Bank of Nova Scotia (BNS) 2012 Q2 法說會逐字稿

Good afternoon. And welcome to the presentation of Scotiabank's second-quarter results. I am Sean McGuckin, Chief Financial Officer. Rick Waugh, our CEO, will lead off with the highlights of the second quarter. Next, I will go over the second-quarter financial results, including a review of business line performance. Rob Pitfield, our Chief Risk Officer, will then discuss credit quality and market risks. 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, Sean. We are pleased to announce another strong quarter. Scotiabank generated net income of CAD1.46 billion. This represents growth of 16%, excluding the acquisition-related gain and the IFRS-related foreign exchange gain in the same period last year. Earnings per share were CAD1.15 for the quarter, up 8% year-over-year, excluding the aforementioned gains. Return on equity remained very strong at 18.6%. Revenue was a record this quarter, growing by more than 10%.

The strong performance this quarter demonstrates the results of our continued focus on our ongoing revenue and cost containment initiatives and acquisitions in high-growth markets. The credit environment continued to be benign this quarter, as evidenced by the continued steady improvement in loan loss provisions. Our industry-leading productivity ratio remains stable at 53.7%. Expense management remains an ongoing priority.

This quarter, excluding the nonrecurring gains, we delivered positive operating leverage. Our capital ratios remain strong. With our solid and consistent internal capital generation and our recent issuance of common shares to fund acquisitions, our Tier 1 and tangible common equity ratios increased significantly this quarter. As well, we remain confident of exceeding the minimum Canadian regulatory expectations of Basel III, which are well above the international Basel III requirements by the first quarter of 2013.

Last week we announced the sale of our Scotia Plaza Office complex here in Toronto. We were the last of the major Canadian banks to own our own head office building. But this asset is not core to our banking business. It's an efficient source of funding and capital to finance our growth. The sale is expected to close on June 20. And the ongoing impact of our operating earnings is not material. We will provide further details on the financial impact of this transaction when the deal closes.

The strong performance this quarter from all our business lines continues to show the underlying strength of our diversified operating model. Canadian Banking had a strong quarter and saw solid growth in residential mortgages, automotive, and commercial lending. Year-to-date revenues are up a solid 3.5%, with net income up 13.5%, as a result of very good expense management in the first half of this year. International Banking had solid net income this quarter with diversified loan and deposit growth. This quarter also includes our most recent acquisition in Colombia, Banco Colpatria. Year-to-date revenues are up strongly at 20%, and net income is up 15%, reflecting our investments in higher-growth markets in Latin America and in Asia.

In Global Wealth Management, earnings this quarter were driven by a solid performance in our Canadian mutual fund business. Year-to-date, revenues increased 18% with net income up 24%, demonstrating the continued strength in both our wealth management and insurance businesses. Also, DundeeWealth continues to contribute to the solid bottom-line growth.

And finally, Global Banking and Markets reported a very good quarter due to stronger capital market revenues in our precious metals, our equities and our energy businesses. Year-to-date revenues have increased 3% from a very strong first half in 2011. And continues to show the strength again of diversified along our product lines and our geographies, and our client-driven focus. However, net income did decline 2%, mainly due to a lower effective income tax rate. So based on this good performance in the first half of the year, we are confident of achieving our financial objectives for 2012.

With that, now back to you, Sean.

Thank you, Rick. Slide 7 shows our key financial performance metrics for the quarter. Earnings per share for the quarter were CAD1.15, an increase of 8% excluding acquisition-related gains and IFRS-related foreign exchange gains from last year, and up 3% over the first quarter, excluding the Calgary real estate gain in the prior quarter.

Looking at year-over-year changes, Q2 earnings benefited from the contribution from acquisitions, particularly Banco Colpatria, as well as a higher margin and solid volume growth, stronger trading revenues and growth in transaction-based banking fees. Partly offsetting were higher operating expenses, mainly from acquisitions, as well as a higher effective income tax rate and a lower net gain on investment securities. The provision for credit losses was CAD264 million this quarter, down CAD6 million from last year, reflecting lower provisions in Canadian Banking and Global Banking and Markets, partially offset by higher provisions in International Banking.

Moving to revenues on slide 8. Revenues during the quarter were a record at just under CAD4.8 billion, representing growth of more than 10%, excluding the aforementioned gains last year. The year-over-year increase reflects higher net interest income which increased due to the impact of acquisitions and organic asset growth. The core banking margin increased 7 basis points year-over-year, mainly from recent acquisitions with higher spread business, partly offset by higher volumes of lower-yielding deposits with banks.

Non-interest revenues increased modestly from last year, excluding acquisition-related gains, due to increased banking fees and higher capital markets revenue, mainly in the precious metals, energy and equity businesses. Quarter-over-quarter, net interest income increased 4% from higher margins from recent acquisitions and business lending asset growth, partly offset by two less days in the quarter.

Non-interest revenues declined slightly quarter-over-quarter, due mainly to the gain on the sale of the Calgary real estate asset in the prior quarter, though this was mostly offset by the impact of acquisitions and the increased contribution from Thanachart Bank in Thailand.

Turning to slide 9. Non-interest expenses were up CAD170 million or 7% from last year. Acquisitions accounted for CAD140 million or over 80% of this increase. Underlying expense growth year-over-year was mainly due to higher staffing levels, as well as increased premises and technology costs. Excluding last year's gains, operating leverage was quite strong at 3.5% year-over-year.

