e40vf

U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 40-F

THE BANK OF NOVA SCOTIA
(Exact name of Registrant as specified in its charter)

44 King St. West, Scotia Plaza 8^th floor,
Toronto, Ontario, Canada M5H 1H1
(416) 866-3672
(Address and telephone number of Registrant’s principal executive offices)

The Bank of Nova Scotia, One Liberty Plaza, 25^th floor,
New York, N.Y., U.S.A. 10006
Attention: Douglas Cooper
(212) 225-5000
(Name, address (including zip code) and telephone number (including area code)
of agent for service in the United States)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

For annual reports, indicate by check mark the information filed with this Form:

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

Indicate by check mark whether the Registrant by filing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). If “Yes” is marked, indicate the filing number assigned to the Registrant in connection with such Rule.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

As of October 31, 2003, management of The Bank of Nova Scotia (the “Bank”) evaluated the effectiveness of the design and operation of its disclosure controls and procedures (disclosure controls) and internal controls over financial reporting (internal controls), as defined under rules adopted by the U.S. Securities and Exchange Commission. This evaluation was performed under the supervision of, and with the participation of, the Chief Executive Officer and the Chief Financial Officer.

Disclosure controls are procedures designed to ensure that information required to be disclosed in reports filed with the securities regulatory agencies is recorded, processed, summarized and reported on a timely basis, and is accumulated and communicated to the Bank’s management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Internal controls are procedures designed to provide reasonable assurance that transactions are properly authorized, assets are safeguarded against unauthorized or improper use, and transactions are properly recorded and reported. This permits the preparation of the Bank’s consolidated financial statements in accordance with Canadian generally accepted accounting principles, including the accounting requirements of the Superintendent of Financial Institutions Canada.

The Bank’s management, including the Chief Executive Officer and the Chief Financial Officer, does not expect that the Bank’s disclosure controls or internal controls will prevent or detect all error and all fraud. Because of the inherent limitations in all control systems, an evaluation of controls can provide only reasonable, not absolute assurance, that all control issues and instances of fraud or error, if any, within the Bank have been detected.

Based on the evaluation of disclosure controls and internal controls, the Chief Executive Officer and the Chief Financial Officer have concluded that, subject to the inherent limitations noted above:

•

the Bank’s disclosure controls are effective in ensuring that material information relating to the Bank is made known to management on a timely basis, and is included as appropriate in this annual report; and

•

the Bank’s internal controls are effective in providing reasonable assurance that the Bank’s consolidated financial statements are fairly presented in accordance with Canadian generally accepted accounting principles, including the accounting requirements of the Superintendent of Financial Institutions Canada.

To the best of management’s knowledge and belief, no change in internal controls occurred during the financial year ended October 31, 2003, that has materially affected, or is reasonably likely to materially affect, internal controls.

All of the members of the Bank’s audit committee are financially literate, and one or more members of the audit committee meet the definition of a financial expert. The Bank’s board of directors has determined that Mr. Ronald A. Brenneman is an audit committee financial expert and is independent, as that term is defined by the New York Stock Exchange’s corporate governance standards applicable to the Bank.

The Securities and Exchange Commission has indicated that the designation of a person as an audit committee financial expert does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the audit committee and board of directors in the absence of such designation.

The Bank has adopted a code of ethics, entitled “Scotiabank Guidelines for Business Conduct”. These guidelines have been in place for many years and apply to all directors, officers and employees of the Bank. The Scotiabank Guidelines for Business Conduct are available on the Bank’s Internet website at www.scotiabank.com, in the Corporate Governance section, and are available in print to any shareholder upon written request to the Secretary of the Bank. Amendments to the Scotiabank Guidelines for Business Conduct and waivers, if any, for directors and executive officers will be disclosed on the Bank’s website. There were no waivers granted in fiscal 2003.

The disclosure provided in Table 30 on page 71 of Exhibit 2, Management’s Discussion & Analysis, is incorporated by reference herein.

The disclosure provided under “Off-Balance Sheet Arrangements” on pages 60 and 62 of Exhibit 2, Management’s Discussion & Analysis, is incorporated by reference herein. Additional information from note 2 on page 84, note 4(b) on pages 86 and 87, and note 20(a) on page 100 of Exhibit 3, 2003 Consolidated Financial Statements, is incorporated by reference into “Off-Balance Sheet Arrangements” in Management’s Discussion & Analysis.

The Bank’s audit committee is composed of the following directors: Arthur R.A. Scace (Chair), Ronald A. Brenneman, Hon. Michael J.L. Kirby, Hon. Barbara J. McDougall, Elizabeth Parr-Johnston, and Paul D. Sobey.

Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereto duly authorized.


Exhibit No.		Description

1.		Annual Information Form dated January 13, 2004

2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations (pages 27 through 72 of the 2003 Annual Report)

3.		2003 Consolidated Financial Statements (pages 73 through 114 of the 2003 Annual Report)

4.	a)	The following pages of the 2003 Annual Report are also incorporated by reference into the Annual Information Form:

		10 - 17, 24 - 26, 115 - 121, 132

		These pages are included in the 2003 Annual Report included in Form 6-K filed with the Commission on January 30, 2004.

	b)	The following pages of the Management Proxy Circular for the Annual Meeting of Shareholders to be held on March 2, 2004 are also incorporated by reference into the Annual Information Form:

		3 - 6 (Election of Directors)

		These pages are included in the Management Proxy Circular included in Form 6-K filed with the Commission on January 30, 2004.

5.		Corporate Governance

6.		Auditors’ Consent

7.		Comments by Auditors for U.S. Readers on Canada — U.S. Reporting Difference

8.		Certifications required by Rule 13a-14(a) or Rule 15d-14(a), pursuant to Section 302 of the U.S. Sarbanes-Oxley Act of 2002.

9.		Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the U.S. Sarbanes-Oxley Act of 2002.

When this form is provided to security holders or other interested parties, it must be accompanied by copies of all the documents incorporated into it by reference. Portions of this Annual Information Form of The Bank of Nova Scotia (the “Bank”) dated January 13, 2004 (the “AIF”) are disclosed in the following documents, portions of which are incorporated by reference into the AIF: (i) Annual Report to Shareholders for the year ended October 31, 2003 (“Annual Report”); and (ii) Management Proxy Circular dated as of December 31, 2003 (the “Proxy Circular”).

Except as otherwise noted, all information is given at or for the year ended October 31, 2003. Amounts are expressed in Canadian dollars. Financial information is presented in accordance with Canadian generally accepted accounting principles, including the accounting requirements of the Superintendent of Financial Institutions Canada.

This document includes forward-looking statements which are made pursuant to the “safe harbour” provisions of the United States Private Securities Litigation Reform Act of 1995. These statements include comments with respect to the Bank’s objectives, strategies, 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. Forward-looking statements are typically identified by words or phrases such as “believe”, “expect”, “anticipate”, “intend”, “estimate”, “may increase”, “may fluctuate”, and similar expressions or 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. The Bank cautions readers not to place undue reliance on these statements, as a number of important factors 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, the effect of change in monetary policy, legislative and regulatory developments in Canada and elsewhere, 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 complete and integrate acquisitions, 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, consolidation in the Canadian financial services sector, changes in tax laws, acts of God such as earthquakes, competition, judicial and regulatory proceedings, the possible impact of international conflicts and other developments including terrorist acts and the war on terrorism, 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, business, financial condition or liquidity.

The Bank cautions that the foregoing list of important factors is not exhaustive. When relying on forward-looking statements to make decisions with respect to the Bank, investors and others should carefully consider the foregoing 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 behalf of the Bank.


		Page Reference

		Annual		Incorporated by Reference from:
		Information
		Form		Annual Report		Proxy Circular

CORPORATE STRUCTURE
	Name and Incorporation		2
	Intercorporate Relationships		2		115
GENERAL DEVELOPMENT OF THE BUSINESS
	Three-Year History		2		10-17, 73-114, 116-121
	Trends		3		27-72
NARRATIVE DESCRIPTION OF THE BUSINESS
	General		3		10-17, 27-121
	Competition		3
	Supervision and Regulation in Canada		4
	Supervision and Regulation Outside Canada		5
SELECTED CONSOLIDATED FINANCIAL INFORMATION
	Annual Information				73-114, 116-121
	Dividends				92, 93, 118-121, 132
MANAGEMENT’S DISCUSSION AND ANALYSIS			6		27-72
MARKET FOR SECURITIES OF THE BANK			6		132
DIRECTORS AND EXECUTIVE OFFICERS OF THE BANK
	Directors and Board Committees of the Bank		6		24, 25		3-6
	Executive Officers of the Bank		6		26
	Shareholdings of Management		7				3-6
	Additional Information for Directors and Executive Officers		7
ADDITIONAL INFORMATION			8

The Bank was granted a charter under the laws of the Province of Nova Scotia in 1832 and commenced operations in Halifax, Nova Scotia in that year. Since 1871, the Bank has been a chartered bank under the Bank Act (Canada) (the “Act”). The Bank is a Schedule I bank under the Act and the Act is its charter. The head office of the Bank is located at 1709 Hollis Street, Halifax, Nova Scotia, and its executive offices are at Scotia Plaza, 44 King Street West, Toronto, Ontario M5H 1H1.

Each international principal subsidiary of the Bank is incorporated or established and existing under the laws of the jurisdiction in which its principal office is located, with the exceptions of Scotia Holdings (U.S.) Inc. and Scotiabanc Inc. which are incorporated and existing under the laws of the State of Delaware. Each Canadian principal subsidiary of the Bank is incorporated or established and existing under the laws of Canada, with the exceptions of BNS Capital Trust, Scotia Capital Inc., Scotia Securities Inc. and Scotiabank Capital Trust which are incorporated or established and existing under the laws of the Province of Ontario.

The Bank is one of the world’s leading financial institutions and was the second largest Canadian chartered bank in terms of assets and market capitalization as at October 31, 2003. The Bank is a full-service financial institution, active in both domestic and international markets. In Canada the Bank provides a full range of retail, commercial, corporate, investment and wholesale banking services through its extensive network of branches and offices in all 10 provinces and two territories. The Bank has branches and offices in 50 countries which

provide a wide range of banking and financial services, either directly or through subsidiary and associated banks, trust companies and other financial institutions.

The Bank realized record earnings of $2,477 million during the fiscal year ended October 31, 2003 and dividends paid on its common shares rose for the 12th consecutive year. The Bank increased its customer internet use to over one million users. Domestic Banking continued to expand its automated banking machine (“ABM”) network in furtherance of its goal of 500 additional machines, launched two new mutual funds and increased retail brokerage fee-based assets by 33%. International Banking increased its interest in Scotiabank Inverlat in Mexico to 91%, acquired 39 new branches in the Dominican Republic, introduced internet-based banking in Jamaica, Trinidad & Tobago and Barbados and became the first Canadian bank in China with a local currency license. Corporate and Investment Banking significantly improved its credit quality and doubled its market share in domestic equity underwriting over the past three years. Domestic Banking, Corporate and Investment Banking, and International Banking, contributed net income of $1,094 million, $721 million and $669 million, respectively, representing 44%, 29% and 27%, respectively, of the Bank’s total earnings for fiscal 2003.

During the fiscal year ended October 31, 2002, the Bank faced a number of challenges, including a weak credit quality in the United States. The Bank sold the operations of its subsidiary in Argentina because of liquidity problems that affected the country’s entire financial services industry during a period of severe political and economic difficulties in Argentina and as a result the Bank incurred a charge against income of $540 million after tax. Domestic Banking contributed $1,142 million to the Bank’s net income for the year of $1,797 million, representing an increase of 19% over the previous year. International Banking had a strong year in Mexico and the Caribbean and achieved earnings of $125 million ($665 million excluding charges related to Argentina of $540 million), which represented a 36% increase over the previous year excluding charges related to Argentina. Corporate and Investment Banking achieved good results in Canada, but these results were offset by problems in the United States loan portfolio and income declined by 45% from the previous year to $380 million.

During the fiscal year ended October 31, 2001, the wealth management group of Domestic Banking created a new sales force of financial planners and launched Scotia Private Client Group, bringing together teams of professionals from The Bank of Nova Scotia Trust Company, Scotia Cassels Investment Counsel Limited and the private banking group. The Bank also integrated the delivery networks for both banking and brokerage services, including branches, ABMs, telephone and internet. The Bank continued its growth strategy in the Caribbean, Asia and Latin America. Domestic Banking, Corporate and Investment Banking, and International Banking contributed net income of $960 million, $686 million and $489 million, respectively, representing 45%, 32% and 23%, respectively, of the Bank’s total earnings for fiscal 2001.

The Canadian banking system is dominated by six major Canadian banks, each of which maintains an extensive branch network, augmented with automated banking machines, telephone and internet banking facilities. In addition to the six major Canadian banks the competitive landscape of the Canadian financial services industry includes more than 2,100 institutions consisting of approximately 25 independent trust companies, 33 foreign-owned bank subsidiaries, 20 foreign bank branches, approximately 1,700 credit unions and caisses populaires, 100 life insurance companies, 230 property and casualty insurers, approximately 150 independent investment dealers and more than 55 independent retail mutual fund management companies.

Key competitive factors include the range and features of financial products, their pricing, distribution, and service quality. Competition has intensified over the years as foreign providers of credit cards, mutual funds, small business loans, consumer finance and investment banking services have increasingly entered Canada.

The competitive landscape in the United States is significantly more complex given the overall size and activity level of the financial services market and the presence of regional and national competitor groupings for many businesses.

The Bank provides a broad range of banking and other financial services to retail, commercial and corporate banking clients in the Caribbean, Latin America and other markets either directly or through subsidiaries. In providing these services the Bank competes with local and international banks and other financial institutions.

Competition is reflected not only in the suite of products and services offered and the different pricing and service models adopted, but in the use of leading-edge technology to gain strategic advantage, as well as the partnerships and alliances entered into by the various institutions to better serve their customers. Increased competition is also evident in the drive for scale and other operating efficiencies, and the greater willingness by all participants to divest low-return businesses.

Driven by the ongoing integration of the Canadian and American economies, consolidation is now under way in the financial services industry in Canada and the United States. It is anticipated that this consolidation could significantly reconfigure the North American financial services landscape in the future by widening the distinctions between various tiers of market participants.

The Bank’s activities in Canada are governed by the Bank Act, which is one of four main federal statutes governing the financial services industry in Canada. The other three statutes cover trust and loan companies, insurance companies and cooperative credit associations.

In accordance with the Bank Act, an organization may engage in and carry on the business of banking and such business generally as appertains to the business of banking. The Bank Act grants Canadian chartered banks broad powers of investment in the securities of other corporations and entities, but imposes limits upon substantial investments. Under the Bank Act, generally a bank has a substantial investment in a body corporate when (1) voting rights attached to the voting shares beneficially owned by the bank and by entities controlled by the bank exceed 10% of the voting rights attached to the outstanding voting shares of the body corporate or (2) the total number of shares of the body corporate that are beneficially owned by the bank and entities controlled by the bank represent more than 25% of the total shareholders’ equity of the body corporate. In addition, under the Bank Act, a bank has a substantial investment in an unincorporated entity where the ownership interests in such entity beneficially owned by that bank and by entities controlled by that bank exceed 25% of all ownership interests in such entity. A Canadian chartered bank is permitted to have a substantial investment in entities whose activities are consistent with those of certain prescribed permitted substantial investments. In general, a bank will be permitted to invest in an entity that carries on any financial services activity whether that entity is regulated or not. Further, a bank may generally invest in entities that carry on commercial activities that are related to the promotion, sale, delivery or distribution of a financial product or service, or that relate to certain information services. A bank may also invest in entities that invest in real property, act as mutual funds or mutual fund distributors or that service financial institutions and the bank may have downstream holding companies to hold these investments. In certain cases, the approval of the Minister of Finance or the Superintendent of Financial Institutions Canada (the “Superintendent”) is required prior to making the investment and/or the bank is required to control the entity. Other than creditor, life and mortgage insurance, which can be offered through branch systems, Canadian chartered banks may offer insurance products only through their subsidiaries and not through their branch systems. Banks may offer insurance products through their credit card systems but are prohibited from target-marketing these products to selected cardholders. Automobile leasing continues to be a prohibited activity for all federally incorporated financial institutions.

Without Minister of Finance approval, no person or group of associated persons may own more than 10% of any class of shares of the Bank. With Minister of Finance approval, a person or group of associated persons may own up to 20% of any class of voting shares and up to 30% of any class non-voting shares of the Bank. Ownership of the Bank’s shares by Canadian or foreign governments is prohibited under the Bank Act.

The Superintendent is responsible to the Minister of Finance for the administration of the Bank Act. The Superintendent provides guidelines for disclosure of a bank’s financial information. The Superintendent is also required to make an annual examination of each bank to ensure compliance with the Bank Act and to ensure that each bank is in sound financial condition. The report of the Superintendent’s examination is submitted to the Minister of Finance. The Bank is subject to regulation by the Canada Deposit Insurance Corporation and the Financial Consumer Agency of Canada and the activities of the Bank in Canada are subject to various other federal statutory provisions. The activities of the Bank’s trust subsidiaries and insurance subsidiaries are also regulated in Canada under provincial laws in respect of their activities in the provinces. Certain activities of the Bank and the Bank’s subsidiaries acting as securities brokers, dealers (including investment and mutual fund dealers), underwriters and advisors (including investment counsel and portfolio managers) are regulated in Canada under provincial securities legislation and, in some cases, by self regulatory organizations such as the Investment Dealers Association for broker dealers and the Mutual Fund Dealers Association for mutual fund dealers.

The activities of the Bank and its subsidiaries in the United States are subject to federal and state supervision, regulation and examination by bank regulatory and other governmental agencies. The Bank is subject to the Bank Holding Company Act of 1956 (“BHCA”) and the International Banking Act of 1978 and associated regulations of the Board of Governors of the Federal Reserve System (the “Board”). The Board and other banking regulators oversee the operation of the Bank’s branches, offices and subsidiaries in the United States.

The Bank is a “financial holding company” under the BHCA. This status allows a broad range of financial and merchant banking activities to be undertaken in the United States. In addition, the Bank owns an insured depository institution in Puerto Rico that is engaged in commercial and retail banking and subject to various laws and regulation and examination by Puerto Rico and federal regulators.

The Bank and its subsidiaries are engaged in a number of financial activities and businesses in the United States, many of which are subject to regulation by the Board and other applicable federal and state agencies. The Securities and Exchange Commission and state securities regulators regulate its broker-dealer subsidiary. Provisions of the Federal Reserve Act place certain limitations and restrictions on the transactions that the Bank’s United States branches, agencies and subsidiary bank engage in with other offices and affiliates of the Bank.

Grupo Financiero Scotiabank Inverlat, S.A. de C.V. is an “affiliate holding company” pursuant to the Law for the Regulation of Financial Groups of Mexico and to the Rules for the Establishment of Foreign Affiliate Financial Institutions of Mexico. The governing authority is the Ministry of Finance of Public Credit of Mexico and the supervising authorities are the Central Bank of Mexico and the National Banking and the Securities Commission of Mexico.

Outside of the United States and Mexico, each of the Bank’s branches, agencies and subsidiaries is also subject to the regulatory requirements of the jurisdiction in which it conducts its business.

The common shares of the Bank are listed on the Toronto, New York and London stock exchanges, certain preferred shares of the Bank are listed on the Toronto Stock Exchange and the Bank has deposit notes and debentures listed on the London Stock Exchange.

Refer to the Annual Report for the directors of the Bank as at January 13, 2004 and to the Proxy Circular for nominees proposed for election as directors of the Bank at the next annual meeting of shareholders.

The following are the Bank’s executive officers, their titles and municipalities of residence as of January 13, 2004:


Name and Principal Occupation		Municipality of Residence

Peter C. Godsoe		Toronto, Ontario
Chairman of the Board

Richard E. Waugh		Toronto, Ontario
President and Chief Executive Officer

Robert W. Chisholm		Toronto, Ontario
Vice-Chairman, The Bank of Nova Scotia and President and CEO, Domestic Banking and Wealth Management

W. David Wilson		Toronto, Ontario
Vice-Chairman, The Bank of Nova Scotia and Chairman and CEO Scotia Capital

Robert L. Brooks		Oakville, Ontario
Senior Executive Vice-President, Treasury and Operations

Sarabjit S. Marwah		Toronto, Ontario
Senior Executive Vice-President and Chief Financial Officer

Deborah M. Alexander		Toronto, Ontario
Executive Vice-President, General Counsel and Secretary

Peter C. Cardinal		Oakville, Ontario
Executive Vice-President, Latin America

Alberta G. Cefis		Toronto, Ontario
Executive Vice-President, Retail Lending Services

Sylvia D. Chrominska		Toronto, Ontario
Executive Vice-President, Human Resources

Timothy P. Hayward		Oakville, Ontario
Executive Vice-President and Chief Administrative Officer International Banking

Christopher J. Hodgson		Toronto, Ontario
Executive Vice-President, Wealth Management


Name and Principal Occupation		Municipality of Residence


Dieter W. Jentsch		Toronto, Ontario
Executive Vice-President, Commercial Banking

Stephen D. McDonald		New York, New York
Executive Vice-President, The Bank of Nova Scotia and Executive Managing Director, Scotia Capital and U.S. Country Head

Margaret J. Mulligan		Mississauga, Ontario
Executive Vice-President, Systems and Operations

Robert H. Pitfield		Toronto, Ontario
Executive Vice-President, International Banking

Luc A. Vanneste		Toronto, Ontario
Executive Vice-President and Chief Auditor

Albert E. Wahbe		Toronto, Ontario
Executive Vice-President, Electronic Banking

Warren K. Walker		Toronto, Ontario
Executive Vice-President, Global Credit Risk Management

John A. Young		Toronto, Ontario
Executive Vice-President, Domestic Branch Banking

All of the executive officers of the Bank have been actively engaged for more than five years in the affairs of the Bank in executive or senior management capacities, except Alberta G. Cefis who, prior to May 1999, was a senior officer of a Canadian chartered bank; Deborah M. Alexander who, prior to June 2002, was a senior partner in the business law department at Osler, Hoskin and Harcourt LLP (Barristers and Solicitors); Christopher J. Hodgson who, prior to July 14, 2003, was a senior officer of a Canadian mutual fund company, Stephen D. McDonald who, prior to November 1, 2003, was a senior officer of a Canadian chartered bank, and Luc A. Vanneste who, prior to July 1999 was a partner in the banking and finance practice of KPMG LLP. All directors have held the positions, or other executive positions with the same, predecessor or associated firms, set out in this AIF or the Proxy Circular for the past five years with the exception of Ronald A. Brenneman who, prior to January 2000 was General Manager, Corporate Planning of Exxon Corporation; Elizabeth Parr-Johnston who, prior to July 2002, was President and Vice-Chancellor of the University of New Brunswick; Arthur R.A. Scace who, prior to January 1, 2004 was a partner of McCarthy Tétrault LLP (Barristers and Solicitors); Sir Graham Day who is Chairman of Sobeys Inc. and Counsel to Stewart McKelvey Stirling Scales LLP (Barristers and Solicitors), and, prior to June 2002, was Chairman, Hydro One Inc., and Pierre J. Jeanniot who is Chairman of Thales Canada Inc. (a systems engineering and integration company) and Director General Emeritus of International Air Transport Association (IATA) (an international organization promoting and facilitating air travel and providing services to airlines) and, prior to June 2002, was Director General and Chief Executive Officer of IATA.

The directors and executive officers of the Bank as a group own, or exercise control or direction over, less than one per cent of the outstanding common shares of the Bank.

To the best knowledge of the Bank, having made due inquiry, the Bank confirms that, as at January 13, 2004:

(i)

in the last 10 years, no director or executive officer of the Bank is or has been a director or officer of another issuer that, while that person was acting in that capacity, (a) was the subject of a cease trade or similar order, or an order that denied the other issuer access to any exemptions under Canadian securities legislation for a period of more than 30 consecutive days or (b) became bankrupt or made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any

proceedings, arrangements or compromises with creditors or had a receiver, receiver manager or trustee appointed to hold its assets;

(ii)

no director or executive officer of the Bank has been subject to any penalties or sanctions imposed by a court relating to Canadian securities legislation or by a Canadian securities regulatory authority or has entered into a settlement agreement with a Canadian securities regulatory authority;

(iii)

no director or executive officer of the Bank has been subject to any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision;

(iv)

no director or executive officer of the Bank nor any personal holding company controlled by such person has, within the last 10 years, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold the assets of the director or executive officer; and

(v)

no director or executive officer of the Bank has any direct or indirect material interest in respect of any matter that has materially affected or will materially affect the Bank or any of its subsidiaries.

The Bank will provide to any person upon request to the Executive Vice-President, General Counsel and Secretary of the Bank: (a) when the securities of the Bank are in the course of a distribution under a preliminary short form prospectus or a short form prospectus: (i) one copy of the Bank’s AIF, together with one copy of any document, or the pertinent pages of any document, incorporated by reference in the AIF; (ii) one copy of the comparative financial statements of the Bank for its most recently completed financial year for which financial statements have been filed, together with the accompanying report of the auditors, and one copy of any interim financial statements of the Bank that have been filed, if any, for any period after the end of its most recently completed financial year; (iii) one copy of the Management Proxy Circular of the Bank in respect of its most recent annual meeting of shareholders; and (iv) one copy of any other documents that are incorporated by reference into the preliminary short form prospectus or the short form prospectus and are not required to be provided under (i) to (iii) above; or (b) at any other time, one copy of any other documents referred to in (a)(i), (ii) and (iii) above, provided the Bank may require the payment of a reasonable charge if the request is made by a person or company who is not a security holder of the Bank.

Additional information, including directors’ and officers’ compensation, indebtedness and options to purchase securities, principal holders of the Bank’s securities and interests of insiders in material transactions, where applicable, is contained in the Management Proxy Circular. Additional financial information is provided in the Bank’s comparative financial statements for its year ended October 31, 2003, as contained in the Annual Report. A copy of such documents may be obtained upon request from the Executive Vice-President, General Counsel and Secretary of the Bank at Scotia Plaza, 44 King Street West, Toronto, Ontario, M5H 1H1.

Management’s Discussion and Analysis
of Financial Condition and
Results of Operations

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. The Bank cautions readers not to place undue reliance on these statements, as a number of important factors 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, regulatory developments in Canada and elsewhere, technological developments, consolidation in the Canadian financial services sector, competition, judicial and regulatory proceedings, the possible impact of international conflicts and other developments, including terrorist acts and the war on terrorism, 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, business financial condition or liquidity.

As of October 31, 2003, the Bank’s management evaluated the effectiveness of the design and operation of its disclosure controls and procedures (disclosure controls) and internal controls over financial reporting (internal controls), as defined under rules adopted by the U.S. Securities and Exchange Commission. This evaluation was performed under the supervision of, and with the participation of, the Chief Executive Officer and the Chief Financial Officer.

Disclosure controls are procedures designed to ensure that information required to be disclosed in reports filed with securities regulatory agencies is recorded, processed, summarized and reported on a timely basis, and is accumulated and communicated to the Bank’s management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Internal controls are procedures designed to provide reasonable assurance that transactions are properly authorized, assets are safeguarded against unauthorized or improper use, and transactions are properly recorded and reported. This permits the preparation of the Bank’s consolidated financial statements in accordance with Canadian generally accepted accounting principles, including the accounting requirements of the Superintendent of Financial Institutions Canada.

Based on the evaluation of disclosure controls and internal controls, the Chief Executive Officer and the Chief Financial Officer have concluded that, subject to the inherent limitations noted above:

•

The Bank’s accounting policies are integral to understanding and interpreting the financial results reported in this annual report. The significant accounting policies used in preparing the Bank’s consolidated financial statements are summarized in Note 1 to those statements. Certain of those policies are considered to be particularly important to the presentation of the Bank’s financial position and results of operations, because they require management to make difficult, complex or subjective judgments, often as a result of matters that are inherently uncertain. The following is a discussion of those policies.

The allowance for credit losses represents management’s estimate of the probable incurred losses inherent in the portfolio of deposits with banks, loan substitute securities, securities purchased under resale agreements, loans, acceptances, and other indirect credit commitments, such as letters of credit and guarantees. Management undertakes regular reviews of credit quality to determine the adequacy of the allowance for credit losses. This determination involves estimates and judgments at many levels, including identifying credits that are impaired, and considering factors specific to individual credits, as well as the impact of portfolio characteristics and risks. Changes in these estimates, or using different but also reasonable judgments and estimates, could have a direct impact on the provision for credit losses and could result in a change in the related allowance.

In determining specific allowances applicable to individual credit exposures, management must first form a judgment as to whether a loan is impaired, and then as to its estimated net realizable value, based on available evidence about the individual borrower. This process requires management to make a number of significant judgments and estimates, including estimates as to the amount and timing of future cash flows, the fair value of any underlying security, costs of realization, observable market prices, and expectations about the future prospects of the borrower and any guarantors.

Specific allowances for homogenous portfolios, including credit card loans, certain personal loans, and certain international residential mortgages are determined on a group basis. This process involves estimating the probable losses inherent in the portfolio, using a formula method that takes into account recent loss experience of the portfolio.

The general allowance is intended to estimate probable incurred losses inherent in the loan portfolio that have not yet been identified on an item-by-item basis. Many factors can affect management’s estimate of the required level of the general allowance, including risk rating migrations, the volatility of default probabilities, loss severity in the event of default, and exposure at default. Management considers observable data, such as economic trends and business conditions, portfolio concentrations, and recent trends in volumes and severity of delinquencies, in forming a judgment as to the quantum of any adjustments required to the general provision.

Financial instruments held for trading purposes, including trading securities and derivatives, are carried at fair value, with changes in fair value recorded in the income statement. Most trading securities are recorded at quoted market prices. Trading derivatives, which include derivatives transacted with customers to accommodate their risk management needs and derivatives used to generate trading income from the Bank’s proprietary trading positions, are recorded at quoted market prices, where available. Where quoted market prices are not available, fair values are determined using other valuation techniques, including discounted cash flow and option pricing models that are based on independently sourced market interest rate yield curves, foreign currency rates and option volatility factors. Management applies judgment in the selection of the models and the various inputs, as well as in the determination of any valuation adjustments to cover future risks and related costs. Any imprecision in these estimates can affect the recorded fair value.

Investment securities comprise debt and equity securities held for liquidity and longer-term investment. Investment securities are held at cost or, in the case of debt securities, at amortized cost. In circumstances where management determines that an other-than-temporary impairment of an investment security has occurred, the carrying value of the security is written down to its estimated net realizable value. This determination involves a number of judgments and estimates.

Management’s judgment as to the existence of an other-than-temporary impairment takes into account the length of time that the market value of a security has been below its carrying value, prospects for recovery in market value, and factors such as the company’s financial condition and future prospects. Once management has determined that the security has suffered an other-than-temporary decline in value, management must form a judgment as to the estimated net realizable value of the security. In making this estimate, management considers all of the data gathered during the impairment evaluation process, as well as its plans and actions for the security.

If different judgments and estimates were used, the determination of which securities have suffered an other-than-temporary impairment and the amount of any associated impairment charge could differ from the amounts actually recorded.

Scotiabank reported net income of $2,477 million in 2003, up 38% from last year. Excluding the charges related to Argentina in 2002, underlying earnings growth was $140 million or 6%. The year-over-year growth was principally due to lower credit losses and growth in business volumes, partially offset by the negative impact of foreign currency translation due to the stronger Canadian dollar.

Total revenue (on a taxable equivalent basis)(1) was $10,443 million, a reduction of $442 million or 4% this year. Excluding the negative impact of foreign currency translation ($550 million), and the sales of the domestic merchant acquirer business ($175 million) and Scotiabank Quilmes in Argentina ($36 million) last year, revenues rose by 3%, with solid underlying growth in Domestic Banking and in many parts of the Bank’s international operations, most notably in Mexico, Jamaica and other units in the Caribbean. This was partially offset by narrower U.S. dollar funding margins.

Net interest income was $6,428 million (on a taxable equivalent basis), a reduction of $515 million or 7% from 2002, following a decrease in average assets of $8.3 billion and a compression of the margin. Excluding foreign currency translation and the sale of Scotiabank Quilmes in Argentina last year, there was an underlying decrease of 1%.

The Bank’s net interest margin (net interest income as a percentage of average assets) (TEB) was 2.23% in 2003, a reduction of 11 basis points from the previous year. The majority of this resulted from a decline in U.S. dollar funding margins from last year’s record levels. The Canadian margin also fell slightly year over year.

Canadian currency net interest income was $3,720 million, an increase of $193 million or 5%, entirely driven by substantial asset growth in Domestic Banking. This was partially offset by a small compression in the margin, caused by lower net interest revenues from trading activities and a narrower spread between fixed rate loans and wholesale funding.

Foreign currency net interest income of $2,708 million fell $708 million year over year, of which $365 million was from foreign currency translation and $56 million from the sale of Scotiabank Quilmes in Argentina in 2002. The remaining decline was due to narrower U.S. dollar funding margins, and a reduction in U.S. corporate lending volumes. Partially offsetting these were volume and margin growth in Jamaica and Mexico.

Canadian currency net interest income is expected to increase in 2004, mainly from volume growth. Foreign currency net interest income is anticipated to decline slightly, entirely from the ongoing negative impact of foreign currency translation. However, this is partly offset by expected wider funding spreads and growth in the Caribbean and Mexico.

Average loans and acceptances (excluding resale agreements) were $158 billion in 2003, a reduction of $1 billion from the prior year. However, excluding foreign currency translation, there was an underlying increase of $4 billion. This was driven by strong growth in residential mortgages and personal lending in Domestic Banking, partially offset by a reduction in corporate lending in the U.S.

Domestic retail lending was up 9.5% in 2003. Adjusted for securitizations, the underlying growth in average retail lending in Canada was a substantial 10%. Canadian residential mortgages increased 9%, due to robust housing markets, as well as innovative products introduced by the Bank, such as the Ultimate Variable Rate™ mortgage, which continued to be popular with customers. The Bank’s mortgage market share increased by 22 basis points, the second consecutive year of strong market share gains. Both our ScotiaLine® and ScotiaLine® VISA volumes grew in excess of 20% year over year, the latter experiencing its fourth consecutive year of substantial growth.

In Scotia Capital, U.S. corporate loan volumes dropped significantly as a result of more selective lending and from

(1)

The Bank, like many banks, analyzes revenues, net interest margin on total average assets, and the productivity ratio, on a taxable equivalent basis (TEB). This methodology grosses up tax-exempt income earned on certain securities and recorded in the consolidated financial statements on a GAAP basis to an equivalent before-tax basis. The corresponding offset is made in the provision for income taxes. 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. This use of TEB results in measures that are different from comparable GAAP measures, and may not be the same as measures presented by other companies. The amount of the taxable equivalent adjustment is shown in Table 6 on page 35.


		2003					2002

Taxable equivalent basis		Average		Average			Average		Average
For the fiscal years ($ billions)		balance		rate			balance		rate

Assets
Interest-bearing deposits with banks		$	16.2		2.72	%	$	17.3		3.31	%
Securities			58.3		5.38			59.8		5.61
Loans:
	Residential mortgages		57.9		5.93			54.8		6.29
	Personal and credit cards		24.5		8.09			21.2		8.54
	Business and governments		67.3		5.44			74.7		5.86
	Securities purchased under resale agreements		27.8		3.13			32.4		3.31

			177.5		5.60			183.1		5.85

Total earning assets			252.0		5.37			260.2		5.63
Customers’ liability under acceptances			8.0		—			8.6		—
Other assets			28.5		—			28.1		—

Total assets		$	288.5		4.69	%	$	296.9		4.93	%

Liabilities and shareholders’ equity
Deposits:
	Personal	$	75.9		2.93	%	$	75.2		3.27	%
	Business and governments		89.3		2.88			91.5		2.60
	Banks		25.2		1.70			27.2		2.50

			190.4		2.74			193.9		2.85

Obligations related to securities sold under repurchase agreements			30.8		3.54			34.7		3.78
Subordinated debentures			3.2		4.35			4.7		4.37
Other interest-bearing liabilities			15.5		4.17			14.7		4.49

Total interest-bearing liabilities			239.9		2.96			248.0		3.10
Other liabilities including acceptances			33.9		—			34.1		—
Shareholders’ equity			14.7		—			14.8		—

Total liabilities and equity		$	288.5		2.46	%	$	296.9		2.59	%

Net interest margin					2.23	%				2.34	%

foreign currency translation. Volumes also fell in both Canadian and European corporate lending portfolios.

Personal lending in the Caribbean declined by 4%. However, excluding the effect of foreign currency translation, it rose by 7%, and personal loans and credit cards doubled over the course of the year in Scotiabank Inverlat.

