Bank of Nova Scotia (BNS) 2013 Q3 法說會逐字稿

Good afternoon and welcome to the presentation of Scotiabank's 2013 third-quarter results. I am Sean McGuckin, Chief Financial Officer. Rick Waugh, our CEO, will lead off with the highlights of the quarter. Next, I will go over 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, which contains Scotia Bank's caution regarding forward-looking statements. Over to you, Rick.

Thank you very much, Sean. Well we are pleased to report a very good quarter and one that reflects the value of our diversified growing businesses. Net income was almost CAD1.8 billion. Diluted earnings per share were CAD1.37 for this quarter, however this includes some non-recurring items Sean will discuss with you in detail later. Excluding these items, earnings per share was CAD1.30 this quarter, an increase of 12% from last year. Our return on equity remains strong at 17%. On a normalized basis revenue grew by 12% from last year, driven by acquisitions and organic growth with very solid results in Global Wealth Management and record results in Canadian Banking. The credit environment in all our businesses remains stable, as reflected in our lower loan loss ratio. Our capital is strong. This quarter, our Basel III all-in common equity Tier 1 ratio increased by 30 basis points to 8.9%. Given the sustainable growth, we also announced a dividend increase of CAD0.02 to a quarterly dividend of CAD0.62, bringing our 2013 paid dividends over 9% higher than last year. And finally, we fully expect to meet or exceed all of our 2013 financial targets.

Looking at Slide 5, revenue and earnings growth this year has been strong. As you can see, three out of our four business lines had double-digit revenue growth. Canadian Business performed exceptionally well and experienced broad-based revenue growth. Earnings were driven by the successful acquisition of ING Direct and by growth in auto loans and mortgages. Deposit growth also drove performance. International Banking results were also driven by strong growth in personal and commercial banking, particularly in Latin America. Acquisitions and a higher underlying contribution for the associated corporations also contributed. Global Wealth Management also performed exceptionally well and benefited from improved equity markets and higher assets under management and assets under administration coming from net mutual fund sales particularly strong in our branch channel and our upgraded iTRADE platform. Our insurance business saw good sales growth. And finally, for the nine months of the year, Global Banking and Markets saw good growth in lending and in fixed income.

The general capital markets environment remains challenging; however, we are well-positioned with respect to our wholesale business model. We had the necessary capital and talent so that no downsizing as seen elsewhere as several other banks is required or planned. Looking forward to the end of the fiscal year, we expect to finish the year on a strong note and are very well-positioned for good performance next year.

I'd now like to specifically address two major areas that we have monitored closely due to external macro factors of concern. That's Canadian consumer debt and the volatility in emerging markets with respect to exchange rates and growth rates. As our results clearly demonstrate, our customers in Canada are behaving as expected. Growth is moderating and all credit metrics -- delinquency, formations, and loan losses -- are essentially flat to down. Canadian retail loan losses were just over CAD100 million in the third quarter, and in the context of our portfolio, this is very modest. All this is consistent with the soft landing we have been forecasting for housing, which included increase in interest rates.

Regarding emerging markets, growth rates have in general moderated but we still expect to achieve above average and increasing growth for next year, including now in the Caribbean, which has stabilized and is expected to improve going forward. We do expect continued volatility in foreign exchange markets, as short-term global flows will still need to adjust to tapering and changes in official reserves. It's worth noting that our primary exposures are in select non-BRIC countries, which are expected to outperform the BRICs in the next few years. And our International earnings are anchored by local personal and commercial banking and onshore wealth businesses, and these are driven by spreads and local demands from mortgages, autos, credit cards, and insurance, which have and will continue to show above average growth. Rob and Brian will provide more detail later on this, so now I'll turn it over to you, Sean.

Thanks, Rick. Slide 7 shows our key financial performance metrics for the quarter. This quarter, the Bank's results include three non-recurring items. First, there's a gain on sale of a subsidiary by an associated corporation in Thailand, which amounted to CAD150 million after tax. In addition, there is a valuation adjustment on acquisition-related receivables in Puerto Rico of CAD40 million after tax and, finally, a restructuring charge related to our Uruguay operations of CAD20 million after tax. All together, these three items provided a net after-tax benefit of CAD90 million to International Banking's earnings this quarter. The comparisons versus Q3 2012 are also adjusted for the gain on the sale of Scotia Plaza last year. Excluding these non-recurring items, diluted earnings per share were CAD1.30. This was 6% higher than the previous quarter and up 12% from the same period last year. Looking at year-over-year changes, Q3 earnings benefited from higher interest income, increased banking and wealth management fees, higher gains on investment securities, and lower loan loss provisions. These items were partly offset by higher operating expenses, lower trading revenues, and a higher tax rate. Last year's results also included a gain on the sale of a non-strategic leasing business in Canadian Banking.

