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Scotiabank reports strong third quarter results of $931 million and record revenues for second consecutive quarter
Third quarter financial measures compared to the same period a year ago:
- Earnings per share (diluted) of $0.87, compared to $0.98
- Net income of $931 million, versus $1.01 billion
- Return on equity of 18.0%, compared to 21.0%
- Productivity ratio of 51.0%, versus 54.3%
- Quarterly dividend of 49 cents per common share
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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 nine
months, Scotiabank earned an ROE of 17.5%.
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 10%.
3. Target: Maintain a productivity ratio(1) of less than 58%.
Scotiabank's ratio was 53.5% for the nine months.
4. Target: Maintain strong capital ratios. At 10.4%, Scotiabank's Tier 1
capital ratio remains strong by international standards.
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(1) Refer to non-GAAP measures discussion further below.TORONTO, Aug. 28 /CNW/ - Scotiabank today reported third quarter income
of $931 million compared with $1.01 billion for the same period last year.
Quarter over quarter, net income was up 7%.
This quarter's results include record revenues for the second consecutive
quarter with contributions from all three business lines. On an all-Bank
basis, revenue increased by 11 per cent compared to the same period last year.
These results were due primarily to higher net interest income, strong growth
in capital market activities, and increased customer transactions, offset by
increases in provisions for credit losses and writedowns on securities.
Diluted earnings per share were $0.87 compared to $0.98 in the same
period a year ago and $0.81 last quarter. Return on equity remained strong at
18.0% compared to 21.0% last year and 17.6% last quarter. A dividend of 49
cents per common share was announced.
"Record quarters from Canadian Banking and Scotia Capital and a solid
contribution from International Banking have allowed Scotiabank to continue to
deliver strong core earnings through challenging conditions," said Rick Waugh,
President and CEO. "Provisions for credit losses, including an increase in the
general allowance, are within our expectations and risk appetite, and we are
continuing to prudently manage our loan portfolios across geographies and
industries.
"Canadian Banking reported a record quarter, benefitting from a seven per
cent rise in revenue from the same quarter last year. This was due mainly to
higher net interest income, from growth in average asset volumes in mortgages,
personal loans and small business and commercial banking. Good progress
continues to be made in all our Wealth Management channels. We led the
industry in mutual funds net sales for the second consecutive quarter.
"Scotia Capital saw record results year over year with strong
performances across all products and businesses, partly offset by higher
provisions for credit losses. Net interest income rose substantially compared
to the same period last year due to higher loan volumes and significantly
improved lending spreads.
"Solid results in International Banking were driven by strong growth in
net interest income, a result of improved margins and loan growth across the
division, offset by higher provisions for credit losses and writedowns on
securities.
"Our capital position continues to improve and remains strong by
international standards, allowing the Bank to continue to deliver consistent
dividends to shareholders and pursue on-going business development
opportunities. High levels of profitability and retained earnings have
contributed to the improvement in our capital ratios.
"Scotiabank's continued focus on expense control across all business
lines is reflected in a productivity ratio of 51.0% compared to 54.3% for the
same period last year.
"Economic conditions in the second half of 2009 are improving. With the
solid results achieved during the first nine months of the year, the Bank is
maintaining the objectives established at the beginning of the year."FINANCIAL HIGHLIGHTS
As at and For the
for the three months ended nine months ended
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July 31 April 30 July 31 July 31 July 31
(Unaudited) 2009 2009 2008 2009 2008
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Operating results
($ millions)
Net interest income 2,176 2,087 1,946 6,229 5,633
Net interest income
(TEB(1)) 2,244 2,164 2,049 6,444 5,954
Total revenue 3,775 3,596 3,374 10,722 9,385
Total revenue(TEB(1)) 3,843 3,673 3,477 10,937 9,706
Provision for credit
losses 554 489 159 1,324 423
Non-interest expenses 1,959 1,886 1,889 5,855 5,352
Provision for income
taxes 303 319 287 812 689
Provision for income
taxes
(TEB(1)) 371 396 390 1,027 1,010
Net income 931 872 1,010 2,645 2,825
Net income available
to common
shareholders 882 821 978 2,508 2,750
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Operating performance
Basic earnings per
share($) 0.87 0.81 0.99 2.48 2.79
Diluted earnings per
share($) 0.87 0.81 0.98 2.48 2.77
Return on equity(1)
(%) 18.0 17.6 21.0 17.5 20.3
Productivity ratio(%)
(TEB(1)) 51.0 51.4 54.3 53.5 55.1
Net interest margin
on total average
assets (%) (TEB(1)) 1.76 1.71 1.79 1.66 1.78
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Balance sheet
information
($ millions)
Cash resources and
securities 156,157 146,060 124,079
Loans and
acceptances 268,053 296,740 283,742
Total assets 485,856 513,567 462,407
Deposits 333,728 346,860 332,469
Preferred shares 3,710 3,710 2,560
Common shareholders'
equity 19,687 19,198 18,801
Assets under
administration 207,913 196,773 207,433
Assets under
management 39,806 35,449 37,842
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Capital measures
Tier 1 capital
ratio(%) 10.4 9.6 9.8
Total capital
ratio(%) 12.7 11.8 11.5
Tangible common
equity to
risk-weighted
assets(1)(%) 8.0 7.7 7.6
Risk-weighted assets
($ millions) 221,494 241,837 225,801
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Credit quality
Net impaired
loans(2)
($ millions) 2,509 2,179 1,009
General allowance
for credit losses
($ millions) 1,450 1,350 1,323
Sectoral allowance
($ millions) 48 60 -
Net impaired loans
as a % of loans
and acceptances(2) 0.94 0.73 0.36
Specific provision
for credit losses
as a % of average
loans and
acceptances
(annualized) 0.66 0.56 0.23 0.53 0.22
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Common share
information
Share price ($)
High 46.51 35.85 52.51 46.51 54.00
Low 33.75 23.99 41.95 23.99 41.95
Close 45.92 33.94 49.98
Shares outstanding
(millions)
Average - Basic 1,017 1,014 989 1,010 986
Average - Diluted 1,020 1,016 994 1,013 993
End of period 1,020 1,017 990
Dividends per
share($) 0.49 0.49 0.49 1.47 1.43
Dividend yield(%) 4.9 6.6 4.1 5.6 4.0
Market
capitalization
($ millions) 46,858 34,518 49,475
Book value per
common share($) 19.29 18.88 18.99
Market value to book
value multiple 2.4 1.8 2.6
Price to earnings
multiple (trailing
4 quarters) 16.6 11.8 13.4
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Other information
Employees 67,482 67,698 62,209
Branches and offices 2,689 2,683 2,557
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(1) Non-GAAP measure. Further below, refer to a discussion of these
measures.
(2) Net impaired loans are impaired loans less the specific allowance for
credit losses.ACHIEVEMENTS
Notable Business Highlights
ScotiaFunds continued its strength in the third quarter, and was ranked
No.1 by the Investment Funds Institute of Canada for total net sales. Support
for this growth came in part from Scotia INNOVA Portfolios, ScotiaFunds' new
fund-of-funds solution, which has had one of the industry's most successful
launches of a product in this category, surpassing $240 million in assets
under management since its January launch.
International Wealth Management has opened a Scotia Private Client Group
office in Miami. The Miami office is a hub for the Bank's expanding wealth
management services in the Caribbean and Latin America.
In a highly successful quarter, Scotia Capital worked closely with
clients on a number of significant transactions, including:- Acted as exclusive financial advisor to China Investment Corporation
(CIC) on a US$1.5 billion equity investment in Teck Resources
Limited. This landmark transaction represents the largest private
placement in Canadian history and the first significant investment in
a Canadian company by one of the world's largest sovereign wealth
funds.
- Scotia Capital was Joint Bookrunner on a $850 million initial public
offering of common shares by Genworth MI Canada Inc. This is the
largest IPO in Canada to date in 2009 and ninth largest IPO in
Canadian history.Employee and customer satisfaction remains high
Scotiabank employees continued to be satisfied with their workplace,
despite the economic turmoil of the past year, according to the Bank's annual
global employee survey, ViewPoint. The overall Employee Satisfaction Index
remained high at 86%, with 88% of employees worldwide agreeing or strongly
agreeing that their branch or department is a great place to work. Employee
participation increased significantly to 91% this year, from 82% in 2008.
Demonstrating a link between employee satisfaction and customer service,
Scotiabank continues to improve on customer service performance, capturing
five Best Banking Awards from the 2009 Synovate Customer Service Index (CSI)
study, up from four in 2008. Scotiabank garnered Best Banking awards for
Values My Business, Financial Planning & Advice, Products & Service
Excellence, Value for Money and Interest Rates & Service Charges.
Serving our customers better
Scotiabank and specialty hockey retailer Pro Hockey Life Sporting Goods
Inc. have formed a strategic alliance to drive sales for both companies and
entitle Scotiabank customers to exclusive discounts and offers.
Scotiabank group captures prestigious awards
Scotia Capital and Scotiabank have been jointly recognized as the Best
Corporate/Institutional Bank in Canada for 2009 by Global Finance magazine.
The award was the result of a joint submission by Scotia Capital and the
Bank's Global Transaction Banking unit (GTB). Scotia Capital's entry included
its portal site, as well as ScotiaFX, SC Online and Scotia Prime Brokerage
sites and platforms. GTB participated in the entry with its web-based cash
management and trade finance platforms. The award recognizes Scotiabank
Group's capability in fulfilling the breadth of its customers' borrowing,
transactional and supply chain needs.
Scotia Capital's Debt Capital Markets and Derivatives Teams were ranked
No.1 in Canada by an independent third-party survey firm.
Scotiabank has been recognized as the Best Trade Bank in Central America
and Best Trade Bank in the Caribbean by Trade Finance magazine. Scotiabank
became the first winner of this new award introduced in 2009. These two awards
recognize the strength of our NAFTA footprint and our global trade
capabilities across multiple geographies and business lines.
For the fourth consecutive year, Scotiabank Mexico was awarded the 2008
JP Morgan Chase Quality Recognition Award. This achievement is a result of the
high quality of international wire processing in Scotiabank Mexico. The award
is granted only to firms that achieve outstanding quality in their operations
- fewer than one per cent of JP Morgan clients met the requirements to earn
this award.
Social responsibility
Scotiabank has been identified among Canada's 50 most socially
responsible corporations in a report by Maclean's magazine and Jantzi
Research. Scotiabank was cited as one of the few banks providing access to
credit for under-served communities and its HIV/AIDS-related initiatives.
The 11th Annual Scotiabank Vancouver Half-Marathon hosted a record field
of more than 5,000 runners from eight provinces and 20 countries on June 28.
The Scotiabank Group Charity Challenge also broke this year's fundraising
goal, raising an impressive $337,000 for 15 local charities, bringing the
11-year total to more than $1.2 million raised.
MANAGEMENT'S DISCUSSION & ANALYSIS
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Forward-looking statements
Our public communications often include oral or written forward-looking
statements. Statements of this type are included in this document, and may be
included in other filings with Canadian securities regulators or the U.S.
Securities and Exchange Commission, or in other communications. All such
statements are made pursuant to the "safe harbour" provisions of the United
States Private Securities Litigation Reform Act of 1995 and any applicable
Canadian securities legislation. Forward-looking statements may include
comments with respect to the Bank's objectives, strategies to achieve those
objectives, expected financial results (including those in the area of risk
management), and the outlook for the Bank's businesses and for the Canadian,
United States and global economies. Such statements are typically identified
by words or phrases such as "believe," "expect," "anticipate," "intent,"
"estimate," "plan," "may increase," "may fluctuate," and similar expressions
of future or conditional verbs, such as "will," "should," "would" and "could."
By their very nature, forward-looking statements involve numerous
assumptions, inherent risks and uncertainties, both general and specific, and
the risk that predictions and other forward-looking statements will not prove
to be accurate. Do not unduly rely on forward-looking statements, as a number
of important factors, many of which are beyond our control, could cause actual
results to differ materially from the estimates and intentions expressed in
such forward-looking statements. These factors include, but are not limited
to: the economic and financial conditions in Canada and globally; fluctuations
in interest rates and currency values; liquidity; 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.
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Additional information relating to the Bank, including the Bank's Annual
Information Form, can be located on the SEDAR website at www.sedar.com and on
the EDGAR section of the SEC's website at www.sec.gov2009 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 above and 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
$68 million versus $103 million in the same quarter last year and $77 million
last quarter. For the nine months, the TEB gross-up to net interest income and
the provision for income taxes was $215 million compared to $321 million for
the same period last year.
For purposes of segmented reporting, a segment's net interest income and
provision for income taxes are grossed up by the taxable equivalent amount.
The elimination of the TEB gross up is recorded in the "Other" segment.
Productivity ratio (TEB)
Management uses the productivity ratio as a measure of the Bank's
efficiency. This ratio represents non-interest expenses as a percentage of
total revenue on a taxable equivalent basis.
Net interest margin on total average assets (TEB)
This ratio represents net interest income on a taxable equivalent basis
as a percentage of total average assets.
Operating leverage
The Bank defines operating leverage as the rate of growth in total
revenue, on a taxable equivalent basis, less the rate of growth in expenses.
Return on equity
Return on equity is a profitability measure that presents the net income
available to common shareholders as a percentage of common shareholders'
equity. The Bank calculates its return on equity using average common
shareholders' equity, which includes common stock, retained earnings and
accumulated other comprehensive income.
Economic equity and Return on economic equity
For internal reporting purposes, the Bank attributes capital to its
business segments based on their risk profile and uses a methodology that
considers credit, market, operational and other risks inherent in each
business segment. The amount of risk capital attributed is commonly referred
to as economic equity. Return on economic equity for the business segments is
based on the economic equity attributed.
The Bank's economic capital methodologies and attribution models are
currently under review.
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 earnings continued to gain momentum this quarter, with net
income of $931 million. Although down 8% or $79 million from the same period
last year, net income was up 7% or $59 million from last quarter as the Bank's
businesses earned through the challenging credit and economic environment.
Compared to the same period last year, the Bank's earnings reflect higher
net interest income and loan fees from asset and customer growth, strong
trading results and the positive impact of foreign currency translation. These
items were more than offset by increases in provisions for credit losses, and
writedowns on non-trading securities.
Quarter over quarter, net income was bolstered by stronger capital
markets revenues, growth in net interest income and higher mutual fund and
other transaction-based fees. These items were partly offset by higher
provisions for credit losses, lower securitization revenues and the negative
impact of foreign currency translation.
