Bank of Nova Scotia (BNS) 2007 Q1 法說會逐字稿

Good afternoon from Halifax and welcome to the presentation of Scotia Bank's first quarter results. I'm Luc Vanneste, the Executive Vice President and Chief Financial Officer. Rick Waugh, our CEO will lead off with the highlights of our results. I will follow with a review of the financials. This will be followed by a review of business line performance and an update on 2007 priorities by each of the business line heads. Than Brian Porter, our Chief Risk Officer will discuss credit quality and market risk. Finally, Rick will provide some closing comments. We will then be glad to take your questions. We also have our two Vice Chairman present to participate in the Q&A and John Schumacher, co-Head of Scotia Capital is also joining us by phone. Before we start I would like to refer you to slide number two of our presentation, which contains Scotia Bank's caution regarding forward-looking statements.

Rick, over to you.

Thanks very much, Luc. It's great to be here in Halifax 175 years anniversary. I'm very pleased to report another quarter of record results and a very strong start to 2007. For the first time, our net income exceeded $1 billion this quarter. Earnings per share was $1.01, an increase of 20% over the same quarter last year. Our return on equity reached near-record levels at 23%. And productivity, it came in at 53.6%, that's an improvement of 160 basis points year over year and 330 basis points versus the last quarter.

Now our strategy at diversifying across businesses and across geographies has once again allowed us to achieve these record results. So if we take a look at the performance by business line. In our domestic strong asset, strong deposit growth, along with good performance from our Wealth Management business resulted in good topline revenue growth. International had record earnings up 36% from last year, very well diversified and driven by widespread organic growth across the division, with positive contributions at the recent acquisitions in Peru, Costa Rica, the Dominican Republic, and Jamaica.

Scotia Capital also had record results, up 14%. These were highlighted by higher lending volumes in all regions and a favorable credit environment partly offset by lower trading revenues. Strong revenue growth and good expense control combined to produce positive year-over-year operating leverage. As you can see on the slide, the all-bank operating leverage was 3.2%. Three of the two business lines had positive leverage with domestic at 2.1 and international at 5.8%. Quarter over quarter all-bank leverage was even higher at 6.2%.

So let's look at this performance versus our stated objectives. Our year-over-year earnings per share growth was 20%, well ahead of our targeted 7 to 12%. Return on equity was 23%, at the top end of our target range. And finally, our productivity ratio was 53.6%, well ahead of our targeted 58%. So all in all, this puts us in a good position to meet our objectives for all of 2007. So with that let's move over to Luc and review our financial performance in more detail.

Thanks, Rick. Before I go through our results, I would like to briefly highlight the impact of the new accounting standards that were adopted at the start of the year. These standards require most financial instruments to be recorded at fair value. The impact on net income in the quarter was minimal, $8 million after-tax.

In terms of balance sheet impact, available for sale securities were mark to market, adding approximately $1.2 billion to their carrying value. The offsetting after-tax impact of approximately $750 million was added to accumulated other comprehensive income. This resulted in a significant increase in the bank's book value during the quarter, combined with the contribution of net earnings and the favorable impact of foreign exchange movements. Book value per share increased $1.86, up 11%.

Now turning to our results. As Rick mentioned, we had record earnings and a near-record ROE in the first quarter. Net income available to common shareholders exceeded $1 billion, up 20% from the same quarter last year and up 14% from the proceeding quarter. Total revenues rose 14% year over year while expenses rose 10%, resulting in positive operating leverage, as Rick mentioned. This quarter we benefited from favorable credit conditions with lower provisions for credit losses. There was minimal foreign exchange impact. Quarter over quarter, total revenues were up 7% while expenses rose 1%. Results were driven by similar factors as well as a good performance in our Wealth Management businesses and minimal expense growth, partly offset by the reduction of the general allowance in the prior quarter.

Looking at revenues in more detail on slide 11. Total revenues on a taxable equivalent basis rose $384 million or 14% year over year. This was driven by broad-based asset growth, including the impact of acquisitions and higher securities gains as well underwriting fees and retail brokerage revenues rose, these were partly offset by lower trading results and a compression of the net interest margin. Quarter over quarter, total revenue rose $215 million or 7%. There was good retail asset growth in Canada, Mexico, and the Caribbean and Central America. As well, there were higher securities gains and increases in several other categories, including trading, investment banking, and credit cards.

Turning to slide 12, sorry, which highlights the strong asset growth in more detail. Average assets rose 21% year over year as all of the major balance sheet categories showed strong growth. Residential mortgages were up $14 billion or 19%. Personal loans rose $4 billion or 11%. Business and government loans and acceptances also increased up $20 billion or 30%. Securities rose $21 billion or 26%, mostly from an increase in trading securities to support customer-driven activity as well as from acquisitions and U.S. retail automotive asset-backed securities. Quarter over quarter, average assets rose 5%.

Now turning to noninterest expenses on slide 13, expenses increased $162 million or 10% from last year, largely due to acquisitions which accounted for 60% of the increase. The remainder reflects normal salary increases and our investments for future growth. Salary and benefits rose due to the opening of new branches and higher staffing costs in Scotia Capital. Premises and technology expenses increased due to the opening of new branches in both domestic and international as well as several projects in Canada, Mexico, the Caribbean, and Scotia Capital. Advertising and marketing expenses also rose. Expenses increased a modest 1% from the prior quarter. This increase was driven by higher renumeration costs, partly offset by seasonal spending declines in some categories.

I would now like to take a moment to review the contribution from Scotia Bank Mexico. Looking at slide 14, you can see that we take the results in Mexican pesos convert to Canadian dollars, pick up our 97% share, and make certain adjustments each quarter to arrive at our Canadian contribution. The amount of the adjustments changes from quarter to quarter. This quarter the Canadian GAAP and acquisition adjustments totaled $43 million, somewhat larger than usual. There are two main reasons for this, taxes and loan losses.

