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- EVP - CFO
Good afternoon, and welcome to the presentation of Scotia fiscal year 2007 results. I'm Luc Vanneste, Executive Vice President and Chief Financial Officer. Rick Waugh, our CEO, will lead off with the highlights of our results and our outlook for 2008. Next, I will go over the financials. This will be followed by a review of business line performance and 2008 priorities by each of our business line heads. Then Brian Porter, our Chief Risk Officer, will discuss credit quality and market risk. Finally, Rick will cover our 2008 targets. We will then be glad to take your questions, and we also have our two Vice Chairmen present to participate in the Q&A. Before we start, I would like to refer to you slide number two of our presentation, which contains Scotiabank's caution regarding forward-looking statements. Rick, over to you.
- President, CEO
Well, thanks very much, Luc. I truly am pleased to report today our record full-year results backed up with another solid quarter. For the year, our earnings per share was $4.01. That's a 13% increase from 2006. And 2007 was a year that featured broad-based and diversified growth. We did it both organically and by acquisitions. We've also done with one investing towards the future. This marked our fifth consecutive year of double-digit earnings per share growth.
So let's look at the fourth quarter results, where earnings per share were $0.95, 7% up from the same period last year, but down from the third quarter. The difficult market conditions in the fourth quarter created some challenges, but notwithstanding these, we were still able to achieve solid earnings in the quarter. Our strong earnings this year allowed us to continue our record of consistent dividend increases. This year our dividend is up 16%. And again today, I'm very pleased to announce a further increase in the quarter dividend of $0.02 to $0.47.
And this year, each business line delivered record earnings. And for the second straight year, each business line contributed more than $1 billion in annual net income. And domestic Canada had a particularly strong year, growing earnings by 21%. Strong asset and deposit growth resulted in good top-line revenue growth, notwithstanding impact of margin compression. In fact, our top-line revenue growth this year is an industry leading. And if you look at our four-year track roll of revenue growth from flat to 4% in '05, 9% in '06, and this year 12%. Very pleased with that.
Of course, our international earnings, up 17% due to strong organic growth and increased contributions from our acquisitions, particularly this year from Peru and Costa Rica. And in Scotia Capital, solid overall trading and investment banking results combined with high recoveries more than compensated for the challenging conditions we all faced in the fourth quarter. Now, we were able to achieve these strong results by executing on our key priorities. The number one priority was a continued focus on sustainable revenue growth. And you heard how we led the industry this year. Each business line delivered on this priority with an especially strong performance from international, which was up 23% in its top-line revenue. Our second priority is to develop our capital effectively. In 2007, we invested over $2 billion on eight acquisitions, including our recent one in Chile, Banco del Desarrollo, which closed November 26th.
We also made significant investments for organic growth. We are investing quite heavily in our brand, our distribution network, and in all aspects of growing our business. And yet, we still have very strong capital. Our tangible common equity ratio of [72.272%] and that strong capital, that enables us to continue to pursue strategic growth opportunities.
Our third overriding priority, leadership. Our people executed very well this year, and importantly, we were able to bring some exceptional new talent into the bank as a result of our recent acquisitions, augmenting an already very strong team. So as a result of all that, we were able to meet or surpass all of our key financial targets. Our earnings per share growth was 13%. That's ahead of our target of 7 to 12. Return on equity was 22%. That's at the high end of our target range. And, of course, our productivity, a record 53.7%. That's an improvement of 160 basis points from last year, well ahead of our target of 58%.
Now let's look at 2008. Overall we expect to see a continuing challenging operating environment through much of the year. We expect a weaker U.S. dollar and the uncertain financial market conditions to continue, to continue to provide head winds, but notwithstanding this, Scotiabank is in very good shape for 2008. Our capital is strong, our credit portfolios are in good shape, and as Brian will explain later, we have only nominal exposure to those current areas of investor or market concern. And, of course, and most importantly, our earnings visibility is good.
Driving sustainable revenue will remain our top priority, and you will hear Chris, Rob, and John discuss some of these growth initiatives that will be key to meeting this objective. Focusing on the three main priorities that I outlined to you will allow us to manage through these uncertain and volatile markets. It will allow us to take advantage of new and continuing emerging opportunities for us, and we will continue to invest for future growth across all of our businesses, both organically and through acquisitions if they become available.
So in summary, we delivered on our 2007 priorities. We achieved record financial results, and we have positive momentum heading into 2008. At the end of our presentation, I will come back, and I will release our specific financial targets for the next year. So now over to Luc to review our performance in more detail.
- EVP - CFO
Thanks very much, Rick. Our strong earnings performance this year was driven by robust asset growth, the positive impact of acquisitions, and favorable credit quality, partly offsetting this were higher expenses, largely relating to acquisitions and revenue growth initiatives. We were also able to earn through some of the net interest margin compression and the negative impact of the stronger Canadian dollar. As Rick mentioned, market conditions were challenging in Q4.
Slide 4 details some of the key items that impact the quarter. The largest impacts or items were the VISA gains, $202 million pretax, the $191 million loss on structured credit instruments. The latter was made up of $115 million related to the consolidation of the commercial paper conduit. $56 million was due to the write-down on an investment in capital notes of structured investment vehicles. $20 million related to write-down on nonbank ABCP. Brian will provide more details on our exposures to these and other asset classes of current focus shortly. Also impacting us this quarter were higher taxes, in particular a $50 million provision relating to an outstanding tax matter. As well, strong growth in retail volumes and higher security gains were more than offset by lower underlying trading revenues and higher expenses relating to growth initiatives.
Turning now to slide 11, year-over-year, each of our business lines had double-digit asset growth. All of the major balance sheet categories grew. Residential mortgages and business and government loans were particularly strong, up 16% and 23% respectively. Compared to Q3, mortgages continued to show excellent growth while trading securities decreased. The Bank's overall net interest margin was basically flat quarter over quarter. Looking at the business lines, the domestic margin fell 23 basis points compared to last quarter. The main reason was higher wholesale funding costs due to the market volatility in the fourth quarter. Our domestic assets are charged 30. 60, 90-day B.A. rates, and when the B.A. rates spiked without a comparable move in prime, our domestic margins were negatively impacted. Some of this margin compression was offset through our hedging activities and group treasury. It is important to note that we manage interest-rate risk at an all-bank level. We also benefited from wider margins in international and Scotia capital.
