Bank of Nova Scotia (BNS) 2013 Q2 法說會逐字稿

Good afternoon, and welcome to the presentation of Scotiabank's 2013 second-quarter results. I'm Sean McGuckin, Chief Financial Officer. Rick Waugh, our CEO, will lead off with the highlights of the quarter. Next, I will go over the 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 Brian Porter, our President, who will provide an outlook for each of our business lines for the remainder of 2013. We will then be glad to take your questions.

Also in the room with us to take your questions are Scotiabank's business line group heads. We have Anatol von Hahn from Canadian Banking; Dieter Jentsch from International Banking; Chris Hodgson from Global Wealth Management; and Mike Durland and Steve McDonald from Global Banking and Markets. As with prior calls, we also have joining us Sabi Marwah, Vice Chairman and Chief Operating Officer; Jeff Heath, our Group Treasurer; and Stephen Hart, our Chief Credit Officer.

Before we start, I would like to refer you to slide number 2 of our presentation, [saying] Scotiabank's caution regarding forward-looking statements. Over to you, Rick.

Thanks, Sean. We are pleased to report a strong second quarter, driven by good revenue growth, solid contributions from all our business lines. Net income was over CAD1.6 billion, representing growth of 10% year over year. Diluted earnings per share were CAD1.23 for the quarter, up 7% from last year. Our return on equity remains strong at 16.2%.

Revenue grew by 11% from last year. Excluding acquisitions, revenue growth was 7%, and was specifically attributed to asset growth, higher fee income, and stronger wealth management and insurance revenues. We delivered positive operating leverage, and we continued to put a priority on expense management.

The credit environment remains stable, and as expected, provisions grew in line with asset growth and portfolio mix, particularly in Latin America. Impaired loan formations have continued to decline, and Canadian retail delinquency has improved, as Rob will discuss shortly. Our capital is strong. Our Basel III all-in common equity Tier 1 ratio increased by 40 basis points to 8.6% this quarter.

Looking at the first half of the year, revenue and earnings growth has been solid. Canadian banking had revenue growth across several categories. The acquisition of ING Direct is performing well, in addition to strong customer growth in credit cards, deposits, payment services, and in wealth management. International banking results were also driven by strong revenue growth, particularly Latin America, higher contributions from associated companies, investment gains, and acquisitions. Partly offsetting was increased PCLs, but as I said, they grew in line with expectations.

Global wealth management had a very good quarter, with both our wealth management and our insurance businesses contributing strong sales, both domestically and internationally. Improved market conditions were primary drivers. And finally, global banking and markets saw stronger revenues in the lending, fixed income, and equity businesses, partly offset by lower precious metals and commodity revenues. Looking forward, we expect growth in the United States to favorably impact our Americas' footprint. Expanded US trade with Canada and Mexico, in particular, will benefit our customers and business conditions. With a strong performance to the first half of this year, we are well-positioned and confident we will meet or exceed targets for the full year, growing in each business line.

I'll now turn it over to Sean.

Thanks, Rick. Slide 7 shows our key financial performance metrics for the quarter. Diluted earnings per share for the quarter were CAD1.23. This was 2% lower than the previous quarter, due primarily to the shorter quarter, but up 7% from the same period last year. Looking at year-over-year changes, Q2 earnings benefited from recent acquisitions, particularly ING, higher net interest income, stronger wealth management results, and higher growth in transaction-based fees. Partly offsetting were lower trading revenues, higher operating expenses, and higher provisions for credit losses.

Moving to revenues on slide 8 -- revenues during the quarter were CAD5.3 billion, up 11% from last year. The increase reflects the impact of ING, as well as asset growth in international banking, corporate lending, and Canadian residential mortgages. The core banking margin was in line with last year, after adjusting for the ING acquisition impact. Growth in net fee and commission revenues was driven by stronger wealth management revenues, and higher net gains on investment securities, partly offset by lower trading revenues. Quarter over quarter, net interest income was up modestly, as stable margin and asset growth was offset by a shorter quarter. Net fee and commission revenues grew due to better performance in wealth management; however, trading revenue was down due to lower results in fixed income, precious metals, and commodities.

Turning to slide 9, non-interest expenses were up CAD276 million, or 11%, from last year. Acquisitions accounted for approximately CAD116 million of this increase. Underlying expense growth year over year was spread out across most operating categories, and was the result of the support of ongoing growth initiatives. Premises costs were also up, due to the real estate sales last year. Compared to the prior quarter, expenses were up 1%, with acquisitions accounting for 50% of the increase. Higher marketing and premises costs were offset by lower compensation-related expenses. Excluding the real estate gains last year, year-to-date operating leverage was positive 1.5%. We continue to expect to achieve positive operating leverage for the full year.

Turning to capital on slide 10 -- you can see that the Bank continues to maintain a strong, high-quality capital position that is well above regulatory minimums. The common equity Tier 1 capital ratio increased by 40 basis points to 8.6% this quarter. The increase came from internally generated capital and stock issued under the dividend reinvestment plan, while risk-weighted assets were in line with last quarter.

