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Operator
Good afternoon. And welcome to the presentation of Scotiabank's first quarter results. I am Sabi Marwah, Senior Executive Vice President and Chief Financial Officer. With us today in front are Rick Waugh, President and Chief Executive Officer, Bob Chisholm, Vice Chairman, David Wilson, Vice Chairman, Bob Brooks, Senior Executive Vice President and Group Treasurer, and Warren Walker, Executive Vice President Global Credit Risk Management.
Rick 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 section of our website at Scotiabank.com.
Rick Waugh - Director, President
As you have seen that I'm certainly happy to report a continuation of record earnings trends. For the quarter earnings per share was $1.33 versus $1.11 a year ago. Return on capital strong, 19.4 percent compared to 16.6 the first quarter of last year. Earnings from all the three businesses were solid, but excluding -- and excluding the impact of the stronger dollar there is good underlying revenue growth.
Credit quality improved from last year. For the quarter, provisions came in at 170 million, a decrease of 155 million from a year ago, but up $50 million from what was an exceptionally low level in quarter 4 of '03. Productivity level remains excellent at 54.3 percent.
A big plus for us is the strength of our capital ratios, of course. Tier 1 up 10.9, and of course our important tangible common equity ratio 9.2 percent remains the strongest of the Canadian bank. Our unrealized security gain increased (indiscernible) $1.2 billion. So overall a solid quarter and a good start to 2004.
The next slide shows our earnings growth over the past five quarters. Each quarter earnings have risen. The message here is the diversity and strength of our three businesses which have allowed us to earn through many challenges, such as the difficult lending conditions, the volumes, and the rapid appreciation of the Canadian dollar.
The next slide shows the three business lines and the strength and diversification across these lines. Domestic division, that concludes Wealth Management, excellent growth in retail lending. Excellent growth in core deposits, accompanied by solid gains in market share. This growth was offset by a narrowing of margins, increases in expenses primarily related to the stock and performance-based compensation and investments in technology.
Internationally, our earnings were on par with last year, notwithstanding the very negative impact of the rapid appreciation of the Canadian dollar, and the resulting effect from foreign currency translation. In other words, underlying trends are clearly positive. Most prominently we saw a substantial improvement in Scotia Capital year-over-year due to significant reductions in credit losses.
In terms of our targets, our 2004 targets, which you remember we raised them, we're firmly on track to meet them. Return on equity is 19.4 in the first quarter is above our raised target of 16 to 19 percent. Earnings per share growth of 20 percent exceeds our targets of 10 to 15 percent. Productivity remains strong, 54.3, well ahead of our goal. And so with that, Sabi will get into more details on our performance.
Sabi Marwah - SVP, CFO
Meet me on slide 8. This slide outlines the impact of certain items this quarter. The first slide then relates to the revaluation of future tax assets. This quarter there was a benefit that we had of 24 million as a result of interior government's reversal of previously enacted tax rate reductions.
Secondly, this quarter we implemented a new CIC accounting guideline, Section 1100, which no longer permits industry practice as a basis for GAAP. As a result, we have begun to capitalize internal software development expenses and to recognize mortgage prepayment penalties, which were previously deferred and amortized. The impact of this new guidelines was a pickup of 10 million after-tax.
Also this quarter we incurred a $10 million premium on the redemption of 250 million of preferred shares. And lastly, we have the negative impact on our results from the strengthening of the Canadian dollar against most of the currencies in which we conduct business. And I will be elaborating on this in a moment. In total the EPS impact of these items were a 2 cent gain versus last quarter on the left, but a 12 decrease compared to a year ago.
The next slide in fact breaks down by line the negative impact of foreign currency translation. As background, compared to last year the Canadian dollar appreciated 19 percent against the U.S. dollar, 28 percent against the peso, and was also up against most other currencies. The translation affected every revenue and expense line including on a year-over-year basis to the right a negative 239 million on revenues and a positive 106 on expenses. As I noted on the previous slide, the net effect was to lower earnings by 95 million. On the left the quarter over quarter impact was much smaller for a net reduction in earnings of 16 million. Despite this negative FX impact we were still able to deliver record earnings.
On the next slide is our revenue growth. While our reported revenues fell 2 percent over last year, excluding the impact of foreign currency translation of 239 million, total revenues rose 182 million or 7 percent from a year ago, of which domestic was up 5 percent and international by 8 percent. Quarter over quarter, again excluding the foreign exchange impact, total revenue was up 2 percent. So underlying revenue growth remains fairly positive.
Turning to slide 11, year-over-year on the far right the margin increased 1 basis point. However, as you can see the Canadian currency margin narrowed by 8 basis points mainly from an narrower spread between floating-rate loans and low rate personal savings and checking deposits. Foreign currency funding spreads, however, improved in all major funding units from the weak results of last year.
In the middle column the margin decreased by 4 basis points versus Q4 of last year. Essentially the 12 basis point reduction in the average prime rate during the quarter resulted in a compression in the Canadian margin.
Moving to slide 12, other income. Excluding the impact of the stronger Canadian dollar, other income was up 10 percent from a year ago and 5 percent above last quarter. On the right hand side again year-over-year the largest contributor was higher gains of the sale of investment securities compared to the unusually low level of gains a year ago, and very good trading results this quarter.
There was also substantial improvement in retail brokerage revenues from higher customer volume. These were partially offset by lower securitization revenues down 23 million, as several issues matured during the past year, and a decline in credit fees and corporate lending.
On the left-hand side compared to Q4 the decrease was due mainly to near record trading, up 44 million in fact from the quarter, particularly strong in foreign exchange, securities trading and a near record performance in precious metals.
Turning to our expense growth on slide 13, reporting expenses decreased 6 percent on the left versus Q4, but rose 4 percent from Q1 which is shown on the right. However, if we exclude the impact of foreign currency translation, expenses were up 12 percent from a year ago.