Moving to revenues on Slide 8. Revenue during the quarter was CAD5.6 billion. This was in line with last year; however, adjusting for the non-recurring items, revenue increased by 12%. Net interest income was driven by asset growth in Canadian mortgages, diversified loan growth internationally, and a stable margin. The growth in non-interest revenues were driven by recent acquisitions, stronger Wealth Management revenues, and higher net gains on investment securities, partly offset by lower trading revenues. Quarter-over-quarter, revenue was up 6%, or 3% excluding the non-recurring item. Net interest income was up due to asset growth and improved margin and a longer quarter. Non-interest revenue was flat excluding the non-recurring items, as a longer quarter was offset by lower gains on investment securities and lower contributions [for the] stated corporations.

Turning to Slide 9, non-interest expenses were up CAD366 million, or 14% from last year. Excluding non-recurring items, expenses were up 11% or CAD292 million, of which CAD108 million was due to acquisitions. Underlying expense growth year-over-year was due primarily to higher remuneration expenses and an increase in pension and benefit costs due to the effect of the continued low-rate environment. These were largely offset by lower stock-based compensation. Quarter-over-quarter, expenses were up 5% or 2% excluding the non-recurring items. A majority of the increase was due to the longer quarter and higher performance-based compensation, in line with business performance. Excluding the non-recurring items and real estate gains last year, year-to-date operating leverage was positive 1.3%. 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 30 basis points to 8.9% this quarter. The increase came from internally generated capital and stock issued under the dividend reinvestment plan. Risk weighted assets were up modestly from last quarter, as an increase in credit risk weighted assets was mostly offset by lower market risk weighted assets.

Turning to the business-line results beginning on Slide 11. Canadian Banking had a record quarter with net income of CAD590 million, an increase of CAD70 million or 13% from a year earlier. Revenue growth was 11%. Excluding the impact of ING, and the sale of the leasing business last year, revenue increased 6%. Organic asset growth was solid. There was a 6% increase in residential mortgage assets. There was also a 27% increase in consumer auto loans, driven mainly by new dealer and manufacturing relationships. Commercial lending assets grew 6%, or 7% after adjusting for the sale of the leasing business last year. The total net interest margin declined 4 basis points, due entirely to the acquisition of ING. Excluding ING, the margin was up slightly. Net fee and commission revenues decreased from the same quarter last year due to a reduction in card revenues, partly offset by growth in other categories, including higher fees for mutual fund sales. Loan loss provisions were lower due to lower provisions in commercial portfolios. Quarter-over-quarter, revenue was up 3%, as a longer quarter and good asset and deposit growth, as well as a higher margin, were partly offset by lower card revenues and lower gains on investments. Expenses were up 3% due mainly to the longer quarter. On a year-to-date basis, operating leverage was positive at 0.7%.

Moving to International Banking on Slide 12. International's earnings were CAD494 million this quarter, an increase of CAD102 million, or 26% from last year. Excluding the three non-recurring items I previously mentioned, net income was up CAD12 million or 3%, driven by solid loan growth in Latin America and Asia, partly offset by higher loan loss provisions and expenses. Year-over-year, revenues increased 18% or 7% on an underlying basis. Asset growth and higher fee income were partially offset by lower margin. Provisions for credit losses increased by CAD26 million to CAD194 million. Retail provisions were higher primarily in Mexico and Colombia, while commercial provisions were relatively flat. Expenses were up 16%, or 9% excluding non-recurring items. Approximately one-third of this increase was due to the acquisition of Credito Familiar in Mexico and the remainder was in line with inflation and business growth. Quarter-over-quarter, net income increased CAD75 million or 18%.

Excluding non-recurring items, earnings were down CAD15 million or 4%, primarily due to unusually high gains on investment securities and higher income from associated corporations last quarter. Last quarter, we benefited from a gain on sale of securities in Mexico, which was in fact a recovery of a loan loss, amounting to approximately CAD30 million after tax. Revenue was up 8%, however excluding the non-recurring item, revenue was down CAD46 million, primarily due to lower underlying income from associated corporations and lower investment securities gains. Provisions for credit losses remained unchanged from last quarter. Moderately higher retail provisions in Mexico were offset by lower retail provisions elsewhere. The 6% increase in expenses was due entirely to the non-recurring items and foreign currency translation. On a year-to-date basis, operating leverage excluding the non-recurring items this year, was positive 0.9%.

