Bank of Nova Scotia (BNS) 2007 Q3 法說會逐字稿

Good afternoon and welcome to the presentation of our third-quarter results. I am Luc Vanneste, CFO. Rick Waugh, our CEO, will lead off with the highlights of our results. I will follow with a review of the all-bank financials, and each of our business line heads will review performance. Chris Hodgson, Head of Domestic Personal Banking, is out of the country and is joining us by phone today. Brian Porter, our Chief Risk Officer, will then 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 today to participate in the Q&A, along with John Schumacher, co-Head of Scotia Capital, and Dieter Jentsch, EVP and Head of Domestic Commercial Banking.

Before we start, I would like to refer you to slide number 2 of our present presentation, which contains Scotiabank's caution regarding forward-looking statements.

Rick, over to you.

Thank you, Luc. I am pleased to report our strong results this quarter. This is our third consecutive quarter of earning more than $1 billion. In fact, our net income was a near record, second only to our strong performance last quarter. Earnings per share was $1.02; that's up 10% from a year ago. But excluding the recovery of the value-added tax we had in international, earnings per share growth was a strong 16%. Return on capital remained a strong 22.7%, and our productivity came in at 53%. That's an 80 basis point improvement year-over-year.

Now taking a closer look at our financial performance for each of our businesses. Domestic Banking had a great quarter with 22% increase in earnings, and we are especially pleased with the increasing contribution from wealth management, from our retail branches, and our commercial banking in Canada. This is the third quarter now [in a row] of excellent results for domestic. And I think you're now seeing the solid results of those many initiatives that we outlined in all our previous presentations. We are developing a very strong retail and commercial franchise here in Canada, one that is growing, and one that is increasing in profitability.

Our international bank had positive results, and this was despite the sharp rising Canadian dollar as well as some mark-to-mark losses that took place in the quarter -- mark-to-market. We again benefited from our geographical diversification, diversification, with organic growth in most of our countries, and of course helped by the acquisitions in the Caribbean and Central America, all of this contributing to a good performance.

Taking a look at each of our regions. First of all, Mexico. Here retail loan growth remains very strong, and this Mexican market continues to provide us with excellent growth potential.

The Caribbean and Central America results were driven by both organic growth and acquisitions. This region is delivering excellent double-digit revenue growth.

And Latin America/Asia also delivered good loan growth this quarter.

Scotia Capital also had a strong quarter, led by excellent trading results and strong loan demand. We also continued to benefit from very stable credit quality, with excellent risk metrics in our credit and our market portfolios.

So overall, we continue to benefit from having three diversified growth platforms. Each has their unique opportunities. And this all allows us to achieve consistent earnings growth.

Some of the highlights for the quarter. On Domestic Banking, we continue to expand our distribution capability. We've opened 16 branches this year to date, and remain on track to open 35 by the end of the year. We are also on track to achieve the hiring of more than 200 sales staff this year, with about 180 of them on board so far.

As I said, we're pleased with our growing wealth management franchise. Assets under administration up 13% this year; assets under management up 10%. As well, our mutual funds rank number 5 across the entire industry, the whole industry, for net sales of the profitable long-term funds.

And of course, we continue to gain market share in several key products. For example, mortgage share is up 18 basis points again year-over-year, our share in term deposits up 21 basis points, and we gained 8 basis point share in mutual funds.

In international, we're moving forward with our strategy of both growing organically and by acquisition. Again, we are here expanding our distributions. This quarter we opened 40 net new branches and offices, with 36 of them in Mexico. We're on track to open another 85 in Mexico by the end of this year, and we've added 450 sales staff in our international division over the past year.

We've implemented several new product initiatives in the area of credit cards and small business. For example, in Jamaica and the Bahamas, we launched two new MasterCard programs aimed at the business segment, which will make credit facilities more available, especially for our small and medium-sized companies. And we also continue to pursue [accretive] investments in these high potential markets.

And in Scotia Capital, we continue to grow, and yet we maintain our credit and our market risk discipline. Our focus has been on investment-grade lending, with a very diversified portfolio, and all of [this] positions us very well in this current environment. The current volatility in the financial markets and tightened liquidity are already providing us with significant opportunities, which we can leverage, thanks to our strong historical relationships -- corporate relationships in Canada, US, Europe and Mexico.

And that leads me to my final point before we go into the business line presentation. The market volatility is focusing us, and particularly Scotia Capital, on three short -- key short-term deliverables. First, avoiding or mitigating any problems in our portfolio. And Brian will show you in a few minutes that we're in very good shape here. Secondly, working with our customers to help get them through this storm. And thirdly, pursuing the many opportunities that this volatility presents to a strong bank such as Scotia. We have a strong balance sheet, excellent liquidity, and long-standing, well-known customer relationships. We will be, and in fact we are, benefiting from the repricing of risk and the repricing of liquidity that is now taking place. With all that, we'll now pass it over to Luc, who will go through the numbers.

Thanks very much, Rick.

