The Bank of Nova Scotia (BNS) 40-F 2002 FY Annual report (Canada)

2002 CONSOLIDATED FINANCIAL STATEMENTS

	Page
Audited Financial Statements:
Management's Responsibility for Financial Information		78
Shareholders' Auditors' Report		78
Consolidated Balance Sheet		79
Consolidated Statement of Income		80
Consolidated Statement of Changes in Shareholders' Equity		81
Consolidated Statement of Cash Flows		82
Notes to the Consolidated Financial Statements		83
Supplementary Information:
Principal Subsidiaries		117
Eleven-year Statistical Review		118

78 2002 SCOTIABANK ANNUAL REPORT

Consolidated Financial Statements

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

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

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

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

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

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

     The Conduct Review Committee of the Board of Directors, composed entirely of outside directors, reviews and reports its findings to the Board of Directors on all related party transactions having a material impact on the Bank.

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

Peter C. Godsoe
Chairman of the Board and Chief Executive Officer
 
Toronto, December 3, 2002 Sarabjit S. Marwah
Senior Executive Vice-President and Chief Financial Officer

Shareholders’ Auditors’ Report

TO THE SHAREHOLDERS OF THE BANK OF NOVA SCOTIA
We have audited the Consolidated Balance Sheets of The Bank of Nova Scotia as at October 31, 2002 and 2001, and the Consolidated Statements of Income, Changes in Shareholders’ Equity and Cash Flows for each of the years in the three-year period ended October 31, 2002. These financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

     In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Bank as at October 31, 2002 and 2001, and the results of its operations and its cash flows for each of the years in the three-year period ended October 31, 2002 in accordance with Canadian generally accepted accounting principles, including the accounting requirements of the Superintendent of Financial Institutions Canada.

KPMG LLP
Chartered Accountants PricewaterhouseCoopers LLP
Chartered Accountants  Toronto, December 3, 2002

2002 SCOTIABANK ANNUAL REPORT 79

Consolidated Balance Sheet

As at October 31 ($ millions)		2002		2001
ASSETS
Cash resources
Cash and non-interest-bearing deposits with banks		$	1,664	$	1,535
Interest-bearing deposits with banks			16,582		16,897
Precious metals			2,027		1,728
			20,273		20,160
Securities(Note 3)
Investment			21,602		25,450
Trading			34,592		27,834
			56,194		53,284
Loans(Note 4)
Residential mortgages			56,295		52,592
Personal and credit cards			23,363		20,116
Business and governments			77,181		79,460
Assets purchased under resale agreements			32,262		27,500
			189,101		179,668
Allowance for credit losses (Note 5 b)			3,430		4,236
			185,671		175,432
Other
Customers’ liability under acceptances			8,399		9,301
Land, buildings and equipment (Note 6)			2,101		2,325
Trading derivatives’ market valuation (Note 22 d)			15,821		15,886
Goodwill (Note 7)			299		400
Other intangible assets (Note 7)			305		334
Other assets (Note 8)			7,317		7,303
			34,242		35,549
		$	296,380	$	284,425
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits(Note 9)
Personal		$	75,558	$	75,573
Business and governments			93,830		80,810
Banks			26,230		29,812
			195,618		186,195
Other
Acceptances			8,399		9,301
Obligations related to assets sold under repurchase agreements			31,881		30,627
Obligations related to securities sold short			8,737		6,442
Trading derivatives’ market valuation (Note 22 d)			15,500		15,453
Other liabilities (Note 10)			15,678		15,369
Non-controlling interest in subsidiaries (Note 11)			1,912		1,086
			82,107		78,278
Subordinated debentures(Note 12)			3,878		5,344
Shareholders’ equity
Capital stock (Note 13)
	Preferred shares		1,275		1,775
	Common shares		3,002		2,920
Retained earnings			10,500		9,913
			14,777		14,608
		$	296,380	$	284,425

Peter C. Godsoe
Chairman of the Board and Chief Executive Officer
 
Arthur R. A. Scace
Director and Chairman of the Audit Committee
 
The accompanying notes are an integral part of these consolidated financial statements.

80 2002 SCOTIABANK ANNUAL REPORT

Consolidated Statement of Income

For the year ended October 31 ($ millions)		2002		2001		2000
INTEREST INCOME
Loans		$	10,708	$	13,049	$	12,129
Securities			3,087		3,062		2,286
Deposits with banks			573		872		916
			14,368		16,983		15,331
INTEREST EXPENSE
Deposits			5,519		8,233		8,192
Subordinated debentures			203		303		324
Other			1,971		2,247		1,616
			7,693		10,783		10,132
Net interest income			6,675		6,200		5,199
Provision for credit losses (Note 5 b and Note 23)			2,029		1,425		765
Net interest income after provision for credit losses			4,646		4,775		4,434
OTHER INCOME
Deposit, payment and card services			836		772		624
Investment, brokerage and trust services			647		638		733
Credit fees			671		640		632
Investment banking			1,031		1,045		756
Net gain on investment securities (Note 3)			179		217		379
Securitization revenues			162		220		206
Other			416		539		335
			3,942		4,071		3,665
Net interest and other income			8,588		8,846		8,099
NON-INTEREST EXPENSES
Salaries and staff benefits			3,344		3,220		2,944
Premises and technology			1,183		1,133		995
Communications and marketing			489		502		428
Other			721		807		786
Loss on disposal of subsidiary operations (Note 23)			237		–		–
Restructuring provision for National Trustco Inc.			–		–		(34	)
			5,974		5,662		5,119
Income before the undernoted			2,614		3,184		2,980
Provision for income taxes (Note 15)			601		876		990
Non-controlling interest in net income of subsidiaries			216		139		64
Net income		$	1,797	$	2,169	$	1,926
Preferred dividends paid			105		108		108
Net income available to common shareholders		$	1,692	$	2,061	$	1,818
Average number of common shares outstanding (thousands):
	Basic		504,340		500,619		495,472
	Diluted		512,752		508,995		501,253
Net income per common share (in dollars) (Note 17):
	Basic	$	3.36	$	4.12	$	3.67
	Diluted	$	3.30	$	4.05	$	3.63
Dividends per common share (in dollars)		$	1.45	$	1.24	$	1.00

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

2002 SCOTIABANK ANNUAL REPORT 81

Consolidated Statement of Changes in Shareholders’ Equity

For the year ended October 31 ($ millions)		2002			2001			2000
PREFERRED SHARES (Note 13)
Bank:
	Balance at beginning of year	$	1,525		$	1,525		$	1,525
	Redeemed		(500	)		–			–
	Balance at end of year		1,025			1,525			1,525
Scotia Mortgage Investment Corporation			250			250			250
Total			1,275			1,775			1,775
COMMON SHARES (Note 13)
Balance at beginning of year			2,920			2,765			2,678
Issued			101			155			87
Purchased for cancellation			(19	)		–			–
Balance at end of year			3,002			2,920			2,765
RETAINED EARNINGS
Balance at beginning of year			9,913			8,435			6,953
Cumulative effect of adoption of new accounting standards			(76)	(1)		(39	)(2)		–
			9,837			8,396			6,953
Net income			1,797			2,169			1,926
Dividends: Preferred			(105	)		(108	)		(108	)
	Common		(732	)		(621	)		(496	)
Net unrealized foreign exchange gains/(losses)(3)			(137)	(4)		79			163
Premium on redemption and purchase of shares			(154	)		–			–
Other			(6	)		(2	)		(3	)
Balance at end of year			10,500			9,913			8,435
Total shareholders’ equity at end of year		$	14,777		$	14,608		$	12,975

(1)	Refer to Note 7.
(2)	Refer to Note 15.
(3)	Comprises net unrealized foreign exchange gains/(losses) of $(162) (2001 – $122; 2000 – $107), gains/(losses) from foreign exchange hedging activities of $3 (2001 – $(62); 2000 – $(12)), reversal of prior years’ foreign exchange losses which were recognized in the Consolidated Statement of Income of $12 (2001 – $19; 2000 – $68) and other of $10 (2001 and 2000 – nil).
(4)	During the year unrealized foreign exchange gains of $107 arising in fiscal 2002 from the translation of the net investment position in Scotiabank Quilmes were recorded in retained earnings. On disposal of Scotiabank Quilmes’ operations (refer to Note 23), the lifetime foreign exchange gains of $95 were transferred to the Consolidated Statement of Income.

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

82 2002 SCOTIABANK ANNUAL REPORT

Consolidated Statement of Cash Flows

Sources and (uses) of cash flows
For the year ended October 31 ($ millions)		2002			2001			2000
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	1,797		$	2,169		$	1,926
Adjustments to net income to determine cash flows:
	Depreciation and amortization		271			295			295
	Provision for credit losses		2,029			1,425			765
	Future income taxes		104			108			34
	Restructuring provision for National Trustco Inc.		–			–			(34	)
	Net gains on investment securities		(179	)		(217	)		(379	)
	Loss on disposal of subsidiary operations (Note 23)		237			–			–
Net accrued interest receivable and payable			(147	)		(104	)		(560	)
Trading securities			(7,402	)		(2,817	)		(7,406	)
Trading derivatives’ market valuation, net			105			(888	)		(114	)
Other, net			136			(428	)		745
			(3,049	)		(457	)		(4,728	)
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits			14,846			845			14,215
Obligations related to assets sold under repurchase agreements			2,671			(975	)		6,434
Obligations related to securities sold short			2,314			2,122			1,445
Subordinated debenture redemptions/repayments			(1,421	)		(106	)		(66	)
Capital stock issued			101			111			52
Capital stock redeemed/purchased for cancellation			(673	)		–			–
Cash dividends paid			(837	)		(686	)		(568	)
Other, net(1)			1,199			(359	)		1,013
			18,200			952			22,525
CASH FLOWS FROM INVESTING ACTIVITIES
Interest-bearing deposits with banks			(117	)		1,753			(1,001	)
Loans, excluding securitizations			(20,244	)		1,257			(19,108	)
Loan securitizations			2,241			2,053			1,299
Investment securities:
	Purchases		(29,434	)		(46,573	)		(28,472	)
	Maturities		10,665			8,165			15,609
	Sales		21,302			33,233			13,884
Land, buildings and equipment, net of disposals			(38	)		(164	)		(100	)
Other, net(2)			198			(29	)		(60	)
			(15,427	)		(305	)		(17,949	)
Effect of exchange rate changes on cash and cash equivalents			(96	)		37			(2	)
Net change in cash and cash equivalents			(372	)		227			(154	)
Cash and cash equivalents at beginning of year			961			734			888
Cash and cash equivalents at end of year		$	589		$	961		$	734
Represented by:
	Cash and non-interest-bearing deposits with banks	$	1,664		$	1,535		$	1,191
	Cheques and other items in transit, net liability (Note 10)		(1,075	)		(574	)		(457	)
Cash and cash equivalents at end of year		$	589		$	961		$	734
Cash disbursements made for:
	Interest	$	8,332		$	11,214		$	10,073
	Income taxes	$	817		$	1,083		$	831

(1)	Includes $750 (2001 – nil; 2000 – $500) from the issuance of Scotiabank Trust Securities, refer to Note 11.
(2)	Includes: (a) investments in subsidiaries of $61 (2001 – $112; 2000 – $361), less cash and cash equivalents at the date of acquisition of $15 (2001 – $83; 2000 – $112); (b) elimination of the net liability for cash and cash equivalents on disposal of subsidiary operations of $106 (2001 and 2000 – nil); and (c) net proceeds from dispositions of business units of $138 (2001 – nil; 2000 – $189).

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note		Description	Page
	1.	Significant accounting policies		84
	2.	Future accounting changes		87
	3.	Securities		88
	4.	Loans		89
	5.	Impaired loans and allowance for credit losses		91
	6.	Land, buildings and equipment		91
	7.	Goodwill and other intangible assets		92
	8.	Other assets		93
	9.	Deposits		93
	10.	Other liabilities		93
	11.	Non-controlling interest in subsidiaries		93
	12.	Subordinated debentures		94
	13.	Capital stock		95
	14.	Stock-based compensation		97
	15.	Corporate income taxes		98
	16.	Employee future benefits		99
	17.	Net income per common share		100
	18.	Related party transactions		100
	19.	Segmented results of operations		100
	20.	Commitments and contingent liabilities		103
	21.	Financial instruments		104
	22.	Derivative instruments		107
	23.	Argentine charges		110
	24.	Acquisition of subsidiary		111
	25.	Sale of business		111
	26.	Reconciliation of Canadian and United States
		generally accepted accounting principles		112

84 2002 SCOTIABANK ANNUAL REPORT

1.   Significant accounting policies
The consolidated financial statements of The Bank of Nova Scotia have been prepared in accordance with Canadian generally accepted accounting principles (GAAP), including the accounting requirements of the Superintendent of Financial Institutions Canada (the Superintendent). In addition, Note 26 describes and reconciles the significant measurement differences between Canadian and U.S. GAAP affecting the accompanying consolidated financial statements.

     The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Therefore, actual results could differ from those estimates.

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

     The significant accounting policies used in the preparation of these consolidated financial statements are summarized on the following pages.

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

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

TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities denominated in foreign currencies are translated into Canadian dollars at rates prevailing at the end of the financial year, except for the following, which are recorded at historical Canadian dollar cost: land, buildings and equipment, and foreign currency equity investments not funded in the same currency as the investments. All revenues and expenses denominated in foreign currencies are translated using average exchange rates except for depreciation, which is based on the historical Canadian dollar cost of the related assets.

     Unrealized translation gains and losses which arise upon consolidation of net foreign currency investment positions in branches, subsidiaries and associated corporations, net of applicable income taxes, together with any gains or losses arising from hedges of those net investment positions, are credited or charged to retained earnings, except as noted below. Upon sale or substantial liquidation of an investment position, the previously recorded unrealized gains or losses thereon are transferred from retained earnings to the Consolidated Statement of Income.

     Translation gains and losses arising from self-sustaining subsidiaries and branches operating in highly inflationary environments, if any, are included in other income – investment banking in the Consolidated Statement of Income.

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

SECURITIES
Securities are held in either the investment or trading portfolio.

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

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

     Trading securities are intended to be held for a short period of time and are carried at market value. Gains and losses on disposal and adjustments to market value are included in other income – investment banking in the Consolidated Statement of Income, except for amounts related to securities used to hedge the volatility of stock-based compensation which are included in salaries and staff benefits expense in the Consolidated Statement of Income.

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

     A loan is classified as impaired when, in management’s opinion, there has been a deterioration in credit quality to the extent that there is no longer reasonable assurance of timely collection of the full amount of principal and interest. If a payment on a loan is contractually 90 days in arrears, the loan will be classified as impaired, if not already classified as such, unless the loan is fully secured, the collection of the debt is in process and the collection efforts are reasonably expected to result in repayment of the loan or in restoring it to a current status within 180 days from the date a payment has become contractually in arrears. Finally, a loan that is contractually 180 days in arrears is classified as impaired in all situations, except when it is guaranteed or insured by the Canadian government, the provinces or a Canadian government agency; such loans are classified as impaired if the loan is contractually in arrears for 365 days. Any credit card loan that has a payment that is contractually 180 days in arrears is written off.

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

2002 SCOTIABANK ANNUAL REPORT 85

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

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

ASSETS PURCHASED/SOLD UNDER RESALE/REPURCHASE AGREEMENTS
The purchase and sale of securities under resale and repurchase agreements are treated as collateralized lending and borrowing transactions. The related interest income and interest expense are recorded on an accrual basis.

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

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

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

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

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

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

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

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

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

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

     For loans transferred prior to July 1, 2001 or transfers arising from commitments made prior to that date, the Bank treats the transfers as sales, provided that the significant risks and rewards of ownership have been transferred and there is reasonable assurance regarding the measurement of the consideration received.

86 2002 SCOTIABANK ANNUAL REPORT

The sales proceeds are recorded based on fair value of the loans sold and issuance costs are deducted from those proceeds in determining the gain or loss. Losses are recognized in income immediately. Gains on sale are recognized immediately, unless there is recourse to the Bank in excess of expected losses, in which case the gains on sales are considered unrealized and deferred until they are collected in cash and there is no recourse to that cash.

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

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

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

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

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

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

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

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

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

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

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

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

     Derivative instruments designated as “trading” include derivatives entered into with customers to accommodate their risk management needs and derivatives transacted to generate trading income from the Bank’s proprietary trading positions. Trading derivatives are carried at their fair values [see Note 22(d) ]. The gains and losses resulting from changes in fair values are included in other income – investment banking in the Consolidated Statement of Income. In arriving at the fair value of trading derivatives, a deferral is made to cover credit risk and ongoing direct costs over the life of the instruments. Unrealized gains and unrealized losses on trading derivatives are reported separately in the Consolidated Balance Sheet as trading derivatives’ market valuation.

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

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

     The cost of pensions and other future benefits earned by employees is actuarially determined each year using the projected benefit

2002 SCOTIABANK ANNUAL REPORT 87

method prorated on service and management’s best estimate of expected plan investment performance, salary escalation, retirement age of employees and health care costs. Generally, for the purpose of calculating the expected return on plan assets, equity instruments are valued using a methodology in which the difference between actual and expected returns is recognized in the value of the assets over a three-year period; fixed income instruments are recognized at market value. Past service costs from plan amendments are amortized on a straight-line basis over the average remaining period to full eligibility of employees active at the date of amendment. For most plans, the net actuarial gain (loss) that exceeds 10 percent of the greater of the benefit obligation and the value of plan assets is amortized over the average remaining service period of active employees.

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

STOCK-BASED COMPENSATION
The Bank has a stock option plan and other stock-based compensation plans for certain eligible employees. In addition, the Bank has stock-based compensation plans for Directors.

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

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

2.   Future accounting changes
STOCK-BASED COMPENSATION
The CICA has issued a new accounting standard for stock-based compensation, which will be adopted by the Bank beginning November 1, 2002. The new standard recommends the use of a fair-value-based method to account for employee stock-based compensation arrangements, which the Bank will adopt on a prospective basis. In 2003, the Bank intends to grant stock appreciation rights under its employee stock option plan (tandem SARs). These allow the employees to either exercise the stock option for shares, or to exercise the tandem SAR and thereby receive the intrinsic value of the stock option in cash. The tandem SARs will be attached to the employee stock options granted in 2002, as well as the anticipated 2003 employee stock option grants. All other terms and conditions of the 2002 stock option grants will remain unchanged. Changes to the Bank’s obligation for these plans will begin to be recognized in the Consolidated Statement of Income in a manner consistent with the accounting for SARs (refer to Note 14).

     Changes in the Bank’s obligation under other stock-based compensation plans are currently recognized in the Consolidated Statement of Income in a manner consistent with the provisions of the new standard. Consequently, the transition to the new standard will have minimal impact on the accounting for these other stock-based compensation plans.

