Bank of Nova Scotia (BNS) 2002 Q3 法說會逐字稿

Good afternoon. Welcome

to the presentation of Scotiabank Third quarter results.

I'm Sarabjit Marwah, chief financial officer.

(inaudible) Bob Chisholm, vice chairman, (inaudible)

vice chairman, David Wilson, vice chairman (inaudible)

and Bob Brooks (inaudible). Highlights of our

results, followed by review of the financial (inaudible).

Review of asset quality by John (inaudible).

Concluding remarks and our outlook for the rest of

the year by Peter. We will then be glad to take

questions.

This presentation is available at www.scotiabank.ca.

Thanks. Good afternoon. Let me start with

a few remarks on corporate governance because the bulk

today is timely. First, we at Scotiabank and I

think it is true of my peer group, are proud of a long

history of integrity of the reporting of numbers and

open disclosure and communicating in a clear and consistent

way, with you, our shareholders and the media. We

have strong processes and controls in place, very strong.

We have no problem with certification, that is required

under the laws of the SEC and the (inaudible)

laws. We have done that to our own board and are

quite prepared secondly, on stock options, again, it

is not a big issue with Scotiabank. We will begin

expensing in fiscal 2003, as we were expensing this

year (inaudible). I do hope and encourage the (inaudible)

international standards have come up with the standards,

otherwise, we will get back into pro forma expensing

of options, as you can change many variables under

the standards (inaudible).

I do hope that does come. Nevertheless, (inaudible)

and we will expense them. Turning then to the third

quarter results, while we produced a solid is euphemism

for an average. Earning per share of $1.05 and ROE

of 16.2, it was a tough quarter. There is no question

it was a tough quarter. On the credit side in the

U.S., it shows us clearly in our numbers, where we

suffered a number of setbacks. We are not at all

happy with the rising of impaired loans, which you

should expect (inaudible). It was a tough quarter

in the valuation of the emerging markets, with part

of the equity (inaudible) in the latter part of June,

and in particularly July. The value melt down, particularly

in Latin America (inaudible). On the positive side,

really most of our businesses are doing remarkably

well. Very strong contributions from the domestic

and the more you dig into the numbers, you more you

will be impressed with the quality of international

numbers (inaudible) Argentina and the situation

aside. Large part to Scotia Capital. The Canadians

and global trading are performing very well.

Our capital ratios are good. We have a lot of capital.

Overall, we have a lot of work to do in dealing

with creditors. We will. We will be attacking them

aggressively over the next few quarters and we are

confident and we know exactly where it is. There

is no surprise. We know where the reserves should

be, what the impaireds are and what we have to do.

Meanwhile, we will continue to earn because our fundamental

earnings are strong.

Next slide, then, shows the trend in the earnings of

564 million this quarter. Down a bit from the first

two quarters adjusting for Argentine write-off. Continuing

our record of consistency across these areas of business,

partially because of diversity and partially because

they are moving very well. Slide 5 makes this point

to the business line. Business lines are doing well,

international and domestic are in good shape and producing

very good quality earnings. Scotia Capital is -

if we didn't have (inaudible) in the U.S. lending,

right now. But, that is a challenge is the problem

we cut a deal with and that is showing up in the numbers

clearly, that weakness.

Briefly on Argentina and Rick Waugh is here if

there are detailed questions. It has minimal impact

on earnings this quarter the way the accounting is.

We are in the - nor should it have because I decide

if in the first quarter to deal with it. We are in

the process of finalizing arrangements with local financial

institutions with a trust structure with a number of

things to exit the country completely.

Our claim has always been in the time we sort of dealt

with this in December, I guess at the annual meeting

with you, after our annual results, where we said this

would be the maximum impact. Our aim always was to

maximize jobs for our employees and treat them as profitably

as we could and returns for various strategy, with

the shareholders having lost money already. Set ourselves

at agonizing nine months from the beginning of November,

it went very well there. A couple of (inaudible)

and I feel very sorry for the people. We expect

to complete the transaction in the next week or so,

but things are never over until they are over in Argentina.

So, we are not dealing with it in the public relations

point of view or reporting it other than to you and

to the public at large and continue to negotiate with

the government in a constructive way.

We do believe and continue to be totally committed

to our international operations, which you can see

from the numbers that is Argentina, are behaving well

and our part of our growth platform is a very important

element for the future. That is our targets overall.

We are on track to meeting them, which is the way

we report to our employees the vast bulk of them are

tied into our general ability to produce returns on

equity and earnings for shareholders, ex-Argentina

for that exercise because most of them were not involved

in it.

Using that measurement, then, our return on equity

year to date is 16.8. It is the upper end of our

band of targets. We are not into the guidance, but

targets of 15 to 17. 9% earnings growth is what we

adjusted last year. productivity in Tier 1, we are

industry leaders. We are very strong in both areas

and remain comfortably ahead of target. Low losses

were obviously well behind target. Given these numbers,

we remain confident we will reach our whole year objective,

excluding Argentina and notwithstanding what we saw

as a rough third quarter and a tougher quarter than

we ever anticipated.

So, with that I will pass to (inaudible) to talk

about performance in detail. Sabi.

Thank you.

