Bank of Nova Scotia (BNS) 2006 Q2 法說會逐字稿

Good afternoon and welcome to the presentation of Scotiabank's second quarter results. I'm Luc Vanneste, Executive Vice President and Chief Financial Officer.

Joining us via conference called from Costa Rica where we held our Board of Directors meeting today are Rick Waugh, President and Chief Executive Officer; Bob Brooks, Vice Chairman and Group Treasurer; Sabi Marwah, Vice Chairman and Chief Administrative Officer and Rob Pitfield, Executive Vice President, International Banking. And with me today in Toronto are Brian Porter, our Chief Risk Officer; Steve McDonald, Co-Head and Co-CEO of Scotia Capital and Head of Global Corporate and Investment Banking; Chris Hodgson, Executive Vice President, Domestic and Personal Banking and Dieter Jentsch, Executive Vice President, Domestic Commercial Banking. Rick will lead all with the highlights of our results. I will follow with a review of the financials and then there will be 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 number two of our presentation which contain Scotiabank's caution regarding forward-looking statements. Rick, over to you.

Thank you very much Luc. And just as a side before I get going, Luc mentioned we're down here in Costa Rica with the full Board. We have got a three day across Central America tour as we're showing the Board our operations that we have down here and some of the opportunities we see become. So we are having a good but very busy two or three days down here.

In regards to our announced quarter, I'm certainly very pleased to report record results again this quarter. Our earnings per share was $0.89, up 10% from $0.81 a year ago and 0.6% from $0.84 last quarter. Our return on equity a very strong 23.2%, up from the second quarter in '05.

All three of our growth platforms contributed to a strong year-over-year increase in earnings. We experienced our best asset growth in several years with a 14% increase since the beginning of this year spread across all of our businesses. International Banking continued its strong growth momentum, an outstanding 44% rise in income. Scotia Capital also had excellent results with a record return on equity of 35%. Both of these businesses demonstrated their ability to earn through the negative impact of the stronger Canadian dollar.

In Domestic Banking, we had substantial year-over-year volume increase in residential mortgages, credit products, retail and business deposits, along with strong results in our Wealth Management business. Partially offsetting the volume growth though in domestic was a slight margin compression. However, the all-bank margin remained stable and it has now remained stable for four quarters.

Favorable credit conditions continue in Canada, the U.S. and into regions where we have a significant presence, including Latin America, the Caribbean and here in Central America. Our capital position remained strong, which allows us to make strategic investments for growth and of course continue to reward our shareholders with increased dividends.

Therefore, today, we announced a further dividend increase of $0.03, or 8%, to $0.39 per common share payable in the third quarter of 2006. Dividends are up 14% this year and have more than doubled in the past four years. In the past 10 years, dividends have increased by an average of 16.5%. We are very proud of this record of consistent dividend growth which of course is underpinned by consistent strong growth in our earnings.

Now looking at the business performance in more detail. Domestic divisions generated net income available to common shareholders of 296 million in the second quarter. That is an increase of 17 million, or 6% from the same period last year. We saw substantial volume, market share increases in residential mortgages and personal deposits as well as strong Wealth Management results this quarter. And while the acquisitions of the Canadian operations of the National Bank of Greece, and the mortgage business of Maple Financial Group did not have a full impact this quarter, they are expected to make a greater contribution to earnings in future quarters.

International net income was a record 268 million, a substantial increase of 82 million, or 44% from last year, helped by strong growth in Mexico but was also broad-based throughout the Americas. Scotia Capital reported record net income of 276 million, 37 million, or 16%, ahead of last year, and benefited from a stable credit environment during the quarter.

So in terms of meeting of our 2006 financial performance objectives, we are firmly on track to meet them. Our return on equity of 22.3% for the half-year is ahead of our range of 18 to 22%. Our earnings per share growth of 9.5% in the first six months is also at the top end of our 5 to 10% objective. Our productivity remains industry-leading at 55.2% and we continue to have strong capital ratios.

So with that now, we'll pass it on to Luc and we will go through the numbers in greater detail.

Thank you, Rick. Beginning on slide 9, as you can see this slide highlights some of the major swing items that impacted our EPS quarter-over-quarter and year-over-year. On the quarter, the positive and negatives more or less canceled each other out. On the positive side, lower credit losses were a positive $0.03. Lower tax rate was also a positive $0.03. Lower stock-based compensation, a positive $0.02 and higher securities gains a positive $0.01.

On the flip slide though, we had lower trading which was a negative $0.05; negative impact of foreign currency translation due to the stronger Canadian dollar negative $0.01, and the shorter quarter, which was negative $0.03 dollars. So the underlying growth quarter-over-quarter was $0.05, equal to the reported increased. On the year, the net effect of the items noted was negative $0.01 with underlying growth equal to a strong $0.09.

Just a word on the tax rate. The lower tax rate in Q2 was primarily due to higher international earnings in lower tax jurisdictions and certain dividends and securities gains that are taxed at lower rates. As well, you will recall, we took a charge in Q2 '05 against future tax assets at Scotiabank Mexico following announced reductions in Mexican tax rates.

Turning to slide 10, this slide highlights our broad-based revenue growth, up 5% year-over-year with increases in both net interest income and other income. The increase in net interest income was driven by very strong asset growth across all the businesses, up 12%, partially offset by 10-basis-point drop in the interest margin. The year-over-year increase of 50 million in other income was widely spread with Wealth Management fees up 32 million, higher card and activity-based banking revenues up 30 million, and stronger trading results up 32 million, although down from the record levels in Q1. Partly offsetting were lower securities gains and securitization revenues. Compared to last quarter, total revenues were in line notwithstanding the lower trading revenues in three fewer days [than] the [first].

