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Scotiabank reports record second quarter earnings of $1.1 billion
Second quarter financial measures compared to the same period a year ago:
- Earnings per share (diluted) of $1.02, compared to $0.81
- Net income of $1,097 million, versus $872 million
- Return on equity of 19.9%,compared to 16.8%
- Productivity ratio of 49.9%, versus 51.4%
- Quarterly dividend maintained at 49 cents per common share
Year-to-date performance versus our 2010 financial and operational
objectives was as follows:
Targets:
1. Earn a return on equity (ROE)(1) of 16 to 20%. For the six months,
Scotiabank earned an ROE of 18.7%.
2. Generate growth in earnings per common share (diluted) of 7 to 12%.
Our year-over-year growth in earnings per share was 19.9%.
3. Maintain a productivity ratio(1) of less than 58%. Scotiabank's ratio
was 50.2% for the six months.
4. Maintain strong capital ratios. At 11.2%, Scotiabank's Tier 1 capital
ratio remains strong by Canadian and international standards.
TORONTO, June 1 /CNW/ - Scotiabank today announced second quarter net income of $1,097 million, up $225 million or 26% compared with the same period last year.
Quarter over quarter, net income increased $109 million or 11%. Diluted earnings per share (EPS) were $1.02 compared to $0.81 in the same period last year and $0.91 last quarter. Return on equity was 19.9% in the second quarter compared to 16.8% last year and 17.4% last quarter. The dividend was maintained at 49 cents per common share.
"We are pleased to announce record quarterly results as we reach the half-way point in the year," said Rick Waugh, Scotiabank President and CEO. "Our results reflect strong contributions from personal and commercial banking and wealth management, as well as the excellent performance of our wholesale business.
"In the face of volatility in world markets, we remain focused on our fundamentals, diversification by business and geography combined with prudent risk management and cost control practices in order to maintain profitability and strong return on equity. Our credit portfolios continue to improve, as evidenced by lower provisions for credit losses this quarter. Furthermore, we have little or no exposure to troubled European sovereign debt.
"With net income of $584 million, Canadian Banking had a record quarter. Year over year, there was strong growth in residential mortgages, lines of credit and business accounts, as well as improved spreads from easing liquidity costs, all of which contributed to higher net interest income. Wealth management and commercial banking revenues also grew, reflecting the improvements in the economy and equity markets.
"International Banking continues to earn through economic and foreign currency headwinds. Despite these challenges, continued widening of margins and careful expense management contributed to overall results.
"Scotia Capital generated strong results this quarter. Net income was $391 million, driven by solid contributions across all business units, good trading performance and net recoveries in provisions for credit losses.
"Our strong capital position and continued generation of capital gives us the ongoing flexibility to maintain our shareholder dividends and explore opportunities for business development and growth.
"While we manage costs carefully, we will continue to invest in growing our businesses. We do not expect our productivity ratio to remain at the current low level, although it will be well within our target.
"The foundation for our success is the focus we place on our core priorities; sustainable revenue growth, capital management, leadership development, prudent risk management and expense control. With the solid results achieved during the first half of the year, we are well-positioned to meet our established objectives for 2010."
FINANCIAL HIGHLIGHTS
As at and for the For the
three months ended six months ended
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April 30 January 31 April 30 April 30 April 30
(Unaudited) 2010 2010 2009 2010 2009
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Operating results
($ millions)
Net interest income 2,058 2,147 2,087 4,205 4,053
Net interest
income (TEB(1)) 2,129 2,222 2,164 4,351 4,200
Total revenue 3,873 3,906 3,596 7,779 6,947
Total revenue (TEB(1)) 3,944 3,981 3,673 7,925 7,094
Provision for
credit losses 338 371 489 709 770
Non-interest expenses 1,967 2,009 1,886 3,976 3,896
Provision for
income taxes 444 512 319 956 509
Provision for
income taxes (TEB(1)) 515 587 396 1,102 656
Net income 1,097 988 872 2,085 1,714
Net income
available to
common shareholders 1,048 939 821 1,987 1,626
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Operating performance
Basic earnings
per share ($) 1.02 0.92 0.81 1.93 1.61
Diluted earnings
per share ($) 1.02 0.91 0.81 1.93 1.61
Diluted cash earnings
per share(1) ($) 1.04 0.93 0.82 1.97 1.64
Return on
equity(1) (2) (%) 19.9 17.4 16.8 18.7 16.6
Productivity
ratio (%) (TEB(1)) 49.9 50.5 51.4 50.2 54.9
Net interest margin
on total average
assets(2) (%)
(TEB(1)) 1.73 1.76 1.71 1.74 1.61
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Balance sheet
information
($ millions)
Cash resources
and securities(2) 181,390 173,472 137,487
Loans and
acceptances(2) 281,268 275,816 306,619
Total assets(2) 526,125 507,626 514,501
Deposits 371,249 364,938 346,860
Preferred shares 3,975 3,710 3,710
Common shareholders'
equity(2) 21,577 21,647 20,132
Assets under
administration 230,964 226,308 196,773
Assets under
management 45,419 43,626 35,449
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Capital measures
Tier 1 capital
ratio (%) 11.2 11.2 9.6
Total capital
ratio (%) 13.3 13.5 11.8
Tangible common
equity to
risk-weighted
assets(1)(3) (%) 8.8 8.8 7.2
Risk-weighted assets
($ millions) 215,115 215,891 241,837
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Credit quality
Net impaired
loans(2)
($ millions) 2,475 2,677 2,179
General allowance
for credit losses
($ millions) 1,450 1,450 1,350
Sectoral allowance
($ millions) 24 43 60
Net impaired loans
as a % of loans and
acceptances(2)(4) 0.88 0.97 0.71
Specific provision
for credit losses
as a % of average
loans and
acceptances(2)
(annualized) 0.55 0.55 0.54 0.55 0.45
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Common share
information
Share price ($)
High 55.33 49.93 35.85 55.33 40.68
Low 44.39 44.12 23.99 44.12 23.99
Close 51.78 44.83 33.94
Shares outstanding
(millions)
Average - Basic 1,030 1,025 1,014 1,028 1,007
Average - Diluted 1,031 1,028 1,016 1,029 1,010
End of period 1,034 1,029 1,017
Dividends per
share ($) 0.49 0.49 0.49 0.98 0.98
Dividend yield (5) (%) 3.9 4.2 6.6 3.9 6.1
Market capitalization
($ millions) 53,544 46,115 34,518
Book value per
common share(2) ($) 20.87 21.04 19.80
Market value to book
value multiple(2) 2.5 2.1 1.7
Price to earnings
multiple (trailing
4 quarters) 14.2 13.0 11.8
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Other information
Employees 68,028 67,910 67,698
Branches and offices 2,730 2,692 2,683
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(1) Refer further below for a discussion of non-GAAP measures.
(2) Amounts for April 30, 2009, have been restated to reflect the impact
of the new accounting policy related to the classification and
impairment of financial assets implemented in the fourth quarter of
2009, effective November 1, 2008 (refer to Note 1 of the
Consolidated Financial Statements in the 2009 Annual Report for
further details).
(3) Amounts for April 30, 2009, have been restated to reflect a new
definition of tangible common equity (refer to non-GAAP measures
further below).
(4) Net impaired loans are impaired loans less the specific allowance
for credit losses.
(5) Based on the average of the high and low common share price for the
period.
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; amendments to, and interpretations of, risk-based capital guidelines and reporting instructions and liquidity regulatory guidance; 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 2009 Annual Report.
The preceding list of important factors is not exhaustive. When relying on forward-looking statements to make decisions with respect to the Bank and its securities, investors and others should carefully consider the preceding factors, other uncertainties and potential events. The Bank does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by or on its behalf.
The "Outlook" sections in this document are based on the Bank's views and the actual outcome is uncertain. Readers should consider the above-noted factors when reviewing these sections.
Additional information relating to the Bank, including the Bank's Annual Information Form, can be located on the SEDAR website at www.sedar.com and on the EDGAR section of the SEC's website at www.sec.gov.
2010 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
People
- High levels of employee satisfaction and engagement
- Diversity of workforce
- Collaboration
Customer
- High levels of customer satisfaction and loyalty
- Deeper relationship with existing customers
- New customer acquisition
Operational
- Productivity ratio of less than 58%
- Strong practices in corporate governance and compliance processes
- Strong capital ratios
- Corporate social responsibility and strong community involvement
Notable Business Highlights
Serving our customers to help them become better off financially
The Scotiabank StartRight Program for Newcomers to Canada website is now available in eight languages - English, French, Traditional Chinese, Simplified Chinese, Spanish, Punjabi, Arabic and Farsi.
Scotiabank is continuing its longstanding relationship with the Canadian Federation of Independent Business (CFIB). As the Official Bank of the CFIB, we will continue to support our customers by combining the value of Scotiabank's Small Business and Commercial offerings with CFIB's market leading position as the Voice of Small Business.
In Wealth Management, the performance of ScotiaFunds remains competitive with market share gains for all funds in 40 of the past 42 months. Scotia INNOVA Portfolios surpassed $1 billion in Assets Under Management, just over a year from their introduction to the marketplace in mid-January 2009.
Through the second quarter, Scotia Capital has supported clients on some significant projects:
- Acted as Joint Bookrunner and Co-Manager of a US$1.9 billion equity
offering and US$2.7 billion high yield issuance respectively, for
Consol Energy Inc.
- Scotia Capital acted as sole Lead Manager and Bookrunner for the
RTL-Westcan Limited Partnership C$130 million high yield bond offering
and also acted as Lead Arranger for a new C$40 million first lien term
and revolving credit facility for the company.
- Acted as Co-Lead Arranger of a US$1.5 billion Senior Secured Term Loan
for Americas Mining Corporation, a wholly-owned subsidiary of Grupo
Mexico.
Scotiabank recognized for excellence
Scotiabank was honoured to have received the following accolades during the quarter:
- The highest-ranking bank on the 2010 Canadian Business - Reputation
Institute list of Most Reputable Canadian Companies.
- Once again named one of Canada's Best Diversity Employers as part of
the 'Canada's Top 100 Employers Project.'
- One of the Best Places to Work(R) in Canada, 2010 by the Great Place
To Work(R) Institute. Scotiabank has also been named on Best Workplace
lists in Mexico, Peru, the Caribbean and Central America.
- Recognized in Macleans and Canadian Business magazines on THE GREEN 30
list of Canadian companies.
- Scotia Capital was named the Best Investment Bank in Canada for the
fourth time in six years, and the Best Infrastructure Bank globally
for the second consecutive year, by Global Finance magazine.
Celebrating International Women's Day
In celebration of the 99th annual International Women's Day, Scotiabank has launched a year-long recognition campaign. Based on nominations, 'Her Success, Her Way', will recognize two Scotiabank women employees each month throughout the year leading up to the 100th anniversary of International Women's Day in 2011. The Bank will make donations to the charities of choice of the women who are recognized and their nominators.
MANAGEMENT'S DISCUSSION & ANALYSIS
Non-GAAP Measures
The Bank uses a number of financial measures to assess its performance. Some of these measures are not calculated in accordance with Generally Accepted Accounting Principles (GAAP), are not defined by GAAP and do not have standardized meanings that would ensure consistency and comparability between companies using these measures. These non-GAAP measures are used in our Management's Discussion and Analysis further below. They are defined below:
Taxable equivalent basis
The Bank analyzes net interest income and total revenues on a taxable equivalent basis (TEB). This methodology grosses up tax-exempt income earned on certain securities reported in net interest income to an equivalent before tax basis. A corresponding increase is made to the provision for income taxes; hence, there is no impact on net income. Management believes that this basis for measurement provides a uniform comparability of net interest income arising from both taxable and non-taxable sources, and facilitates a consistent basis of measurement. While other banks also use TEB, their methodology may not be comparable to the Bank's. The TEB gross-up to net interest income and to the provision for income taxes in the current period is $71 million versus $77 million in the same quarter last year and $75 million last quarter. For the six months, the TEB gross-up to net interest income and the provision for income taxes was $146 million compared to $147 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.
Diluted cash earnings per share
The diluted earnings per share is adjusted to add back the non-cash after-tax amortization of intangible assets to arrive at diluted cash earnings per share.
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.
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.
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 common shareholders' equity plus non-controlling interest in subsidiaries, less goodwill and unamortized intangible assets. Tangible common equity is presented as a percentage of risk-weighted assets. Regulatory capital ratios, such as Tier 1 and Total Capital ratios, have standardized meanings as defined by the Office of the Superintendent of Financial Institutions Canada (OSFI).
Group Financial Performance and Financial Condition June 1, 2010
Financial results
Net income
Scotiabank's net income was a record $1,097 million in the second quarter, up $225 million or 26% from the same period a year ago and $109 million or 11% above the first quarter.
Excluding the negative impact of foreign currency translation of $112 million, net income grew $337 million or 39% compared to the same period last year. Solid underlying net interest income from volume growth particularly in personal and commercial banking, increased wealth management revenues and strong trading income together with lower provisions for credit losses contributed to these strong results. There were also higher net gains on securities which were offset by reduced securitization revenues from the higher levels last year. Partly offsetting the overall results was the impact of a higher effective tax rate.
The quarter-over-quarter increase in net income was due mainly to higher net gains on securities, increased trading revenues, a reduction in non-interest expenses, lower provisions for credit losses and the impact of a lower effective tax rate. These items were partially offset by lower net interest income, partly from the impact of the shorter quarter.
Net income for the six months was $2,085 million, $371 million or 22% higher than the same period last year, notwithstanding the negative impact of foreign currency translation of $240 million and the record $317 million of securitization revenue included in last year's results. The year-over-year increase reflected increased interest income, higher net gains on securities, strong trading and wealth management revenues, and lower provisions for credit losses. Offsetting these items were increased non-interest expenses, and the impact of a higher effective tax rate.
Impact of foreign currency translation
The table below reflects the impact of foreign currency translation on the quarter-over-quarter and year-over-year change in key income statement items. The impact of foreign currency translation was more significant when comparing this quarter to the same quarter last year due to the significant strengthening of the Canadian dollar year over year.
($ millions except For the three For the six
per share amounts) months ended months ended
-------------------------------------------------------------------------
Q2 2010 vs. Q2 2010 vs. Q2 2010 vs.
Q1 2010 Q2 2009 Q2 2009
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U.S./Canadian dollar
exchange rate (average)
April 30, 2010 $ 0.973 $ 0.973 $ 0.961
January 31, 2010 $ 0.949
April 30, 2009 $ 0.804 $ 0.810
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% change 3% 21% 19%
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Impact on income:
Net interest income $ (28) $ (172) $ (322)
Other income (22) (108) (252)
Non-interest expenses 15 98 178
Other items (net of tax) 14 70 156
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Net income $ (21) $ (112) $ (240)
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Earnings per share (diluted) (0.02) (0.11) (0.23)
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Impact by business line:
Canadian Banking (1) (8) (14)
International Banking (7) (41) (98)
Scotia Capital (6) (35) (95)
Other (7) (28) (33)
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Total revenue
This quarter, total revenue (on a taxable equivalent basis) was $3,944 million, up $271 million or 7% from the same quarter last year. Excluding the negative impact of foreign currency translation of $280 million, total revenues grew by $551 million or 15%. The increase was attributable to solid underlying interest income, higher net gains on securities, growth in wealth management revenues and strong trading results due to improvements in equity markets. These items were partly offset by lower securitization income.
