Bank of Nova Scotia (BNS) 2003 Q4 法說會逐字稿

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  • Sabi Marwah - Senior EVP and CFO

  • Good afternoon and welcome to the presentation of Scotiabank's year-end results. I am a Sabi Marwah, Senior Executive Vice President and Chief Financial Officer. With us today in Toronto are Peter Godsoe, our Chairman; Rick Waugh, our newly appointed CEO; Bob Chisholm, Vice Chairman; David Wilson, Vice Chairman; Bob Brooks, Senior Executive Vice President and 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 by Rick. We will then be glad to take your questions. This presentation is also available on the Investor Relations website at Scotiabank.com.

  • Peter Godsoe - Chairman

  • Thanks, Sabi. Happy to report record earnings for the fourth quarter and for 2003. For the quarter, as you now know, our earnings per share was 126 versus 109 a year ago. ROE was strong at 18.6 percent. Looking at our full-year results excluding Argentina, as I mentioned we had record earnings with EPS of $4.69, an increase of almost 8 percent; and the ROE grew to 17.6 percent.

  • In large part these good results are driven by lower loan losses. For the quarter, the provisions came in at 120 million, a decrease of 80 million from the prior quarter. For the year, the provisions were 893 million, down almost 700 million, after excluding the provisions we took for Argentina in 2002. This improvement helped us earn through the negative impact of the stronger Canadian dollar, which hurt us it was painful, on the translation of our foreign currency earnings.

  • Still a very big plus for us is the strength of our capital ratios. Tier 1 up 10.8 percent and, more importantly in my view, tangible common equity ratio of 8.9 percent. Strongest of major Canadian banks and very good by any standards. This capital strength and our strong earnings enabled us to keep increasing dividends, with a further increase of 6 cents to 50 cents per common share in the first quarter of 2004. Overall, then, this was a very good quarter and a good year.

  • Next slide shows the strength of our major and a diversified business lines; and in particular we saw substantial improvement in Scotia Capital due to the significant reductions in credit losses, although there were other very good factors, too. International earnings were on a par with last year, notwithstanding 94 million negative impact of foreign currency translations. In other words, the underlying in our international is clearly positive.

  • Domestic division, which includes Wealth Management, saw a record growth in retail mortgages and core deposits, accompanied by solid gains in market share. This growth in volumes was offset by narrowing of margins and an increase in expenses, primarily related to performance-related compensation and to investments in technology.

  • In terms of our 2003 performance, we met all our targets. ROE, 17.6, against the band of 15 to 18. Earnings per share was 7.8 percent up, in the middle of our 5 to 10 percent target. I might add that we didn't really use stock buybacks at all this year on the earnings per share target. Productivity was 54.9 percent, where are below our 58 percent. And in terms of capital ratios, as I mentioned, we remain industry leaders; our Tier 1 ratio at 10.8 percent is well above our target; and our tangible common equity of 8.9 percent is really world-class.

  • Next slide shows are record of earnings growth and the consistency over the past decade. We take pride in this record of consistency, which we believe is a function of our culture, a very steady culture, very hard-working, and superior execution. A team of over 44,000 people dedicated to each of our various businesses around the world. And I want to thank them personally on behalf of all of the executives for the outstanding efforts they had in delivering these great results.

  • This record of consistent earnings growth has been matched by insisting growth in dividends. We had two dividends this year and delivered a third increase, the 6 cents, effective in January. With that, our dividends are up over 25 percent over the past year; and, furthermore, they have more than doubled in the past four years. As you are aware, we recently increased our payout ratio to 35 to 45 percent, and this brings us just to slightly below 40 percent, well up from the low 30s of last year and the past decade. I will now pass it to Sabi to talk about our performance in more detail.

  • Sabi Marwah - Senior EVP and CFO

  • Thank you, Peter. Beginning on slide 9, this slide outlines the negative impact on our results of foreign currency translation, as a result of the strengthening of the Canadian dollar against most of the currencies in the countries where we operate. For instance, this year the Canadian dollar appreciated by 15 percent against the U.S. dollar, 22 percent against the Mexican peso, and 31 percent against the Jamaican dollar. The translation affected every revenue and expense line, including on a whole-year basis, to the right, a -515 million on revenues and a positive 270 million on expenses. The net effect was lower earnings of 160 million, or 21 cents per share, on the whole year, and 13 cents per share versus the fourth quarter of last year. We did some hedging and other actions that mitigated some of this impact; and as Peter mentioned, we earned through the rest to still deliver record earnings.

  • On the next slide is our revenue growth. The overall reduction of 442 million in revenues was more than accounted for by the impact of foreign currency translation. As well, it was negatively impacted by the sale of the Merchant Acquirer business in 2002, which included a gain on the sale and the revenues from that business, and to a lesser extent by the sale of Quilmes last year. Excluding these items, revenues grew by 319 million or 3 percent; 413 million coming from growth in other income, offset by lower net interest income of 94 million, mainly due to narrower U.S. funding margins. Notwithstanding this modest 3 percent underlying growth in revenues, we believe we have a great engine in international, particularly in Mexico, that will continue to add to revenues in a material way. As well, we believe there is good growth potential in domestic and Scotia Capital.

  • Looking at slide 11, here is the impact of the three items I just mentioned on other income. At the top right, reported other income was up 73 million or 2 percent year-over-year. However, adjusting for these items, underlying other income was up substantially at 413 million or 11 percent. On the left, compared to Q4 '02, the underlying increase was even more evident. Reported other income was down 1 percent; however the underlying was in fact up 158 million or 18 percent.

  • The next slide provides a breakdown of the underlying increase. On the right-hand side, year-over-year investment banking performed very well, up 128 million, including record results in underwriting, foreign exchange, and precious metals. Trading was up a strong 91 million. There were also increases across the board, in deposit and payment services, credit fees, and cards, partially offset by lower security gains and securitization revenues. On the left-hand side, looking at this quarter versus the same quarter last year, a similar picture emerges, with the exception of security gains which were 76 million higher than the same quarter last year.

  • Turning to slide 13, as I mentioned, the underlying growth in other income was partially offset by declining interest income, mainly due to lower margins. Year-over-year, on the right, the major reason for the 11 basis point decline in the margin was lower U.S. funding from the exceptionally high levels we earned last year, and some compression on the Canadian side. On the left, the 6 basis points decrease versus Q3 was due to lower Canadian dollar spreads, as a decline in interest rates in the quarter led to lower asset yields, but not as great a decline in deposit costs because a large amount of deposits already non-interest rate sensitive or at a nil rate.