Average other earning assets (excluding lending business) fell by $7 billion from 2002. These assets include securities, funds on deposits with other banks (used primarily to maintain liquidity) and securities resale agreements. The majority of this decrease was in securities resale agreements in Scotia Capital.

Liabilities declined by $10 billion, entirely from the $21 billion negative impact of foreign currency translation. Average deposits totaled $190 billion in 2003, a decrease of $3.5 billion from last year.

Canadian currency personal deposits grew by $3 billion, primarily from the continued popularity of the Money Master® High Interest Savings Account which offers the highest savings account rate among the major banks. As a result, our personal savings and chequing market share rose by approximately 69 basis points this year. The Bank recently introduced the 3-year and 5-year Ultimate™ GICs which combine the benefits of a long-term GIC with the flexibility of a cashable GIC.

The Bank continued to be successful in growing business deposits. A Money Master for business™ account was introduced during 2003 and current account deposits grew by 10%, the ninth consecutive year of double-digit growth.

In 2004, asset and deposit growth is expected in Canada and in our international operations.

Other income was $4,015 million in 2003, an increase of $73 million or 2% from last year. Excluding the impact of foreign currency translation and the sales of the domestic merchant acquirer business and Scotiabank Quilmes in Argentina last year, the year-over-year growth in other income was substantially higher at $413 million or 11%.

Card revenues fell $76 million in 2003. After excluding the impact of foreign currency translation and the sale of businesses, growth was $36 million, primarily from the maturity of certain credit card securitizations and higher revenues in Scotiabank Inverlat.

Fees from deposit and payment services of $593 million were $37 million or 7% higher than last year. Retail and current account service charges and ABM revenues in Domestic Banking were the main contributors to this increase, as a result of fee increases and higher transaction volumes, partially resulting from an increase in the number of ABMs.

Mutual fund fees were 8% lower year over year at $161 million, mainly from a reduction in average mutual fund balances in Canada.

Revenues from investment, brokerage and trust services fell by $18 million to $455 million, entirely from lower retail brokerage commissions. However, customer trading activity and retail brokerage commissions picked up in the last quarter of the year.

Credit fees rose to a record $684 million in 2003, notwithstanding the negative impact of foreign currency translation. Higher syndication and letters of credit/guarantee fees more than offset a decline in standby and acceptance fees.

Trading revenues of $501 million increased a substantial $62 million from the prior year, primarily as a result of strong securities trading results. Record revenues were achieved in foreign exchange and precious metals. Investment banking performed extremely well in 2003, with revenues of $673 million, an increase of 14% from last year, including a record performance in underwriting.

Net gains on the sale of investment securities fell by $20 million from the prior year, although they remained significant at $159 million. The Bank took advantage of falling interest rates at various times in the year to realize bond gains, although these were below the record gains in 2002. As well, there were substantially lower writedowns of equity and merchant banking investments in 2003.

Securitization revenues of $140 million were $22 million below the previous year following the maturity of certain credit card and revolving credit securitizations. This reduction was offset by higher fee-based revenues and an increase in net interest income.

The remaining categories of other income increased by $128 million year over year, from higher gains on credit default swaps and growth in insurance revenues. As well, included in 2002 was a charge of $87 million related to Argentina.

Steady growth is expected in most of the fee-based revenues in Domestic Banking, International Banking and Scotia Capital. As well, the trading businesses are planned to grow.


																2003
																versus
For the fiscal years ($ millions)	2003			2002			2001			2000			1999			2002

Card revenues	$	204		$	280		$	211		$	116		$	133			(27	)%
Deposit and payment services
Deposit services		479			445			456			433			402			8
Other payment services		114			111			105			75			67			3

		593			556			561			508			469			7

Mutual funds		161			174			161			131			115			(8	)
Investment management, brokerage and trust
Retail brokerage		280			304			317			389			273			(8	)
Investment management and custody		53			32			33			85			97			64
Personal and corporate trust		122			137			127			128			119			(11	)

		455			473			477			602			489			(4	)

Credit fees
Commitment and other credit fees		565			540			504			512			438			5
Acceptance fees		119			131			136			120			105			(9	)

		684			671			640			632			543			2

Trading revenues		501			439	⁽¹⁾		447			326			291			14
Investment banking
Underwriting fees and other commissions		472			405			352			278			268			17
Foreign exchange and other		201			187			246			152			147			7

		673			592			598			430			415			14

Net gain on investment securities		159			179	⁽¹⁾		217			358			343			(11	)
Securitization revenues		140			162			220			206			155			(13	)
Other		445			317	⁽¹⁾		447			274			230			41

Total before the undernoted		4,015			3,843			3,979			3,583			3,183			4
Gains on sale of businesses		—			99			92			82			—			(100	)

Total other income	$	4,015		$	3,942		$	4,071		$	3,665		$	3,183			2	%

Percentage increase (decrease) over previous year		2	%		(3	)%		11	%		15	%		11	%

Non-interest expenses totalled $5,731 million in 2003, a decrease of $243 million or 4% from 2002. Adjusting for the impact of foreign currency translation, the sales last year of the domestic merchant acquirer business and Scotiabank Quilmes, and expense recoveries in 2002 related to prior years’ tax credits, operating expenses grew by $329 million or 6% over 2002.

Salaries and staff benefits — which comprise almost 60% of total non-interest expenses — were essentially flat year over year, increasing by $17 million or less than one per cent. Adjusting for the factors noted above, salaries and staff benefits increased $216 million or 7% in 2003. This arose from normal growth in employee salaries, accompanied by higher performance and stock-based compensation because of the Bank’s strong overall performance, as well as the substantial 43% increase in the Bank’s share price in 2003.

Pension expenses were also higher year over year because of lower asset values and a reduction in the assumed rate of return on pension assets. The Bank’s pension plans remained in a surplus position of $182 million at October 31, 2003.

Premises and technology expenses declined $27 million or 2%. However, adjusting for the factors noted above, expenses increased $76 million or 7%. The largest contributor to the growth was higher technology-related spending on initiatives to upgrade both the domestic and international branch operations. These upgrades are intended to replace older technology platforms with newer systems that will position us to offer new products, enhance customer service or achieve further efficiencies. In addition, the Bank outsourced its cheque processing operations to Symcor in 2003 to take advantage of scale and new technologies. These outsourcing expenses are reported in technology spending rather than in several other categories, such as salaries, depreciation and other expenses.

Most of the remaining expenses were lower or relatively flat compared to 2002, as increases related to volume growth and business initiatives were more than offset by the impact of foreign currency translation and the sale of businesses. However, the Other Expenses category rose 7% from last year, mainly reflecting higher litigation expenses in 2003 and the tax credits received in 2002 related to prior years.

The Bank’s consistent focus on expense control continues to be reflected in its industry-leading productivity ratio of 54.9%, which was unchanged from last year.

A moderate increase in operating expenses is expected in 2004. The Bank will continue to invest in technology and new products while maintaining its cost control discipline. It is anticipated that the productivity ratio will remain below the target of 58%.

The Bank is subject to a variety of taxes, including direct taxes on income by Canadian federal and provincial governments and the governments of foreign jurisdictions in which the Bank operates, and several indirect taxes. Provision for income taxes (taxable equivalent basis) and other taxes were $1.5 billion in 2003, an increase of $155 million from last year.

The overall increase in taxes occurred almost entirely in the provision for income taxes because of an increase in the Bank’s pre-tax earnings. However, the Bank’s effective tax rate for the year was 22.2%, a decline from 23.0% in 2002, primarily due to a 2.0% reduction in the Canadian federal and provincial tax rates, and higher tax-exempt dividend income. These tax savings were partly offset by a lower relative contribution from international subsidiaries with lower effective tax rates, mainly because of the impact of the stronger Canadian dollar.

Indirect taxes totaled $393 million in 2003, a reduction of $38 million year over year. This was largely from the sale of Scotiabank Quilmes last year, the full-year impact of a reduction in CDIC premiums in 2002, and lower expenses in Inverlat.


																2003
																versus
For the fiscal years ($ millions)	2003			2002			2001			2000			1999			2002

Salaries and staff benefits
Salaries	$	2,921		$	2,925		$	2,856		$	2,594		$	2,297			—	%
Pension and other staff benefits		440			419			364			350			330			5

		3,361			3,344			3,220			2,944			2,627			1

Premises and technology
Net premises rent		180			192			200			179			187			(6	)
Premises repairs and maintenance		44			53			49			39			39			(17	)
Property taxes		56			57			59			55			61			(2	)
Computer equipment, software and data processing		498			456			404			309			328			9
Depreciation		208			243			243			267			254			(14	)
Other premises costs		170			182			178			146			138			(7	)

		1,156			1,183			1,133			995			1,007			(2	)

Communications
Telecommunications		68			74			75			62			66			(8	)
Stationery, postage and courier		183			207			210			190			175			(12	)

		251			281			285			252			241			(11	)

Advertising and business development
Advertising and promotion		103			105			118			90			87			(2	)
Travel and business development		96			103			99			86			79			(7	)

		199			208			217			176			166			(4	)

Professional		141			136			157			150			143			4

Business and capital taxes
Business taxes		90			118			121			83			115			(25	)
Capital taxes		54			50			87			93			91			8

		144			168			208			176			206			(15	)

Other
Employee training		37			42			43			34			28			(10	)
Amortization of goodwill and other intangibles		29			28			52			28			23			1
Other		382			347			347			398			335			11

		448			417			442			460			386			8

Total before the undernoted		5,700			5,737			5,662			5,153			4,776			(1	)
Loss on disposal of subsidiary operations⁽¹⁾		31			237			—			—			—			(87	)
Restructuring provisions following acquisitions		—			—			—			(34	)		(20	)		—

Total non-interest expenses	$	5,731		$	5,974		$	5,662		$	5,119		$	4,756			(4	)%

Productivity ratio (TEB)		54.9	%		54.9	%		53.9	%		56.5	%		59.3	%

(1)		Includes provision for (recovery of) income tax related to Argentine charges of $3 (2002 — $(254); 2001 — $(38)). Refer to Table 26 on page 70.

(2)		Comprised of $960 of Canadian taxes (2002 — $818; 2001 — $1,043; 2000 — $1,175; 1999 — $1,017) and $495 of foreign taxes (2002 — $482; 2001 — $530; 2000 — $438; 1999 — $475).

Net impaired loans after deducting the general allowance were $47 million as at October 31, 2003, a significant decrease of $573 million from a year ago. The largest declines were in U.S. corporate lending, reflecting an improvement in credit conditions for certain borrowers, and actions taken by the Bank. There was also a decline in International Banking due to foreign currency translation and a reclassification of foreclosed assets from impaired loans to other assets in accordance with a new CICA accounting standard. These reductions were partially offset by an increase of $209 million in Scotia Capital Europe.

As shown in the chart at the right, net impaired loans as a percentage of loans and acceptances were 0.03% at October 31, 2003, much lower than 0.32% a year ago.

In Domestic Banking in Canada, the retail loan portfolio remained in excellent condition throughout the year. The commercial business loan portfolio improved slightly during the year as gross impaired loans fell by $41 million to $184 million.

In International Banking, gross impaired loans declined by $455 million. Of this decline, $388 million was in Latin America, reflecting a lower level of problem loans in Mexico, El Salvador and Chile, as well as a reduction in cross-border loans to Argentina. There were smaller decreases in the Caribbean, Asia and Europe. The International loan portfolio remains in good condition.

In Scotia Capital, credit conditions improved in the U.S. portfolio, particularly in the cable & telecommunications and power & energy trading sectors. As a result, U.S. gross impaired loans decreased by $604 million to $1,084 million. The impaired loans in Europe increased by $273 million to $386 million as the loan portfolio came under some pressure in 2003. The impaired loans in Canada also rose to $199 million from $127 million.

In 2003, the specific provision for credit losses was $893 million, a significant improvement from $2,029 million last year. Excluding the provision of $454 million in 2002 related to the Bank’s exposure to Argentina and reversals of $64 million in 2003 related to Argentine cross-border loans, the underlying provision for credit losses was $957 million this year, a sharp reduction from the underlying provision of $1,575 million last year.

Domestic Banking provisions were $272 million, a decrease of $10 million from last year, as credit quality remained strong in both the retail and commercial loan portfolios.

In International Banking, provisions were $73 million. Excluding the provision of $454 million in 2002 related to the Bank’s exposure to Argentina, and reversals of $64 million in 2003 related to Argentine cross-border loans, provisions were $137 million, up from $69 million in 2002. This arose mainly because of lower recoveries in Scotiabank Inverlat in Mexico and higher provisions in the Caribbean, partly reflecting loan growth in recent years.

In Scotia Capital, the specific provisions were $549 million, a substantial decline of $698 million from 2002. This reduction was entirely in the U.S. portfolio as the concerns in the cable & telecommunications and power & energy trading sectors subsided because of better credit conditions, including more robust capital markets. However, loan losses rose in Europe by $76 million to $155 million and in Canada from $37 million to $124 million, following a deterioration in a small number of accounts.

The general allowance for credit losses remained unchanged during 2003 at $1,475 million or 0.95% of risk-weighted assets.

In 2004, a continuation of the positive trends noted in the past year, particularly in Scotia Capital’s U.S. portfolio, is dependent on the ongoing economic recovery and strong capital markets. In Canada, there is some uncertainty about the effects on our borrowers of the rapid appreciation of the Canadian dollar and a number of unusual events that occurred in 2003. However, given recent trends, the Bank’s overall provision for credit losses in 2004 is expected to be lower than in 2003.


	2003

				Allowance
				for credit
As at October 31 ($ millions)	Net			losses⁽²⁾			Gross		2002			2001			2000			1999

Domestic
Retail	$	102		$	(190	)	$	292	$	287		$	258		$	270		$	332
Commercial		59			(125	)		184		225			332			343			396

		161			(315	)		476		512			590			613			728

International⁽²⁾
Latin America		102			(505	)		607		995			1,587			432			248
Caribbean		199			(106	)		305		329			283			261			229
Asia		51			(91	)		142		164			302			341			285
Europe		36			(27	)		63		84			63			66			55

		388			(729	)		1,117		1,572			2,235			1,100			817

Scotia Capital
Canada		80			(119	)		199		127			203			111			127
United States		650			(434	)		1,084		1,688			1,280			865			694
Other		243			(143	)		386		113			156			76			39

		973			(696	)		1,669		1,928			1,639			1,052			860

Gross impaired loans								3,262		4,012			4,464			2,765			2,405
Allowance for credit losses — specific and country risk⁽²⁾					(1,740	)				(1,917	)		(2,730	)		(1,526	)		(1,261	)

		1,522								2,095			1,734			1,239			1,144
Allowance for credit losses — general		(1,475	)		(1,475	)				(1,475	)		(1,475	)		(1,300	)		(1,300	)

Net impaired loans after general allowance	$	47							$	620		$	259		$	(61	)	$	(156	)

Net impaired loans as a % of loans and acceptances		0.03	%							0.32	%		0.14	%		(0.03	)%		(0.10	)%
Allowance for credit losses as a % of gross impaired loans					99	%				85	%		94	%		102	%		107	%

(1)		Interest recorded as income on impaired loans was $31 (2002 — $38; 2001 — $55; 2000 — $62; 1999 — $28). This amount related to the international portfolios.

(2)		Includes designated emerging market gross impaired loans and offsetting country risk provision of $21 at October 31, 2003 (2002 — $25; 2001 — $25; 2000 — $24; 1999 — $25).

(1)		Excluding reversals of credit losses (2002 — provision for credit losses) related to Argentina, net specific provisions were $957 in 2003 (2002 — $1,575).

(2)		Refer to footnote (1) on page 118.

Scotiabank’s sizable capital base contributes to its safety, fosters strong investor confidence, supports its high credit ratings and enables the Bank to capitalize on growth opportunities.

Capital is a critical and strategic resource, so it is actively managed by the Bank. Adjustments to our capital structures are made based on changes to the balance sheet and risk-weighted assets, the cost of various types of capital, desired leverage, future investment plans and impact on shareholder returns. The Bank continues to successfully balance the competing requirements of regulators, rating agencies, shareholders and depositors.

Capital adequacy for Canadian banks is governed by the requirements of the Office of the Superintendent of Financial Institutions (OSFI). These requirements are consistent with the international standards set by the Bank for International Settlements (BIS).

Under these standards, bank regulatory capital consists of two components — Tier 1 capital and Tier 2 capital. Tier 1 capital consists primarily of common shareholders’ equity, trust securities and non-cumulative preferred shares. Tier 2 capital consists mainly of subordinated debentures and a portion of the general allowance. While both components provide important support for banking operations and protection for depositors, Tier 1 capital, representing more permanent forms of capital, is of particular importance to regulators, financial markets and investors.

•

Retained earnings rose by $1.35 billion. Earnings (net of dividends) of $1.58 billion were reduced by the $220 million premium paid on the purchase of common shares and redemption of preferred shares.

•

As well, shareholders’ equity declined by $1.2 billion due to unrealized foreign currency translation losses caused by the strengthening of the Canadian dollar.

•

The non-controlling interest in subsidiaries increased by $414 million primarily due to the issuance of $750 million in Scotiabank Trust Securities (BaTS II). This was partially offset by the $366 million reduction in non-controlling interest arising from the acquisition of an additional 36% of Scotiabank Inverlat.

•

Partly offsetting the above increases were the redemptions of the Series 8 and 9 non-cumulative preferred shares during the year, amounting to $475 million.

Scotiabank has a solid record of internal capital generation, among the highest of the Canadian banks. During the past seven years, the Bank generated $8.3 billion in internal capital as a result of record income levels.

Tier 2 capital decreased by $0.9 billion in 2003 due to the redemption or maturity of three debenture issues during the year.

Capital adequacy is measured by capital ratios, which are calculated by dividing capital by risk-weighted assets. Successful capital management requires careful and close attention to both the capital base and risk-weighted assets.

Scotiabank’s Tier 1 ratio rose substantially to 10.8% as at October 31, 2003, an increase of 90 basis points from the previous year. The total capital ratio grew by 50 basis points to 13.2%, notwithstanding the maturity or redemption of three debenture issues. Both ratios remained among the highest of the major Canadian banks. More importantly, the Bank’s ratio of tangible common equity (which is comprised of common equity less unamortized goodwill and intangible assets) to risk-weighted assets at year end was 8.9%, 60 basis points higher than a year ago, remaining the strongest of the major Canadian banks and very good by any standards.

Our very strong capital position allowed us to increase dividends twice in 2003, resulting in a year-over-year increase of 16%. Furthermore, a dividend increase of 6 cents to 50 cents per share was announced effective in January, 2004. With this increase, dividends have more than doubled since 1999, and have risen by a compound annual rate of 11.6% over the past 10 years.

The Bank’s target dividend payout ratio was raised to 35 to 45% of earnings per share, up from 30 to 40%. Our payout ratio was 35% in 2003.


As at October 31 ($ millions)	2003			2002			2001			2000			1999

Tier 1 capital
Common shareholders’ equity	$	13,814		$	13,502		$	12,833		$	11,200		$	9,631
Non-cumulative preferred shares		800			1,275			1,775			1,775			1,775
Non-controlling interest in subsidiaries⁽¹⁾		2,326			1,912			1,086			729			198
Less: Goodwill		(270	)		(299	)		(400	)		(297	)		(138	)

		16,670			16,390			15,294			13,407			11,466

Tier 2 capital
Subordinated debentures (net of amortization)		2,595			3,372			4,933			4,990			5,114
Eligible amount of general allowance⁽²⁾		1,352			1,448			1,442			1,171			1,067

		3,947			4,820			6,375			6,161			6,181

Less: Investments in associated corporations and other items		(209	)		(250	)		(329	)		(539	)		(742	)

Total capital	$	20,408		$	20,960		$	21,340		$	19,029		$	16,905

Total risk-weighted assets ($ billions)	$	154.5		$	165.4		$	164.8		$	156.1		$	142.3

Capital ratios
Tier 1 capital ratio		10.8	%		9.9	%		9.3	%		8.6	%		8.1	%
Total capital ratio		13.2	%		12.7	%		13.0	%		12.2	%		11.9	%

(1)		Includes Scotiabank Trust Securities (BaTS), an innovative capital instrument.

(2)		Under OSFI guidelines, the general allowance was included in Tier 2 capital up to a maximum of 0.875% of risk-weighted assets. Prior to October 2001, this limit was 0.75%.


For the fiscal years ($ millions)		2003			2002			2001			2000			1999

Total capital, beginning of year		$	20,960		$	21,340		$	19,029		$	16,905		$	16,003
Internally generated capital
	Net income		2,477			1,797			2,169			1,926			1,551	⁽¹⁾
	Preferred and common share dividends		(901	)		(837	)		(729	)		(604	)		(537	)

			1,576			960			1,440			1,322			1,014
External financing
	Debentures (net of amortization)		(777	)		(1,561	)		(57	)		(124	)		(25	)
	Preferred shares		(475	)		(500	)		—			—			—
	Innovative Tier 1 capital instruments⁽²⁾		750			750			—			500			—
	Common shares		139			82			155			87			53
	Purchase of shares and premium on redemption		(220	)		(154	)		—			—			—

			(583	)		(1,383	)		98			463			28
Other
	Net unrealized foreign exchange translation gains (losses)⁽³⁾		(1,176	)		(137	)⁽⁴⁾		79			163			(160	)
	Non-controlling interest in subsidiaries		(336	)		76			357			31			25
	Other⁽⁵⁾		(33	)		104			337			145			(5	)

			(1,545	)		43			773			339			(140	)

Total capital generated (used)			(552	)		(380	)		2,311			2,124			902

Total capital, end of year			20,408			20,960			21,340			19,029			16,905

(1)		Refer to footnote (1) on page 118.

(2)		Innovative Tier 1 capital instruments (Scotia BaTS) issued through BNS Capital Trust and Scotiabank Capital Trust.

(3)		Refer to footnote (4) on page 77.

(4)		Refer to footnote (5) on page 77.

(5)		Represents changes to eligible general allowance, regulatory capital deductions to goodwill, investments in associated corporations and securitization-related amounts, and other charges (credits) to retained earnings.

The Bank has a normal course issuer bid in place to buy back up to 25 million common shares at prevailing market prices. These purchases are used primarily to offset dilution due to shares issued under the Bank’s stock option programs.

In fiscal 2003, we purchased 4.1 million common shares at a total cost of $227 million. The current program expires on January 5, 2004, and we expect to renew it for another year.

In January 2001, the Basel Committee on Banking Supervision released a proposal to replace the 1988 accord with a more risk-sensitive framework, driven by the significant transformation that has taken place in risk management practices and financial markets. This new framework is intended to align regulatory capital requirements more closely with underlying risks, and to provide banks with incentives to improve their internal risk management practices. Notable differences from the current accord include the following:

•

Substantive changes in the treatment of credit risk. Three distinct options, from simple to advanced, were provided for banks.

This new Basel II Accord has gone through several stages of consultative processes over the past three years, during which period substantial revisions have been made to the Accord reflecting industry comments. In October 2002, the Basel Committee launched an extensive quantitative impact study involving more than 350 banks in 43 countries. This study allowed banks to perform a comprehensive assessment of how the new accord proposal would affect their organizations. The Basel Committee has since stated that the overall results were consistent with its stated objectives for reform of the regulatory capital requirements. Based on the results of this study, the Committee issued its third consultative paper in the spring of 2003, inviting industry comments by July 2003. The responses indicated that there is continued broad support for the structure of the new accord and agreement on the need to adopt a more risk-sensitive capital framework. The Basel Committee expects the new accord to be finalized in 2004.

Scotiabank is working closely with the regulators and industry groups in the ongoing consultative processes. OSFI expects Canadian banks to prepare for a pro-forma implementation by November 2005 — one year prior to the official implementation date set by the Basel Committee. However, there has been a delay by the Basel Committee in finalizing the accord, which creates some uncertainty as to whether the planned implementation date of November 2006 can be maintained. To ensure the Bank’s preparedness for the timely implementation of the new accord, Scotiabank has established a Basel Accord Steering Committee. We are preparing to enhance the credit database and risk management systems to be compliant with the quantitative and qualitative requirements of the new accord.

In 2004, we will continue to maintain our industry-leading capital ratios by prudently managing the Bank’s capital levels and growth in risk-weighted assets. We also anticipate continuing to increase dividends.

We had another solid year in Domestic Banking in 2003. Net income was $1,094 million, down $48 million or 4% year over year. After adjusting for the sale of the merchant acquirer business in 2002, earnings were up $44 million or 4%. Domestic Banking accounted for 44% of the Bank’s overall net income, and ROE was an impressive 31%. We had market share gains in retail mortgages and deposits, as well as commercial loans and deposits, thanks to innovative product offerings and competitive interest rates. In Wealth Management, Retail Brokerage revenues were up as stock markets recovered.

Our strategy focuses on building market share and strengthening client relationships to win a greater share of their business, emphasizing service excellence, targeted sales efforts, cost control and strong execution.

International Banking had a good year, with net income of $669 million in 2003, or 27% of the all-Bank total, an increase from $125 million last year. Excluding the 2002 charges related to Argentina, earnings were up slightly. Strong asset growth in the Caribbean and Mexico was offset by the effects of foreign currency translation. We increased our ownership position in Scotiabank Inverlat in Mexico to 91%, and made a further investment in the Dominican Republic.

We also made good progress in instilling our customer-focused sales and service culture, and we were named best bank in Jamaica, the Dominican Republic and Mexico.

International Banking’s strategy is to invest in high-growth markets, where we anticipate increased demand for financial services. We will continue to invest in technology and sales-focused initiatives, and expand our delivery network.

Scotia Capital had an excellent year, as net income rose to $721 million or 29% of the all-Bank total, up significantly from $380 million last year. This increase resulted from substantially lower credit losses in the U.S. portfolio. Our Canadian wholesale operations and Global Trading business also performed well.

Our strategy for Scotia Capital remains focused on achieving a good return on capital by carefully managing credit risk, changing the business mix to reduce reliance on capital-intensive lending and deepening client relationships to cross-sell multiple products.

(1)		Refer to Note 19 on page 97 for a description of the items included in Other.

(2)		For management and internal reporting purposes, the Bank allocates equity to its business lines using a methodology that considers credit, market and operational risk inherent in each business line. Return on equity is calculated based on the economic equity allocated to the business line. Economic equity is not a defined term under GAAP and accordingly, the resulting return on equity for each business line may not be comparable to those used by other financial institutions.

Domestic Banking
Retail Banking | Wealth Management | Small Business
Commercial Banking

Domestic Banking had a solid year. Retail assets and deposits continued to grow strongly, and we saw gradual improvement in Retail Brokerage as stock markets recovered. To improve customer service, boost sales productivity and better manage our loan portfolios, we continued to invest in technology, in areas such as online banking and other web-based applications, our data warehouse and credit management.

We are securing a greater share of our customers’ existing and future business by strengthening relationships with them. Customers’ financial needs across the “four cornerstones” are identified and fulfilled using disciplined sales management practices, supported by industry-leading customer service, innovative product offerings and an integrated, multi-channel delivery network.

Scotiabank’s Four Cornerstones
day-to-day banking • borrowing • investing • protection

Maintain industry-leading customer satisfaction and loyalty. Comprehensive analysis has shown there is a strong link between employee satisfaction and customer satisfaction and loyalty. We therefore work hard to keep our staff highly involved and motivated. We do this in several ways, including an annual financial incentive for meeting customer satisfaction targets, and through an award-winning employee recognition program that recognizes key employee behaviours and activities that drive successful customer interactions.

Training also supports outstanding customer service by ensuring that our staff is equipped to meet customer needs. In 2003, we used an innovative and engaging approach to maximize the efficiency of our training efforts by delivering investment and lending training via satellite to more than 2,000 managers and financial advisors.

All of this has led to very high employee satisfaction levels. In 2003, 89% of Domestic Bank employees stated that their branch or office is a great place to work. This has again translated into industry-leading customer satisfaction. For the fourth year in a row, Scotiabank achieved the highest rating for customer service excellence among Canada’s five major banks.

Continue to increase productivity and sales capacity. We have implemented a number of technology enhancements over the past two years to improve productivity and significantly increase sales capacity for branch staff. Over this period, we have increased the available sales time per sales officer by seven hours per week. During the year, we automated and streamlined activities such as the property valuation process and the credit insurance sales process, allowing staff to spend more time with customers.

Sales officers use this time to sell additional products, retain business and initiate new customer contacts, many of which are identified using our award-winning data mining and data warehousing capabilities. In 2003, almost two million sales leads were delivered electronically from our data warehouse to the appropriate branch sales officers.

Provide innovative financial solutions. Our competitive lineup of products and services, along with low interest rates, resulted in record balance growth and solid gains in market share.

In personal lending, our very successful Scotia Total Equity Plan allows customers to establish one secured borrowing plan with multiple credit products (mortgage, line of credit, VISA*, personal loan) that reduces total borrowing costs. This plan

has been complemented by a number of innovative home ownership and lending solutions, such as the Scotia Free Down Payment™ mortgage, along with our No-Fee ScotiaGold™ VISA card, and a comprehensive program designed to help students and their families finance post-secondary education.

In investments and core deposits, we introduced the ican Invest Program, which helps customers identify short- and long-term financial goals and encourages them to set money aside on a regular basis to invest in a selection of “one-stop” solutions. In core deposits, we generated industry-leading growth with our Money Master® High Interest Savings Account, which led to a year-over-year market share increase of 69 basis points.

Continue to manage down costs and expenses. The Domestic Bank is a leader in cost management and productivity. We continue to streamline and automate processes to control costs. For example, we added functionality to our electronic delivery channels that enhances our ability to complete a variety of sales and service-related activities through our ABM network, call centres and online banking platform.

In addition, strong retail credit risk management has kept our loan loss ratio well below that of our peer group. In 2003, we enhanced our portfolio management system by introducing a customer-focused behavioural scoring model for loan and limit management. It allows us to better capture customers’ behavioural information, alerting us early to unfavourable trends, thereby enabling corrective action to be taken.

•

Scotiabank has once again achieved the highest rating for customer service excellence among Canada’s five major banks in 2003. These results, from an independent national survey by Synovate, build on our #1 ranking for the past three years.

•

Scotiabank led Canada’s major banks for job satisfaction of retail financial advisors, according to a report card issued by Investment Executive, Canada’s national newspaper for financial service industry professionals. Scotiabank’s rating was 8.8 — a full point and a half above the industry average. The Bank improved in 18 of 20 categories, with strong gains in the areas of technical efficiency, training and corporate culture.

•

More than 400,000 personal and small business customers have opened a Money Master® High Interest Savings Account, which was launched in October 2001. In the last two years, Scotiabank led all major banks in chequing and savings deposit market share gains. We are now offering this market-leading product to customers for use within their RSPs or RIFs.

•

Scotiabank’s marketing programs were recognized with a variety of important industry awards. For results-driven, direct mail excellence, we captured a prestigious Gold ECHO Award, a top international award presented by the U.S. Direct Marketing Association. We were chosen from more than 140 international entries in the financial services category.

•

Scotiabank won a 1 to 1® “Innovator” Award from Peppers & Rogers Group for our Significant Deposit contact campaign, which is designed to uncover customer needs and present relevant financial solutions.

•

We successfully launched The Ultimate™ GIC. It permits customers to take advantage of higher long-term rates at the time of purchase, and allows them to reinvest or withdraw a portion of the GIC at each anniversary date.

•

We will continue to increase branch staff sales productivity and capacity by using technology and electronic banking channels. For example, we are expanding our branch call redirect program, which allows routine branch telephone calls to be handled by our call centre staff.

•

We will continue to improve functionality and increase efficiency by replacing key legacy systems, such as our term lending system. The new system is web-based and real time, providing more flexibility for mortgage product design, seamless transaction processing and automated customer agreements.

As part of our ongoing efforts to focus on core areas of expertise and provide our customers with improved levels of service, we outsourced the management of statement printing and mailing, cheque processing, and bill payment processing to Symcor Inc., one of North America’s largest financial transaction service providers. The agreement has an expected term of 13 years with estimated fees of $1.1 billion over the same period. Scotiabank is now able to leverage Symcor’s scale, expertise and new technology. For example, we will be using their state-of-the-art digital imaging technology, which improves customer service and reduces costs by allowing us to retrieve images of cheques and other customer communications within seconds, rather than days.

Wealth Management’s strategy is to deliver brokerage, private banking, investment management, estate and trust services, and mutual fund solutions to clients through an integrated team of professionals. Working closely with Retail Banking,

we continue to emphasize the four cornerstone financial planning approach and maximize referral opportunities.

Continued emphasis on meeting client needs. Two market-leading initiatives, ScotiaMcLeod’s Financial Planners and the Scotia Private Client Group, illustrate our commitment to deliver total financial solutions based on a comprehensive financial plan. As well, ScotiaMcLeod launched the Client Commitment program. This program builds the best practices of leading advisors into a major coaching, training and process improvement initiative, focusing on a documented financial plan, a disciplined investment philosophy and client service commitment. We also launched a new program for ScotiaMcLeod advisors to market Scotia Private Client Group’s services (trust, private banking, and discretionary investment management) as a complement to existing full-service brokerage solutions.

Focus on recurring revenue. Fee-based assets continue to be a growing segment of our business. ScotiaMcLeod’s fee-based programs had another strong year, with assets up 33% in 2003. In addition, Scotia Mutual Funds launched two new fund-of-fund solutions — Scotia Partners Portfolios and Scotia Selected Funds. This structure provides clients with more diverse investment options through a single purchase.

Leverage efficiencies and reduce costs. A key Wealth Management imperative continues to be identifying opportunities for cost reductions and operating efficiencies. A number of initiatives were implemented, including supplier renegotiations, process re-engineering and a review of branch operations. Through increased automation, and leveraging synergies across the division, such as a simplified process for transferring accounts across the Scotiabank Group, our Business Excellence program identified significant cost savings.

Enhance online delivery. Online financial services integrate banking, borrowing and investing functionality to further support our commitment to provide total financial solutions. ScotiaMcLeod Direct Investing (SMDI) introduced enhanced online navigation, based on significant client input, which substantially improved the online experience. In addition, SMDI was one of the first Canadian direct brokerage firms to offer a technical analysis tool, through a partnership with Recognia Inc. Electronic trades accounted for 68% of all of SMDI’s trades in 2003, an increase of 9% year over year, while ScotiaMcLeod’s full-service online account penetration increased to more than 80,000 accounts.

•

ScotiaMcLeod’s 350 financial planners teamed with retail bank branches to generate more than $1.3 billion in referrals in 2003.

•

ScotiaMcLeod was ranked first in percentage growth of fee-based assets among the major brokerages for the second consecutive year.

•

SMDI was ranked #2 among all Canadian direct brokerage firms by Gomez Canada, a leading independent consulting firm, in two key customer segments that represent more than 85% of all direct brokerage clients. In addition, The Globe & Mail ranked SMDI #2 for tools, trading and electronic services, and customer satisfaction.

•

SMDI’s growth outpaced the market, with trade share up 9%, and market share (by assets) up 5% to its highest level yet.

•

Scotia Private Client Group’s client satisfaction ratings increased for the second consecutive year, with close to 84% of clients rating the overall performance of their relationship manager as “excellent” or “very good.”

•

We will strongly emphasize sales and business development across all businesses.

•

We will continue to integrate our operations with the retail bank to best serve our clients, reduce costs and streamline processes.

(1)

Includes Offshore Trust, which was transferred to International Banking in 2002 (2001: revenues — $41 million, AUA — $13.1 billion).

We will build market share by providing simple, practical solutions that recognize small business owners’ unique requirements and meet both their personal and business banking needs. Customers are served through our extensive branch network by our small business experts — branch managers and 600 dedicated small business account managers.

Service excellence. This year, we automated the annual credit review process for most small business borrowers, and now manage our credit risk through a highly effective system, based on credit transaction history.

We also made it faster and easier for customers to open business accounts and related services — usually in one short visit — by automating the application, approval and setup processes.

To help small business owners reach their professional and personal goals, we introduced the ScotiaOne business Plan Writer™. It provides small business owners with an online, interactive, step-by-step guide to constructing a business plan. We also provided business owners with access to online learning through our association with Vubiz.

Scotiabank continues to provide straightforward solutions for small business owners to meet their borrowing as well as their saving and investment needs. We were the first Canadian bank to offer 1% cash back on term loans, and we also offer low interest rates on operating lines of credit and the ScotiaLine for business™ VISA card. Our highly successful alliance with Agricore United, which provides crop input financing to farm customers in Western Canada, has been expanded to include cattle, hog and feed financing to livestock producers. Also, we recently developed a preferred package of business and personal banking products for more than 33,000 members of the Ontario Real Estate Association.

•

Scotiabank led all major competitors in market share growth of loans outstanding to small businesses with authorized credit of up to $250,000.