Turning to our results on slide 8. Net income was 1.03 billion, up 17% year-over-year, excluding the $51 million VAT recovery in Mexico last year. This growth was driven by a strong increase in assets across all of our businesses. Total revenues grew 11% year-over-year, as higher asset levels produced good increases in net interest income. We also benefited from higher trading revenues and securities gains. These increases were partly offset by a higher tax rate.

Quarter-over-quarter, net income declined very slightly. Higher trading revenues and securities gains were offset by lower interest and loan loss recoveries and the impact of foreign exchange translation.

As you can see on the next slide, the strengthening of the Canadian dollar in the third quarter, particularly against the US dollar, had a significant impact on our results, hurting us by $0.05 per share compared to last quarter.

Turning to slide 10, you can see that average assets rose 12% year-over-year, as all of the major balance sheet categories showed excellent growth. Residential mortgages and business and government loans were particularly strong, up 16% and 21%, respectively. The majority of this growth was organic, with some contribution from acquisitions in the Caribbean and Central America.

Looking at revenues in more detail on slide 11. Total revenues rose 11% year-over-year, with net interest income up 5% and other income up 18%. The increase in net interest income was driven primarily by strong asset growth. The increase in other income resulted from very strong trading revenues, along with higher retail brokerage fees and broad-based increases in other customer-driven transaction revenues. These increases were partly offset by mark-to-market losses on certain securities as a result of widening credit spreads caused by liquidity disruptions in several markets. Quarter-over-quarter, total revenues were up 3%, as higher trading revenues and securities were partly offset by the impact of foreign currency translation, as well as lower securitization revenues.

Now turning to non-interest expenses on slide 12. Expenses increased 9% from last year, or 6% excluding the VAT recovery. The increase reflected spending on growth initiatives as well as higher performance-based compensation in line with our strong results. Quarter-over-quarter, expenses were up 2% reflecting the longer quarter, higher performance-based compensation and business expansion. These increases were partly offset by the impact of foreign currency translation, plus lower stock-based compensation.

On the next slide, we continued to see positive operating leverage resulting from good revenue growth and our ongoing control of expenses. As you can see on the slide, year-to-date all-bank operating leverage was 4%, excluding the VAT recovery in 2006. While operating leverage may vary from quarter-to-quarter, as we've said before, our goal is to maintain a positive ratio for the year and one that we anticipate achieving in 2007.

Finally, let me say a few words on capital management. We continue to generate significant amounts of capital, nearly 2 billion after dividends over the first three quarters, thanks to the strong performance of our diversified businesses. We continue to invest this capital to grow our businesses, both organically and by acquisition. Risk-weighted assets are up a strong 12% year-over-year.

At the same time we are returning capital to our shareholders. We have increased share buyback activity somewhat this year, as we have bought back 12 million shares at a cost of 629 million to largely offset dilution. We also continued to increase our dividends, which have risen almost 15% over last year. Our dividend payout ratio to date this year is 42%, comfortably within our target range.

In summary, we continue to maintain a balanced approach to capital management. Our strong capital base allows us to continue to invest in organic revenue growth initiatives, be opportunistic and take advantage of acquisition opportunities, and weather any credit or market stresses, while at the same time providing a very strong return for our shareholders.

I will now turn it over to Chris Hodgson to discuss Domestic Banking's results.

Thanks, Luc. I'll be starting on slide 16. Domestic Banking had another very strong quarter with excellent earnings growth. Year-over-year net income rose 22%, and ROE was very high at 32%. Revenues increased 9%, reflecting continued strong volume growth in both assets and deposits. Expenses were up 1%, due primarily to business growth, including additions to our branch network that Rick referred to earlier, and an increase in our sales forces, as well as normal salary increases. These were partly offset by lower pension and employee benefit costs. Loan losses rose in line with strong volume and asset volume, or strong growth in asset volumes. Quarter-over-quarter net income was up 7%, driven by strong volume growth and the benefit of the longer quarter.

Turning to the next slide and looking at revenues in more detail, total revenues rose 9% from last year. In retail and small business, revenues grew 7%, as we continued to benefit from strong mortgage and loan growth, as well as higher personal and business deposits. As Rick mentioned, we continued to gain market share in mortgages and retail deposits. Higher volume growth has resulted in some margin compression, due in part to a rising proportion of lower spread mortgages. In wealth management, we had another record quarter, as revenues increased 19%. There were increases in all areas -- retail brokerage, mutual funds and our private client group. We also had a strong quarter in commercial, as revenues rose 7% on strong asset and deposit growth. Compared to the previous quarter, domestic revenues were up 5%, reflecting volume growth and the longer quarter.

Overall we had another strong quarter. We're seeing good progress in a number of growth areas, such as mutual funds and the expansion of our branch network. We're on track to achieve our two primary goals -- good earnings momentum and positive operating leverage.

I'll now turn it over to Rob Pitfield to talk about International Banking.

Thanks, Chris. International Banking's net income was 270 million for the quarter, an increase of 15% from last year, excluding the 51 million for the VAT in Mexico in Q3 '06. While this quarter's results were affected by some mark-to-market losses and the impact of ForEx, the overall core operating trends are good.

