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Sabi Marwah - SVP & CFO
Good afternoon and welcome to the presentation of Scotiabank's first-quarter results. I am Sabi Marwah, Senior Executive Vice President and Chief Financial Officer. With us today in sunny Halifax are Rick Waugh, President and CEO; Bob Chisholm, Vice Chairman; David Wilson, Vice Chairman; Bob Brooks, Senior Executive Vice President and Group Treasurer; Rob Pitfield, Executive Vice President of International Banking, and Warren Walker, Executive Vice President of Global Risk Management. As usual Rick will begin with a highlight 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?
Rick Waugh - President & CEO
Well, thank you, Sabi. I'm happy to report record results for this quarter. Our earnings per share were 77 cents, up 15 percent from the 67 cents a year ago. Return on equity was a solid 21 percent, up from 19.4 in the first quarter of '04. These record results were driven by solid contributions from all three business lines. We benefited from record trading results, solid growth in investment banking revenue in our Scotia Capital division.
There was continued strong performance in international banking, particularly in our Caribbean and Mexican operations, and solid contributions from a wide variety of product lines in the domestic bank, as well as a continued improvement in our credit quality. For the quarter, net impaired loans were lower, and we continued to have a low level of provisions.
Still, a big plus for us is the strength of our capital ratios. The tangible common ratio of 9.5 percent, this is the strongest of the major Canadian banks. Overall this was a very good quarter. Broadly based, a strong start to the year.
The next slide shows the diversification and the momentum across our three growth platforms, all of which had increases versus the same quarter last year. Our domestic division generated net income of 329 million in the first quarter. This is an increase of $40 million or 14 percent over last year, driven by solid revenue growth and a particularly strong performance by Wealth Management and continued strong growth in retail mortgages and personal loans.
International earnings were 206 million, a significant increase of 52 million or 34 percent from last year. This was achieved notwithstanding the continuing negative effect of foreign currency translation. Good underlying growth in revenue was registered in all regions with particularly strong growth in the Caribbean, as well as Scotiabank Inverlat, and demonstrates the broad growth potential that we have in international.
Scotia Capital reported earnings of 247 million this quarter, up an impressive 57 million from a year ago, primarily from the record results in trading, strong investment banking and continued improvement in credit quality as I mentioned earlier.
In terms of our 2005 performance targets, we are firmly on track to meet them. Our return on equity is 21 percent in the first quarter. That is above our 17 to 20 percent target range. Our earnings per share growth of 15 percent also exceeds our target of 5 to 10 percent. Our productivity remains strong at 55.7 percent, ahead of our goal.
So with that, I will now pass it over to Sabi to talk about our performance in more detail.
Sabi Marwah - SVP & CFO
Thank you, Rick. I shall begin with slide seven, which breaks down our revenue growth, which on a reported basis was up 3 percent over the same quarter last year. This was after the stronger Canadian dollar reduced revenue by 69 million. As well following a new CICA accounting standard, an impaired loan was consolidated this quarter, and the loss of 23 million on this asset was reported in other income versus loan losses previously. As a result, revenues were reduced by 23 million this quarter.
Lastly, last year's revenue was negatively impacted by 15 million related to the premium paid on the redemption of preferred shares in Q1 '04. Excluding these items, underlying revenue was up a solid 147 million or 6 percent with higher than 22 million coming from other income and 25 million from net interest income.
Turning to slide eight, compression in the net interest margin remains a challenge and continues to offset strong retail asset growth. Compared to last year on the right net interest margin fell 11 basis points. The major reason for the decrease was a 7 basis point reduction in the Canadian currency margin, primarily because of the downward growth in mortgages which have a narrower spread. Compared to Q4, the margin fell 6 basis points partly due to a lower Canadian currency margin, again the result of narrower spreads between mortgages and deposits. The impact of AcG 13 and the consolidation of VIEs, specifically 8 billion of multicellular conduits, reduce our reported margin by 5 basis points year-over-year and 3 basis points quarter-over-quarter.
Looking at slide nine, other income, on the topline, excluding the impact of the stronger Canadian dollar, which was up -- it was up 9 percent from a year ago and 13 percent from last quarter. On the right, reported other income was up 71 million, a fairly solid 7 percent year-over-year increase. This came from higher revenues in several areas, most notably by a record performance in trading, which is up 58 million with very good results in derivatives, foreign exchange and precious metals.
Also, contributing were increased retail brokerage fees, up 17 million in line with stronger equity markets, as well as higher deposit and payment service fees. And lastly, there was a very strong performance in underwriting.
Offsetting these strong performances were lower securities gains from the high levels last year, lower securitization revenues mainly from maturities, and lower credit fees in line in with a contraction in corporate lending in the U.S. and Europe.
Quarter-over-quarter to the left, the growth in other income came from the same categories I just noted with particularly strong results in trading with revenue up a solid 92 million and retail brokerage which rose 28 million, both again primarily the result of increased customer activity.
The big decline of 40 million in other was largely due to the 23 million in losses arising from the transfer of an impaired loan to other assets, which would have previously been reported in loan losses.
Turning to expenses on slide 10, excluding the impact of the stronger Canadian dollar, expenses were up 6 percent from a year ago and almost flat from last quarter. On the right, reported expenses were up 51 million, mainly due to higher performance driven compensation related to the strong trading and investment banking results this quarter as I mentioned earlier. The bank salary expense remained well contained with a decline year-over-year mainly from a reduction in the number of staff and foreign currency translation. As well, stock-based compensation expense was lower compared to last year, mainly because of a smaller movement in the bank's share price in the first quarter compared to last quarter -- compared to first quarter last year.
