Bank of Nova Scotia (BNS) 2017 Q1 法說會逐字稿

Good morning, and welcome to Scotiabank's first-quarter 2017 results presentation. My name is Jake Lawrence, and I'm Scotiabank's Senior Vice President responsible for Investor Relations. 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 this morning, we'll be glad to take your questions.

Also joining us in the room this morning to take questions are Scotiabank's Business Line Group Heads: James O'Sullivan from Canadian Banking, Nacho Deschamps from International Banking; and Dieter Jentsch from Global Banking and Markets. Before we start this morning's call, and on behalf of those speaking today, I'd like to refer you to slide 2 of our presentation, which contain Scotiabank's caution regarding forward-looking statements. With that, I'll now turn the call over to Brian Porter

Thank you, Jake, and good morning, everyone. I'll start on slide 4. We are pleased with the Bank's start to 2017. Scotiabank entered the year in a strong position, and we have seen good earnings momentum continue across all three of our businesses.

The Bank delivered over CAD2 billion in earnings and diluted earnings per share of CAD1.57 for the quarter, up approximately 10% compared to last year. Our return on equity was strong at 14.3%, and within our medium-term objectives. On a pretax pre-provision profit basis, our strong revenue growth and focus on reducing structural costs led to a 14% increase compared to last year.

Turning to our business lines, I'd like to make some brief comments. Canadian Banking delivered another strong quarter of earnings by focusing on growing and deepening our customer relationships. Further progress in reducing structural costs led to strong operating leverage, and efforts to optimize the balance sheet have resulted in improved margins and solid loan and deposit growth.

International Banking delivered a record quarter of earnings and was underpinned by solid growth across our key Pacific Alliance markets, notwithstanding some geopolitical headwinds. Overall, our personal and commercial banking businesses are generating roughly 80% of Scotiabank's earnings, with strong earnings growth and improving return on equity.

Global Banking and Markets also had a strong performance in Q1, continuing the momentum we saw in the second half of 2016, with improved efficiency and profitability. At the enterprise level our structural cost initiatives are progressing as planned, and the Bank generated strong operating leverage of 4.5% this quarter.

In terms of risk management, overall credit quality remained stable for the quarter. Risk is evolving as expected across our portfolios. The Bank also remains very well capitalized with a strong common equity Tier 1 ratio of 11.3%. This strength provides us with optionality to invest in our businesses organically, grow through acquisitions, or return capital to our shareholders.

On the last point, we also increased our quarterly dividend by CAD0.02 to CAD0.76 per share. The quarter's strong performance reflects the ongoing execution of our strategy, and building on our momentum to sustainably grow earnings and dividends for our shareholders.

Before I turn the call over to Sean, I want to provide a few comments on our recent digital banking update, which we held on February 2. At our update, we articulated our digital vision, including some ambitious goals we have set over the medium term, and we believe our digital transformation is a key enabler of the Bank's overall strategy.

The ever-quickening pace of technological development is having a profound impact on customers, industries, and economies, not just financial services. As such, we believe it is more important for the Bank to move in the right aspirational direction with good velocity, rather than focus too narrowly on precise targets for a specific timing.

As outlined on the slide, we have identified a number of ambitious goals over the medium term. We aspire to be a leader in customer experience across our five key markets, as measured by our Net Promoter score. We also set goals of having at least 70% digital adoption by our customers, at least 50% digital retail sales, and less than 10% of transactions completed in branch.

These digital goals, taken together with other efficiency-related efforts, will allow Scotiabank to continue improving it's leading all-bank productivity ratio to be at 50% or better by 2021. Overall, we believe the Bank is well-positioned to become a digital leader. I will now turn the call over to Sean to discuss our financial performance.

Thanks, Brian. I will begin on slide 7, which shows our key financial performance metrics for the current quarter and comparative periods. As Brian mentioned, the Bank delivered a very good start to the year, with net income of just over CAD2 billion in Q1, up 11% year over year. Diluted earnings per share of CAD1.57 were up 10% compared to last year.