Looking at the asset growth in more detail on slide 11, residential mortgages were up 8 billion, or 11%. Securities increased 16 billion, or 22%, due to a 9 billion increase in trading securities to support customer-driven activity and a 6 billion increase in asset-backed securities. We also began to see a pickup in business and government lending, up 5%. The other category, which includes personal lending, was also up 7%. And as Rick mentioned, we have experienced our best asset growth in several years with a 14% increase since the beginning of the fiscal year. This growth has been spread across all the businesses and in many key areas and products.

Turning to the margin on slide 5, as you can see on the slide, the all-bank margin has remained stable over the past four quarters, although business line margins vary somewhat partly because of the way we report our results. As we have mentioned before, margins have been under pressure for several quarters due to a number of factors. Six rate hikes since early September, not including last week's increase, which has had the effect of increasing short-term funding faster than prime. We have seen a significant and sustained flattening to the yield curve and competition in the market has been intense.

Partially offsetting this is a positive effect rising rates have had on our floating-rate asset portfolio and on the value of our core deposits and capital funding. We have had a strong personal GIC growth with increases in volume and market share. Notwithstanding these margin pressures, we have managed our gaps well. At the all-bank level, which is where we managed interest rate risk, the margin is unchanged quarter-over-quarter. Going forward, we expect some margin relief, although we are not expecting margin expansion immediately. As spreads stabilize, we should see opportunities to lever our strong growth in assets to increase our revenues.

Turning now to non-interest expenses on slide 13. Expenses increased 75 million, or 5%, from the same period last year. The year-over-year growth in non-interest expenses was mainly due to increases in salaries which occurred mainly due to acquisitions, higher employee benefits and increases in premises, technology and communications costs. Partly offsetting these increases was a decline in business and capital taxes. The other expenses category was up 33 million, a gain partly due to acquisitions. Quarter-over-quarter, expenses were flat. Performance-based compensation was up 21 million in Scotiabank Mexico, reflecting the finalization of the year-end payouts in Q1 '06. As well, payroll taxes rose 11 million due to a full quarter's impact of EI and CPP. There were also increases in technology and communication costs, as well as higher business development expenses, particularly in Canada and the Caribbean.

Offsetting these increases was a reduction in stock-based compensation due to the lower appreciation in the bank's share price this quarter, along with lower legal provisions and capital taxes.

Turning to slide 14, the Tier 1 ratio was 10.2% and tangible common equity was 8.6% this quarter, down from last quarter mainly due to the very strong asset growth and the increasing goodwill from the acquisitions. Risk-weighted assets were up 11 billion over last quarter, half due to organic growth and half due to acquisitions. Partly offsetting was the growth in retained earnings and higher minority interest from our acquisition in Peru.

Turning to slide 15 -- unrealized gains on investment securities -- our surplus remains high at 895 million, although it is down from Q1, '06. The decrease is mainly due to the realization of 108 million in net gains this quarter and 112 million decline in the value of our bond portfolio due to rising interest rates. During the quarter, we realized a $48 million gain on our investment in Shinsei Bank. At quarter end, the unrealized gain in Shinsei was $97 million.

Turning now to the business line results, first domestic on slide 17. For the quarter, domestic banking had earnings of 296 million, 17 million, or 6%, from the same quarter last year. Earnings were down 10% on a sequential basis due primarily to the shorter quarter and higher loan-loss provisions in commercial. ROE was strong at 27%. We concluded two acquisitions during the quarter in domestic -- the Canadian operations of the National Bank of Greece and the mortgage business of Maple Financial Group. While it did not have a significant financial impact this quarter, the acquisition of Maple increased our market share in the important mortgage broker market and added to our deposit base and will add to future earnings.

Domestic Banking revenues were up 5% year-over-year. Retail asset growth continues to be very robust, up 10% compared to last year, led by a substantial increase of 7 billion, or 10% in residential mortgages. Personal lines of credit showed strong growth of 11%. We also had significant growth in personal and business deposits with business deposits up a strong 12% year-over-year. As mentioned earlier, the rising interest rates and the flat yield curve continued to put pressure on our margins. Domestic margin declined four basis points this quarter compared to 11 basis points in Q1. For the past two quarters, retail asset growth was largely funded by retail deposits.

Wealth Management had another good quarter with revenues up 14% year-over-year. Mutual funds rose 19% year-over-year as we continued to see strong sales of our long-term funds, such as the Scotia Selected Funds, which recently surpassed the $1 billion mark in assets. Retail brokerage revenues were up 12% -- sorry -- $12 million, or 9%, reflecting higher customer trading activity. In fact, ScotiaMcLeod direct investing had record trading volumes up nearly 40%. Revenues were down slightly from last quarter due mainly to three fewer days in the quarter.

Strong organic business growth and acquisitions have increased our market share in key products, such as residential mortgages and personal deposits. In mortgages, we have increased our market share by 120 basis points and we are now number three in mortgage market share aided by the acquisition of Maple Trust and the Canadian operations of the National Bank of Greece. It's a similar story in personal deposits where we have increased our market share by an industry-leading 34 basis points year-over-year. We now have the third-largest market share in personal deposits.

