Bank of Nova Scotia (BNS) 2013 Q4 法說會逐字稿

(Technical difficulty) comments, we will be glad to take your questions. Also in the room with us to take your questions today are Scotiabank's Business Line Group Heads, Anatol von Hahn from Canadian Banking; Dieter Jentsch from International Banking; Chris Hodgson from Global Wealth & Insurance; 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; and Jeff Heath, our Group Treasurer.

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

And with that, I'll turn the call over to Brian Porter.

Thank you, Peter, and welcome, everyone. We are pleased to announce a strong year in fiscal 2013. Scotiabank earned adjusted net income of CAD6.6 billion, or CAD5.08 per share, representing growth of 15% and 10% respectively from 2012.

Our 2013 performance reflects strong results in Global Wealth & Insurance and Canadian Banking, along with solid operating performances in International Banking and Global Banking and Markets. We continue to benefit from well-balanced and diversified contributions from each of our business lines across our unique geographic footprint. In addition, we maintained a prudent approach to risk management and disciplined expense controls.

Our capital position remains strong and well above regulatory requirements. Our Basel III all-in common equity Tier 1 ratio was 9.1%, an increase of over 100 basis points from a year ago. Our ability to generate high levels of capital internally through strong earnings has allowed us to increase our dividend twice this year, by a total of over 9%. We remain within our targeted payout ratio range of 40% to 50% of earnings.

Now let me take a few moments to briefly touch on the key priorities of our business lines. Canadian Banking had a record year, aided by the acquisition of ING Direct Canada. Excluding the acquisition, the underlying results were driven by strong assets and deposit growth.

We are focused on deepening relationships with existing customers, adding new customers, and making it easier for all our customers to do business with us. This means ensuring a consistent experience across all delivery channels and delivering the right advice and solutions for our customers' channel of choice.

In addition to our traditional areas of strength, such as auto and real estate lending, we are focused on becoming our customers' primary bank. In payments, we are improving our capabilities and leveraging our partnership and rewards programs to grow our market share in credit cards and day-to-day products. In deposits and investments, we are helping customers meet their financial objectives and leveraging our relationship with Global Wealth & Insurance. For ING Direct, we will rebrand it as Tangerine this coming spring. We will continue to preserve and build this deposit base by extending ING's savings value proposition to meet the banking needs of self-directed customers.

Now let me turn to International Banking. Here we had a good performance this year and we delivered double-digit asset growth despite some challenges in certain markets. Economic growth in Latin America and Asia has moderated somewhat. In certain countries, central banks continue to cut interest rates to stimulate growth, which is pressuring margins. However, we anticipate that continued double-digit loan growth will mitigate these headwinds.

Our strategy to drive growth in our key Latin American and Asian markets is proving to be successful. In particular, we are working to anchor long-term primary bank customer relationships. And finally, we will continue to enhance our customers' experience and streamline our operating model to reduce structural costs.

Turning to Global Wealth & Insurance, we continue to have strong momentum across our businesses. This resulted in double-digit earnings growth for the year. In wealth management, our strategy is focused on building scale and asset management and better serving high net worth customers. We will also fill product gaps with a broader offering, which will better serve our customers and help us participate in the broader market advance. In addition, we are pleased with our investment in CI Financial, which continues to perform very well.

In our insurance businesses, we are seeing increased sales in both Canada and internationally. In Canada, we are continuing to roll out product enhancements and customer retention programs. Internationally, we remain focused on leveraging the Bank's global distribution networks to improve cross-sell and expand our non-creditor business.

And finally, for Global Banking and Markets, earnings here were stable, but down slightly from record levels last year due to challenging market conditions. Our diversified platform is delivering solid revenue growth. We are investing in our core customer sectors and product areas to leverage our expertise and enhance profitability. We are focused on the Bank's existing footprint, particularly in higher growth regions such as Latin America and Asia. We are also improving the coordination across all areas to realize the full benefits of our customer relationships across all businesses.

Turning to slide 6, we are pleased with our results this year. We met or exceeded all our financial targets for 2013. Our earnings per share grew by 10.2%, slightly above our target of 5% to 10%. Our return on equity, an important measure of our effective use and deployment of shareholders' capital, remains strong at 16.4%, within the target range of 15% to 18%. Our continued focus on expense management resulted in a productivity ratio of 53.5%, well below our target of less than 56%, while still supporting strong organic growth and investments in key business initiatives. As I mentioned earlier, our capital position continues to be strong with an all-in Basel III common equity Tier 1 ratio of 9.1%.

