multi-seller conduits sponsored
by the Bank). These monoline insurers were externally rated investment grade
as at October 31, 2008 and January 31, 2009. In February 2009, one of the
monoline insurers announced a major restructuring which resulted in a down-
grade by two rating agencies, one of which rated the monoline as
non-investment grade.
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 January 31, 2009, the Bank had insignificant 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.
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 January 31, 2009, was nominal.
Auction-rate securities
Auction-rate securities (ARS) are long-term, variable rate notes issued
by trusts referenced to long-term notional maturity, but have interest rates
reset at predetermined short-term intervals. ARS are issued by municipalities,
student loan authorities and other sponsors through auctions managed by
financial institutions. The Bank does not sponsor any ARS program and does not
hold any ARS.
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, but could have a current or future impact on the Bank's results of
operations or financial condition. These arrangements can be classified into
the following 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, liquidity fees and other fees from these multi-
seller conduits, which totaled $29 million in the first quarter, compared to
$26 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 has a process
to monitor these exposures and significant events impacting the conduits to
ensure there is no change in the primary beneficiary, which could require the
Bank to consolidate the assets and liabilities of the conduits, at fair value.
Canada
The Bank's primary exposure to the Canadian-based conduits is the
liquidity support provided, with total liquidity facilities of $3.9 billion as
at January 31, 2009 (October 31, 2008 - $4.3 billion). As at January 31, 2009,
total commercial paper outstanding for the Canadian-based conduits
administered by the Bank was $3.4 billion (October 31, 2008 - $3.8 billion).
At quarter end, the Bank held approximately 12% of the total commercial paper
issued by these conduits. The following table presents a summary of assets
held by the Bank's two Canadian multiseller conduits as at January 31, 2009,
and October 31, 2008, by underlying exposure:As at January 31, 2009
------------------------------------
Funded Unfunded Total
($ millions) assets(1) commitments exposure(2)
-------------------------------------------------------------------------
Auto loans/leases $ 1,801 $ 323 $ 2,124
Equipment loans 1,106 102 1,208
Trade receivables 165 59 224
Canadian residential mortgages 83 2 85
Retirement savings plan loans 137 3 140
Loans to closed-end mutual funds 133 23 156
-------------------------------------------------------------------------
Total(3) $ 3,425 $ 512 $ 3,937
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at October 31, 2008
------------------------------------
Funded Unfunded Total
($ millions) assets(1) commitments exposure(2)
-------------------------------------------------------------------------
Auto loans/leases $ 2,204 $ 299 $ 2,503
Equipment loans 969 63 1,032
Trade receivables 205 91 296
Canadian residential mortgages 89 2 91
Retirement savings plan loans 156 3 159
Loans to closed-end mutual funds 161 91 252
-------------------------------------------------------------------------
Total(3) $ 3,784 $ 549 $ 4,333
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Funded assets are reflected at original cost.
(2) Exposure to the Bank is through global-style liquidity facilities and
letters of guarantee.
(3) 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 21% of the funded assets
were externally rated AAA as at January 31, 2009, with the balance having an
equivalent rating of AA- or higher based on the Bank's internal rating
program. There were no non-investment grade assets held in these conduits as
at January 31, 2009. The funded assets have a weighted average repayment
period of approximately 1.1 years, with 68% 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 $12.2 billion as at January 31, 2009 (October 31, 2008 - $12.8
billion). As at January 31, 2009, total commercial paper outstanding for the
U.S.-based conduit administered by the Bank was $7.3 billion (October 31, 2008
- $8.4 billion). At quarter end, the Bank held less than 1% of the commercial
paper issued by this conduit.
A significant portion of the conduit's assets have been structured to
receive credit enhancement from the sellers, including overcollateralization
protection and cash reserve accounts. Each asset purchased by the conduit has
a deal-specific liquidity facility provided by the Bank in the form of an
asset purchase agreement, which is available to absorb the losses on defaulted
assets, if any, in excess of losses absorbed by deal-specific seller credit
enhancement, and the subordinated note issued by the conduit. The Bank's
liquidity agreements with the conduit generally call for the Bank to fund full
par value of all assets, including defaulted assets, if any, of the conduit.
The following table presents a summary of assets purchased and held by
the Bank's U.S. multi-seller conduit as at January 31, 2009 and October 31,
2008, by underlying exposure:As at January 31, 2009
------------------------------------
Funded Unfunded Total
($ millions) assets(1) commitments exposure(2)
-------------------------------------------------------------------------
Credit card/consumer receivables $ 701 $ 680 $ 1,381
Auto loans/leases 3,091 727 3,818
Trade receivables 1,981 2,429 4,410
Loans to closed-end mutual funds 208 999 1,207
Diversified asset-backed securities 936 19 955
Corporate loans(3) 411 37 448
-------------------------------------------------------------------------
Total(4) $ 7,328 $ 4,891 $ 12,219
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at October 31, 2008
------------------------------------
Funded Unfunded Total
($ millions) assets(1) commitments exposure(2)
-------------------------------------------------------------------------
Credit card/consumer receivables $ 1,318 $ 641 $ 1,959
Auto loans/leases 2,894 1,160 4,054
Trade receivables 2,161 1,855 4,016
Loans to closed-end mutual funds 690 652 1,342
Diversified asset-backed securities 932 19 951
Corporate loans(3) 417 50 467
-------------------------------------------------------------------------
Total(4) $ 8,412 $ 4,377 $ 12,789
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Funded assets are reflected at original cost.
(2) Exposure to the Bank is through global-style liquidity facilities in
the form of asset purchase agreements.
(3) These assets represent secured loans that are externally rated
investment grade.
(4) These assets are sourced from the U.S.As at January 31, 2009, approximately 83% of the conduit's funded assets
were rated A or higher, either externally (40%) or based on the Bank's
internal rating program (43%). There were no non-investment grade assets held
in this conduit at January 31, 2009. The funded assets have a weighted average
repayment period of approximately 1.3 years, with 64% maturing within five
years.
The conduit has investments in two pools of diversified asset-backed
securities. 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 nominal at approximately $28 million as at January 31, 2009 (October 31,
2008 - $28 million). These pools are guaranteed by monoline insurers and were
rated investment grade based on the Bank's internal rating program as at
January 31, 2009. Without these guarantees, certain of the underlying assets
of the diversified asset-backed securities would not be rated investment
grade.
Subsequent to January 31, 2009, there were external rating changes to a
monoline insurer (refer to Exposure to monoline insurers above). Based on the
Bank's initial assessment of the current events, the accounting for this
conduit remains unchanged.
Liquidity facilities provided to non-Bank sponsored conduits
For conduits not administered by the Bank, liquidity facilities totaled
$1.2 billion as at January 31, 2009 (October 31, 2008 - $1.2 billion), all of
which were for U.S. 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/AA, 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 the cost-
efficient financing of its 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. Total deposits recorded by the Bank as at January 31, 2009, from
these trusts were $3.4 billion, unchanged from the previous quarter. The Bank
recorded interest expense of $50 million on these deposits for the three
months ended January 31, 2009, compared to $51 million for the three months
ended October 31, 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 $4.8 billion in residential mortgages were
securitized this quarter, bringing the balance of outstanding mortgages
securitized to $16.4 billion as at January 31, 2009, compared to $12.8 billion
as at October 31, 2008.
Guarantees and other indirect commitments decreased 5% from October 31,
2008. Fees from guarantees and loan commitment arrangements recorded in other
income were $85 million in the three-month period ended January 31, 2009,
compared to $67 million in the previous quarter.
Common dividend
The Board of Directors, at its meeting on March 2, 2009, approved a
quarterly dividend of 49 cents per common share. This quarterly dividend
applies to shareholders of record as of April 7, 2009, and is payable April
28, 2009.
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 2008 annual consolidated financial statements for more
information about the significant accounting principles used to prepare the
financial statements. Refer to Note 1 of the interim financial statements for
the changes in accounting policies adopted by the Bank during the first
quarter of 2009.
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 2008 Annual Report.
Transition to International Financial Reporting Standards (IFRS)
Canadian generally accepted accounting principles (GAAP) for publicly
accountable enterprises will be replaced with IFRS for fiscal years beginning
January 1, 2011. For the Bank, IFRS will be effective for interim and annual
periods commencing November 1, 2011, including the preparation and reporting
of one year of comparative figures.
In order to prepare for the transition to IFRS, the Bank has developed a
high-level implementation plan and has established a formal governance
structure which includes senior levels of management from all relevant
departments. In addition, the Bank has commenced assessing the impact of
significant accounting differences between IFRS and Canadian GAAP, including
analyzing the impact on business processes, systems, and internal control over
financial reporting.
Further updates on implementation progress and the potential reporting
impact from the adoption of IFRS will be provided in the interim and annual
reports going forward until full implementation in 2012.
Outlook
Global growth continues to be negatively impacted by deepening recessions
in the U.S., Europe and Japan, alongside persistent problems in the financial
sector and the rapid contraction of international trade flows.
While economic and financial market conditions are likely to remain
challenging in the months ahead, governments and central banks around the
world are taking aggressive action to stabilize the international financial
system, improve credit conditions and stimulate global demand. With inflation
pressures in retreat, short-term interest rates have been reduced to record
lows in many nations. Taken together, these extraordinary measures will help
cushion the downturn and should eventually provide a basis for fostering an
economic recovery in 2010.
With the solid results achieved during the first quarter, the Bank is
confident that appropriate action is being taken to respond to current
challenges. Although the slowing global economy and ongoing uncertainty in
financial markets will continue to put pressure on the Bank's results for this
year, we are maintaining the objectives established at the beginning of the
year.Business Segment Review
Canadian Banking
For the three months ended
-------------------------------------------------------------------------
(Unaudited) ($ millions) January 31 October 31 January 31
(Taxable equivalent basis)(1) 2009 2008 2008
-------------------------------------------------------------------------
Business segment income
Net interest income(2) $ 1,146 $ 1,160 $ 991
Provision for credit losses 155 107 91
Other income 556 554 519
Non-interest expenses 934 939 889
Provision for income taxes 175 202 157
-------------------------------------------------------------------------
Net income(3) $ 438 $ 466 $ 373
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on equity(1) 25.8% 38.0% 30.6%
Average assets ($ billions) $ 189 $ 185 $ 168
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer above for discussion of non-GAAP measures.