Looking at revenues in more detail on slide 13, on a whole-year basis, total revenues rose 12%. Broad based organic growth and a benefit of acquisitions were partly offset by a lower net interest margin and negative ForEx translation. Excluding ForEx and acquisitions, underlying revenues increased 10% versus 2006.
Turning now to slide 14, expenses increased 9% from last year. Approximately 40% of the increase was due to acquisitions. Excluding acquisitions and the positive effect of ForEx translation noninterest expenses were 6% higher. The increased expenses mainly reflect our investments for future growth. Quarter over quarter, expenses rose $40 million as we continued to invest for the future. The increase was mainly due to higher advertising, technology and professional fees, partly offset. by lower performance-based compensation.
Moving to operating leverage on slide 15, for the full year, we generated positive operating leverage resulting from strong revenue growth and expense discipline. On an adjusted basis, excluding the impact of the items that occurred this quarter as shown on the bottom left-hand side of the slide, all bank operating leverage was 3.6% with all three business lines being positive. I will now turn it over to Chris Hodgson to talk about domestic banking.
- EVP - Domestic Personal Banking
Thank you, Luc. I'll be starting on slide 17. At the beginning of the year our two key objectives for the domestic banking business were to increase our earnings momentum and to generate positive operating leverage. We have delivered on both with record net income up 21% from 2006 and positive operating leverage of 6%. Excluding the VISA gain operating leverage was a very strong 4%. We had strong revenue growth in each of retail and small business, wealth management, and commercial banking. Increased expenses largely reflect spending on initiatives to drive future revenue growth, including costs for 35 new branches, the hiring of additional financial advisors, and other client-facing staff. Looking at the Q4 results compared to last quarter, domestic banking's net income was up 11%. Revenues rose 5%, reflecting the $111 million VISA gain, offset partly by lower net interest income. While asset growth continued to be strong, particularly in mortgages, this was more than offset by margin compression, which Luc has already discussed. Expenses were higher, again reflecting our growth initiatives as well as seasonal increases.
While Q4 results were tempered by unsettled market conditions and seasonally high expenses, we made significant progress in the quarter. We opened 19 new branches for a total of 35 on the year. We added more customer-facing sales staff in both retail and wealth management. And we closed the acquisitions of Dundee Bank and Trade Freedom. These investments have all contributed to market share gains. Looking at revenues in more detail on the next slide, total revenues were up 9% from 2006 with good growth in all of our segments. Retail and small business revenues were up 8%. We produced both strong asset and deposit growth with market share gains on both sides of the balance sheet. This positive impact of volume growth was partly offset by a lower margin.
Retail and small business revenue growth also came from the VISA gain, higher service fees, growth in credit card revenues, and a very strong 14% increase in small business banking, one of our target areas. We also indicated to you at the beginning of the year that we were focused on growing our wealth management business. We have achieved strong results in this business with revenue growth of 14%. In mutual funds, our growth increased 24%. Higher brokerage revenues through the full-service and direct investing businesses and our private client revenues were also up 13%.
In commercial banking, we've made very good improvements in fine-tuning our business platform, including our business support centers to improve client service. Revenue growth came from an increase in assets, up 9% and deposits up 10% as well as from higher credit card or higher credit fees and card revenues. Quarter over quarter, total revenues rose 5%. Retail and small business revenues were up 4% as the VISA gain was partly offset by lower net interest income. Continued strong growth in retail assets and small business deposits was more than offset by margin compression. In wealth management, revenues were down slightly from a strong Q3 as markets slowed. In commercial banking, revenues rose 16% largely due to an increase in the margin on deposits reflecting the runup in rates.
The next slide shows the success of our growth initiatives in terms of market share. Year-over-year, we've increased market share in residential mortgages by 15 basis points, and in personal term deposits by 41 basis points. Our market share in mutual funds was up 16 basis points, primarily in the more profitable long-term funds. Overall 2007 was a year of broad based growth across all of our businesses, and we're pleased with the progress in our key growth platforms such as small business banking and mutual funds.
Turning to 2008, we expect to produce further sustainable revenue growth. We will leverage the acquisitions and partnerships made during the last two years to acquire new customers. These include SCENE, Trade Freedom, Travelers, Maple Trust, and our recent partnerships with the NHL and its Players' Association to exclusively market banking products and services under the NHL banner. We intend to build on our strong momentum in wealth management, increasing fee based business, assets under management, advisor productivity, and sales support. And we will leverage our expertise in small business, where we've made significant investments in tools and training and we'll be expanding our small business banking staff.
Finally, we will continue to expand our distribution network with plans to open another 20 to 25 new branches. We will also upgrade our branch technology. In 2007, we focused on the expansion of the ABM network and introduction of a new GIC deposits and mutual fund platform among other initiatives. In 2008 we will continue to upgrade our branch infrastructure to further improve service. I am confident that by continuing to focus on the initiatives discussed here, that we will continue to produce sustainable revenue growth for our domestic business, and also achieve our two key objectives, which is maintain earnings momentum and generate positive operating leverage in 2008. We also expect to make a significant contribution to the overall results of the Bank in 2008.
I will now turn it over to Rob Pitfield to talk about international banking.
- EVP - International Banking
Thanks, Chris. International banking had another record year in 2007, with net income up 17%. The increase was primarily driven by organic growth as well as our acquisitions in Peru, Caribbean, and Central America. Total revenues grew 23%, benefiting from solid asset growth all across our regions. expenses were up 18% due to acquisitions, but also spending on business growth initiatives, including branches, staffing, promotions and advertising. We continue to make significant investments in trying to build long-term growth throughout the division. Operating leverage, despite the expenditures, was a very good 5%, or almost 5%.
