Bank of Nova Scotia (BNS) 2006 Q4 法說會逐字稿

Good afternoon and welcome to the presentation of Scotiabank's fourth quarter and full-year 2006 results. I'm Luc Vanneste, Executive Vice President and Chief Financial Officer. Rick Waugh, our CEO will lead off with the highlights of our results. I will then follow with a review of the financials. Then Brian Porter, our Chief Risk Officer, will discuss credit quality. This will be followed by a review of business line performance and 2007 priorities by each of the business line heads. And finally, Rick will provide some general outlook comments. We will then be glad to take your questions. We also have our two Vice Chairmans participating in the Q&A.

Before we start, I would like to refer you to slide number two of our presentation, which contains Scotiabank's cautions regarding forward-looking statements. Rick, over to you.

Thank you very much, Luc, and welcome, everybody. I'm certainly pleased to report record full-year results and another solid quarter. For the year, our earnings per share was $3.55. That's a 13% increase. Our return on equity reached its highest level in recent years at 22%. And over the last four years, our ROE has averaged over 20%. I think a very good performance there. Looking at our fourth quarter results, earnings per share was $0.89, that's an increase of 11% of the same period last year. Our strategy of diversifying across businesses and geographies has once again allowed us to achieve record results and meet all of our key financial targets for 2006. For the first time, all three business lines, Domestic Banking, Scotia Capital, and International Banking contributed more than $1 billion in annual net income.

Our results also benefited from stable credit quality this year. This consistent earnings growth has allowed to us provide shareholders with regular dividend increases and today we announced a further increase in the quarterly dividend of $0.03 to $0.42, effective in the first quarter of 2007. Now taking a look at the 2006 performance by our business lines. In domestic, we saw strong asset growth and deposit growth resulting in good topline revenue and market share gains. However, we were negatively impacted by margin compression, primarily from higher funding costs.

Also, we had a solid result in wealth management, although not as well on our mutual fund sales as we would have liked. Solid gains both in small business and commercial banking. Of course, international had record earnings, up 32% driven by strong contributions from our recent acquisitions. As well, we benefited from strong organic growth. Particularly across the entire division. Particularly in Mexico, the Caribbean, and Central America with Asia also having a good year. Scotia Capital, too, had record results, up 14%. These were highlighted by strong capital market results, good growth in the loan portfolio, and a favorable credit environment.

Now in Canada, we achieved some notable successes. In a number of categories we had strong market share gains reflecting both organic and acquisition growth. Residential mortgages were up 136 basis points year-over-year. Total personal lending was up 82 basis points year-over-year. Personal term deposits were up 78 basis points year-over-year and total personal deposits were up 48 basis points year-over-year. I know we've been talking that one of our main priorities is is acquiring new customers. I'm very pleased to say that in 2006, we've added nearly 2 million new customers, 180,000 here in Canada and over 1.7 million in international, where we have, of course, made some significant inroads.

Now let me review how we performed against our priorities in 2006. Our first priority was a focus on sustainable revenue growth. This year, we were able to achieve revenue growth of 9%. All three of our platforms delivered with a particularly strong performance in international, which was up 17%. Our second priority, effectively manage our capital. In 2006, acquisitions were an important part of utilizing our capital. We invested about $1.5 billion in seven acquisitions over the past 18 months, and these have contributed about $100 million to this year's earnings. But as well, we made significant investments for organic growth. Investing in technology, delivery channels, and growing significantly our risk-weighted assets.

Of course we've maintained our strong history of increasing dividends, and we still, after all this, remain very well capitalized, with a tangible capital equity ratio -- tangible, pardon me, capital equity ratio of 8.3%. That's amongst the highest of the Canadian banks. And our third overriding priority focuses on leadership, on people, the management of our Bank. Our people execute well and that's the main reason we meet all our targets. As you can see on this next slide. Our earnings per share growth for 2006 was 13%. That was ahead of our target of 5 to 10%. Return on equity was 22%. That's at the very top end of our target range.

And finally, our productivity ratio was 55.3%, well ahead of our target of 58%. So in summary, I am very pleased to report that we delivered on our key priorities for 2006. We had record results and we have good momentum going into 2007. And I'll say more about that in our outlook and our growth prospects a little bit later. But now we'll turn it over to Luc and Luc will review our financial performance in more detail.

Thank you, Rick. I will begin on slide 10.

