Bank of Nova Scotia (BNS) 2014 Q3 法說會逐字稿

Good morning, and welcome to Scotiabank's 2014 third-quarter results presentation. My name is Sean McGuckin, Chief Financial Officer of the Bank. Presenting to you this morning is also Brian Porter, President and Chief Executive Officer; and Stephen Hart, Chief Risk Officer.

Following our comments, 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 Insurance, and Mike Durland from Global Banking and Markets. As with prior calls, we also have joining us 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. I will now turn the call over to Brian Porter.

Thank you, Sean, and good morning. Turning to slide 4, we had good results across our businesses this quarter.

Scotiabank earned net income of CAD2.4 billion, or CAD1.8 billion, excluding the CI gain. Adjusting for the gain and non-recurring items reported in Q3 2013, the Bank reported diluted earnings per share of CAD1.40, representing 9% growth from last year. Our third-quarter performance is a result of our portfolio of diversified businesses, and puts us in a strong position to deliver results within our medium-term objectives for the full year.

Our top line growth of 9% year-over-year, excluding the gain in non-recurring items reflect both good asset growth, improved net interest margins, and strong growth in non-interest revenue. Reported return on equity was 20.6%.

Our capital is in a very strong position, with a common equity Tier 1 ratio of 10.9%. This strong position has allowed us to repurchase 2 million shares during the quarter under our NCIB.

Our confidence in earnings growth allowed us to declare a CAD0.02 increase in our quarterly dividend, to CAD0.66 per common share. We are pleased with our results, and remain focused on executing on our strategies.

Now let me touch briefly on the priorities for each of the business lines. Firstly, in Canadian Banking, we had a good third quarter, with higher margins, double-digit growth in credit card and automotive lending volumes, and strong growth in fee and commission revenues. Increases in loan losses and expenses were mainly from higher business volumes.

We remain focused on executing on our strategy, further deepening relationships with our customers, improving their experience, and increasing the value we provide to them. We have solid plans in place to drive growth in commercial banking, accelerate credit card growth, expand Tangerine, and make it easier for existing and new customers to do business with us.

Turning to International Banking, our retail and commercial businesses in Latin America and Asia continued to perform well, with strong growth and volumes over the last year. Our business in the Caribbean and Central American region continues to experience slow growth, due to the challenging economic environment that persists.

Across the divisions, we continue to focus on streamlining our operating model, and improving the efficiency of our operations, to reduce structural costs. To drive the greatest growth, we remain focused on building scale in our highest priority markets of Mexico, Peru, Colombia and Chile.

In Global Wealth & Insurance, we had another good quarter, with both wealth and insurance businesses performing well. We also benefited from the gain resulting from the sale of the significant portion of our investment in CI financial.

Delivering on our priority of building scale in global asset management, we saw strong sales of ScotiaFunds, and continued improvement in dynamic sales performance. This led to strong growth in both AUM and AUA in Canada.

In our wealth distribution businesses, we are focused on acquiring and building loyal and profitable client relationships, by recruiting talent, improving advisor profitability, and expanding our high net worth capabilities here in Canada. These initiatives are producing positive results.

In ScotiaiTRADE, we introduced loyalty commission pricing to maintain our competitive position in the marketplace. And in insurance, we continue to increase our creditor insurance penetration in Canada, notwithstanding the slowdown in mortgage unit growth. On the international insurance side, we remain focused on leveraging the Bank's global distribution networks to expand in our key markets in Latin America.

In Global Banking and Markets, most of our businesses performed well, with some challenges in the fixed income area. Investment banking reported record results, with leadership roles on several successful transactions this quarter.

We continue to focus on strengthening relationships with our customers, and enhancing product capabilities to increase profitability. We also continue to make improvements to our coverage model, to both drive cross-sell and grow our business, in regions that capitalize on the Bank's existing geographic footprint.

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

Thanks, Brian. Slide 7 shows our key financial performance metrics for the quarter, excluding the notable gain this quarter of CAD555 million and last year's CAD90 million of nonrecurring items. As Brian mentioned, diluted earnings per share were CAD1.40, up 9% year-over-year on good results across our businesses.

Revenue growth continues to be strong at 9% year-over-year, with higher net interest income from both asset growth and improved net interest margins, partly reflecting maturity of higher cost funding. Stronger non-interest revenues, including higher underwriting, banking fees, and security gains, along with positive impact of foreign exchange, also contributed to the increase.

Expense growth was 7% year-over-year. However, adjusting for the impact of timing adjustments for stock-based compensation, Tangerine renaming costs, and FX translation, underlying expense growth was 4%. This increase was due mainly to higher volume-related expenses, higher business taxes, and investment in growth initiatives.