•

The new high-interest Money Master for business™ savings account has attracted significant balances. It offers Canadian small business owners an industry-leading rate of interest and 24/7 access to their funds.

•

Expand the range of services available 24/7 through our call centres and website so that small business customers can bank how and when it suits them.

•

Enable more business owners to finance equipment or supplies quickly and easily, and at attractive rates, at the point of purchase.

We are working one-on-one with mid-market and independent business clients to tailor complete financial solutions. We also serve a number of niche markets, such as automotive finance and real estate lending, and provide mid-market merchant banking through RoyNat, a wholly-owned subsidiary.

Enhance sales force productivity. We have leveraged past investments in technology — such as building a mobile sales force — to allow staff more time to develop tailored financial solutions for customers. In addition, we are working to further streamline sales support activity to free up capacity. For example, in our Indirect Retail business, more than 70% of all loan applications are now received via the Internet through our customized Electronic Dealer Link, up significantly from 10% in October 2002.

Increase client profitability. Our sales management discipline motivates and rewards the behaviours that generate incremental sales and build stronger relationships. An independent survey of mid-market businesses (with sales greater than $5 million) showed that Scotiabank’s market share as the primary financial institution increased 200 basis points between 2001 and 2003. We also deepen each customer relationship by leveraging our areas of specialization. For example, we created a structured finance team to provide advice on structuring, financial analysis, pricing and syndication of complex transactions.

Exploit niche markets and segments. We continue to focus on niche businesses and segments where we generate strong returns and where we have expertise. For example, among the banks, we are the leader in retail indirect lending and commercial automotive finance, with a market share of loans outstanding of more than 30% and 50%, respectively. In addition, RoyNat Capital has become the leading merchant bank in Canada by fully addressing our business clients’ needs through longer-term capital and advisory services.

•

More than 90% of all our auto dealer customers now use our web-based technology, the Flooring Internet Portal, to manage their inventory payouts, administration and payments. In addition to receiving very high customer ratings in independent surveys, the portal received the prestigious 2003 ITX Award for Business Value in June 2003.

•

We introduced a new referral program for commercial clients with Argosy Bridge Management Inc., which provides specialized short-term bridge debt financing to fill the gap between senior and subordinated debt.

•

We are the market leader in multi-unit residential lending in Toronto and Vancouver, and have strong representation

in other markets across the country, despite intense competition in the real estate lending industry.

•

Complete market segmentation and customer profitability analysis to better understand the needs of the business customer and to focus on markets with a large concentration of high-value businesses.

•

Enhance sales and service processes through improved credit risk analysis and expanded customer contact management capabilities.

We will maintain a leadership position in the development of web-based electronic services for our personal and business customers. We will also increase our penetration in the U.S. and other international markets with selected business products, such as wholesale deposit and payment services, aimed at large corporate customers.

Maintain leadership in online banking and brokerage. In 2003, we exceeded 1.1 million activated users of Scotia OnLine, our electronic banking and brokerage service. We continue to build a robust and easy-to-use product. For example, we introduced a customer “Profile & Preferences” section that allows customers to customize their online experience. In addition, we introduced extended account history to allow customers to view the last 90 days of account activity. These enhancements contributed to higher usage and an increase in customer satisfaction ratings.

Deliver innovative, customer-focused electronic banking and e-commerce solutions. We continued to innovate with products and services such as Scotia Web-Wire, which allows businesses to send and receive wire payments over the Web. It also provides companies with the ability to do LVTS (Large-Value-Transfer-System) payments; Scotiabank is the first Canadian bank to offer this service.

•

Scotiabank was rated number one in Canada for our Internet banking service, in a survey conducted by Gomez Canada, a recognized evaluator of online financial services. Scotia OnLine also won the Global Finance Award for Best Banking Transaction site.

•

Shell Canada and Scotiabank announced that Scotiabank-branded ABMs will be installed in up to 500 Shell gasoline convenience stores across Canada. This will expand Scotiabank’s domestic ABM network by 20% to more than 2,700 machines.

•

We were awarded one of the largest commercial card contracts in Canada by meeting the needs of Canada Post.

•

We will expand our ability to generate sales opportunities through our electronic banking channels.

•

We will enhance Scotia OnLine banking and brokerage functionality through initiatives such as providing electronic customer statements.

Domestic Banking, which includes Wealth Management, reported net income of $1,094 million in 2003, $48 million or 4% lower than last year. Excluding the sale of the merchant acquirer business last year, earnings rose by a solid $44 million or 4%. Domestic Banking accounted for 44% of the Bank’s total net income in 2004, with an excellent return on equity of 30.9%.

Retail assets grew a substantial 10% this year, resulting in solid market share gains. Residential mortgage balances rose a record $6.5 billion, aided by the introduction this year of several innovative products, such as the Scotia Free Down Payment™ mortgage, and the continued success of our Ultimate Variable Rate™ mortgage. Also contributing to mortgage growth was increased success with retention. Personal revolving credit increased a substantial 19%, with almost 60% of our ScotiaLine^® credit portfolios being fully secured. Small business and commercial lending volumes grew 6%, led by automotive lending, where we acquired 73 new dealer accounts in 2003. Core retail deposits recorded a double-digit increase, reflecting the success of the Money Master^® High Interest Savings Account, which resulted in a significant market share gain over last year. Business deposits (including the new Money Master for business™ account) rose a strong 10%, continuing the double-digit growth trend of the past several years.

Assets under administration (AUA) grew 9% to $88 billion, led by ScotiaMcLeod Direct Investing, where AUA grew 30% to more than $5 billion. Asset inflows from new and internally referred customers, as well as continued growth in our share of wallet, complemented market-driven gains.

Net interest income rose modestly by $69 million to $3.5 billion, as the considerable volume growth was partly offset by a narrower margin, due to lower interest rates and the changing mix of deposit products.

Other income for the year was $1,528 million, a decline of 4% over last year. However, excluding the impact of the sale of the merchant acquirer business last year, revenues rose 7%. This was from higher electronic banking and transaction-based fees, accompanied by a solid increase in Retail Brokerage following a pickup in customer activity.

Non-interest expenses were $3,076 million in 2003, an increase of $123 million or 4% from last year. Excluding the impact of the sale of the merchant acquirer business last year, expense growth was $177 million or 6%. This was largely from normal growth in employee salaries, as well as from higher stock and performance-based compensation. Expenses also rose for technology initiatives undertaken to enhance customer service, introduce new products or achieve efficiencies. In addition, there were higher litigation expenses. The remaining categories of non-interest expenses increased in line with inflation and business growth.

The provision for credit losses was $272 million in 2003, an improvement of $10 million from last year. Credit quality remained excellent in the retail portfolio, and among the best in the industry, with a loan loss ratio of 26 basis points of retail assets. Provisions for credit losses in the commercial portfolio were also very good, with an improvement over last year.

We expect growth in assets and deposits to moderate from the very high levels achieved over the last two years, but to still remain fairly strong, as we leverage our strength in customer service and focus on sales management. Fee income should also continue its steady growth. Operating expenses are expected to rise in line with business growth.

International Banking had a good year in 2003. Strong retail and commercial asset growth continued in the Caribbean and Mexico, although this local growth was offset by the effect of foreign currency translation, as the Mexican peso and most Caribbean currencies declined against the Canadian dollar.

During the year, we continued to invest in two key Spanish-speaking markets: Mexico and the Dominican Republic. In Mexico, we increased our ownership of Scotiabank Inverlat to 91 per cent. Inverlat posted record results this year, reflecting exceptional growth in retail assets. Inverlat was also named “Mexican Bank of the Year” for 2003 by LatinFinance magazine. In the Dominican Republic, we completed an agreement to acquire selected assets of Banco Intercontinental S.A., including 39 branches and 70,000 credit cards. This acquisition will make Scotiabank the fifth-largest private bank in the country by number of branches. LatinFinance also named us “Best Bank” in the Dominican Republic in 2003.

Expand our franchise by fostering a sales and service culture to deepen customer relationships, identifying new growth markets and continuing to build our extensive branch and electronic delivery network.

Continue to instill a customer-focused sales and service culture. We have successfully implemented the initial phase of the sales and service initiative in our branches, which included extensive employee retraining, the reorganization of the branch structure, the launch of an ongoing customer satisfaction and loyalty measurement program, and piloting a new automated customer relationship management system for sales officers. This initiative leverages the best Canadian sales and service practices to retain and grow our high-value customers.

Expand delivery network in key growth markets. Our branch network expansion activities continue to be focused in key markets — Costa Rica, the Dominican Republic, El Salvador and Puerto Rico — through organic growth and selective acquisition.

In September 2003, we signed an agreement to acquire selected branches and assets of Banco Intercontinental in the Dominican Republic.

We continue to transform our operations from primarily branch-based delivery to a multi-channel network. We expanded our extensive network of ABMs by 19%, installing more than 70 machines, bringing the total number of machines to more than 440 across 19 countries.

As well, 24/7 automated telephone banking was launched in the Dominican Republic, and Internet banking was introduced in Jamaica, Trinidad and Tobago, and Barbados.

Improve credit risk management capability. We continued to enhance our retail credit risk management capabilities by implementing streamlined credit policies, as well as various technology-driven decision support tools to improve credit adjudication and collection capabilities. As well, we continued to roll out sophisticated collection system technology, improving efficiencies within the region’s 10 collection centres.

In Jamaica, we piloted a new web-based application processing system for adjudicating small business loans that uses sophisticated risk management tools. The new system, supported by a centralized underwriting centre and credit scoring models, has greatly improved response times, while significantly reducing the workload for branch staff and increasing capacity for customer relationship management.

These initiatives also led to improved credit quality throughout the region, with lower delinquency levels and writeoffs.

Expand wealth management businesses. Our Trust & Private Banking unit acquired the trust and private banking business of MeesPierson (Bahamas) Limited, and we opened a private banking centre in the Bahamas. We also launched a new investment management service in conjunction with Alliance Capital Management to meet the needs of our high net worth clients. As well, our New York private banking department expanded its services and broadened its international client base to include Latin America.

We also launched the distribution of mutual funds in Jamaica, Costa Rica and Trinidad.

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The Bank of Nova Scotia Jamaica named “Best Bank in Jamaica” by The Banker.

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Scotiabank published its 2002 Caribbean and Central America Community Review, the first of its kind in the region.

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Fully implement our new international banking platform to improve operating efficiency and sales capacity through automation and centralization.

Scotiabank Inverlat is focused on increasing retail and commercial market share by building our delivery capabilities, implementing customer-focused sales and service initiatives and through selective acquisitions.

Purchase minority interest in Grupo Financiero Scotiabank Inverlat. We acquired an additional 36 per cent stake in Scotiabank Inverlat from the Mexican government for $465 million, and anticipate obtaining the remaining nine per cent in 2004.

Increase market share. In 2003, Inverlat had strong results, with growth in core deposits and retail and commercial lending, leading to year-over-year market share gains. We led the market with a 36 per cent share of all new bank-financed mortgages and 29 per cent of all new bank-financed auto loans.

Expand delivery network. Four new branches were added, bringing the total number of branches and offices to 390. We also conducted a branch expansion and rationalization analysis, and are implementing a plan to both increase the size of our network and optimize the efficiency of our existing branches.

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Cited as the leader in customer service and tied for best in overall banking services in a survey by Reforma, Mexico City’s leading newspaper.

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Implemented a new automated customer relationship management system in all branches.

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Continue the implementation of our sales and service initiative to deepen customer relationships.

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Continue to develop a shared services support function to further remove non-sales and service functions from the branches.

Our operations are concentrated in Chile with Scotiabank Sud Americano. As well, we have minority investments in Venezuela and Peru, a representative office in Brazil, and an investment portfolio of emerging market bonds.

In 2003, Scotiabank Sud Americano improved efficiency, began replacing its core banking system, enhanced customer relationship management and grew core deposits. In 2004, we will continue to focus on improving efficiency and creating sales capacity by developing a shared services function.

Provide a broad range of commercial and corporate banking services to clients across Asia, including loans, trade finance, foreign exchange, precious metals and syndications.

Utilize alternatives to traditional loan products. Conditions of limited demand for traditional commercial banking products persisted in many Asian markets, so we continued to focus growth efforts in the securities and derivatives area. We expanded our capabilities in terms of new products and streamlined approval processes. A systematic portfolio overview process was implemented across the region to enhance risk management.

Grow trade finance business. Focused marketing efforts across Asia resulted in steadily increasing revenue from our bank-related trade finance business.

In order to enhance our trade processing capabilities, an advanced trade finance system was introduced in Hong Kong that will be integrated with a user-friendly web-based customer interface in 2004.

Explore high-potential markets. We continued to actively seek strategic opportunities to diversify into retail banking in three key markets: India, Malaysia and China. Our established presence in these markets is beneficial in assessing prospects for growth.

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Signed an agreement in China for an investment in the Xi’an City Commercial Bank.

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Granted a local currency licence for Guangzhou branch in China, the first Canadian bank to have Chinese local currency capability.

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Build Asian capital markets business to supplement traditional lending activities.

International Banking’s net income was $669 million in 2003, a substantial improvement over the $125 million earned last year. Excluding the negative impact of foreign currency translation and the sale of Scotiabank Quilmes in Argentina last year, net income rose $88 million or 13%. International Banking’s earnings represented 27% of the Bank’s net income in 2003.

Caribbean and Central America contributed net income of $253 million this year, a 13% decrease from 2002. Earnings were negatively impacted by foreign currency translation. In local currency, the region continued its steady growth, with a 7% increase in assets and deposits, accompanied by higher margins. This was offset by a rise in operating expenses, as the Bank continued to invest heavily to support business growth. As well, loan losses rose modestly.

The earnings contribution from Latin America was $326 million in 2003, versus a loss of $262 million last year due to charges related to Argentina. Excluding the impact of foreign currency translation and the sale of Scotiabank Quilmes, earnings rose substantially by $83 million or 30%. A major contributor to this growth was higher earnings from Scotiabank Inverlat in Mexico, because of the acquisition of an additional 36% ownership of Inverlat during the year, and good underlying performance. Strong asset and deposit growth resulted in market share gains, accompanied by double-digit growth in other income and an improvement in the productivity ratio. Credit quality remained excellent, with close to nil provisions for credit losses. In addition, improved results from Scotiabank Sud Americano in Chile and higher investment income added to Latin America’s contribution.

In Asia, earnings fell 8% year over year, as a result of foreign currency translation. Underlying results were up 1%, as underlying asset growth of 7% was partially offset by a lower interest spread.

Net interest income was $2,028 million, a decrease of 9% from last year as a result of foreign currency translation and the sale of Scotiabank Quilmes last year. Underlying revenue growth was $152 million or 7%, resulting from growth in assets and deposits across all regions, particularly in Scotiabank Inverlat and in the Caribbean and Central America.

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Includes revenues of $36 from our Mediterranean operations, which we sold in 2001.

Excluding the impact of foreign currency translation and the sale of Scotiabank Quilmes, other income increased by a substantial $200 million or 28%. The growth was led by broad-based fee growth in Scotiabank Inverlat. Double-digit growth was also achieved in both the Caribbean and in Asia.

Non-interest expenses were $1,657 million in 2003, a decline of $202 million or 11% from last year (excluding the 2002 charges for Argentina). Excluding foreign currency translation and the sale of Quilmes, underlying expense growth was $122 million or 7%. The increase reflects continued investment in technology initiatives, the expansion of our delivery network and inflationary increases in most countries.

Loan loss provisions were $137 million in 2003, up from $69 million in 2002, excluding the recoveries and charges related to Argentina in both years. This arose mainly because of lower recoveries in Scotiabank Inverlat in Mexico, and higher provisions in the Caribbean, partly reflecting loan growth in recent years.

We expect International Banking’s track record of earnings growth to continue in 2004, particularly in Mexico and the Caribbean.

Scotia Capital’s results improved significantly in 2003, due primarily to lower loan losses in the U.S. division, which had its most successful year since the integration of the corporate and investment banking businesses in 1999. Our Canadian and Global Trading businesses continued to perform well, while our European operation was challenged by weak credit markets.

Our primary objective is to consistently deliver a good return on shareholder capital and, therefore, we rigorously apply our profitability model to all transactions and client relationships. A disciplined approach to managing credit risk will be critical to improving returns in corporate lending. A second key success factor will be producing sustainable revenue growth, particularly from capital-efficient products such as derivatives and foreign exchange. Cross-selling is becoming engrained in our relationship management culture, and the chart on the right shows the increase in cross-sell revenues year over year.

To grow our well-established full-service franchise by building deeper client relationships. We offer a full range of lending, underwriting, trading and advisory products and services to clients in eight selected industries.

Rank in the top three for each product group. Our target is a top three ranking for the 10 products and services that we offer in Canada, either in market share or in operational excellence, as measured by independent surveys.

Focus on client profitability. We apply our client profitability model to each client relationship and transaction to ensure we are being adequately compensated for the risk we undertake.

Improve management information systems. We continue to closely monitor each client relationship using MIS tools such as a new client profitability model, a business planning tool that monitors progress on building relationships, and comprehensive quarterly reporting on performance metrics.

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In a joint effort between our Canadian and U.S. groups, Scotia Capital won an underwriting position in the largest leveraged buyout in Canadian history — Kohlberg, Kravis, Roberts & Co.’s purchase of Bell Canada’s directory businesses from BCE Inc. We also provided senior and subordinated debt, all foreign exchange and Canadian cash management services and participated in several interest rate swaps. Scotia Capital was also awarded the joint bookrunner role on the $1.0 billion initial public offering (IPO) of the Yellow Pages Group Co., the largest income trust IPO in Canada.

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In Canadian lending, Scotia Capital was the #1 agent/ co-agent for the 12 months ended October 31, 2003, according to Loan Pricing Corporation.

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Scotia Capital is now the #2 ranked domestic dealer for mergers & acquisitions advisory services in Canada, according to Bloomberg. Our advisory successes include acting as the exclusive financial advisor to Fortis Inc. for its $1.36 billion acquisition of Acquila Inc.’s Canadian-regulated electricity assets. We are also advising Manulife Financial Corporation regarding its $15 billion acquisition of John Hancock Financial Services Inc.

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We strengthened our #2 position in equity underwriting among the Canadian dealers, based on underwriting liability. Our success is evidenced by transactions such as the sole lead underwriter mandate on Brookfield Properties Corporation’s $200 million preferred share issue.

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Scotia Capital received the most Top Written Reports nominations and had 13 “All-Star” analyst rankings in the 2003 Brendan Wood International Canadian Institutional Equity Research, Sales and Trading Performance in Canada Report.

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We will maintain high asset quality by using new loan portfolio risk mitigation processes, and implement other initiatives developed jointly with Global Risk Management, including new training programs.

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We will continue to develop new businesses and products, such as equity program trading, in order to enhance returns.

To enhance Scotia Capital’s position as a full-service lender, cross selling selected capital markets products, such as fixed income, derivatives and foreign exchange, as well as cash management in Canada and Mexico. We target clients among the Fortune 1000 in nine industry groups.

Reduce loan losses and improve credit quality. Our top priority in recent years has been reducing loan losses. To enhance portfolio diversification, we reduced single-name exposures and syndication hold guidelines. As well, we expanded the role of our Loan Portfolio Management (LPM) group in order to improve the quality of credit decision-making. This includes managing the loan portfolio to ensure that we are diversified across asset classes and are adequately compensated for risk.

Cross-sell a broader range of products. We upgraded our capital markets capabilities and implemented a number of performance metrics to track cross-selling.

Focus on client profitability. We continue to work closely with clients to achieve profitability targets. Clients whose returns were not expected to meet these targets were reassigned to a separate relationship management team to exit the relationships. We reduced the number of client relationships by 130 in 2003, and have exited more than 200 relationships over the past two years.

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Scotia Capital continues to be the #1 Canadian bank in the U.S. syndicated lending market on a lead arranger basis, as reported by Loan Pricing Corporation.

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Scotia Capital was awarded the co-agent role in the US$1 billion refinancing of Owens-Illinois Inc.’s senior secured credit facilities. We also acted as joint lead arranger for the US$840 million Term B facility, and underwrote, as co-manager, a portion of the US$900 million bond issue.

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We played a key role in the Blackstone Group’s leveraged buyout of TRW Inc.’s auto parts business. Scotia Capital acted as senior managing agent for US$2 billion senior debt facilities, and participated in both a US$1.5 billion high-yield bond issue, and a US$600 million receivables securitization facility.

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We will continue our successful efforts to reduce loan losses and improve credit quality through more restrictive exposure guidelines, disciplined credit review procedures and improved analytical and MIS tools to support credit decision-making.

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We will add to our list of core clients in targeted industries through selective marketing efforts; all new clients must meet profitability criteria.

We will continue to be a niche player in the syndicated lending market and also cross sell selected capital markets products. We are focused on four industries: Entertainment & Leisure, Media & Communications, Transportation and Energy Advisory.

Successes in 2003 included joint lead arranger/underwriter status in Europe’s largest-ever leveraged buyout, committing €250 million to finance the sale of Seat-Pagine Gialle SpA, the Italian yellow pages directory business. As well, we arranged and underwrote the debt to finance Saratoga Partners’ acquisition of Sericol, the market leader in screen printing inks.

Deliver innovative capital markets products and grow revenues from corporate and investor client segments. We have a diversified product range — fixed income (both investment grade and high yield), derivatives, foreign exchange, money markets and precious metals — delivered online and through a network of product specialists. We also conduct proprietary trading.

Develop new products for high-return transactions. We continued to deliver innovative structured products, particularly in credit and equity derivatives, in order to enhance returns.

Expand North American capabilities. We invested in our product capabilities in the U.S. market, particularly in the fixed income area, both investment grade and high yield.

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Scotia Capital’s derivatives team ranked #1 on the Quality Index, #1 as an Important Dealer and #1 for Overall Market Penetration in a third-party market survey.

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ScotiaMocatta ranked second globally in both gold and silver in Risk magazine’s 2003 annual commodity rankings.

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Our expansion of trading activity into Mexico by way of a joint venture with Scotiabank Inverlat yielded success, as evidenced by our role as sole provider of one of the Cemex Companies’ one-year, US$50 million forward equity swap.

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We will be targeting new client relationships, particularly investing clients such as life insurance companies, mutual fund companies and pension funds.

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We will continue to develop new structured products, particularly credit and equity derivatives.

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We will continue to expand in North America, with a particular focus on the joint venture with Scotiabank Inverlat in Mexico.

Net income in Scotia Capital was $721 million in 2003, a substantial increase of $341 million from last year, primarily because of a significant improvement in credit losses in U.S. corporate lending. As well, record earnings were achieved in several areas, including derivatives, foreign exchange and underwriting. This was moderated by lower U.S. dollar funding margins and a reduction in corporate lending assets.

Total revenues decreased 12% year over year to $2,538 million in 2003. Revenues from Canadian operations increased 3%, as non-lending revenues, in particular equity trading, increased 18%. This was partially offset by a 10% decline in loan interest and fees, due to a contraction in the corporate loan portfolio, reflecting lower corporate borrowings and more selective lending. The proportion of revenues from non-lending activities increased to 53% in 2003, up from 47% last year.

Global Trading had mixed results in 2003, with a 24% decline in revenues year over year. Record revenues in foreign exchange, fixed income underwriting and precious metals trading were offset by decreased net interest income due to foreign currency translation and the decline in U.S. dollar funding margins. The latter was because of the maturity of favourable funding positions late last year and the positioning for rising U.S. interest rates which did not occur.

Revenues in the United States declined 13%, driven by lower asset levels as a result of lower corporate borrowings and the restructuring and exiting of some portions of the loan portfolio. This was in line with Scotia Capital’s strategy to reduce its reliance on capital-intensive lending activities and improve overall returns in the U.S. These revenues were also negatively impacted by the strengthening Canadian dollar.

Total non-interest expenses were $986 million this year, a decrease of 4% from 2002, primarily because of lower performance-based compensation.

The provisions for credit losses dropped sharply to $549 million in 2003 from $1,247 million last year, with the reduction entirely in the U.S. The cable & telecommunications sector has stabilized, and several significant debt restructurings were completed in the power & energy trading sector. However, loan losses rose in Europe and in Canada following a deterioration in a small number of accounts. Management of credit risk continues to be a top priority for Scotia Capital.

In 2004, we expect that stronger markets, an increase in corporate borrowings from year-end levels due to the expected economic recovery, and a continued improvement in credit quality will lead to higher earnings in Scotia Capital.

The primary goal of risk management is to ensure that risk is properly controlled and priced to create and protect shareholder value. Risk, to varying degrees and in different forms, is present in virtually all business activities of a financial services organization. In certain activities, risk is assumed as a means of generating revenue, while in other activities, risk exists by virtue of engaging in the activity. Regardless of the type of risk, or the activity that creates the risk, the fundamental concepts of risk management are the same:

These concepts are the foundation of the risk management framework that the Bank has developed to control the risks in its diverse, global activities. The effectiveness of this framework is enhanced by the active participation of executive and business line management in the risk management processes.

Certain key principles determine how the fundamental risk management concepts are applied. In varying forms, these principles apply to all business and risk types:

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Board oversight — Risk strategies, policies and limits are subject to Board approval. The Board, directly or through its committees, receives regular updates on the key risks of the Bank.

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Decision-making — Risk taking must be consistent with the Bank’s business objectives and risk tolerance.

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Independent review — All risk-taking activities are subject to review by units that are independent of the business lines that generate the activity.

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Diversification — Strategies, policies and limits are designed with the objective of ensuring that risk is well diversified.

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Accountability — Business units are accountable for all risks and the related returns, and are allocated capital in line with their risk profiles and with overall Bank strategies.

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Audit review — Individual risks and portfolios are subject to comprehensive internal audit review, with independent reporting to the Audit Committee of the Board by the internal audit function.

Risks are managed within the policies and limits established by the Board of Directors. The senior risk management committees, described below, play key roles in the risk management process.

Credit risk is the risk of loss resulting from the failure of a borrower or counterparty to honour its financial or contractual obligations to the Bank. Credit risk is created in the Bank’s direct lending operations, and in its funding, investment and trading activities where counterparties have repayment or other obligations to the Bank.

Reviews and approves risk management strategies, policies, standards and key limits.

Loan Policy Committee: reviews key risk exposures and risk policies, and adjudicates risk issues referred by the Senior Credit and Market Risk committees.

Liability Committee: provides strategic direction in the management of global interest rate risk, foreign exchange risk, liquidity and funding risk, and trading and investment portfolio decisions.

Senior Credit Committees: adjudicate non-retail credits within prescribed limits, and establish the operating rules and guidelines for the implementation of credit policies. Separate committees cover commercial, international, corporate and investment banking counterparties. In addition, there are separate senior committees which authorize major credit policy changes for retail and small business credit.

Market Risk Management and Policy Committee: oversees and establishes standards for market and liquidity risk management processes within the Bank, including the review and approval of new products, limits, practices and policies for the Bank’s principal trading and treasury activities.

Scotia Capital Trading Risk Committee: assesses and monitors overall market risks, risk control mechanisms, credit risk and compliance issues on an ongoing basis as they relate to trading businesses.

Reputational Risk Committee: reviews structured transactions, loans, merchant banking transactions, underwriting and other transactions or new products referred by the Senior Credit or Market Risk committees, to ensure that the Bank is, and is seen to be, acting legally with high ethical standards.

Credit risk is managed through strategies, policies and limits that are approved by the Board of Directors. The Loan Policy Committee reviews the policies, standards and limits that control risk and recommends to the Board any changes that may be required from time to time. Both the Board and the Loan Policy Committee regularly review the quality of the credit portfolios.

Decision-making for corporate and commercial credits is highly centralized, with all significant credit requests processed through the head office credit units of Global Risk Management. Credit requests are submitted to credit units, which are independent of the business line, for analysis and recommendation. The decision-making process begins with an assessment of the credit risk of the individual borrower or counterparty. Key factors considered in the assessment include: analysis of the borrower’s current and projected financial results and credit statistics; industry in which the borrower operates; economic trends; geopolitical risk; and management. The result of this assessment is the assignment of a risk rating to the borrower, using a 19-category rating system. Risk ratings affect the level of seniority at which the credit decision can be made, the assignment of economic capital and the computation of the general allowance for credit losses. Requests for specific types of facilities are assessed through consideration of security, seniority of claim, structure and tenor.

Credit units have defined authority levels for making credit decisions and, where the decision is beyond these authority levels, the credit unit will make a recommendation and refer the credit to a senior credit committee for adjudication. Senior credit committees also have defined authority levels and, accordingly, forward certain credits to the Loan Policy Committee. In certain cases, credits must be referred to the Board of Directors. In making credit decisions a number of factors are considered, including risk rating, facility risk, industry and country limits, and single name and connection concentration limits.

Individual credit exposures are monitored for any signs of deterioration by both the business line units and Global Risk Management. In addition, a full review and risk analysis of each borrower is conducted annually, or more frequently for higher-risk borrowers.

The Bank segments its corporate and commercial credit exposures into major industry groups. The risks in these industry groups are managed through limits, and lending criteria and guidelines relevant to each particular industry.

Banking units and Global Risk Management review the various segments of the credit portfolio on a regular basis to assess whether changes to the quality of the portfolio have occurred and determine whether corrective action should be taken. These reviews include the examination of the risk to particular industries and countries. The results of these reviews are reported to the Loan Policy Committee and the Board of Directors. The Loan Policy Committee makes recommendations to the Board to adjust limits to various industries and countries.

The Bank uses various internal and external modelling techniques to supplement the risk analysis of individual borrowers and credit portfolios.

Decisions on consumer credits and small commercial loans are generally made through the use of sophisticated credit scoring models. These models are subject to ongoing review to assess their key parameters and ensure that they are creating the intended business and risk results. Changes to these models or their parameters require analysis and recommendation by a credit unit independent of the business line, and approval by the appropriate senior credit committee.

Consumer credit portfolios are reviewed on a monthly basis to determine emerging trends in credit quality, and to assess whether corrective action is required. Individual borrowers are assessed on an ongoing basis through the use of scoring models and internal analysis of predictive characteristics.

Risk diversification is one of the key principles applied in determining policies and limits. Limits are set for individual borrowers, particular industries, countries and certain types of lending to ensure appropriate diversification of credit risk. The Bank’s exposures to various countries and types of borrowers reflect this diversification, and are displayed in the following charts and in Tables 15 and 16 on pages 65 and 66.

In Domestic Banking, credit quality in the consumer portfolios continues to be very high. The Bank’s product offerings have increased the proportion of the portfolio that is secured, thereby reducing the credit risk in this portfolio. The domestic commercial portfolio is well diversified and geographically dispersed, and has continued to perform well.

International portfolios also performed well in 2003. Loan losses were higher in 2003 compared to 2002, due to lower recoveries in Scotiabank Inverlat in Mexico and higher provisions in the Caribbean. Portfolio quality is stable, a condition which is expected to continue.

Credit losses in the Scotia Capital portfolios dropped substantially over 2002. For the most part, overall credit quality in the portfolios has stabilized in line with improving credit conditions in the U.S. As well, the Bank has taken a number of actions to contain and mitigate the risks in these portfolios. For instance, the Bank has reduced its limits for individual borrowers, reduced lending limits to certain industries, mitigated risk through loan sales and the use of credit derivatives, and continued its plan to focus on fewer, more profitable, corporate relationships. One result of these actions is that the size of the corporate loan portfolio has been reduced.

There are a number of industry segments that have been under stress that the Bank continues to monitor and take action on where needed. Both the cable & telecommunications and power & energy trading sectors have largely stabilized, in part due to the robust capital markets. As well, exposures to these industry segments have declined year over year. Hotels and airlines are two other industry groups that are being closely monitored. The Bank has particularly stringent guidelines for its hotel lending and, therefore, is comfortable with the risk in the portfolio. The airline portfolio is small, and action has been taken with respect to troubled borrowers.

While general credit conditions have improved, the Bank continues to manage the credit portfolios in a conservative manner. Ongoing containment of loan losses in Scotia Capital remains a key priority.

Market risk refers to the risk of loss from the Bank’s funding, investment and trading activities due to changes in interest rates, foreign currency rates, equity and commodity prices and market volatility.

Interest rate risk arises where there is a mismatch between positions that are subject to interest rate adjustment within a specified period. Interest rate risk also includes changes in credit spreads, which represent the premium charged by the market for differences in general or specific credit quality and liquidity. Foreign exchange risk arises from trading activities, foreign currency earnings and investments in foreign subsidiaries. Market risk also arises when the Bank is exposed to changes in prices for assets such as precious metals and equities.

Market risk exposures are managed through key strategies, policies, standards and limits established by the Board of Directors. The Board reviews and approves these policies and key risk limits annually, and receives regular reports on risk exposures and performance covering various lines of business.

Within the policy and limit framework established by the Board, the Liability Committee (LCO) and the Market Risk Management and Policy Committee (MRMPC) provide senior management oversight of the Bank’s market risk exposures. The LCO is primarily focused on asset liability management, which includes funding and investment activities. The MRMPC is responsible for the approval of new products, limits and practices for trading, funding and investment activities. All market risk limits are reviewed at least annually.

The Bank uses a variety of techniques to identify, measure and control the market risks it assumes in its various activities. The application of these techniques is evaluated on an ongoing basis to ensure the accuracy of the results and the quality of the analysis. The key market risk measurement techniques are summarized below.

Value at risk (VAR) is an estimation of the potential for loss of value that could result from holding a position for a specified period of time, within a given level of statistical confidence. For trading books, VAR is calculated daily at a 99% confidence level, for a one-day holding period, using historical simulations based on 300 days of market data. The quality of the Bank’s VAR is validated by ongoing backtesting analysis, in which the VAR is compared to hypothetical and actual profit and loss results. VAR is also used to evaluate risks arising in certain funding and investment portfolios.

VAR measures potential losses in normally active markets. Stress testing examines the impact that abnormally large swings in market factors and periods of prolonged inactivity might have on trading portfolios. The stress-testing program is designed to identify key risks and ensure that the Bank’s capital can easily absorb potential losses from abnormal events. The Bank subjects its trading portfolios to more than 200 stress scenarios on a monthly basis. A selected set of stress tests is performed daily. From time to time, the Bank also uses stress-testing scenarios to evaluate the integrity of its investment portfolio, using stress tests based on specific market events.

Sensitivity analysis assesses the effect of changes in interest rates on current earnings and on the economic value of assets and liabilities. It is applied globally to the major currencies within the Bank’s operations. Simulation models enable the Bank to assess interest rate risk under a variety of scenarios over time. The models incorporate assumptions about growth, planned business mix, changes in interest rates, shape of the yield curve, embedded product options, maturities and other factors. Simulation modelling under various scenarios is particularly important for managing risk in the deposit, lending and investment products the Bank offers to its retail customers.

Gap analysis is used by the Bank to assess the interest rate sensitivity of its retail, wholesale banking and international operations. Under gap analysis, interest rate sensitive assets, liabilities and off balance sheet instruments are assigned to predefined time periods on the basis of expected repricing dates. A liability gap occurs when more liabilities than assets are subject to interest rate changes during a given time period. Conversely, an asset sensitive position arises when more assets than liabilities are subject to rate changes.

The Bank’s asset liability management processes focus on identifying, measuring and controlling the market risks arising in the Bank’s funding and investment activities. The Liability Committee meets weekly to review risks and opportunities, and to evaluate performance.

Interest rate risk arising from the Bank’s funding and investment activities is subject to Board-approved global limits which are designed to control the risk to annual income and economic value. The annual income limit measures the effect of a specified shift in interest rates on the Bank’s net income, while the economic value limit measures the impact of a specified change in interest rates on the present value of the Bank’s net assets. Interest rate exposures in individual currencies are also controlled by gap limits. Gap analysis, simulation modelling, sensitivity analysis and VAR are used to assess exposures and for planning purposes.

The Bank actively manages its interest rate exposures with the objective of enhancing net interest income within prudent risk tolerances. Given the uncertainty surrounding central bank interest rate policy during fiscal 2003, the Bank maintained relatively modest exposures in both Canadian and foreign currencies. The chart at right shows that the Bank’s one-year Canadian dollar gap, which was asset sensitive throughout much of fiscal 2003, moved to a small liability sensitive position as at October 2003. Overall, the Canadian dollar margin declined slightly in 2003.

Interest rate gaps in foreign currencies were liability sensitive at the one-year point throughout fiscal 2003, although the position as at October 31, 2003, was modest. Margins on the foreign currency risk positions, primarily in Scotia Capital, fell in fiscal 2003 from the record margins achieved in the previous year.

Based on the Bank’s interest rate positions at year end 2003, an immediate and sustained 100 basis point rise in interest rates across all currencies and maturities would reduce net income after tax by approximately $20 million over the next 12 months. During fiscal 2003, this measure has ranged between $20 million and $(64) million. This same shock would reduce the present value of the Bank’s net assets by approximately $463 million. During fiscal 2003, this measure has ranged between $234 million and $463 million.