All three of our business lines delivered a strong quarter to start the year, with double-digit earnings growth. Revenue growth was up 8% year over year. Adjusting for unfavorable foreign currency translation, revenue growth was 11%, reflecting 7% growth in net interest income and 15% growth in noninterest income. Interest income was driven by higher asset growth and wider margins across all of our business lines, partly offset by lower contributions from asset liability management activities.

Our core banking margin was 2.40%, up two basis points year over year. Fee income was positively impacted by higher banking, underwriting, trading revenues, and wealth management fees, as well as acquisitions. Gains on real estate were offset by lower net gains on investment securities. Noninterest expenses were up 3% year over year, or 6% adjusting for unfavorable foreign currency translation.

The Bank continued to focus on investing on business initiatives, which drove higher digital and technology-related expenses. Higher performance-based compensation and employee pension and benefit expenses also contributed to the increase. These costs were partly offset by continued benefits realized from our previously announced structural cost-reduction activities, along with lower advertising and other business expenses.

In Q1, we realized approximately CAD90 million in savings from our cost-reduction activities, accounting for roughly one quarter of our previously announced guidance of CAD350 million in savings for 2017. Our strong revenue growth and focus on reducing structural costs has led to a 14% increase in pretax pre-provision profit compared to last year.

Our provision for credit loss ratio remained stable. The Q1 productivity ratio was 53.7%, improving by 40 basis points quarter over quarter and 240 basis points compared to the same quarter last year. Overall, we delivered strong operating leverage of 4.5% in Q1. As Brian highlighted earlier, the Bank also increased its quarterly dividend payments to CAD0.76, reflecting a 6% increase compared to last year.

Moving to capital on slide 8, the Bank continues to maintain a strong capital position, with a common equity Tier 1 ratio of 11.3%, up from 11% in the prior quarter, and up 120 basis points compared to Q1 of 2016. The improvement in the CET1 ratio was driven by continued strong internal capital generation and prudent management of our asset growth.

As well, we are seeing positive impacts of higher pension liability discount rates and higher pension plan asset returns, which have essentially now reversed the unfavorable impact on capital ratios from the low interest rate impact on pensions in the previous few years. This improvement contributes approximately 20 basis points to the capital ratio this quarter.

The Bank's common equity Tier 1 risk-weighted assets declined 1% quarter over quarter, reflecting the impact of a stronger Canadian dollar on foreign currency denominated risk-weighted assets, partly offset by higher credit and operational risk RWA.

Turning to the business line results, beginning on slide 9, Canadian Banking produced a strong quarter with net income of CAD981 million, up 12% year over year. Adjusting for real estate gains realized in the quarter, earnings were up approximately 7% year over year.

Total revenues increased 7% from last year, with net interest income of 4% and noninterest income up 11%. Noninterest revenue growth was primarily in card revenues, higher insurance revenues, mutual fund fees, and the real estate gain.

Loan and acceptances increased 3% from last year. Residential mortgage growth was up 2%, or up 4% excluding the Tangerine mortgage runoff book. And personal loans were also up 4%.

Optimizing our balance sheet remains a key focus, as the Bank grew core deposits by 12% in retail savings and 8% in checking deposits. The net interest margin rose four basis points from Q1 last year. Wealth management delivered a strong quarter with earnings growth of 12% year over year, driven in part by market appreciation and net sales, as well as efficiency improvements. AUM was up 9% and AUA was up 7%.

Provision for credit losses were up CAD41 million year over year, or 21%. Higher provisions in retail portfolio accounted for most of the increase, driven by growth in higher margin products, as well as higher commercial provisions due to a single commercial account. The PCL ratio was up four basis points.

Expenses increased 2% year over year, reflecting higher spending on digital and technology, advertising to support business growth, and salary increases, which were partially offset by benefits realized from cost-reduction initiatives. Canadian Banking again delivered strong operating leverage at 4.9% in Q1, or 3.3% adjusting for the aforementioned gain.

