Bank of Nova Scotia (BNS) 2003 Q1 法說會逐字稿

Good afternoon and welcome to the presentation of Scotiabank's second quarter results. I'm Sarabjit Marwah, Senior Executive Vice President and Chief Financial Officer. With us today [indiscernible] are: Peter Godsoe, our Chairman and CEO; Rick Waugh, President; Bob Chisholm, Vice-Chairman; David Wilson, Vice-Chairman; Bob Brooks, Senior Executive Vice President Group Treasurer; and Warren Walker, Executive Vice President Credit Risk Management. 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 Warren, and concluding remarks on outlook by Peter. We will then be glad to take your questions. This presentation is also available under investor relations section of our website at Scotiabank.com.

Peter?

Thanks. I'm happy to report a solid quarter with earnings per share of $1.12 and a return on equity 17.2%. I think our second quarter results again show our ability to deliver consistent earnings notwithstanding geopolitical uncertainty, strong Canadian dollar, economic fallout from SARS, and considerable volatility in the global financial markets.

On the positive side, credit quality does show signs of improving. Net impaired loans and provisions are both down year over year and from last quarter, and we're cautiously optimistic -- and I stress cautiously -- that the worst of the credit cycle is behind us.

However, revenue growth was a challenge this quarter. Revenues are down, mainly due to the affects of the strong Canadian dollar, but that's no excuse. We sold [indiscernible] we sold our merchant acquirer business. But even when we exclude or normalize all of this, revenue is going to be a tough challenge in the quarters and years ahead. Capital ratios remain excellent, Tier 1 is 10.3, as you know we stress tangible common equity. And it's at 8.4, notwithstanding that we bought in Mexico for cash. These are industry leading capital ratios and certainly do provide us with the flexibility to pursue opportunities long or short-term. As well, we continue to increase dividends. This quarter we approved an increase of 4 cents to 44 cents per common share.

In summary then, we had a solid quarter, consistent earnings, ongoing capital strength, and we see some improvement in the credit picture. If I go then to the next slide, it shows the steady trend in earnings that we've been able to deliver over the past couple of years, notwithstanding a very challenging credit environment and weaker capital markets, particularly in the past 12 months. We've been able, in our view, to produce those earnings because of the strength and diversification in our core businesses -- in our three main businesses -- have all been doing well, and our ability to execute, to put our heads down and concentrate.

The next slide shows the diversification of our earnings. You see the three main businesses were all up year over year, with biggest improvement in Scotia capital where loan loss provisions have fallen. The other categories down as last year's numbers included a tax settlement and substantially higher securities.

In terms of performance targets, we did reasonably well in the first half of the year. A return on equity at 17.2 and 16.9 for the half year at the upper band of our 15 to 18 % target range. Earnings per share growth was 1% in the quarter and year to date below the target of 5 to 10 % and a target that is going to be hard to achieve given that we haven't completed and we chose not to so do nearly as much as of the share buybacks as we had planned, given the sharp runup in our stock price. And we didn't see it as a good way to spend our shareholder capital.

Our productivity remains strong. That's well ahead of our goal of 58%. And in terms of capital ratios, we are industry leaders, and our tier 1 at 10.3 is well above our target. And again, I stress our tangible common equity. I was in a conference in Europe and it was basically above virtually every bank I benchmarked with.

On the difference dividend front, our solid earnings and strong capital placed us in a position to increase dividends. Therefore, as I mentioned we're increasing the dividend by 4 cents this quarter to 44 cents per share. This translates into an increase in the quarterly dividend of 19 % year over year, and is the sixth increase in 12 quarters. In fact, as most of you know, this marks a continuity of dividend growth over the past decade and frankly it's back over the past quarter of a century. We intend to maintain that record going forward. And at a higher payout ratio, given we are raising our payout ratio from the 30 to 40 to the 35 to 45% range.

I'll now pass it over to Sarabjit to talk about the performance in more detail.

Thank you, Peter. On slide nine, I'd like to begin by highlighting some of the major items during the quarter, not that these items are particularly unique. In fact, as you all know, we have new items every quarter and basically run the bank with the expectation that we will be faced with new challenges on a regular basis. This quarter related to Argentina, There were two items. Firstly we reversed $27 million of provisions against our cross exposure to Argentina following the declassification and sale of some loans. Secondly this quarter's expenses include a charge of $31 million related to the settlement with the [indiscernible] creditors following the tender offer to them.

