Bank of Nova Scotia (BNS) 2012 Q1 法說會逐字稿

Good afternoon and welcome to the presentation of Scotiabank's first-quarter results. I am Sean McGuckin, Chief Financial Officer. Rick Waugh, our CEO, will lead off with the highlights of the first quarter. Next, I'll go over the first-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, each of whom will provide an outlook for their business for the remainder of 2012. 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. Over to you, Rick.

Thanks very much, Sean and Sean, welcome aboard. This is your first quarter as a Chief Financial Officer, so all your colleagues managed to get you a good one to start you off.

That's for sure. Thank you, all.

We are pleased to announce a very strong quarter, notwithstanding the continuing macroeconomic challenges we all face. Scotiabank generated net income of more than CAD1.4 billion, and this represents growth of 15% from the same period last year. Earnings per share were CAD1.20 for the quarter, up 11% from last year. They did include an CAD0.08 gain related to the sale of our real estate asset in Calgary.

Excluding this gain, as well as a non-recurring pension recovery and an IFRS-related foreign exchange gain in the quarter one of 2011, our earnings per share was up 9%. Return on equity remains strong at 19.8%. And we're very pleased that revenue was a record this quarter, growing by 11% compared to the same period a year ago, and 8% after we exclude the real estate gain.

As you know, our expenses have been high as a result of revenue initiatives which are now as you can see taking hold. We continue to generate high-quality, sustainable, and diversified revenues. The credit environment continued to be benign this quarter and the performance continued to improve throughout our portfolios and as evidenced by lower loan loss provisions.

Our industry-leading productivity ratio remains stable at 53.5%, and we continue to manage our expenses very prudently. We delivered positive operating leverage after adjusting for acquisitions, which were up 80%, -- which were 80% of the year-over-year increase. So during the quarter we completed the acquisition of Banco Colpatria, Colombia's fifth largest financial group and which is strategically significant for our Latin America footprint. Columbia represents an important retail and commercial link between our South American operations in Chile and Peru and our Central American subsidiaries.

Our capital position also remains strong, as we continue to internally generate capital at a high level. In February, we successfully raised capital to fund recently closed and previously announced acquisitions. The offering was very well-received by the market and our stock has traded well above the issue price. We are well on track to achieve the minimum Canadian regulatory expectations for Basel III, which are well above the international Basel III requirements, all by the first quarter of 2013.

Our performance this quarter shows the success of our diversified business model with strong execution and revenues from each of our business lines. Canadian Banking had a record quarter, saw strong volume growth in residential mortgages, small business, and commercial lending. Asset growth continues to be partially offset, though, by ongoing competitive pricing pressures, although we are seeing signs of margin stabilization with the net interest margin increasing only marginally from the previous year -- quarters, pardon me, from the previous quarter.

International Banking had very strong net income which reflected the impact of acquisitions as well as strong broad-based growth, particularly in commercial lending in Latin America and Asia, which are much less affected than other markets. In Thailand, Thanachart Bank is still producing solid profitability. However, the recent challenges of the flooding in that country have negatively impacted the quarter.

In Global Wealth Management, earnings were driven by both the Wealth and Insurance businesses, but with particular strength this quarter in Insurance. The integration of DundeeWealth is going extremely well and meeting our objectives of implementing operating efficiencies while continuing to deliver strong sales performance.

And finally, the results of our newly named Global Banking and Markets, formerly Scotia Capital, were strengthened by the diversification across our product lines and our geographies. I might say, our new branding for our fourth business line, our wholesale business line, reflects the strong recognition by clients of Scotiabank's creditworthiness and trust.

Our brand under the Scotiabank banner aligns well with our recognition in Canada but particularly well in our global operations and our focus on relationship-driven products in the niche markets that we operate in, such as our primary dealers in government securities, our energy business, foreign exchange, and precious metals businesses. So, we've had a strong start to the year and we are well-positioned to meet those targets we have set for 2012.

So now, Sean, it's over to you.

Thank you, Rick. Slide 6 highlights our key financial performance metrics for the quarter. Earnings per share for the quarter excluding the real estate gain Rick mentioned were CAD1.20, an increase of 11% from last year and 24% from last quarter. Excluding the real estate gain, earnings per share increased 4% from last year, and 15% from last quarter.

Looking at year-over-year changes, Q1 earnings benefited from the contribution from acquisitions, in particular DundeeWealth, strong volume growth and transaction-based revenues, and higher trading and insurance revenues. Partly offsetting were higher operating expenses from acquisitions, margin compression, the temporary impact of the recent floods in Thailand, and gains from a pension recovery and IFRS-related foreign currency translation last year.

The provision for credit losses was CAD265 million this quarter, down CAD10 million from last year, reflecting lower provisions in Canadian Banking, partially offset by modestly higher provisions in International Banking and Global Banking and Markets.

