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Rick Waugh, president and CEO of Scotiabank.

Ian Jackson/Ian Jackson/THE GLOBE AND MAIL

Shares of Bank of Nova Scotia were the only decliners among Canada's big five banks on Monday.

Why? Could it be because the bank's chief executive officer on Friday refused to rule out raising equity to get the bank to the new guidelines coming into force under the Basel Committee?

Shareholders never like to hear that there's a chance that their holdings might be diluted, and that's what they heard Friday when Rick Waugh answered questions on the bank's conference call.

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He signalled that the bank could do an equity raise, or look to sell one of its big investments to get to its Basel targets.

Sumit Malhotra, an analyst at Macquarie Securities who follows Canadian banks, tried to pin Mr. Waugh down on what Scotia would have to do to get its Basel III common equity ratio to between 7 per cent and 7.5 per cent by the end of next year.

Mr. Malhotra asked whether Scotia could get there with just internal capital generation, such as earnings, or will it have to do something else.

Mr. Waugh replied that for the bank "it's keep our options open."

Mr. Waugh pointed to "sigificant investments" that Scotia has that get tough capital treatment under Basel and that the bank could "hold those or not." That could be a nod to the bank's stake in CI Financial , which the bank could sell to raise capital, or to some of the bank's minority stakes in foreign banks. Mr. Malhotra then pressed harder, asking whether Scotia could get to its target level "by the end of 2012 without selling one of your investments? Or, doing a direct capital raise that doesn't involve an acquisition?"

Mr. Waugh's answer was "we won't rule out capital issuance, and we'll pursue our options. But, we're not going to tie ourselves down to one thing or another when we have so much flexibility."

Scotiabank deserves credit for not raising equity during the financial crisis, when other banks were selling stock while share prices were in the dumps to pad their balance sheet. But that left the bank a bit behind on the capital front, and Mr. Waugh may be signalling that the bank will have to catch up.

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If Scotiabank does have to raise equity, at least shareholders should be comforted knowing that they will be diluted at much better valuations than investors in other banks were.

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