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Sabi Marwah - Sr. EVP and CFO
Good afternoon and welcome to the presentation of Scotia Bank's second quarter results. I'm Sabi Marwah, Senior Executive Vice President and Chief Financial Officer. With us today in Toronto 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; Rob Pittfield (ph), Executive Vice President, International Banking; and Warren Walker, Executive Vice President, Credit Risk Management.
Rick will begin with the highlights of our results, followed by a review of the the financial 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.
Rick Waugh - President and CEO
Thanks a lot, Sabi, and I'm happy to report a continuation of our record earnings trend. For the quarter, earnings per share was 75 cents versus 56 cents a year ago, a 34 percent increase. Keep in mind of course the earnings per share reflected the two-for-one stock dividend occurring in the last half quarter.
Return on equity. Very good at 21.8 percent compared to 17.2 percent in the second quarter of last year.
Contributions were from all business lines and were strongest quarter and we're well up from the same period last year. Our earnings this quarter included a large investment gain. As we did tell you in the last quarter, we sold part of our investment in Shinside bank in Japan for a pre-tax gain of $125 million. Or 81 million after-tax, 8 cents per share.
Credit quality continues to improve. For the quarter, net impaired loans were a -104 million. And provisions for credit losses came in at 130 million. That's a decrease from (ph) 40 million in the first quarter of '04.
Still a big bust for us of course is the continued strength of our capital ratios. With a tangible common equity ratio of 9.4 percent, that's up 20 basis points from quarter one and remained the strongest of the major Canadian banks.
This capital strength, together with our ability to generate strong earnings, allowed us to once again increase our quarterly dividend 5 cents to 30 cents per common share. So, overall, it was a good quarter.
The next slide shows our earnings growth over the past five quarters, adjusted to reflect the stock dividends. Earnings have risen due to the diversity and strength of our three strong growth platforms. And that said, the businesses continue to have good momentum.
The next slide shows the strength and diversification across our three low (ph) growth platforms. All three had double-digit increases from last year. Our domestic division, which includes Wealth Management, generated net income of 293 million in the second quarter, an increase of 29 million or 11 percent over last year. And this is where volume and market share gains offset margin compression.
International earnings were $200 million, a significant increase of 29 million or 17 percent up from last year.
Notwithstanding the negative effects of foreign exchange currency translation, strong volume, better margin provided significant growth. In Scotia Capital, we recorded earnings of 211 million this quarter up, 42 million or 25 percent from a year ago and it's now showing a very respectable return on capital.
The other segment which includes group treasury recorded net income of 82 million as a loss of 8 million last year. Group treasury had an excellent quarter, which included the $81 million pre-tax gain on the sale of a portion of our investment at Shinside. (MULTIPLE SPEAKERS) Oh, I am sorry -- 81 million after-tax gains -- sorry about that, on the sale of a portion of our investment in Shinside bank.
In terms of 2004 performance targets, we are firmly on track to meet them. Return on equity of 21.8 percent for the quarter at 20.6 percent for the half-year, well above our 6 to 19 percent target range. Earnings per share growth was 34 percent in the quarter, 28 percent year-to-date exceeds the target of 10 to 15 percent.
Our productivity ratio remains strong at 54.3. Our record of consistent growth has been matched by our record of consistent dividend growth. Since this earnings growth has been matched by the system's (ph) dividend growth. We had one dividend increase already this year. We previously announced an increase effective in the first quarter of 6 cents on the pre-split basis. This quarter we have declared a second increase of 5 cents post split, effective quarter 3.
With that, our dividends are up 36 percent over the third quarter of last year and, furthermore, they have more than doubled over the last -- over the past four years.
As you're aware, last year we increased our target payoff ratios to 35 to 45 percent. With this increase of 30 cents per share, our payout ratio becomes about 40 percent, closer to 45 if we exclude the Shinside gain. This compares to just below 30 only two years ago.
For the last, I will now pass it over to Sabi who will talk in detail about our performance.
Sabi Marwah - Sr. EVP and CFO
Thank you, Rick. Leaving on slide 9, this slide outlines the quarter-over-quarter impact of certain items this quarter. First item is the sale of a portion of the bank's investment in Shinside Bank as Rick mentioned, this quarter, for a gain of 125 million pre-tax or 81 million after-tax.
The second item relates to Ontario government's reversal of previously enacted tax reproductions (ph) in Q1. As you will recall, this resulted in a benefit of 24 million last quarter. In total, the EPS impact of these items was a 6 cent gain versus Q1 and an 8-cent increase compared to a year ago which still leaves a good growth in underlying results.
Turning to slide 10. This breaks down the impact of the stronger Canadian dollar. On the left, it did not have a big impact versus Q1, but was significant versus last year, when the Canadian dollar appreciated 11 percent against the U.S., 16 percent against the Mexican peso, and was also up against most other currencies. The translation impact was, therefore, a negative 175 million on revenues and a positive 62 million on expenses, resulting in lower earnings of 86 million.
So we did earn through that to deliver the record earnings.
Turning to slide 11. Compared to last quarter, the second column, the margin rose by 3 basis points. However, there are diverging trends in the Canadian versus the foreign currency margins. The Canadian currency margin fell by 4 basis points, a continuation of the trend we have seen for the past year and which will likely continue next quarter as well.
