Bank of Nova Scotia (BNS) 2011 Q1 法說會逐字稿

Good afternoon and welcome to the presentation of Scotiabank's first quarter results. I am Luc Vanneste, Chief Financial Officer. Rick Waugh, our CEO, will lead off with the highlights of the first quarter. Next, I will go over the financial results, 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 the remainder of 2011. Anatol von Hahn will discuss Canadian banking, Brian Porter will cover international banking, Chris Hodgson will discuss our newest business line, Global Wealth Management, and Mike Durland will discuss Scotia Capital. 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 Scotiabank's caution regarding forward-looking statements. Rick, over to you.

Thanks very much, Luc. We are pleased to report another strong quarter, a record quarter. Scotiabank generated net income of CAD1.174 billion, which represents growth of 19% over the same period last year. Our earnings per share were CAD1.07 for the quarter, up 18% from last year. And our return on equity at 18.7% also remains strong and increased from the same period a year ago. The strength of these results allowed us to increase the quarterly dividend to CAD0.52 per common share. Revenue was also a record of CAD4.2 billion, an increase of CAD215 million from last year. Acquisitions accounted for approximately half of the increase. Credit performance was very strong and continues to improve. Our loans loss provisions decreased 28% from quarter one of last year to CAD269 million this quarter.

And as Rob will discuss in a few moments, all our credit portfolios are performing well. Expenses were up due to higher compensation related to expenses and several planned investments for future growth in all our business lines. This quarter marks a milestone for the Bank, as we are reporting our first set of results for our newest business line, Global Wealth Management. Our record performance this quarter is a result of strong contributions from all four of our growth platforms. Canadian Banking reported net income of CAD496 million. This was driven primarily from strong mortgage asset growth, but also came from deposit growth, some of which can be attributed to our innovative Let the Savings Begin program. In International Banking, organic retail and commercial banking growth, combined with the impact of recent acquisitions, drove these results.

Global Wealth Management reported net income of CAD216 million, this figure does not reflect the financial impact of the recent acquisition of the remainder of DundeeWealth, which will begin next quarter. This quarter we enjoyed strong sales in our mutual fund and our brokerage businesses, as well as solid performance in insurance. And finally, Scotia Capital reported good performance in a market that continued to normalize, with particular strength in the equities business. From a capital standpoint we continue to benefit from high quality capital and strong capital ratio. So in summary, this was a good quarter, a record quarter, a quarter of good, sustainable, quality of earnings. Global uncertainty does remain in several economies and geopolitical risk has heightened in the Middle East.

However, our exposures to both of these factors are not significant, other than broad macro effects. In this environment, Scotiabank sees several areas of opportunity, which we are vigorously pursuing in all our business lines. Our targets for 2011 are achievable, especially after the strong quarter, and should continue, as we realize on these windows of opportunity using our strong footprint, capital, and management strength. With that, I'll turn it over to Luc.

Thanks, Rick. Slide 6 shows the impact of our recent corporate reorganization. The numbers here reflect the carve-out of the wealth and insurance businesses from our Canadian and International Banking business lines into Global Wealth Management. We also changed our transfer pricing methodology for Wealth Management deposits, which resulted in a net transfer from the other segment. Looking at the breakdown of net income, Global Wealth Management accounted for 16% of our earnings in fiscal 2010. This number will increase as we start to report the full impact of DundeeWealth next quarter. As we indicated previously, our medium term target is to have each business line contribute between 20% and 30% of consolidated earnings. In terms of business mix, we look to have approximately 70% of our earnings come from the personal and commercial business and wealth businesses, and 30% from wholesale.

And geographically, our diversified businesses will produce roughly half of our earnings within Canada and the rest internationally. Moving to slide 7, Scotiabank's earnings per share for the quarter was CAD1.07, an increase of 18% from last year and 7% from last quarter. Looking at year-over-year changes, growth in asset levels drove net interest income to a record. The provision for credit losses was CAD269 million this quarter, down CAD102 million from last year. The lower provisions were across all business lines, with the largest decline coming from lower commercial provisions in International Banking. Other income was a record, with growth across many categories, including underwriting fees and trading revenue. Wealth Management was a key contributor to growth, as revenue increases were driven by mutual fund assets under administration and higher retail brokerage fees.

Offsetting these were higher operating expenses due to acquisitions, as well as investments to support business growth, and a decrease in net gains on sales of securities, resulting from a combination of lower gains on the sale of securities and higher write-downs. Return on equity for the quarter at 18.7% remains strong. Moving to revenues on slide 8. Revenues during the quarter were at a record of almost CAD4.2 billion, an increase of 5% from last year and also 5% from Q4. Looking at year-over-year changes, although net interest margin was stable, growth in asset levels drove net interest income to a record. Asset levels were driven by acquisitions, as well as growth in residential mortgages, primarily in Canada and also in commercial loans in International Banking. This was partly offset by lower corporate lending volumes in Scotia Capital.

