Bank of Nova Scotia (BNS) 2005 Q4 法說會逐字稿

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  • Luc Vanneste - CFO

  • Good afternoon, and welcome to the presentation of Scotiabank's year-end results. I'm Luc Vanneste, Executive Vice President and Chief Financial Officer. With us today in Toronto are Rick Waugh, President and Chief Executive Officer; Bob Chisholm, Vice Chairman, Domestic Banking; Sabi Marwah, Vice Chairman and Chief Administrative Officer; Bob Brooks, Senior Executive Vice President and Group Treasurer; Rob Pitfield, Executive Vice President, International. And joining us for the first time today on the call is John Schumacher, Co-Head and Co-CEO of Scotia Capital and Head of Global Capital Markets.

  • Unfortunately, Steve McDonald, Co-Head and Co-CEO of Scotia Capital and Head of Global Corporate and Investment Banking, is out of the country and unable to join us today.

  • Also joining us for the first time is Brian Porter, our Chief Risk Officer. Welcome, John and Brian.

  • Rick will lead with the highlights of our results. I will follow with a review of the financials and then a review of credit quality by Brian. And finally, Rick will provide some outlook comments. We will then be glad to take your questions.

  • Before we start, I would like to refer you to Slide 2 of our presentation, which contains Scotiabank's caution regarding forward-looking statements. Rick, over to you.

  • Rick Waugh - President & CEO

  • Well, thank you very much, Luc. I am very pleased to report record full-year results and another solid quarter. For the year, our earnings per share were 3.15 versus 2.82 a year ago, that's an increase of 12%. Our return on equity also rose to a strong 20.9%; that's up from 19.9 in 2004.

  • And looking at our fourth-quarter results, earnings per share was $0.80; that's an increase of 16% from the same period last year. Again, return on equity was strong at 20.5%, up 18.8% from the fourth quarter of '04.

  • Our strong execution and strategy of diversifying across our three business lines, all of which had good growth, underpinned our record results for this year. This broad-based growth allowed us to earn through the impact of the narrow domestic interest margins and the stronger Canadian dollar.

  • We continue to have strong capital ratios, with a tangible common equity ratio of 9.3%, the highest among the Canadian banks. Our strong capital position has allowed us to provide shareholders with two dividend increases this year and today, we announced a further increase of $0.02 to $0.36 per common share for the first quarter of '06. In summary, we had a record year and a solid quarter.

  • This next slide shows the strength of our major business lines. This year, we saw again strong growth across the board, 13% in domestic, 12% in Scotia Capital, 12% in International. Earnings in domestic banks were up 13%, as I said. We saw significant asset growth in mortgages and other retail lending businesses. We also had a record year in wealth management, driven by excellent results in retail brokerage.

  • Scotia Capital, earnings increased 12% over last year, reflecting record trading revenues and a continued low level of credit losses. International Banking performed well, up 12%. Strong underlying asset growth in Mexico and the Caribbean contributed to another successful year for that division. These international operations are a key differentiator that continues to set us apart from our domestic competition.

  • The next slide shows our record of consistent earnings growth over the past decade. Since 1995, earnings have grown an annual rate of 15%, an excellent record. At the core of this success is our focus on diversification to drive sustainable growth, which we believe gives us a unique advantage. Our record of consistent earnings growth has been more than matched by our record of consistent debit end growth. We had two increases this year and dividends are up 20% on the year and have more than doubled in the past four years. And all of this without compromising our capital strength or our ability to reinvest in our businesses. An overall excellent track record on dividend.

  • Looking at how we did against the targets we set for ourselves at the beginning of the year, all were exceeded. Return on equity was 20.9% for the year, ahead of the 17 to 20% target range. Earnings per share growth was 12%, above our target of 5 to 10%. And our productivity ratio was 56.3 for the year, well below 58%. And of course, we continue to have amongst the strongest capital ratios of the major Canadian banks, which gives us tremendous flexibility to pursue additional growth opportunities going forward.

  • But I will have more to say about our growth prospects after Luc and Brian will have gone over our performance in more detail. So I will pass it over to Luc to go through the numbers.

  • Luc Vanneste - CFO

  • Thanks, Rick. I will be beginning on Slide 10. The slide highlights our revenue growth, an increase of 4% on a reported basis. Excluding the negative impact of foreign currency translation, revenues were up a very solid 7%. Both net interest income and other income grew. They were up 6% and 8%, respectively. As Rick said, this increase in revenues was driven by very strong asset growth, particularly in domestic, which was up 10% this year. In fact, average assets in domestic are up 22% over the past two years. As well, international had a very good underlying asset growth this year, up 8%. We also had growth in assets in Scotia Capital, reflecting strong capital markets activities, which more than offset the reduction in corporate lending volumes.

  • Now, turning to the margin on Slide 10. Looking at the right-handed side, you can see that the margin is down 10 basis points year over year for the reasons that we have talked about in prior quarters, namely customer preference for lower yielding variable rate mortgages, the flattening of the yield curve, and retail asset growth greater than retail deposit growth with the difference being funded by more expensive wholesale deposits. On the quarter, the margin was unchanged. The Canadian currency margin was up slightly due to the impact of HCG 13 (ph).

  • The "Other Income" component of revenue is shown on Slide 13. On the year, Other Income is up 8% after adjusting for FOREX. On a reported basis, you can see the main drivers on the right-hand side. By trading revenues, up 118 million or 25%. Very solid increases in retail brokerage, 92 million or 27%. Deposit and payment services up 55 million. Mutual funds up 22 million. And card revenues up 20 million.

  • Investment banking revenues also increased, up 32 million, reflecting the acquisition of Waterous & Co., along with strong new issue revenue and record institutional brokerage fees. Although securities gains were very strong this year, they were 63 million below the record levels of last year. We also had lower credit fees, reflecting the decline in corporate lending volumes, as well as a $32 million decrease in securitization revenues.

  • On the far left compared to last quarter, other income was up 26 million, a gain mainly from higher retail brokerage and investment banking revenues.

  • Now turning to our expenses on Slide 14. On the right, reported expenses increased 3% for the year and remain well controlled. The largest increase was in salaries and performance-based compensation, up 59 million in total, reflecting the bank's strong overall performance, including excellent results in retail brokerage and trading. You can see on this slide the changes in the various categories from last year. The increase in the Other category of 79 million was comprised of a number of different items, including litigation expense, charitable donation, cash shorts and employee training.

