Bank of Nova Scotia (BNS) 2008 Q4 法說會逐字稿

Good afternoon and welcome to the presentation of Scotia Bank's fourth quarter results.

I'm Luc Vanneste CFO. Rick Waugh, our CEO will lead off with the highlights of our results. Next Credit I will go over the financials including a review of business line performance. I will be followed by each of the three group heads , Chris Hodgson, Rob Pitfield, and Mike Durland, who will discuss their outlook and priorities for 2009. And Brian Porter, our group head will discuss credit quality and market risk and finally Rick will cover our outlook and priorities for 2009. We will then be glad to take your questions. Here with us to participate in the Q & A we also have Sabi Marwah, our Vice Chairman and Chief Operating Officer, Steve McDonald t co-CEO of Scotia Capital, Jeff Heath, Group Treasurer and EVP Commercial Banking Canada. Before we start, I would like to refer you to slide 2 of our presentation which contains Scotia Bank's caution regarding forward-looking statements. Rick? Over to you.

Thanks Luc. Well clearly 2008 was a difficult year, one marked by challenging market conditions and unprecedented volatility in financial markets globally. We were of course not immune to the market turmoil as all Canadian banks have been affected. These events lead to writedowns of $642 million after-tax this quarter and as a result our earnings per share was $0.28 for the quarter and $3.05 for the year. Although we are disappointed to having to take charges of this magnitude, it is important to note that we performed well over the past year compared to many of our major Canadian and global competitors. Notwithstanding these challenges, I'm pleased to report solid core earnings from each of our businesses. We are cautiously optimistic about our earnings next year. We believe we have the right strategies and the right team, but I'm going to come back to that later.

The 2008 results were marked by a record year in Canadian banking. Solid earnings in International Banking. Reported earnings declined by 30% at Scotia Capital. On a core basis all three businesses delivered solid performance, impressive given this weak environment. Canadian banking had a strong year growing earnings by 17% if we exclude last year's gains. Strong asset and deposit growth resulted in good top line revenue growth. International earnings were close to $1.2 billion Credit down 5% from 2007; however on a core basis net income rose 1 1%. We benefited from strong business growth and increased contributions from our divisions.

Scotia Capital was the division most affected by the global market conditions particularly in the fourth quarter; however, underlying performance was comparable to 2007 as we achieved record results in our foreign exchange, precious metals and our fixed income businesses. Partly offsetting the solid core performance of the three business lines was a large negative result in the other category largely reflecting several of the writedowns and higher funding and liquidity costs. Our capital ratios remain strong, and of course, strong capital is very important in this difficult environment. As you can see our tangible common equity was a strong 7.3%. Our Tier 1 ratio was a strong 9.3%. Our total ratio was 11.1%. These ratios remain strong, despite double digit asset growth in all of our business lines. Our ratios are well above the regulatory minimum and are high by all global standards.

We've also been proactive in raising capital, both equity and debt. The quality of our capital is high, given the quality of our assets, the low level of goodwill, and a large component of common equity. As well, despite the challenging conditions, the overall strength of our capital and fundamental earnings allow us to generate sustainable dividends for our shareholders. Our strong capital provides us with a cushion against economic turbulence, allowing us to grow and as well, to look at opportunity to make investments that will help our growth even more. With that I'll turn it over to Luc to go through the financial details with you now.

Thanks, Rick. As Rick mentioned, our fourth quarter results included writedowns of $642 million after-tax. Valuation adjustments totaled $416 million including $137 million charge relating to the purchase of certain CDOs from the banks US multi-seller conduit, $122 million writedown on CDOs held on our balance sheet, and a $150 million charge for AF S Securities. We also had a $117 million trading loss relating to the bankruptcy of Lehman Brothers and $1 \09 million mark-to-market loss on ALM hedging. You can refer to slides 35 and 36 for more details on these items. Excluding the writedowns our core results were solid this quarter. Net income was up 8% versus Q4 last year but down 5% from last quarter. Compared to Q3, we benefited from asset growth across all business lines, increased spreads in the US and European corporate loan portfolios and acquisitions; however, these gains were more than offset by lower underlying securities gains, a decrease in Wealth Management revenues given the challenging market conditions and higher loan losses. When compared to Q4 '07, net income was up 8%. This was largely due to strong business growth as well as acquisitions. Partly offsetting were higher PCLs and expenses, lower underlying securities gains and higher funding costs. On a core basis, we continue to achieve an impressive ROE over 19% and maintain a solid productivity ratio at 54.9% comfortably below our 57% target.

Looking at revenues in more detail on slide 10, year-over-year core revenues were up 9%. Net interest income increased 14% benefiting from acquisitions and broad based loan growth, partly offset by a lower margin. Other income rose 3% driven by record 4 X and precious metal s trading, businesses which benefited from the market volatility. Higher securitizations and acquisitions also contributed, partly offsetting were lower underlying securities gains which were a high level in Q4 '07. Compared to Q3, core revenues were up 2% with higher net interest income offsetting lower other income. Net interest income was helped by continued asset growth and a stable underlying margin.

Turning now to slide 11. Adjusting for the $162 million pre-tax impact of the ALM hedging, the all bank margin increased by three basis points this quarter. We continue to see wider spreads in our US and European corporate books, and we also benefited from higher margins in Latin America. These factors were offset by relatively higher funding and liquidity costs. Turning to expenses on slide 12. Expenses increased 8% year-over-year driven primarily by acquisitions, ForEx, and growth initiatives such as new branches and increased staffing. Partly offsetting were lower performance and stock based compensation. Compared to Q3, underlying expenses were well managed. The increase was due to acquisitions and 4 X, partly offset by lower performance in stock based compensation as well as lower capital taxes.

Now moving on to the business line results beginning with Canadian banking. Canadian banking had another strong quarter with record net income of $466 million. Excluding the Visa gain in Q4 '07, net income was up 35%. Revenues rose 14% driven by strong deposit growth, continued asset growth, and a 16 basis point increase in the margin. Expenses continue to be well managed rising only 1% versus Q4 '07. This reflected multiple acquisitions, 13 new branches and more customer facing staff, mostly offset by our cost containment initiatives and lower commission based compensation in wealth management. Net income was up slightly from a strong Q3 driven by positive volume growth, partly offsetting were higher expenses largely from acquisitions.

