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Sabi Marwah - Senior EVP & CFO
-- third-quarter results. I am 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 Pitfield, Executive Vice President, International Banking; and Warren Walker, Executive Vice President, Global 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 web site at scotiabank.com.
Rick Waugh - President & CEO
Thanks Sabi. I'm happy to report a continuation of our strong and consistent earnings trend. For the quarter earnings per share was 71 cents versus 60 cents a year ago. That's an 18 percent increase. Return on equity was very good at 19.4 percent compared to 17.7 percent in the third quarter last year.
We continued to benefit from our strategy of diversifying across three strong growth platforms, as all our business lines were up from the same period last year.
Credit quality continues to improve. For this quarter, net impaired loans were -227 million and provisions for credit losses came in at 50 million, comprised of 100 million in specific provisions, partly offset by a $50 million reduction in the general allowance for credit losses.
Our capital position remains strong with a tangible common equity ratio of 9.5 percent, up 10 basis points from the second quarter. This is the highest of the major Canadian banks. This capital strength, together with our proven ability to generate strong earnings, gives us tremendous flexibility and enables us to continue to increase our returns to shareholders, including the doubling of dividends over the past four years.
Overall this was a solid quarter.
The next slide shows our earnings growth over the past five quarters, which have been adjusted to reflect the stock dividend earlier this year.
As you may recall, our earnings last quarter included exceptionally large securities gains from the sale of part of our investment in Shinsei Bank in Japan. This was an after-tax gain of 8 cents per quarter. So if you exclude this exceptional gain, our earnings have shown an upward trend over the past several quarters, due again to the diversity and strength of the three businesses which continue to have good momentum.
This next slide shows this diversification and momentum across our three growth platforms. All had increases from last year. Our Domestic division, which includes Wealth Management, generated net income of 289 million in the third quarter, an increase of 17 million, 6 percent over last year.
Our International division -- earnings were $218 million, a significant increase of 43 million or 24 percent from last year. This was achieved notwithstanding the negative effect of depreciation of the Canadian dollar against the Mexican peso and many Caribbean currencies, and reinforces the unique growth potential that we have in International.
Scotia Capital reported earnings of 196 million this quarter, up 3 million from a year ago.
The other segment, which includes Group (ph) Treasury, reported net income of 40 million, up from a loss of 14 million last year. This improvement was largely due to the $50 million reduction in the general allowance for credit losses I mentioned earlier.
Our targets. In terms of 2004 performance targets, we are firmly on track to meet them all. Our return on equity of 19.4 percent for the quarter and 20.2 percent for the year-to-date, well above our 16 to 19 percent target range. Our earnings per share growth was 18 percent over the same quarter last year and 25 percent year-to-date, which also exceeds our target of 10 to 15 percent. And our year-to-date productivity ratio remains strong at 55.3, in line with our target of less then 58 percent.
I will now pass it over to Sabi to talk about our performance in greater detail.
Sabi Marwah - Senior EVP & CFO
Beginning on slide eight, this slide breaks down the impact of the stronger Canadian dollar. On the left it did not have a big impact versus Q2, but was significant versus last year. Compared to the third quarter of last year, while the Canadian dollar was relatively stable against the US dollar it appreciated against many currencies, including 9 percent against the Jamaican dollar and 13 percent against the Mexican peso. The impact is shown on the right hand side. There was a -67 million impact on revenues and a positive 30 million on expenses, resulting in lower earnings of 28 million or 3 cents per share. Though not shown on the slide, the impact for the nine months this year versus last year was much greater at over 200 million or 20 cents per share.
Turning to slide nine, compared to last quarter the second column, excluding the impact of AcG-13, the Canadian currency margin fell by 6 basis points in the quarter, primarily from a narrower spread between floating rate loans and low rate interest checking and savings accounts. In addition, spreads between fixed-rate mortgages and fixed-rate personal term deposits have tightened. Foreign currency spreads were 1 basis points lower quarter-over-quarter. While the impact of AcG-13 was positive on Canadian currency (indiscernible) income, it was largely offset by a reduction in foreign currency.
Looking at slide 10, other income, excluding the impact of the stronger Canadian dollar, other income was up 5 percent from a year ago but fell 18 percent from last quarter, due mainly to the exceptionally high gains on investment securities in Q2. On the right hand side, year-over-year the biggest contributor was higher security gains, up 77 million. There were also significant increases in other categories, including deposits and payment services and card revenues. These were partially offset by lower credit fees and corporate lending, down 28 million, as well as lower securitization revenues for maturing securitized assets and a decline in underwriting despite strong M&A fees. On the left hand side, compared to Q2 the primary contributor to the decrease was lower security gains which fell 145 million and a decline in (indiscernible) brokerage securitization and underwriting. The decline in other (ph) includes lower trading revenues, annual fees received in Q2 and summary classifications.