  • On the far left, compared to Q3, reported expenses were up 62 million. In Q4, we normally see a bump up in our expenses, partly seasonal and partly year-end adjustments. The categories that increased were salaries, which were up 21 million; increased advertising and business development expenses, up 23 million; and higher volume-driven appraisal and acquisition fees. Partly offsetting were lower stock and performance-based compensation and a decrease in pension and employee benefit costs.

  • Slide 15 shows our productivity ratio. At 56.3% through the year, it improved slightly from last year. We continue to lead the Canadian banks in this area.

  • Turning to Slide 16, as Rick mentioned, capital strength remains a big plus for us and gives us flexibility on several fronts. The tier one ratio was 11.1% this quarter, down from last year but unchanged from the previous quarter. Even more important, the tangible common equity ratio remains very strong, at 9.3%, the best of major Canadian banks.

  • Turning to Slide 17, unrealized gains on investment securities. Our surplus remains over $1 billion at the year-end, about the same level as last quarter and last year. And that is after realizing $414 million in gains during the year. I would add that the recent government decision regarding dividend and income trust taxation, which appears to be giving a boost to equity prices, has added to the surplus in Q1.

  • Turning now to the business line results, starting on Slide 19. Looking first at the quarterly results, domestic had another very good quarter, following a very strong Q3 and is up significantly 31% from Q4 last year. International rose 9% over last year but was down versus Q3, and I will have more to say on this in a minute. Scotia Capital was downed marginally from last year but up strongly from Q3. The Other segment was up over both prior periods.

  • Looking at each of the business lines in more detail, first on Slide 20. For the fourth quarter, domestic banking had earnings of 326 million. As I mentioned, a substantial increase of 78 million or 31% from Q4 last year and 2% above Q3 '05. ROE was very strong at 30%. Revenues were up 10% year-over-year and 3% quarter over quarter. Expenses rose moderately, up just 3% from last year, reflecting higher performance-based compensation, in line with stronger retail brokerage revenues. Quarter over quarter, expenses rose 5%, with increases in a number of categories, including advertising and employee training. Overall, credit quality remained stable with specific provisions of 69 million relatively unchanged from the same period last year and the prior quarter.

  • Looking more closely at domestic revenues, we continue to see robust growth in retail lending, with volume growth of 9% in residential mortgages and 15% in revolving credit compared to last year. Good growth in our GIC portfolio drove personal deposit growth of 5%. The strong performance was offset by compression in the interest margin over the past year for the reasons I mentioned earlier. Non-interest revenue was up an impressive 14% year-over-year on the strength of improved wealth management results. Both retail brokerage and mutual fund revenues were higher. As well, there were volume-based increases in transaction service fees and card revenues. Quarter over quarter, total revenues rose 3%, again reflecting good asset growth, as well as increased brokerage and mutual fund fees.

  • Moving now to International on Slide 22. This quarter, international net income was 174 million, up 10% from last year, despite the negative foreign currency translation impact of $12 million. This improvement was due primarily to increased net interest income in the Caribbean and Mexico and reduced loan losses in the Caribbean. Compared to last quarter, earnings declined $60 million. Gains on the sale of emerging market securities were down 38 million. As well, expenses rose, reflecting higher marketing costs and increased performance-based compensation in Mexico this quarter.

  • In the Caribbean and Central America, earnings rose, driven primarily by higher asset volumes, wider margins and lower loan losses.

  • In Latin America, revenues were up a substantial 17% year-over-year, due largely to a higher contribution from Scotiabank Inverlat.

  • Taking a closer look at Inverlat on Slide 23, its contribution was 86 million in Q4 and ROE was strong at 24%. Despite the impact of foreign currency translation, we continued to see strong revenue growth. Underlying revenues were up 21% year-over-year. This increase was driven by strong growth in retail asset volumes. Mortgages were up 26% and credit cards were up 43% from last year. As I mentioned, expenses were up in Q4, driven primarily by higher marketing and business development expenses that have helped to drive our revenues. Overall, we continue to be pleased with Inverlat's success and we are pursuing both organic growth and acquisition opportunities in Mexico.

  • Turning to Slide 24, Scotia Capital had another good quarter with net income of 229 million. This was downed slightly from the same quarter last year, as higher revenues, primarily from derivatives, were offset by lower net loan loss recoveries and lower tax benefits from certain tax structured transactions. Compared to last quarter, earnings were up 15%, which reflected higher revenues, partly from Scotia Waterous, higher loan loss recoveries in Canada and the U.S. and lower expenses. Return on equity was very strong at 27%. Total revenues were up 11% year over year, primarily in global trading, which increased a substantial 41% due to growth in derivatives. There were also slightly higher revenues in Canada as the contribution from Scotia Waterous more than offset impact of lower lending revenues. In the U.S. and Europe, revenues were basically unchanged. Quarter over quarter, revenues increased 4% due to higher realized securities gains in the U.S. Expenses remained well controlled and were down 2% year over year and 7% from the prior quarter. Performance-based compensation and salaries and benefits were lower, partly offset by an increase in severance-related expenses. Credit quality remained stable and Brian will cover this in more detail in a minute.

  • 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 74 million compared to 57 million last year and 22 million from the previous quarter. The year-over-year increase was due mainly to higher net gains on equity investments. The quarter-over-quarter increase was due mainly to the 45 million reversal of the general allowance this quarter.

  • I will now hand it over to Brian to talk about risk management.

  • Brian Porter - Chief Risk officer

  • Thank you, Luc. I will be starting on Slide 27. The story this year was continued improvement in credit quality. Specific provisions for 2005 were 275 million, a substantial decrease of 215 million from last year. Compared to last quarter, specific provisions fell $4 million to 81 million. Net impaired loans after deducting the specific allowance, were 681 million at year end, down 198 million from the same quarter last year, but up 108 million from Q3. Also this quarter, the continuation of positive trends in economic and business conditions allowed us to reduce the general allowance for credit losses by 45 million.

  • Slide 28 shows the breakdown of loan loss provisions by business line. First on the right, 2005 compared to 2004. Domestic banking provisions were 274 million, down from 317 million last year. This decrease occurred entirely in the commercial portfolio. Overall, credit quality remained strong in both the retail and commercial portfolios. In international, provisions were 70 million this year, the same as a year ago. Lower level of provisioning in the Caribbean and Asia were offset by higher loan losses in Mexico and Chile. The major improvement year-over-year was in Scotia Capital, where provisions fell 177 million. The portfolio had net loan loss recoveries of 71 million in 2005, mainly in the U.S. portfolio.