Total revenues rose 13%, primarily on the strength of robust volume growth in all regions. Average assets were up 8 billion, 14% from last year. Card volumes 26%. Mortgages 24%. Commercial loans 19%. Expenses were 6% excluding the VAT recovery, reflecting spending on business, [both] initiatives as well as normal salary increases.

The tax rate rose to 18% from 8%, primarily for reflecting higher taxes in Mexico, Asia and the Caribbean.

Compared with Q2, International Banking's net income was 8% lower. Higher retail volumes in most regions were offset by the impact of the strong Canadian dollar as well as the higher tax rate and the mark-to-market write-downs on securities. Excluding these factors, our core operating results were strong.

Looking at the revenues in more detail, revenues in the Caribbean and Central America up 19% year-over-year. Strong asset growth. Deposit growth across a number of countries including particularly the DR, Trinidad and the Bahamas; the benefit of Interfin in Costa Rica, the acquisition of the Citibank portfolios in the DR also helped.

In Mexico, revenues grew 6% with strong retail loan growth of 30% on widening spreads. And the volume growth -- credit cards and mutual fund fees also rose. This was offset somewhat by trading revenues this quarter, lower trading revenues.

Our revenues in Latin America, Asia and other increased 14%, primarily from higher loan growth in Peru and Chile, partly offset by mark-to-market losses.

Compared to last quarter, revenues were down 3% as growth from higher loan volumes [on the] quarter were offset by the mark-to-market losses and the foreign currency translation. [Remember], we had a strong underlying growth, good contribution from our recent acquisitions. We'll continue to drive revenue and act on our initiatives, and we think we'll have a good quarter coming up.

I'll turn it over to Steve.

Thanks, Rob. Scotia Capital had a strong third quarter with net income of $276 million, unchanged from last year, but down from last quarter's record results, which included very significant interest and loan loss recoveries. ROE for the quarter was 28%.

Revenues rose 5% year-over-year. We benefited from strong trading results, good lending growth and solid M&A advisory fees. The strong business growth is partly offset by lower levels of interest recoveries and securities gains compared to the same quarter last year.

Expenses were up 15%, due mainly to higher performance-based compensation, in line with stronger trading results and higher technology costs. The quarter-over-quarter results also reflected good core operating trends, offset by lower recoveries and the impact of foreign currency translation.

Looking more closely at revenues on slide 23, year-over-year revenue growth of 5% was driven mainly by higher revenues in global capital markets. We had a record quarter in derivatives from higher client activity and favorable market conditions. We also had solid results in fixed income and foreign exchange. These increases were partly offset by lower results in equity trading.

Corporate investment banking revenues declined compared to last year as strong growth in M&A advisory fees and good lending growth was more than offset by lower interest recoveries and security gains. The growth in lending volumes continues to be primarily investment-grade.

Compared to last quarter, total revenues were down slightly due to lower interest recoveries this quarter. Underlying revenues were up on higher trading revenues, higher M&A and advisory fees and wider loan spreads. Overall we had a strong quarter with good underlying performance in most of our businesses.

I'll now pass over to Brian Porter to talk about risk management.

Thanks, Steve. I'll be starting on slide 25. Credit quality was stable again this quarter. Credit losses returned to a more normal level, as last quarter benefited from higher reversals and recoveries, as well as a $25 million reduction in the general allowance. Net impaired loans were flat, as increases in international were offset by declines in Scotia Capital and domestic portfolios.

There was an increase in the VaR this quarter. This reflected some increase in risk and recent market volatility. Market risk remains well-controlled and within acceptable limits. With respect to asset classes of current focus, our exposures are not significant in relationship to our overall portfolio, and I'll have more to say on this shortly. We feel that our portfolios are well-positioned at this point in the cycle.

Looking at the provision for credit losses in more detail, the specific provision was 92 million this quarter, an increase of 47 million from Q2 '07. This was due almost entirely to lower levels of reversals and recoveries in Scotia Capital, and provision reversals in the domestic commercial portfolio last quarter.

The next slide shows that the level of net impaired loans has remained flat over the past four quarters. Increases in international were offset by declines in the Scotia Capital and domestic portfolios.

The next slide shows the VaR in our trading portfolios. The average one-day VaR of 15.6 million has increased over the past year, primarily in interest rates and equities. The increase in interest rate VaR was due to larger interest rate risk positions, while the increase in equities reflected increased M&A risk arbitrage positions, as well as increased market volatility.

In terms of trading results, we had another good quarter with only six loss days compared to three last quarter. The losses were all within the range predicted by VaR.

As I commented earlier, a number of asset classes have come under considerable focus during the past few weeks. Let me provide some color on our exposures in these areas.

With respect to Canadian, non-Scotiabank, asset-backed commercial paper conduits, we have no holdings in our money market funds. Liquidity backup exposure is not significant, and holdings in the Bank are not significant. We have no direct exposure to US sub-prime mortgages. Our indirect exposure, again, is not significant.

