Tuesday, May 27, 2008
Scotiabank reports improved second quarter earnings of $980 million
Diluted earnings per share (EPS) were
"Scotiabank's performance was solid during a challenging quarter for
global financial markets," said Scotiabank President and CEO
"Our Domestic Banking platform is performing very well in a competitive market. The division experienced strong growth in assets, with market share gains in residential mortgages, total deposits and mutual funds.
"The combination of organic growth and contributions from acquisitions
fuelled a solid year-over-year increase in earnings in International Banking.
These results were achieved notwithstanding the negative impact of foreign
currency translation due to the rapid rise of the Canadian dollar in 2007. We
continue to see assets increasing in all regions with solid contributions from
our most recent acquisition in
"Scotia Capital's results showed strength during a turbulent period, with record results in ScotiaMoccatta, strong loan growth, and widening spreads. However, trading results were below the high levels a year ago, but rebounded from the first quarter.
"In a period when many financial institutions experienced significant problems in global and domestic capital markets, our strong risk management and moderate exposures resulted in minimal writedowns. Our loan portfolios performed very well with Scotia Capital showing net recoveries, and loan losses being well contained in other business lines.
"We continue to prudently manage our capital position to ensure that it is adequate to support strategic acquisitions and ongoing business development opportunities.
"Despite difficult markets, we are on track to achieve three of our four
key financial and operational targets: ROE, productivity and maintaining
strong capital ratios. This is a reflection of the relative strength of our
businesses and strategies. However, the challenging global financial markets
continue to impact earnings and, as a result, it is unlikely that we will meet
our EPS growth objective set at the end of last year. At the same time, our
rebound in earnings this quarter, the continued solid asset growth in all
three business lines and improved funding costs, all point to a stronger
second half in 2008. In view of these factors and our strong and improving
capital position, we increased our quarterly dividend
Year-to-date performance versus key 2008 financial and operational
objectives was as follows:
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1. Target: Earn a return on equity (ROE)(1) of 20 to 23%. For the six
months Scotiabank earned an ROE of 20%.
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2. Target: Generate growth in earnings per common share (diluted) of 7
to 12%. Our year-over-year growth in earnings per share was negative
12%.
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3. Target: Maintain a productivity ratio(1) of less than 57%.
Scotiabank's ratio was 55.6% for the six months.
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4. Target: Maintain sound capital ratios. At 9.6%, Scotiabank's Tier 1
capital ratio remains strong by Canadian and International standards.
(1) Refer to non-GAAP measures discussion below.
Live audioWeb broadcast of the Bank's analysts' conference call.
See below for details.
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) 2008 2008 2007 2008 2007
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Operating results
($ millions)
Net interest income 1,873 1,814 1,794 3,687 3,570
Net interest
income(TEB(1)) 1,973 1,932 1,903 3,905 3,784
Total revenue 3,172 2,839 3,102 6,011 6,211
Total revenue(TEB(1)) 3,272 2,957 3,211 6,229 6,425
Provision for credit
losses 153 111 20 264 83
Non-interest expenses 1,794 1,669 1,726 3,463 3,450
Provision for income
taxes 209 193 286 402 563
Provision for income
taxes(TEB(1)) 309 311 395 620 777
Net income 980 835 1,039 1,815 2,059
Net income available
to common
shareholders 958 814 1,028 1,772 2,040
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Operating performance
Basic earnings per
share($) 0.97 0.83 1.04 1.80 2.06
Diluted earnings per
share($) 0.97 0.82 1.03 1.79 2.04
Return on equity
(%)(1) 21.4 18.3 22.4 20.0 22.4
Productivity ratio(%)
(TEB(1)) 54.8 56.5 53.8 55.6 53.7
Net interest margin
on total average
assets (%) (TEB(1)) 1.76 1.79 1.93 1.78 1.92
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Balance sheet
information
($ millions)
Cash resources and
securities 129,749 130,893 131,296
Loans and
acceptances 267,875 260,501 226,310
Total assets 452,573 449,422 411,710
Deposits 322,438 316,797 291,603
Preferred shares 2,210 1,865 1,290
Common shareholders'
equity 18,213 18,128 18,705
Assets under
administration 202,266 195,155 208,426
Assets under
management 32,917 31,704 30,448
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Capital measures(2)
Tier 1 capital
ratio (%) 9.6 9.0 10.1
Total capital
ratio (%) 11.7 10.2 11.4
Tangible common
equity to risk-
weighted assets
(1) (%) 7.5 7.2 8.0
Risk-weighted assets
($ millions) 218,878 234,876 213,078
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Credit quality
Net impaired
loans(3)
($ millions) 845 689 579
General allowance
for credit losses
($ millions) 1,323 1,298 1,298
Net impaired loans
as a % of loans and
acceptances(3) 0.32 0.26 0.26
Specific provision
for credit losses
as a % of average
loans and
acceptances
(annualized) 0.24 0.18 0.08 0.21 0.10
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Common share
information
Share price ($)
High 50.00 54.00 54.73 54.00 54.73
Low 42.00 43.10 49.34 42.00 48.80
Close 47.82 48.19 53.39
Shares outstanding
(millions)
Average - Basic 986 985 992 985 992
Average - Diluted 992 992 1,001 992 1,001
End of period 987 985 990
Dividends per
share($) 0.47 0.47 0.42 0.94 0.84
Dividend yield (%) 4.1 3.9 3.2 3.9 3.2
Dividend payout
ratio(4) (%) 48.4 56.9 40.6 52.3 40.9
Market capitalization
($ millions) 47,194 47,487 52,840
Book value per
common share($) 18.45 18.40 18.90
Market value to book
value multiple 2.6 2.6 2.8
Price to earnings
multiple (trailing
4 quarters) 12.7 12.5 13.7
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Other information
Employees(5) 62,143 62,002 55,926
Branches and
offices(5) 2,529 2,458 2,242
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(1) Non-GAAP measure. Refer to below for a discussion of these measures.
