FRED: Welcome to the Scotiabank podcast. I’m Fred Ketchen, Director of Stock Trading for ScotiaMcLeod. These regular podcasts call on some of Scotiabank’s most knowledgeable experts to help you make the most of what you have. Here we’ll discuss strategies designed to put you in the financial driver’s seat.

ALBERTA: Well, if we look back two years ago Fred, this was a very different economic landscape. The first thing that happened was back in August 2007 when the US subprime market began to meltdown and what we saw is that a major liquidity crisis of global proportions transpired. that was largely due to the fact that there was tremendous uncertainty about the value of the securities that were unpinning asset-back commercial paper that was largely collaterized by these mortgages. Following the liquidity crisis, in September of 2008 we entered a worldwide credit crisis. Largely precipitated by what was happening to global financial institutions worldwide – Lehman, AIG, those are a few names that one would think of right away. Now, if we look at our business customers and what were their preoccupations before the start of these crises is that were was a very different appetite in terms of surplus funds in how these would be invested. And the focus was on higher yields.

FRED: So people were really looking for returns, not paying attention perhaps to the risk that was attached to those higher return investments.

ALBERTA: Absolutely, Fred. The focus was on greater returns, far less on the risk profile of the investment product, or for that matter, of the issuer. Nowadays what we’re seeing is what CFOs, corporate treasurers, CEOs are focused on: How do I maintain liquidity? How do I maintain cash flow? How do I minimize my risk? And so, they’re really looking at short term liquid investments in this climate and institutions that are secure and well capitalized.

FRED: Are we looking at a situation where all of a sudden we’ve gone through this period of high risks, supposedly higher reward and now all of a sudden now we’ve tried to correct that situation and we’ve pulled our opportunities back in? We’ve certainly we’ve become much less risk tolerant. Does that mean that as we go forward all of a sudden we’re going to find ourselves far too careful?

ALBERTA: I think at this point in where we are in this cycle that’s too early say. Obviously the marketplace is dynamic and so are our customers, so as markets regroup, as trends pick up, we will probably see a shift that is right now primarily focused on risk mitigation into a balance of risk management and yield. But I don’t think, Fred, we’re ever going back to the days. There is a new normal now. …pre this liquidity crisis, pre this credit crisis.

FRED: Are we managing credit better now than we were before or is it still one of the challenges that we have to face?

ALBERTA: Liquidity has tended to be less of a problem as we’ve gone in 2009. Credit is still an issue. But I think both factors have underlined global economies worldwide. They’ve created if you will “a new world order.”

FRED: How has the change in the rate environment affected the decision that businesses are making around their own investments?

ALBERTA: Well, just a year ago, if we take the prime rate for Canada in June 2008, that rate was at 4.75%. The rate today is 2.25%, so there’s been a contraction of 250 bases points. Now the interest rate environment is at an all-time low, so really yield isn’t what customers are chasing these days. They’re going to be chasing risk, and frankly, in this kind of an environment, where rates are so low there’s very little motivation to lock funds for higher periods.

FRED: So are you looking at then you’re taking either extra long terms or are you concentrating on very short terms, so that when the situation changes you can make that adjustment?

ALBERTA: I would say that all of our business customers are very much looking at mitigate the risk, have liquidity (because that’s still a concern) and therefore, short-term investments. They don’t want to lock in and they want to have the flexibility to respond as the market dynamics and the economy changes.

FRED: Well as we sit and view this whole worldwide market condition that we’ve involved in, how long do you anticipate that the global economic recession is going to last?

ALBERTA: It’s an interesting question because I’m not an economist and so I want to prefacet that up front, but I would say based on our global portfolio and we do do business with clients in over 50 countries around the world. It is a bit of a different situation depending where we find ourselves, Fred. So I would say that in Canada and the U.S., we’re still in the grip of a global recession. The pace of the contraction is actually waning. If you look at our own Scotia Economics departments, they believe that we’re on the verge of transitioning from recession to recovery, but it’s not going to be quick. It’s not going to be the sharp bounce as we’ve seen in the past. But I would say that that’s also true of Canada and the US. I think these situations are quite different from what we see in Europe. They’re a different pace in the cycle. We still see countries that are facing the eye of the storm. I would include Russia, Eastern Europe, and the CIS countries in that. Now if we look at the International Monetary Fund, they’re now forecasting. And you know this is not a science, this is an art. A recovery of 1.9% and that is less than the 4% we normally see in an economic reprise. One other factor, Fred that I see in our portfolio with our clients that is quite troubling is that world trade this year is contracting by 9%. And global trade has been responsible to a large extent for the pick up in GDP, so this contraction is very worrisome because it has a direct correlation with GDP. And the other trend that we’re seeing is there’s a heightened focus by some countries on protectionism. And that would be, in fact, be a very, very bad story for global economies and obviously all of the businesses that underpin it.

