Bank of Nova Scotia (BNS) 2016 Q1 法說會逐字稿

Good morning and welcome to Scotiabank's 2016 first-quarter results presentation. My name is Jake Lawrence. I'm the Senior Vice President of Investor Relations for the Bank.

Presenting 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 will be glad to take your questions. Also in the room with us to take questions this morning are Scotiabank's Business Line Group Head, James O'Sullivan from Canadian Banking, Dieter Jentsch from International Banking, and Mike Durland from Global Banking and Markets.

Before we start the call and on behalf of those speaking today, I would like to refer to slide 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. I will start on slide 4. We are pleased to report a strong first quarter to our shareholders. This quarter's earnings growth was again driven by good performances in our personal and commercial banking businesses, both here in Canada and internationally. Our PNC businesses generated approximately 80% of our earnings.

The bank earned CAD1.8 billion in the first quarter, delivering diluted earnings per share of CAD1.43, up 6% year-over-year. Our return on equity was 13.8%. Looking at our capital position, the Bank remains well-capitalized, with a common equity tier 1 ratio of 10.1%. We are well-positioned to continue to invest in and grow the Bank organically and we have the balance sheet strength to selectively pursue acquisitions.

We are also well-positioned to return capital to our shareholders. We have raised the quarterly dividend per share to CAD0.72, a 6% increase from a year ago. We are proud of our track record of delivering sustainable earnings which allows us to consistently increase dividends for our shareholders.

Before I turn it over to Sean to discuss this quarter's results in more detail, I wanted to update our shareholders on the important steps we are taking to build an even better bank. As we have said consistently, we are focused on creating value for our shareholders, which by definition, requires we take a longer-term view.

To that end, in my letter to our shareholders this year, I laid out Scotiabank's forward-looking strategic addenda. We have made good progress advancing all of our priorities, but today, I want to update you on the progress we're making in two of those areas.

The first is our digital transformation. At Scotiabank, we have made great progress towards digitizing the bank and building digital solutions to give our customers the best experience there is. For example, we are now one year into an exciting new program that allows us to significantly reduce friction points in key customer areas and deliver the best onboarding experience in the market. The program delivers solutions rapidly, using customer-centric design and agile methodology.

Our rapid lap program is currently focused on several core customer journeys, including mortgages, credit cards, and day-to-day accounts, and allows us to onboard our customers with reduced turnaround times, increased convenience, and radically simplified processes. As we make it easier for our customers to do business with Scotiabank, we expect there to be revenue benefits.

In addition, these improved processes also make things much easier for our employees. Reduced manual efforts by up to 30%, significantly improving error rates and enhancing cross sell opportunities. Our rapid laps are among the most important tools we are using to transform our customers' experience.

When we open the doors of our digital factory this summer, hundreds of Scotia bankers from our rapid laps and many other parts of the bank, including technology and our business units will be working side-by-side to deliver digital solutions. Tangerine is another important part of Scotiabank's digital strategy. Tangerine is already widely recognized for simple onboarding, leading customer experience, and innovative digital products.

One innovation that we are particularly excited about is interactive voice recognition, which allows us to authenticate customers simply and quickly. Tangerine has 2 million customers and is the market leader for Canada's direct ready customers. We are poised to grab an even bigger share of the 12 million Canadians who are ready to do their banking primarily through digital channels.

The second priority I want to highlight is our evolving business mix. We are focused on building and deepening relationships with our customers. The evidence of this focus is apparent in the evolution of our balance sheet.

I would like to highlight a couple points here. In Canada, we sharpened our focus on growing our payments business over the past few years. We made concerted efforts to improve our credit and debit card offerings.

As a result, we increased our credit card penetration with Scotiabank customers from the low 20%s to the low 30%s. And we still have room to make further progress. This shift in business mix has contributed to the improved risk-adjusted returns we earn for our shareholders.

We are also making good progress on the liability side of our balance sheet. Across all business lines, we are focused on increasing customer deposit balances, which further deepens customer relationships and supports a concerted effort to reduce wholesale funding. As an example in this past quarter, Canadian banking had double-digit deposit growth in retail checking and savings balances. This very strong growth reflects some improved product offerings, such as the Scotiabank Accelerator Account, combined with a greater focus on winning more core deposits.

The bottom line is this: we are executing on our strategic agenda as we build an even better bank. We have the right people and strategies in place to navigate the challenging market conditions and create value for our shareholders. With that, I will turn it over to Sean to review this quarter's performance.

Thanks, Brian. And good morning. I will begin on slide 7, which shows our key financial performance metrics for the current quarter and comparative periods. As Brian mentioned, Q1 diluted earnings per share were CAD1.43, up 6% year-over-year. Revenue growth was very good, up 9% Q1 2015, with solid asset growth in Canadian banking and international banking.

Revenues were positively impacted by foreign currency translation, higher fee income and trading revenues, as well as higher wealth management and insurance revenues, as well as contributions from acquisitions. Partially offsetting this growth was lower net gains on investment securities and lower underwriting and advisory fees.