On slide 7, you will see that, beginning in 2014, we are moving to medium-term financial objectives. We do not expect these objectives to change every year; however, we will continue to monitor our performance against the metrics every year. Our medium-term objectives are mostly unchanged from fiscal 2013. We are targeting EPS growth of 5% to 10% per annum, return on equity of 15% to 18%, and positive operating leverage over the medium-term, and continuing to maintain strong capital ratios. By targeting positive operating leverage, this will further enhance our industry-leading productivity ratio.

To conclude, 2013 was another strong year for the Bank and we achieved these results in typical Scotiabank fashion, through well-balanced and well-diversified contributions from each of our four business lines. Our medium-term objectives represent prudent and consistent growth in the context of a challenging operating environment and we have targeted high levels of profitability and efficiency. We are focused on three key priorities to deliver consistent and predictable earnings. Firstly, increasing our focus on our customers.

Secondly, investing in our leadership. And thirdly, being better organized to serve our customers and to reduce structural costs. By executing on these priorities, we are confident that we will be able to achieve our medium-term financial objectives in 2014 and beyond.

And finally, before I turn the call back to Sean, I wanted to take a moment and recognize Rick Waugh for his tremendous efforts and contributions over his 43 years at Scotiabank. On behalf of all Scotiabankers and all our other stakeholders, I wanted to thank Rick for his leadership, particularly over the past 10 years as our CEO.

With that, I will turn it back to Sean.

Thanks, Brian.

Slide 9 shows our key financial performance metrics for the quarter. Earnings per share were CAD1.30, up 10% year-over-year, and net income was CAD1.7 billion, up 12% from last year. Our fourth-quarter results reflect good operating performances in Canadian Banking and Global Wealth & Insurance, as well as more modest performances in International Banking and Global Banking and Markets.

During Q4, there are three smaller one-time items that we're basically offsetting: first, a gain on a sale of a non-strategic business in Peru; second, a yield adjustment recorded in Global Banking and Markets; and lastly, integration costs related to our investment in Horizonte in Peru in Global Wealth & Insurance.

Revenue growth continues to be strong, at 11% year-over-year, a result of strong, broad-based asset growth and acquisitions. Also contributing to the double-digit growth year-over-year was an increase in banking and wealth management fees, along with higher trading revenues and security gains, partially offset by decline in the net interest margin. However, excluding the impact of the ING Direct acquisition, the core banking net interest margin was unchanged year-over-year.

Expense growth was 9% year-over-year, with acquisitions accounting for approximately half of the increase. The remaining increase was due mainly to higher remuneration, including higher pension costs, as well as increased premises and technology costs to support growth initiatives. Our productivity ratio in Q4 improved to 53.7%, 1.2% better than last year, resulting from positive operating leverage, and demonstrating our ability to manage costs effectively while still continuing to invest prudently for future growth.

Moving 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 and positions us well for the evolving regulatory capital environment. Our common equity Tier 1 capital ratio was 9.1%, an increase of 20 basis points from the prior quarter. Risk weighted assets were up CAD5.9 billion or 2% from last quarter to CAD288 billion, due to a combination of organic growth and foreign currency translation.

Turning now to the business line results beginning on slide 11, Canadian Banking had another record quarter, with net income of CAD593 million, an increase of 23% from a year earlier, or 13% excluding ING Direct. We continue to see solid organic loan growth across the business, with particular strength in consumer auto loans and credit card volumes. We are seeing good traction from our focus on core deposit gathering and are also very pleased with ING's deposit growth in 2013, which exceeded the retail deposit growth rate in the rest of Canadian Banking.

The net interest margin was up 1 basis point sequentially, driven primarily by higher spreads in the automotive lending business. The low-rate environment continues to negatively pressure margins. Credit performance was strong this quarter, with provisions remaining low at CAD115 million, down CAD17 million or 13% from last year. Expenses increased 11% year-over-year, but excluding the impact of ING, underlying expenses were up only 3%, primarily related to higher pension costs due to the continued low interest rate environment. The productivity ratio remained below 50% and benefited from positive operating leverage.

Turning to the next slide on International Banking, International Banking's net income was up 5% from last year, reflecting strong loan growth in Latin America and Asia, and higher net interest income and banking fees. This loan growth helped us earn through a decline in the net interest margin, higher provisions for credit losses, and expenses. There was also a CAD25 million after-tax gain from the sale of a non-strategic business in Peru this quarter, while the fourth quarter last year benefited from higher tax benefits in Chile and Mexico for a comparable amount.

There was margin compression in the quarter across the business, due to a number of factors, including an asset mix shift to lower yielding assets, stronger competition, and unexpected interest rate cuts in a few countries. We are focusing on optimizing our asset and funding mix and are reviewing product pricing to help mitigate this negative margin pressure. We expect margins to stabilize or improve slightly from these levels and continue to anticipate strong asset growth in Latin America and Asia.

