Third quarter highlights compared to the same period a year ago:
TORONTO, Aug. 28 /PRNewswire-FirstCall/ -- Scotiabank today
reported near record third quarter net income of $1,032 million
compared with $936 million the same period last year. Quarter over
quarter, net income was down slightly from $1,039 million, due
largely to the unfavourable impact of foreign currency translation
and lower interest and loan loss recoveries. Earnings per share
(diluted) increased 10% to $1.02 from $0.93 in the same period a
year ago, and return on equity remained strong at 22.7%. Excluding
a recovery of value added tax in International Banking recorded in
the third quarter last year, earnings per share (diluted) was up
16%. "Our third quarter saw continued contributions across all
three of our platforms for growth," said Rick Waugh, Scotiabank
President and CEO. "This performance underscores our
diversification and ability to invest in long-term growth
initiatives while continuing Scotiabank's record of achieving
strong quarterly results. "Domestic Banking, including wealth
management, had a very strong quarter characterized by significant
asset and revenue growth. This improvement in our results was
especially satisfying as we continued to make investments aimed at
attracting and retaining customers to promote future growth. These
included marketing initiatives, new branches, and significant
training and expansion of our sales and service staff. We are very
pleased with the increasing contribution that wealth management is
making to our overall domestic results. "Scotia Capital's
diversified businesses combined for a strong third quarter
performance, led by significantly improved trading results, and
strong loan demand from our U.S. and Canadian clients.
"International Banking achieved positive underlying growth
excluding the value added tax recovery in the same quarter a year
ago. Solid results were reported by operations in Peru, the
Caribbean and Central America, and Chile. We continue to move
forward with our strategy to grow and invest in our international
business, and over the quarter we opened new branches in several
countries, introduced new products, and completed our investment in
Thailand. "Although the economic environment and financial markets
are more uncertain than at the beginning of the year, the Bank is
well positioned to manage through any uncertainty and pursue our
current and long-term growth strategies. This confidence is based
on our high levels of profitability and capital, access to multiple
sources of liquidity, our proven competence in risk management and
our significant diversification of operations. Accordingly, the
Bank should be able to achieve the upper range of its key
performance objectives for the year and is well positioned for
continued growth in the future." Year-to-date performance versus
key 2007 financial and operational objectives was as follows: 1.
TARGET: Earn a return on equity (ROE)(1) of 20 to 23%. For the nine
months Scotiabank earned an ROE of 23.2%. 2. TARGET: Generate
growth in earnings per common share (diluted) of 7 to 12%. Our
year-over-year growth in earnings per share was 15%. 3. TARGET:
Maintain a productivity ratio(1) of less than 58%. Scotiabank's
ratio was 53.5% for the nine months. 4. TARGET: Maintain sound
capital ratios. At 9.7%, Scotiabank's Tier 1 capital ratio remains
strong by Canadian and international standards. (1) Refer to
non-GAAP measures discussion further below. FINANCIAL HIGHLIGHTS As
at and for the For the three months ended nine months ended
-------------------------------------------------------------------------
July 31 April 30 July 31 July 31 July 31 (Unaudited) 2007 2007 2006
2007 2006
-------------------------------------------------------------------------
Operating results ($ millions) Net interest income 1,812 1,794
1,716 5,382 4,756 Net interest income(TEB(1)) 1,913 1,903 1,816
5,697 5,065 Total revenue 3,201 3,102 2,889 9,412 8,340 Total
revenue (TEB(1)) 3,302 3,211 2,989 9,727 8,649 Provision for credit
losses 92 20 74 175 184 Non-interest expenses 1,752 1,726 1,608
5,202 4,735 Provision for income taxes 296 286 244 859 669
Provision for income taxes (TEB(1)) 397 395 344 1,174 978 Net
income 1,032 1,039 936 3,091 2,682 Net income available to common
shareholders 1,016 1,028 928 3,056 2,659
-------------------------------------------------------------------------
Operating performance Basic earnings per share ($) 1.03 1.04 0.94
3.09 2.69 Diluted earnings per share ($) 1.02 1.03 0.93 3.06 2.66
Return on equity (%)(1) 22.7 23.4 22.8 23.2 22.5 Productivity
ratio(%) (TEB(1)) 53.0 53.8 53.8 53.5 54.7 Net interest margin on
total average assets (%)(TEB(1)) 1.86 1.93 1.98 1.90 1.98
-------------------------------------------------------------------------
Balance sheet information ($ millions) Cash resources and
securities 121,633 131,296 115,506 Loans and acceptances(2) 233,004
226,310 202,859 Total assets 408,115 411,710 364,981 Deposits
286,985 291,603 255,225 Preferred shares 1,290 1,290 600 Common
shareholders' equity 18,377 18,705 16,468 Assets under
administration 198,786 208,426 180,941 Assets under management
31,031 30,448 26,550
-------------------------------------------------------------------------
Capital measures Tier 1 capital ratio (%) 9.7 10.1 10.0 Total
capital ratio (%) 10.6 11.4 11.6 Tangible common equity to
risk-weighted assets(1) (%) 7.7 8.0 8.4 Risk-weighted assets ($
millions) 219,771 213,078 190,332
-------------------------------------------------------------------------
Credit quality Net impaired loans(4) ($ millions) 584 579 479
General allowance for credit losses ($ millions) 1,298 1,298 1,330
Net impaired loans as a % of loans and acceptances(2)(4) 0.25 0.26
0.24 Specific provision for credit losses as a % of average loans
and acceptances (annualized)(2) 0.16 0.08 0.15 0.12 0.13
-------------------------------------------------------------------------
Common share information Share price ($) High 54.67 54.73 47.24
54.73 49.80 Low 48.91 49.34 41.55 48.80 41.55 Close 49.45 53.39
45.55 Shares outstanding (millions) Average - Basic 988 992 988 990
988 Average - Diluted 996 1,001 999 999 1,001 End of period 982 990
988 Dividends per share ($) 0.45 0.42 0.39 1.29 1.11 Dividend yield
(%) 3.5 3.2 3.5 3.3 3.2 Dividend payout ratio(5) (%) 43.7 40.6 41.5
41.8 41.3 Market capitalization ($ millions) 48,578 52,840 45,022
Book value per common share ($) 18.71 18.90 16.66 Market value to
book value multiple 2.6 2.8 2.7 Price to earnings multiple
(trailing 4 quarters) 12.4 13.7 13.0
-------------------------------------------------------------------------
Other information Employees 55,994 54,908 52,232 Branches and
offices 2,289 2,242 2,147
-------------------------------------------------------------------------
(1) Non-GAAP measure. Refer further below for a discussion of these
measures. (2) Certain comparative amounts in this quarterly report
have been restated to conform with current period presentation. (3)
Balance sheet figures and related ratios have been restated, where
applicable, for the accounting policy related to stock-based
compensation adopted in 2006. Refer to Note 1 of the interim
consolidated financial statements further below for details. (4)
Net impaired loans are impaired loans less the specific allowance
for credit losses. (5) Represents common dividends for the period
as a percentage of the net income available to common shareholders
for the period. MESSAGE TO STAKEHOLDERS Strategies for success
-------------------------------------------------------------------------
Scotiabank continued its strong record of success this quarter by
maintaining its focus on executing strategies that meet the needs
of our stakeholders - and bring us closer to achieving our goal of
being the best Canadian-based international financial services
company. We are committed to our current business model of three
strong business lines and to growing each of our businesses, while
maintaining a high level of diversification. All of our business
lines and key corporate functions made good progress on our three
key priorities for 2007: sustainable revenue growth, including both
organic growth initiatives and acquisitions; effective management
of our capital; and leadership. In Domestic Banking, we are focused
on deepening relationships. We see good potential for growth in
small business and, in May, we launched Scotia Running Start for
business(TM), a comprehensive package of banking solutions that
will help entrepreneurs and small businesses establish new ventures
and support their success. In International Banking, we continue to
complement a strong focus on organic growth with strategic
acquisitions and alliances. We closed the deal announced in the
second quarter to acquire an initial 24.99 per cent stake in
Thanachart Bank, Thailand's eighth-largest bank and leading
automobile lender. This partnership leverages the strengths of both
organizations and builds on our solid track record of strategic
investments in high-potential markets. In Jamaica and the Bahamas,
we launched the Scotiabank MasterCard Business Card and
Scotiabank/AAdvantage Business Executive MasterCard, which will
make credit facilities more easily available for small and
medium-sized businesses. In Scotia Capital, we continue to focus on
building our NAFTA capabilities. Scotia Capital Mexico won the
mandate to lead a US$900 million financing for the acquisition of
Porcelanite Holding, S.A. de C.V. by Grupo Lamosa, S.A.B. de C.V.