  • On the far left, provisions for the quarter fell $4 million. Scotia Capital had 7 million in net loan loss recoveries in the quarter.

  • Slide 29 shows the positive trend in specific provisions over the past few years. Provisions in the domestic and international bank are basically stable over the past three years and remain very reasonable, given the asset growth we are experiencing in these business lines. The improvement has almost entirely been in Scotia Capital, where provisions have declined from 549 million in 2003 to a 71 million net recovery this year. This change reflects the recovery in the U.S. credit markets and the results of actions we took to improve the quality of the portfolio.

  • Slide 30 shows the positive trend in both gross and net impaired loans. As you can see, gross impaired loans have decreased more than 1.4 billion over the past two years. Similarly, net impaired loans have come down by more than 800 million during the same period.

  • The next slide shows the net impaired formations by business line in the quarter. Net formations in domestic retail were 89 million, up from the low levels last quarter. The increase reflects strong volume growth in our portfolio. Underlying credit trends remain stable. Domestic commercial had net classifications of 46 million, due primarily to the classification of two accounts. International banking had net formations of 47 million, which remain reasonable given the size and growth of the portfolio. Scotia Capital had net formations of 57 million, which included the classification of one large account in Europe, an account in the entertainment and leisure sector, that we have been monitoring for some time and decided to classify this quarter. Overall, we had net classifications of 239 million this quarter.

  • Turning to market risk on Slide 32, we have fairly low variability of trading revenue, and continue to run this business with very low risk. In fact, more than 95% of the trading days this year and 89% of the trading days this quarter had positive results.

  • On the next slide are the VAR trends. As you can see, our one-day VAR averaged 7.6 million this year compared to 8.8 million last year, with no single loss day exceeding the one day VAR. For the quarter, the one-day VAR was 7.5 million, down from 7.7 in the third quarter.

  • In summary, the biggest contributor to the credit improvement both in net impaired loans and loan loss provisions was Scotia Capital. Credit quality remains good in domestic and our international portfolios.

  • For the past two years, we have had a high level of loan loss recoveries in the corporate lending portfolio due to favorable credit conditions. However, looking forward, we do not believe this level of recoveries is sustainable. As a result, we would expect specific provisions in 2006 to trend higher from the low levels this year.

  • On the subject of the general allowance, as I mentioned, we had a 45 million reduction this quarter. If the positive trends in economic and business conditions, credit conditions, continue, there may be further reductions in 2006. In terms of market risk, it remains very well-controlled. I will now turn it back to Rick.

  • Rick Waugh - President & CEO

  • Thanks very much, Brian. Well, in summary, I think you can see 2005 was a solid year, a record year for Scotiabank and I know it's one that our whole management team feels very proud and very good about.

  • Well we have to look ahead now to 2006 at our plans and our priorities, and again, we believe we are going to expect to deliver record results yet again. To do this, we have identified three key priorities for the year. The first, sustainable revenue growth, driving many revenue-based initiatives, both in Canada and internationally will be necessary for us to achieve our objectives. The second priority is acquisitions. The potential for increased growth from acquisitions remains significant. And the third, effectively managing and allocating our capital. As one of the world's best capitalized financial institutions, we have a good advantage here. We are well positioned to invest in growth organically and through acquisitions, and it is an advantage that we intend to use. Each business line has multiple opportunities to deliver on these priorities which I have set out in 2006 and over the next several years. So let's look at them.

  • In domestic, Bob Chisholm and his team outlined this for you at our recent and highly successful domestic banking conference. We will grow our businesses with existing customers, increasing the share of wallet by improving our cross-sell, particularly focusing on serving the emerging affluent investors segment. And we will also acquire new customers, reaching out to those Canadians who currently don't have a relationship with us. We are adding new branch locations as well as new branch formats. This year, we will open up to 20 net new branches. This is the first time since 1998 and as well, we're going to increase the number of our financial advisers in our branches. We are also going to grow wealth management organically and if possible through acquisitions and we are making wealth management a top priority.

  • In 2006, we will complete a major restructuring of our commercial bank in Canada, which will allow us to leverage and grow revenue. And finally, we will continue to look for opportunities to grow through strategic alliances and acquisitions, such as the recent agreement to purchase the Canadian operations of the National Bank of Greece. Very simply, our priorities in the domestic banking in Canada for 2006 are to capitalize on our growing customer base; ensure retention of existing businesses, the mortgage rollovers, the deposits; to cross-sell more of our products to these customers; and to expand our delivery channels, branches, brokers, ATMs. This will enable the domestic bank to continue to grow successfully.

  • Turning to international banking, a unique platform for our growth, we continue to increase assets and continue to grow profits, earning through, as I said earlier, the most significant appreciation of the Canadian dollar over the last two years that we have seen in decades.

  • In 2006, we will continue to pursue several revenue growth opportunities. We will do this through the continued implementation of our proven sales and service platform that ensures we provide always the right products, the services and solutions for our customers. As well, we will continue to expand our distribution network by adding branches in Mexico and indeed throughout all the Americas. We will also continue to seek acquisitions that will build on our existing platforms in our targeted countries. Our priority is previously (ph) banking in our existing markets where we can build scale. This means the Americas. Although we will consider opportunities in Asia, given the long-term potential in markets like China and India. While we will focus primarily on add-ons in our existing markets, such as our recent acquisition in El Salvador this year.

  • These in-country acquisitions build on existing platforms, provide us with revenue and expense synergies and allow us to reach or surpass with our minimum target market share of 10%.

  • Finally, we will make additional progress and productivity by building in efficiencies, continuing the roll-out and refinement of technological enhancements, our shared service initiative, we will be able to deliver more economics of scale across the division, yet at the same time significantly freeing up staff to focus on sales and improving customer services.

  • And finally, at Scotia Capital, we intend to maintain a top three position for our products and services here in Canada. We also will be pursuing acquisitions if we can in select niche markets, similar to the recent transaction with Waterous & Co., now Scotia Waterous. We will continue to actively manage credit and market risk. This means focusing on both relationships and transactional business that meet our risk-adjusted return hurdles yet ensuring the prudent operational and reputational risk is maintained. We have a great client base to build on in Canada, in the net United States, Mexico, the rest of the Americas and Europe. And in these markets, we will be broadening our product line in fixed income, foreign exchange, derivatives, and advisory services.

  • Most significant on this front is the integration of our Mexican wholesale business into Scotia Capital. This will allow us to leverage our unique NAFTA platform, with customers in Mexico, United States and Canada and produce several unique revenue opportunities.

