Bank of Nova Scotia (BNS) 2002 Q2 法說會逐字稿

Good afternoon and welcome to the presentation of Scotia Bank's Q2 results. I am Sarabjit Marwah, Chief Financial Officer. With us today are Bob Chisholm, Vice Chairman of Domestic Banking, David Wilson,of Scotia Capital, John Crean,with Risk Management, Bob Brooks, Senior Vice-President and Group Treasurer and Bill Sutton, Executive Vice-President of Latin America. Mr. Godsoe cannot be here as he is in Jamaica at our board meeting. I will begin with the highlights of our results and a review of financials, review of asset quality by John Crean and concluding remarks on the outlook for the rest of the year. We will take your questions then. Overall, we had a strong quarter. With net income of $598 million, up 11% from a year ago. Our EPS came in at $1.11, an 10% increase. Our ROE was up from same quarter last year. These earnings are Gaap earnings, not cash, not operating, not adjusted. We have always presented one set of Gaap numbers, so it is not to confuse shareholders and investors. Our provision for credit losses was $350 million this quarter unchanged from last quarter, when we exclude the provisions for Argentina. Productivity remains a very good 54.3% And {INAUDIBLE] ratio at 9.9% is still the highest of the major Canadian Banks. Briefly covering Argentina it had minimal impact on second quarter results. And we remain well provisioned against Argentina risks. As I, mentioned last quarter excluding Brady bonds and after tax affecting our provision coverage is 90% of our cross-border exposure, a level we remain comfortable with. John Crean will have more to say on this later on. On the economic and financial front, conditions in Argentina remain very difficult and very fluid. And we are monitoring the situation closely literally daily. Bill Sutton is here to answer questions on Argentina. Slide five shows the rebound in our earnings and the growth prior to last quarter when we took the charges related to Argentina. Next, on slide six, a broad-based diversification brought by business-line and geographically has clearly enabled us to maintain strong earnings momentum in a very challenging economic environment. As you can see from the chart, our domestic business continues to perform strongly. Scotia Capital's results were lower because of higher loan losses, the capital markets business held up reasonably well. And lastly, international continued to provide very acceptable returns ex-Argentina. You will also note in the quarterly statements, that the earnings of our segment titled "Other" which is not shown here has jumped this quarter. This has happened for two reasons, firstly a higher contribution from group treasury reflecting strong securities gains, and secondly, $31 million from a settlement of a tax claim from prior years. Similar in nature to that recorded in Q3 in last year. While these have added to the bottom line, we do have items going the other way, such as our stock-based performance related compensation, which were almost $40 million in the quarter. In a large and diversified bank such as ours we will always have plus's and minus's, however, we do not normalize for them but focus on consistently growing our Gaap-based earnings. On the next chart you can see we met or exceeded performance targets on ROE and EPS growth on the quarter. Though clearly, we will not meet them on a year-to-date basis if we exclude the first -- if we include the first quarter charges for Argentina. In terms of productivity and Tier-1 capital ratio we are comfortably ahead of target. Moving to slide eight, our results were driven by good revenue growth up 7% across most businesses, in both interest in other income, and geographically dispersed as well. This versification in our revenue base is an important factor, for supporting on growth and earnings. Our margin remained flat from a year ago. The only item of note was that it fell slightly seven basis points from last quarter. This was due to lower foreign currency spreads down from the record levels we had for most of the past six months and includes a reduction in Latin America. Turning to slide ten, other income, excluding the impact of the tax settlement,[INAUDIBLE] Argentina charges are underlying other income was up 6% over last year, as revenue, were fairly good in several areas. On the quarter underlying income grew by 10%, from higher security gains which rebounded from the lower numbers last quarter. I should note that in addition to the tax settlement in other income, we also recorded a reduction in interest tax expense of $21 million for a total of $31 million. Turning to slide eleven, total expenses were up 8% or Q2 of last year. However, when we exclude the items shown on the chart namely our performance-based compensation and Tier 1 devaluation, our actual base expenses were up 4%, largely from the timing of higher [INAUDIBLE] related expenditures and volume-related growth. Within performance compensation the largest component of the year-over-year increase of $95 million were our Stars and other stock-based compensation which alone accounted for $83 million, and we are driven by the appreciation in our stock price On the quarter our base expenses grew by 1%. Overall, our expenses remained well controlled. Our costs control clearly shows up more clearly in our productivity ratio on slide twelve, where we continue to be the lowest cost producer of the Canadian Banks. Looking at slide thirteen, our capital ratios remained strong, and are the best in the industry. Tier 1 is now 9.9%, up substantially from 9% a year ago. Tangible common equity to risk assets is 8% up from 7.4. Total capital is it now 13.4% versus 12.5% last year. I should mention this quarter, our capital ratios were boosted by the issues of 750 of innovative Tier 1 preferred and the ration will fall by about 30 bases points when we redeem existing preferred shares later this year. Even with the redemption we will still have the strongest ratio. Turning to