Bank of Nova Scotia (BNS) 2004 Q4 法說會逐字稿

Good afternoon and welcome to the presentation of Scotiabank's year-end results. I'm Sabi Marwah, Senior Executive Vice President and Chief Financial Officer. With us today in Toronto are Rick Waugh, President and CEO; Bob Chisholm, Vice Chairman; David Wilson, Vice Chairman; Bob Brooks, Senior Executive Vice President and Group Treasurer; 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 credit quality by Warren and outlook 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?

Thanks, Sabi. I'm happy to report record full-year results and a solid fourth quarter. For the quarter, our earnings per share were 69 cents versus 63 cents a year ago and our return on equity was a solid 18.8 percent.

Looking at our full-year results, as I mentioned, we have had excellent earnings with earnings per share of $2.82, an increase of over 20 percent. Return on equity also rose to a very strong 19.9 percent, up from 17.6 percent in 2003. These good results were driven in a large part by improved credit quality. For the year, provisions came in at 390 million, a decrease of 503 million from last year. Improving credit quality helped us earn through the continuing negative impact of the stronger Canadian dollar, which hurt us on the translation of our foreign currency earnings.

Still, a big plus for us is the strength of our capital ratios. With a tangible common equity ratio of 9.7 percent, this is the strongest of the major Canadian banks. This capital strength and our solid earnings enable us to keep increasing dividends with a further increase of 2 cents to 32 cents per common share in the first quarter of 2005.

So overall this was a solid quarter and a very good year, building on our consistent record of performance.

The next slide shows the strength of our major business lines. This year we saw growth across all our business lines. Our domestic division, which includes wealth management, was 4 percent higher than last year. We saw very strong growth in residential mortgages and other retail lending, accompanied by solid gains in market share. This growth was offset by a narrowing of margins, reflecting low interest rates and the very competitive market.

Scotia Capital's net income increased 18 percent year-over-year due to a substantial improvement in credit losses in all our corporate lending portfolios, as well as record earnings in several of our other areas. These accomplishments were offset by the effect of foreign currency translation and a reduction in corporate lending assets.

International performed well, up 11 percent with strong contributions from Mexico and the Caribbean. This increase was achieved notwithstanding the effect of foreign currency translations, which reduced earnings growth by 17 percent.

Earnings from our other category, which includes group treasury, rose to 195 million compared to a loss of 7 million last year. This improvement was due to higher gains on the sale of investment securities and a $100 million reduction in the general allowance for credit allowances this year.

Now this next slide shows our record of earnings growth and consistency over the past decade. I believe that key to our ongoing success is our exceptional team of talented, experienced, and dedicated employees, along with our unwavering focus on customer satisfaction, risk management, cost control, diversification, and first-rate execution.

Our record of consistent earnings growth has been matched by our record of consistent dividend growth. Some key points I would like to make on our dividend -- firstly, we've had 2 dividend increases in 2004, resulting in the 31 percent increase this year; secondly, our dividend has doubled in the last 4 years; thirdly, our compounded annual growth over the past 10 years has been 14.3 percent; and lastly, and once again, today we announced another increase of 2 cents per share, all of this within our indicated payout ratio and all of this without compromising our capital strength. Overall our great track record on dividends is based on a foundation of growth and strong capital.

In terms of our 2004 performance, we exceeded all of our targets set at the beginning of last year by a wide margin, which were also set from the very strong base we earned in 2003. Our ROE was 19.9 percent for the year, ahead of our 16 to 19 percent target range. Our earnings per share growth was 20.5 percent, well above our 10 to 15 percent target. Our productivity ratio was 56 percent for the year, better than our goal to remain below 58 percent. And we continue to have among the strongest capital ratios of the major Canadian banks, which gives us tremendous flexibility to pursue new growth opportunities.

I will now pass it over to Sabi to talk about our performance in more detail.

Thank you, Rick.

Beginning on slide 9, this slide outlines the negative impact of foreign currency translation on our results as a result of the strengthening of the Canadian dollar against most of the currencies in the countries where we operate. This year, for example, the Canadian dollar appreciated by 9 percent against the US dollar, 17 percent against the Mexican peso, and 21 percent against the Jamaican dollar. This translation affected every revenue and expense line. On the whole year, to the right, it reduced revenues by 533 million, but also reduced expenses by 227 million. The net impact was to lower earnings by 210 million or 21 cents per share for the year. On the left, the impact on the quarters was a -22 million or 2 cents per share. We did hedge a portion of our US dollar earnings, which mitigated some of this negative impact, but we had to earn through the majority of it (ph).

On the next slide is our revenue growth, which was slightly above 2003. However, as I just mentioned, the stronger Canadian dollar reduced revenues by 533 million or 5 percent. Revenue was also negatively impacted by AcG 13, the new accounting standard for hedging, which further reduced revenues by 49 million, of which 18 million occurred in the fourth quarter. Excluding these items, revenues grew 602 million or 6 percent, as you can see from the chart, 497 million coming from growth in other income and 105 from net interest income.

