Scotiabank's record earnings trend continues First quarter highlights compared to the same period a year ago: - Net income of $704 million, up 18.4% from $595 million - Earnings per share (diluted) of $1.33, up 19.8% from $1.11 - Return on equity of 19.4%, an increase from 16.6% - Tier 1 capital ratio of 10.9%, up from 10.0% TORONTO, March 2 /PRNewswire-FirstCall/ -- Scotiabank's record earnings trend continued in the first quarter of 2004 with net income of $704 million - an increase of $109 million, or 18.4%, over the same period last year. Earnings per share (diluted) were $1.33 - up 22 cents per share, or 19.8%, from the first quarter of 2003. Return on equity was very strong at 19.4%. "Our first quarter results continue to reflect the diversity and strength of our businesses," said Rick Waugh, President and CEO. "This led to the Bank exceeding the higher performance targets established for 2004. "Our earnings contribute to our industry-leading capital ratios, which remain a source of strength and flexibility for Scotiabank. "These results are a tribute to the entire Scotiabank team. Our employees continue to deliver customer service excellence. Based on our record first quarter, we remain confident that we will be able to achieve ourperformance targets for 2004. "On behalf of the Scotiabank team, I would like to pay special tribute to Peter Godsoe, who will be stepping down as Chairman today. Through his leadership, the Bank has consistently delivered superior results to shareholders and has grown to be a leading Canadian-based international financial services company. We intend to build on this record of achievement." ------------------------------------------------------------------------- Performance versus our 2004 targets was as follows: ------------------------------------------------------------------------- 1. TARGET: Earn a return on equity (ROE) of 16% to 19%. In Q1, Scotiabank earned an ROE of 19.4%. 2. TARGET: Generate growth in earnings per common share of 10% to 15% per year. In Q1, our year-over-year growth in earnings per share was 19.8%. 3. TARGET: Maintain a productivity ratio of less than 58%. Scotiabank's performance in Q1 was 54.3% and continued to lead the industry. 4. TARGET: Maintain strong capital ratios. At 10.9%, Scotiabank's Tier 1 capital ratio remained very good by any standard. ------------------------------------------------------------------------- Financial Highlights As at and for the three months ended ------------------------------------------------------------------------- January 31 October 31 January 31 (Unaudited) 2004 2003 2003 ------------------------------------------------------------------------- Operating results ($ millions) Net interest income (TEB(1)) 1,548 1,584 1,611 Total revenue (TEB(1)) 2,588 2,591 2,645 Provision for credit losses 170 120 325 Non-interest expenses 1,406 1,494 1,355 Provision for income taxes (TEB(1)) 251 250 296 Net income 704 660 595 Net income available to common shareholders 684 650 568 ------------------------------------------------------------------------- Operating performance Basic earnings per share ($) 1.35 1.28 1.12 Diluted earnings per share ($) 1.33 1.26 1.11 Return on equity (%) 19.4 18.6 16.6 Productivity ratio (%) (TEB(1)) 54.3 57.7 51.2 Net interest margin on total average assets (%) (TEB(1)) 2.18 2.22 2.17 ------------------------------------------------------------------------- Balance sheet information ($ millions) Cash and securities 81,578 83,773 74,540 Loans and acceptances 175,680 178,478 188,043 Total assets 281,451 285,892 289,588 Deposits 191,800 192,672 192,658 Preferred shares 550 800 1,050 Common shareholders' equity 14,209 13,814 13,655 Assets underadministration 167,714 161,974 154,899 Assets under management 20,497 19,964 20,701 ------------------------------------------------------------------------- Capital measures Tier 1 capital ratio(%) 10.9 10.8 10.0 Total capital ratio (%) 13.4 13.2 12.8 Tangible common equity to risk-weighted assets(2) (%) 9.2 8.9 8.5 Risk-weighted assets($ millions) 153,479 154,523 163,231 ------------------------------------------------------------------------- Credit quality Net impaired loans after general allowance(3) ($ millions) 12 47 559 General allowance for credit losses ($ millions) 1,475 1,475 1,475 Net impaired loans as a % of loans and acceptances(3) 0.01 0.03 0.30 Specific provision for credit losses as a % of average loans and acceptances 0.38 0.27 0.67 ------------------------------------------------------------------------- Common share information Share price ($) High 68.48 67.39 54.75 Low 62.15 58.37 44.55 Close 67.50 65.47 50.70 Shares outstanding (thousands) Average (basic) 505,392 505,865 504,503 Average (diluted) 513,704 514,170 512,251 End of period 505,575(4) 505,353 503,666 Dividends per share ($) 0.50 0.44 0.40 Dividend yield (%) 3.1 2.8 3.2 Dividend payout ratio (%) 37.0 34.2 35.6 Market capitalization ($ millions) 34,126 33,085 25,536 Book value percommon share ($) 28.10 27.34 27.11 Market value to book value multiple 2.4 2.4 1.9 Price to earnings multiple (trailing 4 quarters) 13.5 13.8 11.4 ------------------------------------------------------------------------- Other information Employees 44,304 43,986 44,500 Branches and offices 1,875 1,850 1,848 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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) Represents common shareholders' equity and non-controlling interest in the common equity ofsubsidiaries, less goodwill and intangible assets, as a percentage of risk-weighted assets. (3) Net impaired loans are impaired loans less the allowance for credit losses, including the general allowance. (4) Refer to Share Capital further below. Management's Discussion and Analysis Review of Operating Performance A major factor affecting both the results of operations and financial position was the strong year-over-year appreciation of the Canadian dollar against most currencies in which the Bank conducts business - including a 19% rise against the U.S. dollar. The Bank has taken action to mitigate the impact on net income of further volatility of U.S./Canadian exchange rates. Total revenue Total revenue (on a taxable equivalent basis) was $2,588 million in the first quarter, $57 million lower than the same period a year ago and $3 million below last quarter. Excluding the effect of foreign currency translation, total revenue grew by $182 million year over year and$40 million quarter over quarter. The year-over-year revenue increase arose from continued strength in Domestic Banking and in the Caribbean and Mexico. As well, there were higher gains on the sale of investment securities. Net interest income Net interest income (on a taxable equivalent basis) was $1,548 million this quarter, a reduction of 4% from the same quarter last year. However, excluding foreign currency translation, net interest income rose by $80 million or 5%. Compared to the preceding quarter, net interest income declined $36 million, or $7 million excluding foreign currency translation. Canadian currency interest profit was $42 million higher than last year, mainly stemming from solid business growth. This primarily arose from higher residential mortgages, personal loans, current accounts and high-yield savings deposits. The positive impact of these items was partially offset by a compression in the net interest margin compared to last year. Compared to last quarter, Canadian currency interest profit rose by $14 million. This quarter was positively affected by the adoption of a new