Bank of Nova Scotia (BNS) 2012 Q3 法說會逐字稿

Good afternoon and welcome to the presentation of Scotiabank's third-quarter results. I'm Sean McGuckin, Chief Financial Officer. Rick Waugh, our CEO, will lead off with the highlights of the third quarter. Next, I will go over the third 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 2 of our presentation which contains Scotiabank's caution regarding forward-looking statements. Rick, over to you.

Thank you very much, Sean. Well, we are pleased to announce our third quarter with very strong contributions from all our business lines. Scotiabank generated net income of CAD2.05 billion. Earnings per share were CAD1.69 for the quarter, that included the CAD0.53 gain from the sale of Scotia Plaza. But excluding this item, earnings per share increased 5% year over year, and return on equity remained strong at 24.6%. Importantly, revenue was strong this quarter, growing by more than 11% excluding the real estate gain. This performance this quarter demonstrates the diversification we always talk about in our business model, which continues to drive sustainable growth at a high profitability level.

Now, in light of weakening economic forecasts and continued global uncertainty, the Bank increased its collective allowance for credit losses on performing loans this year. This results in a coverage ratio among the highest of our peers. And this reserve is based on conservative provisioning methodology which provides for the possibility of unidentified problems in our portfolios. Notwithstanding this general provision, the Bank's credit portfolios continue to perform well, both in Canada and internationally, and well within our expected ranges and risk appetite even under very stressed scenarios that we perform. This is truly a reflection of our well-recognized risk management throughout the whole Bank.

Our industry-leading productivity ratio remains stable at 53.9%, again excluding that gain in real estate, and expense management remains obviously an ongoing priority. Our capital ratios remain strong by international standards. Our tangible common equity ratio now exceeds 10%, a pre-crisis level, and has been achieved while making more than 20 strategic acquisitions which have totaled over CAD8 billion since the crisis began. This has been accomplished by very disciplined capital management and acquisition metrics as well as a very strong internal capital generation due to our consistently high return on equity. We are also currently within the Bank's target common equity Tier 1 ratio under Basel III of our range of 7% to 7.5%. And this includes of course the strict regulatory definition of regulatory capital which under Basel III isn't required until 2019.

Now let's turn to Slide 5. Our performance this quarter is a result as I've said of this diversification in our business model and strong contributions from each of our businesses. Corporate banking had a record year with very good asset and deposit growth reinforced by disciplined expense control and lower provisions. Year-to-date revenues are up a solid 4.6%, with net income up 16.5% as a result of very good expense management, lower loan losses, continued focus on deposits, payments, and wealth management product distribution, and of course these numbers don't reflect the sale of our building which is recognized in the other category.

International Banking continued its strong contributions to the earnings this quarter as a result of its diversified loan and deposit growth. Year-to-date revenues are up strongly at 22%. Net income is up 20%, reflecting our investments in the higher growth markets in Latin America and Asia. In Global Wealth Management, earnings this quarter were driven by strong insurant results and higher assets under management and assets under administration, notwithstanding the challenging financial markets.

Year-to-date revenues increased 13%, net income up 19%, albeit due in part to one fewer quarter of DundeeWealth contribution in 2011, as well as some nonrecurring expenses last year related to the DundeeWealth acquisition. But again, our numbers demonstrate the continued strength in both our wealth management and insurance business. Finally, Global Banking and Markets had an excellent quarter across the diversified, client-driven platform, particularly in the areas that we've been investing in recently, such as fixed income and the equities business. What was very encouraging was this growth was broadly based across several products, markets, and geographies, and importantly in today's volatile markets, well within our conservative risk appetite.

Year-to-date revenues and net income have both increased 8% and continue to show the strength of the diversification and focus on the relationship-driven products in markets where we are building up special and focused expertise. This was indeed a very satisfying quarter and we anticipate achieving our full year 2012 financial objectives and well-positioned for continued growth next year. And of course, I'm very pleased to reward our shareholders with our second dividend increase this year, a further indication of the quality and sustainability of our earnings and our strategy. With that, I'll turn now over to Sean.

Thank you, Rick. Slide 7 shows our key financial performance metrics for the quarter. Earnings per share for the quarter, excluding the Scotia Plaza gain, were CAD1.16, an increase of 5% from last year and up 1% over the second quarter. Looking at year over year changes, Q3 earnings benefited from the contribution from acquisitions, particularly Banco Colpatria, strong trading and insurance revenues, a lower effective tax rate, and growth in transaction-based banking fees. Partly offsetting were higher provisions and an increase to the collective allowance on performing loans, lower underwriting and advisory fees, and lower net gains on investment securities. Provision for credit losses was CAD402 million this quarter, including CAD100 million increase to the collective allowance on performing loans. Specific provisions were up CAD22 million from last year, reflecting higher provisions in International Banking and Global Banking and Markets, partially offset by lower provisions in Canadian Banking.

Moving to revenues on Slide 8. Revenues during the quarter were a record at just under CAD5.6 billion, representing growth of 28% from last year. Even excluding the real estate gain this quarter, revenue growth was still strong, increasing 11% year over 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 2 basis points year over year, mainly from recent acquisitions with higher spread business, partly offset by lower spreads in Canadian Banking and higher volumes of lower yielding deposits with banks.

