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Executives

Luc Vanneste - Executive Vice President and Chief Financial Officer.

Rich Waugh - CEO

Brian Porter - Chief Risk Officer

Robert H. Pitfield - Executive Vice-President International Banking

Stephen McDonald - Co-Head Scotia Capital

Sarabjit S. Marwah - Vice-Chairman and Chief Administrative Officer

Christopher Hodgson - Executive Vice-President, Head of Domestic Personal Banking

Analysts

Brad Smith - Blackburn Capital

Sumit Malhotra - Merrill Lynch

Jim Bantis - Credit Suisse Michael Goldberg - Desjardins Securities

John Aiken - Dundee Securities

Mario Mendonca - Genuity Capital Markets

Andre Hardy - RBC Capital Markets

Bank of Nova Scotia (BNS) F1Q08 Earnings Call March 4, 2008 11:00 AM ET

Operator

Good morning from Edmonton and welcome to the presentation of Scotiabank’s first quarter results. I am Luc Vanneste, Executive Vice President and Chief Financial Officer. Rick Waugh, our CEO will lead up with the highlights of our results. Next, I will go with the financials. This will be followed by a review of business line performance and priorities by each of the business line heads. Then Brian Porter, our Chief Risk Officer will discuss asset and credit quality and market risk. And finally, Rick will close with some comments on the outlook for the rest of 2008. We will then be glad to take your questions. We also have our two vice chairmen available to participate in the Q-and-A.

Before we start, I would like to refer you to slide number two of our presentation which contains Scotiabank’s cautions regarding forward-looking statements. Rick, over to you.

Rick Waugh

Thanks very much Luc. Well, we had a challenging first quarter with net income of $835 million, down 18% from the same quarter a year ago and down 12% from last quarter. Earnings per share were $0.82 and return on equity was 18.3%. Our productivity ratio was 56.5%, better than our target of 57%.

While we had expected this quarter to be difficult, it was weaker than we expected as tough conditions in global financial markets and an unprecedented volatility continued to impact asset values, our funding costs and currency translations. The ongoing strength of the Canadian dollar impacted our foreign currency earnings as year-over-year the dollar increased from $0.87 to par.

The capital markets continue to be unsettled and that has resulted in a widening of credit spreads and impacting valuations on our portfolios. Our exposure to these stress markets is modest and well diversified, we could not escape the extreme volatility. This as well impacted our trading businesses; although we did have record foreign exchange and precious metals trading results. As a result, we took writedowns and reserves this quarter of $238 million on a pretax basis which reduced our earnings per share by $0.17 and along with the strengthening of the Canadian dollar led to these reduced earnings.

Luc and our business line leaders will provide more details on this in just a few minutes. The good news is that our core personal and commercial businesses in Canada and internationally as well as our corporate client focused lending businesses are in very good shape. This is very well demonstrated in our first quarter volumes where we saw record asset growth across all of our business lines.

Domestic banking had strong volumes which resulted in yet another quarter of market share gains in key products. International banking had good organic growth and benefited from recent acquisitions particularly in Peru and Chile. Mexico did have some one-time tax issues this quarter but the underlying growth continues.

As I said, Scotia Capital continues to see high quality loan growth from a broad base of clients in all major markets. As well, we are well capitalized and as Brian Porter will show our credit portfolios are in good shape.

So overall we feel confident that our diversification strategy by geography, by type of business will allow us to weather these short-term challenges. Crises such as these are only temporary and in fact great opportunities for those with the ability to take advantage of them.

Finally, I’d like to welcome Mike Durland as our new head of capital markets to this presentation. Mike has been with us for over 15 years and leads a very experienced team supported by John Vartan our head of fixed income and Barry Wainstein, head of foreign exchange and precious metals.

This depth and breadth and management is exactly what we need in this environment. So with that, I will now turn it over to Luc who will go through the numbers in more detail and then we’ll have questions later.

Luc Vanneste

Thanks Rick. Let me begin with the brief review of some key factors that impacted earnings this quarter.

As Rick mentioned, we took writedowns in the reserves totaling $238 million, $171 million after-tax which reduced EPS by $0.17. As you can see on slide seven, the writedowns related to three asset classes, $68 million for CDOs, $46 million for SIVs, and $44 million for non-bank asset backed commercial paper. As well, we took a reserve of $80 million against a swap exposure to one of the US monoline insurers. Brian will have more to say on our exposures to these asset classes in a few minutes.

Next, as shown on slide eight, we continue to be impacted by the stronger Canadian dollar. Compared to the same quarter last year, the dollar rose 16% against both the US dollar and the Mexican peso. The impact on net income was almost $60 million or $0.06 per share. The quarter-over-quarter effect was much lower as the dollar has stabilized recently.

Finally as shown on slide nine, the contribution from Scotiabank Mexico on a Canadian GAAP basis, declined $41 million compared to last quarter. We continue to see good volume gains in retail assets. However, these gains were more than offset by a number of factors including somewhat higher PCLs, lower government lending volumes, the VISA gain last quarter and most significantly adjustments to the tax provision. You will note from Scotiabank Mexico’s press release last week that there was a low tax provision on a locally reported basis. On a Canadian GAAP basis we had to make several adjustments. We have reversed the final utilization of tax loss carry forwards and other tax benefits in Mexico as required under Canadian and that was approximately $21 million.

As well we recorded a reduction in the fair value of a future tax asset as we do not anticipate being able to utilize the underlying tax attributes in the time period originally estimated and that was approximately $22 million and there were several other small miscellaneous adjustments for $6 million.