Looking at the right hand side again the largest component of the year-over-year increase was growth in performance and stock-based compensation reflecting the 33 percent increase in the bank stock price as well as stronger business results. Pensions and employee future benefit expenses also rose 21 million, mainly due to the higher present value of pension obligation resulting from the decline in interest rates.
Technology expenses rose 19 million from ongoing investments in technology, the outsourcing of our check processing operations, and the relatively low spending in the first quarter of last year. Next were some expenses that are directly tied to business growth, such as mortgage acquisition costs, the acquisition of Beninta (ph) in the Dominican Republic, and business taxes which collectively were up 18 million. The remaining 35 million equates to an increase of around 3 percent and came from normal salary increases and inflation.
Quarter over quarter on the left the decline of 66 million that you see excluding foreign currency translation was mainly due to lower spending in computer, litigation and severance costs from the high levels incurred last quarter, offset to some extent as I mentioned by higher pension costs.
Slide 14 shows our productivity ratio where we have not given up our advantage. At 54.3 percent for the quarter we remain the leader in the Canadian banking system.
On slide 15, capital strength remains a big plus for us. All our capital issues are very strong. Tier 1 is now 10.9 percent, up 90 basis points from last year, with 10 basis point growth in the current quarter. Even more important, the tangible common equity ratio, which reduces common equity for goodwill and intangibles, is particularly strong at 9.2 percent, 70 basis points higher than a year ago. And in fact 30 basis points up in the quarter. And it remains the highest by far of the Canadian banks.
Turning to slide 16, the surplus of market value of our book value rose sharply this quarter, as Rick mentioned, to 1.157 billion, up 454 million from last quarter. The majority of this increase arose from an unrealized gain of 330 million on an investment in Shinside (ph) Bank in Japan, which clearly was a big win for us.
Since the end of the quarter we have sold about a third of our investment as part of an IPO, for a pre-tax gain of 125 million. Following the IPO the share price has risen, which if sustained will result in a higher unrealized gain in what we have conservatively estimated in these numbers.
Also contributing to the quarterly increase in the unrealized gains were higher values in all three categories, the remaining equity portfolio, emerging market debt, and fixed income.
Turning to the business line results starting on slide 18, as Rick mentioned, all our three business lines produced good results, with each making a solid contribution to the bank's overall earnings. Basically we have a well diversified earnings base.
Looking at each of the business lines in a bit more detail, beginning on slide 19, Domestic Banking which includes our Wealth Management business had another good quarter with earnings up 299 million, up 13 percent quarter over quarter. As well revenue growth compared to last year was 3 percent, notwithstanding ongoing margin compression.
We continue to achieve strong growth in our core lending and deposit products. Over the year for example average balances were up 13 percent in residential mortgages, 16 percent in revolving credit, and 17 percent in core deposits thanks to our very successful Money Master savings account. This growth has been reflected in our market share, for instance in residential mortgages, which continued to grow up 35 basis points from last year. This volume growth was largely offset by a lower interest margin as declining interest rates, lower asset yields far more than deposit costs.
Other income was up 12 percent, mainly from retail brokerage as it benefited from buoyant equity markets which resulted in increased client trading. As a result, brokerage and related revenues were up 26 percent. Expenses rose 7 percent over last year largely from normal growth in salaries, higher performance in stock-based compensation, and an increase in pension costs. As well mortgage acquisition expenses rose in line with volume growth. However, expenses did fall significantly from last quarter when higher litigation, performance-based compensation and technology related expenses were incurred. Credit quality continue to be very good in retail lending, and fairly good in commercial though provisions did rise mainly because of two commercial accounts.
As mentioned earlier, moving to the next slide, we have had very good success in growing our core deposits. On the saving side we have had tremendous success with our Money Master high interest savings account. This has attracted several billion dollars in deposits in just two years. This is a key product for us as it has helped us grow market share and attract new customers. And we will be targeting our cross-sell efforts to broaden customer relationships and build customer loyalty.
As well our Ultimate GIC has been very successful. It is helping to extend the term of our GIC portfolio. And the customer is well benefited from flexible reinvestment, overdraw options at each anniversary date. On the investment side we developed the ICAN investment program to help customers identify and achieve their financial goals by setting money aside on a regular basis, and investing it in a selection of one-stop mutual fund solutions, such as Scotia Partners Portfolio and Scotia Selected Funds. These new products have driven market share increases.
Our share of personal core deposits is above 10 percent for the first time, up 67 basis points year-over-year. We have also increased our share of commercial credit card balances. Basically in the end growing core deposits and gaining a larger share of the investment wallet are key priorities for us.
Turning to our international operation on slide 21, this quarter international lead income was 163 million, down marginally from last but up 7 million or 4 percent from last quarter, notwithstanding the negative impact of foreign currency translation. If we exclude this impact, revenue increased 8 percent from a year ago.
In the Caribbean and Central America net income was 11 percent lower than last year, entirely because of the stronger Canadian dollar. Underlying results in local currency in fact were up 20 percent. As well earnings rose 21 percent from last quarter due to lower loan losses.
In Latin America earnings increased year-over-year mainly due to the acquisition of the additional 36 percent in Scotiabank Inverlat. And I will have more to say on Inverlat the moment. In Asia net income fell compared to last year and last quarter mainly due to the mark-to-market of derivatives that no longer qualified for hedge accounting. Overall when we remove the impact of foreign exchange and the mark-to-market, the underlying retail and commercial operations in international had a very solid quarter.
Briefly looking at Scotiabank Inverlat, our Mexican subsidiary, Inverlat's contribution to our bottom line was 52 million this quarter, up 63 percent year-over-year driven by increase in our ownership interest and solid underlying business growth. For instance, retail loans were up a very strong 47 percent, including an 83 percent increase in higher margin auto and credit card loans. Core deposit rose 23 percent. Commercial lending increased 14 percent. And our market share was up in these areas as well.