The provision for credit losses was CAD207 million this quarter, compared to CAD194 million last quarter and CAD176 million a year ago, due to higher commercial provisions. Expenses were very well controlled, and International Banking had good positive operating leverage of 1.7% for 2013. Expenses were up 4% year-over-year, with half the increase a result of foreign currency translation, and the balance due entirely to the acquisition of Credito Familiar in Mexico. Expense management continues to be a key priority.

Turning to slide 13, Global Wealth & Insurance reported earnings of CAD318 million, up 8% from last year, due to strong growth in both our mutual fund and insurance businesses and increased contributions from our investment in CI Financial. Revenues were up 13%. The results this quarter were impacted by approximately CAD15 million one-time expenses primarily related to integration costs associated with the Horizonte acquisition in Peru this year.

In Wealth, assets under management and assets under administration grew 27% and 15% respectively, driven by acquisitions, improved financial markets, and growth in mutual fund net sales, particularly Scotia funds. In Insurance, we had strong double-digit growth on a year-over-year basis due to an increased premiums from higher product penetration and favorable claims experience.

Of the total revenue, approximately 84% was attributable to Wealth Management and 16% to the Insurance businesses. Expenses were up 16% from the same quarter last year, due mainly to higher volume and remuneration expenses, driven by business growth and the impact of acquisitions.

Looking at slide 14, Global Banking and Market's net income was down 15% from a very strong quarter last year to CAD336 million this quarter, due to challenging market conditions across the business platform. Year-over-year, revenues declined 5%, due to lower revenues in our energy, precious metals and FX businesses, as well as a one-time yield adjustment to net interest income on a specified pool of US loans. Partly offsetting were strong results in equities and an increase in loan volumes in Canada and Europe.

Credit quality remains strong as provisions for credit losses were low, at CAD7 million this quarter. Expenses were up 3% over last year, reflecting higher technology, regulatory and support costs, partially offset by lower performance-based compensation. The effective tax rate was also higher this quarter, at 26% versus 23% a year ago, due to a higher level of tax recoveries in the prior year.

I'll turn now to the Other segment on slide 15, which incorporates the results of group treasury, smaller operating units, and certain Corporate adjustments. The results primarily reflect the impact of asset liability management activities. The Other segment reported a net loss of CAD41 million this quarter compared to a net loss of CAD118 million last year and CAD94 million in the prior quarter. The smaller net loss in the quarter was due mainly to higher security gains, the impact of asset liability management activities.

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

Thanks, Sean.

Turning to slide 17, the credit quality of our portfolios remains strong, well-managed, and well within our risk appetite. The overall loan loss ratio remained low at 32 basis points in the quarter. In dollars, the quarter's provision for credit losses was CAD329 million versus CAD321 million last year and CAD314 million in the prior quarter. The increase over the prior quarter was primarily due to higher provisions in International Banking's commercial portfolio.

Net formations of impaired loans in Q4 reverted back to more a normalized level of CAD315 million, subsequent to a previously-indicated, one-time increase in formations last quarter that was related to our Banco Colpatria acquisition. Market risk remained low and well-controlled. Our average one day all-Bank VaR was CAD17.9 million, up slightly from the CAD17.4 million in the prior quarter, with only one trading loss day compared to the three in the previous quarter.

Slide 18 shows the trend in provisions over the past five quarters for each of our business lines. As you can see, Canadian retail provisions remained relatively stable and performed well, with delinquencies continuing to decline.

The overall portfolio quality remains high, with 94% of our assets being secured. Canadian commercial provisions increased modestly from last quarter but remained historically low. Quarter-over-quarter, international retail provisions improved, as higher provisions in Mexico were more than offset by lower provisions in the other countries.

International commercial provisions had a slight uptick this quarter, due mainly to ongoing softness in the Caribbean. Also contributing was an increase in provisioning in Colombia, which we expect to remain at elevated levels for the next two quarters as the portfolio matures. In Global Banking and Markets, credit quality remains strong, with low provisions for credit losses of CAD7 million this quarter compared to CAD11 million in the prior.

Slide 19 shows our Canadian Banking residential mortgage portfolio. The total portfolio of residential retail mortgages is CAD189 billion. Our portfolio continues to be approximately 90% free-hold and 10% condo, with approximately 55% of the portfolio insured. The uninsured portfolio has an average loan-to-value ratio of approximately 57%, unchanged from a year ago. The loan-to-value credit mix score and delinquency rate on our condo portfolio is not materially different from that of the overall portfolio at large.