Compared to the prior quarter, expenses were up slightly due to acquisitions. Excluding acquisitions, there were reductions in most expense categories. Operating leverage was also positive excluding the real estate gain in the prior quarter. Expense management remains an ongoing priority and we are well on track to deliver positive operating leverage in 2012.

Turning to capital on slide 10. You can see that the Bank continues to maintain a strong, high-quality capital position. Both the Tier 1 and tangible common equity ratios increased significantly this quarter to 12.2% and 9.4%, respectively, due to the share issuance and strong levels of internally-generated capital. This quarter 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 committed to our previous guidance of achieving a fully accelerated Basel III common equity Tier 1 ratio of 7% to 7.5% by the first quarter of 2013.

Turning to the business line results beginning on slide 11. Our Canadian Banking had a strong quarter. Net income was CAD461 million, up CAD87 million or 23% from a year earlier. Revenue growth was solid with growth in net interest income and net fee and commission revenues of 6% and 4%, respectively. Although the margin declined slightly year-over-year by 2 basis points, net interest income was up as a result of solid volume growth in residential mortgages, automotive lending and commercial loans. There is also improved credit performance with loan loss provisions down CAD26 million.

Expense management initiatives were also evident this quarter with expenses virtually flat from last year. Quarter-over-quarter, assets increased 1% mainly from continued growth in retail mortgages and consumer auto loans.

Total revenue declined 2% due to two fewer days in the quarter and a 1 basis point decline in the margin. The provision for credit losses declined CAD16 million to CAD120 million, with lower provisions in both retail and commercial. Expenses were essentially flat compared to last quarter, reflecting the impact of a shorter quarter and seasonally higher expenses in the previous quarter, offset by higher pension costs.

Moving to International Banking on slide 12. Net income in the second quarter was CAD448 million, up from CAD368 million a year ago, excluding an acquisition-related gain. A significant portion of the increase was due to the acquisition of Banco Colpatria in Colombia. Approximately CAD31 million of these earnings are deducted in the noncontrolling interest line.

Year-over-year, revenues increased 27% due to strong diversified loan and deposit growth, the positive impact of acquisitions, as well as wider margins. Net fee and commission revenues were boosted by the contribution from acquisitions, as well as good transaction fee growth, particularly in Peru and the Caribbean.

Expenses were up 32% or CAD224 million, with almost two-thirds attributable to acquisitions. The remainder of the increase was mainly due to inflationary increases and investments in growth initiatives. Quarter-over-quarter, net income was up 15%, largely due to the Colpatria acquisition and the higher contribution from Asia-Pacific.

Loan loss provisions increased CAD21 million from last quarter, primarily from higher commercial provisions in the Caribbean and Central America region. Expenses were up 10% from the previous quarter due entirely to acquisitions and seasonality, reflecting careful expense control.

On slide 13 Global Wealth Management's net income for the quarter was CAD298 million. Excluding an acquisition-related gain, revenues increased 6% year-over-year, driven by strong growth in global insurance and solid results in asset management. Assets under management and assets under administration grew 3% and 2%, respectively. Of the total revenue, approximately 84% was attributable to wealth management and 16% to the insurance businesses. Expenses declined 3% from the same quarter last year due mainly to one-time DundeeWealth costs incurred in 2011 and benefits realized from the integration of DundeeWealth operations.

Quarter-over-quarter, net income increased by 3% due to growth in global asset management and wealth distribution revenues, partially offset by lower earnings from global insurance which benefited from reserve releases the prior quarter. AUM and AUA grew by 3% and 2%, respectively. Expenses were up 6% due to growth in volume-related expenses and technology costs.

Looking at slide 14, Global Banking and Markets recorded very strong net income of CAD387 million. Year-over-year, revenue increased due to higher capital markets revenues, precious metals, equities and energy businesses, partly offset by declining revenues in fixed income.

Provisions for credit losses were a net recovery of CAD1 million, compared to provisions of CAD11 million a year earlier. Expenses were 5% lower than last year, reflecting lower legal expenses and lower remuneration costs. The reduction in expenses reflects cost management initiatives implemented this year.

Quarter-over-quarter, net income increased 24% due to higher equities revenues and higher revenues from US and Canadian lending businesses. Expenses declined by 6% from last quarter, primarily due to lower stock-based compensation.

I'll now turn to the other segment on slide 15 which incorporates the results of Group Treasury, smaller operating units, and certain corporate adjustments. The other segment reported a net loss of CAD134 million this quarter. The segment was impacted by CAD34 million impairment losses on investment securities and a CAD25 million offset to revenues recorded in Global Banking and Markets and Global Wealth Management related to Scotiabank's common share offering in February.

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 portfolio continues to be well-managed. And we continue to see a steady improvement in the quality of our loan portfolios. Our provisions for credit losses improved again this quarter, down by CAD6 million year-over-year and CAD1 million quarter-over-quarter to CAD264 million. Our net impaired loan formations were CAD405 million, an increase from the prior quarter, principally due to two accounts. Our exposures to certain European countries of concern, namely Greece, Ireland, Italy, Portugal and Spain, are not significant and have declined from the last quarter.

Our market risk remained low and well-controlled. Our one-day average VAR was CAD18.3 million versus CAD17.5 million in the prior quarter. There was one less day in the second quarter compared to two in the previous quarter, reflecting lower volatility in capital markets. The one less day was 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 in the Canadian Banking portfolios year-over-year and quarter-over-quarter. The lower provisions were broad-based across a majority of Canadian Banking's retail and commercial businesses. Our Canadian retail portfolio remains extremely high quality, with 93% of assets secured and relatively low exposure to unsecured loans and credit cards.