We have maintained steady trend and tough revenue

in full interest and other income (inaudible) current

state of weaker capital markets. As these revenues

are geographically disbursed, as well. As Peter

mentioned, the diversification of revenue base is important

in supporting our earnings. Looking at slide 10,

our overall margin remained flat from last quarter

and came down 10 basis points from last year, due to

the spread of the Latin market. Canadian spreads

remain stable.

Slide 11, other income, including items of security

gains, trading revenue, settlement interest and (inaudible)

over the last year. (inaudible) due to weaker

capital market activity. Growth in a number of areas,

including revenue, (inaudible). On the quarter

underlying (inaudible) 2%, due to number of small

variables. Our expenses (inaudible), but down 7

over of the quarter and 8% from last year, due to

reductions in performance-based compensation and structure

base evaluation in Argentina. Base expenses remain

well controlled, as always.

Cost approach shows most clearly ratios on slide 15,

remain lowest possible (inaudible) Canadian bank.

Looking at slide 14, capital ratio remains strong.

Tier 1 is 9.8%, up substantially from 9.1% a year

ago and the best of the major banks. Common equities

are 8%, up from 7.6% last year. I should mention

that a Tier 1 ratio (inaudible) basis points we

redeemed 300 million in existing preferred shares by

year-end. We will still have the strongest ratio.

Also of note, we repurchased approximately 2 million

shares in Q3 to offset normal dilution from exercise

of options.

Turning to slide 15, as Peter mentioned, the (inaudible)

positive, that is decline in securities. With the

recent decline in market prices of emerging market

debt and global equity (inaudible), the market value

and the book value of (inaudible) Securities as

of July 31st, compared to 565 million last quarter

end. I show above the drop emerging market debt led

by Brazil and to a lesser extent in equity. Both

events took place largely in July and we had a sublease

at the end of June. Since July 31, the market value

of securities have improved from being in small provision.

Turning to (inaudible) business slide, slide 17.

Domestic banking includes wealth management business.

It carried on with solid performance. Generated

62 million in earnings this quarter, up 24% over last

year. We continue to see strong growth in net interest

income, up 10% year-over-year driven by growth and

revolving personal credit. Credit quality remains

strong, especially in retail. We expect full-year

losses to be about 21 basis points, similar to last

year and still well below the peer group.

Operating expenses are well controlled rising 3%

year over year. (inaudible) earnings improved 3%

due to three additional days in the quarter. Looking

at highlights in domestic, with recent market share,

many products during the (inaudible) up 28 basis

points, personal loans up 29 basis points, mutual funds

up 24 basis points. This success innovative product

offerings, such as total equity I plan. We also

continuing using new products (inaudible) position

of credit card market we began offering 1% cash back

(inaudible) Visa card. We launched no fee, no

rate card in Canada. Note the better sales on small

business customers (inaudible) select loans at a

rate discount on Visa cards (inaudible). This

resulted in 60% increase in approval of financing.

Wealth management we successfully completed integration

of Charles Schwab, Canada and (inaudible) and

strong slide retention. We also made several key

enhancements to online broker service. New research

(inaudible) and so on. That has paid off as we

rose to the rankings (inaudible) yesterday.

Turning to slide 19, as Peter mentioned, Scotia

Capital had a tough quarter. Net income of $56

million was down from last year with credit quality

in the U.S. being made (inaudible). Revenues

(inaudible) decline in trading, they have held reasonably

well given the weak market environment. Margin increased

by 200 million, (inaudible) portfolio and John will

have more to say about credit quality in a moment.

Expenses fell 9%, due to lower performance related

compensation. Turning to international operations

on slide 20, the caribbean, we had another strong quarter

with net income up 29% year over year. (inaudible)

rose by 11% while loan losses and expenses declined.

In Latin America, Scotiabank had a solid quarter

of (inaudible) million. Earnings from (inaudible)

in (inaudible) were up including from the sale of

some PKI bonds. (inaudible) due to lower loan

loss provision. 521 showed (inaudible) from Inverlat,

our Mexican operations. No reporting earnings growth

was higher, but offset by decline in the peso during

the quarter. In the (inaudible) strong growth in

lending and deposits.

Lending was up 25%. Commercial and corporate 15%.

Checking up 30%. As well, Q3 ROE was good

at 18%. So far, we are pleased with progress we

are making in Mexican operations. With that, over

to John Crean, risk management.

Thank you. I will start

with slide 23. The story this quarter is credit condition

s in the U.S. were more difficult than previously

expected, with particular weakness in telecom sector.

As with many financial institutions, we were affected

by well publicized fraud in several U.S. borrowers.

As a result, net impaired loans excluding Argentina,

increased by 568 million, from Q2, to 751 with fraud

having material impact in formation. These formations

and after a full portfolio review, we increased specific

provisions to 400 million from last quarter's level

of 370.

Slide 24, we show the break down of the Scotia Capital

net formation of 835, which is the bulk of the quarter.

80% was in the telecom sector per dollar in the U.S.,

and for provisions this quarter. U.S. formations

consisted of three well publicized accounts, which

were fraud related. The remaining 20% were across

several sectors.

Formation of domestic and international (inaudible)

on the slide, they were modest and given the size of

the portfolio in the (inaudible) norms. The higher

levels of provisioning were mainly in the U.S., on

chart 25. You have the graph of provisioning

and maintained provisioning at a high level over the

last year, mainly due to the U.S. portfolio.

