Bank of Nova Scotia (BNS) 2010 Q4 法說會逐字稿

Good afternoon, and welcome to the presentation of Scotiabank's fourth quarter and 2010 annual results. I'm Luc Vanneste, Chief Financial Officer. Rick Waugh, our CEO, will lead off with the highlights of 2010. Next, I will go over the financial results for the quarter, including a review of business line performance. Rob Pitfield, our Chief Risk Officer, will then discuss credit quality and market risk. Rob will be followed by our business line heads who will provide an outlook for their respective businesses for 2011. Anatol von Hahn will discuss Canadian Banking, Chris Hodgson will provide an outlook on our new business line, Global Wealth Management, Brian Porter will cover International Banking, and Steve McDonald will discuss Scotia Capital. Rick will then sum up with our all-bank outlook for 2011. We will then be glad to take your questions.

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.

Thank you, Luc. We're pleased to report that we achieved a record net income of CAD4.2 billion in 2010, and this represents a 20% increase from last year's results. Earnings per share were CAD3.91 for the year, up 18% from last year. Our results benefited from record revenues, which were CAD15.8 billion, or 7% higher than last year, or 12% excluding foreign currency translation.

And importantly, our credit performance has been very strong. Our loan loss provisions dropped 29% this year, as the economic recovery takes hold. As Rob will discuss in a few moments, all our credit portfolios are performing well.

Expenses were up due to incentive compensation, and planned expansion in all our business lines. Our productivity ratio was, in fact, better than planned, and operating leverage was positive. This strong overall performance resulted in a return of equity of 18.3%, and that's up from 16.7% last year, and demonstrating a consistent and high level of profitability.

The Bank's results continue to be significantly affected by fluctuations in foreign currency rates relative to our strong Canadian dollar, which negatively impacted net income by CAD289 million this year, or CAD0.28 per share. This, together with a slower economic recovery in certain markets, created challenges in 2010 for Scotiabank. However, notwithstanding these obstacles, all of our business lines continue to report very solid results.

We saw particular strength in Canadian Banking, which had net income of CAD2.3 billion, a record year, and up 25% from 2009. This was driven by market share gains in mutual funds, mortgages, and small business lending. International Banking's net income was almost CAD1.3 billion, down only slightly from last year's record. Growth in core products continued, and acquisitions were accretive to earnings, all allowing us to earn through the strength of the Canadian dollar.

Scotia Capital had a great year in both a challenging trading environment, and a market where we saw significantly lower corporate lending volumes. And of course, we had some very exciting news just last week in our newest business line, Global Wealth Management, with our acquisition of the remaining interest in DundeeWealth, which represents a tremendous growth opportunity. And Chris will describe that shortly in greater detail.

While we are obviously very pleased with our results, and as you can see on slide five, we met, and in fact, we exceeded all of our targets for the year. We added a significant amount of internally generated capital to strengthen our capital ratios, which continue to be strong both by Canadian and international standards. Our consistent and our strong level of profitability from all our growth platforms allowed us to increase our capital ratios, while continuing to grow our businesses, both organically and through acquisitions.

With that, we'll now pass it over to Luc to discuss our financial results in more detail, and at the end I'll give you an outlook for 2011.

Thanks, Rick. Fourth quarter net income was CAD1.1 billion, which is the second highest quarterly net income in Scotiabank's history. Year-over-year performance was driven by record net interest income, which came from wider spreads, higher non-interest income, and lower provisions for credit losses.

Acquisitions also made a strong contribution to this quarter. These were partly offset by higher operating expenses. Net interest income growth was driven by an increase in earning assets of 7%, mainly from higher residential mortgages, reverse repos and deposits with banks. Margin was relatively flat compared to the fourth quarter of last year.

Provision for credit losses was CAD254 million this quarter, comprised of CAD294 million in specific provisions, and a CAD40 million reduction in the general allowance. Provisions were all lower in all business lines.

In addition, continued growth in assets under management drove an increase in mutual fund revenues this quarter. Offsetting these items were higher operating expenses due to acquisitions, as well as organic growth initiatives including branch expansion. We also experienced lower trading revenues, and a marginally higher income tax provision due mainly to more income coming from higher tax jurisdictions.

Moving to revenues on slide eight. Revenues during the quarter were just over CAD4 billion, an increase of 5% from last year, and 4% from Q3. Year-over-year, net interest income was driven by higher asset levels. Other income increased due to higher mutual fund revenues, securitization revenues, and net gains on securities, partly offset by lower underwriting fees and trading revenues.