As well last quarter we recorded an adjustment relating to the gains on the VISA restructuring of $19 million pretax or $14 million after-tax. Looking forward, we do not anticipate any further major GAAP adjustments related to income taxes for Mexico.

Now turning to the results; earnings declined 18% year-over-year primarily for the reasons I just mentioned. These were partly offset by a number of positives including continued strong asset growth which increased net interest income and the positive contribution of our recent acquisitions in Latin America.

Compared to the previous quarter earnings were down 12%. This was due mainly to the gains on the VISA restructuring and the sale of our bond index business last quarter partly offset by lower expenses in Q1.

Looking at revenues in more detail on slide 11; year-over-year net interest income was up 3% driven by strong asset growth in our core P&C businesses. This growth was partly offset by the $138 million negative impact of foreign currency translation and mark-to-market losses on non-qualifying derivatives used for asset liability management. Other income declined to 23% compared to last year. This was due mainly to the write downs discussed earlier as well as weaker trading results in Scotia Capital.

Partially offsetting were higher mutual funds and private plant revenues. Quarter-over-quarter total revenues declined 10% or 3% excluding the Visa gains and the sale of the bond indexed business last quarter. The decrease was due mainly to lower gains or non-trading securities and lower tax exempt dividend income. Turning now to slide 12 year-over-year we continued to see very good asset growth. Assets were up 9% with double digit increases in most of the major balance sheet categories. Residential mortgages were up 14%, personal loans were up 9% and business and government loans were up 15%. This broad based asset growth was driven by both strong organic growth and acquisitions. Adjusting for foreign exchange in our Chilean acquisition core growth was in excess of 14% a very strong quarter.

Partly offsetting the effect of this strong asset growth was a deploying in the banks net interest margin which fell 10 basis points in year-over-year. This was mainly due to higher wholesale funding costs. As well we continue to see a change in asset mix in favor of lower yielding but lower risk Canadian residential mortgages. Quarter-over-quarter the margin declined eight basis points, due mainly to lower tax exempt dividend income. On a positive note for the first time in a number of quarters we did see a two basis point improvement in the domestic margin. As we benefited from wide applying DA spreads.

Now turning to expenses on slide 14; expenses were down 3% compared to the same quarter last year. Quarter-over -quarter expenses fell 7% with reductions across many expense categories including lower performance based compensation in line with floor capital markets revenues, seasonal declines and timing of expenses in project spending. With that I will turn it over to Chris Hodgson to talk about domestic banking.

Christopher Hodgson

Thank you Luke, good morning everyone. I’ll be starting on slide 16. Domestic banking had a solid quarter, net income was up 2% from last year, revenues rose 3% and strong asset growth was partly offset by margin compression. Expenses were well contained in the quarter rising only 2%. Loan losses rose moderately reflecting portfolio growth. Compared to Q4 net income declined 16%, however excluding the Visa gain last quarter net income rose 7%, revenues were unchanged.

Expenses fell 4% due to seasonal declines and higher project spending last quarter at expenses typically peak in Q4. Looking at revenues in more detail on the next slide total revenues increased 3% year-over-year due to strong growth in both asset and deposits across all businesses. Retail and small business volume growth was driven by mortgages which were up $15 billion or 16%. Deposit growth of $8 billion or 10% was also strong. The impact of this growth was offset by the increased cost of wholesale deposits used to fund the net asset GAAP. The margin was also compressed by credit spreads our new business reflecting highly competitive markets.

In commercial banking revenue was also driven by higher volumes. We had good organic growth and we acquired travelers leasing last year adding to our auto finance business. Wealth management revenues increased 4% from Q1 ’07 and we had strong growth in private client and mutual fund revenues that benefited from our 18% interest in Dundee Well. All service brokerage was down due to weaker equity markets. Quarter-over-quarter revenues were unchanged excluding the Visa gain.

The next slide shows the success of our growth initiatives in terms of market share. Year-over-year we have increased market share in residential mortgages up 18 basis points and personal term deposit up a market leading 95 basis points and in mutual funds our industry market share was up 24 basis points, primarily in the more profitable long term funds and for the first time in a long while our retail deposit growth during the quarter funded the growth in retail assets thereby reducing our dependency on wholesale funding. We are confident that we can maintain these market share increases in these key product categories.

Finally looking at our priorities and initiatives for the year, driving sustainable, profitable revenue growth remains our top priority. We will do this in several ways; first we are expanding our customer base. We made several acquisitions in the past two years and created new partnerships leading to increased brand awareness in the market place, as well during the quarter we launch both fixed term and equity link GIC to the financial advisory communities through Dundee Bank. We also introduced a national program with western union to offer international money transfers. In addition our mutual fund business continues to build on it’s sales momentum.

We recently introduced 14 new fund targeting brokers and planers and launched the Scotia Global Climate Change Fund. We also continue to expand our sales staff and distribution network. We have opened 57 branches since 2005 and plan to open between 15 and 20 in 2008 and in small business which is a growth area for us and where we have achieved good market share gains this year we added 29 new account managers. We have also added staff in retail banking and wealth management in the quarter. Finally we established a multi cultural banking units to design innovative products for this growing market segment. I am confident that domestic banking will accelerate its earnings momentum and generate positive operating leverage over the balance of 2008. I will turn it over to Rob Pitfield to talk about International Banking.