Expenses in Domestic Banking remained well-controlled, up 3% from last year. This increase reflected growth in salaries and benefits, technology-related project spending and higher appraisal and acquisition fees in line with higher mortgage volumes. These increases were partly offset by lower business and capital taxes. Quarter-over-quarter, expenses rose 1% as the timing of expenditures in a number of categories was partially offset by lower stock-based compensation due to the smaller increase in our share price.

Moving to International on slide 21, this quarter, International had a very strong performance with contributions from the acquisitions in Peru and El Salvador as well as continued growth in Scotiabank Mexico. Net income was 268 million, up a significant 44% from last year and up 15% quarter-over-quarter. In addition to good organic growth and contribution from acquisitions, we also benefited from low loan losses this quarter. We continued to earn through the effects of a stronger Canadian dollar which reduced earnings by 14 million compared to the same quarter last year. ROE was 26%, up from 23% last quarter. Credit quality remains good in our international portfolios. Provision for credit losses was 1 million for the quarter, down substantially both year-over-year and quarter-over-quarter. This quarter, the effective tax rate was 8%, down from 17% a year ago due mainly to higher tax savings in Scotiabank Mexico. As well, as I mentioned earlier, there was a tax cost last year to adjust the value of future tax assets as a result of a reduction in Mexican tax rates.

Revenues in International Banking rose 15% year-over-year, or 22% after adjusting for the impact of foreign currency translation. Net interest income grew by 11% due mainly to growth in retail lending in the Caribbean and Mexico. Growth from our acquisitions in El Salvador and Peru was more than offset by the negative impact of the stronger Canadian dollar. Retail lending growth continued to be very good due to a combination of strong organic growth in our acquisitions. Excluding acquisitions, which contributed 3 billion and the impact of foreign currency translation, retail assets increased 22% with credit cards up 38% and mortgages up 23%. Retail assets in Mexico rose 22% and there was broad-based growth across the Caribbean, with the Dominican Republic up more than 50%, Barbados up 30%, Jamaica up 23% and Trinidad and Tobago up 22%. Other income rose 27% year-over-year. Approximately half of this increase came from the acquisitions in Peru and El Salvador with the remainder coming from growth in Scotiabank Mexico and smaller increases in Jamaica and Chile.

Turning to international expenses on slide 23, expenses rose 52 million, or 13% from last year, mainly as a result of the acquisitions in El Salvador and Peru. There were also higher compensation expenses in Mexico and Jamaica. These increases were partly offset by the impact of foreign currency translation. Quarter-over-quarter, expenses fell 2%, primarily as a result of lower litigation and benefit expenses. These declines were partly offset by the Peru acquisition and higher performance-based compensation in Mexico.

Looking at Mexico in more detail on slide 24, earnings were 124 million, up 46% over the year, but down 10% from last quarter's record levels. ROE continued to be a very strong 34%. Despite the negative $13 million impact of foreign currency translation, we continue to see strong revenue growth. Underlying revenues were up 12% year-over-year. This increase was driven by strong growth in retail asset volumes. Residential mortgages were up 26%, other personal lending rose 14% and commercial lending was up 14%. As I mentioned, expenses were up this quarter compared to last year due to a higher staff complement and the finalization of year-end performance payouts. There were also higher mortgage appraisal and acquisition costs and higher expenses for credit card rewards. These increases were partly offset by lower advertising costs and litigation expenses. Quarter-over-quarter, earnings fell 10% from last quarter's record results as lower security gains and higher performance-based compensation were partly offset by strong volume growth in mortgages and retail loans. Overall, we remained very pleased with the performance in Mexico.

Turning to slide 25, Scotia Capital had another record quarter with net income of 276 million, up 16% from last year and normal 7% quarter-over-quarter. Return on equity rose to an exceptionally strong 35%, also a record. This excellent performance was driven by solid assets and revenue growth and stable credit quality, partly offset by the negative impact of foreign exchange translation. We continued to benefit from the stable credit environment. There were no new provisions in the quarter and the recoveries were 54 million, comparable to the same quarter last year and up substantially from last quarter. Brian will have more to say on credit quality in a few moments.

Total revenues were up 4% (indiscernible) year-over-year, primarily due to growth in global capital markets where revenues rose 14%. Quarter-over-quarter, total revenues fell 6% as trading revenue declined from last quarter's record levels. This was partly offset by higher lending in investment banking revenues. Net interest income of 229 million was essentially unchanged year-over-year as increased interest recoveries from impaired loans and higher interest from trading operations was offset by reduced loan volumes and narrower credit spreads. Average earning assets increased 15 billion year-over-year with securities accounting for virtually all of the increase. Growth in our trading businesses and the purchase of asset-backed securities drove the increases.

Quarter-over-quarter, net interest income rose 20 million, or 10%, as higher interest recoveries and higher loan volumes were partly offset by narrower spreads.

Looking at other income, Global Capital Markets had another strong quarter. Precious metals had a record quarter, up 44% year-over-year and the derivatives and foreign exchange businesses also reported strong results, up 31 and 24%, respectively. In Global Corporate and Investment Banking, revenues declined as last year's results included a gain on the sale of an asset acquired through a loan restructuring. Quarter-over-quarter, other income declined due to lower institutional equity results, partly offset by higher loan syndication fees.

