Bank of Nova Scotia (BNS) 2011 Q3 法說會逐字稿

I'm Luc Vanneste, Chief Financial Officer. Rick Waugh, our CEO, will lead off with the highlights of the 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 the respective businesses for the remainder of 2011. Anatol von Hahn will discuss Canadian Banking, Brian Porter will cover International Banking, Chris Hodgson will discuss 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 announce another good quarter of solid performance, a quarter that demonstrates our ability to earn through challenging times, by remaining focused on our core businesses, and following strong risk management practices. While we are not immune to macro volatility, our consistent execution of our straightforward strategy, combined with our well-diversified businesses, has continued to deliver sustainable profitability and growth.

So Scotiabank generated net income of almost CAD1.3 billion this quarter. Our earnings per share were CAD1.11, up 13% from the prior year, while our return on equity was a very solid 17.8%. The credit environment continued to be benign, and performance continued to improve, as evidenced by lower loan loss provisions this quarter. We also experienced lower non-performing loan formations.

Again this quarter, each of our business lines made a solid contribution to our earnings. Canadian Banking saw volume growth in residential mortgages, and in small businesses and commercial lending. While Alaska growth was partially offset by ongoing competitive pricing pressures, net interest margin was essentially in line with the prior quarter. International Banking reported a solid quarter, and delivered good asset growth in Latin America and Asia.

In Global Wealth Management, earnings were driven by both the wealth and insurance businesses. The integration of DundeeWealth continues to proceed very well. And finally, in Scotia Capital, challenging market conditions negatively impacted trading revenues in fixed income. This was, however, partially offset by higher client trading in precious metals and foreign exchange, as well as strong performance in lending and investment banking.

From a capital standpoint, we continue to benefit from high quality capital, and a strong ability to generate internal capital, which resulted in an increase in the Tier 1 capital ratio to 12.3%. We are also very well-positioned to meet the Basel III requirements, and we expect that our Tier 1 common equity ratio will be in the range of 7% to 7.5% by the first quarter of 2013, and this includes the highly punitive treatment for significant investments, which are deducted under Basel III, yet represents several billions of real value to our shareholders.

In summary, this was a solid quarter of high quality earnings, with the results we are reporting today, we fully do expect to achieve our targets for the full year. And with that, I'll now turn it over to Luc and the rest of our management team.

Thanks, Rick. Slide 6 shows our key financial performance metrics. The prior quarter figures exclude the one-time acquisition-related gains.

Looking at year over year changes, Q3 earnings benefited from solid broad-based organic growth, increased contributions from acquisitions, most notably DundeeWealth, and lower loan loss provisions. This was partly offset by higher expenses due to acquisitions and investments in growth initiatives, the impact of lower trading revenues, and a strong Canadian dollar. The provision for credit losses was CAD243 million this quarter, down CAD33 million from last year, due primarily to lower provisions in both International Banking and Canadian Banking, as well as a modest reduction in our general allowance, partially offset by a shift from net recoveries to modest provisions in Scotia Capital. Return on equity for the quarter, at 17.8%, remained very strong.

Moving to revenues on slide 7, revenues during the quarter were almost CAD4.4 billion, an increase of 13% from last year. The year over year increase reflected higher net interest income, resulting from asset growth in Canadian mortgages and commercial loans internationally. Margin was unchanged from last year. The other income increased 21%, due to contributions from recent acquisitions, both in transaction-based fees and higher securitization revenues. Partly offsetting the increases were lower trading revenues in fixed income, and the negative impact of foreign currency translation.

Quarter over quarter, net interest income was up 6%. Asset growth continued, albeit most of the growth came in the form of low spread assets, which had a modest negative impact on the margin. 3 additional days in the quarter also contributed to the higher net interest income. Other income was down from last quarter, primarily due to lower trading revenues in fixed income.

Turning to slide 8, non-interest expenses were up 18% to CAD358 million from last year. Excluding the impact of foreign currency translation, new acquisitions, and performance-based compensation and benefits, expenses were up 4.5%. This moderate increase was primarily from higher staff and growth from new initiatives, salary increases, and higher premises costs. We also experienced moderate increases in advertising and business development, and technology, again due to growth initiatives. Comparing to the prior quarter, expenses were essentially flat. Higher remuneration expenses resulting from a longer quarter, and higher staffing levels, were partly offset by lower performance-based compensation and professional fees.

Turning to capital, you can see that the Bank continues to maintain a strong capital position. Both the Tier 1 and tangible common equity ratios increased again this quarter, to 12.3%, and 9.6% respectively. The increase was driven by internally-generated capital and the issuance of shares through the Bank's dividend reinvestment plan, partially offset by growth in risk weighted assets. Our capital ratios remain well above regulatory minimums and continue, to be very strong by international standards. As Rick mentioned with respect to the Basel III requirements, we expect that with our strong internal capital generation, our common equity Tier 1 ratio will be in the range of 7% to 7.5% by the first quarter of 2013.

Now turning to the business line results, beginning with Canadian Banking on slide 10. Net income was CAD461 million, up CAD19 million from last year. On a year over year basis, total revenue increased by CAD28 million, or 2%. Net interest income was also up 2%. Average assets increased 6%, due to growth in residential mortgages, direct consumer auto loans, and commercial lending. The asset growth was largely offset by a modest decline in net interest margin, which was impacted primarily by the growth of lower yield mortgages and continued competitive pricing pressures.

