Bank of Nova Scotia (BNS) 2006 Q1 法說會逐字稿

Good afternoon. And welcome to the presentation of Scotiabank's first quarter results. I am Luc Vanneste, Executive Vice President and Chief Financial Officer. With me today in Winnipeg are Rick Waugh, President and Chief Executive Officer; Bob Brooks, Vice Chairman and Group Treasurer; Sabi Marwah, Vice Chairman and Chief Administrative Officer; Brian Porter, our Chief Risk Officer; and joining us via conference call from different locations are Rob Pitfield, Executive Vice President International Banking; Steve McDonald, co-Head and co-CEO of Scotia Capital, and Head of Global Corporate and Investment Banking. And joining us for the first time and with us here in Winnipeg is Chris Hodgson, who was recently appointed Executive Vice President Domestic and Personal Banking; and Dieter Jentsch, Executive Vice President, Domestic Commercial Banking. Welcome Chris and Dieter.

Rick will lead with the highlights of our results. I will follow with a review of the financials. Then a review of credit quality by Brian Porter. 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.

Thank you Luc. Well, I am very pleased to report record results this quarter. Our earnings per share was $0.84. That is up 9% from $0.77 a year ago. Our return on equity is a solid 21.6%. That was up from 21% a year ago.

Our strategy of diversifying across business platforms and geography continues to deliver these record results. Strong contributions from all three business lines which we benefited from. We benefited from continued strong performance in International Banking, particularly our Mexican operations; from strong revenue in Scotia Capital, and here again driven by record trading results; and solid growth in mortgage volumes and personal deposits in our Domestic banks; as well as today's stable credit quality.

Still a big plus for us is the strength of our capital ratios. A tangible common equity ratio of 9%. So overall, a very solid quarter and a very good start to the year.

Looking at our business lines in more detail. On the Domestic division we generated net income available to common shareholders of $329 million in the first quarter, which accounted for 39% of the Bank's total income. Now Domestic results were comparable to our very strong quarter last year. We've got good volume growth, but this was largely offset by lower interest margin. We have strong profitable returns on equity, [that] this is very profitable with 30%.

International income was $233 million. This is an increase of $27 million or 13% from last year, and up $59 million, that is 34% from last quarter. This quarter's results represented 28% of the Bank's net income, and were driven by strong performances in Mexico, continued solid performance in the Caribbean. These results demonstrate the growth potential that we have in International. Return on equity, a solid 23%.

Scotia Capital reported a record net income of $258 million, $11 million or 4% of last year's record quarter, and $29 million or 13% from last quarter. This represented 31% of the Bank's overall net income, and was driven by record trading revenues. Return on equity was a strong 32%.

In terms of meeting our 2006 financial performance objectives, we are firmly on track to meet them. Our return of 21.6 in the first quarter is at the top end of our 18 to 22% range. Our earnings per share growth of 9% is also at the top end of our objective of 5 to 10%. Our productivity remains industry-leading at 55.2%. And we continue to have very strong capital ratios.

I will now pass over to Luc, and we will go through the numbers.

Beginning on slide 8, this slide highlights our solid revenue growth, up 3% quarter over quarter and up 8% year over year. The 8% year over year growth was broad based with increases in net interest income and other income, particularly in trading revenues and transaction-based fee income, as well as contributions from the acquisition of Banco de Comercio in El Salvador, and Waterous & Co. Compared to last quarter, total revenue rose $95 million, due primarily to the record trading revenues Rick mentioned, together with increases in net interest income and transaction-based fee income.

Turning to the margin on slide 9. Looking at the right hand side you can see that the margin is down 3 basis points year over year. While there was a small year over year widening of the Canadian currency margin, this was offset by a narrowing of the foreign currency margin as wider margins in Mexico were more than offset by the impact of ACG-13 and lower margins in corporate United States and Europe. On the quarter the margin was unchanged, as a slight widening in the Canadian currency margin was offset by a 1 basis point narrowing of the foreign currency margin.

Notwithstanding that the all-Bank margin is flat, quarter over quarter you will note from the supplementary package that the reported business line margins vary, with International and Scotia Capital's margin up and Domestic's down, partly a function of the way we transfer price and allocate capital to our businesses.

As we have previously mentioned, the reported compression in the Domestic margin is due to a number of factors. Primarily our retail asset growth has been greater than our retail deposit growth, with the difference assumed to be funded by short-term wholesale deposits. And the rates on these assumed wholesale funding deposits have risen significantly faster than the relatively longer-term rates on the corresponding assets as the yield curve has flattened. The important point to note is that while there are fluctuations in the business lines at the all-Bank level due to how we allocate, the margin is basically unchanged quarter over quarter.

The other income component of revenue is shown on slide 10. Other income, excluding the impact of the stronger Canadian dollar was up 11% from a year ago, and 6% from last quarter. On the right, reported other income was up $114 million, a strong 10% year over year increase. This growth was broad based, led by record trading revenues, which were $33 million higher than the record results of Q1 '05. There were higher net gains on investment securities of $32 million, and sizable increases in transaction-based fee revenues, such as deposit and payment services up $21 million or 13%, and higher retail brokerage revenues of $17 million or 17%, a result of higher customer trading volumes reflecting the buoyant equity market.

Partially offsetting this revenue growth were lower underwriting fees and reduced securitization revenues. Quarter over quarter the growth in other income was due primarily to a significant increase in trading revenues due to the favorable market conditions and higher customer driven activity.

