Bank of Nova Scotia (BNS) 2009 Q1 法說會逐字稿

Welcome to the presentation of Scotia Banks first quarter results. I'm Luc Vanneste, Chief Financial Officer. Rick Waugh, our CEO, will lead off with the highlights of our results. Next I will go over the financials, including a review of business line performance. Brian Porter, our Group Head Risk and Treasury, will then discuss credit quality. Next our business line heads will provide updates on their respective businesses. And finally, Rick will provide some outlook comments. We will then be glad to take your questions.

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

Rick, over to you.

Okay, thanks. Luc. Clearly the conditions that prevailed in 2008 have continued in this first quarter. We've seen ongoing volatility in the global financial markets. We've had major economies around the world that are in recession. And of course, Canada has not been immune.

However, as you can see by our quarter results this year, we are managing well through this downturn with a good level of quality earnings. The banking sector in Canada is still in good shape. Some say the best in the world. As a group, we are all very well capitalized by global standards. And Scotia Bank clearly demonstrated this by the fact that we were able to raise more capital this quarter, all of it from the market from private sources. Our bond and equity investors continue to demonstrate their confidence in us by increasing their direct investment.

Our strength is reflected in solid first quarter results. We had good core earnings from each of our businesses. Our level of profitability remains high with a very respectable return on equity of nearly 17%. And our capital ratios improved even after financing growth in our lending operations and, of course, maintaining our dividends.

What drove these results? Well, we continue to benefit from broad based volume growth in our lending portfolios and a greater focus on raising deposits, as well as higher contributions from our recent acquisitions. We also had record performances in our wholesale advisory businesses and several of our trading portfolios. With did see an increase in credit provisions, which Brian will discuss in more detail in a few minutes. However, these credit provisions remain manageable. Within our risk tolerances. And we have seen as well to offset an increase in our lending margins particularly in our wholesale corporate portfolios.

We also believe that these portfolios are in better shape compared to previous downturns, and Brian will give you some information on this later. And we are dedicating more resources to actively managing these risk levels, but always working with our good customers through trying times.

Each of the three businesses, as I mentioned, had a good quarter. Canadian Banking net income grew by 18% compared to last year. Strong customer borrowing and deposit growth resulted in good top line revenue growth despite competitive pressures and higher funding costs. In our International banking, earnings were up 34%. This increase was driven by strong volume growth in all regions and higher contributions from acquisitions, particularly in Peru and Chile. The countries in which we are most active continue to withstand the crisis better than most.

Scotia Capital's earnings were up more than 50% from last year. They had record performances in investment banking and several capital market businesses. They also had good loan growth, largely from our existing customer base with some increased M&A activity. These increases were offset by higher funding costs and security writedowns which show up in the other category on our statements.

On a broader basis, as I just said in our annual meeting which has just ended, the short run uncertainties are real and will continue this year. The fiscal stimulus is unprecedented globally. But for this to work, the financial sectors have to stabilize. It should, and it is government's top priority. But crises do end and we see signs that this is, in fact, happening. The interbank markets have encouragingly held stable despite several bad news stories, and the bond market and our funding costs are starting to improve.

When we come out of this crisis, probably later this0year, Scotia Bank will be in an excellent position to move ahead strongly. In Canada, in our international markets and also in Scotia Capital. Many of our competitors will have to re-capitalize, out of government ownership back to the private sector. And deal with the unknown and perhaps onerous regulations. We will be in a position to move strongly forward in markets we know and understand, with a strong capital position and with a seasoned management team and well developed strategies.

With that I think I'll turn it become to Luc now who will give you the numbers in more detail..

Thanks very much, Rick. Net income was C$842 million this quarter. This was up slightly from last year and a solid result given the challenging environment that Rick outlined. Net income was up significantly versus Q4. The increase resulted from significantly lower writedowns in Q1, stronger capital markets revenues, and a positive impact of 4X. Partly offsetting were higher PCLs, a lower margin, and higher performance based compensation, in line with stronger capital markets revenues.

Our results for this quarter were impacted by two items of note. Available for sale securities, writedowns of C$236 million pretax which was slightly higher than last quarter. And CDO writedowns, C$43 million pretax this quarter versus C$163 million in Q4. Looking at slide eight, these two factors, offset by strong underlying securities gains, amounted to C$86 million after tax or C$0.09 a share.

Moving to slide nine, revenues were up 16% year-over-year and 32% quarter over quarter. Compared to Q4, net interest income was flat. We benefited from 4X the full quarter impact of strong asset growth in the fourth quarter. Q4 also included a loss on ALM hedging, offsetting was a decline in the interest margin. Other income more than doubled compared to Q4 which was impacted by significantly larger writedowns. Excluding the writedowns, revenues increased from stronger capital markets revenues, 4X and acquisitions. Securitization revenues were also higher this quarter. Year-over-year revenue growth was driven by strong broad based asset growth and the same factors I just mentioned.