Let me turn specifically to telecom on the next chart,

slide 26. Our total cable and telecom exposure of

4.7 billion remained basically unchanged from last

quarter. Credit and quality of the portfolio was

mainly affected by the financial irregularities of

two U.S. borrowers in the sector. This resulted

in credit downgrades of some of the previously investment

grade customers. As a result, gross impaired loans

increased from 287 last quarter to 756 and net impaired

loans to 563. The majority of investment grade accounts

are traditional regulated company [W-S] stable cash

flow, strong customer bases and acceptable access to

capital markets. North America cable operators continue

to have stable operating cash flows.

Our exposure here is limited to service operators

and is well diversified geographically. There is

some financial weakness in the European cable sector.

In most cases, (inaudible) operate companies which

continue to perform. On slide (inaudible), we did

infer the breakdown of the telecom sector, showing

high risk telecom sectors and unregulated telephone,

wireless long haul (fibele) and (selax), local carriers.

We reduced exposure to these sectors through payments

and added new provisioning and taken write-offs. We

have good coverage, 61%, against unregulated telephone.

81% against wireless. 80 against long haul fiber

and 83 against plex. No paging exposure.

Loans to borrowers have generally been structured

senior facilities with security. Despite this, the

losses are high. The action we have taken reflects

these risks and overall the coverage at 72% is very

reasonable. Power and energy trading is also a great

deal of comment. To give you breakdown in this sector,

on slide 28, we have shown the exposure. Almost 30%

of this portfolio is to regulated utilities with three-

quarters being investment grade.

Almost half of the loans are extended to energy-producing

operating entities. (inaudible) assets and significant

equity contribution by sponsors. The group of loans

indicate having power purchase agreements are credits

to entities with sufficient power sole over the term

of the credit facility, fully provide for the retirement

of the debt. The other power group of loans are extended

projects, most of which have substantial power purchase

agreements, uptake agreements, but there remains unsold

or merchant risk. Our lending standard for these

projects call for a higher level of initial equity

contribution from the sponsors.

Diversified generation includes loans to major power

producing (inaudible) facilities. On a number of

borrowers in the category are trading operations, none

of our credits are to these tray trading subsidiaries.

Our loss experienced is historically low, using assistance

of security for high proportion of the portfolio and

strong marketability of the assets. Turn to page

29, which is a subject we discussed at last quarter's

meeting. You will see a chart which proves exposure

to Brazil. This is the one area in which markets

we have some concern. O-R-U Our exposure to Brazil

is limited to government bonds, trade finance and trade

finance being particularly carefully managed and is

slightly down as you can see the chart from last quarter.

Turning to slide 30, we have our market risk numbers.

You can see distribution of daily net trading revenue

for the quarter. Most had positive results. No

single day did the loss exceed one-day VAR. It

occurred at the beginning of the quarter, when there

was significant widening of credit spread combined

with short-term interest rates and the markets reacted

negatively in the U.S. economy, with concerns about

the telecom sector.

Page 31, you have the VAR trends trading revenues

remained good. We did not increase VAR risk reported.

It was less than 10 million small by any standard.

Summarize by saying the credit quality in the domestic

retail portfolio remains strong. Our domestic commercial

and international portfolio excluding Argentina, remain

stable condition. We are managing U.S. portfolio

closely. We have remained cautious in our classification

and in our provisioning. We anticipate going forward

significant reduction in net impaired loans over the

next several quarters through asset sales, portfolio

management and provisioning and with the run-off of

older impaired loans that reached term and come out

of the classification. We expect significant reduction

in net impairs for Q4. In part, also, our nonperformance

will drop by 200 in Q4 given we expect to no longer

consolidate from Argentina. Let me hand back to

Peter to comment on the outlook for the rest of the

year.

Thanks, John. We

are here to look at the economy. As far as we can

see, the Canadian economy will perform well. It

is good after the g-7. U.S. is still a good economy.

Canadians most important because that is retail commercial

bank and how it is operated. It looks very good.

In U.S. and Asia (cut in of talking) - before

the alarm. We are still alive and well managing the

bank.

So, we see Europe is weaker than we would have expected

and we have got a global economy that is subject to

event risk and a number of other things. We see this

in the volatility of the financial markets even though

they have diminished most recently. We continue to

run the bank defensively. Doesn't show with all the

loan loss totals. Defensively on a bearish forecast

level, we are not looking to market the capitalize

that or save us from bad debts and that is why we are

paying close attention to cost and we are spending

every working day looking at the loan assets and individual

and what we can do with them and how we work them and

defeat them.

So, that is our number one priority. Get the impaireds

down. We are looking at reducing them in the hundreds

of millions, on top of the 200 million we are getting

by not consolidating Argentina, which (inaudible)

happened. We are confident we can do that because

if you put this had perspective, large part of the

increase was to fraudulent companies which had been

rated and wasn't a breakdown in fundament underwriting.

Notwithstanding, we have to deal with it and raise

the reserve and sell assets. The conclusion of the

Argentinan situation is long overdue. I think if

we do conclude it, it is an elephant solution, even

though we have lost our money. Importantly to all

of us, I think Rick Waugh has been living with this

day and night, probably seven days per week, 24 hours.

It has been a horrendous mess, the pressure on our

people. It will release a lot of people, very good

people to deploy to other parts of the international,

which will be very good for shareholders and good for

the bank. It has been a big drain on us, big drain.

