Bank of Nova Scotia (BNS) 2014 Q4 法說會逐字稿

Good morning, and welcome to Scotiabank's 2014 fourth-quarter results presentation. I'm Peter Slan with Scotiabank Investor Relations. Presenting to you this morning is Brian Porter, President and Chief Executive Officer; Sean McGuckin, Chief Financial 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 today to address your questions are Scotiabank's business line group heads: Anatol von Hahn from Canadian Banking, Dieter Jentsch from International Banking, and Mike Durland from Global Banking and Markets. We are also joined by James O'Sullivan, Executive Vice President of Global Wealth Management.

Before we begin, I would like to refer you to slide 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, Peter, and good morning. Turning to slide 4, we had good results across our businesses in FY14. Scotiabank earned net income of CAD7.3 billion for the year, or CAD7 billion, excluding notable items.

On an adjusted basis, the Bank reported diluted EPS of CAD5.43 per share, representing growth of 8% for 2013. Our performance in 2014 reflects good results from our portfolio of diversified businesses. Return on equity was 16.1%, or 15.5% excluding notable items. Our top line adjusted revenue growth of 9% year-over-year reflects good asset growth, improved net margins, and strong growth in non-interest revenue.

Our capital levels are strong, with a common equity Tier 1 ratio of 10.8%. From this position of strength, we repurchased a total of 4.5 million common shares during the year, under our buyback program. Our strong earnings growth helped to generate significant capital, allowing us to increase our quarterly dividend twice this year, for a total increase of 7%. We are pleased with our results, and remain confident we have the right strategies in place.

Turning to slide 5. Adjusting for notable items, our 2014 results were within the ranges of our medium-term financial objectives. In the appendix on slide 22, we outline our notable items and include a reconciliation to our pre-announcement on November 4.

Our adjusted earnings per share grew by 8%, within our target range of 5% to 10%. Our return on equity adjusted for notable items remains strong, at 15.5%, within the target range of 15% to 18%. Our continued focus on efficiency resulted in positive operating leverage of 2% on an adjusted basis.

As I mentioned earlier, our capital position continues to be strong, with an all-in Basel III Common Equity Tier 1 ratio of 10.8%. Our medium-term financial objectives remain unchanged. We do not expect these objectives to change every year; however, we will continue to monitor our performance against these metrics every year. In the medium term, we continue to target EPS growth of 5% to 10%, return on equity of 15% to 18%, and positive operating leverage, while maintaining strong capital ratios.

2014 was a year of transition for the Bank, and we nevertheless achieved solid results through well-balanced and well-diversified contributions from each of our business lines. Our medium-term objectives remain prudent, and consistent growth in the context of a challenging operating environment, and we have targeted high levels of profitability and efficiency. I will provide additional color on our outlook for 2015 shortly, but I note that we expect the first half of the year to look fairly similar to our last few quarters, with stronger growth resuming in the second half of the year, as economic fundamentals improve, primarily in Latin America, and we begin to realize the benefits from some of our recent initiatives.

We are focused on three key priorities to deliver consistent and predictable earnings. One, increasing our focus on our customers. Two, investing in our leadership. And three, focusing on achieving long-term efficiency gains by investing in initiatives that enable a low cost by design approach to reduce structural costs.

By executing on these priorities, we are confident that we will be able to achieve our medium term financial objectives. I will now pass the call over to Sean.

Thanks, Brian, and good morning. Slide 7 shows our diluted earnings per share of CAD5.43, which has been adjusted for notable items, which includes the gain in Q3.

In Q4, on an aftertax basis, we had restructuring charges of CAD110 million. The revaluation of unremitted dividends from our investment in Venezuela of CAD47 million, accelerated loan write-offs related to unsecured Canadian bankrupt retail customers of CAD46 million, a funding valuation adjustment of CAD22 million, and legal provisions of CAD40 million. In total, the aftertax notable items impact was CAD265 million or CAD0.22 per share. Adjusting for notable items, we achieved solid underlying EPS growth of 8% for the year.

Slide 8 shows our key financial performance metrics for the quarter. Excluding notable items, which includes the gain last quarter of CAD555 million, this quarter's notable items of CAD265 million, and last year's CAD90 million of notable items. Diluted earnings per share were CAD1.32, up 2% year-over-year on good results across our businesses, which was dampened by the additional loan losses this quarter. Excluding notable items, underlying revenue growth continues to be strong at 8% year-over-year, with higher net interest income from both asset growth, and improved net interest margins.

