Table of Contents

16	Forward-looking statements
17	Non-GAAP measures
18	Financial highlights
OVERVIEW
19	Financial results
21	Outlook
21	Shareholder returns
21	Impact of foreign currency translation
21	Impact of acquisitions
GROUP FINANCIAL PERFORMANCE
22	Total revenue
22	Net interest income
24	Net fee and commission revenues
25	Other operating income
26	Operating expenses
27	Taxes
27	Credit quality
34	Fourth quarter review
36	Summary of quarterly results
37	Financial results review: 2013 vs 2012
GROUP FINANCIAL CONDITION
40	Statement of financial position
41	Capital management
50	Off-balance sheet arrangements
52	Financial instruments
52	Selected credit instruments – publically known risk items

BUSINESS LINES
54	Overview
56	Canadian Banking
58	International Banking
60	Global Wealth & Insurance
62	Global Banking & Markets
64	Other
RISK MANAGEMENT
65	Overview
71	Credit risk
75	Market risk
81	Liquidity risk
87	Other risks
	87    Operational risk
	88    Reputational risk
	88    Environmental risk
	89    Insurance risk
	89    Strategic risk
CONTROLS AND ACCOUNTING POLICIES
90	Controls and procedures
90	Critical accounting estimates
96	Future accounting developments
96	Regulatory developments
97	Related party transactions
SUPPLEMENTARY DATA
98	Geographic information
100	Credit risk
105	Revenues and expenses
107	Selected quarterly information
108	Eleven-year statistical review

2014  Scotiabank Annual Report      15

MANAGEMENT’S DISCUSSION AND ANALYSIS

FORWARD LOOKING STATEMENTS

Our public communications often include oral or written forward-looking statements. Statements of this type are included in this document, and may be included in other filings with Canadian securities regulators or the U.S. Securities and Exchange Commission, or in other communications. All such statements are made pursuant to the “safe harbour” provisions of the U.S. Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities legislation. Forward-looking statements may include, but are not limited to, statements made in this Management’s Discussion and Analysis in the Bank’s 2014 Annual Report under the headings “Overview-Outlook,” for Group Financial Performance “Outlook,” for each business segment “Outlook” and in other statements regarding the Bank’s objectives, strategies to achieve those objectives, expected financial results (including those in the area of risk management), and the outlook for the Bank’s businesses and for the Canadian, U.S. and global economies. Such statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “intent,” “estimate,” “plan,” “may increase,” “may fluctuate,” and similar expressions of future or conditional verbs, such as “will,” “should,” “would” and “could.”

By their very nature, forward-looking statements involve numerous assumptions, inherent risks and uncertainties, both general and specific, and the risk that predictions and other forward-looking statements will not prove to be accurate. Do not unduly rely on forward-looking statements, as a number of important factors, many of which are beyond our control, could cause actual results to differ materially from the estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to: the economic and financial conditions in Canada and globally; fluctuations in interest rates and currency values; liquidity; significant market volatility and interruptions; the failure of third parties to comply with their obligations to us and our affiliates; the effect of changes in monetary policy; legislative and regulatory developments in Canada and elsewhere, including changes in tax laws; the effect of changes to our credit ratings; amendments to, and interpretations of, risk-based capital guidelines and reporting instructions and liquidity regulatory guidance; operational and reputational risks; the risk that the Bank’s risk management models may not take into account all relevant factors; the accuracy and completeness of information the Bank receives on customers and counterparties; the timely development and introduction of new products and services in receptive markets; the Bank’s ability to expand existing distribution channels and to develop and realize revenues from new distribution channels; the Bank’s ability to complete and integrate acquisitions and its other growth strategies; changes in accounting policies and methods the Bank uses to report its financial condition and financial performance, including uncertainties associated with critical accounting assumptions and estimates (See “Controls and Accounting Policies - Critical accounting estimates” in the Bank’s 2014 Annual Report, as updated by quarterly reports); the effect of applying future accounting changes (See “Controls and Accounting Policies - Future accounting developments” in the Bank’s 2014 Annual Report, as updated by quarterly reports); global capital markets activity; the Bank’s ability to attract and retain key executives; reliance on third parties to provide components of the Bank’s business infrastructure; unexpected changes in consumer spending and saving habits; technological developments; fraud by internal or external

parties, including the use of new technologies in unprecedented ways to defraud the Bank or its customers; increasing cyber security risks which may include theft of assets, unauthorized access to sensitive information or operational disruption; consolidation in the Canadian financial services sector; competition, both from new entrants and established competitors; judicial and regulatory proceedings; acts of God, such as earthquakes and hurricanes; the possible impact of international conflicts and other developments, including terrorist acts and war on terrorism; the effects of disease or illness on local, national or international economies; disruptions to public infrastructure, including transportation, communication, power and water; and the Bank’s anticipation of and success in managing the risks implied by the foregoing. A substantial amount of the Bank’s business involves making loans or otherwise committing resources to specific companies, industries or countries. Unforeseen events affecting such borrowers, industries or countries could have a material adverse effect on the Bank’s financial results, businesses, financial condition or liquidity. These and other factors may cause the Bank’s actual performance to differ materially from that contemplated by forward-looking statements. For more information, see the “Risk Management” section starting on page 65 of the Bank’s 2014 Annual Report.

Material economic assumptions underlying the forward-looking statements contained in this document are set out in the 2014 Annual Report under the heading “Overview-Outlook,” as updated by quarterly reports; and for each business segment “Outlook”. The “Outlook” sections in this document are based on the Bank’s views and the actual outcome is uncertain. Readers should consider the above-noted factors when reviewing these sections.

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

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

December 5, 2014

16      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    OVERVIEW

Non-GAAP Measures

The Bank uses a number of financial measures to assess its performance. Some of these measures are not calculated in accordance with Generally Accepted Accounting Principles (GAAP), which are based on International Financial Reporting Standards (IFRS), are not defined by GAAP and do not have standardized meanings that would ensure consistency and comparability between companies using these measures. These non-GAAP measures are used throughout this report and defined below.

Assets under administration (AUA)

AUA are assets administered by the Bank which are beneficially owned by clients and therefore not reported on the Bank’s Consolidated Statement of Financial Position. Services provided for AUA are of an administrative nature, such as trusteeship, custodial, safekeeping, income collection and distribution, securities trade settlements, customer reporting, and other similar services.

Assets under management (AUM)

AUM are assets managed by the Bank on a discretionary basis and in respect of which the Bank earns investment management fees. AUM are beneficially owned by clients and are therefore not reported on the Bank’s Consolidated Statement of Financial Position. Some AUM are also administered assets and are therefore included in assets under administration.

Adjusted diluted earnings per share

The adjusted diluted earnings per share is calculated by adjusting the diluted earnings per share to add back the non-cash, after-tax amortization of intangible assets related to acquisitions (excluding software).

Economic equity and return on economic equity

For internal reporting purposes, the Bank attributes capital to its business segments based on their risk profile and uses a methodology that considers credit, market, operational and other risks inherent in each business segment. The amount of risk capital attributed is commonly referred to as economic equity. The economic equity methodology, models and assumptions are updated annually and applied prospectively. Return on economic equity for the business segments is calculated as a ratio of net income attributable to common shareholders of the business segment and the economic equity attributed.

Core banking assets

Core banking assets are average earning assets excluding bankers’ acceptances and total average assets related to the Global Capital Markets business within Global Banking & Markets.

Core banking margin (TEB)

This ratio represents net interest income (on a taxable equivalent basis) divided by average core banking assets. This is consistent with the Bank’s Consolidated Statement of Income presentation where net interest income from trading operations is recorded in trading revenues included in other operating income.

Operating leverage (TEB)

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

Productivity ratio (TEB)

Management uses the productivity ratio as a measure of the Bank’s efficiency. This ratio represents operating expenses as a percentage of total revenue (TEB).

Return on equity

Return on equity is a profitability measure that presents the net income attributable to common shareholders as a percentage of common shareholders’ equity. The Bank calculates its return on equity using average common shareholders’ equity.

Regulatory capital ratios

Regulatory capital ratios, such as Common Equity Tier 1 (CET1), Tier 1 and Total Capital ratios, have standardized meanings as defined by the Office of the Superintendent of Financial Institutions, Canada.

Taxable equivalent basis

The Bank analyzes net interest income, other operating income, and total revenue on a taxable equivalent basis (TEB). This methodology grosses up tax-exempt income earned on certain securities reported in either net interest income or other operating income to an equivalent before tax basis. A corresponding increase is made to the provision for income taxes; hence, there is no impact on net income. Management believes that this basis for measurement provides a uniform comparability of net interest income and other operating income arising from both taxable and non-taxable sources and facilitates a consistent basis of measurement. While other banks also use TEB, their methodology may not be comparable to the Bank’s methodology. For purposes of segmented reporting, a segment’s revenue and provision for income taxes are grossed up by the taxable equivalent amount. The elimination of the TEB gross up is recorded in the Other segment. The TEB gross up to net interest income, other operating income, total revenue, and provision for income taxes are presented below:

T1 TEB gross up

For the year ended October 31 ($ millions)	2014		2013		2012
Net interest income	$	17	$	15	$	17
Other operating income		337		297		271
Total revenue and provision for income taxes	$	354	$	312	$	288

Tax normalization adjustment of net income from associated

corporations

For business line performance assessment and reporting, net income from associated corporations, which is an after-tax number, is adjusted to normalize for income taxes.

The tax normalization adjustment grosses up the amount of net income from associated corporations and normalizes the effective tax rate in the business lines to better present the contribution of the associated corporations to the business line results.

2014  Scotiabank Annual Report      17

MANAGEMENT’S DISCUSSION AND ANALYSIS

T2 Financial highlights

	IFRS									CGAAP
As at and for the years ended October 31(1)	2014		2013(2)			2012(2)		2011		2010
Operating results ($ millions)
Net interest income		12,305		11,350			9,970		9,014		8,621
Net interest income (TEB(3))		12,322		11,365			9,987		9,035		8,907
Non-interest revenue		11,299		9,949			9,676		8,296		6,884
Non-interest revenue (TEB(3))		11,636		10,246			9,947		8,562		6,884
Total revenue		23,604		21,299			19,646		17,310		15,505
Total revenue (TEB(3))		23,958		21,611			19,934		17,597		15,791
Provision for credit losses		1,703		1,288			1,252		1,076		1,239
Operating expenses		12,601		11,664			10,436		9,481		8,182
Provision for income taxes		2,002		1,737			1,568		1,423		1,745
Provision for income taxes (TEB(3))		2,356		2,049			1,856		1,710		2,031
Net income		7,298		6,610			6,390		5,330		4,339
Net income attributable to common shareholders		6,916		6,162			5,974		4,965		4,038
Operating performance
Basic earnings per share ($)		5.69		5.15			5.27		4.63		3.91
Diluted earnings per share ($)		5.66		5.11			5.18		4.53		3.91
Adjusted diluted earnings per share(3)(4) ($)		5.72		5.17			5.23		4.58		3.94
Return on equity(3) (%)		16.1		16.6			19.9		20.3		18.3
Productivity ratio (%)(TEB(3))		52.6		54.0			52.4		53.9		51.8
Core banking margin (%)(TEB(3))		2.39		2.31			2.31		2.32		N/A	(5)
Financial position information ($ millions)
Cash and deposits with financial institutions(6)		56,730		53,338			47,337		38,723		39,530
Trading assets		113,248		96,489			87,596		75,799		N/A	(5)
Loans(6)		424,309		402,215			352,578		319,056		284,224
Total assets		805,666		743,644			668,225		594,423		526,657
Deposits(6)(7)		554,017		517,887			465,689		421,234		361,650
Common equity		44,965		40,165			34,335		26,356		23,656
Preferred shares		2,934		4,084			4,384		4,384		3,975
Assets under administration(3)		427,547		377,766			327,977		297,668		243,817
Assets under management(3)		164,820		145,470			114,694		102,733		53,532
Capital measures(2)(8)
Common Equity Tier 1 (CET1) ratio (%)		10.8		9.1			N/A		N/A		N/A
Tier 1 capital ratio (%)		12.2		11.1			13.6		12.2		11.8
Total capital ratio (%)		13.9		13.5			16.7		13.9		13.8
Assets to capital multiple		17.1		17.1			15.0		16.6		17.0
CET1 risk-weighted assets ($ millions)(9)		312,473		288,246			253,309		233,970		215,034
Credit quality
Net impaired loans ($ millions)(10)		2,002		1,808			2,005		1,957		3,044
Allowance for credit losses ($ millions)		3,641		3,273			2,977		2,689		2,787
Net impaired loans as a % of loans and acceptances(6)(10)		0.46		0.44			0.55		0.60		1.04
Provision for credit losses as a % of average loans and acceptances (annualized)(6)		0.40		0.32			0.36		0.34		0.45
Common share information
Share price ($)(TSX)
High		74.93		64.10			57.18		61.28		55.76
Low		59.92		52.30			47.54		49.00		44.12
Close		69.02		63.39			54.25		52.53		54.67
Shares outstanding (millions)
Average – Basic		1,214		1,195			1,133		1,072		1,032
Average – Diluted		1,222		1,209			1,160		1,108		1,034
End of period		1,217		1,209			1,184		1,089		1,043
Dividends per share ($)		2.56		2.39			2.19		2.05		1.96
Dividend yield (%)(11)		3.8		4.1			4.2		3.7		3.9
Market capitalization ($ millions)(TSX)		83,969		76,612			64,252		57,204		57,016
Book value per common share ($)		36.96		33.23			28.99		24.20		22.68
Market value to book value multiple		1.9		1.9			1.9		2.2		2.4
Price to earnings multiple		12.1		12.3			10.3		11.3		14.0
Other information
Employees		86,932		86,690	(7)		81,497		75,362		70,772
Branches and offices		3,288		3,330			3,123		2,926		2,784

(1) Amounts and financial ratios for periods after 2010 were prepared in accordance with International Financial Reporting Standards (IFRS). Amounts and financial ratios for 2010 were prepared in accordance with Canadian Generally Accepted Accounting Principles (CGAAP).

(2) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4 in the consolidated financial statements). Capital measures have not been restated for the new and amended IFRS standards as they represent the actual amounts in the period for regulatory purposes.

(3) Refer to page 17 for a discussion of non-GAAP measures.

(4) Amounts for periods before 2013 have been restated to reflect the current period definition. Refer to non-GAAP measures on page 17.

(5) N/A not applicable/not presented under CGAAP.

(6) Amounts and related ratios for 2012 and 2011 have been restated to reflect the current period presentation of deposits with financial institutions and cash collateral on securities borrowed and derivative transactions.

(7) Prior period amounts have been restated to conform with current period presentation.

(8) Effective November 1, 2012 regulatory capital ratios are determined in accordance with Basel III rules on an all-in basis (Refer to page 41). Comparative amounts for prior periods were determined in accordance with Basel II rules and have not been restated.

(9) As at October 31, 2014, credit valuation adjustment (CVA) risk-weighted assets were calculated using scalars of 0.57, 0.65 and 0.77 to compute CET1, Tier 1 and Total Capital ratios, respectively.

(10) Excludes Federal Deposit Insurance Corporation (FDIC) guaranteed loans related to the acquisition of R-G Premier Bank of Puerto Rico.

(11) Based on the average of the high and low common share price for the year.

18      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    OVERVIEW

Overview

Financial Results

Scotiabank had good performance in 2014 with respect to its medium-term financial objectives. Net income was $7,298 million, $688 million or 10% higher than last year’s results. Diluted earnings per share (EPS) were $5.66 as compared to $5.11 in 2013. Return on Equity was 16.1% compared to 16.6% last year.

The current year’s net income included an after-tax gain of $555 million on the sale of a majority of the Bank’s holding in CI Financial Corp. (“the disposition”), after-tax restructuring charges of $110 million (“restructuring charges”), and after-tax impact of other notable items of $155 million, or collectively 23 cents per share (refer T3). Last year’s net income benefited from a non-recurring after-tax benefit of $90 million or 7 cents per share in International Banking. Adjusting for these items, net income grew by $488 million or 7% and diluted earnings per share were $5.43 as compared to $5.04 in 2013, an increase of 8%. Underlying Return on Equity was 15.5% compared to 16.3% last year.

Total revenues on a taxable equivalent basis (TEB) rose 11% from the prior year to $23,958 million. Adjusting for the notable items (refer T3) in 2014 of $566 million and in 2013 of $150 million, underlying revenues increased by 9%. The positive impact of foreign currency translation contributed approximately 2% of this growth.

Net interest income (TEB) increased $957 million or 8% to $12,322 million, primarily from growth in core banking assets and improved margin, including the favourable impact of foreign currency translation.

Net fee and commission revenue was $7,737 million, up $820 million or 12% year over year. Growth was primarily in wealth management fees, from higher mutual fund fees and brokerage commissions. Banking revenue growth was broad-based across all revenue categories.

Other operating income (TEB) was $3,899 million, an increase of $570 million or 17% from the prior year. Adjusting for the notable items in 2014 of $566 million and $150 million in the prior year (refer T3), the underlying increase in operating income was 5%.

The total provision for credit losses was $1,703 million in 2014, up $415 million from last year. Adjusting for the notable item of $62 million (refer T3), the underlying increase was $353 million. Additional loan loss provisions primarily in the Caribbean hospitality portfolio and a change in loss parameters in the Canadian retail portfolio accounted for $109 million of the increase. The remainder of the increase reflected higher provisions in International and Canadian Banking.

Operating expenses rose 8% over last year to $12,601 million. Adjusting for the notable items in 2014 of $203 million and $74 million in the prior year (refer T3), underlying expenses increased $808 million or 7%. The negative impact of foreign currency translation contributed to 1% of this growth. The remaining increase reflects higher compensation costs and initiatives to support business growth. Operating leverage was positive 2.8%, or positive 2.0% after adjusting for the above noted items.

The provision for income taxes was $2,002 million, an increase from $1,737 million last year. The Bank’s overall effective tax rate for the year was 21.5% compared to 20.8% for 2013. The increase in the effective tax rate was due primarily to higher taxes in foreign jurisdictions and a proportionately lower benefit from tax-exempt income, partially offset by lower taxes on the disposition gain in the current year.

The all-in Basel III common equity Tier 1 ratio was 10.8% as at October 31, 2014, well above last year and the regulatory minimum, in part reflecting the impact of the disposition gain.

C1 Earnings per share (diluted)⁽¹⁾

(1) Amounts prior to 2011 calculated under CGAAP

(2) Certain amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4 in the consolidated financial statements)

C2 Closing common share price

as at October 31

C3 Return on equity⁽¹⁾

(1) Amounts prior to 2011 calculated under CGAAP

(2) Certain amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4 in the consolidated financial statements)

C4 Return to common shareholders

Share price appreciation plus dividends reinvested, 2004=100

2014  Scotiabank Annual Report      19

MANAGEMENT’S DISCUSSION AND ANALYSIS

Notable Items

There were several notable items in 2014 totaling a net benefit of $290 million ($301 million pre-tax), or approximately 23 cents per share as outlined in the table below.

T3 Notable Items

			2014									2013									2012
For the years ended October 31 ($ millions, except EPS)	Notes		Pre-tax			After-tax			EPS Impact			Pre-tax			After-tax			EPS Impact			Pre-tax			After-tax			EPS Impact
Gain on sale
Sale of holdings in CI Financial Corp.		1	$	643		$	555		$	0.45		$	–		$	–		$	–		$	–		$	–		$	–
Sale of subsidiary by Thanachart Bank				–			–			–			150			150			0.12			–			–			–
Sale of real estate assets				–			–			–			–			–			–			838			708			0.62
Restructuring charges		2		(148	)		(110	)		(0.09	)		(27	)		(20	)		(0.02	)		–			–			–
Provision for credit losses
Unsecured bankrupt retail accounts in Canada		3		(62	)		(46	)		(0.04	)		–			–			–			–			–			–
Increase in collective allowance				–			–			–			–			–			–			(100	)		(74	)		(0.06	)
Valuation adjustments
Funding valuation adjustment		4		(30	)		(22	)		(0.02	)		–			–			–			–			–			–
Revaluation of monetary assets in Venezuela		5		(47	)		(47	)		(0.04	)		–			–			–			–			–			–
Acquisition-related receivables in Puerto Rico				–			–			–			(47	)		(40	)		(0.03	)		–			–			–
Legal provisions		6		(55	)		(40	)		(0.03	)		–			–			–			–			–			–
Total			$	301		$	290		$	0.23		$	76		$	90		$	0.07		$	738		$	634		$	0.56
By Business line
Canadian Banking			$	(98	)	$	(73	)				$	–		$	–					$	–		$	–
International Banking				(88	)		(79	)					76			90						–			–
Global Wealth & Insurance				604			526						–			–						–			–
Global Banking & Markets				(31	)		(22	)					–			–						–			–
Other				(86	)		(62	)					–			–						738			634
Total			$	301		$	290		$	0.23		$	76		$	90		$	0.07		$	738		$	634		$	0.56
By Consolidated Statement of Income line
Trading revenues			$	(30	)	$	(22	)				$	–		$	–					$	–		$	–
Other operating income – other				596			508						150			150						838			708
Other operating income/Total revenue				566			486			–			150			150			–			838			708			–
Provision for credit losses				(62	)		(46	)					–			–						(100	)		(74	)
Operating expenses				(203	)		(150	)					(74	)		(60	)					–			–
Total			$	301		$	290		$	0.23		$	76		$	90		$	0.07		$	738		$	634		$	0.56

Notes

(1) Sale of majority of Bank’s holding in CI Financial Corp.

In the third quarter of 2014, the Bank sold a majority of its holding in CI Financial Corp. resulting in an after-tax gain of $555 million ($643 million pre tax) or 45 cents per share. This included an after-tax unrealized gain of $152 million on the reclassification of the Bank’s remaining investment in CI Financial Corp. to available-for-sale securities.

(2) Restructuring charges

The Bank recorded restructuring charges of $148 million ($110 million after tax), the majority relating to employee severance charges. These charges will drive greater operational efficiencies. In Canada, the charges relate to recent initiatives to centralize and automate several mid-office branch functions, as well as reductions in required wealth management operational support. In International Banking, the charges are primarily for closing or downsizing approximately 120 branches, which will allow us to focus on high-growth markets, minimize branch overlap, and realize synergies resulting from recent acquisitions. The Bank also made a series of changes to simplify its leadership structure and operating model, recorded in the Other segment.

(3) Provision for credit losses

The Bank changed its write-off policy on unsecured bankrupt retail accounts in Canada in order to accelerate write-offs upon notification of a bankruptcy filing. As a result, a charge of $62 million ($46 million after tax) was recorded.

(4) Funding valuation adjustment

During the fourth quarter of 2014, the Bank enhanced the fair value methodology and recognized a funding valuation adjustment (FVA) charge

of $30 million ($22 million after tax), to reflect the implied funding cost on uncollateralized derivative instruments.

(5) Venezuela

Venezuela has been designated as hyper-inflationary and measures of exchange controls have been imposed by the Venezuelan government. These restrictions have limited the Bank’s ability to repatriate cash and dividends out of Venezuela.

The Bank’s Venezuelan Bolivar (VEF) exposures include its investment in Banco del Caribe, and unremitted dividends and other cash amounts (“monetary assets”) in Venezuela.

During the year, two new exchange rates have been announced by the Venezuelan government, SICAD 1 (1 USD to 11 VEF) and SICAD II (1 USD to 50 VEF). The official exchange rate, as published by the Central Bank of Venezuela, is 1 USD to 6.3 VEF. Currently, the Bank has concluded that the SICAD II is the most likely rate that will be available to the Bank for any future remittances.

As at October 31, 2014, the Bank has remeasured its net investment and monetary assets at the SICAD II rate. As a result, the Bank has recorded a charge of $47 million in the Consolidated Statement of Income representing the revaluation impact on the monetary assets and a reduction in carrying value of the net investment of $129 million has been charged to Other Comprehensive Income.

(6) Legal provision

The Bank recorded a legal provision of approximately $55 million ($40 million after tax) related to certain ongoing legal claims.

20      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    OVERVIEW

Outlook

The pace of growth in many overseas economies remains slow and uneven. Sluggish activity in the euro zone has been reinforced by renewed weakness in the region’s growth leader, Germany. Japan’s nascent recovery and rebound in inflation have been pressured by the hefty increase in consumption taxes last spring. Some large emerging market economies, Brazil and Russia for example, have continued to decelerate alongside lacklustre global growth and moderating commodity prices, especially oil. Even the globe’s growth leader, China, has posted more moderate output gains in response to reduced international trade and domestic efforts to rein in excess credit in the property market.

In contrast, the U.S. economy is regaining momentum, with consumer spending buoyed by pent-up demand, increasing employment, and improved household balance sheets. Industrial output is

being underpinned by strengthening orders for machinery and equipment, rising oil and gas production, and increasing capital investments. Manufacturing activity in Canada is benefiting from improving conditions in the United States as well as a lower-valued exchange rate. Mexico and a number of Latin American economies are piggybacking on the improving U.S. demand, with weaker local currencies providing an added boost.

Internationally, the drop in oil prices and longer-term borrowing costs should help support global activity, as will pro-growth initiatives in many underperforming regions around the world alongside the strengthening in the United States. The Bank’s presence in the markets expected to show economic growth, along with its diversification and strong capital levels, will position the Bank to grow earnings in 2015 and beyond.

Shareholder Returns

Amidst equity market volatility and mixed stock performance, the Bank delivered a positive total shareholder return of 13.2%, a decrease from 21.7% in 2013, as shown in Table 4.

The total compound annual shareholder return on the Bank’s shares over the past five years was 13.1%, and 9.9% over the past 10 years. This exceeded the total return of the S&P/TSX Composite Index, which was 9.1% over the past five years and 8.0% over the last ten years, as shown in Chart 4.

Quarterly dividends were raised twice during the year – a 3% increase effective in the second quarter and a further 3% effective in the fourth quarter. As a result, dividends per share totaled $2.56 for the year, up 7% from 2013. With a payout ratio of 45% for the year, the Bank was within its target payout range of 40-50%.

The Bank’s Return on Equity was 16.1% for fiscal 2014 compared to 16.6% in 2013, due in part to higher capital levels.

T4 Shareholder returns

For the years ended October 31	2014		2013		2012		2011			2010
Closing market price per common share ($)		69.02		63.39		54.25		52.53			54.67
Dividends paid ($ per share)		2.56		2.39		2.19		2.05			1.96
Dividend yield (%)(1)		3.8		4.1		4.2		3.7			3.9
Increase (decrease) in share price (%)		8.9		16.8		3.3		(3.9	)		20.8
Total annual shareholder return (%)(2)		13.2		21.7		7.6		(0.4	)		25.7

(1) Dividend yield is calculated as the dividend paid divided by the average of the high stock price and the low stock price for the year.

(2) Total annual shareholder return assumes reinvestment of quarterly dividends, and therefore may not equal the sum of dividend and share price returns in the table.

Impact of Foreign Currency Translation

The impact of foreign currency translation on net income is shown in Table 5.

T5 Impact of foreign currency translation

Average exchange rate	2014			2013
U.S. dollar/Canadian dollar		0.918			0.981
Impact on income(1) ($ millions except EPS)	2014 vs. 2013			2013 vs. 2012
Net interest income	$	191		$	71
Net fees and commission revenues		99			38
Other operating income(2)		96			(25	)
Operating expenses		(134	)		(65	)
Other items (net of tax)		(70	)		(10	)
Net income	$	182		$	9
Earnings per share (diluted)	$	0.15		$	0.01
Impact by business line ($ millions)
Canadian Banking	$	9		$	1
International Banking(2)		85			22
Global Wealth & Insurance		10			2
Global Banking & Markets		74			6
Other(2)		4			(22	)
	$	182		$	9

(1) Includes impact of all currencies.

(2) Includes the impact of foreign currency hedges.

Impact of Acquisitions

There was no significant impact to the Bank’s reported net income in 2014 from acquisitions.

2014  Scotiabank Annual Report      21

MANAGEMENT’S DISCUSSION AND ANALYSIS

C5 Net interest income by business line⁽¹⁾

TEB, $ millions

(1) Excludes Other segment

C6 Net fee and commission revenues by business line⁽¹⁾

$ millions

(1) Excludes Other segment

C7 Average core banking assets and margin

TEB, $ billions

C8 Other operating income by business line⁽¹⁾

TEB, $ millions

(1) Excludes Other segment

GROUP FINANCIAL PERFORMANCE

Total revenue

Total revenue (TEB) was $23,958 million in 2014, an increase of $2,347 million or 11% from the prior year. Revenue growth benefited from strong growth in net interest income, fee and commission revenues and the impact of notable items (refer T3) in other operating income. Other operating income increased $570 million or 17% from 2013. Adjusting for the notable items in 2014 of $566 million and $150 million in the prior year (refer T3), total revenue growth was 9% including 2% from the positive impact of foreign currency translation.

The increase in net interest income (TEB) of $957 million or 8% was due to growth in average core banking assets and a widening of the core banking margin, and included a favourable impact of foreign currency translation of $191 million. Higher net interest income in Canadian Banking was driven by an increase in both average earning assets and the margin. International Banking’s 12% growth in average earning assets was partly offset by a reduction in the margin. There was strong loan growth in Latin America, including 13% in Mexico and 14% in Colombia.

Net fee and commission revenue was $820 million or 12% higher than last year, including $99 million from the positive impact of foreign currency translation. Strong growth in wealth management revenues, banking revenues and underwriting and other advisory fees all contributed to this increase. Wealth management revenues increased from higher mutual fund fees and brokerage revenues. Growth in banking revenues was widespread with increases in credit cards, deposit and payment services, credit fees and cash management fees. Underwriting and other advisory fees increased primarily from significant growth in equity and debt issues and from increased advisory activities in investment banking.

Other operating income (TEB), adjusting for notable items, was up $154 million or 5%. The increase was primarily from higher net gains on investment securities, largely offset by lower trading revenues, primarily in fixed income, and lower earnings from investments in associated corporations mainly due to the disposition.

Net Interest Income

Net interest income (TEB) was $12,322 million, an increase of $957 million or 8% from the prior year, driven primarily by a 5% increase in core earning assets and an eight basis point widening of the core banking margin.

Core asset volumes increased $26 billion or 5% to $515 billion, primarily from $14 billion growth in International Banking – mainly retail and commercial loans, $2 billion growth in residential mortgages in Canada or $6 billion excluding Tangerine run-off portfolio, $5 billion growth in consumer auto loans in Canada, and $2 billion growth in corporate lending in the U.S., Europe and Canada, as well as $3 billion growth in deposits with banks.

The core banking margin was 2.39%, an eight basis point increase from the previous year. The core banking margin benefited from lower funding costs as maturing high-rate debentures and deposits were replaced with funding at lower current rates and wider margins in Canadian Banking. Partly offsetting was margin compression in Global Banking & Markets. International Banking did not have any impact on the Bank’s core margin, as the narrower margin in International Banking was offset by the increase in asset volumes.

Canadian Banking margin increased five basis points to 2.09%, mainly from higher mortgage, credit card and credit line spreads, as well as strong growth in higher spread assets, including credit cards. Partially offsetting were lower spreads on core deposits and business accounts as a result of the low rate environment.

International Banking margin fell from 4.11% to 4.00% due to narrower margins across all regions.

Global Banking & Markets margin fell primarily due to lower loan origination fees and lower performing loan spreads in U.S. corporate lending.

Outlook

The Bank’s net interest income is expected to increase in 2015 mainly from moderate growth in core banking assets, a wider margin, as well as the impact of acquisitions expected to close in 2015. The core banking margin is expected to benefit from a change in asset mix with a continued focus on volume growth in higher margin products.

22      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    GROUP FINANCIAL PERFORMANCE

T6 Net interest income and core banking margin⁽¹⁾

	2014							2013							2012
($ billions, except percentage amounts)	Average balance		Interest		Average rate			Average balance		Interest		Average rate			Average balance		Interest		Average rate
Total average assets and net interest income	$	795.6	$	12.3				$	748.9	$	11.3				$	659.5	$	9.9
Less: total assets in Global Capital Markets(2)		232.5		–					212.0		–					183.8		–
Banking margin on average total assets	$	563.1	$	12.3		2.19	%	$	536.9	$	11.3		2.11	%	$	475.7	$	9.9		2.09	%
Less: non-earning assets and customer’s liability under acceptances		48.0							47.4							46.0
Core banking assets and margin	$	515.1	$	12.3		2.39	%	$	489.5	$	11.3		2.31	%	$	429.7	$	9.9		2.31	%

(1) Taxable equivalent basis. Refer to non-GAAP measures on page 17.

(2) Net interest income in Global Capital Markets trading assets is recorded in trading revenues in other operating income.

T7 Average balance sheet⁽¹⁾ and net interest income

	2014								2013(4)								2012(4)
TEB(2) For the fiscal years ($ billions)	Average balance			Interest		Average rate			Average balance			Interest		Average rate			Average balance			Interest		Average rate
Assets
Deposits with banks	$	60.1		$	0.3		0.44	%	$	55.6		$	0.3		0.50	%	$	56.9		$	0.3		0.50	%
Trading assets		113.3			0.1		0.12	%		105.1			0.1		0.12	%		90.8			0.1		0.15	%
Securities purchases under resale agreements		91.1			0.2		0.20	%		80.0			0.2		0.24	%		60.1			0.2		0.37	%
Investment securities		41.2			0.8		1.91	%		40.3			0.8		2.20	%		34.7			0.9		2.68	%
Loans:
Residential mortgages		210.9			7.6		3.60	%		206.6			7.4		3.59	%		167.9			6.5		3.86	%
Personal and credit cards		79.6			6.1		7.61	%		72.1			5.6		7.70	%		65.7			4.9		7.49	%
Business and government		128.5			4.3		3.39	%		116.9			4.4		3.76	%		105.0			4.2		3.99	%
Allowance for credit losses		(3.6	)							(3.3	)							(2.9	)
Total loans	$	415.4		$	18.0		4.34	%	$	392.3		$	17.4		4.42	%	$	335.7		$	15.6		4.65	%
Total earning assets	$	721.1		$	19.4		2.69	%	$	673.3		$	18.8		2.80	%	$	578.2		$	17.1		2.97	%
Customer’s liability under acceptances		10.4								10.2								8.8
Other assets		64.1								65.4								72.5
Total assets	$	795.6		$	19.4		2.43	%	$	748.9		$	18.8		2.52	%	$	659.5		$	17.1		2.60	%
Liabilities and equity
Deposits:
Personal	$	172.6		$	2.4		1.42	%	$	167.2		$	2.6		1.57	%	$	135.4		$	2.4		1.75	%
Business and government		339.7			3.5		1.02	%		314.0			3.5		1.12	%		295.5			3.4		1.18	%
Banks		38.4			0.3		0.77	%		35.7			0.3		0.69	%		33.0			0.3		0.80	%
Total deposits	$	550.7		$	6.2		1.13	%	$	516.9		$	6.4		1.24	%	$	463.9		$	6.1		1.32	%
Obligations related to securities sold under repurchase agreements		87.3			0.3		0.32	%		77.7		$	0.3		0.37	%		54.5			0.3		0.48	%
Subordinated debentures		5.3			0.2		3.84	%		7.8			0.3		4.37	%		7.3			0.4		5.19	%
Other interest-bearing liabilities		50.2			0.4		0.72	%		44.5			0.5		1.02	%		36.6			0.4		1.17	%
Total interest-bearing liabilities	$	693.5		$	7.1		1.02	%	$	646.9		$	7.5		1.16	%	$	562.3		$	7.2		1.28	%
Other liabilities including acceptances		54.4								59.4								62.0
Equity(3)		47.7								42.6								35.2
Total liabilities and equity	$	795.6		$	7.1		0.89	%	$	748.9		$	7.5		1.00	%	$	659.5		$	7.2		1.09	%
Net interest income				$	12.3							$	11.3							$	9.9

(1) Average of daily balances.

(2) Refer to non-GAAP measures on page 17.

(3) Includes non-controlling interests of $1.2 billion in 2014, $1.1 billion in 2013 and $0.8 billion in 2012.

(4) Prior period amounts have been restated to reflect current period presentation (refer to note 4 in the consolidated financial statements).

2014  Scotiabank Annual Report      23

MANAGEMENT’S DISCUSSION AND ANALYSIS

C9 Sources of net fee and commission revenues

T8 Net fee and commission revenues

For the fiscal years ($ millions)	2014		2013(1)		2012(1)		2014 versus 2013
Fee and commission revenues
Banking
Card revenues	$	933	$	816	$	768		14	%
Deposit and payment services
Deposit services		901		865		846		4
Other payment services		282		257		237		10
	$	1,183	$	1,122	$	1,083		5	%
Credit fees
Commitment and other credit fees		778		717		690		9
Acceptance fees		236		226		207		4
	$	1,014	$	943	$	897		8	%
Other	$	609	$	589	$	439		3	%
Total banking revenue	$	3,739	$	3,470	$	3,187		8	%
Wealth management
Mutual funds	$	1,468	$	1,280	$	1,125		15	%
Brokerage fees		943		848		721		11
Investment management and trust
Investment management and custody		159		150		141		6
Personal and corporate trust		224		215		183		4
		383		365		324		5
Total wealth management revenue	$	2,794	$	2,493	$	2,170		12	%
Underwriting and other advisory	$	712	$	503	$	493		42	%
Non-trading foreign exchange		420		404		365		4
Other		412		345		293		19
Fee and commission revenues	$	8,077	$	7,215	$	6,508		12	%
Fee and commission expenses
Card expenses	$	253	$	221	$	188		15	%
Deposit and payment services expenses		86		76		68		12
Other expenses		1		1		6		—
	$	340	$	298	$	262		14	%
Net fee and commission revenues	$	7,737	$	6,917	$	6,246		12	%

(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of IFRS 10 in 2014 (refer to Note 4 in the consolidated financial statements).

Net fee and commission revenues

Net fee and commission revenues were $7,737 million, an increase of $820 million or 12%, including the positive foreign exchange impact of $99 million.

Card revenues grew $117 million or 14% to $933 million primarily reflecting higher revenues in Canadian Banking from an increase in transaction-based fees.

Revenues from deposit services were $901 million, up $36 million or 4% over 2013 including the positive impact of foreign currency translation. Both Canadian Banking and International Banking contributed to the growth. The increase in other payment services was primarily from International Banking.

Credit fees were up $71 million or 8% from the prior year. Commitment and other credit fees were $778 million, up $61 million over 2013. Adjusting for the impact of foreign currency translation, Canadian Banking contributed to an increase of $20 million and Global Banking & Markets increased by $11 million in standby commitment fees. Acceptance fees were higher in both Global Banking & Markets reflecting trade finance activities, and Canadian Banking from higher volumes.

The increase in mutual fund fees of $188 million or 15% reflects higher average assets under management due to strong net sales and favourable market conditions.

Brokerage fees were up $95 million or 11% primarily from an increase in fee-based assets in the full service brokerage business.

Investment management and custody fees increased $9 million or 6%, primarily from higher assets under management in Global Wealth & Insurance.

Underwriting and other advisory fees were up year over year $209 million, or 42%, primarily from higher advisory fees in investment banking and from growth in equity and debt underwriting activity.

Non-trading foreign exchange fees were up $16 million or 4% to $420 million mainly from higher revenues in International Banking.

24      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    GROUP FINANCIAL PERFORMANCE

Higher other fee and commission revenues were mainly from non-retail brokerage fees and pension management fees in Colombia and Peru.

Fee and commission expenses rose $42 million or 14% to $340 million. Higher card expenses reflected higher transaction volumes in Canadian Banking.

Outlook

Continued strong performance is expected in fee and commission revenues in 2015, across all categories, particularly in card revenues, mutual fund management fees and brokerage fees.

Other operating income

Other operating income (TEB) was $3,899 million, an increase of $570 million or 17% from 2013. Adjusting for the notable items in 2014 of $566 million and $150 million in the prior year (refer T3), the increase in operating income was $155 million or 5%.

Trading revenues of $1,451 million (TEB) fell by $146 million. Adjusting for the impact of the funding valuation adjustment, the underlying decrease was $116 million, primarily reflecting declines in global fixed income.

Net gains on investment securities were $741 million compared to $375 million in 2013 reflecting strong equity markets this year.

Net income from investments in associated corporations was $428 million, down from $681 million last year. Adjusting for the gain in 2013, underlying earnings were down $103 million, reflecting the impact of the CI disposition and lower contributions from Thanachart Bank in Thailand.

Insurance underwriting income was $474 million, an increase of $26 million or 6% due entirely to International Insurance. Premiums and claims were higher compared to the prior year.

Other income of $805 million was higher by $577 million than 2013, primarily from the impact of notable items of $596 million.

Outlook

Adjusting for the disposition gain in 2014, other operating income will be lower in 2015. Declines are expected in security gains from the strong levels in 2014, lower contributions from associated corporations, partly offset by higher trading revenues, which are expected to be above 2014 levels but are subject to market conditions and customer demand.

T9 Other operating income

For the fiscal years ($ millions)	2014		2013(1)		2012(1)		2014 versus 2013
Trading revenues(2)	$	1,114	$	1,300	$	1,299		(14	)%
Net gain on sale of investment securities		741		375		185		98
Net income from investments in associated corporations		428		681		448		(37	)
Insurance underwriting income, net of claims		474		448		388		6
Other		805		228		1,110		100	+
Total other operating income		3,562		3,032		3,430		17
Taxable equivalent adjustment		337		297		271		13
Total other operating income (TEB)(3)	$	3,899	$	3,329	$	3,701		17	%

(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of IFRS 10 in 2014 (refer to Note 4 in the consolidated financial statements).

(2) On a taxable equivalent basis trading revenues were $1,451 million (2013 – $1,597 million, 2012 – $1,570 million).

(3) Refer to non-GAAP measures on page 17.

T10 Trading revenues

TEB(1) For the fiscal years ($ millions)	2014			2013			2012
By trading products:
Interest rate and credit	$	415		$	596		$	503
Equities		92			120			115
Commodities		359			338			425
Foreign exchange		208			198			233
Other		40			48			23
Sub-total		1,114			1,300			1,299
Taxable equivalent adjustment		337			297			271
Total trading revenues (TEB)(1)	$	1,451		$	1,597		$	1,570
% of total revenues		6.1	%		7.4	%		7.9	%

(1) Refer to non-GAAP measures on page 17.

2014  Scotiabank Annual Report      25

MANAGEMENT’S DISCUSSION AND ANALYSIS

C10 Expenses

$ millions

C11 Productivity⁽¹⁾

operating expenses as a % of revenue (TEB)

(1) Amounts prior to 2011 calculated under CGAAP

(2) Certain amounts are retrospectively adjusted to reflect the adoption of new IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4 in the consolidated financial statements).

C12 Direct and indirect taxes⁽¹⁾

$ millions

(1) Amounts prior to 2011 have been prepared in accordance with CGAAP.

(2) Amounts for 2013 and 2012 are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4 in the consolidated financial statements).

T11 Operating expenses and productivity

For the fiscal years ($ millions)	2014			2013(1)			2012(1)			2014 versus 2013
Salaries and employee benefits
Salaries	$	3,680		$	3,552		$	3,231			4	%
Performance-based compensation		1,669			1,558			1,477			7
Share-based compensation(2)		270			222			208			22
Other employee benefits		1,124			1,075			886			5
	$	6,743		$	6,407		$	5,802			5	%
Premises and technology
Premises
Net rent		392			378			321			4
Property taxes		82			83			85			(2	)
Other premises costs		415			400			362			4
	$	889		$	861		$	768			3	%
Technology	$	1,047		$	954		$	839			10	%
	$	1,936		$	1,815		$	1,607			7	%
Depreciation and amortization
Depreciation		297			297			277			–
Amortization of intangible assets		229			219			169			5
	$	526		$	516		$	446			2	%
Communications	$	417		$	409		$	373			2	%
Advertising and business development	$	571		$	505		$	450			13	%
Professional	$	471		$	432		$	340			9	%
Business and capital taxes
Business taxes		276			234			203			18
Capital taxes		38			40			45			(4	)
	$	314		$	274		$	248			15	%
Other	$	1,623		$	1,306		$	1,170			24	%
Total operating expenses	$	12,601		$	11,664		$	10,436			8	%
Productivity ratio (TEB)(3)		52.6	%		54.0	%		52.4	%

(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4 in the consolidated financial statements).

(2) Excludes Employee Share Ownership Plans.

(3) Taxable equivalent basis. Refer to Non-GAAP measures on page 17.

Operating expenses

Total operating expenses in 2014 were $12,601 million, an increase of $937 million or 8% from last year. Adjusting for the impact of notable items in both 2014 and 2013 of $203 million and $74 million, respectively (refer T3), operating expenses increased $808 million or 7%. Foreign currency translation contributed 1% of this increase.

Salaries and employee benefits were $6,743 million this year, up $336 million or 5%. Adjusting for the 2013 notable item of $27 million, salaries increased $155 million or 4% mainly reflecting annual pay increases. Performance-based compensation was up $111 million or 7% from last year. Commissions in Global Wealth & Insurance were also higher in line with revenue growth. Share-based compensation increased $48 million or 22% largely due to changes in expected payouts and from the impact of hedging. Pensions and other employee benefits increased $49 million or 5% due to higher payroll taxes and Canadian benefits. These increases were partially offset by lower pension costs due to changes in actuarial valuations.

Premises costs rose $28 million or 3% to $889 million due to the unfavourable impact of foreign currency translation and inflation.

Technology costs for the year were $1,047 million, up $93 million or 10% over last year, mainly reflecting continuing investments in new and ongoing technology projects to support business growth.

Advertising and business development increased $66 million or 13% to $571 million. The increase reflected rebranding costs related to Tangerine as well as ongoing and new campaigns related mainly to the Canadian retail market, including the credit cards growth initiative.

Professional expenses rose $39 million or 9% to $471 million to support initiatives and technology investments.

Business and capital taxes were $314 million for the year, up $40 million or 15% reflecting higher deposit insurance in Canada and business taxes mainly in the Caribbean.

26      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    GROUP FINANCIAL PERFORMANCE

Adjusting for the notable items of $203 million in 2014 and $47 million in 2013 (refer T3), other expenses were $161 million or 13% higher. This increase was due mostly to business volume-related expenses including loyalty reward point costs, and regulatory fees.

The productivity ratio in 2014 was 52.6%, an improvement from the previous year of 54.0%. Adjusting for notable items in 2014 and 2013, the productivity ratio in 2014 was 53.0% compared to 54.0%.

Operating leverage was a positive 2.8% or 2.0% after adjusting for the notable items.

Outlook

Adjusting for the notable items in 2014, expenses are expected to rise to support business expansion. The focus will be on achieving long term productivity and efficiency gains by investing in initiatives that enable a ‘low cost by design’ approach. This, coupled with ongoing investments in the businesses, both in Canada and internationally, will position the Bank to effectively support growth.

Taxes

The provision for income taxes was $2,002 million, an increase from $1,737 million last year. The Bank’s overall effective tax rate for the year was 21.5% compared to 20.8% for 2013. The increase in the effective tax rate was due primarily to higher taxes in foreign jurisdictions and a proportionately lower benefit from tax-exempt income, partially offset by a lower tax rate on the disposition gain in the current year.

Outlook

The Bank’s consolidated effective tax rate is expected to be in the range of 21% to 25% in 2015.

Credit Quality

Provision for credit losses

The total provision for credit losses was $1,703 million in 2014, up $415 million from the total provision of $1,288 million in 2013.

The provision for credit losses in Canadian Banking was $661 million, an increase of $183 million from $478 million last year, due to higher provisions in the retail portfolio which includes a $62 million notable item (refer T3) and $26 million related to updated loss parameters to capture recent portfolio trends for credit cards and auto loans.

The provision for credit losses in International Banking increased $250 million to $1,031 million. In the retail portfolio, provisions increased in line with volume growth when excluding the benefit of the credit mark on the acquired portfolio in Banco Colpatria. Higher retail provisions, primarily in Mexico, and largely in unsecured term loans, were partly offset by lower provisions in Chile. In the commercial portfolio, provisions were primarily higher in the Caribbean and Latin America with the former reflecting $83 million in provisions relating mainly to a small number of accounts in the hospitality portfolio. The provision this year includes a net benefit of $12 million due to net amortization of the credit mark on acquired loans in Colombia compared to a net benefit of $55 million last year.

The provision for credit losses in Global Wealth & Insurance was $2 million in 2014, a decrease of $1 million from $3 million in 2013.

The provision for credit losses in Global Banking & Markets was $9 million in 2014, down by $17 million from 2013. In the current year, lower provisions in the United States were somewhat offset by higher provisions in Europe and Canada.

T12 Provisions against impaired loans by business lines

For the fiscal years ($ millions)	2014		2013			2012		2011
Canadian Banking
Retail(1)	$	607	$	423		$	419	$	466
Commercial		54		55			87		126
	$	661	$	478		$	506	$	592
International Banking
Caribbean and Central America		247	$	172		$	192	$	209
Latin America(2)		776		601			413		296
Asia and Europe		8		8			8		4
	$	1,031	$	781		$	613	$	509
Global Wealth & Insurance	$	2	$	3		$	3	$	2
Global Banking & Markets
Canada		3	$	(7	)	$	7	$	27
U.S.		2		38			20		(12	)
Europe		4		(5	)		3		18
	$	9	$	26		$	30	$	33
Total	$	1,703	$	1,288		$	1,152	$	1,136

(1) 2011 amounts have been restated for changes in business line structure effective 2011.

(2) Latin America includes Mexico.

T13 Provision for credit losses as a percentage of average loans and acceptances

For the fiscal years (%)	2014			2013			2012			2011
Canadian Banking
Retail		0.25	%		0.18	%		0.21	%		0.25	%
Commercial		0.17			0.18			0.31			0.50
		0.24			0.18			0.23			0.28
International Banking
Retail		2.15			2.06			1.93			1.88
Commercial		0.35			0.15			0.09			0.09
		1.01			0.86			0.75			0.75
Global Wealth & Insurance		0.03			0.05			0.05			0.03
Global Banking & Markets(1)		0.02			0.07			0.09			0.11
Weighted subtotal – provisions against impaired loans		0.40			0.32			0.33			0.36
Provisions against performing loans		0.00			0.00			0.03			(0.02	)
Weighted total		0.40	%		0.32	%		0.36	%		0.34	%

(1) Global Corporate and Investment Banking only.

T14 Net charge-offs⁽¹⁾ as a percentage of average loans and acceptances

For the fiscal years (%)	2014			2013			2012			2011
Canadian Banking
Retail		0.21	%		0.18	%		0.22	%		0.24	%
Commercial		0.25			0.26			0.31			0.23
		0.21			0.19			0.23			0.24
International Banking
Retail		1.68			1.51			1.28			1.61
Commercial		0.15			(0.06	)		0.05			0.07
		0.71			0.52			0.49			0.64
Global Wealth & Insurance		0.07			0.00			0.06			0.04
Global Banking & Markets(2)		0.15			0.13			0.01			0.11
Weighted total		0.33	%		0.25	%		0.27	%		0.31	%

(1) Write-offs net of recoveries.

(2) Global Corporate and Investment Banking only.

2014  Scotiabank Annual Report      27

MANAGEMENT’S DISCUSSION AND ANALYSIS

C13 Credit losses*

Provisions against impaired loans as a % of average loans & acceptances

* Amounts prior to 2011 calculated under CGAAP

C14 Net impaired loan ratio

as a % of loans & acceptances, as at October 31

C15 Gross impaired loans

as a % of equity & allowances for credit losses as at October 31

C16 Canadian retail portfolio

delinquent loans as a % of total loans

C17 International retail portfolio

delinquent loans as a % of total loans

T15 Impaired loans by business lines

	Gross impaired loans				Allowance for credit losses						Net impaired loans
As at October 31 ($ millions)	2014(1)		2013(1)		2014(1)			2013(1)			2014 (1)			2013(1)
Canadian Banking
Retail	$	887	$	756	$	(550	)	$	(460	)	$	337		$	296
Commercial		201		256		(183	)		(195	)		18			61
	$	1,088	$	1,012	$	(733	)	$	(655	)	$	355		$	357
International Banking
Caribbean and Central America	$	1,470	$	1,160	$	(522	)	$	(454	)	$	948		$	706
Latin America(2)		1,552		1,237		(915	)		(700	)		637			537
Asia and Europe		48		51		(23	)		(20	)		25			31
	$	3,070	$	2,448	$	(1,460	)	$	(1,174	)	$	1,610		$	1,274
Global Wealth & Insurance
Canada	$	6	$	10	$	(2	)	$	(4	)	$	4		$	6
International		3		5		–			–			3			5
	$	9	$	15	$	(2	)	$	(4	)	$	7		$	11
Global Banking & Markets
Canada	$	22	$	–	$	(3	)	$	–		$	19		$	–
U.S.		11		184		–			(35	)		11			149
Europe		–		42		–			(25	)		–			17
	$	33	$	226	$	(3	)	$	(60	)	$	30		$	166
Totals	$	4,200	$	3,701	$	(2,198	)	$	(1,893	)	$	2,002		$	1,808
Allowance for credit losses on performing loans												(1,272	)		(1,272	)
Net impaired loans after allowance on performing loans											$	730		$	536

Impaired loan metrics

	Net impaired loans
As at October 31 ($ millions)	2014 (1)			2013(1)
Gross impaired loans as a % of total allowance for credit losses and shareholders’ equity		7.98	%		7.62	%
Net impaired loans as a % of loans and acceptances		0.46	%		0.44	%
Allowance against impaired loans as a % of gross impaired loans		52	%		51	%

(1) Excludes Federal Deposit Insurance Corporation (FDIC) guaranteed loans related to the acquisition of R-G Premier Bank of Puerto Rico.