  • Turning to expenses on slide 4, reported expenses decreased 4 percent for that year as well as on the quarter. However, if we exclude the same items as we did on the income side, and take into account the tax-related recovery which reduced expenses last year, expenses rose by 6 percent on the year and 15 percent versus the same quarter last year.

  • The next slide breaks down this underlying increase. The largest contributor on both the year and on the quarter was higher stock and performance-based compensations, reflecting the bank's strong overall performance, as well as a substantial 43 percent increase in our share price this year versus a decline in the fourth quarter last year which created a credit. Pension and postemployment expenses were also higher year-over-year, given a lower return on asset assumption and lower asset values. I would also mention our pension plan is still in a surplus position of close to 200 million.

  • Next was litigation expense, which related mainly to two issues in Canada. We do not have any litigation issues or other problems on any of the well-publicized cases in the U.S. The remaining increases were in technology-related spending to support new products and achieve efficiencies. We continue to invest in several new platforms both in Canada and internationally; plus our data center expenses related to the outsourcing to Symcor is now shown in one category, that is computers, rather than in salaries, depreciation, and so on.

  • The growth in the other category at the bottom includes several small increases including severance, related costs related to the acquisition of branches in the Dominican Republic, the reclassification of Scotia Gold credit card points from other income to expenses, higher mortgage acquisition expenses from the growth in the portfolio, and normal inflation-driven increases.

  • Slide 16 shows our productivity ratio, where we have not given up our advantage. At 54.9 percent for the year, it is unchanged from last year; and we continue to lead the Canadian banks in this area.

  • Turning to slide 17 on the right, the deduction for noncontrolling interest in the income of subsidiaries increased 64 million from last year. This was mainly because of the issuance of Scotiabank Trust Securities, or Scotia BaTS, on April last year and February of this year. As these Scotia BaTS represent Tier 1 capital, the bank was able to redeem certain preferred shares in 2002 in 2003. Therefore, the increase in costs related to Scotia BaTS was offset by lower preferred share dividends, shown at the bottom. On the second line, the reductions to Inverlat were because of the bank acquiring additional 36 percent ownership interest. Lastly, the increase in other was from higher earnings in a subsidiary in Jamaica.

  • Looking at slide 18, capital strength remains a big plus for us. All our capital ratios, as Peter mentioned, are very strong. Tier 1 is now 10.8, up 90 basis points from last year. Even more important, the tangible common equity ratio, which reduces common equity by the goodwill and intangibles, is particularly strong at 8.9 percent, 60 basis point higher than a year ago and by far the best of the Canadian banks.

  • Turning to slide 19, the unrealized gains in securities; our surplus has now risen to 703 million at year-end, an increase of 44 million from last quarter and a significant improvement from the deficit of 25 million we had last year end. This quarterly increase came from highest (ph) values of our emerging market debt, while the year-over-year increase was across all of the bank's investment security categories, common equities, fixed income, and emerging market bonds.

  • Turning to the business line results, starting on slide 21, as Peter mentioned, all of our three business lines did well. You can see that they all contributed a healthy share of the bank's earnings; basically a well-diversified earnings base.

  • Looking at each of the business lines, beginning with domestic on slide 22, domestic banking, which includes our Wealth Management business, had another solid quarter with earnings of 264 million. A major positive factor has been a tremendous growth in retail lending. On a spot basis, mortgages increased a record 6.5 billion in 2003; plus our revolving credit products rose by 17 percent. In deposits our Money Master account was very successful. This volume growth was largely offset by a lower margin year-over-year. Other revenues were up 22 percent from last year, after adjusting for the impact of the sale of the Merchant Acquirer business. Stronger markets also drove increased client base revenues in retail brokerage, where related revenues were up 26 percent.

  • Expenses rose 133 million over last year, driven by higher salaries and stock-based compensation, investment in several technology initiatives, and higher mortgage acquisition expenses. Credit quality continue to be very good in both retail and commercial. In fact, our retail loan loss ratio of 26 basis points remains an industry best.

  • As mentioned earlier, much of our success this year in domestic has the driven by lending and deposit growth. As you can see on slide 23, as of September 30th our mortgage market share has risen by 22 basis points, and our checking and savings deposit share by a substantial 69 basis points, reflecting the success of our Money Master account. We also had success in growing our fee-based retail brokerage business, with ScotiaMcLeod having the highest growth rate for fee-based assets among the major brokerages for the second consecutive year.

  • This growth has been supported by a continued emphasis on customer service excellence. Scotiabank once again achieve the highest rating for overall customer service excellence amongst Canada's major banks. These results, from an independent national survey by Synovate, build on Scotiabank's number one rankings in each of the last three years. Last but not least, employee morale in the bank is excellent. In our latest employee survey, 80 percent of employees, the vast majority of whom are in the domestic bank, indicated that Scotiabank was a great place to work.

  • On slide 24, Scotia Capital had earnings of 221 million in the quarter, the highest since the first quarter of '99. Earnings were up a substantial 163 million from the same quarter of last year; and also up 15 percent from last quarter. These better results were driven mainly by lower loan losses (indiscernible) in the U.S. and in Europe. Year-over-year loan losses were down 344 million, which came primarily from the U.S. portfolio. And quarter-over-quarter, they fell 110 million, but lower provisions in the U.S. and recoveries in Europe. Warren will be elaborating on this in a moment.

  • This quarter Scotia Capital also had a strong performance in investment banking. However, total revenues were lower than last year, the result of a number of factors including the stronger Canadian dollar; a decrease in U.S. corporate lending volumes, which were down about 30 percent year-over-year because of foreign currency translation and more selective lending; and narrower U.S. funding margins compared to the very high levels achieved last year. Expenses were stable.

  • Turning to international operations on slide 25, this quarter international net income was 156 million, up 28 million or 22 percent from last year, but down 19 million from Q3. In the Caribbean and Central America, net income was 18 percent lower than last year, entirely from the stronger Canadian dollar. Underlying results in local currency were up 14 percent. The lower earnings this quarter compared to Q3 were because of higher loan losses and the timing of certain project expenditures.

  • In Latin America, excluding Argentina, earnings rose year-over-year due to the acquisition of the additional 36 percent of Scotiabank Inverlat. As well, Inverlat's assets and deposits continue to grow. I will have more to say on Inverlat in a minute. Compared to Q3, net income in Latin America was flat, as lower investment income was offset by provision reversals related to Argentina.

  • In Asia, net income rose substantially compared to last year, but fell slightly quarter-over-quarter. The increase from last year was from a combination of lower credit losses as well as higher fee income. Overall, when you strip away the impact of foreign exchange, the underlying retail and commercial operations in international had a fairly solid quarter.