Net income for the nine months was $2,645 million, $180 million or 6%
lower than the same period last year. Earnings were buoyed by strong capital
markets revenues, higher net interest income and transaction-based revenues
from strong asset growth, increased securitization revenues and the positive
impact of foreign currency translation. These items were more than offset by
higher provisions for credit losses and writedowns on non-trading securities.
Growth in expenses and the impact of a higher effective tax rate also
contributed to the lower year-to-date net income.
Total revenue
Total revenue (on a taxable equivalent basis) was a record $3,843 million
this quarter, up $366 million or 11% from the same period last year and $170
million or 5% above last quarter. Year-over-year growth reflected higher net
interest income from asset growth in all business lines and wider spreads in
corporate lending, strong contributions from capital market activities, higher
securitization revenues and the positive impact of foreign currency
translation. These items were partly offset by increased writedowns on
non-trading securities.
The increase from last quarter was due to higher net interest income,
mainly from improved margins and three additional days in the quarter, strong
trading revenues and increased mutual fund income. This growth was partly
offset by lower securitization revenues and the negative impact of foreign
currency translation.
For the nine months, total revenue (on a taxable equivalent basis) of
$10,937 million was up $1,231 million or 13% from the same period last year,
due primarily to strong capital markets revenues, higher net interest income,
increased securitization income, growth in credit and transaction-based fees,
and the positive impact of foreign currency translation.
Net interest income
Net interest income (on a taxable equivalent basis) was $2,244 million,
up $195 million or 9% from the same quarter last year and $80 million or 4%
above last quarter.
The increase from last year was driven by asset growth in all business
lines, the favourable change in fair value of financial instruments used for
asset/liability management and the positive impact of foreign currency
translation. Partly offsetting these factors were compression in the margin
and lower tax-exempt income.
The quarter-over-quarter growth in net interest income was due mainly to
an improved net interest margin and three additional days in the quarter.
These items were partly offset by the negative impact of foreign currency
translation and a reduction in asset volumes.
Year-to-date net interest income (on a taxable equivalent basis) grew to
$6,444 million, an increase of $490 million or 8% from the same period last
year. The growth was driven by solid organic asset growth in all business
lines, the favourable changes in the fair value of financial instruments used
for asset/liability management, and the positive impact of foreign currency
translation. Partly offsetting these items were reduced tax-exempt income and
a lower margin.
The Bank's interest margin was 1.76%, compared to 1.79% last year and
1.71% last quarter. Compared to the prior year, the reduction in the margin
was due to the significant decline in interest rates, and the impact of assets
repricing faster than liabilities, increased cost of liquidity, lower
tax-exempt income and growth in non-earning assets. These factors were partly
offset by the positive impact of fair value changes of financial instruments
used for asset/liability management and widening of corporate lending spreads.
The margin was up quarter over quarter due to improved spreads in corporate
lending, a reduction in non-earning assets and a favourable change in the fair
value of financial instruments. This increase was offset by lower tax-exempt
income.
Other income
This quarter's other income was $1,599 million, $171 million or 12%
higher than the same period last year. This growth was attributed to strong
trading results, increased securitization revenues and the positive impact of
foreign currency translation. There were also higher credit fees and
investment banking revenues and the positive fair value changes of certain
financial instruments. These increases were partly offset by a higher level of
writedowns on non-trading securities, which included a writedown of an equity
investment in International Banking.
Compared to the previous quarter, the increase of $90 million or 6% was
due primarily to strong trading and investment banking revenues and higher
mutual fund income and the favourable impact of changes in the fair value of
financial instruments. Partly offsetting these items were lower securitization
revenues and the negative impact of foreign currency translation.
For the nine month period, other income was $4,493 million, an increase
of $741 million or 20% from the same period last year. The results reflected a
strong contribution from capital markets revenues, higher securitization
income to take advantage of favourable funding terms, the positive impact of
foreign currency translation and higher credit fees from strong debt
origination. There was also growth in transaction-based revenues from
increased customer activities. These items were partly offset by increased
writedowns on securities and lower retail brokerage fees.
Provision for credit losses
The provision for credit losses was $554 million this quarter, comprised
of $466 million in specific provisions, an increase of $100 million in the
general allowance, and a $12 million reduction in the automotive sectoral
allowance established last quarter, which was reclassified to specific
provisions relating to that sector. The total provision ($554 million)
represents an increase of $395 million from the same period last year and $65
million from last quarter.
The higher level of provisions this quarter compared to a year ago
reflects increased provisions in all three business lines. Further discussion
on credit risk is provided below.
Non-interest expenses and productivity
Non-interest expenses of $1,959 million this quarter rose $70 million or
4% from last year. The year-over-year growth was primarily from acquisitions
and other growth initiatives, mitigated by ongoing cost containment efforts.
Quarter over quarter, non-interest expenses were up $73 million or 4%.
The increase was due mainly to the higher performance-based compensation, from
stronger trading revenues, and an increase in stock-based compensation. Partly
offsetting these items was the favourable impact of foreign currency
translation.
For the nine-month period, non-interest expenses were $5,855 million, up
$503 million or 9% from $5,352 million reported last year. The negative impact
of foreign currency translation accounted for $116 million of this increase,
while acquisitions contributed $230 million. The remaining growth was in
performance-based compensation, as a result of strong trading revenues, and
salaries and other benefits from branch expansion.
The productivity ratio was 51.0% this quarter, compared to 54.3% reported
for the same period last year and 51.4% last quarter. The Bank's operating
leverage this quarter was 6.8% relative to the same period last year, and 0.8%
over the second quarter. The year to date operating leverage was 3.3%.
Taxes
The effective tax rate for this quarter was 24.0% compared to 21.7% in
the same quarter last year and 26.1% last quarter. The increase from a year
ago was due primarily to higher adjustments to future tax assets to reflect
tax rate reductions and lower tax-exempt dividend income. This was partly
offset by a lower statutory tax rate in Canada. The decrease from last quarter
was due primarily to increased income in lower tax rate jurisdictions. These
items were partly offset by a reduction in tax-exempt dividend income.
The year-to-date effective tax rate was 22.9%, compared to 19.1% for the
same period last year.
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 $466 million this quarter,
compared to $159 million in the same period last year and $402 million in the
previous quarter.
The specific provision for credit losses in the Canadian Banking
portfolios was $170 million, up $71 million from the same quarter last year,
but $8 million below last quarter. Retail provisions increased year over year,
primarily in indirect automotive and unsecured personal lending. Increased
provisions in commercial loans were partly offset by lower provisions in small
business banking. Compared to the previous quarter, increased provisions for
credit cards and personal lending were more than offset by lower provisions
for the indirect automotive portfolio and commercial and small business
lending.
International Banking's specific provision for credit losses was $179
million, compared to $56 million in the same period last year and $115 million
last quarter. The year-over-year upward trend in retail and commercial
provisions was reflective of the more challenging economic environment, as
well as acquisition-related retail growth. The same quarter last year also
benefitted from substantial levels of reversals of commercial provisions.
Compared to last quarter, commercial and retail provisions were generally
higher, as last quarter included a reversal of $29 million in provisions no
longer required for certain retail portfolios in Mexico.
Scotia Capital's specific provision for credit losses was $117 million
this quarter, compared to $4 million in the same period last year and $109
million in the prior quarter. The new provisions this quarter were primarily
attributable to several accounts in Canada and the U.S., including $11 million
that was reclassified from the automotive sectoral allowance established last
quarter.
Total net impaired loans, after deducting the allowance for specific
credit losses, were $2,509 million as at July 31, 2009, an increase of $330
million from last quarter. The increase was mostly in International Banking.
The general allowance for credit losses was $1,450 million as at July 31,
2009, up $100 million from last quarter. The automotive sectoral allowance
established last quarter was $48 million as at July 31, 2009, reflecting a
reclassification of $12 million to specific provisions this quarter, of which
$11 million related to Scotia Capital.
Automotive industry exposure
The Bank's direct (corporate and commercial) loan exposure to the North
American and European automotive industry declined to $4.3 billion as at July
31, 2009 and was comprised of the following:As at
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July 31 April 30 October 31
($ billions) 2009 2009 2008
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Original equipment manufacturers (OEMs) $ 0.2 $ 0.2 $ 0.5
Financing and leasing 1.0 1.1 1.2
Parts manufacturers 0.6 0.8 0.7
Dealers 2.5 2.9 2.8
-------------------------------------------------------------------------
Total $ 4.3 $ 5.0 $ 5.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------Approximately 29% of this exposure is rated investment grade, either
externally or based on the Bank's internal rating program, in line with the
previous quarter; however, down from 63% as at October 31, 2008. Loans are
typically senior in the capital structure of the borrowers. The reduction in
the percentage of investment grade exposure from the year end was expected in
part as the result of the repayment of one large OEM investment grade account
and portfolio migration. The year-to-date loss ratio on this portfolio -
specific loan losses as a percentage of average loan exposures - was 47 basis
points annualized.
The Bank is actively managing its exposure to this sector. The Bank is
focused on large multi-dealer relationships and parts-manufacturing customers
with geographic and OEM diversity, and has contained its exposure to North
American OEMs. Regular stress tests are performed on the Bank's non-retail
automotive exposures covering a number of different scenarios, including the
default of the North American OEMs and its impact on part suppliers, financing
companies and dealers.
The North American OEMs have recently restructured resulting in reduced
future production and contraction of North American operations. As a result of
these events, in the previous quarter, the Bank established a $60 million
sectoral allowance against its North American non-retail automotive exposures
for incurred losses expected to be identified individually over the coming
quarters. In the third quarter, $12 million of the sectoral allowance was
reclassified to the specific provision for credit losses. Management believes
this sectoral provision is adequate to meet industry concerns.
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 5% 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 less than one and a half years, and was modified
last year to allow the seller to sell Canadian-based loans to the Bank for a
limited period, rather than U.S.-based loans. The facility is structured with
credit enhancement in the form of overcollateralization 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 consumer auto loan-backed
securities portfolio is within the Bank's risk tolerance level. Approximately
87% 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 $126 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 third quarter, the average one-day VaR was $15.5 million
compared to $15.8 million for the same quarter last year. Increased market
volatility led to increases in VaR in all risk factors, more than offset by an
increase in the diversification between the factors. Compared to the second
quarter, the average one-day VaR decreased from $16.0 million to $15.5 million
due in part to greater diversification benefits.Average for the three months ended
-----------------------------------
July 31 April 30 July 31
Risk Factor ($ millions) 2009 2009 2008
-------------------------------------------------------------------------
Interest rate $ 15.5 $ 15.9 $ 13.0
Equities 5.0 4.0 3.5
Foreign exchange 2.3 2.2 0.9
Commodities 3.2 2.9 3.0
Diversification (10.5) (9.0) (4.6)
-------------------------------------------------------------------------
All-Bank VaR $ 15.5 $ 16.0 $ 15.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------There were six trading loss days in the third quarter, compared to nine
days in the previous quarter. The losses were well within the range predicted
by VaR.
Liquidity risk
The Bank maintains large holdings of liquid assets to support its
operations. These assets generally can be sold or pledged to meet the Bank's
obligations. As at July 31, 2009, liquid assets were $134 billion or 27% of
total assets, compared to $122 billion or 24% of total assets as at April 30,
2009. The mix of these assets between securities and other liquid assets,
including cash and deposits with banks, was 77% and 23%, respectively (April
30, 2009 - 71% and 29%, respectively).
In the course of the Bank's day-to-day activities, securities and other
assets are pledged to secure an obligation, participate in clearing or
settlement systems, or operate in a foreign jurisdiction. Securities may also
be sold under repurchase agreements. As at July 31, 2009, total assets pledged
or sold under repurchase agreements were $85 billion, compared to $99 billion
as at April 30, 2009. The quarter-over-quarter decrease was due to a decrease
in assets pledged to foreign governments and central banks and in securities
sold under repurchase agreements. In some over-the-counter derivative
contracts, the Bank would be required to post additional collateral in the
event its credit rating was downgraded. The Bank maintains access to
sufficient collateral to meet its obligations in the event of a downgrade of
its ratings by one or more of the rating agencies.
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 July 31, 2009 were $486 billion, down $22
billion from October 31, 2008, primarily from the negative impact from foreign
currency translation of $19 billion. Reductions in loans, derivative
instrument assets, cash resources and securities purchased under resale
agreements were offset by growth in securities.
Total securities increased by $38 billion from October 31, 2008.
Available-for-sale securities increased $25 billion due mainly to higher
holdings of Canadian government insured mortgage-backed securities and
Canadian government debt securities. During the first nine months, the Bank's
holdings of Canadian NHA mortgage-backed securities increased by $14 billion
due mainly to the conversion of insured mortgages into mortgage-backed
securities. Trading securities increased $11 billion also from higher holdings
of Canadian government debt securities. Equity accounted investments increased
$2 billion due mainly to the purchase of a significant interest in CI
Financial Corp. (CI Financial).
As at July 31, 2009, the unrealized gain on available-for-sale securities
before hedges was $45 million, an improvement of $1,553 million from last
quarter and $1,273 million from October 31, 2008. This was due mainly to
increases in the values of both debt and equity securities from improvements
in capital markets as well as writedowns taken on securities.
The Bank's loan portfolio decreased $32 billion from October 31, 2008,
which included the negative impact from foreign currency translation of $9
billion. On the retail lending side, residential mortgages decreased $17
billion due mainly to the conversion of insured mortgages into mortgage-backed
securities and the securitization of an additional $9 billion of mortgages
into Canadian government's Canada Mortgage Bond (CMB) and insured Mortgage
Purchase Program. Personal loans were up $3 billion, primarily in Canada.
Business and government loans decreased by $17 billion from October 31,
2008, or $10 billion excluding the impact of foreign currency translation.
Loans in Scotia Capital were down $8 billion, primarily in U.S. corporate
lending, from the negative impact of foreign currency translation and paydown
of significant bridge loans and other repayments. Canadian Banking and
International Banking were down $4 billion and $5 billion, respectively. The
decrease in International Banking was mainly in Asia and the Caribbean and
Central America.
Total liabilities were $462 billion as at July 31, 2009, a decrease of
$24 billion from October 31, 2008, due primarily to the negative impact from
foreign currency translation of $19 billion. Decreases in deposits, derivative
instrument liabilities and other liabilities, primarily cash collateral
received from customers, were offset by growth in obligations related to
securities sold short and subordinated debentures.
Total deposits were down $13 billion but up $1 billion before the impact
of foreign currency movements. Personal deposits increased by $5 billion, due
primarily to growth in high interest savings accounts in Canada. This growth
was offset by decreases in business and government and bank deposits.
