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Executives

Rick Waugh - President and Chief Executive Officer

Sean McGuckin – Executive Vice President and Chief Financial Officer

Rob Pitfield - Group Head and Chief Risk Officer

Anatol von Hahn - Group Head, Canadian banking

Brian Porter - Group Head, International banking

Chris Hodgson - Group Head, Global Wealth Management

Mike Durland - Group Head, Global Capital Markets & Co-CEO, Global banking & Markets

Stephen Hart - Executive Vice-President, Chief Credit Officer

Analysts

Cheryl Pate - Morgan Stanley

Steve Theriault - Bank of America Merrill Lynch

Gabriel Dechaine - Credit Suisse

Rob Sedran - CIBC World Markets

Peter Routledge - National bank Financial

Brad Smith - Stonecap Capital

Michael Goldberg - Desjardins Securities

John Reucassel - BMO Capital Markets

Mario Mendonca - Canaccord Genuity

Sumit Malhotra - Macquarie Capital Markets

The Bank of Nova Scotia (BNS) F3Q12 Earnings Call August 28, 2012 3:15 PM ET

Sean McGuckin

Good afternoon and welcome to the presentation of Scotiabank’s third quarter results. I am Sean McGuckin, Chief Financial Officer. Rick Waugh, our CEO will lead off with the highlights of the third quarter. Next, I will go over the third quarter financial results including a review of business line performance. Rob Pitfield, our Chief Risk Officer, will then discuss credit quality and market risk. Rob will be followed by our business line heads, each of whom will provide an outlook for their business for the remainder of 2012. We will then be glad to take your questions.

Before we start, I would like to refer you to slide number two of our presentation which contains Scotiabank’s caution regarding forward-looking statements. Rick, over to you.

Rick Waugh

Thank you very much, Sean. Well, we are pleased to announce our third quarter with very strong contributions from all our business lines. Scotiabank generated net income of $2.05 billion. Earnings per share were $1.69 for the quarter. That included the $0.53 gain from the sale of Scotia Plaza. But excluding this item, earnings per share increased 5% year-over-year and return on equity remained strong at 24.6%.

Importantly, revenue was strong this quarter, growing by more than 11% excluding the real estate gain and this performance this quarter demonstrates the diversification we always talk about in our business model which continues to drive sustainable growth at high profitability levels.

Now, in light of weakening economic forecasts and continued global uncertainty, the bank increased its collective allowance for credit losses on performing loans this year. This results in a coverage ratio among the highest of our peers. And this reserve is based on conservative provisioning methodology which provides for the possibility of unidentified problems in our portfolio.

Notwithstanding this general provision, the bank’s credit portfolios continued to perform well both in Canada and internationally and well within our expected ranges and risk appetite even under very stressed scenarios that we perform. And this is truly a reflection of our well recognized risk management throughout the whole bank.

Our industry leading productivity ratio remained stable at 53.9%, again excluding that gain in real estate and expense management remains obviously an ongoing priority. Our capital ratios remain strong by international standards. Our tangible common equity ratio now exceeds 10% at pre-crisis level and has been achieved while making more than 20 strategic acquisitions which have totaled over $8 billion since the crisis began.

This has been accomplished by very disciplined capital management and acquisition metrics as well as a very strong internal capital generation due to our consistently high return on equity. We are also currently within the bank’s target of common equity tier one ratio under Basel III three of our range of seven to 7% to 7.5%. And this includes of course the strict regulatory definitions of regulatory capital which under Basel III isn’t required until 2019.

Now, let’s turn to slide five. Our performance this quarter is a result, as I’ve said, of this diversification in our business model and strong contributions from each of our businesses. Corporate banking had a record year with very good asset and deposit growth reinforced by disciplined expense control and lower provisions. Year-to-date revenues are up a solid 4.6% with net income of 16.5% as a result of very good expense management, lower loan losses, continued focus on deposits, payments and wealth management products distribution. And of course these numbers don’t reflect the sale of our building which is recognized in the other category.

International banking continued its strong contributions to earnings this quarter as a result of its diversified loan and deposit growth. Year-to-date revenues are up strongly at 22%, net income was up 20%, reflecting our investments in the higher growth markets in Latin America and Asia. In global wealth management, earnings this quarter were driven by strong insurance results and higher assets under management and assets under administration, notwithstanding the challenging financial markets.