Moving to revenues on slide 7. Revenues during the quarter were a record at just over CAD4.7 billion, representing growth of 11% from last year or 8% excluding the sale of the real estate assets. The year-over-year increase reflects higher net interest income which increased due to asset growth, mainly business and government lending, and residential mortgages, as well as deposits with banks and acquisitions.

Core banking margin narrowed 18 basis points year-over-year, due to narrower spreads on Canadian currency, fixed rate portfolios, higher volumes of low-spread deposits and nonearning assets, partially offset by wider spreads on Canadian currency floating rate portfolios. Net fee and commission revenues increased 21% from last year, due to the contribution from acquisitions, particularly DundeeWealth, and higher credit fees across all business lines.

Other operating income was up 10% from last year, primarily due to higher trading revenues. Trading revenues were higher in fixed income and precious metals. Quarter-over-quarter, net interest income increased modestly due to asset growth. Business and government lending growth was exceptionally strong in both International Banking and Global Banking and Markets. And residential mortgages grew in Canadian Banking. Partly offsetting was a slightly lower margin.

Net fee and commission revenues were also up modestly quarter-over-quarter, due to higher underwriting and transaction-based banking fees, partly offset by lower brokerage revenues. Other operating income was up 67% from last quarter, due to the sale of the Calgary real estate asset and stronger trading revenues. Partly offsetting was a lower contribution from Thanachart Bank in Thailand.

Turning to slide 8. Non-interest expenses were up CAD258 million or 11% from last year. Acquisitions accounted for CAD211 million or over 80% of this increase. Core expense growth year-over-year was mainly due to higher staffing levels and higher performance-based compensation. Pension and benefits also increased as the prior year included a CAD35 million expense benefit from the windup of a subsidiary's pension plan.

Excluding the impact of acquisitions, the pension recovery, and the real estate gain, operating leverage was positive this quarter. Compared to the prior quarter, expenses were up slightly due to higher compensation from increased staffing levels and seasonally higher stock-based compensation, mostly offset by a decrease in advertising, premises, and technology costs. We continue to manage expenses prudently and we are well on track to deliver positive operating leverage in 2012.

Turning to capital on slide 9. You can see that the Bank continues to maintain a strong, high-quality capital position. Both the Tier 1 and tangible common equity ratios declined this quarter to 11.4%, and 8.5% respectively, due to the adoption of IFRS and Basel 2.5. Partly offsetting these new standards were strong internal capital generation of over CAD800 million, and CAD146 million of common equity issued under our dividend reinvestment plan.

In early Q2, we successfully completed a public offering of common equity for gross proceeds of approximately CAD1.7 billion, to fund recently closed and previously announced acquisitions. 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 confident of achieving a Basel III common equity Tier 1 ratio of 7% to 7.5% by the first quarter of 2013.

Just before I get into the Business line results, I want to discuss the reporting change that began this quarter as outlined on slide 10. Beginning with Q1, the Bank has moved to matched maturity transfer pricing. Our new transfer pricing methodology uses rates that match the contractual and behavioral maturities of the assets and liabilities in each Business line. We have restated our 2011 Business line results for this change and the whole-year impact by Business line is shown on page 20 of our quarterly report to shareholders.

The Business line that was most affected was Canadian Banking, and its results are lower than under the previous transfer pricing methodology. This change is from a higher net funding charge, which reflects the term structure of the net asset position of the Business. I should point out, though, that the Business has been making its product pricing and product design on a matched maturity basis for many years.

International Banking was minimally impacted. The modest decrease in income mainly reflects higher-term charges for funding provided by Group Treasury. Global Wealth Management benefited from the change in methodology, mainly reflecting a higher value attributed to its relatively stable pools of client cash balances. Global Banking and Markets was also minimally impacted, as most businesses were [corporately] transfer-priced using short-term rates under the old methodology.

The modest increase in earnings mainly reflects the higher value given to relatively stable pools of corporate banking deposits. All business lines also benefited from a higher funding value from allocated capital. The net impact of the changes is reflected in the other segment, which, as you'll see in a few moments now shows a lower net interest income loss. The remaining interest income loss in the other segment largely reflects the impact of asset liability management activities.

With that, let me now focus on the business line results beginning with Canadian Banking. Canadian Banking had a record quarter with all divisions generating very solid results. Net income was CAD475 million, up CAD24 million or 5% from a year earlier. Although the margin declined year-over-year, net interest income was up as a result of solid asset growth, especially in residential mortgages and commercial lending.

Total revenue increased primarily due to growth in net fee and commission revenues, which increased 5% due to higher card revenues and transaction-based fees in retail banking, as well as an increase in credit fees in commercial banking. Our ongoing strategy to develop the retail payments and card businesses continues to support this growth.

