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Rick Waugh - President and CEO
Good afternoon and welcome, everyone, to our presentation of Scotiabank's third-quarter results. I am Rick Waugh, President and Chief Executive Officer. Slight change in our format right now. I am leading off just to -- I wanted to make some just very preliminary comments here.
Firstly, I do want to congratulate Sabi Marwah, on his appointment as our Vice Chair and Chief Administrative Officer. I think this group well recognizes Sabi's contribution. Sabi has played -- has an important role now in overseeing a wide range of our operations, technology, and resources which are going to be vital to providing us going forward top service to customers and to continue to grow all of our businesses. So I do want to thank Sabi for the leading role he has played in these meetings in the past.
This will be his toughest quarterly conference call that he's ever sat through, because he is going to have to sit there and listen as somebody else runs through the numbers. So I have got a special request to the listening audience and those who are here. Someone, sometime today ask him a question; make him feel wanted, will you?
I would also like to introduce our new CFO, Luc Vanneste. I think many of you already know Luc, because he joined the bank back in '99 as our Chief Auditor and had a (inaudible) very distinguished career at KPMG, where he was a partner in the banking and finance (inaudible).
So at today's meeting we have three, three former Scotiabank CFOs sitting in this room today. Bob Brooks of course; Bob Chisholm; Sabi. So I think, A, that is a great testimony to our great depth and continuity of our leadership. And Luc, don't feel nervous that anybody is looking over your shoulder. Okay?
Finally, my last comment and then we will get on with the numbers, this is David Wilson's last quarterly conference call before he departs us as leader of Scotia Capital for the Ontario Securities Commission which he will head at the beginning of November. I know and I think we all know you will be a great chair at the OSC, leading it into the future. David and I have been colleagues for many years, and in particular the last two years as CEO he's been a tremendous help and partner with me. I have a tremendous amount of respect for him. Of course now that he is going to become one of our senior regulators, I have even more respect for him.
So all that to do and great congratulations to Sabi, to Luc, and to David. And now Luc, it is your meeting. So let's get started.
Luc Vanneste - CFO
Thank you very much, Rick. Joining Rick, David, Sabi, and me in Toronto today, on my right Bob Chisholm, who is Vice Chairman of Domestic Banking and, as Rick mentioned, the former CFO. To my left at the far end is Bob Brooks, Senior Executive Vice President and Group Treasurer, also a former CFO. At the far end is Rob Pitfield, Executive Vice President of the International Banking; and Warren Walker beside Bob Brooks, who is Executive Vice President of Global Risk Management.
Today Rick will begin with the highlights of our results followed by a review of the financials by myself. Warren will review credit quality, and Rick will address the outlook. 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.
Before we start I would like to refer you to slide 2 of our presentation, which contains Scotiabank's caution regarding forward-looking statements. Now Rick over to you.
Rick Waugh - President and CEO
Thanks, Luc. I am happy to report another quarter of solid results. Our earnings per share were $0.77, up 8.5% from the 71% level a year ago. Through the nine months, results are up 10% compared to 2004. Our return on equity through the first three quarters was a strong 21%.
This quarter's results reflect very broadbased gains across all our three growth platforms. This continues the success of our strategy of diversifying across business lines and across geographies. Domestic Banking continued to see strong growth in mortgages and other consumer lending, which, along with higher banking fees, allowed us to earn through compressed margins in the continuing low interest rate competitive environment.
International Banking continues to provide Scotiabank with a truly unique growth engine, with strong results at Scotiabank Inverlat driven by significant mortgage and credit card gains, and ongoing strength from the other areas of international, notably Caribbean, Central America, and Chile. Scotia Capital's results were highlighted by favorable credit quality and solid capital markets related revenue, and a continuation of the trend we saw last quarter of increased demand for loans.
The bank's capital position remains strong, giving us flexibility to pursue a broad range of growth options. It also allows us to continue to increase returns to shareholders through regular dividend increases. Overall, this was a good quarter, one we're pleased with. One that (ph) we call this morning a real feel-good quarter, building on our solid performance in the first half of the year.
This slide shows why it feels so good -- the year-over-year net income trends for our three platforms, all of which increased from last year. Our domestic division, which includes Wealth Management, generated net income of 319 million in the third quarter, an increase of 37 million or 13% over last year. International earnings were 234 million, an increase of 23 million or 11% from last year. This was achieved notwithstanding the $21 million negative effect of foreign currency translation. Scotia Capital reported earnings of 200 million this quarter, up 11 million from a year ago, with solid performances in all its businesses.
The other segment which includes Group Treasury reported net income of 22 million, down from 45 million last year. This was largely due to the $50 million reduction in the general allowances for credit losses that we took place in the third quarter of '04.
So comparing year-to-date results to our performance targets, our return on equity at 21% through the first nine months of 2005 is above our target range of 17% to 20%. Our earnings per share growth of 10.3% exceeds our target of 5% to 10%. Productivity remains strong at 55.9%, ahead of our goal. With our positive results of this year, we expect to achieve the upper end of our target for this year. Now I would like to pass it over to Luc to talk about our performance in even greater detail.
Luc Vanneste - CFO
Thank you, Rick. Beginning on slide 8 with the revenue growth, total revenue earned this quarter was $2.7 billion, an increase of 157 million or 6% over the same quarter last year. Excluding the $77 million impact of foreign currency translation, total revenues increased 234 million or 9% from a year ago. So as you can see our underlying revenue growth has been pretty positive.
Looking at our net interest margin on slide 9, the reported net interest margin fell 10 basis points quarter-over-quarter. The drop was mainly due to the receipt of special dividends, which strengthened the margin in Q2 but did not recur in Q3. Of the positive side, the underlying Canadian margin did not decline this quarter. On a year-over-year basis, the margin fell 12 basis points. This was primarily due to a tighter spread between fixed-rate mortgages and deposits, resulting in a 7 basis point decline in the Canadian margin.