Foreign currency risk arising from the Bank’s funding and investment activities includes that from the Bank’s corporate foreign currency positions and from its net investments in self-sustaining foreign operations (both subsidiaries and branches). These risks are subject to Board-approved limits and are reviewed quarterly by the Liability Committee. To manage the foreign currency exposure in its corporate position and foreign operations, the Bank customarily funds assets with liabilities in the same currency and retains net investments in self-sustaining foreign operations in their local currency.

Foreign currency translation gains and losses from corporate positions are recorded in earnings, while foreign currency translation gains and losses from net investments in self-sustaining operations are recorded in the cumulative foreign currency translation adjustments account of shareholders’ equity. While gains/losses on net investments may increase/ reduce the Bank’s capital, depending on the strength or weakness of the Canadian dollar against other currencies, the Bank’s capital ratios are not materially affected, since the risk-weighted assets of the foreign operations rise or fall in the same proportion as the change in capital.

The Bank is also subject to foreign currency translation risk on the earnings of its foreign businesses. This exposure is reviewed on an ongoing basis by the Liability Committee and, from time to time, a decision is made to enter into transactions that are intended to mitigate such risk.

Equities risk arises from the Bank’s investing activities, and is subject to Board-approved limits. These investments include common and preferred shares, as well as a diversified portfolio of third-party managed funds.

Investment portfolios generally consist of debt and equity securities held for liquidity, longer-term capital appreciation or attractive after-tax yields. Investment holdings are subject to Board-approved limits. As at October 31, 2003, the market value of the Bank’s investment securities portfolio was a substantial $703 million over book value, versus $25 million below book value at the end of fiscal 2002. This sharp improvement arose from the turnaround in North American equity markets, higher values in the Bank’s emerging market bond portfolio and good management of the portfolio.

Scotiabank’s policies, processes and controls for trading activities are designed to achieve a balance between exploiting profitable trading opportunities and managing earnings volatility within a framework of sound and prudent practices. Trading activity is customer focused, but also includes a proprietary component.

Trading is subject to detailed limits that are established by currency, instrument, position and term. Positions are marked to market daily, and valuations are reviewed independently on a regular basis. The back office and risk management units independently review and report on all aspects of trading activity. They provide daily reports of profit and loss, VAR and limit compliance to appropriate departments and executive management for evaluation and action.

Independent risk management units conduct regular reviews and valuations. These units execute and analyze stress testing, sensitivity analysis and VAR calculations, and review and participate in new product development. Any models that are used for financial reporting or limit monitoring are independently validated prior to implementation and subject to formal periodic review.

The Board of Directors annually approves aggregate VAR and stress testing limits for the Bank’s trading portfolios, and reviews the results quarterly. The Market Risk Management and Policy Committee also sets VAR limits by business line and reviews the results monthly.

In fiscal 2003, the all-Bank one-day VAR for trading activities averaged $9.0 million, up slightly from $8.7 million in 2002. This was due to increases in equity and foreign exchange risk positions, partially offset by a decline in interest rate risk. The VAR ranged from a low of $5.8 million to a high of $16.1 million.

The histogram below shows the distribution of daily trading revenue for fiscal 2003. Daily trading revenue averaged $3.1 million per day, versus $3.0 million for 2002. Daily trading revenue was positive on more than 89% of trading days during the year.

The largest single-day loss of $13 million occurred on July 15 due to an unusual combination of large movements in Canadian and U.S. interest rates, as well as in foreign exchange rates. This loss also exceeded the one-day VAR estimate as shown in the chart below, although a small number of such losses is consistent with the 99% confidence level used in the VAR.

The Bank uses derivatives to manage market and credit risks arising from its funding and investment activities, and to lower its cost of capital. The Bank uses several types of derivative products, including interest rate swaps, futures and options, to hedge interest rate risk exposure. Forwards, swaps and options are also used to manage foreign exchange risk. As a dealer, the Bank markets derivatives to its customers and takes positions for its own account.

The Bank trades a wide variety of instruments, including interest rate swaps and options, currency swaps, equity and credit derivatives, as well as more complex structured products.

All derivative transactions are subject to the market risk control, reporting and analytical techniques noted under Trading Activities. Additional controls and analytical techniques are also applied to address certain market-related risks that are unique to derivative products.

To control credit risk, the Bank applies limits to each counterparty, measures exposure as the current fair value plus potential future exposure, and uses credit mitigation techniques, such as netting and collateralization. The Bank’s derivatives portfolio is composed primarily of short-term instruments with high-quality counterparties. Investment grade counterparties account for 90% of the credit risk amount arising from the Bank’s derivative transactions, down slightly from last year.

The Bank’s use of credit derivatives, particularly credit default swaps, increased during the year. Year over year, credit derivative notionals rose by $5.3 billion to $17.4 billion. The majority of this growth was in the Bank’s trading businesses, where the activity includes trading with customers, structured transactions and modest proprietary trading. Net credit derivative trading exposures are not significant. The Bank also transacts credit default swaps in its investment and loan portfolios. Credit protection sold is used as an alternative to bond or loan assets, while credit protection bought is used to manage credit exposures. As at October 31, 2003 the notional value of credit default swaps sold in the investment and credit portfolios was $1.7 billion and the notional value bought was $0.5 billion.

Structured transactions may involve combinations of cash and derivative products. These transactions are carefully evaluated by the Bank to identify and address the credit, market, legal, tax and other risks and are subject to a cross-functional review and sign off from the Global Risk Management, Taxation, Finance and General Counsel departments. All large structured derivatives transactions are also subject to review by senior risk management committees. Once executed, the transactions are subject to the same ongoing credit reviews and market risk analysis as other types of derivatives transactions. Special emphasis is placed on credit ratings of the reference assets, and the valuation of credit derivatives and reference assets in these transactions. The market risk in these transactions is usually minimal, and returns are earned by providing structuring expertise and by taking credit risk.

Commencing November 1, 2003, the Bank adopted the provisions of an accounting guideline on hedging relationships which requires all asset-liability management (non-trading) derivatives that do not meet specified designation, documentation and effectiveness testing requirements to be carried in the financial statements at fair value, with changes in fair value recorded through the income statement. Certain derivatives strategies which act effectively as economic hedges no longer qualify for hedge accounting after transition to the new guideline. The Bank performs ongoing hedge effectiveness testing for qualifying derivatives, and assesses market risk, control and reporting issues for those derivatives that do not qualify for hedge accounting. The adoption of this new guideline is discussed further in note 2 of the consolidated financial statements.

Liquidity refers to the Bank’s ongoing ability to accommodate liability maturities and withdrawals, fund asset growth and otherwise meet contractual obligations through access to funding at reasonable market rates. Liquidity management involves maintaining sufficient and diverse funding capacity, liquid assets and other cash resources to accommodate fluctuations in asset and liability levels resulting from business shocks or unexpected events.

The Board of Directors approves the Bank’s liquidity and funding management policies and establishes limits to control the Bank’s global net cumulative cash flow gap and minimum core liquid assets for key global currencies. The Board of Directors entrusts the responsibility for liquidity risk management to the most senior executives of the Bank through the Liability Committee, which meets weekly to evaluate the Bank’s liquidity profile.

The Bank assesses the adequacy of its liquidity position by analyzing its current liquidity position, present and anticipated funding requirements, and alternative sources of funds. Future cash inflows and outflows are forecasted daily.

As part of the ongoing process of measuring funding requirements, the Bank analyzes liquidity requirements under various scenarios, and reviews the underlying assumptions for such scenarios periodically. Contingency plans have been developed that include strategies for managing a liquidity crisis and procedures for addressing cash flow shortfalls in emergency situations. These plans are updated annually.

The Bank maintains large holdings of liquid assets to support its operations. These assets can be sold or pledged to meet the Bank’s obligations. As at October 31, 2003, liquid assets were $75 billion (2002 — $67 billion), equal to 26% of total assets versus 23% the previous year. These assets consist of securities, 73% (2002 — 70%), and cash and deposits, 27% (2002 — 30%).

The Bank pledges securities and other liquid assets in order to secure an obligation, participate in clearing or settlement systems, or to operate in foreign jurisdictions. As at October 31, 2003, total assets pledged were $44 billion (2002 — $44 billion).

Securities repurchase, borrowing and lending activities account for most of the Bank’s pledging. During 2003, the Board of Directors approved a global policy for asset pledging which includes global limits to ensure that pledging is effectively managed and controlled.

Scotiabank relies on a broad range of funding sources. The principal sources of funding are capital, deposits drawn from retail and commercial clients in the Bank’s extensive domestic and international branch network, and wholesale funding. To ensure that the Bank does not place undue reliance on a single entity as a funding source, the Bank maintains a limit on the amount of deposits it will accept from any one entity. Core funds, represented by capital and core deposits of the Bank’s retail and commercial clients, were $137 billion as at October 31, 2003, versus $135 billion last year. This moderate increase arose from higher retail and commercial deposits, partially offset by the redemption of subordinated debentures. As at October 31, 2003, the Bank’s core funds represent 48% of total funding (2002 — 46%).

The Bank has further enhanced its term funding through note issuance programs and the sale of mortgage-backed securities. In fiscal 2003, the Bank issued $3.4 billion in Euro medium-term notes, $2.8 billion in deposit notes in the domestic market, and $1.8 billion of Yankee certificates of deposit and other instruments. Further details on the Bank’s outstanding medium term-notes are provided in the table below. The Bank also sold $2.4 billion of NHA mortgages to Canada Housing Trust as a participant in the Canada Mortgage Bond Program.

In the normal course of business, the Bank is involved with off-balance sheet arrangements, which fall into three main categories: variable interest entities (VIEs), securitizations, and guarantees.

The Bank is involved with several types of off-balance sheet arrangements using VIEs, which fall into two broad categories:

•

VIEs used to provide a wide range of services to customers. These include sponsoring and actively managing mutual funds, as well as offering trust and estate services for personal and corporate trusts. In addition, the Bank establishes VIEs to assist clients in securitizing their financial assets, to provide investment opportunities and to allow borrowers to efficiently finance capital assets using synthetic leases.

•

Periodically, the Bank uses VIEs to diversify its funding sources and manage its capital requirements, by securitizing its own assets (including personal and corporate loans and mortgages) and issuing innovative Tier 1 capital instruments (e.g., Scotiabank Trust Securities).

As disclosed in Note 2 to the consolidated financial statements on page 84, new Canadian accounting rules, which are effective for fiscal 2005, may require some of the above VIEs to be consolidated by the Bank. However, the standard setters continue to deliberate implementation issues, and have recently proposed amendments that likely will result in non-consolidation by the Bank of trusts administered by the Bank’s trust departments and mutual funds. As well, the Bank is in the process of restructuring certain VIEs with the intent that it will not be required to consolidate these vehicles once the new rules are effective. As a result, it is difficult to determine the financial impact of these new rules; however, the Bank does not expect it to be material.

For many of the VIEs used to provide services to customers, the Bank has no exposure to loss on the underlying assets, as it does not guarantee the performance of the assets. For other transactions, the Bank may be exposed to credit, market, liquidity or operational risks. These VIEs are subject to the review and approval processes that the Bank applies to all transactions to ensure that these risks, as well as accounting, related party and ownership issues, are properly addressed.

In certain off-balance sheet arrangements, the Bank securitizes its own personal and credit card loans, mortgages and business loans by transferring the assets to unrelated third parties. As discussed further in Note 1 to the consolidated financial statements on page 82, if certain criteria are met, the transfers are treated as sales and the transferred assets are removed from the consolidated balance sheet. These securitizations allow the Bank to diversify its funding sources and manage risks and capital requirements. The total principal amount of off-balance sheet securitized personal and credit card loans has declined over the past two years, as these arrangements mature and the underlying assets are reacquired by the Bank. The total principal

(1)

The above figures reflect the inclusion of off-balance sheet instruments, as well as an estimate of prepayments on consumer and mortgage loans. The off-balance sheet gap is included in liabilities.


For the fiscal years ($ millions)	2003			2002			2001			2000			1999

Canadian dollar liquid assets
Cash and deposits with Bank of Canada	$	647		$	868		$	1,062		$	648		$	642
Deposits with other banks		1,382			686			1,124			1,131			1,327
Securities		34,234			30,310			25,284			22,129			16,571
Call and short loans		—			—			—			—			—

		36,263			31,864			27,470			23,908			18,540

Foreign currency liquid assets
Cash and deposits with Bank of Canada		2,388			2,370			2,147			1,598			1,302
Deposits with other banks		16,163			16,348			15,827			15,368			13,844
Securities		20,254			16,194			17,702			12,058			10,229
Call and short loans		—			—			291			—			—

		38,805			34,912			35,967			29,024			25,375

Total liquid assets
Cash and deposits with Bank of Canada		3,035			3,238			3,209			2,246			1,944
Deposits with other banks		17,545			17,034			16,951			16,499			15,171
Securities		54,488			46,504			42,986			34,187			26,800
Call and short loans		—			—			291			—			—

	$	75,068		$	66,776		$	63,437		$	52,932		$	43,915

Liquid assets as a % of total assets		26.3	%		22.5	%		22.3	%		20.9	%		19.7	%

amount of off-balance sheet securitized mortgages has increased over the past two years, as securitization was a cost-effective method of funding the significant growth in mortgages over that period. Given the Bank’s sizable capital base, and manner in which the securitizations are structured, the Bank is not exposed to significant liquidity risks in connection with these off-balance sheet arrangements.

Subsequent to the transfer of the assets, the Bank retains interests in certain securities issued by the trust, maintains relationships with the underlying customers and provides administrative services to the trust. The Bank recorded securitization revenues of $140 million in 2003 compared to $162 million in the prior year. More information on the amount of securitizations and associated cash flows, servicing fees and retained interests is provided in note 4(b) to the consolidated financial statements on page 86.

Off-balance sheet arrangements in the form of guarantees are issued by the Bank to earn fee revenue and consist primarily of:

•

Standby letters of credit and letters of guarantee, which are issued at the request of a bank customer to secure the customer’s payment or performance obligations to a third party. Annual fees from these arrangements are approximately $125 million.

•

Liquidity facilities, which generally provide an alternate source of financing to asset-backed commercial paper conduits, in the event market disruption prevents the conduits from issuing commercial paper.

These arrangements may expose the Bank to credit or liquidity risks and are subject to appropriate underwriting procedures.

Various other guarantees are also issued from time to time in the normal course of business. More information on guarantees can be found in note 20 to the consolidated financial statements on page 100.

Operational risk is the risk of loss resulting from external events, or from inadequate or failed internal processes, systems or human behaviour. Operational risk is an inherent risk element in each of the Bank’s business and key support activities. It can manifest itself in various ways, including breakdowns, errors, business interruptions, and inappropriate behaviour of employees, and can potentially result in financial loss, regulatory sanctions and damage to the Bank’s reputation.

Operational risk is managed and controlled within the individual business lines in accordance with Bank policies and standards, including:

•

continuous identification, assessment, measurement and management of operational risks faced by the Bank, including those related to new initiatives;

•

trained and competent staff, with clearly defined and documented approval authorities;

•

communication and enforcement of the Bank’s Guidelines for Business Conduct;

•

a comprehensive business recovery planning process, including business resumption plans for all key operations areas, and extensive on- and off-site backup facilities to ensure the availability of service delivery; and

As well, regular risk-based audits by an experienced independent internal audit department include comprehensive reviews of the design and operation of internal control systems in all business and support groups, new products and systems, and the reliability and integrity of data processing operations.

The Bank’s central operational risk management unit is responsible for developing and implementing group-wide methodologies for identification, measurement, assessment and management of operational risk. In fulfilling its mandate it is responsible for:

•

defining high-level operational risk policies to ensure a comprehensive and consistent approach to the identification and management of operational risk.

•

providing guidance to business units on operational risk-related issues, including regulatory changes and developments in the measurement and management of operational risk, to promote best practices throughout the Bank; and

•

ongoing review and improvement of all aspects of operational risk management to reflect developments in industry best practice and regulatory requirements.

In 2003, the Bank implemented a guided self-assessment program for all significant business units under the direction of the central operational risk management unit. Line management of each business unit, in conjunction with risk management personnel, conducted a structured operational risk review to identify and assess operational risks relevant to the business unit and, where appropriate, develop action plans to mitigate identified risks. Results of this program were aggregated and reported to executive management and the Board of Directors.

In 2003, the Bank also enhanced its operational loss data collection through the development of data standards based on industry norms, and broadened the scope of data collection in relation to both business units and types of losses.

Reputational risk is the risk that negative publicity regarding an institution’s business practices, whether true or not, will adversely affect the Bank’s operations or customer base, or will require costly litigation or other defensive measures.

Negative publicity about an institution’s business practices may involve any aspect of its operations, but usually involves questions about business ethics and integrity, competence, or quality of products and services. Negative publicity and attendant reputational risk frequently arise as a by-product of some other kind of risk management control failure.

Reputational risk is managed and controlled throughout the Bank by a wide array of codes of conduct, governance practices and risk management programs, policies, procedures, and training. Many relevant checks and balances are outlined in greater detail in other risk management sections, particularly Operational Risk. All directors, officers and employees have a responsibility to conduct their activities in a manner that minimizes reputational risk. The activities of the General Counsel, Corporate Secretary, Public & Corporate Affairs and Compliance departments are particularly oriented to the management of reputational risk.

In providing credit or advice to customers, the Bank considers whether the transaction or relationship might give rise to reputational risk. To manage this risk, the Bank has created a Reputational Risk Committee to support other risk management committees and business units with their assessment of complex products and transactions. To ensure that the Bank executes transactions that are, and will be seen to be, congruent with high ethical standards, the Reputational Risk Committee considers a broad array of factors when assessing transactions, including: the extent, and outcome, of legal and regulatory due diligence pertinent to the transaction; the economic intent of the transaction; the effect of the transaction on the transparency of a customer’s financial reporting; the need for customer or public disclosure; conflict of interest; fairness; and public perception. The Reputational Risk Committee may impose any conditions on customer transactions that the Committee believes are necessary to ensure that the transactions meet Bank standards.

Environmental issues continue to increase in importance for all our stakeholders — shareholders, customers, employees and communities. We realize that we must manage the direct and indirect impact we have on the environment. To do this, we have implemented policies, practices and employee initiatives to operate in an environmentally friendly way.

Scotiabank’s environmental policy was first introduced in 1991, and reflects our commitment to responsible conduct, both to protect and conserve the environment and to safeguard the interests of stakeholders from environmental risk. The policy has since been periodically updated, with the approval of the Bank’s Board of Directors, and guides our day-to-day operations, the management of our real estate holdings and our lending practices. In addition, many of our supplier agreements now include an environmental component.

The Bank is dedicated to integrating environmental compliance and conservation into the management of its business operations. This integration will be pursued in a manner consistent with sound business principles, with due regard for sustainable development.

Environmental considerations are also built into the Bank’s credit evaluation procedures through an Environmental Lending Policy that has been in place for more than 10 years. The policy and related procedures are designed to safeguard the interests of stakeholders from the effects of environmental risk.


	2003

				% of
				earning
As at September 30 ($ billions)	Balance			assets			2002			2001			2000			1999

North America
Canada	$	158.5			60.8	%	$	147.8		$	135.3		$	133.0		$	122.7
United States		34.1			13.1			46.4			43.1			44.0			38.9

		192.6			73.9			194.2			178.4			177.0			161.6

Europe
United Kingdom		8.1			3.1			10.2			10.4			9.2			8.1
Germany		2.9			1.1			2.8			3.5			3.3			2.4
France		1.5			0.6			1.4			1.5			1.9			1.7
Netherlands		1.5			0.6			1.1			1.0			0.6			1.0
Ireland		1.4			0.5			1.6			1.4			0.9			1.2
Other		4.8			1.9			5.0			5.6			4.4			4.2

		20.2			7.8			22.1			23.4			20.3			18.6

Asia
South Korea		1.8			0.7			2.3			1.5			1.4			1.4
Japan		1.7			0.6			1.6			1.4			1.3			1.3
Malaysia		1.5			0.6			1.6			1.7			1.3			1.2
India		1.1			0.4			1.1			1.1			0.9			0.7
Hong Kong		1.0			0.4			1.2			1.4			2.0			1.6
Other		2.0			0.8			2.2			1.9			1.5			1.6

		9.1			3.5			10.0			9.0			8.4			7.8

Caribbean
Jamaica		2.6			1.0			3.4			3.2			2.8			2.7
Puerto Rico		2.1			0.8			2.6			2.4			2.1			2.0
Bahamas		1.7			0.6			1.8			1.7			1.5			1.4
Trinidad & Tobago		1.6			0.6			1.7			1.7			1.5			1.3
Other		6.4			2.5			6.9			5.2			4.6			4.2

		14.4			5.5			16.4			14.2			12.5			11.6

Latin America
Mexico		18.2			7.0			20.3			19.7			1.5			1.2
Chile		3.4			1.3			3.6			3.0			3.1			0.4
Argentina		—			—			0.2			3.7			3.7			3.3
Other		3.7			1.4			3.7			3.9			3.3			2.8

		25.3			9.7			27.8			30.3			11.6			7.7

Middle East and Africa		0.4			0.2			0.5			0.4			0.4			0.6

General allowance⁽¹⁾		(1.5	)		(0.6	)		(1.5	)		(1.5	)		(1.3	)		(1.3	)

Total	$	260.5			100.0	%	$	269.5		$	254.2		$	228.9		$	206.6

Certain comparative amounts in this report have been reclassified to conform with current year presentation.


									Investment in
			Interbank				Government and		subsidiaries				2003		2002
As at October 31 ($ millions)	Loans		deposits		Trade		other securities		and affiliates⁽³⁾		Other		Total		Total

Asia
South Korea	$	819	$	11	$	236	$	547	$	—	$	22	$	1,635	$	2,293
Japan		510		56		60		630		—		103		1,359		1,301
Malaysia		659		13		37		338		128		—		1,175		1,122
India		296		59		491		40		—		17		903		596
Hong Kong		402		—		31		217		—		47		697		758
China		26		29		301		7		—		52		415		149
Other⁽²⁾		215		176		131		310		—		7		839		944

		2,927		344		1,287		2,089		128		248		7,023		7,163

Latin America
Mexico		1,011		—		118		742		888		6		2,765		2,474
Brazil		35		—		561		400		—		1		997		1,065
Chile		431		198		6		—		248		1		884		763
Venezuela		1		—		2		149		89		—		241		300
Argentina		16		—		—		35		—		—		51		164
Other⁽⁴⁾		1,296		6		54		74		104		1		1,535		1,518

		2,790		204		741		1,400		1,329		9		6,473		6,284

(1)		Cross-border exposure represents a claim, denominated in a currency other than the local one, against a borrower in a foreign country on the basis of ultimate risk.

(2)		Includes Indonesia, The Philippines, Singapore, Taiwan and Thailand.

(3)		Excludes goodwill of nil (2002 — $36) in Mexico and $111 (2002 — $110) in Chile.

(4)		Includes Colombia, Costa Rica, El Salvador, Panama, Peru and Uruguay.


																Percentage mix
Excludes reverse repos
As at September 30 ($ billions)	2003			2002			2001			2000			1999			2003			1999

Canada
Atlantic provinces	$	10.0		$	9.4		$	9.3		$	9.2		$	9.1			6.5	%		6.6	%
Quebec		7.9			7.1			6.9			8.1			7.5			5.0			5.4
Ontario		60.8			55.5			51.5			50.7			48.3			39.0			34.7
Manitoba and Saskatchewan		5.0			4.8			4.8			4.4			4.2			3.2			3.0
Alberta		11.7			11.1			11.1			11.0			10.0			7.5			7.2
British Columbia		12.8			12.3			12.2			12.4			12.1			8.2			8.7

		108.2			100.2			95.8			95.8			91.2			69.4			65.6

International
United States		13.8			21.5			21.5			23.5			22.0			8.9			15.8
Europe		8.0			10.8			10.3			9.3			7.9			5.1			5.6
Caribbean		10.2			11.6			10.6			9.4			8.7			6.6			6.3
Asia		4.6			4.9			5.2			5.8			5.7			2.9			4.1
Latin America		12.2			13.1			15.0			7.6			4.4			7.9			3.2
Middle East and Africa		0.4			0.3			0.3			0.3			0.4			0.2			0.3

		49.2			62.2			62.9			55.9			49.1			31.6			35.3

General allowance⁽¹⁾		(1.5	)		(1.5	)		(1.5	)		(1.3	)		(1.3	)		(1.0	)		(0.9	)

Total loans and acceptances	$	155.9		$	160.9		$	157.2		$	150.4		$	139.0			100.0	%		100.0	%


		2003
Excludes reverse repos
As at September 30 ($ billions)		Balance			% of total			2002			2001			2000

Loans to households
Residential mortgages		$	60.4			38.8	%	$	55.9		$	52.5		$	49.8
Personal loans			25.6			16.4			22.9			19.7			17.7

			86.0			55.2			78.8			72.2			67.5

Loans to businesses and governments
Resource and manufacturing, excluding automotive
	Mining and primary metals		3.3			2.1			4.0			4.1			3.8
	Oil and gas		2.6			1.7			3.8			3.5			4.2
	Food and beverage		2.5			1.6			3.1			3.3			2.9
	Agriculture		2.3			1.5			2.3			2.3			2.2
	Electrical and other machinery		1.6			1.1			2.2			3.2			2.8
	Forest products		1.6			1.0			2.6			2.5			2.1
	Other resource and manufacturing		5.5			3.5			6.3			7.7			8.3

			19.4			12.5			24.3			26.6			26.3
Real estate and construction			7.0			4.5			7.2			8.0			8.9
Banks and other financial services			6.5			4.1			7.9			6.7			7.5
Wholesale and retail distribution, excluding automotive			5.7			3.7			5.1			6.6			7.0
Automotive manufacturing and distribution			4.8			3.1			5.0			5.2			5.4
Transportation			3.8			2.4			4.8			4.7			4.7
Telecommunications and cable			3.2			2.0			4.8			4.9			4.1
Hotels			2.9			1.9			3.0			3.1			2.7
Utilities			2.8			1.8			4.6			3.9			2.6
Media			2.5			1.6			2.9			2.9			3.4
Leisure and amusements			2.1			1.4			2.4			2.1			2.6
Business services			1.9			1.2			2.2			2.3			1.8
Government			1.7			1.1			1.3			1.7			0.9
Other services			7.1			4.5			8.1			7.8			6.3

			71.4			45.8			83.6			86.5			84.2

			157.4			101.0			162.4			158.7			151.7
General allowance⁽¹⁾			(1.5	)		(1.0	)		(1.5	)		(1.5	)		(1.3	)

Total loans and acceptances		$	155.9			100.0	%	$	160.9		$	157.2		$	150.4


	2003						2002

Loans and acceptances, as at October 31, 2003	Investment		Non-investment				Investment		Non-investment
($ millions)	grade		grade		Total		grade		grade		Total

Power sector⁽¹⁾
Regulated utilities	$	542	$	494	$	1,036	$	1,213	$	630	$	1,843
Diversified generation		25		338		363		—		789		789
Independent power projects with power purchase agreements		437		272		709		558		475		1,033
Other power projects		45		631		676		202		1,005		1,207

Total	$	1,049	$	1,735	$	2,784	$	1,973	$	2,899	$	4,872

Telecommunication sector
Cable operators	$	131	$	1,441	$	1,572	$	223	$	1,666	$	1,889
Regulated telephone		420		113		533		1,112		249		1,361
Unregulated telephone		56		186		242		69		374		443
Wireless		172		501		673		167		782		949
Other		—		97		97		—		180		180

Total	$	779	$	2,338	$	3,117	$	1,571	$	3,251	$	4,822

(1)

Loans in the Power sector are included in the Utilities category in Table 16 above.


As at October 31 ($ millions)		2003			2002			2001			2000			1999

Gross impaired loans
Balance at beginning of year		$	3,987		$	4,439		$	2,741		$	2,380		$	2,291
Acquisition of subsidiaries			—			—			906			121			—
Net additions			698			3,054			1,820			965			809
Disposal of Scotiabank Quilmes operations⁽²⁾			—			(1,006	)		—			—			—
Writeoffs			(927	)		(2,376	)		(1,165	)		(781	)		(658	)
Foreign exchange and other			(517	)		(124	)		137			56			(62	)

Balance at end of year			3,241			3,987			4,439			2,741			2,380

Allowance for credit losses⁽³⁾
Balance at beginning of year			3,367			4,180			2,802			2,536			1,870
Acquisition of subsidiaries			—			—			919			153			—
Provision for credit losses charged to:
	Income		893			2,029			1,425			765			635
	Retained earnings		—			—			—			—			550	⁽⁴⁾
Disposal of Scotiabank Quilmes operations⁽²⁾			—			(504	)		—			—			—
Writeoffs			(927	)		(2,376	)		(1,165	)		(781	)		(658	)
Recoveries			164			169			123			113			138
Foreign exchange and other			(303	)		(131	)		76			16			1

Balance at end of year			3,194			3,367			4,180			2,802			2,536

Net impaired loans
Balance at beginning of year			620			259			(61	)		(156	)		421
Net change in gross impaired loans			(746	)		(452	)		1,698			361			89
Net change in allowance for credit losses			173			813			(1,378	)		(266	)		(666	)

Balance at end of year		$	47		$	620		$	259		$	(61	)	$	(156	)

(1)

Includes reversals of $64 (2002 — charge of $454) of specific provisions with respect to Argentina, including cross-border exposure.

Table 21 Provisions for credit losses as a percentage of average loans and acceptances


For the fiscal years ($ millions)		2003			2002

Personal loans		$	246		$	241

Businesses and governments
Resource and manufacturing, excluding automotive
	Oil and gas		(51	)		9
	Food and beverage		54			138
	Forest products		19			15
	Agriculture		25			3
	Electrical and other machinery		42			57
	Primary metals and mining		56			(2	)
	Other		25			181

			170			401
Automotive manufacturing and distribution			34			3
Banks and other financial services			—			(23	)
Transportation			140			4
Wholesale and retail distribution, excluding automotive			25			20
Utilities			113			180
Telecommunications and cable			27			552
Real estate and construction			55			53
Media			—			24
Hotels			30			(1	)
Government			1			1
Business services			67			33
Leisure & amusements			14			4
Other services			35			83

			711			1,334

			957			1,575
Argentina			(64	)		454

Total specific provisions		$	893		$	2,029


		2003								2002

Excluding reverse repos					Allowance for								Allowance for
As at October 31 ($ millions)		Net			credit losses			Gross		Net			credit losses			Gross

Personal loans		$	321		$	(436	)	$	757	$	402		$	(479	)	$	881

Businesses and governments
Resource and manufacturing, excluding automotive
	Oil and gas		—			—			—		5			(31	)		36
	Food and beverage		50			(88	)		138		106			(47	)		153
	Forest products		10			(29	)		39		20			(22	)		42
	Agriculture		14			(51	)		65		29			(34	)		63
	Electrical and other machinery		49			(59	)		108		100			(68	)		168
	Primary metals and mining		58			(88	)		146		44			(65	)		109
	Other		69			(91	)		160		214			(188	)		402

			250			(406	)		656		518			(455	)		973
Automotive manufacturing and distribution			42			(66	)		108		18			(52	)		70
Banks and other financial services			2			(9	)		11		17			(87	)		104
Transportation			100			(140	)		240		—			(61	)		61
Wholesale and retail distribution, excluding automotive			20			(66	)		86		74			(85	)		159
Utilities			156			(138	)		294		186			(162	)		348
Telecommunications and cable			300			(86	)		386		528			(162	)		690
Real estate and construction			69			(124	)		193		106			(83	)		189
Media			7			(19	)		26		20			(28	)		48
Hotels			169			(70	)		239		47			(25	)		72
Government			—			(3	)		3		19			(4	)		23
Business services			15			(19	)		34		27			(27	)		54
Leisure & amusements			51			(40	)		91		81			(36	)		117
Other services			20			(97	)		117		52			(147	)		199

			1,201			(1,283	)		2,484		1,693			(1,414	)		3,107

			1,522			(1,719	)		3,241		2,095			(1,893	)		3,988
Allowance for credit losses — general			(1,475	)							(1,475	)

Net impaired loans after general allowance		$	47							$	620


As at October 31 ($ billions)							2003					2002

Conversion		Weighting							Risk-					Risk-
factor		factor					Gross		weighted			Gross		weighted

On-balance sheet
	—		0 – 20	%	Cash resources		$	20.6	$	3.1		$	20.3	$	3.0
	—		0 – 100	%	Securities⁽¹⁾			63.2		9.0			56.2		10.3
	—		0 – 50	%	Residential mortgages			61.5		19.4			56.1		15.6
	—		0 – 100	%	Loans and acceptances			117.0		85.2			138.0		97.4
	—		0 – 100	%	Other assets			23.6		5.0			25.8		5.9

						Total on-balance sheet		285.9		121.7			296.4		132.2

Off-balance sheet
					Indirect credit instruments:
	0%		—			One year and under credit commitments		76.2		—			87.5		—
	20%		0 – 100	%		Short-term trade letters of credit		0.7		0.1			0.8		0.1
	50%		0 – 100	%		Longer-term credit commitments		34.3		14.9			39.5		17.1
	50%		0 – 100	%		Performance guarantees		4.6		2.3			5.6		2.8
	100%		0 – 100	%		Standby letters of credit, letters of guarantee, securities lending and other commitments		16.6		8.9			14.3		6.9

								132.4		26.2			147.7		26.9

					Interest rate instruments:
	0 — 1.5%		0 – 50	%		Futures and forward rate agreements		173.5		—			193.9		—
	0 — 1.5%		0 – 50	%		Interest rate swaps		484.1		2.2			537.8		3.3
	0 — 1.5%		0 – 50	%		Interest rate options		105.4		0.2			98.0		0.2

								763.0		2.4			829.7		3.5

					Foreign exchange instruments:
	1 — 7.5%		0 – 50	%		Futures and foreign exchange contracts		189.8		2.0			213.9		1.5
	1 — 7.5%		0 – 50	%		Currency swaps		52.3		1.3			54.0		0.9
	1 — 7.5%		0 – 50	%		Currency options		6.6		0.1			8.3		0.1

								248.7		3.4			276.2		2.5

					Other derivative instruments
	6 — 10%		0 – 50	%		Equity swaps and options		20.6		0.4			20.4		0.6
	6 — 10%		0 – 50	%		Credit derivatives		17.4		0.3			12.1		0.2
	7 — 15%		0 – 50	%		Other		2.9		0.1			3.3		0.1

								40.9		0.8			35.8		0.9

					Total off-balance sheet			1,185.0		32.8			1,289.4		33.8

					Total gross and risk-weighted assets			1,470.9		154.5			1,585.8		166.0

						Impact of master netting				(3.1	)				(3.3	)

						Market risk – risk assets equivalent⁽¹⁾				3.1					2.7

					Total		$	1,470.9	$	154.5		$	1,585.8	$	165.4

(1)

Includes assets which are subject to market risk. The risk weighting of these assets is included in “Market risk — risk assets equivalent.”

Table 26 Charges related to the sale of the operations of Scotiabank Quilmes

(1)

Reflects the loss from pesofication (the impact of converting U.S. dollar-denominated assets and liabilities to Argentine pesos at different and non-market rates, as mandated by the Argentine government).

(2)

Loss on disposal of subsidiary operations is net of a $95 foreign exchange gain, which was transferred from cumulative foreign exchange translation in the consolidated balance sheet. This foreign exchange gain primarily offsets the foreign exchange loss from the devaluation of the Argentine peso on the allowance for credit losses established in the first quarter of 2002.

Table 27 Components of net income as a percentage of average total assets⁽¹⁾

(1)

Income from tax-exempt securities has been expressed on an equivalent before-tax basis. The provision for income taxes has been adjusted by a corresponding amount: 2003 — $278 million; 2002 — $268 million; 2001 — $230 million; 2000 — $194 million; 1999 — $163 million.

