1. BUS 419 Canadian Chartered Financial Institutions Economic and Market Analysis

2. Agenda Structure of the Industry Scotiabank TD Financial Group Bank Comparison Recommendations

3. Structure of the Industry 14 domestic banks, 33 foreign bank subsidiaries, and 20 foreign bank –In 1999, restrictions on foreign bank operations lowered Managed over $1.7 trillion in assets, which account for over 70 % of the total assets of the Canadian financial services sector Big 6 accounted for over 90% of the assets of the industry 8,000 branches and close to 18,000 ABMs – the highest number of ABMs per capita in the world

4. International Dimension International operations accounted for 33% of their gross revenue in 2001 –United States Wealth management Corporate investment banking Electronic banking. –Latin America, Asia, and Caribbean Investment

5. Products Banking – Personal and business banking –TD Canada Trust –ScotiaOne Insurance – Creditor, life, health, travel, home, and auto products –TD Insurance –ScotiaLine, ScotiaPlan Investment – Wealth management services for private clients –TD Canada Trust – Money market, health protection –TD Waterhouse – Discount brokerage –Scotia McLeod Capital Market – products and services offered to corporations, governments, and institutional clients –TD Commercial Banking –Scotia Capital

6. Revenue Composition Major source of revenue –Net interest income Other non-interest income –Mutual fund –Wealth management –Foreign exchange –Derivative trading

7. Revenue Composition … cont ’ d Increasing of non-interest income over the past 10 years

8. Regulatory Environment BANK ACT –Federal government is responsible for the regulation of the banking industry in Canada The Office of the Superintendent of Financial Institutions (OSFI) –Reporting to Minister of Finance –Safeguard policyholders, depositors and pension plan members from undue loss

9. Regulatory Environment Hybrid nature of the banks activities –Some of their subsidiary activities are provincially regulated

10. Regulatory Environment “ The regulatory and supervisory structure in Canada is well developed, complies with the major international principles and standards, and is a source of international best practice in a number of areas ” ~~ IMF

11. Industry Players

12. Scotia Bank vs. TD Bank

13. SCOTIABANK Life, Money, Balance Both

14. Organizational Structure

15. Earnings by Business Line

16. Scotia’s Risk Management

17. Risk Management Structure

18. Credit Risk

19. Credit Risk (cont’d) Commercial & corporate credit requests assessed by credit units Assessment criteria: current & future credit statistics industry & economic trends geo-political risk management Assignment of risk rating using a rating system with 19 categories Decision factors to be considered, such as: Risk rating Facility risk Industry & country limits

20. Credit Risk (cont’d) Diversified Internationally… …and Diversified by Borrower Types

21. Market Risk Summary of Market Risks –FUNDING Interest Rate Risk Foreign Exchange Risk –INVESTMENT Interest Rate Risk Foreign Exchange Risk Equities Risk –TRADING Interest Rate Risk Foreign Exchange Risk Equities Risk Commodities Risk

22. Market Risk (cont’d) Risk Assessment & Measurement –Value at Risk (VaR) –Stress Testing –Sensitivity Analysis –Simulation Modeling –Gap Analysis Managed risks mainly through limits

23. Liquidity Risk Liquidity risk controlled through… –Liquidity position assessment –Scenario analysis and their assumptions –Contingency plans development Broad range of funding sources… –Capital –Deposits from retail / commercial clients –Wholesale funding Enhanced term funding through… –Note issuance program –Sale of mortgage-backed securities

24. Liquidity Risk (cont’d) As of October 31, 2003 –$75 billion liquid assets (26% of total assets), of which…

25. Derivative Securities 2 primary objectives: –Manage risks from funding & investment activities –Lower the cost of capital Markets derivatives to customers & take positions for own account Trades a wide variety of instruments –Forwards and futures –Interest rate swaps and options –Currency swaps –Equity and credit derivatives –Other more complex structured products

26. Derivative Securities (cont’d) To control credit risk of derivatives: –Use of credit mitigation techniques Applies limits to each counterparty Measures exposure as current fair value plus potential future exposure Portfolio of mostly short-term instruments Investment grade counterparties (90% of total credit risk) –Use of credit derivatives such as credit default swaps