Other income a record CAD1.8 billion, increased 4% from last year. Mutual fund revenues and underwriting fees drove the increase, although these were partially offset by lower gains on securities. Quarter-over-quarter net interest income was up CAD58 million. The increase was attributable to asset growth, as our all bank margin remained stable. Other income increased 7% due to stronger trading revenues reflecting solid results in ScotiaMocatta and institutional equity. Other income also benefited from higher mutual fund revenues and underwriting fees. Partially offsetting these items were lower securitization revenues and lower gains on sales of securities. Turning to slide 9, non-interest expenses rose CAD277 million or 14% from the same period last year, largely due to initiatives that we have under way to drive revenue growth.

Acquisitions accounted for CAD35 million of this increase. Higher stock-based compensation in line with strong quarterly results was driven primarily by new grants awarded, vesting of existing grants and the appreciation of the Bank's share price. Although benefits and pension expenses increased, this was mostly offset by the onetime gain on the wind-up of a pension plan relating to a prior acquisition. Comparing to Q4, expenses were higher due mainly to higher stock-based compensation and the impact of new grants, higher staffing levels, and higher employee benefits. Partially offsetting these were increases in expenses was lower advertising and technology expenses and the pension gain I just mentioned. Turning to capital, you can see that our tangible common equity increased to 9.8% and our Tier 1 capital ratio strengthened to 11.8%.

Our capital ratios benefited from strong internal capital generation of CAD611 million and CAD127 million of stock issued under our dividend reinvestment program. Our capital ratios remained well above regulatory minimums and are strong by international standards. Now turning to the business line results, beginning on slide 11. For each of the business lines the prior period results have been restated to conform to our current four business line presentation. Canadian Banking had net income for the quarter of CAD496 million, an increase of 14% from last year. On a year-over-year basis total revenue rose 3% due to growth in both net interest income and other income. Residential mortgages, personal lines of credit, auto loans and average deposits all increased. Average assets were up 7% from last year.

Provisions for credit losses were down CAD16 million to CAD165 million, due to moderately lower provisions in both retail and commercial portfolios. Quarter-over-quarter, the net interest margin remains stable and we saw continued growth in residential mortgages, high interest savings accounts and deposits. Other income increased from higher credit card non-interest income and securities in Roynat.The provision for credit losses was down CAD7 million or 4% from the previous quarter. Higher performance based compensation and employee benefits were more than offset by previously mentioned onetime gain of CAD35 million from the wind-up of a pension plan relating to a prior acquisition. Moving to International Banking on slide 12. International Banking's net income in the quarter was CAD342 million. This represents an increase of CAD88 million or 35% from Q1 of last year.

We benefited from growth through acquisitions, mainly RG Premier in Puerto Rico and Thanachart's acquisition of Siam City Bank in Thailand. We also benefited from strong organic growth in commercial lending primarily in Asia and Peru. In addition, we saw retail growth, particularly in Peru, as well as widespread growth in deposits led by the Caribbean region. The CAD70 million decline in loan loss provisions was driven by widespread improvements across the division. Our commercial provisions declined in the Caribbean and in Peru, where we saw net recoveries. Our retail provisions improved in Mexico and Chile. Expenses increased 19%, largely due to acquisitions. Last year's results included the release of an indemnity provision no longer required related to the Bank's acquisition in Peru. Underlying expenses grew 8% as a result of higher staffing levels and compensation, premises, business taxes, and professional fees.

Non-interest expenses were up 6% from last quarter, due partly to the wind-up of a third party loyalty program in Mexico in order to launch our own in-house loyalty program. As well, there were increases in pensions and benefits and professional expenses relating to acquisitions and integration. The growth in volumes across many regions continues to be an encouraging sign that economic activity is improving in our markets. Global Wealth Management generated net income of CAD216 million for the quarter, an increase of 18% from last year and 19% from last quarter. Year-over-year we saw total revenues increase 14% as a result of widespread growth, including higher trading volumes and increased fee revenue from higher levels of assets under management, and assets under administration. We also saw higher Insurance revenues.

This quarter, the Wealth Management business accounted for about 80% of the division's revenue, with the remaining 20% coming from insurance. Expenses increased 14% from last year, reflecting higher volume related costs including performance-based compensation. In addition, costs increased due to the investment to support business growth, as well as pension and employee benefit costs. Quarter-over-quarter revenues were up 9% to CAD603 million. The increase was largely due to the same factors as the year-over-year increase. In addition, there was growth in insurance outside of Canada. Expenses increased 3%, principally due to the higher performance-based compensation. Partially offsetting this were lower advertising and business development expenses. Looking at slide 14, Scotia Capital recorded net income of CAD308 million.

The decrease from last year is due to lower revenues reflecting more normalized conditions that commenced in the second half of 2010. Year-over-year, the CAD18 billion or 11% growth in average assets was due primarily to increases in securities purchased under resale agreements and higher levels of trading securities resulting from the expansion of our fixed income business. Loans and acceptances declined by CAD8 billion or 24% across all geographies, while spreads improved. Other income declined largely due to lower trading revenues in global fixed income in comparison to the particularly high levels achieved in the first quarter of last year. Expenses were up 26%, reflecting higher expenses from growth initiatives and higher stock-based compensation resulting from the impact of new grants awarded in the quarter and vesting of existing grants.