Contributing to the increase in regional assets was a purchase last quarter of our U.S. 350 million portfolio of order loans from the finance arm of a major international order company. The margin was higher slightly year-over-year, so there was some compression in the quarter following a rise in interest rates.
Also this quarter we began to recognize the benefit of Inverlat's tax losses as the remaining goodwill and intangibles were eliminated. Overall we are pleased with the Inverlat's ongoing success. We anticipate acquiring the balance of the minority interest later this year, and look for continued double-digit earnings growth.
Turning to Scotia Capital on slide 23, it had earnings up 203 million for the quarter, up 65 million or 47 percent from the same quarter last year for a decline of 8 percent from the strong results we had last quarter. The better year-over-year results were driven mainly by lower loan losses of 153 million entirely in the U.S. and Europe. However, credit losses did rise from the very low levels of last quarter because of lower reversals and recovery. And Warren will have more to say about credit losses in a moment.
Partly offsetting these lower loan losses was a decline in revenues year-over-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 44 percent due to foreign currency translation and more selective lending, and the impact of mark-to-market for nonqualified derivatives.
On the positive side we had higher funding spreads, very strong results in precious metals and higher foreign exchange and securities trading. Expenses remained well controlled as always. In summary performance was solid in all our businesses this quarter. And with that, I will hand it over to Warren to talk about risk management.
Warren Walker - EVP, Credit Risk Management
Good afternoon. I will be starting on slide 25. The story this quarter was a continuation of the cyclic improvement in credit quality. Specific provisions were 170 million, a decrease of 155 million from a year ago, but up 50 million from the low levels of last quarter. Net impaired loans of 12 million came down by 35 million in the quarter and a significant improvement of 547 million from a year ago. This is the sixth consecutive quarter that net impaired loans have dropped largely as a result of lower levels of impaired loans in Scotia Capital.
The next slide shows net formations by business line in the quarter. Formations in domestic, retail and international continued to be modest given the size and growth of these portfolios. As Sabi mentioned earlier, formations in domestic commercial were slightly above our recent run rate due to classification of two accounts, although that is not indicative of any broad-based trend.
Scotia Capital formations were low again this quarter at just 7 million. In the U.S. we classified a couple of merchant energy accounts this quarter, but they were offset by several sales and declassifications. In Europe we reversed the hotel account that was classified impaired last quarter as a result of a loan sale.
Slide 27 shows the trend in net impaired loans which have come down significantly over the past year. And they now represent a small balance.
Slide 28 shows the breakdown of provisioning by business line. Provisions in the domestic, retail and commercial portfolios remain relatively stable compared to the same quarter in 2003. However, they rose from last quarter in commercial lending due to provisions taken against two accounts, as I mentioned earlier.
International provisions were lower year-over-year and on the quarter due primarily to higher provision reversals and recoveries. In Scotia Capital provisions declined by 153 million from the same quarter last year due to decreases in the U.S. and in Europe. On the quarter provisions rose by 49 million as Europe had net provisions of 27 million this quarter compared to net reversals and recoveries of 63 million last quarter. This increase was offset by decreases in Canada and the U.S.
Slide 29 shows the improving trend in specific provisions which decreased dramatically over the course of the past four quarters. As you can see from the slide, the vast majority of the improvement has come from lower provisioning in Scotia Capital. Provisioning on the other hand in the other business line has been fairly steady.
Turning to our cable and telecom exposure, at 2.9 billion it was down by more than 200 million this quarter. The decrease was largely due to pay downs on a number of accounts. Our gross impaired loans of 360 million were down by 26 million from Q4, and net impaired loans also fell by 17 million.
Turning to our power and energy trading exposure, it has come down by almost 150 million from last quarter with all the decrease occurring in the noninvestment grade portion, reflecting a combination of repayments, loan sales, and write-offs. Our gross impaired loans of 439 million increased by 145 million from Q4. And net impaired loans also rose by 112 million due to classification of a couple of energy accounts, as I had previously mentioned.
Turning to market risk on slide 32, we have fairly low variability of trading revenue, and we continue to run this business with very low risk. In fact, more than 93 percent of the days this quarter we had positive results.
On the next slide are the VAR trends. As you can see, our one day VAR averaged 10.3 million this quarter and remained in the range experienced over recent quarters. No single loss day exceeded the one day VAR.
In summary, our credit portfolios remained stable and in much better shape than a year ago. Strong capital markets continue to create opportunities for the bank to sell credit at favorable prices and for borrowers to refinance. While we expect some volatility in loan losses from quarter to quarter in 2004, conditions in the capital markets and a continuing economic recovery in North America should act to contain loan losses for the year to below 2003 levels. With that I will turn it over to Rick.
Rick Waugh - Director, President
As we lookout for the rest of the year we see mainly positive signs in terms of the global recovery in the G-7 countries. U.S. of courses is leading the way, but this is good news I believe for Canada and for Mexico, two of our key markets.
Inflation is expected to be maintained, well controlled in North America. Central banks, as we see, keeping interest rates close to historical lows for much of the year. And we positioned ourselves accordingly. In this environment of improving economics in the conditions of our market we expect continued solid contributions from our business line.
Challenges do remain. Margin pressure obviously a factor due to market liquidity and competition. Continued strength in the Canadian dollar will be a challenge. Although it is important we are not anticipating the rapid rise that we have experienced in a quarter year-over-year comparison. So we don't see the U.S -- the Canadian dollar arising as rapidly as it has in the past. And we had slow asset growth in corporate and commercial lending which we're hoping will see some improvement in the second half of the year.
We're comforted obviously by our strong capital, strong reserves that you see. And we do obviously feel business grade flexibility on a number of fronts going forward. We are well advanced in many initiatives across all our business lines to show good fundamental, consistent progress. And of course we will always continue to focus on the productivity which is a day-to-day exercise.
Overall I feel good. Got to a good start. I am confident we're going to achieve our performance targets for the coming year, which as I indicated earlier, we had raised. So that, Sabi will open it up to questions.