HEDGING
The CICA has issued an accounting guideline for hedging relationships that will become effective for fiscal year 2004. This guideline establishes certain requirements for the application of hedge accounting. Subsequent to November 1, 2003, changes in the fair value of derivatives that do not qualify for hedge accounting will be recorded in the Consolidated Statement of Income. The impact of implementing this guideline on the Bank’s future results will depend on the Bank’s hedging strategies and market volatility.

ACCOUNTING FOR IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
The CICA has issued new accounting standards for impairment and disposal of non-monetary long-lived assets, which are substantially harmonized with the equivalent standard issued by the Financial Accounting Standards Board (FASB). These standards require an impairment loss to be recognized when the carrying amount of a long-lived asset to be held and used exceeds the sum of the undiscounted cash flows expected from its use and disposal. The impairment recognized should be measured as the amount by which the carrying amount of the asset exceeds its fair value. Long-lived assets that are to be disposed of other than by sale should be classified and accounted for as held-for-use until the date of disposal or abandonment. Assets that meet certain criteria are classified as held-for-sale and are measured at the lower of their carrying amounts or fair value, less costs to sell. These requirements are not expected to have a material impact on the Bank.

     In addition, under these standards, the definition of discontinued operations has been broadened to include any disposals of a component of an entity, which comprises operations and cash flows that can be clearly distinguished. This may change the accounting presentation of future discontinued operations.

     The Canadian and U.S. standards are effective for the Bank for fiscal years 2004 and 2003, respectively, except for the change in presentation of discontinued operations under Canadian GAAP which is effective for disposals committed to on or after April 1, 2003.

DISCLOSURE OF GUARANTEES
The CICA has issued a draft guideline on disclosure of guarantees, which broadens the definition of guarantees and requires substantially expanded disclosure about those guarantees. The disclosure requirements of this draft guideline are substantially harmonized with the disclosure requirements of the exposure draft on accounting for guarantees issued by the FASB. In addition to the disclosure requirements of the CICA, the FASB exposure draft requires recognition of a liability equal to the fair value of the guarantee at its inception. This Canadian and U.S. accounting guidance is not expected to have a material impact on the Bank’s financial position or results of operations. It is anticipated that this guidance will be finalized and become effective during 2003.

CONSOLIDATION OF SPECIAL-PURPOSE ENTITIES
The CICA and the FASB have issued substantially harmonized exposure drafts requiring the consolidation of certain special-purpose entities (SPEs). For SPEs that do not meet specified exemption criteria, consolidation is required based upon either voting rights or a determination of the identity of the primary beneficiary. The impact of this accounting guidance on the Bank has not yet been determined as the exposure drafts are still under development. It is anticipated that this guidance will be finalized and become effective during 2003.

88 2002 SCOTIABANK ANNUAL REPORT

3.   Securities

		Remaining term to maturity											2002		2001
										No
		Within		Three to		One to		Over		specific			Carrying		Carrying
As at October 31 ($ millions)		3 months		12 months		5 years		5 years		maturity			value		value
Investment securities:
	Canadian federal government debt	$	815	$	991	$	525	$	1,286	$	–		$	3,617	$	4,045
	Canadian provincial and municipal debt		48		213		93		1		–			355		631
	U.S. treasury and other U.S. agencies		24		29		1,401		136		–			1,590		2,595
	Other foreign governments		545		365		2,582		1,711		–			5,203		6,766
	Bonds of designated emerging markets(1)		–		–		–		1,146		–			1,146		1,218
	Other debt		492		1,162		2,824		1,177		–			5,655		5,811
	Preferred shares		–		–		–		–		1,125	(2)		1,125		1,317
	Common shares		–		–		–		–		2,712			2,712		2,840
	Associated corporations		–		–		–		–		163	(3)		163		194
	Loan substitute securities		–		6		30		–		–			36		33
	Total		1,924		2,766		7,455		5,457		4,000			21,602		25,450
Trading securities(4):
	Canadian federal government debt		401		869		4,572		1,803		–			7,645		6,238
	Canadian provincial and municipal debt		92		96		935		1,616		–			2,739		1,955
	U.S. treasury and other U.S. agencies		8		–		16		239		–			263		542
	Other foreign governments		423		542		1,512		51		–			2,528		3,096
	Common shares		–		–		–		–		14,987			14,987		10,823
	Other		2,970		273		1,860		1,022		305			6,430		5,180
	Total		3,894		1,780		8,895		4,731		15,292			34,592		27,834
Total securities		$	5,818	$	4,546	$	16,350	$	10,188	$	19,292		$	56,194	$	53,284
Total by currency (in Canadian equivalent):
	Canadian dollar	$	2,478	$	2,174	$	6,843	$	5,448	$	15,556		$	32,499	$	27,673
	U.S. dollar		847		1,019		4,988		3,853		3,332			14,039		14,886
	Other currencies		2,493		1,353		4,519		887		404			9,656		10,725
Total securities		$	5,818	$	4,546	$	16,350	$	10,188	$	19,292		$	56,194	$	53,284

(1)	This includes restructured bonds of designated emerging markets after deducting a country risk provision of $418 (2001 – $461). Refer to Note 5.
(2)	Although these securities have no stated term, most provide the Bank with various means to retract or dispose of these shares on earlier dates.
(3)	Equity securities of associated corporations have no stated term and have been classified in the “No specific maturity” column.
(4)	Trading securities are carried at market value.

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

	2002								2001
			Gross		Gross		Estimated				Gross		Gross		Estimated
	Carrying		unrealized		unrealized		market		Carrying		unrealized		unrealized		market
As at October 31 ($ millions)	value		gains		losses		value		value		gains		losses		value
Canadian federal government debt	$	3,617	$	17	$	–	$	3,634	$	4,045	$	96	$	–	$	4,141
Canadian provincial and municipal debt		355		8		–		363		631		32		–		663
U.S. treasury and other U.S. agencies		1,590		31		–		1,621		2,595		120		–		2,715
Other foreign governments		5,203		389		33		5,559		6,766		418		106		7,078
Bonds of designated emerging markets		1,146		172		–		1,318		1,218		276		–		1,494
Other debt		5,655		97		124		5,628		5,811		79		35		5,855
Preferred shares		1,125		15		55		1,085		1,317		36		44		1,309
Common shares		2,712		209		269		2,652		2,840		337		251		2,926
Associated corporations		163		–		–		163		194		–		–		194
Loan substitute securities		36		–		–		36		33		–		–		33
Total investment securities	$	21,602	$	938	$	481	$	22,059	$	25,450	$	1,394	$	436	$	26,408

The net unrealized gains on investment securities of $457 million (2001 – $958 million) decreased to net unrealized losses of $25 million (2001 – net unrealized gains of $537 million) after the net fair value of derivative instruments and other hedge amounts associated with these securities is taken into account.

2002 SCOTIABANK ANNUAL REPORT                    89

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

For the year ended October 31 ($ millions)	2002		2001		2000
Realized gains	$	1,031	$	589	$	787
Realized losses and impairment writedowns		852		372		408
Net gain on investment securities	$	179	$	217	$	379

4.   Loans

a)   Loans outstanding

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

As at October 31 ($ millions)		2002		2001
Canada:
	Residential mortgages	$	52,167	$	48,217
	Personal and credit cards		18,944		15,609
	Business and governments		22,349		23,304
	Assets purchased under resale agreements		10,735		9,173
			104,195		96,303
United States:
	Business, governments and other		21,874		20,912
	Assets purchased under resale agreements		15,678		13,166
			37,552		34,078
Other international:
	Personal lending		8,481		8,804
	Business and governments		33,024		35,322
	Assets purchased under resale agreements		5,849		5,161
			47,354		49,287
			189,101		179,668
Less: allowance for credit losses			3,430		4,236
Total(1)		$	185,671	$	175,432

(1) Loans denominated in U.S. dollars amount to $56,665 (2001 – $56,451) and loans denominated in other foreign currencies amount to $29,511 (2001 – $28,823). Segmentation of assets is based upon the location of ultimate risk of the underlying assets.

b)   Transfer of loan assets

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

The cash flows from mortgage securitizations are summarized below:

For the year ended October 31 ($ millions)		2002		2001(1)
Cash flows received for:
	Proceeds from mortgages securitized	$	2,241	$	297
	Servicing fees		1		–
	Retained interests		9		–

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

90                    2002 SCOTIABANK ANNUAL REPORT

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

As at October 31 ($ millions)		2002			2001
Carrying value of the retained interest ($)			87			11
Fair value of the retained interest ($)			88			11
Weighted average life (in years)			5			5
Prepayment rate (%)			13.3			16.0
	Impact on fair value of a 10% adverse change ($)		(2	)		–
	Impact on fair value of a 20% adverse change ($)		(6	)		(1	)
Residual cash flow annual discount rate (%)			4.5			4.9
	Impact on fair value of a 10% adverse change ($)		(1	)		–
	Impact on fair value of a 20% adverse change ($)		(2	)		–
Excess spread (%)			1.4			2.0
	Impact on fair value of a 10% adverse change ($)		(8	)		(1	)
	Impact on fair value of a 20% adverse change ($)		(16	)		(2	)

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

Information on total securitized loan assets is summarized as follows:

	2002						2001
	Outstanding		Impaired and		Net credit		Outstanding		Impaired and		Net credit
	securitized		other past due		losses for		securitized		other past due		losses for
	loans as at		loans as at		the year ended		loans as at		loans as at		the year ended
($ millions)	October 31		October 31		October 31		October 31		October 31		October 31
Mortgages	$	3,829	$	–	$	–	$	2,775	$	–	$	–
Personal and credit cards		3,376		20		23		4,311		32		37
Business loans		–		–		–		3,287		70		7
Total	$	7,205	$	20	$	23	$	10,373	$	102	$	44

2002 SCOTIABANK ANNUAL REPORT                    91

5.   Impaired loans and allowance for credit losses

a)   Impaired loans

											2002		2001
								Country
					Specific			risk
As at October 31 ($ millions)		Gross(1)(2)			allowance(1)(3)			allowance			Net		Net
By loan type:
	Residential mortgages	$	395		$	(211	)	$	–		$	184	$	247
	Personal and credit cards		385			(268	)		–			117		85
	Business and governments		3,232	(4)		(1,413	)		(25	)		1,794		1,402
Total		$	4,012	(5)(6)	$	(1,892	)	$	(25	)	$	2,095	$	1,734
By geography:
	Canada										$	279	$	334
	United States											1,225		754
	Other international											591		646
Total											$	2,095	$	1,734

(1)	Included in the gross impaired loans and the specific allowances are foreclosed assets held for sale of $120 (2001 – $91) and $45 (2001 – $60) respectively.
(2)	Gross impaired loans denominated in U.S. dollars amount to $2,394 (2001 – $2,425) and those denominated in other foreign currencies amount to $1,059 (2001 – $1,347).
(3)	The specific allowance for individual impaired loans amounts to $1,017 (2001 – $1,386).
(4)	Includes designated emerging markets loans of $25 (2001 – $25) which are fully provided for by the country risk allowance.
(5)	Impaired loans without an allowance for credit losses against individual loans totalled $479 (2001 – $418).
(6)	Average balance of gross impaired loans totalled $4,723 (2001 – $4,272).

b)   Allowance for credit losses

	Specific			Country risk			General
As at October 31 ($ millions)	allowance			allowance(1)			allowance		2002			2001			2000
Balance, beginning of year	$	2,705		$	517		$	1,475	$	4,697		$	3,306		$	3,081
Acquisition of subsidiaries		–			–			–		–			919			153
Write-offs(2)		(2,376	)		(27	)		–		(2,403	)		(1,173	)		(840	)
Recoveries		169			–			–		169			123			113
Provision for credit losses		2,029			–			–		2,029			1,425			765
Disposal of Scotiabank Quilmes operations (including foreign exchange thereon)		(504	)		–			–		(504	)		–			–
Other, including foreign currency adjustment(3)		(131	)		(9	)		–		(140	)		97			34
Balance, end of year	$	1,892		$	481		$	1,475	$	3,848		$	4,697		$	3,306

(1)	Includes $418 (2001 – $461; 2000 – $453) which has been deducted from securities.
(2)	Write-offs of loans restructured during the year were nil (2001 – $4; 2000 – $3).
(3)	This adjustment includes the effect of hedging the allowance for credit losses of foreign currency denominated loans.

6.   Land, buildings and equipment

					2002		2001
			Accumulated		Net		Net
			depreciation &		book		book
As at October 31 ($ millions)	Cost		amortization		value		value
Land	$	264	$	–	$	264	$	304
Buildings		1,447		344		1,103		1,198
Equipment		2,330		1,808		522		587
Leasehold improvements		651		439		212		236
Total	$	4,692	$	2,591	$	2,101	$	2,325

Depreciation and amortization in respect of the above buildings, equipment and leasehold improvements for the year amounted to $243 million (2001 – $243 million; 2000 – $267 million).

92                    2002 SCOTIABANK ANNUAL REPORT

7.   Goodwill and other intangible assets

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

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

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

For 2002, there was no amortization of goodwill. Amortization of goodwill for the years ended October 31, 2001 and 2000 was $24 million and $13 million, respectively. Had goodwill not been amortized, the basic and diluted earnings per share would have increased by $0.05 and $0.03, and net income would have been $2,193 million and $1,939 million, respectively.

GOODWILL

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

	Domestic		International			Scotia
As at October 31 ($ millions)	Banking		Banking			Capital			2002			2001			2000
Balance as at beginning of year	$	97	$	285		$	18		$	400		$	297		$	139
Cumulative effect of adoption of new accounting standard		–		(76	)		–			(76	)		–			–
		97		209			18			324			297			139
Acquisitions		21		7			–			28			148			172
Amortization		–		–			–			–			(24	)		(13	)
Adjustment to Scotiabank Inverlat’s goodwill (Note 24)		–		(37	)		–			(37	)		–			–
Effects of foreign exchange and other		–		(15	)		(1	)		(16	)		(21	)		(1	)
Balance at end of year	$	118	$	164		$	17		$	299		$	400		$	297

INTANGIBLE ASSETS

	Gross
	carrying		Accumulated			2002		2001		2000
As at October 31 ($ millions)	amount		amortization			Net		Net		Net
Intangible assets	$	412	$	(107	)	$	305	$	334	$	199

Intangible assets are comprised primarily of core deposit intangibles. The aggregate amortization expense for the year ended October 31, 2002, was $28 million (2001 – $28 million; 2000 – $24 million).

2002 SCOTIABANK ANNUAL REPORT                    93

8.   Other assets

As at October 31 ($ millions)	2002		2001
Accrued interest	$	2,119	$	2,696
Accounts receivable		1,283		930
Future income tax assets (Note 15)		797		824
Other		3,118		2,853
Total	$	7,317	$	7,303

9.   Deposits

		Payable		Payable		Payable on
As at October 31 ($ millions)		on demand		after notice		a fixed date		2002		2001
Canada:
	Personal	$	2,185	$	17,006	$	42,196	$	61,387	$	59,067
	Business and governments		9,652		7,362		26,466		43,480		37,541
	Banks		65		–		362		427		859
			11,902		24,368		69,024		105,294		97,467
United States:
	Personal		6		185		896		1,087		1,040
	Business and governments		147		213		18,057		18,417		15,770
	Banks		21		41		2,759		2,821		6,897
			174		439		21,712		22,325		23,707
Other international:
	Personal		526		5,526		7,032		13,084		15,466
	Business and governments		2,209		3,617		26,107		31,933		27,499
	Banks		308		364		22,310		22,982		22,056
			3,043		9,507		55,449		67,999		65,021
Total(1)		$	15,119	$	34,314	$	146,185	$	195,618	$	186,195

(1) Deposits denominated in U.S. dollars amount to $68,058 (2001 – $65,307) and deposits denominated in other foreign currencies amount to $33,881 (2001 – $34,179). Segmentation of deposits is based upon residency of depositor.

10.   Other liabilities

As at October 31 ($ millions)	2002		2001
Accrued interest	$	2,227	$	2,933
Accounts payable and accrued expenses		2,571		2,376
Deferred income		494		456
Liabilities of subsidiaries, other than deposits		2,345		1,935
Gold and silver certificates		3,647		3,634
Future income tax liabilities (Note 15)		95		92
Cheques and other items in transit, net		1,075		574
Other		3,224		3,369
Total	$	15,678	$	15,369

11.   Non-controlling interest in subsidiaries

As at October 31 ($ millions)	2002		2001
Non-controlling interest in common equity of subsidiaries	$	662	$	586
Scotiabank Trust Securities – Series 2000-1 issued by BNS Capital Trust (Note 13-9)		500		500
Scotiabank Trust Securities – Series 2002-1 issued by Scotiabank Capital Trust (Note 13-10)		750		–
Total	$	1,912	$	1,086

94                    2002 SCOTIABANK ANNUAL REPORT

12.   Subordinated debentures

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

As at October 31 ($ millions)
Maturity date	Interest rate (%)	Terms(1) (currency in millions)	2002		2001
March, 2003	8.1		$	116	$	116
May, 2003	6.875	US $250		389		397
December, 2006	6.0	Redeemed on December 4, 2001		–		350
June, 2007	6.25	Redeemed on June 12, 2002		–		300
July, 2007	6.5	US $500, redeemed on July 15, 2002		–		794
April, 2008	5.4	Redeemable at any time. After April 1, 2003, interest will be payable at an annual rate equal to the 90 day bankers’ acceptance rate plus 1%		600		600
September, 2008	6.25	US $250		389		397
February, 2011	7.4	Redeemable at any time. After February 8, 2006, interest will be payable at an annual rate equal to the 90 day bankers’ acceptance rate plus 1%		300		300
July, 2012	6.25	Redeemable at any time. After July 16, 2007, interest will be payable at an annual rate equal to the 90 day bankers’ acceptance rate plus 1%		500		500
July, 2013	5.65	Redeemable at any time. After July 22, 2008, interest will be payable at an annual rate equal to the 90 day bankers’ acceptance rate plus 1%		425		425
September, 2013	8.3	Redeemable at any time		250		250
May, 2014	5.75	Redeemable at any time. After May 12, 2009, interest will be payable at an annual rate equal to the 90 day bankers’ acceptance rate plus 1%		325		325
June, 2025	8.9	Redeemable at any time		250		250
August, 2085	Floating	US $214 bearing interest at a floating rate of the offered rate for six-month Eurodollar deposits plus 0.125%. Redeemable on any interest payment date		334		340
			$	3,878	$	5,344

The aggregate maturities of the debentures are as follows ($ millions):

Less than 1 year	$	505
From 1 to 2 years		–
From 2 to 3 years		–
From 3 to 4 years		–
From 4 to 5 years		–
From 5 to 10 years		1,789
Over 10 years		1,584
	$	3,878

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

2002 SCOTIABANK ANNUAL REPORT                    95

13.   Capital stock

Authorized:

An unlimited number of preferred and common shares without nominal or par value.
Issued and fully paid:

