TORONTO, Dec. 2 /PRNewswire-FirstCall/ - Scotiabank today reported full-year earnings of $3.14 billion compared to $4.05 billion last year. The 2008 results were marked by solid core earnings in Canadian Banking, International Banking and Scotia Capital, partially offset by writedowns related to volatile global financial markets. Earnings per share (EPS) (diluted) were $3.05 compared to $4.01 in 2007. Return on Equity (ROE) was 17%.

Net income for the quarter ended October 31, 2008, was $315 million versus $954 million for the same period last year due to charges of $642 million after tax relating to the Lehman Brothers bankruptcy and valuation adjustments, a result of unprecedented volatility in global financial markets. Excluding these charges, we delivered solid core results as net income was flat year over year. EPS (diluted) was $0.28, versus $0.95 for the same period last year, with writedowns this quarter of $0.65 per share.

"Clearly, 2008 was a difficult year, particularly with the writedowns we took in the fourth quarter. While Canadian banks have fared better than their counterparts in other parts of the world, none of us have been immune to the forces buffeting global markets," said Rick Waugh, President and CEO. "However, our strategy of diversifying across geographies, business lines and products continues to serve us well and gives us the strength of diversified revenue streams. Our three growth platforms - Canadian Banking, International Banking and Scotia Capital - demonstrated sustainable core earnings and the outlook for our business lines remains solid.

"The Bank's full-year results reflect a strong increase in average asset levels of $52 billion, or 13%, with contributions from all major business lines. Year over year, Canadian Banking's average assets grew by $21 billion or 14%, International Banking saw growth of $13 billion or 20% and Scotia Capital's average assets grew by $12 billion or 8%.

"Canadian Banking, which includes Wealth Management and Commercial Banking, had a good year, with market share growth in total personal lending and deposits, mutual funds and small business, along with strong volume growth in mortgages and commercial banking. The division's success reflected broad-based organic growth as well as the impact of acquisitions, including Dundee Bank and E*Trade Canada.

"Our solid results in International Banking reflected the impact of the acquisition of Banco del Desarrollo in Chile, and particularly strong growth in Peru. Mexico had strong retail loan growth, but was impacted by increased loan losses, particularly in credit cards, and a higher tax rate, as tax loss carry forwards were fully utilized in 2007.

"Scotia Capital's underlying performance was remarkably good, despite charges on certain structured credit instruments, settlement losses on the Lehman Brothers bankruptcy and generally weak capital markets. Highlighting the strength of the division's diversification were record performances in our foreign exchange, precious metals, ScotiaWaterous and fixed income businesses. In addition, there was good volume growth in lending with minimal credit losses.

"Overall, our assets remain in good shape and are well diversified. They are monitored and stress-tested continuously and are well within our risk tolerances.

"Despite challenging conditions, the overall strength of our capital and core earnings continues to allow us to generate sustainable dividends for shareholders. This year, we announced two quarterly dividend increases, with dividends for the year totaling $1.92, an increase of 10% over 2007. Our dividend remains well supported by both our earnings and high capital levels, which remain strong by global standards.

"I also want to congratulate our employees for providing dedicated service to our customers," Mr. Waugh added. "It is through their efforts that we have been able to deliver solid core earnings this year, and we must ensure in times like these that we continue to provide our customers with the service, advice and products they need.

"The financial sector and the global economy will likely continue to experience significant uncertainty in 2009. However, Scotiabank's diversity - by business line, by product and by geography, including our presence in higher-growth emerging markets - leads us to anticipate moderate overall growth for the Bank in 2009.

"As we manage through these challenging times, we remain focused on our priorities: driving sustainable revenue growth; dynamic capital management, which means maintaining a strong capital position while seeking select strategic growth opportunities and providing our shareholders with consistent returns; and, continuous development of leadership at all levels of the organization. In 2009, we will be emphasizing two of our traditional strengths as key additional priorities: risk management and expense control. These priorities will be key success factors in the current environment.

"With this clear focus - and by effectively executing our strategies - we will be able to achieve our combined goals and objectives both in 2009 and beyond."

