Bank of Nova Scotia (BNS) 2015 Q4 法說會逐字稿

Good morning, and welcome to Scotiabank's 2015 fourth-quarter results presentation. My name is Jake Lawrence. I'm the Senior Vice President of Investor Relations for the Bank.

Presenting to you this morning is Brian Porter, Scotiabank's President and Chief Executive Officer; Sean McGuckin, our Chief Financial Officer; and Stephen Hart, the Bank's Chief Risk Officer. Following our comments, we'll be glad to take your questions. Also in the room with us to take questions are Scotiabank's Business Line Group Heads, James O'Sullivan from Canadian Banking, Dieter Jentsch from International Banking, and Mike Durland from Global Banking and Markets.

Before we start, and on behalf of those speaking today, I would like to refer you to slide number 2 of our presentation, which contains Scotiabank's caution regarding forward-looking statements. And with that, I'll now turn the call over to Brian Porter.

Thank you, Jake, and good morning, everyone. I'll be starting on slide 4. In 2015, the Bank performed well, despite some challenging operating conditions. For example, in the past year we have seen volatility in capital markets, a significant decline in oil prices, continued low interest rates, and uneven global growth.

Notwithstanding these challenges, the Bank earned CAD7.2 billion for the year. On an adjusted basis, 2015 diluted earnings per share grew 4.4% from 2014. Our return on equity was 14.6%. This year's earnings growth was driven by very good performances in our personal, wealth and commercial banking businesses, both here in Canada and internationally. These businesses generated approximately 75% of our earnings.

In Canadian Banking, we had a very strong year, with adjusted earnings up 10%. These results reflected good core asset growth, particularly in credit cards, auto loans and commercial banking. Our asset growth was supported by strong checking and savings deposit growth.

This year, we have continued to make progress on growing our payments business, which deepens customer relationships and enhances returns. For example, of the total new credit cards issued in 2015, 80% were to existing Bank of Nova Scotia customers. And the growth in the business contributed to Canadian Bank's improved margin. Our wealth management businesses in Canada also performed very well, with results up 13%.

In International Banking, we delivered the improved performance we expected in the second half of FY15, with record earnings in Q4. The business saw good volume growth, particularly in Latin America, as well as a stabilization of margins and credit losses and the benefit of foreign currency translation. More importantly, we continued to build profitable market share in our key Pacific Alliance countries and remain well positioned for future growth in the region, which we will showcase at our upcoming Investor Day in January, 2016.

In Global Banking and Markets, the business delivered weaker results. This performance was affected by several factors, including challenging market conditions in the energy and mining sectors, margin compression which offset our stronger loan growth, and a lower contribution from Asia. We expect improved results from Global Banking and Markets next year.

The Bank remains well capitalized with a Common Equity Tier 1 ratio of 10.3%. We are well positioned to continue growing the Bank organically and through acquisitions, as well as returning capital to our shareholders. In 2015, the Bank raised its quarterly dividend twice, to CAD0.70 per share, resulting in a 6% increase.

This year, the Bank made a number of strategic investments in technology that will transform and simplify the way customers do business with us. Compared to just a year ago, these new technologies allow the Bank to deliver a more seamless customer experience and will drive future growth.

Overall, we remain confident that we have the right strategies in place to build an even better bank and create long-term value for our shareholders. I will provide some additional color on our medium-term financial objectives and our outlook for 2016 shortly. I will now pass the call to Sean to review this quarter's performance.

Thanks, Brian. I will begin on slide 6, which shows our key financial performance metrics for the current quarter and comparative periods. My commentary adjusts for the 2014 notable items summarized in the appendix of our investor presentation.

Q4 diluted earnings per share was CAD1.45, up 10% year over year. Our results this quarter included some items that were largely offsetting through the other segment. First, the Bank had CAD151 million after-tax reduction in the pension benefit accrual related to modifications made to the Bank's main pension plan. This was partly offset by reorganization costs of CAD45 million after tax related to our Canadian shared services operations. Secondly, the collective allowance against performing loans increased CAD60 million before tax, or CAD44 million after tax.

This quarter's revenue growth was good, up 5% from Q4 last year, with solid asset growth in Canadian Banking and International Banking. Revenues were also positively impacted by foreign currency translation and higher fee income. Partially offsetting this growth was a lower contribution from investment banking, as well as reduced net gains on investment securities.

Our core banking margin was 2.35%, down 4 basis points year-over-year and 5 basis points from last quarter. This change was driven by lower asset and liability management income, as well as the impact of higher volumes of lower yielding Treasury assets. Partly offsetting was a slightly higher margin in Canadian Banking.

Expenses were up 4% year-over-year. Almost half of the increase was driven by the negative impact of foreign currency translation. The balance was due to technology and marketing expenses, the impact of acquisitions, as well as reorganization costs. Partly offsetting was lower salaries and benefits, primarily due to the reduction in pension accrual benefit I'd mentioned a moment ago.