Table 28 General allowance and unrealized gains (losses) on investment securities


		2003								2002

As at and for the quarter ended		Q4		Q3		Q2		Q1		Q4⁽¹⁾		Q3		Q2		Q1⁽²⁾

Operating results ($ millions)
Net interest income (TEB⁽³⁾)			1,584		1,630		1,603		1,611		1,702		1,733		1,712		1,796
Total revenue (TEB⁽³⁾)			2,591		2,639		2,568		2,645		2,721		2,729		2,770		2,665
Provision for credit losses			120		200		248		325		429		400		350		850
Non-interest expenses			1,494		1,453		1,429		1,355		1,562		1,395		1,505		1,512
Provision for income taxes (TEB⁽³⁾)			250		291		225		296		75		311		275		208
Net income			660		626		596		595		583		564		598		52
Net income available to common shareholders			650		616		572		568		559		537		571		25

Operating performance
Basic earnings per share ($)			1.28		1.22		1.14		1.12		1.11		1.07		1.13		0.05
Diluted earnings per share ($)			1.26		1.20		1.12		1.11		1.09		1.05		1.11		0.05
Return on equity (%)			18.6		17.7		17.2		16.6		16.5		16.2		18.3		0.8
Productivity ratio (%)(TEB⁽³⁾)			57.7		55.1		55.6		51.2		57.4		51.1		54.3		56.7
Net interest margin on total average assets (%)(TEB⁽³⁾)			2.22		2.28		2.25		2.17		2.28		2.33		2.34		2.41

Balance sheet information ($ billions)
Cash and securities			83.8		78.9		77.3		74.5		76.5		78.0		82.1		82.4
Loans and acceptances			178.5		179.6		189.2		188.0		194.1		194.7		191.4		187.7
Total assets			285.9		282.2		291.7		289.6		296.4		299.8		297.1		294.5
Deposits			192.7		190.3		189.2		192.7		195.6		197.5		195.4		194.5
Preferred shares			0.8		0.8		0.8		1.1		1.3		1.6		1.8		1.8
Common shareholders’ equity			13.8		13.9		13.6		13.7		13.5		13.4		13.0		12.6
Assets under administration			162.0		161.2		154.9		154.9		144.4		156.0		163.1		159.1
Assets under management			20.0		20.2		19.6		20.7		21.5		22.7		24.4		24.0

Capital measures (%)
Tier 1 capital ratio			10.8		10.6		10.3		10.0		9.9		9.8		9.9		9.2
Total capital ratio			13.2		13.1		12.7		12.8		12.7		12.5		13.4		12.7
Common equity to risk-weighted assets			9.2		9.1		8.7		8.8		8.6		8.3		8.3		8.0
Tangible common equity to risk-weighted assets			8.9		8.7		8.4		8.5		8.3		8.0		8.0		7.7
Risk-weighted assets ($ billions)			154.5		157.2		159.1		163.2		165.4		168.7		164.5		164.2

Credit quality
Net impaired loans after general allowance ($ millions)			47		317		378		559		620		1,019		515		670
General allowance for credit losses ($ millions)			1,475		1,475		1,475		1,475		1,475		1,475		1,475		1,475
Net impaired loans as a % of loans and acceptances⁽⁴⁾			0.03		0.18		0.20		0.30		0.32		0.52		0.27		0.36
Specific provision for credit losses as a % of average loans and acceptances			0.27		0.43		0.53		0.67		0.87		0.82		0.74		1.77

Common share information
Share price ($)
	High		67.39		64.38		55.79		54.75		51.23		56.19		55.88		50.74
	Low		58.37		55.03		49.67		44.55		42.02		44.06		45.20		44.05
	Close		65.47		60.47		55.79		50.70		45.88		49.25		53.95		48.59
Shares outstanding (millions)
	Average — Basic		505.9		505.2		503.5		504.5		504.0		504.8		504.3		504.3
	Average — Diluted		514.2		513.8		511.3		512.3		510.9		513.5		513.3		513.2
	End of period		505.4		506.1		504.0		503.7		504.1		503.8		505.3		503.7
Dividends per share ($)			0.44		0.44		0.40		0.40		0.37		0.37		0.37		0.34
Dividend yield (%)			2.8		2.9		3.0		3.2		3.2		3.0		2.9		2.9
Dividend payout ratio (%)			34.2		36.1		35.2		35.6		33.3		34.7		32.7		681.0
Market capitalization ($ billions)			33.1		30.6		28.1		25.5		23.1		24.8		27.3		24.5
Book value per share ($)			27.34		27.53		26.99		27.11		26.78		26.52		25.78		25.00
Market value to book value multiple			2.4		2.2		2.1		1.9		1.7		1.9		2.1		1.9
Price to earnings multiple (trailing 4 quarters)			13.8		13.2		12.6		11.4		13.7		14.8		16.3		15.2

(1)

Excluding charges for Argentina, the financial results would have been as follows: total revenue (TEB) $2,717, provision for credit losses $475, non-interest expenses $1,325 and provision for income taxes (TEB) $262. Net income would have been unchanged.

(2)

Excluding charges for Argentina, the financial results would have been as follows: total revenue (TEB) $2,772, provision for credit losses $350, provision for income taxes (TEB) $275, net income $592, net income available to common shareholders $565, return on equity 17.3%, specific provision for credit losses as a % of average loans and acceptances 0.73%, basic earnings per share $1.12, diluted earnings per share $1.10, dividend payout ratio 30.4% and price to earnings multiple 11.4.

(4)

Net impaired loans are impaired loans less the allowance for credit losses, including the general allowance.

The management of The Bank of Nova Scotia (the Bank) is responsible for the integrity and fair presentation of the financial information contained in this Annual Report. These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles, including the accounting requirements of the Superintendent of Financial Institutions Canada.

The consolidated financial statements, where necessary, include amounts which are based on the best estimates and judgement of management. Financial information presented elsewhere in this Annual Report is consistent with that shown in the accompanying consolidated financial statements.

Management has always recognized the importance of the Bank maintaining and reinforcing the highest possible standards of conduct in all of its actions, including the preparation and dissemination of statements fairly presenting the financial condition of the Bank. In this regard, management has developed and maintains a system of accounting and reporting which provides for the necessary internal controls to ensure that transactions are properly authorized and recorded, assets are safeguarded against unauthorized use or disposition, and liabilities are recognized. The system is augmented by written policies and procedures, the careful selection and training of qualified staff, the establishment of organizational structures providing an appropriate and well-defined division of responsibilities, and the communication of policies and guidelines of business conduct throughout the Bank.

The system of internal controls is further supported by a professional staff of internal auditors who conduct periodic audits of all aspects of the Bank’s operations. As well, the Bank’s Chief Auditor has full and free access to, and meets periodically with, the Audit Committee of the Board of Directors.

The Superintendent of Financial Institutions Canada examines and enquires into the business and affairs of the Bank, to the extent deemed necessary, to satisfy himself that the provisions of the Bank Act, having reference to the safety of the interests of depositors, creditors and shareholders of the Bank, are being duly observed and that the Bank is in a sound financial condition.

The Audit Committee, composed entirely of outside directors, reviews the consolidated financial statements with both management and the independent auditors before such statements are approved by the Board of Directors and submitted to the shareholders of the Bank.

The Conduct Review and Pension Committees of the Board of Directors, composed entirely of outside directors, review and report their findings to the Board of Directors on all related party transactions having a material impact on the Bank.

KPMG LLP and PricewaterhouseCoopers LLP, the independent auditors appointed by the shareholders of the Bank, have examined the consolidated financial statements of the Bank in accordance with Canadian generally accepted auditing standards and have expressed their opinion upon completion of such examination in the following report to the shareholders. In order to provide their opinion on these consolidated financial statements, the Shareholders’ Auditors review the system of internal controls and conduct their work to the extent that they consider appropriate. The Shareholders’ Auditors have full and free access to, and meet periodically with, the Audit Committee to discuss their audit and findings as to the integrity of the Bank’s accounting, financial reporting and related matters.

We have audited the Consolidated Balance Sheets of The Bank of Nova Scotia as at October 31, 2003 and 2002, and the Consolidated Statements of Income, Changes in Shareholders’ Equity and Cash Flows for each of the years in the three-year period ended October 31, 2003. These financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Bank as at October 31, 2003 and 2002, and the results of its operations and its cash flows for each of the years in the three-year period ended October 31, 2003 in accordance with Canadian generally accepted accounting principles.


As at October 31 ($ millions)		2003			2002

Assets
Cash resources
Cash and non-interest-bearing deposits with banks		$	1,373		$	1,664
Interest-bearing deposits with banks			17,111			16,582
Precious metals			2,097			2,027

			20,581			20,273

Securities (Note 3)
Investment			20,293			21,602
Trading			42,899			34,592

			63,192			56,194

Loans (Note 4)
Residential mortgages			61,646			56,295
Personal and credit cards			26,277			23,363
Business and governments			64,313			77,181
Securities purchased under resale agreements			22,648			32,262

			174,884			189,101
Allowance for credit losses (Note 5 b)			3,217			3,430

			171,667			185,671

Other
Customers’ liability under acceptances			6,811			8,399
Land, buildings and equipment (Note 6)			1,944			2,101
Trading derivatives’ market valuation (Note 22 d)			15,308			15,821
Goodwill (Note 7)			270			299
Other intangible assets (Note 7)			284			305
Other assets (Note 8)			5,835			7,317

			30,452			34,242

		$	285,892		$	296,380

Liabilities and shareholders’ equity
Deposits (Note 9)
Personal		$	76,431		$	75,558
Business and governments			93,541			93,830
Banks			22,700			26,230

			192,672			195,618

Other
Acceptances			6,811			8,399
Obligations related to securities sold under repurchase agreements			28,686			31,881
Obligations related to securities sold short			9,219			8,737
Trading derivatives’ market valuation (Note 22 d)			14,758			15,500
Other liabilities (Note 10)			14,145			15,678
Non-controlling interest in subsidiaries (Note 11)			2,326			1,912

			75,945			82,107

Subordinated debentures (Note 12)			2,661			3,878

Shareholders’ equity
Capital stock (Note 13)
	Preferred shares		800			1,275
	Common shares and contributed surplus		3,141			3,002
Retained earnings			11,747			10,398
Cumulative foreign currency translation			(1,074	)		102

			14,614			14,777

		$	285,892		$	296,380

The accompanying notes are an integral part of these consolidated financial statements.


For the year ended October 31 ($ millions)		2003		2002		2001

Interest income
Loans		$	9,945	$	10,708	$	13,049
Securities			2,859		3,087		3,062
Deposits with banks			442		573		872

			13,246		14,368		16,983

Interest expense
Deposits			5,222		5,519		8,233
Subordinated debentures			139		203		303
Other			1,735		1,971		2,247

			7,096		7,693		10,783

Net interest income			6,150		6,675		6,200
Provision for credit losses (Note 5 b and Note 23)			893		2,029		1,425

Net interest income after provision for credit losses			5,257		4,646		4,775

Other income
Card revenues			204		280		211
Deposit and payment services			593		556		561
Mutual funds			161		174		161
Investment management, brokerage and trust services			455		473		477
Credit fees			684		671		640
Trading revenues			501		439		447
Investment banking			673		592		598
Net gain on investment securities (Note 3)			159		179		217
Securitization revenues			140		162		220
Other			445		416		539

			4,015		3,942		4,071

Net interest and other income			9,272		8,588		8,846

Non-interest expenses
Salaries and staff benefits			3,361		3,344		3,220
Premises and technology			1,156		1,183		1,133
Communications			251		281		285
Advertising and business development			199		208		217
Professional			141		136		157
Business and capital taxes			144		168		208
Other			448		417		442
Loss on disposal of subsidiary operations (Note 23)			31		237		—

			5,731		5,974		5,662

Income before the undernoted			3,541		2,614		3,184
Provision for income taxes (Note 15)			784		601		876
Non-controlling interest in net income of subsidiaries			280		216		139

Net income		$	2,477	$	1,797	$	2,169

Preferred dividends paid and other			71		105		108

Net income available to common shareholders		$	2,406	$	1,692	$	2,061

Average number of common shares outstanding (thousands) (Note 17):
	Basic		504,783		504,340		500,619
	Diluted		512,869		512,752		508,995
Earnings per common share (in dollars) (Note 17):
	Basic	$	4.76	$	3.36	$	4.12
	Diluted	$	4.69	$	3.30	$	4.05
Dividends per common share (in dollars)		$	1.68	$	1.45	$	1.24

The accompanying notes are an integral part of these consolidated financial statements.


For the year ended October 31 ($ millions)		2003			2002			2001

Preferred shares (Note 13)
Bank:
	Balance at beginning of year	$	1,025		$	1,525		$	1,525
	Redeemed		(475	)		(500	)		—

	Balance at end of year		550			1,025			1,525
Scotia Mortgage Investment Corporation			250			250			250

Total			800			1,275			1,775

Common shares and contributed surplus
Common shares (Note 13):
	Balance at beginning of year		3,002			2,920			2,765
	Issued		163			101			155
	Purchased for cancellation		(25	)		(19	)		—

	Balance at end of year		3,140			3,002			2,920
Contributed surplus: Fair value of stock options (Note 14)			1			—			—

Total			3,141			3,002			2,920

Retained earnings
Balance at beginning of year⁽¹⁾			10,398			9,674			8,275
Cumulative effect of adoption of new accounting standards			—			(76	)⁽²⁾		(39	)⁽³⁾

			10,398			9,598			8,236
Net income			2,477			1,797			2,169
Dividends: Preferred			(52	)		(105	)		(108	)
	Common		(849	)		(732	)		(621	)
Purchase of shares and premium on redemption			(220	)		(154	)		—
Other			(7	)		(6	)		(2	)

Balance at end of year			11,747			10,398			9,674

Cumulative foreign currency translation
Balance at beginning of year			102			239			160
Net unrealized foreign exchange translation gains/(losses)⁽⁴⁾			(1,176	)		(137	)⁽⁵⁾		79

Balance at end of year			(1,074	)		102			239

Total shareholders’ equity at end of year		$	14,614		$	14,777		$	14,608

(4)

Comprises unrealized foreign exchange translation gains/(losses) on net investments in self-sustaining foreign operations of $(2,185) (2002 — $(128); 2001 — $348), gains/(losses) from related foreign exchange hedging activities of $1,009 (2002 — $(31); 2001 — $(288)), reversal of prior years’ foreign exchange losses which were recognized in the Consolidated Statement of Income of nil (2002 — $12; 2001 — $19) and other of nil (2002 — $10; 2001 — nil).

(5)

Includes unrealized foreign exchange gains of $107 arising in fiscal 2002 from the translation of the net investment position in Scotiabank Quilmes, which were recorded in cumulative foreign currency translation. On disposal of Scotiabank Quilmes’ operations (refer to Note 23), the lifetime foreign exchange gains of $95 were transferred to the Consolidated Statement of Income.

The accompanying notes are an integral part of these consolidated financial statements.


Sources and (uses) of cash flows
For the year ended October 31 ($ millions)		2003			2002			2001

Cash flows from operating activities
Net income	$	2,477		$	1,797		$	2,169
Adjustments to net income to determine cash flows:
Depreciation and amortization		237			271			295
Provision for credit losses		893			2,029			1,425
Future income taxes		(108	)		104			108
Net gain on investment securities		(159	)		(179	)		(217	)
Loss on disposal of subsidiary operations (Note 23)		—			237			—
Net accrued interest receivable and payable		406			(147	)		(104	)
Trading securities		(10,218	)		(7,402	)		(2,817	)
Trading derivatives’ market valuation, net		(375	)		105			(888	)
Other, net		(263	)		136			(428	)

		(7,110	)		(3,049	)		(457	)

Cash flows from financing activities
Deposits		10,941			14,846			845
Obligations related to securities sold under repurchase agreements		722			2,671			(975	)
Obligations related to securities sold short		653			2,314			2,122
Subordinated debenture redemptions/repayments		(1,059	)		(1,421	)		(106	)
Capital stock issued		163			101			111
Capital stock redeemed/purchased for cancellation		(720	)		(673	)		—
Cash dividends paid		(901	)		(837	)		(686	)
Other, net		(415	)		1,199			(359	)

		9,384			18,200			952

Cash flows from investing activities
Interest-bearing deposits with banks		(2,061	)		(117	)		1,753
Loans, excluding securitizations		(903	)		(20,244	)		1,257
Loan securitizations		2,443			2,241			2,053
Investment securities:
Purchases		(26,566	)		(29,434	)		(46,573	)
Maturities		10,685			10,665			8,165
Sales		15,168			21,302			33,233
Land, buildings and equipment, net of disposals		(135	)		(38	)		(164	)
Other, net⁽¹⁾		(449	)		198			(29	)

		(1,818	)		(15,427	)		(305	)

Effect of exchange rate changes on cash and cash equivalents		(148	)		(96	)		37

Net change in cash and cash equivalents		308			(372	)		227
Cash and cash equivalents at beginning of year		589			961			734

Cash and cash equivalents at end of year	$	897		$	589		$	961

Represented by:
Cash and non-interest-bearing deposits with banks	$	1,373		$	1,664		$	1,535
Cheques and other items in transit, net liability (Note 10)		(476	)		(1,075	)		(574	)

Cash and cash equivalents at end of year	$	897		$	589		$	961

Cash disbursements made for:
Interest	$	6,971		$	8,332		$	11,214
Income taxes	$	421		$	817		$	1,083

The accompanying notes are an integral part of these consolidated financial statements.


Page	Note

80		1.	Significant accounting policies

84		2.	Future accounting changes

85		3.	Securities

86		4.	Loans

88		5.	Impaired loans and allowance for credit losses

88		6.	Land, buildings and equipment

89		7.	Goodwill and other intangible assets

89		8.	Other assets

90		9.	Deposits

90		10.	Other liabilities

90		11.	Non-controlling interest in subsidiaries

91		12.	Subordinated debentures

92		13.	Capital stock

93		14.	Stock-based compensation

95		15.	Corporate income taxes

96		16.	Employee future benefits

97		17.	Earnings per common share

97		18.	Related party transactions

97		19.	Segmented results of operations

100		20.	Guarantees, commitments and contingent liabilities

102		21.	Financial instruments

105		22.	Derivative instruments

108		23.	Argentine charges

109		24.	Acquisitions

110		25.	Sale of business

110		26.	Reconciliation of Canadian and United States generally accepted accounting principles

The consolidated financial statements of The Bank of Nova Scotia have been prepared in accordance with Canadian generally accepted accounting principles (GAAP), including the accounting requirements of the Superintendent of Financial Institutions Canada (the Superintendent). The significant accounting policies used in the preparation of these consolidated financial statements are summarized on the following pages and conform in all material respects to Canadian GAAP. In addition, Note 26 describes and reconciles the significant measurement differences between Canadian and U.S. GAAP affecting the accompanying consolidated financial statements.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements, and income and expenses during the reporting period. Key areas of estimation where management has made difficult, complex or subjective judgements, often as a result of matters that are inherently uncertain, include those relating to the allowance for credit losses, the fair value of financial instruments, and other-than-temporary impairment of investment securities. Therefore, actual results could differ from these and other estimates.

Certain comparative amounts have been reclassified to conform with current year presentation. Where new accounting policies have been adopted during the year, the effects of these changes have been discussed in the respective notes.

The consolidated financial statements include the assets, liabilities and results of operations of the Bank and all of its subsidiaries after the elimination of intercompany transactions and balances. Subsidiaries are defined as corporations controlled by the Bank which are normally corporations in which the Bank owns more than 50% of the voting shares.

Investments in associated corporations, where the Bank has significant influence which is normally evidenced by direct or indirect ownership of between 20% and 50% of the voting shares, are carried on the equity basis of accounting and are included in investment securities in the Consolidated Balance Sheet. The Bank’s share of earnings of such corporations is included in interest income from securities in the Consolidated Statement of Income.

Foreign currency monetary assets and liabilities of the Bank’s integrated foreign operations, and all foreign currency denominated assets and liabilities of its self-sustaining foreign operations are translated into Canadian dollars at rates prevailing at the end of the financial year. Foreign currency non-monetary assets and liabilities of the Bank’s integrated foreign operations are translated into Canadian dollars at historical rates.

Unrealized gains and losses arising upon translation of net foreign currency investment positions in self-sustaining branches, subsidiaries and associated corporations, together with any gains or losses arising from hedges of those net investment positions, are credited or charged to cumulative foreign currency translation in the Consolidated Balance Sheet, except as noted below. Upon sale, reduction or substantial liquidation of an investment position, the previously recorded unrealized gains or losses thereon are transferred from cumulative foreign currency translation in the Consolidated Balance Sheet to the Consolidated Statement of Income.

Translation gains and losses arising in the Bank’s integrated foreign operations, as well as those arising from self-sustaining foreign operations in highly inflationary environments, if any, are included in other income — trading revenues in the Consolidated Statement of Income.

Revenues and expenses denominated in foreign currencies are translated using average exchange rates, except for depreciation and amortization of foreign currency denominated buildings, equipment and leasehold improvements of the Bank’s integrated operations, which are translated using historical rates.

Precious metals are carried at market value and are included in cash resources in the Consolidated Balance Sheet. The liability arising from outstanding certificates is also carried at market value and included in other liabilities in the Consolidated Balance Sheet.

Securities are held in either the investment or trading portfolio. Investment securities comprise debt and equity securities held for liquidity and longer-term investment. Equity securities in which the Bank’s holdings of voting shares are less than 20% are carried at cost, except where significant influence is demonstrated. Debt securities held in the investment account are carried at amortized cost with premiums and discounts being amortized to income over the period to maturity. When there has been a decline in value of debt or equity securities that is other than temporary, the carrying value of the securities is appropriately reduced. Such reductions, if any, together with gains and losses on disposals, which are determined on an average cost basis, are included in other income — net gain on investment securities in the Consolidated Statement of Income.

Included in the investment portfolio are bonds received from the conversion of loans to designated emerging markets which are recorded at their face value net of the related country risk allowance. Loan substitute securities are customer financings which have been restructured as after-tax investments rather than conventional loans in order to provide the issuers with a lower borrowing rate. Such securities are accorded the accounting treatment applicable to loans.

Trading securities are intended to be held for a short period of time and are carried at market value. Gains and losses on disposal and adjustments to market value are included in other income — trading revenues in the Consolidated Statement of Income. Where securities are used to hedge the volatility of stock-based compensation, gains and losses on disposal and adjustments to market value are included in salaries and staff benefits expense in the Consolidated Statement of Income.

Loans are stated net of any unearned income and of an allowance for credit losses. Interest income is accounted for on the accrual basis for all loans other than impaired loans. Accrued interest is included in other assets in the Consolidated Balance Sheet.

A loan is classified as impaired when, in management’s opinion, there has been a deterioration in credit quality to the extent that there is no longer reasonable assurance of timely collection of the full amount of principal and interest. If a payment on a loan is contractually 90 days in arrears, the loan will be classified as impaired, if not already classified as such, unless the loan is fully secured, the collection of the debt is in process and the collection

efforts are reasonably expected to result in repayment of the loan or in restoring it to a current status within 180 days from the date a payment has become contractually in arrears. Finally, a loan that is contractually 180 days in arrears is classified as impaired in all situations, except when it is guaranteed or insured by the Canadian government, the provinces or a Canadian government agency; such loans are classified as impaired if the loan is contractually in arrears for 365 days. Any credit card loan that has a payment that is contractually 180 days in arrears is written off.

When a loan is classified as impaired, recognition of interest ceases. For those sovereign risk loans to which the related country risk allowance applies, interest continues to be accrued in income, except when the loans are classified as impaired. Interest received on impaired loans is credited to the carrying value of the loan.

Loans are generally returned to accrual status when the timely collection of both principal and interest is reasonably assured and all delinquent principal and interest payments are brought current.

Foreclosed assets received after April 30, 2003 meeting specified criteria are considered to be held for sale and recorded at fair value less costs to sell in other assets in the Consolidated Balance Sheet. If the specified criteria are not met, the asset is considered to be held for use, measured initially at fair value and accounted for in the same manner as a similar asset acquired in the normal course of business. Prior to May 1, 2003, foreclosed assets were included in impaired loans and presumed to be held for sale. As at October 31, 2003, these foreclosed assets totalled $96 million, of which $72 million were classified as held for sale as specified criteria were met at that date; the remainder were classified as held for use.

Loan fees are recognized in income over the appropriate lending or commitment period. Loan syndication fees are included in credit fees in other income when the syndication is completed.

The purchase and sale of securities under resale and repurchase agreements are treated as collateralized lending and borrowing transactions. The related interest income and interest expense are recorded on an accrual basis.

The Bank maintains an allowance for credit losses which, in management’s opinion, is adequate to absorb all incurred credit-related losses in its portfolio of the following on and off-balance sheet items: deposits with banks, loan substitute securities, securities purchased under resale agreements, loans, acceptances and other indirect credit commitments, such as letters of credit and guarantees. The allowance for credit losses consists of specific allowances, a general allowance, and a country risk allowance, each of which is reviewed on a regular basis. The allowance for credit losses against on-balance sheet items is included as a reduction of the related asset category, and allowances relating to off-balance sheet items are included in other liabilities in the Consolidated Balance Sheet. Full or partial write-offs of loans are recorded when management believes there is no realistic prospect of full recovery. Actual write-offs, net of recoveries, are deducted from the allowance for credit losses.

Specific allowances, except those relating to credit card loans, certain personal loans and certain international residential mortgages, are determined on an item-by-item basis and reflect the associated estimated credit loss. In the case of loans, the specific allowance is the amount that is required to reduce the carrying value of an impaired loan to its estimated realizable amount. Generally, the estimated realizable amount is measured by discounting the expected future cash flows at the effective interest rate inherent in the loan at the date of impairment. When the amounts and timing of future cash flows cannot be measured with reasonable reliability, either the fair value of any security underlying the loan, net of expected costs of realization and any amounts legally required to be paid to the borrower, or the observable market price for the loan is used to measure the estimated realizable amount. The change in the present value attributable to the passage of time on the expected future cash flows is reported as a reduction of the provision for credit losses in the Consolidated Statement of Income. Specific allowances for credit card loans, certain personal loans and certain international residential mortgages are calculated using a formula method taking into account recent loss experience.

The general allowance is established against the loan portfolio in respect of the Bank’s core business lines where prudent assessment by the Bank of past experience and existing economic and portfolio conditions indicate that it is probable that losses have occurred, but where such losses cannot be determined on an item-by-item basis.

The general allowance for business and government loans is underpinned by a risk rating process in which internal risk ratings are assigned at the time of loan origination, monitored on an on-going basis, and adjusted to reflect changes in underlying credit risk. With the internal risk ratings as the foundation, the allowance is initially calculated through the application of migration and default statistics by risk rating, loss severity in the event of default, and exposure at default patterns within each of the business line portfolios. Based upon recent observable data, senior management forms a judgement whether adjustments are necessary to the initially calculated (quantitative) allowance and the amount of any such adjustments. In making this judgement, management considers observable factors such as economic trends and business conditions, portfolio concentrations, and trends in volumes and severity of delinquencies.

For personal loan, credit card and mortgage portfolios, expected losses are estimated through analysis of historical loss migration and write-off trends.

The level of general allowance is re-assessed quarterly and may fluctuate as a result of changes in portfolio volumes, concentrations and risk profile; analysis of evolving trends in probability of loss, severity of loss and exposure at default factors; and management’s current assessment of factors that may have affected the condition of the portfolio.

While the total general allowance is established through a step-by-step process that considers risk arising from specific segments of the portfolio, the resulting total general allowance is available to absorb all incurred losses in the loan portfolio.

The country risk allowance is maintained in accordance with instructions issued by the Superintendent based on total transborder exposure to a prescribed group of countries. In accordance with those instructions, any new exposures to those designated emerging markets after October 31,1995, are subject to the same procedures as those used for determining specific allowances referred to above.

Effective July 1, 2001, the Bank adopted a new Canadian Institute of Chartered Accountants’ (CICA) accounting guideline for transfers of loans.

Transfers of loans occurring after June 30, 2001, to unrelated parties are treated as sales provided that control over the transferred loans has been surrendered and consideration other than beneficial interests in the transferred loans has been received in exchange. If these criteria are not satisfied, then the transfers are treated as financing transactions. If treated as sales, the loans are removed from the Consolidated Balance Sheet and a gain or loss is recognized in income immediately based on the carrying value of the loans transferred, allocated between the assets sold and the retained interests in proportion to their fair values at the date of transfer. The fair values of loans sold, retained interests and recourse liabilities are determined using either quoted market prices, pricing models which take into account management’s best estimates of key assumptions such as expected losses, prepayments and discount rates commensurate with the risks involved, or sales of similar assets. Where the Bank continues to service the loans sold, a servicing liability or asset is recognized and amortized over the servicing period as servicing fees.

Retained interests in securitizations that can be contractually prepaid or otherwise settled in such a way that the Bank would not recover substantially all of its recorded investment are classified in investment securities in the Consolidated Balance Sheet. Such retained interests are tested regularly for other-than-temporary impairment. When there has been an adverse change in the expected cash flows and the fair value of such retained interests is less than the carrying value, the retained interest’s carrying value is reduced to that fair value by a charge to securitization revenues in the Consolidated Statement of Income. Other retained interests are classified and accounted for as loans.

Loans transferred prior to July 1, 2001, or transfers arising from the commitments made prior to that date, are accounted for as sales if significant risks and rewards of ownership have been transferred. Gains on sale are recognized immediately, unless there is recourse to the Bank in excess of expected losses, in which case the gains on sale are considered unrealized and deferred until they are collected in cash and there is no recourse to that cash. Losses are recognized in income immediately.

For securitizations of loans, gains and losses on sale and servicing fee revenues are reported in securitization revenues in other income in the Consolidated Statement of Income. Where a servicing liability or asset is recognized, the amount is recorded in other liabilities or other assets in the Consolidated Balance Sheet.

On November 1, 2002, the Bank established a new accounting policy for the sale of performing loans (other than by way of securitization), which is one of its credit risk management strategies. As such, gains and losses are reported in other income — other. Gains and losses on sales of impaired loans are reported in the provision for credit losses.

The Bank’s potential liability under acceptances is reported as a liability in the Consolidated Balance Sheet. The Bank has equal and offsetting claims against its customers in the event of a call on these commitments, which are reported as an asset. Fees earned are reported in other income — credit fees in the Consolidated Statement of Income.

Land is carried at cost. Buildings, equipment and leasehold improvements are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful life of the related asset as follows: buildings — 40 years, equipment — 3 to 10 years, and leasehold improvements — term of lease plus one renewal option period.

Net gains and losses on disposal are included in other income — other, in the Consolidated Statement of Income, in the year of disposal.

Effective November 1, 2001, the Bank retroactively adopted a new CICA accounting standard for goodwill and other intangible assets without restatement of prior periods.

Goodwill is the excess of the purchase price paid for the acquisition of a subsidiary over the fair value of the net assets acquired.

Goodwill and other intangible assets with indefinite useful lives are not amortized, but are subject to impairment tests on at least an annual basis. Goodwill is allocated to reporting units and any potential goodwill impairment is identified by comparing the carrying value of a reporting unit with its fair value. If any potential impairment is indicated, then it is quantified by comparing the carrying value of goodwill to its fair value, calculated as the fair value of the reporting unit less the fair value of its assets and liabilities.

Intangible assets, other than goodwill, which do not have indefinite useful lives are amortized on a straight-line basis over their useful lives not exceeding 20 years. These intangible assets are subject to an impairment test when events and circumstances indicate the carrying amounts may not be recoverable.

The Bank follows the asset and liability method of accounting for corporate income taxes. Under this method, future tax assets and liabilities represent the cumulative amount of tax applicable to temporary differences between the carrying amount of the assets and liabilities, and their values for tax purposes. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Changes in future income taxes related to a change in tax rates are recognized in income in the period of the tax rate change.

Future tax assets and liabilities are included in other assets and other liabilities in the Consolidated Balance Sheet.

Derivative instruments are financial contracts whose value is derived from interest rates, foreign exchange rates or other financial or commodity indices. Most derivative instruments can be characterized as interest rate contracts, foreign exchange and gold contracts, commodity contracts, equity contracts or credit contracts. Derivative instruments are either exchange-traded contracts or negotiated over-the-counter contracts. Exchange-traded derivatives include futures and option contracts. Negotiated over-the-counter derivatives include swaps, forwards and options.

The Bank enters into these derivative instruments to accommodate the risk management needs of its customers, for proprietary trading and for asset/liability management purposes.

Derivative instruments designated as “trading” include derivatives entered into with customers to accommodate their risk

management needs and derivatives transacted to generate trading income from the Bank’s proprietary trading positions. Trading derivatives are carried at their fair values [refer to Note 22(d)]. In determining the fair value of trading derivatives, a deferral is made to cover credit risk and ongoing direct costs over the life of the instruments. The gains and losses resulting from changes in fair values are included in other income — trading revenues in the Consolidated Statement of Income. Unrealized gains and unrealized losses on trading derivatives are reported separately in the Consolidated Balance Sheet as trading derivatives’ market valuation.

Derivative instruments designated as “asset/liability management” are those used to manage the Bank’s interest rate, foreign currency and other exposures, which include instruments designated as hedges. Income and expense on these derivatives are recognized over the life of the related position, primarily as an adjustment to net interest income. If designated hedges are no longer effective, the derivative instrument is reclassified as trading and subsequently marked-to-market. Gains and losses from effective hedges, as well as those on terminated contracts, are deferred and amortized over the remaining life of the related positions. Accrued income and expense and deferred gains and losses are included in other assets and other liabilities, as appropriate, in the Consolidated Balance Sheet. Where the Bank manages its exposures using written put options or written credit default swaps, these derivatives are carried at fair value with changes in their fair value included in other income — other, in the Consolidated Statement of Income. Where derivative instruments are used to hedge the volatility of stock-based compensation, these derivatives are carried at fair value with changes in their fair value included in salaries and staff benefits expense, in the Consolidated Statement of Income.

The Bank maintains pension and other benefit plans for qualified employees in Canada, the United States and other international operations. Pension benefits are based on the length of service and generally the final five years’ average salary. Other retirement, employment and post-employment benefits include health and dental care, life insurance and other benefits.

The cost of pensions and other future benefits earned by employees is actuarially determined each year using the projected benefit method prorated on service and management’s best estimate of expected plan investment performance, salary escalation, retirement age of employees and health care costs. Current market interest rates, for the periods over which payments are estimated to be required, are used to estimate the present value of future benefit obligations. Generally, for the purpose of calculating the expected return on plan assets, equity instruments are valued using a methodology in which the difference between actual and expected returns is recognized in the value of the assets over a three-year period; fixed income instruments are recognized at market value. Past service costs from plan amendments are amortized on a straight-line basis over the average remaining period to full eligibility of employees active at the date of amendment. For most plans, the net actuarial gain or loss that exceeds 10 percent of the greater of the benefit obligation and the value of plan assets is amortized over the average remaining service period of active employees. As well, a pension valuation allowance is recognized for any excess of the prepaid benefit expense over the expected future benefit.

The cumulative difference between pension expense and funding contributions is included in other assets in the Consolidated Balance Sheet. The difference between the other future benefits expense and payments to qualifying individuals is included in other liabilities in the Consolidated Balance Sheet.

The CICA issued a new accounting standard requiring the use of a fair-value-based method for certain stock-based compensation arrangements. The Bank adopted this standard effective November 1, 2002, on a prospective basis for all of its stock-based compensation plans. The transition to this new standard had no impact on these consolidated financial statements on the date of adoption.

The Bank has stock option plans and other stock-based compensation plans for certain eligible employees and non-officer directors that are described more fully in Note 14.

Prior to the adoption of the new standard, the Bank did not recognize any compensation expense for stock options, since the exercise price was set at an amount equal to the closing price on the day prior to the grant of the stock options. When these stock options are exercised, the proceeds received by the Bank are credited to common shares in the Consolidated Balance Sheet.

Commencing November 1, 2002, new stock option grants to employees have tandem stock appreciation rights (Tandem SARs), which allow the employee to either exercise the stock option for shares, or to exercise the Tandem SAR and thereby receive the intrinsic value of the stock option in cash. Tandem SARs were also retroactively attached in December 2002 to the fiscal 2002 option grants. Options with Tandem SARs are accounted for in the same manner as the Bank’s other stock-based compensation plans as described below. If an employee chooses to exercise the option, thereby cancelling the Tandem SAR, both the exercise price and the accrued liability are credited to common shares in the Consolidated Balance Sheet.

Beginning November 1, 2002, new stock option grants to non-officer directors (which do not have Tandem SAR features) are expensed using a fair-value-based method (Black-Scholes pricing model) and recorded in other non-interest expenses with a corresponding credit to contributed surplus in the Consolidated Balance Sheet.

Changes in the Bank’s obligations under other stock-based compensation plans, which arise from fluctuations in the market price of the Bank’s common shares underlying these compensation plans (including the stock options with Tandem SAR features), are recorded in salaries and staff benefits expense in the Consolidated Statement of Income with a corresponding accrual in other liabilities in the Consolidated Balance Sheet.