Expenses were down 1% year-over-year due to lower performance related compensation mainly from adjustments to the quarterly estimate to reflect recent payout experience. Support costs were also lower. These were partially offset by the addition of Waterous, which was acquired in the latter part of 2005. Quarter-over-quarter, expenses were essentially flat as lower salaries and stock-based compensation were offset by higher professional fees and technology costs.

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

Thank you, Luc, and good afternoon. I will be starting on slide 29. The story this quarter was continued stability in credit quality. The specific provision for credit losses this quarter was 35 million, a decrease of 40 million from last quarter. Compared to the same quarter last year, specific provisions were unchanged. Net impaired loans after deducting the specific allowance were 579 million, down 80 million from Q1 '06 and down 87 million from the same quarter last year. There was no change to the general allowance this quarter.

Slide 30 shows the breakdown of loan-loss provisions by business line. Provisions in the domestic portfolio were higher quarter-over-quarter and from the same period last year primarily due to provisions taken against two accounts in the commercial portfolio. Credit quality in the retail portfolio remains solid. Provision for credit losses in international were unusually low at 1 million, which was 26 million lower than last quarter and 25 million lower than Q2 '05. This quarter's provisions reflected retail and commercial provision reversals in the Caribbean, combined with lower provisions in other regions.

Scotia Capital had another quarter of net loan-loss recoveries. There were net recoveries of 54 million this quarter compared to 57 million last year and 16 million last quarter. Net recoveries were primarily in the U.S. and Europe. Scotia Capital continued to benefit from a stable credit environment and the effective execution of the bank's loan workout strategies.

The next slide shows the breakdown of the 11 million net formations by business line this quarter. There were net formations of 73 million in domestic retail. This is in-line with the strong volume growth in our portfolio over the last number of quarters. Underlying credit trends remained stable. The domestic commercial portfolio had net formations of 44 million. This was primarily due to the classification of two accounts.

International net formations were 9 million with retail formations in the Caribbean and Latin America offset by commercial declassifications in Asia and the Caribbean. Scotia Capital had net negative net classifications totaling 115 million, again largely in Europe.

Slide 32 shows the positive trend in impaired loans over the past two years. Gross impaired loans rose year-over-year due to the acquisitions that Rick and Luc mentioned earlier. They added 324 million to our gross impaired loans. However, they are more than 100% provided for. Overall, the trend remains positive. As you can see, gross impaired loans have decreased by 1.2 billion. Similarly, net impaired loans have come down by almost 800 million.

We continue to closely monitor our portfolios, particularly in the auto and forestry sector and actively manage our risks and exposures in addition to executing workout strategies and where appropriate selling loans. We also buy credit protection when we feel it is appropriate. During the quarter, we purchased approximately $800 million of credit protection across a number of industries to manage our portfolio risk.

Turning to slide 33, this quarter more than 87% of the days had positive trading results. There were eight days of trading losses in the second quarter compared to four days in the previous quarter. Overall, we continue to have low variability in our trading revenue and we run this business with very low risk.

On the next slide are the VaR trends. As you can see, our one-day VaR averaged 8 million this quarter compared to 6.8 million in Q2 '05. Compared to last quarter, the VaR decreased slightly with increases in commodity exposure, offset by declines in interest rates and equity exposure. As you can see, there were no days in which our trading losses exceeded the one-day VaR.

In summary, we had another quarter of stable market risk and credit quality. I will now turn it back to Rick.

Okay, thanks, Brian. So to recap and take a look at the future, this quarter, very strong quarter and we reached some important milestones I think during this quarter. In Canada, we now reached the number three position in residential mortgages and we're now number three in personal deposits, two very important product categories obviously for any retail bank. We closed two acquisitions in Canada which will help drive the growth even further.

In International, we closed the Peru acquisition and we're continuing to see some very strong broad-based organic growth, especially in retail assets. In Scotia Capital, another quarter of record earnings, great return on capital and we are now beginning to see a pickup in corporate loan demand in Canada and the United States. We though of course continue to be faced with challenges, particularly the ongoing strength of the Canadian dollar and the relentless pressure on interest margins. However, as we have demonstrated this quarter and indeed over the past few years, we are able to earn through these challenges and headwinds. As margins revert to more normal levels, I think we will be able to see how well we will be able to leverage this great capacity growth we have had and seen in the last few years. And of course, on an all-bank level, we have kept our margins flat for the last four quarters.

So looking forward, we are going to continue to drive our revenue growth by retaining and growing our existing customers' relationships but always looking where we can to acquire new customers. We are going to do this by investing in new resources, technology, marketing and increasing our distribution. By the end of 2007, we expect to add 50 new branches in Canada, more than 100 in Mexico and up to another 50 across the rest of our international network. And we will also continue to make effective use of our strong capital through strategic acquisitions. There are a number of future acquisition possibilities. We have a very strong pipeline and we are aggressively looking at opportunities in all of our major markets. Though the timing and the outcomes are not predictable, we are confident that the acquisitions' discipline will continue to be an important source of growth.

And finally, we expect credit quality to remain stable for the balance of the year. Major economies continued to show good moderate growth despite the higher interest rates and employment levels remain high, high levels, particularly here in Canada.

In summary, we have had a good quarter, a record quarter in reaching a number of important milestones and we are on track to meeting our key 2006 financial performance objectives. So Luc, back to you.

Thanks very much Rick. We will now open up to questions. Do we have any questions from participants in the room? Ian?