Turning to expenses on slide 11, excluding the impact of the stronger Canadian dollar expenses were up 3 percent from a year ago but fell 3 percent from last quarter. On the right hand side, year-over-year the largest component of the growth was higher pension and staff benefit costs of 21 million, due mainly to the higher present value of pension obligations. The remaining rise in expenses were due to growth in general business expenditures such as mortgage acquisition and processing costs, reflecting record volumes, as well as last year's acquisition in the Dominican Republic. Salaries rose 10 million, mainly reflecting the impact of normal merit increases. Lastly, other includes the normal growth in expenses including technology, reclassification of card reward points and so on. Quarter-over-quarter, following a high second quarter expenses fell 51 million due mainly to a 23 million decrease in performance and stock based compensation, in line with reduced brokerage and capital markets revenues, plus good expense control.
Slide 12 shows our productivity ratio remaining strong at 55.3 percent for the nine months this year.
On slide 13, as Rick mentioned we continue to have an excellent capital position, resulting from consistent growth over the past several quarters. All our capital ratios are very strong. Tier 1 is now 11.3 percent, up 70 basis points from last year, with 10 basis points growth in the quarter. Even more important, the tangible common equity ratio is particularly strong at 9.5 percent, the highest of the Canadian banks. It was 80 basis point higher than a year ago and up 10 basis points from last quarter.
Turning to slide 14, the surplus of market value of our book value fell 120 million this quarter to just below 900 million, still a very large surplus with the decline mainly from a lower market value of investment in Shinsei Bank in Japan, along with the realization of gains of the sale of certain investments in the quarter.
Turning to our business line results, starting on slide 16, looking first at Domestic Banking which includes our Wealth Management business, Domestic had another solid quarter with earnings of 289 million, up 6 percent over last year. Earnings fell slightly from last quarter due to lower revenues. Revenue growth compared to last year was modest at 3 percent. Net interest income rose growths slightly as margin compression was more than offset by strong volume growth. Margins continue to be squeezed as they have been across the system due to competitive pressures and the low interest rate environment. However, we continue to see excellent growth and market share increases in core lending and deposit products. Over the year average balances were up 17 percent in residential mortgages, 16 percent in revolving credit and 22 percent in core retail deposits. We had modest growth in other income, up 4 percent over last year. Growth was broad-based with increases coming from transaction based fees, mutual funds and foreign exchange. Expense growth slowed to 3 percent over last year, largely from normal growth in salaries, along with higher pension costs. As well, mortgage acquisition expenses and processing costs rose in line with volume growth. Quarter-over-quarter expenses were basically flat. I would mentioned that credit quality continued to be very good, particularly in retail.
As I mentioned on the next slide, not only are we showing strong growth in assets and deposits, we're also gaining market share in many areas in Canada. In residential mortgages, our all (ph) bank market share is 16 percent, up a substantial 60 basis points over last year. In checking and savings market share rose an impressive 70 basis points over last year, thanks largely to a successful Money Master account. We also seen a significant 140 basis point increase in business current account market share year-over-year. Overall, we believe that we can continue to build on these market share gains by providing superior customer service, maintaining a strong sales discipline and offering new and competitive products.
Turning to Scotia Capital on slide 18, earnings were 196 million for the quarter, up marginally from the same quarter last year, but down 7 percent from Q2. These results were driven by lower loan losses, a decline of 104 million year-over-year, reflecting an improvement in all lending portfolios, notably in the US. Warren will have more to say on this in a minute. These lower loan losses were partly offset by a 17 percent decline in revenues caused by lower US corporate lending volumes, which were down 35 percent plus due to more selective lending and high levels of liquidity in US capital markets. Non-interest revenues also declined year-over-year and quarter-over-quarter from very high levels despite strong M&A fees. Expenses fell due to lower performance-driven compensation. Besides solid earnings, Scotia Capital's ROE was strong at 19 percent, well above the levels in recent years. This was achieved through lower credit losses and a focus on only doing business where we can generate an adequate return. As well I would mentioned that Scotia Capital received several awards this quarter, including the Best Investment Bank in Canada from Global Finance magazine and the Best Debt House in Canada from Euromoney.
Turning to our International operation on slide 19, this quarter International net income was 218 million, up a significant 43 million or 24 percent from the third quarter of last year, and that is despite the negative impact of foreign currency translation. In the Caribbean and Central American net income increased by 21 percent, earning through the negative effect of foreign currency translation. Earnings growth was led by a greater contribution from the Dominican Republic and higher asset and deposit volumes also contribute. In Latin American earnings rose year-over-year mainly due to the strong results of Scotiabank Inverlat. I will have more to say on Inverlat in a moment. This increase was partially offset by lower gains on the sale of emerging market securities. In Asia, net income rose due to lower loan losses. Overall, the core retail and commercial operations in International had a strong quarter.
