Bank of Nova Scotia (BNS) 2012 Q4 法說會逐字稿

Good afternoon and welcome to the presentation of Scotiabank's fourth quarter and 2012 annual results. I am Sean McGuckin, Chief Financial Officer. Rick Waugh, our CEO, will lead off with the highlights of our 2012 results. Next, I will go over the fourth quarter financial results, including a review of business line performance. Rob Pitfield, our Chief Risk Officer, will then discuss credit quality and market risk. Rob will be followed by our business line heads who will each provide an outlook for their respective businesses for 2013.

Anatol von Hahn will discuss Canadian banking, Dieter Jentsch will cover international banking, Chris Hodgson will discuss global wealth management and Steve McDonald will discuss global banking and markets. Brian Porter, our President, will then review the financial targets we have set for fiscal 2013. Following that, we will be pleased to take your questions.

Before we start, I would like to refer you to Slide number 2 of our presentation which contains Scotiabank's caution regarding forward-looking statements. Rick, over to you.

Thanks, Sean. We are pleased to announce that in 2012, Scotiabank continued to deliver sustainable profitability and growth with strong contributions from all our business lines. For the third consecutive year, Scotiabank generated record earnings with net income in 2012 of almost CAD6.5 billion, an increase of 21% from last year. Earnings per share were CAD5.22 for the year and that included a CAD0.61 gain for the sale of real estate assets. Excluding these gains in 2012, and the acquisition gains in the prior year, earnings per share increased 8% year-over-year. Return on equity remains strong at 19.7%.

Top line revenue grew by 14% to almost CAD20 billion this year. This clearly demonstrates our ability to generate high quality, sustainable and diversified revenues. Expenses increased from the past year as a result of our decision to continue to invest in expansion initiatives to grow our platform. Our success is demonstrated by our leading productivity ratio this year of 54.3%. Our traditional focus on costs resulted in positive operating leverage across the bank and of course, our management of credit, market, and operating risk keep these costs to a minimum.

A high level of internal capital generation, along with share issuance in support of our acquisitions, strengthened our capital ratios, and increased our capital by a remarkable CAD9 billion. We continue to benefit from the high quality of this capital as demonstrated by a very strong tangible common equity ratio of 11.3%, a Tier 1 capital ratio of 13.6%, all of these above pre-crisis levels and with significant buffers. As of October 31, 2012, our Basel III all-in common equity Tier 1 ratio was 8.6%, or 7.7% after adjusting for the ING Canada acquisition which closed just shortly after year-end.

Our record performance this year is a result of sustainable contributions from each of our four business lines. Canadian banking had a great year with very good asset and deposit growth, reinforced by disciplined expense control, lower provisions. Our continued focus on deposits, payments and wealth management has resulted in a strong performance across retail, small business, and commercial banking. Our acquisition of ING Direct Canada is a game changer, as it provides an independent brand to nearly 2 million customers and CAD30 billion in retail deposits, further reinforcing us as the third largest retail bank in Canada.

International banking continued its strong contribution to earnings this year as a result of both acquisitions and organic loan and deposit growth. These results continued to highlight the benefit of our diverse geographical footprint across those regions of the world that are showing above average growth, particularly Latin America and Asia.

Global wealth management had an excellent year, also driven by organic growth and acquisitions. Both our wealth management and insurance businesses delivered strong results demonstrating the continued strength in both our platforms. We are very pleased in how well the DundeeWealth transition has gone both in retention of talent and in growth in assets under management, as well of course that's customer retention.

Finally, global banking and markets had a strong year across all our client driven platforms, and continues to show the strength of our diversification and a focus on relationship driven products in markets where we bring special and focused expertise. As well, the significant investment in people and technology over the last few years in London, New York, Mexico, and Toronto, is showing excellent results, particularly in our fixed income rates business.

All of these results are underpinned by each of our business lines adding new customers, either one customer at a time or by acquiring customers through proven platforms Ike E-trade, Dynamic Funds, ING Direct Canada, Colpatria, and Canaccord Bank to name only a few. Since the financial crisis, we have made over 30 acquisitions, investing more than CAD14 billion. All of these transactions have been within our financial and our strategic objectives and are yielding results now and for years to come.