Our core banking margin was 2.38%, down three basis points year-over-year, driven by the low interest rate environment and asset mix changes, with higher levels of liquid assets, partly offset by higher margins in Canadian banking. Expenses are up 12% year-over-year, excluding the impact of acquisitions and negative impact of foreign currency translation, expenses were up 5%. The increase was primarily due to higher technology-related expenses as the bank continues to invest in its business.

As well, business taxes were higher. Moving to capital on slide 8. As Brian mentioned, the Bank continues to have a strong capital position with a common equity tier 1 ratio 10.1%. During the quarter, the Bank generated net internal capital of CAD900 million. The Bank increased its quarterly dividend by 6%, from year-ago levels, to CAD0.72 per share.

The Bank's common equity tier 1 ratio declined from 10.3% to 10.1%, primarily due to a higher capital charge for pensions and the impact of acquisitions. Net capital generation was consumed by organic risk weighted asset growth and other capital deductions. Common equity tier 1 risk weighted assets increased CAD16 billion to CAD374 billion from Q4 2015.

Adjusting for the impact of foreign currency translation and acquisitions, underlying risk weighted assets grew by 1%. The increase was due to broad-based growth as well as some credit migration which had a five basis point impact.

Turning now to the business line results beginning on slide 9. Canadian banking produced a good start to the year with net income of CAD875 million, up 7% year-over-year. These results include the acquisition impact of a credit card portfolio and details are summarized on slide 19. Loan volumes increased 4% year-over-year, driven by prudently managed double-digit growth in credit cards, auto lending and commercial banking.

Adjusting for the Tangerine mortgage runoff book, loan volumes rose 6% from Q1 2015, reflecting our focus on increasing primary customer relationships and day-to-day banking business. Deposit balances increased 7% year-over-year, and as Brian mentioned, retail checking and saving deposit balances were up a strong 11% and 15% respectively. The net interest margin rose 19 basis points from Q1 2015, primarily due to a shift in business mix as well as the runoff of lower spread Tangerine mortgages.

The acquisition of a credit card portfolio this quarter accounted for six basis points of the year-over-year margin increase. Our performance in wealth management remained solid this quarter, with earnings up 4% year-over-year, although AUM levels moderated to 4% year-over-year growth, and AUA levels were flat versus the same period last year, reflecting weaker market conditions to start 2016.

Provision for credit losses were up CAD29 million year-over-year, due mainly to higher provisions in the retail portfolio, driven by growth in higher-margin loans. The PCL ratio was up three basis points, well below the growth in our margin. Expenses increased 9% year-over-year or 6% excluding acquisition impacts. The balance of the increase was driven by higher technology, business investment and salary increases. Canadian banking's reported operating leverage was flat to start the year, but was slightly positive adjusting for acquisitions.

Turning to the next slide on international banking, net income increased 21% to CAD505 million compared to Q1 2015, a record performance. This performance reflected continued strong operating performance in Latin America, including loan, deposit and fee income growth.

The quarter also benefited from the positive impact of foreign currency translation, partly offset by our higher tax rate due to lowered tax benefits this quarter. Our international business continued to deliver strong loan growth, up 19% year-over-year, or 12% excluding the impact of foreign currency translation.

Latin America continued its strong loan growth, up 17% on a constant currency basis, from Q1 2015. This strong asset growth was more than supported by excellent deposit growth, up 27% versus the same quarter last year, or 18%, excluding the impact of foreign currency translation.

The net interest margin declined 4.57%, down 14 basis points versus the same period last year. This decline was primarily driven by asset mix with higher growth in lower spread assets. The impact of acquisitions helped offset the declining margins in Latin America.

Looking forward, the modest benefit of recent rate increases in some of the countries we operate in will take a few quarters before they start to materialize. Loan losses increased CAD6 million year-over-year. The loan loss ratio improved by 19 basis points to 114 basis points. The improvement was driven mostly by lower provisions in Latin America, including Mexico and Peru, despite strong loan growth.

On a risk-adjusted basis, margins were stable year-over-year at 3.72%, as lower loan loss ratio offset the margin decline. Expense growth was 17% year-over-year, or 6% when excluding the impact of acquisitions and the foreign currency translation. The balance was due primarily to business volumes and inflationary increases as well as higher business taxes. Operating leverage was positive 0.9%, or 4% excluding acquisitions and we continue to target positive operating leverage for the year.

Moving to slide 11, global banking and markets. Net income of CAD366 million was down 9% from last year. Compared to the same quarter last year, we had lower contributions from equity, foreign exchange, and investment banking. Loan losses were also higher this quarter.

Partly offsetting was a stronger performance in our precious metals business and the positive impact of FX translation. Trading revenues on a TEB basis increased from last year primarily in our fixed income businesses, while equities were lower. Net interest margin was down 14 basis points year-over-year and down two basis points from last quarter due to margin compression mainly in Europe and Asia.