Stronger non-interest revenues, including higher underwriting, banking fees, and securities gains, along with the positive impact of foreign exchange, also contributed to the increase. Excluding notable items, expense growth was up 6% year-over-year; however, adjusting for the impact of foreign currency translation, underlying expense growth was well contained at 4%. This increase was due mainly to higher volume-related expenses, higher pension and benefit costs, and investment in growth initiatives.

Expense discipline continues to be a major focus. Our productivity ratio in Q4 improved by 110 basis points from last year to 53.3%. For FY14, the Bank delivered positive operating leverage of 2%.

Moving to capital on slide 9. The Bank continued to have a strong capital position this quarter, which puts us well above regulatory minimums, and positions us well for ongoing business expansion, both organically and through acquisitions. Our Basel III Common Equity Tier 1 capital ratio was 10.8%, down 10 basis points from Q3. During the quarter, the investment in Canadian Tire Financial Services consumed approximately 20 basis points.

As Brian mentioned earlier, our very strong capital position and the confidence in our ability to continue to generate predictable, sustainable earnings growth, has allowed us to repurchase 4.5 million shares in 2014 and increase our dividends paid by 7%. Risk-weighted assets were up CAD4.7 billion or 2% from last quarter to CAD312 billion, due mostly to growth in retail lending, as well as foreign currency translation.

Turning now to the business line results, beginning on slide 10. Canadian Banking had a solid quarter, with net income of CAD556 million, in line with Q4 last year, on an adjusted basis. Revenues were up 6%.

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

Deposits were up 2% year-over-year, with 6% growth in retail core deposits. The net interest margin was up 2 basis points year-over-year, driven primarily by higher mortgage spreads, and growth in credit card balances, partly offset by lower spreads on deposits.

Provisions for credit losses were up CAD120 million year-over-year to CAD236 million. Adjusting for the CAD62 million for the accelerated write-offs for bankrupt retail accounts, the underlying increase year-over-year was CAD58 million, to CAD174 million. The underlying increase is primarily due to loss estimate changes, and growth in higher margin credit cards and auto loan volumes.

Expenses increased 4% year-over-year, primarily due to business volume growth, including higher credit card transactions and automotive loan volumes. Overall, Canadian Banking delivered adjusted positive operating leverage of 1.3% for the full year.

Turning to the next slide, on International Banking, adjusted net income was down 16% year-over-year. Strong contributions from Asia were offset by weaker results in Latin America, and the Caribbean and Central America. Lower contributions from associated corporations also contributed to this result.

This quarter saw strong volume growth year-over-year, with loans and deposits increasing 8% and 11% respectively. This was primarily driven by double-digit growth in Latin America, offset by lower volumes in Asia, as the business continues to reposition from lower-yielding trade finance assets to higher-margin corporate and commercial customer business. Volumes in the Caribbean and Central America were slightly lower, due to the protracted weak economic environment.

Year-over-year, International Banking's net interest margin increased 13 basis points or 3%, primarily as a result of asset mix changes to higher-yielding retail loans, offset slightly by lower interest rates in some of our key markets. Compared to last quarter, the margin declined slightly, primarily reflective of the continued pressure on margins in Latin America from recent interest rate cuts.

The provision for credit losses increased by 45 basis points or CAD131 million year-over-year. The increase was mainly due to higher provisions in the Caribbean, related primarily to three existing net impaired loans in the hospitality portfolio we pre-announced on November 4. As well, there are higher retail provisions, primarily in Mexico and the Caribbean region. Adjusting for restructuring costs, the underlying expenses were up 8%, due to inflationary increases, negative foreign currency translation, higher expense recoveries last year, and initiatives to support business growth.

Turning now to slide 12, global wealth and insurance continued to perform well, with strong earnings growth. Adjusting for the CAD8 million restructuring charge and the lower contribution from CI, underlying earnings were up 20% year-over-year. Adjusted revenue growth was 15%.

In wealth, both assets under management and assets under administration grew 13% year-over-year, driven by solid net sales, and favorable market conditions. Expenses in Global Wealth and Insurance were up 12% year-over-year. The increase was due mainly to higher volume-related expenses and performance-based compensation.

Looking at slide 13, global banking and markets net income was up 10% from last year to CAD370 million this quarter, on an adjusted basis, due to strong results in investment banking and equity. Adjusting for notable items, total revenues were up 9% compared to last year, with higher advisory and investment banking revenues, partly offset by lower fixed income revenues.

Average corporate loans and acceptances were up 12% year-over-year, or CAD4.6 billion. Provisions for credit losses were nil this quarter, as credit quality remained strong. Adjusting for notable items, expenses were up 2% over last year, due mainly to higher share-based payments, technology expenses, salaries, and support costs.