With respect to taxes, we normally reverse the deferred tax debits and credits that are put through the local P&L as these are taken into consideration in our tax loss carry forward accounting here in Canada. This quarter there was a large debit locally that we reversed out on consolidation, whereas in the previous two comparable quarters, there were credits. With respect to loan losses, we make adjustments to conform local provisions with Canadian GAAP. Local provisions include amounts for performing loans, which are required under Mexican GAAP, but not Canadian GAAP. As well, this quarter's provisions taken locally -- were taken locally on certain old loans, which were already provided for at the consolidated level through our original purchase price allocation. Accordingly, these local provisions were reversed.

Going forward, we will continue to reverse a portion of the local provisions to conform to Canadian GAAP. We expect that half to three quarters of local provisions will flow through on a consolidated basis. Brian will have more to say on the outlook for loan loss provisions in Mexico in a few minutes. When we strip away the GAAP accounting differences, Mexico had another good quarter of revenue and asset growth, which Rob Pitfield will discuss in more detail. I will now hand it over to Chris to review domestics Q1 results.

Thank you, Luc. I will be now starting on slide 16. Domestic banking had solid earnings growth in the first quarter. Year-over-year net income rose 10%. Revenues increased 7%, which put us at the higher end of the range against our domestic competitors, reflecting continued strong asset and deposit growth and higher fee income, partly offset by margin compression. Expenses were up 4% due primarily to Maple Trust and National Bank of Greece acquisitions, as well as growth initiatives. Higher performance-based compensation in-line with improved results was partly offset by lower pension and benefit costs due to strong returns on pension assets. As well, loan losses rose modestly in-line with volume growth in the retail portfolio. Quarter over quarter, net income increased 8%. Revenues rose 1% while expenses fell 5% due to seasonal declines in some categories, partly offset by higher performance-based compensation and higher advertising expenses.

Looking at revenues in more detail on the next slide, revenues were up 7% from last year with increases in both net interest income and other income. Again putting us at the higher end of the range in relation to our domestic competitors. In retail and small business, revenues rose 6% as we benefited from strong mortgage and loan growth, as well as good growth in both personal and business deposits. In part, reflecting the Maple and NBG acquisitions. This growth has enabled us to earn through the margin compression.

In Wealth Management, revenues increased 17%, primarily in two areas. Retail brokerage, which had higher new issue revenue and increased customer trading activity and mutual funds from strong net sales and market appreciation. Compared to the prior quarter, domestic revenues rose 1% in large part due to higher brokerage and mutual fund revenues and broad-based growth in other categories, partly offset by some margin compression.

Finally, I would like to provide a quick update on some of our key priorities for 2007. We are firmly focused on delivering -- on continuing to deliver sustainable revenue growth, in particular from investment and savings products. We are very encouraged by the strong net sales performance of our mutual funds, where we have set aggressive targets for the year. Our net funds sales exceeded $1 billion for the first four months of the year versus net redemptions last year. Better systems, training, new sales metrics, and improved fund performance all contributed to these strong sales. As well, we had market share gains and personal term deposits up 52 basis points year over year.

We're also focused on acquiring new customers through an expanded distribution network and increased sales capacity. We opened five new branches in the quarter of a planned 35 for the full year. As well, we added close to 50 new financial advisors in our branches and expect to add 300 over the course of the year. These advisors are focused primarily on consolidating investment business from existing customers. Overall, a good start to the year. We're making progress in achieving our priorities and I'm confident that we will continue to deliver solid results and improved earnings momentum. I'll now turn it over to Rob Pitfield to talk about international banking.

Thanks, Chris. One of our strategic initiatives was to broaden our revenue base both in terms of geography and in terms of business. On that basis I would like to highlight through the pie chart that you see the change in our regional earnings mix caused by the regional acquisitions that we've done. As you can see, in Q1 '06, Mexico was the largest component, 59% of the division's bottom line with a net income of $139 million. The Caribbean/Central America, 35%, net income of 81 million and Latin America, Asia, and other, 6% with a net income of $13 million.

With our recent acquisitions of Banco [Vise] and Su de Americano in Peru, Interfin in Costa Rica, and smaller acquisitions in the Dominican Republic and Jamaica, our earnings have grown and the regional mix has shifted quite considerably. If you look at the contributions for this quarter on the upper pie chart, you can see that Latin America, Asia, and others have now tripled their contribution to 19% of earnings due to the acquisition in Peru and in Caribbean and Central America, earnings now have grown $26 million and contribute 34% of international's net income. Mexico now continues to be the largest contributor of 47%, but down from the 59% before. So that sort of gives you a perspective on the change in international's earnings over a very short period of time.

If you look at the results themselves, our net income was up $316 million, an increase of $83 million or 36% from last year, this is in part due to timing on expenses and reversal of pension expense. The revenues rose 30% due to the impact of acquisitions in Peru and the Caribbean Central America, along with strong organic asset growth across the division. Expenses rose 24%, 5% if you exclude the impact of acquisitions. This reflected the cost of opening more branches in Mexico as well as ongoing business growth initiatives. Loan losses declined as Q1 '06 included a large provision taken as a commercial account in Asia. This is partially offset by a higher tax rate as a greater proportion of earnings came from higher tax jurisdictions. Compared to Q4, net income rose $48 million, 18%. Revenues increased 8% based really on strong broad-based asset growth, the impact of acquisitions, and expenses essentially flat.