Our LBO underwriting commitments are approximately 0.2% of total assets. Finally, with respect to hedge fund counterparties, our exposure is not large relative to our total portfolio. We have strong controls in place; limits in counterparties are carefully monitored.

I will just spend a moment now on commercial paper. At the end of Q3, we had approximately C$24 billion in backup liquidity facilities for asset-backed commercial paper programs. Of this, 88% was committed facilities for Scotia-sponsored conduits. These conduits contain largely traditional asset classes such as auto receivables, credit card receivables, and so on.

It is important to note that liquidity facilities we provide to Scotiabank-sponsored conduits are always available. They are not contingent on market disruption. This type of liquidity arrangement has been in place for a long time, as these conduits were set up many years ago.

Turning to slide 31, as I mentioned earlier, we are comfortable with the positioning of our portfolios at this point in the credit cycle. Last quarter we discussed how we control and manage market risk. Let me provide some comments on credit risk.

Since the 2001/2002 downturn, we have made many significant changes in the way we manage credit risk. We have instituted stricter underwriting and execution standards. We now have lower hold limits on single-name exposures and greater diversification. Our mix of assets has changed. We now have 60% of the portfolios in residential mortgages and personal lending, versus 48% five years ago. Also, 71% of the loan portfolio is Canadian-based, versus 62% in 2002. This shift in mix was partly due to the significant growth in retail assets, but it was also a function of reducing systematically the Scotia Capital corporate loan book. We are proactive in terms of managing our portfolios. We use loan portfolio management to optimize pricing and returns, and we also use loan sales and credit protection to manage our portfolio exposures. These measures and procedures have helped us significantly in improving our credit quality over the past five years. Today, 77% of our corporate and commercial portfolios are investment-grade, much higher than in the past. I refer you to slides 40 and 41 in the appendix, where you can see our much improved position from 1999.

I'll now turn it back to Rick.

Thank you very much, Brian. As you heard, we had another strong quarter, and our outlook remains positive. And our confidence is based on a number of factors. Our proven track record of profitability and capital generation. Multiple sources of liquidity. A proven confidence in risk management, as Brian has just demonstrated. Our significant diversification of operations and revenue streams. Our long-standing customer relationships. And of course, our strong capital provides us with the opportunity to continue to invest to future sustainable revenue growth, both organically and through acquisitions. Finally, with our record performance over the first nine months of the year, we are on track to achieve our key financial objectives for 2007, and we are well-positioned for continued growth in 2008.

With that we'll now pass back to Luc and open it up to questions from everyone.

Thanks very much, Rick. We'll take the first question in the room.

The additional disclosure on the liquidity backup, the 24 billion, I thought that number was 10 billion (inaudible) commercial paper. Is it a terminology thing, Brian?

No, our total exposure on liquidity lines is C$24 billion. C$21.4 billion of that is for bank-sponsored conduits, and the balance is for third-party conduits.

So the 10 billion that was down on the press release on August 15, the 10 billion of backstop liquidity (multiple speakers).

That was Canada.

That was just updating the number that we had in the (multiple speakers) financial statements. It was updating the position from October 31 to what happened subsequent to that date. That's why we drew your attention as well to the fact that we had a de-consolidation of one of the conduits. The number now is updating us totally to July 31, reflecting that de-consolidation.

So the 24 billion in US -- sorry -- the 14 billion US conduits -- what sort of things in there -- we're all pretty comfortable with the Canadian conduits. We see less visibility into the US conduits.

I'll deal with the third-party conduits, which total approximately $1.5 billion US. 75% of that is auto-related, and I would describe it as plain vanilla; it's loans, basically auto loans, car loans, a business that, obviously, we're extremely comfortable with. And --

The remainder is (multiple speakers) in the United States. It would be -- you've got -- you've built, over time, great relationships with GM, Ford, etcetera. That's the kind of names you'd be associated (multiple speakers), that quality.

Exactly. It's very straightforward, as I would describe it, plain vanilla, asset-backed --

Corporate America.

Corporate America.

Corporate America, really.

No structured product.

Next question. Darko?

A couple of questions. First of all, with respect to Scotia Capital and the trading revenues that we saw in the quarter, [quite high] in the derivatives area, can you give us a little bit of discussion or color on what that is? And how should we view that from a sustainability point of view, especially given the elevated levels of VaR?

I think that it's actually quite a nice story. We have a very client-driven business. We also happen to have ourselves pretty well positioned in a couple of areas. So about half that result was clients, a little bit more than half. The other half was from being well positioned in interest rates, and more particularly credit markets.

The VaR increase that you saw -- this is something that we signaled to you, I think, for at least a few quarters. It was our intention -- it's no secret that we have been at the bottom of our peer group in terms of trading VaR, and we intended to change that relationship a bit, and slowly, prudently over time move our VaR up. And that is exactly what you're seeing. It's a result of an increase in interest rate VaR, and I believe the other component was an increase in VaR related to merger activity. We've had -- now, that's a little bit more opportunistic; you can't -- you don't just choose to put on a merger [or a] position, there has to be one on the market. So we in Q3 had the opportunity to put on a couple of reasonably large positions.

