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Presentation to the 173rd Annual Meeting of Shareholders
An address by Richard E. Waugh
President and Chief Executive Officer
Scotiabank
March 1, 2005
Halifax, Nova Scotia
"We realize that we have a responsibility to assist a much broader spectrum of stakeholders, not just our customers and shareholders, but also our employees and the broader community, because the health and vitality of our Bank is closely tied to the well-being of the communities we serve, both in Canada and internationally."
"As a result, we pay close attention to the issues that are important to all of these groups and that touch directly and indirectly on various aspects of our Bank’s operations, such as environmental protection, and fair and equal access to employment and banking services, as well as funding for small businesses and community development."
Check Against Delivery
Thank you Sabi, and good morning ladies and gentlemen, Mr. Chairman. It's a tremendous pleasure to be here in Halifax, to mark the end of my first year as your chief executive officer (CEO).
Today, I'd like to discuss the highlights of 2004, as well as our priorities for the year ahead. At Scotiabank, we define success in broad terms, balancing the interests of all our major stakeholders, while also balancing short-term and long-term objectives. So my comments are going to focus not only on our business plans and accomplishments, but on our stakeholder goals, focusing on our work in the community and in particular, our efforts to meet our corporate social responsibility objectives.
For us, this means excelling in customer satisfaction, providing rewarding careers for our employees, contributing to the overall well-being of the communities we serve and of course, creating solid, long-term value for our shareholders.
Let me start with our efforts to continue to achieve profitable and sustainable growth by looking at our high-level strategy. Across all our businesses, we have focused on developing deeper customer relationships, leveraging our core strengths and optimizing our use of capital. Our success has shown that this strategy is a sound one and it will continue to guide our priorities in 2005 across each of our core businesses.
We believe we have good prospects because we have three strong and distinct platforms of growth to build on: Domestic Banking, Scotia Capital and International Banking, each of them with their own challenges and opportunities.
I'd now like to touch on some of the key priorities for these three businesses, each of which can deliver solid earnings growth in 2005.
Looking first at Domestic Banking - our Canadian retail, commercial and wealth management businesses - it continues to deliver consistent financial performance, with net income of $1.1 billion and a return on equity of 30.6 per cent.
This solid performance is also reflected in a number of other areas. Our retail credit quality continues to be the best in Canada. Our online banking service ranked first in Canada in a recent surveyconducted by Watchfire GómezPro, a leading independent research organization. And, most important, for the fifth straight year we were ranked No. 1 in Canada for overall quality of customer service excellence among our major competitors.
These strengths have helped us to increase our market share in lending and savings and investments. They also support our efforts to deepen relationships.
At the same time, we are continuing to focus on acquiring new customers.
We are using our industry-leading analytical capabilities to target those customer segments that are inclined to switch financial institutions, people who have significant borrowing needs and who are establishing their investment relationships. We also try to target life events such as births and retirements.
As well, we are leveraging our market-leading position in indirect auto lending to cross-sell banking products. We are also expanding our small business focus through strategic alliances and partnerships with some 20 small business organizations, such as pharmacists and agricultural associations.
Finally, we are driving customer growth by increasing our national mass media marketing. A great example of this is our successful "Find the Money" campaign. Linked to this is our partnership with financial advisor David Bach, whose philosophy on managing finances very much lines up with our own approach to helping everyday customers achieve their financial goals.
We also have a significant opportunity to expand our Wealth Management customer base. To increase our share of high net-worth clients' total business - what we refer to as share of wallet - we have introduced a new premium service for ScotiaMcLeod clients, called Heritage and created an integrated financial and estate planning group to back this up.
To build scale and grow our wealth management client base, we are leveraging our market-leading position in foundations and trusts for individuals and their families. In ScotiaMcLeod - our retail brokerage - we will be expanding our sales force of investment executives by up to 20 per cent over the next few years. Also, we will be looking at acquisition opportunities.
Turning to Scotia Capital, in 2004 our net income was $854 million, while our return on equity (ROE) was a strong 20.3 per cent.
In Canada, we are a full-service investment dealer and lender and have achieved a Top 3 position in all products offered here.
In the U.S., we are focused on deepening profitable relationships with our long-standing customer base of 600-plus focus clients, the majority of which are Fortune 1000 companies.
Our Global Trading business has also been growing strongly, with net income growth of 20 per cent annually for the past five years.