As always, we will control the cost. We are very

confident of the fundament underlying earnings and

what they are doing, where they are and what they will

produce over the next few quarters. We have been

able to deliver solid earnings and as I said earlier,

domestic and international banks and the majority of

Scotia Capital ex-the wholesale lending in the U.S.,

is actually performing well. We do expect to meet

our 2002 targets, excluding Argentina. We will challenge

the credits aggressively. We stand by those targets

and as far as we can see looking forward, we should

be able to meet them beyond next quarter and onward,

notwithstanding the impact we suffered on the credit

side. I will open to questions, which will go to

John Crean, I am sure.

Begin by giving

your name and your firm.

Michael.

Last year in the first quarter,

you had a high level of formation. You laid out trajectory

for us in terms of expectations of improved MPLs

over the balance of the year. I wonder if you would

be prepared to do something like that again at this

time? If you could give us some idea of where the

improvements would come from in terms of cures, sales

and additional provisions that may be required?

Thank you, John.

We will continue with reasonably heavy level of provisioning

because we are earning enough to afford that and

because it is necessitated by the impaired. I think

you can see that in our numbers. Although, I expect

reductions to start coming. John referred to some

maturing loans. There are a number that we know.

We know where they are. We know what they are.

We know that they cash cover. We know what the

businesses are. They might be technically called

impaired. They frankly are closer to coming out of

the debt trading levels are moving up. Part of what

happened last quarter, we don't speak of specific credits,

but you can guess there is certainly one in there where

we have reserves against it. Modest - more than

modest, they will do money good. It is a question

of when it technically is sold. We are at the offering

of virtually all of these. We are pretty comfortable

over the next couple of quarters and we will be in

the hundreds of millions here. Really, very predictable

and we didn't go out further than that because we will

end up into our next year planning session and give

you guidance after the next quarter. I think we will

be in a position to play that out and say here is where

we are and here is our expectation.

Inferring that by saying we are not at this

stage looking at 15 or 17% equity return and a 7 to

12% earnings per share target that we set last year

as being unattainable at all. You don't see a reason

at this stage, we can't do that and should be able

to do that on a sustainable basis.

I have one thing, Michael.

You will remember that Q1 list that we gave you

last time, the quarters went on and we sold some assets.

Provisioning levels had been sufficient and in a

number of cases, ahead of market prices. We were

able to sell without any provisioning to the bank.

So, this is where we believe we are today And so

we have flexibility in deciding how we wish to take

this number down.

(inaudible). First quarter

2001, if I recall, the new formations were largely

nontelecom related? This is an old industry. The

secondary markets, as I understand it, are (inaudible)

and telecom credit. So, I guess the question is

are you planning on selling down telecom credits?

If so, will you have to give a substantial (inaudible)

in order to get (inaudible)?

Good question. When we put that big question

in Q1 in a number of markets, there wasn't much liquidity.

You could sell small amounts, but not large amounts

in the market. On telecom, as with all of our accounts,

we look at the sale decision as against what we think

we will be able to realize on the account. And in

some issue - some occasions, we expected the market

price is really too severe and in those cases, we won't

sell. I would expect we will sell some telecom and

in fact, we are in the process of selling modest exposures

as we speak. But, I wouldn't want to say that we

are setting out to do much of a large sales exercise

any particular sector. I don't want to signal that.

We will sell when values look great to us and we

have flexibility in how we sell.

(inaudible) follow-up to that.

Without naming names of credits that became impaired

this quarter, as I understand it, these credits are

traded in at last recovery levels and I think a lot

of banks are anticipating - the question is do you

disagree with where the creditors (inaudible) market?

Or -

Depending on the type

of telecom, the price will vary enormously. If you

are looking at cable transaction, with good cash flow

and asset coverage, frankly that type of asset we expect

full recovery on. And there are other telecom accounts

where it is clear and it is more difficult to say whether

the market price is a good reflection of value (inaudible)

in the court. There is no specific question to you.

In some cases, market price reasonable. Other cases,

too low.

John , can you provide a segment

break down of heavy write-offs?

The write-offs are fairly

broad spread. We don't publish a sectoral lay-off.

It would be a good chunk within telecom. Some in

- not a large amount, in energy. But, very broadly,

what we have done with gross accruals down somewhat

over the year, what we have done is go over the entire

portfolio account by account and look to see what we

might be able to realize. We brought the value down.

Part of an exercise (inaudible).

I have a question for (inaudible).

Exiting Argentina, do you see likely impact of

relationship with other international banks?

So far we have not in international banks.

(inaudible).

and again, as Peter said, our objective (inaudible),

but on individual discussions, the place to have a

stipulation, but it is not jeopardized (inaudible)

and have no implication (inaudible).

Quintin Brogue, (inaudible).

Peter, when you put up slide 7 and talked about 2002

targets and employees, you said Argentina doesn't

count. Except for me and Rick. At our level it

counts. Glad I didn't lay it on Rick. Thank you.

Taken under advisement. If the bank has taken two

large corporate hits to the same tune of 500 million

dollars for a vast majority of employees not engaged

in corporate lending (inaudible), would that have

been taken out of your operating results for the purpose

of payment?

