Bank of Nova Scotia (BNS) 2011 Q4 法說會逐字稿

Good afternoon. Welcome to the presentation of Scotiabank's fourth quarter and 2011 annual results. I'm Luc Vanneste, Chief Financial Officer. Rick Waugh, our CEO, will lead off with an overview of our 2011 results. Next, I will go over the fourth quarter 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 2012. Anatol von Hahn will discuss Canadian Banking. Brian Porter will cover International Banking. Chris Hodgson will discuss Global Wealth Management, and Steve McDonald will discuss Scotia Capital. Rick will then sum up with our All Bank outlook for 2012. We will then be glad to take your questions. Before we start, I would like to refer you to slide number two of our presentation which contains Scotiabank's caution regarding forward-looking statements. Rick, over to you.

Thank you very much, Luc. We're pleased to announce that Scotiabank has continued to deliver sustainable profitability and growth in 2011, notwithstanding these challenging macroeconomic environments. Scotiabank again achieved record earnings in 2011. Net income was almost CAD5.3 billion, an increase of 21% from last year. Our earnings per share were CAD4.62, up 18% from 2010. The negative impact of foreign currency translation reduced the 2011 earnings per share by CAD0.10.

Our results benefit from record revenues. Top line revenue growth grew by 11% to almost CAD17.6 billion this year. We continue to generate high quality, sustainable, and diversified revenues. Return on our equity remains strong at 18.8%. Credit conditions continued to be favorable, and we saw loan loss provisions decline by CAD193 million.

Now, it's clearly difficult to forecast how and when the European crisis will end. Having said that, we believe that as the situation unfolds, Scotiabank is well placed to manage this and maintain growth. Our direct exposures to Europe are not large. We do not purchase any CDS or similar-type insurance contracts to reduce any sovereign exposures. Our exposures to European banks are limited to solid, highly rated institutions, and we have little bond or equity exposure to European banks. As Rob will discuss in a few minutes, all our credit portfolios are performing well, and market and operating risks are well contained.

Expenses increased from the past year as we continued to invest in our platform. Acquisitions contributed almost 50% of this increase. And, we continue to benefit from a leading productivity ratio this year of 54.4%. A high level of internal capital generation along with share issuance to support acquisitions strengthened our capital ratios. We continued to benefit from high quality capital and a very strong Tier 1 capital ratio of 12.2% and a tangible net worth ratio of 9.6%.

Even with macroeconomic challenges, all of our businesses contributed to the record results. Canadian Banking saw strong growth in residential mortgages, commercial lending growth, good growth in retail, commercial, and small business banking deposits. Higher transaction-based income is evidence of the success of our investments in deposit and payment products, and we continue to add customers as a result of several well focused marketing initiatives.

International Banking had record net income, which reflected the impact of acquisitions, as well as solid underlying revenue growth and lower loan losses with an attractive geographical footprint. Global Wealth Management had a great year, notwithstanding these volatile markets. Our acquisition of DundeeWealth, together with the strength of our existing wealth management businesses, yielded positive performance. Our Insurance business produced a solid and consistent contribution. The integration of DundeeWealth is going well and meeting our objectives. And finally, the diversification in Scotia Capital helped offset very challenging market conditions, particularly in the second half of the year.

Given the operating environment, we are especially pleased with our results. As you can see on slide five, we met or exceeded all of our financial metrics for 2011. Our earnings per share grew by 18% versus the target of 7% to 12%, and return on equity of 18.8%, near the top end of our range of 16% to 20%. These results reinforce the proven strength of our business model. Long-term strength, short-term flexibility, resulting from the diversification of our businesses, has provided a platform that allows us to balance stability with growth. With that, I'll turn it over to Luc to discuss our financial results in more detail, and at the end, I'll come back and give our outlook as how we see 2012 unfolding.

Thanks, Rick. Slide seven shows our key financial performance metrics for the quarter. Looking at year-over-year changes, Q4 earnings benefited from the contribution from acquisitions, broad-based asset growth, and stronger securitization revenues. This was partly offset by higher operating expenses due to continued investments supporting business growth, lower trading revenues, and fixed income and equities due to weaker market conditions, and the negative impact of foreign currency translation. The provision for credit losses was CAD272 million this quarter, and was comprised of CAD302 million of specific provisions and a CAD30 million reduction in the general allowance. Total provisions increased by CAD18 million from last year, reflecting higher provisions in International Banking, and Scotia Capital and lower provisions in Canadian Banking. Return on equity for the quarter was 16.6%.

Moving to revenues on slide eight. Revenues during the quarter were a record at just over CAD4.4 billion, representing growth of 10% from last year. The year-over-year increase reflects higher net interest income which increased due to growth of assets. Residential mortgages, as well as business and government lending, grew significantly. Margin narrowed 12 basis points due to higher volumes of low spread and non-earning assets as well as lower gains from the fair value of financial instruments for asset and liability management purposes.

Our income increased -- other income, sorry, increased 15% from last year, primarily due to the contribution from acquisitions. Trading revenues were significantly lower in fixed income and institutional equity, partly offset by higher precious metals revenues. Quarter-over-quarter, net interest income increased modestly due to asset growth. Business and government lending grew in both International Banking and Scotia Capital, and residential mortgages grew in Canadian Banking. Other income was also up sequentially, due to stronger securitization revenues and a recognition of negative goodwill on a recent acquisition. Partially offsetting were lower net gains on securities.

Turning to slide nine, non-interest expenses were up CAD336 million, or 15% from last year. Acquisitions accounted for the majority of this increase, or approximately CAD200 million. The organic increase in expenses was mainly due to higher salaries and benefits, additional staffing for business expansion, and increase in pension costs and higher performance-based compensation. Premises and technology costs increased reflecting the investments in growth initiatives. Partly offsetting this were declines in stock-based compensation. Comparing to the prior quarter, expenses were up 6%, mainly due to higher levels of investment in customer acquisition activities, reflected in increased advertising, business development, technology, and professional expenses. We have been focusing on reducing expense growth, and we will have positive operating leverage in 2012.

