Richard E. Waugh Speech - October 23, 2012

Address by Richard E. Waugh
President and Chief Executive Officer
Scotiabank

To the Canadian Business Leadership Forum

October 23, 2012

I'm grateful for the opportunity to address all of you, my colleagues in the Canadian business community.

As many of you know, I'm originally from Winnipeg, and I'm a proud Winnipegger, and also a very proud Canadian. When I joined the Bank in Winnipeg in 1970, I had hardly travelled – once to Calgary – once to Toronto. Now I travel a lot, to the more than 55 countries Scotiabank is active in, and several others.

I tell anyone who will listen about the many virtues and successes of Canada. We do a lot of things right, and we have a lot to be proud of.

We truly are among the elite countries in the world. We have a diverse, trillion dollar economy – a strong democracy – a civil society with rights and freedoms second to none – abundant natural resources and scenery – and good people.

People from around the world make great sacrifices for a chance to live here, and we should always be seeking to attract the best and the brightest.

We must continuously build and develop our own strengths, because the position we enjoy today is not guaranteed. The world is undergoing a period of transformational change, with big implications for this country.

Emerging economies are dominating economic growth and redrawing the map of global power, influence and trade.

It's not just India and China. By 2030, the individual GDPs of Turkey, Indonesia, Mexico, Vietnam and Nigeria are on pace to surpass Canada's.

By the middle of this century, emerging markets will account for 70% of global trade.

However, right now, less than 8% of Canada's exports and 4% of outward investment go to those markets.

Let me repeat that – 70% of global trade – 8% of our exports.

That should be a wake-up call to us. Canada is not doing enough to adjust to the new global reality. This is not the first time we've heard this – nor will it be the last time – but it definitely is the time to do something about it.

I like to be optimistic that we can do it, but it's going to take a lot of hard work. We have some great successes to build upon, but there is a need – and an opportunity – to do far more.

Today I'd like to talk about the opportunities for Canadian businesses in emerging markets – why it's critical that we get to work immediately to seize those opportunities – and I'll also suggest some ways that we go about doing it.

I believe that Canada has the tools and resources we need to be a global economic leader in the coming century – we just need to be more aggressive, and continue to build on them.

To begin with, we are a trading nation, and always have been. My own firm – Scotiabank – had offices in Kingston, Jamaica before Toronto. The reason we went down there was to follow our customers, who were trading lumber for rum – which was a great trade!

Canada does this well, but our successes have been too concentrated: too few markets, primarily the U.S. and E.U. – too few companies, mostly large ones – and too few sectors. We need to diversify.

We have strong government commitment and support for international expansion.

Our governments understand how critical this is for our economy, particularly for creating high-paying head office jobs in Canada. In fact, the federal government and the Bank of Canada have repeatedly called for businesses to diversify beyond traditional trading partners toward higher potential, higher growth international markets – and I agree with them.

The federal government has continued to push a strong pro-trade agenda, signing trade agreements with Colombia, Chile, Peru and others – building relationships that open doors to Canadian companies.

There are innovative government programs and resources available right now, which help Canadian businesses of all sizes break into new markets – but my sense is that most companies don't even know they exist.

Look at Export Development Canada (EDC), for example. Among its many resources, it offers guarantees and political risk insurance for Canadian companies making the transition into emerging markets.

These and other programs can help companies overcome financial and psychological barriers to international expansion, but there's a lot that can be done by all parties to make these programs better known and more widely used.

Governments can help open markets, but it's up to us, the private sector, to win the customers and the business. It's up to us to write our own success stories, and the time to get started is right now.

We have a great foundation to build from. Many Canadian companies have made big investments in emerging markets and are realizing big returns.

Take Yamana Gold, for example – a Canadian company based in Toronto's world-leading hub of mining finance. Yamana is fast becoming a major global player. They operate 8 mines – all in Latin America – but their head office is in Toronto. It's here where their strategy is formulated and directed, and it's here where the high-paying jobs are created.