Income taxes were lower than last year due mainly to a change in mix of income this quarter. Quarter-over-quarter, performance was driven by higher trading revenues in ScotiaMocatta and institutional equity, higher loan origination fees and higher investment banking revenues. We continue to experience modest net recoveries of loan loss provisions. Expenses were up 20% from last quarter, reflecting the higher performance in stock-based compensation, which are generally seasonally higher in Q1. I'll now turn to the other segment, which incorporates the results of group Treasury, smaller operating units, and certain corporate adjustments. The other segment reported a net loss of CAD188 million in Q1, compared to a loss of CAD265 million last year.

Year-over-year the other segment benefited from increase in wholesale rates used for transfer pricing, a favorable change in the fair value of financial instruments used for asset and liability management and higher securitization revenues. Offsetting this were lower gains on available for sale securities and higher expenses. 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 and a lower net cost of term funding. Offsetting this were lower securitization revenues and higher write-downs this quarter. There was no change in the general allowance this quarter, while last quarter included a CAD40 million reversal from general allowance. This concludes my results -- my review of our financial results. I will now turn it over to Rob, who will discuss (technical difficulties).

Thanks, Luc. The risk in our credit portfolios continues to be well-managed. We're seeing a steady improving trend in our loan portfolios as measured by a number of key credit metrics, including both provisions for credit losses and gross impaired loans. We saw significant decline of CAD103 million in specific provisions year-over-year to CAD269 million. On the quarter, the decrease was CAD25 million. Underpinning the decline in provisions is the continued downward trend in gross impaired loan formations, which declined by almost CAD200 million from a year ago. Our market risk remains well-controlled and well within our risk tolerances. There were 6 trading loss days in the quarter, unchanged from the previous quarter. The losses were within the range predicted by VAR. Our average one day VAR was CAD11.7 million compared to CAD9.3 million in Q4.

The quarter-over-quarter increase in average VAR was primarily due to greater interest rate risk. Slide 18 shows the trend in specific provisions over the past five quarters. As you can see, specific provisions have come down meaningfully across all business lines, year-over-year, particularly in the international portfolios. As a result, our all Bank PCL ratio dropped by 17 basis points year-over-year to 38 basis points, the lowest level in two years. To summarize, our asset quality remains strong with the retail and commercial portfolios performing well and our corporate portfolios continuing to show remarkable strength. Based on the improvement we are seeing in the global economies, we expect that 2011 provisions to be moderately lower than 2010. This is predicated on the continued decline in Canadian banking retail provisions, International Banking retail provisions remaining in line with 2010 levels notwithstanding the growth in that portfolio, and modest new provisions in the corporate and commercial portfolios. And that concludes my remarks and I'll just turn this over to Anatol.

Thank you, Rob. Canadian Banking had very strong results this quarter. We achieved solid volume growth in assets and deposits and we gained market share in a number of categories. Our PCLs declined and we grew non-interest income. During the remainder of 2011, we will build on the success by continuing to focus on growing our deposits, payments, and Wealth Management referral businesses. On the deposit and payment side, we have a number of continuing programs and campaigns, such as seen, Let the Savings Begin, and bank the rest that continue to grow in population. Referrals from our branches were up significantly this quarter. Working with our partners in Global Wealth Management to grow the wealth and insurance businesses in Canada remains a priority for us. Going forward, we see the economic recovery beginning to shape consumer behavior in ways that will impact the markets we serve and our business mix. And provide opportunities for growth.

On the retail side, the mortgage portfolio continues to grow as Canadians invest to address their housing needs. However, the threat of rising interest rates and a gradual shift in consumer behavior towards debt repayment will lead to a somewhat lower asset growth rate than we have experienced in recent years. Similarly, debt repayments and the flow of funds back to rising equity markets will slow deposit growth. That is why we have focused our marketing messages on savings and investment with our Let the Savings Begin program. As mentioned earlier, the first two phases of the program have helped us grow market share in both deposits and mutual funds. We've also seen a significant increase in investment planning discussions with our customers.

Turning now to commercial banking, our lending pipeline remains very strong with a significant number of new opportunities across a number of business sectors. Our clients reduce their capital investments during the past three years, but are now moving forward with acquisitions and capital expenditure plans. In commercial real estate, we scaled back somewhat in the last year to manage exposures in a down market, but the market is improving and we continue to finance high quality projects. PCLs are trending well and both retail and commercial PCLs are expected to be lower year-over-year, although commercial provisions can be lumpy from quarter to quarter. Expenses will trend modestly higher, particularly in the retail bank, as we continue to invest in revenue-generating activities such as opening new branches and hiring and training additional staff in our branches and contact centers.