So I hope that answers the P&L -- the revenue question, revenue increase about 50-50, clients and positioning. And the risk, the VaR question, interest rate and merger are related primarily.

And to the sustainability of keeping that VaR at that elevated level, you're suggesting that's going to continue, and we should [look] for revenues of similar magnitude going forward.

Yes. In spite of the current market conditions, we're not having trouble in our trading books or managing our risk. We're intending to slowly increase our VaR level. We don't have a particular end target number in mind, but we're continuing on that path.

Just one last question with respect to risk. Didn't hear any mention of the watchlist, and you're also one of the bigger lenders to financial institutions amongst Canadian banks. I wonder if you can give us any insight there.

Actually, we included that in the presentation to the board this morning. Our watchlist, which we would classify as -- used to classify it as the waiting room, IG 30 to 65 is the lowest that we've ever had in the Bank, and it has not grown. We don't have any new additions to the watchlist. So the portfolio continues on all bases; whether it's commercial or corporate, it continues to perform very well.

Remarks regarding financial institutions?

Again, our exposure to financial institutions is -- in terms of the bank broker area, it's limited to 364-day facilities. And again, it's a large portfolio for us, as it is for all financial institutions. But we are very comfortable with our exposure there.

Michael, you had a question?

A couple questions. Rob, you referred a number of times to mark-to-markets in your segment. I just wonder if you could give us some color on those.

I'll take that question. We had to take a mark-to-market write-down effectively pursuant to the financial instruments accounting standard for the negative fair value component of the instruments.

Is it credit -- widening credit spreads? Also, I noticed that your gross formations those quarter, aggregate for the Bank, are down quite significantly from last quarter. And they had been increasing previously. Is there anything unusual -- I think it was about $300 some-odd million last quarter.

Gross formations are about 1.7 billion, looking at the exact number. The interesting mix of those is (multiple speakers) net new formations (multiple speakers). Do you want to repeat what you -- are you asking formations? Gross formations or net [increase]?

The gross. The 147 that you have this quarter is down quite a bit from last quarter.

I think that that is a function of write-offs we've had in the domestic retail portfolio. And in terms of business generally, we've had formations rise in the international retail business. We've had reversibles in the international commercial business. So it's a function of the retail business in both Canada and internationally.

One other question that I have. Your average risk-weighted assets are up about 17% year-over-year. Your margins, though, your net interest margin continues to narrow. So is it lower-margin business, or what is it that accounts for the margin compression?

A good part of the increase there is in securities that we put on the books to hedge the client activity that John is talking about. So you've got lower yielding assets, but you've got the other income that comes with that.

And also in the Canadian book with those residential mortgages, which we have been aggressively pursuing. And of course, those are low-yielding mortgages -- high-quality, low risk, but also low-margin spreads, which brings that margin down. (multiple speakers) so it's asset mix.

In the corporate business, margins have been modestly improving in both Canada and the US. So from a Scotia Capital perspective, it's a mix issue, with an increasing concentration of high-quality trading assets that is affecting the overall margin. But the underlying margin in the corporate business Canada and US is showing some improvement.

Can we have the first question on the phone, please?

I just want to clarify Michael's question for you. Michael, gross impaired loans decreased by 77 million; you're quite correct. The decrease was attributable to net new formations of 147 million and write-offs of 179 million and a foreign exchange impact of 45.

What I was getting at, though, is the 147 this quarter is down quite materially from last quarter. That number doesn't show up on here. But I think it was around 350 million last quarter --

I'll take it off-line and I'll get the answer for you.

First question on the phone, please.

Brad Smith, Blackmont Capital.

I have two quick questions. One is for Luc. Just wondering, looking at your risk-weighted asset schedule in your supp pack on page 15, the market -- the asset equivalents allocated to the market risk seem to have gone up fairly steadily, and then jumped quite a bit in the third quarter. I was just wondering if you could provide us with any insight into what's going on there. I don't believe the trading asset book itself changed with the change in the business mix. And for Rob Pitfield, a quick question with respect to your divisional ROE has been trending downward, coming in just over 16%. I suspect that relates to the fact that you've been investing heavily in a number of your regions. Just wondering if you can give me any sense for how you would expect that ROE to change, if you were to simply go to a maintenance investment position now. And any sense for what timeframe you would expect that are we to adjust to?

The ROE, the trend down is related to allocation issues and goodwill. Overall with respect to the expenses -- our expenses, once we work through this period of branch builds and the initiatives that were going on, that will trend up again. So it will improve.

Do you have a sense for where it would trend to, though? If you were just to stop making any incremental investment today, maintained your platforms the way they are, would it trend back up, in your opinion, to 18? Would it take two years or a year to do that?