Looking now at international. Core net income was up 14% versus Q4 '07. Revenue growth was very strong up 29%. Key drivers were acquisitions, asset growth, and broad based increases in fee income. Expenses also increased 29% largely as the result of three factors: acquisitions, which added $85 million, ForEx, which increased expenses by $37 million, and investments in revenue growth initiatives. Provisions grew $63 million versus last year mainly because of higher retail provisions. Compared to Q3, net income was slightly lower. Revenues rose 4% mainly due to acquisitions in Peru, a higher margin, and ForEx. Expenses rose 8% due to acquisitions in ForEx.

Moving now to Scotia Capital on slide 15. Excluding the writedowns, Scotia Capital had solid core results. In fact, some of Scotia Capital's businesses such as foreign exchange and precious metals benefited significantly from volatility as customers were more actively hedging their exposures. Taking this into account, Q4 net income as shown on the chart should not be taken as a normal run rate. Compared to Q4 '07, we had higher corporate loan volumes and benefited from wider spreads as the portfolio continued to reprice. As mentioned, we also benefited from record precious metals and foreign exchange trading. Expenses were up 11% compared to last year, as we are selectively investing in the franchise in adding new teams in focus areas such as infrastructure.

I will now hand it over to the business line heads to talk about their outlook and priorities for 2009. We'll begin with Canadian banking. Chris?

Thank you, Luc. In 2008 we made good progress against our priorities. Those priorities included driving sustainable revenue growth organically and through acquisitions, and expanding and enhancing our sales capacity. In meeting these objectives, we've made several acquisitions including Dundee Bank and E*TRADE We're also in the process of closing our transaction to purchase some interest in CI. Subject to regulatory approvals, we expect this transaction to close mid next week. We're looking forward to building our relationship with the Management of CI and have agreed on Board representation. CI recently reported strong gross and net sales for November, a month that saw significant market movements. We're also looking forward to building our relationship with Sun Life as we explore many opportunities in the insurance sector. We're very pleased that Sun Life will continue to have a strong distribution arrangement with CI.

We've also opened 13 new branches and added customer facing sales staff. As a result we've gained market share in key product areas like deposits and mutual funds. Going forward, our long term priorities, to generate positive operating leverage and enhance earnings momentum remain unchanged. At the same time, we'll clearly adjust to a slowing economy in 2009. We expect asset growth to slow and we also anticipate Wealth Management results will be impacted by continuing market difficulties.

In 2009, we'll move forward on our growth initiatives, selectively, and with a focus on careful investment of capital and cost containment. For example, in 2008 we made investments in the small business and multi-cultural banking segments and we'll leverage those in 2009 to continue our market share gains. In retail banking, we'll build on our market share success in 2008 by continuing to focus on growing personal deposits. We'll do the same in our commercial business by realigning our resources to focus on the deposit side of our customers' balance sheets rather than just assets. Also in commercial, in 2008, we acquired a small ticket leasing platform that gives us access to many new customers and a source for targeted growth in 2009.

Similarly in 2008, we made significant investments in wealth management including the acquisitions of E*TRADE and our stake in Dundee Wealth and we continued to concentrate on growing our mutual fund business. In 2009 we will focus on consolidating and integrating these Operations. A good example is E*TRADE where, market volatility should result in higher trading volumes, and we will also continue to develop our partnerships with Scene, Cineplex, and NHL to acquire new customers and exclusively market our products and services. So in summary in 2009 we'll build on the progress we've made in 2008. and at the same time in view of the economic and business environment, we'll be very selective in our initiatives and investments and we'll be prudent in containing our costs. I'll now turn it over to Rob Pitfield.

Thanks, Chris. In international, we expect asset growth will moderate due to slower economic growth in some markets, specifically Caribbean, Central America and Mexico. On the other hand, we expect relatively strong growth in key countries such as Peru and certain countries in Asia. It's important to note that the majority of our countries are forecasting slower growth but still positive growth, unlike many developed countries. Revenue growth will come from the momentum of last year's strong asset growth as well as wider lending spreads. Because we expect slower asset growth, we've revised our management scorecards to put more emphasis on a wider range of profitability drivers including growing deposits, fee based businesses such as insurance and wealth management. Maintaining the long term trend deposit of annual operating leverage continues to be a key priority. We know expenses will increase due to acquisitions last year in Chile and Peru. Inflation will also be a factor in markets such as the Caribbean.

In response, we're tightening our expense management, we're reprioritizing our initiatives, and we're reducing our discretionary spending. While we will manage our business more tightly, we're also going to continue to invest in it. We'll invest in initiatives to increase revenues by optimizing the profitability and retention of our high value customers. We'll also focus on initiatives to improve operating efficiencies by reengineering processes in systems which we've done for quite a while now. For example, we'll continue to upgrade and rollout our call center programs, the new internet platform that we just launched, and our financial MIS to bring all three to best world class standards. Clearly, credit risk management is going to be a priority. We've done a lot already, including tightening underwriting standards early in the cycle. We're adding resources in collections and implementing world class platforms both in retail account management and pricing platforms. While our focus is on organic growth, we continue to assess opportunities for acquisitions and investments in key markets. In summary we expect 2009 to be a year of prudent solid growth.

Mike?

Thanks, Rob. As Rick mentioned, we expect the challenging economic conditions to continue through 2009. Some businesses will be negatively impacted and others will be positively impacted. In those businesses that we expect to be negatively impacted , we believe that the many steps we have taken over the past several years have positioned us well. In our lending businesses, we have significantly improved the percentage of investment grade exposure and the diversification of our portfolios. In our trading businesses, we have exited our proprietary equity trading business, significantly reduced the level of structured derivative activity, and generally reduced our risk exposures.

We will continue to focus on providing those products that are important to our client base. We will grow our NAFTA platform, which is a significant competitive advantage, we will also focus our efforts across all of Scotia Capital on key client sectors such as energy, mining, and infrastructure. We have taken steps to improve our equity and Investment Banking offering including changing the leadership and better aligning our activities with our customers needs and finally, given the challenges we face, we will continue to manage our costs carefully. I will now turn it over to Brian.

Thanks, Mike.

