BNS Baronsmead 4

Scotiabank reports strong third quarter results Third quarter highlights compared to the same period a year ago: TORONTO, Aug. 31 /PRNewswire-FirstCall/ -- Scotiabank reported strong earnings in the third quarter of 2004 with net income of $733 million, an increase of 17.2% from the third quarter of 2003, spurred by solid contributions from the Bank's three major business lines. Earnings per share (diluted) were $0.71, up 18.3% from $0.60 in the third quarter of 2003. "Scotiabank continued to benefit this quarter from its strategy of diversifying across three strong growth platforms," said Rick Waugh, President and CEO. "As well, credit quality continued to improve. The provision for credit losses is at its lowest quarterly level in more than five years. "In Canada, exceptional growth in mortgages and strong gains in other retail lending assets have allowed us to earn through tighter margins in the current low interest rate environment. "Our international division continues to post strong results in all regions, driven by business growth and acquisitions in Latin America and the Caribbean, and lower credit losses in Asia. "At Scotia Capital, an improvement in credit quality and a focus on cross-selling of non-credit products resulted in a year-over-year increase in net income and an improvement in ROE compared to recent years. "The Bank's capital position remains very strong, with a tangible common equity ratio that is the highest of the major Canadian banks. This capital strength gives us tremendous flexibility and will enable us to continue to increase returns to our shareholders, just as we've done over the past four years in doubling our dividend." For the nine-month period ended July 31, 2004, net income was a record $2,223 million, compared to $1,817 million in the same period last year, an increase of 22.4%. Earnings per share (diluted) were $2.13 versus $1.71, up 24.6%, and return on equity was 20.2% compared to 17.2%. ------------------------------------------------------------------------- Year-to-date performance versus our 2004 targets was as follows: 1. TARGET: Earn a return on equity (ROE) of 16% to 19%. In the first nine months, Scotiabank earned a ROE of 20.2%. 2. TARGET: Generate growth in earnings per common share of 10% to 15% per year. Our year-over-year growth in earnings per share was 24.6%. 3. TARGET: Maintain a productivity ratio of less than 58%. Scotiabank's performance was 55.3%, one of the best in the financial sector. 4. TARGET: Maintain strong capital ratios. At 11.3%, Scotiabank's Tier 1 capital ratio remains among the highest of the Canadian banks and strong by international standards. ------------------------------------------------------------------------- Financial Highlights As at and for the three For the nine months ended months ended ------------------------------------------------------------------------- July 31 April 30 July 31 July 31 July 31 (Unaudited) 2004 2004 2003 2004 2003 ------------------------------------------------------------------------- Operating results ($ millions) Net interest income (TEB(1)) 1,534 1,558 1,630 4,640 4,844 Total revenue (TEB(1)) 2,569 2,807 2,639 7,964 7,852 Provision for credit losses 50 130 200 350 773 Non-interest expenses 1,472 1,523 1,453 4,401 4,237 Provision for income taxes (TEB(1)) 264 313 291 828 812 Net income 733 786 626 2,223 1,817 Net income available to common shareholders 727 780 616 2,191 1,756 ------------------------------------------------------------------------- Operating performance Basic earnings per share(2) ($) 0.72 0.77 0.61 2.17 1.74 Diluted earnings per share(2) ($) 0.71 0.75 0.60 2.13 1.71 Return on equity (%) 19.4 21.8 17.7 20.2 17.2 Productivity ratio (%) (TEB(1)) 57.3 54.3 55.1 55.3 54.0 Net interest margin on total average assets (%) (TEB(1)) 2.15 2.21 2.28 2.18 2.23 ------------------------------------------------------------------------- Balance sheet information ($ millions) Cash and securities 85,030 81,273 78,886 Loans and acceptances 182,248 179,887 179,577 Total assets 286,890 283,634 282,160 Deposits 201,133 197,641 190,284 Preferred shares 550 550 800 Common shareholders' equity 14,981 14,857 13,933 Assets under administration 162,121 162,274 161,165 Assets under management 21,151 20,929 20,204 ------------------------------------------------------------------------- Capital measures Tier 1 capital ratio (%) 11.3 11.2 10.6 Total capital ratio (%) 13.7 13.6 13.1 Tangible common equity to risk-weighted assets(3) (%) 9.5 9.4 8.7 Risk-weighted assets ($ millions) 155,516 155,679 157,191 ------------------------------------------------------------------------- Credit quality Net impaired loans after general allowance(4) ($ millions) (227) (104) 317 General allowance for credit losses ($ millions) 1,425 1,475 1,475 Net impaired loans as a % of loans and acceptances(4) (0.12) (0.06) 0.18 Specific provision for credit losses as a % of average loans and acceptances 0.22 0.30 0.43 0.30 0.55 ------------------------------------------------------------------------- Common share information Share price(2) ($) High 36.88 37.45 32.19 37.45 32.19 Low 32.90 33.38 27.52 31.08 22.28 Close 36.60 35.15 30.24 Shares outstanding(2) (millions) Average (basic) 1,008 1,011 1,010 1,010 1,009 Average (diluted) 1,024 1,028 1,027 1,026 1,025 End of period 1,008 1,009 1,012 Dividends per share(2) ($) 0.30 0.25 0.22 0.80 0.62 Dividend yield (%) 3.4 2.8 2.9 3.1 3.0 Dividend payout ratio(5) (%) 41.6 32.4 36.1 36.9 35.7 Market capitalization ($ millions) 36,899 35,452 30,605 Book value per common share(2) ($) 14.86 14.73 13.76 Market value to book value multiple 2.5 2.4 2.2 Price to earnings multiple (trailing 4 quarters) 13.0 13.0 13.2 ------------------------------------------------------------------------- Other information Employees 44,253 44,294 43,869 Branches and offices 1,865 1,869 1,844 ------------------------------------------------------------------------- Certain comparative amounts in this quarterly report have been reclassified to conform with current period presentation. (1) The adjustment that changes GAAP measures to taxable equivalent basis (TEB) measures is discussed in footnotes (2) and (3) further below. (2) Amounts have been retroactively adjusted to reflect the stock dividend paid April 28, 2004, of one common share for each issued and outstanding common share. The stock dividend had the same effect as a two-for-one stock split. (3) Represents common shareholders' equity and non-controlling interest in the common equity of subsidiaries, less goodwill and intangible assets, as a percentage of risk-weighted assets. (4) Net impaired loans are impaired loans less the allowance for credit losses, including the general allowance. (5) Represents common dividends for the period as a percentage of the net income available to common shareholders for the period. Message to Stakeholders Across the Scotiabank Group, our strategy is to build stronger relationships with existing customers, acquire new customers, effectively allocate capital and human resources, and leverage our core strengths - customer satisfaction, people, diversification, expense and risk management, and execution. Overall, we believe that we continue to grow, largely because of diversified and sustainable earnings generated by our three strong growth platforms - Domestic Banking, Scotia Capital and International Banking. Domestic Banking Our focus in Domestic Banking is to build volume and acquire customers by leveraging the winning products and services we have in place. We believe that our Domestic platform - our strength in sales and service, and our leading customer and employee satisfaction - gives us the capacity to do this. In recent quarters, we had solid gains in market share, with particular success in residential mortgages and core deposits. Also, in an independent survey, we led Canada's major banks for job satisfaction among account managers. Scotia Capital In Scotia Capital, we have in place processes and disciplines to continue to effectively manage our credit quality. This has contributed in part to the recent decline in specific provisions. We are also looking at new areas for growth, especially non-lending sources of revenue, and places where we can begin to offer certain products on a global basis. This allows us, in both Canada and the U.S., to leverage our long-established client relationships, which has led to much stronger returns on equity compared to previous years. International Banking In International Banking, we have confidence that there are significant growth opportunities in many markets, due to the combination of under-utilization of financial services, generally higher economic growth rates and young populations. Our primary focus is on Mexico - where we are increasing loans and deposits - and parts of the Caribbean and Central America. We also believe India, China and Malaysia offer good growth prospects over the long term. Economic outlook This year's improved international economic performance and rising commodity prices have bolstered Canadian prospects. Looking ahead to 2005, worldwide growth is expected to moderate to a more sustainable pace, with emerging inflationary pressures and a weaker U.S. dollar contributing to a gradual