Turning to other income on slide 10, excluding the impact of the Canadian dollar, other income rose 13% from a year ago and was down 1% from last quarter. On the right side of the slide, reported other income was up 93 million or 9% year-over-year. Contributing significantly to this increase were stronger retail brokerage and capital markets revenues. As well, there were higher fees from deposit and payment services and credit cards, driven by increased customer transaction volumes, mainly in Canada. Net gains from investment securities this quarter, which included $47 million of gains on emerging market bonds, were in line with the same period last year. These increases were partially offset by a decline in corporate credit fees.
Quarter-over-quarter, on the left side of the slide, reported other income was down $8 million. This was largely due to lower net gains on investment securities, as last quarter included a gain from the sale of a portion of our investment (inaudible) sale. There was also a seasonal decline in retail brokerage revenues. Offsetting were higher capital market revenues, including higher customer driven fixed-income and derivative activities. We also saw a good growth in deposit services, credit card fees, and other revenues, partly due to the consolidation of our new subsidiaries.
Turning to our expenses on slide 11, excluding the effect of the Canadian dollar and also excluding the consolidation of Banco de Comercio in El Salvador and the Waterous acquisition, expenses were up 3% from a year ago and 1% from last quarter. On the right, compared to the same quarter last year, reported expenses were up 45 million. As I mentioned, this was in part due to the consolidation of our new subsidiaries. Expenses rose for professional fees and legal expenses, along with advertising and promotion. The other category contains small increases across several categories, including the reclassification of the cost of credit card reward points in Inverlat. Offsetting these increases were lower mortgage appraisal and acquisition fees.
Compared to last quarter on the left, reported expenses rose 27 million or 2%. The consolidation of our acquisitions accounted for almost half of this change. There were increases in various operating expense categories including professional fees, legal expenses, advertising, and promotion costs. Mortgage appraisal and acquisition costs also rose in line with volume growth. Salary and benefits decreased $9 million, consisting of higher salaries and benefits cost in the neighborhood of $20 million primarily due to three more days in the quarter, largely offset by approximately a $30 million reduction in performance-based compensation. Overall, expenses continued to be well controlled as year-over-year growth was half the revenue growth.
Slide 12 shows our productivity ratio. At 56.4% for the quarter, it improved from 58.1% a year ago. Quarter-over-quarter the ratio was up slightly.
Turning to slide 13, which shows our unrealized gains on investment securities, the surplus this quarter rose to more than $1 billion, an increase of 96 million from last quarter and 197 million higher than last year. Notwithstanding the $47 million of gains we realized this quarter, the value of the emerging market debt portfolio continued to grow. As well, there was a significant improvement in the equities portfolio.
Looking at slide 14, the bank's capital position remains very strong. The Tier 1 capital ratio was 11.1% this quarter, down slightly from the previous quarter and Q3 '04. The decrease was due primarily to the goodwill related to Banco de Comercio and the Waterous acquisitions. Even more important, the tangible common equity ratio continued to be very strong at 9.3%, the best of the major Canadian banks.
Turning now to the business line results, starting on slide 16. As you can see we have three very strong business lines, and as Rick mentioned the year-over-year results were up across all three.
Domestic Banking, which includes our Wealth Management business, had net income of 319 million, up 13% from the same quarter last year and 14% higher than the previous quarter. ROE was very strong at 31%. Revenues were up 5% year-over-year and quarter-over-quarter. Expenses remained very well controlled, up just 2% from last year, reflecting higher performance-based compensation in line with stronger retail brokerage revenues. There were also normal salary increases and an increase in pension and benefit costs. Quarter-over-quarter expenses rose just 1%.
Credit quality remained very good in the retail portfolio, and our retail loan-loss ratio remains among the lowest in the industry. The overall loan-loss provision fell year-over-year due mainly to lower provisions in the commercial portfolio. Quarter-over-quarter, loan-losses were lower in the retail portfolio.
Looking at domestic revenues in more detail on slide 18, we can see the robust growth in retail lending, with volume growth at 12% in residential mortgages and 17% in revolving credit compared to last year. We continued to increase our retail lending market share, which was up 13 basis points year-over-year. Good growth in our GIC portfolio drove personal deposit growth of 4%.
This strong performance was offset by compression in the interest margin over the past year. This was largely due to the continued low level of interest rates and the continuing shift in customer preferences toward lower rate variable mortgages. However, as I mentioned previously, the Canadian dollar margin remained constant in Q3.
Noninterest revenue was up an impressive 9% year-over-year on the strength of improved Wealth Management results. Both full service brokerage and mutual fund revenues trended higher. As well there were volume-based increases in transaction fees and card revenues. Quarter-over-quarter total revenues rose 5% due to good asset growth and the longer quarter.
Looking at our international operations on slide 19, this quarter international net income was 234 million, up 11% from last year and 26% from the prior quarter. Return on equity was very good at 24%. This year-over-year increase in net income was driven by strong asset growth, partly offset by the impact of foreign currency translation. Excluding the effect of the stronger Canadian dollar, net income rose 21% versus last year. The quarter-over-quarter increase was driven by higher gains on the sale of the emerging market securities, along with a slight reduction in the loan-loss provision.
Expenses in international were up over last quarter and the same quarter last year. The increase was driven partly by the consolidation of Banco de Comercio. As well, there was spending on marketing initiatives along with normal business-related growth.
In the Caribbean and Central America higher asset volumes were partly offset by lower loan collection fees related to the Baninter acquisition in the Dominican Republic last year. In Latin America, earnings rose year-over-year due primarily to a higher contribution from Scotia Inverlat. I will have more to say on Inverlat in a moment.
Looking at revenue trends on slide 20, total revenues were up 15% year-over-year as both net interest income and other income were higher. Excluding the impact of the stronger Canadian dollar, revenue rose 21%. Quarter-over-quarter, they were up 86 million or 13%. Net interest income rose 14% year-over-year, excluding the impact of foreign currency translation. Retail asset growth continued to be strong, up 21%, particularly in the Caribbean, Mexico, and Chile. Mortgages grew 28% in Mexico and 30% in Chile. In the Caribbean there was a full quarter's contribution from Banco de Comercio in El Salvador, along with good organic retail growth of 12%.