In summary, we expect to see continued opportunities going forward in 2011. Retail assets will continue to grow, albeit at a slower rate. Deposits and mutual funds are also continuing to grow and our marketing focus on saving for the future has been successful at starting conversations with our customers to develop and deepen relationships. And, as I mentioned earlier, the commercial pipeline is strong. We expect to have a solid year in 2011, although in future quarters we do not expect to benefit from the same level of onetime items that Luc referred to earlier. With that, I'll turn it over to Brian.

Thanks, Anatol. We had a strong quarter and we are pleased with our performance. Compared to a year ago, our results reflect the strong contribution from recent acquisitions and underlying organic growth. As I mentioned last quarter, one of our core strategies is continuing to invest in our distribution channels and sales forces to drive growth in all segments as the economic outlook improves. We saw good asset and revenue growth this quarter. Commercial lending is growing in all regions, with the strongest growth in Asia and Mexico. Retail lending assets are growing modestly, with the strongest growth in Peru and Chile. The English Caribbean is showing signs of improvement. Margins are stable and will continue to benefit from the diversification of our asset base across all regions.

Credit quality is within our risk tolerances and we expect a continuation of this stable performance. We continue to make measured investments to drive growth. We are increasing the capacity of our non-branch distribution channels, such as contact centers and Internet banking and improving the performance of our sales forces to increase our retail business. We are also making process changes and prudent adjustments to our risk appetite to accelerate growth in our commercial book. We remain focused on expense management, the integrations of RG Premier Bank in Puerto Rico and Siam City Bank in Thailand are going well. We remain focused on organic growth and seeking acquisitions to expand our footprint in high growth markets. In summary, a strong start to the year. I will now pass it over to Chris.

Thanks, Brian. First quarter proved to be a very good start to fiscal 2011 for the Global Wealth Management business. We saw widespread growth across all of our businesses and we will continue to build on the sales momentum, product innovation and expanded distribution throughout the year. In Canada, we had record assets under administration and under management and, including DundeeWealth, we were ranked number one in net mutual fund sales. These are clear signs that our strategy to grow our asset management business is working well.Our advisory channels, Scotia Private Client Group and Scotia McLeod, as well as our international platforms, have been successful at acquiring new clients and providing customized advice and we will keep investing in these channels.

As well, we continue to work on integrating and replatforming our online brokerage business. We expect this to be completed in the early part of 2012. A key area of focus for us is DundeeWealth. We're working very hard at making progress leveraging the best of both DundeeWealth and Scotiabank to deliver a broad range of investment solutions across various channels and geographies. DundeeWealth will drive significant earnings growth for the global wealth business. And we continue to be pleased with our investment in CI. It remains an important part of our global wealth strategy. In International Wealth Management, we will continue to focus on growing our mutual fund and brokerage businesses in Mexico, Peru, Chile and Thailand. And build on the recent acquisitions we've completed.

In parallel with organic growth, we will focus on M&A activities, particularly in Latin America and Asia. Insurance has seen solid growth this quarter. We're working to expand growth both internationally and domestically and launched a number of new products in the quarter. In summary, the outlook for Global Wealth Management is excellent. We have invested over CAD5 billion in our wealth businesses in the past three years and we expect to see increasing benefit of these investments in the coming quarters and years as economies and markets continue their recovery. In insurance we have a very clear opportunity to increase our penetration in Canada and significant opportunities across our network in Latin America and Asia. As a result, we are optimistic and excited as we launch this new division of the Bank and will work in close partnership with our colleagues in Canadian International Banking and Scotia Capital to deliver these results. I'll now pass it over to Mike.

Thanks, Chris. In 2011, we are continuing to focus on the execution of several initiatives we have under way in our core industry sectors and product segments. The start of the fiscal year has been positive, trading revenues are performing well and are at a normalized level. We are benefiting from diversification of our products and geographies. Growth initiatives are starting to produce and we are comfortable with the risk in the portfolios. Our initiatives in fixed income are starting to pay off, as we expand our global capabilities and our global product offerings. Our fixed income investments in London and New York are working well and our focus on products such as high yield debt, particularly in the growing Canadian market, are making solid contributions to our business and are expected to be an important driver of future growth.

In corporate and investment banking, the declining trend in loan volumes has moderated and loan spreads have increased. Going forward we expect moderate loan growth resulting from increased M&A activity. Portfolio quality is strong and PCLs are expected to be modest, although continued recoveries are unlikely. The pipeline for new equity issues and M&A is reasonably strong. We continue to see healthy activity in energy and mining, two of our focused sectors. Expenses continue to be closely managed. In the first quarter, the timing of the recognition of incentive compensation from previous years drove expenses higher. We expect to benefit from a reduction of this item in the coming quarters. With that, let me turn it back to Luc.

Thanks, Mike. That concludes our prepared remarks. We would now be pleased to take your questions. Please limit yourself to one question and requeue if you have additional questions. Operator, can we have the first question on the phone.

Steve Theriault from Bank of America-Merrill Lynch.