rise in interest rates. The prospect of continued economic growth, together with the diversification and strength of our core businesses, will help the Scotiabank Group maintain its record of strong results for all our major stakeholders - our shareholders, customers, employees and the communities we serve. Achievements Domestic Banking - For the second consecutive year, Scotiabank led Canada's major banks for job satisfaction among retail financial advisors, based on a recent report card issued by Investment Executive, Canada's national newspaper for financial service industry professionals. We increased our rating in 10 categories and were rated first in 11 of 24 categories, including branch managers and strategic focus. - Our competitive products and excellent customer service continue to generate market share gains. In residential mortgages, a key product, our market share rose significantly over last year, leading all major competitors. As well, we have increased market share in personal chequing and savings accounts, based on the strength of the Money Master(R) High Interest Savings Account. Since its introduction almost three years ago, our market share has risen substantially. - Scotiabank launched an innovative new VISA loyalty program, the ScotiaStar Network(TM). The program can be added to any VISA card, and cardholders can earn rebates of up to 10% at participating retailers. Still growing, the program is already accepted at more than 200 retailers with over 1,500 locations across the country. International Banking - In the Caribbean and Central America (C&CA), customer usage of self-service channels continues to increase, with more than 80,000 new active users year to date, as we launched Internet banking in El Salvador and U.S. Virgin Islands. Our four contact centres in the C&CA received more than 425,000 calls handled by our automated Interactive Voice Response technology and 320,000 calls that were handled by live agents. The contact centres also completed more than 32,000 outbound sales-related calls this quarter. - The small business re-engineering process that was initiated in 2003 was expanded to a further eight countries in the C&CA region, bringing the total to 13. The credit application and adjudication process has been significantly streamlined, and customer response has been very positive. To date, one third of all C&CA small business clients have benefited from the new process. - Scotiabank Inverlat continued to cement its leadership in Mexican capital markets. It has acted as lead arranger in several syndicated loan transactions, including a US$2.4 billion syndication for Telmex, the largest loan syndication in Latin American history. Inverlat retained its first-place ranking in Mexican commercial paper and short-term debt issuance, and was awarded a prestigious mandate to lead Pemex's first commercial paper issue in Mexico. Scotia Capital - Scotia Capital won several awards this quarter, including: Best Investment Bank in Canada (Global Finance magazine), Best Debt House in Canada (Euromoney magazine), and Best Corporate and Institutional Internet Bank in Canada, for a second year in a row (Global Finance magazine). The awards recognize our leadership in the industry, great team of people and our clear strategy to be the best at helping clients achieve financial success by providing relevant solutions to their unique needs. - Scotia Capital acted as the exclusive financial advisor to Allstream Inc. on its $1.7 billion sale to Manitoba Telecom Services Inc. - In a continuing relationship with the Yellow Pages Income Fund, Scotia Capital acted as the co-lead agent and co-bookrunner for the inaugural $750 million medium-term note issue in April. More recently, we were awarded the co-lead manager and co-bookrunner roles in their treasury offering of $743 million of trust units. Employees and Human Resources - Each June, the Bank surveys employees' satisfaction with their working environment. This year's results point to an increasingly satisfied team of employees, which we believe is the key to satisfied customers. Overall employee satisfaction was 82%, an increase of two points over last year. Across the Scotiabank Group, the Bank had a very high participation rate, with 87% of employees giving their input from virtually every country in which we do business, including - for the first time - those in Asia-Pacific. Community involvement - Participation doubled, and funds raised increased by more than 75% to $1.2 million in the second annual Rick Hansen Wheels in Motion, presented by Scotiabank in June. Some 28,000 people wheeled, biked, skated, ran and walked the 10 km course to aid people with spinal cord injuries. Management's Discussion and Analysis Group Financial Performance In the third quarter, the Bank reported good results in all its main businesses, a continuation of the trend in the first half of the year. Also contributing were lower provisions for credit losses in the third quarter, which were at their lowest quarterly level in over five years. As a result, net income for the nine-month period was a record, with the Bank earning through the adverse effect of the appreciation of the Canadian dollar. Total revenue Total revenue (on a taxable equivalent basis) for the third quarter was $2,569 million, compared to $2,639 million in the same period last year, primarily due to lower Canadian dollar net interest income and the negative effect of foreign currency translation. Compared to the preceding quarter, total revenue fell $238 million, mainly as higher gains were realized last quarter on the sale of investment securities, including a $125 million gain on the sale of a portion of the Bank's investment holding in Shinsei Bank in Japan. For the nine-month period ended July 31, 2004, total revenue grew to $7,964 million, up $112 million from the same period last year, notwithstanding a significant $487 million reduction caused by foreign currency translation. The largest contributor to the growth was higher gains on the sale of investment securities in 2004. Net interest income Net interest income (on a taxable equivalent basis) for the third quarter was $1,534 million, down $96 million or 6% from the same period of the prior year. Excluding the effect of foreign currency translation, net interest income fell by $58 million or 4%. Compared to the prior quarter, net interest income decreased $24 million. Canadian currency net interest income was $73 million below the level of the same quarter last year. This was caused by lower net interest income in trading activities, higher outstanding securitization volumes and a decline in the net interest margin caused by the low interest rate environment. Partly offsetting this was exceptional growth in mortgages, accompanied by solid gains in other retail lending assets. Compared to the prior quarter, Canadian currency net interest income was unchanged. The adoption of a new Canadian accounting standard for hedging in fiscal 2004 resulted in an increase in Canadian currency net interest income in the third quarter, which was largely offset by a related reduction in foreign currency net interest income. Foreign currency net interest income was below the level earned in the same quarter a year ago but, excluding the effect of foreign currency translation, income grew $15 million. This increase arose from stronger U.S. funding spreads and higher income in the Caribbean, which was largely mitigated by lower demand and more selective lending in corporate banking. Compared to the second quarter, foreign currency net interest income declined $24 million, mainly from a quarter-over-quarter change in the amounts recorded under the new hedging accounting standard. In the third quarter, the Bank's total interest margin was 2.15%, a decrease of 13 basis points from last year, and 6 basis points below last quarter. For the nine-month period, net interest income (on a taxable equivalent basis) was $4,640 million, down $204 million or 4% from last year. Excluding the effect of foreign currency translation, net interest income rose $75 million or 2%, notwithstanding a compression in the Canadian dollar interest margin. Other income Other income was $1,035 million in the third quarter, an increase of $26 million or 3% from the same period of 2003. Excluding the effect of foreign currency translation, other income rose $55 million or 5%. This improvement resulted largely from higher gains realized on investment securities, strong merger and acquisition fees, and a rise in deposit and payment services revenues primarily in Canadian retail operations. These increases were partially offset by reduced levels of underwriting income, reflecting the recent softening in new issue activity, as well as decreases in securitization and credit fees. Compared to last quarter, other income fell 17%, due mainly to reduced gains on investment securities. As well, there were lower securitization revenues, reflecting the interest rate environment, and retail brokerage fees fell because of a decline in customer activity. For the nine-month period, other income rose to $3,324 million, up $316 million from the same period last year. Excluding the effect of foreign currency translation, other income climbed $524 