Financial Highlights As at and for For the the three months ended year ended ------------------------------------------------------------------------- October July October October October 31 31 31 31 31 (Unaudited) 2008 2008 2007 2008 2007 ------------------------------------------------------------------------- Operating results ($ millions) Net interest income 1,941 1,946 1,716 7,574 7,098 Net interest income (TEB(1)) 2,036 2,049 1,932 7,990 7,629 Total revenue 2,491 3,374 3,078 11,876 12,490 Total revenue (TEB(1)) 2,586 3,477 3,294 12,292 13,021 Provision for credit losses 207 159 95 630 270 Non-interest expenses 1,944 1,889 1,792 7,296 6,994 Provision for income taxes 2 287 204 691 1,063 Provision for income taxes (TEB(1)) 97 390 420 1,107 1,594 Net income 315 1,010 954 3,140 4,045 Net income available to common shareholders 283 978 938 3,033 3,994 ------------------------------------------------------------------------- Operating performance Basic earnings per share ($) 0.28 0.99 0.95 3.07 4.04 Diluted earnings per share ($) 0.28 0.98 0.95 3.05 4.01 Return on equity(1) (%) 6.0 21.0 21.0 16.7 22.0 Productivity ratio (%) (TEB(1)) 75.2 54.3 54.4 59.4 53.7 Net interest margin on total average assets (%) (TEB(1)) 1.68 1.79 1.87 1.75 1.89 ------------------------------------------------------------------------- Balance sheet information ($ millions) Cash resources and securities 125,353 124,079 118,030 Loans and acceptances 300,649 283,742 238,685 Total assets 507,625 462,407 411,510 Deposits 346,580 332,469 288,458 Preferred shares 2,860 2,560 1,635 Common shareholders' equity 18,782 18,801 17,169 Assets under administration 203,147 207,433 195,095 Assets under management 36,745 37,842 31,403 ------------------------------------------------------------------------- Capital measures(2) Tier 1 capital ratio (%) 9.3 9.8 9.3 Total capital ratio (%) 11.1 11.5 10.5 Tangible common equity to risk-weighted assets(1) (%) 7.3 7.6 7.2 Risk-weighted assets ($ millions) 250,591 225,801 218,337 ------------------------------------------------------------------------- Credit quality Net impaired loans(3) ($ millions) 1,191 1,009 601 General allowance for credit losses ($ millions) 1,323 1,323 1,298 Net impaired loans as a % of loans and acceptances(3) 0.40 0.36 0.25 Specific provision for credit losses as a % of average loans and acceptances (annualized) 0.29 0.23 0.16 0.24 0.13 ------------------------------------------------------------------------- Common share information Share price ($) High 51.55 52.51 53.49 54.00 54.73 Low 35.25 41.95 46.70 35.25 46.70 Close 40.19 49.98 53.48 Shares outstanding (millions) Average - Basic 990 989 983 987 989 Average - Diluted 994 994 991 993 997 End of period 992 990 984 Dividends per share ($) 0.49 0.49 0.45 1.92 1.74 Dividend yield (%) 4.5 4.1 3.6 4.3 3.4 Market capitalization ($ millions) 39,865 49,475 52,612 Book value per common share ($) 18.94 18.99 17.45 Market value to book value multiple 2.1 2.6 3.1 Price to earnings multiple (trailing 4 quarters) 13.1 13.4 13.2 ------------------------------------------------------------------------- Other information Employees 69,049 62,209 58,113 Branches and offices 2,672 2,557 2,331 ------------------------------------------------------------------------- (1) Non-GAAP measure. Refer to Non-GAAP measures section of this press release for a discussion of these measures. (2) Effective November 1, 2007, regulatory capital ratios are determined in accordance with Basel II rules. Comparative amounts for prior periods were determined in accordance with Basel I rules. (3) Net impaired loans are impaired loans less the specific allowance for credit losses. (4) Represents common dividends for the period as a percentage of the net income available to common shareholders for the period.

Forward-looking statements

Our public communications often include oral or written forward-looking statements. Statements of this type are included in this document, and may be included in other filings with Canadian securities regulators or the U.S. Securities and Exchange Commission, or in other communications. All such statements are made pursuant to the "safe harbour" provisions of the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities legislation. Forward-looking statements may include comments with respect to the Bank's objectives, strategies to achieve those objectives, expected financial results (including those in the area of risk management), and the outlook for the Bank's businesses and for the Canadian, United States and global economies. Such statements are typically identified by words or phrases such as "believe," "expect," "anticipate," "intent," "estimate," "plan," "may increase," "may fluctuate," and similar expressions of future or conditional verbs, such as "will," "should," "would" and "could."

By their very nature, forward-looking statements involve numerous assumptions, inherent risks and uncertainties, both general and specific, and the risk that predictions and other forward-looking statements will not prove to be accurate. Do not unduly rely on forward-looking statements, as a number of important factors, many of which are beyond our control, could cause actual results to differ materially from the estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to: the economic and financial conditions in Canada and globally; fluctuations in interest rates and currency values; liquidity; significant market volatility and interruptions; the failure of third parties to comply with their obligations to us and our affiliates; the effect of changes in monetary policy; legislative and regulatory developments in Canada and elsewhere, including changes in tax laws; the effect of changes to our credit ratings; operational and reputational risks; the risk that the Bank's risk management models may not take into account all relevant factors; the accuracy and completeness of information the Bank receives on customers and counterparties; the timely development and introduction of new products and services in receptive markets; the Bank's ability to expand existing distribution channels and to develop and realize revenues from new distribution channels; the Bank's ability to complete and integrate acquisitions and its other growth strategies; changes in accounting policies and methods the Bank uses to report its financial condition and the results of its operations, including uncertainties associated with critical accounting assumptions and estimates; the effect of applying future accounting changes; global capital markets activity; the Bank's ability to attract and retain key executives; reliance on third parties to provide components of the Bank's business infrastructure; unexpected changes in consumer spending and saving habits; technological developments; fraud by internal or external parties, including the use of new technologies in unprecedented ways to defraud the Bank or its customers; consolidation in the Canadian financial services sector; competition, both from new entrants and established competitors; judicial and regulatory proceedings; acts of God, such as earthquakes and hurricanes; the possible impact of international conflicts and other developments, including terrorist acts and war on terrorism; the effects of disease or illness on local, national or international economies; disruptions to public infrastructure, including transportation, communication, power and water; and the Bank's anticipation of and success in managing the risks implied by the foregoing. A substantial amount of the Bank's business involves making loans or otherwise committing resources to specific companies, industries or countries. Unforeseen events affecting such borrowers, industries or countries could have a material adverse effect on the Bank's financial results, businesses, financial condition or liquidity. These and other factors may cause the Bank's actual performance to differ materially from that contemplated by forward-looking statements. For more information, see the discussion starting on page 56 of the Bank's 2007 Annual Report.

The preceding list of important factors is not exhaustive. When relying on forward-looking statements to make decisions with respect to the Bank and its securities, investors and others should carefully consider the preceding factors, other uncertainties and potential events. The Bank does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by or on its behalf.

The "Outlook" section in this document is based on the Bank's views and the actual outcome is uncertain. Readers should consider the above-noted factors when reviewing this section.

Additional information relating to the Bank, including the Bank's Annual Information Form, can be located on the SEDAR website at www.sedar.com and on the EDGAR section of the SEC's website at www.sec.gov.

Non-GAAP Measures

The Bank uses a number of financial measures to assess its performance. Some of these measures are not calculated in accordance with Generally Accepted Accounting Principles (GAAP), are not defined by GAAP and do not have standardized meanings that would ensure consistency and comparability between companies using these measures. These non-GAAP measures are used in our Management's Discussion and Analysis below. They are defined below:

Taxable equivalent basis

The Bank analyzes net interest income and total revenues on a taxable equivalent basis (TEB). This methodology grosses up tax-exempt income earned on certain securities reported in net interest income to an equivalent before tax basis. A corresponding increase is made to the provision for income taxes; hence, there is no impact on net income. Management believes that this basis for measurement provides a uniform comparability of net interest income arising from both taxable and non-taxable sources and facilitates a consistent basis of measurement. While other banks also use TEB, their methodology may not be comparable to the Bank's. The TEB gross up to net interest income and to the provision for income taxes in the current period is $95 million versus $216 million in the same quarter last year and $103 million last quarter. The TEB gross up was $416 million for the year compared to $531 million last year.