Looking at Scotiabank Inverlat, our Mexican subsidiary, Inverlat's contribution was 71 million this quarter, up 9 percent quarter-over-quarter and nearly double last year's level. Inverlat's ROE was very good at 25 percent. Strong growth in retail loans and the recognition of the benefits of tax losses drove these increases, along with a higher ownership stake.
We continue to see robust growth in loans. Retail loans were up a very strong 42 percent year-over-year, including a 54 percent increase in high-margin auto and credit card loans. Commercial lending increased 6 percent and deposits also rose by 6 percent.
We also led a number of capital market transactions in the quarter for some of Mexico's largest companies such as a lead arranger (ph) for a 2.4 billion syndication for Telmex, the largest loan syndication in Mexican history. Plus Inverlat retained its first-place ranking in the Mexican commercial paper market and short-term debt issuance. We are very pleased with Inverlat's results and are looking for continued earnings growth.
In summary, all business lines delivered good results this quarter. I will now hand it over to Warren to talk about risk.
Warren Walker - EVP, Global Risk Management
Thank you Sabi and good afternoon. I will be starting on slide 22.
The story this quarter was once again a continuation of the positive trends we have recently seen on the credit quality front. I think as Rick mentioned, net impaired loans were -227 million, a decline of 123 million from the preceding quarter and a substantial reduction of 544 million from a year ago. This represents the eighth consecutive quarter that net impaired loans have dropped.
Specific provisions were 100 million. That's a decrease of 30 million from last quarter and a substantial reduction of 100 million from a year ago. Excluding the reversal of provisions related to Argentina last year, the year-over-year decline was 124 million. The sustained improvement in credit conditions and falling loan volumes in the US has enabled us to reduce the general allowance this quarter by $50 million.
The next slide shows net formations by business lines during the quarter. Formations in domestic retail continue to be modest given the size and growth in the portfolio. Formations in the domestic commercial portfolio were also low in comparison to our recent run rate. International formations were a -24 million, primarily due to declassification of several small accounts. Scotia Capital also had negative formations of 41 million, reflecting declassification of a number of accounts. There were no major formations to speak of this quarter. Overall we had negative net formations of 7 million for the quarter.
Slide 24 shows the positive trend in net impaired loans, which have turned from positive to negative over the course of the past year.
Slide 25 shows the breakdown of provisioning by business line. Total specific provisions have decreased significantly from last quarter and last year to its lowest quarterly level in more than five years. Provisions in the domestic retail and commercial portfolios remained relatively stable compared to the same quarter in 2003. Compared to last quarter they declined by 11 million, in line with the lower formations. International provisions were only 2 million this quarter, reflecting higher levels of reversals and recoveries. In Scotia Capital provisions declined by 104 million from the same quarter last year and were down slightly from the previous quarter. Stronger economic conditions, increased corporate profitability and our ongoing careful management of this portfolio have resulted in continued improvement in credit quality over the course of the past year.
This is evident from the next slide, number 26, which shows the positive trend in net formations and specific provisions in Scotia Capital since Q1 '03. As you can see from the slide, the net formations have come down significantly and have been negative for the past two quarters. Similarly, provisioning in Scotia Capital has also come down substantially.
Slide 27 shows that we continue to maintain a high level of general allowance, notwithstanding the $50 million reduction we're taking this quarter. Our ratio of general allowance to risk-weighted assets at 92 basis points is still at the top end of our peer group.
Turning to our cable and telecom exposure, at 2.3 billion it was down by almost 250 million this quarter with the decrease occurring entirely in the non-investment grade portion, mostly from loan repayments. Our gross impaired loans of 299 million were down by 21 million from Q2 and net impaired loans also fell by 17 million.
Turning to our power and energy trading exposure, overall our overall portfolio remained virtually unchanged at 2.1 billion with a slight improvement in the overall quality of that portfolio.
Turning to market risk on slide 30, we have fairly low variability of trading revenue and we continue to run this business with very low risk. In fact, more than 95 percent of the days this quarter had positive results.
On the next slide are the VAR trends. As you can see, our one day VAR averaged 10.2 million this quarter compared to 8.2 million last quarter. No single loss day exceeded the one day VAR.
In summary, the continued improvement in the credit markets bodes well for our credit portfolios which are in much better shape than a year ago. Credit quality in our domestic retail remains excellent considering the size and growth of the portfolio. Canadian commercial credit quality is stable and our international portfolios are in good shape. As I mentioned earlier, credit quality in Scotia Capital continues to improve. Market risk remains well contained. As well, if the recent trend in favorable credit conditions continues, there may be further reductions in the general allowance for credit losses.
And with that I will turn it over to Rick.
Rick Waugh - President & CEO
Okay. Thank you Warren.