Expense management continues to be a major focus. Our productivity ratio in Q3 improved by 90 basis points from last year, to 52.9%. And on a year-to-date basis, the Bank has produced positive operating leverage of 2%.

Moving to capital on slide 8. The Bank continued to improve its strong, high-quality capital position this quarter, which puts us well above regulatory minimums, and positions us well for ongoing business expansion. Our Basel III common equity Tier 1 capital ratios was 10.9%, an increase of 110 basis points from the prior quarter.

The CI transaction added 116 basis points to common equity Tier 1 during the quarter. Our common equity Tier 1 risk weighted assets were up CAD8 billion or 3% from last quarter to CAD308 billion, due mostly to growth in personal and business lending, and the impacts on the CI transaction. This increase was partially offset by lower FX.

As Brian mentioned earlier, our very strong capital position, and the confidence in our ability to continue to generate solid, sustainable earnings growth, has allowed us to repurchase 2 million shares in Q3, and increase our quarterly dividend by CAD0.02. This strong capital position will allow us to support continued growth in our businesses.

Turning now to the business line results, beginning on slide 9. Canadian Banking had a good quarter with net income of CAD565 million, an increase of 3% year-over-year. Revenues were up 7%.

Loans increased 3% year-over-year with double-digit loan growth in personal loans and credit cards, which largely offset the Tangerine mortgage run-off. Adjusting for the Tangerine mortgage runoff, asset growth was 5%.

Deposits were up 3% year-over-year, with 6% growth in savings deposits, checking accounts, and small business, and commercial banking business operating accounts. This was partly offset by lower GICs and broker deposits. The net interest margin was up 5 basis points year-over-year, driven primarily by higher mortgage spreads and growth in credit card balances.

Provisions for credit losses were up CAD43 million year-over-year to CAD151 million. The higher level of provisions was up from a very low level in Q3 2013, and was driven in part by growth in higher-margin credit cards and auto loan volumes, and lower reversals of commercial provisions compared to last year.

Expenses increased 7% year-over-year, primarily due to business volume growth, including higher credit card transaction volumes, Tangerine brand transition costs, and business initiatives. Notwithstanding, Canadian Banking has delivered positive operating leverage of 1.3% year-to-date.

Turning to the next slide on International Banking. International Banking reported net income up 3% year-over-year, with strong contributions from Latin America and Asia being offset by weaker results in the Caribbean and Central America. These results reflect strong volume growth year-over-year, with loans and deposits increasing 11% and 12% respectively.

This was primarily driven by double-digit growth in Latin America, and good growth in Asia, which has moderated somewhat this quarter by the repositioning of the business from lower yield on trade finance assets to corporate customer business. Volumes in the Caribbean and Central America were essentially flat, due to the protracted weak economic environment.

Year-over-year, International Banking's net interest margin declined 9 basis points or 2%, primarily as a result of the lowering of interest rates in some of our key markets. This quarter's results also included lower security gains versus the prior period last year.

Provisions for credit losses increased by 11 basis points or CAD50 million year-over-year, with almost half being due to lower acquisition benefits. As well, there were higher retail provisions, primarily in the Caribbean and Central American region, while commercial provisions were higher, due mainly to the unusually low level last year.

We continue to have good expense control in all regions, well below the local inflation rates, when adjusting for higher stock-based compensation expenses and FX translation. This quarter's good expense management contributed to an improvement in the year-to-date operating leverage.

Turning to slide 11. Global Wealth and Insurance continued to perform well, with good earnings growth in Wealth, tempered somewhat by lower earnings growth in Insurance. Adjusting for the CI gain, lower contribution from CI, underlying earnings were up 6% year-over-year. Adjusted revenue growth was 10%.

In Wealth, excluding acquisitions, assets under management, and assets under administration grew 19% and 16% year-over-year respectively, driven by solid net sales and favorable market conditions. In Insurance, revenues were up 14% year-over-year, but this was mostly offset by higher claims experience and operating expenses.

Expenses in Global Wealth and Insurance were up 13% from the same quarter last year. The increase was due mainly to higher volume-related expenses, including performance-based compensation, along with higher stock-based compensation.

Looking at slide 12, Global Banking and Markets' net income was up 8% from last year to CAD408 million this quarter, with record results in investment banking, strong results in equities, and a positive impact from FX translation. Total revenues were up 11% compared to last year, with higher advisory and investment banking revenues, partly offset by lower trading revenues, and lower net interest income. The latter was primarily due to a 32 basis point reduction in the margin, mainly from lower loan origination fees and margins in the US.

Average corporate loans and acceptances were up 6% year-over-year, or CAD2.2 billion. Provisions for credit losses continued to be low, at just CAD1 million this quarter, as credit quality remains strong. Expenses were up 12% over last year, due mainly to higher stock-based and performance-related compensation, higher technology expenses, salaries and support costs.