International retail provisions increased CAD33 million year-over-year, mainly due to higher retail provisions in Peru, as well as the recent acquisitions in Uruguay and Colombia, partially offset by lower retail provisions in Mexico and the Caribbean. The quarter-over-quarter increase reflects higher levels of provisioning in the Caribbean.

International commercial provisions increased to CAD12 million due primarily to higher provisions in the Caribbean. Global Banking and Markets had net recoveries of CAD1 million, as net recoveries in Canada were partially offset by higher net provisions related to the two accounts in the United States.

Slide 19 shows our Canadian Banking residential mortgage portfolio. Our total portfolio of residential retail mortgages is CAD149 billion, of which CAD136 billion is related to free-hold properties and CAD13 billion related to condominiums. As you can see from the slide, approximately 56% of the portfolio is insured and 44% is uninsured. The uninsured portion has an average loan-to-value ratio of approximately 56%.

We believe that the solid economic fundamentals will enable the Canadian market to remain healthy and adjust without the bubble-bust scenario that occurred 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 remained strong. Our disciplined underwriting standards through all of our origination channels have resulted in extremely low loan losses.

Turning to slide 20. Our Canadian high rise condo development exposure is relatively small at CAD610 million. The majority of this exposure is to established, well-known Tier 1 developers with significant experience in building and selling high-rise condos. We have long-term relationships with them and a strong covenants and underwriting standards. It is a high-quality portfolio and we have had virtually no losses in the past 15 years.

To summarize our slide on 21, our asset quality remains strong with the retail and commercial portfolio stable. And our corporate portfolio is performing exceptionally well. A combination of growth in portfolios, acquisitions and product mix will result in a natural rise in provisions over coming quarters. We expect Canadian retail provisions to remain stable and international retail provisions to grow due to acquisitions and growth in the portfolio. We expect corporate and commercial provisions to remain modest. And that concludes my comments on risk, and I'll turn it over to Anatol.

Thank you very much, Rob. As Sean discussed, Canadian Banking had another strong quarter with net income of CAD461 million. We have remained focused on deposits, payments and wealth management referrals. And we've grown each, gaining market share in mutual funds and realizing double-digit account growth in cards. We continue to report positive operating leverage on a year-over-year and year-to-date basis. In retail, we expect to see continued healthy asset growth primarily in fixed rate residential mortgages and in consumer auto.

Deposit growth will remain a challenge due to the persistent low interest rate environment and competition for regulatory qualifying liquidity. However, we feel that the success of our Richness Is and other campaigns have positioned us favorably in the market. We have experienced solid asset growth in automotive lending on a quarter-over-quarter and year-over-year basis. As I mentioned, going forward we expect this to continue. Small business deposits continue to grow. But the rate of growth has slowed somewhat from prior periods reflecting intensified competition in this segment.

Turning to commercial banking. We've had very strong year-over-year growth in assets and deposits. Our pipeline remains strong as we continue to focus on targeting initiatives in key industries. And on further leveraging synergies between core commercial banking teams and our specialty teams. Our partnership with Global Transaction Banking has generated excellent growth in deposits. And we expect this growth to continue.

We expect the margin to remain relatively steady as the sale of new mortgages continues to be predominantly in fixed rate mortgages, a higher yield product as opposed to variable rate mortgages. Somewhat offsetting this, spreads on deposits remain under pressure, reflecting competition. Retail delinquencies have continued to slow and steady decline. And recoveries continue to trend favorably, as well. Many of our retail portfolios we have returned to pre-recession delinquency levels. Recent stress testing results demonstrate our ability to withstand severe shocks in the housing market. Overall, we expect retail and small business PCLs to remain stable for the remainder of the year and likely close the year-end with a year-over-year decline.

Commercial PCLs have also improved but can vary from quarter to quarter. However, the current outlook for the balance of the year is for commercial PCLs to be relatively stable. Cost containment has been excellent, with expenses nearly flat quarter-over-quarter and year-over-year. But they're likely to increase somewhat going forward, reflecting seasonal spending patterns and more days in the quarter. In all, Q2 was another excellent quarter and we are optimistic about the remainder of the year. Earlier this year I told you we were committed to delivering positive operating leverage and we feel confident about our ability to continue to do so.

I'll now turn it over to Brian.

Thanks, Anatol. International Banking had another good quarter. Our well-diversified platform delivered solid results, as we continue to realize the benefits from higher growth markets in Latin America and Asia. We had good momentum on loan and deposit growth and we expect this momentum to continue.

From a regional perspective, in Latin America we delivered strong earnings, most notably in Mexico and Peru. Asset and deposit growth remains strong in all markets and economic fundamentals remain favorable. This quarter also included the results from our most recent acquisition, Banco Colpatria in Colombia. Our outlook for the balance of the year remains positive for the Lat-Am region.

In the Caribbean and Central America, our results reflected continuing slower growth in the Caribbean economies. In Central America, we experienced solid growth, particularly in Panama and Costa Rica. We continue to manage the region closely and expect more of the same for the balance of the year. In Asia our core lending portfolios continue to perform well. As noted last quarter, the results from our investment in Thanachart Bank are now benefiting from the post-flood recovery. And we expect this trend to continue over the balance of the year. On the commercial banking side, our businesses across all markets are performing well, with strong loan and deposit growth, reflecting the key growth initiatives we implemented over the past 18 months.