No, we have never

done that. Had is unique in our broad base in which

the vast majority of the people from the tellers to

the branches to the accountants in Jamaica to the

workers in El Salvador are tied into this, which

we picked as broad prophecy to the bank, so they could

feel it is transparent to them. We always said if

the ROE wasn't there, I shouldn't get my bonus

and you don't get your bonus. You write the board,

why should I get my bonus when shareholders are not

lending. We determined in the first quarter, with

the board, this was above and beyond (inaudible),

complete melt down of the country. None of us have

ever seen anything like this in modern history, really

truly haven't. It is not over yet. The INS is

changing plans and dealing with Brazil. We said

to them, the executives should be held accountable

because shareholders are paying a price here. We

will see how that behaves. To that, both of the employees,

this event risk shouldn't count against them if they

do the job we think they are capable of. I can honestly

say it is employees in the international and domestic,

they have done a superb job. Scotia Capital is driven

by specific bonus pool in specific areas and the overall

partnership. We thought that was the fair and right

thing to do.

So, the event risk (inaudible)

cited as being (inaudible) is that fair?

Yeah.

Follow-up. Where do you go

(inaudible) -

I was only kidding.

Just in terms of the corporate

platform, you said it would be great without lending.

But, does that -

I am not suppose tod

deviate from the notes. You are getting me in trouble.

Are you pulling out of corporate

banking in terms of capital, as you have been a large

vendor? Are you looking at selling? What is the

plan in terms of the large (inaudible)?

Why don't I let David

answer that. We are on it and have been for some

period of time. Doesn't show, but we have been.

We have done a lot of things. (inaudible)

down 20% in the U.S. (inaudible) evolution of

revolution. We will take both (inaudible) down

in the U.S., we are exiting accounts. We have 1400

accounts and will exit 500 of them. It will be evolutionary.

We will produce portfolio management and get it

up and running and manage that loan book in the risk.

Introduce new metrics on planned profitability.

We are doing a lot of things to change the business

and incrementally over the next 24 to 36 months, it

will change quite a lot.

Take some questions

off the phone.

We have a question from Jamie

Keating from Merrill Lynch. Please go ahead with

your question.

Thank you. I wonder if I

could ask about - you related -

Could you speak up.

The gross impaired loan to

the extent proportionate dollar amount current, could

you just discuss a little bit around that? Maybe

helpful in understanding how this will develop? Also,

curious to what the credit protection to the extent

you have any purchase or written, curious to know if

there is any and if you expect that to kick in? Finally,

perhaps for Mr. Crean, discuss airline exposure

dollar amount or whether it has changed, that would

be helpful to understand a bit about that. If I

may briefly, PDI bon sales, I am curious about

the pre or post-gains recognized on PDI bond sales

in the current quarter?

Could you be clear about what you are

looking for in the formations questions?

Didn't mean formation specifically,

but in the portfolio of gross loans, how many are current

on interest payments, if any, in dollar amounts?

I don't carry that number. Fairly large percentage

of them would still be paying some level of interest.

We can get back to our method t. is not a number

- I should say that the way Canadian accounting

rules work, when you do your provisioning, you have

to take account for the time value of your interest

in that provisioning. So, have got some type there

you already accorded in the numbers for those that

are not paying interest.

It is a pretty scratchy answer. There are numbers

of accounts. One of the major nonaccrual formations

this year in telecom in the U.S. is paying interest.

While it is court protection, the court has given

us adequate protection for that interest to be paid.

That is not unusual. We are finding more and more

frequently in the U.S. that the regulators are requiring

such accounts even though there is current pay to be

carried on impaired loan basis. So, the percentage

of current paid will have gone up over the last years.

In terms of airline exposure, U.S. exposure is less

than 25 million. I think that is where most of the

common carry risk are centered.

It is David Wilson.

On credit default. We have just begun to use that

market to hedge the risk of portfolio with the new

loan portfolio group that started in March. The

number is 300 million on the portfolio. We also have

about north of 500 million of purchased credit risk

which we view as loan equivalence as part of the loan

portfolio.

Second number of 500 million,

can you tell it again?

500 million (inaudible)

attractive prices loan equivalent.

Got you. 300 million of protection.

On PDI bond sales.

I should point

out that is part of the overall gain on security.

We don't view it in isolation. It is really due

(inaudible) quarter PDI, sometime necessary equity,

sometime in bond. It is gains as entity, rather than

isolated elements offered.

Thank you.

Just (inaudible) decline

in unrealized gains on the portfolio, I am surprised

to see that given the way they (inaudible)? (inaudible)

and of the decline in the 300 million decline surplus

on the major market, how much was from the total and

how much was (inaudible) value (inaudible)?

Bob. There is a

(inaudible) in the presentation and in page 16 of

the supplementary, Ian. That relates to the Brady

bonds that are not in the so-called LVC basket,

which is Mexico and to a lesser extent, Brazil.

On page 16, where you see fixed income securities,

it includes those emerging market bonds, as well as

regular portfolio. That is why there is discrepency

between that number and the number on the slide and

on the other page. As far as a bond portfolio, our

bond portfolio excluding emerging markets bonds varies

depending on liquidity situation on global basis from

4 billion to 8 billion dollars over a period of time.

95% of that is government securities. We do very

little credit. Obviously there is a small amount

of credit in the portfolio. You are correct, the

U.S. spread rule out on the credit and accounted

for great part of the decline in market value.

we don't anticipate any losses in any of the credits.

