Bank of Nova Scotia (BNS) 2002 Q4 法說會逐字稿

Good afternoon and welcome to the presentation of Scotiabank’s year-end results. I’m Sabi Marwah, Senior Executive Vice President and Chief Financial Officer. With us today in Toronto are Peter Godsoe, our Chairman and CEO; Bob Chism, Vice Chairman; David Wilson, Vice Chairman; John Crean, Senior Executive Vice President Risk Management; and Bob Brooks, Senior Executive Vice President and Group Treasurer.

Peter Godsoe will begin with the highlights of our results, followed by a review of the financials by myself, a review of asset quality by John Crean and concluding remarks on our outlook for 2003 by Peter. We will then be glad to take your questions. This presentation is also available at www.scotiabank.comp. Peter?

Thanks, Sabi. And, I’m happy to report a good quarter, in fact, a good year, all things considered. Good given we faced two very serious challenges. First, Argentina, it seems a long time ago, but we made a decision, a firm decision, in the first quarter not to put more new money into Argentina, notwithstanding we’ve had a healthy bank. And, ultimately, subsequent events and that decisions, we ended up exiting Argentina with two goals in mind. First, to treat our people properly, protect them under very difficult circumstances and get as many jobs as we could and we have met that. And, treat with our creditors and depositors positively. We have down that for all of our Paso creditors and depositors. And, we’re working on a plan for the others within the means and what is fair.

On the second tough issue, U.S. credit, the credit losses, we’re still facing a challenge, specifically on the power front. We recognized we had trouble in the U.S., again, it seems along time ago, but it was the first quarter of 2001, and took some preemptive action, some criticism. But, we definitely were being proactive. We had enfaced telecoms, fallen angels, migration, and now power. We think the other parts are more or less behind us, particularly the telecom. And, we’re certainly and definitely on top of the power situation. And, John Crean will talk about this later, but there’s no question the industry as a whole faces a serious liquidity and price instability.

Despite these challenges, we delivered good earnings. As you know by now, we reported net income of almost 1.8 billion, earnings per share of 330, and a return on equity of 13 percent. If we exclude Argentina, and I’m not trying to do pro forma results, but the fact is Argentina and the words of Citibank is the one in a million type chance with an asymmetric pacification, which, in effect, is an expropriation.

If we exclude that, even with the large losses in the U.S., very large, we would have made 3.2 billion, which would have been an increase of 8 percent, and, importantly, would have made a return on equity of 16.6 percent. So, we are proving that we can air through very tough credit cycle with the disseveration of our revenue streams.

Most importantly, our capital ratios, even after the 540 million charged from Argentinean losses and exits, remains strong with tier one at 9.9 or something we focus on even more at Scotia, the tangible common equity of 8.3 percent. But, this is the highest of any of the major Canadian banks and is a very high ratio for tangible common equity for anything.

This year, then, despite Argentina, we also generated more than three-quarters of a billion of excess -- of free capital, three-quarters of a billion. And we definitely expect that number to be even higher next year. In summary then, we have very strong core earnings. I think that’s not debatable, very strong capital and are determined to fix [indiscernible] problem.

The next slide shows the upward trend in earnings over the past decade. It’s been a great run for us, actually. And, while 2002 earnings were down, I can’t mention enough Argentina, can I? Because of Argentina the underlying earnings have been strong and continued on a trend that’s been throughout the decade of the 90’s.

Slide five makes this point and the importance of the diversification. The very solid core earnings in domestic and international, were both up double-digit, one 19 percent, one 36 percent, offset by -- well, also earnings in Latin America and Asia were ahead, so this wasn’t just Caribbean and Mexico on the international side, although Mexico contributed over 100 million this year and it should grow in the years ahead.

Scotia Capital, certainly the numbers are down substantially. We’re in a loss position in the U.S. Both our global trading and our Canadian operation performed well, very well. Dave and his colleagues did a great job. All the challenges were in the U.S. and we’re determined, as I said before, to put it behind us.

Performance targets, well, we clearly did not meet them with the Argentinean charge of 540. Excluding them, as we do for all of our broad based bonus, not necessarily some of those at the table, including me, but for the broad based bonuses we excluded, we met virtually all of our targets. ROE is 16.6, in the upper range of 15 to 17 ban. Earnings per share, lower end of the 712 type range, but was at 7.4. Productivity remains strong; we’re still very good at controlling costs and managing that effectively. Capital ratios, we talked about it, industry leader. You’re one well ahead of any target.

And, I would point out also with the half a billion charge from Argentina, even with that, we still have the second most profitable bank. And, one of it’s most profitable companies overall just in terms of net earnings. A testament to the soundness of those [indiscernible].

And we remain confident going forward that we’ll have that ability to continue to grow earnings. Therefore, we announced a dividend increase of 3 cents this quarter to 40 cents per share, that’s the second time this year. And, this marks the continuation of a record of consistent dividend growth over the past decade, frankly much, much longer, a quarter of a century in fact.

And, as we all know, and this is firmly supported by our board, the case for growing dividends is coming back into fashion and it’s a strong one. It has stood the test of time in terms of returns to your shareholders.

But, going forward we intend to maintain a policy of dividend increases, although we’re leaving our pay out ratio in the 30 to 40 percent range. We’re in about the middle of that now.

I’ll now pass this back to Sabi to talk about our performance in more detail. Sabi?

Thank you, Peter. First on slide nine, I’d like to highlight some of the large items in the quarter. As previously announced, this quarter we recognized the gain of 99 million, pre-tax or 80 million after tax on the sale of a merchant acquire and smart card point of sale business. As well, we expect to receive additional future payments based on achieving certain conditions and business targets, including referrals. You will remember, in the same quarter last it’ll be recognized the [indiscernible] effects gain of 52 million on the sale of our corporate trust business.

Also this quarter we recognized 70 million pre-tax of expense recovery upon the settlement of tax credits related to prior periods. 66 million of this was in expenses and 4 million interest going on these claims was reported in other income. As Peter mentioned, some sectors of the U.S. continued to present a credit challenge. In the fourth quarter we added an additional 125 million in provisions against the U.S. portfolio, brining our total provisions this quarter against the U.S. to 326 million.

John Crean will have more to say about credit quality in a few minutes. As Peter mentioned as well, this quarter we completed the transaction to exit from [indiscernible]. The net P&L impact this quarter was nil. However, as you can see on slide 10 there was significant amounts on individual line. Firstly, in the provision for credit losses we reversed 46 million related to cross border exposure to Argentina. This was due to reversals on several corporate accounts. There was also a small amount of foreign [indiscernible] translation on the provision 4 million which went to other income.

In expenses we show a net loss of 237 million and the disposal of subsidiary operations. This includes the following: a write-off of our equity in all intercompany accounts related to Quilmes and other exit costs, including severance made to Quilmes’s employees. All these costs total 332 million.

As well, we included a credit of 95 million transferred from retain earnings reflecting the lifetime 4X translation gains related to Quilmes. So, the net loss before taxes was 187 million, which was completely offset by a tax recovery of the same amount. The high tax recovery this quarter is because we have now incorporated tax losses that we had not recognized in Q1. But, our tax rate was over 60 percent.

The next slide, in fact, shows the impact of the Quilmes charges on our tax rate. Under right the reported tax rate this quarter was 1 percent. However, if you add back the effect of the Argentine related charges I just mentioned, and adjust for the capital gains treatment on the gain on the sale of our merchant acquire business, the tax rate for the quarter comes in a more normal 23 to 24 percent.