Turning to the business line results beginning on slide 11 -- Canadian banking had another strong quarter, with net income of CAD547 million, an increase of CAD86 million, or 19%, from a year earlier. Revenue growth was strong at 15%, or 6% excluding ING. Strong organic asset growth, including 7% growth in residential mortgages, 24% growth in consumer auto loans, and 7% growth in commercial lending drove the revenue performance. The margin decline of 9 basis points year over year was entirely due to ING. Net fee and commission revenues increased, primarily as a result of growth in credit cards and higher wealth management distribution fees. The higher credit provisions were due to one account in commercial banking.

The ING acquisition accounted for the majority of the increase in expenses. Excluding ING, expenses increased 4%. Quarter over quarter, revenue was down 1%. The shorter quarter and lower card revenues were only partly offset by higher investment gains and the full-quarter impact of ING. Expenses were up 1%, due in part to the full quarter effect of ING, partially offset by the shorter quarter. On a year-to-date basis, operating leverage was positive 1.7%.

Moving to international banking on slide 12 -- international's earnings were CAD419 million this quarter, up 5% from CAD399 million a year earlier. Year over year, revenues increased 11%, due to retail loan and deposit growth, securities gains, the positive impact of foreign currency translation, higher earnings from associated companies, and the impact of acquisitions. Provisions for credit losses increased by CAD49 million to CAD194 million, with approximately 50% of the increase due to acquisitions. The balance of the increase was in line with asset growth and changes in our product mix. Expenses were up 11%, with approximately 50% of the increase attributable to acquisitions and foreign currency translation, and the remainder due to business-driven growth.

Quarter over quarter, net income was up modestly. Revenue was up due to loan growth, particularly in Latin America, foreign currency translation, and securities gains, partly offset by the shorter quarter. While last quarter we benefited from a tax recovery in Puerto Rico, this quarter we benefited from a gain on sale of securities in Mexico, which is in fact a recovery of a loan loss. Each of these items was in the range of CAD25 million to CAD30 million after tax.

Provisions for credit losses increased CAD8 million from last quarter, as growth in provisions in Colombia, Mexico and Peru were partially offset by lower provisions in the Caribbean. The increase in provisions was in line with asset growth, and the loan loss ratio remained stable. Expenses were up 5% due to acquisitions and foreign currency translation. On a year-to-date basis, operating leverage was positive 2.6%.

Turning to slide 13 -- global wealth management had record operating earnings, CAD326 million in net income, an increase of 12% from last year. Revenues increased 12% year over year, driven by strong growth across the wealth management and insurance businesses. The wealth business was driven by strong net sales, including record ScotiaFunds mutual fund sales, improved financial markets, and the acquisition of Colfondos, the pension management business in Colombia. Assets under management and assets under administration grew 24% and 14%, respectively. Of the total revenue, approximately 83% was attributable to wealth management, and 17% to the insurance businesses. Expenses were up 13% from the same quarter last year, due mainly to the Colfondos acquisition, higher volume-related expenses, and the change in Dynamic Funds' administrative fees. Quarter over quarter, net income increased 8%, with revenues increasing 5%, mainly from higher brokerage and mutual fund fees. Expenses were up 4%, primarily reflecting the full-quarter impact of the Colfondos acquisition and higher volume-related expenses. On a year-to-date basis, operating leverage was negative 2%, due primarily to the change in the Dynamic Funds' administration fees.

Looking at slide 14 -- global banking and markets' net income was down CAD26 million from a strong quarter last year to CAD361 million this quarter, reflecting market-driven challenges in commodities and the precious metals business, along with lower underwriting and advisory fees. This was partly offset by stronger results in the lending and fixed income businesses. Year over year, revenues decreased 1%. Provisions for credit losses remained modest at CAD12 million, versus a CAD1 million reversal last year. Expenses were up 8% over last year, reflecting higher salaries and benefits, partially offset by lower performance-based compensation.

Quarter over quarter, net income decreased by CAD38 million, or 10%, from a very strong first quarter. This was due to both the impact of the short quarter, and challenging markets which impacted trading revenue, particularly in the fixed income, commodities and precious metals businesses. Partly offsetting this was solid loan growth in corporate lending. Expenses decreased 2% from last quarter, due primarily to seasonally higher stock-based compensation costs in Q1. On a year-to-date basis, operating leverage was negative 1%.

I'll now turn to the Other segment on slide 15, which incorporates the results of group treasury, smaller operating units, and certain corporate adjustments. The results primarily reflect the impact of asset liability management activities. The Other segment reported a net loss of CAD119 million this quarter compared to a net loss of CAD147 million last year. The reduced loss was partly due to lower operating expenses. In addition, the prior-year results included the offset to underwriting revenues reported in other business segments related to the Bank's common share issuance in Q2 2012. Quarter over quarter, the net loss decreased CAD12 million. Lower taxes and lower operating expenses were partly offset by reduced gains on investment securities.

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

Thanks, Sean. Good afternoon. The risk in our credit portfolios continues to be well-managed, and overall credit quality remains strong. Provisions for credit losses increased by CAD79 million year over year and CAD33 million quarter over quarter to CAD343 million. The increase in provisions was primarily due to three factors. Retail provisions in Latin America grew in line with asset growth and product changes; Canadian commercial provisions increased due to one account; and corporate provisions increased due to two names in the US portfolio. Net impaired loan formations were CAD326 million, an improvement from both the prior quarter and the prior year. Market risk remained low and well-controlled.