(2) Commencing in the first quarter of 2009, net interest income includes
liquidity premium charges arising from a refinement in the Bank's
transfer pricing. Refer to footnote 4 further below for further
details.
(3) Commencing in the fourth quarter of 2008, the reporting of segment
profitability has been changed from net income available to common
shareholders to net income. Prior periods have been restated.Canadian Banking reported solid net income of $438 million this quarter,
an increase of $65 million or 18% from the same quarter last year. Quarter
over quarter, net income declined $28 million or 6%. Return on equity was
25.8% versus 30.6% last year.
Average assets before securitization rose $21 billion or 13% from the
first quarter last year. The increase was due primarily to growth of $12
billion or 11% in residential mortgages. Personal loans, including credit
cards, and business lending volumes also increased. Personal deposit growth of
$9 billion or 12% led to year-over-year market share gains. Growth was
recorded in high interest savings accounts, personal term deposits, as well as
chequing and savings. Non-personal deposits rose 16% from growth in both non-
personal term and current accounts. Compared to the previous quarter, average
assets before securitization rose $4 billion or 2% led by growth in retail
mortgages and personal lending, as well as the acquisition of a significant
interest in CI Financial. Deposits increased 6% from growth in high interest
savings accounts, personal term deposits and current accounts, as well as the
full quarter impact of the E(*)Trade acquisition.
Total revenue was up $192 million or 13% from the same period last year,
from both higher net interest income and other income. Quarter over quarter,
total revenues declined by $12 million or 1% due to lower net interest income.
Net interest income of $1,146 million was up $155 million or 16% from the
first quarter of last year, driven by the benefit of lower funding interest
rates and strong volume growth in both average assets and deposits. There was
volume growth for most products in retail, small business and commercial
banking. Compared to last quarter, net interest income declined by 1%,
reflecting competitive pricing pressures on deposits, higher liquidity costs
partly offset by the impact of lower funding interest rates and the wider
spread between prime and BA interest rates. The margin declined by 8 basis
points to 2.41%.
Other income rose $37 million or 7% from the same quarter last year, due
in part to the investment in CI Financial and the acquisition of E(*)Trade.
Excluding these items other income grew by $11 million or 2%, as increases in
Retail and Commercial Banking were partly offset by declines in Wealth
Management reflecting difficult market conditions. Other income was relatively
unchanged from last quarter. Excluding the impact of acquisitions noted above,
other income declined by $17 million or 3% primarily in Wealth Management
revenues due to market conditions.
The provision for credit losses was $155 million in the Canadian Banking
portfolios, up from $91 million in the same quarter last year and $107 million
in the previous quarter. Retail provisions increased year over year due
primarily to higher volumes in the indirect automotive portfolio including
Scotia Dealer Advantage. Provisions related to commercial and small business
banking were also up modestly year over year. The increase from the previous
quarter was due primarily to increased retail provisions in Scotia Dealer
Advantage and to last quarter's higher level of recoveries in other personal
loans.
Non-interest expenses rose 5% from the first quarter of last year, due in
part to acquisitions and the full year impact of 2008 initiatives. Partially
offsetting were lower volume related expenses. Expenses were largely unchanged
from last quarter, due to seasonally lower expenses and project spending,
partially offset by increases in performance and stock-based compensation.International Banking
For the three months ended
-------------------------------------------------------------------------
(Unaudited) ($ millions) January 31 October 31 January 31
(Taxable equivalent basis)(1) 2009 2008 2008
-------------------------------------------------------------------------
Business segment income
Net interest income(2) $ 947 $ 940 $ 731
Provision for credit losses 116 90 30
Other income 471 228 309
Non-interest expenses 772 753 568
Provision for income taxes 114 75 122
Non-controlling interest in net
income of subsidiaries 28 23 31
-------------------------------------------------------------------------
Net income(3) $ 388 $ 227 $ 289
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on equity(1) 17.2% 10.5% 19.6%
Average assets ($ billions) $ 95 $ 88 $ 70
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer above for discussion of non-GAAP measures.
(2) Commencing in the first quarter of 2009, net interest income includes
liquidity premium charges arising from a refinement in the Bank's
transfer pricing. Refer to footnote 4 further below for further
details.
(3) Commencing in the fourth quarter of 2008, the reporting of segment
profitability has been changed from net income available to common
shareholders to net income. Prior periods have been restated.International Banking's net income in the first quarter was $388 million,
an increase of $99 million or 34% from last year and $161 million or 71% above
last quarter. Excluding the positive impact of foreign currency translation of
$66 million compared to last year and $31 million quarter over quarter, and
charges in previous quarters related to valuation adjustments, the increases
were 3% and 12% respectively. Return on equity was 17.2% versus 19.6% last
year.
Average asset volumes were $95 billion, up $25 billion or 36% from last
year, due partly to the 16% positive impact of foreign currency translation.
Acquisitions in Chile, Peru and Central America contributed $4 billion.
Despite slower growth in the current quarter, the full year impact of prior
period growth resulted in average assets rising by $10 billion year over year.
Growth in low-cost deposits was also strong at 22%, or 9% adjusted for foreign
currency translation. Compared to last quarter, average assets increased by 2%
excluding the positive impact of foreign currency translation.
Total revenues were $1,418 million this quarter, an increase of $378
million or 36% from last year and $250 million or 21% above last quarter,
including a favourable foreign currency translation impact of 14% and 4%,
respectively.
Net interest income was $947 million this quarter, up $216 million or 30%
from the same period last year, and $7 million or 1% above last quarter.
Excluding the positive foreign currency translation impact and the negative
impact of valuation adjustments taken last quarter, results were up $155
million over last year and down $8 million from last quarter. The underlying
increase from last year was a result of strong loan growth across the division
in existing businesses, as well as the impact of acquisitions. Net interest
margins were down from both last year and last quarter, due to the change in
fair value of financial instruments used for asset/liability management
purposes and tightening margins in Peru.
Other income increased $162 million or 52% from last year, including the
positive impact of foreign currency translation and favourable valuation
adjustments. The remaining increase of $55 million or 16% resulted from strong
foreign exchange revenues and widespread transaction-driven growth. Compared
to last quarter, other income increased $243 million to $471 million. This
included the positive impact of foreign currency translation, changes in
valuation adjustments and the factors noted above.
International Banking's provision for credit losses was $116 million this
quarter, compared to $30 million in the same period last year, and $90 million
in the prior quarter. The increase from the same quarter last year was due
largely to acquisition-related retail asset growth in Peru and Chile, and to
higher retail provisions in Mexico. The increase from the prior quarter was
attributable to higher provisions in the retail portfolios, mainly in Peru and
Chile, and a new provision related to one commercial account in Mexico. These
increases were partially offset by higher level of net reversals and
recoveries in the commercial portfolios.
Non-interest expenses were $772 million this quarter, up 36% from last
year. This included a $59 million unfavourable impact of foreign currency
translation and a $58 million increase from acquisitions. The remaining growth
was due primarily to expense recoveries in Latin America last year, and higher
premises, technology, communication and compensation related expenses,
consistent with business growth and new branch openings. Compared to last
quarter, expenses increased $19 million or 2%, including a 1% unfavourable
impact of foreign currency translation.
The effective tax rate this quarter was 22%, down from 28% in the same
period last year and 24% from last quarter. The decreases were due to higher
earnings in low-tax jurisdictions this quarter, primarily in Asia as well as a
lower effective tax rate in Mexico.Scotia Capital
For the three months ended
-------------------------------------------------------------------------
(Unaudited) ($ millions) January 31 October 31 January 31
(Taxable equivalent basis)(1) 2009 2008 2008
-------------------------------------------------------------------------
Business segment income
Net interest income(2) $ 338 $ 331 $ 274
Provision for credit losses 10 10 (10)
Other income 366 (99) 131
Non-interest expenses 291 249 191
Provision for income taxes 103 (71) 33
-------------------------------------------------------------------------
Net income(3) $ 300 $ 44 $ 191
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on equity(1) 22.4% 3.6% 22.6%
Average assets ($ billions) $ 194 $ 169 $ 157
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer above for discussion of non-GAAP measures.
(2) Commencing in the first quarter of 2009, net interest income includes
liquidity premium charges arising from a refinement in the Bank's
transfer pricing. Refer to footnote 4 further below for further
details.
(3) Commencing in the fourth quarter of 2008, the reporting of segment
profitability has been changed from net income available to common
shareholders to net income. Prior periods have been restated.Scotia Capital contributed strong net income of $300 million this
quarter. This represented an increase of $109 million or 57% from the first
quarter of 2008 and $256 million from last quarter. The latter reflected
charges relating to certain trading activities and valuation adjustments taken
in the fourth quarter. The underlying increases from both last year and the
previous quarter, were due mainly to significantly higher revenues throughout
the businesses, partly offset by higher expenses. Return on equity was strong
at 22.4%, and was comparable to the same period last year and well above last
quarter's performance.
Total average assets increased 23% over last year to $194 billion.
Average corporate loans and acceptances were up $19 billion across all lending
businesses. The strongest growth was in the U.S., up $12 billion, due in part
to the impact of the weaker Canadian dollar. There was also an increase of $24
billion in average derivative instrument assets, with a corresponding increase
in derivative instrument liabilities. These increases were partially offset by
a decrease of $12 billion in trading securities and loans. The higher average
assets from the last quarter reflected growth in corporate loans and
acceptances of $10 billion and an increase in derivative instrument assets of
$16 billion (with a corresponding increase in derivative instrument
liabilities), partially offset by a reduction in trading-related securities
and loans of $7 billion.
Total revenues of $704 million were the highest since the second quarter
of 2002. This represents an increase of $299 million or 74% compared to the
first quarter last year, which included losses of $122 million on structured
credit instruments and exposure to a monoline insurer. This quarter's
performance reflected substantial increases in both Global Capital Markets and
Global Corporate and Investment Banking revenues despite challenging market
conditions. The $472 million increase from last quarter was due in part to the
$503 million in charges relating to certain trading activities and valuation
adjustments incurred last quarter, and to the strong underlying revenue
performance in all businesses this quarter.