slide fourteen, our total reserves remain substantial at $ 2.1 billion. And are now the highest of the Canadian Banks have overtaken the CIBC this quarter. Turning to our business line results, beginning on slide sixteen, Domestic Banking which includes a Wealth Management business continued its solid performance. We generated $254 million in earnings this quarter up 14% over last year. Year-over-year we saw strong growth in interest income driven by wider margins and excellent growth in mortgages and revolving lending. In response to an extremely competitive mortgage market, we continue-to introduce value added products.Such as the [INAUDIBLE] cross [INAUDIBLE] to the hassle out of buying a house. Credit quality [INAUDIBLE] strong. Excellent in retail. We expect our full year credit losses to be 21 bases points, similar to last year, and still well below the peer group. Expenses were well controlled rising less than 2% year-over-year as we continue to realize efficiencies in the network. Compared to Q1, earnings declined slightly due to three fewer days in the quarter as well as seasonal factors. An important aspect of our success in the domestic market is our leadership in customer satisfaction. The market facts survey ranked us number one in customer satisfaction. A greater percentage of retail customers related our service excellent relative to our peer group. As well an individual survey of canadian commercial business showed that Scotia Bank is a leader in delivering customer satisfaction. This leadership position is evidence in the critical measures of loyalty and value perceptions, as well we rank highly on the servicing performance of account managers. Overall, service excellent is an important part of our culture and we believe much of ours success in the Domestic Bank is due to this and a focus on execution. Turning to slide eighteen, Scotia Capital, the story is still about credit quality. Net income at $120 million was down from last year, reflecting higher provisioning levels, but our revenues held up well, up 7%. Our provision levels are clearly much higher than where we would like them to be. While we had a large provision for one telecom account this quarter our overall provision levels were stable quarter-over quarter. John Crean, will have more to say on credit quality in a few minutes. The increase in expenses was mostly due to our higher performance related compensation tied to our share price. On slide nineteen, on a more positive note, our revenues at Scotia Capital have proven to be quite stable. Investment banking revenues have held up quite well. [Thanks], for example, to our participation in the growing income crust market. Creating revenue has also held up well in most of our businesses. We have not seen the sharp reductions experienced by some of our peer group. Overall, while investment banking and trading revenues make up a smaller percentage of total revenue relative to our peer group, they have been relatively consistent over the past few quarters. Corporate banking revenues have fallen off slightly in line with most selective lending. Overall, Scotia Capital will show improved results as credit conditions improve. Turning to our International operations on slide twenty, excluding Argentina, the trends are all positive. In the Caribbean we had another strong quarter with net income up 15% year-over-year. In Latin America, Scotiabank [INAUDIBLE] continued its upward momentum. Contributions from other areas were impacted by lower securities games, timing of payments on Brady bonds and lower earnings from Argentina. In Asia revenue growth of 10% was offset by higher provisions, which basically returned to more normal levels. On slide twenty-one, we show a bit more detail on the Caribbean track record. Earnings are up 15% year-over-year, driven by 14% growth and assets. Credit quality is stable, and has held up extremely well in the aftermath of 9/11. We continue to expand and invest in this franchise, we open new branches in Puerto Rico and in the Bahamas, where we took over City Bank branch. We have been expanding our ATM network. As well, we continue to invest in state-of-the-art technologies to improve efficiency and allow us to serve customers better. This quarter we implemented an [INAUDIBLE] auto loan processing system, which frees up time for sales in the branch and reduces our costs. To build on our strength and customer service we are rolling out a customer satisfaction measurement program in several countries. Initial results show that our clients are satisfied with the overall quality of service. In summary the Caribbean continues to be a profitable growing franchise for us. Turning to slide twenty-two, and our operations in Mexico, Scotiabank's earns are growing steadily. Year-over-year they were up 47%. Our ROE was 16% and moving upward. With a focus now on managing the bank's growth rather than workout, we are seeing success on all front. Assets, deposits, and earnings growth. For example our retail portfolio is up 25% year-over-year, Commercial and Corporate up 20. On the deposit side, Retail and Commercial volumes also rose up over 50% this year. This is translating into higher market shares, particularly in deposits. Our overall deposit share has improved by almost a full percentage to 5.6%. And looking specifically at the markets we are in, our retail term deposit shares 8.3%, while a Commercial loan share is 13. To better serve our Corporate and Commercial customers we also merged our Corporate and Investment banking operations into a new entity. Scotiabank [INAUDIBLE]Capital Markets. Providing a fully integrated suite of services which will help us to cross those services more effectively.Also, our commitment to customer service was strengthened with the creation of the office of the[ Ombudsman], the first in the Mexican banking market. We are pleased the with the progress in our Mexican operations. With that, I will turn it over to John Crean to talk about Risk Management.