Compared with last quarter, total revenue (on a taxable equivalent basis) was down $37 million or 1%. Lower net interest income was partially offset by higher net gains on securities and trading and wealth management revenues.
For the six months, total revenue (on a taxable equivalent basis) of $7,925 million was $831 million or 12% higher than the same period last year, notwithstanding the negative foreign currency translation impact of $574 million. In addition to solid net interest income, the year-over-year increase was due primarily to higher net gain on securities, and strong trading and wealth management revenues due to improvements in equity markets. These items were partly offset by lower securitization revenues.
Net interest income
This quarter's net interest income (on a taxable equivalent basis) was $2,129 million, down $35 million from the same quarter last year. Excluding the negative impact of foreign currency translation of $172 million, net interest income grew by $137 million. The underlying increase in net interest income was due mainly to asset growth and an improvement in the net interest margin. The latter was a result of the wider spreads in corporate loans, mortgages and personal lines of credit and lower average non-earning assets, partly offset by lower gains on changes in the fair value of financial instruments used for asset/liability management purposes and a decline in tax-exempt income.
Net interest income (on a taxable equivalent basis) declined $93 million or 4% from the first quarter. The decrease was attributable mainly to a slight decline in the margin and the impact of three fewer days in the quarter.
For the six months, net interest income (on a taxable equivalent basis) rose to $4,351 million, up $151 million or 4% from the same period last year, notwithstanding the negative foreign currency translation impact of $322 million. The increase in net interest income was driven by an improved net interest margin in Canadian and International Banking, particularly in retail and higher positive fair value changes in financial instruments used for asset/liability management purposes.
The Bank's net interest margin was 1.73% this quarter, up from 1.71% in the same quarter of last year, but down from 1.76% in the first quarter.
Compared to the prior year, the improvement in the margin was due to a lower level of average non-earning assets and improved pricing on a variety of assets and deposit products in Canadian Banking, offset by lower gains from the change in fair value of financial instruments used for asset/liability management purposes and a decline in tax-exempt income.
The quarter-over-quarter decrease was due mainly to the margin compression in the Caribbean, lower treasury spreads in International Banking, a decline in corporate loan spreads and higher volumes of lower-spread deposits with banks. Partially offsetting were wider spreads on personal lines of credit and credit cards in Canadian Banking.
Other income
Other income was $1,815 million this quarter, up 20% or $306 million from $1,509 million in the same quarter last year, despite the negative impact of foreign currency translation of $108 million. The primary drivers of the increase were higher net gains on securities, from a combination of higher gains on sales of securities and lower writedowns, increased derivative trading and wealth management revenues and the impact of a positive change in the fair value of non-trading financial instruments. These items were partly offset by a decline in securitization income and a reduction in other trading revenues. In addition, the same quarter last year included a loss on the sale of a credit card portfolio in Mexico.
Quarter over quarter, other income was up $56 million or 3%, due primarily to higher net gains on securities, increased trading revenues, higher credit and wealth management fees, partly offset by lower underwriting and transaction-based fees. Last quarter included a one-time gain on the sale of the pension administration business in Mexico and a loss on the Bank's investment in an affiliate in Venezuela, reflecting a significant devaluation in the Venezuelan Bolivar.
For the six months, other income was $3,574 million, an increase of $680 million or 23% from the same period last year. Excluding the negative impact of foreign currency translation of $252 million, other income grew by $932 million or 32%. The results reflected higher net gains on securities, from a combination of gains on the sale of securities and lower writedowns, and strong derivative trading revenues, partly offset by a loss on the Bank's investment in an affiliate in Venezuela mentioned above. In addition, last year's results included derivative trading losses. The increase in other income was also driven by higher wealth management revenues as a result of growth in assets under administration, a one-time gain on the sale of the pension administration business in Mexico and a positive change in the fair value of non-trading financial instruments. These items were partly offset by lower securitization revenues.
Provision for credit losses
The provisions for credit losses was $338 million this quarter, a decrease of $151 million from the same period last year and $33 million from last quarter. This quarter's provisions was comprised of $357 million in specific provisions offset by $19 million reversal of the sectoral allowance. The reversal of the sectoral allowance reflected improvements in the quality of the corporate automotive portfolio.
Further discussion on credit risk is provided further below.
Non-interest expenses and productivity
Non-interest expenses were $1,967 million this quarter, $81 million or 4% higher than the same period last year or $179 million or 9% excluding the favourable impact of foreign currency translation. Acquisitions accounted for $13 million of the increase and the remainder was due mainly to growth in compensation-related expenses.
Performance-based compensation was higher reflecting the increase in revenues, and stock-based compensation increased due in part to the appreciation of the Bank's share price and changes in compensation plans. Partly offsetting these factors were reductions in premises, technology and professional expenses.
Non-interest expenses were $42 million lower than the first quarter. This decrease was mainly attributable to lower stock-based compensation due primarily to plan changes that impacted the first quarter to a greater extent. There were also decreases in technology and communication costs.
Year to date, non-interest expenses were $80 million or 2% higher than the same period last year, despite the positive impact of foreign currency translation of $178 million. The increase was primarily in compensation-related expenses, particularly stock-based compensation from a combination of plan changes and appreciation in share price. There was also higher performance-based compensation from strong trading and volume-related commissionable revenues. The majority of the other non-interest expense categories declined, in line with the Bank's focus on expense management.
The productivity ratio, a measure of the Bank's efficiency, was 49.9%, an improvement from 51.4% in the same quarter last year and 50.5% last quarter. The Bank's operating leverage this quarter was 3.1% year over year. On a year-to-date basis, operating leverage was 9.7%.
Taxes
The effective tax rate for this quarter was 28.3%, up from 26.1% in the same quarter last year but below the 33.6% in the first quarter. The increase from a year ago was due primarily to a decline in income in lower tax rate jurisdictions and proportionately lower tax-exempt dividend income. These items were partly offset by lower writedowns of future tax assets and a reduction in the statutory tax rate in Canada.
Compared to the previous quarter, the decrease was due primarily to a reduction in losses in lower tax rate jurisdictions and a decline in writedowns of future tax assets.
Risk management
The Bank's risk management policies and practices are unchanged from those outlined in pages 62 to 76 of the 2009 Annual Report.
Credit risk
Provisions for credit losses
Provisions for credit losses were $338 million this quarter, compared to $489 million in the same period last year and $371 million in the previous quarter.
The total provisions for credit losses were $189 million in Canadian Banking, compared to $188 million in the same period last year and $180 million in the previous quarter. On a year-over-year basis, higher retail provisions in the unsecured lending portfolios were offset by lower commercial provisions. The second quarter last year included a sectoral provision of $10 million. Compared to the previous quarter, retail provisions in the unsecured lending portfolios were moderately higher, while total commercial provisions were relatively unchanged.
International Banking's provisions for credit losses were $173 million, compared to $115 million in the same period last year, and $177 million last quarter. The year-over-year increase was due mainly to provisions on a commercial account in the Caribbean, whereas the same quarter last year benefited from reversals in commercial provisions. On a year-over-year basis, retail provisions were unchanged. Compared to the previous quarter, retail provisions were moderately lower, while commercial provisions were unchanged.
Scotia Capital recorded net recoveries of $24 million, compared to total provisions of $159 million in the same period last year and $14 million last quarter. Net recoveries this quarter include a $19 million reversal of the sectoral allowance specific to the automotive industry.
The general allowance for credit losses was $1,450 million as at April 30, 2010, unchanged from last quarter. The sectoral allowance specific to the automotive industry was $24 million, down $19 million, reflecting a reversal of provisions no longer required.
Impaired loans
Total gross impaired loans were $5,322 million as at April 30, 2010, an increase of $1,190 million from the prior quarter. Of this increase, $1,422 million is attributable to the recent acquisition of R-G Premier Bank of Puerto Rico. Excluding the acquisition, gross impaired loans declined by $232 million from last quarter.
Total net impaired loans, after deducting the allowance for specific credit losses, were $2,475 million as at April 30, 2010, a decrease of $202 million from last quarter.
Total net impaired loans in Canadian Banking were $611 million, down from $667 million in the previous quarter, with the bulk of the reduction attributable to the retail portfolio.
International Banking's total net impaired loans were $1,634 million, down from $1,669 million last quarter, as increases in retail impaired loans were more than offset by improvements in the commercial portfolio.
In Scotia Capital, total net impaired loans were $230 million this quarter, compared to $341 million in the prior quarter, with the majority of the improvement attributable to the U.S. portfolio.
Overview of loan portfolio
A large portion of the Bank's loan portfolio is comprised of residential mortgages and consumer loans, which are well diversified by borrower and geography. As at April 30, 2010, these loans amounted to $175 billion ($167 billion as at January 31, 2010) or 63% (62% as at January 31, 2010) of the Bank's total loans outstanding (after specific allowances but before general allowances for credit losses). These residential mortgages and a high percentage of consumer loans are secured, with Canadian Banking's portfolio 92% secured and International Banking's portfolio 77% secured, in line with amounts at year end.
The balance of the loan portfolio is comprised of commercial and corporate loans which are also well diversified by borrower, industry and geography.
Sovereign credit risk
As a result of the Bank's broad international operations, the Bank has sovereign credit risk exposure to a number of countries. The Bank actively manages this sovereign risk, including the use of risk limits calibrated to the credit worthiness of the sovereign exposure. The Bank's exposure to certain European countries that have come under recent focus is negligible, with no sovereign risk exposure to Greece, Portugal or Italy.
Other credit risks
There has been stabilization in the automotive sector as reflected by the partial reversal of sectoral allowance. There are no significant changes in the Bank's automotive industry exposure and consumer auto-based securities since last quarter.
Market risk
Value at Risk (VaR) is a key measure of market risk in the Bank's trading activities. In the second quarter, the average one-day VaR was $13.4 million compared to $16.0 million for the same quarter last year. The decrease was primarily the result of lower interest rate risk.
Compared to the previous quarter, the average one-day VaR decreased from $14.6 million to $13.4 million due to decline in all risk factors.
Average for the three months ended
-------------------------------------------------------------------------
Risk factor April 30 January 31 April 30
($ millions) 2010 2010 2009
-------------------------------------------------------------------------
Interest rate $ 12.2 $ 14.1 $ 15.9
Equities 6.5 7.3 4.0
Foreign exchange 1.5 2.6 2.2
Commodities 1.9 2.7 2.9
Diversification effect (8.7) (12.1) (9.0)
-------------------------------------------------------------------------
All-Bank VaR $ 13.4 $ 14.6 $ 16.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
There were two trading loss days in the second quarter, compared to eight 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 April 30, 2010 liquid assets were $167 billion or 32% of total assets ($146 billion or 29% of total assets as at October 31, 2009). The mix of these assets between securities and other liquid assets, including cash and deposits with banks, was 65% and 35%, respectively (October 31, 2009 - 69% and 31% respectively).
In the course of the Bank's day-to-day activities, securities and other assets are pledged to secure an obligation, participate in clearing or settlement systems, or operate in a foreign jurisdiction. Securities may also be sold under repurchase agreements. As at April 30, 2010, total assets pledged or sold under repurchase agreements were $93 billion ($84 billion as at October 31, 2009). The quarter-over-quarter increase was largely due to an increase in assets pledged to secure an obligation relating to securities borrowed. 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.
Balance sheet
The Bank's total assets at April 30, 2010 were $526 billion, up $29 billion from October 31, 2009. Excluding the negative impact of foreign currency translation total assets were up $43 billion or 9%.
Cash resources grew by $14 billion, primarily from higher interest bearing deposits with central banks.
Total securities increased by $7 billion from October 31, 2009, notwithstanding a negative impact from foreign currency translation of $2 billion. Trading securities increased by $11 billion due mainly to higher holdings of equities and U.S. government debt. There was a decline of $5 billion in available-for-sale securities primarily in mortgage-backed securities and corporate bonds. Equity accounted investments increased by $777 million due mainly to an additional investment in Thanachart Bank to finance that entity's acquisition of Siam City Bank.
As at April 30, 2010, the unrealized gain on available-for-sale securities, after the impact of qualifying hedges is taken into account, was $796 million, a decrease of $232 million from last quarter. The change was due primarily to decreases in the values of mortgage-backed securities and Canadian government debt, from changes in interest rates, partially offset by increases in the values of equity securities and corporate bonds, as a result of improvements in capital markets.
The Bank's loan portfolio increased $7 billion from October 31, 2009, or $12 billion or 5% excluding the negative impact of foreign currency translation. In retail lending, residential mortgages increased $12 billion, with growth of $9 billion in Canadian Banking and $3 billion in International. The increase in International was due primarily to the recent acquisition of R-G Premier Bank in Puerto Rico. Business and government loans decreased $3 billion from the negative impact of foreign currency translation of $4 billion.
Securities purchased under resale agreements increased $4 billion. Other assets, primarily amounts due from brokers and counterparties, increased $3 billion. Derivative instrument assets decreased by $3 billion, which was similar to the decrease in derivative instrument liabilities.
Total liabilities were $501 billion as at April 30, 2010, up $29 billion from October 31, 2009. Excluding the negative impact of foreign currency translation, total liabilities rose $42 billion or 9%.
Total deposits increased by $21 billion, net of foreign currency translation of $11 billion. The growth was primarily in business and government deposits which grew by $17 billion, mainly in the U.S. Other deposits by Banks rose by $3 billion.
Obligations related to securities sold short and obligations related to securities sold under repurchase agreements grew by $8 billion and $4 billion, respectively.
Total shareholders' equity increased $780 million from October 31, 2009. This was driven by internal capital generation of $980 million, the issuance of $386 million common shares through the Bank's Dividend Reinvestment and Employee Share Purchase Plan and the exercise of options, and the issuance of $265 million preferred shares. Partially offsetting the growth was an increase of $875 million in accumulated other comprehensive loss. The latter was due mainly to higher unrealized foreign exchange losses from the strengthening of the Canadian dollar.
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), to ensure that the Bank's capital is more than adequate to meet current and future risks and achieve its strategic objectives. Key components of the Bank's ICAAP include sound corporate governance; establishing risk-based capital targets; managing and monitoring capital, both currently and prospectively; and utilizing appropriate financial metrics which relate risk to capital, including regulatory capital measures. The Bank's capital management practices were unchanged from those outlined on pages 38 to 42 of the 2009 Annual Report.
Capital ratios
The Bank continues to maintain a strong capital position. The Tier 1 and Total capital ratios as at April 30, 2010, were 11.2% and 13.3%, respectively, compared to 11.2% and 13.5% at January 31, 2010. The positive contribution of internally generated capital, share issuances through the dividend reinvestment and employee stock option plans and the issuance of $265 million of preferred shares this quarter, offset the impact of the additional investment in Thanachart Bank and the purchase of R-G Premier Bank in Puerto Rico. The tangible common equity (TCE) ratio at April 30, 2010 was unchanged at 8.8%.