Total corporate loan volumes were up 24% versus Q1 of last year or up 10% excluding the impact of foreign currency translation. The growth was across our portfolios in Canada, the US, and Europe. The Asia trade finance reductions that commenced a year ago will largely conclude next quarter. Provisions for credit losses increased CAD41 million from last year, due mostly to provisions on a few energy-related accounts.

Expenses were up 9% year-over-year, or up 4% excluding the negative impact of foreign currency translation. Higher salaries and technology costs were partly offset by lower performance-based compensation.

I will now turn to the other segment on slide 12, which incorporates the results of group treasury, smaller operating units, and certain corporate adjustments. The results include the net impact of asset/liability management activities. The other segment reported net income of CAD12 million this quarter. This was down from CAD43 million in Q1 2015 and reflects lower contributions from asset/liability management activities, partly offset by lower expenses and lower taxes.

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

Thanks, Sean. The underlying fundamentals of the Bank's risk portfolios remain stable this quarter. Our all bank loss ratio was 45 basis points, up 3 basis points quarter-over-quarter on an adjusted basis and up 3 basis points year-over-year. These levels remain well within our expectations. Before discussing the 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 and overall retail credit quality remains stable, albeit we are seeing some regional weakness in Alberta. For context, Alberta represents 15% of our total Canadian loan book, with the bulk of our exposure being well secured and 59% of those mortgages are insured.

Our unsecured retail loans in the province are approximately CAD2.5 billion, less than 1% of our total Canadian retail portfolio. In terms of customer activity in the region, we have not seen any unusual or unexpected growth in either secured or unsecured revolving credit.

Turning to international, the retail credit performance leading indicators also remain stable. We operate a diverse number portfolios across different geographies and some books are performing better than others. But overall, in excellent shape.

We have made investments in our retail collection capabilities which has strengthened our overall lending business and the credit performance in both Canada and international. Looking at our corporate and commercial loan books, the overall credit quality continues to be solid. This is evidenced by the size of the all-bank watch list, which is basically unchanged from last quarter as weakness in energy has been offset by improvements in other areas of the portfolio.

The higher formations in the quarter reflected the classification of a small number of energy-related accounts. Specifically, in the E&P and oil fields services sector, which we took provisions against as well in the quarter. I'll have more to say on the energy portfolios specifically in a minute.

Now looking at the overall credit metrics, gross impaired loans were up 9% quarter-over-quarter, or up 5% excluding the impact of the foreign currency translation. Over 70% of this growth was in our retail portfolio, mainly due to asset growth. The wholesale increase was primarily in the energy sector.

Our net impaired loans as a percentage of our portfolio improved to 48 basis points, down 2 basis points compared to a year ago. Looking at our market risk, which remains low, our average one-day all-bank BaR was CAN15.2 million, up CAD2.1 million from the prior quarter.

Slide 15 shows the trend in loss rates over the past five quarters for each of our businesses. For context, 80% of our total PCLs relate to our retail businesses, both in Canada and internationally. Overall, at 45 basis points in Q1, the Bank's loss rate remains relatively low and as I mentioned, well within our expectations.

The increase in loss rates from prior periods was almost entirely in the global banking and markets division where the PCL ratio increased 27 basis points, up from 14 basis points last quarter and the very low 8 basis points in the prior year. As I noted earlier, the increase was driven by a small number of energy accounts.

Canadian banking's PCL ratio was 26 basis points. This was up modestly from prior periods and in line with our Canadian peers and expectations for some increases as the asset mix evolved. Meanwhile, international banking had a very stable loss rate quarter-over-quarter, with improved performance compared to last year. Overall, the credit portfolios remain in good condition and are showing the resilience of our diversified operations, a high credit quality of our lending relationships, and the effectiveness of our risk management practices.

Turning to slide 16, which provides an update on our energy exposures, which have been actively managed over the past year, approximately 60% of our drawn portfolio is investment grade and that increases to almost 75% for the undrawn commitments. Our internal ratings, while taking into account the external factors, are performed on a continual basis based on macro and company-specific factors, which provide in our mind a more robust and proactive assessment.

During the quarter, we downgraded approximately 10% of our energy portfolio companies, primarily in the E&P sector, adding nine names to our watch list and we impaired, as I said, four facilities. The rating migration in the energy sector negatively impacted capital by about three basis points this quarter.

Approximately 5% of our energy portfolio in one the watch list, up slightly from last quarter. The watch list consists almost entirely of E&P and oil field services, which are the areas primarily affected by the drop in oil prices. Our focus continues to be on a select portion of that E&P and oil field services portfolios, which we have been working through on a name-by-name basis.

Quarter-over-quarter, excluding the impact of foreign exchange translation, our total committed exposure actually declined by CAD600 million in these two sub-sectors. It is important to note that we do not do subordinated lending and we rank senior in the capital structure. In fact, for the E&P and oil field service accounts that we are focusing much of our attention on, approximately two-thirds that issued debts that ranks below our senior position. On average, this debt is a multiple of the Bank's financing. This demonstrates that unlike in prior downturns, the risk is further distributed away from the senior lender.