Non-interest revenues increased 11% from last year, excluding the real estate gain, due to increased banking fees from credit cards and deposits, stronger capital markets revenue, and the gain from the sale of a non-strategic leasing business, partly offset by lower net gains on investment securities. Quarter over quarter, net interest income increased 4% from solid asset growth and two additional days in the quarter, partly offset by a modest decline in the core banking margin. Non-interest revenues were flat quarter over quarter, as higher trading revenues, the gain on sale of a leasing business, and two additional days in the quarter were mostly offset by decline in wealth management and investment banking revenues, reduced income from associated corporations, and lower net gains on investment securities.

Turning to Slide 9. Non-interest expenses were up CAD270 million or 11% from last year. Acquisitions accounted for CAD138 million, or over 50% of this increase. Underlying expense growth year over year was mainly due to higher staffing levels as well as an increase in performance-based compensation in line with a stronger operating performance. Compared to the prior quarter, expenses were up 2% due in part to two additional days in the quarter. Year-to-date, operating leverage was positive 0.4% with each business line delivering positive operating leverage thus far. Expense management remains an ongoing priority and we are on track to deliver positive operating leverage for the full year as we had committed at the beginning of the fiscal year.

Turning to capital on Slide 10, you can see that the Bank continues to maintain a strong, high quality capital position. All key capital ratios increased this quarter due to strong levels of internally generated capital. The Tier 1 ratio rose to 12.6%, while the Bank's tangible common equity or TCE ratio climbed to over 10% at 10.2%. 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. Furthermore, as Rick mentioned, as at July 31, our common equity Tier 1 ratio under Basel III is now within our stated objective of 7% to 7.5%, two quarters ahead of our Q1 2013 target.

Turning to business line results, beginning on Slide 11. Canadian Banking had a very strong performance again this quarter. Net income was CAD521 million, up CAD95 million or 22% from a year earlier. This quarter also included a CAD32 million after tax gain from the sale of a non-strategic leasing business. Revenue growth was solid with growth in net interest income and net fee and commission revenues of 3% and 4% respectively. Although the margin declined year over year by 7 basis points, net interest income was up as a result of strong asset and deposit growth. There was also improved credit performance with loan loss provisions down CAD28 million.

Expense control was also evident this quarter with expenses only increasing slightly from last year. Quarter over quarter, assets increased 2% mainly from continued growth in retail mortgages, consumer auto lending, and commercial loans. Total revenue increased 7% due to strong asset and deposit growth, the gain on sale of the leasing business, and two more days in the quarter, partly offset by a 2 basis point decline in the margin. Provision for credit losses declined CAD2 million to CAD120 million, due to lower provisions in retail. Expenses were up 3% compared to last quarter reflecting the impact of two additional days in the quarter and higher marketing expenses.

Moving to International Banking on Slide 12. Net income in the third quarter was CAD442 million, up 29% from CAD343 million a year ago. A large portion of the increase was due to the acquisition of Banco Colpatria in Colombia. Year over year, revenues increased 27% due to strong diversified loan and deposit growth, positive impact of acquisitions, wider margins in Peru and Asia and good underlying growth in fees across Latin America and the Caribbean. Expenses were up 23% or CAD176 million with more than two-thirds attributable to acquisitions. The remainder of the increase was mainly due to annual inflationary increases and to support business growth.

Quarter over quarter net income was down a modest 1% from a very strong second quarter, mainly from higher provisions for credit losses and higher expenses. Provisions for credit losses increased CAD23 million from last quarter, primarily from higher retail provisions in Latin America as a result of recent acquisitions, asset growth, and softening market conditions. Expenses were up 1% from the previous quarter, due to higher seasonal costs in Peru and Chile. Expense management remains an ongoing priority.

On Slide 13, Global Wealth Management's net income for the quarter was CAD284 million, which included a nonrecurring CAD12 million deferred tax charge due to the Ontario tax rate freeze, lowering the contribution from our investment in CI Financial. Revenues increased 5% year over year driven by strong growth across insurance and most wealth businesses. Assets under management and assets under administration grew 4% and 2%, respectively. Of the total revenue, approximately 84% was attributable to wealth management, and 16% to the insurance businesses.

Expenses were flat from the same quarter last year, due mainly to lower brokerage commissions, lower performance-based compensation, and discretionary expense management. Quarter over quarter, net income declined by 5% including the aforementioned nonrecurring tax charge. Revenues declined 2%, as lower brokerage and mutual fund revenues from weak financial markets in Canada were only partly offset by higher international wealth revenues. AUM remained unchanged and AUA declined by 1%. Expenses were down 3%, reflecting lower volume-related expenses and performance-based compensation as well as good expense control.

Looking at Slide 14, Global Banking markets recorded very strong net income of CAD398 million, one of the best results on record. Year over year, revenues increased due to higher capital markets revenues in the fixed income and commodity businesses and solid asset growth, partly offset by lower underwriting and advisory fees. Provisions for credit losses remained very low, but were up CAD7 million to CAD15 million. Expenses were up 14% over last year, reflecting higher performance-based compensation and technology costs, as well as the impact of the Howard Weil acquisition. Quarter over quarter net income increased 3% due to strong fixed income and FX revenues, and a recovery of taxes, partly offset by modest increases in provisions for credit losses and expenses. Expenses increased 2% from last quarter, partly due to the full quarter impact of the acquisition of Howard Weil.

I'll turn now 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 net gain of CAD406 million this quarter. The segment's results included CAD614 million after tax gain on the sale of Scotia Plaza, and CAD100 million increase to the collective allowance on performing loans. Adjusting for these two items, the net loss in the other segment was CAD134 million, unchanged from last quarter. This concludes my review of our financial results. I'll now turn it over to Rob who will discuss risk.