million or 17%, due mainly to higher gains on investment securities, accompanied by solid growth in deposit and payment services, and retail brokerage revenues. However, credit fees fell as a result of lower customer demand. Non-interest expenses and productivity In the third quarter of 2004, non-interest expenses were $1,472 million, an increase of $19 million or 1% compared to the same period of 2003. Excluding the effect of foreign currency translation, expenses rose $49 million, or 3%. This modest growth resulted from higher pension costs and other general business expenditures. Compared to the prior quarter, expenses fell $51 million or 3%, mainly due to lower performance-based compensation in line with reduced brokerage and trading revenues, and good expense control. For the nine-month period, non-interest expenses rose $164 million or 4%. Excluding the effect of foreign currency translation, non-interest expenses increased by $355 million or 8%, due to higher stock-based and performance-based compensation, and staff benefits, as well as growth in mortgage appraisal and acquisition fees. The Bank's productivity ratio - a measure of the efficiency with which revenues are generated - was 57.3% this quarter, compared to 55.1% in the same period last year and 54.3% last quarter. On a year-to-date basis, the productivity ratio was 55.3%, versus 54.0% in the same period a year ago. Taxes The Bank's effective tax rate for the third quarter was 20.0%, versus 23.7% in the same period a year ago and 22.7% last quarter. These decreases mainly arose from higher tax savings in the Bank's foreign operations. For the nine-month period, the effective tax rate was 20.8%, compared to 22.9% in 2003. Non-controlling interest The deduction for the non-controlling interest in the Bank's net income was $50 million for the quarter, down $19 million from the same period a year ago, and $5 million below last quarter. The year-over-year reduction was mainly due to decreases in the non-controlling interest in Scotiabank Inverlat, as the Bank increased its ownership to 97% earlier in 2004. Preferred dividends The preferred dividends paid, which are a deduction to determine the Bank's net income available to common shareholders, were $6 million for the third quarter, down from $10 million in the same period last year, but unchanged from the previous quarter. For the nine-month period, preferred dividends paid were $32 million, a reduction from $61 million in the same period of the prior year. These decreases resulted from the redemption of the Series 9 Non-cumulative Preferred Shares on April 28, 2003, and the Series 11 Non-cumulative Preferred Shares on January 28, 2004. Risk management The Bank's key risk management policies and practices are unchanged from those outlined on pages 54 to 63 of the 2003 Annual Report. Credit risk Credit quality continued to improve in the quarter. The provision for credit losses was $50 million in the third quarter, comprised of $100 million in specific provisions partly offset by a $50 million reduction in the general allowance for credit losses. This quarter's specific provisions were a significant improvement over the $200 million in the same quarter last year, and $130 million last quarter. In Domestic Banking, credit quality in the retail portfolios remained strong, with low credit losses and stable delinquency ratios. Specific provisions against the commercial portfolio were relatively modest and have declined over the last two quarters. Specific provisions for credit losses in International Banking were only $2 million this quarter, due to higher provision reversals and recoveries. In Scotia Capital, specific provisions declined $104 million from the same quarter last year, and were down slightly from the previous quarter. Stronger economic conditions, increased corporate profitability and our focus on managing this portfolio have resulted in continued improvement in credit quality over the past year. The $50 million reduction in the general allowance for credit losses during the quarter resulted from the sustained improvement in credit conditions and falling loan volumes in Scotia Capital. If recent trends in credit quality continue, there may be further reductions in the general allowance. Total net impaired loans, after deducting the allowance for credit losses (both specific and general), were negative $227 million as at July 31, 2004, a substantial improvement of $544 million over the same period a year ago, and $123 million from the preceding quarter. Market risk Value at Risk (VaR) is a key measure of market risk in the Bank's trading activities. In the third quarter of 2004, the average one-day VaR rose to $10.2 million, from $9.0 million in the same quarter of last year. This was primarily due to an increase in interest rate risk, which was partially offset by a reduction in equity and foreign exchange risk. Compared to last quarter, most of the change also arose in the interest rate category. These VaR levels represent a moderate level of market risk, given the size of the Bank. Average for the three months ended ------------------------------------------------------------------------- Risk factor July 31 April 30 July 31 ($ millions) 2004 2004 2003 ------------------------------------------------------------------------- Interest rate $ 10.1 $ 7.0 $ 5.2 Equities 3.4 4.5 6.5 Foreign exchange 1.3 1.2 2.1 Commodities 0.7 1.0 0.8 Diversification (5.3) (5.5) (5.6) ------------------------------------------------------------------------- All-Bank VaR $ 10.2 $ 8.2 $ 9.0 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Trading revenue was positive on more than 95% of the days in the quarter, compared to 87% last quarter. No single day's loss exceeded the one-day VaR. Liquidity risk The Bank manages liquidity to ensure it has the ability to generate or obtain funds to meet current and future financial obligations in a cost-effective manner. This involves maintaining sufficient liquid assets, other cash resources and diverse sources of funding. Scotiabank obtains funding through a broad range of sources, including retail and commercial deposits, wholesale funding and capital. The Bank also raises term funding through asset securitizations of mortgages and personal loans. The Bank maintains large holdings of liquid assets to support its operations. As at July 31, 2004, liquid assets were $77 billion (April 30, 2004 - $73 billion), representing 27% of total assets (April 30, 2004 - 26%). In the course of its day-to-day activities, the Bank pledges assets to secure an obligation, participate in a clearing or settlement system, or to operate in a foreign jurisdiction. As at July 31, 2004, total assets pledged or sold under repurchase agreements were $40 billion, unchanged from last quarter. The majority of these assets relate to repurchase agreements, as well as pledges for securities borrowing and lending activities. Balance sheet The Bank's total assets were $287 billion as at July 31, 2004, an increase of $5 billion or 2% from July 31, 2003, and up $3 billion from last quarter. The year-over-year growth in assets included strong gains in retail lending, with residential mortgages up $8 billion, and other personal loans and credit cards rising $4 billion, as well as higher trading securities of $6 billion. These increases were partially offset by $6 billion from the effect of foreign currency translation, as well as a $5 billion reduction in corporate lending. Compared to July 31, 2003, total liabilities increased $4 billion. In Canada, there was strong growth of $3 billion in current accounts, along with continued expansion of personal deposits, especially in the Bank's popular Money Master accounts, which increased $4 billion during this period. This growth was partially offset by the effect of foreign currency translation, as well as decreases in trading derivatives and securities sold under repurchase agreements. Common shareholders' equity was $15 billion as at July 31, 2004, an increase of $1 billion over the past year. This growth arose mainly from strong net income less the effect of foreign currency translation recorded in shareholders' equity. In the nine-month period since the Bank's October 31, 2003 year end, total assets were up $1 billion. This increase was largely driven by growth in retail lending and trading securities, partially offset by declines in U.S. and European corporate loans, as well as lower trading derivatives. As at July 31, 2004, the surplus of the market value over book value of the Bank's investment securities was $887 million, compared to $1,007 million last quarter end. This decrease arose mainly from a lower market value for the Bank's holdings in Shinsei Bank in Japan, along with the realization of gains on the sale of investment securities in the quarter. Capital management The Bank has a very strong level of capital, resulting from consistent increases over the past several years. As at July 31, 2004, the Bank's Tier 1 ratio was 11.3%, a significant improvement of 70 basis points over the same quarter last year, and up 10 basis points from the prior quarter. These improvements arose from strong earnings and modest decreases in risk-weighted assets. The Bank's tangible common equity ratio (which