The credit quality and performance of the residential retail portfolio remains strong and has been stressed under many severe assumptions, confirming it is well within our risk tolerance. Our disciplined and consistent underwriting standards through all of our origination channels has resulted in particularly low loan losses.

With that I'll now turn it back to Sean.

Thanks, Stephen. That concludes our prepared remarks. We will now be pleased to take your questions. Please limit yourself to one question, then re-join the queue to allow everyone the opportunity to participate.

Operator, can we have the first question on the phone, please?

Thank you. Your first question will come from Gabriel Dechaine with Credit Suisse. Please go ahead.

Good afternoon. First question is on the NIM -- just your statements on the -- in the international business there about repricing and actions you're going to take. How long do you expect it to take to see maybe some deposit repricing? And what kind of magnitude of NIM recovery should we expect, and over what time?

And then second question, for Brian, since you've became President and CEO, you talk a lot about -- frequently about organic growth and emphasis on organic growth. Just wondering, though, what's your view on opportunistic acquisitions? There have been a few big deals out in the press -- one in Chile -- lately. I'm wondering what you have to say about some -- maybe not once in a lifetime, but some unique opportunities that could help you expand some market share in some key markets in your international business?

All right. I'll ask Dieter to answer the margin question.

Gabriel, thank you for your question. We anticipate, this quarter, that our margin will be in the range of the 3.90% to 4% mark as we reprice. In some of our portfolios, depending on where we are and what region, we can reprice almost immediately; other ones will take a little longer.

We will also be able to utilize the growth in our assets that we are projecting to continue to grow low-double digits in Lat Am and Asia. We'll take some of the excess liquidity, as well, to help earn some of the softer margin. But we anticipate, to answer your question, very -- in a short way, that this quarter we will be able to have a slight increase in the margin over where we were at the end of Q4.

And that continues throughout the year or it just -- ?

We anticipate we will continue to be where we are -- to strengthen slightly.

Okay. Thanks, Dieter.

And Gabriel, I've made the comment a number of times, as you mentioned, about really focusing on organic growth opportunities throughout our platform. And that's part of largely a function of: We have done a number of acquisitions over the past five or six years, and we are integrating those and reaping the benefits of those transactions. And really focusing on making sure that we can take some structural costs out of the Bank at the same time.

In terms of acquisitions, that doesn't mean we are not going to do acquisitions. I've also said that we will look at acquisitions selectively. They have been an important part of the Bank's strategy for a long period of time, and will continue to be. And we will be focused on acquisitions that are on strategy within our existing footprint.

And would there be a bias size-wise within that (multiple speakers)?

It depends on the acquisition. I'm not going to speculate.

Okay. Thanks, Brian.

Next question, please.

Your next question will come from Robert Sedran with CIBC. Please go ahead.

Hi, just a quick one -- it's for Sean. The drag from the other segment was significantly smaller than any of the other drags on that slide this quarter. How do you feel about going forward? Was it treasury revenue that was a bigger swing that got that far down, or was it indeed securities gains? And do you think like a negative CAD40 million is a reasonable number for that one as we look forward?

Yes, as you can appreciate, there's a lot of moving parts in that other segment. To nail a number down is difficult. The range would be maybe minus CAD50 million to CAD100 million per quarter but --

So, maybe not quite as strong as we saw this time around?

Yes, we had the opportunity to take some security gains this quarter, with the strong equity markets. Whereas with our -- our global banking markets had some more challenging markets in some of the metals and the foreign currency, the equity cap markets were quite favorable, and we were able to take some gains there.

Okay. Thank you.

Next question, please.

Your next question will come from John Reucassel with BMO Capital Markets. Please go ahead.

Thank you. Sean, could you just explain to me the -- or elaborate a little more on this yield adjustment? What type of loans was this, and what was going on? And is this a one-time in nature? Can you just elaborate a bit?

It really is just a one-time correction on some interest accruals we had on a small portfolio of loans in the US.

So, you had over-accrued and you had to -- ?

Yes, we had to make an adjustment there.

Had to make -- and is this just general corporate loans? Is that what it is?

No, it was some auto receivables that we had purchased many years back that are now winding down. So, it's one-time. It's not going to repeat itself, and it doesn't really affect the margin going forward.

Okay. Thank you.

Next question, please.

Your next question will come from Peter Routledge with National Bank Financial. Please go ahead.

Good afternoon -- a question for Steve. On your page 19, you've got the uninsured part of that pie, and I see the LTV is 57%. If you were to take that uninsured part of your book, and take the top quintile or the top decile, how would the debt-service ratios in that echelon of uninsured borrowers who have higher LTVs, albeit they are below 80% -- what would be the debt-service ratios, on average? And how does that compare with the rest of the uninsured portfolio?