Looking ahead, we continue to have a healthy sales pipeline. On the retail banking side, our efforts to improve sales productivity and enhance our distribution channels are showing encouraging results. For example, without the benefit of Banco Colpatria, we had strong year-over-year loan growth of [11%]. Origination levels for personal loan products are strong and we expect that pattern to continue for the balance of the year. We continued our sharp focus on expense management and we are on track for delivering positive operating leverage this year. In summary, International Banking had a good first half. We are expecting a solid second half based on good momentum in our underlying businesses and from the benefits from our Banco Colpatria acquisition.

With that, I'll turn it over to Chris.

Thank you, Brian. Our outlook for Global Wealth Management is for good organic growth. This outlook may be impacted by the current uncertainty in the markets. Growth in our global insurance business remains strong with the addition of new offerings with acceptable risk profiles diversifying our product range. For example, we expanded distribution of our new Scotia life travel insurance program to the retail bank channel, and launched new products in the Dominican Republic, Jamaica and the Cayman Islands.

As we have discussed before, we are in a multi-year strategy of leveraging the bank's significant distribution networks and deepening collaboration with our partners in other bank channels. We are pleased with our progress to date and our improved cross-sell of insurance. Insurance is a highly complementary business to our wealth platforms, and growth should be sustainable.

In our wealth businesses, we have a strong base of assets under management and assets under administration to drive our top line. We have significant strengths in both asset management and in the breadth and depth of our distribution channels. Based on the most recent IFIC data, we gained market share for the quarter. Net sales in Canadian mutual funds have more than offset market declines over the past year. And expectations are that sales momentum will continue. This past quarter we have combined net sales of CAD1.4 billion. Our relationship with our partners in Canadian and International Banking continues to be a key source of competitive advantage in driving our sales momentum.

We continue to leverage our asset management bench strength with a focus on product innovation. We launched eight new funds across our Canadian international channels this past quarter. In our wealth distribution businesses, we're seeing good growth in our Canadian private banking business and international wealth businesses. And we continue to invest in our technology and operating platforms to drive efficiencies and create greater capacity for growth.

We recently completed the consolidation of our online brokerage platforms under a single Scotia iTrade brand, and launched a new trading platform and public website with significant new features and benefits. We believe we are well positioned to grow this business.

The acquisition of DundeeWealth and the integration continues to capture both revenue and cost synergies, and is progressing well. Our investment in CI continues to be an important strategic investment for us and we are also pleased with its ongoing performance.

Finally, we remain vigilant on expense management and generating positive operating leverage for the year. In summary, we are watching the economic and market environment closely. Despite the ongoing pressure facing markets which will impact all participants in the wealth sector, we believe our diversified business model will continue to deliver good results in 2012.

With that, I'll now pass it over to Steve.

Thanks, Chris. Global Banking and Markets had another strong quarter. This quarter ranked among the best performances ever for our wholesale operations. Solid results were diversified across all of our business platforms and geographic footprints. In addition to Scotia Mocatta achieving two consecutive record quarters, we experienced stronger results in our equities business, our investment banking business, and our US and Canada corporate banking businesses. Results in fixed income and energy kept pace with the strong levels set in the prior quarter.

The acquisition of Howard Weil this quarter expands our product footprint in the energy sector and also grows our equity sales, trading and research capabilities in the US. As well, we continue to focus on growing our global wholesale banking platform, especially in Latin America and Asia. Market headwinds are expected to persist due to global uncertainty. As well, the summer months often show cyclically lower levels of activity in the capital markets businesses. We do not expect revenues in these businesses to remain at current levels.

The pipeline for investment banking and advisory revenues for the second half is fairly robust. But in the absence of a pickup in M&A activity, the low level of activity in lending markets suggests some challenges for loan underwriting fees. Average assets continue to show steady growth, mainly in support of our global capital markets platforms. This 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 shown modest increases and we expect this trend to continue. Loan spreads have remained very stable over the past few quarters, despite competitive pressures and we do not expect this to change significantly. The credit quality of our loan portfolio remains strong. And while we do not expect ongoing net recoveries, we do expect PCLs to remain modest going forward.

Cost management continues to be a priority and our cost savings initiatives will help us maintain positive operating leverage and our strong productivity ratio. Overall, with our diversified geographic and product mix, we expect to deliver solid results. And remain well-positioned to benefit as opportunities arise over the second half. With that, let me turn it back to Sean.

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

Peter Routledge with National Bank Financial.

Just a first question on your European exposure. There was a big jump in deposits with UK and German banks. Can you give us a little color of what's driving that? I'm referring specifically to the disclosure on page 13, the shareholders report.

Yes. That's a combination of two things, Peter. One, just liquidity management. And two, natural customer cash flows. Those cash flows can tend to go up and down there. They were at a high point and those volumes have come down. But as you say, they're in the strongest areas of the European sector and we selected them on that basis.

Okay. So we're talking systemically important institutions.

It's Mike Durland. In our global prime finance business, there were a couple of transactions that occurred late in the quarter that caused a jump in those numbers. Those transactions were short-dated. They've matured and those positions have not come off.

Thanks. And then a quick question for Chris, just on the earnings growth and contribution outside Canada. Can you give us a sense of what percent contribution you're getting from your businesses outside Canada in your segment? And then how much did those contribute to growth in the quarter?

The contribution outside of Canada would be limited. From a wealth perspective, it represents about 6% to 7% of the earnings. For insurance, it would represent a larger amount. In terms of the mix of earnings, we still see significant opportunities to grow our business in Canada overall but we do expect insurance outside of Canada to continue to grow. Insurance represents about 20% or 25% of the revenue for the business overall and the bottom line is slightly higher than that.