Also contributing to the year-over-year growth in expenses were higher professional fees of 13 million and smaller increases and decreases in the other expense categories. Compared to the preceeding quarter on the left, the largest increase in expenses was in performance-based compensation, up 56 million in line with higher revenues. Most other expense categories fell quarter-over-quarter.
Slide 11 shows our productivity ratio. At 55.7 percent for the quarter, it was relatively unchanged from the same quarter last year with a large improvement from the 59.4 last quarter. I would also mention that the new CICA accounting standard which results in the cost of our BaTS and preferred shares now being reported in interest expense rather than non-controlling interest payable dividends results in a 90 basis points deterioration in the productivity ratio.
Looking at slide 12, capital continues to be very strong. The Tier 1 ratio was 11.2 percent compared to 10.9 percent last year and 11.5 percent in the previous quarter. Quarter-over-quarter the positive effect of the strong growth in retained earnings was more than offset by higher risk weighted assets and the impact of share repurchases. This quarter we bought back 12.7 million shares. Tangible common equity continued to be the strongest of the major Canadian banks at 9.5 percent, up from 9.2 percent last year but down slightly from 9.7 last quarter. The bank's capital ratios weren't affected by the new accounting standards which I will discuss in a moment.
Turning to slide 13, the unrealized gains on investment securities, our surplus has risen to 1.174 billion, an increase of 126 million from last quarter and a slight improvement of 17 million from last year. The increase this quarter resulted from higher values in all three security categories. Included in the surplus was a gain of 241 million related to the bank's investment in Shinsei Bank in Japan. In February 2005, the bank sold a portion of its investment through a second resale and realized a pre-tax gain of approximately 110 million, which will be in our second-quarter numbers.
Before I review the business line results, I would like to briefly go over the impact of the new CICA accounting standards that became effective this quarter. First, the requirement to present some of our capital instruments as liabilities rather than equity. As you can see in the top half of the slide, this resulted in the reclassification this quarter of 2 billion of BaTS from noncontrolling interest and 250 million of preferred shares. Pre-2005 amounts have been restated.
Furthermore, commencing in Q1 '05 on a go forward basis 1.5 billion of the BaTS have been recorded in deposits. This is required as these BaTS were issued under a trust structure, which is a VIE, but where the bank is not the primary beneficiary. Therefore, we have deconsolidated them and reclassified them to deposits. The remaining 500 million of BaTS and 250 million of preferred shares have been reclassified to subordinated debt and capital instruments.
In terms of the income statement, the change in accounting standards resulted in an increase in interest expense of 37 million for this quarter with the corresponding reductions in the other categories shown. You'll note that the restatement caused interest expense to increase by 52 million in Q1 '04, which is 15 million more than this quarter, and that is mainly reflecting the premium paid on the redemption of preferred shares last year. In all cases, the new accounting standards and policies had no impact on net income available to common shareholders or to earnings per share.
Turning to slide 15, the second major change was the new CICA standard on VIEs. This resulted in the consolidation of three multi-seller commercial paper conduits which we administered. The effect of this consolidation on the balance sheet was an increase in investment securities of 5 billion and personal and credit card loans of 3 billion with a corresponding 8 billion increase in other liabilities.
In terms of the income statement, net interest income is higher by 2 million with a corresponding decrease in other income. This accounting change again did not impact net income available to common or EPS or our regular pre-capital ratios. We continue to monitor the accounting guidance and are assessing restructuring alternatives that may result in a change of accounting treatment in future quarters.
Turning now to the business slide results starting on slide 17, the results for 2004 have been restated to reflect the impact of the new accounting standards I just discussed. For your information, business line net income on the following charge is now net income after preferred share dividends.
Domestic banking, which includes our Wealth Management business, had net income of 329 million, up 14 percent from Q1 last year and 33 percent higher than the previous quarter. We continue to see very good growth in retail lending, although mortgage volumes were down from the record levels last quarter, in part due to seasonal factors. As well, Wealth Management results improved due to higher brokerage commissions and fees for new issues.
Year-over-year volume growth was strong. Residential mortgages were up 16 percent, and revolving credit products rose by 17 percent. In deposits, our very successful Money Master account drove core deposit growth up 13 percent. However, this strong performance was offset by a compression in interest margin over the past year, largely from ongoing growth in mortgages which had a lower margin. Expenses were down 7 percent quarter-over-quarter due to lower performance in stock-based compensation, severance and advertising expenses, as well as lower mortgage acquisition costs. Expenses were up 3 percent year-over-year from higher performance-based compensation, normal salary growth and higher legal expenses. Credit quality remained good in the retail portfolio with our retail loan loss ratio among the lowest in the system. On the commercial side, credit losses fell year-over-year.
Turning to slide 18, Scotia Capital had a record quarter with net income of 247 million, up a strong 30 percent from the same quarter last year and 4 percent above last quarter. Record trading revenues and low credit losses drove the growth.
On credit quality, we had a net recovery of 9 million versus 25 million last quarter and a provision of 71 million in the same quarter last year. Warren will have more to say about this in a few moments.
On the revenue side, total revenues rose 14 percent from last quarter driven by record trading results with strong performances in fixed-income, derivatives, foreign exchange, precious metals, securities trading and underwriting. Year-over-year revenues declined 3 percent as increases from capital markets were offset by lower interest and fee revenues from corporate banking in both the U.S. and Europe and the 23 million loss related to the impaired loan now reported in other assets.