Moving to slide 10, quarter over quarter the all bank margin declined 15 basis points. This decline was driven by competitive pricing on retail deposits, lower tax exempt dividend income, and significant decline in interest rates resulting in a compression against low cost savings and checking accounts.

On the positive side, we are seeing wider spreads in corporate banking. Record low interest rates in Canada will continue to put pressure on the margins in the near term. Effective in the first quarter of 2009, we have refined the bank's transfer pricing methodology to include the liquidity premium charge in the cost of funds allocated to the business segments. Three business lines are still charged at 30, 60, 90 day BA rates on funds received from group treasury. The net impact of this charge was to reduce the net interest income of the three business lines and reduce the net interest expense in the other segments. While this refinement does not affect the all bank margin, it does lower the business line margins quarter over quarter, with the largest impact being in Canadian Banking.

Expense management was one of our key priorities in 2009. Compared to Q4, expenses were very well managed, up only 3%. This increase was driven by increased performance based compensation due to stronger capital markets revenues and 4X. Advertising, travel, and several other expense categories were down, reflecting our successful cost containment efforts. Year-over-year expenses rose 20%. However, excluding acquisitions, 4X, and performance based compensation, the increase was 7%.

Now turning to the business lines. Canadian Banking had a solid quarter with net income of C$438 million, up 18% year-over-year but down 6% quarter over quarter. Revenues were down slightly versus Q4 due to an eight basis point decline in the margin reflecting the liquidity premium charge I just mentioned and competition for deposits. The highlight this quarter was our record deposit growth, up C$7.8 billion quarter over quarter. For the first time in many quarters Canadian Banking's absolute growth in deposits exceeded asset growth. Wealth management revenues were relatively stable compared to Q4 as the positive impact of the E*TRADE acquisitions and the CI investment offset the lower retail brokerage and mutual fund revenues.

Expenses were very well managed and were down 1% versus Q4. Year-over-year the 18% increase in net income was driven by strong asset and deposit growth and a higher margin, partly offset by increased expenses and provisions. International had a record quarter earning C$388 million, up 71% versus last quarter. Revenues were up 21% quarter over quarter driven by several factors. Volume growth, broad based transaction growth, including higher card revenues, deposit fees, 4X revenues, and credit fees. We also had the positive impact of 4 X and the absence of the writedowns we had in Q4 '08. Similar to domestic, expenses were well managed versus Q4 rising only 2% mostly due to 4X.

Year over year, earnings were up 34%. The increase was due to acquisitions, 4X and strong organic growth partly offset by higher expenses and provisions.

Scotia Capital had a very strong quarter with net income of C$300 million, our second best quarter ever. Looking briefly at some of the trends quarter over quarter, revenues were up 300%, mainly due to last quarter's high level of writedowns. Our global capital markets business benefited from record performances in fixed income and precious metals. And sharply higher results in institutional equity. These were offset by derivative trading losses and lower FX revenues which were down modestly from a record Q4.

Our global corporate and investment banking business had strong growth in lending revenues from higher volumes, a significant improvement in portfolio spreads and a sharp increase in fee income. Investment banking had record revenues in Q1 '09 with good M&A fees, and very strong underwriting revenues. Expenses rolled 17% due to higher performance based compensation, reflecting higher revenues and net income.

Other operating expenses were well controlled. Loan losses remained modest in the first quarter but they are expected to rise in coming quarters. Net income growth year-over-year reflects broad based revenue growth and lower writedowns.

Now looking at the other segment. This segment had a loss of C$284 million compared to a loss of C$422 million last quarter. Revenues improved by C$150 million quarter over quarter. Positives were higher securitization revenues, a favorable change in fair value of financial instruments used for asset and liability management, lower net securities writedowns, and the liquidity premium charged to the three business lines, as I mentioned earlier. Partly offsetting was the negative impact of relatively higher term funding costs compared to the declining wholesale funding rates used for transferred pricing. Compared to last year, the higher loss largely reflects higher funding costs and an increase in writedowns on available for sale securities.