accounting guideline for hedging relationships, which requires asset-liability management derivatives that do not qualify for hedge accounting to bemarked-to-market (refer to details of new accounting policies in Note 1). This benefit was offset by a reduction in foreign currency interest profit resulting from the same accounting policy change. Foreign currency interest profit of $598 million declined by 15% year over year. Excluding the effect of foreign currency translation, interest profit rose primarily due to growth in Scotiabank's international operations, particularly in the Caribbean and Mexico, and wider U.S. dollar funding margins. The Bank's total interest margin was 2.18% in the first quarter, up modestly from the first quarter last year, but down four basis points from the fourth quarter. Other income Other income rose to $1,040 million this quarter, up $6 million year over year and $33 million above last quarter. Excluding the impact of foreign currency translation, the increases were more substantial, with other income rising $102 million year over year and up $47 million from the prior quarter. The increase over the first quarter of last year was driven by stronger gains on the sale of investment securities, compared to the unusually low level last year. There was also a substantial improvement in retail brokerage revenues from higher customer volumes. These gains werepartly offset by lower securitization revenues following the maturity of several issues and a decline in credit fees in corporate lending. The increase over last quarter was mainly due to near-record trading revenues, particularly in foreign exchange and securities trading, and higher underwriting fees. Credit fees were lower, in line with reduced corporate lending volumes. Non-interest expenses and productivity Non-interest expenses were $1,406 million in the first quarter, up 4% over the same quarter last year. Excluding the effect of foreign currency translation, non-interest expenses rose by 12% year over year. The largest component of this increase was salaries and benefits, mainly because of higher stock-based compensation, following a 33%rise in the Bank's stock price. There was also growth in performance-based compensation in line with stronger business results. Pension costs rose, primarily from the higher present value of pension obligations due to a decline in interest rates. Computer expenses rose year over year, reflecting the Bank's outsourcing of cheque processing operations (now reported in computer expenses rather than in several other categories), and the relatively low level of computer expenses in the first quarter last year. As well, mortgage acquisition expenses rose due to higher volumes. Quarter over quarter, expenses fell significantly by $88 million, mainly because of a decline in computer and litigation expenses from the high levels incurred last quarter. The Bank's productivity ratio - a measurement showing the efficiency with which revenues are generated - continued to lead the industry at 54.3%. Taxes The Bank's first quarter effective tax rate was 19.4%. This quarter, there was a benefit of $24 millionfrom the revaluation of net future income tax assets, as a result of the Ontario government's reversal of previously enacted tax rate reductions. Excluding this, the effective tax rate was 22.0%, versus 25.4% last year. This decrease was due to higher tax-exempt dividend income, utilization of tax loss carryforwards in Scotiabank Inverlat, and a 1% decline in the overall Canadian statutory tax rate. Non-controlling interest The deduction for non-controlling interest in the income of subsidiaries was $57 million this quarter, $17 million less than the first quarter last year, and $10 million below last quarter. The year-over-year decrease was due mainly to the Bank's purchase of an additional 36% of Scotiabank Inverlat on April 30, 2003. Partiallyoffsetting this decrease were higher costs from the issuance of Scotiabank Trust Securities in February last year (although, these costs were largely mitigated by lower preferred share dividends). 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 The total provision for credit losses was $170 million this quarter, a substantial improvement from $325 million in the same period a year ago,but up from $120 million in the preceding quarter. Provisions for credit losses in the domestic retail and commercial portfolios remained relatively stable compared to the same quarter in 2003. However, credit losses in commercial lending rose from last quarter, due primarily to provisions taken against two accounts. Credit losses this quarter in international operations were lower than the same period last year, due primarily to higher provision reversals and recoveries. Compared to the preceding quarter, credit losses also fell, because of lower new provisions. In Scotia Capital, the provision for credit losses declined $153 million from the same quarter last year, but rose $49 million from the fourth quarter, which included higher provision reversals. Strong capital markets continue to create opportunities for the Bank to sell loans at favourable prices and for borrowers to refinance. While we expect some volatility in loan losses from quarter to quarter through 2004, conditions in the capital markets and a continuing economic recovery in North America should act to contain loan losses below 2003 levels. Total net impaired loans, after deducting the allowance for credit losses (both specific and general), were $12 million, a significant improvement from $559 million in the first quarter of 2003, and a moderate decrease from $47 million last quarter. Market risk Value at Risk (VaR) is a key measure of market risk in the Bank's trading activities. In the first quarter of 2004, the one-day VaR averaged $10.3 million. Most of the year-over-year increase of $0.7 million was associated with interest rate risk, though this was substantially offset by a decrease in foreign exchange risk. ------------------------------------------------------------------------- Jan. 31 Oct. 31 Jan. 31 Risk factor 2004 2003 2003 ($ millions) Average Average Average ------------------------------------------------------------------------- Interest rate $ 8.8 $ 6.7 $ 5.3 Equities 5.4 6.1 5.4 Foreign exchange 1.4 1.4 4.8 Commodities 1.0 1.0 0.5 Diversification (6.3) (6.4) (6.4) ------------------------------------------------------------------------- All-Bank VaR $ 10.3 $ 8.8 $ 9.6 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Trading revenue was positive on more than 93% of the days in this quarter, compared to 83% for the previous quarter. No single loss day 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 personal and credit card loans, mortgages and business loans. The Bank maintains large holdings of liquid assets tosupport its operations. As at January 31, 2004, liquid assets were $73 billion (October 31, 2003 - $75 billion), representing 26% of total assets (October 31, 2003 - 26% of total assets). 