The tax rate increased, primarily reflecting more normalized taxes in Mexico. Quarter over quarter, international banking's net income rose 31%, excluding the $71 million for VISA, it was a good quarter. We grew about 5%. Looking at the earnings mix, you can see from the chart that it's pretty well diversified now with an increasing contribution from Latin America as we get greater contributions from our various acquisitions.
Turning to the revenues across our regions, Mexico's 2007 revenues rose 13%. This increase was driven by strong retail loan growth, 36% credit card, 34% mortgages, good fee income, primarily from brokerage and credit cards. Revenues in the Caribbean and Central America increased 25%. Growth was driven by, again, strong asset and strong deposit growth across the region, commercial loans, cards, mortgages, as well as good growth from our acquisitions in Costa Rica, the DR and Jamaica. We also had a good year in credit cards and personal banking fees in the Caribbean.
In Latin America, Asia, and other, which is wealth insurance, revenues increased 36% largely reflecting our successful acquisitions in Peru. If you look at the quarter, Q4 revenues were up 14% from Q3. Mexico's revenues were 13%. Again, driven by the underlying asset growth and higher margins that I talked about before, Revenues in the Caribbean up 15% including the VISA gain. Latin America and Asia revenues were up 15%, driven by asset volumes in Chile, Peru, and Asia.
Looking at 2008, our priorities as with the other divisions, drive consistent revenue growth. We're expanding further into customer segments as we talked about in Peru, at the investor's conference. In Mexico we're entering the large rapidly growing consumer finance segment with the launch of the new credit card joint venture with a very good credit card partner. We'll also leverage our expertise, our new-found expertise that we have in Peru and Chile acquisitions. We're rolling out our small business initiative that we piloted in the Bahamas, El Salvador, and Jamaica. We're building out our wealth management franchise.
We will also improve significantly our distribution network in 2008. We'll add 140 new branches. 100 in Mexico. We'll put in 15 new product client centers over 2007, 2008. We'll launch a completely new Internet platform which is the best of service from the amalgam of Internet platforms that we have across the various regions. We've set up a team headed by Mike Hayes who runs our call centers in Canada to help us build a connected network with best of class technology and management practices. And we'll also continue with our acquisitions. So we've invested significantly in our platforms, we still maintain very good operating leverage, and we've had a good year. Now I'll turn it over to John.
- Co-Head, Scotia Capital
Thanks, Rob. I'll begin on slide 27. I'm pleased to report that Scotia Capital also had record results in 2007 with net income up 6%. Good revenue growth and higher loan loss recoveries more than offset weaker market conditions in the fourth quarter. We operated a number of businesses and products which provided a diverse spending stream, a key strength in uncertain markets. Quarter over quarter, earnings were down 18% primarily on lower trading revenues, including the losses on structured credit instruments which Luc discussed earlier. This was partly offset by lower expenses.
Next slide. Looking closer at revenues on slide 28, for 2007, revenues were up 3%, with strong growth in both global capital markets and global corporate and investment banking, which was partially offset by the losses I just mentioned. Total capital markets, trading had another good year. Revenue was up in most trading businesses. Derivatives, fixed income, precious metals, and foreign exchange, and that was partly offset by lower revenues in institutional equity trading. Global corporate and invested banking benefited from higher revenues in a number of areas, increased M&A and advisory fees, higher equity underwriting revenues and higher interest recoveries. As well, loan growth was strong with loans up 22%, although portfolio spreads tightened, in part reflecting an increase in the proportion of the investment grade loans. Compared to Q3, revenues were down 19%. Global capital markets revenues were down $136 million from Q3.
Trading revenues were lower because of the losses incurred in this quarter and the very high level of trading revenues in Q3. We also benefited from a $43 million gain on the sale of our bond index business. Global corporate and investment banking revenues grew 4%, benefiting from higher securities in the United States and Europe, partly offsetting were lower credit fees as well as a reduction in investment banking fees compared to the record level achieved in Q3.
Looking at next year, we will remain focused on producing sustainable revenue growth while maintaining credit and market discipline. Our key priorities include continuing to leverage our NAFTA capabilities, something we consider to be a significant competitive advantage for us. We will increase our market share with alternative asset managers and in certain capital market products. We will further expand our client coverage globally in selected industries. We'll add trading research and investment banking capabilities in energy and mining in both Europe and the U.S., building on the good progress we made in Canada in 2007.
We will also continue to build our capabilities in infrastructure finance. In 2007, we established a NAFTA infrastructure lending capability. In 2008, we will build out our capital markets and advisory offerings for this industry. Finally, we will develop further develop our referral business in coordination with international banking in order to increase sales of Scotia capital products to other categories. We have a well-diversified earnings platform that we are continuing to invest in and grow. As a result we expect to deliver sustainable net income growth with a high return on equity.
I will now pass it over to Brian.
- Chief Risk Officer
Thanks, John. I'll be starting on slide 31. Credit quality was stable again this quarter. Credit losses of $95 million were basically flat quarter over quarter. Net impaired loans were stable across all business lines quarter over quarter. While VAR increased year-over-year, it was down quarter over quarter. The year-over-year increase reflects some increase in the risk and the 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 relation to our overall portfolio, and I will have more to say on this shortly.
Looking at the provision for credit losses in more detail, the specific provision was $95 million this quarter compared to $92 million in Q3 '07, with loan losses for all the business lines in line with those in Q3 '07. We had another quarter of net recoveries in Scotia Capital, the trend in domestic provisions reflect strong asset growth. International has trended higher due to asset growth and asset mix.
The next slide shows that the level of net impaired loans has remained stable over the past year. Impaired loans in domestic retail remain stable in line with strong portfolio growth. Impaired loans for international retail have been trending up, reflecting organic growth, acquisitions, and asset mix changes. Impaired loans in Scotia Capital are the lowest we have seen in a long time, reflecting the overall quality of credits in our portfolio. Similarly, our domestic and international commercial portfolios are in very good shape. The next slide shows the VAR and our trading portfolios. The average one-day VAR of 13.2 million has increased from a year ago, but is down from Q3. Year-over-year positions were higher in interest rate risk, foreign exchange, and precious metals. Increased market volatility has also contributed to the VAR increase.