(2) Effective November 1, 2007, regulatory capital ratios are determined
in accordance with Basel II rules. Comparative amounts for prior
periods were determined in accordance with Basel I rules.
(3) Net impaired loans are impaired loans less the specific allowance for
credit losses.
(4) Represents common dividends for the period as a percentage of the net
income available to common shareholders for the period.
(5) Certain amounts for prior periods have been restated to include final
numbers for all new acquisitions.
Strategies for success
The volatility in global financial markets carried forward into the second quarter. Our Bank met the challenges and results improved versus the first quarter - due to continued solid performances from most areas of our businesses. We remain confident that we will achieve most of our key financial and operational objectives, but it is unlikely that we will meet our earnings growth objective.
We have the right growth strategy, focused on diversification by business and by geography, and the right priorities to ensure our long-term success: sustainable revenue growth, effective capital management and leadership.
We continued to find new ways to generate and sustain revenue growth by
helping our customers become better off financially. During the quarter, we
introduced innovative new products and services, such as the Scotia Global
Climate Change Fund - the first of its kind in
We continued to use our capital prudently keeping our balance sheet strong
yet being able to support overall asset growth and strategic acquisitions -
such as our purchase of certain assets from Grupo Altas Cumbres of
In terms of leadership, we have tremendous bench strength and continue to develop leaders by broadening their experience in different businesses and markets. We also enhanced our people development with the launch of an internal online resource site that provides Scotiabank's current and aspiring leaders with tools to support career development plans.
Although the start of the year has been challenging, we achieved a rebound in earnings this quarter. This overall performance, combined with improved funding costs, continued solid asset growth in all three of our business lines, and our effective risk and cost management, points to a stronger second half in 2008. As well, we continue to believe in the ability of our great team of people to effectively execute our strategies and priorities over the balance of the year.
(signed)
Rick Waugh
President and Chief Executive Officer
2008 Objectives -Our Balanced Scorecard
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Financial
- Return on equity of 20-23%
- Diluted earnings per share growth of 7-12%
- Long-term shareholder value through increases in dividends and stock
price appreciation
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Operational
- Productivity ratio of <57%
- Sound ratings
- Strong practices in corporate governance and compliance processes
- Sound capital ratios
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Customer
- High levels of customer satisfaction and loyalty
- Deeper relationships with existing customers
- New customer acquisition
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People
- High levels of employee satisfaction and engagement
- Enhance diversity of workforce
- Commitment to corporate social responsibility and strong community
involvement
Domestic Banking
- We continued the strategic expansion of our distribution network,
adding four new branches in high-growth markets this quarter, with
plans to open approximately 10 over the balance of the year. As well,
we expanded our sales capacity in key growth markets by hiring an
additional 103 personal and small business sales officers in the
first half of 2008.
- To meet customer needs and improve the customer experience, we
continued to develop new products:
- ScotiaMcLeod Direct Investing introduced Scotia Active Service,
designed for our most active online clients, which gives these
customers lower flat-fee pricing options based on their quarterly
trade volume.
- We introduced a ScotiaGold Passport for business VISA card that
allows small business customers to earn valuable reward points
that can be redeemed for an extensive array of rewards, and allows
owners to keep their business and personal spending separate.
- We launched a new hockey website in March, scotia-hockey.com, to
showcase our continued association with Canada's favorite sport. The
launch was promoted with a national contest called Build Stanley,
which challenged Canadians to create their own replica of the Stanley
Cup. In just seven weeks, the contest reached over one hundred
thousand hockey fans from coast to coast, primarily through word of
mouth, adding to our national visibility and increasing brand
awareness.
International Banking
- We continue to invest in Peru, a key growth market. In May, we
announced:
- an increase in our ownership of Scotiabank Peru to 98%,
as we purchased Intesa Sanpaolo's 20% interest; and
- the purchase of Banco del Trabajo's operations in Peru, which
increases our share of the important consumer finance market.
- We continue to expand our distribution footprint in key markets:
- we opened 14 branches during the quarter, and plan to open 90 to
100 branches in 2008;
- we opened a Private Client Group (PCG) office in Barbados, in
addition to our offices in the Bahamas, Cayman Islands and the
Dominican Republic, to better serve our high net worth customers,
and plan to open another seven PCG offices over the balance of the
year.
- We are expanding our credit card offering to offer better value to
customers, launching a new Aero Platinum Visa card with a proprietary
competitive travel rewards program in Trinidad, a new Mastercard
Black card for our private client customers in the Bahamas and Cayman
Islands, as well as a new Global Card from our joint venture in
Mexico aimed at the consumer finance segment.