The next slide provides a breakdown of our AFS securities portfolio of approximately C$44 billion. C$23.5 billion consists of government bonds, C$17.6 billion is other debt securities, and C$2.9 billion is in equities, mostly common. In this portfolio, our cumulative unrealized loss was C$1.6 billion at quarter end, up C$345 million from last quarter. The increase was due mainly to lower values of corporate debt and equity securities offset by higher values of government bonds. The majority of the unrealized government bond gains of approximately C$800 million are associated with Canadian government bonds with the balance related to foreign government bonds including Mexico. The net unrealized loss of C$1.9 billion in the other debt category reflects higher bond spreads, in part due to continued market liquidity premiums embedded in current bond prices.

As you can see, a large portion of these bonds are rated high investment grade. We have the ability and the intent to hold these bonds until there is a recovery in value. In the case of equities, we have net unrealized losses of approximately C$500 million as a result of the selloff in the equity markets which commenced last year. The vast majority of these equities are high graded widely held North American companies. Most of the writedowns we took to the P&L this quarter were in common equities. Should the equity markets persist at these low levels, further charges to the P&L may be required.

I will now pass it over to Brian to talk about credit risk.

Thanks, Luc. Today I will discuss our two main messages about credit risk. Firstly, we are managing well through the continuing challenges presented by the credit markets. And secondly, this is largely due to the nature of the credit portfolios we have built and reshaped over the past several years. As you know, we have been reducing our concentration in wholesale lending in the US and focusing on secured lending. And we have broadened our country diversification and pursued quality over volume.

That said, clearly the health of the economies in which we operate is driving a level of growth in impaired loans and provisions. In terms of our Q1 performance, we are where we thought we would be when we started the fiscal year. It is important to walk through and show how our credit portfolios are different than in the past and why we believe we are better positioned than in previous downturns. On the market risk front we continue to see volatility in the markets in the first quarter. However, we managed down VAR by the end of the quarter and are well within our market risk tolerances.

But first, the provisions. The specific provisions increased to C$281 million from C$207 million last quarter. The quarter over quarter increase in Canadian retail provisions was primarily in higher margin indirect auto related portfolios where the acquired businesses are beginning to season. In addition, unsecured credit is being impacted, as expected given the economic environment. The increase in the commercial provisions in Canada was modest for the quarter. The quarter over quarter increase in international provisions was essentially in the recently acquired retail businesses in Peru and Chile where margins remain strong. Scotia Capital's Q1 provisions of C$10 million were unchanged from last quarter and related to two corporate names in the US.

The next slide shows the gross impaired loan formations. They were C$897 million this quarter compared to C$615 million in Q4. Which is to be expected given the current credit conditions. The increase was across all the businesses except for Canadian commercial. In Canadian retail most of the increase was primarily in residential mortgages, and the recently acquired indirect auto portfolios. Most of the formations in residential mortgages are in the insured category.

The increases in formations in international retail were across the division, reflecting an increase in delinquencies and the recent growth in loan portfolios. International commercial formations of C$142 million in the quarter were primarily due to the classification of a number of accounts in Mexico, Chile, and Puerto Rico. Scotia Capital formations of C$60 million related to the classifications of two accounts in the US.

I will now talk about our lending portfolios in more detail. Slide 22 shows the overall shift in the mix of our total lending portfolios from 1999 to today. As you can see, the component in corporate lending is now smaller, down from 30% in 1999 to 23% today. Conversely, the total retail component is now the majority compared to 44% in 1999. 55% of the bank's overall portfolio is now retail biased. 87% of that is in Canada. While the total commercial piece is down slightly, the mix between Canada and international has reversed. Our US exposure is now only 10% of the bank's assets, none of which is directly to the US consumer.

In summary, our overall portfolio mix is now more diversified by business and geography.

The next slide shows the mix in our retail portfolios. The point we would like to reinforce is that our portfolios are better secured than during the consumer driven downturn in the early '90s. 90% of our retail portfolios of C$180 billion is secured today versus 83% in the early '90s. 73% of our retail portfolio is in mortgages, compared to 54% in the early '90s. As we have discussed in prior calls, we continue to actively mitigate risks in these portfolios. In particular, we are paying close attention to our unsecured lines and indirect auto loans, reducing exceptions, being proactive with early defaults and collections, as well as avoiding higher risk customers.

We also know how important it is to support our good customers, especially during the early stages of a downturn. We will continue to help those with good credit histories and who meet our underwriting standards. In this falling rate environment, we expect mortgage refinancing to continue. This provides customers with an opportunity for a credit review and us the opportunity to readjudicate to insure levels of credit are suitable, given the customer's current situation.

Turning to the Canadian retail lending, our total portfolio now stands at C$158 billion. 92% of the portfolio was secured. Our deliberate choice several years ago to focus on secured lending is now evident across the entire retail portfolio. 94% of all personal loans are secured. 70% of lines of credit are secured. And 36% of credit cards are secured.