For purposes of segmented reporting, a segment's net interest income and provision for income taxes are grossed up by the taxable equivalent amount. The elimination of the TEB gross up is recorded in the "Other" segment.

Productivity ratio (TEB)

Management uses the productivity ratio as a measure of the Bank's efficiency. This ratio represents non-interest expenses as a percentage of total revenue on a taxable equivalent basis.

Net interest margin on total average assets (TEB)

This ratio represents net interest income on a taxable equivalent basis as a percentage of total average assets.

Operating Leverage

The Bank defines operating leverage as the rate of growth in total revenue, on a taxable equivalent basis, less the rate of growth in expenses.

Return on equity

Return on equity is a profitability measure that presents the net income available to common shareholders as a percentage of the capital deployed to earn the income. The Bank calculates its return on equity using average common shareholders' equity, including all components of shareholders' equity.

Economic equity and Return on economic equity

For internal reporting purposes, the Bank attributes capital to its business segments using a methodology that considers credit, market, operational and other risks inherent in each business segment. The amount attributed is commonly referred to as economic equity. Return on equity for the business segments is based on the economic equity attributed to the business segments. The difference between the economic equity amount required to support the business segments' operations and the Bank's total equity is reported in the "Other" segment.

Tangible common equity to risk-weighted assets

Tangible common equity to risk-weighted assets is an important financial measure for rating agencies and the investing community. Tangible common equity is total shareholders' equity plus non-controlling interest in subsidiaries, less preferred shares, unrealized gains/losses on available-for-sale securities and cash flow hedges, goodwill and other intangible assets (net of taxes). Tangible common equity is presented as a percentage of risk-weighted assets.

Regulatory capital ratios, such as Tier 1 and Total Capital ratios, have standardized meanings as defined by the Office of the Superintendent of Financial Institutions Canada (OSFI).

Group Financial Performance and Financial Condition

Full Year Review

Net Income

Scotiabank's net income was $3,140 million, a reduction of $905 million from last year. Return on equity was 16.7%, compared to 22.0% in 2007. Earnings per share (diluted) were $3.05 versus $4.01 in 2007.

The Bank's 2008 results were negatively impacted by unprecedented volatility in global financial markets, which led to charges of $0.82 per share. Please refer to the Items of Note section at the end of this release for further details.

Notwithstanding these challenges and the higher funding costs experienced in 2008, our three business lines' core earnings were solid.

Total revenue

Total revenue (on a taxable equivalent basis) was $12,292 million in 2008, a decrease of $729 million or 6% from the prior year. This change was due primarily to charges of $1,221 million relating to certain trading activities and valuation adjustments, reflecting unprecedented volatility in global financial markets. As well, there was a negative impact of $301 million due to foreign currency translation, compared to $199 million in 2007, as the Canadian dollar continued to appreciate for much of the year against most currencies in countries in which the Bank operates.

Canadian Banking revenue grew 6% over last year. This increase reflected broad-based growth as well as the impact of the acquisition of Dundee Bank, Travelers Leasing Corporation (now Scotia Dealer Advantage), TradeFreedom, and E*Trade Canada, partially offset by the impact of the gain last year on the global Visa restructuring.

International Banking revenues rose 15%, reflecting the impact of the acquisition of Banco del Desarrollo in Chile, as well as strong growth in Peru.

In Scotia Capital, revenue declined by 25%, mainly due to charges relating to the Lehman Brothers bankruptcy, valuation adjustments and generally weak capital markets. These were partially offset by record foreign exchange and precious metals trading revenues, and strong growth in corporate lending. Group Treasury was also impacted by the weakening global financial markets, with lower realized gains on the sale of non-trading securities, valuation losses on securities, and relatively higher liquidity costs.

Net interest income

Net interest income (on a taxable equivalent basis) was $7,990 million in 2008, up $361 million or 5% over last year, despite a negative impact of $275 million from adjustments in fair value on derivatives used for asset and liability management purposes, $221 million from foreign currency translation and $115 million from lower tax-exempt dividend income. Excluding these items, underlying interest income grew by $972 million as a result of strong asset growth driven by normal business operations and acquisitions.

The growth in average total assets of $52 billion or 13% was mainly in business and government lending ($23 billion or 29%) and residential mortgages ($14 billion or 14%). All business segments contributed to the strong asset growth.

Canadian Banking's average assets grew by $21 billion or 14%, primarily in mortgages. There was also strong growth in personal revolving credit and other personal loans, as well as in business lending to both commercial and small business customers.

International Banking's average asset growth of $13 billion or 20% mainly reflected the impact of the acquisition of Banco del Desarrollo in Chile and strong growth in business lending in Asia and in Peru. Scotia Capital's average assets grew by $12 billion or 8%, from strong growth in lending in the U.S., Europe and Canada, as well as in trading assets.

The Bank's net interest margin (net interest income as a percentage of average assets) was 1.75% in 2008, down from 1.89% last year. The decline was due primarily to the unfavourable change in the fair value of derivatives used for asset and liability management purposes, lower tax-exempt dividend income, and higher volumes of non-earning assets. Excluding these items, the underlying net interest margin on earning assets remained in line with the prior year. The impact of the increased liquidity costs and shift in Canadian Banking's assets to lower-yielding variable rate mortgages was offset by the strong growth in existing businesses and acquisition-driven increases in International Banking's assets, both of which have higher margins. Also contributing was the widening of spreads in Scotia Capital's corporate lending business.