Benefits from last year's restructuring charge have been tracking to plan; and in FY15 approximately CAD60 million has been realized, with an approximate CAD120 million benefit expected in 2016. These benefits, along with other initiatives, will drive a more efficient bank. In FY15, operating leverage was just slightly negative.

Moving to capital on slide 7. As Brian mentioned, the Bank continues to have a strong capital position, with a Common Equity Tier 1 ratio of 10.3%. During the year, the Bank generated net internal capital of CAD3.6 billion.

The Bank's dividend increased 6% in 2015, to CAD2.72 per share, a dividend payout ratio of nearly 48%. Over the course of the year, we also bought back 15.5 million shares, representing just over 1% of our outstanding shares. Risk weighted assets were up CAD10 billion, to CAD358 billion from Q3. The increase was due primarily to good growth in personal and business lending. And our Basel lll leverage ratio was 4.2%.

Turning now to the business line results, beginning on slide 8. Canadian Banking produced a good quarter to end a very good year, with net income of CAD837 million, up 10% year-over-year on an adjusted basis.

Loan volumes increased 3% year-over-year, driven by double-digit growth in credit cards, auto lending and commercial banking. Adjusting for the Tangerine mortgage runoff, loan volumes rose 5% from Q4 last year. Deposit balances also increased 5% year-over-year, with retail checking and savings deposit balances up a very strong 11% and 14%, respectively.

The net interest margin rose 11 basis points from Q4 last year, primarily due to a shift in asset mix towards higher margin earning assets, as well as the runoff of lower spread Tangerine mortgages. Compared to Q3, the margin increased 1 basis point, as the benefit from continued asset mix changes more than offset the slight reduction in deposit spreads.

Our good performance in wealth management continued this quarter, with AUM and AUA levels up 9% and 5%, respectively, versus the same period last year. Provisions for credit losses were up CAD6 million, reflecting modest increases in retail and commercial portfolios. The PCL ratio was unchanged at 24 basis points, compared to adjusted Q4 last year.

Expenses increased 6% year-over-year, primarily due to technology investments, project spending, and volume- and revenue-driven growth. Partly offsetting was benefits realized from structural cost reductions. Overall, Canadian Banking delivered adjusted positive operating leverage of 2.8% in 2015.

Turning to the next slide, on International Banking. Net income increased 33% compared to Q4 of last year. This performance reflected many positive contributions, including a stronger operating performance in Latin America, higher contribution from associated corporations, lower provisions for credit losses, and the positive impact of foreign currency translation.

Our International business continued to deliver strong loan growth, up 17% year-over-year. Excluding the impact of foreign currency translation, total loan growth was still a strong 10%. Latin America continued its strong loan growth, up 15% on a constant currency basis from Q4 last year. This strong asset growth was more than supported by excellent deposit growth, up 19% versus the same quarter last year.

The net interest margin, at 4.7%, was up 2 basis points from the same period last year and remains in line with our range of 4.65% to 4.75%. Quarter-over-quarter, the margin declined 7 basis points, or just over 1%, reflecting competitive pricing pressures in Mexico and the Peru de-dollarization impact. We continue to expect our margin to remain in line with this range moving forward.

Non-interest income reflected solid fee income growth, a higher contribution from associated corporations, and the positive impact of foreign currency translation. Loan losses declined CAD52 million year-over-year, and the loan loss ratio improved by 45 basis points, to 117 basis points. Improvement was driven mostly by lower commercial provisions from the Caribbean, which saw higher levels in the prior year relating to a small number of hospitality accounts. Retail provisions were also lower, excluding the impact of acquisitions.

Adjusting for the notable items last year, expense growth was up 13% year-over-year. About half the increase was due to acquisitions and the impact of foreign currency translations, with the balance due to higher technology investments, increased marketing and inflationary increases. While the operating leverage was slightly negative for the year, adjusting for integration costs of recent acquisitions, it was essentially flat.

Moving to slide 10, Global Banking and Markets. Net income of CAD325 million was down 24% from last year's strong performance in Q4. Compared to the same quarter last year, we had lower contributions from investment banking and equities, corporate lending in the US and Asia, as well as slightly higher provisions for credit losses. These lower results were partly offset by a stronger performance in the fixed income business and the positive impact of foreign currency translation. The prior year also included securities gains. Trading revenues increased slightly from last year, primarily in our fixed income businesses.

Net interest margin was down 13 basis points year-over-year, due to margin compression in the US, Europe and Asia portfolios. Total corporate loan volumes were up 19% versus Q4 of last year, with growth in our portfolio in Canada, the US and Europe. The majority of this growth was due to foreign currency translation.