Common dividend
The Board of Directors, at its meeting on May 31, 2010, approved a quarterly dividend of 49 cents per common share. This quarterly dividend applies to shareholders of record as of July 6, 2010, and is payable July 28, 2010.
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 2009 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 $1,937 billion as at April 30, 2010, compared to $1,540 billion as at October 31, 2009, largely due to an increase in interest rate contracts. The percentage of derivatives held for trading and those held for non-trading or asset liability management was generally unchanged. The credit equivalent amount, after taking into account master netting arrangements, was $18.4 billion, compared to $18.5 billion at year end.
Selected credit instruments
A complete discussion of selected credit instruments which markets regarded as higher risk during the financial crisis was provided on pages 47 to 50 of the Bank's 2009 Annual Report. The disclosure provided a detailed discussion on the nature and extent of the Bank's exposures.
There have been no significant changes to the Bank's exposure to mortgage-backed securities, asset-backed commercial paper, structured investment vehicles, Alt-A loans and securities, highly leveraged loans awaiting syndication, and auction-rate securities, since January 31, 2010 and October 31, 2009.
Collateralized debt obligations and collateralized loan obligations
Non-trading portfolio
As at April 30, 2010, the carrying value of cash-based CDOs/CLOs reported as loans on the Consolidated Balance Sheet was $959 million (January 31, 2010 - $1,031 million; October 31, 2009 - $1,059 million). The fair value was $656 million (January 31, 2010 - $716 million; October 31, 2009 - $688 million). None of these cash-based CDOs/CLOs are classified as impaired loans. The overall risk profile of cash-based CDOs/CLOs has not changed significantly since January 31, 2010 and October 31, 2009.
The Bank's remaining exposure to synthetic CDOs/CLOs was $295 million as at April 30, 2010 (January 31, 2010 - $339 million; October 31, 2009 - $323 million). During the quarter, the Bank recorded a pre-tax gain of $30 million in net income for changes in fair value of synthetic CDOs/CLOs (first quarter of 2010 - pre-tax gain of $45 million; second quarter of 2009 - pre-tax gain of $5 million). The improvement in fair value of the synthetic CDOs/CLOs was mainly driven by the tightening of credit spreads. The overall risk profile of synthetic CDOs/CLOs has not changed significantly since January 31, 2010 and October 31, 2009.
Trading portfolio
The Bank holds synthetic CDOs in its trading portfolio as a result of structuring and managing transactions with clients and other financial institutions. The portfolio remains substantially hedged through the purchase or sale of CDOs to other financial institutions.
The risk profile of the Bank's CDOs has not changed significantly from January 31, 2010 and October 31, 2009.
Exposure to monoline insurers
The Bank has insignificant direct exposure to monoline insurers. The Bank has indirect exposures of $1.0 billion (January 31, 2010 - $1.2 billion; October 31, 2009 - $1.3 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. Of this exposure, $0.7 billion (January 31, 2010 and October 31, 2009 - $0.7 billion) relates to 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). The two monoline insurers were rated non-investment grade by the external rating agencies.
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.
For a complete discussion of these types of arrangements, please refer to pages 43 to 46 of the Bank's 2009 Annual Report.
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.
Canada
The Bank's primary exposure to the Canadian-based conduits is the liquidity support provided, with total liquidity facilities of $1.4 billion as at April 30, 2010 (January 31, 2010 - $1.5 billion; October 31, 2009 - $1.8 billion). As at April 30, 2010, total commercial paper outstanding for the Canadian-based conduits administered by the Bank was $1.2 billion (January 31, 2010 - $1.2 billion; October 31, 2009 - $1.6 billion), and the Bank held less than two per cent of the total commercial paper issued by these conduits. Funded assets purchased and held by the Bank's two Canadian multi-sellers as at April 30, 2010, as reflected at original cost, were $1.2 billion (January 31, 2010 - $1.2 billion; October 31, 2009 - $1.6 billion). The fair value of these assets approximates original cost. There has been no significant change in the composition or risk profile of these conduits since October 31, 2009.
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 $7.0 billion as at April 30, 2010 (January 31, 2010 - $7.6 billion; October 31, 2009 - $7.5 billion). As at April 30, 2010, total commercial paper outstanding for the U.S.-based conduit administered by the Bank was $3.1 billion (January 31, 2010 - $3.5 billion; October 31, 2009 - $4.2 billion), and the Bank did not hold any commercial paper issued by this conduit. Funded assets purchased and held by the Bank's U.S. multi-seller conduit as at April 30, 2010 were $3.1 billion (January 31, 2010 - $3.5 billion; October 31, 2009 - $4.0 billion). The fair value of these assets as at April 30, 2010 was $2.7 billion (January 31, 2010 - $3.2 billion; October 31, 2009 - $3.6 billion). There has been no significant change in the composition of this conduit since October 31, 2009.
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 both of which are rated non-investment grade by the external rating agencies.
Other off-balance sheet arrangements
The Bank provides liquidity facilities to non-Bank sponsored conduits, all of which are U.S. third party conduits. There has been no significant change in our exposures through these liquidity facilities since last quarter or the year-end.
The Bank may securitize residential mortgages as a means to diversify its funding sources, as this represents a cost effective means to fund the growth in this portfolio. A further $0.6 billion in residential mortgages were securitized this quarter, bringing the balance of outstanding mortgages securitized to $15.9 billion as at April 30, 2010, compared to $17.5 billion as at October 31, 2009.
Guarantees and other indirect commitments decreased 2% from October 31, 2009. Fees from guarantees and loan commitment arrangements recorded in other income were $103 million in the three-month period ended April 30, 2010, compared to $107 million in the previous quarter ($105 million in the fourth quarter of 2009).
Accounting Policies and Controls
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 2009 annual consolidated financial statements for more information about the significant accounting principles used to prepare the financial statements. 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 2009 Annual Report.
Future accounting changes
Transition to International Financial Reporting Standards (IFRS)
Canadian publicly accountable enterprises must transition to 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 (adoption date), and will include the preparation and reporting of one year of comparative figures, including an opening balance sheet as at November 1, 2010 (transition date).
In order to prepare for the transition to IFRS, the Bank has implemented a project governance structure and has developed an implementation plan which consists of three phases: (i) planning and governance; (ii) review and detailed assessment; and (iii) design, development and implementation. The Bank is currently in the latter stages of the second phase and has started the third phase for certain key areas.
Page 82 of the Bank's 2009 Annual Report contains a discussion of the Bank's IFRS implementation plan and the aspects of IFRS that have the potential to most significantly impact the Bank.
Key elements of the Bank's IFRS changeover plan
The following provides an update of the key elements identified in the Bank's implementation plan.
Financial statement presentation
The Bank has completed detailed assessments of the accounting differences related to IFRS standards that are applicable to the Bank. Furthermore, the Bank continues to analyze the impacts of first-time adoption and future accounting policy choices under IFRS and has made significant progress in this regard; however, final decisions regarding these choices have not been made at this time. Key decisions will likely be finalized by the end of the year.
The Bank has appropriately engaged its external and internal auditors in the IFRS conversion project. Timely review and concurrence from the Bank's auditors is critical to the Bank's overall implementation success.
Training and communication
A training program has been implemented for key stakeholders. To date, training has been focused on raising awareness across the Bank and providing in-depth training to finance, key support areas, and IFRS governance members (including the Board of Directors and senior management) to equip them with the necessary knowledge to assess the impact of IFRS on the Bank. From a broader perspective, training has also been provided to the Bank's credit and banking personnel, as they will be reviewing customer financial information prepared on a different basis of accounting.
The Bank's internal global learning group is currently conducting a comprehensive learning needs assessment for all stakeholders impacted by IFRS. Training will be focused and tailored to meet the varying requirements for all stakeholders.
Training and communication will continue as a priority during the remainder of the transition period.
Information technology systems
Based on analysis of current IFRS, the Bank has not identified the need for any significant modifications to its information technology systems. As the Bank continues to analyze and complete its in-depth business and process assessment work, this view may change. The Bank is focused on developing processes and controls relating to the dual-reporting period in fiscal 2011.
Business and process activities
The Bank's analysis of differences between Canadian GAAP and IFRS includes identification of business and process activities that will be impacted outside of financial reporting, such as contractual arrangements and client covenants. The Bank is also assessing the impact to its performance measurement processes, including planning and budgeting.
Control environment
The identification and assessment of internal control over financial reporting (ICFR) is embedded in our existing change management processes. The Bank has not identified any significant changes in ICFR to date. ICFR will be appropriately addressed as processes and system changes are made. The ICFR related to the reporting of IFRS financial statements and notes, including comparative year information as well as on-going financial reporting, are a key area of focus as process and system assessments are finalized.
The Bank's implementation plan also considers the impact of IFRS on its disclosure controls and procedures and no significant changes have been identified to date.
IFRS Accounting Standards
IFRS are premised on a conceptual framework similar to Canadian GAAP, although significant differences exist in certain matters of recognition, measurement and disclosure. The Bank has determined a number of key differences that have the potential to significantly affect the financial statements, operations or capital of the Bank. Net adjustments to the Bank's opening balance sheet resulting from differences between Canadian GAAP and IFRS will be recorded against retained earnings on transition.
Derecognition
Canadian GAAP uses a control-based model to assess derecognition while IFRS primarily focuses on whether risks and rewards have been substantively transferred. These differences in criteria will likely result in an increase in total assets and liabilities on the Bank's consolidated balance sheet, particularly in respect of residential mortgages securitized through the Canadian Government's Canada Mortgage Bond (CMB) program.
Consolidation
Canadian GAAP determines consolidation based on the variable interest entity ("VIE") and voting control models while IFRS is based on control. Under IFRS, control can either be based on majority voting or de facto control, which could result in different consolidation conclusions. As a result, certain VIE's may be consolidated under IFRS that were not consolidated under Canadian GAAP. The Bank has not finalized its consolidation analysis.
Business combinations
The business combinations model under IFRS represents a fair value model of accounting which can result in a significant change in accounting compared to current Canadian GAAP. The fair value model includes carrying contingent consideration and non-controlling interest at fair value. Furthermore, IFRS is more restrictive on the capitalization of acquisition costs. Separate from the Bank's transition decision on past acquisitions, the impact from this change will be related to acquisitions made subsequent to transition date.
Financial instruments and hedging
For classification and measurement of financial instruments, there is significant alignment between Canadian GAAP and IFRS. In addition, for the Bank, the impact of IFRS on hedge accounting is not expected to be significant.
First-time adoption of IFRS
The Bank's adoption of IFRS will require the application of IFRS 1, First-Time Adoption of International Financial Reporting Standards ("IFRS 1"), which provides guidance for an entity's initial adoption of IFRS. IFRS 1 generally requires that an entity retrospectively apply all IFRS effective at the end of its first IFRS annual reporting period. However, IFRS 1 does include certain mandatory exceptions and limited optional exemptions from this general requirement of retrospective application. The Bank has not finalized these transition decisions.
The following are the more significant optional exemptions available under IFRS 1 which the Bank is currently considering. This is not an exhaustive list and does not encompass all exemptions which the Bank is analyzing.
Business combinations
Entities can elect to not retrospectively restate any of the business combinations that occurred prior to the transition date.
Employee benefits
Entities can elect to recognize all cumulative unamortized actuarial gains and losses for employee defined benefit plans at transition date instead of retrospective restatement, with an offsetting adjustment against opening retained earnings.
Based on the Bank's latest actuarial valuation, this accounting election for employee benefits would negatively impact opening retained earnings.
Cumulative translation differences
IFRS 1 allows cumulative translation differences for all foreign operations to be deemed zero at the date of transition to IFRS, instead of recalculating from inception.
This results in the reclassification of amounts in accumulated other comprehensive income to retained earnings on transition.
Accounting and regulatory developments
As interpretations of current accounting standards continue to change, the Bank will continue to adjust its implementation plan accordingly. The Bank actively monitors developments in standards from the International Accounting Standards Board (IASB) and the Canadian AcSB, as well as regulatory requirements from the Canadian Securities Administrator and OSFI.
In March 2010, OSFI issued the Advisory on Conversion to IFRS for Federally Regulated Entities. OSFI has allowed banks the option to phase in the impact of conversion to IFRS on retained earnings for regulatory capital purposes over five quarters. OSFI has also made a concession on the calculation of the asset-to-capital multiple with respect to certain securitized insured mortgages that will likely come back on balance sheet. The government insured mortgages securitized through the CMB program up until March 31, 2010 will be grandfathered and therefore, would not impact the capital leverage ratio. OSFI has also communicated that early adoption of IFRS standards will generally not be permitted.
The impact of IFRS on the Bank's consolidated financial results at the time of transition is dependent upon prevailing business circumstances, market factors and economic conditions at that time, as well as the accounting elections that have not yet been made. As a result, the transition impact is not reasonably determinable at this time.
Changes in internal control over financial reporting
There have been no changes in the Bank's internal controls over financial reporting during the quarter ended April 30, 2010, that have materially affected, or are reasonably likely to materially affect, the Bank's internal control over financial reporting.
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 136 of the 2009 Annual Report. All transactions with related parties continued to be at market terms and conditions.
Outlook
The global recovery continues to gain momentum, although the pace of activity varies considerably among countries. Asia and the Americas (excluding the U.S.) remain the pacesetters, led by China, India and South East Asia, with Brazil, Peru and Mexico leading in Latin America. Growth in the U.S. and Canada has accelerated in response to low interest rates, powerful fiscal stimulus and a revival in domestic spending. In contrast, the revival has been slower in Japan and Europe, but the Bank's exposures in these countries are not significant.
Looking ahead into 2011, growth will likely moderate as many governments focus on reducing fiscal deficits and interest rates begin to rise above their recession lows. Nevertheless, emerging markets, such as those in which the Bank actively operates will lead global growth, although trends in the Caribbean and Central America will be constrained by U.S. and European performance. In addition, among the developed nations, Canada will continue to lead growth, due to its relatively better domestic fiscal and financial fundamentals and the prospect of continued buoyancy in global commodity markets.
With the solid results achieved during the first half of the year, and the macro economic growth projected for the markets we have chosen to operate in - Canada, Latin America, Caribbean, Central America and Asia - the Bank is well-positioned to meet its established objectives for 2010.
Business Segment Review
Canadian Banking
For the six
For the three months ended months ended
-------------------------------------------------------------------------
(Unaudited)
($ millions)
(Taxable
equivalent April 30 January 31 April 30 April 30 April 30
basis)(1) 2010 2010 2009 2010 2009
-------------------------------------------------------------------------
Business
segment income
Net interest income $ 1,287 $ 1,298 $ 1,147 $ 2,585 $ 2,293
Provision for
credit losses 189 180 188 369 343
Other income 664 623 524 1,287 1,080
Non-interest expenses 954 962 899 1,916 1,833
Provision for
income taxes 224 218 174 442 349
Non-controlling
interest in net
income of
subsidiaries - 1 - 1 -
-------------------------------------------------------------------------
Net income $ 584 $ 560 $ 410 $ 1,144 $ 848
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on economic
equity(1) 27.9% 25.4% 19.7% 26.6% 22.5%
Average assets
($ billions) $ 201 $ 199 $ 191 $ 200 $ 190
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer above for a discussion of non-GAAP measures.