		2002						2001				2000
As at October 31 ($ millions)		Number of shares			Amount			Number of shares		Amount		Number of shares		Amount
Preferred shares:
	Series 6(1)		–		$	–			12,000,000	$	300		12,000,000	$	300
	Series 7(2)		–			–			8,000,000		200		8,000,000		200
	Series 8(3)		9,000,000			225			9,000,000		225		9,000,000		225
	Series 9(4)		10,000,000			250			10,000,000		250		10,000,000		250
	Series 10(5)		–			–			–		–		7,100		–
	Series 11(6)		9,992,900			250			9,992,900		250		9,992,900		250
	Series 12(7)		12,000,000			300			12,000,000		300		12,000,000		300
	Total issued by the Bank		40,992,900			1,025			60,992,900		1,525		61,000,000		1,525
	Issued by Scotia Mortgage Investment Corporation(8)		250,000			250			250,000		250		250,000		250
Total preferred shares(9)(10)			41,242,900		$	1,275			61,242,900	$	1,775		61,250,000	$	1,775
Common shares:
	Outstanding at beginning of year		503,795,469		$	2,920			497,964,733	$	2,765		494,251,965	$	2,678
	Issued under Shareholder Dividend and Share Purchase Plan(11)		84,577			4			1,086,522		47		1,200,368		40
	Issued under Stock Option Plans (Note 14)		3,550,454			97			4,744,214		108		2,512,400		47
	Purchased for cancellation(12)		(3,308,600	)		(19	)		–		–		–		–
Outstanding at end of year			504,121,900		$	3,002			503,795,469	$	2,920		497,964,733	$	2,765
Total capital stock					$	4,277				$	4,695			$	4,540

(1)	Series 6 Non-cumulative Preferred Shares were redeemed on October 29, 2002. These shares were entitled to non-cumulative preferential cash dividends payable quarterly in an amount per share of $0.446875. These shares were redeemed at par, at a price of $25.00 per share.
(2)	Series 7 Non-cumulative Preferred Shares were redeemed on July 29, 2002. These shares were entitled to non-cumulative preferential cash dividends payable quarterly in an amount per share of $0.44375. These shares were redeemed at a price of $26.00 per share, which included a premium of $1.00 per share.
(3)	Series 8 Non-cumulative Preferred Shares are entitled to noncumulative preferential cash dividends payable quarterly in an amount per share of $0.4375. The Bank intends to redeem these shares on January 29, 2003 at a price of $26.00 per share, which includes a premium of $1.00 per share.
(4)	Series 9 Non-cumulative Preferred Shares are entitled to noncumulative preferential cash dividends payable quarterly in an amount per share of $0.421875. With regulatory approval, the shares may be redeemed by the Bank on or after April 28, 2003, in whole or in part, at declining premiums, by either the payment of cash or the issuance of common shares. On and after October 27, 2005, the Series 9 Preferred Shares will be convertible at the option of the holder into common shares of the Bank, subject to the right of the Bank prior to the conversion date to redeem for cash or find substitute purchasers for such preferred shares.
(5)	Series 10 Non-cumulative Preferred Shares were redeemed on April 26, 2001. These shares were entitled to non-cumulative preferential cash dividends, payable quarterly in an amount per share of $0.02. These shares were redeemed by the Bank at par, at a price of $10.00 per share.
(6)	Series 11 Non-cumulative Preferred Shares are entitled to non-cumulative preferential cash dividends payable quarterly in an amount per share of $0.375. With regulatory approval, the shares may be redeemed by the Bank on or after January 28, 2004, in whole or in part, by either the payment of cash or the issuance of common shares. On and after January 27, 2006, the Series 11 Preferred Shares will be convertible at the option of the holder into common shares of the Bank, subject to the right of the Bank prior to the conversion date to redeem for cash or find substitute purchasers for such preferred shares.
(7)	Series 12 Non-cumulative Preferred Shares are entitled to non-cumulative preferential cash dividends payable quarterly in an amount per share of $0.328125. With regulatory approval, the shares may be redeemed by the Bank at par on or after October 29, 2013, in whole or in part, by the payment in cash of $25.00 per share, together with declared and unpaid dividends to the date fixed for redemption.
(8)	Scotia Mortgage Investment Corporation, a wholly-owned subsidiary of the Bank, issued Class A Preferred Shares which are entitled to non-cumulative preferential cash dividends, if and when declared, payable semi-annually in an amount per share of $32.85. With regulatory approval, on or after October 31, 2007, Class A Preferred Shares may be redeemed in whole by the payment of cash by Scotia Mortgage Investment Corporation or, at the option of the Bank, exchanged for common shares of the Bank. On or after October 31, 2007, the Class A Preferred Shares will be exchangeable at the option of

96                    2002 SCOTIABANK ANNUAL REPORT

	the holder into common shares of the Bank, subject to the right of the Bank prior to the exchange date to purchase for cash or find substitute purchasers for such shares. Under certain circumstances the Class A Preferred Shares of Scotia Mortgage Investment Corporation will be automatically exchanged, without the consent of the holder, into Series Z Non-cumulative Preferred Shares of the Bank which would bear the same dividend rate and similar redemption features.
(9)	On April 4, 2000, BNS Capital Trust, a wholly-owned closed-end trust, issued 500,000 Scotiabank Trust Securities – 2000-1 (“Scotia BaTS”). These securities are exchangeable into Noncumulative Preferred Shares Series Y of the Bank in certain circumstances.
	Each Scotia BaTS is entitled to receive non-cumulative fixed cash distributions payable semi-annually in an amount per Scotia BaTS of $36.55.
	The Scotia BaTS, with regulatory approval, may be redeemed in whole prior to June 30, 2005, upon the occurrence of certain tax or regulatory capital changes, or on or after June 30, 2005, at the option of BNS Capital Trust. On or after June 30, 2011, the Scotia BaTS may be exchanged, at the option of the holder into Non-cumulative Preferred Shares Series Y of the Bank, subject to the right of the Bank prior to the exchange date to purchase for cash or find substitute purchasers for such securities. These Non-cumulative Preferred Shares Series Y would pay a dividend rate equivalent to the cash distribution rate of the Scotia BaTS. Under certain circumstances, the Scotia BaTS would be automatically exchanged without the consent of the holder, into Non-cumulative Preferred Shares Series Y of the Bank. See Note 11, non-controlling interest in subsidiaries.
(10)	On April 30, 2002, Scotiabank Capital Trust, a wholly-owned open-end trust, issued 750,000 Scotiabank Trust Securities -Series 2002-1 (“Scotia BaTS II”). Each Scotia BaTS II is entitled to receive non-cumulative fixed cash distributions payable semi-annually in an amount per Scotia BaTS II of $33.13. The first such payment was made on June 30, 2002, in an amount of $11.07 per Scotia BaTS II.
	The Scotia BaTS II, with regulatory approval, may be redeemed in whole prior to June 30, 2007, upon the occurrence of certain tax or regulatory capital changes, or on or after June 30, 2007, at the option of Scotiabank Capital Trust. The holder of the Scotia BaTS II has the right at any time to exchange their Scotia BaTS II into Non-cumulative Preferred Shares Series W of the Bank. The Series W shares will be entitled to cash dividends payable semi-annually in an amount per $25.00 share of $0.53125. Under certain circumstances, the Scotia BaTS II would be automatically exchanged without the consent of the holder, into Non-cumulative Preferred Shares Series X of the Bank. The Series X shares will be entitled to non-cumulative cash dividends payable semi-annually in an amount per $25.00 share of $0.70. See Note 11, non-controlling interest in subsidiaries.
(11)	As at October 31, 2002, common shares totalling 11,305,039 have been reserved for future issue under the terms of the Shareholder Dividend and Share Purchase Plan.
(12)	In January 2002, the Bank announced its intention to purchase up to 10.0 million common shares over the twelve months ending January 20, 2003, pursuant to a normal course issuer bid. During the year ended October 31, 2002, 3.3 million shares were purchased at an average price of $49.90.

RESTRICTIONS ON DIVIDEND PAYMENTS

Under the Bank Act, the Bank is prohibited from declaring any dividends on its common or preferred shares when the Bank is, or would be placed by such a declaration, in contravention of the capital adequacy, liquidity or any other regulatory directives issued under the Bank Act. In addition, common share dividends cannot be paid unless all dividends to which preferred shareholders are then entitled to have been paid or sufficient funds have been set aside to do so.

     In the event that applicable cash distributions on either the Scotia BaTS or Scotia BaTS II are not paid on a regular distribution date, the Bank has undertaken not to declare dividends of any kind on its preferred or common shares. Similarly, should the Bank fail to declare regular dividends on any of its directly issued outstanding preferred or common shares, cash distributions will not be made on either of the Scotia BaTS or Scotia BaTS II.

     Currently, these limitations do not restrict the payment of dividends on preferred or common shares.

2002 SCOTIABANK ANNUAL REPORT                    97

14.   Stock-based compensation

a)   Stock option plans

Under terms of the Employee Stock Option Plan, options to purchase common shares may be granted to selected employees at an exercise price not less than the closing price of the Bank’s common shares on the Toronto Stock Exchange (TSX) on the day prior to the date of the grant. These options vest evenly over a four-year period and are exercisable no later than 10 years after the date of the grant. Outstanding options expire on dates ranging from June 2004, to June 2012. A total of 49 million shares were reserved for issuance under this plan, of which 15.2 million shares have been issued as a result of the exercise of options, 27.1 million shares are committed under outstanding options, leaving 6.7 million shares available for issuance as options.

     In 2001, a Directors’ Stock Option Plan was approved. A total of 400,000 common shares has been reserved for issuance to non-employee Directors under this plan. Options are fully exercisable at the time of grant, expiring between March and December, 2011. Currently, 103,000 (2001 – 63,000) options are outstanding at a weighted average exercise price of $44.79 (2001 – $41.90). To date, no options have been exercised.

Details of the Bank’s Employee Stock Option Plan are as follows:

	2002					2001					2000
	Number			Weighted		Number			Weighted		Number			Weighted
	of stock			average		of stock			average		of stock			average
	options			exercise		options			exercise		options			exercise
As at October 31	(000's)			price		(000's)			price		(000's)			price
Outstanding at beginning of year		26,523		$	31.80		25,321		$	27.51		22,449		$	26.29
Granted		4,470	(1)		49.37		6,270			42.05		6,026			28.35
Exercised		(3,550	)		27.44		(4,744	)		22.61		(2,512	)		18.79
Forfeited/cancelled		(330	)		32.58		(324	)		29.70		(642	)		26.83
Outstanding at end of year		27,113		$	35.25		26,523		$	31.80		25,321		$	27.51
Exercisable at end of year		13,775		$	30.24		11,851		$	27.36		11,401		$	23.98
Available for grant		6,734					10,875					16,821

(1) In 2003, the Bank intends to grant stock appreciation rights under its employee stock option plan (tandem SARs). As well, these tandem SARs will be attached to the 2002 employee stock option grants (refer to Note 2).

As at October 31, 2002	Options Outstanding						Options Exercisable
	Number		Weighted		Weighted		Number		Weighted
	of stock		average remaining		average		of stock		average
Range of exercise prices	options (000's)		contractual life (years)		exercise price		options (000's)		exercise price
$13.25 to $16.53		1,732		3.3	$	15.89		1,732	$	15.89
$26.05 to $35.10		14,964		6.2	$	30.59		10,674	$	31.06
$42.05 to $54.87		10,417		8.6	$	45.17		1,369	$	42.05
		27,113		6.9	$	35.25		13,775	$	30.24

b)   Employee share ownership plans

Qualifying employees can contribute up to the lesser of a specified percentage of salary and a maximum dollar amount towards the purchase of common shares of the Bank or deposits with the Bank. In general, the Bank matches 50% of qualifying contributions which is expensed in salaries and staff benefits. During 2002, the Bank’s contributions totalled $23 million (2001 – $23 million; 2000 – $22 million). Contributions, which are used by the plan trustee to purchase common shares in the open market, do not result in a subsequent expense to the Bank from share price appreciation.

c)   Other stock-based compensation plans

Other stock-based compensation plans use notional units that are valued based on the Bank’s common share price on the TSX. These units, with the exception of Stock Appreciation Rights, accumulate dividend equivalents in the form of additional units based on the dividends paid on the Bank’s common shares. Fluctuations in the Bank’s share price changes the value of the units, which affect the Bank’s stock-based compensation expense. In 2002, $24 million (2001 – $18 million; 2000 – $52 million), net of hedging and other items, was recognized in salaries and benefits in the Consolidated Statement of Income for changes in the amount of the Bank’s liability for these units. Details of these plans are as follows:

STOCK APPRECIATION RIGHTS (SARs)

SARs are granted instead of stock options to selected employees in countries where local laws may restrict the Bank from issuing shares. The SARs have vesting and exercise terms and conditions similar to the stock options. The cost of SARs is recognized on a graded vesting basis. When a SAR is exercised, the Bank pays the appreciation amount in cash equal to the rise in the market price of the Bank’s common shares since the grant date. During fiscal 2002, 1,166,922 SARs were granted (2001 – 1,536,000; 2000 – 1,455,000) and as at October 31, 2002, 5,909,593 SARs were outstanding (2001 – 5,793,525; 2000 – 5,444,095), of which 2,599,212 SARs were vested (2001 – 2,281,094; 2000 – 2,196,370).

DEFERRED STOCK UNIT PLAN (DSU)

Under the DSU Plan, senior officers may elect to receive all or a portion of their cash bonus under the Management Incentive Plan (which is expensed for the year awarded in salaries and staff benefits in the Consolidated Statement of Income) in the form of deferred stock units which vest immediately. Units are redeemable only when an officer ceases to be a Bank employee and must be redeemed within one year thereafter. As at October 31, 2002, there were 747,103 units outstanding (2001 – 513,900; 2000 – 258,420).

DIRECTORS’ DEFERRED STOCK UNIT PLAN (DDSU)

Under the DDSU Plan, non-employee Directors of the Bank may elect to allocate all or a portion of their fee for that fiscal year (which is expensed by the Bank in other expenses in the Consolidated Statement of Income) in the form of deferred stock units which vest immediately. Units are redeemable only following resignation or retirement and must be redeemed by December 31st of the year following the year of retirement or resignation. As at October 31, 2002, there were 35,544 units outstanding (2001 – 17,928; 2000 – nil).

RESTRICTED SHARE UNIT PLAN (RSU)

Under the RSU Plan, selected employees receive a bonus in the form of an award of restricted share units which vest at the end of three years. The underlying bonus and the stock-based compensation expense is recognized evenly over the three-year vesting period, at which time the units are paid to the employee. As at October 31, 2002, there were 492,625 units awarded and outstanding (2001 – 150,947; 2000 – nil) of which none were vested.

98                    2002 SCOTIABANK ANNUAL REPORT

15.   Corporate income taxes

On November 1, 2000, the Bank adopted the asset and liability method of accounting for corporate income taxes, as established by the CICA, on a retroactive basis, with no restatement of prior periods. In previous periods, the Bank followed the deferral method of accounting for income taxes, whereby income tax provisions or recoveries were recorded in the years the income and expense were recognized for accounting purposes, regardless of when the related taxes were actually paid or settled. Income tax provisions or recoveries were measured at income tax rates in effect in the year the differences originated and generally were not adjusted for future income tax rates. An amount of $39 million was charged to fiscal 2001 opening retained earnings with an offsetting reduction to the future income tax asset.

COMPONENTS OF INCOME TAX PROVISION

For the year ended October 31 ($ millions)			2002		2001			2000
Provision for income taxes in the Consolidated Statement of Income:
	Current		$	497	$	768		$	956
	Future			104		108			34
				601		876			990
Provision for future income taxes in the Consolidated Statement of Changes in Shareholders’ Equity in respect to unrealized foreign currency gains and losses and other				4		(9	)		9
Total provision for income taxes			$	605	$	867		$	999
Current income taxes:
	Domestic:
		Federal	$	148	$	247		$	405
		Provincial		70		152			220
	Foreign			279		369			331
				497		768			956
Future income taxes:
	Domestic:
		Federal		13		61			28
		Provincial		23		19			12
	Foreign			72		19			3
				108		99			43
Total income taxes			$	605	$	867		$	999

RECONCILIATION TO STATUTORY RATE

Income taxes in the Consolidated Statement of Income vary from the amounts that would be computed by applying the composite federal and provincial statutory income tax rate for the following reasons:

		2002						2001						2000
					Percent of						Percent of						Percent of
					pre-tax						pre-tax						pre-tax
For the year ended October 31 ($ millions)		Amount			income			Amount			income			Amount			income
Income taxes at statutory rate		$	1,004			38.4	%	$	1,309			41.1	%	$	1,267			42.5	%
Increase (decrease) in income taxes resulting from:
	Lower average tax rate applicable to subsidiaries, associated corporations, and foreign branches		(308	)		(11.8	)		(354	)		(11.1	)		(230	)		(7.7	)
	Tax-exempt income from securities		(128	)		(4.9	)		(107	)		(3.4	)		(96	)		(3.2	)
	Future income tax effect of substantively enacted tax rate reductions		30			1.2			90			2.8			–			–
	Other, net		3			0.1			(62	)		(1.9	)		49			1.6
Total income taxes and effective tax rate		$	601			23.0	%	$	876			27.5	%	$	990			33.2	%

FUTURE INCOME TAXES

The tax-effected temporary differences which result in future income tax assets and (liabilities) are as follows:

As at October 31 ($ millions)	2002			2001
Allowance for credit losses	$	598		$	581
Deferred income		149			174
Loss on disposal of subsidiary operations		146			–
Securities		(128	)		5
Premises and equipment		(78	)		(89	)
Pension fund		(124	)		(121	)
Other		139			182
Net future income taxes(1)	$	702		$	732

(1) Net future income taxes of $702 (2001 – $732) are represented by future income tax assets of $797 (2001 – $824), net of future income tax liabilities of $95 (2001 – $92).

Earnings of certain international subsidiaries are subject to tax only upon their repatriation to Canada. As repatriation is not currently planned in the foreseeable future, the Bank has not recognized a future income tax liability. If all international subsidiaries’ unremitted earnings were repatriated, taxes that would be payable as at October 31, 2002, are estimated to be $463 million (October 31, 2001 – $497 million).

2002 SCOTIABANK ANNUAL REPORT                    99

16.   Employee future benefits

On November 1, 2000, the Bank adopted the new accounting standard established by the CICA for employee future benefits. Employee future benefits include pensions and other retirement benefits, post-employment benefits and compensated absences.

    The new accounting standard requires the accrual of the Bank’s expected cost and obligation of providing other retirement benefits (such as health and dental care costs and life insurance benefits) as the employees earn the entitlement to the benefits, in a manner similar to pension costs. In prior years, such costs were charged to income when paid by the Bank. The new standard also requires the use of current market interest rates to estimate the present value of future benefit obligations, whereas in prior years, an estimated long-term interest rate was used to determine the present value of the pension obligation.

    The new accounting standard was adopted on a prospective basis with a transition date of November 1, 2000. The net transitional asset will result in a reduction in benefit expense in the Consolidated Statement of Income as it is recognized over the estimated average remaining service life of the employees of approximately 14 to 18 years.