Robert H. Pitfield

Thanks Chris. Starting on slide 21 the International Banking net income was $282 million for the quarter down $34 million or a 11% from Q1 ’07. However excluding the impact of foreign currency translation net income rose $5 million. Revenue growth was 8% driven by strong organic loan growth, our acquisition in Chile and our investment in Thailand as well as higher securities gains. Partially off set by a negative Forex impact of a $145 million and the change in per value of certain non-trading securities at this quarter. Expenses were well controlled increasing only 1%. Higher compensation related expenses in the impact of acquisitions largely offset by Forex. International tax rate increased from a 11% in Q1 07 to 27% this quarter. The increase was due to higher taxes in Mexico as Luke mentioned and lower earnings in low tax jurisdictions. Compared to last quarter net income was flat excluding the Visa gain. Looking at our revenues by region a little more detail Mexico’s revenues decreased 5% year-over-year that was very good for loan growth and higher commercial banking fees offset ForEx. Going forward we believe our growth initiatives such as the 90 plus branches we opened last year will help drive good sustainable growth. Revenues in Caribbean and Central American were flat year-over-year up 13% adjusting for Forex and prior period Visa gain. There was good underline growth in retail and commercial loans of 18% and 8% respectively. As well the margin increased a 11 basis points, however these positive factors were offset by Forex.

In Latin America, Asia and other revenues increase varies from 39%. These increase was driven by acquisitions and higher securities gains. Partly offsetting were the change in fair value of certain non-trading securities and the impact of Forex. Quarter-over-quarter revenues were up 4% excluding last quarters Visa gains. This was due largely to acquisitions and organic loan growth across the region. Looking at our priorities for the year, first our overwriting priority like the domestic banks is to continue driving sustainable growth. We drive organic growth across the division by targeting new customer segments as an example we will open 10 new private plan centers to serve our loan customers in Caribbean and Latin America. We will also drive organic growth by expanding our distribution network. We plan to open between 90 and a 100 branches this year. We are upgrading all our alternative channels such as the internet, call centers, our external sales forces and our strategic alliances with retailers. Second we’ll continue to focus on Mexico. We’ll open new branches at a reduced rate, up to 60 and we are entering the large and rapidly growing consumer finance segment through the launch of a new credit card business with the best of class partner. Third we’ll continue to look for acquisitions that improve our PC banking footprint and add complementary businesses and with that I’ll turn it over to Steve.

Stephen McDonald

Thanks Rob. Beginning on slide 25, Scotia Capital’s net income for the quarter was $197 million. Our peers and we were affected by the challenging market conditions although to a lesser extent. Widening credit spreads and capital market volatility led to write-downs and reserves of $122 million this quarter. As a result revenues were down 36% year-over-year. A higher level of interest recoveries last year and weaker credit derivative and equity trading results this quarter also contributed to the decrease.

Expenses were 26% lower that last year due mainly to lower performance based compensation. As well, operating expenses including signing bonuses were lower. Quarter-over-quarter net income was down 17%. The decrease was due mainly to lower equity derivatives revenue and the gain on sale of the bond index business last quarter partly offset by lower expenses.

Looking at revenues, on slide 26; year-over-year total revenues were down 36% or 16% excluding write-downs and reserves. Global capital markets revenue lowered due to weaker equity and credit derivative trading. Partly offsetting were record foreign exchange trading and strong fixed income trading.

Revenues in global corporate and investment banking declined 15% compared to last year reflecting lower interest recoveries and lower credit and advisory fees. This was partly offset by good growth in lending volumes and higher loan spreads.

Quarter-over-quarter revenues declined 22% or 14% excluding items of note in the two quarters. Decrease was due mainly to higher tax exempt dividend income in Q4 and lower equity trading and securities gains in the US and Europe. These were partly offset by the strong performance in foreign exchange and fixed income trading.

Looking at our priorities for the year, we are continuing to leverage our NAFTA capabilities, a significant competitive advantage for us.

This quarter we closed a number of notable lending transactions in Mexico. We are further expanding our client coverage globally in selective industries particularly energy and mining. We are adding expertise in trading, resources and investment banking and we continue to focus on infrastructure finance. In 2007 we established a NAFTA infrastructure lending capability. This year we will strengthen our capital markets and advisory offerings for this sector.

We are also looking to capitalize on market opportunities. The terms and pricing of new transactions are more attractive now than they have been in a long while. Above all we will continue to be disciplined about risks.

I’ll now pass it over to Brian to talk about risk management in more detail.

Brian Porter

Thanks Steve. Out portfolios have held up quite well in the current challenging environment. Credit quality remained stable this quarter. With respect to asset classes of current focus this quarter we took action to ensure that valuations in our portfolios reflect these difficult market conditions as Luc explained earlier.

As we’ve previously stated the underlying assets are of high quality and our exposures in these areas are not significant relative to our overall portfolio. In terms of US lending we have no direct retail exposure. Our key mack portfolio is performing according to our expectations and our wholesale portfolios are well diversified and in solid shape.

With respect to market risk there has been some increase in VaR this quarter. However market risk remains well with acceptable limits.

Looking first at the provision for credit losses; the specific provision was $111 million this quarter compared to $95 million last quarter. We had net recoveries in Scotia Capital with provision reversals in Canada and Europe more than offsetting new provisions. The increase in domestic provisions reflect growth in our retail portfolio as well as modest increases in auto leasing due to the Travelers acquisition. The increase in international is due to higher provisions in Mexico, The Caribbean and Central America partially offset by lower previsions in Peru and Asia.