In terms of the trading results, this quarter was more challenging than the previous quarter, with losses exceeding the one-day VAR on one occasion. The market was very volatile in the fourth quarter, and this resulted in more dispersion in our trading results than in the past. Revenue was positive on more than 86% of the trading days compared to 91% in Q3 '07. Overall, we remain comfortable with our market risk.
Now let me turn to the asset classes of current focus. This slide gives you some details on our exposures. Luc has gone through the P&L impact. I would like to highlight some key points. Firstly, most importantly, as mentioned last quarter, we have no direct exposure to U.S. subprime mortgages. And our indirect exposure is nominal. Secondly, we have relatively small holdings of Canadian non-bank asset-backed commercial paper that relates to the Montreal Accord. It's $187 million.
Thirdly, with respect to our own non consolidated conduits, we have no significant concerns. They consist primarily traditional assets. We were also a sponsor of a conduit whose primary assets were highly rated structured credit products. As a result of the recent market disruption and lack of investor demand for this type of paper, we decided to consolidate the assets as of October 31. The residual risks has now largely been hedged. Fourthly, we hold $1.2 billion of CDOs and CLOs, the underlying asserts are primarily corporate and sovereign counter parties. 516 million was acquired at fair value through our purchase of Dundee Bank. We are very comfortable with this investment exposure.
Fifthly, as Rick mentioned, we do not sponsor, manage, or provide liquidity support to structured investment vehicles. Our holdings are very modest at year end, $125 million. Finally, we have no concerns with either our LBO underwriting commitments or our hedge fund exposures. I'll now turn it back to Rick.
- President, CEO
Thanks very much. Great results, everybody. Thank you very much. Those are great results.
So now let's take a look at the targets we have set for 2008. First, we are maintaining our strong financial objectives. Our growth in earnings per share in the range of 7 to 12%, and our return on equity in the range of 20 to 23%. We are going to improve our productivity ratio target, lowering it to less than 57%. Of course, because of this high level of profitability, we will also continue to maintain strong capital ratios. We are confident we can achieve these targets. We have the right strategies in place, underpinned by our tremendous diversification across businesses and across geographies. We also have the right team in place. Our executive team and all the Scotiabank group, right across Canada, right across the world.
So in summary, we're well positioned for 2008, and well beyond. With that, pass it back to Luc, and he will moderate and open up to questions.
- EVP - CFO
Thanks very much, Rick. First question, Michael?
- Analyst
I guess my first question is, the 7 to 12%, 7 to 12% earnings growth objective, is that off the 401 earnings per share reported?
- EVP - CFO
Yes, it is.
- Analyst
I guess the mic doesn't carry your nod. Secondly, of the 23% business loan growth, how much of that was organic versus through acquisitions? And can you see organic business loan growth continuing at the pace that we saw in 2006?
- EVP - CFO
I think it's around 8 to 8 billion, Michael that relates to acquisition growth, and we certainly look forward to continuing to grow our assets in a balanced way. Just like to refer everybody else to the appendix as one highlight. It shows you the impact on earnings of the acquisitions, 2006, 2007. You will see the $0.19 this year versus the $0.05. That graph should tell you two things. Obviously one is the impact of the acquisitions, and the success we have, as we always do, with our discipline and making sure it's accretive. As you can see, the results speak for themselves on the acquisition. That's in the appendix, I believe. Slide 41.
Operator
Your first question comes from Mario Mendonca of Genuity Capital Markets. Please go ahead.
- Analyst
Good afternoon. Question, perhaps, for Brian. in your list of exposures, you referred to the bank trading synthetic CDOs, primarily for servicing clients. What would the inventory be of these synthetic CDOs?
- Chief Risk Officer
I don't have that number at my fingertips, Mario. John Schumacher may have that, or we can get if for you.
- Co-Head, Scotia Capital
I think we'll have to get that number.
- Chief Risk Officer
We'll get back to you.
- Analyst
Follow-up question. The $115 million, the charge taken this quarter related to the bank-sponsored conduit, it's now been consolidated. Have you disclosed anywhere the size of that conduit?
- Chief Risk Officer
I don't think that we have, Mario. I'll give you the background here. We've got one bank-sponsored conduit in New York. That's called Liberty Street. Two in Canada, King and Bay street. We had one in Europe called Stega, it was $1 billion U.S. roughly.
It was the bank-sponsored, obviously an asset backed commercial paper conduit whose revenues were generated from $1 billion U.S. with highly rated structured credit. It was rated AAA by both S & P and Fitch. The bank was both a swap counter party and a liquidity provider. And as the fourth quarter unfolded, and the market became nervous in terms of the volatility in credit spreads, it became somewhat more difficult to place the commercial paper, so we made the business decision at the end of the quarter, end of the year, to consolidate, buy back the paper and consolidate the assets and liabilities of the conduit.
- Analyst
That was $1 billion even?
- Vice Chairman
Mario, this is Sabi Marwah. We did disclose in the press release, page 14, the market risk that describes the transaction.
- Analyst
Thank you.
- Vice Chairman
Mario, excuse me, it's Bob. Just to add a little more color so you don't get confused, the other conduits that Brian mentioned, King and Bay and Liberty, whose assets are primarily traditional trade receivables and credit card receivables, rather than structured types of credits, have continued to fund themselves quite satisfactorily throughout this period, and hence -- was the only one that we consolidated.
- Analyst
Maybe just a broad question. Is there any reason you could explain to us why there wouldn't necessarily be further charges against this billion dollars?
- Vice Chairman
Because we consolidated the conduit, we got the assets on our books, the assets and liabilities, and we've hedged the position.
- Analyst
Finally, the $43 million bond index gain. I just need to know where that went through, flow through. Is that trading?
- Co-Head, Scotia Capital
That's -- this is John Schumacher speaking. That was from the sale of our PC bond business to the TSX, and that revenue was recognized in --
- Vice Chairman
Be in other on Scotia Capital.
- Analyst
Trading?
- Vice Chairman
No, in other income. In other-other.