Quarter-over-quarter, the margin increased by 7 basis points to 1.75%, as a result of lower volumes on lower spread assets, a positive impact from changes in the fair value of financial instruments used for asset and liability management, and higher earnings from associated companies. These items more than offset higher levels from non-earning assets.

Other income increased 5% from stronger securitization revenues, higher contribution from R-G Premier Bank in Puerto Rico, and improvements in the fair value of non-trading financial instruments. In addition, trading revenues were stronger, reflecting improved performance in Scotia Capital. This was partly offset by lower gains on securities, primarily bonds.

Turning to slide nine, non-interest expenses rose 6% from the same period last year. Although recent acquisitions contributed to this growth, most of it came from higher salaries and employee benefits, reflecting normal growth. Technology and advertising spending also increased as a result of several projects and initiatives that we have underway to drive revenue growth.

Comparing to Q3, expenses were higher, mainly due to higher performance based compensation, driven by the Bank having exceeded its performance targets. There was also a higher level of investment in marketing, customer acquisition, and other revenue growth initiatives, as well as certain other seasonally higher spending.

Turning to capital on slide 10, you can see that our tangible common equity and Tier 1 capital ratios strengthened to 9.6% and 11.8%, respectively. In 2010, we were able to strengthen our ratios because of strong internal capital generation of over CAD2 billion for the year, and CAD619 million of stock issued under our dividend reinvestment plan. Our capital ratios remained well above the regulatory minimums, and strong by international standards.

Now turning to the business line results, beginning on slide 11. As Rick mentioned, Canadian Banking had a record year in 2010, with all divisions generating solid performances. Net income for the quarter was CAD567 million, down 6% from a record Q3, but up almost 13% from the same quarter last year. On a year-over-year basis, total revenue in Canadian Banking rose 5% due to growth in both net interest income and other income. We experienced lower retail provisions in credit cards, and in the automotive portfolio. This was somewhat offset by higher provisions in personal lines of credit.

An increase in expenses primarily reflected increased investments in growth initiatives. Quarter-over-quarter, interest margin remained relatively flat, but average assets increased, lifting net interest income. The provision for credit losses was up CAD11 million, or 7%, from the previous quarter primarily due to higher commercial provisions. We experienced one large loan loss in commercial banking this quarter as a result of a fraud. Expenses rose as a result of increased investment in growth initiatives and seasonality.

Moving to International Banking on slide 12. International Banking's net income in the fourth quarter was CAD363 million, an increase of CAD80 million, or 28%, from last year. Excluding the negative impact of foreign currency translation, the increase was CAD87 million, or 31%, partly due to acquisitions. Positive contribution from acquisitions accounted for approximately 70% of the year-over-year increase in interest income. Growth in other income came from higher foreign exchange and insurance revenues, as well as the positive impact of acquisitions, partly offset by lower securities gains.

The provision for credit losses reflected lower commercial provisions in Chile and Asia. Retail provisions were slightly higher, with increases in the Caribbean and Mexico, partly offset by lower provisions in Peru. Non-interest expenses increased 7% from the same quarter last year, due to the impact of acquisitions, higher compensation costs, and premises expenses across the division. Comparing against the previous quarter, net income increased 15%. The impact of foreign currency translation was not material quarter-over-quarter.

Total revenues increased 3%, mainly from higher interest income, which was driven by new acquisitions and loan growth of 3%. Overall, the results show that International Banking is successfully earning through economic challenges and foreign currency translation, and is benefiting from diversification across its many jurisdictions. The growth in volumes across our many regions is an encouraging sign that economic activity is improving in our markets.

Looking at slide 13, Scotia Capital's net income of CAD1.3 billion for the year was the second highest on record. Many of the businesses in both our Global Capital Markets and our Global Corporate Investment Banking divisions also had record or near record results for the year. Scotia Capital's net income for the quarter was CAD273 million. The decline from last year was largely due to more normalized market conditions, particularly in the trading and loan origination areas. Although spreads remain steady, GCIB net interest income and loan origination fees fell due to significantly lower loan volumes.

Other income also declined, as higher securities gains were more than offset by lower investment banking revenues, and reduced credit fees, especially from the US portfolio. Other income in GCM declined, mainly due to lower trading revenues.

Expenses rose as we continued to invest in new businesses. Partly offsetting lower revenues and higher expenses, were lower loan loss provisions. We recorded a net recovery of CAD8 million in the fourth quarter, mainly due to net recoveries in the US portfolio. Looking at quarter-over-quarter, total revenues were up 4%, mainly from gains on certain securities and higher M&A advisory fees. Expenses increased due to legal provisions, and continued investments in growth initiatives.