They are all investment grade accounts. But, spreads

have widened across the board.

In the numbers, Ian,

we wrote down 90 million in this quarter alone. We

have written well over a quarter of a billion down,

out of earnings without - we have been writing down

all the time. Hasn't been reaping gaining. We are

well aware the optics are virtually all the gains are

done before June, when we still had 200 million plus

surplus, which we lost nicely in July. So, it has

bounced back today.

Following up on the (inaudible)

Brady Bond - (inaudible) with that 20 million

after tax, would it be in international business?

That is correct.

Great.

As Peter said, net gains are (inaudible)

in the same portfolio and they have been material over

the last 2 years.

Questions on the phone?

Question from Neil Matthewson

from Standard Life Investment. Please go ahead.

Thank you. Good afternoon.

Over the last two quarters you pulled down allowance

for credit losses by roughly billion dollars. Going

forward, do you expect to continue to pull that down

as part of writing down the gross net exposure or is

it a case of at some point, you would actually want

to maintain or build up that reserve further?

When you do write-offs, you take down the

gross and allowance. We're, as I mentioned earlier, going

through the portfolio and doing a review of what we

think ultimately might be recoverable and in many cases,

taking write-offs. That program will continue. You

will see the impact on both sides.

The question is what stage

do you feel you are adequately reserved? Is there

a point you feel you were not adequately reserved?

I am trying to say as we do provisioning, we

provide, as we go through adequately to reflect what

we expect will be recovered on these accounts. And

the provisions plus the write-offs give us the coverage

of the original amount. We will continue to provide

and put up 400 this quarter. And in addition to that,

we are looking to see what write-offs we should do

to reflect the ultimate amount on optimistic basis

that we might recover and will continue to take write-offs.

So, you have got on the one hand, provisions being

added and on the other hand, write-offs taken against

the gross and the allowance.

Just to follow-up to that might

help a bit. Roughly what proportion of the formation

this quarter were these two fraud-type cases you talked

about?

It reflects a very

large percentage of the Scotia Capital formations.

It would be over 50%, over sect%.

Of the Scotia Capital?

Of the 835 Scotia

Capital. Just a clarification. Yes, we feel we are

adequately reserved. We are certifying statements,

Sabi and I. We looked at each loan and know where

we are and knew what the impaireds were. We are not

happy with it by any stretch of the imagination, but

the 400 million wasn't arrived at lightly. I would

rather be 200 million frankly, be much happier. We

have been reserving heavily. We sat back in January

even with the position then, we thought we would be

down to high 200s.

Sure. If you were to roll

on with maybe not a billion a quarter formations, but

high numbers of formations, would you have to rethink

-

We do not see that.

We know where the migrations are and know what it

is. We have the luxury of having some recoveries

because making a (inaudible) but we have a rather

large older portfolio of impaired, which is back to

the telecom and other things that have been in the

works for quite a period of time. We know where each

machine is what it is cash flow and what it could be

sold for. We can get rid of some of that, where we

really are now if there are more events, I will add

frauds are complete surprises on the field. They

are difficult to predict. But, I'm confident frankly

with the certification with the (inaudible) and the

president said put them in handcuffs and send them

to jail. There are not many more left out there.

We found them all, that is another question. I

will not bore you with that.

Okay. Thank you.

I am still not clear on the

realized and unrealized gains in the (inaudible)

section. Can I get clarification? You have 105

million of realized gains, including (inaudible)

sales of TBI. Also, it includes and here is what

where I want clarification, 90 million of write-offs

that are netted against - fairly high level of other

realized gains during the quarter. Okay. Then,

I am looking - you mentioned a lot of the decline

in the unrealized gains related to fixed income or

at least the impression I have is that may be due

to (inaudible) in Brazil. Could you quantify -

Let me clarify. Look

at page 16 of the supplementary under reserves. You

see at the top of the section, designated surplus deficit

bonds. We went from a deficit of $28 million at

the end of last quarter to 222 million this quarter.

Okay. That's Mexican - that's the Brady we are

talking about where the market blew out and declined.

PDI bonds declined from 262 to 187. A portion

was sale and the value of the bonds declined in July.

Skip two lines under investment securities to fixed

income, which went from 296, down to 75. Still a

surplus. That 210 million reflects widening spreads

that I talked to Ian about on traditional bonds.

And the sale, gross sales that were just referred

to.

Close to couple hundred million dollars. Sales before

the write-down. Okay. Does that help you?

Yes, it does. I have one

other question looking at the power slide that you

presented. Fairly high level of noninvestment grade

exposure there. To what extent does that exposure

fall (inaudible) as opposed to bonds that were originally

investment grade?

There is clearly migration

taking place in that portfolio over the last three

or four months. That has happened. We, in our grading,

are clearly aggressive in down grading and classifying

into noninvestment grade, if you think that is an appropriate

place to put them.

Okay. If I could finish

up with one other question. Looking at all these

numbers, why should we feel comfortable that over the

next couple of quarters that you are not going to mitigate

the high level of net impaired and the deterioration

in the unrealized gains, especially on the equity side

that I see now without some write-downs on the equity side

and without fairly high level of provisions on the

credit side?

I think, one, you

have to take our track record at a certain perspective.

Yes, we go through troublesome patches, no question.

Love to avoid them, but they happen. You deal with

them and you go on. You concentrate on the basics.