In Canada, corporate lending revenues were up modestly. Expenses were up 8 percent year-over-year and 29 percent quarter-over-quarter due mainly to higher performance-based compensation in line with the strong trading results.
Looking at our international operations on slide 19, this quarter international net income was very strong at 206 million, up a substantial 34 percent from last year and 30 percent above the previous quarter. These increases were moderated by the continued impact of foreign currency translation, which reduced earnings by 17 million year-over-year. Excluding this impact, income, in fact, was up 45 percent year over year.
In the Caribbean and Central America, net income rose 36 percent over the same quarter last year as higher asset volumes and insurance revenues were partly offset by narrower margins. Quarter-over-quarter earnings rose 81 percent due to lower loan loss provisions as last quarter included some hurricane-related provisions.
In Latin America, earnings also rose year-over-year, mainly due to a higher contribution from Scotiabank Inverlat and Scotiabank Sud Americano in Chile. Inverlat's assets and deposits continue to grow, and I will have more to say on Inverlat in a minute.
In Asia net income rose both quarter-over-quarter and year-over-year.
On Inverlat, Inverlat's contribution was 79 million in Q1, basically on par with Q4 and up 27 million or 52 percent from last year. Despite the impact of foreign exchange translation, we continue to see good revenue growth driven by higher margins and strong growth in retail asset volumes, particularly mortgages, as well as good growth in commercial lending. Expenses remain well-controlled, and we continue to invest in our Mexican operations, for instance opening 16 new branches in the last year. Overall we continue to be pleased with Inverlat's success, and we will continue to pursue both organic growth and acquisition opportunities.
With that, I will now hand it over to Warren to talk about risk management. Warren?
Warren Walker - EVP, Global Risk Management
Thank you, Sabi, and good afternoon. I will be starting on slide 22. The story this quarter was continuing improvement in credit quality. Gross impaired loans fell to $2 billion, its lowest level since October '97 and down 172 million from Q4 '04. Net impaired loans after deducting the specific allowance were 762 million, down 117 million from Q4 and a significant improvement of 725 million from the same quarter last year. This is the 10th consecutive quarter that net impaired loans have dropped, largely as a result of lower levels of impaired loans in Scotia Capital.
The total provision for credit losses this quarter was 74 million, an increase of 34 million from last quarter. However, the prior quarter amount included a reduction in the general allowance of $50 million. Specific provisions were down 16 million, therefore, from last quarter. Compared to the same quarter last year, specific provisions decreased $96 million.
The next slide shows net formations or net classifications by business line during the quarter. In summary, net formations and domestic retail of 75 million continue 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 157 million reflecting new formations of 60 million, offset by 114 million of declassifications, payments, sales and a transfer of an impaired loan of $103 million to other assets as a result of the accounting requirements Sabi mentioned. Overall we had negative net classifications of $60 million this quarter.
Slide 24 shows the positive trend in gross and net impaired loans. As you can see, gross impaired loans have decreased more than $1.2 billion over the past year. Similarly, net impaired loans have come down by 725 million over the same period.
Slide 25 shows the breakdown of provisioning by business line. Total specific provisions decreased slightly from last quarter and significantly from last year, the lowest level in more than five years.
Provisions in the domestic retail and commercial portfolios remain relatively stable compared to last quarter. Compared to the same quarter in 2004, they declined by 16 million in line with lower formations in the commercial portfolio.
International provisions were only 7 million this quarter, flat with last year but down significantly from last quarter when hurricane-related provisions were recorded in the Caribbean.
In Scotia Capital there was a net recovery of 9 million compared to a net recovery of 25 million last quarter and a provision for credit losses of 71 million a year ago, the result of continued reversals in recoveries in all aspects of the corporate portfolios.
This improvement in credit quality in Scotia Capital is evident from the next slide, number 26, which shows the positive trend in both NPL formations and specific provisions over the past eight quarters. As you can see from the slide, net formations have come down significantly and have been negative for the past four quarters. Specific provisions have changed from a large charge in 2003 to a net recovery in the last two quarters.
Turning to market risk on slide 27, again we have fairly low variability of trading revenue and we continue to run this business with very low-risk. There is only one loss day in the quarter, and it was well within the range predicted by VAR. Overall, while trading revenues were strong in several areas, this was driven primarily by customer activity and not by proprietary trading positions. This quarter more than 98 percent of the days had positive results.
On the next slide are the VAR trends. As you can see, our one day VAR averaged 8.4 million this quarter with no single day loss exceeding one day VAR.
In summary, the continued improvement in 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 be good. Market risk remains well contained.
At this point in the cycle and four months into the year, our outlook for the full year is that specific provisions should be lower than last year. As well, if the trend in recent favorable credit conditions continues, there will likely be further reductions in the general allowance for credit losses.
And with that, I will turn it over to Rick.
Rick Waugh - President & CEO
Thank you very much, Warren. It was a strong start to 2005, broadly based, although we will be challenged to maintain the 15 percent year-over-year growth in earnings per share. The challenges are as we have mentioned before, thanks to the Canadian dollar, lack of corporate loan demand and the compression in interest margins.
Nevertheless, due to the continued performance at each of our three strong platforms and with the diversification and opportunities that this brings to Scotiabank, all of this underpinned by the depth and breadth of our employees and our management team, we expect to meet our key performance targets that we gave you earlier this year. So with that, I will hand it back to Sabi, and we will open it up to questions.
Sabi Marwah - SVP & CFO
If you will begin with the questions, say your name and company so at least we can know who is speaking from Halifax. First question.
Operator
Jim Bantis, Credit Suisse First Boston.