Total shareholders' equity increased $1.8 billion from October 31, 2008.
The increase was from internal capital generation of $1,012 million and the
issuance of $939 million common shares and $850 million preferred shares (of
which $500 million common shares and $250 million non-cumulative preferred
shares were issued in relation to the CI Financial acquisition). These items
were offset by an increase of $1 billion in losses in accumulated other
comprehensive income. These losses were due to a $1.9 billion increase in
unrealized exchange losses from the strengthening of the Canadian dollar,
partly offset by an improvement in the unrealized gain on available-for-sale
securities.
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 are 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
Total capital ratios as at July 31, 2009, were 10.4% and 12.7%, respectively,
compared to 9.6% and 11.8% as at April 30, 2009.
The increase in the Tier 1 capital ratio this quarter was largely the
result of an increase in internally generated capital, the issuance of $650
million Tier 1 innovative capital instruments and a decline in risk-weighted
assets across most business lines. The Total capital ratio was also impacted
by the redemption of $325 million of subordinated debentures. The
strengthening Canadian dollar did not have a significant impact on capital
ratios as the reduction to capital from the higher unrealized losses from
foreign currency translation was offset by lower risk-weighted assets due to
currency translation.
The tangible common equity (TCE) ratio was 8.0% as at July 31, 2009, a
substantial increase from 7.7% as at April 30, 2009.
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 $1,625 billion as at July 31,
2009, compared to $1,562 billion as at October 31, 2008, with the increase in
interest rate derivatives partially offset by a decline in foreign exchange
and credit 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 master netting
arrangements into account, was $20.4 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 4% of the Bank's total assets as at July 31, 2009, and
are shown in the table below. During the year, the Bank's holdings of Canadian
NHA mortgage-backed securities increased by $14 billion due mainly to the
conversion of insured mortgages into mortgage-backed securities.
Exposure to U.S. subprime mortgage risk is nominal.
Trading portfolio
Total mortgage-backed securities held as trading securities represent
less than 0.1% of the Bank's total assets as at July 31, 2009, and are shown
in the table below.Mortgage-backed securities
As at July 31, 2009
------------------------
Non-trading Trading
Carrying value ($ millions) portfolio portfolio
-------------------------------------------------------------------------
Canadian NHA mortgage-backed securities(1) $ 21,469 $ 216
Commercial mortgage-backed securities 58(2) 43(3)
Other residential mortgage-backed securities 98 -
-------------------------------------------------------------------------
Total $ 21,625 $ 259
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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)
As a result of the Montreal Accord ABCP restructuring, in the first
quarter, the Bank received longer-dated securities which are classified as
available-for-sale. Approximately 80% of the new notes are investment grade
Class A-1 and A-2 notes. The Bank's carrying value of $144 million represents
approximately 62% of par value. Taking into account current market conditions,
the Bank has not recorded any net gain or loss in the current quarter.
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 facility is $200 million; it is currently undrawn.
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 non-trading portfolio which are primarily
classified as available-for-sale securities. CDOs and CLOs generally achieve
their structured credit exposure either synthetically through the use of
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 July 31, 2009, the remaining exposure to CDOs was $412 million
(April 30, 2009 - $393 million; October 31, 2008 - $420 million), of which $92
million is included in AOCI (April 30, 2009 - $105 million; October 31, 2008 -
$83 million). The year-to-date change included the impact of the maturity and
sale of a CDO, foreign currency translation, and positive current fair value
changes. This portfolio is well diversified, with an average individual CDO
holding of $19 million, and no single industry exceeding 25% of the referenced
portfolio on a weighted average basis. Based on their carrying values, these
CDOs have a weighted average rating of BBB. More than 11% of these investment
holdings are senior tranches with subordination of 10% or more, and 16% of the
investments are in equity tranches.
During the current quarter, the Bank recorded a pre-tax gain of $73
million in net income (three months ended July 31, 2008 - loss of $24 million)
and a pre-tax gain of $13 million in other comprehensive income (three months
ended July 31, 2008 - loss of $2 million), reflecting changes in the fair
value of the CDOs.
As at July 31, 2009, the fair value of the Bank's investments in CLOs was
$506 million (April 30, 2009 - $439 million; October 31, 2008 - $660 million),
net of $473 million unrealized losses recorded in AOCI (April 30, 2009 - $651
million; October 31, 2008 - $436 million). This portfolio is well diversified
with an average individual CLO holding of $5 million, and no single industry
exceeding 13% of the referenced portfolio on a weighted average basis. Based
on carrying values, these CLOs have a weighted average rating of AA. More than
90% 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 $11
million in net income (three months ended July 31, 2008 - loss of $1 million)
and a pre-tax gain of $178 million in other comprehensive income (three months
ended July 31, 2008 - loss of $20 million), reflecting positive changes in the
fair value of the CLOs. 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 July 31, 2009, a 50 basis point widening of relevant credit
spreads would result in a pre-tax decrease in income of approximately $10
million and $13 million in other comprehensive income.
Trading portfolio
The Bank also holds synthetic CDOs in its trading portfolio as a result
of structuring and managing transactions with clients and other financial
institutions. Total CDOs purchased and sold in the trading portfolio were as
follows:As at July 31, 2009
------------------------
Positive/
Notional (negative)
Outstanding ($ millions) amount fair value
-------------------------------------------------------------------------
CDOs - sold protection $ 6,250 $ (1,875)
CDOs - purchased protection $ 6,338 $ 2,252
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 July 31,
2009, a 50 basis point widening of relevant credit spreads in this portfolio
would result in a pre-tax increase in income of approximately $16 million.
Almost 60% 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 $1.6 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 $0.6 billion (October 31, 2008 - $1.5
billion) was primarily to U.S. municipalities and states. Approximately 90% 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 $1.0 billion (October
31, 2008 - $1.3 billion). These exposures are primarily comprised of $0.8
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). During the quarter, two monoline insurers were downgraded by at
least one of the external rating agencies. At July 31, 2009, the two
downgraded monoline insurers were rated non-investment grade by at least one
external rating agency.
Exposure to Alt-A
In the U.S., loans are classified as Alt-A when they have higher risk
characteristics such as lower credit scores and/or higher loan-to-value
ratios. As at July 31, 2009, the Bank had insignificant 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 July 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 totalled $5 million in the third quarter,
compared to $16 million in the same quarter last year.
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.
Funded asset levels in these conduits continued to decline this quarter as
assets amortized and were paid down.
Canada
The Bank's primary exposure to the Canadian-based conduits is the
liquidity support provided, with total liquidity facilities of $2.2 billion as
at July 31, 2009 (October 31, 2008 - $4.3 billion). As at July 31, 2009, total
commercial paper outstanding for the Canadian-based conduits administered by
the Bank was $2.0 billion (October 31, 2008 - $3.8 billion), and the Bank held
approximately 8% of the total commercial paper issued by these conduits. The
following table presents a summary of assets held by the Bank's two Canadian
multi-seller conduits as at July 31, 2009, and October 31, 2008, by underlying
exposure:As at July 31, 2009
-------------------------------
Unfunded Total
Funded commit- exposure
($ millions) assets(1) ments (2)
-------------------------------------------------------------------------
Auto loans/leases $ 725 $ 74 $ 799
Equipment loans/leases 857 48 905
Trade receivables 165 59 224
Canadian residential mortgages 72 1 73
Retirement savings plan loans 105 2 107
Cash deposits 91 2 93
-------------------------------------------------------------------------
Total(3) $ 2,015 $ 186 $ 2,201
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at October 31, 2008
-------------------------------
Unfunded Total
Funded commit- exposure
($ millions) assets(1) ments (2)
-------------------------------------------------------------------------
Auto loans/leases $ 2,204 $ 299 $ 2,503
Equipment loans/leases 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, which approximates
estimated fair value.
(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 10% of the funded assets
were externally rated AAA as at July 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 July 31, 2009. While 58% of the total funded assets, based on maturities,
fall within three years, the weighted average repayment period, based on
expected cash flows, approximates one year. 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 $8.4 billion as at July 31, 2009 (October 31, 2008 - $12.8
billion). As at July 31, 2009, total commercial paper outstanding for the
U.S.-based conduit administered by the Bank was $4.7 billion (October 31, 2008
- $8.4 billion), and the Bank does not hold any of the commercial paper issued
by this conduit.
A significant portion of the conduit's assets have been structured to
receive credit enhancement from the sellers, including overcollateralization
protection and cash reserve accounts. Each asset purchased by the conduit has
a deal-specific liquidity facility provided by the Bank in the form of an
asset purchase agreement, which is available to absorb the losses on defaulted
assets, if any, in excess of losses absorbed by deal-specific seller credit
enhancement, and the subordinated note issued by the conduit. The Bank's
liquidity agreements with the conduit generally call for the Bank to fund full
par value of all assets, including defaulted assets, if any, of the conduit.
The following table presents a summary of assets held by the Bank's U.S.
multi-seller conduit as at July 31, 2009 and October 31, 2008 by underlying
exposure:As at July 31, 2009
-------------------------------
Unfunded Total
Funded commit- exposure
($ millions) assets(1) ments (2)
-------------------------------------------------------------------------
Credit card/consumer
receivables $ 55 $ 56 $ 111
Auto loans/leases 1,941 677 2,618
Trade receivables 1,351 2,442 3,793
Loans to closed-end mutual
funds 250 497 747
Diversified asset-backed
securities 764 15 779
Corporate loans(3) 346 47 393
-------------------------------------------------------------------------
Total(4) $ 4,707 $ 3,734 $ 8,441
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at October 31, 2008
-------------------------------
Unfunded Total
Funded commit- exposure
($ millions) assets(1) ments (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. The fair value of these
assets as at July 31, 2009 is estimated to be $4.3 billion (October
31, 2008 - $8.0 billion).
(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 July 31, 2009, approximately 74% of the conduit's funded assets
were rated A or higher, either externally (33%) or based on the Bank's
internal rating program (41%). Substantially all of the assets in the conduit
were rated investment grade as at July 31, 2009. While 58% of the total funded
assets, based on maturities, fall within five years, the weighted average
repayment period, based on expected cash flows, approximates 1.4 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. These pools are guaranteed by monoline insurers that were rated
non-investment grade by at least one rating agency as at July 31, 2009.
During the quarter, there were external rating downgrades to these
monoline insurers (refer to Exposure to monoline insurers above). Based on the
Bank's 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
$700 million as at July 31, 2009 (October 31, 2008 - $1.2 billion), all of
which were for U.S. third-party conduits. The decrease was due to a reduction
in program size and amortization. The assets of these non-Bank sponsored
conduits, which are not administered by the Bank, are almost entirely consumer
auto-based securities. Approximately 74% of these assets are externally rated
AAA/AA. 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 three such SPEs -
Scotiabank Capital Trust, Scotiabank Subordinated Notes Trust and Scotiabank
Tier 1 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,
Scotiabank Subordinated Notes Trust and Scotiabank Tier 1 Trust are reported
in deposits. Total deposits recorded by the Bank as at July 31, 2009, from
these trusts were $3.9 billion, (October 31, 2008 - $3.4 billion). The Bank
recorded interest expense of $60 million on these deposits for the three
months ended July 31, 2009, compared to $49 million for the three months ended
July 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 $2 billion in residential mortgages were
securitized this quarter, bringing the balance of outstanding mortgages
securitized to $18.7 billion as at July 31, 2009, compared to $18.9 billion as
at April 30, 2009.
Guarantees and other indirect commitments decreased 18% from October 31,
2008, reflecting the impact of strengthening of the Canadian dollar and a
general reduction in customer business volumes. Fees from guarantees and loan
commitment arrangements recorded in other income were $101 million in the
three-month period ended July 31, 2009, compared to $95 million in the
previous quarter.
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 in 2009, which relate
to the definitions of goodwill and intangibles and result in a
reclassification of certain software costs to intangibles. 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.
Future accounting changes
The following summarizes future accounting policy changes that will be
relevant to the Bank's consolidated financial statements.
Impairment and classification of financial assets
In August 2009, the Canadian Institute of Chartered Accountants (CICA)
amended Section 3855, Financial Instruments - Recognition and Measurement, to
achieve consistency with international standards on impairment of debt
securities. The amendments adopt the definition of loans and receivables from
International Financial Reporting Standards. As a result, certain debt
securities not quoted in an active market could be classified as loans and
measured at amortized cost. Impairment for debt securities classified as loans
will be assessed and recorded using the incurred credit loss model. These
amendments are effective for the Bank commencing Q4 2009, and will be applied
retroactively to November 1, 2008. The Bank is currently in the process of
evaluating the impact of adopting these amendments.
Financial instrument disclosures
In June 2009, the CICA issued amendments to its Financial Instruments -
Disclosure standard to expand disclosures of financial instruments consistent
with new disclosure requirements made under international standards. The
amendments include new disclosure requirements relating to instruments carried
at fair value into a hierarchy based on quoted prices in active markets (Level
1), models using observable inputs other than quoted prices (Level 2), or
models using inputs that are not based on observable market data (Level 3).
These amendments are effective for the Bank commencing Q4 2009.
Transition to International Financial Reporting Standards (IFRS)
Canadian GAAP for publicly accountable enterprises will be replaced with
IFRS for fiscal years beginning on or after 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 launched an
enterprise-wide project and established a formal governance structure that
comprises senior levels of management from all relevant departments. Formal
project management practices and governance are considered essential to a
successful transition. A transition plan is in place and regular reporting on
the progress of conversion is provided to the Bank's senior management teams,
and to the Audit and Conduct Review Committee of the Board of Directors.
An ongoing training program has been implemented for key stakeholders to
raise awareness and prepare for transition to IFRS. The Bank has identified
key accounting differences that have the potential to significantly affect the
financial statements or operations of the Bank. IFRS teams are progressing as
planned in their assessment of the system, process and financial statement
impacts of these critical accounting differences. The assessment also includes
the review of internal control over financial reporting.
The impact of IFRS on the Bank's consolidated financial results is not
reasonably determinable at this time, as key accounting standards and
interpretations under IFRS are expected to change significantly prior to the
Bank's transition date.
Changes in internal control over financial reporting
There have been no changes in the Bank's internal control over financial
reporting during the quarter ended July 31, 2009, that have materially
affected, or are reasonably likely to materially affect, the Bank's internal
control over financial reporting.
Common dividend
The Board of Directors, at its meeting on August 27, 2009, approved a
quarterly dividend of 49 cents per common share. This quarterly dividend
applies to shareholders of record as of October 6, 2009. This dividend is
payable October 28, 2009.