Just a couple quick ones I think on the international division. First one for Brian Porter. Brian, the efficiency ratio took a hit this quarter and Luc alluded to some of the drivers during his commentary. Can you quantify the wind-up cost of the Mexican loyalty program and talk a little bit about your outlook for the efficiency ratio over the remainder of the year.

Sure. I'd make a couple comments. First of all, the wind-up of the loyalty program was about CAD13 million after tax. The second item was that we had a small fraud in the quarter, which is obviously nonrecurring and non-systemic. And then the other issue is, as I mentioned, is that we're investing for the future in revenue related build-up of our contact centers in Peru, Mexico. We're expanding our external sales force in Chile and those are things we're doing, obviously, to drive revenue going forward.

I think, Steve, this is Sabi Marwah, if I could make another point. That if you exclude the acquisitions made in international and, as Brian mentioned, the onetime items such as the wind-up of the loyalty points and the fraud, our expense growth in international goes from around 19% to around 2% to 3% for the year-over-year growth and that's really driven by business growth, so that's the underlying run rate.

When we think of going forward, would you say we're likely closer to the high 50s or the mid-50s with all the noise?

High 50s --

you mean our productivity ratio?

That's right.

I think it's improved from current levels. It's going to improve, so depends on revenue growth, but it will improve from current levels.

Okay, that's fair. And just quickly, if I might, Rob, your -- for Rob Pitfield, your guidance last quarter and now this quarter for international retail provisions was to have them remain around Q4 levels, but a pretty good improvement this quarter. From your comment today should I draw that you think the PCL in international retail was maybe a little unsustainably low this quarter?

Yes, I think it's going to go back more to Q4 levels and then it will be steady through the course of the year. So it's really the same guidance that we gave in Q4, steady as you go.

Okay. Thanks very much.

Next question, please.

Robert Sedran from CIBC World Markets.

Wanted to ask about the net interest income line. If I exclude trading it was up about CAD75 million quarter-over-quarter. I'm trying to understand how much of that increase might have been related to the Treasury and, Luc, I don't know if the top -- the first line of slide 15 is my answer. Or if there's something more to it. And I'd also like to know if the lower net securities gain is in any way related to activity in the Treasury as well.

Jeff, do you want to talk on the Treasury?

If you look at slide 15, funding net interest income, which is related to Treasury, improved CAD24 million for the quarter. However, a fairly meaningful part of that change was internal transfer pricing of funds. The balance was actually a lower cost of term funding. And in terms of the securities write-downs in Q1, that all is in group Treasury.

And there's no -- I guess what I'm asking is, is there a sense that some element of the higher NII was just from Treasury? I'm really looking at the top of the house, rather than at the segment level. I'm just trying to understand how much might have been related to the Treasury or was it a bit of a wash.

It wasn't material overall, Rob. I mean, our margin on an all-Bank basis was stable and there was a little impact from financial instruments, but not, nothing significant.

Okay. Thank you.

Next question, please.

Andre Hardy from RBC Capital Markets.

I think it was Rick Waugh on the last call that suggested that if we take out the noise from DundeeWealth, revenue growth should exceed expense growth on a full year basis. Is that something that is still realistic to expect this year?

No, I think we've accelerated our investments right now and we do strongly believe that we have some opportunity here and so we've made the decision that we're going to do our best to capitalize on that. So we've been expanding our distribution, our contact centers, so our expenses are higher than our norm, but it's focused very much on these opportunities and revenue driven. So these opportunities we see I think are somewhat unique. The window's open and we're going to accelerate.

As well, Andre, it's Luc. We're experiencing a relatively significant increase in our overall pension and benefit costs on a consolidated basis, as well. HST this year has a greater impact than it did last year.

So Luc, if we go back to slide nine --

slide nine, yes.

Which is the one where you talk about expenses.

Yes.

So you look at the three items you've got there, there's CAD35 million in acquisitions, about CAD30 million on stock-based comp relative to last year and then the net impact of pensions about CAD16 million. So that leaves CAD195 million of higher expenses and what I'm trying to reconcile is Rick's comments with yours and where do these investments in growth initiatives show up? Is it primarily people? Or is it premises as well? Like where we would see that?

Certainly, we have increased our headcount, Andre, so that's part of it. In terms of pension -- sorry, in terms of business expansion, we're -- our salaries are up CAD42 million to CAD50 million. There's also increased technology relating to our expansion. That's about another 25 . Payroll taxes as a result of increased taxes, but also additional headcount takes 10 to 15. Our professional fees as a result of the acquisitions that we're doing are in the neighborhood of CAD15 million. So a good chunk of our CAD277 million increase year-over-year on that particular slide relates to business expansion.

You also referenced a couple of items in terms of the stock-based compensation. That is up -- performance based compensation is also up 25 to 30. We've got additional people in areas that the compensation is a high component relative to the revenues. On a year over -- sorry, a year-over-year basis, CAD35 million to CAD40 million is the incremental pension cost and of course this quarter we had the pension credit. So that on a net basis from the pension and the other items I referenced are in the CAD60 million range. So I think that if we look forward in terms of our expenses, I think that yes, they will be somewhat elevated. I would expect that as we go from Q1 through to the end of the year, that they will decrease in absolute terms and that we would see our revenues increase over that period. That being said, I would not anticipate that we would have positive operating leverage in the number of business lines in fiscal 2011.