As far as the revenues, in a little more detail, Mexico, Caribbean, Central America, Mexico's revenues were a good, healthy 12% year over year driven by strong asset growth, mortgages were up 38%, personal loans, 32%, credit cards, 45%, as well as higher brokerage, trust, and credit card fees. Revenues in the Caribbean/Central America increased 24%. This resulted from the Interfin acquisition in Costa Rica, but it was also very solid growth across really all the countries, including particularly Puerto Rico, Bahamas, and Trinidad and Tobago. Latin America and Asia revenues increased 86%, primarily with the acquisition in Peru. Quarter over quarter, revenues in Mexico rose 12% on very good volume growth as I stated before. Positive impact of foreign currency translation in the Caribbean and Central America. Revenues were up a very healthy 11% due to volume growth and the inclusion of a full quarter's results for Interfin. In Latin America and Asia, revenues fell slightly, but that was the result of Q4 including a gain on the sale of a foreclosed asset.

So finally, if you look at some of the initiatives that we've got on for 2007, we continue to look for acquisitions and investment opportunities. We announced an investment of U.S. $94 million, 10% position in First Bancorp Puerto Rico. That gives us a window into a market that we've looked at for a long time. As well as during the quarter we finalized the acquisition of Dehring Bunting, and Golding in Jamaica, which will enhance our Wealth Management operations in Jamaica, as well as the Caribbean, we hope. We're continuing to expand our network, our branch network, our sales outlets, our customer base. We've added 17 new branches in the quarter, 13 in Mexico. We've doubled the direct mail programs that we've put out. We've launched a number of new initiatives with partner programs. We've put on a number of new customers, very significant number of new customers based on just pure organic sales and service activities. So we expect that we'll continue and have a good double digit growth for 2007. So, Steve? Scotia Capital.

Thanks, Rob. Beginning on slide 25, Scotia Capital had record results in the first quarter with net income of, $294 million, up 14% from the same quarter last year. ROE was very strong at 31%. Revenues rose 2% year over year as strong growth in assets was partially offset by lower trading revenues compared to record levels last year. Expenses increased 2% due to higher compensation and technology costs. We also continue to benefit from favorable credit conditions as we realized a higher level of loan loss recoveries, mainly in the U.S. Quarter over quarter, earnings were up $59 million or 25%. Revenues rose 10% due to higher lending volumes and interest recoveries and increased revenues in equity trading, foreign exchange, and precious metals. These were partly offset by lower advisory fees and lower spreads. Expenses rose 20% due to higher performance-based compensation and the hiring of a senior team to enhance our mining companies. As well we had loan loss recoveries this quarter versus provisions last quarter.

Looking more closely at revenues on slide 26, year-over-year revenue growth of 2% was driven by higher revenues in global corporate investment banking which rose 20%. This increase was driven by a 33% increase in loan volumes with growth of 37% in Canada and 38% in the U.S. Largely reflecting financing opportunities arising from global M&A activity. As well, there were higher interest recoveries from impaired loans, higher investment banking revenues, and increased securities gains. In global capital markets, revenues fell 11% year over year. Strong results in foreign exchange in precious metals were more than offset by declines in other areas particularly [Inaudible] and equities.

Looking at our 2007 priorities, first we will continue our NAFTA expansion by adding new customers and new product capabilities. For example, we are adding global transaction banking capabilities in the U.S. We are also continuing to build global industry specializations. Our purchase of [Waukis] has moved us into a much stronger North American and international position in the oil and gas sector and we are aggressively pursuing additional cross sell activities. Mining is another industry where we are adding expertise with recent hires which positions us well for the future. We're also developing expertise to enable us to target alternative asset managers. The infrastructure for this business has been built and we are looking to grow in a very selective manner with well-known, established funds.

Finally, we are maintaining our strong credit discipline. We have increased our focus on investment grade lending. More than 70% of our portfolio is now rated investment grade. Up significantly over the past five years. As well we will maintain reduced hold levels and limits. Executing on these priorities will enable Scotia Capital to deliver sustainable earnings growth with a high return on equity. I'll now toss it over to Brian Porter to talk about risk management.

Thanks, Steve. Credit quality was once again stable this quarter as we continued to benefit from favorable credit conditions. The total provision for credit losses was $63 million compare to $75 million in the first quarter of 2006 and $32 million last quarter. Last quarter's provision was composed of $92 million in specific provisions and a $60 million reduction in the general allowance. Net impaired loans were $579 million, down $80 million from a year ago and up marginally from last quarter.

Looking at provisions by business line on slide 30, total specific provisions in domestic were $74 million, an increase of $10 million from the same quarter last year, reflecting strong asset growth, particularly in the retail portfolios. Specific provisions of $19 million in international were down $8 million from last year. Mainly as a result of lower provisions in the commercial portfolios in Asia. In Mexico, higher retail loan losses in-line with strong retail lending growth were partially offset this quarter with the reversal of acquisition related provisions no longer required. Our losses and delinquencies in Mexico across all product groups are at or better than the Mexican peer group.

We expect that loan loss provisions in Mexico will trend up in-line with the growth of the retail loan portfolio. Quarter over quarter, provisions in international rose $11 million with a small increases in each of the regions. Scotia Capital had a net recovery of $30 million, due primarily to one account in the U.S. Compared to a net recovery of $16 million last year. There were no new provisions in the quarter. Compared to last quarter, provisions fell $56 million, again primarily in the U.S.

The next slide shows the breakdown of net impaired loan formations this quarter. Domestic retail had net formations of $81 million, in-line with the strong volume growth in our portfolio. Net formations in commercial were minimal. International net formations of $65 million were primarily in the retail portfolios in Mexico, the Caribbean, and Central America. Scotia Capital had net declassifications $75 million, mainly due to one loan sale in the United States and the declassification of two accounts in Europe.

Looking at net formation trends over the past year, our performance in managing problem accounts has been very good. This is reflected in low formations and the stability of our various loan portfolios. Reviewing formations by business line, net formations in the domestic retail portfolio have more or less -- have been more or less stable given the significant loan growth in recent years. Similarly, the domestic commercial portfolio has performed very well. In the international retail portfolio, net formations have been gradually trending upwards, consistent with the strong loan growth we have experienced, especially in Mexico. We have also achieved sizable declassifications in the international/commercial portfolio over the past four quarters. In Scotia Capital, we've had good success in returning several large accounts to performing status over the past five quarters. Overall, we had another quarter of stable credit quality. Looking at the balance of 2007, we expect credit losses to rise somewhat as recoveries slow and our portfolios continue to grow.