Outlook
The global economy is improving, bolstered by monetary and fiscal
stimulus, and the renewed thrust provided by the restocking of inventories.
The global recovery should broaden and build momentum into 2010. A resumption
in consumer spending and accelerating infrastructural investments around the
world should help strengthen commodity markets and buoy prospects in Canada,
as well as throughout the developing world. The global economy will likely
remain on a comparatively slower growth trajectory, weighed down by ongoing
deleveraging, industrial restructuring, and continuing competitive challenges.
The Bank expects economic conditions in the countries in which it is
active (the Americas and Asia) to improve over the next several quarters, and
is well positioned to benefit from this rebound. With the solid results
achieved during the first nine months of the year, the Bank is maintaining the
objectives established at the beginning of the year, as we anticipate a
substantially better fourth quarter than last year.
Business Segment ReviewCanadian Banking
For the
For the three months ended nine months ended
-------------------------------------------------------------------------
(Unaudited)
($ millions)
(Taxable
equivalent July 31 April 30 July 31 July 31 July 31
basis)(1) 2009 2009 2008 2009 2008
-------------------------------------------------------------------------
Business segment
income
Net interest
income(2) $ 1,212 $ 1,147 $ 1,122 $ 3,505 $ 3,164
Provision for
credit losses 169 188 99 512 292
Other income 593 524 564 1,673 1,620
Non-interest
expenses 933 899 914 2,766 2,693
Provision for
income taxes 203 174 210 552 541
-------------------------------------------------------------------------
Net income(3) $ 500 $ 410 $ 463 $ 1,348 $ 1,258
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on economic
equity(1) 22.3% 19.7% 38.5% 22.4% 34.8%
Average assets
($ billions) $ 193 $ 191 $ 177 $ 191 $ 172
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer to 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. Prior periods have not been restated. Refer to
footnote above and 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 net income for the quarter was a record $500 million, up
$37 million or 8% from the same quarter last year. Quarter over quarter, net
income increased $90 million or 22%. Return on economic equity was 22.3%
versus 38.5% last year, with the decrease due largely to increased allocated
equity associated with the acquisition of E(*)TRADE Canada (renamed Scotia
iTRADE) and the equity interest in CI Financial.
Average assets before securitization rose $16 billion or 9% from the
third quarter last year, due primarily to growth of $8 billion or 7% in
residential mortgages. Personal loans, including revolving credit, also
increased. Asset growth also included the investment in CI Financial. Personal
deposits grew by $9 billion or 10%, in high-interest savings accounts,
registered deposits, chequing and other savings accounts. Non-personal
deposits rose $9 billion or 21% from growth in both business accounts and
non-personal term deposits. Compared to last quarter, average assets before
securitization rose $2 billion or 1%, reflecting growth in personal lending.
Deposits increased 4% from growth in high-interest savings accounts, current
accounts and other savings. Assets under administration grew 9% from last
quarter.
Total revenue rose $119 million or 7% from the same quarter last year,
due to growth in both net interest income and other income. Quarter over
quarter, total revenues increased by $134 million or 8% from higher net
interest income and other income.
Net interest income was $1,212 million, up $90 million or 8% from the
third quarter of last year. The increase was due mainly to growth in average
assets and deposits. Average volumes increased for most retail products, as
well as in Small Business and Commercial Banking. Compared to last quarter,
net interest income was up $65 million or 6% due to three more days in the
quarter, asset growth, and an improved interest margin, reflecting higher
spreads on floating rate assets and deposits due to re-pricing, as well as the
impact of lower wholesale funding interest costs. This was partly offset by
the narrower spreads on the fixed mortgage portfolio as mortgages re-priced at
historically low current rates.
Other income increased by $29 million or 5% from the same quarter last
year, due largely to the contributions from CI Financial and Scotia iTRADE and
higher credit fees in Commercial Banking. These were partly offset by a
decline in other wealth management related revenues reflecting difficult
market conditions. Other income grew by $69 million or 13% from last quarter,
in part due to DundeeWealth Inc.'s previous quarter writedown on certain debt
instruments. Wealth management revenues increased this quarter, reflecting
improved market conditions and market share gains. Commercial banking revenues
increased due to lower writedowns on securities and higher foreign exchange
revenues. Retail banking revenues grew from higher card revenues and
transaction-based fees.
The provision for credit losses was $169 million, up from $99 million in
the same quarter last year, but $19 million below the $188 million last
quarter, which included a $10 million sectoral provision related to the
automotive sector. Higher provisions were recorded year over year in indirect
automotive and unsecured personal lending due to portfolio growth and rising
delinquencies. There were also higher provisions in commercial banking due in
part to the historically low levels in the third quarter of last year.
Compared to the previous quarter, provisions increased in credit card and
personal lending, which were more than offset by lower provisions for the
indirect automotive portfolio and commercial and small business lending.
Non-interest expenses increased 2% from the third quarter of last year
due mainly to acquisitions, partly offset by lower volume-related compensation
including broker commissions in wealth management and the impact of cost
containment initiatives. Expenses rose 4% quarter over quarter from
volume-related growth, as well as higher remuneration as a result of three
more days in the quarter.International Banking
For the
For the three months ended nine months ended
-------------------------------------------------------------------------
(Unaudited)
($ millions)
(Taxable
equivalent July 31 April 30 July 31 July 31 July 31
basis)(1) 2009 2009 2008 2009 2008
-------------------------------------------------------------------------
Business segment
income
Net interest
income(2) $ 979 $ 959 $ 847 $ 2,885 $ 2,375
Provision for
credit losses 179 115 56 410 146
Other income 296 349 389 1,116 1,054
Non-interest
expenses 718 729 698 2,219 1,881
Provision for
income taxes 38 102 118 254 347
Non-controlling
interest in net
income of
subsidiaries 28 30 29 86 96
-------------------------------------------------------------------------
Net income(3) $ 312 $ 332 $ 335 $ 1,032 $ 959
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on economic
equity(1) 10.9% 12.7% 15.8% 13.4% 17.5%
Average assets
($ billions) $ 87 $ 95 $ 81 $ 92 $ 77
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer to 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. Prior periods have not been restated. Refer to
footnote above and 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 third quarter was $312 million,
a decrease of $23 million or 7% from last year and $20 million or 6% below
last quarter. Excluding the impact of foreign currency translation, net income
decreased $38 million from last year, but increased $4 million from last
quarter. Return on economic equity was 10.9% compared to 15.8% last year and
12.7% last quarter.
Average asset volumes of $87 billion were up $6 billion or 7% from last
year, partly due to the $4 billion positive impact of foreign currency
translation. The underlying year-over-year increase in average assets of $2
billion reflected the impact of acquisitions and growth of 4% in retail loans
and 5% in commercial loans. Growth in low-cost deposits was strong at 8%.
Compared to last quarter, average assets decreased $8 billion or 8% due mainly
to the impact of the stronger Canadian dollar. Underlying volumes declined,
reflecting general tightening of credit markets and a continued focus on risk
and capital management.
Total revenues were $1,275 million this quarter, an increase of $39
million or 3% from the same period last year, notwithstanding the adverse
impact of a $79 million writedown of an equity investment this quarter.
Compared to last quarter, revenues increased $33 million or 3%, excluding the
impact of the stronger Canadian dollar.
Net interest income was $979 million this quarter, up $132 million or 16%
from the same period last year, and $20 million or 2% above last quarter.
Excluding the impact of foreign currency translation, results were up $110
million or 13% over last year and $74 million or 8% from last quarter. The
underlying increase from last year was a result of loan growth across the
division in existing businesses, as well as the impact of acquisitions. Net
interest margins were up from both last year and last quarter, due to widening
margins across the division.
Other income decreased $93 million or 24% year over year. The variance
reflected lower gains on securities in the current quarter due to the
writedown of an equity investment noted above, largely offset by positive fair
value changes of certain financial instruments. As well, last year included
the impact of a $40 million gain from an IPO of the Mexican Stock Exchange.
Also offsetting were increased contributions from acquisitions, growth in
transaction-driven income and strong foreign exchange revenue. Compared to
last quarter, other income decreased $53 million mainly from higher securities
writedowns this quarter, the adverse impact of foreign currency translation,
as well as lower treasury and transaction-driven revenue. These factors were
partly offset by the positive fair value changes in certain financial
instruments and a loss on the sale of a portion of Mexico's performing credit
card portfolio last quarter.
International Banking's specific provision for credit losses was $179
million, compared to $56 million in the same period last year and $115 million
last quarter. The year-over-year upward trend in retail and commercial
provisions was reflective of the more challenging economic environment, as
well as acquisition-related retail growth. The same quarter last year also
benefitted from substantial levels of reversals in commercial provisions.
Compared to last quarter, commercial and retail provisions were generally
higher, as last quarter included a reversal of $29 million in provisions no
longer required for certain retail portfolios in Mexico.
Non-interest expenses were $718 million this quarter, up 3% or $20
million from last year, entirely due to acquisitions and branch expansion.
Underlying costs declined reflecting effective cost containment and operating
improvement efforts across the division. Compared to last quarter, expenses
decreased $11 million or 2%.
The effective tax rate this quarter was 10.3% compared to 24.6% in the
same quarter last year and 21.9% last quarter. The effective tax rate
decreased due primarily to increased deductibility of loan losses for tax
purposes in Mexico and higher levels of income in lower tax jurisdictions.Scotia Capital
For the
For the three months ended nine months ended
-------------------------------------------------------------------------
(Unaudited)
($ millions)
(Taxable
equivalent July 31 April 30 July 31 July 31 July 31
basis)(1) 2009 2009 2008 2009 2008
-------------------------------------------------------------------------
Business segment
income
Net interest
income(2) $ 423 $ 345 $ 269 $ 1,106 $ 789
Provision for
credit losses 106 159 4 275 (15)
Other income 681 502 383 1,549 806
Non-interest
expenses 266 231 254 788 688
Provision for
income taxes 262 129 97 494 179
-------------------------------------------------------------------------
Net income(3) $ 470 $ 328 $ 297 $ 1,098 $ 743
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on economic
equity(1) 21.8% 18.3% 34.1% 20.7% 28.8%
Average assets
($ billions) $ 180 $ 189 $ 162 $ 188 $ 162
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer to 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. Prior periods have not been restated. Refer to
footnote above and 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 record net income of $470 million this
quarter, an increase of $173 million or 58% from the third quarter of 2008 and
up $142 million or 43% from last quarter. The increase compared to last year
was due mainly to record revenues with strong performances throughout the
segment, partly offset by higher provisions for credit losses. Compared to
last quarter, higher revenues and lower provisions for credit losses were
partly offset by higher expenses. Return on economic equity at 21.8% was down
from the same period last year as the record income level was mitigated by an
increase in equity allocated to the business.
Total average assets increased 12% over last year to $180 billion.
Average corporate loans and acceptances increased $4 billion or 10%, primarily
in the United States, due in part to the impact of the weaker Canadian dollar.
There was also a $13 billion increase in average derivative instrument assets,
with a corresponding increase in derivative liabilities. The decrease in
average assets of $9 billion, or 5% from the last quarter reflects a $9
billion decline in corporate loans and acceptances, due in part to the
stronger Canadian dollar, and a $6 billion decrease in derivative instrument
assets. This was partly offset by an $8 billion increase in loans and
securities to support the trading businesses.
Total revenues were a record $1,104 million, an increase of $452 million
or 69% compared to the third quarter last year and up $257 million or 30% from
last quarter. This quarter's performance reflects record revenues in both
Global Capital Markets and Global Corporate and Investment Banking.
Net interest income of $423 million increased $154 million or 57% over
last year primarily from increases in loan volumes, interest margins, loan
origination fees and interest from trading businesses. The $78 million or 23%
increase from the previous quarter reflects growth in interest from trading
businesses. Higher loan interest margins and loan origination fees, were
largely offset by lower average loan volumes.
The provision for credit losses was $106 million (comprised of $117
million in specific provisions, less $11 million reclassified from the
automotive sectoral allowance established last quarter) compared to $4 million
in the same period last year and $159 million last quarter, which included $50
million of sectoral allowance. Provisions for credit losses were primarily in
the U.S. and Canada this quarter and in the U.S. last quarter. In the third
quarter last year, provisions were related primarily to one account in the
U.S.
Other income was $681 million, a significant increase of $298 million or
78% from last year. Global Capital Markets increased $213 million or 93%
reflecting record revenues in derivatives businesses and the third consecutive
quarter of very strong revenues in the fixed income business. There were also
strong foreign exchange, equity trading, underwriting and precious metals
revenues. Global Corporate and Investment Banking increased $85 million or 55%
over the same period last year due to higher credit fees and positive fair
value changes in securities. Compared to last quarter, other income increased
$179 million due primarily to the stronger trading revenues and higher credit
fees.
Non-interest expenses were $266 million this quarter, up $12 million or
5% from last year, due primarily to higher salaries, technology costs, legal
provisions, clearing fees and support costs, partially offset by lower
performance-based compensation due to a change in the plan which resulted in a
deferral of compensation expense. Compared to last quarter non interest
expenses increased $35 million or 15%. Higher performance based compensation,
in line with results, and higher technology costs and legal provisions were
somewhat offset by lower professional fees, benefits costs and support costs.Other(1)
For the
For the three months ended nine months ended
-------------------------------------------------------------------------
(Unaudited)
($ millions)
(Taxable
equivalent July 31 April 30 July 31 July 31 July 31
basis)(2) 2009 2009 2008 2009 2008
-------------------------------------------------------------------------
Business segment
income
Net interest
income(3)(4) $ (438) $ (364) $ (292) $ (1,267) $ (695)
Provision for
credit losses 100 27 - 127 -
Other income 29 134 92 155 272
Non-interest
expenses 42 27 23 82 90
Provision for
income taxes(3) (200) (86) (138) (488) (378)
-------------------------------------------------------------------------
Net income
(loss)(5) $ (351) $ (198) $ (85) $ (833) $ (135)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Average assets
($ billions) $ 46 $ 44 $ 37 $ 47 $ 36
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes all other smaller operating segments and corporate
adjustments, such as the elimination of the tax-exempt income gross-
up reported in net interest income and provision for income taxes,
differences in the actual amount of costs incurred and charged to the
operating segments, and the impact of securitizations.
(2) Refer to above for a discussion of non-GAAP measures.
