Bank of Nova Scotia will face writedowns of $890 million, or $595 million after tax, in the fourth quarter thanks to extreme market volatility, the bank announced on Tuesday.

For the three months ending Oct. 31, the bank said its financial results would include charges “relating to certain trading activities and valuation adjustments.”

“We are disappointed to announce these writedowns. Both the equity and fixed income markets have experienced significant declines in value and extreme levels of volatility over the last several weeks, exacerbated by the Lehman bankruptcy,” said Rick Waugh, Scotiabank’s president and CEO, in a statement.

Within the writedowns, a charge of approximately $115 million after tax results from trading revenues related to the bankruptcy of Lehman Brothers in September. The loss occurred primarily as a result of a failed settlement and the unwinding of trades in rapidly declining equity markets shortly after the bankruptcy, Scotiabank said. It has submitted a bankruptcy claim for losses.

There will also be valuation adjustments of approximately $370 million after tax, or $560 million before tax. This includes writedowns of $105 million after tax in available for sale securities based on current estimates of fair value — a result of deteriorating economic conditions and market volatility.

The balance of $265 million after tax relates to mark-to-market adjustments on collateralized debt obligations, including a net fair value loss of $135 million after tax on the purchase of CDOs from Scotiabank’s U.S. multi-seller conduit, pursuant to the terms of a liquidity asset purchase agreement.

Scotiabank noted that if credit spreads improve ahead, a portion of these valuation adjustments will reverse and be recorded as income. Its remaining exposure to investments in CDOs will now be roughly US$348 million.

Finally, a mark-to-market loss of approximately $110 million after tax relates to derivatives used for asset/liability management purposes that do not qualify for hedge accounting. This was driven by continuing declines in interest rates, Scotiabank said, and is expected to reverse over the average three-year life of the hedges such that no economic loss should occur.

In terms of the impact on its business lines, approximately $305 million after tax relates to Scotia Capital, about $90 million after tax to its international banking arm and approximately $200 million after tax relates to its other business segment, which includes group treasury and executive offices.

“Notwithstanding these challenges, our three business lines are profitable and core earnings remain solid,” said Waugh. “We are confident that our diversified businesses, strong, conservative risk management discipline and prudent capital management position us well to manage through these uncertainties and to achieve continued success.”

IE