Market risk. Turning briefly to market risk, we had another good quarter on the trading side with only one lost day. Overall, market risk as measured by VaR declined slightly compared to last quarter. The average daily VaR was $9.2 million compared to $10.1 million in Q4.

Finally, I would like to briefly review our hedge fund credit exposure. This exposure is controlled by board-approved limits and is comprised primarily of collateralized lending and derivatives. We have three types of exposure, prime brokerage, derivatives, and short-term liquidity lines. With respect to prime brokerage, outstanding loans were $485 million as at January 31. Each loan is governed by a prime brokerage margin account agreement, which among other things allow us to value positions and make mark to market margin calls on a daily basis and close out any account at our discretion. Our credit equivalent derivatives exposure was just under $550 million, mostly in total return swaps. Almost all of our lines call for daily margin top ups and the equity derivatives and total returns swap lines also require up-front margin. Liquidity exposure was minimal. Overall, we feel very comfortable with our hedge fund exposure. We have had strong controls in place and limits and counterparties are carefully monitored. I will now turn it back to Rick.

Okay. Thanks very much, Brian. As you can see or I guess at least heard, we've had very strong first quarter and as I said, we're pleased to break that $1 billion mark for the first time. This performance was solid in terms of our major strategic priorities. Strong revenue growth, proactive capital management, revenue up strong 14% from the first quarter last year. This growth was well balanced between our organic growth and our acquisition growth, and we continue to see broad-based organic growth through all our businesses. And we are also seeing the strong, positive contributions from our recent acquisitions, particularly in National in Peru and Costa Rica. These acquisitions highlight the broader, ongoing diversification of our revenue and our earnings stream. As Rob mentioned, Latin America, Asia, and our other businesses contributed 19% of international's net income for this quarter and that's up from 6% in the corresponding quarter last year.

With regards to our second priority, capital management, the balance we achieved in both strong earnings growth and a high return on equity show the discipline we have in investing our capital. We are not sacrificing high returns for growth or growth for high returns. For the balance of the year, we will continue to invest in business growth initiatives. We will also continue to look for acquisition opportunities to grow revenue in each of our business lines. We are confident that this will well position ourselves to achieve our 2000 performance objectives and position us for even better growth beyond. So with that, let's turn it back to Luc now who will Chair the meeting and open up to questions.

Thank you very much, Rick. Could we have the first question on the phone, please.

Your first question comes from Jim Bantis of Credit Suisse. Please go ahead.

Hi. Good afternoon. Just a couple of questions. On the domestic banking side, Chris, a strong quarter relative to 2006 trends, you're particularly showing some operating leverage there. When I look at the revenue growth of up 7% year over year, how much of that is coming from acquisitions?

Jim, it would be actually a smaller amount because National Bank of Greece actually came on through the course of the year. Maple Trust would have contributed to that, but for the most part, it would be organic growth. You will start to see these acquisitions for National Bank of Greece and Maple Trust really kick in towards the end of this year and we just closed on our traveler's leasing on February 14. That really won't contribute much to this year's earnings, but more into '08. This is predominantly through the expansion of our network and also our wealth had a very good quarter. We saw some good gains in terms of our brokerage side. I think really the big story, if you will, has been the turnaround in our mutual fund business where our market share had been declining. In the last few months we've turned that around. We've got market share gains and we've got close to $1 billion swing in terms of where we were for the year ago.

Chris, you had mentioned on previous calls that there were a number of systems updates that were underway within the retail bank.

Correct.

Can you give us an update where they are at this perspective. It sounds like some of the training at the branch level has really kicked in as well.

Yes, Jim. Thanks. I think in terms of the systems, I've mentioned really three systems in the past, the term lending system and investment platform, and then XI, which is a contact management system for brokerage. Term lending system, TLS has been rolled out and that is essentially into our branch system and that for the most part, that investment has been covered off. Investment platform, we had a second launch, which just rolled out over the last couple of months. This allows us to consolidate third party funds at the branch level and have a consolidated plan account. Again, that is now in force and we have one more phase of that, Jim, to launch in '08.

Then finally, through the balance of this year, we will launch the XI system. It's about a $15 million system to our 900 advisors within Scotia McLeod. So by the end of the year, we will have really completed the majority of these three initiatives. One covering our mortgage book of business, the second on the investment side, including deposits, and then the third the contact management system.

In terms of the training piece, we have had ongoing training in our branches the last couple of years to focus on investments, which we've made clear in prior calls. And we did change our metrics as of November 1, to attribute a higher percentage of sales on the investment side relative to where we were a year ago. That's having a positive impact on our mutual fund sales.

Okay. Thanks very much, Chris. Just a question for John Schumacher. John, looking at the trading revenues, we've seen the market risk in terms of assets increase sequential quarters for a few quarters now. We've seen in the commentary, in the note to shareholders about more assets towards trading activities, yet you really haven't been really keeping up with the net trading revenues on that front. Maybe you can give us some of the dynamics that have been happening this quarter and why you've been lagging your peers.

Actually, the story starts with Q1 '06. Our comparison year over year is down 11%. Q1 '06 was really by far our best quarter ever. We had very active corporate interest rate derivatives activity on a number of accounts. A lot of volume that quarter. We also had a very big quarter in proprietary trading on energy. The combination of those two resulted, as I say, in a very good quarter in Q1 '06 and a swing to this quarter resulting from those two, I think is in the order of about $75 million. So that quarter was a blip and we did speak about it at that time.