Going forward, we expect our tax rate to be around this level. For comparison purposes, on the left-hand side is the tax rate in Q1 of this year when we took the first Argentine charge. As you can see, at that time, our tax rate was very high at 61 percent when we had a very low tax recovery for the Argentine charges shown on the second line. The tax recovery this quarter effectively offsets this.

Moving to slide 12 on the revenue side, we have maintained a steady trend in top line revenue, in both interest and other income. Despite uncertain economic and capital market environment. At 2.7 billion for the quarter, revenues remained at near record levels. And these revenues are geographically well dispersed.

On slide 13 our margins have held up reasonably well. On the left, compared to last quarter, our margins fell by 5 basis points, primarily on the foreign side because of the wind down of some favorable U.S. funding positions. We also had a slight narrowing on the Canadian side.

Turning to slide 14 and other income, on the left are the fourth quarter numbers compared to last year. Looking at some of the larger changes in the quarter, we had a net loss on investment securities this quarter of 16 million, which included substantial write downs of over 100 million on our equity and merchant banking investments, partly offset by bond gain. Moving down is the gain on the sale of our merchant acquired business I already mentioned.

The next item is Quilmes. The big swing arises from deconsolidating this quarter and end well, that doesn’t change much on the quarter. Normalizing for the four items results in a year-over-year growth of 12.6 percent. Similarly on the right, the same process takes us from a year ago decline of 3.2 to a growth of 1.2 percent.

Our expenses on slide 15 were up 4.8 percent over the same quarter last year and 5.5 percent higher for the full year. On the right, you can see that year-over-year most of the expense increase was due to having [indiscernible] for an extra quarter and the net loss on Quilmes. Going the other way, were the expense recoveries of 66 million I mentioned earlier. On the left, looking at Q4 this year versus last year, the main reason for the increase was the loss on Quilmes, offset by lower performance based compensation and the tax related expense recovery.

After adjusting for the items shown on the slide, base expenses were up only 1.8 percent versus Q4 of last year. And, in fact, we’re basically flat for the full year. Overall, our base expenses remain well controlled as always.

Our cost control shows [indiscernible] productivity ratio slide 16 where we remain the lowest cost producer of the Canadian bank.

Looking at slide 17, as Peter mentioned, our capital ratios remain very strong and are, by far, the best among the major banks. Tier one is now 9.9 percent, up substantially from 9.3 percent last year and 9.8 last quarter. Tangible common equity to risk assets is 8.3, up from 7.8 percent last year. The more recent quarter-over-quarter improvement is primarily from a 3.3 billion decline in risk-weighted assets. Over 1 billion of this was due to the deconsolidation of Quilmes and the balance from small declines in several risk weighted assets.

Overall, the strong capital ratios provide us with substantial capacity to absorb any unforeseen credit or other events should they occur.

Turning to the business line results in slide 19, slide 19 shows the strength of our diversification. This year domestic and international, ex Argentina, make up 82 percent of the total versus 68 percent last year. Strong performance from our domestically regional commercial operation, Mexico the Caribbean and global trading have ensured we went through some very significant challenges. Not shown in the pie is the other segment, which had a net income 150 million this year versus 34 million last year. This was primarily because we added 175 million to general provisions in 2001 compared to nil this year. As well, 2002 earnings included tax-related recoveries and a continued solid performance by group treasury.

Domestic banking on slide 20, which includes our wealth management business, earned 347 million, up 19 percent from the fourth quarter of last year. Q4 this year included the 80 million after tax on the sale of merchant acquire business while last year’s number includes the gain from the corporate trust sale of 52 million. Excluding the gains in both quarters, net income was up a very solid 11 percent. Retail assets grew by 9 percent, led by residential mortgages, also up 9 percent and revolving credit up 20 percent.

We also increased our market share in key products during the [indiscernible]. Mortgages up 25 basis points, personal loans up 37 basis points, the largest increase among the bank. Mutual funds up 17 basis points. This success reflects our innovative product offerings, typically the bundled solutions such as Scotia Total Equity Plan or STEP as we call it, plus Scotia Line Visa and strong gains in indirect lending through [indiscernible] relationships, technology, and service delivery.

Credit quality remained excellent in the retail portfolio, running at about 20 basis points, a good part due to innovative product design, which strengthens the customer’s risk profile. For example, around 50 percent of our revolving credit is now fully secured. As well, we continue to lead the industry in customer service, which is a big plus for us, as you can see on the next slide.

This year, Scotiabank customers once again rated us as the bank providing the highest level of excellent customer service. And, this is based on an independent national survey done by Market Facts of Canada. This marks the third year in a row that we have achieved the highest overall quality in customer service. And, in fact, we have widened the gap between ourselves and our peer group. Superior customer service is a very important metric. It leads to increased customer loyalty, increased propensity to buy additional products, increased propensity to refer business and ultimately increase profitability.

Turning to slide 22 Scotia Capital is a good news, bad news story again this quarter. On the positive side, two of Scotia Capital’s main business units continue to do very well. Global trading and Canadian Capital structuring. For the year earnings from global trading and Canadian capital structuring were up 3 percent. These very good performances in both derivatives and equity underwriting. Total Scotia Capital revenues grew by 30 million or 4 percent over last quarter, and were in par with last year with non-interest revenues being among the best in recent quarters. Interest income declined due to low assets that was in corporate lending and the runoff of positive funding positions.

On the negative side, loan loss provisions remain at elevated levels in the U.S. Expenses continue to be well controlled, down 15 million or 6 percent from last year, primarily due to lower performance related compensation. The quarter-over-quarter increased mainly to reflect higher severance costs.

Within Scotia Capital, global trading remains a particular success story. Our revenues are up 14 percent year-over-year. We have now had 7 consecutive years of revenue growth with particularly strong performance this year in derivatives where revenues were up 33 percent and in our U.S. funding operation.

Scotia [Mecatta] [phonetic], our precious metals operation, also improved accompanied by a strong performance in foreign exchange. In fact, we were voted the number one Canadian dollar bank by Asia Eremite.

Just a word on the actions we are taking to address unsatisfactory performance in the U.S. lending business, these actions have been underway since the early part of last year. Firstly, we are continuing to aggressively exit those relationships where we cannot make an acceptable ROE. In July 2001 we had 1,450 relationships. Currently, we are down to 1,100, of which we have designated 500 as non-core. We intend to exit 80 percent of these non-core accounts over the next three years. As well, we are taking a much more disciplined approach to lending. We are reducing single-name exposure limits with the biggest decreases being made at the higher risk levels. We are reducing syndication target hole levels, as well as cutting back industry limit.

We expect to reduce the economic capital allocated to U.S. lending by $1 billion over the next three year, approximately 40 percent lower than the current allocation. In addition, we will be making greater use of loan portfolio management, which we established in March of this year.

Going forward, we will focus our efforts on deepening relationships with a smaller number of clients that offer an acceptable ROE, improving our non-lending product offerings, and growing non-credit revenues. In summary, we are very committed to improving the core earnings from this business.

Turning to our international operations on slide 25, this quarter international net income was 128 million, down from a very high 212 last quarter and 12 percent below last year if we exclude the 53 million provision taken for Argentina. The major reasons for the decrease were higher credit losses this quarter versus reversals in Q3 and timing of expenses, as well as the sale of some PDI bonds in Q3 that weren’t there this quarter.