As Rick mentioned, we had record earnings of ROE in 2006. The solid earnings growth was driven by strong asset growth, the positive impact of acquisitions, and stable credit quality, offset partially by compression of the net interest margin as well as negative 4X impact. In Q4, net income was up 11% from the same quarter last year. The increase again reflected the positive impact of acquisitions, widespread growth in retail volumes, as well as higher trading volumes. Net income was $38 million below last quarter's record level. This decrease resulted from higher expenses, due primarily to the $51 million back recovery in Mexico last quarter, as well as a pretax $40 million negative impact of ACG-13, largely timing. Partly offsetting were lower credit losses from a $60 million reduction in the general allowance.

Looking at revenues in more detail on slide 11, total revenues rose 9% year-over-year. If we exclude the impact of 4X and the acquisitions, underlying revenues were up 8%, reflecting strong asset growth across each of our business lines. Year-over-year, the all-bank net interest margin was down 5 basis points. Total revenue in the fourth quarter increased 10% over the same quarter last year, again strong asset growth in each business line was the main driver. Quarter over quarter, total revenues rose by $10 million as higher trading, securitization, and investment management, brokerage and trust revenues were largely offset by the negative impact of ACG13 at lower investment gains.

Turning now to slide 12, which highlights the strong asset growth in more detail, all of the major balance sheet categories grew. Residential mortgages were up $10 billion or 14%. Business and government lending also increased, up 11%. Securities rose $16 billion, or 22%. In part due to our transaction with GMAC as well as an increase in trading securities.

Now turning to noninterest expenses on slide 13. Expenses increased $400 million or 7% from last year. Approximately 60% was due to acquisitions. Excluding the impact of acquisitions and the positive effect of foreign currency translation, noninterest expenses were 5% higher. The increase in part reflects our investment for future growth. Salary and benefits rose $280 million due to increased staff from acquisitions and the opening of new branches, as well as higher performance-based compensation. Premises and technology expenses increased $66 million, reflecting acquisitions and the new branches in domestic and international, as well as a variety of [durham] projects in Canada, Mexico, and the Caribbean.

And other expenses were up $54 million, also largely due to the impact of acquisitions. These increases were partly offset by the recovery of value-added tax of $51 million in Mexico. Expenses increased 8% over the same quarter last year, 70% of that increase was due to acquisitions. Quarter over quarter, noninterest expenses rose $100 million, mainly due not VAT recovery, as well as higher remuneration, technology, and advertising expenses. I'll now hand it over to Brian to talk about risk management.

Thank you, Luc.

I'll be starting on slide 15. Credit quality was once again stable this quarter. The total provision for credit losses in Q4 was $32 million, compared to $74 million in Q3, comprising $92 million in specifics and a $60 million reduction in generals. Net impaired loans were $570 million, down $111 million from one year ago. Quarter over quarter, net impaireds rose $91 million.

Looking at provisions by business line on slide 16, starting on the right, the total provisions in domestic were $279 million, a slight increase of $5 million from last year, reflecting continued strong credit conditions in both the retail and commercial portfolios. Specific provisions of $60 million in international were down $10 million from last year, a result of lower provisions in the commercial portfolios in Mexico, the Caribbean, and Central America. Scotia Capital had a net recovery of $63 million in 2006 compared to recoveries of $71 million in 2005. Each of Scotia Capital's three regions had recoveries with Europe reporting the most improvement year-over-year. On the left, quarter over quarter, lower provisions in domestic and international were offset by a return to modest provisions in Scotia Capital.

The next slide shows the breakdown of net impaired loan formations this quarter. Domestic retail had net formations of $77 million, in-line with the strong volume growth in our portfolio. Net formations of $29 million in commercial were due to the classification of several small accounts. International net formations of $27 million were in Mexico, the Caribbean, and Central America, partially offset by declassifications in Latin America and Asia. Scotia Capital had net classifications of $36 million, primarily due to two accounts in Europe, offset by a loan sale in the U.S.

In summary, we had another quarter and year of stable credit quality. Looking forward to 2007; we expect credit losses to rise somewhat as recoveries slow and our portfolios continue to grow. I'll now turn it over to Chris Hodgson, Head of Domestic Personal Banking to begin the finance review.

Thank you, Brian.

I'll be starting on slide 19. Domestic banking's 2006 results reflected strong asset and deposit growth, which translated into market share gains, as Rick discussed earlier. This growth was partly offset by margin compression. We also had solid performances in wealth management, small business, and commercial banking. Q4 versus Q3 net income rose 5%. Strong growth in assets and deposits as well as increased wealth management fees and lower credit losses helped drive the increase, while the margin pressure began to show some signs of easing.