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 were relatively stable this quarter at 12.2% and 9.6% respectively. In 2012, we were able to strengthen our capital ratios because of strong internal capital generation of almost CAD2.8 billion for the year, CAD632million of common equity issued under our dividend reinvestment plan, and the issuance of CAD1.8 billion of common shares and CAD409 million of preferred shares for the acquisition of DundeeWealth. Our capital ratios remain strong by international standards. We will continue to prudently manage capital to support organic growth initiatives, selective acquisitions, and evolving regulatory changes. The Bank remains committed to achieving a Basel III common equity Tier 1 ratio of 7% to 7.5% by the first quarter of 2013.

Now, turning to the business line results, beginning with Canadian Banking on slide 11. Canadian Banking had another record year with all divisions generating solid performances. Net income for the year was almost CAD1.9 billion. Net income for the fourth quarter was CAD460 million, up 4% from the same period last year. Although assets grew significantly, especially in residential mortgages and consumer auto loans, net interest income was down as a result of a lower margin caused by higher whole wholesale funding costs, competitive pressures on spreads, and consumer preference for lower yielding, variable rate mortgages. Total revenue increased primarily due to growth in other income which increased 6% due to higher card revenues and transaction-based fees in retail banking. The growth in other income is sustainable and client-driven.

Expenses were up 4%, largely reflecting higher salaries, higher pension and premises costs, and volume and initiative-driven expense growth. Quarter-over-quarter, assets rose 2% from growth in residential mortgages and increases in consumer automotive lending and commercial banking. Although other income was higher, total revenue was down as the impact of solid asset growth was offset by a modestly lower margin. Provision for credit losses was down CAD10 million from last quarter, largely due to lower provisions in the commercial portfolio. Expenses were up modestly, mostly due to seasonality.

Moving to International Banking on slide 12. For the full year, net income was almost CAD1.5 billion. Net income in the fourth quarter was CAD373 million. This included CAD27 million in negative goodwill on a recent acquisition. Year-over-year revenues increased 11% due to broad-based organic asset growth as well as a positive impact of acquisitions. The asset growth more than offset a modest reduction in margin, leading to net interest income growth. Other income was aided by the contribution from acquisitions, solid growth in credit card and trading revenue, as well as transaction-based fees. Expenses were up 16%, or CAD114 million. Approximately 40% of the increase was due to the impact of new acquisitions. The remainder of the increase was mainly due to higher staffing costs to support growth initiatives.

Looking now at quarter-over-quarter, net income was relatively stable excluding the negative goodwill. Average assets were up 4% due to growth from acquisitions, mainly Uruguay, combined with strong organic loan growth. We also saw low cost deposit growth of 3%, largely in the Caribbean and Peru. Loan loss provisions increased from last quarter due to higher provisions in commercial lending and higher retail provisions in the Caribbean and Peru. Somewhat offsetting this were lower retail provisions in Mexico. Expenses were up 9% from the previous quarter as a result of higher seasonal expenses as well as the impact of the acquisition in Uruguay.

Global Wealth Management generated net income of CAD1.2 billion in 2011. On slide 13, you can see that net income for the quarter was CAD250 million. Year-over-year, revenue growth was largely a result of the inclusion of DundeeWealth. However, organic growth was very solid driven primarily by strong mutual fund and insurance sales. Excluding DundeeWealth, assets-under-management and assets-under-administration grew 6% and 4%, respectively. Of the total revenue, approximately 85% is attributable to wealth management and 15% to the insurance businesses.

Expenses rose 54% from the same quarter last year, due to the consolidation of DundeeWealth operations, higher volume-related expenses, and increased expenses to support growth. The integration of DundeeWealth is proceeding well. Quarter-over-quarter, net income declined by 2%, mostly due to lower earnings from the asset management and private client businesses because of weaker market conditions, partly offset by higher earnings from brokerage and global insurance. AUM and AUA both declined by 2% as positive net sales were offset by market declines. Expenses were up mostly due to high remuneration costs, partially offset by lower volume-related revenue.

Looking at slide 14, Scotia Capital recorded net income of almost CAD1.2 billion for the year. Net income for the quarter was CAD230 million, down CAD43 million from last year, largely reflecting challenging market conditions. Revenue was impacted by lower trading revenues in fixed income and institutional equity. Trading revenue was lower as a result of volatile market conditions and a more moderate risk appetite. Net interest income rose due to higher income earned on trading assets as well as higher loan volumes, partially offset by a modestly narrower margin. Other income fell due to lower fixed income revenues, partly offset by stronger precious metals and foreign exchange revenues as well as lower investment banking revenues. Provisions for credit losses continued to be very modest, increasing from an CAD8 million reversal last year to provisions of CAD14 million this quarter.

Expenses were 9% higher than last year, reflecting higher staffing costs and increased technology spending to support business expansion. These expenditures are now largely behind us. Quarter-over-quarter, net income declined 20%, reflecting challenging conditions, especially for the fixed income and equity businesses. The fourth quarter also saw lower investment banking revenues and a CAD10 million write-down on securities.

Loan loss provisions were up a modest CAD6 million, with higher provisions in the US and Europe. The latter due to one corporate account, offset by lower provisions in Canada. Expenses increased by 13% from the last quarter, primarily due to higher performance-based compensation, and increased technology costs to support the business. Tax costs were lower this quarter due to a tax recovery.