The global financial system has encountered unprecedented stress since the Lehman bankruptcy filing in mid September. Earlier, Luc talked about the significant writedowns we took this quarter relating to asset valuation. A failed Lehman trade and ALM hedges. I will now provide some comments on credit and market risks as well as areas of current focus, namely, bank sponsored multi-seller conduits, auto exposure, and international retail loan portfolios. I will conclude my remarks by providing some comments on our 2009 risk outlook.

Looking first at provisions. The specific provisions were $207 million this quarter compared to $159 million last quarter. There was a slight quarter-over-quarter increase in the commercial portfolios in Canada. Canadian retail portfolios continued to perform well. International provisions increased by $34 million. Of this increase, $24 million were in the retail portfolios and the remaining increase was due to lower recoveries in the commercial portfolios. I will have some additional comments on the international retail portfolios later on. Scotia Capital's Q4 provision was $10 million reflecting one account in the US.

In terms of relative PCL performance on slide 23, our loss ratio compares very favorably against the peer group. This quarter, the loss ratio was 29 basis points, slightly higher than last quarter's 23 basis points. The next slide shows the upward trend in gross impaired loan formations, which is expected, given the current credit environment. Gross formations amounted to $615 million in Q4, unchanged from the previous quarter but well up from last year. Formations have been relatively stable in the Canadian PNC business, a reflection of the solid credit quality of the portfolios and the relatively favorable credit environment in Canada to date. The year-over-year increase in international formations arose mainly from classifications in Chile and the impact of some economic slowdown in certain regions. The formations in Scotia Capital have been modest, only $6 million this quarter.

Turning to market risk, the unprecedented swings in currency , equity and credit markets from about mid September triggered mostly by the Lehman bankruptcy filing, created volatility in the bank's trading results. As a result, our trading losses on one day during the week of the Lehman bankruptcy exceeded our VAR; however, this loss was well within our stress testing parameters and our credit risk model measures. The trading results recovered from this loss and the trading revenues were positive for the quarter. We expect VAR levels in 2009 to be somewhat higher, in the mid to high $20 million range. This is a result of factoring in the extreme volatility experienced in September and October into our 2009 VAR measurements.

Looking next at slide 26, we had a wider distribution of trading results this quarter, arising from the extreme volatility. The largest one day loss of $39 million and the largest one day gain of $39 million both occurred in the week of the Lehman bankruptcy. That same week, the TSX composite index was down about 7% before recovering on the last day of the week to be up almost 9% on the week. Looking at the bank's multi-seller commercial paper conduits, funded assets of $3.8 billion in the Canadian conduits are down approximately 20% from Q3. Excluding ForEx, funded assets in the US conduit are down approximately 9% on the quarter. The weighted average rating of these assets held by the conduits is high, with the Canadian conduit assets having an average rating of double A minus or higher and 92% of the assets in the US conduit rated A or higher.

The assets have mostly 364 day term with a mix of auto loans, consumer, and trade receivables. During the quarter, the bank acquired US dollars $330 million of CDOs and CLOs from the US conduit. These were written down to fair value and as Luc noted, we recorded an after-tax loss of $137 million. We now have no direct CDO or CLO exposure in the conduits. On the next slide, we have updated our exposure to the North American and European wholesale auto loan and acceptances. Consumer auto backed securities and auto exposures in the bank sponsored and third party conduits. As discussed last quarter, almost two-thirds of the wholesale portfolio is investment grade with more than half of the exposure to dealers and floor plans. Mostly, foreign auto dealers in Canada where the loan loss experience has been quite low.

Our consumer auto backed securities of $7.8 billion increased by $700 million in the quarter due entirely to appreciation of the US dollar. 98% of this exposure is auto loans and the remaining 2% auto leases. A large portion of these securities, $6.6 billion, were purchased from GMAC under the revolving facility. We have reduced the US component of this exposure by taking more Canadian receivables. Now, 22% of our total exposure. While the recent loss experienced in the US has been above our original estimates, we continue to have sufficient reserves to cover anticipated losses in the program.

The last category is liquidity facilities to our own multi-seller conduits as well as liquidity facilities to third party conduits, which are primarily consumer auto loans. Of the total of $7.8 billion, $1.2 billion relate to third party conduits. Approximately 91% of the assets of the third party conduits are externally rated triple A, with the balance internally rated investment grade by the banks. The next slide shows the composition of our international retail portfolios. Overall, we have roughly 60% of our portfolio in mortgages, 30% in personal loans, and the remaining 10% in credit cards. Our Caribbean and Central American region make up approximately half the portfolio.

In terms of provision for credit losses, the ratios are higher than in Canada as you would expect; however we are adequately compensated for risks through higher margins. The loan losses have been for the most part within our tolerance level except for credit cards in Mexico, which have been problematic for all banks including ourselves. At $600 million, we are a small player in the Mexican credit card market. We have recently clamped down by reducing risk levels since early in 2008. We expect to see the results of these measures by mid 2009 in terms of the leveling off of delinquencies and losses. Overall, the risks in our international retail portfolios are manageable.

In summary, our exposures to banks sponsored multi-seller conduits, the auto sector, and international retail are manageable. As we look ahead to 2009, the focus will largely be on credit risk. While we are comfortable with the call it of our portfolio at this juncture, we expect overall provisions to increase, but be well within our risk tolerances. In Canadian banking, we expect the effects of the economic slowdown to result in a moderate increase in provisions. International will be impacted by the effects of the US economic weakness, most noticeably in Mexico and the Caribbean. Lower commodity prices will also have an impact on resource dependent countries such as Chile and Peru, as well, we anticipate lower commercial recoveries in Mexico and Peru. For Scotia Capital, we expect to see higher provisions in 2009, as a general decline in the US economy will have some impact on our major clients in North America and Europe. In particular, we will be closely monitoring our exposures to the housing and auto sectors. Overall, we feel our portfolios are better positioned in terms of diversification and asset quality going into this credit downturn; hence we expect better credit performance in this cycle than in the past.

I'll now turn it back to Rick.