Brad, it's Luc. Let me comment on a couple of things there. In Q3, we had an unusually low ROE, in part because of the mark-to-market hit, which impacted income and corresponding increase in tax rate. If we didn't do anything else today, we still have those acquisitions that we've done in the last 12, 24, 36 months that are still coming to full fruition as we go through the integration. And we will see increasing impact on our bottom line from those acquisitions. So I think it's fair to say that a combination of those would increase ROE on a go-forward basis.

Terrific. Thanks so much. And just on the risk-weighted asset market risk.

This is John Schumacher speaking. That really represents -- almost all of that represents growth in my derivatives business and our total return swap portfolio. That's very high-quality risk assets, and that plan is something that has been in place for quite a while. We're just getting some traction. It looks like a very high growth rate, but that's a very steady business that we will continue to grow.

So that's not -- I guess in a sense that is reflective of a change in the business mix towards that business? That's additional capital being allocated to that business?

These transactions attract very relatively low capital; they're very high returns. They -- actually, getting back to the earlier question from Michael, they are in part the reason why our margins appear to be narrowing. The addition of those assets, obviously, changes the denominator in that equation. But they are very high quality, very low capital, very high return.

Just while I have a second, I wanted to clarify something. With respect to the increase, our plans for increasing our VaR, I should tell you -- I didn't want to leave the wrong impression. We aren't planning on moving to the top of our peer group. I think over time, if we saw our VaR level move to the middle of our peer group, we would be quite happy with that. But again, that would be over time.

Sumit Malhotra, Merrill Lynch.

First question is for Rob Pitfield. When I look at the loan growth in what you call business loans and acceptances, down about 11% quarter-over-quarter, we saw the same kind of trend when we got the Mexico numbers earlier this month. Just wanted to ask you -- it looks like -- you've talked about this before; more of a shift to retail. But the loans coming off the book in the international business, is this voluntary? Is this a market share issue? Is this something where you feel the risk reward is better in retail? Just wanted to get your thoughts on that for what we see, both on the total international and Mexico specifically as well.

I know the Scotia Capital side -- and Steve can jump in here -- I know Scotia Capital has been refocusing its efforts on the corporate book for high-return type of investments. And when they don't have that, they have been judicious in the way that they manage those companies. As far as the retail side, you're absolutely right. It is a refocus to retail, and you're seeing the strong growth there, with the 40% in credit cards and the 40% in mortgages. I don't know if you want to talk about how you're positioning that book, Steve?

The other comment that I would make, Sumit, as it relates to Rob's business, and certainly to Steve's as well, to the extent that it's not in Canada, is the impact of foreign currency translation on a spot basis at the end of the quarter. Quarter-over-quarter spot was quite significant. So that will bring those assets down by a considerable amount.

It seemed like, Luc, even in the Mexico numbers, though, when we got those in pesos in early August, it looked like we saw the same kind of trend for business loans. But you have talked in the past about shifting this.

The one thing that I want to say on the foreign currency translation, though, relative to that, Sumit, is that the greatest impact was on the Canadian/US dollar comparison, not on the other currencies this quarter. The impact from a Canadian dollar/peso Mexico situation is not as great.

Next one is to shift over to domestic for Chris Hodgson. If I got these numbers right, you want to open 35 branches before the year is done. 16 of them are done through the first nine months, so it looks like there's 19 that are going to open in Q4. Expenses, operating leverage, all the stuff you talked about at the end of 2006 has been a very good story so far. It sounds like here we've got a period of time where expenses in this business as we continue to grow it out are going to trend back to some of the higher levels, maybe not with all the initiatives you had going in 2006. But as some of your peers have talked about a revenue expense paradigm when they think about their domestic retail businesses, is that a better way for us to think about what Scotia is going to do in Domestic Banking?

We made it very clear at the beginning of the year that we had two objectives in our domestic business. One was to improve our operating leverage, and the other was to show earnings momentum. And up to this point I think we've been able to achieve that.

In terms of the operating leverage side, clearly, this is a very, very strong quarter for us. We've been clear in the past that we have been making some significant investments in the business, particularly on the technology side and the platform side. And I've been through some of those numbers. Also last year we opened up a number of branches. We opened 15 branches. This year we'll open up 35. And yes, the balance -- Rick had indicated about 16 to 20 or so will come in this last quarter. But we are going to keep a very strong eye on operating leverage. To assume or to think that we would generate operating leverage similar to what we've done this quarter while we continue to invest in the business is something that we watch very, very closely. So we're going to continue to build out our branch system, but we're not going to just throw expense to the wind. We're going to continue to grow our sales force side of things.

And we have made significant growth in our mutual fund business, and we're seeing the benefits of that now in terms of what we've done on the advisory side. And on that front, our mutual fund fees and the wealth side contributed about 35% of that revenue growth for our domestic business overall. So we're going to continue -- to answer your question, we are going to continue to invest in our business. But one of our key goals is to have positive operating leverage. And I've been clear, I think, in the past that that operating leverage will fluctuate from quarter-to-quarter. This particular quarter has been very, very strong, but we still expect reasonable numbers going into the fourth quarter and into 2008.