In terms of PCL, our ratio is running at 30 basis points on the total portfolio versus 22 basis points a year ago. This is where we expected to be this quarter given the environment and our acquisitions. The insured and secured nature of our mortgage portfolio continues to provide only limited PCLs. We did see an increase in month over month delinquency this quarter, as expected, and this tends to be concentrated in the insured side of the book where customers with higher LTVs at the outset are beginning to show signs of pressure. In Q1, looking at mortgages that were more than three months delinquent, close to 80% are in the insured book, consistent with Q4 '08.

Turning to the uninsured mortgage book, our LTV is in the mid-50s. Overall, we are comfortable with our mortgage book as it stands.

Looking at our unsecured portfolio, there has been a modest uptick in PCL in our credit lines and credit cards. But these portfolios are relatively small. The biggest PCL increase has been in our personal loan portfolio, largely from our recent acquisitions of auto related businesses. Balances in Scotia Dealer Advantage have grown to about C$700 million and we expect them to stay at about this level. As these portfolios mature and we see a full year performance, we expect provisions to grow somewhat.

While loss rates are higher than traditional auto lending, margins generally compensate for higher loss rates. Overall, our Canadian retail portfolios remain in very good shape.

The next slide shows our C$23 billion international retail portfolio. 76% of which is secured. Overall, roughly 60% of the portfolio is in mortgages, 30% in personal loans, and the remaining 10% in credit cards. Owing to our longstanding history, the Caribbean and Central American regions comprise half the portfolio where we have and continue to enjoy strong margins.

Our loan losses in Mexico had been within our tolerance levels with the exception of credit cards. Our provisions against the credit card portfolio were C$26 million for Q1, down from C$38 million in Q4 '08. At C$500 million in balances, and with a 2% market share, we are a relatively small player in the Mexican credit card market. You will recall last quarter I commented on the de-risking of that portfolio that began a year ago. We expect to continue to see the results of these measures, especially towards the latter part of this year as delinquencies and therefore losses begin to taper off.

The year-over-year increases in Chile and Peru are primarily from our recent acquisitions in these two countries. These acquisitions increased our book by about C$2.5 billion or 10%. And provisions increased accordingly. Much of these businesses involve consumer finance, a segment of the market but a higher risk profile but even higher margins. Overall, the risks in our international retail portfolios are manageable.

Looking next at our corporate and commercial lending portfolio, they now constitute 45% of the total portfolio compared to 56% in 1999. We have also shifted our wholesale portfolio away from the US and now accounts for 10% of the total portfolio versus 16% in 1999. And our corporate loan book is 73% investment grade compared to 50% in 1999. More importantly, we have significantly reduced our participation in the highly leveraged loan syndication market where our exposures are now minimal.

Looking at slide 27, with the several acquisitions in Latin America over the past decade, our international commercial lending portfolio is now more diversified by geography and industry. Our emerging market portfolio is over 50% secured and has solid overall quality with a loss ratio that has averaged 35 basis points over the past 18 years. We've experienced net reversals here over the past few years as we have worked through loans we acquired via acquisitions. Looking at some of our industry exposures, our exposure to the hotel resorts in the Caribbean is a C$1.8 billion and is essentially to well known names we have dealt with for many years. The loan to values here are typically less than 50% and our writeoff history in this sector has been excellent over the past two decades.

We have approximately C$450 million in exposure to the mining sector in Chile and Peru. We deal with senior operators, and the economic fundamentals of these two countries are still relatively solid.

On the next slide, we have provided some color on what we described as our focus areas in North American and European and our commercial lending portfolios. Firstly, our exposure to the auto industry. As discussed in the last two quarters, more than half of our exposure is to dealers and floor planning. Mostly foreign auto dealers in Canada which is fully secured. The loan loss experience in these portfolios has been low at nine basis points last year.

Next, our real estate exposure of C$10 billion is well diversified by geography and type of project. Our focus here is to deal with top tier customers. Most of our exposure in the US is in investment grade REITs with only C$125 million in the US construction sector. Our media exposure is well diversified by geography and media type, 57% investment grade. We did however have C$6 million of PCLs in this quarter. In summary, our corporate and commercial portfolios are diversified by geography and industry.

As we look ahead to the remainder of 2009, we believe credit markets will continue to be challenging. Given this tough environment, we expect provisions to continue to build. Against that outlook, we feel our portfolios are better positioned today than in previous downturns and we are better diversified with higher quality portfolios and an overall business mix that emphasizes retail and secured lending. As I have said before, managing risk continues to be our number one priority. And while provisions will increase, we expect them to be manageable and within our risk tolerances.

I'll now turn it over to Chris.