I'll now turn to the other segment on slide 13, which incorporates the results of Group Treasury, smaller operating units, and certain corporate adjustments. The results include the net impact of asset liability management activities.

The other segment reported net income of CAD72 million this quarter, compared to a net loss of CAD37 million last year, and net income of CAD31 million in the prior quarter. The year-over-year change was due mainly to higher revenues from asset liability management activities, partly reflecting maturity of higher cost funding over the past year. As well, there were higher securities gains.

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

Thanks, Sean. Credit quality of our portfolios remains strong. Quarter-over-quarter, the overall loan loss ratio was up 1 basis point, sequentially to 37 basis points. This is well within our risk appetite, and our expectations for the quarter.

Canadian Banking loss rates were largely unchanged, with slightly higher retail losses reflecting the growth in the higher margin credit card and auto loan portfolios, which we had mentioned in previous quarters. International Banking loss rates were up from Q2 2014, reflecting higher loan losses in retail and commercial, in both Latin America and the Caribbean.

Global Banking and Markets credit quality continues to be strong, with a loss rate of only 1 basis point. Net formations of impaired loans in Q3 decreased to CAD477 million, driven largely by lower formations across all the business lines.

Market risk remains well-controlled. Our average one-day all-bank VAR was CAD21.5 million, up from CAD18.1 million in the prior quarter, with only one trading loss day reported.

Turning to slide 16, shows the trend in loss rates over the past five quarters for each of our businesses. As indicated, Canadian Banking loss rates were up 1 basis point quarter-over-quarter and 6 basis points year-over-year.

The increase from Q3 2013 reflects growth in the higher-margin credit cards and retail auto balances, as well as increased commercial provisions from an unusually low level last year. The Canadian Banking portfolio credit quality continues to be strong.

Loss rates in International were up 4 basis points quarter-over-quarter, and 11 basis points year-over-year, with the increase attributable to both retail and commercial portfolios. The increase from Q3 2013 was driven by higher retail provisions in Latin America, as well as the Caribbean and Central America.

Commercial provisions increased from an unusually low level last year, mainly in Latin America, most notably in Mexico, as well as in Colombia. Further, there were lower acquisition-related benefits in Colombia, which we expect will be fully utilized by the end of this year. This will result in an expected higher reported loss experience in 2015 for International Banking.

In Global Banking and Markets, credit quality remains strong, with 1 basis point loss experience, lower both quarter-over-quarter and year-over-year.

Slide 17 shows our Canadian Banking residential mortgage portfolio. Our total portfolio of residential retail mortgages is CAD189 billion. As of July 31, our portfolio was 89% free-hold and 11% condo, 52% of the portfolio insured, and 48% uninsured.

The uninsured portfolio has an average loan-to-value ratio of 55%, which is unchanged from last quarter. The loan-to-value and credit score mix on our condo portfolio continues to be in line with the portfolio at large.

The credit quality and performance of the residential 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 our origination channels have 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 rejoin the queue to allow everyone the opportunity to participate. Operator, can we have the first question on the phone, please?

Our first question comes from the line of Gabriel Dechaine of Canaccord Genuity. Please go ahead.

Just now that the CI stake has been sold, and that capital has been fully reflected in your updated capital target ratios, just wondering if you can give us a sense of where you're comfortable with the capital level being? Seems like the minimum target that the banks have been having is a moving target, keeps going higher. I'm just wondering where Scotia stands.

Gabriel, it's Brian Porter. I've been asked the question before, and we said that, as a bank, we'd be comfortable with a base of 9 with a buffer on top of that. As you know, we're running at 10.9 now.

We've got two transactions that are going to close, the Canadian Tire financial transaction will probably close in Q4, and Cencosud will close sometime in Q1. That's CAD800 million plus of acquisitions.

We continue, as you know the Bank well, we continue to be opportunistic, and look for transactions that are within our footprint, and on strategy. So that's where we are.

Okay. And just in the international business, Dieter, the NIM was up 5 basis points quarter-over-quarter, which is a bit surprising. I had anticipated a bit of weakness, because of the rate cut in Mexico. It's a pleasant surprise. I guess, to highlight some flexibility you have to manage the NIM?

Are you going to be replacing those lower yielding assets that you got rid of, and what's the time line there? I'm thinking specifically of something like the Banco -- the micro finance one in Mexico.

Generally, we've been talking about a NIM range of 3.90 to 4, and there's always quarterly variability in that number, and we feel comfortable in that range.

And then the replacement assets?

That's an ongoing business mix as we go forward. But you don't see a significant change going forward.

Okay. What's the outlook for that Credito Familiar?