The international business obviously had an outstanding quarter. I'm trying to understand because it surprised how strong it was. It looked as if (indiscernible) or for ex-Mexico, the earnings are up 30 or 40%, and I was wondering if you could try to articulate what areas that was coming from? It looked as if Peru was only in for a month, so that could not have been a huge contributor. Why was it so much stronger?

Rob, do you want to take that question?

Sure. Ian, it was partly the acquisitions, to a limited degree; one month of Peru and El Salvador coming on strong. DR also came on strong. The Caribbean was broadly -- did a very good job, so that was good. Chile has come on.

Other areas besides Mexico performed wells, so all on all it was a very broad-based performance. And the kind of sales and service activities that we have been talking about for awhile that the domestic bank has practiced for a long time, we have been able to employ a lot of that. So we have been able to increase our sales time per sales officer by a very significant amount. We have been able to very significantly ramp up the dollar per sales dollar sale per week. So when you put that all together, it's contributed a very strong broad performance.

So, Rob, if I was to think of this, the loan losses I think were unusually good this quarter. But outside of that, is there anything that you would say is unusual in the non-Mexico business? Or, is this a sustainable level of profitability?

We think it's sustainable, we think it's sustainable. These are basic sales and service activities that we've been carrying out for two or three years now, and they are starting to kick in. And if you think that in many of these countries there's opportunities for further branch expansion. We are looking at sales forces outside of the branch. So that kind of consistent, solid growth is something that we will hope to continue.

Ian, if I can just elaborate on Rob's comments, if you exclude Mexico just the Caribbean alone, the earnings are up around 30% year-over-year. I think you heard in Luc's comment, if you look at our retail assets in the Caribbean, DR up 50%, Barbados up 30, Jamaica up 23, T&T up 22 -- so that just indicated what the broad-based asset growth across the Caribbean and Central Americas (indiscernible).

Next question, Michael?

A couple of questions. Maybe I will start with Rick. You commented about a strong pipeline of potential acquisitions, and I'm just wondering if you could give us some color on that? You know, where in particular? And what kinds of lines of business?

Sure. Of course, we don't comment specifically on any one specific one, but basically what we have been saying all along, they're essentially in markets we are in. We're not venturing out into new markets, so obviously the Americas is an area as you have seen in Peru and El Salvador. And so that will be a continuing process. In Canada, we closed on Maple, we closed on National Bank of Greece and we're going to explore all opportunities we can. Obviously mergers are not on the table right now. But in terms of the Wealth Management area and that, we will be looking. And some of them will be somewhat large in terms of the international side, such as Peru. You know we did about $700 million in the last little while, and -- but some of them are quite small. For example, just on Friday, we bought Citibank's retail operations out of the Dominican Republic; their credit card operation and their branches. We've done similarly that in the Bahamas with Citibank previously. And these are little add-ons but are very accretive. They are our core businesses (indiscernible). There's lots of opportunity in that pipeline right now. And so we are going to be pursuing that pretty closely. But nothing transformational that we see out there. You have heard me speak about the United States before and we don't see any urgency there because we have opportunities elsewhere in markets that we are all familiar with.

Okay, and I had one other one. The comment was made about higher level of interest recapture this quarter. Can you quantify the amount of interest recapture this quarter compared to prior periods?

This quarter compared to Q2 '05 was about in the neighborhood of 3 to 5, Michael. And in the current quarter compared to the previous quarter, it was around 7.

And that is quarter-to-quarter --?

Q2 '06 to Q1 '06.

Questions on the phone.

Steve Cawley, TD Securities.

-- was talking about a $50 million swing in the profitability of ex-Mexico. Does that drive you crazy from a budgeting standpoint? I'm just trying to get a sense of this. It's such a big swing in the quarter, I'm sure you can sympathize from analysts and investors who are trying to model this business that it's just so volatile. And while I can appreciate the growth, can you give a better answer for why such a big swing?

Luc, do you want me to take that?

Sure, go ahead, Rob.

If you break it down like this, Steve, we had -- remember the big hurricane that we took that occurred about a year, a year and a half ago, where we had to take big provisions for that? We were able to reverse some of them, so that was a chunk. Then, you had our acquisitions that are just starting to come on, so you had El Salvador that now is fully integrated and starting to contribute well. You had DR that's the same kind of thing. We had a major integration that we went through, and that's starting to come on strong. We have Peru which will do the same kind of process, so that has come along. And then on top of that, you have these core activities that we have been talking about for quite a while and it takes a significant amount of time to get those disciplines put into the system. So they are starting to contribute. So when you put that all together, we had a good quarter.

You are effectively telling us that you're hitting absolute home runs with these deals.

No, we go for doubles and triples and singles. Home runs when they come, they come. You know we're looking at quarter on quarter earnings and you know the economies are -- of the countries are a little more volatile than mature, but this quarter-on-quarter estimate thing is tough. I don't know how you guys even can do it yourselves. I know you want to go to day by day, but I think it's tough. But over a 12-month period, not to be flippant, it's (indiscernible) in our parameters as we forecast out, but there will be quarter-on-quarter swings, and this quarter everything went. But the fundamental growth rates as we quoted those numbers on the growth and the mortgages portfolio, the residential mortgages, the car loans and what have you, that is pretty broad-based business. But the numbers are there. Doesn't mean that we're not going to see this kind of quarterly swings and I don't think everybody should expect that, but our fundamental strategy of strong growth rates in these emerging markets, I mean that has been something we have been saying for many years. And we get hammered a little bit with the Canadian dollar, but we go through this and made high-double-digits.