Deposits also rose, with strong growth in each of retail, small business and commercial deposits. Provisions for credit losses were down CAD18 million to CAD145 million. Lower retail provisions were partially offset by higher commercial provisions, related to 1 account, as well as the benefit last year of a CAD6 million reversal of the automotive sectoral allowance. Expenses were up 6%, due to the higher pension costs resulting from changes in actuarial assumptions, as well as higher performance-based compensation.

Quarter over quarter, assets rose 2% from growth in personal and commercial lending. The margin was relatively unchanged, while net interest income was up due to growth in residential mortgages and the longer quarter. Higher credit fees in commercial banking increased other income. The provision for credit losses was flat quarter over quarter. Expenses increased 8%, due to the longer quarter, and generally higher volume-related expenses.

Moving to International Banking on slide 11. International Banking's net income in the quarter was CAD350 million, down from a record Q2, but CAD58 million higher than last year. Year over year revenues were up 6% due to broad-based organic loan growth, especially in commercial lending, as well as deposit growth, and the positive impact of acquisitions. Partially offsetting these items were lower securities gains. Provisions for credit losses were down CAD18 million to CAD120 million this quarter, following general economic improvement. Expenses were up 11%, primarily driven by expenses associated with new acquisitions and investments in growth initiatives in Mexico, Chile and Peru. The significant decrease in the tax rate this quarter reflected a non-recurring future tax asset adjustment to last year.

Looking now at the quarter over quarter, net income was down CAD52 million, entirely due to last quarter's CAD52 million in negative goodwill from the recent acquisition. Average assets were up 4%, due to sustained growth in retail and commercial loans in Peru and Chile, and commercial loans in Asia, Peru and Mexico. We also saw low-cost deposit growth of 3% across the division. Loan loss provisions increased from last quarter due to higher provisions in commercial lending. Retail provisions were unchanged. Expenses were up 9% from the previous quarter, as a result of higher investment spending to support future growth, and the effects of the longer quarter and seasonality.

On slide 12 you can see that Global Wealth Management generated net income of CAD256 million this quarter. Year over year, revenue growth was largely a result of our acquisition of DundeeWealth, combined with solid results from the existing wealth and insurance businesses. Excluding DundeeWealth, assets under management and assets under administration grew 13% and 10% respectively, and drove growth in fee revenue. Of the total revenue, approximately 85% was attributable to Wealth Management, and 15% to our insurance businesses.

Quarter over quarter, excluding both the CAD260 million acquisition-related gain, and the CAD27 million integration costs, net income was flat. Higher earnings in asset management and insurance were offset by lower earnings in the brokerage business, resulting from weaker markets, and lower trading activity. Comparing against the previous quarter, AUM and AUA each declined 2%. Expenses were down, in line with lower revenues.

Looking at slide 13, Scotia Capital recorded net income of CAD289 million, a decline of 5% from last year. Our niche approach, combined with the diversification of our wholesale businesses, has helped us through these challenging markets. Year over year, average assets increased CAD20 billion, or 12%. Most of this increase was due to higher level of securities, supporting the expansion of the fixed income business, and to a lesser extent, in precious metals loans. Higher investment banking revenues and credit fees in corporate lending were partially offset by lower trading revenues, mainly in fixed income. This led to an increase in revenue of 5%.

Provisions for credit losses increased from a CAD25 million reversal last year to modest provisions this quarter. The prior year included an CAD18 million recovery from the automotive sectoral allowance. Non-interest expenses were up 17%, reflecting higher remuneration and benefit costs due to growth initiatives in the trading businesses, growth in support costs, and an increase in performance in stock-based compensation. Quarter over quarter, net income declined 19%, reflecting challenging conditions in capital markets.

The decline in revenue was largely driven by lower performance in the fixed income business, which was partly offset by high revenues in institutional equity, foreign exchange, and precious metals. Net interest income was aided by higher interest earned on US auto-backed consumer loans. The decline in expenses was mostly attributable to lower performance based compensation. The provision for income taxes increased this quarter, as last quarter included a higher level of tax-exempt income.

I'll now turn to the Other segment, which incorporates the results of Group Treasury, small operating units, and certain corporate adjustments. The Other segment reported a net loss of CAD71 million this quarter, compared with a loss of CAD181 million in the same period last year. Year over year, the Other segment benefited from an increase in wholesale rates used for transfer pricing, and a favorable change in the fair value of financial instruments used for asset [and value] management. Increased securitization revenues and higher net gains on securities also added to the performance.

This quarter, the provision for credit losses also included a CAD30 million reduction in the general allowance. Quarter over quarter, performance was impacted by higher net gains on securities and securitization revenues, partially offset by decline in the fair value of financial instruments used for asset and liability management purposes. This concludes my review of our financial results. I'll now turn it over to Rob, who will discuss risk.

Thanks, Luc. The risk in our credit portfolios remains well-managed. We continue to see a steadily improving trend in the quality of our loan portfolios, as measured by a number of key credit metrics, including net impaired loan formations, and the provisions for credit losses. Our specific provisions have been stable for the past 3 quarters, and were down 9% year over year to CAD273 million. The improvement in the credit quality of our portfolios allowed us to decrease the general allowance by CAD30 million this quarter, to CAD1.038 billion.

Our net impaired loan formations declined this quarter, and continued the steadily improvement that we have seen since the peak in Q2 2009. Our sovereign and bank exposures in certain European countries of concern, namely Portugal, Ireland, Italy, Greece and Spain, are not significant. Our market risk remains well-controlled and well within our risk tolerances. Our average one day VaR was CAD11.8 million compared to CAD12.1 million in Q2. There were 9 trading loss days in the third quarter, compared to 2 days in the previous quarter, reflecting greater volatility in capital markets. The losses were within the range predicted by VaR.

