Presentation to Canadian Club of Montreal
Montreal, Quebec

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

Scotiabank
March 21, 2005
Open Doors: Opportunities and Challenges of a Changing World Economy

"While the importance of the U.S. will always be paramount and it will remain a relationship we need to manage carefully ... we need to diversify our trade and our investment opportunities."

"We need to more consciously focus on the very real and exciting opportunities in other markets, in particular in Latin America and throughout the Asia Pacific region, because these areas truly represent some of the greatest future opportunities for Canadian business."

"There has already been a massive shift in investment flows to these markets. But generally speaking, in Canada, we've been dragging our feet. My concern is that we are not reaching for the prize like so many other countries are doing."

Check Against Delivery

Thank you, Russell [Goodman, President of the Canadian Club of Montreal] and good afternoon, ladies and gentlemen.

It's a great pleasure to be here with you today and to have this opportunity to speak here in Montreal and to have a chance to discuss the opportunities and challenges we all face in a rapidly changing global economy.

And it's a pleasure to be here in Montreal. Scotiabank - Banque Scotia - has a long and proud history in Quebec and in meeting the financial needs of the people and businesses in this great province. In fact, it's been our great pleasure to serve this province for more than 116 years. When we opened our first branch in Montreal in 1888, on Rue St. Jacques, it was at the time, the Bank's only Canadian office outside the Maritimes.

Despite being one of Canada's smaller banks by market share, we're Canada's second largest bank by market capitalization. Our achievement is due to a great team of people at Scotiabank in our three growth platforms - Domestic Banking, Scotia Capital and International Banking - and it is also due to the fact that the market view, and certainly my view is that our unique international banking platform offers tremendous growth opportunities.

Scotiabank has more than 1,800 branches and offices in some 50 countries. In most of these countries we operate as both a multi-national bank, but most importantly a local bank, offering full services to our customers, generally under the Scotiabank banner.

Our bank has always seen the value of international markets. Our interests run deep, particularly in the Caribbean and Latin American regions, as well as Asia, areas we see as high-growth markets.

We are the oldest bank in the Dominican Republic and 115 years in Jamaica. We are the only large international bank with a presence in four of the seven countries in Central America: Panama, Costa Rica, El Salvador and Belize.

We're a leading bank in Mexico. And in Asia, we've been in Malaysia for 30 years, India for about 20 years and China for more than 20 years.

All these markets not only play a fundamental role in our current success, but a significant role in our future plans.

And we've had an opportunity to witness first hand a significant transformation take place in many of these countries.

Today I want to talk about some of the regions we operate in and more specifically, the opportunities for firms here in Quebec and across this great country, opportunities that I truly believe exist in markets outside of Canada, especially Latin America and Asia.

Now, as the title of my speech suggests, notwithstanding the many challenges of today's global economy and the ongoing bilateral and in some cases multi-lateral trade differences, it is fundamentally a world of opening doors.

We've seen the weaknesses and stagnation of closed markets, and the strength and growth of open markets, to know the value of trade to prosperity. Here, in Canada, we've experienced the opportunities first hand through the North American Free Trade Agreement (NAFTA).

That said, I believe Canada and Canadian companies seeking growth need to do more to grasp those opportunities now.

The recent results from the World Economic Forum's Global Competitiveness report, where our country slipped further in the rankings, only reinforces this point.

Let me turn first to the world economy as a backdrop to this discussion.

My overall view is one of cautious optimism for the year ahead. I'm optimistic because of the continued growth we're seeing in the global economy, although clearly slower than the past year.

And I'm cautious due to a number of important issues related to competitiveness and exchange rate realignments, the growing trade and savings imbalances in the U.S., ongoing trade disputes and the drag of high energy costs on the energy-intensive global economy.

Overall, the biggest challenges Canadian businesses continue to face are the need to improve our cost competitiveness, to innovate more and to move up the value-added production chain.

These are key to sustaining solid domestic growth, but also to take advantage of the opportunities in key international markets.

Here in Canada, our adjustments to the changes in the world economy will be tougher due to the strengthening of our currency. With a strong Canadian dollar today and likely an even stronger currency ahead of us, businesses will need to go through another round of significant restructuring, adjustments that could rival those of more than a decade ago, when we signed the free trade agreement.

But rather than be pessimistic about this, we must take into account that these adjustments are being undertaken against a relatively favourable economic backdrop.