I'm surprised there was only 14 million on the dollar. That was a year-over-year number you gave us, right, for the international division?

Yes.

Is there hedging there that helps mitigate some of your currency risk?

There's some hedging, yes.

Okay. So that -- it's pretty -- that's another thing that makes it maybe pretty hard for us to predict what the impact is on the bottom line.

I think the other thing, just amplifying what Rob said earlier, what we're doing is really leveraging a lot of the expertise that we have developed over time within the domestic network, and that is really starting to bear fruit, particularly in the Caribbean. As it relates to retail lending, we are -- year-over-year credit cards are up significantly, as are mortgages. We saw a very good double-digit growth in commercial volume. So you know, a significant chunk of the increase that Steve you were talking about relates to the Caribbean to those things that we have been doing over the last number of years that are starting to bear fruit in the current year.

Because the numbers certainly reflect that. Like the efficiency ratio is looking certainly a heck of a lot better than it has in previous quarters. So it looks like you're starting to be able to leverage what you have established in some of these prices.

Yes, the other thing is that we're cutting costs out of the system as well as we consolidate, and that is something that is obvious very much focusing on and hopefully we will be able to do that on a go-forward basis as well.

And the political climate in South America has certainly gone leftist. I don't really think that impacts much of your businesses, does it?

Rick, can I ask you to talk to that?

Sure, and of course we've got our Board down here and we're hosting the President of Costa Rica tonight and tomorrow the President of El Salvador tomorrow night, and I think we have the first Vice President of Panama. So we're trying to get that. And of course just on Central America, you have some very -- you hear a lot about Chavez, and we [can't not] discount that and some of the moves to the left in Bolivia where we're not. But the liberalization of the market-friendly (indiscernible) is still moving ahead without some -- notwithstanding the exceptions of Venezuela and Bolivia. Peru we're facing an election here. I guess it's this weekend or is coming up pretty soon. It looks like a market-friendly candidate will win and similarly in Mexico. But it's not a left or a right thing anymore. It's (indiscernible) most of these countries do recognize that the market-friendly liberalization of markets is working. But it does have to be distributed more amongst those that haven't participated. But there's not very much in radical thinking in these Americans as a way back to the '80s and '90s. And so this movement of growing middle classes and demographics, more privatization, you know, look at the Mexican banking system which has always been a problem in Mexico. In fact, it created crises so many times. Now, the Mexican banking system is the strength of the country. And so we're feeling fairly optimistic on both the geopolitical and the macroeconomic. NAFTA is working. Now we have a CAFTA. And so we do have some exceptions as I said in Venezuela and Bolivia. But in the markets we're in, we're feeling pretty comfortable on -- notwithstanding, there will be changes in governments and some of them will be to the left and some of them will be to the right. But democracy seems to be working down here.

And one last one. That tax situation in Mexico seems to evolve quarter by quarter. Can you just give us an update?

Yes, we fully expect to have tax loss carryforwards until the first quarter of 2007. We are continuing to look at tax attributes that we can use deductions on a go-forward basis. Beyond that, we would look probably to mid 2007 and beyond that our tax rate would be going up in Mexico. We would think that it would be somewhere in the neighborhood of 15 to 20% versus a higher statutory rate in Mexico of 25 or 28%.

Thanks very much and it looks like you guys have a reason to celebrate in Costa Rica tonight.

Rob Wessel, National Bank Financial.

Good afternoon, I just have very few housekeeping questions I think. The first is just to Steve's question -- the impact of the utilization of tax loss carryforwards from Inverlat this quarter. Can you please quantify that?

The entire difference was the difference between what we reported down in Mexico and what we picked up here. So we recorded 107 local earnings, Rob, and contribution to Scotiabank was 124. The difference of 17 is what our recognition was in the current quarter.

Okay. And the Q1 07 expiry is basically now moving it back. If I'm not mistaken, it was Q2 '07 last quarter and now it's Q1 '07. And is it fair to say, if you continue to grow earnings at a robust pace, that could move again, or are you now have a high degree -- this has been bouncing around -- do you have a high degree of confidence now that it's basically Q1 '07 that we should start seeing this move up?

Well, certainly it's impacted by earnings as you indicated, Rob. And if we have blowout quarters in the next two, that will utilize these tax loss carryforwards that we have not recognized yet. That being said, as I mentioned, we're looking at the potential of using other tax attributes on a go-forward basis which will have a mitigating effect, but not to the same extent as pure tax loss carryforwards. So we will continue to look at managing the tax rate there, but it will go up to the 15 to 20% range over a period of time.

Okay. And how to set compare -- not to flog this issue too much -- but how does that compare to last quarter Q1 '06 where you had 138 million of earnings? I'm just trying to get a sense for what the underlying earnings were in Mexico sort of sequentially taking that variable away.

We recognized around 15 in terms of previously unrecognized tax losses. As well, there were a number of Canadian GAAP entries that needed to be made that took the number from 150 to 138.

Okay. And the Shinsei after-tax gain, how much was that?

48 times whatever it is -- 65 -- (multiple speakers)

So a 35% tax rate?

Capital gains tax rate. It's capital gains rate, so you basically (multiple speakers)

I'm sorry -- there is a few people speaking, I apologize. What was the number?

35 after-tax.

35 after-tax, okay thank you. And then over to Mr. Porter -- the reversals in the Caribbean and Central America, I know that was a variable in bringing down provisions for international. Would you care to put some level of quantification on that?

