Presentation to the Partnership in International Management (PIM) Conference,
Schulich School of Business,
York University,
Toronto, Ontario

An address by Richard E. Waugh
President
Chief Executive Officer Scotiabank

October 27, 2006

"There are two main points I want to make. One, I believe globalization is not only a reality - it is no longer even a debatable point.  Therefore, businesses, governments and universities need to embrace the opportunities of international growth and reject protectionist thinking in all its forms.  My second point is that governments must lead in building the right policy framework to facilitate international growth, because, in my view, good foreign policy equals good domestic policy.  And then it's up to the rest of the private and institutional sectors to go out and execute our growth strategies."

Check Against Delivery

Good morning, and thank you Dean Horvath for that kind introduction.  Let me say at the outset, what a pleasure it is to be here and to compliment you on your leadership of one of the best business schools in Canada.  Schulich is celebrating its 40th anniversary - and Dean Horvath has been leading the school for almost half that time - with a tremendous record of achievement!

It's a real pleasure for me to have the opportunity to speak at the 2006 PIM - Partnership in International Management conference.  Certainly, the whole purpose of PIM - international student exchange and the development of management skills in a global environment - is one that Scotiabank fully supports. 

The exchange of students from more than 50 of the world's best business schools is a real accomplishment - and a challenge I can completely appreciate - coming from Scotiabank, where we operate in some 50 countries around the world.

The schools represented here are focused on creating the opportunities for students to study in countries that may be truly foreign to them.  Yet that is precisely the challenge many businesses and business leaders face today - finding growth in foreign markets.  And that, in turn, is what all of you need to plan for. 

It's within that context that I want to share with you Scotiabank's international growth experience - focusing on our strategies and experiences in growing in emerging markets.  I want to discuss our experience in Mexico, in particular.  I see Mexico as a good example of our Bank's long-term approach, of the risk and reward trade-off, and of growth in emerging markets.

There are two main points I want to make. One, I believe globalization is not only a reality - it is no longer even a debatable point.  Therefore, businesses, governments and universities need to embrace the opportunities of international growth and reject protectionist thinking in all its forms.  My second point is that governments must lead in building the right policy framework to facilitate international growth, because, in my view, good foreign policy equals good domestic policy.  And then it's up to the rest of the private and institutional sectors to go out and execute our growth strategies.

In other words, you need strong foreign policy founded on clear international trade and investment priorities.  This lays the groundwork for businesses to reach out and grow and succeed outside their home markets, which creates jobs, wealth and a stronger domestic economy - with universities and colleges providing the talent and the opportunity.  This success at home, in turn, better positions firms to compete more effectively internationally, creating a virtuous circle!

There are always people or special interest groups who will look to create barriers.  But the reality of globalization - open trade and open borders - is how countries and companies will prosper and grow.

Now, to be fair, like most of you, I have a bias in favour of internationalism.  Our Bank's prosperity and success have been based on our unique international strategy.  Scotiabank has a history of looking outside our Canadian borders for growth. So let me begin by giving you some background about Scotiabank as Canada's most international bank.

Scotiabank is Canada's third largest bank by assets. We rank second by market capitalization in Canada and we are a top 10 bank in North America by the same measure. And, as I mentioned, we are in some 50 countries around the world. 

We started in the port city of Halifax, Nova Scotia almost 175 years ago. When we ventured out - it was our customers and the trade flows between North America and the West Indies that attracted us.  Our history as an international bank began more than 100 years ago, when we opened a branch in Kingston, Jamaica in 1889.

Throughout the U.S. and in Europe we have offices where we focus on corporate and investment banking, and have established a strong platform that now includes Mexico - our NAFTA platform. We're in nine countries throughout Asia, including China and India, with a history ranging from 25 to almost 45 years in these countries.

We have extensive operations throughout the Caribbean. And we are the only large international bank with a presence in four of the seven countries in Central America: Panama, Costa Rica, Belize and El Salvador.  In South America, Scotiabank has full operations in Peru - where we are the third largest bank - and operations in Chile through our subsidiary, Scotiabank Sud Americano. We also have affiliates in Venezuela and a representative office in Brazil.  Add it all up and it's nearly 50 countries.

What is unique is that we operate as a local bank in most of these countries.  We provide products and services locally, relying on local talent and management, but using the best practices of a large successful international bank.

Our largest operations outside Canada are in Mexico.  And it's our story in Mexico - which I'd like to talk about now - that really speaks to the point about recognizing the potential of globalization.  Our history in Mexico can be taken as a case study of how good foreign policy - specifically the promotion of foreign direct investment and international trade - is good domestic policy because it leads to growth for businesses and jobs and careers for individuals.