Moving down, in gains and securities we realized a gain on the sale of Panama PDI bonds of $63 million. As we capitalize on the sharp increase and emerging market debt values. This gain was mostly offset by the writedown of $50 million against LBO and other securities. Next our stock based compensation increased by $20 million quarter over quarter reflecting the upward movement in our stock price from $50.70 on January 31st to $55.79 at the end of the second quarter.

On the positive side, we had higher tax savings of about $30 million with our effective tax rate being 19.2 % this quarter. This lower tax rate came from higher tax exempt dividend income as well as higher earnings from international subsidiaries with lower effective tax rates. Our run rate going forward is likely to be somewhere between Q1 and Q2's rate.

Finally, the appreciation of the Canadian dollars against the U.S. dollar in the quarter, plus against the Caribbean and other currencies impacted our earnings by approximately $20 million this quarter. At the end of the day the net result of all of these items was basically neutral.

Turning to slide ten, our margin rose by 8 basis points in the quarter but still remained nine basis points below a year ago. As in the first quarter, the major reason for the year over year decrease was lower funding spreads in North America and Europe, down from the record levels of last year. This was somewhat offset by slightly higher spreads in U.S. corporate. For the quarter, the eight basis point increase was due to the slightly higher funding and U.S. corporate spread as well as several other small pluses. Looking at slide 11, "Other Income" at the top reported other income was down by $93 million year over year and $69 million on the quarter, contributing to the year over year decline with the sales of Scotiabank [indiscernible] and the bank's merchant acquirer business. As well we had lower gains on the sale of securities compared to last year's exceptionally high levels and a drop in retail brokerage revenues in line with market trends. Partly offsetting were higher investment banking revenues. Compared to last quarter on the left, the decrease of $69 million was mainly due to lower investment banking revenues, which were down from the record levels in the first quarter. The declines in the other categories was largely offset by higher security gains.

Turning to a noninterest expenses on slide 12, reported expenses fell 5 % from last year, but rose 5 % on the quarter. Both of these changes are moderated if we exclude the expenses related to Scotiabank [indiscernible] and the merchant acquirer business. On the right, the year over year drop falls from $76 million to $67 million, most of which was from lower stock and performance based compensation. On the left compared to last quarter, expenses rose $74 million due largely to the settlement with Scotiabank's [indiscernible] creditors and higher stock-based compensation following the recent runup in our share price. Overall our base expenses remain well controlled.

Our cost control shows up more clearly in our productivity ratio in slide 13. At 53.4 % year to date, it remains very good, and we continue to lead in this area.

Looking at slide 14, capital strength remains a big, big plus for us. All our capital ratios remain very strong and are the best among the major banks, notwithstanding the acquisition of the additional 36% of [indiscernible] this quarter, which reduced our ratios by around 29 basis points. Tier 1 is now 10.3 % up 40 basis points from last year and 30 points higher than last quarter. Even more important, the tangible common equity ratio, which is just common equity for goodwill and intangibles remain strong at 8.4%, 40 points higher than a year ago, so down very modestly from last quarter because of the [indiscernible] acquisition. This quarter there was a large impact on both risk assets and capital due to the appreciation of the Canadian dollar against foreign currencies. It negatively impacted retained earnings by $400 million. However, this was more than offset by a reduction in risk assets of $4 billion from Q1.

Turning to slide 15, it shows the unrealized gains on investment securities, where the surplus has risen again this quarter to $418 million versus $244 million last quarter. This current $74 million improvement was mainly due to higher values of emerging market debt and equity portfolios.

Turning to the business result starting on slide 16, as Peter mentioned, our earnings strength was very broad-based with all three business lines up year over year. Beginning with domestic on slide 17, domestic banking includes our wealth management business. It had a solid quarter with earnings up $264 million, up 4 % from the second quarter of last year. Quarter over quarter earnings were down mainly because of three fewer days in the quarter and high expenses from the first quarter's unusually low levels. Retail assets and core deposits continue to grow. Year over year, residential mortgages were up 9 % with strong demand and retention rates above 90 % again this quarter. Revolving credit balances were up a very strong 20 % compared to last year. Market share and retail lending grew 38 basis points from a year ago.

On the deposit side, core deposits rose 14 %. Driven partly by a very successful retail money master savings account. We have introduced a similar account for small business customers. In terms of market share for core deposits and mutual fund balances, it also rose by 32 basis points over last year. Retail credit quality continues to be excellent with loan loss provisions running at 24 basis points year to date.