  • Inverlat is on slide 26. Inverlat's contribution was higher this year, driven by an increase in our ownership interest, and by solid underlying earnings growth due to assets and business. For instance, retail loans were up an impressive 62 percent; commercial lending increased 21 percent; and core deposit rose 12 percent. And our market share was up in these areas, as well. Contributing to the increase in retail assets was the purchase of a US$350 million portfolio of auto loans from the finance arm of a major international auto company. On the customer side we were very pleased to be named Best Bank in Mexico for 2003 by Latin Finance Magazine, which reflects our emphasis on customer service, where we are also a market leader.

  • During the quarter the purchase price equation of our 36 percent acquisition of Inverlat was finalized. This resulted in the creation of 62 million in goodwill and 16 million in intangible assets. On tax losses, to date at the consolidated level we have not been recognizing any of Inverlat's tax losses, as they must first be applied against the existing Inverlat goodwill and intangible assets. In the fourth quarter, we set up a future tax asset, with respect to a portion of these tax losses. This eliminated all of Inverlat's goodwill and has reduced the intangible asset balance to 18 million. Given Inverlat's tax loss utilization, the remaining intangible asset will be eliminated in the first quarter, at which point we will begin to recognize the benefit of Inverlat's tax losses in our consolidated net income. Overall we are very pleased with Inverlat's success in 2003. We anticipate acquiring the balance of the minority interest in 2004 and look for continued double-digit earnings growth.

  • In summary, businessline performance was solid this quarter with improved credit quality, allowing us to earn through lower spreads and the impact of foreign currency translation. I will now hand it over to Warren to talk about risk management.

  • Warren Walker - EVP, Credit Risk Management

  • Thank you, Sabi. Good afternoon. I'll be starting on slide 28. The story this quarter was continued reduction in credit losses and net compared loans. Specific provisions were down to 120 million, and that is a decrease of 80 million from last quarter. For the full year, specific provisions were 898 million, down 1,136,000,000 from last year. Excluding Argentina, provisions were still down a very substantial $618 million.

  • Net impaired loans were 47 million, and that is down 270 million from Q3 and a significant improvement of 573 million from the same quarter last year. This is the fifth consecutive quarter that net impaired loans have dropped, largely as a result of lower levels of impaired loans in Scotia Capital, and the effect of the sale of our Argentine operations last year. The biggest contributor to the year-over-year decline in loan losses was Scotia Capital, and that is where things are certainly improving.

  • Slide 29 shows the breakdown of provisioning by business line year-over-year and over last quarter. Looking year-over-year first, the domestic division at 272 million was down slightly from last year, with quality remaining strong in both the retail and the commercial portfolios. In international, excluding Argentina, provisions were 137 million this year, up from 69 million last year. This increase was due primarily to lower recoveries in Inverlat this year, as well as higher provisions in the Caribbean.

  • As I mentioned, the major improvement year-over-year was Scotia Capital. The U.S. portfolio had substantially lower provisions in the second half of the year, reflecting the recovering U.S. credit markets and the actions that we took in managing this portfolio. For the quarter the 91 million reduction in provisions excluding Argentina was largely in Scotia Capital, which had net provisions of just 22 million versus 132 million last quarter, as previously established provisions were reversed during the quarter, due to higher realization from loan sales and loans returning to performing status.

  • Slide 30 shows the improving trend in specific provisions, which decreased dramatically over the past four quarters. As you can see from the slide, the vast majority of the improvement has come from lower provisioning of Scotia Capital; provisioning in the other business lines has remained fairly steady.

  • Turning to slide 31, we see net formations by business line for the quarter. Scotia Capital formations were down again this quarter to just 8 million. Scotia Capital Canada was up 89 million, and that is mainly due to the classification of two medium-sized steel accounts. In the U.S. we classified one energy account this quarter, but it was more than offset by several sales and declassifications. In Europe there was one hotel account that was classified impaired. Formations in domestic and international continued to be modest, given the size and the growth of these portfolios. As well this quarter, we reclassified $114 million in foreclosed assets from impaired loans to other assets, in line with the new CICA standard. Most of these were in international.

  • The next slide shows the positive trend in net impaired loan formations over the course of the past five quarters. As you can see, formations this quarter were well below Q4 last year, down from almost 400 million to 91 million, excluding the impact of the transfer of the foreclosed assets.

  • Turning to our cable and telecom exposure, at 3.1 billion it was down almost 800 million this quarter. The decrease was partly due to Forex, but we also sold several loans and had paydowns on several accounts. As a result, our gross impaired loans, at 386 million, was down 266 million from Q3; and net impaired loans also fell by 175 million.

  • Turning now to our power and energy trading exposure, it has come down by more than 650 million from last quarter, with almost all of the decrease occurring in the noninvestment grade portions, reflecting a combination of write-offs, loan sales, and repayments, as well as the Forex impact. As I have mentioned previously, most of the big-name accounts have successfully restructured; although we did classify one account this quarter.

  • Turning to market risk on slide 35, we have fairly low variability of trading revenue, and we continue to run this business with very little risk. Our one-day VAR was fairly modest at 8.8 million in the fourth quarter, and was fairly stable over the year. As well, it was at the low end compared to the other Canadian banks.

  • In summary, the biggest contributor to the credit improvement in both net impaired loans and loan losses was the U.S. portfolio of Scotia Capital. Credit quality remains good both in Canada and also in our international portfolios. Looking ahead to 2004, obviously the continuation of the positive trends, particularly in Scotia Capital's U.S. portfolio, will depend on ongoing economic recovery and strong capital markets. In Canada, the rapid appreciation of the Canadian dollar has not yet fully impacted some of our borrowers, and we will have to wait and see how this plays out. Nevertheless, given recent trends, we expect 2004 specific provisions to be lower than those in 2003. With that, I will turn it over to Rick.

  • Rick Waugh - CEO

  • Thank you, Warren, and thank you, Sabi, and thank you, Peter, for a great year and a great 11 years. These results are just fantastic; and I just don't mean the financial ones. I think on all measures of that, I owe congratulations. Thank you much for the great year, Peter.

  • Now we look to next year, and our goal is to do better than we did in 2003, and we will. My optimism comes from three areas. First, given the expected economic recovery, we are optimistic about reduced credit losses. This gives us some real leverage going into next year; and we have and are taking steps, as you know, to ensure that the loan losses stay well controlled into the future, not just for 2004, but also beyond.

  • Turning to capital, we fully intend to keep our capital base strong. It provides us with tremendous flexibility to expand our businesses, handle unforeseen risks, buy back shares; last but not least, it gives us the confidence to keep increasing dividends, just as we have done today, and we expect this trend to continue.