- We began the consolidation of call centres in the English Caribbean
to increase both efficiency and capacity.
Scotia Capital
- Scotia Capital's Canadian operations won a number of awards from a
premier strategic consulting and research firm, including #1
rankings in foreign exchange, debt capital markets and corporate
derivatives.
- Scotia Capital acted as co-financial advisor to the board of CHC
Helicopter Corporation on the $3.7 billion sale of CHC to First
Reserve Corporation, a leading private equity firm in the energy
industry.
- Scotia Waterous is acting as co-financial advisor to Bois d'Arc
Energy, Inc. on the US$1.8 billion acquisition of Bois d'Arc by Stone
Energy Corporation.
The combined company will become one of the largest Gulf of Mexico-
focused operating companies.
- Scotia Capital was the joint bookrunner and co-manager for a
US$455 million senior note issue by Videotron Ltd. As part of the
transaction, we were appointed lead hedge arranger and lead hedge
provider for the associated hedging program.
Employee highlights
- Our commitment to being a global employer of choice was recognized by
the Great Place to Work Institute, which named Scotiabank as one of
the 2008 Best Places to Work in Central America and Caribbean. The
annual recognition is based primarily on employees' feedback to a
survey that measures the level of trust, pride and camaraderie within
the workplace. Locations that participated in the survey include
Puerto Rico, the Dominican Republic, El Salvador and Costa Rica.
Community involvement
- Scotiabank has established the Scotiabank Mexico Corporate Social
Responsibility Fund at the University of Alberta in Edmonton. Endowed
awards will support and enhance the teaching and research experience
of undergraduate and graduate students - both inbound from and
outbound to Mexico - in the university's Faculty of Agricultural,
Life & Environmental Sciences.
- Scotiabank announced a new partnership with Caribana. The agreement
includes title sponsorship of the Caribana Festival, Toronto's annual
celebration of Caribbean music, cuisine, revelry, and visual and
performing arts, which attracted more than 1.2 million people last
year and is a key tourist attraction for the city. This partnership
will build on Scotiabank's extensive presence in the Caribbean, as
well as our support for diversity and the communities we serve.
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Forward-looking statements
Our public communications often include oral or written forward-looking
statements. Statements of this type are included in this document, and may be
included in other filings with Canadian securities regulators or the U.S.
Securities and Exchange Commission, or in other communications. All such
statements are made pursuant to the "safe harbour" provisions of the United
States Private Securities Litigation Reform Act of 1995 and any applicable
Canadian securities legislation. Forward-looking statements may include
comments with respect to the Bank's objectives, strategies to achieve those
objectives, expected financial results (including those in the area of risk
management), and the outlook for the Bank's businesses and for the Canadian,
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
The preceding list of important factors is not exhaustive. When relying on forward-looking statements to make decisions with respect to the Bank and its securities, investors and others should carefully consider the preceding factors, other uncertainties and potential events. The Bank does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by or on its behalf.
The "Outlook" section in this document is based on the Bank's views and the actual outcome is uncertain. Readers should consider the above-noted factors when reviewing this section.
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Additional information relating to the Bank, including the Bank's Annual Information Form, can be located on the SEDAR website at www.sedar.com and on the EDGAR section of the SEC's website at www.sec.gov.
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 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
For purposes of segmented reporting, a segment's net interest income and provision for income taxes are grossed up by the taxable equivalent amount. The elimination of the TEB gross up is recorded in the "Other" segment.
Productivity ratio (TEB)
Management uses the productivity ratio as a measure of the Bank's efficiency. This ratio represents non-interest expenses as a percentage of total revenue on a taxable equivalent basis.
Net interest margin on total average assets (TEB)
This ratio represents net interest income on a taxable equivalent basis as a percentage of total average assets.
Return on equity
Return on equity is a profitability measure that presents the net income available to common shareholders as a percentage of the capital deployed to earn the income. The implementation of the new accounting standards for financial instruments in the first quarter of 2007 resulted in certain unrealized gains and losses being reflected in a new component of shareholders' equity. The Bank calculates its return on equity using average common shareholders' equity, including all components of shareholders' equity.
Economic equity and Return on economic equity
For internal reporting purposes, the Bank allocates capital to its business segments using a methodology that considers credit, market, operational and other risks inherent in each business segment. The amount allocated is commonly referred to as economic equity. Return on equity for the business segments is based on the economic equity allocated to the business segments. The difference between the economic equity amount required to support the business segments' operations and the Bank's total equity is reported in the "Other" segment.
Tangible common equity to risk-weighted assets
Tangible common equity to risk-weighted assets is an important financial measure for rating agencies and the investing community. Tangible common equity is total shareholders' equity plus non-controlling interest in subsidiaries, less preferred shares, unrealized gains/losses on available-for- sale securities and cash flow hedges, goodwill and other intangible assets (net of taxes). Tangible common equity is presented as a percentage of risk- weighted assets.
Regulatory capital ratios, such as Tier 1 and Total Capital ratios, have standardized meanings as defined by the Office of the Superintendent of Financial Institutions Canada (OSFI).