I'll now turn to the other segment on slide 14, which incorporates the results of Group Treasury, smaller operating units, and certain corporate adjustments. The results include the net impact of asset and liability management activities. Adjusting for the notable CAD22 million restructuring charge and CAD40 million of legal provisions, the other segment reported an underlying net income of CAD47 million this quarter, compared to net income of CAD16 million last year, and CAD72 million in the prior quarter. The year-over-year change was due mainly to higher revenues, asset and liability management activities, partly reflecting maturity of higher-cost funding over the past year, as well as higher securities gains.

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

Thanks, Sean, and good morning. The underlying credit quality of our portfolios remain strong. Quarter-over-quarter, the overall loan loss ratio was up 16 basis points to 53 basis points. However, adjusting for these previously advised notable items, the ratio remained flat quarter-over-quarter at 37.

The Canadian Banking underlying loss rates were largely unchanged, with slightly higher retail losses reflecting growth in the higher-margin credit cards and the auto loans. International Banking's underlying loss rates were up 5 basis points quarter-over-quarter, reflecting higher retail loan losses in Mexico and the Caribbean, and also the previously-announced higher commercial loan losses in the Caribbean. Global banking and markets' credit quality was strong, with a loss rate of zero.

We remain comfortable with our exposure to the oil and gas sector, which has been a recent area of market interest. Our loan portfolio, which includes upstream, midstream, downstream as well as the service sectors has been stable over the last several quarters, is less than 3% of our total loan portfolio, and it remains of high quality. We run stress tests often, and update our market pricing assumptions regularly. At present the effective oil price assumption used in our borrowing base calculations is below the current market values.

Our business model in the energy sector has proven itself to be very stable throughout the economic cycles. When oil prices were in the CAD40 range back in 2009, our loan losses were zero. Finally, we expect that lower oil prices will be a net positive to many other sectors of our overall loan book, as the other industries and consumers stand to benefit from the lower costs.

Net new formations of impaired loans in Q4 increased to CAD816 million, largely due to one commercial account in Puerto Rico. Our average one-day all-bank VAR was CAD23.8 million, up from CAD21.5 million in the prior quarter, with seven trading loss days in the quarter. During this quarter, the markets were significantly volatile, which resulted in a higher number of trading loss days. We are still confident that market risk remains well-controlled at the Bank.

Slide 17 shows the trend in loss rates over the past five quarters for each of our businesses, and indicates that on an adjusted basis, our loss performance is consistent with the prior quarters, and well within our risk appetite. And with that, I'll now turn the call back to Brian.

Thanks, Stephen. I would like to comment briefly on each business line's performance this past year, and summarize our 2015 outlook for each business, and then I'll comment on the all-Bank outlook for the year ahead.

Canadian Banking had a solid year overall, with higher margins, double-digit growth in credit card and automotive lending volumes, and strong growth in fees and commission revenues. We are confident with our focus on partnerships, including the recent closing of the Canadian Tire Financial Services transaction, and the ongoing success of our American Express offering. For 2015, strong volume growth is expected in higher-margin credit cards, commercial, and auto loans.

We expect to see further expansion in the net interest income and wealth management and other fee income, offset by higher PCLs, reflecting this modest adjustment in our asset mix. Importantly, we see the overall margin growing faster than the loan loss ratio, and we continue to grow our business on a risk-adjusted basis, in a manner that is prudent and designed to serve our customers better. And we expect these achievements despite some competitive pressures in auto, the commercial lending business, and deposits.

International Banking had a more challenging year in 2014. Despite strong asset growth in our retail and commercial businesses in Latin America and Asia, there were a number of offsets. In particular, we witnessed a combination of interest rate cuts and higher regulatory costs in Latin America, which reduced our earnings by over CAD100 million.

We also had higher provisions for credit losses, due to the write-offs we took in Puerto Rico and the Caribbean hospitality portfolio, as well as the runoff of the Colpatria credit mark. Finally, we faced some challenges with two of our associated companies in Venezuela and Thailand. In total, these headwinds reduced International Banking's earnings by approximately CAD250 million in 2014.

Looking ahead to 2015, we expect some of the current headwinds to persist through the first half of the year. We expect earnings growth in the International Bank to begin the year modestly, and then improve in the second half of 2015. These improvements will be driven by economic growth, and certain market reforms in Latin America, leading to more favorable business conditions.

In Global Banking and Markets, most of our businesses performed well in 2014, with some challenges in the fixed income business. Investment banking reported strong results with leading roles on several important transactions this year.

In 2015, our focus is on both corporate lending and our ScotiaMocatta lending business. We expect our corporate loan book to provide stable earnings growth, with stable margins, and low loan losses. While we expect some challenges in our fixed income businesses, we expect modestly higher trading revenues in 2015.