There has been some interest in loan covenants in last week's calls. Quite frankly, covenant breaches serve as an indicator of potential credit stress and any need for relief facilitates a discussion between the bank and the borrower. In these instances, the bank works to be constructive with the borrower to improve the situation, but we do not compromise our economic interest.

Covenant relief is granted infrequently, and if so, in exchange for improvements to our lending position, whether it's with loan reductions, improved security, tighter controls, or higher pricing. For accounts that do become impaired in any sector, we look to provision both early and appropriately and have a strong risk culture and one of working out problem accounts. This is well evidenced across our full lending portfolio by comparing our total allowances to risk weighted assets, which is at the top end of our Canadian peers.

As we have indicated previously, the bank's corporate and retail losses in a stressed environment with higher unemployment in Alberta and oil prices staying where they are today throughout the end of 2017, would in our estimate, add an additional CAD450 million to CAD550 million of PCLs for the bank. We would not expect this to take place all in one quarter and would increase the all-bank PCL ratio between 5 to 10 basis points from the current level of 45.

We remain encouraged by the high degree of investment grade loans in our energy portfolio and as we have over the past two years, we will continue to proactively manage these exposures. With that, I will 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 over the quarter, and make some brief remarks on the outlook. As we noted earlier, Canadian banking had a strong quarter. Our continued focus on deepening customer relationships and improving our business mix is hitting the bottom line with earnings up 7% year-over-year.

These efforts resulted in strong volume growth in targeted areas, notably, retail and commercial loans and deposits and a more profitable business mix. Together with a recent credit card portfolio acquisition, these factors helped to drive continued improvement in the net interest margin again this quarter. Over the course of 2016, we expect the continued shift in business mix to benefit asset yields and improve risk-adjusted margin.

Our Canadian wealth management businesses also performed well, with results up 4% year-over-year, notwithstanding a challenging market backdrop. After several strong quarters of the double-digit growth, we are likely to experience more moderate growth for the balance of 2016. Commercial banking results were solid with double-digit asset growth supported by strong growth in deposits.

And while the expense level in Q1 was elevated, as we continue to invest in improving our customer experience and drive operational efficiencies, our higher than pure revenue growth in this segment affords us the ability to make the necessary strategic internal investments while still delivering good bottom-line results. Looking ahead, despite imbalances in regional performances across Canada, we continue to see good opportunities to grow Canadian banking over the course of 2016.

Turning to international banking, as Sean noted, we delivered another quarter of earnings and we're off to a good start in 2016. The strong results were delivered in large part by robust loan, deposit, and fee growth from the Pacific alliance countries of Mexico, Peru, Chile and Colombia. As we outlined in our recent investor day, we continue to see great potential from these markets, expecting growth in the 9% to 11% range over the medium-term. Also contributing to the very good performance was the Caribbean and Central America, which continues to benefit from an improved economic environment and lower energy prices.

International banking also continues to experience very good credit performance as we pursue growth in a disciplined manner. Over the course of 2016, we expect any PCL growth to be largely in line with asset growth. As we said before, our efforts and resources will be prioritized on the Pacific alliance region as we look to achieve greater relevance and presence in this important region.

With economic growth in the 2.5% to 3.5% range, we remain highly confident that we can run a profitable and growing operations in the region. As Nacho Deschamps assumes leadership for international banking, we look forward to continued strong results from the division.

Finally, in global banking and markets, the business delivered improved results this quarter. While results are down from a year ago, we are pleased with the improving performance. However, challenging market conditions, including substantial volatility, are likely to persist in the near-term.

As Stephen noted, we expect there to be additional provisions for some of our loans in the energy sector. Notwithstanding these headwinds, we are encouraged by some of the recent trends we have seen in selected businesses, including our lead role on some meaningful M&A transactions and equity offerings. As we look forward to the balance of 2016, we expect concerns about the global economy to persist.

Here in Canada, we expect the second half of the year to be stronger than the first half and benefit from a strengthening export economy. In our international markets, particularly the Pacific alliance region, we are seeing positive signs across the region and expect economic growth to be between 2.5% and 3.5%.

We are encouraged by our Q1 operating results with our PNC businesses here in Canada and internationally delivering good performances across several core areas. As such, we are confident that we are on track to deliver improving financial and operating results to our shareholders for the balance of this year. With that, I will turn it over to Sean for the 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. Operator, can we have the first question on the phone, please?

Robert Sedran, CIBC.

Hi, good morning. I just wanted to ask James about some of the personal loan growth that we have been seeing. It continues to outpace the industry. I wonder if you can just give us a sense of the sort of geographic breakdown. I mean is it basically market weight the country or is there a specific region in which you're surging? And then if you could also contrast that with the mortgage growth, even ex-Tangerine, it seems like it's a little bit below where the market is and wondering if that's a conscious decision or if it's a competitive response.