We are very pleased with our results and we achieved all our financial targets for 2012. Our earnings per share grew 8% versus a target of 5% to 10%. Our return on equity of 17.6% was near the top end of our target range of 15% to 18%. These results reinforce the proven strength of our business model. Long term strength and short-term flexibility, resulting from the diversifications of our business, has provided a platform that allows us to balance both stability and growth.

We are also very pleased by last weeks announcement, that Scotiabank was the first Canadian bank to be named Global Bank of the Year by the Banker Magazine, a Financial Times publication. We were also named the best bank in Canada, bank of the year in the Americas.

With that, I'll turn it over to Sean who will now go into our financial results in more detail.

Thanks, Rick. Slide 8 shows our key financial performance metrics for the quarter. Earnings per share for the quarter were CAD1.18, an increase of 22% from last year and up 2% over the third quarter. Looking at year-over-year changes, Q4 earnings benefited from the contribution from acquisitions, particularly Bank of Colpatria, stronger trading revenues, growth in transaction based banking fees and a lower effective tax rate. Partly offsetting were higher provisions for credit losses and higher operating expenses.

The provision for credit losses was CAD321 million this quarter, compared to CAD281 million in the same period last year. The year-over-year increase was mainly due to a decrease of CAD30 million and the collective allowance on performing loans last year, and higher provisions in international banking partially offset by modestly lower provisions in Canadian banking and global banking and markets.

Moving to revenues on Slide 9. Revenues during the quarter were solid at CAD4.9 billion, representing growth of 15% from last year. The year-over-year increase reflects higher net interest income which increased due to the impact of acquisitions and higher volumes of core banking assets across all business lines. The core banking margin increased 9 basis points year-over-year from recent acquisitions with higher spread business.

Non-interest revenues increased 20% from last year due to stronger capital markets revenue, increased banking revenues and payment volumes, and higher mutual fund revenues. Quarter-over-quarter, net interest income was up slightly due to growth in residential mortgages and personal loans, partly offset by a decline in the margin in Chile. Non-interest revenues were up 3% versus last quarter when you exclude the Scotia Plaza gain, as higher banking revenues in Latin America and higher gains on investment securities were partly offset by decline in trading revenues and the impact of the gain on sale of a leasing business in the prior quarter.

Turning to Slide 10, non-interest expenses were up CAD224 million, or 9% from last year. Acquisitions accounted for approximately CAD123 million, or 55% of this increase. Underlying expense growth year-over-year was mainly due to higher staffing levels for business expansion in certain divisions, as well as an increase in performance based compensation, in line with stronger operating performance. As well, premises costs, technology, and professional expenses rose reflecting spending to support growth initiatives.

Compared to the prior quarter, expenses were up 4% due mainly to seasonally higher fourth quarter expenses including higher professional fees, technology costs, advertising, and business development. These were partly offset by lower benefit expenses. Expense management remains an ongoing priority and we are pleased to have delivered on our commitment to achieve positive operating leverage in 2012.

Turning to capital on Slide 11. 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 13.6% and 11.3% respectively, due mainly to the 1.7 billion share issuance to fund our acquisition of ING Direct Canada and strong levels of internally generated capital.

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 of October 31, our common equity Tier 1 ratio under Basel III on a fully implemented basis was 8.6%, or 7.7% after adjusting for the ING Canada acquisition.

Turning to the business line results beginning on Slide 12. Canadian banking recorded another solid performance again this quarter. Net income was CAD481 million, up CAD62 million, or 15% from a year earlier. Revenue growth was solid at 6% with growth in net interest income of 7%, growth in net fee and commission revenues of 4%. Although the margin was stable year-over-year, net interest income was up due to strong asset and deposit growth.

Credit performance improved modestly with loan loss provisions down CAD3 million. Operating expenses were up 3% year-over-year as higher advertising costs and project spending to support business growth were partly offset by a decreased staffing level from operational efficiency initiatives. On a full year basis, Canadian banking had positive operating leverage.

Quarter-over-quarter, assets increased 2%, mainly from solid growth in residential mortgages. Total revenue decreased 1% due to the gain on sale of a leasing business in the previous quarter. Adjusting for this, revenues were up 2%, mostly from growth in retail assets and commercial deposits. The provision for credit losses increased CAD14 million to CAD132 million due to higher provisions in commercial banking. Expenses were up 3% compared to last quarter, reflecting seasonally higher expenses and new business initiatives.