Scotiabank's experience in international markets has been overwhelmingly positive. We're Canada's most international bank, with operations in each of the BRIC countries and many secondary emerging markets like Colombia, Vietnam and Turkey. We have a strong historical presence throughout the Caribbean and across Latin America, with nearly half of our 80,000 employees speaking Spanish as their first language.

Our head office in Toronto is full of highly-skilled professionals from a wide range of fields who support our large international network.

Those of us with deep international experience – like Yamana, Scotiabank, Bombardier, RIM and others – can be useful resources and models for other Canadian companies looking to expand abroad.

In many markets, the fact that we are Canadian is a big advantage for us. The world wants to do business with Canada.

I can tell you that in my 40 years of experience, Canada's brand has never been stronger than it is right now.

We are highly regarded, not just for how well we weathered the crisis – our world-leading banking system – and our strong fiscal position – but also, our ethical business practices – our embracement of, and respect for, cultural diversity – and our leadership in balancing free markets and private ownership with a civil society that respects and strives for humanitarian goals.

Not to mention our world-class expertise in critical sectors like mining, energy, banking, health care, transportation and education.

Canada's strong, stable reputation amid a weak and volatile global economy gives us a window of opportunity to go beyond our borders that will not last forever. Other economies will bounce back and will be looking to expand in markets where the strongest growth is found.

Right now, Canadian companies have strong balance sheets, and the Bank of Canada has repeatedly called upon us to invest it. Some of us are, but more companies should heed this advice. If we put this capital to work to expand beyond our borders, we can achieve levels of growth simply not possible at home. And we can develop high quality jobs and opportunities for our citizens – especially our trained youth.

Let's take a brief look at what opportunities can look like in emerging markets.

Take Colombia, for example, where this year Scotiabank made our largest-ever international acquisition when we purchased Colombia's fifth-largest bank, Banco Colpatria.

Colombia is not traditionally thought of as an economic powerhouse, but the Colombia of today is far different from the Colombia of a few decades ago – or even a few years ago.

Today, it has a strengthening democracy with supportive institutions – and it welcomes investment. The Colombian business community is well-educated, confident and optimistic.

Like many Latin American countries – and like Canada – Colombia's banking system is strong and weathered the financial crisis very well.

Colombia has free trade agreements with 47 countries – including Canada – with access to over 1.5 billion consumers.

GDP growth has been well above the world average for the past decade, and in 2011 it was nearly 6%. GDP per capita has doubled in the last six years – to about $10,000. So while a strong middle class is emerging, there is still a significant upside.

Colombia's demographics point to similar growth in the future. It has 47 million people – more than Canada, and it's growing fast.

More than half of its population is under 30 years old.

Colombia is not unique – similar trends are found in countries across Latin America, and more and more in Asia. Tremendous growth opportunities for Canadian companies exist not only through trade from Canada to these markets, but also within the regions themselves, where trade flows are growing rapidly.

Because of Canada's multicultural population, we have strong economic and cultural ties with many of these markets, and real opportunities are available to those who are willing to seize them.

Expanding across borders, and particularly into emerging markets, naturally involves risks, but they are certainly manageable, even for small businesses.

• Do your homework before getting started – generally, there is a wealth of information and market intelligence available
• Decide how much risk you're comfortable taking, but don't be afraid to reach
• Line up financing and insurance – banks, the EDC in Canada, or similar agencies in other countries, can help
• Last but not least, consider finding a local partner for a new market.

Partnerships can be critical for helping to mitigate risk in international markets. They provide local knowledge and customers, and can also help to reduce the size of your initial investment until you're ready to take on the whole thing.

Partnerships have worked very well for Scotiabank. They are how we first entered Latin America, and they are the basis of some of our most significant international operations, including Colombia, Thailand and China. Some have evolved into wholly-owned subsidiaries, such as in Mexico, Chile and Peru.

For more than 120 years we've approached international markets:

• By learning about each market's unique needs, culture and regulatory environment
• By starting small, and if we're comfortable with the risks, building on our investment
• By using local people wherever we can, and building local networks
• And by embedding in new markets our best practices – and our strong culture – from our team at head office and across our diverse footprint.