Other income was up 56 million or 31% year-over-year with higher gains from emerging market securities and strong growth in Mexico. These were partly offset by the impact of the stronger Canadian dollar and the lower loan collection fees related to the Baninter acquisition.
Taking a closer look at Scotiabank Inverlat on slide 21, Inverlat's contribution was $97 million in Q3, up $26 million or 36% from last year. Despite the impact of foreign currency translation, we continued to see revenue momentum. Underlying revenues were up 30% year-over-year driven by strong growth in retail asset volumes. Mortgages were up 28%, while credit cards and other personal loans grew 15%. There was also strong growth in commercial and corporate lending with volumes up 22%.
Other income excluding ForEx rose 20% year-over-year as higher retail banking and mutual fund fees were partially offset by lower trading revenues. Underlying expenses rose 17% year-over-year, driven by higher marketing expenses and personnel costs. However, productivity improved to 62% compared to 69% in the same quarter last year. Overall, we continue to be pleased with Inverlat's success, and we're pursuing both organic growth and acquisition opportunities.
In the Caribbean and Central America, we finalized the purchase of Banco de Comercio and merged it with our existing operations in that country. The merged bank, Scotiabank El Salvador, was launched in early May with the complete rebranding of branches, offices, and ABMs across the country. We acquired from Banco de Comercio more than 1.43 billion in asset, 1,700 employees, and a strong distribution network that includes 47 branches, 80-plus ABMs, and 18 remittance branches throughout the United States. Combined with our existing operation, we now have a market share of more than 17%. El Salvador is an important market for us in Central America and we continue to look for growth opportunities in this region.
Turning to slide 23, Scotia Capital had another good quarter, with net income of 200 million. This was up 6% from the same quarter last year, but down 16% from last quarter, which benefited from loan loss recoveries. Return on equity was strong at 25%. Improving credit quality and higher trading revenues were the main drivers behind the year-over-year earnings growth. Scotia Capital had a loan-loss provision of 2 million versus 28 million last year.
Quarter-over-quarter, lower loan loss recoveries in institutional equity revenues caused a decrease in net income. Total revenues were down 2% year-over-year due primarily to lower corporate lending asset levels and narrower loan spreads in the U.S. and Europe. These were partly offset by higher interest income from trading. Quarter-over-quarter revenues were down 7% due mainly to the gain we realized last quarter from the sale of an asset acquired as part of a loan restructuring.
Expenses were down 14% year-over-year and 17% from the prior quarter. The declines were due in large part to lower performance-based compensation as a result of adjustments to previous accruals to reflect expected sales.
During the quarter, we announced the acquisition of Waterous & Co., a leading global energy advisory firm. Waterous has advised 24 of the world's 30 largest private sector oil and gas companies over the past three years. It has been involved in transactions totaling US$15 billion since 2002, most recently advising Unocal Corporation on the pending sale of its Northrock Resources subsidiary for US$1.8 billion. This acquisition will increase the number of client relationships, give us a very strong footprint in the oil and gas space, and allow the new Scotia Waterous to offer one-stop financing for our (inaudible) clients.
Rick Waugh - President and CEO
He was going so good.
Luc Vanneste - CFO
Wishful thinking there. Turning briefly to the other segment, which is comprised of group treasury and corporate adjustments not allocated to the three business lines. Net income was 22 million compared to 45 million last year and 118 million in the previous quarter. The year-over-year decrease was due mainly to a 50 million reversal of the general allowance in the third quarter of 2004 and lower net investment gains. The quarter-over-quarter decrease was due largely to the 118 million gain realized last quarter on the bank's investment holdings in Shinsei Bank.
I will now hand it over to Warren Walker to talk about the risk management.
Warren Walker - EVP Global Risk Management
Thanks, Luc, and good afternoon. I will be starting on slide 27. Continuing the trend, this was another good quarter for credit quality. Gross impaired loans fell $119 million from last quarter to about 1.8 billion. That is the lowest level since January 1992.
Net impaired loans were also down. After deducting the specific allowance, net impaired loans were 573 million, a decrease of 93 million from Q2 and a significant improvement of 625 million from the same quarter last year. This is the 12th consecutive quarter that net impaired loans have dropped, largely as a result of reductions in Scotia Capital.
The specific provision for credit losses this quarter was 85 million, up 50 million from the very low levels last quarter, which benefited from an unusually high level of recoveries, primarily in the Scotia Capital U.S. portfolio. There was no change to the general allowance for credit losses this quarter, compared to a $50 million reduction in the same quarter last year.
The next slide shows net formations of impaired loans by business line in the quarter. In summary, net formations of 50 million in domestic retail continued to be very reasonable, given the size and the growth of the portfolio. Formations in the domestic commercial portfolio were low again this quarter at $11 million. International net formations were $9 million. Scotia Capital had negative net classifications of 1 million. And overall, we had net formations of 69 million.
Slide 29 shows the positive trend in both 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 more than 600 million during the same period.
Slide 30 shows the breakdown of specific provisions by business line. Provisions in domestic were down compared to last quarter and last year, in line with the lower formations. International provisions were 21 million, down slightly from Q2 '05 but up from the unusually low levels of last year. In Scotia Capital, specific provisions were 2 million, down 26 million from the same period last year, but up from the large net recovery of last quarter.
Turning to market risk on slide 31, we continue to have low variability of trading revenue, and we run this business with very low risk. This quarter, more than 98% of the days had positive results, with only a single day loss compared to three days in the previous quarter.
On the next slide are the VaR trends. As you can see, our one-day VaR averaged 7.7 million this quarter and there were no days in which we exceeded the one-day VaR.