Thank you, Brian. I'll be starting on slide 31. As Luc mentioned earlier, Q1 was a solid quarter in Canadian Banking. Net income was C$438million, 18% higher than the same quarter last year. And operating leverage was 7.8%. During the quarter, we enjoyed strong deposit growth and continued asset growth and we've exercised tight control of our expenses. Overall, a reasonable result.

The economic outlook for the rest of 2009 is challenging. Both retail and commercial asset growth have slowed somewhat recently. And we're beginning to experience an uptick in PCLs. In addition, equity markets have impacted our wealth management businesses. Therefore, while our long term priorities remain unchanged, and those are to generate positive operating leverage and enhance earnings momentum, we will clearly need to manage to the current environment. We expect to achieve positive operating leverage for the whole year by carefully managing costs.

Cost control is one of our bank's historic strengths, and we have actively reviewed all costs, includes discretionary spending, slowing or deferring some new initiatives such as new branch openings, though we are committed to the expansion of our branch networks, having opened 71 new branches over the past few years.

Strong risk management has been another traditional Scotia Bank strength. While losses are up this quarter, they remain within our expectations, as Brian indicated earlier. We will continue to manage credit risk tightly and to dedicate resources to manage it. We will also continue to pursue revenue growth opportunities as they arise and focus on key products and segments. In Q1, we capitalized on opportunities to grow market share in deposits by introducing both our new high interest Scotia power savings account and a tax free savings account. We also found opportunities for targeted pricing campaigns to manage the spread at which we are putting on new business.

In insurance we recently launched Scotia Life Financial which will offer comprehensive creditor, travel, life, and health insurance products. Similarly, we continue to look at ways to maximize the investments we made in 2008 and 2009. CI Financial, E*TRADE, Dundee Wealth and Roynat Lease Financial which was formerly Irwin Commercial Leasing. With E*TRADE we are consolidating and integrating operations and will shortly announce a new branding strategy.

We are focused on driving sources of value in our Dundee and CI relationships. For instance, we have been partnering well with Dundee by white labeling banking products via the Dundee Bank into theIR very sizable advisory distribution network. We're in discussions with CI about similar arrangements. In summary, we're keeping a close eye on the economy, managing our costs and risk base, but still investing in select high growth opportunities for the future.

I'll now turn it over to Rob.

Thanks, Chris. I'm pleased to say this was a record quarter for international banking with strong results across the division. Our core businesses are performing well. As well, this quarter market conditions allowed us to increase our foreign exchange revenues and created foreign exchange translation gains. We're adopting to changing conditions by placing less emphasis on volume and putting more emphasis on margins, deposits, and fee based businesses. At the same time, we're benefiting from a flight to quality particularly for deposits in Trinidad and Barbados.

Insurance is a major source of non-interest revenue. In Q1 we added a new line of business in the Caribbean, launched a joint venture to sell auto insurance in El Salvador, and acquired a broker in Costa Rica in anticipation of the market being open to private sector insurers. Wealth management is another important source of fee income. In this quarter, we opened private client centers in Trinidad and Tobago, and in in Turks & Caicos.

We continue to see costs and productivity improvements in order to maintain positive annual operating leverage. We're cutting discretionary spending in areas such as travel and marketing and reducing expenditures for new projects. For example, we plan to open 59 new branches this year compared to 98 last year.

While we're managing our businesses more tightly, we continue to invest in initiatives to increase revenue and improve productivity. We're rolling out upgrades to our call centers, Internet platform, and financial MIS to bring them to world class standards. These projects are examples of our continuing focus on operational and organizational efficiencies.

Clearly credit risk management remains a key priority for us. We tightened our retail underwriting standards and collection standards early in the cycle. More recently, we stepped up contacts with high risk customers and rolled out a customer assistance program across the division to help good customers meet their payment obligations. We're adding resources in collections and implementing a world class retail account management and pricing platform. We believe these steps will keep credit quality within approved tolerance levels.

In summary, this quarter's record results reflect our success in adapting our businesses to the opportunities and challenges in our environment.

And with that, over to Steve.

Thanks, Rob. This was a very good quarter for Scotia Capital. Near record quarter. Most all businesses performing very well. We were able to profit from market conditions with our foreign exchange, metals, and fixed income businesses benefiting from heightened volatility, and our lending business getting a good lift in spreads and fees from much better pricing on transactions.

However, we did incur a net loss in our derivatives business. As we've told you before, we are managing down our positions In several of these books. As well, we are benefiting from our relative strength in this troubled market. While other global institutions are struggling, we were able to continue to act for our clients, provide liquidity, write new business, and get paid well for it on attractive terms.