Thank you, Sarabjit. The story of this quarter is that while credit conditions have continued to be choppy the quality in our overall portfolios has remained stable. Our net impaired loans excluding Argentina improved slightly from $12 million from Q1 to a level of $183 million. As well our specific provisions remained unchanged at $350 million as Sarabjit noted. The same level as last quarter before Argentina. Despite the large provision that we made for one large telecommunication account. We routinely include in our credit forecasting models a contingency for unexpected event risk. This allowed us to remain within the guidance parameters we previously provided to the street not withstanding the probable account we had this quarter. Looking at Argentina separately, net impaired fell $143 million, mainly because of further devaluation in the Argentine Peso. As a result total that impaired include Argentina fell $155 million during the quarter. Turning to slide twenty-five, you have the formations, formations this quarter were $359 million. The largest amount coming from Scotia Capital with one account in the telecom sector being responsible for a large proportion of this increase. Formations in Domestic and International business lines were as expected given the size and growth of these portfolios. On page 46, which shows the trend to net impaireds, which excluding Argentina have declined by close to $400 million overly the past year and from $12 million from Q1. As well, our total gross impaired loans including Argentina have come down by $650 million this quarter, or 12%. The next slide shows the call position provisions for the quarter. The overall level of provision excluding Argentina was unchanged from the last quarter with Scotia Capital continuing to get most of the provisions. The $260 million provisions in Scotia Capital includes a sizable provision for the one large telecommunication account that I mentioned. In Domestic, Commercial and International portfolios are remaining in very good to excellent shape. Page 28, gives you normal detail and cable and telecom exposure. It is up slightly this quarter with increases taking place in investment grade regulated telephone and in the cable operations categories. These were mostly offset by a decline in the high-risk long-haul fiber exposure. Net impaired loans were up slightly from $60 million last quarter to $87 million this quarter, with gross impaireds up from $218 million to $287, again primarily from the large telecommunication account that I mentioned. Page 29, gives you the Argentinian, perspective, well reserved, our net cross-border was $319 this quarter, it declined $34 million from the 353 in Q1. Mainly because of some pay-downs and some sales and pay-downs in the trade and corporate categories. As well, with gross cross-border exposure, and our provisions have dropped versus last quarter, as we have now allocated both the bond impairment charge against the Brady bonds, and a Pacification charge against the caring value of [INAUDIBLE] Furthermore the provisions and caring value of the Scotia [INAUDIBLE] were both reduced by 47% devaluation of the Peso that took place in the quarter. Excluding our Brady bonds and after-tax affecting the figures, our provision coverage is about 90% which we believe is adequate. Turning to the trading books on slide thirty, our market risk is low, as you can see the distribution of daily net trading revenue for the quarter, we had almost in large percentage of the days, we had poll results. And then on page 31, we have got the numbers and while the trading revenues remain good, we did not take on increased market risk to achieve these revenue. The one-day volume this carter was $9 million which is small by any standards. In summary, credit quality in the Domestic, Retail, Commercial and International portfolio's remains in excellent or stable condition. Scotia Capital accounted for most of the formation and provision in this quarter, and this is was consistent with the message we have given you in earlier quarters. For the second half of the year, keeping in mind that credit conditions remained choppy, we hope, from what we see, that provisions will decline from the levels recorded in each of the first two quarters. And let me now hand it back to Sabi for comment on the outlook for the rest of the year.