Our history in Mexico began modestly in 1967 with the opening of a representative office in Mexico City.  All business was conducted in U.S. dollars, because we were restricted from doing any local banking in pesos. Regulatory constraints in Mexico meant that Scotiabank's operations were very limited. Furthermore, in 1982, Mexican banks were nationalized in an effort to stem massive capital flight - but we stayed the course.

Eventually, the opportunities of open markets and globalization began to encourage Mexico to begin the process of transforming and modernizing its economy and to looking outward.  Liberalization of the rules on trade and foreign investment first took place in the early 1990s, beginning with the re-privatization of the banks in 1991.  And in 1992, when Mexico signed on to NAFTA - free trade began to take hold. 

The North American Free Trade Agreement was a watershed for Canada, the U.S. and Mexico.  Since the agreement came into force in 1994, merchandise trade among the three countries has more than doubled to over US $750 billion a year.  But the political leadership shown by all three countries at the time created the foundation for economic opportunity, greater foreign investment and greater long-term prosperity. 

Mexico was making significant strides towards a freer market. And, consequently, at Scotiabank, we began to take an even more serious look at expanding our presence, recognizing the country's potential.

From our perspective, Mexico had then and still has now exceptional potential for growth.  It has a very young, energetic population.  There are more than 100 million people.  The median age is 25 - versus 39 in Canada. And Mexican GDP is almost two-thirds that of Canada - and the gap is narrowing. 

Seven out of 10 Mexicans live in urban areas such as Mexico City. The country is targeted to have 750,000 housing starts this year. Yet very few Mexicans today use banks for mortgages or day-to-day banking.  Private sector credit as a percentage of Gross Domestic Product (GDP), a good indicator of banking penetration, is only about 14 per cent in Mexico, very low, especially when you consider that in Canada it's 71 per cent and in the U.S. it's over 65 per cent.

In 1992, Scotiabank made its first investment in Grupo Financiero Inverlat. By 1994, we had invested more than $150 million.

However, the road forward was not without obstacles, and in the mid '90s, Mexico went through what became known as the Tequila Crisis.  To make a long, complicated story short, Mexico abandoned the peso's peg to the U.S. dollar.  Its value plummeted, inflation soared to over 50% and in the banking sector, loans - both in local currency and US dollars - went sour, because all loans had been granted on a floating rate basis. 

All the banks were hit hard, essentially bankrupt and in need of capital.  In 1995, we wrote off our original investment.  On a larger scale, the Mexican government needed to act to rescue the country's economy - it was in a state of crisis. 

To help shore up the financial sector, Mexico - instead of retreating inwardly - took a critical step and openly invited foreign banks to further invest and even to control its local banks. Scotiabank was well-known and highly regarded by the Mexicans because we already had a stake.  The structural changes to the legislative and regulatory framework to deepen financial sector liberalization encouraged our Bank to reinvest. 

So, again, we decided to stay the course.  Our strategy was and is long-term and we purchased a 10% stake in Inverlat in 1996.  We were the first foreign bank - and, for quite a while, the only bank - to reinvest in Mexico immediately after the Tequila Crisis.  We worked out an agreement whereby the Mexican government would own the majority of the remaining shares, but we would manage the Bank on their behalf and we would invest in bonds that would allow Scotiabank the option to control 55% at a later date. 

About twenty senior Scotiabankers from Canada and other operations around the world went to Mexico to work with the local management team to completely rebuild the bank. It was a bank that was very transaction-focused, as opposed to customer-focused; systems needed upgrading; a large portion of the loan portfolio was non-performing; and costs had to be taken out to significantly improve efficiency. 

But thanks to the hard work of our people in Mexico, Inverlat - or Grupo Scotiabank as we call the bank today - is now a market leader in several areas of the Mexican financial services industry. We were the first bank to lower credit card rates and we led in reintroducing residential mortgage lending.  We have more than 7,000 employees, serving one million customers in over 400 branches all across the country - and will add more than 100 branches by the end of next year.

In total, we have invested over $1 billion in Grupo Scotiabank and now hold 97% of the company.  We took out about $100 million per year in operating costs and reduced non-performing loans.  We created a true sales and service culture.  We've gone from losing money in 2001 to generating almost $440 million in net income in 2005.  We have one of the highest returns on equity of the major banks in Mexico.  And we're one of the most strongly capitalized banks - and we've almost brought the overall efficiency levels to those in Canada.