(2) Latin America includes Mexico.

Allowance for credit losses

The total allowance for credit losses was $3,470 million as at October 31, 2014 (excluding $171 million related to loans covered by FDIC guarantees in R-G Premier Bank of Puerto Rico), up from $3,165 million (excluding $108 million related to R-G Premier Bank) last year. The $305 million increase was mainly attributable to increases in International Banking and Canadian Retail.

Allowances in Canadian Banking increased by $78 million, primarily due to higher new provisions in the retail portfolio.

In International Banking, allowances increased by $286 million to $1,460 million. The increases were in Latin America (with the exception of Chile) and Caribbean & Central America.

Global Banking & Markets’ allowances decreased significantly to $3 million from $60 million, in line with the significant reduction in gross impaired loans.

The collective allowance for credit losses on performing loans remained unchanged at $1,272 million.

28      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    GROUP FINANCIAL PERFORMANCE

Impaired loans

Gross impaired loans increased to $4,200 million as at October 31, 2014, from $3,701 million last year.

Impaired loans in Canadian Banking increased by $76 million, primarily in the retail portfolio.

In International Banking, impaired loans increased by $622 million largely due to increases in Latin America and Caribbean & Central America.

In Global Wealth & Insurance, impaired loans decreased by $6 million. Impaired loans in Global Banking & Markets decreased by $193 million, attributable primarily to the portfolios in the United States and Europe.

Net impaired loans, after deducting the allowance for credit losses, were $2,002 million as at October 31, 2014, an increase of $194 million from a year ago.

As shown in Chart 14, net impaired loans as a percentage of loans and acceptances were 0.46% as at October 31, 2014, virtually unchanged from 0.44% a year ago.

Acquisition-related purchased loans

All purchased loans are initially measured at fair value on the date of acquisition, with no allowances for credit losses recorded in the Consolidated Statement of Financial Position on the date of acquisition. Consequently, none of the purchased loans are considered to be impaired on the date of acquisition. In arriving at the fair value, the Bank considers interest rate mark and credit rate mark adjustments.

The interest rate mark on the date of acquisition is principally set up for fixed interest rate loans and captures the impact of the interest rate differential between the contractual rate of interest on the loan and the prevailing interest rate on the loan on the date of acquisition for the remaining term. The interest rate mark is fully amortized into interest income in the Consolidated Statement of Income over the expected life of the loan using the effective interest method.

Banco Colpatria

On the Bank’s acquisition of Banco Colpatria, to arrive at the fair value, an aggregate credit mark adjustment of $549 million was established (incurred loss mark of $385 million and a future expected loss mark of $164 million). This adjustment captures management’s best estimate of cash flow shortfalls on the loans over their lifetime as determined at the date of acquisition.

For individually assessed loans, the incurred loss mark of $115 million established at the date of acquisition is tracked over the life of the loan. Changes to the expected cash flows of these loans from those expected at the date of acquisition, are recorded as a charge/recovery in the provision for credit losses in the Consolidated Statement of Income. As at the end of October 31, 2014, the remaining credit mark adjustment was $25 million (October 31, 2013- $67 million).

Where loans are not individually assessed for determining losses, a portfolio approach is taken to determine losses at the date of acquisition. The portfolio approach resulted in both an incurred loss mark of $270 million and a future expected loss mark of $164 million. The incurred loss mark is assessed at the end of each reporting period against the performance of the loan portfolio, and an increase in expected cash flows will result in a recovery in provision for credit losses in the Consolidated Statement of Income. Any cash flows lower than expected will result in additional provision for credit losses. The future expected loss mark is amortized into income as losses are recognized or as the portfolio of loans amortizes down over its expected life. An assessment is required at the end of each reporting period to determine the reasonableness of the unamortized balance in relation to the acquired loan portfolio. An overall benefit is only recognized to the extent that the amortized amount is greater than the actual losses incurred. A charge is recorded if the actual losses exceed the amortized amounts. As at October 31, 2014, on the loans that are not individually assessed, the remaining incurred loss mark and expected loss mark was $9 million and $7 million, respectively (October 31, 2013 -$80 million and $57 million).

The remaining credit mark reduced to $41 million (mostly the incurred loss mark) in 2014, from $204 million in 2013.

Tangerine Bank

On the Bank’s acquisition of Tangerine, to arrive at the fair value of the purchased loans, an aggregate credit mark adjustment of $40 million was established (incurred loss mark of $11 million and a future expected loss mark of $29 million) relating to $13.9 billion of uninsured loans. There were no loans acquired at a deep discount within the purchased loan portfolio. As at the end of October 31, 2014, the remaining incurred loss mark and future expected loss mark were $2 million and $18 million, respectively (October 31, 2013 -$7 million and $23 million).

Portfolio review

Canadian Banking

Gross impaired loans in the retail portfolio increased by $131 million from 2013 or 17%. Provision for credit losses in the Canadian retail portfolio were $607 million, up $184 million or 43% from last year reflecting the notable item, updated loss parameters and portfolio growth and change in product mix. The provision for credit losses as a percentage of average loans was 0.25%, compared to 0.18% last year.

In the Canadian commercial loan portfolio, gross impaired loans decreased by $55 million to $201 million. The provision for credit losses in the Canadian commercial loan portfolio was $54 million, down $1 million or 2% from last year.

International Banking

In retail, gross impaired loans increased by $298 million to $1,858 million during the year, with an increase attributable mainly to Caribbean & Central America, Peru and Mexico. The provision for credit losses in the retail portfolio increased to $807 million from $698 million last year, with higher provisions in Mexico, primarily in unsecured term loans.

In commercial banking, gross impaired loans were $1,212 million, an increase of $324 million over the prior year, reflected across most regions, and partially offset by Chile. The provision for credit losses in the commercial portfolio was $224 million in 2014, versus $83 million in 2013. The increase was attributable mainly to higher provisions in Caribbean & Central America and Latin America, primarily related to a provision of $83 million for a small number of accounts in the Caribbean hospitality industry.

Global Wealth & Insurance

Global Wealth & Insurance’s overall credit quality was strong in 2014. The provision for credit losses was $2 million and gross impaired loans were $9 million.

Global Banking & Markets

The provision for credit losses was $9 million in 2014, versus $26 million in 2013. The provisions this year were primarily in Europe and Canada.

Gross impaired loans in Global Banking & Markets decreased by $193 million in 2014 to $33 million. Impaired loans in the U.S. decreased by $173 million to $11 million and in Europe decreased by $42 million to nil. Impaired loans in Canada increased by $22 million year over year from nil the prior year.

Risk diversification

The Bank’s exposures to various countries and types of borrowers are well diversified (see T66 on page 98 and T70 on page 100). Chart 18 shows loans and acceptances by geography. Ontario represents the largest Canadian exposure at 33% of the total. Latin America has 10% of the total exposure and the U.S. has 5%.

Chart 19 shows loans and acceptances by type of borrower (see T70 on page 100). Excluding loans to households, the largest industry exposures were financial services (5.1%), wholesale and retail (3.8%), and real estate and construction (3.5%).

2014  Scotiabank Annual Report      29

MANAGEMENT’S DISCUSSION AND ANALYSIS

C18 Well diversified in Canada and internationally…

loans and acceptances, October 2014

C19 … and in household and business lending

loans & acceptances, October 2014

Risk mitigation

To mitigate exposures in its performing corporate portfolios, the Bank uses diversification by company, industry and country, with loan sales and credit derivatives used sparingly. In 2014, loans sales totaled $153 million, compared to $161 million in 2013. The largest volume of loan sales in 2014 related to loans in the transportation and media industries.

At October 31, 2014, there were no credit derivatives used to mitigate exposures in the portfolios, compared to $31 million (notional amounts) at October 31, 2013.

The Bank actively monitors industry and country concentrations. As is the case with all industry exposures, the Bank continues to closely follow developing trends and takes additional steps to mitigate risk as warranted. Hospitality, media and entertainment, and shipping portfolios are being closely managed.

Overview of loan portfolio – Top and emerging risks

While the Bank has a well-diversified portfolio by product, business and geography. Details of certain portfolios of current focus are highlighted below.

Residential mortgages

A large portion of the Bank’s lending portfolio is comprised of residential mortgages and consumer loans, which are well diversified by borrower. As at October 31, these loans accounted for $297 billion or 68% of the Bank’s total loans and acceptances outstanding (October 31, 2013 - $286 billion or 69%). Of these, $232 billion or 78% are real estate secured loans (October 31, 2013 - $228 billion or 81%).

Insured and uninsured mortgages and home equity lines of credit

The following table presents amounts of insured and uninsured residential mortgages and home equity lines of credit (HELOCs), by geographic areas.

T16 Insured and uninsured residential mortgages and home equity lines of credit (HELOCs), by geographic areas

	2014
	Residential mortgages															Home equity lines of credit
As at October 31	Insured (1)					Uninsured					Total					Insured (1)					Uninsured					Total
($ millions)	Amount		%			Amount		%			Amount		%			Amount		%			Amount		%			Amount		%
Canada:(2)
Atlantic provinces	$	6,940		3.7		$	5,168		2.7		$	12,108		6.4		$	2		–		$	1,300		6.9		$	1,302		6.9
Quebec		7,506		4.0			8,065		4.3			15,571		8.3			1		–			1,062		5.6			1,063		5.6
Ontario		47,031		24.9			46,380		24.6			93,411		49.5			3		0.1			9,409		49.5			9,412		49.6
Manitoba & Saskatchewan		4,639		2.5			3,684		1.9			8,323		4.4			1		–			885		4.7			886		4.7
Alberta		17,396		9.2			11,847		6.3			29,243		15.5			4		–			3,107		16.4			3,111		16.4
British Columbia & Territories		14,431		7.6			15,755		8.3			30,186		15.9			1		–			3,183		16.8			3,184		16.8
Canada(3)	$	97,943		51.9	%	$	90,899		48.1	%	$	188,842		100	%	$	12		0.1	%	$	18,946		99.9	%	$	18,958		100	%
International		–		–			23,806		100			23,806		100			–		–			–		–			–		–
Total	$	97,943		46.1	%	$	114,705		53.9	%	$	212,648		100	%	$	12		0.1	%	$	18,946		99.9	%	$	18,958		100	%
		2013
Canada	$	103,295		54.7	%	$	85,642		45.3	%	$	188,937		100	%	$	15		0.1	%	$	18,666		99.9	%	$	18,681		100	%
International		–		–			20,928		100			20,928		100			–		–			–		–			–		–
Total	$	103,295		49.2	%	$	106,570		50.8	%	$	209,865		100	%	$	15		0.1	%	$	18,666		99.9	%	$	18,681		100	%

(1) Default insurance is contractual coverage for the life of eligible facilities whereby the Bank’s exposure to real estate secured lending is protected against potential shortfalls caused by borrower default. This insurance is provided by either government-backed entities or private mortgage insurers.

(2) The province represents the location of the property in Canada.

(3) Includes multi-residential dwellings (4+ units) of $1,518 million of which $632 million are insured.

Amortization period ranges for residential mortgages

The following table presents the distribution of residential mortgages by amortization periods, and by geographic areas.

T17 Distribution of residential mortgages by amortization periods, and by geographic areas

	2014
	Residential mortgages by amortization
As at October 31	Less than 20 years			20-24 years			25-29 years			30-34 years			35 years and greater			Total residential mortgage
Canada		34.6	%		34.0	%		25.1	%		6.2	%		0.1	%		100	%
International		66.6	%		20.5	%		11.5	%		1.2	%		0.2	%		100	%
		2013
Canada		34.3	%		29.4	%		26.6	%		9.5	%		0.2	%		100	%
International		64.5	%		21.2	%		12.9	%		1.1	%		0.3	%		100	%

30      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    GROUP FINANCIAL PERFORMANCE

Loan to value ratios

The Canadian residential mortgage portfolio is 48% uninsured (October 31, 2013 -45%). The average loan-to-value (LTV) ratio of uninsured portfolio is 54% (October 31, 2013 -57%).

The following table presents the weighted average LTV ratio for total newly originated uninsured residential mortgages and home equity lines of credit during the year, which include mortgages for purchases, refinances with a request for additional funds and transfer from other financial institutions, by geographic areas.

T18 Loan to value ratios

	Uninsured LTV ratios(1)
	For the year ended October 31, 2014
	Residential mortgages LTV%			Home equity lines of credit(2) LTV%
Canada:
Atlantic provinces		67.6	%		65.6	%
Quebec		61.4			68.1
Ontario		61.1			64.6
Manitoba & Saskatchewan		65.7			66.7
Alberta		65.4			68.0
British Columbia & Territories		59.0			62.5
Canada		62.0	%		65.0	%
International		69.9	%		N/A
		For the year ended October 31, 2013
Canada		63.0	%		63.8	%
International		71.1	%		N/A

(1) The province represents the location of the property in Canada.

(2) Includes only home equity lines of credit (HELOC) under Scotia Total Equity Plan. LTV is calculated based on the sum of residential mortgages and the authorized limit for related HELOCs, divided by the value of the related residential property, and presented on a weighted average basis for newly originated mortgages and HELOCs.

Potential impact on residential mortgages and real estate home equity lines of credit in the event of an economic downturn

The Bank performs stress testing on its portfolio to assess the impact of increased levels of unemployment, rising interest rates, reduction in property values and changes in other relevant macro economic variables. Potential losses in the mortgage portfolio under such economic downturn scenarios are considered manageable given the diversified composition of the portfolio, the high percentage of insured exposures, and the low LTV in the portfolio. This is further supported by sound risk management oversight and pro-active risk mitigation strategies.

Loans to Canadian condominium developers

With respect to loans to Canadian condominium developers, the Bank had loans outstanding of $978 million as at October 31, 2014 (October 31, 2013 – $971 million). This is a high quality portfolio with well-known developers who have long-term relationships with the Bank.

European exposure

As a result of the Bank’s broad international operations, the Bank has sovereign credit risk exposure to a number of countries. The Bank actively manages this sovereign risk by using risk limits calibrated to the credit worthiness of the sovereign exposure. The current European exposure is provided in Table 19 below.

The Bank believes that its European exposures are manageable, are sized appropriately relative to the credit worthiness of the counterparties (80% of the exposures are to investment grade counterparties based on a combination of internal and external ratings), and are modest relative to the capital levels of the Bank. The Bank’s European exposures are carried at amortized cost or fair value using observable inputs, with negligible amounts valued using models with unobservable inputs (Level 3). There were no significant events in the quarter that have materially impacted the Bank’s exposures.

T19 European exposure

The current European exposure is provided below:

As at October 31	2014												2013
	Loans and Loan Equivalents						Other
($ millions)	Loans and acceptances(1)		Letters of credit and guarantees(2)		Undrawn commitments(3)		Securities and deposits with financial institutions(4)		Securities Financing Transactions (SFT) and derivatives(5)		Total European Exposure		Total European Exposure
Gross exposures		8,045		1,839		11,187		8,102		1,900		31,073	$	27,749
Less: Undrawn commitments						11,187						11,187		8,370
Net funded exposure		8,045		1,839		–		8,102		1,900		19,886	$	19,379

(1) There are no individual allowances for credit losses. Gross and net values are equal as collateral is not posted against these exposures.

(2) Letters of credit and guarantees are included as funded exposure as they have been issued.

(3) Undrawn commitments represent an estimate of the contractual amount that may be drawn upon at the time of default of an obligor.

(4) Exposures for securities are calculated taking into account derivative positions where the security is the underlying reference asset and short trading positions. Gross and net values are equal as collateral is not posted against these exposures.

(5) SFT comprise of securities purchased under resale agreements, obligations related to securities sold under repurchase agreements and securities lending and borrowing transactions. Net funded exposure represents all net positive positions after taking into account collateral. Collateral held against derivatives was $2,185 million and collateral held against SFT was $13,823 million.

2014  Scotiabank Annual Report      31

MANAGEMENT’S DISCUSSION AND ANALYSIS

T20 Funded exposures

Below are the funded exposures related to all European countries:

As at October 31	2014(1)									2013
($ millions)	Sovereign(2)			Bank		Corporate(3)		Total		Total
Greece	$	–		$	–	$	384	$	384	$	432
Ireland		19			2		274		295		226
Italy		(10	)		268		13		271		407
Portugal		–			3		3		6		28
Spain		79			33		218		330		316
Total GIIPS	$	88		$	306	$	892	$	1,286	$	1,409
U.K.	$	1,078		$	1,832	$	5,162	$	8,072	$	6,799
Germany		1,258			527		750		2,535		2,398
France		2,105			631		341		3,077		2,934
Netherlands		42			281		265		588		1,012
Switzerland		–			357		612		969		1,945
Other		588			274		2,497		3,359		2,882
Total Non-GIIPS	$	5,071		$	3,902	$	9,627	$	18,600	$	17,970
Total Europe	$	5,159		$	4,208	$	10,519	$	19,886	$	19,379
Total Europe as at October 31, 2013	$	3,540		$	4,904	$	10,935	$	19,379

(1) Amounts in brackets represent net short positions arising from trading transactions.

(2) Includes $397 million (October 31, 2013 – $170 million) in exposures to supra-national agencies.

(3) Corporate includes financial institutions that are not banks.

T21 Bank’s exposure distribution by country

The Bank’s exposures are distributed as follows:

As at October 31	2014(1)											2013
($ millions)	Loans and loan equivalents		Deposits with financial institutions		Securities			SFT and derivatives		Total		Total
Greece	$	380	$	–	$	4		$	–	$	384	$	432
Ireland		37		18		240			–		295		226
Italy		307		1		(41	)		4		271		407
Portugal		–		–		6			–		6		28
Spain		237		–		88			5		330		316
Total GIIPS	$	961	$	19	$	297		$	9	$	1,286	$	1,409
U.K.	$	4,094	$	1,432	$	1,363		$	1,183	$	8,072	$	6,799
Germany		852		317		1,272			94		2,535		2,398
France		563		11		2,363			140		3,077		2,934
Netherlands		307		71		140			70		588		1,012
Switzerland		563		37		320			49		969		1,945
Other		2,544		45		415			355		3,359		2,882
Total Non-GIIPS	$	8,923	$	1,913	$	5,873		$	1,891	$	18,600	$	17,970
Total Europe	$	9,884	$	1,932	$	6,170		$	1,900	$	19,886	$	19,379

(1) Bracketed amounts represent net short positions arising from trading transactions.

The Bank’s exposure to certain European countries of focus – Greece, Ireland, Italy, Portugal and Spain (GIIPS) – is not significant. As of October 31, 2014, the Bank’s current funded exposure to the GIIPS sovereign entities, as well as banks and non-bank financial institutions and corporations domiciled in these countries, totaled approximately $1.3 billion, down from $1.4 billion last year.

Specific to sovereign exposures to GIIPS, the Bank’s exposure to Ireland included central bank deposits of $18 million and $1 million in trading book securities. The Bank was net long securities in sovereign exposures to Spain ($79 million) and short to Italy ($10 million). The Bank had no sovereign securities holdings of Greece and Portugal.

The Bank had exposures to Italian banks of $268 million, as at October 31, 2014 (October 31, 2013 – $375 million), primarily related to short-term precious metals trading and lending activities. Greek

exposure of $384 million (October 31, 2013 – $432 million) related primarily to secured loans to shipping companies.

Securities exposures to European sovereigns and banks (excluding GIIPS) was $4.9 billion as at October 31, 2014 (October 31, 2013 – $4.4 billion), predominately related to issuers in France, Germany and the United Kingdom. Securities are carried at fair value and substantially all holdings have strong market liquidity.

The majority of the current funded credit exposure is in the form of funded loans which are recorded on an accrual basis. As well, credit exposure to clients arises from client-driven derivative transactions and securities financing transactions (reverse repurchase agreements, repurchase agreements, and securities lending and borrowing). OTC derivative counterparty exposures are recorded on a fair value basis and security financing transactions are recorded on an accrual basis.

32      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    GROUP FINANCIAL PERFORMANCE

Undrawn commitments of $11 billion (October 31, 2013 – $8.4 billion) are comprised of unfunded loan commitments and commitments to issue letters of credit on behalf of other banks in a syndicated bank lending arrangement. Total unfunded loan commitments to corporations in Europe (excluding GIIPS) were $7.5 billion as at October 31, 2014 (October 31, 2013 – $5.1 billion). As at October 31, 2014 commitments related to letters of credit with banks amounted to $3.6 billion (October 31, 2013 – $2.9 billion). Undrawn commitments are detailed further by country in Table 22.

The Bank’s indirect exposure is also detailed in the table below and is defined as:

– securities where the exposures are to non-European entities whose parent company is domiciled in Europe, and

– letters of credit or guarantees (included as loan equivalents in the above table) associated with entities in European countries.

Included in the indirect exposure detailed in Table 22 was $452 million in indirect securities related to GIIPS, $131 million to Germany, $66 million to the United Kingdom and $55 million to Switzerland. Indirect exposure by way of letters of credit totaled $1,839 million at October 31, 2014 (October 31, 2013 – $1,523 million), of which $43 million (October 31, 2013 – $69 million) was indirect exposure to GIIPS. Indirect exposure is managed through the Bank’s credit risk management framework, with a robust assessment of the counterparty.

In addition to the total indirect exposures detailed in Table 22, the Bank had Euro-denominated collateral held for non-European counterparties of $1,371 million (October 31, 2013 – $680  million).

T22 Indirect exposures

As at October 31	Undrawn Commitments				Indirect Exposure
($ millions)	2014		2013		2014			2013
Greece	$	–	$	–	$	–		$	–
Ireland		87		68		(1	)		18
Italy		45		74		7			21
Portugal		–		–		–			–
Spain		57		294		490			209
Total GIIPS	$	189	$	436	$	496		$	248
U.K.	$	5,662	$	4,043		693		$	524
Germany		791		782		313			370
France		1,269		647		346			273
Netherlands		1,056		845		175			172
Switzerland		806		548		172			229
Other		1,414		1,069		365			288
Total Non-GIIPS	$	10,998	$	7,934	$	2,064		$	1,856
Total Europe	$	11,187	$	8,370	$	2,560		$	2,104

The Bank does not use credit default swaps (CDS) as a risk mitigation technique to reduce its sovereign debt exposures. With respect to banks and non-bank financial institutions and corporations, the Bank may on occasion use CDS to partially offset its funded loan exposures. Specific to GIIPS as at October 31, 2014, the Bank had no CDS protection on funded exposures. As part of the trading portfolio, the Bank may purchase or sell CDS. All exposures, including CDS, are subject to risk limits and ongoing monitoring by the Bank’s independent risk management department.

Like other banks, the Bank also provides settlement and clearing facilities for a variety of clients in these countries and actively monitors and manages these intra-day exposures. However, the Bank has no funded exposure in these countries to retail customers or small businesses.

Outlook

The quality of the Bank’s credit portfolio is expected to remain strong given its low exposure to areas and regions of concern and broad global diversification.

Domestically, retail provision for credit losses are expected to increase from asset growth and changes in the business mix particularly for credit cards and auto loans, which is within our risk appetite and aligned to our strategy. Provisions for non-retail loans are expected to increase moderately from the unusually low levels experienced in 2014. Internationally, provision for credit losses are expected to increase from asset growth, acquisitions and a reduction of credit mark adjustments associated with acquired portfolios.

2014  Scotiabank Annual Report      33

MANAGEMENT’S DISCUSSION AND ANALYSIS

Fourth Quarter Review

Q4 2014 vs. Q4 2013

Net income

Net income was $1,438 million in the fourth quarter compared to $1,676 million in the same quarter last year. Adjusting for the notable items of $265 million (refer T23), net income grew by $27 million or 2%. Good volume growth, higher interest margins, and the positive impact of foreign currency translation were largely offset by increased provision for credit losses and higher operating expenses.

Total revenue

Total revenue (TEB) of $5,848 million was up $371 million or 7% from the same quarter last year. Adjusting for the notable items of $77 million (refer T23), total revenue increased by $448 million or 8%. The year-over-year increase in revenues reflected higher net interest income from asset growth and improved interest margin, stronger non-interest revenues, including higher banking fees and wealth management revenues and the positive impact of foreign currency translation. Partly offsetting was lower income from investment in associated corporations due to the disposition of CI in June 2014.

Net interest income

Net interest income (TEB) was $3,105 million, $228 million or 8% higher than the same quarter last year. The increase in net interest income, including the positive impact of foreign currency translation, was attributable to asset growth in International Banking and Canadian Banking and an increase in the core banking margin.

The core banking margin was 2.39%, up from 2.31% last year. The increase in the margin was primarily due to higher margins in both Canadian Banking and International Banking, and lower funding costs as maturing high-rate debentures and deposits were replaced with funding at lower current rates.

Net fee and commission revenues

Net fee and commission revenue of $2,042 million was up $259 million or 15% from last year. This increase was primarily from higher banking fees, wealth management revenues in mutual funds and brokerage commissions, as well as growth in underwriting fees and the positive impact of foreign currency translation.

Other operating income

Other operating income (TEB) of $701 million was down $116 million or 14%. Adjusting for the notable items of $77 million (refer T23), other operating income declined by $39 million or 5%. Lower trading revenues and income from associated corporations were partly offset by higher net gains on investment securities.

Provision for credit losses

The provision for credit losses was $574 million in the fourth quarter compared to $321 million in the same period last year. Adjusting for the notable item of $62 million (refer T23), the provision for credit losses rose by $191 million. The year-over-year increase was entirely in International Banking and Canadian Banking and includes a $62 million notable item (refer T23), as well as additional provisions of $26 million related to Canadian retail accounts and $83 million in International Banking for certain accounts in the Caribbean hospitality portfolio.

Operating expenses and productivity

Operating expenses were $3,361 million in the fourth quarter, an increase of $384 million or 13% over the same quarter last year. Notable items of $203 million (refer T3) accounted for just over half of the increase. The negative impact of foreign currency translation was 1%. The remaining growth was due mainly to higher salaries and benefits from annual pay increases, higher payroll taxes and other benefits. Other increases were due to increased spend on technology initiatives and higher business taxes in the Caribbean.

The productivity ratio in the fourth quarter was 57.5%, up from 54.4% in the same quarter last year. Adjusting for notable items the current quarter ratio was 53.3%.

Taxes

The effective income tax rate for this quarter was 20.6% compared to 20.3% in the same quarter last year. The increase in the effective rate was due primarily to lower tax recoveries partially offset by higher levels of tax-exempt income this year.

34      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    GROUP FINANCIAL PERFORMANCE

Q4 2014 vs. Q3 2014

Net income

Net income was $1,438 million this quarter, compared to $2,351 million in the previous quarter. Adjusting for this quarter’s notable items of $265 million and last quarter’s notable gain of $555 million (refer T23), net income fell $93 million or 5%. This quarter over quarter decline was primarily from higher provision for credit losses, lower net interest income, and reduced operating income reflecting the disposition last quarter. The decrease in net income was partly offset by higher banking fees and wealth management revenues.

Total revenue

Total revenue (TEB) was $5,848 million, a reduction of $728 million or 11% from the previous quarter mostly due to the notable items in both quarters. The underlying decline in total revenue of $8 million was due mainly to lower net interest margin, trading revenues, and net income from investment in associated corporations. These decreases were entirely offset by higher banking fees, wealth management revenues, and higher net gains on investment securities.

Net interest income

Net interest income (TEB) declined $50 million to $3,105 million. The core banking margin was 2.39% compared to 2.41%. The decrease in the margin was primarily in Canadian Banking and International Banking.

Net fee and commission revenues

Net fee and commission revenue was $2,042 million, up $80 million or 4%. This increase was mainly from higher retail banking fees, mainly in International Banking and higher wealth management revenues.

Other operating income

Other operating income (TEB) was $701 million, a reduction of $758 million from the prior quarter, mostly from the notable items in both quarters. The underlying decline of $38 million or 5% was primarily from lower trading revenues and net income from investment in associated corporations. Partly offsetting was higher net gains on investment securities.

Provision for credit losses

The provision for credit losses was $574 million for the fourth quarter compared with $398 million from last quarter. Adjusting for the notable item of $62 million (refer T23), provision for credit losses rose by $114 million. The increase was entirely in International Banking and Canadian Banking and includes additional provisions of $26 million related to Canadian retail accounts and $83 million in International Banking for certain accounts in the Caribbean hospitality portfolio.

Operating expenses and productivity

Operating expenses were up $221 million or 7%. Adjusting for notable items, expenses were up $18 million or 1%. Higher technology, professional, and advertising expenses, primarily related to initiatives, were largely offset by lower performance and share-based compensation.

The productivity ratio was 57.5% compared to 47.8% in the previous quarter. Adjusting for notable items, the ratios were 53.3% versus 52.9% respectively.

Taxes

The effective income tax rate this quarter was 20.6% compared to 20.3% last quarter. The increase in the effective rate was due primarily to a lower tax rate on the disposition gain in the prior quarter, partly offset by higher levels of tax-exempt income this quarter.

T23 Notable Items

	For the three months ended
($ millions, except EPS)	October 31 2014									July 31 2014
	Pre-tax			After-tax			EPS Impact			Pre-tax		After-tax		EPS Impact
Gain on sale
Sale of majority of holding in CI Financial Corp.(1)	$	–		$	–					$	643	$	555
Restructuring charges		(148	)		(110	)					–		–
Provision for credit losses
Unsecured bankrupt retail accounts in Canada		(62	)		(46	)					–		–
Valuation adjustments
Funding valuation adjustment		(30	)		(22	)					–		–
Revaluation of monetary assets in Venezuela		(47	)		(47	)					–		–
Legal provisions		(55	)		(40	)					–		–
Total	$	(342	)	$	(265	)	$	(0.22	)	$	643	$	555	$	0.45
By Consolidated Statement of Income line
Trading revenues	$	(30	)	$	(22	)				$	–	$	–
Other operating income – other		(47	)		(47	)					643		555
Other operating income/Total revenue		(77	)		(69	)					643		555
Provision for credit losses		(62	)		(46	)					–		–
Other operating expenses		(203	)		(150	)					–		–
Total	$	(342	)	$	(265	)	$	(0.22	)	$	643	$	555	$	0.45

(1) Includes an after-tax unrealized gain of $152 million ($174 million pre tax) on the reclassification of the Bank’s remaining investment to available-for-sale securities.

2014  Scotiabank Annual Report      35

MANAGEMENT’S DISCUSSION AND ANALYSIS

Summary of Quarterly Results

Quarterly Financial Highlights

T24 Quarterly financial highlights

For the three months ended
	Oct. 31 2014		July 31 2014		April 30 2014		Jan. 31 2014		Oct. 31(1) 2013		July 31(1) 2013		April 30(1) 2013		Jan. 31(1) 2013		Oct. 31(1) 2012		July 31(1) 2012		April 30(1) 2012		Jan. 31(1) 2012
Total revenue ($ millions)	$	5,747	$	6,487	$	5,725	$	5,645	$	5,400	$	5,515	$	5,213	$	5,171	$	4,851	$	5,516	$	4,692	$	4,587
Total revenue (TEB(2)) ($ millions)		5,848		6,576		5,809		5,725		5,477		5,594		5,295		5,245		4,925		5,593		4,761		4,655
Net income ($ millions)	$	1,438	$	2,351	$	1,800	$	1,709	$	1,676	$	1,747	$	1,582	$	1,605	$	1,502	$	2,050	$	1,440	$	1,398
Basic earnings per share ($)		1.10		1.86		1.40		1.33		1.30		1.37		1.23		1.26		1.19		1.70		1.17		1.21
Diluted earnings per share ($)		1.10		1.85		1.39		1.32		1.29		1.36		1.22		1.24		1.18		1.68		1.15		1.18

(1) Amounts for prior periods are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4 in the consolidated financial statements).

(2) Refer to non-GAAP measures on page 17.

Net income

The Bank reported good results throughout 2014 with growth in performance through the first three quarters, followed by a slight decline in underlying performance in the fourth quarter resulting mainly from lower net interest income and lower trading revenues, and higher loan losses. Adjusting for the disposition gain of $555 million (refer T23), diluted EPS in the third quarter was $1.40. Fourth quarter net income was significantly lower as a result of $265 million of notable items (refer T23).

Net interest income

Net interest income rose during the first three quarters of the year before declining by $50 million in the fourth quarter from lower net interest margins in Canadian Banking and International Banking. Core banking assets increased steadily during 2014 from continuing strong loan growth in Latin America, in part from the benefit from the impact of foreign currency translation, and consumer auto loan and commercial loan growth in Canadian Banking, as well as corporate loan growth in Global Banking & Markets. Low spread deposits with banks have increased since the fourth quarter of last year.

The core banking margin improved eight basis points from the fourth quarter last year to the fourth quarter this year. The margin increased during the first two quarters from improved margins in both Canadian Banking and International Banking and the maturity of higher cost wholesale funding and debentures replaced by wholesale funding at lower current rates. The margin decreased slightly in the third and fourth quarters this year from narrower spreads in Canadian and International Banking and higher volumes of low yielding deposits with banks.

Canadian Banking’s margin improved during the first three quarters from higher mortgage, credit card and credit line spreads and strong growth in higher spread products, including credit cards and then declined slightly in the fourth quarter from lower spread in consumer auto loans and mortgage prepayment income. International Banking’s margin increased in the first three quarters of 2014 from higher spreads across all countries in Latin America and in Asia, and then narrowed slightly in the fourth quarter. Spreads in Global Banking & Markets corporate lending portfolio declined slightly during each quarter from lower spreads in the U.S. Corporate loan portfolio.

Non-interest income

Underlying non-interest revenues grew steadily during the year, while the third quarter also included the benefit of the disposition gain of

$555 million. Fourth quarter non-interest revenue was negatively impacted by notable items of $77 million (refer T23). Banking revenues trended upward during the year with strong growth in card fees in Canada and Latin America. Both mutual fund fees and retail brokerage fees grew steadily throughout the year reflecting higher average assets under management and assets under administration. Quarterly trading revenues reflected the different levels of market opportunities during the year, up in the second quarter, but fell during the third and fourth quarters below the average of the prior six quarters. The level of net gains on investment securities reflected market opportunities.

Provision for credit losses

Provision for credit losses increased steadily during the year in both Canadian Banking and International Banking reflecting loan volume growth and higher loss ratios in both business lines. Provisions in the fourth quarter include a $62 million notable item (refer T23), as well as additional provisions of $26 million related to Canadian retail accounts and $83 million in International Banking for certain accounts in the Caribbean hospitality portfolio. The provision for credit losses in Global Banking & Markets continued to be at minimal levels.

Operating expenses

Operating expenses increased during the year, primarily due to notable items of $203 million (refer T23) in the fourth quarter. Technology costs increased in the third and fourth quarters reflecting a higher level of costs incurred for business expansion and investment in new initiatives in the latter half of the year. The timing of share and performance based compensation and advertising and business development costs contributed to the quarterly fluctuations.

Provision for income taxes

The effective tax rate ranged between 20% and 22% reflecting different levels of income earned in lower tax jurisdictions and the timing of the benefit of net income from associated corporations. The tax rate declined in the third quarter due to the disposition gain at the capital gains tax rate and remained steady in the fourth quarter as a result of higher tax benefits in certain International jurisdictions and the restructuring charges at higher than average tax rates.

An eight quarter trend in net income and other selected information is provided on page 107.

36      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    GROUP FINANCIAL PERFORMANCE

Financial Results Review: 2013 vs. 2012

In order to identify key business trends between 2013 and 2012, commentary and the related financial results are below.

Net income

Scotiabank had record results in 2013 and met or exceeded all of its financial objectives. Net income was $6,610 million, $220 million or 3% higher than last year’s record results. Diluted earnings per share (EPS) were $5.11 as compared to $5.18 in 2012. Return on equity was at 16.6% compared to 19.9% last year.

The 2013 net income included a non-recurring after-tax benefit of $90 million in International Banking from (i) the gain on sale of Thanachart Life Assurance Public Company Ltd. by Thanachart Bank, an associated corporation in Thailand ($150 million after tax), less (ii) a valuation adjustment on acquisition-related receivables in Puerto Rico ($40 million after tax) and (iii) a restructuring charge in the Bank’s Uruguay operations ($20 million after tax). Combined, these non-recurring items amounted to 7 cents per share. 2012 net income benefited from real estate gains of $708 million or 61 cents per share. Adjusting for these items, net income grew by $838 million or 15% and diluted earnings per share were $5.04 as compared to $4.57 in 2012, an increase of 10.3%. Underlying ROE was a strong 16.3% compared to 17.7% in 2012.

Total revenue

Total revenues on a taxable equivalent basis (TEB) rose 8% from the 2012 to $21,611 million. Adjusting for the above noted gain from an associated corporation this year, the real estate gains in 2012 and the positive impact of foreign currency translation, total revenues increased by 11%.

Net interest income

Net interest income (TEB) increased $1,378 million or 14% to $11,365 million, primarily from the contribution of acquisitions and growth in average core banking assets. The core banking margin remained unchanged from the 2012.

Non-interest income

Net fee and commission revenue was $6,917 million, up $671 million or 11% year over year. Acquisitions accounted for approximately one-third of the increase. Growth was primarily in wealth management fees, from higher mutual fund asset levels and brokerage commissions. Banking revenue growth was broad-based across all revenue categories.

Other operating income (TEB) was $3,329 million a decrease of $372 million or 10% from 2012, which reflected the impact of the real estate gains in 2012. Partly offsetting was the noted gain from an associated corporation in 2013. Adjusting for these items, the growth was 11% reflecting higher net gains on investment securities and insurance revenues.

Provision for credit losses

The provision for credit losses increased $36 million to 1,288 million from $1,252 million in 2012.

Operating expenses

Operating expenses rose 12% over 2012 to $11,664 million. Approximately half of this growth was attributable to acquisitions, the negative impact of foreign currency translation, and the above noted non-recurring items. The remaining increase reflects initiatives to support business growth, higher employee benefits costs and increased rent due to the sale of Scotia Plaza in 2012. Operating leverage was positive 1.3%, after adjusting for the 2012 real estate gains and the above noted non-recurring items in 2013.

Provision for income taxes

The Bank’s overall effective income tax rate was 20.8% compared to 19.7% for 2012. The increase in the effective tax rate was due primarily to the impact of lower taxes on the sale of real estate assets in 2012.

T25 Financial Results Review

For the year ended October 31, 2013 ($ millions)(2)	Canadian Banking		International Banking		Global Wealth & Insurance		Global Banking & Markets		Other(1)		Total
Net interest income	$	5,419	$	4,923	$	409	$	787	$	(188)	$	11,350
Non-interest income		1,554		2,498		3,587		2,793		(483)		9,949
Total revenue	$	6,973	$	7,421	$	3,996	$	3,580	$	(671)	$	21,299
Provision for credit losses		478		781		3		26		0		1,288
Non-interest expenses		3,583		4,138		2,411		1,589		(57)		11,664
Provision for income taxes		761		584		336		510		(454)		1,737
Net income	$	2,151	$	1,918	$	1,246	$	1,455	$	(160)	$	6,610
Net income attributable to non-controlling interests		–		192		39		–		–		231
Net income attributable to equity holders of the Bank	$	2,151	$	1,726	$	1,207	$	1,455	$	(160)	$	6,379

(1) Includes all other smaller operating segments and corporate adjustments, such as the elimination of the tax-exempt gross-up reported in net interest income and other operating income and provision for income taxes for the year ended October 31, 2013 ($312 million) to arrive at the amounts reported in Consolidated Statement of Income, differences in the actual amount of costs incurred and charged to the operating segments.

(2) Taxable equivalent basis. Refer to non-GAAP measures on Page 17.

For the year ended October 31, 2012 ($ millions)(2)	Canadian Banking		International Banking		Global Wealth & Insurance		Global Banking & Markets		Other(1)		Total
Net interest income	$	4,610	$	4,456	$	442	$	760	$	(298)	$	9,970
Non-interest income		1,531		2,029		3,072		2,744		300		9,676
Total revenue	$	6,141	$	6,485	$	3,514	$	3,504	$	2	$	19,646
Provision for credit losses		506		613		3		30		100		1,252
Non-interest expenses		3,192		3,683		2,076		1,507		(22)		10,436
Provision for income taxes		642		463		315		524		(376)		1,568
Net income	$	1,801	$	1,726	$	1,120	$	1,443	$	300	$	6,390
Net income attributable to non-controlling interests		3		168		25		–		–		196
Net income attributable to equity holders of the Bank	$	1,798	$	1,558	$	1,095	$	1,443	$	300	$	6,194

(1) Includes all other smaller operating segments and corporate adjustments, such as the elimination of the tax-exempt gross-up reported in net interest income and other operating income and provision for income taxes for the year ended October 31, 2012 ($288 million) to arrive at the amounts reported in Consolidated Statement of Income, differences in the actual amount of costs incurred and charged to the operating segments.

(2) Taxable equivalent basis. Refer to non-GAAP measures on Page 17.

2014  Scotiabank Annual Report      37

MANAGEMENT’S DISCUSSION AND ANALYSIS

Financial performance of business lines

Canadian Banking

Canadian Banking’s net income attributable to equity holders was $2,151 million in 2013, $350 million or 19% higher than in 2012. Return on economic equity was 33.4% versus 35.9% in 2012. Retail, small business, and commercial banking all generated strong performances.

Total revenues were $6,973 million, up $832 million or 14% from 2012.

Net interest income increased 18% to $5,419 million. Excluding the impact of Tangerine, the underlying growth in net interest income was driven by strong asset and deposit growth. The net interest margin decreased 5 basis points to 2.04% due mainly to the acquisition of Tangerine.

International Banking

Net income attributable to equity holders increased by $168 million or 11% to $1,726 million including a $90 million after tax benefit from (i) the sale of a subsidiary by an associated corporation in Thailand ($150 million), less (ii) a valuation adjustment on acquisition-related receivables in Puerto Rico ($40 million), and (iii) a restructuring charge in Uruguay ($20 million). Adjusting for these items, net income increased by $78 million or 5% driven by acquisitions and solid underlying revenue growth, which included an after-tax gain of $25 million on the sale of a non-strategic business in Peru. Partly offsetting were higher provision for credit losses, operating expenses and income taxes. Return on economic equity was 14.2% versus 11.9% in 2012.

Total revenues of $7,421 million increased 14%. Excluding the $203 million benefit (on a tax-normalized basis) of the noted gain in an associated corporation in Thailand and the favourable impact of foreign exchange translation, revenues rose $632 million or 10%.

Net interest income increased 10% driven by solid loan growth and acquisitions. The net interest margin at 4.11% was relatively flat compared to 4.13% in 2012. Net fee and commission revenues increased 8% to $1,403 million largely driven by the acquisitions and higher underlying retail and commercial fees. Net income from associated corporations increased $283 million. Excluding the noted gain (on a tax-normalized basis) in an associated corporation, contributions were up $80 million or 21% mainly in Asia. Other operating income rose 23% to $427 million due mainly to the gain on the sale of a non-strategic business in Peru and higher net gains on investment securities.

Global Wealth & Insurance

Global Wealth & Insurance reported net income attributable to equity holders of $1,207 million, an increase of $112 million or 10%

compared to 2012. Net income increased due to strong broad-based results in both the wealth management and insurance businesses. Growth in wealth management was driven by higher assets under management (AUM) and assets under administration (AUA) from net sales, improved financial market conditions and the acquisitions of Colfondos in Colombia and AFP Horizonte in Peru. Return on economic equity was 16.7% compared to 13.5% in 2012.

Total revenues for the year were $3,996 million, an increase of $482 million or 14% over 2012. The increase in revenues was driven by strong growth across the wealth management and insurance businesses and from acquisitions.

Global Banking & Markets

Global Banking & Markets reported net income attributable to equity holders of $1,455 million in 2013, a slight increase of $12 million or 1% from 2012. This result was positively impacted by solid contributions from the diversified client platform. Solid revenue growth across the business platform led to record revenues, however this was mitigated by growth in expenses. Return on economic equity was 27.6% compared to 26.3% in 2012.

Total revenues during 2013 were a record $3,580 million compared to $3,504 million in 2012, an increase of 2% as the business continues to benefit from a diversified products and services platform. The fixed income, equities and Canadian corporate lending businesses experienced record revenues during 2013. Also contributing was very strong growth in the corporate lending business in Europe. These were partly offset by declines in the commodities, investment banking, precious metals, U.S. corporate lending and foreign exchange businesses.

Other

The Other segment had a net loss attributable to equity holders of $160 million in 2013, compared to a net income of $300 million in 2012. 2012 net income benefited from $708 million after-tax gains on sale of real estate assets.

Net interest income, other operating income, and the provision for income taxes in each period include the elimination of tax-exempt income gross-up. This amount is included in the operating segments, which are reported on a taxable equivalent basis. The elimination was $312 million in 2013, compared to $288 million in 2012.

Net income from investments in associated corporations and the provision for income taxes in each period include the tax normalization adjustments related to the gross-up of income from associated corporations. This adjustment normalizes the effective tax rate in the divisions to better present the contribution of the associated corporations to the divisional results.

38      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    GROUP FINANCIAL PERFORMANCE

Financial Position 2013 vs. 2012

Total assets

The Bank’s total assets at October 31, 2013 were $744 billion, up $75 billion or 11% from October 31, 2012, including approximately $28 billion related to the acquisition of Tangerine.

Cash and deposits with financial institutions grew by $6 billion, due mainly to increases in interest bearing deposits with central banks, while precious metals decreased $4 billion due to lower prices and inventory. Securities purchased under resale agreements and securities borrowed increased by $16 billion.

Trading assets

Trading assets increased $9 billion from October 31, 2012. Trading securities rose $10 billion from higher holdings of common equities, and U.S. and Canadian provincial government debt. Trading loans decreased $2 billion due mainly to a reduction in precious metals trading and lending activities.

Investment securities

Investment securities grew by $1 billion due mainly to increased holdings of other foreign government debt. As at October 31, 2013, the unrealized gain on available-for-sale securities, after the impact of qualifying hedges is taken into account, was $980 million, an increase of $89 million from October 31, 2012. The change was due mainly to increases in common equities, as unrealized gains on debt securities declined year over year.

Loans

Loans increased $50 billion or 14% from October 31, 2012. Residential mortgages increased $34 billion mainly from the acquisition of Tangerine. Personal and credit card loans rose $8 billion due mainly to growth in Canada and Mexico. Business and government loans were up $8 billion due primarily to growth in Latin America and Asia.

Total liabilities

Total liabilities were $698 billion as at October 31, 2013, up $70 billion or 11% from October 31, 2012, including $35 billion from Tangerine.

Deposits

Total deposits increased by $52 billion. Personal deposits grew by $33 billion primarily from the acquisition of Tangerine. Business and government deposits increased $20 billion, $6 billion from the Tangerine acquisition as well as other growth in Canada and the U.S. Deposits by financial institutions decreased $1 billion.

Other Liabilities

Obligations related to securities sold under repurchase agreements and securities lent, as well as obligations related to securities sold short, grew by $21 billion and $6 billion, respectively. Derivative instrument liabilities decreased $6 billion, which was similar to the decrease in derivative instrument assets.

Equity

Total shareholders’ equity increased $5,722 million from October 31, 2012. This increase was driven by internal capital generation of $3,293 million, the issuance of common shares of $1,377 million, comprised of $99 million for the purchase of Colfondos in Colombia and $1,278 million through the Dividend Reinvestment Plan and the exercise of options. The Bank redeemed $300 million of preferred shares during the year.

Accumulated other comprehensive income increased $1,133 million due mainly to remeasurement of employee benefit plan assets and liabilities and reduced unrealized foreign exchange translation on the Bank’s investments in its foreign operations.

2014  Scotiabank Annual Report      39

MANAGEMENT’S DISCUSSION AND ANALYSIS

C20 Loan portfolio

loans & acceptances, $ billions, as at October 31

C21 Deposits

$ billions, as at October 31

GROUP FINANCIAL CONDITION

T26 Condensed statement of financial position

As at October 31 ($ billions)	2014		2013		2012
Assets
Cash, deposits with financial institutions and precious metals	$	64.0	$	62.2	$	59.7
Trading assets		113.2		96.5		87.6
Securities purchased under resale agreements and securities borrowed		93.9		82.5		66.2
Investment securities		38.7		34.3		33.4
Loans		424.3		402.2		352.6
Other		71.6		65.9		68.7
Total assets	$	805.7	$	743.6	$	668.2
Liabilities
Deposits	$	554.0	$	517.9	$	465.7
Obligations related to securities sold under repurchase agreements and securities lent		89.0		77.5		57.0
Other liabilities		108.6		97.0		95.7
Subordinated debentures		4.9		5.8		10.1
Total liabilities	$	756.5	$	698.2	$	628.5
Equity
Common equity		45.0		40.2		34.3
Preferred shares		2.9		4.1		4.4
Non-controlling interest in subsidiaries		1.3		1.1		1.0
Total equity	$	49.2	$	45.4	$	39.7
Total liabilities and shareholders’ equity	$	805.7	$	743.6	$	668.2

Statement of Financial Position

Assets

The Bank’s total assets at October 31, 2014 were $806 billion, up $62 billion or 8% from October 31, 2013. Adjusting for the impact of foreign currency translation, total assets were up $40 billion or 5%.

Cash and deposits with financial institutions increased $3 billion, due mainly to higher interest bearing deposits with central banks, while precious metals decreased $2 billion due to lower prices and inventory. Securities purchased under resale agreements and securities borrowed increased $11 billion.

Trading Assets

Trading assets increased $17 billion from October 31, 2013 due primarily to an increase in trading securities of $11 billion from higher holdings of common equities and Canadian government debt and an increase in trading loans of $3 billion.

Investment Securities

Investment securities grew by $4 billion due mainly to increased holdings of U.S. government debt for liquidity management purposes. As at October 31, 2014, the unrealized gain on available-for-sale securities, after the impact of qualifying hedges is taken into account, was $847 million, a decrease of $133 million from October 31, 2013. The decrease was due mainly to realized gains on sales in 2014.

Loans

Loans increased $22 billion or 5% from October 31, 2013. Adjusting for the impact of foreign currency translation, loans increased $15 billion or 4%. Residential mortgages increased $3 billion mainly in Latin America and the Caribbean as underlying growth in Canadian residential mortgages was generally offset by the planned run-off of a component of Tangerine’s mortgage portfolio. Personal and credit card loans rose $8 billion, due mainly to growth in Canada and Latin America. Business and government loans were up $11 billion mainly in Canada and Latin America.

Other Assets

Investments in associates decreased $2 billion due mainly to the partial sale and the reclassification of the Bank’s remaining holdings in CI Financial Corp. to available-for-sale securities, offset in part by the acquisition of Canadian Tire’s Financial Services business.

Liabilities

Total liabilities were $756 billion as at October 31, 2014, up $58 billion or 8% from October 31, 2013. Adjusting for the impact of foreign currency translation, total liabilities increased $38 billion or 5%.

Deposits

Total deposits increased by $36 billion, including the impact of foreign currency translation of $16 billion. Personal deposits grew by $4 billion due primarily to growth in Canada and Latin America. Business and government deposits increased $29 billion to support asset growth.

Other Liabilities

Obligations related to securities sold under repurchase agreements and securities lent grew by $11 billion, in part to finance growth in securities purchased under resale agreements and securities borrowed. Derivative instrument liabilities increased $7 billion, which was similar to the increase in derivative instrument assets.

40      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    GROUP FINANCIAL CONDITION

Equity

Total shareholders’ equity increased $3,824 million from October 31, 2013. This increase was driven by internal capital generation of $3,806 million, issuance of common shares of $771 million mainly through the Dividend Reinvestment Plan and the exercise of options. Accumulated other comprehensive income increased $561 million due primarily to unrealized foreign currency translation gains on the Bank’s investments in its foreign operations. These increases were partly offset by the repurchase and cancellation of 4.5 million common shares for $320 million under the Normal Course Issuer Bid program. The Bank redeemed $1,150 million of preferred shares during the year.