But we did see an improvement of 7 basis points on the foreign currency side from wider spreads in the U.S. dollar funding and in Mexico.
And, lastly, the net impact of accounting guideline 13 and other changes in accounting were largely offsetting.
Looking at slide 12. Other income, excluding the impact of the stronger Canadian dollar, other income was up 38 percent from a year ago and 19 percent above last quarter. On the right hand side year-over-year, the biggest contributor was our securities gain up 126 sorry -- 216 million, with the largest coming from Shinside.
There were also significant increases in a number of other categories, including underwriting, retail brokerage, deposit and balance services, securitization revenues and card revenues. These were probably offset by a lower trading, down 20 million, and an expected decline in credit fees and corporate lending.
On the left hand side, compared to Q1, again the primary factor behind increase was higher security gains, up 175 million. This was offset by lower trading revenues, down 50 million. All the trading results with an interest income that partly offset this.
Turning to expenses on slide 13. Excluding the impact of the stronger dollar, expenses were up 11 percent from a year ago. On the right hand side, year over year, the largest component of the increase was performance in stock-based compensation, reflecting improved results from investment banking, and retail brokerage and the rise in our stock price.
As well, pension and staff benefit rose 46 million, mainly due to the higher present value of pension obligations due to a decline in interest rates. The third line summarizes a few other areas where expenses have risen, because of growth in (indiscernible) businesses such as mortgages and the acquisition of Banenter (ph) in the Dominican Republic.
Salaries rose 90 million from normal merit increases and, lastly, Other includes a normal growth and expenses including technology, premises and the reclassification of our Scotia Gold reward points from other income.
Quarter over quarter on the left. Expenses rose 110 million, again, mainly due to the 48 million in recent performance and stock-based compensation; the timing of pension and staff benefit costs; and generally lower spending in the first quarter.
Slide 14 shows a productivity ratio which remains strong at 54.3 percent for the year.
On slide 15, capital strength remains a big plus for us. All our capital ratios are very strong. Pier 1 is now 11.2 percent up 90 basis points from last year with 30 basis point growth in the current quarter. Even more important, the tangible common equity ratio is particularly strong at 9.4 percent, 100 basis points higher than a year ago and up 20 basis points this quarter. The highest of the Canadian banks.
Turning to slide 16, the surplus above market value over book value fell 150 million this quarter to just over 1 billion, entirely because of gains realized in the quarter including from the sale of about a third of our investment in Shinside Bank. Included in the surplus is approximately 218 million, related to the remaining holdings of Shinside.
Turning to the business line results. We start at slide 18. Looking first at domestic banking, which includes our Wealth Management business, domestic has another good quarter with earnings up 293 million, up 11 percent over last year. Earnings fell slightly from last quarter due to high expenses and two fewer days in the quarter.
Revenue growth compared to last year was fairly robust at 9 percent. Net interest income rose 5 percent as margin compression was more then offset by strong volume growth. Margin compression continues to be a challenge as it is across the system.
However, we continue to achieve excellent growth and market share increases in our core lending and deposit products. For instance, over the year, average balance were up 15 percent for residential mortgages, 16 percent in revolving credit and 19 percent in core retail deposits. We also had significant growth in other income of 21 percent from last year with half of this coming from regional brokerage. There were also small increases in transaction-based fees, mutual fund revenues and foreign exchange.
Expenses rose 9 percent over last year largely from normal growth in salaries, higher performance in stock-based compensation and an increased pension cost. As well, mortgage acquisition expense rose in line with volume growth. Credit quality continued to be very good, particularly in retail lending.
As I mentioned, not only are we showing strong growth in assets and deposits, we're also gaining share in many areas in Canada. For instance, in this slide, in residential mortgages, our all bank market share is 15.76 percent, up a substantial 21 basis points over last year. In checking and savings, market share rose 92 basis points thanks in part to our successful Money Master account.
In business lending we gained 14 basis points in share and an even larger 45 basis points, excluding nonresidential mortgages, where we have been running down the old National Trust portfolio. We've also seen a significant 155 basis point increase in business (indiscernible) market share year-over-year.
Overall, we believe that our focus in providing superior customer service, along with a strong self-discipline, will allow us to build on these market share gains.
Turning to Scotia Capital on slide 20. Earnings were 211 million for the quarter, up 42 million or 25 percent from the same quarter last year, and 4 percent above last quarter. The improved year-over-year results were driven mainly by lower loan losses down 139 million. As well credit losses declined from last quarter and Warren will have more to say about this in a moment. These lower loan losses were partly offset by a 9 percent decline in revenues year-over-year or by lower U.S. corporate lending volumes, which were down 45 percent plus, due to foreign currency translation, more selective lending, and high levels of liquidity in U.S. capital markets.
On the positive side, we had higher funding spreads again this quarter and a 16 percent year-over-year increase in non-lending revenues. Expenses did rise over last year and last quarter, due to higher performance-driven compensation.
Besides higher earnings as Rick mentioned, Scotia Capital's ROE was 20 percent this quarter, well above the levels in recent quarters. This was achieved through lower credit losses and a total focus on only doing business where we can generate an adequate return and our efforts here are paying off.