Familiar is performing well. Their integration went well. Overall, it's not significant in the overall results of International.

Okay. Thanks.

Our next question is from Robert Sedran of CIBC. Please go ahead.

Just to continue along the international theme for a moment. If I look at the average balance sheet quarter-on-quarter, everything was more or less flat. Is some of that, Dieter, just related to this move from trade finance assets into more corporate business, or is there something else going on there, perhaps even currency?

What you see in this quarter, overall assets, if you take constant currency, would have been flat Q over Q. On a year-over-year basis, you would have seen them as being 8% year-over-year. And the key drivers on that is Latin America continues to perform well, with 14% year-over-year and 2% Q over Q.

But you also see a reflection of continuing softness in what I see as Central America and the Caribbean region, and that's being down, it was down this quarter, and it was down year-over-year. And I would see the Asia repositioning of our book as temporary. We see continued good growth in Asia as high single digit, with some temporary repositioning of our book in Asia.

Is it just, Dieter, that the trade finance business doesn't have enough margin in it to make it worthwhile, or is there something else that would --?

There's a combination. We see that business as having lots of variability, in terms of consistent performance. We see it as a lower margin business. But also, what you're seeing is some movement of our risk appetite on some of our counterparties.

Thank you.

The next question comes from the line of John Aiken of Barclays. Please go ahead.

Good morning. Stephen, the acquisition benefits in Colombia, can you let us know roughly what the impact was on the PCL ratios? I guess what I'm getting at is, how much of an impact should this have on the ratios going forward in 2015, all else being equal. In terms of Dieter's commentary on Rob's question, the softness in Central America, while that's impacting loan volumes, is that having any impact on the credit quality that you're seeing going forward?

On the first question, with Colombia's purchase price adjustment winding down, we expect on a go-forward basis that the NIAD per quarter will be affected by both CAD10 million to CAD15 million in 2015 and on.

With regard to Central America, while the volumes are soft, we're not really seeing any increase in loan losses in Central America. In the Caribbean, actually in some of the -- it's a mixed bag, because there's a lot of islands. Some are doing better than others.

Some have stabilized, and others continue to show some weakness. Especially probably Puerto Rico would be the one island right now, obviously, that's in the news.

Stephen, we're not seeing any impact on impairments and provisions, but have you increased your watch list or is there any heightened concern? Not that it's necessarily going to translate into additional losses, but is that rippling through in terms of the credit?

Certainly in Puerto Rico, because of the situation there with the government and the potential knock-off consequences, we're looking specifically there. On the overall portfolio basis, our watch list is actually reducing year-over-year.

Fantastic.

I'll also add, it's Dieter here. Our retail provisions are within our plan, and within strategy.

Great. Thank you.

Next question from the line of Peter Routledge of National Bank Financial. Please go ahead.

I'm going to stick with International Banking. Thanks for the color on the Asian trade finance, and issues in the Caribbean. I'm kind of surprised we didn't see an offset elsewhere in Peru, Colombia, Chile, and Mexico.

Why were commercial -- why wasn't the growth elsewhere in that footprint enough to offset the headwinds you're getting in Asia? Was it weak growth, say, in South America? Or was it the Asian falloff was just so dramatic, that it obscured stronger growth in those regions?

Let me just put the portfolio again in some perspective. The LatAm assets are approximately 55%, and with the Asia being -- Asia and Central America and Caribbean split evenly through the remaining portion. What you saw this quarter was, again, continuing softness in the Caribbean, and in Puerto Rico, in the English Caribbean.

You also saw some moderation in the Latin American economies. That's been well in the media, well-scripted in the media. You see some softening in terms of moderation of the economy in Chile, some softening in terms of the GDP numbers in Peru, and you saw some continuing, I would say, moderation of performance in Mexico, with Colombia being the standout.

What's happening is what we view is different, by country. What you saw in Chile is continued reluctance by the consumer to spend and companies to invest, while Michelle Bachelet brings in various reforms in place. With that coming to a close, we see some uptick in the economy continuing to have a huge significant input or export to China in terms of copper, we see that continuing, being such a low cost producer.

In Peru, you had some softening in the economy, as mining investment curtailed back a little bit, some impact of the weather, and government wasn't spending. What we see there going forward, quite frankly, and you saw that article in The Financial Times today, where Peru will become the second-largest copper producer in the world, as some of the large mines come on place and the government starts to spend in 2015, prospects for Peru look good.

Colombia was a shining light this quarter, grew over 6%. That's a good news story, as the election issues and the standoff with investment and the consumer stopped this quarter.

And in Mexico, quite frankly, it's continued waiting for the reforms to take place, and put in place. You saw the energy platforms being put into new legislation this quarter. And then the prospects for Mexico continue to look very strong, as the telecom, energy, and its closeness to the US offers some good prospects in Q1 and Q2 of next year.