The CICA has issued an accounting guideline for hedging relationships that will become effective for the Bank on November 1, 2003. This guideline establishes certain qualifying conditions for the use of hedge accounting, which are more stringent and formalized than current standards. Subsequent to November 1, 2003, asset/liability management (non-trading) derivatives that do not qualify for hedge accounting will be carried at fair value in the Consolidated Balance Sheet, and changes in their fair value will be recorded in the Consolidated Statement of Income. The Bank has reassessed its hedging relationships as at November 1, 2003, and as a result of recording on transition non-qualifying derivatives at fair value, assets and liabilities in the Consolidated Balance Sheet will increase by $705 million and $749 million, respectively. In addition, the associated unrealized net loss of $44 million will be deferred in other assets in the Consolidated Balance Sheet, and recognized in earnings as the original hedged items affect net income.

In June 2003, the CICA issued a new accounting guideline which requires the consolidation of VIEs by the primary beneficiary. A VIE is an entity where (a) its equity investment at risk is insufficient to permit the entity to finance its activities without additional subordinated support from others and/or where certain essential characteristics of a controlling financial interest are not met, and (b) it does not meet specified exemption criteria. The primary beneficiary is the enterprise that will absorb or receive the majority of the VIEs expected losses, expected residual returns, or both. This guideline is effective for the Bank’s interim financial statements commencing November 1, 2004.

The following is a summary by VIE category of the presently estimated financial statement impact of this new guideline. Accounting standard setters continue to deliberate implementation issues associated with this guideline. As implementation issues are addressed and revisions to the accounting guideline are made, the estimated effects of this new guideline, as discussed below, may change.

The Bank sponsors a number of open-ended mutual funds with assets totalling $15.4 billion as at October 31, 2003. As sponsor, the Bank actively manages and administers such funds for a fee. Certain of these funds are considered VIEs under the new accounting guideline as there is a disproportionate relationship between the control of the fund assets and the rights to the investment returns and losses by the mutual fund investors. As a result of the fees charged, the Bank would likely be considered the primary beneficiary, under the new accounting guideline, for those mutual funds that have low volatility in their investment returns (e.g., money market funds). The potential impact is that consolidation would increase total assets and liabilities by approximately $11 billion. A U.S. exposure draft on VIEs proposes to exclude mutual fund trusts from the scope of the U.S. VIE accounting standard. This exposure draft is expected to be issued in final form by the end of December 2003, at which time Canadian standard setters will likely consider similar amendments to their accounting guideline. In any event, the Bank’s right to the underlying mutual fund assets and the maximum loss exposure are limited to its investment in seed capital of $22 million.

The Bank offers trust and estate services for administering assets on behalf of specified beneficiaries. The trust structures used are considered VIEs under the new accounting guideline for the same reasons as mutual funds above. As a result of fees charged, the Bank would likely be considered the primary beneficiary under the new accounting guideline for those trust structures that have low volatility in their investment returns and have several unrelated beneficiaries. Given the unique nature of the thousands of trusts that the Bank administers, it is not presently practical to estimate those trusts for which the Bank may be regarded as the primary beneficiary under the new accounting guideline. However, the Bank does not expect to be the primary beneficiary where it only acts as custodian. Consolidating all the non-custodial trusts the Bank administers would increase total assets and liabilities by approximately $10 billion. As with mutual funds, the U.S. exposure draft on VIEs proposes to exclude these trusts from the scope of the U.S. VIE accounting standard. This exposure draft is expected to be issued in final form by the end of December 2003, at which time Canadian standard setters will likely consider similar amendments to their accounting guideline. In any event, the Bank has no exposure to loss on these assets as it does not guarantee the performance of the trusts’ assets, nor does it have the right to these assets except for the collection of fees and expense recoveries.

The Bank administers three multi-seller commercial paper conduit programs. The programs involve the purchase of assets by conduit vehicles from outside parties funded by the issuance of asset-backed commercial paper (totalling $7.3 billion as at October 31, 2003). The sellers continue to service the assets and absorb the first losses for their portion of the program. The Bank has no rights to these assets, but manages for a fee the commercial paper selling program and provides backstop liquidity and partial credit enhancement facilities to the conduits. The Bank’s maximum loss exposure to these programs is $0.8 billion as at October 31, 2003. Efforts are underway to restructure these programs, with the intent that the Bank will not need to consolidate the conduits once the new accounting guideline becomes effective.

The Bank has historically securitized portions of its credit card and mortgage portfolios (refer to Note 4(b)). The Bank does not expect to consolidate the associated securitization vehicles as they are exempt from the scope of the new guideline.

The Bank has issued $2.0 billion in innovative Tier 1 capital using two trust structures: BNS Capital Trust and Scotiabank Capital Trust (refer to Note 11). These structures are considered to be VIEs under the new accounting guideline; however, the Bank is likely not the primary beneficiary for Scotiabank Capital Trust. As a result, the Bank would deconsolidate $1.5 billion of non-controlling interest in subsidiaries and record this amount on the Consolidated Balance Sheet as a deposit liability. This will not impact the Bank’s capital ratios as the Superintendent has confirmed that existing securities issued under these trust structures will remain as eligible Tier 1 capital.

The Bank is involved with other entities or structures such as investment vehicles, collateralized debt obligation vehicles, and synthetic leases, which total approximately $5 billion and which could be regarded as VIEs. The Bank continues to assess these structures under the new guideline and does not expect a material financial statement impact.


		Remaining term to maturity											2003		2002

										No
		Within		Three to		One to		Over		specific			Carrying		Carrying
As at October 31 ($ millions)		3 months		12 months		5 years		5 years		maturity			value		value

Investment securities:
	Canadian federal government debt	$	1,783	$	140	$	375	$	364	$	—		$	2,662	$	3,617
	Canadian provincial and municipal debt		299		34		100		41		—			474		355
	U.S. treasury and other U.S. agencies		1,104		71		728		512		—			2,415		1,590
	Other foreign governments		648		508		2,373		1,792		—			5,321		5,203
	Bonds of designated emerging markets⁽¹⁾		—		—		37		679		—			716		1,146
	Other debt		517		878		2,791		1,197		—			5,383		5,655
	Preferred shares		—		—		—		—		875	(2)		875		1,125
	Common shares		—		—		—		—		2,265			2,265		2,712
	Associated corporations		1		11		—		—		140	(3)		152		163
	Loan substitute securities		—		4		26		—		—			30		36

	Total		4,352		1,646		6,430		4,585		3,280			20,293		21,602

Trading securities⁽⁴⁾:
	Canadian federal government debt		396		2,850		2,400		2,618		—			8,264		7,645
	Canadian provincial and municipal debt		325		134		1,267		1,935		—			3,661		2,739
	U.S. treasury and other U.S. agencies		23		—		57		1,977		—			2,057		263
	Other foreign governments		912		1,280		2,601		195		—			4,988		2,528
	Common shares		—		—		—		—		17,252			17,252		14,987
	Other		2,087		610		2,477		1,033		470			6,677		6,430

	Total		3,743		4,874		8,802		7,758		17,722			42,899		34,592

Total securities		$	8,095	$	6,520	$	15,232	$	12,343	$	21,002		$	63,192	$	56,194

Total by currency (in Canadian equivalent):
	Canadian dollar	$	4,291	$	3,659	$	5,240	$	5,706	$	17,765		$	36,661	$	32,499
	U.S. dollar		1,537		741		4,945		5,486		2,923			15,632		14,039
	Other currencies		2,267		2,120		5,047		1,151		314			10,899		9,656

Total securities		$	8,095	$	6,520	$	15,232	$	12,343	$	21,002		$	63,192	$	56,194

(1)

This includes restructured bonds of designated emerging markets after deducting a country risk allowance of $363 (2002 — $418). Refer to Note 5.

(2)

Although these securities have no stated term, most provide the Bank with various means to retract or dispose of these shares on earlier dates.

(3)

Equity securities of associated corporations have no stated term, and as a result, have been classified in the “No specific maturity” column.

An analysis of unrealized gains and losses on investment securities is as follows:


	2003								2002

			Gross		Gross		Estimated				Gross		Gross		Estimated
	Carrying		unrealized		unrealized		market		Carrying		unrealized		unrealized		market
As at October 31 ($ millions)	value		gains		losses		value		value		gains		losses		value

Canadian federal government debt	$	2,662	$	29	$	—	$	2,691	$	3,617	$	17	$	—	$	3,634
Canadian provincial and municipal debt		474		4		—		478		355		8		—		363
U.S. treasury and other U.S. agencies		2,415		5		3		2,417		1,590		31		—		1,621
Other foreign governments		5,321		468		38		5,751		5,203		389		33		5,559
Bonds of designated emerging markets		716		314		—		1,030		1,146		172		—		1,318
Other debt		5,383		126		24		5,485		5,655		97		124		5,628
Preferred shares		875		34		22		887		1,125		15		55		1,085
Common shares		2,265		232		244		2,253		2,712		209		269		2,652
Associated corporations		152		—		—		152		163		—		—		163
Loan substitute securities		30		—		—		30		36		—		—		36

Total investment securities	$	20,293	$	1,212	$	331	$	21,174	$	21,602	$	938	$	481	$	22,059

The net unrealized gain on investment securities of $881 million (2002 — $457 million) decreases to a net unrealized gain of $703 million (2002 — net unrealized loss of $25 million) after the net fair value of derivative instruments and other hedge amounts associated with these securities is taken into account.

An analysis of realized gains and losses on sales of investment securities is as follows:

The Bank’s loans net of unearned income and the allowance for credit losses in respect of loans are as follows⁽¹⁾:

(1)

Geographic segmentation of assets is based upon the location of the ultimate risk of the underlying assets.

(2)

Loans denominated in U.S. dollars amount to $40,770 (2002 — $56,665) and loans denominated in other foreign currencies amount to $23,155 (2002 — $29,511).

In fiscal 2003, the Bank securitized mortgages of $2,467 million (2002 — $2,272 million; 2001⁽¹⁾ — $301 million) resulting in recognition of a net gain on sale of $49 million (2002 — $34 million; 2001⁽¹⁾ — $6 million). The Bank’s retained interests, which consist of its rights to future cash flows, had a fair value on the date of sale of $89 million (2002 — $80 million; 2001⁽¹⁾ — $12 million). The Bank retained servicing responsibilities for which a liability of $16 million (2002 — $15 million; 2001⁽¹⁾ — $2 million) was recognized. The weighted average key assumptions used to measure fair value at the dates of securitization were a prepayment rate of 14.3% (2002 — 13.3%; 2001⁽¹⁾ — 16.0%), an excess spread of 1.4% (2002 — 1.4%; 2001⁽¹⁾ — 1.7%), and a discount rate of 4.3% (2002 — 4.9%; 2001⁽¹⁾ — 4.9%). No credit losses are expected as the mortgages are insured.

(1)

Subsequent to the change in accounting policy in fiscal 2001 (refer to Note 1).

The key assumptions used in measuring the fair value of the retained interests for mortgages securitized since the change in the accounting policy in fiscal 2001 described in Note 1, and the sensitivity of the current fair value of retained interests to a 10% and 20% adverse change to these assumptions are as follows:

The sensitivity measures above are hypothetical and should be used with caution. Other sensitivity estimates should not be extrapolated from those presented above since the relationship between the change in the assumption to the change in fair value is not linear. In addition, changes in a particular assumption and the effect on the fair value of the retained interests is calculated without changing any other assumption; however, the factors are not independent and the actual effects could be magnified or counteracted from the sensitivities presented.


	2003						2002						2001

	Outstanding		Impaired and		Net credit		Outstanding		Impaired and		Net credit		Outstanding		Impaired and		Net credit
	securitized		other past due		losses for		securitized		other past due		losses for		securitized		other past due		losses for
	loans as at		loans as at		the year ended		loans as at		loans as at		the year ended		loans as at		loans as at		the year ended
($ millions)	October 31		October 31		October 31		October 31		October 31		October 31		October 31		October 31		October 31

Mortgages	$	5,248	$	—	$	—	$	3,829	$	—	$	—	$	2,775	$	—	$	—
Personal and credit cards		2,417		12		16		3,376		20		23		4,311		32		37
Business loans		—		—		—		—		—		—		3,287		70		7

Total	$	7,665	$	12	$	16	$	7,205	$	20	$	23	$	10,373	$	102	$	44

(1)

As at October 31, 2003, foreclosed assets held for sale of $87 are included in other assets. As at October 31, 2002, foreclosed assets of $120 were included in gross impaired loans, along with a specific allowance of $45.

(2)

Gross impaired loans denominated in U.S. dollars amount to $1,555 (2002 — $2,394) and those denominated in other foreign currencies amount to $1,080 (2002 — $1,059).

(3)

The specific allowance for impaired loans evaluated on an individual basis amounts to $1,290 (2002 — $1,422).

(4)

Includes designated emerging markets loans of $21 (2002 — $25) which are fully provided for by the country risk allowance.

(5)

Impaired loans without an allowance for credit losses against individual loans totalled $154 (2002 — $479).

(1)

Includes $363 (2002 — $418; 2001 — $461) which has been deducted from securities.

(2)

Write-offs of loans restructured during the year were $40 (2002 — nil; 2001 — $4).

Depreciation and amortization in respect of the above buildings, equipment and leasehold improvements for the year amounted to $208 million (2002 — $243 million; 2001 — $243 million).

Effective November 1, 2001, the Bank retroactively adopted a new CICA accounting standard for goodwill and other intangible assets without restatement of prior periods. In previous periods, the Bank amortized goodwill and intangibles over their useful lives, with goodwill amortization periods not exceeding 20 years. The value of goodwill was regularly evaluated for any permanent impairment by reviewing the returns of the related business, taking into account the associated risks.

Upon completion of its transitional goodwill impairment test, the Bank determined that unamortized goodwill of $76 million relating to Scotiabank Quilmes as at November 1, 2001, was impaired under the new fair-value-based impairment methodology. This amount was charged to opening retained earnings with a corresponding reduction in goodwill on the Consolidated Balance Sheet.

The Bank determined that none of its intangible assets other than goodwill had indefinite lives and, accordingly, continues to amortize them on a straight-line basis over their estimated useful lives, not exceeding 20 years.

For 2003 and 2002, there was no amortization of goodwill. Amortization of goodwill for the year ended October 31, 2001 was $24 million. Had goodwill not been amortized in 2001, the basic and diluted earnings per share would have increased by $0.05, and net income would have been $2,193 million.

The changes in the carrying amount of goodwill by main operating segment are as follows:

Intangible assets are comprised primarily of core deposit intangibles. The aggregate amortization expense for the year ended October 31, 2003, was $29 million (2002 — $28 million; 2001 — $28 million).

(1)

During 2003, the Bank recognized income tax benefits of $102 (2002 — $37), relating to pre-acquisition income tax loss carryforwards that had not been reflected in the purchase price equation at the date of acquisition. These income tax benefits have been applied first to decrease goodwill by $95 (2002 — $37) and then to reduce intangible assets by $7 (2002 — nil).


		Payable		Payable		Payable on
As at October 31 ($ millions)		on demand		after notice		a fixed date		2003		2002

Canada:
	Personal	$	2,321	$	19,628	$	42,173	$	64,122	$	61,387
	Business and governments		12,612		8,003		32,172		52,787		43,480
	Banks		57		—		451		508		427

			14,990		27,631		74,796		117,417		105,294

United States:
	Personal		7		197		854		1,058		1,087
	Business and governments		218		37		14,852		15,107		18,417
	Banks		14		46		1,233		1,293		2,821

			239		280		16,939		17,458		22,325

Other international:
	Personal		514		5,015		5,722		11,251		13,084
	Business and governments		2,162		3,103		20,382		25,647		31,933
	Banks		277		232		20,390		20,899		22,982

			2,953		8,350		46,494		57,797		67,999

Total⁽²⁾		$	18,182	$	36,261	$	138,229	$	192,672	$	195,618

(2)

Deposits denominated in U.S. dollars amount to $53,556 (2002 — $68,058) and deposits denominated in other foreign currencies amount to $33,059 (2002 — $33,881).

These debentures are direct, unsecured obligations of the Bank and are subordinate to the claims of the Bank’s depositors and other creditors. The Bank, where appropriate, enters into interest rate and cross-currency swaps to hedge the related risks. The outstanding debentures as at October 31 are:


As at October 31 ($ millions)

Maturity date	Interest rate (%)	Terms⁽¹⁾ (currency in millions)	2003		2002

March, 2003	8.1	Matured on March 24, 2003	$	—	$	116
May, 2003	6.875	US $250. Matured on May 1, 2003		—		389
April, 2008	5.4	Redeemed on April 1, 2003		—		600
September, 2008	6.25	US $250		330		389
February, 2011	7.4	Redeemable at any time. After February 8, 2006, interest will be payable at an annual rate equal to the 90 day bankers’ acceptance rate plus 1%		300		300
July, 2012	6.25	Redeemable at any time. After July 16, 2007, interest will be payable at an annual rate equal to the 90 day bankers’ acceptance rate plus 1%		500		500
July, 2013	5.65	Redeemable at any time. After July 22, 2008, interest will be payable at an annual rate equal to the 90 day bankers’ acceptance rate plus 1%		425		425
September, 2013	8.3	Redeemable at any time		250		250
May, 2014	5.75	Redeemable at any time. After May 12, 2009, interest will be payable at an annual rate equal to the 90 day bankers’ acceptance rate plus 1%		325		325
June, 2025	8.9	Redeemable at any time		250		250
August, 2085	Floating	US $214 bearing interest at a floating rate of the offered rate for six-month Eurodollar deposits plus 0.125%. Redeemable on any interest payment date		281		334

			$	2,661	$	3,878

(1)

In accordance with the provisions of the Capital Adequacy Guideline of the Superintendent, all redemptions are subject to regulatory approval.

An unlimited number of preferred and common shares without nominal or par value.


		2003						2002						2001

As at October 31 ($ millions)		Number of shares			Amount			Number of shares			Amount			Number of shares		Amount

Preferred shares:
	Series 6⁽¹⁾		—		$	—			—		$	—			12,000,000	$	300
	Series 7⁽²⁾		—			—			—			—			8,000,000		200
	Series 8⁽³⁾		—			—			9,000,000			225			9,000,000		225
	Series 9⁽⁴⁾		—			—			10,000,000			250			10,000,000		250
	Series 11⁽⁵⁾		9,992,900			250			9,992,900			250			9,992,900		250
	Series 12⁽⁶⁾		12,000,000			300			12,000,000			300			12,000,000		300

	Total issued by the Bank		21,992,900			550			40,992,900			1,025			60,992,900		1,525
	Issued by Scotia Mortgage Investment Corporation⁽⁷⁾		250,000			250			250,000			250			250,000		250

Total preferred shares^(8)(9)(10)			22,242,900		$	800			41,242,900		$	1,275			61,242,900	$	1,775

Common shares:
	Outstanding at beginning of year		504,121,900		$	3,002			503,795,469		$	2,920			497,964,733	$	2,765
	Issued under Shareholder Dividend and Share Purchase Plan⁽¹¹⁾		71,700			4			84,577			4			1,086,522		47
	Issued under Stock Option Plans (Note 14)		5,306,386			159			3,550,454			97			4,744,214		108
	Purchased for cancellation⁽¹²⁾		(4,147,100	)		(25	)		(3,308,600	)		(19	)		—		—

	Outstanding at end of year		505,352,886		$	3,140			504,121,900		$	3,002			503,795,469	$	2,920

Total capital stock					$	3,940					$	4,277				$	4,695

(1)

Series 6 Non-cumulative Preferred Shares were redeemed on October 29, 2002. These shares were entitled to non-cumulative preferential cash dividends payable quarterly in an amount per share of $0.446875. These shares were redeemed at par, at a price of $25.00 per share.

(2)

Series 7 Non-cumulative Preferred Shares were redeemed on July 29, 2002. These shares were entitled to non-cumulative preferential cash dividends payable quarterly in an amount per share of $0.44375. These shares were redeemed at a price of $26.00 per share, which included a premium of $1.00 per share.

(3)

Series 8 Non-cumulative Preferred Shares were redeemed on January 29, 2003. These shares were entitled to non-cumulative preferential cash dividends payable quarterly in an amount per share of $0.4375. These shares were redeemed at a price of $26.00 per share, which included a premium of $1.00 per share.

(4)

Series 9 Non-cumulative Preferred Shares were redeemed on April 28, 2003. These shares were entitled to non-cumulative preferential cash dividends payable quarterly in an amount per share of $0.421875. These shares were redeemed at a price of $26.00 per share, which included a premium of $1.00 per share.

(5)

Series 11 Non-cumulative Preferred Shares are entitled to non-cumulative preferential cash dividends payable quarterly in an amount per share of $0.375. With regulatory approval, the shares may be redeemed by the Bank on or after January 28, 2004, in whole or in part, by either the payment of cash or the issuance of a variable number of common shares based upon an average of the Bank’s common share price near the redemption date. On and after July 27, 2006, the Series 11 Preferred Shares will be convertible at the option of the holder into a variable number of common shares based upon an average of the Bank’s common share price near the redemption date; this option is subject to the right of the Bank prior to the conversion date to redeem for cash or find substitute purchasers for such preferred shares.

(6)

Series 12 Non-cumulative Preferred Shares are entitled to non-cumulative preferential cash dividends payable quarterly in an amount per share of $0.328125. With regulatory approval, the shares may be redeemed by the Bank at par on or after October 29, 2013, in whole or in part, by the payment in cash of $25.00 per share, together with declared and unpaid dividends to the date then fixed for redemption.

(7)

Scotia Mortgage Investment Corporation, a wholly-owned subsidiary of the Bank, issued Class A Preferred Shares which are entitled to non-cumulative preferential cash dividends, if and when declared, payable semi-annually in an amount per share of $32.85. With regulatory approval, on or after October 31, 2007, Class A Preferred Shares may be redeemed in whole by the payment of cash by Scotia Mortgage Investment Corporation or, at the option of the Bank, exchanged for a variable number of common shares based upon an average of the Bank’s common share price near the redemption date. On or after October 31, 2007, the Class A Preferred Shares will be exchangeable at the option of the holder into a variable number of common shares based upon an average of the Bank’s common share price, subject to the right of the Bank prior to the exchange date to purchase for cash or find substitute purchasers for such shares. Under certain circumstances the Class A Preferred Shares of Scotia Mortgage Investment Corporation will be automatically exchanged, without the consent of the holder, into Series Z Non-cumulative Preferred Shares of the Bank which would bear the same dividend rate and similar redemption features.

(8)

On April 4, 2000, BNS Capital Trust, a wholly-owned closed-end trust, issued 500,000 Scotiabank Trust Securities — 2000-1 (“Scotia BaTS”). Each Scotia BaTS is entitled to receive non-cumulative fixed cash distributions payable semi-annually in an amount per Scotia BaTS of $36.55. With regulatory approval,

these securities may be redeemed in whole by the payment of cash prior to June 30, 2005, upon the occurrence of certain tax or regulatory capital changes, or on or after June 30, 2005, at the option of BNS Capital Trust. On or after June 30, 2011, the Scotia BaTS may be exchanged, at the option of the holder into Non-cumulative Preferred Shares Series Y of the Bank, subject to the right of the Bank prior to the exchange date to purchase for cash or find substitute purchasers for such securities. These Non-cumulative Preferred Shares Series Y would pay a dividend rate equivalent to the cash distribution rate of the Scotia BaTS. Under certain circumstances, the Scotia BaTS would be automatically exchanged without the consent of the holder, into Non-cumulative Preferred Shares Series Y of the Bank. Refer to Note 11, non-controlling interest in subsidiaries.

(9)

On April 30, 2002, Scotiabank Capital Trust, a wholly-owned open-end trust, issued 750,000 Scotiabank Trust Securities — Series 2002-1. These securities are entitled to receive non-cumulative fixed cash distributions payable semi-annually in an amount of $33.13 per security. The first such payment was made on June 30, 2002, in an amount of $11.07. With regulatory approval, these securities may be redeemed in whole by the payment of cash prior to June 30, 2007, upon the occurrence of certain tax or regulatory capital changes, or on or after June 30, 2007, at the option of Scotiabank Capital Trust. The holder has the right at any time to exchange their security into Non-cumulative Preferred Shares Series W of the Bank. The Series W shares will be entitled to cash dividends payable semi-annually in an amount of $0.53125 per $25.00 share. Under certain circumstances, these trust securities would be automatically exchanged without the consent of the holder, into Non-cumulative Preferred Shares Series X of the Bank. The Series X shares will be entitled to non-cumulative cash dividends payable semi-annually in an amount of $0.70 per $25.00 share. Refer to Note 11, non-controlling interest in subsidiaries.

(10)

On February 13, 2003, Scotiabank Capital Trust issued 750,000 Scotiabank Trust Securities — Series 2003-1. These securities are entitled to receive non-cumulative fixed cash distributions payable semi-annually in an amount of $31.41 per security. The first such payment was made on June 30, 2003, in an amount of $23.58. With regulatory approval, these securities may be redeemed in whole by the payment of cash prior to June 30, 2008, upon the occurrence of certain tax or regulatory capital changes, or on or after June 30, 2008, at the option of Scotiabank Capital Trust. The holder has the right at any time to exchange their security into Non-cumulative Preferred Shares Series U of the Bank. The Series U shares will be entitled to cash dividends payable semi-annually in an amount of $0.50 per $25.00 share. Under certain circumstances, these trust securities would be automatically exchanged without the consent of the holder, into Non-cumulative Preferred Shares Series V of the Bank. The Series V shares will be entitled to non-cumulative cash dividends payable semi-annually in an amount of $0.61250 per $25.00 share. Refer to Note 11, non-controlling interest in subsidiaries.

(11)

As at October 31, 2003, 11,233,339 common shares have been reserved for future issue under the terms of the Shareholder Dividend and Share Purchase Plan.

(12)

In January 2003, the Bank announced its intention to purchase up to 25 million common shares over the twelve months ending January 5, 2004, pursuant to a normal course issuer bid. During the year ended October 31, 2003, 4.1 million shares were purchased at an average price of $54.63. During the year ended October 31, 2002, 3.3 million shares were purchased at an average price of $49.90 under a previous normal course issuer bid.

Under the Bank Act, the Bank is prohibited from declaring any dividends on its common or preferred shares when the Bank is, or would be placed by such a declaration, in contravention of the capital adequacy, liquidity or any other regulatory directives issued under the Bank Act. In addition, common share dividends cannot be paid unless all dividends to which preferred shareholders are then entitled to have been paid or sufficient funds have been set aside to do so.

In the event that applicable cash distributions on any of the Scotiabank Trust Securities are not paid on a regular distribution date, the Bank has undertaken not to declare dividends of any kind on its preferred or common shares. Similarly, should the Bank fail to declare regular dividends on any of its directly issued outstanding preferred or common shares, cash distributions will also not be made on any of the Scotiabank Trust Securities.

Currently, these limitations do not restrict the payment of dividends on preferred or common shares.

Under terms of the Employee Stock Option Plan, options to purchase common shares may be granted to selected employees at an exercise price not less than the closing price of the Bank’s common shares on the Toronto Stock Exchange (TSX) on the day prior to the date of the grant. Employee stock options granted during 2003 also have tandem stock appreciation rights (Tandem SARs), which allow the employee to either exercise the stock option for shares, or to exercise the Tandem SAR and thereby receive the intrinsic value of the stock option in cash. In addition, Tandem SARs were retroactively attached to the 2002 employee stock options. All other terms and conditions relating to the 2002 stock options remained unchanged. These 2002 stock options were out of the money at the date of attachment. As a result, there was no impact on the Bank’s stock-based compensation expense on the date of retroactive attachment of the Tandem SARs.

Options vest evenly over a four-year period and are exercisable no later than 10 years after the date of the grant. Outstanding options expire on dates ranging from June 3, 2004, to April 3, 2013. A total of 49 million shares were reserved for issuance under this plan, of which 20.5 million shares have been issued as a result of the exercise of options, 23.7 million shares are committed under outstanding options, leaving 4.8 million shares available for issuance as options.

In 2001, a Directors’ Stock Option Plan was approved. A total of 400,000 common shares have been reserved for issuance to non-officer directors under this plan. During the year, the Bank granted 38,000 stock options to non-officer directors. As these options are fully exercisable at the time of grant, the fair value of $0.5 million was fully expensed in other non-interest expenses in the Consolidated Statement of Income. These options expire between March, 2011 and December, 2012. Currently, 141,000 (2002 — 103,000; 2001 — 63,000) options are outstanding at a weighted average exercise price of $45.87 (2002 — $44.79; 2001 — $41.90). As at October 31, 2003, none of these options have been exercised. The Bank will no longer be granting options to these directors.


	2003					2002					2001

	Number			Weighted		Number			Weighted		Number			Weighted
	of stock			average		of stock			average		of stock			average
	options			exercise		options			exercise		options			exercise
As at October 31	(000’s)			price		(000’s)			price		(000’s)			price

Outstanding at beginning of year		27,113		$	35.25		26,523		$	31.80		25,321		$	27.51
Granted		2,120			48.86		4,470			49.37		6,270			42.05
Exercised		(5,307	)		30.00		(3,550	)		27.44		(4,744	)		22.61
Forfeited/cancelled		(205	)		39.85		(330	)		32.58		(324	)		29.70
Exercise of Tandem SARs		(21	)		49.35		—			—		—			—

Outstanding at end of year⁽¹⁾		23,700		$	37.59		27,113		$	35.25		26,523		$	31.80

Exercisable at end of year		14,712		$	33.18		13,775		$	30.24		11,851		$	27.36

Available for grant		4,840					6,734					10,875

Qualifying employees can contribute up to the lesser of a specified percentage of salary and a maximum dollar amount towards the purchase of common shares of the Bank or deposits with the Bank. In general, the Bank matches 50% of qualifying contributions which is expensed in salaries and staff benefits. During 2003, the Bank’s contributions totalled $24 million (2002 — $23 million; 2001 — $23 million). Contributions, which are used by the plan trustee to purchase common shares in the open market, do not result in a subsequent expense to the Bank from share price appreciation.

All other stock-based compensation plans use notional units that are valued based on the Bank’s common share price on the TSX. These units, with the exception of Stock Appreciation Rights (SARs), accumulate dividend equivalents in the form of additional units based on the dividends paid on the Bank’s common shares. Fluctuations in the Bank’s share price change the value of the units, which affects the Bank’s stock-based compensation expense. Upon exercise, payments are made to the employees with a corresponding reduction in the accrued liability. In 2003, an aggregate expense of $119 million (2002 — $24 million; 2001 — $18 million), net of hedging gain (loss) of $113 million (2002 — $(7) million; 2001 — nil) and other items, was recognized in salaries and staff benefits in the Consolidated Statement of Income for changes in the amount of the Bank’s liability for these units. Details of these plans are as follows:

The SARs include Tandem SARs, as described above, as well as standalone SARs which are granted instead of stock options to selected employees in countries where local laws may restrict the Bank from issuing shares. SARs have vesting and exercise terms and conditions similar to the employee stock options. The cost of SARs is recognized on a graded vesting basis. When a SAR is exercised, the Bank pays the appreciation amount in cash equal to the rise in the market price of the Bank’s common shares since the grant date. During fiscal 2003, 2,684,412 SARs were granted (2002 — 5,636,922; 2001 — 1,536,000) and as at October 31, 2003, 11,830,947 SARs were outstanding (2002 — 10,353,305; 2001 — 5,793,525), of which 4,282,172 SARs were vested (2002 — 2,599,212; 2001 — 2,281,094).

Under the DSU Plan, senior officers may elect to receive all or a portion of their cash bonus under the Management Incentive Plan (which is expensed for the year awarded in salaries and staff benefits in the Consolidated Statement of Income) in the form of deferred stock units which vest immediately. Units are redeemable, in cash, only when an officer ceases to be a Bank employee and must be redeemed by December 31 of the following year. As at October 31, 2003, there were 899,191 units outstanding (2002 — 747,103; 2001 — 513,900).

Under the DDSU Plan, non-employee directors of the Bank may elect to receive all or a portion of their fee for that fiscal year (which is expensed by the Bank in other expenses in the Consolidated Statement of Income) in the form of deferred stock units which vest immediately. Units are redeemable, in cash, only following resignation or retirement and must be redeemed by December 31 of the following year. As at October 31, 2003, there were 47,048 units outstanding (2002 — 35,544; 2001 — 17,928).

Under the RSU Plan, selected employees receive a bonus in the form of an award of restricted share units which vest at the end of three years. The underlying bonus and the stock-based compensation expense is recognized evenly over the three-year vesting period, at which time the units are settled, in cash, to the employee. As at October 31, 2003, there were 1,644,950 units awarded and outstanding (2002 — 492,625; 2001 — 150,947) of which none were vested or paid.

Under the Scotia Capital Deferred Payment Plan, a portion of the bonus received by selected employees (which is accrued and expensed in the year to which it relates) is allocated to employees in the form of units. These units are subsequently paid, in cash, to the qualifying employees over each of the following three years.

Changes in the value of the units, which arise from fluctuations in the market price of the Bank’s common shares, are expensed in the same manner as the Bank’s other stock-based compensation plans in salaries and staff benefits expense in the Consolidated Statement of Income.

Prior to fiscal 2003, the deferred payment was held in a trust, which purchased common shares of the Bank in the open market. As a result, there was not a subsequent expense to the Bank from share price appreciation.

Corporate income taxes recorded in the Bank’s consolidated financial statements for the years ended October 31 are as follows:

On November 1, 2000, the Bank adopted a new CICA accounting standard for corporate income taxes, on a retroactive basis, with no restatement of prior periods. This resulted in a charge of $39 million to fiscal 2001 opening retained earnings with an offsetting reduction to the future income tax asset.

Income taxes in the Consolidated Statement of Income vary from the amounts that would be computed by applying the composite federal and provincial statutory income tax rate for the following reasons:


		2003						2002						2001

					Percent of						Percent of						Percent of
					pre-tax						pre-tax						pre-tax
For the year ended October 31 ($ millions)		Amount			income			Amount			income			Amount			income

Income taxes at statutory rate		$	1,289			36.4	%	$	1,004			38.4	%	$	1,309			41.1	%
Increase (decrease) in income taxes resulting from:
	Lower average tax rate applicable to subsidiaries and foreign branches		(309	)		(8.7	)		(308	)		(11.8	)		(354	)		(11.1	)
	Tax-exempt income from securities		(197	)		(5.6	)		(128	)		(4.9	)		(107	)		(3.4	)
	Future income tax effect of substantively enacted tax rate reductions		25			0.7			30			1.2			90			2.8
	Other, net		(24	)		(0.6	)		3			0.1			(62	)		(1.9	)

Total income taxes and effective tax rate		$	784			22.2	%	$	601			23.0	%	$	876			27.5	%

The tax-effected temporary differences which result in future income tax assets and (liabilities) are as follows:

Earnings of certain international subsidiaries are subject to tax only upon their repatriation to Canada. As repatriation is not currently planned in the foreseeable future, the Bank has not recognized a future income tax liability. If all international subsidiaries’ unremitted earnings were repatriated, taxes that would be payable as at October 31, 2003, are estimated to be $412 million (October 31, 2002 — $463 million).

Employee future benefits include pensions and other retirement benefits, post-employment benefits and compensated absences.

On November 1, 2000, the Bank adopted the new accounting standard established by the CICA for employee future benefits. This new accounting standard was adopted on a prospective basis with a transition date of November 1, 2000. The net transitional asset results in a reduction in benefit expense in the Consolidated Statement of Income as it is recognized over the estimated average remaining service life of the employees of approximately 14 to 18 years.