Turning to slide 9, 1 of the challenges in 2004 was the compression in the net interest margin, which partially offset great retail asset growth. Compared to last year on the right, the margin fell 7 basis points. The major reason for the decrease was a 9 basis point reduction in the Canadian currency margin, mainly from a narrower spread between floating-rate loans and low-rate interest checking and savings deposits. In addition, spreads between fixed-rate mortgages and fixed-rate personal term deposits have tightened. Compared to Q3 on the left, the margin fell by 3 basis points, due mainly to lower foreign currency margins this quarter.

Looking at slide 12, other income, at the top right reported other income was up 305 million, a fairly solid 8 percent year-over-year. As I just mentioned, adjusting for foreign currency translation and AcG 13, underlying other income was 497 million higher or 12 percent above last year. A large part of the year-over-year increase was higher security gains up 318 million, which included 125 million gain on the sale of part of our Shinsei Bank investment. There were also increases in retail brokerage, deposits and payment services and card revenues. Partly offsetting were lower credit fees from reduced volumes in corporate lending and a 29 million decrease in securitization revenues. On the left, compared to Q3, other income was down slightly, mainly from lower security gains, offset by increases in other, which include trading revenues, insurance, gains from hedging activities, and miscellaneous retail and commercial fees.

Turning to expenses on slide 13, on the right reporting expenses increased by 131 million or 2 percent for the year. However, if we exclude the impact of the stronger Canadian dollar as we did on the income side, expenses rose 6 percent for the year. The largest increase, 88 million, was in pension and employee benefits, mainly due to the effect of higher benefit obligations resulting from a decline in interest rates. I would also like to mention that our pension plan is still in a surplus position of more than 300 million at year end.

Stock and performance-based compensation was also up over last year, reflecting the bank's strong overall performance, as well as a substantial 21 percent increase in our share price this year. Partially offsetting the increase were lower severance costs of 25 million and other decreases, including the impact of the capitalization of the software development expenditures effective this year, in line with the new accounting standards.

On the far left, compared to the last quarter expenses fell 11 million, the result of lower performance-based compensation in Scotia Capital as we finalized our payouts at the end of the year and lower pension and employee benefits. Offsetting some of this decrease were increases in advertising, severance and technology.

1 other item worth mentioning is that our staffing has fallen by 58 from last year end. And that is after adding 260 million (indiscernible) after adding 260 staff for the Baninter acquisition in the Dominican Republic. So before that we were down in staffing by over 300 with reductions in domestic Scotia Capital and in international.

Slide 14 shows our productivity ratio. At 56 percent for the year it's up slightly from last year. However, we continue to lead the Canadian banks in this area.

Turning to slide 15, on the right the deduction for non-controlling interest in income of subsidiaries was 209 million or a decline of 71 million from 2003, as you can see on the chart, due mainly to the impact of increasing the bank's in ownership of Scotiabank Inverlat to 97 percent during the year. This reduction was partly offset by the impact of the issuance of the Scotiabank Trust Securities, or Scotia BaTS, on February 13th last year. As these Scotia BaTS represent Tier 1 capital, the bank was able to redeem certain preferred shares last year. Accordingly, the increase in the costs related to the BaTS of 14 million that you see in the chart was entirely offset by lower preferred share dividends, as you can see at the bottom.

Looking at slide 16, capital strength remains a big plus for us and gives us flexibility on several fronts. All our capital ratios are very strong. Tier 1 is now 11.5 percent, up 70 (ph) basis points from last year. Even more important, the tangible common equity ratio is particularly strong at 9.7 percent, 80 basis point higher than a year ago and 20 basis points above last quarter, the strongest of the Canadian banks. The growth in these ratios is due to the record increase in internally-generated capital of 1.8 billion, offset partially by the premium paid on share repurchases and a loss of 700 million because of foreign currency translation, which also reduces risk assets by around 3 billion.

Turning to slide 17, unrealized gains on investment securities, our surplus has risen to over 1 billion at year end, an increase of 161 million from last quarter and an improvement of 345 million from last year. And that, I might remind, you is after realizing 477 million in gains during the year. The growth this quarter resulted from higher values in all investment security categories, while the year-over-year increase being primarily in the value of common equities.

Turning to the business line starting on slide 19, starting with domestic. For the fourth quarter domestic banking, which includes our wealth management business, had earnings of 255 million, down 3 percent from Q4 last year and 12 percent below the third quarter with AcG 13 contributing about 15 million pre-tax of that increase.

A very positive factor in domestic has been the tremendous growth in retail lending. For instance, compared to last year residential mortgages were up 15 percent, a record growth for us. And revolving credit products rose by 17 percent. In deposits our very successful Money Master account drove core deposit growth of 18 percent. However, this strong performance was offset by a lower interest margin where we have seen compression all year.

Non-interest expenses were relatively unchanged from the same quarter last year. Quarter-over-quarter, they rose by 5 percent due to higher performance-based compensation following a great year, higher technology, severance and advertising expenses.

Credit quality remained very good in the retail portfolio with our retail loan loss ratio among the lowest in the system.

On the commercial side, credit losses rose from a deterioration in a small number of accounts.