Turning to Slide 13, Global Wealth Management reported earnings of CAD327 million, an increase of 18% from last year. Revenues increased year-over-year as a result of strong growth in mutual fund fees and higher brokerage revenues. Assets under management and assets under administration grew 24% and 14%, respectively. Of the total revenues, approximately 85% was attributable to wealth management and 15% to the insurance businesses. Expenses were up 21% from the same quarter last year due mainly to higher volume-related expenses, acquisitions, and a change in methodology with respect to dynamic funds administrative fees, which results in higher reported revenues and expenses. Quarter-over-quarter, net income increased CAD1 million with revenues increasing 3%, mainly from higher mutual fund fees, the acquisition of AFP Horizonte in Peru, and stronger brokerage revenues, partly offset by lower insurance revenue. Expenses were up 4%, primarily reflecting the AFP Horizonte acquisition, lower legal recoveries, and volume-related growth. On a year-to-date basis, operating leverage was negative 2%, due primarily to the change in the Dynamic fund's administration fees.

Looking at Slide 14, Global Banking Markets' net income was down CAD11 million from a very strong quarter last year to CAD386 million this quarter. Improved performance in the lending business and higher underwriting fees were offset by ongoing market challenges in fixed income and commodities. Year-over-year, revenues increased 1%. Provisions for credit losses declined CAD4 million to CAD11 million this quarter. Expenses were up 5% over last year, reflecting higher salaries and benefits, technology costs, and support costs, partially offset by lower performance-based compensation. Quarter-over-quarter, net income increased by CAD25 million or 7%, with increases in both Investment Banking and Capital Markets revenues. Expenses decreased 1% from last quarter, due to lower remuneration expenses, partly offset by higher support costs. On a year-to-date basis, operating leverage was negative 1.9%.

Now turning 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 net loss of CAD94 million this quarter compared to net income of CAD414 million last year. Last year's Q3 included a CAD614 million after-tax gain on the sale of Scotia Plaza. Excluding this item, the net loss decreased by CAD106 million from the same period last year, mostly due to the CAD100 million increase in the collective allowance against performing loans last year. Quarter-over-quarter, the net loss decreased CAD25 million due to the impact of asset liability management activities. This concludes my review of our financial results. I'll now turn it over to Rob who will discuss risk.

Thanks, Sean. The risk in our credit portfolio continues to be well managed and overall credit quality remains strong. The overall loan loss ratio declined to 31 basis points this quarter. The provisions for credit losses was CAD314 million this quarter versus CAD402 million last year; however, last year's number included a CAD1 million increase in the collective allowance against performing loans. The credit risk in the Canadian residential mortgage portfolio remains benign and customers continue to manage their finances as expected. The loss estimated for the real estate portfolio impacted by the Alberta flooding is not significant.

In International Banking, retail provisions were higher in Mexico and Colombia, while commercial provisions were stable. Net impaired loan formations were up CAD152 million to CAD478 million, partially due to the grading of loans related to the Banco Colpatria acquisition in line with Scotia Bank's credit policies. We do not expect further material formations resulting from this process, as it is now mostly complete. Market risk remained low and well controlled. Our average one-day all-bank VaR was CAD17.4 million, up from CAD16.8 million in the prior quarter. There were the three trading losses in the quarter compared to two for the previous quarter.

On Slide 18, we see the trends in provisions over the past five quarters. As you can see, Canadian retail provisions remained relatively stable. Quarter-over-quarter, a moderate increase in mortgage provisions, primarily relating to the flooding in Calgary, was more than offset by lower other retail provisions. Overall, portfolio quality remains extremely high, with 94% of our assets secured. Canadian commercial provisions decreased this quarter. From last quarter, International retail provisions were down slightly, as moderately higher provisions in Mexico were more than offset by lower provisions in other geographies. Commercial provisions were up slightly and flat from the last year. Global banking and Markets had provisions for credit losses of CAD11 million this quarter compared to CAD12 million in the prior quarter.

Slide 19 shows our Canadian Banking residential mortgage portfolio. Our total portfolio of residential retail mortgages is CAD189 billion. Our portfolio remains -- continues to be approximately 90% freehold and 10% condo. As you can see from the slide, approximately 56% of the portfolio is insured and 44% is uninsured. The uninsured portion has an average loan-to-value ratio of approximately 56%. While we continue to believe that the Canadian housing market generally remains stable, there may be some softness in Canadian housing and market prices in the short-term. Credit quality and performance of the residential portfolio remains strong. Our disciplined and consistent underwriting standards through all of our origination channels have resulted in extremely low loan losses and again have been stressed under many severe assumptions, which confirm the appropriateness of our risk appetite.