Thanks, Sean. Risk in our credit portfolio continues to be well-managed. Our specific provisions for credit losses remain in line with expectations, increasing by CAD22 million year over year and CAD38 million quarter over quarter to CAD302 million. There was also an increase in the collective allowance on performing loans of CAD100 million, in light of the weaker global economic conditions. Our net impaired loan formations were CAD365 million, an improvement from the prior quarter. Our exposures to certain European countries of concern, Greece, Ireland, Italy, Portugal, and Spain, are not significant and have declined from last quarter.

Our market risk remains low and well-controlled. Our average one day all bank VaR was CAD20 million versus CAD18.3 million in the prior quarter. There were five trading day losses in the third quarter, compared to the one in the previous quarter. The five days of losses were all below CAD3 million. The losses were well within the range predicted by VaR and our ongoing stress testing confirms the appropriateness of our risk appetite.

On Slide 18, you see 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. 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 CAD35 million year over year, mainly due to our acquisitions in Uruguay and Colombia, higher retail provisions in Latin America as a result of asset growth, and softening market conditions partially offset by lower retail provisions in Mexico and the Caribbean. Quarter over quarter, increase reflects higher levels of provisioning in Colombia and Peru.

International commercial provisions increased to CAD17 million, due primarily to higher provisions in Latin America and Asia, partly offset by lower provisions in the Caribbean and Central America. Overall commercial provisions remained relatively low. Global Banking and Markets had provisions for credit losses of CAD15 million this quarter, compared to provisions of CAD8 million in the same period last year and recoveries of CAD1 million in the prior quarter. The increases are a result of higher provisions in the United States, related to two accounts.

Slide 19 shows our Canadian Banking residential mortgage portfolio. Portfolio of residential retail mortgages is CAD153 billion, of which CAD139 billion is related to free-hold properties and CAD14billion related to condominiums. As you can see from the slide, approximately 60% of the portfolio's insured, 40% uninsured. The uninsured portion has an average loan-to-value ratio of approximately 57%. We believe that the solid economic fundamentals and the new mortgage regulation changes will enable the Canadian market to remain healthy and balanced.

The continued low interest rate environment and reasonable economic performance will allow consumers to manage debt levels well. Credit quality and performance of the portfolio remains strong. Our disciplined and consistent underwriting standards through all of our origination channels have resulted in extremely low loan losses and again have been stressed under many severe assumptions which confirm our risk appetite.

To summarize on Slide 20, our asset quality remains strong with the retail and commercial portfolios performing as expected and our corporate portfolios demonstrating continued strength. As we've articulated over the last several quarters, a combination of growth in portfolios and product mix will result in rising provisions which we expect to be more than offset by increased interest margin. We expect Canadian retail provisions to remain stable, international retail provisions will grow in line with portfolio growth, product mix, and a modest softening in economic conditions. We expect corporate and commercial provisions to remain modest. With that, that concludes my remarks and I'll turn it over to Anatol.

Thank you, Rob. Canadian Banking had a record quarter with net income of CAD521 million. Excluding a CAD32 million gain on the sale of a leasing business, earnings of CAD489 million were also a record with all of our businesses performing very well. We experienced solid growth in our key areas of focus -- deposits, payments, and wealth management -- with double-digit account growth in credit cards and checking accounts and market share gain in deposits and mutual funds. Assets and deposits each had their strongest quarterly growth rate over the last six quarters. We remain disciplined on costs and continue to report positive year-to-date operating leverage.

In retail, we expect to see continued asset growth albeit at a more moderate pace than in Q2 and Q3 of this year. We see volume growth coming primarily from residential mortgages, unsecured lines of credit, and credit cards. In deposits, competition for regulatory qualifying liquidity remains strong. However, our Richness Is and Summer of Scene campaign have positioned us well for strong growth in personal core deposits. Small business continues to perform well with good operating leverage and strong deposit growth. Going forward, we will continue to partner with our global transaction banking partners to further grow this important deposit base. In automotive lending, we continue to perform very well as we've expanded our footprint by adding more manufacturer and dealer relationships.

Turning to commercial banking. We had a very strong year over year and quarter over quarter growth ins assets and deposits. Our pipeline remains strong as we continue to focus on targeted initiatives in key industries and further leverage synergies between our commercial banking teams and our specialty teams, including Global Transaction Banking, and Global Banking and Markets.

Retail delinquencies continue to improve and we expect PCLs to remain stable going into next year. Commercial PCLs have also stabilized but are at very low levels and can vary from quarter to quarter. Cost containment has been excellent this year but expenses are likely to increase somewhat in Q4 reflecting seasonal spending patterns. Earlier this year, we committed to positive operating leverage for the year and we fully expect to deliver on this commitment. Let me now turn it over to Brian.

Thank you, Anatol. After a particularly strong second quarter, International Banking delivered solid results this quarter. On a year over year basis, we had a strong, broad-based growth in commercial and retail loans and deposits. Compared to last quarter, growth moderated somewhat and we experienced some margin compression in Chile and Thailand. Apart from these factors, our outlook for the division remains stable for the balance of the year.