Outlook

Assets and deposits are expected to continue to grow in 2015, with increases spread across all business lines. In Canada, lower growth in residential mortgages is expected to be offset by growth in other lending categories. Internationally, lending assets and deposits are expected to grow.

Capital Management

Overview

Scotiabank is committed to maintaining a strong capital base to support the risks associated with its diversified businesses. Strong capital levels contribute to safety for the Bank’s customers, foster investor confidence and support strong credit ratings. It also allows the Bank to take advantage of growth opportunities as they arise and enhance shareholder returns through increased dividends. The Bank’s capital management framework includes a comprehensive internal capital adequacy assessment process (ICAAP), aimed at ensuring that the Bank’s capital is adequate to meet current and future risks and achieve its strategic objectives. Key components of the Bank’s ICAAP include sound corporate governance; creating a comprehensive risk appetite for the Bank; managing and monitoring capital, both currently and prospectively; and utilizing appropriate financial metrics which relate risk to capital, including economic and regulatory capital measures.

Governance and oversight

The Bank has a sound capital management framework to measure, deploy and monitor its available capital and assess its adequacy. Capital is managed in accordance with the Board-approved Capital Management Policy. In addition, the Board reviews and approves the Bank’s annual capital plan. The Liability Committee and senior executive management provide governance over the capital management process. The Bank’s Finance, Treasury and Global Risk Management groups take a coordinated approach to implementing the Bank’s capital plan.

Risk appetite

The risk appetite framework that establishes enterprise wide risk tolerances in addition to capital targets are detailed in the Risk Management section “Risk appetite framework” on page 65. The framework encompasses medium to long-term targets with respect to regulatory capital thresholds, earnings, economic capital and other risk-based parameters. These targets ensure the Bank achieves the following overall objectives: exceed regulatory and internal capital targets, manage capital levels commensurate with the risk profile of the Bank, maintain strong credit ratings and provide the Bank’s shareholders with acceptable returns.

Regulatory capital

Capital ratios are a means to monitor the capital adequacy and the financial strength of banks. The three primary regulatory risk-based capital ratios, Common Equity Tier 1, Tier 1 and Total, are determined by dividing capital components by risk-weighted assets.

Capital adequacy standards for Canadian banks are regulated by the Canadian regulator, the Office of the Superintendent of Financial Institutions (OSFI). These standards are largely consistent with international standards set by the Basel Committee on Banking Supervision (BCBS).

Effective November 1, 2012, Canadian banks are subject to the revised capital adequacy requirements as published by BCBS and commonly referred to as Basel III. Basel III builds on the “International Convergence of Capital Measurement and Capital Standards: A Revised Framework” (Basel II).

As compared to previous standards, Basel III places a greater emphasis on common equity by introducing a new category of capital, Common Equity Tier 1 (CET1), which consists primarily of common shareholders’ equity net of regulatory deductions. These regulatory adjustments include goodwill, intangible assets (net of deferred tax liabilities), deferred tax assets, pension assets and investments in financial institutions over certain thresholds. Overall, the Basel III rules increase the level of regulatory deductions relative to Basel II.

Basel III also increases the level of risk-weighted assets for significant investments and deferred tax amounts under defined thresholds, exposures to large or unregulated financial institutions meeting specific criteria, derivative exposures to centralized counterparties and exposures that give rise to wrong way risk.

On January 13, 2011, additional guidance was issued by the BCBS, with respect to requirements for loss absorbency of capital at the point of non-viability. These requirements were effective on January 1, 2013 for Canadian banks. These rules affect the eligibility of instruments for inclusion in regulatory capital and provide for a transition and phase-out of any non-eligible instruments. All of the Bank’s current preferred shares, capital instruments and subordinated debentures do not meet these additional criteria and are subject to phase-out commencing January 2013. The Bank reserves the right to redeem, call or repurchase any capital instruments within the terms of each offering at any time in the future.

In addition, OSFI designated the 6 largest banks in Canada as domestic systemically important banks (D-SIBs), increasing its minimum capital ratio requirements by 1% for the identified D-SIBs. This 1% surcharge is applicable to all minimum capital ratio requirements for CET1, Tier 1 and Total Capital, by January 1, 2016, in line with the requirements for global systemically important banks. The Bank is expected to maintain a material operating buffer above the minimum capital ratio requirements.

To enable banks to meet the new standards, the BCBS Basel III rules contain transitional arrangements commencing January 1, 2013, through January 1, 2019. Transitional requirements result in a phase-in of new deductions to common equity over 5 years, phase-out of non-qualifying capital instruments over 10 years and a phase-in of a capital conservation buffer over 4 years. As of January 2019, banks will be required to meet new minimum requirements related to risk-weighted assets of: Common Equity Tier 1 ratio of 4.5% plus a capital conservation buffer of 2.5%, collectively 7%, minimum Tier 1 ratio of 8.5%, and Total capital ratio of 10.5%.

OSFI has issued guidelines, reporting requirements and disclosure guidance which are consistent with the Basel III reforms, except for its deferral of the Basel III credit valuation adjustment (CVA) related capital charges, requiring they be phased-in over a five-year period, beginning January 2014. In accordance with OSFI’s requirements, a scalar for CVA risk-weighted assets of 0.57 was used in the first two quarters of 2014. At Q3 and Q4 2014, CVA risk-weighted assets were calculated using scalars of 0.57, 0.65 and 0.77 to compute the CET1, Tier 1 and Total ratios, respectively.

2014  Scotiabank Annual Report      41

MANAGEMENT’S DISCUSSION AND ANALYSIS

Commencing the first quarter of 2013, OSFI required Canadian deposit-taking institutions to fully implement the 2019 Basel III reforms, without the transitional phase-in provisions for capital deductions (referred to as ‘all-in’) and achieve a minimum 7% Common Equity Tier 1 target.

Regulatory developments related to capital

In addition to risk-based capital requirements, the Basel III reforms introduced a simpler, non risk-based Leverage ratio requirement to act as a supplementary measure to its risk-based capital requirements. The Leverage ratio is defined as a ratio of Basel III Tier 1 capital to a leverage exposure measure which includes on-balance sheet assets and off-balance sheet commitments, derivatives and securities financing transactions, as defined within the requirements.

In January 2014, the BCBS issued revisions to the Basel III Leverage ratio framework. Revisions to the framework related primarily to the exposure measure, i.e. the denominator of the ratio, and consist mainly of: lower credit conversion factors for certain off-balance sheet commitments; further clarification on the treatment for derivatives, related collateral, and securities financing transactions; additional requirements for written credit derivatives; and, minimum public disclosure requirements commencing January 2015. The final calibration will be completed by 2017, with a view to migrating to a Pillar 1 (minimum capital requirement) treatment by January 2018.

In October 2014, OSFI released its Leverage Requirements Guideline which outlines the application of the Basel III Leverage ratio in Canada and the replacement of the existing Assets-to-Capital Multiple (ACM), effective Q1 2015. Institutions will be expected to maintain a material operating buffer above the 3% minimum. The Bank expects to meet OSFI’s authorized Leverage ratio. Disclosure in accordance with OSFI’s September 2014 Public Disclosure Requirements related to Basel III Leverage ratio will be made commencing Q1 2015.

Planning, managing and monitoring capital

Capital is managed and monitored based on planned changes in the Bank’s strategy, identified changes in its operating environment or changes in its risk profile. As part of the Bank’s comprehensive ICAAP, sources and uses of capital are continuously measured and monitored through financial metrics, including regulatory thresholds, and economic capital. (These results are used in capital planning and strategic decision-making.)

The Bank’s assessment of capital adequacy is in the context of its current position and its expected future risk profile and position relative to its internal targets while considering the potential impact of various stress scenarios. Specific scenarios are selected based on the current economic conditions and business events facing the Bank. In addition, the Bank’s forward looking capital adequacy assessment includes a consideration of the results of more severe multi-risk scenarios within

its enterprise-wide stress testing. This testing is used to determine the extent to which severe, but plausible events, impact the Bank’s capital.

The Bank sets internal economic and regulatory capital targets to ensure the Bank’s available capital is sufficient within the context of its risk appetite.

For economic capital, the Bank’s medium-term internal target is that common shareholder’s equity should be at least 100% of required economic capital. However, in the short term, it may be as low as 95% of required economic capital and supported by preferred shares.

For regulatory capital, the Bank’s internal target includes an adequate buffer over the regulatory minimum ensuring sufficient flexibility for future capital deployment and in consideration of the Bank’s risk appetite, the volatility of planning assumptions, the results from stress testing and contingency planning.

The Bank has a comprehensive risk management framework to ensure that the risks taken while conducting its business activities are consistent with its risk appetite, its impact on capital relative to internal targets, and that there is an appropriate balance between risk and return. Refer

to the Risk Management section on page 65 for further discussion on the Bank’s risk management framework. In managing the Bank’s capital base, close attention is paid to the cost and availability of the various types of capital, desired leverage, changes in the assets and risk-weighted assets, and the opportunities to profitably deploy capital. The amount of capital required for the business risks being assumed, and to meet regulatory requirements, is balanced against the goal of generating an appropriate return for the Bank’s shareholders.

Capital generation

Capital is generated internally through net earnings after dividend payments. As well, capital is generated by the issuance of common shares, preferred shares, and Tier 2 subordinated debentures.

Capital utilization

The Bank deploys capital to support sustainable, long-term revenue and net income growth. The growth can be through existing businesses by attracting new customers, increasing cross-selling activities to existing customers, adding new products and enhancing sales productivity, or through acquisitions. All major initiatives to deploy capital are subject to rigorous analysis, validation of business case assumptions and evaluation of expected benefits. Key financial criteria include impact on earnings per share, capital ratios, return on invested capital, expected payback period and internal rate of return based on discounted cash flows. Any potential business acquisitions, investments or strategic initiatives are reviewed and approved by the Bank’s Strategic Transaction Executive Committee, to ensure effective deployment of capital.

Regulatory capital ratios

The Bank continues to maintain strong high quality capital levels which positions it well for future business growth. The Basel III all-in Common Equity Tier 1 (CET1) ratio as at year end was 10.8%. Increases in the CET1 ratio were primarily due to strong internal capital generation, the sale of the Bank’s investment in CI Financial Corp. which significantly lowered regulatory capital deductions, and prudent management of asset growth. The Bank continued to issue common shares through its Dividend Reinvestment (DRIP), stock option and share purchase plans; however, the Bank eliminated the 2% discount on the DRIP and initiated share repurchases through its Normal Course Issuer Bid program during the year to manage its capital levels. The Bank’s investment in Canadian Tire Financial Services in the fourth quarter had a modest impact on its capital position. In addition, redemptions of non-common capital instruments during the year resulted in Basel III all-in Tier 1 and Total capital ratios of 12.2% and 13.9%, respectively, as at year end.

The Bank’s capital ratios continue to be well in excess of OSFI’s minimum capital ratios of 7%, 8.5% and 10.5% for CET1, Tier 1 and Total Capital respectively. These ratios were also strong by international standards.

In addition to the regulatory risk-based capital ratios, banks are also subject to a maximum leverage test, the assets-to-capital multiple (ACM) as established by OSFI. The ACM is calculated by dividing a bank’s total assets, including specified off-balance sheet items, such as direct credit substitutes and performance letters of credit, by its total capital. As at October 31, 2014, the Bank’s ACM of 17.1x was well below the regulatory maximum. OSFI has decided to replace the ACM with the Basel III Leverage ratio effective Q1, 2015.

Outlook

The Bank will continue to have a strong capital position in 2015. Capital will be prudently managed to support organic growth initiatives and selective acquisitions that enhance shareholder returns, while maintaining full compliance with evolving regulatory changes.

42      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    GROUP FINANCIAL CONDITION

T27 Regulatory capital⁽¹⁾

	IFRS									CGAAP
	Basel III  All-in						Basel II
As at October 31 ($ millions)	2014			2013			2012			2011			2010
Common Equity Tier 1 capital
Total Common Equity(2)	$	44,965		$	40,569		$	34,755		$	27,932		$	23,199
Qualifying non-controlling interest in Common Equity of subsidiaries		514			479			966			640			579
Goodwill and non-qualifying intangibles, net of deferred tax liabilities(3)		(10,482	)		(9,772	)		(7,840	)		(6,860	)		(3,638	)
Threshold related deductions		(305	)		(3,630	)
Net deferred tax assets (excluding those arising from temporary differences)(4)		(620	)		(752	)
Other Common Equity Tier 1 capital deductions(4)(5)		(330	)		(535	)
Common Equity Tier 1		33,742			26,359
Preferred shares(6)		2,934			4,084			4,384			4,384			3,975
Capital instrument liabilities – trust securities(6)		1,400			1,400			2,150			2,900			3,400
Other Tier 1 capital adjustments(7)		(3	)		71			21			(507	)		(2,181	)
Net Tier 1 Capital		38,073			31,914			34,436			28,489			25,334
Tier 2 capital
Subordinated debentures, net of amortization(6)		4,871			5,841			9,893			6,723			6,790
Eligible collective allowance for inclusion in Tier 2 and excess allowance (re: IRB approach)		468			971			454			353			574
Qualifying Non-controlling interest in Tier 2 capital of subsidiaries		180			115
Other Tier 2 capital adjustments(7)		–			–			(2,590	)		(3,033	)		(3,099	)
Tier 2 capital		5,519			6,927			7,757			4,043			4,265
Total regulatory capital		43,592			38,841			42,193			32,533			29,599
Risk weighted assets ($ billions)
Credit risk		261.9			240.9			210.0			200.8			180.5
Market risk		17.3			15.4			13.8			5.9			10.5
Operational risk		33.3			31.9			29.5			27.3			24.0
CET1 risk-weighted assets(8)	$	312.5		$	288.2		$	253.3		$	234.0		$	215.0
Capital ratios
Common Equity Tier 1 capital ratio		10.8	%		9.1	%		N/A			N/A			N/A
Tier 1 capital ratio(9)		12.2	%		11.1	%		13.6	%		12.2	%		11.8	%
Total capital ratio(9)		13.9	%		13.5	%		16.7	%		13.9	%		13.8	%
Assets to capital multiple(10)		17.1	x		17.1	x		15.0	x		16.6	x		17.0	x

(1) Effective November 1, 2012 regulatory capital ratios are determined in accordance with Basel III rules on an all-in basis (Refer to page 41). Prior period amounts have not been restated for new and amended IFRS standards as they represent the actual amounts reported in that period for regulatory purposes.

(2) Amounts for periods 2012 and prior exclude components of accumulated other comprehensive income not eligible for Basel II Tier 1 Capital.

(3) Reported amounts are based on OSFI’s requirements that Goodwill relating to investments in associates be classified as goodwill for regulatory reporting purposes beginning Q3 2014.

(4) 2013 has been restated for presentation purposes

(5) Other CET1 capital deductions under Basel III all-in include deferred tax assets (excluding those arising from timing differences) and Defined Benefit Pension Fund Assets and other items.

(6) Non-qualifying Tier 1 and Tier 2 capital instruments are subject to a phase-out period of 10 years.

(7) Other Tier 1/Tier 2 capital adjustments under the all-in approach include eligible non-controlling interests in subsidiaries, in addition, Tier 2 includes eligible collective allowance and excess allowance. Basel II deductions include 50/50 deduction of certain investments in associated corporations and other items.

(8) At Q4 2014, CVA risk-weighted assets were calculated using scalars of 0.57, 0.65, and 0.77 for CET1 capital ratio, Tier 1 capital ratio and Total capital ratio respectively.

(9) For fiscal 2012, excluding the equity issued for the Bank’s acquisition of Tangerine, Tier 1 and Total Capital ratios were 12.9% and 16.0% respectively.

(10) Under Basel III, asset-to-capital multiple is calculated by dividing the Bank’s total assets, including specific off-balance sheet items, by total regulatory capital on a transitional basis.

T28 Changes in regulatory capital⁽¹⁾

	IFRS									CGAAP
	Basel III  All-in						Basel II
For the fiscal years ($ millions)	2014			2013			2012			2011			2010
Total capital, beginning of year		38,841		$	42,193		$	32,533		$	29,599		$	28,588
Implementation of Basel III				$	(1,906	)
Changes in Common Equity Tier 1
Net Income attributable to Common Equity Holders of the Bank		6,916			6,422			6,243			5,181			4,239
Dividends paid to Equity Holders of the Bank		(3,110	)		(3,075	)		(2,713	)		(2,416	)		(2,224	)
Shares issued		771			1,404			4,872			2,657			829
Shares repurchased/redeemed		(320	)
Movements in Accumulated Other Comprehensive Income, excluding Cash Flow Hedges(2)		410			482			168			(624	)		(590	)
Change in Non-controlling interest in Common Equity of Subsidiaries NCIB		35			119			339			62			24
Change in Goodwill and other intangible assets (net of related tax liability)(3)		(710	)		(1,928	)		(577	)		(1,612	)		(142	)
Other changes including regulatory adjustments below:		3,391			(379	)
–Deferred tax assets that rely on future profitability (excluding those arising from temporary differences)		132			48
–Significant investments in the common equity of other financial institutions (amount above 10% threshold)		2,583			(147	)
–Other capital deductions		941
–Other		(265	)		(280	)
Changes in Common Equity Tier 1		7,383		$	3,045			N/A			N/A			N/A
Changes in Additional Tier 1 Capital
Issued		–			–			–			409			265
Redeemed		(1,150	)		(1,050	)		(750	)		(500	)		–
Other changes including regulatory adjustments and phase-out of non-qualifying instruments		(74	)		23			(1,634	)		(3	)		(717	)
Changes in Additional Tier 1 Capital		(1,224	)	$	(1,027	)	$	5,948		$	3,154		$	1,684
Changes in Tier 2 Capital
Issued		–			–			3,250			–			–
Redeemed		(970	)		(4,052	)		–			(67	)		(43	)
Collective allowances eligible for inclusion in Tier 2 and Excess Allowance under AIRB		(502	)		517			101			(218	)		3
Other changes including regulatory adjustments and phase-out of non-qualifying instruments		64			71			361			65			(633	)
Changes in Tier 2 Capital		(1,408	)	$	(3,464	)	$	3,712		$	(220	)	$	(673	)
Total capital generated (used)		4,751		$	(3,352	)	$	9,660		$	2,934		$	1,011
Total capital, end of year		43,592		$	38,841		$	42,193		$	32,533		$	29,599

(1) Effective November 1, 2012 regulatory capital ratios are determined in accordance with Basel III rules on an all-in basis (Refer to page 41). Prior period amounts have not been restated for new and amended IFRS standards as they represent the actual amounts reported in that period for regulatory purposes.

(2) The Bank implemented IFRS on November 1, 2011, however amounts related to regulatory capital for prior periods have not been restated as they represent the actual amounts in the period for regulatory purposes.

(3) Reported amounts are based on OSFI’s requirements that Goodwill relating to investments in associates be classified as goodwill for regulatory reporting purposes beginning Q3 2014.

2014  Scotiabank Annual Report      43

MANAGEMENT’S DISCUSSION AND ANALYSIS

C22   Tier 1 capital^*

%, as at October 31

* Amounts prior to 2012 are calculated under Basel II and
amounts prior to 2011 calculated under CGAAP

C23 Dividend growth

dollars per share

C24 Internally generated capital*

$ billions, for years ended October 31

* Amounts prior to 2011 calculated under CGAAP

Regulatory Capital Components

Bank regulatory capital is divided into three components – Common Equity Tier 1 (CET1), Tier 1 capital and Tier 2 capital, depending on their degree of permanency and loss absorbency. All components of capital provide support for banking operations and protect depositors.

CET1, consists primarily of common shareholders’ equity, a proration of non-controlling interests, and regulatory deductions. These regulatory deductions include goodwill, intangible assets (net of deferred tax liabilities), deferred tax assets that rely on future profitability, defined-benefit pension fund net assets, shortfall of credit provision to expected losses and significant investments in the common equity of other financial institutions.

Additional Tier 1 capital consists primarily of qualifying non-cumulative preferred shares or non-qualifying preferred shares and innovative tier 1 instruments subject to phase-out. Tier 2 capital consists mainly of qualifying or non-qualifying subordinated debentures subject to phase-out and the eligible allowances for credit losses.

The Bank’s Common Equity Tier 1 capital was $33.7 billion as at October 31, 2014, an increase of $7.4 billion from the prior year primarily from:

• $3.8 billion growth from internal capital generation. Over the past 5 years, the Bank’s level of internal capital generation has been consistently strong;

• $3.7 billion from lower capital deductions, mainly due to the sale of the Bank’s investment in CI Financial Corp.;

• $0.5 billion increase from common share issuances issued through the Bank’s Dividend Reinvestment Program and Share Purchase Plans net of share repurchases under the Bank’s Normal Course Issuer Bid; and,

• $0.4 billion increase from movements in Accumulated Other Comprehensive Income, including foreign currency translation.

Partly offset by:

• $0.7 billion increase in goodwill primarily from revisions to OSFI’s Capital Adequacy Requirements Guideline for the reporting of goodwill related to significant investments, including the Bank’s recent investment in Canadian Tire Financial Services, and growth in other intangible assets.

The Tier 1 capital ratio was also impacted by redemptions of $1.2 billion of preferred shares and the Total Capital ratio was further impacted by redemptions of $1.0 billion of subordinated debentures. In addition, revisions to OSFI’s Capital Adequacy Requirements Guideline for the collective allowance reduced Total Capital by $0.5 billion.

Dividends

The strong earnings and capital position of the Bank allowed the Bank to increase its dividends twice in 2014. The annual dividend payout in 2014 was $2.56, compared to $2.39 in 2013, an increase of 7%. The Bank’s Board has approved target dividend payout ratio of 40-50%. Adjusting for notable items, in 2014 the dividend payout ratio was 46.9%, compared to 47.1% in 2013.

T29 Selected capital management activity

For the fiscal years ($ millions)	2014			2013			2012
Dividends
Common	$	3,110		$	2,858		$	2,493
Preferred		155			217			220
Common shares issued(1)(2)		771			1,377			4,803
Common shares repurchased for cancellation under the Normal Course Issuer Bid(2)		(56	)		–			–
Preferred shares redeemed(3)		(1,150	)		(300	)		–
Subordinated debentures issued(4)		–			–			3,250
Maturity, redemption and repurchase of subordinated debentures(4)		(1,000	)		(4,210	)		(20	)
Issuance/(redemption) of trust securities		–			(750	)		(750	)

(1) Represents primarily cash received for stock options exercised during the year, common shares issued pursuant to the Dividend and Share Purchase Plan and shares issued for acquisitions.

(2) For further details, refer to Note 26 of the consolidated financial statements.

(3) For further details, refer to Note 27 of the consolidated financial statements.

(4) For further details, refer to Note 23 of the consolidated financial statements.

Normal Course Issuer Bid

On May 27, 2014, the Bank announced that OSFI and the Toronto Stock Exchange approved its normal course issuer bid (the “bid”) pursuant to which it may repurchase for cancellation up to 12 million of the Bank’s common shares. The bid will end on the earlier of May 29, 2015, or the date on which the Bank completes its purchases. During the year ended October 31, 2014, the Bank repurchased and cancelled 4.5 million common shares under this bid at an average price of $71.04 per share for a total amount of approximately $320 million.

44      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    GROUP FINANCIAL CONDITION

Share data and other capital instruments

The Bank’s common and preferred share data, as well as other capital instruments, are shown in Table 30. Further details, including exchangeability features, are discussed in Notes 26 and 27 of the consolidated financial statements.

T30 Shares and other instruments

As at October 31, 2014 Share data		Amount ($ millions)		Dividend		Dividend rate (%)		Number outstanding (000s)
Common shares(1)	$	15,231	$	0.66		–		1,216,582
Preferred shares
Preferred shares Series 14(2)		345		0.281250		4.50		13,800
Preferred shares Series 15(2)		345		0.281250		4.50		13,800
Preferred shares Series 16(2)		345		0.328125		5.25		13,800
Preferred shares Series 17(2)		230		0.350000		5.60		9,200
Preferred shares Series 18(2)(3)(4)		187		0.209375		3.35		7,498
Preferred shares Series 19(2)(3)(5)		158		0.185500		2.97		6,302
Preferred shares Series 20(2)(3)(6)		201		0.225625		3.61		8,039
Preferred shares Series 21(2)(3)(7)		149		0.163625		2.62		5,961
Preferred shares Series 22(2)(3)(8)		234		0.239375		3.83		9,377
Preferred shares Series 23(2)(3)(9)		66		0.174875		2.80		2,623
Preferred shares Series 30(2)(3)(10)		265		0.240625		3.85		10,600
Preferred shares Series 32(2)(3)(11)		409		0.231250		3.70		16,346
Trust securities	Amount ($ millions)		Distribution		Yield (%)		Number outstanding (000s)
Scotiabank Trust Securities – Series 2006-1 issued by Scotiabank Capital Trust(12a,c,d)	$	750	$	28.25		5.650		750
Scotiabank Tier 1 Securities – Series 2009-1 issued by Scotiabank Tier 1 Trust(12b,c,d)		650		39.01		7.802		650
Options							Number outstanding (000s)
Outstanding options granted under the Stock Option Plans to purchase common shares(1)(13)(14)								23,355

(1) Dividends on common shares are paid quarterly. As at November 21, 2014, the number of outstanding common shares and options was 1,216,649 thousand and 23,287 thousand, respectively.

(2) These shares are entitled to non-cumulative preferential cash dividends payable quarterly.

(3) These preferred shares have conversion features (refer to Note 27 of the consolidated financial statements in the Bank’s 2014 Annual Report for further details).

(4) Subsequent to the initial five-year fixed rate period which ended on April 25, 2013, and resetting every five years thereafter, the dividends, if and when declared, will be determined by the sum of the five-year Government of Canada Yield plus 2.05%, multiplied by $25.00.

(5) Dividends, if and when declared, are determined by the sum of the three-month Government of Canada Treasury Bill Yield plus 2.05%, multiplied by $25.00, which will be reset quarterly until April 25, 2018.

(6) Subsequent to the initial five-year fixed rate period which ended on October 25, 2013, and resetting every five years thereafter, the dividends, if and when declared, will be determined by the sum of the five-year Government of Canada Yield plus 1.70%, multiplied by $25.00.

(7) Dividends, if and when declared, are determined by the sum of the three-month Government of Canada Treasury Bill Yield plus 1.70%, multiplied by $25.00, which will be reset quarterly until October 25, 2018.

(8) Subsequent to the initial five-year fixed rate period which ended on January 25, 2014, and resetting every five years thereafter, the dividends, if and when declared, will be determined by the sum of the five-year Government of Canada Yield plus 1.88%, multiplied by $25.00.

(9) Dividends, if and when declared, are determined by the sum of the three-month Government of Canada Treasury Bill Yield plus 1.88%, multiplied by $25.00, which will be reset quarterly until January 25, 2019.

(10) Dividends, if and when declared, are for the initial five-year period ending on April 25, 2015. Subsequent to the initial five-year fixed rate period, and resetting every five years thereafter, the dividends will be determined by the sum of the five-year Government of Canada Yield plus 1.00%, multiplied by $25.00.

(11) Dividends, if and when declared, are for the initial five-year period ending on February 1, 2016. Subsequent to the initial five-year fixed rate period, and resetting every five years thereafter, the dividends will be determined by the sum of the five-year Government of Canada Yield plus 1.34%, multiplied by $25.00.

12 (a) On September 28, 2006, Scotiabank Capital Trust issued 750,000 Scotiabank Trust Securities – Series 2006-1 (Scotia BaTS II Series 2006-1). The holders of Scotia BaTS II Series 2006-1 are entitled to receive non-cumulative fixed cash distributions payable semi-annually in an amount of $28.25 per security. With regulatory approval, these securities may be redeemed in whole upon the occurrence of certain tax or regulatory capital changes, or in whole or in part on December 30, 2011 and on any distribution date thereafter 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 S of the Bank. The Series S shares will be entitled to cash dividends payable semi-annually in an amount of $0.4875 per $25.00 share [refer to Notes 26 and 27 – Restrictions on dividend payments]. Under the circumstances outlined in 12(c) below, the Scotia BaTS II Series 2006-1 would be automatically exchanged without the consent of the holder, into Non-cumulative Preferred Shares Series T of the Bank. The Series T shares will be entitled to non-cumulative cash dividends payable semi-annually in an amount of $0.625 per $25.00 share. If there is an automatic exchange of the Scotia BaTS II Series 2006-1 into Preferred Shares Series T of the Bank, then the Bank would become the sole beneficiary of the Trust.

12 (b) On May 7, 2009, Scotiabank Tier 1 Trust issued 650,000 Scotiabank Tier 1 Securities Series 2009-1 (Scotia BaTS III Series 2009-1). Interest is payable semi-annually in an amount of $39.01 per Scotia BaTS III Series 2009-1 on the last day of June and December until June 30, 2019. After June 30, 2019 and on every fifth anniversary thereafter until June 30, 2104, the interest rate on the Scotia BaTS III Series 2009-1 will be reset at an interest rate per annum equal to the then prevailing 5-year Government of Canada Yield plus 7.05%. On or after June 30, 2014, the Trust may, at its option redeem the Scotia BaTS III Series 2009-1, in whole or in part, subject to regulatory approval. Under the circumstances outlined in 12(c) below, the Scotia BaTS III Series 2009-1, including accrued and unpaid interest thereon, would be exchanged automatically without the consent of the holder, into newly issued Non-cumulative Preferred Shares Series R of the Bank. In addition, in certain circumstances, holders of Scotia BaTS III Series 2009-1 may be required to invest interest paid on the Scotia BaTS III Series 2009-1 in a series of newly-issued preferred shares of the Bank with non-cumulative dividends (each such series is referred to as Bank Deferral Preferred Shares). If there is an automatic exchange of the Scotia BaTS Preferred Shares, then the Bank would become the sole beneficiary of the Trust.

12 (c) The Scotia BaTS II Series 2006-1 and Scotia BaTS III Series 2009-1 may be automatically exchanged, without the consent of the holder, into Non-cumulative Preferred Shares of the Bank in the following circumstances: (i) proceedings are commenced for the winding-up of the Bank; (ii) the Superintendent takes control of the Bank or its assets; (iii) the Bank has a Tier 1 Capital ratio of less than 5% or a Total Capital ratio of less than 8%; or (iv) the Superintendent has directed the Bank to increase its capital or provide additional liquidity and the Bank elects such automatic exchange or the Bank fails to comply with such direction.

12 (d) No cash distributions will be payable on the Scotia BaTS II Series 2006-1 and Scotia BaTS III Series 2009-1 in the event that the regular dividend is not declared on the Bank’s preferred shares and, if no preferred shares are outstanding, the Bank’s common shares. In such a circumstance the net distributable funds of the Trust will be payable to the Bank as the holder of the residual interest in the Trust. Should the Trust fail to pay the semi-annual distributions on the Scotia BaTS II Series 2006-1 and Scotia BaTS III Series 2009-1 in full, the Bank will not declare dividends of any kind on any of its preferred or common shares for a specified period of time [refer to Notes 26 and 27 – Restrictions on dividend payments].

(13) Included are 364 thousand stock options with tandem stock appreciation rights (Tandem SAR) features.

(14) During 2013, certain employees voluntarily renounced 2,835 thousand Tandem SARs while retaining their corresponding option for shares.

2014  Scotiabank Annual Report      45

MANAGEMENT’S DISCUSSION AND ANALYSIS

Credit ratings

Credit ratings affect the Bank’s access to capital markets and borrowing costs, as well as the terms on which the Bank can conduct derivatives and hedging transactions and obtain related borrowings. The Bank continues to have strong credit ratings. The current ratings are AA by DBRS, Aa2 by Moody’s, AA- by Fitch and A+ by Standard and Poor’s (S&P).

In July 2014, Moody’s placed the senior debt ratings of several of the Canadian banks on “negative outlook”. In August 2014, Standard & Poor’s took a similar action, changing the outlook for several Canadian banks to “Negative” from “Stable”. These actions are not downgrades, nor do they suggest that downgrades are highly likely to follow. Rather, these changes suggest that, over the next 12-18 months, these rating agencies feel that a downgrade is more likely than an upgrade for the Canadian banks. Both rating agencies cited the uncertainty around the federal government’s proposed new “bail-in” regime for senior unsecured debt as the principal reason for these system-wide changes in outlook in order to reflect the greater likelihood that such debt may incur losses in the unlikely event of a distress scenario.

In addition, Moody’s placed the Bank’s standalone rating – which assumes no government support – on “negative outlook”. This is also not a downgrade. This change was done primarily because Moody’s believes that the Bank’s international business is more risky than its Canadian business and is likely to grow more rapidly in the coming years. Moody’s also cited the Bank’s plans to grow its unsecured consumer lending businesses – both in Canada and internationally – as a reason for the change.

The Bank remains confident that it will retain very high credit ratings.

Risk-weighted assets

Regulatory capital requirements are based on OSFI’s target minimum percentage of risk-weighted assets (RWA). RWA represent the Bank’s exposure to credit, market and operational risk and are computed by applying a combination of the Bank’s internal credit risk parameters and OSFI prescribed risk-weights to on- and off-balance sheet

exposures. Common Equity Tier 1 (CET1) RWA increased by $24.2 billion in 2014 to $312.5 billion. The key contributors to the change were credit risk of $20.9 billion (including the impact of foreign currency translation of $8.7 billion), market risk of $1.8 billion and operational risk of $1.5 billion. In addition, Tier 1 and Total Capital RWA increased by $0.8 billion and $2.0 billion, respectively, due to the adoption of OSFI prescribed scalars for CVA risk-weighted assets.

CET1 Credit risk-weighted assets

CET1 credit risk-weighted assets of $261.9 billion increased $20.9 billion as shown in Table 31 from the following components:

• Underlying business growth added $8.5 billion to RWA largely as a result of increases in retail and business lending across all business lines.

• Improvement in the credit quality of the portfolio resulted in a $5.7 billion reduction in RWA. In addition to positive migration of exposures to higher ratings, favourable credit experiences resulted in improved risk parameters which are updated at least annually to account for increased historical data and changes in model estimates/assumptions.

• Model enhancements to retail AIRB models increased RWA by $2.3 billion.

• Methodology and policy changes of $5.0 billion are a result of the phase-in adoption of the Basel III CVA capital requirements based on the OSFI prescribed scalar for CET1 RWA of 57% which will increase to 100% by 2019.

• Acquisitions/disposals include higher RWA of $2.2 billion due to the impact on threshold deductions from the sale of CI Financial Corp. and the carrying value of the remaining investment.

• The impact of foreign exchange translation added $8.7 billion mainly due to the Canadian dollar weakening against the U.S. dollar. The Bank’s structural foreign exchange exposures are managed with the primary objective of ensuring, where practical, that consolidated capital ratios and the capital ratios of individual banking subsidiaries are largely protected from the effect of changes in exchange rates.

T31 – Flow statement for Basel III All-in credit risk-weighted assets ($ millions)

	2014						2013
Credit risk-weighted assets movement by key driver(1) ($ millions)	Credit Risk			Of which Counterparty Credit Risk			Credit Risk			Of which Counterparty Credit Risk
CET1 Credit risk-weighted assets as at beginning of year	$	240,940		$	10,471		$	209,966		$	6,642
Book size(2)		8,546			2,283			12,448			799
Book quality(3)		(5,742	)		(582	)		(745	)		56
Model updates(4)		2,272			–			–			–
Methodology and policy(5)		5,003			5,003			11,473			2,863
Acquisitions and disposals		2,144			–			3,843			–
Foreign exchange movements		8,724			760			3,955			111
Other		–			–			–			–
CET1 Credit risk-weighted assets as at end of year(6)	$	261,887		$	17,935		$	240,940		$	10,471
Tier 1 CVA scalar		790			790			–			–
Tier 1 Credit risk-weighted assets as at end of year(6)		262,677			18,725			240,940			10,471
Total CVA scalar		1,186			1,186			–			–
Total Credit risk-weighted assets as at end of year(6)	$	263,863		$	19,911		$	240,940		$	10,471

(1) Includes counterparty credit risk.

(2) Book size is defined as organic changes in book size and composition (including new business and maturing loans).

(3) Book quality is defined as quality of book changes caused by experience such as underlying customer behaviour or demographics, including changes through model calibrations/realignments.

(4) Model updates are defined as model implementation, change in model scope or any change to address model enhancement.

(5) Methodology and policy is defined as methodology changes to the calculations driven by regulatory policy changes, such as new regulation (e.g. Basel III).

(6) At Q4 2014, risk-weighted assets were calculated using scalars of 0.57, 0.65, and 0.77 to compute CET1 capital ratio, Tier 1 capital ratio and Total capital ratio respectively.

Credit risk-weighted assets – non-retail

Credit risk measures the risk that a borrower or counterparty will fail to honour its financial or contractual obligations to the Bank. The Bank uses the Advanced Internal Ratings Based (AIRB) approach under Basel III to determine minimum regulatory capital requirements for its domestic, U.S. and European credit portfolios, and certain international non-retail portfolios. The remaining credit portfolios are subject to the Standardized approach, which relies on the external credit ratings of borrowers, if available, to compute regulatory capital for credit risk. For

AIRB portfolios, the key risk measures used in the quantification of regulatory capital for credit risk include probability of default (PD), loss given default (LGD) and exposure at default (EAD).

• Probability of default (PD) measures the likelihood that a borrower, with an assigned Internal Grade (IG) code, will default within a one-year time horizon. IG codes are a component of the Bank’s risk rating system described on page 72. Each of the Bank’s internal borrower IG codes is mapped to a PD estimate.

46      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    GROUP FINANCIAL CONDITION

T32 Internal rating scale⁽¹⁾ and mapping to external rating agencies

Equivalent Rating
External Rating – S&P	External Rating – Moody’s	External Rating – DBRS	Grade	IG Code	PD Range(2)
AAA to AA+	Aaa to Aa1	AAA to AA (high)	Investment grade	99-98	0.0000%  –  0.0595%
AA to A+	Aa2 to A1	AA to A (high)		95	0.0595%  –  0.1563%
A to A-	A2 to A3	A to A (low)		90	0.0654%  –  0.1681%
BBB+	Baa1	BBB (high)		87	0.1004%  –  0.2595%
BBB	Baa2	BBB		85	0.1472%  –  0.3723%
BBB-	Baa3	BBB (low)		83	0.2156%  –  0.5342%
BB+	Ba1	BB (high)	Non-Investment grade	80	0.3378%  –  0.5929%
BB	Ba2	BB		77	0.5293%  –  0.6582%
BB-	Ba3	BB (low)		75	0.6582%  –  0.8292%
B+	B1	B (high)		73	0.8292%  –  1.6352%
B to B-	B2 to B3	B to B (low)		70	1.6352%  –  3.0890%
CCC+	Caa1	-	Watch list	65	3.0890%  –  10.8179%
CCC	Caa2	-		60	10.8179%  –  20.6759%
CCC- to CC	Caa3 to Ca	-		40	20.6759%  –  37.0263%
-	-	-		30	37.0263%  –  60.8493%
Default			Default	27-21	100%

(1) Applies to non-retail portfolio

(2) PD ranges overlap across IG codes as the Bank utilizes two risk rating systems for its AIRB portfolios, and each risk rating system has its own separate IG to PD mapping.

T33 Non-retail AIRB portfolio exposure by internal rating grade⁽¹⁾⁽²⁾

As at October 31 ($ millions)		2014										2013(3)
Grade	IG Code	Exposure at  default ($)(5)		RWA ($)		PD (%)(6)(9)		LGD (%)(7)(9)		RW (%)(8)(9)		Exposure at default ($)(5)		RWA ($)		PD (%)(6)(9)		LGD (%)(7)(9)		RW (%)(8)(9)
Investment grade(4)	99-98		61,045		399		0.01		16		1		56,907		643		0.01		15		1
	95		33,352		6,484		0.07		37		19		35,103		6,871		0.08		35		20
	90		40,114		7,315		0.09		36		18		37,154		9,052		0.12		37		24
	87		33,212		8,750		0.14		37		26		26,626		8,472		0.15		39		32
	85		30,343		11,577		0.21		42		38		31,949		11,418		0.24		39		36
	83		31,433		15,552		0.33		45		49		29,932		14,624		0.32		43		49
Non-Investment grade	80		27,175		14,914		0.42		44		55		26,530		13,304		0.44		41		50
	77		16,253		10,357		0.57		43		64		14,466		9,000		0.66		41		62
	75		16,578		11,180		0.83		41		67		13,367		9,260		0.95		39		69
	73		5,223		4,401		1.64		38		84		4,337		3,241		1.60		34		75
	70		4,556		4,453		3.09		37		98		3,774		3,477		3.11		34		92
Watch list	65		815		1,454		10.80		45		178		1,030		1,871		10.91		44		182
	60		500		1,101		20.34		44		220		591		1,326		20.87		44		224
	40		816		2,003		33.23		47		245		706		1,562		32.23		40		221
	30		37		77		59.18		50		208		11		18		56.81		42		164
Default(10)	27-21		1,018		1,467		100		48		144		1,527		3,327		100		43		218
Total, excluding residential mortgages			302,470		101,484		0.78		35		34		284,010		97,466		0.99		34		34
Government guaranteed residential mortgages			83,446		–		–		15		–		86,216		–		–		15		–
Total			385,916		101,484		0.61		31		26		370,226		97,466		0.76		30		26

(1) Refer to the Bank’s Quarterly Supplementary Regulatory Capital Disclosures for a more detailed breakdown by asset class, exposure at default, probability at default, loss given default and risk-weighting.

(2) Excludes securitization exposures.

(3) 2013 has been restated for presentation purposes.

(4) Excludes government guaranteed residential mortgage of $83.4 billion.

(5) After credit risk mitigation.

(6) PD – Probability of Default

(7) LGD – Loss Given Default including certain conservative factors as per Basel accord.

(8) RW – Risk Weight

(9) Exposure at default used as basis for estimated weightings.

(10) Gross defaulted exposures, before any related allowances.

• Loss given default (LGD) measures the severity of loss on a facility in the event of a borrower’s default. The Bank’s internal LGD grades are mapped to ranges of LGD estimates. LGD grades are assigned based on facility characteristics such as seniority, collateral type, collateral coverage and other structural elements. LGD for a defaulted exposure is based on the concept of economic loss and is calculated using the present value of repayments, recoveries and related direct and indirect expenses.

• Exposure at default (EAD) measures the expected exposure on a facility in the event of a borrower’s default.

All three risk measures are estimated using the Bank’s historical data, as well as available external benchmarks, and are updated on a regular basis.

The historical data used for estimating these risk measures exceeds the minimum 5-year AIRB requirement for PD estimates and the minimum 7-year AIRB requirement for LGD and EAD estimates. Further analytical adjustments, as required under the Basel III Framework and OSFI’s requirements set out in their Domestic Implementation Notes, are applied to average estimates obtained from historical data. These analytical adjustments incorporate the regulatory requirements pertaining to:

• Long-run estimation of PD, which requires that PD estimates capture average default experience over a reasonable mix of high-default and low-default years of the economic cycle;

• Downturn estimation for LGD, which requires that LGD estimates appropriately reflect conditions observed during periods where credit losses are substantially higher than average; and

2014  Scotiabank Annual Report      47

MANAGEMENT’S DISCUSSION AND ANALYSIS

• Downturn estimation for EAD, which requires that EAD estimates appropriately reflect conditions observed during periods of economic downturn; and

• The addition of a margin of conservatism, which is related to the likely range of errors based on the identification and quantification of the various sources of uncertainty inherent in historical estimates.

These risk measures are used in the calculation of regulatory capital requirements based on formulas specified by the Basel framework. The credit quality distribution of the Bank’s AIRB non-retail portfolio is shown in Table 33.

The risk measures are subject to a rigorous back-testing framework which uses the Bank’s historical data to ensure that they are appropriately calibrated. Based on results obtained from the back-testing process, risk measures are reviewed and re-calibrated on at least an annual basis to ensure that they reflect the implications of new data, technical advances and other relevant information.

• As PD estimates represent long-run parameters, back-testing is performed using historical data spanning at least one full economic cycle. Realized PDs are back-tested using pre-defined confidence intervals, and the results are then aggregated to provide an overall assessment of the appropriateness of each PD estimate;

• The back-testing for LGD and EAD estimates is conducted from both long-run and downturn perspectives, in order to ensure that these estimates are adequately conservative to reflect both long-run and downturn conditions.

Portfolio-level back-testing results, based on a comparison of estimated and realized parameters for the four-quarter period ended at July 31, 2014, are shown in Table 34. During this period the actual experience was significantly better than the estimated risk parameter:

T34 Portfolio-level comparison of estimated and actual non-retail percentages

	Estimated(1)		Actual
Average PD		1.02		0.24
Average LGD		38.03		27.87
Average CCF(2)		61.31		8.80

(1) Estimated parameters are based on portfolio averages at Q3/13, whereas actual parameters are based on averages of realized parameters during the subsequent four quarters.

(2) EAD back-testing is performed through Credit Conversion Factor (CCF) back-testing, as EAD is computed using the sum of the drawn exposure and the committed undrawn exposure multiplied by the estimated CCF.

Credit risk-weighted assets – Canadian retail

The AIRB approach is used to determine minimum regulatory capital requirements for the retail credit portfolio. The retail portfolio is comprised of the following Basel-based pools:

• Residential real estate secured exposures consists of conventional and high ratio residential mortgages and all other products opened under the Scotia Total Equity Plan (STEP), such as loans, credit cards and secured lines of credit;

• Qualifying revolving retail exposures consists of all unsecured credit cards and lines of credit;

• Other retail consists of term loans (secured and unsecured), as well as credit cards and lines of credit which are secured by assets other than real estate.

For the AIRB portfolios the following models and parameters are estimated:

• Probability of default (PD) is the likelihood that the facility will default within the next 12 months.

• Loss Given Default (LGD) measures the economic loss as a proportion of the defaulted balance.

• Exposure at Default (EAD) is a portion of expected exposures at time of default.

The data observation period used for PD/EAD/LGD estimates meets the five year minimum. Various statistical techniques including predictive modeling and decision trees were used to develop models. The models assign accounts into homogenous segments using internal and external borrower/facility-level credit experience. Every month exposures are automatically re-rated based on risk and loss characteristics. PD, LGD and EAD estimates are then assigned to each of these segments incorporating the following regulatory requirements:

• PD incorporates the average long run default experience over an economic cycle. This long run average includes a mix of high and low default years.

• LGD is adjusted to appropriately reflect economic downturn conditions.

• EAD may also be adjusted to reflect downturn conditions when PD and EAD are highly correlated.

• Sources of uncertainty are reviewed regularly to ensure uncertainties are identified, quantified and included in calculations so that all parameter estimates reflect appropriate levels of conservatism.

The table below summarizes the credit quality distribution of the Bank’s AIRB retail portfolio as at October 2014.

T35 Retail AIRB portfolio exposure by internal rating grade⁽¹⁾⁽²⁾

As at October 31 ($ millions)		2014										2013
Category	PD Range	Exposure at default ($)(2)		RWA ($)		PD (%)(3)(6)		LGD (%)(4)(6)		RW (%)(5)(6)		Exposure at default ($)(2)		RWA ($)		PD (%)(3)(6)		LGD (%)(4)(6)		RW (%)(5)(6)
Exceptionally low	0.0000% – 0.0499%		26,232		408		0.04		27		2		16,578		207		0.03		13		1
Very low	0.0500% – 0.1999%		70,129		3,277		0.12		22		5		87,255		4,410		0.12		28		5
Low	0.2000% – 0.9999%		66,984		14,012		0.47		39		21		46,058		8,890		0.46		37		19
Medium low	1.0000% – 2.9999%		16,215		8,616		1.80		45		53		17,928		8,854		1.70		51		49
Medium	3.0000% – 9.9999%		7,953		6,186		4.94		47		78		10,669		8,095		4.82		41		76
High	10.0000% – 19.9999%		2,307		3,273		12.84		59		142		934		1,452		12.86		61		156
Extremely high	20.0000% – 99.9999%		1,969		3,027		40.40		52		154		2,077		2,570		34.45		36		124
Default(7)	100%		644		–		100.00		71		–		597		–		100.00		63		–
Total			192,433		38,799		1.47		33		20		182,096		34,478		1.41		32		19

(1) Refer to the Bank’s Quarterly Supplementary Regulatory Capital Disclosures for a more detailed breakdown by asset class, exposure at default, probability at default, loss given default and risk-weighting.

(2) After credit risk mitigation.

(3) PD – Probability of Default.

(4) LGD – Loss Given Default.

(5) RW – Risk Weight.

(6) Exposure at default used as basis for estimated weightings.

(7) Gross defaulted exposures, before any related allowances.

All AIRB models and parameters are monitored on a quarterly basis and independently validated annually by the Global Risk Management group. These models are tested to ensure rank ordering and back testing of parameters is appropriate as described in the Validation Guidelines. Comparison of estimated and actual loss parameters for the period ended July 31, 2014 are shown in Table 36. During this period the actual experience was significantly better than the estimated risk parameters.

48      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    GROUP FINANCIAL CONDITION

T36 Estimated and actual loss parameters⁽¹⁾

($ millions)	Average Estimated PD (%)(2)(7)		Actual Default Rate (%)(2)(5)		Average Estimated LGD (%)(3)(7)		Actual LGD (%)(3)(6)		Estimated EAD ($)(4)(7)		Actual EAD ($)(4)(5)
Residential Real Estate secured
Residential mortgages
Insured mortgages(8)		0.89		0.63		–		–		–		–
Uninsured mortgages		0.53		0.43		15.87		12.44		–		–
Secured lines of credit		0.91		0.24		26.69		17.19		79		72
Qualifying revolving retail exposures		1.59		1.47		72.04		68.68		464		456
Other retail		1.93		1.29		64.86		52.51		9		8

(1) Excludes the acquisition of Tangerine.

(2) Account weighted aggregation.

(3) Default weighted aggregation.

(4) EAD is estimated for revolving products only.

(5) Actual based on accounts not at default as at four quarters prior to reporting date.

(6) Actual LGD calculated based on 24 month recovery period after default and therefore exclude any recoveries received after the 24 month period.

(7) Estimates are based on the four quarters prior to the reporting date.

(8) Actual and Estimated LGD for insured mortgages are not shown. Actual LGD includes the insurance benefit, whereas Estimated LGD may not.

Credit risk-weighted assets – International retail

International retail credit portfolios follow the Standardized approach and consist of the following components:

• Residential real estate secured lending;

• Qualifying revolving retail exposures consisting of all credit cards and lines of credit;

• Other retail consisting of term loans.

Under the standardized approach, in general, residential real estate secured lending products are risk-weighted 35% and other retail products receive a 75% risk-weight.

Market Risk

Market risk is the risk of loss from changes in market prices including interest rates, credit spreads, equity prices, foreign exchange rates, and commodity prices, the correlations between them, and their levels of volatility.

For all material trading portfolios, the Bank applies its internal models to calculate the market risk capital charge. OSFI has approved the Bank’s internal VaR, Stressed VaR, Incremental Risk Charge and Comprehensive Risk Measure models for the determination of market risk capital. The attributes and parameters of these models are described in the Risk Measurement Summary on page 76.

For some non-material trading portfolios, the Bank applies the Standardized Approach for calculating market risk capital. The standardized method uses a “building block” approach, with the capital charge for each risk category calculated separately.

Below are the market risk requirements as at October 31, 2014 and 2013.

T37 Total market risk capital

($ millions)	2014		2013
All bank VaR	$	241	$	192
All bank stressed VaR		428		397
Incremental risk charge		396		338
Comprehensive risk measure		130		166
CRM surcharge		139		112
Standardized approach		46		31
Total market risk capital	$	1,380	$	1,236

(1) Equates to $17,251 million of market risk-weighted assets (2013 – $15,454 million).

T38 Risk weighted assets movement by key drivers

	Market risk
($ millions)	2014			2013
RWAs as at beginning of the year	$	15,454		$	13,823
Movement in risk levels(1)		1,986			1,537
Model updates(2)		(189	)		94
Methodology and policy(3)		–			–
Acquisitions and disposals		–			–
Other		–			–
RWA as at end of the year	$	17,251		$	15,454

(1) Movement in risk levels are defined as changes in risk due to position changes and market movements. Foreign exchange movements are imbedded within Movement in risk levels.

(2) Model updates are defined as updates to the model to reflect recent experience, change in model scope.

(3) Methodology and policy is defined as methodology changes to the calculations driven by regulatory policy changes (eg. Basel III).

Market risk-weighted assets increased by $1.8 billion to $17.3 billion as shown in Table 38 mainly due to movements in risk levels related to exposure in Global Fixed Income which increased VaR and the Incremental Risk Charge.