Within international, Caribbean remained a solid contributor, up 7 percent year-over-year. In Latin America, Scotiabank Inverlat continued its solid performance. However, other revenues fell due to lower contributions from emerging market investments.

In Asia net income declined this quarter primarily due to credit losses, which were high in the quarter, plus there were net reversals last quarter. Asset volumes, however, continued to grow, up 13 percent from last year and 5 percent quarter-over-quarter.

On the Caribbean, stepping back from the quarter and looking at the year as a whole, on the next slide, slide 26, shows the continued strength of the Caribbean operation. The Caribbean’s contributed almost 300 million in earnings this year, an increase of 15 percent over 2001. The strong performance was broadly based across the region, 11 percent growth in assets, and a 7 percent increase in Quito deposits. Revenue was up 7 percent year-over-year led by a 15 percent increase in card products and transaction based fees.

Credit quality in the region continues to be strong. The provisions for further loss is down 14 percent. Testifying to our dominance in the Caribbean, we received the first ever award presented by Latin’s finance publication for, and I quote, “the best bank in the Caribbean”. The award was based on superior productivity and scope and quality of service across the Caribbean. And, we continue to reinvest in the region. This year we opened eight new branches, including four in the Dominican Republic, increasing our presence in one of the fastest growing markets in the region. We also launched several region-wide programs to increase our share of the residential mortgage market. Overall, we see very good prospects for growth in this market for a long time to come.

Turning to slide 27 and Scotiabank Inverlat. Inverlat continues to make very solid progress. Their contribution for this year was well over 100 million, versus 61 million for three quarters of last year. Our operation is growing and taking market share. We’ve had very good success in the auto and mortgage market where we have been an industry leader. Year to date we have captured about 30 percent of the new auto and mortgage business. We are also doing well in the commercial and corporate market where loans are up 16 percent year-over-year. So far this year we have increased our market share of loans up 70 basis points to 5.9 percent. We have done even better on the deposit side increasing our share by 150 basis points.

We also have seen a record use of our ultimate delivery channels this year. 2.7 million visits to Inverlat’s website and 6.5 million calls to our customer service center. So far we are pleased with the progress we are making.

On my last slide is a reconciliation between Canadian and U.S. gap net income, which we thought we should explain given the differences between the two numbers. The left-hand side looks at net income and our year-end equity is on the right. These numbers, I might add, are detailed in note 26 to our financial statement. At the end of the day the net income differences from year to year have little impact since the book value on the board gaps is essentially the same by 2002 year-end. But, nevertheless, looking first at the net income column, there are three items that cause the difference between Canadian and U.S. GAAP.

Firstly, derivatives and hedges under FAS133. Here there are two components. First, our 2002 Canadian GAAP income includes the accrual income from some hedges we put on for funding purposes last year. For U.S. GAAP this accrual income is reversed since the hedges are market-to-market included in U.S. income last year. This is basically a timing difference between the two years. The other component relates to our use of derivatives to lock in spread on a portfolio of fixed rate bonds. Under Canadian GAAP, both instruments accounted for on an accrual basis. However, under U.S. GAAP, that is under FAS133, the derivatives are mark-to-market through the P&L, but the bonds are not. Instead, the increased value of the bonds is treated as an unrealized gain and shown directly in equity.

The second main area of difference in GAAP rules is around the evaluation of investment securities that are available for sale under U.S. GAAP. Under Canadian GAAP we take a longer-term view of whether decline in the value of these securities is other than temporary. Under U.S. GAAP, however, any securities that are significantly below market for a period of six to nine months are automatically written down to market value. I would emphasize that these are not high-risk securities, but solid, stable companies whose values have fallen recently.

The third item is the goodwill write down on Quilmes of 76 million that we took in Q1 of this year as part of the new rules under Canadian GAAP. Under U.S. GAAP this transitional charge is recorded in net income rather than retained earnings. The balance is for other small items. In the end, however, all these differences come together in the equity box at the end of 2002, which is shown on the right.

As you can see, the Canadian GAAP equity at the top is 13.502 million, while the U.S. GAAP equity at the bottom is 13.54 million, essentially the same number. I would emphasize that we manage the bank and report our results on the basis of Canadian GAAP.

I’ll now hand it over to John Crean to talk about credit.

Thank you, Sabi. Now, I’ll start at slide 30. As we forecasted last quarter, the net impaired loans for the bank did come down substantially this quarter, down almost 400 million to 670 million [phonetic]. Of this decrease, 243 million is due to the deconsolidation of Quilmes in Argentina. The U.S. continues to be a challenging market, particularly in the power sector, where this quarter we saw some significant formations and I’ll come back to that in a minute.

As we can see, we continue to provide aggressively against our portfolio in the U.S. provisions for credit losses this quarter were 475, before a 46 million reduction and provisions related to the Argentine cross boarder loans that Sabi referred to. And, this compares to 400 million last quarter.

Now, slide 31, we see more detail on the drop in net impaireds. Again, it’s through the Argentina net formations for 383 million this quarter, of this, approximately 260 was in the power and energy trading sector, primarily due to the classification of three major power accounts against which we put up significant provisions that provide a coverage of over 50 percent.

We’ve also classified two wireless accounts this quarter, although in both of those cases we expect to declare minimal losses on these credits. Formations in domestic and international business size continues to be modest given the size and growth of these portfolios.

The next slide shows the breakdown of the provisioning. Domestic, the commercial portfolio’s in good shape and provisioning is relatively stable. On the retail side, we’ve had very strong credit quality with very low provisioning lead of around 20 basis points, which is the best from what any of the Canadian banks.

In international, the provisioning has come down this year, reflecting improvements across all of our major portfolios, Caribbean, Asia and Latin America.

As you can see the largest increase has come entirely from one area, Scotia Capital, the U.S. where we face challenges in the telecom sector earlier in the year and power, more particularly this quarter. We’ve had a policy of provisioning against the U.S. portfolio for a number of quarters, it’s really over the last eight quarters. And, that the provisions of 475 this quarter, excluding Argentina, approximately two-thirds were put against the U.S. portfolio.

I’ve shown you a slide 33, the total cable and telecom exposure of 4.8 billion basically unchanged from last quarter, of no gross impaired loans of 690 this quarter is down 66 million from 756 in Q3 and the net impairs to 529 are down 34 million from the 563 million in Q3. And, we’re defiantly turning the quarter in this sector.

I’m showing you on 34 an updated slide, you saw this one last quarter, showing you where the coverage’s are. 69 percent against unregulated telephone, 80 percent against long haul fiber, 99 percent against calyx and we’ve no paging exposure.

On the wireless coverage 16 percent is low, but as I mentioned, this is potentially a couple of accounts that we classified this quarter and we expect to incur minimal losses on these accounts.

Overall, we have good coverage against these sectors at 72 percent, and if we include the cable, the overall coverage is still about 50 percent.

Slide 35 gives you our power and energy trading exposure. You’ll notice that this exposure has increased from 3.9 billion last quarter to 4.9 billion this quarter. Approximately half of the increase was due to the brining of our U.S. collateralized loan obligation vehicle back on to our balance sheet. And, generally, as you know, this portfolio consists of good names. The other half of the increase was due to drawdowns.