- Analyst
Other-other. Perfect. Thank you.
- EVP - CFO
Next question, please.
Operator
Your next question comes from John Aiken of Dundee Securities.
- Analyst
In terms of the impact on the balance sheet from the acquisition of Dundee Bank, I was a little surprised to see there wasn't an increase in the personal deposits. Was there some shift in reclassification on the acquisition?
- EVP - Domestic Personal Banking
John, it's Chris Hodgson. There was actually an increase in deposits. If you're talking about market share, I don't have those numbers, but since the end of September, when we closed on that transaction, we've brought in $350 million in deposits, and we have about $2.7 billion in deposits. We've launched three GIC products with the advisor channel. We're about to launch early in the new year a new investment loan product. So we're very satisfied with the way that's been progressing. It's been a good partnership for us.
- President, CEO
It's Rick Waugh. Dundee did bring in well over $2 billion of personal deposits which have grown since we took them in. As you know, it's been one of the wins for Scotia personal deposit. I think our year-over-year market share is 42 basis points. Of that 42 basis points approximately 14 basis points was Dundee Bank. As I said, those deposits, in fact, are growing, as well as other products that we are now putting in, into the Dundee Bank, which is providing that independent chain. That conversion early days, has gone exceedingly well and I'm quite pleased, especially on the personal deposit side to see it grow almost immediately on conversion. So that one is very encouraging.
- Analyst
Thanks, Rick.
- Vice Chairman
Sabi Marwah again. If you go to the balance sheet in the supplementary information you will see the growth from $98.1 billion to $100.8 billion. It just doesn't show up on the averaging yet, but it clearly shows up in the balance sheet. It's in the supplementary on the balance sheet.
- Analyst
Thanks, Sabi. Chris, just a followup question. Do you see a strategic advantage from the acquisition that you're actually able to offer high interest rate deposits through something that is separately branded and essentially outside of your branch network?
- EVP - Domestic Personal Banking
The short answer is yes. It gives us access to a third-party channel which we really haven't had. We have something within our own brokerage area, but this is really a white label opportunity, and as I mentioned, the three GIC products that we've launched have done very, very well. So we expect to grow this significantly over a period of time which will also help us on the other larger book of business in the domestic side to help us on our funding issue.
- Analyst
Great. Thank you very much.
- EVP - CFO
Next question, please.
Operator
Your next question comes from Ian de Verteuil of BMO Capital Markets. Please go ahead.
- Analyst
Good afternoon. The $191 million loss on structured million, if I'm correct it's 135 and 56. Where does the 135 show up? Is it in trading?
- EVP - CFO
It is in other-other.
- Analyst
In terms of trading revenues, though. If I were to try to figure out what the trading revenues of the bank were excluding these write-downs I would add in 135?
- Vice Chairman
No, off that number, 115 would show up in trading, 20 will show up in gains on -- losses on nontrading securities.
- Analyst
Losses on non-trading -- so the net gains on security other than trading. But on the 56, the -- So that's all in there.
- Vice Chairman
That's right.
- Analyst
So it looked like you had had a barn burner securities quarter, sort of $220 million, excluding these write-downs of gains. I don't know if Bob can talk a bit to that.
- EVP - CFO
Yes, we had a good quarter. Bob, do you want to talk to that, please?
- Vice Chairman
Yes. Hi, Ian. It was not much different from what we've been telling you for years. We continue to have, as you know, even after this quarter, something close to $1 billion in unrealized gains of securities. They're diversified across a wide range of public and private, mostly public securities. A number of our fund investments pay out strongly this year, and some of the other positions this year and this quarter, so it's masked to some extent by these write-downs as the guys have pointed out.
- Analyst
And just -- I'll requeue for my next question, but just to reiterate Mario's question, we've obviously gotten a fairly rude surprise on the CDO positions that are hedged, so we'd really like to know the gross position and the trading of the synthetic CDOs.
- EVP - CFO
Okay. Thank you, Ian.
- Chief Risk Officer
Just one thing we can clarify on the CDO front is that we have a fully -- from the trading point of view, we have a fully distributed model, and we don't carry the residual CDO position in our trading accounts.
- Analyst
Right.
- Chief Risk Officer
I think we need to answer fully based on other investment related CDOs.
- EVP - CFO
We have some CDO investments in a number of our investment books aggregating the numbers Brian has shown, $1.2 billion. The underlying assets in those CDOs are largely corporate loans. They are not asset-backed pair. They are obviously not mortgage paper, as we've indicated. They are largely corporate loans, and they were put on and continue to be put on with the expectation, like all of our available for sale securities, to be held to maturity.
- Analyst
I guess I'm not talking about the investment book, and the trading book, presumably -- it would be great to get a --
- EVP - CFO
The answer is no. We are not long and short. That's a fully distributed product, and we don't maintain residual CDO positions in the trading books.
- Analyst
I see.
- EVP - CFO
No inventory.
- President, CEO
No inventory.
- Analyst
Thank you. That's a great answer.
- President, CEO
No inventory. Period. Hedged.
- Analyst
Sorry, what was the term, Rick? Hedged?
- President, CEO
No inventory.
- EVP - CFO
No inventory.
- Analyst
Thank you. I preferred no inventory to hedged.
- President, CEO
Let me make myself perfectly clear.
- Analyst
Thanks, guys.
- EVP - CFO
Next question on the phone, please.
Operator
Your next question comes from Rob Sedran of National Bank Financial.
- Analyst
Good afternoon. My question surrounds the acquisition environment. You've been very active over the last couple of years, but now that this arroyo has closed, I'm assuming the 7.2 tangible ratio is somewhat lower than where it was at year end, which was already the lowest it has been in quite some time. Can you talk a little about whether -- how much you can use your paper internationally, if at all, if you wanted to continue the acquisitions there, or do you need some time frankly to digest what you've done and rebuild capital a little bit? Chris, if you want to add any color on your segment, it would also be interesting.