The US$675 million senior secured portion of the financing is the
largest syndicated facility ever led by Scotia Capital in Mexico.
Our Calgary Customer Contact Centre was recently named a
platinum-level Contact Centre Employer of Choice(R), identifying
the site as one of the best contact centres to work for in the
country. The Toronto Customer Contact Centre earned the same
designation last year. Awards such as these affirm our progress in
ensuring that Scotiabank is a great place to work, and our belief
that satisfied employees lead to satisfied customers. Heading into
the final quarter of fiscal 2007, we are confident that we will
continue to achieve good earnings performance and meet the
financial and operating objectives we have established for this
year and are well positioned for continued growth in 2008. 2007
Objectives - Our Balanced Scorecard
-------------------------------------------------------------------------
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 Operational - Productivity
ratio of less than 58% - Sound ratings - Strong practices in
corporate governance and compliance processes - Sound capital
ratios Customer - High levels of customer satisfaction and loyalty
- Deeper relationships with existing customers - New customer
acquisition People - High levels of employee satisfaction and
engagement - Enhance diversity of workforce - Commitment to
corporate social responsibility and strong community involvement
ACHIEVEMENTS
-------------------------------------------------------------------------
Domestic Banking - We continue to expand our distribution network
to better serve existing customers and attract new ones. We opened
an additional seven new branches in high growth markets during the
quarter, in addition to the nine added in the first half of 2007.
We plan to open 35 branches in total this year. Since 2006, our
expansion program has added 31 branches, 71 ABMs and nearly 300
sales and service positions. - Our SCENE entertainment program,
Canada's first-ever entertainment loyalty program, has been very
successful, greatly exceeding expectations since its launch in the
first quarter. Members use their Scotiabank SCENE debit and credit
cards to earn points redeemable for free movies and other
entertainment-related rewards. - Scotiabank is committed to helping
customers succeed financially, and launched a market leading
program for business start-ups called Scotia Running Start for
business(TM). It helps new enterprises successfully launch by
providing discounted personal and business banking services, a
complimentary copy of QuickBooks EasyStart accounting software and
other practical resources such as a state-of- the-art business plan
writer called Scotia Plan Writer for business. International
Banking - Scotiabank continues to be honoured for its commitment to
excellence in banking. Scotiabank de Costa Rica received the Best
Emerging Market Bank award from Global Finance magazine. This
recognition is given to banks that continuously provide high levels
of service and have qualities that corporations should look for
when choosing a bank. - We completed the initial purchase of 24.99%
of Thanachart Bank, Thailand's eighth-largest full service bank and
leading automobile financier. With the bank's full platform of
financial services and over 150 branches throughout the country,
this investment opens up substantial growth opportunities in
Thailand. - Scotiabank Mexico and Global Transaction Banking
successfully launched TRADEXPRESS elite, our trade finance Internet
service. It is now available to all Mexican business clients, along
with customers in 28 other countries. - Through the joint efforts
of Scotiabank de Puerto Rico's Corporate Banking team and Scotia
Capital's Public Finance Group in New York, Scotiabank was lead
arranger for a US$1.5 billion revolving credit facility for the
Commonwealth of Puerto Rico. This is the second consecutive year
that Scotiabank has arranged this revolving credit facility and it
was the fourth billion-dollar mandate awarded to the Bank by the
Commonwealth of Puerto Rico in the last 18 months. Scotia Capital -
ScotiaMocatta was named one of Canada's Global Leaders by the
Institute for Competitiveness and Prosperity, the research arm of
Ontario's Task Force on Competitiveness, Prosperity and Economic
Progress. - Scotia Capital acted as financial advisor to CanWest
Global Communications Corp. on its $495 million privatization of
CanWest MediaWorks Income Fund. Related to the transaction, Scotia
Capital successfully syndicated and was also the lead arranger and
bookrunner on $1.3 billion of bank facilities, joint bookrunner on
US$400 million senior subordinated notes and sole hedge advisor. -
Scotia Capital Mexico won the mandate to lead the financing for the
acquisition of Porcelanite Holding, S.A. de C.V. by Grupo Lamosa,
S.A.B. de C.V. The financing includes a US$675 million senior
secured syndicated facility, the largest syndication ever led by
Scotia Capital Mexico. Employee highlights - Scotia Applause, our
employee recognition program, was honoured at the Employer of
Choice Marketing Awards sponsored by working.com, and by
Recognition Professionals International. These awards affirm our
progress in ensuring that Scotiabank is a great place to work and
build rewarding careers, and our belief that satisfied employees
lead to satisfied customers. Community involvement - The Scotiabank
Research Centre was unveiled at Pier 21, a national historic site
in Halifax, on June 5. The Bank established the centre with a
donation to Pier 21 to commemorate Scotiabank's 175th year in
business and celebrate the Bank's diversity. With thousands of
immigrants' stories, photographs, documents and oral histories in
its collections, the Scotiabank Research Centre is a place to share
and preserve memories for future generations to enjoy. MANAGEMENT'S
DISCUSSION & ANALYSIS 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 and any applicable
Canadian securities legislation. These statements include comments
with respect to the Bank's objectives, strategies to achieve those
objectives, expected financial results (including those in the area
of risk management), and the outlook for the Bank's businesses and
for the Canadian, United States and global economies.
Forward-looking statements are typically identified by words or
phrases such as "believe," "expect," "anticipate," "intent,"
"estimate," "plan," "may increase," "may fluctuate," and similar
expressions of future or conditional verbs such as "will,"
"should," "would" and "could." By their very nature,
forward-looking statements involve numerous assumptions, inherent
risks and uncertainties, both general and specific, and the risk
that predictions and other forward-looking statements will not
prove to be accurate. 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; operational and reputational risks; the accuracy and
completeness of information the Bank receives on customers and
counterparties; the timely development and introduction of new
products and services in receptive markets; the Bank's ability to
expand existing distribution channels and to develop and realize
revenues from new distribution channels; the Bank's ability to
complete and integrate acquisitions and its other growth
strategies; changes in accounting policies and methods the Bank
uses to report its financial condition and the results of its
operations, including uncertainties associated with critical
accounting assumptions and estimates; the effect of applying future
accounting changes; global capital markets activity; the Bank's
ability to attract and retain key executives; reliance on third
parties to provide components of the Bank's business
infrastructure; unexpected changes in consumer spending and saving
habits; technological developments; consolidation in the Canadian
financial services sector; changes in tax laws; competition, both
from new entrants and established competitors; judicial and
regulatory proceedings; acts of God, such as earthquakes and
hurricanes; the possible impact of international conflicts and
other developments, including terrorist acts and war on terrorism;
the effects of disease or illness on local, national or
international economies; disruptions to public infrastructure,
including transportation, communication, power and water; and the
Bank's anticipation of and success in managing the risks implied by
the foregoing. A substantial amount of the Bank's business involves
making loans or otherwise committing resources to specific
companies, industries or countries. Unforeseen events affecting
such borrowers, industries or countries could have a material
adverse effect on the Bank's financial results, businesses,
financial condition or liquidity. These and other factors may cause
the Bank's actual performance to differ materially from that
contemplated by forward- looking statements. For more information,
see the discussion starting on page 53 of the Bank's 2006 Annual
Report. 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 and its
securities, 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. 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.