In summary, we had another quarter of stable credit quality. However, the bank continues to actively monitor certain industries, including those impacted by higher oil prices. A few sectors that have come under recent stress are, as you're well aware, the North American automotive industry and the forest products industry. Nevertheless, at this point in the cycle and 10 months into the year, total provisions for credit losses in 2005 are expected to be well below last year and may also include a reduction in the general allowance for credit losses if current credit conditions continue. With that, I will turn it back to Rick.
Rick Waugh - President and CEO
Thanks a lot, Warren. Well, as evidenced by these results we had another solid quarter of growth. At the same time, we continue to face many of the same challenges of the past. First, the ongoing straightening of the Canadian dollar. We see that continuing but at a more moderate pace than the past period. Second, the pressure on our margins, though we are seeing signs that the worst may be behind us. Third, low level of business loan demand. However we have now seen for the second consecutive quarter growth in the corporate loan books through a combination of new business and better utilization of loans from existing customers.
As you have seen in our results, we are effectively managing these challenges. We have earned through them thanks to strong execution by management and employees, and thanks to the diversity of our three strong businesses. We are confident that we can continue this performance, which is why we expect to achieve results in the upper end of our key targets for 2005.
But now we are focused on next year and beyond. Revenue growth remains our key priority. We will target both organic growth and growth through selective acquisitions in each of our business lines. All will provide opportunities for growth. In particular, our international platform.
At the same time, we will maintain our cost and our risk control culture. We have a strong balance sheet, a strong capital position, and as you have seen, we use our capital in a disciplined way. We will use some of our capital to step up investments in technology and product development to support revenue and customer growth. We will continue to work hard to find the right acquisition opportunities that bring us both strategic and economic value to us, such as the ones we've just announced so far this year.
We remain very confident about the future. We remain confident in each of our business lines. We remain confident in our ability to deliver consistent results both in the short term and the long term. With that, I will pass it back to Luc.
Luc Vanneste - CFO
Thanks very much, Rick. We will now open up to questions.
Unidentified Audience Member
Two questions. The first one is for Rob Pitfield. If we look at the sequential trends, other income was up 63 million driven by gains. It looks like the increase on noninterest expenses is a little more sustainable and that it's business growth and the acquisition of Banco de Comercio. Can you talk about the sustainability of your net income, especially considering higher tax rates in Mexico next year?
Rob Pitfield - EVP International Banking
With respect to the tax rates in Mexico, that impact may not be as significant in 2006 as we had thought. As far as sustainability of income, speaking first to Mexico, we continue to outperform the industry with respect to our loans, in car loans and in credit cards and in mortgages specifically. We think that that trend can continue. As I talked before, the whole sales and service concept that we had in Canada, we have put several key individuals from our domestic operations into Mexico. I think you're seeing the results of that right now.
In the Caribbean, despite very strong margins in Jamaica and the DR last year, despite Baninter fees we have still been able to perform very well this year. We have gotten very good loan growth for a franchise that from a Caribbean perspective is pretty mature.
We will also continue to build out our Central American franchise. We have done an acquisition with Banco de Comercio. But we expect to be able to fill in that region. Ultimately that region we believe will look like the Caribbean for us. So generally speaking, it is a very strong TNC (ph) franchise that we think that we can continue to build out.
Unidentified Audience Member
Were there unusual expenses in the quarter?
Rob Pitfield - EVP International Banking
You had unusual expenses with respect to Comercio. You've got the DR, where we're still trying to cut back our expenses to the size that we need, while at the same time giving us the engine to grow. So the DR looks a little bit like Mexico did two, three years ago, where it's a bit oversized, it's a bit expensive; but we think that we can grow into it. So generally speaking, we think that it will be okay.
Luc Vanneste - CFO
I would just like to elaborate for a moment, John, the Inverlat tax situation. We believe that we will have tax loss carryforwards to utilize until the end of Q3 2006 as a result of a successful tax court case where we challenged the deductibility of certain expenses. So that is what we expect now.
Unidentified Audience Member
The other question I had was on personal loan balances. They were down a bit sequentially. Can you explain why that was the case?
Sabi Marwah - Vice Chairman and CAO
Where, in International or in all banks?
Unidentified Audience Member
The quality of the math (ph) on the balance sheet.
Sabi Marwah - Vice Chairman and CAO
I think at the all-bank level it's because of deconsolidation of SBV (ph). So for whether (ph) deconsolidation it just fell off in the quarter, so. Underlying loans are up substantially; the deconsolidation drops (ph) around a billion and a half.
Luc Vanneste - CFO
1.5 billion plus 1 billion going the other way.
Unidentified Audience Member
Just a follow-up. So the tax rate should be comparable in Mexico next year as it was this the year; and then in '07 we should be seeing something more like 25% for the consolidated international division, 20, 25? Do you just managed to defer it. Okay.
Just sticking with the domestic bank it seems like every Q4 there seems to be a true up of expenses, and we see a big, big jump in noninterest expenses in the domestic bank. Is there any reason to believe that we shouldn't see that bounce up again next quarter?
Rick Waugh - President and CEO
I don't think there's been that big a jump to Q4, Steve. I certainly don't expect any big jump this year in the Q4 expenses. What happens at times is, when we have a fairly profitable Q4, when we look at the whole year, it tends to be that the variable comp might come in at the higher end of expectations. Because the results are there. So that often leads to sort of a true up of the accrual for the variable comp in Q4. That is the main variable that bolsters Q4. Other than that, the Q4 should not be significantly different from Q3.
Unidentified Audience Member
One other one. On the Scotia Capital, this is the first quarter in four that we have seen a credit loss, albeit very small. Is this an indication that reversals and recoveries -- that pool maybe had built up over the course of 2003, 2004 -- it is starting to evaporate a little bit here?
Unidentified Company Representative
Through the cycle, Steve, what you would expect of course is recoveries in the early stages of improvement. We still think we will have some recoveries, although perhaps not to the same scale and the scope of the past two years.