You've had some -- you made some progress as you pointed out, on expenses in International Banking. What sort of -- if we get more headwinds in South America and Central America than we anticipate, how much quicker, how much more aggressive can you be on expenses?

Peter, you've seen us be able to dial down on our variable expenses as the economy moves up or down. We don't operate our expense budgets on a quarterly basis. There's timing in our numbers.

So this quarter, you would have seen some lumpiness pertaining to stock-based comp and timing on some of the pension adjustments in Uruguay, and vacation accruals in Chile. Quite frankly, our underlying expenses are operating at approximately the inflation rate and our other initiatives we have taken place in terms of consolidating our data centers, consolidating contact centers, those are medium to longer-term initiatives that are taking place on the structural side.

If you would see, to answer your question clearly and directly, if you were to see continued dial back, we would dial back our variable expenses, both from advertising and salaries, to take place, to be consistent with our loan volumes and our deposit volumes.

Thanks. Very helpful, thank you.

Our next question comes from the line of Mario Mendonca of TD Securities. Please go ahead.

You covered most of what we were going through. Brian, if we could go back to the capital question. So we saw the normal course issuer bid activated this quarter.

How do you view that? Is this an ongoing thing now? It was a little uncharacteristic for Scotia. Do you view this as an ongoing tool, or was this more of an a one-off?

It's something you want to have in the toolbox, Mario, and we have a buyback of up to 12 million shares. We've executed on 2 million of those. I would view it as something in the tool kit.

And if we go to stock-based comp, a more specific question. CAD64 million this quarter, CAD20 million last year, in the same quarter.

When you look at that, the seasonality in stock-based comp, you'd normally expect it to be fairly high in the first quarter, and then taper off. Two parts to this question. Why so high this quarter, and do you expect it to follow the normal pattern going forward?

We would view this quarter, Mario, a bit unusually high. What happened this quarter is, because of the stronger run-up in our stock price over the last quarter and a bit, that increased our performance fact on the PSUs, whereas last year, we reduced the performance factor. So you have a year-over-year swing.

Last year was negative. This year was positive. As well, as more units continue to come on in the vested period, with the run-up in the stock price, you've got a higher catch-up with the new vested amounts. So this would be more of an unusual quarter compared to last year.

And assuming just a normal performance in the stock price, you'd still expect going forward the Q1 to be the high watermark and then decline from there?

Absolutely.

Thank you.

The next question comes from the line of Darko Mihelic of RBC Capital Markets. Please go ahead.

Question on the Canadian Banking. The Tangerine branch transition costs, were they material, and is the transition over?

Two things. The first part in terms of the third quarter, our total charge during the quarter was about CAD10 million that we put through, and it's mostly over. There's still a small amount that we've got in Q4, that's the tail end of the rebranding.

Thank you. And another question on card revenues. Could you give an indication of how much of those revenues are annual fees, and how much of that would be related to interchange?

Annual fees are relatively low. The income that we have is interchange fees associated with the cards, but not so much the annual fees.

Much of the growth that we've had over the course of the last year has been where the first year's fee has been waived. So the annual fee is a relatively small amount here.

Okay. That's helpful. Thank you.

Your next question comes from the line of Sohrab Movahedi of BMO Capital Markets. Please go ahead.

Dieter, I just -- sorry to go back to you, but maybe the best way I wanted to ask you the question on international is, are you happy with the progress the Bank has been making so far this year in International, relative to what you had set out for us as the outlook for international? For example, year-to-date operating leverage is a minor negative.

Are we going to get positive operating leverage this year? And margins are a little bit better, but volumes are slowing a little bit. I'm just trying to get a sense of where you think we are on the continuum, relative to the expectations you had set out for us.

I take it you're talking about the expense side generally?

Sure.

Maybe I'll start out with that. We look at, compared to last year, we generated positive operating leverage of 0.8% when you exclude the Q3 2013 notable items. That relates to the T Bank Life gain that we recorded in the Scotia Corp revenue line and the charge we took on Uruguay and Puerto Rico.

If you look at it really over a year-over-year, our leverage continues to -- operating leverage continues to improve. We improved 70 basis points and we're slightly negative. Going next year, in anticipation of your question, by the end of the year we'd be flat to slightly negative.

Underlying what we're doing, we're continuing to realign our distribution network in Mexico, Chile and in the Caribbean. We continue to work on what I consider to be near-term expense initiatives that we want to see take hold. And our expenses, quite frankly, while generating at or below the inflation rate, there's more work to be done and there's a framework and a program in place to do that, that takes place in all the geographies across the country.