Q2 2010 vs Q2 2009
Canadian Banking reported record net income of $584 million this quarter, an increase of $174 million or 42% from the same quarter last year. Return on economic equity improved to 27.9% from 19.7% last year.
Average assets before securitization grew $10 billion or 5% from the same quarter last year. The increase was due primarily to growth of $9 billion or 7% in residential mortgages and $3 billion or 15% in personal lines of credit, partly offset by a modest reduction in commercial lending assets. Average deposits grew $21 billion, an increase of 15%. This included $10 billion of broker-sourced deposits transferred from Group Treasury last quarter. In addition, strong growth was recorded in non-personal current accounts and registered personal high interest savings accounts.
Total revenues increased a substantial $280 million or 17% from the same period last year, with significant growth in both net interest income and other income, particularly wealth management.
Net interest income of $1,287 million was up $140 million or 12% from the second quarter of last year, reflecting strong asset and deposit volume growth and a 17 basis point improvement in the interest profit margin. Volume growth reflected continuing market demand due to record low interest rates in the current environment, as well as new and innovative products and services introduced in the last year. The margin increase was due to both improved pricing on a variety of asset and deposit products, and lower wholesale funding interest rates. In addition, the margin benefited from easing liquidity costs.
Other income increased $140 million or 27% from the same quarter last year reflecting growth in each of wealth management, commercial and retail banking. Wealth management revenues grew in most business units, driven by new sales and improved market conditions. There were also higher gains on securities and higher credit fees.
The provisions for credit losses were $189 million, relatively unchanged from the same quarter last year. On a year-over-year basis, higher retail provisions in the non-secured lending portfolios, were largely offset by lower commercial provisions. The same quarter last year included a sectoral allowance relating to the automotive sector.
Non-interest expenses rose 6% from the same quarter last year due to higher performance and stock-based compensation, spending on growth initiatives and volume-related expenses including broker commissions. Partially offsetting these increases were lower bank card fraud losses. Overall expenses continue to be well managed and the segment reported strong positive operating leverage.
Q2 2010 vs Q1 2010
Quarter over quarter, net income grew by $24 million or 4%. Return on economic equity was 27.9% versus 25.4% last quarter.
Average assets before securitization rose $2 billion or 1% led by continued growth in retail mortgages and personal lines of credit. Deposits decreased $0.5 billion, primarily in non-personal term deposits and current accounts as businesses re-invest in their operations given the improved economy. Partially offsetting were higher personal deposits from RRSP contributions.
Total revenue rose $30 million or 2% quarter over quarter, from higher other income, partially offset by lower net interest income.
Net interest income decreased by 1%, primarily from three fewer days in the quarter. Partially offsetting was continued asset growth and higher spreads on personal lines of credit and credit cards.
Other income was up $41 million or 7% quarter over quarter, primarily from higher securities gains and increase in earnings from associated corporations, in addition Commercial Banking reported higher credit fees.
The provisions for credit losses of $189 million was up $9 million from the previous quarter. The increase was mainly due to higher retail provisions in the non-secured portfolios, while total commercial provisions were relatively unchanged.
Non-interest expenses were 1% below last quarter mainly due to three less days in the quarter. Partially offsetting were seasonally higher pension and benefits costs, and initiative spending.
International Banking
For the six
For the three months ended months ended
-------------------------------------------------------------------------
(Unaudited)
($ millions)
(Taxable
equivalent April 30 January 31 April 30 April 30 April 30
basis)(1) 2010 2010 2009 2010 2009
-------------------------------------------------------------------------
Business segment
income
Net interest income $ 822 $ 940 $ 959 $ 1,762 $ 1,906
Provision for
credit losses 173 177 115 350 231
Other income 447 434 349 881 820
Non-interest expenses 681 706 729 1,387 1,501
Provision for
income taxes 100 172 102 272 216
Non-controlling
interest in net
income of
subsidiaries 27 25 30 52 58
-------------------------------------------------------------------------
Net income $ 288 $ 294 $ 332 $ 582 $ 720
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on economic
equity(1) 11.3% 11.5% 12.7% 11.4% 14.8%
Average assets
($ billions) $ 82 $ 83 $ 95 $ 83 $ 95
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer above for a discussion of non-GAAP measures.
Q2 2010 vs Q2 2009
International Banking's net income in the second quarter was $288 million, a decrease of $44 million or 13% from last year, but only $3 million excluding the negative impact of a stronger Canadian dollar. Return on economic equity was 11.3% versus 12.7% last year.
Average assets were $82 billion this quarter, a decrease of $13 billion from the same period last year, due mainly to the adverse impact of foreign currency translation. Underlying growth of 6% in commercial loans in the Pacific was more than offset by declines in the other regions and retail growth was limited. Low-cost deposits grew 14%, adjusted for foreign currency translation, mainly in the Caribbean and Mexico.
Total revenue was $1,269 million in the second quarter, a decrease of $39 million or 3%, however, excluding foreign currency translation, revenue grew 10%.
Net interest income was $822 million this quarter, down $137 million or 14% from last year, or $19 million excluding the impact of foreign currency translation. Higher margins in Peru and lower funding costs in Mexico and Chile were more than offset by unfavourable fair value changes in financial instruments used for asset/liability management purposes.
Other income was $447 million, up $98 million or 28% from last year. The negative impact of foreign currency translation and lower foreign exchange revenues in Latin America was more than offset by higher securities gains, including $36 million gain on Siam City Bank shares, increased transaction-driven revenues and favourable fair value changes in non-trading financial instruments. In addition, the same quarter last year included a loss on the sale of a portion of a credit card portfolio in Mexico.
The provisions for credit losses were $173 million, compared to $115 million a year ago. The increase was due mainly to provisions on a commercial account in the Caribbean, whereas reversals in commercial provisions were recorded last year. Retail provisions were unchanged.
Non-interest expenses at $681 million were down $48 million, but up $27 million excluding the positive impact of foreign currency translation. The growth was primarily in compensation costs, professional fees related to acquisitions and business taxes.
The effective tax rate this quarter was 24% compared to 22% last year. Higher effective rates in Peru and the Pacific region and lower income in low tax jurisdictions, were mostly offset by lower effective rates in Mexico and Chile.
Q2 2010 vs Q1 2010
Net income of $288 million declined $6 million quarter over quarter due to foreign currency translation. Return on economic equity was 11.3% compared to 11.5% last quarter.
Average assets were in line with last quarter, with no significant impact from foreign currency translation. Modest increases in retail loans and strong growth in commercial lending and securities in the Pacific and Peru, were mostly offset by reductions in commercial loans in Chile. Low-cost deposits grew 3% after adjusting for foreign currency translation.
Total revenue was down 8% or $105 million quarter over quarter, including adverse foreign exchange of $27 million.
Net interest income at $822 million decreased $118 million quarter over quarter, due to the impact of foreign currency translation, margin compression in the Caribbean, lower treasury results in Mexico and Chile and reduced contributions from associated corporations. There were also unfavourable fair value changes in financial instruments used for asset/liability management.
At $447 million, other income increased $13 million from last quarter. There were higher net gains on the sale of securities and an increase in insurance revenues in the Caribbean, as well last quarter included a $32 million devaluation loss on the Bank's investment in a Venezuelan affiliate. Partially offsetting was the negative impact of foreign currency translation, adverse fair value changes in non-trading financial instruments and lower foreign exchange revenues in Latin America.
The provisions for credit losses were $173 million, compared to $177 million last quarter. Retail provisions were modestly lower, while commercial provisions were unchanged.
Non-interest expenses of $681 million decreased $25 million or 4% from last quarter, primarily from lower professional expenses, the seasonality of certain expenses, and the positive impact of foreign currency translation. Last quarter included a release of legal provisions in Peru and lower business taxes.
The effective tax rate this quarter was 24% compared to 35% last quarter, reflecting a return to more typical levels, as last quarter was impacted by the non-deductibility of the devaluation loss on the Venezuelan affiliate and a correction of a tax expense.
Scotia Capital
For the six
For the three months ended months ended
-------------------------------------------------------------------------
(Unaudited)
($ millions)
(Taxable
equivalent April 30 January 31 April 30 April 30 April 30
basis)(1) 2010 2010 2009 2010 2009
-------------------------------------------------------------------------
Business segment
income
Net interest income $ 275 $ 304 $ 345 $ 579 $ 683
Provision for
credit losses (24) 14 159 (10) 169
Other income 583 596 502 1,179 868
Non-interest
expenses 299 307 231 606 522
Provision for
income taxes 192 198 129 390 232
-------------------------------------------------------------------------
Net income $ 391 $ 381 $ 328 $ 772 $ 628
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on
economic equity(1) 22.2% 18.5% 18.3% 20.2% 20.1%
Average assets(2)
($ billions) $ 156 $ 160 $ 190 $ 158 $ 192
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer above for a discussion of non-GAAP measures.
(2) Amounts for April 30, 2009, have been restated to reflect the impact
of the new accounting policy related to the classification and
impairment of financial assets implemented in the fourth quarter of
2009, effective November 1, 2008 (refer to Note 1 of the Consolidated
Financial Statements in the 2009 Annual Report for further details).
Q2 2010 vs Q2 2009
Net income for the quarter at $391 million was up $63 million or 19% year over year. Return on economic equity improved to 22.2%.
Average assets decreased $34 billion or 18% from the same period last year. There was a $23 billion or 44% decrease in corporate loans and acceptances across all lending businesses. Average derivative instrument assets declined $17 billion, with a corresponding decrease in average derivative instrument liabilities. These decreases were partially offset by modest increases in average trading securities and other assets to support both client-driven activities and trading opportunities.
Total revenue at $858 million increased $11 million or 1%, driven primarily by growth of 25% in Global Capital Markets which reported a strong quarter for its institutional equity business. Derivatives revenues were also up substantially, although these were partly offset by reduced revenues in other trading businesses compared to the high levels in the prior year. Net interest income in Global Corporate and Investment Banking was down due to the decrease in lending volumes.
Interest income decreased $70 million or 20% as wider corporate lending spreads and higher loan origination fees were more than offset by a substantial decrease in corporate loan volumes.
Scotia Capital had net recoveries of $24 million in the second quarter, primarily from a partial reversal of the sectoral allowance. This compared to net provisions for credit losses of $159 million in the second quarter of last year. Last year's provisions for credit losses included a $50 million sectoral allowance related to the automotive industry sector, in addition to provisions in the U.S.
Other income increased $81 million or 16%, largely driven by the strong trading revenues in Global Capital Markets. All businesses contributed solid results although revenues from fixed income, foreign exchange and precious metals did not reach the high levels achieved a year ago. Other income decreased 8% in Global Corporate and Investment Banking as modest growth in investment banking revenues was more than offset by lower fee revenues.
Total non-interest expenses were $299 million in the second quarter, 29% higher than last year, primarily from increases in performance related compensation in line with revenue growth. There were also higher salaries, pension and benefit costs and computer expenses.
Higher income taxes reflect a greater proportion of income earned in higher tax rate jurisdictions than in the prior year.
Q2 2010 vs Q1 2010
Net income increased $10 million or 3% from last quarter. Return on economic equity was 22.2% versus 18.5% last quarter.
Total assets decreased $4 billion due primarily to a reduction in corporate loans and acceptances across all lending businesses.
Total revenue at $858 million was down $42 million or 5% from last quarter's strong results. Revenues in Global Corporate and Investment Banking were negatively impacted by lower lending volumes, spreads and investment banking revenues. Revenues in Global Capital Markets benefited from strong results in the institutional equity business, and were in line with last quarter's strong results.
Interest income decreased $29 million, reflecting lower interest from trading operations and lower corporate loan volumes, partly offset by higher loan origination fees.
A net recovery of $24 million was recorded this quarter compared to provisions for credit losses of $14 million in the previous quarter. The current quarter recovery included a partial reversal of the auto sectoral allowance. Last quarter provisions were primarily attributable to one account in Canada.
Other income was down slightly from the previous quarter. Modest growth in Global Capital Markets was driven by increases in the institutional equity, fixed income and foreign exchange businesses, partly offset by lower revenues from the derivatives and precious metals businesses. Other income was down in Global Corporate and Investment Banking due to reduced investment banking revenues, lower positive fair value changes to non-trading financial instruments and a decrease in credit fees.
Total non-interest expenses were $299 million, 3% lower than last quarter. The decrease was primarily from lower performance-based compensation, although salaries and pension and benefits costs also decreased.
Other(1)
For the six
For the three months ended months ended
-------------------------------------------------------------------------
(Unaudited)
($ millions)
(Taxable
equivalent April 30 January 31 April 30 April 30 April 30
basis)(2) 2010 2010 2009 2010 2009
-------------------------------------------------------------------------
Business segment
income
Net interest
income(3) $ (326) $ (395) $ (364) $ (721) $ (829)
Provision for
credit losses - - 27 - 27
Other income 121 106 134 227 126
Non-interest
expenses 33 34 27 67 40
Provision for
income taxes(3) (72) (76) (86) (148) (288)
-------------------------------------------------------------------------
Net income
(loss)(4) $ (166) $ (247) $ (198) $ (413) $ (482)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Average assets
($ billions) $ 66 $ 59 $ 44 $ 62 $ 48
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes all other smaller operating segments and corporate
adjustments, such as the elimination of the tax-exempt income
gross-up reported in net interest income and provision for income
taxes, differences in the actual amount of costs incurred and charged
to the operating segments, and the impact of securitizations.
(2) Refer above for a discussion of non-GAAP measures.
(3) Includes the elimination of the tax-exempt income gross-up reported
in net interest income and provision for income taxes for the three
months ended April 30, 2010 ($71), January 31, 2010 ($75), and April
30, 2009 ($77), and for the six months ended April 30, 2010 ($146),
and April 30, 2009 ($147) to arrive at the amounts reported in the
Consolidated Statement of Income.
(4) As a result of a transfer of $10 billion of broker-sourced deposits
to Canadian Banking from Group Treasury, the net loss for the three
months ended April 30, 2010, decreased by $34 million (January 31,
2010 - $37 million). For the six months ended April 30, 2010, the net
loss decreased by $71 million.
Q2 2010 vs Q2 2009
The Other segment had a net loss of $166 million in the second quarter, compared to a loss of $198 million last year.
Net interest income and the provision for income taxes include the elimination of tax-exempt income gross-up. This amount is included in the operating segments, which are reported on a taxable equivalent basis. The elimination was $71 million in the second quarter, compared to $77 million in the same period last year.
Total revenue this quarter was negative $205 million, an improvement of $25 million from the prior year.