  • So hopefully you can see our three growth platforms not only provide us and have provided us with significant earnings this year, but each provide us with many opportunities for growth next year and beyond, and opportunities which we intend to capitalize on. Therefore, looking to our 2006, to our performance objectives, we are maintaining or increasing these objectives for 2006.

  • Our earnings per share growth objective is 5 to 10%. We are increasing our return on equity to a range of 18 to 22% and we are still planning on a productivity ratio below 58%. And of course, because of this high level of profitability that we generate, we will continue to maintain strong capital ratios and credit ratios.

  • These objectives are to ensure that we balance and have diversification, both in terms of short-term and long-term results but also balanced amongst our business lines and in balancing the sound but shareholder friendly capital management objectives.

  • So to conclude, we had a record year in 2005. Obviously, challenges remain, but we are confident we will continue our history of solid growth and we will meet these objectives, thereby delivering solid, long-term value to our shareholders and our stakeholders, and meeting all the needs of our stakeholders; our customers, to be a great place to bank; our employees, to be great place to work, as well as to contribute to the well-being of our communities in which we operate.

  • And with that, we will now open up to questions and hand it back to Luc to monitor the meeting.

  • Luc Vanneste - CFO

  • Thank you, Rick. Questions? Michael?

  • Michael Goldberg - Analyst

  • A couple of questions, first of all starting off, can you just give a little bit more elaboration on the expense increases in the international segment? It looks like this is a factor that not only affected Mexico -- and I understand that there was some startup expenses on the card there -- but also other countries, international.

  • Luc Vanneste - CFO

  • The biggest expenses outside of Mexico were Comercio, 28 million plus 5 million in integration. And then when you add on Mexico, what we really wanted to do was build up our rewards program. It was an opportunity with Huera (ph), which is one of the better rewards programs in Mexico to tie that up. We also tied in a program with Mexicana, the airlines. We wanted to make a splash. Much of the expense was incurred in this last quarter, 25 million overall which is -- 25 to 30 which is largely the campaign, which would have been 20 to 25, plus the sales commissions related costs to that. Plus we are going to launch an insurance program tied in to auto, not related (ph) to loan and we wanted to beef up our call centers. And just the sheer volume of card applications that were going through it, we had to build up our support for that. So all in all, it was a big bunch of expense that we bit off that quarter.

  • Overall, the campaign has been very successful. We were targeting like 90,000 cards. It looks like we will come in over that, and we also wanted to position our credit card program, which is one of our weaker loan offerings in Mexico on a go-forward basis and protect it. So, that is essentially where the costs come in.

  • Michael Goldberg - Analyst

  • So if I hear you right, there was about 25 to 30 million incurred in the quarter, largely in relation to the card loyalty program; is that correct?

  • Luc Vanneste - CFO

  • Yes.

  • Michael Goldberg - Analyst

  • Can I go with another question? I guess one other question, you indicated that stock-based comp was lower this quarter. Can you actually quantify what it would have been?

  • Luc Vanneste - CFO

  • What was the sort of difference in the stock price quarter over quarter -- have you got -- I don't have the numbers right in front of me.

  • Unidentified Company Representative

  • I think the stock-based comp, Michael, across the bank, keep in mind the banks share went up to a lesser extent in Q4 than in Q3 and even to a lesser extent than Q4 last year. So stock-based expense is around 38 million last quarter, 42 this quarter and 48 last year.

  • Michael Goldberg - Analyst

  • So it's 42 this quarter?

  • Unidentified Company Representative

  • That's correct. And the reason why it's slightly higher than last quarter is because we hedged these -- the hedged is not as perfect as we would like it to be. So the hedge didn't move in exactly in tandem.

  • Michael Goldberg - Analyst

  • Okay, and final question for Brian Porter. You mentioned that there was one major account in Europe that was classified this quarter. Ballpark, can you give us an idea of what the size of that classification was gross?

  • Brian Porter - Chief Risk officer

  • Well this was an account that we've had in the portfolio for quite some time. We have been monitoring it very closely. As I said, it's in the leisure and entertainment sector. And we have been monitoring it quarter by quarter. We felt it prudent from a housekeeping perspective to classify it this past quarter. I'd prefer not to give you the exact details in terms of the size of the loan.

  • Michael Goldberg - Analyst

  • Was there any particular event that was a catalyst for --

  • Unidentified Company Representative

  • No, Michael. We have been watching the account really on a monthly basis and we sit down every quarter and look in terms of classifications. The results vary from month to month. We just felt it would be prudent to do it at this time.

  • Rick Waugh - President & CEO

  • Fred is looking more and more stressed all the time so we have to keep an eye on him.

  • Luc Vanneste - CFO

  • Next question?

  • Rick Waugh - President & CEO

  • That's particular credit, not credit in general, but particular.

  • Jim Bantis - Analyst

  • Jim Bantis, Credit Suisse First Boston. Looking at the credit, circling back there, net impaired loans, the highest level in a couple of quarters and bucking a trend relative to other banks as well, and particularly saw some net impaired formations in the retail and commercial area. Maybe Bobby can just give us a bit of a color, what has occurred there or is it relating to the acquisition?

  • Bob Chisholm - Vice Chairman, Domestic Banking

  • No, the acquisition hasn't closed yet, so. In the commercial, a couple of accounts that again were kind of the walking one that we decided to classify this quarter, not in the case of trend, au contraire, look at our numbers are quite a bit less than last year on the commercial side. In the retail side, we have had tremendous growth. Part of that growth has led to some increases in non-performings. Our losses are tremendous at 21 basis points. We expect that that will be a relatively good number going forward; I'm not forecasting next year precisely. So there's nothing to be concerned with other than we have had tremendous growth, 22% over the last two years.

  • In the summer, we put in a new collection system that's just settling down. So it threw up a couple of little extra non-performings, partly, we think, it has to because it's settling down. Part of it I think has a systemic that's being cleared out. But we haven't seen anything to cause us undue concern. So it's not a -- we don't believe it's a trend, it's just sheerly the size of the portfolio that we have.

  • Unidentified Company Representative

  • In fact, Jim, our delinquency levels were slightly down quarter over quarter. So (indiscernible).

  • Bob Chisholm - Vice Chairman, Domestic Banking

  • Yes, the broad base.