Operational risk

Operational risk is the risk of loss, whether direct or indirect, to which the Bank is exposed due to external events, human error, or the inadequacy or failure of processes, procedures, systems or controls. The Bank currently applies the Standardized Approach for calculating operational risk capital as per applicable Basel Standards. Total capital is determined as the sum of capital for each of eight Basel defined business activities. The capital for each activity is the product of the relevant risk factor, as defined by Basel, applied to the gross income of each respective business activity. The Bank has submitted its pre-application to OSFI to use the Advanced Measurement Approach (AMA), and plans to submit its full application in fiscal 2015. Under AMA, regulatory capital measurement will more directly reflect the Bank’s operational risk environment through the use of a loss distribution approach model which will use internal loss events, external loss events, scenario analysis and other adjustments to arrive at a final operational risk regulatory capital calculation. The impact on required regulatory capital is not determinable at this time.

Operational risk-weighted assets increased by $1.5 billion during the year to $33.3 billion due to organic growth in gross income. There were no material operational risk losses during the year.

Economic capital

Economic capital is a measure of the unexpected losses inherent in the Bank’s business activities. Economic capital is also a key metric in the Bank’s ICAAP. The calculation of economic capital relies on models that are subject to independent vetting and validation as required by the Bank’s Model Risk Management Policy. Management assesses its risk profile to determine those risks for which the Bank should attribute economic capital.

2014  Scotiabank Annual Report      49

MANAGEMENT’S DISCUSSION AND ANALYSIS

The major risk categories included in economic capital are:

• Credit risk measurement is based on the Bank’s internal credit risk ratings for derivatives, corporate and commercial loans, and credit scoring for retail loans. It is also based on the Bank’s actual experience with recoveries and takes into account differences in term to maturity, probabilities of default, expected severity of loss in the event of default, and the diversification benefits of certain portfolios.

• Market risk for economic capital incorporates models consistent with the regulatory basis, with some exclusions, and calibrated to a higher 99.95% confidence interval, and models of other market risks, mainly structural interest rate and foreign exchange risks.

• Operational risk for economic capital is based on a model incorporating actual losses, adjusted for an add-on for regulatory capital.

• Other risks include additional risks for which economic capital is attributed, such as business risk, significant investments, insurance risk and real estate risk.

In addition, the Bank’s measure of economic capital includes a diversification benefit which recognizes that all of the above risks will not occur simultaneously.

The Bank also includes the full amount of goodwill and intangible assets in the economic capital amount. The Bank uses its economic capital framework to attribute capital to the business lines, refer to non-GAAP measures, page 17. Table 50 on page 70 shows the attribution of economic capital by business line which allows the Bank to appropriately compare and measure the returns from the business lines, based upon their inherent risk. For further discussion on risk management and details on credit, market and operational risks, refer to the Risk Management section.

Off-balance Sheet Arrangements

In the normal course of business, the Bank enters into contractual arrangements with entities that are either consolidated or not required to be consolidated in its financial statements, but could have a current or future impact on the Bank’s financial performance or financial condition. These arrangements can be classified into the following categories: structured entities, securitizations and guarantees and other commitments.

Structured entities

Arrangements with structured entities include structured entities that are used to provide a wide range of services to customers, such as structured entities established to allow clients to securitize their financial assets while facilitating cost-efficient financing, and to provide certain investment opportunities. The Bank creates, administers and manages personal and corporate trusts on behalf of its customers. The Bank also sponsors and actively manages certain structured entities (see discussion on other unconsolidated structured entities on page 51).

All structured entities are subject to a rigorous review and approval process to ensure that all relevant risks are properly identified and addressed. For many of the structured entities that are used to provide services to customers, the Bank does not guarantee the performance of the structured entities’ underlying assets, and does not absorb any related losses. For other structured entities, such as securitization and investment vehicles, the Bank may be exposed to credit, market, liquidity or operational risks. The Bank earns fees based on the nature of its association with a structured entity.

Consolidated structured entities

The Bank controls its U.S.-based multi-seller conduit and certain funding and other vehicles and consolidates these structured entities in the Bank’s consolidated financial statements.

As at October 31, 2014, total assets of consolidated structured entities were $36 billion, compared to $41 billion at the end of 2013. The decrease was primarily due to repayments by Scotia Covered Bond Trust and Scotiabank Covered Bond Guarantor Limited Partnership, and the maturity of the Notes of one of the Bank’s funding vehicles in the second quarter of the year. In addition, two of the Bank’s funding vehicles were deconsolidated as a result of the adoption of IFRS 10; consequently their assets are no longer reflected with the total assets of consolidated structured entities. More details of the Bank’s consolidated structured entities are provided in Note 16(a) to the consolidated financial statements on page 163.

Unconsolidated structured entities

There are two primary types of association the Bank has with unconsolidated structured entities:

• Canadian multi-seller conduits administered by the Bank, and

• Structured finance entities.

The Bank earned total fees of $20 million in 2014, unchanged from 2013, from certain structured entities in which it had a significant interest at the end of the year but did not consolidate. More information with respect to the Bank’s involvement with these unconsolidated structured entities, including details of liquidity facilities and maximum loss exposure by category is provided below and in Note 16(b) to the consolidated financial statements on pages 164 and 165.

Canadian multi-seller conduits administered by the Bank

The Bank sponsors two Canadian-based multi-seller conduits that are not consolidated. The Bank earned commercial paper issuance fees, program management fees, liquidity fees and other fees from these multi-seller conduits, which totaled $18 million in 2014, compared to $15 million in 2013. These multi-seller conduits purchase high-quality financial assets and finance these assets through the issuance of highly rated commercial paper.

As further described below, the Bank’s exposure to these off-balance sheet conduits primarily consists of liquidity support and temporary holdings of commercial paper. Although the Bank has power over the relevant activities of the conduits, it has limited exposure to variability in returns, which results in the Bank not consolidating the two Canadian conduits. The Bank has a process to monitor these exposures and significant events impacting the conduits to ensure there is no change in control, which could require the Bank to consolidate the assets and liabilities of the conduits at fair value.

A significant portion of the conduits’ assets have been structured to receive credit enhancements from the sellers, including overcollateralization protection and cash reserve accounts. Each asset purchased by the conduits is supported by a backstop liquidity facility provided by the Bank in the form of a liquidity asset purchase agreement (LAPA). The primary purpose of the backstop liquidity facility is to provide an alternative source of financing in the event the conduits are unable to access the commercial paper market. Under the terms of the LAPA, the Bank is not obliged to purchase defaulted assets.

50      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    GROUP FINANCIAL CONDITION

The Bank’s primary exposure to the Canadian-based conduits is the liquidity support provided, with total liquidity facilities of $4.1 billion as at October 31, 2014 (October 31, 2013 – $4.2 billion). The year-over-year decrease was due to normal business operations. As at October 31, 2014, total commercial paper outstanding for the Canadian-based conduits was $2.7 billion (October 31, 2013 – $3.0 billion) and the Bank held less than 0.5% of the total commercial paper issued by these conduits. Table 39 presents a summary of assets purchased and held by the Bank’s two Canadian multi-seller conduits as at October 31, 2014 and 2013, by underlying exposure.

All of the funded assets have at least an equivalent rating of AA– or higher based on the Bank’s internal rating program. There were no non-investment grade assets held in these conduits as at October 31, 2014. Approximately 55% of the funded assets have final maturities falling within three years, and the weighted-average repayment period, based on cash flows, approximates 1.5 years. There is no exposure to the U.S. subprime mortgage risk within these two conduits.

T39 Assets held by Scotiabank-sponsored Canadian-based multi-seller conduits

As at October 31 ($ millions)	2014
	Funded assets(1)		Unfunded commitments		Total exposure(2)
Auto loans/leases	$	1,486	$	464	$	1,950
Trade receivables		171		556		727
Canadian residential mortgages		880		395		1,275
Equipment loans/leases		170		3		173
Total(3)	$  2,707		$  1,418		$  4,125
	2013
As at October 31 ($ millions)	Funded assets(1)		Unfunded commitments		Total exposure(2)
Auto loans/leases	$	1,385	$	775	$	2,160
Trade receivables		521		197		718
Canadian residential mortgages		1,112		163		1,275
Equipment loans/leases		–		–		–
Total(3)	$  3,018		$  1,135		$  4,153

(1) Funded assets are reflected at original cost, which approximates estimated fair value.

(2) Exposure to the Bank is through global-style liquidity facilities.

(3) These assets are substantially sourced from Canada.

Structured finance entities

The Bank has interests in structured finance entities used to assist corporate clients in accessing cost-efficient financing through their securitization structures. The Bank’s maximum exposure to loss from structured finance entities was $ 2,833 million as at October 31, 2014, (October 31, 2013 – $1,257 million). The year-over-year increase reflects an increase in the financing needs of the Bank’s corporate customers.

Other unconsolidated structured entities

The Bank sponsors unconsolidated structured entities in which it has insignificant or no interest at the reporting date. The Bank is a sponsor when it is significantly involved in the design and formation at inception of the structured entity, and the Bank’s name is used by the structured entity to create an awareness of the instruments being backed by the Bank’s reputation and obligation. The Bank also considers other factors, such as its continuing involvement and obligations to determine if, in substance, the Bank is a sponsor. The Bank earned $1,822 million income from its involvement with the unconsolidated Bank-sponsored structured entities for the year ended October 31, 2014 (for the year ended October 31, 2013 – $1,585 million).

Securitizations

The Bank securitizes fully insured residential mortgage loans through the creation of mortgage backed securities that are sold to Canada Housing Trust (CHT) and/or third parties. The sale of such mortgages does not qualify for derecognition with the exception of sale of social housing mortgage pools. The outstanding amount of off-balance sheet securitized social housing pools was $1,499 million as at October 31, 2014, compared to $1,590 million last year. The transferred mortgages sold to CHT and/or third parties continue to be recognized on balance sheet along with the proceeds from sale treated as secured borrowings. More details have been provided in Note 15 to the consolidated financial statements on Page 162.

The Bank securitizes a portion of its unsecured personal line of credit receivables (receivables) on a revolving basis through Hollis Receivables Term Trust II (Hollis), a Bank-sponsored Structured entity. Hollis issues notes to third-party investors and the Bank, and the proceeds of such issuance are used to purchase a co-ownership interest in the receivables originated by the Bank. The sale of such co-ownership interest does not qualify for derecognition. Recourse of the note holders is limited to the purchased interest. The subordinated notes issued by the Structured entity are held by the Bank. During the year, $602.4 million (October 31, 2013 – $602.4 million) of assets were securitized through Hollis.

Guarantees and other commitments

Guarantees and other commitments are fee-based products that the Bank provides to its customers. These products can be categorized as follows:

• Standby letters of credit and letters of guarantee. As at October 31, 2014, these amounted to $26 billion, compared to $24 billion last year. These instruments are issued at the request of a Bank customer to secure the customer’s payment or performance obligations to a third party. The year-over-year increase reflects a general increase in customer activity;

• Liquidity facilities. These generally provide an alternate source of funding to asset-backed commercial paper conduits in the event a general market disruption prevents the conduits from issuing commercial paper or, in some cases, when certain specified conditions or performance measures are not met;

• Indemnification contracts. In the ordinary course of business, the Bank enters into many contracts where it may indemnify contract counterparties for certain aspects of its operations that are dependent on other parties’ performance, or if certain events occur. 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;

• Loan commitments. The Bank has commitments to extend credit, subject to specific conditions, which represent undertakings to make credit available in the form of loans or other financings for specific amounts and maturities. As at October 31, 2014, these commitments amounted to $137 billion, compared to $119 billion last year.

These guarantees and loan commitments may expose the Bank to credit or liquidity risks, and are subject to the Bank’s standard review and approval processes. For the guaranteed products, the dollar amounts represent the maximum risk of loss in the event of a total default by the guaranteed parties, and are stated before any reduction for recoveries under recourse provisions, insurance policies or collateral held or pledged.

Fees from the Bank’s guarantees and loan commitment arrangements, recorded as credit fees in other income in the Consolidated Statement of Income, were $465 million in 2014, compared to $434 million in the prior year. Detailed information on guarantees and loan commitments is disclosed in Note 38 to the consolidated financial statements on pages 189 to 191.

2014  Scotiabank Annual Report      51

MANAGEMENT’S DISCUSSION AND ANALYSIS

Financial instruments

Given the nature of the Bank’s main business activities, financial instruments make up a substantial portion of the Bank’s financial position and are integral to the Bank’s business. Assets that are financial instruments include cash resources, securities, securities purchased under resale agreements, loans and customers’ liability under acceptances. Financial instrument liabilities include deposits, acceptances, obligations related to securities sold under repurchase agreements, obligations related to securities sold short, subordinated debentures and capital instrument liabilities. In addition, the Bank uses derivative financial instruments for both trading and hedging purposes.

Financial instruments are generally carried at fair value, except for non-trading loans and receivables, certain securities and most financial liabilities, which are carried at amortized cost unless designated as fair value through profit and loss at inception.

Unrealized gains and losses on the following items are recorded in other comprehensive income:

• available-for-sale securities, net of related hedges,

• derivatives designated as cash flow hedges, and

• net investment hedges.

Gains and losses on available-for-sale securities are recorded in the Consolidated Statement of Income when realized. Gains and losses on cash flow hedges and net investment hedges are recorded in the Consolidated Statement of Income when the hedged item affects income.

All changes in the fair value of derivatives, including embedded derivatives that must be separately accounted for, are recorded in the Consolidated Statement of Income, other than those designated as cash flow and net investment hedges which flow through other comprehensive income. The Bank’s accounting policies for derivatives and hedging activities are further described in Note 3 to the consolidated financial statements (see pages 129 and 132).

Interest income and expense on non-trading interest-bearing financial instruments are recorded in the Consolidated Statement of Income as part of net interest income. Credit losses resulting from loans are recorded in the provision for credit losses. Interest income and expense, as well as gains and losses, on trading securities and trading loans are recorded in other operating income – trading revenues. Realized gains and losses and writedowns for impairment on available-for-sale debt or equity instruments are recorded in net gain on investment securities within other operating income.

Several risks arise from transacting financial instruments, including credit risk, liquidity risk, operational risk and market risk. Market risk arises from changes in market prices and rates including interest rates, credit spreads, foreign exchange rates, equity prices and commodity prices. The Bank manages these risks using extensive risk management policies and practices, including various Board-approved risk management limits.

A discussion of the Bank’s risk management policies and practices can be found in the Risk Management section on pages 65 to 89. In addition, Note 39 to the consolidated financial statements on pages 191 to 200 presents the Bank’s exposure to credit risk, liquidity risk and market risks arising from financial instruments as well as the Bank’s corresponding risk management policies and procedures.

There are various measures that reflect the level of risk associated with the Bank’s portfolio of financial instruments. For example, the interest rate risk arising from the Bank’s financial instruments can be estimated by calculating the impact of a 100 basis point increase or decrease in interest rates on annual income, and the economic value of shareholders’ equity, as described on page 78. For trading activities, Table 53 on page 79 discloses the average one-day Value at Risk by risk factor. For derivatives, based on the Bank’s maturity profile of derivative instruments, only 12% (2013 – 15%) had a term to maturity greater than 5 years.

Note 10 to the consolidated financial statements (see pages 151 to 155) provides details about derivatives used in trading and hedging activities, including notional amounts, remaining term to maturity, credit risk and fair values.

The fair value of the Bank’s financial instruments is provided in Note 7 to the consolidated financial statements (see pages 141 to 143) along with a description of how these amounts were determined.

The fair value of the Bank’s financial instruments was favourable when compared to their carrying value by $1,918 million as at October 31, 2014 (October 31, 2013 – favourable $337 million). This difference relates to loan assets, deposit liabilities, subordinated debentures and other liabilities. The year-over-year change in the fair value over carrying value arose mainly from changes in interest rates. Fair value estimates are based on market conditions as at October 31, 2014, and may not be reflective of future fair values. Further information on how fair values are estimated is contained in the section on critical accounting estimates on page 91.

Disclosures specific to certain financial instruments designated at fair value through profit and loss can be found in Note 9 to the consolidated financial statements (see page 150). These designations were made primarily to significantly reduce accounting mismatches.

Selected credit instruments – publically known risk items

Mortgage-backed securities

Non-trading portfolio

Total mortgage-backed securities held as available-for-sale securities as a percent of the Bank’s total assets is insignificant as at October 31, 2014, and are shown in Table 40. Exposure to subprime mortgage risk in the U.S. is nominal.

Trading portfolio

Total mortgage-backed securities held as trading securities represent less than 0.25% of the Bank’s total assets as at October 31, 2014, and are shown in Table 40.

T40 Mortgage-backed securities

As at October 31 Carrying value ($ millions)	2014				2013
	Non-trading portfolio		Trading portfolio		Non-trading portfolio			Trading portfolio
Canadian NHA mortgage-backed securities(1)	$	–	$	1,431	$	–		$	733
Commercial mortgage-backed securities		30		132		2	(2)		170	(3)
Other residential mortgage-backed securities		107		473		127			292
Total	$	137	$	2,036	$	129		$	1,195

(1) Canada Mortgage and Housing Corporation provides a guarantee of timely payment to NHA mortgage-backed security investors.

(2) The assets underlying the commercial mortgage-backed securities in the non-trading portfolio relate primarily to non-Canadian properties.

(3) The assets underlying the commercial mortgage-backed securities in the trading portfolio relate to Canadian properties.

Collateralized debt obligations and collateralized loan obligations

Non-trading portfolio

The Bank has collateralized debt obligation (CDO) and collateralized loan obligation (CLO) investments in its non-trading portfolio. CDOs and CLOs generally achieve their structured credit exposure by investing and holding corporate loans or bonds. Cash-based CDOs and CLOs are classified as loans and are carried at amortized cost. These are assessed for impairment like all other loans.

As at October 31, 2014, the carrying value of cash-based CDOs and CLOs reported as loans on the Consolidated Statement of Financial Position was $87 million (October 31, 2013 – $548 million). The fair value was $84 million (October 31, 2013 – $535 million). The year-over-year decline was due primarily to disposals and repayments during the year. None of these cash-based CDOs and CLOs are classified as impaired. Substantially all of the referenced assets of the Bank’s CDOs and CLOs are corporate exposures, without any U.S. mortgage-backed securities.

52      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    GROUP FINANCIAL CONDITION

Trading portfolio

The Bank also holds synthetic CDOs in its trading portfolio as a result of structuring and managing transactions with clients and other financial institutions. To hedge its trading exposure, the Bank purchases or sells CDOs to other financial institutions, along with purchasing and/or selling index tranches or single name credit default swaps (CDSs). The main driver of the value of CDOs and CDSs is changes in credit spreads. Total CDOs purchased and sold in the trading portfolio are shown in Table 41 below.

T41 Collateralized debt obligations (CDOs)

As at October 31 Outstanding ($ millions)	2014					2013
	Notional Amount		Positive/ (negative) fair value			Notional Amount		Positive/ (negative) fair value
CDOs – sold protection	$	2,151	$	50		$	2,529	$	31
CDOs – purchased protection	$	1,973	$	(4	)	$	1,938	$	8

The change in the notional amounts of the CDO sold protection is due mainly to trades that matured during the year. The change in fair value of CDOs was due to tightening in credit spreads that occurred during the year. Based on positions held at October 31, 2014, a 50 basis point widening of relevant credit spreads in this portfolio would result in a pre-tax decrease of approximately $0.3 million in net income.

All of the Bank’s credit exposure to CDO swap counterparties is to entities which are externally or internally rated investment grade equivalent. The referenced assets underlying the trading book CDOs are substantially all corporate exposures, with no mortgage-backed securities.

Other

As at October 31, 2014, the Bank has insignificant exposure to highly leveraged loans awaiting syndication, auction-rate securities, Alt-A type loans, monoline insurance and investments in structured investment vehicles.

2014  Scotiabank Annual Report      53

MANAGEMENT’S DISCUSSION AND ANALYSIS

BUSINESS LINE OVERVIEW In 2014, the Bank reported its results through four business operating segments. Effective November 1, 2014 for fiscal 2015, the Canadian and International businesses within Global Wealth & Insurance will be included in Canadian Banking and International Banking’s results respectively. As well, certain Asia business activity currently reported in International Banking will be included in Global Banking & Markets. Prior period comparative results will be restated. Below are the results of the Bank’s four business operating segments for 2014. CANADIAN BANKING Canadian Banking had net income attributable to equity holders of $2,188 million in 2014. Adjusting for notable items (refer T44), net income grew by 5% to $2,261 million. This was a result of asset and deposit growth and a widening margin driven mainly from credit cards, mortgages and credit lines, as well as higher non-interest revenues. Partly offsetting, were higher provisions for credit losses and expenses. Return on economic equity was 31.0% compared to 33.4% last year.	C25   Canadian Banking net income(1) $ millions
INTERNATIONAL BANKING International Banking had net income attributable to equity holders of $1,492 million, a decrease of $234 million from last year. Adjusting for the 2014 notable items and the 2013 net notable gain of $90 million (refer T44), net income fell by $65 million or 4%. The benefits of strong asset growth in Latin America and the positive impact of foreign currency translation were more than offset by margin compression, lower contribution from associated corporations and securities gains, and higher provisions for credit losses and expenses. Return on economic equity was 11.7% compared to 14.2% last year.	C26   International Banking net income(1) $ millions
GLOBAL WEALTH & INSURANCE Global Wealth & Insurance reported net income attributable to equity holders in 2014 of $1,831 million, including the disposition gain of $534 million. Earnings were primarily driven by strong performance across the Wealth and Insurance businesses. Wealth business benefited from higher Assets under Management and Assets under Administration reflecting continued growth in net sales and favourable market conditions. Return on economic equity was 28.2% compared to 16.7% last year, primarily due to the disposition gain.	C27   Global Wealth &          Insurance net income(1) $ millions
GLOBAL BANKING & MARKETS Global Banking & Markets reported net income attributable to equity holders of $1,459 million in 2014 in line with last year. Strong performances in the underwriting and advisory business were partly offset by lower revenues in fixed income. The increase in revenues was offset by higher performance based-expenses and higher taxes. Return on economic equity increased to 30.4% from 27.6% last year.	C28   Global Banking & Markets net income(1) $ millions

(1) Net income attributable to equity holders.

54      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    BUSINESS LINES OVERVIEW

KEY PERFORMANCE INDICATORS FOR ALL BUSINESS LINES

Management uses a number of key metrics to monitor business line performance:
•  Net income	•  Return on economic equity	•  Productivity ratio	•  Loan loss ratio	•  Employee  engagement

T42 2014 financial performance

($ millions)	Canadian Banking			International Banking			Global Wealth & Insurance			Global Banking & Markets			Other(1)			Total
Net interest income(2)	$	5,690		$	5,352		$	446		$	728		$	89		$	12,305
Net fee and commission revenues		1,672			1,460			3,364			1,522			(281	)		7,737
Net income / (loss) from investments in associated corporations		–			411			156			–			(139	)		428
Other operating income(2)		74			300			1,080			1,563			117			3,134
Total revenue(2)		7,436			7,523			5,046			3,813			(214	)		23,604
Provision for credit losses		661			1,031			2			9			–			1,703
Operating expenses		3,810			4,330			2,727			1,729			5			12,601
Provision for income taxes(2)		777			489			440			616			(320	)		2,002
Net income	$	2,188		$	1,673		$	1,877		$	1,459		$	101		$	7,298
Net income attributable to non-controlling interest
Non-controlling interests in subsidiaries		–			181			46			–			–			227
Capital instrument equity holders		–			–			–			–			–			–
Net income attributable to equity holders of the Bank	$	2,188		$	1,492		$	1,831		$	1,459		$	101		$	7,071
Return on economic equity(3) (%)		31.0	%		11.7	%		28.2	%		30.4	%		–			16.1	%
Total average assets ($ billions)	$	280		$	139		$	15		$	283		$	79		$	796
Total average liabilities ($ billions)	$	193		$	89		$	20		$	209		$	237		$	748

(1) The Other category represents smaller operating segments, including Group Treasury, and other corporate adjustments that are not allocated to an operating segment. Corporate adjustments include the net residual in matched maturity transfer pricing, the elimination of the tax-exempt income gross-up reported in net interest income, other operating income and provision for income taxes, changes in the collective allowance on performing loans, differences in the actual amount of costs incurred and charged to the operating segments, and the impact of securitizations.

(2) Taxable equivalent basis. See non-GAAP measures on page 17.

(3) Non-GAAP measure. Return on equity for the business lines is based on economic equity attributed. See non-GAAP measures on page 17.

Effective fiscal 2014, the Bank enhanced its funds transfer pricing methodology that is used to allocate interest income and expense to the business lines. The enhancements included a transfer of higher regulatory liquidity costs, and a reduced interest value for certain deposit types. These enhancements result in reducing the net interest cost in the Other segment and reducing the net interest income in the business segments. These changes have no impact on the Bank’s consolidated results. Prior years amounts have also been retrospectively adjusted for IFRS changes described on page 26. The impact of both these changes on net income attributable to equity holders is presented below:

T43 Impact of IFRS changes and funds transfer pricing methodology enhancements

For the year ended October 31, 2013 ($ millions)	Canadian Banking			International Banking			Global Wealth & Insurance			Global Banking & Markets			Other		Total
IFRS changes		(36	)		(13	)		(8	)		11			3		(43	)
Funds transfer pricing methodology enhancements		(117	)		(10	)		(57	)		(38	)		222		–
Total		(153	)		(23	)		(65	)		(27	)		225		(43	)

For the year ended October 31, 2012 ($ millions)	Canadian Banking			International Banking			Global Wealth & Insurance			Global Banking & Markets			Other			Total
IFRS changes		(29	)		2			(6	)		(15	)		(1	)		(49	)
Funds transfer pricing methodology enhancements		(109	)		(9	)		(44	)		(32	)		194			–
Total		(138	)		(7	)		(50	)		(47	)		193			(49	)

T44 Notable Items

The following is the impact of the 2014 notable items on Business Line results. Refer also to Table 3, Page 20 for additional details.

	2014																2013(1)
For the year ended October 31 ($ millions)	Canadian Banking			International Banking			Global Wealth & Insurance		Global Banking & Markets			Other			Total		Total
Revenues	$	–		$	(47	)	$	615	$	(2	)	$	–		$	566	$	150
Provision for credit losses		62			–			–		–			–			62		–
Operating expenses		36			41			11		29			86			203		72
Net income before income taxes	$	(98	)	$	(88	)	$	604	$	(31	)	$	(86	)	$	301	$	78
Income taxes		(25	)		(9	)		78		(9	)		(24	)		11		(12	)
Net income	$	(73	)	$	(79	)	$	526	$	(22	)	$	(62	)	$	290	$	90
Net income attributable to equity holders of the Bank	$	(73	)	$	(79	)	$	526	$	(22	)	$	(62	)	$	290	$	90

(1)  2013 Notable items relate to International Banking.

2014  Scotiabank Annual Report      55

MANAGEMENT’S DISCUSSION AND ANALYSIS

Canadian Banking

Canadian Banking provides a full suite of financial advice and banking solutions, supported by an excellent customer experience, to retail, and small business and commercial customers in Canada. Starting in 2015, Canadian Banking will also include Canadian Wealth Management and Insurance.

2014 Achievements

•    Delivered an industry leading customer experience

–   Highest Customer Retention Index of the Big 5 Banks (Source: Hay Research International Switching Study, 2013)

–   #2 in Share-of-Wallet Among All Financial Institutions (Source: Ipsos Reid, Canadian Financial Monitor, 2014)

•    Completed key milestones to transform Retail Banking

–   Completed significant realignment and cross-country training of salesforce to connect customers with the right banker to manage all their needs, and launched industry leading financial planning software

–   First Canadian bank to launch sales capabilities in our Mobile Banking channel

•    Made strides in Business Banking

–   Achieved strongest growth in net new Small Business customers over the past five years

–   Roynat Equity Partners turned an investment in Pineridge Bakery into a record gain

•    Expanded our capabilities in payments, investments and deposits

–   Achieved double-digit growth in credit cards

–   Canadian Banking achieved record mutual fund net sales; ScotiaFunds ranked #1 in market share growth and percentage growth in assets over the past three years (Source: IFIC Data)

–   Recognized as Best Online Deposit, Credit and Investment Product Offerings in North America by Global Finance, 2014

•   Strengthened our differentiated core businesses

–   Continued to lead the automotive lending space with double-digit asset growth

–   Successfully closed a strategic partnership transaction with Canadian Tire Corporation that includes a 20% equity interest in Canadian Tire Financial Services and became the exclusive provider of new financial products to Canadian Tire customers as part of a wide-reaching marketing partnership

–   Formed a partnership with Rogers providing significant multiplatform brand exposure

–   Awarded the prestigious “Best of Show” from the Sponsorship Marketing Council of Canada for the Scotiabank Community Hockey Program

•    Continued to be a leader in direct banking through Tangerine

–   Successfully completed rebrand of ING Direct to Tangerine and nearly doubled ABM footprint via fee free access to the Scotiabank ABM Network

–   For the third year in a row, Tangerine ranked “Highest in Customer Satisfaction Among the Midsize Retail Banks” by J.D. Power and Associates⁽¹⁾

(1)  The 2014 study based on 17,183 total responses measuring 17 banks and measures opinions of consumers with their primary banking institution. Proprietary study results are based on experiences and perceptions of consumers surveyed May-June 2014. Visit jdpower.com

T45 Canadian Banking financial performance

($ millions)	2014			2013			2012
Net interest income(1)	$	5,690		$	5,419		$	4,610
Net fee and commission revenues		1,672			1,507			1,477
Net income from investments in associated corporations		–			10			3
Other operating income		74			37			51
Total revenue(1)		7,436			6,973			6,141
Provision for credit losses		661			478			506
Operating expenses		3,810			3,583			3,192
Income taxes		777			761			642
Net income	$	2,188		$	2,151		$	1,801
Net income attributable to non-controlling interest		–			–			3
Net income attributable to equity holders of the Bank	$	2,188		$	2,151		$	1,798
Key ratios
Return on economic equity		31.0	%		33.4	%		35.9	%
Productivity		51.2	%		51.4	%		52.0	%
Net interest margin(2)		2.09	%		2.04	%		2.09	%
Provision for credit losses as a percentage of loans and acceptances		0.24	%		0.18	%		0.23	%
Selected Consolidated Statement of Financial Position data (average balances)
Earning assets	$	277,280		$	270,059		$	223,904
Total assets		280,055			272,488			224,916
Deposits		187,256			181,462			146,689
Total liabilities		193,177			185,764			150,434
Economic equity	$	6,962		$	6,320		$	4,918

(1) Taxable equivalent basis.

(2) Net interest income (TEB) as % of average earning assets excluding bankers acceptances.

Business Profile

Canadian Banking provides a full suite of financial advice and banking solutions, supported by an excellent customer experience, to over 7.8 million Retail, Small Business and Commercial Banking customers. It serves these customers through its network of 1,040 branches and 3,942 automated banking machines, as well as internet, mobile and telephone banking and specialized sales teams. Canadian Banking also provides an alternative self-directed banking solution to almost 2 million Tangerine customers.

Canadian Banking is comprised of the following areas:

Retail and Small Business Banking provides financial advice, solutions and day-to-day banking products, including debit cards, chequing accounts, credit cards, investments, mortgages, loans and related creditor insurance products, to individuals and small businesses. Tangerine provides internet, mobile and telephone banking to self-directed customers.

Commercial Banking delivers advice and a full suite of customized lending, deposit, cash management and trade finance solutions to medium and large businesses, including automotive dealers and their customers that we provide retail automotive financing solutions to.

Strategy

Canadian Banking remains focused on its three-year strategy to deliver above average growth in net income and becoming Canada’s most recommended bank. This will be achieved by providing an excellent customer experience and executing on our 2015 strategic priorities. Canadian Banking will deliver on this by focusing on the customer first and delivering on its 2015 strategic priorities.

2015 Priorities

•    Enhance our retail product and service delivery to deepen customer relationships

•   Align Commercial Banking platform to achieve greater market penetration and become the primary banker for our customers

•   Accelerate development of payments expertise, capabilities and infrastructure; leverage partnerships and rewards to increase market share

•    Expand Tangerine to be the direct bank of choice for Canadians’ everyday banking needs

•   Find better ways to serve our customers, while also reducing structural costs

•    Transform wealth advisory offerings to better meet the needs of high net worth and mass affluent customers, increase penetration of proprietary products, and strengthen primary banking relationships

•    Build scale and integrate capabilities in Global Asset Management

56      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    CANADIAN BANKING

Financial Performance

Canadian Banking’s net income was $2,188 million in 2014. Adjusting for the notable items of $73 million (refer T44), net income was $2,261 million, $110 million or 5% higher than last year. Return on economic equity was 31.0%. Adjusting for the notable items, return on economic equity was 32.0% versus 33.4% last year. Retail and small business, and commercial banking all generated solid performances.

Assets and liabilities

Average assets rose $8 billion or 3% from last year. Adjusting for a decrease in securities of $2 billion and the run-off of $4 billion of Tangerine broker originated and white label mortgages, Canadian Banking recorded a solid growth in assets of $14 billion or 6%. This reflects $12 billion or 5% in residential mortgages, consumer auto lending, credit cards and other personal loans as well as $2 billion or 6% in business loans and acceptances.

Average liabilities rose $7 billion or 4%. Retail banking experienced solid growth in chequing accounts of $1 billion or 7% and savings deposits of $5 billion or 10%. There was also growth of $2 billion or 5% in small business and commercial banking business operating accounts. Other liabilities increased by $2 billion. This was partially offset by a decline in lower spread GICs of $3 billion or 4%.

Revenues

Total revenues were $7,436 million, up $463 million or 7% from last year.

Net interest income increased 5% to $5,690 million and was driven by good asset and deposit growth and a five basis point increase in the margin to 2.09%. The margin increase was primarily driven by higher mortgage and other personal loan spreads, as well as growth in credit card products.

Net fee and commission revenues were $1,672 million in 2014, up $165 million or 11%, primarily due to strong growth across several categories, including higher fees from mutual fund sales, card revenues and commercial credit fees.

Other operating income was $74 million, up $37 million mostly due to higher net gains on investment securities.

Retail & Small Business Banking

Total retail and small business banking revenues were $5,712 million, up $327 million or 6% from last year. Net interest income grew by $188 million or 4%, and was primarily driven by solid growth in mortgages, credit card products and deposits as well as an eight basis point improvement in the margin. Net fee and commission revenues increased by $125 million or 11%, reflecting higher fees from mutual fund sales and higher credit card revenues. Net income from investments in associated corporations increased by $5 million from the investment in Canadian Tire Financial Services during the year. Other operating income rose $9 million, mainly from higher gains on investment securities.

Commercial Banking

Total commercial banking revenues increased $136 million or 9% to $1,724 million in 2014. Net interest income rose by $83 million or 7% due mainly to growth in loans and business operating accounts. Net fee and commission revenues increased by $40 million or 12% mainly from higher credit fees. Net income from investments in associated corporations decreased by $15 million from last year. This was more than offset by a $28 million increase in other operating income mainly from higher net gains on investment securities.

Operating expenses

Adjusting for the notable item of $36 million (refer T44), operating expenses were up $191 million or 5%, primarily reflecting business growth, Tangerine brand transition costs, growth initiatives and salary increases. Operating leverage was positive 0.3%, or positive 1.3% after adjusting for notable items.

Provision for credit losses

The provision for credit losses was $661 million, an increase of $183 million from $478 million last year. Adjusting for the notable item (refer T44), the provision for credit losses was $599 million, an increase of $121 million due mainly to a change in asset mix and $26 million related to updated loss parameters to capture recent portfolio trends for credit cards and auto loans.

Provision for income taxes

The effective tax rate was in line with the previous year.

Outlook

The outlook for Canadian Banking in 2015 is anticipated to remain solid, with good loan growth across most businesses, primarily driven by auto, credit card and commercial loans. Other loan categories are expected to grow in line with the industry. Deposit growth will continue to be challenged by intense competition in a low rate environment. The margin is expected to improve in 2015, with wider spreads in mostly lending products, partly offset by competitive pressures on commercial, automotive and deposit spreads.

Provisions for credit losses are expected to rise reflecting the changing mix of asset growth and a more normal loan loss ratio in Commercial.

The outlook for the Wealth Management business remains positive, subject to market conditions, with continued solid growth expected from new customer acquisition, and increased sales to the Bank’s existing customer base.

Investing to grow the business through our strategic priorities, while prudently managing expenses, remains a key priority for the group. Canadian Banking will be targeting positive operating leverage. The effective tax rate is expected to rise slightly in 2015.

C29 Total revenue

$ millions

C30 Total revenue by sub-segment

$ millions

C31 Average loans and acceptances

$ billions

2014  Scotiabank Annual Report      57

MANAGEMENT’S DISCUSSION AND ANALYSIS

International Banking

International Banking provides a full range of financial products, solutions and advice to retail and commercial customers in select regions outside of Canada. Starting in 2015, International Banking will also include International Wealth Management and Insurance.

2014 Achievements

•   Acquisition of 51% of Cencosud S.A.’s Financial Services Business in Chile pending regulatory approval. Cencosud is the largest retailer in Chile and the third largest retailer in Latin America. The company’s financial services business includes approximately 2.5 million credit cards and more than US$1.2 billion in outstanding balances in Chile.

•   Named the 2014 “World’s Best Consumer Internet Bank in Latin America” in 22 of our countries by Global Finance magazine.

•   Recognized as a Great Place to Work in Chile, Costa Rica, Dominican Republic, El Salvador, Panama, Peru, Puerto Rico and Mexico.

•   Recognized as one of the Top 100 companies with the best employee talent in Colombia by Merco (Monitor of Corporate Reputation).

•   Named the 2014 Business of the Year in Peru by the Peruvian-Canadian Chamber of Commerce.

•    Named the 2014 Bank of the Year in the British Virgin Islands, Guyana, Jamaica and Trinidad Tobago by The Banker magazine.

•    Celebrated Scotiabank Jamaica’s 125^th and Scotiabank Trinidad and Tobago’s 60^th anniversary this year.

T46 International Banking financial performance

($ millions)	2014			2013			2012
Net interest income(1)	$	5,352		$	4,923		$	4,456
Net fee and commission revenues		1,460			1,403			1,298
Net income from investments in associated corporations		411			668			385
Other operating income(1)		300			427			346
Total revenue(1)		7,523			7,421			6,485
Provision for credit losses		1,031			781			613
Operating expenses		4,330			4,138			3,683
Income taxes(1)		489			584			463
Net income	$	1,673		$	1,918		$	1,726
Net income attributable to non-controlling interest		181			192			168
Net income attributable to equity holders of the Bank	$	1,492		$	1,726		$	1,558
Key ratios
Return on economic equity		11.7	%		14.2	%		11.9	%
Productivity(1)		57.6	%		55.8	%		56.8	%
Net interest margin(2)		4.00	%		4.11	%		4.13	%
Provision for credit losses as a percentage of loans and acceptances		1.01	%		0.86	%		0.75	%
Selected Consolidated Statement of Financial Position data (average balances)
Earning assets		133,879		$	119,899		$	108,048
Total assets		139,257			121,085			109,135
Deposits		69,618			61,741			54,305
Total liabilities		89,024			78,460			69,884
Economic equity	$	12,267		$	11,629		$	12,429

(1) Taxable equivalent basis.

(2) Net interest income (TEB) as % of average earning assets excluding bankers acceptances.

Business Profile

Scotiabank has an international presence unmatched by other Canadian Banks. The International Banking business line encompasses retail and commercial banking operations in 3 regions outside of Canada. This business line has operations in Latin America, the Caribbean and Central America, and Asia. In partnership with our associated corporations in China, Curacao, Thailand and Venezuela, a full range of personal and commercial financial services is provided to over 14 million customers through a network of close to 3,000 branches and offices, over 7,700 ABMs, mobile, internet and telephone banking, in-store banking kiosks and specialized sales forces.

Strategy

The International Banking strategy is aligned with the All-Bank priorities, with primary focus on the following:

• Acquiring more sustainable and profitable primary banking customer relationships anchored with core payments solutions, which will ultimately drive more deposits and greater cross-sales across the full-breadth of the Bank’s solution offerings. We are focusing on providing our customers with the right practical advice and the right solutions, through the right channels.

• Optimizing our operating model and our footprint to improve our customer experience, lower our structural costs, reduce our complexity and ultimately to be more efficient.

• Making leadership a competitive advantage by actively acquiring, developing and engaging a diverse pool of leaders to deepen our bench strength of talent.

2015 Priorities

Aligned to our strategy and in addition to the growth in our core business, our primary focus is on the following 4 key growth initiatives over the next 3-5 years

• Revamp our Retail Sales & Delivery Platform to ensure we have a consistent customer relationship management and origination front-end system across our franchise to drive greater customer relationship management, a better customer experience and ultimately more cross-sales. This will also include self-service channels such as online and mobile banking.

• Right-size our network and drive growth in Mexico to ensure we are well-positioned to effectively compete for our target customer segments and build sustainable scale in this key market.

• Improve our competitive position in Peru to ensure we remain in a strong competitive position as global and local players aggressively ramp up their presence within the country.

• Reduce our structural costs by optimizing our operating model, reducing our complexity and ultimately by being more efficient.

58      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    INTERNATIONAL BANKING

Financial Performance

Net income attributable to equity holders was $1,492 million. Adjusting for the notable items of $79 million in 2014 and $90 million last year (refer T44), net income was down $65 million or 4%. Revenue from strong volume growth and the positive impact of foreign currency translation was offset by margin compression, lower securities gains, lower contributions from associated corporations, and higher provision for credit losses, which included a $57 million charge related primarily to the Caribbean hospitality portfolio in the fourth quarter. Adjusting for the notable items, slightly higher earnings in both Latin America and Asia were more than offset by lower results in the Caribbean due to higher provision for credit losses.

Assets and Liabilities

Average assets of $139 billion increased 15%, driven by strong retail and commercial loan growth of 12% or 8% excluding foreign currency translation, primarily in Latin America and Asia. Deposit growth was strong at 12% or 8% excluding foreign currency translation.

Revenues

Total revenues of $7,523 million increased 1%. Adjusting for notable items in 2014 and 2013 (refer T44), revenues increased $352 million or 5% including the positive impact of foreign currency translation.

Net interest income increased 9% driven by solid loan growth and the acquisition of Credito Familiar in Mexico. This was in part offset by a 3% decline in the net interest margin from 4.11% to 4.00% as a result of the lowering of interest rates in key markets and changes in asset mix. Net fee and commission revenues increased 4% to $1,460 million largely driven by higher banking fees across Latin America and Caribbean. Net income from associated corporations decreased by $257 million. Adjusting for the notable gain (on a tax-normalized basis) last year in an associated corporation, contributions were down $54 million with lower contributions from Thanachart Bank in Thailand and Banco del Caribe in Venezuela. Other operating income decreased by $127 million, or $80 million excluding the notable items (refer T44), due mainly to lower net gains on investment securities and lower gains from financial instruments used for asset/liability management purposes, partly offset by higher trading revenues.

Latin America

Total revenues of $4,807 million increased 6% from last year, driven by strong loan growth of 13%, excluding the impact of foreign currency translation. Net interest income rose $348 million or 11%, reflecting the impact of strong asset growth partly offset by a lower net interest margin. Net fee and commission revenues increased by $39 million, or 4% largely driven by higher banking fees. Net income from associated corporations was down $31 million due to a lower contribution from Banco del Caribe in Venezuela. Other operating income decreased by $87 million, or $39 million excluding the notable items (refer T44), due mainly to lower net gains on investment securities and lower gains related to the sale of a non-strategic business in Peru.

Caribbean and Central America

Total revenues increased 2% to $1,985 million. Net interest income rose $47 million or 3% largely due to the positive impact of foreign currency translation. A modest 1% underlying growth in retail assets was offset by a 6% decline in commercial assets. Fee and commission revenues increased by 5% due to higher deposit, payment and card revenues. Other operating income was down $33 million due partly to lower securities gains and lower recoveries in Puerto Rico.

Asia

Total revenues were $731 million, down 21% versus last year. Adjusting for last year’s notable gain from an associated corporation of $203 million (on a tax-normalized basis), revenues were up $4 million. Net interest income rose by $34 million or 11% with strong growth in lending assets partially offset by lower spreads. Net income from associated corporations, adjusted for the notable gain, decreased $24 million as a lower contribution from Thanachart Bank in Thailand was only partly offset by a higher contribution from Bank of Xi’an in China.

Operating expenses

Operating expenses of $4,330 million increased $192 million or 5% from last year. Adjusting for the notable items of $41 million this year versus $74 million last year (refer T44), expenses increased $225 million or 6%. The underlying growth reflected the negative impact of foreign currency translation, inflationary increases and business growth. Operating leverage was slightly negative at -0.7%, adjusting for notable items.

Provision for credit losses

The provision for credit losses in International Banking increased $250 million to $1,031 million. In the retail portfolio, provisions increased in line with volume growth when excluding the benefit of the credit mark on the acquired portfolio in Banco Colpatria. Higher retail provisions, primarily in Mexico, and largely in unsecured term loans, were partly offset by lower provisions in Chile. In the commercial portfolio, provisions were primarily higher in the Caribbean and Latin America with the former reflecting $83 million in provisions relating mainly to a small number of accounts in the hospitality portfolio. The provision this year includes a net benefit of $12 million due to net amortization of the credit mark on acquired loans in Colombia compared to net benefit of $55 million last year.

Provision for income taxes

The effective tax rate was 22.6% compared to 23.3% last year due primarily to higher tax benefits realized mainly in Mexico and Chile.

Outlook

International Banking expects to continue to benefit from its diversification, both by geography and product and by the relatively attractive economic and demographic profiles within the regions where it operates. While moderated growth in many Latin American countries in 2014 is expected to continue into 2015, loan growth is expected to remain solid in these key markets. In the Caribbean and Central America, some pick-up in loan growth is expected, although with mixed trends by geography. Margins are expected to remain stable and operating leverage positive. Credit provisions in Latin America are projected to increase in line with asset growth and the reduction of credit mark benefits from past acquisitions. In the Caribbean and Central America, higher credit provisions will be driven largely by growth in the retail portfolios and the impact of challenging economic conditions in some regions on the commercial portfolios. Selective and disciplined acquisitions, primarily in existing markets, will continue to be considered. Overall, International Banking is well positioned for 2015. Earnings growth is expected to remain moderate in the first half of 2015 and pick up in the latter part of the year as economic conditions improve into 2016.

C32 Total revenue

C33 Total revenue by region

$ millions

C34 Average loans and acceptances

$ billions

C35 Average earning assets⁽¹⁾ by region

$ billions

(1) Average earning assets excluding bankers acceptances

2014  Scotiabank Annual Report      59

MANAGEMENT’S DISCUSSION AND ANALYSIS

Global Wealth & Insurance

Offers wealth management and insurance products and services to retail and institutional clients in Canada and internationally.

2014 Achievements Global Wealth & Insurance

•  Monetized a significant portion of our investment in CI Financial Corp, resulting in an after tax gain of $555 million for the Bank (including $534 million in GWI)

•   Expanded institutional asset management by acquiring the remaining Aurion Capital Management shares not already owned by the Bank

•   Achieved record net sales for ScotiaFunds through the Canadian Banking channel for second straight year

•   Launched fourteen new products in Dynamic Funds, including nine mandates under Dynamic Private Investment Pools, and twenty-two new funds launched across Latin America and the Caribbean

•   Launched the Global Portfolio Advisory Group (GPAG) to provide industry-leading global investment strategies for both developed and emerging markets

•   Expanded insurance distribution and footprint in Canada and the English Caribbean

•   Opened Vancouver Wealth office, housing a private bank and investment advisors targeting the Asian market

•   Bank of Beijing and Scotia Asset Management Ltd. (BOBSAM) joint venture launched:

•   First fund - the largest money-market fund IPO in China ($1.14 billion raised)

•  First fixed income fund ($57 million during IPO)

•   Scotiabank Bahamas, Barbados and Cayman Islands ranked #1 by Euromoney for select Private Banking and Wealth Management Services

•   Scotia iTRADE named “top pick” in three categories for 2014 in MoneySense magazine’s ranking of Canada’s online brokerages

•   Colfondos received the 2014 World Finance Pension Fund Award for best pension fund in Colombia

•   Profuturo AFP recognized by Bolsa de Valores de Lima as a Top 25 Peruvian company; and by Universidad del Pacifico Graduate School and El Dorado Investments as “Best Investment Manager 2013” for two pension funds

•   Scotia Mutual Funds received three A+ awards (2013 Fundata FundGrade A+ Awards), and Scotia Fondos (Mexico) received three 5-star rankings in the 2014 “Best Funds” annual ranking, published by S&P and Expansión magazine.

2014 Achievements Global Transaction Banking

•  Scotiabank received a Visa Service Quality Performance Award for 2013 for GTB’s Commercial Card Program.

•   Scotiabank GTB won Global Finance magazine’s World’s Best Corporate/Institutional Bank 2014 in 16 Latin American and Caribbean countries.

•   Scotiabank was named 2013 Best Partner Bank in Trade and Supply Chain Finance in Europe and Central Asia by the International Finance Corporation, in recognition of GTB’s innovation and extensive work to support the growth of emerging market trade.

•  GTB Mexico received the 2013 JP Morgan Quality Recognition Award for quality in processing international wires.

T47 Global Wealth & Insurance financial performance

($ millions)	2014			2013			2012
Net interest income(1)	$	446		$	409		$	442
Net fee and commission revenues		3,364			2,935			2,469
Net income from investments in associated corporations		156			230			209
Other operating income(1)		1,080			422			394
Total revenue(1)		5,046			3,996			3,514
Provision for credit losses		2			3			3
Operating expenses		2,727			2,411			2,076
Income taxes(1)		440			336			315
Net income	$	1,877		$	1,246		$	1,120
Net income attributable to non-controlling interest		46			39			25
Net income attributable to equity holders of the Bank	$	1,831		$	1,207		$	1,095
Key ratios
Return on economic equity		28.2	%		16.7	%		13.5	%
Productivity(1)		54.1	%		60.3	%		59.1	%
Selected Consolidated Statement of Financial Position data (average balances)
Earning assets	$	10,556		$	10,553		$	9,638
Total assets		14,867			14,379			13,539
Deposits		18,222			16,789			15,227
Total liabilities		19,625			17,522			15,923
Economic equity	$	6,390		$	6,965		$	7,756
Other ($ billions) as at Oct 31
Assets under administration	$	368		$	326		$	283
Assets under management	$	165		$	145		$	115

(1) Taxable equivalent basis.

Business Profile

Global Wealth & Insurance (GWI) provides a comprehensive suite of investment, pensions and insurance advice, solutions, and management services to high net worth, mass affluent, affluent, mass market and institutional clients, as well as advisors, across Scotiabank’s unmatched global footprint.

Global Wealth Management is an integrated business unit composed of asset management and advisory businesses. Asset management business is focused on investment manufacturing and developing innovative investment solutions for both retail and institutional investors. Our global client-facing wealth businesses, including private client, online and full service brokerage, pensions, institutional client services and an independent advisor channel, are focused on providing advice and solutions to clients in Canada and internationally.

Global Insurance provides clients with four main solutions in Canada: creditor, life and health, home and auto and travel. Internationally, a full range of insurance solutions – creditor, non-creditor, life and health, and property – are offered through a number of different Scotiabank channels.

Global Transaction Banking (GTB) offers comprehensive business solutions – cash management, payment services, electronic banking, business deposits, and trade services – on a global basis to Scotiabank’s small business, commercial and corporate customers. GTB also provides correspondent banking products and services to other financial institutions globally. The financial results of this unit are included in Canadian Banking, International Banking and Global Banking & Markets.

Effective November 1, 2014, Global Wealth & Insurance businesses were integrated into the Bank’s three Business Lines: Canadian Banking, International Banking, and Global Banking & Markets.

Global Wealth Management continues to be a key business unit, reporting jointly to Canadian Banking and International Banking. Canadian Insurance and International Insurance report to Canadian Banking and International Banking, respectively. Global Transaction Banking is now managed by Global Banking & Markets.

60      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    GLOBAL WEALTH & INSURANCE

Financial Performance

Global Wealth & Insurance reported net income attributable to equity holders of $1,831 million, an increase of $624 million or 52% compared to last year. The results included the disposition gain of $534 million and restructuring charge of $8 million (after tax) (refer T44). Adjusting for these items and the impact of lower income as a result of the disposition, the underlying net income attributable to equity holders grew by 13% due to strong performance across all businesses. Growth was driven by higher Assets under Management (AUM) and Assets under Administration (AUA) from higher net sales, improved financial market conditions and acquisitions. Return on economic equity was 28.2% compared to 16.7% last year primarily due to the impact of the disposition.