Sabi Marwah - SVP, CFO
Let's start the questions, Michael.
Unidentified Audience Member
(technical difficulty) 600,000 shares? That was equal to dilution.
Sabi Marwah - SVP, CFO
I think our policy has been -- our practice has been, Michael, to buy back the amount of shares to offset the dilution caused by stock options. And that was up roughly the amount that was diluted in the quarter.
Unidentified Audience Member
So there was no intent with the normal course issuer bid that you put in place to go beyond that level at some point?
Sabi Marwah - SVP, CFO
I think we will. I wouldn't say that it was primarily done to offset I think the short term we said that we would be really be looking at primarily to use to offset dilution. We may use it for other reasons as well, but the primary purpose is to offset dilution.
Rick Waugh - Director, President
We continue to look at it as an options. And we still (indiscernible) growth, dividends and buybacks will continue.
Unidentified Audience Member
(Inaudible question - microphone inaccessible)
Warren Walker - EVP, Credit Risk Management
Actual dividends, you didn't like our two-for-one stock? Is that not special? (multiple speakers) I'll tell you when I went across the country -- I will answer your question -- but when I went across the country how many times I would ask Rick when are you going to (indiscernible) our employees and by our small investors. When are you going to split the stock? And we all know that portability issue and (indiscernible) is not unimportant. It was a constant question. Any how that is not your question. But I do feel that that is special.
Again we're still confident that we have lots of things going on in our business line that may or may not take capital. We have said it many times, and I will say again, we like dividends and we like to increase our dividends. We increased a payout ratio, as you know, last year, so we will have dividends of a recurring nature. What have you -- consistency in return. If in the form at the time we are generating internal cash flow, which we -- or capital as we always have been. That could happen, but I don't see it in the immediate term.
Unidentified Audience Member
On your unrealized security gains, if I'm correct the Shinside didn't actually happen until the end of the quarter. How is it that you show it as an unrealized gain?
Sabi Marwah - SVP, CFO
Bob, do you want to take it or do you want me to go ahead?
Unidentified Audience Member
Go ahead.
Sabi Marwah - SVP, CFO
I think what really our practice has been to really have the unrealized gain be used whenever we have a market price. So whenever we have an alternative price of a transaction. So October 31st -- oh sorry, at the January 31st there was enough information that what the IP would be, so it was really like a subsequent event. So we essentially used the IPO price for the one-third that we knew we were going to sell. And for the remaining amount we have used the IPO price plus a haircut which is our standard policy of any restricted stock or any stock where we have a limited trading. Right now there's a hole for some period of time, so we always use a 10 percent haircut. And that is our standard policy for unrealized gain on that basis. Which is why I said that we very conservatively estimated the unrealized gain.
Unidentified Audience Member
That was the 525 gain?
Sabi Marwah - SVP, CFO
That's right.
Unidentified Audience Member
After a haircut?
Sabi Marwah - SVP, CFO
That's right.
Unidentified Audience Member
So your 125 is --.
Sabi Marwah - SVP, CFO
The 125 is based on the IPO price.
Unidentified Company Representative
That's realized.
Rick Waugh - Director, President
That's actually been realized now in cash. And the remainder, the difference between that and the 300 (indiscernible) in the unrealized gain is valuing the shares we still hold, as Sabi says, the 525 IPO price less a haircut for liquidity.
Unidentified Audience Member
Did you pay any taxes? Has this been untaxed entirely?
Sabi Marwah - SVP, CFO
We have not assumed at this stage that it is going to be free of tax. We assume that it is going to be taxable.
Unidentified Audience Member
So that the 125 is --?
Sabi Marwah - SVP, CFO
Pretax. And so you just (indiscernible) normal Canadian tax credit at this stage --.
Unidentified Audience Member
You will accrue for that regardless.
Sabi Marwah - SVP, CFO
At this stage, yes.
Unidentified Audience Member
Just wondering if I could ask you about credit and improvement. Many of the other banks are showing pretty demonstrably drops in credit costs. You are at roughly 44 basis points which isn't bad, but certainly isn't where the other banks are. Are you seeing things out there that you're still more conservative on? Obviously noninvestment credit spreads have narrowed in substantially, had a couple of the commercials hits. But does it have a feeling out there that we're getting significantly better? Are you being conservative on this posture clearly improving over 2003 on your peak sales isn't a big hurdle. And in fact, earnings are going down if you just improve over those peak sales. So if you can just give us a sense of the market?
Rick Waugh - Director, President
Thank you for the complement, Quentin, first of all. We do see an improvement. We have talked about that at previous quarter ends. At each quarter we do both a bottom-up and a top-down view of credit. And both those indices tell us that credit is improving. And you see that from the public domain literature published by Standard & Poor's and Moody's as well, when you take a look at the pace of downgrades and what is going on in the publicly rated sector, and also from what we look at.
We do, and we have for a long time had a policy of very conservatively reserving against problem loans to make sure that we take our lumps upfront. And through the cycle I think you'll see that we will report recoveries as well as we go forward. But yes, to your question, we are seeing improvement. And I think I indicated in my comments that we fully expect this year to be better than last year.
Unidentified Audience Member
Is that such a high standard for those PCLs last year in the improvement that you have seen in the current credit environment? I guess I'm putting it in context versus where you were this time last year?
Rick Waugh - Director, President
I think the guidance that we have given is fair, Quentin, in the sense that as I say we will in all likelihood report a lower number this year. But this is a very difficult business to predict. And when you get down to levels of provisioning in that 100 range, in any given quarter you can expect to see some volatility either for the good or to the bad. I prefer not to get too granular on a quarter to quarter basis.
Warren Walker - EVP, Credit Risk Management
And you saw the pickup in the Canadian commercial, which we don't think is broad-based. These were old loans, the walking wounded that are now crippled even further. But it was not indicative, but of course did have an impact on (technical difficulty).
Sabi Marwah - SVP, CFO
Any questions on the phone?
Operator
Rob Wessel from National Bank Financial.