Moving to international banking on Slide 13. Net income in the fourth quarter was CAD453 million, up 22% from CAD371 million a year ago. Last years results included CAD27 million of negative goodwill from acquisitions. The acquisition of Bank of Colpatria in Colombia contributed to the strong growth over last year.

Year-over-year, revenues increased 18% due to strong loan and deposit growth and the positive impact of acquisitions, partly offset by the negative goodwill on the prior year. Expenses were up 19% or CAD159 million, two thirds attributable to acquisitions. The remainder of the increase was mainly due to higher remuneration and premises costs largely in Latin America as a result of inflationary increases and to support business growth. On a normalized full year basis, international banking had positive operating leverage.

Quarter-over-quarter, net income was up 2% reflecting solid retail asset growth in Latin America and lower taxes in Chile and Mexico, partly offset by an increase in provisions for credit losses, higher expenses, and the negative impact of foreign currency translation. Provisions for credit losses increased CAD8 million from last quarter, primarily from higher retail and commercial provisions in the Caribbean offset by lower provisions in Latin America, mostly related to the acquisition in Colombia. Expenses were up 4% from the previous quarter, primarily due to seasonality to support business development in Latin America.

On Slide 14, global wealth management's net income for the quarter was a record at CAD300 million, an increase of 15% from last year. Revenues increased 10% year-over-year driven by strong growth across insurance and most wealth management businesses. Assets under management and assets under administration grew 12% and 8% respectively. Of the total revenue, approximately 84% was attributable to wealth management and 16% to the insurance businesses. Expenses were up 5% from the same quarter last year due mainly to higher volume related expenses, partially offset by discretionary expense management. On a full year basis, global wealth management had positive operating leverage.

Quarter-over-quarter net income increased 6% as last quarter included a non-recurring CAD12 million deferred tax charge due to the Ontario tax rate freeze which lowered the contribution from our investment in CI Financial. Revenues increased 4%, mainly from growth in our global asset management, brokerage and international wealth businesses. AUM increased by 6% and AUA grew 4%. Expenses were up 6%, primarily reflecting seasonality and higher volume related expenses.

Looking at Slide 15, global banking and markets had a very good quarter with net income of CAD396 million, an increase of 63% or CAD153 million from last year. This growth reflects a significant improvement in revenues across the platform compared to the challenging market conditions experienced in 2011. Year-over-year, revenues increased 37%, primarily driven by higher fixed income revenues, as well as stronger revenues in equities, commodities, corporate lending and investment banking.

Provisions for credit losses remained very low, declining CAD6 million to CAD11 million. Expenses were up 5% over last year, reflecting higher performance based compensation due to the higher business results. On a full year basis, global banking markets had positive operating leverage.

Quarter-over-quarter, net income declined modestly by CAD2 million, as higher revenues and fixed income and from the US, European and Canadian lending businesses were partly offset by declines in the other capital markets businesses. Expenses increased 4% from last quarter due to higher salaries, stock based compensation, and professional fees.

I'll now turn to the other segment on Slide 16 which incorporates the results of group treasury, smaller operating units and certain corporate adjustments. The results primarily reflect the impact of asset liability management activities. The other segment reported a net loss of CAD111 million this quarter, compared to a net loss of CAD138 million last year. This quarter's net loss of CAD111 million was lower than the previous quarters amount after adjusting for the sale of Scotia Plaza and the CAD100 million increase in collective allowance in the third quarter, due mainly to higher security gains in Q4.

This concludes my review of our financial results. I'll now turn it over to Rob who will discuss risk.

Thanks, Sean. The risk in our credit portfolios continues to be stable and benign. Our provisions for credit losses on impaired loans remain in line with expectations, increasing by CAD10 million year-over-year and CAD19 million quarter-over-quarter to CAD321 million. Our net impaired loan formations were CAD374 million, an improvement from the prior quarter.

Market risk remained low and well controlled. Average one day all bank borrow was CAD19 million versus CAD20 million in the prior quarter. There's one day trading losses in the fourth quarter compared to five in the previous quarter. The loss is well within the range predicted by VAR. Our ongoing stress testing confirms the appropriateness of our risk appetite.

Slide 19 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, but were up CAD14 million quarter-over-quarter as commercial provisions increased. Our Canadian retail portfolio remains extremely high quality with 93% of our assets secured and relatively low exposure to unsecured loans and credit cards.