Looking at net impaired loans on the next slide, Impaired loans increased 88$ million in the quarter. This was due largely to the closing of our accusation in Chili and classifications in Scotia Capital. Looking at Net Impaired Loans by business line, domestic retail has been trending up consistent with strong portfolio growth. International has also been trending up reflecting organic growth in retail assets and the Chilean acquisition. These increase where partially offset by declines in the commercial portfolio in Peru and the Caribbean. Well Impaired loans in Scotia capital have increased quarter-over-quarter, the portfolio remains in good shape.

Now turning to areas of current focus, this slide gives you an update on our exposures. Firstly our Mono line exposure is primal contained to one counter party. The 3 AAA rated CDO tranches are reference primarily to investment rate corporate and some remains. There is no sub-prime mortgage exposure. We have taken a reserve of approximately 50% on the mark-to-market exposure of a $161 million as of January 31. Secondly out indirect Mono line exposures is U.S $4.4 billion of credit faculties related to issuers or holders of public finance or other securities. These securities are guarantied by Mono line insurers. They are primarily investment grade and represent risks the bank would take without these guaranties. Exposure to sub prime mortgages is normal.

Thirdly we have small holding, a $144 million of Canadian non-bank asset back commercial paper that relates to Montreal Accord. Fourthly we also have $1.4 billon of CDO’s and CLO’s, an increase of approximately $200 million from the last quarter due to some SIV restructurings. The underlying assets are a 100% investment grade equivalent corporate and Solver encounter parties. We are comfortable with these exposures.

Finally we had very little remaining exposure to SIV’s and have no significant concerns regarding our mainland exposures.

Not let me provide some comments on our U.S exposures. Firstly we have no direct credit card personal lending or sub-prime mortgage exposures. Secondly we do have an exposure to secure auto loans to our GMAC portfolio. We are comfortable with this portfolio, it is internally modeled at more that 90% investment grade and continues to perform at or above our expectations. With regard to our U.S Cooperate lending portfolio, the portfolio remains largely investment grade, asset quality is strong and the U.S residentially real estate construction of exposure is less than $500 million.

Turing now to market risk; the next slid shows the bar in our trading portfolios. The average one day bar rose to $16.6 million an increase of $3.4 million from last quarter. The increase was mainly in interest rate bar due primarily to structure credit activity in the quarter as well as the impact of the increased market volatility. Looking at our trading results this quarter continued to be challenging with positive results on 79% of trading days compared to 86% last quarter. Overall however we remain comfortable with our market risks. Our structured credit rating is well controlled and we understand the risk in this market well. We are very comfortable with our overall asset quality. Credit portfolios are in good shape, our exposure to other asset classes is not significant relevant to or overall portfolio and supported by high quality under lying assets. I will now turn it back to Rick.

Rick Waugh

Thanks very much Brian. Well in summary it‘s been a difficult and a noisy quarter due to this extreme volatility in the global, financial market. However I think as you can see due to our strategy and diversification I am certainly confident that we can leverage this short term uncertainty in the capital markets due to our underlying growth, you saw that in our quarterly and year-over-year growth in assets. We will continue to invest in these three growth platforms to support both our organic expansion and acquisitions and this will lead to continued sustainable revenue and earnings growth. We have the capital, we the opportunities, we have the strategies and we have the management to deliver. The crises is due end and we see some positive indications.

Capital markets are expected to improve in the second half of the year. Short term rate declines are leading to approved funding costs for us. The Canadian dollar is expected to hold in it’s current range. Asset growth and acquisition of customers across all our three business lines remain strong supported by strong growth in our emerging markets in Canada and finally we have placed increased focus on our cost control, but consequently we are maintaining the financial objectives outlined at the beginning of the year. Although we recognize there will be a challenge to reach them in light of the current quarters results, we do not attempt to stand still and that we are confident that we have taken and are taking actions to deal with these challenges head on.

So with that I will now pass on to Luke who will MC and open up the question.

Luc Vanneste

Question-and-Answer Session

Thanks very much Rick. Can we have the first question please?

Operator

Your first question comes from Brad Smith from Blackburn Capital. Please go ahead.

Brad Smith - Blackburn Capital

Thank you very much I have two questions actually. First dealing with the domestic banking business clips I saw the string market share again made relative to what you had reported last quarter and I believe I am seeing relatively stable interest margins. Just wondering if you could provide a little bit more insight into that market share, the source of the market share improvement. Is that growth in your customer base or is that largely cross selling successor or what have you been reflected and then secondly I was just hoping we could run over the Mexico path adjustment again just to make it very clear, what that was from and what the exact amounts were relative to Q4.

Rick Waugh

Okay, Brad thank you. In terms of our market share gains it’s really coming from two places, one is increased customer acquisition. We’ve been very aggressive and clear on that the last couple of years, both in terms of acquisitions that we’ve made where we have taken on new books of business through the travelers and through national bank of Greece and through some of our other acquisitions. We picked up new customers that way plus some of the partnerships that we’ve signed over the last couple of years. The Center Plex has been helping us cross sell, so to be clear we have picked up year-over-year good gains in mortgages. Though in the first quarter we gave a little bit of that back Brad and we did that consciously because spreads came in at the beginning of the quarter and they were very, very tight and we were seeing some unprofitable business in the mortgage front, so we decided to give up a bit of market share on that front. But for the first quarter in the long time our retail liability growth actually outstripped our asset growth and we did have good have market share gains once again on the deposit side, so on mutual finds our long terms assets sales were very, very strong in the quarter but to answer your question specifically we are really seeing it from two sides. One is from new customers and the other is from our existing customers where we are getting a greater share of wallet.

Brad Smith - Blackburn Capital

Okay great. Thank you. And just on the international, perhaps Luke you could just run through those numbers again that the 68 was impacted by I heard two numbers 21 and 22 million.