Group Financial Performance and Financial Condition
Scotiabank's net income was
Compared to the prior quarter, net income rose
Net income for the six months was
Total revenue
This quarter, total revenue (on a taxable equivalent basis) was
Compared with last quarter, total revenues were higher by
For the six months, total revenue of
Net interest income
This quarter's net interest income (on a taxable equivalent basis) was
Net interest income grew
For the six months, net interest income rose to
The Bank's net interest margin, at 1.76% in the second quarter, was down from 1.93% in the same quarter of last year and from 1.79% in the first quarter. Compared to the prior year, the reduction in the margin was due mainly to lower interest recoveries, a decline in tax-exempt dividend income and the negative impact of fair value changes on derivatives used for asset/liability management. The quarter-over-quarter decrease was due primarily to lower tax-exempt dividend income and change in asset mix with the growth in lower yielding trading assets.
Other income
Other income was
Quarter over quarter, other income was up
For the six months, other income was
Provision for credit losses
The provision for credit losses was
Non-interest expenses and productivity
Non-interest expenses were
Non-interest expenses were
Year to date, non-interest expenses were slightly higher from the same period last year, as increases across most categories, including the impact of recent acquisitions, were mostly offset by the impact of foreign currency translation.
The productivity ratio, a measure of the Bank's efficiency, was 54.8%, compared to 53.8% in the same quarter last year and 56.5% last quarter. The Bank's operating leverage this quarter - the rate of growth in total revenue on a tax equivalent basis less the rate of growth in expenses - was negative 1.9% year over year. On a year-to-date basis, operating leverage was a negative 3.4%, partly as a result of the writedowns on certain credit instruments in the first quarter and lower trading revenues.
Taxes
The effective tax rate for this quarter was 17.0%, down from 21.1% in the
same quarter last year and 18.2% in the first quarter. The decrease from a
year ago was due primarily to a reduction in the statutory tax rate in
The tax rate for the six months was 17.6% compared to 21.0% for the same period last year, due primarily to higher income in lower tax jurisdictions.
Risk management
The Bank's risk management policies and practices are unchanged from those outlined in pages 56 to 67 of the 2007 Annual Report.
Credit risk
Credit conditions remained relatively stable in most of the Bank's lending
markets. The provision for credit losses was
Scotia Capital had net recoveries of
The provision for credit losses of
International Banking's provision for credit losses was
Total net impaired loans, after deducting the allowance for specific
credit losses, were
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
Average for the three months ended
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Risk factor April 30 January 31 April 30
($ millions) 2008 2008 2007
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Interest rate $ 12.8 $ 13.8 $ 7.2
Equities 3.0 4.5 5.2
Foreign exchange 1.3 0.9 1.2
Commodities 3.6 2.7 1.5
Diversification (6.1) (5.3) (3.8)
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All-Bank VaR $ 14.6 $ 16.6 $ 11.3
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There were 21 trading loss days in the second quarter, compared to 13 days in the previous quarter. The increase in the number of loss days was a reflection of higher credit spread and interest rate volatility during the quarter. The losses were 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
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
Related party transactions
There were no changes to the Bank's procedures and policies for related party transactions from those outlined on pages 72 and 122 of the 2007 Annual Report. All transactions with related parties continued to be at market terms and conditions.
Balance sheet
The Bank's total assets as at
The Bank's loan portfolio grew
Business and government loans increased
Securities increased by
Total liabilities were
Total deposits were up
Total shareholders' equity rose
Capital management
Implementation of the revised Basel framework
The revised Basel Capital framework (Basel II) became effective for
Canadian banks on
Under Basel II, there are two main methods for computing credit risk: the standardized approach, which uses prescribed risk weights; and internal ratings-based approaches, which allow the use of a bank's internal models to calculate some, or all, of the key inputs into the regulatory capital calculation. Users of the Advanced Internal Ratings Based Approach (AIRB) are required to have sophisticated risk management systems for the calculation of credit risk regulatory capital and application of this approach could result in less regulatory capital than the use of the alternative approaches. Once banks demonstrate full compliance with the AIRB requirements, and OSFI has approved its use, they may proceed to apply the AIRB approach in computing capital requirements. However, in order to limit sudden declines in the capital levels for the industry in aggregate, transitional capital floors were introduced for the first two years after full implementation of AIRB. A minimum capital floor of 90% of the Basel I calculation will apply in the first year of full approval, and 80% in the second year. In the second quarter, the Bank received regulatory approval to move to the 90% floor.
The Bank received approval, with conditions, from OSFI to use AIRB for
material Canadian, U.S. and European portfolios effective
Capital ratios
The Bank continues to maintain a strong capital position. The Tier 1 and
the Total capital ratios as at
The increase in the ratios from
The tangible common equity (TCE) ratio was 7.5% as at
Financial instruments
Given the nature of the Bank's main business activities, financial instruments make up a substantial portion of the balance sheet and are integral to the Bank's business. There are various measures that reflect the level of risk associated with the Bank's portfolio of financial instruments. Further discussion of some of these risk measures is included in the Risk Management section above.
The methods of determining the fair value of financial instruments are detailed on pages 69 to 70 of the 2007 Annual Report. Management's judgment on valuation inputs is necessary when observable market data is not available, and management applies judgment in the selection of valuation models. Uncertainty in these estimates and judgments can affect fair value and financial results recorded.
