Bank of Nova Scotia (BNS) 2008 Q1 法說會逐字稿

Good morning from Edmonton. Welcome to the presentation of Scotiabank's first quarter 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. Next, I will go over the financials. This will be followed by a review of business line performance and priorities by each of the business line heads. Then Brian Porter, our Chief Risk Officer, will discuss asset and credit quality, and market risk.

And finally, Rick will close with some comments on the outlook for the rest of 2008. We will then be glad to take your questions. We also have our two vice chairmen available to participate in the Q&A. Before we start, I would like to refer you to slide number two of our presentation, which contains Scotiabank's caution regarding forward-looking statements. Rick, over to you.

Thanks very much, Luc. Well, we had a challenging first quarter with net income of $835 million, down 18% from the same quarter a year ago, and down 20% -- 12%, pardon me, from last quarter. Earnings per share were $0.82, and return on equity was 18.3%. Our productivity ratio was 56.5%, better than our target of 57%. While we had expected this quarter to be difficult, it was weaker than we expected. As tough conditions in global financial markets and an unprecedented volatility continued to impact asset values, our funding costs, and currency translation. The ongoing strength of the Canadian dollar impacted our foreign currency earnings as year-over-year, the dollar increased from $0.87 to par.

The capital markets continued to be unsettled. And that has resulted in a widening of credit spreads and impacting valuations on our portfolios. While our exposure to these stress markets is modest and well-diversified, we could not escape the extreme volatility. This, as well impacted our trading businesses, although we did have record foreign exchange and precious metals trading results. As a result, we took write-downs and reserves this quarter of $238 million on a pretax basis, which reduced our earnings per share by $0.17. And along with the strengthening of the Canadian dollar, led to these reduced earnings. Luc and our business line leaders will provide more details on this in just a few minutes.

The good news is that our core personal commercial businesses in Canada and internationally, as well as our corporate client-focused lending businesses are in very good shape. This is very well-demonstrated in our first quarter volumes where we saw record asset growth across all of our business lines. Domestic banking had strong volumes, which resulted in yet another quarter of market share gains in key products. International banking had good organic growth and benefited from recent acquisitions, particularly in Peru and Chile. Mexico did have some one-time tax issues this quarter, but the underlying growth continues. As I said, Scotia Capital continues to see high quality loan growth from a broad-base of clients in all major markets. As well, we are well-capitalized and as Brian Porter will show, our credit portfolios are in good shape.

So overall, we feel confident that our diversification strategy, by geography, by type of business, will allow us to weather these short-term challenges. Crises such as these are only temporary and in fact, create opportunities for those with the ability to take advantage of them. Finally, I would like to welcome Mike Durland as our new head of Capital Markets to this presentation. Mike has been with us for over 15 years and leads a very experienced team supported by John Madden, our head of Fixed Income and Barry Wainstein, head of Foreign Exchange and Precious Metals. This depth and breadth in management is exactly what we need in this environment. So with that, I'll now turn it over to Luc who will go through the numbers in more detail and then have questions later.

Thanks, Rick. Let me begin with a brief review of some key factors that impacted earnings this quarter. As Rick mentioned, we took write-downs and reserves totaling $238 million, $171 million after tax, which reduced EPS by $0.17. As you can see on slide seven, the write-downs related to three asset classes, $68 million for CDOs, $46 million for SIVs and $44 million for non-bank asset-backed commercial paper. As well, we took a reserve of $80 million against a swap exposure to one of the U.S. mono-line insurers. Brian will have more to say on our exposures to these asset classes in a few minutes. Next as shown on slide eight, we continue to be impacted by the stronger Canadian dollar. Compared to the same quarter last year, the dollar rose 16% against both the U.S. dollar and the Mexican peso. The impact on net income was almost $60 million or $0.06 per share. The quarter-over-quarter effect was much lower as the dollar has stabilized recently.

Finally, as shown on slide nine, the contribution from Scotiabank Mexico on a Canadian GAAP basis declined $41 million compared to last quarter. We continue to see good volume gains in retail assets. However, these gains were more than offset by a number of factors, including some somewhat higher PCLs, lower government lending volumes, the VISA gain last quarter, and most significantly, adjustments to the tax provision. You will note from Scotiabank Mexico's press release last week that there was a low tax provision on a locally reported basis. On a Canadian GAAP basis, we had to make several adjustments. We reversed the final utilization of tax loss carry-forwards and other tax benefits in Mexico as required under Canadian GAAP, and that was approximately $21 million.

As well, we recorded a reduction in the fair value of a future tax asset, as we do not anticipate being able to utilize the underlying tax attributes in the time period originally estimated. And that was approximately $22 million, and there were several other small miscellaneous adjustments for $6 million. As well last quarter, we recorded an adjustment related to the gains on the VISA restructuring of $19million pretax or $14 million after tax. Looking forward, we do not anticipate any further major GAAP adjustments related to income taxes for Mexico. Now turning to the results. Earnings declined 18% year-over-year, primarily for the reasons I just mentioned. These were partly offset by a number of positives, including continued strong asset growth which increased net interest income and the positive contribution of our recent acquisitions in Latin America.