A summary of the Bank’s principal plans is as follows⁽¹⁾:

	Pension plans									Other benefit plans
For the year ended October 31 ($ millions)	2002			2001			2000			2002			2001
Change in projected benefit obligation
Projected benefit obligation at beginning of year	$	2,728		$	2,257		$	2,141		$	526		$	–
Adjustment related to adoption of new accounting standard		–			210			–			–			455
Cost of benefits earned in the year		85			77			70			23			19
Interest cost on projected benefit obligation		195			176			161			37			33
Employee contributions		8			9			7			–			–
Benefits paid		(126	)		(117	)		(110	)		(31	)		(29	)
Actuarial loss (gain)		5			106			(8	)		27			42
Other		24			10			(4	)		(10	)		6
Projected benefit obligation at end of year	$	2,919		$	2,728		$	2,257		$	572		$	526
Change in fair value of assets
Fair value of assets at beginning of year	$	3,548		$	3,406		$	2,916		$	75		$	–
Adjustment related to adoption of new accounting standard		–			154			–			–			70
Actual return on assets		(41	)		87			589			1			4
Employer contributions		13			13			9			20			19
Employee contributions		8			9			7			–			–
Benefits paid		(126	)		(117	)		(110	)		(20	)		(18	)
Other		(10	)		(4	)		(5	)		–			–
Fair value of assets at end of year	$	3,392	(2)	$	3,548	(2)	$	3,406	(2)	$	76		$	75
Funded status
Excess (deficit) of fair value of assets over projected benefit obligation at end of year	$	473		$	820		$	1,149		$	(496	)	$	(451	)
Unrecognized net actuarial loss (gain)		625			301			(797	)		76			48
Unrecognized past service costs		28			7			62			(8	)		–
Unrecognized transitional obligation (asset)		(589	)		(641	)		(10	)		329			354
Valuation allowance		(133	)		(109	)		(82	)		–			–
Other		3			3			–			8			7
Prepaid (accrued) benefit expense at end of year	$	407		$	381		$	322		$	(91	)	$	(42	)
Annual benefit expense
Cost of benefits earned in the year	$	85		$	77		$	70		$	23		$	19
Interest cost on projected benefit obligation		195			176			161			37			33
Expected return on assets		(275	)		(280	)		(198	)		(5	)		(5	)
Recognition of transitional obligation (asset)		(45	)		(45	)		(2	)		24			24
Valuation allowance provided against prepaid benefit expense		24			27			42			–			–
Other		2			(1	)		(16	)		1			–
Benefit (income) expense	$	(14	)	$	(46	)	$	57		$	80		$	71
Weighted average assumptions(%)
Discount rate at beginning of year		6.75			7.00			7.50			6.75			7.00
Discount rate at end of year		7.00			6.75			7.50			7.00			6.75
Assumed long-term rate of return on assets		7.50			8.00			7.50			7.50			7.50
Rate of increase in future compensation		3.90			3.90			4.15			3.90			3.90

(1)	Other minor plans operated by certain subsidiaries of the Bank are not considered material and are not included in these disclosures.
(2)	The fair value of assets invested in common shares of the Bank totalled $360 (2001 – $372; 2000 – $308).

The assumed health care cost trend used in determining benefit expense for 2002 is 9% (2001 – 10%), decreasing 0.75% per annum (2001 – 1%) to an ultimate level of 4.5% (2001 – 4.5%). The assumed dental care cost trend used in determining benefit expense for 2002 is 4.85% (2001 – 5%), decreasing 0.15% per annum (2001 – 0.15%) to an ultimate level 3.5% (2001 – 3.5%).

An increase of one percentage point in the health and dental cost trends would have increased the 2002 benefit expense by $3 million and end-of-year benefit obligation by $63 million.

Included in the pension plans’ projected benefit obligation at the end of 2002 is $164 million (2001 – $146 million) related to supplemental unfunded retirement arrangements.

A decrease of one percentage point in the assumed discount rate or rate of return on assets for the principal pension plans would result in an additional pension expense to the Bank of $45 million and $32 million, respectively. An increase of 0.25% in the assumed future compensation rate would result in an additional pension expense to the Bank of $5 million.

100                    2002 SCOTIABANK ANNUAL REPORT

17.   Net income per common share

Basic net income per common share is determined by dividing net income available to common shareholders as reported in the Consolidated Statement of Income by the average daily number of common shares outstanding. Diluted net income per common share reflects the potential dilutive effect of stock options granted under the Bank’s Stock Option Plans, as determined under the treasury stock method.

    Convertible preferred shares have not been included in the calculation of diluted earnings per share since the Bank has the right to redeem them for cash prior to the conversion date.

18.   Related party transactions

In the ordinary course of business, the Bank provides to its associated corporations normal banking services on terms similar to those offered to non-related parties.

19.   Segmented results of operations

Scotiabank is a diversified financial services institution that provides a wide range of financial products and services to retail, commercial and corporate customers around the world. The Bank is organized into three main operating segments: Domestic Banking, International Banking, and Scotia Capital.

    Domestic Banking, including Wealth Management, provides a comprehensive array of retail and commercial banking services through branch and electronic delivery channels, to individuals and small to medium-sized businesses in Canada. The retail services include consumer and mortgage lending, credit and debit card services, savings, chequing and retirement products, personal trust services, retail brokerage, mutual funds and transaction services. In addition to credit, commercial clients are provided with deposit and cash management services.

    International Banking supplies retail and commercial banking services through branches, subsidiaries and foreign affiliates. The products, services and channels offered are generally the same as those in Domestic Banking.

    Scotia Capital is an integrated corporate and investment bank which services the credit, capital market and risk management needs of the Bank’s global relationships with large corporations, financial institutions and governments. The services provided include credit and related products, debt and equity underwriting, foreign exchange, derivative products, precious metals products and financial advisory services. Also, it conducts trading activities for its own account and manages the short-term funding of the Bank.

    The Other category represents smaller operating segments, including Group Treasury and other corporate items, which are not allocated to an operating segment.

    The results of these business segments are based upon the internal financial reporting systems of the Bank. The accounting policies used in these segments are generally consistent with those followed in the preparation of the consolidated financial statements as disclosed in Note 1. The only notable accounting measurement difference is the grossing up of tax-exempt net interest income to an equivalent before-tax basis for those affected segments.

    Because of the complexity of the Bank, various estimates and allocation methodologies are used in the preparation of the business segment financial information. The assets and liabilities are transfer-priced at wholesale market rates, and corporate expenses are allocated to each segment based on utilization. As well, capital is apportioned to the business segments on a risk-based methodology. Transactions between segments are recorded within segment results as if conducted with a third party and are eliminated on consolidation.

For the year ended October 31, 2002
($ millions)		Domestic			International			Scotia
taxable equivalent basis		Banking			Banking			Capital			Other(1)			Total
Net interest income		$	3,405		$	2,225		$	1,615		$	(570	)	$	6,675
Provision for credit losses			(282	)		(523	)		(1,247	)		23			(2,029	)
Other income			1,599			678			1,255			410			3,942
Net interest and other income			4,722			2,380			1,623			(137	)		8,588
Amortization of capital assets			(159	)		(80	)		(27	)		(5	)		(271	)
Other non-interest expenses			(2,794	)		(2,016	)		(995	)		102			(5,703	)
Income before the undernoted:			1,769			284			601			(40	)		2,614
	Provision for income taxes		(627	)		(5	)		(221	)		252			(601	)
	Non-controlling interest in net income of subsidiaries		–			(154	)		–			(62	)		(216	)
Net income		$	1,142		$	125		$	380		$	150		$	1,797
Total average assets($ billions)		$	93		$	58		$	124		$	22		$	297

2002 SCOTIABANK ANNUAL REPORT                    101

For the year ended October 31, 2001
($ millions)		Domestic			International			Scotia
taxable equivalent basis		Banking			Banking			Capital			Other(1)			Total
Net interest income		$	3,135		$	2,020		$	1,598		$	(553	)	$	6,200
Provision for credit losses			(283	)		(250	)		(754	)		(138	)		(1,425	)
Other income			1,582			691			1,196			602			4,071
Net interest and other income			4,434			2,461			2,040			(89	)		8,846
Amortization of capital assets and goodwill			(139	)		(76	)		(22	)		(58	)		(295	)
Other non-interest expenses			(2,808	)		(1,594	)		(962	)		(3	)		(5,367	)
Income before the undernoted:			1,487			791			1,056			(150	)		3,184
	Provision for income taxes		(527	)		(200	)		(370	)		221			(876	)
	Non-controlling interest in net income of subsidiaries		–			(102	)		–			(37	)		(139	)
Net income		$	960		$	489		$	686		$	34		$	2,169
Total average assets($ billions)		$	90		$	47		$	115		$	20		$	272

For the year ended October 31, 2000
($ millions)		Domestic			International			Scotia
taxable equivalent basis		Banking			Banking			Capital			Other(1)			Total
Net interest income		$	2,932		$	1,371		$	1,385		$	(489	)	$	5,199
Provision for credit losses			(210	)		(185	)		(412	)		42			(765	)
Other income			1,706			451			1,001			507			3,665
Net interest and other income			4,428			1,637			1,974			60			8,099
Amortization of capital assets and goodwill			(168	)		(58	)		(24	)		(45	)		(295	)
Other non-interest expenses			(2,804	)		(999	)		(885	)		(136	)		(4,824	)
Income before the undernoted:			1,456			580			1,065			(121	)		2,980
	Provision for income taxes		(574	)		(173	)		(415	)		172			(990	)
	Non-controlling interest in net income of subsidiaries		–			(43	)		–			(21	)		(64	)
Net income		$	882		$	364		$	650		$	30		$	1,926
Total average assets($ billions)		$	89		$	31		$	101		$	18		$	239

(1) Includes revenues from all other smaller operating segments of $243 in 2002 (2001 – $359; 2000 – $356), and net income of $147 in 2002 (2001 – $210; 2000 – $193). As well, includes corporate adjustments such as the elimination of the tax-exempt income gross up reported in net interest income and provision for income taxes, increases in the general provision, differences in the actual amount of costs incurred and charged to the operating segments, and the impact of securitizations.

The following table summarizes the Bank’s financial results by geographic region. Revenues and expenses which have not been allocated back to specific operating business lines are reflected in corporate adjustments.

GEOGRAPHICAL SEGMENTATION⁽¹⁾

For the year ended October 31, 2002				United			Other
($ millions)	Canada			States			International			Total
Net interest income	$	3,798		$	748		$	2,545		$	7,091
Provision for credit losses		(319	)		(1,131	)		(602	)		(2,052	)
Other income		2,338			475			846			3,659
Non-interest expenses		(3,527	)		(324	)		(2,263	)		(6,114	)
Provision for income taxes		(668	)		89			(55	)		(634	)
Non-controlling interest in net income of subsidiaries		–			–			(154	)		(154	)
Income	$	1,622		$	(143	)	$	317		$	1,796
Corporate adjustments											1
Net income										$	1,797
Total average assets($ billions)	$	165		$	44		$	83		$	292
Corporate adjustments											5
Total average assets, including corporate adjustments										$	297

102                    2002 SCOTIABANK ANNUAL REPORT

For the year ended October 31, 2001				United			Other
($ millions)	Canada			States			International			Total
Net interest income	$	3,580		$	721		$	2,298		$	6,599
Provision for credit losses		(306	)		(686	)		(295	)		(1,287	)
Other income		2,383			493			860			3,736
Non-interest expenses		(3,488	)		(297	)		(1,856	)		(5,641	)
Provision for income taxes		(667	)		(64	)		(229	)		(960	)
Non-controlling interest in net income of subsidiaries		–			–			(102	)		(102	)
Income	$	1,502		$	167		$	676		$	2,345
Corporate adjustments											(176	)
Net income										$	2,169
Total average assets($ billions)	$	152		$	44		$	72		$	268
Corporate adjustments											4
Total average assets, including corporate adjustments										$	272

For the year ended October 31, 2000				United			Other
($ millions)	Canada			States			International			Total
Net interest income	$	3,282		$	651		$	1,588		$	5,521
Provision for credit losses		(243	)		(308	)		(256	)		(807	)
Other income		2,407			469			588			3,464
Non-interest expenses		(3,455	)		(287	)		(1,229	)		(4,971	)
Provision for income taxes		(682	)		(217	)		(176	)		(1,075	)
Non-controlling interest in net income of subsidiaries		–			–			(43	)		(43	)
Income	$	1,309		$	308		$	472		$	2,089
Corporate adjustments											(163	)
Net income										$	1,926
Total average assets($ billions)	$	143		$	39		$	54		$	236
Corporate adjustments											3
Total average assets, including corporate adjustments										$	239

(1) Revenues are attributed to countries based on where services are performed or assets are recorded.

2002 SCOTIABANK ANNUAL REPORT                    103

20.   Commitments and contingent liabilities

a)   Indirect commitments

In the normal course of business, various indirect commitments are outstanding which are not reflected in the consolidated financial statements. These may include:

– Guarantees and standby letters of credit which represent an irrevocable obligation to pay a third party when a customer does not meet its contractual financial or performance obligations.

– Documentary and commercial letters of credit which require the Bank to honour drafts presented by a third party when specific activities are completed.

– Commitments to extend credit which represent undertakings to make credit available in the form of loans or other financings for specific amounts and maturities, subject to specific conditions.

– Securities lending transactions under which the Bank, acting as principal or agent, agrees to lend securities to a borrower. The borrower must fully collateralize the security loan at all times.

– Security purchase commitments which require the Bank to fund future investments.

These financial instruments are subject to normal credit standards, financial controls and monitoring procedures.

The table below provides a detailed breakdown of the Bank’s off-balance sheet indirect commitments expressed in terms of the contractual amounts of the related commitment or contract.

As at October 31 ($ millions)		2002		2001
Guarantees and standby letters of credit		$	16,198	$	11,738
Documentary and commercial letters of credit			783		746
Commitments to extend credit:
	Original term to maturity of one year or less		87,460		92,170
	Original term to maturity of more than one year		39,512		40,422
Securities lending			2,968		3,090
Security purchase commitments			757		825
Total off-balance sheet indirect commitments		$	147,678	$	148,991

b)   Lease commitments and other executory contracts

Minimum future rental commitments at October 31, 2002, for buildings and equipment under long-term, non-cancellable leases are shown below.

For the year ($ millions)
	2003	$	177
	2004		154
	2005		120
	2006		99
	2007		71
	2008 and thereafter		306
	Total	$	927

Building rent expense, net of rental income from subleases, included in the Consolidated Statement of Income was $192 million (2001 – $200 million; 2000 – $179 million).

In addition, the Bank and its subsidiaries have entered into certain long-term executory contracts relating to outsourced services.

c)   Pledging of assets

In the ordinary course of business, securities and other assets are pledged against liabilities. Details of assets pledged are shown below:

As at October 31 ($ millions)		2002		2001
Assets pledged to:
	Bank of Canada(1)	$	80	$	75
	Foreign governments and central banks(1)		3,441		4,663
	Clearing systems, payment systems and depositories(1)		815		450
Assets pledged in relation to exchange-traded derivative transactions			93		117
Assets pledged as collateral related to:
	Securities borrowed and securities lent		7,632		9,965
	Obligations related to assets sold under repurchase agreements		31,881		30,627
	Over-the-counter derivative transactions		54		94
	Other		1		4
Total		$	43,997	$	45,995

(1) Includes assets pledged in order to participate in clearing and payment systems and depositories or to have access to the facilities of central banks in foreign jurisdictions.

d)   Litigation

In the ordinary course of business the Bank and its subsidiaries have legal proceedings brought against them. Management does not expect the outcome of these proceedings, in aggregate, to have a material adverse effect on the Bank’s consolidated financial position or results of operations.

104                    2002 SCOTIABANK ANNUAL REPORT

21.   Financial instruments

a)   Fair value

Fair value amounts represent estimates of the consideration that would currently be agreed upon between knowledgeable, willing parties who are under no compulsion to act and is best evidenced by a quoted market price, if one exists. Many of the Bank’s financial instruments lack an available trading market. Therefore, these instruments have been valued using present value or other valuation techniques and may not necessarily be indicative of the amounts realizable in an immediate settlement of the instruments. In addition, the calculation of estimated fair value is based on market conditions at a specific point in time and may not be reflective of future fair values.

     Changes in interest rates are the main cause of changes in the fair value of the Bank’s financial instruments. The majority of the Bank’s financial instruments are carried at historical cost and are not adjusted to reflect increases or decreases in fair value due to market fluctuations, including those due to interest rate changes. For those financial instruments held for trading purposes, the carrying value is adjusted regularly to reflect the fair value.

The following table sets out the fair values of on-balance sheet financial instruments and derivative instruments of the Bank using the valuation methods and assumptions described below. The fair values disclosed do not reflect the value of assets and liabilities that are not considered financial instruments, such as land, buildings and equipment.

		2002								2001
		Total		Total			Favourable/			Total		Total			Favourable/
		fair		book			(Unfavour-			fair		book			(Unfavour-
As at October 31 ($ millions)		value		value			able)			value		value			able)
Assets:
	Cash resources	$	20,273	$	20,273		$	–		$	20,160	$	20,160		$	–
	Securities		56,651		56,194			457	(1)		54,242		53,284			958	(1)
	Loans		185,842		185,671			171			177,195		175,432			1,763
	Customers’ liability under acceptances		8,399		8,399			–			9,301		9,301			–
	Other		4,730		4,730			–			4,359		4,359			–
Liabilities:
	Deposits		196,467		195,618			(849	)		187,570		186,195			(1,375	)
	Acceptances		8,399		8,399			–			9,301		9,301			–
	Obligations related to assets sold under repurchase agreements		31,881		31,881			–			30,627		30,627			–
	Obligations related to securities sold short		8,737		8,737			–			6,442		6,442			–
	Other		14,519		14,519			–			13,938		13,938			–
	Subordinated debentures		4,036		3,878			(158	)		5,555		5,344			(211	)
Derivatives (Note 22)			717		998	(2)		(281	)		945		987	(2)		(42	)

(1)	This excludes deferred realized hedge losses on securities of $264 (2001 – $283).
(2)	This amount represents a net asset.

The book value of financial assets and financial liabilities held for purposes other than trading may exceed their fair value due primarily to changes in interest rates. In such instances, the Bank does not reduce the book value of these financial assets and financial liabilities to their fair value as it is the Bank’s intention to hold them to maturity.

DETERMINATION OF FAIR VALUE

The following methods and assumptions were used to estimate the fair values of on-balance sheet financial instruments:

     The fair values of cash resources, assets purchased under resale agreements, customers’ liability under acceptances, other assets, obligations related to assets sold under repurchase agreements, acceptances and other liabilities are assumed to approximate their carrying values, due to their short-term nature.