Turning to international operations on slide 21. This quarter international net income was 200 million, up 29 million or 17 percent from the second quarter of last year, despite the negative impact of foreign currency translation. If we exclude this impact, net income was 37 (ph) percent above last year. In the Caribbean and Central America, income increased 35 percent plus (technical difficulty) last year and last quarter. Higher asset (technical difficulty) fee income along with more loan losses drove increase. These will probably be offset by the effects of the stronger Canadian dollar.
In Latin America, earnings increased year-over-year, mainly due to the strong results at Scotiabank Inverlat. (technical difficulty) Inverlat in a moment. This increase was partially offset by lower gains in emerging market security.
Overall the core retail and commercial operations and international had an excellent quarter.
Looking at Scotiabank Inverlat, our Mexican subsidiary, its contribution was 75 million this quarter, up 25 percent quarter over quarter and well above last year. Inverlat's ROE was very good at 26 percent. Strong growth in retail loans and the recognition of the benefits of tax losses drove these increases, along with a higher ownership state. We continue to see robust growth in loans. Regional loans were up a very strong 46 (ph) percent, including a 67 percent increase in high margin, auto, and credit card loan, including the purchase in Q4 last year of our U.S. 350 million portfolio auto loans.
Commercial lending rose 9 percent. And as noted, we realized a larger benefit from Inverlat's tax losses as the remaining goodwill and intangibles were eliminated last quarter.
Overall, we're very pleased with Inverlat's ongoing success and are looking for continued double-digit earnings growth. In summary, all businesses delivered solid results this quarter. And with that, I'll hand it over to Warren Walker to talk about risk management. Warren.
Warren Walker - EVP, Credit Risk Management
Thank you, Sabi, and good afternoon. I'll be starting on slide 24. The story this quarter was a continuation of the positive trends we've seen recently on the credit quality front. Specific provisions were 130 million, a decrease of 40 million from last quarter and a substantial reduction of 118 million from a year ago. Excluding the reversal of provisions related to Argentina last year, year-over-year decline was 145 million. Net impaired loans were a negative 104 million, a decline of 116 millions from the preceding quarter, and a substantial reduction of 482 million from a year ago. This is the seventh consecutive quarter that net impaired loans have dropped.
The next slide shows net formations by business line in the quarter. Formations in domestic retail continue to be modest, given the size and growth in that portfolio. Formations in the domestic commercial portfolio were in line with our recent run rate. International formations were a -55 million primarily due to a change in classification policies with a respect to impaired mortgages in Inverlat. And they were brought in line to conform with those of our bank.
Scotia Capital also had negative formations of 33 million. In Canada, one account was paid off and another was declassified. In the U.S., we classified a couple of accounts of modest size. But they were more than offset by several sales and declassifications.
In Europe, we classified a couple of small accounts as well. Overall, there were virtually no net formations this quarter.
Slide 26 shows the positive trend in net impaired loans which have come down significantly over the past five quarters and, as I said earlier, are now negative.
Slide 27 shows the breakdown of provisioning by business line. Provision from the domestic retail and commercial portfolios remained relatively stable compared to the same quarter in 2003. Moreover, they declined from last quarter which included provisions taken against two commercial accounts. International provisions were slightly higher than last quarter and a year ago, because of lower levels of reversals and recoveries. However, they remained very modest given the size and growth in the international portfolios.
In Scotia Capital, provisions declined by 139 million from the same quarter last year, due to reductions in Canada and in Europe. Provisions also decreased from last quarter, down 39 million.
Slide 28 shows the improving trend in specific provisions which have decreased significantly over the course of the past five quarters. As you can see from the slide, the vast majority of the improvement has come from lower growth (ph) provisioning in Scotia Capital. Provision in the other business lines has been fairly steady.
Turning to our cable and telecom exposure. At 2.6 billion, it was down by more than 300 million this quarter with most of the decrease occurring in the non investment grade portion, reflecting a combination of repayments, some loans sales, and some nominal write-offs. Our gross impaired loans of 320 million were down by about 40 million from Q1. And net impaired loans also fell by 48 million as the result of a couple of loan sales.
Turning to our power and energy trading exposure. Outstandings have come down by more than 600 million from last quarter, to 2 billion, with 60 percent of the decrease occurring in the non investment grade portion, reflecting a combination of repayments, loans sales, and some modest write-offs.
Turning to market risks on slide 31. We have fairly low variability of trading revenue and we continue to run this business with very low risk. In fact, more than 87 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 8.2 million this quarter, down from 10.3 million last quarter and no single loss day exceeded the one day VAR.
In summary, our credit portfolios remain stable and in much better shape than a year ago, and market risk is well contained. Strong credit markets continue to create opportunities for the bank to sell at favorable prices and for borrowers to refinance.
Overall, while we expect loan losses in 2004 to be below 2003 levels, we are likely to experience a little volatility in loan losses, as you might expect from quarter to quarter. As well, if the recent trend in favorable credit conditions continues, it is likely that we will reduce the general allowance for credit losses.
And with that, I'll turn it over to Rick.
Rick Waugh - President and CEO
Thanks, Warren. So now, looking ahead to the rest of the year. The economies in which we operate continue to show strength led by the U.S. and the whole of China. In the next year the prospect of a gradual rise, a gradual rise in interest rates and renewed currency strength in Canada may dampen but not disrail (ph) expenses.
And we have three strong growth platforms to capitalize on what we see as these opportunities. And they are doing well, very well.