Turning now to non-interest expenses on slide 11. On the right compared to Q1 '05 reported expenses rose $105 million, or 7%. The inclusion of acquisitions made last year contributed approximately 1% to this increase. The year over year growth in non-interest expenses was attributable mostly to increases in salaries of $24 million, and higher pension and benefit expenses. Performance and stock-based compensation costs were $16 million higher, due mainly to a greater appreciation in the Bank’s share price when we compare this quarter with the same quarter last year, as well as the accelerated recognition of costs for recent retirees.

The growth in the other expense category of $29 million was due primarily to higher litigation costs, together with increases in employee training, and appraisal and acquisition fees, the latter being in line with higher retail volumes. As well, there were increases in premises and technology, communications, and higher advertising and business development expenses reflecting ongoing investments in business initiatives.

On the far left compared to Q4 reported expenses decreased $17 million or 1%. The decline in non-interest expenses from last quarter was due primarily to lower advertising and development costs related to specific promotional initiatives in Canada, Mexico and the Caribbean in the latter part of last year, and reduced professional expenses. These favorable reductions in expenses were partly offset by higher performance driven compensation costs, reflecting the strong trading results this quarter and the finalization of year-end payouts.

Slide 12 shows our productivity ratio. At 55.2% this quarter it improved slightly from Q1 last year, and is better than the 57.8 recorded last quarter.

Turning to slide 13, our capital ratios remain strong. Tier 1 capital ratio was 10.8% this quarter, down slightly from last year and the previous quarter. TCE was down 30 basis points from last quarter, primarily due to an increase of $6 billion in risk assets reflecting strong loan growth, plus the impact of the GMAC transaction.

Turning to slide 14, unrealized gains on investment securities. Our surplus remains over $1 billion, slightly above the level last quarter, despite net gains of $94 million on sales of investment securities in the first quarter. At quarter end the unrealized gain on our investment in Xi’an City Bank was $142 million.

Turning now to the business line results, first Domestic on slide 16. For the quarter Domestic Banking had earnings of $329 million comparable to the same quarter last year and the previous quarter. ROE was strong at 30.5%. Revenues were up 3% year over year. Retail asset growth continues to be robust. Mortgages were up 9.7%. Personal loans were up 9.7%, including a 17.3% increase in line of credit balances, and a 5.3% increase in credit card outstandings. Small-business deposits were up a robust 17%. This growth was offset by the reduction in the net interest margins due to the reasons I mentioned earlier.

Looking at non-interest revenues, we had another strong quarter in Wealth Management, with higher mutual fund fees and an increase in retail brokerage revenues reflecting higher customer trading activity. There were also increases in card revenues and transaction service fees. Quarter over quarter revenues declined slightly due to margin pressures.

Expenses rose 6% from last year, reflecting higher performance-based compensation, as well as higher stock-based compensation and pension and staff benefit costs. Quarter over quarter expenses fell 4% as the prior quarter included significant marketing and sponsorship expenditures. There were also seasonal declines in other categories.

Loan loss provisions declined year over year and quarter over quarter, reflecting lower provisions in the commercial portfolio. Quarter over quarter there was a slight increase in retail provisions.

Moving to International on slide 17, this quarter International Banking net income was $233 million, up 13% from last year. Earnings were also up 34% quarter over quarter. This robust performance was due primarily to the strong results in Scotiabank Mexico and continued solid performance in the Caribbean.

ROE was 23%, up from 18% last quarter. Revenues rose 16% year over year due mainly to growth in retail lending, as well as our acquisition of Banco de Comercio in El Salvador, which contributed approximately one-quarter of the increase. Retail lending growth was up 23% in Mexico, and was broad based across the Caribbean, with Barbados up 29%, Trinidad and Tobago up 21%, Jamaica 18%, and the Bahamas up 11%.

Expenses increased 17% from last year as a result of the impact of Banco de Comercio, higher litigation costs, and business related growth in most countries. Quarter over quarter expenses fell 7%, primarily in Mexico, as marketing expenses fell and performance related compensation reflected the finalization of year-end payouts.

Loan loss provisions rose quarter over quarter and year over year as a result of higher retail and commercial provisions in Mexico, and an impaired commercial account in Asia.

Turning to Mexico on slide 18, Inverlat is now known as Grupo Scotiabank Mexico as we look to fully leverage the Scotiabank name in emerging markets. Grupo Scotiabank Mexico's contribution was a record $139 million, up 78% year over year, and 76% quarter over quarter. ROE was exceptionally strong at 36%. Despite the impact of foreign currency translation, we continued to see strong revenue growth. Underlying revenues were up 27% year over year and 9% quarter over quarter. This increase was driven by strong growth in retail asset volumes. Mortgages were up 25%, and credit cards were up 55% from last year. We also benefited from a gain on the sale of investment securities as a portion of our bond portfolio was sold.

As I mentioned, expenses were down this quarter due to lower marketing costs, which included a major credit card acquisition campaign last quarter, and lower performance related compensation related to the finalization of year-end payouts. Overall, we remain pleased with the performance in Mexico, and expect double-digit growth in year over year results to continue.

Turning to slide 19, Scotia Capital had a record quarter with net income of $258 million, up 4% from last year and 13% quarter over quarter. Return on equity rose to 32%. This excellent performance was driven by good revenue growth and stable credit quality. Total revenues were up 12% year over year, primarily in Global Capital Markets where revenues rose 16%, with record results in derivatives and equity trading driven by higher customer activity and favorable market conditions.