Turning to our three major regions, in Latin America we continued to benefit from a well-diversified and growing platform. The region's earnings were up 3% on the quarter with a strong contribution from Mexico. Over the past year, our initiatives in Mexico have been driving a stronger performance and we expect this momentum to continue. We continue to be pleased with the solid earnings delivered in Colombia, although PCL levels will rise in line with new portfolio growth. We expect Peru to continue as a strong performer for us and in Chile, lending activity should continue to grow at market levels, with margin pressure continuing in the fourth quarter. Overall, we expect our LatAm region to finish the year with solid results.

In the Caribbean and Central America, our performance was encouraging this quarter given the continuing headwinds faced by many Caribbean economies. Our retail business in the English Caribbean performed well, with good growth in both loan volumes and deposits. In our Spanish Caribbean countries, our retail and commercial businesses performed as we expected. Our outlook calls for flat to modest growth overall in the region with some strong country performances, most notably in Panama. In Asia, spreads have remained relatively attractive in our commercial portfolio and our lending pipeline remains solid. In Thailand, we had good asset growth, particularly in the auto lending segment, although we continue to manage through the aftereffects of the floods which include margin compression.

On the commercial banking side, our lending pipeline remains solid and is up from last quarter. We expect this segment to continue performing well in Latin America, Mexico, and Asia for the balance of the year. In retail banking, loan and deposit growth has been very strong year over year. In general, we expect current retail growth rates to continue for the balance of the year. Moving to expenses. We limited expense growth to 1% over last quarter, and we will continue with our prudent approach to expense management.

Finally, with respect to M&A, we are pleased with the Credito Familiar transaction in Mexico. The Consumer and Micro Finance segment holds significant promise for us and we plan to leverage the great success we've had in Peru across other parts of Latin America. In Asia, we continue to make progress on regulatory matters in connection with closing our investment in the Bank of Guangzhou. In summary, International Banking had a solid quarter and we expect to finish 2012 in line with the expectations we had set out for the year. With that, I'll turn it over to Chris.

Thank you, Brian. Global Wealth Management generated good results in the quarter, despite the persistent challenges facing the market. Underlying earnings were up 14% year over year with strong organic growth in both the wealth and insurance businesses. Global transaction banking, whose earnings are incorporated across the other business lines, also saw its deposit base grow well.

In our wealth distribution businesses, we continue to see growth. We are particularly pleased with the contribution from our international wealth businesses, coming in part from the acquisition of Colpatria in Colombia, as well as from very strong earnings in our international pension businesses. We anticipate that our recently announced Colfondos acquisition will further increase our scale in this segment and the region overall. As we move forward, we will continue to pursue M&A opportunities in international markets that fit our strategic direction and complement our International Banking business.

With the introduction of our newly fully integrated website, we are pleased that Scotia iTRADE ranks number one in online discount brokerage services in Canada, according to Service [Corps] online discount brokerage scorecard. We're very well positioned to grow this business as an aspect of our full wealth offering. In the asset management business, we've got a very strong base of AUM and AUA to drive our top line. Despite persistently weak markets, we gained market share for the quarter against the industry as a whole, both on a quarter over quarter and year over year basis. In addition, sales in Canadian mutual funds have maintained their momentum as we remain second in the industry in total net sales year-to-date according to the most recent IFIC data.

Our focus on capturing both revenue and cost synergies from the acquisition of DundeeWealth remains a priority. We are nearing completion in our integration and we are extremely pleased with our progress. Overall, we are on track to achieve expected deal synergies sooner than originally expected. In terms of insurance, growth in insurance remains strong with international insurance demonstrating marked year over year gains, specifically in key markets like Mexico and Peru. Our multi-year strategy of leveraging the Bank's significant distribution networks is progressing well and we continue to experience improved cross-sell of insurance, particularly here in Canada.

Global Transaction Banking was recognized by Global Finance magazine as the best corporate internet bank in North America 2012 for both best online cash management and best trade finance services for global transaction banking. Our investment in CI continues to perform well and we're selectively expanding our mandates with them. Finally, expense management and generating positive operating leverage remains a key focus. In summary, we continue to monitor the economic and market environment closely, yet despite the ongoing pressure facing the markets, we believe our diversified business model will continue to deliver solid results for the balance of this year. And with that, I'll pass it over to Mike.

Thanks, Chris. Global Banking and Markets had an excellent quarter. Consistent with the last quarter, strong results were achieved across our diversified product platform and geographic regions. Our recent investments in key businesses continued to incrementally contribute to our profitability. Our fixed income, equity, and foreign exchange businesses all had strong results in the quarter as did ScotiaMocatta, which did decline modestly after achieving two consecutive record quarters. Our lending and investment banking business continued to deliver solid results in the face of moderate market activity.

Global Transaction Banking which is responsible for global cash management products for our clients continues to provide opportunities for cross-sell, particularly around deposit growth. The pipeline for investment banking and advisory revenues for the remaining of the year is reasonably strong. However, we continue to see some challenges for loan underwriting fees. Our corporate loan portfolio showed strong growth this quarter, particularly in the United States where we expect more moderate growth in the fourth quarter. Loan spreads have remained 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 we expect PCLs to remain modest. Average assets continue to show steady growth in support of our global capital markets platform as we continue to actively manage our risk exposures and optimize capital usage. Expense management remains a key priority and cost saving and efficiency initiatives will help us maintain our positive operating leverage and our strong productivity ratio. In summary, we had a strong quarter. The performance was solid across all of the business units. Our focus for the past few years has been to diversify our business across products and geographies and to strengthen the linkage of our products and services with the core clients and geographies of the Bank.