In domestics, our pipeline on the retail venue side is still strong. And we are taking shares amongst -- across the board in savings, checking, and current accounts, and in mortgages, in particular. In Scotia Capital besides improving our credit quality, our results are solid in underwriting, derivative, foreign exchange, and precious metals. I'm also very pleased with the credit and the capital managements and a significant improvement in cross-selling in Scotia Capital. As you know, this was a matter of debate several months ago.
The risk adjusted returns on equity has improved significantly in Scotia Capital.
But we will benefit when the U.S., Canadian, and European clients begin to borrow as they ultimately will in an economic cycle.
And, lastly, in international. Mexico and the Caribbean in particular have good topline growth notwithstanding the foreign currency translations, and we expect this to continue.
That's not to say we don't have any challenges. We do. Such as margin pressure in Canada, the volatility in exchange rates, and the loss of asset growth in our business lending portfolios. However, we remain focused on investing all of these issues and challenges.
We're also comforted by having very strong reserves and strong capital, which give us a broad range of options for future growth, and enables us to continue to increase returns to shareholders.
So, overall, we've had a very good first half and we fully expect to achieve our performance targets for the year as a whole.
So with that, my colleagues here will open it up to questions.
Sabi Marwah - Sr. EVP and CFO
(indiscernible) Steve?
Unidentified Audience Member
On slides 12 and 13, you show the increase in other income and then on 13 you show the increase in other expenses.
I consider a lot of the growth and other income because of the investment securities a lot of that is discretionary. While 13, I'd like you to maybe discuss the discretionary nature of some of those expenses.
Sabi Marwah - Sr. EVP and CFO
Again you do want me to start with slide 12, when you say investment is discretionary. Besides being discretionary, Steve, I would say they are opportunistic. Whenever there is an opportunity to gain, we take the gains so I think market (indiscernible)
Warren Walker - EVP, Credit Risk Management
Yes I mean there are opportunities -- opportunistic, I think, is a better word than discretionary in that you're reacting to market conditions. Not reacting to an earnings pattern. And this happened to be a quarter with several things happen, Shinside being the most often obvious. As well as that -- As you know, we and other banks have had various funds that have had substantial write-offs over the past several periods. That turned around this quarter. There were still a few write-offs but there were some big reasonably large harvesting done by fund managers from here in Canada that you're well aware of and others. So that benefited the quarter. We didn't control that at all. The timing of that is totally out of our hands, Steve. But that was the significant in the quarter. And then just I'd like to sat skillful management of the portfolios led to the remainder. So I think opportunistic is a better word (MULTIPLE SPEAKERS).
Unidentified Audience Member
(inaudible) wrong term but what about on the expense front?
Sabi Marwah - Sr. EVP and CFO
Expense front, I think it's fair to say that I guess what you're asking, what's our run rate, it's hard to really say to -- I wouldn't really categorize any of these expenses discretionary, you take expenses as and when they're needed. Asking what is a normal run rate? It's fair to say that we don't expect an 8 percent increase in the quarter as being a normal growth quarter. So it's somewhere between Q1 and Q2, basically, where we will end up with the balance of the year.
Unidentified Audience Member
Specifically with domestic banking and international banking. Is there any efficiency ratio targets that you want to share with us at all?
Sabi Marwah - Sr. EVP and CFO
I think on the international, I think that you got to separate Mexico from non Mexico and Mexico I think we've set publicly a target. Right now we are running about 75 percent productivity. We want to get to around 60 percent. And that was sort of a 2 to 3 target we have set (indiscernible) balance of the (technical difficulty) national run from the low 50s are (technical difficulty) very good already and in domestic we run into (technical difficulty) looking to drive that down.
Rick Waugh - President and CEO
Yes we're still looking to drive the domestic down by making further improvements as we've done over the past few years. One other thing on the growth quarter over quarter is, Steve, is there are certain expenses. We had favorable adjustments in Q1 and so, it makes -- it exaggerates the growth over what it truly was so I think Sabi's right. I would take sort of the average of the two.
Sabi Marwah - Sr. EVP and CFO
And another thing that drives our expenses, really, the stock price. As you know we have a (indiscernible) in stock price and it's not a great place to be but that stock price falls we will get a credit (MULTIPLE SPEAKERS) so we're not trying to drop stock price down but you'll get to see a credit in Q3. If the stock price stays at the current level.
Unidentified Audience Member
What was that expense (inaudible)?
Sabi Marwah - Sr. EVP and CFO
For the stock? (MULTIPLE SPEAKERS) Around 20 million per quarter.
Warren Walker - EVP, Credit Risk Management
And other variable comp, as well in the well side. Part of the domestic bank there's very little comp, obviously, in the brokerage side, in the variable comp caused by the strong stock performance was really bolstered. That was the -- by far, probably 75 percent of the quarter's increase was those two items.
Unidentified Audience Member
Could we get some more information on the tax laws (ph) carryforwards in international, specifically, how much is left, timing on when you'll take it and what is the sustainable tax rate of (inaudible).
Sabi Marwah - Sr. EVP and CFO
For international? I think we look at the international tax rate for the last several, well, started last several years has been trending down. Trending down for two reasons. There, obviously, is that as some of our international operations (technical difficulty) earnings in the lower tax provisions such as the Bahamas or the Caymans, or the (technical difficulty) Chile, those run at a substantial lower tax rate than Canada. So that, as those earnings grow, the tax rate will fall. And the second reason is, in the most recent quarter, the decline that you see is coming from the utilization of Inverlat's tax losses.