Net interest income of $338 million increased $64 million or 23% over
last year from higher loan volumes, interest margins and loan origination
fees. This was partially offset by a decrease in interest from trading
operations. The increase from the previous quarter also arose from the same
factors.
Scotia Capital's provision for credit losses was $10 million this
quarter, unchanged from last quarter but higher compared to net reversals of
$10 million in the first quarter of last year.
Other income was $366 million, an increase of $235 million or 179% from
last year. Global Capital Markets increased $181 million which reflected
record revenues in the fixed income and precious metals businesses. In
addition, foreign exchange revenues were at their second highest level, behind
last quarter's record. The segment also benefited from both very strong
institutional equity trading and underwriting revenues, partially offset by
derivative trading losses. Global Corporate and Investment Banking increased
45% due to record investment banking revenues and higher acceptance and credit
fees in the lending businesses. Compared to last quarter, other income
increased $465 million, due primarily to the strong results achieved this
quarter and the impact of the losses relating to certain trading activities
and valuation adjustments incurred last quarter.
Non-interest expenses were $291 million this quarter, up $100 million
from last year, due primarily to higher performance-related compensation.
Salaries, other personnel costs, technology and support costs also increased
in support of underlying business growth. Compared to last quarter, higher
performance based compensation, technology costs and capital taxes were
somewhat offset by lower other personnel costs.Other(1)
For the three months ended
-------------------------------------------------------------------------
(Unaudited) ($ millions) January 31 October 31 January 31
(Taxable equivalent basis)(2) 2009 2008 2008
-------------------------------------------------------------------------
Business segment income
Net interest income(3)(4) $ (465) $ (490) $ (182)
Other income (8) (133) 66
Non-interest expenses 13 3 21
Provision for income taxes(3) (202) (204) (119)
-------------------------------------------------------------------------
Net income (loss)(5) $ (284) $ (422) $ (18)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Average assets ($ billions) $ 51 $ 39 $ 34
-------------------------------------------------------------------------
(1) Includes all other smaller operating segments and corporate
adjustments, such as the elimination of the tax-exempt income
gross-up reported in net interest income and provision for income
taxes, differences in the actual amount of costs incurred and charged
to the operating segments, and the impact of securitizations.
(2) Refer above for a discussion of non-GAAP measures.
(3) Includes the elimination of the tax-exempt income gross-up reported
in net interest income and provision for income taxes for the three
months ended January 31, 2009 ($70), October 31, 2008 ($95), and
January 31, 2008 ($118), to arrive at the amounts reported in the
Consolidated Statement of Income.
(4) Historically, assets and liabilities are transfer-priced at wholesale
market rates. In the first quarter of 2009, due to current market
conditions, the Bank refined its transfer pricing to include a
liquidity premium charge in the cost of funds allocated to the
business segments. The net impact of this change was to reduce the
net interest income of the three major segments which was offset by a
reduction in the net interest expense of the Other segment.
(5) Commencing in the fourth quarter of 2008, the reporting of segment
profitability has been changed from net income available to common
shareholders to net income. Prior periods have been restated.The Other segment had a net loss of $284 million in the first quarter,
compared to losses of $18 million in the same period last year and $422
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 $70 million in the first quarter, compared to $118
million in the same period last year and $95 million last quarter.
Total revenue this quarter was negative $473 million, down $357 million
from the prior year but up $150 million from last quarter.
Net interest income was negative $465 million this quarter, $283 million
below the same quarter last year, and a $25 million improvement from last
quarter. The year over year change was due mainly to the negative impact of
relatively higher term funding costs compared to the declining wholesale rates
used for transfer pricing with the business segments. The change in the fair
value of financial instruments used for asset/liability management purposes
was unfavourable compared to last year, but favourable to the prior quarter.
Other income was negative $8 million in the first quarter, $74 million
lower than last year, but $125 million above last quarter. The decrease from
last year was mainly attributable to writedowns on available-for-sale
securities caused by the continued deterioration in the economic conditions
and declines in equity markets. This was partly offset by higher
securitization revenues. The increase from last quarter reflected higher
securitization revenues, and the impact of certain charges and valuation
adjustments taken last quarter, partially offset by writedowns on available
for sale securities (net of securities gains).
Non-interest expenses were $13 million this quarter, a decrease of $8
million from last year but $10 million higher than last quarter, largely from
an increase in expenses related to securitization initiatives.Total
For the three months ended
-------------------------------------------------------------------------
January 31 October 31 January 31
(Unaudited) ($ millions) 2009 2008 2008
-------------------------------------------------------------------------
Business segment income
Net interest income $ 1,966 $ 1,941 $ 1,814
Provision for credit losses 281 207 111
Other income 1,385 550 1,025
Non-interest expenses 2,010 1,944 1,669
Provision for income taxes 190 2 193
Non-controlling interest in net
income of subsidiaries 28 23 31
-------------------------------------------------------------------------
Net income(1) $ 842 $ 315 $ 835
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on equity(2) 16.9% 6.0% 18.3%
Average assets ($ billions) $ 529 $ 481 $ 429
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Commencing in the fourth quarter of 2008, the reporting of segment
profitability has been changed from net income available to common
shareholders to net income. Prior periods have been restated.
(2) Refer above for a discussion of non-GAAP measures.
Geographic Highlights
For the three months ended
-------------------------------------------------------------------------
January 31 October 31 January 31
(Unaudited) ($ millions) 2009 2008 2008
-------------------------------------------------------------------------
Geographic segment income
Canada $ 361 $ 368 $ 503
United States 23 (211) 24
Mexico 57 78 64
Other international 559 279 258
Corporate adjustments (158) (199) (14)
-------------------------------------------------------------------------
Net income(1) $ 842 $ 315 $ 835
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average assets ($ billions)
Canada $ 330 $ 306 $ 285
United States 51 34 29
Mexico 21 20 20
Other international 117 111 86
Corporate adjustments 10 10 9
-------------------------------------------------------------------------
$ 529 $ 481 $ 429
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Commencing in the fourth quarter of 2008, the reporting of segment
profitability has been changed from net income available to common
shareholders to net income. Prior periods have been restated.
Quarterly Financial Highlights
For the three months ended
-------------------------------------------------------------------------
Jan. Oct. July April Jan. Oct. July April
31 31 31 30 31 31 31 30
2009 2008 2008 2008 2008 2007 2007 2007
-------------------------------------------------------------------------
Total revenue
($ millions) $3,351 $2,491 $3,374 $3,172 $2,839 $3,078 $3,201 $3,102
Total revenue
(TEB(1))
($ millions) 3,421 2,586 3,477 3,272 2,957 3,294 3,302 3,211
Net income
($ millions) 842 315 1,010 980 835 954 1,032 1,039
Basic earnings
per share ($) 0.80 0.28 0.99 0.97 0.83 0.95 1.03 1.04
Diluted earnings
per share ($) 0.80 0.28 0.98 0.97 0.82 0.95 1.02 1.03
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer above for a discussion of non-GAAP measures.
Share Data As at
-------------------------------------------------------------------------
January 31
(thousands of shares outstanding) 2009
-------------------------------------------------------------------------
Common shares 1,012,447(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)(9)
Preferred shares Series 20 14,000(8)(10)
Preferred shares Series 22 12,000(8)(11)
Preferred shares Series 24 10,000(8)(12)
Preferred shares Series 26 13,000(8)(13)
Preferred shares Series 28 11,000(8)(14)
-------------------------------------------------------------------------
Series 2000-1 trust securities issued
by BNS Capital Trust 500(15)
Series 2002-1 trust securities issued
by Scotiabank Capital Trust 750(16)
Series 2003-1 trust securities issued
by Scotiabank Capital Trust 750(16)
Series 2006-1 trust securities issued
by Scotiabank Capital Trust 750(16)
-------------------------------------------------------------------------
Scotiabank Trust Subordinated Notes -
Series A issued by Scotiabank Subordinated Notes Trust 1,000(16)
-------------------------------------------------------------------------
Outstanding options granted under the Stock Option
Plans to purchase common shares 27,083(1)(17)
-------------------------------------------------------------------------
(1) As at February 19, 2009, the number of outstanding common shares
and options were 1,013,035 and 26,473, 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 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 preferred shares have conversion features.
(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 $0.4315 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.
(10) 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.
(11) These shares are entitled to non-cumulative preferential cash
dividends payable quarterly. The initial dividend was paid on
January 28, 2009, in an amount of $0.4829 per share. Dividends, if
and when declared, during the initial five-year period ending on
January 25, 2014, 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 1.88%, multiplied by $25.00.
(12) These shares are entitled to non-cumulative preferential cash
dividends, payable quarterly. The initial dividend, if and when
declared, will be payable on April 28, 2009, in an amount of
$0.5865 per share. Dividends, if and when declared, during the
initial five-year period ending on January 25, 2014, will be payable
in an amount of $0.3906 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 3.84%, multiplied by $25.00.
(13) These shares are entitled to non-cumulative preferential cash
dividends payable quarterly. The initial dividend, if and when
declared, will be payable on April 28, 2009, in an amount of
$0.41524 per share. Dividends, if and when declared, during the
initial five-year period ending on April 25, 2014, will be payable
in an amount of $0.390625 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 4.14%, multiplied by $25.00.
(14) These shares are entitled to non-cumulative preferential cash
dividends payable quarterly. The initial dividend, if and when
declared, will be payable on April 28, 2009, in an amount of
$0.37671 per share. Dividends, if and when declared, during the
initial five-year period ending on April 25, 2014, will be payable
in an amount of $0.390625 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 4.46%, multiplied by
$25.00.
(15) Reported in capital instrument liabilities in the Consolidated
Balance Sheet.
(16) Reported in deposits in the Consolidated Balance Sheet.
(17) Included are 20,632 stock options with tandem stock appreciation
right (SAR) features.
Further details, including convertibility features, are available in Notes
13, 14 and 17 of the October 31, 2008, consolidated financial statements
presented in the 2008 Annual Report, and Note 6 further below of this report.