represents common equity less goodwill and intangibles as a percentage of risk-weighted assets) was 9.5% at the end of the third quarter, up 80 basis points from last year, and 10 basis points higher than last quarter. This ratio remains higher than that of the other major Canadian banks. Common dividend The Bank paid a dividend of 30 cents per common share in the third quarter, which was 36% higher than the same period a year ago and 20% above last quarter. This reflects the Bank's ongoing commitment to dividend growth and increasing shareholder returns. At its meeting on August 31, 2004, the Board of Directors approved a quarterly dividend of 30 cents per common share, payable on October 27, 2004, to shareholders of record on October 5, 2004. Outlook We remain confident that our three diversified business lines will enable us to deliver solid earnings in a moderate economic growth environment. However, we face continuing challenges from the appreciation of the Canadian dollar, compression in interest margins, and lack of corporate loan demand in the U.S. As well, the large securities gains realized to date in 2004 will not be sustainable at these levels. That being said, with record nine-month earnings to date, we fully expect to meet our key targets that we have set for 2004. Business Line Review Domestic Banking For the three For the nine months ended months ended ------------------------------------------------------------------------- (Unaudited) ($ millions) (Taxable equivalent July 31 April 30 July 31 July 31 July 31 basis)(1) 2004 2004 2003 2004 2003 ------------------------------------------------------------------------- Business line income Net interest income $ 886 $ 901 $ 866 $ 2,664 $ 2,596 Provision for credit losses (70) (81) (71) (243) (224) Other income 414 424 399 1,255 1,122 Non-interest expenses (805) (803) (778) (2,372) (2,232) Provision for income taxes (136) (148) (144) (423) (432) ------------------------------------------------------------------------- Net income $ 289 $ 293 $ 272 $ 881 $ 830 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Other measures Return on equity(2) 31.4% 32.7% 30.8% 32.1% 31.5% Average assets ($ billions) $ 113 $ 109 $ 102 $ 110 $ 100 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Refer to footnote (2) further below. (2) Refer to footnote (4) further below. Domestic Banking, which includes Wealth Management, reported net income of $289 million in the third quarter, an increase of $17 million or 6% over last year. Domestic Banking accounted for 39% of the Bank's total net income this quarter, with an ROE of 31%. Quarter over quarter, net income fell 1%. For the nine-month period, net income grew $51 million or 6% to $881 million from the same period last year. Net interest income rose modestly by 2% this quarter versus the same period last year, as strong ongoing increases in retail lending, core retail deposits and business deposits were mostly offset by a lower margin. Asset growth was led by residential mortgages, where balances grew by $9.6 billion from a year ago, including a record $3.6 billion this quarter. Other income was up $15 million or 4% from the same quarter a year ago, with broad-based growth, including higher transaction-based fees, mutual fund fees and foreign exchange revenues. Quarter over quarter, the decline in other income was mainly due to lower retail brokerage revenues from a reduction in customer trading volumes. Credit quality was strong in both the retail and commercial portfolios. Non-interest expenses grew 3% from the same quarter last year. This increase was due to merit-based growth in salaries and higher pension costs. Also contributing to the rise in expenses were higher mortgage acquisition costs and growth in processing expenses, consistent with volume growth. Quarter over quarter, expenses were relatively unchanged as lower performance-based compensation was offset by higher mortgage acquisition costs. Scotia Capital For the three For the nine months ended months ended ------------------------------------------------------------------------- (Unaudited) ($ millions) (Taxable equivalent July 31 April 30 July 31 July 31 July 31 basis)(1) 2004 2004 2003 2004 2003 ------------------------------------------------------------------------- Business line income Net interest income $ 230 $ 261 $ 315 $ 745 $ 970 Provision for credit losses (28) (32) (132) (131) (527) Other income 309 328 330 969 994 Non-interest expenses (249) (268) (262) (758) (741) Provision for income taxes (66) (78) (58) (215) (196) ------------------------------------------------------------------------- Net income $ 196 $ 211 $ 193 $ 610 $ 500 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Other measures Return on equity(2) 19.3% 20.0% 14.2% 18.8% 11.3% Average assets ($ billions) $ 108 $ 114 $ 116 $ 111 $ 120 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Refer to footnote (2) further below. (2) Refer to footnote (4) further below. Scotia Capital reported earnings of $196 million this quarter, a modest increase from a year ago, but down $15 million or 7% from last quarter. However, ROE was a solid 19% in the quarter, well ahead of the levels earned in recent years. For the nine months ended July 31, 2004, net income was $610 million, a significant increase of $110 million or 22% over last year, primarily due to lower provisions for credit losses. Total revenues in the third quarter of 2004 decreased 17% from last year, primarily from the reduction in loan volumes and credit fees in North America and Europe, as a result of more selective lending and increased liquidity in the capital markets. Total revenues fell $50 million or 9% from the second quarter, primarily due to lower trading revenues. While strong revenues were earned from derivatives, foreign exchange trading and precious metals, they fell short of the peaks achieved in recent quarters. In addition, challenging market conditions depressed revenues from new equity issues. However, revenues were bolstered in the quarter by merger and acquisition fees, which were at their highest level in the past several quarters. Provisions for credit losses were $28 million in the third quarter, a significant decline of $104 million from last year, reflecting an improvement in all corporate lending portfolios, most notably in the U.S. There was also a modest reduction in credit losses compared to last quarter. For the nine-month period, credit losses were $131 million, a significant improvement from $527 million last year. Total non-interest expenses fell 5% from last year and were 7% below the previous quarter, primarily due to lower performance-based compensation, in line with the decline in revenues. International Banking For the three For the nine months ended months ended ------------------------------------------------------------------------- (Unaudited) ($ millions) (Taxable equivalent July 31 April 30 July 31 July 31 July 31 basis)(1) 2004 2004 2003 2004 2003 ------------------------------------------------------------------------- Business line income Net interest income $ 481 $ 513 $ 506 $ 1,442 $ 1,534 Provision for credit losses (2) (18) 3 (27) (28) Other income 181 197 174 552 584 Non-interest expenses (390) (426) (402) (1,206) (1,253) Provision for income taxes (35) (44) (71) (118) (198) Non-controlling interest in net income of subsidiaries (17) (22) (35) (62) (126) ------------------------------------------------------------------------- Net income $ 218 $ 200 $ 175 $ 581 $ 513 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Other measures Return on equity(2) 24.6% 24.2% 21.7% 22.8% 21.2% Average assets ($ billions) $ 50 $ 49 $ 50 $ 49 $ 53 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Refer to footnote (2) further below. (2) Refer to footnote (4) further below. International Banking reported net income of $218 million this quarter, a significant increase of $43 million or 24% from last year, with higher contributions from all regions, namely the Caribbean, Latin America and Asia. This was achieved notwithstanding the negative effect of the appreciation of the Canadian dollar against the Mexican peso and many Caribbean currencies. Compared to the prior quarter, net income grew $18 million or 9%. For the nine months ended July 31, 2004, net income was $581 million, up a substantial $68 million or 13% over the same period last year. Scotiabank Inverlat's third quarter contribution rose substantially over last year, following the increase in the Bank's ownership level to 97% earlier in 2004, and the recognition of benefits from Inverlat's tax loss carryforwards in the consolidated results. As well, Inverlat's earnings rose from strong business growth. Compared to last quarter, Inverlat's contribution increased moderately continuing the steady growth of the past several quarters. Net income from the remaining operations in Latin America was below last year, as a result of lower gains on the sale of emerging market securities. However, results rose slightly from last quarter. Caribbean net income increased by 21% from last year, earning through the negative effect of foreign currency translation as the Canadian dollar appreciated against many Caribbean currencies. The earnings growth was led by a greater