Jim Bantis - Analyst
A question for Mr. Wilson regarding the capital market conditions, very very strong quarter, and maybe you could just talk about the sustainability of it, and if you could break it out by region in the context of what is particularly strong in Canada versus the U.S. and again perhaps some commentary regarding the trading revenue? It looked like in particular it was derivatives and other that were strong -- I mean it was strong across the board -- but just some color with respect to sustainability and with respect to each region. Thanks.
David Wilson - Vice Chairman
It is David Wilson here. Let me talk about the trading performance in the first quarter first and then a little bit on the outlook.
In the first quarter, everything was working very well, both the client flows and our basic trade room trading activity. On the client side, our pipeline for the year, a lot of it came into the first quarter earlier than expected. So we were ahead of our expectations on the client side in the first quarter. The client pipeline remains very very solid, so we think there will be more there than we had originally planned on back in October.
On the trading side, the market was trading friendly environment. It was benign and friendly. It continues that way, so we expect trading to continue to be reasonably good. But it is unlikely that future quarters will have everything going for them as well as the first quarter. But we are on balance, Jim, quite positive from the client flows for the balance of the year, and the trading environment is remaining reasonable and is a good prospect.
I know that is a general answer, but it's a pretty broad subject to ask about.
Jim Bantis - Analyst
Are you starting to get more contribution out of the U.S. operations now and as well as the Mexican operations?
David Wilson - Vice Chairman
We are getting -- we have had last year and continue this year with very strong cross-sell of non-lending products from our U.S. lending clients. That is a little ahead of last year in the first quarter, so very solid again on the capital markets products from our borrowing clients in the U.S.
We are getting selective notable successes in Mexico. It is early days on cross-selling our capital markets products into our Mexican plant base or Scotiabank Inverlat's Mexican base. Lots of prospects for growth in that initiative which you have heard about before. So good signs in both geographies.
Operator
Jamie Keating, RBC Capital Markets.
Jamie Keating - Analyst
Hello from snowy Toronto. I was looking at page nine of the press release, Sabi, and on the one hand other income rose handsomely as brokerage revenue and so on looked very strong. And on the other hand, the performance in stock-based comp seemed to fall I think fairly sharply in the quarter, and those seem to be going in slightly different directions. Can you just describe the accrual impacts? Maybe it was a true-up factor in the fourth quarter, I don't know, but --?
Sabi Marwah - SVP & CFO
Are you looking at quarter-over-quarter or year-over-year?
Jamie Keating - Analyst
Well, I am focused on the quarterly impact I think as much as anything, but there just seems to be a diametrically (multiple speakers)
Sabi Marwah - SVP & CFO
I think they are moving in the same direction. If we look at quarter-over-quarter, my total performance-based compensation in total went up by 45 million. It went up from 231 to 277, so that is up 45. That is sort of in-line with the strong performances in Scotia Capital. (multiple speakers) and that is after stock-based compensation, in fact, going down by around 10, so performance base is really up closer to 55. (multiple speakers). It went down, not up.
Jamie Keating - Analyst
Okay. Why don't I take that off-line. Maybe I am missing something, but if there (multiple speakers)
Warren Walker - EVP, Global Risk Management
If they are going lower -- the stock price is lower. We had a big catch-up in Q4 because the stock was so strong and it has been stable in Q1. (multiple speakers)
Sabi Marwah - SVP & CFO
It is not that the stock price is lower. The stock price is higher, but the change in the stock price from year-end to now is lower than the change in the stock price from Q3 to Q4. And the stock-based compensation is based on the change, not the absolute amount. So the greater the change in the quarter, that would affect stock-based comp.
Jamie Keating - Analyst
Okay and I guess suffice it to say, if we are getting obviously a remarkable quarterly or sequential improvement in profit in this division, but more confident we are at a run-rate level at this level than perhaps the fourth quarter was indicative of?
Sabi Marwah - SVP & CFO
In terms of the comp? I think --
Jamie Keating - Analyst
I'm focused on the bottom line now, Sabi, sorry. I'm in domestic banking to be specific.
Sabi Marwah - SVP & CFO
Oh, domestic banking had two factors going. One, credit losses is really down, and also the expenses are down seasonally, too. If you look at it, expenses also fell in the first quarter of last year compared to in the Q4. So expenses do tend to trend down, but domestic should be reasonably good.
Jamie Keating - Analyst
Okay, terrific. I will take it off-line because I am still missing something here.
Another brief question is more curiosity, and again I am on page 10 of the press release now, and I'm looking at loans are indicated somewhat weak as customer demand is low. When I look at the balance sheet, the loan balances were quite high. I think at the end of the quarter, it may have been the average loans were a lot lower. Was there a blip-up in the loan balances at quarter-end at all? I see 61 billion on the balance sheet, and then the averages are only 55.
Sabi Marwah - SVP & CFO
You have got to factor in the monthly seller conduits that really came on balance sheet. That is 8 billion.
Jamie Keating - Analyst
That pops into loans, okay.
Sabi Marwah - SVP & CFO
So that really goes into both personal and other loans, so that is really $8 billion. And on the terms of the balance sheet because of the year-end -- because of the spot rate, in fact, the Canadian dollar depreciated on a spot rate quarter-over-quarter. And that increase caused loan balances or rather asset balances to grow by around 3 billion. So even though averages were down year-over-year, the spot balances, in fact, Canadian dollar weakened slightly.
Jamie Keating - Analyst
Brilliant. Thanks a million, Sabi.
Operator
Michael Goldberg, Desjardins Securities.