-------------------------------------------------------------------------
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Income
For the three months ended
-------------------------------------------------------------------------
January 31 October 31 January 31
(Unaudited) ($ millions) 2009 2008 2008
-------------------------------------------------------------------------
Interest income
Loans $ 4,137 $ 4,321 $ 3,825
Securities 868 1,054 1,168
Securities purchased under resale
agreements 156 183 229
Deposits with banks 209 255 319
-------------------------------------------------------------------------
5,370 5,813 5,541
-------------------------------------------------------------------------
Interest expenses
Deposits 2,752 3,201 3,078
Subordinated debentures 63 56 24
Capital instrument liabilities 9 9 9
Other 580 606 616
-------------------------------------------------------------------------
3,404 3,872 3,727
-------------------------------------------------------------------------
Net interest income 1,966 1,941 1,814
Provision for credit losses (Note 4) 281 207 111
-------------------------------------------------------------------------
Net interest income after provision
for credit losses 1,685 1,734 1,703
-------------------------------------------------------------------------
Other income
Card revenues 113 107 95
Deposit and payment services 231 222 207
Mutual funds 80 78 78
Investment management, brokerage and
trust services 178 189 186
Credit fees 185 142 133
Trading revenues 180 (41) (44)
Investment banking 287 189 164
Net gain (loss) on securities, other
than trading (144) (543) 20
Other 275 207 186
-------------------------------------------------------------------------
1,385 550 1,025
-------------------------------------------------------------------------
Net interest and other income 3,070 2,284 2,728
-------------------------------------------------------------------------
Non-interest expenses
Salaries and employee benefits 1,130 1,058 978
Premises and technology(1) 388 382 321
Communications 90 89 75
Advertising and business development 78 96 69
Professional 54 59 45
Business and capital taxes 50 24 14
Other(1) 220 236 167
-------------------------------------------------------------------------
2,010 1,944 1,669
-------------------------------------------------------------------------
Income before the undernoted 1,060 340 1,059
Provision for income taxes 190 2 193
Non-controlling interest in net income
of subsidiaries 28 23 31
-------------------------------------------------------------------------
Net income $ 842 $ 315 $ 835
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Preferred dividends paid 37 32 21
-------------------------------------------------------------------------
Net income available to common
shareholders $ 805 $ 283 $ 814
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of common shares
outstanding (millions):
Basic 1,001 990 985
Diluted 1,003 994 992
-------------------------------------------------------------------------
Earnings per common share (in
dollars)(2):
Basic $ 0.80 $ 0.28 $ 0.83
Diluted $ 0.80 $ 0.28 $ 0.82
-------------------------------------------------------------------------
Dividends per common share (in
dollars) $ 0.49 $ 0.49 $ 0.47
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Certain comparative amounts have been reclassified to conform to current
period presentation.
(1) Refer to note 1 for changes in accounting policies related to
goodwill and intangible assets.
(2) The calculation of earnings per share is based on full dollar and
share amounts.
The accompanying notes are an integral part of these interim consolidated
financial statements.
Consolidated Balance Sheet
As at
-------------------------------------------------------------------------
January 31 October 31 January 31
(Unaudited) ($ millions) 2009 2008 2008
-------------------------------------------------------------------------
Assets
Cash resources
Cash and non-interest-bearing
deposits with banks $ 3,007 $ 2,574 $ 2,816
Interest-bearing deposits with banks 27,261 32,318 29,431
Precious metals 3,529 2,426 4,164
-------------------------------------------------------------------------
33,797 37,318 36,411
-------------------------------------------------------------------------
Securities
Trading 50,529 48,292 60,702
Available-for-sale 43,788 38,823 32,992
Equity accounted investments 3,266 920 788
-------------------------------------------------------------------------
97,583 88,035 94,482
-------------------------------------------------------------------------
Securities purchased under resale
agreements 14,182 19,451 20,362
-------------------------------------------------------------------------
Loans
Residential mortgages 111,984 115,084 105,532
Personal and credit cards 51,674 50,719 43,513
Business and government 130,182 125,503 101,389
-------------------------------------------------------------------------
293,840 291,306 250,434
Allowance for credit losses (Note 4) 2,706 2,626 2,451
-------------------------------------------------------------------------
291,134 288,680 247,983
-------------------------------------------------------------------------
Other
Customers' liability under
acceptances 13,144 11,969 12,518
Derivative instruments 43,526 44,810 25,217
Land, buildings and equipment(1) 2,422 2,449 2,240
Goodwill 2,820 2,273 1,266
Other intangible assets(1) 561 521 493
Other assets 10,660 12,119 8,450
-------------------------------------------------------------------------
73,133 74,141 50,184
-------------------------------------------------------------------------
$ 509,829 $ 507,625 $ 449,422
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and shareholders' equity
Deposits
Personal $ 122,648 $ 118,919 $ 108,219
Business and government 198,887 200,566 175,772
Banks 25,035 27,095 32,806
-------------------------------------------------------------------------
346,570 346,580 316,797
-------------------------------------------------------------------------
Other
Acceptances 13,144 11,969 12,518
Obligations related to securities
sold under repurchase agreements 35,578 36,506 32,967
Obligations related to securities
sold short 11,963 11,700 13,570
Derivative instruments 43,831 42,811 25,046
Other liabilities 29,474 31,063 25,333
Non-controlling interest in
subsidiaries 549 502 548
-------------------------------------------------------------------------
134,539 134,551 109,982
-------------------------------------------------------------------------
Subordinated debentures (Note 5) 5,407 4,352 2,150
-------------------------------------------------------------------------
Capital instrument liabilities 500 500 500
-------------------------------------------------------------------------
Shareholders' equity
Capital stock
Preferred shares (Note 6) 3,710 2,860 1,865
Common shares 4,496 3,829 3,614
Retained earnings 18,853 18,549 17,809
Accumulated other comprehensive income
(loss) (Note 7) (4,246) (3,596) (3,295)
-------------------------------------------------------------------------
22,813 21,642 19,993
-------------------------------------------------------------------------
$ 509,829 $ 507,625 $ 449,422
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Certain comparative amounts have been reclassified to conform with
current period presentation.
(1) Refer to note 1 for changes in accounting policies related to
goodwill and intangible assets.
The accompanying notes are an integral part of these interim consolidated
financial statements.
Consolidated Statement of Changes in Shareholders' Equity
For the three months ended
-------------------------------------------------------------------------
January 31 January 31
(Unaudited) ($ millions) 2009 2008
-------------------------------------------------------------------------
Preferred shares
Balance at beginning of period $ 2,860 $ 1,635
Issued 850 230
-------------------------------------------------------------------------
Balance at end of period 3,710 1,865
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Common shares
Balance at beginning of period 3,829 3,566
Issued 667 48
-------------------------------------------------------------------------
Balance at end of period 4,496 3,614
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings
Balance at beginning of period 18,549 17,460
Net income 842 835
Dividends: Preferred (37) (21)
Common (493) (463)
Other (8) (2)
-------------------------------------------------------------------------
Balance at end of period 18,853 17,809
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
Balance at beginning of period (3,596) (3,857)
Other comprehensive income (loss) (650) 562
-------------------------------------------------------------------------
Balance at end of period (4,246) (3,295)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total shareholders' equity at end of period $ 22,813 $ 19,993
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statement of Comprehensive Income
For the three months ended
-------------------------------------------------------------------------
January 31 January 31
(Unaudited) ($ millions) 2009 2008
-------------------------------------------------------------------------
Comprehensive income
Net income $ 842 $ 835
-------------------------------------------------------------------------
Preferred shares
Other comprehensive income (loss), net of
income taxes (Note 7):
Net change in unrealized foreign currency
translation losses (126) 885
Net change in unrealized gains (losses) on
available-for-sale securities (386) (60)
Net change in gains (losses) on derivative
instruments designated as cash flow hedges (138) (263)
-------------------------------------------------------------------------
Other comprehensive income (loss) (650) 562
-------------------------------------------------------------------------
Comprehensive income $ 192 $ 1,397
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these interim consolidated
financial statements.
Condensed Consolidated Statement of Cash Flows
For the three months ended
-------------------------------------------------------------------------
Sources (uses) of cash flows January 31 January 31
(Unaudited) ($ millions) 2009 2008
-------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 842 $ 835
Adjustments to determine net cash flows from
(used in) operating activities 102 239
Net accrued interest receivable and payable 80 244
Trading securities (2,351) (331)
Derivative assets 2,012 (1,127)
Derivative liabilities 337 (1,742)
Other, net (2,335) 838
-------------------------------------------------------------------------
(1,313) (1,044)
-------------------------------------------------------------------------
Cash flows from financing activities
Deposits (1,425) 17,330
Obligations related to securities sold under
repurchase agreements (437) 4,229
Obligations related to securities sold short 247 (2,766)
Subordinated debentures issued 1,000 394
Preferred shares issued 600 230
Common shares issued 167 36
Cash dividends paid (530) (484)
Other, net 352 1,426
-------------------------------------------------------------------------
(26) 20,395
-------------------------------------------------------------------------
Cash flows from investing activities
Interest-bearing deposits with banks 2,951 (5,179)
Securities purchased under resale agreements 4,872 2,537
Loans, excluding securitizations (6,812) (13,510)
Loan securitizations 4,763 550
Securities, other than trading, net (2,389) (2,035)
Land, buildings and equipment, net of disposals (51) (79)
Other, net(1) (1,563) (1,046)
-------------------------------------------------------------------------
1,771 (18,762)
-------------------------------------------------------------------------
Effect of exchange rate changes on cash and
cash equivalents 1 89
-------------------------------------------------------------------------
Net change in cash and cash equivalents 433 678
Cash and cash equivalents at beginning of period 2,574 2,138
-------------------------------------------------------------------------
Cash and cash equivalents at end of period(2) $ 3,007 $ 2,816
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash disbursements made for:
Interest $ 3,614 $ 3,653
Income taxes $ 253 $ 331
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For the three months ended January 31, 2009, comprises investments in
subsidiaries and associated corporations, net of cash and cash
equivalents at the date of acquisition of nil (January 31, 2008 -
$35), net of non-cash consideration of common shares issued from
treasury of $500 (January 31, 2008 - nil), and non-cumulative
preferred shares of $250 (January 31, 2008 - nil).
(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, 2008. The significant
accounting policies used in the preparation of these interim consolidated
financial statements are consistent with those used in the Bank's
year-end audited consolidated financial statements, except as discussed
in Note 1.