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. At January 31, 2004, total assets pledged or sold under repurchase agreements were $40 billion, compared to $44 billion at October 31, 2003. The majority of these assets relate to repurchase agreements, as well as pledges for securities borrowing and lending activities. Balance sheet As at January 31, 2004, total assets were $281 billion, down $8 billion or 3% from one year ago. Excluding the effect of foreign currency translation, assets grew by $8 billion. Domestic retail lending operations continued to perform very well. Residential mortgage lending rose by a substantial $5 billion, accompanied by growth in personal revolving credit balances of $3 billion, as the Bank's product offerings continued to deliver market share gains. Excluding the impact of foreign currency translation, International Banking's loan balances also grew year over year, particularly in the Caribbean and Mexico. Scotiabank Inverlat experienced 46% growth in mortgages and personal lending, in part due to an acquisition of a portfolio of retail auto loans. In Scotia Capital, asset levels rose in trading operations, but continued to fall in corporate lending from a combination of a planned reduction and the high level of liquidity in the capital markets. Partially offsetting asset growth in these areas were underlying decreases in securities purchased under resale agreements and in investment securities. Compared to the prior quarter, total assets declined by $4 billion, mainly from reductions in corporate lending, securities purchased under resale agreements and investment securities. However, residential mortgages and retail lending in Canada continued to grow strongly. As well, excluding foreign currency translation, there was solid business growth in the Bank's international operations. Total liabilities decreased $8 billion from the same quarter of the prior year, but after adjusting for foreign currency translation, they rose by $8 billion. Over the past year, deposits in the Bank's popular Money Master account more than doubled to reach $7 billion, and current account balances grew by $3 billion. The surplus of market value over book value in the Bank's investment securities portfolio continued to grow, reaching $1,157 million at the end of the quarter. This was a significant increase of $454 million from October 31, 2003. Included in the surplus was an unrealized gain of $330 million relating to the Bank's investment holding in Shinsei Bank in Japan. In February 2004, the Bank sold a portion of this investment in the initial public offering for a realized pre-tax gain of approximately $125 million. Capital management The Bank further increased its very strong capital position during the quarter. As at January 31, 2004, the Tier 1 ratio was 10.9%, up significantly from 10.0% a year ago. This ratio also rose by 10 basis points over the prior quarter, notwithstanding the redemption of $250 million of Tier 1 preferred shares. The tangible common equity ratio (which represents common equity less goodwill and intangibles as a percentage of risk-weighted assets) was 9.2%, an increase of 70 basis points from last year, and above the ratios of other major Canadian banks. Dividend The Board of Directors announced on March 2, 2004, a stock dividend doubling the number of the Bank's outstanding common shares and effectively achieving a two-for-one split of its common shares. The stock dividend is payable on April 28, 2004 to common shareholders of record at the close of business on April 6, 2004, with each outstanding whole common share being entitled to one additional common share. By doubling the number of common shares outstanding, there will be a corresponding reduction in the market price per share. The Board of Directors also approved a quarterly dividend of 50 cents per common share to shareholders of record as of April 6, 2004. The payment date for the cash dividend isApril 28, 2004, and is payable prior to the stock dividend. This cash dividend would be the equivalent of 25 cents per share on a split basis. Outlook We expect a more synchronized global economic recovery among industrial nations during 2004 and 2005. The U.S. will lead the revival among industrial nations by a substantial margin. A global recovery is good news for Canada and Mexico, given the importance of exports - especially to the United States - to both countries. A broad-based recovery is also good for many of Canada's commodities producers. At the same time, a number of industries are facing transitional challenges, triggered by the rapid appreciation of the Canadian dollar and the need to improve productivity to compete effectively in the U.S. and other international markets. Inflation is expected to remain well controlled in North America, allowing central banks to keep interest rates at historically low levels through 2004. Despite the improving economic conditions in many of the Bank's markets, we still face some challenges of margin pressure, foreign currency volatility and asset growth in business lending. Notwithstanding, we are confident that our overall strategies will enable us to achieve our performance targets for the coming year. ------------------------------------------------------------------------- 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 otherforward-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 spendingand 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-lookingstatements, whether written or oral, that may be made from time to time by or on behalf of the Bank. ------------------------------------------------------------------------- Business Line Review Domestic Banking Business line income For the three months ended ------------------------------------------------------------------------- (Unaudited) ($ millions) January 31 October 31 January 31 (Taxable equivalent basis)(1) 2004 2003 2003 ------------------------------------------------------------------------- Net interest income $ 877 $ 878 $ 869 Provision for credit losses (92) (48) (76) Other income 417 406 371 Non-interest expenses (764) (844) (716) Provision for income taxes (139) (128) (154) ------------------------------------------------------------------------- Net income $ 299 $ 264 $ 294 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Other measures For the three months ended ------------------------------------------------------------------------- January 31 October 31 January 31 (Unaudited) 2004 2003 2003 ------------------------------------------------------------------------- Return on equity(2) 32.4% 29.2% 32.7% Average assets ($ billions) $ 107 $ 105 $ 98 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Refer to footnote (2) further below. (2) Refer to footnote (4) further below. Highlights Domestic Banking, which includes Wealth Management, generated net income of $299 million in the first quarter, an increase of 2% over last year's solid results. Domestic Banking contributed 42% of the Bank's total net income this quarter. Quarter over quarter, net income rose 13%, reflecting significantly lower expenses, partly offset by an increase in provisions for credit losses. Net interest income was slightly above last year, as continued strong growth in both retail lending and core deposits was mostly offset by a lower margin. Residential mortgages and revolving credit remained the main contributors to asset growth. As well, business deposits recorded a significant increase. Other income rose $46 million or 12% year over year, mainly from higher brokerage and related revenues, which continued to rebound with higher customer volumes. There were smaller increases in other categories, such as transaction-based and electronic banking fees. Provisionsfor credit losses rose $16 million year over year, and $44 million compared to the prior quarter, mainly in the commercial portfolio due primarily to provisions taken against two accounts. Credit quality remained solid in the retail portfolio. Operating expenses grew 7% from the same quarter last year, largely as a result of normal growth