  • Finally, but I believe the most important challenge, is the optimism is growing, which we believe to be considered the number one challenge we face. We believe we have good prospects because we have three strong and distinct platforms. This diversification in platforms has allowed us to earn through the previous challenges, such as Argentina, such as the higher loan losses in the U.S., and in 2003 the rapid foreign exchange movements.

  • So let me give you a brief overview of the growth prospects in each of our three businesses. First of all, domestic. In domestic we do have a big competitive advantage, in that we are the leader in customer satisfaction and loyalty. Our customers have told us that now for four years. We believe that this gives us a tremendous opportunity, not just to increase the share of their business, but also to attract new customers from that large pool of customers who don't currently deal with us.

  • Therefore we've initiated several strategies to accomplish this. For example, we are launching more focused advertising and branding, which we can now do because of our industry-leading and award-winning technology in data marketing. We are also launching and have launched many innovative products; more to come. As well as leveraging our leadership in existing areas, such as our leadership in the indirect auto market.

  • Another key growth driver for us in our domestic will come from expanding now integrated Wealth Management operation. We have now rebuilt this business, adding significantly to management and technology; and we are in a strong position to leverage our position two ways, through referrals and by capitalizing on higher levels of service and, most importantly, performance. And of course, Scotiabank's core strengths of cost control will continue. We are continuing implementing initiatives and technology enhancements to improve productivity and, importantly, to create additional sales capacity for our branch staff.

  • Now moving to Scotia Capital, our second growth platform, we have achieved a top three position in wholesale banking in Canada, in Canadian lending, in fixed income, in equity underwriting, mergers and applications. We have a broadening array of corporate and investment products services, and we intend going forward to leverage this, to get new mandates, sell more products, get more business. We will do this by cross selling capital markets, advisory, and credit facilities, and insuring that we have the best people in the industry.

  • Our global trading business has been extremely successful over the past several years. Why? We have, I believe, some of the best and greatest people, reinforced with very strong risk metrics and technology; and our risk profile is still the lowest. So we know we have room to grow this business in Canada, the U.S., and internationally in Mexico. In the U.S. we are a looking for controlled but sustained growth. We are focusing on deepening profitable relationships from those long-standing customers. We have over 600 focused clients. The majority of these 600 are Fortune 1000 companies. We can offer our U.S. client a broad range of products and services, including leveraging our international presence.

  • And lastly for Scotia Capital, control credit quality. We will continue to offer a wide range of credit facilities for our relationships. We are in the business of lending. But I want to emphasize that we have put in place improved processes and disciplines to manage this more effectively going forward, and insuring a much better balance of risk and reward.

  • And finally, taking a look at our international operations, for us it is a great platform for growth, a third and diversified earnings stream. Our international markets have good demographics, faster growth rates, and lower banking penetration of financial services than they do in Canada or in the United States. First and foremost is carry on with our proven and winning strategies in international. In the areas of sales and service we are implementing proven (indiscernible) programs to ensure we do the very best job of managing customer relationships, providing consistent customer experience that will attract customers, build loyalty, and generate profitable revenues. This makes us leaders in these markets, as it did last year in Mexico and the Caribbean.

  • As well, we plan to continue to aggressively expand product offerings in these markets. We will also leverage our distribution networks, and we will look for strategic analysis where they can help us, such as insurance. Continuing to improve our productivity here is a given. Leveraging our Canadian expertise, and through the introduction of new technology, new processes. Next year we expect to fully install a new International Banking platform, modified on our Canadian model, right across the Caribbean, which will allow us to do a lot more for a lot less. You will also see growth in the Spanish Caribbean and Central America. We just increased our presence in the DR, where we acquired 39 branches with good long-term prospects. But we will also be expanding in Costa Rica, El Salvador, more recent entrants to Scotiabank where we believe growth opportunities are faster than in Canada.

  • Before I conclude and move to our targets for 2004, I think I should say a few words about mergers and our plans for an acquisition in the United States. In Canada, nothing can or will happen until we get some clarity from Ottawa, which will not likely happen till at least mid 2004 and/or even later. This uncertainty in Canada has a direct impact on our plans in the United States. We do not intend on making any acquisition in the United States until we get the needed clarity regarding mergers in Canada.

  • It is essential we manage both our human and our capital resources very carefully. It would be extremely difficult to execute successfully both a Canadian merger and a meaningful U.S. acquisition at the same time. But if and when we do decide to make a move in Canada, or the U.S., or in fact anywhere, we are keeping all our options open. It will be disciplined, the Scotia way. We have no intention of stretching our resources or overpaying just to be in a market.

  • This is why we will stay totally focused on looking for growth from our existing businesses and to ensure that our 2004 targets reflect this. Indeed, we have revised them upwards. Our earnings per share growth target is now 10 to 15 percent, up from the 5 to 10 percent last year. Our return on equity target for 2004 is increased to 16 to 19 percent, versus 15 to 18 percent last year. We are still planning a productivity ratio below 58 percent, and we will continue to maintain our strong capital ratios and our credit ratings. With that, I will pass it back to Sabi, who will open it up to questions.

  • Sabi Marwah - Senior EVP and CFO

  • We begin with questions in the room.

  • Unidentified Audience Member

  • A question for David in terms of Scotia Capital. First (inaudible) quarter largely driven off the credit performance in the quarter; I imagine that type of loan loss provisions are not sustainable going forward. But the division is a challenges in the context of revenue growth, and particularly as assets run off. Has the division come to a point where it can re-enter the U.S. market in terms of funding asset growth, as players are leaving, like the other Canadian banks in terms of their asset run off? Is there opportunity with spreads to go back and see some nominal asset growth in 2004? And if not, is there more room on the expense line to maintain the earnings momentum, as well?

  • David Wilson - Vice Chairman

  • I think the answer to your question about pursuing growth in the lending business, and the cross sell of other products along with that in the U.S., is yes. We're very focused on looking for adding to our core client base in the U.S. What will drive demand for drawing U.S. credit will be the credit cycle, which looks to be turning. So we've got capital expenditures and M&A activity, which should be a plus.

  • The negative is the capital markets are taking a lot of -- has a lot of liquidity that replaces bank lending. So those dynamics have got to play out. But we are very much in a prospecting mode in the U.S., to add to our client list on a controlled basis in terms of return and concentration. But we're very much marketing to build that business.

  • Unidentified Audience Member

  • (inaudible) in the context of the equity markets not cooperating with getting back into the debt side. Is there room on the cost control? You've showed some this quarter; some of it coming from performance cost. But is there more room structurally to change the operations in the U.S.?