Also, over time, what you tend to get is some of what would normally show up in the loan-loss recovery line shows up in investment gains, because through some of the bankruptcies we wind up taking back equity, where we think there is good value in the asset. So you may expect to see some recoveries from that source as well going forward.
Unidentified Audience Member
What would have been the credit loss this quarter were it not for reversals and recoveries?
Unidentified Company Representative
This quarter? It was virtually flat. (multiple speakers) Virtually no recoveries. And similarly, there were virtually no loan sales either. I think we sold maximum $5 million of loans this quarter; so it was a true clean number.
Unidentified Audience Member
A couple of questions. First of all, with David Wilson heading off to the OSC, can you talk about leadership at Scotia Capital?
Rick Waugh - President and CEO
Well, I can talk. We haven't announced the new leadership, so I am not going to talk specifically to new leadership. But I hate to see a guy go, but I also said that they are replaceable.
Unidentified Company Representative
Very true. No argument.
Rick Waugh - President and CEO
So I am confident we will very shortly resolve the pending vacancy in the leadership, and I think we will all feel very comfortable with the results.
Unidentified Audience Member
Okay. The other question I have is, what is the decision on whether or not to release any general reserve in the fourth quarter actually, in John (ph)? Because you have been talking about this through the year so far, the potential?
Warren Walker - EVP Global Risk Management
We review it, Michael, every quarter. Obviously it's a significant management judgment that has to be made on a quarterly basis. We use a combination of quantitative estimates together with a qualitative management assessment based upon the things that we see happening in the marketplace.
This quarter we made the judgment that it would be more prudent not to do something at this point in time. You are looking at an environment of spiking oil prices. While we have no particular concerns about its impact on credit quality at this point in time, we thought it was appropriate to keep our powder dry perhaps for another quarter. What we said in the MD&A is that credit conditions continue on a favorable track, that there is a possibility of a Q4 release.
Unidentified Audience Member
So on the quantitative criteria that you look at, how much excess general allowance would you estimate that you would have right now?
Warren Walker - EVP Global Risk Management
By definition we have no excess, because that is a determination that we make. If you are asking us what the mix is between the hard quantitative and the qualitative, it has been relatively steady over the course of the past couple of quarters. Now we also refine our methodology on an ongoing basis, based upon better information, better insights as well.
Unidentified Audience Member
Just a follow-up I guess, on the gains taken in the international side. Just how much of that $47 million drops to the bottom line? Then perhaps on a sequential basis, can you remind us what gains might have been taken in? Any material gains, I guess, in the last few quarters?
Rob Pitfield - EVP International Banking
On the international side?
Unidentified Audience Member
On the international side (multiple speakers) tax.
Rob Pitfield - EVP International Banking
(multiple speakers) It has been in the 20 to 30s for other force (ph).
Unidentified Audience Member
And of the 47 how much drops to the bottom line? I assume there's not much mix to it? All of it at the 16%? Okay.
Unidentified Company Representative
That would be at the margin (multiple speakers).
Unidentified Company Representative
So it's held in the bank, here. (ph) (multiple speakers) 75%.
Unidentified Audience Member
In terms of Scotia Capital, David, just looking at revenues, if we look over a large number of quarters, they don't look particularly strong. I am just wondering, A, in the quarter was there anything going on specifically? B, is it all currency? And C, perhaps what does the pipeline look like in terms of opportunities still out there?
David Wilson - Chairman and CEO
I have got some numbers I can give you, Clinton, on year-to-date this year versus last year on revenues. The Scotia Capital's gross revenue line was down 36 million year-to-date this year over last year. Of the 36, 52 was foreign exchange; 138 was lending declines, which is spread compression and from our drawn asset declines. There is 154 million increase in the nonlending revenue. So that one component is growing at about 20%, the nonlending revenues. So I think looking at it through those three components is the way to parse the wholesale revenues.
And the pipelines, it's hard to see very hard ahead. But the fourth quarter looks pretty solid for most of our product lines. We are busy in virtually all products. Rick mentioned, we saw a bottoming and a slight lift off the drawn credit time series the last couple of quarters.
Unidentified Audience Member
Are you seeing any differentiation between Canada and the U.S. in terms of how busy things look or what the pipeline looks like? In terms of just general activity levels for your group.
David Wilson - Chairman and CEO
Canada is a little busier, but both have lots of stuff going on.
Unidentified Company Representative
Are there any questions on the phone?
Operator
Jamie Keating from RBC Capital Markets.
Jamie Keating - Analyst
Congrats on the good quarter here. A couple of quick questions. Did I hear you right? You said the marginal rate on the securities emerging market was what percent?
Unidentified Company Representative
35% is (ph) the margins actually (ph) in Canada.
Luc Vanneste - CFO
They are held in the Bank.
Jamie Keating - Analyst
Okay, so 35%. I had a couple of smaller ones. Mortgage prepayment fees in the quarter versus last quarter if possible?
Luc Vanneste - CFO
They went up 4 million from 16 to 20.
Jamie Keating - Analyst
Excellent. Last question. Your 15% loan -- say (ph) 15% loan growth in the domestic business -- spectacular number. Could you parse it or break out what the credit card balances loan growth was relative to a line of credit? Or just give us a little color on that, perhaps.
Bob Chisholm - Vice Chairman Domestic Banking
It was 14% in mortgages and 14% in nonmortgage loans, which includes lines of credit and that nature. It was spread across all the product lines.
Jamie Keating - Analyst
Bob, just again probably more for comparison purposes, could you just describe what the credit card loan balances grew by at all? Would you hazard a guess? I am kind of curious for your competitors actually, because some guys dropped off sharply this quarter, or one bank did.
Bob Chisholm - Vice Chairman Domestic Banking
We didn't see any drop off. There was small growth in it. I don't have the number in front of me.
Jamie Keating - Analyst
Thank you very much, Bob.
Operator
Rob Wessel, National Bank Financial.