Other income

Other income was $4,302 million in 2008, a decrease of $1,090 million or 20% from 2007, including a reduction of $80 million from foreign currency translation partially offset by increased contributions from recent acquisitions. The decrease primarily reflected charges related to certain trading activities and valuation adjustments. In total, these charges were $1,059 million in 2008 compared to a net gain of $54 million in 2007 as detailed in the Items of Note section at the end of this release.

Card revenues were a record $397 million in 2008, an increase of 8% from last year. International card revenues increased 11% due to strong growth in Peru, the Caribbean and Mexico. Canadian revenues were up 6% year over year, due mainly to higher transaction volumes.

Revenues from deposit and payment services, which represent revenues earned from retail, commercial and corporate customers, grew 6% to $862 million in 2008. Canadian Banking revenues were 3% higher than last year, mainly from new account growth and pricing changes. International revenues increased by 14%, mainly from the acquisition of Banco del Desarrollo in Chile and acquistions in Peru.

Mutual fund fees were a record $317 million in 2008, an increase of 7% from 2007. This reflected higher average balances, which grew by 6% in Canada, resulting mainly from net fund sales, particularly in the longer term funds. International Banking mutual fund fees were 12% higher than last year, mainly in Mexico and Peru.

Revenues from investment management, brokerage and trust services were $760 million in 2008, in line with last year. Retail brokerage commissions were $538 million, down 3% from 2007, despite the positive impact of the acquisitions of TradeFreedom and E*Trade Canada during the year.

Credit fees of $579 million were $49 million or 9% higher than last year. There were higher acceptance fees in Canada, from both corporate and commercial customers. In the United States, credit fees were 8% above 2007, reflecting stronger lending volumes. International Banking credit fees increased 15%, due mainly to the acquisition of Banco del Desarrollo in Chile, and strong growth in Peru.

Trading revenues were $188 million in 2008, a decrease of $262 million from last year, mainly related to the bankruptcy of Lehman Brothers. In addition, revenue from trading securities fell by $103 million, reflecting a decline in debt and equity market conditions. Foreign exchange trading was $17 million above last year, with record revenue in Scotia Capital being partially offset by declines in Group Treasury and International Banking. Precious metals trading revenue was a record $160 million, an increase of $44 million or 38% over last year, with higher revenues recorded in each of our major centres.

Investment banking revenues were $716 million in 2008, a decrease of $21 million or 3% from last year. Notwithstanding record advisory fees in ScotiaWaterous, underwriting fees fell by $88 million or 23%, due mainly to lower new issue fees. Non-trading foreign exchange revenues were $75 million or 32% above 2007 due to strong growth in both Canadian and International Banking.

There was a net loss on non-trading securities of $374 million in 2008, compared to a net gain of $488 million last year. The net loss this year was due mainly to valuation adjustments of $783 million on certain structured credit instruments and securities. These losses arose due mainly to market conditions, including widening credit spreads and credit events in certain previously highly rated reference assets which negatively impacted the fair value of Collateralized Debt Obligations (CDO). This included a loss of $298 million on the purchase of certain CDOs from the Bank's U.S. multi-seller conduit, pursuant to the terms of a liquidity asset purchase agreement. These were partially offset by gains realized on the sale of both debt and equity securities, which were lower than the prior year, reflecting the challenging market conditions.

Securitization revenues of $130 million in 2008 were $96 million above last year, largely from wider spreads and a higher volume of mortgage securitizations under available government programs. Other revenues were $727 million in 2008, a decrease of $187 million from last year, primarily reflecting the 2007 gains of $202 million on the global Visa restructuring and $43 million on the sale of our bond index business.

Provision for credit losses

The provision for credit losses was $630 million in 2008, up from $270 million last year.

The provision for credit losses in Canadian Banking was $399 million in 2008, an increase of $104 million compared to last year. This was due to higher provisions in both the commercial and retail portfolios. The former related primarily to a small number of accounts compared to a very low level of provisions in 2007. The increase in retail provisions related mainly to asset growth in Scotia Dealer Advantage and the credit card portfolios, partially offset by higher recoveries in other personal loans.

In International Banking, the provision for credit losses was $236 million in 2008, an increase of $135 million compared to last year. Retail portfolios in Mexico, Peru, the Caribbean and, to a lesser extent Chile, recorded increased provisions for credit losses, mainly related to growth in lending portfolios, acquisitions, and rising delinquency in certain markets. The International commercial portfolio continued to benefit from similar levels of net reversals and recoveries as last year.

Scotia Capital had net recoveries of $5 million in 2008 versus net recoveries of $101 million in 2007.

There was no reduction of the general allowance in 2008, compared to a reduction of $25 million in 2007.

Non-interest expenses

Non-interest expenses were $7,296 million in 2008, an increase of $302 million or 4% from last year, including a benefit from the positive impact of foreign currency translation of $146 million. Recent acquisitions accounted for approximately $240 million of the growth in non-interest expenses.

Salaries and employee benefits were $4,109 million in 2008, up $126 million or 3% from last year, including the favourable impact of $72 million due to foreign currency translation. Salaries increased 10%, reflecting both acquisitions and new branches including 13 in Canada, 58 in Mexico, as well as higher staffing to support growth initiatives. Performance-based compensation was $104 million below last year, reflecting lower results, including in Scotia Capital and retail brokerage. Stock-based compensation decreased by $44 million or 33% due to the decline in the Bank's common share price during the year. Pensions and other employee benefit costs increased by $40 million or 8%, due in part to acquisitions.

Premises and technology expenses were $1,451 million in 2008, an increase of $98 million or 7% from last year. The higher premises costs reflected both acquisitions and new branches. Technology expenses increased by $47 million or 8%, mainly for a variety of new and ongoing project costs.

Communications expenses of $326 million rose $26 million or 8% year over year, which in part reflected the impact of acquisitions, business volume growth and new branches.

Advertising and business development expenses were $320 million in 2008, an increase of $9 million or 3% over last year, due mainly to the impact of acquisitions.

Business and capital taxes were $27 million or 19% lower than last year, reflecting reductions to capital tax rates in Canada and lower income.