-------------------------------------------------------------------------
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/. Non-GAAP Measures The Bank uses a number of
financial measures to assess its performance. Some of these
measures are not calculated in accordance with Generally Accepted
Accounting Principles (GAAP), are not defined by GAAP and do not
have standardized meanings that would ensure consistency and
comparability between companies using these measures. These
non-GAAP measures are used in our Management's Discussion and
Analysis further below, and they are defined below: Taxable
equivalent basis The Bank analyzes net interest income and total
revenues on a taxable equivalent basis (TEB). This methodology
grosses up tax-exempt income earned on certain securities reported
in net interest income to an equivalent before tax basis. A
corresponding increase is made to the provision for income taxes,
hence there is no impact on net income. Management believes that
this basis for measurement provides a uniform comparability of net
interest income arising from both taxable and non-taxable sources
and facilitates a consistent basis of measurement. While other
banks also use TEB, their methodology may not be comparable to the
Bank's. The TEB gross-up to net interest income and to the
provision for income taxes for the three months ended July 31, 2007
is $101 million versus $100 million in the same quarter last year
and $109 million last quarter. For the nine months ended July 31,
2007, the TEB gross- up amount is $315 million versus $309 million
for the same period last year. For purposes of segmented reporting,
a segment's net interest income and provision for income taxes is
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. These items do not have an
impact on the reported earnings in the period. As a result, the
Bank calculates its return on equity using average common
shareholders' equity excluding: - unrealized gains/losses on
available-for-sale securities, and - unrealized gains/losses on
derivative instruments designated as cash flow hedges. 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 and operational risk
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. 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 Superintendent of Financial Institutions Canada.
Group Financial Performance and Financial Condition Scotiabank's
earnings momentum continued this quarter, bringing net income for
the nine months to well over $3 billion. Compared to last year,
year-to-date net income grew by $409 million or 15%, driven by
strong asset and revenue growth. This quarter's net income was
$1,032 million, up $96 million or 10% from the third quarter last
year. Excluding the value added tax (VAT) recovery of $51 million
in International Banking included in the third quarter last year,
net income grew 17% year over year. Net income this quarter was
down slightly from the $1,039 million reported last quarter, due
primarily to the negative impact of foreign currency translation
and lower interest and loan loss recoveries. Total revenue Total
revenue (on a taxable equivalent basis) was $3,302 million this
quarter, up $313 million or 11% above the same period last year and
$91 million or 3% from last quarter. Year-over-year growth
reflected higher net interest income, stronger trading revenues,
and broad-based growth across transaction-based revenue categories,
partially offset by the impact of the foreign currency translation.
The increase from last quarter was due primarily to the higher
trading revenues, broad-based asset growth in our lending portfolio
and securities gains, partially offset by lower securitization
revenues and the impact of foreign currency translation. For the
nine months, total revenue of $9,727 million rose $1,078 million or
12% from the same period last year. Net interest income Net
interest income (on a taxable equivalent basis) was $1,913 million,
up $97 million or 5% from the same quarter last year and slightly
higher than last quarter. The increase from last year was driven by
strong asset growth, particularly in Domestic retail lending, and
the positive impact of net gains from derivatives used for
asset/liability management. Partially offsetting the increase were
lower interest recoveries and the impact of foreign currency
translation this quarter. Quarter over quarter, the benefit of
continued asset growth, three extra days in the quarter and the
positive impact of gains from derivatives used for asset/liability
management was mostly offset by the impact of foreign currency
translation and lower interest recoveries. Year-to-date net
interest income was $5,697 million up 12% from the $5,065 million
for the same period last year. The increase was driven by the
contribution of recent acquisitions and growth across most
businesses. The Bank's interest margin was 1.86% this quarter, a
reduction from 1.98% last year and 1.93% last quarter. This was due
to lower interest recoveries, rising wholesale funding costs, and a
change in the asset mix, primarily from very strong growth in both
the lower-yielding Canadian mortgage portfolio and trading assets.
Other income This quarter's other income was $1,389 million, $216
million or 18% higher than the same period last year. This growth
was primarily in trading revenues, which were particularly strong
this quarter. There were also higher retail brokerage revenues and
broad-based increases in other customer-driven revenues. As well,
there were higher securities gains, primarily in equity
investments, which were partially offset by the change in fair
value of certain securities resulting from widening credit spreads.
Compared to the previous quarter, the increase of $81 million or 6%
was due primarily to higher trading revenues and net securities
gains, partially offset by lower securitization revenues and the
impact of foreign currency translation. For the nine-month period,
other income was $4,030 million, up 12% from the $3,584 million in
the same period last year. The growth was spread across all income
categories, partly from the contribution of recent acquisitions.
The increases were also from higher customer-driven activities in
retail brokerage, investment banking, mutual funds and
transaction-based services, reflecting in part the growth in the
Bank's customer base. Provision for credit losses The provision for
credit losses was $92 million this quarter, compared to $74 million
in the same period last year and $20 million last quarter. The low
levels in the second quarter were due to the combination of a
reduction in the general allowance of $25 million and higher net
provision reversals and recoveries in the Scotia Capital portfolio.
Further discussion on credit risk is provided further below.
Non-interest expenses and productivity Non-interest expenses of
$1,752 million this quarter rose $144 million or 9% from the same
period last year. Excluding the $51 million value added tax (VAT)
recovery recorded last year, non-interest expenses grew 6% year
over year. The increase over the same period last year was
broad-based to support the Bank's ongoing business and growth
initiatives. There was higher performance- based compensation this
quarter, in line with the Bank's strong results. As well, salaries,
premises, and technology costs, advertising and business
development expenses rose from expansion and promotional activities
both in Canada and internationally. Quarter over quarter,
non-interest expenses were up $26 million or 2%. There were
increases in salaries, reflecting the three additional days this
quarter, and higher performance-based compensation and other
expenses to support ongoing business expansion initiatives. Partly
offsetting were the impact of foreign currency translation and
lower stock-based compensation due to a reduction in the Bank's
share price. For the nine-month period, non-interest expenses were
$5,202 million, up 10% from $4,735 million reported last year. The
growth was primarily from the recent acquisitions, as well as
increases in salaries and employee benefit costs from revenue
initiatives and higher performance-based compensation. There was
also growth in advertising and promotional expenses. Excluding the
VAT recovery last year, expenses were up 9% over the same period
last year. The productivity ratio was 53.0% this quarter, an
improvement over the 53.8% reported for the same period last year
and the second quarter. The Bank's operating leverage this quarter
- the rate of growth in total revenue on a taxable equivalent basis
less the rate of growth in expenses - was 1.6% compared to the same
period last year, and 1.4% over the second quarter. The
year-to-date operating leverage was 2.6%, or 3.8% excluding the VAT
recovery last year. Taxes The effective tax rate for this quarter
was 21.8%, up from 20.2% in the same quarter last year and 21.1%
last quarter. The higher effective tax rate was mainly from lower
tax savings from foreign operations. The year-to-date effective tax
rate was 21.3% compared to 19.6% for the same period last year, as
the Bank had a larger benefit from the utilization of tax loss
carryforwards in Mexico last year. Risk management The Bank's risk
management policies and practices are unchanged from those outlined
in pages 53 to 63 of the 2006 Annual Report. Credit risk The
provision for credit losses was $92 million in the third quarter,
compared to $74 million in the same period last year and $20
million in the previous quarter. Last quarter's provision comprised
$45 million in specific provisions, partially offset by a reduction
of $25 million in the general allowance for credit losses. Scotia
Capital had a net reversal of $10 million in the third quarter,
compared to a net reversal of $19 million in the same quarter last
year and reversals and recoveries totaling $51 million in the
previous quarter. The net reversal in the current quarter related
primarily to provision reversals in the European and U.S.