in salaries, higher performance and stock-based compensation and an increase in pension costs. In addition, mortgage acquisition expenses rose in line with volume growth. Operating expenses were 9% lower than the prior quarter, when higher litigation, performance-based compensation and technology-related expenses were incurred. Other highlights: - Scotiabank led the major banks in year-over-year residentialmortgage market share gains, as our innovative product lineup and industry-leading customer service, along with a continuation of low interest rates, resulted in strong growth from all distribution channels. - Based on the significant success of The Ultimate(R) GIC product, Scotiabank is now offering it within RSPs and RIFs. The Ultimate(R) GIC permits customers to take advantage of higher long-term interest rates at the time of purchase, and allows them to reinvest or withdraw a portion of the GIC at each anniversary date. - Scotiabank's marketing programs continue to be recognized with a variety of important industry awards. We received four awards, including one gold, at the 2003 Canadian Marketing Association's Awards Gala. Scotiabank was the only major bank to win an award. - Scotiabank continues to successfully grow the recently launched ican Invest(TM) Program. More than 30,000 customers are using the program to identify and achieve their financial goals by setting money aside on a regular basis and investing it in a selection of one-stop solutions, such as the Scotia Selected(TM) Funds, a series of six mutual fund portfolios comprising Scotiabank and Capital International mutual funds. - We continue to see strong growth in fee-based brokerage assets, which reached $6 billion, up 15% during the quarter. - RoyNat Capital, our merchant banking subsidiary, opened two more U.S. offices in Charlotte and Chicago, following early successes with our office in Cleveland. Our U.S. offices service Canadian companies seeking capital to finance expansion into the United States, and provide long-term financing to mid-market U.S. companies in our target industries. Scotia Capital Business line income For the three months ended ------------------------------------------------------------------------- (Unaudited) ($ millions) January 31 October 31 January 31 (Taxable equivalent basis)(1) 2004 2003 2003 ------------------------------------------------------------------------- Net interest income $ 254 $ 279 $319 Provision for credit losses (71) (22) (224) Other income 332 295 349 Non-interest expenses (241) (245) (229) Provision for income taxes (71) (86) (77) ------------------------------------------------------------------------- Net income $ 203 $ 221 $ 138 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Other measures For the three months ended ------------------------------------------------------------------------- January 31 October 31 January 31 (Unaudited) 2004 2003 2003 ------------------------------------------------------------------------- Return on equity(2)17.4% 18.5% 8.4% Average assets ($ billions) $ 112 $ 112 $ 122 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Refer to footnote (2) further below. (2) Refer to footnote (4) further below. Highlights Scotia Capital reported earnings of $203 million in the first quarter, a significant increase of $65 million from a year ago, but a decline of $18 million from last quarter. ROE, at 17.4% for the quarter, was significantly ahead of the previous year, but slightly lower than last quarter. The improvement from last year was due largely to a significant reduction in credit losses in the U.S. and Europe corporate lending portfolios. The decrease from the previous quarter primarily reflected the low level of credit losses in that period. Total revenues fell 12% compared to a year ago because of foreign currency translation and reductions in North American lending volumes. Revenues from capital markets, precious metals, foreign exchange trading and underwriting continued to be strong, resulting in a 2% growth in total revenues from last quarter. The provision for credit losses was $71 million, significantly lower than last year, but $49 million above last quarter, which included the benefit of several provision reversals due to loan sales and loans returning to performing status. Strong capital markets continue to create opportunities for the Bank to sell loans at favourable prices and for borrowers to refinance. Overall, provisions for loan losses for the year should be below 2003 levels. Total expenses rose 5% from last year reflecting higher performance- related compensation. However, they fell 2% from last quarter, primarily due to lower severance costs and professional fees, partly offset by higher performance-related compensation. Other highlights: - Scotia Capital earned the No. 1 ranking in debt underwriting and the No. 1 ranking in total debt and equity financings for 2003 in Canada for Canadian companies, as reported by Bloomberg. - In 2003, we were the No. 1 Canadian bank in the global syndicated lending market (arranger/agent full credit volume basis), as reported by Loan Pricing Corporation. - Scotia Capital's interest rate derivatives team ranked No. 1 on the Quality Index, No. 1 for Overall Market Share and No. 1 for Overall Market Penetration in a third-party market survey of interest rate derivatives in Canada. - Scotia Capital held a successful conference for analysts and investors on January 22, as members of Scotia Capital's management team, along with the Bank's head of credit risk management, reviewed the key businesses. The conference was well received by the investment community. - We were the co-lead underwriter of $800 million in bank debt facilities and the joint bookrunner of a US$350 million, 10-year, high-yield bond offering, proceeds of which funded Alimentation Couche-Tard Inc.'s $1.1 billion cross-border acquisition of Circle K stores. - Scotia Capital was the co-lead manager for Cineplex Galaxy's $194 million initial public offering of income trust units, and the co-lead arranger and administrative agent of the accompanying $170 million senior credit facility. We were also appointed sole advisor and lead hedge arranger for the client's interest rate hedging program. - Scotia Capital was awarded the joint lead arranger and joint-bookrunner role in the $500 million recapitalization of Weight Watchers' existing senior credit facilities. - Scotia Capital was the exclusive financial advisor for Dorel Industries Inc.'s US$310 million acquisition of Pacific Cycle LLC. In addition, we were a significant participant in the senior bank syndicate for the acquisition financing. International Banking Business line income For the three months ended ------------------------------------------------------------------------- (Unaudited) ($ millions) January 31 October 31 January 31 (Taxable equivalent basis)(1) 2004 2003 2003 ------------------------------------------------------------------------- Net interest income $ 448 $ 494 $ 527 Provision for credit losses (7) (45) (28) Other income 174 192 193 Non-interest expenses (390) (404) (411) Provision for income taxes (39) (47) (61) Non-controlling interest in net income of subsidiaries (23) (34) (53) ------------------------------------------------------------------------- Net income $ 163 $ 156 $ 167 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Other measures For the three months ended ------------------------------------------------------------------------- January 31 October 31 January 31 (Unaudited) 2004 2003 2003 ------------------------------------------------------------------------- Return on equity(2) 19.4% 19.1% 20.0% Average assets ($ billions) $ 48 $ 49 $ 57 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Refer to footnote (2) further below. (2) Refer to footnote (4) further below. Highlights International Banking reported net income of $163 million this quarter, a modest decline of $4 million or3% from last year. However, excluding the impact of the stronger Canadian dollar, net income rose $40 million. Quarter over quarter, earnings grew $7 million, notwithstanding the further strengthening of the Canadian dollar. Scotiabank Inverlat's contribution increased substantially over last year and last quarter as a result of the continued strong growth in retail loans and deposits, and utilization of tax loss carryforwards. In addition, the acquisition of an additional 36% share of Inverlat in 2003 contributed to the year-over-year increase. The results of the remaining operations in Latin America were on par with last year, but fell from last quarter as a result of provision reversals related to Argentina in that period. There was good underlying growth in retail loans and deposits in the Caribbean; however, due to the effect of foreign currency translation, earnings fell 11% below last year. Net income improved from last quarter as a result of a decline in credit losses and lower expenses. In Asia, net income fell below both last year and last quarter primarily due to the marked-to-market adjustment relating to derivatives that no longer qualified for hedge accounting beginning this quarter (refer to details of new accounting policies in Note 1). Underlying earnings were stable with moderate asset growth and minimal credit losses. Other highlights: - Scotiabank Inverlat continued to show strong growth in retail lending, with the highest market share in both bank-financed automotive (31%) and residential mortgage (29%) lending. As well, we launched a personal line of credit product (ScotiaLine), which is new to the Mexican marketplace. - In Mexico, Scotiabank Inverlat teamed up with First Data Corp. to launch ScotiaPOS, a new merchant services alliance that will enhance merchant processing services. Under the terms of the 10-year agreement, First Data assumes management of Scotiabank Inverlat's merchant credit card processing operations, as well as related sales and marketing activities. - In the Caribbean and Central America, we continue to expand our ABM network, a key part of our delivery platform. We added more than 60 ABMs in Q1, bringing the total number inthe region to 472. - The 2003 CID Gallup Consumer Usage and Attitudes Study revealed that Scotiabank de Costa Rica is the best-rated bank for quality of service for the second consecutive year. Our high standard of customer service isthe reason Scotiabank is ranked number one in the financial sector. - In the Dominican Republic, we completed the integration of the acquired Banco Intercontinental branches, with 33 branches upgraded and rebranded as Scotiabank. As well, we issued new credit cards for the 70,000 accounts acquired as part of this investment, making us one of the largest card issuers in the country. - To improve operating efficiency and increase sales capacity, we completed the implementation of the ScotiaGlobe core banking system in the Bahamas. The new system will be installed across the Caribbean by the end of the year. Other(1) Business line income For the three months ended ------------------------------------------------------------------------- (Unaudited) ($ millions) January 31 October 31 January 31 (Taxable equivalent basis)(2) 2004 2003 2003 ------------------------------------------------------------------------- Net interest income(3) $ (99) $ (135) $ (172) Provision for credit losses - (5) 3 Other income 117 114 121 Non-interest expenses (11) (1) 1 Provision for income taxes(3) 66 79 64 Non-controlling interest in net income of subsidiaries (34) (33) (21) ------------------------------------------------------------------------- Net income $ 39 $ 19 $ (4) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Other measures For the three months ended ------------------------------------------------------------------------- January 31 October 31 January 31 (Unaudited) 2004 2003 2003 ------------------------------------------------------------------------- Average assets ($ billions) $ 16 $ 17 $ 17 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Highlights Other segments reported a profit of $39 million for the quarter, including $24 million from the revaluation of net future income tax assets following the Ontario government's reversal of previously enacted tax rate reductions. As well, in Group Treasury, there were higher gains on the sale of investment securities, and an increase in net interest income, reflecting the marked-to-market adjustment for certain derivatives that no longer qualified as hedges under the new accounting rules. Total Business line income For the three months ended ------------------------------------------------------------------------- January 31 October 31 January 31 (Unaudited) ($ millions) 2004 2003 2003 ------------------------------------------------------------------------- Net interest income $ 1,480 $ 1,516 $ 1,543 Provision for credit losses (170) (120) (325) Other income 1,040 1,007 1,034 Non-interest expenses (1,406) (1,494) (1,355) Provision for income taxes (183) (182) (228) Non-controlling interest in net income of subsidiaries (57) (67) (74) ------------------------------------------------------------------------- Net income $ 704 $ 660 $ 595 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Other measures For the three months ended ------------------------------------------------------------------------- January 31 October 31 January 31 (Unaudited) 2004 2003 2003 ------------------------------------------------------------------------- Return on equity(4) 19.4% 18.6% 16.6% Average assets ($ billions) $ 283 $ 283 $ 294 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (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 andcharged to the operating segments, and the impact of securitizations. (2) The Bank, like many 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 January 31, 2004 ($68), October 31, 2003 ($68), and January 31, 2003 ($68), to arrive at the amounts reported in the Consolidated Statement of Income. (4) For management and internal reporting purposes, the Bank allocates equity to its business lines using a methodology that considers credit, market and operational risk inherent in each business line. Return on equity is calculated based on the economic equity allocated to the business line. Economic equity is not a defined term under GAAP and, accordingly, the resulting return on equity for each business line may not be comparable to those used by other financial institutions. Geographic Highlights For the three months ended ------------------------------------------------------------------------- January 31 October 31 January 31 (Unaudited) 2004 2003 2003 ------------------------------------------------------------------------- Net income ($ millions) Canada $ 470 $ 379 $ 431 United States 78 74 48 Other international 184 240 150 Corporate adjustments (28) (33) (34) ------------------------------------------------------------------------- $ 704 $ 660 $ 595 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Average assets ($ billions) Canada $ 185 $ 181 $ 170 United States 25 27 40 Other international 70 72 80 Corporate