Year-to-date revenues increased 13%, net income up 19%, albeit due in part to one fewer quarter of DundeeWealth contribution in 2011 as well as some non-recurring expenses last year related to the DundeeWealth acquisition. But, again, our numbers demonstrate the continued strength in both our Wealth Management and Insurance business.

And finally, global banking and markets had an excellent quarter across the diversified client driven platform, particularly in the areas that we’ve been invested in recently, such as fixed income and the equities business. What was very encouraging was its growth was broadly-based across several products, markets, and geographies. And importantly in today’s volatile markets, well within our conservative risk appetite.

Year-to-date revenues and net income have both increased 8% and continue to show the strength of the diversification and focus on the relationship driven products in markets where we’re building up special and focused expertise. This was indeed a very satisfying quarter and we anticipate achieving our full-year 2012 financial objectives and well positioned for continued growth next year. And of course, I’m very pleased to reward our shareholders with our second dividend increase this year, a further indication of the quality and sustainability of our earnings and our strategy.

With I’ll turn now over to Sean.

Sean McGuckin

Thank you Rick. Slide seven shows our key financial performance metrics for the quarter. Earnings per share for the quarter, excluding the Scotia Plaza gain were $1.16, an increase of 5% from last year and up 1% over the second quarter. Looking at year-over-year changes, Q3 earnings benefited from the contribution from acquisitions, particularly Banco Colpatria, strong trading and insurance revenues, a lower effective tax rate and growth in transaction based banking fees. Partly offsetting were higher provision and an increase to the collective allowance on performing loans, lower underwriting and advisory fees, and lower net gains on investment securities.

Provision for credit losses was $402 million this quarter including $100 million increase to the collective allowance on performing loans. Specific provisions were up $22 million from last year, reflecting higher provisions in International banking and global banking and markets partially offset by lower provisions in Canadian banking.

Moving to revenues on slide eight. Revenues during the quarter were a record at just under $5.6 billion, representing growth of 28% from last year. Even excluding the real estate gain this quarter, revenue growth was still strong, increasing 11% year-over-year. The year-over-year increase reflects higher net interest income, which increased due to the impact of acquisitions and organic asset growth. The core banking margin increased two basis points year-over-year mainly from recent acquisitions with higher spread business, partly offset by lower spreads in Canadian banking and higher volumes of lower yielding deposits with banks.

Non-interest revenues increased 11% from last year, excluding the real estate gain, due to increased banking fees from credit cards and deposits, stronger capital markets revenue, and the gain from the sale of a non-strategic leasing business, partly offset by lower net gains on investment securities. Quarter-over-quarter, net interest income increased 4% from solid asset growth and two additional days in the quarter, partly offset by a modest decline in the core banking margin.

Non-interest revenues were flat quarter-over-quarter as higher trading revenues, the gain on sale of the leasing business, and two additional days in the quarter were mostly offset by a decline in wealth management and investment banking revenues, reduced income from associated corporations and lower net gains on investment securities.

Turning to slide nine. Non-interest expenses were up $270 million or 11% from last year. Acquisitions accounted for $138 million or over 50% of this increase. Underlying expense growth year-over-year was mainly due to higher staffing levels as well as an increase in performance based compensation in line with a stronger operating performance. Compared to the prior quarter, expenses were up 2% due in part to two additional days in the quarter.

Year-to-date, operating leverage was positive 0.4% with each business line delivering positive operating leverage thus far. Expense management remains an ongoing priority and we are on track to deliver positive operating leverage for the full year as we have committed at the beginning of the fiscal year.

Turning to capital on slide ten. You can see that the bank continues to maintain a strong, high quality capital position. All key capital ratios increased this quarter due to strong levels of internally generated capital. The tier one ratio rose to 12.6% while the bank’s tangible common equity or TCE ratio climbed to over 10% at 10.2%.

Our capital ratios remain strong by international standards. We will continue to prudently manage capital to support organic growth initiatives, selective acquisitions and evolving regulatory changes. Furthermore, as Rick mentioned, as of July 31 our common equity tier one ratio under Basel III is now within our stated objective of 7% to 7.5%, two quarters ahead of our Q1 2013 target.

Turning to business line results beginning on slide 11. Canadian banking had a very strong performance again this quarter. Net income was $521 million, up $95 million or 22% from a year earlier. This quarter also included a $32 million after-tax gain from the sale of a non-strategic leasing business.

Revenue growth was solid with growth in net interest income and net fee and commission revenues up 3% and 4% respectively. Although the margin declined year-over-year by 7 basis points, net interest income was up as a result of strong asset and deposit growth. There is also improved credit performance with loan loss provision down $28 million. Expense control was also evident this quarter, with expenses only increasing slightly from last year.