Sure. Thanks Rob. I would say in terms of asset growth, we are very much executing our plan. Our plan, as you know, includes delivering an improved customer experience, changing our business mix to deliver a higher margin including a higher risk-adjusted margin, and finally, driving operational improvements which will result in an improved productivity ratio over time.

So, we have been very much focused in terms of business mix and in terms of the asset side of the balance sheet, we've been determined to grow cards as part of our payment strategy, auto as well as commercial. And if you look at those three asset classes in particular, Rob, cards are up 41% year over year. That would be 15% ex-Chase. Auto was up 15%, commercial's up 11%. In terms of, to give you sort of a regional perspective on it, I would say, and I think commercial is a very good example of this, that business is very much being driven by BC and Ontario.

And we are fortunate, of course, that BC and Ontario represent in excess of 50% of this country's GDP, so strength in those two regions, I think, continues to bode well in terms of growing that business. Otherwise, I would say in terms of cards and auto, I would not point to any regional variances in particular other than, in respect of cards and auto, we are increasingly focused on quality. It's not just about quantity. And so we have tightened up our credit in certain markets, including those regions that are impacted by low oil prices. So perhaps a bit of a bias away from Alberta and a couple of other areas.

Let me speak briefly to mortgages. What I would say on mortgages is that we are very satisfied with our position in the market. We are number three in the market. We have low single-digit growth in balances and we have modest margin expansion year over year. And I would say that's not just an outcome, it's very much a choice. We've been thoughtful and we've been deliberate about which asset classes we want to grow and at what pace. And we are satisfied with our position in mortgages. Currently, as you know, it's an intensely competitive business and I would say on the variable rate side of the business, margins in particular are very, very compressed.

So these trends in mortgages you would expect to continue, then?

Absolutely. Low single-digit growth in mortgages is very much our plan.

Okay. Thank you.

Next question, please.

Meny Grauman, Cormark Securities.

Hi, good morning. Just to follow up on Rob, wondering if you could give us some numbers in terms of what kind of asset growth you are seeing in Alberta specifically. Specifically in the autos and the credit cards. Is that something that you can share?

I think our auto book in Alberta would be declining. It's not increasing. Again, that's a choice. It's not just an outcome. I don't have the numbers for cards. Stephen, do you have a perspective on that?

I don't have the trend line. As I indicated, the unsecured lines which includes cards, is about CAD2.5 billion. That number really has not moved over the last quarter.

Okay. Thanks for that. And then specifically in the auto book in the oil affected regions, there was another bank that talked about some of the credit issues emerging in that book specifically. I'm wondering if you could talk to that in terms of what you are seeing specifically in that portfolio.

Yes, no, I'd be happy to. Let me make a few comments on auto. First, I want to reiterate that we very much like this business overall. It's important to our customers, it's a major item that they purchase frequently, and we've been doing this for a very long time and we believe we're good at it. So we have contracts currently with nine of the OEMs. Six of them are exclusive. I think it's important to point out that our primary focus is on new cars and sub-vented arrangements.

And we view that as actually quite risk-mitigating over a cycle compared to other types of lending we might do here. So the business has performed well. If we look at it currently, I would say it's performing within our expectations, but clearly it's impacted by both intense competition and indirect energy impacts, and as a result, we are seeing margins compressing and we are seeing PCLs increasing.

So we are focusing, or refocusing, this business really on two things. The first is risk-adjusted margins and the second is cross-sell. So the team as we speak, they are busy on pricing, they're busy on the quality of bookings. And they are actually launching pilots, which I think are quite important, to really test our ability to cross-sell and deepen the client relationship.

Thanks for that. And then just if I can ask another question on the international business, you talked about the shift in business mix impacting the margin. I'm wondering if you see any need to mitigate some of that or do have the need or the ability to mitigate some of that change in business mix in Latin America?

Meny, it's Dieter here. The modest decline is something that's well within our range of expectations. And we see the margin strengthening over the next couple quarters as central bank rate increases come repriced through the asset and liabilities. We certainly believe this is manageable and, as you can see, we've earned through the margin with significant volumes and our expense growth to more than offset

Thanks for that.

Okay, next question, please. Next question on the line, please.

Gabriel Dechaine, Canaccord Genuity.

Couple of questions for Steve or James. You talked about the end-quarter impact of credit downgrades on your Q1 ratio, could you tie in the stressed scenario, what that would mean to your CET1 from all the downgrades you anticipate? Then, you talked also about the unsecured lending exposure in Alberta, CAD2.5 billion. What about the auto portfolio? I might have missed that.

Okay. Thanks, Gabriel. As it relates to our stress tests, we expect over the two-year period, that the movement could be up to a maximum of 30 basis points to the CET1 ratio. As I said, that would be spread out over the two years, as the losses came in and as we continued downgrade. It's not really the losses, it's the downgrade of the portfolio that affects it more than anything else.

As it relates to the credit cards, I actually, in Alberta, as I said, between cards and unsecured lines, it's CAD2.5 billion. In the auto side, it's running at about a little over CAD4 billion, CAD4.2 billion and as we indicated before, that's kind of flat-lining at the moment.