adjustments 3 3 4 ------------------------------------------------------------------------- $ 283 $ 283 $ 294 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Other Initiatives Electronic Banking - In November, Scotiabank became the first Canadian financial institution to distribute new EMV-compliant VISA chip cards in a pilot in Barrie, Ontario. EMV chip technology provides numerous security enhancements and enables card issuers to build customer-focused applications, such as loyalty programs, right into the card. - Scotiabank has increased accessibility and improved customer service through the use of voice recognition technology. For example, customers can now reset their password or add a new bill payment company to their profile using this technology. Employees and Human Resources - Four of Scotiabank's executive vice-presidents - Deborah Alexander, General Counsel and Secretary; Alberta Cefis, Retail Lending Services; Sylvia Chrominska, Human Resources; and Peggy Mulligan, Systems & Operations - were named on November 27, to the top 100 list of Canada's Most Powerful Women, developed by the Women's Executive Network and the University of Western Ontario's Richard Ivey School of Business. Thiswas the highest representation from any single organization. Community Involvement - More than 1,000 Grade 9 students across Canada explored career options on November 4 during Take Our Kids to Work Day. The national job shadowing program, sponsored by the Learning Partnership and corporations, including Scotiabank, brings parents, education and business together to give students a firsthand look at the working world. At Scotiabank's Toronto offices, visiting students learned about the wide range of career options available through the Bank, ranging from graphic artists to security experts, as well as the traditional finance-related jobs. - Scotiabank President and CEO Rick Waugh took part in a ceremonial blanket dance at Scotia Plaza on November 20, which raised more than $25,000 for the Native Canadian Centre of Toronto and Mishkaowjiwan, the Native Centre Foundation. The Bank donated $10,000 to the centre as part of the event. - In November, Toronto Special Events received five major awards at the International Festivals and Events Association Pinnacle Awards competition, which recognize outstanding examples of special events promotion. The 36th annual Cavalcade of Lights, presented by Scotiabank, took the gold trophy for the Best Full Length TV Program (Local) and a silver trophy for Best Photograph. Designs in Ice, a three-day ice carving exhibition and competition, also presented by Scotiabank, won the silver trophy for Single New Sponsorship Program. - Dr. Carleen Allen, a recent graduate of the University of the West Indies, won the inaugural Scotiabank Jamaica Award for Pediatrics for outstanding performance in her final examinations. Dr. Allen, who competed with more than 100 of her classmates, received US$2,500. - Employees across Canada were enthusiastic participants in their local United Way/Centraide campaigns. The largest campaign was in the Greater Toronto Area, where on January 8, President and CEO Rick Waugh presented a cheque for $4.7 million to the United Way on behalf of the Bank and its employees - the Bank's largest-ever donation to the charity. Later that month, Scotiabank received the Employee Campaign of the Year award at the United Way Spirit Awards. In Vancouver, the Bank was once again the title sponsor of the Scotiabank and United Way Spirit Awards breakfast, held January 21. Vancouver-area employees also raised a record $330,000 for this year's campaign. Interim Consolidated Financial Statements Consolidated Statement of Income For the three months ended ------------------------------------------------------------------------- January 31 October 31 January 31 (Unaudited) ($ millions) 2004 2003 2003 ------------------------------------------------------------------------- Interest income Loans $ 2,300 $ 2,339 $ 2,622 Securities 684 654 734 Deposits with banks 98 100 122 ------------------------------------------------------------------------- 3,082 3,093 3,478 ------------------------------------------------------------------------- Interest expense Deposits 1,235 1,211 1,411 Subordinated debentures 26 26 45 Other 341 340 479 ------------------------------------------------------------------------- 1,602 1,577 1,935 ------------------------------------------------------------------------- Net interest income 1,480 1,516 1,543 Provision for credit losses (Note 6) 170 120 325 ------------------------------------------------------------------------- Net interest income after provision for credit losses 1,310 1,396 1,218 ------------------------------------------------------------------------- Other income Card revenues 61 58 55 Deposit and payment services 155 148 150 Mutual funds 41 41 41 Investment management, brokerage and trust services 125 122 111 Credit fees 146 158 174 Trading revenues 152 107 157 Investment banking 161 165 169 Net gain on investment securities 70 66 11 Securitization revenues 28 26 51 Other 101 116 115 ------------------------------------------------------------------------- 1,040 1,007 1,034 ------------------------------------------------------------------------- Net interest and other income 2,350 2,403 2,252 ------------------------------------------------------------------------- Non-interest expenses Salaries and staff benefits 841 853 806 Premises and technology 281 305 274 Communications 59 61 64 Advertising and business development 47 55 47 Professional 29 40 30 Business and capital taxes 37 33 37 Other 112 147 97 ------------------------------------------------------------------------- 1,406 1,494 1,355 ------------------------------------------------------------------------- Income before the undernoted 944 909 897 Provision for income taxes 183 182 228 Non-controlling interest in net income of subsidiaries 57 67 74 ------------------------------------------------------------------------- Net income $ 704 $ 660 $ 595 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Preferred dividends paid and other 20 10 27 ------------------------------------------------------------------------- Net income available to common shareholders $ 684 $ 650 $ 568 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Average number of common shares outstanding (thousands): Basic 505,392 505,865 504,503 Diluted 513,704 514,170 512,251 ------------------------------------------------------------------------- Earnings per common share (in dollars): Basic $ 1.35 $ 1.28 $ 1.12 Diluted $ 1.33 $ 1.26 $ 1.11 ------------------------------------------------------------------------- Dividends per common share (in dollars) $ 0.50 $ 0.44 $ 0.40 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated Balance Sheet As at ------------------------------------------------------------------------- January 31 October 31 January 31 (Unaudited) ($ millions) 2004 2003 2003 ------------------------------------------------------------------------- Assets Cash resources Cash and non-interest-bearing deposits with banks $ 1,361 $ 1,373 $ 1,431 Interest-bearing deposits with banks 15,363 17,111 14,051 Precious metals 2,127 2,097 2,264 ------------------------------------------------------------------------- 18,851 20,581 17,746 ------------------------------------------------------------------------- Securities Investment 18,288 20,293 21,514 Trading 44,439 42,899 35,280 ------------------------------------------------------------------------- 62,727 