Slide 17 shows the trend in specific provisions over the past 5 quarters. As you can see, specific provisions have come down meaningfully in the Canadian retail portfolios, both year over year and on the quarter, whereas they have been stable in the international retail portfolios. Our Canadian retail portfolio remains extremely high-quality, with 92% of assets secured and relatively low exposure to unsecured loans and credit cards. The increase in the Canadian commercial provisions from the last quarter and a year ago reflects provisions set aside against one account this quarter. While the international commercial provisions have declined by CAD16 million year over year to CAD4 million, they increased from last quarter. Scotia Capital provisions were stable quarter over quarter, but up from net recoveries a year ago. As a result, our all-Bank PCL ratio of 38 basis points improved from 43 basis points a year ago but remained unchanged from the last 2 quarters.

Slide 18 shows the Bank's counter-party exposures to certain European sovereign and bank credits. As you can see, we do not have any sovereign exposure to Portugal, Italy, Greece or Spain. The Irish sovereign exposure of CAD210 million is largely in the form of central bank deposits, resulting from regulatory reserve requirements to support our operations in Ireland. With respect to exposures to banks, we do not have any exposure in Greece. The bank exposures of CAD1.1 billion in Italy relate primarily to precious metals trading and lending activities. The bank exposures in Portugal, Ireland and Spain are not material. As for trading and securities exposures to these countries, they are not significant.

And to summarize, our asset quality remains strong with the retail and commercial portfolios performing well, and our corporate portfolios showing their continued strength. Looking ahead with 3 quarters of the fiscal year behind us, we expect overall 2011 provisions to come in below the 2010 level, as declines in retail and commercial provisions should more than offset a modest increase in corporate provisions, due to lower recoveries. That concludes my comments on risk, and I'll turn it over to Anatol.

Thank you, Rob. Q3 was another successful quarter for Canadian Banking. We gained market share in a number of important areas, including core, retail checking and savings deposits, small business assets, and consumer auto lending. Looking forward, we believe that we can continue to succeed by remaining focused on the priorities that we outlined to you in prior quarters, delivering growth in payments, deposits, and in the sale of products for our partners in Global Wealth Management, while protecting our other core franchises.

Looking at assets, in the near and medium term, we continue to see opportunities for growth. On the retail side, the mortgage market has begun to slow, and price competition has been intense, but volume growth remains positive and we see that continuing. We may also be starting to see increased pricing discipline in the market. In addition, we have a leading position in consumer auto financing, a market which remains fairly strong, and our new variable rate product has been very popular. In commercial banking, our pipeline is good, and we see continuing opportunities for volume growth in a variety of sectors.

With respect to deposits, we have had good growth with average volumes up CAD5 billion or 5% year over year, with increases in each of retail, small business, and commercial banking. This solid growth reflects our strategic focus on deposits and payments, and the introduction of new products like the Money Back Checking Account, the first of its kind in Canada, as well as the continuing roll-out of our Let the Savings Begin campaign. As I mentioned earlier, the result has been market share growth in core accounts and higher transaction fees.

Looking at the margin, the current low interest environment has presented challenges. Our margin stabilized this quarter, but remains under pressure from consumer preference for relatively lower-yield variable rate instruments and from intense competition in a slower growth, low interest rate environment. Going forward, our margin movement should continue to reflect these market realities, and will move in line with our peer group. Retail provisions for credit losses have come down year over year, and we expect them to remain relatively stable going forward. In Q3, commercial PCLs increased, due to a single connection. As I have said in previous quarters, commercial losses are lumpy, and in general, we do not see them increasing from 2011 levels as we move into 2012.

Lastly, we continue to manage our expenses to generate future earnings. Expenses are higher this quarter, reflecting 3 more days in the quarter, some one-time items, and initiative spending. Cost control is part of our culture, and will continue to be so in 2012. Again, this was a good quarter for Canadian Banking. We believe that we are focused and have the opportunities to perform well in an uncertain environment going forward. With that, I'll turn it over to Brian.

Thanks, Anatol. International Banking had a solid third quarter, generating good growth in revenue and loan volumes, as well as increasing our low-cost deposit base by 3% on the quarter. Loan growth was well-balanced between commercial and retail, with commercial volumes increasing strongly by 4% on the quarter, and retail volumes increasing by 2%. We are optimistic that our assets and underlying revenues will continue to show growth, driven primarily by our various organic growth initiatives.

Driving sustainable growth across our diversified platform remains a key focus for us. We have considerable room to grow our commercial business, through a combination of improved processes, expanded coverage, and a good pipeline. In our retail business, we continue to make good progress on expanding our sales capacity, as well as improving our sales productivity and processes. Margins were down slightly this quarter, but they remained flat year over year. Looking ahead, while we continue to proactively manage margin pressures in certain countries, overall, we expect margins to remain relatively stable.

Turning to credit quality, our commercial PCLs increased this quarter, while retail provisions were unchanged. We are comfortable with our retail and commercial portfolios, and expect that the cyclical improvements we've seen in loan losses will begin to level off. Our investment this year in sales-focused initiatives such as call centers, telemarketing and other non-branch sales and service improvements have added over 1,000 new employees, particularly in Mexico. As a result, expenses are elevated somewhat, however, we are starting to see positive results, and are confident that they will add significant strength to our underlying franchise.