And as noted, well you didn't note it earlier, but I have in previous calls, we set up about six to nine months ago, an enhanced collection team, specifically on the autos, as well as one for the cards. So we have been on top of this for some time and that's really helping to improve our returns at the end.

In that stress scenario, what kind of loss rates are you baking into those portfolios? And then the corporate too?

In the individual energy portfolio, if you take a look at our current five-quarter run-rate for energy, we're probably around 78 basis points now that we've experienced cumulatively and we expect that to go up. But historically, if you look back, the maximum has been about 200 basis points in 2000, 2001. We are expecting to something a little higher than that in that particular industry.

As we mentioned on the call, the 45 basis points all-bank would go up 5 to 10 basis points (multiple speakers).

I understand that. And how about the consumer stuff?

The consumer stuff? That's part of the CAD550 million (multiple speakers).

Right.

(Inaudible) earlier stress.

No but the numbers you gave on the energy, or the 78 going up to 200, kind of thing. Maybe I will follow-up offline. I just want to sneak in one more, though. Spring is around the corner. It felt like it this weekend anyway. The redetermination process, can you give us some sense of what's in the cards there, the credit lines being cut by XX percent kind of thing and what other adjustments you might be contemplating with your borrowers?

Sure, well we are having, obviously from the last credit redetermination, as we indicated, about 50% of our lines decreased, 50% held. The lines that decreased last fall were probably down about 20% plus. We recast, obviously, the price decks based upon the current scenarios. And they will come into effect in the next month and a half, two months sort of thing. So we would expect at least a like reduction in lines.

Probably not a 50/50 split, though?

It will vary. It really depends. And what we found is, quite frankly, a lot of our clients are being very resilient in continuing production while their CapEx may be slowing, the production actually of the North American fields is almost up from what it was last year.

Okay, thank you, Stephen.

All right. No problem.

Next question on the line, please.

Steve Tehriault, Bank of America Merrill Lynch

Thanks very much. First just a couple of follow-ups for Stephen. First on capital, looking at the regulatory capital supplement, there's about a CAD3 billion decline in RWA from methodology and policy changes. Can you just outline that a bit for us?

I will take that. There's just a -- we have ongoing refinements and remodels and this is just one model that's on the corporate lending side that's reduced some of our risk rates.

Corporate lending across a broad variety of sectors?

Yes. Across the whole corporate lending book. Yes.

Okay. And then just going back to oil and gas for second, Stephen, in your prepared remarks, I think it was, you talked about 5% of the portfolio being on the watch list. Wondering in your stress tests, what percent does that go up to in terms of percent of the oil book on the watch list?

We didn't actually key on the percentage to be honest. I was busy working on the aggregate down. We basically took most of the watch list in the stress test, and moved everything down at least three grades.

Okay.

So I don't have that number right on hand. I can get it for you.

Okay. I may follow up. And then just lastly, turning to the JPMorgan deal, just a little detail there. I saw in the notes there was a CAD230 million credit mark, you used about CAD40 million in the quarter. Is that, I think it was CAD39 million, is that how we should think about the normalized credit losses on the book?

It seems a bit high at 9%. If I take that CAD39 million annualized over the whole portfolio. So maybe just a little detail around what you expect on the credit side there. And in a couple of years, does that grow or is part of that going to run off? Maybe just give us a sense for how you project that out the next little while.

I will speak to the credit mark. We expect the remaining credit mark of about CAD230 million to be runoff of 50% this year and about 20% in 2017 and the continuous, into 2018, 2019 at a similar 15% to 20% rate. In terms of the actual card portfolio, James, do want to give us some color on that?

Yes. Maybe just a couple of thoughts. Look, we're very pleased to welcome the Chase cards team aboard. We got customers, we got card balances, we got a great platform and we got some good technology. So we got in excess of 2 million active customers there, about CAD1.7 billion of receivables, and 600 employees importantly with expertise in fraud, collections, recovery and customer service.

So far, we have seen over 500,000 new Scotiabank Momentum MasterCards have been activated to date. We are very, very pleased with that. The portfolio though, as you've pointed out, is runoff in nature. So in Q1, we earned CAD15 million. It will stabilize at a lower level. My expectation is that stabilization will occur kind of late 2017, maybe early 2018, and for a number, maybe it will stable in the CAD10 million-a-quarter kind of range. But so far, we are very pleased with the acquisition and happy to welcome that new team and those customers aboard.

Okay, that's helpful. Thanks very much.

Next question, please.

Peter Routledge, National Bank Financial.

Thanks. Some questions for Steve. And thanks for your comments on being subordinate or having debt subordinate to your position in your oil and gas loans. But how does that subordination impact your assessment of loss given default and probability of default?

Well, obviously the probability of default is based on the total debt.

So it goes up, presumably?