On the next slide, looking at revenues in more detail, revenues were up 4% year-over-year with increases in both net interest income and other income. In retail and small business, we benefited from strong asset growth, in part reflecting our acquisition of Maple Trust. As well, we had higher transaction fees and higher card revenues. Part of this growth was offset by margin compression. In our wealth business, revenues increased from growth in mutual funds, up 21%, largely as a result of improved markets and a business mix and improved performance in our fund lineup. Higher retail brokerage, both in our full service and direct investing business units, and a 10% increase in our private client revenues.

In commercial banking, revenue growth came from an increase in assets, up 7% and deposits up 15%. Year-over-year increase in the bottom line in commercial banking of 13% and a positive operating leverage of 4%. Loan losses very well-managed in this business area. Compared to Q3, domestic revenues rose 3% in large part due to the asset growth and higher brokerage revenues. All three segments delivering revenue growth this quarter.

On the next slide, looking forward. Turning now to the outlook for '07. We are firmly focused on continuing to deliver sustainable revenue growth. At the same time, improving our earnings momentum and operating leverage in 2007. As you know, we've had great success in capturing our customer's borrowing business. We believe we have a significant opportunity to capture more of our customer's investment business as well. We have restructured and trained more than 5,000 branch staff and we are adjusting sales metrics to capture a greater share of our customer's investment wallet.

In addition, we continue to build on our successful strategy to grow our client or our customer base. Specifically growing key segments such as small business, commercial banking, and the emerging affluent. We will continue to focus on higher margin products, where we've had good success and is right for the customer. We plan to put even more focus on mutual funds and credit cards, where we can do better. From mutual funds, we've introduced our new technology sales platform and have set aggressive sales targets for 2007. In fact in November, we released net sales of $200 million, $150 million reported, $50 million of our partner's program, which is our best result in years.

We introduced new metrics in place effective November 1st to drive mutual fund sales. We have strong performance, as I mentioned before. 75% of our funds are in the top two quartiles over a one to three year period. We have our new technology platform called investment platform, which is in the process of being rolled out to allow us to consolidate third party mutual funds and our business mix, which is very important. In 2003, 48% of our sales were in long-term funds. Today, the number is 85%. So we believe that this business has turned the corner and we expect greater results through the balance of the year.

In retail deposits, we also have good momentum. We have a goal of opening 120,000 net new transactional accounts annually, double our current rate. We will do this through new partnership accounts, increased cross sell, and innovative promotions, such as our campaign to fly free when you open a new Scotia One checking account. In addition, we expect good results out of our new Cineplex relationship. We're also focused on acquiring new customers through ongoing investments in our distribution networks. We plan to open 35 branches in 2007 in attractive, high-growth markets. We opened 15 branches in 2006. We'll increase our sales capacity.

We expect to add 100 financial advisors in our branches in '07 and 100 investment executives in ScotiaMcLeod, which would bring us to 1,000 IEs by the end of '07. Also, we will continue to pursue selective acquisitions, both in the retail banking space, but also with a particular emphasis on the wealth businesses. I'm confident that building on our solid foundation by focusing on these priorities will enable the domestic bank to improve earnings momentum and generate operating -- positive operating leverage in 2007. I'll now turn it over to Rob Pitfield to talk about international banking.

Thanks, Chris.

Turning to slide 23, international banking's net income increased 32% from last year. The strong performance is achieved notwithstanding the 4-X and if you adjust for that, net income rose 40%. Return on equity was a strong 23%. Most of the significant contributors to earnings growth were Mexico, the Caribbean, Central America, and our acquisition in Peru. Mexico's net contribution increased 65% from 2005 mainly due to good loan growth, higher retail banking revenues, and $51 million VAT recovery. Results in the Caribbean and Central America were helped by acquisitions in Costa Rica, El Salvador, Dominican Republic, as well as strong underlying loan growth and high credit card revenues.

In Q4, net income was $268 million, up 54% from the same period last year. The increase was due primarily to strong growth in all regions, the highest being Mexico followed by Asia and acquisitions in Peru. Compared with Q3, net income decreased $17 million primarily due to the VAT recovery, but excluding that, quarter over quarter earnings were 15% higher across the division.