Turning to our international operation on slide 18, this quarter international net income was $171 million, up $21 million or 14 % from last year and a slight increase over last quarter. Within international, region national performance was mixed. In Latin America with a sharp runup in prices of emerging market debt we took the opportunity to sell some of our holdings of PDI bonds with an asset backed gain of $40 million. In the Caribbean and Central America results were down 12% from last quarter and 20% below last year mainly due to the strengthening of the Canadian dollar against the U.S. and most other Caribbean occurrences and the timing of loan losses. However, ROE remained strong across the region. In Asia, net income was unchanged from a year ago but fell below last year's particularly strong results.

As Peter mentioned, we increased the ownership of [indiscernible] to 91% on April 30th, purchasing the Mexican's government's 36% interest for $465 million. This represented a premium of 27% over book value, which both parties felt was a fair price. We have also made an offer to purchase the outstanding 9% of [indiscernible] shares held by former shareholders at the same price. We expect the purchase of this 36% interest will add $80 plus million or 16 cents per share to earnings on an annual basis. The remaining 9% should add another $20 million or 4 cents per share.

On slide 20, Scotia Capital had earnings of $169 million for the quarter, up a substantial $49 million or 40 % year over year and up 22 % from last quarter. Both of these improvements were driven by lower loan losses which were down $98 million or 36% over last year and down $53 million or 21% over last quarter. Moderating these gains was a decrease in revenues, due to a combination of lower funding spreads in North America and Europe and a weaker U.S. dollar.

In summary, we have a solid performance by all the business lines this quarter, notwithstanding the top revenue environment. I'll now hand it over to Warren Walker to talk about risk management. Warren?

Thank you, Sarabjit. Good afternoon. I'll be starting on slide 21.

The story this quarter is one of continued improvement in overall credit quality. Quickly going through the main business lines, Canadian retail continues to perform very well. Provisions are at about the same level as last quarter. Canadian commercial is stable with provisions down slightly. International is also stable. Most of the good news is in Scotia Capital, where we saw both provisions and formations drop this quarter. Overall, there are signs of credit quality stabilization. In particular, a number of major companies in the power and energy trading sector continue to successfully restructure their debt. But there is weakness in some sectors and I'll have more to say about that in a minute.

Looking at the numbers on the next slide. Net impaired loans this quarter were $378 million, that's down $181 million from Q1, driven by lower formations in Scotia Capital. Specific provisions were also down to $248 million, a decrease of $77 million from last quarter. The $248 million is after $27 million in reversals related to Argentinean cross border exposure following either the sale or declassification of some loans. Excluding Argentina, provisions were $275 million, down about $50 million from Q1.

Looking at the net formations by business, slide 24 shows the net formations by business line in more detail. Scotia Capital formations, $83 million this quarter, were down substantially. There were only two major formations this quarter, Air Canada and a major healthcare company in the United States. There were also a number of loan sales and declassifications this quarter, mainly in the U.S. Formations in domestic continue to be modest given the size and growth of this portfolio. In international, there were net declassifications this quarter primarily related to the sale of Argentine cross border loans and reversals in Asia.

The next slide shows the trend in net impaired loan formations over the course of the past five quarters. As you can see, formations this quarter are well below Q1 down from $394 million last quarter to $153 million this quarter. This is the lowest level of net formations we've had since the third quarter of 2001. Slide 26 shows the trend in specific provisions, which decreased both quarter over quarter and on the year.

Turning now to our power and energy trading exposure, it's come down more than $500 million from last quarter with the decrease occurring across all sectors that reflects a combination of write-offs, loan sales, and permanent reductions in repayments, as well as some 4x impact.

As I mentioned earlier, a further number of major companies in the power and energy trading sector successfully restructured their debt this past quarter. This has made us somewhat more confident that this sector will not see multiple corporate failures. However, we will continue to view this sector with caution until all of the major companies have completed their restructurings and there's evidence of improving business fundamentals.

Turning to airlines, our exposure is not that significant, just under $400 million. We had one major classification this quarter. As you can see from the slide, we have provisioned aggressively for our impaired loans in this sector with coverage over 60%.

Another sector where some concern has been raised is the hotel industry, given the slowdown in travel and tourism. We believe our exposure here is very manageable. And there are two major pieces. The first is hotels in the Caribbean and Central America and other tourist destinations. We have a good handle on managing these types of properties. We've been through many of the down cycles, including hurricanes, as well as September 11th. We have very disciplined lending policies in place and very strict guidelines around loan to value requirements. The other part of our exposure is in the corporate hotels in North America. Our policy has been to bank only the best names which generally have strong financial support and an international presence. We have a couple of accounts that we are monitoring, but neither exposure is particularly large, and both are well secured. Unless the global economy weakens dramatically, we do not expect this sector to be a major concern.