Michael Goldberg - Analyst
I have a couple of questions. First of all, on the $103 million loan that was transferred to other assets with the new CICA rules, was there any allowance attached to that loan that came out of the total credit allowances also?
Warren Walker - EVP, Global Risk Management
Michael, it is Warren Walker. No, it was transferred at its net carrying value at the time under the new rules.
Michael Goldberg - Analyst
So there was no movement in allowance related to that loan.
Warren Walker - EVP, Global Risk Management
That is correct.
Michael Goldberg - Analyst
Okay. So when I am working that -- in other words (technical difficulty)-- amount of the loan that was taken out was $103 million, both the gross and the net? Is that correct?
Warren Walker - EVP, Global Risk Management
Michael, could you repeat the question? I'm sorry.
Michael Goldberg - Analyst
So both the gross and the net amount of the loan that was taken out was $103 million?
Warren Walker - EVP, Global Risk Management
No, the gross taken out was 103. It carried with it an allowance for credit loss.
Michael Goldberg - Analyst
So what was the net amount that was taken out?
Warren Walker - EVP, Global Risk Management
The net amount was 39.
Michael Goldberg - Analyst
Okay, all right. Also, just coming back to this question of stock-based comp, your stock price was down 10 cents in the quarter. Would it be reasonable to estimate with that small movement in the price that stock-based comp overall would have been near zero during the quarter?
Sabi Marwah - SVP & CFO
The change is really 10 million down. Last quarter it cost us around 40. This quarter it cost around 30. So the change is 10 million down in stock-based comp quarter-over-quarter.
Operator
Ian De Verteuil, BMO Nesbitt Burns.
Ian De Verteuil - Analyst
The first question is for Warren. The reclassification, the CICA rule requiring you to bring this loan on to the balance sheet and it impacted your other income, Warren, should I think of it as a PCL-like expense that was carried somewhere else in the income statement?
Warren Walker - EVP, Global Risk Management
Well, at the end of the day, as Sabi explained, under the new accounting guidelines because it was a situation where we had majority control of the Enterprise, we had to transfer it directly on the balance sheet rather than carrying it as a loan interest. And so whatever was incurred during that quarter in terms of further losses that would have needed to have been funded, which would have normally come through provisions for credit losses came out of other income or were funded through other income during that quarter. So the impact of that would be felt in other areas of the financials, not in the PCL.
Ian De Verteuil - Analyst
So effectively if there had not been the CICA guideline change, as opposed to having 74 million of PCLs, you would have had closer to 100?
Warren Walker - EVP, Global Risk Management
That is absolutely correct, Ian.
Ian De Verteuil - Analyst
The second question, this looks like a perfectly normal Scotiabank quarter. Everything is going along. No surprises. There is only one thing that stands out here, to me anyway, and that is that the bank bought back 15 million shares in the quarter. Typically you have been far less active on your buyback than you have had the balance sheet or the capacity to do, and I was wondering is there some new thought process within the bank with respect to share buybacks given the ongoing build in capital?
Sabi Marwah - SVP & CFO
I think there are a couple of points I would like to make on that, Ian. The first one is that if you look at our buyback activity over the last five years compared to our peer group, we are definitely at the low-end. I think we have done a cumulative around 2 percent versus a range of 10 to 18 percent for some of our peer group in terms of the buybacks we have done.
Secondly is that we certainly are on a strong capital position, which gives us the flexibility to do a lot more in buybacks.
And thirdly is that we're listening to investors. I think we did indicate in Q4 that we wanted to increase our shareholder returns through buybacks, so in essence we are just following through on that. At the same time, I would not assume that the buyback rate of 12.7 million is what is going to happen in each quarter for the balance of the year. It will remain higher than normal, but not at this pace.
Ian De Verteuil - Analyst
Thanks for a predictable quarter, Sabi.
Sabi Marwah - SVP & CFO
You are welcome.
Operator
Rafael Bello, Citigroup.
Rafael Bello - Analyst
Thank you. Good afternoon. I was wondering if you could give us a little bit of your view on what is happening ahead in terms of Mexico, where you see that what parts of your portfolio present sustainable growth going forward? And how do you see that happening over the next, let's say, year and half? And also if your plans to grow in Mexico involve acquisitions as well?
Rob Pitfield - EVP, International Banking
Looking at organic growth, we will continue with a steady acquisition or a steady buildup of our branch network. We have been aiming at around 20 a year, and we will keep on that pace, and we are comfortable with that pace.
As far as retail lending, we think the market is opening up, and it is opening up in a positive way, not an excessive way and is something that we can manage. So our growth rates right now, which are in the 20 to 30 percent range on a retail basis, we think we can sustain that.
The corporate is very competitive, but we have done well in that. We think that that should be able to continue as well.
Our commercial has been somewhat slow, but has been good this quarter. So we are putting more organizational focus on that as we are on the retail. So from an organic perspective, we think that the performance should continue at a steady rate, maybe not as spectacular as the 20 to 30 percent, but it should outperform what you typically get in a domestic type franchise.
As far as acquisitions we are in discussions, heavy discussions, with the Sipholes (ph), and we will see how that goes. And then if there are other opportunities in Mexico, we will look to those as well.
Operator
Quentin Broad, CIBC World Markets.
Quentin Broad - Analyst
Just a few questions on the next side. So if we look a year, I think the comparison with foreign exchange adjusted I think revenues are running about 6 percent and costs are running about 6 percent, which suggests over last year, it would suggest you are not creating an expense gap.
Just in terms of your thoughts that we should be keeping in mind when we compare those two numbers, if there is anything that you guys are doing or anything in those numbers that I've got to make sure I back out to see an expense cap? Because while the efficiency ratio is strong, it's a question of can I continue to improve?