I'll turn now 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 CAD73 million this quarter compared with a loss of CAD125 million in the same period last year. Year-over-year, the Other segment benefited from an increase in wholesale rates used for transfer pricing, long-term funding costs, and higher securitization revenues. This quarter, the provision for credit losses also included a CAD30 million reduction in the general allowance compared to a CAD40 million reduction in the same period last year. Quarter-over-quarter, performance was impacted by a favorable change in fair value of financial instruments used for asset and liability management purposes, a lower net cost of term funding, higher securitization revenues, and a lower level of write-downs, partly offset by lower gains on sale of securities, and a valuation allowance recorded against a future tax asset.

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 steady improvement in the quality of our loan portfolios as measured by a number of key credit metrics including net impaired loan formations. Our specific provisions have been relatively stable this quarter. They were up CAD8 million year-over-year, CAD29 million quarter-over-quarter, to CAD302 million. The continued improvement in the credit quality of the portfolios allowed us to decrease the general allowance by CAD30 million this quarter to CAD1.35 billion. Our net impaired loan formations have continued to climb steadily since they peaked in Q2 2009 and at CAD160 million were the lowest in the last four years. Our exposures to certain European countries of concern, Greece, Ireland, Italy, Portugal, and Spain, are not significant, and I will have more details on these exposures in a moment.

Our market risk remained low and well controlled. Our average one-day VAR was CAD9.5 million compared to CAD11.8 million in Q3. There were 14 trading loss days in the fourth quarter compared to nine in the previous quarter, reflecting greater volatility in capital markets. All but one of our loss days were within the range predicted by VAR.

Slide 18 shows the trend in specific provisions over the past five quarters. As you can see, specific provisions have declined meaningfully in the Canadian retail portfolio year-over-year, whereas they were stable on the quarter. Our Canadian retail portfolio remains extremely high quality, with 92% of our assets secured and relatively low exposure to unsecured loans and credit cards. The provisions in the Canadian commercial portfolio were down slightly from last year. They decreased by CAD13 million from Q3 as a result of a provision set aside against one account last quarter.

International retail provisions are unchanged year-over-year. The quarter-over-quarter increase of CAD13 million reflects higher levels of provisions in the Caribbean, Peru, and Chile, partially offset by a decline in Mexico. The International commercial provisions of CAD23 million reflects a more normalized level of provisioning compared to last quarter and a year ago, when those quarters benefited from significant recoveries. Scotia Capital provisions were relatively stable quarter-over-quarter but up from net recoveries a year ago.

Slide 19 shows the Bank's funded exposure to certain European countries. In addition, our unfunded commitments are quite modest at CAD375 million, of which CAD302 million are to corporations and CAD73 million to banks. As you can see, we do not have any sovereign exposure to Portugal, Italy, Greece or Spain. The Irish sovereign exposure of CAD114 million is largely in the form of central bank deposits, resulting from regulatory reserve requirements to support our operations in Ireland. We have not used purchase credit default swaps to reduce our sovereign exposures.

With respect to exposures to banks, we do not have any exposure in Greece. Bank exposure of CAD1 billion in Italy relates primarily to precious metals trading and lending activities. The bank exposures in Portugal, Ireland, and Spain are not significant. The corporate exposure in Greece is mainly to shipping companies where we have long-standing relationships, whereas the corporate exposure in Spain is mainly to multinational companies. As for trading securities exposures to these countries, they are not significant. We believe these exposures are manageable.

Turning to other European exposures on slide 20. In addition to exposure to Greece, Ireland, Italy, Portugal, and Spain, we have outlined our exposure to the remaining European countries on this slide. We believe that these exposures are manageable. We also have trading securities relating predominantly to issuers in the United Kingdom, Germany, and France, totaling approximately CAD1.1 billion, almost all of which have strong market liquidity.

To summarize, our asset quality remains strong with the retail and commercial portfolios performing well, and our corporate portfolios continue to show strength. Looking ahead, we expect the overall 2012 provisions to remain in line with or move slightly higher than the 2011 level. We expect Canadian retail provisions to remain stable, and International retail provisions to show overall improvement though they may grow in absolute number, due to the growth in the overall portfolio. We expect corporate and commercial provisions to return to more normal levels, given the current stage in the economic cycle. That concludes my remarks, and I'll now turn it over to Anatol.

Thanks, Rob. As Luc has told you, Canadian Banking had another strong year in 2011. We did particularly well in our focus areas of deposits, payments, and wealth management, and we continue to grow in all our main business lines -- including retail mortgages, consumer auto lending, small businesses, commercial lending, and deposits. In 2012, we expect to continue this success, despite the uncertain economic environment and persistently low interest rates.

First, we'll stay the course and continue to focus on our three priority areas, deposits, payments, and wealth management referrals. We believe that we can outgrow the market in these fee-based and relatively less capital- and liquidity-intensive businesses, by offering our customers the right mix of advice, service, and convenience. In the payments sphere, we launched two new retail products in 2011, Scotia Moneyback Checking, which is Canada's first account that pays customers money back with every debit purchase and the Scotia Momentum VISA Infinite card account and have added customers as a result. We expect to continue to roll out new offerings in 2012. We also have momentum in wealth management where we had record mutual fund sales and grew market share in 2011. We expect to continue this focus in 2012.

Secondly, we expect continued asset and deposit growth in our traditional businesses in 2012. Growth in retail banking should moderate somewhat, reflecting economic conditions and consumer debt retrenchment. However, in commercial banking, our pipeline is quite good, and we expect growth to be relatively stronger, particularly in certain segments.

We also expect small business banking to remain a source of strength in 2012. This year, we achieved double-digit growth in small business deposits and significant market share gains in lending, as we focused on high potential customers with strong product offerings and advice-based solutions. We will continue this focus next year.

Turning to the margin, going forward, we expect it to be relatively stable in the near-term, but with continued downward pressure due to the persistently low interest rate environment and tight competition, particularly for regulatory-qualifying liquidity. Provision for loan losses are expected to be relatively stable in 2012.

Finally, and as always, tight management of expenses remains a priority for the Canadian Bank. We will continue to maintain our cost discipline while investing prudently in the initiatives and platforms that will give us future growth. With that, I'll turn it over to Brian.