(3) Includes the elimination of the tax-exempt income gross-up reported
in net interest income and provision for income taxes for the three
months ended July 31, 2009 ($68), April 30, 2009 ($77), and July 31,
2008 ($103), and for the nine months ended July 31, 2009 ($215), and
July 31, 2008 ($321), 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. Prior
periods have not been restated.
(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 $351 million in the third quarter,
compared to a net loss of $85 million last year and $198 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 $68 million in the third quarter, compared to $103 million in
the same period last year and $77 million last quarter.
Total revenue this quarter was negative $409 million, down $209 million
from the prior year, and a decrease of $179 million from last quarter.
Net interest income was negative $438 million this quarter, $146 million
below the same quarter last year, and a decline of $74 million 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 quarter-over-quarter
decline was partly from a $32 million unfavourable change in the fair value of
financial instruments used for asset/liability management.
Other income was $29 million in the third quarter, $63 million lower than
last year and $105 million below last quarter. The decrease from last year was
mainly attributable to an increase in writedowns on available-for-sale
securities and lower gains realized on sale of securities, partly offset by
higher securitization revenues. The significant decrease from the previous
quarter was due mainly to lower securitization revenues in the third quarter.
Non-interest expenses were $42 million this quarter, an increase of $19
million from last year and $15 million higher than last quarter. The increase
from last year was primarily from higher issuance costs associated with asset
securitization.
The provision for credit losses this quarter included a $100 million
increase in the general allowance. This was $73 million higher than the prior
quarter. There was no change in the general allowance last year.Total
For the
For the three months ended nine months ended
-------------------------------------------------------------------------
(Unaudited) July 31 April 30 July 31 July 31 July 31
($ millions) 2009 2009 2008 2009 2008
-------------------------------------------------------------------------
Business segment
income
Net interest
income $ 2,176 $ 2,087 $ 1,946 $ 6,229 $ 5,633
Provision for
credit losses 554 489 159 1,324 423
Other income 1,599 1,509 1,428 4,493 3,752
Non-interest
expenses 1,959 1,886 1,889 5,855 5,352
Provision for
income taxes 303 319 287 812 689
Non-controlling
interest in net
income of
subsidiaries 28 30 29 86 96
-------------------------------------------------------------------------
Net income(1) $ 931 $ 872 $ 1,010 $ 2,645 $ 2,825
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on equity(2) 18.0% 17.6% 21.0% 17.5% 20.3%
Average assets
($ billions) $ 506 $ 519 $ 457 $ 518 $ 447
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 to above for a discussion of non-GAAP measures.
Geographic Highlights
For the
For the three months ended nine months ended
-------------------------------------------------------------------------
(Unaudited) July 31 April 30 July 31 July 31 July 31
($ millions) 2009 2009 2008 2009 2008
-------------------------------------------------------------------------
Geographic segment
income
Canada $ 650 $ 395 $ 606 $ 1,406 $ 1,670
United States 111 55 40 189 127
Mexico 48 41 97 146 238
Other international 340 455 325 1,354 939
Corporate
adjustments (218) (74) (58) (450) (149)
-------------------------------------------------------------------------
Net income(1) $ 931 $ 872 $ 1,010 $ 2,645 $ 2,825
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average assets
($ billions)
Canada $ 338 $ 336 $ 291 $ 334 $ 289
United States 38 43 29 44 29
Mexico 18 20 20 20 20
Other international 107 114 107 113 99
Corporate
adjustments 5 6 10 7 10
-------------------------------------------------------------------------
$ 506 $ 519 $ 457 $ 518 $ 447
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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
-------------------------------------------------------------------------
July April Jan. Oct. July April Jan. Oct.
31 30 31 31 31 30 31 31
2009 2009 2009 2008 2008 2008 2008 2007
-------------------------------------------------------------------------
Total revenue
($ millions) $3,775 $3,596 $3,351 $2,491 $3,374 $3,172 $2,839 $3,078
Total revenue
(TEB(1))
($ millions) 3,843 3,673 3,421 2,586 3,477 3,272 2,957 3,294
Net income
($ millions) 931 872 842 315 1,010 980 835 954
Basic earnings
per share($) 0.87 0.81 0.80 0.28 0.99 0.97 0.83 0.95
Diluted earnings
per share($) 0.87 0.81 0.80 0.28 0.98 0.97 0.82 0.95
-------------------------------------------------------------------------
(1) Refer to above for a discussion of non-GAAP measures.
Share Data As at
-------------------------------------------------------------------------
July 31
(thousands of shares outstanding) 2009
-------------------------------------------------------------------------
Common shares 1,020,432(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)
Series 2009-1 trust securities issued by Scotiabank Tier 1
Trust 650(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 24,359(1)(17)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) As at August 14, 2009, the number of outstanding common shares and
options were 1,020,445 and 24,344, 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.
(7) These shares are entitled to non-cumulative preferential cash
dividends payable quarterly in an amount of $0.35 per share.
(8) These preferred shares have conversion features.
(9) These shares are entitled to non-cumulative preferential cash
dividends payable quarterly. 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. 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 was paid 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 was paid 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 was paid 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 $25.00.
(15) Reported in capital instrument liabilities on the Consolidated
Balance Sheet.
(16) Reported in deposits on the Consolidated Balance Sheet.
(17) Included are 19,433 stock options with tandem stock appreciation
right (SAR) features.
Further details, including convertibility features, are available in Notes
13, 14 and 17 of the October 31, 2008, consolidated financial statements
presented in the 2008 Annual Report, and further below in this report.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Income
For the
For the three months ended nine months ended
-------------------------------------------------------------------------
(Unaudited) July 31 April 30 July 31 July 31 July 31
($ millions) 2009 2009 2008 2009 2008
-------------------------------------------------------------------------
Interest income
Loans $ 3,182 $ 3,369 $ 3,888 $ 10,688 $ 11,511
Securities 1,319 1,198 1,193 3,385 3,561
Securities
purchased under
resale agreements 97 99 170 352 603
Deposits with banks 89 119 249 417 828
-------------------------------------------------------------------------
4,687 4,785 5,500 14,842 16,503
-------------------------------------------------------------------------
Interest expenses
Deposits 1,805 2,111 2,904 6,668 8,930
Subordinated
debentures 78 69 50 210 110
Capital instrument
liabilities 10 9 10 28 28
Other 618 509 590 1,707 1,802
-------------------------------------------------------------------------
2,511 2,698 3,554 8,613 10,870
-------------------------------------------------------------------------
Net interest income 2,176 2,087 1,946 6,229 5,633
Provision for credit
losses (Note 5) 554 489 159 1,324 423
-------------------------------------------------------------------------
Net interest income
after provision for
credit losses 1,622 1,598 1,787 4,905 5,210
-------------------------------------------------------------------------
Other income
Card revenues 104 105 102 322 290
Deposit and payment
services 229 225 225 685 640
Mutual funds 104 63 83 247 239
Investment management,
brokerage and trust
services 185 172 196 535 571
Credit fees 218 203 164 606 437
Trading revenues 387 235 150 802 229
Investment banking 233 221 193 741 527
Net gain (loss) on
non-trading
securities (155) (133) 90 (432) 169
Other 294 418 225 987 650
-------------------------------------------------------------------------
1,599 1,509 1,428 4,493 3,752
-------------------------------------------------------------------------
Net interest and
other income 3,221 3,107 3,215 9,398 8,962
-------------------------------------------------------------------------
Non-interest expenses
Salaries and employee
benefits 1,093 1,024 1,068 3,247 3,051
Premises and
technology(1) 382 379 361 1,149 1,035
Communications 86 89 82 265 237
Advertising and
business development 66 68 77 212 224
Professional 47 53 55 154 168
Business and capital
taxes 47 39 40 136 92
Other(1) 238 234 206 692 545
-------------------------------------------------------------------------
1,959 1,886 1,889 5,855 5,352
-------------------------------------------------------------------------
Income before the
undernoted 1,262 1,221 1,326 3,543 3,610
Provision for
income taxes 303 319 287 812 689
Non-controlling
interest in net
income of
subsidiaries 28 30 29 86 96
-------------------------------------------------------------------------
Net income $ 931 $ 872 $ 1,010 $ 2,645 $ 2,825
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Preferred dividends
paid 49 51 32 137 75
-------------------------------------------------------------------------
Net income
available to common
shareholders $ 882 $ 821 $ 978 $ 2,508 $ 2,750
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of
common shares
outstanding
(millions):
Basic 1,017 1,014 989 1,010 986
Diluted 1,020 1,016 994 1,013 993
-------------------------------------------------------------------------
Earnings per common
share (in
dollars)(2):
Basic $ 0.87 $ 0.81 $ 0.99 $ 2.48 $ 2.79
Diluted $ 0.87 $ 0.81 $ 0.98 $ 2.48 $ 2.77
-------------------------------------------------------------------------
Dividends per
common share
(in dollars) $ 0.49 $ 0.49 $ 0.49 $ 1.47 $ 1.43
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------
July 31 April 30 October 31 July 31
(Unaudited) ($ millions) 2009 2009 2008 2008
-------------------------------------------------------------------------
Assets
Cash resources
Cash and non-interest-bearing
deposits with banks $ 3,308 $ 2,919 $ 2,574 $ 2,914
Interest-bearing deposits
with banks 21,516 27,340 32,318 25,701
Precious metals 4,897 3,690 2,426 4,281
-------------------------------------------------------------------------
29,721 33,949 37,318 32,896
-------------------------------------------------------------------------
Securities
Trading 59,624 61,107 48,292 56,016
Available-for-sale (Note 3) 63,395 47,555 38,823 34,314
Equity accounted investments 3,417 3,449 920 853
-------------------------------------------------------------------------
126,436 112,111 88,035 91,183
-------------------------------------------------------------------------
Securities purchased under
resale agreements 14,166 14,838 19,451 17,774
-------------------------------------------------------------------------
Loans
Residential mortgages 98,334 110,672 115,084 113,830
Personal and credit cards 53,706 52,847 50,719 48,971
Business and government 108,054 124,248 125,503 111,921
-------------------------------------------------------------------------
260,094 287,767 291,306 274,722
Allowance for credit
losses (Note 5) 2,982 2,828 2,626 2,477
-------------------------------------------------------------------------
257,112 284,939 288,680 272,245
-------------------------------------------------------------------------
Other
Customers' liability
under acceptances 10,941 11,801 11,969 11,497
Derivative instruments 31,943 39,250 44,810 23,504
Land, buildings and
equipment(1) 2,372 2,443 2,449 2,305
Goodwill 2,875 2,845 2,273 2,134
Other intangible assets(1) 541 549 521 524
Other assets 9,749 10,842 12,119 8,345
-------------------------------------------------------------------------
58,421 67,730 74,141 48,309
-------------------------------------------------------------------------
$485,856 $513,567 $507,625 $462,407
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and shareholders'
equity
Deposits
Personal $123,996 $125,308 $118,919 $112,872
Business and government 189,120 195,021 200,566 191,239
Banks 20,612 26,531 27,095 28,358
-------------------------------------------------------------------------
333,728 346,860 346,580 332,469
-------------------------------------------------------------------------
Other
Acceptances 10,941 11,801 11,969 11,497
Obligations related to
securities sold under
repurchase agreements 36,013 42,407 36,506 29,116
Obligations related to
securities sold short 13,840 14,608 11,700 11,765
Derivative instruments 36,155 41,292 42,811 22,981
Other liabilities 24,804 26,296 31,063 28,725
Non-controlling interest
in subsidiaries 520 536 502 455
-------------------------------------------------------------------------
122,273 136,940 134,551 104,539
-------------------------------------------------------------------------
Subordinated
debentures (Note 6) 5,958 6,359 4,352 3,538
-------------------------------------------------------------------------
Capital instrument
liabilities (Note 7) 500 500 500 500
-------------------------------------------------------------------------
Shareholders' equity
Capital stock
Preferred shares (Note 8) 3,710 3,710 2,860 2,560
Common shares 4,768 4,629 3,829 3,728
Retained earnings 19,561 19,179 18,549 18,784
Accumulated other
comprehensive income
(loss) (Note 9) (4,642) (4,610) (3,596) (3,711)
-------------------------------------------------------------------------
23,397 22,908 21,642 21,361
-------------------------------------------------------------------------
$485,856 $513,567 $507,625 $462,407
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Certain comparative amounts have been reclassified to conform with
current period presentation.
(1) Refer to note 1 for changes in accounting policies related to
goodwill and intangible assets.
The accompanying notes are an integral part of these interim consolidated
financial statements.
Consolidated Statement of Changes in Shareholders' Equity
For the nine months ended
-------------------------------------------------------------------------
July 31 July 31
(Unaudited) ($ millions) 2009 2008
-------------------------------------------------------------------------
Preferred shares
Balance at beginning of period $ 2,860 $ 1,635
Issued 850 925
-------------------------------------------------------------------------
Balance at end of period 3,710 2,560
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Common shares
Balance at beginning of period 3,829 3,566
Issued 939 163
Purchased for cancellation - (1)
-------------------------------------------------------------------------
Balance at end of period 4,768 3,728
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings
Balance at beginning of period 18,549 17,460
Net income 2,645 2,825
Dividends: Preferred (137) (75)
Common (1,489) (1,411)
Purchase of shares - (6)
Other (7) (9)
-------------------------------------------------------------------------
Balance at end of period 19,561 18,784
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
Balance at beginning of period (3,596) (3,857)
Other comprehensive income (loss) (1,046) 146
-------------------------------------------------------------------------
Balance at end of period (4,642) (3,711)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total shareholders' equity at end of period $ 23,397 $ 21,361
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statement of Comprehensive Income
For the For the
three months ended nine months ended
-------------------------------------------------------------------------
July 31 July 31 July 31 July 31
(Unaudited) ($ millions) 2009 2008 2009 2008
-------------------------------------------------------------------------
Comprehensive income
Net income $ 931 $ 1,010 $ 2,645 $ 2,825
-------------------------------------------------------------------------
Other comprehensive income
(loss), net of income
taxes (Note 9):
Net change in unrealized
foreign currency
translation losses (1,428) 193 (1,877) 993
Net change in unrealized
gains (losses) on
available-for-sale
securities 1,258 (243) 821 (513)
Net change in gains (losses)
on derivative instruments
designated as cash
flow hedges 138 69 10 (334)
-------------------------------------------------------------------------
Other comprehensive
income (loss) (32) 19 (1,046) 146
-------------------------------------------------------------------------
Comprehensive income $ 899 $ 1,029 $ 1,599 $ 2,971
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these interim consolidated
financial statements.