Expenses were up 5% due almost entirely to a one-time pension gain in the first quarter of last year. Quarter-over-quarter, assets increased 1% from growth in residential mortgages and consumer automotive lending. Total revenue rose 2% from both higher net interest income and other income. The margin was up 2 basis points this quarter, as consumer preferences shifted towards higher-yielding fixed-rate mortgages from lower-yielding variable-rate mortgages.

Net fee and commission revenues also increased 2% quarter-over-quarter, from higher transaction-driven card revenues in retail banking and commercial credit fees. The provision for credit losses was relatively unchanged from the previous quarter, as higher retail provisions were almost completely offset by lower commercial [inaudibe]. Expenses declined 4% reflecting lower staffing costs and lower advertising and other seasonal costs.

Moving to International Banking on slide 12. Net income in the first quarter was CAD391 million. Year-over-year, revenues increased 11% due to strong broad-based asset growth mainly in commercial lending, and the positive impact of acquisitions, as well as wider margins. Net fee and commission revenues were aided by the contribution from acquisitions.

Other operating income was negatively impacted by lower earnings in Thailand. Expenses were up 12% or CAD90 million, with more than half of the increase due to the impact of acquisitions. The remainder of the increase was mainly due to inflationary increases and investments in growth initiatives.

Looking now at quarter-over-quarter, net income was up 5%. Strong broad-based asset growth and wider margins more than offset the negative goodwill recognized last quarter and lower contributions from Thanachart Bank as a result of recent flooding. Loan loss provisions declined significantly from last quarter reflecting lower provisions in commercial lending and slightly lower retail provisions in the Caribbean and Mexico. Partly offsetting this were higher retail provisions in Chile, Peru and Uruguay. Expenses were up 3% from the previous quarter as a result of higher compensation costs and business taxes.

On slide 13, Global Wealth Management's net income for the quarter was CAD288 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 2% respectively. Of the total revenue, approximately 83% was attributable to Wealth Management and 17% from the Insurance businesses.

Expenses were up 47% from the same quarter last year, due mainly to the consolidation of DundeeWealth's operations. Excluding acquisitions, expenses were unchanged as discretionary expense management remains a key focus. Quarter-over-quarter, net income increased by 10%, mostly due to stronger earnings from insurance, partly offset by lower earnings from the Asset management and Brokerage businesses. AUM and AUA each increased by 3%. Expenses were down 3%, due to higher discretionary expenses in the prior quarter, partially offset by higher volume-related expenses.

Looking at slide 14, Global Banking and Markets recorded net income of CAD311 million, down CAD24 million from a very strong first quarter last year. Revenue was impacted by lower investment banking revenues, and lower margin, partly offset by higher trading revenues in precious metals, foreign exchange, and fixed income. Provisions for credit losses continued to be very modest at CAD5 million, compared to a reversal last year of CAD3 million. Expenses were 3% lower than last year, reflecting lower performance-based compensation.

Quarter-over-quarter, net income increased 28% due to stronger revenues from global capital markets and lower provision for credit losses. Global capital markets experienced higher trading revenues mainly in fixed income, equities, and precious metals. Loan loss provisions declined CAD12 million with new provisions relating to two US accounts, more than offset by recoveries in two other accounts in the US. Expenses increased by 5% from last quarter, primarily due to seasonally higher stock-based compensation, partly offset by lower technology costs. Tax costs were higher this quarter, due to a tax recovery in the fourth quarter.

I'll now turn to the other segment which incorporates the results of Group Treasury, smaller operating units, and certain corporate adjustments. The other segment reported a net loss of CAD29 million this quarter. As we have discussed, the segment benefited from a gain of CAD111 million or CAD94 million after tax on the sale of a building in Calgary. The segment was also impacted by CAD19 million of impairment losses on investment securities. This concludes my review of our financial results. I'll now turn it over to Rob who will discuss risk.

Thanks, Sean. The risk in our credit portfolios continues to be 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 provisions for credit losses have remained stable this quarter. They were down CAD10 million year-over-year and CAD16 million quarter-over-quarter to CAD265 million.

Our net impaired loan formations were CAD276 million, continuing the stable performance since peaking in Q2 2009. Our exposures to certain European countries of concern, Greece, Ireland, Italy, Portugal, and Spain, are not significant and are virtually unchanged from last quarter. Our market risk remains low and well-controlled.

Our average one-day all-bank VAR was CAD17.5 million versus CAD15.9 million in the prior quarter. There were 2 losses in the first quarter compared to 14 in the previous quarter, reflecting lower volatility in capital markets. Both of our loss days were well within the range predicted by VAR.

Slide 18 shows the trend in provisions over the past five quarters. As you can see, provisions have declined meaningfully in the Canadian Bank portfolios year-over-year and were stable over the quarter. Our Canadian retail portfolio remains extremely high-quality, with 93% of assets secured, and relatively low exposure to unsecured loans and credit card. The provisions in the Canadian commercial portfolio were down CAD7 million from last year and CAD6 million from the prior quarter, due to improving credit quality of the portfolio.