Our experience in Mexico is a powerful example of how important global operations and international experience are to the success of companies and how strong policy - trade and foreign investment policy - by the Mexican government equaled strong domestic policy.  That innovative and bold move by the Mexican government has now made the Mexican banking industry a leader in emerging markets, creating jobs and introducing new products and services for Mexicans.

Clearly, Scotiabank has done well through its investment.  But so has Mexico and so has Canada.  And our Bank's confidence in large part was based on a sound policy framework put in place by the governments of Mexico and Canada (and the U.S.) - specifically the free trade agreement - and Mexico's strong support for open markets.

Obviously, my thinking has been greatly influenced by our Bank's experiences.  But it's also based on our sense of where growth opportunities exist for other businesses - including our clients - today, and in the years to come.

Today, I am concerned about a possible step backward in trade over the lack of progress of global trade talks and the collapse of Doha. But the reality is that - with worldwide multilateral talks stalled - regional, sub-regional and bilateral level agreements are becoming the focus. 

Last year, China signed an agreement with the Association of Southeast Asian Nations (ASEAN).  South Korea has plans for more than 50 free trade agreements. In recent years, Mexico has signed more than 10 bilateral and sub-regional trade agreements, including one with the European Union.  The United States has signed deals with five countries in Central America - through CAFTA - plus the Dominican Republic. They've also signed deals with Australia, Singapore, Jordan, Bahrain and Morocco to name a few.  In fact, over the past six years the U.S. has signed or is in the process of negotiating 24 bilateral agreements - albeit some of these have been based on geo-political objectives versus pure economic goals. 

My sense is that you'll see more and more countries look to regional, sub-regional and bilateral trade deals to secure access to markets.  In fact, regionalism is why we're seeing cross border trade expand.  There are some pros and cons to this.  But regardless of these, for the near future, trade within various regions - the Euro zone, Asia and the Americas - will continue to be a key driving force of global economic activity.

Now before I finish, I'd like to take this one more step - that is I believe strongly that the real growth opportunities today for businesses in North and South America exist in the Americas - and these opportunities are just beginning.

While Latin America is among the least integrated regions in the world - that is changing - and must change.  The U.S. government has made clear its support for this - and sees economic integration as critical to the hemisphere's future. 

Canadian investment has shown a bias towards our hemisphere - and not just the U.S. and Mexico.  Over the last decade the compound average annual growth rate of Canadian investment in Central and South America was 11%.  This is 50% higher than the growth in investment in Asia - and more than five times the growth of Canadian investment in the European Union. 

The opportunities are many which is why Scotiabank's international growth strategy has followed this north-south pattern. Let me turn to two recent examples of acquisitions this year.

In Peru, we acquired two banks for about $390 million, which we're merging to form Scotiabank Peru, S.A.  We're now third-largest bank in the country, with more than 1.5 million customers.

In Costa Rica, we acquired Banco Interfin for $330 million, the largest privately owned bank in the country, and we're merging it with our existing operations.  Together, we will have a 13% market share in loans.

In many of these emerging countries, they see a real benefit to the strength and stability of an international bank like Scotiabank.  I believe that acquisitions and consolidation in these countries bring many tangible benefits, such as reducing lending spreads, by reducing the cost of credit, and by bringing in a sales and service culture as well as compliance expertise.

Ladies and gentlemen, globalization has been the major trend of my 35 year-plus business career. When I started out as a business school graduate in a branch in Winnipeg, Manitoba, my goals were to stay in Winnipeg and pursue a career there.  But I moved with Scotiabank to Toronto, then New York and, finally, as head or our International Bank, I traveled the world continuously for years.

All during that time, I watched as cross-border trade and investment expanded.  Our Bank's growth and, hence my career, seemed to move in the same direction.   I understand globalization requires an unprecedented degree of co-operation and interaction to encourage the flow of trade and investments and importantly, information. It requires an unprecedented degree of collaboration among countries, companies and now more and more, individuals. But these difficulties are worth the rewards. And overall, I could see the benefits of free markets.

From my perspective, the real growth opportunities for Canadian business are global.  And we must have strong policies to support trade and investment - with a particular focus on the opportunities that exist in the Americas.  And this should be a clear priority as well for our government.

Although I strongly believe the current failure of multilateral trade talks at a global level will merely slow what is a truly rising and enduring trend - there is a constant need for our governments, for business leaders, such as myself, and for intellectuals and educators, such as you, to stand up and talk to the benefits of open economies.

Because globalization is here to stay.  Internationalism is the way of the future - good, progressive and open policy - trade and investment policy - will equal good domestic policy - and our long-term prosperity depends on it. Thank you - and enjoy the rest of the conference.