Net interest income was negative $326 million this quarter as compared to negative $364 million in the same quarter last year. The year-over-year improvement was due primarily from the transfer of broker sourced deposits from the Other business segment to Canadian Banking in the first quarter of 2010.
Other income was $121 million in the second quarter, $13 million lower than last year. This decrease was mainly attributable to lower securitization revenues, which were at peak levels last year. This was mostly offset by a lower level of writedowns and higher gains on available-for-sale securities.
Provisions for credit losses were nil in the second quarter. The prior year included a $27 million increase in the general allowance.
Non-interest expenses were $33 million this quarter, an increase of $6 million from last year.
The provision for income taxes was a credit of $72 million this quarter, a decline of $14 million from the prior year.
Q2 2010 vs Q1 2010
There was a net loss of $166 million in the second quarter as compared to a loss of $247 million in the prior quarter.
The elimination of tax exempt income gross-up was $71 million in the second quarter, compared to $75 million last quarter.
Total revenue this quarter was negative $205 million, an improvement of $84 million from last quarter.
Net interest income was negative $326 million in the second quarter, an improvement of $69 million from last quarter, mainly due to the change in the fair value of financial instruments used for asset/liability management purposes, fewer days in the quarter, and the positive impact of lower term funding costs compared to slightly higher short-term wholesale rates used for transfer pricing with the business segments.
Other income was $121 million in the second quarter, $15 million above last quarter. This increase was due mainly to higher gains on the sales of securities and lower writedowns.
Non-interest expenses were $33 million this quarter, $1 million lower than last quarter.
The provision for income taxes was a credit of $72 million this quarter, a decline of $4 million from the prior quarter.
Total
For the six
For the three months ended months ended
-------------------------------------------------------------------------
(Unaudited) April 30 January 31 April 30 April 30 April 30
($ millions) 2010 2010 2009 2010 2009
-------------------------------------------------------------------------
Business segment
income
Net interest income $ 2,058 $ 2,147 $ 2,087 $ 4,205 $ 4,053
Provision for
credit losses 338 371 489 709 770
Other income 1,815 1,759 1,509 3,574 2,894
Non-interest expenses 1,967 2,009 1,886 3,976 3,896
Provision for
income taxes 444 512 319 956 509
Non-controlling
interest in net
income of
subsidiaries 27 26 30 53 58
-------------------------------------------------------------------------
Net income $ 1,097 $ 988 $ 872 $ 2,085 $ 1,714
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on
equity(1)(2) 19.9% 17.4% 16.8% 18.7% 16.6%
Average assets(2)
($ billions) $ 505 $ 501 $ 520 $ 503 $ 525
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer above for a discussion of non-GAAP measures.
(2) Amounts for April 30, 2009, have been restated to reflect the impact
of the new accounting policy related to the classification and
impairment of financial assets implemented in the fourth quarter of
2009, effective November 1, 2008 (refer to Note 1 of the Consolidated
Financial Statements in the 2009 Annual Report for further details).
Geographic Highlights
For the six
For the three months ended months ended
-------------------------------------------------------------------------
(Unaudited) April 30 January 31 April 30 April 30 April 30
($ millions) 2010 2010 2009 2010 2009
-------------------------------------------------------------------------
Geographic segment
income
Canada $ 709 $ 676 $ 395 $ 1,385 $ 756
United States 137 131 55 268 78
Mexico 64 69 41 133 98
Other international 347 308 455 655 1,014
Corporate
adjustments (160) (196) (74) (356) (232)
-------------------------------------------------------------------------
Net income $ 1,097 $ 988 $ 872 $ 2,085 $ 1,714
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average assets ($ billions)
Canada $ 330 $ 332 $ 338 $ 331 $ 334
United States 52 48 43 50 47
Mexico 18 18 20 18 20
Other international 98 97 114 97 116
Corporate
adjustments 7 6 5 7 8
-------------------------------------------------------------------------
$ 505 $ 501 $ 520 $ 503 $ 525
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarterly Financial Highlights
For the three months ended
-------------------------------------------------------------------------
April 30 Jan. 31 Oct. 31 July 31 April 30 Jan. 31
2010 2010 2009 2009 2009 2009
-------------------------------------------------------------------------
Total revenue
($ millions) $ 3,873 $ 3,906 $ 3,735 $ 3,775 $ 3,596 $ 3,351
Total revenue
(TEB(1))
($ millions) 3,944 3,981 3,808 3,843 3,673 3,421
Net income
($ millions) 1,097 988 902 931 872 842
Basic earnings
per share($) 1.02 0.92 0.84 0.87 0.81 0.80
Diluted earnings
per share($) 1.02 0.91 0.83 0.87 0.81 0.80
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer above for a discussion of non-GAAP measures.
For the three months ended
------------------------------------------------------
Oct. 31 July 31
2008 2008
------------------------------------------------------
Total revenue
($ millions) $ 2,491 $ 3,374
Total revenue
(TEB(1))
($ millions) 2,586 3,477
Net income
($ millions) 315 1,010
Basic earnings
per share($) 0.28 0.99
Diluted earnings
per share($) 0.28 0.98
------------------------------------------------------
------------------------------------------------------
(1) Refer above for a discussion of non-GAAP measures.
Share Data
As at
-------------------------------------------------------------------------
April 30
(thousands of shares outstanding) 2010
-------------------------------------------------------------------------
Common shares 1,034,071(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)
Preferred shares Series 30 10,600(8)(15)
-------------------------------------------------------------------------
Series 2000-1 trust securities
issued by BNS Capital Trust 500(16)
Series 2002-1 trust securities
issued by Scotiabank Capital Trust 750(17)
Series 2003-1 trust securities
issued by Scotiabank Capital Trust 750(17)
Series 2006-1 trust securities
issued by Scotiabank Capital Trust 750(17)
Series 2009-1 trust securities
issued by Scotiabank Tier 1 Trust 650(17)
-------------------------------------------------------------------------
Scotiabank Trust Subordinated Notes -
Series A issued by Scotiabank Subordinated Notes Trust 1,000(17)
-------------------------------------------------------------------------
Outstanding options granted under
the Stock Option Plans to purchase common shares 23,941(1)(18)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) As at May 21, 2010, the number of outstanding common shares and
options were 1,034,134 and 23,878, 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. 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. 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. 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. 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) These shares are entitled to non-cumulative preferential cash
dividends payable quarterly. The initial dividend, if and when
declared, will be payable on July 28, 2010 in an amount of $0.2822
per share. Dividends, if and when declared, during the initial
five-year period ending on April 25, 2015, will be payable in an
amount of $0.240625 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 1.00%, multiplied by $25.00.
(16) Reported in capital instrument liabilities on the Consolidated
Balance Sheet.
(17) Reported in deposits on the Consolidated Balance Sheet.
(18) Included are 17,898 stock options with tandem stock appreciation
right (SAR) features.
Further details, including convertibility features, are available in Notes
13, 14 and 17 of the October 31, 2009, consolidated financial statements
presented in the 2009 Annual Report.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Income
For the six
For the three months ended months ended
-------------------------------------------------------------------------
(Unaudited) April 30 January 31 April 30 April 30 April 30
($ millions) 2010 2010 2009 2010 2009
-------------------------------------------------------------------------
Interest income
Loans(1) $ 2,889 $ 2,975 $ 3,484 $ 5,864 $ 7,745
Securities(1) 1,030 1,024 1,083 2,054 1,827
Securities
purchased under
resale agreements 39 36 99 75 255
Deposits with banks 71 75 119 146 328
-------------------------------------------------------------------------
4,029 4,110 4,785 8,139 10,155
-------------------------------------------------------------------------
Interest expenses
Deposits 1,649 1,599 2,111 3,248 4,863
Subordinated
debentures 57 71 69 128 132
Capital instrument
liabilities 9 9 9 18 18
Other 256 284 509 540 1,089
-------------------------------------------------------------------------
1,971 1,963 2,698 3,934 6,102
-------------------------------------------------------------------------
Net interest income 2,058 2,147 2,087 4,205 4,053
Provision for credit
losses (Note 4) 338 371 489 709 770
-------------------------------------------------------------------------
Net interest income
after provision
for credit losses 1,720 1,776 1,598 3,496 3,283
-------------------------------------------------------------------------
Other income
Card revenues 100 110 105 210 218
Deposit and
payment services 216 220 225 436 456
Mutual funds 140 125 63 265 143
Investment management,
brokerage and
trust services 199 192 172 391 350
Credit fees 212 205 203 417 388
Trading revenues 322 285 235 607 415
Underwriting fees and
other commissions 132 143 126 275 291
Foreign exchange
other than trading 89 81 95 170 217
Net gain (loss) on
securities, other
than trading 137 91 (133) 228 (277)
Securitization revenues 22 18 219 40 317
Other 246 289 199 535 376
-------------------------------------------------------------------------
1,815 1,759 1,509 3,574 2,894
-------------------------------------------------------------------------
Net interest and
other income 3,535 3,535 3,107 7,070 6,177
-------------------------------------------------------------------------
Non-interest expenses
Salaries and
employee benefits 1,143 1,187 1,024 2,330 2,154
Premises and
technology 360 371 379 731 767
Communications 81 86 89 167 179
Advertising and
business development 77 78 68 155 146
Professional 44 50 53 94 107
Business and
capital taxes 40 37 39 77 89
Other 222 200 234 422 454
-------------------------------------------------------------------------
1,967 2,009 1,886 3,976 3,896
-------------------------------------------------------------------------
Income before
the undernoted 1,568 1,526 1,221 3,094 2,281
Provision for
income taxes 444 512 319 956 509
Non-controlling
interest in net
income of
subsidiaries 27 26 30 53 58
-------------------------------------------------------------------------
Net income $ 1,097 $ 988 $ 872 $ 2,085 $ 1,714
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Preferred
dividends paid 49 49 51 98 88
-------------------------------------------------------------------------
Net income
available to
common
shareholders $ 1,048 $ 939 $ 821 $ 1,987 $ 1,626
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of
common shares
outstanding
(millions):
Basic 1,030 1,025 1,014 1,028 1,007
Diluted 1,031 1,028 1,016 1,029 1,010
-------------------------------------------------------------------------
Earnings per
common share
(in dollars)(2):
Basic $ 1.02 $ 0.92 $ 0.81 $ 1.93 $ 1.61
Diluted $ 1.02 $ 0.91 $ 0.81 $ 1.93 $ 1.61
-------------------------------------------------------------------------
Dividends per
common share
(in dollars) $ 0.49 $ 0.49 $ 0.49 $ 0.98 $ 0.98
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Certain comparative amounts have been reclassified to conform to current
period presentation.
(1) Amounts for April 30, 2009, have been restated to reflect the impact
of the new accounting policy related to the classification and
impairment of financial assets implemented in the fourth quarter of
2009, effective November 1, 2008 (refer to Note 1 of the Consolidated
Financial Statements in the 2009 Annual Report for further details).
(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
-------------------------------------------------------------------------
April 30 January 31 October 31
(Unaudited) ($ millions) 2010 2010 2009
-------------------------------------------------------------------------
Assets
Cash resources
Cash and non-interest-bearing
deposits with banks $ 3,743 $ 3,384 $ 3,355
Interest-bearing deposits with banks 48,047 48,867 34,343
Precious metals 5,587 5,085 5,580
-------------------------------------------------------------------------
57,377 57,336 43,278
-------------------------------------------------------------------------
Securities
Trading 69,219 58,061 58,067
Available-for-sale (Note 2) 50,489 54,378 55,699
Equity accounted investments 4,305 3,697 3,528
-------------------------------------------------------------------------
124,013 116,136 117,294
-------------------------------------------------------------------------
Securities purchased
under resale agreements 21,315 16,970 17,773
-------------------------------------------------------------------------
Loans
Residential mortgages 113,771 105,412 101,604
Personal and credit cards 60,964 61,500 61,048
Business and government 103,199 104,200 106,520
-------------------------------------------------------------------------
277,934 271,112 269,172
Allowance for credit losses (Note 4) 4,321 2,948 2,870
-------------------------------------------------------------------------
273,613 268,164 266,302
-------------------------------------------------------------------------
Other
Customers' liability under acceptances 7,655 7,652 9,583
Derivative instruments 22,770 25,373 25,992
Land, buildings and equipment 2,320 2,322 2,372
Goodwill 2,701 2,765 2,908
Other intangible assets 555 560 561
Other assets 13,806 10,348 10,453
-------------------------------------------------------------------------
49,807 49,020 51,869
-------------------------------------------------------------------------
$526,125 $507,626 $496,516
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and shareholders' equity
Deposits
Personal $124,255 $124,920 $123,762
Business and government 221,009 212,169 203,594
Banks 25,985 27,849 23,063
-------------------------------------------------------------------------
371,249 364,938 350,419
-------------------------------------------------------------------------
Other
Acceptances 7,655 7,652 9,583
Obligations related to securities
sold under repurchase agreements 40,781 39,471 36,568
Obligations related to
securities sold short 23,119 13,339 14,688
Derivative instruments 27,023 27,699 28,806
Other liabilities 23,826 22,164 24,682
Non-controlling
interest in subsidiaries 539 561 554
-------------------------------------------------------------------------
122,943 110,886 114,881
-------------------------------------------------------------------------
Subordinated debentures (Note 5) 5,881 5,945 5,944
-------------------------------------------------------------------------
Capital instrument liabilities 500 500 500
-------------------------------------------------------------------------
Shareholders' equity
Capital stock
Preferred shares 3,975 3,710 3,710
Common shares and contributed surplus 5,358 5,113 4,946
Retained earnings 20,894 20,353 19,916
Accumulated other comprehensive
income (loss)(Note 7) (4,675) (3,819) (3,800)
-------------------------------------------------------------------------
25,552 25,357 24,772
-------------------------------------------------------------------------
$526,125 $507,626 $496,516
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these interim consolidated
financial statements.