That's very helpful. Thank you.

I think, Andre, this is Sabi, if I can just add a bit more color to the expense growth of 14%, which really does jump out. As I mentioned earlier when I was talking about international, if we take out acquisitions and the onetime items that accounts for around 6% of that 14% growth. Then we take out compensation and pension related expenses, mainly stock-based and performance-based comp, that's another 3%. So that takes us to 9%. So the remaining 5% is really the business growth and that business growth is salaries for our branches and our contact centers, we've added a couple of hundred people in Mexico in international in contact centers. Our technology expense is up around CAD20 million, CAD25 million, that's largely to support of our wholesale initiatives in Scotia Capital. Advertising is up around CAD10 million. So that's the 5% of business expansion that's driving revenue growth, or will drive revenue growth in the future.

Gabriel Dechaine from Credit Suisse.

Just on the loan growth in international, I guess flat because of FX. But the comments about seeing more strength in commercial than retail, is there anything to do there with maybe the retail borrowers in some of these regions being a bit more apprehensive given the [food] crisis or anything of that nature?

Sure, I'll give you a flavor of some of the asset growth we've seen in the different regions. From a commercial perspective, as I said in my comments, we saw pretty good asset growth in Peru and Mexico. Peru grew at 3%, Mexico grew at around 3%. The Caribbean region was a little more muted and to your point, that's a function of consumer confidence and project financing and people are just waiting for a little more economic certainty. On a retail basis, our Peru book grew at 6.5%. Mexico was basically flat. Chile grew at 2% and the Caribbean for all intents and purposes was relatively flat, which comes back to the consumer confidence issue.

Question on Dundee Corp. Are there any restrictions on their ability to sell Scotia shares now that they're in possession of around 30 million, 31 million, sorry. And then my last question is on risk weighted assets. I noticed your market risk, risk weighted assets come down because of the advanced models approach that you're using now. Something that puzzles me is how every bank seems to have different sensitivities on Basel III basis. Should I be really worried about inflation? It seems like there's a lot of levers the banks, I am not saying Scotia specifically, but a lot of levers that you can pull to manage this potential influx of higher capital requirements.

Gabriel, it's Chris Hodgson, I'll deal with the Dundee Corp. question. The answer is no, there are no restrictions in terms of selling the stock.

And Gabriel, on the broader question and you sort of covered a broad spectrum here so I'll try to concise. First of all, we're very comfortable on our business model reflecting the changes in Basel, the FSP and what have you. We have a very straightforward business model that's seen the test of time and we've stressed it for Basel, and like I say, and so this is an ongoing issue. Now, we are just starting down the path of this re-regulation and we're benefiting because we don't see any substantial changes in our business model.

Other banks, whether they be in Canada or other jurisdictions, I think will have -- could have a different response. But we're pretty comfortable that we can meet the challenges, although I must say Basel II had its shortcomings and I think Basel III has them too, but we're all subject to this regulatory grind that is going on and we'll just have to take it as it is. But we're still comfortable with how we can manage the business model, our return on capital and -- but there's volatility because every regulator in every part of the world is still adjusting their models and that's to make it a safer banking system.

So do you think the -- are you seeing the estimates out there, are we being too conservative?

In what way are you being too -- ?

Like a pro forma Basel III ratios and things like that.

I think Basel II said we should have four, Rossi said we should have seven and we kept nine or ten and now, of course, they're coming out with these different levels. The levels aren't the issue. They have redefined capital, the deductions that went there and I think those particularly hit the Canadian banking model and some of the strengths. Again, we can manage around them, but we used to have -- there was only one source of capital and that's shareholder capital, except the regulators have now have gone to great lengths to define regulatory capital and that is causing some angst amongst all of us, but again, we will manage through. And our return on capital, as you see which over the last 10 years and last year was leading return on equity and we're keeping our governance at 16 to 20. It's putting a lot of work on a lot of people just to respond to a huge amount of regulatory response, not just in Canada, but around the world. Regulatory fatigue is setting in.

All right. All right, thank you.

Next question, please.

Brad Smith from Stonecap Securities.

My question relates to the new Global Wealth segment. I was struck by the overall profitability that you're showing in that unit, whether you look at expense efficiencies or, say, a return on sales type metric. It seems to be that you're retaining at the net income line about CAD0.30 to CAD0.35 per dollar of revenue that you're generating, slightly less if I back out the equity accounted interest in CI and Dundee, which I believe are in those revenues, but was wondering if that reflects a differential in the profitability profile between the domestic wealth component and the international. And I guess one of the ways you might sort of address that would be to share with us the revenue adjustments that were made, as well as the net income adjustments, Luc, that you provided in your supplement this quarter.