Compared to the previous quarter, earnings were down 12%. This was due mainly to the gains on the VISA restructuring and the sale of our bond index business last quarter, partly offset by lower expenses in Q1. Looking at revenues in more detail on slide 11, year-over-year net interest income was up 3%, driven by strong asset growth in our core PNC businesses. This growth was partly offset by the $138 million negative impact of foreign currency translation and mark-to-market losses on non-qualifying derivatives used for asset liability management. Other income declined 23% compared to last year. This was due mainly to the write-downs discussed earlier, as well as weaker trading results in Scotia Capital. Partly off-setting were higher mutual fund and private client revenues.

Quarter-over-quarter, total revenues declined 10%, or 3% excluding the VISA gains and the sale of the bond index business last quarter. The decrease was due mainly to lower gains on non-trading securities and lower tax exempt dividend income. Turning now to slide 12, year-over-year we continue to see very good asset growth. Assets were up 9%, with double-digit increases in most of the major balance sheet categories. Residential mortgages were up 14%, personal loans were up 9%, and business and government loans were up 15%. This broad-based asset growth was driven by both strong organic growth and acquisitions. Adjusting for foreign exchange and our Chilean acquisition, core growth was in excess of 14%, a very strong quarter.

Partly offsetting the effect of this strong asset growth, was a decline in the Bank's net interest margin which fell 10 basis points year-over-year. This was mainly due to higher wholesale funding costs. As well, we continue to see a change in asset mix in favor of lower yielding, but lower risk Canadian residential mortgages. Quarter-over-quarter, the margin declined 8 basis points, due mainly to lower tax exempt dividend income. On a positive note, for the first time in a number of quarters, we did see a two-basis-point improvement in the domestic margin, as we benefited from wider prime VA spreads.

Now turning to expenses on slide 14, expenses were down 3% compared to the same quarter last year. Quarter-over-quarter, expenses fell 7%,with reductions across many expense categories including lower performance-based compensation in line with lower capital markets revenues, seasonal declines, and timing of expenses and project spending. With that, I will now turn it over to Chris Hodgson to talk about domestic banking.

Thank you, Luc. Good morning, everyone. I'll be starting on slide 16. Domestic banking had a solid quarter. Net income was up 2% from last year. Revenues rose 3% as strong asset growth was partly offset by margin compression. Expenses were well-contained in the quarter, rising only 2%. Loan losses rose moderately, reflecting portfolio growth. Compared to Q4, net income declined 16%. However, excluding the VISA gain last quarter, net income rose 7%. Revenues were unchanged. Expenses fell 4%, due to seasonal declines and higher project spending last quarter, and expenses typically peak in Q4.

Looking at revenues in more detail on the next slide, total revenues increased 3% year-over-year, due to strong growth in both assets and deposits across all businesses. Retail and small business volume growth was driven by mortgages, which were up $15 billion or 16%. Deposit growth of $8 billion or 10% was also strong. The impact of this growth was offset by the increased cost of wholesale deposits used to fund the net asset gap. The margin was also compressed by tighter spreads on new business, reflecting highly competitive markets. In commercial banking, revenue was also driven by higher volumes. We had good organic growth, and we acquired Travelers Leasing last year, adding to our auto finance business.

Wealth management revenues increased 4% from Q1 '07, and we had strong growth in private client and mutual fund revenues, and benefited from our 18% interest in Dundee Wealth. Full service brokerage was down due to weaker equity markets. Quarter-over-quarter, revenues were unchanged, excluding the VISA gain. 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, up 18 basis points, and personal term deposits up a market leading 95 basis points. And in mutual funds, our industry market share was up 24 basis points, primarily in the more profitable, long-term funds. And for the first time in a long while, our resale deposit growth during the quarter funded the growth in retail assets, thereby reducing our dependency on wholesale funding. We are confident that we can maintain these market share increases in these key product categories.

Finally, looking at our priorities and initiatives for the year, driving sustainable, profitable revenue growth remains our top priority. We'll do this in several ways. First, we're expanding our customer base. We made several acquisitions in the past two years and created new partnerships, leading to increased brand awareness in the marketplace. As well during the quarter, we launched both fixed-term and equity-linked GICs to the financial advisory community through Dundee Bank. We also introduced a national program with Western Union to offer international money transfers.

In addition, our mutual fund business continues to build on its sales momentum. We recently introduced 14 new funds, targeting brokers and planners and launched the Scotia Global Climate Change Fund. We also continue to expand our sales staff and distribution network. We've opened 57 branches since 2005, and plan to open between 15 and 20 in 2008. And in small business, which is a growth area for us and where we have achieved good market share gains this year, we added 29 new account managers. We've also added staff in Retail Banking and Wealth Management in the quarter. Finally, we established a multi-cultural banking unit to design innovative products for this growing market segment. I'm confident that domestic banking will accelerate its earnings momentum and generate positive operating leverage over the balance of 2008. I'll now turn it over to Rob Pitfield to talk about international banking.