International retail provisions increased CAD30 million year-over-year, primarily in Latin America, as results of acquisitions, asset growth, and moderating market conditions. The quarter-over-quarter increase reflects higher levels of provisioning in the Caribbean. International commercial provisions declined year-over-year and were stable sequentially at CAD17 million, reflecting higher provisions in the Caribbean offset by lower provisions in Latin America, mostly related to the acquisition in Colombia.

Overall commercial provisions remained relatively low. Continued economic softness in the Caribbean has negatively impacted both portfolios although these portfolios are well managed. Global banking and market tap provisions for credit losses of CAD11 million this quarter compared to provisions of CAD17 million in the same period last year and CAD15 million in the prior quarter. The declines are a result of lower provisions in the US and European lending businesses.

Slide 20 shows our Canadian banking residential mortgage portfolio. Our total portfolio of residential retail mortgages is at CAD156 billion of which CAD142 billion is related to free hold properties and CAD14 billion related to condominiums. As you can see from the slide, approximately 60% of the portfolio is insured and 40% is uninsured. The uninsured portion has an average loan to value ratio of approximately 54%. We believe that 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 their debt levels well. Credit quality and performance of the portfolio remains strong. Our disciplined and continued 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 overall risk appetite.

To summarize on Slide 21, our asset quality remains high with the retail and commercial portfolios performing as expected and our corporate portfolios continuing to demonstrate this strength; however, a combination of growth in portfolios and product mix will result in somewhat higher provisions in 2013. We expect Canadian retail provisions to remain stable, international 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.

And that concludes my remarks and I'll now turn it over to Anatol.

Thank you, Rob. Turning to Slide 23. In 2013, we expect to see continued asset and deposit growth in Canadian banking but with some softening of volume growth in residential mortgages and personal lines of credit. We believe the acquisition of ING Canada will have a strong positive impact on our bottom line and solidify our number three position in retail banking in Canada.

Recently, the launch of our new American Express suite of travel rewards cards was an unprecedented success that well exceeded our expectations. Through our branches, we continued to do very well with solid mutual fund sales and strong cross selling of creditor insurance. With continued success in payments, deposits, and wealth management, we are confident about our ability to outgrow the market in these fee based businesses.

Turning to assets and deposits, we see continued volume growth especially in automotive lending, commercial banking, and small business. Retail growth is expected to be solid though not quite as strong as in 2012. Our partnership with Global Transaction Banking has produced excellent results in commercial banking and small business, and this will remain a focus for 2013. Looking at the margin, we expect it to stay relatively stable going forward; however, margin pressure will remain with the low interest rate environment expected to extend well into 2013 calendar year and with continued competition for regulatory qualifying deposits.

Turning to PCLs, we expect moderately higher provisions driven by protected asset growth. Our loan loss ratio is expected to remain relatively stable. We also expect commercial banking PCLs to remain near their current levels but as you know, these can vary from one quarter to the next. Managing expenses will remain a top priority in 2013 as we reinvest a portion of our savings from operational efficiency initiatives to support growth opportunities. 2012 was an excellent year. Looking forward, Canadian banking will continue to execute on our strategic priorities to further enhance our customer experience supported by optimized distribution channels and efficient operations.

Let me now turn it over to Dieter.

Thank you, Anatol. For 2013, we had a positive outlook for international banking. Despite continued economic uncertainty around the globe, we are comfortable our footprint will generate double digit loan growth. This will be accomplished primarily through organic initiatives.

We have a positive outlook for our retail businesses. We've continued to build a good momentum over the past several quarters. Our relatively attractive rates of economic growth in some of our key retail regions, most notably in Latin America and Asia, will sustain our retail growth trajectory. In addition, we continue to advance a number of organic initiatives including new offerings such as premium banking, an increased focus on consumer and micro finance segment, and process and efficiency improvements to improve costs and our customers experience.

For our commercial businesses, our pipeline for 2013 is healthy, especially in our large platforms in the Asia Pacific and Latin American regions. The process improvements that we invested in over the past 18 months, which reduced turnaround times by more than 40%, continue to pay dividends. In partnership with Global Transaction Banking, international banking looks to make continued progress in building deposits and providing cash management services in our commercial customers, as well to continue to grow our trade finance business, particularly in Asia.