Turning to the next slide on International Banking, the business lines continued to build on the strong momentum of 2016, with our record level of quarterly earnings. At CAD576 million, earnings grew 14% compared to last year, or 18% adjusting for unfavorable foreign currency translation. Earnings growth has been profitable and the business generated an ROE of 14.2%.

These results reflect continued good retail loan and deposit growth, strong net interest margin, and growth in noninterest revenues, including higher banking fees, insurance revenues and securities and hedge gains. Benefits from reducing structural costs also contributed to the quarter. Loan growth was flat year over year but up 5% adjusting for foreign currency translations.

On a constant currency basis, Latin America grew 5% compared to a year ago, led by strong retail growth of 12%. Solid loan growth in our Pacific lines of the region was partially offset by a reduction in the remainder of Latin America.

Although we are seeing underlying momentum in our commercial loan portfolios, the book experienced some meaningful US dollar-denominated pay downs in the quarter due to market-driven factors, and is working through strong levels of commercial loan growth versus the first half of last year. Over the course of this year, we expect commercial volume growth to strengthen on a constant currency basis.

International Banking is also driving higher deposit growth of 5%, or 10% adjusting for unfavorable foreign currency translation. The net interest margin increased to 4.73%, up 16 basis points year over year, driven by an improvement in business mix acquisitions and repricing following recent interest rate changes in some markets.

Credit quality remained stable. Relative to last quarter, loan losses increased CAD16 million to CAD310 million. The loan loss ratio was up 6 basis points; however, this was due mainly to lower acquisition-related benefits and recoveries.

Expense growth was 1% versus last year, or up 6% adjusting for the impact of foreign currency translation. About half of this increase was from acquisitions, with the balance from higher business volumes and inflationary increases, partially offset by benefits from cost-reduction initiatives.

The productivity ratio of 55.3% in Q1 improved by approximately 120 basis points from last quarter and roughly 230 basis points compared to the prior year. And operating leverage was strong at 4.2% to start the year.

Before moving on to Global Banking Markets, I want to reiterate the strong underlying performance in International Banking, as well as discuss some thoughts around the outlook. Q1 was another quarter of strong growth. Improving margins, stable credit risk, and focus on reducing structural costs has allowed the business to deliver record earnings.

Turning to Scotiabank Mexico for a moment, I want to emphasize this business continues to perform well. While the peso has depreciated, causing some headwinds, we had other operating tailwinds to support earnings and the business has been gaining market share. In fact, Scotiabank Mexico's market share performance this quarter ranked top three across all key products. Retail loan growth has been strong, margins have increased, and expenses remain well-managed.

Specific line countries, including Mexico, are producing strong results and have great potential. And we are committed to the medium-term objectives shared at our Investor Day in Mexico City in 2016.

Moving to slide 11, Global Banking and Markets. Net income of CAD469 million was up a strong 28% compared to last year. This earnings growth was driven by higher contributions from fixed income and Canadian lending businesses, as well as lower PCLs.

Trading revenues on a TEB basis increased more than 25% year over year, driven mainly by strong results from fixed income and foreign exchange, as well as lower comparable levels in the same quarter last year. Revenues also benefited from higher lending volumes and deposits in Canada and the US, as well as higher loan origination fees versus a year ago. Partly offsetting were lower volumes in Asia and margin compression in the US, Canada, and Asia.

On a quarter-over-quarter basis, margins were down 15 basis points. This is driven by higher allocated funding costs, lower loan origination fees, and margin compression in the three geographic regions I just mentioned.

Provision for credit losses of CAD8 million was down CAD46 million versus last year. The loan loss ratio improved by 23 basis points to four basis points. Quarter over quarter, loan losses were down CAD31 million. Improvement was driven by lower provisions in the energy sector.

Expenses were up 10% compared to last year, due mainly to higher performance-based compensation costs, as well as higher technology and regulatory expenses. Notwithstanding, operating leverage was very strong at positive 5%.