Turning to market risk on slide 30, we have fairly low variability of trading revenue, in fact, more than 96% of the days this quarter had positive results.

On the next slide are the bar trends. While trading revenues remain strong, we did not take on increased market risk. The one day VAR this quarter was just under $9 million and that's small by some standards.

In summary, credit quality remains good in Canada and also stable across the international portfolios. The area of focus continues to be Scotia Capital. While certain sectors continue to show some weakness, there have been signs of overall credit quality stabilizing. We're continuing to monitor the power and energy trading portfolio closely as some major restructurings have yet to be completed. Overall, given the continued uncertain economic environment, we're being very conservative. However, our view of credit is somewhat more positive today than it was last quarter, and we expect specific provisions for the second half of the year to be below that of the first half, excluding Argentina.

And with that, I'll hand it back to Peter.

Thanks, Warren. To sum up, then, on the credit quality front, as Warren said, we're starting to see some signs of stabilization. Nevertheless, we continue to manage our portfolios on a conservative basis. So our attention is turning to the current challenge before us, as well as before the industry, which is achieving revenue growth. We expect global economic growth to remain soft well into next year, and I think that's on all fronts, Far East, Europe, North America, Latin America, and we're still facing a world of geopolitical uncertainty. So despite these difficult economic conditions, we are focused on growing our businesses, building on our strengths in customer service, our productivity, and our execution capabilities. We're particularly excited about the future prospects for Inverlat [ph] and the higher earnings contribution that will commence with our 36% per share purchase. We also take comfort in our strong capital position, which gives us the flexibility to expand businesses on a long -term basis or opportunistically and to increase our dividends. Over all, despite these challenges, we still expect to meet our 2003 performance targets.

And with that, I'll open it up for questions.

Thank you. One moment please for your inquiries question. The first question comes from Nick [indiscernible], Bancorp. Please go ahead.

Hello, going to the supplementary package on page 14. On the foreign exchange value there, $172 million and other, could you just define what the other is and what the split between foreign exchange and other is?

I show it's page 14, gross impaired loans?

Just on the change, a couple of different lines, the one on the -- where you go from gross impaireds to net impaireds, there's a foreign exchange and other adjustment there of $172 million.

That's just translation. That really comes from foreign exchange.

The majority is foreign exchange?

Correct.

Also the productivity ratio kind of creeped up in the second quarter compared to the first quarter. Is there any specific reasons --

I think if you normalize for the $31 million settlement from [indiscernible] creditors you'll find the productive ratio will be more in line with the last couple. The $31 boosted it a bit.

$31 million. Okay. On the hotel exposure, have you made any provision against loans that are currently not impaired, but you might have reasons to believe that you might have down the road or is it only for impaired loans at this point.

Only impaired loans.

I think under GAAP you can't have provision against nonimpaired loans. So by default it has to be against the currently impaired loans.

On the U.S. acquisition expansion strategy, could you just update us on that?

Peter.

[laughter]

[indiscernible] for delegation. Thank you. Yes. I mean, as we've said before, we've looked over the past year, almost year and a half at a number of different potential acquisitions in the U.S. We're down to a number that we thought might be suitable. We continue to look at it. We've always been very careful. To say we didn't view this as an end strategy in and of itself, it was just a partial strategy that might be combined with Canadian bank mergers or with the longer run view, because we couldn't see ourselves purchasing anything of scale or dominance in either management or technology, given what we were that it would be as much value added as we'd like to see for our shareholders. So we continue to look at it, we continue to size it, but we have no imminent plans.

Okay. Thank you.

The next question comes from Robert Weisel, National Bank Financial.

Good afternoon. I have a question for Peter following up on your comments about not wanting to buy back shares, not a good use of your capital given the fact your shares have gone up so much. I was going to ask now that you've trade at essentially a market multiple, is it really your view that your stock is maybe not the best use -- or buybacks, excuse me, are maybe not the best use of your capital? Are you making a statement, I guess, or at least notionally that maybe your shares have run ahead of themselves?

[laughter] Well, that's your statement, Rob. It's not my professional view. I think, frankly, and you've been one of our supporters, that our multiple was running behind itself. Part of that was the risk perception, part of which is softening. But what we have proven with our existing businesses, is even though we're overcapitalized somewhat, is that we are proving we can still earn a very adequate return on equity, that makes buying back at a very high stock price not that great use of our capital. So you're seeing that we're taking quite an aggressive stance on dividends as another way of returning capital, even though we're aware of the taxation. No, I don't think the stock has run ahead of itself. I thought it was catching up a bit.