Condensed Consolidated Statement of Cash Flows
For the For the
three months ended nine months ended
-------------------------------------------------------------------------
Sources (uses) of cash flows July 31 July 31 July 31 July 31
(Unaudited) ($ millions) 2009 2008 2009 2008
-------------------------------------------------------------------------
Cash flows from operating
activities
Net income $ 931 $ 1,010 $ 2,645 $ 2,825
Adjustments to determine net
cash flows from (used in)
operating activities 877 208 1,775 424
Net accrued interest
receivable and payable 155 14 (59) 247
Trading securities 668 6,511 (12,533) 4,980
Derivative assets 5,281 2,477 10,941 1,592
Derivative liabilities (2,898) (1,134) (4,491) (4,542)
Other, net (4,166) 2,924 (7,926) 4,396
-------------------------------------------------------------------------
848 12,010 (9,648) 9,922
-------------------------------------------------------------------------
Cash flows from financing
activities
Deposits (812) 7,903 1,330 29,240
Obligations related to
securities sold under
repurchase agreements (5,808) 1,196 633 (416)
Obligations related to
securities sold short (657) (3,301) 2,333 (4,637)
Subordinated debentures issued - - 2,000 2,194
Subordinated debentures
redeemed (342) (425) (342) (425)
Preferred shares issued - 350 600 925
Common shares issued 137 82 434 145
Common shares redeemed/
purchased for cancellation - (7) - (7)
Cash dividends paid (548) (517) (1,626) (1,486)
Other, net 245 309 (2,119) 1,258
-------------------------------------------------------------------------
(7,785) 5,590 3,243 26,791
-------------------------------------------------------------------------
Cash flows from investing
activities
Interest-bearing
deposits with banks 4,015 845 6,854 (776)
Securities purchased under
resale agreements 342 (2,229) 4,570 5,458
Loans, excluding
securitizations 57 (16,290) (9,093) (38,623)
Loan securitizations 2,008 892 11,189 2,584
Non-trading securities 1,120 (147) (4,415) (3,051)
Land, buildings and equipment,
net of disposals (17) (53) (144) (208)
Other, net(1) (39) (376) (1,604) (1,457)
-------------------------------------------------------------------------
7,486 (17,358) 7,357 (36,073)
-------------------------------------------------------------------------
Effect of exchange rate
changes on cash and
cash equivalents (160) 31 (218) 136
-------------------------------------------------------------------------
Net change in cash and
cash equivalents 389 273 734 776
Cash and cash equivalents
at beginning of period 2,919 2,641 2,574 2,138
-------------------------------------------------------------------------
Cash and cash equivalents
at end of period(2) $ 3,308 $ 2,914 $ 3,308 $ 2,914
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash disbursements made for:
Interest $ 2,699 $ 3,627 $ 9,162 $ 10,851
Income taxes $ 262 $ 199 $ 981 $ 953
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Certain comparative amounts have been reclassified to conform with
current period presentation.
(1) For the three and nine months ended July 31, 2009, comprises
investments in subsidiaries, net of cash and cash equivalents at the
date of acquisition of $4 and $4, respectively (July 31, 2008 - nil
and $37, respectively), and net of non-cash consideration of common
shares issued from treasury of nil and $500, respectively (July 31,
2008 - nil and nil, respectively), and net of non-cumulative
preferred shares of nil and $250, respectively (July 31, 2008 - nil
and nil, respectively).
(2) Represents cash and non-interest-bearing deposits with banks.
The accompanying notes are an integral part of these interim consolidated
financial statements.
Notes to the Interim Consolidated Financial Statements (Unaudited)
These interim consolidated financial statements have been prepared in
accordance with Canadian Generally Accepted Accounting Principles (GAAP).
They should be read in conjunction with the consolidated financial
statements for the year ended October 31, 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
Goodwill and intangible assets
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 as at
October 31, 2008 (July 31, 2008 - $237 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,
$7 million for the three-month period ended July 31, 2008 (nine-month
period ended July 31, 2008 - $19 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.
Impairment and classification of financial assets
In August 2009, the Canadian Institute of Chartered Accountants
(CICA) amended Section 3855, Financial Instruments - Recognition and
Measurement, to achieve consistency with international standards on
impairment of debt securities. The amendments adopt the definition of
loans and receivables from International Financial Reporting
Standards. As a result, certain debt securities not quoted in an
active market could be classified as loans and measured at amortized
cost. Impairment for debt securities classified as loans will be
assessed and recorded using the incurred credit loss model. These
amendments are effective for the Bank commencing Q4 2009 and applied
retroactively to November 1, 2008. The Bank is currently in the
process of evaluating the impact of adopting these amendments.
Financial instrument disclosures
In June 2009, the CICA issued amendments to its Financial Instruments
- Disclosure standard to expand disclosures of financial instruments
consistent with new disclosure requirements made under international
standards. The amendments include new disclosure requirements
relating to instruments carried at fair value into a hierarchy based
on quoted prices in active markets (Level 1), models using observable
inputs other than quoted prices (Level 2), or models using inputs
that are not based on observable market data (Level 3). These
amendments are effective for the Bank commencing Q4 2009.
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.
The impact of IFRS on the Bank's consolidated financial statements is
not reasonably determinable at this time, as accounting standards and
interpretations are expected to change prior to transition.
3. Securities
An analysis of unrealized gains and losses on available-for-sale
securities is as follows:
As at
------------------------------------------
July 31, 2009
------------------------------------------
Gross Gross
unrealized unrealized Fair
($ millions) Cost(1) gains losses value
---------------------------------------------------------------------
Canadian federal government
debt(2) $ 32,019 $ 817 $ 128 $ 32,708
Canadian provincial and
municipal debt 1,159 16 1 1,174
U.S. treasury and other
U.S. agencies' debt 1,050 6 18 1,038
Other foreign governments'
debt 7,316 338 62 7,592
Bonds of designated
emerging markets 294 182 1 475
Other debt 18,539 308 1,386 17,461
Preferred shares 569 15 135 449
Common shares 2,404 185 91 2,498
---------------------------------------------------------------------
Total available-for-sale
securities $ 63,350 $ 1,867 $ 1,822 $ 63,395
---------------------------------------------------------------------
---------------------------------------------------------------------
As at
------------------------------------------
October 31, 2008
------------------------------------------
Gross Gross
unrealized unrealized Fair
($ millions) Cost(1) gains losses value
---------------------------------------------------------------------
Canadian federal government
debt(2) $ 9,662 $ 232 $ 1 $ 9,893
Canadian provincial and
municipal debt 14 - - 14
U.S. treasury and other
U.S. agencies' debt 2,178 12 14 2,176
Other foreign governments'
debt 6,983 226 124 7,085
Bonds of designated
emerging markets 334 140 5 469
Other debt 17,398 69 1,492 15,975
Preferred shares 598 5 64 539
Common shares 2,884 134 346 2,672
---------------------------------------------------------------------
Total available-for-sale
securities $ 40,051 $ 818 $ 2,046 $ 38,823
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Cost for debt securities is amortized cost.
(2) Includes Canada Mortgage Bonds, Canadian NHA mortgage-backed
securities, and retained interests in conjunction with the
Bank's mortgage securitization.
The net unrealized gain on available-for-sale securities of $45
million (October 31, 2008 - loss of $1,228 million) decreases to a
net unrealized loss of $117 million (October 31, 2008 - loss of
$1,320 million) after the net fair value of derivative instruments
and other hedge amounts associated with these securities is taken
into account. The net unrealized loss on available-for-sale
securities is recorded in accumulated other comprehensive income.
4. Sales of loans through securitizations
The Bank securitizes residential mortgages through the creation of
mortgage-backed securities. No credit losses are expected, as the
mortgages are insured. For the quarter ended July 31, 2009, the key
weighted-average assumptions used to measure the fair value at the
dates of securitization were a prepayment rate of 21%, an excess
spread of 1.2% and a discount rate of 1.3%. The following table
summarizes the Bank's sales.
For the
For the three months ended nine months ended
----------------------------------------------------
July 31 April 30 July 31 July 31 July 31
($ millions) 2009 2009 2008 2009 2008
---------------------------------------------------------------------
Net cash
proceeds(1) $ 2,008 $ 4,418 $ 892 $ 11,189 $ 2,584
Retained
interest 62 225 32 457 85
Retained
servicing
liability (13) (24) (5) (66) (15)
---------------------------------------------------------------------
2,057 4,619 919 11,580 2,654
Residential
mortgages
securitized(2) 2,006 4,420 900 11,253 2,597
---------------------------------------------------------------------
Net gain (loss)
on sale(3) $ 51 $ 199 $ 19 $ 327 $ 57
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Excludes insured mortgages which were securitized and retained by
the Bank of $16,852 for the three months ended July 31, 2009
(April 30, 2009 - $1,382, July 31, 2008 - $157), and $18,345 for
nine months ended July 31, 2009, net of subsequent sales
(July 31, 2008 - $2,063). As at July 31, 2009, the outstanding
balance of mortgage-backed securities was $20,288, and these
assets have been classified as available-for-sale securities.
(2) Includes sales of mortgage-backed securities in the current
period that related to residential mortgages securitized by the
Bank in prior periods but retained by the Bank at that time. For
the three and nine months ended July 31, 2009 these were $273
million and $2,126 million, respectively (three months ended
April 30, 2009 - $1,635 million, July 31, 2008 - $317 million,
nine months ended July 31, 2008 - $918 million).
(3) Net of issuance costs.
5. Impaired loans and allowance for credit losses
(a) Impaired loans
As at
-------------------------------------------------
July 31 April 30 October 31
2009 2009 2008
-------------------------------------------------
Specific
($ millions) Gross allowance(1) Net Net Net
---------------------------------------------------------------------
By loan type:
Residential
mortgages $ 1,006 $ 245 $ 761 $ 649 $ 432
Personal and
credit cards 967 642 325 296 84
Business and
government 2,020 597 1,423 1,234 675
---------------------------------------------------------------------
Total $ 3,993 $ 1,484 $ 2,509 $ 2,179 $ 1,191
---------------------------------------------------------------------
---------------------------------------------------------------------
By geography:
Canada $ 763 $ 746 $ 354
United States 228 191 80
Other
International 1,518 1,242 757
---------------------------------------------------------------------
Total $ 2,509 $ 2,179 $ 1,191
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) The specific allowance for impaired loans evaluated on an
individual basis totalled $594 (April 30, 2009 - $503;
October 31, 2008 - $462).
(b) Allowance for credit losses
During the second quarter of 2009, the Bank established a sectoral
allowance of $60 million related to the automotive industry. This
industry continued to deteriorate during the quarter, as evidenced by
an increase in number of credit defaults as well as downgrades in
publicly available debt ratings for companies in that industry.
During the third quarter, $12 million was reclassified to specific
allowance. The sectoral allowance is in addition to the specific and
general allowances.
The general allowance is established against the loan portfolio in
respect of the Bank's core business lines, where prudent assessment
by the Bank of past experience and existing economic and portfolio
conditions indicate that it is probable that losses have occurred,
but where such losses cannot be determined on an item-by-item basis.
When an industry sector or geographic region experiences specific
adverse events or changes in economic conditions, it may be necessary
to establish an additional allowance for loan losses for the group of
loans as a whole, even though the individual loans comprising the
group are still classified as performing. These allowances are
considered sectoral and are established for losses which have not
been specifically identified, and where the losses are not adequately
covered by the general allowance. The level of the allowances
considers the probability of default, loss given default and expected
exposure at default.
For the
For the three months ended nine months ended
----------------------------------------------------
July 31 April 30 July 31 July 31 July 31
($ millions) 2009 2009 2008 2009 2008
---------------------------------------------------------------------
Balance at
beginning of
period $ 2,836 $ 2,714 $ 2,498 $ 2,634 $ 2,252
Writeoffs (377) (397) (218) (1,057) (602)
Recoveries 52 48 52 159 154
Provision for
credit losses 554 489 159 1,324 423
Other, including
foreign
exchange
adjustment (78) (18) (6) (73) 258
---------------------------------------------------------------------
Balance at the
end of
period(1)(2)(3) $ 2,987 $ 2,836 $ 2,485 $ 2,987 $ 2,485
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) As at July 31, 2009, includes $9 of specific allowance and nil of
general allowances relating to acquisition of a new subsidiary
(April 30, 2009 - nil and nil, respectively; July 31, 2008 - $143
and $25, respectively), which may change as the valuation of
acquired loan assets is finalized.
(2) As at July 31, 2009, $5 has been recorded in other liabilities
(April 30, 2009 - $8; July 31, 2008 - $8).
(3) As at July 31, 2009, the sectoral allowance for credit losses was
$48 (April 30, 2009 - $60; July 31, 2008 - nil) and the general
allowance for credit losses was $1,450 (April 30, 2009 - $1,350;
April 30, 2008 - $1,323).
6. Subordinated debentures
(a) Subordinated debentures totaling $1 billion were issued on
January 22, 2009, and will mature on January 22, 2021. Interest is
payable semi-annually in arrears, on the 22nd of January and July, 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 in arrears
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.
(b) Subordinated debentures totalling $1 billion were issued on
April 15, 2009 and will mature on April 15, 2019. Interest is payable
semi-annually in arrears, commencing on October 15, 2009, at 4.94%
per annum until April 15, 2014. From April 15, 2014, until maturity,
interest is payable at an annual rate equal to the 90-day Bankers'
acceptance rate plus 4.24%, payable quarterly in arrears, commencing
July 15, 2014. The subordinated debentures are redeemable by the Bank
at any time subject to prior regulatory approval. The subordinated
debentures qualify as Tier 2B capital.
(c) On May 12, 2009, the Bank redeemed all of its $325 million 5.75%
subordinated debentures due May 12, 2014, at par plus accrued and
unpaid interest to the redemption date.
(d) On June 22, 2009, the Bank repurchased US$14 million of Floating
Rate Subordinated Debentures due August 2085.
7. Capital instrument liabilities, trust securities and trust
subordinated notes
On May 7, 2009, Scotiabank Tier 1 Trust issued 650,000 Scotiabank
Tier 1 Securities Series 2009-1 (Scotia BaTS III Series 2009-1).