  • David Wilson - Vice Chairman

  • When you look at our numbers over the last couple of years, the costs have been controlled right through the cycle. And we intend to keep controlling the cost. To promise a further decline in cost, that's not in our plans; but we will control the cost for sure, Jim.

  • Sabi Marwah - Senior EVP and CFO

  • One of the things I did want to mention, Jim, you also mentioned spreads. On delta, the U.S. funding spreads, as you know, they fell from the high levels we had in basically all of 2002; and it was negative for the first half of 2003. That has turned. So we will see an improvement year-over-year (indiscernible) '04 and '03 on the U.S. funding side for sure. Heather?

  • Heather Wolf - Analyst

  • Can I ask a follow up to that and maybe a second question? The top line this quarter seemed to be about 12 percent below the run rate in Scotia Capital. I am curious if there was anything in particular you can site; or whether or not you can give us any color on whether we should be looking at the first three quarters as a run rate, or the last quarter as a run rate?

  • Warren Walker - EVP, Credit Risk Management

  • The foreign exchange had an impact on the revenues. We lost about -- about a third of the decline, I think, Sabi, is foreign exchange related.

  • Heather Wolf - Analyst

  • Quarter-over-quarter?

  • Sabi Marwah - Senior EVP and CFO

  • Quarter over quarter it wasn't that high; but year over year --

  • Warren Walker - EVP, Credit Risk Management

  • Year over year it was about a third on the foreign exchange.

  • Heather Wolf - Analyst

  • (multiple speakers) the difference between the first three quarters of this year and the fourth quarter in terms of revenue. It wouldn't seem to me that the currency translation in the fourth quarter was all that.

  • David Wilson - Vice Chairman

  • There's nothing fundamentally declining in the business. Fixed income was down a little in the quarter from a very good performance in quarter three. It is just likely the (indiscernible) trading was down a little. There's a bunch of little things. FX was down from the third quarter.

  • Sabi Marwah - Senior EVP and CFO

  • If I could elaborate on that, Heather, the two items that really caused the Q4 revenues to fall off; one was underwriting. We had a record quarter in Q3, and that really came back to a more normal level in Q4. So it's not that Q4 was bad, it's just more normal; and Q3 was really a record. The second thing, Q3 also had a large number of credit fees that fell in, in the quarter. So credit came back to more normal level.

  • So I think if you are looking for a run rate, I would take the average for the year and assume that to be a run rate. This Q3 was depressed also a bit on the trading side, which will recover in Q4. Q4 was low on the trading side, which will recover as well. So I will take Q4 as certainly an anomaly in the run rates.

  • Heather Wolf - Analyst

  • The second question, also, I know you don't give guidance for provisioning overall, but obviously the provision here in Scotia Capital is very low. Can you give us any feel for where that goes to next year?

  • Warren Walker - EVP, Credit Risk Management

  • I was enjoying that. The outlook for next year is positive, Heather. I think the issues that we were looking at going into next year are, number one, we've done a bottom-up review, account by account, as we do every quarter. We have taken a look at what we expect to see in '04. And we're optimistic with respect to '04, certainly by comparison to '03.

  • I would add to that if you take a look at some external indicators, if you look at the decline in default rates year-over-year, and how we expect the U.S. economy to perform, we think we will see a continued decline in default rates in the U.S. market through next year, as well. And that will certainly help our business.

  • With respect specifically to Scotia Capital, the forecast we are giving is that we expect provisions to be down year-over-year.

  • Peter Godsoe - Chairman

  • We don't give governance and we're not going to. But as we say though, the trend will be down. But also quarterlies will be lumpy. So you should not -- I know you wouldn't fall into the trap of annualizing quarters in that, especially on a quarter by quarter basis. It will be lumpy. So a little guidance on that.

  • Sabi Marwah - Senior EVP and CFO

  • Michael?

  • Unidentified Audience Member

  • A couple questions. First of all, what will it take get your domestic margin back up to more normal levels? Is it purely getting higher interest rates? Is that the key factor? And the other one, I'm just wondering; this quarter you indicated that you had had some relatively high level of loan sales. How much nonperforming loans were sold? And maybe to follow-up the question for Wayne, what room do you think you have or capacity for continued nonperforming loan sales in 2004?

  • Sabi Marwah - Senior EVP and CFO

  • Why don't we take those questions one at a time. There are several questions in there. Bob, do you want to respond to margins?

  • Unidentified Company Representative

  • On the margin, Michael, clearly a rise in administered domestic rates should have a positive impact on our margin. As you know, on a lot of our business that is floating rate, it will adjust immediately on the asset side. But to the extent that rates have dropped, we're already at the minimums of the floor with many our deposit accounts. So that has compressed the margin. That has been the biggest factor.

  • There has also been a factor of fairly strong competition out there, as some banks have shunned corporate banking and fallen in love with retail again. So there is a little bit of that mixed in. But the biggest factor is administered rate.

  • Sabi Marwah - Senior EVP and CFO

  • The other point I would mention is, Michael, in terms of the domestic margin, the domestic margin really gets a bit squeezed because all of our growth that has happened to fund the asset side is happening in Money Master. So that from a mix standpoint that is causing a compression of the margin. Yet the bank's margin still benefits overall. But the domestic margin gets compressed early, because of a mix change in terms of it is a much higher growth rate than the other departments. Warren, do you want to take the one on asset sales?

  • Warren Walker - EVP, Credit Risk Management

  • Yes, and the question, Michael, was specifically the nonperforming book?

  • Unidentified Audience Member

  • Yes, it was how much in the way of nonperforming loans was sold in the fourth quarter? And what room do you think you have for additional sales next year?

  • Warren Walker - EVP, Credit Risk Management

  • We sold 191 million nonperforming loans in the fourth quarter, generating recoveries in excess of $12 million from the sales. The markets for distressed debt during the latter part, almost all and certainly the latter part of 2003, have been very buoyant, as you may well know. So we watch this very carefully on a case-by-case basis.

  • It's always been our policy to try and work our way out of distressed loans, rather than simply selling them. Because history has taught us that that is a better deal for the shareholder rather than dumping them at a distressed debt price. So I see the coming year to be equally good in terms of being able to move paper if we choose to do so.

  • Rick Waugh - CEO

  • We will use loan sales to mitigate risk and reduce losses, as it is a very common strategy and we've used it, as Warren says, this year. We will keep that in mind looking forward. However, it is a very expensive process, because there is the cost of capital, and the vulture or the hedge funds versus ourself. So it will be always with a line, yes, always to mitigate risk, but to make sure that is why we're doing it; not just for the sake of getting an asset level down.