portfolios. Credit losses of $77 million in the Domestic Banking
portfolios were up from both $69 million in the same quarter last
year and $66 million in the prior quarter. The year-over-year
increase arose from higher retail provisions in line with the
strong growth in retail lending volumes. The increase from the
prior quarter was due mainly to provision reversals in the
commercial portfolio last quarter. International Banking's
provision for credit losses was $25 million in the third quarter,
compared to $24 million in the same period last year and $30
million in the prior quarter. Total net impaired loans, after
deducting the allowance for specific credit losses, were $584
million as at July 31, 2007, in line with $579 million last
quarter. The general allowance for credit losses was $1,298
million, unchanged from last quarter. Market risk Value at Risk
(VaR) is a key measure of market risk in the Bank's trading
activities. In the third quarter the average one-day VaR was $15.6
million compared to $9.2 million for the same quarter last year and
$11.3 million in the previous quarter, with increased exposure
across most risk factors. The increase in Equity risk reflected
certain trading opportunities as well as an increase in market
volatility. These changes also led to an increase in the average
one-day VaR from the previous quarter. Average for the three months
ended
-------------------------------------------------------------------------
Risk factor July 31 April 30 July 31 ($ millions) 2007 2007 2006
-------------------------------------------------------------------------
Interest rate $ 9.0 $ 7.2 $ 7.2 Equities 8.7 5.2 6.2 Foreign
exchange 2.0 1.2 1.1 Commodities 1.3 1.5 1.0 Diversification (5.4)
(3.8) (6.3)
-------------------------------------------------------------------------
All-Bank VaR $ 15.6 $ 11.3 $ 9.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
There were six trading loss days in the third quarter, compared to
three in the previous quarter. The losses were all within the range
predicted by VaR. Liquidity risk The Bank maintains large holdings
of liquid assets to support its operations. These assets generally
can be sold or pledged to meet the Bank's obligations. As at July
31, 2007, liquid assets were $107 billion or 26% of total assets
compared to $117 billion or 28% of total assets at April 30, 2007.
These assets consist of securities, 72%, and cash and deposits with
banks, 28% (April 30, 2007 - 73% and 27%, respectively). In the
course of the Bank's day-to-day activities, securities and other
assets are pledged to secure an obligation, participate in clearing
or settlement systems, or operate in a foreign jurisdiction.
Securities may also be sold under repurchase agreements. As at July
31, 2007, total assets pledged or sold under repurchase agreements
were $74 billion, compared to $71 billion at April 30, 2007. The
quarter-over-quarter increase was attributable to higher levels of
pledges for securities sold under repurchase agreements and
securities borrowing transactions. Related party transactions There
were no changes to the Bank's procedures and policies for related
party transactions from those outlined on pages 67 and 114 of the
2006 Annual Report. All transactions with related parties continued
to be at market terms and conditions. Balance sheet The Bank's
total assets at July 31, 2007, were $408 billion, up $29 billion or
8% from October 31, 2006, or $37 billion or 10% excluding the
impact of foreign currency translation. Compared to the prior
quarter, total assets were down $4 billion or 1%, as the
significant growth in residential mortgages and other loans was
more than offset by the negative impact of foreign currency
translation and lower trading securities. Total securities were $93
billion, a decline of $3 billion from October 31, 2006. Trading
securities increased $1 billion to support customer-driven activity
and trading operations. More than offsetting the growth in trading
securities was a decline of $4 billion in available-for-sale
securities since year end. This reduction was due primarily to the
deconsolidation of a variable interest entity that was restructured
in the previous quarter. As at July 31, 2007, the unrealized gains
on available-for-sale securities were $960 million, compared to
$1,091 million at October 31, 2006, a reduction of $131 million.
Compared to the previous quarter, unrealized gains declined by $248
million, mainly from a reduction in the value of certain debt
securities resulting from recent market volatility, and gains
realized in the quarter. The Bank's loan portfolio grew $20 billion
or 10% from October 31, 2006. Mortgages were up a very strong $9
billion, driven by Domestic residential mortgages, which rose $11
billion or 14% (before securitization of $3 billion) from market
share gains as well as the continued demand arising from the strong
domestic housing market. Business and government loans rose $8
billion, with $1 billion in commercial loans in Domestic Banking
and $2 billion from International Banking, primarily from the
Pacific Region. As well, Scotia Capital's lending and trading
portfolio was up $4 billion. Total liabilities were $388 billion as
at July 31, 2007, $27 billion or 7% higher than October 31, 2006,
partially offset by the impact of foreign currency translation of
$9 billion. There was $23 billion growth across deposit categories,
including in wholesale deposits to fund the growth in banking and
trading assets. As well, securities sold short, which are used in
the trading book activities of Scotia Capital, rose $8 billion.
During the quarter, the Bank redeemed all of its $500 million 6.25%
subordinated debentures due July 2012. Total shareholders' equity
rose $2 billion from October 31, 2006. The increase was due
primarily to the strong internal capital generation, and the change
in accounting standards for financial instruments, which resulted
in after-tax fair value adjustments of $741 million relating
primarily to available-for-sale securities, and $690 million of
non-cumulative preferred shares issued in the nine-month period.
These increases were partly offset by the impact of foreign
currency translation. Capital management The Bank continues to
maintain a strong capital position and resulting capital ratios.
The Tier 1 ratio was 9.7% this quarter, down from 10.2% at October
31, 2006, as strong levels of internally generated capital, as well
as the issuance of $690 million non-cumulative preferred shares,
were more than offset by growth in risk-weighted assets across the
business lines. The tangible common equity (TCE) ratio, which
represents common equity less goodwill and other intangible assets
as a percentage of risk-weighted assets, continued to be strong.
This ratio was 7.7% at July 31, 2007, down from 8.3% at October 31,
2006, as the Bank continues to invest its capital in various growth
initiatives. During the quarter, the Bank purchased 7.7 million
common shares at an average price of $51.47, pursuant to the normal
course issuer bid initiated in the first quarter of 2007. This
compares to 1.3 million shares purchased in the third quarter of
last year at an average cost of $44.84. 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.
Commencing November 1, 2006, the Bank adopted three new accounting
standards issued by the Canadian Institute of Chartered Accountants
(CICA), which are discussed more fully in Note 1 to the interim
consolidated financial statements further below. The methods of
determining the fair value of financial instruments, as detailed on
page 65 of the 2006 Annual Report, are also applicable to financial
instruments not previously carried at fair value. 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 normal economic, industry and
market conditions. Total derivative notional amounts were $1,237
billion at July 31, 2007, compared to $1,045 billion at October 31,
2006, with growth in most derivative categories. The percentage of
those derivatives held for trading and those held for non-trading
or asset/liability management was generally unchanged. The credit
equivalent amount after taking into account master netting
arrangements was $22 billion as at July 31, 2007, compared to $14
billion last year end, primarily due to growth in the portfolio and
higher interest rates, partially offset by the unfavourable impact
of foreign currency translation. 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 loan commitments. No material contractual
obligations were entered into this quarter that are not in the
ordinary course of business. Processes for review and approval of
these contractual arrangements are unchanged from last year. During
the quarter, the Bank did not enter into any significant new
arrangements with VIEs that are not consolidated by the Bank in its
balance sheet. In the second quarter, as a result of a change in
the structure of one of the multi-seller conduits administered by
the Bank, it was determined that the Bank was no longer the primary
beneficiary of the VIE. Accordingly, the VIE was no longer included
in the Bank's consolidated balance sheet effective April 30, 2007.