During this quarter, changes in the fair value of financial instruments generally arose from existing economic, industry and market conditions.
Total derivative notional amounts were
Off-balance sheet arrangements
In the normal course of business, the Bank enters into contractual arrangements that are not required to be consolidated in its financial statements. These arrangements are primarily in three categories: Variable Interest Entities (VIEs), securitizations, and guarantees and other commitments. No material contractual obligations were entered into this quarter by the Bank that are not in the ordinary course of business. Processes for review and approval of these contractual arrangements are unchanged from last year.
Multi-seller conduits sponsored by the Bank
The Bank sponsors three multi-seller conduits, two of which are Canadian-
based and one in the U.S. The Bank's primary exposure to these conduits is the
liquidity support provided, with total liquidity facilities of
Canada
Funded Unfunded Total
As at April 30, 2008 assets commit- exposure
($ millions) ments (1)
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Asset classes(2):
Auto loans/leases $ 3,629 $ 329 $ 3,958
Trade receivables 207 89 296
Residential mortgages 102 2 104
Other 1,411 259 1,670
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Total $ 5,349 $ 679 $ 6,028
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(1) Exposure to the Bank is through global-style liquidity facilities and
letters of guarantee.
(2) These assets are substantially sourced from Canada.
Substantially all of the conduits' assets have been structured to receive credit enhancements from the sellers, including overcollateralization protection or cash reserve accounts. Approximately 18% of the funded assets are externally rated AA- or higher, and the balance of the funded assets have an equivalent rating of AA- or higher based on the Bank's internal rating program. There are no non-investment grade rated assets held in these conduits. The weighted average life of the funded assets is approximately 1.1 years. There is no exposure to U.S. subprime mortgage risk in these conduits.
The following table presents a summary of the classes of assets held by
the Bank's U.S. multi-seller conduit as of
United States
Funded Unfunded Total
As at April 30, 2008 assets commit- exposure
($ millions) ments (1)
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Asset classes(2):
Credit card/consumer receivables $ 1,012 $ 675 $ 1,687
Auto loans/leases 2,836 1,108 3,944
Trade receivables 1,552 1,585 3,137
Loans to closed-end mutual funds 634 835 1,469
CDOs/CLOs(3) 332 - 332
Other 1,122 522 1,644
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Total $ 7,488 $ 4,725 $ 12,213
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(1) Exposure to the Bank is through program-wide credit enhancement
and global-style liquidity facilities.
(2) These assets are sourced from the U.S.
(3) These assets are externally rated AAA.
A significant portion of the conduit's assets have been structured to receive credit enhancements from the sellers, including overcollateralization protection or cash reserve accounts. Approximately 22% of the funded assets are externally rated A or higher, and 65% of the funded assets have an equivalent rating of A or higher based on the Bank's internal rating program. There are no non-investment grade rated assets held in this conduit. The weighted average life of the funded assets is approximately 1.1 years. Exposure to U.S. subprime mortgage risk is nominal.
Liquidity facilities provided to non-Bank sponsored conduits
For conduits not administered by the Bank, liquidity facilities totaled
Funding vehicles
The Bank uses special purpose entities (SPEs) to facilitate cost-
efficient financing of its own operations. The Bank has two such SPEs:
Scotiabank Capital Trust and Scotiabank Subordinated Notes Trust that are VIEs
and are not consolidated on the Bank's balance sheet, as the Bank is not the
primary beneficiary. The Scotiabank Trust Securities and Scotiabank Trust
Subordinated Notes issued by the Trusts are not reported on the Consolidated
Balance Sheet. The deposit notes issued by the Bank to Scotiabank Capital
Trust and Scotiabank Subordinated Notes Trust are reported in Deposits and
qualify as regulatory capital. Total deposits recorded by the Bank as at
Other off-balance sheet arrangements
The Bank may securitize residential mortgages as a means to diversify its
funding sources, as this represents a cost-effective means to fund the growth
in this portfolio. A further
Guarantees and other indirect commitments increased 10% from
Selected credit instruments
Mortgage-backed securities
Non-trading portfolio
Total mortgage-backed securities held as available-for-sale securities
represented approximately 1% of the Bank's total assets as at
As at April 30, 2008 Carrying
($ millions) value
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Canadian NHA mortgage-backed securities(1) $ 5,478
Commercial mortgage-backed securities 116
Other residential mortgage-backed securities 12
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Total $ 5,606
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(1) Canada Mortgage and Housing Corporation provides a guarantee of
timely payment to NHA mortgage-backed security investors.
Exposure to U.S. subprime mortgage risk is nominal.
Trading portfolio
Total mortgage-backed securities held as trading securities represent less
than 0.1% of the Bank's total assets as at
As at April 30, 2008 Carrying
($ millions) value
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Canadian NHA mortgage-backed securities(1) $ 389
Commercial mortgage-backed securities 44
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Total $ 433
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(1) Canada Mortgage and Housing Corporation provides a guarantee of
timely payment to NHA mortgage-backed security investors.