  • Unidentified Audience Member

  • I have another one. I'm just wondering also how much the tax loss carryforward in Inverlat is? And when did you say you would be able to start using that?

  • Sabi Marwah - Senior EVP and CFO

  • After Q1 of next year, Michael; and the unused portion that is there to be utilized in future years is in excess of 100 million. Quentin?

  • Quentin Broad - Analyst

  • A couple questions, coming back to credit for a second. In the retail bank, Warren, obviously that is not an area that we tend to see volatility; and you got good volatility this quarter. So I'm just trying to understand what is going on in there. Because we haven't seen that certainly at any of the other banks. And in fact, commercial credit losses have pushed up a bit. So if you can give us some color in there.

  • And then just the efficiency ratio in the quarter, Bob. I think Sabi highlighted some issues, but some of that spend, one would think, continues on. The efficiency ratio in there looks high. It may mean there is great opportunity. And is that just revenue-driven opportunity, or is it further expense reduction?

  • Unidentified Company Representative

  • If I may, I will answer both. On the credit losses, and Warren can embellish, on the credit losses the metric -- I think the number you are referring to is 272 or whatever it is; that's both retail and commercial. It is down 20 from last year. Our credit losses are running in the low 20s and have been for many years in the retail side. Basis points.

  • The drop was in the commercial. And basically it is a reflection of the quality of the commercial book. We had anticipated things being worse throughout the year; and in the fourth quarter obviously we adjusted it back to what it was. So our numbers are a reflection of the portfolio as it is. The big chunk of that, of course, is the retail, which has always been in the low 20s, Quentin. Taking out the student loans, we're actually about 22 or 23 basis points, (indiscernible) up 1 basis point over last year; '02 being last year. So that is where the credit losses are.

  • As far as the expense side, in Q4 we had some very large expenses, particularly if you compare with Q4 last year. There is a growth in expenses of approximately, I think, $118 million quarter-over-quarter; $133 million. Half of that is related to increased variable comp in the quarter. Again a good chunk of that is driven off the compensation that is related to the stock performance. And so that 58 million, approximately, is related to variable comp increases in the quarter versus the same quarter last year.

  • Another big part of that has to do with what Sabi alluded at Scotia, in the in-tech (ph), where we outsourced some of our processing to Symcor. In prior years the cost would have been in salaries, depreciation, technology and other. And because of the way it is billed to us, that all goes into technology. So there is, as far as a category is concerned, there is an increase in the technology side; but is not in the overall. There is not that much of an increase.

  • We had increases of about 11 to 12 million in costs of doing business, just on the mortgage side quarter-over-quarter, because of the high volume of business. We had three record months in the fourth quarter. Normally the business busiest quarter of the year is our third quarter, the May-June-July quarter. So our appraisal, acquisition, all those costs were up by over $11 million.

  • Lastly of the big items, the second last, is approximately $8 million of reclassification of our Scotia awards, Scotia Gold points. They used to be netted against our fees, our revenue. And we've modified the accounting to gross up the revenue side; and it shows as an expense, as previously it was a debit against the revenue line. So again, we did not retroactively adjust '02 for that $8 million.

  • And lastly, it's some legal costs in the quarter, for about $15 million of about three or four cases, that we topped up our provision to make sure that we were covered in all those areas. So that when these issues are settled, we are adequately provided. So those were in Q4 items, as well. So there's a whole series of things. The bottom line is, most of that increase is, I would argue, is virtually onetime, a lot of those issues.

  • Quentin Broad - Analyst

  • All of those would relate to 844 gains, 7-11?

  • Unidentified Company Representative

  • That's correct.

  • Quentin Broad - Analyst

  • Then if we looked, 844 gave us 778?

  • Unidentified Company Representative

  • There were similar but lesser amounts in that respect. (multiple speakers) Like over half of it, of the 66, 43 is variable comp in one way or the other. Two thirds of it is that.

  • Sabi Marwah - Senior EVP and CFO

  • And the Scotia Gold points is (multiple speakers)

  • Unidentified Company Representative

  • (multiple speakers) it is almost --

  • Sabi Marwah - Senior EVP and CFO

  • Any questions on the phone?

  • Operator

  • Rob Wessel, National Bank Financial.

  • Rob Wessel - Analyst

  • I have a quick question about -- I just wanted to confirm, Sabi, that you had mentioned that foreign currency accounted for 31 cents per share or 160 million. I just wanted to ask, within that can you give an idea, first of all, is that gross or net of hedging costs? That is the first question.

  • And the second question is, can you give a rough idea as to the impact of the different currencies? Sort of how much was that from the U.S. dollar; how much was from the peso; or anything else?

  • Sabi Marwah - Senior EVP and CFO

  • That number is gross of hedging. And in terms of where that really belongs, I would say 70 percent, or two thirds to 70 percent of that number really affects international; around another 20 percent affects Scotia Capital; and the balance is really distributed amongst the other business lines.

  • Rob Wessel - Analyst

  • Okay, does that -- I was thinking by currency, U.S. dollar, peso.

  • Sabi Marwah - Senior EVP and CFO

  • The three biggest impacts are U.S. dollar by far; the Jamaican dollar; and the peso are the three big ones. And then you have other smaller currencies in ripples. There are several of them, Rob, in the Caribbean mainly.

  • Rob Wessel - Analyst

  • So of the 31 cents, then, roughly how much would have came from the U.S. dollar? And you might not know. Just sort of intuitively, how much would be from the U.S. dollar, how much from the Jamaican dollar?

  • Sabi Marwah - Senior EVP and CFO

  • 70 percent was (indiscernible) effect was in international. So how much of that is U.S.? I have not broken it up by U.S., to be honest. I can get back to you on the U.S. breakdown. We normally break it down by business line rather than by the U.S.

  • Rob Wessel - Analyst

  • That would be great it you could do that. The second question I have is just on buybacks. Remind me again; do you have a buyback? I know you're not buying back shares, but do you have one? Like are you able to buy back shares?

  • Sabi Marwah - Senior EVP and CFO

  • I'm sorry, just repeat that again, Rob.

  • Rob Wessel - Analyst

  • Remind me again. I know you are not buying back shares, but are you able to right now? Or do you need to institute a new buyback? And if so, might you do that soon?

  • Unidentified Company Representative

  • We have a program in place, Rob. And it would be our intention to renew it. But as was said, we didn't use it very much. But yes, we can if we choose to.

  • Rob Wessel - Analyst

  • Do you think you might choose to?