Rob Wessel - Analyst
Just a couple of quick questions actually. The first, can you give two things with respect to the tax loss carryforwards for Inverlat would be sort of the order of magnitude that it had on the earnings? And second what sort of time period we're looking for before these get absorbed?
Sabi Marwah - SVP, CFO
In terms of the order of magnitude for the quarter is around 10 million that flowed into income. And in terms of going forward the carryons certainly well into 2005. At this stage, depending of course if Inverlat continues to generate the earnings, which we have fairly comfortable it will continue to date.
Rob Wessel - Analyst
Second question is, if you take out the Mexican net earnings out of international, you have a fairly sharp decline. And I understand that part of that -- it is actually 135 in Q1 and 111 in the most recent quarter, Q1 '03. Can you give a breakdown or a better idea how much of that is currency and how much of that is perhaps other countries outside of the Caribbean not doing as well?
Sabi Marwah - SVP, CFO
It is entirely due to two reasons, Rob. The two reasons being currency translation in the Caribbean and virtually in every market internationally. And the second reason is the mark-to-market loss on nonqualifying derivatives that we took in Asia this quarter. We have an unrealized gain, a higher unrealized gain on the other side, but these derivatives didn't qualify for hedge accounting, so they were mark-to-market. So that was hit in the quarter. So keep in mind it was offset by gain in other business lines in Canadian currencies. So the bottom-line impact of the bank was immaterial, but it did affect international.
Rick Waugh - Director, President
And even within international that is a timing issue. These are relatively short dated securities where there's optionality that has been hedged in the security. And under Accounting Guideline 13 rules you can't get hedge treatment on embedded options. And so as it happens, the way the market moves there was a mark-to-market loss that will recover over the life of the securities, and they're quite short. So it may well bounce back next quarter. If not, it will be at most a year or so before that'll be recovered. So it is a timing issue, not a real loss.
Rob Wessel - Analyst
And last question, of the 163 million in international earnings reported this quarter, how much came from the Caribbean?
Sabi Marwah - SVP, CFO
I would say if you take the (indiscernible), if you take off 52 million from Mexico, and the bulk of that, I would say two-thirds of the remainder would be the Caribbean.
Unidentified Company Representative
The third part, Rob (indiscernible) there is country by country on local earnings, local earnings they are hitting their (indiscernible).
Operator
James Keating from RBC Capital Markets.
James Keating - Analyst
Nice quarter. I have a question on the retail earnings or Domestic Banking earnings. I'm curious year-over-year earnings progression were relatively flat, but I believe the tax rates dropped 2 or 3 points. That may not sound like a lot, but it seemed to swing it from, if I am doing my math right, from slight positive growth to slightly negative. And I don't know if I'm doing that right. Sabi, is there any comment on the tax rate for the Domestic Banking division as to what we might expect and what happened this quarter?
Sabi Marwah - SVP, CFO
(indiscernible) just when the tax benefits really flow back and forth. There is really -- they could be some tax sufficient transactions a quarter, but nothing significant.
James Keating - Analyst
Just the current quarter tax rate, I don't know if you have studied it, but is that a reasonably fair run rate or will it go back up a little bit to what 2003 average was?
Sabi Marwah - SVP, CFO
I think it will go back in domestic simply because while you've got the benefit of the future tax reductions this quarter, in the future quarters the tax rate in Canada is going to go up. So you expect the Canadian rate to be slightly higher going forward.
Operator
Theodore Covales (ph) from Sky Capital.
Theodore Covales - Analyst
I'm wondering if you could speak a little bit about potential acquisition policy? The last time we heard anything was with any bank in the United States within a -- what was it a 90 minute flight?
Rick Waugh - Director, President
(multiple speakers) Well again on acquisitions in the United States we watch the market. We're going to be disciplined. We are going to be very patient. I don't see anything on the near horizon. But we will watch it because longer-term if we see the right bank and the right size and the right opportunity, we will take a look at it. But the overall market is pricey down there, and so we're going to be patient.
Theodore Covales - Analyst
What is the right size?
Rick Waugh - Director, President
Don't know yet. Not going to commit. The most important thing is to get it right. And to get right is to get the right bank at the right price, and go from there. The size is -- will be open. And I think it benefits us to keep our options open.
Operator
Susan Cohen from Dundee Securities.
Susan Cohen - Analyst
Some of the other banks have been taking reversals of their provisions for generals. It is that something that you might consider? And if so, what would be required before you would consider doing something like that?
Warren Walker - EVP, Credit Risk Management
Susan, it is Warren Walker. We are looking at it right now. As you may know, generals are not only a GAAP issue, but they do require the concurrence of the regulator to make material changes. So we are studying the matter now. We do expect over the course of the next quarter or so to make a determination as to what if any changes should be made.
Operator
Jim Bantis from Credit Suisse First Boston
Jim Bantis - Analyst
A couple of questions. One on a technical matter for Warren on the allowances for credit losses. It seemed to drop significantly in the quarter for a line item called (indiscernible) securities. If you could take a moment just to explain that to me, that would be helpful.
And secondly, in the context of Rick's urgings for the government to move on mergers, let's assume it doesn't happen. Rick, can you talk about the strategic alternatives outside of the U.S., particularly looking at the Caribbean and perhaps in Asia. We saw earlier in the month Citibank make an acquisition in Korea. I know that the bank doesn't have a retail presence really in Asia, but are there opportunities that the bank can use their excess capital for?
Sabi Marwah - SVP, CFO
I will answer the first question on the allowance. If you really go to page 18 after first quarter report, it shows allowance for credit losses, and you can see the movement in an out. What has really happened here is that, again, as part of the Section 1100, a country -- we as you know have a country risk allowance, which are the remnants of the old country risk provision that was taken in the late 1980s. And that country risk allowance is allocated to individual securities.