1. Changes in accounting policies
Commencing November 1, 2008, the Bank adopted a new accounting
standard - Goodwill and Intangible Assets. As a result of adopting
the new standard, certain software costs previously recorded as Land,
buildings and equipment are now recorded as Other intangible assets
in the Consolidated Balance Sheet. Accordingly, $239 million at
October 31, 2008 (at January 31, 2008 - $220 million) was
reclassified from Land, building and equipment to Other intangible
assets. The related amortization expense that was previously recorded
in Premises and technology non-interest expenses on the Consolidated
Statement of Income is now recorded as Other non-interest expenses.
Accordingly, $15 million for three-month period ended October 31,
2008 (three-month period ended January 31, 2008 - $6 million), was
reclassified from Premises and technology non-interest expenses to
Other non-interest expenses.
Note 1 to the Bank's 2008 annual audited consolidated financial
statements describes accounting policy changes for the prior year.
2. Future accounting changes
The following summarizes future accounting policy changes that will
be relevant to the Bank's consolidated financial statements.
International Financial Reporting Standards (IFRS)
The Canadian Accounting Standards Board (AcSB) has determined that
profit-oriented publicly accountable enterprises will be required to
adopt International Financial Reporting Standards. IFRS will replace
current Canadian GAAP for those enterprises. For the Bank, IFRS
will be effective for interim and annual periods commencing November
1, 2011, including the preparation and reporting of one year of
comparative figures. The Bank is currently in the process of
evaluating the impacts and implications from its conversion to IFRS.
3. Sales of loans through securitizations
The Bank securitizes residential mortgages through the creation of
mortgage-backed securities. No credit losses are expected, as the
mortgages are insured. For the quarter ended January 31, 2009, the
key weighted-average assumptions used to measure the fair value at
the dates of securitization were a prepayment rate of 23.7%, an
excess spread of 1.6% and a discount rate of 3.0%. The following
table summarizes the Bank's sales.
For the three months ended
---------------------------------------------------------------------
January October January
31 31 31
($ millions) 2009 2008 2008
---------------------------------------------------------------------
Net cash proceeds(1) $ 4,763 $ 2,537 $ 550
Retained interest 170 80 16
Retained servicing liability (29) (15) (4)
---------------------------------------------------------------------
4,904 2,602 562
Residential mortgages securitized 4,827 2,577 555
---------------------------------------------------------------------
Net gain (loss) on sale(2) $ 77 $ 25 $ 7
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Excludes insured mortgages which were securitized and retained by
the Bank of $847 for the three months ended January 31, 2009
(October 31, 2008 - $1,822; January 31, 2008 - $1,351). As at
January 31, 2009, the outstanding balance of mortgage-backed
securities was $6,474, and these assets have been classified as
available-for-sale securities.
(2) Net of issuance costs.
4. Impaired loans and allowance for credit losses
(a) Impaired loans
As at
---------------------------------------------------------------------
January October
31 31
2009 2008
---------------------------------------------------------------------
Specific
($ millions) Gross allowance(1) Net Net
---------------------------------------------------------------------
By loan type:
Residential mortgages $ 788 $ 246 $ 542 $ 432
Personal and credit
cards 829 675 154 84
Business and government 1,368 462 906 675
---------------------------------------------------------------------
Total $ 2,985 $ 1,383 $ 1,602 $ 1,191
---------------------------------------------------------------------
---------------------------------------------------------------------
By geography:
Canada $ 449 $ 354
United States 131 80
Other International 1,022 757
---------------------------------------------------------------------
Total $ 1,602 $ 1,191
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) The specific allowance for impaired loans evaluated on an
individual basis totalled $459 (October 31, 2008 - $462).
(b) Allowance for credit losses
The following table summarizes the change in the allowance for credit
losses.
For the three months ended
---------------------------------------------------------------------
January October January
31 31 31
($ millions) 2009 2008 2008
---------------------------------------------------------------------
Balance at beginning of period $ 2,634 $ 2,485 $ 2,252
Writeoffs (283) (278) (194)
Recoveries 59 77 51
Provision for credit losses 281 207 111
Other, including foreign exchange
adjustment 23 143 242
---------------------------------------------------------------------
Balance at the end of
period(1)(2)(3) $ 2,714 $ 2,634 $ 2,462
---------------------------------------------------------------------
(1) As at January 31, 2009, includes nil specific allowance relating
to acquisitions of new subsidiaries (October 31, 2008 - $89;
January 31, 2008 - $177).
(2) As at January 31, 2009, $8 has been recorded in other liabilities
(October 31, 2008 - $8; January 31, 2008 - $11).
(3) As at January 31, 2009, the general allowance for credit losses
was $1,323 (October 31, 2008 - $1,323; January 31, 2008 -
$1,298).
5. Subordinated debentures
Subordinated debentures totalling $1 billion were issued on January
22, 2009, and will mature on January 22, 2021. Interest is payable
semi-annually in arrears, commencing on July 22, 2009, at 6.65% per
annum until January 22, 2016. From January 22, 2016 until maturity,
interest is payable at an annual rate equal to the 90-day Bankers'
Acceptance Rate plus 5.85%, payable quarterly commencing April 22,
2016. The subordinated debentures are redeemable by the Bank, at any
time subject to prior regulatory approval. The subordinated
debentures qualify as Tier 2B capital.
6. Capital management
The Bank has a capital management process in place to measure, deploy
and monitor its available capital and assess its adequacy. The
objectives and practices of the Bank's capital management process are
consistent with those in place at October 31, 2008.
Regulatory Capital Ratios
The two primary regulatory capital ratios used to assess capital
adequacy are Tier 1 and Total capital ratios, which are determined by
dividing those capital components by risk-weighted assets. Risk
weighted assets represent the Bank's exposures to credit, market and
operational risk and are computed by applying a combination of the
Bank's internal credit risk parameters and Office of the
Superintendent of Financial Institutions, Canada (OSFI) prescribed
risk weights to on-and off-balance sheet exposures.
The regulatory minimum ratios prescribed by OSFI are 7% for Tier 1
capital and 10% for Total capital. The Bank exceeded these minimum
ratio thresholds as at January 31, 2009. OSFI has also prescribed an
asset-to-capital leverage multiple; the Bank was in compliance with
this threshold as at January 31, 2009.
Bank regulatory capital consists of two components - Tier 1 capital,
which is more permanent, and Tier 2 capital as follows:
As at
---------------------------------------------------------------------
January October January
31 31 31
(unaudited)($ millions) 2009 2008 2008
---------------------------------------------------------------------
Shareholders' equity per
consolidated balance sheet $ 22,813 $ 21,642 $ 19,993
Components of accumulated other
comprehensive income excluded
from Tier 1 1,624 1,220 (369)
Capital instrument liabilities -
trust securities 2,750 2,750 2,750
Non-controlling interest in
subsidiaries 549 502 548
Goodwill deduction (2,820) (2,273) (1,266)
Other capital deductions(1) (2,077) (578) (490)
---------------------------------------------------------------------
Tier 1 capital 22,839 23,263 21,166
---------------------------------------------------------------------
Qualifying subordinated debentures,
net of amortization 5,357 4,227 1,859
Trust subordinated notes 1,000 1,000 1,000
Other net capital items(2) (1,818) (643) (151)
---------------------------------------------------------------------
Tier 2 capital 4,539 4,584 2,708
---------------------------------------------------------------------
Total Regulatory Capital 27,378 27,847 23,874
---------------------------------------------------------------------
Total risk weighted assets $ 239,660 $ 250,591 $ 234,876
---------------------------------------------------------------------
Capital ratios
Tier 1 capital ratio 9.5% 9.3% 9.0%
Total capital ratio 11.4% 11.1% 10.2%
Assets-to-capital multiple 18.1x 18.0x 19.2x
---------------------------------------------------------------------
Certain comparative amounts have been reclassified to conform to
current period presentation.
(1) Comprised of net after-tax gains on sale of securitized assets,
50% of all investments in certain specified corporations and
other items.
(2) Comprised of 50% of all investments in specified corporations and
other items, 100% of investments in insurance entities, offset by
eligible allowance for credit losses and net after-tax unrealized
gain on available-for-sale equity securities.
Significant capital transactions
(a) 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 terminated on January 11,
2009. The Bank did not purchase any common shares pursuant to this
bid during the quarter.
(b) On December 12, 2008, the Bank issued 14,450,867 common shares at
a price of $34.60 per share as part of the acquisition of CI
Financial Corp. (CI Financial). Refer to Note 11 for further details.
(c) Series 24 non-cumulative five-year rate reset preferred shares
totaling $250 million were issued on December 12, 2008, as part of
the acquisition of CI Financial. Holders are entitled to receive
fixed non-cumulative preferential cash dividends, payable quarterly,
if and when declared, in an amount of $0.3906 per share for the
initial five-year fixed rate period ending on January 25, 2014. The
initial dividend, if and when declared, will be payable on April 28,
2009, and will be $0.5865 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 3.84%, multiplied by $25.00.
Holders of Series 24 preferred shares have the option to convert
their shares into an equal number of Series 25 non-cumulative
floating rate preferred shares on January 26, 2014, and on January 26
every five years thereafter. Series 25 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 3.84%, 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 24 preferred shares issued and
outstanding on the applicable Series 24 Conversion Date, all of the
issued and outstanding Series 24 preferred shares will automatically
be converted on such Series 24 Conversion Date into an equal number
of Series 25 preferred shares. With prior written approval of the
Superintendent of Financial Institutions Canada, Series 24 preferred
shares and, if applicable, Series 25 preferred shares, are redeemable
by the Bank. These shares are redeemable at $25.00 per share on
January 26, 2014, and every five years thereafter. On all other dates
beginning January 26, 2014, Series 25 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.
(d) Series 26 non-cumulative five-year rate reset preferred shares
totaling $325 million were issued on January 21, 2009. Holders are
entitled to receive fixed non-cumulative preferential cash dividends,
payable quarterly, if and when declared, in an amount of $0.390625
per share for the initial five-year fixed rate period ending on April
25, 2014. The initial dividend, if and when declared, will be payable
on April 28, 2009, and will be $0.41524 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 4.14%, multiplied by $25.00.