I'll 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 a net loss of CAD78 million this quarter. Earnings in the segment were down from CAD12 million in Q1 last year, driven by lower securities gains, negative foreign currency translation amounts, and higher expenses. On the all-bank perspective, these lower net gains on investment securities were largely offset by the real estate gains discussed earlier in Canadian Banking.

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

Thanks, Sean, and good morning. We remain very comfortable with the underlying fundamentals of the Bank's risk portfolios. The results this quarter are within expectations, and the loan loss ratio was stable at 45 basis points.

Our energy portfolio remains well-managed and had a net recovery of CAD13 million in Q1 with no new formations. The commutative energy loan loss ratio since 2015 of 2% is well below our guidance of less than 3% until the end of this year. We remain committed to our guidance and are actively managing our exposures.

Overall, our retail credit performance in Canada and International is performing as expected. In Canada, higher provisions in retail are being driven by growth in relatively higher spread loans, reflecting asset mix and portfolio seasoning. This quarter, there was also provisions on a single commercial account.

In International, overall credit quality versus last quarter was driven by higher retail provisions in the Caribbean and Central America, due to lower acquisition-related benefits and recoveries. Commercial provisions were largely unchanged.

Now looking at credit metrics, gross impaired loans were down 3% quarter over quarter. The decrease was driven by International as well as Global Banking and Markets. Our net impaired loans as a percentage of our portfolio was unchanged to 49 basis points quarter over quarter.

Net formations amounted to CAD723 million, up from the CAD645 in the prior quarter. The increase was driven by higher international retail formations through Colombia and Peru, with all other areas either flat or improving.

Looking at our market risk, which remains low in Q1, our average one-day all-bank VAR was CAD12 million, up CAD1.6 million from the prior quarter, and there were no daily trading losses in the quarter.

Slide 15 shows the recent trend in loss rates for each of our businesses. Our loan loss ratio this quarter is 45 basis points, unchanged from last quarter and year over year. Canadian Banking's PCL ratio up four basis points year over year was driven by retail exposures as the Bank continues to optimize its balance sheet, as well as the one commercial account mentioned earlier.

In International Banking, the loan loss ratio was up six basis points quarter over quarter and seven basis points compared to a year ago. Global Banking markets improved to a low of four basis points due to the lower energy-related provisions. Overall, we believe our credit portfolios remain in good condition. And with that, I'll now turn the call back to Brian.

Thank you, Stephen. Before we open the call for questions, I'd like to highlight some of the key takeaways from our presentation and comment on the outlook for Scotiabank. We delivered strong results to start the year and we expect this momentum to continue over the balance of the year.

In Canada, we continue to strengthen the customer experience, optimize business mix, and reduce structural costs. For the International Bank, our operations delivered record earnings and generated strong operating leverage. We continue to see great potential across the Pacific Alliance region, including Mexico. And Global Banking and Markets has seen improvement market activity and lower energy-related credit costs, which is leading to improved results.

Our previously announced restructuring charge is on track, and we are delivering improved operating efficiency as we reduce structural costs. As we continue to transform the Bank digitally, we will make further investments to redesign and streamline processes to become a digital leader. The investments will make us more efficient and easier for new customers to do business with us, and existing customers to do more business with us. In closing, we are pleased with our results this quarter, and I will now turn the call back to Sean for questions

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?

Thank you. Gabriel Dechaine, International Bank Financial.

Good morning, thanks for taking my question. I just wanted to delve into that commercial loan growth in International a bit, and you talked about it, Sean. I'd like to hear a bit more about that. How big is the USD denominator portfolio? And were these actions taken preemptively by corporates that were better able to do so and maybe there's some others there that are better having a bit more difficulty. Have there been any changes to your watch list in the international segment, specifically in that type of portfolio?

Okay, so I'll ask Nacho to address that.

Yes, this is Nacho. Let me step back and tell you I'm very pleased with this performance of International Banking. This is really a record quarter and we are executing our strategy. You see double-digit growth in revenues, good expense control, operating leverage.