In terms of volumes overall, if you look at the underlying volumes in Asia, we continue to see high single digit growth in Asia on a year-over-year basis, and continue to see that continuing going forward. We also see continuing volumes in Latin America on the medium to longer term, and we see this temporary moderation as just that, as temporary. I believe that we have fundamentally very sound economies, sound demographics, and a good business environment to take advantage of an uptick, and so we are very confident that we have our investment thesis correct.

And look, the Caribbean continues to be a challenge. We had some significant paydowns of some structural loans, infrastructure loans in Panama and El Salvador. In the normal course of business, they're all good, that's what we set out to do, they're paid on time that we expected.

Puerto Rico will continue to be a challenge for us, as will the English Caribbean. We're going to have some lumpiness, in terms of our asset formations there.

And credit costs are going to start catching up with you there a little bit as well, no, in LatAm?

What you're going to see is some of the benefit we had of the PPE adjustments we had on Colpatria. You're going to see some catch-up going forward, or impact as Stephen Hart mentioned in his earlier comment, in 2015.

But aside from that, the underlying credit quality of the -- just the volume growth is going to start hitting you from behind.

What you're going to see, some natural increase in your retail PCLs, and in commercial, as their volumes continue to increase at double-digit levels in the LatAm markets.

Thank you.

Our next question comes from Doug Young of Desjardins Capital Markets. Please go ahead.

Just the first question on the Global Wealth & Insurance, I think you mentioned in your prepared remarks, if you exclude the gain from CI, earnings were CAD312 million, which sequentially was down, which was surprising. So I'm just wondering, and I think you mentioned it was more on the Insurance side than on the Wealth side, and can you break out the earnings between the two, and can you talk a bit about what the driver of the weakness at that division?

Doug, it's Chris Hodgson. I think it's important, when you look at the wealth numbers, we had a stated number of CAD312 million. But on a normalized basis, where we've been showing our CI contributions in the past, that would have put us at CAD338 million on the quarter, which is entirely in line with all of the estimates on the Street.

I think in terms of the business overall, expenses were a little bit higher on the quarter. We were 13%, with some one-time items, that takes us down to about 11%. And that is spread between volume-related, performance-based, and initiatives.

We had revenue growth of around 10% in the business line. Most important thing to think about, I think, for this business going forward, though, is the growth in assets under management and assets under administration, and the growth in those areas, which include acquisitions, are 22% in AUM and 17% in AUA. So strong mutual fund revenues, largely coming from ScotiaFunds.

We have moderated the redemption side on dynamics, so that should translate well into the future. Our brokerage revenue and private client revenues were higher.

On Insurance, the Insurance business in international has been performing well in some of the key growth markets, particularly Peru, Colombia, and Mexico. And in the Canadian insurance markets, that has slowed down a bit with the slowdown in mortgage volumes and as indicated in some of Sean's comments, there were some claims on the insurance side.

In the international side, there was $6.5 million that was claimed in the international, but we only allow for CAD2.5 million of that, because we actually then reinsure that and push that bucket back into the reinsurers. I think, from a GWI perspective, the results were in line, and the growth into the future's certainly going to come from the asset management side, certainly.

Just to clarify. You said $6.5 million of claims in international related to --

That was Chile.

Okay.

We didn't -- there was $6.5 million in claims made against that business in the US. We have a CAD2.5 million cap, and then the balance of that goes to the reinsurers.

Okay. And then just on the regulatory capital ratio, I think there was some -- correct me if I'm wrong. I skimmed through this quickly.

But there was model refinements in quarter, and I think that had an impact on your risk weighted assets of CAD1.3 billion. If I'm correct, what was that related to specifically, from a business book perspective?

That was primarily our retail portfolio. On an ongoing regular basis, we update our risk parameters, and this quarter was the time to update the risk parameters on the retail. We're not expecting anything significant in terms of model enhancements going forward.

Okay. Great. Thank you.

Your next question comes from the line of Meny Grauman of Cormark Securities. Please go ahead.

Question on Canadian Banking, when you look at the mortgage growth on a year-over-year basis, excluding Tangerine, is that a number that concerns you, or is it the case that when you look out into the future, is that a number that you'd expect to remain fairly stable, or is it on the low side this quarter?

Meny, Anatol here. The 3% growth that we've had in the mortgage business is in line with where the market is growing. We had hoped that the market would grow a little bit faster than what it has. As you know, it started slow, and in the last couple of months, it's picked up.

But I think, looking forward, we can expect this type of growth. All three of our channels are doing very well in terms of distribution. So I think in a slower growth mortgage market that we'll be facing this year, most likely also next year, I think that's the type of growth we can expect.