Okay. Thanks very much.

Gabriel Dechaine with Credit Suisse.

First, on international, if I back out Colpatria, it looks like expenses were up 11% year-over-year. Can you, Brian, let me know how you expect that to trend over the next several quarters? Then in the other segment, we saw the NII swing quite substantially. I don't have the number in front of me here but on a quarter-over-quarter basis it was a negative 145, and I think it was around minus 90 last quarter. I thought we'd see less swings like that because of the new fund transfer pricing methodology. But maybe I'm barking up the wrong tree there.

And then in your capital section you talk about increased use of advanced models for RWA calculation by 2013, 2014. I know it's quite early to be asking this but any sense of what kind of benefit we would expect from that in terms of RWA reduction? Any help you can provide there would be appreciated. Thanks.

Okay. Gabriel, on expenses I'd make two points. One, as you know, we've been going through a period of time where we've invested in our non-branch sales channels in terms of systems and processes, et cetera. That's largely over. So we're left with the ongoing operating expenses, largely staff, of those initiatives. And those initiatives are certainly gaining traction as you can see from our loan growth on the retail front. I would say this quarter, Q2 is a little lighter on a seasonal basis and that just reflects the shorter quarter and the amount of holidays, particularly in Lat-Am in the quarter.

The other point I'd make is that we're managing headcount aggressively. We're going through a process of branch consolidations in Chile, Central America and Mexico, and reducing headcount that way. So expenses, again, are our priority and we expect to produce positive operating leverage this year.

Would we expect that to drop substantially?

I'm not going to forecast expenses for you. But we are going to have positive operating leverage, as I said.

With respect to the higher interest charge in the other segment, about half of this increase came from the change in our consolidated funding profile. We've added a bit more longer term funding which hasn't been allocated out to the business lines yet. And the remainder is mainly from lower spreads and volumes in our short-term funding book and some minor refinements to our transfer pricing within the business line. With respect to the note we made about moving some of our books further into the advanced internals rating based approach, those relate primarily to some smaller books in our international business, primarily the Caribbean retail and Mexico, the year after. We're still working through the numbers. We haven't fully quantified it. But it may be a small hit to our risk weighted -- like, additional risk-weighted asset as opposed to a reduction.

Was that because of the consumer portfolio?

Yes, that's got part of it. That's part of the reason that's driving that, just a higher loss experience in some of those books.

So half of the change in the NII in the other segment comes from you just haven't allocated the funding yet?

We've done some additional longer-term funding in advance of some maturities later in the year, so that sits in the other.

Is that mostly attributable to Canada?

Mostly US longer term funding that we replaced early.

Okay, thank you.

Robert Sedran with CIBC World Markets.

For Rob Pitfield, first. On your slide 18, Rob, the international side for both the retail and commercial, I believe you said that the reason was the Caribbean for the increase. Is it actually getting worse in the region or is it just that things are not improving?

First of all, looking at international commercial, international commercial has been relatively pristine. It's got a Caribbean loan portfolio, as you well know, that's soft. And occasionally you get a bump in that portfolio, and you saw it this quarter. And as far as international retail, Bahamas and Puerto Rico, couple of islands, they've been working through their NALs and their problem loans. It is more difficult in these countries but on the other hand, it's mortgages, principally, it's secured. There's no overall trend up. It's just a work through and it's taking longer than we forecast.

I'll just add in as well, due the higher volume growth in international, as well from a loan loss experience standpoint, the loan loss experience is basically unchanged from a year ago and just up slightly from last quarter.

Is that true of the Caribbean as well, Sean?

The Caribbean is up a bit more than the rest of international. I was talking more about the broader international segment.

And just one quick point of clarification from Brian. You mentioned that Thailand was a positive contributor on the quarter. And perhaps I was mistaken or maybe it bounced back faster than I thought it would, but I thought it might still be a drag. So is it recovering faster? And is the recovery still a work in process or are you happy that it's where it needs to be from a contribution perspective?

It's still a work in progress. We have all of our branches open. When you go through one of these natural catastrophes, the first things you see is revenues start to come back. But PCLs lag for a quarter or two. We're starting to see the revenues come back. So car loans, for instance, which is a big part of our business there, volumes have returned to the late 2010, early 2011 levels. So that business is performing very well.

We did have a recovery on a rather large commercial loan this quarter which we had the benefit of that this quarter. I wouldn't expect that next quarter. But business volumes are coming back and we would expect PCLs to start to edge off. And we'll be back to normal in a quarter or two.

Is that recovery of a noteworthy size to the segment, Brian, or is it just noteworthy to Thailand?

It's just noteworthy to Thailand.

Okay.

Michael Goldberg with Desjardins Securities.

I have a few questions. First of all, I understand that the increase in international retail gross formations is largely due to loans in Uruguay. What is it about this portfolio causing the increase? And also, with what looks like a relatively small portion of loans in Colpatria secured, will we see a higher level of formations and provisions out of Colombia?

Michael, it's Brian Porter. New formations in international retail were up CAD70 million this quarter. That's driven by CAD30 million of mortgages, largely in the Caribbean. And our coverage ratio quarter-over-quarter remains stable. So we're comfortable there. The other piece was CAD28 million driven by our consumer finance business in Chile and Peru. And provisions were up there, and that's just a function, as Sean said earlier, of portfolio growth.

As far as the overall run rate on Colpatria, yes, Colpatria will contribute a significant, normal, natural level of provisions going on into 2013.