Our average one-day all-Bank borrow was CAD16.8 million, down slightly from CAD17.4 million in the prior quarter. There were two trading day losses in the quarter compared to none in the previous quarter. Our exposure to Europe is not significant, and was down CAD3 billion from last quarter. The credit risk in the Canadian residential mortgage portfolio remains benign, and delinquencies are continuing to decline.

Slide 18 shows the trend in provisions over the past five quarters. As you can see, Canadian retail provisions remained relatively stable. Portfolio quality remains extremely high, with 94% of assets secured. As I mentioned, Canadian commercial provisions increased this quarter due to one account.

International retail provisions increased CAD47 million year over year to CAD180 million. Provisions were higher, although in line with expectations, largely due to the acquisition in Colombia. Provisions were also higher in Peru and Chile due to asset growth and an adjusting portfolio mix. Quarter over quarter, retail provisions grew in Colombia and Mexico, partly offset by improving retail conditions in the Caribbean.

International commercial provisions were relatively flat year over year, as lower recoveries in Latin America were offset by reduced provisions in the Caribbean. Quarter over quarter, there were broad-based provision recoveries in the Caribbean, although these were substantially offset by lower recoveries in Latin America. Global banking and markets had provisions for credit losses of CAD12 million this quarter compared to a reversal of CAD1 million in the same period last year, and provisions of CAD5 million in the prior quarter. While lending assets grew strongly, the Bank's overall PCL ratio remained low and within expectations at 35 basis points.

Slide 19 shows our Canadian banking residential mortgage portfolio. Our total portfolio of residential retail mortgages is CAD188 billion. Our portfolio continues to be approximately 90% freehold and 10% condo. As you can see from the slide, approximately 58% of the portfolio's insured, 42% uninsured. The uninsured portion has an average loan-to-value ratio of approximately 55%.

The Canadian housing market generally remains balanced between supply and demand. Reasonable economic performance has allowed consumers to manage debt levels well; however, we do expect some softness in the Canadian housing market in the short term. Credit quality and performance of the residential portfolio remains strong. Our disciplined and consistent underwriting standards with all of our origination channels have resulted in extremely low loan losses, and again, have been stressed under a series of severe tests which confirm the appropriateness of our risk appetite.

To summarize on slide 20, our asset quality remains high with the retail and commercial portfolios performing as expected, and our corporate portfolios continuing to demonstrate strength. However, a combination of growth in portfolios and changes in portfolio mix will result in somewhat higher provisions this year compared to 2012. We expect Canadian retail provisions to remain stable. Although international retail provisions are expected to rise, the pace of growth will match the natural loan growth of the portfolio. We expect corporate and commercial provisions to remain controlled, although as this quarter has shown, from time to time, corporate and commercial provisions can be lumpy.

This concludes my remarks. I'll now pass it over to Brian. Brian?

Thank you, Rob. Beginning with Canadian banking -- for the balance of the year, we expect to see asset growth in line with what we have experienced so far this year. Automotive finance, which has been a source of strength recently, and residential mortgages will both continue to achieve solid growth. Our commercial banking pipeline remains strong. In deposits and payments, we continue to see positive results, especially from our cash-back and rewards credit cards, as well as our innovative checking products. We have gained market share in both deposits and payments, and we remain confident about our ability to grow these businesses. In mutual funds, we continue to experience solid market share gains, and we expect to see continued growth in the sale of wealth management products and the cross-sell of creditor insurance throughout our branch network.

Turning to the margin, we expect it to stay relatively stable going forward, as favorable changes in product mix will continue to offset the pressure from the low interest rate environment and competitive pricing pressures. Looking at PCLs, we expect increases to be in line with asset growth, and our loan-loss ratios to remain in line with the current experience. We now have a full-quarter contribution from ING, and we expect to continue to see solid results. Finally, while we will continue to invest in our business initiatives, expense management will also remain a key priority. Overall, the outlook for Canadian banking for the remainder of the year is for solid growth.

Moving to international banking, the outlook continues to be favorable. Our diversification balances the higher-growth business outlook we have for Latin America and Asia, with the more modest outlook we have for the Caribbean and Central America. Overall, we continue to expect low-double-digit growth across the Division's loan portfolios for the rest of the year. Our retail banking segment continues to have good momentum, with solid performance expected in Latin America. We also expect positive contributions from our premium banking launch in Latin America, the Caribbean and Central America. We are also building out our distribution capacity in Mexico by expanding our ATM network, and through alliances with local partners.

For our commercial businesses, our pipeline is in good shape, and is significantly higher than last year. In particular, the prospects are solid for Latin America, and we are seeing continued momentum in Asia, particularly in commercial volumes. We expect PCLs to rise in line with the growth in our portfolios. Despite some pressure on margins, we expect them to remain stable overall, due to our well-diversified business and geographical mix. We are facing greater regulatory requirements in the areas of consumer protection throughout our footprint, which may slightly slow the pace of revenue growth.

We are pleased with international banking's current trajectory and its growth prospects for the balance of the year. In global wealth management, our outlook is for good underlying growth across our key businesses, supported by our diversified business mix and geographic scale. Global asset management continues to grow, with AUM and AUA reaching all-time highs of CAD135 billion and CAD313 billion.

Net sales of ScotiaFunds reached a record CAD1.2 billion this quarter, and had the strongest percentage growth rate among the Canadian banks. We have received regulatory approval to operate a fund management joint venture with the Bank of Beijing, which provides us with a vehicle to expand our fund management capabilities. We will continue to recruit talent, fill product gaps, grow our distribution pipeline, and better target and serve high-priority segments and markets.