  • Jim Bantis - Analyst

  • I just want a follow-up question for John with respect to the wholesale operations. One of the numbers that hasn't really moved over the past couple of years is the underwriting revenue. It's been flat really around the 475 to 490 million, and that's despite the acquisition and pretty robust underwriting environment in Canada. So just want to get a sense where you think the backlog is, where the Waterous acquisition is going to make an impact at this point?

  • John Schumacher - Co-head, Scotia Capital & Head, Global Markets

  • I guess with respect to Waterous, it's not really clear yet; it's very early days. We're hoping to get a lot of cross sell in other products out of that acquisition. So very hard to guess what it would be, but we are optimistic, but probably not appropriate to mention any numbers.

  • I think that's true about our underwriting generally. The pieces of that puzzle have moved around quite a bit. We have -- a couple years ago, had a very large number in the U.S. in our fixed income underwriting. The non-investment grade market tightened up a bit and that came down. Our domestic fixed income went up. The combination of the three, the fact that it's been relatively stable and consistent masks the stories (ph) underlying (inaudible) which are really market related and not controllable. I don't know if that answers your question?

  • Jim Bantis - Analyst

  • A little bit. With respect to the pipeline going forward --

  • Rick Waugh - President & CEO

  • Steve is not here, but the pipeline is -- and Brian of course has just transformed from that and Brian can add in. The pipeline is quite strong that we're seeing on the M&A activity and that trust, the whole issue in that, I think -- and Brian has got better hands-on on that -- but certainly the pipeline is as good as we have seen on certain parts of the business. Certainly, the loan underwriting pipeline is good. Our commitments are going up. Our utilizations haven't gone up but our committed lines have gone up, some of these bridges and acquisitions and just more and more, I think committed lines of credit are being granted. So that's pretty good. We have not seen though the utilization of these commitments as much as I would have liked to have seen on that part of the underwriting. Brian?

  • Brian Porter - Chief Risk officer

  • Yes, just on Scotia Waterous, this is the first full quarter of having Waterous in our numbers. The business is performing extremely well, as you would expect in this type of commodity environment for oil. Although it's an M&A business, so it tends to be lumpy in terms of fee recognition. The rest of the businesses, obviously, the income trust market is back in Canada. We have a dominant position in terms of issuance in that sector, so we will be able to benefit from that. But in terms of the Canadian businesses, they are all performing well. The pipeline of M&A transactions is looking very good and the pipeline on the issuance side is very solid.

  • Luc Vanneste - CFO

  • Next question? Quentin?

  • Quentin Broad - Analyst

  • Quentin Broad, CIBC World Markets. I just wanted to look at the 2006 objectives, Rick. First off, the pace number, that's a 5 to 10% just based off of? What number is that? (multiple speakers)

  • Brian Porter - Chief Risk officer

  • (multiple speakers) GAAP earnings.

  • Rick Waugh - President & CEO

  • That's a growth, so that's on our -- (multiple speakers) -- 315 is the (multiple speakers).

  • Unidentified Company Representative

  • (multiple speakers) we don't just (indiscernible).

  • Rick Waugh - President & CEO

  • We only use one number.

  • Quentin Broad - Analyst

  • Very good. If I use that number and I think about an 18% ROE off your base shareholders' equity ending, is it possible to get 5% earnings growth with an 18% ROE?

  • Luc Vanneste - CFO

  • It probably won't be higher than 18.

  • Rick Waugh - President & CEO

  • Eighteen to 22.

  • Quentin Broad - Analyst

  • Right, so, I'm just -- I'll go on to where you use the capital. You also said, Rick, you wanted to redeploy capital into your businesses. If you'll look at the capital allocation over the course of the last three years, you've taken it out of Scotia Capital and moved it over to the other businesses almost dollar for dollar, it looks like the exchanges have been. Like this year, 800 million came out of Scotia Capital, it would appear, using our ROEs and that amount went into Scotia and the international side domestic. So the earnings aren't getting put to work yet, it would appear. So, continuing on the tact of where you get this put to work, it has got to come I guess from acquisitions because unless you're going to continue or you're going to stop taking out of that Scotia Capital and you see clear opportunities there, but the trend has been continue to take it out. So is that trend going to stop or are there other issues that we are not seeing as part of the capital allocation inside the business?

  • Rick Waugh - President & CEO

  • First of all, the Scotia Capital my hope is actually it will take some more capital on the lending side of the business. As I said, we have had our commitments continually go up. As you know, Quentin, we stayed in that business. Our customer list in fact has grown. A number of our primary relationships has grown. What hasn't grown, especially on an averaging basis, although we're starting to see some signs of it, is the outstanding loans. So that will answer that part of your question on Scotia Capital. And as you know through our prior presentations, on our existing client base in Scotia Capital, all products in, we're earning 20% plus; that's with the costs out and what have you.

  • So given the size of that business and the number of relations we have, that has the potential of absorbing reasonable amounts of capital at high returns on equity. And so I think that's what -- again, back to our general -- we have three businesses and all of which I see as having growth and that will use, all of them, capital. And if they need more capital such as the Waterous acquisition in Scotia Capital, that will be available to them, and we will look at that on an A (ph) strategy.

  • Yes, the two other businesses are more long-tailed. One thing about Scotia Capital is market business; you can see it relatively quickly. The other ones are longer-tail and we are investing in those businesses. And we are investing in those businesses. You heard some of the International's initiatives in the fourth quarter, which are expense -- that's capital too and we are looking for longer term. We're balancing the short-term and long-term. And what these diversifications of businesses have done and again, our securities income has generated a lot of capital which we have reinvested, and continue. So it's this balancing which I referred to in my remarks of both the short-term and the long-term. At the same time, short-term, we're confident on these goals. And the high profitability that these businesses are maintaining, a 20% plus on each one of them, it does give us this ability to reinvest in these businesses with high returns on equity, and getting into capital management, to continue the dividend increases that we've historically done and have increased over the last few years. We see that continuing and share buybacks. And that's, by the way, the priority. The dividends have obviously become a little more attractive to our shareholders and we have to take that into consideration, but our priorities have been the same thing as you have asked, all of you, at these meetings before and whatever, is for internal growth generic and acquisition, dividends and then share buybacks, and that relationship and we use them all and we balance the use of them.