So it's true, commercial loan growth has been below our expectations. This is actually, as Sean explained, we have had some pay downs of US dollars denominated loans by corporate, but we still see new domestic growth of commercial in the countries.

Relative to our peers, we are winning market share. We see our pipeline rebuilding, and we expect commercial to strengthen over the course of the year. There is also, I would like to highlight that the retail growth was very positive, offsetting lower commercial growth. So overall, I'm very confident with our earning objectives that we have provided as in outlook for International Banking.

And Gabriel, it's Stephen. On the watch list issue, no, the watch list in International, in fact, the overall watch list for the Bank was stable to down this quarter. And International, especially on the commercial side, actually showed some improvement.

Okay, okay, well I'll stick to the one question, thank you.

Thank you, Gabriel. Next question, please

Meny Grauman, Cormark Securities.

Hi, good morning. I just wanted to ask a question about the composition of loan growth in Canadian Banking. It seemed like the story for 2016 at Scotia was that you were, to some extent, de-emphasizing mortgage growth in favor of unsecured lending, the credit card in particular.

And I'm wondering, given the slowdown we're seeing on the credit card book, how your outlook between those two specific loan books between the credit cards and the mortgage is changing. Are you getting less positive on the credit card side? And conversely, are you getting more positive on the outlook for the Canadian mortgage business?

Sure, thanks, Meny, it's James. I would say first of all, we are very much executing our plan. We continue to be focused on asset mix, and frankly, on growing deposits faster than assets, and I think that's an important point. So if we look at average assets, they're up 3%, that would be 4% ex the Tangerine runoff.

And if we dig into assets, what we see is that mortgages, up a bit less than 4%. Commercial Banking assets, you've got to adjust for the sale of Roynat lease finance, but Commercial Banking assets are up 8%. And small business loans are up 8%. So as I've said before, these are very much choices; they're not outcomes that just sort of fall upon us.

I would say to your specific question, what we saw in the first quarter was higher mortgage volumes than we planned. I think we found ourselves very well positioned, frankly, with an available balance sheet and three strong distribution channels. So mortgage volumes did come in a bit higher than we originally planned. Our appetite for those volumes on an ongoing basis is going to be very dependent on the outlook for margins, but we like the optionality. We'll see how margins develop.

As for credit cards, I think the principal feature for the past two or three quarters has been the expected runoff of the MasterCard portfolio. That portfolio was performing very, very well, but we expected a portion of it, the private label portion, in particular, to run off, and it is >And so we're issuing against that. And balances are roughly flat at CAD6.7 million, CAD 6.8 billion.

But as we speak, I think it's important, as we speak, we're working hard on plans to identify the next leg of growth in credit card. As we sit here today, Meny, we're proud of the fact that we've doubled the profitability of our card business over the past three years. But we're mindful that sitting here today, 2% of our domestic balance sheet is committed to credit cards. Our peer average would be about 4%, and this is a business we very much like strategically.

So overall, I'd say asset growth, the asset mix initiative is going as expected. Q1 did see more mortgages than we expected, and that's okay; we like that optionality, and we continue to work hard on cards.

Thank you. Maybe if I could just ask a follow-up maybe for Brian. Early in 2016, you were one of the more vocal voices out there talking cautiously about the Canadian mortgage market. Have you changed your outlook or your view in any way?

No, I made some comments at the end of Q2 last year, and it was my primary concern, or our primary concern was around the Vancouver market, secondarily the Toronto marketplace. And we been supportive of the changes that the government's made to the mortgage market. I think we're going to need some time to see those take hold, and we will see that through the spring mortgage season.

But there's a number of factors at work here. There's population growth, immigration, there's the time that it takes to develop a property in terms of getting through the government processes, all those different types of things here. So this is a complicated issue.