To summarize, our asset quality remains high with both the retail and commercial portfolios performing as expected and our corporate portfolios continuing to demonstrate strength. As we have mentioned in the past, a combination of growth in portfolios, changes in product mix, and acquisitions will result in somewhat higher provisions for the full year as compared to 2012. We have been seeing this trend as we have progressed through three quarters of the fiscal year. For the balance of the year, we expect Canadian retail provisions to remain stable, though commercial provisions were unusually low this quarter. International retail provisions are expected to rise in line with loan growth and normal post-acquisition run rates. That concludes my remarks. And I'll now turn it over to Brian. Brian?

Thanks, Rob. Let me start by saying that we continue to be very pleased with how our business model is producing balanced results. As you know, our overall strategy calls for effective diversification across our four business lines and further diversification within the business lines. In addition, each of our business lines effectively balances the need to invest for future growth and manage costs prudently. As a result we have positive operating leverage year-to-date. So now let me touch on the outlooks for each of our business lines beginning with Canadian Banking.

We expect to finish the year with solid asset and deposit growth. Each of our core businesses will continue to perform well. Asset growth in automotive finance and residential mortgages was strong in Q3 and we see that continuing in Q4. Our commercial banking pipeline remains strong. In deposits and payments, we continued to see positive results. By leveraging innovative products, such as our SCENE debit card and the Scotiabank AMEX cards, we remain confident about our ability to deliver solid growth in these businesses. In mutual funds, we've experienced strong year-to-date growth and we have also continued to gain market share. Overall, we expect to see strong whole-year growth. And turning to ING, we also expect solid results for the balance of the year. We expect our margin to remain stable as favorable changes in product mix continue to help offset competitive pricing pressures. Turning to PCLs, we expect retail increases to be in line with asset growth and we expect our loan loss ratio to remain relatively constant. We also expect commercial PCLs to remain stable. We expect expenses to increase somewhat in Q4, reflecting seasonal patterns and our investments for future growth. Overall, we expect to see solid results for the balance of the year in Canadian Banking.

Moving to International Banking, the impact of moderating growth in China, lower commodity prices, weaker currencies, and more recently, the uncertainty around the tapering of the US quantitative easing program, has resulted in somewhat lower growth expectations for Latin America and Asia. Nevertheless, our retail banking segment continues to have momentum with solid performance expected in Latin America. We have experienced positive results from our Premium Banking launch, which is targeted at the mass affluent segment in Latin America and the Caribbean. We are also seeing strong returns from various initiatives of improved productivity in our branches. For our commercial businesses, our pipeline is healthy. In particular, the prospects are solid for Latin America, and we are seeing continued momentum in Asia, particularly in our trade finance volumes and deposits. We expect PCLs to rise modestly, reflecting growth in our portfolios.

With regards to margin, a number of factors have contributed to the pressure we have been experiencing, including more local competition and evolving regulatory standards such as legislative changes in Peru, which have affected the margin on credit cards. We continue to see strong growth in lower-yielding, lower-risk assets in Asia and a moderation of growth in Latin America. Looking forward, government regulatory changes and competitive pressures should be stable. As a result, we expect our margins to stabilize. While we continue to manage through a volatile and uncertain macroeconomic environment, our outlook remains stable for the balance of the year.

In Global Wealth Management, our outlook is good for good underlying growth across our key businesses. Global Asset Management continues to grow, driven by a solid base of AUM and AUA and strong domestic and international revenues. Net sales of ScotiaFunds reached a record CAD2.8 billion over the first three quarters of 2013, with ScotiaFunds experiencing the strongest rate of AUM growth among Canadian banks both year-over-year and quarter-over-quarter. In wealth distribution, strong cross-sell among our Canadian advisory and private banking channels is reinforcing business growth. Internationally, the AFP Horizonte integration with Profuturo in Peru is progressing as planned and will significantly increase our market share in this important business. Looking ahead, we will continue to drive value from recent acquisitions to sustain growth momentum and increase scale in Latin America.

The outlook for our Canadian insurance business remains stable with ongoing product enhancements and customer retention programs driving a growing client base. Internationally, our focus in insurance remains on improving cross-sell and expanding our non-creditor business. In global transaction banking, our outlook calls for more Basel III-friendly deposit products, enhanced cross-border payments capabilities, and an expansion of our commodity trade finance capabilities across all our geographies. Lastly, we will be hosting an Investor Day here in Toronto, focusing on our Global Wealth and Insurance businesses on September 25. We hope that many of you will be able to join us. The Investor Day will also be available via live webcast.

Moving to Global Banking and Markets, we expect continued good performance across our wholesale businesses. Economic uncertainty persists and this will continue to impact client activity; however, our business mix and our focus on cross-sell is expected to mitigate some of these factors. The business pipeline for the next quarter is solid and should allow us to experience continued good performance. The Corporate loan portfolio is expected to show moderate growth with loan spreads remaining stable. The credit quality of our loan portfolio remains strong and loan loss provisions are expected to remain modest. In summary, as Rick mentioned earlier, we have progressed well through three quarters of the year and anticipate meeting or exceeding our financial targets for 2013. I'll now turn it back to Sean.