Montreal Accord Asset-Backed Commercial Paper (ABCP)
The Bank holds
Collateralized debt obligations and collateralized loan obligations
Non-trading portfolio
The Bank has collateralized debt obligation (CDO) and collateralized loan obligation (CLO) investments in its non-trading portfolio which are classified as available-for-sale securities. CDOs and CLOs generally achieve their structured credit exposure either synthetically through the use of structured credit derivatives, or by investing and holding corporate loans or bonds. These investments are carried at fair value on the Bank's Consolidated Balance Sheet. Changes in the fair value of cash-based CDOs/CLOs are reflected in Other Comprehensive Income, unless there has been an other than temporary decline in fair value which is recorded in net income. Changes in fair value of synthetic CDOs/CLOs are reflected in net income. Substantially all of the reference assets of the Bank's CDO and CLO investments are corporate exposures with no U.S. subprime mortgage exposure. Substantially all of these investments are investment grade, with a weighted average rating of AA. Over 70% of these investment holdings are senior tranches with subordination of 9% or more. Only 8% of the investments are in equity tranches.
As at
As at
The cumulative unrealized loss recorded in Accumulated Other Comprehensive
Income for cash-based CDOs and CLOs was
A significant portion of the above movements in fair value relating to CDOs and CLOs reflects changes in asset prices arising from liquidity challenges and do not reflect a change in underlying credit quality.
Trading portfolio
The Bank also holds synthetic CDOs in its trading portfolio as a result of
structuring and managing transactions with clients and other financial
institutions. Total CDOs purchased and sold in the trading portfolio as at
Outstanding as at April 30, 2008 Positive/
Notional (negative)
($ millions) amount fair value
-------------------------------------------------------------------------
CDOs - sold protection $ 5,887 $ (911)
CDOs - purchased protection $ 5,136 $ 710
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To hedge the net exposure, the Bank purchases from or sells CDOs to other financial institutions, along with purchasing and/or selling index tranches or single name credit default swaps (CDSs). Over 90% of these CDO exposures are investment grade equivalent. Approximately 85% of the Bank's credit exposure to CDO swap counter-parties are to entities which are externally or internally rated the equivalent of A- or better, while the balance is fully cash collateralized. These CDOs have no U.S. subprime exposures.
Structured Investment Vehicles
As at
Exposure to monoline insurers
The Bank has insignificant direct exposure to monoline insurers. The Bank
has indirect exposures of
The securities related to these facilities are primarily rated investment grade without the guarantee, and represent risk the Bank would take without the availability of the guarantee. In the second quarter, the Bank replaced the credit default protection previously provided by an insurance monoline with protection from another swap counterparty which resulted in a modest gain being recorded in Other Income-Trading Revenues.
Leveraged loans
The Bank's exposure to highly leveraged loans awaiting to be syndicated as
at
Common dividend
The Board of Directors, at its meeting on
Outlook
U.S. economic activity has weakened significantly. Even with the
aggressive easing of monetary policy since last summer and substantial fiscal
stimulus, the U.S. performance will likely be very subdued over the balance of
2008. Growth trends have begun to soften in
Canadian economic activity has been tempered by the weakening trend in manufacturing exports, although robust demand and high prices for a broad range of commodities have provided an important offset. Even with this support and relatively sound domestic fundamentals, Canadian growth is likely to moderate over the balance of the year.
Despite difficult markets, the Bank is on track to achieve three of its four key financial and operational targets: ROE, productivity and maintaining strong capital ratios. This is a reflection of the relative strength of the Bank's businesses and strategies. However, the challenging global financial markets continue to impact earnings and, as a result, it is unlikely that the Bank will meet its earnings per share growth objective set at the end of last year. At the same time, the rebound in earnings this quarter, the continued solid asset growth in all three business lines and improved funding costs, all point to a stronger second half in 2008.
Business Segment Review
Domestic Banking
For the
For the three months ended six months ended
-------------------------------------------------------------------------
(Unaudited)
($ millions)
(Taxable
equivalent April 30 January 31 April 30 April 30 April 30
basis)(1) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Business segment
income
Net interest
income $ 1,051 $ 991 $ 942 $ 2,042 $ 1,895
Provision for
credit losses 102 91 66 193 140
Other income 537 519 530 1,056 1,048
Non-interest
expenses 890 889 870 1,779 1,740
Provision for
income taxes 174 157 169 331 333
-------------------------------------------------------------------------
Net income $ 422 $ 373 $ 367 $ 795 $ 730
Preferred dividends
paid 6 6 3 12 5
-------------------------------------------------------------------------
Net income available
to common
shareholders $ 416 $ 367 $ 364 $ 783 $ 725
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on equity(1) 35.3% 30.6% 32.0% 32.9% 31.6%
Average assets
($ billions) $ 172 $ 168 $ 149 $ 170 $ 148
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer above for discussion of non-GAAP measures.
Domestic Banking reported net income available to common shareholders of
Average assets before securitization rose
Total revenue was up
Net interest income of
Other income was
Credit losses of
Non-interest expenses increased by 2% from the second quarter last year due in part to growth initiatives, normal salary increases, and the impact of acquisitions. Partly offsetting these expenses were lower stock-based and performance-based compensation. Non-interest expenses were flat quarter over quarter, as increases in spending for growth initiatives and seasonally higher expenses were offset by the impact of lower stock-based compensation and a decline in salaries as a result of the shorter quarter.