Results were also strong in foreign exchange and precious metals. Global corporate and investment banking revenues were higher year over year, as the previous year included a loss from a business acquired through a loan restructuring. These increases were partially offset by lower net interest income, reflecting continuing competitive pressures on interest margins due to excess global liquidity.

Quarter over quarter revenues increased 15% due to the strong trading results and higher M&A fees, partly offset by a decline in new issue fees and lower fees from Waterous, which tend to be somewhat lumpy.

Expenses were down 3% year over year due to lower performance related compensation, mainly from adjustments to the quarterly estimates to reflect recent payout experience. Quarter over quarter expenses rose 28%, due primarily to higher performance based compensation, in line with record trading results.

Credit quality remains stable as new provisions fell and recoveries rose. Brian will cover this in more detail shortly. The provision for income taxes rose to $122 million from $53 million in the same quarter last year, as 2005 benefited from certain tax structured transactions. I will now hand it over to Brian to talk about risk management.

Good afternoon. I will be starting on slide 21. The story this quarter was continued stability and credit quality. The specific provision for credit losses this quarter was $75 million, a decrease of $6 million from the last quarter. Compared to the same quarter last year, specific provisions were virtually unchanged. Net impaired loans, after deducting the specific allowance, were $659 million, down $22 million from Q4 '05, and down $103 million from the same quarter last year.

Slide 22 shows the breakdown of loan loss provisions by business line. As I mentioned, total specific provisions decreased slightly from last quarter and were essentially unchanged from last year. Provisions in the Domestic retail and commercial portfolios were slightly lower than the same quarter last year and the prior quarter. Provisions for credit losses of $27 million in international operations was higher than both the unusually low level of $7 million last year, and $16 million in the previous quarter.

Scotia Capital benefited from lower new provisions this quarter, along with continuing recoveries, resulting in a net recovery of $16 million in the first quarter compared to a net recovery of $9 million in the same quarter last year, and a net recovery of $7 million in the previous quarter.

The next slide shows net formations of impaired loans by business line in the quarter. There were net formations of $106 million in Domestic retail. This reflects strong volume growth in our portfolio over the last number of quarters. Underlying credit trends remain stable.

The Domestic commercial portfolio had negative net classifications of $3 million, and there were no major formations to speak of.

International net formations were $82 million, a combination of increases in both retail and commercial. This reflects the growth we have seen in our retail portfolio, as well as the classification of one large commercial account in Asia.

Scotia Capital had negative net classifications totaling $78 million, largely in the U.S., with smaller declassifications in Europe and Canada. Overall, we had net formations of $107 million.

Slide 24 shows the positive trend in impaired loans over the past two years. As you can see, gross impaired loans have decreased more than $1.5 billion. Similarly, net impaired loans have come down by more than $800 million.

On the next slide are the VaR trends. We have fairly low variability of trading revenue, and we continue to run this business with very low risk. In fact, more than 93% of the trading days this quarter had positive results. As you can see, our one day VaR averaged $8.1 million this quarter, with no single loss day exceeding the one day VaR.

In summary, we had another quarter of stable credit quality. Credit quality remains solid in Domestic and in our International portfolios. Scotia Capital continues to be the biggest contributor to the credit improvement, both in net impaired loans and loan loss provisions. We continue to closely monitor the forestry and automotive sectors where we are actively managing our portfolios.

In terms of market risk might it remains very well controlled. I will now turn it back Rick.

I will address the outlook. As I outlined last quarter, our three key priorities for this year 2006 across all our business lines are drive sustainable revenue growth, make strategic acquisitions, and effectively manage our capital and allocation of it.

During the quarter we continued to successfully execute these strategies and deliver on these priorities. We are driving sustainable revenue growth. It is up 8% year over year. And we're doing it by retaining and growing existing customer relationships and by adding new customers.

As part of the strategy to acquire new customers, we are accelerating our branch networks in Canada, as well as Mexico this year. Twenty new branch openings planned for Canada net new, and 50 in Mexico. In addition, we have acquired the National Bank of Greece's Canadians operation, and that includes 10 branches in Ontario and Québec.

The acquisition of Maple Trust just announced significantly increases our distribution capabilities and scale in the fast-growing mortgage broker channel, moving us up to number three overall, and number two in that particular channel. Our strategy on personal GICs resulted in a very good growth of 17%, and an increase in market share of 18 basis points.

And we continue to make effective use of capital through strategic acquisitions. You know during the quarter we announced a $390 million investment in Peru to position us to be a major bank in that market. And there are a number of further acquisition possibilities, but timing and outcomes are not predictable.

We also announced a significant financing agreement with General Motors Acceptance, in which GMAC will sell us up to $20 billion in U.S. retail auto receivables over the next five years under an ongoing revolving facility. And finally, our pipeline in the investment and the corporate bank remains strong.

Looking forward, we remain confident that we are in a strong position to continue growth. And we believe this because we see continued economic growth across the regions, the many regions in which we operate. We have three strong and diversified platforms that are growing organically. And of course, we have the capital to pursue opportunities for strategic acquisitions. Total, in short and summary, we had a good, solid start to the year and a very straightforward quarter. And we're on track to meet our 2006 financial performance objectives.

With that now I think I will pass this back to Luc and my colleagues around the world for any questions.

We will open up to questions. The first question on the phone please.

Rob Wessel of National Bank Financial.