Thanks, Brian. That concludes our prepared remarks. We'll now be pleased to take your questions. Please limit yourself to one question and rejoin the queue to allow everyone the opportunity to participate. Operator? Can we have the first question on the phone please?

Steve Theriault, Bank of America Merrill Lynch.

Just wanted to follow-up first on Brian's comments and maybe for Dieter. Dieter, Brian mentioned potential changes to cards and rate caps. Can you give us a little color on that? Is that -- that's within the consumer finance business improve, is it?

Yes, that occurred in our quarter where we had the regulator and in the [consumer] protection group combine to limit our fees that we can charge for the various card products. We're able to increase our rate but not sufficient enough to overcome the reduction in fees.

So the control is on fees not rates?

That's correct.

Okay. And if I might, for Sean, in your Corporate and Other segment you mentioned ALM as a positive quarter-on-quarter and year-on-year so is that primarily the absolute effect of a steeper curve in the quarter or does it reflect where you're taking risk or is it something else and can you help size that for us at all?

Yes, there's a few different elements there. One benefit that we're starting to see is as some of the oldest subordinated debt runs off and gets replaced with cheaper debt, that reduces our funding costs and that resides in that Other segment. There's slightly higher prepayment fees, which also end up in the Other segment rather than in the business line so those are some of the factors that are driving that net benefit in the Other segment.

Can you size it relative to what you might consider normal?

It is a bit better this quarter than what we've seen in the past quarters. In terms of sizing it, it would be hard to say but I would expect next quarter to be maybe somewhat closer to somewhere in between last quarter and this quarter's number.

Thank you.

Next question please?

John Aiken, Barclays.

Dieter, the [term] or at least the outlook for the Caribbean has hit a bit of an inflection point. Can you let us know whether that's retail or commercial or both and then what your mid-term expectations are for Mexico going forward?

Well first on the Caribbean, it would be predominantly in the retail book. We've managed to stabilize and increase the margin by a focus on our deposits and focus on our core premium banking offering. So we've seen some positive growth in the Caribbean retail assets in Q3 and have single-digit expectations for retail going forward. With regard to Mexico, Mexico continues structurally not to benefit from some of the optimism that we had shown earlier but that seems to be coming together going forward in Q4 and the first part of 2014 as some of the government programs take hold and we anticipate to be very optimistic about growth in Mexico going forward especially as the United States continues its recovery.

Great, thank you.

Next question please?

Gabriel Dechaine, Credit Suisse.

Dieter, while I've got your attention there. Just on the PCL in International, it looks like it's stabilized at least sequentially. You think that's a steady-as-she-goes from now on and all else equal, we'll see a CAD60 million-ish pick-up next year because the credit mark on Colpatria is expiring? That's some of the guidance you gave at the--?

I'll start and maybe then hand it over to Rob. What we've done in the last couple of years is enhance our coverage ratios.

Yes.

But we've increased our coverage ratios, so now we're seeing well north of 60% up from high 30%s before so we're very positive about increasing our allowances, [what] we've done. The underlying quality of the asset book continues to show well. Their delinquents are moderate to declining and at the same time what we've done is we've doubled down on our collection platform, not only in terms of some of the reward for performance in terms of individuals but also in process improvements and that will continue to show positive impact going forward. Rob, I don't know if you had anything else to add?

Yes. We anticipate normal growth rates in PCLs and nothing untoward. It will be partly because of normalized post-acquisition run rates and partly natural growth in the portfolio and partly as a result of the strength of the portfolios that we see on the consumer finance side, so very much within expectations.

Okay, but we're -- I'm getting the sense of the steady state but there's acquisition benefit that's going away next year, I just wanted to confirm that?

We don't see a great impact in the retail PCLs going forward with a moderate increase in the commercial PCLs, as some of the PPE impact in Colombia starts to come off.

Okay, thanks. And then second question is for Anatol, on the -- just want to drill down on the credit card business here. Some comments you've made and other Scotia people in the past, it's like the credit card business is something you want to embrace more closely than you have in the past, maybe you left some money on the table. Given the disruption with Aeroplan on the horizon, I'm just wondering what plans you've got in place to pursue an opportunity there. How much is a credit card customer worth to you? What kind of investment do you make in acquiring a customer? If you can give me some guidance there that would be helpful?