The deconsolidation resulted in a decrease to available-for- sale
securities and other liabilities of $7 billion, with a net increase
in guarantees and other indirect commitments of $8 billion from the
year end. The Bank provides liquidity facilities, as well as
partial credit enhancements in certain instances, to commercial
paper conduits administered by the Bank and by third parties. These
facilities provide an alternate source of financing, in the event a
conduit cannot issue commercial paper or, in some cases, when
certain specified conditions or performance measures are not met.
Liquidity facilities to commercial paper conduits totaled $24
billion as at July 31, 2007, of which $21 billion were to
commercial paper conduits administered by the Bank. As at July 31,
2007, total commercial paper outstanding in conduits administered
by the Bank was $17 billion. Liquidity facilities provided by the
Bank to non-Scotiabank sponsored Canadian conduits are nominal. The
Bank may securitize residential mortgages as a means to diversify
its funding sources, as it represents a cost-effective means to
fund the growth in this portfolio. A further $1,351 million in
residential mortgages were securitized this quarter, bringing the
balance of outstanding mortgages securitized to $11,651 million as
at July 31, 2007, versus $11,913 million at October 31, 2006.
Excluding the impact of the deconsolidation discussed above,
guarantees and other indirect commitments increased 11% from
October 31, 2006. Pursuant to the new CICA accounting standards
relating to financial instruments, a liability is now recorded for
the fair value of the obligation assumed at the inception of
certain guarantees. As at July 31, 2007, the Bank has recorded an
increase in other liabilities of $79 million and a corresponding
increase in other assets relating to the implementation of the new
accounting standards as they apply to guarantees. Fees from
guarantees and loan commitment arrangements recorded in other
income were $55 million for the three-month period ended July 31,
2007, compared to $57 million for the same period a year ago.
Common dividend The Board of Directors, at its meeting on August
28, 2007, approved a quarterly dividend of 45 cents per common
share. This quarterly dividend applies to shareholders of record as
of October 2, 2007 and is payable October 29, 2007. Recent market
developments During July and August, the global financial markets
have exhibited considerable volatility and stress. The stress
included decreases in equity values, widening of credit spreads and
difficulties experienced by some asset backed commercial paper
conduits in re-issuing their commercial paper at its maturity. The
market behaviour has had minimal impact on the Bank in terms of
trading revenues and values of financial instruments held by the
Bank. At this point, it is not evident that the stress in the
financial markets will translate into weakness in the global
economy, and therefore, we do not see any significant near-term
impact on our portfolios. The Bank has no direct exposure to U.S.
subprime mortgages, and only minimal indirect exposure. While the
Bank trades and invests in Collateralized Debt Obligations (CDO's),
none of the CDO's include assets based on U.S. subprime mortgages.
The Bank's positions in Canadian third party asset backed conduit
commercial paper are not significant. Outlook Global growth remains
broadly based, led by China, India and other emerging nations. The
pace of expansion has moderated in the developed economies,
particularly in the U.S., where declining housing activity, more
cautious consumer spending and recent market volatility has
undercut momentum. Canada and Mexico are expected to continue to
outperform the United States, based on the ongoing strength of
commodity markets. In recent months, in many countries, including
Canada, central banks had moved interest rates slightly higher in
reaction to tight labour markets, strong commodity markets and a
moderate increase in consumer price inflation. However, a gradual
moderation in economic activity among developed nations and
concerns about the potential fallout from renewed financial market
volatility may temper further increases. Although the economic
environment and financial markets are more uncertain than at the
beginning of the year, the Bank is well positioned to manage
through any uncertainty and pursue our current and long-term growth
strategies. This confidence is based on our high levels of
profitability and capital, access to multiple sources of liquidity,
our proven competence in risk management and our significant
diversification of operations. Accordingly, the Bank should be able
to achieve the upper range of its key performance objectives for
the year and is well positioned for continued growth in the future.
Business Segment 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) 2007 2007 2006 2007 2006
-------------------------------------------------------------------------
Business segment income Net interest income $ 1,006 $ 942 $ 932 $
2,901 $ 2,725 Provision for credit losses 77 66 69 217 221 Other
income 537 530 480 1,585 1,437 Non-interest expenses 892 870 879
2,632 2,557 Provision for income taxes 179 169 143 512 434
-------------------------------------------------------------------------
Net income $ 395 $ 367 $ 321 $ 1,125 $ 950 Preferred dividends paid
4 3 2 9 6
-------------------------------------------------------------------------
Net income available to common shareholders $ 391 $ 364 $ 319 $
1,116 $ 944
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures Return on equity(1) 31.8% 32.0% 26.3% 31.6% 28.0%
Average assets ($ billions) $ 156 $ 149 $ 139 $ 151 $ 134
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer above for discussion of non-GAAP measures. Domestic
Banking, which includes Wealth Management, reported strong net
income available to common shareholders of $391 million this
quarter, an increase of $72 million or 22% from the third quarter
last year and $27 million or 7% higher than last quarter. The
segment contributed 38% of the Bank's total quarterly net income.
Return on equity increased to 31.8% from 26.3% last year. Average
assets before securitization rose $17 billion or 12% from the same
quarter last year, due primarily to growth of $13 billion or 16% in
residential mortgages. Strong mortgage growth was recorded in all
sales channels, and resulted in increased market share. Personal
revolving credit and business lending volumes also grew. Market
share of retail deposits, which includes savings and chequing
accounts and term deposits, continued to increase as volumes rose
6%. Non-personal deposits grew 13%, mainly in current accounts and
non-personal term. Quarter over quarter, average assets before
securitization rose 4% and deposits increased 2%. Total revenue was
up $131 million or 9% from the same quarter last year, mainly as a
result of strong volume growth and higher fee income related to
wealth management activities. Revenues rose $71 million or 5% from
the second quarter due to volume growth and three additional days
in the quarter. Net interest income of $1,006 million was up $74
million or 8% from the same period last year, driven by strong
volume growth in both assets and deposits. Average volume growth
was reported for most products, including mortgages, personal lines
of credit, personal deposits, small business deposits, commercial
loans, acceptances, and nonpersonal deposits. Partially offsetting
was a decline in the interest margin from increasing consumer
demand for lower risk, lower spread products, competitive pressures
and somewhat higher funding costs due to recent rate increases.
Quarter over quarter, net interest income rose by $64 million or
7%, due in part to three additional days this quarter and strong
asset and deposit growth. The provision for credit losses was $77
million this quarter, up from $69 million reported in the same
quarter last year and $66 million last quarter. Retail provisions
increased year over year from growth in the portfolio, while the
previous quarter benefited from provision reversals in the
commercial portfolio. Other income was $537 million this quarter,
an increase of $57 million or 12% compared to the same quarter last
year, reflecting strong growth in wealth management revenues, as
well as increases in retail, small business and commercial banking.