We continue to invest in the fundamental parts of our businesses. The equities business enhancement initiative we undertook in Q4 of last year is bearing significant fruit. We've reorganized to more fully coordinate sales and trading and investment banking efforts. This paid off in Q1 as we landed a number of key underwritings. We are also number one in Canada for stock sales during calendar 2008 when you exclude parent bank financings, a significant increase from our past rankings.

As well, we are continuing to build our infrastructure finance and energy trading capabilities. We look for these businesses to provide revenue growth later in 2009 and into 2010. We continue to benefit from our integrated approach to running the business. We have been very successful in leveraging our lending capabilities to generate cross-sell throughout the firm. We're also executing our global sectorial strategy which allows us to be more coordinated and focused in our marketing efforts.

We're continuing to prudently manage credit market and operational risks. On the lending side, we have realigned resources to increase the focus on managing our existing portfolios and accounts of concern. Our decision three years ago to effectively exit leverage lending in the US and Europe will pay healthy dividends during this significant downturn.

In capital markets, we are reducing the size of some of our derivative books and staying away from proprietary trading. Our substantial avoidance of investments in the US mortgage-backed securities market and CDOs and CLOs because they did not align with our strategy has also saved us significant losses.

In summary, our focus for 2009 is careful management of risks and expenses while continuing to grow our core business in a a prudent manner.

I'll now turn it over to Rick.

Thank you. Thanks very much, Steve. In summary, in terms of our outlook, we remain cautiously optimistic. Especially given our strong relative position. As Brian mentioned, our portfolios are in better shape than in previous downturns, more diversity, higher quality. We are proactively managing our risk exposures and expect loan losses to remain manageable and within our set risk tolerances. As well, we will continue to manage our expenses, one of our traditional strengths. And finally, we have a strong capital base.

We are controlling what we can control. And have the necessary shock absorbers in place to handle the unknown unknowns. So we're confident we can manage through the current challenges, and we are maintaining the targets we set for ourselves at the beginning of the year. When we come out of this crisis -- and we will -- our opportunities will be significant, as will shareholder return.

And with that, we'll now turn over to your questions. Luc?

Thanks very much, Rick. Before we take the first call on the phone, we are aware that there is another bank conference call in about 20 minutes so we ask that you restrict to one question, that you don't ask multiple questions. Ask one question and then requeue. Thank you, we'll take the first call please.

Thank you. Your first question comes from Jim Bantis with Credit Suisse. Please go ahead.

Hi, good morning. Question is for Rick. If you could talk about some of the political issues and social unrest in Mexico and what does it mean for your businesses in that region in terms of operational risk, credit risk?

Sure. First of all, the macro economic and the Mexican financial sector is in relatively good shape. The financial sector, the banking sector is in significantly better shape than it ever has been in the past, going into whatever uncertainties there. Obviously, the issues on the drug situation would concern all of us. But I know for a fact that the Mexican government is very focused on this, much more than past governments have. Have made it a strong priority. And have the wherewithal and the support of others to compound that.

And just as Colombia eventually solved their problems on that issue, I think Mexico, and with the help of many others, will solve that. What it means for our business I think is, other than our concern, and of course we have branches and employees up in that part of the country, but we take the necessary precautions. The real violent part of it -- again, not to underestimate it -- has been focused in some very specific situations that are not , has certainly not affected us as we've seen in any of our operations.

Thank you. Next question.

Our next question comes from Robert Sedran with National Bank Financial. Please go ahead.

Good afternoon. Brian, you mentioned how much better the book is positioned and how much more retail there is. When you look at the performance this quarter, the increase in provisions really does come to a large extent from the domestic bank, especially retail. Do these trends at all concern you? We're so far from the last recession in Canada, I'm wondering if the Canadian consumers' behavior has changed.

I don't think so. The drivers for the increases, as I said in the text, are really at the higher risk part of the portfolio, which you'd expect. So they're in Scotia Dealer Advantage which is our near prime auto lending business. It's in our indirect auto business, part of the portfolio we purchased from another bank last year. In the indirect auto portfolio, PCLs are running at 69 basis points, generally tracking where we thought they would be. And unsecured lending is up which, again, is exactly where we thought it would be at this point of the cycle. We have added some higher risks in parts of the portfolio. But we're comfortable with the risk.

Thank you. Next question.

Your next question comes from Mario Mendonca with Genuity Capital Markets. Please go ahead.

Could you tell us, Brian, how large is this near prime auto portfolio, all in? The stuff you referred to as indirect, how large is this business?