Quarter-over-quarter assets increased 2% mainly from continued growth in retail mortgages, consumer auto lending and commercial loans. Total revenue increased 7% due to strong asset and deposit growth, a gain on sale of the leasing business and two more days in the quarter, partly offset by two basis points decline in the margin. Provision for credit losses declined $2 million to $120 million due to lower provisions in retail. Expenses were up 3% compared to last quarter, reflecting the impact of two additional days in the quarter and higher marketing expenses.

Moving to international banking on slide 12. Net income in the third quarter was $442 million, up 29% from $343 million a year ago. A large portion of the increase was due to the acquisition of Banco Colpatria in Colombia. Year-over-year revenues increased 27% due to strong diversified loan and deposit growth, positive impact of acquisitions, wider margins in Peru and Asia, and good underlying growth in fees across Latin America and the Caribbean.

Expenses were up 23% or $176 million with more than two-thirds attributable to acquisitions. The remainder of the increase was mainly due to annual inflationary increases and to support business growth. Quarter-over-quarter, net income was down a modest 1% from a very strong second quarter, mainly from higher provisions for credit losses and higher expenses. Provisions for credit losses increased $23 million from last quarter primarily from higher retail provisions in Latin America as a result of recent acquisitions, asset growth and softening market conditions.

Expenses were up 1% from the previous quarter due to higher seasonal costs in Peru and Chile. Expense management remains an ongoing priority. On slide 13, global wealth management’s net income for the quarter was $284 million which included a nonrecurring $12 million deferred tax charge due to the Ontario tax rate freeze lowering the contribution from our investment in CI Financial.

Revenues increased 5% year-over-year driven by strong growth across insurance and most wealth businesses. Assets under management and assets under administration grew 4% and 2% respectively. Of the total revenue, approximately 84% was attributable to wealth management and 16% to the insurance businesses. Expenses were flat from the same quarter last year due mainly to lower brokerage commissions, lower performance based compensation and discretionary expense management.

Quarter-over-quarter, net income declined by 5% including the aforementioned nonrecurring tax charge. Revenues declined 2% as lower brokerage and mutual fund revenues from weak financial markets in Canada were only partly offset by higher international wealth revenues. AUM remained unchanged and AUA declined by 1%. Expenses were down 3% reflecting lower volume related expenses and performance based compensation as well as good expense control.

Looking at slide 14. Global banking and markets recorded very strong net income of $398 million, one of the best results on record. Year-over-year, revenues increased due to higher capital markets revenues in the fixed income and commodity businesses and solid asset growth partly offset by lower underwriting and advisory fees. Provisions for credit losses remained very low, but were up $7 million to $15.

Expenses were up 14% over last year reflecting higher performance based compensation and technology costs as well as the impact of the Howard Weil acquisition. Quarter-over-quarter, net income increased 3% due to strong fixed income and FX revenues and a recovery of taxes, partly offset by modest increases in provisions for credit losses and expenses. Expenses increased 2% from last quarter partly due to the full quarter impact of the acquisition of Howard Weil.

I’ll turn now to the other segment on slide 15 which incorporates the results of group treasury, smaller operating units and certain corporate adjustments. The other segment reported net gain of $406 million this quarter. Segment’s results included $614 million after-tax gain on the sale of Scotia Plaza and $100 million increase to the collective allowance on performing loans. Adjusting for these two items, the net loss in the other segment was $134 million, unchanged from last quarter.

This concludes my review of our financial results. I’ll now turn it over to Rob who will discuss risk.

Rob Pitfield

Thanks, Sean. The risk in our credit portfolios continues to be well managed. Our specific provisions for credit losses remain in line with expectations increasing by $22 million year-over-year and $38 million quarter-over-quarter to $302 million. There was also an increase in the collective allowance on performing loans of $100 million in light of the weaker global economic conditions. Our net impaired loan formations were $365 million, an improvement from the prior quarter.

Our exposures to certain European countries of concern, Greece, Ireland, Italy, Portugal and Spain, are not significant and have declined from last quarter. Our market risk remained low and well controlled. Our average one day all bank VaR was $20 million versus $18.3 million in the prior quarter. There were five trading day losses in the third quarter compared to the one in the previous quarter. The five days of losses were all below $3 million, the losses were well within the range predicted by VaR and our ongoing stress testing confirms the appropriateness of our risk appetite.