If you turn to the next slide, speaking about revenues, looking at the revenues for the region, Mexico's 2006 revenues rose 14% despite $62 million negative impact for foreign exchange. This increase was driven strongly from volume growth including 54% in credit cards, 28% in mortgages, and 15% in commercial loans. Revenues in the Caribbean and Central America increased 11% in 2006. The results of the full-year impact of the El Salvador acquisition as well as solid underlying loan growth, an 19% increase in retail loans, 22% increase in commercial loans which is very strong. Latin America and Asian revenues increased $37 million in 2006. The increase is due primarily to our acquisitions in Peru. 24/06 revenues increased 26% from last year, 6% from Q3 '06. Major contributors to the year-over-year and quarter over quarter growth were acquisitions in Peru, Costa Rica, as well as our strong organic growth.

If you turn to our 2007 key priorities, our key revenue driver will continue to be our focus on leveraging sales and service not only across our core operating franchises, but as well as our new acquisitions. Secondly, we'll continue to look at -- or the new acquisitions, but we'll continue to look for further acquisitions. Our pipeline is strong. We expect to have the same kind of performance 2007 as we've done in the past. Our focus will be continue to be in basic PNC banking to build skill and scale. We'll concentrate on the Americas, Latin America, the Caribbean, Central America. We'll also try and increase our focus on those existing markets where we already have a presence, already have an infrastructure the way we did in Costa Rica and Peru. We'll also try and not only realize revenue growth from that, but good synergy expense savings as well. In addition to those types of acquisitions, we'll also look at ancillary businesses such as insurance and wealth management.

When you combine that all, we believe we'll do well in 2007. From that, like the domestic bank, we'll also look at build out our branches because there's natural acquisitions for Mexico, we'll concentrate on trying to put in 100 branches in Mexico, another 25 throughout the rest of our international holdings. So if you look at branches, if you look at our acquisitions and you look at our sales and service organic growth, we expect to have a very good 2007.

So I'll turn it over to Steve.

Thanks, Rob.

Beginning on slide 29, Scotia Capital had record results in 2006 with net income up 14% and ROE of 31%. The strong performance was driven by solid revenue growth of 10%. We continue to benefit from a benign credit environment, which again resulted in net loan loss recoveries.

Expenses remain well-controlled, up a modest 3% from last year. Quarter over quarter, earnings were down primarily due to lower revenues and higher provisions, partly offset by lower expenses. Looking closer at revenues on slide 28, for 2006, global capital markets revenues rose 12%. Most trading businesses were up with particularly strong performance in derivatives, precious metal, and foreign exchange, partly offset by lower equity trading. In GCIB, Global Corporate Investment Banking, revenues rose 8%, increased lending volumes higher interest recoveries contributed the growth in net interest income. This is partly offset by a continuing tightening of credit spreads. We also had record M&A revenues and record M&A revenues were achieved before including the full-year impact of solid results generated by Scotia Waterous.

Compared to Q3, revenues were down 6%, mainly from lower securities gains and interest recoveries, partly offset by higher derivatives revenue. Looking out at next year, John Schumacher and I will be focused on achieving sustainable revenue growth. First of all, we'll be continuing our NAFTA expansion by adding new customers and new part capabilities. Secondly, we will target growing customer segments, such the alternative asset segment with new products. However, we will deal only with select number of top-tiered counterparties. Thirdly, we will continue to build global industry specializations. Our well-timed purchase of Waterous has moved us into a much stronger North American and international position in the oil and gas sector. Mining is another industry where we have just added expertise, which positions us well for the future. Fourthly, will continue to leverage our long-standing client relationships and finally we will maintain our high credit standards. Executing on these priorities will enable Scotia Capital to deliver sustainable net income growth with a high return on equity.

I'll pass it back to Rick.

Thank you, Steve. In summary, 2006 was a record year for Scotiabank, one that you saw featured broad-based growth, built on our core strengths and one that saw us continue to invest for our future. So now looking ahead to 2007. The bottom line is we fully expect to deliver another year of record results. But to do this, we will continue to focus -- to focus on our three overriding priorities. The first is to focus on driving sustainable revenue growth. You've heard Chris, Rob, and Steve discuss some of these revenue-based initiatives that will be so key to achieving our objectives.

Well, revenue growth is our key priority. At the same time, we will maintain the strong expense management and credit disciplines that we're known for. On the expense side, we will continue to invest for the future. However, we will not lose our cost management discipline, it is part of our culture. Many of our growth initiatives are bearing fruit. Whether it's the market share gains that you saw or the topline revenue growth. Those initiatives that do not contribute to revenue growth will be cut back or eliminated. On the credit front, while we don't see any significant problems ahead, we do expect the environment may get somewhat tougher next year. So we will rely on our long-standing risk management strengths, which will be critical.