Looking ahead, our challenges, as we have mentioned before, depreciation in the Canadian dollar, compression of interest rate margins and the lack of corporate loan demand, especially in the United States. However, we continue to benefit from the diversification of our earnings and we are confident that our three growth platforms will enable us to deliver solid earnings in a moderate growth environment.
Specifically looking at each of the three businesses, in Domestic retail volumes remain strong and we continue to take market share almost across the board 60 basis points in mortgages, 70 basis points in core retail deposits and over 130 basis points in business deposit accounts.
We are embarking on several initiatives to acquire additional customers to augment the increasing cross-sell to our current customer base. In Scotia Capital we've achieved a great success in improving in sustaining our credit quality. But we are equally focused on revenues and increasing the cross-sell on additional products and services. Plus, for the future we are well positioned for the upside when loan demand returns of our well-established and existing American and Canadian client base.
In International, Mexico, the Caribbean and Central America, they continue to have good top-line growth, notwithstanding the impact of foreign currency translations. And of course we are adding to our already strong capital and reserves. This gives us a broad range of options to exploit opportunities for future growth, as well as share buy-backs and dividends, and will enable us to continue to increase sustainable returns to shareholders.
Overall, we expect to achieve our performance targets for 2004 and continue to build our platforms for another year of sustainable performance in 2005 and beyond.
So with that, we will open it up to questions. Sabi?
Sabi Marwah - Senior EVP & CFO
Jim, if you could just say your name & company, just for the advantage of people on the phone?
Jim Bantis - Analyst
Sure. Two questions. Jim Bantis, CSFB. The first question is to Rick and it's regarding US expansion. When we have talked about this in the past clearly the bank's been focused on trying to find a good asset, good management, but coupling it with good economics. And clearly with the recent transaction the market is willing to look aside good economics over a good asset. And at what point -- your thoughts on this in the respect of perhaps paying up (ph) for strategy or where is a US acquisition perhaps, on the front burner or back burner going forward?
Rick Waugh - President & CEO
Each of us have to look at our own comparative strengths and our options and what we have. And Jim and others have heard of course we like our position in terms of the options we have. We have our three platforms. And of course what's unique, we have our international. And we watch the American market very closely. But being as we all know on a number of recent transactions, this market, the premiums that are being paid are from most analyticals I know, very, very rich. We also know historically that high premiums and total shareholder returns are very hard to achieve, and it's very challenging. So it's all in execution.
But right now, again, my view, our view in the market, its pricey down there. But we will continue to watch it and what have you. We have to balance our continuing need to perform in both the short and medium with the long run. And we're blessed with other options. So for us it's steady as our goal. We will keep our eyes open and we know what we have in terms of our broad opportunities and our capital. But we see a market down there that's still at least in the short run very pricey, and execution will be tough down there.
Jim Bantis - Analyst
Two questions to David. Scotia Capital's NII is down a third from a year ago, obviously in terms of the rundown of US corporate loan bookings. To what extent has that now been complete in terms of parsing back some of that non -- the poor (ph) financial relationships that you have?
David Wilson - Vice Chairman
The US exit process is virtually complete. We're disbanding our US exit group -- we had a dedicated team -- in the middle of September, so next month. So that's pretty much finished. We are about a year to go in Europe. So the exit process is pretty much over with. Relatively little P&L impact of this. It will gradually run off. And repayment process worked well there. But only about 10 or 15 percent of the spread decline is because of the exit portfolio. It is mostly the reduction in drawn assets in the lending business, mainly in the US, that is not (ph) that decline. The exit portfolio is not the main reason that NII went down as it has gone down.
Quentin Broad - Analyst
Quentin Broad, CIBC World Markets. Just to follow up on that, looking at the mix (ph) rate, the non-interest expense ratio continues to decline. David, is there a point where you think that tops out given the way you've restructured it? I mean, clearly having a big balance sheet helps to drive down the mix ratio. At what point does that kind of stop growing? Obviously there's revenue challenges, but I think it's a business mix issue also.
David Wilson - Vice Chairman
I think the business mix rebalancing is pretty much done, so I think we're at a stable point and broadly speaking the business mix sense. So the mix ratio should stabilize.
Quentin Broad - Analyst
In the quarter you mentioned variable comp down, but I guess if I look at the non-interest expense (indiscernible) is it -- did we see anything in the first two quarters that would suggest perhaps we got a little ahead of ourselves on variable comp and it came down this quarter? Or is it kind of lock step in there, it was nothing that went through --?
David Wilson - Vice Chairman
No. The businesses that had a big second quarter -- institutional equity, for example -- is a larger, variable comp business than some of the other spread businesses. So I think that's the dynamic you're seeing.