If you looked at the trading revenue quarter over quarter, we are up 10% and some of the -- I think some of the other banks have probably positioned better in the fixed income market. I see in some of their comments that they're expecting interest rates to drop. I'm not as optimistic about that. So we haven't had that -- we haven't taken advantage of that one thing that really has represented an opportunity this quarter. So flat yield curves up until this week very low interest rate volatility has meant not very active -- not very active clients and not very many trading opportunities. Having said that, better than last quarter, I am looking forward to a solid rest of this year. So I'm not concerned about the trading revenue pattern.

Jim, if I can give you -- this is Sabi. If I can give you some longer-term perspective. If you really take our trading revenue, as you know, they can be fairly volatile. If you take the last eight quarters, this is the third-best quarter of the last eight. That will give you some perspective, this it is still a pretty good quarter.

Thanks for that, Sabi. Typically when you look at the banks in general, Q1, Q2 seemed to overweight trading revenues and the second half seems to fall off. I don't know if it's a seasonal impact. Do you expect the same with Scotia in that regards, or not so much?

I've usually felt that our Q1 and Q4 have been our better quarters and Q2 and Q3 -- especially Q3 include some summer months have been later. Having said that, our pipelines look very good. The things that are bouncing around here are relatively lumpy items, so there are timing issues and we do have visibility on some trades that will make this, I believe, a solid year. So I don't -- I wouldn't -- if you're thinking of this Q1 as a high water mark for us, I'm quite confident that that won't be so.

Thanks very much, John. I'll requeue.

I think Q3 is always done because all the base free traders go on holiday for all summer.

Your next question comes from Steve Cawley of TD Newcrest.

Rob, I just got the bad news from my boss that my bonus next quarter is going to be based on the accurateness of my international banking model.

Good luck to you, buddy.

Yes, so a great, big quarter again. My first question. Acquisitions certainly helped and you made note of that. Would you provide us a quantification of just how much those acquisitions on the bottom line had an impact year over year? The reason why I think it might make sense to disclose this, you guys do lots of acquisitions, when you make them, when you announce them it doesn't seem like the market has much of a reaction to it. Maybe if you tell us how good these acquisitions have been, when you do the next one, the market will give you the benefit of the doubt.

Yes. In terms of the acquisitions Q1 '07 versus Q4 '06, you're looking at $34 million and in Q4 '06 $33 million. So that gives you a perspective right there.

I'm sorry, I missed it. The $34 million?

Yes. In Q1 '07, it's $34 million.

Was the positive impact year over year?

Yes, that's a positive impact of 1. It's Q4 '06 it was 33.

Okay. So 34 million was the positive contribution of the acquisitions in Q4 '07 -- in Q1 '07? I just want to make sure I understand that?

Steve, the year over year change -- a number of these acquisitions came in during the year, I think the year over year change is a better number to look at, and that's more in the neighborhood of the mid-40s.

Okay. The second question that I had, and this is probably a bit of a lob ball for you, Rob, but the number that I'm impressed with is the efficiency ratio. Despite the acquisitions, or maybe because of the acquisitions, you tell me and despite these branch acquisitions, you're at 58%. Can you give me some sort of sense. Is this going to be a number that we should be thinking is going to continue to show improvement here, the efficiency ratio?

I don't think so, Steve. I think that this was a particularly good quarter for us, where as I said from the start, there were timing on a couple of things that made the quarter very good. I think that what you'll do is you'll see expenses that weren't necessarily fully kicked in for Q1. They will come on stream for Q2, Q3, Q4 as they have in prior years. So we've tended, if you look at our trend lines, we've tended over the last couple of years to have a pretty good Q1 and then as the spending initiatives start to ramp up then the level of income will level off to a degree and I would expect the same kind of thing to happen here. Our leverage ratio, I think it looks superb. I don't think it's really that superb. I think that when you regularize the revenues, regularize the expenses, we'll still be positive. Which to me, if we can be positive with all the expenses that we have we're doing okay. That's our game at the end of the day, just to stay positive and we will.

I'll leave you with one more question. I was comforted to hear that on terms of credit in international, I think I wrote this down properly, that you would expect credit losses to grow in-line with the growth of the retail portfolio?

Yes.

The reason I'm comforted by that, when you look at the Mexican GAAP number that you put out this quarter, the PCL number really jumped out big-time, which was quite confusing to me. Maybe, can you explain -- is it worthwhile explaining why that Mexican PCL number all of a sudden jumped up? It wasn't in line with the growth of the portfolio under Mexican GAAP.

Steve, it's Brian Porter. Maybe I can start and then Rob can talk about business conditions. But in terms of the Mexican business line, our underwriting standards have remained unchanged. What we've done, if you look at the portfolio, 75% of our retail portfolio in Mexico is comprised of mortgages and auto loans, so the overall portfolio grew 39% last year. Provisions and formations are tracking just a bit ahead of that, but it's coming from the credit card area and it's coming from the Scotia line area, which are off a very low base in terms of our total absolute portfolio. So as Rob has indicated in prior quarters, we've had different initiatives to grow the credit card business. We've used third party telemarketers, for example, different sales channels, and with that comes higher loan losses, because we're bringing in new clients where we don't have a credit history, per se. We're comfortable with the business, we think we're more than getting paid for the risk. Hopefully that answers your question.

Steve, it's Luc. One additional factor on this. Absolutely agree with what Brian is saying. The fluctuations relative to comparable quarters in those quarters, we had some reversals of commercial provisions no longer required, so that's why you saw more of a dramatic change this quarter.

Thanks, guys.

Your next question comes from Michael Goldberg with Desjardins Securities. Please go ahead.

Thanks a lot. A couple of questions that I had. First of all, I notice when I look at your unrealized equity gains that they're up quarter over quarter and yet you still had very healthy realized investment gains during the quarter. Could you give us a little bit of color on where those gains came from? And secondly, a question for Steve McDonald. Can you explain what you mean by adding transaction banking capability in the United States?