As mentioned earlier, on the next slide we have had tremendous success this year increasing assets and deposits. And as a result, our market share has risen as well. As you can see on this slide, as of September 30th our mortgage market share has risen by 52 basis points over last year and our checking and savings share grew by 26 basis points. Business current account (ph) market share also showed substantial growth with a 70 basis point increase. This growth in market share has been supported by a continued emphasis on customer service excellence. Scotiabank once again achieved the highest rating for overall customer service excellence among Canada's major 5 banks. These results from an independent national survey by Sinovate built on Scotiabank's number 1 ranking in each of the last 4 years.

On slide 21, Scotia Capital had record earnings of 244 million for the quarter. Earnings were up 10 percent from the same quarter last year and 24 percent higher than last quarter. A large reason for these improvements were lower credit losses. For the full year loan losses were down 443 (ph) million to 106 million this year and quarter-over-quarter they fell 53 million to a net recovery of 25 million in Q4. Warren will be elaborating on this in a moment.

In addition to this, as Rick mentioned, we had record results in several areas; for instance, in foreign exchange, precious metals and investment banking.

On the revenue side, revenue did fall 14 percent from last year, driven by declines in corporate lending in United States and in Europe. This was due to continued reduction in asset levels as customer demand has not yet emerged. In Canada revenues decreased 9 percent, reflecting lower M&A fees.

Expenses were 202 million in the fourth quarter, a decrease of 18 percent from the previous year, due mainly to lower performance-based compensation as we finalize our payouts, accompanied by a decline in severance-related expenses.

Turning to our international operation on slide 22, this quarter international net income was 165 million, up 6 percent from last year, but 24 percent below Q3. International earnings were significantly reduced by foreign currency translation with full-year earnings being reduced by 112 million and 9 million compared to last quarter. In the Caribbean and Central American net income was 9 percent lower than Q4 last year, due again mainly to the stronger Canadian dollar, notwithstanding strong growth in assets in both retail and commercial. The lower earnings this quarter compared to Q3 were because of higher loan losses related to hurricanes and the timing of certain project expenditures. In Latin America, earnings rose year-over-year because of our higher contribution from Scotiabank Inverlat and Scotiabank Sud Americano in Chile, which were partly offset by lower security gains. Inverlat assets and deposits continued to grow, and I will have more to say on Inverlat in a minute.

In Asia, net income was down compared to last quarter with the decrease mainly due to a combination of higher credit losses versus a net recovery last quarter and a small impact from AcG 13.

On the next slide, our Inverlat earnings, Inverlat's contribution rose to 83 million in Q4, up 12 million or 17 percent from Q3. Compared to the same quarter last year, net income rose 40 million or 93 percent, driven partially by an increase in our ownership interest, but mainly from solid underlying earnings growth due to higher margins and assets. For instance, retail loans were up an impressive 14 percent, commercial lending increased 7 percent and our market share was up in these areas as well.

On the customer side, we were very pleased that Scotiabank Inverlat placed in the top 3 in all 6 categories of the National MERC Customer Satisfaction Survey, with first-place rankings in the branch service and telephone banking categories. Overall we are quite pleased with Inverlat's success and 2004 and are looking for continued solid growth.

I will now hand it over to Warren Walker to talk about risk management. Warren?

Thank you, Sabi, and good afternoon. I will be starting on slide 25.

The story this quarter was continued improvement in credit quality. Gross impaired loans fell to 2.2 billion, its lowest level since October 1997. And that's down 815 million from Q3 '04. Net impaired loans after deducting the general allowance was a -496 million, again down 269 from Q3 and a significant improvement of 543 million from the same quarter last year. This represents the ninth consecutive quarter that net impaired loans have dropped, and that's largely as a result of Scotia Capital. Specific provisions were down to 19 (ph) million, a decrease of 10 million from last quarter and 30 million from the same quarter last year. The continued improvement in credit quality enabled us to release another 50 million from the general allowance for credit losses for a total release of 100 million during 2004.

The next slide shows net formations or net classifications by business line during the quarter. In summary, net formations in domestic retail continued to be reasonable given the size and the growth of the portfolio. Domestic commercial and international had virtually no net formations to speak of. Scotia Capital had negative net classifications of 154 million, reflecting new formations of 104 million, offset by 258 million in declassifications, payments, and sales. Overall, we had negative net classifications of 87 million this quarter.

Slide 27 shows the positive trend in net impaired loans, which have turned from slightly positive to almost 0.5 billion negative over the past year.

Slide 28 shows the breakdown of provisioning by business line. First on the right, 2004 compared to 2003, domestic revisions at 317 million was up from 272 million last year. Most of the increase incurred in the commercial portfolio to provide for a small number of accounts that deteriorated during the course of the year. However, overall credit quality remains strong in both the retail and the commercial portfolios.

In international, excluding Argentina, provisions were 70 million this year, down from 137 million last year. This decrease was due primarily to lower levels of provisioning in the Caribbean, Central America, and Chile, as well as higher reversals in other parts of our Latin American operations.