Michael Goldberg - Analyst
Michael Goldberg, Desjardins Securities. I want to follow up on the point that is being made about the lack of business loan demand in the United States. And maybe if we could get a little further color on this, the reason for the decrease in draw-downs that you see? Is there the same trend that you're still seeing in corporate Canada and on the commercial side? And what will it take to get a pick up in business lending?
David Wilson - Vice Chairman
The exit portfolio, as I said, had some impact, but there's a secular trend of other lenders, just intermediating banks in the US and Europe and to a lesser extent in Canada. There's a lot of liquidity in the market. A lot of it is being provided by hedge funds, pension funds. The term B market has become a very, very big market in the US. That's a non-bank drawn credit market.
So we're aware that the market dynamics have changed, especially in the US; as I say, to a lesser extent in Canada. The current numbers, just as we proceeded through the end of the third quarter, indicate a possible bottoming. But there's a secular change that has happened there. Now, as the economy recovers and the corporations still have all their liquidity lines, we expect we're positioned for a bounce back in drawn bank credit. But there has been a disintermediation effect occur.
That's the wholesale side. There was a question about commercial as well there Bob.
Unidentified Company Representative
We have seen a very small up-tick in the commercial demand in this quarter after five quarters of diminished demand. So we have some optimism that Q4 we will see a continuation of that. But it reflects the general economy, and so we're not expecting a huge up-tick in outstandings. But there is some favorable trends there, which depending obviously on the economic forecasts you follow and interest rates will continue hopefully into '05.
Michael Goldberg - Analyst
Can I just get some further elaboration on the US lending? We've seen now three, maybe four years of lower C&I lending in the United States. To what extent do you think that this is secular and to what extent do you think it's cyclical?
David Wilson - Vice Chairman
You're asking for predictions of where it's going. Our economics department has done a fair bit of work on this and we have talked about it. We think there will be a bottoming and we've seen some commentary that there will be a bottoming. Whether we're at the bottom now, you know, Rick, you and I have talked about this at length.
Rick Waugh - President & CEO
I have got some views on this, and they're just views but -- because this is an important business for us. We've said that before and we're committed to it. And obviously while we're very pleased with these results, the disintermediation in the US portfolio, that 35 percent decrease in the loans is not what we would want. So we have looked at that, what has happened there.
And as we look at it, because we're going through this very rigorous process of discipline and profitability, what's happened is our customer base is intact. We have grown customers. And we have more customers, even having gone through this exercise. And while our loans had been paid down 35 percent, our customers have not canceled their lines. Our authorized lines are down slightly, but not anywhere near the 35 percent that you see down in outstandings. So what in effect has happened, as David says, we've faced some very strong disintermediation, probably the strongest I've ever seen and I was down there for many years. And we have seen that pay down. We can discuss probably at another time of what the causes are -- the hedge funds and long-term interest rates, people going to bond markets, customers managing for cash, keeping their working capital levels low. But it's interesting to note our customers have not canceled our line.
So, what does that mean about the future? I think we have got, as I said in my comments, our established customer base. When is this upturn? I'd say when, not if. When is this upturn going to happen? We thought it would have been happening. The economics (indiscernible) we've got this jobless recovery and what have you. We would have hoped that this recovery would have happened by now. We have seen some signs of bottoming out in commercial. We have seen M&A activity. But we have not seen any kind of general up-tick in sort of lending for working capital and inventory and capital expenditures.
Some signs, some good economic issues into a lot of correlations of when interest rates start to rise you do go back and look at the charts and C&I loans over 20 years, and you look at that chart and when interest rates start to rise C&I loans go up. Sometime in that future I believe in cycles and I believe that people will come in and start using their bank lines again. And in the States remember these bank lines are paid, they're committed lines so they are paying for that. Whether it ever rebounds to the levels we enjoyed ten years ago because of hedge funds and what have you, will be a debate. But it will rebound.
Unidentified Audience Member
Ian from Nesbitt. The first question relates to the securities gain of 106 million. Wondering if they're (indiscernible). I am kind of thinking of your discussions. Sabi, you said there were lower securities gains in Latin America, so (indiscernible) were down. So what did you (multiple speakers)
Sabi Marwah - Senior EVP & CFO
There's no Shinsei gain in this quarter.
Unidentified Audience Member
There's no Shinsei, exactly. So if there is no Shinsei and the brady (ph) sales are down from previous quarters, how do you still book 106 million and where did you fabricate those (multiple speakers)
Unidentified Company Representative
Generate. We have a host of portfolios, is the short answer. And different things happened in different ones this quarter. It was heavily oriented to equity portfolios, mostly public equity portfolios. There were no special onetime gains. So it was across a fairly broad front.
The other thing, as you know, for -- I have forgotten how many quarters now, we've been writing down LBO funds and other equity assets that we felt were impaired. The write-downs this quarter were significantly lower. And in the case of the LBO funds, there were some fairly sizable realizations. We book gains on those when we are paid out by the fund manager. So those were high this quarter, or higher than they have been in several years, let me put it that way. I'm not sure it was a onetime thing because these funds have been harvesting and they have been taking write-downs, and now with the economy having improved they're starting to realize gains. So it was a whole bunch of things of that kind.
