Financial Update

· TSX -78.40pts (Reuters) Manulife's drag on the heavily weighted financial group kept the broader index from tagging along with a rally in U.S. stock markets, after it said it would report a 4th-quarter loss of C$1.5 billion due to sliding markets and issue $2.1 billion in common equity to bolster its capital position. Additionally, "We have this whole political issue going on that is certainly not going to entice foreigners to invest in Canada right now," said Julie Brough, vice president at Morgan Meighen & Associates.
· DOW +270.00pts fuelled by reassuring words from Ford Motor Co. chief executive Alan Mulally, who said the automaker has enough cash to make it through 2009 and might not need government help
· Dollar -.37c to $79.84US. "
· Oil -$2.32 to $46.96US per barrel.
· Gold +$6.50 to $783.30US per ounce the biggest percentage advancer, up 7.4%
· www.bankofcanada.ca/en/rates/bond-look.html Canadian bond prices


Bank of Nova Scotia pulls back on lending

Eoin Callan, Financial Post

Bank of Nova Scotia is pulling back on lending to consumers and warning investors to brace for softer earnings next year as the economy slides into recession.

The third-largest bank in the country provided the clearest signal yet of any major Canadian financial institution that it is reining in offers of loans to customers for big-ticket items like homes.

Rick Waugh, chief executive, said the bank was becoming increasingly cautious amid profound economic uncertainty and worsening credit conditions.

Senior executives said the bank had stopped competing with Bay Street rivals to increase the bank's share of mortgages issued to Canadians.

"We lost a little bit of market share, and we've done that consciously," said Chris Hodgson, head of Canadian banking.

The disclosures indicate the bank has made a major strategic decision that separates it from Toronto-Dominion Bank in particular, where Chief Executive Ed Clark has promised investors he will dramatically increase the bank's share of the retail market.

The retreat by Scotia could leave the field open for TD and BMO to compete most aggressively to offer Canadians new loans, if RBC and CIBC follow Scotia's lead and ease back next year.

Rob Pitfield, the head of international banking at Scotia, said managers were also becoming "very circumspect" in providing consumer loans in Latin America and had "taken alot of action to tighten up."

In some respects, Scotia's executive team are putting into words what many bank executives around the world have been reluctant to say publicly, for fear of drawing political ire at a time when policymakers are encouraging financial institutions to ease the supply of credit.

The chief executive said interference from politicians was emerging as a major headache for international banks that had been compelled to turn to their governments for capital injections amid one of the worst financial crises of the century.

"I don't think government capital comes cheap," said Mr. Waugh, citing pressure on banks to make more loans to mitigate the impact of a recession.

"Politically, it comes with a true cost," he added, saying some foreign banks had been forced by governments to take capital they "didn't want" to guard against potential future losses.

Yet despite the warnings about the after-effects of state interventions, Scotia appears likely to be a beneficiary of moves by the Federal Reserve and United States Treasury to supply extra liqudity to the auto finance industry.

Scotia has more than $20-billion in exposures to the auto finance industry, mainly in the form of loans to consumers to buy cars and to auto dealers to keep their lots filled with vehicles.

The bank has extended about $5.2-billion in loans to consumers, parts manufacturers and dealers, plus exposures of $7.8-billion in off-balance sheet vehicles and another $7.8-billion in an on-balance sheet portfolios made up of securitized credit.

The exposures are a source of "comcern" but have so far been managed without unexpected losses, said Peter Routledge, a senior credit officer at Moody's, the ratings agency. "If we have a normal turn in the credit cycle tied to a recessionary period, then that would suggest they would not have diffculties managing credit losses. If it is an unusually bad cycle and credit losses are much higher, than conceivably it might put some negative pressure on the [credit] rating," said Mr. Routledge.

Brian Porter, Scotia's chief risk officer and a rising force within the bank, said the next year "is going to be a focus on credit, credit and credit."

But he said while there would be a rise in loan losses across the board, he did not anticipate any nasty surprises.

The chief executive said Scotia would not raise capital by issuing common equity, but had ample scope to take advantage of new looser capital rules by selling preferred shares.

Analysts said they expected the bank to act soon to pad its capital base in this way, as its reserves appeared set to dip below the level of 9% of risk-weighted assets, a trigger for other institutions to raise cash.

Scotia Tuesday said profit fell 66% due to a worse-than-expected charge of $642-million incurred amid turbulent markets. The said net income for the year-end quarter ended Oct. 31 was $315-million (28 cents) compared with $954-million (95 cents) in the year-earlier quarter.