Thank you, John. To sum up, while economic outlook is moderately more favorable given the good Canadian and US numbers, we continue to run the bank assuming a slightly bearish and challenging environment. As John mentioned, we are paying close attention to all credit portfolios, but particularly in the US. We are following and dealing with Argentina literally on a daily basis, but are comfortable with our provisions. We are controlling costs carefully, as always. And even more so these days given the environment. Overall, ex-Argentina we expect to meet our targets for the year. With that I will open it up for questions.

If I could ask each one of you to state your name and your company for the benefit of people on the phone. Heather?

Heather Wolfe, Goldman Sacs. I am looking for John, How much has changed in the credit environment since you took the big lump provision last year? [ poor audio ] whether or not you foresee another material revision to the portfolio in terms of classification?

Heather, thank you for the question. We have always tried to recognize problems early on and take rapid action. That is what happened when we posted that billion six in non-accruals in Q1 of last year. We continue to provide aggressively, conditions have changed, you are right, from that situation eighteen months ago. I would say the major shifts have seen us move towards difficulties in the telecom portfolio, which we did not see fifteen, eighteen months ago, and you have seen the provisioning take place there. The provisioning we have done this year is probably been 35 to 45% in the Scotia Capital provisioning in the telecom portfolio. We have obviously worked through those areas where we were concerned in the early part of last year. You remember we had some significant provisioning against accounts in the Health Care Industry, we had [INAUDIBLE] charges, Steam Industry, and we have for the most part worked through those. The provision coming in those areas is very small. We have also worked through the 9/11 types of problems, you remember then we talked about worries from our Hotel portfolio, and from our Airline exposures. The Hotel portfolio is performing extremely well, I am happy to say. Caribbean has bounced back well with the bookings in the Caribbean coming back up towards normal levels now. And going forward, we continue to be concerned there is clearly choppiness still in telecom. We figured that into our forecast going forward. We have some emerging issues in things like the Energy Traders, trading companies, again that has been factored in. We have just said to you that we would see the provisioning coming down somewhat from the run rate in the first two quarters. And I think while the composition has changed broadly speaking we're seeing the watch list and unsatisfactory accounts beginning to trend down. Credit is always a lagging indicator, it is choppy and we see some larger things happening such as the telecom account that we have all been talking about, all of the Canadian Banks, we have probably will have some choppiness in the next two quarters, but we still nonetheless see the provisioning levels being down from the current runway from the first two quarters.