- President, CEO
Let me cover that first on a broad basis, because we do take management of capital very seriously. It's our second overriding strategy. And we believe it very important not only to cushion ourselves, but to be opportunistic, and that's why we raised $1 billion of preferreds in the last year to do that. The last three or four years, we were questioned, and quite widely, why we had so much excess capital, and what were we going to do with it. And we said we would balance it with generic growth, we would balance it with acquisitions, we would balance it with dividend payment, and some modest buyback of share dilution. And I see that overall strategy, A, continuing, and still be able to maintain relative ratios that are strong, albeit as you identified, have declined from that very high base, and we will be cognizant.
Now, what that means, in addition to the high level of acquisitions, I know you all noticed the high level of growth in risk based assets, and that level may not, although we do anticipate growing that, that one may not maintain its rapid pace of the last two years but we'll have to judge that so we feel we have flexibility. We don't see capital as limiting the opportunities. Question about the impactibility of our paper worldwide. Let me tell you, and I'm not singing any issuance of paper, but if we ever had had to we don't anticipate any, that it's our reputation of over 100 years in most of these markets, there's a lot of the markets would love us to issue either paper locally or through the corporation, so we have that flexibility, quite frankly, and we even have flexibility with some of the subs to issue locally. We have lots of alternatives, so I do not feel -- yes, our ratios are lower, but still I think if you do your global peer analysis, and regional peer analysis, you'll our capital ratios are in good shape. We're BAZL-2 ready. That will help. We each got very good access to markets if we so choose, and still yet maintain this balance that I come back to of organic acquisition and dividends. Is that too broad of a statement, or are you okay with that?
- Analyst
No, I was just I guess wondering, and I suppose it was the strong balance sheet that allowed you to use cash internationally rather than having to use paper, so I appreciate the options there. You have anything to add, Chris, on the domestic acquisition front?
- President, CEO
Before he jumps in, we had a little bet gaming on that question which surfaced. We can't comment specifically on -- well, you didn't ask a specific question, I guess, because we can't comment specifically on anything. Just to say, and Chris will take over, wealth management, first of all, I'm very pleased, from my viewpoint, on our generic role. You saw the 24% increase in mutual funds and the strong growth, so I view it that we have lots of options what. We want to do with it, growth or acquisitions, and we'll see how things develop. But, Chris, have you got anything?
- EVP - Domestic Personal Banking
Sure. Rick, I'd just add, over the last year and a half, we have done five acquisitions, and they're all in different areas, too. National Bank of Greece, traditional PNC, we did Maple on the mortgage side, Travelers on the auto finance, Trade Freedom on direct investing, and Dundee Bank. And all of those come under about $1 billion. And at various contribution levels they're starting to contribute. So just to comment or support what Rick was saying, we've got very aggressive organic strategies, and we will continue to look for opportunities to add on or tuck in different acquisitions. And if we have other opportunities we'll consider that, but it's got to be on strategy and on price.
- Analyst
Fair enough. Thank you.
- EVP - CFO
Next question on the phone, please.
Operator
Your next question comes from Andre Hardy of RBC Capital Markets. Please go ahead.
- Analyst
Hey, Brian Porter. Questions for you, please. Your gross impaireds, net impaireds, still look good. Can you address your watch list, whether that be Canada commercial, or in the U.S., and specifically financial services. A lot of the companies that we've seen have seen credit default swap spreads widen. They'd still be investment grade rated. Are you exposed to those loans or those companies?
- Chief Risk Officer
Good question. Our watch list is basically flat quarter over quarter. It's up a little bit year-over-year, and that's a function of the environment we're in. In terms of what our worry beads are, and I've spoken about it here before, we're concerned and mindful about any spread from the subprime mortgage events in the U.S. and how that might affect the consumer discretionary, obviously mindful of the housing market and the auto sector in terms of our overall portfolios. In Canada, again, we've been mindful of the auto parts sector, largely in commercial, in our commercial portfolio and the forestry sector. So I think we managed the portfolios accordingly. We've got security, we've trimmed positions in the marketplace where we can. There is one -- we've got one mono line exposure in the U.S. of approximately $90 million that is on our watch list. We're watching carefully and we would expect a restructuring of some sort in the following couple of quarters.
- Analyst
And if credit default swap spreads were widening, would that be enough to add things to your watch list, or do you still put in a lot of your own judgment?
- Chief Risk Officer
We've got the one name, Andre that we're concerned about. That would be our largest exposure. And I don't see any additions to the watch list on that basis.
- Analyst
Thanks, Brian.
- Chief Risk Officer
Keeping in mind, in terms of our exposure to the financial services sector, which is significant, given that we're a bank, a lot of is it very short dated, and a lot of it is trading lines where we're secured.
- Analyst
Okay. And my last question is, I may have missed this, but have you disclosed, like you did last year, the equivalent of level 1, 2, and 3 assets?
- Chief Risk Officer
Not yet. That will be coming out when we release our full financial statements and MD&A.
- Analyst
You're not willing to give the number out today?
- Chief Risk Officer
Don't have it here, Andre. I'll have to ask to you wait until around the 18th or 19th of December to get that information.
- Analyst
Thanks a lot.
- EVP - CFO
Next question on the phone, please.
Operator
Your next question comes from Brad Smith of Blackmont Capital. Please go ahead.
- Analyst
Thanks very much. I suspect my question is for perhaps Brian Porter. Brian, just looking at the credit derivatives schedule on page 16, just noting that the risk weighted balance was up contingent with the increase in the notional amount and the overall activity levels. I'm just, I guess, looking for any sort of insight you can provide in terms of counter party exposures in that book of business. And specifically, what if any exposures you might have to U.S. financial guarantors in there.
- Chief Risk Officer
Yes. Sort of goes back to the same question that Andre asked. Credit derivative notionals are up year-over-year. I would say that at $80 billion per year end it's the lowest of all our counterparts here in Canada, and up because of a function of growth in our business. As I said earlier we're comfortable with our counter parties. We've got one that we're mindful of that's on our watch list. Other than that, our portfolio seems to be in very good shape.
- Analyst
I apologize if that question was asked. I was called out of my office.