contribution from the Dominican Republic. In addition, there was continued growth in retail loans and deposits across the region. Net income was slightly higher than last quarter as a result of lower expenses. In Asia, net income exceeded both last year and last quarter, primarily due to lower credit losses. Other(1) For the three For the nine months ended months ended ------------------------------------------------------------------------- (Unaudited) ($ millions) (Taxable equivalent July 31 April 30 July 31 July 31 July 31 basis)(2) 2004 2004 2003 2004 2003 ------------------------------------------------------------------------- Business line income Net interest income(3) $ (131) $ (182) $ (132) $ (412) $ (466) Provision for credit losses 50 1 - 51 6 Other income 131 300 106 548 308 Non-interest expenses (28) (26) (11) (65) (11) Provision for income taxes(3) 41 22 57 129 224 Non-controlling interest in net income of subsidiaries (33) (33) (34) (100) (87) ------------------------------------------------------------------------- Net income $ 30 $ 82 $ (14) $ 151 $ (26) ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Other measures Average assets ($ billions) $ 13 $ 14 $ 16 $ 14 $ 17 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Other segments, which include Group Treasury, reported net income of $30 million for the quarter, versus a loss of $14 million in the same quarter last year. This improvement was largely due to the $50 million reduction in the general allowance for credit losses this quarter. Compared to the prior quarter, net income fell $52 million, largely because last quarter included a $125 million ($81 million after tax) gain realized on the sale of a portion of the Bank's investment holding in Shinsei Bank. Partly offsetting this was the $50 million reduction in the general allowance this quarter. Net interest income also improved quarter over quarter, mainly from the mark-to-market adjustment for certain derivatives that no longer qualified as hedges under the new accounting rules. Total For the three For the nine months ended months ended ------------------------------------------------------------------------- (Unaudited) July 31 April 30 July 31 July 31 July 31 ($ millions) 2004 2004 2003 2004 2003 ------------------------------------------------------------------------- Business line income Net interest income $ 1,466 $ 1,493 $ 1,555 $ 4,439 $ 4,634 Provision for credit losses (50) (130) (200) (350) (773) Other income 1,035 1,249 1,009 3,324 3,008 Non-interest expenses (1,472) (1,523) (1,453) (4,401) (4,237) Provision for income taxes (196) (248) (216) (627) (602) Non-controlling interest in net income of subsidiaries (50) (55) (69) (162) (213) ------------------------------------------------------------------------- Net income $ 733 $ 786 $ 626 $ 2,223 $ 1,817 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Other measures Return on equity(4) 19.4% 21.8% 17.7% 20.2% 17.2% Average assets ($ billions) $ 284 $ 286 $ 284 $ 284 $ 290 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (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) The Bank, like some other banks, analyzes revenues, net interest margin on total average assets and the productivity ratio on a taxable equivalent basis (TEB). This methodology grosses up tax-exempt income earned on certain securities to an equivalent before-tax basis. In the presentation of business line results, the corresponding offset is made in the provision for income taxes. 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. This use of TEB results in measures that are different from comparable GAAP measures and may not be the same as measures presented by other companies. (3) Includes the elimination of the tax-exempt income gross-up reported in net interest income and provision for income taxes for the three months ended July 31, 2004 ($68), April 30, 2004 ($65), and July 31, 2003 ($75), and for the nine months ended July 31, 2004 ($201), and July 31, 2003 ($210), to arrive at the amounts reported in the Consolidated Statement of Income. (4) For management and internal reporting purposes, the Bank allocates equity to its business lines using a methodology that considers credit, market and operational risk inherent in each business line. Return on equity is calculated based on the economic equity allocated to the business line. Economic equity is not a defined term under GAAP and, accordingly, the resulting return on equity for each business line may not be comparable to those used by other financial institutions. Geographic Highlights For the three For the nine months ended months ended ------------------------------------------------------------------------- July 31 April 30 July 31 July 31 July 31 (Unaudited) 2004 2004 2003 2004 2003 ------------------------------------------------------------------------- Net income ($ millions) Canada $ 421 $ 387 $ 375 $ 1,278 $ 1,192 United States 89 91 89 258 204 Other international 244 336 205 764 514 Corporate adjustments (21) (28) (43) (77) (93) ------------------------------------------------------------------------- $ 733 $ 786 $ 626 $ 2,223 $ 1,817 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Average assets ($ billions) Canada $ 190 $ 188 $ 177 $ 188 $ 174 United States 19 22 32 22 36 Other international 74 74 71 72 76 Corporate adjustments 1 2 4 2 4 ------------------------------------------------------------------------- $ 284 $ 286 $ 284 $ 284 $ 290 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Share Capital As at ------------------------------------------------------------------------- July 31 (thousands of shares) 2004(1) ------------------------------------------------------------------------- Preferred shares Series 12 12,000 Class A preferred shares issued by Scotia Mortgage Investment Corporation 250 ------------------------------------------------------------------------- Series 2000-1 trust securities issued by BNS Capital Trust 500(2) Series 2002-1 trust securities issued by Scotiabank Capital Trust 750(2) Series 2003-1 trust securities issued by Scotiabank Capital Trust 750(2) ------------------------------------------------------------------------- Common shares outstanding 1,008,181 ------------------------------------------------------------------------- Outstanding options granted under the Stock Option Plans to purchase common shares 44,365(3) ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) As at August 23, 2004, the number of outstanding common shares and options were 1,008,271 and 44,269, respectively. The number of other securities disclosed in this table were unchanged. (2) Reported in non-controlling interest in subsidiaries in the Consolidated Balance Sheet. (3) Included are 14,602 stock options with tandem SAR features. Further details are available in Notes 13 and 14 of the October 31, 2003, consolidated financial statements presented in the 2003 Annual Report, and Note 4 further below. Forward-looking statements This document includes forward-looking statements which are made pursuant to the "safe harbour" provisions of the United States Private Securities Litigation Reform Act of 1995. These statements include comments with respect to our objectives, strategies, expected financial results (including those in the area of risk management), and our outlook for our businesses and for the Canadian, U.S. and global economies. Forward-looking statements are typically identified by words or phrases such as "believe," "expect," "anticipate," "intent," "estimate," "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. The Bank cautions readers not to place undue reliance on these statements, as a number of important factors could cause actual results to differ materially from the estimates and intentions expressed in such forward- looking statements. These factors include, but are not limited to, the economic and financial conditions in Canada and globally; fluctuations in interest rates and currency values; liquidity; the effect of changes in monetary policy; legislative and regulatory developments in Canada and elsewhere; the accuracy and completeness of information the Bank receives on customers and counterparties; the timely development and introduction of new products and services; the Bank's ability to complete and integrate acquisitions; 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; consolidation in the Canadian financial services sector; changes in tax laws; competition; judicial and regulatory proceedings; acts of God, such as earthquakes; the possible impact of international conflicts and other developments, including terrorist acts and war on terrorism; 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. The Bank cautions that the foregoing list of important factors is not exhaustive. When relying on forward-looking statements to make decisions with respect to the Bank, investors and others should carefully consider the foregoing 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 behalf of the Bank. Additional information relating to the Bank, including the Bank's Annual Information Form, can be located on the SEDAR website at http://www.sedar.com/, and on the EDGAR section of the SEC's website at http://www.sec.gov/. Interim Consolidated Financial Statements