Thanks, Chris. Starting on slide 21, international banking's net income was $282 million for the quarter, down $34 million or 11% from Q1 '07. However, excluding the impact of foreign currency translation, net income rose $5 million. Revenue growth was 8%, driven by strong organic loan growth, our acquisition in Chile and our investment in Thailand, as well as higher securities gains. Those were partially offset by a negative 4X impact of $145 million, and the change in fair value of certain non-trading securities this quarter. Expenses were well-controlled, increasing only 1%. Higher compensation-related expenses and the impact of acquisitions, were largely offset by for 4AX International's tax rate increased from 11% in Q1 '07 to 27% this quarter. The increase was due to higher taxes in Mexico as Luc mentioned, and lower earnings in low tax jurisdictions. Compared to last quarter, net income was flat, excluding the VISA gain.

Looking at a revenues by region in a little more detail, Mexico's revenues decreased 5% year-over-year. There was very good core loan growth and higher commercial banking fees, offset by 4AX. Going forward, we believe our growth initiatives such as the 90-plus branches we opened last year will help drive good, sustainable growth. Revenues in Caribbean and Central America were flat year-over-year, up 13% adjusting for 4AX and prior period VISA gains. There was good underlying growth in retail and commercial loans of 18% and 8% respectively. As well, the margin increased 11 basis points. However, these positive factors were offset by 4AX.

In Latin America, Asia and other, revenues increased a very strong 39%. This increase was driven by acquisitions and higher securities gains. Partly offsetting were the change in fair value of certain non-trading securities and the impact of 4AX. Quarter-over-quarter, revenues were up 4%, excluding last quarter's VISA gains. This was due largely to acquisitions, and organic loan growth across the region. Looking at our priorities for the year, first, our over-riding priority like the domestic banks is to continue driving sustainable growth. We'll drive organic growth across the division by targeting new customer segments. As an example, we'll open ten new product client centers to serve affluent customers in the Caribbean and Latin America. We'll also drive organic growth by expanding our distribution network. We plan to open between 90 and 100 branches this year. We're upgrading all our alternative channels such as the internet, call centers, our external sales forces, and strategic alliances with retailers.

Second, we'll continue to focus on Mexico. We'll open new branches at a reduced rate, up to 60. And we're entering the large and rapidly growing consumer finance segment through the launch of a new credit card business with a best-of-class partner. Third, we'll continue to look for acquisitions that improve our PC banking footprint and add complementary businesses. With that, I'll turn it over to Steve.

Thanks, Rob. Beginning on slide 25, Scotia Capital's net income for the quarter was $187 million. Our peers, we were affected by the challenging market conditions, although to a lesser extent. Widening credit spreads and capital market volatility led to write-downs and reserves of $122 million this quarter. As a result, revenues were down 36% year-over-year. A higher level of interest recoveries last year and weaker credit derivative, and equity trading results this quarter, also contributed to the decrease. Expenses were 26% lower than last year, due mainly to lower performance based compensation. As well, operating expenses, including signing bonuses were lower.

Quarter-over-quarter, net income was down 17%. The decrease was due mainly to lower equity derivatives revenue and the gain on sale of the bond index business last quarter, partly offset by lower expenses. Looking at revenues on slide 26, year-over-year total revenues were down 36%, or 16% excluding write-downs and reserves. Global capital markets' revenue was lower due to weaker equity and credit derivative trading, partly offsetting were record foreign exchange trading and strong fixed income trading. Revenues in global corporate and investment banking declined 15% compared to last year, reflecting lower interest recoveries, and lower credit and advisory fees. This was partly offset by good growth in lending volumes and higher loan spreads.

Quarter-over-quarter, revenues declined 22%, or 14% excluding items of note in the two quarters. Decrease was due mainly to higher tax exempt dividend income in Q4, and lower equity trading and securities gains in the U.S. and Europe. These were partly offset by the strong performance in foreign exchange and fixed income trading. Looking at our priorities for the year, we are continuing to leverage our NAFTA capabilities, a significant competitive advantage for us. This quarter, we closed a number of notable lending transactions in Mexico. We are further expanding our client coverage globally in selected industries, particularly energy and mining. We are adding expertise in trading research and investment banking, and we continue to focus on infrastructure finance.

In 2007, we established a NAFTA infrastructure lending capability. This year, we will strengthen our capital markets and advisory offerings for this sector. We're also looking to capitalize on market opportunities. The terms and pricing of new transactions are more attractive now than they have been in a long while. Above all, we will continue to be disciplined about risk. I'll now pass it over to Brian to talk about risk management in more detail.

Thanks, Steve. Our portfolios have held up quite well in the current challenging environment. Credit quality remains stable this quarter. With respect to asset classes of current focus, this quarter we took action to ensure that valuations in our portfolios reflect these difficult market conditions, as Luc explained earlier. As we previously stated, the underlying assets are of high quality and our exposures in these areas are not significant relative to our overall portfolio. In terms of U.S. lending, we had no direct retail exposure. Our GMAT portfolio is performing according to our expectations, and our wholesale portfolios are well-diversified and in solid shape.

With respect to market risk, there has been some increase in borrow this quarter, however, market risk remains well within acceptable limits. Looking first at the provision for credit losses, the specific provision was $111 million this quarter, compared to $95 million last quarter. We had net recoveries in Scotia Capital, with provision reversals in Canada and Europe more than offsetting new provisions. The increase in domestic provisions reflect growth in our retail portfolio, as well as modest increases in auto leasing due to the Travelers acquisition. The increase in international is due to higher provisions in Mexico, the Caribbean and Central America, partially offset by lower provisions in Peru and Asia.