Assets Under Management and Assets Under Administration

AUM of $165 billion increased $20 billion or 13% from last year, driven by improved financial markets and strong net sales. AUA increased $42 billion or 13% to $368 billion driven by new customer assets and improved financial markets.

Revenues

Total revenue increased by $1,050 million or 26% compared to the same period last year. This includes the disposition gain and lower contribution from CI Financial Corp. (CI). Adjusting for these items, revenues increased by $488 million or 13% across wealth management and insurance businesses. The year-over-year growth also benefited from the full year impact of the acquisitions of Colfondos and AFP Horizonte.

Net interest income increased by $37 million or 9% primarily due to growth in loans and deposits.

Net fee and commission revenues of $3,364 million grew by $429 million or 15% mainly due to stronger mutual fund fees, higher brokerage revenues, increased insurance income and the full year impact of acquisitions.

Net income from associated corporations was lower from the prior year due to the disposition of CI.

Other operating income of $1,080 million increased by $658 million mostly due to the disposition gain and insurance revenue. Last year’s results included a writedown on investment securities.

Wealth Management

Total revenue of $4,311 million, increased $973 million or 29% compared to last year. Adjusting for the disposition gain and lower contribution from CI, revenues increased by $411 million or 13%. Higher wealth management revenues were driven by strong growth in mutual funds, increased brokerage revenues and the full year impact of acquisitions.

Insurance

Total revenue of $735 million, increased $77 million or 12% over last year, mainly reflecting higher insurance premiums and favourable claims experience. Insurance revenues represent approximately 17% of Global Wealth Insurance (excluding CI gain and contribution), the same as in 2013.

Operating expenses

Operating expenses for the year were $2,727 million, an increase of $316 million mainly due to higher volume-related expenses in line with revenue growth, the full year impact of the acquisitions, and the restructuring charge. The remaining increases were in remuneration and other expenses to drive business growth. Operating leverage was positive 13.2%. Adjusting for the notable items and the lower net income from an associated corporation, operating leverage was generally flat.

Provision for income taxes

The effective tax rate was 19.0% compared to 21.2% last year mainly due to lower taxes on the notable gain.

C36 GWI revenue⁽¹⁾ $ millions

(1) Excludes CI gain and CI contribution

C37 Total revenue⁽¹⁾

(1) Excludes CI gain and CI contribution

C38 Wealth management asset growth

$ billions, as at October 31

2014  Scotiabank Annual Report      61

MANAGEMENT’S DISCUSSION AND ANALYSIS

Global Banking & Markets

Global Banking & Markets (GBM) provides clients with corporate banking, investment banking and capital markets solutions. GBM’s products and services are offered to corporate, government and institutional clients in Canada and in select international countries.

2014 Achievements

•  Exclusive Financial Advisor to Fortis Inc. on its acquisition of UNS Energy Corporation for approximately US$4.5 billion. Scotiabank underwrote committed bridge facilities, installment receipts and Preference Shares to finance the transaction.

•  Scotiabank ranked #1 on the Canadian Equity League tables (January 1st to October 31st, 2014), Bloomberg.

•  Co-Lead Manager in HK Electric Investments’ (HKEI) US$3.1 billion Initial Public Offering, the largest ever investment trust IPO in Hong Kong and largest IPO in Hong Kong in the last year, and Bookrunner on HKEI’s US$4.7 billion loan.

•   Exclusive Financial Advisor on Baytex Energy Corporation’s $2.8 billion acquisition of Aurora Oil & Gas Limited, Sole Underwriter on $2.8 billion bridge loan and credit facilities, and Lead Bookrunner on the $1.5 billion equity financing.

•  Scotiabank is acting as Financial Advisor to Manulife Financial Corporation on its approximately $4.0 billion acquisition of Standard Life plc’s Canadian business and was Sole Bookrunner on the related $1.8 billion equity financing. The proposed transaction is expected to close in Q1 2015.

•   Exclusive Financial Advisor to LINN Energy, LLC on its US$2.3 billion acquisition of assets from Devon Energy Corporation. Scotiabank acted as Joint Lead Arranger and Joint Bookrunner on a US$1.3 billion term loan and Joint Lead Arranger and Bookrunner on a US$1 billion bridge loan.

•  Mandated Lead Arranger in AUD$3.4 billion facilities for East West Link Stage One PPP, a road construction and operation project in Australia.

•  Joint Lead Manager for Scentre Group on its €2.1 billion multi-tranche and multi-currency bond issue, one of the largest ever corporate bond issues from Australia into the global debt capital markets.

•   Exclusive Financial Advisor to Encana Corporation on its US$3.1 billion acquisition of Freeport-McMoRan’s oil and gas properties in the Eagle Ford play of South Texas.

•   Joint Bookrunner on Unión Andina de Cementos S.A.A.’s (UNACEM) inaugural U.S. dollar notes offering, raising US$625 million, the largest ever high yield bond issuance from Peru.

•   Scotiabank was recognized as the Best Corporate/Institutional Internet Bank in 16 Latin American countries (2014), by Global Finance.

•   Scotiabank received five Infrastructure Financing awards (2014), by LatinFinance.

T48 Global Banking & Markets financial performance

($ millions)	2014			2013			2012
Net interest income(1)	$	728		$	787		$	760
Net fee and commission revenues		1,522			1,268			1,218
Net income from investments in associated corporations		–			–			1
Other operating income(1)		1,563			1,525			1,525
Total revenue(1)		3,813			3,580			3,504
Provision for credit losses		9			26			30
Operating expenses		1,729			1,589			1,507
Income taxes(1)		616			510			524
Net income	$	1,459		$	1,455		$	1,443
Net income attributable to non-controlling interest		–			–			–
Net income attributable to equity holders of the Bank	$	1,459		$	1,455		$	1,443
Key ratios
Return on economic equity		30.4	%		27.6	%		26.3	%
Productivity(1)		45.3	%		44.4	%		43.0	%
Net interest margin(2) (3)		2.10	%		2.33	%		2.44	%
Provision for credit losses as a percentage of loans and acceptances(2)		0.02	%		0.07	%		0.09	%
Selected Consolidated Statement of Financial Position data (average balances)
Trading assets	$	110,653		$	102,304		$	88,236
Loans and acceptances		41,739			39,083			33,873
Earning assets		246,354			221,827			183,526
Total assets		282,953			250,309			219,100
Deposits		51,395			48,300			46,493
Total liabilities		208,962			188,944			164,783
Economic equity	$	4,731		$	5,151		$	5,358

(1) Taxable equivalent basis.

(2) Global Corporate and Investment Banking only.

(3) Net interest income (TEB) as % of average earning assets excluding bankers’ acceptances.

Business Profile

Global Banking & Markets conducts the Bank’s wholesale banking and capital markets business with corporate, government and institutional clients. GBM is a full-service lender and investment dealer in Canada and Mexico, and offers a wide range of products and services in the United States, Central and South America, and select markets in Europe and Asia. More specifically, GBM provides clients with corporate lending, equity and debt underwriting, mergers and acquisitions advisory, as well as fixed income and equity sales, trading and research, prime brokerage, securitization, foreign exchange, energy and rates hedging, and precious and base metals sales, trading and storage.

Strategy

GBM’s goal is to build a diversified and profitable customer-focused business that delivers best-in-class performance versus our Canadian peers. GBM seeks to achieve sustainable revenue and net income growth through a strategy focused on maximizing client relationships both in Canada and internationally, and expanding business in high-growth regions outside of Canada where we can leverage the Bank’s strong reputation and existing presence.

2015 Priorities

• Enhancing focus on the client: Improving our client coverage model and deepening relationships with our most important client relationships in Canada and internationally.

• Strategic lending and alignment: Extending credit to targeted clients in a more strategic manner and aligning our advisory and capital markets businesses with that strategic lending.

• Expanding in key regions: While continuing to grow our competitive position in Canada, we will expand our Latin America and Asia-Pacific business, focusing on select local, regional and international clients in core sectors and priority countries.

• Focusing on core sectors: Continued focus throughout our businesses and geographies on the key sectors of Energy, Mining, Infrastructure and Financial Services.

• Improving efficiency and effectiveness: Prudently managing expenses and risks through global oversight and governance, while enhancing infrastructure and operational efficiencies.

• Developing a talented workforce and leadership: Attracting, developing and retaining talent and building global leadership capability with diverse business experience.

62      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    GLOBAL BANKING & MARKETS

Financial Performance

Global Banking & Markets reported net income attributable to equity holders of $1,459 million in 2014, a slight increase of $4 million from last year. Adjusting for the notable items (refer T44), net income grew by $26 million or 2% from last year.

The diversified platform contributed to record results in investment banking and Canadian lending, dampened somewhat by challenges in the other capital markets groups. Return on economic equity increased to 30.4% from 27.6% last year.

Assets and Liabilities

Average assets increased by $33 billion or 13% to $283 billion this year, comprised mainly of earning assets which grew by $25 billion or 11% to $246 billion this year. Securities purchased under resale agreements increased by $13 billion while trading securities increased by $7 billion. Corporate loans and acceptances also grew by $2 billion in the U.S., Canada and Europe.

Revenues

Total revenues during 2014 were a record $3,813 million compared to $3,580 million last year. Adjusting for the notable items, revenues grew by $235 million, an increase of 7%. The business continues to benefit from a diversified products and services platform. The equities, investment banking, and the Canadian lending businesses experienced record revenues during 2014. These strong results were partly offset by declines in the fixed income and, to a lesser extent, the precious metals businesses.

Net interest income decreased by 7% to $728 million, mainly due to lower loan origination fees and ongoing spread compression in the US. This was partly offset by a slight increase in corporate loan volumes and higher spreads in Canadian corporate lending.

Net fee and commission revenue of $1,522 million rose by 20%, due mainly to higher advisory fees in investment banking and higher underwriting fees in investment banking and equities.

Other operating income increased by 2% to $1,563 million. Equities, commodities and Canadian lending improved, and there were securities gains in U.S. lending. This was partly offset by lower results in the fixed income business.

Operating expenses

Operating expenses increased by 9% to $1,729 million in 2014. Adjusting for notable items, expenses grew by 7%. Performance-related and share-based compensation were the main drivers along with higher technology, salaries and benefits and support costs. Operating leverage was flat adjusting for the notable items.

Provision for credit losses

The provision for credit losses was $9 million in 2014, down by $17 million from 2013. In the current year, lower provisions in the United States were somewhat offset by higher provisions in Europe and Canada.

Provision for income taxes

The effective tax rate of 29.7% was higher than the prior year by 3.7%. This was mainly due to higher taxes in foreign jurisdictions.

Outlook

In 2015, Global Banking & Markets will continue to focus on providing stable net income across our diversified business platform. Growth will be driven by enhancing our customer focus in all regions and by integrating our business in Asia. While revenue growth may face continued challenges due to market volatility, any impact should be mitigated by our highly diversified business platform and by a strong focus on ancillary customer revenue. The corporate loan portfolio is expected to grow further in 2015 with loan spreads expected to remain stable. Credit quality of the loan portfolio should remain strong and loan loss provisions are expected to remain low. GBM will actively manage risk exposures and work to optimize capital. There will also be a continued focus on expense management to maintain a leading productivity ratio, while investing in the business to position for future growth.

C39 Total revenue

C40 Global corporate and investment banking revenue

$ millions

C41 Global capital markets revenue by business line

$ millions

C42 Composition of average earning assets

$ billions

C43 Trading day losses

2014  Scotiabank Annual Report      63

MANAGEMENT’S DISCUSSION AND ANALYSIS

Other

The Other segment includes Group Treasury, smaller operating segments and other corporate items which are not allocated to a business line.

Financial performance

The Other segment had a net income attributable to equity holders of $101 million in 2014, compared to a net loss of $160 million in 2013. This year’s net income was reduced by notable items of $62 million (refer T44).

Net interest income, other operating income, and the provision for income taxes in each period include the elimination of tax-exempt income gross-up. This amount is included in the operating segments, which are reported on a taxable equivalent basis. The elimination was $354 million in 2014, compared to $312 million in 2013.

Net income from investments in associated corporations and the provision for income taxes in each period include the tax normalization adjustments related to the gross-up of income from associated corporations. This adjustment normalizes the effective tax rate in the divisions to better present the contribution of the associated corporations to the divisional results.

Revenues

Net interest income was $89 million this year, an improvement of $277 million from 2013 mainly due to higher revenues from asset/liability management activities partly reflecting maturing high-rate debentures and deposits which were replaced with funding at lower rates.

Net fees and commission revenues was negative $281 million in 2014, compared to negative $196 million in 2013. The decrease was mainly due to the offset to revenues reported in the other operating segments. This offset had no impact on the Bank’s consolidated results.

Other operating income was $117 million in 2014, compared to negative $60 million last year. The increase was almost entirely due to higher net gains of $176 million on investment securities year over year.

Operating expenses

Adjusting for notable items, operating expenses were a credit of $82 million in 2014, compared to a credit of $57 million last year. The increase was due to higher inter-segment offsets in 2014 with no impact on the Bank’s consolidated results. Partly offsetting was the business-related tax recoveries in 2013.

T49 Other financial performance

($ millions)	2014			2013			2012
Net interest income(1)	$	89		$	(188	)	$	(298	)
Net fee and commission revenues		(281	)		(196	)		(216	)
Net income from investments in associated corporations		(139	)		(227	)		(150	)
Other operating income(1)		117			(60	)		666
Total revenue(1)		(214	)		(671	)		2
Provision for (recovery of) credit losses		–			–			100
Operating expenses		5			(57	)		(22	)
Income taxes(1)		(320	)		(454	)		(376	)
Net income	$	101		$	(160	)	$	300
Net income attributable to non-controlling interests		–			–			–
Net income attributable to equity holders of the bank	$	101		$	(160	)	$	300

(1) Includes the net residual in matched maturity transfer pricing and the elimination of the tax-exempt income gross-up reported in net interest income, other operating income and provision for income taxes in the business segments.

64      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    RISK MANAGEMENT

RISK MANAGEMENT

Effective risk management is fundamental to the success of the Bank, and is recognized as a core deliverable in the Bank’s overall approach to strategy management. Scotiabank has a strong, disciplined risk management culture where risk management is a responsibility shared by all of the Bank’s employees. A key aspect of this culture is diversification across business lines, geographies, products, and industries.

Risk management framework

The primary goals of risk management are to ensure that the outcomes of risk-taking activities are consistent with the Bank’s strategies and risk appetite, and that there is an appropriate balance between risk and reward in order to maximize shareholder returns. The Bank’s enterprise-wide risk management framework provides the foundation for achieving these goals.

This framework is subject to constant evaluation to ensure that it meets the challenges and requirements of the global markets in which the Bank operates, including regulatory standards and industry best practices. The risk management programs of the Bank’s subsidiaries conform in all material respects to the Bank’s risk management framework, although the actual execution of their programs may be different. For new acquisitions, or situations where control of a subsidiary has been recently established, the Bank assesses existing risk management programs and, if necessary, develops an action plan to make improvements in a timely fashion.

The Bank’s risk management framework is applied on an enterprise-wide basis and consists of three key elements:

• Risk Governance,

• Risk Appetite, and

• Risk Management Tools.

The Bank’s risk management framework is predicated on the three-lines-of-defence model. Within this model, functional Business Line staff and management (the first line) incur and own the risks, while Global Risk Management and other control functions (the second line) provide independent oversight and objective challenge to the first line of defence, as well as monitoring and control of risk. Internal Audit Department (the third line) provides assurance that control objectives are achieved by the first and second lines of defence.

Risk governance

Effective risk management begins with effective risk governance.

The Bank has a well-established risk governance structure, with an active and engaged Board of Directors supported by an experienced senior management team and a centralized risk management group that is independent of the business lines. Decision-making is highly centralized through a number of senior and executive risk management committees.

The Board of Directors

The Board of Directors, either directly or through its committees ensures that decision-making is aligned with the Bank’s strategies and risk appetite. The Board approves key risk policies, limits and risk appetite frameworks, and on a quarterly basis receives a comprehensive summary of the Bank’s risk profile and performance of the portfolio against defined goals. The Bank’s Internal Audit department reports independently to the Board (through the Audit and Conduct Review Committee) on the effectiveness of the risk governance structure and risk management framework.

Management

Executive management, and in particular the President and Chief Executive Officer and the Chief Risk Officer (CRO), are responsible for risk management under the oversight of the Board. The CRO, who oversees the Global Risk Management (GRM) division of the Bank, reports to the President and Chief Executive Officer but also has direct access to the Executive and Risk Committee of the Board. The President and Chief Executive Officer, CRO, and other senior executives chair the Bank’s senior and executive risk management committees. Committee structures and key accountabilities are outlined on page 66.

Global Risk Management (GRM)

GRM is responsible for the design and application of the Bank’s risk management framework, and is independent of the Bank’s business units. It provides oversight of credit, market (including structural foreign exchange and structural interest rate), liquidity, operational (including model), environmental and insurance risks.

2014  Scotiabank Annual Report      65

MANAGEMENT’S DISCUSSION AND ANALYSIS

BANK’S RISK GOVERNANCE STRUCTURE

Executive Committees:

Operating Committee:  sets the Bank’s key strategies, and following Board approval, directs the execution of those strategies; and executes the Bank’s overall risk strategy and monitors and evaluates the Bank’s ongoing financial performance and how risks are managed across the Bank.

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

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

Strategic Transaction Executive Committee:  provides advice, counsel and decisions on effective allocation and prioritization of resources with respect to the Bank’s portfolio of businesses, and strategic investments including mergers and acquisitions, and divestitures.

Systems Planning and Policy Committee:  reviews and approves significant business initiatives involving system and computing investments in excess of designated executive approval limits.

Human Investment Committee:  reviews and approves all major new and changing Bank-wide Human Resources objectives, strategies, policies and programs including all compensation matters. As well it reviews and approves all senior management appointments and the staffing of key positions.

Senior Management Committees:

Senior Credit Committees:  adjudicate credits within prescribed limits and establish the operating rules and guidelines for the implementation of credit policies. Separate committees cover commercial, international and corporate counterparties, and Canadian and international retail, small business, and wealth management.

Market Risk Management and Policy Committee:  oversees and establishes standards for market, liquidity and insurance 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.

Operational Risk Committee:  promotes an enterprise-wide operational risk management framework to ensure operational risks are understood, communicated, and appropriate actions are taken to mitigate related losses.

Stress Testing Committee:  sets overall direction and makes key decisions relating to stress testing activities across the Bank, and guides the design, execution, and results assessment of the Enterprise-wide Stress Testing program.

Reputational Risk Committee:  upon referral from business lines or risk committees, reviews business activities, initiatives, products, services, transactions or processes and recommends either proceeding or not proceeding, based on an assessment of reputational risk, to ensure that the Bank is, and is seen to be, acting with high ethical standards.

Model Review Committee:  oversees model submissions, vetting, approval, and ongoing review processes primarily for market and treasury risk models.

Insurance Risk Committee:  provides risk management direction and oversight on the risk taking activities of the Bank’s enterprise-wide insurance operations.

66      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    RISK MANAGEMENT

Risk management culture

Effective risk management requires a strong, robust, and pervasive risk management culture.

The business lines are responsible for the development and execution of business plans that are aligned with the Bank’s risk management framework, and are accountable for the risks they incur. Understanding and managing these risks is a fundamental element of each business plan. Business lines work in partnership with Global Risk Management to ensure that risks arising from their business are thoroughly evaluated and appropriately addressed.

Risk education programs, and documented policies and procedures are jointly available to staff in the business lines and Global Risk Management.

Decision-making on risk issues is highly centralized. The membership of senior and executive management committees responsible for the review, approval and monitoring of transactions and the related risk exposures, includes business line heads and senior risk officers from Global Risk Management. The flow of information and transactions to these committees keeps senior and executive management well informed of the risks the Bank faces, and ensures that transactions and risks are aligned with the Bank’s risk appetite. The interaction between senior risk officers and business line heads at committee meetings is robust, with constructive discussions and objective challenge by all participants in order to fully identify and address all relevant risks applicable to a transaction.

The Bank’s material incentive compensation programs are structured to reflect the Bank’s risk appetite, with a substantial portion deferred in order to achieve stronger alignment with the results of risk-taking activities. The Bank also has a very stringent Guidelines for Business Conduct to which all staff must attest on an annual basis. Performance-related compensation is eligible for claw-back where there is a material breach of compliance rules or Guidelines for Business Conduct, or if there is a material misstatement of results in the fiscal year of the grant.

Risk appetite framework

Effective risk management requires clear articulation of the Bank’s risk appetite and how the Bank’s risk profile will be managed in relation to that appetite.

The Bank’s Risk Appetite Framework consists of a risk capacity, risk appetite statement and key risk appetite measures. Together, application of the risk appetite statement and monitoring of the key risk appetite measures help to ensure the Bank stays within appropriate risk boundaries. The Bank’s Credit Risk Appetite further defines the Bank’s risk appetite with respect to lending, counterparty credit risk, and other credit risks (such as investments).

Risk appetite is supported by the following Core Deliverables:

1. Maintain appropriate financial strength and liquidity

• Diversity, quality and stability of earnings

• Focus on core businesses, with disciplined and selective strategic investments

• Maintain capital adequacy

2. Measure, monitor and manage all aspects of the Bank’s risk appetite and risk profile.

• Dedicated attention to credit, market, liquidity, and operational risks

• Careful consideration of reputational, environmental, and other risks

• No tolerance for reputational risks that could affect our brand

3. Meet the needs and expectations of our customers, employees, shareholders and other key stakeholders.

4. Ensure a deep, diverse and engaged pool of talented Scotiabankers.

5. Operate in an efficient, secure and compliant manner.

Risk management tools

Effective risk management includes tools that are guided by the Bank’s Risk Appetite Framework and integrated with the Bank’s strategies and business planning processes.

Policies and Limits

Policies

Apply to specific types of risk or to the activities that are used to measure and control risk exposure. They are based on recommendations from risk management, internal audit, business lines, and senior executive management. Industry best practices and regulatory requirements are also factored into the policies. Policies are guided by the Bank’s risk appetite, and set the limits and controls within which the Bank and its subsidiaries can operate.

• Key risk policies are approved by the Board of Directors, either directly or through the Board’s Executive and Risk Committee or Audit and Conduct Review Committee (the Board).

• Management level risk policies associated with processes such as model development and stress testing are approved by executive management and/or key risk committees.

Limits

Control risk-taking activities within the tolerances established by the Board and senior executive management. Limits also establish accountability for key tasks in the risk-taking process and establish the level or conditions under which transactions may be approved or executed.

2014  Scotiabank Annual Report      67

MANAGEMENT’S DISCUSSION AND ANALYSIS

Guidelines, Processes and Standards

Guidelines

Are the directives provided to implement policies as set out above. Generally, they describe the facility types, aggregate facility exposures and conditions under which the Bank is prepared to do business. Guidelines ensure the Bank has the appropriate knowledge of clients, products, and markets, and that it fully understands the risks associated with the business it underwrites. Guidelines may change from time to time, due to market or other circumstances. Risk taking outside of guidelines usually requires approval of the Bank’s Senior Credit Committees, Market Risk Management and Policy Committee, or Risk Policy Committee.

Processes

Are the activities associated with identifying, evaluating, documenting, reporting and controlling risk.

Standards

Define the breadth and quality of information required to make a decision, and the expectations in terms of quality of analysis and presentation. Processes and standards are developed on an enterprise-wide basis, and documented in a series of policies, manuals and handbooks under the purview of GRM. Key processes cover the review and approval of new products, model validation and stress testing.

Measurement, Monitoring, and Reporting

Measurement

GRM is responsible for developing and maintaining an appropriate suite of risk management techniques to support the operations of the various business lines, and for supporting the measurement of economic capital on an enterprise-wide basis. The risk sections explain the application of these techniques.

Risk measurement techniques include the use of models and stress testing. The Bank uses models for a range of purposes including estimating the value of transactions, risk exposures, credit risk ratings and parameters, and economic and regulatory capital. The use of quantitative risk methodologies and models is balanced by a strong governance framework and includes the application of sound and experienced judgement. The development, independent review, and approval of models are subject to formalized policies where applicable, including the oversight of senior management committees such as the Model Review Committee for market risk (including counterparty credit risk) and liquidity risk models.

Regular Monitoring

Ensures that business activities are within approved limits or guidelines, and are aligned with the Bank’s strategies and risk appetite. Breaches, if any, of these limits or guidelines are reported to senior management, policy committees, and/or the Board depending on the limit or guideline.

Risk Reports

Aggregate measures of risk across products and businesses, and are used to ensure compliance with policies, limits, and guidelines. They also provide a clear statement of the amounts, types, and sensitivities of the various risks in the Bank’s portfolios. Senior management and the Board use this information to understand the Bank’s risk profile and the performance of the portfolios.

Control and audit functions are also established that are independent of the organizations whose activities they review, and whose role includes ensuring that all of the components of the risk management framework are effective and being implemented on a day to day basis.

Stress testing

The Bank’s stress testing programs draw upon the principles set out under guidelines issued by the Office of the Superintendent of Financial Institutions, in particular:

• Guideline A-1 Capital Adequacy Requirements (Chapter 9 Stress Testing),

• Guideline E-18 Stress Testing – Sound Business and Financial Practices, and

• the Internal Capital Adequacy Assessment Process;

as well as international industry groups, in particular:

• the Institute of International Finance (Governance for Strengthened Risk Management), and

• the International Monetary Fund (Macrofinancial Stress Testing – Principles and Practices), and

• the Bank for International Settlements Principles for sound stress testing practices and supervision.

Stress testing programs at both enterprise-wide level and individual risk level allow the Bank to estimate the potential impact on income, capital and liquidity of significant changes in market conditions, credit environment, liquidity demands, or other risk factors. Each program is developed with input from a broad base of stakeholders, and results are integrated into management decision-making processes for capital, funding, market risk limits, and credit risk appetite. Enterprise-wide stress testing is also integrated with both the strategic and financial planning processes. The development, approval and on-going review of the Bank’s stress testing programs are subject to formalized policy, and are under the oversight of the Stress Testing Committee.

The following highlight some of the key stress tests that have been performed:

• Domestic Retail: The Bank performed a stress test involving a historically unprecedented deterioration in credit quality of domestic households and firms (including a decline of at least 6.6% in real GDP, an unemployment rate of 13.3% and a drop in housing prices of up to 40% with further 20% reductions in Toronto and Vancouver).

• International: Stress tests conducted include a political and economic crisis in Latin America, widespread impairment of Euro nations (including a disorderly default), and a deflationary Asia crisis.

Despite the severity of the stress tests detailed above, the Bank remained profitable in every instance, throughout the duration of each stress scenario.

Including consideration of a variety of operational risk, strategic risk, and broad economic stress scenarios, the Bank’s 2014 Enterprise-wide Stress Testing program made it clear that the Bank’s combination of adequate capital ratios, credit risk profile, and diversified earnings base would make it challenging to construct stress scenarios based on traditional credit, market, and operational risks that would be of sufficient severity to question the Bank’s solvency.

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Principal risk types

The principal risk types, their governing documentation, and their applicability to risk appetite are outlined in the table below.

Risk Type	Governing Documentation	Application to Risk Appetite
Credit Risk	Credit Risk Policy Credit Risk Appetite Collective Allowance Policy for Performing Loans Residential Mortgage Underwriting Policy	Quantitative limits/tolerances: •  Exposure to a single customer or group of related parties (limits differentiated by customer risk rating and security cover); •  Country risk (exposure limits to control transfer/cross-border and sovereign default risks); and •  Industry concentrations (exposure and risk adjusted concentration limits).
Market Risk	Market and Structural Risk Management Policy	Quantitative limits/tolerances, such as various VaR limits, stress test results, equity and debt investment exposures, and structural interest rate and foreign exchange exposures.
Liquidity and Funding Risk	Liquidity Risk and Collateral Management Policy	Quantitative limits/tolerances, such as: •  Appropriate hold levels of unencumbered high quality liquid assets that can be readily sold or pledged; •  Limits to control the maximum net cash outflow over specified short-term horizon; and •  Diversification of funding by source, type of depositor, instrument, term and geographic market.
Other Risks
Operational Risk	Operational Risk Management Policy and Framework Internal Control Policy Fiduciary Risk Management Policy Model Risk Management Policy New Products and Services Risk Management Compliance Policy	•  Systematic identification, measurement, mitigation and monitoring of operational risk, regardless of whatever the risk is internal to the Bank or outsourced to a third party; •  Minimization of residual operational risk; and •  Expressed quantitatively by an aggregate loss event limit, a single event loss limit and by comparison of Bank operational losses with an industry benchmark.
Reputational Risk	Reputational Risk Policy Guidelines for Business Conduct	•  Low tolerance for reputational, legal, or taxation risk arising in business activities, initiatives, products, services, transactions or processes, or from a lack of suitability of products for clients.
Environmental Risk	Environmental Policy	Consistency with the Equator Principles by requiring provisioning of project financing only to those projects whose borrowers can demonstrate their ability and willingness to comply with comprehensive processes aimed at ensuring that projects are developed in a socially responsible manner and according to sound environmental management practices.
Strategic Risk	Annual Strategy Report to the Board of Directors	Strategy report considers linkages between the Bank’s Risk Appetite Framework with the enterprise strategy, business line strategies and corporate function strategies; also incorporates linkages to measuring progress against strategic priorities and implementation.
Insurance Risk	Insurance Risk Policy and Framework	Maintain minimal exposure to insurance risk; where insurance risks are taken, it is on a selective basis to achieve stable and sustainable earnings, the risk assumed is diversified geographically and by product, and the majority is short-term.

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T50 Exposure to risks arising from the activities of the Bank’s businesses

(1) Average assets for the Other segment include certain non-earning assets related to the business lines.

(2) Economic equity is reported on a twelve month average basis, consistent with Return on Economic Equity.

(3) Includes economic equity for goodwill and intangibles.

(4) Risk-weighted assets (RWA) are as at October 31, 2014 as measured for regulatory purposes in accordance with the Basel III all-in approach.

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Credit risk

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 arises 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.

  Index of all credit risk disclosures

	Page		Tables and charts	Page
Credit risk summary		72
Credit Risk Management Framework
Risk measures		72
Corporate and commercial		72
Risk ratings		72
Adjudication		72
Credit Risk Mitigation-Collateral/Security		73
Traditional Non-Retail Products		73
Commercial/Corporate Real Estate		73
Traded products		73
Credit Risk Mitigation-Collateral/Security		74
Retail		74
Adjudication		74
Risk ratings		74
Credit Risk Mitigation-Collateral/Security		74
Credit Quality		27	T2 Financial highlights		18
Provision for credit losses		27	T12 Provisions against impaired loans by business line		27
Allowance for credit losses		28	T13 Provision for credit losses as a percentage of average loans and acceptances		27
Impaired loans		29	T14 Net charge-offs as a percentage of average loans and acceptances		27
			T15 Impaired loans by business line		28
			C13 Credit losses – provisions against impaired loans as a % of average loans & acceptances		28
			C14 Net impaired loan ratio as a % of loans and acceptances		28
			C15 Gross impaired loans as a % of equity & allowances for credit losses		28
			T67 Gross impaired loans by geographic segment		99
			T68 Provision against impaired loans by geographic segment		99
			T69 Cross-border exposure to select countries		99
			T70 Loans and acceptances by type of borrower		100
			T71 Off balance-sheet credit instruments		100
			T72 Changes in net impaired loans		101
			T73 Provision for credit losses		102
			T74 Provision for credit losses against impaired loans by type of borrower		102
			T75 Impaired loans by type of borrower		103
			T76 Total credit risk exposures by geography		103
			T77 AIRB credit risk exposures by maturity		103
			T78 Total credit risk exposures and risk-weighted assets		104
			Analysis of the aggregate credit risk exposure including market risk exposure, assets of the Bank’s insurance subsidiaries and other assets that fully reconciles to the balance sheet (refer Note 39 – Financial instruments – risk management in the consolidated financial statements)		191
Acquisition-related purchased loans		29
Portfolio review		29	C16 Canadian retail portfolio – delinquent loans as a % of total loans		28
			C17 International retail portfolio – delinquent loans as a % of total loans		28
Risk diversification		29	C18 Well diversified in Canada and internationally – loans and acceptances		30
			C19 and in household and business lending – loans and acceptances		30
			T66 Loans and acceptances by geography		98
Risk mitigation		30
Overview of loan portfolio		30	T19 European exposure		31
Residential mortgages		30	T20 Funded exposures		32
Loans to Canadian condominium developers		31	T21 Bank’s exposure distribution by country		32
European exposures		31	T22 Indirect exposures		33
Financial instruments		52-53	T40 Mortgage-backed securities		52
			T41 Collateralized debt obligations (CDOs)		53

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Credit risk summary

• Loans and acceptances (Retail and Non-Retail) remained diversified by region, industry and customer. Regional exposure is evenly spread across our key markets (Canada 69.0%, United States 5.4%, Mexico 3.7% and Other 21.9%). Our largest industry exposure is to Financial Services, which constitutes 5.1% of overall gross exposures (before consideration of collateral) and was $22 billion, a decrease of $2 billion from October 31, 2013. These exposures are predominately to highly rated counterparties and are generally collateralized.

• The Bank’s overall loan book as of October 31, 2014 increased to $434 billion versus $413 billion as of October 31, 2013, with growth in the portfolio mainly driven by Personal, and Business and Government Lending. Residential mortgages were $213 billion as at October 31, 2014, with 90% in Canada. The corporate loan book, which accounts for 32% of the total loan book, is composed of 61% of loans with an investment grade rating as of October 31, 2014, unchanged from October 31, 2013.

The effective management of credit risk requires the establishment of an appropriate credit risk culture. Key credit risk policies and appetite statements are important elements used to create this culture.

The Board of Directors, either directly or through the Executive and Risk Committee (the Board), reviews and approves the Bank’s Credit Risk Appetite and Credit Risk Policy on an annual basis:

• The objectives of the Credit Risk Appetite are to ensure that:

– target markets and product offerings are well defined at both the enterprise-wide and business line levels;

– the risk parameters for new underwritings and for the portfolios as a whole are clearly specified; and

– transactions, including origination, syndication, loan sales and hedging, are managed in a manner that is consistent with the Bank’s risk appetite.

• The Credit Risk Policy articulates the credit risk management framework, including:

– key credit risk management principles;

– delegation of authority;

– the credit risk management program;

– counterparty credit risk management for trading and investment activities;

– aggregate limits, beyond which credit applications must be escalated to the Board for approval; and

– single name/aggregation exposures, beyond which exposures must be reported to the Board.

Global Risk Management develops the credit risk management framework and policies that detail, among other things, the credit risk rating systems and associated parameter estimates; the delegation of authority for granting credit; the calculation of the allowance for credit losses; and the authorization of write-offs.

Corporate and commercial credit exposures are segmented by country and by major industry group. Aggregate credit risk limits for each of these segments are also reviewed and approved annually by the Board. Portfolio management objectives and risk diversification are key factors in setting these limits.

Consistent with the Board-approved limits, borrower limits are set within the context of established lending criteria and guidelines for individual borrowers, particular industries, countries and certain types of lending, to ensure the Bank does not have excessive concentration in any single borrower, or related group of borrowers, particular industry sector or geographic region. Through the portfolio management process, loans may be syndicated to reduce overall exposure to a single name. For certain segments of the portfolio, credit derivative contracts

are also used to mitigate the risk of loss due to borrower default. Risk is also mitigated through the selective sale of loans.

Banking units and Global Risk Management regularly review the various segments of the credit portfolio on an enterprise-wide basis to assess the impact of economic trends or specific events on the performance of the portfolio, and to determine whether corrective action is required. These reviews include the examination of the risk factors for particular products, industries and countries. The results of these reviews are reported to the Risk Policy Committee and, when significant, to the Board.

Risk measures

The credit risk rating systems support the determination of key credit risk parameter estimates which measure credit and transaction risk. These risk parameters – probability of default, loss given default and exposure at default are transparent and may be replicated in order to provide consistency of credit adjudication, as well as minimum lending standards for each of the risk rating categories. The parameters are an integral part of enterprise-wide policies and procedures encompassing governance, risk management, and control structure, and are used in various internal and regulatory credit risk quantification calculations.

The Bank’s credit risk rating system is subject to a rigorous validation, governance and oversight framework. The objectives of this framework are to ensure that:

• Credit risk rating methodologies and parameters are appropriately designed and developed, independently validated, and regularly reviewed; and

• The review and validation processes represent an effective challenge to the design and development process.

Non-retail credit risk rating methodologies and parameters are reviewed and validated at least annually. Units within Global Risk Management are responsible for design and development, validation and review, and are functionally independent from the business units responsible for originating transactions. Within Global Risk Management, they are also independent from the units involved in risk rating approval and credit adjudication.

Internal credit risk ratings and associated risk parameters affect loan pricing, computation of the collective allowance for credit losses, and return on economic capital.

Corporate and commercial

Corporate and commercial credit exposure arises in Canadian Banking, International Banking, Global Wealth Insurance and Global Banking & Markets business lines.

Risk ratings

The Bank’s risk rating system utilizes internal grade (IG) codes – an 18 point scale used to differentiate the risk of default of borrowers, and the risk of loss on facilities. The general relationship between the Bank’s internal borrower IG codes and external agency ratings is shown in Table 32 on page 47.

IG codes are also used to define credit adjudication authority levels appropriate to the size and risk of each credit application. Lower-rated credits require increasingly more senior management involvement depending upon the aggregate exposure. Where the decision is beyond their authority levels, credit units will refer the request – with its recommendation – to a senior credit committee for adjudication. Senior credit committees also have defined authority levels and, accordingly, forward certain requests to the Risk Policy Committee. In certain cases, these must be referred to the Executive and Risk Committee of the Board of Directors.

Adjudication

Credit adjudication units within Global Risk Management analyze and evaluate all significant credit requests for corporate and commercial

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credit exposures, to ensure that risks are adequately assessed, properly approved, continually monitored and actively managed. 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:

• The borrower’s management;

• The borrower’s current and projected financial results and credit statistics;

• The industry in which the borrower operates;

• Economic trends; and

• Geopolitical risk.

Based on this assessment, a risk rating is assigned to the individual borrower or counterparty, using the Bank’s risk rating systems.

A separate risk rating is also assigned at the facility level, taking into consideration additional factors, such as security, seniority of claim, structure, term and any other forms of credit risk mitigation that affect the amount of potential loss in the event of a default of the facility. Security typically takes the form of charges over inventory, receivables, real estate, and operating assets when lending to corporate and commercial borrowers; and cash or treasuries for trading lines such as securities lending, repurchase transactions, and derivatives. The types of acceptable collateral, and related valuation processes are documented in risk management policies and manuals.

Other forms of credit risk mitigation include third party guarantees and, in the case of derivatives facilities, master netting agreements.

Internal borrower and facility risk ratings are assigned when a facility is first authorized, and are promptly re-evaluated and adjusted, if necessary, as a result of changes to the customer’s financial condition or business prospects. Re-evaluation is an ongoing process, and is done in the context of general economic changes, specific industry prospects, and event risks, such as revised financial projections, interim financial results and extraordinary announcements. Global Risk Management is the final arbiter of internal risk ratings.

The internal credit risk ratings are also considered as part of the Bank’s adjudication limits, as guidelines for hold levels are tied to different risk ratings. Single borrower limits are much lower for higher risk borrowers than low risk borrowers.

The credit adjudication process also uses a risk-adjusted return on equity profitability model to ensure that the client and transaction structure offers an appropriate return for a given level of risk. For the corporate portfolio, and the large borrowers in International, the Loan Portfolio Management Group reviews the profitability model results, together with external benchmarks, and provides an opinion on the relative return and pricing of each transaction above a minimum threshold.

Individual credit exposures are regularly monitored by both the business line units and Global Risk Management for any signs of deterioration. In addition, a review and risk analysis of each borrower is conducted annually, or more frequently for higher-risk borrowers. If, in the judgement of management, an account requires the expertise of specialists in workouts and restructurings, it will be transferred to a special accounts group for monitoring and resolution.

Credit Risk Mitigation – Collateral/Security

Traditional Non-Retail Products (e.g. Operating lines of Credit, Term Loans)

Collateral values are accurately identified at the outset and throughout the tenure of a transaction by using standard evaluation methodologies. Collateral valuation estimates are conducted at a frequency that is appropriate to the frequency by which the market value fluctuates, using the collateral type and the Borrower risk profile.

In addition, when it is not cost effective to monitor highly volatile collateral (e.g. accounts receivable, inventory), appropriate lending

margins are applied to compensate (e.g. accounts receivable are capped at 80% of value, inventory at 50%). The frequency of collateral valuations is also increased when early warning signals of a Borrower’s deteriorating financial condition are identified.

Borrowers are required to confirm adherence to covenants including confirmation of collateral values on a periodic basis, which are used by the Bank to provide early warning signals of collateral value deterioration. Periodic inspections of physical collateral are performed where appropriate and where reasonable means of doing so are available.

Bank procedures require verification including certification by Banking officers during initial, annual, and periodic reviews, that collateral values/margins/etc. have been assessed and, where necessary, steps have been taken to mitigate any decreased collateral values.

The Bank does not use automated valuation models (AVMs) for valuation purposes. Global Risk Management (GRM) performs its own valuations of companies based on various factors such as book value, discounted book value, enterprise value etc.

Commercial/Corporate Real Estate

New or updated appraisals are generally obtained at inception of a new facility, as well as during Loan Modifications, Loan Workouts and Troubled Debt Restructure. The primary reason for requiring a new appraisal is if, in the reasonable opinion of the Banking Execution Unit, or GRM Real Estate, there has been a material change in value. Additionally, none of the appraisal guidelines contained within the policies should dissuade the Bank from requesting an appraisal more frequently if an adverse change in market conditions, sponsorship, credit worthiness, of other underwriting assumptions is realized or expected.

Appraisals must be in writing and must contain sufficient information and analysis to support the Bank’s decision to make the loan. Moreover, in rendering an opinion of the property’s market value, third party appraisers are responsible for establishing the scope of work necessary to develop credible assignment results. The appraisal must meet the regulatory and industry requirements which, depending on the type of property being appraised, contain any or all of the following three approaches to value:

i. comparable sales approach

ii. replacement cost approach

iii. income approach

The appraiser should disclose the rationale for the omission of any valuation approach. Furthermore, the appraiser must disclose whether the subject property was physically inspected and whether anyone provided significant assistance to the person signing the appraisal report. The report should contain a presentation and explanation of the assumptions used in determining value under each of the above mentioned approaches.

Review of every appraisal is conducted by the banking units and GRM Real Estate to confirm that the appraisal identifies all of the relevant issues for the specific asset class, location and economic environment and incorporates all appropriate valuation methodologies and assumptions. In most cases, the banking units also include comparable properties in addition to what is included in the appraisal to further justify value.

When third party assessors are used, they must be accredited and satisfactory to the Bank. In addition, GRM validates any third party valuations via internal desktop estimates either based on comparables or discounted income valuations.

Traded products

Traded products are transactions such as derivatives, foreign exchange, commodities, repurchase/reverse repurchase agreements, and securities lending/borrowing. Credit risks arising from traded products cannot be determined with certainty at the outset, because during the tenure of a

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transaction the dollar value of the counterparty’s obligation to the Bank will be affected by changes in the capital markets (such as changes in stock prices, interest rates, and exchange rates). The Bank adjudicates credit exposures arising from transacting in traded products by considering their current fair value plus an additional component to reflect potential future changes in their mark-to-market value. The credit adjudication process also includes an evaluation of potential wrong way risk, which arises when the exposure to a counterparty is positively correlated to the probability of default of that counterparty.

Credit risk associated with traded products is managed within the same credit adjudication process as the lending business. The Bank considers the credit risk arising from lending activities, as well as the potential credit risk arising from transacting in traded products with that counterparty.

Credit risk mitigation – collateral/security

Derivatives are generally transacted under industry standard International Swaps and Derivatives Association (ISDA) master netting agreements, which allow for a single net settlement of all transactions covered by that agreement in the event of a default or early termination of the transactions. ISDA agreements are frequently accompanied by an ISDA Credit Support Annex (CSA), the terms of which may vary according to each party’s view of the other party’s creditworthiness. CSAs can require one party to post initial margin at the onset of each transaction. CSAs also allow for variation margin to be called if total uncollateralized mark-to-market exposure exceeds an agreed upon threshold. Such variation margin provisions can be one-way (only one party will ever post collateral) or bilateral (either party may post depending upon which party is in-the-money). The CSA will also detail the types of collateral that are acceptable to each party, and the haircuts that will be applied against each collateral type. The terms of the ISDA master netting agreements and CSAs are taken into consideration in the calculation of counterparty credit risk exposure.

For derivative transactions, investment grade counterparties account for approximately 92% of the credit risk. Approximately 63% of the Bank’s derivative counterparty exposures are to bank counterparties. After taking into consideration, where applicable, netting and collateral arrangements, no net credit risk amount arising from traded products transactions with any single counterparty was considered material to the financial position of the Bank as at October 31, 2014. No individual exposure to an investment grade bilateral counterparty exceeded $1,020 million and no individual exposure to a corporate counterparty exceeded $585 million.

Retail

Retail credit exposure arises in the Canadian Banking, International and Wealth Management business lines.

Adjudication

The decision-making process for retail loans ensures that credit risks are adequately assessed, properly approved, continually monitored and actively managed. Generally, credit decisions on consumer loans are processed by proprietary adjudication software and are based on risk ratings, which are generated using predictive credit scoring models.

The Bank’s credit adjudication and portfolio management methodologies are designed to ensure consistent underwriting and

early identification of problem loans. The Bank’s rigorous credit underwriting methodology and risk modeling in Canada is more customer focused than product focused. The Bank’s view is that a customer-centric approach provides better risk assessment than product-based approaches, and should result in lower loan losses over time. The adjudication system calculates the maximum debt for which a customer qualifies, allowing customers to choose the products that satisfy all of their credit needs. International Banking uses a similar approach to risk modeling, adjudication and portfolio management.

All credit scoring and policy changes are initiated by units within Global Risk Management that are functionally independent from the business units responsible for retail portfolios. Risk models and parameters are also subject to independent validation and review from the units involved in the design and development of models. The review process includes referral to the appropriate Senior Credit Committee for approval, where required. Consumer credit portfolios are reviewed monthly to identify emerging trends in loan quality and to assess whether corrective action is required.

Risk ratings

The Bank’s consumer risk rating systems are oriented to borrower or transaction risk. Each retail exposure is assigned a risk grade based on the customer’s credit history and/or internal credit score. The Bank’s automated risk rating systems assess the ongoing credit-worthiness of individual customers on a monthly basis. This process provides for meaningful and timely identification and management of problem loans.

The overall risk ratings system under AIRB approach is subject to regular review with ongoing performance monitoring of key components. Risk model validations are conducted independently from the areas responsible for rating system development and implementation, to ensure effective independence.

Customer behavior characteristics which are used as inputs within the Bank’s Basel III AIRB models are consistent with those used by the Bank’s Canadian consumer risk rating systems. The International portfolios are subject to the Standardized approach at this time.

Credit risk mitigation – collateral/security

The property values for residential real estate secured exposures are confirmed at origination through either an AVM or a full appraisal (in-person inspection). The appraisal is completed by a third party, Bank approved appraiser. For monitoring of material portfolios, property values are indexed quarterly to house prices. For loan impairment within the material portfolios, residential property values are re-confirmed using third party AVM’s.

Where AVM values are used, these AVM values are subject to routine validation through a continuous random sampling process that back-tests AVM values against available property appraisals (primarily third party AVMs). Where third party appraisals are obtained, the Bank relies on the professional industry accreditation of the appraiser. Samples of approved appraisal reports are reviewed by the Bank’s senior appraisers to ensure consistent appraisal quality and satisfactory appraisal values. The third party appraisers are selected from a pre-approved list of Bank-vetted appraisers.

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Market Risk

Market risk is the risk of loss from changes in market prices and rates (including interest rates, credit spreads, equity prices, foreign exchange rates and commodity prices), the correlations between them, and their levels of volatility. Below is an index of market risk disclosures:

  Index of all market risk disclosures

Index	Page		Tables and charts	Page
Market risk factors		76
Interest rate risk		76
Credit spread risk		76
Foreign currency risk		76
Equity risk		76
Commodity risk		76
Market risk governance		76
Risk measurement summary		76
Value at risk		76
Incremental risk charge and the comprehensive risk measure		76
Stress testing		77
Sensitivity analysis		77
Gap analysis		77
Validation of market risk models		77
Non-trading market risk
Interest rate risk		77-78	C44 Interest rate gap		78
			T51 Interest rate gap		78
			T52 Structural interest rate sensitivity		78
Foreign currency risk		78
Investment portfolio risks		78
Trading market risk		78-79	T53 Total one-day VaR by risk factor		79
			C45 Trading revenue distribution		79
			C46 Daily trading revenue vs. VaR		79
Market risk linkage to balance sheet		80	T54 Market risk linkage to balance sheet of the Bank		80
Derivative instruments and structured transactions		80
Derivatives		80
Structured transactions		80
European exposures		31-33	T19 European exposure		31
			T20 Funded exposures		32
			T21 Bank’s exposure distribution by country		32
Market risk		49	T37 Total market risk capital		49
Financial instruments		52-53	T40 Mortgage-backed securities		52
			T41 Collateralized debt obligations (CDOs)		53

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Market risk factors

Interest rate risk

The risk of loss due to changes in the level and/or the volatility of interest rates. This risk affects instruments such as, but not limited to, debt securities, loans, mortgages, deposits and derivatives.

Interest rate risks are managed through sensitivity, gap, stress testing, annual income and VaR limits and mitigated through portfolio diversification and hedges using interest rate derivatives and debt securities.

Credit spread risk

The risk of loss due to changes in the market price and volatility of credit, or the creditworthiness of issuers. This risk is mainly concentrated in loan and debt securities portfolios. Risk is managed through sensitivity, jump-to-default, stress testing and VaR limits and mitigated through hedges using credit derivatives.

Foreign currency risk

The risk of loss resulting from changes in currency exchange rates and exchange rate volatility. Foreign currency denominated debt and other securities as well as future cash flows in foreign currencies are exposed to this type of risk. Maximum net trading position, sensitivity, stress testing and VaR limits are used to manage foreign currency exposures. Risk is managed through hedges using foreign exchange positions or derivatives.

Equity risk

The risk of loss due to changes in prices, volatility or any other equity related risk factor of individual equity or equity linked securities. This risk affects instruments such as, but not limited to, equities, exchange traded funds, mutual funds, derivatives and other equity linked products. Risk is managed through sensitivity, stress testing and VaR limits and mitigated through hedges using physical equity and derivatives instruments.

Commodity risk

The risk of loss due to changes in prices or volatility of precious metal, base metal, energy and agriculture products. Both commodity physical and derivatives positions are exposed to this risk. Risk is managed through aggregate and net trading position, sensitivity, stress testing and VaR limits and mitigated through hedges using physical commodity and derivative positions.

The following maps risk factors to trading and non-trading activities:

Non-trading
Funding	Investments
Interest rate risk Foreign currency risk	Interest rate risk Credit spread risk Foreign currency risk Equity risk
Trading
Interest rate risk Credit spread risk Foreign currency risk Equity risk Commodity risk

Market Risk Governance

Overview

The Board of Directors reviews and approves market risk policies and limits annually. The Bank’s Liability Committee (LCO) and Market Risk Management and Policy Committee (MRMPC) oversee the application of the framework set by the Board, and monitor the Bank’s market risk exposures and the activities that give rise to these exposures. The

MRMPC establishes specific operating policies and sets limits at the product, portfolio, business unit and business line levels, and for the Bank in total. Limits are reviewed at least annually.

Global Risk Management provides independent oversight of all significant market risks, supporting the MRMPC and LCO with analysis, risk measurement, monitoring, reporting, proposals for standards and support for new product development. To ensure compliance with policies and limits, market risk exposures are independently monitored on a continuing basis, either by Global Risk Management, the back offices, or Finance. They provide senior management, business units, the LCO, and the MRMPC with a series of daily, weekly and monthly reports of market risk exposures by business line and risk type.

The Bank uses a variety of metrics and models to measure and control market risk exposures. These measurements are selected based on an assessment of the nature of risks in a particular activity. The principal measurement techniques are Value at Risk (VaR), Incremental Risk Charge, Comprehensive Risk Measure, stress testing, sensitivity analysis and gap analysis. The use and attributes of each of these techniques are noted in the Risk Measurement Summary.