27. Foreign Exchange and Gold Contracts

28. Total Notional Value of OTC and Exchange Traded Derivative Financial instruments

29. Proportion Invested in Each Derivative Instrument

30. Derivatives Instruments to Hedge Interest Rate

31. Trading vs. Non-Trading

32. Non-Trading Derivatives

33. Scotia’s Employee Stock Options

34. Employee Stock Options Exercise price will not be less than the closing price of common shares on the trading day before grant date Options vest over 4 years and expire after 10 years, subject to early expiration Outside Canada, where options granting are restricted, SARs have been granted instead Will start expensing options in 2004 due to new CASB rule Ownership requirement for chief executives = 3 times the base salary

35. Employee Stock Options Tandem stock appreciation rights (Tandem SARs) Deferred Stock Unit Plan (DSU) Directors ’ Deferred Stock Unit Plan (DDSU) Restricted Share Unit Plan (RSU) Scotia Capital Deferred Payment Plan

36. TD Bank Financial Group

37. History 1855 Bank of Toronto is founded 1871 The Dominion Bank is founded 1955 Bank of Toronto + The Dominion Bank = Toronto Dominion 2002 Acquire Canada Trust and become TD Canada Tust

38. TD Bank Composition

39. Operations

40. Overall Performance http://www.td.com/ar2003/md_02_01.html http://www.td.com/investor/2001/complete.PDFhttp://www.td.com/investor/2001/complete.PDF pg.18 Million

41. Income by Business Segment Adapted from: http://www.td.com/ar2003 Note: Cash Basishttp://www.td.com/ar2003 Million

42. Risk Management

43. Risk Factors Strategic Risk Credit Risk Market Risk Operational Risk Liquidity Risk Investment Risk Regulatory Risk Reputational Risk

44. Risk Management Committees

46. Value at Risk 2002 +ve 88% 2003 +ve 96.4% Adapted from: http://www.td.com/ar2003;and annual report 2002http://www.td.com/ar2003;and

47. Value at Risk 20022003 Adapted from: http://www.td.com/ar2003;and annual report 2002http://www.td.com/ar2003;and

48. Market Risk and Derivatives RiskDerivative Interest Rate RiskInterest Rate Swaps Forward rate agreements Foreign ExchangeForeign Exchange Swaps Foreign Exchange Forward Contracts Cross-currency interest rate swaps

49. Trading vs. Non-Trading Adapted from:http://www.td.com/ar2003/pdf/ar2003.pdf pg.57

50. Non-Trading Derivatives 2003 2002 Adapted from:http://www.td.com/ar2003/pdf/ar2003.pdf pg.57

51. Derivatives used to hedge Foreign Exchange Risk

52. Derivatives Instruments to hedge Interest Rate

53. Total Notional value of OTC and Exchange traded Derivative Financial instruments

54. Concentration of Credit Risk – Derivative Financial Instruments by country

55. TD Bank’s Employee Stock Options

56. Employee Stock Options Options for common shares granted to eligible employees and non-employee directors of the bank Before Oct. 5, 2002Oct. 6, 2002 onwards Settlement terms of 10 years, vested for periods of 4 years Can settle the options for cash up to the intrinsic value of the option Reduced use of stock options Reduced terms to 7 years No longer settle for cash More disclosure from senior executive who plan to exercise More ownership req. for senior executives

57. Employee Stock Options

58. Asset Base http://www.fin.gc.ca/toce/2002/bank_e.htmlhttp://www.fin.gc.ca/toce/2002/bank_e.html; Last Updated: 2003-09-05

59. Stock Performance

60. ROI for Big 6 Banks

61. Comparison: Executive Stock Options ScotiabankTD Bank 10 year settlement terms Can receive cash for intrinsic value or settle for shares Moved from 10 year to 7 year settlement terms Can only be settled for common shares Increased executive share ownership requirements Reduced use of stock options

62. Recommendations Minimize spread between favourable and non-favourable Re-evaluating executive stock options –Reduce time to expiration –Expense options immediately Create a natural hedge for Foreign Exchange

63. Questions?

64. Sources Scotiabank Annual Reports, for fiscal years ending 1999 to 2003 TD Bank Financial Group Annual Reports, for fiscal years ending 1999 to 2003 “TD Bank Financial Group Enhances Corporate Governance Policies On Executive Compensation” from http://biz.yahoo.com/cnw/031218/td_exec_compensatio n_1.html, March 10, 2004