Looking at net impaired loans on the next slide, impaired loans increased $88 million in the quarter. This was due largely to the closing of our acquisition in Chile and classifications in Scotia Capital. Looking at net impaired loans by business line, domestic retail has been trending up consistent with strong portfolio growth. International has also been trending up, reflecting organic growth in retail assets and the Chilean acquisition. These increases were partially offset by declines in the commercial portfolio in Peru and the Caribbean. While impaired loans in Scotia Capital have increased quarter-over-quarter, the portfolio remains in good shape.

Now turning to areas of current focus, this slide gives you an update on our exposures. Firstly, our monoline exposure is primarily contained to one counter-party. The three AAA-rated CDO tranches are referenced primarily to investment-grade corporate, and sovereign needs. There is no subprime mortgage exposure. We have taken a reserve of approximately 50% on the mark-to-market exposure of $161 million as of January 31st. Secondly, our indirect monoline exposure is U.S. $4.4 billion of credit facilities related to issuers or holders of public finance or other securities. These securities are guaranteed by monoline insurers. They are primarily investment-grade and represent risk the bank would take without these guarantees. Exposure to subprime mortgages is nominal.

Thirdly, we have small holdings, $144 million of Canadian non-bank asset-backed commercial paper that relates to the Montreal Accord. Fourthly we also have $1.4 billion of CDOs and CLOs, an increase of approximately $200 million from the last quarter, due to some SIV restructurings. The underlying assets are 100% investment-grade equivalent, corporate and sovereign counter parties. We are comfortable with these exposures. Finally, we have very little remaining exposure to SIVs and have no significant concerns regarding our SIV fund exposures.

Now, let me provide some comments on our U.S. exposures. Firstly, we had no direct credit card, personal lending or subprime mortgage exposures. Secondly, we do have an exposure to secured auto loans through our GMAC portfolio. We are comfortable with this portfolio. It is internally modeled at more than 90% investment-grade and continues to perform at or above our expectations. With regard to our U.S. corporate lending portfolio, the portfolio remains largely investment-grade, asset quality is strong, and the U.S. residential real estate construction exposure is less than $500 million.

Turning now to market risk, the next slide shows the bar in our trading portfolios. The average one-day bar rose to $16.6 million, an increase of $3.4 million from last quarter. The increase was mainly in interest rate bar, due primarily to structured credit activity in the quarter, as well as the impact of increased market volatility. Looking at our trading results, this quarter continued to be challenging, with positive results on 79% of trading days, compared to 86% last quarter.

Overall however, we remain comfortable with our market risk. Our structured credit trading is well-controlled and we understand the risks in this market well. We are very comfortable with our overall asset quality. Credit portfolios are in good shape. Our exposure to other asset classes is not significant relative to our overall portfolio and supported by high quality underlying assets. I will now turn it back to Rick.

Thanks very much, Brian. Well, in summary, it's been a difficult and a noisy quarter due to this extreme volatility in the global opinions financial markets. However, I think as you can see due to our strategy of diversification, I'm certainly confident that we can weather this short-term uncertainty in the capital markets due to our underlying growth. You saw it in our quarterly and year-over-year growth in assets. We will continue to invest in these three growth platforms to support both our organic expansion and acquisitions. And this will lead to continued sustainable revenue and earnings growth.

We have the capital. We have the opportunities. We have the strategies. And we have the management to deliver. Crises do end. And we see some positive indications. Capital markets are expected to improve in the second half of the year. Short-term rate declines are leading to improved funding costs for us. The Canadian dollar is expected to hold in its current range. Asset growth and acquisition of customers across all of our three business lines remain strong, supported by strong growth in our emerging markets and Canada.

And finally, we have placed increased focus on our cost control. So consequently, we are maintaining the financial objectives outlined at the beginning of the year. Although we recognize it will be a challenge to reach them, in light of the current quarter's results, we do not intend to stand still and are that we are confident that we have taken, and are taking actions to deal with these challenges head-on. So with that, I'll now pass on to Luc who will MC and open it up to questions.

Thanks very much, Rick. Could we have the first question please?

Your first question comes from Brad Smith from Blackmont Capital. Please go ahead.

Thank you very much. I have two questions, actually. First, dealing with the domestic banking business. Chris, I saw the strong market share gains that you made relative to what you had reported last quarter. I believe I'm seeing relatively stable interest margins. Just wondering if you could provide a little bit more insight into that market share --- the source of the market share improvement? Is that growth in your customer base? Or is that largely cross-selling success or what have you being reflected? Then secondly, I was just hoping we could run over the Mexico tax adjustment again, just to make it very clear. What that was from and what the exact amounts were relative to Q4?

Okay. Brad, thank you. In terms of our market share gains, it's really coming from two places. One is increased customer acquisition. We've been very aggressive and clear on that the last couple of years, both in terms of acquisitions that we've made where we've taken on new books of business through Travelers and through National Bank of Greece, and some of our other acquisitions. We picked up new customers that way. Plus, some of the partnerships we've signed over the past couple of years. The Cineplex has been helping us with the cross sell.