International retail provisions increased CAD15 million year-over-year mainly due to a one-time recovery in Mexico in Q1 of last year. The quarter-over-quarter decline reflects the lower levels of provisioning in Mexico, the Caribbean, and Peru. International commercial had net recoveries of CAD1 million due to lower provisions in the Caribbean. Global Banking and Markets provisions improved quarter-over-quarter, but were off slightly from net recoveries a year ago.

Slide 19 shows our Canadian Banking residential mortgage portfolio. Our total portfolio of residential retail mortgages is CAD146 billion. As you can see from the slide, approximately 56% of the portfolio is insured, 44% uninsured. The uninsured portion has an average loan-to-value ratio of approximately 55%. We believe that solid economic fundamentals will enable the Canadian market to remain healthy and adjust without the bubble-bust scenario that we've seen in the United States.

The continued low interest rate environment and reasonable economic performance will enable consumers to manage debt levels well. Credit quality and performance of the portfolio remains strong. Our disciplined underwriting standards through all of our origination channels have resulted in extremely low loan losses.

To summarize on slide 20, our asset quality remains strong with the retail and commercial portfolios performing well and corporate portfolios continuing to show strength. 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 dollars due to growth in the overall portfolio. We expect corporate and commercial provisions to remain within their ranges. That concludes my comments on risk. I'll now turn it over to Anatol.

Thank you, Rob. As Sean discussed, Canadian Banking had a very strong start to the year. We've had continued success in our priority areas, payments, deposits, and wealth management, and had a great performance in commercial banking, small business, and consumer auto as well. Our cost control has been excellent and we reported positive operating leverage on both a quarter-over-quarter and year-over-year basis, after adjusting for the one-time pension pickup we had back in 2011.

Looking forward, we expect to see retail assets continue to grow as they have in Q1, with mortgages and automotive lending leading the way. Growth in other types of retail credit remains subdued, as Canadians remain generally prudent in their assumptions of debt. Overall, we expect to see good growth this year although some cooling of overall housing-related credit may be seen as the year progresses.

Retail deposit market growth remains slow in the current interest rate environment. We see this market as continuing to be competitive, and would expect growth rates similar to recent years. Small business deposit growth has been strong, however, and we expect this to continue, although competition in this market is also becoming fierce.

Commercial asset growth was very strong year-over-year and our pipeline remains healthy. On the liability side, in partnership with Global Transaction Banking, we have grown our commercial deposit book substantially in the last year and target continued growth going forward.

Looking at our margin, it stabilized this quarter and we're cautiously optimistic looking ahead. We're beginning to see signs of change in consumer term preferences and somewhat improved market discipline on the asset side, although deposit spreads are very competitive. Retail PCLs were down a little this quarter and should remain in the same range going forward, as we have not seen any signs of increasing delinquency.

Commercial provisions were also good and we expect them to remain at fairly subdued levels, although as you're aware, they can be lumpy. Overall, a good quarter, and we're pretty optimistic on the near term outlook. However, given the uncertain economic environment, we'll continue our smart spending program and focus tightly on our strategic priorities to producing positive operating leverage for the year. I'll now turn it over to Brian.

Thank you, Anatol. International Banking started the year with a very good quarter. Our continued focus on core asset and deposit growth is taking hold nicely. Year-over-year, we grew our total loan book by 15%, while adding 12% to our low-cost deposit base. In particular, our focus on growing commercial loans is paying off. We had a robust increase of 21% in the portfolio over last year. And our pipeline continues to grow nicely.

On the retail side, we had balanced performance between loan and deposit growth which reflects our investments in sales and service initiatives and our non-branch channels. While we continue to monitor global uncertainty, we remain positive on our diversified growth prospects for the year. From a regional perspective, we expect positive performances from each of our major divisions.

In Latin America, our operations across the region are benefiting from stronger economic growth rates and we continue to grow our footprint. In particular, our results will benefit from our newest operations in Uruguay and Colombia. In the Caribbean and Central America, we expect to see moderate growth this year in our English Caribbean markets, with stronger contributions from our higher-growth Spanish-speaking countries. And in Asia, our Commercial Loan business continues to perform well and the pipeline remains strong.

On the retail side, our results are primarily driven by our investment in Thanachart Bank. The business was negatively impacted this quarter by the flooding in Thailand. Although things are stabilizing and we expect the Thai economy to recover by the second half of this year.

Much of the growth we achieved this quarter was driven by the organic initiatives we launched over the past several quarters. These initiatives will continue to yield positive results and help us to drive core asset and deposit growth. Together with a strong focus on expense management, we maintain our outlook for positive operating leverage this year. In addition, we expect our loan loss ratio to remain stable in the coming quarters.