Okay. And actually that does lead me to my second question, which is the tax write for Sarabjit. I may have misheard I thought you said during the call you expected a normal tax rate to the extent you can forecast that going forward to be somewhere between the last quarter and this quarter.

I think that's right, Rob, somewhere in the low 20s would be a fair -- somewhere in that range would be about right.

Somewhere in the low 20s. That's still a fairly meaningful decline over what we've seen in the past. Maybe I don't understand fully what's going on in the sort of moving parts. But can you give -- is it just simply because you're starting to get more earnings from the international side as a percent of total?

That's correct.

And if I could just add one more question, I notice that the Caribbean operations, there was a citation in the press release the Caribbean profitability had fallen, I think it was 20% year over year. Is most of that -- what is the composition of that decline between currency changes and, say, loss of market share.

I don't think it's loss of market share at all, Rob. I think it's predominantly currency. If you just take the Jamaican dollar year over year alone is 15% plus in terms of depreciation. And a lot of the other currencies are in the double-digit range, other Caribbean currencies. So the bulk of that is exchange. As well, we have some timing of loan losses in the quarter that will come back in line in Q3 and Q4. So, half of it's timing and the majority being exchange.

Okay, great. Thank you very much.

The next question comes from Jamie Keeton from RBC. Please go ahead.

Good afternoon. A couple of quick questions for Warren, perhaps, I wonder if you could update us on gross formations on the impaired loan front was. Or if we could talk a little bit about loan sales. I understand you've made some but I don't know how much you've sold. Could you give a dollar amount or how much was impaired and investment grade or otherwise.

I'll answer the second question first, this is Warren, and then ask you to repeat the first question because it was a little garbled over the speaker. We sold probably about $140 million of loans this past quarter. It would be roughly half and half impaired versus unimpaired. The first question was?

I just wondered gross formations of impaired loans versus net, if you could perhaps update us what the gross number was and how it breaks out, not net over recoveries. [indiscernible].

We show the gross of impaired formations basically on page 14 of the supplementary, Jamie.

153 is the gross formation?

That's the gross net formations, if that's the way you look. We don't really break out, we don't show the gross gross formations. That's really net of declassifications in the quarter.

Gotcha. Okay. Quick question, perhaps, for Peter as well, if you can hear me, at least. You mentioned, Peter, the expector [ph] of domestic mergers. Are we closed book on that for 18 months, Peter? Is there anything going on at all?

I think we're closed book, Jamie. I think it's a function of the politics of the time. But then I think they will be back.

Any questions in the room?

Could you expand on the wealth management performance in the last quarter? More specifically.

Again, it's what it was in terms of what you saw in the markets, Robin, both for McCloud [ph] and on the full service side. As you know, the mutual fund side for the industry was not there, so we had I don't think in terms of industry any abnormal. Our full service -- our discount quotia for McCloud Direct Investing which was our discount [indiscernible] the Schwab acquisition was relatively good, but was not meaningful or up. There was nothing unusual other than what it's it's been, a very disappointing industry and what have you. I think we're comfortable as we can be. We do the cost side very, very significantly and are working on the cost and taking some people out.

Robin if you go to page 7 of the supplementary you can see that trends in revenues are broken out there, you can see the retail brokerage revenues which are the bulk of the revenues going from $65 million to $63 and mutual funds going from $41 to $38, it just shows you the second quarter trends so you can see year over year as well. Basically it's just in line with market. So our market shares held up pretty well in terms of commissions.

We had two slow months in the quarter and the third month, April, was much stronger on the brokerage side. Also Q1 had some of the gains regarding PSX share sales, bolstered Q1. All in all, it was a slow quarter but improved towards the end as markets picked up, and all the other areas, other than the brokerage were pretty well on par with Q1.

Two questions. First on the Canadian dollar impact, I think a lot of your peers so far have indicated that there hasn't been much impact and basically that they hedge out their expected profits particularly on their [indiscernible] businesses. Can you give us a little color on why you would feel more impact than some of your peers.

I think part of the reason is that a lot of my earnings are not just in the U.S., they are also in the peso, they're also in Caribbean currencies, which are next to impossible to hedge. It's very difficult to get enough liquidity to really hedge, especially if you want to go out six months, nine months, a year, [indiscernible] to hedge. That's the bulk of it. On the U.S. side we did have a little bit but not enough, obviously to prevent having an impact.