To be clear, we picked up year-over-year good gains in mortgages. Though in the first quarter, we gave a little bit of that back, Brad. We did that consciously because spreads came in at the beginning of the quarter, they were very, very tight. And we were seeing some unprofitable business in the mortgage front, so we decided to give up a bit of market share on that front. For the first quarter in a long time, our retail liability growth actually outstripped our asset growth and we did have good market share gains once again on the deposit side. So on mutual funds, our long-term asset sales were very, very strong in the quarter. But to answer your question specifically, we're really seeing it from two sides. One is from new customers, and the other is from our existing customers where we're getting a greater share of wallet.

Okay. Great. Thank you. Just on the international, perhaps Luc you could just run through those numbers again. The 68 was impacted by -- I heard two numbers, 21 and $22 million.

That is correct. The 21 related to reversing the final utilization of the tax loss carry-forwards. You'll recall, Brad, that in the past from a Canadian GAAP perspective, we had recorded that benefit in advance of what they did from a local Mexican GAAP basis. They finally utilized all of those tax loss carry-forwards. The last bunch was in the current quarter and so we had to reverse those as well as the other tax benefits that we had realized from a Canadian GAAP perspective. So that's the $21 million. As well, I've chatted in the past about tax attributes that we would look to use on a go-forward basis.

We had had recorded a future tax asset, but now we do not anticipate being able to utilize those tax attributes in the time period that we originally estimated. So we had to write down the fair value of that tax asset, and that was $22 million. Comparing that to Q4, so the total of those two is $43 million. We had similar tax adjustments, in terms of them recognizing tax loss carry-forwards in Q4 of around $26 million. When you take a look at the adjustments on slide 9, Canadian GAAP adjustments, 49 for Q1 '08 versus 19 for Q4 '07. You also have to take into account the VISA gain which was $14 million after tax, so if you take the $19 million and add $14 million to make it $33 million, the difference quarter-over-quarter is not as great as it appears on this slide.

Thank you very much.

Okay. Next question.

Next question comes from Sumit Malhotra from Merrill Lynch. Please go ahead.

Hi, good morning. First question is for Brian Porter. Brian, if I go to the areas of focus for this quarter, and I look at the $80 million reserve you took for the $161 million of mark-to-market exposure. Was this counter party --- or is this counter party the one C-rated monoline that's out there? And if so, why didn't you take the entire $161 million?

That's a good question. It is the stated counter party. The difference for us here is that, it really comes down to asset quality. All the hits we've see out there, pertaining to this same have some subprime exposure. The three trades that we have on with said counter party were rated AAA at the time we put the trades on. They're still rated AAA, so asset quality is high. We are presently working on a restructuring of the trade, and we are bound by a confidentiality agreement so I can't go into specifics about what we're doing. But we're confident we'll get this restructured in the next quarter. If by chance we don't, we'll deal with the position accordingly.

Okay. Two more in this regard, kind of in the same area. When you talk about the 4.4 of indirect exposure, what are we looking at here? Is it municipal bonds? When you say they have an underlying relationship with these monolines.

Yes. They basically support public finance transactions. The underlying portfolio is 86% single-A or better, in terms of credit quality. The balance, 13%, would be triple-B minus. So the credit quality of the portfolio is fine. As I said in my comments, these are credits or assets, we would be comfortable to have on our own books, in terms of credit quality.

Okay. The last one in terms of these exposures, three months ago, last quarter's call, we heard about the European conduit that you had put back on your balance sheet. And you referred to at that time as being fully hedged. Obviously, given the difficulties we're having in credit markets, somewhat concerned about the -- just how well these hedges have held up. Is there anything you can offer on that point?

Clearly, when we consolidated the conduit, we inherited a long credit position, and we hedged it accordingly. And in terms of --- you can hedge our credit exposure, and our single name exposure, and our correlation exposure. That drove our credit no-shows up through the quarter. We're comfortable how we had the position hedged. I would expect -- it depends on market conditions, but our plan is to reduce this exposure in subsequent quarters.

Okay. I'll leave it there for now. Luc --

The other point I would make there, in terms of counter parties, our counter parties on anything we've hedged in that book are large, interbank counter parties. There aren't any monolines. There aren't any counter parties in there that we have a credit issue with.

Okay. Thanks for that detail. Luc, one for you, and I'll wrap it up there. On slide 7, the Items of Note, you broke out the financial statement lines. Just listening to some of the commentary, it sounds like this stuff ran through three segments. Could you give us some details? Sounds like it was international, Scotia Capital and other. Could you break that out for us if you have it handy?

Sure. Happy to do that. Of the 238, 122 was Scotia Capital, 30 was international, and 86 is in other.

Okay. Thanks very much.

Thank you. Next question.

Your next question comes from Andre Hardy from RBC Capital Markets. Please go ahead.

I have two questions, and maybe they're related. One, can you talk about the very, very rapid growth in business and government lending during the quarter? Was that business you wanted? Was that lines of credit being drawn by companies that are struggling? So maybe give us a little bit more detail on that. And thanks for the enhanced disclosure on the automobile lending in the U.S. I just wonder if you could give us the reasons why that's internally modeled to being investment grade. Is that over collateralization? Is that because you have protection from GMAC? That would be helpful in us understanding that. That's not a big risk for you guys.