The probability of default will be based on total leverage. Our actual loss given default will be based on our senior leverage which, as I indicated, is significantly less in those cases. So that's why you can't expect that we will be having formations and restructurings going forward over this next year as this plays out. However, we think these restructurings will end up with most of the banks at the senior level coming through.

The worst senior loan recovery rate over the last 25 years according to Moody's is about 50%. I mean, what are your expectations relative to that admittedly, stress loss given default?

Well, and that 50% is based on a all, secured and unsecured.

Yes (multiple speakers).

That's not the -- and I would agree that historically, our unsecured lines probably run, average, in that 40% to 50% range. However, that's not what we've experienced when we've been in a secured reserve-based environment. It's been substantially lower than that.

Okay. And then just can --

However, to be honest, for this to be open on the stress tests, we do assume a higher loss rate than we have historically.

Okay. And then, on your undrawn commitments on page 16, of CAD14.1 billion, what are your assumptions on how much of that gets drawn in advance of default? So what are your exposure at default assumptions, in other words?

Exposure default we usually take for the non-investment grade portion of it. We assume at least 50% gets drawn. And for the investment grade, we assume 75% gets drawn.

Great, thanks. And then one other just question on the whole oil and gas portfolio. Every now and again, we see a going concern, the oil and gas company issue a press release and say we got covenant relief. And sometimes your peers are involved in that press release. Sometimes it's Scotiabank. Some folks will argue that is the sign that the bank in question is extending and pretending and there are big losses coming down the pike. What would be your response to that argument?

I think that's why I opened it up in my remarks right at the very beginning. So, I'm happy, we can discuss it off-line, but I think we all know that whatever we do, we do from the benefit of the bank and our shareholders.

And so that, those actions, you are taking with a mind to limiting losses?

I'm taking in mind to strengthen my position, yes.

Yes. And then, how common is, there was a deal in the press release in late January where you did have covenant relief, but you also lowered the commitment by 25%. Is that basically the quid pro quo with these clients who are maybe struggling through a difficult period? Covenant relief for dropping your commitment?

As I indicated in my remarks, we will use it to reduce the amount, to shorten the term, to improve the security. In a rare case, we'll, I mean pricing isn't what I'm looking for at that point. I will take it if I get it, but I'm looking to improve my secured position.

Fair enough. Thanks for that.

Next question on the line, please

Mario Mendonca, TD Securities.

Good morning. First a question for Mike Durland. The growth in the corporate book has been very strong, and I think Sean, you gave us an idea that it was about 10% growth year over year excluding FX. You also said that it was Canada, US and Europe.

What I'm trying to understand is why is it that for that for Scotia, and frankly all the Canadian banks, the corporate loan growth has been so good? Are there particular sectors you can point to? Of course excluding FX, any particular sectors or why has it suddenly been so strong, given that sort of de-emphasis on corporate lending, say only just a few years ago?

Yes, so I would say a couple things. One, I would say for Scotia, our loan growth is a little bit of a catch up. I think that we had slower loan growth for a period of time in that business, so we've been focused on re-engaging with relationships that we've had for a long, long time, up-tiering ourselves with those relationships, and that has produced a very strong growth trajectory which we are very pleased about. In terms of the sectors, it's very broad-based. One of the sectors that we are doing very well in is the infrastructure sector.

We have a very strong platform in that business across the bank's domestic and international platforms. That's something that we are quite pleased with. But it's been very broad and I would articulate it as delivering the bank to the customer and very much focused on relationships they've had a long, long time and really working hard to up-tier ourselves with those relationships.

And Mike, why do you figure the bank is sort of re-engaging itself with these old relationships?

Why do I think we are?

Yes, because you hadn't for a while and now you are again. Something's changed that's made you want to re-engage with these relationships.

I think when we looked at our strategy a couple of years ago, Brian and I sat down and looked at it, we thought that we had leveled out in terms of our relevance to some of our important relationships. We have a big bank, a strong bank a great reputation, great brand in the market, and we have a strong cross-sell capability and we thought that, that part of the business lagged the growth of our cross-sell capability and presented an opportunity for us.

We have been very focused on engaging in conversation, presenting to our customers the strength of our platform and that conversation has been extremely positively received. It will take time. It's taking time. We started this a couple years ago. Really the results are just starting to appear now. But there is good momentum. But it's high-quality momentum.

We are not talking about going from the eighth bank to the first bank. We are just talking both slowly deepening those relationships, demonstrating our capability, earning the trust, and I think it's a very important strategic imperative and I know that Dieter and others will continue to focus on it.

Could we go to Stephen again? On the -- all your comments around subordination and where Scotia and the banks are in the capital structure, and especially your comment on the covenant relief were important to me, and admittedly somewhat eye-opening as well. I felt like I was learning something from this.

Let me ask one other related question about the covenant relief. We all know that it happens, what would be helpful to understand is how pervasive. You called it infrequent. Would it be fair to say that it's a less than 5% of the portfolio at this time or perhaps less than 10% of the portfolio?