And finally, in January we closed our 51% investment in Banco Colpatria. Banco Colpatria complements our Latin American footprint very nicely and provides important synergies for our regional customers. As for Bank of Guangzhou investment, we expect the transaction to close later this year. In summary, International Banking had a good start to the year and the necessary elements are in place for us to continue on a positive track for the remainder of the year. I will now pass it over to Chris.

Thank you, Brian. It was a good start to the year for the Global Wealth Management business. Our outlook for the balance of 2012 is also for good organic growth across the business line. Growth in our Global Insurance business remains strong and it should also be sustainable.

We are in a multiyear strategy of leveraging the Bank's significant distribution networks and we're very pleased with our progress to date and our improved cross-sell of insurance. We have complemented our focus on distribution with selective additions of new products with acceptable risk profiles. Insurance is proving to be a highly complementary business beside our wealth platforms.

In wealth we have a strong base of assets under management, and assets under administration to drive our top line. We have significant strength in both asset management and in the breadth and depth of our distribution channels. Based on the most recent IFIC data we rank number-two in Canada for net mutual fund sales and we continue to rank number-two among the Canadian banks in mutual fund assets.

Our focus continues to be leveraging strong brands and product innovation. This past quarter alone, we launched nine new funds across our domestic and international channels. We also continue to focus on capturing both revenue and cost synergies from the acquisition of DundeeWealth and the integration is going well.

In our Wealth Distribution businesses, we expect good organic growth. In Canada, we continue to invest in our advisory channels, Scotia Private Client Group, ScotiaMcLeod, and DundeeWealth Advisors, to drive growth through new client acquisition and improved margins. We are excited to approach the final consolidation of our online brokerage platforms and the relaunch of Scotia iTRADE.

Our investment in CI continues to be an important strategic investment for us and we are pleased with its ongoing performance. Finally, we remain vigilant on expense management and generating positive operating leverage. In summary, we're watching the economic and market environment closely. We do believe, though, our diversified business model will produce strong results for the balance of 2012. And with that I'll pass it over to Mike.

Thanks, Chris. Global Banking and Markets has had a strong start to the year, as market conditions improved from the previous two quarters. Fixed income rebounded from a challenging fourth quarter, performing well across all geographies and generating revenue similar to the strong results they generated in their first quarter of last year.

We have now substantially completed our significant strategic growth initiatives and are focused on efficiently executing on our expanded geographic and product footprint. Market headwinds are expected to persist due to global uncertainty. This impact should continue to be mitigated by our diversified platform. However, going forward, we expect trading revenues to moderate somewhat.

Average assets have grown mainly in support of our global trading platforms. This growth is in line with our expectations and we continue to maintain our discipline to limit risk exposures and to optimize capital usage. Loan volumes have increased modestly and should continue to trend upwards. We have also benefited from opportunities to purchase loans on the secondary market at attractive prices.

The credit quality of our loan portfolio remains strong and we expect PCLs to remain modest going forward. In the current markets, while activity has not been as robust as last year for equity new issue and advisory fees, we are seeing a reasonable pipeline. However, we have not seen opportunities for loan underwriting fees at the same level as we have had historically, particularly in the US. This may present some headwinds going forward.

One of our key objectives this year is to continue to execute the Bank's global wholesale banking initiative. We expect growth and sustainable revenues and net income in the future, particularly from opportunities to cross-sell capital market products to corporate lending clients.

Cost management continues to be a priority and we have implemented cost-saving initiatives in order to reduce expenses and maintain positive operating leverage and our strong productivity ratio. Overall, with our platform diversified by both product and geography, we are well positioned to benefit from opportunities as they arise over the course of the year. And with that, let me turn it back to Chris.

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

Steve Theriault, Bank of America-Merrill Lynch.

If I get one I'll go with a question for Chris, please, on the wealth side. You talked about being vigilant on expenses. Was there anything unusual or seasonal going through the expense line this quarter? And to the point, is a sub-60% efficiency ratio, is that sustainable, achievable on a run-rate basis? And then as a follow-up in insurance, you talked about some new offerings. Can you give us some examples of some of the new insurance offerings you're putting through the distribution channel?

All right, Steve. Thanks for the question. In terms of the expense management, we made a commitment at the end of last year to generate positive operating leverage on behalf of the business and we believe that we will continue to do that. Our revenues were up 3% on the quarter and our expenses were down 3%. We made a conscious effort to scale back some non-core initiatives that we didn't see a significant payback and we do believe that we'll be able to maintain reasonable expense management over the course of the year. So in answer to your question, not seasonal and we're watching the expense line very, very closely and we think we can continue to manage that as the year goes on. On the insurance side, we launched a number of new products in Canada. We launched a new travel insurance program. We moved the business from one provider to another. We also launched some life and disability products. But the big story really in insurance in Canada is the creditor cross-sell and the penetration through the Canadian Banking side which has gone up significantly and we still have some room to grow there, in terms of actually getting to the industry average but there's been some significant progress. On the international insurance, there's been some significant work done by our investment International Banking group in markets like Peru just in standard insurance products and we're seeing good growth in markets like that which we're trying to leverage on the international side. So the business line is an important contributor to wealth overall and we expect to see some good growth in it over the balance of the year.