Wealth management revenues grew primarily from higher retail
brokerage customer activity and increased mutual fund revenues from
higher average balances, resulting from strong net sales,
particularly in longer term products. Private Client revenues rose
from growth in estate and trust fees and Managed Account fees. In
addition, there were increases in personal and nonpersonal
transaction service revenues and card revenues. On a
quarter-over-quarter basis, other income increased 1%. Non-interest
expenses rose 1% from the third quarter last year due mainly to
business growth, including additions to the branch network and
sales force. There were also normal salary increases, higher
expenses for performance-based compensation, and increases in
advertising expenditures. Partly offsetting were lower pension and
employee benefits costs. Quarter over quarter, expenses increased
2% due to three more days in the quarter, and expenses related to
growth initiatives, partially offset by lower stock-based
compensation. International Banking For the three For the nine
months ended months ended
-------------------------------------------------------------------------
(Unaudited)($ millions) (Taxable equivalent July 31 April 30 July
31 July 31 July 31 basis)(1) 2007 2007 2006 2007 2006
-------------------------------------------------------------------------
Business segment income Net interest income $ 703 $ 679 $ 607 $
2,052 $ 1,678 Provision for credit losses 25 30 24 74 52 Other
income 250 300 237 847 672 Non-interest expenses 558 577 477 1,697
1,372 Provision for income taxes 65 44 29 152 64 Non-controlling
interest in net income of subsidiaries 29 31 27 85 70
-------------------------------------------------------------------------
Net income $ 276 $ 297 $ 287 $ 891 $ 792 Preferred dividends paid 6
4 2 12 6
-------------------------------------------------------------------------
Net income available to common shareholders $ 270 $ 293 $ 285 $ 879
$ 786
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures Return on equity(1) 16.1% 18.7% 23.9% 18.8% 24.3%
Average assets ($ billions) $ 65 $ 69 $ 57 $ 66 $ 54
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer above for discussion of non-GAAP measures. International
Banking's net income available to common shareholders in the third
quarter of 2007 was $270 million, a decrease of $15 million or 5%
from the same period last year and $23 million or 8% from last
quarter. Excluding the $51 million value-added tax recovery in
Mexico in the third quarter last year, net income available to
common shareholders increased $36 million or 15% from last year,
despite the impact of foreign currency translation. The decline
relative to the prior quarter was 3% excluding foreign currency
translation, due mainly to the change in fair value of certain
securities resulting from widening credit spreads. International
Banking accounted for 27% of the Bank's total net income and had a
return on equity of 16.1%. Average asset volumes were $65 billion
this quarter, up $8 billion or 14% from last year, $10 billion or
17% excluding the impact of foreign currency translation. This was
a result of organic loan growth of 19%, driven by an increase of
26% in credit cards, 24% in mortgages and 12% in other retail
loans. In addition, commercial loans rose 19% from strong growth in
Asia, the Caribbean and Central America, Chile and Mexico. Compared
to last quarter, average assets decreased $4 billion or 6%, but
were in line with last quarter excluding the unfavourable impact of
foreign currency translation. Retail loans continued their steady
growth trend with an increase of 3% over last quarter. Total
revenues were $953 million this quarter, an increase of $109
million or 13% from last year, but $26 million or 3% below last
quarter. Excluding the impact of foreign currency translation,
revenue increased $140 million from last year and $29 million from
last quarter. Major contributors to the year-over-year growth were
Peru, our acquisitions in Caribbean and Central America, as well as
strong organic asset and deposit growth in the Caribbean and Asia.
The quarter-over-quarter increase was primarily in the Caribbean
and Peru. Net interest income was $703 million this quarter, up $96
million or 16% from last year, or 19% excluding the impact of
foreign currency translation. This increase was due primarily to
very strong loan and deposit growth across the segment. Net
interest income grew $24 million or 4% compared to the previous
quarter, or 9% excluding the impact of foreign currency
translation. This increase was driven by strong organic loan growth
in Peru, Mexico, the Caribbean and Asia. Interest margins were up
seven basis points from last year and 25 basis points above last
quarter. However, excluding the net gains from derivatives used for
asset/liability management and other timing differences, margins
were almost flat with last quarter, but down six basis points from
last year due to a change in asset mix. The provision for credit
losses was $25 million in the third quarter, compared to $24
million last year and $30 million last quarter. Other income was
$250 million, up $13 million or 6% from last year. Excluding the
impact of foreign currency translation, other income increased $21
million from last year. This increase resulted from our
acquisitions and growth in customer-driven transaction revenues in
the Caribbean and Central America, Chile and Peru, partly offset by
the change in fair value of certain securities from widening credit
spreads. Quarter over quarter, other income fell $50 million or $33
million excluding foreign currency translation, due primarily to
the change in fair value of certain securities and lower trading
revenue in Mexico. Non-interest expenses were $558 million this
quarter, up 17% or $81 million from last year, but $19 million or
3% lower than last quarter. After adjusting for the impact of
foreign currency translation and the $51 million VAT recovery in
Mexico in the third quarter last year, expenses rose $43 million or
8% from last year and 1% from last quarter. The year-over-year
growth was due to acquisitions in the Caribbean and Central
America, normal salary increases, higher pension costs and ongoing
business growth initiatives in the Caribbean and Mexico. The
effective tax rate this quarter was 18%, up from 8% in the same
period last year and higher than the 12% last quarter. The
increases were due to lower earnings in low tax jurisdictions,
primarily in Asia, and a higher effective tax rate in Mexico from
lower tax loss carryforwards available for utilization. Scotia
Capital
-------------------------------------------------------------------------
For the three For the nine months ended months ended
-------------------------------------------------------------------------
(Unaudited) ($ millions) (Taxable equivalent July 31 April 30 July
31 July 31 July 31 basis)(1) 2007 2007 2006 2007 2006
-------------------------------------------------------------------------
Business segment income Net interest income $ 231 $ 296 $ 262 $ 796
$ 700 Provision for credit losses (10) (51) (19) (91) (89) Other
income 413 360 351 1,134 1,113 Non-interest expenses 267 262 232
788 739 Provision for income taxes 107 125 120 337 346
-------------------------------------------------------------------------
Net income $ 280 $ 320 $ 280 $ 896 $ 817 Preferred dividends paid 4
2 2 8 5
-------------------------------------------------------------------------
Net income available to common shareholders $ 276 $ 318 $ 278 $ 888
$ 812
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures Return on equity(1) 27.7% 33.4% 31.9% 30.5% 33.1%
Average assets ($ billions) $ 156 $ 153 $ 136 $ 153 $ 126
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer above for discussion of non-GAAP measures. Scotia Capital
earned net income available to common shareholders of $276 million,
down slightly from the same period last year and $42 million or 13%
lower than last quarter due primarily to less interest and loan
loss recoveries in the third quarter. Excluding the impact of
foreign currency translation, net income available to common
shareholders was an 8% decrease quarter over quarter. This
represents a contribution of 27% to the Bank's overall results this
quarter. Return on equity at 27.7% was slightly lower than the
strong results achieved in the third quarter last year and last
quarter. Total average assets increased 15% over last year to $156
billion. Securities and loans in our trading business increased $17
billion to support both client-driven activity and trading
opportunities. In addition, there was a $5 billion or 19% increase
in corporate loans and acceptances across all businesses, with the
vast majority of the growth in investment grade loans. The increase
in total average assets compared to the prior quarter was due to
higher securities and loans in our trading business and a modest
increase in corporate loans and acceptances. Total revenues of $644
million were $31 million or 5% higher than the same quarter last
year due mainly to growth in Global Capital Markets, driven
primarily by record revenues in our derivatives business. Global
Corporate and Investment Banking revenues decreased from last year
due mainly to higher securities gains and interest recoveries on
impaired loans in the prior year. The $12 million or 2% decrease in
revenues from last quarter reflected the impact of higher interest
recoveries on impaired loans in the second quarter, substantially
offset by stronger trading revenues. Net interest income of $231
million was $31 million below last year, due mainly to higher
interest recoveries from impaired loans in the third quarter last
year and lower loan origination fees. Partially offsetting were the
benefit of higher interest from trading operations, and growth in
loan volumes, though somewhat mitigated by tighter credit margins.