     The fair value of securities is assumed to be equal to the estimated market value of securities provided in Note 3. The fair value of obligations related to securities sold short is assumed to be equal to their book value as they are carried at market value. These market values are based on quoted prices, when available. When a quoted price is not readily available, market values are estimated using quoted market prices of similar securities, or other valuation techniques.

2002 SCOTIABANK ANNUAL REPORT                    105

     The estimated fair value of loans reflects changes in the general level of interest rates that have occurred since the loans were originated. The particular valuation methods used are as follows:

– For loans to designated emerging markets, fair value is based on quoted market prices.

– For floating rate loans, fair value is assumed to be equal to book value as the interest rates on these loans automatically reprice to market.

– For all other loans, fair value is determined by discounting the expected future cash flows of these loans at market rates for loans with similar terms and risks.

     The fair values of deposits payable on demand or after notice or floating rate deposits payable on a fixed date are assumed to be equal to their carrying values. The estimated fair values of fixed-rate deposits payable on a fixed date are determined by discounting the contractual cash flows, using market interest rates currently offered for deposits with similar terms and risks.

     The fair values of subordinated debentures and liabilities of subsidiaries, other than deposits (included in other liabilities), are determined by reference to current market prices for debt with similar terms and risks.

b)   Interest rate risk

The following table summarizes carrying amounts of balance sheet assets, liabilities and equity, and off-balance sheet financial instruments in order to arrive at the Bank’s interest rate gap based on the earlier of contractual repricing or maturity dates. To arrive at the Bank’s view of its effective interest rate gap, adjustments are made to factor in expected mortgage and loan repayments based on historical patterns, and to reclassify the Bank’s trading instruments to the immediately rate-sensitive category.

As at October 31, 2002	Immediately		Within			Three to			One to			Over			Non-rate
($ millions)	rate sensitive(1)		3 months			12 months			5 years			5 years			sensitive			Total
Cash resources	$	2,350	$	10,088		$	3,784		$	89		$	–		$	3,962		$	20,273
Investment securities		803		2,678			2,665			6,584			4,872			4,000	(2)		21,602
Trading securities		369		5,428			1,406			7,185			4,912			15,292			34,592
Loans		27,728		88,012			20,702			46,124			2,485			620	(3)		185,671
Other assets		–		–			–			–			–			34,242	(4)		34,242
Total assets		31,250		106,206			28,557			59,982			12,269			58,116			296,380
Deposits		17,301		108,858			33,948			22,572			112			12,827			195,618
Obligations related to assets sold under repurchase agreements		–		30,817			1,064			–			–			–			31,881
Obligations related to securities sold short		–		390			122			4,053			3,455			717			8,737
Subordinated debentures		–		–			1,438			800			1,640			–			3,878
Other liabilities		–		–			–			–			–			41,489	(4)		41,489
Shareholders’ equity		–		–			–			–			–			14,777	(4)		14,777
Total liabilities and shareholders’ equity		17,301		140,065			36,572			27,425			5,207			69,810			296,380
On-balance sheet gap		13,949		(33,859	)		(8,015	)		32,557			7,062			(11,694	)		–
Off-balance sheet gap		–		17,810			(17,417	)		(2,591	)		2,198			–			–
Interest rate sensitivity gap based on contractual repricing		13,949		(16,049	)		(25,432	)		29,966			9,260			(11,694	)		–
Adjustment to expected repricing		8,326		2,874			13,876			(11,385	)		(5,325	)		(8,366	)		–
Total interest rate sensitivity gap	$	22,275	$	(13,175	)	$	(11,556	)	$	18,581		$	3,935		$	(20,060	)	$	–
Cumulative gap		22,275		9,100			(2,456	)		16,125			20,060			–			–
As at October 31, 2001
Total interest rate sensitivity gap	$	15,104	$	(28,518	)	$	(1,312	)	$	25,919		$	7,418		$	(18,611	)	$	–
Cumulative gap		15,104		(13,414	)		(14,726	)		11,193			18,611			–			–

(1)	Represents those financial instruments whose interest rates change concurrently with a change in the underlying interest rate basis, for example, prime rate loans.
(2)	This includes financial instruments such as common shares, non-term preferred shares, and shares in associated corporations.
(3)	This includes net impaired loans and the general allowance.
(4)	This includes non-financial instruments.

The tables on the following page summarize average effective yields, by the earlier of the contractual repricing or maturity dates, for the following on-balance sheet rate-sensitive financial instruments (these rates are shown before and after adjusting for the impact of related derivatives used by the Bank for asset/liability risk management purposes).

106                    2002 SCOTIABANK ANNUAL REPORT

Average effective yields by the earlier of the contractual repricing or maturity dates:

	Unadjusted
	Immediately			Within			Three to			One to			Over						Adjusted
As at October 31, 2002	rate sensitive			3 months			12 months			5 years			5 years			Total			total(1)
Cash resources		5.8	%		3.0	%		3.4	%		1.8	%		–	%		3.5	%		3.5	%
Investment securities(2)		3.4			5.5			5.1			6.3			6.3			5.9			5.8
Trading securities		4.3			5.9			3.5			4.3			6.3			5.2			5.2
Loans(3)		6.1			4.6			5.5			6.9			8.1			5.5			5.5
Deposits(4)		2.1			2.5			2.9			4.7			5.8			2.8			2.8
Obligations related to assets sold
under repurchase agreements(4)		–			3.7			4.6			–			–			3.7			3.7
Obligations related to securities sold short		–			2.5			2.8			3.1			5.4			4.1			4.1
Subordinated debentures(4)		–			–			5.3			6.7			6.7			6.2			4.6

	Unadjusted
	Immediately			Within			Three to			One to			Over						Adjusted
As at October 31, 2001	rate sensitive			3 months			12 months			5 years			5 years			Total			total(1)
Cash resources		4.1	%		4.5	%		4.4	%		3.6	%		–	%		4.4	%		4.4	%
Investment securities(2)		6.4			7.1			8.0			7.8			6.7			7.3			7.2
Trading securities		8.3			8.3			2.6			4.9			6.0			6.3			6.3
Loans(3)		8.4			5.4			6.4			7.4			7.8			6.7			6.7
Deposits(4)		3.2			3.8			4.2			5.3			5.3			4.0			4.0
Obligations related to assets sold under repurchase agreements(4)		–			5.1			4.1			–			–			5.0			5.0
Obligations related to securities sold short		–			2.5			2.2			3.3			5.2			4.3			4.3
Subordinated debentures(4)		–			6.0			5.7			6.4			6.5			6.2			4.8

(1)	After adjusting for the impact of related derivatives.
(2)	Yields are based on book values, net of the related country risk provision, and contractual interest or stated dividend rates adjusted for amortization of premiums and discounts. Yields on tax-exempt securities have not been computed on a taxable equivalent basis.
(3)	Yields are based on book values, net of allowance for credit losses, and contractual interest rates, adjusted for the amortization of any deferred income.
(4)	Yields are based on book values and contractual interest rates.

c)   Credit exposure

The following table summarizes the credit exposure of the Bank to businesses and governments, net of the allowance for credit losses, by sector:

	2002								2001
	Loans and		Derivative		Other
As at September 30 ($ millions)	acceptances(1)		instruments(2)		exposures(3)		Total		Total
Primary industry and manufacturing	$	26,219	$	1,044	$	4,543	$	31,806	$	34,477
Commercial and merchandising		29,200		319		4,970		34,489		33,963
Real estate		3,379		35		795		4,209		4,001
Transportation, communication and utilities		16,040		743		2,465		19,248		17,816
Banks and other financial services		7,416		14,173		2,920		24,509		22,565
Foreign governments and central banks		942		73		729		1,744		2,121
Canadian governments		379		1,039		66		1,484		1,735
Total	$	83,575	$	17,426	$	16,488	$	117,489	$	116,678
General allowance(2)(4)								1,419		1,399
							$	116,070	$	115,279

(1)	Excludes assets purchased under resale agreements.
(2)	Derivative instruments and general allowance are as at October 31.
(3)	Comprises guarantees and letters of credit.
(4)	The remaining $56 (2001 – $76) of the $1,475 (2001 – $1,475) general allowance relates to loans other than business and government loans.

2002 SCOTIABANK ANNUAL REPORT                    107

d)   Anticipatory hedges

In its normal course of business, the Bank may decide to hedge anticipatory transactions such as future foreign revenues and expenses and planned deposit campaigns. As at October 31, 2002, and 2001, there were no material anticipatory hedges outstanding.

22.   Derivative instruments

a)    Notional amounts

The following table provides the aggregate notional amounts of off-balance sheet derivative instruments outstanding by type and segregated between those used by the Bank in its dealer capacity (Trading) and those used in the Bank’s asset/liability risk management process (ALM). The notional amounts of these contracts represent the derivatives volume outstanding and do not represent the potential gain or loss associated with the market risk or credit risk of such instruments. The notional amounts represent the amount to which a rate or price is applied to determine the amount of cash flows to be exchanged. Other derivative contracts include equity, precious metals other than gold, base metals and credit derivatives.

		2002						2001
As at October 31 ($ millions)		Trading		ALM		Total		Trading		ALM		Total
Interest rate contracts
Exchange-traded:
	Futures	$	57,397	$	12,239	$	69,636	$	75,455	$	12,703	$	88,158
	Options purchased		6,690		–		6,690		4,389		–		4,389
	Options written		–		–		–		1,324		–		1,324
			64,087		12,239		76,326		81,168		12,703		93,871
Over-the-counter:
	Forward rate agreements		72,293		51,954		124,247		80,279		24,226		104,505
	Swaps		440,096		97,699		537,795		423,261		90,824		514,085
	Options purchased		39,336		1,114		40,450		43,981		2,369		46,350
	Options written		50,842		51		50,893		55,444		704		56,148
			602,567		150,818		753,385		602,965		118,123		721,088
Total		$	666,654	$	163,057	$	829,711	$	684,133	$	130,826	$	814,959
Foreign exchange and gold contracts
Exchange-traded:
	Futures	$	2,757	$	–	$	2,757	$	2,136	$	–	$	2,136
	Options purchased		2		–		2		77		–		77
	Options written		66		–		66		96		–		96
			2,825		–		2,825		2,309		–		2,309
Over-the-counter:
	Spot and forwards		201,034		10,153		211,187		197,263		4,799		202,062
	Swaps		42,402		11,551		53,953		39,261		10,936		50,197
	Options purchased		4,128		–		4,128		4,597		–		4,597
	Options written		4,078		–		4,078		4,464		–		4,464
			251,642		21,704		273,346		245,585		15,735		261,320
Total		$	254,467	$	21,704	$	276,171	$	247,894	$	15,735	$	263,629
Other derivative contracts
	Exchange-traded	$	756	$	–	$	756	$	4,512	$	–	$	4,512
	Over-the-counter		29,063		6,023		35,086		17,142		4,723		21,865
Total		$	29,819	$	6,023	$	35,842	$	21,654	$	4,723	$	26,377
Total notional amounts outstanding		$	950,940	$	190,784	$	1,141,724	$	953,681	$	151,284	$	1,104,965

108                    2002 SCOTIABANK ANNUAL REPORT

b)   Remaining term to maturity

The following table summarizes the remaining term to maturity of the notional amounts of the Bank’s derivative instruments by type:

		Within		One to		Over
As at October 31, 2002 ($ millions)		1 year		5 years		5 years		Total
Interest rate contracts
	Futures	$	53,652	$	15,984	$	–	$	69,636
	Forward rate agreements		114,423		9,824		–		124,247
	Swaps		235,950		230,768		71,077		537,795
	Options purchased		21,003		24,112		2,025		47,140
	Options written		22,649		24,945		3,299		50,893
			447,677		305,633		76,401		829,711
Foreign exchange and gold contracts
	Futures		2,103		654		–		2,757
	Spot and forwards		195,318		15,047		822		211,187
	Swaps		13,204		28,976		11,773		53,953
	Options purchased		2,891		1,239		–		4,130
	Options written		2,893		1,251		–		4,144
			216,409		47,167		12,595		276,171
Other derivative contracts			22,036		13,453		353		35,842
Total		$	686,122	$	366,253	$	89,349	$	1,141,724

		Within		One to		Over
As at October 31, 2001 ($ millions)		1 year		5 years		5 years		Total
Interest rate contracts
	Futures	$	55,371	$	32,787	$	–	$	88,158
	Forward rate agreements		101,242		3,263		–		104,505
	Swaps		229,343		223,013		61,729		514,085
	Options purchased		23,019		24,661		3,059		50,739
	Options written		22,880		31,113		3,479		57,472
			431,855		314,837		68,267		814,959
Foreign exchange and gold contracts
	Futures		1,648		488		–		2,136
	Spot and forwards		188,396		13,064		602		202,062
	Swaps		11,414		25,975		12,808		50,197
	Options purchased		3,159		1,515		–		4,674
	Options written		3,072		1,488		–		4,560
			207,689		42,530		13,410		263,629
Other derivative contracts			17,271		8,521		585		26,377
Total		$	656,815	$	365,888	$	82,262	$	1,104,965

2002 SCOTIABANK ANNUAL REPORT                    109

c)    Credit risk

As with on-balance sheet assets, derivative instruments are subject to credit risk. Credit risk arises from the possibility that counter-parties may default on their obligations to the Bank. However, whereas the credit risk of on-balance sheet assets is represented by the principal amount net of any applicable allowance for credit losses, the credit risk associated with derivatives is normally a small fraction of the notional amount of the derivative instrument. Derivative contracts generally expose the Bank to credit loss if changes in market rates affect a counterparty’s position unfavourably and the counterparty defaults on payment. Accordingly, credit risk of derivatives is represented by the positive fair value of the instrument.

     Negotiated over-the-counter derivatives often present greater credit exposure than exchange-traded contracts. The net change in the exchange-traded contracts is normally settled daily in cash with the exchange. Holders of these contracts look to the exchange for performance under the contract.

     The Bank strives to limit credit risk by dealing with counter-parties that it believes are creditworthy, and manages its credit risk for derivatives through the same credit risk process applied to on-balance sheet assets.

     The Bank pursues opportunities to reduce its exposure to credit losses on derivative instruments. These opportunities include entering into master netting arrangements with counterparties. The credit risk associated with favourable contracts is eliminated by a master netting arrangement to the extent that unfavourable contracts with the same counterparty are not settled before favourable contracts.

The following table summarizes the credit exposure of the Bank’s derivatives. The credit risk amount (CRA) represents the estimated replacement cost, or positive fair value, for all contracts without taking into account any master netting or collateral arrangements that have been made. The CRA does not reflect actual or expected losses.

     The credit equivalent amount (CEA) is the CRA plus an add-on for potential future exposure. The add-on amount is based on a formula prescribed in the Capital Adequacy Guideline of the Superintendent. The risk-weighted balance is the CEA multiplied by counterparty risk factors prescribed by this Guideline.

		2002										2001
								Credit
				Credit risk		Potential		equivalent		Risk-		Credit risk		Risk-
		Notional		amount		future		amount		weighted		amount		weighted
		amount		(CRA)		exposure		(CEA)		balance		(CRA)		balance
As at October 31 ($ millions)				(a)		(b)		(a) + (b)
Interest rate contracts
	Futures	$	69,636	$	–	$	–	$	–	$	–	$	–	$	–
	Forward rate agreements		124,247		71		44		115		22		155		32
	Swaps		537,795		11,703		2,220		13,923		3,260		11,882		3,325
	Options purchased		47,140		743		151		894		216		737		220
	Options written		50,893		–		–		–		–		–		–
			829,711		12,517		2,415		14,932		3,498		12,774		3,577
Foreign exchange and gold contracts
	Futures		2,757		–		–		–		–		–		–
	Spot and forwards		211,187		2,810		2,547		5,357		1,557		2,516		1,523
	Swaps		53,953		1,253		2,442		3,695		900		1,637		906
	Options purchased		4,130		99		91		190		73		178		106
	Options written		4,144		–		–		–		–		–		–
			276,171		4,162		5,080		9,242		2,530		4,331		2,535
Other derivative contracts			35,842		747		1,896		2,643		843		977		879
Total derivatives		$	1,141,724	$	17,426	$	9,391	$	26,817	$	6,871	$	18,082	$	6,991
Less: impact of master netting agreements					10,815		3,323		14,138		3,277		10,030		2,806
Total				$	6,611	$	6,068	$	12,679	$	3,594	$	8,052	$	4,185

110                    2002 SCOTIABANK ANNUAL REPORT

d)   Fair value

Fair values of exchange-traded derivatives are based on quoted market prices. Fair values of over-the-counter (OTC) derivatives are determined using pricing models, which take into account current market and contractual prices of the underlying instruments, as well as time value and yield curve or volatility factors underlying the positions.

     Trading derivatives are subject to a further valuation adjustment, determined on a portfolio basis, to cover future risks and related costs.

The following table summarizes the fair value of derivatives segregated by type and segregated between trading and those derivatives used in the Bank’s asset/liability risk management process (ALM).

		2002				2002				2001
		Average fair value(1)				Year-end fair value				Year-end fair value
As at October 31 ($ millions)		Favourable		Unfavourable		Favourable		Unfavourable		Favourable		Unfavourable
TRADING
Interest rate contracts
	Forward rate agreements	$	60	$	35	$	45	$	29	$	127	$	100
	Swaps		8,668		8,044		10,725		9,646		10,323		9,555
	Options		623		779		739		932		736		884
			9,351		8,858		11,509		10,607		11,186		10,539
Foreign exchange and gold contracts
	Forwards		3,242		2,880		2,686		2,324		2,492		2,075
	Swaps		1,088		1,857		840		1,765		1,141		2,157
	Options		144		134		99		105		178		157
			4,474		4,871		3,625		4,194		3,811		4,389
Other derivative contracts			736		621		687		699		889		525
Trading derivatives’ market valuation		$	14,561	$	14,350	$	15,821	$	15,500	$	15,886	$	15,453
ALM(2)
Interest rate contracts
	Forward rate agreements					$	26	$	45	$	28	$	53
	Swaps						978		795		1,559		1,254
	Options						4		–		1		18
							1,008		840		1,588		1,325
Foreign exchange and gold contracts
	Forwards						124		52		24		19
	Swaps						413		287		496		331
	Options						–		–		–		–
							537		339		520		350
Other derivative contracts							60		30		88		9
Total ALM derivatives’ market valuation						$	1,605	$	1,209	$	2,196	$	1,684
Total gross fair values before netting						$	17,426	$	16,709	$	18,082	$	17,137
Less: impact of master netting agreements							10,815		10,815		10,030		10,030
Total derivatives’ market valuation						$	6,611	$	5,894	$	8,052	$	7,107

(1)	The average fair value of trading derivatives’ market valuation for the year ended October 31, 2001 was: favourable $10,645 and unfavourable $10,949. Average fair value amounts are based on month-end balances.
(2)	The fair values of these derivative financial instruments wholly or partially offset the changes in fair values of related on-balance sheet financial instruments.