Now our second main priority is to continue to deploy our capital effectively and profitably. Our strong capital position, an advantage for us, allows us to invest for growth both organically and through acquisitions. We will also, of course, consider the additional dividend increases as a priority while doing share buybacks to offset dilution. And finally, we will maintain our focus on developing our current leaders and our leaders of the future. The depth and breadth of the management throughout our whole organization is a strength of our bank. That is why in 2006 we achieved all our targets and why we expect to achieve even higher targets in 2007 and beyond.

So now let's take a look at the targets that we have set for ourselves for 2007. First, we are increasing our earnings per share growth objective to a range of 7 to 12%. Next, we are raising our target return on equity to a range of 20 to 23%. And third, we are targeting our productivity ratio below 58%. And of course, because of this high level of profitability, we will also continue to maintain strong capital ratios and strong credit ratings.

So to conclude, we've had a very good year, a record year in 2006. It was a challenging year and clearly we will continue to face challenges in 2007. Increased competition, moderate economic growth, and probably a tougher credit environment. However, we remain confident that with our long-standing strategy, our discipline to stay on strategy, and with the many new initiatives we are undertaking in each of our businesses, we will continue to achieve strong results in 2007 and over the next several years. So with that, I'll turn back to Luc as our moderator and open it up to questions to our management team.

Any questions in the room before we go to the phones? Michael?

I guess for Steve and Rick, both of you talked about a tougher credit environment in 2007. We can read the newspapers about the things that are going on, but could you give us actual anecdotal information that indicates where you see this concern about a tougher environment coming up?

I'll start, perhaps. We have benefited from a wonderfully benign credit environment. We've said that. We see no evidence at this juncture of any problems on the horizon. There's nothing in our books that's giving us great concern. There's nothing that we can see in the market that's giving us concern. We are seeing all time types in terms of margins overall, so we're simply of the view that this can't last forever. But we don't have any data to suggest that it's going to change immediately or in the near term. We just know that in this business at some point, something comes along that surprises you. And so we are managing our books very carefully with that in mind.

The only thing I'd add to that, Michael, is that our portfolios are in as good shape as they've ever been, but as Steve said, you wonder when the cycle is going to turn. And anecdotally, if you look at the transactions that are being done in the U.S. market, where we saw leverage levels at 5 or 6 times last year at this time, they were at 7 or 8 times in some instances, there's a lack of covenants, amortization is back ended, terms are being extended, and pricing is getting compressed. We all know if you've been around markets a long time, that's usually a signal that things are getting pretty stretched, there's too much liquidity out there and it's not going to last forever. So as Steve said, we've maintained our discipline. As we've talked here before as an organization, we've not played generally in the LBO market in the U.S. For our organization, we don't think it makes sense, we don't think we get paid for the risk.

Is there any particular economic variable or price variable that you'd say you're particularly vulnerable to?

I'd worry about unemployment. Don't see it, don't see it in many places. Obviously we had a big surprise because of some macro economic thing that results in significant increase in unemployment. I think the retail portfolios would react fairly significantly. And while you may see it on some regional basises, that one would really worry. And obviously again, if there was a major change in what we see as benign macro economics, but you don't see that anywhere. So it's some spike in inflation, which you can talk to all the economists on that and you don't see it. So you get to the -- we probably had this discussion last year, more or less. And I guess that's what's sort of -- those of us that's seen cycles and those cycles exist and I tend to get around the world a lot, and we have these discussions with a lot of the peer groups and we talk about this and it's just this sense that we've had it very, very fine.

Now we could definitely get -- I think it's as good as it's going to get, but we may be in this environment longer than we think. There is a scenario that while it's not going to get any better, but we will at this very comfortable level bump along if it were. But we're going to be very disciplined and cautious and if our cautiousness is wrong, well so much the better. That's for the upside.

Thanks.

Ian, do you have any questions?

You're already scraping the bottom of the barrel?

[laughter]. Your own words.

I guess a follow-up on the -- I think Michael's focus was on the corporate side, but it doesn't look as if this quarter, particularly, has been different trends in the commercial, but the domestic commercial book has been looked to this quarter, you had a very unusual, quite low PCLs. I think your book's about $22 billion. Is there -- I would have thought Canadian dollar where it was that ultimately the commercial book will start to deteriorate, and the activity this quarter, you've seen great success.