Unidentified Audience Member
I guess a follow-up for Sabi. Did that come through the corporate and other or does that come through Scotia Capital?
Sabi Marwah - Senior EVP & CFO
It comes through other. I would elaborate just on the LBO gains, approximately one-third of our number is really LBO gains but historically that number has been much lower. And other thing that Bob didn't elaborate on is that we have option revenue in that we normally do not recognize. It is when Bob's people write options against equities that we don't recognize until the options expire or we are called (ph) away. So a lot of options early expired and we recognized the income, so that was around 20 million. So that's part really of the ongoing strategy to really realize gains from our equity portfolio.
Unidentified Audience Member
The second question for Sabi as well. The reversal of the general provision, when I look back over time Scotiabank actually took most of its general through a direct charge to retained earnings, yet you're bringing back through the reverse (ph) sell-through income. Just (multiple speakers)
Sabi Marwah - Senior EVP & CFO
(multiple speakers) did it on non-GAAP basis once doesn't mean we are going to do the reversals through a non-GAAP basis. We're just adhering to GAAP.
Unidentified Audience Member
I couldn't resist that one.
Sabi Marwah - Senior EVP & CFO
And other questions? Michael?
Michael Goldberg - Analyst
How much tax loss carry-forward is left in Inverlat? And how much longer will it be (multiple speakers)
Sabi Marwah - Senior EVP & CFO
I think I will give you the same answers I gave last quarter. It's still in excess of 100 million and it will expire sometime at the end of next year into 2006.
Sabi Marwah - Senior EVP & CFO
Any questions on the phone?
Operator
Jamie Keating, RBC Capital Markets.
Jamie Keating - Analyst
Looks like a fairly solid quarter here. Sabi, I wonder if you might help us with slide 19 and just looking at the International contributions, if you might help us investors as to what the relative contributions were from the other regions, roughly. I think we know it's 71 or so from the Mexican operation.
Sabi Marwah - Senior EVP & CFO
I think I would say to you we've shown you what Inverlat is. Inverlat is around 71 million. And then I would say approximately half of what is left is easily the Caribbean. But that's the number I can give you after the (indiscernible) if you want -- do you have a break down of that?
Jamie Keating - Analyst
I wonder if I might while you're doing that -- slide 14 talks about the unrealized securities gains. You have got big emerging market debt in the money there. Obviously Shinsei is in the money. Wonder if you would just discuss hedgeability or whether you have an (indiscernible) for hedging, just discuss the issue there.
David Wilson - Vice Chairman
We have looked extensively into hedging the Shinsei holding, and because of the fact that it's structured through a partnership agreement we're not able practically to do that at this time. That may become available later. The stocks actually held up reasonably well. It's obviously not at its all-time highs, as you would not expect. But it's actually been rising recently. It is up around 650 yen I think. The ideal price was 5.25. So it's still well in excess of that, but off its 800ish peak that it reached.
The LBC portfolio, or emerging markets portfolio, as you know we've had for a long, long, long time and intend to have the most of it for a long time yet to come, although we do trade around the fringes of it from time to time when valuations get out of whack for some reason or other. So we don't feel that trying to hedge that is an appropriate strategy in that circumstance. These are bonds and for practical purposes we're going to hold them till maturity.
Jamie Keating - Analyst
Maybe just for Rick while we have him, following on to the usage of excess capital question, which is probably the biggest burning issue for Rick and the Board I guess. Can you update us on what we know about Banarte (ph)? I understand there may be a new management team there. Is that a bit of a longer-term possibility of at this point in time given the new information?
Rick Waugh - President & CEO
They have changed their chief executive officer, but the core ownership is still the same. But they have made a change there, but not on an ownership basis. I got no, other than that, no other really insights on what they're doing. I think they're reasonably happy with their state in life, but you have to ask them (indiscernible) nothing to that. But management has changed and I think all the banks down there it's competitive that it is a market we're all comfortable in, but nothing really to add on that.
Sabi Marwah - Senior EVP & CFO
If I can just finish my earlier response, (indiscernible) that you see in the quarter, as we said 71 is Inverlat. And of the remaining, right around 60 percent will be Caribbean. And the balance divided between the brady (ph) bonds and Asia.
Jamie Keating - Analyst
Terrific. Thank you very much Sabi.
Operator
Rob Wessel, National Bank Financial.
Rob Wessel - Analyst
I do have a few. The first question I have is for Warren. Warren, now that we've seen provisions calling fairly meaningful basically within the whole sector but Scotia as well, would you attribute this more to sort of quarterly volatility? Or do you think that we users of external financial information should view this more as something that will persist for a period time?