Consolidated Statement of Changes in Shareholders' Equity
For the six months ended
-------------------------------------------------------------------------
April 30 April 30
(Unaudited) ($ millions) 2010 2009
-------------------------------------------------------------------------
Preferred shares
Balance at beginning of period $ 3,710 $ 2,860
Issued 265 850
-------------------------------------------------------------------------
Balance at end of period 3,975 3,710
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Common shares and contributed surplus
Common shares:
Balance at beginning of period 4,946 3,829
Issued 386 800
-------------------------------------------------------------------------
Balance at end of period 5,332 4,629
-------------------------------------------------------------------------
Contributed surplus:
Balance at beginning of period - -
Stock option expense (Note 8) 26 -
-------------------------------------------------------------------------
Balance at end of period 26 -
-------------------------------------------------------------------------
Total 5,358 4,629
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings
Balance at beginning of period 19,916 18,549
Net income 2,085 1,714
Dividends: Preferred (98) (88)
Common (1,007) (990)
Other (2) (6)
-------------------------------------------------------------------------
Balance at end of period 20,894 19,179
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other comprehensive income (loss)(1)
Balance at beginning of period as previously reported (3,800) (3,596)
Cumulative effect of adopting new accounting policies - 595
-------------------------------------------------------------------------
Balance at beginning of period as restated (3,800) (3,001)
Other comprehensive income (loss) (875) (675)
-------------------------------------------------------------------------
Balance at end of period (4,675) (3,676)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total shareholders' equity at end of period $ 25,552 $ 23,842
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statement of Comprehensive Income
For the three For the six
months ended months ended
-------------------------------------------------------------------------
April 30 April 30 April 30 April 30
(Unaudited) ($ millions) 2010 2009 2010 2009
-------------------------------------------------------------------------
Net income $ 1,097 $ 872 $ 2,085 $ 1,714
-------------------------------------------------------------------------
Other comprehensive
income (loss), net of
income taxes (Note 7):
Net change in unrealized
foreign currency
translation losses (785) (323) (986) (449)
Net change in unrealized
gains (losses) on
available-for-sale
securities(1) (153) 66 3 (98)
Net change in losses on
derivative instruments
designated as
cash flow hedges 82 10 108 (128)
-------------------------------------------------------------------------
Other comprehensive
income (loss)(1) (856) (247) (875) (675)
-------------------------------------------------------------------------
Comprehensive income(1) $ 241 $ 625 $ 1,210 $ 1,039
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Comparative amounts have been restated to reflect the impact of the
new accounting policy related to the classification and impairment of
financial assets implemented in the fourth quarter of 2009, effective
November 1, 2008 (refer to Note 1 of the Consolidated Financial
Statements in the 2009 Annual Report for further details).
The accompanying notes are an integral part of these interim consolidated
financial statements.
Condensed Consolidated Statement of Cash Flows
For the three For the six
months ended months ended
-------------------------------------------------------------------------
Sources (uses) of cash flows April 30 April 30 April 30 April 30
(Unaudited) ($ millions) 2010 2009 2010 2009
-------------------------------------------------------------------------
Cash flows from
operating activities
Net income $ 1,097 $ 872 $ 2,085 $ 1,714
Adjustments to determine
net cash flows from (used in)
operating activities(1) 656 796 1,238 898
Changes in operating
assets and liabilities:
Net accrued interest
receivable and payable (93) (294) 24 (214)
Trading securities (11,759) (10,850) (11,905) (13,201)
Derivative assets (25) 3,648 (319) 5,660
Derivative liabilities 1,509 (1,930) 878 (1,593)
Other, net(1) (2,863) (1,397) (5,069) (3,730)
-------------------------------------------------------------------------
(11,478) (9,155) (13,068) (10,466)
-------------------------------------------------------------------------
Cash flows from
financing activities
Deposits 9,477 3,567 26,184 2,142
Obligations related to
securities sold under
repurchase agreements 1,615 6,878 4,695 6,441
Obligations related to
securities sold short 9,977 2,743 8,677 2,990
Subordinated debentures issued - 1,000 - 2,000
Subordinated debentures
redemptions/repayments - - (11) -
Preferred shares issued 265 - 265 600
Common shares issued 218 130 365 297
Cash dividends paid (554) (548) (1,105) (1,078)
Other, net 792 (2,716) 747 (2,364)
-------------------------------------------------------------------------
21,790 11,054 39,817 11,028
-------------------------------------------------------------------------
Cash flows from investing activities
Interest-bearing
deposits with banks (1,626) (112) (16,452) 2,839
Securities purchased
under resale agreements (4,338) (644) (3,558) 4,228
Loans, excluding
securitizations(1) (6,609) (3,418) (10,494) (9,755)
Loan securitizations 584 4,418 1,166 9,181
Non-trading securities(1) 2,754 (2,094) 3,804 (4,960)
Land, buildings and
equipment, net of disposals (70) (76) (75) (127)
Other, net(2) (532) (2) (596) (1,565)
-------------------------------------------------------------------------
(9,837) (1,928) (26,205) (159)
-------------------------------------------------------------------------
Effect of exchange rate changes
on cash and cash equivalents (116) (59) (156) (58)
-------------------------------------------------------------------------
Net change in cash
and cash equivalents 359 (88) 388 345
Cash and cash equivalents
at beginning of period 3,384 3,007 3,355 2,574
-------------------------------------------------------------------------
Cash and cash equivalents
at end of period(3) $ 3,743 $ 2,919 $ 3,743 $ 2,919
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash disbursements made for:
Interest $ 2,020 $ 2,849 $ 4,207 $ 6,463
Income taxes $ 439 $ 466 $ 1,217 $ 719
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Comparative amounts have been restated to reflect the impact of the
new accounting policy related to the classification and impairment of
financial assets implemented in the fourth quarter of 2009, effective
November 1, 2008 (refer to Note 1 of the Consolidated Financial
Statements in the 2009 Annual Report for further details).
(2) For the three and six months ended April 30, 2010, comprises
investments in subsidiaries and associated corporations, net of cash
and cash equivalents at the date of acquisition of $203 and $203,
respectively (April 30, 2009 - nil and nil), net of non-cash
consideration of common shares issued from treasury of nil and nil,
respectively (April 30, 2009 - nil and $500), and net of
non-cumulative preferred shares of nil and nil (April 30, 2009 - nil
and $250 respectively).
(3) Represents cash and non-interest-bearing deposits with banks.
The accompanying notes are an integral part of these interim consolidated
financial statements.
Notes to the Interim Consolidated Financial Statements (Unaudited)
These interim consolidated financial statements have been prepared in
accordance with Canadian Generally Accepted Accounting Principles (GAAP).
They should be read in conjunction with the consolidated financial
statements for the year ended October 31, 2009. The significant
accounting policies used in the preparation of these interim consolidated
financial statements are consistent with those used in the Bank's year-
end audited consolidated financial statements.
1. Changes in accounting policies
There were no new accounting policies adopted in the current fiscal
year. Note 1 to the Bank's 2009 annual audited consolidated financial
statements describes accounting policy changes.
2. Available-for-sale securities
An analysis of unrealized gains and losses on available-for-sale
securities is as follows:
As at
---------------------------------------------------------------------
April 30, 2010
---------------------------------------------------------------------
Gross Gross
unrealized unrealized Fair
($ millions) Cost(1) gains losses value
---------------------------------------------------------------------
Canadian federal
government debt $ 11,889 $ 92 $ 80 $ 11,901
Mortgage-backed
securities(2) 18,553 251 109 18,695
Canadian provincial
and municipal debt 712 8 2 718
U.S. treasury and other
U.S. agencies' debt 280 1 8 273
Other foreign governments'
debt 7,136 250 22 7,364
Bonds of designated
emerging markets 221 147 - 368
Other debt 8,155 234 132 8,257
Preferred shares 501 15 67 449
Common shares 2,179 297 12 2,464
---------------------------------------------------------------------
Total available-for-sale
securities $ 49,626 $ 1,295 $ 432 $ 50,489
---------------------------------------------------------------------
---------------------------------------------------------------------
As at
---------------------------------------------------------------------
October 31, 2009
---------------------------------------------------------------------
Gross Gross
unrealized unrealized Fair
($ millions) Cost(1) gains losses value
---------------------------------------------------------------------
Canadian federal
government debt $ 11,507 $ 163 $ 68 $ 11,602
Mortgage-backed
securities(2) 20,972 488 76 21,384
Canadian provincial
and municipal debt 1,164 20 - 1,184
U.S. treasury and other
U.S. agencies' debt 706 9 14 701
Other foreign governments'
debt 7,703 321 35 7,989
Bonds of designated
emerging markets 270 175 - 445
Other debt 9,609 224 234 9,599
Preferred shares 544 17 140 421
Common shares 2,211 224 61 2,374
---------------------------------------------------------------------
Total available-for-sale
securities $ 54,686 $ 1,641 $ 628 $ 55,699
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Cost for debt securities is amortized cost.
(2) Includes securities retained by the Bank in connection with its
mortgage securitizations. The outstanding balance of these
mortgage-backed securities is $18,202 (October 31, 2009 -
$20,864). Canada Mortgage and Housing Corporation provides a
guarantee of timely payment to NHA mortgage-backed security
investors.
The net unrealized gain on available-for-sale securities of
$863 million (October 31, 2009 - gain of $1,013 million) decreases to
a net unrealized gain of $796 million (October 31, 2009 - gain of
$828 million) after the impact of qualifying hedges is taken into
account. The net unrealized gain on available-for-sale securities is
recorded in accumulated other comprehensive income.
3. Sales of loans through securitizations
The Bank securitizes residential mortgages through the creation of
mortgage-backed securities. No credit losses are expected, as the
mortgages are insured. For the quarter ended April 30, 2010, the key
weighted-average assumptions used to measure the fair value at the
dates of securitization were a prepayment rate of 23.7%, an excess
spread of 1.2% and a discount rate of 1.6%. The following table
summarizes the Bank's sales.
For the three months For the six months
ended ended
---------------------------------------------------------------------
April 30 January 31 April 30 April 30 April 30
($ millions) 2010 2010 2009 2010 2009
---------------------------------------------------------------------
Net cash
proceeds(1) $ 584 $ 582 $ 4,418 $ 1,166 $ 9,181
Retained interest 18 19 225 37 395
Retained servicing
liability (4) (4) (24) (8) (53)
---------------------------------------------------------------------
598 597 4,619 1,195 9,523
Residential
mortgages
securitized(2) 590 590 4,420 1,180 9,247
---------------------------------------------------------------------
Net gain (loss) on
sale(3) $ 8 $ 7 $ 199 $ 15 $ 276
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Excludes insured mortgages which were securitized and retained by
the Bank of $132 for the three months ended April 30, 2010
(January 31, 2010 - $390; April 30, 2009 - $1,382) and $522 for
the six months ended April 30, 2010 (April 30, 2009 - $2,229).
These assets are classified as available-for-sale securities and
have an outstanding balance of $18,202 (refer to Note 2).
(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 months and six months ended April 30, 2010, these were
nil and nil respectively (three months ended January 31, 2010 -
nil; six months ended April 30, 2009 - $1,853).
(3) Net of issuance costs.
4. Impaired loans and allowance for credit losses
(a) Impaired loans
As at
---------------------------------------------------------------------
January 31 October 31
April 30, 2010 2010 2009
---------------------------------------------------------------------
Specific
($ millions) Gross allowance(1) Net Net Net
---------------------------------------------------------------------
By loan type:
Residential
mortgages $ 2,065 $ (930) $ 1,135 $ 1,093 $ 878
Personal and
credit cards 781 (628) 153 191 193
Business and
government 2,476 (1,289) 1,187 1,393 1,492
---------------------------------------------------------------------
Total $ 5,322(2) $ (2,847)(2) $ 2,475 $ 2,677 $ 2,563
---------------------------------------------------------------------
---------------------------------------------------------------------
By geography:
Canada $ 696 $ 777 $ 719
United States 145 229 354
Other International(2) 1,634 1,671 1,490
---------------------------------------------------------------------
Total $ 2,475 $ 2,677 $ 2,563
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) The specific allowance for impaired loans evaluated on an
individual basis totalled $1,286 (January 31, 2010 - $582;
October 31, 2009 - $446).
(2) Includes $1.4 billion related to the acquisition of R-G Premier
Bank of Puerto Rico (refer to Note 12), nil net impaired.
(b) Allowance for credit losses
As at and for the six months ended
-------------------------------------------------------------------------
April 30, 2010
-------------------------------------------------------------------------
Other,
including
Provision foreign Balance
Balance at for currency at end
beginning Write- Recover- credit adjust- of
($ millions) of period offs ies losses ment(1) period
-------------------------------------------------------------------------
Specific $ 1,381 $ (766) $ 130 $ 729 $ 1,382 $ 2,856(2)
Sectoral 44 - - (20) - 24
General 1,450 - - - - 1,450
-------------------------------------------------------------------------
$ 2,875 $ (766) $ 130 $ 709 $ 1,382(3)$ 4,330
-------------------------------------------------------------------------
-------------------------------------------------------------------------
---------------------------------
January October
31 2010 31 2009
---------------------------------
Balance Balance
at end at end
($ millions) of period of period
-----------------------------------
Specific $1,461(2) $1,381(2)
Sectoral 43 44
General 1,450 1,450
-----------------------------------
$ 2,954 $ 2,875
-----------------------------------
-----------------------------------
(1) As at April 30, 2010, includes $1,436 in specific allowances and
nil of general allowances related to acquisitions (January 31, 2010 -
$14 and nil; October 31, 2009 - $9 and nil).
(2) As at April 30, 2010, $9 has been recorded in other liabilities
(January 31, 2010 - $6; October 31, 2009 - $5).
(3) Includes $1.4 billion related to the acquisition of R-G Premier Bank
of Puerto Rico.
5. Subordinated debentures
On December 15, 2009, the Bank repurchased US$10.1 million of
Floating Rate Subordinated Debentures due August 2085.
6. Capital management
The Bank has a capital management process in place to measure, deploy
and monitor its available capital and assess its adequacy. The
objectives and practices of the Bank's capital management process are
consistent with those in place as at October 31, 2009.
Regulatory capital ratios
Regulatory capital ratios are determined in accordance with the
revised capital framework based on the International convergence of
capital measurement and capital standards: A revised framework,
commonly known as Basel II.
The Bank uses the Advanced Internal Ratings Based Approach (AIRB) to
compute credit risk for material Canadian, U.S. and European
portfolios. The Bank is targeting the remaining material credit
portfolios for application of AIRB approach between fiscal years 2011
and 2013, and currently uses the standardized approach for these
portfolios. The Bank uses both internal models and standardized
approaches to calculate market risk capital and the standardized
approach to calculate the operational risk capital requirements.
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 April 30, 2010. OSFI has also
prescribed an asset-to-capital leverage multiple; the Bank was in
compliance with this threshold as at April 30, 2010.
Bank regulatory capital consists of two components - Tier 1 capital,
which is more permanent, and Tier 2 capital as follows:
As at
---------------------------------------------------------------------
April 30 January 31 October 31
($ millions) 2010 2010 2009
---------------------------------------------------------------------
Shareholders' equity per
consolidated balance sheet $ 25,552 $ 25,357 $ 24,772
Components of accumulated other
comprehensive income excluded
from Tier 1 (228) (299) (117)
Capital instrument liabilities -
trust securities 3,400 3,400 3,400
Non-controlling interest in
subsidiaries 539 561 554
Goodwill deduction (2,701) (2,765) (2,908)
Other capital deductions(1) (2,442) (2,119) (2,051)
---------------------------------------------------------------------
Tier 1 capital 24,120 24,135 23,650
---------------------------------------------------------------------
---------------------------------------------------------------------
Qualifying subordinated debentures,
net of amortization 5,781 5,845 5,833
Trust subordinated notes 1,000 1,000 1,000
Other net capital items(2) (2,193) (1,930) (1,895)
---------------------------------------------------------------------
Tier 2 capital 4,588 4,915 4,938
---------------------------------------------------------------------
---------------------------------------------------------------------
Total regulatory capital 28,708 29,050 28,588
---------------------------------------------------------------------
---------------------------------------------------------------------
Total risk weighted assets $ 215,115 $ 215,891 $ 221,656
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital ratios
Tier 1 capital ratio 11.2% 11.2% 10.7%
Total capital ratio 13.3% 13.5% 12.9%
Assets-to-capital multiple 17.7x 16.8x 16.6x
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Comprised of 50% of all investments in certain specified
corporations and other items.