Finally, in terms of acquisitions and integrations this quarter, we closed our second acquisition in Uruguay, adding Nuevo Banco Comercial to our Pronto! acquisition last quarter. Our integrations in Puerto Rico and Thailand continue to progress as planned. We remain interested in selective acquisitions, and we are well-positioned to respond to opportunities in the marketplace. In summary, notwithstanding current global pressures, we remain focused and optimistic about the growth prospects in our regions. I'll now pass it over to Chris.

Thanks, Brian. Global Wealth Management had solid performance in Q3, led by our Canadian mutual fund and global insurance operations. Recent market weakness and volatility, though, will have some impact on our financial results in Q4. However, we do not expect the impact -- or we do expect the impact to be mitigated by our global insurance businesses, which continue to perform strongly. Certain of our wealth businesses will be less impacted than others, including our global private client business, and our international wealth management business.

We have a strong base of AUM and AUA to drive our top line in wealth going forward. Our AUM and AUA are up 110% and 49% respectively, year over year. We're pleased to see that these asset levels were not significantly impacted by the market volatility in Q3, as net sales mitigated market declines. Based on the most recent IFIC data from June, we continue to rank number 2 among Canadian banks and mutual fund assets with market share of 18.7%.

The outlook for our global insurance businesses is strong. In Canada, we're making steady progress, increasing the cross-sell of insurance products, and we've been successful in rolling out new insurance products, both creditor and direct. Internationally, we continue to enjoy increases in sales of insurance, as a result of our investment in contact centers, particularly in Mexico. Across Global Wealth Management, we will continue and heighten our scrutiny of expense growth and new initiatives, mindful of the uncertainty in the current operating environment.

Our investment in CI continues to be an important strategic investment for us. We continue to work with the management of CI to improve the relationship between our 2 organizations. And finally, we recently announced a significant reorganization within Global Wealth Management, creating 2 new global mandates. A new Global Asset Management business unit, run by David Goodman, will combine dynamic funds, Scotia funds and our international mutual fund businesses. A new Global Wealth Distribution business unit, run by Barb Mason, will bring together all of our distribution channels, including the DundeeWealth advisor network, our international brokerage and private client businesses, and all of our Canadian channels. We are confident that this structure will leverage our acquisition of DundeeWealth, and drive future growth and performance for our business. With that, I'll pass it over to Mike.

Thanks, Chris. Scotia Capital continues to benefit from diversification of our products and geographies. Global corporate and investment banking performance this quarter helped offset lower results in Global Capital Markets, which was negatively impacted by challenging market conditions. Total revenues fell quarter over quarter, driven by fixed income, however, revenues increased in equities, foreign exchange, and precious metals. We do expect market conditions will continue to present some headwinds, but our diversification and emphasis on client business will mitigate that impact.

Growth initiatives continue to positively impact our results, and while this has led to higher average assets, we have been careful to maintain our discipline on risk exposures. In global corporate and investment banking, the declining trend we have seen in loan volumes has stabilized to the point we showed modest growth in the quarter, and we are cautiously optimistic on future loan growth. We anticipate some stress on corporate loan margins, given the low interest rate environment, as well as competitive pressures, but will maintain our lending discipline and strong execution. We expect to see modest M&A activity going forward, recent activity has been centered more on equity or public debt issues than on bank debt.

The credit quality of our loan portfolio remains strong, and we expect PCLs to remain modest. We have reported lower investment banking revenues this quarter compared to Q2, mainly advisory fees in Scotia Waterous, however, the pipeline for new equity issues and M&A is reasonably strong. And finally, Scotia Capital will be hosting an Investor Day on October 17th in Toronto for analysts and institutional investors. The event will also be webcast, and we're looking forward to profiling our individual businesses at that event. With that I'll hand it back to Luc.

Thanks, Mike. That concludes our prepared remarks. We would now be pleased to take your questions. Operator, can we have the first question on the phone, please?

Your first question comes from the line of Steve Theriault of Bank of America-Merrill Lynch. Please go ahead.

Thanks very much. A question to start for Mike Durland, please, with respect to the fixed income trading number. Is there anything that you did during or subsequent to quarter-end that you think will help to dampen the volatility for Q4 and beyond, or is it really simply that this line will be more volatile going forward, given some of your more recent investments? And also, when I look at slide 46 in the slide deck, it indicates that you had nine days of trading losses in the quarter. I'd be interested if you could tell us how many days of trading losses you had, just for the fixed income business.

Okay. Yes, fixed income was down about 58% Q-over-Q in terms of revenue. We had very choppy markets, and also very lethargic business conditions. There just wasn't a whole lot of client activity, so those set of conditions aren't particularly constructive for running that type of business. We don't think in the near term we're going to see a change to that environment, so we believe that business line will produce more modest revenue numbers going forward the next few months. Certainly over that quarter, you asked a little bit about activity, we have been derisking our businesses, and feel very good about the steps we've taken. So other than that, in terms of trading days, I don't have that number in front of me, in terms of how many were fixed income versus the other business. We actually rolled it up, and looked at it on an aggregate business basis.

One more if I might, probably for Rick. I think, given that you remain in the middle of your target payout ratio range, I probably expected you'd be back to your typical practice of raising the dividend every second quarter. Should we interpret the decision not to move this quarter, as maybe the Board sending a bit of a cautious message, or is it just that you're not at the stage yet where you're reviewing that every second quarter, as a typical practice?