On slide 18 you see the trend in provisions over the past five quarters. As you can see, provisions have declined in the Canadian banking portfolios year-over-year and quarter-over-quarter. Our Canadian retail portfolio remains extremely high quality with 93% of assets secured and relatively low exposure to unsecured loans and credit cards. International retail provisions increased $35 million year-over-year mainly due to our acquisitions in Uruguay and Colombia, higher retail provisions in Latin America as a result of asset growth and softening market conditions, partially offset by lower retail provisions in Mexico and the Caribbean.

Quarter-over-quarter increase reflects higher levels of provisioning in Colombia and Peru. International commercial provisions increased to $17 million, due primarily to higher provisions in Latin America and Asia, partly offset by lower provisions in the Caribbean and Central America. Overall commercial provisions remained relatively low. Global banking and markets had provisions for credit losses of $15 million this quarter compared to provisions of $8 million in the same period last year and recoveries of $1 million in the prior quarter. The increase is a result of higher provisions in the United States related to two accounts.

Slide 19 shows our Canadian banking residential mortgage portfolio. Portfolio of residential retail mortgages is $153 billion, of which are $139 billion is related to freehold properties and $14 billion related to condominiums. As you can see from the slide, approximately 60% of the portfolio is insured, 40% uninsured. The uninsured portion has an average loan-to-value ratio of approximately 57%. We believe that the solid economic fundamentals and the new mortgage regulation changes will enable the Canadian market to remain healthy and balanced.

The continued low interest rate environment and reasonable economic performance will allow consumers to manage debt levels well. Credit quality and performance of the portfolio remained strong. Our disciplined and consistent underwriting standards through all of our origination channels have resulted in extremely low loan losses and again have been stressed under many severe assumptions which confirm our risk appetite.

To summarize on slide 20, our asset quality remains strong with the retail and commercial portfolios performing as expected, and our corporate portfolio is demonstrating continued strength. As we’ve articulated over the last several quarters, a combination of growth in portfolios and product mix will result in rising provisions, which we expect to be more than offset by increased interest margin.

We expect Canadian retail provisions to remain stable. International retail provisions will grow in line with portfolio growth, product mix and a modest softening in economic conditions. We expect corporate and commercial provisions to remain modest.

And with that concludes my remarks and I’ll turn it over to Anatol.

Anatol von Hahn

Thank you, Rob. Canadian banking had a record quarter with net income of $521 million. Excluding a $32 million gain on the sale of a leasing business, earnings of $489 million were also a record, with all of our business performing very well. We experienced solid growth in our key areas of focus, deposits, payments, and wealth management with double digit account growth in credit cards and checking accounts, and market share gains in deposits and mutual funds.

Asset and deposits each had their strongest quarterly growth rate over the last six quarters. We remain disciplined on cost and continue to report positive year-to-date operating leverage. In retail, we expect to see continued asset growth albeit at a more moderate pace than in Q2 and Q3 of this year. We see volume growth coming primarily from residential mortgages, unsecured lines of credit and credit cards. In deposits, competition for regulatory qualifying liquidity remains strong. However, our richness is and summer of seeing campaigns have positioned us well for strong growth in personal core deposits.

Small business continues to perform well with good operating leverage and strong deposit growth. Going forward we’ll continue to partner with our global transaction banking partners to further grow this important deposit base. In automotive lending we continue to perform very well as we’ve expanded our footprint by adding more manufacturer and dealer relationships.

Turning to commercial banking, we had a very strong year-over-year and quarter-over-quarter growth in assets and deposits. Our pipeline remains strong as we continue to focus on targeted initiatives in key industries and further leverage synergies between our commercial banking teams and our specialty teams, including global transaction banking and global banking and markets. Retail delinquencies continue to improve and we expect PCLs to remain stable going into next year.

Commercial PCLs have also stabilized but are at a very low level and can vary from quarter-to-quarter. Cost containment has been excellent this year, but expenses are likely to increase somewhat in Q4 reflecting seasonal spending patterns. Earlier this year, we committed to positive operating leverage for the year and we fully expect to deliver on this commitment.

Let me now turn it over to Brian.

Brian Porter

Thank you, Anatol. After a particularly strong second quarter International banking delivered solid results this quarter. On a year-over-year basis, we had a strong broad-based growth in commercial and retail loans and deposits. Compared to last quarter, growth moderated somewhat and we experienced some margin compression in Chile and Thailand. Apart from these factors, out outlook for the division remain stable for the balance of the year.