Are we to assume given that if you are taking the sort of unexpected reserves in the provision guidance that you have given us, are we to assume if we see another unexpected event in the next six months that might cause you to increase your provision or is there still more of a cushion there for something unexpected?

The core of this -- of these models are your probabilities of default and you're working off a historical base and also working off an examination of the individual accounts. And we do very careful analysis of all of the accounts that we are concerned about and that goes into our forecasting. There is still certain room for unexpected events, 9/11 is a good example of an unexpected event. And none of us can forecast that. But we have included what we can on the historical basis for circumstances such as that large telecommunication account going wrong. We will continue to have those kinds of surprises, and all I can invite you to do is look at our past track record of being fairly good in the forecasting that we have done.

Chuck?

This is Chuck Jacob [INAUDIBLE] [ poor audio. John your [INAUDIBLE] residential mortgages and personnel. In addition to that there was over $2 billion -- [ indiscernible ] can we expect -- the loans going forward?

You have seen some draws on investment grade credits in the last couple of quarters related to some companies with difficulties in the commercial paper market. That has been behind some of the growth in the corporate book. As markets settle down, I think you may see some of that wash back away. You are quite right took look at the growth in the personal -- the retail assets in Canada. It is not an objective to grow this , the corporate book. I would not expect it to be much growth in that going forward. SARABJIT MARWAH If I can elaborate on that, one of the primary reasons in the growth in business lending, is really our CLO [INAUDIBLE] We have a collateral loan obligation in the US, that is really coming on balance sheet as the [INAUDIBLE] winds down. We have over 1 to 2 billion, more than that, that is coming on balance sheet that is causing that growth. But is a transfer from elements of areas on the income statement.

$2.7 billion canadian?

That's correct.

Poor audio ]

If you look at the lending levels besides the Caribbean and the Domestic side, Caribbean and Asia which continues to grow, Mexico has seen some pretty sharp growth. Our lending in the US, has been trending down now for five quarters. We have obviously have not really committed to a floor on that or how much has been done but it is done for five or six quarters now consistently. That [INAUDIBLE] business is trending down.

Two questions, first of all on the cable and telecom exposure, does that include equipment suppliers to the telecommunications industry and if not, can you tell us what it is and split that between investment grade and non-investment grade. The second question is to capital. Your capital ratio is very impressive and you continue to build excess capital. It looks as if you have got $2 billion in capital, even taking back some of that.

I will have John answer the question and I will take the second.

No ,It is not excluded. It is somewhere in the neighborhood of $100 to $250 million canadian. The bulk of that would be non-investment grade.

In addition to the. [ AUDIBLE]

Non-investment grade. It is fairly widely distributed.

On the capital side, clearly our capital is the highest of the Canadian Banks. I would point out, that at the same time ROE earning an 18% plus ROE. Management's view has always been and that has been investment consistent for the last several years, in fact our role is to redeploy the capital for the benefit of shareholders and investors and we are clearly attempting to do that. We are looking at a few opportunities that would utilize some of the capital. I mentioned Mexico in the past and I think we are looking at a possible acquisition in the US, on the commercial side. But should we not see anything come up over the next several quarters we will take alternative actions. Any questions on the phone?

Your first question is from Jamie Keating with Merrill Lynch. Please proceed.

Thanks, guys. Good quarter. I have a couple of questions. One maybe for Mr. Crean, could you help us out with the balance for the corporate loan portfolio is in Canada and the US, this is all our terms and if you could follow on the level of credit protection might be out there for Scotiabank, {INAUDIBLE] Could you give us a window as to whether you also participate in that and to what degree. I have a follow-up on Mexico probably for Bill.

On the corporate lending book in the US And Canada give me a minute and I will get that for you. What was your second question?