The basics here are fundamentally really pretty good

in the vast majority of our businesses. Then you

come back and say yes, there has been a loss of surpluses

in the equity accounts, does that project into there

is more losses to come here? No. I mean, it was

a July incident, almost totally, which is a combination

of emerging markets and credit spreads. They had

actually all moved a bit in small surpluses. That,

combined with the fact we have written down our merchant

banking and our investment portfolios almost consistently

now for two years to the tune, as I said, another

90 million this quarter. We have been taking that

without great flashlight or saying here is an extraordinary

thing that happened that we had to write-down. All

portfolios have been gone through. They are clean

relatively. You turn back to the credit issue. And

obviously in a peer group sense, we don't look good.

We have high net impaireds and gross net, pick your

number.

We had this bulge again this quarter, of which part

is explainable, but fallen angel. The point of fact

is we are going to have this sort of thing and have

to deal with it. We know our portfolios inside out.

We really have been on this since the end of 2000.

Doesn't make (inaudible). It does mean it is

not for lack of knowledge that we are not going to

deal with this. If we say we can deal with it to

the tune of hundreds of million, you can take that

as a firm given. I wouldn't stand here and John

wouldn't stand here unless we have gone three reams

of this personally. Again, back to it, didn't want

to and didn't think we would be here. Meanwhile,

we have also looked forward at our earnings and dynamics

of the spread fundamental ability to control cost that

are capital expenditures, everything we can think of,

and say is this fraud guidance because we are not into

the quarterly guidance, is this 7 to 12% earnings

per share, is this 15 to 17% return on equity, is

it realistic? Are we going to come back and say,

well, we should have got them. No, we think we have

that. We think we have that ability. We think our

mixture of assets and liabilities, our people and portfolio

of businesses can achieve that nowithstanding what

we see as a set back and obviously attack of dead-on

credibility with cause because we didn't expect this.

We sure didn't expect the numbers to go that way.

We are also confident we have very solid earnings

power and we have a handle on them. And will produce

the results for shareholders.

One last question.

You mentioned the sale of about

200 million or gain on sale of about 200 million dollars

of what sounds like largely government bonds. Doesn't

that effectively mean you are selling higher coupon

bonds and doesn't that mean you are then going to replace

them with lower coupon bonds than just show up in the

margin?

Yeah, we move the bond portfolios around.

We maintain government bond portfolios and multiple portfolios

for liquidity purposes and cash management purposes.

We accountively manage them in the context of market

view on interest rates essentially. So, with the

bond market having rallied the way it did in the period,

certain of our government bonds have had a big move.

We sold them and replaced them with other government

bonds before that.

To clarify, group

treasury where most of this is, operates that portfolio

ex-what our earnings expectations are. There is just

a block number in there. So, they actually were surprising

us on the upside through June because they felt there

were certain markets they wanted to trigger. Of course,

surpluses disappeared. We are not very keen to see

more sales. We really do tend to stay away from it

to less than right the puts and calls and move in and

out of the index without it trying to be pro-trading.

We have that in one area. We don't try to do it

in there. Okay.

Any other questions on the

phone?

We have a question from Melanie

Ward from RBC Capital markets.

Can we expect another quarter

in the 400 million dollar range for loan loss provisions?

Welcome back, Melanie. I think it should

be lower. I don't know, obviously. The devil is

in the detail. But, we are one month through the

quarter. You know where we are. I think we would

hope we are looking at lower rates as we go forward

next quarter into the next year. But, I take that

with a hint of always, if some of that comes up or

something, we will deal with it and we must. We do

not want to be under reserve.

Thanks.

Didn't help you, did I?

That is okay.

That's fine.

Any other questions?

Question from Jim Bantis

from CFFB. Please go ahead, sir.

Good afternoon. You have

given sketchy details, but confidence in terms of net

impaired loan positions coming down over the next few

quarters in an orderly fashion. You have quite hefty

capital ratios at this point. There was talk about

taking over the minority interest in Inverlat over

the next few quarters as U.S. expansion. Can you

talk about the use of capital in the near-term given

the credit issues you are facing?

Rick here. We are in negotiations

to take over the balance of the Mexican bank. We

see that as good deployment of capital. We are still

generating capital, if you look at the numbers again,

even with the loan losses. We are generating capital

between 4 and 500 million a quarter. So, we are still

a very large capital generation machine. What is

coming out is some referreds or redeemed it. Our

fundament earnings power says notwithstanding the credit

setback we could afford to buy a smaller sized U.S.

bank, where we have been actively looking for months

now.

Bob Chisholm is here and has been working with Warren

Walker on that and visited a number, as we said from

the beginning - it is not an end strategy. It is

deployment of excess capital because we are sitting

at the highest rates in Canada . If you look at

intangible common, it is very good against any system

anywhere in the world. The intangible common, which

is probably the true thing because it is not using

any of the other things that go into Tier 1. It

is a percent, far ahead of regulatory needs and quite

a bit above most major banks have.

So, we will maintain that and we actually do think

that we are at the end of the fallen angels, I hope.

With that done, we know where our migrations are,

our portfolios are not perfect. Back to what clinton

says, we are on top of which accounts to exit where

to go. We are careful on underwriting. We are certain

this will self correct. It always does in time.