International banking continues to work closely with the partners in global wealth management. In particular, we are seeing an increasing number of cross segment referrals between our commercial and retail segments and the wealth segment. On the risk side, we expect PCLs, both in dollar and percentage terms, will increase modestly. This reflects our expectations of underlying organic growth in our portfolios, as well as our acquisition of Bank of Colpatria.

Turning to expenses, we continue to have a focus on expenses this year and we expect to deliver positive operating leverage in 2013. With respect to margins, we expect them to remain relatively stable. Finally, while we are always open to attractive acquisitions on a selective basis, our primary emphasis in 2013 will be to leverage the good organic growth opportunities that we already have within our international banking footprint.

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

Thanks, Dieter. Our outlook for 2013 is for good organic growth across our global wealth management businesses, while taking into account market volatility and the current economic environment.

In our wealth distribution businesses in Canada, we continue to invest in our advisor channels to drive growth through new client acquisition. We have experienced strong earnings in our private client business driven by asset and volume growth across all business lines, while Scotia iTRADE is well positioned to gain market share. We are pleased with the contribution from our international wealth businesses. We anticipate that our recently announced Cofundos acquisition, together with our existing Colpatria business, will accelerate our scale in the region. As we move forward, we will continue to pursue tuck in acquisitions in international markets that fit our strategic direction.

In global asset management, we continue to gain market share and mutual funds against the industry. Our assets under management and assets under administration have increased to CAD115 billion and CAD283 billion respectively, and we remain second in the industry in net sales year-to-date according to the most recent IFIC data.

Our focus for 2013 is on continuing to explore opportunities to fill product gaps and grow our distribution pipeline by leveraging product innovation and leadership to deliver a broad range of investment solutions across multiple channels, both in Canada and internationally. We also remain focused on recruiting high quality talent and improving advisor productivity, while continuing to capture both revenue and cost synergies across our business lines.

Growth in insurance remains strong, both in Canada and internationally. 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. This business maintains strong growth potential and offers attractive revenue diversification as it is less exposed to market volatility. Our largest opportunity is in leveraging the global distribution reach of the Bank.

In global transaction banking, we continue to focus on providing comprehensive client coverage across the Bank's network for deposit, cash management, payment services, trade services, and financial institutions.

In terms of our strategic investment in CI, we are building our relationship with CI as a preferred partner as part of the growth of our global asset management business, and have recently extended a number of new mandates to them. Finally, continued scrutiny on expense management remains a focus for global wealth management in 2013. In conjunction with our partners and Canadian and international banking and global banking and markets, we expect to deliver a good wealth management result in 2013.

And with that, I'll pass it over to Steve.

Thanks, Chris. In global banking and markets, we expect that market headwinds will continue to impact capital markets businesses with uncertainty still surrounding the economic climate in the US and Europe; however, we are confident that the investments we've made in the past few years in fixed income, equities, commodities and metals will continue to provide momentum in the growth of our stable client focused platform.

We expect loan growth to be mid to high single digits in the coming year, while loan spreads should remain stable. We continue to see some challenges for loan underwriting fees in the absence of an increase in debt related M&A activity. The credit quality of our loan portfolio remains strong and we expect PCL to remain modest. We continue to optimize capital usage and carefully manage our risk exposures in support of our global capital markets platform. Global Transaction Banking services are prime cross-sell products for global banking and markets customer base. Almost 60% of GBM's corporate customer base in North America use Global Transaction Banking products or services.

Our expense management focus remains strong and we expect to maintain our positive operating leverage and strong productivity ratio in 2013. Our long term strategy has been to maximize the quality and stability it of global banking and markets earnings. We have done this through our investments in the business by continuing to focus on diversification across products and geographies, and by strengthening the linkage of our products and services with the core clients and geographies of the Bank.

With that I'll pass it over to Brian to wrap up with a review of our financial targets for 2013.

Thanks, Steve. Looking at our targets for 2013, on Slide 31, which are mostly unchanged from 2012, we expect earnings per share growth of 5% to 10% for 2013, excluding the real estate gains we recorded in 2012. For return on equity, we again are targeting a range of 15% to 18%. And with our continued focus on expense management, we have now improved our productivity target by reducing it to 56% versus our 2012 target of less than 58%. This improvement reflects the efficiency initiatives that we have implemented over the past few years. We will continue to grow our capital position and maintain strong capital ratios.