Okay, thanks, Brian. I'm now going to turn to the 2009 outlook and go over our priorities. In terms of the outlook, we believe that the economic activity will likely be weak through much of 2009. We also expect this volatility in the financial markets to continue. But consequently, we're going to manage all our businesses under these assumptions; however, it will be the strength of our diversifications which are by business, by product, and by geography, which will give us confidence that we will achieve growth in 2009, albeit at a more moderate rate than in the past. Although GDP growth in many of our key international markets is expected to be slow as Rob mentioned, most will continue to grow at a faster pace relative to the North American economies and particularly of course US and Canada. Now, obviously as I said we'll be managing with a view to the challenges that we're facing, but we see no reason for any drastic changes in our strategies and we will of course execute them very effectively. We always do.

We remain committed to our three priorities that we mention continuously: first, to drive sustainable revenue growth; secondly, to manage our capital prudently; third, of course leadership and its development. But we're adding two more. These are actually areas of our longstanding traditional strength, that being of course risk management and expense control. Firstly let's talk about driving sustainable revenue. This will be both organically and through acquisitions, and remains one of our top priorities and is still achievable in this environment. We will leverage all our recent acquisitions and investments and look to take advantage of market opportunities. Second, as I said, we will continue to prudently manage our capital. Strong capital is important in challenging Markets as these, and yet provides us with the flexibility to continue to invest in our businesses. Third, our priority and leadership and its development, and at all levels of our organization will remain a key priority. Identifying and developing talent, to drive business innovation and to drive growth will be a critical component of our future success, and in 2009, we'll also be highlighting risk management and expense controls, even more than we have in the past as key priorities which build on our strengths in this uncertain current environment.

So overall, moving into 2009, let me be as clear as possible in these uncertain times. We're obviously cautious given the environment, but we are confident in our future, confidence that is shown by what we are communicating now to all our main stakeholders. We're telling our customers that we will continue to meet their needs with prudent lending, good advice, and great service, just as we always have. We're telling our employees that despite the economic conditions which do require tight expense management, something we're extremely good at, we do not foresee any forced layoffs. Indeed, I continue to see great career opportunities for employees as we move forward.

We're saying to our communities as always, we take our social responsibility seriously and will continue to contribute positively to the community in which we live and work, and we're saying to governments, regardless of who leads them, that we are confident that we do not need any subsidies or capital from them; however, we do need continued support to insure that we have a level playing field with our global competitors, as most of them are receiving subsidies, are including substantial government capital. So finally, let me tell our shareholders, that their dividend is safe and well maintained and that we do see increased earnings and growth in 2009 with great long term opportunities even in this difficult environment; however, we will evaluate these opportunities as we always do with discipline and prudence and adherence to the priorities that I've just outlined.

Finally, our targets for 2009. First, we are maintaining our earnings per share growth objective of 7 to 12% over 2008. Our target range for return on equity is 16 to 20%. Now this is down from 20 to 23% of last year's objective but reflects the realities of the current environment. We are maintaining our productivity ratio target at less than 58% and as I have said, we will continue to maintain strong capital and dividends. With our clear focus, executing effectively on our strategies, we are confident we will be able to achieve these goals and objectives both in 2009 and beyond.

So with that we'll pass it over to Luc and open up to questions to the management team.

Thank you very much, Rick. Could we have the first question on the phone, please?

Your first question comes from John Aiken of Dundee Capital Markets.

Good afternoon. Just wanted to elaborate on acquisition opportunities. I know that you're talking about prudent Capital Management but it seems that Scotia has gone through a cycle of acquisitions, first running through international and then more on the domestic wealth management area and Rick, where do you see opportunities deploy capital not necessarily in 2009 but over, call it the next three to five years?

That's a long way out, but we're going to stay on strategy. We're going to stay in the areas that we know and we know well, unless we see some extreme opportunities, we always reserve the right to be opportunistic, but there are so many opportunities that are developing in the markets we already are, so we want to stay on strategy, improve where perhaps we are the low levels we want to be, and or where it goes into even strong levels we're at right now so what you've seen is probably what we're going to be able to do.

Great. Thanks, Rick, and Chris, just for elaboration, you mentioned CI Board representation. Is that going to be, are you essentially taking over the spots that will be vacated by Sun Life?

John, we'll have at least two Board members and we haven't decided on who those members are going to be at this point.

Okay, great. Thank you very much.

Next question, please?

Your next question comes from Ian de Verteuil of BMO Capital Markets.

Hi. Luc, it looked as if the charge on the EFS was bigger than you had pre-announced. Can you talk through how that EFS charge that flows through income, how it could have changed as much as it did over the course of a couple weeks?

Well certainly, Ian, when we made our pre-announcement on November 18th, we were still going through our year-end process and looked at all the securities that had unrealized losses. The environment was such volatile and directionally it was going the other way, and we decided to on a relatively few number of securities, take another impairment writedown. And that was the $67 million pre-tax, 45 after-tax.

Sorry, I thought it was different from what you pre- announced on the EFS. Did I get that wrong?

Some of the numbers that we had in the earlier, in the November 18th press release were rounded numbers at that point and these are the actual numbers after going through the year-end audit process.

So I guess, Luc, the question I would have, I mean when I look at the large unrealized loss now in the EFS book, how should we think of that, if over the course of a couple weeks the charge coming through income presumably it's because it's no longer of a temporary nature. How should we think about that large negative mark in the EFS securities?

Well a couple of very important points here, Ian. One, we did not transfer very much from the trading account over to the EFS account. I think that that is important. Secondly, about 78% relates to debt securities and if you look at debt securities very differently than you look at equity securities, we have the ability to hold those debt securities to maturity and that is an intention currently, so when you take a look at what we have, net unrealized losses as of October 31, it is a relatively small number. It is under $300 million. So that, while there certainly is some risk depending on what happens with the economic environment that we could have other than temporary impairment charges, we do not expect them to be particularly difficult to take from an equity perspective.

What proportion of those EFS shares, EFS securities have highly transparent markets and how many don't? Can you talk to that?

Most of them do have external sources that we can go to for market valuation purposes.

Ian, it's Brian Porter. Most of these securities would be high grade equities or bonds and there were a couple equity securities in particular that Luc was referring to that between ourselves and the auditors thought there was impairment.

So of the $39 billion of EFS, how much is bonds, how much is equity?

79%.

Sorry, 79%.

No, that was the underlying net losses, it was 79%, it was debt.