Provisions for credit losses increased CAD25 million from last year, due mostly to two accounts, but remained at relatively modest levels. Expenses were up 2% year-over-year, driven by higher salaries and benefits, technology expenses, and the negative impact of FX translation. These were partly offset by lower performance-based compensation.

I'll now turn to the Other segment on slide 11, 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. The Other segment reported income of CAD117 million this quarter. This was up CAD47 million from last year and reflects the largely offsetting items I discussed earlier. We expect the Other segment to have a lower contribution in 2016, mainly due to lower securities gains, higher technology costs, and lower tax benefits.

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

Thanks, Sean. The underlying fundamentals of the Bank's risk portfolios are solid and there were really no surprises this quarter. Excluding the impact of the collective allowance, our all-Bank loss ratio was unchanged, at 42 basis points, compared to last quarter. This was well within our expectations.

Before discussing current credit metrics, I'd like to give you an update of our retail, corporate and commercial credit portfolios. In Canada, our retail delinquency rates continue to remain at the lowest levels in the past decade. Furthermore, overall credit quality remains stable.

Utilization rates in Canadian retail also remain largely unchanged from last year, and we've not seen any unusual or unexpected growth in either secured or unsecured revolving credit. As a reminder, more than 90% of this portfolio is secured against real estate and autos.

In International, retail credit performance leading indicators also remain stable. We operate a diverse number of portfolios across different geographies and some books are performing better than others. For example, last quarter saw an uptick in the Colombian PCL ratio which we saw normalize this quarter. Overall, delinquency rates are generally stable across international retail and utilization rates are largely unchanged. I should note, we have made investments in our retail collection capabilities which have strengthened our overall lending business.

Now looking at our corporate and commercial loan books, the overall credit quality continues to be solid. Loss levels are near historic lows and formations continue to be reasonable. This quarter did have two formations in the energy sector, names that were on our watch list, and this portfolio is performing as we have expected. I will have more to say on the energy portfolio in a minute.

As Sean mentioned earlier, this quarter we added to the collective allowance. As a result, our coverage ratio rose to 85%. We periodically review the collective allowance, and this quarter's addition is our first since 2012 and reflects our growth in RWA.

Now looking at the credit metrics, gross impaired loans were flat quarter-over-quarter, while the gross impaired loan ratio improved 3 basis points. The 11% year-over-year increase was driven primarily by foreign currency translation. This quarter, we were pleased to have our net formations improve compared to last quarter and Q4 of last year.

Our net impaired loans as a percent of our portfolio have also continued to improve over the year and, at 44 basis points, stand well below our global peer group. Looking at our market risk, which remains low, our average one-day all-Bank VaR was CAD13.1 million, up CAD2.6 million from the prior quarter.

Turning to slide 14 shows the trend in loss rates over the past five quarters for each of our businesses. On an adjusted basis, Canadian Banking's PCL ratio was unchanged at 24 basis points year-over-year, with modestly higher retail and commercial provisions. Compared to last quarter, the PCL ratio was up 1 basis point. Meanwhile, International Banking loss rates actually decreased 10 basis points quarter-over-quarter. Excluding the Colpatria credit mark, the International Banking PCL ratio fell 13 basis points from last quarter.

Retail loss rates were generally stable compared to last year, while there was a significant improvement in commercial, given the provisions taken last year around the small number of accounts in our Caribbean hospitality portfolio. The quarter-over-quarter improvement was driven by retail, particularly in Colombia, while commercial loss rates were basically stable.

Looking at Global Banking and Markets, the PCL ratio increased to 14 basis points, up from a very low level last year and 8 basis points last quarter. As noted earlier, this increase was driven by a couple of accounts. Overall, the Bank's loss rates remain low, well within our expectations, and the credit portfolios are in good condition, showing the resilience of our customer base and risk management practices.

Turning to slide 15 and for an update on our energy exposures, which have been actively managed over the past year. At CAD16.5 billion, our drawn oil and gas exposures represent about 3.5% of our loan book. Drawn exposures were up 4% quarter-over-quarter. The increase incurred in our lower risk mid-stream and downstream segments. Our drawn portfolio percentage that is investment grade is unchanged versus the last quarter, at 58%.

The undrawn oil and gas commitments increased slightly to CAD14.3 million, and 75% of this amount is investment grade. The growth reflects the commitment to support our strongest clients. At roughly 60%, the upstream segment represents the majority of the portfolio. For many of our upstream accounts, we are completing the semiannual borrowing base redeterminations.

With more than 70% of these reviews competed, almost 66% of our upstream exposures have either maintained or increased their credit facilities based on increased reserve production. For the remaining 33%, the reduction in credit is averaging approximately 20%. In these instances, clients are continuing to make the necessary and prudent moves, including further reducing expenses and selling assets in order to reduce debt and maintain liquidity.