We look at our dividend every quarter. We obviously think dividend increases are important, and we were one of the early and first banks to do so this year. We are also mindful that we are in a very high return on our reinvestment of earnings. We have almost an 18% return on equity, and we are subject to obviously this environment, growth orientated, so it's a balance between what our shareholders should require in dividends, and secondly, what the opportunities we see forward for growth, and just prudent management. So I wouldn't read anything into one or two times a year or whatever, because really -- and of course, the world is changing all the time, and we see it as one of opportunity, so we want to balance out dividend growth with the fact that we have strong reinvestment opportunities, and earn a high return on invested capital.

Thank you.

Next question, please?

Your next question comes from the line of Robert Sedran of CIBC. Please go ahead.

Good afternoon. Luc, on the expense side, every business had mentioned during their comments something about expense control and certainly on previous calls, we've heard about that the expense run rate would probably stay elevated through 2011. If we turn to 2012, is it fair to assume that the pace of growth may slow in that year, and perhaps return to positive operating leverage, or are some of these increases or the increased growth rate we're seeing, a little stickier, and going to linger beyond just 2011?

I think there will be some decreases. One of the things that has impacted our expense base in 2011, Rob, is the relatively significant increase in pension and benefit costs. That certainly has an impact on Canadian Banking, probably more so than the other business lines. That being said, we continue to focus on growing the top line, revenue growth is important, so we continue to invest in initiatives that will over time, and hopefully in a relatively short time, will pay dividends.

So when you take a look, from a macro perspective on a quarter-over-quarter basis, so Q3 this year versus Q3 last year, we had a growth rate of about 17.7%. We're an acquisitive organization, so a good chunk of that growth in expenses relates to acquisition. In this particular case, it's in excess of 8.5%, so you take that out of the equation. You get to sub-10%, I referenced that our compensation costs have increased. It's not only the pension. There's stock-based compensation year-over-year that has increased. Performance compensation as well, but clearly, you have to earn that, before you pay through that. And merit increases.

So when you take that out of the equation, you get down to our expenditures relative to business expansion, and you heard from certainly Brian, and from others, that we are increasing our headcount in terms of some key initiatives that we have within international, the contact centers, that's not just headcount. that's also premises, that's technology and as well you've seen both in the local Canadian environment and in the international environment that we continue to advertise and support and get our name out there, and so a combination of all of that runs you into the 4% to 4.5%. So you really have to bifurcate it to understand the numbers.

Even if we're not assuming expense declines, at the very least some of these -- like the contact centers, and that kind of thing, we shouldn't expect to see that growth in that kind of expense, year on year.

Going back to your question, will we be back into operating leverage in 2012? At this point, Rob, I can't commit to that, but certainly it will -- the negativity that we see in operating leverage so far in 2011 will certainly decrease significantly.

Rob, it's Rick. Let me give you a little bit more context, because at this time last year, we made some I think significant decisions that we were through the worst of that financial crisis, and we were well-positioned to move forward. And of course, most significant of that was the creation of a fourth business line, and that has created a -- we've had to augment a management team, and then the acquisition came along, and what have you.

We also, as Luc referred to, significant increases in branches in Peru and Mexico, and Brian did that, and headcount. The call centers, the contact, these are outward bound call centers, all that to capture the growth in these emerging markets that we were in. So we started to make use of what we, and still believe, is the relative opportunity, but there were -- there was sort of after two or three years of tough slugging on the cost side, there was an unleashment.

Where we are today, and we are also mindful of the course, did we call it right last year in terms of economic recovery, we do not see a double dip. Obviously growth rates are going to be mitigated, but I think we've chosen our markets well, obviously in the Americas and Asia, but also what we can do here, as you heard Chris said, in Wealth Management. However, we have several cost initiatives, some of which were began -- always are in there, and some that we have plan Bs and Cs, but right now, we think that you can see in the top line revenue growth, you can see in the market share, and again, our cautious but optimistic outlook that in these markets we have chosen, we can bring the revenue, and you can certainly see it in the net profits.

So this year that we're in is a high year. The rate of growth next year will be significantly different and more mitigated because of these issues that I've seen, and -- but if things get worse, not in our forecast, we have the ability and the track record to react in a prudent -- in a very relevant way.

Next question, please?

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

Good afternoon. My first question is for Brian Porter. Brian, last quarter you made the comment that you felt margins -- net interest margin in international would remain somewhat stable, and you echoed that today. What's interesting is we've seen long-term interest rates take a significant step lower over the last quarter. So I was hoping you could refresh me a little bit here about NIM trends with international, specifically, do you feel that stability maybe relative to some of the other business lines of the Bank is more due to a lesser level of competition in some of the markets you're in? Or is the interest rate structure somewhat less important than maybe we see in the Canadian Banking or corporate loan book?

Sumit, I'd make the comment that the NIM structure in international is a little more complex for obvious reasons. This quarter, for example, we saw margins compress in Peru a bit, and that was a function of competition in the credit card portfolio. We saw margins better in both Chile and Mexico. We really hadn't forecast. There's a lot of variability in the international NIM, and we expect it to be within the same range, as Scotia Capital's commented here, they've seen some pressure on loan trends. In most markets internationally, we have not seen that kind of pressure. I would also add from a funding perspective, in this type of environment, despite the dislocation in some markets, we're finding our core markets, Peru, Chile, Mexico and Asia, funding very well. There's an excess of local liquidity, and there's an excess of US dollar liquidity in those markets.

In some of the -- I guess Anatol made this comment about Canada, that you're seeing some step back in the level of competition, I'm paraphrasing what he said. Is that similar in some of your international markets where, I'm thinking of Peru, Mexico, Puerto Rico now I think fits that criteria as well that you have relatively top heavy oligopolies. Is it similar structure to what we see in Canada?