Turning to slide 20, we are keeping our medium-term financial objectives unchanged. We expect earnings growth to moderate in 2015, and may be at or near the low end of the range, as we expect certain headwinds, including the timing of the reinvestment of our surplus capital, and the rising credit costs from Colombia I mentioned earlier. However, on an underlying basis, we expect to be fully within the range of our objectives.

While aggregate loan losses are expected to be higher in 2015, we do not expect our PCL ratio to be as high as the elevated levels we saw this quarter. In 2015, we will continue investing in technology improvements, such as our recently-announced commitment to install a new core banking platform in Mexico, as well as other efficiency initiatives, in order to make it easier for our customers to do business with us, an improved customer response time and the overall customer experience.

The restructuring initiatives that we announced last month are expected to generate ongoing operational efficiencies, most of which will begin in the latter part of 2015. We are confident that the optimization of our international branch network, the automation and centralization of the middle office in Canadian Banking, and the streamlining of certain capital markets businesses will position us to serve our customers better and faster, with operations that are low-cost by design.

2014 was a year of transition. We have simplified and realigned our businesses to be closer to our customers, our strategy is crystal clear, and we look forward to 2015. We remain confident that the Bank is on the right track, and well-positioned to create substantial shareholder value over the medium and long term. And with that, I'll turn the call back to Sean.

Thanks, Brian. That concludes our prepared remarks, we will now be pleased to take your questions. As in the past, 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 phones?

Our first question is from Sohrab Mohavedi of BMO Capital Markets. Please go ahead.

Thank you. Brian, I wanted to get a feel for the capital plan. Big common equity Tier 1 ratio number, you have some of it committed for the same pursuit, but where do buybacks fit in and have they shifted anywhere within the priority list, as far as capital deployment is concerned?

Sohrab, as you know, we closed on Canadian Tire in the past quarter. We expect Cencosud to close either later in Q1, or the beginning of Q2. There's other things that we're looking at, that are on strategy within our footprint, and as I said before, in terms of buybacks, keep those in the tool kit and govern ourselves accordingly.

So the 2.5 million shares in Q4, I shouldn't read too much into that? Maybe you're allocating more of the excess capital towards buybacks next year?

I wouldn't read anything into that. As you know, we've got a buyback to buy 12 million shares. As it happens we bought 2.5 million back in the quarter, and it's more formulaic than anything else.

Thank you.

Your next question comes from Brian Klock of Keefe, Bruyette & Woods. Please go ahead.

My question's for Stephen. Stephen, on page 17 of the sub pack, the oil and gas exposure to CAD12.8 billion, can you give us the idea of, I guess, the mix of what is E&P borrowing base versus servicing and midstream? And then maybe even the geography mix of that portfolio as well?

Sure, Brian. Of that CAD12.8 billion, about CAD6.8 billion is what we call the E&P side of the business, so the upstream portion. Of that CAD6.8 billion, about 45% is reserve-based, so we have our engineers review the underlying reserves. We have a price deck that's based on a borrowing base, which as I indicated, is currently well below the current rates.

The rest of that E&P portfolio is investment grade, high investment grade, and is based more on a covenant pattern that you would have in the rest of the industries. The rest of that portfolio, there's about CAD2 billion that's sitting in what we call the energy services side. So that's quite frankly the area that we're watching more carefully.

Having said that, these are companies that quite frankly are quite large, the [Shellenbergers], the Halliburtons, the ones that deal with cradle-to-grave well servicing. So they're fairly large, substantial, across a number of different basins. Midstream area, which is the pipes area, which is quite frankly relatively independent on price, is about CAD1.5 billion. And then the downstream section, which is more the refinery and the gas stations, which will actually benefit from oil prices dropping, is about another CAD2.5 billion.

Great. Thank you. And I guess from that, how much is in Canada versus US, or in any other sort of international?

It's probably 40% Canada, 50% the US, and the rest in Latin America.

All right. I'll requeue. Thank you.

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

Good morning, everyone. Quick question for Mike Durland on the FVA charge. I wanted to ask if you were reserving for the FVA leading up to Q4, and if so, for how long? I ask because it seems like the size of this charge that we've seen from all the banks this quarter is somewhat dependent in part on who was already taking reserves, and who wasn't.

No, this is the reserve. So we had not reserved to it prior. And one thing I will say, I know there's been a lot of back and forth on the size of it, just to let everybody know, our methodology is based on a netted approach. There's no clip-offs. So we're not clipping off tail ends of it. And I think it reflects the size of our derivative business, which in the context of our revenue, is a relatively small business.

So was there some discretion on -- it sounds like there was some discretion on how to apply it at the end of the day?

No.