Thanks, Anatol. International Banking ended the year with a solid quarter, and we are pleased with our strong overall performance in 2011. Looking ahead to 2012, we remain optimistic about growing our business organically. Despite the current economic uncertainty around the globe, we are comfortable with our growth prospects. In our commercial business, an increased focus on this segment and some important initiatives that we have underway will drive meaningful growth. The commercial pipeline for 2012 is solid.

In retail lending, we have continued to build good momentum. This quarter, we delivered our best retail loan growth in the past eight quarters. Looking ahead, our investments in areas such as sales productivity and contact centers along with our plan to expand some key segments will help us to maintain this momentum. As our organic growth initiatives continue to gain more traction, along with a sharp focus on managing expenses, we expect to deliver positive operating leverage in 2012. With respect to margins, we expect them to remain relatively stable.

Finally, I'd like to comment on integrations and acquisitions as we were busy on both fronts in 2011. We completed two major integrations this year, one in Puerto Rico and one in Thailand. In Puerto Rico, we completed the integration of R-G Premier. And in Thailand, we completed the integration of Siam City into Thanachart Bank. Both these integrations went very well, and they speak to our ability to bring businesses into the Scotiabank fold quickly and efficiently. On the subject of flooding in Thailand, despite the very difficult situation which we are actively monitoring, we are well positioned to benefit when market conditions improve.

And finally, on the M&A side, we completed and announced six new acquisitions in 2011, including significant investments in the Bank of Guanghzou and Banco Colpatria, both of which are expected to close in the first quarter. Acquisitions have been an important driver of our business over the past few years, and we will continue to look at selective acquisitions that complement our footprint. We will also leverage the organic growth opportunities in our existing platform. In summary, even in this uncertain environment, International Banking is well positioned to continue generating meaningful organic and acquisition growth in 2012. I'll now turn it over to Chris.

Thank you, Brian. 2011 was a good year for our Global Wealth Management business with a strong foundation for future growth. Our outlook for 2012 is for good organic growth in each of our business units -- Asset Management, Wealth Distribution, Insurance, and Global Transaction Banking. While recognizing the uncertain environment, we are planning for growth, but equally, we are ready for any prolonged market weakness. We will deliver positive operating leverage in this business overall in 2012.

We have a strong base of AUM and AUA to drive our top line going forward. Our assets-under-management and assets-under-administration are up 90% and 39%, respectively, year-over-year. Excluding DundeeWealth, our organic asset-under-management growth was 6%. Our industry-leading sales in Canadian mutual funds have helped offset market volatility.

In Global Asset Management, we expect continued strong growth in sales in both Canada and internationally. Based on the most recent IFIC data, we ranked number one in Canada for net mutual fund sales. We continue to rank number two among the Canadian banks in mutual fund assets.

Our focus for 2012 is on leveraging product innovation and leadership to deliver a broad range of investment solutions across multiple channels and take advantage of significantly untapped potential in Canada and internationally. The acquisition of DundeeWealth is a cornerstone in growing our Global Asset Management capabilities. We continue to focus on capturing both revenue and cost synergies, and the integration is going well. Earlier this week, Dynamic Funds was recognized at the Canadian Investment Awards as the Analysts' Choice Investment Fund Company of the year and was also awarded Best Global Equity Fund and Best US Equity Fund.

In Global Wealth Distribution -- our client-facing businesses -- we expect good organic growth in all businesses. For example, in Canada, we continue to invest in our advisory channels -- Scotia Private Client Group, Scotia McLeod, and DundeeWealth Advisors to drive growth through new client acquisition. 2012 will also mark the final consolidation of our online brokerage platforms and the re-launch of Scotia iTRADE. Internationally, our focus is on leveraging our geographic footprint and significant distribution network to drive sales of wealth products and services as well as exploring strategic opportunities in priority markets.

The outlook for our insurance business is positive. This business has very good growth potential and is less exposed to markets and less volatile than our wealth businesses. Our largest opportunity in insurance, as in wealth, is leveraging the distribution reach of the Bank's global branches and offices. In Canada, we're making steady progress in increasing the cross-sell of insurance products, and we are continuing to roll out new initiatives including a travel insurance program and creditor insurance product enhancements. Internationally, our focus is on continuing to expand insurance sales through alternative channels as well as leveraging existing distribution channels and enhancing our product offerings.

In global transaction banking, we continue to focus on providing comprehensive client coverage across the Bank's network for deposit, cash management, payment services, trade services, and financial institutions. Our investment in CI continues to be an important strategic investment for us, and we are pleased with its ongoing performance.

Finally, across our Global Wealth Management businesses, we have heightened our scrutiny of expense growth, new initiatives, and discretionary items. We will continue to leverage two of our greatest strengths, our global distribution network and our people, to continue to grow the business. We'll also continue to look at strategic partnerships and acquisition opportunities as they arise. In summary, while we continue to watch the economic and market environment closely, we believe our diversified business model will produce strong results in 2012. And with that, I'll now pass it over to Steve.

Thanks, Chris. Scotia Capital reported lower net income in the fourth quarter as unusually difficult markets and weak levels of client activity had a significant impact on some of our businesses. We expect challenging market conditions to continue for the near-term. However, these market headwinds will continue to be mitigated by the diversification and modest expected growth of our core businesses and product offerings. Although market conditions had a challenging impact on fixed income results for the year, and particularly in the most recent quarter, this has been somewhat mitigated by the solid performance of our global equities, precious metals, and foreign exchange businesses. Average assets have grown during the year to support the growth in our trading platforms. This growth is being closely monitored, and we continue to be careful to maintain our discipline to limit risk exposures.