  • Quentin Broad - Analyst

  • So on the buybacks, finally, I think Peter (indiscernible) had a 2.1 times book, yet he wasn't going to be aggressive with buybacks, so 3 times book. How does -- mentioned buybacks have got to be way down the list? Or --

  • Rick Waugh - President & CEO

  • It's not. I think I said in priorities, it's third. Having said that, it needs to be balanced. We have dilution. We only had the Waterous, we had whatever, but we did excel it. I think as you will look, our percentage of buybacks is pretty low relative to other peer groups. And the equation that 2 to 3 times is there, I wish I had about a 3 times book three years ago. I would've bought maybe $20 a share if that was the case. So book is a one-year measurement too. We won't get into the theory of -- we can if you want -- but of capital allocation on when to use book value or internal rates of return. But it's also over a time period and the timing and again, it's our third priority, so I don't want to overemphasize buyback at all.

  • But having said that, any buybacks we have done over the last several years have been probably fairly rewarding to the existing shareholders. But, internal growth, acquisitions, dividends and then buybacks, in that order.

  • Luc Vanneste - CFO

  • Questions on the phone?

  • Operator

  • James Keating, RBC Capital Markets.

  • James Keating - Analyst

  • Hello, team. A couple of quick questions if I may. One is on securities gains, the unrealized portion thereof. I wonder if I could just reexplore what's in there from a mix perspective and how that's being regenerated. It seems to be a continuing success story. I'm just looking for the business background there. Also, I wonder if I can get an update on the market share numbers here on the retail and commercial or small-business side, maybe from Bob or anyone, just to describe at what stage of progress you feel you are on on the commercial small-business banking side and where the retail shares are?

  • Rick Waugh - President & CEO

  • Bob, can I ask you to handle the securities question?

  • Unidentified Company Representative

  • Sure, on the securities gains, Jamie, and the mix, the mix obviously changes over time. This year, as you are well aware, we had Shinsay (ph) Bank again, was a significant single item, and we still have a piece of that left, roughly a third of our original investment left in that bank. That was the only very large transaction. Another thing this year that was up again after several years of going the other way was payouts out of the various third-party funds that we have had money in for a long, long time. They went through a rough patch. As you know, a few years ago, we had fairly significant write-downs in those things. That's turned around and they are now kicking off a fair bit of income in the current environment. So that's been a turnaround.

  • In prior years, we had fairly significant gains in the fixed income markets as interest rates were falling; that's obviously not happening today at all. But our unrealized losses and fixed incomes are immaterial at the moment.

  • And then the last piece that was significant again, as mentioned earlier, was we reshuffled some of our Third World debt holdings, which are a fairly significant part of this portfolio, and we didn't reduce the aggregate amount but we did some transactions to change the character of that around, which resulted in some realized gains. So those are the major pieces.

  • Going forward, it depends on markets. As Rick said, or Luc, I guess, we have a broad portfolio of securities, mainly focused on income type securities. So recent moves in Canada, for example, on dividends, benefit that kind of a portfolio.

  • Bob Chisholm - Vice Chairman, Domestic Banking

  • Jamie, on the small business first -- Bob Chisholm here -- our market share improved in the year on small-business by what, 23 basis points. Strong growth particularly in the deposit side but also growth in the asset side, combined about 13%. And we have continued optimism for, as we go forward there. It's a little hard to get precise numbers of small, but we define (indiscernible) and that's been under 200 on authorizations under 250. The dated (ph) and the (indiscernible) would otherwise be because where the borderline is to keep commercial in small business.

  • Generally speaking, in market share on the consumer lending equity mortgages we were flat; I think they were down 2 basis points the last month we had, which I believe is August. On the deposit side, we were up flat -- or down a snick on demand but up on term. So net, we're up 10 basis points, substantially up on the term side. So all in all, where we expected to be.

  • Luc Vanneste - CFO

  • Next question on the phone?

  • Operator

  • Mario Mendonca, Genuity Capital Markets.

  • Mario Mendonca - Analyst

  • Good afternoon. Just a quick point of clarification. In response to Michael Goldberg's question, you explained that the advertising promotion costs in Mexico specifically as it relates to the cards is 25 to 30 million. Is the implication that that additional cost is now over and it falls of the table going forward?

  • Bob Chisholm - Vice Chairman, Domestic Banking

  • To be honest, it really depends upon what opportunities are out there. We have got a franchise that's not the biggest franchise in the Mexico market, so we want to build it. So we're spending significantly on branches. We are putting in sales staff to man our call centers. We are doing things that we think will beef up our franchise. That is an example of that. Is that a one-off event, that particular one? Yes, it is. Will we do other things like that if there's opportunities to grow the franchise in Mexico? Yes, we will. So, that's about it. The 30 million will not recur just in and itself, vis-a-vis that particular campaign. But you know what, we have to grow that franchise and we have to do things, so we will continue on that basis.

  • Mario Mendonca - Analyst

  • Is there anything obvious going on in the first quarter that might be a slice of the same thing?

  • Bob Chisholm - Vice Chairman, Domestic Banking

  • Not at this point in time, no.

  • Luc Vanneste - CFO

  • Next question on the phone?

  • Operator

  • Rafael Bello, Citigroup.

  • Rafael Bello - Analyst

  • I wonder if you could just expand a bit on your international investments. On the one hand, if you would say that for 2006, Mexico is going to be your main area of investment or if you plan to do other countries in Latin America and maybe if you can make a comment on Chile. And then the second part of my question relates to the U.S. In the past, you have mentioned -- or at least you have expressed, at least that's how I have interpreted it -- that the U.S. might not be a priority unless there is something that comes out to you that it's really attractive. Would that -- has that changed and would the U.S. be more attractive now or not?

  • Rick Waugh - President & CEO

  • Rick Waugh here. I will take this because it's essentially an acquisitions and -- we will and as I said, look at any of the countries (technical difficulty) put the United States aside, I will come back to that. On the countries we are in, we are actively looking at any of the countries we are in to see if we can do the platform. Mexico, as you know very, very well, again it's somewhat like the Canadian environment, there's only six banks. So the chances of doing it in the bank side would be regarded to be very remote because none of those banks have said they are for sale. Having said that, we will look at any possibility in Mexico, but there, our growth will be just what Rob is doing, it's going to be more investing and promotional or buying these seats on the airplane and growing 65,000 cards, so that will probably be it. Although the wealth management and insurance may give us some opportunities. You know, we looked at the afforays (ph), didn't get there, but long term, who knows. But again, it's hard to see in the short run much happening other than generic investment in Mexico.

  • In the other countries, it's active. I would say in any given quarter, we're looking at lots of opportunities. But Chile, you mentioned, again, Chile is a market of essentially six banks. And there's no sellers, and we are not a seller. So, again anything that develops in Chile, we are just as -- in Canada or in Mexico, will be a part of the scenario there. And there's other countries that we are in, where we are looking at opportunities. And you know the countries we are in, Central America, Peru, all of those are of interest to us. Now for the U.S., that's okay on the international side?