Luc Vanneste

That is correct. The 21 related to reversing the plainly utilizations of the tax loss here. If you recall Brad that in the past from a Canadian GAAP perspective, we have recorded that benefit in advance of what they did from a local Mexican GAAP basis. They finally utilized all of those tax loss carry forwards. The last bunch was in the current quarter and so we have to reverse those as well as the other tax benefit that we had realized from a Canadian GAAP perspective, so that’s the $21 million. As well I chartered in the past about tax attributes and that we would look to use on a go-forward basis. We had recorded a future tax asset, but now we do not anticipate being able to utilize those tax attributes in the time period that we originally estimated. So we had to write down the fair value of that tax asset and that was $22 million. Comparing that to Q4 -- so the total of those two is 43, we had similar tax adjustments in terms of them recognizing tax loss carry forwards in Q4 of around 26 million. When we take a look at the adjustments on slide 9, Canadian GAAP adjustments, 49 for Q1 08 versus 19 for Q4 07, you also got to take into account the Visa gain which was $14 million after tax, so if you take the 19 and that 14 to make it 33 the difference quarter-over-quarter is not as great as it appears on this slide.

Brad Smith - Blackburn Capital

Thank you very much.

Luc Vanneste

Okay next question.

Operator

Next question comes from Sumit Malhotra from Merrill Lynch. Please go ahead.

Sumit Malhotra - Merrill Lynch

Hi good morning. First question is for Brian Porter. Brian if I go to the areas of focus for this quarter and I look at the 80 million reserve you took for the 161 million of mark-to market exposure. Is this counterparty the ones C rated mono line that’s out there and if so why didn’t you take the entire 161?

Brian Porter

That’s a good question. It is the stated counterparty and the difference for us here is that it really comes down to asset quality. All the hits we’ve seen out there pertaining to the same have some sub-prime exposure. The free trade that we have on with set counter party, were rated AAA at the time we put the trades on. There is bill rated AAA, so asset quality is high. We are presently working on the restructuring of the trade and we are bound by confidentiality agreement so I can’t go into specifics about what we are doing, but we are confident we will get this restructured in the next quarter. If by chance we don’t, we will deal with the position accordingly.

Sumit Malhotra - Merrill Lynch

Okay two more in this regard, kind of in the same area. Would you take about the 4.4 of indirect exposure, what are we looking at? Is it municipal bonds that when we say they have a underlying relationship with these border lines.

Rick Waugh

Yeah, they basically support public finance transactions. The under lying portfolio is 86% single layer better in terms of credit quality, the balance 13% would be BBB minus, so the credit quality of the portfolio is fine and as I said in my comments these are credits or assets we’d be comfortable to have on our own books in terms of credit quality.

Sumit Malhotra - Merrill Lynch

Okay, the last one in terms of these exposures, three months ago last quarters call, we heard about the European conduit that you had put back on your balance sheet and you had refereed to it at that time as being fully hedged. I mean obviously given the difficulties we are having in credit markets some are concerned about the just how well these hedges have held off. Is there anything that, on that point?

Rick Waugh

Well, certainly when we consolidated the conduit we inherited a long credit position and we hedged accordingly and in terms of you can hedge our credit exposure and our single name exposure and our correlation exposure. That drove our credit notional up for the quarter. We are comfortable how we have the position hedged. I would expect it depends on market conditions, but our plan is to reduce this exposure in subsequent quarters.

Sumit Malhotra - Merrill Lynch

Okay, I’ll leave it there for now. Luke…

Rick Waugh

There are the point that make those in terms of counter parties. Our counterparties on anything we have hedged in that book are large inter bank counterparties. There aren’t any model lines, there aren’t any counterparties in there that we have a credit issue with.

Sumit Malhotra - Merrill Lynch

Okay thanks for that detail. Luke one for you and I’ll wrap it up there. On slide 17 items of note, you broke out the financial statement line. Just listening to some of the commentary it sounds like this stuff ran through three segments, could you give us some detail. It sounds like it was international Scotia Capital matter, could you just break that that up for us if you have that handy.

Luc Vanneste

Sure happy to do that Sumith of the 238, 122 with Scotia Capital, 30 was international and 86 is in other.

Sumit Malhotra - Merrill Lynch

Okay thanks very much.

Luc Vanneste

Thank you, next question.

Operator

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

Andre Hardy - RBC Capital Markets

Two questions and may be they are related, but one; can you talk about the very, very rapid growth and business and government lending during the quarter. Was that business you wanted, was that line to credit being drawn by Company’s that are struggling. So may be give us a little bit more detail on that and thanks for the enhanced disclosure on the automobile lending in the U.S. and I was just wondering if you could give us the reasons why that’s internally modeled to being investment great. Is that over collateralization, is that because you have protection from GMAC and that will be helpful in us understanding that that’s not a big risk for you guys.

Brian Porter

But why don’t we start with Steve on the business lines and I’ll follow up with the risk comment.

Stephen McDonald

Okay Brian with respect to the business loan growth within Scotia Capital. The growth has been quiet distributed across a number of our businesses and we are fine with the growth generally. We are quiet happy with it. It is growing in the right places. We are seeing some growth in our investment rate quality risk and we are not tilting the balance between investment grade and non investment grade through the piece. So, its quiet broad, it geographically and by product and it’s basically good news in our views and we are seeing increased margins on the loan portfolio. We are seeing increased margins and pretty well there is a portfolio as well, our TLS portfolio significantly increased pricing on new deals, both investment grade and non-investment grade but particularly non-investment grade and some really great opportunities in the secondary markets. With some paper that it is what we value to be a quiet high trading at significant discount given all the volatility, so it’s providing us with opportunities.