As we have indicated over the course of 2015, with continued low energy prices we do expect some fender benders. Over the past 12 months, oil has averaged roughly CAD50 per barrel, creating a challenging and, in some instances, stressed operating environment, particularly for oil field services and upstream companies. We remain encouraged by the quality and resilience of our portfolio, as well as the steps taken by many of our clients' management teams.

Finally, as we have over the past 18 months, we will continue to proactively manage these exposures. And with that, I'll now turn the call back to Brian.

Thanks, Stephen. Before we open the call for questions, I'd like to comment briefly on each business line's performance this past year and make some brief remarks on our outlook.

As we noted earlier, Canadian Banking had a very strong year. We expect that momentum to continue in 2016, particularly in mortgages, automotive, payments and commercial banking. This growth will be supported by our increased focus on deposits.

We've had good success in 2015 on retail, small business and commercial deposits. We will continue to grow our payments business, an important part of our overall strategy to deepen customer relationships.

We expect our asset mix to continue evolving, which will gradually increase our risk adjusted margin over the course of next year. We also look forward to Tangerine's MasterCard launch and further progress they are making towards becoming an everyday bank.

And finally, our sharpened focus on structural cost reductions will create capacity to fund further investments in the business. These investments will drive a better customer experience and an improved productivity ratio over time.

Turning to International Banking. As we look to FY16, we expect assets and deposit growth momentum from 2015 to continue. Growth will be driven by the Pacific Alliance region, along with an improved performance from the Caribbean and Central America. We expect margins and credit quality to remain stable, with PCL growth in line with asset growth. We will continue to build on the efficiency gains we've made last year and expect operating leverage to be flat to slightly positive in 2016.

We remain committed to prioritizing our efforts and resources on the Pacific Alliance region, as we look to achieve greater relevance and presence in this important geography. With economic growth in that 2.5% to 3.5% range, we remain highly confident we can run profitable, growing operations in the Pacific Alliance region. Our upcoming Investor Day in Mexico City next month will be a great opportunity to discuss in more detail the many opportunities we see in the region.

For Global Banking and Markets division, we faced a number of factors which contributed to weaker results in the second half of the year. Looking ahead to 2016, we expect to be back on track towards growing a high quality, well diversified wholesale platform. For those businesses that were challenged in 2015, we expect them to produce stronger results this year. This includes investment banking and corporate banking.

As we have indicated previously, we will have a lower contribution from the equity derivatives business in 2016 and beyond. We will look to mitigate the impact of this structural change through some of our other wholesale businesses.

We expect the overall credit quality of our loan book to remain strong. Expense management will remain a key priority and we will maintain our highly efficient productivity ratio. We will also continue making the necessary investments to position the business for future success.

Turning to slide 18 and our medium-term objectives. Changes to our medium-term objectives are infrequent, only when we believe there has been a structural change in our operating environment or some other material factor. At this time, we are adjusting our ROE objective to 14% plus, primarily to reflect the recent increases in capital levels.

In all other aspects, our medium-term objectives remain unchanged. We expect to perform within our medium-term EPS objective. We will continue to focus our efforts on our customers, enhancing their experience, deepening our relationships with them, and committing to make them better off. We are well underway on our digital transformation of the Bank and we are also making the necessary investments to reduce our structural costs. These efforts will enhance our customers' experience and drive financial benefit over the medium and longer term.

With the meaningful progress we made in 2015 and the growing momentum across our businesses, we are very confident in the Bank's future. And with that, I'll turn it back to Sean for Q&A.

Thanks, Brian. That concludes our prepared remarks. We will now be pleased to take your questions. Please limit yourself to one question and then rejoin the queue to allow everyone the opportunity to participate in the call. And please note, after the final question, Brian will close the call with a few brief comments.

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

The first question comes from Gabriel Dechaine of Canaccord Genuity. Please go ahead.

Hello. Good morning. Just wanted to talk to you about that collective allowance. I know it's -- the timing, I guess, is obviously going to get some attention here. I just want to know if you have some sort of target coverage ratio that you're aiming to achieve over time or maybe a bit more of the rationale behind why you took this collective, because obviously there's a lot of concern on the credit front in Canada.

Hello, Gabriel. It's Stephen. We analyze our portfolio on a quarterly basis, obviously. The collective, as you know, is the collective for performing loans. So it relates not to the impaired part, but to the rest of the portfolio.

That portfolio's grown substantially. It's been three years since we last talked up the collective. And we've done it periodically over the last decade or so and we'll continue to do so. But really, it just reflects the total growth of the portfolio.

As shown, the gross impaired loans actually decreased quarter-over-quarter and our provisions remained flat. So it wasn't due to anything we saw in the portfolio that was changing. It was really just related to the total growth. And we've been monitoring this, as I said, for the last three years.