Rob Wessel - Analyst
Almost all of my questions have been asked; so I just have (ph) two quick ones re disclosure. Has the bank given any consideration, with the new CFO and all, to disclose or break out Wealth Management as well as breaking out variable comp? No disrespect, Sabi.
Unidentified Company Representative
We don't see changing that level of disclosure in the near term.
Rob Wessel - Analyst
Not to be difficult, but do you not believe that variable compensation is a fairly meaningful number to disclose, and therefore would it not add incrementally to your disclosure? Not to be difficult.
Sabi Marwah - Vice Chairman and CAO
I think to be fair, Rob, we do disclose that number to you. Pick up the foreign calls; all they really saying is publish the number if you call and ask. We have given that to Michael. We have given it to every meeting. So we can get it anytime.
Rob Wessel - Analyst
Okay, can I get it for the last couple quarters?
Sabi Marwah - Vice Chairman and CAO
Sure.
Rob Wessel - Analyst
Do want me to call you off-line?
Sabi Marwah - Vice Chairman and CAO
Just call Luc.
Rob Wessel - Analyst
Okay. I will do that; thank you.
Bob Chisholm - Vice Chairman Domestic Banking
If I may, though, in Wealth Management give you some color, we had a very good quarter in Wealth Management and year-to-date, with our revenues are up in the double digits on year-over-year. Our net income is up significantly. So we're having -- all areas are refiring, all sellers (ph) are refiring in the Wealth Management side.
Rob Wessel - Analyst
Bob, how many dollars are in significantly?
Bob Chisholm - Vice Chairman Domestic Banking
They are quite significant.
Rob Wessel - Analyst
I guess I am not going to get that, so I will go. Thanks.
Operator
Gentlemen, there are no further questions at this time for the phone lines. Please continue.
Unidentified Audience Member
Luc, if I look at international, international grew from 211 to 234; in the last up 26; and you had 13 (ph) million of incremental gains from these sale of these Bradys (ph). I presume that all flows through international. It looks as if, excluding those internationals, down about 10%. No help from Sabi here. Any thoughts on -- I am just taking Q3 versus Q3 last year.
Rob Pitfield - EVP International Banking
It's a good question, Ian. Aside from the currency you had big Baninter fees last year. You had big Jamaica margins with the disruption in the country. And the same for the DR. So that was a huge chunk, and it was a very strong quarter for us in Q3. So if you look at it just Q3 '04 to Q3 '05, it looks like we're down; but it was really a spectacular time with a very significant amount of money earned (ph) that quarter.
Sabi Marwah - Vice Chairman and CAO
If I could elaborate on that, Ian, it's a really normalized sort of an industry (ph). As we just said (ph), well, around (ph) 10 to 15 million in Q3 last year; plus exchange hit us 20 to 25 million year-over-year. So normalized for those too if you are going to normalize for the gain. So if you normalize for those two, we have still double-digit growth.
Unidentified Audience Member
Baninter is on plan? I know you had some early (ph) wins on some of those credit fees (multiple speakers).
Rob Pitfield - EVP International Banking
The DR is slow right now. We think it will turn around. It is starting to do that right now. Our volumes have picked up very considerably in the last couple of quarters. But I think as Sabi has mentioned before, just (inaudible) from the fees we basically paid for the franchise. So it is all gravy. And it's a very different good franchise for us. It's a strong block of branches. It gives us the critical mass, and we will grow into that franchise I think the way that Mexico has.
Unidentified Audience Member
Any general comments, Rick and Rob, on the potential for acquisitions? What are you see out there? Is there any movement at all?
Rick Waugh - President and CEO
There is a continue (inaudible). But there is a continual flow of opportunities. If anything, the opportunities are -- I would say continued flow is a perfectly (ph) good description of it. There is a lot that doesn't fit because we are out looking for new countries. We will look to the central region. Central America region is an area with perhaps maybe a new country, but it would be sort of as an extension of something we are doing. So we are active.
Having said that, we said the other day at a meeting, bold but disciplined. We feel we will just take our time. But we will definitely move ahead. So I am comfortable with the flow, and we're actively looking; have looked at several; bid on several; won a couple; lost a couple.
Rob Pitfield - EVP International Banking
We think we will be able to build out that franchise in those areas.
Unidentified Audience Member
The view on the U.S. expansion, is that unchanged?
Unidentified Company Representative
Yes, it's the same. I haven't seen anything really to fundamentally change my opinion that we would obviously watch what's going on down there. But in terms of the thought before the entry levels, the high operating cost, the competitiveness, the environment down there, I don't see any rush to do. So no changes, no.
Unidentified Audience Member
Maybe it's a better question to ask an economist, but I can't help but start getting worried with $70 oil here. We talked a little bit about that, but I just was wondering what sort of mechanisms go through your mind, either from a credit perspective or even a revenue perspective if this continues here and we go higher? We have seen some -- I think I have read three articles in the last week about $100 oil. Is there anything that you can do right now to hedge yourself against the potential impact? How do you think of it, as a management team, about this potential factor?
Bob Chisholm - Vice Chairman Domestic Banking
Well, once you handle the sort of the credit side of it, because we talked about it again in the last couple of days, then I will fix on (ph) revenue or David (multiple speakers).
Warren Walker - EVP Global Risk Management
It is an issue that we watch closely, Steve. We do modeling to take a look at the perspective and potential impact on our portfolio overall. So we take a top-down approach to modeling potential impacts of various oil prices. The concern is always not so much the absolute level of the oil price; rather, the pace at which it changes.
Within a reasonable range, companies and consumers can adjust to higher oil prices. If they increase too rapidly businesses tend to lose the capacity to quickly and easily pass on those price increases, because they're locked in on the supply side or on the sell slide.
So we model it top-down across our whole portfolio. We look at six specific industries that would be fairly easy to identify, that would have a further major impact. And we take a look at what prospective downgrades in those industries might do to the overall general level portfolio quality.