Why don't we start with Steve on the business line, then I'll follow up with a risk comment.

Okay, Brian. With respect to the business loan growth within Scotia Capital, the growth has been quite distributed across a number of our businesses. And we're fine with the growth, generally. We're quite happy with it. It is growing in the right places.

We're seeing some growth in our investment-grade quality risk. And we're not tilting the balance between investment grade and non-investment grade through the piece. So it's quite broad, geographically and by product, and it's basically good news in our views. We're seeing increased margins on the loan portfolio. We're seeing increased margins in pretty well other portfolios as well, our TRS portfolio, significantly increased pricing on new deals. Both investment grade and non-investment grade, but particularly non-investment grade, And some really great opportunities in the secondary market with some paper that is what we value to be quite high, trading at significant discounts given all the volatility. So it's providing us with opportunities.

I'll just add to that, Steve. It's Rick Waugh. And we also saw some good growth on the business side in Asia, some good growth there, and of course through all the other commercial and our Americas side. Again, just this is -- these are our customers. They're all good names and well-distributed. So the customers are obviously, with these financial markets, making use of some bank facilities here.

And are they using them to a level that it changes your risk ratings of those customers?

No. We've had very few instances where we've had corporate draw-downs because said corporation is in trouble. I can think of one case, and it's not significant and it's not troublesome as far as we're concerned. In terms of the GMAC portfolio particularly, we have to be cautious here because again, we are bound by a confidentiality agreement. We did get an outside rating just to make sure that our internal work had been done properly. But this is something that we worked on for months.

We have a lot of knowledge about the auto sector. Clearly, we're an auto bank. We've got a lot of knowledge, in terms of structuring. These are over collateralized and structured the way we want them. We actually, probably gave up a little bit of revenue to enhance the over-collateralization and the structuring of these obligations. So again, we're comfortable with our exposures.

So you're not dependent on somebody else's credit rating?

No.

Thank you very much.

Next question.

Next question comes Mario Mendonca from Genuity Capital Markets. Please go ahead.

Good morning. Quick question. In the press release, there's a reference to the decline in interest rates in the past quarter had a significant negative impact on the fair value of derivatives used for asset liability management. I guess the first question is, does that -- we're not talking about credit derivatives here, are we? It sounds like interest rate derivatives.

Interest rate derivatives, you're right, Mario.

So these interest rate derivatives --- you say they were used for asset liability management or that's what's written, I'm sorry. And is this what affected trading --- interest rate trading revenue in the quarter? Were these sort of interest rate positions designed to sort of capture things like steepness in the curve that didn't play out?

It's Bob Brooks. The answer is no. This primarily relates to the mortgages that are sold into the CMB program with the government. Unfortunately, under the terms of the swap arrangements that are integral in that program, it is almost impossible to get hedge accounting treatment on the offsetting hedge that you take for the cash flows flowing out of that trust. So you have an economic hedge, but you can't get an accounting hedge. And when interest rates move around obviously, you don't reflect the gain on the mortgage because that's in the trust and not on our books. But you do reflect the gain or loss on the offsetting interest rate hedge. So it's an interest rate hedge. Every bank has them, and we can't get accounting treatment on them.

In our Canadian portfolio.

In our Canadian portfolio.

I follow that. So if the economic loss, let's call it. Not economic loss, I'm sorry. The loss that appears or the issue that appears because on the derivatives, essentially, there must be some kind of positive element that will emerge over time.

Yes, over the life of the underlying mortgages, this will come back to par. These are five-year mortgages.

Got it.

So at a point in time Mario, it does have an impact on our net interest income line. It wasn't particularly dramatic quarter-over-quarter, but it was certainly dramatic year-over-year. Q1 this year versus Q1 last year, the impact on the net interest income line was around $100 million.

Okay.

Mario, this is Sabi. The issue is really, one side you have accrual accounting. The other side, you have mark-to-market accounting.

I totally follow that now. One final thing, and this is for perfect clarity from Brian. Monoline exposure, I think you've done a pretty good job of giving us an understanding of where the monolines come in. That one transaction you're referring --- or three transactions you're referring to with $161-million fair value exposure written down. Are there any other securities or other transactions, the Company's entered into that are ledged with monolines? Or is that the whole picture right there?

That's the whole picture there. And for full disclosure, in our CDO portfolio which I mentioned, $1.4 billion. Our total CDO or our total monoline exposure, in terms of monolines being incorporated, in some of the names in those CDOs, would be $200 million. So it's not significant.

Thanks very much.

Next question?

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

Good morning. Just want to follow up on the retail numbers. Chris, you highlighted a number of market share gains, but I was kind of surprised not to see the other income line within domestic banking lift with the market share gains. It was relatively flat. Can you talk a little bit ---was there some one-time items that maybe dampened that this quarter?

In terms of other income? Sorry, Jim. It's Luc.

In domestic banking, too.

Sorry?

Sorry, Luc. It's in domestic banking that I'm referring to.

Domestic banking, can't forget that we had the VISA gain last quarter. That was $111 million pretax. So that impacts their results.

Oh, I can appreciate that. But when I look at the $519 million on page four, it seems a little bit lighter versus the Q3, Q2, Q1 run rates of '07. And so I'm just wondering, despite the market share gains and the assets under management pickup, was just wondering what may have dampened that this quarter.