International Banking
For the
For the three months ended six months ended
-------------------------------------------------------------------------
(Unaudited)
($ millions)
(Taxable
equivalent April 30 January 31 April 30 April 30 April 30
basis)(1) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Business segment
income
Net interest income $ 797 $ 731 $ 679 $ 1,528 $ 1,349
Provision for credit
losses 60 30 30 90 49
Other income 356 309 300 665 597
Non-interest
expenses 615 568 577 1,183 1,139
Provision for income
taxes 107 122 44 229 87
Non-controlling
interest in net
income of
subsidiaries 36 31 31 67 56
-------------------------------------------------------------------------
Net income $ 335 $ 289 $ 297 $ 624 $ 615
Preferred dividends
paid 9 7 4 16 6
-------------------------------------------------------------------------
Net income available
to common
shareholders $ 326 $ 282 $ 293 $ 608 $ 609
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on equity(1) 17.6% 19.6% 18.7% 18.5% 20.4%
Average assets
($ billions) $ 79 $ 70 $ 69 $ 74 $ 67
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer above for discussion of non-GAAP measures.
International Banking's net income available to common shareholders in the
second quarter was
The segment accounted for 34% of the Bank's net income available to common shareholders and had a return on equity of 17.6%.
Average asset volumes of
Total revenues were
Net interest income was
Other income increased
The provision for credit losses was
Non-interest expenses were
The effective tax rate this quarter was 22.0%, compared to 11.9% in the
same period last year and 27.6% from last quarter. The increase from last year
was due to a higher effective tax rate in
Scotia Capital
For the
For the three months ended six months ended
-------------------------------------------------------------------------
(Unaudited)
($ millions)
(Taxable
equivalent April 30 January 31 April 30 April 30 April 30
basis)(1) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Business segment
income
Net interest income $ 246 $ 274 $ 296 $ 520 $ 565
Provision for
credit losses (9) (10) (51) (19) (81)
Other income 292 131 360 423 721
Non-interest
expenses 243 191 262 434 521
Provision for income
taxes 49 33 125 82 230
-------------------------------------------------------------------------
Net income $ 255 $ 191 $ 320 $ 446 $ 616
Preferred dividends
paid 4 4 2 8 4
-------------------------------------------------------------------------
Net income available
to common
shareholders $ 251 $ 187 $ 318 $ 438 $ 612
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on equity(1) 29.6% 22.6% 33.4% 26.2% 32.0%
Average assets
($ billions) $ 167 $ 157 $ 153 $ 162 $ 152
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer above for discussion of non-GAAP measures.
Scotia Capital contributed net income available to common shareholders of
Total average assets increased 9% over last year to
Total revenues of
Net interest income of
This quarter, net recoveries were
Other income was
Non-interest expenses were
Other(1)
For the
For the three months ended six months ended
-------------------------------------------------------------------------
(Unaudited)
($ millions)
(Taxable
equivalent April 30 January 31 April 30 April 30 April 30
basis)(2) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Business segment
income
Net interest
income(3) $ (221) $ (182) $ (123) $ (403) $ (239)
Provision for
credit losses - - (25) - (25)
Other income 114 66 118 180 275
Non-interest
expenses 46 21 17 67 50
Provision for
income taxes(3) (121) (119) (52) (240) (87)
-------------------------------------------------------------------------
Net income $ (32) $ (18) $ 55 $ (50) $ 98
Preferred dividends
paid 3 4 2 7 4
-------------------------------------------------------------------------
Net income (loss)
available to
common
shareholders $ (35) $ (22) $ 53 $ (57) $ 94
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Average assets
($ billions) $ 37 $ 34 $ 33 $ 36 $ 31
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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, 2008 ($100), January 31, 2008 ($118),
and April 30, 2007 ($109), and for the six months ended April 30,
2008 ($218), and April 30, 2007 ($214), to arrive at the amounts
reported in the Consolidated Statement of Income.
Net income available to common shareholders was negative
Net interest income and the provision for income taxes include the
elimination of tax-exempt income gross up. This amount is included in the
operating segments, which are reported on a taxable equivalent basis. The
elimination was
Total revenue this quarter was negative
Other income of
Non-interest expenses were
Total
For the
For the three months ended six months ended
-------------------------------------------------------------------------
(Unaudited) April 30 January 31 April 30 April 30 April 30
($ millions) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Business segment
income
Net interest income $ 1,873 $ 1,814 $ 1,794 $ 3,687 $ 3,570
Provision for credit
losses 153 111 20 264 83
Other income 1,299 1,025 1,308 2,324 2,641
Non-interest
expenses 1,794 1,669 1,726 3,463 3,450
Provision for income
taxes 209 193 286 402 563
Non-controlling
interest in net
income of
subsidiaries 36 31 31 67 56
-------------------------------------------------------------------------
Net income $ 980 $ 835 $ 1,039 $ 1,815 $ 2,059
Preferred dividends
paid 22 21 11 43 19
-------------------------------------------------------------------------
Net income available
to common
shareholders $ 958 $ 814 $ 1,028 $ 1,772 $ 2,040
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures
Return on equity(1) 21.4% 18.3% 22.4%(2) 20.0% 22.4%(2)
Average assets
($ billions) $ 455 $ 429 $ 404 $ 442 $ 398
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer above for a discussion of non-GAAP measures.