  • Rafael Bello - Analyst

  • That's fine, thank you.

  • Rick Waugh - President & CEO

  • On the United States, I haven't changed my view on the United States at this time. I don't see any rushing need to do anything there. I find it is expensive. There is lots of competition, high operating costs and the scenario there is one that is not the top of our must to-do list. So, that really hasn't changed as we have seen. We watch the developments down there and we will continue to watch the developments down there and we will see in the long term. But, the current environment is, we are in no rush.

  • Luc Vanneste - CFO

  • Ian, can I come back to you on your question?

  • Ian De Verteuil - Analyst

  • A question for Bob. We have that great session on the domestic bank and domestic wealth management. I know it was very recent, but it's my sense that some of the high interest paying guys haven't followed up the short-term rates and haven't followed up prime even since then. Do you get a sense that any sort of backing off from the high interest paying guys like ING just in the --

  • Bob Chisholm - Vice Chairman, Domestic Banking

  • Oh, you're talking on the deposit side?

  • Ian De Verteuil - Analyst

  • On the deposit side, yes.

  • Bob Chisholm - Vice Chairman, Domestic Banking

  • Oh, there hasn't really been any movement in that, which has enabled the spreads to improve somewhat. Although the flatter yield curve has somewhat squeezed that again. So, sort of status quo, Ian.

  • Ian De Verteuil - Analyst

  • So, from a competitive point of view, as you look out, the individuals that have been aggressive on the high interest are also very highly rate sensitive, I would imagine to the flattening yield curve, as well. I would have thought that you would start to see some of those guys back off, wouldn't you?

  • Bob Chisholm - Vice Chairman, Domestic Banking

  • One of the things that -- (multiple speakers) -- one of things that we've seen and what our strategy has been in the past few months, to the extent to preserve those customers who are highly rate-sensitive is that we have switched them into cash flow term deposits. So while you have seen our market share stay relatively flat on the demand side where those ones are, it's gone up quite a bit on the terms side. So we have been able to preserve the highly sensitive ones by putting them into a slightly more price -- slightly higher priced cash flow term deposits.

  • Ian De Verteuil - Analyst

  • And the second question is for Rob. The DR, post the acquisition of Benintour (ph), I think became a lot more important to you in terms of scale. It's my sense that there's more and more concern again that the DR is running into more problems. Do you have a sense short-term? I mean is the business remaining strong or -- generally?

  • Rob Pitfield - EVP, International Banking

  • We did well with the fees on Benintour, as you know, Ian. As far as the franchise itself, we are really pleased with it. It's a good size. We might add around the corners and the edges to beef it up. It's starting to produce good money. It's gone through quite an integration and quite a culture change because we took on a much bigger franchise, so we literally had to train everybody. So, that's starting to bear fruit. And as far as the economy and the country itself, it's starting to improve. A new government and a new president and we believe that generally speaking, it's headed in the right direction. So we are feeling good about that.

  • With respect to other financial institutions, I think that there is still weaknesses there and that will sort of cloud issues generally speaking for the country. Fundamentally, we think it's directionally good. And that that kind of issue and problem should accrue ultimately to our benefit. So we think that the overall situation there is fine.

  • Luc Vanneste - CFO

  • Michael?

  • Michael Goldberg - Analyst

  • A question again for Rob. I just wonder if you can expand on your market position in cards in Mexico. Where you stand, what you're trying to achieve? In particular, maybe a little elaboration on the loyalty program, what you are really trying to do there. And you said something about an insurance program related to do the card. What's that also about?

  • Rob Pitfield - EVP, International Banking

  • First of all, the insurance program, it's typically attached to cars and you sell insurance as you sell cars, (multiple speakers) but automobiles.

  • Michael Goldberg - Analyst

  • Oh, cards.

  • Rob Pitfield - EVP, International Banking

  • (multiple speakers). So, we find opportunity to beef that up ex the specific auto loan, so we are doing that. With respect to the credit cards, credit cards is the smallest portfolio, loan portfolio, in Inverline (ph), in Scotiabank Inverlat. And we need to do more there, number one, to have more cards. It is not only profitable but it's a great database to go against as far as developing your customers. So we wanted to establish ourselves there as strongly as we could in the face of very strong and very capable competitors. And the rewards program, which we had -- it came to an opportunity where we were going to continue with that, because that rewards program could go to a larger card base, obviously. So we wanted to cement that situation and build on it. So this is an opportunity to do that and then go out with an aggressive campaign and make better headway in this market. So that's all in all what we are trying to accomplish.

  • Luc Vanneste - CFO

  • Next question on the phone?

  • Operator

  • James Keating, RBC Capital Markets.

  • James Keating - Analyst

  • Thank you. And I think for Brian Porter, I apologize for digging into this too much, but on the credit side, Brian, we have got coverage down in the quarter, impaired loans seem to be edging up sequentially. You have released a bit of reserve here and indicating we may be releasing some more. I'm just trying to get a read on what the message is here broadly. And I understand -- I think it's good news we're seeing some releases, but all those arrows in the quarter didn't really point to it as far as I could tell. Am I missing anything?

  • Brian Porter - Chief Risk officer

  • No, that's a good question, Jamie. I think that having spent the last six years in Scotia Capital, I can tell you that the portfolios in Canada, the U.S. and Europe are as in good shape as we have ever seen them. If you look out in the credit environment for the next two quarters, we think it's a continuation of where we have been. It's going to be relatively benign. Although, as I said in my statement that we think we passed the peak in terms of recoveries, so we are going to see a lower level of recoveries.

  • Our two worry beads out there in terms of industry would be automotive and forestry. We're watching those two sectors very carefully. In terms of the auto sector, our exposures have been disclosed to this group before. We have actively managed our exposures in the last couple of quarters. We made some sales at what we think are very advantageous prices to get our exposure down. In the forestry sector, again, we're trying to manage our exposures down, get security where we can and be very proactive in terms of managing our exposures there. So really, what the formations you saw in Q4 were more what I would call a confluence of events that we just felt it was good housekeeping to take these provisions now and drive on.

  • Luc Vanneste - CFO

  • Next question on the phone?

  • Operator

  • There are no further questions on the phone lines at this time, please continue.

  • Luc Vanneste - CFO

  • Jim Bantis.