Consolidated Statement of Income For the three For the nine months ended months ended ------------------------------------------------------------------------- (Unaudited) July 31 April 30 July 31 July 31 July 31 ($ millions) 2004 2004 2003 2004 2003 ------------------------------------------------------------------------- Interest income Loans $ 2,248 $ 2,235 $ 2,473 $ 6,783 $ 7,606 Securities 657 674 718 2,015 2,205 Deposits with banks 116 107 111 321 342 ------------------------------------------------------------------------- 3,021 3,016 3,302 9,119 10,153 ------------------------------------------------------------------------- Interest expense Deposits 1,196 1,101 1,294 3,532 4,011 Subordinated debentures 29 27 26 82 113 Other 330 395 427 1,066 1,395 ------------------------------------------------------------------------- 1,555 1,523 1,747 4,680 5,519 ------------------------------------------------------------------------- Net interest income 1,466 1,493 1,555 4,439 4,634 Provision for credit losses (Note 6) 50 130 200 350 773 ------------------------------------------------------------------------- Net interest income after provision for credit losses 1,416 1,363 1,355 4,089 3,861 ------------------------------------------------------------------------- Other income Card revenues 58 53 49 172 146 Deposit and payment services 169 161 153 485 445 Mutual funds 43 43 41 127 120 Investment management, brokerage and trust services 123 143 116 391 333 Credit fees 150 144 181 440 526 Trading revenues 101 105 101 358 394 Investment banking 160 183 195 504 508 Net gain on investment securities 106 247 28 423 93 Securitization revenues 17 40 43 85 114 Other 108 130 102 339 329 ------------------------------------------------------------------------- 1,035 1,249 1,009 3,324 3,008 ------------------------------------------------------------------------- Net interest and other income 2,451 2,612 2,364 7,413 6,869 ------------------------------------------------------------------------- Non-interest expenses Salaries and staff benefits 875 907 877 2,623 2,508 Premises and technology 283 282 295 846 851 Communications 62 60 61 181 190 Advertising and business development 51 53 48 151 144 Professional 39 47 30 115 101 Business and capital taxes 37 36 38 110 111 Other 125 138 104 375 301 Loss on disposal of subsidiary operations - - - - 31 ------------------------------------------------------------------------- 1,472 1,523 1,453 4,401 4,237 ------------------------------------------------------------------------- Income before the undernoted 979 1,089 911 3,012 2,632 Provision for income taxes 196 248 216 627 602 Non-controlling interest in net income of subsidiaries 50 55 69 162 213 ------------------------------------------------------------------------- Net income $ 733 $ 786 $ 626 $ 2,223 $ 1,817 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Preferred dividends paid and other 6 6 10 32 61 ------------------------------------------------------------------------- Net income available to common shareholders $ 727 $ 780 $ 616 $ 2,191 $ 1,756 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Average number of common shares outstanding(1) (millions): Basic 1,008 1,011 1,010 1,010 1,009 Diluted 1,024 1,028 1,027 1,026 1,025 ------------------------------------------------------------------------- Earnings per common share(1) (in dollars): Basic $ 0.72 $ 0.77 $ 0.61 $ 2.17 $ 1.74 Diluted $ 0.71 $ 0.75 $ 0.60 $ 2.13 $ 1.71 ------------------------------------------------------------------------- Dividends per common share(1) (in dollars) $ 0.30 $ 0.25 $ 0.22 $ 0.80 $ 0.62 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Amounts have been retroactively adjusted to reflect the stock dividend paid April 28, 2004, of one common share for each issued and outstanding common share. The stock dividend had the same effect as a two-for-one stock split. The accompanying notes are an integral part of these interim consolidated financial statements. Consolidated Balance Sheet As at ------------------------------------------------------------------------- July 31 April 30 October 31 July 31 (Unaudited) ($ millions) 2004 2004 2003 2003 ------------------------------------------------------------------------- Assets Cash resources Cash and non-interest-bearing deposits with banks $ 1,411 $ 1,417 $ 1,373 $ 1,301 Interest-bearing deposits with banks 16,840 16,668 17,111 15,776 Precious metals 2,275 2,627 2,097 2,188 ------------------------------------------------------------------------- 20,526 20,712 20,581 19,265 ------------------------------------------------------------------------- Securities Investment 18,343 18,377 20,293 19,186 Trading 46,161 42,184 42,899 40,435 ------------------------------------------------------------------------- 64,504 60,561 63,192 59,621 ------------------------------------------------------------------------- Loans Residential mortgages 66,955 63,829 61,646 59,189 Personal and credit cards 29,475 28,432 26,277 25,325 Business and governments 61,259 62,485 64,313 68,762 Securities purchased under resale agreements 21,307 21,225 22,648 22,843 ------------------------------------------------------------------------- 178,996 175,971 174,884 176,119 Allowance for credit losses (Note 6) 3,242 3,303 3,217 3,498 ------------------------------------------------------------------------- 175,754 172,668 171,667 172,621 ------------------------------------------------------------------------- Other Customers' liability under acceptances 6,494 7,219 6,811 6,956 Land, buildings and equipment 1,872 1,872 1,944 2,019 Trading derivatives' market valuation 11,163 13,745 15,308 14,639 Goodwill 271 280 270 348 Other intangible assets 246 253 284 282 Other assets 6,060 6,324 5,835 6,409 ------------------------------------------------------------------------- 26,106 29,693 30,452 30,653 ------------------------------------------------------------------------- $286,890 $283,634 $285,892 $282,160 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities and shareholders' equity Deposits Personal $ 79,569 $ 79,464 $ 76,431 $ 77,144 Business and governments 97,478 95,486 93,541 90,398 Banks 24,086 22,691 22,700 22,742 ------------------------------------------------------------------------- 201,133 197,641 192,672 190,284 ------------------------------------------------------------------------- Other Acceptances 6,494 7,219 6,811 6,956 Obligations related to securities sold under repurchase agreements 23,299 22,535 28,686 27,904 Obligations related to securities sold short 11,421 9,527 9,219 9,640 Trading derivatives' market valuation 10,972 12,645 14,758 14,144 Other liabilities 13,094 13,697 14,145 13,463 Non-controlling interest in subsidiaries 2,280 2,277 2,326 2,335 ------------------------------------------------------------------------- 67,560 67,900 75,945 74,442 ------------------------------------------------------------------------- Subordinated debentures 2,666 2,686 2,661 2,701 ------------------------------------------------------------------------- Shareholders' equity Capital stock Preferred shares 550 550 800 800 Common shares and contributed surplus 3,204 3,187 3,141 3,131 Retained earnings 12,881 12,512 11,747 11,392 Cumulative foreign currency translation (1,104) (842) (1,074) (590) ------------------------------------------------------------------------- 15,531 15,407 14,614 14,733 ------------------------------------------------------------------------- $286,890 $283,634 $285,892 $282,160 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes are an integral part of these interim consolidated financial statements. Consolidated Statement of Changes in Shareholders' Equity For the nine months ended ------------------------------------------------------------------------- July 31 July 31 (Unaudited) ($ millions) 2004 2003 ------------------------------------------------------------------------- Preferred shares Bank: Balance at beginning of period $ 550 $ 1,025 Redeemed (250) (475) ------------------------------------------------------------------------- Balance at end of period 300 550 Scotia Mortgage Investment Corporation 250 250 ------------------------------------------------------------------------- Total 550 800 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Common shares and contributed surplus Common shares: Balance at beginning of period 3,140 3,002 Issued 88 145 Purchased for cancellation (25) (17) ------------------------------------------------------------------------- Balance at end of period 3,203 3,130 Contributed surplus: Fair value of stock options 1 1 ------------------------------------------------------------------------- Total 3,204 3,131 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Retained earnings Balance at beginning of period 11,747 10,398 Net income 2,223 1,817 Dividends: Preferred (22) (42) Common (808) (626) Purchase of shares and premium on redemption (259) (144) Other - (11) ------------------------------------------------------------------------- Balance at end of period 12,881 11,392 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cumulative foreign currency translation Balance at beginning of period (1,074) 102 Net unrealized foreign exchange translation