  • Unidentified Company Representative

  • Anything is possible. I guess we would not have the program if we didn't think there was some chance we would use it.

  • Rob Wessel - Analyst

  • That's what I would have thought, but you had one this year.

  • Unidentified Company Representative

  • (multiple speakers) We did buy back just under about 4.5 million shares.

  • Rob Wessel - Analyst

  • That's great. Thank you very much.

  • Unidentified Company Representative

  • (inaudible) did more through options exercise than we bought back; so net we had an increase.

  • Rob Wessel - Analyst

  • That's great. Thanks.

  • Operator

  • Susan Cohen, Dundee Securities.

  • Susan Cohen - Analyst

  • Given the fact that foreign currency was very costly for you this year, have you thought about reconsidering your strategy with respect to hedging at all?

  • Rick Waugh - CEO

  • No, I think first of all in terms of our strategy in hedging, no. Currencies do move up and down in international operations all the time. We saw, of course, an absolutely rapid increase which is really accentuating a lot of things. But in our core operations and internationally, we are balanced. We finance our local operations with local currency. I call it a natural hedge. And basically when you have devaluations in these countries, or whatever creates the issue, they are generally gradual, and your underlying growth rate really protects you.

  • So that is how you manage that. You can, when there is some cyclicality in the currency rates on your earnings flow, do some hedging; and that we do. But we balance it by balancing our local operations. And history has told us that that is the best way to do it.

  • Susan Cohen - Analyst

  • Thank you very much.

  • Rick Waugh - CEO

  • You recover your earnings accordingly.

  • Operator

  • There are no further questions from the phone lines. Please continue.

  • Sabi Marwah - Senior EVP and CFO

  • Michael?

  • Unidentified Audience Member

  • At the end of the year, you have got $512 million in emerging market surplus. How much of that is PDI bonds? And what would you say, on average, the market value versus par of those bonds would be now?

  • Unidentified Company Representative

  • PDIs are on our book for the dollar, so they have no cost. And I believe the surplus on the PDIs in the 200 range, roughly. The remainder of course is a mixed bag of things, Michael, and I couldn't tell you of the top of my head how it breaks down. Other than Mexico is a big part of it, Brazil is a meaningful part of it, as well. Mexico would be the biggest single part. We have managed this portfolio to some degree over the past few years as swap bonds and things of that ilk within it; and presumably would continue to do that.

  • Sabi Marwah - Senior EVP and CFO

  • Jim?

  • Unidentified Audience Member

  • Sabi, maybe getting back to the international operations, there was a one-off asset purchased in the quarter in terms of the auto loan. When we think of capital deployment, is there opportunities in a meaningful way to deploy capital back into the international operations and to Mexico? Are there smaller monoline companies or assets in that marketplace that could fit well with Inverlat? Is Inverlat at a capacity now, and the systems are at capacity, to take on new assets? The upgraded banking systems, is that nearly complete at this point?

  • Unidentified Company Representative

  • First of all, we have lots of capacity in terms of our generic operations. Our branch system and what we have rebuilt there, they are underleveraged in terms of the locations. We are now. We are going to want to be in more locations. Approximately 400 branches. I think eventually a good target for us is around the 600 level. So we will obviously do that through branch by branch extension.

  • However, we are always on the lookout to buy either a group of branches and what have you. So that would be one. You can't forecast when those will be available, but we would be a buyer if they make sense. Sometimes they don't. We have looked at packages and they haven't made sense.

  • There is the insurance. We mentioned it. And there's all sorts of different ways of approaching that in insurance. I'm intrigued on both the Wealth Management and the capital market side in Mexico. It is a lot like Canada, in terms of a good regional market and a limited number of players there. So we can look for distribution, as we are here, brokers as well as management and what have you. That is another area to fill out into Mexico. And of course there rules and regulations are much more flexible than they are here. So that does give us some opportunities.

  • Unidentified Audience Member

  • From a management perspective, do you think you've got the skill set and the people down there to take on that growth --?

  • Unidentified Company Representative

  • Yes, and we had a huge -- I mean unfortunately the currency mellows some of that growth, but as we gave you some metrics on volumes, for example, of residential mortgages, car loans, what have you, we have -- and a lot of that on the retail side is centralized, as much we do it here; calls, our centralized centers and stuff, what have you. Several, I think, of the analysts have been down to (indiscernible), which is one of our centralized (indiscernible) so we have the capacity -- and managerial people-wise there is a good pool of them. Mexico, the outlook is good. It is still a developing country, and there is always bumps along the road, but they are bumps. They're not roadblocks.

  • Sabi Marwah - Senior EVP and CFO

  • Ian (ph) I thought you were never going to ask.

  • Unidentified Audience Member

  • This is a question for I guess Rick, looking forward; and I guess Peter, looking back.

  • Peter Godsoe - Chairman

  • In that order, or what?

  • Unidentified Audience Member

  • If the bank has clearly decided it is not going to do U.S. acquisitions at this stage; and Canadian bank valuations are some of the most attractive they have been, relative to U.S. bank valuations; and the Canadian dollar is strengthening versus the U.S. dollar; does that mean that Scotiabank will never expand in the United States?

  • Peter Godsoe - Chairman

  • No, not at all, to clarify, and Rick, what we said was we are in -- we have the capital. I think that is clear. We have the earnings momentum. That is clear. The credit cycle is on our way. We've raised our guidance. Things are looking pretty good, whether we are communicating that as positively as we really feel maybe isn't coming across. But we feel very strong.

  • We think there will be clarification within Canada, end of next year, early the following year. Not because it is necessary, but because they are working on it. And it is Martin's legislation that is on the table. We think it wouldn't be smart to make sort of a semi-move into the United States in the next interim period, until we see more clearly what the landscape is here. Which tends to say, you're on into 2005 and 6.

  • And at that stage, I think a lot of the thinking here was evolving, under Rick, to -- you can look a lot bigger if you're going to do it. Because we are accumulating capital at a very, very large rate, as you know. And it is free capital, because you collate that with the prior question on how much we could spend internationally. And the point of fact is, we can not spend a lot of money that fast. We are generating money internationally almost faster than we can spend it; the same as in Canada.

  • All on the bottom line is saying, yes, it is sort of off for a year; and then you're starting to look; and you have various alternatives in Canada. But not on the front burner right now. Was that backward or looking forward?

  • Unidentified Audience Member

  • Just that we always seem to be waiting for clarity.

  • Rick Waugh - CEO

  • That ain't the question. The question probably should be addressed elsewhere. But also, we have a history in our bank, which will continue because we look forward, but with our history have been opportunistic. And I did say we will keep our options open and what have you. I lived in the States for eight years and have seen banks and Canadians and whatever, and I have great respect, and I like the market down there. But it is a competitive market and you better know what you're doing.