Michael, it's Bob Brooks. I'll take the first question on the securities gains, particularly the equity gains. We have pretty broad-based equity portfolios, both public and private. The public portfolios, when we disclose our unrealized securities gains are for that purpose mark to market. And you see that in the OCI. The private portfolios by and large are not. They're carried at cost until there's realization. So in that sense, the unrealized securities gains tends to understate the real if you will unrealized securities gains. There's nothing we can do about that because we don't control a lot of the private investment. In terms of the actual results this quarter, the lion's share of the equity gains did come from the private portfolios, some being third party funds that we are invested in, where there were contributions and in a couple of cases, private equity investments that we had made alongside funds. There was also a little bit from the public portfolios, but that's about it.

Thanks a lot.

Steve?

On the subject of the global transaction banking initiative in the U.S., we're pursuing obtaining a banking license in the State of Texas which will allow us to gather deposits nationwide amongst our 5 to 600 corporate client base in the U.S. We think that's important because our capabilities in Canada and Mexico when matched with our new found abilities in the U.S. will allow us to be a meaningful cash management provider to our client base across the NAFTA region. This is going to take some time to build out, but it's an important cross selling product capability that we're excited about being able to build in '07 and '08 and beyond.

And just so there's no confusion, that's a corporate client base, not a retail client base. It's a corporate one, which will work very well for us. And commercial.

Next question, please.

Your next question comes from Ian de Verteuil of BMO Capital Markets.

Just to echo Steve's comments, Rob, excellent numbers, and I think we definitely need a trip down to the Caribbean next month or so.

Any excuse, Ian, any excuse.

Exactly, the next month, preferably. I was wondering, Rob -- first of all, it was a very useful breakdown and I was wondering if you could give us the numbers for Q4 as well between Mexico, the Caribbean, and--?

Sorry, in terms of what?

In terms of net income, so the slide 20 that you've provided.

The pie chart.

For Mexico?

Just all three. That is a very useful chart so we could get a sense of the diversity. Do you want to get back to me on that.

Ian, we'll get back to you -- I don't have those numbers handy and rather than adding them in our head, I'll get back to you that after the call.

Sure. The next question would be for Brian. Brian, when I look at loan losses in Mexico, and again following on Steve's train of thought, the loan losses in Mexico, are $4 million this quarter. And if I look back at Q3 and Q4 of last year, you've run sort of 2 to $4 million and before that you ran in the 10s and 10 to 15s. When I think about the growth you've experienced in Mexico on a loan of about -- I don't know, $9 billion, to have $4 million of provisions in a quarter doesn't seem to me to be a lot.

Right.

So outside of -- let's leave aside the way a group like Scotia Bank reports and just think about loan losses in Canadian GAAP. How should I think about that $4 million number?

It's a good question. I think that if can I talk about GAAP for a sec, you're going to, as Luc said, continue to see Canadian GAAP adjustments for Mexican loan loss provisions going forward. We would expect that Mexican quarterly provisions to be in-line with what we've seen in this last quarter, given the growth from the portfolio and where we see the business headed.

So in Canadian GAAP--?

In Canadian GAAP they're going to be in the range of approximately 25 to 30 million.

Per year?

That's correct. Per quarter.

25 to 30 million per quarter?

In Canadian GAAP.

In Canadian GAAP. So this quarter it was 4? Are you saying it will be more 25 to 30 quarterly?

Go ahead.

Ian, in terms of what the run rate here was, was 277 local currency. So let's round that up and say $30 million. When we adjust to Canadian GAAP, all other things being equal, we expect that somewhere in the neighborhood of 50 to 75% will be what translates into the Canadian consolidated accounts for loan loss provisions for Mexico. So the pure math would be 50% of 30 to 75% of 30 or 15 to $22 million per quarter based on where we are right now.

That is going to mirror the growth of the portfolio and that is largely because if you take a look at the -- in our local press release there, you'll see at the back that under Mexican GAAP, we have to provide for performing loans. So that's what we back out. There will continue to be some volatility, though, because as in this quarter where we had some old loans that were disposed of that we had taken into account in our purchase price equation, there are still some left so when those get disposed of, they will have to take a provision locally to the extent that they haven't provided adequately, and that will get reversed on consolidation. But from a pure retail perspective, it's going to be 50 to 75% of the local number run rate to 50 to 300.

Okay. So to make sure I understand, this quarter there's obviously a lot of noise, but your -- in Canadian GAAP given your current position in your Mexican portfolio and given the growth that's experienced, a normally quarterly loss rate, all other things equal will be either side of $20 million?

That is correct.

15 to 20 is where we are estimating currently. You're absolutely right.

One of the things I've looked at Brian, I'm sure you has as well, when you look at the other big multinationals operating in Mexico, their loan losses are not a bit higher than last year. They are two to three to four times higher than they were in the previous year. And I'm not even talking Mexican GAAP, I'm talking their home country GAAP. So is there -- would you say that you guys are outperforming [Banamax], Banc of America, HSBC in the quality of your loan portfolio and the growth?

What I can say, is we've got some industry stats for last year in terms of delinquency. With the exception, with all product groups, the ones I've given you in credit cards, mortgages, auto loans, personal loans, et cetera, we're outperforming with the exception of autos on delinquencies. Our peer group in Mexico.

It's Rick Waugh. I haven't done yet the comparisons to the Mexican banks at least on this last quarters numbers and all banks are not the same. We did not buy the [Saffoli] which was the subprime residential. I think some other banks, not all, have been a little bit more aggressive in the doubt going to the -- I don't even want to call it subprime because of all the issues in the state, but some have gone further down market and they could be still very profitable business, but the provisioning would be higher. Again, we haven't done that analysis.