I'll turn now to the other segment, which incorporate the results of group treasury, smaller operating units, and certain corporate adjustments. The other segment reported a loss of CAD111 million in Q4, a significant improvement over both the prior year and the prior quarter. Year-over-year, we benefited from lower funding costs, higher securitization revenues, and a lower level of writedowns on available for sale securities.

Performance also benefited from the transfer of broker sourced deposits from the other business segment to Canadian Banking in the first quarter of 2010, as well as a CAD40 million reduction in the general allowance, and lower securities writedowns. These items were partly offset by lower income on bond investments. Quarter-over-quarter, net income was aided by a favorable change in the fair value of financial instruments used for asset and liability management purposes, a lower net cost of term funding, higher securitization revenues, and the CAD40 million reduction in general allowances. This was partially offset by higher expenses.

This concludes my review of our financial results. I'll now turn it over to Rob, who will discuss risk. Rob?

Thanks, Luc. The risk in our credit portfolios continues to be well managed. We've seen steady and continuing improvement in our loan portfolios, as measured by a number of key metrics. We saw a significant decline in provisions from a year ago, and a more modest decline quarter-over-quarter. Underpinning the decline in provisions is the continued downward trend in gross impaired loan formations, which are about half the size of a year ago. The improvement in the credit quality of the portfolios allowed us to decrease the general allowance by CAD40 million this quarter to CAD1.41 billion.

Our market risk remains well managed, and well within our risk tolerances. There was a lower variability in trading revenues this quarter compared to the previous three months. As a result, our average one day VAR was CAD9.3 million, down from CAD12.7 million in Q3, and we had significantly fewer trading losses days this quarter compared to the prior quarter. The losses were well within the range predicted by the VAR.

Slide 17 shows the trend in specific provisions over the past five quarters. As you can see, the specific provisions have come down significantly in international, commercial and Scotia Capital year-over-year. As a result, our all bank PCL portfolio ratio dropped by 22 basis points year-over-year, to 41 basis points.

The next slide shows the positive trend in net impaired loan formations over the past five quarters. We are clearly seeing a downward trend in the total formation since they peaked in the second quarter of 2009. The decrease in quarter-over-quarter formations primarily reflects lower net classifications in our Canadian international retail portfolios, partially offset by an increase in classifications in Scotia Capital.

The Canadian commercial formations in the quarter were mostly driven by two larger accounts, including one that was fraud related. This resulted in an increase in formations in the portfolio quarter-over-quarter, which was largely offset by an increase in net declassifications in international commercial.

To wrap up on slide 19, we're very comfortable with the asset quality and positioning of our credit portfolios. Our portfolios have responded favorably to the economic recovery that's taking hold here in Canada and elsewhere in the world. With respect to our retail and commercial portfolios, they're performing as expected. We continue to see the Caribbean lag the rest of our international operations in terms of economic recovery. Our corporate portfolios continue to show very good strength.

Looking ahead to 2011, we expect the overall provisions to remain in line with 2010, as the global economies show modest economic improvement. Canadian Banking retail provisions are expected to improve modestly. The International Banking retail provisions should remain in line with current levels, given the growth in these portfolios. Provisions in the corporate and commercial portfolios are expected to have lower new provisions, but with less recoveries in 2010.

And that concludes my remarks, and I'll turn it over to Anatol who will address Canadian banking. Anatol?

Thank you, Rob. As both Rick and Luc mentioned, 2010 was a record year for Canadian Banking. We achieved this despite the headwinds created by economic uncertainty and rising PCLs. Looking ahead, while the speed of the economic recovery remains very uncertain, and retail asset growth may slow with the housing market, we think that there are opportunities.

In 2011, we will focus particularly on three areas. Firstly, we will work to increase our share of core customer deposits. This is a tough market, but we believe that we have the tools to succeed. Our foundation for success is good, with a strong delivery network, well developed opportunities in key deposit markets like small business banking, and innovative products on which to build, such as our Bank the Rest initiative.

Our second priority will be to work closely with our partners in Global Wealth Management to continue to grow the Canadian Wealth Management and Insurance businesses, delivering the high value products that customers want, and increasing our overall share of wallet. And third, we intend to leverage our 2010 successes in mobile banking, and debit and credit cards, to continue to build our payments business.

Also, in 2011, our provisions for credit losses are expected to stabilize. However, we expect that PCLs will remain somewhat elevated, at least in the early part of the year, given the uncertain economic outlook. We expect that the interest margin will also remain under some pressure due to competition. However, the market uncertainty around the direction and speed of interest rate movement will also continue to create pricing opportunities. And finally, we will continue to reinvest in our businesses going forward, which as we have stated in the past, is a key to our success.