Okay, let me just talk first in terms of the credit card business. If you look at and -- we've discussed this in the past -- if you look at where we were, say, two years ago to where we are, we've put a lot of emphasis into the credit card business and its done very, very well. Brian referred to the AMEX card as one. That has been a tremendous success for us, particularly in a segment that's the travel segment, so that has shown very good growth. Very good new customer acquisition and also exceptional cross-sell to existing customers. And that's something that we expect to continue, so in reference to what you were saying in terms of the marketplace, that's a business that if you look forward we think will continue to grow. In terms of the value of a customer, and particularly in the credit card business, that's very hard to answer because we really aren't looking for a one-product customer. We're looking for relationships of which credit cards is one part of it. We do acquire customers though through different channels -- one, through our branch channel; two, through our indirect channel; but most of our business is done in terms of cross-selling with credit cards.

Is -- let's say the customer has a checking account with you. Are you willing to pay more to acquire that one and would you target more of a spender or somebody that carries a big balance? I'm just conceptually trying to--?

No, if you look at our credit card portfolio, it is very much about the turnover that goes on in the credit card. It's not about borrowing and leaving large borrowings on the credit cards. It is about spenders and if you look at our different credit card offerings, we have different cards for different niches but it's not that we're paying a customer. And if they already have a checking account, we aren't paying to get them. What we're doing is we're servicing their needs including the payment needs of which credit cards is one part of it.

I appreciate that, thanks.

Okay, next question please?

Peter Routledge, National Bank.

Another question for Dieter. Seems like if I look at International Banking, just year-over-year operating ratio excluding the one-timers this quarter looked negative to me. Efficiency seems a little high by Scotiabank's standards and I'm going to guess that part of the explanation is the bank has done a lot of acquisitions and it's just going to take a while to build in the Scotiabank cost culture everywhere you've acquired. So the question for you is what sort of opportunities do you see in terms of cost reduction in International Banking to really just take out big chunks of the cost and how long will that take to build?

Peter, I would just work on the first point that you mentioned. If you look at our -- subtract the notable items that we incurred this quarter, as well as adjust for what Sean mentioned relating to Credito Familiar and FX, our underlying expenses year-over-year increased 5%, which is generally in line with inflation in most of our markets and on a quarterly basis, our expense growth, adjusted for FX and notable items, was flat to down. So we've been watching our expenses closely in line with what's happening with -- in some of the areas -- of other areas of our business. But as -- you're right, as you move forward and some of your integrations are becoming close to completion, there's incumbent upon the Business to continue to look where the structural cost efficiencies may reside and we're looking at that going forward for 2014.

Just is that hard to do? The Bank has typically been pretty good about managing foreign subs by leaving day-to-day business decisions to people in the market.

Well, we're looking hard--

Isn't it going to be hard to move into those businesses and start making operating suggestions?

Well, I believe -- we run our shared services model on an international basis and we look at it on a complete picture in all our countries and all our various processes and expenses occur in those countries and where they are bench-marked relative to the peers within country and where they rank relative to themselves within our portfolio and there's an understanding of our country heads that we need to watch our expenses and look for structural cost efficiencies going forward.

Is there a central effort to push that or is it basically--?

We always have a central governance oversight of our operating countries from Toronto.

Okay and then quick one for Anatol -- news about NHA MBS rationing, got the prospect of bail-in debt coming next year maybe. Is it going to be more expensive to fund mortgages going forward? Assume the yield curve doesn't change, it just freezes where it is today. So does your cost of funding mortgage rise over the next year?

On this, I'll ask Jeff Heath to pipe in as the Treasury expert.

So, Peter, on dealing with NHA MBS first. At this point, we don't have a lot of information about the future. We all know what was announced as a short-term measure by CMHC, but without knowing the size of the cap and how it will be allocated in the future, long-term impact is really hard to gauge at this point. My view in the near-term is that the impact is not material. NHA MBS is a pure funding, it's relatively modest, in our case in the overall scheme of things and roughly comparable to the cost of covered bonds, that's another alternative.

What about bail-in debt? Any concerns about funding costs there?

Well, again, the issue on bail-in, as you're aware, it was mentioned in the budget, at this point, we have very little information. The design the government has in mind has not been fleshed out and communicated. Not a lot of information, but my view is that recognizing that that's more of a resolution issue, i.e., a tail event. I don't think it's likely to have any significant impact on our funding.

Okay, all right, thanks.

All right, next question please?

Robert Sedran, CIBC World Markets.

I'd just like to try to tie together some of the various comments about the outlook for the International segment, so if high-teens in Latin America seemed to be one of the messages from the January investor conference in terms of earnings growth rate. And it sounds like you don't really see that for 2014. So first of all, is that a fair comment? And second of all, when you -- a more positive outlook for the Caribbean, it sounds like a more positive outlook for Mexico, would those be enough to, say, offset a more tepid view of South America in the next 12 to 18 months?