Partly offsetting our lower trading revenues in 2011, in global corporate investment banking, we benefited from higher new equity issue and advisory fees. However, M&A activity dropped significantly in the latter part of the year which limited opportunities for both fee income and lending. We do not yet see any signs of a significant upturn in the M&A market, although our Scotia Waterous pipeline looks reasonably robust. We are seeing a modest but positive upward trend in loan volumes which we expect will continue into 2012. We're also finding opportunities to purchase loans on the secondary market at attractive prices. Corporate loan margins will likely face moderate pressure. However, we intend to maintain our pricing discipline to help offset this compression risk.

The credit quality of our loan portfolio remains strong, and we expect loan loss provisions to remain modest going forward. Operating costs are being closely managed. We have substantially completed our investments in people and technology for our key growth initiatives and expect expenses to decline over the course of the year. One of our key priorities for 2012 is to successfully implement the Bank's wholesale -- global wholesale banking initiative with a particular focus on Mexico, Chile, Peru, Colombia, and Brazil. This initiative progressed well over the last year, and we expect growth in sustainable revenues and net income in the future, particularly from growing our client base in these markets and cross-selling capital markets products to them. Overall, with our platform diversified by both product and geography, we are in good shape to perform through the current market conditions and to benefit when markets become more normalized. With that, let me turn it back to Rick to wrap up.

Thanks, Steve. Looking ahead, global prospects are being pressured again by financial market volatility, resulting of course from the European debt crisis and the longer term challenges in the United States. However, we do see industrial production and retail spending improving in the United States, and the growth rates in our international markets are solid. The upside of the volatility is that it provides opportunities for stable, well capitalized banks. The windows of opportunity we have talked about in the past, which are a result of our diversified footprint, continue to be available. We have chosen well and acted on these opportunities in 2011, and we expect to see solid contributions from these initiatives in 2012.

Organic asset growth will occur, and this, combined with the full-year impact of current acquisitions, will lead to growth in net interest income. Margin is expected to remain stable. The pressure from the continuing low interest rate environment will be offset by better margin on credit-related products we are now seeing in certain markets. Higher customer activity will drive increases in our Other income.

Expense control, a strength of our Bank, will be an area of even greater focus for us in 2012. We will balance investments in new products and services to grow our businesses with prudent expense control and continue to expect to have a leading productivity ratio in 2012. And, as Luc has said, we will return to a positive operating ratio. Risk management, especially credit and market risk, will continue to be a core competency and priority of this Bank.

So, now, looking more specifically at our targets for 2012. Our targets for earnings per share growth are forecasted at 5% to 10% for 2012, excluding the CAD286 million-related gain we recorded in the second quarter of 2011. This reflects the current environment and is conservative. For return on equity, we are targeting a range of 15% to 18%. We expect to continue to benefit from a strong productivity ratio with a target for 2012 of less than 58%, and we will maintain strong capital ratios.

In summary, these targets represent conservative but consistent growth, a high level of profitability, and excellent efficiency. We will continue to execute this proven business model to deliver sustainable and growing profitability. And, we are confident that we will be able to achieve our goals and objectives both in 2012 and beyond. Pass it back to Luc now.

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

Your first question comes from Robert Sedran from CIBC World Markets. Please go ahead.

Good afternoon. A lot of talk about restoring positive operating leverage for next year. I just want to know, is it really -- does it depend at all on the revenue outlook? Or, are you comfortable that you've got enough flexibility that if the revenue outlook doesn't come through the way you're hoping that you can pull expenses back still further? Are there any specific programs you have planned? Or, is it really just the absence of the higher -- some of the higher expense spend you had this year that will help you get that operating leverage next year?

Rob, it's Luc. It's a combination of things. As we mentioned, a number of the business lines and certainly Scotia Capital, we're building out a platform, and that was expensive, both in terms of the technology and the people. The technology is generally finished. The people are in place. So, the rate of growth will decrease. And, certainly, we have mechanisms -- if the revenues do not produce, we have ways that we will contain and reduce the expenses even further.

Is a couple hundred basis points a reasonable assumption?

Yes.

Okay.

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

Just about your ROE guidance, and also the fact that you haven't provided any pro forma IFRS disclosure. Just wondering why your ROE target range is down relative to your 2011 target. Is it just really added conservatism? Because I would think there would be some benefit of lower equity due to IFRS.

Well, it's down slightly, but I don't think significantly, especially when you look at what's going on around the world. We had made and continue to make a lot of acquisitions. They meet our internal rate of returns and our return on our economic capital. But, it does take some time to get them up to what we generally get on a return on capital. So, in this environment, I think they are very achievable and attainable and not really a significant move. We're certainly not going to increase our risk appetite to get higher ROE.

Gabriel, it's Luc. As it relates to IFRS, what we propose to do is before the end of January is to provide to you and others the IFRS restatement for 2011 -- from the Canadian GAAP to IFRS on a quarterly basis, by business line. And at that point, we'll discuss the changes in considerable detail with you.

And, just on the expenses, can you -- to follow up on Rob's question there. Can you give a bit of a sense other than Scotia Capital, maybe, where you're going to be pulling back on expenses? Like in International in particular, sounds like that's an area where some of that excess expense growth this year is going to be nonrecurring. And, what the mix between revenue growth and expense growth will shake out in terms of operating leverage?

Fair enough. If we take, for example, the fourth quarter on an all-Bank basis, Gabriel, expenses were up CAD136 million, approximately CAD40 million of that related to the acquisition. You are not going to have the magnitude of that in the -- as a run rate on a go-forward basis because a number of the acquisition-related expenses are one-time. As well, if we take a look at outside of an acquisition, some of the expenditures that we have had that would account for some of the CAD136 million. Technology in the quarter was around CAD30 million as we were building out some things. Advertising and business development -- that's a discretionary expense. It was around CAD30 million. We can cut that back. And, we did have some legal costs in the quarter around on a consolidated basis -- around CAD20 million which we don't expect to recur on a go-forward basis.