In summary, these targets represent prudent but consistent growth and a high level of profitability and efficiency, while also reflecting the continued challenging operating environment. We will continue executing on our five point strategy to deliver sustainable profitability. We are confident that we will be able to achieve our targets and objectives, both in 2013 and beyond.

With that, I'll pass it back to Sean for questions.

Thanks, Brian. That concludes our prepared remarks. Please limit yourself to one question, then rejoin the queue to allow everyone the opportunity to participate. Operator, can we have the first question on the phone please?

Certainly, thank you. Robert Sedran, CIBC.

Hi, good afternoon. Quick question on the business and government side on the international segment. At least on an average basis it was down again this quarter, now I'm wondering if there's anything. I know last quarter we spent some time talking about the period end balances and differences between the average. I'm wondering if there's something of that nature that might obscure the underlying trends in terms of the quarter itself.

And Dieter, I don't mean to front run the investor conference in January, but if you can give us a bit of an idea by region, Caribbean, Latin America and Asia, in terms of the double digit growth where you are expecting it to come from next year.

Rob, I'll answer the first part of your question in terms of loan growth over the quarter and the year. First of all, I'd say that as you recall, the Canadian Dollar was strong relative to most of the currencies that we generate income in, the Mexican Peso, US dollar et cetera, for the quarter. So that impacted our average assets to the tune of CAD1.8 billion for the quarter.

If you look at a year-over-year basis, our commercial assets grew 21%, 16% ex of Colpatria, and our retail assets grew 19% and 10% ex of Colpatria. So year-over-year our asset growth has been very strong and that's against -- if you break it down by region, which was really the basis of your question, our commercial assets have shrunk by 7% in English Caribbean. So we're earning through that and they've also been down in Puerto Rico on our RG acquisition, which we stated at the time the Fed-assisted transaction we did that we would be shrinking assets over time. So against the back drop of those two issues in the Caribbean.

I would also point out that in Asia, two things there. One, trade finance volumes were off this quarter. They were off last quarter. That's partially a function of pricing in the marketplace and competition or competitive pressures in the marketplace. It's also a function, on the commercial side, that we had some large pay downs this quarter. So it was a matter of timing more than anything.

In terms of Asia, we have a strong commercial corporate pipeline coming on so I'm not unduly worried about asset shrinkage in the quarters ahead and as Dieter said in his outlook, we would expect double digit asset growth for 2013.

Right. When you think about that double digit asset growth, do you expect the Caribbean to remain that kind of a drag or are we going to stabilize that portfolio at some point?

Well I'd say there's two countries in particular that continue to suffer economically in the Caribbean. That would be the Bahamas and Puerto Rico, where those two markets haven't found a bid in terms of their real estate markets. In terms of the travel business, the hotel hospitality business for the coming year, bookings are very strong, the strongest we've seen in some time. So that would mean, for some countries, this is the second good year in a row and for some countries it's the third good season in a row, so that's a positive sign.

The only negative out there would be the Dominican Republic which is a function of decreased traffic from Europe for the coming year, because they are quite dependent on European volumes. But I would expect the Caribbean to start to stabilize here. You're expecting positive economic growth in Trinidad, Jamaica seems to be stabilizing somewhat, Barbados is okay, so we would expect to see some sort of stability.

Thank you.

Just following on Brian's point to your question, our pipeline is strong in all our major platforms and if you look at Peru, Chile, and Colombia with Asia and you look at the forecast for growth for 2013, it would range from anywhere from about 4% to 5.5%. So those we anticipate and the way the first couple months are shaping up in terms of activity, we see very positive trends there, as well as Mexico. Mexico is a large platform that we believe we could generate some good activity. So those large platforms with underlying economies are functioning well and we anticipate to be generating growth from those markets at low double digit.

Okay, next question on the line please?

Gabriel Dechaine, Credit Suisse.

Good afternoon. In international, for Dieter, you mentioned some competitive behavior, or Brian actually mentioned that, the competitive behavior restraining some of your growth, I'm wondering if you've also seen that in LatAm and if that's the local players or the Spanish banks that are getting more aggressive as Spain slows down. And then on the accounting side, IAS19, looks like there's a CAD1.2 billion pre-tax unamortized pension loss and this is not just for Scotia, but for other banks too. Will you have to write that off against retained earnings in Q1 2014 and is that number already reflected in your Basel III 77 there?