Well, I'll take a shot at what you brought forward here. We look forward to Lat Am. We continue to grow at low double-digit growth. We've had great year-to-date growth in Latin America. For instance, in Lat Am, our retail growth grew 18% year-over-year and commercial grew 13%. Our pipeline continues to look strong on a year-over-year basis and the projected economies in these countries -- in Chile, Peru, and Colombia -- are expected to grow between 4% and 5.5% so they continue, notwithstanding some of the world events, to have a positive outlook. We anticipate that the economy continues to strengthen as United States starts to move forward in 2014 and that will have positive impact not only on Mexico but on Colombia, as well as the Caribbean, So perhaps some moderating but still some very positive growth in the countries that we [are] resident in.

So Dieter, just to follow-up, is it fair to say that some of the noise or the movement in the markets is much less important than what's actually going on, on the ground and you're still optimistic for what you see on the ground today?

We're still optimistic what we see today.

Okay, thank you.

Just -- this is Sean -- just a point of clarity. I don't think we said that earnings would grow high double-digits at the off sites. We were guiding about asset growth in the low to mid-double-digits at the time. So we're quite comfortable that, as Dieter said, the economic outlook is still quite positive for the various markets we're in, somewhat moderated compared to 2012 but we expect a bit more pick up in the economic outlook next year versus this year. Next question please?

Michael Goldberg, Desjardins Securities.

I'm looking at Page 19 of your supplemental and the CAD167 million of gross formations in International commercial. How much of that was the re-rated loans in Colpatria?

A significant chunk of that, Michael, the vast majority of it.

It's about CAD100 million.

About CAD100 million?

Yes.

Okay, and secondly, any update on possible new product launches in ING for geographic expansion?

Let me touch that. So firstly in terms -- [I'd say] -- more than just the products. In terms of the steps that you'll see us take -- first as you know, we have a period of time in which we will be rebranding and that will take place within the first three to four months of the calendar 2014. With that, you can expect that we will continue in ING to do the type of product sales that you just saw during the course of the late Spring and the early Summer, so it's business as usual. And as you look at us in the rebranding, we will continue to target expanding business as we've done in the last few months so that's as much as we can go. There are always plans in terms of launching products but that's part of the regular course of business, very much focused in terms of both savings and the direct banking model.

Well one product that's been talked about as a possibility is a card?

Yes and that continues to be a possibility.

Okay, thank you.

All right. Next question on the line please?

John Reucassel, BMO.

Just maybe I'll give Dieter a break and talk to Chris. Chris, I just -- I'm looking at Page 6 of the Global Wealth and I noticed the AUA and the AUM is flat to down from the second quarter, so could you explain to me, is that just FX or what is going on there? I know you had good in flows at Scotia, but is it different at Dundee Wealth or could you just give us some update there?

Sure. John, in the AUA, we were down about CAD2 billion in AUA on the quarter and that is largely from a sub-custodial account that we earned very little fees on and it moved away from us so not a significant piece of business and it was a large part of that drop in AUA. Overall, though, we've pretty well remained flat. And on the AUM, we have done very well in the ScotiaFunds channel, as was mentioned in some of the comments. We have had some redemptions in the Dynamic side but the Dynamic AUM has been holding flat at about CAD39 billion over the course of the last while, based on our product mix. So overall we've done very well in the ScotiaFunds side. We gained market share there but we have lost a bit of market share on the Advisory side. Third-party Advisory, which is not unique to that channel, a lot of the other independents have lost to the bank side also.

Okay, and then could you just give us an update, maybe a progress on cross-selling creditor insurance on new mortgage? I know you've wanted to increase your penetration? And then you mentioned cross-selling -- I think I've got this right -- on non-creditor International Insurance. Just remind me what that means as well?

Sure. On the creditor side, a number of years ago, we were significantly below the industry average in terms of selling against our mortgage book and over the last few years we've increased our penetration through the retail branch channel to industry average. So we're now at a rate of about 77%, which is in and around industry. We expect to continue to see that grow over the course of the next few years even though the mortgage volumes are slowing down. We also believe that in terms of certain regions, we have an opportunity to grow in parts of Canada where we've been a little bit slower, but that's some work that's being done through Anatol and his group. The other thing I would say on that front is when we bought the Maple book of business a number of years ago, we had very low cross-penetration in that, in terms of creditor insurance.

We've grown that now from 12% about four or five years ago to about 45%, so we see significant continued growth through that broker channel. In terms of International, we still do see some opportunity to grow the creditor book of business in different markets and I would just add on that comment earlier about the International business and growth rates, the Insurance business is an important contributor to earnings growth in a number of the markets. In particular, we expect Insurance to grow at significant rates in markets like Peru and Colombia and certainly Mexico, which is an area where we think we've got great opportunities. So beyond that, John, we're looking at some non-creditor. There's optional products, which is not really an insurance product, that we will look at selling in different markets but we're still very active on the creditor side.