Okay. Thank you.

Next question, please.

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

Thank you. Just quickly, first, just to be clear -- the 15% to 18% ROE target, that already envisions an IFRS book value effectively? Or, there's not really any material difference?

The impact on -- is going to be CAD1.9 billion on capital. We estimate at this stage of the game. So, it's not going to have a material impact. It will have some impact, clearly, but not material.

Okay. And, then for Rick. Rick, can you help us understand how you and the Board are thinking about the dividend? If I look at the mid-point of your guidance for next year, even in the context of a few cent increase in the dividend, you'd be right at the mid-point of the increased -- the 40% to 50% payout ratio target. There seemed to be a desire to be at least a little more aggressive with the dividend given that you've raised the payout ratio a few quarters ago. So, is it that shoring up capital is job one? Is it the macro environment, or is there something else keeping you on the sidelines there?

You're right. We've got good earnings coverage on the payout side in that. We have windows of opportunity so we have this great internal -- because of the high return on equity -- the great capacity to regenerate income. And, so, we will balance that out, and we raised our dividend this year. Our Board and I think we all know the importance of the dividend and cash increases, and we will continue to look at it at every quarter. There's lots of opportunities out there, but we want to balance off opportunities with some dividends. So, it will be an ongoing part of our strategy as you've seen over many, many, many years, and we anticipate continuing that.

So, we shouldn't necessarily see the reemergence of a pattern of dividend increases which you might have seen in the past?

Well, we have except for one year increased our dividend, I think, almost every year. That pattern is certainly in there. I mean, you're talking about multiple dividend increases during the year?

Maybe we fell into a comfort level. I believe it was every second quarter for a fairly prolonged period of time.

Back in the '05, '06, '07, and you had economies and earnings growth growing very high. Hopefully, we will return to that, but there is a new norm. Look, we've got these windows of opportunity. We've given you some conservative guidance, and we certainly like to -- and will attain our targets. And, if it gets better, we will adjust it accordingly.

That's fair. Thank you.

Thank you. Next question, please.

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

Thanks. Couple of questions. First of all, in line with the comments made about controlling expenses. One thing that stands out was in Scotia Capital, your revenue was down 14% during the quarter. So, why was variable comp up?

Yes, Q-over-Q, I think it was a -- kind of a shore-up. We had lowered it quite considerably in the third quarter, and it increased somewhat over the fourth quarter. So, it was just the way we quarterized it.

But it's just a true-up?

Effectively, yes, Michael, it was a true-up. With the benefit of looking at the whole year, Q3 was lower than it should have been, and we had to true it up in Q4. That's in a nutshell is what happened.

Okay.

It correlates well to year-over-year.

Yes, yes.

I think you've got to look at that year-over-year, and I think it correlates well -- the performance versus the incentive compensation.

Okay. And, on the international side, you also had high expense growth. That was driven by your organic and acquisition growth, also. And, I guess in the latest quarter in particular, you had Uruguay coming in. How much did Uruguay contribute to revenue and expense growth in the quarter?

Michael, it's Brian. Just to give you -- our expenses were up CAD66 million for the quarter. CAD37 million of that was related to the second piece of the Uruguay acquisition. You'll recall in quarter two, we did the Pronto which is the Consumer Finance business. In this quarter, we closed NBC, which is the Nouveau Banco Comercial, which is the commercial business. Also, on expenses, we were up CAD29 million due to seasonality of advertising, our sponsorship of the Pan American Games in Mexico, and the balance was really finishing off our growth initiatives for our non-branch sales channels -- our contact centers and our service areas in Peru and Mexico, primarily.

Thank you very much.

Next question, please.

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

Hi, thanks very much. Two short ones. I'll just say them both, and then wait. High formations in International Commercial and Scotia Capital this quarter over last quarter. Particular, Scotia Capital shows a trend of rising formations. How do you interpret that? Two, what happened to trading revenue in early August? There was a big spike down. It went outside your VAR limit level. Wonder if you could give us some sense of what was going on there? What the product might have been?

It's Steve. I'll speak to the issue of the formations. I don't think you should read a lot into that. I think as we said in our comments, we feel very good about our portfolio. It's been very strong over the last several years, per our investor presentation of a month or two ago. We've been very, very successful in managing loan loss experience, and our portfolio looks very good for the future. If we were to see a serious economic recession in our major markets, that would have an impact. But, we've done well through the last downturn, and our portfolio feels like it's capable of demonstrating that kind of performance again, even in a downturn.

What explains the trend? Is it just return to normal?

I'm sorry?

Is the trend over the last two years a return to a normal level of formation?

Do you want me to --?

Go ahead.

Peter, what you're seeing is a situation where Scotia Capital's portfolios really have been pristine. So, from time to time, you will see them tag up just because you'll see it in the commercial portfolio in Canada. Fundamentally, the portfolio is sound. It's good quality and it won't be a trend.

So, we're just getting back to norms is what you're saying?

And Peter, on the international commercial side, as we've been saying to the Street for quite some time. The recoveries out of Peru would be coming to an end. I believe we're there. So, we had three provisions. They were broad-based -- a small one in Chile, one in Puerto Rico, and one in Jamaica. It's a question of timing, not asset quality.

I was referring to the formations, not the provisions.

Peter, I don't have the ratios in front of me, but the absolute numbers are quite, quite low, especially relative to the size of the portfolios. We have actually, as you know, grown our risk-based assets over this period of time. So, the absolute level or the ratio analysis on that, which obviously you will do, shouldn't show you any concern.

Okay. Just on the trading, the [550]?

On the trading side, there are two different positions that caused volatility in the early part of August. One where we had inventories in corporate bonds and spreads widened tremendously, and we took steps to reduce the risk of those portfolios materially. The second is when we hold derivative positions in the broker-dealer, we have to mark our longs at the bid and our shorts at the offer. So, in those volatile days when they closed the markets, the bid-offer spreads widen, and that actually induces volatility that doesn't really exist. Oftentimes, those books are very low risk, but the longs and the shorts are priced off of a bid offer. When that widens any illiquid marks, it actually induces volatility. So, some of that --.