The substantial decrease from the last quarter primarily reflects
higher interest recoveries from impaired loans last quarter and
lower interest from trading operations. This quarter net loan loss
reversals were $10 million compared to reversals of $19 million in
the same period last year and reversals of $51 million last
quarter. Net reversals were realized primarily in Europe and the
U.S. this quarter. Other income was $413 million or 17% higher than
last year. Global Capital Markets increased 85% primarily
reflecting higher trading revenues, particularly in our derivatives
business. Global Corporate and Investment Banking decreased 22%
from last year, due mainly to gains on the sale of securities
realized last year. Compared to last quarter, other income
increased by 15% due to significantly higher derivatives revenues
and merger and acquisition advisory fees, partly offset by lower
equity trading results. Non-interest expenses were $267 million, a
15% increase from the same quarter last year, due primarily to
higher performance-based compensation, salaries and technology
costs. Compared to last quarter, expenses were up $5 million,
mainly in higher performance-based compensation, partially offset
by lower salary costs. Other(1) For the three For the nine months
ended months ended
-------------------------------------------------------------------------
(Unaudited) ($ millions) (Taxable equivalent July 31 April 30 July
31 July 31 July 31 basis)(2) 2007 2007 2006 2007 2006
-------------------------------------------------------------------------
Business segment income Net interest income(3) $ (128) $ (123) $
(85) $ (367) $ (347) Provision for credit losses - (25) - (25) -
Other income 189 118 105 464 362 Non-interest expenses 35 17 20 85
67 Provision for income taxes(3) (55) (52) (48) (142) (175)
-------------------------------------------------------------------------
Net income $ 81 $ 55 $ 48 $ 179 $ 123 Preferred dividends paid 2 2
2 6 6
-------------------------------------------------------------------------
Net income available to common shareholders $ 79 $ 53 $ 46 $ 173 $
117
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures Average assets ($ billions) $ 32 $ 33 $ 32 $ 32 $ 29
-------------------------------------------------------------------------
(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 July 31, 2007 ($101), April 30,
2007 ($109), and July 31, 2006 ($100), and for the nine months
ended July 31, 2007 ($315), and July 31, 2006 ($309), to arrive at
the amounts reported in the Consolidated Statement of Income. Net
income available to common shareholders for Other was $79 million
in the third quarter, $33 million higher than the same period last
year, and $26 million above last quarter. The increase was
primarily from higher securities gains. Total revenues increased
$41 million from the same quarter last year and $66 million from
last quarter. The increase was driven by higher gains on equity
investments, partially offset by lower net interest income and
securitization revenues. 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 $101
million in the third quarter, compared to $100 million last year,
and $109 million in the second quarter. Non-interest expenses were
$15 million higher than the same period last year and up $18
million from last quarter due to small increases across a number of
categories. Total For the three For the nine months ended months
ended
-------------------------------------------------------------------------
(Unaudited) July 31 April 30 July 31 July 31 July 31 ($ millions)
2007 2007 2006 2007 2006
-------------------------------------------------------------------------
Business segment income Net interest income $ 1,812 $ 1,794 $ 1,716
$ 5,382 $ 4,756 Provision for credit losses 92 20 74 175 184 Other
income 1,389 1,308 1,173 4,030 3,584 Non-interest expenses 1,752
1,726 1,608 5,202 4,735 Provision for income taxes 296 286 244 859
669 Non-controlling interest in net income of subsidiaries 29 31 27
85 70
-------------------------------------------------------------------------
Net income $ 1,032 $ 1,039 $ 936 $ 3,091 $ 2,682 Preferred
dividends paid 16 11 8 35 23
-------------------------------------------------------------------------
Net income available to common shareholders $ 1,016 $ 1,028 $ 928 $
3,056 $ 2,659
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other measures Return on equity(1) 22.7% 23.4% 22.8% 23.2% 22.5%
Average assets ($ billions) $ 409 $ 404 $ 364 $ 402 $ 343
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Refer above for a discussion of non-GAAP measures. Geographic
Highlights
-------------------------------------------------------------------------
For the three For the nine months ended months ended
-------------------------------------------------------------------------
July 31 April 30 July 31 July 31 July 31 (Unaudited) 2007 2007 2006
2007 2006
-------------------------------------------------------------------------
Net income available to common shareholders ($ millions) Canada $
639 $ 561 $ 495 $ 1,744 $ 1,501 United States 98 139 108 400 285
Mexico 112 124 162 383 431 Other international 201 211 174 624 493
Corporate adjustments (34) (7) (11) (95) (51)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ 1,016 $ 1,028 $ 928 $ 3,056 $ 2,659
-------------------------------------------------------------------------
Average assets ($ billions) Canada $ 270 $ 256 $ 233 $ 260 $ 221
United States 25 32 33 30 31 Mexico 21 22 21 21 21 Other
international 86 85 69 83 64 Corporate adjustments 7 9 8 8 6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ 409 $ 404 $ 364 $ 402 $ 343
-------------------------------------------------------------------------
Quarterly Financial Highlights For the three months ended
-------------------------------------------------------------------------
July April Jan. Oct. July April Jan. Oct. 31 30 31 31 31 30 31 31
2007 2007 2007 2006 2006 2006 2006 2005
-------------------------------------------------------------------------
Total revenue ($ millions) $3,201 $3,102 $3,109 $2,868 $2,889
$2,717 $2,734 $2,660 Total revenue (TEB(1)) ($ millions) 3,302
3,211 3,214 2,999 2,989 2,830 2,830 2,735 Net income ($ millions)
1,032 1,039 1,020 897 936 894 852 811 Basic earnings per share ($)
1.03 1.04 1.02 0.90 0.94 0.90 0.85 0.81 Diluted earnings per share
($) 1.02 1.03 1.01 0.89 0.93 0.89 0.84 0.80
-------------------------------------------------------------------------
(1) Refer above for a discussion of non-GAAP measures. Share Data
As at
-------------------------------------------------------------------------
July 31 (thousands of shares outstanding) 2007
-------------------------------------------------------------------------
Common shares 982,368(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)
-------------------------------------------------------------------------
Class A preferred shares issued by Scotia Mortgage Investment
Corporation 250(6)
-------------------------------------------------------------------------
Series 2000-1 trust securities issued by BNS Capital Trust 500(7)
Series 2002-1 trust securities issued by Scotiabank Capital Trust
750(8) Series 2003-1 trust securities issued by Scotiabank Capital
Trust 750(8) Series 2006-1 trust securities issued by Scotiabank
Capital Trust 750(8)
-------------------------------------------------------------------------
Outstanding options granted under the Stock Option Plans to
purchase common shares 28,942(1)(9)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) As at August 17, 2007, the number of outstanding common shares
and options were 982,397 and 28,913, 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, except for the
initial dividend paid on April 26, 2007, which was in an amount of
$0.28356 per share. (5) These shares are entitled to non-cumulative
preferential cash dividends payable quarterly in an amount of
$0.28125 per share, except for the initial dividend paid on July
27, 2007, which was in an amount of $0.34829 per share. (6)
Reported in capital instrument liabilities in the Consolidated
Balance Sheet. On August 9, 2007, Scotia Mortgage Investment
Corporation announced its intention to redeem all its 250,000 Class
A non-cumulative preferred shares (Scotia BOOMS) on October 31,
2007. (7) Reported in capital instrument liabilities in the
Consolidated Balance Sheet. (8) Reported in deposits in the
Consolidated Balance Sheet. (9) Included are 16,246 stock options
with tandem stock appreciation right (SAR) features. Further
details, including convertibility features, are available in Notes
13, 14 and 15 of the October 31, 2006 consolidated financial
statements presented in the 2006 Annual Report and Note 6 further
below. 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
2006 annual consolidated financial statements for more information
about the significant accounting principles used to prepare the
financial statements. The Bank's interim consolidated financial
statements have been affected by the implementation of three new
CICA accounting standards, namely Financial Instruments -