Our objective in doing this is to minimize the volatility of GPM's earnings and therefore improve their quality. We feel quite positive about this quarter because the results suggest that we're seeing continued progress toward this objective. There are still headwinds that continue to make the wholesale business challenging. The market conditions continue to demand discipline and caution which is consistent with our risk appetite. With that, I'll hand it back to Sean.

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

Cheryl Pate, Morgan Stanley.

Hi, good afternoon. Just wanted to talk a little bit more about credit and the addition to the collective allowance this quarter. When I look at the outlook by Canadian retail, stable, corporate and commercial, modest, looks mostly coming from international retail where you mentioned growing in line with portfolio growth, modest softening, some product mix, so maybe could we spend a little more time on where the biggest areas of concern are coming from and whether Colpatria Credit is tracking along with expectations as well.

Cheryl, this is Rob. The CAD100 million to the collective is not related to the existing portfolio and its performance. It really stems from the fact that back in November we set up a cross-functional team to look at Europe and what might fall out of Europe and we've done a series of stress tests over a long period of time now in various forms and concluded that there's a possibility that there could be an impact of contagion and that contagion would have an impact on the various business lines. And given the fact that this is a good year, given the fact that it's a good performance by the Bank, this is one of those periods where we believed it was prudent to take a provision against that possible contagion, and that's all it is.

As far as Colpatria, Colpatria's performance as far as PCLs is tracking according to our plan. It had a bit of a hiccup this last quarter because of credit cards. That is not expected to continue. It's a temporary situation. There's all sorts of effort against it and we're pleased with that portfolio.

Thanks for the color there. Maybe if I could ask one for Anatol as well. You mentioned credit card as an area of growth. One of your peers earlier today highlighted some softening margins coming from the product as customer behaviors are changing and more balance is being paid down. Can you give us some color on your positioning in the segment, whether you're focusing more on high volume transactors or a customer segment that would be more likely to carry a balance?

What you see and you see it also in our non-interest income, when you look at our portfolio and the growth that we've had in the credit card portfolio over the last two years, it has been in customers that use the credit cards as a means by which they acquire and pay for their things. It's not so much a financing mechanism. When you look at the growth that we've had, it's new credit card sales to customers who will use it occasionally for financing but they transact on it and that has been part of our payment strategy and something we've been very successful at. So that's when I'm referring to the growth, that's what I'm talking about.

Thanks very much.

Cheryl, it's Rick again. Just wanted to just add to Rob's comments which I obviously totally agree with. Scotia, those of you that have followed us for a long time, we've always been aggressive on provisioning and later on we take the recoveries and dealing with the general, we haven't got specifics, we all know what's happening in Europe and what have you and the methodology. Now puts us at the top end of our range and I really view that as a position of strength for us going forward in almost any scenario. So take them, there is concern but it's a position -- take them when you can, it's a position of strength and that's how we view it right now.

Thank you. I appreciate it.

Next question, please.

Steve Theriault, Bank of America.

Thanks very much. For Brian Porter, please. So Brian, business and government loans in international look flat to down sequentially on a Canadian dollar basis at any rate. That's the first time I've seen that in some time. Can you spend a couple minutes walking us through the loan growth trends in some of your key markets and specifically, are you seeing any softening of the pipeline in the commercial side?

Sure. Good question, Steve. I'd just remind everybody that in terms of asset growth year-over-year, our commercial book has grown 21% and our retail book has grown by 22%. So those are very good numbers and numbers we're proud of. The numbers were relatively flat on a commercial basis this quarter and that's a function of two different markets. One being Asia, where we saw our trade finance numbers decline by about a CAD0.5 billion. And that's a function, trade finance as you know is relatively short-dated.

We saw some competition from the Japanese banks, at spreads where we didn't want to compete. So that business has amortized off. The other market would be Mexico where we're repositioning parts of our commercial portfolio. If you look at the banks down there, our exposure to states and municipalities would be the lowest of our peer group. We continue to de-emphasize that business. That, with some paydowns in Mexico, was another CAD0.5 billion.

So that's CAD1 billion of assets in the quarter on an average. If you look at it on a spot basis, we're actually up 2%. And as I said in my comments, our commercial pipeline remains very strong. We see good underlying growth in all our Latin American markets, Mexico included. Asia and -- so we feel very comfortable about our asset growth profile.

That noise in Mexico on the paydowns, could we see that for a few more quarters?

No. We've been amortizing this portfolio down over time, Steve. The bulk of it is done.

Okay. While I have you, then, a question on Peru. The numbers that you give on Peru looked very strong in the first half but dropped off a bit in Q3. Was there something credit related? Is there some noise there? Maybe some seasonality we're not aware of? Doesn't look like currency to me.

I'd say two things. Obviously, we had a very strong Q2 in the whole division. And we benefited from strong commercial recoveries last quarter in Peru to the amount of CAD10 million, and in Asia to the amount of CAD11 million. We obviously didn't have those recoveries this quarter. But the increase in PCLs as Rob mentioned in Peru is CAD16 million, and that's a function of -- the asset growth we've seen in the portfolio was across the board for a sustained period of time. We have tightened our underwriting standards on the higher risk part of the portfolio and we're investing in collections on the back end. But again, if you look at the other banks in the region, you're going to see NPLs across the board increasing. We're performing, as you would expect, very well against our peer group. So Peru, we're solid, we're comfortable with the credit metrics in our book and we're operating within our risk profile and our risk appetite.