I was asking if you or John could comment on the level of credit default swabs you may have in dollar terms and perhaps if you can enlighten us as to whether any of them pertain to the telecom portio specifically? My other follow-on, while you are getting organized for [INAUDIBLE] is regarding Mexico, I wondered if Bill might, if he's there, if he can let us know what the competitive environment is like in Mexico [INAUDIBLE] the other banks and if specifically, is sounds like [INAUDIBLE] is quite cleanly capitalized and is open for business. Could you comment on the state of the other banks as to whether you have a window of opportunity for a while as others perhaps clean up and real structure some of their old good bank-bad bank structures?

Let me answer your question that I said on the corporate lending in Canada and the US, In canada it is around $13 billion and the US, is around $21 billion.

15 and 21? SARABJIT MARWAH.

13 and 21.

Both of these numbers, have been sort of -- on the US in particularly trending down over the last six quarters. In terms of the credit default swabs I will let John Crean answer that.

We have done most of our protection by selling loans or selling participation in loans. We have not been large participants in buying protection for the loan book.

Thank you.

On the competitive environment, Bill?

There is no question that in Mexico we have benefited from the mergers and internal focus of the other banks given their Data Merger, Colburn and. [ poor audio ] a lot have focused on internal integration and bringing them together. If you look at our loan growth last year in Mexico, it increased dramatically by over 30%. Also added to that is the market dynamics in Mexico for shipping tremendously in that -- between 96 and the year 2000, interest rates were really quite high, especially, you know, in -- I mean in local currency, which kept you out of the retail market to a large degree. In the past 12 months especially, interest rates have dropped, have come down dramatically. I think the [INAUDIBLE] Mexican Peso's is under 6%. This opened up the window of opportunity in retail lending, particularly in car loans and in mortgage lending and there is no question that we have taken advantage of that and I think we got in there before the other banks.

Thanks gentleman ,Thanks Bill.

Next question on the phone?

Your next question is from Melanie Ward with RBC Capital Markets, please proceed.

Hello, Melanie, Welcome back.

Thanks very much, I had a question on your security gains and the sustainability of them, I appreciate there are positives and plus's and negatives that go on to have Gaap earnings grow. In terms of looking forward, can you see some sort of level like this being repeated? And my second question has to do with the International low lost provisions, they came in really low this quarter, quite low, even if you take into account what happened last quarter, but the run rate is very low relative to the past few quarters, in fact.

Okay, if I could have Bob Brooks take the first question and John Crean the second.

It is always, as you said, Melanie, very difficult to predict the timing and availability of security gains, we don't take gains, because of the impact on the financial statements, we take gains, or losses, for that matter, based on our outlook for the particular securities and the securities markets that are involved, or if is private activities, we don't have a lot of because of market opportunities to aggregate. Having said that, the unrealized gains at the end of the quarter were in excess of $600 million Canadian dollars, a big piece of that is emerging markets to paper. Obviously, But not all of it. So there is clearly room to take gains, if market conditions remain reasonably good. I think this quarter's numbers were somewhat on the large side, relative to a normal kind of run rate number, although we don't really have a run rate number in mind. I guess the other thing I would mention in the context of this is for the last several quarters, as I am sure you know, we have been taking writedowns on various fund investments that the bank has to reflect the situation in the telecom area, in particular, but not just that, so to the extent that levels out at all, the numbers will actually go up. Because these numbers are net of those writedowns.

We have been taking writedowns, the only thing is that haven't treat them as special, we have taken them through earnings. We did in excess of $175 million of writedowns between last year and this year.

Thank you.

On the International provisions, as you know, Argentina has been treated as outside of the normal numbers in the last two quarters. When you do a quick survey of the quality of the various portfolios, the far east is in good shape, very stable, Mexico is in good shape, Caribbean has been doing very well. Normal levels there. And so generally, it reflects the caliber of those portfolios.

Thank you.

Next question on the phone.

Neil Mathewson with Standard Life Investments, please proceed.