  • And we talk about scale here. Well, you have to think about that, too. So at the same time, we have to keep that. I have no magic level or number or what have you on that. I think you have to look at opportunities as they arise, which we will. Wall Street is very good at making sure you see, quote, opportunities. And we will talk to them all. Having said that, though, and then to give as much clarity as we can in something which is -- by nature you want to keep your options open. I think what we said is relatively clear.

  • Unidentified Company Representative

  • One other thing. If you look at the speeches that Peter and Rick have made over the last year or so, on this whole issue of mergers, I think you will find we have consistently said the only rationale for doing a domestic merger is because of international expansion. So the two are not in opposition. In fact they are a complementary strategy in our view.

  • Sabi Marwah - Senior EVP and CFO

  • Jimmy, you have been far too quiet.

  • Unidentified Audience Member

  • I was going to ask a two-parter for Peter and Rick. I'm not sure. (multiple speakers) We're managing to 10 to 15 percent earnings per share growth; revenue seems to be a challenge. Can you describe what sort of revenue growth rate you're trying to manage to over the next three or four years here? Again, are we in a new era here for revenue growth, Peter?

  • Peter Godsoe - Chairman

  • I'll just speak personally on that. That 10 to 15 was not with stock buyback. So we are presupposing that we've got some good embedded growth. I think you heard the domestic. You have seen the momentum there. And the negative was the margin; and Bob answered that we are more comfortable with the margin and we are better off as things start to go forward. And we've taken some steps there.

  • You've heard about the U.S., that David -- we are not out of lending. We haven't put a cap on that. We have got the discipline. We've got good credit methodologies. We have got seasoned people. And we are comfortable that we can go back into that market and get some momentum going back, because we've broken the back of the credit cycle, so to speak. Doesn't mean it's all over; there's some walking wounded.

  • That, together with the spread compression that we earned our way through last year, tends to argue that we've got some momentum going there, without quantifying it in a number. And the international is the international. We were up very close to 100 million with a stabilized dollar. Are we going to face another type of increase that we had this year? I doubt it very much. Anyway we will take some counterbalancing action.

  • So you are pretty comfortable you can get it. But I think you are in single-digit growth in any area you look at, except Mexico and Caribbean, where we still expect double. It is the quantum on the single that I think is hard, because the spread compression in domestic has pretty well wiped out your asset gains last year. But I think that will turn, as Bob said.

  • Unidentified Company Representative

  • I really think you have to go back to looking at this as the three platforms. And the reasons for growth -- and I see revenue growth. Certainly in local currencies, we have this issue of the dollar. Caribbean has, even in this last year and in different countries, but overall shown good revenue growth. That will continue to be; Mexico, Central America, some of the Caribbean countries. That is revenue growth, and that will be good.

  • And Canada as I mentioned on the domestic platform, certainly you saw in mortgages and the personal lending some very good growth rates on revenue. The funding and the spreads were the issue there. And again, our marketshare, we've got a long way to go yet in Canada. We are still fourth or fifth in a lot of products. We sell very well to our customer base, but there's a lot of them that haven't heard from us yet. And we have got to work on that. So I think you can fatten (ph) the market there.

  • And the United States is, again, the commercial-corporate. What we have not seen in the last four or five years, of course, is a great growth in commercial or corporate. Corporations, companies, inventory rebuilding, capital expenditures. If you continue at this growth rate -- you are the economists and you have access to (indiscernible) -- if you have seen GNP growth rates at the rates that we have seen in the States, and if they're sustainable in the third and fourth quarter, that is the question, it is going to come from the commercial and corporate sector, both in Canada and in the United States. And there you can see some growth.

  • And we are leveraged, in both Canada and the U.S. and Europe to some extent on those. So the revenue I think is there. We are managing the bottom line. Obviously on our growth rates.

  • Sabi Marwah - Senior EVP and CFO

  • Any other questions? Quentin.

  • Quentin Broad - Analyst

  • Just talking about strategically, you seem to indicate that others in the marketplace with the religion of retail seem to be driving things down. But you are getting strong growth and showing some margin compression. The Money Master account obviously having some impact. So strategically, is this driving towards doing what Rick has suggested, building out the client base? And therefore attracting them in with different innovative well-priced products? Or has what happened is a repricing of your installed base, which is causing some of the challenge on the margin side and erasing that growth on (multiple speakers) ?

  • Unidentified Company Representative

  • Most of the Money Master, while it is a higher-priced product, is new money to the bank. For the last year it was around 75 percent new money inflow. What it is replacing was wholesale funds; notwithstanding that, because of our huge growth we've had this year, or $10 billion in asset growth on the retail side, we have not grown the retail deposit at the same pace; and hence have had to fund the gap with wholesale funds.

  • So that is where, certainly, to the extent that we can fill that in at more moderately priced retail deposits, our margins in and of themselves will improve. So it has not been a cannibalization. The cannibalization on Money Master took place in the first three or four months that we had it, two-plus years ago. And so the growth now has been external.

  • Our challenge and the opportunity is to continue to increase our penetration of our customer base and expand our customer base, utilizing the products that we have, many of which are unique; and to leverage off the strong relationship between retail and the wealth side, which we really haven't exploited as much as we believe can be the case. So there are strong growth opportunities there organically, as well as increasing our customer penetration of the general market. So we are fairly optimistic that with our technology, our products, and our low-cost base we can do that.

  • Sabi Marwah - Senior EVP and CFO

  • Thank you all. Mary, sorry; go ahead, Mary.

  • Mary Hallward - Analyst

  • My name is Mary Hallward, if anybody doesn't know me in the room. I was the penultimate president of the now-defunct Canadian bank analysts group. And I just want to thank you, Peter. Many of us in this room have enjoyed you over the last 20 years, I'd say, when you have hosted these meetings. I think the performance of your stock over the last 11 years speak for itself. I wish I had a chart that I could show people and say, look what I did. You have always been informative, candid, and I think most importantly entertaining. We thank you, we will miss you, and we wish you the best.

  • Peter Godsoe - Chairman

  • Thank you, Mary, and you are not talking about my golf game, I think. Thank you very much.

  • Unidentified Company Representative

  • We are going for dinner tonight, and I think we'll get Peter to entertain us.

  • Sabi Marwah - Senior EVP and CFO

  • Thank you all; we look forward to seeing you in February.

  • Operator

  • Ladies and gentlemen, this concludes the conference call for today. Thank you for participating, and please disconnect your lines.