- Chief Risk Officer
Yes, that's just for -- we've got one mono line exposure in the U.S. The exposure is around $90 million, and it's on our watch list. We would expect -- I've got my crystal ball out here, but some sort of restructuring in the next couple quarters.
- Analyst
Perfect. Thanks so much.
- EVP - CFO
Next question on the phone, please.
Operator
Your next question comes from Jim Bantis of Credit Suisse.
- Analyst
Good afternoon. Question for Chris. Strong first three-quarters of the year in terms of retail banking, then a bit of a soft one in the context of Q4 with the tick-up in expenses. The VISA gain kind of offset some of the NIM compression, but you won't have the VISA gain in Q1 and Q2 of '08. Wondering, how do you look at your operating leverage going into the first half of 2008 with the higher wholesale funding, and, the continued expansion that you're looking in terms of branches and system updates?
- EVP - Domestic Personal Banking
Jim, I think the -- we're very happy with the way that the overall year went, and, yes, Q4, because of the higher funding costs, had an impact, and that is something that we actually expect to ease somewhat going into 2008 with rates coming off, so we actually expect spreads to widen as the year goes on, which will mean that the significance or the impact that you saw in Q4 will be down significantly. The other point I would make is that our expenses were up $35 million quarter over quarter, and there is some seasonality in that, and there's also some advertising and project expenses that we don't expect to repeat, so you will see expenses moderate more in the first part of 2008. So again, we're committed to positive operating leverage, as I said earlier, and the other point that I would make, is we opened 35 new branches this year, and we staffed all of those up. We're opening a smaller number of branches going into 2008, 20 to 25, and we will likely continue on that trend going into '09, where we will be opening a smaller number again, probably in the 10 to 15 range. So we feel the markets notwithstanding, that 2008 we expect a good year for the business.
- EVP - CFO
Jim, it's Luc. If I can just add a little color commentary, in Q4 the prime BA spread average, the139 basis points, then the average for November went up to about 157. It's pulled back a little bit with the recent rate cut. However, you know, we do anticipate that there will be further rate cuts elsewhere, that we'll widen that spread again. So the margin compression that we experienced in Q4 should not be as severe in the first couple of quarters of 2008.
- Analyst
Got it. Thank you. Question for maybe Rob and Brian. You know, they're talking about the R word now with respect to the U.S., and with respect to recession, and we can all maybe draw the link to what it could mean for the Canadian economy, but talk about what the impact of a U.S. recession might mean to Mexico and the Caribbean and central American operations.
- Chief Risk Officer
That is a good question, and we're all looking at that. Having said that, if you look back at our franchise historically through all the recessions, a solid good PNC franchise that has basic core operating principles and uses conservative lending models, which we do, tends to weather this kind of a situation well. So we're expecting that our portfolios will hold up well, will certainly hold up as well or better than our competitors, and, you know, it will be part of doing business. So we're sanguine about it.
- EVP - International Banking
I'd add to that if you look at our portfolios by bucket, the retail portfolio is 80% secured, so again we feel very good. We've been in the regions for long time. We've got a solid track record. On a commercial basis, again, the lending is largely secured in the Caribbean we've been a hotel lender for a long time. We know the properties. We've got ample security. We know the business well. And again in the other parts of the region, whether it's central, Latin America, Mexico. So we're comfortable with our exposures in the portfolio overall.
- President, CEO
It's Rick Waugh. One added color on this, because Mexico is probably the one, as Rob said, the Caribbean and those countries, we've got a lot of experience. Mexico, we've been in it for awhile now, but that's obviously one of the questions, and there's no doubt about it that, the effect of the U.S. will have some effect, but our reason for going into this country, which was consistent with others, was the demographics and the positive outlook for domestic consumption. That's with the demographics. The age, the number of houses that have to be built, as the young people now go into that economic system, and you build up a free market democratic and institutional infrastructure. And so when you look at Mexico and some of these other countries, this is a little bit of emerging market thesis, and so again, you can't discount the American influence on that but what they got, which a lot of others don't, again, is these great demographics where you've got young people entering into the system who excuse me.
You've got a barking system that is underbanked, and you've got these hundreds of thousands of homes in Mexico that will have to be built, and then you look at Mexico's balance sheet, and it ain't bad. Certainly a heck of a lot better than it ever was before, and they've got some issues and what have you, but they have energy and they can use it a little better, so it's our local forecast is looking not that bad. But we'll have to wait and see on the trade side. But it's -- you have to look at the fundamentals.
- Vice Chairman
Just another comment on that, Jim, Bob Brooks, this particular turmoil in the financial system that we're having, if it does result in a recession will be the root cause of this is confined entirely to the developed markets. The emerging markets, whether it's Mexico or countries in Asia or Central America, et cetera, are completely immune, so very local financial systems are functioning quite well, and we're obviously part of that locally in those markets. So that's not to say there won't be some economic spin-off, but this is a bit of a different scenario than we've traditionally seen.
- Analyst
Got it. Thanks very much for the color. And I have got just a really quick one for Luc. Looking at your slide 40, the $133 million after-tax losses on the structured credit instruments, you've broken out the split between business line in terms of the revenue, the pretax. Can you give the breakdown of the 133 between Scotia Capital and other?
- EVP - CFO
It's 88 in Scotia Capital and 45 in other, Jim.
- Analyst
That's great. Thanks very much, guys.
- EVP - CFO
Thank you. Question from Michael Goldberg in the room.
- Analyst
Yes, one of the concerns that I've had coming back to Canadian non-bank ABCP is litigation risk. So a couple things I was wondering if you could address. First of all, just how active was Scotia Bank as distributor of this product, and how much Canadian nonbank ABCP is still held by clients that you sold to them?
- Chief Risk Officer
I'll start to answer that Michael. I'd say a couple things first. We're not going to disclose client positions, obviously, but ourselves and other banks have been working diligently on a reorganization of one of the conduits, and we hope to have that done by month's end, and that will be obviously good for the marketplace. And secondly, we've met with Mr. Crawford, and his committee and his advisors a number of times on the rest of the asset-backed commercial paper conduits that are stranded in this country. There's a lot of stakeholders around the table. It's very complex. It's a reorganization and a work-out. It's going to take some time. But we're putting our best minds and our best people to that cause for obvious reasons to get it resolved.