Right, what proportion of the $39 billion of EFS? Can you talk to that portfolio?

I don't have that information in front of me, Ian. I'll have to get back to you on that.

Okay.

Largely fixed income, but we'll get it for you though.

Thank you.

Next question on the phone please?

Your next question comes from Mario Mendonca.

Good afternoon. The multi-seller conduit I want to see if I can understand what's going on there a little better. It sounds to me Brian in the quarter the Company changed, altered the obligations on how, your press release reads the bank will fund full par value assets and it sounds like that was a change in the quarter. The first question I have is what caused the bank to change this? The second question I have is it seems like because of a note issued by the conduit to an unrelated third party, that's redundant but to this third party, that the bank is not responsible for any losses from the conduit and I find that confusing given that a loss was taken on the CDOs that came from the conduit just this quarter so could you address those two please?

Sure, Mario. Just by way of background is that clearly given widening of credit spreads and the impact of the turmoil in the marketplace it had an impact on three CDOs which had face value of $250 million and to a lesser extent $80 million face value of CLOs in the portfolio, and they were put to us in the bank. We recorded the loss. We did that and we resized the expected loss note in the conduit and then the conduit has been wrapped by ScotiaBank as well so that's the outcome of what we did in the third quarter.

I'll ask the question more directly. Can the bank experience further losses on this conduit and why was the conduit altered in the quarter or liquidity provided?

I can tell you that what we've tried to do and what we're doing is high grading the assets in the portfolio. There's one amount, it amounts to $770 million US of a diverse asset backed securities which are wrapped primarily and secondarily by the monolines. The way it's structured now, if there's a down grade, one or two or three downgrades, we'll be fine. If there's downgrades beyond that we would have to access the whole portfolio in terms of PDs, the impact it would have on the expected loss note and we could possibly one of the two outcomes would be we would bring the assets on balance sheet or resize the expected loss note.

Brian I'm not sure I understand what the expected loss note does if in fact the bank took the losses on the CDOs this quarter. What is the expected loss note do for the bank then?

Well most of these, well all these conduits have expected loss notes and they take the first loss, if you will, on any losses in the conduit. The impact of the mark to mark on the CDOs given widening of credit spreads happen to be larger than the expected loss notes so we took the CDOs and CLOs out of the conduit and resized the expected loss note.

So I'll leave this soon, I just want to make sure I understand this. What is the expected loss note do for you on a go forward basis if losses exceed a certain amount?

It's the first loss. It protects us from loss.

Okay, and but it didn't protect you from the CDO loss?

Because the CDO losses happen to be wider in terms of credit spreads widening happened to be bigger than the amount of the expected loss note.

Is there anything you can tell us now about the expected loss note that would give us comfort that losses emerging from this point forward would be covered by the expected loss note and not by BNF?

Yeah, I think I've been pretty direct. I think the risky asset in the conduit is this package of diversified asset backed securities, wrapped primarily and secondarily by the monolines. If the monolines go through a significant down grade, the result would be we either take the assets on balance sheet or we can go back and look at resizing the expected loss.

Question for maybe Luc or whomever. The increase in NII this quarter and the stability of the margin, the NIM, not necessarily in retail but just for the bank as a whole, given what was happening with funding costs and I'm excluding anything to do with trading here, I was surprised the resilience of the margin. Is there anything you can tell us what happened in the quarter that may cause the margin to appear more resilient or does this feel right that the margin can be this resilient going forward?

Let me turn it over to Jeff initially to talk about the funding costs.

Yeah, I think in the quarter, if you look at the sort of medium term funding costs, while spreads have widened out, the curve has come down so the all in costs of medium term funding year-over-year really haven't changed that materially. So that's from the cost side.

On the business side of it, as you know, spreads have widened out on the credit spreads and of course that cost a short run on these mark-to-markets and that but the re pricing of our assets, especially in the commercial corporate books and indeed in the retail books is widening. Now, that repricing is ongoing as we speak. I was frankly a little disappointed we didn't see as much in 2008 as I'd expected but of course, customers are doing what they should do and resisting going and repricing their loans whether it be big corporations or small individuals so that is taking more delay, but it will come, if you just look at the spreads today and where they're going so I think in terms, yes, the funding is a little more volatile but hopefully we're through the worst of that and then we can hopefully look forward to the repricing on the asset side.

And Rick just for perfect clarity the guidance the 7-12, is that on the reported number or the adjusted number?

We don't report adjusted numbers as you know. We let you guys do all of the adjusting. We only report reported earnings so the number is as it always has been on the reported number.

Thanks.

I think one other point I'd make at the margin at the old bank level is that the old bank margins also supported by the growth of international as you know we've had pretty strong asset growth in international and we've come to much higher margin overall.

That's helpful, thank you.

Thank you. Before I take the next caller, I just want to respond to Ian de Verteuil's question in terms of what proportion of the $38.8 billion available for sale securities are debt. That is in excess of 90% are debt securities, only a little more than 8% is equity. So next question on the phone please?

Your next question comes from Robert Sedran of National Bank Financial. Please go ahead.

Hi, good afternoon. The 9.3% Tier 1 ratio I assume does not include the impact of the CI transaction yet, so I guess pro forma that deal with go to 8.8? How do you feel about a Tier 1 ratio under 9 % in this environment and I guess with the tangible common still at 7.3, is it fair to say at this point to the extent you would be looking for more capital, it's likely on the preferred share side not on the common equity side?

Well let me just talk about it. Of course, as you know, in Europe, 4% is your Tier 1 and regulatory Tier 1 and the United States if you're capitalized at 6% you're well capitalized. Prescribed rate, regulatory rate is 7%, and we have chosen as a bank to keep the ratio, the Tier 1 ratio well above that and it has been in the 9 to 10% area. Yes, there's been a lot of recapitalization by a lot of other banks to recapitalize based on asset deterioration, so and we don't see that need to do that, so we're well above the regulatory levels. As you mentioned, I think our tangible common, the quality of your Tier 1 is very very important. I think we have the highest or one of the highest qualities of Tier 1 with the 7.3, so and then we do have earnings growth that we're projecting, so we'll watch.