Philosophically we're trying to manage the capital in the various currencies that prevent major changes in that aspect. That's why you sa that our capital ratios are virginly unaffected by big swings in currencies. That takes priority over attempting to time the hedging of the earnings side. Having said that, if you take the totality of the thing, we're fairly convinced that we can handle a stronger Canadian dollar going into next year and still record and stay with our guidance. It's partially where we're putting our priorities and how we hold our capital. We tend to run each of the sets as a separate balance sheet, which is back to the Caribbean equation. In a local currency basis or in Mexico, they are both doing a lot better than they show here, which is part of how they are run.

And then just a follow on question to that I think last quarter we talked a little bit about your GAAP position and how you were positioned for rising rates in Canada and the U.S. Can you talk a little bit about how that has impacted your result?

It hasn't really other than the comment that was made last quarter and this quarter that our U.S. dollar funding profits have been extremely low. They are lower than last year and running it at a low rate. That's a reflection of the position that's been taken in that side of the business and the fact there's zero yield curving in that business. I don't think anybody is making any money. Other than that, the Canadian side we're really in an economic sense more closely matched than the numbers show because of the optionality in a lot of retail products which don't get captured easily in a GAAP kind of calculation. So we're really more neutral. And of course we did have a little uplift in the Canadian rates. To that extent it was beneficial. As Sarabjit showed you in the margin, net net. It was a negligible change.

Back to the [indiscernible] Heather, as you know, we said our margins of foreign currency which is the North American funding and European funding margins were negative in Q1. They were less negative in Q2 and we don't expect them to be negative in Q3.

Thank you.

Michael?

Just a couple of things, first of all, card revenue seems to be unusually low this quarter. Is there anything --

The majority of that is [indiscernible] that will come back in Q3.

Secondly, I just want to see if my memory is correct. I see you say in your presentation the swap based compensation had a $20 million impact this quarter, that's against zero last quarter or near zero. Was that correct?

Pretty close to that. That's correct.

So, overall, and you lump together the stock based compensation and the variable compensation, am I correct in observing that your variable comp is a percent of brokerage underwriting and trading revenue was up somewhat this quarter? Looks to me, you know, somewhere in the order -- I think excluding the stock-based compensation, in the order of, say, 50% versus about 40% last quarter. Where would you say is the level that you're actually aiming for?

I think it's really a function of the timing of accruals on the performance-based compensation, Michael. I think the number this quarter is more likely, better run rate rather, than last quarter.

Okay. And finally on a more general tone, Peter, you raised the point about revenue growth as being a key issue for the Scotia and for banks generally. What's the fate of you guys? I mean, of the banks ultimately, if you can't solve this? Do you just roll over and become income trusts or what?

[laughter] Well, I think philosophically, one, we're in an industry that, say, unlike commodity based or others, is tending to hold its margins. That's one good thing. Two, I think when you look at Scotia, we have this wonderful oligopoly called Canada. We're competing effectively, we've held our market shares, we're not price discounting, particularly, that's holding. And we've got our cost -- people two or three years ago said your efficiency ratio is too low, you have nowhere to go. But we've gone down as fast as our peer group, and believe me, Bob and Rick and others have many programs in place, so I'm confident there. Meanwhile you're still going to get growth that's say triple the money, the inflation proxy. So, you are going to get [indiscernible] and frankly, we've had mortgage growth and other things that have exceeded our expectations in the past month or so. So we're optimistic as we go forward.

In the capital market side, the trading revenues have held up. We are far ahead of U.S. peers to take that in terms of our exit accounts and what's going down. You've seen the shrinkage in those books in the spread income. We're back now still dealing with that [indiscernible] over to the credit cycle, but we're certainly back in a marketing phase on our focus accounts. I think we can arguably look forward and say that's not a shrinking revenue number, that will be a growing revenue number. And then on top of that you've got your credit losses.

On the international, we grew over 40% in retail and commercial in Mexico. Embedded in those numbers is a repayment of some government loans that come out of restructuring. So the growth there and the quality of the growth, because we're all over it with audits and everything to make sure we're not putting on bad paper to get growth, is very, very good and we are still growing in the local currencies at a double digit rate through the Caribbean. We're doing well in Chile. So we can arguably look at that, sure, we have to deal with the translation aspect of a strong dollar, but where's the dollar going to be? 80 cents? I don't think so. But in the 70s, we've got growth coming. So we can look forward to 2004, anyway, and the balance of this year and say, yes, there is growth in here.