And, Michael, you should remember that Colpatria is a high-margin bank. The margins run around 8%. Loan losses between the two businesses, retail and commercial, come out around 325, 350 basis points.

Okay. Also, any change in your expectation of possible opportunities that might be created from distress in Europe?

Clearly acquisitions have been part of the international strategy for some time. We continue to look at opportunities as they arise. But I would say, and we've emphasized this for the past two years, we see significant opportunity for organic growth on the platform and that's what we're focusing on.

Okay. And my last question, why is your financial reporting of your balance sheet different from your reporting to OSB, when there are no similar differences at other banks?

Have you got examples of where they're different?

It's in the loans and in the cash items.

We'll take that offline, Michael, to have a better answer for you on that.

Okay.

John Reucassel with BMO Capital Markets.

Just a question for Anatol on the deposits. Anatol, if I have the numbers right, it looks like your personal deposits actually went down in the quarter. Is that correct? And where are you seeing most of the competition on the deposit side? And what are you doing to address that?

On the deposit side, we've got the different categories. In small business, it's growing. In commercial, it's growing. And on the retail side it's staying relatively flat. The biggest thing is the shift that we've done, the focus that we've got in the Canadian Bank is towards deposits and payments and referrals to wealth management. I think we've taken a number of steps to get the focus onto the deposit side. We're quite pleased with the steps that we've taken and the initial results in it. I think as we discussed last quarter, this is about taking a lot of small action that will give us results over a longer period of time.

But is there a specific area, Anatol, that you're seeing the competition on deposits? Is it three-year money, GIC, five-year, or is it demand deposit? Where are you seeing the competition?

The very strong competition is both on GICs and in terms of checking accounts and savings accounts.

Okay. And when you have to go to the Treasury for funding, what rate, approximately, equivalent in the GIC market do you get of that? Is it like a three-year GIC?

It depends also as we've gone in towards matched maturity, it depends on the type of loans that we're making and the terms of the loans that we have. So it's in essence, it's matched.

Okay. Thank you.

Andre Hardy with RBC Capital Markets.

This is probably for Sean. In the target Tier 1 common ratio for Q1 2013, are you including the gain from Scotia Plaza? I'm also curious why you're not disclosing what that gain is expected to be.

Yes, our target range of 7% to 7.5% would include the gain from the sale of Scotia Plaza. We're very pleased with the transaction we've negotiated with Scotia Plaza. And we'll be disclosing the financial impact when we close the transaction on June 20.

I'm curious why you're choosing not to disclose what's likely a material amount?

It's not closed yet. When it does close we'll be comfortable with disclosing the gain at that point. We've got no reason to think it won't close but we're just wanting to disclose it on the date it closes.

Andre, this is Sabi. I think one of the main reasons is there's still a small chance that the transaction may not close and I'm not t quite sure we want to divulge what our cost base is.

Okay, thank you.

Steve Theriault with Bank of Montreal Merrill Lynch.

Couple quick questions for Brian to start, please. Brian, can you give us the organic loan growth for consumer and commercial separately in international? And then by way of follow-up to some of what you said earlier, how many branch closures are you looking at doing over, say, the remainder of the year? And lastly on the credit side, can you speak to the nature of the couple of accounts that were mentioned? Is this the Caribbean hotel portfolio coming up again or something else?

Yes, a comment about the Caribbean hospitality portfolio. And I've commented on it a number of times over the past number of years. The portfolio, we continue to work the portfolio down. Last time I probably made a comment it was CAD1.25 billion, it's now CAD1.1 billion. The good news is we've had a number of cures in the last number of quarters where we've been able to sell properties or we've had equity injected in the properties.

The other point I'd make is the Caribbean hospitality industry actually had a very good year. RevPAR was up 8% across the board, occupancy's up, average daily rate's up. So the Caribbean hospitality industry generally had a very good year. So, look, we're just grinding it out. We've got a couple of residue properties that we're working out, nothing out of the unusual. We thought it was prudent to take a provision as we continue to grind through it.

In terms of the asset growth, the organic asset growth year-over-year in international, excluding Colpatria it's about 17%, of which about 11% is retail and about 20% is commercial. And versus last quarter, if you exclude Colpatria, retail's up about 3% and commercial's up about 2%.

And the branch closures?

Branch closures, they're not significant numbers. In Mexico it's going to number between 15 and 17 branches. In Chile, it's a handful. In Costa Rica, particularly, it's another handful. But we just think it's prudent business given the direction of our customers these days.

And just to wrap up, can you speak to the nature of the investment loss that you highlight in the corporate and other line item? I apologize if I missed that earlier.

Jeff, did you want to take that?

The impairment charge this quarter was somewhat higher than the last several quarters. That's a difficult number to forecast. It obviously depends what's going on in markets. But it was higher than the past several quarters.

So it's not one specific item, it's a number of things?

There was one larger one in there, but there was also other things. (multiple speakers) CAD20 million?

Yes, it just wasn't material. We had one larger one but it was not material to the overall results.

Thanks very much.

Sumit Malhotra with Macquarie Capital Markets.

First, over to Brian Porter. Brian, you updated some of the numbers for us in regards to Colpatria's net interest margin and loan loss outlook. Just revisiting some of your commentary from when this acquisition was announced last year. If the numbers are right here, it was about CAD5 billion in loans, CAD1 billion of which were credit cards. My question is, as you've gotten to know this portfolio a little bit better, is there anything that's changed in terms of the businesses you're emphasizing versus Colpatria's legacy operations? In other words, where there's some portions of the book that were a little bit risky for your taste and may not continue at the clip they were? I'm specifically thinking about the credit card business they had.