Holders of Series 26 preferred shares have the option to convert
their shares into an equal number of Series 27 non-cumulative
floating rate preferred shares on April 26, 2014, and on April 26
every five years thereafter. Series 27 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 4.14%, 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 26 preferred shares issued and
outstanding on the applicable Series 26 Conversion Date, all of the
issued and outstanding Series 26 preferred shares will automatically
be converted on such Series 26 Conversion Date into an equal number
of Series 27 preferred shares. With prior written approval of the
Superintendent of Financial Institutions Canada, Series 26 preferred
shares and, if applicable, Series 27 preferred shares, are redeemable
by the Bank. These shares are redeemable at $25.00 per share on April
26, 2014, and every five years thereafter. On all other dates
beginning April 26, 2014, Series 27 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.
(e) Series 28 non-cumulative five-year rate reset preferred shares
totaling $275 million were issued on January 30, 2009. Holders are
entitled to receive fixed non-cumulative preferential cash dividends,
payable quarterly, if and when declared, in an amount of $0.390625
per share for the initial five-year fixed rate period ending on April
25, 2014. The initial dividend, if and when declared, will be payable
on April 28, 2009, and will be $0.37671 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 4.46%, multiplied by $25.00.
Holders of Series 28 preferred shares have the option to convert
their shares into an equal number of Series 29 non-cumulative
floating rate preferred shares on April 26, 2014, and on April 26
every five years thereafter. Series 29 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 4.46%, 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 28 preferred shares issued and
outstanding on the applicable Series 28 Conversion Date, all of the
issued and outstanding Series 28 preferred shares will automatically
be converted on such Series 28 Conversion Date into an equal number
of Series 29 preferred shares. With prior written approval of the
Superintendent of Financial Institutions Canada, Series 28 preferred
shares and, if applicable, Series 29 preferred shares, are redeemable
by the Bank. These shares are redeemable at $25.00 per share on
April 26, 2014, and every five years thereafter. On all other dates
beginning April 26, 2014, Series 29 preferred shares are redeemable
at $25.00 per share plus a redemption premium of $0.50 per share.
These preferred shares qualify as Tier 1 capital.
7. Accumulated other comprehensive income (loss)
The components of accumulated other comprehensive income (loss) as at
January 31, 2009, and other comprehensive income (loss) for the three
months then ended were as follows:
Accumulated other comprehensive income (loss)
As at and for the three months ended
-------------------------------------------------------------------------
Opening Net Ending Opening Net Ending
balance change balance balance change balance
----------------------------------------------------------
October January October January
31 31 31 31
($ millions) 2008 2009 2007 2008
-------------------------------------------------------------------------
Unrealized
foreign
currency
translation
gains (losses),
net of hedging
activities $ (2,181) $ (126) $ (2,307)(1) $ (4,549) $ 885 $ (3,664)
Unrealized
gains (losses)
on available-
for-sale
securities,
net of hedging
activities (949) (386) (1,335)(2) 639 (60) 579
Gains (losses)
on derivative
instruments
designated
as cash flow
hedges (466) (138) (604)(3) 53 (263) (210)
-------------------------------------------------------------------------
Accumulated
other
comprehensive
income
(loss) $ (3,596) $ (650) $ (4,246) $ (3,857) $ 562 $ (3,295)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Net of income tax expense of $345 (January 31, 2008 - expense of
$333).
(2) Net of income tax benefit of $495 (January 31, 2008 - expense of
$276). The balance as at January 31, 2009, includes unrealized losses
of $1,940 (January 31, 2008 - $277) after tax on the available-for-
sale securities.
(3) Net of income tax benefit of $273 (January 31, 2008 - benefit of
$100).
Other comprehensive income (loss)
The following table summarizes the changes in the components of other
comprehensive income (loss).
For the three months ended
---------------------------------------------------------------------
January January
31 31
($ millions) 2009 2008
---------------------------------------------------------------------
Net change in unrealized foreign currency
translation losses
Net unrealized foreign currency translation
gains (losses)(1) $ (44) $ 1,141
Net losses on hedges of net investments in
self-sustaining foreign operations(2) (82) (256)
---------------------------------------------------------------------
(126) 885
---------------------------------------------------------------------
---------------------------------------------------------------------
Net change in unrealized gains (losses) on
available-for-sale securities
Net unrealized gains (losses) on available-
for-sale securities(3) (273) 8
Reclassification of net gains to net income(4) (113) (68)
---------------------------------------------------------------------
(386) (60)
---------------------------------------------------------------------
---------------------------------------------------------------------
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) (323) 278
Reclassification of net (gains) losses to net
income(6) 185 (541)
---------------------------------------------------------------------
(138) (263)
---------------------------------------------------------------------
---------------------------------------------------------------------
Other comprehensive income (loss) $ (650) $ 562
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Net of income tax expense of nil.
(2) Net of income tax expense of $27 (January 31, 2008 - benefit of
$94).
(3) Net of income tax benefit of $122 (January 31, 2008 - benefit of
$46).
(4) Net of income tax expense of $2 (January 31, 2008 - expense of
$16).
(5) Net of income tax benefit of $138 (January 31, 2008 - expense of
$126).
(6) Net of income tax benefit of $83 (January 31, 2008 - expense of
$251).
8. Financial instruments
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's framework to
monitor, evaluate and manage these risks is consistent with that in
place as at October 31, 2008.
(a) 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.
Credit risk exposures
Credit risk exposures disclosed below are presented based on Basel II
approaches utilized by the Bank. All material portfolios in Canada,
U.S. and Europe are treated under the advanced internal ratings based
approach (AIRB) and the remaining portfolios including other
international portfolios are treated under the Standardized approach.
Under the AIRB approach, the Bank uses internal risk parameter
estimates, based on historical experience, for probability of default
(PD), loss given default (LGD) and exposure at default (EAD), as
defined below:
- EAD: Generally represents the expected gross exposure; outstanding
amount for on-balance sheet exposure and loan equivalent amount
for off-balance sheet exposure.
- PD: Measures the likelihood that a borrower will default within a
one-year time horizon, expressed as a percentage.
- LGD: Measures the severity of loss on a facility in the event of a
borrower's default, expressed as a percentage of exposure at
default.
Under the standardized approach, credit risk is estimated using the
risk weights as prescribed by the Basel II framework, either based on
credit assessments by external rating agencies or based on the
counterparty type for non-retail exposures and product type for
retail exposures. Standardized risk weights also takes into account
other factors such as specific provisions for defaulted exposures,
eligible collateral, and loan-to-value for real estate secured retail
exposures.
Exposure at default(1)
---------------------------------------------------------------------
As at January 31, As at October 31,
2009 2008
---------------------------------------------------------------------
Standard-
($ millions) AIRB(2) ized Total Total
---------------------------------------------------------------------
By Exposure sub-type
Non-Retail(2)
Drawn(3) $ 142,663 $ 71,028 $ 213,691 $ 208,494
Undrawn Commitments 55,897 4,067 59,964 64,870
Other exposures(4) 83,880 2,972 86,852 87,713
---------------------------------------------------------------------
Total Non-Retail $ 282,440 $ 78,067 $ 360,507 $ 361,077
---------------------------------------------------------------------
---------------------------------------------------------------------
Retail
Drawn(5) $ 100,620 $ 36,933 $ 137,553 $ 137,624
Undrawn Commitments 8,666 220 8,886 7,540
---------------------------------------------------------------------
Total Retail $ 109,286 $ 37,153 $ 146,439 $ 145,164
---------------------------------------------------------------------
Total $ 391,726 $ 115,220 $ 506,946 $ 506,241
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) After credit mitigation, excludes available-for-sale equity
securities and other assets.
(2) Non-retail AIRB drawn and undrawn exposures include government
guaranteed mortgages ($35 billion).
(3) Non-retail drawn includes loans, bankers' acceptances, deposits
with banks and available-for-sale debt securities.
(4) Includes off-balance sheet lending instruments such as letters of
credit, letters of guarantee, securitization, derivatives and
repo-style transactions net of related collateral.
(5) Retail drawn includes residential mortgages, credit cards, lines
of credit and other personal loans.
Total Credit risk exposures by geography(1)
---------------------------------------------------------------------
As at October 31,
As at January 31, 2009 2008
---------------------------------------------------------------------
Undrawn Other
commit- expo-
($ millions) Drawn ments sures(2) Total Total
---------------------------------------------------------------------
Canada $ 202,578 $ 44,960 $ 33,291 $ 280,829 $ 278,770
USA 35,330 17,575 36,244 89,149 89,451
Mexico 12,996 320 1,092 14,408 15,137
Other
International
Europe 26,303 2,272 9,816 38,391 39,486
Caribbean 27,743 1,703 2,652 32,098 30,788
Latin America
(excluding
Mexico) 23,061 903 1,085 25,049 22,653
All other 23,233 1,117 2,672 27,022 29,956
---------------------------------------------------------------------
Total $ 351,244 $ 68,850 $ 86,852 $ 506,946 $ 506,241
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Geographic segmentation is based upon the location of the
ultimate risk of the credit exposure. Includes all credit risk
portfolios and excludes available-for-sale equities, and other
assets.
(2) Includes off-balance sheet lending instruments such as letters of
credit, letters of guarantee, securitization, derivatives and
repo-style transactions after collateral.
Balance sheet asset categories cross-referenced to credit risk
exposures
The table below provides a mapping of on-balance sheet asset
categories that are included in the various Basel II exposure
categories, as presented in the credit exposure summary table above
of these financial statements. The amounts for Basel II purposes do
not include certain assets such as cash, precious metals, available-
for-sale equity securities and other assets. Also excluded from Basel
II credit exposures are all trading book assets and assets of the
Bank's insurance subsidiaries.