That's great. Thanks, Chris. Last one from me is quickly for Luc. Luc, to be clear on this. International -- Puerto Rico and Thailand. Those businesses will be included in earnings for the first time in Q4? Is that correct?

That is correct.

You own minority stakes in both, so it's just your piece of those businesses that you'll book through international, only the net income component? Is that accurate?

Where we have significant influence and we account for it on an equity basis we will bring it into net income; otherwise it's just a dividend pool that comes in.

Jim Bantis, Credit Suisse First Boston.

Continuing on the international aspect, we saw that the effective tax rate has gone from 8% to 12%, now to 18%. Maybe Luc or Rob Pitfield, if you can give us a sense on where that's going to level off over the next couple of quarters. And secondly, there was a lot of noise regarding -- or discussion regarding the mark-to-market and security in that segment. Could you quantify the amount in terms of what the write-down was?

Sure, Jim. It's Luc. The mark-to-market for write-down was approximately $20 million after tax. The tax rate increase this quarter over last quarter was impacted by that write-down. So we've had lower income in lower tax jurisdictions. So if you put that around the other way, the income that you did have was subject to higher tax rates than the combined or consolidated international rate was in the past. But we have told you in the past that we will be increasing our tax rate in international as we have now recognized the previously unrecognized tax loss carryforwards relating to Mexico. That is starting to come into the equation as well. That was in part the increase from 12% to 18% this quarter. Looking to Q4, it all depends what happens. I would not expect to see an increase like we saw in from Q2 to Q3.

Just the last question; maybe this is for Rob. It sounds like you're coming fairly close to completing a transaction, a very large transaction in Chile. Maybe you can give us an update in terms of how that's proceeding, and why Chile?

Well, for us, Chile is a strong investment-grade country. We have a franchise that though it's a strong franchise, it's a small franchise. You know our target is to achieve 10% or critical mass. So we're looking to do that in that country. It will establish us in Chile and it will establish us and strengthen us in Latin America. And we're continuing, and we hope that we can land this deal.

Andre Hardy, RBC Capital Markets.

Just following up on Jim's question. Historically in Chile, your returns have been well below the industry average. How much was scale the biggest factor there? Are there other issues? Said differently, would a transaction allow you to bring up profitability more in line with the rest of the industry?

All of that. We think it's a scale issue. We think that with another franchise it's strong in commercial and it's strong in near prime, two areas that we need to strengthen for our franchise down there. So we think that we'll get the scale. We think that we'll get the higher ROE. We think we'll get higher income, and it will position us to do further things in Chile, perhaps.

We have nothing to announce yet.

And we have nothing to announce.

There are no further questions from the phone line at this time.

[Ian]?

I guess just taking the opportunity, looking at the group of individuals here, lots of grey-hairs and some no-hairs as well. As you think of the environment we're in here, where we've had incredible volatility and the [t-bill] market, we've had -- you know, what's gone on in commercial paper, which really for a while looked as if it was going to spread beyond the non-bank or conduit market. Given the experience, whether it's Bob or Rick or whoever wants to volunteer, how do you think this thing plays out? Are you surprised it's been localized and hasn't gone beyond where it is, or do you think it's been way more than just localized so far? Tough question, I know.

We've had some great debates amongst us all right on that question, and they are fantastic debates. And we have contradictory views, because nobody's got the crystal ball. But you're right; a lot of us have been through this. Many of us have been through it, not quite the same as we're in today. Every issue is quite -- from land loans in Alberta, to LDC loans international, what have you. There's always something. There's been a lot of us, a lot of people saying something is going to happen. We just don't know where and we just don't know when. But from my perspective, and Bob and others can join in because they're interesting times --

First of all, we have a reassessment -- a repricing and reallocation of liquidity. And following that, credit. There is lots of liquidity right now globally. Look at Asia and the Asian banks, and all the petro dollars that are out. But it has to be reallocated because it's really -- that process is going on. And so there's a reprice in liquidity, which in one respect, as long as there is not a systematic problem, from our perspective, that's a good thing. Because we've been giving liquidity away for nothing for five or six years. And you know, there's only -- the ultimate sources of liquidity are, obviously, your central banks, but through that your clearers and your commercial banks. And I think that's something that always has to be understood.

And I think the global commercial banks, and certainly the Canadian commercial banks, are in good shape. Certainly that's our message, and I think you're probably hearing that elsewhere and for good cause. So the financial sector in Canada is in strong shape. There are parts of it that aren't. But there are the majority that are. We were just talking again [at the Board meeting], our dollar, as you know, is pretty strong. The dollar is really what the world thinks of your economy and your financial sector. So we've just got to stand back and look at what's really happened.