Keep in mind that putting all of your eggs in one basket – or relying on only one market – carries its own risks. Diversification lowers risk – this is the key to Scotiabank's strategy, and the reason why we're in more than 55 countries, spreading and diversifying our capital across markets.

Our goal is for our earnings to be split 50/50 between Canada and internationally, and we are pretty well on target right now.

We've chosen to go to very different markets, and we've also chosen not to follow the crowd.

Scotiabank looked long and hard at opportunities to purchase personal & commercial banks in the United States following the financial crisis, but despite the rock-bottom prices we were never comfortable enough with the political, regulatory and competitive risks to pull the trigger. In fact, we have significantly consolidated and downsized our operations over the past several years.

In Europe, for many of the same reasons, we consolidated and closed most of our offices and in fact sold our bank in Greece in 2006.

We have stayed in London, New York, Ireland and Houston, pursuing very profitable niche businesses in energy, lending and trading – but all of these offices are connected to our global strategy.

Economic growth and opportunity is increasingly being found in emerging markets – and for Canadian companies, in my opinion, the long term risks of inaction are far greater than any hurdles that might be faced entering these markets.

I would like to conclude my remarks this afternoon with a call to action. The world has changed. We can no longer rely on our traditional partners to buy all of our products and services.

In Canada, we are going to have to work harder, work smarter – and work together – to duplicate in this century the remarkable success we achieved in the last one.

Now, the stakes are higher, and the competition is tougher. Canadians have risen to great challenges before when we have recognized a great need, and understood the urgency for action. I believe we can do it again.

This is not only about building for the future. It is also adjusting to a new normal of slower growth in traditional economies for some time to come. We have a critical need for growth right now, to support the creation of highly-skilled, high-paying jobs for Canadians.

So what must be done? Let me humbly suggest some areas to focus on.

For governments...

Build on recent successes in developing trade agreements with Chile, Colombia and others, and continue to pursue more and better trade agreements, to break down barriers and open doors to growth.

Create the right environment for Canadian companies to succeed overseas – especially small and medium-sized enterprises – through trade offices, missions and communication that promotes Canada's brand of open markets and values-based political, economic and educational institutions.

And, notwithstanding the current issues around ensuring a "net benefit" to Canada for foreign investment – which should only be used in exceptional circumstances – avoid protectionist policies, which always end in loss of opportunity and productivity.

Lastly, use our highly-regarded educational institutions to our advantage – to lure bright minds from abroad and help us build and strengthen long-term ties with key markets.

For businesses...

Understand that to grow your business, you can no longer count on domestic demand and customers, a low Canadian dollar or protectionist trade and tariff policies. This means tougher competition in Canada from both domestic and foreign competitors.

Recognize that right now is a significant window of opportunity for growing internationally.

Figure out what you are good at, your competitive advantages, and put them to work.

Use the investment programs offered by government agencies to assist in the search for new markets and trade opportunities.

Focus on emerging markets where opportunity is abundant and competition will not be as fierce as in slower growth developed markets.

Get out of your comfort zone. That's what it takes to be the best, to build your workforce, and to grow profits for your shareholders over the long term.

For Canadians and investors...

Recognize this opportunity and support Canadian businesses, large and small, in these efforts. Picking the right winners will yield superior investment returns.

Let's write the next chapter in our long history as a proud trading nation. Let's build a Canadian culture that includes international success – from our schools – to our businesses – to our governments – to our institutions.

Let's build a culture where ambition to grow outside our borders is not only applauded – but also expected. Where international successes are celebrated, and lessons are shared and passed on to the next generation of entrepreneurs.

And where setbacks and failures are met with encouragement – not despair – and with the confidence that the lessons learned will lead to future triumphs.

Success internationally is not an easy road. It's long, and has its share of twists and turns. But it leads to Canada's future prosperity, and for that reason it's the road we must take.

Thank you.