As I mentioned, the major improvement year-over-year was Scotia Capital where provisions fell $443 million. The portfolio had substantially lower provisions reflecting the recovering US credit markets and the results of actions we took managing down the portfolio. On the far left, provisions for the quarter fell $10 million, largely again in Scotia Capital, as previously established provisions were reversed during the quarter due to higher realizations from loan sales, payments, and loans returning to performing status. The decrease in Scotia Capital was partially offset by a $41 million increase in international, which primarily reflected hurricane-related provisions in the Caribbean, as well as higher reversals in other regions in prior quarters.

This improvement in credit quality in Scotia Capital is evident from the next slide, number 29, which shows the positive trend in both net formations and specific provisions over the course of the past 8 quarters. As you can see from the slide, the net formations have come down significantly, and have been negative for the past 3 quarters while provisions have changed from the large number in 2003 to a net recovery this quarter.

Turning to market risk on slide 30, we had fairly low variability of trading revenue and we continue to run this business with very low risk. In fact, more than 92 percent of the days this year and 95 percent of the days this quarter we had positive results.

On the next slide are the VaR trend. As you can see here, our 1 day VaR averaged 8.8 million this year, compared to 9 million last year with no single loss day exceeding the 1 day VaR. For the quarter the 1 day VaR was 6.7 million, down from 10.2 million in the third quarter.

In summary, the biggest contributor to the credit improvement, both in net impaired loans and loan losses, was Scotia Capital. Credit quality remains good, both in Canada and in our international portfolios. Market risk remains well-controlled.

Looking ahead to 2005, obviously the continuation of the positive trends, particularly in Scotia Capital's portfolio, will depend on a continued economic recovery and strong capital markets. Nevertheless, given recent trends, we expect specific provisions for credit losses in 2005 to be generally in line with those incurred in 2004, though there may be a little bit of volatility on a quarter-by-quarter basis. As well, if there is sustained improvement in credit quality of the commercial and corporate portfolios, the general allowance may be further reduced in 2005.

And with that, I will turn it over to Rick.

Thanks, Warren.

In summary, 2004 was a very good year with record income, more than 20 percent growth in earnings per share, strong dividend increases, further improvements in our capital position. However, 2004 is now behind us, so let me turn to what lies ahead in 2005.

Obviously we will continue to face some challenges -- the ongoing appreciation of the Canadian dollar, albeit at a somewhat slower rate; weak corporate borrowing and continued pressure on our margins. And I would like to add to this list our expectation of somewhat slower economic growth as the world adjusts to higher and volatile energy prices, the significant realignment of the US dollar and an upward trend in interest rates. In fact, it's a combination of these challenges that is most significant and has led us to reduce our earnings per share growth target, while increasing our return on equity target range and maintaining our productivity objective. I will come back to our target in a few minutes. First, let me turn to our strategies and discuss how we are responding to these challenges and what we see as key opportunities.

Our position is consistent with what we've talked about in the past; namely our confidence in the future is rooted in our 3 great platforms for growth -- domestic banking, Scotia Capital, and our international operations. Each business line has multiple opportunities to provide sustainable, growing earnings in 2005 and over the next several years. Let me explain.

In domestic, we will, as we did this year, add more new customers and increase market share in key market sectors. We will be reaching out to the 80 percent of Canadians who don't have a relationship with us. We will build market share in mortgages, personal lending, and savings deposits. And we will find new ways to grow in wealth management.

In Scotia Capital we will continue to deepen and broaden our wholesale relationships, selling both investments and lending services in Canada, the United States, while also building these services in Mexico and Chile. A key factor for Scotia Capital will be corporate lending demand, particularly in the United States and Canada. Clearly we're at a low point in the borrowings cycle and when it turns up, as it surely well, we are strategically positioned for growth. We added more corporate customers this year, and we have large unutilized but committed lines of credit. Utilization rates, in fact, of these lines, though, are at a historical low.

In international, our unique third platform for growth, we continue to increase volumes and grow profits, earning through the most significant foreign exchange challenges we have faced in decades. The Canadian dollar has appreciated considerably against the US dollar and the currencies of virtually all the countries we do business. For instance, the Canadian dollar has gained nearly 30 percent against the US dollar over the past 2 years, yet we have earned through this extraordinary shift because of our underlying strengths in our businesses. Our international platform provides great organic growth and acquisition opportunities in existing markets, on existing platforms, like the deal we announced in El Salvador only a few weeks ago. And we are working on several more, and indeed are close on at least 1.

This takes me to another significant opportunity for the future and another significant strength -- our capital and our reserves. Our industry-leading capital position gives us the ability to invest in these sorts of strong growth opportunities in a disciplined way, of course, especially in international, but also in our other businesses and our other platforms. It will also allow us to continue to increase dividends as we did today and continue to increase shareholder returns through common share buy backs.

Internally we are consistently talking about our strong shared values and our 1 team, 1 goal approach. I talk about it all the time, because I deeply believe in it. I believe the depth, the breadth, and the experience of our management team, indeed all our Scotiabank employees, are among the best of any company anywhere. It's all about execution, leveraging our 3 existing platforms for growth to reach our goal of being Canada's best international financial service company. In a word, we are ready to execute, to grow revenues and to find ways to reduce costs. So on that note, let me move now to our 2005 targets.