I wanted to ask you about the heightened advertising by Bank of Nova Scotia, and in particular, the commercials or advertising around the Partners Plus program, the You Are Richer Than You Think advertising. I guess the first quick question I have, is that a national campaign?

Yes, it is.

I didn't know if it was just in my neighborhood. I guess the question I have for you then is, is that bearing fruit? Can you just give us a sense for what you're hoping to accomplish from that? Can you give us an idea as to what sort of progress you have made? I just have another question regarding that as well.

The whole premise behind that is to build our investment share of wallet, and to leverage off of our brand. And so from the Partners' perspective we have actually had increase in Partners’ sales. And we report our numbers monthly on an IFIC basis. But we also have non-IFIC reported numbers which include the Partners. And we have had actually very strong growth in the Partners Portfolios. We actually have $2 billion that has come into that particular fund of funds.

This is all about an asset allocation product and utilizing some of the new tools that we rolled out into the branch system, some of financial planning tools. And we are seeing some results from that. And we will be sitting down and measuring the results of it over the next few quarters.

Just a quick point of clarification. Did you say that the $2 billion of non-IFIC data is public information, or is that information you have just given on the call?

No, no. It is public information. We do a press release. So our IFIC reported numbers will show this month $100 million net. But in terms of non-IFIC numbers, the numbers are actually $225 million net. And the other point that I think is important under mutual fund business really is that the amount that is going into long-term assets has increased significantly, and that should help our business going forward.

I guess I have a follow-up question for Rick. I know that the Bank has talked about on a few occasions possibly thinking about acquisitions in Wealth Management. If I was to think about the fact that you are advertising and trying to perhaps get inflows for other manufacturers and not necessarily exclusive to just your own in-house mutual fund company, this is quite unique. Can you give us a sense for what is it about having exclusivity that you think doesn't serve you well versus your competitors where it does serve them well? For example, do you think that you need to improve your manufacturing or is it the bank doesn't do as good a job capitalizing on their own distribution channels, or is there any other issues or areas of improvement that you think serve you well to have this sort of strategically different direction?

It is Chris Hodgson. I'm going to answer that question. I think --.

Can Rick comment too?

Absolutely.

If Chris lets me.

Right.

Let me just start. We are absolutely committed to the growth of our proprietary platform. And also in the Partners Portfolios, the $2 billion that I gave you, of that $440 million are in the Scotia Funds, so we continue to grow some proprietary product in that area. But it really goes down to choice. And certainly in terms of our platform and in the branch system, we are seeing a very significant demand from the customer base in looking at choice, which includes third-party funds.

In addition to that, we have our select funds which are about $900 million, and that includes mainly our proprietary funds and then some funds from the Capital Group. We are really -- we're dealing with the demand in the marketplace and the fact that customers are looking for choice above and beyond just our own individual proprietary funds.

I will add to that. And Chris is right, it is choice and all that. But it is also strategic in the sense of a self-analysis. We have said this many, many times that we view our wealth management very centric on distribution. We do have in-house capabilities, and many retailers have their own private labels and they sell a lot of other things on the shelf. We very much look like it is a field that we have this distribution. We have a great salesforce that is well trained and we can well train them in multiple products. And we will be able to maximize our distribution by maximizing customer choice, and therefore this distribution strategy.

And you know it even reflects in that acquisition of Maple on the mortgage channel. Where we're going out into different sort of alternative channels and an alternative delivery. Distribution though in wealth management is to us the key. And I think this aligns and therefore the advertising. And we usually do things for a number of reasons. The advertising does accomplish some other things in terms of recognition, which we want to get out there. But it also is giving this message that we have -- we can deliver through our many channels lots of products, and that is what Partners is all about.

Just two more very quick follow-ups. You have also expended money for the naming rights at the Corel Centre, and I guess you are involved in the CFL promotion. So it does seem like Bank of Nova Scotia has done, at least to myself, a significant amount of additional advertising. Is this a new thing or is this something that is sort of for the past six months? That is the first question.

And the second question I have, before I requeue is, is there a cost to these that we would see running off? It doesn't seem when you look at your expense line on advertising that you really even notice a difference? Is it just that these expenses -- you can get a lot of visibility for really not that much money?

There's a lot of ways of answering both those questions, but first of all, the underlying premise of why we're doing this and it is the Corel Centre, Scotia -- pardon me, was that a faux pas.

Sorry; that was my term, Rick. I apologize.

Scotiabank Place, and our sponsorship in CFL, our sponsorship on the Giller Awards for the literary community that we just did a major multi year sponsorship with Rick Hansen and all the great work he has done and doing in getting the word out on that great cause.

But what is underlying this, and I think it is important to note, is that we want to make sure that Canadian customers think of us when it is time to look at a bank financial service, and whether it is a new one or expanding. And 65% of Canadians haven't dealt with Scotiabank. And so we want to be one of the two or three that at least they think about when it comes to that time. Then when they do, that is when I'm very confident that with the products we have, the services we have, the great people we have, the salesforce -- and that is what our metrics tell us. We have very high customer loyalty and customer satisfaction numbers and what have you. So we have got to get you into the door. That is what is underlying that.

It is not just putting your name on a building or sponsoring many, many worthy functions. It is to identify what our customers are important to them. Get our name out there that we are a bank to be reckoned with. That we have the products and services, and get that state of mind recognition when they make those choices. Because that is how we're going to have to grow, and that is how we will grow in getting customer acquisitions.