FRED: One of the ways that financial minister, central bankers and other money people have recommended that we can help ourselves get out of this mess is by the stimulus program. We’ve had stimulus proposed in all kinds of places. Are these things really working? Have they gone beyond just the giving to the recipient and it sits there in a bank account?

ALBERTA: I think what we’ve seen is an unprecedented synchronicity around the world with central banks really having a coordinated strategy around unleashing a powerful way of stimulus by very quick and very large monetary injunctions. So historically, this is an unprecedented first. However, this does take time for this to work itself in the system. I would also say that what we’ve seen is some easing up because as commodity prices have come down, as the price of oil has hit that consumer or that business in a very different way than it was even 12 months ago. There is price discounting that’s worked its way through in the economy. Things have eased up, but there is no quick fix. And I would add one very important variable to all of this, Fred, which is you cannot have strong national and global economies if your global financial system is unhealthy. The global financial system depending on the country is still on the mend and we need strong financial institutions for strong economic pick up.

FRED: So what does this mean for businesses and how are their financial institutions navigate the current economic condition?

ALBERTA: Well, I think a trusted and loyal banker is always an important partner and that’s how I see our roles with businesses. That is in good times and in bad times. And frankly, when the economy is less certain, there, is even more importance of the advice and the solution based approach that banks can bring to a business. When I look at our business customers, what they’re looking for us in terms of the business services we provide them, is solutions around liquidity management: How can I optimize that? Solutions around cash management and really having a solid grip on that. Solutions around cash management and really having a solid grip on that. And working capital, which is so important to them. If I paired that up in terms of the product offerings and what this entails, it really is, Fred, the spectrum of trade finance services, cash management services, payment services and electronic banking and platform, combined with a fairly resilient strategy around deposits and investments.

FRED: Cash management means that you may at some point in time have a cash surplus. Well what does that company with the financial surplus, what do they do to look for from their banker in terms of advice on how that surplus should be invested?

FRED: Basically, what you’re talking about is professional investment management that is working to everybody’s benefit under those kinds of circumstances. You know, I’ve heard good things about Canada’s position overall in the global market. Is this positive news for Canadian businesses?

ALBERTA: I think it’s tremendous news for Canadian business and I’ve seen it being a tremendous asset for us in our international efforts with customers on a whole spectrum of fronts. The Canadian banking system is viewed as a model worldwide. The world economic forum rated it the top financial services centre in the world and those kind of rankings have been echoed by the IMF and standard & Poors….. Now you contrast them with the US, which was ranked 40th, or Britain at the 44th level. Our banks are extremely well capitalized. They have strong credit ratings. They have strong tier 1tier 1 capital ratios. They have been well regulated, solidly managed. They have had very different policies. For example, no Canadian bank rushed and did subprime mortgages. And so our risk profile is quite different. What we can offer our customers and that’s what I mean when I said at the very beginning – the integrity of the rate issuer. It’s both the product, but who’s standing behind that paper or that deposit. And so we are in a very unique position and I think again that bodes well for our national economy and our customers. I would say for us at Scotiabank what’s also being quite important this year is that we were rated by Oliver Wyman in a global financial services ranking that they do as being in the top 10 performing banks worldwide.

FRED: While businesses are obviously facing some significant challenges that maybe at the present time doesn’t seem all that bad, so what are we hearing and what are you hearing Alberta, from your customers. What do you think the future is going to hold for them?

ALBERTA: I think depending on the country again it’s a little bit different, but I would say that if I looked at Canada, US, and even Mexico, who are our NAFTA based customers, certainly the preoccupation right now is mitigate risk, have very solid investment policies and keep liquidity buoyant. That is definitely a key concern. They’re not chasing yield, but they want to be positioned in a way to take advantage of that if the markets bounce back. They’re looking at the security of the banker that they deal with and the issuer behind the paper. And I think the other big thing is they are partnering with us on the holistic banking relationship, so the credit plus what we’ve been talking about today which are the cash management payments, deposits and investments services for optimal solutions. And they’re looking at the banker very much in this climate as a trusted partner.

FRED: It seems to me in listening to you that one of the words that comes up is in our relationships with our customers. One thing that we need to bring to them is a level of confidence in ourselves as a bank, but confidence that they can have that we’re progressing along and that things are going to improve.

ALBERTA: Correct and I think we do that very much in Canada by having a very strong financial system, by all the banks having very, very solid positions. But then we bring it to our customers by the quality of the specialist we put in front of them. People that can really look at their balance sheet, that can look at their cash flows and really recommend the strategies for that business. Which at the end of the day is really what is important for that customer: How can I save money? How can I optimize on my investments? How can I manage my risk?

FRED: All makes good sense to me, Alberta and I do thank you for sharing your insights with us today. We hope that this special business edition will assist our commercial and corporate as they face the challenges to the market and the economy. And Thank you for joining us. I’m Fred Ketchen. For more information on our global transaction banking services, please visit us at gtb.scotiabank.com.