The Scotia Dealer Advantage portfolio, as I said in my text, is C$700 million and we would expect it to stay there. Our indirect auto portfolio we bought from the other bank is C$1.9 billion. But if you take our overall indirect auto exposure of personal loans to auto in Canada, would be about C$10 billion. Of which our loss experience has been very good. On the seasoned part of the portfolio the losses run 55 to 60 basis points.

Mario, it's Rick. I just want to reinforce that it was the acquisitions which were within what we thought they would be, although Scotia Dealer Advantage, it was the new acquisition and it's given us more pain that we anticipated on bringing this into our operation. But we have now, I think, put in the necessary risk controls. So from that portfolio which in effect I view it as a spike rather than a continuing trend. Although that business is supposed to have higher provisions.

Just for history, we used to call this Travelers when we bought it. We renamed it Scotia Dealer Advantage.

And the total business is C$2.6 billion, C$700 million in Dealer Advantage and the C$1.9 billion indirect. the indirect that we purchased from another bank.

The indirect we purchased from another bank.

That indirect is prime business.

But all in, we're talking about a C$2.6 billion business.

Rich, and then as I said, our total indirect, direct auto loan business in terms of personal loans to auto would be about C$10 billion.

That's what we acquired.

Next question.

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

Thanks. Luc, I wonder if you could help us with the other division. From 2002 to 2007 it was pretty consistent in earning C$150 million to C$200 million a year. Now we've had a couple quarters where it's just been quite weak. Could you help us understand in normal quarters, in normal years what that should earn? And I understand securities gains are not going to be there. We've had tremendous interest rate volatility. There's also something that sounds more permanent like higher term funding costs. Anything you could give us to help us would be useful here.

Okay. Certainly the point that you just made, the higher term funding costs are a major impact today. In any given quarter, that particular category, the other category, combination of treasury and executive offices/corporate, would also be impacted, positively or negatively, by financial instruments, accounting previously ACG 13, over a period of time. You referenced the securities gains and losses. That can have a significant impact one way or the other over a period of time.

In terms of what a normal run rate would be on a go forward basis, I can't give that to you, haven't thought through what it would be. Certainly, as we go forward now, one of the components that we're taking out of that category is the liquidity charge that we're passing on to the business lines and that was in the neighborhood of C$130 million this quarter. So that reduced the interest expense in that particular category.

Maybe you could give us, when you look at this, perhaps a way to help us is how much is the higher term funding component versus a normal year and we'll make our own assumptions on securities gains and so on. Thank you.

I think Andre if I could elaborate. The three or four large items in there, right now you've got, other than impairment on AFS Securities in previous years, it was a gain. So that's a strain, that's several hundred million. Another item, we are securitizing mortgages a lot more.

As you know, we keep the business lines whole so that is really a credit to the business line and a debit to other. The third category in there, there's some costs for stock based compensation because we hedge our stock with compensation but our options, when the stock price drops below the strike price, that ends up being a debit. And the fourth piece is really the medium term funding. And also the cost of capital. We had debentures, and much of the higher costs. So there are really five components in that swing from a credit to a debit.

Okay, thanks.

Your next question comes from Ian de Verteuil from BMO Capital Markets. Please go ahead.

Brian, slide 27, the international commercial lending book. From what I can tell, we're talking about a book of business that's about C$50 billion of loans here. And the Caribbean and Central America is somewhere between C$12billion and C$15 billion of loans, total business and government loans. And you highlighted retail and hotels. What else is in that book other than hotels and resorts?

I'll give you a flavor. Just under 50% of that portfolio is investment grade rated. So if you go around the globe internationally to some of our operations, we'd have corporate type loans, even though they're classified in commercial here. In places like Japan, Hong Kong, Malaysia, the Far East, that are investment grade rated corporations, which we've lent to for a long time. There's a real estate component to it too which would be C$1 billion or so, hotels, mining, et cetera. So it's a small microcosm of what you'd see in Scotia Capital.

But talking about the Caribbean and Central American, it looks like it's about 28% of the total portfolio which I think is about C$50 billion or C$60 billion. So that should be somewhere between C$10 billion and C$15 billion. Outside of hotels, what else is in the Caribbean? How much of it is financial institutions?

There is very little, next to nothing in terms of financial institutions. The largest concentration would be hotels, resorts, and real estate.

And a lot of commercial mid-market lending. As you know, we're a full service bank down there. So it's not quite as high as Scotia Capital, weighted to the big stuff. It's mid-level commercial accounts. Caribbean is a P&C business, personal, commercial. The one distinguishing factor is, of course, and that's why we highlighted it, the amount of resort financing which is somewhat unique obviously for Caribbean.