With that, I'll turn it over to Chris to talk on Global Wealth Management.

Thanks, Anatol, and good afternoon. I'm very excited to speak about the 2011 outlook for our new Global Wealth Management division. Our focus next year will be on driving growth in each of our main businesses, Canadian Wealth Management, International Wealth Management, Insurance, and Global Transaction Banking. Each of these areas has strong growth potential going forward.

In Canadian Wealth Management, we expect good organic growth in all four of our business lines. For example, we will continue to invest in our advisory channels, Scotia Private Client Group and Scotia McCloud, to drive growth through new client acquisition, and by providing customized advice, and a full suite of wealth management solutions. With Scotia iTRADE, we will continue to integrate and innovate with the replatforming of our online brokerage business.

As well, a key focus for us is optimizing our opportunity with Dundee Wealth. This opportunity will enable us to leverage the extensive capability of two proven leaders, DundeeWealth and Scotia Asset Management, in product development and asset management. We will leverage the best of both operations to deliver a broad range of investment solutions across multiple distribution channels, and take advantage of the significant untapped potential in both Canadian and international channels in the short, medium and long term.

In our International Wealth Management, we expect continued strong growth in mutual funds in our key markets, Mexico, Chile, Peru, and Thailand. For example, earlier this week, I met with our mutual fund people in Mexico to talk about some new funds we are looking to launch in that market. And we are projecting continued growth from our brokerage and private client group businesses, having opened several new private client group offices in the last few years in key markets.

In Insurance, we're making enhancements to our insurance offerings, and working with our partners to augment our sales management practices, and improve our sales performance both domestically and internationally. And in Global Transaction Banking, we are pursuing aggressive business deposit and investment growth in collaboration with our business line partners, as well as leveraging our global network, and investing in our technology platforms and systems.

Finally, our new organization structure will permit us to focus on and lever two of our main strengths, our global distribution network and our people. We'll also continue to look at other opportunities for new partnerships and acquisitions as they arise. In summary, I'm very excited about our new division, Global Wealth Management, and our prospects for growth in 2011.

I'll now pass it over to Brian.

Thanks, Chris. We had a solid quarter, and are very pleased with our performance this year. For International Banking, 2011 is about sustainable growth. We will see a return to stronger organic growth, and the continuing pursuit of selective acquisitions. We expect renewed asset and revenue growth, as our major markets rebound, with the fastest growth in Latin America, particularly Chile and Peru, as well as Asia, and gradual improvement in other countries.

Margins will benefit from stronger retail asset growth, and increased sales of high margin products such as [cars]. We will see the benefit of increasing the size and capacity of our retail sales channels. We expect PCLs will be stable, with a positive trend in our overall portfolio. We continue to review our credit policies to insure that they are aligned with market conditions and the bank's risk appetite.

We will further improve our operating efficiencies, and make measured investments to drive future growth, while continuing to manage expenses prudently. In 2010, our results benefited significantly from the acquisition of R-G Premier Bank in Puerto Rico, and Siam City in Thailand. In 2011, we intend to remain acquisitive on a selected basis, particularly where there are opportunities to increase our footprint in high growth markets. In summary, 2011 is about sustainable growth, and taking full advantage of improving conditions in our markets.

I'll now pass it over to Steve.

Thanks, Brian. As Luc mentioned, even in a challenging operating environment, especially in the second half of the year, Scotia Capital had its second best year on record with respect to net income. In 2011, we will continue to focus on the execution of several strategic initiatives that we have underway to provide capital markets products to both existing and new clients in our core industry sectors. This includes the expansion of our fixed income and equities platforms.

Although we expect to deliver strong earnings, results are unlikely to match those achieved in 2010, which benefited from very favorable market conditions in the first half of the year. In Global Capital Markets, the more normalized market conditions experienced in the second half of 2010 are likely to continue, particularly in the trading businesses. However, GCM should continue to benefit from growth in the focused businesses and niche products in which we have been investing.

In Global Corporate Investment Banking, long expected stronger activity in the corporate finance, and mergers and acquisitions markets, will benefit new issue and advisory fees, as well as provide opportunities for growth in lending volumes and loan origination fees. Loan loss provisions are expected to remain below historical levels, but are unlikely to benefit from net recoveries as we did in 2010.

A key focus in 2011 will be the successful execution of our global wholesale banking initiative, following on from the recent reorganization of the Bank's worldwide wholesale activities under Scotia Capital. We will also manage operating costs closely, but will continue investing in businesses and our core industry sectors, oil and gas, mining, power and infrastructure, that provide sustainable revenue growth.

With that, let me turn it back to Rick to wrap up.