Sure Rob. As Rob Pitfield said earlier, some of those were the provisions that we took last year at this time that were hurricane related, both in our retail and our commercial portfolio, and we just felt it was timely to reverse them.

And the amount roughly, some order of magnitude?

14 million.

14 million. Okay, I'm sorry for that all the detail here. But the very last question before I reach you if necessary, is the impact on [GMAC] -- does someone care to comment on what the impact was on some of the various line items for the bank? And maybe even it would be great if we had some level of whether or not this is contributing to the bottom line and if, what degree.

Certainly Rob, it's contributing to the bottom line. It has contributed to our net interest income line within Scotia Capital. In the quarter, it would have been in the neighborhood of $7 to $9 million.

Okay. And while you're here Luc, and now you're the new CFO, I think Ian De Verteuil asked a great question about the spread and earnings if you take out Mexico, and now it looks like it's getting to be a bigger and bigger amount. Do you think it might be helpful for everybody if you started to put some numbers around some of the other countries which are starting to contribute (indiscernible) the amount of revenues? Would you care to commit to that for next quarter?

Well, we'll take it under advisement. How is that, Rob?

Well, I'm sure the follow-up analysts will vote for more disclosure. Thanks a lot.

Mario Mendonca, Genuity Capital Markets.

You explained that 800 million, you purchased 800 million credit protection in the quarter. A couple of just to understand this is, first of all, is that Scotia's normal pattern? How did that sort of differ from what Scotia has done in the past? And if it is different, is there any message we can take from this?

This is Brian Porter speaking. It's a bit different than how we have managed the risk in the portfolio in the past. We took a look at credit spreads generally and didn't think that there was much likelihood of them tightening any further. And we felt it was advantageous to buy some protection, particularly around some industries and corporate names where we felt that we had significant concentration. We just felt it was a prudent risk management tool.

And that would the autos, presumably?

You know, it's across the board in terms of industry. If you look through our portfolio specifically, we bought some protection in the energy industry, we bought some in mining and industrial products, we bought some in auto. So it's broad-based.

So more a reflection of credit spreads being so tight than seeing any imminent risk?

Exactly.

Flipping over to trading, you referred to the $9 billion increase in securities. And throughout the press release, you refer to having this record quarter in precious metals. And sort of bringing it altogether, you also refer to having eight days of trading losses. And finally, you also refer to having found these trading opportunities. Are these all sort of connected, particularly the eight days of trading losses? And acknowledging of course that Scotia's strength is gold. Is the bank taking on additional sort of -- what are these trading opportunities that are taking on additional risk essentially?

I'm going to ask Steve McDonald to respond to that.

First of all, part of the [fees] of trading losses, they are principally around our proprietary trading or our institutional equity trading business, modestly around [Macada]. I don't think you should draw from it that we are taking largely, considerable more risk in the portfolio. It is more a reflection of that quarter versus the previous quarter. The previous quarter was a very tame and healthy market quarter for trading. Q2 was a little more normal. And there was a fair bit of activity and volatility around the oil and energy-related stocks, and that's where we faced the eight days. So I would not say -- I would say we're growing the business on the trading side, but we're not growing it inordinately. So you shouldn't expect that we're taking quantum increases in risk in that business.

So when you say trading opportunities, are you referring to essentially gold trading, or something else?

Well, I think it's across a number of trading businesses. Certainly Macada would be a big one for us.

Okay. Flip over just briefly to the NIM. In the press release, you referred to continue to pressures on NIM, and I think Luc in your presentation, you referred to potentially seeing some relief, if not -- but not expansion. Perhaps you were referring to two separate either geographies or time periods. But perhaps you could just clarify that for me.

Well I think -- we think we will continue to have pressure here domestically, but where we're hoping with the rates now not continuing to go up the way they have in the past, that by the end of this year, we will potentially see a reversal in the domestic margin.

And that is something you would think about at the end of this fiscal year, a bit of a reversal?

Yes.

And is that largely premised on the notion that the Bank of Canada could pause?

Yes.

Luc, it's Bob. Can I interject for a second here?

Sure.

If you look at the way we finance our domestic bank compared to the competitors, we finance a greater percentage with wholesale funds rather than core funds. When you get a steady and predictable rise in interest rates of the kind we have had, what tends to happen is the wholesale market anticipates the next increase by the central bank. And so wholesale rates move up faster than the administered rates, such as the prime rate and the mortgage rates which are driven more off of the Bank of Canada's actions. So that kind of scenario puts pressure on our domestic bank more so than it does on some of the other competitors. So we do think the Bank of Canada and the Fed for that matter, if they have not paused now for a long, are certainly very close to that. And hence, this kind of pressure will start to turn as the year goes on.

The second thing that has impacted our margin overall is in our U.S. operations where the absence of a yield curve of course has made it much more difficult to profitably fund those books. We're not bidding a yield curve again and that should help as well. So I think all of these things will see some margin improvement as we go forward.

The third component which has been talked about by us and a lot of other banks of course is the competition out there in the retail marketplace. And I don't know that we see an awful lot of relief there in the short run.

One sort of final unrelated question. You have heard a strong growth in your term deposits. A bank, another Canadian bank, routinely suggests that growth in their money market mutual funds has been sufficient or has been helpful in perhaps even slowing the growth in the lower margin term deposits. Is that not the case with Scotia?

Chris, do you want to respond to that?