Could you tell us what the penetration level is on the creditor versus the industry average?

Well, we've grown from about 45% over the last few years up to the low 70%s now. We're 71% and the industry is a little bit higher. There's a couple of Best-in-Class that would be a little higher than 71%, so we still have room to grow.

Thanks very much.

Gabriel Dechaine, Credit Suisse.

My question is going to be about the efficiency ratio in the International segment. Do you have a target there that you'd like to get, actually very similar to Steve's question, but on International, do you have a target you would like to get to? And I'm wondering if you can put any numbers around what's going on in the expense line now related to discretionary-type investing? Because it seems like earnings growth is good, a lot of that driven by credit but expense is still pretty high in that segment and I'm wondering what the plan is there to bring down expense inflation? And can you do that without compromising your loan growth? Because loan growth has been very strong.

Okay. Gabriel. I'd look at expenses on a year-over-year basis. I think that's the way to do it. If you look at our increase year-over-year is CAD92 million. Of that CAD92 million, CAD53 million of that is due to acquisitions in Uruguay and Brazil, so about 58% of it is acquisition-related. The balance being 42% is split relatively evenly between inflationary increases and the initiatives we've outlined in terms of our non-branch sales channels, the investments we've made there. And as you can see from our asset growth, both on the commercial side and the retail side, which has a fair degree of breadth to it, we believe those investments are paying off nicely.

Right. And so you've also believe that by pulling back expenses if the need arises, you're not going to -- ?

The other point I would make is operating leverage for the quarter was negative 1.2. I said in my comments that we predict that we'll get to positive operating leverage for the year and that's definitely in our plan for the year.

Just to add some more color. If we adjust for acquisitions, the operating leverage actually is slight positive 0.4%.

All right. Thanks.

Peter Rutledge, National Bank Financial.

Question on the -- switch to the maturity funds, transfer pricing methodology. First of all, it seems like International Banking, the impact was much less at International Banking than at Canadian Banking, yet they run proportionately a very similar gap, so I'm wondering why it wasn't more costly in International Banking. And then a part B for both segments, how do your incentives change in each segment now that you have this matched maturity pricing? Thanks.

Okay. So on the first question on the International Banking, International Banking is primarily, largely self-funded, so it's effectively transfer priced within the local country. For the commercial loan book in Asia, that is funded by Group Treasury, but it's not nearly the same size as the Canadian Banking. In terms of compensation incentives, we have not changed our model for compensation incentives.

But cost of funds for the segments change and net income, at least for Canadian Banking changes. Are they incented to raise core deposits much more aggressively now than they were before?

This drives the rate behavior to acquire more deposits because they'll get greater value for those in the mass maturity transfer pricing. On the asset side for many years as we had mentioned they'd been pricing their products and designing products based on a mass maturity basis.

Peter, I'll just jump in. Anatol here. One of the other thing that this has done, is it's allowed our sales force to align with what is, in essence, profitability versus volume. And that result we've already seen in this first quarter. So it's very much aligned. By going to matched maturity it has allowed us to do that in an easier fashion.

Thanks. That's very helpful, I appreciate it.

John Reucassel from BMO Capital Markets.

Just a question for Rob on your slide 19. I'd just be curious, when you look at the LTVs across the country, Ontario, BC particularly, are they higher in particular provinces or cities like Toronto? And do the LTVs differ between condos and houses?

The LTVs across the country are not that much different and as far as condos versus mortgages, would be about the same as -- it's remarkably consistent.

Okay, so there's no big difference between the two groups.

No.

Okay. Thank you.

John Aiken, Barclays Capital.

Just to continue picking on Rob. Rob, taking a look at the provisions that occurred on the personal line this quarter, granted they were essentially flat, but we saw a big drop in residential mortgages but a big increase on personal and credit card loans. Was that consistent between the domestic and the international portfolio or was there something between the geographies that was driving those differences?

Well, I think that you're going to see the mortgages start to tail down as you see the work-through in 2008 and 2009. And I think what you're seeing in the Canadian retail is just growth, normal growth, and therefore the PCLs and delinquency that will come from that and we don't see that as anything untoward. As far as the international, it's typically international, there's a variety of different things at play. The Caribbean is being stabilized. Mexico's being stabilized. Peru's a little up because of its growth and Chile is relatively stable as well. So they're not correlated.