Good question. Last year at this time, Q4 '05 and Q1 '06 we took some provisions in the commercial book. We were worried about it to a certain extent to the reasons you've articulated. Rising Canadian dollar, oil prices, the manufacturing base shifting offshore. The portfolio stabilized in and has been very resilient. It's performed very well in Q2, Q3, and Q4. We're very comfortable where we are and there are a couple small provisions but nothing meaningful to mention.

You've given slightly better disclosure on the commercial versus retailer here. When I look at it, should I think of a commercial loan book as having 50, 60 basis points of loan losses over a cycle? Is that --?

Our five-year average of loan losses in commercial is around, I'll be within two or three basis points here, around 39, 40 basis points.

Thank you.

First question on the phone?

The first question comes from Jamie Keating from RBC Capital Markets. Please go ahead.

I think that's me, Jamie Keating here. We've got Brian warmed up, so we'll stick with that end, or Stephen. I'm a little confused here, which is nothing new, of course. But I wanted to talk about corporate loan growth. I think I heard from Brian that things are stretching out there on covenants and so on, but on the other hand, the on-books growth seemed to be pretty significant in the Scotia Capital. I think it's up 28% year on year. We're seeing this at most of the banks, and yet spreads dropping. It seems like a stone. I'm just trying to reconcile these two thing, particularly in light of Brian's comments about covenants.

I'll make a quick comment and Steve can talk about it on a business perspective. The comments I made generally about covenants being light, that's more in the U.S. market. But we were seeing some of that in Canada and particularly in the leverage loan market where we're not really participating. Steve might want to talk about what's happening in the investment grade market.

We are focusing most of our efforts in the investment grade market. We've moved our portfolio increasingly more toward investment grade. As I mentioned last quarter, there has been a lot of activity, as you know on the M&A sphere affecting investment grade clients as well as noninvestment grade. So a lot of our growth has been driven by M&A activity, some of which is short-term in nature. It's refied into bonds and et cetera. So as long as that activity continues, we'll probably be seeing growth in our loan books. Because a lot of our growth has been around M&A of investment grade -- high investment grade quality credits, the spreads are very tight on those deals. They're very short-term facilities and very low spreads. So that has had an impact on our margin.

Another factor on our margin is that we have sold and traded out of some of our higher risk, higher margin loans as we've gone along here. We continue to prune the portfolio. And that's had a negative impact on margins. And of course any refies that are taking place these days with massive excess liquidity are being done at all-time thin spreads. So it's in large -- it's a combination of market driven and our own approach to the portfolio. We've, as Brian was saying earlier, chosen not to be actively engaged, heavily engaged in the noninvestment grade market in the U.S. We have picked up margins that way, we've chosen not to because we think that's not the prudent thing to do at this point in the cycle.

A terrific explanation, thanks. I also had a quick one on AGC-13. Perhaps for Luc. The delta of $0.03 quarter on quarter. Is that also roughly the absolute, it's very easy for us to ignore AGC-13, but without the absolute you're guessing.

In the third quarter, standing back from all of this, ACG subjects us to volatility depending on interest rate movements. As you know, not all instruments are qualified for hedge accounting and have to be mark to market. Over a period of time, the cash flows from these instruments even out with cash flows from other aspects of our portfolio. What happened in Q4, we had a major swing from Q3 in the mark to market on ACG13 due entirely to the timing of the inclusion of Maple Trust in our results. In Q3, Maple was consolidated of June 30 and there had been a runoff of interest rates that resulted in a mark to market gain of that time. By July 31, those rates had come down and resulting in increase from an ACG-13 perspective and that was included in our Q4 results. As we manage the P&L volatility or exposure to AGC-13 on a bank basis, now that Maple Trust is coterminous with the rest of the bank, that should decrease the overall on a quarterly basis going forward.

Luc, just to clarify, does that mean there was or was not an absolute impact from AGC-13 --

Absolute impact in Q4. Small in total, but there was a small impact in Q4.

Okay. Maybe I'll take it offline. So the $0.03, I should cut that off by $0.02?

Yes, that's right. Next question on the phone.

The next question comes from Andre Hardy rom Merrill Lynch.

A quick one for Luc and one for either Rob or Ryan. Tax rate was a little low this quarter. Can you remind us of what you're hoping to get next year? A range would be helpful. The other one on credit. On page 16, for the second half of the year, your provisions in Mexico were $5 million, which seems extremely low considering how strong your retail loan growth is. How much are commercial recoveries masking what I presume is an increase in BCLs just due to loan growth?