This is Rob. Just so you get your numbers right, our corporate commercial numbers are much more like C$30 billion, not the C$60 billion.

Sorry. I was just working off the, I think you said the international commercial was 15% of the loan book. I'll follow-up off line, guys.

Next question.

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

Thanks very much. I guess this is probably for Brian. Brian, I would like to get some interpretation of the allowance levels that you're carrying. If I go back to the beginning of 2007 before any of the credit and related economic stresses started to develop, your allowance, your specifics have grown about 7%. Your generals are flat, the aggregate is up about 3%. I look at the impaired loan growth just in dollar terms, they're up about 59%, and the total loan portfolio on a gross basis is up 37%. How should I interpret the decline of the allowance relative to the volume of lending and exposures through impaireds? And the absence of any adjustments to the generals? Should I look at that as being a positive signal that you don't see credit deteriorating in a broad sense? Or should I look out to the future earnings and wonder if there's going to be some burden out in the future with respect to allowance levels?

Good question. I'll answer it on two front. First of all, if you look at our specifics against our gross impaired loans, it's 46.3% which I think is roughly in the middle of the pack in terms of our peer group, and we're comfortable with that. The point I'd make is that we've also, and we did it this quarter too, is if you look at the top 10 gross impaired loans in the bank, a lot of them are real estate focused or resort focused and come out of the Caribbean or Central America. In this quarter we classified four loans, which would account to C$100 million, but we did not take a provision. And we did not take a provision because LTV is well less than 50%. We're comfortable we're going to work it out.

The other thing I'd point to is the general is, that no two generals are created alike. Our general is basically a wholesale general. There's a very small retail component to our general which is different than some of our counterparts on the street because we're taking our provisions on a quarterly basis. And so if you look at our total amount of coverage, it's at 91%, if we add the specifics and the general together, which is where we thought we'd be at this point of the cycle. And in past cycles, if you look back, it benchmarks very well. Having said that, I don't think it would come as a surprise to the street if we added to our general in the next couple of quarters as we move along here.

If we look back to 2007 which I guess now in retrospect was sort of a peak, we were running a ratio of about 122 basis points, your ACLs to gross loans. Would we expect that to repeat at some point in the future as we come out of this downturn and into the next up cycle?

We'll see how things go. We're focused on today. We've been very conservative in our approach to these things. And we have, in terms of Scotia Bank fashion, we've been early in terms of classifying a lot of these loans, taking some of the provisions up front or classifying them up front.

So you wouldn't describe your position at the beginning of 2007 as being overly conservative.

I'd say we were on the conservative side for sure.

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

Thank you. I just want to get some clarification on some numbers that looked relatively high during the quarter in your other revenue, namely your agency foreign exchange, credit fees, and also securitization that is built into the other other revenue. Can we actually get a breakout of the securitization? And on the topic of securitization, do you intend to securitize a large portion of your insured mortgages before we move into IFERS?

I'll take the last one while the others, we'll see if we can give you whatever numbers you need on that. We have not been a big bank that has securitized the assets. We've been comfortable with the assets we've had. So we've got quite a lot of assets, good assets, on our balance sheet. And we've always looked at is as a funding cost, an alternative funding cost because we've got sufficient capital so that wasn't an issue. So the way we're looking at it is purely on a cost of funding alternative basis.

And of course, that's one of the issues we've all faced is this cost of funding. It is, quite frankly, the most significant driver of our numbers, as largely reflected in that other category. And so, as long as that facility has been made available, we've certainly got the assets we can use and we'll just compare it on an incremental cost of funding basis. But it is not fundamental to our business model or the way we want to run the business. I'll pass to the others now.

We're running short of time here. Michael, we'll get back to you on the breakouts. We'll take one last question.

Thank you. Your last question comes from John Aiken with Dundee Capital Markets. Please go ahead.

Good afternoon. I guess I'll put this out to Brian International retail provisions, you mentioned it was Peru and Chile acquired businesses. Can you give us some sense what that would have been with out the card businesses and whether or not you're continuing to pursue business at similar levels given the fact you're seeing deterioration.

The loan growth in the international business was up C$2 billion this quarter, primarily in the Caribbean and Central America. There is some impact or adjustment to that for currency, but we did see selective growth. There was PCL increase given the integration of Dessarollo and Bank Trabajo in Peru. I can't give you the exact number off the top of my head about what the incremental number was for those acquisitions but we can get back to you.

I've got those numbers. For the acquisitions it was 160. If you break it down organic, Mexico, and the new acquisitions, the biggest was Mexico around the 200 mark. That's essentially how it broke down.

Great, thank you very much.

Thank you for joining us on the call today. We'll see you next quarter. Thank you.

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