(2) Certain comparative amounts in this quarterly report have been
restated to conform with current period presentation.
Geographic Highlights
For the
For the three months ended six months ended
-------------------------------------------------------------------------
April 30 January 31 April 30 April 30 April 30
(Unaudited) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Net income available
to common
shareholders
($ millions)
Canada $ 552 $ 494 $ 561 $ 1,046 $ 1,105
United States 61 22 139 83 302
Mexico 75 63 124 138 271
Other international 348 252 211 600 423
Corporate
adjustments (78) (17) (7) (95) (61)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ 958 $ 814 $ 1,028 $ 1,772 $ 2,040
-------------------------------------------------------------------------
Average assets
($ billions)
Canada $ 293 $ 285 $ 256 $ 289 $ 254
United States 29 29 32 29 33
Mexico 20 20 22 20 22
Other international 102 86 85 94 81
Corporate
adjustments 11 9 9 10 8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ 455 $ 429 $ 404 $ 442 $ 398
-------------------------------------------------------------------------
Quarterly Financial Highlights
For the three months ended
-------------------------------------------------------------------------
April Jan. Oct. July April Jan. Oct. July
30 31 31 31 30 31 31 31
2008 2008 2007 2007 2007 2007 2006 2006
-------------------------------------------------------------------------
Total revenue
($ millions) $3,172 $2,839 $3,078 $3,201 $3,102 $3,109 $2,868 $2,889
Total revenue
(TEB(1))
($ millions) 3,272 2,957 3,294 3,302 3,211 3,214 2,999 2,989
Net income
($ millions) 980 835 954 1,032 1,039 1,020 897 936
Basic earnings
per share($) 0.97 0.83 0.95 1.03 1.04 1.02 0.90 0.94
Diluted earnings
per share($) 0.97 0.82 0.95 1.02 1.03 1.01 0.89 0.93
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer above for a discussion of non-GAAP measures.
Share Data
As at
-------------------------------------------------------------------------
April 30
(thousands of shares outstanding) 2008
-------------------------------------------------------------------------
Common shares 986,905(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)
-------------------------------------------------------------------------
Series 2000-1 trust securities issued by BNS Capital Trust 500(9)
Series 2002-1 trust securities issued by Scotiabank Capital
Trust 750(10)
Series 2003-1 trust securities issued by Scotiabank Capital
Trust 750(10)
Series 2006-1 trust securities issued by Scotiabank Capital
Trust 750(10)
-------------------------------------------------------------------------
Scotiabank Trust Subordinated Notes - Series A issued by
Scotiabank Subordinated Notes Trust 1,000(10)
-------------------------------------------------------------------------
Outstanding options granted under the Stock Option Plans to
purchase common shares 26,972(1)(11)
-------------------------------------------------------------------------
(1) As at May 15, 2008, the number of outstanding common shares and
options were 987,652 and 26,224, respectively. The number of other
securities disclosed in this table were unchanged.
(2) These shares are entitled to non-cumulative preferential cash
dividends payable quarterly in an amount of $0.328125 per share.
(3) These shares are entitled to non-cumulative preferential cash
dividends payable quarterly in an amount of $0.30 per share.
(4) These shares are entitled to non-cumulative preferential cash
dividends payable quarterly in an amount of $0.28125 per share.
(5) These shares are entitled to non-cumulative preferential cash
dividends payable quarterly in an amount of $0.28125 per share.
(6) These shares are entitled to non-cumulative preferential cash
dividends payable quarterly in an amount of $0.328125 per share
except for the initial dividend paid on January 28, 2008, which was
in an amount of $0.39195 per share.
(7) These shares are entitled to non-cumulative preferential cash
dividends payable quarterly in an amount of $0.35 per share except
for the initial dividend paid on April 28, 2008, in an amount of
$0.33753 per share.
(8) These shares are entitled to non-cumulative preferential cash
dividends payable quarterly. The initial dividend, if and when
declared, will be payable on July 29, 2008, in an amount of
$0.4315 per share. Dividends, if and when declared, during the
initial five year period ending on April 25, 2013, will be payable
in an amount of $0.3125 per share. Subsequent to the initial five-
year period ending April 25, 2013, and resetting every five years
thereafter, the dividends will be determined by the sum of the
five year Government of Canada yield and 2.05%, multiplied by
$25.00.
(9) Reported in capital instrument liabilities in the Consolidated
Balance Sheet.
(10) Reported in deposits in the Consolidated Balance Sheet.
(11) Included are 17,586 stock options with tandem stock appreciation
right (SAR) features.
Further details, including convertibility features, are available in Notes
13, 14 and 16 of the
-------------------------------------------------------------------------
Accounting Policies and Estimates
The interim consolidated financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP). See Note 1 to the 2007 annual consolidated financial statements for more information about the significant accounting principles used to prepare the financial statements. There were no new significant accounting policies adopted by the Bank during the second quarter of 2008.
The key assumptions and bases for estimates that management has made under GAAP, and their impact on the amounts reported in the interim consolidated financial statements and notes, remain substantially unchanged from those described in our 2007 Annual Report.
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