Sabi Marwah - SVP & CFO
I cannot say anything has changed a whole lot. We have focused on expenses and on revenues as we always have been. The productivity ratio did improve over Q4, and maybe not doing anything, we just continued to invest in the areas that we feel is important, particularly in international. I cannot say we are doing anything else.
The reason why our productivity ratio -- actually why expenses really went up is simply because of the huge amount of trading profits in Scotia Capital.
Quentin Broad - Analyst
But that suggests, though, that because your variable comp is running similarly high, that a lot of that does not drop, right? That by definition, the people who are creating it are taking a large part of it?
Sabi Marwah - SVP & CFO
It is still incremental, though.
Quentin Broad - Analyst
Just then to Jamie's question in the domestic bank, what I think he was driving at is the commentary says that quarter-over-quarter, so sequential quarter, expenses fell 7 percent, reflecting a decrease in the performance based compensation and stock-based performance -- (multiple speakers).
Sabi Marwah - SVP & CFO
(inaudible) performance-based compensation in domestic, not in the bank.
Quentin Broad - Analyst
Correct. (multiple speakers). No, that is correct.
Sabi Marwah - SVP & CFO
They would go down quarter-over-quarter where it went up in total. In the bank, it went up.
Quentin Broad - Analyst
Understood. But within domestic, domestic looks like it had an exceptionally strong quarter, and so I guess the question is, why would performance comp go down?
Sabi Marwah - SVP & CFO
Because I think in domestic, the domestics performance-based compensation is largely tied to the bank's performance-based compensation. It ties to the bank's targets of 5 to 10 percent, so whatever we are building at that accrual, that is what drives that, not variable comp in that sense.
Bob Chisholm - Vice Chairman
(inaudible) the stockprice.
Quentin Broad - Analyst
Sorry, Bob?
Bob Chisholm - Vice Chairman
Driven off the stockprice, changes in the price of the stock -- okay -- impacts the domestic bank from a compensation point of view. But the modest change in the stock in Q1 had a commensurate modest change in the cost relative to Q4.
Quentin Broad - Analyst
Okay.
Sabi Marwah - SVP & CFO
And there was a bit of a true-up in the quarter, too. It is around 10 million.
Quentin Broad - Analyst
Okay. And then just in terms of how you think about your tax rate in 2006 on the international side, obviously down again this quarter and looking at the tax loss carryforwards, what should we start to think about in terms of 2006?
Sabi Marwah - SVP & CFO
I think in international that the low tax rate is driven entirely largely by Inverlat. To me we still see that continuing to flow through for the balance of this year so, and the bank rate I think that at all bank levels we have previously given guidance of it being 22 to 25 percent, and I think that is still our guidance.
Quentin Broad - Analyst
That is for 2006 in international, Sabi?
Sabi Marwah - SVP & CFO
2006 should begin to rise.
Quentin Broad - Analyst
To a particular number?
Sabi Marwah - SVP & CFO
I would say in the 15 to 20 percent range.
Quentin Broad - Analyst
Okay. Thank you.
Operator
Jim Bantis, Credit Suisse First Boston.
Jim Bantis - Analyst
Just a follow-up question on the domestic banking for Bob Chisholm. The bottom-line numbers certainly show impressive growth, particularly coming off expenses and lower PCLs. But, Bob, when I look at the top line momentum, I think the numbers' 4 percent growth really falls quite behind the peers this quarter on a year-over-year and even quarter-over-quarter basis, which were experiencing double-digit growth, and you've got your Wealth Management results built into there. Maybe you can just give a little bit color on what happened with respect to the revenue side. Was it a particular area or market share or just maybe some guidance in that regard to the observation relative to the peers?
Bob Chisholm - Vice Chairman
Well, the other income, the fee income, certainly was strong in the quarter. A good chunk of that was related to the wealth side.
On the net interest profit, while it was up about 30 on the quarter, it was muted somewhat by a compression in the margin. So the combined impact of the quarter-over-quarter, we are up I guess 60 million in total revenue. But you know, the margin being squeezed has offset the growth in our assets.
Q1 is always a slower growth quarter for us relative to the rest of the year. You know we think that we are -- on our plan numbers, we're actually ahead of plan a little bit in Q1. But I think the numbers -- I don't see any -- there is nothing unusual in them, so I think to the extent that we had that growth, you know it may not have been as large as some of the others on the brokerage side, but we had a very strong quarter in the brokerage regardless.
Sabi Marwah - SVP & CFO
I think on the marketshare as well, we didn't really take market share in mortgages of around 50 points and 30 basis points for retail assets in total. So market share is still trending up year-over-year and on the quarter for that matter.
Jim Bantis - Analyst
Okay, great. Thank you. But it does seem to be more on the Wealth Management side, Bob, which you are isolating in that regards, whereas perhaps the relative growth fell short of the peers.
Bob Chisholm - Vice Chairman
Could be.
Jim Bantis - Analyst
Okay, thank you.
Operator
Susan Cohen, Dundee Securities.
Susan Cohen - Analyst
Do you see any signs of corporate loan demand picking up in the U.S.?
Bob Chisholm - Vice Chairman
(inaudible). The trends in drawn corporate loan demand by the three geographies, I will just quickly go through them. In Canada in the last quarter we actually saw a very modest rise, so that was -- I think it's safe to say we are bottom in Canada, maybe a little growth on the horizon.