Other expenses were $747 million in 2008, an increase of $70 million or 11% from last year, due largely to the impact of acquisitions and higher loyalty reward point costs.

Our productivity ratio - a measure of efficiency in the banking industry - was 59.4% for the year. The ratio deteriorated from 53.7% last year, due mainly to the impact of the items of note discussed earlier, as total revenue fell 6% while expenses increased 4%.

Taxes

The provision for income taxes recorded in income was $691 million in 2008, a decrease of 35% compared to last year. This was due primarily to the 24% decline in pre-tax income and a drop of 2.1% in the statutory effective tax rate year over year. The Bank's overall effective tax rate for the year was 17.5%, down from 20.3% last year.

Non-controlling interest

The deduction for non-controlling interest in subsidiaries was $119 million in 2008, in line with last year.

Fourth quarter review

Net Income

Net income was $315 million in the fourth quarter, a decrease of $639 million or 67% from the same quarter last year, and $695 million below last quarter. The decline reflected $642 million in after tax charges this quarter related to certain trading activities and valuation adjustments, arising from recent challenging market conditions and unprecedented volatility in global financial markets. Please refer to the Items of Note section at the end of this release for further details.

Total Revenue

Total revenue (on a taxable equivalent basis) was $2,586 million in the fourth quarter, a decrease of $708 million or 21% from the same quarter last year, notwithstanding a positive foreign currency translation impact of $46 million. Quarter over quarter, total revenue fell by $891 million or 26%, despite a positive foreign currency translation impact of $17 million.

Net Interest Income

Net interest income (on a taxable equivalent basis) was $2,036 million in the fourth quarter, an increase of $104 million or 5% over the same quarter last year, but $13 million below the third quarter. There was a positive impact of foreign currency translation of $70 million over the same quarter last year, and $40 million compared to the third quarter.

The increase in net interest income from the same quarter last year reflected solid growth in average assets of $72 billion or 18%. Canadian residential mortgages grew by $12 billion or 11%. In Scotia Capital, assets grew by $19 billion comprised of increases in corporate lending and capital markets. International Banking average assets grew by $23 billion or 35%, reflecting both acquisitions and growth in the Bank's existing operations.

The Bank's net interest margin was 1.68% in the fourth quarter, a decrease of 19 basis points from last year, due to the negative impact of fair value changes on derivatives used for asset/liability management purposes and lower tax-exempt dividend income. The Bank's net interest margin narrowed by 11 basis points versus last quarter driven entirely by the negative impact of fair value changes on derivatives and higher volumes of non-earning assets. This more than offset the impact of widening margins throughout Latin America and wider spreads in Corporate Lending.

Other Income

Other income was $550 million in the fourth quarter, a decrease of $812 million from the same quarter last year, including a negative foreign currency translation impact of $24 million. This was due mainly to the charges noted above. As well, the same quarter last year included the $202 million gain on the global Visa restructuring and a $43 million gain on the sale of our bond index business. Partially offsetting were record foreign exchange and precious metals trading revenues in Scotia Capital, the impact of acquisitions, and higher revenues from securitizations, credit fees, and various retail products and services.

Quarter over quarter, other income fell by $878 million, due mainly to the charges noted above. There were also declines in trading securities revenue, underwriting revenue, credit fees, and mutual fund fees due to poor market conditions, as well as a negative foreign currency translation impact of $23 million. Partially offsetting were record foreign exchange and precious metals trading revenues in Scotia Capital, and higher securitization and non-trading foreign exchange revenues.

Provision for Credit Losses

The provision for credit losses was $207 million this quarter, up $112 million from the same period last year and $48 million compared to last quarter. The higher level this quarter compared to a year ago was due to higher provisions in the retail portfolios in International Banking, reversals and recoveries in Scotia Capital last year, and provision increases in Canadian Banking.

The general allowance for credit losses was $1,323 million as at October 31, 2008, unchanged from last quarter.

Non-Interest Expenses

Non-interest expenses were $1,944 million in the fourth quarter, an increase of $152 million or 8% over the same quarter last year, including an unfavourable impact of $47 million from foreign currency translation. Recent acquisitions accounted for approximately $103 million of the growth in non-interest expenses. The increases in salaries, premises, technology and communications also reflected new branches in Canada and Mexico. Partially offsetting were declines in performance-related compensation, professional fees and capital taxes.

Quarter over quarter, non-interest expenses rose $55 million, including an unfavourable impact of $31 million from foreign currency translation. Recent acquisitions accounted for approximately $50 million of the growth in non-interest expenses. Advertising expenses rose, due primarily to new initiatives to drive revenue growth. Partially offsetting were declines in performance-related compensation and capital taxes.

Taxes

The Bank's effective tax rate was 0.6% in the fourth quarter, compared to 17.1% in the same quarter last year and 21.7% in the previous quarter. These declines were due mainly to lower income resulting from certain trading activities and valuation adjustments, which were in higher-tax jurisdictions.

Non-controlling interest

The deduction for non-controlling interest in subsidiaries was $23 million for the quarter, down $10 million from the same period last year, and $6 million from last quarter, due mainly to the acquisition of the additional 20% ownership of Scotiabank Peru.

Common Dividend

The Board of Directors, at its meeting on December 2, 2008, approved a quarterly dividend of 49 cents per common share for the quarter ended January 31, 2009, payable on January 28, 2009, to shareholders of record at the close of business on January 6, 2009. Annual dividends for 2008 rose 18 cents to $1.92, an increase of 10%.

Outlook

The global economy decelerated during the second half of 2008. In the Bank's major markets, with household, business and investor confidence at a low ebb, economic activity will likely be weak through much of 2009. Volatility in world financial markets is also expected to continue. In this uncertain environment, we will carefully manage our risks and our expenses, balancing both with selective investments in growth initiatives. Overall, we expect moderate growth for the Bank this year, with ongoing contributions from our three business lines and further acquisitions.