Risk Measurement Summary

Value at risk (VaR)

VaR is a statistical method of measuring potential loss due to market risk based upon a common confidence interval and time horizon. The Bank calculates VaR daily using a 99% confidence level, and a one-day holding period for its trading portfolios. This means that once in every 100 days, the trading positions are expected to lose more than the VaR estimate. VaR has two components: general market risk and debt specific risk. The Bank calculates general market risk VaR using historical simulation based on 300 days of market data. Obligor specific risk on debt instruments and credit derivatives not captured in general market risk VaR is calculated through the debt specific risk VaR, which uses a Monte Carlo simulation. In addition, the Bank calculates a Stressed VaR measure which follows the same basic methodology as VaR but is calibrated to a one year stress period. The stress period is determined based on analysis of the trading book’s risk profile against historical market data. Stressed VaR complements VaR in that it evaluates the impact of market volatility that is outside the VaR’s historical set.

All material risk factors are captured in VaR. Where historical data is not available, proxies are used to establish the relevant volatility for VaR and Stressed VaR until sufficient data is available. Changes in VaR between reporting periods are generally due to changes in positions, volatilities and/or correlations between asset classes. VaR is also used to evaluate risks arising in certain funding and investment portfolios. Backtesting is also an important and necessary part of the VaR process. The Bank backtests the actual trading profit and loss against the VaR result to validate the quality and accuracy of the Bank’s VaR model. The Board reviews VaR and backtesting results quarterly.

Incremental Risk Charge (IRC) and the Comprehensive Risk

Measure (CRM)

Basel market risk capital requirements include the Incremental Risk Charge (IRC) and the Comprehensive Risk Measure (CRM) which capture the following:

Default risk: This is the potential for direct losses due to an obligor’s (equity/bond issuer or counterparty) default as well as the potential for indirect losses that may arise from a default event.

Credit migration risk: This is the potential for direct losses due to a credit rating downgrade or upgrade as well as the potential for indirect losses that may arise from a credit migration event.

A Monte Carlo model is used to perform default and migration simulations for the obligors underlying credit derivative and bond portfolios. In addition, for CRM in correlation trading there is a market simulation model to capture historical price movements. Both IRC and CRM are calculated at the 99.9th percentile with a one year liquidity horizon. The Board reviews IRC and CRM results quarterly.

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Stress testing

A limitation of VaR and Stressed VaR is that they only reflect the recent history of market volatility and a specific one year stress period, respectively. To complement these measures, stress testing examines the impact that abnormally large changes in market factors and periods of prolonged inactivity might have on trading portfolios. Stress testing scenarios are designed to include large shifts in risk factors as well as historical and theoretical multi risk market events. Historical scenarios capture severe movements over periods that are significantly longer than the one-day holding period captured in VaR, such as the 2008 Credit Crisis or the 1998 Russian Financial Crisis. Similar to Stressed VaR, stress testing provides management with information on potential losses due to tail events. In addition, the results from the stress testing program are used to verify that the Bank’s market risk capital is sufficient to absorb these potential losses.

The Bank subjects its trading portfolios to a series of daily, weekly and monthly stress tests. The Bank also evaluates risk in its investment portfolios monthly, using stress tests based on risk factor sensitivities and specific market events. The stress testing program is an essential component of the Bank’s comprehensive risk management framework which complements the VaR methodology and other risk measures and controls employed by the Bank. The Board reviews stress testing results quarterly.

Sensitivity analysis

In trading portfolios, sensitivity analysis is used to measure the effect of changes in risk factors, including prices and volatility, on financial products and portfolios. These measures apply across product types and geographies and are used for limit monitoring and management reporting.

In non-trading portfolios, sensitivity analysis assesses the effect of changes in interest rates on current earnings and on the economic value of shareholders’ equity. It is applied globally to each of the major currencies within the Bank’s operations. The Bank’s sensitivity analysis for limit and disclosure purposes is measured through positive and negative parallel shifts in the underlying interest rate curves. The Bank also performs sensitivity analysis using various non-parallel interest rate curve shifts, for example: curve steepeners, curve flatteners and curve twists. The Board reviews sensitivity results quarterly.

Gap analysis

Gap analysis is used to assess the interest rate sensitivity of re-pricing mismatches in the Bank’s non-trading operations. Under gap analysis, interest rate sensitive assets, liabilities and off-balance sheet instruments are assigned to defined time periods based on expected re-pricing dates. Products with a contractual maturity are assigned an interest rate gap term based on the shorter of the contractual maturity date and the next re-pricing date. Products with no contractual maturity are assigned an interest rate gap based on observed historical consumer behaviour. The Board reviews gap results quarterly.

Validation of market risk models

Prior to the implementation of new market risk models, rigorous validation and testing is conducted. Validation is conducted when the model is initially developed and when any significant changes are made to the model. The models are also subject to ongoing validation, the frequency of which is determined by model risk ratings. Models may also be triggered for earlier revalidation when there have been significant structural changes in the market or changes to the composition of the portfolio. Model validation includes backtesting, and additional analysis such as:

• Theoretical review or tests to demonstrate whether assumptions made within the internal model are appropriate;

• Impact tests including stress testing that would occur under historical and hypothetical market conditions

• The use of hypothetical portfolios to ensure that the model is able to capture concentration risk that may arise in an undiversified portfolio.

The validation process is governed by the Bank’s Model Risk Management Policy.

Non-trading market risk

Funding and investment activities

Market risk arising from the Bank’s funding and investment activities is identified, managed and controlled through the Bank’s asset-liability management processes. The Liability Committee meets weekly to review risks and opportunities, and evaluate performance including the effectiveness of hedging strategies.

Interest rate risk

Interest rate risks in the non-trading portfolios are predominately driven by the interest rate mismatch (i.e. repricing frequency) in the asset and liability exposures. The largest exposures in the non-trading book arise from retail banking operations in Canada. The largest component of this risk is from positions related to the retail mortgage book. Table 51 shows a summary of the interest rate gaps for the Bank’s non-trading positions.

Interest rate risk arising from the Bank’s lending, funding and investment activities is managed in accordance with Board-approved policies and global limits, which are designed to control the risk to net interest income and economic value of shareholders’ equity. The annual income limit measures the effect of a specified change in interest rates on the Bank’s annual net interest income over the next twelve months, 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. These limits are set according to the documented risk appetite of the Bank. Board-level limit utilization is reported to both the Liability Committee and the Board on a regular basis. Any limit exceptions are reported according to the Limit Monitoring and Compliance Policy of the Bank.

Net interest income and the economic value of equity result from the differences between yields earned on the Bank’s non-trading assets and interest rate paid on its liabilities. The difference in yields partly reflects mismatch between the maturity and re-pricing characteristics of the assets and liabilities. This mismatch is inherent in the non-trading operations of the Bank and exposes it to adverse changes in the level of interest rates. The Liability Committee provides strategic direction for the management of structural interest rate risk within the risk appetite framework authorized by the Board of Directors. The asset/liability management strategy is executed by Group Treasury with the objective of enhancing net interest income within established risk tolerances.

Gap analysis, simulation modeling, sensitivity analysis and VaR are used to assess exposures and for limit monitoring and planning purposes. The Bank’s interest rate risk exposure calculations are generally based on the earlier of contractual re-pricing or maturity of on-balance sheet and off-balance sheet assets and liabilities, although certain assets and liabilities such as credit cards and deposits without a fixed maturity are assigned a maturity profile based on the longevity of the exposure. Expected prepayments from loans and cashable investment products are also incorporated into the exposure calculations. Common shareholders’ equity is assumed to be non-interest rate sensitive.

Table 52 shows the after-tax impact of an immediate and sustained 100 basis point shock over a one year period on annual income and economic value of shareholder’s equity. The interest rate sensitivities tabulated are based on a static balance sheet. There are no assumptions made for management actions that may mitigate risk. Based on the Bank’s interest rate positions at year-end 2014, an immediate and sustained 100 basis point rise in interest rates across all

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MANAGEMENT’S DISCUSSION AND ANALYSIS

currencies and maturities, would increase after-tax net income by approximately $179 million over the next 12 months. During fiscal 2014, this measure ranged between $98 million and $183 million.

This same increase in interest rates would result in an after-tax decrease in the present value of the Bank’s net assets of approximately $498 million. During fiscal 2014, this measure ranged between $495 million and $586 million. The directional sensitivity of these two key metrics is largely determined by the difference in time horizons (annual income captures the impact over the next twelve months only, whereas economic value considers the potential impact of interest rate changes on the present value of all future cash flows). The annual income and economic value results are compared to the authorized Board limits. There were no limit breaches in the reporting period.

C44 Interest rate gap

$ billions, one-year interest rate gap

T51 Interest rate gap

Interest rate sensitivity position(1) As at October 31, 2014 ($ billions)	Within 3 months		3 to 12 months			Over 1 year		Non- interest rate sensitive			Total
Canadian dollars
Assets	$	230.2	$	42.4		$	127.2	$	0.9		$	400.7
Liabilities	$	220.0	$	58.6		$	113.1	$	9.0		$	400.7
Gap	$	10.2	$	(16.2	)	$	14.1	$	(8.1	)	$	–
Foreign currencies
Assets	$	305.7	$	24.5		$	39.3	$	35.5		$	405.0
Liabilities	$	285.3	$	29.1		$	35.4	$	55.2		$	405.0
Gap	$	20.4	$	(4.6	)	$	3.9	$	(19.7	)	$	–
Total
Gap	$	30.6	$	(20.8	)	$	18.0	$	(27.8	)	$	–
As at October 31, 2013
Gap	$	16.5	$	(16.2	)	$	23.0	$	(23.3	)	$	–

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

T52 Structural interest sensitivity⁽¹⁾

	2014						2013
As at October 31 ($ millions)	Economic Value of Shareholders’ Equity			Annual Income			Economic Value of Shareholders’ Equity			Annual Income
After-Tax Impact of
100bp increase in rates
Non-trading risk	$	(498	)	$	179		$	(572	)	$	97
100bp decrease in rates
Non-trading risk	$	474		$	(87	)	$	420		$	(64	)

(1) Corresponding with the current low interest rate environment, the Annual Income sensitivity of a 100bp decrease in rates for currencies with rates below 1% are measured using a 25 bps decline. Prior period amounts have been restated to reflect this change.

Foreign currency risk

Foreign currency risk in the Bank’s unhedged funding and investment activities arises primarily from the Bank’s net investments in foreign operations as well as foreign currency earnings in its domestic and remitting foreign branch operations.

The Bank’s foreign currency exposure to its net investments in foreign operations is controlled by a Board-approved limit. This limit considers factors such as potential volatility to shareholders’ equity as well as the potential impact on capital ratios from foreign exchange fluctuations. On a quarterly basis, the Liability Committee reviews the Bank’s foreign currency net investment exposures and determines the appropriate

hedging strategies. These may include funding the investments in the same currency or using other financial instruments, including derivatives.

Foreign currency translation gains and losses from net investments in foreign operations, net of related hedging activities and tax effects, are recorded in accumulated other comprehensive income within shareholders’ equity. However, the Bank’s regulatory capital ratios are not materially affected by these foreign exchange fluctuations because the risk-weighted assets of the foreign operations tend to move in a similar direction.

The Bank is also subject to foreign currency translation risk on the earnings of its domestic and remitting foreign branch operations. The Bank forecasts foreign currency revenues and expenses, which are primarily denominated in U.S. dollars, over a number of future fiscal quarters. The Liability Committee also assesses economic data trends and forecasts to determine if some or all of the estimated future foreign currency revenues and expenses should be hedged. Hedging instruments normally include foreign currency spot and forward contracts, as well as foreign currency options and swaps. Certain of these economic hedges may not qualify for hedge accounting resulting in a potential for a mismatch in the timing of the recognition of economic hedge gains/losses and the underlying foreign earnings translation gains/losses. In accordance with IFRS, foreign currency translation gains and losses relating to monetary and non-monetary items are recorded directly in earnings.

As at October 31, 2014, a one percent increase in the Canadian dollar against all currencies in which the Bank operates decreases the Bank’s before-tax annual earnings by approximately $49 million in the absence of hedging activity, primarily from exposure to U.S. dollars. A similar change in the Canadian dollar as at October 31, 2014 would increase the unrealized foreign currency translation losses in the accumulated other comprehensive income section of equity by approximately $260 million, net of hedging.

Investment portfolio risks

The Bank holds investment portfolios to meet liquidity and statutory reserve requirements and for investment purposes. These portfolios expose the Bank to interest rate, foreign currency, credit spread and equity risks. Debt investments primarily consist of government, agency, and corporate bonds. Equity investments include common and preferred shares, as well as a diversified portfolio of third-party managed funds. The majority of these securities are valued using prices obtained from external sources. These portfolios are controlled by a Board-approved policy and limits.

Trading market risk

The Bank’s policies, processes and controls for trading activities are designed to achieve a balance between pursuing profitable trading opportunities and managing earnings volatility within a framework of sound and prudent practices. Trading activities are primarily customer focused, but also include a proprietary component.

Market risk arising from the Bank’s trading activities is managed in accordance with Board-approved policies, and aggregate VaR and stress testing limits. The quality of the Bank’s VaR is validated by regular backtesting analysis, in which the VaR is compared to both theoretical profit and loss results based on fixed end of day positions and actual reported profit and loss. A VaR at the 99% confidence interval is an indication of a 1% probability that losses will exceed the VaR if positions remain unchanged during the next business day. Trading positions are however managed dynamically and, as a result, actual profit/loss backtesting exceptions are uncommon. During fiscal 2014, there was one theoretical profit/loss exception on October 14 due to declines in Canadian and US interest rates, and widening credit spreads. There were no actual profit/loss exceptions.

In fiscal 2014, the total one-day VaR for trading activities averaged $20.8 million, compared to $17.4 million in 2013. The increase was due to both higher general market risk and debt specific risk resulting from increased exposure in the Global Fixed Income portfolio.

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MANAGEMENT’S DISCUSSION AND ANALYSIS    |    RISK MANAGEMENT

T53 Total one-day VaR by risk factor

	2014										2013
($ millions)	Year end			Avg			High		Low		Year end			Avg			High		Low
Credit Spread plus Interest Rate	$	8.6		$	13.1		$	22.1	$	8.2	$	10.9		$	10.4		$	15.5	$	7.0
Credit Spread		8.1			9.6			12.4		7.6		7.6			8.0			10.3		5.6
Interest Rate		4.2			9.3			18.1		4.2		7.4			7.6			14.8		4.4
Equities		2.2			2.6			5.9		1.5		2.5			2.6			6.2		0.9
Foreign Exchange		0.9			0.9			1.9		0.4		1.5			1.2			2.8		0.4
Commodities		3.2			2.8			5.5		1.6		3.7			3.0			7.7		1.2
Debt Specific		20.4			15.8			22.2		11.1		14.5			13.8			17.3		10.2
Diversification Effect		(12.8	)		(14.5	)		N/A		N/A		(15.9	)		(13.6	)		N/A		N/A
All-Bank VaR	$	22.5		$	20.8		$	27.3	$	16.0	$	17.2		$	17.4		$	21.8	$	13.2
All-Bank Stressed VaR	$	38.7		$	32.9		$	40.3	$	25.3	$	33.1		$	34.3		$	41.3	$	28.2

Stressed VaR Results

The Bank also calculates a Stressed VaR which uses the same basic methodology as the VaR. However, Stressed VaR is calculated using market volatility from a one-year time period identified as stressful, given the risk profile of the trading portfolio. The current period is the 2008/2009 credit crisis surrounding the collapse of Lehman Brothers. In fiscal 2014, the total one-day Stressed VaR for trading activities averaged $32.9 million compared to $34.3 million in 2013. The decrease was in part due to positioning within the trading portfolio which reduced exposure to large market movements such as those experienced in the stressed period.

Basel market risk capital requirements include the Incremental Risk Charge (IRC) and the Comprehensive Risk Measure (CRM) which capture obligor default and migration risk. On October 31, 2014 the market risk capital requirements for IRC and CRM were $396 million and $130 million respectively. The CRM surcharge was $139 million.

Description of Trading Revenue Components and graphical comparison of VaR to daily P&L

Chart 45 shows the distribution of daily trading revenue for fiscal 2014 and Chart 46 compares that distribution to daily VaR results. Trading revenue includes changes in portfolio value as well as the impact of new trades, commissions, fees and reserves. Some components of revenue which are calculated less frequently are pro-rated. Trading revenue averaged $6.0 million per day, compared to $6.2 million for 2013. Revenue was positive on 95% of trading days during the year, lower than 2013. During the year, the largest single day trading loss was $7.5 million which occurred on October 15, 2014, and was lower than the total VaR of $24.1 million on the same day.

C45 Trading revenue distribution

Year ended October 31, 2014

C46 Daily trading revenue vs. VaR

$ millions, November 1, 2013 to October 31, 2014

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Market risk linkage to Consolidated Statement of Financial Position

Trading assets and liabilities are marked to market daily and included in traded risk measures such as VaR. Derivatives risk related to Global Banking & Market activities is captured under trading risk measures while derivatives used in asset/liability management are in the non-traded risk category. A comparison of Consolidated Statement of Financial Position items which are covered under the trading and non-trading risk measures is provided in Table 54 below.

T54 Market risk linkage to Consolidated Statement of Financial Position of the Bank

	Market Risk Measure
As at Oct 31, 2014 ($ millions)	Consolidated Statement of Financial Position		Traded Risk		Non-traded risk		Not subject to market risk		Primary risk sensitivity of non-traded risk
Precious metals	$	7,286	$	7,286	$	–	$	–		n/a
Trading assets		113,248		113,248		–		–		n/a
Financial instruments designated at fair value through profit or loss		111		–		111		–		Interest rate
Derivative financial instruments		33,439		31,401		2,038		–		Interest rate, FX, equity
Investment securities		38,662		–		38,662		–		Interest rate, equity
Loans		424,309		–		424,309		–		Interest rate, FX
Assets not subject to market risk(1)		188,611		–		–		188,611		n/a
Total assets	$	805,666	$	151,935	$	465,120	$	188,611
Deposits	$	554,017	$	–	$	526,929	$	27,088		Interest rate, FX, equity
Financial instruments designated at fair value through profit or loss		465		–		465		–		Interest rate, equity
Obligations related to securities sold short		27,050		27,050		–		–		n/a
Derivative financial instruments		36,438		34,992		1,446		–		Interest rate, FX
Trading liabilites(2)		4,571		4,571		–		–		n/a
Pension and other benefit liabilities		2,095		–		2,095		–		Interest rate, credit spread
Liabilities not subject to market risk(3)		131,819		–		–		131,819		n/a
Total liabilities	$	756,455	$	66,613	$	530,935	$	158,907

(1) Includes goodwill, intangibles, other assets and securities purchased under resale agreements and securities borrowed.

(2) Gold and silver certificates and bullion included in other liabilities.

(3) Includes obligations related to securities sold under repurchase agreements and securities lent and other liabilities.

	Market Risk Measure
As at Oct 31, 2013 ($ millions)	Consolidated Statement of Financial Position		Traded Risk		Non-traded risk		Not subject to market risk		Primary risk sensitivity of non-traded risk
Precious metals	$	8,880	$	8,880	$	–	$	–		n/a
Trading assets		96,489		96,489		–		–		n/a
Financial instruments designated at fair value through profit or loss		106		–		106		–		Interest rate
Derivative financial instruments		24,503		23,147		1,356		–		Interest rate, FX, equity
Investment securities		34,319		–		34,319		–		Interest rate, equity
Loans		402,215		–		402,215		–		Interest rate, FX
Assets not subject to market risk(1)		177,132		–		–		177,132		n/a
Total assets	$	743,644	$	128,516	$	437,996	$	177,132
Deposits	$	517,887	$	–	$	495,456	$	22,431		Interest rate, FX, equity
Financial instruments designated at fair value through profit or loss		174		–		174		–		Interest rate
Obligations related to securities sold short		24,977		24,977		–		–		n/a
Derivative financial instruments		29,267		28,262		1,005		–		Interest rate, FX
Trading liabilites(2)		3,622		3,622		–		–		n/a
Pension and other benefit liabilities		1,680		–		1,680		–		Interest rate, credit spread
Liabilities not subject to market risk(3)		120,650		–		–		120,650		n/a
Total liabilities	$	698,257	$	56,861	$	498,315	$	143,081

(1) Includes goodwill, intangibles, other assets and securities purchased under resale agreements and securities borrowed.

(2) Gold and silver certificates and bullion included in other liabilities.

(3) Includes obligations related to securities sold under repurchase agreements and securities lent and other liabilities.

Derivative instruments and structured transactions

Derivatives

The Bank uses derivatives to meet customer needs, generate revenues from trading activities, manage market and credit risks arising from its lending, 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. Forward contracts, swaps and options are used to manage foreign currency risk exposures. Credit exposures in its lending and investment books are managed using credit default swaps. As a dealer, the Bank markets a range of derivatives to its customers, including interest rate, foreign exchange, equity, commodity and credit derivatives.

Market risk arising from derivatives transactions is subject to the control, reporting and analytical techniques noted above. Additional controls and analytical techniques are applied to address certain market-related risks that are unique to derivative products.

Structured transactions

Structured transactions are specialized transactions that may involve combinations of cash, other financial assets and derivatives designed to meet the specific risk management or financial requirements of customers. These transactions are carefully evaluated by the Bank to identify and address the credit, market, legal, tax, reputational and other risks, and are subject to a cross-functional review and sign-off by trading management, Global Risk Management, Taxation, Finance and Legal departments. Large structured transactions are also subject to review by senior risk management committees and evaluated in accordance with the procedures described below in Reputational Risk.

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MANAGEMENT’S DISCUSSION AND ANALYSIS    |    RISK MANAGEMENT

The market risk in these transactions is usually minimal, and returns are earned by providing structuring expertise and by taking credit risk. Once executed, structured transactions are subject to the same ongoing credit reviews and market risk analysis as other types of derivatives transactions. This review and analysis includes careful monitoring of the quality of the reference assets, and ongoing valuation of the derivatives and reference assets.

Liquidity Risk

Liquidity risk is the risk that the Bank is unable to meet its financial obligations in a timely manner at reasonable prices. Financial obligations include liabilities to depositors, payments due under derivative contracts, settlement of securities borrowing and repurchase transactions, and lending and investment commitments.

Effective liquidity risk management is essential to maintain the confidence of depositors and counterparties, manage the Bank’s cost of funds and to support core business activities, even under adverse circumstances.

Liquidity risk is managed within the framework of policies and limits that are approved by the Board of Directors. The Board receives reports on risk exposures and performance against approved limits. The Liability Committee (LCO) provides senior management oversight of liquidity risk and meets weekly to review the Bank’s liquidity profile.

The key elements of the liquidity risk framework are:

• Measurement and modeling – the Bank’s liquidity model measures and forecasts cash inflows and outflows, including off-balance sheet cash flows on a daily basis. Risk is managed by a set of key limits over the maximum net cash outflow by currency over specified short-term horizons (cash gaps), a minimum level of core liquidity, and liquidity stress tests.

• Reporting – Global Risk Management provides independent oversight of all significant liquidity risks, supporting the LCO with analysis, risk measurement, stress testing, monitoring and reporting.

• Stress testing – the Bank performs liquidity stress testing on a regular basis, to evaluate the effect of both industry-wide and Bank-specific disruptions on the Bank’s liquidity position. Liquidity stress testing has many purposes including:

– Helping the Bank to understand the potential behavior of various on-balance sheet and off-balance sheet positions in circumstances of stress; and

– Based on this knowledge, facilitating the development of risk mitigation and contingency plans.

The Bank’s liquidity stress tests consider the effect of changes in funding assumptions, depositor behavior and the market value of liquid assets. The Bank performs industry standard stress tests, the results of which are reviewed at senior levels of the organization and are considered in making liquidity management decisions.

• Contingency planning – the Bank maintains a liquidity contingency plan that specifies an approach for analyzing and responding to actual and potential liquidity events. The plan outlines an appropriate governance structure for the management and monitoring of liquidity events, processes for effective internal and external communication, and identifies potential counter measures to be considered at various stages of an event. A contingency plan is maintained both at the parent level as well as for major subsidiaries.

• Funding diversification – the Bank actively manages the diversification of its deposit liabilities by source, type of depositor, instrument, term and geographic market.

• Core liquidity – the Bank maintains a pool of highly liquid, unencumbered assets that can be readily sold or pledged to secure borrowings under stressed market conditions or due to Bank-specific events. The Bank also maintains liquid assets to support its intra-day settlement obligations in payment, depository and clearing systems.

Liquid assets

Liquid assets are a key component of liquidity management and the Bank holds these types of assets in sufficient quantity to meet potential needs for liquidity management.

Liquid assets can be used to generate cash either through sale, repurchase transactions or other transactions where these assets can be used as collateral to generate cash, or by allowing the asset to mature. Liquid assets include deposits at central banks, deposits with commercial banks, call and other short-term loans, marketable securities, precious metals and securities received as collateral from securities financing and derivative transactions. Liquid assets do not include borrowing capacity from central bank facilities.

Marketable securities are securities traded in active markets, which can be converted to cash within a timeframe that is in accordance with the Bank’s liquidity management framework. Assets are assessed considering a number of factors, including the time it would take to convert them to cash.

Marketable securities included in liquid assets are comprised of securities specifically held as a liquidity buffer or for asset liability management purposes; trading securities, which are primarily held by Global Banking & Markets; and collateral received for securities financing and derivative transactions.

The Bank maintains large holdings of unencumbered liquid assets to support its operations. These assets generally can be sold or pledged to meet the Bank’s obligations. As at October 31, 2014, unencumbered liquid assets were $183 billion, compared to $170 billion as at October 31, 2013. The mix of these liquid assets between securities and other liquid assets, which include cash, deposits with banks and precious metals was 68% and 32%, respectively (October 31, 2013 – 68% and 32%, respectively). The increase in liquid assets was mainly attributable to an increase in cash and deposits with central banks and unencumbered liquid securities, including mortgage-backed securities which are classified as residential mortgage loans for accounting purposes.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

The carrying values outlined in the liquid asset table are consistent with the carrying values in the Bank’s Statement of Financial Position as at October 31, 2014. The liquidity value of the portfolio will vary under different stress events as different assumptions are used for the stress scenarios.

The Bank’s liquid asset pool is summarized in the following table:

T55 Liquid asset pool

							Encumbered liquid assets				Unencumbered liquid assets
As at October 31, 2014 ($ millions)	Bank-owned liquid assets		Securities received as collateral from securities financing and derivative transactions		Total liquid assets		Pledged as collateral		Other(1)		Available as collateral		Other
Cash and deposits with central banks	$	49,507		–	$	49,507		–	$	5,262	$	44,245		–
Deposits with financial institutions		7,223		–		7,223		–		1,441		5,782		–
Precious metals		7,286		–		7,286		–		43		7,243		–
Securities
Canadian government obligations		31,551		17,595		49,146		27,059		–		22,087		–
Foreign government obligations		36,959		41,405		78,364		61,380		–		16,984		–
Other securities		55,868		44,195		100,063		52,586		–		47,477		–
Loans
NHA mortgage-backed securities(2)		42,286		–		42,286		3,686		–		38,600		–
Call and short loans		976		–		976		–		–		976		–
Total	$	231,656	$	103,195	$	334,851	$	144,711	$	6,746	$	183,394		–
							Encumbered liquid assets				Unencumbered liquid assets
As at October 31, 2013 ($ millions)	Bank-owned liquid assets		Securities received as collateral from securities financing and derivative transactions		Total liquid assets		Pledged as collateral		Other(1)		Available as collateral		Other
Cash and deposits with central banks	$	44,097	$	–	$	44,097	$	–	$	7,509	$	36,588	$	–
Deposits with financial institutions		9,240		–		9,240		–		1,626		7,614		–
Precious metals		8,880		–		8,880		–		54		8,826		–
Securities
Canadian government obligations		28,667		8,231		36,898		23,007		–		13,891		–
Foreign government obligations		30,903		38,327		69,230		53,809		–		15,421		–
Other securities		49,573		34,808		84,381		32,292		–		52,089		–
Loans
NHA mortgage-backed securities(2)		45,546		–		45,546		10,810		–		34,736		–
Call and short loans		887		–		887		–		–		887		–
Total	$	217,793	$	81,366	$	299,159	$	119,918	$	9,189	$	170,052	$	–

(1) Assets which are restricted from being used to secure funding for legal or other reasons.

(2) These mortgage-backed securities, which are available for sale, are reported as residential mortgage loans on the balance sheet.

82      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    RISK MANAGEMENT

A summary of total unencumbered liquid assets held by the parent bank and its branches, and domestic and foreign subsidiaries, is presented below:

T56 Total unencumbered liquid assets held by the parent bank and its branches, and domestic and foreign subsidiaries

As at October 31 ($ millions)	2014		2013
Bank of Nova Scotia (Parent)	$	141,999	$	126,376
Bank domestic subsidiaries		23,583		21,288
Bank foreign subsidiaries		17,812		22,388
Total	$	183,394	$	170,052

The Bank’s liquidity pool is held across major currencies, mostly comprised of Canadian and U.S. dollars holdings. As shown above, the vast majority 90% of liquid assets are held by the Bank’s corporate office, branches of the Bank, and Canadian subsidiaries of the Bank. To the extent a liquidity reserve held in a foreign subsidiary of the bank is required for regulatory purposes, it is assumed to be unavailable to the rest of the Group. Other liquid assets held by a foreign subsidiary are assumed to be available only in limited circumstances. The Bank monitors and ensures compliance in relation to minimum levels of liquidity required and assets held within each entity, and/or jurisdiction.

Encumbered assets

In the course of the Bank’s day-to-day activities, securities and other assets are pledged to secure an obligation, participate in clearing or settlement systems, or operate in a foreign jurisdiction. Securities may also be pledged under repurchase agreements. A summary of encumbered and unencumbered assets is presented below:

T57 Asset encumbrance

								Encumbered assets				Unencumbered assets
As at October 31, 2014 ($ millions)	Bank-owned assets		Securities received as collateral from securities financing and derivative transactions			Total assets		Pledged as collateral		Other(1)		Available as collateral(2)		Other(3)
Cash and deposits with central banks	$	49,507	$	–		$	49,507	$	–	$	5,262	$	44,245	$	–
Deposits with financial institutions		7,223		–			7,223		–		1,441		5,782		–
Precious metals		7,286		–			7,286		–		43		7,243		–
Liquid securities:
Canadian government obligations		31,551		17,595			49,146		27,059		–		22,087		–
Foreign government obligations		36,959		41,405			78,364		61,380		–		16,984		–
Other liquid securities		55,868		44,195			100,063		52,586		–		47,477		–
Other securities		9,759		4,840			14,599		3,291		–		–		11,308
Loans classified as liquid assets:
NHA mortgage-backed securities		42,286		–			42,286		3,686		–		38,600		–
Call and short loans		976		–			976		–		–		976		–
Other loans		395,554		–			395,554		11,625		38,435		10,358		335,136
Other financial assets(4)		144,019		(86,166	)		57,853		2,748		–		–		55,105
Non-financial assets		24,678		–			24,678		–		–		–		24,678
Total	$	805,666	$	21,869		$	827,535	$	162,375	$	45,181	$	193,752	$	426,227
								Encumbered assets				Unencumbered assets
As at October 31, 2013 ($ millions)	Bank-owned assets		Securities received as collateral from securities financing and derivative transactions			Total assets		Pledged as collateral		Other(1)		Available as collateral(2)		Other(3)
Cash and deposits with central banks	$	44,097	$	–		$	44,097	$	–	$	7,509	$	36,588	$	–
Deposits with financial institutions		9,240		–			9,240		–		1,626		7,614		–
Precious metals		8,880		–			8,880		–		54		8,826		–
Liquid securities:
Canadian government obligations		28,667		8,231			36,898		23,007		–		13,891		–
Foreign government obligations		30,903		38,327			69,230		53,809		–		15,421		–
Other liquid securities		49,573		34,808			84,381		32,292		–		52,089		–
Other securities		9,372		4,286			13,658		2,491		–		–		11,167
Loans classified as liquid assets:
NHA mortgage-backed securities		45,546		–			45,546		10,810		–		34,736		–
Call and short loans		887		–			887		–		–		887		–
Other loans		367,007		–			367,007		9,821		30,802		10,135		316,249
Other financial assets(4)		123,835		(70,341	)		53,494		2,938		–		–		50,556
Non-financial assets		25,637		–			25,637		–		–		–		25,637
Total	$	743,644	$	15,311		$	758,955	$	135,168	$	39,991	$	180,187	$	403,609

(1) Assets which are restricted from being used to secure funding for legal or other reasons.

(2) Assets that are readily available in the normal course of business to secure funding or meet collateral needs including central bank borrowing immediately available.

(3) Other unencumbered assets are not subject to any restrictions on their use to secure funding or as collateral but the Bank would not consider them to be readily available. These include loans, a portion of which may be used to access central bank facilities outside of the normal course or to raise secured funding through the Bank’s secured funding programs.

(4) Securities received as collateral against other financial assets are included within liquid securities and other securities.

2014  Scotiabank Annual Report      83

MANAGEMENT’S DISCUSSION AND ANALYSIS

As of October 31, 2014 total encumbered assets of the Bank were $208 billion (October 31, 2013 – $175 billion). Of the remaining $620 billion (October 31, 2013 – $584 billion) of unencumbered assets, $194 billion (October 31, 2013 – $180 billion) are considered readily available in the normal course of business to secure funding or meet collateral needs as detailed above.

In some over-the-counter derivative contracts, the Bank would be required to post additional collateral in the event its credit rating was downgraded. The Bank maintains access to sufficient collateral to meet these obligations in the event of a downgrade of its ratings by one or more of the rating agencies. In the event of a one-notch or two-notch downgrade of the Bank’s rating by rating agencies, the Bank has to provide additional $512 million or $669 million collateral, respectively, to meet contractual derivative funding or margin requirements.

Encumbered liquid assets are not considered to be available for liquidity management purposes. Liquid assets which are being employed to hedge derivative positions in trading books or for hedging purposes, are considered to be available for liquidity management provided they meet the criteria discussed in liquid assets above.

Regulatory developments relating to liquidity

In January 2013 the Basel Committee on Banking Supervision (BCBS) finalized its international framework on Liquidity Coverage Ratio (LCR) requirements. Subsequently, in May 2014, OSFI released its Liquidity Adequacy Requirements (LAR) which contain the rules for Canadian Banks including LCR and the Net Cumulative Cash Flow (NCCF). The LCR and NCCF are scheduled for implementation in January 2015.

In October 2014, BCBS released its final document on the Net Stable Funding Ratio (NSFR). NSFR will become a minimum standard by 1 January 2018. The Bank continues to monitor developments related to liquidity requirements.

Funding

The Bank ensures that its funding sources are well diversified. Funding concentrations are regularly monitored and analyzed by type. The sources of funding are capital, deposits from retail and commercial clients sourced through the Canadian and international branch network, deposits from financial institutions as well as wholesale debt issuance.

Capital and personal deposits are key components of the Bank’s core funding and these amounted to $231 billion as at October 31, 2014 (October 31, 2013 – $224 billion). The increase since October 31, 2013, was due primarily to personal deposits and internal capital generation. A portion of commercial deposits, particularly those of an operating or relationship nature, would be considered part of the Bank’s core funding. Furthermore, core funding is augmented by longer term wholesale debt issuances (original maturity over 1 year) of $123 billion (October 31, 2013 – $110 billion). Longer term wholesale debt issuances include medium-term notes, deposit notes, mortgage securitizations, asset-backed securities and covered bonds.

The Bank operates in many different currencies and countries. From a funding perspective, the most significant currencies are Canadian and U.S. dollars. With respect to the Bank’s operations outside Canada, there are different funding strategies depending on the nature of the activities in a country. For those countries where the Bank operates a

branch banking subsidiary, the strategy is for the subsidiary to be substantially self-funding in its local market. For other subsidiaries or branches outside Canada where local deposit gathering capability is not sufficient, funding is provided through the wholesale funding activities of the Bank.

From an overall funding perspective the Bank’s objective is to achieve an appropriate balance between the cost and the stability of funding. Diversification of funding sources is a key element of the funding strategy.

The Bank’s wholesale debt diversification strategy is primarily executed via the Bank’s main wholesale funding centres, located in Toronto, New York, London and Singapore. The majority of these funds are sourced in Canadian and U.S. dollars. Where required, these funds are swapped to fund assets in different currencies. The funding strategy deployed by wholesale funding centres and the management of associated risks, such as geographic and currency risk, are managed centrally within the framework of policies and limits that are approved by the Board of Directors.

In the normal course, the Bank uses a mix of unsecured and secured wholesale funding instruments across a variety of markets. The choice of instruments and market is based on a number of factors, including relative cost and market capacity as well as an objective of maintaining a diversified mix of sources of funding. Market conditions can change over time, impacting cost and capacity in particular markets or instruments. Changing market conditions can include periods of stress where the availability of funding in particular markets or instruments is constrained. In these circumstances the Bank would increase its focus on sources of funding in functioning markets and secured funding instruments. Should a period of extreme stress exist such that all wholesale funding sources are constrained, the Bank maintains a pool of liquid assets to mitigate its liquidity risk. This pool includes cash, deposits with central banks and securities.

In Canada, the Bank raises short- and longer-term wholesale debt through the issuance of senior unsecured deposit notes. Additional longer-term wholesale debt is generated through the Bank’s Canadian Debt and Equity Shelf and the securitization of Canadian insured residential mortgages through CMHC securitization programs (such as Canada Mortgage Bonds and Canadian NHA MBS), and of unsecured personal lines of credit through the Hollis Receivables Term Trust II Shelf. While the Bank includes CMHC securitization programs in its view of wholesale debt issuance, this source of funding does not entail the same type of run-off risk that can be experienced in funding raised from capital markets.

Outside of Canada, short-term wholesale debt is raised through the issuance of negotiable certificates of deposit in the United States, Hong Kong and Australia and the issuance of commercial paper in the United States. The Bank operates longer-term wholesale debt issuance registered programs in the United States, such as its SEC Registered Debt and Equity Shelf and SEC Registered Covered Bond Shelf. As well, the Bank’s Covered Bond Program is listed with the U.K. Listing Authority. The Bank also raises longer-term funding across a variety of currencies through its Australian Medium Term Note Programme, European Medium Term Note Programme and Singapore Medium Term Note Programme.

84      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    RISK MANAGEMENT

The table below provides the remaining contractual maturities of funding raised through wholesale funding. In the Statement of Financial Position, these liabilities are primarily included in Business & Government Deposits.

T58 Wholesale funding⁽¹⁾

As at October 31, 2014 ($ millions)	Less than 1 month		1-3 months		3-6 months		6-9 months		9-12 months		Sub-Total < 1 Year		1-2 years		2-5 years		>5 years		Total
Deposits from banks(2)	$	5,417	$	755	$	514	$	104	$	153	$	6,943	$	96	$	117	$	–	$	7,156
Bearer deposit notes, commercial paper and certificate of deposits		9,111		24,400		33,152		15,192		3,913		85,768		8,567		1,103		121		95,559
Asset-backed commercial paper(3)		3,691		2,609		32		–		–		6,332		–		–		–		6,332
Medium term notes and deposit notes		3,127		6,266		2,953		2,294		5,499		20,139		12,026		30,448		7,317		69,930
Asset-backed securities		–		1		279		–		1		281		507		794		523		2,105
Covered bonds		2,254		–		1,408		–		2,817		6,479		2,254		8,205		2,158		19,096
Mortgage securitization(4)		–		616		779		696		392		2,483		3,869		8,526		5,356		20,234
Subordinated debentures(5)		16		16		53		45		29		159		–		–		5,288		5,447
Total wholesale funding sources	$	23,616	$	34,663	$	39,170	$	18,331	$	12,804	$	128,584	$	27,319	$	49,193	$	20,763	$	225,859
Of Which:
Unsecured funding	$	17,671	$	31,437	$	36,672	$	17,635	$	9,594	$	113,009	$	20,689	$	31,668	$	12,726	$	178,092
Secured funding		5,945		3,226		2,498		696		3,210		15,575		6,630		17,525		8,037		47,767
As at October 31, 2013 ($ millions)	Less than 1 month		1-3 months		3-6 months		6-9 months		9-12 months		Sub-Total < 1 Year		1-2 years		2-5 years		>5 years		Total
Deposits from banks(2)	$	7,304	$	1,104	$	615	$	292	$	364	$	9,679	$	90	$	111	$	42	$	9,922
Bearer deposit notes, commercial paper and certificate of deposits		12,666		31,061		26,376		5,183		6,055		81,341		8,274		930		125		90,670
Asset-backed commercial paper(3)		4,205		1,738		83		–		–		6,026		–		–		–		6,026
Medium term notes and deposit notes		486		3,426		2,493		2,116		1,487		10,008		14,275		27,448		3,128		54,859
Asset-backed securities		–		–		–		–		–		–		931		791		71		1,793
Covered bonds		16		999		42		–		10		1,067		5,998		6,809		36		13,910
Mortgage securitization(4)		1,750		1,510		3,483		1,327		1,369		9,439		2,482		10,129		5,116		27,166
Subordinated debentures(5)		14		15		17		12		12		70		–		100		5,860		6,030
Total wholesale funding sources	$	26,441	$	39,853	$	33,109	$	8,930	$	9,297	$	117,630	$	32,050	$	46,318	$	14,378	$	210,376
Of Which:
Unsecured funding	$	20,470	$	35,606	$	29,501	$	7,603	$	7,918	$	101,098	$	22,639	$	28,589	$	9,155	$	161,481
Secured funding		5,971		4,247		3,608		1,327		1,379		16,532		9,411		17,729		5,223		48,895

(1) Wholesale funding sources exclude repo transactions and bankers acceptances, which are disclosed in the contractual maturities table in Note 40 of the consolidated financial statements. Amounts are based on remaining term to maturity.

(2) Only includes commercial bank deposits raised by Group Treasury.

(3) Wholesale funding sources also exclude asset-backed commercial paper (ABCP) issued by certain ABCP conduits that are not consolidated for financial reporting purposes.

(4) Represents residential mortgages funded through Canadian Federal Government agency sponsored programs. Funding accessed through such programs does not impact the funding capacity of the Bank in its own name.

(5) Although subordinated debentures are a component of regulatory capital, they are included in this table in accordance with EDTF recommended disclosures.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Wholesale funding generally bears a higher risk of run-off in a stressed environment than other sources of funding. The Bank mitigates this risk through funding diversification, ongoing engagement with investors and by maintaining a large holding of unencumbered liquid assets.

Contractual Obligations

The Bank’s contractual obligations include contracts and purchase obligations, including agreements to purchase goods and services, that are enforceable and legally binding on the Bank. Table 59 provides aggregated information about the Bank’s contractual obligations related to all financial and other liabilities as at October 31, 2014, which affect the Bank’s liquidity and capital resource needs. The table provides details on undiscounted cash flows to maturity. Depending on the nature of these obligations, they may be recorded on- or off-balance sheet.

The Bank leases a large number of its branches, offices and other locations. The majority of these leases are for a term of five years, with options to renew. The total cost of these leases, net of rental income from subleases, was $392 million in 2014 (2013 - $378 million).

Two major outsourcing contracts have been entered into by the Bank. Both are cancellable with notice.

The largest is a contract with IBM Canada entered into in 2001 to manage the Bank’s domestic computer operations, including data centres, branches, Automated Banking Machines, and desktop computing environment. The contract was expanded in 2005 to also include the computer operations for the Caribbean & Central America, and Mexico. The contract for the Canadian operations, Mexico and Caribbean & Central America was renewed earlier in 2013, for a further 5 year period.

The second is a three-year contract, with two optional five-year renewals, entered into in 2003 with Symcor Inc. to manage the Bank’s cheque and bill payment processing, including associated statement and report printing activities across Canada. The remaining 5-year option was exercised in 2010 and runs to the end of 2015.

T59 Contractual obligations

As at October 31, 2014 ($ millions)	Under 1 year		1-2 years		2-5 years		Over 5 years		No Specific Maturity(1)		Total
Deposits	$	217,013	$	45,523	$	65,982	$	14,988	$	210,976	$	554,482
Acceptances		9,876		–		–		–		–		9,876
Obligations related to securities sold short		1,635		3,912		7,645		10,924		2,934		27,050
Derivative financial instruments		8,382		4,232		8,656		15,168		–		36,438
Obligations related to securities sold under repurchased agreements		88,953		–		–		–		–		88,953
Subordinated debentures		–		–		–		4,871		–		4,871
Capital instrument liabilities		–		–		–		–		–		–
Other liabilities		1,535		1,948		2,999		3,387		24,916		34,785
Subtotal	$	327,394	$	55,615	$	85,282	$	49,338	$	238,826	$	756,455
Operating leases		310		261		550		577		–		1,698
Credit commitments(2)		46,967		13,821		73,224		3,424		5		137,441
Financial guarantees(3)		–		–		–		–		27,137		27,137
Outsourcing obligations		228		161		286		1		1		677
Total	$	374,899	$	69,858	$	159,342	$	53,340	$	265,969	$	923,408

(1) Includes deposits on demand and on notice.

(2) Includes the undrawn component of committed credit and liquidity facilities.

(3) Includes outstanding balances of guarantees, standby letters of credit and commercial letters of credit which may expire undrawn.

Capital Expenditures

Scotiabank has an ongoing program of capital investment to provide the necessary level of technology and real estate resources to service our customers and meet new product requirements. All major capital expenditures go through a rigorous review and approval process.

Total capital expenditure in 2014 reflected an increase of $129 million or 27% over 2013. The increase is primarily due to the relocation of our New York office, improvements in our retail branch network, and higher technology spending in regulatory, efficiency and customer driven projects.

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MANAGEMENT’S DISCUSSION AND ANALYSIS    |    RISK MANAGEMENT

Other Risks

Operational risk

Operational risk is the risk of loss, whether direct or indirect, to which the Bank is exposed due to inadequate or failed internal processes or systems, human error, or external events. Operational risk includes legal and regulatory risk, business process and change risk, fiduciary or disclosure breaches, technology failure, financial crime and environmental risk. It exists in some form in every Bank business and function. Operational risk can not only result in financial loss, but also regulatory sanctions and damage to the Bank’s reputation. The Bank is very successful at managing operational risk with a view to safeguarding client assets and preserving shareholder value.

In fiscal 2014, operational risk losses continue to be within the Bank’s risk appetite.

Governance and Organization

The Bank has developed policies, processes and assessment methodologies to ensure that operational risk is appropriately identified and managed with effective controls. The governing principles of the Bank’s Operational Risk Management Framework include:

• The three lines of defence model helps to ensure proper accountability and clearly defines the roles and responsibilities for operational risk management. The first line of defence is the business units, who own the risks in their businesses and operations. The second line of defence is led by a central risk management unit within Global Risk Management, with support from control and stewardship functions across the Bank. The third line of defence is Internal Audit.

• The individual business lines are accountable for management and control of the significant operational risks to which they are exposed.

The Bank has a governance and organizational structure through which there is effective oversight and in which operational risk is managed to an established risk appetite, including:

– The Board of Directors is responsible for sound corporate governance and approves annually the Bank’s Operational Risk Management Policy and Operational Risk Management Framework;

– A senior level Operational Risk Committee comprised of Heads of business lines and key control functions, and chaired by the Chief Risk Officer. This Committee provides consistent, Bank-wide oversight of operational risk management;

– Business-line level operational risk committees are in place to ensure issues are known, discussed, managed and escalated, as needed and in a timely manner;

– Executive management with clearly defined areas of responsibility;

– A central unit in Global Risk Management responsible for: developing and applying methods to identify, assess, manage and monitor operational risks; and reporting on risks as well as actual loss events and to play a challenge role to the business units in their assessment and management of operational risk;

– Independent specialist units responsible for developing methods to mitigate specific components of operational risk, including codifying policies and processes required to control those specific risks;

– Separation of duties between key functions; and

– An independent internal audit department responsible for verifying that significant risks are identified and assessed, and for testing controls to ensure that overall risk is at an acceptable level. The Internal Audit department is also responsible for auditing and assessing the Bank’s Operational Risk Management Framework and its design and effectiveness.

Operational Risk Management Framework

The Bank’s Operational Risk Management Framework sets out an integrated approach to identify, assess, control, mitigate and report operational risks across the Bank. The following are key components of the Bank’s Operational Risk Management Framework:

• The Bank’s risk and control assessment program, which is managed by Global Risk Management’s central operational risk unit, includes formal reviews of significant units, operations and processes to identify and assess operational risks. This program provides a basis for management to ensure that key risks have been identified and that controls are functioning effectively. Business line management attests to the accuracy of each assessment and develops action plans to mitigate risks if controls are not identified as effective. Results of these reviews are summarized and reported to executive management and the Board of Directors.

• The Bank has a standard inventory of operational risks which are discussed and considered in each risk assessment.

• The Bank’s scenario analysis program provides a forward looking view of key risks and provides management with insights into how plausible but high impact, remote operational risk events might occur. Scenario analysis will also assist in the selection of severity distributions in the Bank’s Advanced Measurement Approach (AMA) capital model (discussed below).

• The Bank’s Key Risk Indicator (KRI) program provides management with an early warning system of changes in risk exposure that may indicate that an operational risk appetite or tolerance may be breached. KRIs exist at the business line and all-Bank level.

• The Business Environment and Internal Control Factors (BEICF) program incorporates the impact of key business environment and internal control factors into the regulatory capital allocated to divisions by utilizing a BEICF scorecard. The scorecard will be used to adjust capital calculations produced using the Bank’s AMA capital model and due to its forward-looking nature, it also assists with identifying new trends and emerging risks.

• The Bank’s centralized operational loss event database, which is managed and maintained by the central operational risk unit within Global Risk Management, captures key information on operational losses. This data is analyzed, benchmarked against industry loss data and significant metrics, then reported to executive management and the Board of Directors to provide insight into operational risk exposures, appetites and trends.

• Operational risk is difficult to quantify in a fulsome and accurate manner, due to the nature of operational risk itself. Operational risk is often included with or is a by-product of another form of risk and is not taken on intentionally. Tools for operational risk management and measurement continue to evolve across the global financial services industry. There are two methods for the calculation of operational risk regulatory capital available to the Bank under Basel III – The Standardized Approach and the Advanced Measurement Approach (AMA). The Bank continues to use the Standardized Approach and will implement AMA, when approved by OSFI.

• Operational risk reporting is provided to the Bank’s senior executive management and the Board of Directors. In addition to details and trends from operational risk loss events, reporting also includes information on risk and control assessments and scenarios completed, industry trends and significant events, key risk indicators and Business Environment and Internal Control Factor (BEICF) survey results. The combination of these information sources provides both a backward and forward-looking view of operational risk at the Bank.

• The Bank is a member of the Operational Riskdata Exchange Association (ORX), an international consortium of banks that share anonymized loss

2014  Scotiabank Annual Report      87

MANAGEMENT’S DISCUSSION AND ANALYSIS

data. This industry data is used to support risk identification, assessment and will be used as an input to the Bank’s AMA capital model. Discussion forums within ORX also help to ensure that the Bank is current of all industry best practices and developments.

• The Bank’s Fraud Management Office, which identifies threats of financial crime, implements systems and processes to mitigate loss and reports on fraud loss activity to senior management.

• The Bank’s monitoring of industry events, identifies significant losses incurred at other financial institutions and provides a reference for reviewing and assessing the Bank’s own risk exposure.

• The compliance risk management program led by Global Compliance through an established network and associated processes that include: monitoring regulatory changes; conducting compliance risk assessments; implementing policies and procedures; training; monitoring and resolving issues; and reporting on the status of compliance and compliance controls to executive management, the Board of Directors, and regulators as required.

• The Bank’s New Products and Services Risk Management Policy which describes the general principles applicable to the review, approval and implementation of new products and services within Scotiabank and is intended to provide overarching guidance. Processes are in place at the all-Bank level and in each business line for evaluation of risk in new businesses, services and products.

• The Bank’s Business Continuity Management Department is responsible for governance and oversight of the Bank’s business continuity, and monitors units to ensure compliance with these policies. The Bank’s business continuity management policy requires that all business units develop business continuity capabilities for their respective functions.

• The Bank is exposed to ever increasing cyber risks, which may include theft of assets, unauthorized access to sensitive information, or operational disruption such as breaches of cyber security. With this in mind, the Bank has implemented a robust and continuously evolving cyber security program to keep pace with the evolving threats. While the Bank’s computer systems continue to be subject to cyber-attack attempts, the countermeasures in place remain effective. Scotiabank has not experienced material breaches of cyber security. The Bank continues to actively monitor this risk, leveraging external threat intelligence, internal monitoring, reviewing best practices and implementing additional controls as required, to mitigate these risks.

• The Bank’s Model Risk Management Policy, which provides the framework for model review and approval under the oversight of the Operational Risk Committee.

• The Bank’s training programs, including the mandatory Anti-Money Laundering, Operational Risk and Information Security courses and examinations which ensure employees are aware and equipped to safeguard our customers’ and the Bank’s assets.