But we see the challenge. We're still generating capital at a very large rate. We're generating closer to a billion five of free capital that we have to somehow employ for our shareholders going forward. So much dividends, so much stock buyback at what price, and make sure that we buy carefully and selectively, in everything we do on the acquisition front.

Vincent?

Just a follow-on, you said you're going to hold to your current guidance on most of your financial objectives, and obviously the EPS growth of 5 to 10% in the back half of the year means really 10 to 20% back half growth. Given what you just said, we all like to think about 18 months the mark is rational, we'll look good so far. The next six months, that looks exceptionally challenging. Are there things you gave us, obviously Mexico comes in, that offsets the tax report you had in this quarter, do you see anything in terms of levers that are available now as you look for the next six months in hitting particularly that EPS growth target?

Well, the EPS -- I was joking with the board that if the stock price fell, then our stock-based compensation makes our earnings easier to do, and we can do more buybacks, which is like deviant behavior for a shareholder. So I'm not really sure I want to get trapped on one metric that will lead us in the wrong direction. If I look at the totality of Scotia in the next, you know, month, 18 months, two years, you see a very strong and consistent management team that's going through succession seamlessly. I think that's good. A team you know and what they can do.

We've earned our way through various credit cycles that we'd like not to have been as deeply embedded in as we were. But we've tended to take a view and we're taking it on hospitality that we know the assets we have, we know where they are, we know each hotel, and we're fairly comfortable with the policies we have in place. And we can do that. We're obviously going to get some pickup from the credit cycles. We've got a very good set of franchises internationally that have embedded in them double digit growth because of demographics, and because of our particular market shares. We're very comfortable with our domestic competitive position. Well aware of the fact that the oligopoly, everyone has fallen in love with retail and it's going to be tough. But we feel our customer satisfaction is second to none, as benched outside. Our employee internal ratings of where would be the best place to work are running at 86%. They have never been that high. So our staff are in good form and we're a great believer that service makes it and then we are on top of our U.S. situation. David is personally spending a lot of time down there and with the team, and we're pretty comfortable we've got it turned and we're right sized. So we look at that part of it and say we're in very good shape to face a slow economy and to fight for share, and we're pretty confident over the next quarter to six quarters we can grow it.

When you go beyond that, you're back into mergers, you're back into strategy of mergers. You're back into well bank insurance come to this country, which could be distribution opportunities, and you're back into what and when and how do you expand in the U.S. given we have very good franchises in Canada, Mexico, and Caribbean. So for Scotia, let alone other Canadian banks, it makes certain sense to look at personal and commercial banking in the U.S. as a potential opportunity. And you're looking at a multiple expansion in a currency that has actually put you in better place internationally at least to look at a potential different strategies if you chose to so do. So I'm fairly confident that we can get you the growth. The earnings per share was always going to be tough. It obviously is manageable by stock buybacks, but we've always been of the position that we weren't going to chase the stock with a buyback for the sake of earnings per share, because it really wasn't good behavior for shareholders. They lost, not won.

If I could follow up on two issues you raised, for Warren and David. On the hotel portfolio, Warren, you talked about having good security. Could you give us a sense in terms of average loan to value ratio, let's say on investment grade versus noninvestment grade as you've aligned them, and then, you know, how much of that exposure is secured, perhaps, on that same demarcation. And then secondly, David, you've given us updates on where you are in terms of allocating your book to as others are calling it core, noncore, what progress you've been making on that front, and just generally what you're seeing in the market from your borrowers. Are you extending out lines and then not getting usage? Are you pulling in drastically the term facilities you're putting out there? Just what's the environment that you're facing out there?

In terms of the hotels, Quentin, it would not be unusual, and I speak first to the Caribbean, Latin and Central America, it would not be unusual to be in the 50% range, loan to value, and always secured. In the corporate portfolio, of course, we've restricted our exposure to the top names, the top flags. Most of that would be secured as well. And we go through this portfolio and we just completed a review here two or three weeks ago of the entire portfolio looking at each of those accounts, reviewing their performance, the status in terms of their ongoing financial position, what our loan to value ratios were, and we're fairly comfortable. Now, having said that, if you've got another six months of poor travel environment, some of those will continue to suffer. And I will not tell you that there wouldn't be some further downward risk migration. But at this point in time, and as I've said earlier, we've been through 9/11, we've been through hurricanes, we've been through a lot of factors in this business over many, many years. We actually, I think, when you look at our book of business in the Caribbean, in the last 17 years, we took six losses on hotel lending projects - on hotels for an aggregate amount of less than $10 million. So that gives you a sense of how those -- how the loan policies have held up through the fullness of time.