In view of this outlook, we have established the following targets for2009: - Earnings per share growth: 7 to 12%; - ROE: 16 to 20%; - Productivity ratio of less than 58%; and - Maintain strong capital ratios.

Risk management

The Bank's risk management policies and practices are unchanged from those outlined in pages 56 to 67 of the 2007 Annual Report.

Credit risk

The specific provision for credit losses was $207 million in the fourth quarter, compared to $95 million in the same period last year and $159 million in the previous quarter.

The provision for credit losses was $107 million in the Canadian Banking portfolios, up from $78 million in the same quarter last year and $99 million in the previous quarter. Both increases were due mainly to higher provisions in the commercial portfolio. In the retail portfolio, higher provisions attributable to asset growth and increased provisions for Scotia Dealer Advantage were largely offset by increased recoveries in other personal loans.

International Banking's provision for credit losses was $90 million in the fourth quarter, compared to $27 million in the same period last year and $56 million last quarter. The increases were due primarily to higher retail provisions related to asset growth, acquisitions and rising delinquency in certain markets. In addition, commercial provisions increased from last year due to acquisitions, and from last quarter due to lower recoveries this quarter.

Scotia Capital's provision for credit losses was $10 million in the fourth quarter, compared to net recoveries of $10 million in the fourth quarter of last year and a provision of $4 million in the previous quarter. The increase from the previous quarter was related primarily to one new provision in the U.S., and to lower levels of reversals and recoveries.

Market risk

Value at Risk (VaR) is a key measure of market risk in the Bank's trading activities. In the fourth quarter, the average one-day VaR was $20.1 million compared to $13.2 million for the same quarter last year, as detailed in the table below. Volatile market conditions during the fourth quarter were a major contributing factor to this increase. The average daily VaR of $20.1 million in the fourth quarter 2008 compared to $15.8 million in the prior quarter. This increase was due primarily to market volatility, as noted earlier, as well as increases in interest rate and equity positions.

------------------------------------------------------------------------- Average for the three months ended October 31, July 31, October 31, Risk Factor ($million) 2008 2008 2007 ------------------------------------------------------------------------- Interest rate 16.9 13.0 9.2 Equities 7.9 3.5 6.1 Foreign exchange 1.5 0.9 2.4 Commodities 3.0 3.0 1.5 Diversification effect (9.2) (4.6) (6.0) ------------------------------------------------------------------------- All-Bank VaR 20.1 15.8 13.2 -------------------------------------------------------------------------

There were 13 trading loss days in the fourth quarter, compared to 11 days in the previous quarter. With the exception of a single day during the quarter when the actual loss exceeded the VaR, the losses were within the range predicted. This exception occurred due to extreme volatility in the equity markets.

Liquidity risk

The Bank maintains large holdings of liquid assets to support its operations. These assets generally can be sold or pledged to meet the Bank's obligations. As at October 31, 2008, liquid assets were $106 billion (2007 - $103 billion), equal to 21% (2007 - 25%) of total assets. These assets consist of securities 64% (2007 - 71%) and cash and deposits with banks, 36% (2007 - 29%).

Related party transactions

There were no changes to the Bank's procedures and policies for related party transactions from those outlined on pages 72 and 122 of the 2007 Annual Report. All transactions with related parties continued to be at market terms and conditions.

Balance sheet

The Bank's total assets at October 31, 2008 were $508 billion, up $96 billion or 23% from last year, including a $38 billion positive impact from foreign currency translation from the weaker Canadian dollar at the end of the year. Retail, commercial and corporate loans grew by $62 billion and derivative instrument assets were up $23 billion, with a corresponding increase in derivative instrument liabilities.

Total securities declined slightly by $1 billion from last year, including a $7 billion positive impact from foreign currency translation. Trading securities declined $11 billion, due primarily to a reduction in the size of the equity securities portfolio. There was an increase in available-for-sale securities of $10 billion, primarily from higher holdings of Canadian and foreign government debt securities. In the fourth quarter, there was a reclassification of $394 million of certain trading securities to available-for-sale securities as a result of amendments to accounting standards issued in October 2008.

As at October 31, 2008, the unrealized loss on available-for-sale securities was $1,228 million, compared to a $972 million unrealized gain in the prior year. This includes unrealized losses of $36 million that arose subsequent to the August 1, 2008, reclassification of certain bonds and preferred shares from the trading portfolio to the available-for-sale portfolio. The total unrealized loss was largely the result of the ongoing deterioration of economic conditions and volatility in debt and equity markets. Debt securities account for 78% of the unrealized loss.

The Bank's loan portfolio grew $62 billion or 27% from last year, including the positive impact of $18 billion from foreign currency translation. On the retail lending side, residential mortgage growth in Canadian Banking was $13 billion, before securitization of $5 billion. In addition, International Banking contributed $5 billion to this growth. Personal loans were up $9 billion, or 22% from last year, with strong growth in all regions.

Business and government loans increased $40 billion from last year. Loans in Scotia Capital were up $17 billion, primarily in corporate lending. Canadian Banking experienced growth of $4 billion. In International banking, business and government loans increased $18 billion, primarily from the acquisition of Banco del Desarrollo, which contributed $3 billion, and growth in Asia and the Caribbean of $7 billion and $4 billion respectively.

Total liabilities were $486 billion as at October 31, 2008, an increase of $93 billion or 24% from last year, including a $39 billion impact from foreign currency translation. Deposits grew by $58 billion, obligations related to repurchase agreements were up $8 billion and derivative instruments liabilities were up $18 billion. The latter increase was similar to the change in the derivative instruments assets and due primarily to recent changes and volatility in interest and foreign exchange rates and credit spreads.

Total deposits grew by $58 billion, or 20% from 2007, including a $26 billion positive impact from foreign currency translation. Personal deposits increased by $18 billion, led by $5 billion of growth in domestic personal GICs. International deposits increased $5 billion with increases across most regions. Business and government deposits were up $39 billion, primarily to fund the Bank's strong asset growth.