Our wealth distribution businesses will continue to be driven by better market conditions and strategic initiatives. Our international wealth business continues to yield strong results, driven by asset volume growth, and augmented by our strategy of select acquisitions. The recent purchase of 50% of AFP Horizonte in Peru will allow us to increase the scale of our existing Profuturo pension management business, and become a bigger presence in this growing segment. In Canada, we continue to be focused on recruiting talent and improving advisor productivity to drive growth through new client acquisition.

The outlook for our Canadian insurance business remains positive, as ongoing product enhancements and higher branch cross-sell continue to grow our client base. Internationally, our focus in insurance remains on leveraging the Bank's global distribution networks to experience improved cross-sell and to expand our non-creditor business. And in global transaction banking, we are continuing to enhance cross-sell activities with our business line partners, and have a number of key strategic initiatives underway. GTB is focusing on developing and marketing innovative Basel III-friendly deposit products globally, and providing enhanced cross-border payment capabilities. We are also expanding our commodity trade finance capabilities across all our geographies.

Moving to global banking and markets, we will continue to focus on producing high-quality, low-volatility earnings from our diversified business platform. Global and domestic economic uncertainty will continue to moderate client activity; however, we continue to see good growth opportunities across our international platform, in our focus sectors, and from our cross-sell and global FX initiatives. The corporate loan portfolio is expected to experience mid- to high-single-digit growth rates for the balance of the year, with loan spreads remaining stable.

Conditions for loan underwriting remain modest in the absence of improved M&A activity; however, we are optimistic of continued improvement for the remainder of 2013. Credit quality of the loan portfolio remains strong, and loan loss provisions are expected to remain modest. Our long-term strategy is to continue to be client-focused in order to generate high-quality and sustainable earnings in global banking and markets. We will accomplish this through our continued investment in the Business, and our ongoing focus on diversification and growth across products and geographies.

And finally, at the all-Bank level, as Rick mentioned earlier, we have had a very good first half of the year, and are well-positioned to meet our financial targets for 2013, including delivering positive operating leverage through prudent expense management.

Now I'll turn it back to Sean.

Thanks, Brian. That concludes our prepared remarks. We will now be [prepared] to take your questions. 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?

Your first question comes from the line of Steve Theriault from Banc of America/Merrill Lynch. Please go ahead.

Thanks very much. I wanted to ask a question on capital for Rick or Brian. But Sean, just quickly, could you -- you mentioned during your remarks that the securities gains in international can be viewed as essentially loan loss reversals. Can you just clarify that, and was that CAD25 million to CAD30 million after tax?

Yes. So this relates to a loan we had on the books many years ago that came in the form of a security. The security was eventually sold this quarter, but it relates more to an original loan many years back, and the amount was, yes, close to CAD30 million after tax.

There was some sort of an exchange for a security at some point?

Yes, many years ago when it got converted into a restructured loan, and we got it in the form of a security. So when we sell it, it comes through, again, as security rather than as a loan loss.

Okay. Thanks for that. So just on capital, your Basal III Tier 1 common is coming nicely, over 8.5% at quarter end, you're tracking to 9% in pretty short order it looks like. Is there any thought to eliminating the DRIP discount or buying back stock at some point in the next few quarters? Or are you still in the mode where you want to keep your powder dry, you want to hold back a little, and I guess you have the potential completion of the China acquisition at some point?

Yes, yes. We've got a really dynamic capital management plan process. In the past we've used share buyback primarily to offset shared option dilution. We've been very successful over the years deploying our capital into our forward business line. So we would see that as a continued key strategy going forward. That being said, some time in the future we may add share buybacks as a tool to add to our capital management toolkit, but again it would not be a significant part of our capital deployment strategy. In terms of the DRIP, yes, we look at that every year to determine whether to keep the discount on that, and if we do decide to do a share buyback program in the future, we would obviously turn off the DRIP.

Just to add to Sean's --

(Multiple speakers) Sorry, go ahead.

Just to add to Sean's remarks. I don't -- we're going to be consistent with our capital management, and as you can see by our results, especially on the revenue and the asset growth, our first priority is always to grow our business. And that's what we've done in the past, and I see we are -- we do have the advantage of these opportunities, and you can see how throughout the business lines, we're really growing our business, priority number one. Second priority obviously in capital management, is we do believe in rewarding our shareholders with dividends. We have been a consistent and regularly increasing our dividend, and again with these results, we see that consistent. Share buybacks, we have in the past to offset dilution for any stock issued, and we'll look towards doing that. So again, I think we're going to be very consistent. We're very comfortable in our capital ratios and we, again we (technical difficulties) what you've seen before, you'll see again.

Your next question comes from Gabriel Dechaine from Credit Suisse.

Good afternoon. Just another clarification. So the securities gains in international is CAD30 million, but you also had a credit mark, a positive credit mark amortization of CAD18 million, correct?

That credit mark, you're referring to the Bank of Colpatria.

Yes.

But our increase in loan losses, we still had an increase in loan losses quarter-over-quarter. Because of Colpatria, that just reduced the increase in the provision.