In terms -- now the expense issues on that, well, this is still Scotiabank and costs are important. We have found ways -- we are not increasing the amounts we're spending, but we're finding ways of some of the savings we make elsewhere in that and helping to fund. And our executive marketing team and that has been a very, very effective way that we tell them they have to live within a number and they find a way of doing it.

Jamie Keating with RBC Capital Markets.

Congratulations everyone. A quick follow-up on the expense culture point I think you were making, Rick. I see that the numbers in terms of retail expenses domestically seem to be pretty high here, on a growth basis at least. I'm just curious. Please tell me there is something in here that is kind of unusually high this quarter. Is there any description you can give us there, and perhaps for Luc?

There's nothing particularly unusual this quarter in Domestic itself.

Okay; just looking at the revenue and expense equation it doesn't look like there's a lot of operating leverage in there.

I think -- it is Rick -- a slightly different question on the revenue side. And Luc, you want to -- I think our revenue line, which as you see there, rightly so, is lower on the stated value -- lower. There is an issue on margins and in particular the allocation of interest expense to the business line in terms of our transfer pricing, which is understated –- it is not understated but has reduced that revenue growth. And Luc can go through that.

But when we true up the numbers, expenses to revenue for the revenue -- and there are a lot -- there are some small adjustments. They're not -- when we on the expense side our true run rate is a positive revenue -- pardon me, leverage ratio, our operating leverage ratio. And so when you X out the effect of the allocation of the interest rate margin and a few expenses, we have a positive ratio. I'm quite confident on that.

I would love to follow up on that with Luc perhaps off-line. That's very helpful. While I have got you, I just also was quite intrigued by the branch expansion commentary you highlighted, Rick. And I'm just curious, two things. One line of questioning is both Canada and Mexico, is there any information you can give us about the key regions where these branches might drop in? I am just curious about how you're targeting your branch expansion?

I would not want to tell our competition where I think the key regions are going in. I will just say they are high demographic, high-growth areas, which will not cannibalize our existing operations.

Fair enough. Is there anything financially we should consider in this as you are adding branches, costs, ahead of revenue infill type of considerations?

Nothing that is really -- they do cost. Now, a lot of these are capitalized, and of course that still costs you, because you got to depreciate, and we still count depreciation as a real cost. But they're not all one expense items. The expenses get allocated.

The revenues, we have very high metrics -- each branches’ business case, but because of the demographics in these areas, we will -- it is usually about 18 months to three years depending on the area. It is quicker in Mexico. But we give them actually -- the Canadian areas that we have identified are looking fairly good. So the paybacks are the 18 to two years, and expenses get allocated. It is not going to give us a big spike in expenses, if that is where you're going.

Just for Brian, can you comment on auto exposure, whether there is any [data] on the portfolio or anything else you want to talk about in terms of how controlled the auto exposure is at Scotia?

Our auto exposure, as you would expect, obviously didn't go up. It has remained -- it has gone down slightly. We're monitoring the portfolio aggressively. We have made some sales in some names that had been downgraded by the agencies. And we just wanted to get our risk in line with our internal control process. And as you heard me say, it is a sector we're monitoring aggressively, and we will continue to do so.

I think, Jamie, to add to that, add one comment to your earlier question on expense growth in Domestic. As you can see the number is 6%, which does appear high, but over half of that really comes straight from performance and stock-based comp. Our share price rose higher this quarter than a year ago, as well as we took a catch-up charge for retirees based on some new accounting guidance that came out. We take that and some true ups, basically our costs -- really half of that is really stock and performance-based comp. If you exclude that, our run rate is below 3%.

Always good to hear from you Sabi. Thank you everyone.

Mario Mendonca of Genuity Capital Markets.

A question for Luc. Just to clarify the commentary about how --the transfer pricing essentially on the NIM. When you said you look at -- you compare what you're earning to some assumed rate -- some assumed wholesale funding rate. When you use the word assumed, are you suggesting then that the actual rate that you funded the loan at is lower? That there's a real -- the real cost of funding is actually lower than what you have assumed?

Let me turn that question over to Bob Brooks.

It is not necessarily on an all-bank basis lower. It is again what ends up in the business line and what ends up in Treasury. It reflects the difference between how we actually fund the incremental loan growth and the, as Luc used the phrase, assumed short-term rate that is charged to the business line when the business line is short funded, as is the case here. You have to -- if you look again at the all-Bank level and you see the stability in the margin, by subtraction if there is a reduction in Domestic, there must be an improvement somewhere else.

Just amplifying that, we do manage interest rate at an all-Bank level. So if you take a look at the all-Bank margin, it has been fairly stable for the last five quarters.

What I'm trying to do here, though, just in terms of my thinking is, is the offset really in Treasury or is the offset the fact that the International side is so strong?

No, we have disclosed two margins to you, a foreign currency margin and a Canadian margin. And if you look at those separately, on the Canadian margin side, Domestic being largely a Canadian currency business, the offset is in Treasury.

But you would acknowledge though that International's NIMs are up fairly strong? They are fairly healthy?

Yes, absolutely.

Okay.

But there will be some margin mitigation on our U.S. dollar loan portfolio there which will offset that. But it is strong.

Perhaps a related question then. Sabi in the past has referred to the premium rate savings account going a long way -- certainly being worth your effort, provided that the rate is lower than wholesale funding. Can you give us an update on where we stand in that respect? Is that still true?

