04 March 2009

Scotiabank Q1 2009 Earnings

RBC Capital Markets, 4 March 2009

We view Scotiabank's results as neutral to the view we had going into the quarter. Profitability was close to our estimates. Capital ratios were slightly better than expected and loan losses were lower than we had thought, although signs of credit deterioration are clear in our view.

• The international division was much more profitable than we had anticipated (net income of $388 million versus our $269 million estimate) as revenues were stronger than we had looked for and loan losses increased, but not as much as we had been expecting. The "other" division was well short of our estimate on higher funding costs and write-downs of securities.

Our 2009 EPS estimates are essentially unchanged although some of the moving parts are different (greater expected profits in International and Scotia Capital, and lower "Other")

• We will publish our estimated 2010 EPS for Scotiabank and other banks as part of our Q1/09 industry review.

Our Underperform rating on Scotiabank's stock has reflected:

• Our view that that structured finance/off-balance sheet conduit issues are likely to cause lower writeoffs for the bank's peers than in 2008.

• Our view that the credit cycle will broaden to areas beyond U.S. residential real estate/U.S. consumer/U.S. residential construction lending, into areas where Scotiabank has more exposure such as traditional business lending in the U.S., Canada, Latin America and the Caribbean. Loan losses were lower than expected, but signs of credit deterioration are evident.

• Capital ratios that would likely to decline to the low end of the Big 6 bank range, which did occur. The Tier 1 ratio and TCE to RWA ratios are high by global standards, but at the low end of the Canadian peer group.

• Scotiabank trades at 1.4x BV versus a range of 0.9x - 1.4x for peers, 1.6x TBV versus 1.0x - 2.1x and a dividend yield of 7.3% versus 6.7% - 10.1%.

• As is normally the case during bank reporting periods, we will wait until our industry review to reassess our relative rankings and to review our 12-month target prices.