Brad, it's Chris Hodgson. I'm going to deal with that. In terms of the profitability, the overall division, I think, there's a couple of things. One is the majority of the profitability, at least for now, is being driven through the Canadian Wealth business. The efficiency ratio or productivity ratio clearly for the numbers we reported was quite strong, but remember that that doesn't include the fully consolidated DundeeWealth position, which will go in next quarter. So when you add that, you will start to see that productivity ratio float up to more of an industry standard. The other point I would make is that it's dependent upon business mix and business model.

Our business mix is about 80% of the revenue comes from our wealth businesses and about 20% comes from insurance. If you look at our insurance model, we tend to be more of a distributor and we don't tend to manufacture to the extent that some of our other competitors do, and as a result of that, we benefit on the productivity ratio on that front. So when you blend them together, we're a bit lower, but the point that partly that I think that Rick and Sabi made a little earlier is that we are going to see the productivity ratio move up a little bit in the wealth business, as we consolidate all of the DundeeWealth business in Q2 going forward.

Chris, can you share with us the revenue breakdown between the international and the domestic?

It's Luc. If you go to slide six, which shows us what we had on the 2010 full year basis. If you divide those numbers into a quarterly basis, that will give you an indication of where the contributions came from, but we at this stage of the game are not going to be providing a line by line on this basis.

Okay. So slide six just to be clear, that's just the net income.

Right.

And so the revenue is not available.

No. But you can also take a look at the breakdown in our Q1 report to shareholders in terms of where revenues and net income come geographic basis, Canada and different places. You can do comparisons quarter-over-quarter there as well.

Okay. I will do that. Thanks, Luc.

Okay. Thank you. Next question, please.

Mario Mendonca from Canaccord Genuity.

I'll try to be a little more direct on the capital question. Is the Bank prepared to disclose the pro forma Basel III common equity [run] ratio today?

No.

No. That settles it. A follow-up question. Maybe for Mike Durland. This is something we saw across the group in the quarter. We saw repo balances increase fairly consistently and what I'd like to understand is not so much for you to quantify the impact that this has on the Bank from an earnings or revenue perspective, just understand what business and what clients are you supporting with that growth in repos and why would it happen, and I know you can't talk for the other banks, but why is it that it seem to happen across the group almost simultaneously.

Yes, I can't answer the question on why it's happen across the group. For us it relates to our expansion in New York and London and liquid rates. So, both of those initiatives are focused on the liquid government securities segment of the fixed income market. And repos are very important product offering in that particular segment. For us it relates solely to those two strategic initiatives.

And the clients then would be what, large institutional investors, traders?

Yes, primarily large institutional real money accounts.

Thanks very much.

Next question, please.

John Reucassel from BMO Capital Markets.

Just want to circle back with Rick and maybe Sabi on the expenses and just to be clear, you accelerated the expenses, growth investments, so does that mean you'll still be within your target EPS growth range this year? And then should we assume since you accelerated them that you might be at the higher end of your range in the years after that. I'm just trying to make sure we understand the timing of the payoff here.

We're not going to give you quarter by quarter governance. You guys have got to do some work yourself. As I said in my comments, we're quite confident on achieving our forecasts, notwithstanding these expenses that are going, because again, there's lots of opportunities. So we feel very comfortable on our governance and our hitting our targets, our profitability ratios, but we have decided expenses. Mike just gave you a good example. We're going to open up a state-of-the-art trading floor. In May, I guess, we're ready to move in because we're going to capitalize on our great counter-party acceptance in the markets and of course not only do you open up that floor, which costs a lot of money on the technology and the positions, but you've got to fill the chairs and which we've been busily doing.

And we're very confident on that business because, again, our reputation on people who want to deal with us because they don't have large exposures and we're a good name. So we have a new trading floor there and these are the kind of things, our contact centers, Mexico, 300 people, 12 more branches in Canada, more contact centers in Canada, so the world is still an uncertain place and many of our competitors are still trying to figure out their capital and their business models. We're pretty confident of where we are and so we decided to accelerate. But because it is Scotia and we hit our forecasts, we're not changing our governance on our earnings targets and our productivity ratios.

Okay. Thanks for clearing that up. And then just, Anatol, I don't want you to feel left out, the Canadian business, you talked about a slowdown in personal lending. Could you talk about what you think a slowdown is? And maybe the outlook on margins.

Yes. Let me start first in terms of slowdown. What we're seeing here and seeing is and mortgages is probably a very good example to use as an example. In the mortgage segment we're seeing that the amount of demand for mortgages has slowed down. There's still growth, but not at the same rate as what we had last year and what we had hoped for in terms of this year. We're also seeing some migration of customers moving over who have lines of credit, moving over into the mortgage product, either with variable rates or fixed rates.

So we'll see -- we'll continue to see growth, just not at the same pace as what we had seen last year. Margins, again, it's a question of the mixture of product. The margins on mortgages is getting tighter and we're seeing that in the marketplace. On the other hand, we have other products where we continue to grow and do well, things like small business, where our margins are attractive. So, our margin, I think, we are looking and you have seen quarter-over-quarter is relatively flat. There will be and is pressure, but it's marginal at this point.