Thanks a lot, Steve. Scotiabank has a unique window of opportunity available to us, and we are capitalizing on these windows, as we have most recently done with the DundeeWealth announcement, and in our international banking activities. In 2011, we expect to achieve sustainable revenue growth supported by strong contributions from all four of our business lines.

We expect increases in most revenue categories, including volume based fee income and trading revenues. Results will be driven by moderate but sustainable asset growth, and improved margins. Expense control remains, and will remain, a key strength of this Bank. We expect that any increases in non-interest expenses will be driven mainly by acquisitions and volume related growth.

So, now looking more specifically at our targets for 2011, which is on your slide 30. Our targets for next year are unchanged from 2010. First, we are maintaining our earnings per share growth objective of 7% to 12%. Our target range for return on equity is 16% to 20%. We are maintaining our productivity ratio target, an area where Scotiabank is a clear leader, at less than 58%. And we will continue to maintain strong capital ratios.

We are changing our dividend payout ratio to 40% to 50%. This is consistent with our actual payout ratios since the fourth quarter of 2007, as well as being well within industry parameters. And it provides us with greater flexibility to increase our dividend, while still reinvesting for growth. In summary, with our clear focus, executing effectively on our strategies, and integrating our acquisitions, we are confident that we'll be able to achieve our goals and our objectives, both in 2011 and beyond.

With that, we'll pass it back to Luc.

Thanks, Rick. Could we have the first question on the phone, please?

Your first question on the phone line comes from Steve Theriault of Banc of America Merrill Lynch. Please go ahead.

Thanks very much. First a question for Chris Hodgson. On your slide you mentioned exploring global opportunities and in Canada, you use the word "organic," I think, in your commentary. So with respect to acquisitions, does that imply you expect to be fairly quiet on the Canadian front while the focus turns to pursuing opportunities elsewhere? And in what areas or geographies are you most interested outside of Canada?

From a strategic perspective, I think, first and foremost, our objective in Canada is to work closely now with our new partners at Dundee Wealth to make this a successful transition, so let me be very clear on that front. At the same time we will continue to be open to looking at strategic opportunities within Canada. That being said, we do see some opportunities in different markets. We'll be working in conjunction with our partners in Scotia Capital in International Banking. But specifically to leverage off of the footprint that we have throughout the bank in some key regions. And examples would be in Mexico, Chile, Peru and also in Asia. So certainly we will be looking for opportunities but it will be done in conjunction with the partners in Scotia Capital International Banking. We are going to be focused on organic growth in Canada. We see some significant opportunities in our key wealth business lines and insurance. And on the insurance side, I would say, Steve, too, that we're underpenetrated in the creditor side here in Canada so we see some opportunity on that front to really grow on that side also.

Okay, thanks. A question for Rob Pitfield. At the end of the year you had about CAD10 billion of market risk weighted assets. Can you tell us how much larger that would get under the new market risk parameters that come into effect in 2012? Some banks have suggested that their market risk could be up something like fourfold while others are potentially seeing much less impact, so can you give us some thoughts on that?

Sure, Steve, it's Luc. We're really still in the process of assessing the impact but we anticipate that the increase will be in a range of around CAD7 billion to CAD10 billion increase in risk weighted assets, which on the outside would be double of what we have. So it's nowhere near the quadrupling that was referenced elsewhere.

Okay, that's great. And one last one, if I might. Just quickly, sorry if you mentioned this, but why did the R-G Premier impaireds drop by about CAD1 billion this quarter?

It's just a disclosure. We used to, in the first couple of quarters, Q2, Q3, we had it gross with a provision. We've now fair valued the book for the most part and showing it on a net basis and it's just disclosure. Nothing else has changed.

Got you, thank you.

Next question, please?

Your next question comes from Gabriel Dechaine of Credit Suisse. Please go ahead.

Hi, good afternoon. Loan growth in international, we're all asking about Canada on the other calls, can you give me a sense that the broad based International segment, what's your expectation for loan growth in 2011?

We saw loan growth up 3% across-the-board in International in Q4 which is a nice trend. We did see some growth, albeit smaller, in Q3 as well, so we've got a bit of a trend here. But we would expect stronger growth in 2011 and that's primarily going to be driven by Peru and Chile which are the higher growth regions, Asia Pacific as well, and to a lesser extent the Caribbean and Central America.

Actually just Peru and Chile -- Peru, I think it was around 20% sequential growth and Chile was 4% or 5%. What are you guys doing down there? The market's obviously working in your favor but is there anything specific that Scotia's doing to gain market share basically?

We've got a very solid franchise there. The economy's growing at between 8% and 9% in the last couple quarters. We see good loan growth demand both commercially and from a retail perspective.