I guess it didn't hurt that you had a bit of extra funds lying around from that pension gain. But then my next question is the mortgage book in Canada. So earlier this year, so in the Canadian P&C business, we saw there was big spike in the margins, because some mortgages that you had priced fairly aggressively a few years ago had rolled off and you were repricing them at higher spreads.

Are we going to see any of that type of activity again in the upcoming year? Are there any old mortgages that are -- block of mortgages repricing that could see some similar spread enhancement?

No, Gabriel, it's James. I'd say what you can -- you should expect to see is low single digit growth in mortgage balances and perhaps some very modest, very modest margin expansion in that business.

Okay. What about overall, I guess, let's go through your whole loan book and then the total margin.

Yes. So I'd say overall, we would expect margins to be stable at this level as they've been now for a couple of quarters. Our goal remains to make steady improvement in our risk adjusted margins.

And I think as we shift our asset mix somewhat, we will see some modest growth in margin. But I'd be thinking stable to modest growth in margin from here, perhaps ticking up a bit on the asset side, but giving it away on the deposit side as we sharpen our focus on that side of the balance sheet.

Okay. All right. Thank you. That's helpful.

Next question, please.

Thank you. The next question comes from Robert Sedran of CIBC. Please go ahead.

Hello. Good morning. Stephen, just on those redetermination agreements, I wonder if you can give us a little color as to what some of the assumptions that you may have used. I was a little surprised to see the borrowing base rise for some companies.

Yes. We use a deck that goes out. Quite frankly, the deck assumes, from a pricing basis, that we're talking CAD40.00 to CAD45.00 for the next two to thee years. We also have some assumptions on operating costs, as well as inflation that are built into that. But the basis of what most of them we were able to increase was the substantial drilling that they've done over the last year and basically increased the reserves. So while the price per barrel went down, the number of barrels that they can actually pull out has gone up.

In addition, as you know, most of the operating costs in all basins, be it US or Canada, have come down as they've sharpened their own pencils.

And so this is not about giving some clients that may have been up against lines a little bit more flexibility so as to avoid problems? Actually, you're comfortable that if they're drawing on this added flexibility, you're comfortable with that exposure going up?

We have the security underlying it, yes, yes. In those cases where the redeterminations came down, as I said, indicated, we will give people a short period of time in order to bring outstandings down.

And was there any impact on impaired loans in those cases where the redetermination agreement took their flexibility down?

No, the two accounts that went non-accrual were from previous issues.

Okay. Thank you.

Next question, please.

Thank you. The next question comes from Mario Mendonca of TD Securities. Please go ahead.

Good morning. I just want to focus on loan growth in the two segments, both domestic and international. First, in domestic, we saw from both BMO and Scotia this quarter commercial loan growth looked awfully light on a quarter-over-quarter basis.

And although there was some anecdotal evidence to suggest it would be lower, it was a bit surprising. So any commentary on commercial loan growth in Canada?

I'd say it was a bit lower this quarter. But you know, Mario, we had -- we targeted solid double-digit growth in the commercial loan book in 2015. We would be targeting the same, frankly, for 2016. It remains one of the focus areas alongside cards and auto.

Why do you figure this quarter we saw it for both BMO and Scotia, the decline, that is, or softer growth?

I don't know. Nothing, frankly, jumps to mind that would have made this quarter different than previous quarters.

Okay. And in International, it was the opposite issue. Quarter-over-quarter, we saw such strong growth, both commercial and retail. Now, I doubt currency had any effect there, but was there something else that you could point me to that would suggest this was an unusually good quarter?

Hello, Mario. It's Dieter. We signaled last quarter that Q4 traditionally is seasonally a stronger growth quarter for both retail and commercial. And in fact, that's played out for the last five years. So I would view that as a seasonal uptick in our volumes.

Okay. Thanks very much.

Next question, please.

Thank you. The next question comes from Meny Grauman of Cormark Securities. Please go ahead.

Hello. Good morning. You talked about adjusting your ROE target due to capital consideration. I'm wondering, since the last time you thought about these targets, what has changed?

Is there any different indication that you're getting from OSFI in terms of capital? Just curious your thoughts.

It's Brian. There's been nothing from OSFI in terms of expectations on capital. It's just where we choose to run the Bank in terms of our Common Equity Tier 1. And for the past eight quarters, it's been through 10% and we expect it to stay there. It gives us a level of comfort, and that's where we are.

Okay. And then during the quarter, it was reported that you made an investment in an online lending platform, a relatively small investment. But I'm wondering what your view of online lending is and why did you decide to participate in this funding round?

Well, you know -- it's James speaking. We're quite committed to a stepped up investment in technology, generally. It's much more than just that investment that was announced. The bulk of it, frankly, is internal spend. We're spending a lot of money on rapid labs, really trying to improve the on-boarding experience for our customers. We're spending a lot of money, frankly, on our own channels, our proprietary channels, whether they're mobile, online, or the branches themselves, but selectively. We're open minded to making investments in Syntech opportunities, with a view to engaging and with a view to partnering so that we can improve our customer experience.