Andre, it's Luc. On the first question, we anticipate that our consolidated tax rate will be in the 20 to 23% range.

In terms of commercial recoveries in the international book, we had recoveries of about $22 million in Q4 and the bulk of those would have been in Mexico.

Thank you.

Next question?

the next question comes from Brad Smith from Blackmont Capital. Please go ahead.

Thanks very much. I had a couple of quick questions. First one for Rob. Just in terms of the customer growth we heard about earlier in the international, I was wondering if you could break that out in any regard between the organic growth and acquired customer growth.

In terms of the $1.3 -- sorry, $1.7 million, about 6, 700 would be pro. About 3, 4 would be Costa Rica. There'd be about $100,000 probably total in the DR. Commercial would probably be about 2, 300. I can get these numbers more specifically for you, so I'm sort of going off the top of my head.

I just wanted to get a general sense.

And then the balance would be organic.

So a couple hundred organic then, it looks like?

Probably higher than that, actually.

Okay, terrific. And I was just curious about capital generation in the international. In terms of your ability to fund further growth, are you still in a position where you would be reliant on your parent for future acquisitions at this point in time?

Sure. [laughter].

Although it's no free ride, Rob.

Rick is one of my good friends.

My rate is kind of high.

Are you generating positive capital down there at this point in time?

Absolutely.

Huge capital.

Yes.

Huge.

But not enough to fund acquisition growth?

Part of it, but not all of it.

Terrific, thanks. And just a follow-up question for Chris. Within the adviser channel, Chris, I was just wondering, can you talk a little bit about productivity and what sort of benchmarks do you use to manage that and how do you feel you stand relative to the competitive landscape in Canada?

Sure. We look at a number of things. We look at average assets per adviser, we look at the average book, we look at number of advisers, we look at total assets under management. Within our ScotiaMcLeod network, we have about $61 billion. We have just under 900 advisers and the average book size is just under $70 million. It's a very, very productive group.

When we go up in terms of new issue deals and Steve could probably comment a little more on that, but we do very well on the new issue side and we have a significant focus in converting more from transactional to fee-based business, so the fee-based growth within the Scotia McLeod business this year has been 20%. Which would be ahead of our competitors. We watch that number and also we look at insurance. So we absolutely look at all the metrics. I think in terms of average book sizes, we'd be a little less than CIBC Gundy or DS and that would reflect the average age of our sales force and experience.

Okay, terrific. Thanks so much.

Next question on the phone?

the next question comes from Mario Mendonca from Genuity Capital Markets. Go ahead, please.

A question that might best be for Luc and Rob. You do a great job this quarter and your press releases throughout the year separating the earnings accretion from the acquisitions and the impact of foreign exchange, particularly in Mexico. And in the presentation you demonstrated that 15% -- or sorry, $0.15 of earnings removed as a result of the strength of the peso relative to the Canadian dollar -- sorry, the other way around, the Canadian dollar to the peso. If you look at exchange rates right now, that entire $0.15 not necessarily comes back at ut you, but that $0.15 negative doesn't play out in 2007. What I'm trying to understand is on the acquisition front, because those two seem to offset each other a fair bit. Can you give us a sense for what the $0.10 in earnings accretion this year associated with acquisition, what that be for '07 assuming no additional deals. Because these deals weren't defense attorney all at the very beginning of 2006. Is there some way to help understand that?

It's Luc. On the effects side, the entire $0.15 is not in international and so it does not correlate in its entirely to your Canadian dollar/Mexican peso. Only about $0.07 applies to international. The rest is in Scotia Capital, which has operations in the U.S. and the U.K. as well as in Bob Brooks's world, who has foreign currency risk as well. So let me now turn it over to Rob to talk about the impact of the acquisitions as we see them for 2007.

We did about $85 million after-tax with acquisitions for 2006. Our pipeline is pretty good with respect to acquisitions that we'd hoped to do in 2007 and we have a certain amount planned for that.

But ignoring any additional deals, wouldn't just passage of time allow further accretion in 2007 relative to 2006?

Yeah. No, no, absolutely. We'll have our Costa Rica operations come on, we'll have Peru come on more. We'll have the D.R. come on, so we'll have benefits from that for sure.

Mario, we only had proof for effectively half of the year, so when we take a look at acquisitions, the number that Bob referred to, 85 is, the year-over-year increment. The total bottom line from acquisitions was $100 million after-tax. So when you're looking forward, you really have to effectively double the Peru component and look at when we did the other acquisitions and adjust for those as well.