Thanks very much. If I could sneak in one last one, probably for Mike Durland. Fixed income trading I think it was a record number. Is there anything unusual in the CAD183 million of rate credit rating, any material mark-to-markets we should be aware of, or is this really a function of some of the initiatives in your expanded business, particularly in the US?

It's the latter. There was nothing -- no unusual items whatsoever in that number. It was a good number, probably exceeded our own expectation a little bit. There was a lot of reason to believe the third quarter would have been a very challenging quarter but the group performed very well, Toronto, London, New York, the new initiatives did very well, DCM business did very well so it was broadly based across all of their business units.

Thanks very much.

Next question, please.

Gabriel Dechaine, Credit Suisse.

Just talk a bit more about the international business here, and either Rob or Brian, could you clarify the modest softening of the credit outlook I guess in the international business, where are you seeing that? And then more broadly, I'm not a China expert or anything, but there is ongoing debate about the strength of that economy. I'm just wondering if you've started to see any impact on your business in some of the more export-driven countries like Chile and Peru especially, whether it's affecting credit at all or any loan demand from the businesses, kind of a -- I hate to tie it to one factor but if China GDP growth drops below 7%, is that something that worries you or --?

A good question and a question we quite often get asked. I think if you look at Peru as an example and Peru's economy is driven by investment. There's going to be over CAD50 billion of investment over the next 5 to 10 years, different mining and energy projects. So that is what is fueling, along with some domestic consumption in Peru. A real turndown in the Asian economies would have some impact but if you look at economic forecasts across the board including our own for Peru and Colombia next year, you're expecting 5%, 6% plus growth in these countries.

And the balance sheets of the countries, the fundamentals, the economic fundamentals of the countries remain intact and very strong. In terms of PCLs for the region, what I'd emphasize here is with the acquisition in Colombia and the growth of our business in Peru, we've tweaked our asset mix in international retail somewhat. Our lead product is still mortgages and auto but we're building out consumer finance and personal loans in these countries and the bottom line is you get paid for the risk. The returns are very attractive. The margins in our retail book in Colombia for instance are through 10% and they'd be higher than that in Peru.

So it really is mix, because I was hearing commentary about softening outlook. It's kind of mixing a little bit.

The question I got, I was asked earlier is that there is a little bit of softening in credit profile across the board in these countries. You can see it in our competitors' NPLs and that's just a function of absolute asset growth over time. But from a Scotia perspective, again, we're comfortable with our risk profile, we're comfortable with our risk appetite. We've had good, solid growth in these portfolios, we'd expect PCL's to uptick modestly from here, but again, within our appetite.

Just a commentary here, maybe for your disclosure, it might be helpful to put in some of the spot balances or currency adjusteds, just to get a better sense for it, because you refer to 2% quarter-over-quarter growth on the spot balance basis. The average can play some games sometimes, right. Might give a better interpretation of what's going on in the business.

We'll take that under consideration, Gabriel.

Thanks.

Next question, please.

Robert Sedran, CIBC World Markets.

I just want to come back to the trading revenue question. I hate to ask the question because there's never a good answer to it. Mike, you mentioned business growth but clearly the last three quarters or certainly what you've done year-to-date is higher on an average basis than what you did in 2011 and is this really what it is, business growth? Are you comfortable that the platform, again, without getting too bogged down on what the markets are doing, are you comfortable that the platform is kind of delivering what you would expect this year and that it's a reasonable run rate going forward.

We're very happy with what the platform's delivering and three years ago, four years ago when we made these investments obviously we were hopeful that the results would be the results that we've been seeing the last two or three quarters so we're very, very happy. Obviously, we continue to be pretty cautious as it relates to the current market conditions which to me is a good thing. We're trying to run this business well within the low end of our risk appetite which we have. You saw the trading days; we only had five negative days this quarter. Our VaR numbers are very much in line with actually the last three or four year run rate, probably on the low end of that, and the results are showing the quality that was our objective in making the investments.

One thing that's been happening is, I've been watching very closely, is we're coming from a relatively small base and of course we have a great counterparty. So our onboarding of clients, institutional clients and what have you in the rates business, the fixed income business is very, very good. As we know, some of the international banks are having some real difficulties both in their business models, their ability to take on perhaps more counterparty risk and of course the attractiveness of Scotiabank's counterparty risk [follow that]. We're into actually a fairly good spot on that and we're getting great client reaction about increasing our business with them and so the P&Ls are exceeding our expectation.

Thanks for that. Just to follow up or a point of clarification around the Basel III ratio. When you say that you're in the range, does that mean fully loaded for an IFRS phase-in. Does it include the planned acquisition in China and if you are in the range is there a reason why you won't just give us the number now? I understood when you weren't in the range but now if you are, why can't we just have the actual number?

A few questions there. We are including IFRS and the eventual acquisition of Guangzhou. We are not giving our number now. The number will move around a bit up and down over the next couple quarters but again, we are in the range and we fully expect to be still in the range in Q1 2013.

Okay. I tried. Thanks. (laughter )

All right, next question, please.

Peter Routledge, National Bank Financial.

Another question for you on China. So I mean, Gabriel outlined the case for the potential of hard landing or maybe a less soft landing. How does that impact how you're looking at Bank of Guangzhou. How concerned are you about balance sheet risk at Bank of Guangzhou, credit losses specifically and sum it all up with looking at your -- the acquisition price, in light of that.