In terms of your question as to what the amount is, (indiscernible) I think we publicly disclosed at the end of last year that those tax losses that one recognizes were well in excess of 100 million. And I think that's still the case. And in terms of when they might expire they will be there for at least the next 6, 7 quarters.
Assuming Inverlat's depending on Inverlat earnings of course, assuming Inverlat earnings carry out to the same run rate as they are now, they are good for at least till the end of 2005, going into 2006.
Unidentified Audience Member
Then, should we, as we're looking at our models to forecast in a 25 percent tax rate for international for the next six to seven quarters.
Sabi Marwah - Sr. EVP and CFO
25 percent is on the high side.
Unidentified Audience Member
Okay. And then on a sustainable basis from a year ago you were carrying a tax rate of 37, 38 percent. Should we be.
Sabi Marwah - Sr. EVP and CFO
Not a year ago, that's not international. International tax rate a year ago were around 25 and they didn't (MULTIPLE SPEAKERS)
Warren Walker - EVP, Credit Risk Management
Domestically is that, taxable income has about the average rate (MULTIPLE SPEAKERS)
Sabi Marwah - Sr. EVP and CFO
May have maybe look in one particular I think the international tax rate in itself has been running around the mid-20s and they've been trending down since then, over the last four or five quarters.
Unidentified Audience Member
That's all. I'll double check with you afterwards.
Sabi Marwah - Sr. EVP and CFO
Michael?
Unidentified Audience Member
Question for Warren. You described what was happening with net formations. I am wondering if you can break it apart and describe what's happening to gross formations and carry (ph) sales onto repayment and how much in the way of actual sales were there in the way this quarter?
Warren Walker - EVP, Credit Risk Management
We don't, Michael, segregate. I think what you're referring to is gross formations. We talk net numbers. And as I indicated to you, this quarter was net $5 million. In terms of sales, sales have been relatively constant. And I think we sold -- I will have to check the number for you but it was in the order of magnitude of $300 to $350 million this quarter. And that would include both performing and non performing.
Unidentified Audience Member
How much of that would have non performing?
Warren Walker - EVP, Credit Risk Management
The smaller part of it. I would say about $100 million. We actively trade out of performing loans when we move to market conditions. We manage hold levels with certain accounts.
Sabi Marwah - Sr. EVP and CFO
Ian?
Unidentified Audience Member
Question for Bob on the unrealized security (indiscernible) very big with the unrealized current gain. Have you thought at all about hedging any of these things? I mean you said, you've got 208 million left in this one investment as just a gain cost of that, that's a pretty big position for a bank to (MULTIPLE SPEAKERS) on the second, on the second question relates to Osprey. Is Osprey in the quarter. The gain on Osprey, is that -- ?
Rick Waugh - President and CEO
First question, we have looked into hedging some or all of the I shouldn't say gain. It's not practical for various reasons. And short answer is not practical. Having said that, the stock is quite stable, it's trading around 700 yen. Give or take 25 yen, day in day out, the outlook for the bank is quite good. The outlook for the Japanese economy is quite good so we're not uncomfortable with holding the -- holding that position. Obviously there's no guarantees and, yes, there and I don't -- Sabi might have another, was a small amount for Osprey?
Sabi Marwah - Sr. EVP and CFO
It is below 10 yen for the Osprey, again, the vast majority of the gain is still unrealized.
Unidentified Audience Member
Just on the expenses, Scotia Capital trying to marry that up to the revenue numbers, and relating it to performance comp. Is there anything in those that's unusual in the quarter, because certainly the top line? That may help as well with the revenue (inaudible) --
Sabi Marwah - Sr. EVP and CFO
I think it's the same reason that I mentioned as Rick mentioned earlier. Q1 is depressed because in some ways you have some reversible of some accruals finalizing applying finalization of 2003 payouts. So, Q1 is really depressed so the growth looks higher than it really should be.
Unidentified Audience Member
Yes but if I go back in time and just look at the revenue, Sabi, over the last.
Sabi Marwah - Sr. EVP and CFO
That again, it's all mixed, because the revenue decline at Scotia Capital is all customer and corporate lending which is of a totally different compost than the growth and the growth is all coming in trading and underwriting and that's at a much higher comp. So that mix change is also driving that.
Unidentified Audience Member
So if we look forward, then, our productivity ratio should be running in the mid-40s on a going forward basis, given that this is a permanent change almost permanent change in (indiscernible) outstanding.
Warren Walker - EVP, Credit Risk Management
Corporates haven't been borrowing.
Sabi Marwah - Sr. EVP and CFO
For the foreseeable future.
Rick Waugh - President and CEO
Any questions on the phone?
Operator
James Keating, RBC Capital Markets.
James Keating - Analyst
Hello everyone. Sabi, I wonder if I might ask about international again just to clarify the moving parts here? On Slide 21 Caribbean contributions upsize as well as Latin America and can I just confirm those? Are those constant currency or those in Canadian dollars? Your percentage.
Sabi Marwah - Sr. EVP and CFO
Canadian dollars.