Having said that, where you see that we picked up in terms of growth is on other personal loans, both secured, unsecured, and then as Brian mentioned in his comments, and I think Sean did as well, in the auto business and the credit card. So what we're seeing is some good growth in other areas of the retail bank that are picking up.

And then just turning to the International side, you talked about regulatory changes in Mexico, and quite wide-sweeping. I'm wondering, when you analyze those changes, are there any facets of those changes that are particularly relevant for your operations in Mexico, and any changes that present a risk or are concerning for you?

On the overall reforms, on balance they are more positive than negative for us, as an organization. Generally, as it relates to some of the reforms related to the energy business, and reforms related to the telecom business.

There was some temporary setbacks, as you know, on the tax reform that negated spending and investments, and some reforms on the way government deals with some of its expenditures. On balance, they tend to have a positive impact, not a negative.

Thank you very much.

Your next question comes from the line of Derek De Vries of UBS. Please go ahead.

I just want to follow up a little bit on a couple things that have been touched on. On the capital side, you talked about 5 basis points for model refinements on the retail side.

One of your competitors reported the update from their corporate. It was a much, much larger adjustment. Do you have a similar adjustment on your corporate book coming, or nothing on the corporate side?

Again, there's nothing special on the corporate side. As I mentioned, every year we update our parameters, updating the historical profile of our parameters for every new year that we add. There's nothing significant coming on our sight lines at this point.

It was just a roll forward. There was also an adjustment on the capital ratio related to the [off-sea] capital adequacy requirements. Apologies if I should know this. The 15 basis points that came off there, can you just explain what that was related to?

I'm not sure what the 15 basis points you referred to.

You gave a CAD500 million figure coming off of the capital. You said revisions to off-sea's capital adequacy requirements guideline for collective allowance affected this quarter reduced total capital by CAD500 million.

That's just the way the -- that doesn't affect common equity Tier 1. Just affects total capital. (multiple speakers).

And then just back to Mexico. You talked about the changes there. There was also like a competition paper that came out a few months ago.

It was only published in Spanish, if I'm not mistaken. Does that create an opportunity for you? Is there going to be some restrictions put on the two big players in Mexico, so that you could perhaps take market share in the cards business, or if you'd comment on that.

There's always government. The general view there is they want more granularity and local ownership of share holdings within the banks. As that plays itself out, there will be opportunity for us to expand our footprint.

That's very helpful. Appreciate it.

Our next question comes from the line of John Aiken of Barclays. Please go ahead.

Thank you. My follow-up has been asked and answered.

Our next question comes from the line of Peter Routledge of National Bank Financial. Please go ahead.

Question for Steve Hart. Steve, you mentioned Puerto Rico as an area of focus, and leaving aside the whole issue with PREPA and the public corporations, you've got, I think, about a CAD2.9 billion real estate secured portfolio. How concerned should we be for that, given, it looks to me anyway, like unemployment's rising in Puerto Rico right now.

As you know, almost half of that portfolio came to us from RG, and is covered by the FDIC insurance. And we've been working down on the corporate real estate side. We've been working that down over the last few years. So we actually have that down to a fairly small position now.

The mortgage book in Puerto Rico, actually most of the mortgages that we put on the book in Puerto Rico, we then, similar to what's done in the States, we ended up selling them off to Fannie and Freddie. We don't actually hold much of a mortgage portfolio book at a retail level.

And you're reserving -- you're not anticipating a real uptick in provisions?

No. We've had a couple, we've had some long-term workouts in Puerto Rico for a couple of hotels, a couple of real estate positions for a long time. It does get lumpy, but we have actually written off and sold a couple of properties, recently.

So we are seeing some -- notwithstanding the economy is off, people are looking at it as an opportunity to invest at the same time. So we are seeing new money come into the country.

Okay. Thank you.

(Operator Instructions)

Your next question comes from the line of Darko Mihelic of RBC Capital Markets. Please go ahead.

Thank you for the opportunity to ask another question. Question for Sean. Maybe you can help me with the modeling here of the other segment.

As I see on page 13, and also on the supplemental, you mentioned, or you highlight that you have higher revenues from asset liability management, as well as higher net gains on investment securities. So a couple of questions come to mind.

With respect to higher revenues from asset liability, I'm assuming that's in the net interest income line. That's been relatively stable for the last two quarters.

The question is, is that about an appropriate run rate? And who what would be an appropriate run rate for the gains on investment securities?

That's hard to give run rate for securities. We've had a good, strong year this year. The equity markets have been quite strong.

Securities going forward, this quarter we had a large portion of the [old] Bank, security gains were in the other segment this quarter, versus some of the other segments. So a run rate, I'm loath to give run rate on security gains. They were elevated this year. We'll have to see how they -- if the markets continue to be strong next year, then we'll see continued strong gains next year.