We talked about the competitive pressures in LatAm on numerous occasions. They consistently remained very strong and notwithstanding that, we continue to generate good low double digit loan growth and we don't see that changing in 2013.

Is it the local players or the foreign?

It's a combination of local players and foreign players. It varies from quarter to quarter.

Okay thanks.

And on the second question with the IS19, the pensions, as you pointed out, that is effective 2014. We're still working through that. The net difference between that and what's already on the asset is a prepaid pension asset gets written off to retained earnings, so that would end up in our Q1 2014 capital plan and we would be planning around that.

So it's not in the 77, it's not CAD1.2 billion, it's a smaller number?

I can't remember exactly what we had in our financial statement, it was around CAD1 billion I think, of which we already had a prepaid asset of 300. So the net hit if rates don't rise and stays where it is, it would be CAD600 million to CAD700 million hit to our capital. Thank you.

Steve Theriault, Banc of America.

Thanks very much. For Rob Pitfield, I think you indicated in your remarks that credit losses are expected to rise due to growth in mix and softening economic conditions, could you help us out a little bit in terms of the loss rate? I can appreciate the dollar amount of PCLs goes up with growth but on the loss rate, are we looking at a couple of basis points or with the changes in mix and softening conditions in your base case or your plan numbers, could we -- or are we looking to approach 90 basis points or something in that range?

At least that. No, that's a joke. We will be nothing like that. We're very low. We're well below our historical three to five year minimums and quite frankly, I would expect to be at that range, the minimum range or below, in 2013.

If you look through it, the Caribbean may continue to be a little soft but Mexico will be fine. Peru will have PCL growth but just as the portfolio itself grows. The same with Chile, the same with Uruguay, and the same with Colombia. So we feel very good about 2013 and when we talk about the various factors that will cause the growth, it's really just portfolio growth which is the biggest issue.

Okay, that makes sense.

And Canada is okay as well. Canada, both on the retail and the commercial side.

If I could just for Sean, does your 7.7 B3 Tier 1 common, does it include the impact of the pending Chinese acquisition as well?

No, that would be a further 30 basis points as of when it closes.

Thanks very much.

Next question, please?

Michael Goldberg, Desjardins Securities.

Thank you. You noted your internal capital generation of about CAD3.6 billion in the year and now you're talking about your Basel III common equity Tier 1. Let's make an assumption that you didn't increase your risk weighted assets and if you continued to generate capital internally at that rate, how much would your -- would the set one ratio increase annually?

We've said before publicly that we accrete internal generally capital of 20 to 25 basis points a quarter and that assumes about an 8% asset growth built into that, so within a year, excluding any acquisitions, about 80 to100 basis points.

What asset growth did you say?

About 8% risk weighted asset growth.

And one other number question I have. You noted that your tax rate was below normal in the fourth quarter, how much did irregular items impact it and what should your normal TEB tax rate be going forward?

As we did point out in the commentary, there were some tax recoveries and benefits in international from Chile and Mexico. There will always be fluctuations quarter to quarter. We like to look at a whole year basis so if you take international for example, their tax rate -- this is a non-TEB -- was about 21% this year which is up about 0.5% over last year. So international is generally between 19% to 23% but as we said, depending on timing of recoveries during the year, you may get some quarters more or less than others.

So how much was it this quarter in terms of the impact on the tax rate and on a consolidated basis, what should your normal TEB tax rate be?

So again, we would be targeting, on a non-TEB basis -- I don't have the TEB with me -- but on a non-TEB basis, our all bank rate would be around 20% to 23% and for this quarter and international, I think the rate was about 15%. So it was about CAD25 million to CAD30 million of benefits on some tax recoveries there.

Thank you.

Next question please?

John Reucassel, BMO.

Thank you. Just maybe I could ask for an update on -- maybe from Brian, just on the Guangzhou acquisition, I know it's not on your Basel ratios, but where does that stand and is there any timing update on that?

A number of us were over in China six or eight weeks ago. We've agreed to commercial terms on the transaction, John. There has been a change of government in the municipality of Guangzhou with the mayor, the vice mayor level. These are important people and very influential in the transaction, so we're spending time with them. I think we're in good stead with the CBRC, the regulator over there, so I'm not going to speculate on timing. As I said before, these things take time in China and I can't forecast whether it's going to be Q2 or Q4 but we're making headway.

And the terms of the transaction would be similar to what was disclosed?