I still think it is true. If you look at our Money Master rate I think it is the 275 -- you look at the 90 day money rate essentially that we borrow in the market, as you know we short fund the market 15, $20 billion on a regular basis, because our mix of assets and deposits will be long assets. When I am borrowing that much at the wholesale -- let's say you are borrowing at 90 or 180 day money, you are borrowing basically at 3.5. And Money Master is at 275, so you make an automatic spread right there.

Are you finding though that one of the more important competitors in this space is being a little more aggressive in '06 than they were in '05?

It is Rick. I'll take that. Yes, it is. And we have subtly, as we do, exchanged some of our deposit gathering strategy into emphasizing more over the last nine months the GICs rather than the money market type accounts. And our percentage increases there are very strong. And we find that an effective way to, A, to meet the competition, and help us to manage the margins.

Because there is a lot of aggressiveness on that day to day money market account where the money swings in and out quite dramatically. And of course in rising environments those markets act very dramatically.

And so have been using GICs and a whole array of GICs -- we're just offering a new product this quarter -- as an effective way. And we're getting double-digit growth rates in our GICs. And actually our market share and our growth in personal deposits is going up, although you're going to see less of that in those money market accounts in terms of our balances. They will be more on the GIC side.

That was helpful. I want to finish up with something in the -- what was formally known as Inverlat. In their press release about expenses. Expenses being substantially lower, not only because the advertising was lower, but because of -- it sounded like a reversal of some kind of an expense accrual. And that being -- it suggests -- it seems like that explains, or at least helps to explain, the 78% increase in Grupo Scotiabank's earnings this quarter. If you could help me -- am I interpreting this correctly, and what was the amount?

You were interpreting it correctly. There was a reduction in incentive compensation effectively that had been accrued. And it relates to the fact that we have been able to utilize a -- tax attributes, I will call them, which are expenses, which were previously not able to be deducted for tax purposes, which reduced the income in Inverlat, which then effectively reduced the compensation, as well. Effectively a profit-sharing component. So that went down to the bottom line.

On the tax side with the use of these tax attributes, the tax loss carryforwards that we had communicated to you that might end up drying up at the end of Q3 this year, will in fact now likely take us into the end of the first quarter of 2007. And we will be able to shelter income to that period.

But the effect this quarter would be to add to earnings, Inverlat's earnings, or what was formally known as Inverlat's earnings, and also add to obviously to Scotiabank on a consolidated basis.

That's right.

What I'm trying to figure out is how much was that?

Again, we don't give guidance on a quarterly basis, but the fluctuations on the quarter by quarter are significant. You can see the prior quarters we showed you in the graph.

There was a bunch of compensation expenses and other ones, a true up, which gave a positive influence into the fourth quarter -- into the first quarter. But as a number there's a lot of things into that. And so we don't -- you'll see that we just I think sent out the Mexican earnings yesterday, and you will see the numbers in there.

I went through it. I don't think I was asking for guidance per se. It was more just to understand this particular quarter. So you don't break out anything that might be an item of note, I suppose. It seems like it is Scotia's pattern not to do that.

That's right.

That is what you're telling me. Thank you very much.

Mario, if I could just interject for a minute. I just want to clarify the earlier comment I made on the foreign currency margin. If you look at the all-Bank level, again the foreign currency margin is actually flat to slightly down, not up. Notwithstanding that International’s margin as a business line is up substantially.

And the reason for that of course is we have foreign currency operations in Treasury. We have foreign currency operations in Scotia Capital. And both of those were affected by the rise in short-term interest rates -- U.S. dollar interest rates primarily -- through the quarter. So there was some compression on the spread there which offset the improvement in International.

I understand the nuance, what you just described there. But ultimately the International NIMs remain pretty strong, and in Canada is where some of the weakness was. That would be sort of a simple takeaway from this, I would suspect.

Canada and Scotia Capital really on the [spread side].

Jim Bantis of Credit Suisse.

Just looking at the risk-weighted assets on page 11 of the sub pack and we have seen a sizable increase quarter over quarter, particularly coming from securities and loans. And I just want to get an understanding of that. And if that related to taking on some of the GMAC positions? (multiple speakers).

Sorry, the total was $6.1 billion, $3 billion of that was loans, and about 7.7 or so was mortgages. GMAC was 1.5.

So GMAC was only 1.5 and the rest was just kind of normal business growth?

Yes.

Got it. Could you let us know what the delta was in terms of the gain on sale of investment securities in Grupo Scotiabank, as you highlighted on slide 18?

Slide 18 on the --.

On the revenue side, Luc, you had highlighted a gain on sale of the bond portfolio. And I just wanted to see if I could quantify that.

I think it was 8 -- just a second -- 8 to 10.

Got it. And if Steve McDonald is on the line, I just wanted to ask you some questions regarding the wholesale banking operations. But specifically I know there's been an effort to build Scotia Capital in Mexico. Underwriting and privatization have been very strong in that marketplace, and I wanted to see if Scotia Capital has been able to participate in that?

It is Steve McDonald. I think we have had our share of participation in that overall privatization market. We have had some success. I would caution that it is going to take some time for us to fully integrate Grupo Scotiabank's wholesale operations with Scotia Capital. So these are early days.

We're spending a lot of time on issues of systems, policies, procedures and getting that all in place so that we can grow the business. And we are growing the business as we go. But it is not a material factor overall from a wholesale perspective. But it has a good growth potential. (multiple speakers) participating.

So you are getting your share of the deals that happen in Mexico?

I think we are, yes.

Just, Steve, on a corporate loan growth perspective, we are seeing the M&A pickup both in Canada and the U.S., and this was supposed to be the final catalyst to get corporate loan growth. Have you started seeing any of it at this point?