	Pension plans									Other benefit plans

For the year ended October 31 ($ millions)	2003			2002			2001			2003			2002			2001

Change in projected benefit obligation
Projected benefit obligation at beginning of year	$	2,919		$	2,728		$	2,257		$	572		$	526		$	—
Inclusion of Scotiabank Inverlat⁽²⁾		239			—			—			91			—			—
Adjustment related to adoption of new accounting standard		—			—			210			—			—			455
Cost of benefits earned in the year		91			85			77			31			23			19
Interest cost on projected benefit obligation		226			195			176			48			37			33
Employee contributions		8			8			9			—			—			—
Benefits paid		(143	)		(126	)		(117	)		(41	)		(31	)		(29	)
Actuarial loss		243			5			106			91			27			42
Foreign exchange and other		(59	)		24			10			(45	)		(10	)		6

Projected benefit obligation at end of year	$	3,524		$	2,919		$	2,728		$	747		$	572		$	526

Change in fair value of assets
Fair value of assets at beginning of year	$	3,392		$	3,548		$	3,406		$	76		$	75		$	—
Inclusion of Scotiabank Inverlat⁽²⁾		235			—			—			102			—			—
Adjustment related to adoption of new accounting standard		—			—			154			—			—			70
Actual return on assets		325			(41	)		87			13			1			4
Employer contributions		44			13			13			36			20			19
Employee contributions		8			8			9			—			—			—
Benefits paid		(143	)		(126	)		(117	)		(41	)		(20	)		(18	)
Foreign exchange and other		(155	)		(10	)		(4	)		(24	)		—			—

Fair value of assets at end of year⁽³⁾	$	3,706		$	3,392		$	3,548		$	162		$	76		$	75

Funded status
Excess (deficit) of fair value of assets over projected benefit obligation at end of year	$	182		$	473		$	820		$	(585	)	$	(496	)	$	(451	)
Unrecognized net actuarial loss		825			625			301			152			76			48
Unrecognized past service costs		73			28			7			(7	)		(8	)		—
Unrecognized transitional obligation (asset)		(510	)		(589	)		(641	)		294			329			354
Valuation allowance		(155	)		(133	)		(109	)		—			—			—
Other		27			3			3			9			8			7

Prepaid (accrued) benefit expense at end of year	$	442		$	407		$	381		$	(137	)	$	(91	)	$	(42	)

Annual benefit expense
Cost of benefits earned in the year	$	91		$	85		$	77		$	31		$	23		$	19
Interest cost on projected benefit obligation		226			195			176			48			37			33
Expected return on assets		(275	)		(275	)		(280	)		(14	)		(5	)		(5	)
Recognition of transitional obligation (asset)		(44	)		(45	)		(45	)		24			24			24
Valuation allowance provided against prepaid benefit expense		22			24			27			—			—			—
Other		3			2			(1	)		1			1			—

Benefit expense (income)	$	23		$	(14	)	$	(46	)	$	90		$	80		$	71

Weighted average assumptions (%)⁽⁴⁾
Discount rate to determine current year’s expense		7.25			6.75			7.00			7.40			6.75			7.00
Discount rate for end of year projected benefit obligation		6.75			7.00			6.75			6.85			7.00			6.75
Assumed long-term rate of return on assets		7.25			7.50			8.00			8.50			7.50			7.50
Rate of increase in future compensation		3.95			3.90			3.90			4.00			3.90			3.90
Rate of increase in health care costs for the year⁽⁵⁾		—			—			—			8.00			7.90			8.40

An increase of one percentage point in the assumed combined health care trend rates would have increased the 2003 benefit expense by $11.1 million and the end-of-year benefit obligation by $72.1 million.

Included in the pension plans’ projected benefit obligation at the end of 2003 is $228 million (2002 — $164 million; 2001 — $146 million) related to supplemental unfunded retirement arrangements.

A decrease of one percentage point in the assumed discount rate or rate of return on assets for the principal pension plans would result in an additional pension expense to the Bank of $52 million and $33 million, respectively. An increase of 0.25% in the assumed future compensation rate would result in an additional pension expense to the Bank of $5 million.

The Bank’s main pension plan has a measurement date of August 31, while the other principal plans use July 31.


For the year ended October 31 ($ millions)	2003		2002		2001

Basic earnings per common share
Net income	$	2,477	$	1,797	$	2,169
Preferred dividends paid and other		71		105		108

Net income available to common shareholders	$	2,406	$	1,692	$	2,061

Average number of common shares outstanding (thousands)		504,783		504,340		500,619

Basic earnings per common share	$	4.76	$	3.36	$	4.12

Diluted earnings per common share
Net income available to common shareholders	$	2,406	$	1,692	$	2,061

Average number of common shares outstanding (thousands)		504,783		504,340		500,619
Stock options potentially exercisable⁽¹⁾		8,086		8,412		8,376

Average number of diluted common shares outstanding (thousands)⁽²⁾		512,869		512,752		508,995

Diluted earnings per common share	$	4.69	$	3.30	$	4.05

In the ordinary course of business, the Bank provides to its associated and other related corporations normal banking services on terms similar to those offered to non-related parties.

Scotiabank is a diversified financial services institution that provides a wide range of financial products and services to retail, commercial and corporate customers around the world. The Bank is organized into three main operating segments: Domestic Banking, International Banking, and Scotia Capital.

Domestic Banking, including Wealth Management, provides a comprehensive array of retail and commercial banking services through branch and electronic delivery channels, to individuals and small to medium-sized businesses in Canada. The retail services include consumer and mortgage lending, credit and debit card services, savings, chequing and retirement products, personal trust services, retail brokerage, mutual funds and transaction services. In addition to credit, commercial clients are provided with deposit and cash management services.

International Banking supplies retail and commercial banking services through branches, subsidiaries and foreign affiliates. The products, services and channels offered are generally the same as those in Domestic Banking.

Scotia Capital is an integrated corporate and investment bank which services the credit, capital market and risk management needs of the Bank’s global relationships with large corporations, financial institutions and governments. The services provided include credit and related products, debt and equity underwriting, foreign exchange, derivative products, precious metals products and financial advisory services. Also, it conducts trading activities for its own account and manages the short-term funding of the Bank.

The Other category represents smaller operating segments, including Group Treasury and other corporate items, which are not allocated to an operating segment.

The results of these business segments are based upon the internal financial reporting systems of the Bank. The accounting policies used in these segments are generally consistent with those followed in the preparation of the consolidated financial statements as disclosed in Note 1. The only notable accounting measurement difference is the grossing up of tax-exempt net interest income to an equivalent before-tax basis for those affected segments. This change in measurement enables comparison of net interest income arising from taxable and tax-exempt sources.

Because of the complexity of the Bank, various estimates and allocation methodologies are used in the preparation of the business segment financial information. The assets and liabilities are transfer-priced at wholesale market rates, and corporate expenses are allocated to each segment based on utilization. As well, capital is apportioned to the business segments on a risk-based methodology. Transactions between segments are recorded within segment results as if conducted with a third party and are eliminated on consolidation.


For the year ended October 31, 2003
($ millions)		Domestic			International			Scotia			Other⁽¹⁾
taxable equivalent basis		Banking			Banking			Capital			Other⁽¹⁾			Total

Net interest income		$	3,474		$	2,028		$	1,249		$	(601	)	$	6,150
Provision for credit losses			(272	)		(73	)		(549	)		1			(893	)
Other income			1,528			776			1,289			422			4,015

Net interest and other income			4,730			2,731			1,989			(178	)		9,272
Depreciation and amortization			(150	)		(66	)		(20	)		(1	)		(237	)
Other non-interest expenses			(2,926	)		(1,591	)		(966	)		(11	)		(5,494	)

Income before the undernoted:			1,654			1,074			1,003			(190	)		3,541
	Provision for income taxes		(560	)		(245	)		(282	)		303			(784	)
	Non-controlling interest in net income of subsidiaries		—			(160	)		—			(120	)		(280	)

Net income		$	1,094		$	669		$	721		$	(7	)	$	2,477

Total average assets ($ billions)		$	101		$	52		$	119		$	17		$	289


For the year ended October 31, 2002
($ millions)		Domestic			International			Scotia			Other⁽¹⁾
taxable equivalent basis		Banking			Banking			Capital			Other⁽¹⁾			Total

Net interest income		$	3,405		$	2,225		$	1,615		$	(570	)	$	6,675
Provision for credit losses			(282	)		(523	)		(1,247	)		23			(2,029	)
Other income			1,599			678			1,255			410			3,942

Net interest and other income			4,722			2,380			1,623			(137	)		8,588
Depreciation and amortization			(159	)		(80	)		(27	)		(5	)		(271	)
Other non-interest expenses			(2,794	)		(2,016	)		(995	)		102			(5,703	)

Income before the undernoted:			1,769			284			601			(40	)		2,614
	Provision for income taxes		(627	)		(5	)		(221	)		252			(601	)
	Non-controlling interest in net income of subsidiaries		—			(154	)		—			(62	)		(216	)

Net income		$	1,142		$	125		$	380		$	150		$	1,797

Total average assets ($ billions)		$	93		$	58		$	124		$	22		$	297


For the year ended October 31, 2001
($ millions)		Domestic			International			Scotia			Other⁽¹⁾
taxable equivalent basis		Banking			Banking			Capital			Other⁽¹⁾			Total

Net interest income		$	3,135		$	2,020		$	1,598		$	(553	)	$	6,200
Provision for credit losses			(283	)		(250	)		(754	)		(138	)		(1,425	)
Other income			1,582			691			1,196			602			4,071

Net interest and other income			4,434			2,461			2,040			(89	)		8,846
Depreciation and amortization			(139	)		(76	)		(22	)		(58	)		(295	)
Other non-interest expenses			(2,808	)		(1,594	)		(962	)		(3	)		(5,367	)

Income before the undernoted:			1,487			791			1,056			(150	)		3,184
	Provision for income taxes		(527	)		(200	)		(370	)		221			(876	)
	Non-controlling interest in net income of subsidiaries		—			(102	)		—			(37	)		(139	)

Net income		$	960		$	489		$	686		$	34		$	2,169

Total average assets ($ billions)		$	90		$	47		$	115		$	20		$	272

The following table summarizes the Bank’s financial results by geographic region. Revenues and expenses which have not been allocated back to specific operating business lines are reflected in corporate adjustments.

In February 2003, the CICA issued an accounting guideline on the disclosure of guarantees, which broadens the definition of guarantees and requires substantially expanded disclosure. This new guideline was effective for the Bank this year. As this guideline requires disclosure only, there was no impact on the Consolidated Statement of Income and Consolidated Balance Sheet.

A guarantee is a contract that contingently requires the guarantor to make payments to a third party based on (i) changes in an underlying interest rate, foreign exchange rate or other variable, including the occurrence or non-occurrence of an event, that is related to an asset, liability or equity security held by the guaranteed party, (ii) an indemnification provided to the third party with the characteristics listed above, (iii) another entity’s failure to perform under an obligating agreement, or (iv) another entity’s failure to perform related to its indebtedness. The various guarantees and indemnifications that the Bank provides to its customers and other third parties are presented below.

Standby letters of credit and letters of guarantee are issued at the request of a Bank customer in order to secure the customer’s payment or performance obligations to a third party. These guarantees represent an irrevocable obligation of the Bank to pay the third party beneficiary upon presentation of the guarantee and satisfaction of the documentary requirements stipulated therein, without investigation as to the validity of the beneficiary’s claim against the customer. Generally, the term of these guarantees does not exceed four years. The types and amounts of collateral security held by the Bank for these guarantees is generally the same as for loans.

The Bank enters into written credit derivative contracts under which a counterparty is compensated for losses on a specified referenced asset, typically a loan or bond, if a default or other defined triggering event occurs. The Bank also enters into written option contracts under which a counterparty is granted the right, but not the obligation, to sell a specified quantity of a financial instrument at a pre-determined price on or before a set date. These written option contracts are normally referenced to interest rates, foreign exchange rates or equity prices. Typically, a corporate or government entity is the counterparty to the written credit derivative and option contracts that meet the characteristics of guarantees described above. The maximum potential amount of future payments disclosed in the table above relates to written credit derivatives, puts and floors. However, these amounts exclude certain derivatives contracts, such as written caps, as the nature of these contracts prevents quantification of the maximum potential amount of future payments.

The Bank provides backstop liquidity facilities to asset-backed commercial paper conduits, administered by the Bank and by third parties. These facilities provide an alternative source of financing, in the event market disruption prevents the conduit from issuing commercial paper or, in some cases, when certain specified conditions or performance measures are not met. Generally, these facilities have a term of up to one year. No amounts have been recorded in the Consolidated Balance Sheet with respect to these facilities.

The Bank provides partial credit enhancements, in the form of financial standby letters of credit, to commercial paper conduits, administered by the Bank and by third parties. As at October 31, 2003, these credit enhancements amounted to $846 million and are included within standby letters of credit and letters of guarantee in the above table. The credit enhancements are provided to ensure a high investment grade credit rating is achieved for notes issued by the conduits. Generally, these facilities have a term of up to one year. No amounts have been recorded in the Consolidated Balance Sheet with respect to these facilities.

The Bank’s revolving securitization agreements may require payments to be made to the trusts under certain limited circumstances. These guarantees will be outstanding for the remaining term to maturity of the trusts’ securitization notes, which is on average 19 months. These payments are contingent on failure to maintain a minimum pool size due to the occurrence of certain limited predefined events.

In the ordinary course of business, the Bank enters into many contracts which contain indemnification provisions, such as purchase contracts, service agreements, trademark licensing agreements, escrow arrangements, sales of assets or businesses, outsourcing agreements, leasing arrangements, clearing system arrangements, securities lending agency agreements and structured transactions. In such contracts, the Bank may indemnify counterparties to the contracts for certain aspects of the Bank’s past conduct if other parties fail to perform, or if certain events occur, such as changes in laws and regulations (including tax legislation), changes in financial condition of third parties, infringements and breaches of representations and warranties, undisclosed liabilities, and loss caused by the actions of third parties, or as a result of litigation claims by third parties. These indemnification provisions will vary based upon the contract. In certain types of arrangements, the Bank may in turn obtain indemnifications from other parties to the arrangement or may have access to collateral under recourse provisions. In many cases, there are no pre-determined amounts or limits included in these indemnification provisions and the occurrence of contingent events that will trigger payment under them is difficult to predict. Therefore, the Bank cannot estimate in all cases the maximum potential future amount that may be payable, nor the amount of collateral or assets available under recourse provisions that would mitigate any such payments. Historically, the Bank has not made any significant payments under these indemnities. As at October 31, 2003, $10 million was included in other liabilities in the Consolidated Balance Sheet with respect to indemnifications.

In the normal course of business, various other indirect commitments are outstanding which are not reflected on the Consolidated Balance Sheet. These may include:

—

Commercial letters of credit which require the Bank to honour drafts presented by a third party when specific activities are completed.

—

Commitments to extend credit which represent undertakings to make credit available in the form of loans or other financings for specific amounts and maturities, subject to specific conditions.

—

Securities lending transactions under which the Bank, acting as principal or agent, agrees to lend securities to a borrower. The borrower must fully collateralize the security loan at all times. The market value of the collateral is monitored relative to the amounts due under the agreements, and where necessary, additional collateral is obtained.

—

Security purchase commitments which require the Bank to fund future investments.

These financial instruments are subject to normal credit standards, financial controls and monitoring procedures.

The table below provides a detailed breakdown of the Bank’s other indirect commitments expressed in terms of the contractual amounts of the related commitment or contract which are not reflected on the Consolidated Balance Sheet.

Minimum future rental commitments at October 31, 2003, for buildings and equipment under long-term, non-cancellable leases are shown below.

Building rent expense, net of rental income from subleases, included in the Consolidated Statement of Income was $180 million (2002 —$192 million; 2001 — $200 million).

In addition, the Bank and its subsidiaries have entered into certain long-term executory contracts relating to outsourced services.

In the ordinary course of business, securities and other assets are pledged against liabilities. Details of assets pledged are shown below:

In the ordinary course of business, the Bank and its subsidiaries are routinely defendants in or parties to a number of pending and threatened legal actions and proceedings, including actions brought on behalf of various classes of claimants.

In view of the inherent difficulty of predicting the outcome of such matters, the Bank cannot state what the eventual outcome of such matters will be; however based on current knowledge, management does not believe that liabilities, if any, arising from pending litigation will have a material adverse effect on the consolidated financial position, or results of operations of the Bank.

Fair value amounts represent estimates of the consideration that would currently be agreed upon between knowledgeable, willing parties who are under no compulsion to act and is best evidenced by a quoted market price, if one exists. Many of the Bank’s financial instruments lack an available trading market. Therefore, these instruments have been valued using present value or other valuation techniques and may not necessarily be indicative of the amounts realizable in an immediate settlement of the instruments. In addition, the calculation of estimated fair value is based on market conditions at a specific point in time and may not be reflective of future fair values.

Changes in interest rates are the main cause of changes in the fair value of the Bank’s financial instruments. The majority of the Bank’s financial instruments are carried at historical cost and are not adjusted to reflect increases or decreases in fair value due to market fluctuations, including those due to interest rate changes. For those financial instruments held for trading purposes, the carrying value is adjusted regularly to reflect the fair value.

The following table sets out the fair values of on-balance sheet financial instruments and derivative instruments of the Bank using the valuation methods and assumptions described below. The fair values disclosed do not reflect the value of assets and liabilities that are not considered financial instruments, such as land, buildings and equipment.


		2003									2002

		Total			Total			Favourable/			Total		Total			Favourable/
		fair			book			(Unfavour-			fair		book			(Unfavour-
As at October 31 ($ millions)		value			value			able)			value		value			able)

Assets:
	Cash resources	$	20,581		$	20,581		$	—		$	20,273	$	20,273		$	—
	Securities		64,073			63,192			881	⁽¹⁾		56,651		56,194			457	⁽¹⁾
	Loans		172,789			171,667			1,122			185,842		185,671			171
	Customers’ liability under acceptances		6,811			6,811			—			8,399		8,399			—
	Other		3,613			3,613			—			4,730		4,730			—
Liabilities:
	Deposits		193,856			192,672			(1,184	)		196,467		195,618			(849	)
	Acceptances		6,811			6,811			—			8,399		8,399			—
	Obligations related to securities sold under repurchase agreements		28,686			28,686			—			31,881		31,881			—
	Obligations related to securities sold short		9,219			9,219			—			8,737		8,737			—
	Other		12,820			12,820			—			14,519		14,519			—
	Subordinated debentures		2,880			2,661			(219	)		4,036		3,878			(158	)
Derivatives (Note 22)			(520	)		(388	)⁽²⁾		(132	)		717		998	⁽²⁾		(281	)

The book value of financial assets and financial liabilities held for purposes other than trading may exceed their fair value due primarily to changes in interest rates. In such instances, the Bank does not reduce the book value of these financial assets and financial liabilities to their fair value as it is the Bank’s intention to hold them to maturity.

The following methods and assumptions were used to estimate the fair values of on-balance sheet financial instruments:

The fair values of cash resources, securities purchased under resale agreements, customers’ liability under acceptances, other assets, obligations related to securities sold under repurchase agreements, acceptances and other liabilities are assumed to approximate their carrying values, due to their short-term nature.

The fair value of securities is assumed to be equal to the estimated market value of securities provided in Note 3. The fair value of obligations related to securities sold short is assumed to be equal to their book value as they are carried at market value. These market values are based on quoted prices, when available. When a quoted price is not readily available, market values are estimated using quoted market prices of similar securities, or other valuation techniques.

The estimated fair value of loans reflects changes in the general level of interest rates that have occurred since the loans were originated. The particular valuation methods used are as follows:

—

For loans to designated emerging markets, fair value is based on quoted market prices.

—

For floating rate loans, fair value is assumed to be equal to book value as the interest rates on these loans automatically reprice to market.

—

For all other loans, fair value is determined by discounting the expected future cash flows of these loans at market rates for loans with similar terms and risks.

The fair values of deposits payable on demand or after notice or floating rate deposits payable on a fixed date are assumed to be equal to their carrying values. The estimated fair values of fixed-rate deposits payable on a fixed date are determined by discounting the contractual cash flows, using market interest rates currently offered for deposits with similar terms and risks.

The fair values of subordinated debentures and liabilities of subsidiaries, other than deposits (included in other liabilities), are determined by reference to current market prices for debt with similar terms and risks.

The following table summarizes carrying amounts of balance sheet assets, liabilities and equity, and off-balance sheet financial instruments in order to arrive at the Bank’s interest rate gap based on the earlier of contractual repricing or maturity dates. To arrive at the Bank’s view of its effective interest rate gap, adjustments are made to factor in expected mortgage and loan repayments based on historical patterns, and to reclassify the Bank’s trading instruments to the immediately rate-sensitive category.


As at October 31, 2003	Immediately		Within			Three to			One to			Over			Non-rate
($ millions)	rate sensitive⁽¹⁾		3 months			12 months			5 years			5 years			sensitive			Total

Cash resources	$	1,139	$	12,828		$	2,671		$	56		$	—		$	3,887		$	20,581
Investment securities		588		5,087			1,547			5,933			3,858			3,280	⁽²⁾		20,293
Trading securities		—		6,582			4,150			6,736			7,709			17,722			42,899
Loans		24,803		73,043			19,589			50,802			3,383			47	⁽³⁾		171,667
Other assets		—		—			—			—			—			30,452	⁽⁴⁾		30,452

Total assets		26,530		97,540			27,957			63,527			14,950			55,388			285,892

Deposits		20,906		105,401			29,261			22,697			494			13,913			192,672
Obligations related to securities sold under repurchase agreements		—		27,109			1,577			—			—			—			28,686
Obligations related to securities sold short		—		308			218			3,798			4,137			758			9,219
Subordinated debentures		—		—			281			1,555			825			—			2,661
Other liabilities		—		—			—			—			—			38,040	⁽⁴⁾		38,040
Shareholders’ equity		—		—			—			—			—			14,614	⁽⁴⁾		14,614

Total liabilities and shareholders’ equity		20,906		132,818			31,337			28,050			5,456			67,325			285,892

On-balance sheet gap		5,624		(35,278	)		(3,380	)		35,477			9,494			(11,937	)		—
Off-balance sheet gap		—		3,082			1,868			(4,251	)		(699	)		—			—

Interest rate sensitivity gap based on contractual repricing		5,624		(32,196	)		(1,512	)		31,226			8,795			(11,937	)		—
Adjustment to expected repricing		15,166		10,190			219			(9,623	)		(5,570	)		(10,382	)		—

Total interest rate sensitivity gap	$	20,790	$	(22,006	)	$	(1,293	)	$	21,603		$	3,225		$	(22,319	)	$	—
Cumulative gap		20,790		(1,216	)		(2,509	)		19,094			22,319			—			—

As at October 31, 2002
Total interest rate sensitivity gap	$	22,275	$	(13,175	)	$	(11,556	)	$	18,581		$	3,935		$	(20,060	)	$	—
Cumulative gap		22,275		9,100			(2,456	)		16,125			20,060			—			—

The tables on the following page summarize average effective yields, by the earlier of the contractual repricing or maturity dates, for the following on-balance sheet rate-sensitive financial instruments (these rates are shown before and after adjusting for the impact of related derivatives used by the Bank for asset/liability risk management purposes).

Average effective yields by the earlier of the contractual repricing or maturity dates:

(1)		After adjusting for the impact of related derivatives.
(2)		Yields are based on book values, net of the related country risk provision, and contractual interest or stated dividend rates adjusted for amortization of premiums and discounts. Yields on tax-exempt securities have not been computed on a taxable equivalent basis.
(3)		Yields are based on book values, net of allowance for credit losses, and contractual interest rates, adjusted for the amortization of any deferred income.
(4)		Yields are based on book values and contractual interest rates.

The following table summarizes the credit exposure of the Bank to businesses and governments, net of the allowance for credit losses.


	2003								2002

	Loans and		Derivative		Other
As at September 30 ($ millions)	acceptances⁽¹⁾		instruments⁽²⁾		exposures⁽³⁾		Total		Total

By sector:
Resource and manufacturing, excluding automotive	$	19,437	$	645	$	4,080	$	24,162	$	29,212
Finance and government		8,129		13,913		5,073		27,115		28,587
Other		43,792		1,797		7,858		53,447		59,690

Total	$	71,358	$	16,355	$	17,011	$	104,724	$	117,489

General allowance⁽²⁾⁽⁴⁾								1,457		1,419

							$	103,267	$	116,070

By geography⁽⁵⁾:
Canada	$	29,858	$	5,806	$	5,602	$	41,266	$	39,893
United States		13,747		5,053		7,653		26,453		34,756
Other International		27,753		5,496		3,756		37,005		42,840

Total	$	71,358	$	16,355	$	17,011	$	104,724	$	117,489

General allowance⁽²⁾⁽⁴⁾								1,457		1,419

							$	103,267	$	116,070

In its normal course of business, the Bank may decide to hedge anticipatory transactions such as future foreign revenues and expenses and planned deposit campaigns. As at October 31, 2003, and 2002, there were no material anticipatory hedges outstanding.

The following table provides the aggregate notional amounts of off-balance sheet derivative instruments outstanding by type and segregated between those used by the Bank in its dealer capacity (Trading) and those used in the Bank’s asset/liability risk management process (ALM). The notional amounts of these contracts represent the derivatives volume outstanding and do not represent the potential gain or loss associated with the market risk or credit risk of such instruments. The notional amounts represent the amount to which a rate or price is applied to determine the amount of cash flows to be exchanged. Other derivative contracts — other includes precious metals other than gold, and base metal derivatives.


		2003						2002

As at October 31 ($ millions)		Trading		ALM		Total		Trading		ALM		Total

Interest rate contracts
Exchange-traded:
	Futures	$	53,630	$	29,335	$	82,965	$	57,397	$	12,239	$	69,636
	Options purchased		15,561		—		15,561		6,690		—		6,690
	Options written		2,571		129		2,700		—		—		—

			71,762		29,464		101,226		64,087		12,239		76,326

Over-the-counter:
	Forward rate agreements		67,250		23,343		90,593		72,293		51,954		124,247
	Swaps		410,343		73,739		484,082		440,096		97,699		537,795
	Options purchased		37,131		1,954		39,085		39,336		1,114		40,450
	Options written		46,668		1,387		48,055		50,842		51		50,893

			561,392		100,423		661,815		602,567		150,818		753,385

Total		$	633,154	$	129,887	$	763,041	$	666,654	$	163,057	$	829,711

Foreign exchange and gold contracts
Exchange-traded:
	Futures	$	2,684	$	—	$	2,684	$	2,757	$	—	$	2,757
	Options purchased		69		—		69		2		—		2
	Options written		145		—		145		66		—		66

			2,898		—		2,898		2,825		—		2,825

Over-the-counter:
	Spot and forwards		177,165		10,067		187,232		201,034		10,153		211,187
	Swaps		40,529		11,728		52,257		42,402		11,551		53,953
	Options purchased		3,337		—		3,337		4,128		—		4,128
	Options written		3,018		—		3,018		4,078		—		4,078

			224,049		21,795		245,844		251,642		21,704		273,346

Total		$	226,947	$	21,795	$	248,742	$	254,467	$	21,704	$	276,171

Other derivative contracts
	Equity: over-the-counter	$	17,268	$	3,330	$	20,598	$	15,956	$	4,399	$	20,355
	Credit: over-the-counter		15,051		2,301		17,352		10,521		1,624		12,145
	Other		2,912		—		2,912		3,342		—		3,342

Total		$	35,231	$	5,631	$	40,862	$	29,819	$	6,023	$	35,842

Total notional amounts outstanding		$	895,332	$	157,313	$	1,052,645	$	950,940	$	190,784	$	1,141,724

The following table summarizes the remaining term to maturity of the notional amounts of the Bank’s derivative instruments by type:


		Within		One to		Over
As at October 31, 2003 ($ millions)		1 year		5 years		5 years		Total

Interest rate contracts
	Futures	$	65,704	$	17,261	$	—	$	82,965
	Forward rate agreements		89,707		886		—		90,593
	Swaps		203,954		214,751		65,377		484,082
	Options purchased		29,380		23,792		1,474		54,646
	Options written		24,394		23,954		2,407		50,755

			413,139		280,644		69,258		763,041

Foreign exchange and gold contracts
	Futures		2,130		554		—		2,684
	Spot and forwards		172,484		13,468		1,280		187,232
	Swaps		17,025		23,543		11,689		52,257
	Options purchased		2,637		769		—		3,406
	Options written		2,438		725		—		3,163

			196,714		39,059		12,969		248,742

Other derivative contracts
	Equity		16,834		3,722		42		20,598
	Credit		2,976		13,910		466		17,352
	Other		2,665		247		—		2,912

			22,475		17,879		508		40,862

Total		$	632,328	$	337,582	$	82,735	$	1,052,645


		Within		One to		Over
As at October 31, 2002 ($ millions)		1 year		5 years		5 years		Total

Interest rate contracts
	Futures	$	53,652	$	15,984	$	—	$	69,636
	Forward rate agreements		114,423		9,824		—		124,247
	Swaps		235,950		230,768		71,077		537,795
	Options purchased		21,003		24,112		2,025		47,140
	Options written		22,649		24,945		3,299		50,893

			447,677		305,633		76,401		829,711

Foreign exchange and gold contracts
	Futures		2,103		654		—		2,757
	Spot and forwards		195,318		15,047		822		211,187
	Swaps		13,204		28,976		11,773		53,953
	Options purchased		2,891		1,239		—		4,130
	Options written		2,893		1,251		—		4,144

			216,409		47,167		12,595		276,171

Other derivative contracts
	Equity		15,985		4,245		125		20,355
	Credit		3,271		8,646		228		12,145
	Other		2,780		562		—		3,342

			22,036		13,453		353		35,842

Total		$	686,122	$	366,253	$	89,349	$	1,141,724

As with on-balance sheet assets, derivative instruments are subject to credit risk. Credit risk arises from the possibility that counterparties may default on their obligations to the Bank. However, whereas the credit risk of on-balance sheet assets is represented by the principal amount net of any applicable allowance for credit losses, the credit risk associated with derivatives is normally a small fraction of the notional amount of the derivative instrument. Derivative contracts generally expose the Bank to credit loss if changes in market rates affect a counterparty’s position unfavourably and the counterparty defaults on payment. Accordingly, credit risk of derivatives is represented by the positive fair value of the instrument.

Negotiated over-the-counter derivatives often present greater credit exposure than exchange-traded contracts. The net change in the exchange-traded contracts is normally settled daily in cash with the exchange. Holders of these contracts look to the exchange for performance under the contract.

The Bank strives to limit credit risk by dealing with counterparties that it believes are creditworthy, and manages its credit risk for derivatives through the same credit risk process applied to on-balance sheet assets.

The Bank pursues opportunities to reduce its exposure to credit losses on derivative instruments. These opportunities include entering into master netting arrangements with counterparties. The credit risk associated with favourable contracts is eliminated by a master netting arrangement to the extent that unfavourable contracts with the same counterparty are not settled before favourable contracts.

The following table summarizes the credit exposure of the Bank’s derivatives. The credit risk amount (CRA) represents the estimated replacement cost, or positive fair value, for all contracts without taking into account any master netting or collateral arrangements that have been made. The CRA does not reflect actual or expected losses.

The credit equivalent amount (CEA) is the CRA plus an add-on for potential future exposure. The add-on amount is based on a formula prescribed in the Capital Adequacy Guideline of the Superintendent. The risk-weighted balance is the CEA multiplied by counterparty risk factors prescribed by this Guideline. Other derivative contracts — other includes precious metals other than gold, and base metal derivatives.


		2003								2002

								Credit
				Credit risk		Potential		equivalent		Risk-		Credit risk		Risk-
		Notional		amount		future		amount		weighted		amount		weighted
		amount		(CRA)		exposure		(CEA)		balance		(CRA)		balance
As at October 31 ($ millions)				(a)		(b)		(a) + (b)

Interest rate contracts
	Futures	$	82,965	$	—	$	—	$	—	$	—	$	—	$	—
	Forward rate agreements		90,593		26		5		31		6		71		22
	Swaps		484,082		7,624		1,861		9,485		2,179		11,703		3,260
	Options purchased		54,646		530		141		671		167		743		216
	Options written		50,755		—		—		—		—		—		—

			763,041		8,180		2,007		10,187		2,352		12,517		3,498

Foreign exchange and gold contracts
	Futures		2,684		—		—		—		—		—		—
	Spot and forwards		187,232		4,744		2,328		7,072		2,065		2,810		1,557
	Swaps		52,257		2,786		2,208		4,994		1,270		1,253		900
	Options purchased		3,406		126		65		191		71		99		73
	Options written		3,163		—		—		—		—		—		—

			248,742		7,656		4,601		12,257		3,406		4,162		2,530

Other derivative contracts
	Equity		20,598		258		1,215		1,473		477		509		545
	Credit		17,352		209		772		981		279		155		186
	Other		2,912		52		216		268		97		83		112

			40,862		519		2,203		2,722		853		747		843

Total derivatives		$	1,052,645	$	16,355	$	8,811	$	25,166	$	6,611	$	17,426	$	6,871

Less: impact of master netting agreements					9,619		3,422		13,041		3,173		10,815		3,277

Total				$	6,736	$	5,389	$	12,125	$	3,438	$	6,611	$	3,594

Fair values of exchange-traded derivatives are based on quoted market prices. Fair values of over-the-counter (OTC) derivatives are determined using pricing models, which take into account current market and contractual prices of the underlying instruments, as well as time value and yield curve or volatility factors underlying the positions.

Trading derivatives are subject to a further valuation adjustment, determined on a portfolio basis, to cover future risks and related costs.

The following table summarizes the fair value of derivatives segregated by type and segregated between trading and those derivatives used in the Bank’s asset/liability risk management process (ALM).


		2003				2003				2002

		Average fair value⁽¹⁾				Year-end fair value				Year-end fair value

As at October 31 ($ millions)		Favourable		Unfavourable		Favourable		Unfavourable		Favourable		Unfavourable

Trading
Interest rate contracts
	Forward rate agreements	$	23	$	21	$	18	$	30	$	45	$	29
	Swaps		9,604		8,577		7,159		6,068		10,725		9,646
	Options		652		846		520		686		739		932

			10,279		9,444		7,697		6,784		11,509		10,607

Foreign exchange and gold contracts
	Forwards		4,111		3,885		4,704		4,624		2,686		2,324
	Swaps		1,393		1,728		2,435		2,203		840		1,765
	Options		118		145		126		181		99		105

			5,622		5,758		7,265		7,008		3,625		4,194

Other derivative contracts
	Equity		326		540		134		711		454		477
	Credit		118		131		160		196		150		144
	Other		77		71		52		59		83		78

			521		742		346		966		687		699

Trading derivatives’ market valuation		$	16,422	$	15,944	$	15,308	$	14,758	$	15,821	$	15,500

ALM⁽²⁾
Interest rate contracts
	Forward rate agreements					$	8	$	7	$	26	$	45
	Swaps						465		781		978		795
	Options						10		—		4		—

							483		788		1,008		840

Foreign exchange and gold contracts
	Forwards						40		139		124		52
	Swaps						351		1,165		413		287
	Options						—		—		—		—

							391		1,304		537		339

Other derivative contracts
	Equity						124		22		55		19
	Credit						49		3		5		11
	Other						—		—		—		—

							173		25		60		30

Total ALM derivatives’ market valuation						$	1,047	$	2,117	$	1,605	$	1,209

Total gross fair values before netting						$	16,355	$	16,875	$	17,426	$	16,709

Less: impact of master netting agreements							9,619		9,619		10,815		10,815

Total derivatives’ market valuation						$	6,736	$	7,256	$	6,611	$	5,894

In the first quarter of fiscal 2002, a significant provision for credit losses and other charges were recorded against the Bank’s operations in Scotiabank Quilmes and against cross-border Argentine risk, as a result of the extraordinary political and economic upheaval in Argentina.

In September, 2002, Scotiabank Quilmes ceased operations following the finalization of arrangements with the Argentine financial authorities and other private sector institutions. Based on these arrangements, certain deposits were transferred to the government along with an equivalent amount of sovereign loans. The remaining assets and liabilities were assumed by other local financial institutions or placed in an Argentine liquidating trust.

In the fourth quarter of 2002, as the Bank no longer had control of Scotiabank Quilmes, the remaining assets, liabilities and results of operations ceased to be consolidated. At the same time, a loss on disposal was recorded in non-interest expenses of the Consolidated Statement of Income in the International segment. In addition, the Bank recorded an income tax recovery related to the disposal of its investment in Scotiabank Quilmes.

In fiscal 2003, the Bank continued to reduce its remaining cross-border Argentine risk through loan sales and repayments, resulting in a $64 million recovery of the specific provision for credit losses for these loans. As well, the Bank recorded a net loss on its Argentine securities of $19 million and $31 million charge for a settlement with creditors of Scotiabank Quilmes.

Information on the total provision and charges (recovery) recorded against the Bank’s operations in Scotiabank Quilmes and against cross-border Argentine risk assets is provided in the table below:

On November 30, 2000, the Bank increased its voting ownership in Grupo Financiero Scotiabank Inverlat (Inverlat) from 10% to 55%. The purchase price for the additional 45% was US $184 million, comprised of the conversion of debentures of US $144 million purchased in 1996, and a US $40 million cash payment by the Bank. The total purchase price for the entire 55% was US $215 million ($320 million). Inverlat is comprised of three main operating companies: a full-service bank, a brokerage house and a foreign exchange operation. The results of Inverlat have been included in the Bank’s income since acquisition. This acquisition was accounted for using the purchase method.

On April 30, 2003, the Bank increased its ownership in Inverlat to 91%. The purchase price for the additional 36% was $465 million, which was paid in cash. This transaction resulted in increases in goodwill of $62 million, other intangible assets of $16 million, and net positive fair value adjustments to other assets of $12 million, as well as a reduction in non-controlling interest in subsidiaries of $375 million.

The Bank has offered to purchase the remaining 9% of Inverlat, presently held by the non-controlling shareholders, at the same price per share as was paid for the 36% acquired in April 2003. It is expected that this transaction will be completed in the first half of 2004.