Yes, okay. And actually just speaking of loan losses, I'm just wondering. You talked about PCLs being -- kind of growing in line with loan growth, but if I look at the retail formations in international, the ratio of formations to retail loans has been going up pretty consistently. I'm just wondering if you're seeing anything that's diverging a bit from your earlier expectations this year that's maybe a bit worse than you're expecting? And then also there's no recoveries to speak of in that retail formations line. This, I believe you hired some collection agents in Peru last year, a large number. I wonder if there's like a latent effect there where we start seeing recoveries on these impaired loans later in the year, or if that's just the nature of the business, that you have unsecured lending that's driving that impaired loan formation?

Hi, Gabriel, it's Dieter. At the LatAm Investor Conference, we signaled that we would be seeing a rise in some of our formations, and in line with some of the businesses that we have in Latin America. We also articulated some of our increases will be due to the acquisitions, and so if you look at where the rise has come in the last six to nine months, its been a function of the acquisitions, Colpatria, and Credito Familiar. It's been the growth in our retail business, which in LatAm has grown 18% year-over-year.

Right.

And as Rob mentioned in his remarks, that we've had in Peru, we signaled that we had changed some of the mix, and there was some moderate deceleration in the market. At the same time, what we were doing was we were adding to our allowances, and our allowance today stands at 60%. We added to our allowances, notwithstanding that our book is 68% secured. So we look at over the past year, we took a very, I think, a proactive approach to dealing with our allowance, dealing with our coverage ratios.

We watched some of the underwriting practices in Peru. So we didn't grow as fast as with the market. Going forward, if you look forward, we see that the catch-up that we would have done on some of the allowances is behind us, and that we will grow our PCLs in line with our retail growth. The recoveries you talked about were largely in the Peru on the commercial side, and the business that we would see -- you would see in Peru would generally be on the micro finance and on the unsecured side, where we don't have a lot of recovers.

Okay, so that's kind of normal, I guess.

Yes.

And then, just the -- because we don't see the commercial loan broken down in your presentation by country in international. So I see PCL in Colombia, I don't see -- in retail, I don't see it in commercial. Just wondering if you're still on track for that 3.25% or 3.5% PCLs ratio as it normalizes, I guess, beyond the mark?

Our PCLs on the commercial side are sitting around 10 to 15 basis points.

Okay.

And still relatively what are called benign formations on the commercial side.

Okay, thank you.

Next call on the line please?

Your next question comes from Robert Sedran from CIBC. Please go ahead.

Good afternoon. Question on trading. I guess it came in a bit, took a bit of a step back this quarter, and I know a couple of comments were made about rates and commodities. I'm wondering if perhaps you can tell us why the interest rate side seems to be so volatile quarter-over-quarter? And perhaps give us a little color around Mocatta and its various businesses during the quarter. It feels like whatever happened in Q2 is still happening in Q3 on the precious metal side. I'm just curious how the various businesses, including the fee-based ones at Mocatta, performed during the quarter.

Okay. Well, let's start out with the fixed income side. It's just the opposite of the comment you made. They've been extremely stable Q-over-Q for the last six quarters. Fixed income actually had a very good quarter. We had extremely strong first quarter, and still had a very strong second quarter. So fixed income itself is performing very well. On the commodity side, we were soft on the energy trading side, and year-over-year on Mocatta, we had a very strong Q2 2012. In the last six quarters, last five quarters, we've had two quarters that have been better this quarter Mocatta, two that have been worse.

So it's kind of the middle of the pack. It was on its plan number. But on the metals side, the way you should think about it is, we have a loan book and that book, the net interest margin does decline as the commodity price goes down. Having said that, the offset is that the consumers tend to be more active. So we tend to get a little bit more of a flow bias to the business during -- with a lower commodity price. So Mocatta is doing very, very well. For us it was just a slower quarter on the client side of the business, and that really explains it. It was slightly weaker across the majority of the businesses, and it wasn't really one that was materially -- it was unusual in anything -- in any way.

(Inaudible) when I look at the interest rate line in the supplementary on Page 9, I'm seeing CAD120 million, CAD160 million, CAD120 million, CAD180 million, like that's -- I guess that's it's not tremendous amount of volatility. It just seems bounce around plus or minus CAD50 million in a quarter, and I'm just wondering if there's a reason for it or if it's just flow related.

If you include the fee parts of the business, because that kind of -- we have a tough time reconciling that number, or cell, but if you look at the all-in quarter-over-quarter-over-quarter-over-quarter results from fixed income, it's an extremely stable business. Actually, of all of our businesses, and this is somewhat unusual because we think of fixed income as being slightly higher volatility, but its been one of our lower volatility businesses for the last six quarters.

Thank you.

Next call on the line, please?

Your next question comes from the line of Michael Goldberg from Desjardins Securities.

Thank you. You had very robust loan growth in a number of sectors, but I see that you had virtually no increase in credit risk-weighted assets. I'm looking at Page 33 of your sub-pack for the detail, but could you just explain what's happening here, and why there was no increase?

Sure. When you look at our loan growth, you'd expect risk-weighted assets up maybe about CAD2 billion or CAD3 billion. The investment portfolio went down. That would have reduced risk-weighted assets by about CAD1 billion, but for the loan growth there was some asset mix change. We had a bigger portion of trade finance, which has a much lower risk-weighted asset than regular commercial lending. And there's also some data refinements as we were better able to apply the collateral within our risk-weighted assets methodology. So we would expect next quarter, though, that risk-weighted asset growth would be a bit more in line with the asset growth.