To further improve credit quality, we have implemented several initiatives such as enhanced use of loan portfolio management and lowering overall loan exposures, while continuing to focus on maintaining our lending discipline.
In addition to improving our lending discipline, we have also begun selectively acquiring new clients. We have had success, adding 70 new investment-grade clients over the past 18 months, while increasing the cross-sell of non-lending products in Canada, the U.S. and increasingly Mexico.
We are also capitalizing on the growing demand for Global Trading products, targeting investing clients such as pension funds and hedge funds, as well as our traditional institutional client base.
Mexico will play an increasingly important role for Scotia Capital as part of our NAFTA wholesale banking platform. This NAFTA platform will allow us to better serve clients across Canada, the U.S. and Mexico.
We have had success with expanding products and client relationships. For example, we are now the leading provider of commercial paper in Mexico.
Another example is our relationship with Delphi Automotive, one of the world's leading auto parts suppliers, which began as a corporate lending relationship in the U.S. and has now expanded to Mexico, where we are their Mexican banker, providing treasury, foreign exchange and supplier payment facilities.
Also, we are using our derivatives and mergers and acquisitions expertise in New York and Toronto to meet the expanding demand for such products and services in Mexico. Recent successes using derivatives have been with clients such as Cemex, the world-class Mexican cement group and Pemex, Mexico's national oil company.
Turning now to our third growth platform, International Banking, net income in 2004 was $746 million, with a return on equity of 21.7 per cent. Our international operation includes more than 40 countries and is organized into three main regions: the Caribbean; Mexico, South America and Central America; and Asia.
This unique platform provides us with a significant growth opportunity. Most of the markets in which we have established ourselves have low banking penetration and provide very attractive demographics for growth.
In many of these countries, we are focused on achieving organic growth by undertaking a major realignment of our sales and service processes to better enable us to build and deepen client relationships.
We have now begun this process in Mexico and we've seen great results. This past year in Mexico, we were able to achieve 28 per cent market share in new bank automotive lending and 27 per cent share of new residential bank mortgages.
We've also made advances in the Caribbean and Central America. For example, we have now virtually completed the implementation of our ScotiaGlobe operating platform, greatly increasing functionality and allowing us to offer near-paperless banking in our Caribbean branches. This new platform, along with other technological gains, will enable us to further enhance our already strong systems and operations capabilities, all leading to increased productivity.
In addition, we've continued to focus on centralizing support areas. Only five years ago, we had 22 separate data centres spread throughout the region. Today, because of the great change in telecommunication technology, we have now significantly reduced this number to only eight and we plan to consolidate even further. These are examples and evidence of our ongoing commitment to apply the latest in technology to enhance our productivity, efficiency and to provide the best in customer service.
The quality of our operations and strength of our customer service, particularly in the Caribbean and Latin America, have been recognized by a number of major publications. For example, we were rated best bank in the Caribbean, in Mexico, the Dominican Republic and Costa Rica. We were bank of the year in Jamaica, best multinational company in Chile and we had four first place awards for service quality in Mexico.
To build further on the strength of our local franchises, we are also making selective acquisitions to accelerate growth. Over the past five years, our disciplined, but proactive, approach to acquisition opportunities has helped us to grow significantly. In 2004, 37 per cent of our International Banking earnings came from acquisitions made over the last five years.
And this past year, we continued to focus on high-potential markets. We further increased our ownership of Scotiabank Inverlat to 97 per cent. In El Salvador, we have successfully completed a tender for all shares for Banco del Comercio. We currently have agreement from 97 per cent of shareholders and subject to final regulatory approval, expect to finalize the acquisition in the next 30 to 60 days. This Bank will be merged with our existing bank, which we acquired in 1997 and will significantly increase our market share to more than 17 per cent.
Going forward, we will continue to look for other acquisition opportunities in Latin America. Each one of these will be "in-market" mergers, involving markets where we already have a presence and can build on our existing platforms. Building on existing platforms where we already have people and systems in place provides substantial benefits of scale as well as revenue synergies. This also significantly reduces operational risks while allowing us to broaden access to these markets that offer a unique opportunity for above average growth.
The flexibility to consider growth options like these is strongly linked to the effective management of our capital - a key issue - and as Sabi mentioned, an area where we are in a clear position of strength. We have strong regulatory capital, well above our requirements. We have strong market capitalization, ranking No. 2 among the major Canadian banks.