• Risk mitigation programs, which use insurance policies to transfer the risk of high severity losses, where feasible and appropriate.

Reputational risk

Reputational risk is the risk that negative publicity regarding Scotiabank’s conduct, business practices or associations, whether true or not, will adversely affect its revenues, operations or customer base, or require costly litigation or other defensive measures.

Negative publicity about an institution’s business practices may involve any aspect of its operations, but usually relates to questions of business ethics and integrity, 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 codes of conduct, governance practices and risk management programs, policies, procedures and training. Many relevant checks and balances are outlined in greater detail under other risk management sections,

particularly Operational risk, where reference is made to the Bank’s well-established compliance program. All directors, officers and employees have a responsibility to conduct their activities in accordance with the Scotiabank Guidelines for Business Conduct, and in a manner that minimizes reputational risk. While all employees, officers and directors are expected to protect the reputation of Scotiabank by complying with the Bank’s Guidelines for Business Conduct, the activities of the Legal, Corporate Secretary, Public, Corporate and Government Affairs and Compliance departments, and the Reputational Risk Committee, are particularly oriented to the management of reputational risk.

In providing credit, advice, or products to customers, or entering into associations, the Bank considers whether the transaction, relationship or association might give rise to reputational risk. The Bank has an established, Board-approved reputational risk policy, as well as policy and procedures for managing reputational and legal risk related to structured finance transactions. Global Risk Management plays a significant role in the identification and management of reputational risk related to credit underwriting. In addition, the Reputational Risk Committee is available to support Global Risk Management, as well as other risk management committees and business units, with their assessment of reputational risk associated with transactions, business initiatives, and new products and services.

The Reputational Risk Committee considers a broad array of factors when assessing transactions, so that the Bank meets, and will be seen to meet, high ethical standards. These factors include 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; conflicts of interest; fairness issues; and public perception.

The Committee may impose conditions on customer transactions, including customer disclosure requirements to promote transparency in financial reporting, so that transactions meet Bank standards. In the event the Committee recommends not proceeding with a transaction and the sponsor of the transaction wishes to proceed, the transaction is referred to the Risk Policy Committee.

Environmental risk

Environmental risk refers to the possibility that environmental concerns involving Scotiabank or its customers could affect the Bank’s financial performance.

To safeguard the Bank and the interests of its stakeholders, Scotiabank has an environmental policy, which is approved by the Bank’s Board of Directors. The policy guides day-to-day operations, lending practices, supplier agreements, the management of real estate holdings and external reporting practices. It is supplemented by specific policies and practices relating to individual business lines.

Environmental risks associated with the business operations of each borrower and any real property offered as security are considered in the Bank’s credit evaluation procedures. This includes an environmental assessment where applicable, and commentary on climate change where it could have a material impact (including regulatory, physical or reputational impacts) on the borrower. Global Risk Management has primary responsibility for establishing the related policies, processes and standards associated with mitigating environmental risk in the Bank’s lending activities. Decisions are taken in the context of the risk management framework discussed on page 65.

In the area of project finance, the Equator Principles have been integrated into the Bank’s internal processes and procedures since 2006. The Equator Principles help financial institutions determine, assess and manage environmental and social risk. The principles apply to project finance loans and advisory assignments where total capital costs exceed US$10 million, and to certain project-related corporate loans. The Equator Principles provide safeguards for sensitive projects to ensure protection of natural habitats and the rights of indigenous peoples, as well as safeguards against child and forced labour.

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MANAGEMENT’S DISCUSSION AND ANALYSIS    |    RISK MANAGEMENT

Environmental concerns also play a prominent role in shaping the Bank’s real estate practices and purchasing decisions. The Real Estate Department adheres to an Environmental Compliance Policy to ensure responsible management of the Bank’s real estate holdings from an environmental perspective. In addition, recycling and resource management programs are in place in the Bank’s corporate offices and branch networks. Internal tracking systems are in place with respect to energy use, greenhouse gas emissions (GHG) and paper consumption. Since 2012, GHG emissions data for the branch network and corporate offices has been externally verified. A variety of reduction measures are in place for energy, paper and waste. In order to further reduce the Bank’s environmental footprint, it has developed an internal Environmental Paper Policy.

To ensure it continues to operate in an environmentally responsible manner, the Bank monitors policy and legislative requirements through ongoing dialogue with government, industry and stakeholders in countries where it operates. Scotiabank has been meeting with environmental organizations, industry associations and socially responsible investment organizations with respect to the role that banks play to help address issues such as climate change, protection of biodiversity, promotion of sustainable forestry practices, and other environmental issues important to its customers and communities where it operates. The Bank has an ongoing process of reviewing its policies in these areas.

Scotiabank has a number of environmentally related products and services to meet demand and promote the “green” economy. These include: an EcoEnergy Financing program designed to support personal and small business customers who wish to install small-scale renewable energy projects; an auto loan product for hybrid, electric and clean diesel vehicles; an Energy and Agriculture Commodities group, which assists corporate clients originate and trade carbon credits; and an eco-home renovation program.

Environmental Reporting

Scotiabank is also a signatory to, and participant in the Carbon Disclosure Project, which provides corporate disclosure to the investment community on greenhouse gas emissions and climate change management. For further information, you may access the Bank’s annual Corporate Social Responsibility report at www.scotiabank.com/csr/reports.

Insurance risk

The Bank is both a distributor of third party insurance products and underwriter of insurance risk. As a distributor of third party insurance products, the Bank earns fees but bears no insurance risk. The Bank bears insurance risk in its role as an underwriter, either through direct underwriting or via reinsurance.

Insurance risk is the risk of potential financial loss due to actual experience being different from that assumed in the pricing process of the insurance products.

Insurance by nature involves the distribution of products that transfer individual risks to the issuer with the expectation of a return built into the insurance premiums earned. The Bank is exposed to insurance risk primarily through its creditor, life and select property and casualty insurance and reinsurance products.

The insurance governance and risk management frameworks are calibrated within each insurance subsidiary commensurate with the nature and materiality of risk assumed. Senior management within the insurance business units has primary responsibility for managing insurance risk, with oversight by Global Risk Management through the Insurance Risk Committee. The insurance company subsidiaries have their own boards of directors, as well as independent appointed actuaries who provide additional risk management oversight.

The insurance companies maintain a number of policies and practices to manage insurance risk. Sound product design is an essential element. The vast majority of risks insured are short-term in nature, that is, they do not involve long-term pricing guarantees. Geographic diversification and product-line diversification are important elements as well. Reinsurance is commonly used as an effective tool to manage the insurance risk exposures. Insurance risk is also managed through effective underwriting and claim adjudication practices, ongoing monitoring of experience, and stress-testing scenario analysis.

Strategic risk

Strategic risk is the risk that the Bank’s business strategies are ineffective, being poorly executed, or insufficiently resilient to changes in the business environment.

The Board of Directors is ultimately responsible for oversight of strategic risk, by adopting a strategic planning process and approving, on an annual basis, a strategic plan for the Bank.

The Bank manages its strategic planning process through a series of coordinated efforts between the Executive Management Team, the Business Lines and the Corporate Functions. These efforts address a wide range of relevant considerations including capital and resource allocation, business initiatives, strategic transactions and investments, stress testing and alignment with the Bank’s Risk Appetite Framework. These considerations are reviewed in a consistent and disciplined manner. The process involves input from the entire Executive Management Team and from the Board of Directors.

On an annual basis, a comprehensive Strategy Report is prepared that summarizes the Bank’s key strategic considerations, and is presented by the President and Chief Executive Officer to the Board of Directors for their review and approval. The effectiveness of the Bank’s enterprise strategy is actively monitored and measured through a balanced scorecard process, which is reported on throughout the year.

The execution and evaluation of strategic plans within the Bank is critically important to the Bank’s enterprise-wide risk management framework. The Bank makes continuous efforts to ensure that all employees are aware of the Bank’s overall strategic direction, and that employees are also aware of the strategies and objectives for their respective business line or corporate function. On an ongoing basis, the business lines and corporate functions identify, manage and assess the internal and external considerations – including risk factors – that could affect the achievement of their strategic objectives. These matters are considered on an enterprise-wide basis by the Bank’s Executive Management Team, which makes adjustments, as required.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

CONTROLS AND ACCOUNTING POLICIES

Controls and procedures

Management’s responsibility for financial information contained in this annual report is described on page 116.

Disclosure controls and procedures

The Bank’s disclosure controls and procedures are designed to provide reasonable assurance that information is accumulated and communicated to the Bank’s management, including the President and Chief Executive Officer and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure.

As of October 31, 2014, the Bank’s management, with the participation of the President and Chief Executive Officer and CFO, evaluated the effectiveness of its disclosure controls and procedures, as defined under the rules adopted by the U.S. Securities and Exchange Commission (SEC) and the Canadian securities regulatory authorities, and have concluded that the Bank’s disclosure controls and procedures are effective.

Internal control over financial reporting

Management of the Bank is responsible for establishing and maintaining adequate internal control over financial reporting. These controls include policies and procedures that:

• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Bank;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the Bank; and

• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Bank’s assets that could have a material effect on the financial statements.

All control systems contain inherent limitations, no matter how well designed. As a result, the Bank’s management acknowledges that its internal control over financial reporting will not prevent or detect all misstatements due to error or fraud. In addition, management’s evaluation of controls can provide only reasonable, not absolute, assurance that all control issues that may result in material misstatements, if any, have been detected.

Management assessed the effectiveness of internal control over financial reporting, using the Committee of Sponsoring Organizations of the Treadway Commission (COSO) 1992 framework, and based on that assessment concluded that internal control over financial reporting was effective as at October 31, 2014. Commencing 2015, the effectiveness of internal control over financial reporting will be assessed using the Internal Control-Integrated Framework 2013 issued by COSO.

Changes in internal control over financial reporting

There have been no changes in the Bank’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting during the year ended October 31, 2014.

Critical accounting estimates

The Bank’s accounting policies are integral to understanding and interpreting the financial results reported in this annual report. Note 3 on pages 126 to 138 summarizes the significant accounting policies used in preparing the Bank’s consolidated financial statements. Certain of these policies require management to make estimates, assumptions and subjective judgements that are difficult, complex, and often relate

to matters that are inherently uncertain. The policies discussed below are considered to be particularly important to the presentation of the Bank’s financial position and results of operations, because changes in the estimates, assumptions and judgements could have a material impact on the Bank’s consolidated financial statements. These estimates, assumptions and judgements are adjusted in the normal course of business to reflect changing underlying circumstances.

Allowance for credit losses

The allowance for credit losses represents management’s best estimate of the probable credit losses in the portfolio of deposits with other institutions, loans to borrowers and acceptances. Management undertakes regular reviews of credit quality to assess the adequacy of the allowance for credit losses. This process requires the use of estimates, assumptions and subjective judgements at many levels. These subjective judgements include identifying credits that are impaired, and considering factors specific to individual credits, as well as portfolio characteristics and risks. Changes to these estimates or use of other reasonable judgements and estimates could directly affect the provision for credit losses.

The allowance for credit losses is comprised of collective and individually assessed allowances.

Allowances in respect of individually significant credit exposures are an estimate of probable incurred losses related to existing impaired loans. In establishing these allowances applicable to individual credit exposures, management individually assesses each loan for objective indicators of impairment and forms a judgement as to whether the loan is impaired. Loan impairment is recognized when, in management’s opinion, there is no longer reasonable assurance that interest and principal payments will be collected based on original contractual terms. Once a loan is determined to be impaired, management estimates its net realizable value by making judgements relating to the timing of future cash flow amounts, the fair value of any underlying security pledged as collateral, costs of realization, observable market prices, and expectations about the future prospects of the borrower and any guarantors.

Individual provisions were higher in 2014 than in 2013, driven primarily by higher provisions in International Banking.

Management estimates allowances on a collective basis for exposures in certain homogenous portfolios, including residential mortgages, credit card loans and most personal loans. This collective assessment for these positions involves estimating the probable losses inherent in the portfolio by using a formulaic method that considers recent loss experience.

An allowance is also determined in respect of probable incurred losses that are inherent in the portfolio, of performing loans, but have not yet been specifically identified on an individual basis. Management establishes this allowance on a collective basis through an assessment of quantitative and qualitative factors. Using an internally developed model, management arrives at an initial quantitative estimate of the collective allowance for the performing portfolio based on numerous factors, including historical average default probabilities, loss given default rates and exposure at default factors. Material changes in any of these parameters or assumptions would affect the range of expected credit losses and, consequently, could affect the collective allowance level. For example, if either the probability of default or the loss given default rates for the non-retail portfolio were independently increased or decreased by 10%, the model would indicate an increase or decrease to the quantitative estimate of approximately $74 million (2013 – $85 million). The non-retail quantitative estimate in 2014, includes an adjustment in respect of variation and uncertainty in the historically based credit parameters.

A qualitative assessment of the collective allowance is made based on observable data, such as: economic trends and business conditions, portfolio concentrations, risk migrations and recent trends in volumes

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and severity of delinquencies and a component for the imprecision inherent in the model and model parameters. Management reviews the collective allowance quarterly to assess whether the allowance is at the appropriate level in relation to the size of the portfolio, inherent credit risks and trends in portfolio quality.

The total collective allowance for credit losses as at October 31, 2014, was $2,856 million, an increase of $252 million from a year earlier. The increase was primarily due to changes in credit quality. The collective allowance amount is primarily attributable to business and government performing loans ($584 million), with the remainder allocated to personal lending and credit cards ($1,752 million) and residential mortgages ($520 million). The allocation to personal lending and credit cards increased year over year, as a result of an enhancement to the retail methodology in determining the collective allowance on performing loans. These amounts for personal lending and credit cards and for residential mortgages include allowances for both performing and impaired loans.

As noted above, the individual allowance for credit losses for personal loans, credit cards and mortgages is formula-based and also reflects incurred but not yet identified losses.

Fair value of financial instruments

All financial instruments are measured at fair value on initial recognition. Subsequent measurement of a financial instrument depends on its classification. Non-trading loans and receivables, certain securities and most financial liabilities are carried at amortized cost unless classified or designated as fair value through profit and loss or available-for-sale at inception. All other financial instruments, including those designated as fair value through profit and loss at inception, are carried at fair value.

Fair value of a financial asset or liability is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal, or in its absence, the most advantageous market to which the Bank has access at the measurement date.

The best evidence of fair value for a financial instrument is the quoted price in an active market. Quoted market prices represent a Level 1 valuation. Quoted prices are not always available for over-the-counter transactions, as well as transactions in inactive or illiquid markets. In these instances, internal models that maximize the use of observable inputs are used to estimate fair value. The chosen valuation technique incorporates all the factors that market participants would take into account in pricing a transaction. When all significant inputs are observable, the valuation is classified as Level 2. Financial instruments traded in a less active market have been valued using indicative market prices, present value of cash-flows or other valuation techniques. Fair value estimates normally do not consider forced or liquidation sales. Where financial instruments trade in inactive markets or when using models where observable parameters do not exist, greater management judgement is required for valuation purposes. Valuations that require the significant use of unobservable inputs are considered Level 3. The calculation of estimated fair value is based on market conditions at a specific point in time and therefore may not be reflective of future fair values.

The Bank has controls and processes in place to ensure that the valuation of financial instruments is appropriately determined. Global Risk Management (GRM) is responsible for the design and application of the Bank’s risk management framework. GRM is independent from the Bank’s business units and is overseen by Executive Management and the Board of Directors. Senior management committees within GRM oversee and establish standards for risk management processes that are critical in ensuring that appropriate valuation methodologies and policies are in place for determining fair value.

Where possible, valuations are based on quoted prices or observable inputs obtained from active markets. GRM oversees a monthly Independent Price Verification (IPV) process in order to assess the reliability and accuracy of prices and inputs used in the determination of fair value. The IPV process is performed by price verification groups that are independent from the business. The Bank maintains an approved list of pricing sources that are used in the IPV process. These sources include, but are not limited to, brokers, dealers and consensus pricing services. The valuation policies relating to the IPV process require that all pricing or rate sources used be external to the Bank. On a periodic basis, an independent assessment of pricing or rate sources is also performed by GRM to determine market presence or market representative levels.

Where quoted prices are not readily available, such as for transactions in inactive or illiquid markets, internal models that maximize the use of observable inputs are used to estimate fair value. An independent senior management committee within GRM oversees the vetting, approval and ongoing validation of valuation models used in determining fair value. Risk policies associated with model development are approved by Executive Management and/or key risk committees.

During the fourth quarter of 2014, the Bank recognized a funding valuation adjustment (FVA) charge of $30 million ($22 million after tax), relating to its uncollateralized derivative instruments. This amount has been recorded in Trading Income in the Consolidated Statement of Income. This change was driven by growing market evidence that term funding was an important component of the fair value of uncollateralized derivatives.

In determining fair value for certain instruments or portfolios of instruments, valuation adjustments or reserves may be required to arrive at a more accurate representation of fair value. The Bank’s policy of applying valuation reserves to a portfolio of instruments is approved by a senior management committee. These reserves include adjustments for credit risk, bid-offer spreads, unobservable parameters, constraints on prices in inactive or illiquid markets and when applicable funding costs. The methodology for the calculation of valuation reserves are reviewed at least annually by senior management.

Valuation adjustments recorded against the fair value of financial assets and financial liabilities totaled $113 million as at October 31, 2014, (2013 – $118 million), net of any write-offs. These valuation adjustments are due mainly to credit risk considerations and bid-offer spreads on derivative transactions.

The Bank discloses the classification of all financial instruments carried at fair value in a hierarchy based on the determination of fair value. The valuation hierarchy is as follows:

• Level 1 – fair value is based on unadjusted quoted prices in active markets for identical instruments,

• Level 2 – fair value is based on models using significant market-observable inputs other than quoted prices for the instruments, or

• Level 3 – fair value is based on models using significant inputs that are not based on observable market data.

The Bank’s assets and liabilities which are carried at fair value as classified by the valuation hierarchy are reflected in Note 7 on pages 144 and 145. The percentage of each asset and liability category by fair value hierarchy level are outlined as follows:

T60 Fair value hierarchy of financial instruments carried at fair value

	Assets						Liabilities
Fair value hierarchy	Trading assets		Available- for-sale securities		Derivatives		Obligations related to securities sold short		Derivatives
Level 1		61%		58%		3%		89%		3%
Level 2		38%		37%		94%		11%		96%
Level 3		1%		5%		3%		–		1%
		100%		100%		100%		100%		100%

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Impairment of investment securities

Investment securities are evaluated for impairment at the end of each reporting date, or more frequently, if events or changes in circumstances indicate the existence of objective evidence of impairment.

In the case of equity instruments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its original cost is considered in determining whether impairment exists. In the case of debt instruments classified as available-for-sale and held-to-maturity investment securities, impairment is assessed based on the same criteria as impairment of loans.

When a decline in value of available-for-sale debt or equity instrument is due to impairment, the value of the security is written down to fair value. The losses arising from impairment are reclassified from accumulated other comprehensive income and included in net gain on investment securities within other operating income in the Consolidated Statement of Income.

The losses arising from impairment of held-to-maturity investment securities are recognized in net gain on investment securities within other operating income in the Consolidated Statement of Income.

Reversals of impairment losses on available-for-sale debt instruments resulting from increases in fair value related to events occurring after the date of impairment are included in net gain on investment securities within other operating income in the Consolidated Statement of Income, to a maximum of the original impairment charge. Reversals of impairment on available-for-sale equity instruments are not recognized in the Consolidated Statement of Income; increases in fair value of such instruments after impairment are recognized in equity.

Reversals of impairment losses on held-to-maturity investment securities are included in net gain on investment securities within other operating income in the Consolidated Statement of Income, to a maximum of the amortized cost of the investment before the original impairment charge.

As at October 31, 2014, the gross unrealized gains on available-for-sale securities recorded in accumulated other comprehensive income were $1,259 million (2013 – $1,297 million), and the gross unrealized losses were $123 million (2013 – $160 million). Net unrealized gains were therefore $1,136 million (2013 – $1,137 million) before hedge amounts. The net unrealized gains after hedge amounts were $847 million (2013 – $980 million).

At October 31, 2014, the unrealized loss recorded in accumulated other comprehensive income relating to securities in an unrealized loss position for more than 12 months was $90 million (2013 – $84 million). This unrealized loss was comprised of $23 million (2013 – $26 million) in debt securities, $59 million (2013 – $44 million) related to preferred shares and $8 million (2013 – $14 million) related to common shares. The unrealized losses on the debt securities arose primarily from changes in interest rates and credit spreads. For debt securities, based on a number of considerations, including underlying credit of the issuers, the Bank expects that future interest and principal payments will continue to be received on a timely basis in accordance with the contractual terms of the security.

Employee benefits

The Bank sponsors various pension and other benefit plans for eligible employees in Canada, the U.S., and other international operations. The pension benefits are generally based on years of service and average earnings at retirement. Other benefits generally include post-retirement health care, dental care and life insurance, along with other long-term employee benefits such as long-term disability.

Employee benefit expense and the related benefit obligation are calculated using actuarial methods and certain actuarial assumptions. These assumptions are based on management’s best estimate and are reviewed and approved annually. The management assumption with the greatest potential impact is the discount rate. This rate is used for measuring the benefit obligation and is generally prescribed to be equal to the current yield on long term, high-quality corporate bonds with durations similar to the benefit obligation. This discount rate must also be used to determine the annual benefit expense. If the assumed discount rate was 1% lower, the benefit expense for 2014 would have been $109 million higher. Other key assumptions include future compensation, health care costs, employee turnover, retirement age and mortality. When making these estimates, management considers expectations of future economic trends and business conditions, including inflation rates as well as other factors, such as plan specific experience and best practices.

The Bank uses a measurement date of October 31, and based on this measurement date, the Bank reported a deficit of $624 million in its principal pension plans as disclosed in Note 31 to the consolidated financial statements on pages 179 to 183.

Actual experience that differs from assumptions made by management will result in a net actuarial gain or loss recognized immediately in other comprehensive income.

Note 31 on pages 179 to 183 of the 2014 consolidated financial statements contains details of the Bank’s employee benefit plans, such as the disclosure of pension and other benefit amounts, management’s key assumptions, and a sensitivity analysis of changes in these assumptions on the employee benefit obligation and expense.

Corporate income taxes

Management exercises judgement in determining the provision for income taxes and deferred income tax assets and liabilities. The provision is based on management’s expectations regarding the income tax consequences of transactions and events during the period. Management interprets the tax legislation for each jurisdiction in which the Bank operates and makes assumptions about the expected timing of the reversal of deferred income tax assets and liabilities. If management’s interpretations of the legislation differ from those of the tax authorities or if the actual timing of the reversals of the deferred income tax assets and liabilities is not as anticipated, the provision for income taxes could increase or decrease in future periods.

Total deferred tax assets related to the Bank’s unused income tax losses from operations arising in prior years were $620 million as at October 31, 2014 (October 31, 2013 – $756 million). The tax related to temporary differences, unused tax losses and unused tax credits for which no deferred tax asset is recognized in the Consolidated Statement of Financial Position amounted to $338 million (2013 – $279 million). The amount related to unrecognized tax losses was $38 million, which will expire as follows: $20 million in 2018 and beyond and $18 million have no fixed expiry date.

The Bank maintains provisions for uncertain tax positions that it believes appropriately reflect the risk of tax positions under discussion, audit, dispute, or appeal with tax authorities, or which are otherwise considered to involve uncertainty. These provisions are made using the Bank’s best estimate of the amount expected to be paid based on an assessment of all relevant factors, which are reviewed at the end of each reporting period.

Note 30 on pages 177 to 179 of the 2014 consolidated financial statements contains further details with respect to the Bank’s provisions for income taxes.

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Structured entities

In the normal course of business, the Bank enters into arrangements with structured entities on behalf of its customers and for its own purposes. These structured entities can be generally categorized as multi-seller commercial paper conduits, Bank funding vehicles and structured finance entities. Further details are provided on pages 50 and 51 in the off-balance sheet arrangements section.

Management is required to exercise judgement to determine whether a structured entity should be consolidated. This evaluation involves understanding the arrangements, determining whether decisions about the relevant activities are made by means of voting rights or other contractual arrangements and determining whether the Bank controls the structured entity.

The Bank controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The three elements of control are:

• power over the investee;

• exposure, or rights, to variable returns from involvement with the investee; and

• the ability to use power over the investee to affect the amount of the investor’s returns.

This definition of control applies to circumstances

• when voting rights or similar rights give the Bank power, including situations where the Bank holds less than a majority of voting rights or involving potential voting rights;

• when an investee is designed so that voting rights are not the dominant factor in deciding who controls the investee (i.e., relevant activities are directed by contractual arrangements);

• involving agency relationships; and

• when the Bank has control over specified assets of an investee.

The Bank does not control an investee when it is acting in an agent’s capacity. The Bank assesses whether it is an agent by determining whether it is primarily engaged to act on behalf and for the benefit of another party or parties. Factors that the Bank considers in this assessment include the scope of its decision-making authority over the investee, the rights held by other parties, the remuneration to which it is entitled, and the Bank’s exposure to variability of returns from other interests that it holds in the investee.

The analysis uses both qualitative and quantitative analytical techniques and involves the use of a number of assumptions about the business environment in which the structured entity operates and the amount and timing of future cash flows.

The Bank reassesses whether it controls an investee if facts and circumstances indicate that one or more of the three elements of control change.

Management is required to exercise judgement to determine if a change in control event has occurred.

During 2014, there were no change in control events that caused the Bank to change its control conclusion of its multi-seller conduits or other structured entities.

As described in Note 16 to the consolidated financial statements (on pages 163 to 165) and in the discussion of off-balance sheet arrangements (on pages 50 and 51), the Bank does not control the two canadian-based multi-seller conduits that it sponsors and they are not required to be consolidated on the Bank’s Consolidated Statement of Financial Position. The Bank controls its U.S.-based multi-seller conduit and consolidates it on the Bank’s Consolidated Statement of Financial Position.

Equity investment in hyper-inflationary country

Venezuela has been designated as hyper-inflationary and measures of foreign exchange controls have been imposed by the Venezuelan

government. These restrictions have limited the Bank’s ability to repatriate cash and dividends out of Venezuela.

As at October 31, 2014, the Bank’s total net investment in Banco del Caribe of $54 million, along with monetary assets, comprising of cash and dividend receivable was translated at the SICAD II exchange rate of 1 USD to 50 VEF. These amounts were previously measured at the official exchange rate of 1 USD to 6.3 VEF.

As a result the Bank recorded a reduction in the carrying value of the investment in associates of $129 million with a corresponding decrease to OCI. The Bank has also recognized foreign exchange losses of $47 million in the Consolidated Statement of Income as other operating income, in relation to the monetary assets.

Goodwill

For the purpose of impairment testing, goodwill acquired in a business combination is, on the acquisition date, allocated to each of the Bank’s group of cash-generating units (CGU) that are expected to benefit from the particular acquisition.

Goodwill is not amortized but tested for impairment annually and when circumstances indicate that the carrying value may be impaired.

Goodwill is reviewed at each reporting date to determine whether there is any indication of impairment. Each CGU to which goodwill is allocated for impairment testing purposes reflects the lowest level at which goodwill is monitored for internal management purposes.

The carrying amount of the CGU is determined by management using approved internal economic capital models. These models consider various factors including market risk, credit risk, operational risk, and other relevant business risks for each CGU. An impairment loss is recognized if the carrying amount of a CGU exceeds its recoverable amount. The recoverable amount is the greater of fair value less costs of disposal and value in use. If either fair value less costs of disposal or value in use exceeds the carrying amount, there is no need to determine the other. The recoverable amount for the CGU has been determined using the fair value less costs of disposal method. In arriving at such value an appropriate valuation model is used which considers various factors including normalized net income, price earnings multiples and control premium. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators. An impairment loss, in respect of goodwill, is not reversed.

Significant judgement is applied in determining the recoverable amounts of the CGU and assessing whether certain events or circumstances constitute objective evidence of impairment.

Goodwill was assessed for annual impairment based on the methodology as at July 31, 2014 and no impairment was determined to exist.

Indefinite life intangible assets

Intangible assets with indefinite useful lives are not amortized but tested for impairment annually and when circumstances indicate that the carrying value may be impaired. Intangible assets are reviewed at each reporting date to determine whether there is any indication of impairment.

The recoverable amount is the greater of fair value less costs of disposal and value in use. If either fair value less costs of disposal or value in use exceeds the carrying amount, there is no need to determine the other. Value in use method is used by the Bank to determine the recoverable amount of the intangible asset. In determining value in use, an appropriate valuation model is used which considers factors such as management-approved cash flow projections, discount rate and terminal growth rate. An impairment loss is recognized if the carrying amount of the intangible asset exceeds its recoverable amount. Impairment losses recognized in prior periods are reassessed at each reporting period for any indication that the loss has decreased or no

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longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the intangible asset’s carrying amount does not exceed the carrying amount that would have been determined if no impairment loss had been recognized.

The recoverable amount is significantly impacted by the discount rate and the terminal value. Significant judgement is applied in determining the intangible asset’s recoverable amount and assessing whether certain events or circumstances constitute objective evidence of impairment.

Intangible assets were assessed for annual impairment based on the methodology as at July 31, 2014 and no impairment was determined to exist.

Provisions

According to IFRS, the Bank should recognize a provision if, as a result of a past event, the Bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Probable in this context means more likely than not.

Litigation and other

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 Statement of Financial Position or results of operations of the Bank.

Off-balance sheet credit risks

The provisions for off-balance sheet credit risks relates primarily to off-balance sheet credit risks such as undrawn lending commitments, letters of credit and letters of guarantee. These are collectively assessed in a manner consistent with the collective allowance for performing on-balance sheet credit risks.

Recently adopted standards and future accounting developments

Changes in accounting policies during the year

The Bank has adopted the following new and amended accounting standards issued by the IASB effective November 1, 2013. The changes have been applied retrospectively, unless otherwise noted. Consequently the new accounting policies used by the Bank have been described below.

Employee benefits (IAS 19)

The amended standard IAS 19, Employee Benefits, eliminates the use of the corridor approach (the method previously used by the Bank) and requires the value of the surplus/deficit of the defined benefit plans to be recorded on the Consolidated Statement of Financial Position, with actuarial gains and losses to be recognized immediately in OCI. In addition, the discount rate to be used for recognizing the net interest income/expense is based on the rate at which the liabilities are discounted and not the expected rate of return on the assets. This will result in higher expense in the Consolidated Statement of Income in line with the funded status of the plan. The OCI balances will change in line with changes in the actuarial gains and losses.

The impact of the adoption of the standard on the consolidated financial statements for prior periods is shown in Table 61.

Consolidation (IFRS 10)

The new accounting standard, IFRS 10, Consolidated Financial Statements, replaced the consolidation guidance in IAS 27, Separate Financial Statements and SIC-12, Consolidation – Special Purpose Entities. It introduces a single, principle-based control model for all entities as a basis for determining which entities are consolidated and set out the requirements for the preparation of consolidated financial statements.

The standard was applied retrospectively allowing for certain practical exceptions and transitional relief.

The adoption of IFRS 10 has resulted primarily in the deconsolidation of Scotiabank Capital Trust and Scotiabank Tier 1 Trust (together, the “capital trusts”) through which the Bank issues certain regulatory capital instruments. These entities are designed to pass the Bank’s credit risk to the holders of the securities. Therefore the Bank does not have exposure or rights to variable returns from these entities.

The Bank consolidates all structured entities that it controls, including its U.S.-based multi-seller conduit and certain funding and other vehicles.

The impact of the deconsolidation on the consolidated financial statements for prior periods is shown in Table 61.

Disclosure of interests in other entities (IFRS 12)

In conjunction with the adoption of IFRS 10, the Bank has adopted IFRS 12, Disclosure of Interests in Other Entities, that broadens the definition of interests in other entities and requires enhanced disclosures on both consolidated entities and unconsolidated entities with which the Bank is involved. The relevant incremental disclosures have been included in Note 16 of the consolidated financial statements.

Joint arrangements (IFRS 11)

Under the new accounting standard, IFRS 11, Joint Arrangements, the Bank classifies its interests in joint arrangements as either joint operations or joint ventures depending on the Bank’s rights to the assets and obligations for the liabilities of the arrangements. The adoption of the new accounting standard has no impact on the Bank’s assets, liabilities and equity.

Fair value measurement (IFRS 13)

IFRS 13 provides a revised definition of fair value and guidance on how it should be applied where its use is already required or permitted by other standards within IFRS. In accordance with the transitional provisions, IFRS 13 has been applied prospectively from November 1, 2013. The adoption of this new standard did not have an impact on the Bank’s determination of fair value. However, IFRS 13 required additional disclosures on fair value measurement which are included in Note 7.

Disclosures-offsetting financial assets and financial liabilities (IFRS 7)

IFRS 7 – Financial Instruments: Disclosures – Offsetting Financial Assets and Liabilities requires the Bank to disclose gross amounts subject to rights of set off, amounts set off, and the related net credit exposure. These new disclosures are included in Note 11.

Presentation of financial statements (IAS 1)

IAS 1, Presentation of Financial Statements, requires the separate disclosure of items within other comprehensive income based on whether or not they will be reclassified into net income in subsequent periods. On November 1, 2013, the Bank adopted this presentation on a retrospective basis along with the implementation of IAS 19. Changes on remeasurement of employee benefit plans that are recognized directly in other comprehensive income are not reclassified to the Consolidated Statement of Income in future periods.

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T61 Summary of impact on adoption of new and amended accounting standards

The following tables summarize the impact of the changes:

As at October 31, 2013 ($ millions)	Previously reported		Employee benefits IAS 19			Consolidation IFRS 10			Restated
Assets impacted by changing IFRS accounting standards
Investment securities	$	34,303	$	–		$	16		$	34,319
Loans – Business and government		119,550		–			65			119,615
Property and equipment		2,228		–			(14	)		2,214
Investment in associates		5,294		–			32			5,326
Deferred tax assets		1,780		158			–			1,938
Other assets		10,924		(394	)		(7	)		10,523
Assets not impacted by changes		569,709		–			–			569,709
Total assets		743,788		(236	)		92			743,644
Liabilities impacted by changing IFRS accounting standards
Deposits – Business and government(1)		312,487		–			1,507			313,994
Derivative financial instruments		29,255		–			12			29,267
Capital instruments		650		–			(650	)		–
Other liabilities		31,896		171			(20	)		32,047
Liabilities not impacted by changes		322,949		–			–			322,949
Equity impacted by changing IFRS accounting standards
Retained earnings		25,315		(243	)		(4	)		25,068
Accumulated other comprehensive income (loss)		545		(157	)		–			388
Non-controlling interests
Non-controlling interests in subsidiaries		1,155		(7	)		(10	)		1,138
Capital instrument equity holders		743		–			(743	)		–
Equity not impacted by changes		18,793		–			–			18,793
Total liabilities and equity	$	743,788	$	(236	)	$	92		$	743,644
Net income for the year ended October 31, 2013	$	6,697	$	(68	)	$	(19	)	$	6,610
Earnings per share
Basic	$	5.19							$	5.15
Diluted	$	5.15							$	5.11

As at November 1, 2012 ($ millions)	Previously reported			Employee benefits IAS 19			Consolidation IFRS 10			Restated
Assets impacted by changing IFRS accounting standards
Investment securities	$	33,361		$	–		$	15		$	33,376
Loans – Business and government		111,549			–			99			111,648
Allowance for credit losses		(2,969	)		–			(8	)		(2,977	)
Property and equipment		2,260			–			(42	)		2,218
Investment in associates		4,760			–			31			4,791
Deferred tax assets		1,936			337			–			2,273
Other assets		11,572			(242	)		(9	)		11,321
Assets not impacted by changes		505,575			–			–			505,575
Total assets		668,044			95			86			668,225
Liabilities impacted by changing IFRS accounting standards
Deposits – Business and government(1)		291,361			–			2,256			293,617
Derivative financial instruments		35,299			–			24			35,323
Capital instruments		1,358			–			(1,358	)		–
Other liabilities		31,753			1,000			(27	)		32,726
Liabilities not impacted by changes		266,894			–			–			266,894
Equity impacted by changing IFRS accounting standards
Retained earnings		21,978			(180	)		(23	)		21,775
Accumulated other comprehensive income (loss)		(31	)		(714	)		–			(745	)
Non-controlling interests
Non-controlling interests in subsidiaries		966			(11	)		(9	)		946
Capital instrument equity holders		777			–			(777	)		–
Equity not impacted by changes		17,689			–			–			17,689
Total liabilities and equity	$	668,044		$	95		$	86		$	668,225
Net income for the year ended October 31, 2012	$	6,466		$	(41	)	$	(35	)	$	6,390
Earnings per share
Basic	$	5.31								$	5.27
Diluted	$	5.22								$	5.18

(1) Includes deposit liabilities designated at fair value through profit or loss of $174 (November 1, 2012 - $157).

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Future accounting developments

The Bank actively monitors developments and changes in standards from the IASB as well as regulatory requirements from the Canadian Securities Administrators and OSFI.

Effective November 1, 2014

The IASB issued a number of new or amended standards that are effective for the Bank as of November 1, 2014. The Bank has completed its assessment phase and will be able to meet the requirements of the new standards in the first quarter of 2015. Based on the assessments completed the Bank does not expect the impact of adoption of these standards to be significant.

Presentation of own credit risk (IFRS 9)

IFRS 9 Financial Instruments, requires an entity choosing to measure a liability at fair value to present the portion of the change in fair value due to the changes in the entity’s own credit risk in the Consolidated Statement of Other Comprehensive Income, rather than within the Consolidated Statement of Income. The IASB permits entities to early adopt this requirement prior to the IFRS 9 mandatory effective date of January 1, 2018. The Bank will early adopt these requirements as of Q1, 2015.

Levies

IFRIC 21, Levies, provides guidance on when to recognize a liability to pay a levy imposed by government that is accounted for in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets, and also for a liability to pay a levy whose timing and amount is certain. The interpretation clarifies that an obligating event, as identified by legislation, would trigger the recognition of a liability to pay a levy. While the interpretation discusses the timing of the recognition, it does not change the measurement of the amount to be recognized.

Novation of Derivatives and Continuation of Hedge Accounting

This amendment to IAS 39, Financial Instruments: Recognition and Measurement, adds a limited exception to IAS 39 to allow hedge accounting to continue in a situation where a derivative, which has been designated as a hedging instrument, is novated to effect clearing with a central counterparty as a result of laws and regulation, if specific conditions are met.

Presentation

The amendments to IAS 32, Financial Instruments: Presentation, clarifies the requirements relating to offsetting financial assets and financial liabilities.

Disclosures for Non-financial Assets

The amendment to IAS 36, Impairment of Assets, provides new disclosure requirements relating to the measurement of the recoverable amount of impaired assets as a result of issuing IFRS 13, Fair Value Measurement.

Effective November 1, 2017

Revenue from Contracts with Customers

On May 28, 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers, which provides a single principle based framework to be applied to all contracts with customers. IFRS 15 replaces the

previous revenue standard IAS 18, Revenue, and the related Interpretations on revenue recognition. The standard scopes out contracts that are considered to be lease contracts, insurance contracts and financial instruments, and as such will impact the businesses that earn fee and commission revenues. The new standard is a control-based model as compared to the existing revenue standard which is primarily focused on risks and rewards. Under the new standard revenue is recognized when a customer obtains control of a good or service. Transfer of control occurs when the customer has the ability to direct the use of and obtain the benefits of the good or service. The standard is effective for the Bank on November 1, 2017, with early adoption permitted, using either a full retrospective approach or a modified retrospective approach. A majority of the Bank’s revenue generating instruments meets the definition of financial instruments and remains out of scope. The areas of focus for the Bank’s assessment will be fees and commission revenues from wealth management and other banking services.

Effective November 1, 2018

Financial Instruments

On July 24, 2014, the IASB issued IFRS 9 which will replace IAS 39. The standard covers three broad topics: Classification and Measurement, Impairment and Hedging.

Classification and Measurement

The standard uses a single approach to determine whether a financial asset is measured at amortized cost or fair value. Financial assets will be measured at fair value through profit or loss unless certain conditions are met which permits measurement at amortized cost or at fair value through other comprehensive income. Most of the IFRS 9 requirements for financial liabilities have been carried forward unchanged from IAS 39.

Impairment

The standard introduces a new single model for the measurement of impairment losses on all financial instruments subject to impairment accounting. The expected credit loss (ECL) model replaces the current “incurred loss” model and is based on a forward looking approach. The ECL model contains a “dual stage” approach which is based on the change in credit quality of loans since initial recognition. Under the first stage, an amount equal to 12 months expected credit losses will be recorded for financial instruments where there has not been a significant increase in credit risk since initial recognition. Under the second stage, an amount equal to the lifetime expected losses will be recorded for those financial instruments where there has been a significant increase in credit risk since initial recognition.

Hedging

The standard expands the scope of hedged items and hedging items to which hedge accounting can be applied. It changes the effectiveness testing requirements and removes the ability to voluntarily discontinue hedge accounting.

The standard is effective for the Bank on November 1, 2018 on a retrospective basis with certain exceptions. Early adoption is permitted and if elected must at a minimum be applied to both the classification and measurement and impairment models simultaneously. The Bank is currently assessing the impact of adopting this new standard.

Regulatory developments

The Bank continues to respond to global regulatory developments, such as capital and liquidity requirements under the Basel Committee on Banking Supervision global standards (Basel III), over-the-counter derivatives reform, consumer protection measures and specific financial reforms, such as the Dodd-Frank Wall Street Reform and Consumer

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MANAGEMENT’S DISCUSSION AND ANALYSIS    |    CONTROLS AND ACCOUNTING POLICIES

Protection Act. The Bank monitors these and other developments and is working to ensure business impacts, if any, are minimized.

On February 18, 2014 the Board of Governors of the Federal Reserve System (“Federal Reserve”) in the U.S. approved the final rule to implement the enhanced prudential standards and early remediation requirements of sections 165 and 166 of the Dodd-Frank Act for bank holding companies and foreign banking organizations. With respect to foreign banking organizations, the overall intent of the final rule is to strengthen the regulation of the U.S. operations of foreign banking organizations by requiring home country capital certification consistent with the Basel capital framework, home country capital stress tests comparable to U.S. standards, maintenance of a liquidity buffer for U.S. branches and agencies and establishment of a U.S. risk committee with the appointment of a U.S. chief risk officer. The Bank will work to help ensure compliance with the final rule by the effective date of July 2016.

On December 10, 2013, the Federal Reserve approved a final rule implementing Section 619 of Dodd Frank, commonly known as the Volcker Rule. The Volcker Rule imposes prohibitions and restrictions on banking entities and their affiliates in connection with proprietary trading and investing in or sponsoring of hedge funds or private equity funds. In the final rule, the Federal Reserve extended the conformance period to July 2015. The Bank is currently working to help ensure compliance with the Volcker rule by July 2015.

The Foreign Account Tax Compliance Act (FATCA) is U.S. legislation designed to prevent U.S. taxpayers from using accounts held outside of the U.S. to evade taxes. FATCA, and in some countries, related local regulations, will require financial institutions to report annually on specified accounts held outside of the U.S. by U.S. taxpayers. This reporting will be made available to the U.S. Internal Revenue Service either directly or through local regulatory agencies. A number of other OECD member countries intend to implement requirements for automated exchange of information relating to tax residents of those countries commencing in 2016. Across our entire global network, the Bank intends to meet all obligations imposed under FATCA and other exchange of tax information regimes in accordance with local banking and tax regulations. Under the guidance of an enterprise program office, dedicated project teams in each of the business lines are working to meet all such obligations worldwide while minimizing negative impact on the client experience.

Related party transactions

Compensation of key management personnel

Compensation of the Bank key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Bank, directly or indirectly, and comprise the directors of the Bank, the President and Chief Executive Officer, certain direct reports of the President and Chief Executive Officer, including Group Heads, and the Chief Financial Officer.

T62 Compensation of the Bank key management personnel

For the year ended October 31
($ millions)	2014		2013
Salaries and cash incentives(1)	$	17	$	20
Equity-based payment(2)		25		34
Pension and other benefits(1)		3		2
Total	$	45	$	56

(1) Expensed during the year

(2) Awarded during the year

Directors can use some of all of their director fees earned to buy common shares of the Bank at market rates through the Directors’ Share Purchase Plan. Non-officer directors may elect to receive all or a

portion of their fees in the form of deferred stock units which vest immediately. Commencing in fiscal 2004, the Bank no longer grants stock options to non-officer directors. Refer to Note 29 – Share-based payments for further details of these plans.

Loans and deposits of key management personnel

T63 Loans and deposits of key management personnel

As at October 31
($ millions)	2014		2013
Loans	$	4	$	1
Deposits	$	5	$	12

In Canada, loans are currently granted to key management personnel at market terms and conditions. Effective March 1, 2001, the Bank discontinued the practice of granting loans to key management personnel in Canada at reduced rates. Any of these loans granted prior to March 1, 2001, are grandfathered until maturity.

The Bank’s committed credit exposure to companies controlled by directors totaled $9.4 million as at October 31, 2014 (October 31, 2013 – $3.5 million) while actual utilized accounts were $3.4 million (October 31, 2013 – $1.3 million).

Transactions with associates and joint ventures

In the ordinary course of business, the Bank provides normal banking services and enters into transactions with its associated and other related corporations on terms similar to those offered to non-related parties. If these transactions are eliminated on consolidation, they are not disclosed as related party transactions. Transactions between the Bank and its associated companies and joint ventures also qualify as related party transactions and are as follows:

T64 Transactions with associates and joint ventures

As at and for the year ended October 31 ($ millions)	2014		2013
Net income	$	11	$	20
Loans		553		511
Deposits		223		287
Guarantees and commitments	$	75	$	58

Scotiabank principal pension plan

The Bank manages assets of $1.8 billion (October 31, 2013 – $1.7 billion) which is a portion of the Scotiabank principal pension plan assets and earned $4 million (October 31, 2013 – $4 million) in fees.

Oversight and governance

The oversight responsibilities of the Audit and Conduct Review Committee (ACRC) with respect to related party transactions include reviewing policies and practices for identifying transactions with related parties that may materially affect the Bank, and reviewing the procedures for ensuring compliance with the Bank Act for related party transactions. The Bank Act requirements encompass a broader definition of related party transactions than is set out in GAAP. The Bank has various procedures in place to ensure that related party information is identified and reported to the ACRC on a semi-annual basis. The ACRC is provided with detailed reports that reflect the Bank’s compliance with its established procedures.

The Bank’s Internal Audit department carries out audit procedures as necessary to provide the ACRC with reasonable assurance that the Bank’s policies and procedures to identify, authorize and report related party transactions are appropriately designed and operating effectively.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

SUPPLEMENTARY DATA

Geographic information

T65 Net income by geographic segment

	2014													2013													2012
For the fiscal years ($ millions)	Canada		U.S.		Mexico		Peru		Other Inter- national		Total			Canada		U.S.		Mexico		Peru		Other Inter- national		Total			Canada		U.S.		Mexico		Peru		Other Inter- national		Total
Net interest income	$	6,219	$	440	$	1,180	$	935	$	3,576	$	12,350		$	5,706	$	461	$	1,048	$	895	$	3,325	$	11,435		$	4,747	$	527	$	846	$	832	$	3,127	$	10,079
Net fee and commission revenues		5,282		451		495		454		1,344		8,026			4,588		459		452		416		1,204		7,119			4,226		422		416		376		977		6,417
Net income from investments in associated corporations		156		–		–		6		405		567			239		–		4		5		659		907			214		–		3		4		377		598
Other operating income		1,633		359		104		74		917		3,087			904		287		122		72		948		2,333			1,472		275		58		24		986		2,815
Provision for credit losses		662		6		240		267		528		1,703			472		38		130		246		402		1,288			515		20		89		180		348		1,152
Operating expenses		6,986		513		1,154		645		3,399		12,697			6,441		464		1,050		628		3,230		11,813			5,770		412		857		587		2,914		10,540
Provision for income taxes		1,156		237		35		175		497		2,100			956		190		61		166		510		1,883			856		286		34		156		367		1,699
Net income	$	4,486	$	494	$	350	$	382	$	1,818	$	7,530		$	3,568	$	515	$	385	$	348	$	1,994	$	6,810		$	3,518	$	506	$	343	$	313	$	1,838	$	6,518
Corporate adjustments(1)												(232	)												(200	)												(128	)
											$	7,298												$	6,610												$	6,390
Net income attributable to:
Non-controlling interests												227													231													196
Preferred shareholders												155													217													220
Common shareholders											$	6,916												$	6,162												$	5,974

(1) The adoption of the standard on business combinations results in a change in the definition of net income to exclude non-controlling interests.

T66 Loans and acceptances by geography⁽¹⁾

	IFRS												CGAAP			Percentage mix
As at October 31 ($ billions)	2014			2013			2012			2011			2010			2014			2010
Canada
Atlantic provinces	$	25.5		$	19.2		$	17.3		$	15.7		$	17.0			5.8	%		6.0	%
Quebec		27.7			25.3			22.3			20.5			17.7			6.3			6.2
Ontario		145.1			145.6			123.7			109.7			101.7			33.1			36.0
Manitoba and Saskatchewan		15.1			13.1			11.5			10.4			6.6			3.4			2.3
Alberta		46.3			42.4			36.7			33.9			21.7			10.6			7.7
British Columbia		43.0			46.3			39.4			36.1			21.1			9.8			7.5
		302.7			291.9			250.9			226.3			185.8			69.0			65.7
U.S.		23.5			20.0			20.7			16.7			21.1			5.4			7.5
Mexico		16.0			12.9			10.7			10.3			10.1			3.7			3.6
Other International
Latin America		41.6			36.8			33			28.5			23.4			9.5	%		8.3	%
Europe		6.3			6.4			6.0			8.7			6.5			1.5			2.3
Caribbean and Central America		27.7			27.0			25.9			17.8			18.8			6.3			6.6
Asia and Other		20.0			21.1			17.2			21.1			17.0			4.6			6.0
		95.6			91.3			82.1			76.1			65.7			21.9			23.2
	$	437.8		$	416.1		$	364.4		$	329.4		$	282.7			100.0	%		100.0	%
Total allowance for loan losses(2)		(3.6	)		(3.3	)		(3.0	)		(2.7	)		(1.4	)
Total loans and acceptances net of allowance for loan losses	$	434.2		$	412.8		$	361.4		$	326.7		$	281.3

(1) 2011 and 2012 have been restated as follows: deposits with non-bank financial institutions are now excluded (previously classified as loans); loan facilities drawn by way of letters of credit are now excluded; and letters of credit facilities drawn by way of loans are now included. Periods prior to 2011 reflect balances as at September 30, and General Allowances as at October 31.

(2) Total allowance includes a collective allowance on performing loans of $1,272 million.

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T67 Gross impaired loans by geographic segment

	IFRS								CGAAP
As at October 31 ($ millions)	2014(1)		2013(1)		2012(1)		2011(1)		2010
Canada	$	1,116	$	1,022	$	1,182	$	1,168	$	1,276
U.S.		11		184		139		8		179
Mexico		314		223		145		152		250
Peru		423		326		266		230		219
Other International		2,336		1,946		1,890		1,843		2,497
Total	$	4,200	$	3,701	$	3,622	$	3,401	$	4,421

(1) Excludes Federal Deposit Insurance Corporation (FDIC) guaranteed loans related to the acquisition of R-G Premier Bank of Puerto Rico.