(2) Comprised of 50% of all investments in certain specified
corporations and other items, 100% of investments in insurance
entities, offset by eligible allowance for credit losses and net
after-tax unrealized gain on available-for-sale equity
securities.
Significant capital transactions
Series 30 non-cumulative five-year rate reset preferred shares
totaling $265 million were issued on April 12, 2010. Holders are
entitled to receive fixed non-cumulative preferential cash dividends,
payable quarterly, if and when declared, in an amount of $0.240625
per share for the initial five-year fixed rate period ending on April
25, 2015. The initial dividend, if and when declared, will be payable
on July 28, 2010, and will be $0.2822 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%, multiplied by $25.00.
Holders of Series 30 preferred shares have the option to convert
their shares into an equal number of Series 31 non-cumulative
floating rate preferred shares on April 26, 2015, and on April 26
every five years thereafter.
Series 31 preferred shares are entitled to receive floating rate non-
cumulative preferential cash dividends, if and when declared, in an
amount per share equal to the sum of the T-bill rate plus 1%,
multiplied by $25.00. If the Bank determines that, after giving
effect to any Election Notices received, there would be less than
1,000,000 Series 30 preferred shares issued and outstanding on the
applicable Series 30 Conversion Date, all of the issued and
outstanding Series 30 preferred shares will automatically be
converted on such Series 30 Conversion Date into an equal number of
Series 31 preferred shares.
With prior written approval of the Superintendent of Financial
Institutions Canada, Series 30 preferred shares and, if applicable,
Series 31 preferred shares, are redeemable by the Bank. These shares
are redeemable at $25.00 per share on April 26, 2015, and every five
years thereafter. On all other dates beginning April 26, 2015, Series
31 preferred shares are redeemable at $25.00 per share plus a
redemption premium of $0.50 per share. These preferred shares qualify
as Tier 1 capital.
7. Accumulated other comprehensive income (loss)
The components of accumulated other comprehensive income (loss) as at
April 30, 2010, and other comprehensive income (loss) for the six
months then ended were as follows:
Accumulated other comprehensive income (loss)
As at and for the six months ended
---------------------------------------------------------------------
April 30, 2010
---------------------------------------------------------------------
Opening Net Ending
($ millions) balance change balance
---------------------------------------------------------------------
Unrealized foreign
currency translation
losses, net of
hedging activities $ (3,917) $ (986) $ (4,903)(1)
Unrealized gains
(losses) on
available-for-sale
securities, net of
hedging activities 540 3 543 (2)
Gains (losses) on
derivative instruments
designated as cash
flow hedges (423) 108 (315)(4)
---------------------------------------------------------------------
Accumulated other
comprehensive
income (loss) $ (3,800) $ (875) $ (4,675)
---------------------------------------------------------------------
---------------------------------------------------------------------
As at and for the six months ended
---------------------------------------------------------------------
April 30, 2009
---------------------------------------------------------------------
Opening Transition Net Ending
($ millions) balance amount change balance
---------------------------------------------------------------------
Unrealized foreign
currency translation
losses, net of
hedging activities $ (2,181) $ - $ (449) $ (2,630)(1)
Unrealized gains
(losses) on
available-for-sale
securities, net of
hedging activities (949) 595(3) (98)(3) (452)(2)
Gains (losses) on
derivative instruments
designated as cash
flow hedges (466) - (128) (594)(4)
---------------------------------------------------------------------
Accumulated other
comprehensive
income (loss) $ (3,596) $ 595 $ (675) $ (3,676)
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Net of cumulative income tax expense of $803 (April 30, 2009 -
expense of $435).
(2) Net of cumulative income tax expense of $253 (April 30, 2009 -
benefit of $69).
(3) For further details refer to the new accounting policy related
to the classification and impairment of financial assets
implemented in the fourth quarter of 2009, effective November 1,
2008 in Note 1 of the Consolidated Financial Statements in the
2009 Annual Report.
(4) Net of cumulative income tax benefit of $103 (April 30, 2009 -
benefit of $239).
Other comprehensive income (loss)
The following table summarizes the changes in the components of other
comprehensive income (loss).
For the three months For the six months
ended ended
---------------------------------------------------------------------
April 30 April 30 April 30 April 30
($ millions) 2010 2009 2010 2009
---------------------------------------------------------------------
Net change in unrealized
foreign currency
translation losses
Net unrealized foreign
currency translation
losses(1) $ (1,127) $ (479) $ (1,423) $ (523)
Net gains on hedges of
net investments in self-
sustaining foreign
operations(2) 342 156 437 74
---------------------------------------------------------------------
(785) (323) (986) (449)
---------------------------------------------------------------------
---------------------------------------------------------------------
Net change in unrealized
gains (losses) on
available-for-sale
securities
Net unrealized gains
(losses) on available-
for-sale securities(3) (154) 85(4) 81 34(4)
Reclassification of net
(gains) losses to net
income(5) 1 (19) (78) (132)
---------------------------------------------------------------------
(153) 66 3 (98)
---------------------------------------------------------------------
---------------------------------------------------------------------
Net change in losses on
derivative instruments
designated as cash flow
hedges
Net gains (losses) on
derivative instruments
designated as cash flow
hedges(6) (167) 24 (299) (299)
Reclassification of net
(gains) losses to net
income(7) 249 (14) 407 171
---------------------------------------------------------------------
82 10 108 (128)
---------------------------------------------------------------------
Other comprehensive income
(loss) $ (856) $ (247) $ (875) $ (675)
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Net of income tax expense of nil.
(2) For the three and six months ended April 30, 2010, net of income
tax expense of $122 and $157 (April 30, 2009 - expense of $90 and
$117, respectively).
(3) For the three and six months ended April 30, 2010, net of income
tax benefit of $86 and $6 (April 30, 2009 - expense of $14 and
benefit of $15, respectively).
(4) Refer to the new accounting policy related to the classification
and impairment of financial assets implemented in the fourth
quarter of 2009, effective November 1, 2008 in Note 1 of the
Consolidated Financial Statements in the 2009 Annual Report for
further details.
(5) For the three and six months ended April 30, 2010, net of income
tax benefit of $7 and expense of $29 (April 30, 2009 - expense of
$4 and $6, respectively).
(6) For the three and six months ended April 30, 2010, net of income
tax benefit of $60 and $108 (April 30, 2009 - expense of $50 and
benefit of $88, respectively).
(7) For the three and six months ended April 30, 2010, net of income
tax benefit of $109 and $179 (April 30, 2009 - expense of $16 and
benefit of $67, respectively).
8. Stock based compensation
Equity Classified Stock Option Plan
Stock options issued after November 1, 2009, require settlement in
shares only and do not contain the tandem share appreciation
features, which provide the choice for settlement in cash or shares.
On December 11, 2009, the Bank granted 3,953,456 options with an
exercise price of $47.75 per option and at a weighted average fair
value of $8.47 to selected employees, under the terms of the amended
Employee Stock Option Plan. The Black Scholes option pricing model
was used to determine the grant date fair value after incorporating
appropriate assumptions as they relate to volatility, expected term,
discount rate and dividend yield. These stock options vest evenly
over a four-year period and are exercisable no later than 10 years
after the date of grant. The fair value on the date of grant is
expensed over the vesting period. Where the employee is eligible to
retire prior to the vesting date, the fair value is expensed over the
period between the grant date and the date of retirement eligibility.
These expensed amounts are recorded in non-interest expenses in the
Consolidated Statement of Income with a corresponding credit to
contributed surplus within Shareholders' equity in the Consolidated
Balance Sheet. An amount of $26 million was recorded in contributed
surplus as at April 30, 2010.
9. Employee future benefits
Employee future benefits include pensions and other post-retirement
benefits, post-employment benefits and compensated absences. The
following table summarizes the expenses for the Bank's principal
plans(1).
For the three months For the six months
ended ended
---------------------------------------------------------------------
April 30 January 31 April 30 April 30 April 30
($ millions) 2010 2010 2009 2010 2009
---------------------------------------------------------------------
Benefit expenses
Pension plans $ 5 $ 4 $ (12) $ 9 $ (14)
Other benefit plans 29 29 28 58 57
---------------------------------------------------------------------
$ 34 $ 33 $ 16 $ 67 $ 43
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Other plans operated by certain subsidiaries of the Bank are not
considered material and are not included in this note.
10. Segmented results of operations
Scotiabank is a diversified financial services institution that
provides a wide range of financial products and services to retail,
commercial and corporate customers around the world. The Bank is
organized into three main operating segments: Canadian Banking,
International Banking and Scotia Capital.
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 2009 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 April 30, 2010
---------------------------------------------------------------------
Taxable equivalent Inter-
basis(1) Canadian national Scotia
($ millions) Banking Banking Capital Other(2) Total
---------------------------------------------------------------------
Net interest income $ 1,287 $ 822 $ 275 $ (326) $ 2,058
Provision for credit
losses 189 173 (24) - 338
Other income 664 447 583 121 1,815
Non-interest expenses 954 681 299 33 1,967
Provision for income
taxes 224 100 192 (72) 444
Non-controlling
interest in net
income of
subsidiaries - 27 - - 27
---------------------------------------------------------------------
Net income(3) $ 584 $ 288 $ 391 $ (166) $ 1,097
---------------------------------------------------------------------
---------------------------------------------------------------------
Average assets
($ billions) $ 201 $ 82 $ 156 $ 66 $ 505
---------------------------------------------------------------------
---------------------------------------------------------------------
For the three months ended January 31, 2010
---------------------------------------------------------------------
Taxable equivalent Inter-
basis(1) Canadian national Scotia
($ millions) Banking Banking Capital Other(2) Total
---------------------------------------------------------------------
Net interest income $ 1,298 $ 940 $ 304 $ (395) $ 2,147
Provision for credit
losses 180 177 14 - 371
Other income 623 434 596 106 1,759
Non-interest expenses 962 706 307 34 2,009
Provision for income
taxes 218 172 198 (76) 512
Non-controlling
interest in net
income of
subsidiaries 1 25 - - 26
---------------------------------------------------------------------
Net income(3) $ 560 $ 294 $ 381 $ (247) $ 988
---------------------------------------------------------------------
---------------------------------------------------------------------
Average assets
($ billions) $ 199 $ 83 $ 160 $ 59 $ 501
---------------------------------------------------------------------
---------------------------------------------------------------------
For the three months ended April 30, 2009
---------------------------------------------------------------------
Taxable equivalent Inter-
basis(1) Canadian national Scotia
($ millions) Banking Banking Capital Other(2) Total
---------------------------------------------------------------------
Net interest income $ 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 $ 410 $ 332 $ 328 $ (198) $ 872
---------------------------------------------------------------------
---------------------------------------------------------------------
Average assets
($ billions) $ 191 $ 95 $ 190(4) $ 44 $ 520(4)
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Refer above for a discussion of non-GAAP measures.
(2) 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 April 30, 2010 ($71),
January 31, 2010 ($75), and April 30, 2009 ($77), 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.
(3) As a result of a transfer of $10 billion of broker-sourced
deposits to Canadian Banking from Group Treasury in the first
quarter, the net loss for the three months ended April 30, 2010,
decreased by $34 million (January 31, 2010 - $37 million).
(4) Amounts have been restated to reflect the impact of the new
accounting policy related to the classification and impairment of
financial assets implemented in the fourth quarter of 2009,
effective November 1, 2008 (for further details refer to Note 1
of the Consolidated Financial Statements in the 2009 Annual
Report for further details).
For the six months ended April 30, 2010
---------------------------------------------------------------------
Taxable equivalent Inter-
basis(1) Canadian national Scotia
($ millions) Banking Banking Capital Other(2) Total
---------------------------------------------------------------------
Net interest income $ 2,585 $ 1,762 $ 579 $ (721) $ 4,205
Provision for credit
losses 369 350 (10) - 709
Other income 1,287 881 1,179 227 3,574
Non-interest expenses 1,916 1,387 606 67 3,976
Provision for income
taxes 442 272 390 (148) 956
Non-controlling
interest in net
income of
subsidiaries 1 52 - - 53
---------------------------------------------------------------------
Net income(3) $ 1,144 $ 582 $ 772 $ (413) $ 2,085
---------------------------------------------------------------------
---------------------------------------------------------------------
Average assets
($ billions) $ 200 $ 83 $ 158 $ 62 $ 503
---------------------------------------------------------------------
---------------------------------------------------------------------
For the six months ended April 30, 2009
---------------------------------------------------------------------
Taxable equivalent Inter-
basis(1) Canadian national Scotia
($ millions) Banking Banking Capital Other(2) Total
---------------------------------------------------------------------
Net interest income $ 2,293 $ 1,906 $ 683 $ (829) $ 4,053
Provision for credit
losses 343 231 169 27 770
Other income 1,080 820 868 126 2,894
Non-interest expenses 1,833 1,501 522 40 3,896
Provision for income
taxes 349 216 232 (288) 509
Non-controlling
interest in net
income of
subsidiaries - 58 - - 58
---------------------------------------------------------------------
Net income $ 848 $ 720 $ 628 $ (482) $ 1,714
---------------------------------------------------------------------
---------------------------------------------------------------------
Average assets
($ billions) $ 190 $ 95 $ 192(4) $ 48 $ 525(4)
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Refer above for a discussion of non-GAAP measures.
(2) 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 April 30, 2010 ($71),
January 31, 2010 ($75), and April 30, 2009 ($77), and for the six
months ended April 30, 2010 ($146), and April 30, 2009 ($147) 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.
(3) As a result of a transfer of $10 billion of broker-sourced
deposits to Canadian Banking from Group Treasury in the first
quarter, the net loss for the six months ended April 30, 2010,
decreased by $71 million.
(4) Amounts have been restated to reflect the impact of the new
accounting policy related to the classification and impairment of
financial assets implemented in the fourth quarter of 2009,
effective November 1, 2008 (for further details refer to Note 1
of the Consolidated Financial Statements in the 2009 Annual
Report for further details).
11. 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, 2009.
(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) As at
---------------------------------------------------------------------
January 31 October 31
April 30, 2010 2010 2009
---------------------------------------------------------------------
Standard-
($ millions) AIRB(2) ized Total Total Total
---------------------------------------------------------------------
By exposure
sub-type
Non-retail(2)
Drawn(3) $ 146,871 $ 68,619 $ 215,490 $ 218,046 $ 209,324
Undrawn
commitments 51,204 3,522 54,726 58,894 57,887
Other
exposures(4) 57,739 2,880 60,619 61,642 62,351
---------------------------------------------------------------------
Total non-
retail $ 255,814 $ 75,021 $ 330,835 $ 338,582 $ 329,562
---------------------------------------------------------------------
---------------------------------------------------------------------
Retail
Drawn(5) $ 118,617 $ 27,139 $ 145,756 $ 140,984 $ 138,874
Undrawn
commitments 6,137 - 6,137 6,110 6,664
Total retail $ 124,754 $ 27,139 $ 151,893 $ 147,094 $ 145,538
---------------------------------------------------------------------
Total $ 380,568 $ 102,160 $ 482,728 $ 485,676 $ 475,100
---------------------------------------------------------------------
---------------------------------------------------------------------
(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.