Now, roughly 38 percent of the exposure is for the regulated utility sector, with two-thirds of this exposure being investment grade. And a word, our definition is independent power projects with TPA’s or power entities that benefit from longer-term power purchase agreements, which provide a stream of revenue designed to be sufficient to cover the debt and its service.

The category other power projects covers projects that do not have sufficient TPA’s to provide full debt service and we, therefore, rely on merchant or open market sales for some of all of their output. In the case of these credits, our credit standards call for a higher level of equity for such projects.

Certain of the entities in each of these two categories are sponsored by companies listed in the diversified generation or regulated utilities categories. But, since these projects have their own sources of income, they’re categorized separately from their sponsor.

On Page 36, I give you a recap of our power and energy trading coverage. In the non-accruals you’ll see that [indiscernible] coverage of non-performance is approximately 60 percent. Looking at the individual categories you can see that the bulk of the impaireds are on the bottom three categories, which are obviously [indiscernible] basic concern. As you know, the power and energy sector has experienced significant dislocation [indiscernible] over expansion in generating capacity, weaker demand and significant reductions in electricity pricing.

In this environment, many companies have seen their ratings cut and a growing number of [indiscernible] covenants and face liquidity challenges. The bank, as we always do at this time of the year, has competed a thorough review of all accounts in the power and energy portfolio. Our watch list in the industry comprises of a little less than 900 million in drawn exposure that’s of particular concern. There’s further 150 undrawn exposure to the companies on this watch list.

Included in the exposure are loans totally approximately 500 million to three large public companies in the diversified generation category. These companies are currently in negotiation with their debt holders. And, while we have good reason to expect that the debt maturities should be extended, there’s always the possibility that negotiations may falter.

The remaining 400 million in watch list is in the other power and project category. And, we expect, over the course of the year that only a portion of the accounts on the watch list will finally end up in default. But, the broader uncertainties the industry suggest that by the end of 2003 there may be migration of some accounts that are not currently on the watch list.

It’s our expectation that perhaps half or more of Scotia Capital’s provisioning during the coming year will be required for the power and energy trading portfolio, and I’ll come to our forecast of the provisioning for next year in a minute. Due to the uncertainties in this sector, the default rates could be somewhat higher.

On the trading side, on slide 37, you can see the low volatility variability as a trading revenue. In fact, more than 90 percent of the days this year have had positive results, which is quite remarkable considering [indiscernible] volatility that we’ve experienced.

And, the next page shows our bar trends while trading revenues have remained really very good, we did not take on increased market risk. The one-day [VAR] [phonetic] for this year was about 10 million, which is small by most standards.

To summarize, net impairments came down this quarter as we forecasted. Credit quality is exceptionally good in Canada; conditions in the international portfolio are stable. However, conditions in the U.S. remain very choppy. During 2002 we’ve maintained our policy of a consisting aggressive rate of provisioning in Scotia Capital, inline with the weakness in the U.S. portfolio.

For 2003 we will continue with this policy of heavy provisioning against weak accounts. We expect that the U.S. portfolio will generate the bulk of the provisions, although the overall levels should moderate somewhat from those in the current year.

For the bank as a whole, we expect overall provisions to be somewhat lower at 1.575 million that we had in provisions this year. It is our intention to bring the level of net impaired loans down to a level somewhat below the current level by the end of 2003. This will be done through restructured credits, many of which we know are reaching the end of their period in their restructuring and where necessary and appropriate, through asset sales.

However, due to uncertainties, particularly in the U.S., the quarter-to-quarter level of net impaireds may fluctuate. This overall outlook is based on the assumption that weakness in the North American economy is bottoming out and we should see some improvements in many sectors.

And, now let me hand it back to Peter.

Thanks, John. Well, we have seen some economic positives signals, we are still -- we’re managing the bank completely on a cautious basis, credit quality, loan demand, forward forecast of P&L, and our capital market’s activities. And, obviously, our number one priority is managing the U.S. credit portfolio specifically the power portfolio very closely so that we’re on top each account loan-by-loan, name-by-name. It’s not systemic it sounded granular here.

As always, we will control cost carefully. We will maintain a strong balance sheet in industry high capital ratios. But, given our high capital ratios and strong internal capital generation, we will be accelerating our share buyback program to the vicinity of 25 million share range this year.

Overall, we’re expecting an ROE next year, 2003, in the 15 to 18 percent range, raise the band a bit, and earnings per share growth we’re saying in the 5 to 10 percent range. Domestic Canada, all areas of international, Scotia Capital in Canada, are all well placed and we should be able to grow those basis reasonable well from both the revenue and a P&L point of view. [Indiscernible] variability is credit, credit quality and while we’re right on top of it, they’re facing further deterioration in the power sector. If this should get even worse it makes achieving the targets difficult. I’d like to see the glass half full too. If the converse were to be true, we’d see our results better. We do remain optimistic. We have very strong core earnings, a strong capital base, second to none, first class fees and management. We’ve been here and we’ve been through this before, that work well together and we will produce good results, as we have for the past 12.

With that, I’ll open it up to questions.

Jim?

Thanks, Sabi.

Could you state your name for people on the phone and the name of the firm so everybody can hear it on the phone.

Credit Suisse First Boston, Jim [Mann] [phonetic]. Going to slide 24, you’ve given us some details regarding the plan for reducing the U.S. corporate exposure as a tough challenge for ’03. And, I tried to catch some of those numbers on the account base, Sabi, in terms of 1,400, 1,100 and 500 and 80 percent. But, if we could somehow translate those to, I’d say [indiscernible] give us the extent what that 500 accounts who are not work kind of relate to and you’ve given us for your time rise and [indiscernible] accomplice. That would give me some comfort. And, secondly, not to be cute, but as the [indiscernible] are going down somewhat, loan authorizations are going down somewhat, could you define somewhat?

David, do you want to take the first question and the size of the...

Jim, we haven’t got quantities for you today of the differences. It’s a three-year program against those 500 accounts that are remaining in the active category down. And, as we reduce those outstandings, we will be growing the non-credit revenues in the complete model continued growth and earnings on that basis. But, I haven’t got specific dollar amount of loan numbers for you today. We can get those to you offline if you’d like.

But, if I can approximate, Jim, we said that the economic capital that we’re allocating those businesses is going to be 40 percent lower. If I run this approximately off my loan book, you’re looking at least a 10 billion decline in asset levels.

And, the U.S. book or loan book’s roughly about 20 billion?

No, it’s around 30.

Okay. Thank you.

On somewhat, John?

It’s very difficult to put a number on this, Jim. You know, with these bounce around 100 million I would consider maybe somewhat. But, I want to avoid being tied down too closely, because there will be changes quarter to quarter. I told you last quarter that we would be down. We are down significantly this year, quite apart from Argentina. And, by the end of the year we’re looking for the number to be down further.

John, do you represent that the numbers [indiscernible] provisions this quarter to be additional required to U.S. corporate loan book as somewhat extraordinary and should not be part of the run rate going forward? Thank you?

Yes, they’re somewhat above normal. [Indiscernible], Jim.

Michael?

Michael [Golcher] [phonetic] [Indiscernible] Securities. When you talked about your credit outlook, what kind of assumptions are you making as far as the impact of the flat yield curve on margin?

No, that’s fine, Bob can alleviate. We’re positioned against rate rides. So, the flattening yield curve doesn’t favor us in the first half of the year. The second half of the year we should see some expansion. So, our forecasting and our plans have some margin compression the first half of the year.