Okay. And this is -- I gather this will be built into your, I guess, pricing going forward. We're not going to -- the FVA charge is not something that's going to resurface from time to time, or may it?

It will be built into the pricing, so the way to think about it from a quarter to quarter perspective, new transactions will be priced based on the FVA. That will not affect the revenue, so it will be done on a net revenue basis. Changes in interest rates and currency will change the funding obligations, expected funding obligations for the swap books, so they'll have some effect on the FVA. And the funding cost to the Bank will have some effect on it, but it will be a relatively stable item going forward.

Thanks for that color.

Your next question comes from Gabriel Dechaine of Canaccord Genuity. Please go ahead.

Thank you. Brian, I just want to go back to your outlook for the business segments and the total Bank. I'm not asking for specific numbers, but if you want to maybe run through them, and then tie into your 5% to 10% EPS growth target, where could you think each one is positioned, whether it's the low end of the range or the high end of the range? Just a directional commentary would help.

I think that directionally the Canadian Bank, you're going to see a growth rate similar to what you've seen in the past year. For the international Bank, as I said, I think the first two quarters are going to be similar to what you've seen in the last two or three quarters, and then we expect some pickup in Q3 and Q4, and that's a function of some structural reforms the governments are making there, increased infrastructure projects, I think every country we're in, every major country, Mexico, Peru, Chile, Colombia have all announced infrastructure projects.

I would also point out in each of those jurisdictions, we're making significant profitable market share gains against our competitors across all our products. So we see it's sort of a division of two years in international. First half will be more of the same, the second half, we view as improving.

And then in GBM, we would say, we're expecting a pretty good year in the GBM. We expect better loan volumes out of our corporate banking business, Mocatta, we see some pretty good growth, particularly in Asia. And the fixed income business is one that's, as you've seen from ourselves and our competitors, has been a tough business for a few years, but we would expect that at some juncture during the course of the year, you get more volatility and more activity in the business.

Okay. And then just on the capital deployment issue, you cited a bit of a challenge too. I go back 10 years, and I think Scotia averaged about five acquisitions a year. So you've historically been very acquisitive, and is that outlook still reliable I guess for the next couple of years, maybe the pace slows down, but you're still seeing a lot of opportunities out there for deployment?

Gabriel, as I said when I was named President of the Bank, that I felt that we had been very acquisitive as a bank. We'd done something like 20 different transactions in the international business, and it was time for us to make sure we executed well and integrated these acquisitions properly. I believe we're well on track to do that. I don't think we missed anything out there that we had any interest in, candidly. There's still opportunities out there for us, and we're looking at them, and if they're on strategy, we'll continue to be disciplined and opportunistic.

Thanks for the responses. Have happy holidays.

Your next question comes from Peter Routledge of National Bank Financial. Please go ahead.

Hi, thanks. I'd like to maybe ask Brian or Dieter to go a little bit more into your rationale, and your optimism really around the second half in Latin America, and then maybe remind us of some of the market reforms there, that you're counting on.

Sure. I gave you the macro view, so I'll let Dieter.

Good morning, Peter. We continue to see good loan momentum in both of those four markets, both in Mexico, Chile, Peru, and Colombia, on the retail side, as well as the commercial side. That will continue on. The challenge we've always seen is where does the asset growth fall to the bottom line, and that's a function of what the headwinds that Brian articulated in his comments.

But when you look at what the governments are doing, they all have a very strong fiscal and macroeconomic policy. The governments are very focused on moving their monetary policy around, to promote growth. You saw the tax rate reductions in Peru, for example. So the governments are very proactive, very mindful of staying in front of keeping the economies moving.

And when you move over into a country like Mexico, which continues to be, by any definition, very optimistic from our point of view in the medium to longer term, the country has the fundamentals and the trade links together with the US and other parts of the world, to generate continued good growth. And while you may have some medium, short-term setbacks or slowdown, the fundamentals are pointing to continued growth. That gives us a lot of optimism.

Our footprint is well-positioned to take advantage of that. Our coverage models are ready to go in all the countries. We've been optimizing our branch network and our sales teams, they take advantage of some of the opportunities and benefits in the medium to longer term.

One thing in looking at that business, the price of copper, which as you know is down, and I'm not going to ask you to predict the price of copper, but if commodity prices stay depressed, and for whatever reason, you just don't get that pickup in the second quarter, what will you do then?

What we're still seeing, though, is the demand for copper itself continues to stay reasonably strong, and so the export market is vibrant. The prices are down, but you're going to see the mines coming on place in Peru, and continued production in Chile. The cost of production relative to world's standards remains very low.