The debt-service ratios are capped out. So, at no level would we find anyone higher in a particular segment than the other.

The loan-to-value ratio for the uninsured is fairly well spread along the curve, so there's probably in the 70% to 80% loan-to-value. It's maybe 30% of the portfolio. That has actually been declining over time.

But the debt-service ratio -- I haven't got specifically blocked out in baskets, but we don't define -- the quality of our clients based on credit scoring is consistent across all the LTV levels.

So, you don't have a concentration of folks at 75% LTV and debt-service ratios at 40%?

Not that I've seen. We can double-check and get back to you but --

Okay. And then, Sean, just a quick one. Was there any IAS pension restatement coming for 2013 and 2014?

We disclose that in our MD&A on page 87 -- the amounts. Like all the banks, we have to restate for the higher pension costs, so we will be restating 2013 and 2012.

Okay. And it's on page 87?

Yes.

All right. Thanks. That's it.

Next question, please.

Your next question will come from Steve Theriault with Bank of America. Please go ahead.

Thanks very much. Just for Brian, please. Brian, in your comments, you said you believe you're relatively well positioned to achieve the medium-term targets in 2014. So, just wondering: What's the rationale for moving to medium-term targets versus the annual targets, which I quite liked? I know it's maybe more comparable to peers, but any implications there --?

Well --

Go ahead, Brian?

That's the consistency. The rest of the peer group is there. If you go back historically, we had medium-term targets, and about 10 years ago moved them to annual targets. So, we thought for consistency purposes we would move them back to medium term. It's more housekeeping than anything.

Certainly no impact on compensation or anything down that road?

No, none whatsoever.

Okay. Thanks.

Next question, please.

Your next question will come from John Aiken with Barclays. Please go ahead.

Good afternoon. Following on, on the change in the targets, you changed from a productivity ratio to an operating leverage, which, actually I philosophically agree with. But can we get your thinking behind the switch between those two metrics, and whether this has any implication for the growth outlook to be anticipated out of international banking and wealth management?

I'll start, and then Sean may have a comment. We just think operating leverage -- discussing it with the business line heads -- just a little more granular calculation, and made more sense for us in terms of tracking the Business. As I said in an earlier question, we are really focused on taking some structural costs out of our Business. So, we think it's just a more granular, accurate measure for us as a business group.

And at that point, it really is an all-Bank target. So, we are hoping all divisions achieve it, but there may be a year where we need to invest a bit more in one division. But again, overall it's [pos] operating leverage for the Bank.

Understood. Thank you very much.

Next question, please.

Your next question comes from Mario Mendonca with TD Securities. Please go ahead.

Good afternoon. One quick one first. You refer to regulatory changes in the international segment that have, or could, impact the margin going forward. You sound bullish on what the margin will do, but what were you referring to when you referred to the regulatory changes?

Let me just answer that. In Peru, we had some increased capital requirements for consumers that -- where we bank -- consumers that had their third credit card were required to hold more capital. So, that was an impact.

We also had some changes where they imposed some -- an impositionable that we not charge fee for some cards products, not only in Peru, but in some other markets. We believe we are largely through those changes going forward.

Any limits on the interest rate you can actually charge?

Not in Peru. It's just the fees that they dealt with.

But do you see that coming in any -- ?

You do see it -- we have seen or have heard indication that in Dominican Republic they are going to impose some credit card fee limits, and that will not have significant impact in overall international's earnings.

Okay. And then real quickly, Brian, you made reference to -- you emphasized the importance of ROE when you were going through your targets, and it caused me to just look back. And while the ROE was strong this year, it is down almost 200 basis points from last year. What would be helpful to understand is the extent to which you would want to defend that ROE if, in fact, earnings growth does slow fairly substantially, and you start to approach that 15% -- the bottom end of that target range. How relevant is that to you?

Well, it's very relevant, and it has been for a long period of time here. So, we talk a lot about it in the Bank because it speaks to, as I said in my text, the proper allocation of capital in any business. So, we are very keyed on our ROE measures here.

The subtext to that question is really -- the Bank -- you're probably the only bank that isn't talking about normal buybacks in any material way. Is that something you would -- is that something in your toolkit if the ROE does approach 15%?

Yes, well, I would answer it this way: Look, we are very comfortable with our capital position. As I said, the steady tier 1 number is 9.1%. We have made a lot of headway on capital in the last couple of years in the Bank, and we go through a rigorous capital planning process. So, on a quarterly basis, we will look at the discount on the DRIP, and we like the optionality of share buybacks to have in the toolkit as we go forward.

Thank you.

Next question, please.

Your next question will come from Brad Smith with Stonecap Securities. Please go ahead.