And so, there is this fear of the unknown that is going on as this liquidity gets reallocated and what have you. Macroeconomics on a global basis, again, having been through many crises, this is so unlike the Asian crisis, the Russian [default] when you had liquidity issues, you had macroeconomic issues in all these countries and emerging markets. None of that is different. But there is, obviously, an initiative going on such from our perspective, as shown from credit portfolios, showing from market portfolios, and this is where we show -- try to show you an appendix of where we are today versus where we were in that crisis back in '99, 2000 and 2001. We are in pretty good shape, and I think a lot of others are. And so we'll see how this dispersion of risk liquidity works out. But it plays, quite frankly, to a commercial bank's strengths, if you've got strong capital, you've got access to multiple sources of liquidity, and you understand how to underwrite and price and distribute credit risk. So I am a little bit more optimistic. Bob, do you want to (multiple speakers)?

I'm not really going to be that much more bearish. I'll just make a couple of comments. I'm paid to worry, along with Brian. We're the two guys who are paid to worry around here. But a couple of things. First of all, as Rick said, we don't know how this is going to play out. But clearly, it does favor strong financial institutions, which we are. So in the long run, I don't think we're terribly concerned at all.

But I would describe what is going on in the context of the history here. The past several years there's been a tremendous expansion of credit globally, whether it was mortgage-backed securities, asset-backed commercial papers, CDOs, CLOs, whatever. These were all vehicles that provided credit through the capital markets, through structured vehicles in one form or another that were sold to the capital markets. And that allowed tremendous credit expansion to take place. And that whole marketplace relied, essentially, on credit rating agencies to tell people what it was they were buying. Because these things are opaque, it's very difficult for even very sophisticated investors to really understand what's in these various structures and so forth. So the credit rating agencies became kind of the kings here. And that's allowed all of the tranching and so forth that went on that people bought.

Now we have had a crisis in confidence in the credit rating agencies, manifested in Canada particularly in the commercial paper market, but more broadly globally in other markets as well. And so people -- investors are rethinking what kinds of paper they ought to want to hold, given that they're not quite sure how to evaluate the underlying risk. So it's coming back to the people who can evaluate credit risk, people like ourselves. And whether that -- all of it comes back or only some of it comes back, or (inaudible) we don't know.

But we're prepared for it.

Yes.

A comment from the trading management side --

Now the dark-haired guys.

(inaudible). I don't know how much value there is in grey hair, in a way (multiple speakers). Because it seems the market finds a new way to screw up every time. In '87, the ones I've been through -- [starting in business] (inaudible) in '84. In '87 -- not exclusively, but primarily your job as a trading floor manager was to stand over the equity desk. Skip a couple of crises to '98, long-term capital. That was really a fixed income issue. They had some exotic Italian bonds and some other fixed income positions. So that was largely a bond desk issue, and so as the trading floor manager, you were standing at that desk. You had problems elsewhere, but that's largely where you focused.

I never thought in my entire career I would be standing at the commercial paper desk. They don't even have coupons over there. So I guess by that I mean to say, every time is different. (inaudible). Every crisis is different, and this one is no exception. So we'll have to wait and see.

But it's quite -- this one is tough, because commercial paper is cash management, and that's about balancing the till. This isn't about fraud or misvaluation of long-term securities, or funding derivative structures or anything. This is like are people able to balance their checkbook at the end of each day? That's a very tough question to worry about.

So getting back to Rick's comments, all of the money that used to be around is still around. There's been some deleveraging, so I think some money has been taken off the table. But largely it's hiding. It's a buyer strength of sorts. And that's based on confidence. And somehow my view is that of course confidence will return to the market, and we'll start to function, and six months from now we'll wonder what happened. We'll probably know, because it does have to do -- it does have to do with the issue that the rating agencies, in my opinion, started rating credit exclusively and forgot about liquidity. And I was a part of the opinion that maybe it was missing and maybe investors didn't understand. And this is 20/20 hindsight. But in the future, I'm imagining that ratings will include a lot of talk about liquidity.

And that's why liquidity was zero. People forgot about it. But liquidity is your ultimate cost.

One last question, [Michael].

Actually it's sort of two interrelated. And it goes back to Bob's comments. First of all, is it too early to ask what risk-weighted assets would be under Basel II right now. We're not that far from the -- presumably, from Basel II coming into force. And given recent events, the implications you are saying for rating agencies is credibility. Do you think that there's any possibility that the adoption of Basel II, with its heavy reliance on ratings, might be delayed or changed?

In a sense, I hesitate to comment on what risk-weighted assets are under Basel II, because we're waiting to see what the regulator is actually going to do. We're in that process of -- as the other banks are, of submitting information to them and getting acceptance (multiple speakers). As you know, we've got a new superintendent --

It's too early.

So it's too early at this stage of the game. And with respect to the second question --

We could certainly make the comment, I think, safely that our ratios will not be hurt by Basel II.

No, that's true. Certainly as it relates to asset classes which we're partaking in, i.e. our $100 billion residential mortgage book. The risk-weighted component of that is certainly going to be very different that what it is currently.

It's fair to say, Michael, that in all the modeling we've done in Basel II, every one of those show risk-weighted assets coming down.

As far as trying to guess whether regulators might change their views on something they've invested all this time and effort in, who the hell knows? It's a very legitimate question to ask, but you better ask them.

Thank you for participating in today's call. We'll see you soon.