Yes, we're going to -- given that this was announced a year ago, we're going to have to go back and do some due diligence work on the basis that the transaction will proceed to make sure that we're comfortable with the asset quality and the earnings of the bank and those type of things, but I don't expect you to see a significant change in commercial terms.

Great. Thank you.

Next question please?

Sumit Malhotra, Macquarie Capital Markets.

Good afternoon. My question is for Anatol, and, Anatol, when I look at the commentary you give in Canadian banking under the outlook, not just this quarter but over the course of the year, the net interest margin commentary has stated things like stabilizing or steady but remains under pressure.

The thing is when you look at the numbers, it's hard to see where that pressure is because year-over-year your margin in the segment is virtually unchanged. And when I look at some of the components, most of your growth on the balance sheet side has been on the resi mortgage product, at least on a dollar basis, and it doesn't look like there's been too much of a change in your deposit profile. So what is it you would attribute that steadiness and margin to? Obviously you've seen most of your peers have had much more significant declines, some help there would be appreciated.

Let me talk to you about two sides of it. One in terms of where we're seeing deposit in terms of pressure and in terms of squeezing is on the deposit side where it's a lot more competitive, say, now this time of the year as it was a year ago and throughout the year. So we've seen compression in terms of margin on the deposit side.

On the positive side, where we've been able to make that up, is as mortgages that we've made variable rate mortgage loans over the course of the last two to three years, as they're coming due, those customers are in a very large percentage, well over 80%, are taking fast rate mortgages where the spreads are higher than the spreads we were making on the variable rates. So we've got those two effects that are affecting us. Now, there are a number of other things but you're also seeing on the commercial side we've got a little bit of tightness in terms of spreads, although the pipeline is still good but the major lines are those two, the deposits on the one side and the renewal of the mortgages and the new mortgages that we're booking on the other.

So when I look at your disclosure in the presentation, the mortgage balance is up, let's call it, CAD11 billion year-over-year so your commentary, if I hear that right, is that what percentage would you attribute new business that's now going to the fixed?

I think you've got to look at a little bit wider of a scope, Sumit, and that is that over the course of the year, though we might have grown close to CAD11 billion, we had churn of close to CAD30 billion. So you also have loans that we already have, mortgages that we already have that come due that are variable and we've renewed those at a higher margin than what we had them on the book on originally. So that's where maybe some of the math might [be from].

Just in terms of total, it's probably at least 85%, 90% are going into terms like three to five year product.

It varies from month to month, but well above 80%.

So I think on an organic basis, before I quickly ask about ING Direct and leave it there, it's obviously the interest rate environment isn't beneficial to anybody but it doesn't sound like on your organic basis, the organic business you're expecting a significant decline in the margin from where you stand today, is that a fair assessment?

No I'd say on the deposit side, we're continuing to see a lot of pressure on the deposits so that's an area we're watching very, very carefully. We think we'll offset it though with what we're seeing on the mortgage side and again, our variable mortgages that will come due in 2013 should help offset that.

Any commentary on early days of ING Direct?

We're delighted. We just closed and we've started to work with ING or more importantly ING Canada has started to work with us. As you know and we've talked about, we are not going to do an integration but we are coordinating very, very well, and it is, as you say, very, very early but we're very pleased with what we have. The management team at ING has their targets and their plan and we're working with them to coordinate better or well I should say.

Thanks for your time.

Thank you. Next question on the call please?

Mario Mendonca, Canaccord Genuity.

Good afternoon. Just want to follow-up on that question about retail margins. I thought one of the beneficial effects that played out this year was some of the pre-funding in the covered bond market. If you could just clarify the extent to which that benefited the margin and generated some of the stability and whether the absence of that pre-funding going forward could put pressure on the NIM, did that make a difference or did I misread that?

I don't have the net benefit from the covered bonds, but obviously that's lower cost funding than straight wholesale funding but we can get back to you with that specific question.

Looking forward though, do you anticipate not having used much covered bonds -- well no one really has -- whether that could have a negative effect on the margin in 2013?

I think we're right on covered bonds. As you're aware, the government put the legislation in, in June and the industry has been waiting for regulations to go with that so that we can structure our programs in accordance with the regulations. I think that process is nearing an end so I would expect early in 2013 we'll be in a position to issue covered bonds again.

Thank you.

I don't believe there are anymore questions on the line. Thank you for listening and have a happy holiday season.

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