Sure. Peter, the Bank went through a transaction two and-a-half years ago where the balance sheet was cleaned up and all the bad loans were taken off the balance sheet and new equity pumped into the Bank. We sent 22 Scotiabankers to Guangzhou in terms of due diligence. We went through all the loan files up and down and did extensive due diligence on the enterprise where we're comfortable with the risk appetite of the Bank, with one exception and one concentration of a loan. Their underwriting practices, there weren't a lot of real estate loans to speak of in the Bank, so we were comfortable in terms of asset quality. We've looked at the quarterly statements of the Bank and are comfortable in terms of financial progress of the Bank and asset quality and we'll do that once again before we close the Bank.

Okay. And is there a potential for a purchase price adjustment if you're not happy?

I'm not going to get into that.

Okay. And any thought of when you might get to close on that?

Well, the Board asked me that question this morning and I've given up forecasting, to be honest with you. I was there in July. I was in Beijing, seen the regulator, and all the comments were positive. It just takes time.

Okay. Thank you very much.

Next question on the line, please.

Brad Smith, Stonecap Capital.

Question for Brian Porter. Brian, could you just confirm to me the sort of aggregate or cumulative amount of capital that you've invested in acquisitions in your segment in the last four quarters? And I was wondering if there are carry-on costs after those acquisitions are made to get them teed up and things like that and if those are just being run through the expense line in the division currently.

Brad, I don't have that at my fingertips. We'll come back to you offline. Away from Colpatria which was a sizable acquisition which was $1 billion, there was a few smaller ones I'd have to add on. Rather than speculate, I'll come back to you with a firm number.

That would be helpful. With respect to the return that you're generating which is just sub-12% right now, could you contrast that with other end market peer returns that you're aware of and sort of general terms in the markets you're in?

Sure. I think that it's important to -- we're building a business, we're acquiring businesses, and when you do that you incur goodwill. That's part of, as I say when you build an international business, you need capital, time, and patience. But if you look at our end market results, for example in Peru this quarter, our ROE was 18.7%; in Mexico it was 20%; in the English Caribbean, 19%. In Chile, it's a little lower; it's in single digits and that's a function of the goodwill we incurred in Desarrollo. Our end market ROEs in most cases are within the pack of our peer group.

And Brian, just as a follow-on from that, your leverage in those markets, what would it be roughly in terms of assets to your capital?

It would be what you'd see here in Canada and I would stress that our capital levels -- as these countries gravitate towards Basel III, we're very well positioned there. We're running at excess capital levels in most of our jurisdictions.

This is Sean. The leverage would be a bit lighter than what we have in Canada because it's loaded up for all the capital for the goodwill and the intangibles. So when you back that out, it would be more in line with the Bank but when you include that, then their leverage versus the equity employed would be a lot less.

I mean, 10 times would be a reasonable estimate for the leverage down there including the goodwill and the funding?

Yes, it would probably be closer to 13% to 15%, thereabouts.

13 to 15 times assets to equity?

Yes. We'll come back to you with more accurate number than that, but that's the general range.

Thank you very much.

Next question, please.

Sumit Malhotra, Macquarie Capital Markets.

First for Sean McGuckin on capital. If I heard you correctly, the 7% to 7.5% of which you're in the range right now fully embeds the impact of all acquisitions that have been announced but have not yet closed?

Correct.

And am I also correct in stating that the CAD1.6 billion in equity that you raised in February was essentially taking into account the impact of same acquisitions that hadn't yet closed? In other words, you're not contemplating the need for further capital to stay within regulatory requirements for transactions that have been announced but not closed?

No.

Okay. Good. Nice and clear. Thanks for that. (laughter) Over to Brian on international. I think one of the reasons that there's some concern over the slowdown in asset growth this quarter is I think we've seen Brazil, the largest economy in South America, where I know Scotia isn't overly active but we've seen that country require some economic stimulus after the slowdown that's taken place. Are you seeing the impact of Brazil? I know we've talked about China and some further away regions but is the impact of Brazil causing you any concern in terms of what kind of growth you're going to see in the areas that have been stronger for you in international the last couple of years.

Do I get to give a one word answer too? (laughter) I'd say that Brazil's a juggernaut as an economy, there's no question about it. It's dangerous to look at all Latin America through the lens of Brazil. And that's why I made the comments I did about Peru earlier and the investment in these countries. Peru is a very unique country on a different growth trajectory than Brazil.

Chile has different fundamentals for a lot of different reasons. But that's why I stated that it's investment that's driving these economies and in the mining and energy sector and will to do so as the personal growth starts to kick in. So if Brazil's growing at 2%, which it is, or 2.5%, I wouldn't confuse that with the outlook in other countries where we're operating where growth rates are pretty close to double, if not higher. So the impact of Brazil on its neighbors I don't think is significant in terms of economic development.

I'd just add one more thing on that business model. In those other countries ex-Brazil we really are a P&C bank, we have branches. And so while we do get the foreign direct investment, the average age of these people and the growth rate into the formal economy is quite large. They're starting to buy furniture and appliances and cars and houses and we're branch banking in those countries. Brazil, we're not branch banking and so there's different dynamics that affect both our growth rates and our diversification and consumption in these countries. It's phenomenal when you go down and see it in Colombia and Peru and the growth of the formal economy in the middle class and we, Scotiabank, benefit from that because we're not just investment banking down there. We're banking the real economy.