It is in most marketplaces, but I'd say the competition is fierce. Others have asked me if this question, saying have you expected Spanish banks to ease off a bit here given the troubles that they have in their home market and that is not the case. Competition is as fierce as always, whether it's BB base and there are HSBC or Citi in those markets, or some of the local banks for that matter.

Last one from me. If I direct this one to Luc. On page 8 of your supplement, where you show us your Other or Treasury segment, if I look at your asset balance here, Luc, it's increased about CAD22 billion so far in 2011, that's certainly a large increase. Could you help me out with what exactly the drivers of asset growth in this segment are, what would explain such a sizable increase?

I'm going to pass that over to Jeff Heath, our Group Treasurer, relates to Treasury.

Yes, basically, we've been building up our deposits with banks, mainly depositing money into central banks. We're able to attract funds at attractive rates, and basically bulk up deposits in those places.

Okay. Next question, please?

Our next question comes from the line of Peter Routledge of National Bank Financial. Please go ahead.

Thanks very much. I'll pick up from Sumit's question. Same page, looking at total deposits, at page 8 of the supplemental pack. Total deposits from the end of the year, end of 2010, go up CAD32 billion to CAD157 billion, so just two related questions.

First of all, it appears, a big part of that appears to be funding an increase in assets at Scotia Capital. Through the year, you're putting on assets at Scotia Capital. What was driving the growth in the balance sheet at Scotia Capital and are you having any challenges in this environment, unwinding that, or are you? And then the second question is, you look at the very good loan growth you've got in Canada and International Banking, growing faster than deposits, so I presume you're going to continue to rely on Treasury to help fund the gap. How much do you expect the cost of all bank funding to rise in order to comply with Basel III liquidity? Just round numbers, interest expense, holding all else equal, what kind of basis point increase in cost of funding might you expect as a result of having perhaps to term out some of your wholesale funding? Thanks.

Okay. It's Mike Durland, I'll start with Scotia Capital. Over the past 5, 6 quarters, you've seen some growth in our securities line that relates to the expansion of our fixed income distribution business. That has leveled out. So if you look on a spot basis, you start to see those numbers stabilize and if you look at those securities, they're all highly liquid securities.

Okay. So there's no negative spread or anything on that particular trade?

No, no.

Okay. And then just on the gap funding it and the potential for rising cost of funding?

Yes, I think in looking at Basel III metrics, we think the cost of managing that is quite manageable. I don't have it in basis point terms, but a manageable amount, and in looking at --

Will we see it in the all-bank NIM, or will it just sort of get lost in the normal variation?

I don't think you'll see it as something significant in NIM, no.

Okay. Thanks. And my compliments on breaking out those aggregate balances. I think you're the only bank that does that.

Thank you. Next question, please.

Your next question comes from the line of John Reucassel of BMO Capital Markets. Please go ahead.

Thanks. Just a question for Rick. Rick, you talked about your EPS, on track for EPS growth this year. When you look at next year, I know it's initial, but you talk about -- we heard about spreads, credit may be flattening out. Is 7% to 12% still a reasonable range for you, or is it a little tougher with the less -- the negative operating leverage?

I'm not going to give you a range right now, but let me say -- and of course we're now getting into the heavy lifting for 2012, and we've got to focus on somewhat a normality. With this volatility, there's always, every one of us has got to wonder what the heck is going on there, and how does it affect us, but as we look at every one of our businesses, where we're positioned and even these expenses we just talked about a few minutes ago, and what we are seeing in top line revenue growth, and with all the headlines you see in the last 3 or 4 weeks, I remain cautiously optimistic, and with a fair amount of self-confidence. So when we're setting our targets, which we will start to do, I don't think you're going to see -- and I'm not committing to a number, but you're not going to see a drastic change.

You've seen in the quarter-by-quarter, not just this last three months but over several quarters now, sustainable revenue growth during very, not only volatile times but very low growth rates in lots of markets. I see the growth rate in our markets, it's not back to what it should be, but it is growing, and therefore, our ability to execute and bring it down to the bottom line, in terms of our net earnings per share growth and that, and our return on equity, I think are very sustainable from what we learned in the past, and we'll take a hard look at it going forward, but what you see is what you're getting, and we'll see what modifications we'll have to do, but they won't be I don't think too meaningful.

Great. Just one last question for Chris. Chris, as you know, DundeeWealth still does some disclosure, does file a statement, and it looks like year-to-date they've earned about CAD20 million. I guess there are one-time items in there, could be higher, closer to CAD30 million. Is that a good number to look at the earnings contribution from DundeeWealth year-to-date, or in the quarter, or some indication to the Wealth Management business?

No. Actually, the run rate on DundeeWealth is in the range of about CAD35 million, CAD35 million, CAD36 million per quarter. And I would think that it's going to become a little more difficult to see that, because we will be retiring this as a related issuer over the course of the next while, and we'll be taking some of our Scotia asset management businesses and putting it into this, so you're going to have combined numbers. But to answer your question, the number is closer to CAD35 million, CAD36 million per quarter and rising.

Thank you.

Next question, please.

Your next question comes from the line of Brad Smith of Stonecap Securities. Please go ahead.

Yes, thanks very much. I had a question with respect to the capital in the international business. I note that the return on economic capital came in at 13.6%. I'm just curious about over time, that seems like a very under leveraged business, if you just go through your calculation, how you get to the 13.6%. It looks like it's leveraged about 10 times. Your domestic bank is leveraged about 40 times. At what point do we expect to see the leverage being able to creep up in the international and drag that return up with it?