Our second priority is to make sure we manage our capital to make sure we can obviously well meet the Prudential and meet the growth, so these ratios are going to have to see what develops and I would be careful of generalizing what's happening in Europe because they are coming from a very little base and even the United States, it's not just us at Scotia. The Canadian banks have always maintained high quality so nine, 10, or eight, we're going to retain flexibility, but always insure we've got relative strength. So we'll leave it at that.

Okay, and if I can just follow-up on Mario's question about the targets for 2009. I mean if we were to take out the items of note I understand that you don't but you get an EPS number of closer to $4 and I guess your guidance or targets for 2008 are somewhat closer to 335 or 340. We're talking about a margin that's relatively stable. Is this all about loan losses and capital markets or is there something else that's going to be a bigger headwind next year than we're seeing right now?

Well we're going to prudently be optimistic, and forecasting, we think it is important to give guidance. We usually have given guidance in the 7 to 12 range. That's what we did last year and I think the year before was very similar to that so this is not out of line of the normal targets we give. We believe in giving prudent and yet achievable and yet aggressive targets. I think it's a very prudent target in this environment. Hopefully we'll over achieve but that's the way we see it right now and so it's very consistent to the growth rates that we've managed to. What I'm telling management to, and, we'll see how this world develops but it's important that we do produce sustainable revenue growth, the quality of the growth is very much important rather than going for home runs when you just want to get around the bases.

Okay, thank you.

Next call on the phone please?

Your next question comes from Michael Goldberg of Desjardins Securities.

Thanks. You mentioned that you got out of equity prop trading during the year. I'm not sure exactly when during the year, but let's suppose that you got out of all prop trading altogether in your business and we were to look at your trading revenue for 2007 and 2008, excluding prop trading. How much different would the numbers have been overall?

I'm going to ask Mike Durland to respond to that. Michael?

Okay, the first question was when we exited the proprietary equity business and we commenced that in the first quarter of '08 and we ran off the positions throughout 2008, we're completely out of those positions now. As far as proprietary trading and the impact on Scotia Capital's results, we don't really have any pure proprietary trading businesses anymore. The one we did have was the equity business which we shut down last year. We made a bit of money in that in 2007, lost a bit of money in that 2008. What we do engage in though are trading activities around our client flows. The business is organized to be much more client focused but even if you include those trading numbers you would get a revenue number bell below the 5% of total Scotia Capital revenues both for 2007 and 2008.

Thanks. Another question. I just want to confirm, did you have any benefit to earnings from a lower value of HST liabilities and generally speaking , either Luc or Rick, what do you think of the concept of taking into income a decline in value of liabilities?

Let me answer the first part. No, we did not have any benefit in our results. Michael, you and I have chatted about it so let me get Sabi.

Really in the past Michael as you know we never fair valued the liabilities. We just don't think in this environment, in some ways we pay for it next year so it's not a permanent gain, we just haven't done that nor do we intend to.

Thank you.

Next question, please?

Your next question comes from Andre Hardy of RBC Capital Markets. Please go ahead.

Thanks. I just want to go back to the issue of guidance please. I understand you don't want to get into too much detail but a previous Analyst suggested earnings would have been 394 excluding writedowns. What takes that number to 335? You talk about strong asset growth that will slow but was strong, a steady margin, you classified many items as items of notes on the assumption they don't recur so is it all credit that causes you to be cautious or is there more than that?

Well the world causes us to be cautious to start off with. Secondly, look, the variables of the drivers, look at what the foreign exchange rate did from this time today to this day last year or the previous quarter. We were talking $0.97 dollars last year or even in the third quarter and what did we get, something like $0.83 so the volatility of exchange rates, the volatility of credit swaps. Where is this economic recession? We're not going to, and we never have given you line by line guidance and we won't but let me tell you this. We're being very conservative, we think, in our loan loss forecasts. They are obviously going up. We're very confident in our risk Management abilities and our ability to prudently manage these risks but they are going up. There's a lot of volatility, the ability to predict I have a lot of empathy for all you analysts for how to come up with prediction and I think some banks have even not given guidance and I understand how they may want to get that; however, we have sustainable revenue growth as our objective and we give broad guidance and we feel comfortable in those numbers, and --

Thanks, maybe just a quick one for Chris. Very strong growth in assets and deposits. Was there any change as the quarter went on? Did things slowdown later in the quarter or it looked the same?

Andre, the short answer is "no". We've almost had the same growth in both sides as you know. We made a conscience effort to slowdown our growth on the asset side over the last couple of years and that's been reflected in our mortgages where our market share has come off a little bit, but we've been very focused on the deposit side and as a result of that we've gained our deposit market share quite significantly, so we've actually been surprised that it hasn't slowed down but we have factored that into our thinking for '09 is certainly more moderate growth in terms of the asset side, we're going to be very focused in gathering deposits and building that side of our business in '09 but at this point we haven't seen a significant slowdown.

Okay, great. Thank you.

Next question, please?

Your next question comes from Brad Smith of Blackmont Capital. Please go ahead.

Sure, thanks very much. This is a question for Chris. Just wondering, looking at your charts with your market share, just wondering if we could just make sure that I understand exactly how these are reading. You're giving us year-over-year market share gains in the fourth quarter. They are lower than the year-over-year that you've provided in the third quarter. Am I right in interpreting that, Chris, as being deceleration in your market share gains and if so could you explain what some of the components contributing to that were? Is that intentional, was it the result of pricing in either the deposit or the mortgage business during the quarter?

Okay. Brad? The answer is "yes". I think you're on the right track there. I mentioned a moment ago that we have consciously made a decision to be selective in our mortgage business and look at specific products, so we have seen a slowdown in market share and in fact we've lost a little bit of market share there. We've done that consciously.

On the deposit side, it's a very very competitive market and we've been quite active in dynamically pricing our product on that side and making sure that we're not giving it away from that perspective so we've made a conscious decision on that front and as a result of that while we have had good deposit share gains, it has slowed down a bit, but we look at that on an ongoing basis. There's a few other things we've actively done. We expanded our partnerships, which would be through things like Scene and Cineplex, we've had a number of new products we've brought out through called Bank the Rest and high interest savings accounts and the long and short of it is it's a very competitive market out there from a deposit perspective and we'll pick the spots we think we can get a good margin and we can get good assets and we'll step back where we feel it's too aggressive.