Now under GAAP technically speaking a country risk allowance is not permitted. So essentially what we did, we have eliminated the country risk allowance and basically allocated that specifically to the bonds. So in and out of country risk allowance and is allocated to the bonds. So there's no impact, but it just means that the country risk allowance will henceforth disappear. And that amount has been taken in a sense by writing down the simple value of the securities.
Jim Bantis - Analyst
And no impact to P&L?
Sabi Marwah - SVP, CFO
No impact to P&L. It is a formalization of something that was already in place. All it really means is instead of having a country risk allowance that country risk allowance has now been allocated to individual securities. And the book value of the securities been written down. I will let Rick answer the second question.
Rick Waugh - Director, President
On the broader issue of what we can do outside of the United States, obviously in every one of the countries that we are in, if any country manager can come up with a proposal we look at it. A lot of these countries admittedly are small, so the Dominican Republic which is really a special situation and will increase our marketshare dramatically, took very little capital. But we constantly look at it.
The big one will be, obviously because of size, is Mexico. We will -- we have invested over $1 billion in Mexico at very attractive terms. And we will continue to see if anything comes up. There is the broad area of Wealth Management, insurance and what have you. There is there's lots of generic growth. It will take branch expansion and what have you.
As to Asia, really only two or three countries. We're well-positioned for great finance in commercials, but really it is where can we find an acceptable acquisition in the retail C&C side. And quite frankly somewhat limited years ago, a few years ago, we looked that Korea. I don't anticipate us doing anything in Korea. But probably the likely ones if we can would India and Malaysia. Malaysia has some regulatory issues, but we're well-positioned there and something could happen and we're expanding generically. India, we're looking.
China. But China will be very small. We have got a license to do local currency. And we will probably open up in Shanghai. We are still waiting for the Chinese to respond to that small purchase we were going to make of a bank, but the World Bank (indiscernible) almost a year ago with ISC in Cheyenne (ph). But that hasn't happened yet due to regulatory issues I guess relying on that side. But that won't material. But we are looking. And these things take a long time, especially in Asia and in all the countries.
Jim Bantis - Analyst
And if I may, a quick question for Bob Chisholm in terms of the Wealth Management operation. It looks like the other banks with the upturn in the equity markets have benefited from higher fees off mutual fund and assets under management have been growing quarter by quarter is really not the case here at Scotia. Can you elaborate in terms of some of the struggles perhaps that have been occurring there and what we can do to turn that around?
Bob Chisholm - Vice Chairman, Domestic Banking
We actually had growth, Jim, I think about 24 percent -- 20 percent on the quarter in Wealth Management and revenues. We're quite pleased with that. It is all across the board in different areas. Some of our wealth is that we include our personal trust side, which is not directly driven off market activity immediately resulting in an increase in revenues. But we have had a good growth in our wealth numbers.
Rick Waugh - Director, President
If I may just add, our brokerage is doing fine. Where our challenges are on our mutual funds. And we have to (indiscernible) devote more attention to that. We have a long-term strategy which I think is very sound, and that is getting referrals out of our branches into Wealth Management.
One of the challenges that Bob and his team had, and I'm not using this as an excuse, but the growth in our branch system on mortgages and personal loans, part of our Wealth Management strategy is very fundamental on using that branch system to refer mutual funds. And is been a tougher hole. I don't think it is because of the mutual fund product itself. It is because again the volumes we're gaining in the domestic side.
Warren Walker - EVP, Credit Risk Management
On the mutual fund side too there has been a mix shift from money market related funds into equity funds, which has been encouraging and has driven up our fees somewhat. But the bulk of our growth in mutual fund sales have been in what we call our partners and the select portfolios which are funds that are sold in, but are not our own funds within Scotia. So the funds sales have been growing, but in funds that are not on our books per se.
Sabi Marwah - SVP, CFO
Jim, if I can elaborate a bit as well, we also have a bit of a mix issue. If you're looking at my reported numbers year-over-year you're seeing them as flat in mutual funds. So you have got a 7 to 8 percent increase in domestic being offset by a 7 to 8 percent decrease in Inverlat because of translation. So that is really why it is showing up as flat.
Operator
Steve Cawley from TD Newcrest.
Steve Cawley - Analyst
I understand ACG 13, but maybe you could just clarify one of your points. You mentioned in Asia there would have been an ACG 13 loss. Did you say that that loss was offset by gains in another area? And if that is the case, can you quantify what the Asia loss was? And can you also tell me where the gain was located?
Sabi Marwah - SVP, CFO
The losses and gains are in about three or four different places, Steve. There is a gain in medium-term term, one in group treasury. There's a loss in global trading. There is a loss in Asia. And there's a small gain in group treasury on options revenue. So you've got around three pieces of around 10 to 15 million each.
Steve Cawley - Analyst
Ten to fifteen each? Does that explain, Sabi, the fall off in the net interest margin in the international bank? I calculate 373, and that would have compared to 403 in Q4 and 405 in Q3. So it is a pretty good drop off.
Sabi Marwah - SVP, CFO
I think on the quarter over quarter that is part of it. And also margins did get compressed slightly in Inverlat because of rising interest rates. Those two are the really big components of that. But ACG 13 being by far the bigger one. And as Bob mentioned, we think that that will come back because that loss that you saw in ACG 13 is really directly offset by a higher gain in the unrealized gains that you see in fixed incomes. So in other words, they both move hand in hand. So while one is in the P&L, the offset is again which increases the unrealized gain.
Steve Cawley - Analyst
So let's say if we were to look at net interest margins for last year and we saw a gradual increase, would you expect to see a gradual increase in net interest margins for the international bank again this year?
Sabi Marwah - SVP, CFO
I think I would expect them to go up to more normal levels and then be sustained there.
Steve Cawley - Analyst
What would be a more normal level?
Sabi Marwah - SVP, CFO
I haven't looked at interest margins. The thing is it is very difficult to come up with a normalized interest margin for the international because there's just so many components that go into it. So many countries, so many components, so many interest rate regimes that it is very difficult to come up with. I think if you take the average over last year there's no reason why the NB (ph) average for this year will be any different than the average for last year.