Do you view the development of online lending as being something that you're exploring, or do you see this as a platform that really will start to gain market share in Canada?

I would describe it as it's a small oar that we've put in the water. We'll see how it involves over time. I don't really have a macro view on the full potential of that opportunity, at this point. It was a very small investment.

Thank you.

Next question, please.

Thank you. The next question comes from Peter Routledge of National Bank Financial. Please go ahead.

Hello. Good morning. Just some questions about GBM. Obviously, not a great year relative to 2014.

In the past, you've mentioned you're transitioning your Asian trade finance business, and then this morning, you've referenced the equities derivatives business as a headwind. Can you give us a little more color on each of those? Are those the two businesses that have driven the fall in net income in that or is there other factors at play?

It's Mike. So the way I think you should look at it is there's really three factors at play. Asia, we have been taking a very purposeful approach to pivoting that business away from trade finance, away from smaller commercial accounts to be more of a corporate platform that would look identical to the Canada, US, European platforms.

We're a significant way through that adjustment. There's a little bit of work left. We've got the new platform in place, the new people on board. They're out engaging in activities.

So we're very happy with the new. The old, there's a little bit left to still clean up of the older business. And that will take us probably two-thirds of the way through 2016 to complete that process of cleaning that up.

Equity derivative is a fourth quarter issue. So we decided, looking at 2016, to take down a significant portion of our book to go into 2016, free up the funding. Our intent there is to grow the core part of our business, so we wanted to have the runway and the time to do that. And that's going to be a bit of a drag for the next couple of quarters. But over the next year or so, we'll earn through that, as well.

The thing that is also important is that our deal flow in 2015 was quite a bit different than our deal flow in 2014. 2014, we had a very, very strong investment banking performance, strong M&A. When you have strong investment banking, strong M&A, you get a leverage effect in all of the businesses. The lending business does better. The equity business does better. The fixed income business does better. A little bit softer deal flow in 2015.

Our pipeline is really good. So we feel very optimistic about 2016. And one of the things I would say about having a couple soft quarters is that people work really, really hard. We're a long way down the road of pivoting these businesses. People are very, very focused. The pipeline is very strong. People feel very good.

Just on the trade finance business, some observers had pointed to Asian trade finance counterparties as borrowing in US dollars and generating non-US dollar revenues. Is that why you're pulling out, just trying to get ahead of any potential problems that might crop up over the next couple years?

No, it's more of a purposeful change in strategy. Our approach to Asia is to think of it as being connected with our important customers around our global footprint. So if they're engaged in trade finance activity, we're quite happy to support that. But we want the focus of that platform to be on the core, strategically important customers to the Bank.

Okay.

So it's more just a pivoting and a focus on our real core customers.

Okay. Thank you very much.

Next question, please.

Thank you. The next question comes from Doug Young of Desjardins Capital. Please go ahead.

Good morning. My question is for Steve. You talked about the two oil and gas formations being something that was on your watch list already.

Can you talk a little bit more about how the -- what the evolution of your watch list has been like and can you give a little bit more detail, if you can, on different, obviously, topical segments?

Has that watch list been growing, contracting? If you could give some more details, that would be helpful. Thank you.

Sure. Actually, on a year-over-year basis, our watch list is flat, both on a dollar basis and as a percentage of the portfolio. It was improving for most of the year. It did pop up a little bit this quarter. And that, as you can guess, would be as part of the redeterminations that we were doing.

So there were some downgrades that occurred for that one-third of the portfolio. But quite frankly, the energy sector in the watch list account is about 10% of the volume there. And in fact, a lot of the watch list by number of accounts is actually more on the international side. But as I said, basically I'd say it was fairly stable, a little bit of pivot, as you would expect, in the energy sector.

And what would that 10% been last year? Has that been relatively flat, or have you seen any increase?

I would say last year, it was probably closer to 6% of the portfolio.

Okay. All right. Thank you very much.

No problem.

Next question, please.

Thank you. The next question comes from Sohrab Movahedi from BMO Capital. Please go ahead.

Sohrab Movahedi. Quick question for Dieter or Brian, I guess. International outlook for flattish operating leverage after a -- call it a slightly negative year -- why can't the expense ratio in International segment improve?

Sohrab, it's Dieter. Good morning. A couple things. We keep investing in the business, improving our technology and our delivery network. So in our key markets we continue to invest. That's the first point.

And the second point I would say is that we have made some numerous acquisitions and it takes a while to digest those. So we've operated essentially flat this year after digesting for the acquisitions. So going forward, as we digest some more of these acquisitions, we'll spend some more money. We're operating on the premise of positive operating leverage going forward, while we continue to invest in the business.