I would, on the aggregate all-bank portfolio, that's probably the right number. Obviously, as we are going through with the energy sector, and they are having the difficulties you would expect in this current environment, it would be a higher percentage. And you've got to understand, I mean, we are looking at a number of different financial ratios which are set up under different circumstances.

So, financial covenants are set to trip well before the company defaults. That's the whole point of the early warning system. So just because someone trips a covenant doesn't necessarily mean they are seconds away from default. It means, obviously, their business model isn't quite doing what they thought it was going to do when we originally went into the loan and so we have to sit down and re-address to see what their business model cranks out now.

So it would be infrequent as it relates to the entire book of loans, Scotia's entire book, but it would be frequent as it relates to the oil and gas sector. Is that fair?

I would say that obviously at this point of the cycle, we are spending more time negotiating with all of our clients in the energy sector, yes.

Thank you.

Next question on the line, please.

Doug Young, Desjardin Capital Markets

Hi, good morning. Just want to kind of go back to a few things. I guess, Dieter, on the international side, on the NIMs, you say you anticipate it to increase as you move through FY16. Is the CAD465 million to CAD475 million range that you have given before, is that still relevant, or has that range changed in your view?

Well that's the medium-term target. We're going to see the next few quarters, see our asset and liabilities repriced to the central bank rate increases that we saw in Mexico and Peru. That's going to take some time. And so we'll anticipate we'll move the margin up over the next foreseeable quarters.

But when you say medium-term, your thinking it's going to move back towards that range, but probably not until --

Yes. Q3, Q4.

Q3, Q4.

But here I would add on this, and I emphasize this, is the teams have continued to earn through the margin. I mean, good volumes, watching their costs, they're running very good banks, and we are returning good value to shareholder in terms of net income increases. So we are earning through, what I would say, a very modest compression, we're still less than 2% of the overall number.

Yes. And then just, Steve, I think you mentioned credit migration had an impact on the CET1 ratio and on the PCL ratio, and I apologize, I missed those. Can you repeat what those were?

It's five basis points on the common equity tier 1 ratio this quarter and in terms of -- sorry, what was your second question on the provision for credit loss?

Yes. Was there an impact on migration there?

No, not really. We've got some higher specific [accounting] provisions but that's not really so much migration. We had accounts that also moved from watch list into the impaired loans, but that's how to think of it from a provisionist standpoint.

Okay, and then just lastly, Brian, in your prepared remarks, you just said you've got strong balance sheet to selectively pursue acquisitions. You're sitting at a 10.1% CET1 ratio. Just kind of trying to think about those two points and where you want to run from a CET1 perspective. Thank you.

Yes. I've been asked that question a number of times and I'd answer the same way as that we could dip a little bit below 10% for something that's on strategy that looks attractive. But, we are doing a lot of work around here in terms of RWA and scrubbing our RWA. That's a continuous process.

We had 15 basis points against our capital this quarter on the pension plan. We would expect, as markets normalize a bit here, which we expect them to do to earn that back, so in terms of acquisitions, we continue to monitor the marketplace and if we do anything, it would be like we've done, purchasing the Citibank assets in Peru, Costa Rica, Panama. I would view them as tuck-ins, incremental acquisitions. Nothing transformational.

Thank you very much.

Okay. We have time for one more question on the line, please.

Sohrab Movahedi, BMO Capital Markets.

Okay, thanks. It's actually a two-part question. It's two parts of the last question. One, Brian, you were very clear about the transformation the bank has been going through. You've talked about the investments you're making from a technology perspective.

I wonder if you could comment as to whether or not the current-quarter expenses, for example, would be reflective of the type of run-rate expenses you would be willing to run at balance of year as you make that transformation.

In terms of just expenses, what you see in this quarter would be a little higher than what we would expect in the norm. You will see -- we have had a lot of expenses with some technology initiatives from a regulatory standpoint. We would expect those to start to burn off in the balance of 2016.

And candidly, as I said in my comments, there is a couple technology initiatives that were customer focused that we wanted to move ahead in 2016 regardless of economic condition. And we've gone ahead and done those. And as I said in my comments, we are earning through them with strong asset growth in the Canadian bank. So expense levels will tend to moderate a bit from here.

Okay, excellent. And any updates on the [Sanichart] file?

Nothing that I can comment on.

Thank you.

Thank you all. I will turn it over to Brian for some very brief closing remarks.

Thank you all for your participation today. Before we close, I'd like to take the opportunity to recognize Mike Durland for joining us on his last call this morning. Mike has been with the bank for 20 years and has been a key member of our team here at Scotiabank and Mike has lots to be proud of in terms of his contribution to the capital markets business and the bank overall.

And I think that, on behalf of the team, Mike, you represent the best of Scotiabank's culture in terms of being a community leader and a philanthropist. You've served the bank exceedingly well, and on behalf of the team here, we want to wish you and Catherine continued success and good fortune. Well done.

Thank you, Brian. I appreciate that.

Thank you very much for participating. We look forward to talking to you next quarter.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.