As I said earlier, we're facing a very difficult combination of challenges, as all international banks are. Because of this, we have reduced our earnings per share growth target to 5 to 10 percent for 2005. While we fully expect continued growth and earnings and returns to shareholders, it will be at a more moderate rate this year, in line with the global economic conditions and the overall operating environment I explained. We're also targeting an ROE in the range of 17 to 20 percent. And we are still planning on a productivity ratio below 58 percent. Finally, we will continue to maintain strong capital ratios and strong credit ratings.

So concluding, a great year in 2004; some challenges ahead, but we are confident that we will continue to hit our targets and deliver solid, long-term value to all our stakeholders.

With that, I will pass the meeting back to Sabi and we will open it up for questions.

I will start with questions from the floor.

This is just for Bob Chisholm. (inaudible) how much of your new lending is secured versus 2 or 3 years ago? How much has that had an impact on your margins?

It has, I think, about over 60 percent of our non-mortgage business is secured.

Would that have been the case 3 years ago?

No. That has changed dramatically since we brought in the step plan which enabled us to cook in products like ScotiaLine Visa and lines of credit underneath the umbrella mortgage that allows our customers to borrow it more cheaply, but it gives us the much lower loan losses. So there's a trade-off there for us, but our numbers are significant. We can get you the precise numbers, but it's just been shooting up, as probably in the last two years over 75 percent of our mortgages have been under a step plan. And most of them have multitude of products underneath them. So our losses are very low in the consumer lending side.

I think besides that, I would add besides losses being low, I think you are fair (ph) that the margin is probably reduced as a result. But the other thing that helps considerably over the long-term is that customer attrition is significantly reduced in addition to credit losses. So you get 2 pluses on that side.

Another question, if I may, on Scotia Capital. Trading revenue on page 6 of the supplementary package were up, call it 20 million, while other income in Scotia Capital was down, call it 50 million, from Q3 to Q4. So was investment banking and corporate lending downs 70 million? Is that the right way to look at it?

Not quite. I think the 50 million drop was -- there's 2 main drivers. 1 was there was a very large M&A fee in the quarter, in Q3, and it was very light in Q4. So there was a large drop in M&A fees, which is in that other income category. As well, derivatives revenues were down in the fourth quarter by about 15 million from the third quarter; not a material change or an indication of a trend, but 15 million down from the third quarter. The combination of those 2 things essentially accounted for 50 million.

3 questions; all have to do with credit. First thing, you mentioned there is some deterioration in the commercial book in Canada. Can you talk -- is that export oriented; is it agriculture? Is there anything? That's question 1. The second thing is of the return to performing status (ph), was there 1 single name in there or maybe you could provide some flavor on that? And thanks for providing gross and net (multiple speakers) formation. And the last thing is you're the only bank so far that are saying that PCL's aren't going to rise meaningfully in '05. I was just sort of wondering why -- if there's any flavor you can provide why you think that there's not going to be any worse in '05.

In the commercial book, there was no 1 event. There was a series of several accounts that some of them had been situations that we'd been tracking for a year or more that eventually went out of business. And we took the provisions this year and tidied up some long-standing situations. So there's not a trend there. There's nothing -- we're not signaling a pattern or a trend.

There was no -- your second question there was no 1 specific account returning. Rather I think there were about 7 or 8 accounts in total, in particular in Scotia Capital, where we either -- they either came back to performing status, or we sold out of the position, or we wrote them off. So it was a broad-based. It was not 1 single large event.

And with respect to the PCL forecast for '05, we've done both a bottom-up and a top-down analysis. We go account by account when we forecast out usually 6 quarters. We have a reasonably high degree of certainty out 2 quarters, obviously, because the circumstances and situations are clear to us. 2 quarters beyond, it depends a little bit more on economic circumstances. And beyond that, it's truly how the economy performs because of the correlation between economic performance and corporate defaults. So we've done our analysis both bottom-up and top-down looking at macro historic default rates and comparing the bottom-up with the top-down. And we're comfortable that next year, or the current year that we're in now, will not be materially different from the past fiscal year-end.

Even with oil at $50 and Canadian dollar at 85 cents there isn't sort of stresses on the sort of mid-market manufacturing and the heartland (ph)?

We have run stress tests on our portfolio to stress exactly those factors and taken a look at the potential impact overall of $50 or beyond oil. And we've looked at the impact on Canadian manufacturers of exchange rates. Now that's not to say that -- that's not to say that there will not be the odd fallen angel or surprise. But we think the forecast can accommodate that.

Our metrics are trending (indiscernible) and we also have the specific -- we take a look the portfolios. So the world is always subject to change, but as we see it now that's where we stand.

You're 1 of the banks that doesn't provide actual data on incentive comp and stock-based comps, so I'm wondering if you can help me in recalibrating some of the information that I do have. Your stock price was up $3 during the fourth quarter. And I usually use about $26 million per $1 change in the price of your stock as the cost (ph) of your stock-based compensation. So it would be about $78 million in the latest quarter. Was it that high or have you hedged to reduce that cost?