23.   Argentine charges

In the first quarter of fiscal 2002, a significant provision for credit losses and other charges were recorded against the Bank’s operations in Scotiabank Quilmes and against cross-border Argentine risk, as a result of the extraordinary political and economic upheaval in Argentina.

     In September, 2002, Scotiabank Quilmes ceased operations following the finalization of arrangements with the Argentine financial authorities and other private sector institutions. Based on these arrangements, certain deposits were transferred to the government along with an equivalent amount of sovereign loans.

The remaining assets and liabilities were assumed by other local financial institutions or placed in an Argentine liquidating trust.

     Subsequent to these events, as the Bank no longer had control of Scotiabank Quilmes, the remaining assets, liabilities and results of operations ceased to be consolidated. At the same time, a loss on disposal was recorded in non-interest expenses of the Consolidated Statement of Income in the International segment. In addition, the Bank recorded an income tax recovery related to the disposal of its investment in Scotiabank Quilmes.

2002 SCOTIABANK ANNUAL REPORT                    111

Information on the total provision and charges recorded against the Bank’s operations in Scotiabank Quilmes and against cross-border Argentine risk assets is provided in the table below:

($ millions)		2002			2001
Provision for credit losses		$	454		$	50
Other income:
	Loss on securities		20			40
	Investment banking		(4	)		–
	Other(1)		87			10
Non-interest expenses:
	Loss on disposal of subsidiary operations(2)		237			–
Total provision and charges before income taxes			794			100
Provision for (recovery of) income taxes			(254	)		(38	)
Total		$	540		$	62

(1)	Reflects the loss from pesofication (impact of converting U.S. dollar-denominated assets and liabilities to Argentine pesos at different and non-market rates, as mandated by the Argentine government).
(2)	Loss on disposal of subsidiary operations is net of a $95 foreign exchange gain, which was transferred from retained earnings. This foreign exchange gain primarily offsets the foreign exchange loss from the devaluation of the Argentine peso on the allowance for credit losses established in the first quarter of 2002.

24.   Acquisition of subsidiary

GRUPO FINANCIERO SCOTIABANK INVERLAT, MEXICO

On November 30, 2000, the Bank increased its voting ownership in Grupo Financiero Scotiabank Inverlat (Inverlat) in Mexico from 10% to 55%. The purchase price for the additional 45% was US$184 million, comprised of the conversion of debentures of US$144 million purchased in 1996, and a US$40 million cash payment by the Bank. The total purchase price for the entire 55% was US$215 million ($320 million). Inverlat is comprised of three main operating companies: a full-service bank, a brokerage house and a foreign exchange operation. The results of Inverlat have been included in the Bank’s income since acquisition. This acquisition was accounted for using the purchase method.

This acquisition is summarized in the table below:

($ millions)
Identifiable assets acquired:
	Cash and deposits with other banks	$	1,812
	Securities		3,322
	Loans		5,800
	Assets purchased under resale agreements		4,749
	Intangible assets		18
	Other assets		1,196
				$	16,897
Less liabilities assumed:
	Deposits	$	8,059
	Obligations related to assets sold under repurchase agreements		7,435
	Other liabilities		858
	Non-controlling interests in subsidiary		303
					16,655
Net identifiable assets acquired					242
Goodwill					78
Total purchase consideration				$	320

During 2002, the Bank recognized a future income tax asset of $37 million, related to the recognition of pre-acquisition income tax loss carryforwards of Inverlat which were not recorded as part of the purchase price allocation set out above. This benefit has been applied to reduce goodwill by the same amount (refer to Note 7).

25.   Sale of business

Effective October 31, 2002, the Bank sold its merchant acquirer and smart-card point-of-sale business to Paymentech Canada. The sale includes debit and credit card payment services and smart card programs offered to merchants across Canada. As a result of this transaction, a gain of $99 million, net of associated expenses, was recorded in other income – other in the Consolidated Statement of Income. Subject to certain conditions and performance standards, additional revenue may be earned in future periods.

112                    2002 SCOTIABANK ANNUAL REPORT

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

The consolidated financial statements of the Bank have been prepared in accordance with Canadian GAAP, including the accounting requirements of the Superintendent of Financial Institutions Canada. The significant measurement differences between Canadian and U.S. GAAP affecting the consolidated financial statements are as follows:

Reconciliation of net income and shareholders’ equity

		Net income									Shareholders' equity
For the year ended October 31
($ millions)		2002			2001(1)			2000(1)			2002			2001(1)			2000(1)
Net income and shareholders’ equity based on Canadian GAAP		$	1,797		$	2,169		$	1,926		$	14,777		$	14,608		$	12,975
Employee future benefits (a)			3			(2	)		39			(25	)		(12	)		(10	)
Restructuring costs (b)			(9	)		(5	)		(59	)		30			39			44
Transfers of loans (c)			(55	)		(1	)		69			79			134			135
Derivative instruments and hedging activities: (d)
	Transition adjustment		–			101			–			124			124			–
	Current year adjustments		(347	)		25			(11	)		(377	)		(78	)		(11	)
Unrealized losses on securities reclassified as trading (d)			(24	)		(4	)		–			(28	)		(4	)		–
Conversion of loans into debt securities (e)			18			25			(13	)		14			52			77
Available-for-sale securities (e)			(229	)		–			–			151			669			778
Computer software development costs (f)			22			27			47			96			74			47
Non-controlling interest in net income of subsidiaries (g)			(16	)		(16	)		(16	)		(250	)		(250	)		(250	)
Goodwill and other intangibles (h)			(76	)		–			–			–			–			–
Tax effect of above differences			203			(62	)		(25	)		(13	)		(315	)		(466	)
Future income taxes (i)			(13	)		(20	)		(28	)		(13	)		–			(19	)
Net income and shareholders’ equity based on U.S. GAAP		$	1,274		$	2,237		$	1,929		$	14,565		$	15,041		$	13,300
Preferred dividends			(96	)		(99	)		(99	)
Net income available to common shareholders’ based on U.S. GAAP		$	1,178		$	2,138		$	1,830
Net income per common share based on U.S. GAAP (in dollars):
	Basic	$	2.34		$	4.27		$	3.69
	Diluted	$	2.30		$	4.20		$	3.65

(1) Restated for the U.S. GAAP difference relating to the pension valuation allowance (refer to a).

a)   Employee future benefits

Effective November 1, 2000, the Bank adopted a new Canadian accounting standard for employee future benefits on a prospective basis, with the net transitional asset being recognized in Canadian GAAP income as a reduction of benefit expense over the estimated average remaining service life of the employees of approximately 14 to 18 years. This accounting standard is now substantially consistent with U.S. GAAP. Prior to adoption of this new Canadian accounting standard, non-pension retirement and post-employment benefits were charged to income when paid; U.S. GAAP and the new Canadian accounting standard require the expected cost and obligation of providing such benefits to be accrued as the employees earn the entitlement to such benefits. For pension benefits, U.S. GAAP and the new Canadian accounting standard require the use of current market interest rates to estimate the present value of the pension obligation; prior to the adoption of the new Canadian accounting standard, an estimated long-term interest rate was used.

     Under U.S. GAAP, the Bank adopted the pensions, other retirement benefits and post-employment benefits standards on November 1, 1999, as it was not practicable for the Bank to adopt these U.S. standards on their earlier effective dates. For pensions and other retirement benefits, the allocated after-tax portion of the net transitional obligation pertaining to years elapsed between the effective date of the U.S. standard and the adoption date was charged to U.S. GAAP retained earnings using the estimated average remaining service life as at November 1, 1999 of the employees of 14 to 18 years, with the balance being amortized prospectively to U.S. GAAP income. The transitional obligation for post-employment benefits was charged to U.S. GAAP retained earnings as at November 1, 1999. The total amount charged to retained earnings under U.S. GAAP as at November 1, 1999 amounted to $54 million.

     Canadian GAAP requires recognition of a pension valuation allowance for any excess of the prepaid benefit expense over the expected future benefit. Changes in the pension valuation allowance are recognized in the Consolidated Statement of Income. U.S. GAAP does not specifically address pension valuation allowances; recently the U.S. regulators have interpreted this to be a difference between Canadian and U.S. GAAP. In light of these recent developments, the Bank retroactively increased previously reported U.S. GAAP net income for fiscal 2001 and 2000 by $38 million (including a tax benefit of $18 million) and $22 million (net of a tax expense of $16 million) respectively (2001 – $0.08 per basic share and $0.07 per diluted share; 2000 – $0.04 per share, basic and diluted).

     U.S. GAAP requires the excess of any unfunded accumulated benefit obligation (with certain other adjustments) to be reflected as an additional minimum pension liability in the U.S. GAAP Consolidated Balance Sheet with an offsetting adjustment to intangible assets to the extent of unrecognized prior service costs, with the remainder recorded in other comprehensive income.

2002 SCOTIABANK ANNUAL REPORT                    113

     Subsequent to October 31, 2000, there will continue to be a difference in the charge to income for employee future benefits between Canadian and U.S. GAAP, principally due to differences in the amortization of the transitional amounts and differences in the treatment of the pension valuation allowance.

b)   Restructuring costs

Under Canadian GAAP, restructuring costs are accrued as liabilities provided that a restructuring plan detailing all major actions to be taken had been approved by an appropriate level of management, and significant changes to the plan were not likely. Under U.S. GAAP, for activities initiated prior to January 1, 2003, additional criteria must be met prior to accrual, including that certain restructuring costs be incurred within one year from the date of approval of the restructuring plan. Certain planned restructuring costs not incurred within the one-year time limit are recognized in U.S. GAAP income as incurred.

c)   Transfers of loans

Effective July 1, 2001, the Bank adopted a new Canadian accounting standard for transfers of loans on a prospective basis. This standard is consistent with the U.S. standard for transfers of loans adopted on April 1, 2001.

     Prior to the adoption of the new Canadian standard, transfers of loans were treated as sales under Canadian GAAP when the risks and rewards of ownership were transferred and there was reasonable assurance regarding measurement of consideration received. Gains on transfers of loans were recognized immediately, unless there was recourse to the Bank in excess of expected losses, in which case the gains were considered unrealized and deferred until they were collected in cash and there was no recourse to that cash. Under U.S. GAAP, gains on transfers of loans that qualify as sales are recognized in income at the time of sale. There will continue to be differences in Canadian and U.S. GAAP income until the deferred gains related to assets securitized prior to July 1, 2001 have all been recognized in Canadian GAAP income.

     Prior to the harmonization of Canadian and U.S. GAAP, some transfers of assets did not qualify for sale accounting under U.S. GAAP. These transfers have been accounted for as secured lending arrangements under U.S. GAAP. This results in the assets remaining on the U.S. GAAP Consolidated Balance Sheet and in the net spread being recognized in U.S. GAAP income over the term of the loans rather than immediate recognition of a gain.

     In April 2001, the Bank securitized personal loans of $1,064 million, on a revolving basis, resulting in recognition of a net gain on sale of $9 million. The Bank’s retained interest, which consist of its rights to future cash flows, had a fair value on the date of sale of $28 million. The Bank retained servicing responsibilities for which a liability of $2 million was recognized. The key assumptions used to measure fair value at the date of securitization were a prepayment rate of 8.3%, an excess spread of 0.9%, a discount rate of 8.3% and an expected credit loss of 0.3%.

The cash flows from this securitization are summarized below:

For the year ended October 31 ($ millions)		2002		2001
Cash flows received for:
	Proceeds from personal loans securitized	$	–	$	1,047
	Servicing fees		5		3
	Retained interest		9		7
Cash outflows for:
	Collections reinvested in revolving securitizations	$	976	$	608

The expected static pool credit losses, which are the sum of the actual and projected future credit losses over the life of the securitization as a percentage of the original loan pool balance, annualized, were 0.2% (2001 – 0.2%).

The key assumptions used in measuring the fair value of the retained interest for this securitization, and the sensitivity of the current fair value of retained interest to a 10% and 20% adverse change to the assumptions are as follows:

As at October 31 ($ millions)		2002			2001
Carrying value of the retained interest ($)			28			28
Fair value of the retained interest ($)			29			29
Weighted average life (in years)			1			1
Prepayment rate (%)			7.7			8.2
	Impact on fair value of a 10% adverse change ($)		(1	)		(1	)
	Impact on fair value of a 20% adverse change ($)		(1	)		(1	)
Expected credit losses (annual rate) (%)			0.2			0.2
	Impact on fair value of a 10% adverse change ($)		–			–
	Impact on fair value of a 20% adverse change ($)		–			–
Residual cash flow annual discount rate (%)			6.3			6.3
	Impact on fair value of a 10% adverse change ($)		–			–
	Impact on fair value of a 20% adverse change ($)		–			–
Excess spread (%)			1.2			1.1
	Impact on fair value of a 10% adverse change ($)		(1	)		(1	)
	Impact on fair value of a 20% adverse change ($)		(2	)		(2	)

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

114                    2002 SCOTIABANK ANNUAL REPORT

d)   Derivative instruments and hedging activities

Under Canadian GAAP, the Bank accounts for derivative instruments held for asset/liability management purposes primarily on an accrual basis. Derivative instruments held for trading purposes are accounted for at fair value with changes in fair value recognized in income.

     The Bank adopted the new U.S. accounting standard on accounting for derivative instruments and hedging activities effective November 1, 2000. The new U.S. accounting standard requires all derivative instruments to be recognized at fair value in the Consolidated Balance Sheet. The U.S. standard restricts the types of transactions that qualify for hedge accounting and contains guidance on measuring hedge effectiveness. The change in fair value of a derivative instrument designated as a fair value hedge is offset in U.S. GAAP income against the change in the fair value of the hedged item relating to the hedged risk. The change in fair value of a derivative instrument designated as a cash flow hedge is recorded in other comprehensive income until the revenues or expenses relating to the hedged item are recorded in income. Hedge ineffectiveness and changes in the fair value of derivative instruments that do not qualify as hedges are recognized in income as they arise. The Bank has recorded an after-tax loss of $7 million (2001 – after-tax income of $24 million), which represents the ineffective portion of fair value hedges.

     The new U.S. accounting standard also requires derivative instruments embedded in financial instruments that are not clearly and closely related to their host instrument to be separated and recorded at their fair value. If an embedded derivative cannot be separated, the entire financial instrument is recorded at fair value. Certain securities with embedded derivatives were reclassified from available-for-sale to trading securities. Under Canadian GAAP, these securities are classified as investment securities.

     The Bank has fair value hedges of interest rate risk relating to its subordinated debentures and available-for-sale securities in addition to cash flow hedges of its variable rate instruments. The Bank expects to reclassify $17 million (2001 – $30 million) of after-tax losses from accumulated other comprehensive income to earnings as a result of its cash flow hedges within the next twelve months. As at October 31, 2002 and 2001, the maximum term of cash flow hedges was less than 5 years and 3 years respectively.

     Upon adoption of the new U.S. accounting standard on November 1, 2000, the Bank recorded an increase in consolidated assets of $377 million, an increase in consolidated liabilities of $330 million, and reflected a transition adjustment increasing 2001 U.S. GAAP net income by $60 million ($0.12 per share, basic and diluted), net of applicable income taxes, and a charge of $13 million in other comprehensive income.

     For periods prior to November 1, 2000, the previous U.S. standards required accrual accounting for derivative instruments held for hedging purposes. The criteria for applying hedge accounting under these previous U.S. standards were different from those applied by the Bank under Canadian GAAP. As a result, derivatives that were accounted for as hedges under Canadian GAAP, which did not meet the U.S. hedge accounting requirements were marked to market in U.S. GAAP income.

e)   Securities

U.S. GAAP requires securities to be classified as either trading, held-to-maturity or available-for-sale. The Bank has classified all investment securities as available-for-sale under U.S. GAAP (other than those reclassified to trading on adoption of the new U.S. accounting standard on derivative instruments as discussed above), which are carried on the Consolidated Balance Sheet at their fair value. Other-than-temporary declines in the fair value of available-for-sale securities are recognized in U.S. GAAP income based on market values; declines in fair values are generally presumed to be other than temporary if they have persisted over several quarters. Both investment securities and trading securities are required to be accounted for on a trade date basis in the Consolidated Statement of Income and Consolidated Balance Sheet.

     Under U.S. GAAP, unrealized gains and losses on available-for-sale securities, net of related income taxes, are recorded in other comprehensive income until realized. However, commencing in fiscal 2001, as required by the new U.S. standard on accounting for derivative instruments and hedging activities, the unrealized gains and losses on hedged available-for-sale securities are recorded in U.S. GAAP income. Prior to fiscal 2001, the unrealized gains and losses on the derivatives hedging these available-for-sale securities were classified in other comprehensive income until the offsetting gains and losses on the hedged available-for-sale securities were realized.

     Under Canadian GAAP, securities are classified as either trading or investment. The Bank carries investment securities at amortized cost. Other-than-temporary declines in the value of investment securities are recorded in income based on net realizable values; declines in fair values are generally presumed to be other than temporary if conditions indicating impairment have persisted for a more prolonged period of time than under U.S. GAAP. Investment securities and trading securities are accounted for on a settlement date basis in the Consolidated Balance Sheet and on a trade date basis in the Consolidated Statement of Income.

     Under Canadian GAAP, debt securities acquired in settlement of loans in a debt restructuring are recorded at net book value. Under U.S. GAAP, the debt securities are recorded at their fair value with the difference between the carrying value of the loans and the fair value of the debt securities acquired recorded in income.

f)   Computer software development costs

Effective November 1, 1999, U.S. GAAP requires certain internal costs incurred for software development to be capitalized and amortized over the useful life of the software. Under Canadian GAAP, these costs are expensed as incurred.

g)   Non-controlling interest in net income of subsidiaries

On the U.S. GAAP Consolidated Balance Sheet, the preferred shares issued by Scotia Mortgage Investment Corporation, a wholly-owned subsidiary of the Bank, are presented as non-controlling interests. The net income applicable to these non-controlling interests is reflected as a reduction of U.S. GAAP income. Under Canadian GAAP, the Bank includes these preferred shares within the total preferred shares of the Bank in the Consolidated Balance Sheet and the related dividends are reflected as a reduction of net income available to common shareholders.

h)   Goodwill and other intangible assets

As discussed in Note 7, effective November 1, 2001, the Bank adopted the new Canadian and U.S. accounting standards for goodwill and other intangible assets without restatement of prior periods. These standards are substantially consistent except that any transitional impairment charge on the date of adoption is recognized as a charge to opening retained earnings under Canadian GAAP and as a cumulative adjustment to income under U.S. GAAP. On adoption of the new standard, a charge to U.S. GAAP income of $76 million was recognized ($0.15 per share, basic and diluted).

i)   Future income taxes

Effective November 1, 2000, the Bank adopted a new Canadian standard on accounting for corporate income taxes, which is now substantially consistent with U.S. GAAP. However, there may still be a difference in the provision for income taxes, as changes in income tax rates are recorded under U.S. GAAP when the rate changes are enacted in law, whereas under Canadian GAAP such amounts are recorded when the changes are considered to be substantively enacted. Prior to fiscal 2001, Canadian GAAP required corporate income taxes to be calculated using the deferral method.