At the same time we do a bottom-up process, which involves taking a look at companies in particular in those six industries that we think are most susceptible to energy price shocks. It's not just energy prices, but rather it is also impact of changes in derivative prices. For example, resins in the plastics industry and that type of other impact that might not be as obvious as the immediate energy price increase.
So we look at this customer by customer, and we do a sensitivity analysis when we do the credit analysis to try and determine what impact there might be with that customer given a range of potential outcomes. As I say we're confident that we have got a monitoring mechanism in place to know who would be most impacted, what the implications would be. We're satisfied that the financial resources of those firms are sufficient to weather initially a 12-month shock, and then beyond; because of course oil prices have gone up and they have also come down.
I recall several years ago, no one would have thought we would have $11 oil and we did. I am not suggesting it is going back to $11, other than to suggest that there could be considerable volatility. So from a credit perspective we think we have it in hand.
Rick Waugh - President and CEO
This process, as Warren articulated, identifies particular names at the end of the day, which will come out of the process. We have downgraded the rating and what have you. Then we will take a specific look at it, as to what an action plan would be. Do we have to mitigate the risk? Do we want to insure the risk? Do we just have to monitor a lot closely?
There is a lot of variables goes into that thing. So it is specifically managed in that. As the question came up in Generals, (ph) that was one of the issues about the General. For what is in the portfolio, we don't know what is going to hit us. We are looking hard.
I think the manufacturing base in central Canada is obviously -- that input, input prices will have some effect. Good companies will survive it, and they will be able to get some price pass on and what have you. You know inflation is benign, so there can be some perhaps push up on this strong consumer demand on prices. But we will have to see how that one plays out. That is a sort of 10,000-foot analysis of that one. So we're looking at it and again we don't see specific distress signs there. But we cannot ignore the fact of $70 oil.
On the revenue side, and you know our timing on Waterous was just great. Absolutely great. Must have seen it coming and what have you. But we have specifically earmarked energy, oil and gas, pipelines, and what have you as one of our core competencies. We have building on it for a number of years. It includes lending; it includes M&A; it includes the whole derivatives and whatever. Our spot lending in oil and gas and pipelines year-over-year is showing very significant increases. So in the whole portfolio there's other things we are doing which offset.
So we're seeing it in loan demand; we're seeing it in M&A activity; we're seeing it in capital markets activity. We are in Houston, we are in Calgary, we are in London, and we're in Mexico, and that is an energy focus. So we have some offsets. That is again -- how does that come into profitability. I think 2006 we will have offsets, and we see some signs of that right now. Waterous is -- they are in -- they are not only a North American top-notch, they are world. And we were very encouraged when they decided to partner up with us.
Unidentified Audience Member
You're Canada's biggest lender for fleets. Your floor planning and whatnot, you're quite large there, and you're big I think -- certainly in Mexico it is something where you are growing. Is that something that you look at a little bit more critically at this point? Or is that still too early? We haven't seen any sort of --?
Rick Waugh - President and CEO
Related to the Canadian oil and gas (ph), right? We did an analysis at one of our committees; and actually Warren Jestin, our Chief Economist, presented it. I can get you a copy of it, where he showed that in consumer demand the effect of a price in gas or oil, in terms of your price of operating a car or a vehicle, comparing it to the cost of licenses, fees, insurance, maintenance, and whatever. It is not as significant a cost and not a driver on purchases, which may explain why auto lending is still strong. It is obviously price discounting and what have you.
But consumer preferences -- now the oil price last month has really gone up, but it's been going for a while. So it is only one factor in a consumer's purchase. We can actually quantify it, in that it is a lot less significant than you think. That analysis is available to anybody who wants to see it. I thought it was quite enlightening.
Bob Chisholm - Vice Chairman Domestic Banking
On the floor planning and that, we have very tight controls and very experienced staff that we control that with, Steve. We have never really lost any significant money in that area. In the end consumer side, what really drives the consumer is employment. That is the number you should watch.
Our delinquency and numbers are in very good shape. What caused it -- unlike the United States, perhaps, where there's certain inducement to borrow money because of the tax situation -- in Canada, Canadian consumers some might say they are a bit overborrowed today, but the real essence of the credit risk is in the employment numbers. As long as people work and they need a place to live, they will pay their mortgage. And they also need to get to work; they will pay for their car loan.
Those are the key things from our perspective, and we are seeing very good delinquency numbers and strong growth. We just got a report from J.D. Power that showed our whole automotive lending from the dealer side; and that was rated number one in Canada from a customer satisfaction point of view.
Unidentified Audience Member
One more for you. The subprime mortgage lending, have you done any work on the? I know you were looking at it.
Bob Chisholm - Vice Chairman Domestic Banking
We're still doing some work on it. I'd prefer to think of that as near prime. It is an area that we think we can make some -- get some growth in. We're looking at it quite seriously. But it is still -- still we will (ph) see a small part of our total consumer lending, which is basically a strong (ph) client based lending.
Unidentified Company Representative
Are there any more questions on the phone?
Operator
Jamie Keating from RBC Capital Markets.
Jamie Keating - Analyst
For Bob, if possible. I am looking at the very high volume gains in the domestic business. Obviously favorable. But trying to square that with the revenue growth, which I think is at the low end of the Tier range again this quarter. I am just trying to square the two concepts and think about going forward whether this is sustainable.
Bob Chisholm - Vice Chairman Domestic Banking
I think, Jamie, the revenue growth, 5% quarter-on-quarter, year-over-year, is I think right in the middle of the pack of the TNC (ph) business of the peer group. As far as the asset growth, we have had strong asset growth in average assets; but also our spot assets are up quite a bit as well. So that bodes well for the future, that our base is higher going into Q4 into next year.
So our revenue growth has been strong. Our margins have been flat. So the growth in the asset base is translated directly into net interest income. We have taken a little bit of market share, certainly I think, what (ph), 14 basis points year-over-year on the asset side and about 3 to 4 basis points on the deposit area. So we are showing solid growth across the board. Not spectacular growth, but solid growth. I think all the troops are doing a great job up there, and our value proposition is evident from our growth in market share.