Warren Walker - EVP, Global Risk Management
I can only answer reliably in terms of our own numbers. This is about where we would expect to be at this point in the cycle. And from our perspective we know that perhaps going out two or slightly more quarters we're comfortable at this level. It could be better based on the timing of recoveries, because we do anticipate recoveries. We could be hit with one account in any given quarter, so it could be slightly worse. But this is about where we would expect to be at this point in the cycle.
Rob Wessel - Analyst
Do you think this stage of the cycle will persist for more than four quarters?
Warren Walker - EVP, Global Risk Management
I think the number to watch is growth in GDP. There is a great study out of the US Fed in New York that tracks 40 years of corporate default rates. And anytime you see GDP growth punching out about 2.5 to 3 percent range on the upside, you see a dramatic drop-off in corporate defaults. When it falls dramatically below 2.5 percent for a sustained period you see a rise generally three quarters and beyond out in terms of corporate defaults.
Rick Waugh - President & CEO
What you do see as good trend, as we've mentioned, in our net formations, a very good trend and had a good quarter on that. And finally, based our delinquency ratios in International and Domestic on that are all trending favorably.
Rob Wessel - Analyst
And I have a question for you, Rick, just to pick up on one of the questions asked earlier. And maybe I would try to ask the same question in a different way and hope for more specificity. With respect to the allocation of capital, it is quite large. And I know the previous question pertained to the USA in particular. I wanted to know if you could discuss what some of your other options were and if we could get some sense for whether, or not you feel that there is an opportunity -- or sorry, that there is the potential for the bank to be opportunistic perhaps over the next six quarters, or if you think that really right now there's not a whole lot of good uses for it and we should just watch it build.
Rick Waugh - President & CEO
I don't think -- we are looking always for opportunities. And in our International operation we continue to look for opportunity. We're probably not going to look for a new country or a new market, but within those countries we're in, 45 of them, we think that we have built platforms that are ready to take many of these countries to a new level and we will continue to do that, whether it be Mexico, Central America, Caribbean or Asia. And so we have dedicated teams that looks at these things. Yes, we take our time in looking at these things and the opportunities are maybe not as robust as you see in the United States where you have 7500 banks and great investment bankers to do that. But we're still looking at that and generic growth and building up in portfolios and customers and acquisitions. So we're not going to sit on our capital. We're going to make sure we're earn good returns on it and look at all options. So it's not just a sit and wait.
Rob Wessel - Analyst
Just to give us an idea as to the environment internationally with respect to the number of potential opportunities, do you get the sense that there is a lot of opportunity out there for you? Or is it more a bit like in the US where a lot of people think valuations aren't so good, maybe they will be better in a year? Do you get the impression that maybe this is a good time and you have a lot of options, it's just a question of deciding what's the right option?
Rick Waugh - President & CEO
Internationally especially and the markets we are in, you have to be opportunistic. In most markets people who are making a lot of money in banking usually aren't ready to sell. And so we have to recognize that. But there are circumstances where banks are going through some transformational, successional or whatever that we can move in. We've got some files that go back years on specific situations and we will just have to wait and see. So I'm sorry I'm not being specific because you really can't other than we're committed to looking back when we see the right opportunity.
Rob Wessel - Analyst
One last sort of technical question. This is for Sabi. In terms of Domestic Banking, that sort of change in profitability quarter-over-quarter going from 297 and 293, can you give us a sense for how much -- what the respective changes were between Wealth Management and Domestic Banking, recognizing I know that you feel they are integrated?
Sabi Marwah - Senior EVP & CFO
I think the majority of the drop is caused by Wealth Management.
Rob Wessel - Analyst
The majority of the decline?
Sabi Marwah - Senior EVP & CFO
That is right.
Rob Wessel - Analyst
Is caused by Wealth Management?
Sabi Marwah - Senior EVP & CFO
Correct.
Rob Wessel - Analyst
Did retail rise?
Sabi Marwah - Senior EVP & CFO
Retail is flat. Commercial may have gone up a touch.
Rob Wessel - Analyst
Thank you very much.
Operator
Darko Mihelic, First Associates.
Darko Mihelic - Analyst
Good afternoon. A question for Sabi. I am just trying to better understand the net interest margins quarter-over-quarter. It seems like the drop in net interest margins in the domestic bank seem almost excessive. I wonder if you can comment on why they dropped so much in the quarter.
Sabi Marwah - Senior EVP & CFO
I think the main reason why it appears higher than it actually is is that in Q2 the margin was really inflated to some extent because we had mortgage prepayment fees that really came. If you remember, we announced at the beginning of the year that under the new Section 1100 CSE changes we had to recognize certain amount of mortgage prepayment fees, so some of that really came in in Q2 (indiscernible) inflates Q2.