2002 SCOTIABANK ANNUAL REPORT                    115

j) Comprehensive income

U.S. GAAP requires a statement of comprehensive income to be included in the financial statements. Comprehensive income includes net income and all changes in equity, net of taxes, for the period except those resulting from investments by and distributions to shareholders. Comprehensive income also includes the foreign currency translation adjustments arising from the consolidation of subsidiaries where the functional currency is other than the reporting currency. Under Canadian GAAP, there is no requirement to present a statement of comprehensive income and the foreign currency translation adjustment pertaining to net investments in foreign subsidiaries is presented in retained earnings.

Consolidated statement of comprehensive income

For the year ended October 31 ($ millions)		2002			2001(7)			2000(7)
Net income based on U.S. GAAP		$	1,274		$	2,237		$	1,929
Other comprehensive income, net of income taxes:
	Change in unrealized gains and losses on available-for-sale securities, net of hedging activities(1)		(229	)		71			319
	Change in unrealized foreign currency translation gains and losses(2)		(137	)(3)		79			163
	Transition adjustment arising from adoption of the new accounting standard for derivative instruments(4)		–			(13	)		–
	Change in gains and losses on derivative instruments designated as cash flow hedges(5)		28			(57	)		–
	Change in additional minimum pension liability(6)		(11	)		–			–
Total other comprehensive income		$	(349	)	$	80		$	482
Total comprehensive income		$	925		$	2,317		$	2,411

Accumulated other comprehensive income

As at October 31 ($ millions)	2002			2001			2000
Unrealized gains and losses on available-for-sale securities, net of hedging activities	$	536		$	765		$	694
Unrealized foreign currency translation gains and losses		(55	)		82			3
Derivative instruments		(42	)		(70	)		–
Additional minimum pension liability		(11	)		–			–
Total accumulated other comprehensive income	$	428		$	777		$	697

(1)	Net of income tax benefit of $121 (2001 – benefit of $221; 2000 – expense of $227).
(2)	Net of income tax expense of $5 (2001 – benefit of $9; 2000 – benefit of $6).
(3)	Refer to footnotes (3) and (4) of the Consolidated Statement of Changes in Shareholders’ Equity.
(4)	Net of income tax expense of nil (2001 – expense of $36; 2000 – nil).
(5)	Net of income tax expense of $20 (2001 – benefit of $35; 2000 – nil).
(6)	Net of income tax benefit of $5 (2001 – nil; 2000 – nil).
(7)	Restated for the U.S. GAAP difference relating to the pension valuation allowance (refer to a).

Stock-based Compensation – Pro-forma disclosures

Currently, for U.S. GAAP purposes, the Bank accounts for stock options using the intrinsic value based method, which does not result in a compensation expense to the Bank. Effective November 1, 2002, the Bank will commence expensing the fair value of stock options on a prospective basis. In 2003, the Bank intends to attach tandem SARs to the 2002 employee stock option grants as well as the anticipated 2003 employee stock option grants (refer to Note 2). These tandem awards will be accounted for consistently under both Canadian and U.S. GAAP.

     U.S. GAAP requires pro-forma disclosure of net income and earnings per share as if the fair-value-based method had been applied retroactively, detailed as follows:

	As reported						Pro-forma
For the year ended October 31	2002		2001(1)		2000(1)		2002		2001		2000
Net income ($ millions)	$	1,274	$	2,237	$	1,929	$	1,216	$	2,184	$	1,891
Earnings per share ($)		2.34		4.27		3.69		2.22		4.16		3.62
Diluted earnings per share ($)		2.30		4.20		3.65		2.19		4.11		3.59

(1) Restated for the U.S. GAAP difference relating to the pension valuation allowance (refer to a).

In determining the pro-forma disclosures above, the fair value of options granted was estimated on the date of grant using an option pricing model. The fair value is then amortized over the vesting period. The fair value of the fiscal 2002 option grant was $14.11 per option (2001 – $12.01; 2000 – $7.42).

Significant assumptions are as follows: (i) risk-free interest rate of 5.2% (2001 – 5.6%; 2000 – 6.3%); (ii) expected option life of 6 years (2001 – 6 years; 2000 – 6 years); (iii) expected volatility of 30% (2001 – 28%; 2000 – 26%); and (iv) expected dividends of 2.7% (2001 – 2.6%; 2000 – 3.3%).

116                    2002 SCOTIABANK ANNUAL REPORT

Condensed consolidated balance sheet

		2002							2001
As at October 31		Canadian					U.S.		Canadian					U.S.
($ millions)		GAAP		Adjustments			GAAP		GAAP		Adjustments			GAAP
ASSETS
Cash resources		$	20,273	$	–		$	20,273	$	20,160	$	–		$	20,160
Securities
	Investment/AFS		21,602		(105	)c,d,e		21,497		25,450		(320	)c,d,e		25,130
	Trading		34,592		762	d,e		35,354		27,834		716	d,e		28,550
Loans			185,671		2,084	c		187,755		175,432		7,303	c		182,735
Derivative instruments			15,821		1,829	d		17,650		15,886		2,948	d		18,834
Other			18,421		(1,023	)(1)		17,398		19,663		(1,727	)(4)(6)		17,936	(6)
		$	296,380	$	3,547		$	299,927	$	284,425	$	8,920		$	293,345
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits		$	195,618	$	2,092	c,d	$	197,710	$	186,195	$	6,455	c,d	$	192,650
Derivative instruments			15,500		1,267	d		16,767		15,453		2,084	d		17,537
Non-controlling interest in subsidiaries			1,912		250	g		2,162		1,086		250	g		1,336
Other			64,695		64	(2)		64,759		61,739		(399	)(2)(6)		61,340	(6)
Subordinated debentures			3,878		86	d		3,964		5,344		97	d		5,441
		$	281,603	$	3,759		$	285,362	$	269,817	$	8,487		$	278,304
Shareholders’ equity
Capital stock
	Preferred shares	$	1,275	$	(250	)g	$	1,025	$	1,775	$	(250	)g	$	1,525
	Common shares		3,002		–			3,002		2,920		–			2,920
Retained earnings			10,500		(390	)(3)		10,110		9,913		(94	)(5)(6)		9,819	(6)
Accumulated other comprehensive income			–		428	j		428		–		777	j		777
		$	14,777	$	(212	)	$	14,565	$	14,608	$	433		$	15,041
		$	296,380	$	3,547		$	299,927	$	284,425	$	8,920		$	293,345

Note references refer to GAAP differences described above.

(1)	See a, b, c, d, e, f, i.
(2)	See a, b, c, d, e.
(3)	See a, b, c, d, e, f, h, i, j.
(4)	See a, b, c, d, e, f.
(5)	See a, b, c, d, e, f, j.
(6)	Restated for the U.S. GAAP difference relating to the pension valuation allowance (refer to a).

Future U.S. accounting changes

Note 2 describes future Canadian GAAP accounting changes and future U.S. GAAP accounting changes, which are substantially harmonized with Canadian GAAP. This note describes other future U.S. accounting changes.

     The FASB issued a standard on accounting for costs associated with exit or disposal activities, except those incurred in connection with a purchase business combination. The standard requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at its fair value in the period in which the liability is incurred. The provisions of this standard are effective for exit or disposal activities that are initiated after December 31, 2002.

2002 SCOTIABANK ANNUAL REPORT                    117

Principal Subsidiaries⁽¹⁾

As at October 31, 2002 ($ millions)			Principal office	Carrying value of shares
CANADIAN
BNS Capital Trust			Toronto, Ontario	$	131
BNS Investments Inc.			Toronto, Ontario	$	4,989
	The Bank of Nova Scotia Properties Inc.		Toronto, Ontario
	e-Scotia Commerce Holdings Limited		Toronto, Ontario
	Montreal Trust Company of Canada		Montreal, Quebec
	MontroServices Corporation		Montreal, Quebec
	Scotia Merchant Capital Corporation		Toronto, Ontario
The Mortgage Insurance Company of Canada			Toronto, Ontario	$	374
National Trustco Inc.			Toronto, Ontario	$	722
	The Bank of Nova Scotia Trust Company		Toronto, Ontario
	National Trust Company		Toronto, Ontario
RoyNat Inc.			Toronto, Ontario	$	65
Scotia Capital Inc.			Toronto, Ontario	$	129
Scotia Cassels Investment Counsel Limited			Toronto, Ontario	$	40
Scotia Life Insurance Company			Toronto, Ontario	$	42
Scotia Mortgage Corporation			Toronto, Ontario	$	145
Scotia Mortgage Investment Corporation			St. John's, Newfoundland	$	67
Scotia Securities Inc.			Toronto, Ontario	$	434
Scotiabank Capital Trust			Toronto, Ontario	$	3
INTERNATIONAL
The Bank of Nova Scotia Berhad			Kuala Lumpur, Malaysia	$	145
The Bank of Nova Scotia International Limited			Nassau, Bahamas	$	7,475
	BNS International (Barbados) Limited		Warrens, Barbados
	BNS Pacific Limited		Port Louis, Mauritius
	The Bank of Nova Scotia Asia Limited		Singapore
	The Bank of Nova Scotia Channel Islands Limited		Jersey, Channel Islands
	The Bank of Nova Scotia Trust Company (Bahamas) Limited		Nassau, Bahamas
		The Bank of Nova Scotia Trust Company (Cayman) Limited	Grand Cayman, Cayman Islands
	Scotia Insurance (Barbados) Limited		Warrens, Barbados
	Scotia Subsidiaries Limited		Nassau, Bahamas
		Scotiabank (Bahamas) Limited	Nassau, Bahamas
		Scotiabank (British Virgin Islands) Limited	Road Town, Tortola, B.V.I.
		Scotiabank (Cayman Islands) Ltd.	Grand Cayman, Cayman Islands
	Scotiabank (Hong Kong) Limited		Hong Kong, China
	Scotiabank (Ireland) Limited		Dublin, Ireland
The Bank of Nova Scotia Jamaica Limited (70%)			Kingston, Jamaica	$	262
Grupo Financiero Scotiabank Inverlat, S.A. de C.V. (56%)			Mexico, D.F., Mexico	$	501
Nova Scotia Inversiones Limitada			Santiago, Chile	$	314
	Scotiabank Sud Americano, S.A. (98%)		Santiago, Chile
Scotia Capital (USA) Inc.			New York, New York		(2)
Scotia Holdings (US) Inc.			Atlanta, Georgia		(3)
	The Bank of Nova Scotia Trust Company of New York		New York, New York
	Scotia International Inc.		New York, New York
	Scotiabanc Inc.		Atlanta, Georgia
Scotia International Limited			Nassau, Bahamas	$	291
	Corporacion Mercaban de Costa Rica, S.A.		San Jose, Costa Rica
	Scotia Mercantile Bank		Grand Cayman, Cayman Islands
	Scotiabank Anguilla Limited		The Valley, Anguilla
Scotiabank de Puerto Rico			Hato Rey, Puerto Rico	$	261
Scotiabank El Salvador, S.A.			San Salvador, El Salvador	$	66
Scotiabank Europe plc			London, England	$	1,998
Scotiabank Trinidad & Tobago Limited (47%)(4)			Port of Spain, Trinidad	$	94
ScotiaMocatta Limited			London, England	$	17

(1)	The Bank owns 100% of the outstanding voting shares of each subsidiary unless otherwise noted. The listing includes major operating subsidiaries only.
(2)	The carrying value of this subsidiary is included with that of its parent, Scotia Capital Inc.
(3)	The carrying value of this subsidiary is included with that of its parent, BNS Investments Inc.
(4)	Associated corporation effectively controlled by the Bank.

118                    2002 SCOTIABANK ANNUAL REPORT

Eleven-year Statistical Review
Consolidated Balance Sheet

As at October 31 ($ millions)		2002		2001		2000		1999		1998		1997
ASSETS
Cash resources		$	20,273	$	20,160	$	18,744	$	17,115	$	22,900	$	18,174
Securities
Investment			21,602		25,450		19,565		20,030		17,392		17,091
Trading			34,592		27,834		21,821		13,939		12,108		10,908
			56,194		53,284		41,386		33,969		29,500		27,999
Loans
Residential mortgages			56,295		52,592		50,037		47,916		45,884		41,727
Personal and credit cards			23,363		20,116		17,988		16,748		18,801		17,764
Business and governments			77,181		79,460		78,172		69,873		76,542		59,353
Assets purchased under resale agreements			32,262		27,500		23,559		13,921		11,189		8,520
			189,101		179,668		169,756		148,458		152,416		127,364
Allowance for credit losses			3,430		4,236		2,853		2,599		1,934		1,625
			185,671		175,432		166,903		145,859		150,482		125,739
Other
Customers’ liability under acceptances			8,399		9,301		8,807		9,163		8,888		7,575
Land, buildings and equipment			2,101		2,325		1,631		1,681		1,759		1,716
Trading derivatives’ market valuation			15,821		15,886		8,244		8,039		13,675		8,925
Other assets			7,921		8,037		7,456		6,865		6,384		5,025
			34,242		35,549		26,138		25,748		30,706		23,241
		$	296,380	$	284,425	$	253,171	$	222,691	$	233,588	$	195,153
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Personal		$	75,558	$	75,573	$	68,972	$	65,715	$	62,656	$	59,239
Business and governments			93,830		80,810		76,980		64,070		70,779		56,928
Banks			26,230		29,812		27,948		26,833		32,925		22,808
			195,618		186,195		173,900		156,618		166,360		138,975
Other
Acceptances			8,399		9,301		8,807		9,163		8,888		7,575
Obligations related to assets sold under repurchase agreements			31,881		30,627		23,792		16,781		14,603		11,559
Obligations related to securities sold short			8,737		6,442		4,297		2,833		3,121		3,739
Trading derivatives’ market valuation			15,500		15,453		8,715		8,651		14,360		8,872
Other liabilities			15,678		15,369		14,586		11,667		9,787		9,731
Non-controlling interest in subsidiaries			1,912		1,086		729		198		173		137
			82,107		78,278		60,926		49,293		50,932		41,613
Subordinated debentures			3,878		5,344		5,370		5,374		5,482		5,167
Shareholders’ equity
Capital stock
	Preferred shares		1,275		1,775		1,775		1,775		1,775		1,468
	Common shares		3,002		2,920		2,765		2,678		2,625		2,567
Retained earnings			10,500		9,913		8,435		6,953		6,414		5,363
			14,777		14,608		12,975		11,406		10,814		9,398
		$	296,380	$	284,425	$	253,171	$	222,691	$	233,588	$	195,153

(1) Pre-1996 comparative amounts have not been restated to reflect the reporting of trading derivatives’ market valuation on a gross basis, as they were not reasonably determinable.

2002 SCOTIABANK ANNUAL REPORT                    119

As at October 31 ($ millions)		1996		1995(1)		1994		1993		1992
ASSETS
Cash resources		$	14,737	$	16,728	$	11,388	$	8,634	$	8,337
Securities
Investment			15,835		13,820		17,093		10,894		9,417
Trading			10,070		8,154		8,473		6,944		4,811
			25,905		21,974		25,566		17,838		14,228
Loans
Residential mortgages			30,683		28,620		26,857		18,600		16,703
Personal and credit cards			16,801		15,343		13,421		11,651		11,182
Business and governments			50,408		47,741		44,438		40,228		41,246
Assets purchased under resale agreements			9,112		8,378		4,304		4,606		1,706
			107,004		100,082		89,020		75,085		70,837
Allowance for credit losses			1,568		2,295		2,241		2,881		2,785
			105,436		97,787		86,779		72,204		68,052
Other
Customers’ liability under acceptances			5,945		5,563		4,796		3,921		3,726
Land, buildings and equipment			1,523		1,485		1,200		1,099		1,110
Trading derivatives’ market valuation			8,978		–		–		–		–
Other assets			2,777		3,652		3,199		2,814		1,924
			19,223		10,700		9,195		7,834		6,760
		$	165,301	$	147,189	$	132,928	$	106,510	$	97,377
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Personal		$	47,768	$	45,538	$	42,431	$	31,288	$	29,058
Business and governments			44,981		41,747		35,660		30,009		30,902
Banks			25,145		24,060		21,664		16,451		16,667
			117,894		111,345		99,755		77,748		76,627
Other
Acceptances			5,945		5,563		4,796		3,921		3,726
Obligations related to assets sold under repurchase agreements			7,894		7,354		5,798		4,926		2,574
Obligations related to securities sold short			6,509		5,416		5,989		4,191		2,779
Trading derivatives’ market valuation			8,571		–		–		–		–
Other liabilities			7,387		6,809		7,158		6,608		4,413
Non-controlling interest in subsidiaries			101		133		175		56		51
			36,407		25,275		23,916		19,702		13,543
Subordinated debentures			3,251		3,249		3,016		3,156		2,128
Shareholders’ equity
Capital stock
	Preferred shares		1,325		1,575		1,100		1,300		1,000
	Common shares		2,161		1,994		1,839		1,429		1,308
Retained earnings			4,263		3,751		3,302		3,175		2,771
			7,749		7,320		6,241		5,904		5,079
		$	165,301	$	147,189	$	132,928	$	106,510	$	97,377

120                    2002 SCOTIABANK ANNUAL REPORT

Consolidated Statement of Income

For the year ended October 31
($ millions)		2002		2001		2000			1999(1)			1998		1997
INTEREST INCOME
Loans		$	10,708	$	13,049	$	12,129		$	10,654		$	10,269	$	8,082
Securities			3,087		3,062		2,286			1,874			1,815		1,636
Deposits with banks			573		872		916			943			1,007		770
			14,368		16,983		15,331			13,471			13,091		10,488
INTEREST EXPENSE
Deposits			5,519		8,233		8,192			7,284			7,303		5,714
Subordinated debentures			203		303		324			314			354		260
Other			1,971		2,247		1,616			1,201			1,057		797
			7,693		10,783		10,132			8,799			8,714		6,771
Net interest income			6,675		6,200		5,199			4,672			4,377		3,717
Provision for credit losses			2,029		1,425		765			635			595		35
Net interest income after provision for credit losses			4,646		4,775		4,434			4,037			3,782		3,682
Other income			3,942		4,071		3,665			3,183			2,858		2,683
Net interest and other income			8,588		8,846		8,099			7,220			6,640		6,365
NON-INTEREST EXPENSES
Salaries and staff benefits			3,344		3,220		2,944			2,627			2,501		2,202
Premises and technology			1,183		1,133		995			1,007			958		778
Communications and marketing			489		502		428			407			366		320
Other			721		807		786			735			621		483
Loss on disposal of subsidiary operations			237		–		–			–			–		–
Restructuring provisions following acquisitions			–		–		(34	)		(20	)		–		250
Write off of goodwill			–		–		–			–			–		26
			5,974		5,662		5,119			4,756			4,446		4,059
Income before the undernoted			2,614		3,184		2,980			2,464			2,194		2,306
Provision for income taxes			601		876		990			867			762		758
Non-controlling interest in net income of subsidiaries			216		139		64			46			38		34
Net income		$	1,797	$	2,169	$	1,926		$	1,551		$	1,394	$	1,514
Preferred dividends paid			105		108		108			108			97		99
Net income available to common shareholders		$	1,692	$	2,061	$	1,818		$	1,443		$	1,297	$	1,415
Average number of common shares outstanding (thousands)(2):
	Basic		504,340		500,619		495,472			493,136			490,914		478,972
	Diluted		512,752		508,995		501,253			498,090			496,697		482,981
Net income per common share (in dollars)(2):
	Basic	$	3.36	$	4.12	$	3.67		$	2.93		$	2.64	$	2.95
	Diluted	$	3.30	$	4.05	$	3.63		$	2.90		$	2.61	$	2.93
Dividends per common share (in dollars)(2)		$	1.45	$	1.24	$	1.00		$	0.87		$	0.80	$	0.74

(1)

These financial results were prepared in accordance with Canadian generally accepted accounting principles (GAAP), including the accounting requirements of the Superintendent of Financial Institutions Canada, other than recording the increase in the general provision for credit losses as a direct charge to retained earnings in the fourth quarter of 1999, which was in accordance with the accounting requirements specified by the Superintendent of Financial Institutions Canada under the Bank Act. Had the one-time increase in the general provision of $550 before tax ($314 after-tax) been recorded as a charge to the Consolidated Statement of Income, these financial results would have been as follows: provision for credit losses $1,185, net income $1,237, basic earnings per share $2.29 and diluted earnings per share $2.26.