Ian?

Ian [Indiscernible], [Indiscernible]. Just, John, the bump in the outstandings to power and energy, you said half of it was the CBO’s coming back on to the balance sheet. I was just wondering if you could expand on that? I was surprised about that. The second thing, is you indicated that there were on your watch list about $500 million as a result of three names, which are in negotiations, [indiscernible] restructuring. At what stage does that -- is something like that classified?

It will -- let me take the first question second. Classification will take place immediately that we no longer have reasonable expectation of timely recovery of our loans. This is an accounting issue and it’s very strictly observed. In each one of these three accounts, we have reasonable expectations that the bondholders and banks will work their way through to an agreement on an extension of the credits. But, as you know, in these negotiations everybody is jockeying right down to the final wire. So, we will know, I would expect with all of these, within the next three to five months what the outcome is.

Are they current on everything, bonds...

Absolutely. Absolutely. And, I should say one other thing in terms of our classification of investment grade, non-investment grade, which will be a bit of an introduction to your first question. We in the bank, unlike the rating agencies, classify things according to where we see the credit conditions of the account as of today. We don’t do any kind of classification through the cycle as the rating agencies do. Therefore, we’re inevitably faster to downgrading. So, there will be included in the so-called non-investment grade category a number of credits, which are fully investment grade according to both major rating agencies.

The CLO, as with most CBO’s is a vehicle where you put high quality credits. They’re under very strict requirements for the rating agencies for the maintenance of the ratings and the various [indiscernible] of debt in there. And, so, we [indiscernible] balance sheet of our CLO [indiscernible] a bunch of higher quality credits of the -- back on the books of the bank. Some of those, even though they were investment grade from the rating agencies we’ve classified as non-investment grade [indiscernible].

So, what happens to the equity trust that the CLO, it would have been on your books anyway?

It would have been on our books in any case.

We lost some money [indiscernible].

The portion of it that we own.

If we class it because we have excess capital.

Melanie?

I’m Melanie [Wargarb] [phonetic] [indiscernible] Household Markets. I had a question about the low level of formations actually this quarter. I would have thought they would have been higher. I know they were high last quarter, but some of your competitors have had clearly high levels of formation last quarter and this quarter. And, given that your have risen a bit on the power side, it seemed a little confusing to have such low level of formation. Is this timing or is it a state of the portfolio quality or...

We have been aggressive in putting accounts non-accrual. In that sense, we have early on classified some. I cannot speak for my competitors. We, like most banks, don’t talk about specific names that we’ve classified. So, we have it as little transparency as the other banks as you do. All I can say is that we have historically had this policy. As you know, and go back to the Asia, East Asian crisis, tried to identify accounts that are in trouble at an early stage, put them non-accrual and -- so, our formations then reflect that rather earlier identification. That may be the case in other institutions.

I think, Melanie, in part, you never can tell the cycles over. We have been classifying a lot before some of the others. Now, that doesn’t mean we’re wiser. It just meant we took some very large classification back at the beginning of 2001 when others weren’t. And, we did capture some headlines and credibility gaps and everything. But, we tend to have things running off too, as well as forming. I think power is very difficult to predict. I mean I personally believe in the long run will prove to be an asset recovery type stance relatively much, much higher than the parts of the telecom, because we know power will grow. What we’re in too is granularity here. You can have some very bad power loans that don’t have real assets behind them. But, where you have reasonably good real assets, you’re going to have pretty high levels of up recovery and/or they’re going to be, as John was saying, the ones we’re watching right now, these are operating companies with real assets that traded, the trading parts are gone through now. We know where they are. They’re wound down. You’re now down to what are their rates? What are the contracts they’re under? How good is the turbine structure et cetera, et cetera, compounded by liquidity? And, we’re one of the major banks working out. I don’t say that with any pleasure. This means we’ve got a large exposure here. We have good people on it, John and his top work of people are -- we’re in with the others. We do know where the liquidity is and we’re trying to work constructively to stabilize parts of this. The more you stabilize the better this will look, the more you don’t, the more it’s going to be a difficult year.

And, secondly, on the corporate relationships you’re trying to exit over the next three years, the 500, because they don’t hit the thresholds or threshold ROE, what is your threshold ROE?

15 percent for a lending customer, including the cross sell revenues or more at the floor.

Quinton?

Quinton [Indiscernible] [Indiscernible] Markets. John, just a follow-up on the net formations. The net formations include sales. And, so, could you give us a sense, A, what the sales might have been in the quarter; and then, two, could you, I don’t know if you’ve got it at your fingertips, but over the course of the last two years, obviously, it’s been a difficult credit environment, could you give us a sense of what’s happened, let’s say from the start of ’01 to today in terms of ECL [phonetic] write-offs and sales, things that totaled U.S. 30 billion. How much of a whack have you taken against that portfolio for the last two years?

We posted a billion six in net non-accruals at the beginning of your period. We were able to dispose, we probably sold 5, 600, 700 million of that, I don’t have the number at my fingertips. We sold it almost exactly at book. So, the provisioning we took against that at the beginning turned out to be an accurate reflection. Some were a bit up; some were a bit down on balance it worked out very closely. That was our period of largest loan sales. In the current quarter we had some loan sales, but they were not a stunning amount.

Going forward, could I request the net formations be broken out as growth formations and then sales, just a request?

Thank you.

[Indiscernible].

[Indiscernible].

Slide in with one, in terms of the status of Mexico, just where we might be at, Peter, on Inverlat and getting the rest in, given all this excess capital [indiscernible] deals could have been struck by now.

[Indiscernible]. The process of Mexico is time consuming. We had a team down last week. We have investment bankers. We have everything you need. And, it has to be transparent. I suspect, though, it won’t happen until April, May, just the way -- that’s the way things happen. And, we have lots of goodwill there. I was meeting with the finance minister three weeks ago, [Indiscernible]. No, we weren’t meeting at [indiscernible], it was in Toronto. But, I have no doubt about it going forward or the goodwill. It takes time, it sort of like bank mergers in Canada.

Michael?

I won’t tough that one.

No, don’t, Michael. I’m in enough trouble already. I’m not supposed to do this over the web, am I?

I’m looking at your net investments, the gains and losses, and you mentioned that you have about $100 million of equity write-down in the latest quarter. Can you tell us about where you’ve put other gains and what -- you know, what you want us to know about the prospect for continuing investment gains in 2003?

Bob?

The offsetting gains were primarily, as you would have expected, in sovereign bonds, Michael. We had a bond market rally through this period and obviously the sovereign credits that we owned for interest rates kept positioning [indiscernible] improved. As rates came down, we felt that they weren’t going to stay down forever, so we lightened up on a number of those portfolios, which, obviously, allowed us or was available to offset some of the equity write downs. The equity write-downs were a mix of both private equity, mainly, in our case, through a fund investment that we have, which, as we’ve talked about before, like everybody that’s been in funds, writing things down for quite some time now. And, that continues through the period. Plus, some of the public equities that we own that, again, have been severely depressed, we just finally came to the conclusion that the write downs were warranted on some of those, even on the Canadian GAAP, a little bit of stuff write down there as well.

Going forward, at this point in time, we’re not forecasting significant security gains for ’03 as we see the market right now. We’re not terribly [indiscernible] about the latest upsurge in the equity market. We’re not sure it’s lasting, particularly, and by the same token, we think that some point in this current year, rates will back up somewhat and then that obviously makes it difficult to realize [indiscernible].