Okay. Okay, thank you very much.

Next question, please?

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

Thank you. Just back to Dieter on international. Dieter, I'm just trying to understand what happened in the quarter, and there was the credit mark gain. I guess if you look through that, it doesn't look like there was much earnings growth. I'm sure that's not the way you view internally. Can you just tell us kind of what's going on, and where we should expect things to go from here? How much is left in the credit mark gain, and where you're going to get more operating leverage?

Well, let me take some time and walk through both the revenue and the expense side. As we all can appreciate, it's a pretty multi-dimensional issue. But first of all, in our revenue gains of 11% year-over-year came notwithstanding that 25% of our revenues derived from the Caribbean, which is working at about 5% to 8% single digit revenue gains. So you got some revenue that hasn't normally come in line with what we would see in other parts of our portfolio. Part of our revenue this quarter, also notwithstanding, was 11%. We had margin compression in Chile for the last two quarters that impacted our revenue gains, and we see that returning as inflation comes back to more normalized levels going forward. The other that we saw last year, and as you look at our revenue gains last year, we had a considerable spike in our trade finance assets in the first two quarters. So when you sort of take that in together and you add into the mix the loan recovery came as a form of security, you've actually had good revenue gains, notwithstanding some offset variances that would -- that mitigate some of the revenue surpluses.

On the expense side, and it's something that Sean mentioned, and if you look at our operating expenses, half of those would be acquisition-related. And then if you look to the PCL side, which would have moved to impacted our NIAT number at 5% year-over-year, it goes down to the explanation I gave in the earlier question, where we had increased PCLs from acquisition-related, some product and mix changes in Peru, and some addition to our allowance coverage ratios to bring them up to a very, very acceptable level of 60%. So when you look at what we consider to be revenue that's been impacted, it should flow to the business on an ongoing basis going forward, and you combine that with the double digit loan growth that we continue to put forward as achievable for this year, and driven mainly by Latin America and Asia, the underlying fundamentals going forward look positive.

Okay. So Dieter, just -- so you're looking at -- are you looking at organic operating -- was there organic operating leverage in the quarter?

Our operating leverage in the quarter was negative 0.36%, so we're going to get some natural volatility quarter to quarter. Our year-to-date operating leverage was about 2.6%, and we're targeting a positive operating leverage for the year.

Okay, and just sorry. When do the credit marks expire? Is that some time next year, Q2 or something?

Sean?

Yes. It will take another 18 months or so to run out, and again, as those come off, those are just merely decreasing the current increase in provisions that we're getting out of Colombia, and as that benefit runs off, we've got growing revenues in Colpatria that helps offset that decline in the credit mark over the next 18 months or so.

Got it, thank you.

Your next question comes from the line of Stefan Nedialkov from Citi.

Yes. Hi guys. Good afternoon. It is Stefan from Citigroup. I have a question on LatAm net interest margins. Yes, maybe Dieter, if you can just give us some color on a country by country basis. Maybe Chile, Peru, Colombia, Mexico. Are you guys seeing any easing competitive pressures on the asset yield side of things, or any pressure on the funding side? We have seen a bunch of your peers report a variety of different trends at the NIM level within the Latin American countries. So just really looking for some more color here.

Yes, overall our net interest margin for the quarter went up six basis points, and it's due to the portfolio impact of the various countries. You're absolutely right to notice that. You would have seen different impacts from Chile, where the margin would have compressed, as well as we've seen some slight margin compression in Peru. This would have been offset by our operations in Colombia and Mexico, where they were increases in the net interest margin because of business mix. You're going to see some continuing margin pressures in Asia. We've seen them going forward, but overall, given where we're up, and some cases where we're down, we've [insisted] to put forward that we're going to have a stable interest margin going forward. Some markets, and that was a point where -- knowing some markets we have excess liquidity, and we were able to reduce some of the deposit costs lower and maintain some of the margin as well.

Okay, thank you.

Next call please?

Your next question comes from Peter Routledge from National Bank Financial.

Thanks. A couple questions on Canadian banking. A short one. What industry was the commercial banking PCL account in? You had an account that goes --

In the petroleum servicing industry.

Petroleum servicing, thanks. Just thinking about PNC banking. I mean revenues overall probably would be flat in that segment, given spreads and demand for credit in Canada, and PCLs may start to rise, just consistent with what happens in a credit cycle. They seem to be at near all-time lows. So earnings probably get squeezed. What do you do? I mean, either to get earnings growth, you can implement a more broad and deep cost-cutting program, where you're cutting meat, not just fat, or you buy back shares to help bolster your EPS. How are you thinking about that?

I think you heard in the comments that Brian made earlier. Firstly, in terms of the expense comment that you just made, I think if you look at Scotiabank, we always do, and always have, is just be a very lean operation, and the Canadian bank is no exception. So I don't think that's the way for us. If you look at us, look at the revenues that we've had, the growth that we've had. I think we perform as well or better on the growth side than the market does, and if you look at the cross-sell that we've been getting, that's given us some lift. In the last nine months on the mortgage portfolio, you'll have seen that the customers who are renewing their mortgages, who came in on a variable basis, are now taking fixed term mortgages, which are giving also additional better margins.