We're concerned that, from the perspective that trees don't go through the sky and markets will correct at some stage here. And we're proud of the fact that we believe we've got a very conservative mortgage book here with a 50% plus is insured, and the LTD on the remaining portion is 51%. And we've reduced tail risk in our portfolio. So really the message is we're governing ourselves accordingly.

Thank you.

Thank you, next question on the line please.

Rob Sedran, CIBC.

Hello, good morning. I'd like to come back to International Banking, if I may. You guys don't seem that [fast] by some of the currency movements, and I understand why, it's out of your control and the results are good even with some of the currency headwinds. But I suspect the central banks in the region are a little more concerned about the currency activity.

When you think about your business going forward, the margin, in particular, but if they start to tighten rates, is there a negative impact on the economy that you might foresee? How should we think about a potential central bank response or an ongoing central bank response to some of the weaker currencies in the region?

It's Nacho. Well, I think interest rate increases have been important, as you mentioned. This is really a tailwind for us. I'm very pleased how our teams have proactively managed the prices. In Mexico in particular, there's been a 200-basis-point increase since Q2, the end of Q3.

So we expect this to be an upside in our results in the going forward. And I still see the fundamentals of these countries talking about the Pacific Alliance in general, very positive, young activation, growth this year between 2.5% and 3%. So overall, the dynamics of growth underlying I think are going to be positive, and I think it's a very good part of the world to be investing in banking going forward.

Nacho, do you think that the loan demand then is just not as interest=rate sensitive as it might be in more developed markets?

Well, there is some impact, of course, of interest rates going up, but I see one factor, for example, is the credit penetration in general in these markets is relatively low. So historically, low growth has been 2 or 3 times higher than GDP. I expect those economics to continue.

You think of these more in the medium term, I think they are very strong drivers for growth in the Pacific Alliance countries. And specifically for 2017, I see an opportunity of interest rates going up and strengthening our revenues in the year. So there's some impact, but overall, I think the fundamentals are for growth in the coming years.

Okay, thank you.

Sure

Next question, please.

Ebrahim Poonawala, Bank of America Merrill Lynch.

Good morning. If you can shift to this capital levels means, Brian, I believe you mentioned last quarter that at 11%, you had good amount of optionality, and how to allocate capital. We are obviously at 11.3%.

Could you just talk about in terms of how you're thinking about capital management, be it capital return. And also, you've talked about potentially M&A opportunities, be it in some of the Pacific Alliance countries. Are there realistic opportunities where you see yourself deploying that capital over the next 6 to 12 months?

Sure, my answer really hasn't changed from prior quarters. We like optionality as a Bank, and we like how we're positioned here, and we're going to be patient. And we have choices to invest in our business organically, which we're doing.

We also will have from time to time acquisition opportunities that are on strategy. And it's not just in the Pacific Alliance; we've done quite a few things in Canada in the course of the last three years here, whether it's the JPMorgan portfolio, for example, or other targeted acquisitions.

So we're going to be patient here, be thoughtful about how we deploy their shareholders' capital, that's what we get paid to do. And the countries of priority will be Canada, Mexico, Peru, Chile, Colombia, and those are our five major focus markets.

Thank you.

Next question, please.

Sohrab Movahedi, BMO Capital Markets.

Thanks, I just wanted to go back maybe to James O'Sullivan. James, on the cards portfolio in Canada, maybe this dovetails well with Stephen Hart as well. In the quarter, the PCL rate there is now over about 430 basis -- I think 435 or so basis points.

I understand that there's a numerator and denominator there, and when the dominator slows, and as the book seasons, this number has to get to its, let's call it run rate or normalized rate. But as you think about the next leg of your card strategy here, what -- obviously, you're getting the NIM, but what sort of PCL rates are you targeting for this book on a run-rate basis?

Well, I'll start. We are very focused on risk-adjusted margin, as we've discussed in other forums. But when I think about cards, I just want to reemphasize this is a strategic initiative. It's truly an initiative that we're going to look at and measure over a horizon period of three to five years.