Yes. Thanks very much. We heard earlier in the week, from another of your peers, a suggestion that they may be de-emphasizing, to a certain degree, their involvement in the brokered mortgage channel. This is a channel that your Bank dominates, and seems very happy to continue dominating.

And I understand that part of the secret for Scotia in that channel is the ability to cross-sell. Can you talk a little bit about the customers that you pick up through that channel, and perhaps where they are now on a cross-sell-metric basis? And just give us some sense for how that's progressing?

Yes, Brad, just to put it into context -- and you talk about the fact that our strategy is that we use all three channels of distribution for mortgages. So, just to put it into context, about 45% of our mortgages are done -- the sale of them is done through the broker channel. The remainder is done through the branches and our in-house sales force.

The cross-sell -- the strongest cross-sell is in the branch and through the branch network. What we do do is through the broker channel, our cross-sell indice has gone up, which we are very pleased with, and that's been something that we have done over the last three years.

And furthermore, we are also, and have employed -- where the actual closing of the mortgage in some cases is also done at the branch, and that's brought the cross-sell up as well. It's still a little bit lower than what we have through the branches, but it's done very, very well.

And Brad, it's Chris Hodgson. Also on the creditor insurance piece, since we bought Maple Trust, we have actually quadrupled the penetration of sales in that particular product line through the mortgage broker unit but--

And also to add to this, and it closes towards the question that you've got, which is: We've had very, very strong rate of renewal of those mortgages. So, one of the areas that I think we all look at in terms of the broker mortgages is, after the maturity of that mortgage, what happens to the mortgage. We have had record highs in terms of renewal of those mortgages with the Bank.

So, would it be safe to say then, or accurate to say, that you would be basically willing to take on as much capacity there as it's made available to you through exits?

No, the way -- and if you look at us over the last couple of years where the opportunities like that have occurred, we have very clear niches and segments where we distribute our mortgages. If opportunities come up in terms of acquiring certain brokers, or firms of brokers, we will look at that. But in this case, it's organic growth and you'll see us continuing to do that.

Right. Fine.

If I could just ask one other unrelated question -- just to Brian -- talking about ROE, I'm just wanting clarification. A lot is changing in your regulatory world with respect to your ability to leverage, or in some cases, force deleveraging. Is the leveraged ROE metric really the one that you believe is the best to be looking at? Or do you think an unleveraged return might be just as effective from a management perspective?

When you say unlevered, are you talking about return on assets or what -- ?

Exactly, exactly, return on assets.

Yes, we look at both measures internally to make sure we get a good sense that we are using our funding to its best capacity. So, we -- again, we look at both metrics when we manage our Business here.

And of the decline recently, what proportion of that in ROE has come from the leveraging?

It's primarily the additional capital we have been building for the Basel II risk-based capital requirements. So, as we built up our common equity Tier 1 from, say, 7% two years ago, up to 9% now, you think of that capital not being able to be deployed because it has to build in capital. That's what drives your ROE down. But now that we are north of 9%, and we're starting to get close to that resting area, it wouldn't be the same downward pressure on ROE as we have seen the last couple of years.

Said differently -- you don't see the same pressure to delever at this point in time going forward?

Absolutely not.

Perfect, thanks.

All right, next question, please.

Your next question will come from Michael Goldberg with Desjardins Securities. Please go ahead.

Thanks. Brian, you talked, at the beginning, again, in discussing ING Direct, extending its saving value of proposition. What does that mean? What actions specifically does this mean that you intend to take, and over what time period?

I'm going to turn that question over to Anatol, if I may.

Absolutely. Michael, let me start -- two things. One: If you look at ING Direct, it has been, and continues to be, and will continue to be a very strong savings bank. So, it goes out into the market in terms of ISAs, in terms of GICs, in terms of savings products.

As we go forward, we will see that continuing. However, we are going to see Tangerine be more active in terms of being a direct bank. On the last call, last quarter, you asked about credit cards. That's the type of thing that we will see in the future.

Time frame is: It will most likely be in 2015 that we are going to see that. Within 2014, what we are going to see is the rebranding, continuing focus on the savings and investment side, and we are going to then expand. And we will look at other areas that fit the strategy, and really will be something that will be driven by our direct customers.

I'm not sure that I understand, when you say direct bank and credit cards. Can you just explain, please?

Yes, yes, let me open up on that. What it is, is that our customers in Tangerine have been investing their funds. However, they are also looking for other products, so things like a credit card; they want to start banking.

We, today, have an account which is a checking account called THRiVE, which we have started to advertise and have had very, very good results. So, our customers are turning towards not just a savings product, but also towards direct banking, doing more of their banking online and directly.