Recognition and Measurement, Hedges and Comprehensive Income. The
changes, and the impact of these changes on the Bank's consolidated
financial statements, are described in Note 1 to the interim
consolidated financial statements. Consistent with the requirements
of the new accounting standards, the Bank has not restated any
prior period as a result of adopting the accounting changes, but
has recorded certain transitional amounts that represent the
cumulative effect of adjustments relating to prior periods. As
required, unrealized foreign currency translation losses have been
reclassified to accumulated other comprehensive income (loss)
within shareholders' equity for prior periods. 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 2006 Annual Report. 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)
2007(1) 2007(1) 2006 2007(1) 2006
-------------------------------------------------------------------------
Interest income Loans $ 3,536 $ 3,404 $ 3,098 $ 10,317 $ 8,321
Securities 1,192 1,286 1,113 3,609 3,008 Securities purchased under
resale agreements 325 283 284 938 776 Deposits with banks 292 266
230 809 624
-------------------------------------------------------------------------
5,345 5,239 4,725 15,673 12,729
-------------------------------------------------------------------------
Interest expense Deposits 2,756 2,600 2,275 7,882 6,007
Subordinated debentures 30 30 32 93 98 Capital instrument
liabilities 14 13 14 40 40 Other 733 802 688 2,276 1,828
-------------------------------------------------------------------------
3,533 3,445 3,009 10,291 7,973
-------------------------------------------------------------------------
Net interest income 1,812 1,794 1,716 5,382 4,756 Provision for
credit losses (Note 3) 92 20 74 175 184
-------------------------------------------------------------------------
Net interest income after provision for credit losses 1,720 1,774
1,642 5,207 4,572
-------------------------------------------------------------------------
Other income Card revenues 92 89 78 274 224 Deposit and payment
services 208 199 198 613 570 Mutual funds 77 73 60 218 178
Investment management, brokerage and trust services 192 195 159 575
495 Credit fees 143 129 140 404 403 Trading revenues 217 151 99 517
499 Investment banking 184 195 167 573 484 Net gain on
available-for-sale securities(2) 134 79 105 340 307 Other 142 198
167 516 424
-------------------------------------------------------------------------
1,389 1,308 1,173 4,030 3,584
-------------------------------------------------------------------------
Net interest and other income 3,109 3,082 2,815 9,237 8,156
-------------------------------------------------------------------------
Non-interest expenses Salaries and employee benefits 1,013 1,004
940 3,020 2,802 Premises and technology 335 329 313 991 892
Communications 76 75 70 224 201 Advertising and business
development 71 70 59 217 159 Professional 53 48 46 146 116 Business
and capital taxes 37 34 37 110 97 Other 167 166 143 494 468
-------------------------------------------------------------------------
1,752 1,726 1,608 5,202 4,735
-------------------------------------------------------------------------
Income before the undernoted 1,357 1,356 1,207 4,035 3,421
Provision for income taxes 296 286 244 859 669 Non-controlling
interest in net income of subsidiaries 29 31 27 85 70
-------------------------------------------------------------------------
Net income $ 1,032 $ 1,039 $ 936 $ 3,091 $ 2,682
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Preferred dividends paid 16 11 8 35 23
-------------------------------------------------------------------------
Net income available to common shareholders $ 1,016 $ 1,028 $ 928 $
3,056 $ 2,659
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of common shares outstanding (millions): Basic 988
992 988 990 988 Diluted 996 1,001 999 999 1,001
-------------------------------------------------------------------------
Earnings per common share (in dollars): Basic $ 1.03 $ 1.04 $ 0.94
$ 3.09 $ 2.69 Diluted $ 1.02 $ 1.03 $ 0.93 $ 3.06 $ 2.66
-------------------------------------------------------------------------
Dividends per common share (in dollars) $ 0.45 $ 0.42 $ 0.39 $ 1.29
$ 1.11
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Certain comparative amounts have been reclassified to conform with
current period presentation. (1) Refer to Note 1 for impact of new
accounting policies related to financial instruments adopted in the
first quarter of 2007. (2) Prior to November 1, 2006, the net gain
was related to securities classified as investment securities.
Refer to Note 1 for further details. 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)
2007(1) 2007(1) 2006 2006
-------------------------------------------------------------------------
Assets Cash resources Cash and non-interest-bearing deposits with
banks $ 2,370 $ 2,532 $ 2,280 $ 2,013 Interest-bearing deposits
with banks 23,048 23,967 17,734 18,412 Precious metals 3,358 4,623
3,362 3,756
-------------------------------------------------------------------------
28,776 31,122 23,376 24,181
-------------------------------------------------------------------------
Securities Trading 63,797 71,547 62,490 57,600
Available-for-sale(2) 29,060 28,627 33,012 33,725
-------------------------------------------------------------------------
92,857 100,174 95,502 91,325
-------------------------------------------------------------------------
Securities purchased under resale agreements 26,834 25,867 25,705
22,535
-------------------------------------------------------------------------
Loans Residential mortgages 99,000 94,706 89,590 85,541 Personal
and credit cards 41,360 40,408 39,058 38,245 Business and
government 84,778 83,424 76,733 72,568
-------------------------------------------------------------------------
225,138 218,538 205,381 196,354 Allowance for credit losses (Note
3) 2,423 2,505 2,607 2,695
-------------------------------------------------------------------------
222,715 216,033 202,774 193,659
-------------------------------------------------------------------------
Other Customers' liability under acceptances 10,289 10,277 9,555
9,200 Trading derivatives' market valuation 14,407 14,313 10,369
11,929 Land, buildings and equipment 2,296 2,308 2,256 2,209
Goodwill 1,140 1,176 873 688 Other intangible assets 287 301 294
267 Other assets 8,514 10,139 8,302 8,988
-------------------------------------------------------------------------
36,933 38,514 31,649 33,281
-------------------------------------------------------------------------
$ 408,115 $ 411,710 $ 379,006 $ 364,981
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and shareholders' equity Deposits Personal $ 98,171 $
97,218 $ 93,450 $ 91,904 Business and government 156,668 157,919
141,072 135,249 Banks 32,146 36,466 29,392 28,072
-------------------------------------------------------------------------
286,985 291,603 263,914 255,225
-------------------------------------------------------------------------
Other Acceptances 10,289 10,277 9,555 9,200 Obligations related to
securities sold under repurchase agreements 31,223 29,577 33,470
29,117 Obligations related to securities sold short 21,322 21,521
13,396 14,663 Trading derivatives' market valuation 12,780 12,214
11,211 11,815 Other liabilities 22,820 22,976 26,457 24,457(3)
Non-controlling interest in subsidiaries 505 496 435 411
-------------------------------------------------------------------------
98,939 97,061 94,524 89,663(3)
-------------------------------------------------------------------------
Subordinated debentures (Note 5) 1,774 2,301 2,271 2,275
-------------------------------------------------------------------------
Capital instrument liabilities 750 750 750 750
-------------------------------------------------------------------------
Shareholders' equity Capital stock Preferred shares 1,290 1,290 600
600 Common shares and contributed surplus 3,521 3,539 3,425 3,393
Retained earnings 16,967 16,763 15,843 15,372(3) Accumulated other
comprehensive income (loss)(1) (2,111) (1,597) (2,321) (2,297)
-------------------------------------------------------------------------
19,667 19,995 17,547 17,068(3)
-------------------------------------------------------------------------
$ 408,115 $ 411,710 $ 379,006 $ 364,981
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Certain comparative amounts have been reclassified to conform with
current period presentation. (1) Refer to Note 1 for impact of new
accounting policies related to financial instruments adopted in the
first quarter of 2007. (2) Prior to November 1, 2006, these
securities were classified as investment securities. Refer to Note
1 for further details. (3) Refer to Note 1 for the accounting
policy related to stock-based compensation adopted in 2006. The
accompanying notes are an integral part of these interim
consolidated financial statements. DATASOURCE: Scotiabank -
Financial Releases CONTACT: Kevin Harraher, Vice-President,
Investor Relations, (416) 866-5982; Frank Switzer, Director, Public
Affairs, (416) 866-7238
Copyright