James Keating - Analyst
Okay and then could you help me? One more thing on that? Could you give me what the FX impact has been on either those percentage gains and/or if are possible on their revenue and expenses for the division overall? In some manner or other? Either dollars or otherwise? Whatever works for you?
Sabi Marwah - Sr. EVP and CFO
That's a lot of information to give you on the phone, Jim. Why don't you just call me after the meeting? I will gladly give you those?
James Keating - Analyst
Okay that'll be great. Hoping also to follow-up on the --
Sabi Marwah - Sr. EVP and CFO
The impact, just to tell you -- the impact on international on the year of 35 million debit so it'll be really, so we have earned for 35 and still delivered those results.
James Keating - Analyst
Great and if I may, also in the press release, the quarterly report. Page 8. The mortgage prepayment fee, I wonder if you could tell what the dollar, say, benefit of that was and/or what the dollar cost of the higher mortgage acquisition cost might have been?
Sabi Marwah - Sr. EVP and CFO
The prepayment fees in the first quarter was 5 million; the second quarter was around 15. And that finishes it. The rest? There's nothing further in the sense that the balance will remain on the balance sheet and will continue to be deferred and amortized.
James Keating - Analyst
Okay and it refers to some mortgage acquisition costs -- I'm not familiar with but what that is about. But, could you just detail that a bit, Sabi?
Sabi Marwah - Sr. EVP and CFO
That is standard business as usual. Bob can comment but that's standard visual, it just goes up in line with volume growth (MULTIPLE SPEAKERS)
Bob Chisholm - Vice Chairman
It's the cost of (indiscernible) we paid, Jamie, on the brokerage side. Sometimes we absorb the legal and discounting interest rate. All that is driven on volume. When we -- the higher the volumes that we have the higher our cost is going to be.
Sabi Marwah - Sr. EVP and CFO
Next question on the phone.
Operator
Rob Wessel of National Bank.
Rob Wessel - Analyst
Most of my questions were asked and answered. Just have one left, which is, now that your capital levels continue to grow I just was curious to see if you had given any thought to buying back more shares? I think I ask you this every call but I thought I'd try again this quarter. (laughter)
Warren Walker - EVP, Credit Risk Management
You like the consistent reply?
We again capital management is the one we take very seriously and we look at all the opportunities first as we can grow the businesses and then (indiscernible) we like dividends as you saw with our dividend increase. And we do our normal first issuer on our buybacks for delusion. And that's the way we still look at it as everything -- see things today. (MULTIPLE SPEAKERS)
Rick Waugh - President and CEO
We were more aggressive this quarter than we have been (MULTIPLE SPEAKERS)
Rob Wessel - Analyst
How many shares did you buy back?
Sabi Marwah - Sr. EVP and CFO
If I could elaborate, Bob. This quarter we did buy 5 million shares, which is higher than our historical levels. Last quarter was 1.1 million shares so we are listening in the sense that we are doing more buybacks than we historically have been doing.
Rob Wessel - Analyst
Okay, I promise I won't ask this next time.
Sabi Marwah - Sr. EVP and CFO
Next question on the phone.
Operator
Jim Bantis, CSFB.
Jim Bantis - Analyst
Question regarding the domestic operations. Pretty strong quarter, Bob, and just matching the record for Q1, could you aggregate the earnings trends from the Wealth Management, the retail numbers? The retail numbers from most of the other banks seem to come off because of margin compression in a fewer days. Can you give me a little bit of color there? And, secondly, regarding the retail numbers just going back to slide 19, in terms of the market share numbers. Your competitors I guess would argue that you're pricing this Money Master account or the checking savings products at a level that, perhaps, is not profitable. And maybe you can elaborate a little bit on the market share gains as well?
Bob Chisholm - Vice Chairman
First question, Jim, the mix impact wealth was clearly up in the quarter over Q1, not by a huge amount but still up. And the retail was pretty was up a little bit, commercial was down due to volumes being rather flat in the commercial side. So all in all, not a huge mix change. Obviously, the retail was hurt by a couple of less days which hit by about 7 million after-tax so you got to factor that into the equation. As far as some -- I can't comment on what my competitors are or are not doing. Clearly the bank has a winning formula in the retail side with strong market growth, No. 1 customer service levels, and a good momentum. I would -- I do and mention from time to time the sometimes actions of sort of our competitors regarding pricing as well. Our pricing, and I think it's pretty well on the market, we are gaining market share. But not by huge leaps and bounds. But we're not gaining it at the expense of not only of profitability but by good quality earnings. And you notice that our loan losses are substantially below the other banks. So and the asset side that relates to what my comments are. Regarding Money Match and other products, our pricing is dead on our competitors, and lower than some of the near bank the non big five bank competitors. And we price based upon alternative sources of deposits, and we price for profit. So other than that, I can't comment on what specifics they have.
Sabi Marwah - Sr. EVP and CFO
Jim, if I could elaborate on this whole issue of the Money Master account. One of the things we should remember, it may not be profitable for the others but it is very profitable disclosure for the simple reason that we, as you know are asset long as a bank. So we borrow on the wholesale market -- 5, 6, 7 billion daily. So my alternative (indiscernible) funds is wholesale monies. As long as I can raise money on the retail side that's cheaper than wholesale, I'm always better off. That is not true with my peer group and because when they have a Money Master account they cannibalize their regional deposits. I don't have the same issue. So for me it's highly profitable but they cannot -- it will never be profitable to them.