These securities qualify as Tier 1 capital. Interest is payable semi-
annually in arrears in the amount of $39.01 per Scotia BaTS III
Series 2009-1 on the last day of June and December until June 30,
2019. Commencing June 30, 2019 and on every fifth anniversary
thereafter until June 30, 2104, the interest rate on the Scotia BaTS
III Series 2009-1 will be reset at an interest rate per annum equal
to the then prevailing Government of Canada Yield plus 7.05%. The
first interest payment was made on June 30, 2009 in the amount of
$11.54 per Scotia BaTS III Series 2009-1. On or after June 30, 2014,
the Trust may, at its option redeem the Scotia BaTS III Series
2009-1, in whole or in part, subject to the approval of the
Superintendent of Financial Institutions Canada (OSFI). In certain
circumstances the Scotia BaTS III Series 2009-1 will be automatically
exchanged for non-cumulative preferred shares of the Bank. In
addition, in certain circumstances, holders of Scotia BaTS III Series
2009-1 will be required to invest cash interest paid thereon in
deferral preferred shares of the Bank.
The proceeds of the issue were used to acquire the Series 2009-1 Bank
Deposit Note. If there is an automatic exchange of the Scotia BaTS
for Preferred Shares, then the Bank would become the sole beneficiary
of the Trust.
Scotiabank Tier 1 Trust, which is a special purpose entity, is not
consolidated by the Bank as the Bank is not the primary beneficiary.
These securities are reported on the Consolidated Balance Sheet as
deposit notes issued by the Bank to Scotiabank Tier 1 Trust.
8. 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 as 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 the 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 substantially exceeded
these minimum ratio thresholds as at July 31, 2009. OSFI has also
prescribed an asset-to-capital leverage multiple; the Bank was in
compliance with this threshold as at July 31, 2009.
Bank regulatory capital consists of two components - Tier 1 capital,
which is more permanent, and Tier 2 capital as follows:
As at
-------------------------------
July 31 April 30 October 31
(unaudited) ($ millions) 2009 2009 2008
---------------------------------------------------------------------
Shareholders' equity per consolidated
balance sheet $ 23,397 $ 22,908 $ 21,642
Components of accumulated other
comprehensive income excluded from
Tier 1 558 1,735 1,220
Capital instrument liabilities - trust
securities 3,400 2,750 2,750
Non-controlling interest in
subsidiaries 520 536 502
Goodwill deduction (2,875) (2,845) (2,273)
Other capital deductions(1) (1,938) (1,951) (578)
---------------------------------------------------------------------
Tier 1 capital 23,062 23,133 23,263
---------------------------------------------------------------------
Qualifying subordinated debentures,
net of amortization 5,908 6,309 4,227
Trust subordinated notes 1,000 1,000 1,000
Other net capital items(2) (1,801) (1,832) (643)
---------------------------------------------------------------------
Tier 2 capital 5,107 5,477 4,584
---------------------------------------------------------------------
Total regulatory capital 28,169 28,610 27,847
---------------------------------------------------------------------
Total risk weighted assets $221,494 $241,837 $250,591
---------------------------------------------------------------------
Capital ratios
Tier 1 capital ratio 10.4% 9.6% 9.3%
Total capital ratio 12.7% 11.8% 11.1%
Assets-to-capital multiple 16.6x 17.3x 18.0x
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Comprised of 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.
Significant capital transactions
(a) In the third quarter of 2008, the Bank initiated a normal course
issuer bid to purchase up to 20 million of the Bank's common shares.
This represented approximately 2% of the Bank's common shares
outstanding as at April 30, 2008. The bid terminated on January 11,
2009.
(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 13 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 was paid on April 28, 2009, in an amount of $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 treasury-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 million 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 was paid on April 28, 2009, in
an amount of $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 treasury-
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 million 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 was paid on April 28, 2009, in
an amount of $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 treasury-
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 million 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 $0.50 per share.
These preferred shares qualify as Tier 1 capital.
9. Accumulated other comprehensive income (loss)
The components of accumulated other comprehensive income (loss) as at
July 31, 2009, and other comprehensive income (loss) for the nine
months then ended were as follows:
Accumulated other comprehensive income (loss)
As at and for the nine months ended
-------------------------------------
Opening Net Ending
balance change balance
-------------------------------------
October 31 July 31
($ millions) 2008 2009
---------------------------------------------------------------------
Unrealized foreign currency
translation gains (losses),
net of hedging activities $ (2,181) $ (1,877) $(4,058)(1)
Unrealized gains (losses) on
available-for-sale securities,
net of hedging activities (949) 821 (128)(2)
Gains (losses) on derivative
instruments designated as cash
flow hedges (466) 10 (456)(3)
---------------------------------------------------------------------
Accumulated other comprehensive
income (loss) $ (3,596) $ (1,046) $ (4,642)
---------------------------------------------------------------------
---------------------------------------------------------------------
As at and for the nine months ended
-------------------------------------
Opening Net Ending
balance change balance
-------------------------------------
October 31 July 31
($ millions) 2007 2008
---------------------------------------------------------------------
Unrealized foreign currency
translation gains (losses),
net of hedging activities $ (4,549) $ 993 $(3,556)(1)
Unrealized gains (losses) on
available-for-sale securities,
net of hedging activities 639 (513) 126(2)
Gains (losses) on derivative
instruments designated as cash
flow hedges 53 (334) (281)(3)
---------------------------------------------------------------------
Accumulated other comprehensive
income (loss) $ (3,857) $ 146 $ (3,711)
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Net of cumulative income tax expense of $636 (July 31, 2008 -
expense of $546).
(2) Net of cumulative income tax expense of $11 (July 31, 2008 -
expense of $81).
(3) Net of cumulative income tax benefit of $192 (July 31, 2008 -
benefit of $132).
Other comprehensive income (loss)
The following table summarizes the changes in the components of other
comprehensive income (loss).
For the For the
three months ended nine months ended
------------------------------------------
July 31 July 31 July 31 July 31
($ millions) 2009 2008 2009 2008
---------------------------------------------------------------------
Net change in unrealized
foreign currency translation
losses
Net unrealized foreign
currency translation gains
(losses)(1) $ (2,053) $ 279 $ (2,576) $ 1,602
Net gains (losses) on
hedges of net investments
in self-sustaining foreign
operations(2) 625 (86) 699 (609)
---------------------------------------------------------------------
(1,428) 193 (1,877) 993
---------------------------------------------------------------------
---------------------------------------------------------------------
Net change in unrealized
gains (losses) on
available-for-sale
securities
Net unrealized gains (losses)
on available-for-sale
securities(3) 1,040 (213) 735 (356)
Reclassification of net
(gains) losses to net
income(4) 218 (30) 86 (157)
---------------------------------------------------------------------
1,258 (243) 821 (513)
---------------------------------------------------------------------
---------------------------------------------------------------------
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) 134 187 (165) 487
Reclassification of net
(gains) losses to net
income(6) 4 (118) 175 (821)
---------------------------------------------------------------------
138 69 10 (334)
---------------------------------------------------------------------
---------------------------------------------------------------------
Other comprehensive income
(loss) $ (32) $ 19 $ (1,046) $ 146
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Net of income tax expense of nil.
(2) For the three and nine months ended July 31, 2009, net of income
tax expense of $201 and $318, respectively (July 31, 2008 -
benefit of $28 and expense of $119, respectively).
(3) For the three and nine months ended July 31, 2009, net of income
tax expense of $372 and $308, respectively (July 31, 2008 -
benefit of $83 and $187, respectively).
(4) For the three and nine months ended July 31, 2009, net of income
tax benefit of $80 and $74, respectively (July 31, 2008 - expense
of $22 and $70, respectively).
(5) For the three and nine months ended July 31, 2009, net of income
tax expense of $42 and benefit of $46, respectively (July 31,
2008 - expense of $85 and $223, respectively).
(6) For the three and nine months ended July 31, 2009, net of income
tax benefit of $5 and $72, respectively (July 31, 2008 - expense
of $54 and $380, respectively).
10. Financial Instruments
Risk management
The Bank's principal business activities result in a balance sheet
that consists primarily of financial instruments. In addition, the
Bank uses derivative financial instruments for both trading and
asset/liability management purposes. The principal financial risks
that arise from transacting financial instruments include credit
risk, liquidity risk and market risk. The Bank's framework to
monitor, evaluate and manage these risks is consistent with that in
place as at October 31, 2008.
(a) Credit risk
Credit risk is the risk of loss resulting from the failure of a
borrower or counterparty to honour its financial or contractual
obligations to the Bank.
Credit risk exposures
Credit risk exposures disclosed below are presented based on Basel II
approaches utilized by the Bank. All material portfolios in Canada,
U.S. and Europe are treated under the advanced internal ratings based
approach (AIRB), and the remaining portfolios including other
international portfolios are treated under the standardized approach.
Under the AIRB approach, the Bank uses internal risk parameter
estimates, based on historical experience.
Under the standardized approach, credit risk is estimated using the
risk weights as prescribed by the Basel II framework, either based on
credit assessments by external rating agencies or based on the
counterparty type for non-retail exposures and product type for
retail exposures.
Exposure at default(1)
---------------------------------------------------------------------
April 30, October
As at July 31, 2009 2009 31, 2008
---------------------------------------------------------------------
Standard-
($ millions) AIRB(2) ized Total Total Total
---------------------------------------------------------------------
By exposure
sub-type
Non-retail(2)
Drawn(3) $135,464 $ 64,082 $199,546 $211,663 $208,494
Undrawn
commitments 52,943 3,272 56,215 58,257 64,870
Other
exposures(4) 65,644 2,195 67,839 77,397 87,713
---------------------------------------------------------------------
Total
non-retail 254,051 69,549 323,600 347,317 361,077
---------------------------------------------------------------------
---------------------------------------------------------------------
Retail
Drawn(5) 111,453 24,232 135,685 138,330 137,624
Undrawn
commitments 5,999 159 6,158 5,851 7,540
---------------------------------------------------------------------
Total retail 117,452 24,391 141,843 144,181 145,164
---------------------------------------------------------------------
Total $371,503 $ 93,940 $465,443 $491,498 $506,241
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) After credit risk mitigation, excludes available-for-sale equity
securities and other assets.
(2) Non-retail AIRB drawn and undrawn exposures include government
guaranteed mortgages of $40.7 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.
Credit quality of non-retail exposures
The Bank's non-retail portfolio is well diversified by industry. As
at July 31, 2009, 79% (April 30, 2009 - 78%) of the AIRB portfolio
was internally assessed at a grade that would generally equate to an
investment grade rating by external rating agencies. Exposures in the
standardized portfolio, mainly in the Caribbean and Latin American
region, are primarily to non-investment grade counterparties, based
on the Bank's internal grade systems. There has not been a
significant change in concentrations of credit risk since October 31,
2008.
As at July 31, 2009, non-retail loans not assessed as impaired but
with payments more than 30 days past due were $0.9 billion (April 30,
2009 - $0.7 billion). This represented 0.8% (April 30, 2009 - 0.5%)
of the total non-retail loan portfolio.
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 July 31,
2009, retail loans not assessed as impaired but with payments more
than 30 days past due were $2.4 billion (April 30, 2009 - $2.6
billion), of which 71% (April 30, 2009 - 75%) relate to insured and
conventional residential mortgages. This represented 1.6% (April 30,
2009 - 1.6%) of the total retail loan portfolio.
Retail standardized portfolio
The retail standardized portfolio of $25 billion as at July 31, 2009
(April 30, 2009 - $36 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, $13 billion (April 30, 2009
- $22 billion; October 31, 2008 - $24 billion) related to mortgages
and loans secured by residential real estate, mostly with a loan-to-
value ratio of 80% or less at origination.
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
July 31, 2009, total assets pledged were $49 billion (April 30, 2009
- $56 billion; October 31, 2008 - $45 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 $134 billion as at
July 31, 2009 (April 30, 2009 - $122 billion; October 31, 2008 -
$106 billion), representing 27% of the Bank's total assets (April 30,
2009 - 24%; October 31, 2008 - 21%).
Contractual maturities
The table below shows the contractual maturities of certain of the
Bank's financial liabilities.
Payable on a fixed date
-----------------------------
Greater
As at July 31, Payable Payable Less One to than
2009 on after than five five
($ millions) demand notice one year years years Total
-------------------------------------------------------------------------
Deposits $ 43,044 $ 60,527 $162,663 $ 61,268 $ 6,226 $333,728
Subordinated
debentures - 251 5,707 5,958
Capital
instrument
liabilities - - 500 500
-------------------------------------------------------------------------
Total $ 43,044 $ 60,527 $162,663 $ 61,519 $ 12,433 $340,186
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at April
30, 2009 $ 38,740 $ 57,621 $183,120 $ 61,623 $ 12,615 $353,719
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at October
31, 2008 $ 37,157 $ 52,312 $186,818 $ 63,911 $ 11,234 $351,432
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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.
(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.
Derivative instruments
The Bank is subject to liquidity risk relating to its use of
derivatives to meet customer needs, generate revenues from trading
activities, manage market and credit risks arising from its lending,
funding and investment activities, and lower its cost of capital. As
at July 31, 2009, 46% (April 30, 2009 - 49%; October 31, 2008 - 52%)
of the notional value of the Bank's derivative instruments mature
within one year, while 86% (April 30, 2009 - 86%; October 31, 2008 -
85%) mature within five years.
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 July 31, 2009
---------------------------------------------------------------------
Net income Economic value of equity
Other Other
Canadian curren- Canadian curren-
($ millions) dollar cies Total dollar cies Total
---------------------------------------------------------------------
100 bp increase $ 102 $ 40 $ 142 $ (28) $ (225) $ (253)
---------------------------------------------------------------------
100 bp decrease $ (106) $ (50) $ (156) $ (17) $ 253 $ 236
---------------------------------------------------------------------
---------------------------------------------------------------------
As at April 30, 2009 October 31, 2008
---------------------------------------------------
Economic Economic
value value
Net of Net of
($ millions) income equity income equity
---------------------------------------------------
100 bp increase $ 196 $ (148) $ 89 $ (373)
---------------------------------------------------
100 bp decrease $ (156) $ 194 $ (100) $ 346
---------------------------------------------------
---------------------------------------------------
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 July 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 $46 million (April 30, 2009 - $37 million; October 31,
2008 - $38 million) in the absence of hedging activity, primarily
from exposure to U.S. dollars. A similar change in the Canadian
dollar as at July 31, 2009, would increase (decrease) the unrealized
foreign currency translation losses in the accumulated other
comprehensive income section of shareholders' equity by approximately
$179 million (April 30, 2009 - $190 million; October 31, 2008 - $174
million), net of hedging.
Equity risk
Equity risk is the risk of loss due to adverse movements in equity
prices. The Bank is exposed to equity risk through its available-for-
sale equity portfolios. The fair value of available-for-sale equity
securities is shown in Note 3.