No. On closing, the lending assets in the bank were CAD6 billion, which is roughly split 50/50 between retail and commercial. The retail book primarily consists of credit cards and mortgages. They've been quite innovative in terms of their credit card portfolio. And actually we're learning some things about their arrangement with a utility and with a retailer in terms of the credit card business in Colpatria. So we're comfortable with the risk appetite and how they're executing on that business. I think the next page for us, we put some people into the Colpatria organization, a Chief Risk Officer, a Head of Operations, Audit, those type of functions. But will be to grow a higher-end commercial business and dovetail into the Global Banking and Markets business over time as that business grows in Colombia.

The last two quarters on a reported basis, the net interest margin in your segment is up over 30 basis points. I think it's fair to say the bulk of that is Colpatria related. Can I take from your comments that you're not significantly repositioning the portfolio such that we're going to see a dropoff from where NIM stands right now?

No. Margin's up 20 basis points this quarter and that's a benefit of Colpatria. If Colpatria wasn't in it, it would be flat. But we're not repositioning the bank in terms of assets. We like the asset profile and the risk profile of the bank.

Just one other point I should have mentioned is that when you look at margins, one thing we should point out is that margins in Asia were up. They've been trending up but they were up significantly this quarter. We're the benefit of that. We see it in our trade finance and our lending business there. But that's a function of European banks disappearing in terms of the lending market in Asia.

So you're able to take loan yields higher?

Exactly.

Then over to -- sorry, I called it Scotia Capital. It's called Global Banking and Markets now, so for Mike and Steve, a two-parter. On the negative side, it looked like there was a at least somewhat noticeable increase in gross impaired loan formation, something we haven't seen for this segment in a while. If you could give me some color there on what you're seeing in terms of the loan loss outlook. It doesn't sound like you're expecting provisions to increase materially but we did see the formations higher.

And then secondly, on trading, pretty much flat from the Q1 number despite the fact conditions seemed to worsen as the quarter went on. Just wanted to get an update from you on whether this is related more to the global expansion you've had in the business or there was specific opportunities that you saw this quarter that worked out well. And that's it from me.

Okay. It's Steve, to answer the first part of your question, Sumit. As you know, we really have run with a very clean portfolio in Global Banking and Markets for some time now. But we did take early action on one account in the US that moved the numbers. And, as you say also, we aren't anticipating big changes in our provisioning. So it is something that we've identified and we're going to work on it. And it's going to take us the better part of a year or two. It's going to probably involve a restructuring. But again, our levels are very low and we're actually reasonably comfortable with this particular exposure.

So more of a one-off rather than a trend?

Absolutely.

Sumit, this is Rob. The overall portfolio in terms of NALs has gone down by an order of three to four times. And in that trend we've always said that there will be times where you'll get one-offs and bumps along the way, and this is a bump along the way. It just happens to be a sizable account.

And then for Mike, the trading performance and outlook?

Sure. Obviously we're very pleased with the second quarter. Second quarter was a mirror image in way of the first. First quarter, we started in softer market conditions, they got better in the second half of the first quarter. Second quarter started out a little stronger and then got weaker throughout the quarter. But I see the job at hand right now to be -- to tailor the business to be as resilient as possible to market conditions. We think that this volatility is going to be around for a while and so we're keeping the risk levels very low. The business is very diversified.

We've had very strong performance in the first two quarters from our commodities business. The precious metals business has done very well. We've got a small growth strategy in base metals which is doing well. Energy's doing well. Both of the rates, billed in both New York and London, are doing very well. It's trying to get to fire on as many cylinders as possible, and to make the business as resilient as we can to the volatility that we think its going to be around for a while.

Brad Smith with Stonecap Securities.

Brian Porter, a question for you. When I look at the international segment, I see what I would call a unit that's in the early stages of its second phase of development. I would be expecting to see rates of return start to rise, and rise quickly, I would think, at some point in time. I'm just wondering, are we seeing a bit of a springboard here where the division's return is actually being depressed by the last steps and that it's going to start to rise? I was wondering if you could comment on where you envision those returns rising to and over what time frame? And then just lastly, if you could just comment on where you are charging yourself for your capital in thinking about your economic returns.

Okay. Sean will take the second part but I'll kick it off. I think it's important to note that the International division benefits by diversification. And when Sean gave the numbers in terms of ex Colpatria commercial loan growth being 20% this year, year-over-year, that's also with commercial assets declining in the Caribbean. And that's by design, given our risk appetite. And we haven't found a whole lot of good quality commercial loans to underwrite within our risk appetite.

We're benefited by diversification. Colombia's an important acquisition for us. It's a high-growth market. As I said, we're really focused on organic growth and driving the opportunities within our platform. But you can't ignore the climate like today and there will be M&A opportunities for us. We have executed on a number of transactions. We don't execute on everything. We're very disciplined in our approach. But we've been focused on turning our operations around in Mexico, for example.

Mexico produced an ROE of 18.5%, all bank, this quarter. We're very pleased with the growth in Mexico. We're not a big lender in the unsecured market in Mexico, so in a bull market that affects the returns. Look, we think we're well positioned to continue to grow the franchise on both an organic and an acquisition basis.

With respect to the charge on capital, all business lines get allocated economic equity based on the risks they assume in their business lines. And where we have acquisitions, goodwill intangibles get charged dollar for dollar. As you're building out a business line, as we have for international the last number of years, they have a higher capital charge up-front. But soon those acquisitions turn into organic growth and over time those returns drive up as they earn through that goodwill cost.