Brad, it's Rick. Just to add a comment. The mortgages was a definite strategy. We didn't want to go after the last 10% and we feel very comfortable with that strategy. There's lots of ways of looking at it but on the graph you got on the quarter-over-quarter, I know there's lots of ways of looking at it but if you annualize the quarter-over-quarter and compare that to year-over-year, we're often Mutual Funds were up and personal deposits, we are down in term deposits. That's another way of looking at it to show that we're really maintaining ourselves and some products we're actually doing better, term deposits we're not.

Thank you very much. That's a very fulsome answer.

Next question?

Your next question comes from Darko Mihelic of CIBC World Markets. Please go ahead.

Hi, good afternoon. I have a bunch of little questions so I hope we can get through this quick. I apologize for throwing three or four at you. The first question is can you remind me where you stand with Sanachart.

Right now the government has approved it. We will look at going forward with the 24.9%. We'll see what the situation in Thailand does with respect to the government and the ability to proceed with that but at this point in time we tend to go ahead.

That's a 24% increase so we go from 24 to 49 increase.

and would there be any impact on Tier 1 capital if you went ahead with that increase?

It's minimal, Darko.

Okay so we have 47 basis points of impact from CI, let's say minimal from Sanachart. I'm curious about what your expectations are for risk weighted asset growth and what the dynamics are for that going forward. If you could help me with that, that would be very useful.

Certainly the risk weighted asset growth between Q3 and Q4 was higher than what we are expecting on a go forward basis consistent with what we said about asset growth not on risk weighted basis and as Rick mentioned, we manage capital very dynamically so it's a question of how we fund these various acquisitions and as well you can see we have been active in raising some debt and pressures over the year, Darko.

And maybe a question for Brian. Where do you stand with the general reserve? Some of your competitors are taking general loan loss provisions and when I take their general reserves as a percentage of risk weighted assets and do it relative to you, if I just took one of the banks it looks like to get to that level that they would have you need the $400 million provision in general, so what would your comment be on that? Is there a prospect that maybe perhaps that's part of the issue going into 2009 that you'd have to increase your general reserve?

I'll make a general comment just where we are in the credit cycle and then get to your question. It would be our view that we're in the third inning of the credit cycle, so 2009 is going to be a focus on credit credit and credit. There's no mistake about that. And you heard my comments about what we're managing, what we're concerned about and how we think we're better off this time versus the last downturn in the credit cycle but in terms of coverage ratio what we focus on here is if you look at specific allowances for credit losses as a percent of gross impaired, we're around 52.3%, somewhere around that, so loss given the faults historically for the bank have been in the mid 40s so you've got a cushion there and if you add the generals on top of that you're well through a hundred so we think the cushion is more than adequate for where we are right now.

Okay and so generally speaking then, I'm hearing from you that risk weighted asset growth will be dynamically managed, don't really need the general, impact on Tier 1 from acquisitions is say 50 basis points going forward so unless there's a hiccup, you're comfortable bringing your Tier 1 capital ratio down to 8.5%?

I think if I could just comment on it, it's Sabi, I don't think you should assume that we won't take any other action in raising capital. We have significant room yet left from the preferred share capacity or innovative capacity. We have lots of room so don't assume that we are not going to take action on that front.

That's actually what I'm getting at is perfect, thanks very much for interjecting there. I guess the point is that I guess you could say strongly to your shareholders today that it's not necessary nor would you want to do an equity issue that you have lots of space to do other things to suck up maybe a 50 basis point hit over the course of the next quarter.

We have lots of capacity in virtually every category.

Perfect and last question for Brian. It's been my recollection that when I look at Scotia, if we go back usually the first quarter of every year, during credit cycle is when we get a big scrub down of the book and an increase in loan formations, and I'm rather surprised to see just $6 million of formation at Scotia Capital. Can you tell us about your watch list, the scrub process and the process of seeing an increase in formations in the first quarter?

Obviously, you heard my earlier comments about credit quality and the bank. Generally we've seen some migration over the past couple quarters. That's a function of SNIX in the US so some migrations downward. Of those SNIX, there's two to three names that we're really concerned about that are in the sectors that we spoke about earlier, automotive primarily, and anything that touches the House in the US, so look, the way things are tracking from where we see it today, don't see a significant uptick though we expect moderate increases across all of the books as I said and as Rick said. But don't expect a big surprise from where we sit in terms of formations in Q1 in Scotia Capital.

Great. Thanks very much guys.

Next question?

Your next question comes from Sumit Malhotra of Merrill Lynch.

Good afternoon. For Luc or Brian. Luc, your comments on the risk weighted asset growth sequentially Q3 to Q4 being something we shouldn't expect to see going forward. Can you talk about how much of that 25 billion increase related to currency?

I think it was around --

It's a large piece. We'll get you the number.

Just give me a second.

I can jump on to something else.

Why don't you do that while I get the number for you.

For Rob Pitfield. If I go back just over a year to the Investor Day in Peru, when you talked about some of the objectives for international banking over the next five years one of the ones we heard most about as I recall was consumer finance, the success that you had had in Peru and Chile and looking to bring that over to Mexico, now clearly we get a lot more color today on what's happening in the retail book, in international, when you think about your comments, was it prudent growth for 2009, I mean aren't there a lot of areas in the retail book that may have been looked at for driving the growth going forward that perhaps the bank has decided to pull back given the economic environment?

Well with respect to consumer financing, you're absolutely right. We will be very circumspect with that portfolio. It's not as now from Peru, the very small part of our overall portfolio and we will grow it very slowly, very circumspectly and we've taken a lot of action to tighten up on that market already, but as you know from being there in Peru, there's lots of other ways that we were going to grow our revenues such as ancillary revenues, such as focus on segmentation, on Wealth Management, on insurance and we'll continue to do that. So what we'll do, faced with that, faced with potentially slow growth environment, we're focusing on non-interest revenues, we're focusing on our margins which that was brought up earlier in the questions, we'll focus on our expense manage. We'lll focus on PCL Management and focus on these ancillary segment so there's lots we can do besides consumer finance. We'll continue in that market but it's very circumspect.