Okay. And you mentioned the acquisition contribution to net interest income growth 70% of the year-over-year change. Can you tell me what the earnings growth was from acquisitions, maybe even sequentially? And then I'll just throw my other question in here. Earnings in Canada, unless I missed it you didn't break out the wealth segment yet. Can you tell me what the Canadian wealth business contributed to Canadian retail, or Canadian earnings in 2010? I assume you can be forthcoming because you're going to be breaking that out next quarter, right?

We will be breaking it out, Gabriel, but we are not proposing to do that on our year-end results. We will give you that information in Q1 with comparative numbers at that time. With respect to your question on the impact of acquisitions on a year-over-year basis, net income from acquisitions was about CAD140 million.

And the sequential?

It went from, let's see here, in Q3 from CAD30 million to CAD60 million plus.

Sorry, what?

Sorry, CAD30 million in Q3 to CAD60 million plus in Q4.

Okay, got you. Thank you.

Thank you. Next question, please?

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

Thanks. I just want to follow-up a little bit further on this question of the new market risk regime. What actions do you expect to take to mitigate the impact of the higher risk weighted assets that you anticipate? And what impact could this increase have on the economics and revenue from your trading businesses?

We've been anticipating this for quite some time. We have taken action in the past two years to build a business that's much more focused on client activity, more vanilla type of activity. We also have in the works the move to derivative clearinghouses which will also end up having an effect on risk weighted assets, so that change is also coming, or credit risk assets, I guess is the case. Other than that, I think our business, relatively speaking, is actually in quite good shape.

Okay. And just on a separate topic for Chris, you're talking about your objective to increase your penetration in creditor life. Where does your penetration in Canada stand? And do you sell this product, maybe I should ask Brian, do you sell this product outside of Canada also?

Michael, the creditor side in Canada, on the mortgage side we have some opportunities on that front but we actually have a Visa protection plan program which we're going to be launching which will give us considerable opportunity. There is a similar opportunity in the international side but because insurance is different from an international perspective, actually in some countries the creditor side is actually mandated, so we've got a higher participation rate. So we still are underpenetrated in Canada. We've actually put a metric in for our Canadian business to increase that and we're seeing some results from that already.

Can you just give us some idea of how underpenetrated you are in Canada?

We can get back to you on those numbers but I'm not going to give that out right now.

Okay, that's great. Thanks a lot.

Thank you, next question please?

Your next question comes from Rob Sedran of CIBC.

Hi there. Good afternoon. Brian, when you talk about improving conditions in many of your markets, I look at your slide 38 in the appendix and it looks like a lot of the major markets are actually decelerating, certainly better than developed markets. But GDP growth is perhaps decelerating into 2011. Is there another indicator or are there other indicators we should be looking to in trying to gauge your operating outlook in a lot of those environments?

I think the key point I'd make is that in Peru and Chile and Asia Pacific what we're seeing is there's been some pent-up demand for loans, and companies or corporations have put off making the decision for some time while they gain more confidence in what's happening with the overall economy. So we're seeing that definitely come through the system, too. I would also say on a macro standpoint, as per capita income in these jurisdictions is rising quickly, people are being, there's a burgeoning middle class, relatively young population, so there's demand for credit products throughout the retail spectrum. And that's part of, as you know, been part of our strategy for some time and we're seeing it in these higher growth markets.

It's Rick. I just thought I'd add to -- and we do because we've added with these incremental acquisitions scale as part of the strategy and we are reasonably comfortable that we are seeing and we'll continue to see market share. As you all know, in the international banking scene, we've been fortunate to be relatively immune to some of these things that are happening in Europe and whatever. And I think other banks are still going to be aggressive but we're in a pretty favorable position on what we can do in these markets relative to both local and some of our international companies. So we have some market share targets to hit.

Thanks.

Next question?

Your next question comes from Peter Routledge of National Bank Financial. Please go ahead.

Hi, thank you. Looking at your corporate and other segment, it appears to me that you're a little less reliant on wholesale funding this quarter than last. And more to the point, there's a broader trend of lesser lines than wholesale funding. Have I got that right? And if I do what's going on that explains that?

Peter, I wouldn't say it's a trend in terms of the change in wholesale funding. The funding net interest income number on that slide represents two things. One is the difference between our wholesale funding costs and internal transfer pricing. And the second is the cost of hedging our interest rate risk. Quarter-over-quarter I'd say the improvement is probably more driven by increasing short-term rates, thereby narrowing the gap versus our wholesale funding costs.

And the movement in average deposits which is down a fair bit, is there anything to read into that or is that normal volatility?