- Analyst
So you've got clients, then, that, the way this looks like it's going to unfold, will experience losses on their paper. Do you have concerns that there will be litigation that will result, and how material do you feel that it will be?
- President, CEO
We always have concerns, but I don't think you can put any number on it because, first of all, the restructuring has to take place, or should take place, and if it's done successfully, that will have a big factor on whatever potential claims result there. For us, I just point out we weren't a sponsor, we weren't a manufacturer in -- involved in two or three of them. I think one in a swap asset role, and three or four others in a standby. And us and about seven or eight other dealers did distribute, in the distribution, and that distribution was widely held amongst the community, but there are significantly different roles. So again, as Brian's comments are, there's this one that looks like it's going to happen, and the goal of it all is to mitigate any losses, and once you mitigate losses, you mitigate litigation. But it's very speculative at this time. We're not begging the question, because the question is very hard to focus.
- EVP - CFO
Any more questions on the phone?
Operator
Your next question comes from Sumit Malhotra of Merrill Lynch.
- Analyst
Good afternoon. This one is for Steven McDonald, if he's in the room. Scotia Capital, we saw a few items in the presentation that helped net interest income this quarter. One of the ones I wand to ask about was the lending spreads that you're seeing with the widening in corporate spreads. Just getting an idea how quickly that might be working its way to your top line in terms of net interest income repricing and such.
- Co-CEO
Sumit, it is Steve McDonald. I am here. Yes, the improvement in spreads is not happening as quickly as we would like, in part because the deal activity has lessened substantially. The opportunity has not been great. We still do anticipate that we will see margin improvement in the coming quarters. We are seeing it in the leveraged area. We're not seeing it in the investment-grade area. But the entire market still has suffered from the problem that exists in the states, and the availability of credit broadly in the banking community today is much more limited than it was six months ago. So the opportunity to do sizable transactions that would yield improved margins and activity just hasn't happened yet in sight, and we're hoping in the new year we'll see a change there or some movement, some positive movement.
- Analyst
And how about in terms of commitments you already have outstanding in terms of repricing or depending on when these things turn over I'm guessing is the answer?
- Co-CEO
A lot of our transactions now are three and five-year terms. So clients, if they don't have to come to market, and if they're in compliance and they're not making any acquisitions, they're just sitting tight. And so that's our issue right now. But those that are coming to the market, again, particularly in the leveraged end, are seeing increased pricing. So the whole process is a little slower than we would have expected.
- Analyst
Okay. Just staying with Scotia Capital, I think Brian mentioned in his comments watching for any spread in the U.S. credit problems to other sectors for the consumer. Can you give us an update on GMAC, just where we ended up in terms of the total amount of securities that the Bank is holding within Scotia Capital? I think that's in your securities line there. And how credit quality for the portfolio is looking on that end.
- Chief Risk Officer
Well, let me just comment on how the -- it is performing. Again, we have to be very careful in terms of disclosure on client business. But I've said consistently, and I'll say it again, our -- we do get reports on a quarterly and monthly basis on that financing, that structured arrangement, and it is performing very well. And there are structural elements to our financing that provide us with a good degree of comfort, and we're obviously paying attention, because these are more difficult times than perhaps six months ago. But GMAC has gone through decades of experience, and we have the benefit of their experience and their data in going through all this. So we do think we're both well structured and well positioned going into what might be a tougher time at this stage.
- Analyst
I'm sorry, does anybody have it handy? How much is the bank holding these days?
- EVP - CFO
Sumit, it's been relatively constant over the last couple of quarters. It's decreased from the beginning of the year. It's under $6 billion at the current time.
- Analyst
Okay. Thanks very much.
Operator
Your final question --
- EVP - CFO
One last question on the phone, please.
Operator
Your final question comes from Mario Mendonca of Genuity Capital Markets.
- Analyst
I just became completely confused when you were answering Ian's questions. The question is real simple. Actually, let me just go to what I'm really interested in. If you could just tell where you say the 150 and the 56 and the 20, what line items are those? The amount that adds up to 191.
- EVP - CFO
Are you looking at a particular schedule in the package?
- Analyst
No, you told us $191 million was the charge on -- it's not all trading, though.
- Vice Chairman
Mario, 115 is in trading in Scotia Capital. 20 is in gains and investment securities in Scotia Capital. And 56 is in gains and investment securities in other group treasury.
- Analyst
Now I actually do remember what I wanted to ask. When I originally asked the question about the inventory in -- related to the CDO, the synthetic CDO trading, you said you wanted to get back to me. When Ian asked the same question, the answer was 0, no longs or shorts.
- President, CEO
We found the answer in the meantime.
- Analyst
So you can have a trading book without having any positions at all?
- Co-Head, Scotia Capital
Well, it's not so much a trading book. It's a distribution business. So we do construct positions and distribute them to clients but we don't maintain residual positions. Unlike money market and fixed income and foreign exchange, we don't pre-position. These are largely customized transactions. Once they're done, they're given to the client, and we're not left with a residue.
- EVP - CFO
The bank had the good fortune of not having any of that at exactly the time when things fell apart.
- President, CEO
Mario, perhaps the word "trading" was not the best choice of words to describe the activity. As John said, we put these things together, we structure them, we sell them off. We don't make markets in them and buy and sell. Yes, in theory you could end up with some small inventory if your distribution model broke down in mid process, but that's not what happened. Hence, we have none.
- Co-Head, Scotia Capital
I think, Mario, a lot of the U.S. dealers and others have been caught in terms of warehousing a lot of product in anticipation of structuring some of these things.
- Analyst
Precisely what I was thinking.
- Co-Head, Scotia Capital
That is not the business we're in.
- Analyst
Got it. Thank you.
- President, CEO
Thank you very much for joining us today, and wish you all a happy holiday season, and we'll talk to you in the New Year. Thank you.
Operator
Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.