We have hedged, Michael. We have hedged, I would say, about 60 percent of that amount. But also, you won't see the (indiscernible) vesting periods and it depending on whether they are SARs or BSUs they have different vesting periods. So why don't you really take that off-line if you like any (indiscernible) give you as much detail as we can.

I also have another question related to the (indiscernible) sales and repayments. How much of that would have been sales during the quarter? Were there any gains on the sales? And was there any interest for capture?

At a macro-level, I don't have the specific numbers on my fingertips. But I can get those for you. Yes, there were some loan sales. I think 3 or 4 during the quarter. There would have been some minor recaptures or recoveries on those loan sales. There were some refinancings as well that would have resulted in some provision reversals as well. I think on a -- and if you look at the trend, if you look back over 8 quarters, if you want to know what the trend is, basically we've seen classifications come down probably in the order of 170 to 180 million off their peak to where we are today. And recoveries have probably reduced 100 million off their peak during that 2-year period as well. So we're tracking the last 3 quarters at a fairly narrow range in terms of new provisions and recoveries.

Any questions on the phone?

Jamie Keating, RBC Capital Markets.

Nice to see the stock has reflected what seems like it was an okay quarter here in the end. I wanted to ask about -- drill a bit deeper into the domestic businesses here. And 1 of the challenges of your disclosure is obviously we don't know the wealth management numbers. And when I compare your revenue growth in domestic bank versus the others, it appears to be lower and you don't have as much -- the growth appears to be lower than some of the other reporters. And you don't have as much wealth management, so I wouldn't have thought that would sting you, for example. I just wonder if you could help us a bit on this. Is wealth management having much of impact here on the revenue line --?

(multiple speakers) there is very little impact on the quarter. On the Q4 over Q3 there's very little impact. I think the big impact on revenue in the quarter, you can see there's a 28 million decline in interest -- a 50 (ph) million decline in interest in domestic banking in the quarter. That's 100 from AcG 13. So (multiple speakers) flat. What has happened there, you have asset growth really being offset by a compression of the margin. That's really the offset there.

That's my segue way, if I may, Sabi, just to talk about if there's an upside here. I think I'm understanding that the compression seems to be an ongoing challenge from Rick's comments. However, I also thought we were understanding that the rates up may be helpful -- should they ever go up that is -- may be helpful to spreads here. Is that still a fair assumption or has the world changed a bit in terms of what the spreads might do?

I think that's still a fair assumption for the bank as a whole. Domestic may not see it. You may see the pick up more in (indiscernible) funding which is in group treasury. But for the bank as a whole, if the interest rates rise you should see a pick (ph).

Just a last question, speaking of treasury, for Mr. Brooks if possible. It looks like the Canadian currency gap has gone very asset sensitive in the short end, if I'm reading this correctly. Is there anything on here we should know about how you are positioned on the balance sheet, Bob, regarding rates?

I think Sabi just answered that for you. We've been positioned in the Canadian book for rising rates for quite some time. They haven't risen as much as we would have liked. But what you see is more of that. Again, you're looking at a 1 day snapshot. Sometimes the very short end can move around a lot from 1 period to another. But the general thrust is as you see it.

Just to be clear, Bob, my assumption had been in the retail book, the variability in the loan book would be a big positive attribute. But what I'm trying to do is dissect that from what the positioning of the bank might be. I guess -- is what you're saying that a natural position of the bank is opening up? Your asset sensitive and you're just letting it open? Or is there a bit of a bet on (ph) as well?

We treat it as an integrated whole. I'm not sure quite how to answer your question. The customer dynamics are what they are, and reflect obviously the myriad of customers preferences. We then manage -- we take -- that's a given, that position. And then we choose to increase it or decrease it as the case may be. In this particular environment that we've had for the last several years, the high growth of mortgages combined with a slower growth of retail term deposits creates a natural asset sensitivity unless you counteract it. So we have allowed in effect that position to increase to a point. You don't want to get too extended on these things. You can be wrong.

Thanks, Bob.

Our customers -- our residential mortgages have grown very, very well. And of course our customers make their choice on that in terms of the maturity. So the customers make their choices. Then we at our alco (ph) committee watch the broad aggregates, and we will take the necessary actions and neutralize other effects. But we're basically slightly asset sensitive. I'm comfortable with that.

Next question on the phone.

Steve Cawley, TD Newcrest.

Sorry to rehash what Jamie's asked you and what Andre has asked you, but I am going to ask it in another way on margins in Canada. Because 40 basis points down in 2 quarters yet growth in market share is going to lead to some conclusions, or accusations, that you are buying the business. Is the answer to this that margins are down partially because of product mix, partially because the Company looks long-term and sees that you will have lower credit losses than perhaps your peers because how secure the business is? Is that the right answer?