And so you're going to see what the mines have said, and what the people of -- our people on the ground in Peru have said, is these mines are coming on production. So there's going to be more volume produced, recognizing ultimately if the price of copper drops dramatically, you are going to see some impact. But you are going to see the mines producing more, and the economies will slow down, but not dramatically to the point everyone perhaps thinks they're going to do.

At the same time, what you're seeing is, the governments have amassed a considerable surplus in all of their budgets, and they're prepared to invest in other parts of their economy, to start them moving. It's not as copper dependent as we always thought about, and we continue to expect a lot of the internal consumption to drive some of the economies in these countries.

You have -- I know cost reduction in Latin American subsidiaries is sort of a slower process, it's not an easy thing to do. Can you move more quickly if you had to?

Peter, you saw an example of us announcing the restructuring charge to move fast forward the realignment of our branch footprint in Latin America. We closed 55 branches in the last year, and we have plans to optimize another 123. That's an example of where we're going to fast forward, right sizing and optimizing our footprint, after numerous acquisitions, as Brian mentioned earlier. That will allow us to move forward some of our expense synergies, and make ourselves a better bank in each of the countries.

All right. Thanks for the detail. Appreciate it.

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

I think I'd actually just like to stay on that theme for a second, if I can. Brian, the back-half recovery, I guess. You guys are on the ground. So your opinion of what the economy's going to do in the second half probably carries more weight than most. My question is how much of the optimism is based on Scotia-specific factors, in other words, the things that Dieter was talking about, and how much is dependent on some of those macro reforms actually having an impact? In other words, if the economy in the second half looks like the economy in the first half, does Scotia in the second half look like Scotia in the first half?

That's a good question. I think, and Dieter and I spent a lot of time in the region. We've got good relationships with the finance ministries and central banks in the region, and I'd point out that there's two different Latin Americas out there. And the four countries we happen to be in are extremely well-managed from a fiscal perspective and a financial perspective.

They've got fire power, debt to GDP in Peru, for example, is 16%. It's negligible to zero in Chile. So these governments have the fire power and they've announced significant infrastructure projects.

Now, to your point, it gets down to execution. They have to get some of these done. So we're comfortable with the macroeconomic fundamentals. That's point one.

And point two is keep in mind, these are P&C businesses, and probably a bit of a moderation or slowdown we've seen in the last year is healthy, in terms of overall consumer credit growth. But we like how our businesses are positioned from a competitive basis, and as Dieter said, we can -- Dieter and his team have done a very good job addressing a lot of our structural costs and our redundancies, and so we feel comfortable how we're positioned.

You talk about some of the fire power that the central banks have. As they've been using it, it seems like the margin has been a little bit more resilient to interest rate cuts than we saw perhaps a year ago. Are you comfortable if more fire power is used, that the margin can hang in there on the international side?

It's always difficult forecasting margins, so I'll start with that premise. There's so many different pieces to it. Look, I can't see further rate cuts coming. I don't want to go too far on a limb, but Colombia's increased rates this year. Their economy's growing at 4%-plus clip. So it depends where you are. I think we probably bottomed out in terms of the rate cycle.

Thank you.

Our next question comes from men Meny Grauman of Cormark Securities.

Wanted to ask about recently proposed corporate tax hikes in Colombia, and whether you think that will be a significant headwind for you?

They're going to have an impact on our earnings going forward, but we'll manage through that, as we continue to see our operations continue to gain some momentum in the latter part of 2015. And the good news is that we have a portfolio of banks in position in the countries we want to do business in and where there's headwind in one country, we'll make up for it in another country.

Just a follow-up, staying in the region. You recently announced a loan sale to Santander in Mexico. And I'm just wondering sort of a little bit more of the background, the rationale behind deciding to sell to them?

To put the loan sale in context, the amount of the loans is less than 1% of our asset base of our operation in Mexico, so it's not material from that respect. And what we've done there is repositioned our portfolio versus our core competencies, allowing us to focus on our core businesses, which we have our strengths. We're ready to move on the regulatory reforms that have been announced in Mexico, and our branches and businesses are well-positioned to take advantage of those.

Thank you.

Our next question comes from Stefan Nedialkov, Citigroup. Please go ahead.

I've got two questions. Number one, on assets under management, those were largely flat Q on Q, while most of the other competitors showed at least small increases. Was just wondering whether it's FX related or outflows related? Anything fundamental going on or is it really more on the technical side of things?

And number two, for your Latin American business, wanted to get some color on what regulatory costs are the ones that you incurred? Some more specifics on that. And also, outlook for volumes by country going forward. Thank you.

Okay. The first question, I'll ask James O'Sullivan to answer, on the AUM.