Yes, I'd make a couple comments, Brad. One is that if you break it down by region or country in terms of return on equity for our businesses, the lowest would be Chile and Mexico, and Chile is a function of the goodwill we took on when we bought Banco del Desarrollo, and Mexico is just a function of the operating climate in Mexico now, and it's a good point to comment on that. We see a lot of banks in Mexico doing things that would be outside our risk appetite. We have a good mortgage book in Mexico, good auto lending book, a good corporate lending book and a good commercial business, but we see some activities in some sectors of the business that we're not comfortable with, so in terms of risk appetite, so some banks might have a higher ROE versus Scotia in Mexico, but that's a function of risk appetite at this point in the cycle.

Terrific. And then similar comment or question with respect to Scotia Capital and the economic equity supporting that business. As I look at this, the earnings are down 17% year-over-year. The assets are up 12%. And the return on economic equity is up a couple of basis points, or a couple hundred basis points. It seems to me that the leverage has gone up substantially there, and I know that the new assets coming in from the fixed income side are liquid and low risk, but at the same time, the implication here is that the risk capital, the denominator has gone down by about CAD1 billion. Is there something else going on there?

It's Steve McDonald. Just a couple thoughts there. The economic capital attached to the corporate banking portfolio is reducing fairly substantially, as we've had relatively flat asset levels, and the quality of the portfolio has been improving. And then secondly, you did allude to the other issue. The asset growth that we've had is at the very high quality end in Mike's businesses, so they attract very little capital.

You're saying, then, Steve, that the decline in the risk capital that's being reflected in this top pack is related to the corporate banking portfolio, so about CAD1 billion of reduction in required risk capital related to that, because the highly liquid nature of the other, if nothing, would not put the capital up but would not bring it down either.

Yes, that's correct.

Terrific, thanks a lot.

Next question, please.

Next question comes from the line of Mario Mendonca of Canaccord Genuity. Please go ahead.

Good afternoon. Two quick questions that are pretty much just follow-ups on others. Around the discussion for deposits with banks, the explanation for what was going on there sounded fairly straightforward. The bank is taking advantage of some pretty low cost of funds, for Scotia in particular, maybe Canadian banks in general, and essentially just clipping a small spread there. That's what it sounds like you're doing. The question I wanted to ask is there -- what are the risks the Bank is taking in sort of having the balance sheet increase this way, or is this -- do you just view this as a very low risk endeavor?

A lot of the deposits are basically with central banks, so I would view it as a very low risk endeavor that we can alter very short notice.

What would the risk be, then, if rates were to decline from here? And you were not able to pick up the yield, and that spread actually declined significantly? I'm trying to figure if there's any, not so much asset risk, I'm not concerned about credit risk here, I'm more concerned about a change in the shape of the curve, for example.

There's very little interest rate risk in that growth. Basically, the assets are very short-dated, virtually overnight in most cases, and the liabilities are not all that long-dated either. So there's minimal interest rate risk.

I was correct in saying that you just clip a really small spread there, and it's low risk so you're content to do it as long as the market's content to fund you this way?

That's correct.

The second question then is, going back to the dividends, in Q4 2010, when the Bank raised the payout ratio to 40% to 50%, I think that came as a surprise to a few people, and then promptly raised the dividend in Q1 2011. At that time, there really wasn't much talk then about a lot of opportunities and sort of the decision to sort of retain capital. What I don't really understand is what's changed from then, when the Bank was sort of took the unusual step of raising the payout ratio to now wanting to retain, say, CAD0.03 per share, if that was a typical dividend increase.

Not that I want to dispute, but I think we've been very consistent on what we have said, and for one year we did not increase the dividend, but that was only four quarters. And we've consistently said, because we've consistently had a high return on equity, that we've continued this balanced strategy. And, so we did increase the payout ratio, because the world is not growing quite as quickly, and yet we're still having this high return on equity, so we're looking at this quarter-by-quarter, and the world is slowly -- it has its ups and downs, recovering. So I think we have a very consistent policy that hopefully is well-understood. If not, we'll have to continue to reiterate. And we will match dividend growth with opportunities and a high level of reinvested capital, and that conditions are there, and we continue to see them there.

You would say nothing has really changed from perspective Q4 2010 when you raised the target ratio today.

I think it's reflected the world had changed a little bit, and certainly our shareholders in the world and the great thing about dividends, they're real, and so the mix -- we did change the slight mix et al, but it really doesn't change the formula or how we view it.

Thank you.

Next question, please?

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

Thanks. Question is for Rick. Rick, Christine Lagarde says that European banks need urgent recapitalization, and there's European officials who pooh-pooh her warnings. Who's right?

I'm not going to stick my neck there. I have to head down to the IMF meeting in three weeks and meet these people. Europe is going under a lot of volatility. I just -- I'm in this IAF group, who have been part of the discussions when Greece and whatever, and I've been privy to some of it. I'm just glad we don't have any exposures there. There's been significant recapitalization of banks, in certainly the United States, but also Europe, and so I haven't talked to her specifically on this issue, but the IMF is in 2 or 3 weeks, so there has been a significant deleveraging of global banks, and that's what makes this volatility less worrisome to me, and I think some other knowledgeable people, than in 2008 and 2009, that the banking system is much more deleveraged.