In terms of the net interest income, you're right, the last couple quarters, it has moderated. Maybe it's slightly elevated, but these levels is what we generally expect to see, at least into next quarter.

And so maybe just then to wrap it up, it's now making money, and it's consistently made money over the last four quarters. Is that the expectation going forward? And/or would you be tempted to perhaps alter some of the --

Transfer pricing?

Some of the transfer pricing or allocations?

We will look at that. We've had some higher GAAP profits. We want to make sure we're allocating that properly.

But this segment, again, there's a few ins and outs that go into the segment. It's really hard to get a number. But it would generally run maybe slightly positive, to flat, to slightly negative going forward.

Okay. Appreciate the commentary. Thank you.

Our next question comes from the line of Robert Sedran of CIBC. Please go ahead.

Sean, just a quick follow-up on that securities gain question. So if and when any action is taken, once you're off restriction on the rest of the CI stake, will it flow through the securities gain line, or will it show somewhere else?

We have recorded the bulk of the value of that unsold portion, due the accounting requirements. So any remaining piece would flow through the securities gain line.

Okay. Thank you.

Our next question comes from the line of Mario Mendonca of TD Securities. Please go ahead.

I have a follow-up question on the ALM. That statement, asset liability management, that's fairly broad. Is there any way you could narrow that down, like what specifically, what activities specifically would have been -- would have driven the better results this quarter?

Again, we've signaled throughout the year that, because the way we do our transfer pricing, some of the older, long-term maturity -- sorry, long-term debt that is maturing this year, at a higher cost, that residue stays in the other segment. So that's what's causing the high year-over-year comparison. But compared to Q2, our net interest income is up CAD3 million in that category.

So again, a large part of the better performance, compared to what we've seen in the past is again the runoff of this higher cost of funding, where the benefit stays in the other segment.

So absent any change in transfer funding, there's no reason why that should decline then? Or transfer pricing, there's no reason why that would decline?

True. There's always other costs that may hit that line. If our liquidity costs go up for some reason, that resides there.

The overall GAAP profits, depending on how we GAAP the balance sheet, some of that stays there. Again, it will move around, Mario. It's not a really fixed number.

Okay. Then just a follow-up for Stephen Hart. You referred to higher PCLs in the international segment, driving NAIA lower by CAD10 million to CAD15 million relative -- in 2015, relative to 2014. Is that the right way to interpret that? Like if you just gross that CAD10 million to CAD15 million up to a pretax number, that would be the extent to which you'd expect PCLs to go up, absent any growth in the portfolio?

As it relates to Colombia, yes.

Don't forget, we own 51%. Once you get to the top line provision for credit loss, it's 100%, but our share's only 51% from a bottom line standpoint.

Thank you.

Our next question comes from the line of Sohrab Movahedi of BMO Capital Markets. Please go ahead.

Just a quick one for Anatol. The productivity ratio in your segment has been tracking well, but the mix of business is changing now, with more of that higher risk -- arguably higher risk stuff coming through, but higher margin stuff. Any thoughts, Anatol, as to what the right productivity ratio is for your segment given the mix shift that's happening in the next year?

You'll recall when we talked at the investor conference that we had a number of months ago, we're now in the low 50%s, and we hope to get into the high 40%s over the next three years. That's very much in line.

We've got a number of initiatives, one on the cost reduction and becoming more effective, more efficient and serving our customers better, while at the same time investing. So you should see us, in terms of productivity, coming down by 200 basis points or so.

Okay. Thank you.

That's over a three year period.

Our next question comes from the line of Steve Theriault of Bank of America. Please go ahead.

First, a question for Mike Durland. Equity underwriting looked very strong, looks like a record quarter. But didn't look like a record quarter in the lead tables to me, particularly equity underwriting of the highest margin of the three buckets they tend to look at, was down year on year. Were there any timing issues or anything clouding that number, any color you can give me there would be appreciated.

It was a very robust quarter. Obviously, we had, CI transaction was in the quarter. But it was also spread across some of the energy names. I haven't tied it back to the lead tables, but it was a strong underwriting quarter.

I may come back then. If I could just ask a follow-up on the buyback. The regulatory disclosures that I look at didn't actually flag that 2 million shares for the quarter. I was just wondering if there was anything unusual, maybe using derivatives in the quarter as an alternative way to buy back stock? Anything unusual you could flag for us?

Just the old fashioned buyback. We were in the markets I think starting late June, buying back a small amount every day.

Okay. Thank you.

Gentlemen, there are no further questions at this time. I would like to hand the call back over to Mr. McGuckin for closing remarks.

Thank you everyone for participating in our conference call today. We do look forward to talking to you next quarter. Have a great day.

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your lines, and have a great day.