63,192 56,794 ------------------------------------------------------------------------- Loans Residential mortgages 62,583 61,646 56,902 Personal and credit cards 27,046 26,277 23,788 Business and governments 63,155 64,313 75,321 Securities purchased under resale agreements 19,266 22,648 27,359 ------------------------------------------------------------------------- 172,050 174,884 183,370 Allowance for credit losses (Note 6) 3,257 3,217 3,639 ------------------------------------------------------------------------- 168,793 171,667 179,731 ------------------------------------------------------------------------- Other Customers' liability under acceptances 6,887 6,811 8,312 Land, buildings and equipment 1,863 1,944 2,070 Trading derivatives' market valuation 15,547 15,308 17,735 Goodwill 280 270 292 Other intangible assets 276 284 297 Other assets 6,227 5,835 6,611 ------------------------------------------------------------------------- 31,080 30,452 35,317 ------------------------------------------------------------------------- $ 281,451 $ 285,892 $ 289,588 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities and shareholders' equity Deposits Personal $ 78,328 $ 76,431 $ 76,551 Business and governments 89,463 93,541 89,946 Banks 24,009 22,700 26,161 ------------------------------------------------------------------------- 191,800 192,672 192,658 ------------------------------------------------------------------------- Other Acceptances 6,887 6,811 8,312 Obligations related to securities sold under repurchase agreements 24,144 28,686 27,232 Obligations related to securities sold short 9,911 9,219 9,198 Trading derivatives' market valuation 15,160 14,758 16,608 Other liabilities 13,810 14,145 15,104 Non-controlling interest in subsidiaries 2,316 2,326 1,919 ------------------------------------------------------------------------- 72,228 75,945 78,373 ------------------------------------------------------------------------- Subordinated debentures 2,664 2,661 3,852 ------------------------------------------------------------------------- Shareholders' equity Capital stock Preferred shares 550 800 1,050 Common shares and contributed surplus 3,115 3,141 3,024 Retained earnings 12,144 11,747 10,691 Cumulative foreign currency translation (1,050) (1,074) (60) ------------------------------------------------------------------------- 14,759 14,614 14,705 ------------------------------------------------------------------------- $ 281,451 $ 285,892 $ 289,588 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated Statement of Changes in Shareholders' Equity For the three months ended ------------------------------------------------------------------------- January 31 January 31 (Unaudited) ($ millions) 2004 2003 ------------------------------------------------------------------------- Preferred shares Bank: Balance at beginning of period $ 550 $ 1,025 Redeemed (250) (225) ------------------------------------------------------------------------- Balance at end of period 300 800 Scotia Mortgage Investment Corporation 250 250 ------------------------------------------------------------------------- Total 550 1,050 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Common shares and contributed surplus Common shares: Balance at beginning of period 3,140 3,002 Issued 26 30 Purchased for cancellation (4) (9) ------------------------------------------------------------------------- Balance at end of period 3,162 3,023 Contributed surplus: Fair value of stock options 1 1 Common shares purchased for trading (Note 1) (48) - ------------------------------------------------------------------------- Total 3,115 3,024 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Retained earnings Balance at beginning of period 11,747 10,398 Net income 704 595 Dividends: Preferred (10) (18) Common (253) (202) Purchase of shares and premium on redemption (44) (77) Other - (5) ------------------------------------------------------------------------- Balance at end of period 12,144 10,691 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cumulative foreign currency translation Balance at beginning of period (1,074) 102 Net unrealized foreign exchange translation gains/(losses)(1) 24 (162) ------------------------------------------------------------------------- Balance at end of period (1,050) (60) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total shareholders' equity at end of period $ 14,759 $ 14,705 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Comprises unrealized foreign exchange translation gains/(losses) on net investments in self-sustaining foreign operations of $162 (January 31, 2003 - $(260)) and gains/(losses) from related foreign exchange hedging activities of $(138) (January 31, 2003 - $98). Condensed Consolidated Statement of Cash Flows For the three months ended ------------------------------------------------------------------------- Sources and (uses) of cash flows January 31 January 31 (Unaudited) ($ millions) 2004 2003 ------------------------------------------------------------------------- Cash flows from operating activities Net income $ 704 $ 595 Adjustments to net income to determine cash flows 123 331 Net accrued interest receivable and payable (41) 209 Trading securities (1,465) (1,106) Trading derivatives' market valuation, net 161 (830) Other, net (104) (533) ------------------------------------------------------------------------- (622) (1,334) ------------------------------------------------------------------------- Cash flows from financing activities Deposits (2,281) (897) Obligations related to securities sold under repurchase agreements (4,573) (3,707) Obligations related tosecurities sold short 692 500 Capital stock issued 26 30 Capital stock redeemed/purchased for cancellation or trading, net (346) (311) Cash dividendspaid (263) (220) Other, net (296) 431 ------------------------------------------------------------------------- (7,041) (4,174) ------------------------------------------------------------------------- Cash flows from investing activities Interest-bearing deposits with banks 2,190 2,408 Loans, excluding securitizations 2,442 2,842 Loan securitizations 967 749 Investment securities, net 2,281 (338) Land, buildings and equipment, net of disposals (24) (20) ------------------------------------------------------------------------- 7,856 5,641 ------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents 17 (30) ------------------------------------------------------------------------- Net change in cash and cash equivalents 210 103 Cash and cash equivalents at beginning of period 897 589 ------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 1,107 $ 692 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Represented by: Cash and non-interest-bearing deposits with banks $ 1,361 $ 1,431 Cheques and other items in transit, net liability (254) (739) ------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 1,107 $ 692 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash disbursements made for: Interest $ 1,726 $ 1,964 Income taxes $ 164 $ 123 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Notes to the Interim Consolidated Financial Statements (Unaudited): These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. They should be read in conjunction with the consolidated financial statements for the year ended October 31, 2003, as set out in the 2003 Annual Report. The accounting policies used in the preparation of these interim consolidated financial statements are consistent withthose 