Yes, we are seeing it in Canada particularly. We have seen some pretty substantial loan growth in Canada year over year and last quarter. The M&A activity though, while it is strong, wasn't felt directly in Q1. We feel that the pipeline is very good for future quarters here. And that will bring with it additional loan growth into Canada.

In the U.S., it is probably somewhat less robust because we're not participating in the -- aggressively in the financial sponsor world where you can add a lot of assets. But they come with a fair degree of risk attached to them. We have chosen not to be aggressive in growth there. So the disintermediation that we have been facing for several quarters now continues.

Pricing for a corporate loan in Canada has always been a competitive situation with some of the banks kind of playing less of a role in that marketplace. Do you feel that the conditions and the pricing has improved any what?

I think there is some evidence that we are seeing a turnaround in pricing in the Canadian marketplace. It is a little too early to call it definitively, but we are seeing some evidence of improvement in margin in Canada. And we're certainly hopeful that that is going to be an indication of a trend.

Andre Hardy of Merrill Lynch.

When you split up the International division between Mexico and International, Mexico is obviously doing very well, but International has earned somewhere between 90 and $95 million in Q1 and Q4. And then if you go back before that, it was earning between 130 and 140 consistently. Is there something in particular that has been going on in the last two quarters, maybe stepped-up investment levels, or you alluded to higher BCLs in Asia, I presume that hit there? Some color would be helpful.

Certainly the Asian provision for credit losses is part of it. Rob, do you want to talk to that?

Sure. There is -- you're absolutely right, Andre. There is a bunch of non-recurring items that hit this quarter. They would be things like executive officer compensation as a result of the share price, loan losses in Asia, as you have identified. There were higher pension expenses, a significant part of which were non-recurring. Then we had the ACG-13 impact, ForEx impact. The [ben-inter] fees which we had for a while, they dropped off. So when you take those altogether it had a big impact.

The overall run rate of the business is actually very good. The Caribbean had very solid midteens growth. So we are very, very happy on top of Mexico that the other areas of the International, and specifically the Caribbean, which has been our bread and butter for a long, long while before Mexico, continued to show good growth.

That's very helpful. Thank you.

Ian De Verteuil of BMO Nesbitt Burns.

It’s been a long week, so all I will ask is to get to follow-on Mario's question, because I did read the Grupo Scotiabank numbers and I am -- I think that is part of the reason it feels like such a long week. I understand that you're not going to provide guidance, but there look to be an additional $60 million of earnings where there were a number of what appeared to be accounting changes or securities gains. When you looked at Grupo Scotiabank what do you think the earnings were this quarter, excluding all the noise?

This is Rick. I will take it, and anybody else can chip in later on in that. Again, there's a lot -- between Mexican GAAP, U.S. GAAP, different quarter end -- or timing periods and whatever in that, it is very difficult externally. And I think it challenges even internally as we true it up. That is why again I cautioned on any quarter on Inverlat of annualizing the quarters.

But the fundamental rules, first of all, we have given you some volume numbers on the products and whatever, they are all as you can see growing very, very, very strongly.

And the core business, the one thing we have said is growing at 20% plus kind of growth rates. And we see that in the core business that is a sustainable business. But we obviously have a base, and we just average the two quarters. And again I'm not giving you any guidance on that, because it is difficult on a quarter by quarter to do it. But this bank reported earnings of $400 million, and that is a pretty good number. That number will grow in the midteens to 20%. Is that any help?

I think if you are asking specifically on the gains, rather than make a big issue out of the gains in Inverlat that are referenced on that page, around 10 to $15 million.

That is a gain on investment securities components?

Right.

And then there was the other issue of some of the accounting issues that --.

It would be in the same ballpark, maybe a touch higher. As Rick said, you take Q4, you take Q1, and average it, and that would be a reasonable run rate.

So Sabi just got to the same spot. I [get] back on the top down, he gets the bottom up.

I'm glad you guys are coming at it both ways. I had one other question, and I guess it follows on from your point about wealth management business. Where you indicated that your focus was much more on -- I think I understood you right to say that your focus was much more on the distribution than the manufacturing. Is that a shift in perspective?

No, we're not giving up -- and I don't want to give that impression that we're giving up on manufacturing. We know we have Scotia Cassels. We have Scotia Securities. There are Scotia Mutual Funds. And again just like a lot of retailers, they have their in-house brands, and we are going to have that too. So I believe that is important.

But distribution is what I really think that gives us a comparative strength. There’s a lot of good manufacturers around, and we want to be one of those too. But the manufacturers don't have distribution, we do. That distribution -- and controlled distribution. That to me is a comparative advantage that’s not only in our Bank of course, it is those that have it, have it. And that is what I really think.

It is being as close to your customers as many ways as possible. And it is selling them as many products as possible. And while we've got some good products ourselves, our mutual fund lineup is not as large as several of the others. And we have through our focus groups and what our customers are telling us, our investing customers and that, how confused it is out there with the aligning of products. So we're trying to in some ways simplify their choices, but give them choices and not just our own but others.

That is eloquent. Thank you very much.

Susan Cohen of Dundee Securities.

My questions have already been answered. Thanks anyway.

Patrick Blais of KBSH Capital Management.

If I focus on the Mexican operations and the quarterly run rate and trends, it seems as though you're suffering from significant net interest rate margin. That would be similar to your competitors in that market. Has Scotiabank taken any action to maybe mitigate this, especially in light of continued cut rates in short-term rates by the Mexican Central Bank?