Bob Chisholm - Vice Chairman
Well we did cannibalize at the outset of that, which was a strategic decision that we took to forego some margin. And we had about a 40 percent cannibalization from internally but after that the issue was over, we've begun and have been taking it, more than two-thirds to 70 percent of the growth has been from other FIs. So the cannibalization is -- we packed it a long time ago because we introduced this product 3 years ago.
Jim Bantis - Analyst
Got it. Okay, that's very helpful thank you. If I could follow up with Scotia Bank Inverlat. You've shown again some pretty strong asset growth numbers. And could you help put those in the context of the sector or industry? Retail loans of 46 percent? High margin credit 67 percent? Can you talk about that relative to your peers again, or perhaps in terms of market share gains as well?
Rick Waugh - President and CEO
Sure. At this point in time, the major banks, as opposed to the (indiscernible) and the smaller entities in Mexico have not come onstream full bore. At this point, we're doing with about 6 to 9 percent market share, depending upon the retail service or the retail product. We are doing about 30 percent on auto finance and about 30 percent in terms of mortgages. So we're doing very, very well. And we believe that that is sustainable. We are putting right now the same kind of platform that we have in the domestic Canadian bank. We are putting that into Mexico and, actually, we're putting it into all of international, where we will have the sales and service. We'll have a new international banking platform. We'll have the automated sales management and tracking platform that will allow us to continue to enhance the performance. So we look for that to sustain itself.
Jim Bantis - Analyst
And that domestic platform coming down to Inverlat, the timing of that is likely?
Rick Waugh - President and CEO
That is rolling out right now. So that will be fully implemented by the end of this year.
Sabi Marwah - Sr. EVP and CFO
(indiscernible) just elaborate as well as what Rob just said we are taking shares in board retail lending, retail deposit and on the commercial side as well.
Jim Bantis - Analyst
And on the commercial side?
Sabi Marwah - Sr. EVP and CFO
That's right.
Jim Bantis - Analyst
Great, thank you. And last question please. And in context of some of your competitors who are, again, talking about the wholesale channel showing perhaps a weaker second half in the context of the IPO backlog and trust business weakening. And, perhaps, if David can talk about that, that would be great for the Scotia Capital's prospects?
David Wilson - Vice Chairman
Yes, Jim, I read the comments from the other banks that reported earlier. We are a little more optimistic than some of those comments. The pipeline is still pretty busy. The market was a little soggy in April but it's firmed up. So -- and M&A looks pretty accurate for the last half so my tone's a little better than you heard from some others.
Jim Bantis - Analyst
Okay that's great. Thanks, David.
Sabi Marwah - Sr. EVP and CFO
Any other questions on the phone?
Operator
Susan Cohen, Dundee Securities.
Susan Cohen - Analyst
Thank you. You mention that you might consider reducing your general allowance. Can you give a little color surrounding, perhaps, the timing or what kind of level you'd feel comfortable with?
Warren Walker - EVP, Credit Risk Management
It's Warren Walker, Susan. Yes. We've been watching circumstances over the last two or three quarters. And we will likely do something in Q3. Whatever we do will be relatively modest, and we will likely if we do something in Q3, watch this quarter to quarter to quarter going forward as well. The -- as most of our peer group does we evaluate our requirements for general allowances based upon both the qualitative and a quantitative computation. General drop-off in demand for loans, currency translation, and the relative improvement in the portfolio has driven that calculated portion of your generals down and contributed over the last year or so to a significant rise in the qualitative portion which may now be getting outsized. Certainly in our view. So I would say, expect something in Q3. And then we will watch it again quarter by quarter going forward.
Susan Cohen - Analyst
Thank you very much.
Sabi Marwah - Sr. EVP and CFO
Any other questions on the phone?
Operator
Darkolm Mehammich (ph), Research Capital.
Darkolm Mehammich - Analyst
Just a question for Sabi. It's pretty simple. I guess last quarter, you mentioned that you might have some ACG 13 unrealized hedging gains that might fall back into international in relatively short order. Did we see any of that come back in Q2?
Sabi Marwah - Sr. EVP and CFO
Yes part of the strength that you see in international quarter over quarter is because of ACG 13. Last quarter was a debit, this quarter was a credit so the total strength is around 20 million. Quarter to quarter in international.
Darkolm Mehammich - Analyst
That's 20 million after-tax?
Sabi Marwah - Sr. EVP and CFO
No. Pretax.
Operator
James Keating, RBC Capital Markets.
James Keating - Analyst
Sabi -- or it may be for Bob. I think that we mentioned that Rick mentioned spread compression perhaps may continue another quarter in retail. Was that comment signaling that that may be the last quarter where you anticipate spread compression? Or could you just describe the dynamics of how you're looking at what's been going on in retail?
Sabi Marwah - Sr. EVP and CFO
It really depends on what happens to rates. But given where rates are today, if rates don't change, we will see a compression in Q3 and if rates still don't change you'll see a further compression Q4. But our rates do start moving up, we think it will have bottomed out in Q3. It really depends on where rates go.
Operator
There are no further questions on the phone lines.
Unidentified Audience Member
A question for Rick and probably Bob. Since you look at the (indiscernible) ratings seem to be going extremely well. What and you've got tons of excess capital -- what is the prospect for a deal and sort of a build out of the platform beyond just the intrinsic growth?