Steve Cawley - Analyst
Thank you for that. That was what I was looking for. One final question on the international bank. Can you give us a little bit of color on the Dominican Republic and the performance of that acquisition in the quarter and your expectations whether or not they have changed?
Rick Waugh - Director, President
It is Rick Waugh. I will do that. In terms of the acquisition of the branches, the credit card operation, the people, everything is moving ahead as planned. In all our targets and our expectations on the conversion have been met. And that is good. The only caution, but it is only just -- the country is going through an election so there is some variability again on the currency and what have you, but on the fundamentals they are very strong. And it has met all our expectations.
Sabi Marwah - SVP, CFO
Any questions in the room? Ian?
Unidentified Audience Member
So I guess the 10 to 15 percent then is growth. When I look at the trailing four quarter earnings of 16 cents (indiscernible) I am at the bottom end of that, coming back to Quentin's point, doesn't seem to be heroic. So I guess (indiscernible). Should I read that you're not expecting a hell a lot more growth for the remainder of the year?
Rick Waugh - Director, President
(indiscernible) when we set our targets was a wish and a hope, and it did come in. We don't set our targets on security gains and what have you in that. Looking forward we're not changing our guidance yet. Margins in Canada are still an issue. Our volumes have surprised us favorably on the mortgage side. Nice favorably, fundamentally whatever. But you don't see again how long can this mortgage growth continue? And in Canada it has been continuing at not quite as high rates of growth as we have seen, but still above expectations.
And my other degree of caution it is on the commercial and corporate loan demand. We have seen in our U.S. dollar loan book a substantial drop in outstanding loans. Some of this was definitely planned and this was with David getting our exposure levels down, and where we were going to core profitability. And as you see, our ROE is going up. And obviously loan losses are there, but we're gaining on ROE. And so we've had this disciplined approach on core profitability and getting down to our 6, 700 core accounts.
However, having said that what has what has happened, and I think -- and there's a foreign exchange drop on the U.S. dollar. That is also about that. But what has happened is obviously the degree of recapitalization that has gone on in the United States, lower fixed interest rates, the bond market and what have you, and the borrowing of corporate America for working capital and what have you.
We still have, and this is in our plan, expect to see that pick up as we go into the third and fourth quarters. Somewhat encouraged because of what we are seeing in the -- we have seen a leveling out of the broad curves, and we have seen a pickup, but it is still early days. There is caution there.
There has been a significant decline in -- do we disclose outstanding loans? I guess we don't. We have to be consistent. So it is not a matter of -- but it has been significant on the outstanding loans.
Sabi Marwah - SVP, CFO
Michael, do you have a question?
Unidentified Audience Member
Yes. You said that you expect to (indiscernible) the balance of the Inverlat this year. What happens after you have done that? What kind of changes, if any, could we be looking at in Inverlat?
Rick Waugh - Director, President
There will be no changes fundamentally how we are operating Inverlat. We will own 100 percent. We might be a percentage short or something, but still we don't control that process. There is still some issues going on and the shareholders and the government and that. But we do expect to get the bulk of it. No fundamental change. We will own it all. We think it is a great investment. And we have been pushing everybody down there very hard to grow. That doesn't change. I don't see any fundamental change.
Sabi Marwah - SVP, CFO
In fact, we're running it today, Michael, as if we own 100 percent. So all it means you pick up to 9 percent of earnings, that's all. In terms of everything, running it, we're running it the way we want to run it.
Steve Cawley - Analyst
Just coming back to this question of the U.S. C&I lending, are you actually seeing any evidence of any pickup in that activity?
Rick Waugh - Director, President
I think in the quarter we saw it flatten out. We have not seen the upturn on the wholesale side of the drawn credit. But we did see it flatten out after a pretty steep curve over the last six quarters. So we are, as Rick said, optimistic, but flattening out will lead to some growth starting by the third and fourth quarters.
Sabi Marwah - SVP, CFO
Quentin?
Unidentified Audience Member
(technical difficulty) can you give us a sense of where -- what you have been doing in in terms of your authorizations (indiscernible)? Maybe you can give us a number in terms of where the utilizations have gotten down to and leveled out? And perhaps a sense for loan structure and pricing, whether you are still seeing latitude on your part (technical difficulty) pricing to your benefit, or has the market started to turn and you're starting to see banks giving credit away a little more freely again?
Warren Walker - EVP, Credit Risk Management
A couple of questions there, Quinten. The drawn credits have been coming down rapidly, as Rick said. The aggregate average outstandings in the quarter -- Sabi, do we disclose a total for Deutsche Capital?
Sabi Marwah - SVP, CFO
No, but go ahead. (multiple speakers) That's a problem.
Warren Walker - EVP, Credit Risk Management
The 27 million Canadian is the average -- is the drawn credit for the credit -- billion, excuse me. And that is the decline from the fourth quarter is only a couple of billion, and that includes some foreign currencies. So the decline seems to have flatten out. As I said in response to Michael's question, I think we can see that number starch go back up again. But it has come down a lot from 18 months ago.
Unidentified Company Representative
Year-over-year we have come down 40 percent in our U.S. dollar loan portfolio. Now, Warren, is the applauding that immensely from a credit risk point of view, and which he should and which I do too. (indiscernible) part of that is there. Now out of that 40 percent there is the exchange rate, but there is a fundamental 30 percent -- that is a rough number -- drop. It is through this drop off of utilization on the loans, not our authorized amounts, because we're staying in that business and we're well-positioned to stay in that business. But we have to have a (indiscernible).
So that is a pretty -- that 34 percent drop off year-over-year, which is something that we will -- and I agree with David -- we just not bounce back right back right away, but at some level.