I would have said normal volatility.

Okay. Next question just on Scotia Capital. At the risk of throwing you a softball, what stands out is the stability in the revenue line. And what I'd like to understand is what's driving that? And I'm sure a big part of it is just very strong management. You could put a pin in that explanation. Maybe just talk about what about the business model you think differentiates Scotia Capital. Is it your diversification in precious metals or is there a broader model that explains that kind of stability?

Yes, it's Mike Durland. I think it is the diversification that the business has. Not only do we have the Macotta platform which is a very nice business for us and a very consistent performer. But we also don't have all of our eggs in one basket. So we have a very nice fixed income business and a very good performing equity business, and we've got strong FX business, strong metals business. How they link to the client side of the bank. It's got some geographic diversification. So it really is a diversification story. And it's been interesting over the past couple years, when one zigs the other one zags, and it's produced a very nice high quality revenue stream for us.

Okay, that's it. Thanks.

Thank you, next question please?

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

Thank you. I just want to first clarify with Luc the answer you gave earlier on the acquisition question. I thought you said year-over-year the impact of acquisition was CAD140 million; is that correct?

Sorry, I should have said it was about CAD120 million actually. The number CAD140 million is for the total year, Andre.

Okay, so that's year-over-year and quarter-over-quarter is CAD60 million?

That is correct.

Okay, thank you. And then my other question relates to the objectives on slide 30. I realize the productivity ratio will worsen with Dundee Wealth in there just by nature of how these businesses work, but it still seems like an awfully conservative objective relative to what you've been able to accomplish. So I'd just like to understand where you're coming from with that target.

Andre, it's Luc. We've had that target for a number of years, and I think we've communicated that our targets are not a single year but are medium term targets. And so over a period of time we may vary from them. But as we get into these new businesses, as you correctly pointed out, Wealth Management has a different profile, that will have an impact on our productivity ratio going forward and as Chris builds other components of the business as well.

Andre, it's Rick Waugh. I never disagree with my Chief Financial Officer but I agree, we've been performing quite well under that target. But I think with the amalgamation or the merger with what we're doing at Dundee Wealth we're working through that, and we think we're going to take out some cost synergies in back office and that. But I think if we continue to perform like that, we'll have to keep watching that target. So it's also a message to the rest of the management around this table.

How about I ask the question this way. If we take out the impact of business mix, I would think you would expect most of your business leaders to grow revenues faster than expenses, is that correct?

Absolutely.

Thank you.

Next question?

Your next question comes from Darko Mihelic of Cormark Securities. Please go ahead.

Hi, my question is for Luc, and I'm hoping you can help me with this. On slide eight you talked a little bit about the quarter-over-quarter improved margin and I think you quickly rattled off a few of the things. But I'm hoping you can actually maybe walk me through what it is that caused the jump quarter-over-quarter in your margin. When you say you had some asset liability gains in there, maybe perhaps you can walk me through perhaps if I push it towards the supplemental, page 12 where I see some of the movements in the average balance sheet amounts, I see a very big drop in deposits with the banks, on the liability side I see drops in business and government deposits. Can you walk me through why, what it is that's causing this volatility? And more to the point, how should we think about the margin on a go forward basis?

Let me give you some components of this. The margin was up quarter-over-quarter at the all bank level so the three basis points was the mixed impact of the lower volumes and the low spread DWBs that you referenced.

Sorry, I didn't hear you, Luc. What was that?

Lower volumes, low spread deposit with banks. Two basis points wider spread on Canadian dollar floating rate portfolio. You referenced the impact of the financial instruments, that was two basis points. And then going the other way we had a negative two basis point mix impact of higher volumes on non-earning assets.

Okay, and what should I look to that I could track over time? I suppose the only one I could look at is a change in financial instruments and/or the Canadian dollar currency floating rate. But can you give any idea of what we should be tracking or looking at to think about Scotia's margin on a go forward basis?

I don't think that we're going to see a significant movement one way or the other, Darko, in the near term. It's going to depend on what the interest rate environment is. If there's increases in rates then you may see differences but we don't anticipate any increases in administered rates in the near term.

Okay, fair enough. And my last question, for Rick. You mentioned the dividend policy increasing and that gives you more flexibility. Can you reconcile that for me? How does increasing your dividend payout ratio give you more flexibility?

Because it reflects -- I think we're right now at 49%, 50%. We have our growth targets and we're still doing the growth. So the next 12 months, it's probably going to be much more predictable where our payout ratio will be and that gives us flexibility because I think back in 2007, whatever, was the last time and then we gave this guidance 35% to 45%, so it's really the calculation.