And I think if you look at our different businesses, the commercial bank is doing quite well. We have a very good pipeline. We continue to expect growth from there. Small business has done very well and will continue to do well, and in the retail space, it has slowed down, to your point, but its done very, very well. And on the cross-sell side, if you look at things like mutual funds, insurance business, we've done very, very well by it. So I think it's really just very straightforward tackle and blocking type of banking, back to what it was prior to the crisis.

So I agree with you on expenses. I mean, your expenses are below 50% on efficiency, and I expect that will continue. Revenues may top out, not because of anything happening at Scotia, but just because the market is not conducive to growing revenues. I mean, loan growth is slowing down. If the household starts to slowdown, business may also start to slowdown. Do you address that -- I mean, do you have plans in terms of cost reduction to address that potential outcome, or is that something where you might look at share buybacks as a tool in order to defend both the position of your franchise, the strength of your franchise, and deliver some EPS growth?

I mean, let's divide that question into two. Firstly from the business side let me take that, and then Sean can take the question on the share buyback. On the business side, we have a number of initiatives that are in motion, both in terms on the revenue side in terms of having more cross-sell and also expanding certain businesses organically, as well as controlling our costs. So I'd say this is part of regular normal business where we set ourselves up for success in the coming quarters and year or years. So that's just regular business, and maybe with that--

As you know, Peter, diversification is the key element of our strategy here at Scotiabank, and the Canadian PNC business makes up only about a third of our overall income, and as you've seen in prior years when some divisions are a bit slower, we've got the benefit of having some stronger growth in some of the other businesses. So on balance, we're pretty comfortable with our strategy of continuing to grow earnings in our EPS target range of 5% to 10%.

(Multiple speakers) It's Rick. I think you're being a little hard on Canada in terms of Canada's growth. There's definitely a move away from commodities and energy, but broadly based Canada, we are growing and we are going to get a lift from our greatest trading partner, the United States, that is pulling up. And so we're still talking about growing in Canada, albeit some of these other Americas growing faster, but that's good for us. So the broadly based, you talk to the auto parts industry, you talk to some of the manufacturing. Even in our lumber business, and those kind of things that are up. So I wouldn't quite get too -- I know there's a lot of talk about how well the Americas doing, and we think that's just great, because they our biggest trading partner.

And share buybacks are now in your toolkit as a possible tactic?

Not necessarily.

I'd just say as we're seeing it, and I think if you look at our top line revenue growth in Canada and around the world, we have still great opportunities, [fortunately]. Our customers, we're growing our customers, and we're growing in that, and that's our priority. And then we'll look at dividends, because I think consistent, stable, increasing dividends is the way to go. And so while it's in the toolkit, and it should be in the toolkit, again historically we've used it just to offset dilution, and that all is on predicated that we've got places to grow, and we firmly believe we've got places to grow.

Fair enough, thank you.

Next question please?

Your next question comes from Sumit Malhotra from Macquarie Capital Markets.

Good afternoon. First question is a two-parter for Sean and maybe Dieter. On the gain that Thanachart is going to take next quarter on the sale of their insurance business, if the numbers I've run are correct, that should be in the range of CAD150 million. Is that in the ballpark, or do the economics change because of the ongoing relationship the two entities are going to have that's going to defer some of that over time?

We've purposely not disclosed that gain amount, Sumit, out of respect for our partner at Thanachart Bank. It's going to be much more material for them than it is for us, and they haven't announced it yet. So we're not in a position to comment on your estimate.

Okay, so let's go to the recurring part of it. This is maybe more for Dieter. I will appreciate some help. If you can tell me, was the insurance business a meaningful part of the ongoing earnings stream for Thanachart? Does this change the pick-up that you've had in any kind of major way, or do you not see it as material?

It's not going to have a significant impact. Part of the agreements, as we've disclosed, that there's a bank assurance agreement where we'll be distributing the product. So we'll be getting distribution revenues, which is will offset our existing insurance revenue that will fall off. So it'll be a slight reduction, but is not going to be meaningful to Scotiabank.

What I would add to that, our underlying core banking, both in terms of car lending, business lending continues to be very strong in Thailand.

My next question is for Anatol. Anatol, when I think about the credit card business for Scotia's Canadian segment, I've heard some of your colleagues and predecessors say over the years that the business has been more about the lend than the spend for Scotia. And when I ask you in this time of secured real estate lending slowing, is there an opportunity for the bank to perhaps change their credit card offering, and especially with ING now aboard, a different type of customer base, perhaps get more aggressive on the credit card side of the equation? What steps are you considering there, if any?

Yes, let's divide this question into two, as well. One for the Bank and the other for ING. In the first, with respect to the Bank, actually I'd argue a little differently than what your comments were that you just made. We've actually in the last two to three years have done exceptionally well in terms of our credit card growth business, and its been part of our payments strategy. So it wasn't on the lending side only. It was more about using it as the primary vehicle through which our customers pay many of their bills. So it's part of the anchoring of the relationship with individuals.

As you know, we launched the American Express Scotiabank card, which has done exceptionally well, and has exceeded our expectations, and the money-back card as well. So overall, I'd say in credit cards we've had very good organic growth. Understandably from a small base, but we've done over the last couple of years, and particularly in the last 10 to 12 months, I think exceptionally well. And that, I think you'll see us continue to do, to be aggressive in that. With respect to ING, with ING, we're looking at longer term strategy in terms of how to position ING, and clearly credit cards will be something that we'll consider there. Today ING does not offer a credit card, but we'll see what we'll do in the mid- -- short- to mid-term.