(2)

Amounts have been retroactively adjusted to reflect the two-for-one stock split on February 12, 1998.

2002 SCOTIABANK ANNUAL REPORT                    121

For the year ended October 31 ($ millions)		1996			1995		1994		1993		1992
INTEREST INCOME
Loans		$	7,881		$	8,007	$	6,090	$	5,382	$	5,729
Securities			1,757			1,991		1,287		1,243		1,201
Deposits with banks			740			597		391		313		357
			10,378			10,595		7,768		6,938		7,287
INTEREST EXPENSE
Deposits			5,969			6,166		4,149		3,706		4,191
Subordinated debentures			214			209		172		133		134
Other			841			1,046		487		434		374
			7,024			7,421		4,808		4,273		4,699
Net interest income			3,354			3,174		2,960		2,665		2,588
Provision for credit losses			380			560		567		465		449
Net interest income after provision for credit losses			2,974			2,614		2,393		2,200		2,139
Other income			2,008			1,498		1,606		1,380		1,197
Net interest and other income			4,982			4,112		3,999		3,580		3,336
NON-INTEREST EXPENSES
Salaries and staff benefits			1,910			1,652		1,583		1,399		1,270
Premises and technology			664			588		533		481		461
Communications and marketing			272			265		230		207		191
Other			391			339		348		276		252
Loss on disposal of subsidiary operations			–			–		–		–		–
Restructuring provisions following acquisitions			(20	)		–		175		–		–
Write off of goodwill			–			–		162		–		–
			3,217			2,844		3,031		2,363		2,174
Income before the undernoted			1,765			1,268		968		1,217		1,162
Provision for income taxes			665			371		455		490		475
Non-controlling interest in net income of subsidiaries			31			21		31		13		11
Net income		$	1,069		$	876	$	482	$	714	$	676
Preferred dividends paid			113			104		97		92		79
Net income available to common shareholders		$	956		$	772	$	385	$	622	$	597
Average number of common shares outstanding (thousands)(2):
	Basic		468,716			457,197		437,427		416,563		406,166
	Diluted		469,551			457,356		437,513		416,563		406,166
Net income per common share (in dollars)(2):
	Basic	$	2.04		$	1.69	$	0.88	$	1.49	$	1.47
	Diluted	$	2.04		$	1.69	$	0.88	$	1.49	$	1.47
Dividends per common share (in dollars)(2)		$	0.65		$	0.62	$	0.58	$	0.56	$	0.52

122                    2002 SCOTIABANK ANNUAL REPORT

Consolidated Statement of Changes in Shareholders’ Equity

For the year ended October 31 ($ millions)			2002			2001			2000			1999			1998			1997
PREFERRED SHARES
Bank:
	Balance at beginning of year		$	1,525		$	1,525		$	1,525		$	1,525		$	1,218		$	1,325
	Issued			–			–			–			–			311			143
	Redeemed			(500	)		–			–			–			(4	)		(250	)
	Balance at end of year			1,025			1,525			1,525			1,525			1,525			1,218
Scotia Mortgage Investment Corporation				250			250			250			250			250			250
Total				1,275			1,775			1,775			1,775			1,775			1,468
COMMON SHARES
Balance at beginning of year				2,920			2,765			2,678			2,625			2,567			2,161
Issued				101			155			87			53			58			406
Purchased for cancellation				(19	)		–			–			–			–			–
Balance at end of year				3,002			2,920			2,765			2,678			2,625			2,567
RETAINED EARNINGS
Balance at beginning of year				9,913			8,435			6,953			6,414			5,363			4,263
Adjustments				(76	)(1)		(39	)(2)		–			(314	)(3)		–			–
Net income				1,797			2,169			1,926			1,551			1,394			1,514
Dividends: Preferred				(105	)		(108	)		(108	)		(108	)		(97	)		(99	)
		Common		(732	)		(621	)		(496	)		(429	)		(393	)		(355	)
Net unrealized foreign exchange gains/(losses)				(137	)		79			163			(160	)		152			43
Premium on redemption and purchase of shares				(154	)		–			–			–			–			–
Other				(6	)		(2	)		(3	)		(1	)		(5	)		(3	)
Balance at end of year				10,500			9,913			8,435			6,953			6,414			5,363
Total shareholders’ equity at end of year			$	14,777		$	14,608		$	12,975		$	11,406		$	10,814		$	9,398
Other Statistics(5)
Operating measures(%)
Return on equity				13.0			17.3			17.6			15.3	(3)		15.3			20.2
Productivity ratio				54.9			53.9			56.5			59.3			60.4			62.4
Return on assets				.61			.80			.81			.68	(3)		.65			.85
Common share information(6)
Earnings per share ($):
	Basic			3.36			4.12			3.67			2.93	(3)		2.64			2.95
	Diluted			3.30			4.05			3.63			2.90	(3)		2.61			2.93
Dividends per share ($)				1.45			1.24			1.00			0.87			0.80			0.74
Book value per common share ($)				26.78			25.47			22.49			19.49			18.37			16.19
Number of shares outstanding (thousands)				504,122			503,795			497,965			494,252			492,089			489,812
Share price ($):
	High			56.19			50.50			45.65			36.90			44.70			34.10
	Low			42.02			37.30			26.05			28.60			22.80			20.55
	Close – October 31			45.88			43.85			43.50			33.60			32.20			31.08
Capital ratios
Risk-adjusted (%):
	Tier 1			9.9			9.3			8.6			8.1			7.2			6.9
	Total			12.7			13.0			12.2			11.9			10.6			10.4
Assets to capital ratio(7)				14.5			13.5			13.7			13.5			14.9			14.2
Common equity to total assets (%)				4.8			4.7			4.5			4.4			3.9			4.1
Valuation measures
Dividend payout (%)(8)				43.2			30.1			27.3			29.7	(3)		30.3			25.1
Dividend yield (%)(9)				3.0			2.8			2.8			2.7			2.4			2.7
Price to earnings multiple(10)				13.7			10.6			11.9			11.5	(3)		12.2			10.5
Other information
Average total assets ($ millions)				296,852			271,843			238,664			229,037			213,973			179,176
Number of branches and offices				1,847			2,005			1,695			1,654			1,741			1,658
Number of employees(11)				44,633			46,804			40,946			40,894			42,046			38,648
Number of automated banking machines				3,693			3,761			2,669			2,322			2,244			2,030

2002 SCOTIABANK ANNUAL REPORT                    123

For the year ended October 31 ($ millions)			1996			1995			1994			1993			1992
PREFERRED SHARES
Bank:
	Balance at beginning of year		$	1,575		$	1,100		$	1,300		$	1,000		$	1,000
	Issued			100			675			–			300			–
	Redeemed			(350	)		(200	)		(200	)		–			–
Balance at end of year				1,325			1,575			1,100			1,300			1,000
Scotia Mortgage Investment Corporation				–			–			–			–			–
Total				1,325			1,575			1,100			1,300			1,000
COMMON SHARES
Balance at beginning of year				1,994			1,839			1,429			1,308			1,201
Issued				167			155			410			121			107
Purchased for cancellation				–			–			–			–			–
Balance at end of year				2,161			1,994			1,839			1,429			1,308
RETAINED EARNINGS
Balance at beginning of year				3,751			3,302			3,175			2,771			2,335
Adjustments				(116	)(4)		–			–			–			–
Net income				1,069			876			482			714			676
Dividends: Preferred				(113	)		(104	)		(97	)		(92	)		(79	)
		Common		(305	)		(283	)		(253	)		(233	)		(211	)
Net unrealized foreign exchange gains/(losses)				(19	)		(15	)		9			20			50
Premium on redemption and purchase of shares				–			–			–			–			–
Other				(4	)		(25	)		(14	)		(5	)		–
Balance at end of year				4,263			3,751			3,302			3,175			2,771
Total shareholders’ equity at end of year			$	7,749		$	7,320		$	6,241		$	5,904		$	5,079
Other Statistics(5)
Operating measures(%)
Return on equity				15.8			14.2			7.9			14.4			15.7
Productivity ratio				58.8			59.9			65.6			57.7			56.8
Return on assets				.67			.64			.40			.71			.72
Common share information(6)
Earnings per share ($):
	Basic			2.04			1.69			0.88			1.49			1.47
	Diluted			2.04			1.69			0.88			1.49			1.47
Dividends per share ($)				0.65			0.62			0.58			0.56			0.52
Book value per common share ($)				13.53			12.37			11.36			10.90			9.89
Number of shares outstanding (thousands)				474,893			464,513			452,518			422,544			412,374
Share price ($):
	High			21.20			15.13			16.63			14.75			12.38
	Low			14.19			12.13			11.57			10.94			9.50
	Close – October 31			21.13			14.44			13.75			14.50			12.00
Capital ratios
Risk-adjusted (%):
	Tier 1			6.7			6.7			6.2			6.5			5.7
	Total			8.9			9.6			9.6			10.4			8.6
Assets to capital ratio(7)				16.4			15.2			15.2			12.9			14.8
Common equity to total assets (%)				3.9			3.9			3.9			4.3			4.2
Valuation measures
Dividend payout (%)(8)				31.9			36.7			65.8			37.5			35.3
Dividend yield (%)(9)				3.7			4.6			4.1			4.4			4.8
Price to earnings multiple(10)				10.4			8.5			15.6			9.7			8.2
Other information
Average total assets ($ millions)				158,803			137,988			120,619			100,836			93,807
Number of branches and offices				1,464			1,460			1,454			1,376			1,361
Number of employees(11)				34,592			33,717			33,272			30,375			30,675
Number of automated banking machines				1,526			1,429			1,381			1,280			1,190

(1)	Cumulative effect of adoption of new goodwill accounting standard.
(2)	Cumulative effect of adoption of new corporate income taxes accounting standard.
(3)	If the increase in the general provision had been charged to income (refer to footnote 1 on the previous page) these 1999 financial ratios would have been: return on equity 12.0%, return on assets 0.54%, basic earnings per share $2.29, diluted earnings per share $2.26, dividend payout 38.0% and price earnings multiple 14.3.
(4)	In accordance with the guidelines issued by the Superintendent, the Bank adopted new impaired loans accounting principles established by the Canadian Institute of Chartered Accountants.
(5)	Pre-1996 comparative amounts have not been restated to reflect the reporting of trading derivatives’ market valuation on a gross basis, as they were not reasonably determinable.
(6)	Amounts have been retroactively adjusted to reflect the two-for-one stock split on February 12, 1998.
(7)	Based on guidelines issued by the Superintendent of Financial Institutions Canada, the Bank’s assets to capital ratio is calculated by dividing adjusted total assets by total regulatory capital.
(8)	Dividend payments as a percentage of net income available to common shareholders.
(9)	Based on the average of the high and low common share price for the year.
(10)	Based on the closing common share price.
(11)	Includes all personnel (part-time stated on a full-time equivalent basis) of the Bank and all its subsidiaries.

124                    2002 SCOTIABANK ANNUAL REPORT

GLOSSARY

ALLOWANCE FOR CREDIT LOSSES:An allowance set aside which, in management’s opinion, is adequate to absorb all credit-related losses from on and off-balance sheet items. It includes specific, country risk and general allowances.

ASSETS UNDER ADMINISTRATION AND MANAGEMENT:Assets owned by customers, for which the Bank provides management and custodial services. These assets are not reported on the Bank’s consolidated balance sheet.

BANKERS’ ACCEPTANCES (BAs):Negotiable, short-term debt securities, guaranteed for a fee by the issuer’s bank.

BASIS POINT:A unit of measure defined as one-hundredth of one per cent.

CAPITAL:Consists of common shareholders’ equity, preferred shareholders’ equity and subordinated debentures. It can support asset growth, provide against loan losses and protect depositors.

COUNTRY RISK ALLOWANCE:Funds set aside initially in 1987-89 to cover potential losses on exposure to a designated group of emerging market countries determined by OSFI.

DERIVATIVE PRODUCTS:Financial contracts whose value is derived from an underlying price, interest rate, exchange rate or price index. Forwards, options and swaps are all derivative instruments.

DESIGNATED EMERGING MARKETS (DEM):Countries against whose loans and securities OSFI has required banks to set aside a country risk allowance.

FOREIGN CURRENCY TRANSLATION GAIN/LOSS:The unrealized gain or loss recorded when foreign currency assets and liabilities are translated into Canadian dollars at a balance sheet date, when exchange rates differ from those of the previous balance sheet date.

FOREIGN EXCHANGE CONTRACTS:Commitments to buy or sell a specified amount of foreign currency on a set date and at a predetermined rate of exchange.

FORWARD RATE AGREEMENT (FRA):A contract between two parties, whereby a designated interest rate, applied to a notional principal amount, is locked in for a specified period of time. The difference between the contracted rate and prevailing market rate is paid in cash on the settlement date. These agreements are used to protect against, or take advantage of, future interest rate movements.

FUTURES:Commitments to buy or sell designated amounts of commodities, securities or currencies on a specified date at a predetermined price. Futures are traded on recognized exchanges. Gains and losses on these contracts are settled daily, based on closing market prices.

GENERAL ALLOWANCE:Established by the Bank to recognize credit losses which have occurred as at the balance sheet date, but have not yet been specifically identified on an individual item-by-item basis.

GUARANTEES AND LETTERS OF CREDIT:Assurances given by the Bank that it will make payments on behalf of clients to third parties if the clients default. The Bank has recourse against its clients for any such advanced funds.

HEDGING:Protecting against price, interest rate or foreign exchange exposures by taking positions that are expected to react to market conditions in an offsetting manner.

IMPAIRED LOANS:Loans on which the Bank no longer has reasonable assurance as to the timely collection of interest and principal, or where a contractual payment is past due a prescribed period. Interest is not accrued on impaired loans.

MARKED-TO-MARKET:The valuation of securities and off-balance sheet instruments, such as interest and exchange rate contracts, held for trading purposes, at market prices as of the balance sheet date. The difference between market and book value is recorded as a gain or loss to income.

MIDDLE OFFICE:The independent middle office plays a key role in risk management and measurement. It reviews trading models and valuations; develops and performs stress tests, sensitivity analysis and VAR calculations; reviews profit and loss performance; and participates in new product development.

NET INTEREST MARGIN:Net interest income, on a taxable equivalent basis, expressed as a percentage of average total assets.

NOTIONAL PRINCIPAL AMOUNTS:The contract or principal amounts used to determine payments for certain off-balance sheet instruments, such as FRAs, interest rate swaps and cross-currency swaps. The amounts are termed “notional” because they are not usually exchanged themselves, serving only as the basis for calculating amounts that do change hands.

OFF-BALANCE SHEET INSTRUMENTS:These are indirect credit commitments, including undrawn commitments to extend credit and derivative instruments.

OPTIONS:Contracts between buyer and seller giving the buyer of the option the right, but not the obligation, to buy (call), or sell (put) a specified commodity, financial instrument or currency at a set price or rate on or before a specified future date.

OSFI: The Office of the Superintendent of Financial Institutions Canada, the regulator of Canadian banks.

PRODUCTIVITY RATIO:Measures the efficiency with which the Bank incurs expenses to generate revenue. It expresses non-interest expenses as a percentage of the sum of net interest income on a taxable equivalent basis and other income. A lower ratio indicates improved productivity.

REPOS:Repos is short for “obligations related to assets sold under repurchase agreements” — a short-term transaction where the Bank sells securities, normally government bonds, to a client and simultaneously agrees to repurchase them on a specified date and at a specified price. It is a form of short-term funding.

RETURN ON EQUITY (ROE):Net income, less preferred share dividends, expressed as a percentage of average common shareholders’ equity.

REVERSE REPOS:Short for “assets purchased under resale agreements” — a short-term transaction where the Bank purchases securities, normally government bonds, from a client and simultaneously agrees to resell them on a specified date and at a specified price. It is a form of short-term collateralized lending.

RISK-WEIGHTED ASSETS:Calculated using weights based on the degree of credit risk for each class of counterparty. Off-balance sheet instruments are converted to balance sheet equivalents, using specified conversion factors, before the appropriate risk weights are applied.

SECURITIZATION:The process by which financial assets (typically loans) are transferred to a trust, which normally issues a series of different classes of asset-backed securities to investors to fund the purchase of loans. The Bank normally accounts for these transfers as a sale, provided certain conditions are met, and accordingly, the loans are removed from the consolidated balance sheet.

SWAPS:Interest rate swaps are agreements to exchange streams of interest payments, typically one at a floating rate, the other at a fixed rate, over a specified period of time, based on notional principal amounts. Cross-currency swaps are agreements to exchange payments in different currencies over predetermined periods of time.

TAXABLE EQUIVALENT BASIS (TEB):The grossing up of tax-exempt income earned on certain securities to an equivalent before-tax basis. This ensures uniform measurement and comparison of net interest income arising from both taxable and tax-exempt sources.

TIER 1, TOTAL CAPITAL RATIOS:These are ratios of capital to risk-weighted assets, as stipulated by OSFI, based on guidelines developed under the auspices of the Bank for International Settlements (BIS). Tier 1 capital, the more permanent, consists primarily of common shareholders’ equity plus non-cumulative preferred shares, less unamortized goodwill. Tier 2 capital is mainly cumulative preferred shares, subordinated debentures and the general allowance. Together, Tier 1 and Tier 2 capital less certain deductions comprise total capital.

VALUE AT RISK (VAR):VAR is an estimate of the potential loss of value that might result from holding a position for a specified period of time, with a given level of statistical confidence.