Good afternoon. A couple questions for John Crean, if I may. The first is regarding the cable and telecom exposure. Under "Cable," is there part of that which is in the UK and Europe? And if so, can you tell us how much?

Yes, there is some in the UK and Europe, and we don't normally provide breakdowns on geographic basis.

Okay. And another one, John, you mentioned that year-to-date, if I have understood it right, you have taken about 35 to 45% of Scotia Capital's loan losses have been against telecoms. Have I got that right?

Yes.

Okay. Is it likely to be at that kind of level for the balance of the year?

What we do in our guidance on the provisioning is to provide your guidance on an all-bank basis, and I would not want to start doing it on a business line or industry segmented basis.

All right. And then the only other detail is can you give us either a figure or guidance of the provisions taken in this sector last year, in 01?

Neil, I can try and get that information and have Kevin get back to you on that specific.

That would be helpful.

Not large.

Not large.

Next question on the phone?

It is from Rob Russell with National Bank Financial. Please proceed.

Yes, Thank you. I have just one question, actually. On slide 28, the cable and telecom exposure, can you identify which balances you feel comfortable with or you would define as, say, you know, medium-to-low risk?

Just picking through those cable operators are standard lending parameters are to lend to operating cable operators where we have 5 to 6 times leverage, have security over the assets, and that has been a good -- a well-performing stable part of the portfolio. Regulated telephone is what it is, and that has been stable. Unregulated telephone and wireless has a small amount of the net impaireds of 87. That has been a pretty stable part of the portfolio. Long haul pipers is where we have had the problems and that one large account we just talked about, and Plex have not been very good either. Those are the two portfolios which have caused us more concern.

Thank you very much.

Next question on the phone?

It is from Steve Collie with TD New Crest. Please proceed.

Hi there, I would like a little bit more color on the write-offs on the quarter and as well, Just another -- TD Bank in fact, has given more color on their specific allowance coverage ratio. Like yours is 59%, but what they have done is they have given us an adjusted ratio where they have added the cumulative write-offs. I was wondering if you might be interested in offering up that kind of information in terms an adjusted specific allowance adjusted ratio?

You will get into detailed information for a conference call. [INAUDIBLE] Whatever additional disclosure we feel is appropriate, we can provide you that.

What about just the write-offs, Sabi?

The write-offs are general historically , we have not written them off aggressively. I think we just started that simply because there has been a concern to some people that our gross non-performing loans were higher than average, we are just writing the loans down. It is not out of the ordinary.

591 is a big number. Am I looking at the right number? $591 million was the write-offs in the quarter?

That's right.

As, Sabi said. John Crean speaking. Sabi said we have been slow historically to write off these balances. We have focused from a management standpoint more on the net non-accruals. We have been writing them down this quarter more aggressively. I don't think I have got much more to say than that. I think you want to focus on the net numbers more. In terms of provisioning, our provisioning levels, we are looking at what we can -- what well expect to be able to recover out of the asset, and our provisioning levels on individual accounts we believe have been really very aggressive.

I will call you later, Thanks.

Your next question is from Susan Cohen with Dundy Securities.

Thank you. Maybe just focusing on Argentina for a moment, if you were able to exit Argentina, might that likely involve any kind of additional charges to close down the operation or to exit, or do you feel that the provisions that you have taken would likely cover any exceptional charges as well?

At this stage, Susan, we think that coverage and the provisions they set up are adequate.

Okay. Even in the eventuality of exiting and any operational charges that that might involve?

To the extent that operational charging, to the extent we have severance, we don't think the numbers will be material. They can be handled through normal earnings.

Ok, Great. Thank you.

Your next question is from Quintin Brog with CIBC World Markets, please proceed.

Yeah thanks, Good afternoon. Two questions, one going back to John, just on the large telecom name, would you mind giving us the gross impaired and net impaired, the reserve level you have taken on that name and then secondly Sabi you talked about the strong Tier 1 capital ratio and excess capital in that you have talked about mexico, you have talked about the possibility of US expansion, but if those things don't happen, I would assume Mexico is probably closer perhaps than the US, but just what you would do, you said, that there may be things, could you illuminate us on those other things? Is that more aggressive stock buy-back dividends, et cetera?