Because of our strong capital, we also have flexibility, not only to consider acquisitions, as I've mentioned, but also to reinvest in our business lines, in a broad range of growth strategies. We can also continue our long history of dividend payments and finally, we can use our capital to continue share buybacks to offset dilution and increase our earnings per share to existing shareholders.
All that said, Mr. Chairman, we are cognizant and realistic about the challenges of the year ahead. A strong Canadian dollar, strong competition and tougher economic climate will make achieving our targets a stretch. Notwithstanding this, we believe in our strategies and the skills of our people and we are targeting solid growth from each of our businesses in 2005.
We have set our earnings per share (EPS) growth target at five-to-10 per cent for the year, a more moderate rate than last year, but in line with global economic conditions.
Our return on equity (ROE) target range of 17 to 20 per cent is higher than last year and we are continuing to target a productivity ratio below 58 per cent.
Finally, we will maintain strong capital ratios and credit ratings.
Let me conclude with one final message. I mentioned at the outset that our performance expectations go beyond business results and touch on many facets of how we do business.
We recognize that ourBank's role in society extends beyond helping our customers become financially better off and creating value for our shareholders.
We realize that we have a responsibility to assist a much broader spectrum of stakeholders, not just our customers and shareholders, but also our employees and the broader community, because the health and vitality of our Bank is closely tied to the well-being of the communities we serve, both in Canada and internationally.
As a result, we pay close attention to the issues that are important to all of these groups and that touch directly and indirectly on various aspects of our Bank's operations, such as environmental protection, fair and equal access to employment and banking services, as well as funding for small businesses and community development.
This is the right thing to do for our communities and it makes good business sense for the Bank and you, our shareholders.
In 2004, beyond our business achievements, we made significant progress in meeting these broader social goals. For example, we contributed more than $33 million in donations and sponsorships in the areas of health, education, arts, culture and social services, and we financially supported employee involvement through volunteer-focused programs, where our employees give up their own personal time to help others.
And by paying attention and listening to our employees, we increased our overall employee satisfaction levels to 82 per cent, a two per cent increase. We are working hard to improve the diversity of our organization, in particular, by increasing the representation of women in senior management positions, an area we still need to improve. Our efforts to be an employer of choice have in part led to the Bank being rated a Top 50 employer by the Report on Business Magazine here in Canada. Importantly, we were one of only two companies with over 10,000 employees to make this Top 50 list. We are also a Top 50 employer in Mexico and a Top 20 employer in Jamaica.
In addition, we joined the United Nations Environmental Program's Financial Institutions North American Task Force, which aims to expand sustainable environmental financial practices in North America and completed an assessment of the Bank's major environmental impacts, policies and processes.
In January of this year, we adopted the Equator Principles, international standards designed to help major lenders address environmental and social issues in their international finance projects as part of an improvement to our internal risk management process.
We are supporting Environment Canada's One-Tonne Challenge, a federal government initiative to encourage Canadians to reduce their greenhouse gas emissions to help address the important issue of climate change.
Given our successful involvement with micro-credit programs in Guyana and Jamaica, we are also looking forward to participating in the United Nations International Year of Micro-Credit in 2005.
These efforts and much, much more are discussed in our Corporate Social Responsibility Report / Public Accountability Statement, a copy of which we left on your chairs along with the Annual Report. This is required reading for our management team and Board and I encourage you to take it home with you to read.
Mr. Chairman, as I've said before, banking is at heart, a people business. It encompasses our shareholders, our customers, our communities and our employees.
I want to stress how proud I am of our employees. Our success is absolutely driven by them. This past year was a very difficult year for many of our employees, especially those in the Caribbean, a region where we are the leading bank - with significant operations - and a region that was overwhelmed by hurricanes this past fall. Thanks to the tremendous efforts of our teams and despite often terrible personal loss, our employees worked hard for each other and for their customers to see everyone through very difficult times.
Lastly, my thanks to you , Mr. Chairman, and to our Board. Over the last two years as a management Board member and this year as your CEO, I have benefited first hand from the advice and guidance of yourself and the Board as individuals and as a whole. Our Board has great depth, breadth and integrity. To each one of you and on behalf of our management team, thank you for your guidance and your foresight.
Ladies and gentlemen, Mr. Chairman, 2004 was a challenging year, but an exciting and successful one for our Bank. And we are confident - with the strength of our people - that the depth and breadth of our talent, I believe, is unmatched in the industry and we will continue to succeed in the year ahead. Thank you.
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