Darko Mihelic - Analyst
And year-over-year it is also --
Sabi Marwah - Senior EVP & CFO
Year-over-year the margin is down. In fact, we've been saying about margin compression for quite some time.
Darko Mihelic - Analyst
It just seems a lot more versus your competitors on the retail side. I guess it also affects the --
Sabi Marwah - Senior EVP & CFO
I think another reason why it's really down is that the majority, the vast majority of asset growth is really coming in mortgages and mortgages (indiscernible) as interest rates keep falling.
Darko Mihelic - Analyst
You see the same impact in the International Banking as well because there is also a very substantial decrease there?
Sabi Marwah - Senior EVP & CFO
In International, that drop quarter-over-quarter that you see is really driven by AcG-13. Almost two-thirds of that drop is really driven by the swing in AcG-13.
Darko Mihelic - Analyst
Thanks very much.
Sabi Marwah - Senior EVP & CFO
Next question on the phone.
Operator
There are no further questions at this time. Please continue.
Sabi Marwah - Senior EVP & CFO
Any questions here? Michael?
Michael Goldberg - Analyst
You have about 60, $65 million of general allowance in excess of the general allowance that can be included in your regulatory capital. Is this one of the reasons that gives you confidence that there's more room for general allowance releases? And does it also maybe give some reasonable scale to the magnitude of potential releases?
Unidentified Company Representative
I think when we look at general allowances, there's two issues we look at as we have contemplated the current release and our future position. Number one has been the decline in volume in the loan book. Number two has been the improvement in the quality, the underlying quality.
The general allowance is a formulaic exercise based upon a model approved with our regulator that uses a combination of volumes and portfolio quality to arrive a calculated portion. Plus there's a management judgment and management assessment over and above that. The calculated or quantitative portion in our case has been decreasing quarter-over-quarter as the loan book has both improved in quality and come down in volume. And based upon our reading of the situation, we felt it was appropriate and reasonable to release some. Should those trends continue we expect to do similarly in future quarters.
But there is not an accounting convention that we follow, nor do we manage it for that reason. It's a pure credit-driven issue.
Sabi Marwah - Senior EVP & CFO
I think it is no different than what the other banks are really seeing (indiscernible) we have been seeing a general release in general reserves for several quarters by all the banks and we are no different. The fact that volumes -- credit quality is improving and volumes are falling. And we don't really need the extent of allowance that is there. And (indiscernible) declined a couple of quarters ago and we are still continuing to flag it.
Michael Goldberg - Analyst
One other thing on a different topic that I just wanted to clarify. I just wanted to clarify that you have had positive impact of AcG-13 this quarter in Canadian currency and that was offset by negative impact of AcG-13 13 in foreign currency. Is that correct?
Sabi Marwah - Senior EVP & CFO
That's absolutely correct.
Michael Goldberg - Analyst
Can you give us roughly what the amounts were and what the overall net amount is?
Sabi Marwah - Senior EVP & CFO
Around 15 each.
Michael Goldberg - Analyst
15 each netting out to near 0?
Michael Goldberg - Analyst
0 -- netting out a small positive. There is some in other income too. It is some small positive. The bottom line is a positive 5. It is relatively small.
Michael Goldberg - Analyst
Thanks very much.
Quentin Broad - Analyst
First, for Warren, just talking about recoveries and reversals and International, what size where they? And in Scotia Capital, I guess it looks like Canada had activity, which surprises me. It looked like it had more activity than the US on that basis recoveries. Just I'm curious as to whether there's something large that went through Scotia Capital Canada this quarter that was unusual.
Warren Walker - EVP, Global Risk Management
There was one account that represented about $20 million in terms of provision reversal in the steel industry.
Quentin Broad - Analyst
And in the International side?
Warren Walker - EVP, Global Risk Management
The International, they were small and spread out. There was nothing -- no one account of any significance.
Quentin Broad - Analyst
David, just on the M&A fees that were talked about in the press release, I assume there was one large cross-border transaction M&A fee booked into the quarter.
David Wilson - Vice Chairman
There were quite a number of fees. Two good-sized fees and a bunch of sort of standard M&A fees made for -- I think it was record revenues in M&A for us for the quarter.
Quentin Broad - Analyst
So would the two be -- let me tack another way. What does the pipeline look like given clearing out a couple of these large (multiple speakers)
David Wilson - Vice Chairman
The pipeline has some significant transactions which would be lumpy if they close, but in the world of M&A you can never be sure. There's lots of stuff going on. How much of it will actually get closed is hard to predict.
Quentin Broad - Analyst
And that pipeline versus what you've seen over the last two, three, four quarters --?
David Wilson - Vice Chairman
It's about the same.
Sabi Marwah - Senior EVP & CFO
Any other questions? If not, thank you very much, and we look forward to seeing you in November.