gains/(losses)(1) (30) (692) ------------------------------------------------------------------------- Balance at end of period (1,104) (590) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total shareholders' equity at end of period $ 15,531 $ 14,733 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Comprises unrealized foreign exchange translation gains/(losses) on net investments in self-sustaining foreign operations of $131 (July 31, 2003 - $(1,370)) and gains/(losses) from related foreign exchange hedging activities of $(161) (July 31, 2003 - $678). The accompanying notes are an integral part of these interim consolidated financial statements. Condensed Consolidated Statement of Cash Flows For the three For the nine months ended months ended ------------------------------------------------------------------------- Sources and (uses) of cash flows July 31 July 31 July 31 July 31 (Unaudited) ($ millions) 2004 2003 2004 2003 ------------------------------------------------------------------------- Cash flows from operating activities Net income $ 733 $ 626 $ 2,223 $ 1,817 Adjustments to net income to determine cash flows (51) 292 9 971 Net accrued interest receivable and payable (37) 68 (223) 311 Trading securities (4,405) (2,323) (3,374) (6,973) Trading derivatives' market valuation, net 875 (183) 364 (261) Other, net 560 (1,397) (524) (1,128) ------------------------------------------------------------------------- (2,325) (2,917) (1,525) (5,263) ------------------------------------------------------------------------- Cash flows from financing activities Deposits 5,979 3,315 7,514 4,123 Obligations related to securities sold under repurchase agreements 1,166 (6,998) (5,233) (1,428) Obligations related to securities sold short 1,966 498 2,205 1,002 Subordinated debenture redemptions/repayments - (343) - (1,059) Capital stock issued 23 67 88 145 Capital stock redeemed/purchased for cancellation (62) - (534) (636) Cash dividends paid (308) (233) (830) (668) Other, net (512) (257) (360) (472) ------------------------------------------------------------------------- 8,252 (3,951) 2,850 1,007 ------------------------------------------------------------------------- Cash flows from investing activities Interest-bearing deposits with banks (576) (531) 593 (350) Loans, excluding securitizations (5,761) 6,149 (6,782) 2,631 Loan securitizations 859 701 2,735 1,828 Investment securities, net (268) 571 2,833 1,081 Land, buildings and equipment, net of disposals (64) (21) (139) (77) Other, net(1) - (6) (59) (471) ------------------------------------------------------------------------- (5,810) 6,863 (819) 4,642 ------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (27) (23) 8 (104) ------------------------------------------------------------------------- Net change in cash and cash equivalents 90 (28) 514 282 Cash and cash equivalents at beginning of period 1,321 899 897 589 ------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 1,411 $ 871 $ 1,411 $ 871 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Represented by: Cash and non-interest-bearing deposits with banks $ 1,411 $ 1,301 Cheques and other items in transit, net liability - (430) ------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 1,411 $ 871 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash disbursements made for: Interest $ 1,462 $ 1,727 $ 4,899 $ 5,438 Income taxes $ 135 $ 24 $ 571 $ 311 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Represents investment in subsidiaries. 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, 2003. The accounting policies used in the preparation of these interim consolidated financial statements are consistent with those used in the Bank's year-end audited consolidated financial statements, except as discussed in Note 1. Certain comparative amounts have been reclassified to conform with the current period's presentation. 1. New accounting policies: Hedging Effective November 1, 2003, the Bank adopted a new accounting guideline for hedging relationships, issued by the Canadian Institute of Chartered Accountants (CICA). This guideline establishes certain qualifying conditions for the use of hedge accounting, which are more stringent and formalized than prior standards. Income and expenses on derivative instruments designated and qualifying as hedges under this guideline are recognized in the Consolidated Statement of Income in the same period as the related hedged item. Asset-liability management (non-trading) derivatives that do not qualify for hedge accounting are carried at fair value on the Consolidated Balance Sheet, and subsequent changes in their fair value are recorded in the Consolidated Statement of Income as follows: interest rate-related contracts in net interest income; options used in managing investment securities in net gain on investment securities; and other derivative contracts in other income - other. The Bank reassessed its hedging relationships as at November 1, 2003, which on transition resulted in an associated unrealized net loss of $44 million. This amount was deferred in other assets in the Consolidated Balance Sheet, and is being recognized in earnings as the original hedged items affect net income. The adoption of this accounting guideline did not have a material impact on the Bank's results of operations. Generally accepted accounting principles Effective November 1, 2003, the Bank, as required, prospectively adopted a new CICA standard for financial reporting. This standard (section 1100) formalizes the Canadian GAAP framework and specifies that industry practice is no longer recognized as a source of GAAP. The changes in accounting policies as a result of adopting this standard did not have a material impact on the Bank's results of operations and are set out below. Computer software development costs Effective November 1, 2003, certain costs incurred for software development are capitalized and amortized over the useful life of the software. Previously, these costs were expensed as incurred. Common shares The Bank's broker-dealer subsidiary, as permitted by Bank Act regulations, trades in the Bank's shares. Prior to November 1, 2003, these shares were accounted for as trading securities. Effective November 1, 2003, trades in the Bank's shares are accounted for as capital transactions in shareholders' equity. Mortgage prepayment fees Prior to November 1, 2003, mortgage prepayment fees were deferred by the Bank and amortized over the remaining term of the original mortgage. As at October 31, 2003, deferred mortgage prepayment fees of $75 million were recorded in other liabilities. Effective November 1, 2003, the Bank recognizes mortgage prepayment fees in interest income unless only minor modifications (based on a present value cash flow test) were made to the mortgage, in which case they continue to be deferred and amortized. The majority of these prepayment fees continue to be deferred and amortized. Other The Bank continues to evaluate the presentation of certain asset and liability balances on the Consolidated Balance Sheet. The impact of these changes is not expected to be material to the consolidated financial statements. 2. Future accounting changes: Consolidation of variable interest entities (VIEs) In March 2004, the CICA issued a draft document amending the VIE accounting guideline, previously issued in June 2003, to harmonize with the December 2003 revisions to the U.S. VIE accounting standard. Under these revisions, the Bank does not expect to consolidate most of the mutual funds it sponsors, nor its personal and corporate trust structures. Apart from this change, the disclosure of the estimated financial statement impact described in Note 2 to the consolidated financial statements for the year ended October 31, 2003, continues to apply. As implementation issues are addressed and revisions to the accounting guideline are made, the estimated impact of this new guideline may change. Liabilities and equity In January 2004, the CICA issued a new pronouncement amending the accounting for certain financial instruments, which have the characteristics of both a liability and equity. This pronouncement requires certain contractual obligations that can be settled at the issuer's option by issuing a variable number of the issuer's own equity instruments to be presented as liabilities rather than as equity. This change in accounting would be applied retroactively, with restatement of comparative amounts, and is effective for the Bank's interim financial statements commencing November 1, 2004. The Bank expects that the $250 million of preferred shares issued by Scotia Mortgage Investment Corporation and $2.0 billion of Scotiabank Trust Securities will be reclassified from shareholders' equity and non-controlling interest in subsidiaries, respectively, to liabilities. This will not impact the Bank's capital ratios, as the Superintendent of Financial Institutions Canada has confirmed that these existing securities will remain eligible as Tier 1 capital. 3. Segmented results of operations Scotiabank is a diversified financial services institution that provides a wide range of financial products and services to retail, commercial and corporate customers around the world. The Bank is organized into three main operating segments: Domestic Banking, International Banking and Scotia Capital. Results for these operating segments are presented in the Business line income tables above. 