Total shareholders' equity increased $3 billion in 2008. This was due primarily to internal capital generation of $1 billion, the issuance of $1 billion of non-cumulative preferred shares, and an increase of $261 million in accumulated other comprehensive income. The increase in unrealized foreign exchange gains relating to the Bank's foreign operations, due to the weakening of the Canadian dollar, was mostly offset by higher unrealized losses on other components of comprehensive income, including those related to available-for-sale securities.

Capital Management

The revised Basel Capital framework (Basel II) became effective for Canadian banks on November 1, 2007. Basel II is designed to more closely align regulatory capital requirements with the individual risk profile of banks by introducing substantive changes to capital requirements for credit risk and an explicit new capital charge for operational risk.

Under Basel II, there are two main methods for computing credit risk: the standardized approach, which uses prescribed risk weights; and internal ratings-based approaches, which allow the use of a bank's internal models to calculate some, or all, of the key inputs into the regulatory capital calculation. Users of the Advanced Internal Ratings Based Approach (AIRB) are required to have sophisticated risk management systems for the calculation of credit risk regulatory capital and the application of this approach could result in less regulatory capital than the use of the alternative approaches. Once banks demonstrate full compliance with the AIRB requirements, and OSFI has approved its use, they may proceed to apply the AIRB approach in computing capital requirements. However, in order to limit sudden declines in the capital levels for the industry in aggregate, transitional capital floors were introduced for the first two years after full implementation of AIRB. A minimum capital floor of 90% of the Basel I calculation will apply in the first year of full approval, and 80% in the second year. Since receiving regulatory approval in the second quarter, the Bank has applied the 90% floor.

The Bank received approval, with conditions, from OSFI to use AIRB for material Canadian, U.S. and European portfolios effective November 1, 2007. The Bank is assessing the remaining credit portfolios for application of AIRB in the future. The Bank uses the standardized approach for these portfolios. As well, the Bank is using the standardized approach to calculate the operational risk capital requirements. The capital requirements for market risk are substantially unchanged for the Bank.

Capital ratios

The Bank continues to maintain a strong capital position. The Tier 1 and the Total capital ratios as at October 31, 2008 under Basel II were 9.3% and 11.1%, respectively, compared to 9.3% and 10.5% at October 31, 2007.

The tangible common equity (TCE) ratio was 7.3% as at October 31, 2008, compared to 7.2% at October 31, 2007. The TCE ratio remains strong by global standards.

Financial instruments

Given the nature of the Bank's main business activities, financial instruments make up a substantial portion of the balance sheet and are integral to the Bank's business. There are various measures that reflect the level of risk associated with the Bank's portfolio of financial instruments. Further discussion of some of these risk measures is included in the preceding Risk Management section.

The methods of determining the fair value of financial instruments are detailed on pages 69 and 70 of the 2007 Annual Report. Management's judgment is applied on valuation inputs when observable market data is not available, and in the selection of valuation models. Uncertainty in these estimates and judgments can affect fair value and financial results recorded.

During this quarter, changes in the fair value of financial instruments generally arose from existing economic, industry and market conditions.

Total derivative notional amounts were $1,562 billion at October 31, 2008, compared to $1,287 billion at October 31, 2007, with the increase due primarily to the effect of foreign currency translation. The percentage of those derivatives held for trading and those held for non-trading or asset liability management was generally unchanged. The credit equivalent amount related to derivatives, after taking into account master netting arrangements and eligible financial collateral, was $28.5 billion, compared to $20.6 billion last year end.

Financial stability forum disclosures

In April 2008, the Financial Stability Forum released its report on recent conditions in the credit market. Among others, a key recommendation of the report was to improve transparency by providing enhanced disclosures on financial instruments that markets consider to be higher risk, including off-balance sheet vehicles and structured products. Based on these recommendations, the Bank has provided additional disclosures below in the sections on Off-balance sheet arrangements and Selected credit instruments.

Off-balance sheet arrangements

In the normal course of business, the Bank enters into contractual arrangements that are not required to be consolidated in its financial statements. These arrangements are primarily in three categories: Variable Interest Entities (VIEs), securitizations, and guarantees and other commitments. No material contractual obligations were entered into during the year by the Bank that are not in the ordinary course of business. Processes for review and approval of these contractual arrangements are unchanged from last year.

As at October 31, 2008, total consolidated assets related to VIEs were $5.8 billion, compared to $6.1 billion at end of 2007. The amounts owed by or to the consolidated VIEs were not significant. The Bank earned fees of $72 million and $65 million in 2008 and 2007, respectively, from certain VIEs in which it has a significant variable interest at the end of the year but did not consolidate.

There are three primary types of association the Bank has with VIE's: 1. Multi-seller conduits sponsored by the Bank 2. Liquidity facilities provided to non-Bank sponsored conduits 3. Funding vehicles

Multi-seller conduits sponsored by the Bank

The Bank sponsors three multi-seller conduits, two of which are Canadian-based and one in the United States. The Bank earns commercial paper issuance fees, program management fees, liquidity fees and other fees from these multi-seller conduits which totaled $70 million in 2008, compared to $56 million in the prior year.

The multi-seller conduits purchase high quality financial assets primarily from clients and finance these assets through the issuance of highly rated commercial paper (CP). For assets purchased, there are supporting backstop liquidity facilities that are generally equal to 102% of the assets purchased or committed to be purchased. The primary purpose of the backstop liquidity facility is to provide an alternative source of financing in the event the conduit is unable to access the commercial paper market.

As further described below, the Bank's exposure to these off-balance sheet conduits primarily consists of liquidity support, program-wide credit enhancement and temporary holdings of commercial paper. The Bank has a process to monitor these exposures to ensure it is not required to consolidate the assets and liabilities of the conduit.

Canada

The Bank's primary exposure to the Canadian-based conduits is the liquidity support provided, with total liquidity facilities of $4.3 billion as at October 31, 2008 (October 31, 2007 - $7.4 billion). A substantial reduction in auto loans/leases in 2008 caused the year-over-year decline. As at October 31, 2008, total commercial paper outstanding for the Canadian-based conduits administered by the Bank was $3.8 billion (October 31, 2007 - $6.7 billion). At year-end, the Bank held approximately 6% of the total commercial paper issued by these conduits. The following table presents a summary of assets held by the Bank's two Canadian multi-seller conduits as at October 31, 2008 and 2007 by underlying exposure.