Bob Chisholm - Vice Chairman
International (MULTIPLE SPEAKERS)
Unidentified Audience Member
I mean are you seeing things or (MULTIPLE SPEAKERS)?
Bob Chisholm - Vice Chairman
Yes we will -- we will look and we're not going to pick any new countries. Or I don't see the possibility but in the countries we already have and we've established over a reasonable amount of time, some platforms, so if we can do our -- this thing we think there might be some acquisition possibilities in our existing platforms. These are add-ins, add-ons. They're not transport informational. They are not huge but they will build upon a platform that we've already built. And these will be in the countries that we are and also in Mexico.
So we do see some opportunities but the banking market especially in international there's lots of perplexity because of ownership and regulatory and what have you. We've looked at a few last quarter and just didn't get there on one that we were very serious about. Very hard to time and, hopefully, we will be able to do something. (inaudible)
Unidentified Audience Member
Just a follow-up on that, Rick, and then a follow-up for credit for international. Does that -- well, you can't give a number I mean, given the amount of internal capital generation occurring at Scotia I mean, does it -- is it bigger than that so you're really not eating into or if you would be eating into your excess capital? And then just in terms of credit quality, Bob, in Mexico given the share that you're taking and the growth rates that you're getting, just any concerns or flavor for the market? And the credit quality that you're bringing in and -- ?
Bob Chisholm - Vice Chairman
We're actually quite pleased with the credit quality. Overall it's improved over the last year and the trend is good. The trend is positive both on the commercial side and the retail side.
Unidentified Audience Member
Those are default trends, (inaudible) what's the trend there?
Bob Chisholm - Vice Chairman
Our delinquency trends have come down about 50, 45, 50 percent from last year. Our coverage is very good on our NALs. The management of all the new stuff that we're putting on we think is well managed. Doing pretty good (inaudible).
David Wilson - Vice Chairman
If I can just add to that, Quentin, we have a very centralized credit approval process from the bank as you probably know. So apart from (MULTIPLE SPEAKERS) apart from relatively modest limits, I can confirm what (indiscernible) we see it here in Toronto too.
Sabi Marwah - Sr. EVP and CFO
Rob's limited at $500 for credit card. Michael?
Unidentified Audience Member
Any signs yet visible of pick up in business lending in Canada or the U.S.?
Bob Chisholm - Vice Chairman
I can speak for Canada on the commercial side and then I'll pass it over to Dave but in the commercial area we're starting to say some pickup, absolutely, in the past few weeks. Seem to be more confidence out there that there's a pickup. Not to the extent that we don't believe that we will hit our original target for the year but it will close a lot of the gap. I think we will be for the last two quarters of the year I believe we will be on plan for growth in those quarters. But the averages won't hit where we thought, Michael, so some positive sign, though. David.
David Wilson - Vice Chairman
On the wholesale lending, Michael, we've tracked it pretty carefully. Last quarter Canada, actually, was up a little. 200 million. And loans outstanding, the U.S. at the end of the quarter flattened out so we think the decline is over and we may see some growth there. And Europe is still coming down partly by market forces and partly by design.
Unidentified Audience Member
Great, thank you. There were some rumors that two Spanish banks would be merging or potentially merging which would then merge their two Mexican subsidiaries. I don't know if you heard that, Rob, or not?
Rob Pittfield - EVP, Int'l Banking
No, I didn't (inaudible).
(MULTIPLE SPEAKERS) Just what -- you are obviously comfortable.
Rob Pittfield - EVP, Int'l Banking
The two that are in Mexico, I mean, I-- I --
Unidentified Audience Member
They're of significant size.
Rob Pittfield - EVP, Int'l Banking
Yes and I -- obviously I can't, I don't know anything -- surprised that particular merger would take effect and then the effect in Mexico.
Unidentified Audience Member
I was wondering what kind of market shares would those two have together?
(MULTIPLE SPEAKERS) I'd say 30 to be around 40 (indiscernible) 35 percent -- to 40.
Unidentified Audience Member
Let's just assume hypothetically that they were to merge.
Rob Pittfield - EVP, Int'l Banking
-- overlap the branches it would be there. (MULTIPLE SPEAKERS)
Bob Chisholm - Vice Chairman
At this time, the environment in Mexico is not supportive of that massive a merger. I haven't heard it myself.
Rob Pittfield - EVP, Int'l Banking
That would be an opportunity for us, hopefully, to pick up some (MULTIPLE SPEAKERS) Mexico is underbanked but overbranched. We want to add branches -- not a heck of a lot because well, we're an international bank. We have new strategy. We've always looked. There have been some packages of the branches available. We've picked up a few but of course people discard the one you don't want and a merger of that probably would produce something of relevance. But, again, we are fairly focused on where we want to go and it's not a huge number of branches. Relative to the number that are there. But it would give us some opportunity and would love to see it if it happened.
And I wouldn't be afraid of the concentration that that would resolve. I know a lot of the competition people think of Mexico but for us I wouldn't mind that happening at all.
Sabi Marwah - Sr. EVP and CFO
If there are no other questions, thank you again very much and we look forward to seeing you all next quarter. Thank you.
Operator
Ladies and gentlemen, this concludes the conference call for today. We thank you for participating and ask that you please disconnect your lines.