Okay, thank you.

Thanks, John.

Next question, please.

Sumit Malhotra from Macquarie Capital Markets.

One numbers question to start, probably for Luc or Rob Pitfield. There's a couple of references in the report to shareholders regarding a onetime provision for credit loss recovery in Mexico regarding a mortgage support program. Did you provide a number for how much that was?

Yes, it's about CAD12 million.

CAD12 million.

CAD12 million, CAD14 million.

Okay, so it sounds like Mexico had a few back and forth items this quarter with the expenses on loyalty, the fraud and then this provision recovery as well?

That's correct, Sumit.

Okay. And I hate to this, but one more crack at expenses, if we can, just to try and get this straight. I think Scotiabank's been more open than most of your peers in that expenses usually follow a very seasonal pattern at this bank. And even if I forget about the compensation side of it and just look at the non-comp expenses, it seems like you rise throughout the year, peak in Q4, and then we always have a pretty sizable drop from Q4 to Q1. And I think some of the concern on our end is that we didn't really see that drop in non-comp costs to begin 2011. So my question would be forgetting about the impact of DundeeWealth, do you feel that perhaps we don't see as defined a pattern of growth as 2011 continues for these costs?

Sumit, it's Luc. Fair question. In reality, when you take a look at year-over-year change in Q1 over a five-year period, it has actually been relatively volatile going from 10.4 to minus 3.2 to plus 20.4 to zero to 13.8. So while the changes this quarter relative to last year are significant, it's not the first time that it's happened. As I mentioned earlier, I do believe that the expenses will decrease as we go through the year, probably still elevated in Q2 and will normalize more in Q3 and Q4.

Let's wrap up with one for Anatol on business lending. Obviously, the corporate book has been a source of strength for Scotia for a long period of time. If my numbers are right here, looking at the public disclosure, on commercial lending in Canada the Bank is fifth amongst the big five Canadian banks and you talked about a strong pipeline, but from the supplement the level of business loans outstanding doesn't look like it's changed very much in the last couple of years. Please correct me if my numbers are wrong here, but just want to get a little bit more color on what exactly you're thinking about when it comes to business lending in Canadian Banking and how that may offset some of the slowdown you talked about in retail.

Right. Sumit, in the commercial segment, we have different segments within there. So just to highlight that.In terms of the commercial pipeline, the mid market segment, we're showing some very good both demand and pipeline and that's what I refer to in the comments. I also talked about the real estate book, where we laid off over the last year. So what you're seeing there is we're seeing a very strong pipeline in the commercial book. Our real estate portfolio had a drop in it and it's coming back. We're back lending into that segment on a secured basis and in market -- in central markets like Vancouver, Toronto, et cetera. So, I think what you're seeing is the net figure and my comments were about the individual segments.

So that CAD24 billion number I see on page four of the supplement in business loans and acceptances, you've had one part decreasing, other parts of the book increasing and is it fair to say you feel that the CRE slowdown has run its course. Now we should see that CAD24 billion start to increase?

I think what we're going to see is in the commercial market we're going to continue to see growth and we're seeing that already. And in the real estate market, as we go forward there will be a run-off of the existing real estate portfolio because these are construction loans to builders. So we will be net up, but it will be a slight or small amount. So there will be an increase, but it won't be a big jump because we do have run-off in the real estate portfolio.

Thank you for your time.

Okay.

We have time for one last question.

Michael Goldberg from Desjardins Securities.

Now that the DundeeWealth is done, can you just bring us up-to-date on the original indication of CAD0.12 accretion by year three? Has this changed? Is there anything that you could tell us nearer term? And beyond that, how does the investment in CI continue to fit in?

Michael, it's Chris Hodgson. In terms of the longer term outlook for DundeeWealth, we feel we're on plan to deliver what we planned from a business perspective in terms of net income and other opportunities. We made some announcements yesterday on aligning the money management aspect of the business and there is a tremendous amount of work that's gone on on that front. We continue to see very strong sales growth. So when you put the Scotia Asset Management and DundeeWealth together in terms of the mutual fund sales, we were number one in net sales in the quarter.

So everything is moving along well from that perspective and we continue to work with David Goodman and the management team to really expand the growth opportunities for that business. So we're pleased with the developments there. As it relates to CI, as indicated in my comments, CI continues to be an important investment for us. The stock has moved up recently. They improved their dividend. We gave them a few mandates back in the fall, so it continues to be an important part of the equity earnings that we get in the global wealth business. And we continue to be happy with the position that we have at this point.

And your intention with it?

Well, I just told you what the intention is. We're happy to collect the equity earnings. If the stock continues to move up, we're pleased with that and also dividends increase. All the more power to CI and the management team.

Okay. Thank you.

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

Ladies and gentlemen, that does conclude our conference call for today. Thank you for participating. You may now disconnect your lines.