And, is all of your gains and losses are in this fund there’s nothing given other categories?

No, no, it’s all there.

Do you think that somebody else does?

We do believe, incidentally -- don’t want to go there. We do believe incidentally that that, the write-downs within the LBO fund portfolio are virtually [indiscernible] portfolio that are quire [indiscernible] today as best we can tell and you’re dealing with third party funds. So, you’re not as close to the individual investments as you’d like to be until we believe we’re ahead of the managers in dealing with those portfolios, and that, you know, they’re in pretty good shape.

We don’t believe that we are. We’re ahead of the managers, or that that was a number of them. And, of course, that’s where some of the smart money is now looking at energy, very, very large sums. But, we have -- you know, there’s been two real tough issues that the banks systemically are dealing with the loan loss, banks that were lenders like us and the merchant venture capital fund side. We’re positive on our funds merchant banking. There’s no one-time write-offs coming there. We’re above water 50-plus, probably a little higher and we’re earning through the loan losses, that’s really what we’ve been doing. We’ve been doing that day-by-day, quarter-by-quarter and I think we’re down to energy.

And, if I could just take a couple of questions on the phone firstly. Questions on the phone?

Thank you one -- yes, one moment please. Your first question comes from [Jamie Keeting] [phonetic] from Merrill Lynch. Please go ahead.

Hi, team. I just had a quick question, I guess for Peter as well on the capital and capital outlook, if I could. I’m interested in some of your remarks about the share repurchase program that’s on, Peter. And, I was just thinking if you could scope out for us what your hope is for capital at the end of ’03? I guess you can free up some capital from the U.S. book, perhaps spend some on Mexico, buy back some. Do you also have any plans or some set aside for any other acquisition type activity?

Yes, we continue to look at the U.S. and we’ve talked to a number of people. But, we have nothing very active at the moment. We’re watching really mainly developments in Canada to see how that sorts out, both politically and from a policy point of view. If I factor it all back, Jamie, the buybacks and the generation of capital that we will have next year with the Mexico buyback, which is a certainty, our capital ratios will remain about even at the end of the year. And, that’s very, very strong, you know, a strong 8.234 percent in tangible common is very good. The tier one, of course, you’re in the high [indiscernible] you can issue a close to. We’re just running off our prefer basically because we have so much capital.

If I can just elaborate on the numbers, Jamie, basically the buyback and the buyout of Inverlat will cost me to 100 to 120 basis points and I’ll easily accrete that in terms of between the reduction in U.S. lending and my normal capital generation, I’ll accrete over the year. So, I’m not going to be that far off from where I am today, maybe a touch down, but I’m still going to be the highest for Canadian banks.

Okay, that’s very helpful. Thank you. Could I also just ask a couple little small ones? There was a couple of allusions to the merchant acquire sale resulting in potential future payments. Is that a material amount at all? And, the other thing, I wondered if John Crean might just briefly comment on scooping the single name exposure and/or any other sort of numerics, perhaps, around the reduction in loan syndication and other sort of metrics on national portfolio?

Beyond the merchant acquire business, Jamie, the future revenues will be in the same range as what we took into income except we spread over the next three to five years.

Okay.

Jamie, it’s David Wilson on your question on the single name exposures that’s indication guidelines. We reduced our previous levels, which are ranked by IG codes at low risk to investment grade low risk to high risk. We’ve reduced them from 20 to 33 percent in each category. So, it’s a fairly big reduction from where we were to where we are now. That’s both in the single name exposure limits and in the syndication whole guideline limits by IG code.

And, did you buy any more credit protection at all this quarter I wondered, or can you just update us on what that number is approximately?

No, it’s still pretty modest, Jamie, about 100 million Canadian. As always, we’ve used a lot in terms of hedges to hedge our book. The prices in the power sector are very high to do that hedging, so we simply haven’t gone into that.

Thanks so much. Appreciate it.

The next question on the phone?

Your next question comes from Heather [Wolf][phonetic] from Goldman Sachs. Please go ahead.

Hi, good afternoon, two quick questions. First off, John, I think you mentioned that you sort of thought we were in the final innings with telecom. And, I’m curious if you can give us a little bit of color on what you’re thinking about European telecom, and also where your exposure levels lie in Europe. And, then, secondly, with respect to international credit quality, I think, Sabi, you said that you saw some higher losses in the international division. It looked like some of that was coming from Asia, I’m curious if you can update us on some of your Latin American losses.

In Europe, in telecom there has been a number of fairly significant companies in restructuring [indiscernible] lending with one exception, which was an acquisition that did not finally get completed and we got stranded with the acquisition company. Our lending is down at the operating entity in entire portfolio. We will see a couple of those major entities hold companies coming out of Chapter 11 or the European equivalent and that will ease the pressure significantly. Our exposures in other -- and, these are cable essentially. Our exposures in other areas are really pretty minimal. And, does that pretty well answer it for you for European telecom?

It does, thank you.

And, in Asia our overall levels of loan losses are really very low. I think it was [indiscernible]...

What’s really happening is that it’s really going from a reversal last quarter to a charge this quarter, so the swing looks a lot bigger that really is, but you’re still talking fairly small numbers.

I guess I’m a little confused, then, because you had said that one of the main reasons for the significant drop in the international was...

If you look at the international numbers you’ll see that the international had 16 million of recoveries last reversal then Q3 versus zero in Q4. But, the zero in Q4 is really net of the 46 million credit for Argentina.

Right.

So, the swing is really going from a 16 credit to a 46 debit.

Right.

So, that’s really the swing.

And, is all of that swing coming from Asia, or...

A combination of Asia, the Caribbean, and a little bit in Mexico. It’s spread across all three regions. It’s just the timing of when we took reversals, when reversals happened and when recoveries came in and when we took the provisions.

Can you give us any color on sort of a normalized level of provisioning they’re going forward into ’03?

I think if you take my whole year number for international and divide by four you’ll get it pretty close to that.

Okay. Great. Thank you very much.

Your next question comes from Susan Cowan from Dundee Securities. Please go ahead.

Thank you. I realize this is a hypothetical question, but with the very strong capital base, are there any circumstances in which you would consider kind of a big bath provision to, you know, deal aggressively and early with potentially the power portfolio?

We don’t think we need it, Susan. Well aware of big bath strategies, but without Argentina was a one-time event. In the past 12, 13 years, we’ve managed to meet our guidance every year. And, we’ve been through other cycles. And, we’re obviously signaling that we don’t think next year is going to be an easy year, but that we think we can meet the guidance we’ve given you without a big bath. Now, if the world turns ugly, we obviously have the capital to handle the types of shocks that might be out there and none of us know the total outcome of something like an Iraq war. We certainly found out that chaos theory applies not only to weather, but to energy pricing, I think Ernie Ees [phonetic] is learning that as we speak. So, it’s a difficult forecast and we’re aware of that. You’re probably aware that, you know, we reaffirmed it’s in a double-A, low double-A by Moodies but not on negative [indiscernible] and without a downgrade on the overall B credit. So, they have a pretty good view of what our abilities are to handle this power challenge and that was fairly recent.

Great. Thank you very much.

Next question on the phone?

Your next question comes from Steve [Cally] [phonetic] from [TD Newcrest] [phonetic]. Please go ahead.

Hi. Would your derivative counter-party risk substantially increase your exposure to the power group?