It is Bob Brooks. The structure of P&C banks’ balance sheets in Mexico and the way that loans are priced in that marketplace has the effect of making the banks asset sensitive, such that when short-term rates come down, margins get compressed. As you point out, that is not unique to Scotiabank. That is right across the system.

The way we hedge against that is by acquiring investment securities as we attempt to play the cycle down there. And then lightening up on them when rates are falling. So you saw securities gains which were a result of a deliberate strategy to hedge the balance sheet.

Excepting that they are in two different categories, one comes in margin, the other one comes in other income.

Jamie Keating with RBC Capital Markets.

They are two simple ones so I will give them both at the same time. First, I just wonder if you could comment on core deposit growth? Certainly the GIC is strong, core is good.

And the other, perhaps for Bob Brooks again. Bradies seem from time to time get dividends or other action coming through. Is there any cycle we should be aware of this year on potential cash flow from the emerging market bonds?

It is Chris Hodgson. Core deposit growth was up 1%. And as Rick indicated, personal term deposits were up significantly, 8%. And our small-business deposits were up significantly too, and we gained market share in those areas.

It is Bob. As you see from our unrealized securities gains, the emerging market debt portfolio has continued to increase in value this quarter, and that reflects market conditions.

Yes, I have been wringing my hands, looking for when it comes.

We do not as you know actively trade that portfolio. There obviously is income on it. Some of the securities have worth of various kinds attached, which occasionally pay off because of other circumstances, but not -- that is not significant.

Mostly what happens is we take a view on price value relationships from time to time, in a particular part of the market. And we may sell some small amount of the portfolio or trade it for another emerging market security. There was nothing material this quarter.

Just one just qualification on core deposits. Because we have -- we are doing, as I mentioned, another GIC strategy, so our personal deposits grew 6%. And that includes personal GICs. And again I don't know the definition that you --.

That's helpful.

And whatever. Again, when you look at the total personal deposits side, the growth was much more. It is 6%.

Quentin Broad of CIBC World Markets.

Here I thought you were going to shut me out, Luc. And I just wanted to know if Rick noticed that Rob Pitfield suggested that executive officer comp due to a rising share price was a non-recurring expense?

You mean the late Rob Pitfield.

I don't know whether I missed it, but in terms of the trading revenue, and I guess for Stephen, obviously a huge number in the quarter, I think a record number, and almost across all the businesses except perhaps ForEx. Just what is going on in there? Obviously, all the banks showed up with some very good numbers, but this just looks that much better.

And in comparison, and no doubt your traders would appreciate hearing this, it would appear without a commensurate increase in the VaR risk. If you could just give us some color?

One of your competitors, TD, suggested that these types of trading revenues over at their shop were not sustainable. I'm wondering if you might have a comment on that too?

As you know, trading revenues are difficult to annualize. We did enjoy a very strong quarter in all our trading businesses this quarter, and on top of a record performance the year before. So it was quite strong. And it was a function of two things, strong market environments -- market conditions, commodities prices, equities prices allowing for the equities trading business to do well, and then significant client flow -- client activity helping with our derivatives revenues for the quarter. The other businesses, ScotiaMocatta was strong and FX was strong as well.

So I think it is difficult and perhaps not advisable to take this quarter and multiply by four for the year. And we would say that the conditions were quite exceptional in Q1.

Having said all that, I think on the global corporate investment banking side there was a sense that we were not operating at full horsepower in Q1. As you know, the new issue market on equities was challenged by government policy issues around income trusts. Our M&A pipeline was getting started, but not well underway in Q1. And some of our syndications businesses, particularly in the U.S., were relatively weak in Q1. Waterous is a very -- Scotia Waterous has a very lumpy revenue stream, and Q1 was not strong.

So we've got a number of things on the corporate investment banking side that we feel pretty good and pretty positive about in future quarters that should help offset if the trading markets are not as robust as they have been in Q1 of this year.

On a NICs basis in terms of the impact on NICs, or let me put it another way, the NICs -- the noninterest expense, i.e., comp that might be associated with trading revenues versus other revenues within the corporate bank, how would you characterize the expense load to these revenues relative to your NICs?

I would say that we do the best we can every quarter trying to assess what we think is a reasonable allocation for performance-based compensation for that particular quarter. And we do have models that we apply to derive these levels. And it is always a challenge to get those numbers right. And of course, they do fluctuate from quarter to quarter.

So I wouldn't try to derive too much out of the fact that the performance-based compensation is a relatively high number this year -- this quarter sorry. And that our direct expenses, which it is important for us to be managing, because that is what we're actually paying out in that quarter, are being well managed. We think we've got good control over our base expenses, and you should expect that we're going to continue to have good control in the old Scotiabank way over our total expenses, and that includes performance-based compensation.

Finally, I don't know whether for Luc or Rob Pitfield, just in terms of Grupo Scotiabank, the normalized -- or maybe it was even Sabi -- the normalized, did you say look at an LTM as kind of normalized, or just the Q1 plus Q4, and that average is kind of where your base is?

I think I implied the average.

Yes, I would go with that too.

Which should lead to a higher share price, right -- up?

(multiple speakers) I hope that is your forecast -- your forecast.

Thanks guys.

Any more questions on the phone?

There are no further questions on the phone lines. Please continue.

Thank you very much for participating. Have a great weekend. Talk to you next quarter.