(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 April 30, 2010, 83% (January 31, 2010 - 82%; October 31, 2009 -
80%) 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, 2009.
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.
Retail standardized portfolio
The retail standardized portfolio of $27 billion as at April 30, 2010
(January 31, 2010 - $25 billion; October 31, 2009 - $25 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,
$16 billion (January 31, 2010 - $14 billion; October 31, 2009 -
$13 billion) was represented by mortgages and loans secured by
residential real estate, mostly with a loan-to-value ratio of below
80%.
Loans past due but not impaired(1)
A loan is considered past due when a counterparty has not made a
payment by the contractual due date. The following table presents the
carrying value of loans that are past due but not classified as
impaired because they are either less than 90 days past due, or fully
secured and collection efforts are reasonably expected to result in
repayment, or restoring it to a current status in accordance with the
Bank's policy.
As at
---------------------------------------------------------------------
April 30, 2010
---------------------------------------------------------------------
91
31-60 61-90 days and
($ millions) days days greater Total
---------------------------------------------------------------------
Residential
mortgages $ 1,108 $ 435 $ 218 $ 1,761
Personal and
credit cards 398 203 60 661
Business and
government 290 204 136 630
---------------------------------------------------------------------
Total $ 1,796 $ 842 $ 414 $ 3,052
---------------------------------------------------------------------
---------------------------------------------------------------------
As at
---------------------------------------------------------------------
October 31, 2009
---------------------------------------------------------------------
91
31-60 61-90 days and
($ millions) days days greater Total
---------------------------------------------------------------------
Residential
mortgages $ 1,173 $ 463 $ 302 $ 1,938
Personal and
credit cards 429 220 61 710
Business and
government 342 201 168 711
---------------------------------------------------------------------
Total $ 1,944 $ 884 $ 531 $ 3,359
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Loans past due 30 days or less are not presented in this analysis
as they are not administratively considered past due.
(b) Market risk
Market risk arises from changes in market prices and rates (including
interest rates, credit spreads, equity prices, foreign exchange rates
and commodity prices), the correlations among them, and their levels
of volatility.
Interest rate risk
Interest rate risk, inclusive of credit spread risk, is the risk of
loss due to the following: changes in the level, slope and curvature
of the yield curve; the volatility of interest rates; mortgage
prepayment rates; changes in the market price of credit; and the
creditworthiness of a particular issuer.
Interest rate sensitivity
Based on the Bank's interest rate positions, the following table
shows the pro-forma after-tax impact on the Bank's net income over
the next twelve months and economic value of shareholders' equity of
an immediate and sustained 100 and 200 basis point (bp) increase and
decrease in interest rates across major currencies as defined by the
Bank.
As at
-------------------------------------------------------------------------
April 30, 2010
-------------------------------------------------------------------------
Net income Economic value of equity
-------------------------------------------------------------
($ Canadian Other Canadian Other
millions) dollar currencies Total dollar currencies Total
-------------------------------------------------------------------------
100 bp
increase $ 54 $ 47 $ 101 $ (151) $ (308) $ (459)
100 bp
decrease (125) (50) (175) (5) 405 400
-------------------------------------------------------------------------
200 bp
increase $ 136 $ 91 $ 227 $ (312) $ (587) $ (899)
200 bp
decrease (221) (106) (327) 26 822 848
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at
---------------------------------------------------
January 31, 2010 April 30, 2009
---------------------------------------------------
Economic Economic
($ Net value of Net value of
millions) income equity income equity
---------------------------------------------------
100 bp
increase $ 180 $ (239) $ 196 $ (148)
100 bp
decrease (165) 268 (156) 194
---------------------------------------------------
200 bp
increase $ 339 $ (531) $ 383 $ (286)
200 bp
decrease (375) 577 (422) 496
---------------------------------------------------
---------------------------------------------------
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 April 30, 2010, 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 $36 million (January 31, 2010 - $36 million; April 30,
2009 - $37 million) in the absence of hedging activity, primarily
from exposure to U.S. dollars. A similar change in the Canadian
dollar as at April 30, 2010, would increase (decrease) the unrealized
foreign currency translation losses in the accumulated other
comprehensive income section of shareholders' equity by approximately
$189 million (January 31, 2010 - $186 million; April 30, 2009 -
$190 million), net of hedging.
Equity risk
Equity risk is the risk of loss due to adverse movements in equity
prices. The Bank is exposed to equity risk through its available-for-
sale equity portfolios. The fair value of available-for-sale equity
securities is shown in Note 2.
Trading portfolio risk management
Market risk arising from the Bank's trading activities can be
aggregated using VaR and stress testing measures. The table below
shows the Bank's VaR by risk factor:
One-day VaR by risk factor
-------------------------------------------------------------------------
As at For the three months ended As at As at
April April 30, 2010 January April
30 ------------------------------- 31 30
($ millions) 2010 Average High Low 2010 2009
-------------------------------------------------------------------------
Interest rate $ 14.0 $ 12.2 $ 16.5 $ 10.2 $ 11.9 $ 13.9
Equities 3.6 6.5 10.8 2.7 6.4 2.2
Foreign exchange 1.5 1.5 3.4 0.6 2.1 2.5
Commodities 1.9 1.9 2.8 1.0 1.8 2.4
Diversification (6.0) (8.7) n/a n/a (8.1) (5.6)
-------------------------------------------------------------------------
All-Bank VaR $ 15.0 $ 13.4 $ 16.1 $ 10.3 $ 14.1 $ 15.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 $167 million (January 31, 2010 - $197 million;
April 30, 2009 - loss of $277 million). The maximum length of cash
flow hedges outstanding was less than 10 years for all periods
presented.
Any hedge ineffectiveness is measured and recorded in current period
income in the Consolidated Statement of Income. The Bank recorded a
gain of $44 million during the three months ended April 30, 2010
(January 31, 2010 - gain of $27 million; April 30, 2009 - gain of
$21 million), of which a gain of $10 million (January 31, 2010 - gain
of $1 million; April 30, 2009 - gain of $6 million) related to cash
flow hedges, due to the ineffective portion of designated hedges. For
the six months ended April 30, 2010, the Bank recorded a gain of
$71 million (April 30, 2009 - gain of $48 million) of which a gain of
$11 million (April 30, 2009 - gain of $9 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 $2.8 billion as at April 30, 2010
(January 31, 2010 - $3.2 billion; October 31, 2009 - $3.5 billion).
The change in fair value that was recorded through trading income for
the three and six months ended April 30, 2010, was a gain of $90
million (January 31, 2010 - gain of $99 million; April 30, 2009 -
gain of $538 million) and a gain of $189 million (April 30, 2009 -
gain of $228 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 $2 million as at
April 30, 2010 (January 31, 2010 - $18 million; October 31, 2009 -
$47 million). The change in fair value that was recorded through
trading income for the three and six months ended April 30, 2010, was
a loss of $5 million (January 31, 2010 - loss of $1 million; April
30, 2009 - loss of less than $1 million) and a loss of $6 million
(April 30, 2009 - gain of $5 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 $3,796 million as at April 30, 2010
(January 31, 2010 - $3,897 million; October 31, 2009 -
$4,283 million). The change in fair value that was recorded through
trading and net interest income for the three and six months ended
April 30, 2010, was a loss of $24 million (January 31, 2010 - gain of
$59 million; April 30, 2009 - gain of $103 million) and a gain of
$35 million (April 30, 2009 - gain of $125 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
$87 million as at April 30, 2010 (January 31, 2010 - $59 million;
October 31, 2009 - $22 million). The change in fair value that was
recorded through net interest income for the three and six months
ended April 30, 2010, was a gain of $2 million (January 31, 2010 -
loss of $1 million; April 30, 2009 - gain of less than $1 million)
and a gain of $1 million (April 30, 2009 - loss of $2 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 April 30, 2010, the
Bank is contractually obligated to pay $87 million to the holders of
the notes at maturity (January 31, 2010 - $58 million; October 31,
2009 - $22 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 April 30, 2010, the fair values of the bond
assets and preferred shares were $212 million (January 31, 2010 -
$243 million; October 31, 2009 - $257 million) and $64 million
(January 31, 2010 - $68 million; October 31, 2009 - $67 million),
respectively.
Due to the reclassification of bond assets, for the three and six
months ended April 30, 2010, the Bank recorded a pre-tax other
comprehensive income gain of $5 million (January 31, 2010 - gain of
$9 million; April 30, 2009 - gain of $12 million) and a gain of
$14 million (April 30, 2009 - loss of $3 million), respectively,
relating to fair value movements. Due to the reclassification of
preferred shares, for the three and six months ended April 30, 2010,
the Bank recorded a pre-tax other comprehensive income loss of
$2 million (January 31, 2010 - gain of $4 million; April 30, 2009 -
gain of $2 million) and a gain of $2 million (April 30, 2009 - loss
of $2 million), respectively, relating to fair value movements. If
these reclassifications had not been made, these gains and losses
would have been recorded in the Consolidated Statement of Income.
Fair value hierarchy
The Bank values instruments carried at fair value using quoted market
prices, where available. Quoted market prices represent a Level 1
valuation. When quoted market prices are not available, the Bank
maximizes the use of observable inputs within valuation models. When
all significant inputs are observable, the valuation is classified as
Level 2. Valuations that require the significant use of unobservable
inputs are considered Level 3. The following table outlines the fair
value hierarchy of instruments carried at fair value.
As at
-------------------------------------------------------------------------
April 30, 2010(1)
-------------------------------------------------------------------------
($ millions) Level 1 Level 2 Level 3 Total
-------------------------------------------------------------------------
Assets:
Trading securities(2) $ 52,253 $ 15,514 $ 1,452 $ 69,219
Available-for-sale
securities(3) 17,056 31,209 1,298 49,563
Derivative instruments 129 22,029 612 22,770
Liabilities:
Obligations related to
securities sold short $ 19,218 $ 3,898 $ 3 $ 23,119
Derivative instruments 158 25,222 1,643 27,023
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at
-------------------------------------------------------------------------
October 31, 2009(1)
-------------------------------------------------------------------------
($ millions) Level 1 Level 2 Level 3 Total
-------------------------------------------------------------------------
Assets:
Trading securities(2) $ 40,408 $ 15,683 $ 1,976 $ 58,067
Available-for-sale
securities(3) 16,485 36,861 1,395 54,741
Derivative instruments 81 24,683 1,228 25,992
Liabilities:
Obligations related to
securities sold short $ 11,707 $ 2,981 $ - $ 14,688
Derivative instruments 105 26,188 2,513 28,806
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Loans and deposit notes designated as trading are classified as
Level 2.
(2) Includes securities designated as trading. Level 2 trading securities
are comprised of $5,893 (October 31, 2009 - $4,861) of bonds mainly
issued by foreign governments and $9,621 (October 31, 2009 - $10,822)
of corporate bonds and other debt and equity instruments which
generally trade in public markets.
(3) Excludes available-for-sale equity securities that are not quoted
in an active market of $926 (October 31, 2009 - $958). Level 2
available-for-sale securities include $5,367 (October 31, 2009 -
$7,204) of bonds mainly issued by foreign governments and $6,959
(October 31, 2009 - $8,204) of corporate bonds and other debt
instruments which generally trade in public markets. The remaining
Level 2 available-for-sale securities are primarily comprised of
mortgage-backed securities guaranteed by Canada Mortgage and Housing
Corporation.
12. Acquisitions
On April 9, 2010, the Bank's affiliate, Thanachart Bank, acquired a
48% stake of Thailand's Siam City Bank. Scotiabank owns 49% of
Thanachart Bank. In accordance with securities laws in Thailand, upon
closing of the 48% stake, Thanachart Bank launched a tender offer for
the remaining shares in Siam City Bank. Subsequent to completion of
the tender offer and any additional regulatory approvals, Thanachart
Bank and Siam City Bank will be merged. Scotiabank will continue to
own 49% of the merged bank, to be known as Thanachart Bank. As part
of the financing for this transaction, Scotiabank subscribed to
additional shares in Thanachart Bank of approximately $650 million.
This investment is accounted for under the equity method of
accounting.
On April 30, 2010, the Bank through its subsidiary, Scotiabank de
Puerto Rico, acquired R-G Premier Bank of Puerto Rico. Under the
terms of the transaction, Scotiabank acquired US $5.6 billion in
assets, which includes US $5.3 billion in loans covered under a loss-
sharing agreement with the Federal Deposit Insurance Corporation
(FDIC). Under this agreement, the FDIC guarantees 80% of
loan losses. The acquisition also includes US $2.2 billion in
deposits with the remainder financed by FDIC. To facilitate the
transaction, the capital of Scotiabank de Puerto Rico was increased
by a contribution of US $460 million from the Bank. The purchase
price allocation has not been finalized as the Bank is completing its
valuation of the assets acquired and liabilities assumed.
SHAREHOLDER INFORMATION
Direct deposit service
Shareholders may have dividends deposited directly into accounts held at financial institutions which are members of the Canadian Payments Association. To arrange direct deposit service, please write to the transfer agent.
Dividend and Share Purchase Plan
Scotiabank's dividend reinvestment and share purchase plan allows common and preferred shareholders to purchase additional common shares by reinvesting their cash dividend without incurring brokerage or administrative fees.
As well, eligible shareholders may invest up to $20,000 each fiscal year to purchase additional common shares of the Bank. Debenture holders may apply interest on fully registered Bank subordinated debentures to purchase additional common shares. All administrative costs of the plan are paid by the Bank.
For more information on participation in the plan, please contact the transfer agent.
Dividend dates for 2010
Record and payment dates for common and preferred shares, subject to approval by the Board of Directors.
Record Date Payment Date
January 5 January 27
April 6 April 28
July 6 July 28
October 5 October 27
Annual Meeting date for fiscal 2010
The Annual Meeting of Shareholders of the Bank for the fiscal year ending October 31, 2010, will be held in Halifax, Nova Scotia, on Tuesday, April 5, 2011.
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 June 1, 2010, at 2:00 pm 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 1-800-814-4860 (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 June 1, 2010, to June 15, 2010, by calling (416) 640-1917 or 1-877-289-8525 and entering the identification code 4299399 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) 933-1273
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.com
Rapport trimestriel disponible en français
Le Rapport annuel et les états financiers de la Banque sont publiés en français et en anglais et distribués aux actionnaires dans la version de leur choix. Si vous préférez que la documentation vous concernant vous soit adressée en français, veuillez en informer Relations publiques, Affaires de la société et Affaires gouvernementales, La Banque de Nouvelle-Écosse, 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.
For further information: Peter Slan, Senior Vice-President, Investor Relations, (416) 933-1273; Lauren Mostowyk, Scotiabank Public Affairs, (416) 866-6806