In the U.S., it was a continued decline, but very modest, so it seems to be flattening out in the U.S. based on the last couple of quarters. In Europe, the same story as the U.S. So those are the broad trends on drawn corporate loan demand. Very modest movement quarter-over-quarter, but a slight different direction in Canada versus outside Canada.
Susan Cohen - Analyst
With respect to your general allowance, you talked about the possibility of a reversal later on. Can you put a little color in terms of where you would feel comfortable with your allowance?
Warren Walker - EVP, Global Risk Management
It is Warren Walker. We look at the general every quarter, and we do very much a modeling assessment of the levels of the general together with an outside and economic assessment as to the appropriate level of generals.
We elected this quarter to stand pat at the existing level of 1375, but it is something that we will review on a quarter-to-quarter basis. Our sense is that with our expectation of continued improvement in overall credit conditions, that likely we will be releasing at some point or at a couple of points during the course of fiscal '05.
Operator
Michael Goldberg, Desjardins Securities.
Michael Goldberg - Analyst
Thanks. I wonder if you could give us a little more color on the insurance business in the Caribbean? There was a comment that this was one factor contributing to results in the quarter.
Rob Pitfield - EVP, International Banking
Michael, Rob Pitfield. Jamaica is constantly evaluating and reevaluating its reserves and found that they were excessive vis-a-vis what was required, and so we were able to release money back into income.
Michael Goldberg - Analyst
Can you quantify that?
Rob Pitfield - EVP, International Banking
About 8 or 9 million.
Sabi Marwah - SVP & CFO
I think that notwithstanding that, that is really in the quarter. But if you look at the trends over the last, I think the same trends we showed you when you were down in Mexico, Michael, the trends long-term since we started the business are very very positive. The entire business, book of business has been growing fairly consistently for several years. So the underlying growth in the business, not in Jamaica, not only in Jamaica but other parts of the Caribbean are beginning to get a bit of traction.
Michael Goldberg - Analyst
Are these mortality reserves or what?
Sabi Marwah - SVP & CFO
In this case of Jamaica, it was mortality.
Michael Goldberg - Analyst
So it is just an ongoing trend of better mortality than built into the assumptions?
Sabi Marwah - SVP & CFO
That is my understanding. That is correct.
Michael Goldberg - Analyst
Okay. And I have one other question if I could. You mentioned that you did not -- this I guess would be for Warren -- you mentioned that you did not release any general reserve this year, although you can see the likelihood that you may release in upcoming quarters. Can you explain the logic of not releasing this quarter when you do see the visibility of that possibility going forward?
Warren Walker - EVP, Global Risk Management
Well, Michael, it's Warren. It is always a point in time evaluation that we do. And at that particular point in time, as at the end of the quarter when we looked at what our historic modeling combined with our sense of some of the economic uncertainties on the horizon were, we determined that the level of generals at that point in time were adequate.
Now there has been a trend to improve credit conditions. We are monitoring it very closely. But I would be inclined to tell you that the likelihood of us releasing through the remainder of this year is greater than the likelihood of us not releasing.
Michael Goldberg - Analyst
Okay. Thanks very much.
Operator
Andre Hardy, Merrill Lynch.
Andre Hardy - Analyst
Two follow-up questions. One for Sabi on the tax rate internationally. Were you talking about 15 to 20 -- I'm sorry 10 to 15 -- sorry, is it 15 to 20 percentage points or 15 to 20 percent?
And for David Wilson, on corporate lending in the U.S., aggregate balances for the industry are actually up now year-over-year. Do you sense that it is different for non-investment-grade versus investment-grade, and that is perhaps why you are seeing declining loan demand when the industry's actually looking like it is recovering?
David Wilson - Vice Chairman
You know, we look at the industry numbers truthfully. We are in the large corporate segment of the U.S., and the investment-grade borrowers in the U.S. have not been drawing down bank loans, they have been going to the capital markets who are not spending the money. The below investment-grade, there is an improvement in the volumes in that category. But still in the large corporate segment, they have other alternatives to drawing down bank loans, the high-yield market or the capital markets if they are spending the money. So the broad industry data includes C&I loans, which is broader than the Fortune 1000 companies which is our target market.
Andre Hardy - Analyst
That makes sense. Thanks.
Sabi Marwah - SVP & CFO
Just to answer your earlier question, if you look at our international tax rate over the last several years, in 2002 and 2003 they were running between 20 to 25 percent, probably closer to 20 to 23, and started dropping in 2004 as Inverlat's tax benefit is really being utilized. And that is what drives the rate down to around 10. So I think once that really expires, you see the rates back to the 2002/2003 levels which are around 20 to 25 percent.
Andre Hardy - Analyst
Okay. I misunderstood your previous comment. Thanks.
Operator
Quentin Broad, CIBC World Markets.
Quentin Broad - Analyst
Bob, if we could get the market share gains in Canada slide, could you just give us an update, I guess it would be the December numbers for residential mortgage check savings and business current accounts?
Bob Chisholm - Vice Chairman
I don't think we have the December numbers, do we, Sabi? Sabi has --
Sabi Marwah - SVP & CFO
They are up year-over-year in December. We have 54 basis points in mortgages and 33 basis points for total retail assets.
Bob Chisholm - Vice Chairman
That is year-over-year. (multiple speakers)
Sabi Marwah - SVP & CFO
December '04 to December '03.
Quentin Broad - Analyst
So we don't gain the September 2004 residential mortgage share of 12.1? Do we have a benchmark against that?
Warren Walker - EVP, Global Risk Management
The September?