AUM was, as you observed, flat Q over Q. Year-over-year it was up 13%, AUA was also up 13% year-over-year. So on the sequential numbers, the flat AUM, I'd say that was two things. One was obviously the volatility in the market correction we experienced six or seven weeks ago. The second thing that I would point out is in the Bahamas, we had a couple of large accounts, reclassified from AUM to AUA, as the provision of services to those clients changed during Q4.

All right.

Dieter Jentsch here. On the regulatory challenges that we see, they generally area around what I call capital taxes, caps on rates, and restrictions on fees that we may encounter. That amounted to CAD20 million to CAD25 million in earnings in 2014. Going forward, in terms of our overall asset outlook, growth outlook, we're high single digit, low double-digit in Latin America. We'll even out about high single digit overall for the division.

Okay. Thank you.

Your next question comes from Sumit Malhotra of Scotiabank.

Want to start with Stephen Hart, and a couple questions on the PCL outlook. I think the statement was the core number on PCL, ex of the items that are specified was around 37 basis points, but it's 53 on a fully-loaded basis. When you think about some of the issues that the business is facing, particularly in international, what is the outlook that you have on the loan side, and how we could see provisions migrate in that business, as a couple other things work through, specifically Colpatria, and maybe this issue in Puerto Rico.

As it relates to the international and particularly both commercial and retail, other than the adjustment for the Colpatria mark, we actually expect loan losses to grow in line with the volume of loans for the year, going forward. We had a couple of those ones that we indicated in the notables, that we were effectively cleaning up some old legacy projects, but the rest of the portfolio is in actually fairly good shape, and as indicated with the drop in oil prices, especially in the Caribbean, that will actually show an improvement for a lot of the countries there, which are all net oil importers.

On Puerto Rico, maybe two pieces to it. I know part of the loss share agreement, if I'm not mistaken, is set to expire halfway through FY15. Wanted to know if you have that resulting in any kind of a major impact for the Bank, given the economic challenges the island has faced, specifically for the one you called out in Puerto Rico, can you talk about your provisioning in that particular account?

Sure. As relates to the FDIC, you're right, the five-year agreement on the commercial side will run out in 2015. On the retail side it does extend for another five years. We've actually gone through the portfolio that we picked up, and have actually fully reassessed it and reappraised it. So we're comfortable on the corporate commercial side of Puerto Rico, that's actually been covered and, therefore, there's no loss going forward that we haven't already covered. As it relates to the one large commercial account, of course, I can't really comment on individual names, but it is one that we are in the process of negotiating on, along with the number of other banks, we are one small part of a very large equation that will work itself out over the next six months or so.

Thanks for that. Very quickly for Sean or Dieter, just a numbers question. In the supplement for International Banking, when we look at loan growth, on a quarter-over-quarter basis, the consumer book looks strong, but the business loan balance was down again. I know there's been a lot of noise in that business loan category, because of trade finance. Is that the issue again this quarter, or was there something in the core business, if I can it that, for the business book?

We had a couple core -- it's Dieter here. We had a couple of big paydowns in the quarter, as well, where we continued to reposition our trade finance assets in Asia.

Thanks for your time.

Your next question comes from Doug Young of Desjardins Securities. Please go ahead.

Good morning. Wanted to go back to CAD3 billion -- sorry, the excess capital. I think you've been clear in your priorities in terms of M&A. What I'm wondering, because in your comments, you also mentioned you've done a lot of M&A in the past, and you thought the focus should be back now on execution, which you're doing. Do you have the appetite to be acquisitive, I guess, in the international side, while you're going through the restructuring? Or do you feel you need to kind of wait to get some of that restructuring through before you become more acquisitive in that market? That's my first question.

I think what you'll see us do is things that tend to be incremental. You're not going to see anything transformational from the Bank. So these are going to be tuck-in acquisitions that make sense, that are on strategy, that are very manageable, that are easy to execute. That's what you're going to see from us.

So nothing of size, more tuck-in to the existing operations?

That's correct.

And Brian, just is there any one particular market in those four regions which you're more attracted to, or you see better opportunities?

Well, every market's different, pointing to the obvious. But we'd like to be a bigger bank in Mexico, there's no question about that. We think that Peru and Colombia hold a tremendous amount of promise for us, and we like Chile, as well. Chile is obviously more developed, well-banked and the banking system has excess capital, and any acquisition there would be very expensive. But we continue to monitor the landscape, and you'll hear from us as the year goes on.

Okay. Then just maybe a quick one for Sean. Just I note this in your notable items, there was a certain item that you detailed in your chart, but you didn't actually exclude them or back them out. I think it related to the Caribbean and to Canadian on the PCL side, provisioning side. Just wondering why those weren't included in the notable items, just thinking through that? Thank you.