Thank you. Brian, just a follow-up. You mentioned that Mexico was returning about an 18.5%. Your consolidated segment is around 12.5% annualized in the quarter. Is that to imply that there's some serious laggards here?

Colpatria has an impact on that. And I would say that the other country from an operational standpoint that we're working on, we're making headway, is Chile. And that's a function of the goodwill we absorbed in Chile in the Desarrollo acquisition and we're building out our platform.

John Aiken with Barclays Capital.

For Chris Hodgson. Chris, looking at the revenue growth that you experienced sequentially quarter-over-quarter, very strong, particularly on the fee side. Was wondering if you could give us some sort of outlook in terms of the change that was undertaken on the mutual fund pricing in terms of capping the expenses and charging a fixed rate. Do you expect that to have any material impact on revenue growth or earnings in the near term?

The short answer is no, John. I think that what we did is just do what other institutions have done since about 2005, which is cap our fixed admin fees. So it's only a portion of the fee. We do believe that with growth in the portfolio over time that we'll actually be able to grow revenue and NIAT through this. And it also provides some transparency to the client and the advisor base. In terms of the growth in fee income, it largely came from our mutual fund portfolio early on in the quarter. And then as the quarter changed from a market perspective, we saw a bit of a slowdown in that fee income. This quarter we had less income coming in from the insurance side and we actually expect that to pick up as the rest of the year goes on.

Great. Thanks, Chris.

Darko Mihelic with Cormark Securities.

A question, again going back to International Banking for a moment. My understanding in the shareholder report is that Colpatria has earned about CAD65 million of net income. And so when I take International's earnings and I take Colpatria out, if I also strip out Mexico, which I understand earned CAD83 million this quarter versus CAD64 million last quarter, and then my final adjustment would be to take out the associated corporation which would be CAD109 million this quarter versus CAD68 million. If I make those adjustments, everything else in International looks like it's down about 26% quarter-over-quarter. So where did I make my mistake in my math?

This is quarter-over-quarter you're looking at?

Yes. First, maybe first talk about Colpatria. In the shareholders report it says CAD65 million.

Right, and then you're going to take half that out on the minority interest line.

I could look at it that way too. If you want to look at net income attributable to equity holders of the Bank, I can look at it that way, too. I'm going to end up with the same math.

There was growth in the other areas. So there's obviously something that's confusing. We'll get back to you.

Sorry, I didn't hear the answer.

We'll get back to you on what's driving that. But we did have, again, strong asset growth in the quarter. Margins were generally flat when you take out Colpatria. And expenses were well-managed.

But I'm just trying to look at net income. If the shareholders report says CAD65 million for Colpatria, most of which, my understanding all of it happened in Q2. And then I know the Mexico number, which you provided, which is CAD83 million this quarter, and CAD64 million last. And I can see here the CAD109 million in associated corporations versus CAD68 million last quarter. I would think that the math is fairly straightforward. But I just can't reconcile.

Securities gains were down this quarter, Darko. That would be CAD20 million. Anyway, we'll take it offline and go through it with you.

Okay, that would be great. Thanks very much.

Broad-based growth in multiple regions, Asia and whatever. We'll have to get back to the numbers, Darko. But somehow we're coming out to different conclusions, so we'll get back to you.

Mario Mendonca with Canaccord Genuity.

Probably for Rob Pitfield. You gave us enough information to go through Colpatria and understand the contribution to earnings and NII. I think either Rob or Brian you made reference to PCLs, losses of around 325 to 350 basis points eventually. Could you tell us what they were this quarter? And over what time period do you expect to get to those losses of 325 to 350 basis points?

Okay. They were around 265 this quarter. And they've been very low, vis-a-vis our plan and our forecast. You've had exceptional performance in corporate. You've had very low PCLs in international commercial. Steady performance in Canadian retail and Canadian commercial.

So what we expect to see is that at some point in time you'll see corporate start to trend up in a natural way. You'll see International again revert to a normal number. And this is just natural planning. And then you will have Colpatria come on, and you will have Uruguay come on fully. And so when you add all those up, you're looking at a run rate that's 325, 350, very naturally.

Sorry, just want to be clear. The 325 to 350 basis points, Brian, I think you referred to that --.

No, that's 325, 350 absolutely. It's around, in terms of basis points, we're at 31 now. We've said that we're looking at a 38 basis points overall. So it would be between those two numbers.

I'm going to back up then for a second because I just remember Brian Porter saying that losses on Colpatria would be roughly 325 to 350 basis points.

I think Rob's giving an all bank number. Your question pertains to Colpatria. We fair valued the assets on acquisition, which was January 17. So the loan losses you see of CAD3 million are just the discrepancy between the fair value and what happened at the end of the quarter. You'll have to look at local results going forward but loan losses in Colpatria will be around 325 to 350 depending on the blend of business and the mix between commercial and retail in Colpatria.

So going back to my question, the losses this quarter would have been close to zero.

Zero. CAD3million.

And you'd expect it to be something like CAD50 million on a quarterly basis going forward based on what you gave us. And what I'm getting at is, over what time period would you expect it to ramp up to that?

It would be about 40 to 50. And it should be somewhere in 2013.

Thank you. And then just one quick clarification. Sean, you said the organic growth consumer international, what was that again? 16% year-over-year?

Year-over-year, 11%.

11%, I'm sorry. Thank you very much.

All right. Thank you all for participating in today's call. And we look forward to talking to you again next quarter. Good-bye.

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