One, as I mentioned, the global economy is still expanding. We are seeing continuing growth in many parts of the world, even despite the sluggishness in the Euro zone and Japan.

Two, inflation is creeping higher, but remains low and is generally in hand both here and abroad.

Three, interest rates remain at historically low levels. The cost of money is very supportive for businesses and consumers. After six rounds of tightening, the bellwether U.S. federal funds rate is only 2.5 per cent and is widely expected to move up to 2.75 per cent tomorrow. And the Bank of Canada has stopped raising its overnight rate after reaching 2.5 per cent, but again, is near historic lows.

Four, the strength of the commodity markets is buoying resource related activity here in Quebec as well as in the west and east.

And finally, Ottawa has fiscal surpluses that are being used largely on the spending side, supporting economic growth.

Let me also make it clear that an international focus does not mean one loses sight of Canada.

From Scotiabank's perspective, we are very much a Canadian bank. Canada is and will remain our core market, where our bank continues to have great success and where we constantly reinvest in operations to maintain our competitive position.

This approach has helped to make us leaders in customer satisfaction and has made it possible for us to export our strengths to win in other markets.

So Canada is very much our foundation, a market we will cultivate to stay strong by continuing to focus on customer service and better products. I see strength and success in our home market as a true starting point - in fact the only starting point - for our international competitiveness.

But Canada is also a challenge for us and for many businesses looking for strong growth.

Canada is a mature, highly competitive market, faced with slower population growth. We're a small, mature market when measured on a global scale.

By necessity, we have had to look to international markets to expand and grow.

Consider that exports represent 40 per cent of our gross domestic product (GDP), about four times greater than in the United States. Clearly, the livelihood of many Canadians depends on trade and investment outside Canada.

At the same time, the significance of trade to our well-being and the relative openness of our market mean we are more susceptible to shifts in the global economy and in particular the U.S. economy, where the majority of our exports flow.

While the importance of the U.S. will always be paramount and it will remain a relationship we need to manage carefully, we are at a point - long past it in fact - where we need to diversify our trade and our investment opportunities.

We need to more consciously focus on the very real and exciting opportunities in other markets, in particular in Latin America and throughout the Asia Pacific region, because these areas truly represent some of the greatest future opportunities for Canadian business.

This again is not news. There has already been a massive shift in investment flows to these markets.

In fact, over the past decade, the growth in direct investment to these regions has outpaced investments to the G-7 by a factor of three.

But generally speaking, in Canada, we've been dragging our feet. For example, Australia's exports to China are roughly twice as large as Canada's, a reasonable comparison given we're both commodity based countries shipping similar products.

My concern is that we are not reaching for the prize like so many other countries are doing. It's a concern that clearly the government shares. In fact it was one of the reasons for Prime Minister Paul Martin's trade trip to Asia in January.

Improved macroeconomic performance, financial sector reforms, trade liberalization, privatization and deregulation of the '90s have all been big factors in re-energizing economies like Mexico's, like China's, like India's and on and on.

One of the strongest reasons for optimism about these countries stems not only from the important structural and institutional changes that have been made to the economies, but from the simple reality of demographics and population growth.

Let's turn to Mexico as an example. It has by far the most youthful population in North America, with a median age of just 22, compared with 35 in the United States and 38 in Canada. Consider the potential this has for the future.

Over the next several decades, Mexico's labor force expansion and potential growth rate are forecast to remain well above those of both Canada and the U.S.

Young people entering the economic market quickly become consumers. They first buy toasters, then cell phones, then cars, then houses.

This spending properly managed fuels growth, producing more jobs, more business and more prosperity.

My optimism about Mexico is also rooted in the growth of its financial services sector.

Retail banking markets are growing rapidly, about three times the pace of economic growth. This is especially true in mortgages and personal loans.

There is potential for even more growth.

This is a country that is under-banked. Loans represent only 20 per cent of GDP, compared to more than 70 per cent for the United States and almost 90 per cent in Canada.

Going back to the analogy of open doors, Mexico's economy is clearly the most open for Canada. It offers some of the greatest and most immediate opportunities. Hopefully the upcoming meeting between Prime Minister Martin, Mexico's President Vicente Fox and U.S. President George Bush at his Texas ranch will result in further opportunities to integrate our economies.

In the NAFTA countries, we've seen great success over the past 10 years, but more recent signs show trade interdependence is declining somewhat as other country's like China grow in importance as a source of low-cost manufacturing input.