Okay. I mean, you took some restructuring charges last year. Presumably some of that benefit would have come through this year and certainly would have been helpful to next year. So are you taking that and spending even more on investments?

If you look at our overall expense, year-over-year expense numbers, and you adjust it for volume and inflation, there is an amount more that we spent from the money we saved. And all of the initiatives that we've outlined, in terms of the optimization in the Caribbean, the optimization in Mexico, we're taking those savings and reinvesting in our technology, into our delivery network, and they're going to come through in 2016.

Okay. And just on restructuring, Sean, the charge taken this quarter through the corporate segment, what sort of benefit, if any, is that going to provide to the Bank expense line in the coming years?

That takes a few years to get to the final run rate savings. But the run rate savings is about the same amount as the charge, about CAD60 million a year. And we'll get that two years out from now. So a year from now, we'll get about two-thirds to three-quarters of it, and we'll get a bit in 2016.

Okay. Thank you.

Next question, please.

Thank you. The next question comes from Darko Mihelic from RBC Capital Markets. Please go ahead.

Hello. Good morning. On that note, Sean, just to circle back on expenses, you suggested that the CAD160 million of savings were to be realized in 2016. What's the breakdown of that? Which segment benefits the most?

That was CAD120 million, if I recall correctly. And that's mostly Canadian Banking and then some in IB, as the full value of their branch optimization takes hold, and a bit in GBM.

Okay. That's helpful. Thank you. And then just really quickly on the borrowing base redeterminations, it's a semi-annual process. You suggested that you're 70% through. But how many loans are you actually touching? In other words, is this half the portfolio that you're reviewing, or you're reviewing the entire portfolio?

We review the entire portfolio of ones that have borrowing bases. And the borrowing bases usually relate to what I call the non-investment grade, the ones that are secured. So with regard to the investment grade part of the upstream segment, those are obviously higher rated. They have a different structure. It's on a covenant basis, as opposed to a secured basis. But we will examine 100% of the secured borrowing bases.

That's helpful. And one quick last question. Do you care that -- I mean, what I see is a slight increase in early stage delinquencies -- can you comment on that?

In which sector?

Actually, across the board. But in truth, it looks as though -- let me just grab my spreadsheet here -- it actually looks as though most of it is occurring -- it actually looks like as though it's in the 91 days and greater, and it's business and government. I mean, it looks like that's the biggest, but it's actually across all sectors and across all buckets.

No, I mean, our delinquencies, at least in Canada, delinquencies have gone up slightly, like 1 or 2 bps in the auto side. But really, in the business and government sector, it's been pretty stable.

Okay. That's good. Thank you.

Next question, please.

Thank you. The next question comes from Mike Rizvanovic from Veritas. Please go ahead.

Good morning. I'm sorry if I missed this in your disclosure somewhere, but I'm wondering if you can quantify both sequentially and year-over-year the currency impact in the International business.

We do disclose that. On a quarter-over-quarter basis, I think it was about CAD5 million benefit for International Banking and CAD26 million on a year-over-year basis.

Okay. Thanks. And just quickly on acquisitions, when I look at the last two, the [Santo] Sud and the Citibank Peru transaction, they look to be a bit on the expensive side, just based on your guidance last quarter. And I'm wondering if the increased turbulence in the LatAm region is providing you with perhaps more favorable valuations on other opportunities for tuck-in deals?

Sorry, Mike, I didn't understand your question. I didn't understand what you said the acquisitions were priced --

They seemed a bit pricey, based on the, I believe it was CAD40 million in run rate earnings, and the price tag being about CAD600 million for the two in combination. I'm just wondering if the turbulence in the region that we've seen in the last few months pick up, has that changed the valuations on some of your potential targets?

There's no doubt that devaluation of currencies would impact the value of franchises. But the acquisitions we made, we're very comfortable with the investments. They really do make us a better, more relevant bank in our key markets. And at this point, what we have seen as we progress, they are fulfilling what we anticipated they would.

Okay. Thank you.

Next question, please.

Thank you. The next question comes from Peter Routledge of National Bank Financial. Please go ahead.

Hello. A question for Stephen Hart. Appreciate all the commentary on Canadian credit remaining quite benign. But either towards the end of last quarter or even afterwards, are you seeing any weakness in retail credit in Alberta and Saskatchewan?

It just seems to me like job losses are on the increase and housing prices are coming down. That's got to get into credit at some point, and maybe get your thoughts on that.

Yes, obviously it's an area we've been following for well over the last year. I mean, as you note, the unemployment rate in Alberta and Saskatchewan, to a lesser extent, has been going up. It was at low, very low levels vis-a-vis all Canada. It's now moved up to the Canadian average, and quite frankly, we expect it to rise above the Canadian average. That obviously does have effect. And we are seeing similarly the delinquencies in our Alberta portfolio retail-wide have moved up from where they were, still at remarkably low levels.