Rick Waugh

I will just to add to that Steve, it’s Rick Waugh and we also saw some good growth on the business side in Asia. Some liberal fair and of course that’s through all the other commercial and on America’s side and again I guess this is -- these are our customers, they are all good names and well this are distributed and the customers are obviously with these financial markets making new use of some bank facilities here.

Andre Hardy - RBC Capital Markets

And are they using them to level that -- it changes your risk ratings of those customers.

Rick Waugh

No, we had very few instances where we have had corporate drive- down because that corporation is in trouble. I can pick up one case that is not significant and is not troublesome me as we are concerned. In terms of the GMAC portfolio particularly we have to be cautious here because again, we are bound by a confidentiality agreement. We did get an outside reading just to make sure that our internal work had been done properly, but this is something that we worked on for months, we have a lot of knowledge about the auto sector clearly, we are an auto bank. We have got a lot of knowledge in terms of structuring. These are over collateralized and structured the way we want them. We actually probably gave up a little bit of revenue to enhance the over collateralization and the structuring of these obligation. So again we are comfortable with our experience.

Andre Hardy - RBC Capital Markets

Okay, so you are not dependant on somebody else at credit rating.

Rick Waugh

No

Andre Hardy - RBC Capital Markets

Thank you very much.

Luc Vanneste

Next question.

Operator

Next question comes from Mario Mendonca from Genuity Capital Markets. Please go ahead.

Mario Mendonca - Genuity Capital Markets

Good morning, a quick question. In the press release there is a reference a decline in interest rates in the past quarter had a significant negative impact on the fair value to derivatives either stress or liability management. I don’t I guess the first question is with that -- we are not talking about credit derivatives here are we, it sounds like interest rate derivatives.

Rick Waugh

Interest rate derivatives your right Mario.

Mario Mendonca - Genuity Capital Markets

So these interest rate derivatives, well you say they were used of asset liability management or that’s what’s written I am sorry and well is this what effected trading, interest rate trading revenue in the quarter, were these sort of interest rate positions designed to sort of capture things like Stephens in the curve and didn’t play out.

Robert H. Pitfield

It’s Bob here and the answer is no. This primarily relates to the mortgages that are sold into the CSB program with the government and on per annuity terms of the swap arrangements that are integral in that program. It is almost impossible to get hedge accounting treatments on the off setting hedge that you take for the cash flows flowing out of that trust and so you have an economic hedge but you can’t get an accounting hedge and when interest rates move around obviously you don’t reflect the gain (Inaudible) orders for that, not on our books and but you do reflect the gain or loss on the offsetting interest rate hedge, so it’s an interest rate hedge, every bank has them and we can’t get accounting frequent on them.

Mario Mendonca - Genuity Capital Markets

In your Canadian portfolio.

Robert H. Pitfield

In the Canadian portfolio.

Mario Mendonca - Genuity Capital Markets

I follow that so if the economic loss, lets call it -- not that kind of loss, I am sorry. The loss that appears or the issue that appears because on the derivates essentially there must be some kind of positive element that will emerge over time.

Rick Waugh

Yes over the life of the other like mortgages this will come back to par, see these are five year mortgages.

Mario Mendonca - Genuity Capital Markets

Got it.

Rick Waugh

So at a point in time Mario it does have an impact on our net interest income line it wasn’t particularly dramatic quarter-over-quarter, but it was certainly dramatic year-over-year Q1 this year versus Q1. Last year the impact on the net interest income line was around a $100 million.

Sarabjit S. Marwah

Maria this is Sabi, the issue is really is one side you have a cruel accounting on the other side you have to mark-to-market accounting.

Mario Mendonca - Genuity Capital Markets

I totally follow it now. One final thing and this is just for perfect clarity from Brian. Mono line exposure, I think you have done a pretty good job of giving us an understanding of where the mono lines come in. That one transaction your referring to or three transactions your referring too with a $161 million of per value exposure with debt. Are there any other securities or other transactions the companies entered into that are hedged with mono line or is that the whole picture right there.

Rick Waugh

That’s the whole picture there and for full disclosure in our CDO portfolio which I mentioned earlier before, our total CDO, our total mono line exposure in terms of mono lines being incorporating some of the maintenance of CDO’s would be $200 million so it’s not significant.

Mario Mendonca - Genuity Capital Markets

Thanks very much.

Luc Vanneste

Next question.

Operator

Your next question comes from Jim Bantis from Credit Suisse. Please go ahead.

Jim Bantis - Credit Suisse

Hi good morning just want to follow-up on the retail numbers. Chris you highlighted the number of market share gain yet I was kind of surprise not to see the other income line within domestic banking list with the market share gains, it was relatively flat. Can you talk a little bit with the some one item’s that may be you have dampened that this quarter.

Luc Vanneste

In terms of other income -- sorry Jim, its Luke.

Jim Bantis - Credit Suisse

Luke it’s in domestic banking I’m referring to.

Luc Vanneste

Domestic banking don’t forget that we have the Visa gain last quarter that was a $111 million pre tax so that impacts the results.

Jim Bantis - Credit Suisse

I can appreciate that but when I look at the $519 million on page 4. It seems a little bit lighter versus the Q3, Q2, Q1 run rates and of ’07 and so I was just wondering despite the market share gains and the asset as a management pick up, I was just wondering what made you dampen that this quarter.