Thank you.

Andre Hardy, RBC Capital Markets.

Probably for Brian Porter but maybe for Mike Durland as well. Are you seeing any changes to the competitive environment as it relates to subsidiaries of European banks either in the US or Latin America or Asia? And at the same time, are you seeing more potential deal flow versus normal types?

I'll start off and Mike may have a comment. I can speak to Asia. Our margin expanded in Asia this past quarter and that's a function of the absence of some European banks in terms of lending so we were the beneficiary of that. Haven't seen the dynamic change in Latin America. The Spanish banks are still fierce competitors and we don't see them letting up. We did acquire a few loans last quarter in Chile that were investment-grade loans that for existing clients that fit our risk profile and that was just year end housekeeping from European banks in terms of selling.

I would say yes, but probably not to the extent that one would expect. And we're seeing it in all of the markets, so a little bit in Latin America, we're seeing a little bit in the US, a little bit of a change in Europe but I would just qualify that and say that probably less than we would are have expected.

Thanks. Let me try to sneak in a second one if possible. Are you willing to share the inflation to risk weighted assets you expect as a result of counterparty credit risk charges increasing?

We haven't provided that in the past but I think it will be in the range of CAD5 billion to CAD7 billion in terms of extra risk weighted assets.

Thank you very much.

Sumit Malhotra, Macquarie Capital Markets.

My questions are for Mike Durland. Mike, it certainly didn't seem from a volume perspective that activity levels in the quarter were sufficient to drive the increase in trading. You mentioned the fact that you don't think it's likely to be sustainable at this level. Could you talk a little about how perhaps remarking of inventory helped your fixed income business this quarter, sizing that potential gain?

Had nothing to do with remarking of inventory. We were, I would say, quite risk averse, especially in the fourth quarter last year. We had a pretty slow start to this quarter in November. And really, when the liquidity programs were initiated in Europe, we saw a pretty robust couple of months of activity which we were able to take advantage of. Our inventories going into the year were very, very light. So none of the change in the quarter had anything to do with changes in marks to inventory. I will also say that fixed income had a great quarter but the thing that was impressive was that fixed income equity, foreign exchange commodities, metals, energy, all had very strong quarters. So it was a little bit of -- it was a lot of chip shots that got us around the course during the quarter.

When you say that you don't expect this level to be sustainable, what have you seen, obviously I know you're not going to give guidance here but what have you seen slow down to begin in Q2?

I think there was a spark of activity caused by two things. One, just the increase in global liquidity which occurred in late November, and I think there was a little bit of a turn of the calendar effect. I think people had brought their risk levels down universally on the buy side, especially in the middle to back half of 2011 and I think we saw some of that -- those risk assets, that risk profile change around the calendar which was good for our business. It was good for Chris' business. But I don't think that we're out of the woods yet. We are still careful and cautious about the current market conditions. We think that it's been a pretty robust turn of the calendar but we don't expect it to sustain itself for the entire 12 months of the year.

And lastly, how much -- you say you bought some loans in the market. Could you give us a little bit of information there on what exactly what type of assets these are and what the size is that you purchased.

So it's Steve McDonald. We were able to buy prior to calendar year end about CAD3 billion in loans at discounted prices and nicely distributed between International. So half that would be International and half of it would show up in Global Banking Markets, and then distributed geographically relatively evenly. Again, high investment grade quality with relatively short term and the sellers were principally the European banks. Since then, we've seen -- of course I should mention that the ROEs were 35% range, so very healthy. Since then, as Mike was indicating with respect to increased liquidity, we've seen a significant reduction in the selling activity of the -- particularly the European banks, not a complete cessation but a substantial reduction. Some of that probably is calendar-year-end related. It might pick up over the course of the year, but we're anticipating that we'll be able to see modest continued growth in assets regardless of whether secondary asset sale purchases show up again.

I think also the introduction of the three year ECB facility has taken, at least in the immediate term, some of the pressure off of what European banks had to do. I'm not sure that that is finalized yet because it is only a three-year facility but I think it's taken and probably healthy-wise taken off a little bit of pressure and then the Europeans will all have to reassess their business models as they go forward with what's happening in Europe.

Thanks for your time, guys.

Robert Sedran, CIBC World Markets.

Brian, the issue of Thailand has come up a few times on the call. I'm hoping perhaps you could give a little bit more color in terms of the direct impact that the flood has had -- flooding has had on your business and people. And then you mentioned the hope that the Thai economy might rebound in the second half. Does that mean that 2013 is the year we start to see a bit of an earnings recovery from T bank or should we see a progression through this year?