I understand. So you mean to say more flexibility to raise the dividend, not necessarily more capital flexibility? So I think I misunderstood you.

Right, that's a fair point.

Okay, thank you.

Next question please?

Your next question comes from Sumit Malhotra of Macquarie Capital Markets. Please go ahead.

Good afternoon. First for Luc Vanneste or Chris Hodgson. On last Monday's call you indicated that you'd be in a position to give us an update on the impact on tangible common equity ratios from the Dundee Wealth acquisition. I apologize if I missed it but is that something you can provide or have provided?

No, you haven't missed it, Sumit. It's 75 to 80 basis points on TCE.

75 to 80, okay, thank you for that. Secondly, in regards to Europe, and this is in regards to the Scotia Capital, first for the corporate loan book, which if I look at my numbers here, I think the loan book overall on Scotia Capital is about CAD37 billion now. If we go back a while, Europe was a sizeable portion of the portfolio here. Just wanted to get an update on how much of that CAD37 billion we see in the supplement relates to European corporate lending and what your outlook is or what is the health of that portfolio right now?

Yes, Steve McDonald. That number would have been quite a bit higher in past years. We exited the leveraged lending business in Europe about five years ago. So as we exited, those numbers would have come down quite considerably. So about roughly CAD4 billion of the total relates to Europe, and it's mostly investment grade credit where we get a lot of cross-sell from large multi-national corporates.

And the second part of that is for Michael Durland. There was an announcement post the quarter that talked about Scotia expanding its fixed income and interest rate trading operations in Europe. Obviously one of your peers in Canada has talked to us extensively in the last couple of quarters about their experience in European trading and how that's impacted the results. Just wanted to get some color from you on how you feel this business is going to grow in Europe, what kind of capital allocation we're going to see and how it will affect the trading revenue on a near term basis. Is it something that's going to be significant?

I wouldn't say it's going to be significant. It's a modest add-on to our global fixed income offering. The other thing I would add is that one of the benefits you have of launching a business in the middle of the crisis is you go in with your powder dry. There's a lot of volatility in that market and we're certainly aware of the dangers which is also a good thing because you go into a new business with already an awareness of the trouble you can get in if you're complacent. But it will be in the most liquid part of the market, and it's a small part of a very big business that we have globally.

So I'll wrap it up here. As was indicated in the previous question, you talked about the trading business being somewhat, you think the current levels we've had in Q3 and Q4 are more reflective of the run rate you should have in 2011. So this expansion doesn't really add, in your mind, too much to what we're seeing in these results right now given the normalization that's continuing?

Yes, and I think the way to think about it is in the context of how big the delta would be. We've been running a race where, on the one hand, we've had market normalization, and on the other hand we've had anticipated benefits from some of the strategic investments we've made. But you have to also factor those into just the context of the delta. You've seen the effect of the normalization. And the growth objectives we have are also modest and we should see them start to pay off in 2011.

Thanks for your time.

Thank you. We'll take one more question.

Your final question comes from Brad Smith of Stonecap Securities. Please go ahead.

Thanks very much. Just a quick question with respect to the credit trend in the International. It was down nicely in the quarter, I think about 9% sequential. And I was just wondering if you could give us an update with respect to particularly the Caribbean credit portfolio and where you see that trending over the next year or so.

Hi, Brad. It's Rob. The Caribbean will continue to be soft, and in the mortgage portfolio it's being worked on. So I think it will be steady. I don't think there will be any surprises but we'll have to continue to work away at it. It will be the softest area of the International portfolio.

So just for context then, given that gross impaireds were down in International, I believe in the quarter--

Yes, that's right.

Did the Caribbean contribute to that decline or was there something else that was making a bigger contribution to that improvement?

Yes, it did contribute to that decline. That was largely in Chile where we've been working through on the integration. It was partly on Peru where we've also been continuing to work through the integrations of the various consumer finance entities we purchased a couple years ago. So it's primarily those. Mexico would have been flat.

Terrific. Thanks, Rob.

We will take one more question and I apologize for what I said a few minutes ago. One more.

Your final question comes from Mario Mendonca of Canaccord Genuity. Please go ahead.

Luc, that was kind of you. A quick question. Actually I'm so flustered now.

Just be kind to us. It was a Christmas present, Mario.

It was actually a very simple question. I may have missed it but the increase in your payout ratio, was that in any of the material that you released today? Or was that just you threw it out -- not "threw it out," you offered it on the conference call?

I offered it on the conference call.

Okay. That's very helpful, thank you.

Thank you for joining us today. This concludes our conference call and we will see you next quarter. Many thanks for joining us. Take care, bye-bye.

Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation and you may now disconnect your lines.