Just on Peru because I just got back eight or nine days ago down there and it's a very important part of our bank and it's the third largest bank down there and we did go through those portfolios quite extensively. Real growth in Peru next year, regardless of these copper prices and whatever is probably 6-7% based upon internal domestic consumption and but based on the demographics, so the retail and this will include that consumer finance, which is very unique to the Peru market although there are other markets which get into that and very profitable spreads, is one that we're going to have to make sure especially on the salesforce we tighten up but with that 7% growth in Peru plus or minus, it's quite a different view than the United States and Canada, and I think that's some other countries with that same maybe not quite as dramatic growth rate but still positive growth rate so we keep a balanced approach and expect some widening of losses but again, the spreads are wide and the growth is reasonable.

Again, as Rick said, Rob again, just want to mention that the spreads are very attractive in this business even after PCL, so, it's just something the overall business is a good business, if well managed.

One more for you, Rick, and I'll wrap it up there. Your comments on the fact that the Canadian banks still need any kind of capital injection and certainly the banks have held up better than their global peers, that being said in a world where Citigroup has got a 14.5% Tier 1 heavily aided by Uncle Sam, it doesn't seem unreasonable to me to think that a little bit of extra capital and if the taxpayers can make money on it if the banks will benefit from that position, is bad for anybody. Your comments on government aid or stability on that front. What exactly would you be looking for here and why in your view would it be such a bad thing for a little bit of a capital top up for all of the Canadian banks or financial institutions given in the last two weeks there's probably a couple of guys who have come to market that didn't think they would?

Well I don't think government capital comes cheaply quite frankly. I think the government capital and some of them were given it whether they wanted it or not and I do not as a fact some of them did not want it. It was given to them at attractive rates and that looks in the short run very good and they were instructed and many of them have to go ahead and use that but I just think politically that the big word for me, that it comes with a true cost, and we've had a lot of experience over many decades in emerging markets. We've gone through this and it's kind of ironic that what the United States is going through a lot of these emerging countries went through 10, 20 years ago and when governments start to inject capital I think it's naive because we're all regulated that it doesn't come with a significant cost and also puts pressure on you to refinance that as quickly as possible and as the levels are very high, of course, they were mandated to do things with them and some of them had to do it because of what they knew was coming in terms of future mark-to-markets because we're still in this awful market world and so some of it was more of recapitalization rather than getting excess capital.

It's Luc, independence response to your question the FX was about 40% of the absolute total growth of $25 billion.

40% okay, thanks very much.

Yeah. Next question?

Your next question is a follow-up from Ian de Verteuil of BMO Capital Markets.

First of all, Rick, I want to totally endorse your views. I think people think money from the government is free or cheap, I think they are wrong. There's a cost to that and we may not see it in the coupon but we will see it. I guess though having said that, the capital that you have currently, the 9.3 Tier 1 and 7.3 tangible common, I mean, it shouldn't be lost on us though that you've picked up 100 basis points of Tier 1 just from the shift from B1 to B2 and it seems if most of the world is actually almost moving away from B2 here, towards sort of more transparent metrics. So I guess I'm surprised you've allowed the risk weighted to continue to rise as significantly as they have here and what else can you do to get risk weighted down because I'm not sure I agree that the preferred market is going to be there in one, two, six weeks I don't know so what can you do to get the risk weighted down meaningfully at ScotiaBank?

Well two things and just on the B1-B2, look at our leverage ratio, the nominal ratio. Look at our ratio versus our competitors around the world. We're in very good shape on our leverage ratio and you look at some of the European banks and American banks so that's not risk-based, that's nominal and it's real. What you can do in risk-based, first of all one reason is I think our ratios are very acceptable and our ratios are very acceptable because we have grown our risk base and that has been a voluntary strategy to lend where we thought the risk was prudent and the spreads were wide, and that's how we're going to measure it going forward, and we can pull that back pretty quickly because first of all, I don't want to sell off good assets at all, but we have good assets. So the flexibility of the quality of capital, the quality of your capital is the quality of your assets plus the makeup of your mix, and I know I'm sounding like a broken record.

We're diversified in so many different countries and what have you, there's a lot of levers to pull. Having said all that we are not going to compromise the level of our capital. I remember the challenges three years ago from certain camps that we had excess capital. We went into this crisis 14, 15 months ago and I think probably around 10%, we were at 9.8 in the third quarter and 9.3 now and that's despite growing our assets in double digits, and so, we can pull back lending if we desire, and we're certainly being very prudent and in fact we're there and I mentioned our market share in mortgages, we made that decision several months ago that we weren't going to chase, we were leading in mortgages for most of '06, '07 and probably the first part of '08, I'd have to check my numbers but I'm pretty sure we were leaving in market share and this was before all of the stuff. We chose not to chase it so yeah, we gave up market share and our assets they were growing down so long answer because we call it dynamic capital management for a reason and then again, just to the point on quantity, with the government did give us that 30 to 40% and you got to have a market there and I agree with you, be have almost $5 billion of capacity in that because we haven't used them as much as we could have and we had that opportunity and we have the hybrids, don't like the price on any of this stuff, so we'll have to watch that.

What was the other 60% increase, Luc? Was it intrinsic growth or was it migration within the PDs and the risk weightings?

Of the 25, about two-thirds of that was on balance sheet. We had some growth in the off balance sheet, some increase in market risk because of what is happening, operational risk as well and then of course there's always the scaling factor and but the largest single factor was the FX.

What I'm trying to get at is how much is the PD migration as opposed to the actual volume growth itself, I don't want to say volume growth. I know foreign exchange is a big part of the volume growth. I don't know if it's clear what I'm trying to get at. Is there any part of the B2, the cyclicality of the model? Can you talk to was that a factor at all in the growth in RWAs?

Brian do you want to comment?

Yeah, I know where you're getting at Ian. You're thinking we're putting a lot of assets on the books to try to grow our way out of this type of market and if you look at Scotia Capital, the growth has been extremely moderate. We've seen growth in assets in international and to a certain extent on the domestic business as well. There was an increased charge for market risk capital as Luc said and that's a function of credit spreads and currency, et cetera, But look, as Rick said we're moderating in some businesses. We're not interested putting assets on and we're being prudent as we said in this point in the cycle.

Thanks.

Thank you very much for joining us on the call today. We will see you next quarter. Thank you.

Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation. You may now disconnect your lines.