And so doubling our portfolio, doubling our profitability from where we started is, I think, a very, very good start. But this is driven by a desire to be much more relevant in payments broadly to our customers.

And I think the most important thing here for all of us to bear in mind is we can't make the mistake of separating risk from reward. We really like this business; it's important to our customers.

It's Stephen here, and certainly from what we've been doing, we've been looking to invest in the whole lifecycle of the card. We've improved our analytics upfront, and we're spending a lot of time and effort on the collection side, the back end, to improve our overall performance.

So we see that actually starting to show, and we're seeing improvements. We expect the run rate to plateau this first half, and then start to come back down in the second half at the portfolio seasons. But certainly the vintages, the new vintages we're seeing coming on are really showing that improvement going forward.

Okay, and just as a quick follow up, James, you're still continuing to -- the bulk of the growth is still coming through existing Scotia customers?

That's correct.

Thank you.

All right, next question on the line, please.

Darko Mihelic, RBC Capital Markets.

Hello, good morning. A question on your investment gains or lack thereof. If I look at page 23 of your supplemental, the available-for-sale securities, it's a fairly big swing in Canadian-US sovereign debt values. And I'm wondering if you can just speak to was that something that was like a one-off in the quarter, going to come back? And also, Sean, should I think about securities gains going forward as being more moderate, given the fact that your on a net unrealized loss? Thank you.

Yes, we don't generally, project out security gains. It's just one component of many components that's used to help manage the overall returns for the shareholder. I don't think you can read too much in, in terms of the shift, in terms of the debt, obviously the higher rates takes off some of the unrealized gains there. But we manage this over the longer term, and there will always some gains that we are able to harvest each quarter.

And if I may, just one clarification as well, Sean. Your investor presentation on slide 12, when you mention that the other segment was affected by hedges, I just wanted some clarification on that. If you could just mention, is that hedge breakage or just normal course hedging, because currencies move one way and the other segments are benefiting from the hedging activity?

Yes, it's really the -- that's the foreign exchange comments you're referring to?

Right.

That's where the P&L items come in at an average rate, and then it gets marked to a spot at the end of the quarter. And it just so happens Q1 of 2016, the spot was going one way against the average and in Q1 2017 it was going the opposite way.

So the year over year, it was just magnified in terms of that. But it's really just not so much hedge gains or losses, it's just more the mechanism where you bring in your P&L items at an average rate, and then you've got to true it up to a spot at the end of the quarter.

Okay, fair enough. Let me follow-up with you off-line, thank you.

Sure, next question on the line, please.

Nick Stogdill, Credit Suisse.

Hi, good morning. Just a question on the margin on International. I was wondering if you could provide us with an update on your outlook there. I know we've seen some rate hikes, and but was down slightly from last quarter. And then what -- are you building in any rate hikes or cuts into that outlook? Thank you.

Thank you, no, I think our NIM has been quite stable actually, so it will be up compared to year over year. We are very focused also, as James mentioned for Canada and International, also in risk-adjusted margin. Our risk-adjusted margin is 385 basis points, up against the last year, so I see our margins stable and also our risk-adjusted margin going forward.

I would just add, we do have an upward P&L bias towards the higher rates, so we will see some modest improvement over the coming year.

Thank you.

All right, next question on the line, please.

Doug Young, Desjardins Capital Markets.

Good morning, just, hopefully this is just more of a quick question, probably for Nacho. I just noticed as I go through your release that obviously Peru is a big part of the International division, but earnings were down in Peru year over year. I'm just wondering if there was anything abnormal in there, if you can flesh out this any further details on that. Thank you.

Thank you for your question. No, I see Peru is having a strong year. It's true that it's not so much driven by revenues, because asset growth has been in [generates] more moderate, but the operating leverage of Peru is positive. And we have seen, especially relative to the market, because you always have to compare relative to other tiers, Peru, Scotiabank Peru is performing very strong actually, number one bank growth in [niat] year over year.