We had a little bit of a write-down, in terms of the --- some retained securitization interest during the quarter there as well as some lower gains in one of the subsidiaries. And that combined with $111 million, really took care of that $144 million differential quarter-over-quarter.

Okay. Got it. Thank you. Just looking at the comment that Chris, you had made with respect to the funding. This quarter, with respect to deposits funding asset growth. Can you talk about the financial impact of that going forward? Maybe in round terms, how this could impact your results?

Well, I think the most positive thing, Jim, is the fact that margin increased by two basis points on the quarter. We actually see spreads widening, based on where rates are going over the course of the next -- or the balance of '08. So we do expect that to positively impact our results over the course of the rest of the year. We have been aggressive in terms of growing our deposit base, but we haven't been out of the market. We've been very careful in terms of some of the offerings that we've had. But generally speaking, we will continue to be quite aggressive in growing our deposits. I think the other thing I didn't say in our growth and deposit share of course, is that the Dundee Bank acquisition and partnership has been very positive for us. When we closed on that deal, we had $2.3 billion in deposits. And we've grown it by just under about $1 billion in deposits over the last number of months. So we continue to see some good growth in that area. The long and short of it is, that we expect the spreads to widen and to help us over the course of the balance of the year.

Got it. Thank you very much, Chris. And then just the last question with respect to --- tier run ratio. Unlike some of the other banks, didn't really receive much of a lift from going from one to two. Can you talk about perhaps some of your internal models or some of the dynamics involved in that?

I think --- Jim, it's Luc. There were two aspects there. In terms of the calculation there, there are some anomalies there, in terms of the impact of our general allowance, in terms of the calculation under basal two. As well, we --- with respect to market risk, our model is in process of being proved. Once approved, that will reduce significantly, we expect the risk-rated assets relating to market risk.

Luc, do you see the market risk matter being resolved in 2008?

Yes, we do. Yes, we do.

Thanks very much.

Thank you. Next question.

Next question comes from Michael Goldberg from Desjardins Securities.

Please go ahead.

Thanks, good morning. My first question is for Chris. If you could give us a little more color on how you plan to use Dundee Bank?

Okay, Michael. Well, I think very simply, we own 100% of Dundee Bank. We've launched a number of new products in conjunction with Dundee Wealth. And this gives us access to the third-party channel to help grow our deposits and GIC base. So we've launched three new products actually over the course of the last quarter. We will be launching very, very soon an investment loan product. In fact, there's a pilot project in the works right now. And that will be quite competitive, in terms of a couple of other products that are in the market. Specifically, Manulife has a product on that front.

So we will continue to look for ways to support that channel, and to grow really our deposits and our GICs through that area. And we're seeing some good growth through that channel. I gave you some numbers a moment ago. We're up about $1 billion since we purchased the Company at the end of September.

Okay. Also, a question for Steve. Can you elaborate on the type of opportunities that you're seeing? And which types actually interest you? I think you were saying that you've seen attractive spreads on the credit side, and in particular, in secondary markets. Are you buying?

Yes, we are buying. And we've gone to the secondary market, A, because it's a very attractive market in terms of pricing. But B, because the primary market is relatively slow, right? There's not a lot of deal transactions going on in these kind of markets. So part of our challenge is trying to find partners who are willing to put up some capital to do deals. So your syndications markets have been slow. The fee generation has been slow there.

But what we have been able to do, is some interesting kind of one-off structured financings. And we can pick our -- in this market, we can pick the risk profile that we're looking for. And we find, we're finding in this market, that we can stay at the very high-end quality and get paid very, very well. So what has been interesting about the last three months, and what I think will be interesting about the rest of the year, is that people are coming to us with issues. Sometimes, they are liquidity-related, rather than really capital relief-related. They're looking to us for funding. We can structure arrangements that are of very high quality that generate excellent returns for us on a -- and so that's the kind of thing we're seeing in this market. I would like to see the primary market develop more. Hopefully, that will happen. But certainly in the states, particularly, it is very slow.

Can you give us some comparison of the type of margins that you're seeing in these markets now, compared to, let's say prior to the credit challenges that we're experiencing?

So as I mentioned earlier, we're seeing real movement in margins in the non-investment grade. Most of our activity is in the investment grade, volume-wise. In non-investment grade, we're seeing spreads going from, maybe 150 basis points six months ago to 300 plus in this market. In the investment-grade area, we might see spreads going from 50 beats to 100 beats. So it's basically a doubling and more, in the non-investment grade. So it's 300 --- 300 is ---- we're also seeing 350, 375 for risks that are not unacceptable. And structures, common structures, and capital structures, that are a lot more favorable.

Okay. And Rick, can you also expand on opportunities that you're seeing, given the challenges that are out there?

Well, there's two broad opportunities. First of all, as Steve just pointed out, our relationship lending at --- we stayed in the relationship client business in Scotia Capital throughout --- even though when the spreads are really, really low, we stay with our key customers and try to make it up on cross sell. So that it creating a lot of opportunities. While we don't wish adversity on our competitors, as Steve alluded to, is --- a lot of them are just out of the market now, at least temporarily. So the alternative that our customers have are a lot fewer. And they're coming to some of us who have kept our powder dry, so to speak. So that's the first opportunity.