Liquidity is much better and policy makers and even us in the private sector, I think are much more adept at dealing with these issues, so she's obviously a very knowledgeable person and the IMF is what it is. So I'm siding on with my colleagues in Europe that while the issues are significant, the European banking system, certainly the banks that I know over there, is in much better shape than they were in 2008 and 2009 when we had all the -- you know the banks, I won't name them. So it's a different environment, some we still can't be complacent about and watch but not the issues that we faced in 2008 and 2009 and one reason is there's been a significant recapitalization of both European and American banks.

Okay. Separately, a much less controversial numbers question for Luc. Slide 14 of the presentation, the financial instruments number in there, is this amount included in net interest revenue and if it is, is it trading net interest revenue or non-trading net interest revenue?

Sorry, what slide were you on, Michael?

I'm looking at slide 14, the Other segment.

Slide 14.

And the financial instruments number.

Yes.

In there. I guess my understanding is that is included in net interest revenue?

Yes.

Is it trading or non-trading net interest revenue?

Non-trading.

Thank you very much.

Okay. Next question, please?

Your next question comes from the line of Cheryl Pate of Morgan Stanley.

Just a quick question for Anatol. Just wondering if you can provide some color on the degree to which a lot of the initiatives on the deposits, and obviously we saw some strong growth there this quarter, was able to offset some of the pressure you would have otherwise seen on the margin, and how you think about that going forward, if you're able to continue growing the deposits at the sort of growth rates we've seen?

Okay. Two things. This is really a result of a strategy that was put into place well over, close to two years, a year and-a-half ago, where we started to focus in terms of both products, distribution, and aligning our objectives towards the deposit side of the house. We've had good results, if you look at our deposit side, both in small business, retail, and of late, also in the commercial side in terms of day-to-day banking relationships, that has come as a result of that.

So I see it more towards your second question. This is something that will continue. The focus in the Canadian bank is very strong on the deposit side. We're seeing good results and we expect that to continue to evolve. If you look at the last products that we've launched over the course of this quarter, they are both focused on the deposit side and on the payment side, which is really geared towards deposits in both cases.

Okay. Thank you.

Next question, please?

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

Good afternoon. Just reading into Brian Porter's comments on international loan growth, was pretty good this quarter. Do you have a number in constant currency, sequential and organic for loan growth? I know, that's a mouthful. But more importantly, like your comments were quite positive on the outlook. If you can flush that a bit more. And then for Rick, talking about expenses, and where you've got some discretion to pull back, if you see some big change in the macro, like would the answer be different in international versus Canada versus wealth? Is the Canadian Banking segment one area where you have more discretion?

Okay. I'll start, Gabriel. Is that average FX rates really had a nominal impact on loan growth in the quarter. CAD-US weakened slightly quarter-over-quarter but it's almost flat on. The other currencies, the Mexican Peso, Chile, Peru and Jamaican Dollar were relatively growth, so if you look at total average loan growth was 3% as we disclosed. If you look on it on a spot basis, FX-adjusted, it's 4%, so there's a slight difference.

Okay.

To answer the big question on cost, it's an important question, and I don't belittle it at all, but it's a granular question. It is revenue-driven and we measure. We measure always, and if we don't see the revenue coming, we will take some steps. Now, each market is different. For example, in Mexico we've added 35 branches in Mexico. We've added a call contact center, as we call it. I think that's about 1,000 people. Those are all revenue. I got a report just last week of the number of applications we're getting through the contact center, and it's very encouraging. We've got to watch that carefully, and believe me we measure.

Peru, we -- as Brian says, we've got again, another build a branch kind of issue. In Canada it's less branches, although we are doing it, and it's alternative delivery. These were revenue-driven and we're not -- so I think we can react if the revenue's not there, but we'll react in a measured way, because we're not a bank that announces big layoffs and whatever, because we have a longer term view and quite frankly, we have profitability diversified to take that. Having said that, look at our productivity ratio and look at it this quarter, and look at it every quarter, and so I think we're okay in that. It's 1,000 things. It's not one big layoff or one big closure of something. I don't see any of that in our forecast. But if the revenue don't come, then expenses don't come, and we'll pull it back and we've got lots of ways of doing that, so it's managing 1,000 different things. No big silver bullet.

Gabriel, I'd just mention, just add on what Rick said, adding somebody to a call center in Mexico is about a third of the cost that it would be here in Canada, just for perspective.

Right.

Thank you, we have time for one last question.

Your final question comes from the line of Darko Mihelic of Cormark Securities. Please go ahead.

Good afternoon. Question for Luc with respect to your Basel III comment, that you can get to 7% to 7.5%. Where are you currently now, and what are you assuming gets you there? Pure growth from earnings? I'm just curious, I just want to sort of understand how you get there and where you're starting from.

It's based on our current operations, Darko. So we referenced several times our ability to generate internal capital. We balance that with what we pay out to shareholders. So it's based on bank of know Bank of Nova Scotia where you see it today.

What's your current estimate of the Basel III?

We're not providing that information.

What's the big secret? I'm just curious.

I'll take that offline, Darko.

This forecast forward is a living forecast. It's based on revenue growth -- pardon me, asset growth, and a whole bunch of assumptions, multiple assumptions, and as I said in my comments, and we indicated 7%, 7.5%, that's not even including several billion dollars of real value that is not even included in the base, and in that number, and so look at our tangible net worth. Look at our GAAP. We're an accounting Company in that, and there's lots of information there. Models are models, and they're as good as the assumption. I bet you every bank whose got a 2,000 whatever, 15 model, whatever, we've all got different assumptions, and so that's why I think you can game any model, and we're not going to play that game, and we're giving you good guidance, and look at our financial numbers.

Thank you very much for joining us today. We'll see you next quarter. Have a great day.