Balance sheet asset exposures
-------------------------------------------------------------------------
As at January 31, 2009 As at October 31, 2008
-------------------------------------------------------------------------
Drawn(1) Other Drawn(1) Other
Non- expo- Non- expo-
($ millions) retail Retail sures retail Retail sures
-------------------------------------------------------------------------
Deposits
with
banks $ 23,887 $ - $ 4,964 $ 28,208 $ - $ 5,132
Available-
for-sale
debt
securities 25,315 6,485 9,461 20,201 6,066 9,724
Residential
mortgages 32,223(2) 79,450 - 33,959(2) 80,836 -
Personal and
credit
cards - 51,482 - - 50,603 -
Securities
purchased
under
re-sale
agreements - - 14,176 - - 19,445
Loans to
business
and
government 118,461 - 6,061 114,157 - 3,422
Customers'
liability
under
acceptances 13,144 - - 11,969 - -
Derivative
instruments - - 43,526 - - 44,810
Other assets 661 136 - - 119 -
-------------------------------------------------------------------------
Total $213,691 $137,553 $78,188 $208,494 $137,624 $82,533
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Gross of allowances for credit losses for AIRB exposures and net of
specific allowances for standardized exposures.
(2) Includes $32 billion (October 31, 2008 - $33 billion) in mortgages
guaranteed by Canada Mortgage Housing Corporation.
Credit quality of non-retail exposures
The Bank's non-retail portfolio is well diversified by industry. As
at January 31, 2009, a significant portion of the authorized
corporate and commercial lending portfolio was internally assessed at
a grade that would generally equate to an investment grade rating by
external rating agencies. There has not been a significant change in
concentrations of credit risk since October 31, 2008.
Non-retail AIRB portfolio
The cross references of the Bank's internal borrower grades with
equivalent rating categories utilized by external rating agencies are
outlined on page 141 of the 2008 Annual Report. The credit quality of
the non-retail AIRB portfolio, expressed in terms of risk categories
of Borrower internal grades is shown in the table below:
Exposure at default(1)
---------------------------------------------------------------------
As at
Category of October 31,
internal grades As at January 31, 2009 2008
---------------------------------------------------------------------
Undrawn Other
Commit- Expo-
($ millions) Drawn ments sures(2) Total Total
---------------------------------------------------------------------
Investment
grade $ 70,368 $ 40,877 $ 77,767 $ 189,012 $ 188,904
Non-investment
grade 37,332 11,259 5,073 53,664 54,591
Watch list 2,959 512 752 4,223 2,736
Default 481 58 79 618 297
---------------------------------------------------------------------
Total,
excluding
residential
mortgages $ 111,140 $ 52,706 $ 83,671 $ 247,517 $ 246,528
---------------------------------------------------------------------
Government
guaranteed
residential
mortgages(3) 31,523 3,191 - 34,714 36,303
---------------------------------------------------------------------
Total $ 142,663 $ 55,897 $ 83,671 $ 282,231 $ 282,831
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) After credit risk mitigation.
(2) Includes off-balance sheet lending instruments such as letters of
credit, letters of guarantee, derivatives, securitizations
(excluding first loss protection of $209) and repo-style
transactions (reverse repurchase agreements, repurchase
agreements and securities lending and borrowing), net of related
collateral.
(3) Under Basel II, these exposures are classified as sovereign
exposure and included in the non-retail category.
Non-retail standardized portfolio
The non-retail standardized portfolio as at January 31, 2009,
comprised of drawn, undrawn and other exposures to corporate, bank
and sovereign counterparties, amounted to $78 billion unchanged from
year end. Exposures to most Corporate and Commercial counterparties,
mainly in the Caribbean and Latin American region, are to non-
investment grade counterparties, based on the Bank's internal grading
systems.
Credit quality of retail exposures
The Bank's retail portfolios consist of a number of relatively small
loans to a large number of borrowers. The portfolios are distributed
across Canada and a wide range of countries. As such, the portfolios
inherently have a high degree of diversification. As at January 31,
2009, the amount of retail loans that were past due but not impaired
was not significant.
Retail AIRB portfolio
The general relationship between PD ranges and the category of PD
grades is outlined on page 142 of the 2008 Annual Report. The data in
the table below provides a distribution of the retail AIRB exposure
within each PD grade by exposure class:
Exposure at default(1)
---------------------------------------------------------------------
As at
October 31,
Category of PD grades As at January 31, 2009(2) 2008
---------------------------------------------------------------------
Undrawn
Commit-
($ millions) Drawn ments Total Total
---------------------------------------------------------------------
Very low $ 64,191 $ 5,860 $ 70,051 $ 74,214
Low 11,886 1,663 13,549 15,174
Medium 20,445 1,011 21,456 15,862
High 2,794 90 2,884 1,468
Very high 967 42 1,009 518
Default 337 - 337 312
---------------------------------------------------------------------
$ 100,620 $ 8,666 $ 109,286 $ 107,548
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) After credit risk mitigation.
(2) The PD factors were updated in the first quarter of 2009,
resulting in higher PDs across the portfolios.
Retail standardized portfolio
The retail standardized portfolio of $37 billion as at January 31,
2009 (October 31, 2008 - $38 billion), was comprised of residential
mortgages, personal loans, credit cards and lines of credit to
individuals, mainly in the Caribbean and Latin American region. Of
the total standardized retail exposures, $23 billion (October 31,
2008 - $24 billion) related to mortgages and loans secured by
residential real estate, mostly with a loan-to-value ratio of below
80%.
Collateral
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.
Collateral pledged
In the normal course of business, securities and other assets are
pledged to secure an obligation, participate in clearing or
settlement systems, or operate in a foreign jurisdiction. As at
January 31, 2009, total assets pledged were $55 billion (October 31,
2008 - $45 billion; January 31, 2008 - $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.
(b) 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 holdings of liquid assets, which can generally be sold or
pledged to meet its obligations, amounted to $108 billion as at
January 31, 2009 (October 31, 2008 - $106 billion; January 31, 2008 -
$114 billion), representing 21% of the Bank's total assets
(October 31, 2008 - 21%; January 31, 2008 - 25%).
Contractual maturities
The table below shows the contractual maturities of certain of the
Bank's financial liabilities.
Payable on a fixed date
------------------------------
Greater
As at January Payable Payable Less One to than
31, 2009 on after than one five five
($ millions) demand notice year years years Total
-------------------------------------------------------------------------
Deposits $ 38,201 $ 54,654 $184,039 $ 61,950 $ 7,726 $346,570
Subordinated
debentures - - - 249 5,158 5,407
Capital
instrument
liabilities - - - - 500 500
-------------------------------------------------------------------------
Total $ 38,201 $ 54,654 $184,039 $ 62,199 $ 13,384 $352,477
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Payable on a fixed date
------------------------------
Greater
As at October Payable Payable Less One to than
31, 2008 on after than one five five
($ millions) demand notice year years years Total
-------------------------------------------------------------------------
Deposits $ 37,157 $ 52,312 $186,818 $ 63,659 $ 6,634 $346,580
Subordinated
debentures - - - 252 4,100 4,352
Capital
instrument
liabilities - - - - 500 500
-------------------------------------------------------------------------
Total $ 37,157 $ 52,312 $186,818 $ 63,911 $ 11,234 $351,432
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Payable on a fixed date
------------------------------
Greater
As at January Payable Payable Less One to than
31, 2008 on after than one five five
($ millions) demand notice year years years Total
-------------------------------------------------------------------------
Deposits(1) $ 26,710 $ 38,900 $120,885 $ 48,622 $ 6,181 $241,298
Subordinated
debentures - - 256 - 1,894 2,150
Capital
instrument
liabilities - - - - 500 500
-------------------------------------------------------------------------
Total $ 26,710 $ 38,900 $121,141 $ 48,622 $ 8,575 $243,948
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The Bank's deposit liabilities at January 31, 2008, are those
recorded in Canada and the United States, which amounted to
$241 billion, representing 76% of the Bank's total deposits.
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. The majority
of these commitments, which are not reflected on the Consolidated
Balance Sheet, had a remaining term to maturity of less than one year
for all periods presented.
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 January 31, 2009, 49% (October 31, 2008 - 52%; January 31, 2008 -
56%) of the notional value of the Bank's derivative instruments
mature within one year, while 85% (October 31, 2008 - 85%; January
31, 2008 - 87%) mature within five years.
(c) 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.
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.
Interest rate sensitivity
Based on the Bank's interest rate positions, the following table
shows the potential after-tax impact on the Bank's net income over
the next 12 months and on the economic value of shareholders' equity
of an immediate and sustained 100 basis point increase and decrease
in interest rates across all currencies.
As at January 31, 2009 October 31, 2008 January 31, 2008
---------------------------------------------------------------------
Economic Economic Economic
($ Net value of Net value of Net value of
millions) income equity income equity income equity
---------------------------------------------------------------------
100 bp
increase $ 145 $ (109) $ 89 $ (373) $ 124 $ (548)
---------------------------------------------------------------------
100 bp
decrease $ (113) $ 107 $ (100) $ 346 $ (104) $ 564
---------------------------------------------------------------------
---------------------------------------------------------------------
Non-trading 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.
As at January 31, 2009, 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 (October 31, 2008 - $38 million;
January 31, 2008 - $34 million) in the absence of hedging activity,
primarily from exposure to U.S. dollars. A similar change in the
Canadian dollar as at January 31, 2009, would increase (decrease) the
unrealized foreign currency translation losses in the accumulated
other comprehensive income section of shareholders' equity by
approximately $187 million (October 31, 2008 - $174 million;
January 31, 2008 - $145 million), net of hedging.
Equity risk
Equity risk is the risk of loss due to adverse movements in equity
prices. The Bank is exposed to equity risk through its available-for-
sale equity portfolios. The fair value of available-for-sale equity
securities as at January 31, 2009, was $2,915 million (October 31,
2008 - $3,211 million; January 31, 2008 - $3,223 million).
Trading portfolio risk management
Market risk arising from the Bank's trading activities can be
aggregated using VaR and stress testing measures. The table below
shows the Bank's VaR by risk factor:
One-day VaR by risk factor
-------------------------------------------------------------------------
As at For the three months ended As at As at
January January 31, 2009 October January
31 31 31
($ millions) 2009 Average High Low 2008 2008
-------------------------------------------------------------------------
Interest rate 14.9 19.7 26.1 12.7 23.8 16.7
Equities 5.4 5.3 8.3 3.6 4.9 2.8
Foreign exchange 2.8 2.3 4.7 0.8 1.7 0.6
Commodities 3.6 3.9 4.9 2.8 3.4 3.4
Diversification (11.9) (9.5) N/A N/A (7.3) (4.2)
-------------------------------------------------------------------------
All-Bank VaR 14.8 21.7 28.9 14.8 26.5 19.3
-------------------------------------------------------------------------
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 after-
tax loss of approximately $276 million (October 31, 2008 - loss of
$204 million; January 31, 2008 - loss of $99 million). As at
January 31, 2009, the maximum length of cash flow hedges outstanding
was less than 10 years (October 31, 2008 - less than 10 years;
January 31, 2008 - less than 7 years).