Very quick one for Rick before I leave. Rick, I've heard some talk that the CVA impact for risk-weighted assets that has been delayed until Q1 2014 may end up being delayed again. Is there anything you can offer on that file?

It continues to be under discussion, and of course, we want a level playing field with the other jurisdictions, and internationally they've got a long way to go before they tackle that one. So it's under discussion because we want the level playing field to compete, but so we're actively discussing it as an industry, the Canadians.

Thank you.

We have time for two more questions on the phone.

Your next question comes from Brad Smith from Stonecap Security Capital.

Two very quick questions. I note that your earnings, your average earning assets, and your revenues in your domestic segment are growing faster than the pace that we've seen so far from your peers. I was wondering, I may have missed it, but I don't see any reference really to your market share positioning in your presentation today. I was wondering if you could talk a little bit about your domestic market share and the mortgages, the personal lending, and on the personal deposit side, and the SME side? Thank you.

Okay, let me take it in terms of market share. If we compare ourselves, and there are different ways, of course to compare, but if we look at ourselves relative to the other Canadian major banks. If you look at us on the mortgage side, both quarter-over-quarter and year-over-year, we've had good growth in the mortgage side, in secured lending. And when you look at us on a total personal lending basis, again, the same is true both quarter-over-quarter and year-over-year. If you look on the deposit side, particularly on the checking and savings, and on the accounts, both with ING and ex-ING, we've had positive growth quarter-over-quarter and year-over-year. The numbers are striking with ING because of the acquisition, and it really is showing. The benefits of the strategy of having acquired it, both in terms of the size that it gives us, but also more importantly access to new customers.

Okay terrific and then I noticed that the advertising spend in the quarter went up quite substantially. Can you just talk a little bit about what that was? It looks a little lumpy there. Was there something specific, or should we be expecting that to recur going forward?

There are two effects in there. One is on our hockey strategy. As you know, in the first quarter, the hockey season hadn't started yet. So what you're seeing in the second quarter is part of that hockey spend taking place, which has giving us also very good recognition, both in terms of brand and in terms of activation. Secondly, the other reason it's gone up is on the ING marketing side. Last quarter ING had relatively little amount of marketing, and it wasn't a full quarter. This quarter in ING, we had both the GIC campaign, the savings campaign, and a third campaign, and all three of those were and are very successful, but were launched and are recorded in the second quarter.

Okay. So just to be clear, the CAD51 million of contribution from ING would have reflected that spend, I take it, and I had another question. Would it also include any contribution from the excess capital that was at ING Bank when you acquired it?

Yes, as we've described in the past, as we free up liquidity in ING and pass that back to the bank, it does increase the income we earn off ING. So that's a factor as the year progresses.

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

Good afternoon. I'll try to be quick here. On a spot basis, ING's deposits, on a quarter ending?

It was CAD31.4 billion.

Thank you. And then also fairly quickly, quarter-over-quarter retail, and this is in the international segment, retail and commercial loans were up over 7%. Presumably, that's -- we're seeing some of the effects of the acquisitions, and perhaps FX as well. Dieter, do you have those numbers quarter-over-quarter for both retail and commercial international, the loan growth?

Yes. What we have on the retail side, we would have grown 18% year-over-year, but quarter-on-quarter, we would have grown--

It's about 4%, excluding FX.

And is that also excluding Credito Familiar?

Yes, it's probably closer to 3%.

It excludes the acquisition.

So about 3% retail, and then commercial?

It's about 5%.

Quarter-over-quarter?

Yes, but a lot of that is trade finance in Asia.

Yes, what we're seeing is good momentum in the latter part of the quarter on Asia. Matter of fact, Asia on the last quarter, would have grown almost 8% within the quarter over last quarter. Very strong momentum in our grown book, both commercial and trade in Asia.

So, and that 5% is excluding anything to do with acquisitions and FX? That's just essentially the Asia growth you're referring to?

Yes, that's predominantly on Asia and Lat Am. Year-over-year you'll see some Colpatria impact, but quarter-over-quarter, it would be predominantly Asia and LatAm.

Okay, and if I could just -- one final thing to clear this up. On Colpatria, last quarter you explained to us that as loan losses normalize there, we could see losses in Colombia at CAD40 million to CAD50 million a quarter. It would be helpful to understand this quarter is where we were relative to that CAD40 million to CAD50 million. Was it still really modest at say, CAD5 million, or has it already started to migrate higher?

For loan losses you're talking about?

Yes. Colpatria specifically, and this is just following up on a question that I asked last quarter.

So after market was close to CAD30 million provisions in the quarter.

On Colpatria specifically?

Colpatria specifically.

So you're already, you're well on your way to the CAD40 million to CAD50 million you referred to last quarter, then?

Yes, as I saying, it will take us over the next 18 months before that credit mark disappears, and we're kind of running at a local rate of provisions.

Thank you very much.

All right. Thank you all for joining the call, and we'll talk to you next quarter. Bye.

Ladies and gentlemen, this does conclude the conference call for today. Thank you for participating. You may now disconnect your lines.