Lastly, Brian, I know you're not in the business of building our models for us, but when you think about your business, is international with some of the global headwinds you've talked about and we're seeing every day, is international from an asset growth perspective as you think about 2013 still a double-digit growth type of profile or is it something more in the mid-single digits that you're thinking about going forward as you think about your 2013 plan?

You know, if you look at our asset growth last year and what we've obtained this year, even ex of the acquisition of Colpatria, I would phrase a asset growth next year for low double-digit or high single digits. Look, the economic trajectory of these countries that we're in remains intact and we're comfortable with the asset growth levels and targets that we've commented about.

Thanks for your time.

Next question, please.

Michael Goldberg, Desjardins Securities.

First of all, I always think of setting reserves as a bit of an art as much as a science. So simplistically, is there any reason why I can't think of the way this CAD100 million strengthening took place as being -- we've got this big gain on the realization of Scotia Plaza. Let's put CAD100 million towards the collective and then we've got an additional amount so we can tell people we're now above the 7% level on a common equity Tier 1 basis.

This is Sean. I don't think that's a fair way to look at it. Maybe 10 years ago, when the rules were different. No, as you heard from Rob, we had looked at some of the contagion from Europe that could apply. Bracing ourselves for potential some softening in the market conditions but we thought it was great time to do that.

Okay.

Put it another way, Michael, if you were going to do it after all the stress testing that you've done, when would you do it?

I guess when you have a nice gain it's not a bad time to do it.

Certainly easier.

It makes it easier. Okay. Another one. You seem to have more cautious outlook for International Banking. To what extent can we expect further penetration of wealth and insurance in those markets to offset the moderation in International Banking?

Michael, it's Chris Hodgson. I think that some of the results that we actually posted this quarter support the longer term opportunities. So for example, in insurance if you look at the underlying results, particularly in Peru and Mexico, there has been strong growth in insurance and we actually expect that to continue into the future. In addition to that, with the recent acquisition of Colpatria, and now our purchase of Colfondos, we see an opportunity to expand our pension business. I think that's probably indicative of some of the things we want to do in wealth going forward in partnership with International Banking.

We would likely have not entertained the acquisition of Colfondos had there not been a strong P&C presence in Colombia through Colpatria and there's actually a very strong relationship between the management of those organizations. So in the region of Latin America, we see some good opportunities. The other thing is for the international wealth businesses, on the advisory side we see some opportunity in, again, some of these key markets, particularly in Peru, Colombia, and Mexico would be the sphere we're going to focus on.

Okay. And lastly, can you talk again about the possibility of more international businesses becoming available due to distress in Europe?

Sure, Michael. I can comment about that. It's Brian. As you know, and you've heard us comment before, we're always looking at acquisitions. Acquisitions have been a key part of the international strategy to build out our franchise. We continue to look at them and as you would expect in current economic conditions there are some businesses available.

We've got time for only two more calls. I ask the caller just to ask one question, pick the best of all your questions for the sake of time. Next caller, please.

John Reucassel, BMO Capital Markets.

One question. Mike Durland, the trading numbers are very good. And you talked about -- I think Rick talked about counterparty. But how tight are you keeping trading with your kind of origination and credit providing to your clients or is this a trading business all unto itself? And then when you think about the loan growth, did you buy those loans in the marketplace or where did these loans come from. I think in the US and Europe, I think you picked up CAD5 billion of loans. If you could --

I'll let Steve handle the loan question. But as I said in the past, we're a bank. We have customers all around the world. We've got relationships that we've nurtured for a long, long time and we've been very -- my focus over the last four years has been to connect our product suite with those customers. In some cases, for example in the fixed income space, we've had deep relationship with central banks to provide liquidity needs to those central banks throughout the world, we have on-boarded a lot of buy-side accounts, they trade cash instruments with us.

Those relationships by and large have been on-boarded. That's been a large initiative for us. The majority of it when we talk about on-boarding, it's initiating a different product relationship with an existing relationship. And that's been a very focused effort for us the past three or four years, again. The other point I would make is that our strategic plan, we haven't deviated from at all for the last four years. We've been very focused on the things we've been communicating, fixed income, the commodity space, our prime brokerage offering which we've just launched and we are very happy with the results and hopefully we can continue to sustain them. And I'll let Steve handle the question.

In terms of loan growth, we're seeing loan growth in Q3 in all our markets. It's not really much in the way of purchase loans. We saw a lot of that activity around calendar year-end. Since then, it's been modest. So we're adding net new clients in all our markets and that's what's driving the loan growth.

But no distressed or European banks looking to unload?

Very little of that. As I say, the activity was around calendar year-end. It's been modest, muted since then, so it's a steady stream of relatively immaterial numbers as we go weekly.

Thank you.

Thank you. Last call, please.

Mario Mendonca, Canaccord Genuity.

Good afternoon. One quick question for Brian Porter, sort of goes along the lines of other questions. The organic growth year-over-year in retail and organic this quarter, sorry, retail and commercial loan growth in international this quarter.

Okay. Our retail loan growth was 2% quarter-over-quarter. Commercial was down about 1% on an average basis and that's a function of the decline in loans in Mexico and Asia I spoke about earlier.

What I was thinking about was organic year-over-year.

If you take out the Colpatria acquisition, our organic commercial loan growth is 14%, our retail loan growth is about 12%.

Okay. So still fairly good. Thank you.

Yes.

All right. Thank you very much for joining us on the call. We look forward to talking to you again in the end of Q4. Bye.

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