4. Significant capital transactions On January 28, 2004, the Bank redeemed $250 million Series 11 Non-cumulative Preferred Shares. These shares were redeemed at a price of $26 per share, which included a premium of $1 per share. On April 28, 2004, the Bank paid a stock dividend of one common share for each of its issued and outstanding common shares to common shareholders of record at the close of business on April 6, 2004. The effect is the same as a two-for-one stock split of its common shares. Amounts presented in this report relating to the number of common shares, as well as all per share amounts, have been retroactively adjusted. In the first quarter, the Bank initiated a new normal course issuer bid. Following the payment of the stock dividend, the number of shares authorized for purchase was adjusted to 50 million. This represents approximately 5 per cent of the Bank's outstanding common shares. The bid will terminate on the earlier of January 5, 2005, or the date the Bank completes its purchases. During the quarter, the Bank purchased 1.7 million common shares at an average cost of $35.45. For the nine months ended July 31, 2004, 7.9 million common shares were purchased at an average price of $34.63. 5. Sales of loans through securitizations The Bank securitizes residential mortgages through the creation of mortgage-backed securities. The net gain on sale of the mortgages resulting from these securitizations is recognized in securitization revenues in the Consolidated Statement of Income. No credit losses are expected as the mortgages are insured. The following table summarizes the Bank's sales. For the three For the nine months ended months ended --------------------------------------------------------------------- July 31 April 30 July 31 July 31 July 31 ($ millions) 2004 2004 2003 2004 2003 --------------------------------------------------------------------- Net cash proceeds $ 859 $ 909 $ 701 $ 2,735 $ 1,828 Retained interest 23 32 33 82 71 Retained servicing liability (6) (5) (4) (18) (11) --------------------------------------------------------------------- 876 936 730 2,799 1,888 Residential mortgages securitized 871 908 704 2,754 1,846 --------------------------------------------------------------------- Net gain on sale $ 5 $ 28 $ 26 $ 45 $ 42 --------------------------------------------------------------------- --------------------------------------------------------------------- 6. Allowance for credit losses The following table summarizes the change in the allowance for credit losses. For the three For the nine months ended months ended --------------------------------------------------------------------- July 31 April 30 July 31 July 31 July 31 ($ millions) 2004 2004 2003 2004 2003 --------------------------------------------------------------------- Balance at beginning of period $ 3,317 $ 3,270 $ 3,995 $ 3,580 $ 3,848 Presented with securities - - - (363)(1) - Write-offs (117) (140) (258) (434) (580) Recoveries 46 33 40 119 119 Provision for credit losses 50(3) 130 200 350(2)(3) 773 Other, including foreign exchange adjustment (40) 24 (81) 4 (264) --------------------------------------------------------------------- Balance at the end of period(2)(3) $ 3,256 $ 3,317 $ 3,896(4) $3,256 $3,896(4) --------------------------------------------------------------------- --------------------------------------------------------------------- (1) Effective November 1, 2003, the country risk allowance related to investment securities is no longer disclosed as part of the allowance for credit losses, but continues to be deducted from investment securities. (2) As at July 31, 2004, $14 (April 30, 2004 - $14; July 31, 2003 - $nil) has been recorded in other liabilities. (3) As at July 31, 2004, the general allowance for credit losses was $1,425 (April 30, 2004 - $1,475; July 31, 2003 - $1,475). (4) Includes the country risk allowance related to investment securities of $398, which was deducted from investment securities. 7. Employee future benefits Employee future benefits include pensions and other retirement benefits, post-employment benefits and compensated absences. The following table summarizes the expense for the Bank's principal plans(1). For the three For the nine months ended months ended --------------------------------------------------------------------- July 31 April 30 July 31 July 31 July 31 ($ millions) 2004 2004 2003 2004 2003 --------------------------------------------------------------------- Benefit expense Pension plans $ 21 $ 22 $ 6 $ 65 $ 18 Other benefit plans 26 26 23 78 67 --------------------------------------------------------------------- $ 47 $ 48 $ 29 $ 143 $ 85 --------------------------------------------------------------------- --------------------------------------------------------------------- (1) Other minor plans operated by certain subsidiaries of the Bank are not considered material and are not included in this note. Shareholder & Investor Information Direct deposit service Shareholders may have dividends deposited directly into accounts held at financial institutions which are members of the Canadian Payments Association. To arrange direct deposit service, please write to the Transfer Agent. Dividend and Share Purchase Plan Scotiabank's dividend reinvestment and share purchase plan allows common and preferred shareholders to purchase additional common shares by reinvesting their cash dividend without incurring brokerage or administrative fees. As well, eligible shareholders may invest up to $20,000 each fiscal year to purchase additional common shares of the Bank. Debenture holders may apply interest on fully registered Bank subordinated debentures to purchase additional common shares. All administrative costs of the plan are paid by the Bank. For more information on participation in the plan, please contact the Transfer Agent. Dividend dates for 2004 Record and payment dates for common and preferred shares, subject to approval by the Board of Directors. Record Date Payment Date January 6 January 28 April 6 April 28 July 6 July 28 October 5 October 27 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: http://www.scotiabank.com/. Conference call and Web broadcast The quarterly results conference call will take place on Tuesday, August 31, 2004, at 3:00 p.m. EDT and is expected to last approximately one hour. Interested parties are invited to access the call live, in listen-only mode, by telephone, toll-free, at 1-800-814-3911 (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 http://www.scotiabank.com/. Following discussion of the results by Scotiabank executives, there will be a question and answer session. Listeners are also invited to submit questions by e-mail to . A telephone replay of the conference call will be available from August 31, 2004, to September 14, 2004, by calling (416) 640-1917 and entering the identification code 21080533 followed by the number sign. The archived audio webcast will be available on the Bank's website for three months. Contact information Investors: Financial analysts, portfolio managers and other investors requiring financial information, please contact Investor Relations, Finance Department: Scotiabank Scotia Plaza, 44 King Street West, Toronto, Ontario, Canada M5H 1H1 Telephone: (416) 866-5982 Fax: (416) 866-7867 E-mail: 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: 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: 1-800-564-6253 Fax: 1-888-453-0330 E-mail: Co-Transfer Agent (U.S.A.) Computershare Trust Company, Inc. 350 Indiana Street Golden, Colorado 80401 U.S.A. Telephone: 1-800-962-4284 Co-Transfer Agent (United Kingdom)(1) Computershare Investor Services PLC The Pavilions Bridgwater Road Bedminster Down Bristol BS99 7NH United Kingdom Telephone: +44 870 702 0003 Fax: +44 870 703 6101 (1) Effective as of the close of business on March 30, 2004, the Bank's common shares are no longer listed on the London Stock Exchange and the Official List of the UK Listing Authority. For other shareholder enquiries, please contact the Secretary's Department: Scotiabank Scotia Plaza, 44 King Street West Toronto, Ontario, Canada M5H 1H1 Telephone: (416) 866-4790 Fax: (416) 866-5090 E-mail: Rapport trimestriel disponible en version francaise Le Rapport annuel et les etats financiers periodiques de la Banque sont publies en francais et en anglais et distribues aux actionnaires dans la version de leur choix. Si vous preferez que la documentation vous concernant vous soit adressee en francais, veuillez en informer le Service des relations publiques de la Banque Scotia, Scotia Plaza, 44, rue King Ouest, Toronto (Ontario), Canada M5H 1H1, en joignant, si possible, l'etiquette d'adresse, afin que nous puissions prendre note du changement. The Bank of Nova Scotia is incorporated in Canada with limited liability. DATASOURCE: Scotiabank CONTACT: Sabi Marwah, Senior Executive Vice-President and Chief Financial Officer, (416) 866-6808; Kevin Harraher, Vice-President, Investor Relations, (416) 866-5982; Frank Switzer, Public Affairs, (416) 866-7238

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