Michael, it's Brian. The other thing I would add to that is, and I said this in investor presentations before, one of the other things that appealed to us about ING was they had the track record, when it was owned by the parent company, of building out these platforms outside of Canada. So, we are examining that, giving it some thought and to see what other markets this may have some appeal.

Okay, thanks. Just one other thing to clarify. You noted that the adjustments for 2012 and 2013 for IAS 19 are in your MD&A. Should we expect, in 2014, that the impact will be around a similar level as 2013?

We are still waiting for the final actuarial numbers to come through. But if rates stay generally where they are now, then we would expect a comparable amount in 2014 to the 2013 restated amount.

Thanks very much.

Next question, please.

Your next question will come from Darko Mihelic with RBC Capital Markets. Please go ahead.

Hello, thank you. I just wanted to revisit the margin question in international banking. Can you provide some color on how sensitive or how much of the rate or how much of the margin decline was related to rate cuts?

Yes, we -- it's Dieter here -- about 7 basis points would be the central bank rate. That's predominantly based in Chile and Mexico, where they had two rate cuts this quarter.

Okay. And then, just to be perfectly clear, so for -- you mentioned this quarter 3.90% to 4% as a possible range because of pricing action?

We have seen some -- for example, the inflation numbers came. I'll give you an example because we are all -- it's very diverse regional, as you can appreciate.

In Chile, we have seen the inflation numbers come out today, and they are higher, so that bodes well for an increased margin. We've seen some increased growth in our credit card business in Peru, more than we have in prior quarters, and that bodes well for the margin. And we have seen the trade finance business in Asia strengthen in terms of margin over the last two months.

So, what we have seen directionally in the first couple of months of activity is that it's going to be on the upward trend, as opposed to the downward trend.

Okay. What I'm also struggling with is: You have, on the slide, competition as a -- (multiple speakers)

On that, about 20% of our margin impact this quarter was just due to the competitive pressures of, in some cases, the Japanese coming back in some of our markets, or some of the excess liquidity of the other banks.

Okay. So, where -- (multiple speakers)

-- around 5 basis points.

Where I'm driving at is: In the last quarter, some of the pressure was geographic and assets -- switching assets. And this quarter, it looks like competition, rate cuts, and again, asset mix changes are happening. And we are trying to do some pricing changes to keep the margin between 3.90% and 4%; we still expect double-digit loan growth.

To what extent are you willing to competitively price to keep double-digit loan growth? Or would you, at some point, look at maintaining some sort of pricing discipline and watching the loan growth slow?

Let me try and tackle the question, and see if it meets your needs. If you look at our quarter net interest margin, about 50% of our 11 basis points relates to the asset mix change. And that relates to growth in the lower-margin business of mortgages and car loans, rather than credit cards. It relates to our growth in the trade finance assets. And it also relates to an increase in some of the deposit with banks securities in Mexico and Peru.

30% of the margin, about 7 basis points, was really to, as I mentioned, the unanticipated reduction and the central bank reducing its interest rates. And the other 20% relates to margin pressure.

We see continued pipeline growth in our pipelines. Our pipelines are actually much stronger year over year, so we had some benefit of that. And we see that pricing, while being pressured [as to do with] competition, continues to be quite solid. So, we feel confident going forward that our double-digit asset growth, combined with our expense management and maintenance of our margin, will help us earn through this.

Darko, the answer to the question on a competitive context is it depends on the ROE. So, it's going to make more sense for us to do a commercial loan in Peru where we are getting LIBOR plus 250 than grant a mortgage in Barbados.

And to add to Brian's point, what you're going to see is much more focus on us where we allocate our capital where we are growing as we move our markets and the opportunities around a bit.

Okay. Okay, thank you very much.

Next question, please.

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

Thank you, just didn't want Chris to feel left out here. But on page 6 of the supplement, Chris, the AUM and AUA numbers -- are those average numbers or are those year-end numbers?

And if you were just an asset manager with those type of increases in year-over-year AUA and AUM, you could look forward to high -- close to 20% earnings growth in 2014, but I suspect that that's not what you would like us to do. Could you talk a little bit about the growth there this year, given next year, given where markets have moved to?

Sure. First of all, those are spot numbers, John.

Okay.

Secondly, in terms of the growth opportunity in the Business overall, when we did the investor presentation off-site, we committed to double-digit growth. We are continuing to support that, and believe that we will do that in 2014.

If you look at each of the business lines we have -- in global asset management, we had earnings growth of 13% this past year. If you look at the distribution business, we had earnings growth of 12%. And if you look at insurance, we had earnings growth of 13%. So, it's a diversified business line.