We view those as just additional loan losses, and the timing it hit Q4, so we view them as a cost of goods sold. So we kept them in our underlying earnings result.

There's nothing else to read into that in terms of ongoing pressures?

No, nothing at all. We just view it as loan losses, cost of goods sold, and we're not going to normalize for that.

Great. Thank you.

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

Going back to the question about international margins, Brian, I follow your logic in saying it perhaps is unlikely rates are going to drop still further, but throughout the year, we did see some rate cuts. Do you think that's been -- maybe this is for you Dieter, do you think that's been sufficiently baked into the margin, or could the first half of 2015 still reflect margin pressure associated with the rate cuts?

Mario, it's Dieter. I'll take that one. It takes a while to reprice the asset and liabilities to the rate cuts. We don't believe the rate cuts will continue. We think they've gone as low as they can go, to bottom out, as Brian articulated. And underlying volumes continue to be strong in LatAm, so we're going to have some pressure and we'll earn through those, through our volumes in the other business that we have. We had 12% asset growth in both retail and commercial year-over-year in LatAm. So those are positive numbers.

Would it be fair to say that those rate cuts in 2014 will still manifest themselves in the margin in the first half of 2015?

Yes, in the first couple quarters.

Now, can you give us some sense, like what's left, a few basis points here and there, or something more material? Sequentially, I'm thinking.

We've always given the guidance of generally being 3.90 to 4. Some quarters it's up. Some quarters it's down. Generally we see it being within that range.

3.90 to 4. Thank you.

3.90 to 4.

Got it. Thanks.

Your next question comes from Darko Mihelic, RBC Capital Markets. Please go ahead.

Please forgive me for asking this question, because I was trying to run through and keep track of those things you were mentioning, Brian, in your opening remarks, about the impacts that happened in international. I think you said there was CAD100 million of higher regulatory costs, and so on, there was issues in Venezuela and Thailand, and so on, another CAD250 million. Am I right in thinking that you've identified CAD350 million of negative headwinds that hit 2014 in international?

Sorry, the aggregate number was CAD250 million.

Okay.

And the biggest piece of that was compression of NIM due to interest rate cuts. The other components of that were lower earnings from associated companies, being Venezuela and Thailand, higher taxes, business taxes, capital taxes, asset taxes, and the like.

Okay. So is your intention though to signal to us that you effectively think of the earnings power of international really being closer to about CAD1.8 billion for a full year, rather than the CAD1.571 billion of adjusted, is that what you're trying to signal?

I knew you'd ask me to extrapolate. Look, as I said here before, in the international business, because you've got so many moving parts, if we had the engine running on six cylinders we're happy, because you're always going to have a hurricane in the Caribbean or something somewhere that's going to impact you for a quarter or two.

But we've had a bit of a perfect storm, and there's six or seven different items, whether it was Puerto Rico, whether it was the associated companies, the PCLs we took on the hospitality portfolio, compressed NIM, so you're always going to have one or two of those in a single year. We've had six or seven of those. In that regard, we're glad 2014 is over. But I think the team's done a very good job managing through it, and we look forward to a better second half in 2015.

Okay. And maybe just a quick one then for Sean, on your slide 11, one of the things you note is the strong performance from Asia. I wonder if you can give us order of magnitude, and what it is that's helping you out internationally, and whether or not you'd actually expect strong performance from Asia to continue in the first half of the year? If you can just help us with some order of magnitude, and maybe perhaps also talk to the income from associated corporations, and what your expectations would be on a go-forward basis. Thanks.

Well, for Asia we saw on a year-over-year basis volumes were up, but sequentially they're coming off as Dieter had mentioned, we're shifting away from the lower-yielding trade finance. On a year-over-year basis, Asia was up. There's also some security gains in the fourth quarter that should also help Asia a bit there. Sorry, what was your second question?

Just the associated corporations and your expectations there?

So as you have heard from Brian and Dieter, we had about CAD40 million less in associated corps earnings this past year. Venezuela will stay low, because we have now devalued to a much lower currency rate. Thailand will start turning the corner. We will start seeing some growth coming out of Thailand into next year.

Thank you.

Your final question will come from the line of Sohrab Mohavedi, BMO Capital Markets. Please go ahead.

Sorry about that. My question has been asked and answered.

Thank you. Thank you, everybody, for being on the call. And I just wanted to say that, reinforce that 2014 was a transition year for the Bank.

We've realigned a number of our businesses to be closer to our customers, and we believe our strategy is clear, and we're confident that we're on the right track and well-positioned to create shareholder value in 2015 and beyond. Thank you for participating on today's call, and wish you all the very best for the holiday season. Thank you.

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