Luc Vanneste

We had a little of bit of a write down in terms of some sort of -- we change securitization interests during the quarter there as well, some lower gains in one of the subsidiaries and that combined with a $111 really took to care out $144 million differential quarter-over-quarter.

Jim Bantis - Credit Suisse

Okay, got it thank you. Just looking at the comment that Chris you made with respect to the funding this quarter being with respect to deposits funding assets growth, can you talk about the financial impact of that going forward may be in down terms or how this can impact the results.

Christopher Hodgson

Well I think the most positive thing Jim is the fact that margin increased by 2 basis points on the quarter and we actually see spreads widening based on where rates are going over the course of the next where the balance of ’08. So we do expect that to positively impact our results over the course for the rest of the year. We have been aggressive in terms of growing our deposit base but we haven’t been out in the market and we have been very careful in terms of some of the offerings that we have had but generally speaking, we will continue to be quite aggressive in growing our deposits. I think the other thing I didn’t say in our growth in deposit share of course is that the Dundee Bank acquisition and partnership has been very positive for us. When we closed on that deal we had $2.3 billion in deposits and we have grown it by just under about $1 billion in deposits over the last number of months. So we can see some good growth in that area. Long and short of it is that we expect the spreads to widen and to help us over the course of the balance of the year.

Jim Bantis - Credit Suisse

Good. Thank you very much Chris and then just the last question with respect to Basel II, 2:1 ratio, unlike some of the other banks didn’t really receive much of a lift from going from 1 to 2. Can you talk about perhaps some of your internal models or some of the dynamics involved in that?

Luc Vanneste

I think Jim it’s Luke. There were two aspects there in terms of the calculation. There are some anomalies there in terms of the impact of our general allowance in terms of the calculation under Basel II. As well with respect to market risk, our model is in the process of being approved and once approved that will reduce significantly -- we expect the risk rated assets relating to market risk.

Jim Bantis - Credit Suisse

And Luc, do you see the market risk matter being resolved in 2008?

Luc Vanneste

Yes, we do.

Jim Bantis - Credit Suisse

Thanks very much.

Luc Vanneste

Thank you. Next question?

Operator

The next question comes from Michael Goldberg from Desjardins Securities. Please go ahead.

Michael Goldberg - Desjardins Securities

Thanks, good morning. My first question is for Chris; if you could give us a little more color on how you plan to use Dundee Bank?

Christopher Hodgson

Okay, Michael. Well I think very simply we own a 100% of Dundee Bank. We have launched a number of new products in conjunction with Dundee Wealth and this gives us access to the third-party channels to help grow our deposits and GIC base. So we have launched three new products actually over the course of the last quarter. We will be launching very, very soon an investment loan product. In fact there is a plan of project in the works right now and that will be quite competitive in terms of a couple of other products there in the market specifically Manulife has a product on their front. So we will continue to look for ways to support that channel and to grow really our deposits and our GICs through that area and we are seeing some good growth through that channel. I gave you some numbers a moment ago; we are up about $1 billion since we purchased the company at the end of September.

Michael Goldberg - Desjardins Securities

Okay, also a question for Steve. Can you elaborate on the type of opportunities that you are seeing and which types actually interest you? I think you were saying that you have seen attractive spreads on the credit side and in particular in secondary markets, are you buying?

Stephen McDonald

Yes, we are buying and we have gone to this secondary market mainly because this is a very attractive market in terms of pricing but we because the primary market is relatively slow, right? There is not a lot of deal transactions going on in these kinds of markets. So part of our challenge is trying to find partners who are willing to put up some capital to do deals. So your syndications markets have been slow, the fee generation has been slow there but what we have been able to do is some interesting kind of one-offs structured financings and we can pick our -- in this market, we can pick the risk profile that we are looking for and we find, we are finding in this market that we can stay at the very high end quality and get paid very, very well. So what has been interesting about the last three months and when I think will be interesting about the rest of the year is that people are coming to us with issues sometimes they are liquidity related rather than really capital relief related and they are looking to us for funding and we can structure arrangements that are of very high quality that generate excellent returns for us on a -- and so that’s the kind of thing we are seeing in this market. I would like to see the primary market develop more, hopefully that will happen but certainly in the States particularly it is very slow.

Michael Goldberg - Desjardins Securities

Can you give us some comparison of the type of margins that you are seeing in these markets now compared to let's say prior to the credit challenges that we’re experiencing?

Stephen McDonald

So as I mentioned earlier, we are seeing real movement in margins in the non-investment grade. Most of our activity is in the investment grade volume wise. In non-investment grade, we are seeing spreads going from maybe 150 basis points six months ago to 300 plus in this market and in the investment grade area, we might see spreads going from 50 BPs to 100 BPs. So it’s basically a doubling and more in the non-investment grade, because 300 -- we are also seeing 350, 375 for risks that are not unacceptable and structures, covenant structures and capital structures that are a lot more favorable.

Michael Goldberg - Desjardins Securities

Okay, and Rich, can you also expand on opportunities that you are seeing given the challenges that are out there?