That comes back later in the quarter.

Yes, exactly. Half of that volatility actually was induced by the bid offer.

Appreciate that. Thank you very much for the color.

Next question, please.

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

Thank you. Brian or Luc, just want to make sure. I think CAD44 million was mentioned as integration costs in International in the quarter. Is that right? Or acquisition costs?

No, CAD37 million pertains to the acquisition of Uruguay, which is NBC, Nouveau Banco Comercial, for the quarter.

Okay. So, if we were to -- so, that is a nonrecurring number?

No, we're going to -- it's the expense of running the operation.

The expense of running the operation. Okay. Were there some expenses on integration in the quarter that we should be aware of?

Nothing meaningful.

Okay. And then just -- Brian, just on the -- there have been a lot of acquisitions you've had in International. Do you need to take a breather? Or, do you have the management scope to continue to do more integrations or make more acquisitions? And, would the size of these acquisitions be similar to what we've seen in the past?

Well, that's a hard one to answer because as you've heard before we're constantly looking at different opportunities out there. They have to be complementary and fit in our footprint, our culture, and where we're driving the business. But, it's hard to drive the business by doing acquisitions and organically at the same time. We have a lot of organic growth opportunities which we want to execute on in the next year. And, we'll see what the market brings from an acquisition perspective.

The concentration -- it's Rick. The concentration will be on organic growth, but we are also and have the ability to be opportunistic, not only in terms of how we finance it, funding and capital, but on resources. And, does stretch. But, we have -- I think we have the technical and the people resources if we have to. But, the focus is going to be organic because now we want to reap the benefits of the all the stuff we've done over the last few years.

Thank you.

Next question, please.

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

Thanks very much. I guess my question would be for Anatol. Anatol, in the domestic banking business, the revenue progression has been -- the best term would be flat -- for quite some time, certainly for the full year. I was just wondering, are there things building up in your domestic Bank that are going to lead to expansion of that revenue at more of a consistent peer level in the coming year?

I think looking at the different businesses -- I think if we look at the retail business, I think we're seeing a lot of competition there. I think if we look at the revenue side, we're going to see small amounts of growth, but nothing very large there. On the commercial side, as I mentioned in my comments, as well as in the small business side, we are seeing growth, and we expect to continue to see growth in those segments. The automotive industry, particularly on the retail side where we have a very strong position as well, is another area that has and will continue to have growth. So, I think those are the areas that we're seeing strong growth in.

And, I think in the broad numbers -- it's Rick. The margin obviously has shown -- of the total revenue has contributed to the flatness. In the Other Income line, which is more the transactional and day-to-day banking, there is good fundamental growth. There's some ins and outs because of the expenses in that, but there I think we -- and we have some good internal data on customers and what have you. It's probably, on a customer basis, in the low teens.

Yes, that's right.

About in the low teens in terms of the number of customers we're adding in the sustainable cards and day-to-day small business financing and what have you. There, I think we'll see some -- if we can get margin stabilization, on the customer side, the transactional side.

Yes, just to pursue that for a moment. I guess if I look at the -- at your peers that have reported now. They, across the board, have delivered a positive revenue growth in the latest fiscal year. I guess what I'm sort of wondering is if your Bank is avoiding margin pressure, I would expect the net interest margins to have held up better. And yet, I see that they've actually trended in line with peers. So, we didn't get the revenue growth, and we got the margin pressure. So, I'm just trying to figure out how those two things are going to resolve in 2012.

Let me talk to this a little bit in terms of when you look at our assets, we've got our mortgage portfolio which is a very strong portion, and as you heard in the comments from Rob, in terms of the portion of our assets that are secured. In the mortgage portfolio, the pressure has been downward because as we've got mortgages that have matured, they are maturing as smaller -- they're maturing and renewing at smaller margins. That has been the pressure that you see, and that Rick referred to earlier on.

What we have seen in the last six to seven weeks is that there's a little more normality coming back into the mortgage market, particularly on the two-year and five-year segment. That's, I think, one of the areas that we expect to stabilize and see stabilization in terms of income.

Volumes have had good growth. We've had very good growth in terms of the retail segment. The pressure has been on the margin side.

Okay. Thank you very much.

There is some transfer pricing. If you notice, our Other category, where we true up on the transfer pricing. That has some issues. As you can see, we're down on the Other -- to the benefit of the Other category, and some of the business lines, including Canadian Banking, pick that up as a cost.

Okay. That's great. Thank you.

Next question, please.

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

Good afternoon. One clarification. One question, please. The clarification for Rick or Luc. When you make your comments in regards to your Basel III common equity ratio being between 7% and 7.5% by the end of 2012, I didn't hear you say it so I just want to ensure. Is this based only on internal capital generation, normal course earnings, RWA growth, dividends? Or, are you envisioning some form of external capital event?

We're looking, as we've said -- you saw in the acquisition of Colpatria. They took some capital. So, on acquisitions, we reserve the right to finance that. We look at all our whole portfolio and assets -- on asset maximization. So, it's keep our options open. We have great reinvestment. Our DRIP plan is going well. And we'll see -- we will meet. We will meet. We've got lots of options, and we have a huge amount of significant -- what they call significant investments. And, of course, don't get the advantage of capital, but we intend to hold those or not as we see go-forward. So, we have a lot of options, and issuance of capital can always be on the table, especially -- well, for acquisitions.

Let me just double-check on what you're saying there. I'm with you on anything that's already been announced. What I want to ask directly is -- can you get to that 7% to 7.5% level by the end of 2012 without selling one of your investments? Or, doing a direct capital raise that doesn't involve an acquisition?