Just to put it in context, the overall retail book for us in Alberta is about CAD39 billion, which is 15%. But 93% of that is secured. The mortgage book there is actually a much higher percentage of insured, so it's 59% versus our all-Canada average of 50%. And the loan to value ratio is about 55%. So they've built up a very good cushion there.

The key area that we really look at is the unsecured, which is both lines of credit, as well as the credit cards. That's a very small -- that's about maybe CAD2.4 billion, which is less than 1% of our total Canadian retail book. We've been monitoring the usage of the revolvings lines to see if there's any increased usage, which would usually be the first sign of people having to tap their lines. Quite frankly, the utilization has dropped by 1% over the last year. So people are not tapping into their lines, which is, as I say, a prime start.

We have taken a look at our lending criteria. We have tightened up some of our originations. We have actually put a lot more effort, as I said earlier, into our collection activity, and we have specialist teams in both auto and credit cards that focus on that area. So we're actually seeing that have good traction. But it's certainly an area that we will continue to monitor.

All right. Thanks very much. That's very helpful.

Next question, please.

Thank you. The next question comes from Sohrab Movahedi from BMO Capital. Please go ahead.

Just to follow up on Peter's question quickly. The utilization rates, had you increased the commitment levels here for the unsecured pieces?

No.

Year-over-year?

That's reflective of the total portfolio. So we haven't seen any need to increase. Obviously, on an individual basis, there are individuals that we will increase their credit lines and then decrease their credit lines, based on their credit scores and requirements. No, there's no movement like that.

Okay. I mean, Brian, I guess my question goes back to your commentary around operating at higher capital levels and needing to adjust to that through the ROE line. With the push into unsecured, let's say, in Canada, with propects of improving the profitability of the Canadian Banking segment, with the propects of at least the International segment steady to improving, I'm curious as to why you think you need to reduce the ROE target.

I think it's just reflective of market conditions, too, and their outlook for the next couple years. If you look at, as I said, there's no pressure from OSFI to increase capital levels here in Canada; but if you look globally, Common Equity Tier 1 ratio numbers are going up. We like the optionality, as I discussed before, in terms of potential acquisitions that may come. And we like to have some fire power.

So again, as the movements we've made in terms of credit cards and payments here in Canada, to give you an idea, before the JPMorgan transaction, credit cards amounted to balances outstanding 1.2% of our assets of the Bank overall. And if you add International to that, it's a little bit over 2%. So we're still underweight. We're doing it thoughtfully. Most of the sales are to our existing customers.

So the ROE environment is a function of the capital we choose to carry, the low interest rate environment we're in, and just business outlook generally, and the investments we're making in technology, which are multi-year. So we're working on our cost structure, we're working on digitizing the Bank and that will bear fruit at some time.

Each of the last four quarters, your CET1 ratio has been 10.3% or higher. Is the message here that you will likely operate at those types of numbers, maybe draw down from time to time, but buybacks and all included, we should expect you to be, call it, towards the 10.3% CET1 number?

I think that's a fair number.

Thank you.

Okay. Last question on the phone, please.

Thank you. The last question comes from Mario Mendonca of TD Securities. Please go ahead.

Good morning. Brian, just a very big picture question. Over the last, say, four or five years -- and this is true for Scotia and your peer group -- ROEs have trended down from like 20%-ish down to 14%, 15%, as we're talking about today.

Yes.

That's a big move. I know capital's played a huge role in that, maybe margins, as well, the things you've highlighted. But what I'm asking you to think about now is, what does the banking industry in Canada look like to you?

Looking out several more years, and perhaps another four or five years, is Canada going to look a little bit like the rest of the world, with maybe very low double-digit ROEs, something in the 11%, 12% range? Or do you think -- and I know this is tough -- do you think sort of 14%, 15% is sustainable?

I think in the medium to longer term, 14% to 15% is sustainable. I think that -- and I'm speaking from the Scotiabank perspective -- we've got optionality. We've got high quality growth, as we've exhibited in our Q3 and Q4 in the International business.

Dieter and his team have done a great job taking costs out, closing branches. And you're going to see more of that continue to bear fruit. And if you look at our ROEs in Mexico, as a standalone business, is 20%-plus. In Peru, it's 18% to 20%. So our ROE in market is very good. And you'll see that continue at these levels, I would suspect.

But as we continue to transform the Bank from a cost perspective, that will bear fruit for shareholders. That's why we're confident we'll be in the 14% to 15% range.

Okay. Thanks.

Just to recap, I wanted to thank everybody for being on the call today. Thank you for your support during the course of the year, and wanted to wish you and your families all the very best for the holiday season. Thank you.

Ladies and gentlemen, this concludes your conference call. Please disconnect your line and have a great day.