Rick Waugh

Well, there is two broad opportunities. First of all as Steve just pointed out, our relationship lending, we stayed in the relationship client business in Scotia Capital throughout even though when the spreads got really low, we stayed with our key customers and tried to make it up a cross-sell. So that is creating a lot of opportunities and while we don’t wish adversity on our competitors, as Steve alluded to, a lot of them are just out of the market now for at least temporarily and so the alternatives that our customers have are a lot fewer and they are coming to some of us who have kept our powder dry so to speak and so that’s the first opportunity. The second opportunity of course is we have been disciplined and acquisitive -- not big huge acquisitions but acquisitions that fill into our strategies, fill into our footprint and where we are geographically and that continues because again for the same broad reason, the capital markets in that and as a matter of fact, when you have these disruptions that tend to be no more sellers and buyers and so that’s an advantage for us. We are going to take our own sweet time I guess looking at the pipeline in international is -- it continues to be active although we are using that to fill in where we fill we need to. We will continue those discussions and they are ongoing and we will -- of course in Canada where we have our wealth management initiatives, we will keep our eyes and ears open on that and we will do both, organic growth and acquisitions much along the same lines we have done over the last several years but I think the opportunities are everyday becoming a little more attractive and we will take a measure of response to it.

Michael Goldberg - Desjardins Securities

One more for you Rich, you know we know that the -- you know the downturn will at some point come to an end, but what specifically gives you comfort of expecting a recovery in the second half?

Rick Waugh

Well, there is a number of issues, just some maybe specific -- first of all, you know the currency always is -- I think a strong Canadian dollar is good for us because we are -- our foundation is in Canada and that’s good. However it does give us of course some challenges when we bring back those earnings outside and it’s just a fact that in the second quarter of last year, the Canadian dollar was in the $0.85 to $0.90. So given our forecast that the Canadian dollar will trade around these levels at par plus and minus just and in the third and fourth quarter of next year, that really is back to the third and fourth quarter of last year, sorry -- that transition gives us one reason for confidence on that.

Secondly, as Chris mentioned, on our domestic funding and you can see it in that quarter-over-quarter increased in our Canadian. As you know and we have told you this many times that we – mark-to-market in essence to our domestic business line with the increase in short-term rates, well that of course has changed as you are aware that it is changing today I understand with all these rates coming down and you see that in our quarters of trend, we continue, we see it happening now -- it’s not a -- and we completely see that forecast trending. The third thing of course is when you saw the, I mean I haven’t seen such volume growth in a long, long time and maybe ever I haven’t seen this turbulence as much as has, but the offset is as you can see in our first quarter, asset totals I mean those are honorable ups now, so we are going to get the benefit of that as the averaging takes place over year-over-year and we are not standing still on looking at opportunities and cost initiatives. I think we have always been cost conscious and this environment is certainly making us ensure that we are still going to invest for growth etcetera, etcetera but there are opportunities now that we just got to go back and take some cost out.

Michael Goldberg - Desjardins Securities

Do you expect that you are going to sustain the organic growth in lending volume that you have had in the first quarter?

Rick Waugh

Absolutely, because first of all, I think we were in those -- what market is better to be in than these developing, emerging countries and Canada. So that’s good and then in the United States in our wholesale we have relationships that go back many times and these will create the opportunities for organic growth. So the volumes are -- I'm very confident on the volumes. The spreads in Canada now of course they are all subject to all this volatility that we see and so it’s when you peel back all these accounting and mark-to-markets which we were -- we make sure our portfolios are reflecting this uncertainty. When you peel that back, you can see the growth.

Michael Goldberg - Desjardins Securities

Thank you very much.

Luc Vanneste

Thank you. We have time for a one last question.

Operator

Your next question comes from John Aiken from Dundee Securities. Please go ahead.

John Aiken - Dundee Securities

Good morning and hi. Brian or Stephen in terms of gross impaired loans coming out of Scotia Capital, the new classifications in the quarter, was this broad based or just related to one or two single names?

Unidentified Speaker

It’s one single name in Canada.

John Aiken - Dundee Securities

Can you give us some flavor as to what sector, what area this relates to?

Stephen McDonald

Alright, this is probably one only –- the only one gross impaired loan in the country.

John Aiken - Dundee Securities

Perfect. Thank you very much. And Rich, just a general strategic question for you. Are you gaining any traction with the government in your campaign to try to open up the borders and I guess indirectly start the -- certain, the move on mergers once again?

Stephen McDonald

For the first part, there is of course a couple of panels on competitiveness going forward on what have you and Canada didn’t sign many trade agreements over the last several years but in the last year, they signed two and one of them was in Peru and the Americas and so I think there is a recognition of uncertainty that we are in a global world, Canada, great position but we have to think of our markets globally. So when you look at the government’s policy statements on advantage Canada when you look at -- Harper made a speech down in Chile on what he saw for the Americas and now backed up with actually some trade agreements because while we’ve only done two if you look at some of the Mexico have done dozens of trade agreements. So I think there is the recognition that growth for Canada is great but it were in a global market and Canadian companies and that will grow. So I don’t want to sound like I'm making a speech here but I think the policies are reflecting that and going forward, on second, on the perennial question on mergers, I mean to me, I think we are past the policy stage but it’s a fact of politics and the politics are obviously on the agenda but if you look what’s happening in the world with what’s going on with the Italian banks and the European banks, and what have you, it’s not if, it’s when, but when could be very long, long time away. So we will just have to let that one play out. Meanwhile, we are not counting on it. We are going -- we will make our points when we can and we will just continue on this strategy and are counting on anything happening.

Rick Waugh

John, just on the formation we talked about that is probably a little technical in response, but we also had the position, more than half hedged and so in terms of provisions more than made up in the CDOs what we provide of course for the loans. So in time, we can agree we are really good

John Aiken - Dundee Securities

Okay, thanks for clarification, Brian and Rick, thanks for the commentary; greatly appreciated.

Luc Vanneste

Okay, thank you very much for participating in our call this morning. Have a great day and we will to you next quarter.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.

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Source: Scotiabank F1Q08 (Qtr End 1/31/08) Earnings Call Transcript
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