Trading portfolio risk management
Market risk arising from the Bank's trading activities can be
aggregated using VaR and stress testing measures. The table below
shows the Bank's VaR by risk factor:
One-day VaR by risk factor
---------------------------------------------------------------------
For the
three months ended
As at July 31, 2009 As at As at
July 31 ------------------------- April 30 October
($ millions) 2009 Average High Low 2009 31 2008
---------------------------------------------------------------------
Interest rate $ 13.2 $ 15.5 $ 23.5 $ 10.9 $ 13.9 $ 23.8
Equities 6.5 5.0 9.3 2.5 2.2 4.9
Foreign exchange 3.1 2.3 3.7 1.1 2.5 1.7
Commodities 4.4 3.2 4.4 2.2 2.4 3.4
Diversification (13.2) (10.5) n/a n/a (5.6) (7.3)
---------------------------------------------------------------------
All-Bank VaR $ 14.0 $ 15.5 $ 22.6 $ 12.1 $ 15.4 $ 26.5
---------------------------------------------------------------------
---------------------------------------------------------------------
Hedges
There are three main types of hedges for accounting purposes: (i)
fair value hedges, (ii) cash flow hedges and (iii) net investment
hedges.
In a fair value hedge, the change in fair value of the hedging
derivative is offset in the Consolidated Statement of Income by the
change in fair value of the hedged item relating to the hedged risk.
The Bank uses 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 uses 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 $220 million (April 30, 2009 - loss of $277 million;
October 31, 2008 - loss of $204 million). As at July 31, 2009, the
maximum length of cash flow hedges outstanding was less than 10 years
(April 30, 2009 - less than 10 years; October 31, 2008 - less than
10 years).
Any hedge ineffectiveness is measured and recorded in current period
income in the Consolidated Statement of Income. The Bank recorded a
gain of $40 million during the three months ended July 31, 2009
(July 31, 2008 - gain of $17 million), of which a gain of $26 million
(July 31, 2008 - gain of $6 million) related to cash flow hedges, due
to the ineffective portion of designated hedges. For the nine months
ended July 31, 2009, the Bank recorded a gain of $88 million
(July 31, 2008 - gain of $14 million) of which a gain of $35 million
(July 31, 2008 - $13 million) related to cash flow hedges. When
either a fair value or cash flow hedge is discontinued, any
cumulative adjustment to either the hedged item or other
comprehensive income is recognized in income over the remaining term
of the original hedge, or when the hedged item is derecognized.
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 $3.7 billion as at July 31, 2009 (April 30, 2009 - $4.8 billion;
October 31, 2008 - $7.5 billion). The change in fair value that was
recorded through trading income for the three and nine months ended
July 31, 2009, was a gain of $456 million (July 31, 2008 - loss of
$5 million) and a gain of $684 million (July 31, 2008 - loss of
$232 million), respectively. These changes in fair value were
substantially offset by the changes in the fair value of the related
credit derivatives.
The Bank's trading operations purchase loan assets in specifically
authorized portfolios for which performance is evaluated on a fair
value basis. The fair value of these loans was $42 million as at
July 31, 2009 (April 30, 2009 - $60 million; October 31, 2008 -
$56 million). The change in fair value that was recorded through
trading income for the three and nine months ended July 31, 2009, was
a gain of $11 million (July 31, 2008 - loss of less than $1 million)
and a gain of $16 million (July 31, 2008 - loss of $3 million),
respectively.
The Bank has designated 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 $4,802 million as at July 31, 2009
(April 30, 2009 - $5,408 million; October 31, 2008 - $565 million).
The change in fair value that was recorded through trading and net
interest income for the three and nine months ended July 31, 2009 was
a gain of $10 million (July 31, 2008 - loss of $2 million) and a gain
of $135 million (July 31, 2008 - loss of $13 million), respectively.
The Bank has classified certain deposit note liabilities containing
extension features as trading, in order to significantly reduce an
accounting mismatch between these liabilities and fair value changes
in related derivatives. The fair value of these liabilities was
$22 million as at July 31, 2009 (April 30, 2009 - $12 million;
October 31, 2008 - $297 million). The change in fair value that was
recorded through net interest income for the three and nine months
ended July 31, 2009, was a loss of less than $1 million (July 31,
2008 - gain of less than $1 million) and a loss of $2 million
(July 31, 2008 - loss of $13 million), respectively. 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. As at July 31, 2009, the Bank is contractually
obligated to pay $22 million to the holders of the notes at maturity
(April 30, 2009 - $12 million; October 31, 2008 - $295 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 July 31, 2009, the fair values of the bond
assets and preferred shares were $263 million (April 30, 2009 -
$285 million; October 31, 2008 - $277 million) and $67 million
(April 30, 2009 - $77 million; October 31, 2008 - $81 million),
respectively.
Due to the reclassification of bond assets, for the three and nine
months ended July 31, 2009, the Bank recorded pre-tax other
comprehensive income gains of $19 million and $16 million,
respectively, relating to fair value movements. Due to the
reclassification of preferred shares, for the three and nine months
ended July 31, 2009, the Bank recorded pre-tax other comprehensive
income gains of $10 million and $8 million, respectively, relating to
fair value movements. If these reclassifications had not been made,
these gains would have been recorded in the Consolidated Statement of
Income.
11. Employee future benefits
Employee future benefits include pensions and other post-retirement
benefits, post-employment benefits and compensated absences. The
following table summarizes the expenses for the Bank's principal
plans(1).
For the
For the three months ended nine months ended
----------------------------------------------------
July 31 April 30 July 31 July 31 July 31
($ millions) 2009 2009 2008 2009 2008
---------------------------------------------------------------------
Benefit
expenses
Pension plans $ - $ (12) $ - $ (14) $ 2
Other benefit
plans 29 28 29 86 88
---------------------------------------------------------------------
$ 29 $ 16 $ 29 $ 72 $ 90
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Other plans operated by certain subsidiaries of the Bank are not
considered material and are not included in this note.
12. 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.
The results of these business segments are based upon the internal
financial reporting systems of the Bank. The accounting policies used
in these segments are generally consistent with those followed in the
preparation of the consolidated financial statements as disclosed in
Note 1 of the 2008 Consolidated Financial Statements. The only
notable accounting measurement difference is the grossing up of tax-
exempt net interest income to an equivalent before-tax basis for
those affected segments. This change in measurement enables
comparison of net interest income arising from taxable and tax-exempt
sources.
Scotiabank's results, and average assets, allocated by these
operating segments, are as follows:
For the three months ended July 31, 2009
---------------------------------------------------------------------
Taxable
equivalent Inter-
basis Canadian national Scotia
($ millions) Banking Banking Capital Other(1) Total
---------------------------------------------------------------------
Net interest
income(2) $ 1,212 $ 979 $ 423 $ (438) $ 2,176
Provision for
credit losses 169 179 106 100 554
Other income 593 296 681 29 1,599
Non-interest
expenses 933 718 266 42 1,959
Provision for
income taxes 203 38 262 (200) 303
Non-controlling
interest in net
income of
subsidiaries - 28 - - 28
---------------------------------------------------------------------
Net income(3) $ 500 $ 312 $ 470 $ (351) $ 931
---------------------------------------------------------------------
---------------------------------------------------------------------
Average assets
($ billions) $ 193 $ 87 $ 180 $ 46 $ 506
---------------------------------------------------------------------
---------------------------------------------------------------------
For the three months ended April 30, 2009
---------------------------------------------------------------------
Taxable
equivalent Inter-
basis Canadian national Scotia
($ millions) Banking Banking Capital Other(1) Total
---------------------------------------------------------------------
Net interest
income(2) $ 1,147 $ 959 $ 345 $ (364) $ 2,087
Provision for
credit losses 188 115 159 27 489
Other income 524 349 502 134 1,509
Non-interest
expenses 899 729 231 27 1,886
Provision for
income taxes 174 102 129 (86) 319
Non-controlling
interest in
net income of
subsidiaries - 30 - - 30
---------------------------------------------------------------------
Net income(3) $ 410 $ 332 $ 328 $ (198) $ 872
---------------------------------------------------------------------
---------------------------------------------------------------------
Average assets
($ billions) $ 191 $ 95 $ 189 $ 44 $ 519
---------------------------------------------------------------------
---------------------------------------------------------------------
For the three months ended July 31, 2008
---------------------------------------------------------------------
Taxable
equivalent Inter-
basis Canadian national Scotia
($ millions) Banking Banking Capital Other(1) Total
---------------------------------------------------------------------
Net interest
income(2) $ 1,122 $ 847 $ 269 $ (292) $ 1,946
Provision for
credit losses 99 56 4 - 159
Other income 564 389 383 92 1,428
Non-interest
expenses 914 698 254 23 1,889
Provision for
income taxes 210 118 97 (138) 287
Non-controlling
interest in
net income of
subsidiaries - 29 - - 29
---------------------------------------------------------------------
Net income(3) $ 463 $ 335 $ 297 $ (85) $ 1,010
---------------------------------------------------------------------
---------------------------------------------------------------------
Average assets
($ billions) $ 177 $ 81 $ 162 $ 37 $ 457
---------------------------------------------------------------------
---------------------------------------------------------------------
(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 for the three months ended July 31, 2009 ($68), April 30,
2009 ($77), and July 31, 2008 ($103), and for the nine months
ended July 31, 2009 ($215), and July 31, 2008 ($321), to arrive
at the amounts reported in the Consolidated Statement of Income,
differences in the actual amount of costs incurred and charged to
the operating segments, and the impact of securitizations.
(2) Historically, assets and liabilities are transfer-priced at
wholesale market rates. In the first quarter of 2009, due to
current market conditions, the Bank refined its transfer pricing
to include a liquidity premium charge in the cost of funds
allocated to the business segments. The net impact of this change
was to reduce the net interest income of the three major
segments, which was offset by a reduction in the net interest
expense of the Other segment. Prior periods have not been
restated.
(3) Commencing in the fourth quarter of 2008, the reporting of
segment profitability has been changed from net income available
to common shareholders to net income. Prior periods have been
restated.
For the nine months ended July 31, 2009
---------------------------------------------------------------------
Taxable
equivalent Inter-
basis Canadian national Scotia
($ millions) Banking Banking Capital Other(1) Total
---------------------------------------------------------------------
Net interest
income(2) $ 3,505 $ 2,885 $ 1,106 $ (1,267) $ 6,229
Provision for
credit losses 512 410 275 127 1,324
Other income 1,673 1,116 1,549 155 4,493
Non-interest
expenses 2,766 2,219 788 82 5,855
Provision for
income taxes 552 254 494 (488) 812
Non-controlling
interest in net
income of
subsidiaries - 86 - - 86
---------------------------------------------------------------------
Net income(3) $ 1,348 $ 1,032 $ 1,098 $ (833) $ 2,645
---------------------------------------------------------------------
---------------------------------------------------------------------
Average assets
($ billions) $ 191 $ 92 $ 188 $ 47 $ 518
---------------------------------------------------------------------
---------------------------------------------------------------------
For the nine months ended July 31, 2008
---------------------------------------------------------------------
Taxable
equivalent Inter-
basis Canadian national Scotia
($ millions) Banking Banking Capital Other(1) Total
---------------------------------------------------------------------
Net interest
income(2) $ 3,164 $ 2,375 $ 789 $ (695) $ 5,633
Provision for
credit losses 292 146 (15) - 423
Other income 1,620 1,054 806 272 3,752
Non-interest
expenses 2,693 1,881 688 90 5,352
Provision for
income taxes 541 347 179 (378) 689
Non-controlling
interest in net
income of
subsidiaries - 96 - - 96
---------------------------------------------------------------------
Net income(3) $ 1,258 $ 959 $ 743 $ (135) $ 2,825
---------------------------------------------------------------------
---------------------------------------------------------------------
Average assets
($ billions) $ 172 $ 77 $ 162 $ 36 $ 447
---------------------------------------------------------------------
---------------------------------------------------------------------
(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 for the three months ended July 31, 2009 ($68), April 30,
2009 ($77), and July 31, 2008 ($103), and for the nine months
ended July 31, 2009 ($215), and July 31, 2008 ($321), to arrive
at the amounts reported in the Consolidated Statement of Income,
differences in the actual amount of costs incurred and charged to
the operating segments, and the impact of securitizations.
(2) 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. Prior periods have not been
restated.
(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.
13. Acquisitions
Prior quarters
On February 3, 2009, the Bank acquired an additional 24% of
Thanachart Bank in Thailand for approximately $270 million, which
increased the Bank's ownership from 24.99% to 49%. The investment
will continue to be accounted for under the equity method of
accounting.
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 first quarter of 2009, the Bank completed the
purchase price allocation and recorded goodwill of $430 million and
intangibles of $32 million on the Consolidated Balance Sheet.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 August 28, 2009,
at 10:00 a.m. EDT and is expected to last approximately one hour. Interested
parties are invited to access the call live, in listen-only mode, by
telephone, toll-free, at 1-800-733-7571 (please call five to 15 minutes in
advance). In addition, an audio webcast, with accompanying slide presentation,
may be accessed via the Investor Relations page of www.scotiabank.com.
Following discussion of the results by Scotiabank executives, there will be a
question and answer session. Listeners are invited to submit questions by
e-mail to investor.relations@scotiabank.com.
A telephone replay of the conference call will be available from August
28, 2009, to September 11, 2009, by calling (416) 640-1917 and entering the
identification code 21312851 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.
250 Royall Street Canton, MA 02021 U.S.A.
Telephone: 1-800-962-4284
For other shareholder enquiries, please contact the Finance Department:
Scotiabank
Scotia Plaza, 44 King Street West
Toronto, Ontario, Canada M5H 1H1
Telephone: (416) 866-4790
Fax: (416) 866-4048
E-mail: corporate.secretary@scotiabank.comRapport trimestriel disponible en français
Le Rapport annuel et les états financiers de la Banque sont publiés en
français et en anglais et distribués aux actionnaires dans la version de leur
choix. Si vous préférez que la documentation vous concernant vous soit
adressée en français, veuillez en informer Relations publiques, Affaires de la
société et Affaires gouvernementales, La Banque de Nouvelle-Ecosse, Scotia
Plaza, 44, rue King Ouest, Toronto (Ontario), Canada M5H 1H1, en joignant, si
possible, l'étiquette d'adresse, afin que nous puissions prendre note du
changement.
The Bank of Nova Scotia is incorporated in Canada with limited liability.
%SEDAR: 00001289EF %CIK: 0000009631
For further information:
For further information: Kevin Harraher, Vice-President, Investor Relations, (416) 866-5982; Frank Switzer, Public Affairs, (416) 866-7238