Unidentified Audience Member
Just quickly, Bob, if I could ask you. The expense line, we can't really prove without the detail whether you're the low-cost producer anymore here. I just wonder if you can just comment on that how you look on that basis? Because you probably can see those numbers.
Bob Chisholm - Vice Chairman Domestic Banking
I don't think the productivity ratio for the domestic bank was steady quarter-over-quarter. I think it was around -- the problem is, Jamie, as you know, watching it down below the all-bank numbers the productivity ratio depends a lot on how net office costs are allocated. So our focus is in driving down our absolute costs and not necessarily working on the formula that distributes them around to various business lines. But our productivity ratio in the domestic bank I think in the quarter was pretty flat quarter-over-quarter.
Sabi Marwah - Vice Chairman and CAO
(indiscernible) on the expenses, Jamie, expenses for the domestic bank are really up only 8 million. So it's not really a big growth.
Unidentified Audience Member
True. Thanks, Sabi.
Sabi Marwah - Vice Chairman and CAO
And the bulk of that growth is really coming in appraisal and legal and acquisition (inaudible) acquisition expenses or mortgages. So if you normalize the number, basically flat.
Jamie Keating - Analyst
Is there anything in the quarter with the professional fees and so on that we should know? They seem to be up a bit.
Sabi Marwah - Vice Chairman and CAO
I think professional fees tend to be -- I think, the one variable that tends to move around there is litigation provisions. Those we evaluate them on an item by item basis, and there is probably some adjustment upward this quarter.
Jamie Keating - Analyst
Thank you.
Operator
Susan Cohen from Dundee Securities.
Susan Cohen - Analyst
Mortgage growth in Mexico was very strong at the 28%. How comfortable are you with this level of growth continuing?
Secondly, how comfortable are you with this high growth rate not potentially resulting in problem loans down the road?
Rob Pitfield - EVP International Banking
In Mexico, as you probably well know, there is a huge demand for housing. So we should see significant growth in mortgages in housing for Mexico for quite a while. I think you are also going to see the bank get better at mortgage lending. A significant percentage of that business was traditionally done with Safoles (ph). So the banking part of that business I think will increase as well. So that is the second.
The third is that we have been strong in generating mortgages domestically. We brought that into the Caribbean. We have been strong in that. Those core competencies we have taken into the market in Mexico. So vis-a-vis our market share, we're actually growing market share at a very significant rate against very good competitors. So all in all, we think the market is naturally growing in terms of just housing itself; and that that is quite sustainable. We think that our core competency in terms of good basic consumer lending in this area is strong.
As far as the credit itself, our delinquency continues to go down. So the portfolio itself we think is strong. Our credit models as we get to know Mexico are becoming more and more refined. So in all those areas, we are pretty comfortable.
Rick Waugh - President and CEO
The competition -- I was just down there -- in Mexico right now, in the mortgages -- and listen, we've got some very good competitors, and they have seen our success, and they are not going to stand still. Having said that, the competition, this is a healthy sign. It's not on the loan underwriting itself. It is on the spread. Now we've got high spreads down there.
So, so far, it is more on pricing issues from what we can see, than we are under any competitive threat on underwriting. As Rob said, we're using the same standards, the debt service ratio, loan to equity, and what have you. We are able to maintain those certainly as of now. And with the demand versus supply there, that is (inaudible).
Unidentified Company Representative
We have time for one more question.
Operator
Gentlemen, there are no further questions at this time from the phone lines. Please continue.
Unidentified Audience Member
Just a couple of quick items. Just on the other expense line, is there anything unique in there this quarter?
Sabi Marwah - Vice Chairman and CAO
I think probably litigation increases (inaudible) as well as (multiple speakers).
Unidentified Audience Member
Then the component of Shinsei in the equity gains?
Warren Walker - EVP Global Risk Management
Unrealized? Approximately 100 million I think at quarter end. It's actually risen somewhat since then.
Unidentified Audience Member
Just finally, Rick, perhaps to finish off, strategically would you be unhappy over the next three to five years if revenues simply built out of mid single digit expenses, you maintain a good 200, 300 basis point gap, and not just kind of steady-state, you have p-sales (ph) bounce up a little bit. But that is what the bank looked like in three to five years; your ROE is obviously going to come down, because your capital generation is 450, 500 a quarter. Would that be okay strategically for The Bank of Nova Scotia?
Rick Waugh - President and CEO
No.
Unidentified Audience Member
So what should it be differently than that?
Rick Waugh - President and CEO
We debate and we can debate what the growth rates are in the economies we're doing business with. We are -- our international strategy is for higher growth rates. So a lot of the developing countries need to sustain their models, and based on their demographics 5 or 6 growth rate, percent growth from (ph) GNP, versus say a run rate here in Canada, say, it's 2 or 3%. So if we execute the way we're supposed to execute, we're going to capture some of that. We will have some mitigating against probably a stronger Canadian dollar, which will off set that. So that is one point.
Secondly, we do have a strong capital position. While we are going to be disciplined and we're also going to be broadbased in how we distribute our capital dividends and stock buybacks, we're obviously -- and we have said this to you -- our priority is to use a reasonable amount of that capital for growth.
So we're trying to fit (ph) growth markets, and we try about (ph) our third option. In Canada we have not given up on growth. It is a lot tougher. We have gaps in our product line that we have to build. So again, we're not giving specific governance as to what rates are, because there are these relative terms. But as a minimum we anticipate good relative growth to whatever other alternatives there are and save that (ph) in the financial sector.
And secondly, if we keep our core competencies and what have you, I think we should -- it is hard to see a little inflation returning to those strong double-digit growth rates and that. And inflation as we have seen this say (ph) , or the economists have denied, so there will be a challenge to get the double-digits. But we certainly have not given up on that, and we're not going to give up on it.
Unidentified Company Representative
Thank you for joining us this afternoon. We will see you next quarter.
Operator
Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.