Firstly, the drop in the 40 basis points was somewhat exacerbated by a special item we had in Q2 which bolstered the margins. So you almost have to back that out of Q2, which brings you back much closer to the Q1 margin. Secondly, there was a tremendous shift in the second half of the year of our customer borrowing preferences into floating rate or 1 year and less terms come up from about 10 percent to about 40 percent of our business and a corresponding drop in the 5-year side. This has the effect of compressing our margins in the short run, particularly in a rising rate environment, because some of those have a lag effect in our ability to increase the rate. So the rate -- our ability to increase the floating rate on the mortgages is staggered somewhat after -- lagging after the increase in the cost of funds. So there is a bit of -- it somewhat exaggerates the margin compression in that regard. Now, lately because of the rise in rates that we've had and expectations, the mix of business has returned to a more normal mix, which is about 50 percent back into the 5-year, and about 25 percent into the 1-year and less.

Bob, would it surprise you that if some of your competitors told you that their floating rate mortgages were more profitable than their 5-year mortgages?

It depends on how you allocate capital and cost of funds.

There were 2 other points that I would make on the domestic margin. 1 is really that the mortgage mix, besides the term of the mortgage, mortgages -- if you look at the beginning of the year, for instance, in mortgages represented around 40 percent of really -- 40 to 45 percent of Bob's -- of the total assets. Right now in Q4 they represent around 43 to 48 -- they've gone up by around 3 to 4 percentage points simply because they've been growing much faster. Mortgages just come at a lower spread than the rest of your book, and hence you'll see a 10 basis point decline just from that over the --

The second thing is that current accounts is also causing an impact. At the same time last year current accounts at interest were around 70 to 72 percent of the portfolio. Today current accounts at interest, they've grown tremendously over the past year. But the growth has taken place in the at interest component. So today that is around 70 to 77 percent of the portfolio. So that's another factor that is causing a compression in the margin.

So you take 2 to 3 basis points from all these several items, and you add up to the margin compression that you see.

Thanks for the details, guys. I've got 1 more for you. When we were in Mexico I'm pretty sure somebody asked the question about the impact of hurricanes on your international business, and I don't recall there being much of a response. Like I thought it would be like a marginal impact in the quarter. So to see the 43 million PCO (ph) was a bit of a surprise. Was there any evolution of credit losses after Mexico?

I don't think our view has really changed in that. We said that was primarily due -- it is about half of that is from hurricanes. It is just that last quarter was so low so that growth from 0 to 43 just looked exaggerated (indiscernible) is around half of that.

Thanks, Sabi.

(multiple speakers) just normal business. It's just that Q3 was just so low. I think in Q3 we had 0 -- we had very negligible losses in Q3.

When you give Michael Goldberg his answer on recovery of interest back on some loans that you changed their status on, I'd like to get that answer as well please.

I will see to it you get it as well.

Rafael Bello, Citigroup.

I wonder if you could make a comment on 2 points. First, on Mexico, clearly Banamex and Bancomer, your 2 largest competitors there, are definitely increasing their lending activity. And I wonder if you could comment on how that might impact your growth going forward or you're starting to see any sort of pressure in pricing on your products as you continue to establish your presence in Mexico. The other 1 relates to your capital deployment. Would capital deployment in growth areas include Mexico and/or the United States?

I'll answer both of them (indiscernible). In Mexico, first of all, in spreads, the wholesale is -- there is some compression on the wholesale margin side; somewhat the same attributes that are around the world on the liquidity in the wholesale and just a smaller corporate base.

On the retail, no, other than -- I wouldn't say any significant trends on -- negative trends on the retail margin. Yes, the other banks are starting -- we did have the jump on the residential side and what have you. But it hasn't -- we haven't seen that as a significant slowdown in our growth in numbers. I don't know what the others are doing yet. I haven't seen current market shares. But they are starting to rev up.

But having said that, and this ties into your capital, and as we said to everybody when we were down there, and as I said earlier in my remarks, with our view on Mexico, our platform in Mexico, we will invest and are going to invest in Mexico. A little earlier on I answered we were getting close to an NMOU (ph) and what I wanted to make sure is that we announced in Mexico (indiscernible) going to be announced in Mexico. But we signed an NMOU this afternoon on 1 of the sapolis. Those of you that were with us down there will remember the sapolis. This is the mortgage companies which are the less -- sort of sub-prime mortgage lending that the banking industry doesn't lend to. And we now half an NMOU with Hipotecaria Credito y Casa (ph) which is the number 3 some sapolis (ph) in Mexico; 15 market share. This will be subject to due diligence and normal regulatory, etc. But we signed besides an NMOU (ph) with them, and this is a very attractive part of the marketplace. 600,000 housing starts, as you know, in Mexico. The bank industry probably does less than 100,000 of those. Or there is a 600,000 demand for housing and the banks do less than 100. And this -- sapolis are the sector that takes that. So this is a very significant growth opportunity for us. They have about 1.5 billion, 2 billion Canadian in residential mortgages now, and very attractive growth rates going forward. So again, this is an answer to your question that yes we have capital there and we seen the platform because it is a market we are in and what have you.

In terms of the United States, I think you have heard me quite often, quite consistency recently, that that market is still on a relative basis to many of the opportunities we see elsewhere that we have available to them, I find it a very expensive market with a high degree of competitive execution risk and heavy premiums at this time.

Thanks a lot.