  • Jim Bantis - Analyst

  • You had all the excess capital this year and it wasn't a very active year in terms of corporate activity outside of Waterous and the acquisition in the Americas. And what we see are some of your competitors going to the U.S. We see it because there's an environment that's allowing for acquisitions in terms of margin compression and flattening yield curve and slowing loan curve. What catalysts could it be in terms of acquisitions in the Americas? Maybe we're not as familiar with the environment so I talked to our Latin American analysts. He seemed to think things are obviously going well in Mexico and the other Americas, so they are not sellers. Could we be in another year of inactivity, I guess?

  • Rick Waugh - President & CEO

  • You never know for sure, but I agree with your analysis. I mean the United States is the easiest market in the world to do a transaction. Just let Wall Street know you're interested and the planes to Toronto are packed with investment bankers and from investment bankers to Bay (ph) Street. It is blessed with 7500 banks and lots of potential transactions, although sellers' expectations, especially in light, you know, you saw the Sovereign deal and a few others, so the expectations are going higher, whether that will slow down the transactional side, depending on the discipline of the buyers. But yes, I think anyone who wants to buy would find the U.S. as the most accommodating market, if you get over your other criteria.

  • The other markets are in international and are extremely difficult. They present actually some of the pluses from that point of view and negatives, you can never count on it for sure. And while it was inactive in terms of closings, which are obviously very important, let me tell you, it was very active in terms of teams, the number of -- I think I said this before but if not -- we looked serious -- we looked at a lot of ones. But seriously, like with teams and due diligence at nine different -- this is on the international side -- eight or nine different ones, and you're right, we only closed really on one major one and one small one, but very serious due diligence. And I would say we have got similar numbers we're probably looking at in different degrees planned for this planning cycle. What you can close on are very difficult, because if times are good, these banks are very profitable. Why would you want to sell?

  • Having said that, there are reasons that people are selling in some of these markets. One is upcoming basel. This puts a whole range of constraints on smaller banks. We all know here in Canada the big banks with all the basel, the anti money laundering, the Patriot Act is doing, in terms of -- all banks are facing huge technological costs and regulatory oversight. So this puts pressure on the smaller countries and the smaller banks to hopefully, that will give us some opportunity. And it always, in these markets, many of them are controlled by shareholders, individuals, and of course, you get succession issues and family issues that create opportunities. And they slow the process up and make it somewhat unpredictable but the activities of potentials is as good as I have seen it. But again, we can be -- have to give you no certainty as to our actual closures except we are there and looking, and I'm confident we will be able to do closings in these countries. The timing will not be there and certainly the commitment to do it is there. The opportunities will present themselves and I think the demographics of these markets is worth the wait, but it's hard to predict.

  • Jim Bantis - Analyst

  • During that wait, the capital position continues to build in. I want to talk more about the dividend payout ratio relative to some of the changes that are talked about in today's government. And should we be revisiting the payout ratio during this period as well, capital buildup of potential legislation changes?

  • Rick Waugh - President & CEO

  • I know you all know this, that our return on capital actually went up. And I also noticed, the long-term, unfortunately, the long-term bond yield is at 4%, and yet our return to our shareholders is going up. So I have a little comfort that the absolute level of the profitability of our organization are enough to benefit our shareholders on dividends, possibly some stock buyback and still allow us to wait. Because our return on equity, the profitability of these three businesses is fantastic. Twenty percent plus, I mean you can allocate capital and do these things, but it's high. If I was dangling down a 12% return on capital, that needs to be an issue with our shareholders, and I understand that issue. But these high levels of absolute profitability, we can wait for the right opportunities, and still reward shareholders with two dividend increases last year, 20% increase. We raised our dividend $0.02 a share this quarter. We will look at that as we go forward, and the payout ratio still gives us room, I believe. And payout ratios are a function of profitability and growth and we are in good shape on that. And of course our regulatory capital ratios give us all that time. So it's a pretty nice spot to be in from a management's point of view to be still shareowner friendly and still tell your management and your employees that we can grow generically.

  • Bob Chisholm - Vice Chairman, Domestic Banking

  • It's also the case -- and I am a little confused by Quentin's earlier question about redeployment of capital. The fact of the matter is, while our capital ratios remain extremely strong, they have actually declined slightly, but in both TC and tier one are down year-over-year. So when you talk about are we deploying the capital, the fact of the matter is, we have, and as Rick said, we've earned 20 some odd percent on it. So we did generate some capital this year, believe it or not. We had a preferred share issue, you may remember. We had some retained earnings and we did generate some capital.

  • Luc Vanneste - CFO

  • And I think you will see in the supplementary package there that we've had, as we mentioned, significant loan growth, so the risk-weighted assets year over year have gone from sort of 150 billion to 162 plus. So we are using it and we're getting the return.

  • One final question.

  • Quentin Broad - Analyst

  • Quentin Broad, CIBC World Markets. Not that it's (inaudible). Exactly, it looks like there's added leverage on Scotia Capital to average assets, but beyond that, John, I would ask, in terms of Scotia Capital, if I look at the bottom line this quarter versus last couple of quarters, in particular the Q1, Q2. As I understood it, variable comp was down. And yet, if I look at a bottom line basis ex the provisions for credit losses, which would be a Q2 comparison are then taxed, which seems to impact Q1, this was a pretty good quarter. So I'm trying to understand what happened with the variable comp this quarter, whether it was a catch-up and then whether on a mix ratio basis -- the productivity obviously was very good at 36.7. Is it better to think about it as a 42.8 on a run rate basis, which is the full year?

  • John SchumacherI think the variable comp credit is just pure timing. We did a true-up. We started doing a true-up early in Q3 and there was a larger true-up in, Q4, which results in a much lower comp because we really did feel we needed the extent of the accrual we put together in Q1 and Q2. So the variable comp is just pure timing.

  • Quentin Broad - Analyst

  • So Q4 is really very (multiple speakers) slightly overstated.

  • Luc Vanneste - CFO

  • Yes, it was. Q1 was very, very strong in John's business line, so the accruals that were set up based on maybe (multiple speakers) indicating that success for the entire year, we adjusted in Q4.

  • Quentin Broad - Analyst

  • Full year mix is a better indication, (multiple speakers)?

  • Luc Vanneste - CFO

  • Yes.

  • John Schumacher - Co-head, Scotia Capital & Head, Global Markets

  • Don't use the DQ (ph).

  • Luc Vanneste - CFO

  • Thank you very much for joining us and we will see you the next quarter.