Quentin, a couple of questions I think what you asked me. The core, noncore progress from November the 1st, '02 which is really [indiscernible] we're down about 33% in committed amount from where we started. So, we're about a third of way there. As you know from what I've said in the past, we're determined to get noncore off the books in a very gradual staged way, not taking a P&L hit in doing it. We could do it more quickly but it would be expensive. On the existing core accounts, how are we doing, I think you were asking?

We're cross selling more products to each of them. Our return equity for each of them i going up. The challenge in the core accounts and Peter alluded to this, is to get growth in that core book is challenging right now because a lot of corporations aren't putting up new plants, they aren't making acquisitions and many of them are going to capital markets and paying down their bank loan. So we have that cyclical dynamic. But the progress in getting the returns up in those core accounts is quite good.

Ian.

A hotel story, you've already talked about the development in the Caribbean. There's about a billion here that is probably Asia and Europe. Can you talk to, I guess granular activity? How big is the biggest name in here? Is it 50-50 Asia/Europe? Did you classify any hotel credits in the quarter? I think one of your competitors did classify credit in the quarter.

It's primarily Europe and other destinations. There's a very, very small part of it in Asia that would be subject to SARS concerns. So it's primarily Europe and other destination type resorts. This quarter we did classify two hotels. It was for a modest amount. As you see in the material, we have in the high 40s in terms of classifications. Two were a added to that category this quarter and provisions were made against those nonperforming loans. And we're watching -- I would say we have two on our watch list at this point in time for the remainder of the next two quarters that are struggling a little bit. The exposures are not large. The book of business is well diversified, as I said, by name, by geography and by type of property

Is the biggest $75 million?

It might be $100 million, the biggest.

If I could go back to questions on the phone.

The next question comes from Derek [indiscernible], Research Capital. Please go ahead.

Hi, good afternoon. Just two questions. If you could just remind us about your philosophy behind hedging your stock-based compensation costs. And the second question relates to in Inverlat, I wondered if there was going to be any major strategic shifts here with Inverlat over the next year or so?

On the hedging of our stock based compensation, we would like to hedge more of it, but again with the sharp runup in the stock price we're unable to do so. We have about a third hedge. On in Inverlat --

I'll take in Inverlat [ph]. I know you saw we acquired 36%, which is good and significant for us. And we will go after, and presumably I think we will have the last 9%, so at that point we will have effectively 100%. As Peter has said this is something we're very enthusiastic and confident on. The strategies going forward are, quite frankly, the ones that have this year have been successful in an average economy. In residential mortgages and in car financing, we are a P&C bank down there but we also have Scotia Capital or [indiscernible] fully integrated. We're going to keep doing that thing. We think with the growth factor out there we'll add branches but we're not going to add huge amounts and continue with the growth that we see. So it will be generic growth and we'll be looking for opportunities. Maybe we can add a package of branches, what have you, as we go forward.

Great, thanks.

The next question comes from Jamie Keeton, RBC. Please go ahead.

As a follow on Rick, does that mean Benarti [ph] is not an option?

Yes, sir. We don't rule out Benarti [ph]. We know Don Roverto Gonzalez [ph] well, and we're in touch with them. We don't see it as imminent at all. His son is not on the board. They know and trust us, so upon long run, we don't know where Benarti [ph] will end up.

Any other questions on the phone?

The next question comes from Robert Weisel, National Bank. Please go ahead.

Hi, I just had one more question. Unless I missed it did you address specifically the issue of provision guidance for 2003?

I think what we said, Rob, is that provisions in the second half of 2003 will be less than in the first half.

I'm sorry, excluding Argentina?

That [indiscernible] refers to the $27 million provisions that we had this quarter.

Okay. Great. Thank you.

The next question comes from Steve Colly, TD Newcrest. Please go ahead.

Hello, Steve? I think we lost Steve. Any other questions on the phone?

The next question comes from Theodore Coselet, Sky Capital. Please go ahead.

Yes. I came in a little late. So if you answered this before I got here, I apologize. I wonder if you have anything to add with regard to potential expansion into the United States?

I think we did cover that. Do you want to listen to the replay, you can hear the replay on our website.

Very good. Thank you. Okay.

Gentlemen, there are no further questions from the phone lines. Please continue.

Any questions in the room? Heather?

[Indiscernible]

It's closed as of April 30th. We paid them the money as of that date. The 9% is outstanding, we hope to close that within three to six months. If there are no other questions, thank you all for coming. We look forward to seeing you all in three months.

Thank you