We had greater growth within ScotiaFunds, which was our propriety bank channel, through the cooperation and the partnership with Anatol and the retail banking group. Then we had some decline in the advisor side, simply because of the type of performance we have through some of the dynamic funds. But the bottom line is: We still expect to see and commit to organic growth, which was what Brian indicated earlier, in double-digit nature for this Business for 2014.

Okay. Thank you.

Next question, please.

Your next question comes from Gabriel Dechaine with Credit Suisse. Please go ahead.

Just a quick one for Anatol. You guys have broken out the ING Direct mortgage run-off now in the supplement. Is there -- I don't recall you talking about it, but is there a strategy to retain some of that and then roll it into branch, similar to what one of your peers has done? And I'm just wondering, if that's the case, what kind of margin pick-up we would get on those assets?

Let me take you through. The ING mortgage book also had three channels in terms of distribution. What ING is doing is it will only retain -- and has already made the decision and implemented it, that it will only retain mortgage distribution through their own direct channel. So, if a customer of theirs comes in and would like a mortgage, they get it. And if they want to renew a mortgage as well.

The two other channels, including the broker channel we shut off there, referred the mortgage brokers that qualify for Scotiabank across to Scotiabank, and some of them have continued a relationship with us. So, you will see the mortgage portfolio drop down or drop off just because the independent brokers will no longer be generating for ING. Those assets are replaced. So, a mortgage asset on ING is being replaced at the Canadian Bank level with assets in general. That includes mortgages. It includes credit card business, commercial business, et cetera.

And then -- if they are being replaced, maybe it's different, but similar question -- what's the margin --?

It won't change materially because if you look at the asset composition of the Canadian Bank, we are very, very strong on the mortgage side. So, it's a very slight pick-up, but it's -- I think it's a blip.

Okay. And just quickly, what was the year-over-year growth in auto lending?

In auto lending, we were close to 29%.

And is that the floor plan or consumer mostly?

No, no, that's consumer.

Consumer.

It's consumer wildly diversified both in terms of manufacturing type, in terms of geography, and in terms of our other loans.

Thank you.

Thanks.

Next question, please.

Your next question will come from John Aiken with Barclays. Please go ahead.

Good afternoon, thanks again. Dieter, your answer on the margins was quite fulsome, but there was one lever we didn't talk about when we were looking at where earnings growth can come from, and that was on the fee-based side. Are there any levers that you can pull within there, that may offset some of the margin compression that we have seen?

And also, as a follow-on to that, can you refresh my memory about the Q4 seasonality on the retail banking fees, and how much that actually helped the revenues sequentially in the quarter?

To answer your first question, we are always looking at how we enhance our yield on various products, and we are looking at our various products and the various regions where we can optimize our fees and structures.

And with regard to your second question, that would be in Chile, and the amount of impact on that would be CAD15 million-ish, sort of -- CAD15 million.

Great. Thank you.

Okay. For the second time, can I ask the remaining analysts asking questions to ask only one question?

So, next question, please.

Thank you. Your next question will come from Steve Theriault with Bank of America. Please go ahead.

I just wanted to follow up with Anatol. Anatol, you mentioned earlier very strong renewal rates on broker mortgages. I just want to make sure I understand how that works and what the implications are.

Should I be -- is this Scotiabank call centers reaching out to these mortgage holders on renewal, and you're getting better spreads and more branch-type spreads on renewal? Can you just explain a bit what you meant by that?

Yes, there are different ways in which our customers can renew. One is where we do reach out. I would say that is still a very low proportion of our renewals, but I believe that we will see that increasing over time.

The other, which is our preferred way, is that our customers who have a mortgage, have a relationship in the branch, and have other products and services. Are the margins higher or are they lower? It's not dependent on the channel.

What it is dependent on is, in terms of the type of mortgage that they take. So, for instance, over the last 18 months or so, we have seen a lot of variable rate mortgages that were taken two and three years ago where the margins were tighter, and they have renewed them at fixed-rate, longer-term mortgages where the market has been wider. So, that's been part of the lift that you've seen in terms of our margin. That's not sustainable going forward.

Thanks.

All right. We have time for one more question, please.

Thank you. Your last question will come from Mario Mendonca with TD Securities. Please go ahead.

Just a quick reminder: The CVA effect in Q1 2014 -- is that in the annual report? It's about 30 basis points from what I recall?

No, it's closer to 15 basis points.

15? And then the pension adjustment, is that 30?

No, it's come in a lot from last year, so it's less than 10 basis points for the pension.

So, 10 and 15. Thank you.

No, no, no -- less than 10.

Less than 10, and 15. Thank you.

All right. Thank you very much for calling in today, and we wish you all the best in the holiday season.

Thanks. Bye now.

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