Luc, a point of clarification. You corrected me by saying the $0.15 was not all Mexico. When we look at slide 34, you start off by giving us -- oh, you do Mexico and the U.S. -- I follow you now. You're saying of that $0.15, maybe a third of it might relate to Mexico.

Yes. I can give you the number offline, Mario. I'm saying about $0.07 of the $0.15 that affects translation related is in international.

Got it. That is the international, the $0.07. Okay, I'm with you there.

This is correct.

This is Sabi Marwah, approximately half would be U.S. dollar translation and half would be Mexico.

That's helpful. A question now for Chris Hodgson. You started off -- you sort of concluded your presentation by saying, it's time or it's the company's intention to focus on generating positive operating leverage in domestic retail in 2007 -- sorry, sure I heard that correctly, but then you went on and described how branch openings would be perhaps double in 2007 what they were in 2006 and that you were going to add 300 additional staff here and there. How do we reconcile those two? If the initiative spending could possibly be greater in 2007 than in 2006, and operating leverage was so elusive in 2006, how do you reconcile those two?

Well, there's a couple of things. First of all, we've made, over the last couple of years, we've launched this past year, a new term lending system which was not insignificant in terms of overall cost. We also have launched this investment platform that I mentioned on the GIC and the fun side and we're about to launch a new broker workstation. All of those expenses are not repeatable. Those are one-time items. The other point that I would make is that clearly the story in the retail business this year has been strong market share gains in all products, but mutual funds. But also still retail assets outstripping our deposit growth.

We've had a little more of a funding gap. We expect a return to a more realistic interest rate environment and in fact towards the end of the year, we are looking at rates dropping. That will have a positive impact in terms of our business, but we are building into our plans in '07 expenses to fund the increase and the number of branches and also the salespeople to support that. So our revenue numbers that we're putting in place will reflect that and we expect to have a positive operating leverage, but we're going to continue to invest in the business.

At the same time, I think one of the questions that's out there is clearly if you've had negative operating leverage for the past year and what are you going to do to invest in this business to give us the footprint that we need to see growth down the road.

Great. Sort of a related question, you suggested that there were some signs of relief on the domestic NIM front. And that's a comment I've heard probably starting from the middle of 2006. It sounded to me just from speaking to various people at the Bank that it looked like a little bit of a relief on the NIM front in domestic retail. It really hasn't played out that way, but you're suggesting again that maybe some relief. What specifically are you looking at? Or anything we can see from your public disclosure that would support the contention that there's some relief on the NIM front?

Well this last quarter is probably a reasonable example. Our NIM did decline 0.5, but it is slowing down related to that and a portion of that would be related to Maple Trust. As we look into the first part of year, we may expect to see a little more NIM compression, but as the year goes on, we actually believe that that will level out. If we have that rate compression change, then we're going to pick something up on the other side, so we it has slowed down. In the last quarter, we've noticed that things are slowing down.

It's Bob Brooks. Just to add another flavor to that too. At the margin in retail banking spreads have stabilized and in fact are starting to improve, at the margin. But it takes time for that to work through a portfolio. There's a lag. If rates stay steady more or less or start a lag. If rates stay steady more or less or start to decline, what is what our forecast is calling for, then that marginal affect will start to impact the portfolio as we go forward in next year.

Positively.

Right.

So you're essentially just saying lower wholesale costs positively and at the margin you're seeing better margins or NIMs --

We're seeing better pricing at the margins on the retail side, not in the wholesale side.

Sure.

Our funding costs went up 130 basis points over the year in short-term rates with that rapid rise we had in interest rates in the inverse yield curve and because of the rapid rise, we added our assets in retail very, very -- of course that had a cost to it with our forecast and then the margin and the average, because the assets are staying with us and repricing up even a little bit as they roll over, we'll catch up.

Thank you very much.

One last question on the phone?

The last question will be from Susan Cohen from Dundee Securities. Please go ahead.

That thank you. You've enjoyed some very strong growth, volume growth in Mexico this year. Can you give us some reasonable assumptions of what to look forward to in 2007?

Growth?

Yes.

We think that we'll be very much like this year, we'll be plus in that 10 to 15% range. That's what we're planning for. We'll be putting new branches, we'll be looking at new sales forces. Our credit card growth is very strong. We should be in that ballpark. If you look at all the numbers for 2006, we're not really planning on a whole lot of change from those.

Thank you.

Thank you very much for joining us this afternoon. That concludes our analyst call. We'll see you next quarter. Thank you.