No.

Great. Next question, in terms of tax rates, I think that it is a long-term reduction that you’ve provided us of roughly, I guess, 23 percent is what we should be using moving forward. Can you explain why that -- I figured you were pretty much guiding towards 30 percent before, if I’m not mistaken, what is creating it through that long-term improvement in the tax rate?

Marwah.

On that note, Steve, if you look at my tax rate over the last one-year it’s been running around 25 percent. Well, the first thing that’s driving that is really affecting all the Canadian banks, the Canadian federal tax rate is really coming down. Secondly, we are by far more international than our peer groups. And, we’ve really been doing a lot of that whether it’s Mexico, whether it’s Chile or whether it’s a Caribbean operation, we are generating. Those are contributing more to my earnings and that’s helping my tax rate.

Okay.

[Indiscernible] we also have been putting a lot of strategies in place that really help capitalize on that international network.

Okay. And, on that, Sabi, just following up on Heather’s question. It seems like every quarter I’m a little bit surprised by the result of the international bank. And, you mentioned about the provision for credit loss reversals, but even if we do that math, you’re a little bit below. I think last quarter we were talking about this and you were mentioning that something -- maybe not yourself, but somebody was mentioning roughly 175 million would have been the run rate in Q3. And, so, just to hit this again, why is this less than 175 million, including, let’s say the reversal?

I think Rick had mentioned that the run rate of the international would be around 175, Steve, and I think, to some extent, the loan losses that came in Q4 in Asia and also the Caribbean weren’t really [indiscernible] of that time. Plus, we did have some higher expenses in the Caribbean, as we really -- we had some major improvements and commitments made for the quarter that really should see big dividends next year. But, I think, if you take the overall run rate from international I think it’s fair to say that we will be between 170 and 180 as my run rate.

Okay. Great. And, I think I caught that there were no drawdowns on our PDI?

No, there were none this quarter. There was some last quarter, which caused part of the swing.

Okay. Great. Thanks.

Your next question comes from Rob [Wessel] [phonetic] from National Bank Financial. Please go ahead.

My questions were asked and answered. Thank you.

We have a follow-up question from Jamie Keeting from Merrill Lynch. Please go ahead.

And, it’s brief, just on the guidance on the earnings growth, is that -- can you just give us some baseline on that 5 to 10 percent guidance, if I could? And, also, private equity portfolio, just the book value of that equity portfolio, or the merchant bank equity private portfolio?

Sorry, I missed the first part of the question, Jamie, what about the earning’s guidance for 5 to 10?

Yes. What’s that off -- what base, Sabi?

Obviously, off the base including Argentina.

So, 335?

No, off the 435?

435...

No, the 335...

It’d be a dollar.

[Indiscernible]. I’d take that any day.

We’ll take it though, Jamie.

That sounds a lot better, though, I must admit, we’re really going to be up 30 percent, that’s a good number.

The private equity portfolio, I was just wondering what the book value on that is?

Broadly defined to include bonds, to include our investments in, I shouldn’t say bank, in Japan, the things in our own merchant bank and a few other odds and sods, about a billion two Canadian, about half of that’s fund.

I wouldn’t include [indiscernible], that was one off and it’s probably doubled in value. You weren’t even counting that.

You think it’s doubled in value.

Well, that’s my investment or we don’t give opinion.

Is that a significant amount of the pace?

It was 85 million U.S. It is 85 million U.S. on our books and, as Peter says, based on discussions with our partners, it would appear to have increased substantially, but we don’t write private equity investments up.

Thanks, Bob. Thanks so much.

Your next question comes from Nick [Gillelli] [phonetic] from [Bimcorp] [phonetic]. Please go ahead.

Good afternoon. I’m just trying to get a sense of the adequacy of your provisioning. And, looking at your net impaired loans at 620 million, it seems to be among the highest among your peers. And, part of me is making such a direct comparison, but compared to one of your competitors who have -- who has such a very similar loan exposure to the telecomm and power, who have taken pectorals, you know, looking at them, they’re at close to a negative billion dollars and negative impaired loans. Have you given any thoughts to providing pectoral provisions?

The short answer is we have given though to it, we have no intention of doing so. We look at our impaired’s as a provisioning on the impaired at the level of the individual account. This is a rigorous process that we go through. You are undoubtedly aware of the [TICA] [phonetic] 3025 requirement that we have to follow. We then are audited by our internal audit people. We’re then audited by external shareholders and examined by a variety of regulators and for the U.S. portfolio that includes the Federal Reserve Bank. And, so we are very comfortable with that level of external scrutiny, but the level of provisioning, particularly in power and telecom, is an adequate level of provisioning.

Okay. And, secondly, I noticed there was a brief significant increase in your exposure to that sector, and the power [indiscernible]. Was this mostly due from undrawn credit lines? And, if so, do you still have a pretty large amount of undrawns in this sector?

If you look at it about half of the increase was due to bringing the CLO collateralized loan obligation vehicle back on to our balance sheet. And, the other half was due to the draw down of unutilized credits. I mentioned, to give you a sense of the potential unhang of undrawn, I mentioned to you that had about 880 million on the watch list. These are accounts where we think that there’s a reasonable chance of problems during the year. There’s only about 150 million left undrawn on the accounts on that list.

Okay. And, lastly, just for a stock option expensing, is there any decision made for next year?

I think we have signaled that last quarter that we will be expensing stock options.

In ‘03? And, if you were to have done that in ’02, do you have any figures on what that number would have been?

Keep in mind that one of the things that we’ve also done that I should point out is that we have really attached tandem stars to our stock options, so really that means I no longer have a stock option expense, but I will be expensing the cost of my stars on a regular basis for P&L, that at least has the advantage of getting tax deductibility for that expense. So, that really depends on, it’s noted very clearly in my notes to my financial statement.

Okay. Thank you very much.

There are no further questions from the phone.

[Indiscernible] just to go back on Jamie’s question with the 435, Sabi, within that, obviously, you count the gain in the quarter of $80 million after tax.

Correct.

Bob has said he doesn’t expect any gains, you aren’t taking in any gains since that 179 pre-tax let’s say dropped 80 to 90 million. So, those two combined are about a 10 percent profit change. You’ve told us you’re going to buyback 5 percent of your stock to be more aggressive. Where else, am I forgetting anything in terms of outright change, other than organic business growth that actually thinking about get this by the 10 percent over the basis?

Maybe I can start and Peter can end that. Keep in mind that we have very solid growth in the other businesses. Domestic is still going to grow 5 to 10 percent. The Caribbean is approaching double-digits. Mexico has continued growth. Plus, I should have two to three-quarter additional earning from Mexico because [indiscernible] continue to grow. Global trading is growing. Canada is growing. So, the only area that’s really not growing is possibly the U.S. And the U.S. expects, as well should come down because we do expect for [indiscernible] to fall. So, when you add those up we are fairly comfortable that you’ll get very close. We’ll be able to offset the two negatives that we have, which is a payment [indiscernible] gain. And, the decline in security gains is still hits the 5 to 10 percent. So, we do have very strong businesses that are still generating solid core earnings.

Michael?

Michael [Golcher] [phonetic] [Indiscernible] Securities. Just to follow up [indiscernible] question. You are expensing, as far as now, I guess, as part of your variable [indiscernible]. What would that have been in the fourth quarter? What is it for the full year?

