Luc Vanneste Speech - March 3, 2009

An address by Luc Vanneste
Executive Vice-President and
Chief Financial Officer

Presentation to
the Scotiabank Annual General Meeting
Halifax, Nova Scotia

March 3, 2009

Check Against Delivery

Thank you, Mr. Chairman - and welcome, ladies and gentlemen.

In today's presentation, I'm going to begin with a discussion of our performance in 2008 - and then I will speak briefly on the highlights from the first quarter of 2009.

Before I begin, I'm required to advise you that some of the remarks made today may include forward-looking statements - typically relating to the Bank's objectives, intentions and outlook - and I would like to caution you that the Bank's actual results could differ materially from what is discussed.

Clearly, 2008 was a difficult year - and the Bank's results were negatively impacted by unprecedented volatility in global financial markets. Net income in 2008 was $3.1 billion, and earnings per share were $3.05 - down due to writedowns of $822 million after tax for the year - with the majority of that - $642 million - coming in the fourth quarter.

We were certainly disappointed at having to take charges of this magnitude - although it's important to note that Scotiabank performed well compared to our major Canadian and global competitors.

Also, notwithstanding the charges - which were due largely to losses on securities and those related to Lehman Brothers - as well as higher funding costs - I'm pleased to report that the core earnings of our three business lines were strong.

Once again, we had good contributions from Canadian Banking, International Banking and Scotia Capital. Despite what was a very challenging environment - especially in wholesale banking - we managed to achieve a good earnings balance from our three business lines.

Canadian Banking had a very strong year, reporting net income of more than $1.7 billion - a 10% increase - with solid performances from retail and small business banking, wealth management and commercial banking.

Excluding the gain from the global VISA restructuring in 2007, underlying net income growth was 17%.

We achieved a market share gain of 10 basis points in total personal lending - led by increases in residential mortgages and personal loans - and a gain of 61 basis points in total personal deposits, in part from our acquisition of Dundee Bank.

Revenues increased by 6% due to strong volume growth in both assets and deposits - partly offset by higher provisions for credit losses and a slight decline in margins.

International Banking achieved strong earnings of close to $1.2 billion - a 5% decline. However, core earnings increased 9%.

The greatest contributors to growth were Peru and our acquisition in Chile. Although Mexico also had strong retail loan growth, it was affected by increased loan losses and a higher tax rate.

Total revenues increased by 15% - and net interest income increased by 20% - despite the significant impact from foreign currency translation.

Overall, revenues in International Banking were well balanced. Revenues increased in all three of our major geographical categories.

Scotia Capital was the business line most affected by the global market conditions - particularly in the fourth quarter. The division absorbed charges of $632 million before tax - relating to trading activities and losses on Lehman Brothers.

Underlying performance was strong. Net income was $787 million - a decrease of 30% from last year - although still a substantial profit in very difficult market conditions.

The turbulent environment also led to opportunities in the marketplace - and resulted in record performances by Scotia Capital's foreign exchange, precious metals, fixed income and Scotia Waterous businesses.

Total average assets grew by 8% - and corporate loans and acceptances grew by 24%.

Turning to all-Bank performance, we continued our strong asset growth in 2008 with an increase in average assets of 13% - led by business and government lending, residential mortgages and personal loans - with all three business lines making strong contributions.

Our productivity is a core competency and a traditional strength of our Bank - and we continued to outperform our Canadian peers - as shown on this slide.

We are also committed to maintaining a solid capital base to support the risks associated with our diversified businesses.

Given the difficult environment in 2008, capital strength was - and continues to be - of particular importance. It not only provides a cushion against economic turbulence - but also offers flexibility to invest in growth initiatives.

Our capital ratios remained well above regulatory requirements - and comparatively high by global standards. Our tangible common equity ratio was 7.3% - our Tier 1 ratio was 9.3% - our total ratio was 11.1% - a strong measure, given the significant asset growth in all our business lines.

In terms of outlook, we believe economic activity will be weak through much of 2009. We also expect the volatility in the financial markets to continue. Consequently, we are managing all our businesses under these assumptions.

We remain committed to our three strategic priorities:

First, we will continue to drive sustainable revenue growth - both organically and through acquisitions.

Second, we will continue to prudently manage our capital.

And third, we will continue to develop leadership talent - at all levels of our organization.

We've also added two more priorities for 2009 - in areas of our traditional strengths - risk management and expense control. Both will be critical to achieving success in this difficult economic environment.

At the beginning of November, we established the following targets for 2009:

We are maintaining our earnings per share growth target of 7-12%.

Our target range is 16-20% for return on equity - which reflects the realities of the global economy.

We are targeting a productivity ratio of less than 58%.

And we will continue to maintain strong capital and dividends.

I would now like to turn to our first quarter results for 2009 - which were announced this morning:

  • our net income was $842 million - an increase of 1 per cent over $835 million for the same period last year - and up substantially from the fourth quarter of 2008;
  • our EPS on a fully diluted basis was $0.80 - compared to $0.82 the same period a year ago - and up from $0.28 in the fourth quarter;
  • our ROE was 16.9 per cent - compared to 18.3 per cent in Q1, 2008; and
  • our productivity ratio was 58.7 per cent versus 56.5 per cent.

Looking at our capital - our ratios not only remained strong - but improved this quarter.

Our tangible common equity ratio - at 7.8% - was up 50 basis points from last quarter. Our Tier 1 ratio and total capital ratios - at 9.5% and 11.4% - also rose this quarter. We benefited from the $2.5 billion of capital that we raised in Q1 - along with a decline in risk-weighted assets.

In addition to maintaining a strong capital position, we have also been proactive in raising capital - both equity and debt. Our Bank has been very successful in generating capital - as have our peers. Canadian banks have not required government capital infusions - and at the same time, are maintaining balance sheets that are arguably among the strongest of any banking system, globally.

Each of our three business lines had solid quarters.

Canadian Banking net income grew by 18% compared to last year. Strong asset and deposit growth resulted in good top line revenue growth.

In International Banking, earnings were up 34%. This increase was driven by strong volume growth in all regions - and higher contributions from acquisitions.

Scotia Capital's earnings were up more than 50% from Q1 of last year. We had record performances in investment banking and several capital markets businesses - as well as good loan growth.

These increases were offset by higher funding costs and securities writedowns, which are included in the Other category.

Notwithstanding the ongoing global economic challenges and difficulties within the financial sector - the Bank performed well in the first quarter of 2009. We again had strong contributions from each of our business lines.

The main issue offsetting good business results was higher funding costs.

Going forward, we remain committed to executing our strategy - and focusing on our priorities. While the targets we have set for ourselves are challenging given the recessionary economy - we believe this growth is possible.

I would now like to call upon our President and Chief Executive Officer to say a few words. Ladies and gentlemen, please welcome Rick Waugh.