Mar 05, 2008
By: Bill Graveland
EDMONTON - The Bank of Nova Scotia (TSX:BNS) has reported what its chief executive acknowledges was a "weaker-than-expected" first quarter, with net income falling 18 per cent from a year earlier to $835 million.
While the bank is not directly exposed to the U.S. subprime mortgage market, the meltdown of which has caused consternation in global credit markets, "we are not immune to the effects of the severe volatility that has occurred," Rick Waugh told the bank's annual meeting in Edmonton.
"One of the key root causes was a lack of attention to basic, proven principles of good risk management."
Calling the bank's exposure to asset-backed paper and other conduits affected by troubles in the U.S. "nominal" as well as "modest and well diversified," Waugh said volatility in global financial markets did cause at least some valuation writedowns to its portfolios.
"Financial institutions with good risk cultures that stuck to fundamental principles have been largely protected from the crisis," Waugh added.
"Unfortunately few of us did it perfectly and some didn't do it very well at all."
Waugh received an impassioned plea to help investors who were affected by the asset-backed paper situation.
"Scotiabank has the duty and the expertise to know it was selling a flawed savings product to unknowing retail investors like myself," said Reid Mosely, a representative of over 1400 retail customers of Canaccord Capital, Central Credit Union Group and the National Bank (TSX:NA), who own non-bank ABCP that has been frozen since last summer.
"Now our plans are destroyed and our life's savings from our jobs and businesses - the things we built are literally hanging somewhere in the Internet," he added.
"Scotiabank either stands behind its savings products or it doesn't. I would like to ask you today, which is it?"
Scotiabank is one of four of Canada's largest banks that have agreed to join a group of lenders working with Bay Street lawyer Purdy Crawford on restructuring the ABCP market that was managed by non-bank companies.
Crawford's committee announced that Bank of Montreal (TSX:BMO), CIBC (TSX:CM), Royal Bank (TSX:RY) and Scotiabank (TSX:BNS) have indicated they will participate as lenders in a $14-billion fund that could be drawn on if further ABCP problems erupt.
This fund is a key element in efforts by the Pan-Canadian Investors Committee headed by Crawford to ensure that holders of the ABCP notes eventually get their principal back, although over a longer period than anticipated when the commercial paper was purchased.
"Going back as far as the fall when this issue (surfaced) - we said although we were not signatories to the Montreal agreement, nor did we have any material exposure, that we would work in supporting the Montreal group," Waugh told reporters.
"We've been working in a constructive way and we have told them what exactly we are committing to do and we have made a commitment to participate and now it's in the hand of the profit committee."
Earlier, Waugh said Scotiabank booked "solid core growth" in its domestic and international banking operations, "but our results in Scotia Capital were negatively affected by the market volatility."
The first-quarter profit was down from a year-earlier $1.02 billion and Scotiabank's return on equity fell to 18.3 per cent from 22.1 per cent.
Earnings per share declined to 82 cents from $1.01, as revenue in the November-January period ebbed to $2.84 billion, compared with $3.11 billion a year earlier.
Provision for credit losses increased to $111 million from $63 million and the bank's Tier 1 capital ratio deteriorated to nine per cent from 10.4 per cent, while total assets grew to $449.4 billion from $396.5 billion.
"Beyond our bank my confidence extends to the belief we will overcome the challenges in the financial markets that arose this past summer," Waugh said.
"Crises do come to an end."
In a speech to bank shareholders, Waugh called for government support for more public policies supporting international competitiveness.
"From our bank's perspective, the recent foreign acquisition binge involving some of Canada's biggest and best companies is a clear signal Canadian businesses must become more aggressive international acquirers."
He repeated his desire to see Ottawa scrap ownership restrictions on banks and allow the federal finance minister to review potential foreign bank investments.
Waugh wants to see the government eliminate the specific ownership limits for banks and rely on the finance minister's discretion to assess potential foreign bank investments. Current federal rules limit ownership stakes in large domestic banks to 20 per cent, making it impossible for big mergers or takeovers.
"I always say, it's not if, it's when - but when can be very long from now," Waugh said.
"We obviously believe in free trade, competition and open markets and if we can go to Mexico and Chile and buy banks eventually the pressure will be put on when you open up the Canadian system because we do stand out as being very protectionist."