It depends on other assumptions. On how fast we grow or don't grow our risk-based assets. And it is, again, this model is a bunch of assumptions in that. If we find that acquisitions, both current -- and don't forget, we haven't closed two of the acquisitions. They won't close until some time now next year. We haven't even closed two of the acquisitions. We'll see what it has at that time. We won't rule out capital issuance, and we'll pursue our options. But, we're not going to tie ourselves down to one thing or another when we have so much flexibility.

All right. My question is for Brian Porter. Brian, when I think about the International Banking segment, it's always been an area of growth for Scotiabank, and expenses have trended that way. So, with Luc promising positive operating leverage for most of the retail businesses, it sounds like next year, I think you can get there just by slowing expenses. Though does that have an impact on the management of this business in terms of your branch expansion, advertising, technology? In your view, would outright slowing expenses impact the revenue as well?

We've invested quite significantly in the past year-and-a-half to build our non-branch sales and service platforms in Mexico, Peru, and Chile. So, we've invested significantly in these businesses. Now, the plan for 2012 is to reap the benefit. We're getting good traction already in terms of driving sustainable revenue growth from these channels. So we would expect -- I'm not going to forecast expenses for you. But, we would expect operating expenses are going to moderate from these levels due to where you see annual inflationary increases and the impact of recent acquisitions. But, as I stressed in my earlier comment, we're focusing on our organic growth platform. We've added 1,500 staff in Mexico in these contact centers. 800 in Peru. 300, 400 in Chile. So, it's time to make the assets sweat and reap the benefit from those.

Sumit, this is Sabi. One of the things we've always said to all of you is that you can take the expense growth out of context of hitting our targets. When we are comfortable that we can hit our targets, we will use that opportunity to reinvest in our businesses, no matter which business it is. And, so, when those targets -- when we feel -- so, we felt in 2011 that we were very comfortable of hitting our guidance which is 7% to 12%. In fact, exceeding it. And, we took that opportunity to reinvest in many of our business. Now, as we are entering the new year, and if we see the targets we have to moderate clearly our expense growth in order to hit our new targets. And, that's what we will do. So, you cannot take the expense growth in isolation.

Sabi, having levers always helps. Thank you for your time.

Okay.

Next question, please.

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

Thank you. I just wanted to follow up on Michael Goldberg's question. If we look at Scotia Capital revenues, they were down 7%. This is a full-year number, and the all-Bank variable comp was up 24%. Now, in that variable comp, presumably, there's some related to DundeeWealth, presumably there's some related to the Bank. Nonetheless those trends seem odd. Just some color around that would be helpful.

My second question is if I heard the comment correctly about Thailand, it's that you're well positioned when things get better. You didn't really say anything about the potential credit impacts of the unfortunate events in Thailand.

At Scotia Capital, I can assure you that the variable compensation and the net revenue, obviously, track one another. You do have to keep in mind that the way that we expense our performance-related compensation, given that we have this deferral mechanism, actually causes us to have an over-- have a high accrual in the first quarter. So, that's something that we're phasing in. So, that's affecting the statutory way that we report that number. But, I can assure you that it tracks the net income.

Okay. Thanks, [Mike].

And, just on Thailand, quickly, we have 681 branches in Thailand. Less than 10% of them are affected in the flood zone. But, that number had been closed for some period of time. So, it's going to impact provisioning in T Bank. Don't know the extent, and there will be reduced loan demand for a quarter or two. But, as we've lived through these natural disasters in other jurisdictions, we expect to make up for that in subsequent quarters.

Okay, thank you for that.

One last question, please.

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

Good afternoon. One sort of broad question. Throughout the conference call, you refer to stable margins, positive operating leverage, stable PCLs, reaping the benefits from International. And, when you sort of layer on that the nearly CAD2 billion reduction in your capital associated with IFRS, it does seem incongruous with taking your guidance down 5% to 10% and the ROE guidance down as well. First, am I correct in suggesting that it does seem a little incongruous? And, if you could describe, what might I be missing in that laundry list of some of the positives? And, thinking of that in the context of the reductions in your guidance?

Well, the economy is -- macro economy is very uncertain. So we have, as I said, conservative guidance out to reflect that on, say, earnings growth. And, it's just a conservative and reflection of -- and will probably be -- I don't know what other banks in Canada are doing. But, certainly on a global basis, it's pretty good growth, and it's sustainable. So, it is what it is.

On the ROE, I think we benefit from one of the highest return on equities in the world at very high levels. And, it's a very de minimis increase and stretching it at a very high level to go to -- we are not going to see those 20% ROEs in any bank. Well, I can only speak for our Bank, in that it would be very hard in low interest rate environments and with the higher capital ratios. So, I think it's very good, high level of profitability, and the 1% is certainly models out to us very well. And, it is what it is, and it's a very high level of profitability. And, it's a very good, stable, sustainable growth forecast. But, we're quite comfortable because it's based on conservative assumptions.

So, just to be clear, then, you're not seeing any deterioration in fundamentals. It sounds to me like you're trying to build in some kind of cushion for the uncertainty associated with what you see in Europe? Is that fair?

We just produced our results as of October 31. So, that's pretty current numbers, and you can see how broad-based, sustainable they are, both at high levels of profitability. So, I feel very, very good on where we are, and it's very current. Guidance looking out on anything market is you have to be conservative, and I think any management team or whatever that wouldn't be conservative forecasting in this environment has to be conservative. And, so, we hit and attain what our shareholders expect of us as we have so consistently. So, quarter-by-quarter, year-by-year, volatility -- I feel very good that we had a very consistent and stable outlook. But, that's for everybody of our shareholders to decide.

Thank you.

Thank you.

Thank you very much for joining us today on the call. Have a happy holiday season, and we will talk to you soon. Take care.

Ladies and gentlemen, that does conclude the conference call for today. Thank you for participating. Please disconnect your lines.