The second opportunity, of course, is we have been in a disciplined, and --- not big huge acquisitions, but acquisitions that fill into our strategy, fill into footprint, where we are geographically. And that continues because again, for the same broad reasons, the capital markets and that. As a matter of fact, when you have these disruptions, there tends be now more sellers and buyers. So that's good for us. We're going to take our own sweet time looking at them. The pipeline in international --- continues to be active. Although, we're using it to fill in where we feel we need to. We'll continue those discussions, and they're ongoing. We will of course, in Canada, where we have our wealth management initiative, we will keep our eyes and ears open on that. And we'll do both, organic growth and acquisitions, much along the same lines, we've done over the last several years. But I think the opportunities are every day becoming a little more attractive, and we'll take a measured response to it.

One more for you, Rick. We know that the downturn will at some point come to an end. But what specifically gives you comfort of accepting or recovering in the second half?

There's a number of issues, just some maybe specific. First of all, the currency always --- I think a strong Canadian dollar is good for us because our foundation is in Canada. And that's good. However, it does give us of course, some challenges when we bring back those --- those earnings outside. It's just a fact, that in the first and second quarter of last year, the Canadian dollar was in the $0.85 to $0.90. So give our forecast, that the Canadian dollar will trade around these levels at par, plus and minus. In the third and fourth quarter next year --- back to the third and fourth quarter last year, sorry. That transition gives us one reason for confidence on that.

Secondly, as Chris mentioned on our domestic funding, and you can see it in that quarter --- increase in our Canadian. As you know, and we've told you this many times, that we mark-to-market, in essence to our domestic business line with the increase in short-term rates. Well that of course has changed, as you're aware of, and it's changing today, I understand. These rates are coming down. And you see that in our quarter. So that trend, we continue --- we see it happening now. It's not a --- and we see that forecast trending.

The third thing of course, is when you see ---- such volume growth in a long, long time, and maybe ever. I also haven't seen this turbulence as much as that. But the offset is that, as you can see, in our first quarter, half the totals --- those are on our books now. So we're going to get the benefit of that as the averaging takes place year-over-year. And we're not standing still on looking at opportunities and cost initiatives. We've always, always have been cost-conscience. This environment is certainly making us insure that we're going to invest for growth, et cetera, et cetera. But there's opportunities now, that we just got to back and take some cost sells.

Do you expect that you're going to sustain the organic growth in lending volume that you've had in the first quarter?

Absolutely, because first of all, I think we're in those --- what market is better to be in than these developing, emerging countries and Canada. So that's good. And then, in the United States, in our wholesale, we have relationships --- go back, many times. And these will create the opportunities for organic growth. So the volumes --- I'm very confident on the volumes. The spreads in Canada, now of course, that they're all subject to all this volatility that we see. It's when you peel back all these accounting mark-to-markets, which we were --- we made sure our portfolios are reflecting this uncertainty. When you peel that back, you can see the growth

Thank you very much.

Thank you. We have time for one last question.

Your next question comes from John Aiken from Dundee Securities. Please go ahead.

Good morning. Hi. Brian or Steve, and in terms of gross impaired loans coming out of Scotia Capital, the new classifications in the quarter, was this broad-based or does this relate to one or two single names?

It's one single name in Canada.

Can you give us some flavor as to what sector, what area this relates to?

I think that there is probably only one gross impaired loan in the country.

Perfect.

So I think it's pretty obvious.

Thank you very much. And Rick, just a general strategic question for you. Are you gaining any traction with the government in your campaign to try to open up the borders? And I guess indirectly start the move on mergers once again?

The first part, there is of course a couple of panels on competitiveness going forward and what have you. Canada didn't sign many trade agreements over the last several years. But in the last year, they signed two. One of them was in Peru and the Americas. And so I think there is a recognition and certainly that --- we're in a global world. Canada is in a great position, but we have to think of our markets globally. When you look at the government's policy statements on Advantage Canada. When you look at --- Harper made a speech down in Chile on what he saw for the Americas, and now backed up with actually some trade agreements. Because while we've only done two, if you look at some of -- Mexico's done dozens of trade agreements. I think there is a recognition that growth for Canada is great, but we're in a global market, and Canadian companies and that will grow. So I don't want to sound like I'm making a speech here. But I think the policies are reflecting that and going forward.

On second, on the perennial questions on mergers. To me, I think we're past the policy stage, but it is a fact of politics. The politics are obviously on the agenda. If you look what's happening in the world, with what's going on with Italian banks and the European banks and what have you. It's not if, it's when. But when could be very long, long time away. So we'll just have to let that one play out. Meanwhile, we're not counting on it. We're going to -- we'll make our points when we can. But we'll just continue on this strategy and not counting on anything happening.

John, just on the formation we talked about, I was probably a little flippant in my response. We also had the position more than half hedged. So in terms of provision --- that provision we more than made up in the CDS market what we provided for in the loan. So in time, we think we're going to be money good.

Okay. Thanks for the clarification, Brian and Rick. Thanks for the commentary. Greatly appreciate it.

Okay. Thank you very much for participating in our call this morning. Have a great day and we'll talk to you next quarter.

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