I'd say one thing, that this is a significant natural disaster. We had our Board there in late October and saw part of it before the worst part came. But this is very significant. We have a branch network there of about 680 branches. About 10% of our branches have been closed for a significant period of time. So our experience in natural disasters is, you're going to have an increase in non-performing loans, you don't underwrite as much business as you had in prior -- in a more normalized environment. So there has been some economic stimulus. Thailand is forecasted to have positive growth for the year. And we would expect to see more normalized growth in Thailand in Q3 and Q4 this year.

So is the decline that we saw this quarter related to nonperformers or just slower business growth, or is it both?

Slower business. A slight increase in nonperformers, but basically it's slower business and the business has been running at half the normalized rate.

Thank you.

Mario Mendonca, Canaccord Genuity.

One quick question first for Brian. Organic loan growth in the International segment, either in total or for commercial specifically, could you help us with that?

Sure. Loan growth, I can give you year-over-year. Commercial loan growth year-over-year is 21%, excluding acquisitions it's 20%. In the quarter, it was up 6%. Retail loan growth, 10% increase year-over-year, up 3% for the quarter. And the interesting note here, Mario, is that as I think I said in my written text is the loan growth we're seeing is broad spread throughout the platform with the exception of the English Caribbean. So it's diversified across the platform.

And Colpatria would add, what, maybe another CAD5 billion or so. I understand that it closed very late in the quarter. Is that the right number to be focused on?

Yes, in terms of assets, Colpatria is CAD5.5 billion of assets split evenly between retail and commercial. It's about CAD6.5 billion of risk weighted assets.

Okay, and then finally. A more detailed question, just overall. Could you tell us where you stand with covered bonds, how much has been issued, what your room is and whether the extent to which you -- you hit your limit on covered bonds, does that affect -- could that have an effect on your capacity to grow domestic retail mortgages or loans more generally?

It's Jeff Heath. I'll respond to those questions. So our outstanding covered bonds are about CAD12.5 billion. Using Austry's 4% cap, that puts us about halfway to our cap. So we certainly have lots of room to go on covered bonds. Although covered bonds have been fairly significant in the last year, in the context of our overall funding, it is not the dominant part of our funding profile. So at this point I certainly don't see it as a constraint issue.

Thank you.

Darko Mihelic, Cormark Securities.

Just a question with respect to the net interest margin and the decline that we saw quarter-over-quarter. I also want to put it in the context of your annual report where you suggested that you would have some runoff of higher cost long-term funding that would actually help the margins stay stable. So I guess the question is, has the higher cost long-term funding run off or is that something we should expect to see towards the back half of the year and in fact we have net interest margin go higher, and if that's not the case what's impacting the margin? And if you can provide an outlook for the margin within that context, that would be good. Thanks.

This is Sean. I'll start the first part of the question. The margin was down 4 basis points versus last quarter and part of that is due to asset mix. We added to our deposit with banks, which were at a lower spread, so that accounted for about half of that difference. As well, although the Canadian Banking retail margin is starting to tick up a little bit as you saw in the results there, the Global Banking Market spread was off a little bit. There was also a one-time item that hit, interest of CAD16 million that we disclosed, mostly offset in other income. That also contributed to the margin going down. But if the Canadian consumer preference continues to shift to more fixed-rate mortgage product as we've seen recently, that will reduce the downward pressure on the margin that we've seen in the last two, three months -- two, three quarters, so looking forward, we think we may be near the bottom of the margin compression and Jeff, did you have a comment on the long-term funding?

We do expect some benefit from the rolling off of higher cost funding and derivatives, but I would say its impact is relatively modest and over a number of quarters.

Cheryl Pate, Morgan Stanley.

Just a quick question for Rob Pitfield. Just wondering if you could share some more color with us on condo exposure both in terms of the mortgage portfolio but also the development and construction portfolio as well.

Sure. We have about CAD13 billion in condos. About 80% of that would be rated A or B in terms of credit quality, about half, 46%, would be insured. The delinquency would be about 125, so as good or better than the overall portfolio. There would be another CAD2.7 billion that would have a very low loan-to-value, so it's a very good, solid portfolio, about CAD5 billion of that would be in -- of the CAD13 billion would be Toronto and about CAD2.5 billion would be in Vancouver. So it's a good, well-performing portfolio. The metrics continue to be good on it. We feel that the absorption rate in the market continues to be at historic levels. We see the demand fundamentals, they don't seem to be showing any sign of letting up fundamentally. Our condo builders are very select. They have deep pockets, so there's support there. They're very experienced. We have a lot of relationship with them. The number of presales is very, very high, so overall, it's a concern everybody's watching the market. We're watching it very closely ourselves, but the fundamentals continue to be strong.

And the CAD13 billion is total, both in the mortgage portfolio and the development?

No, that's just the condos. The retail, sorry.

Okay.

There are no further questions at this time. Please continue.

All right. I'd just like to thank you all for participating in our first-quarter results discussion. Look forward to having you on the line next quarter.

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