Rick Waugh - Director, President
I think Quentin had a second question, if I'm not mistaken, on what we're seeing on the pricing of loans and the demand curve (indiscernible) credit. There is still a lot of liquidity. In the last three weeks we have seen a little bit of sensitivity as to pricing. There was a large U.S. indicated deal in the U.S. that we were deeply involved in that reflects -- and we didn't get the deal done. It is Calpine. It is publicly known. So the market is getting a little bit more selective. Just a hint of a little more selectivity coming into it, all which is a sign of a little more rational pricing. Spreads have come in a lot, as you know. So that is a pretty micro observation. Just current the trends.
Unidentified Audience Member
In terms of corporate funding, if we did see volumes return to more normalized levels, what does that do to your capital ratios? And then I had a question -- a question on credit. It looks like some of your other peers who have been active funders in the states have posted some better provisioning numbers than you guys have in the wholesale bank. I'm wondering if you can give us any color on why that might be? Are you guys not selling down as aggressively as they are? Or is this just sort of one off specific credit type of situation?
Sabi Marwah - SVP, CFO
(multiple speakers) I really don't see a material impact. When we're talking about growth in corporate lending, even if corporate lending grows, we're not talking about 50 percent growth in corporate lending. Let's say gross 10 percent, which is what would be a reasonable expectation. So take my capital Tier 1 down from 10 points (indiscernible) under 10.8 there is not a material impact on some of the capital ratios. So I won't --.
Unidentified Audience Member
(indiscernible)
Sabi Marwah - SVP, CFO
No, it's not really material to capital ratios.
Warren Walker - EVP, Credit Risk Management
This is Warren Walker, Heather. To your second question, to give you a real credible answer you would have to go on a name my name basis to understand those relationships that we're in that others are not and vice versa.
But when I can say is traditionally we have been a bank has held on and worked our way out of more situations perhaps than others have. And we know, and this is publicly available, I think Standard & Poor has published a study dealing with the 1998 to 2003 time frame. And the study said that in excess of 70 percent of the time you were much better off, even on a present value basis, by working your way out and selling -- selling loans into the secondary market. So that has been -- that has been a long-standing strategy of our bank. That doesn't mean we do not sell loans. I think we have sold in the order of $280 million in loans in the past quarter.
But we make a case-by-case determination. If we feel we have a good understanding of the industry, a good understanding of the business, if we feel we're at the table either because we are an agent bank or we have some insight into the risk on the potential returns that we're going to garner, then we will probably make a decision that makes sense economically to stick around. If we don't have that have that and we're relatively speaking a small player, then we might make another decision. There is no one simple easy answer to the question.
Sabi Marwah - SVP, CFO
Any questions on the phone again?
Operator
Rob Wessel from National Bank Financial.
Rob Wessel - Analyst
Just one could question. Can you discuss, or let us know what the restrictions are, with respect to the sale of the unrealized gains or what restrictions you have on the Japanese banking?
Unidentified Company Representative
There is a six hold, Rob, from IPO date, a complete lockup. And then the issue is a little more complicated because I'm sure you know we won the shares, as do all the other participants through a series of limited partnerships. So we don't have direct control at this moment over our stock. And it will depend on what the decision that will be taken over the next six months are regarding those partnerships. Whether they will distribute the stock, which is quite possible or not, or some part. And so those determinations will happen over the next six month period before the lockup expires.
Sabi Marwah - SVP, CFO
Any other question, Rob?
Rob Wessel - Analyst
No, that's fine. Thank you.
Operator
James Keating from RBC Capital Market.
James Keating - Analyst
Were there any gains on the 280 million in loans sold? And the other question is just -- you referred to a $12 million securitization gain, I believe. I just wanted to confirm that? And what was the tax rate?
Rick Waugh - Director, President
We are down essentially quarter over quarter. I mean, not as many.
Warren Walker - EVP, Credit Risk Management
In terms of quarter over quarter, I don't have the numbers at the ready, but I can certainly get back to you with it. Of the 280 we were in the money. I think we were in the money on basically 40 percent. And we were not in the money on the other 60 percent. But it would not have been a significant further loss relative to whenever would have been provisioned against those numbers.
Rick Waugh - Director, President
And recoveries were definitely less than they were in the fourth quarter of last year.
Sabi Marwah - SVP, CFO
And on the securitization, when you say gain, Jamie, in fact it is the other way around. Our securitization revenues in fact are down year-over-year simply because a lot of the issues that we have, such as our ScotiaLine securitization and our mortgage securitization, some of the others basically matured over really most of last year. In fact, that is why, if you notice on the other income page on the slide presentation, you can see a decline year-over-year. So that is because maturities are really happening over the last one year. But there's no gain as such.
James Keating - Analyst
No mortgage-backed security gain or anything in that?
Sabi Marwah - SVP, CFO
There is a mortgage-backed security. That is part of the CMB issue we do -- we have been doing one. All the banks have been doing one sort of every quarter, so quarter over quarter thre is not much of a change.
James Keating - Analyst
One quick follow up, if I can. Just on the domestic bank, Sabi. If I take a guess at what Wealth Management Group (indiscernible) I think Rick expressed maybe a 25 percent growth rate on Wealth Management?
Sabi Marwah - SVP, CFO
Retail corporate revenues.
James Keating - Analyst
Okay.
Sabi Marwah - SVP, CFO
Talking Wealth Management in total it is retail brokerage, which is one component of Wealth Management. I think all the banks are really seeing a fairly step up in retail brokerage activity in the quarter.
James Keating - Analyst
Maybe I can be specific. I'm just trying to gauge what the actual retail and commercial bank looked like it was doing, if at all possible, from a revenue perspective?
Sabi Marwah - SVP, CFO
I think year-over-year the domestic bank is up 4 percent before foreign exchange, and 5 percent after foreign exchange.
James Keating - Analyst
Okay. I will follow up with you. Thanks, Sabi.
Operator
There are no further questions at this time. Please continue.
Sabi Marwah - SVP, CFO
I think that there no other questions. Thank you all for coming again. And we look forward to seeing you in three months. Take care.