Susan Cohen, Dundee Securities.

You mentioned that M&A fees came down quite substantially in this quarter. Can you look out to next quarter and kind of give us an idea of what your pipeline in M&As and other investment banking areas look like?

The near-term pipeline 6 months out looks very good. The low M&A fees in the fourth quarter was just a lumpy situation; no indication of a trend at all. The outlook is quite positive.

And just a point of clarification. Would someone be able to spell that sapolis (multiple speakers)

Don't ask me. I'm only the President. It is Credito y Casa (ph) with a y.

Thank you very much.

Jamie Keating, RBC Capital Markets.

Sorry, my question has been asked and answered. Thank you.

There are no further questions on the phone.

A couple of questions. First, for Warren, I guess to go back to the issue Ian raised. In terms of what you're seeing then on the credit side, looking at the change in the retail side, pulling in more credit under a mortgage structure, the growth in Mexico or international operations, and then what you're seeing in David's area. Full cycle provision levels, where do see those getting to as a percentage of loans and acceptances versus the last cycle, which might have been in the 50 or 60 basis points? Have you seen material change off of that given what you've done inside your various business units?

The quick answer would be no. I'm a little reluctant to talk about our outlook and our forecast because this is an issue we're taking to our Board in January in terms of our detailed forecast and our through-the-cycle outlook. So that I can probably answer more credibly for you at the end of the next quarter as opposed to this quarter.

But the number that's been historical, you don't think there's been major changes in the way the bank operates that would change that number materially going forward?

What that number actually is --

No, I think there is demonstratable significant improvement I think. And we see it in our migration numbers in that currently and what have you and the discipline and our hold levels, all these things that we've done. And that would strongly lead one to expect that our levels will be lower as we go forward, and I certainly believe that.

The only caveat to that will be the growth in our international, because as you look at an all (ph) bank, because again while these are great opportunities in Mexico and what have you, those cyclical loss rates will tend to be higher than they have been in our US and Canadian. But on our wholesale book, I would be very disappointed if we didn't come up with those positive conclusions, but we're still working at it. And again, it is somewhat hypothetical.

But to be sure, Rick, given the sapolis (ph) acquisition, if you get it done, given where they lend, given the other lending that goes on, that's biasing (ph) going forward clearly to less credit quality based look for that portion enhanced by what you're doing in Canada and perhaps in the US. So it may equal out --?

That is why I say that asset mix issue, which there -- times the expected loss will have an effect. And of course there is a lot -- we expect very rapid growth in these non-traditional -- or this new markets. And that will offset. But on our wholesale historical markets with the discipline's we've put in, I see demonstratable evidence they are working, and therefore lower expected loan losses.

Given you were hoping you would do your announcement down in Mexico, are you prepare to give us what size of acquisition this is in terms of the cost --?

It's around of -- investment of around Canadian 200 give or take.

Finally, just for David, in terms of expenses -- and I guess, Sabi, you mentioned truing up of comp -- in terms of the expenses with the wholesale bank, part of it I thought was market -- or product mix last quarter in terms of where some of the bonuses got paid. But are we to assume if you look historically that fourth quarter is a constant truing up, so as we see Q1, Q2 rolling out with kind of higher expenses, we're kind of baking in to give us a fourth quarter --?

No, I don't think so. Our efficiency ratio at Scotia Capital in the fourth quarter was 40.7 versus 46.2 in the third quarter. I think the running rate, as I said to you last quarter, should be around 45-ish.

I think we are just going to have a true up during the -- more than we've been doing. So I think that's what's going to happen.

So less true up in Q4 and more true up through the year?

That's right.

Rick, 1 comment that you had on the domestic side, you said that you'll find new ways to grow in wealth management; sort of a cryptic comment. Could you maybe elaborate on what you're getting at here?

Cryptic is good.

We are committed to grow wealth management. I know it is a big statement or a broad statement. We are committed to grow wealth management because it is important. We see our existing bank channels as a significant way of doing it through referrals and what have you. And Bob and his people have been working very hard on that. But we are going to open ourselves to any other opportunities, whatever they may be. And I really can't say more than that. It is not a large market in any event, but we're committed to it and I want our people to know that. And we will invest in it generically and if any opportunities arise.

A question on the dividend. I was a bit surprised by the dividend increase in the quarter. I think your target payout ratio is 35 to 45 still.

Correct.

At 32 cents you earned 7 percent basic EPS. That is a 46 percent payout ratio. Even if I do it based on your guidance for '05 it's a 42 percent payout ratio already. Am I missing something? When you think about payout ratio do you think of it on --?

(multiple speakers) whole year basis, on a whole year basis for 2004 we had 38 percent payout ratio. We're assuming that we will grow within our guidance. That will be, as you say, around 40 to 42; probably close to the 42 percent. But we think that's fair. That's still within our guidance of 35 to 45.

Because -- but I mean you had Shinsei in 2004.

We still have Shinsei. It hasn't gone away. In fact, it has gone up. (multiple speakers) Anyway, I want to thank you all for coming and want to wish you all a very happy holiday season and look forward to seeing you in the new year. Thank you again.