It's Dieter. You saw some shifts in the FX capital markets business as a dollarization substantially was completed, and that was a structural change.

Okay, so there's some additional -- I may follow up with you, thank you.

Next question on the line, please.

Sohrab Movahedi, BMO Capital Markets.

I just want to come also, Nacho, just in Mexico in particular, just given some of the headlines over the last few months, are you actually seeing opportunities to grab market share here on a sustainable basis?

Absolutely, Sohrab. I was in Mexico two weeks ago. I think -- I see Scotiabank very proactive, we are winning market share in all of the markets, and we are -- this is an opportunity really to be close to our customers. Very strong retail growth, winning primary customers in general.

So I think Mexico was really a top performer. You see [NIA] growth year over year, 17% growth in constant terms. The dynamics are strong overall. Operating leverage in Mexico is more than 10%, so we are executing also in a very disciplined way. Our technological transformation of our core platform, so really, Mexico is improving. The underlying drivers are strong across the lines and very top performing in the quarter.

Sohrab, it's Brian. There has been a lot of questions on International, and I just stress this one point is that it's important to get the big picture right. And the person on Main Street, whether they're in Mexico City, Guadalajara Monterey or any other city in the Pacific Alliance, our day-to-day business is somebody's purchasing a home or planning for retirement. That's not changing in terms of what's going on in some of these Bloomberg screens.

So I think it's important that what's going on in Main Street is different than what's going on in terms of the latest rhetoric out of Washington or the latest tweet. So just to reiterate, our business is performing exceeding well. We're in the right countries. We're focused. Our businesses are operating very well.

And just to highlight another point is that we're very conservative in these countries about composition of our balance sheet. So in terms of US dollars versus local currency. So Mexico for example, our book in Mexico would be 90% peso denominated, and if we're leading US dollars, we're lending them to an entity that sources US dollars. So we're very careful about that in our cross-country exposures throughout the International division are very tightly managed.

Brian, just be clear, I have no doubt about that. I actually wanted to see if that rhetoric may have caused some of your competitors to bring back their horns and for you to pick up some market share; that's what I was trying to get at.

Yes, and it was a good question, Sohrab, and you see that in our market share numbers.

Thank you.

Next question on the line, please.

Ebrahim Poonawala, Bank of America Merrill Lynch.

Hi, just had a couple of follow-up questions. Brian, to your point, is it safe to assume that the mix you gave, that 90% of Mexico is USDs or peso denominated? Is that true for the rest of the Pacific Alliance countries?

It's pretty close; the one outlier would be Peru, and that's -- in Peru, the central bank has gone through a process of de-dollarization of banks' balance sheet, so that would be more SOL60,/$40. But the trend continues more soles than dollars in terms of banks' balance sheets. But again, we manage our exposures very, very carefully, and the number I gave you on Mexico would be similar in Chile, for example, and Columbia.

And just to follow-up to that, if I can. There's clearly a lot of differentiation. We tend to bucket these four markets together. As you look out at least over the next 12 months, where do you see the biggest opportunity from an earnings or loan growth perspective and where are you most concerned from a credit perspective?

Well, I would say that this is an advantage of having a franchise with different markets that compensate also one for the other. I would say the drivers, in general, we see overall good prospects for interest rate offsite in the region.

I see volumes, commercial retail volumes are very strong and will continue to grow double digits. And as I said, commercial volumes will strengthen over the course of the year. All the countries have been very focused on structural costs. The operating leverage of International Banking is 4.2%, seventh consecutive quarter with positive operating leverage year over year. So that will continue to be an important driving of earnings for us, and very relatively stable also retail PCLs.

So I see the Pacific Alliance overall performing well. We are doing well in the countries, as Brian said. And I'm very confident on our earnings objectives outlook for International Banking.

Got it, thank you.

Next question on the line, please.

There are no other questions at this time.

Okay, well thank you all for participating in our Q1 call. We look forward to talking to you with our Q2 results at the end of May. Thank you.

Thank you, and that will conclude today's call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.