I think we are expensing them, Michael, but we have hedged them. So, in essence, there really is no cost because we took a hedge several quarters ago. We’ve been hedging, basically we can do it [indiscernible] swapping, hedge the cost of that. So, in fact, that’s what we’ll do with the new options as well. We will -- so, we have a cost under the funding cost for the [indiscernible], but barring that there really is no cost.

And, so the cost to that where the benefit of the hedge is going into your trading revenue?

No, to go into -- if we can really assign it, the two option ways to account it, if we can’t really, it matches a perfect hedge, it goes into other income, otherwise it goes into [indiscernible] expense. So, we have to wait for the new rules to come in that begin November 2000. So, either way the P&L is still the same, but it’s just geography on the P&L.

But, you have been expensing it this year?

That’s correct.

Yes, and we’ve had large volatility.

Right.

Plus or minus 40 million in a quarter on our SAR type compensation. So, we’ve been trying to level that out with the hedging program, not trying to play the stock market. I mean, we’re pretty confident that the fundamental earnings of the bank are very good. We’ve talked about the credit, which become basically power. And, if you go forward the year beyond this and start to normalize our loan losses, you have a pretty good picture of an earnings pattern [indiscernible] in 2004. So, we’re going to take advantage of what we see as a way to lock that part of our compensation in without taking large volatility in it. Plus, we do get a tax deduction to us be a better way of doing it than taking it through the [indiscernible] route.

Okay. Just by the way it’s being accounted for now, is the full amount of the expense being charged in -- you know, being charged as part of expenses and the impact of the hedge that you have...

Between expenses as well. Both.

Okay, so...

The both of them are going through compensation expense, debit and the credit.

It’s the various business launch, SARs are used broadly in international for instance, if we can’t give options.

Jim?

One of the highlights of 2002 was the domestic banking operations, which you probably don’t get enough credit for. Well, at 33 percent are we at 20 basis points in terms of loan loss provisions? The concern is how sustainable is that growth? So, have you talked about 5 to 10 percent, but really, you know, expenses were flat, loan loss provisions were at an all-time low. And, I’m just trying to get a sense of how that can be part of the growth [indiscernible] for 2003, given how strong it was this year.

The loss ratio at 20 is up from 18 last year, but it was 20 the prior year. So, that’s a fairly sustainable number, even know the delinquencies are up a little bit for an environment. So, I don’t think it’s going to be much higher next year in that regard. And, we had a fair amount of building growth just from this year. The growth we’ve had during the year we grew $8 billion in retail alone, which is about 10 percent asset based. So, even the carryovers, if they don’t grow 1 cent dollar in the growth of today is going to get growth and profit next year because of the asset that were put on them in the second half of the year. And, we are planning growth and assets next year. So, our profit plans are to sort of compatible with the all bank and we should achieve [indiscernible] approaching the high single digits or attempt closer to 10.

And, the other thing I would point out is that on the commercial side last year, our commercial lending was flat to down. We don’t expect that to reoccur next year so we should see commercial growing as well.

Jim, thank you for the question. If you turn around that whole row of people are the people that run our domestic bank and they were number one in customer service by a wide margin, number one in [indiscernible], number one in productivity, over 30 percent return on economic equity and took market share in every retail asset category and in the combined deposit mutual fund category. So, it was the year to remember.

But, they’ve committed to doing even better next year.

Ian?

My first question relates to the international, if I stripped out Argentina, you had provisions of 46 million in the quarter, Sabi, and you said that was unusually high. I guess when I go back it looks as if that’s a normal level of provisioning. And, in 2001 the PTL’s are 250 million for the year and in 2000 they were 185. And, I don’t think 2000 had Inverlat in there. So, why isn’t this a normal quarter? Why isn’t this a normal run rate of loan losses?

Why isn’t this a normal run rate? I mean...

I mean it looks [indiscernible] that this is normal?

In that period you had the East Asian crisis. And, the Far East is now very stable and is -- some of those economies are performing exceedingly well. We see very little in the way of loan losses coming through. There’s some minor commercial ones in India, but it’s very tranquil. The Caribbean is in good shape. Mexico, we actually will be taking some reversals because we’re overprovided on the loan book. And, you can see the statements from Mexico. Chile we’ve had a little bit of commercial difficulty because that economy has been struggling for a couple of years. But when you look across international now, Argentina has been dealt with. Apart from Brazil, which we talked about, there really isn’t very much in the horizon.

Keep in mind, when we say we’re excluding Argentina, you’ll be excluding the one-time charges for Argentina that has, you know, for 2002. But, the normal base rate expense in credit losses and the expenses in revenues and interest have been [indiscernible] and my 2002 base and 2001. So, you can’t look at, because 2001 of 200, which you see in slide 32 includes around 50 million for Argentina, which we’re not going to have any more. So, you’ve already normalized Argentina, not just for the one-time charge, but also for all the core revenues and expenses that are in 2001. So, our run rate will be a lot below 200.

The second question relates to it looks on your cross border exposures that you put about half a billion U.S. into Korea.

That’s correct.

Can you sort of comment on what the [indiscernible].

The two major areas are trade credit, which is short-term and supported by the Korean banks and the other major area is government securities or exposures that are guaranteed by government.

All high quality?

Yes.

And, the last question is securitization, revenue seemed quite high in this quarter.

That’s right. We wound up one of our securitizations, our mortgage securitization that was really -- had a couple of hundred million left on the balance sheet. We wound it up. And, secondly, we did some CMB deals in the quarter that I think all the Canadian banks. Bob, do you want to comment on the...

Yes, this is CMHC’s program and under the Canadian accounting rules, that’s a true sale and so you have to take into income and affect the present value without the spread on those mortgages. And, we’ve been aggressive sellers into those programs. They’ll continue again next year. In fact, there’s one likely to go this month or early next month. But, that’s not unique to us. Different banks have different amounts in each program.

What’s the bottom line impact of the securitization in the quarter?

It’s around 20 to 25 million, I would imagine, somewhere in that range Ian.

In previous quarters it looked as if...

But, it’s very spotty. It really goes up and down in terms of maybe you do a CMBD lend to the new Canadian [indiscernible], see if they picked income as a sales, so it’s really very spotty, really when the deal is done.

Quinton, one last question.

Sure. Peter, could you just give us, from the bank perspective, managing the organization, obviously, you’ve said you’re not going to do it forever. So, could you just give us a sense, I mean is this going to be the proverbial walk in the snow at some point and then you’re going to come back and say here’s the anointed one, or are -- just in terms of a succession plan, I mean I talked to the people inside and it doesn’t seem like, you know, when you were coming up that, you know, you appeared anointed and you beat off a couple of people and you got [indiscernible]. Can you just give us a sense of what’s going on inside as you prepare for your succession plan?

Well, I’m not going to [indiscernible], was there in that area, it didn’t keep anybody [indiscernible].

Except for me.

No, we’ve had succession planning in place since 1998 in a very rigorous fashion at the board, at the human resource committee. And, that’s been well in place and it’s constantly reviewed. And, I turn 65 next year. There’s no question that that year that it always been targeted probably would have been earlier if there weren’t some other things that came up. But, it will be next year.

’03 next year, next year ’04?

’03 is next year I thought.

So, that’s calendar, not fiscal?

Yes.

I think on that very clear note of whose taking over, I think we should end this call. So, thank you all for coming and we look forward to seeing you next quarter. Thank you.