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 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 conditionsfor 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 for the quarter. Generally accepted accounting principles (GAAP) Effective November 1, 2003, the Bank, as required, prospectively adopted a new CICA standard for financial reporting. This standard formalizes the Canadian GAAP framework and specifies that industry practice is no longer recognized as a source of GAAP. The effect of adopting this standard on these financial statements is 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. For the three months ended January 31, 2004, the amount capitalized, net of related amortization, was $10 million. Common shares The Bank's broker-dealer subsidiary, as permitted by Bank Act regulations, trades in the Bank's shares. In prior periods, these were recorded in trading securities. Effective November 1, 2003, trades in the Bank's shares are accounted for as capital transactions in shareholders' equity. As at January 31, 2004, the Bank's broker-dealer subsidiary held$48 million of the Bank's common shares, which were recorded as a reduction to the Bank's issued share capital. Mortgage prepayment fees In prior periods, 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 income unless only minor modifications (based on a present value cash flow test) were made to the mortgage. During the quarter, deferred fees of $5 million relating to customers who had transferred their mortgage to another financial institution were recognized in income. The Bank continues to evaluate the remaining fees to determine whether they should continue to be deferred and amortized, or recognized immediately in income. Other The Bank continues to evaluate the presentation of certain asset and liability balances on the Consolidated Balance Sheet. The presentation of cheques and other items in transit on a net basis and recording securities transactions on settlement dates are the remaining items under review. 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 January 2004, the CICA announced its intention to update 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 Bankdoes not expect to be required 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. Sales of loans through securitizations During the quarter, the Bank securitized residential mortgages of $975 million (January 31, 2003 - $760 million) through the creation of mortgage-backed securities, and received net cash proceeds of $967 million (January 31, 2003 - $749 million). A net gain on sale of $12 million (January 31, 2003 - $11 million) was recognized in securitization revenues in the Consolidated Statement of Income. No credit losses are expected, as the mortgages are insured. 4. 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. 5. Significant capital transactions In the first quarter, the Bank initiated a new normal course issuer bid to purchase up to 25 million of the Bank's common shares. This represents approximately 5 per cent of the Bank's outstanding common shares. The bid will terminate on the earlier ofJanuary 5, 2005, or the date the Bank completes its purchases. During the quarter, the Bank purchased 0.6 million common shares at an average cost of $63.34. 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 $1 per share. 6. Allowance for credit losses The following table summarizes the change in the allowance for credit losses, segregated among specific, country risk and general allowances. For the three months ended --------------------------------------------------------------------- Country Specific risk General January 31 January 31 ($ millions) allowance allowance allowance 2004 2003 --------------------------------------------------------------------- Balance at beginning of period $ 1,719 $ 386 $ 1,475 $ 3,580 $ 3,848 Presented with securities - (363) - (363) - Reclassified to specific allowance 23 (23) - - - Write offs (177) - - (177) (77) Recoveries 40 - - 40 49 Provision for credit losses 170 - - 170 325 Other, including foreign exchange adjustment 20 - - 20 (60) --------------------------------------------------------------------- Balance at the end of period $ 1,795(1) $ - $ 1,475 $ 3,270(1) $ 4,085 --------------------------------------------------------------------- --------------------------------------------------------------------- (1) Includes $13 (January 31, 2003 - nil) which has been recorded in other liabilities. 7. Subsequent event On March 2, 2004, the Bank's Board of Directors announced a stock dividend of one common share for each of its issued and outstanding common shares. The effect is the same as a two-for-one stock split of its common shares. The record date for the stock dividend is April 6, 2004, effective immediately after the record date of the cash dividend declared of 50 cents per common share. The earnings and dividends per common share figures will be restated in the Consolidated Statement of Income after the record date, as follows: For the three months ended --------------------------------------------------------------------- January 31 October 31 January 31 (Unaudited) 2004 2003 2003 --------------------------------------------------------------------- Net income available to common shareholders ($ millions) $ 684 $ 650 $ 568 Average number of common shares outstanding (thousands): Basic 1,010,784 1,011,730 1,009,006 Diluted 1,027,409 1,028,340 1,024,502 --------------------------------------------------------------------- Earnings per common share (in dollars): Basic $ 0.68 $ 0.64 $ 0.56 Diluted $ 0.67 $ 0.63 $ 0.55 --------------------------------------------------------------------- Dividends per common share (in dollars) $ 0.25 $ 0.22 $ 0.20 --------------------------------------------------------------------- --------------------------------------------------------------------- Share Capital (thousands of shares) January 31, 2004 --------------------------------------------------------------------- Preferred shares outstanding: 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(1) Series 2002-1 trust securities issued by Scotiabank Capital Trust 750(1) Series 2003-1 trust securities issued by Scotiabank Capital Trust 750(1) --------------------------------------------------------------------- Common shares outstanding 505,575(2) --------------------------------------------------------------------- Outstanding options granted under the Stock Option Plans to purchase common shares 24,052(3) --------------------------------------------------------------------- --------------------------------------------------------------------- (1) Reported in non-controlling interest in subsidiaries in the Consolidated Balance Sheet. (2) Included are 715 shares held by the Bank's broker-dealer (refer to Note 1 above, of this report). (3) Included are 7,494 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 5 above, of this report. 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, March 2, 2004, at 2:30 p.m. EST 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 March 2, 2004, to March 16, 2004, by calling (416) 640-1917 and entering the identification code 21034320 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 InvestorRelations, 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 and Corporate 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) 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 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; David Scott, Public Affairs, (416) 866-6203

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