Quentin Broad - Analyst
You had in your pack, your previous slide pack, September was 12.1 residential (multiple speakers)
Sabi Marwah - SVP & CFO
I will have to change -- I will have to get you that. I will have to change that. I've been tracking it much better than that. I'm going to have the absolute.
Quentin Broad - Analyst
Okay. And, Bob, while I'm there, given the customer preferences and your focus on the step and I think we hit on this last quarter, but are we seeing just a permanent reduction in margin here rather than just a cyclical issue given the term structure and the interest rates that we have really helped change customer behavior, and perhaps on a risk-adjusted basis, you guys are going to be showing notionally lower margins and then hopefully making it up on the PCL line?
Bob Brooks - Senior EVP & Group Treasurer
Well, there is a shift somewhat in the mix truly. Those consumer loans that are now under the step plan because they are secured tend to have a lower yield, and yes, it does have an adverse impact on the margin, which we believe would be more than offset by lower loan losses as we go forward. You can see our numbers are very good in the quarter. So there is some of that in the step plan.
There is also a shift, an incurring shift from by consumers in general to move out of, to pay off their higher cost debt via their mortgages in general because of the low rates.
But our step continues to grow. The percentage of our borrowings continue to be higher. I think at the end of the quarter our non-mortgage debt was 62 percent secured, non-mortgage consumer debt was 62 percent secured under the step plan. So it is an increasing part of our portfolio you know. So part of it is the step, which may have an enduring aspect to it, and part of it is the general mix of business and the interest rate cycle as it is today.
Bob Brooks - Senior EVP & Group Treasurer
Just a comment. It is Bob Brooks. You know we track mortgage rates at the margin on a match maturity basis, and on that basis, the compression seems to have bottomed out in the last quarter or two. So the market is behaving I think a little more rationally. The mix, as Bob said, is still working against us, and the fast rate of growth of mortgages vis-a-vis underlying retail deposits is working against us. But on a pure marginal pricing basis, I think if there has been a secular decline, it looks like it has bottomed out.
Quentin Broad - Analyst
Bob, while I have got you, notwithstanding yesterday's move in the U.S. in the 10-year, if rates continue to flatten this curve out and we get the short end coming up another 50 or so basis points, what does that do for you guys in terms of the way you structure the balance sheet? I know a full 100 basis point move across the curve is worth 60-odd million, but what is a real true -- real flattening out entirely do to you?
Bob Brooks - Senior EVP & Group Treasurer
Well, all else being equal and all else is never equal, it should help us marginally on our interest margin given the way we are currently positioned by flattening of the curve caused by a rise at the short end. But we're not building any substantial margin improvement into our plans looking forward.
Rick Waugh - President & CEO
It is Rich Waugh. I just want to make on whether the secular compression on the retail is there, I mean none of us really know. Hopefully it is not. But I will tell you this, two things that we are doing. We are going to focus very hard in the next couple of quarters on that issue, point one. But point two, and this is where the cross-sell of the step product, and quite frankly our whole strategy becomes very important and the stickiness we hold for that product, and so the other income, the nonlending spread is going to be (inaudible). It is certainly it is in our product offerings, and we are going to be working hard on that notwithstanding if we get some change in the secular trend.
Operator
Jamie Keating, RBC Capital Markets.
Jamie Keating - Analyst
Sabi, just forgive me for this dog with a bone syndrome I have got here, I'm trying to sort this out. Expenses are down 60 million sequentially in domestic. I think you described earlier that the SARS expense is down 10 million in the quarter. If I'm not mistaken, I thought you said 40 to 30. Maybe that was --
Sabi Marwah - SVP & CFO
That is right.
Jamie Keating - Analyst
But there is another --
Sabi Marwah - SVP & CFO
I can tell you advertising is down. The pace on acquisition fees is down. Severance is down. Pension benefit is down, and cash short is down. So everything is down.
Jamie Keating - Analyst
Okay. And then one other thing that seems to be down is the mortgage acquisition cost?
Sabi Marwah - SVP & CFO
Simply because lower volumes compared to Q4, Q1 is normally seasonally a lower quarter. Q4 was a record, so the lower volume growth will result in lower mortgage and acquisition expenses.
Jamie Keating - Analyst
I am wondering just could you quantify that number as well?
Sabi Marwah - SVP & CFO
That is around 10.
Jamie Keating - Analyst
Okay. That is great. (multiple speakers)
Sabi Marwah - SVP & CFO
(multiple speakers) and cash op is down primarily because cash op tends to be written off at year-end every year. So you will see the seasonal factor every year.
Jamie Keating - Analyst
Okay, interesting. There was a slide last quarter detailing the EPS impact of FX, and we can sort of deduce it a little bit with the two numbers you give us I think. Can you give us -- do you have -- have you calculated the EPS impact?
Sabi Marwah - SVP & CFO
Of what?
Jamie Keating - Analyst
Year-on-year foreign exchange translation.
Sabi Marwah - SVP & CFO
It is in the slide. (multiple speakers). 3 cents.
Jamie Keating - Analyst
3 cents. Okay, I apologize.
Sabi Marwah - SVP & CFO
It is on slide -- it is 3 cents. We have not put it in, but it is 3 cents.
Jamie Keating - Analyst
3 cents? Great. The slide was there last quarter. I just did not see it.
Sabi Marwah - SVP & CFO
It is 29 million in income, 3 cents EPS. And the quarter is 15 million in income, 1.5 cents EPS.
Jamie Keating - Analyst
Brilliant.
Operator
There are no further questions at this time. Please continue.
Sabi Marwah - SVP & CFO
Thank you all very much, and we look forward to seeing you in May. Thank you, again.