Any hedge ineffectiveness is measured and recorded in current period
income in the Consolidated Statement of Income. The Bank recorded a
gain of $27 million during the three months ended January 31, 2009
(October 31, 2008 - loss of $14 million; January 31, 2008 - loss of
$6 million), of which a gain of $3 million (October 31, 2008 - loss
of $1 million; January 31, 2008 - loss of $4 million) related to cash
flow hedges, due to the ineffective portion of designated hedges.
When either a fair value or cash flow hedge is discontinued, any
cumulative adjustment to either the hedged item or other
comprehensive income is recognized in income over the remaining term
of the original hedge, or when the hedged item is derecognized.
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. No ineffectiveness was recognized on net
investment hedges.
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 $5.2 billion as at January 31, 2009 (October 31, 2008 -
$7.5 billion; January 31, 2008 - $6.4 billion). The change in fair
value that was recorded through trading income for the three months
ended January 31, 2009, was a loss of $310 million (October 31, 2008
- loss of $1,533 million; January 31, 2008 - loss of $280 million).
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 $63 million as at
January 31, 2009 (October 31, 2008 - $56 million; January 31, 2008 -
$110 million). The change in fair value that was recorded through
trading income for the three months ended January 31, 2009, was a
gain of $5 million (October 31, 2008 - loss of less than $1 million;
January 31, 2008 - loss of $3 million).
The Bank has classified certain debt and equity investments as
trading securities to reduce an accounting mismatch between these
assets and fair value changes in related derivatives. The fair value
of these trading securities was $2,998 million as at January 31, 2009
(October 31, 2008 - $565 million; January 31, 2008 - $85 million).
The change in fair value that was recorded through trading income for
the three months ended January 31, 2009, was a gain of $22 million
(October 31, 2008 - loss of $28 million; January 31, 2008 - loss of
$7 million).
The Bank has classified certain deposit note liabilities containing
extension features as trading, in order to significantly reduce an
accounting mismatch between these liabilities and fair value changes
in related derivatives. The fair value of these liabilities was
$135 million as at January 31, 2009 (October 31, 2008 - $297 million;
January 31, 2008 - $766 million). The change in fair value that was
recorded through net interest income for the three months ended
January 31, 2009, was a loss of $2 million (October 31, 2008 - loss
of $2 million; January 31, 2008 - loss of $10 million). The change in
fair value, which is mainly attributable to changes in interest
rates, was substantially offset by the changes in fair value of the
related derivatives. At January 31, 2009, the Bank is contractually
obligated to pay $133 million to the holders of the notes at maturity
(October 31, 2008 - $295 million; January 31, 2008 - $764 million).
Reclassification of Financial Assets
The Bank reclassified certain non-derivative financial assets out of
trading securities to available-for-sale securities effective
August 1, 2008. These assets were comprised of $303 million of bond
assets and $91 million of preferred shares that were no longer traded
in an active market and which management intends to hold for the
foreseeable future. As at January 31, 2009, the fair values of the
bond assets and preferred shares were $278 million (October 31, 2008
- $277 million) and $77 million (October 31, 2008 - $81 million),
respectively. Due to these reclassifications of bond assets and
preferred shares, for the three months ended January 31, 2009, the
Bank recorded pre-tax losses in other comprehensive income of
$15 million (October 31, 2008 - loss of $26 million) and $4 million
(October 31, 2008 - loss of $10 million), respectively, relating to
fair value movements on these assets. If these reclassifications had
not been made, these losses would have been recorded in the
consolidated statement of income. As of the reclassification date,
the weighted average effective interest rate on the reclassified bond
asset portfolio was 4.0%, with expected recoverable cash flows of
$366 million.
9. Employee future benefits
Employee future benefits include pensions and other post-retirement
benefits, post-employment benefits and compensated absences. The
following table summarizes the expenses for the Bank's principal
plans(1).
For the three months ended
---------------------------------------------------------------------
January October January
31 31 31
($ millions) 2009 2008 2008
---------------------------------------------------------------------
Benefit expenses
Pension plans $ (2) $ (1) $ 1
Other benefit plans 29 30 29
---------------------------------------------------------------------
$ 27 $ 29 $ 30
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Other plans operated by certain subsidiaries of the Bank are not
considered material and are not included in this note.
10. 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: Canadian Banking,
International Banking and Scotia Capital. Results for these operating
segments are presented in the Business segment income tables above.
Because of the complexity of the Bank, various estimates and
allocation methodologies are used in the preparation of the business
segment financial information. The assets and liabilities are
transfer-priced at wholesale market rates, and corporate expenses are
allocated to each segment based on utilization. As well, capital is
apportioned to the business segments on a risk-based methodology.
Transactions between segments are recorded within segment results as
if conducted with a third party and are eliminated on consolidation.
In the first quarter, due to current market conditions, the Bank
refined its transfer pricing to include a liquidity premium charge in
the cost of funds allocated to the business segments. The net impact
of this change was to reduce the net interest income of the three
major segments and reduce the net interest expense of the Other
segment.
11. Acquisitions
On December 12, 2008, the Bank completed the acquisition of Sun Life
Financial Inc.'s 37.6% ownership stake in CI Financial Income Fund
for approximately $2.3 billion. The consideration was in the form of
$1.55 billion cash, $500 million common shares and $250 million non-
cumulative preferred shares. This investment is accounted for under
the equity method of accounting.
The Bank completed the acquisition of E(*)Trade Canada on September
22, 2008, through the acquisition of 100% of the outstanding shares
for cash consideration of approximately $500 million. During the
quarter, the Bank has completed the purchase price allocation and
recorded goodwill of $430 million and intangibles of $34 million on
the balance sheet.
12. Subsequent event
Acquisition
On February 3, 2009, the Bank acquired an additional 24% of
Thanachart Bank in Thailand for approximately $270 million, which
increases the Bank's ownership from 24.99% to 48.99%. The investment
will continue to be accounted for under the equity method of
accounting.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 2009
Record and payment dates for common and preferred shares, subject to
approval by the Board of Directors.
Record Date Payment Date
January 6 January 28
April 7 April 28
July 7 July 29
October 6 October 28Annual Meeting date for fiscal 2009
The Annual Meeting of Shareholders of the Bank for the fiscal year ending
October 31, 2009, will be held in St. John's, Newfoundland, on Thursday, April
8, 2010.
Duplicated communication
If your shareholdings are registered under more than one name or address,
multiple mailings will result. To eliminate this duplication, please write to
the transfer agent to combine the accounts.
Website
For information relating to Scotiabank and its services, visit us at our
website: www.scotiabank.com.
Conference call and Web broadcast
The quarterly results conference call will take place on March 3, 2009,
at 11:30 a.m. EST and is expected to last approximately one hour. Interested
parties are invited to access the call live, in listen-only mode, by
telephone, toll-free, at 1-800-731-5319 (please call five to 15 minutes in
advance). In addition, an audio webcast, with accompanying slide presentation,
may be accessed via the Investor Relations page of www.scotiabank.com.
Following discussion of the results by Scotiabank executives, there will be a
question and answer session. Listeners are invited to submit questions by e-
mail to investor.relations@scotiabank.com.
A telephone replay of the conference call will be available from March 3,
2009, to March 17, 2009, by calling (416) 640-1917 and entering the
identification code 21297445 followed by the number sign. The archived audio
webcast will be available on the Bank's website for three months.-------------------------------------------------------------------------
Contact information
Investors:
Financial analysts, portfolio managers and other investors requiring
financial information, please contact Investor Relations, Finance
Department:
Scotiabank
Scotia Plaza, 44 King Street West
Toronto, Ontario, Canada M5H 1H1
Telephone: (416) 866-5982
Fax: (416) 866-7867
E-mail: investor.relations@scotiabank.com
Media:
For other information and for media enquiries, please contact the Public,
Corporate and Government Affairs Department at the above address.
Telephone: (416) 866-3925
Fax: (416) 866-4988
E-mail: corpaff@scotiabank.com
Shareholders:
For enquiries related to changes in share registration or address,
dividend information, lost share certificates, estate transfers, or to
advise of duplicate mailings, please contact the Bank's transfer agent:
Computershare Trust Company of Canada
100 University Avenue, 9th Floor
Toronto, Ontario, Canada M5J 2Y1
Telephone: 1-877-982-8767
Fax: 1-888-453-0330
E-mail: service@computershare.com
Co-Transfer Agent (U.S.A.)
Computershare Trust Company N.A.
350 Indiana Street
Golden, Colorado 80401 U.S.A.
Telephone: 1-800-962-4284
For other shareholder enquiries, please contact the Finance Department:
Scotiabank
Scotia Plaza, 44 King Street West
Toronto, Ontario, Canada M5H 1H1
Telephone: (416) 866-4790
Fax: (416) 866-4048
E-mail: corporate.secretary@scotiabank.com
Rapport trimestriel disponible en français
Le Rapport annuel et les états financiers de la Banque sont publiés en
français et en anglais et distribués aux actionnaires dans la version de leur
choix. Si vous préférez que la documentation vous concernant vous soit
adressée en français, veuillez en informer Relations publiques, Affaires de la
société et Affaires gouvernementales, La Banque de Nouvelle-Ecosse, Scotia
Plaza, 44, rue King Ouest, Toronto (Ontario), Canada M5H 1H1, en joignant, si
possible, l'étiquette d'adresse, afin que nous puissions prendre note du
changement.
The Bank of Nova Scotia is incorporated in Canada with limited liability.%SEDAR: 00001289EF %CIK: 0000009631
For further information:
For further information: Kevin Harraher, Investor Relations, (416) 866-5982; Ann DeRabbie, Public Affairs, (416) 933-1344