T68 Provision against impaired loans by geographic segment

	IFRS									CGAAP
For the fiscal years ($ millions)	2014		2013		2012		2011			2010
Canada	$	662	$	472	$	515	$	621		$	712
U.S.		6		38		20		(12	)		(13	)
Mexico		240		130		89		145			168
Peru		267		246		180		85			104
Other International		528		402		348		297			352
Total	$	1,703	$	1,288	$	1,152	$	1,136		$	1,323

T69 Cross-border exposure to select countries⁽¹⁾

As at October 31 ($ millions)	Loans		Trade		Interbank deposits		Government and other securities		Investment in subsidiaries and affiliates		Other				2013 Total
													2014 Total
Asia
China	$	3,689	$	4,342	$	153	$	519	$	359	$	24	$	9,087	$	7,928
Hong Kong		1,377		105		72		171		–		35		1,761		1,795
India		2,123		1,000		–		167		–		34		3,323		3,928
Japan		137		38		89		700		–		791		1,754		768
Malaysia		956		175		–		17		306		32		1,486		1,626
South Korea		1,854		632		–		276		–		60		2,822		3,096
Thailand		8		43		428		53		2,134		4		2,670		2,472
Turkey		370		876		–		–		–		–		1,245		1,772
Other(2)		1,387		447		125		112		–		113		2,185		2,022
Total	$	11,901	$	7,657	$	867	$	2,014	$	2,800	$	1,093	$	26,332	$	25,408
Latin America
Brazil	$	2,717	$	2,369		–	$	104	$	181	$	12	$	5,384	$	4,287
Chile		2,712		727		–		–		2,668		19		6,126		6,407
Colombia		778		366		–		3		1,455		4		2,606		2,004
Mexico		1,749		427		–		54		3,022		2		5,254		5,145
Peru		2,254		228		–		–		2,784		14		5,280		4,582
Uruguay		223		25		–		–		335		–		583		475
Other		6		–		–		–		78		–		84		183
Total	$	10,440	$	4,142	$	–	$	160	$	10,522	$	52	$	25,316	$	23,084
Caribbean and Central America
Dominican Republic	$	800	$	129	$	68	$	14		–	$	3	$	1,014	$	956
Jamaica		64		1		–		–		435		–		501		596
Other(3)		1,497		87		12		57		344		2		1,999		2,011
Costa Rica		1,010		152		–		–		715		–		1,877		1,755
El Salvador		446		82		–		–		488		–		1,016		951
Panama		2,443		181		25		4		–		1		2,653		2,933
Total	$	6,260	$	632	$	105	$	75	$	1,983	$	6	$	9,060	$	9,203

(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. Totals may not add due to rounding.

(2) Includes Indonesia, Macau, Singapore, Taiwan and Vietnam.

(3) Includes other English and Spanish Caribbean countries, such as Bahamas, Barbados, British Virgin Islands, Trinidad & Tobago, Turks & Caicos.

2014  Scotiabank Annual Report      99

MANAGEMENT’S DISCUSSION AND ANALYSIS

Credit Risk

T70 Loans and acceptances by type of borrower⁽¹⁾

	2014
As at October 31 ($ billions)	Balance			% of total			2013			2012(1)
Residential mortgages	$	212.6			48.6	%	$	209.9		$	175.6
Personal loans and credit cards		84.2			19.2			76.0			68.3
Personal	$	296.8			67.8	%	$	285.9		$	243.9
Financial services
Non-bank	$	13.4			3.1	%	$	11.7		$	13.0
Bank(2)		8.9			2.0			12.1			7.8
Wholesale and retail		16.6			3.8			14.1			13.4
Real estate and construction		15.5			3.5			14.2			12.2
Oil and gas		12.8			2.9			10.4			9.8
Transportation		8.1			1.9			7.8			8.1
Automotive		8.1			1.9			7.4			6.6
Agriculture		7.1			1.6			6.1			5.7
Hospitality and leisure		3.6			0.8			3.4			3.6
Mining and primary metals		6.0			1.4			4.7			3.2
Utilities		5.9			1.3			4.4			5.3
Health care		3.5			0.8			3.6			3.5
Technology and media		5.4			1.2			5.3			5.2
Chemical		1.4			0.3			1.3			1.2
Food and beverage		3.9			0.9			3.1			2.5
Forest products		1.3			0.3			1.5			1.3
Other(3)		15.3			3.5			14.9			13.8
Sovereign(4)		4.2			1.0			4.2			4.3
Business and government	$	141.0			32.2	%	$	130.2		$	120.6
	$	437.8			100.0	%	$	416.1		$	364.4
Total allowance for loan losses		(3.6	)					(3.3	)		(3.0	)
Total loans and acceptances net of allowance for loan losses	$	434.2					$	412.8		$	361.4

(1) 2012 amounts have been restated as follows: deposits with non-bank financial institutions are now excluded (previously classified as loans); loan facilities drawn by way of letters of credit are now excluded; and letters of credit facilities drawn by way of loans are now included.

(2) Deposit taking institutions and securities firms.

(3) Other related to $6.5 in financing products, $1.3 in services and $1.2 in wealth management.

(4) Includes central banks, regional and local governments, and supra-national agencies.

T71 Off balance-sheet credit instruments

	IFRS								CGAAP
As at October 31 ($ billions)	2014		2013		2012		2011		2010
Commitments to extend credit(1)	$	137.3	$	118.8	$	109.9	$	104.7	$	103.6
Standby letters of credit and letters of guarantee		26.0		24.2		22.1		21.1		20.4
Securities lending, securities purchase commitments and other		38.9		28.3		16.2		14.2		14.0
Total	$	202.2	$	171.3	$	148.2	$	140.0	$	138.0

(1) Excludes commitments which are unconditionally cancellable at the Bank’s discretion at any time.

100      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    SUPPLEMENTARY DATA

T72 Changes in net impaired loans

For the fiscal years ($ millions)	2014			2013			2012			2011
Gross impaired loans(1)
Balance at beginning of year	$	3,701		$	3,622		$	3,401		$	3,714
Net additions(2)
New additions		3,767			2,863			2,825			2,790
Declassifications		(32	)		(208	)		(194	)		–
Payments		(1,295	)		(1,218	)		(1,183	)		(1,708	)
Sales		(141	)		(9	)		(36	)		–
		2,299			1,428			1,412			1,082
Write-offs
Residential mortgages		(69	)		(91	)		(66	)		(130	)
Personal loans		(1,027	)		(728	)		(733	)		(374	)
Credit cards		(463	)		(449	)		(299	)		(628	)
Business and government		(338	)		(201	)		(200	)		(192	)
		(1,897	)		(1,469	)		(1,298	)		(1,324	)
Foreign exchange and other		97			120			107			(71	)
Balance at end of year	$	4,200		$	3,701		$	3,622		$	3,401
Allowance for credit losses on impaired loans
Balance at beginning of year	$	1,893		$	1,617		$	1,406		$	1,385
Provision for credit losses		1,703			1,288			1,252			1,076
Write-offs		(1,897	)		(1,469	)		(1,298	)		(1,324	)
Recoveries
Residential mortgages		87			40			30			55
Personal loans		223			179			185			71
Credit cards		107			113			76			152
Business and government		93			111			84			71
		510			443			375			349
Foreign exchange and other(3)		(11	)		14			(118	)		(80	)
Balance at end of year	$	2,198		$	1,893		$	1,617		$	1,406
Net impaired loans
Balance at beginning of year	$	1,808		$	2,005		$	1,995		$	2,329
Net change in gross impaired loans		499			79			221			(313	)
Net change in allowance for credit losses on impaired loans		(305	)		(276	)		(211	)		(21	)
Balance at end of year	$	2,002		$	1,808		$	2,005		$	1,995
Collective allowance on performing loans		(1,272	)		(1,272)			(1,272	)		(1,224)
Balance, after deducting collective allowance on performing loans, at end of year	$	730		$	536		$	733		$	771

(1) Excludes Federal Deposit Insurance Corporation (FDIC) guaranteed loans related to the acquisition of R-G Premier Bank of Puerto Rico.

(2) 2011 information has been presented in aggregate for declassification, payments and sales in “payments”.

(3) Includes $4 million transferred to/from other liabilities (2013 – $4 million, 2012 – $4 million, 2011 – $8 million).

2014  Scotiabank Annual Report      101

MANAGEMENT’S DISCUSSION AND ANALYSIS

T73 Provision for credit losses

For the fiscal years ($ millions)	2014			2013			2012			2011
Gross provisions	$	2,312		$	1,829		$	1,637		$	1,653
Reversals		(99	)		(98	)		(110	)		(168	)
Recoveries		(510	)		(443	)		(375	)		(349	)
Net provision for credit losses on impaired loans		1,703			1,288			1,152			1,136
Collective provision (reversals) on performing loans		–			–			100			(60	)
Total net provision for credit losses	$	1,703		$	1,288		$	1,252		$	1,076

T74 Provision for credit losses against impaired loans by type of borrower

For the fiscal years ($ millions)	2014		2013			2012			2011
Residential mortgages	$	–	$	117		$	112		$	176
Personal loans and credit cards		1,414		1,004			875			760
Personal	$	1,414	$	1,121		$	987		$	936
Financial services
Non-bank		5		–			–			(7	)
Bank		–		–			1			–
Wholesale and retail		58		36			30			23
Real estate and construction		61		43			25			29
Oil and gas		3		18			4			48
Transportation		12		(11	)		5			43
Automotive		1		–			2			(2	)
Agriculture		7		4			17			(1	)
Hospitality and leisure		44		9			10			6
Mining and primary metals		12		–			(1	)		1
Utilities		24		10			2			3
Health care		15		5			13			4
Technology and media		32		6			7			16
Chemical		–		–			–			–
Food and beverage		9		2			(1	)		3
Forest products		–		–			7			4
Other		6		42			41			30
Sovereign		–		3			3			–
Business and government	$	289	$	167		$	165		$	200
Total provisions against impaired loans	$	1,703	$	1,288		$	1,152		$	1,136

102      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    SUPPLEMENTARY DATA

T75 Impaired loans by type of borrower

	2014(1)							2013(1)
As at October 31 ($ millions)	Gross		Allowance for credit losses		Net			Gross		Allowance for credit losses		Net
Residential mortgages	$	1,491	$	359	$	1,132		$	1,270	$	338	$	932
Personal loans and credit cards		1,254		1,225		29			1,046		994		52
Personal	$	2,745	$	1,584	$	1,161		$	2,316	$	1,332	$	984
Financial services
Non-bank		15		5		10			3		–		3
Bank		1		1		–			2		1		1
Wholesale and retail		194		127		67			151		86		65
Real estate and construction		270		91		179			351		119		232
Oil and gas		44		51		(7	)		81		55		26
Transportation		88		24		64			47		22		25
Automotive		14		4		10			8		3		5
Agriculture		82		41		41			76		34		42
Hospitality and leisure		168		80		88			154		41		113
Mining and primary metals		62		22		40			15		7		8
Utilities		265		20		245			56		12		44
Health care		51		26		25			56		28		28
Technology and media		16		9		7			52		29		23
Chemical		2		–		2			–		–		–
Food and beverage		54		18		36			23		8		15
Forest products		4		3		1			12		9		3
Other		113		88		25			247		98		149
Sovereign		12		4		8			51		9		42
Business and government	$	1,455	$	614	$	841		$	1,385	$	561	$	824
Total	$	4,200	$	2,198	$	2,002		$	3,701	$	1,893	$	1,808

(1) Excludes Federal Deposit Insurance Corporation (FDIC) guaranteed loans related to the acquisition of R-G Premier Bank of Puerto Rico.

T76 Total credit risk exposures by geography⁽¹⁾⁽²⁾

	2014										2013
	Non-Retail
As at October 31 ($ millions)	Drawn		Undrawn		Other exposures(3)		Retail		Total		Total
Canada	$	61,914	$	26,735	$	33,969	$	283,100	$	405,718	$	390,613
U.S.		64,690		19,436		32,843		–		116,969		104,366
Mexico		11,473		307		1,032		7,963		20,775		17,859
Peru		12,461		974		2,659		5,297		21,391		17,703
Other International
Europe		13,962		5,787		9,522		–		29,271		30,072
Caribbean and Central America		17,279		1,382		1,519		14,387		34,567		34,034
Latin America		20,460		944		1,372		11,782		34,558		31,856
Other		30,372		3,823		2,993		82		37,270		36,959
Total	$	232,611	$	59,388	$	85,909	$	322,611	$	700,519	$	663,462

(1) Geographic segmentation is based upon the location of the ultimate risk of the credit exposure. Includes all credit risk portfolios and excludes available-for-sale equities and other assets.

(2) Amounts represent exposure at default.

(3) Includes off-balance sheet lending instruments such as letters of credit, letters of guarantee, derivatives, securitization and repo-style transactions after collateral.

T77 AIRB credit risk exposures by maturity⁽¹⁾⁽²⁾

As at October 31 ($ millions)	2014								2013
Residual maturity	Drawn		Undrawn		Other exposures(3)		Total		Total
Non-retail
Less than 1 year	$	115,182	$	17,613	$	46,581	$	179,376	$	173,719
One to 5 years		61,439		36,797		30,071		128,307		119,173
Over 5 years		6,961		1,229		6,519		14,709		9,019
Total non-retail	$	183,582	$	55,639	$	83,171	$	322,392	$	301,911
Retail
Less than 1 year	$	36,048	$	12,868	$	–	$	48,916	$	39,325
One to 5 years		154,437		–		–		154,437		166,712
Over 5 years		20,138		–		–		20,138		14,653
Revolving credits(4)		36,192		16,196		–		52,388		47,622
Total retail	$	246,815	$	29,064	$	–	$	275,879	$	268,312
Total	$	430,397	$	84,703	$	83,171	$	598,271	$	570,223

(1) Remaining term to maturity of the credit exposure. Includes all credit risk portfolios and excludes available-for-sale equities and other assets.

(2) Exposure at default, before credit risk mitigation.

(3) Off-balance sheet lending instruments, such as letters of credit, letters of guarantee, securitization, derivatives and repo-style transactions after collateral.

(4) Credit cards and lines of credit with unspecified maturity.

2014  Scotiabank Annual Report      103

MANAGEMENT’S DISCUSSION AND ANALYSIS

T78 Total credit risk exposures and risk-weighted assets

	2014												2013
	AIRB				Standardized(1)				Total				Total
As at October 31 ($ millions)	Exposure  at Default(2)		CET1  risk- weighted assets(3)		Exposure  at Default(2)		CET1  risk- weighted assets(3)		Exposure  at Default(2)		CET1  risk- weighted assets(3)		Exposure at Default(2)		Risk- weighted assets
Non-retail
Corporate
Drawn	$	89,287	$	50,298	$	41,334	$	39,942	$	130,621	$	90,240	$	116,209	$	82,203
Undrawn		43,395		18,682		3,687		3,632		47,082		22,314		45,758		21,547
Other(4)		29,099		8,951		2,579		2,545		31,678		11,496		24,902		9,520
		161,781		77,931		47,600		46,119		209,381		124,050		186,869		113,270
Bank
Drawn		23,360		6,022		2,523		1,478		25,883		7,500		28,186		9,509
Undrawn		10,895		3,331		59		25		10,954		3,356		12,463		3,968
Other(4)		8,096		1,398		99		88		8,195		1,486		11,361		2,071
		42,351		10,751		2,681		1,591		45,032		12,342		52,010		15,548
Sovereign
Drawn		70,935		4,589		5,172		269		76,107		4,858		69,594		5,013
Undrawn		1,349		139		3		1		1,352		140		1,568		234
Other(4)		805		33		–		–		805		33		4,837		84
		73,089		4,761		5,175		270		78,264		5,031		75,999		5,331
Total Non-retail
Drawn		183,582		60,909		49,029		41,689		232,611		102,598		213,989		96,725
Undrawn		55,639		22,152		3,749		3,658		59,388		25,810		59,789		25,749
Other(4)		38,000		10,382		2,678		2,633		40,678		13,015		41,100		11,675
	$	277,221	$	93,443	$	55,456	$	47,980	$	332,677	$	141,423	$	314,878	$	134,149
Retail(5)								.
Retail residential mortgages
Drawn	$	187,364	$	9,053	$	23,977	$	10,713	$	211,341	$	19,766	$	209,581	$	18,956
Undrawn		–		–		–		–		–		–		–		–
		187,364		9,053		23,977		10,713		211,341		19,766		209,581		18,956
Secured lines of credit
Drawn		19,115		4,487		–		–		19,115		4,487		18,241		4,802
Undrawn		12,209		1,282		–		–		12,209		1,282		12,856		1,419
		31,324		5,769		–		–		31,324		5,769		31,097		6,221
Qualifying retail revolving exposures (QRRE)
Drawn		16,011		9,356		–		–		16,011		9,356		15,174		7,105
Undrawn		16,196		2,105		–		–		16,196		2,105		12,900		1,672
		32,207		11,461		–		–		32,207		11,461		28,074		8,777
Other retail
Drawn		24,325		12,355		22,755		16,493		47,080		28,848		40,499		24,412
Undrawn		659		161		–		–		659		161		735		90
		24,984		12,516		22,755		16,493		47,739		26,009		41,234		24,502
Total retail
Drawn		246,815		35,251		46,732		27,206		293,547		62,457		283,495		55,275
Undrawn		29,064		3,548		–		–		29,064		3,548		26,491		3,181
	$	275,879	$	38,799	$	46,732	$	27,206	$	322,611	$	66,005	$	309,986	$	58,456
Securitization exposures		19,922		4,561		60		60		19,982		4,621		17,975		7,049
Trading derivatives		25,249		8,041		–		–		25,249		8,041		20,623		6,977
CVA derivatives		–		–		–		5,632		–		5,632		–		–
Subtotal	$	598,271	$	144,844	$	102,248	$	80,878	$	700,519	$	225,722	$	663,462	$	206,631
Equities		4,269		4,269		–		–		4,269		4,269		3,728		3,728
Other assets		–		–		52,288		23,065		52,288		23,065		55,910		22,250
Total credit risk, before scaling factor	$	602,540	$	149,113	$	154,536	$	103,943	$	757,076	$	253,056	$	723,100	$	232,609
Add-on for 6% scaling factor(6)		–		8,831		–		–		–		8,831		–		8,331
Total credit risk	$	602,540	$	157,944	$	154,536	$	103,943	$	757,076	$	261,887	$	723,100	$	240,940

(1) Net of specific allowances for credit losses.

(2) Outstanding amount for on-balance sheet exposures and loan equivalent amount for off-balance sheet exposures, before credit risk mitigation.

(3) At Q4 2014, CVA risk-weighted assets were calculated using scalars of 0.57, 0.65, and 0.77 to compute CET1 capital ratio, Tier 1 capital ratio and Total capital ratio respectively.

(4) Other exposures include off-balance sheet lending instruments, such as letters of credit, letters of guarantee, non-trading derivatives and repo-style exposures, after collateral.

(5) During the year, the Bank implemented new retail probability of default (PD), exposure at default (EAD) and loss given default (LGD) models for credit cards, lines of credit and real estate secured revolving credit.

(6) Basel Committee imposed scaling factor (6%) on risk-weighted assets for Internal ratings-based credit risk portfolios.

104      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    SUPPLEMENTARY DATA

Revenues and Expenses

T79 Volume/rate analysis of change in net interest income

TEB⁽¹⁾

($ millions)	Increase (decrease) due to change in: 2014 versus 2013									Increase (decrease) due to change in: 2013 versus 2012
		Average			Average			Net			Average			Average			Net
		volume			rate			change			volume			rate			change
Net interest income
Total earning assets	$	1,246		$	(719	)	$	527		$	2,684		$	(1,017	)	$	1,667
Total interest-bearing liabilities		381			(811	)		(430	)		1,023			(734	)		289
Change in net interest income	$	865		$	92		$	957		$	1,661		$	(283	)	$	1,378
Assets
Deposits with banks	$	23		$	(39	)	$	(16	)	$	(6	)	$	(2	)	$	(8	)
Trading assets		10			(5	)		5			21			(25	)		(4	)
Securities purchased under resale agreements		27			(38	)		(11	)		73			(104	)		(31	)
Investment securities		21			(121	)		(100	)		150			(193	)		(43	)
Loans:
Residential mortgages		156			33			189			1,492			(573	)		919
Personal loans and credit cards		583			(72	)		511			476			151			627
Business and government		426			(477	)		(51	)		478			(271	)		207
Total loans		1,165			(516	)		649			2,446			(693	)		1,753
Total earning assets	$	1,246		$	(719	)	$	527		$	2,684		$	(1,017	)	$	1,667
Liabilities
Deposits:
Personal	$	85		$	(267	)	$	(182	)	$	556		$	(301	)	$	255
Business and government		289			(346	)		(57	)		218			(176	)		42
Banks		18			32			50			22			(39	)		(17	)
Total deposits		392			(581	)		(189	)		796			(516	)		280
Obligations related to securities sold under repurchase agreements		36			(46	)		(10	)		112			(89	)		23
Subordinated debentures		(106	)		(29	)		(135	)		21			(63	)		(42	)
Other interest bearing liabilities		59			(155	)		(96	)		94			(66	)		28
Total interest bearing liabilities	$	381		$	(811	)	$	(430	)	$	1,023		$	(734	)	$	289

(1) Refer to non-GAAP measures on page 17. Totals may not add due to rounding.

(2) Prior period amounts have been restated to conform with current year presentation.

T80 Provision for income taxes

For the fiscal years ($ millions)	2014		2013(1)		2012(1)		2014 versus 2013
Income taxes
Provision for income taxes	$	2,002	$	1,737	$	1,568		15	%
Other taxes
Payroll taxes		312		277		247		12
Business and capital taxes		314		274		248		15
Harmonized sales tax and other		295		268		252		10
Total other taxes		921		819		747		12
Total income and other taxes(2)	$	2,923	$	2,556	$	2,315		14	%
Net income before income taxes	$	9,300	$	8,347	$	7,958		11	%
Effective income tax rate (%)		21.5		20.8		19.7		0.7
Total tax rate (%)(3)		28.6		27.9		26.6		0.7

(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4 in the consolidated financial statements).

(2) Comprising $1,679 million of Canadian taxes (2013 – $1,403 million; 2012 – $1,258 million) and $1,244 million of foreign taxes (2013 – $1,153 million; 2012 – $1,057 million).

(3) Total income and other taxes as a percentage of net income before income and other taxes.

2014  Scotiabank Annual Report      105

MANAGEMENT’S DISCUSSION AND ANALYSIS

T81 Assets under administration and management

($ billions)	2014		2013		2012		2011
Assets under administration
Personal
Retail brokerage	$	148.8	$	132.9	$	117.6	$	108.1
Investment management and trust		95.1		85.2		79.9		72.6
		243.9		218.1		197.5		180.7
Mutual funds		122.5		106.8		82.2		73.5
Institutional		61.1		52.9		48.3		43.5
Total	$	427.5	$	377.8	$	328.0	$	297.7
Assets under management
Personal	$	35.7	$	29.7	$	24.3	$	18.4
Mutual funds		110.6		96.5		73.8		67.7
Institutional		18.5		19.3		16.6		16.6
Total	$	164.8	$	145.5	$	114.7	$	102.7

T82 Fees paid to the shareholders’ auditors

For the fiscal years ($ millions)	2014		2013		2012		2011
Audit services	$	24.6	$	24.4	$	20.7	$	18.9
Audit-related services		0.6		1.2		0.5		1.4
Tax services outside of the audit scope		–		0.1		0.1		0.1
Other non-audit services		0.7		0.4		0.5		0.5
Total	$	25.9	$	26.1	$	21.8	$	20.9

106      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    SUPPLEMENTARY DATA

Selected Quarterly Information

T83 Selected quarterly information

	2014								2013(1)
As at and for the quarter ended	Q4		Q3		Q2		Q1		Q4		Q3		Q2		Q1
Operating results ($ millions)
Net interest income		3,099		3,150		3,051		3,005		2,874		2,930		2,779		2,767
Net interest income (TEB(2))		3,105		3,155		3,054		3,008		2,877		2,935		2,782		2,771
Non-interest revenue		2,648		3,337		2,674		2,640		2,526		2,585		2,434		2,404
Non-interest revenue (TEB(2))		2,743		3,421		2,755		2,717		2,600		2,659		2,513		2,474
Total revenue		5,747		6,487		5,725		5,645		5,400		5,515		5,213		5,171
Total revenue (TEB(2))		5,848		6,576		5,809		5,725		5,477		5,594		5,295		5,245
Provision for credit losses		574		398		375		356		321		314		343		310
Operating expenses		3,361		3,140		2,995		3,105		2,977		3,003		2,856		2,828
Provision for income taxes		374		598		555		475		426		451		432		428
Provision for income taxes (TEB(2))		475		687		639		555		503		530		514		502
Net income		1,438		2,351		1,800		1,709		1,676		1,747		1,582		1,605
Net income attributable to common shareholders		1,343		2,267		1,699		1,607		1,567		1,637		1,467		1,491
Operating performance
Basic earnings per share ($)		1.10		1.86		1.40		1.33		1.30		1.37		1.23		1.26
Diluted earnings per share ($)		1.10		1.85		1.39		1.32		1.29		1.36		1.22		1.24
Adjusted diluted earnings per share(2)($)		1.11		1.86		1.40		1.34		1.31		1.38		1.23		1.26
Return on equity(2)(%)		11.9		20.6		16.3		15.4		15.8		17.2		16.5		16.8
Productivity ratio (%)(TEB(2))		57.5		47.8		51.6		54.2		54.4		53.7		53.9		53.9
Core banking margin (%)(TEB(2))		2.39		2.41		2.42		2.35		2.31		2.33		2.30		2.29
Financial position information ($ billions)
Cash and deposits with financial institutions		56.7		50.0		59.8		55.3		53.3		52.2		55.2		53.1
Trading assets		113.2		120.4		117.7		113.0		96.5		101.8		104.3		104.5
Loans		424.3		418.9		418.9		414.8		402.2		397.3		394.7		388.7
Total assets		805.7		791.5		791.8		782.8		743.6		742.5		754.3		736.5
Deposits(3)		554.0		545.1		551.5		539.4		517.9		507.3		520.0		514.7
Common equity		45.0		44.2		43.0		42.4		40.2		38.6		36.9		35.9
Preferred shares		2.9		2.9		3.2		3.8		4.1		4.4		4.4		4.4
Assets under administration(2)		427.5		421.9		419.0		393.1		377.8		360.5		362.6		352.1
Assets under management(2)		164.8		164.8		158.8		153.3		145.5		134.6		135.2		130.6
Capital measures
Common Equity Tier 1 (CET1) capital ratio (%)		10.8		10.9		9.8		9.4		9.1		8.9		8.6		8.2
Tier 1 capital ratio (%)		12.2		12.3		11.3		11.2		11.1		11.0		10.7		10.3
Total capital ratio (%)		13.9		14.1		13.3		13.5		13.5		13.8		13.6		13.5
Asset to capital multiple		17.1		16.8		17.9		17.4		17.1		17.1		17.5		17.3
CET1 risk-weighted assets ($ billions)		312.5		307.8		300.2		302.1		288.2		282.3		280.7		280.1
Credit quality
Net impaired loans ($ millions)(4)		2,002		1,877		1,941		1,833		1,808		1,874		1,809		1,934
Allowance for credit losses ($ millions)		3,641		3,406		3,364		3,361		3,273		3,213		3,220		3,105
Net impaired loans as a % of loans and acceptances(4)		0.46		0.43		0.45		0.43		0.44		0.46		0.45		0.49
Provision for credit losses as a % of average loans and acceptances (annualized)		0.53		0.37		0.36		0.34		0.31		0.31		0.35		0.32
Common share information
Share price ($) (TSX)
High		74.39		74.93		66.72		66.75		64.10		60.15		61.84		59.20
Low		64.05		66.18		59.92		60.56		57.35		55.10		56.33		52.30
Close		69.02		74.01		66.60		61.10		63.39		58.01		58.09		58.65
Shares outstanding (millions)
Average – Basic		1,217		1,217		1,215		1,209		1,204		1,198		1,193		1,186
Average – Diluted		1,223		1,225		1,222		1,217		1,210		1,207		1,213		1,204
End of period		1,217		1,217		1,217		1,215		1,209		1,203		1,198		1,192
Dividends per share ($)		0.66		0.64		0.64		0.62		0.62		0.60		0.60		0.57
Dividend yield(5)(%)		3.8		3.6		4.0		3.9		4.1		4.2		4.1		4.1
Market capitalization ($ billions) (TSX)		84.0		90.1		81.0		74.2		76.6		69.8		69.6		69.9
Book value per common share ($)		36.96		36.34		35.33		34.87		33.23		32.12		30.82		30.15
Market value to book value multiple		1.9		2.0		1.9		1.8		1.9		1.8		1.9		1.9
Price to earnings multiple (trailing 4 quarters)		12.1		12.6		12.3		11.7		12.3		11.5		10.8		11.0

(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4 in the consolidated financial statements). Capital measures have not been restated for the new IFRS standards as they represent the actual amounts in the period for regulatory purposes.

(2) Refer to page 17 for a discussion of non-GAAP measures.

(3) Prior period amounts have been restated to conform with current period presentation.

(4) Excludes Federal Deposit Insurance Corporation (FDIC) guaranteed loans related to the acquisition of R-G Premier Bank of Puerto Rico.

(5) Based on the average of the high and low common share price for the period.

2014  Scotiabank Annual Report      107

MANAGEMENT’S DISCUSSION AND ANALYSIS

Eleven-Year Statistical Review

T84 Consolidated Statement of Financial Position

		IFRS
As at October 31 ($ millions)	2014		2013(1)		2012(1)			2011
Assets
Cash and deposits with financial institutions	$	56,730	$	53,338	$	47,337		$	38,723
Precious metals		7,286		8,880		12,387			9,249
Trading assets
Securities		95,363		84,196		74,639			62,192
Loans		14,508		11,225		12,857			13,607
Other		3,377		1,068		100			–
		113,248		96,489		87,596			75,799
Financial instruments designated at fair value through profit or loss		111		106		197			375
Securities purchased under resale agreements and securities borrowed		93,866		82,533		66,189			47,181
Derivative financial instruments		33,439		24,503		30,338			37,322
Investment securities		38,662		34,319		33,376			30,176
Loans
Residential mortgages		212,648		209,865		175,630			161,685
Personal and credit cards		84,204		76,008		68,277			63,317
Business and government		131,098		119,615		111,648			96,743
		427,950		405,488		355,555			321,745
Allowance for credit losses		3,641		3,273		2,977			2,689
		424,309		402,215		352,578			319,056
Other
Customers’ liability under acceptances		9,876		10,556		8,932			8,172
Property and equipment		2,272		2,214		2,218			2,504
Investments in associates		3,461		5,326		4,791			4,434
Goodwill and other intangible assets		10,884		10,704		8,692			7,639
Deferred tax assets		1,763		1,938		2,273			2,214
Other assets		9,759		10,523		11,321			11,579
		38,015		41,261		38,227			36,542
	$	805,666	$	743,644	$	668,225		$	594,423
Liabilities
Deposits
Personal	$	175,163	$	171,048	$	138,051		$	133,025
Business and government(2)		342,367		313,820		293,460			262,833
Financial institutions		36,487		33,019		34,178			25,376
		554,017		517,887		465,689			421,234
Financial instruments designated at fair value through profit or loss(2)		465		174		157			101
Other
Acceptances		9,876		10,556		8,932			8,172
Obligations related to securities sold short		27,050		24,977		18,622			15,450
Derivative financial instruments		36,438		29,267		35,323			40,236
Obligations related to securities sold under repurchase agreements and securities lent		88,953		77,508		56,968			38,216
Subordinated debentures		4,871		5,841		10,143			6,923
Capital instruments		–		–		–			2,003
Other liabilities		34,785		32,047		32,726			29,848
		201,973		180,196		162,714			140,848
		756,455		698,257		628,560			562,183
Equity
Common equity
Common shares		15,231		14,516		13,139			8,336
Retained earnings		28,609		25,068		21,775			18,421
Accumulated other comprehensive income (loss)		949		388		(745	)		(497	)
Other reserves		176		193		166			96
Total common equity		44,965		40,165		34,335			26,356
Preferred shares		2,934		4,084		4,384			4,384
Total equity attributable to equity holders of the Bank		47,899		44,249		38,719			30,740
Non-controlling interests
Non-controlling interests in subsidiaries		1,312		1,138		946			626
Capital instrument equity holders		–		–		–			874
Total equity		49,211		45,387		39,665			32,240
	$	805,666	$	743,644	$	668,225		$	594,423

(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4 in the consolidated financial statements).

(2) Prior period amounts have been restated to conform with current period presentation.

108      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    SUPPLEMENTARY DATA

T85 Consolidated Statement of Income

		IFRS
For the year ended October 31 ($ millions)	2014		2013(1)		2012(1)		2011
Revenue
Interest income
Loans	$	18,176	$	17,359	$	15,606	$	14,373
Securities		921		1,000		1,045		986
Securities purchased under resale agreements and securities borrowed		180		190		221		221
Deposits with financial institutions		263		279		287		275
		19,540		18,828		17,159		15,855
Interest expense
Deposits		6,173		6,397		6,117		5,589
Subordinated debentures		204		339		381		369
Capital instruments		–		–		–		138
Other		858		742		691		745
		7,235		7,478		7,189		6,841
Net interest income		12,305		11,350		9,970		9,014
Net fee and commission revenues		7,737		6,917		6,246		5,727
Other operating income		3,562		3,032		3,430		2,569
Total revenue		23,604		21,299		19,646		17,310
Provision for credit losses		1,703		1,288		1,252		1,076
Operating expenses		12,601		11,664		10,436		9,481
Income before taxes		9,300		8,347		7,958		6,753
Income tax expense		2,002		1,737		1,568		1,423
Net income	$	7,298	$	6,610	$	6,390	$	5,330
Net income attributable to non-controlling interests	$	227	$	231	$	196	$	149
Non-controlling interests in subsidiaries		227		231		196		91
Capital instrument equity holders		–		–		–		58
Net income attributable to equity holders of the Bank	$	7,071	$	6,379	$	6,194	$	5,181
Preferred shareholders		155		217		220		216
Common shareholders	$	6,916	$	6,162	$	5,974	$	4,965
Earnings per common share (in dollars)
Basic	$	5.69	$	5.15	$	5.27	$	4.63
Diluted	$	5.66	$	5.11	$	5.18	$	4.53

(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4 in the consolidated financial statements).

2014  Scotiabank Annual Report      109

MANAGEMENT’S DISCUSSION AND ANALYSIS

T84 Consolidated Balance Sheet – CGAAP

	CGAAP
As at October 31 ($ millions)	2010			2009			2008			2007			2006			2005			2004
Assets
Cash resources	$	46,027		$	43,278		$	37,318		$	29,195		$	23,376		$	20,505		$	17,155
Securities
Trading		64,684			58,067			48,292			59,685			62,490			50,007			43,056
Available-for-sale		47,228			55,699			38,823			28,426			–			–			–
Investment		–			–			–			–			32,870			23,285			15,576
Equity accounted investments		4,651			3,528			920			724			142			167			141
		116,563			117,294			88,035			88,835			95,502			73,459			58,773
Securities purchased under resale agreements		27,920			17,773			19,451			22,542			25,705			20,578			17,880
Loans
Residential mortgages		120,482			101,604			115,084			102,154			89,590			75,520			69,018
Personal and credit cards		62,548			61,048			50,719			41,734			39,058			34,695			30,182
Business and government		103,981			106,520			125,503			85,500			76,733			62,681			57,384
		287,011			269,172			291,306			229,388			205,381			172,896			156,584
Allowance for credit losses		2,787			2,870			2,626			2,241			2,607			2,469			2,696
		284,224			266,302			288,680			227,147			202,774			170,427			153,888
Other
Customers’ liability under acceptances		7,616			9,583			11,969			11,538			9,555			7,576			7,086
Derivative instruments		26,852			25,992			44,810			21,960			12,098			12,867			15,488
Land, buildings and equipment		2,450			2,372			2,449			2,061			2,103			1,836			1,823
Other assets		15,005			13,922			14,913			8,232			7,893			6,777			7,119
		51,923			51,869			74,141			43,791			31,649			29,056			31,516
	$	526,657		$	496,516		$	507,625		$	411,510		$	379,006		$	314,025		$	279,212
Liabilities and shareholders’ equity
Deposits
Personal	$	128,850		$	123,762		$	118,919		$	100,823		$	93,450		$	83,953		$	79,020
Business and government		210,687			203,594			200,566			161,229			141,072			109,389			94,125
Banks		22,113			23,063			27,095			26,406			29,392			24,103			22,051
		361,650			350,419			346,580			288,458			263,914			217,445			195,196
Other
Acceptances		7,616			9,583			11,969			11,538			9,555			7,576			7,086
Obligations related to securities sold under repurchase agreements		40,286			36,568			36,506			28,137			33,470			26,032			19,428
Obligations related to securities sold short		21,519			14,688			11,700			16,039			13,396			11,250			7,585
Derivative instruments		31,990			28,806			42,811			24,689			12,869			13,004			16,002
Other liabilities		28,947			24,682			31,063			21,138			24,799			18,983			13,785
		130,358			114,327			134,049			101,541			94,089			76,845			63,886
Subordinated debentures		5,939			5,944			4,352			1,710			2,271			2,597			2,615
Capital instrument liabilities		500			500			500			500			750			750			2,250
Shareholders’ equity
Preferred shares		3,975			3,710			2,860			1,635			600			600			300
Common shareholders’ equity
Common shares and contributed surplus		5,775			4,946			3,829			3,566			3,425			3,317			3,229
Retained earnings		21,932			19,916			18,549			17,460			15,843			14,126			13,239
Accumulated other comprehensive income (loss)		(4,051	)		(3,800	)		(3,596	)		(3,857	)		(2,321	)		(1,961	)		(1,783	)
Total common shareholders’ equity		23,656			21,062			18,782			17,169			16,947			15,482			14,685
Total equity attributable to equity holders of the Bank		27,631			24,772			21,642			18,804			17,547			16,082			14,985
Non-controlling interests		579			554			502			497			435			306			280
Total shareholders’ equity		28,210			25,326			22,144			19,301			17,982			16,388			15,265
	$	526,657		$	496,516		$	507,625		$	411,510		$	379,006		$	314,025		$	279,212

110      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    SUPPLEMENTARY DATA

T85 Consolidated Statement of Income – CGAAP

	CGAAP
For the year ended October 31 ($ millions)	2010		2009		2008		2007		2006		2005		2004
Interest income
Loans	$	12,171	$	13,973	$	15,832	$	13,985	$	11,575	$	9,236	$	8,480
Securities		4,227		4,090		4,615		4,680		4,124		3,104		2,662
Securities purchased under resale agreements		201		390		786		1,258		1,102		817		594
Deposits with banks		292		482		1,083		1,112		881		646		441
		16,891		18,935		22,316		21,035		17,682		13,803		12,177
Interest expense
Deposits		6,768		8,339		12,131		10,850		8,589		5,755		4,790
Subordinated debentures		289		285		166		116		130		134		112
Capital instrument liabilities		37		37		37		53		53		53		164
Other		1,176		1,946		2,408		2,918		2,502		1,990		1,410
		8,270		10,607		14,742		13,937		11,274		7,932		6,476
Net interest income		8,621		8,328		7,574		7,098		6,408		5,871		5,701
Provision for credit losses		1,239		1,744		630		270		216		230		390
Net interest income after provision for credit losses		7,382		6,584		6,944		6,828		6,192		5,641		5,311
Other income		6,884		6,129		4,302		5,392		4,800		4,529		4,320
Net interest and other income		14,266		12,713		11,246		12,220		10,992		10,170		9,631
Non-interest expenses
Salaries and employee benefits		4,647		4,344		4,109		3,983		3,768		3,488		3,452
Other		3,535		3,575		3,187		3,011		2,675		2,555		2,410
		8,182		7,919		7,296		6,994		6,443		6,043		5,862
Income before income taxes		6,084		4,794		3,950		5,226		4,549		4,127		3,769
Provision for income taxes		1,745		1,133		691		1,063		872		847		786
Net income	$	4,339	$	3,661	$	3,259	$	4,163	$	3,677	$	3,280	$	2,983
Net income attributable to non-controlling interests	$	100	$	114	$	119	$	118	$	98	$	71	$	75
Net income attributable to equity holders of the Bank		4,239		3,547		3,140		4,045		3,579		3,209		2,908
Preferred shareholders		201		186		107		51		30		25		16
Common shareholders	$	4,038	$	3,361	$	3,033	$	3,994	$	3,549	$	3,184	$	2,892
Average number of common shares outstanding (millions)
Basic		1,032		1,013		987		989		988		998		1,010
Diluted		1,034		1,016		993		997		1,001		1,012		1,026
Earnings per common share (in dollars)(1)
Basic	$	3.91	$	3.32	$	3.07	$	4.04	$	3.59	$	3.19	$	2.87
Diluted	$	3.91	$	3.31	$	3.05	$	4.01	$	3.55	$	3.15	$	2.82
Dividends per common share (in dollars)	$	1.96	$	1.96	$	1.92	$	1.74	$	1.50	$	1.32	$	1.10

(1) The calculation of earnings per share is based on full dollar and share amounts.

2014  Scotiabank Annual Report      111

MANAGEMENT’S DISCUSSION AND ANALYSIS

T86 Consolidated Statement of Changes in Equity

	IFRS
For the year ended October 31 ($ millions)	2014			2013(1)			2012(1)			2011
Common shares
Balance at beginning of year	$	14,516		$	13,139		$	8,336		$	5,750
Issued		771			1,377			4,803			2,586
Purchased for cancellation		(56	)		–			–			–
Balance at end of year	$	15,231		$	14,516		$	13,139		$	8,336
Retained earnings
Balance at beginning of year		25,315			21,978			18,421			21,932
IFRS adjustment		(247	)		(203	)		(144	)		(6,248	)
Restated balances		25,068			21,775			18,277			15,684
Adjustments		–			–			–			–
Net income attributable to common shareholders of the Bank(4)		6,916			6,162			5,974			4,965
Dividends: Preferred(5)		–			–			–			–
Common		(3,110	)		(2,858	)		(2,493	)		(2,200	)
Purchase of shares for cancellation and premium on redemption		(264	)		–			–			–
Other		(1	)		(11	)		17			(28	)
Balance at end of year	$	28,609		$	25,068		$	21,775		$	18,421
Accumulated other comprehensive income (loss)
Balance at beginning of year		545			(31	)		(497	)		(4,051	)
IFRS adjustment		(157	)		(714	)		32			4,320
Restated balances		388			(745	)		(465	)		269
Cumulative effect of adopting new accounting policies		–			–			–			–
Other comprehensive income (loss)		561			1,133			(280	)		(766	)
Balance at end of year	$	949		$	388		$	(745	)	$	(497	)
Other reserves(7)
Balance at beginning of year		193			166			96			25
Share-based payments		30			36			38			46
Other		(47	)		(9	)		32			25
Balance at end of year	$	176		$	193		$	166		$	96
Total common equity	$	44,965		$	40,165		$	34,335		$	26,356
Preferred shares
Balance at beginning of year		4,084			4,384			4,384			3,975
Net income attributable to preferred shareholders of the Bank(4)		155			217			220			216
Preferred dividends(5)		(155	)		(217	)		(220	)		(216	)
Issued		–			–			–			409
Redeemed		(1,150	)		(300	)		–			–
Balance at end of year	$	2,934		$	4,084		$	4,384		$	4,384
Non-controlling interests
Balance at beginning of year		1,155			1,743			1,500			579
IFRS adjustment		(17	)		(797	)		(891	)		936
Restated balances		1,138			946			609			1,515
Net income attributable to non-controlling interests		227			231			196			149
Distributions to non-controlling interests		(76	)		(80	)		(44	)		(181	)
Effect of foreign exchange and others		23			41			185			17
Balance at end of year	$	1,312		$	1,138		$	946		$	1,500
Total equity at end of year	$	49,211		$	45,387		$	39,665		$	32,240

(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4 in the consolidated financial statements).

(2) Relates to the adoption of new financial instruments accounting standards under CGAAP.

(3) Relates to the adoption of new stock-based compensation accounting standard under CGAAP.

(4) Under CGAAP, net income attributable to preferred shareholders was included in retained earnings.

(5) Under IFRS, preferred dividends are recorded as a reduction to preferred shareholders’ equity. Under CGAAP, dividends are a reduction to retained earnings.

(6) Relates to the adoption of the new accounting standard for impairment and classification of financial instruments under CGAAP.

(7) Under CGAAP, amounts represent Contributed Surplus.

T87 Consolidated Statement of Comprehensive Income

	IFRS
For the year ended October 31 ($ millions)	2014			2013(1)		2012(1)			2011
Net income	$	7,298		$	6,610	$	6,390		$	5,330
Other comprehensive income (loss), net of income taxes:
Net change in unrealized foreign currency translation gains (losses)		889			346		149			(697	)
Net change in unrealized gains (losses) on available-for-sale securities		(38	)		110		151			(169	)
Net change in gains (losses) on derivative instruments designated as cash flow hedges		(6	)		93		116			105
Net change in remeasurement of employee benefit plan asset and liability(2)		(320	)		563		(747	)		–
Other comprehensive income from investments in associates		58			20		25			–
Other comprehensive income (loss)		583			1,132		(306	)		(761	)
Comprehensive income	$	7,881		$	7,742	$	6,084		$	4,569
Comprehensive income attributable to:
Common shareholders of the Bank	$	7,477		$	7,298	$	5,694		$	4,199
Preferred shareholders of the Bank		155			217		220			216
Non-controlling interests in subsidiaries		249			227		170			96
Capital instrument equity holders		–			–		–			58
	$	7,881		$	7,742	$	6,084		$	4,569

(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4 in the consolidated financial statements).

(2) Amounts recorded for remeasurement of employee benefits plan assets and liabilities will not be reclassified to the Consolidated Statement of Income.

112      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    SUPPLEMENTARY DATA

CGAAP
2010			2009			2008			2007			2006			2005			2004
$	4,946		$	3,829		$	3,566		$	3,425		$	3,316		$	3,228		$	3,140
	804			1,117			266			184			135			172			117
	–			–			(3	)		(43	)		(26	)		(84	)		(29	)
$	5,750		$	4,946		$	3,829		$	3,566		$	3,425		$	3,316		$	3,228
	19,916			18,549			17,460			15,843			14,126			13,239			11,747
	–			–			–			–			–			–			–
	–			–			–			–			–			–			–
	–			–			–			(61	)(2)		(25	)(3)		–			–
	4,239			3,547			3,140			4,045			3,579			3,209			2,908
	(201	)		(186	)		(107	)		(51	)		(30	)		(25	)		(16	)
	(2,023	)		(1,990	)		(1,896	)		(1,720	)		(1,483	)		(1,317	)		(1,110	)
	–			–			(37	)		(586	)		(324	)		(973	)		(290	)
	1			(4	)		(11	)		(10	)		–			(7	)		–
$	21,932		$	19,916		$	18,549		$	17,460		$	15,843		$	14,126		$	13,239
	(3,800	)		(3,596	)		(3,857	)		(2,321	)		(1,961	)		(1,783	)		(1,074	)
	–			–			–			–			–			–			–
	–			–			–			–			–			–			–
	–			595	(6)		–			683			–			–			–
	(251	)		(799	)		261			(2,219	)		(360	)		(178	)		(709	)
$	(4,051	)	$	(3,800	)	$	(3,596	)	$	(3,857	)	$	(2,321	)	$	(1,961	)	$	(1,783	)
	–			–			–			–			1			1			1
	25			–			–			–			(1	)		–			–
	–			–			–			–			–			–			–
$	25		$	–		$	–		$	–		$	–		$	1		$	1
$	23,656		$	21,062		$	18,782		$	17,169		$	16,947		$	15,482		$	14,685
	3,710			2,860			1,635			600			600			300			300
	–			–			–			–			–			–			–
	–			–			–			–			–			–			–
	265			850			1,225			1,035			–			300			–
	–			–			–			–			–			–			–
$	3,975		$	3,710		$	2,860		$	1,635		$	600		$	600		$	300
	554			502			N/A			N/A			N/A			N/A			N/A
	–			–			–			–			–			–			–
	–			–			–			–			–			–			–
	100			114			N/A			N/A			N/A			N/A			N/A
	(35	)		(36	)		N/A			N/A			N/A			N/A			N/A
	(40	)		(26	)		N/A			N/A			N/A			N/A			N/A
$	579		$	554		$	502		$	497		$	435		$	306		$	280
$	28,210		$	25,326		$	22,144		$	19,301		$	17,982		$	16,388		$	15,265

CGAAP
2010			2009			2008			2007			2006			2005			2004
$	4,339		$	3,661		$	3,259		$	4,163		$	3,677		$	3,280		$	2,983
	(591	)		(1,736	)		2,368			(2,228	)		(360	)		(178	)		(709	)
	278			894			(1,588	)		(67	)		–			–			–
	62			43			(519	)		76			–			–			–
	–			–			–			–			–			–			–
	–			–			–			–			–			–			–
	(251	)		(799	)		261			(2,219	)		(360	)		(178	)		(709	)
$	4,088		$	2,862		$	3,520		$	1,944		$	3,317		$	3,102		$	2,274
$	3,787		$	2,562		$	3,294		$	1,775		$	3,189		$	3,006		$	2,183
	201			186			107			51			30			25			16
	100			114			119			118			98			71			75
	–			–			–			–			–			–			–
$	4,088		$	2,862		$	3,520		$	1,944		$	3,317		$	3,102		$	2,274

2014  Scotiabank Annual Report      113

MANAGEMENT’S DISCUSSION AND ANALYSIS

T88 Other statistics

	IFRS
For the year ended October 31	2014		2013(1)			2012(1)		2011
Operating performance
Basic earnings per share ($)		5.69		5.15			5.27		4.63
Diluted earnings per share ($)		5.66		5.11			5.18		4.53
Return on equity (%)(2)		16.1		16.6			19.9		20.3
Productivity ratio (%)(TEB(2))		52.6		54.0			52.4		53.9
Return on assets (%)		0.92		0.88			0.97		0.91
Core banking margin (%)(TEB(2))		2.39		2.31			2.31		2.32
Net interest margin on total average assets (%)(TEB)		N/A		N/A			N/A		N/A
Capital measures(3)
Common Equity Tier 1 (CET1) capital ratio (%)		10.8		9.1			N/A		N/A
Tier 1 capital ratio (%)		12.2		11.1			13.6		12.2
Total capital ratio (%)		13.9		13.5			16.7		13.9
Assets to capital multiple		17.1		17.1			15.0		16.6
Common share information
Share price ($) – (TSX):
High		74.93		64.10			57.18		61.28
Low		59.92		52.30			47.54		49.00
Close		69.02		63.39			54.25		52.53
Number of shares outstanding (millions)		1,217		1,209			1,184		1,089
Dividends per share ($)		2.56		2.39			2.19		2.05
Dividend yield (%)(4)		3.8		4.1			4.2		3.7
Price to earnings multiple(5)		12.1		12.3			10.3		11.3
Book value per common share ($)		36.96		33.23			28.99		24.20
Other information
Average total assets ($ millions)		795,641		748,901			659,538		586,101
Number of branches and offices		3,288		3,330			3,123		2,926
Number of employees		86,932		86,690	(6)		81,497		75,362
Number of automated banking machines		8,732		8,471			7,341		6,260

(1) Certain prior period amounts are retrospectively adjusted to reflect the adoption of new and amended IFRS standards (IFRS 10 and IAS 19) in 2014 (refer to Note 4 in the consolidated financial statements). Capital measures have not been restated for the new IFRS standards as they represent the actual amounts in the period for regulatory purposes.

(2) Refer to page 17 for a discussion of non-GAAP measures.

(3) Effective November 1, 2012, regulatory capital ratios are determined in accordance with Basel III rules as an all-in basis (refer page 41). Comparative amounts for period, 2012-2007 were determined in accordance with Basel II rules. Amounts prior to 2007 were determined in accordance with Basel I rules and have not been restated.

(4) Based on the average of the high and low common share price for the year.

(5) Based on the closing common share price.

(6) Restated to conform with current period presentation.

114      2014  Scotiabank Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS    |    SUPPLEMENTARY DATA

CGAAP
2010		2009		2008		2007		2006		2005		2004
	3.91		3.32		3.07		4.04		3.59		3.19		2.87
	3.91		3.31		3.05		4.01		3.55		3.15		2.82
	18.3		16.7		16.7		22.0		22.1		20.9		19.9
	51.8		53.7		59.4		53.7		55.3		56.3		56.9
	0.84		0.71		0.72		1.03		1.05		1.06		1.05
	N/A		N/A		N/A		N/A		N/A		N/A		N/A
	1.73		1.68		1.75		1.89		1.95		2.00		2.10
	N/A		N/A		N/A		N/A		N/A		N/A		N/A
	11.8		10.7		9.3		9.3		10.2		11.1		11.5
	13.8		12.9		11.1		10.5		11.7		13.2		13.9
	17.0		16.6		18.0		18.2		17.1		15.1		13.8
	55.76		49.19		54.00		54.73		49.80		44.22		40.00
	44.12		23.99		35.25		46.70		41.55		36.41		31.08
	54.67		45.25		40.19		53.48		49.30		42.99		39.60
	1,043		1,025		992		984		990		990		1,009
	1.96		1.96		1.92		1.74		1.50		1.32		1.10
	3.9		5.4		4.3		3.4		3.3		3.3		3.1
	14.0		13.6		13.1		13.2		13.7		13.5		13.8
	22.68		20.55		18.94		17.45		17.13		15.64		14.56
	515,991		513,149		455,539		403,475		350,709		309,374		283,986
	2,784		2,686		2,672		2,331		2,191		1,959		1,871
	70,772		67,802		69,049		58,113		54,199		46,631		43,928
	5,978		5,778		5,609		5,283		4,937		4,449		4,219

2014  Scotiabank Annual Report      115