Future Banking: Banks are driving strategies to develop bank-to-bank relationships and many are looking to provide services without establishing a physical presence in their clients' location. Smaller banks are keen to enter relationships with larger banks in order to access deposit, lending and related services. How has Scotiabank adapted and leveraged its strengths to succeed in this new environment?

Alberta Cefis: World trade that fuelled a decade of global GDP growth actually shrank 10% last year, which posed immense challenges for trade finance banks and their clients.

Companies returned to the instruments of trade they knew and understood best in order to mitigate risk. There was therefore a palpable move away from open account trading back into traditional letters of credit (LCs). The volumes and values of those LCs were of course down, not only because of a diminution in terms of global trade, but also because commodity prices were way down from their highs of 2007 and most of 2008.

In addition, we have seen a reduction in the relationships between trade banks and altogether more selectivity over the partners, countries and customers with whom they wish to work. Successful trade finance in such a radically altered liquidity environment, compared with just two years ago, has therefore become far more strategic. It is about selective plays and selective positioning.

However, because Scotiabank maintained its long-standing trade finance capability when many other institutions exited the sector, we have been able to boost business. We are presently in some 50 countries and have an extremely strong correspondent banking network. Last year, we significantly grew our trade finance revenues, primarily by continuing to service our existing customers worldwide.

Cristian Mandachescu (Vice-President, Strategy & Business Management, Trade Services & Financial Institutions): We grew because we are a strong and focused bank, and we were able to take advantage when other banks retrenched from our markets. Our physical presence in some 50 countries is a significant and critical advantage for us in doing trade, because it gives us the ability to generate business by working directly with our customers — both corporate and commercial businesses, as well as financial institutions.

Future Banking: How have the challenges of the past 12 months affected Scotiabank's correspondent banking relationships and how you manage risk?

AC: The quality of our correspondent partners is crucial. We have a select number of choice banks that meet our criteria in terms of balance sheet capital, but that also offer mutual opportunities and are keen on doing business with us. In Turkey, we are the only Canadian bank and, as a result, we are the preferred provider and correspondent to Turkish banks for any business directed from Canada.

Eduardo Klurfan (Vice-President, Trade Finance & Financial Institutions): Turkey is a good example of how relationships really do count. Strong relationships are built over time and mutual trust is created by providing solutions and a network that can support our clients' businesses. Therefore, the business case for setting up in a country is driven first by the needs of our customers. It is through our understanding of a country that we can start to see the opportunities for business development and, of equal importance, for improved risk management.

AC: When our core clients were concerned with counter-party risk, they used to mean other corporates. Now, most customers globally are concerned with the risk of the other bank. The idea that a bank involved in a transaction could actually add to the risk was never contemplated before. This has added to the complexity of the transaction and to the risk, both real and perceived.

CM: We have also seen a much stronger connection between the primary and secondary markets. The secondary market was once used to make money. It is now being used to complement the business that's being done in the primary market because, in

Pictured from left to right: Alberta Cefis, Executive Vice-President & Head, GTB, Paul LeBlanc, Senior Vice-President, TS&FI, Cristian Mandachescu Vice-President, Strategy & Business Management, Trade Services and Financial Institutions, and Eduardo Klurfan, Vice-President, Trade Finance & Financial Institutions.

truth, it's not a business in itself. Now you see banks, such as Scotiabank, that work with other banks to support their clients.

Future Banking: What has been the impact of the financial crisis on transactional services and what does the future hold for correspondent banking in a volatile market?

Paul LeBlanc (Senior Vice-President, Trade Services & Financial Institutions): One of the key changes last year was that companies lost sources for their working capital. They used to be able to issue commercial paper. But when the markets dried up, they had to find new ways to create working capital to run their businesses. The LC allowed them to do that, because they could get financing for an LC transaction. That accounted to a large extent for the flow away from open account transactional activity into LCs. As we go forward and other sources become available for them to draw that working capital, there will be a tendency to go back to open accounts.

CM: There has also been an effect on the emerging supply chain finance (SCF) market. It is based on trust, whether through a bank or a technology provider. Now, we've seen a shift back to banks, because they, as opposed to pure technology providers, can effect payment — and liquidity has been one of the main concerns during this crisis. We think that SCF will continue to evolve and banks will be more involved in providing the visibility that will allow them to secure financing at different points in the transaction.

EK: Scotiabank underpins its trade finance capability by running an award-winning, web-based FX trading application that allows clients to view daily market reports and conduct secure trading 24-hours a day. We also have a global team that deals in all major and most minor currencies, providing global coverage in key financial centres and regions around the world. We have been ranked as Canada's Best Foreign Exchange Bank for five years in a row by Global Finance magazine.

Future Banking: Thank you for sharing your views about the opportunities and challenges in today's environment. Is there anything you want to add?

AC: To wrap up, I think it is important to emphasise the widely recognised strength of the Canadian market and banks. No Canadian bank has needed a government bailout. We have a strong balance sheet at Scotiabank. The big matrix that we've all had to live with this past year is less about return on equity on transactions and far more about return on risk-weighted capital and regulatory capital. It has been about seeing what really makes sense in a world where capital is rationed, and focusing closely on relationship management and on the customer value proposition.

We have been able to succeed because of our legacy as a major global trading bank and our more than 175 years of banking experience. We have also been recognised as the Best Trade Finance Bank in Canada for the third time in the past four years by Global Finance magazine, which underscores our strength and commitment to offering our clients industry-leading products and services. It's an important fact that when margins were paper thin and many other banks were exiting trade finance, we stayed — and actually boosted our global presence and nurtured the correspondent banking network, which now puts us in such a very strong position in the market.