Essentially, Ian -- this is Rob. Essentially, Ian, the portfolio is performing very much in-line with our competitors. We're probably in the -- of seven banks, we're probably number three, seven being the worst and one being the best. We'd be about threeish. So the growth that you're seeing is very natural, it's very in-line with the portfolio, it's very in-line with the competition. The loan loss expenses are higher in credit cards. At the end of the day though, we only have about 10% of our portfolio in credit cards, about 5% in retail lines of credit. The overall loan loss expense is about 2.5, 2.7 on the portfolio. It's trending fine. It's just complicated when you go from Mexican GAAP to Canadian GAAP, et cetera.

Last question, just a follow-up on this, Luc. The other adjustment to the Mexican GAAP so I think you've very clearly outlined the issues on the loan loss adjustments. Can you give us some sense of these reverse -- the reversals of the taxes and the conversion?

Sure, Ian. Effectively, what we do is we take the local tax provisions and just back them out because we take everything into account from our accounting here on a consolidated basis for the loan losses that we have been recognizing in Mexico. We have effectively one more quarter that we're recognizing and on a go-forward basis, then I would suggest that you look at a run rate for taxes in Mexico in the neighborhood of 15% on a go-forward basis past Q3.

So -- this quarter you actually did have that 15% tax rate. But you reversed that in the consolidation? And are you saying that that reversal won't occur in the future?

Once we are past Q2, all other things being equal, what we will be doing is having a run rate that's about half of the statutory rate. Statutory rate is 28, 29 there. So it will be in a range of 15, Ian. There's lots of ins and outs in terms of deferred taxes, assets, and debits, credits, et cetera. That's how I would suggest you look at it. 15% on a go-forward basis, Q3 beyond.

Okay. I'll requeue. Thanks, guys.

Next question.

Next question comes from Mario Mendonca of Genuity Capital Markets.

Not to go too far with this, I'm still having trouble understanding how PCLs in Mexico or -- how everything, not everything, but things seem to change so much from one quarter to the next? Is there anything you can help in that regard?

Going back to what I said earlier, Mario, in the previous quarter, we had some reversals of commercial provisions that were no longer required and that reduced the overall provision for credit losses locally reported, but the underlying we had a similar run rate for the retail portfolio.

And going back several quarters, so the reversals weren't just for one quarter, they were for several quarters?

No, there were reversals in a number of quarters, certainly the comparable quarters, yes.

That's helpful. Loan growth in Canada, you can see that it looks pretty strong on a year over year basis and even strong -- strong even if you were to remove the effects of Maple. This quarter specifically, though, was there anything that -- did loan growth slow somewhat this quarter or market share losses?

Mario, it's Chris Hodgson. Actually our pipeline is still quite strong on the mortgage side, and when we look at our market share gains, we had gains of 130 basis points year over year. From a quarter to quarter basis, yes, it did slow down a bit. Though we're seeing very good volume growth through Maple. They are putting on some very very strong business and we expect that as I said before, the originations and the size of the book to be reasonable through the year.

The slowdown in the quarter, is there anything you can point us to?

Well, remember that we put a very significant push on here in the last two years on the investment side in working through our branch system and also putting some metrics in place to improve our mutual fund and our deposit growth. So in fact, what we're seeing now which has an impact on our margin, by the way, is that our growth in our deposits is getting close to the growth in our mortgages. In fact this quarter, they were pretty close. That's going to help us in terms of our margin and our spread. So there's been a much more active strategy in terms of the deposit side of our business and we picked up market share and checking and day to day Q over Q, but the bottom line quite simply is that there's been a very significant focus in the last two years in looking at the investment side of our business and that has had some impact in terms of our people in the branches and in the field and their focus on mortgages.

Would it be fair to say that there could ever be a point where Scotia would prefer to slow the pace of growth in the mortgage book?

That's a good question. I think that the important thing to keep in mind is that we particularly use that product to get new customer acquisition and also to cross sell so we have our step product, which you're very familiar with. So once we have got that on our book, we actually have five products that we sell within that versus just a stand-alone single model line product. There's a good cross-selling opportunity. Having said all of that, we have definitely accelerated our strategy in terms of growing our deposits and we're going to continue to do that.

And we will, but let me just say that I think residential mortgages is one of the great products of all times and we will continue to, as long as our customers want it and the underwriting remains stable, we're going to push it. It does result in lower margin because of course the margins on that are a lot lower, but it does certainly increase the profit. And then when we cross-sell, so I don't see any change in our strategy, but Chris is actually right, we're going to just do better on the other stuff, the deposits and the investment side, but not giving up our unrelenting focus to increase market share in our revenue and residential markets. It's great.

One final question. Can you offer us anything on how GMAC is progressing? Not so much what you've taken on, but more any kind of credit trends? Anything you can offer us there. And if you could couch your comments in the context of the U.S. subprime market. Not suggesting, of course that GMAC is subprime, but just couch your comments in that context, if you would?

It's Steven Donald. The whole GMAC portfolio continues to perform very well. And better than our models would have predicted. And that is with the most recent data and we get data monthly. So we've got a very good and keeping a close eye on this, but it's going very well. So I don't really see any connection to a subprime business with the product and the assets that we're dealing with here.

Just to be clear, our portfolio is 100% auto receivable. It does not include residential margins.

But some of the subprime autos have also looked a little bit soft recently. Again, the point I was trying to make clearly in my mind, is no connection there. GMAC, subprime, no connection?

No, none.

Next question?

Next question is a follow-up question of Michael Goldberg of Desjardins Securities. Please go ahead.

Thanks. First I'd just like to follow-up on the mortgage and cross-selling. This is a strategy that a number of the other banks have been using for quite some time, so what I would like is I guess some color from you as you ramped up growth in this business as to whether you think the real payoff is that you're having even more success than -- in cross selling than you originally expected in this initiative?