Sure. We have actually had very strong growth in our deposit portfolio. In terms of our short-term money market funds, we have had money that has gone out into longer-term assets. In fact, one of the reasons why our mutual fund numbers are posting the way they are is we have had some of those assets have gone out into premium savings accounts that we have actually, we're still managing the money, but they have gone out into alternative products, such as the [Altamira] cash performer high interest. So there has been a bit of a movement there, but we still administer that money.

I see. But are you content to grow the term deposits? Is that still a good appropriate source of financing for that?

We absolutely do want to grow our deposit side and it goes back to partially what Bob was getting at before. We still have very strong retail asset growth and there was a comment that both Rick and Luc made earlier about our mortgage portfolio being up about 10%. But we are growing our market share in terms of the term deposit side and it is part of our strategy to grow our investment share of wallet. So we are putting a lot of focus in that particular area.

And we actually had a specific strategy of deemphasizing to some degree our Money Master, personal Money Master accounts and go into the personal term deposit. That was a campaign and a strategy that has got to be nine months old now. And for profitability and customer competitiveness, to me it's a very successful strategy and we have done very well. I'm very pleased with that.

So just to be clear, you like the term deposits over the premium rates savings account then, in terms of margin?

(multiple speakers) the dynamics of where you are in the yield curve and the rapid rise and how your portfolio can be repriced. [Obviously] if you stay competitive for your customers and give them a good yield, but in managing the portfolio there is certain advantages in a rising rate environment. (multiple speakers)

But also Mario if I can just elaborate on that, by going to term deposit, you can selectively go rather than pay a high interest rate across the entire base in your money master. You can be far more selective on how your price those deposits.

It makes a lot of sense because the Money Master gets applied -- the higher rate there gets applied on everything.

You got it.

I'm with you. Thanks.

Jim Bantis, Credit Suisse First Boston.

Good afternoon and congratulations on a good reported quarter. Just looking at slide 22 here, and you have given us a lot of details in terms of asset growth in specific regions. But how do I reconcile to the average assets being up only 8%? What was -- what brought that local number down? Was it Asia or FX?

FX was certainly a component of it year-over-year, Jim. Let me see if I --

I think it was 13 if you exclude the FX.

I don't have the numbers in front of me, Jim. I'm sorry. I will get back to you off-line.

Great, thanks. The great the next question I was going to look at was the NIM in international really reboundings from Q4 '05 to 393 to 415. And I think some of your competitors have talked about NIM stabilizing in Mexico. So I wanted to get a sense of the NIM expansion in terms of where it has been coming from and where do you think it's going as well in the international segment?

Rob, can you respond to that please?

Well, I think generally speaking, you will see the same kind of pressure on margins that you will see in Canada. But obviously because of the nature of the countries, we have got a wider margin to play with. Having said that, we put a lot of focus on retail products, unsecured lending, secured lending, credit cards. We have done a lot of work with deposit collection, core deposit collection. We have done a lot of work with trying to have a more disciplined approach to our -- to the management of our funds. So I think all that is just -- it has come into place. But you will still see the same kind of pressure on margins. However, I think that we have been managing that well over the last (indiscernible).

And it's a broader factor too, because you know with our acquisitions that we have been doing, and Rob leading the sales and service, we're become a much more retail bank in our international versus before. We were certainly in parts of the Caribbean and Asia a commercial bank with retail. Now we are a retail bank with commercial, if I could put it that way. And of course the retail spreads. If you saw that huge growth we had in our credit cards in Mexico in the last two quarters, we went on a huge campaign last year on credit cards in Mexico and signed up thousands of cards, the number just escapes me. But now we are getting balances in Mexico. And those balances in Mexico on credit cards have got very, very wide spreads, certainly a lot wider than lending commercial loans in Mexico. So I think you're getting the asset mix and now I again as we are getting further along in our strategies, that is showing up and that's giving us some net interest rate margin. And again, we're expanding in Peru and spreads are pretty wide in Peru. That's going to help add to that, and so there is a lot.

And as somebody said earlier, you know the forecast and certainly on a quarter by quarter gets a little hairy, but the trends are there. So I think that has moved to retail where the wider spreads are, it's having a big (indiscernible) part of that.

Thanks. And the last question, I think Rick it was your comment you were referring to corporate loan activity picking up. And I just wanted to get a sense from you and perhaps Steve McDonald as well -- are you finding that it's more M&A related in terms of financing transactions, or is the loan activity related to CapEx and organic growth within the people you're funding?

Steve, why don't you take it?

Thank you, sir. Utilization rates have not moved much, so we're not seeing them in terms of uptick and drawing down of existing facilities. It really is more M&A related. And we're fairly selective. We can choose what one deals we want to go into and not. So we have intentionally avoided to a fairly large degree the leveraged market in the U.S. We could have put on a lot of volume in U.S. leveraged land. But we have chosen not to because we don't think the risk in return is in balance there. So it is selective, but a lot of our clients in all our markets actually are engaging of course in merger activity, and that is yielding some draw, some new facilities that have resulted in some drawing down. So we're seeing an uptick in the last quarter and it's always difficult to try to find -- determine a bottom. But we see some evidence of loan demand increasing for a number of reasons. Margin pressure is still there, but the loan demand seems to be increasing.

We will take one more question. Any more questions on the phone?

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

Any more questions in the room. If not, thank you very much for joining us today and we will see you next quarter. Thank you. The conference is terminated.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.