Assets held by Scotiabank-sponsored Canadian-based multi-seller conduits 2008 ---------------------------------------- Funded Unfunded Total As at October 31 ($ millions) assets(1) commitments exposure(2) ------------------------------------------------------------------------- Auto loans/leases $ 2,204 $ 299 $ 2,503 Equipment loans 969 63 1,032 Trade receivables 205 91 296 Canadian residential mortgages 89 2 91 Retirement savings plan loans 156 3 159 Loans to closed-end mutual funds 161 91 252 ---------------------------------------- Total(2) $ 3,784 $ 549 $ 4,333 ---------------------------------------- ---------------------------------------- 2007 ---------------------------------------- Funded Unfunded Total As at October 31 ($ millions) assets(1) commitments exposure(2) ------------------------------------------------------------------------- Auto loans/leases $ 4,506 $ 531 $ 5,037 Equipment loans 1,227 79 1,306 Trade receivables 251 45 296 Canadian residential mortgages 113 2 115 Retirement savings plan loans 291 6 297 Loans to closed-end mutual funds 209 167 376 ---------------------------------------- Total(2) $ 6,597 $ 830 $ 7,427 ---------------------------------------- ---------------------------------------- (1) Funded assets are reflected at original cost. (2) Exposure to the Bank is through global-style liquidity facilities and letters of guarantee. (3) These assets are substantially sourced from Canada.

Substantially all of the conduits' assets have been structured to receive credit enhancements from the sellers, including overcollateralization protection and cash reserve accounts. As at October 31, 2008, approximately 24% of the funded assets are externally rated AAA, with the balance having an equivalent rating of AA- or higher based on the Bank's internal rating program. There are no non-investment grade rated assets held in these conduits. The funded assets have a weighted average repayment period of approximately 1.1 years, with 69% maturing within three years. There is no exposure to U.S. subprime mortgage risk in these two conduits.

United States

The Bank's primary exposure to the U.S.-based conduit is the liquidity support and program-wide credit enhancement provided, with total liquidity facilities of $12.8 billion as at October 31, 2008 (October 31, 2007 - $12.7 billion). Excluding the impact of foreign currency translation, total exposure declined $2.7 billion year over year. As at October 31, 2008, total commercial paper outstanding for the U.S.-based conduit administered by the Bank was $8.4 billion (October 31, 2007 - $7.9 billion). At year-end, the Bank did not hold any commercial paper issued by this conduit.

A significant portion of the conduit's assets have been structured to receive credit enhancements from the sellers, including overcollateralization protection and cash reserve accounts. Each asset purchased by the conduit has a deal-specific liquidity facility provided by the Bank in the form of an asset purchase agreement. Program-wide credit enhancement is generally equal to 10% of the assets purchased or committed to be purchased by the conduit. This is available to absorb a portion of the losses on defaulted assets, if any, in excess of losses absorbed by deal-specific credit enhancement. In the fourth quarter, in line with current market practices, the Bank revised its liquidity agreements with the conduit such that the Bank will fund full par value of all assets including any defaulted assets, if any, of the conduit.

The following table presents a summary of assets purchased and held by the Bank's U.S. multi-seller conduit as at October 31, 2008 and 2007 by underlying exposure.

Assets held by Scotiabank-sponsored U.S.-based multi-seller conduit 2008 ---------------------------------------- Funded Unfunded Total As at October 31 ($ millions) assets(1) commitments exposure(2) ------------------------------------------------------------------------- Credit card/consumer receivables $ 1,318 $ 641 $ 1,959 Auto loans/leases 2,894 1,160 4,054 Trade receivables 2,161 1,855 4,016 Loans to closed-end mutual funds 690 652 1,342 Diversified asset-backed securities 932 19 951 CDOs/CLOs - - - Mortgage-backed securities - - - Corporate loans(3) 417 50 467 ---------------------------------------- Total(4) $ 8,412 $ 4,377 $12,789 ---------------------------------------- ---------------------------------------- 2007 --------------------------------------- Funded Unfunded Total As at October 31 ($ millions) assets(1) commitments exposure(2) ------------------------------------------------------------------------ Credit card/consumer receivables $ 1,172 $ 513 $ 1,685 Auto loans/leases 2,774 1,462 4,236 Trade receivables 1,434 1,832 3,266 Loans to closed-end mutual funds 940 350 1,290 Diversified asset-backed securities 787 42 829 CDOs/CLOs 372 - 372 Mortgage-backed securities 114 536 650 Corporate loans(3) 260 111 371 --------------------------------------- Total(4) $ 7,853 $ 4,846 $12,699 --------------------------------------- --------------------------------------- (1) Funded assets are shown at original cost. (2) Exposure to the Bank is through program-wide credit enhancement and global-style liquidity facilities. (3) These assets represent secured loans that are externally rated investment grade. (4) These assets are sourced from the U.S.

Approximately 92% of the conduit's funded assets are rated A or higher, either externally (16%) or based on the Bank's internal rating program (76%). There are no non-investment grade assets held in this conduit. The funded assets have a weighted average repayment period of approximately 1.4 years, with 75% maturing within five years.

The conduit has investments in two pools of diversified asset-backed securities. These pools are guaranteed by monoline insurers (refer to Exposure to monoline insurers discussion below) and are rated investment grade based on the Bank's internal rating program. The assets underlying these securities are primarily retail loans, including U.S. home equity, student loans and residential mortgage-backed securities. Exposure to U.S. subprime mortgage risk within these securities was nominal at approximately $28 million as at October 31, 2008.

On April 30, 2007, the Bank's U.S. Multi-seller Commercial Paper Conduit issued a Subordinated Note (the "Note") to an unrelated party that absorbs the majo