Well, as I think we mentioned a moment ago, I think the mortgage strategy and building the mortgage business has been part of the D&A of this bank and will continue to be as we move forward. The reality is that we have a very competitive product in the marketplace which is the step product that I mentioned a moment ago and we track the number of products that go into this and the revenue that comes from it and the cross selling. And in addition to that, there had been a question earlier about acquisitions. We pick up some additional business through National Bank of Greece, about 0.5 billion on the loan side and our Maple Trust volumes are growing. We had a very significant growth in volumes in Maple Trust in the first quarter. We have yet to leverage through Maple Trust the cross-selling and we're going to be working on an investment platform that will allow us the ability to integrate the Maple Trust mortgage system. So there's some cross-selling opportunities there.

The long and short of it is that our mortgage development managers and our salespeople out in the field are very focused in the growth of our mortgage portfolio and we will continue to promote that because it is something that we've been very, very good at and we're able to cross-sell into our other products including deposits and mutual funds. So for example, in terms of sitting down with customers, we launched a blueprint financial planning tool over the course of the past year, which allowed us the ability to understand the risk metrics of a customer and then to start to move them more into investment products, which is our proprietary funds or our partners' portfolios, if you will. This is another reason why we're starting to see some growth in both our deposit book of business and also our mutual fund book of business, Michael.

That's helpful. I had one other question. And I may be wrong, but it seems like the accounting change had a particularly big impact in adding to your book value. Can you just clarify that?

It did -- Michael, on an after-tax basis, other comprehensive income increased by $753 million. So that is larger than others. By comparison, we've had relative to available for sale securities and gains from losses on cash flow hedges, ours is $753 after-tax. Others range from a negative 91 to 327 but three of the four are single digits. So it is bigger, has a bigger impact for us by a considerable margin.

So why would that be the case?

It's unrealized gains on securities, Michael. If you take a look, I think it's the last slide in our package where we show at the end of Q1 '07 that we've got net 1.161 billion unrealized securities gains. That now goes into our equity box on an after-tax basis in the accumulated other comprehensive income. Others don't have that same magnitude of securities gains.

Okay, that's great. Thanks a lot.

You're welcome. Next question?

Next question comes from Shannon Cowherd of Citigroup. Please go ahead.

Hi. Just a quick question on your hedge fund exposure. Is there a particular specter focus, is there a dominant investment strategy, and are they primarily based in the U.S. or Canada?

The bulk of them would be located in the U.S. If you look at our hedge fund strategy that we deal with 40 to 50 managers, probably 80 to 90 different funds. The way we look at it is that we have to feel comfortable with the people and their track record, their investment strategy, and then we look at in terms of how we deal with them in terms of the net asset value triggers are important and obviously the appropriate amount of collateral and margin. But we've been very selective in terms of who we deal with. Hedge fund is a big term, as you well know. We've been very selective and in terms of strategy, it would be across the board. John, you might make a comment in terms if there's any balance one way or the other?

From a geographic point of view, we're most active, as Brian said in the U.S. We cover the Canadian hedge fund client market, but it just isn't that big. Pardon me. We do have groups active in Europe and Asia. So we're global in the sense -- in that sense. We have global coverage, but the biggest concentration is, I guess the U.S. and Europe would be the best way to describe it. The types of funds that we deal with are credit hedge funds, fund of funds, and prime brokerage. The prime brokerage initiative is of more recent vintage. I won't call it a start-up. We've got some traction in that area, but we have a long way the grow. And the product suite that we offer, probably the biggest product is the total return swap product, which is a way of providing the funds with financing. And as Brian indicated, we think it's -- as long as you select your counterparties well, which we believe that we do, it's a very good type of transaction because it's fully collateralized. You do a total return swap. You have ownership of the reference assets, plus you have collateral, which often comes in the form of cash with daily margining and top ups in many cases. So a very, very good credit risk profile. So we're growing that business, but we're doing it in the Scotia fashion and I think it's coming along nicely.

But no particular sector, like industry sector focus?

Industry sector focus. From a client point of view, the clients that -- it's hard to describe. Use the term industry sector in the funds arena. But our -- the three client categories that we're after are credit hedge funds, fund of funds, and prime brokerage. Does that answer your question?

Yes, thank you.

We have time for one more question.

the last question is a follow-up question from Ian de Verteuil of BMO Capital Markets. Please go ahead.

Just following-on the last question on hedge funds, great thanks for the additional disclosure on this. Brian, when you mention margin, I presume margin as leverage. So $1 of exposure, but we don't actually have a full $1 of collateral. Am I wrong, is this 100% collateralized?

No.

Do you want me to try that--?

Yes, you start, John.

Brian? What we're doing is helping finance assets referred to in this context as reference assets. So we enter into a total return swap. The way it's different from a loan is that we get, if it's $100 million total return swap, we get title to $100 million worth of reference assets. Those may be bonds, it can be any number of different types of assets. We get title to that. So if nothing happens, no valuation changes happen, we're in a sense fully collateralized because we have those assets. In addition to that, in some cases we've gotten as much as 25% margin. We don't get as much anymore, but call the range 10 to 25% of cash collateral in addition to all of the assets. So at inception, I feel that we have more than 100% of coverage. Just to repeat, all of the reference assets plus the margin, then we have margin triggers and on a daily basis we revalue and we're able to make margin calls. So it's very, very, very different from lending money. Does that help you?

It does and it's taking me the way I want to go, which is that you're very secured on this. What I don't understand is how does this allow anybody to finance anything? If they have $100 of assets and they give it all to you as collateral, and in fact, give you $125, how is it allowing hedge funds to finance themselves or fund themselves? It looks like they are almost reverse funding themselves?

No, they get the value of the assets in exchange. The swap is the financing vehicle.

I'll deal with this offline.

We've got the collateral in the top of--?

The benefit of the changes in value of the assets are the clients.

Right.

I'd be very happy to have an offline conversation with you on this if you would like.

Thank you very much.

Thank you for participating in our call today. It is concluded and we'll see you next quarter.