Thank you.

Next question please?

Sumit Malhotra, Macquarie Capital Markets.

A two parter on International to start. Part A of that is net interest margin and what we're seeing in loan yields. In some of the key geographies you operate in, in International, we've seen some pretty sizeable increases in bond yields over the course of the last few months. And in the segment, we see margin down 10 basis points. So Dieter, can you walk me through how increases in long bond yields in some of your key geographies make their way into the margin of BNS, because I realize there might be some differences relative to what we see in your Canadian business?

If you look overall in our International business, we're off about 10 to 11 basis points in our margin, which impacted us about CAD23 million in net income after tax. And what we see happening and that's -- there's two main drivers, quite frankly, that are occurring. One is the usual competitive pressures and liquidity in some markets, but we've also seen what I would call an asset reallocation of where growth is coming from -- where in Peru, we've had more moderating growth in our higher-margin business, but we've had more growth -- higher growth rates -- in our lower-margin business in Asia. So that takes about two-thirds, you want to call it, asset reallocation, two-thirds of our NIM pressure is from asset allocation between geographies. And then within geographies, and again in Peru this quarter, you saw the growth occurring in some of the lower-margin products in the automobile business and in the mortgage business rather than in the credit card and the micro-consumer finance business. So some asset reallocation between geographies and within geographies, but we haven't seen the significant increase in bond yields directly impact our pricing on our credit yet.

Yet makes it sound like it's something we can--?

It may or may not happen. We just have not seen it happen yet.

Okay and part B of that first question was just a clarification that you've provided for us in the past. Obviously, with some significant volatility in foreign exchange rates in the quarter, this might be more for Sean. Would you be able to provide us, as you have in the past, the quarter-over-quarter, what I'll call core growth rate in both your consumer and commercial portfolios in International?

You talking about volume growth?

Yes, please.

Yes, we've -- as in on the slide deck, we do a year-to-date, we like to look at a whole-year comparison, but on the quarter, it has slowed somewhat. Both retail and commercial up 1% to 2% on the quarter.

So the number that we see in the supplement even with the FX volatility isn't too different from what you would consider core?

Right.

Okay, and my second question, last question, is for either Rick or Brian. Since we last spoke at the Q2 results, the Bank made the decision official or it was announced that you would not be pursuing the stake in Bank of Guangzhou. That frees up, by my math, 25 to 30 basis points of Basel III capital on your ratio. Since that time, there's been a lot more talk about leverage ratios and what might be the next step of Basel III. You've also talked about the fact in some statements that the Bank would more likely, and correct me if I'm wrong here, would put more emphasis in the near-term on organic growth rather than acquisitive. The decision -- the capital save from that deal, is it likely that you use it to build your buffer for whatever the next stage of capital standards may be or does this give you some more fire power to look at another acquisition in Guangzhou's place?

Well, Sumit, your number in terms of capital is bang on, it's about 28 basis points so between 25 and 30 obviously. It provides us some flexibility going forward. I was asked two calls ago in terms of where we thought we would end up in terms of capital going forward, what we thought the number would be. My number then was 8.5% to 9%. Having said that, there's a lot of discussion about the leverage ratio and we need some clarity from OSFI in terms of where we are going to be in Canada in terms of the leverage ratio. So it provides us some flexibility as you've heard from the questions around the table today. We're focused on a variety of organic growth initiatives throughout the Bank and we've got a lot of them and we'll look at acquisitions selectively as they come up and on the basis that they are on strategy and make sense.

Thanks for your time.

All right, next question please?

Andre Hardy, RBC Capital Markets.

My question is for Mike Durland. On Page 30, in the explanation for the sequential increase in Global Capital Markets revenues, you note higher commodities, fixed income, and FX revenues. I'm a little curious to see a comment about better fixed income trading revenues given pretty severe back-up in both rates and spreads back in June. So can you please help me understand what went well in your business in the context of what appeared to me to be a difficult environment?

Yes, sure. Overall, we were quite happy with the quarter. Obviously, there was quite considerable volatility as a result of the news from the Fed. One thing I will say is that, as you know probably, we've been thinking about this and talking about it for quite awhile so it was something that we were prepared for and we were positioned relatively close to shore and that helped us. And when you have volatility like this, it can be -- you can do a little better than you expect, you can do a little worse than you expect or you can do what we did, which was a decent quarter so we're pretty happy about that.

Actually (inaudible)--

And there were only three negative trading days versus two last quarter, so a lot of it just had to do with the way we're set up.

Okay. Thank you, Mike.

All right, that was the last question. So thank you all for listening in and we'll talk to you next quarter.

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