So we have to consider more carefully the markets of Asia. While the level of access in the short term is not the same, the long-term potential is tremendous.

Look at Asia - China and India in particular. These two countries have become powerful regional and increasingly, global growth engines in fairly short order. In fact, we believe that soon, the size of these economies will dominate those of more developed countries.

Let's consider auto sales as a proxy for growth. In 2004, auto sales in China hit a record high. Even on at slower growth rate, China is likely to become the world's second largest car market by the end of the decade.

When you see images of China in the future, it won't be of a bicycle, a powerful socialist symbol of the past half-century. It will be the automobile, a true symbol of western style wealth. And I bet you will see a made-in-China car on U.S. streets this year or next.

What about India? Even though India's auto market is less than half the size of China's, it overtook China as the fastest growing auto market last year. Together, these two nations are becoming the major drivers of the global auto industry.

Most, if not all of new assembly facilities will be in Mexico, Latin America, China or even Eastern Europe, where the strongest growth and demand for new products will be.

Overall, I believe that as we look five to 10 years ahead, we'll see the United States, as a consumers' market, become relatively less important versus these new, high-growth markets.

For Canadian companies, this presents a challenge, as well as a great opportunity. In this changing environment, successful Canadian companies will need to expand their product capabilities in these regions. They'll need to form partnerships and alliances to lower their costs.

Competitive challenges will constrain near-term growth prospects. But here in Quebec and across the country, I'm confident that we will continue to make the important restructuring and strategic investments needed to strengthen productivity. So, we will continue to hold our ground here at home.

Canada also has some excellent, world-class companies and Quebec is home to many that have and are adapted to the competitive challenges at home and cultivating new opportunities abroad. Firms like Quebecor, Yellow Pages, BCE, Alcan, SNC-Lavalin, Power Corporation, CAE and many more, all companies that are and will continue to grow and expand and win in foreign markets.

And remember, a strong Canadian dollar bolsters our ability to invest abroad.

The real challenge of the future is the willingness of everyone, businesses and governments alike, to support and encourage that growth.

For Scotiabank, we see strengthening our position and expansion in international markets as critical to long-term growth. Let me briefly explain our approach and how we do it.

First, in international markets where we have a presence, we are looking to achieve local organic growth by re-aligning our sales and service processes to better enable us to build and deepen customer relationships.

Our strong customer focus has contributed to the recognition we have received in a number of countries. 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.

Second, we continue to expand into complementary businesses. We are placing more emphasis on wealth management and on insurance, a business where banks here in Canada unfortunately face regulatory constraints that severely limit options to leverage our distribution networks. Here in Quebec, the caisses populaires have been allowed to retail insurance through branches since 1999, a fact that has helped broaden access to insurance for under-served segments of the population, such as lower income households.

For our Bank, we've had great success with insurance in Jamaica and we are currently looking at opportunities to expand this business in Mexico and other parts of the Caribbean and Central America.

We're also focused on our wholesale business, leveraging our expertise in Canada, the U.S. and in Mexico, our NAFTA wholesale banking platform. This NAFTA platform allows us to better serve clients across Canada, the U.S. and Mexico.

Also, we are using our derivatives and mergers and acquisitions (M&A) expertise in New York and Toronto to meet the expanding demand for such services in Mexico. For example, we have had recent successes with significant derivatives transactions for clients such as Cemex, the world-class Mexican cement group.

In addition, we're constantly looking for efficiencies and ways to build economies of scale. One way we are doing this is by consolidating and upgrading our already strong operating platform.

Only five years ago, we had 24 different data centres supporting our Caribbean and Central American operations. We have reduced this number significantly to eight in 2004 and plan to consolidate even further. We've been able to do this given the huge advancements in telecommunications technology.

Finally, we are making selective acquisitions to accelerate growth.

We are currently waiting for regulatory approval to finalize our purchase of Banco del Comercio, the third-largest retail and commercial bank in El Salvador. The merged entity will significantly increase our market share to more than 17 per cent. And we continue to look for other acquisition opportunities.

Overall, our International Banking division contributed close to $750 million in net income last year, close to 30 per cent of our total earnings.

In closing, ladies and gentlemen, I think it's clear that globalization and the opportunities that stem from increasingly open markets have become a very important means for achieving growth and generating wealth.

At Scotiabank, international expansion is something we view as a key platform for achieving continued success. I think Canadian corporations have a tremendous opportunity for growth.

Ladies and gentlemen, thank you for coming this afternoon.