In the third quarter of 2003, the Bank entered into an agreement to acquire or lease 39 branch locations from Banco Intercontinental in the Dominican Republic for $32 million, with the option to purchase selected credit card, personal and commercial loans. In the fourth quarter, the Bank acquired part of their credit card portfolio for $20 million.

Effective October 31, 2002, the Bank sold its merchant acquirer and smart-card point-of-sale business to Paymentech Canada. The sale includes debit and credit card payment services and smart card programs offered to merchants across Canada. As a result of this transaction, a gain of $99 million, net of associated expenses, was recorded in 2002 in other income — other in the Consolidated Statement of Income. In 2003, $7 million of additional sales consideration was earned by the Bank. Additional revenue may be earned in future periods.

26. Reconciliation of Canadian and United States generally accepted accounting principles

The consolidated financial statements of the Bank have been prepared in accordance with Canadian GAAP, including the accounting requirements of the Superintendent. The significant measurement differences between Canadian and U.S. GAAP affecting the consolidated financial statements are as follows:


		Net income									Shareholders' equity
For the year ended October 31
($ millions)		2003			2002			2001			2003			2002			2001

Net income and shareholders’ equity based on Canadian GAAP		$	2,477		$	1,797		$	2,169		$	14,614		$	14,777		$	14,608
Employee future benefits (a)			31			3			(2	)		(19	)		(25	)		(12	)
Restructuring costs (b)			(4	)		(9	)		(5	)		26			30			39
Transfers of loans (c)			(32	)		(55	)		(1	)		47			79			134
Derivative instruments and hedging activities (d):
	Transition adjustment		—			—			101			124			124			124
	Current year adjustments		248			(347	)		25			(212	)		(377	)		(78	)
Unrealized gains (losses) on securities reclassified as trading (d)			7			(24	)		(4	)		(21	)		(28	)		(4	)
Conversion of loans into debt securities (e)			1			18			25			(32	)		14			52
Available-for-sale securities (e)			95			(229	)		—			925			151			669
Computer software development costs (f)			14			22			27			110			96			74
Non-controlling interest in net income of subsidiaries (g)			(16	)		(16	)		(16	)		(250	)		(250	)		(250	)
Goodwill and other intangibles (h)			—			(76	)		—			—			—			—
Other			(13	)		—			—			(11	)		—			—
Tax effect of above differences			(74	)		203			(62	)		(298	)		(13	)		(315	)
Future income taxes (k)			13			(13	)		(20	)		—			(13	)		—

Net income and shareholders’ equity based on U.S. GAAP		$	2,747		$	1,274		$	2,237		$	15,003		$	14,565		$	15,041

Preferred dividends paid and other			(62	)		(96	)		(99	)

Net income available to common shareholders based on U.S. GAAP		$	2,685		$	1,178		$	2,138

Earnings per common share based on U.S. GAAP (in dollars):
	Basic	$	5.32		$	2.34		$	4.27
	Diluted	$	5.24		$	2.30		$	4.20

Canadian and U.S. accounting standards for employee future benefits are substantially consistent; however, there continues to be a difference in the charge to income between Canadian and U.S. GAAP, principally due to differences in the amortization of the transitional amounts resulting from differing adoption dates of those standards, and differences in the treatment of the pension valuation allowance.

Canadian GAAP requires recognition of a pension valuation allowance for any excess of the prepaid benefit expense over the expected future benefit. Changes in the pension valuation allowance are recognized in the Consolidated Statement of Income. U.S. GAAP does not permit recognition of a pension valuation allowance.

As well, U.S. GAAP requires the excess of any unfunded accumulated benefit obligation (with certain other adjustments) to be reflected as an additional minimum pension liability in the U.S. GAAP Consolidated Balance Sheet with an offsetting adjustment to intangible assets to the extent of unrecognized prior service costs, with the remainder recorded in other comprehensive income.

Under Canadian GAAP, restructuring costs incurred for activities initiated prior to April 1, 2003, were accrued as liabilities provided that a restructuring plan detailing all major actions to be taken had been approved by an appropriate level of management, and significant changes to the plan were not likely. Under U.S. GAAP, for activities initiated prior to January 1, 2003, additional criteria were required to have been met prior to accrual, including that certain restructuring costs be incurred within one year from the date of approval of the restructuring plan; the accruals recorded under Canadian GAAP for certain planned restructuring costs not incurred within the one-year time limit are reversed under U.S. GAAP and the costs are expensed as incurred. For restructuring costs incurred for activities initiated after March 31, 2003, Canadian and U.S. GAAP are consistent.

Effective July 1, 2001, the Bank adopted a new Canadian accounting guideline for transfers of loans on a prospective basis. This guideline is consistent with the U.S. standard for transfers of loans adopted on April 1, 2001.

Prior to the adoption of the new Canadian guideline, transfers of loans were treated as sales under Canadian GAAP when the significant risks and rewards of ownership were transferred. Gains on transfers of loans were recognized immediately, unless there was recourse to the Bank in excess of expected losses, in which case the gains were considered unrealized and deferred until they were collected in cash and there was no recourse to that cash. Under U.S. GAAP, gains on transfers of loans that qualify as sales are recognized in income at the time of sale. There will continue to be differences in Canadian and U.S. GAAP income until the deferred gains related to assets securitized prior to July 1, 2001 have all been recognized in Canadian GAAP income.

Prior to the harmonization of Canadian and U.S. GAAP, some transfers of assets did not qualify for sale accounting under U.S. GAAP. These transfers have been accounted for as secured lending arrangements under U.S. GAAP. This results in the assets remaining on the U.S. GAAP Consolidated Balance Sheet and in the net spread being recognized in U.S. GAAP income over the term of the loans rather than immediate recognition of a gain.

In April 2001, the Bank securitized personal loans of $1,064 million, on a revolving basis, resulting in recognition of a net gain on sale of $9 million. The Bank’s retained interest, which consists of its rights to future cash flows, had a fair value on the date of sale of $28 million. The Bank retained servicing responsibilities for which a liability of $2 million was recognized. The key assumptions used to measure fair value at the date of securitization were a prepayment rate of 8.3%, an excess spread of 0.9%, a discount rate of 8.3% and an expected credit loss of 0.3%.

The expected static pool credit losses, which are the sum of the actual and projected future credit losses over the life of the securitization, as a percentage of the original loan pool balance, annualized, were 0.3% (2002 — 0.2%; 2001 — 0.2%).

The key assumptions used in measuring the fair value of the retained interest for this securitization, and the sensitivity of the current fair value of retained interest to a 10% and 20% adverse change to the assumptions are as follows:


As at October 31 ($ millions)		2003			2002

Carrying value of the retained interest ($)			28			28
Fair value of the retained interest ($)			29			29
Weighted average life (in years)			1			1

Prepayment rate (%)			7.4			7.7
	Impact on fair value of a 10% adverse change ($)		—			(1	)
	Impact on fair value of a 20% adverse change ($)		(1	)		(1	)

Expected credit losses (annual rate) (%)			0.3			0.2
	Impact on fair value of a 10% adverse change ($)		—			—
	Impact on fair value of a 20% adverse change ($)		—			—

Residual cash flow annual discount rate (%)			6.3			6.3
	Impact on fair value of a 10% adverse change ($)		—			—
	Impact on fair value of a 20% adverse change ($)		—			—

Excess spread (%)			1.1			1.2
	Impact on fair value of a 10% adverse change ($)		(1	)		(1	)
	Impact on fair value of a 20% adverse change ($)		(3	)		(2	)

The sensitivity measures above are hypothetical and should be used with caution. Other sensitivity estimates should not be extrapolated from those presented above since the relationship between the change in the assumption to the change in fair value is not linear. In addition, changes in a particular assumption and the effect on the fair value of the retained interest is calculated without changing any other assumption; however, the factors are not independent and the actual effects could be magnified or counteracted from the sensitivities presented.

Under Canadian GAAP, the Bank accounts for derivative instruments held for asset/liability management purposes primarily on an accrual basis. Derivative instruments held for trading purposes are accounted for at fair value with changes in fair value recognized in income.

The Bank adopted a new U.S. accounting standard on accounting for derivative instruments and hedging activities effective November 1, 2000. This standard requires all derivative instruments to be recognized at fair value in the Consolidated Balance Sheet. U.S. GAAP restricts the types of transactions that qualify for hedge accounting and contains guidance on measuring hedge effectiveness. The change in fair value of a derivative instrument designated as a fair value hedge is offset in U.S. GAAP income against the change in the fair value of the hedged item relating to the hedged risk. The change in fair value of a derivative instrument designated as a cash flow hedge is recorded in other comprehensive income until the revenues or expenses relating to the hedged item are recorded in income. Hedge ineffectiveness and changes in the fair value of derivative instruments that do not qualify as hedges are recognized in income as they arise. The Bank has recorded an after-tax loss of $19 million (2002 — after-tax loss of $7 million; 2001 — after-tax income of $24 million), which represents the ineffective portion of fair value hedges. Certain foreign currency funding transactions that were designated as hedges, for Canadian GAAP, did not meet the strict U.S. hedge criteria. Therefore, the change in the fair value of these transactions has been recognized in U.S. GAAP income.

U.S. GAAP also requires derivative instruments embedded in financial instruments that are not clearly and closely related to their host instrument to be separated and recorded at their fair value. If an embedded derivative cannot be separated, the entire financial instrument is recorded at fair value. Certain securities with embedded derivatives were reclassified from available-for-sale to trading securities. Under Canadian GAAP, these securities are classified as investment securities.

The Bank has fair value hedges of interest rate risk relating to its subordinated debentures and available-for-sale securities in addition to cash flow hedges of its variable rate instruments. The Bank expects to reclassify $11 million (2002 — $17 million; 2001 — $30 million) of after-tax losses from accumulated other comprehensive income to earnings as a result of its cash flow hedges within the next twelve months. As at October 31, 2003, 2002 and 2001, the maximum term of cash flow hedges was less than 10 years, 5 years and 3 years, respectively.

On November 21, 2002, the Bank adopted new U.S. GAAP guidance on accounting for derivative contracts held for trading purposes. Under the new guidance, the unrealized gain or loss arising at the inception of a derivative transaction is recognized in U.S. GAAP income only when the fair value of the derivative is obtained from a quoted market price, supported by comparison to other observable market transactions, or based upon a valuation technique incorporating observable market data. The adoption of the new guidance did not have a material impact on the U.S.GAAP results of the Bank in fiscal 2003.

Upon adoption of the new U.S. accounting standard on November 1, 2000, the Bank recorded an increase in consolidated assets of $377 million, an increase in consolidated liabilities of $330 million, and reflected a transition adjustment increasing 2001 U.S. GAAP net income by $60 million ($0.12 per share, basic and diluted), net of applicable income taxes, and a charge of $13 million in other comprehensive income.

U.S. GAAP requires securities to be classified as either trading, held to maturity or available for sale. The Bank has classified all investment securities as available for sale under U.S. GAAP (other than those reclassified to trading on adoption of the U.S. accounting standard on derivative instruments and hedging activities as discussed above), which are carried on the Consolidated Balance Sheet at their fair value. Other-than-temporary declines in the fair value of available-for-sale securities are recognized in U.S. GAAP income based on market values; declines in fair values are generally presumed to be other than temporary if they have persisted over several quarters. Both investment securities and trading securities are required to be accounted for on a trade date basis in the Consolidated Statement of Income and Consolidated Balance Sheet.

Under U.S. GAAP, unrealized gains and losses on available-for-sale securities, net of related income taxes, are recorded in other comprehensive income until realized. However, commencing in fiscal 2001, as required by the new U.S. standard on accounting for derivative instruments and hedging activities, the unrealized gains and losses on hedged available-for-sale securities are recorded in U.S. GAAP income. Prior to fiscal 2001, the unrealized gains and losses on the derivatives hedging these available-for-sale securities were classified in other comprehensive income until the offsetting gains and losses on the hedged available-for-sale securities were realized.

Under Canadian GAAP, securities are classified as either trading or investment. The Bank carries investment securities at amortized cost. Other-than-temporary declines in the value of investment securities are recorded in income based on net realizable values; declines in fair values are generally presumed to be other than temporary if conditions indicating impairment have persisted for a more prolonged period of time than under U.S. GAAP. Investment securities and trading securities are accounted for on a settlement date basis in the Consolidated Balance Sheet and on a trade date basis in the Consolidated Statement of Income.

Under Canadian GAAP, debt securities acquired in a loan restructuring prior to May 1, 2003, were recorded at net book value. Under U.S. GAAP, the debt securities are recorded at their fair value with the difference between the carrying value of the loans and the fair value of the debt securities acquired recorded in income. For debt securities acquired in a loan restructuring after April 30, 2003, Canadian and U.S. GAAP are consistent.

U.S. GAAP requires certain internal costs incurred for software development to be capitalized and amortized over the useful life of the software. Under Canadian GAAP, these costs are expensed as incurred.

On the U.S. GAAP Consolidated Balance Sheet, the preferred shares issued by Scotia Mortgage Investment Corporation, a wholly-owned subsidiary of the Bank, are presented as non-controlling interests. The net income applicable to these non-controlling interests is reflected as a reduction of U.S. GAAP income. Under Canadian GAAP, the Bank includes these preferred shares within the total preferred shares of the Bank in the Consolidated Balance Sheet and the related dividends are reflected as a reduction of net income available to common shareholders.

As discussed in Note 7, effective November 1, 2001, the Bank adopted the new Canadian and U.S. accounting standards for goodwill and other intangible assets without restatement of prior periods. These standards are substantially consistent except that any transitional impairment charge on the date of adoption is recognized as a charge to opening retained earnings under Canadian GAAP and as a cumulative adjustment to income under U.S. GAAP.

On adoption of the new standard, a charge to U.S. GAAP income of $76 million was recognized ($0.15 per share, basic and diluted).

Effective February 2003, the Bank adopted a new Canadian guideline on disclosure of guarantees, as set out in Note 20. The new U.S. standard is consistent with this Canadian guideline, except that it also requires recognition of a liability for the fair value of the obligation assumed at the inception of the arrangement for guarantees issued or modified after December 31, 2002.

The fair value under U.S. GAAP for guarantees at October 31, 2003 amounted to $78 million. This amount excludes derivative instruments meeting the definition of guarantees, the fair values of which are included in the amounts disclosed in Note 22.

In January 2003, a new U.S. standard on the accounting for VIEs was issued. This standard is identical to the new Canadian guideline with the exception of the effective date. Under U.S. GAAP, VIEs created after January 31, 2003 are required to be consolidated where the Bank is the primary beneficiary; there is no material measurement difference as a result of this requirement. For the remaining VIEs, the accounting on a U.S. GAAP basis is effective for the year commencing November 1, 2003. The effects are expected to be materially the same as those described in Note 2 under Canadian GAAP.

Canadian and U.S. accounting standards for corporate income taxes are substantially consistent, except that the effect of changes in income tax rates are recorded under U.S. GAAP when the rate changes are enacted in law, whereas under Canadian GAAP such amounts are recorded when the changes are considered to be substantively enacted.

Under Canadian GAAP, non-cash collateral received as part of securities lending transactions is not recognized in the Consolidated Balance Sheet. Under U.S. GAAP, collateral received for transactions where the Bank lends securities as principal is accounted for as a secured borrowing in the Consolidated Balance Sheet.

U.S. GAAP requires a statement of comprehensive income to be included in the financial statements. Comprehensive income includes net income and all changes in equity, net of taxes, for the period except those resulting from investments by and distributions to shareholders. Comprehensive income also includes the foreign currency translation adjustments arising from the consolidation of subsidiaries where the functional currency is other than the reporting currency. Under Canadian GAAP, there is no requirement to present a statement of comprehensive income and the foreign currency translation adjustments pertaining to net investments in foreign subsidiaries are presented in cumulative foreign currency translation in the Consolidated Balance Sheet.


For the year ended October 31 ($ millions)		2003			2002			2001

Net income based on U.S. GAAP		$	2,747		$	1,274		$	2,237
Other comprehensive income, net of income taxes:
	Change in unrealized gains and losses on available-for-sale securities⁽¹⁾		434			(229	)		71
	Change in unrealized foreign currency translation gains and losses⁽²⁾		(1,295	)		(137	)⁽³⁾		79
	Transition adjustment arising from adoption of the new accounting standard for derivative instruments⁽⁴⁾		—			—			(13	)
	Change in gains and losses on derivative instruments designated as cash flow hedges⁽⁵⁾		24			28			(57	)
	Change in additional minimum pension liability⁽⁶⁾		(17	)		(11	)		—

Total other comprehensive income		$	(854	)	$	(349	)	$	80

Total comprehensive income		$	1,893		$	925		$	2,317

For U.S. GAAP purposes, the Bank accounted for stock options issued prior to November 1, 2002, using the intrinsic value based method, which did not result in a compensation expense to the Bank. Effective November 1, 2002, the Bank commenced expensing the fair value of stock options on a prospective basis. All stock-based compensation awards are accounted for consistently under both Canadian and U.S. GAAP subsequent to that date.

U.S. GAAP requires pro-forma disclosure of net income and earnings per share as if the fair-value-based method had been applied retroactively, as detailed below:

In determining the pro-forma disclosures above, the fair value of options granted is estimated as at the date of grant using an option pricing model. The fair value is then amortized over the vesting period. As a result of the retroactive attachment of Tandem SARs to the 2002 employee stock option grants, the 2003 pro-forma disclosures no longer reflect a fair value expense for these employee stock options. The fair value of the fiscal 2002 and 2001 employee stock option grants were $14.11 and $12.01, respectively. Significant assumptions for 2002 and 2001, respectively, were as follows: (i) risk-free interest rate of 5.2% and 5.6%; (ii) expected option life of 6 years for both periods; (iii) expected volatility of 30% and 28%; and (iv) expected dividends of 2.7% and 2.6%.


		2003									2002

As at October 31		Canadian						U.S.			Canadian					U.S.
($ millions)		GAAP			Adjustments			GAAP			GAAP		Adjustments			GAAP

Assets
Cash resources		$	20,581		$	—		$	20,581		$	20,273	$	—		$	20,273
Securities
	Investment/Available-for-sale		20,293			277	^c,d,e		20,570			21,602		(105)	^c,d,e		21,497
	Trading		42,899			674	^d,e		43,573			34,592		762	^d,e		35,354
Loans			171,667			1,630	^c		173,297			185,671		2,084	^c		187,755
Derivative instruments			15,308			1,323	^d		16,631			15,821		1,829	^d		17,650
Other			15,144			3,214	⁽¹⁾		18,358			18,421		(1,023	)⁽⁵⁾		17,398

		$	285,892		$	7,118		$	293,010		$	296,380	$	3,547		$	299,927

Liabilities and shareholders’ equity
Liabilities
Deposits		$	192,672		$	1,693	^c,d	$	194,365		$	195,618	$	2,092	^c,d	$	197,710
Derivative instruments			14,758			2,318	^d		17,076			15,500		1,267	^d		16,767
Non-controlling interest in subsidiaries			2,326			250	^g		2,576			1,912		250	^g		2,162
Other			58,861			2,383	⁽²⁾		61,244			64,695		64	⁽⁶⁾		64,759
Subordinated debentures			2,661			85	^d		2,746			3,878		86	^d		3,964

		$	271,278		$	6,729		$	278,007		$	281,603	$	3,759		$	285,362

Shareholders’ equity
Capital stock
	Preferred shares	$	800		$	(250)	^g	$	550		$	1,275	$	(250)	^g	$	1,025
	Common shares		3,141			—			3,141			3,002		—			3,002
Retained earnings			11,747			(167	)⁽³⁾		11,580			10,398		(446	)⁽⁷⁾		9,952
Cumulative foreign currency translation			(1,074	)		1,074	^m		—			102		(102)	^m		—
Accumulated other comprehensive income			—			(268	)⁽⁴⁾		(268	)		—		586	⁽⁸⁾		586

		$	14,614		$	389		$	15,003		$	14,777	$	(212	)	$	14,565

		$	285,892		$	7,118		$	293,010		$	296,380	$	3,547		$	299,927

Note references refer to GAAP differences described above.

(1)		Refer to a, b, c, d, e, f, i, k, l.

(2)		Refer to a, b, c, d, e, i, l.

(3)		Refer to a, b, c, d, e, f, k.

(4)		Refer to a, d, e, m.

(5)		Refer to a, b, c, d, e, f, k.

(6)		Refer to a, b, c, d, e.

(7)		Refer to a, b, c, d, e, f, h, k, m.

(8)		Refer to a, d, e, m.

In May 2003, a new U.S. standard on accounting for certain financial instruments with characteristics of both liabilities and equity was issued. This standard requires that under specified circumstances, these instruments be reclassified from equity to liabilities on the balance sheet. This change in accounting is effective for the Bank’s U.S. GAAP reporting for the year commencing November 1, 2003. This pronouncement will not have a material impact on the Bank’s U.S. GAAP consolidated financial statements.

Sound and effective corporate governance is a priority and the Bank has adopted corporate governance guidelines. The Bank’s Corporate Governance Practices and the charters of Board committees may be found on the Bank’s website at www.scotiabank.com, in the Corporate Governance section, and are available in print to any shareholder upon written request to the Secretary of the Bank.

We consent to the inclusion in this annual report on Form 40-F of (i) our audit report dated December 2, 2003 on the Consolidated Balance Sheets of The Bank of Nova Scotia as at October 31, 2003 and 2002, and the Consolidated Statements of Income, Changes in Shareholders’ Equity and Cash Flows for each of the years in the three-year period ended October 31, 2003, and (ii) our Comments by Auditors for U.S. Readers on Canada — U.S. Reporting Difference dated December 2, 2003.

In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when there is a change in accounting principles that has a material effect on the comparability of the company’s financial statements, such as the changes described in Note 1 (accounting for foreclosed assets, sales of loans, and stock-based compensation) and Note 7 (amortization of goodwill), to the consolidated financial statements as at October 31, 2003 and 2002 and for each of the years in the three-year period ended October 31, 2003. Our report to the shareholders dated December 2, 2003 is expressed in accordance with Canadian reporting standards, which do not require a reference to such changes in accounting principles in the auditors’ report when the change is properly accounted for and adequately disclosed in the financial statements.

I, RICHARD E. WAUGH, President and Chief Executive Officer of The Bank of Nova Scotia, certify that:

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;

The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the issuer and have:

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and

The issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of issuer’s board of directors (or persons performing the equivalent functions):

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and

any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.

I, SARABJIT S. MARWAH, Senior Executive Vice-President and Chief Financial Officer of The Bank of Nova Scotia, certify that:

any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ENACTED PURSUANT TO
SECTION 906 OF THE U.S. SARBANES-OXLEY ACT OF 2002

The Bank of Nova Scotia (the “Company”) is filing its annual report on Form 40-F for the fiscal year ended October 31, 2003 (the “Report”) with the U.S. Securities and Exchange Commission.

I, Richard E. Waugh, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as enacted pursuant to section 906 of the U.S. Sarbanes-Oxley Act of 2002, that:

(i)

the Report fully complies with the requirements of section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934; and

(ii)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ENACTED PURSUANT TO
SECTION 906 OF THE U.S. SARBANES-OXLEY ACT OF 2002

The Bank of Nova Scotia (the “Company”) is filing its annual report on Form 40-F for the fiscal year ended October 31, 2003 (the “Report”) with the U.S. Securities and Exchange Commission.

I, Sarabjit S. Marwah, Senior Executive Vice-President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as enacted pursuant to section 906 of the U.S. Sarbanes-Oxley Act of 2002, that:

(i)

the Report fully complies with the requirements of section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934; and

(ii)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

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[Check one]

o		Registration statement pursuant to section 12 of the Securities Exchange Act of 1934

		or

x		Annual report pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934


		Name of each exchange
Title of each class		on which registered

Common		New York Stock Exchange


Registrant:	THE BANK OF NOVA SCOTIA


	By:	/s/ R. Waugh Name: Richard E. Waugh Title: President and Chief Executive Officer


	2003 versus 2002									2002 versus 2001
	Increase (decrease) due to change in:									Increase (decrease) due to change in:

Taxable equivalent basis	Average			Average			Net			Average			Average			Net
For the fiscal years ($ millions)	volume			rate			change			volume			rate			change

Net interest income
Assets	$	(411	)	$	(701	)	$	(1,112	)	$	1,232		$	(3,809	)	$	(2,577	)
Liabilities and shareholders’ equity		216			381			597			(647	)		3,737			3,090

Total	$	(195	)	$	(320	)	$	(515	)	$	585		$	(72	)	$	513


Wealth Management vital statistics	2003			2002		2001

Assets under administration (AUA) ($ million)⁽²⁾		87,615			80,705		92,835	⁽¹⁾
Assets under management (AUM) ($ million)⁽²⁾		17,373			18,407		18,846
Number of investment executives (IE)		828			851		906
Assets per IE ($ millions)		55.0			44.0		38.9
New assets — ScotiaMcLeod ($ millions)		13,655			10,800		10,540
% increase in active discount brokerage accounts		4			26		13
Net fund sales (redemptions) ($ millions)		(512	)		658		2,647
% of funds in top quartiles — one-year return		69			51		64


For the fiscal year ended October 31, 2003		Commission File Number 001-31316


x Annual information form		x Audited annual financial statements


Common Shares		505,352,886
Preferred Shares
	Series 11	9,992,900
	Series 12	12,000,000


	Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities registered pursuant to Form 40-F; the securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities


	28	Caution Regarding Forward-Looking Statements
	28	Controls and Procedures
	29	Summary of Critical Accounting Policies

Group Financial Performance

	30	Net Income
	30	Total Revenue
	30	Net Interest Income
	30	Assets and Liabilities
	32	Other Income
	34	Non-interest Expenses and Productivity
	34	Taxes
	36	Credit Quality
	38	Capital Management

Business Lines

	41	Overview
	42	Domestic Banking
	48	International Banking
	51	Scotia Capital

Risk Management

	54	Overview
	54	Credit Risk
	56	Market Risk
	59	Liquidity Risk
	60	Off-Balance Sheet Arrangements
	62	Operational Risk
	63	Reputational Risk
	63	Environmental Risk

Supplementary Data

	64	Credit Risk
	69	Capital
	70	Other Information


									2002

											Excluding charges
Net income ($ millions)			2003			ROE (%)⁽²⁾			As reported		for Argentina		2001

	n	Domestic Banking	$	1,094			30.9	%	$	1,142	$	1,142	$	960
	n	International Banking		669			20.7			125		665		489
	n	Scotia Capital		721			12.9			380		380		686
		Other⁽¹⁾		(7	)		—			150		150		34

		Total net income	$	2,477			17.6	%	$	1,797	$	2,337	$	2,169


Domestic Banking — vital statistics	2003		2002		2001

Staffing		20,221		20,564		20,948
Number of branches		964		984		1,021
Employee satisfaction index (%)		87		83		80
Average share of retail customer balances (%)		38		36		36


Electronic Banking — vital statistics	2003		2002		2001

Number of ABMs		2,378		2,188		2,182
Number of ABM transactions		204,209,112		202,790,249		198,761,373
Number of Scotia OnLine users		1,163,739		906,601		619,766
Number of Scotia OnLine transactions		107,157,389		66,921,834		38,618,060
Number of TeleScotia transactions		36,521,809		35,738,191		35,506,549
Number of calls handled by call centres		36,590,894		34,461,217		32,952,533


Taxable equivalent basis ($ millions)	2003		2002		2001

Retail	$	3,118	$	3,007	$	2,745
Small Business & Commercial		1,133		1,270		1,198
Wealth Management		751		727		774

Total revenue	$	5,002	$	5,004	$	4,717


Domestic Banking	2003			2002			2001

Financial performance ($ millions)
Net interest income	$	3,474		$	3,405		$	3,135
Other income		1,528			1,599			1,582
Provision for credit losses		(272	)		(282	)		(283	)
Non-interest expenses		(3,076	)		(2,953	)		(2,947	)
Income taxes		(560	)		(627	)		(527	)
Net income	$	1,094		$	1,142		$	960
Return on equity (%)		30.9			33.0			28.1
Average earning assets ($ billions)		101			93			90
Productivity ratio (%)		61.5			59.0			62.5


Yes o		82-__________		No x


Yes x		No o


Scotia Capital	2003			2002			2001

Financial performance ($ millions)
Net interest income	$	1,249		$	1,615		$	1,598
Other income		1,289			1,255			1,196
Provision for credit losses		(549	)		(1,247	)		(754	)
Non-interest expenses		(986	)		(1,022	)		(984	)
Income taxes		(282	)		(221	)		(370	)
Net income	$	721		$	380		$	686
Return on equity (%)		12.9			6.4			12.5
Average earning assets ($ billions)		119			124			115
Productivity ratio (%)		38.8			35.6			35.2
Vital statistics
Staffing		1,340			1,447			1,488


•	Policy	•	Measurement
•	Identification	•	Monitoring
•	Analysis	•	Limits
•	Assessment	•	Communication


Funding	Investment	Trading
- interest rate risk	- - interest rate risk	- interest rate risk
- foreign exchange risk	- - foreign exchange risk	- foreign exchange risk
	- - equities risk	- equities risk
		- commodities risk


Risk Factor	2003

Interest rate	$	5.7
Equities		5.6
Foreign exchange		2.8
Commodities		0.7
(Diversification)		(5.8	)

Total VAR	$	9.0


Medium-term note maturities ($ millions)
	Wholesale		Euro
	deposit notes		MTN		Total

Less than one year	$	2,624	$	2,788	$	5,412
One to five years		5,743		4,981		10,724
Greater than five years		548		—		548

Total	$	8,915	$	7,769	$	16,684


										Non-interest
Interest rate sensitivity position⁽¹⁾		Within			3 to 12			Over		rate
As at October 31, 2003 ($ billions)		3 months			months			1 year		sensitive			Total

Canadian dollars
Assets		$	95.5		$	14.7		$	44.0	$	5.6		$	159.8
Liabilities			92.6			19.2			26.3		21.7			159.8

Gap			2.9			(4.5	)		17.7		(16.1	)
Cumulative gap			2.9			(1.6	)		16.1		—

Foreign currencies
Assets			90.8			8.9			15.9		10.5			126.1
Liabilities			94.9			5.7			8.8		16.7			126.1

Gap			(4.1	)		3.2			7.1		(6.2	)
Cumulative gap			(4.1	)		(0.9	)		6.2		—

Total
Gap		$	(1.2	)	$	(1.3	)	$	24.8	$	(22.3	)
Cumulative gap			(1.2	)		(2.5	)		22.3		—

As at October 31, 2002:
	Gap	$	9.1		$	(11.6	)	$	22.5	$	(20.0	)
	Cumulative gap		9.1			(2.5	)		20.0		—


For the fiscal years (%)		2003			2002			2001			2000			1999

Canada
	Residential mortgages, personal and credit cards		0.27	%		0.26	%		0.23	%		0.23	%		0.25	%
	Business		0.47			0.29			0.34			0.15			(0.01	)
U.S. and Other International			0.70			2.06			1.22			0.87			0.57

Weighted subtotal — specific provisions			0.48			1.05			0.68			0.46			0.31

General provision			—			—			0.10			—			0.10	⁽¹⁾

Weighted total			0.48	%		1.05	%		0.78	%		0.46	%		0.41	%


Issues		Maturities/Redemptions/Repurchases

Tier 1 Capital		Preferred shares

February 13, 2003	$750,000,000 Scotiabank Trust Securities — Series 2003-1 issued by Scotiabank Capital Trust	January 29, 2003	$225,000,000 Series 8 non-cumulative preferred shares

		April 28, 2003	$250,000,000 Series 9 non-cumulative preferred shares

		Subordinated debentures

		March 24, 2003	$116,215,000 8.10% debentures due March 24, 2003

		May 1, 2003	US$250,000,000 6.875% debentures due May 1, 2003

		April 1, 2003	$600,000,000 5.40% debentures due April 1, 2008


Page		Audited Financial Statements:

74		Management’s Responsibility for Financial Information

74		Shareholders’ Auditors’ Report

75		Consolidated Balance Sheet

76		Consolidated Statement of Income

77		Consolidated Statement of Changes in Shareholders’ Equity

78		Consolidated Statement of Cash Flows

79		Notes to the Consolidated Financial Statements

		Supplementary Information:

115		Principal Subsidiaries

116		Eleven-year Statistical Review


Peter C. Godsoe Chairman of the Board and Chief Executive Officer Toronto, December 2, 2003		Richard E. Waugh President		Sarabjit S. Marwah Senior Executive Vice-President and Chief Financial Officer


KPMG LLP Chartered Accountants		PricewaterhouseCoopers LLP Chartered Accountants		Toronto, December 2, 2003


Peter C. Godsoe Chairman of the Board and Chief Executive Officer		Richard E. Waugh President


								Country			2003		2002
					Specific			risk
As at October 31 ($ millions)		Gross⁽¹⁾⁽²⁾			allowance⁽¹⁾⁽³⁾			allowance			Net		Net

By loan type:
	Residential mortgages	$	388		$	(156	)	$	—		$	232	$	285
	Personal and credit cards		369			(280	)		—			89		117
	Business and governments		2,505	⁽⁴⁾		(1,283	)		(21	)		1,201		1,693

Total		$	3,262	⁽⁵⁾⁽⁶⁾	$	(1,719	)	$	(21	)	$	1,522	$	2,095

By geography:
	Canada										$	241	$	279
	United States											650		1,225
	Other international											631		591

Total											$	1,522	$	2,095


	Specific			Country risk			General
As at October 31 ($ millions)	allowance			allowance⁽¹⁾			allowance		2003			2002			2001

Balance at beginning of year	$	1,892		$	481		$	1,475	$	3,848		$	4,697		$	3,306
Acquisition of subsidiaries		—			—			—		—			—			919
Write-offs⁽²⁾		(927	)		(21	)		—		(948	)		(2,403	)		(1,173	)
Recoveries		164			—			—		164			169			123
Provision for credit losses		893			—			—		893			2,029			1,425
Disposal of Scotiabank Quilmes operations (including foreign exchange thereon)		—			—			—		—			(504	)		—
Other, including foreign currency adjustment		(303	)		(74	)		—		(377	)		(140	)		97

Balance at end of year	$	1,719		$	386		$	1,475	$	3,580		$	3,848		$	4,697


					2003		2002
			Accumulated		Net		Net
			depreciation &		book		book
As at October 31 ($ millions)	Cost		amortization		value		value

Land	$	241	$	—	$	241	$	264
Buildings		1,414		358		1,056		1,103
Equipment		2,337		1,882		455		522
Leasehold improvements		651		459		192		212

Total	$	4,643	$	2,699	$	1,944	$	2,101


Less than 1 year	$	—
From 1 to 2 years		—
From 2 to 3 years		—
From 3 to 4 years		—
From 4 to 5 years		330
From 5 to 10 years		1,475
Over 10 years		856

	$	2,661


As at October 31, 2003	Options Outstanding						Options Exercisable

	Number		Weighted		Weighted		Number		Weighted
	of stock		average remaining		average		of stock		average
Range of exercise prices	options (000’s)		contractual life (years)		exercise price		options (000’s)		exercise price

$13.25 to $16.53		1,031		2.35	$	16.04		1,031	$	16.04
$26.05 to $35.10		10,824		5.19	$	30.54		9,876	$	30.75
$42.05 to $54.87		11,845		7.88	$	45.90		3,805	$	44.11

		23,700		6.41	$	37.59		14,712	$	33.18

(1)		Includes a gross future tax asset of $295 as at October 31, 2003, relating to subsidiaries’ unused income tax losses arising in prior years, which expire mostly by 2006. This future tax asset has been reduced by a valuation allowance of $189, resulting in a net future tax asset of $106 (2002 — $38).
(2)		Net future income taxes of $912 (2002 — $702) are represented by future income tax assets of $982 (2002 — $797), net of future income tax liabilities of $70 (2002 — $95).

(1)		Other minor plans operated by certain subsidiaries of the Bank are not considered material and are not included in these disclosures.
(2)		Scotiabank Inverlat is included as a principal plan in 2003. Prior years have not been restated since the information is not available.
(3)		The fair value of assets invested in common shares of the Bank totalled $405 (2002 — $360; 2001 — $372).
(4)		Includes international plans which generally have higher rates than Canadian plans. For Canadian pension plans for 2003, the discount rate used to determine the current year’s expense is 7.00%, the discount rate for the end of year projected benefit obligation is 6.50%, and the assumed long-term rate of return on assets is 7.00%.
(5)		Generally, inflation rates for health care costs gradually reduce to approximately 4.30% in 6 years.

(1)		Reflects the potential dilutive effect of stock options granted under the Bank’s Stock Option Plans as determined under the treasury stock method. Excludes options with Tandem SAR features as these options are expensed and booked as liabilities. All other stock options are included in the computation.
(2)		Convertible preferred shares have not been included in the calculation since the Bank has the right to redeem them for cash prior to conversion date.