I just thought it would be this year. We are toward

the end now and I think it is next year where we will

see lower loan losses.

Jim, we had a modest buyback in the quarter,

as well.

That is right. No, I just

wanted to see if anything was put on hold outside of

the credit issues. Great. Thanks very much.

Other questions

on the phone?

Yes, a question from Steve

Collie from TD Newcrest. Please go ahead.

On page 16 of the report, note

4, there is reference to special purpose entities.

I don't mean to sound alarmist here, but could you

just comment on that? If that note wasn't in the

last financial statements, is there potential qualification

you can give on this?

Quarterly.

On note four?

We don't - (inaudible) presentation to the board

yesterday and really there is no issue for us in the

overall scheme of things material at all.

Great. Second question.

You say 500 of 1400 corporate relationships in the

U.S. that you hope will be run off the books. Is

that roughly the same proportion in terms of capital?

Roughly the same. It is about a third of

the client list and a third of the risk capital, economic

capital of the book. We are well on our way to doing

that. We started the exit process eight months ago.

It takes discipline and time for the loans to mature.

We are exiting the relationship (inaudible).

Okay. We have seen disclosure

as well from the other companies on pensions and changing

of assumptions and increased expenses that were incurred

this quarter as a result of changing assumptions.

Can you comment on on where you sit on pension obligation?

Look at last year's annual report and we

were in substantial surplus, very large surplus as a result

of that, the bank has been enjoying a modest pension

credit, rather than pension expense for the last number

of years. We current - we adjust our estimates of

the pension assets typically once a year with effect

from the beginning of the year. We will review that

in the next month or so to decide what to do for next

year. We did lower it slightly next year, reducing

the credit slightly. We haven't decided what we will

do next year. Our best - we stressed this things

six ways to Sunday, we see no particular material

negative effect given the likely range of possibilities,

although the credit may well drop down 20 or 30 million

dollars, depending on what we settle on.

It is safe to say

under the numbers you see out there from (inaudible),

we are still surplus.

One final one, on page 5, the

international banking. This is pulling from the supplementary.

For the international bank and the 212 in net

income, you got me confused on the various gains and

what-not from sale of the Brady and PDI. Can

you say to me 12 - if there weren't gains on sale

there, what would have been the profit number and with

the provision for credit loss that looks like it was

recovery of 16 million, can you again clarify that

for me?

Comment on the

recovery?

In the normal court, we will have occasions

when we have recoveries greater than our - provisions

we put up in lost accounts. That was the case in

the international bank for this quarter. It was a

range of a whole series of smaller accounts.

Whole range. Is that the

only thing in there I should view as being unsustainable?

I don't think we should be modeling 212 per quarter

from this moving forward?

As Sabi said, gross gain of 25 million.

20 million after-tax.

Okay.

In terms of

(inaudible), you should be marketing 212. We have

gains occasionally, last quarter we had the (inaudible)

and you don't have write-down. These numbers, you

know, you say you want to pick one item out, other

things that go the other way.

Thanks.

That 212 is a high

number. I wouldn't annualize it at all. I don't

know, again, as Sabi says, it is a lot to do

with foreign exchange. 180 would be a reasonable number.

Thanks, Rick.

Ian.

(inaudible) a lot of questions

here on the growth in net impaired, some competitors

are going to (inaudible) sectoral. What is sort

of your sense on that providing for particular blocks

of loans where it looks as if there could be sustained

period of higher provisioning going forward, what is

your view on that?

It is (inaudible). It is interesting initiative.

As you know, we have generals. Generals in the

U.S., as most of the European system would be fluctuated

and in effect, playing the part of sectorals. The

sectoral is putting up reserve against it that keep

it from being impaired where the interest income can

go through earnings. Back to that question, we didn't

have the number. Once we are impaired, interest earnings

disappear and the reserve pool starts to build up.

So, I think it is an interesting initiative. It

moves us closer to U.S. style, where the difference

between nonaccrual and accrual is great because under

the classification, you can keep part of a loan performing

and your earnings per share stay up. So, I welcome

that. We are not thinking of going there. Frankly,

it is our classic style, we have had tunnel vision

right now. Get the impaireds down and make sure we

have reserves properly sized and that our existing

businesses which are doing so well keep managing the

way they should and keep taking share and keep producing

good earnings for our shareholders. Sectorals might

become a way of life up here. I personally think

we will converge more with a SFAS 142 style and

get out of the ciba, because so much of the rest is

moving that way. Maybe that will be two or three

years.

Any questions

on the phone?

We have a question from Trevor

Bateman from CIBC World Markets.

Thank you. Just a question

with regard to supplemental page 11 (inaudible) assets

with respect to the indirect credit instruments, notable

increase in the quarter?

Could you speak

up a little bit?

Notable increase in credit

instruments on supplemental page 11. I am wondering

what is the driver of that and how should I expect

that number to perform in the future as you reduce

your corporate credit relationship?

Couple of components

in there, as David mentioned, we sold credit and that

goes into that number. With the reduction in direct

lending commitments or lending the offset comes in

indirect. There is trade-up between lending and going

into indirect credit commitments. Those are the two

items.

Thank you.

Any other questions?

Yes, on the balance sheet, market valuation in the

quarter, is there anything -

Function of

(inaudible) on the balance sheet.

If there are

no further questions. Thank you for coming. We

look forward to seeing you in three months.