On that one account, John Crean speaking, we have reserved it to 85%.

On the capital said, Quintin, you know the terms as well as I do, if you don't see anything, the only two options is aggressive buy-backs and higher dividends and that is what we will go do.

Thank you.

The next question is from Jim Bantis with Credit Suisse First Boston, please proceed.

Hi, Good afternoon. During this past quarter some of your competitors have provided us with information regarding exposure to the power and power generation areas. Could you give us a breakdown perhaps of your total exposure from the loans in BA's perspective?

We have not provided that guidance, that set of numbers historically and have not done so with this package either.

John, Do you plan to over the near term given the sectoral issues,-- the issues facing the sector? It is known that the bank has been an active lender in that section, you highlighted in your comments there had been exposure to a couple of names?

The issue came up last quarter, when we had one particular account at that time, we said that the account would not be of material impact on the bank. Generally, in the energy sector, we tend to lend at the operating entity -- operating level, not at the whole coal level and so that we are -- for the vast bulk of the exposure, to those kinds of companies, we are actually close to the asset often secured and close to the cash flows. And so that I am not expecting that there is going to be a large impact on our provisioning levels from that sector.

Great, Thank you If I could ask another question regarding the International operations, you have been kind to provide us with some slides in terms of Mexico and the Caribbean, but despite the lower PCL's, we have seen the net contribution from International actually fall off from the previous quarter, and Sabi mentioned some issues regarding timing of payments, could you elaborate on that? Do you expect the net contribution to rebound in Q3?

I think it will rebound somewhat. I think one of the reasons as well that Argentina year over year, Argentina is pulling a drag a bit. We have timing of some Brady bond payments we put in Argentina, Brady bonds non-accruals, there are a couple of items and some issues will bounce back. Asia as well provisions will return to more normal levels. That should come back again. So the plus and minus's, we think the trend is still long-term going to be up.

That's great, Thank you.

Your next question is a follow-up from Jamie Keating with Merrill Lynch.

I just want Jim to notice, I did queue up again. I have a brief question regarding the gross impaired loans. You alluded to this earlier, you have accelerated your write-offs perhaps to start moving those gross impaireds back in line with the group. Could you expand on your strategy to get the gross impaireds down back into the range of the other banks and over what time frame you might execute that strategy?

Essentially what we have done is to look at individual exposures. The likelihood of ultimately getting some value back from them, we provisioned to levels that we believe are realistic, and so the amount -- the total carrying value is in many cases well more than we might, in any very optimistic scenario recuperate our investment. So we are going through exposure by exposure and gradually writing those amounts off. I think you will see over the next two, three, four quarters, this continue. We have no specific targets for it to happen, and it will come down to doctor more generally in line with the peers.

Our gross impaireds are higher than our peer group because of our international operations. Keep in mind that our Mexican gross impaireds are still there, but they are a hundred percent provided, so while it looks high on the gross side , on our net side the impact is zero. Similarly for Argentina, the gross impaireds are high but on a net basis there is less of an issue. Even if you factor that out, we are bringing the paper paired loans close to peer group Next question on the phone.

There are no further questions on the phone line, Sir.

Any further questions here? Mary?

Sabi, could you please go over again unpaid 6 in the supplemental swing of the $100 million in other year-over-year.

That is the two issues, Mary, the other includes group treasury, there is higher gains coming in that line, in the other category, and the second one is the fact that we have the tax settlement interest of which is $10 -- $16 million is another income and $21 million is a reduction to income tax expense. That flows into other as well. So, that really is the bulk of the growth there. If there are no further questions I know we have another analyst meeting starting at 3. So thank you very much. We look forward to see you next contract -- next quarter.

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