Turning to our three major regions. in Latin America, we continue to benefit from a well-diversified and growing platform. The region’s earnings were up 3% on the quarter with a strong contribution from Mexico. Over the past year, our initiatives in Mexico have been driving a stronger performance and we expect this momentum to continue.

We continue to be pleased with the solid earnings delivered in Columbia, although PCL levels will rise in line with new portfolio growth. We expect Peru to continue as a strong performer for us. And in Chile, lending activity should continue to grow at market levels with margin pressure continuing in the fourth quarter. Overall, we expect our Lat-Am region to finish the year with solid results.

In the Caribbean and Central America, our performance was encouraging this quarter given the continuing headwinds faced by many Caribbean economies. Our retail business in the English Caribbean performed well with good growth in both loan volumes and deposits. In our Spanish Caribbean countries, our retail and commercial businesses performed as we expected. Our outlook calls for flat to modest growth overall in the region with some strong country performances most notably in Panama.

In Asia, spreads have remained relatively attractive in our commercial portfolio and our lending pipeline remains solid. In Thailand, we had good asset growth particularly in the auto lending segment, although we continue to manage through the aftereffects of the floods which include margin compression.

On the commercial banking side, our lending pipeline remains solid and is up from last quarter. We expect this segment to continue performing well in Latin America, Mexico and Asia for the balance of the year. In retail banking, loan and deposit growth has been very strong year-over-year. In general, we expect current retail growth rates to continue for the balance of the year. Moving to expenses. We limited expense growth to 1% over last quarter and we will continue with our prudent approach to expense management.

And finally, with respect to M&A, we are pleased with the Credito Familiar transaction in Mexico. The consumer and micro finance segment holds significant promise for us and we plan to leverage the great success we’ve had in Peru across other parts of Latin America.

In Asia, we continue to make progress on regulatory matters in connection with closing our investment in the Bank of Guangzhou. In summary, International banking had a solid quarter and we expect to finish 2012 in line with the expectations we had set out for the year.

With that I’ll turn it over to Chris.

Chris Hodgson

Thank you, Brian. Global Wealth Management generated good results for the quarter despite the persistent challenges facing the market. Underlying earnings are up 14% year-over-year with strong organic growth in both the wealth and insurance businesses. Global transaction banking, whose earnings are incorporated across the other business lines, also saw deposit base grow well. In our wealth distribution businesses, we continue to see growth.

We are particularly pleased with contribution from our international wealth businesses, coming in part from the acquisition of Colpatria in Colombia as well as from very strong earnings in our international pension businesses. We anticipate that our recently announced Colfondos acquisition will further increase our scale in this segment and the region overall. As we move forward, we will continue to pursue M&A opportunities in international markets that fit our strategic direction and complement our international banking business.

With the introduction of our newly fully integrated website, we are pleased that Scotia iTRADE ranks number one in online discount brokerage services in Canada, according to Surviscor Online Discount Brokerage scorCard. We’re very well positioned to grow this business as an aspect of our full wealth offering.

In the asset management business, we’ve got a very strong base of AUM and AUH drive our top line. Despite persistently weak markets, we gained market share for the quarter against the industry as a whole both on a quarter-over-quarter and year-over-year basis. In addition, sales in Canadian mutual funds have maintained their momentum, as we remain second in the industry in total net sales year-to-date according to the most recent IFIC data.

Our focus on capturing both revenue and cost synergies from the acquisition of DundeeWealth remains a priority. We are nearing completion in our integration, and we’re extremely pleased with our progress. Overall, we’re on track to achieve expected deal synergies sooner than originally expected. In terms of insurance, growth in insurance remained strong with international insurance demonstrating marked year-over-year gains, specifically in key markets like Mexico and Peru.

Our multiyear strategy of leveraging the bank’s significant distribution networks is progressing well and we continued to experience improved cross-sell of insurance, particularly here in Canada. Global transaction banking was recognized by Global Finance Magazine as the best corporate internet bank in North America 2012 for both Best Online Cash Management and Best Trade Finance Services for Global Transaction banking.

Our investment in CI continues to perform well and we’re selectively expanding our mandates with them. Finally, expense management and generating positive operating leverage remains a key focus. In summary, we continue to monitor the economic and market environment closely. Yet despite the ongoing pressure facing the markets, we believe our diversified business model will continue to deliver solid results for the balance of this year.

And with that I’ll pass it over to Mike.

Mike Durland

Thanks, Chris. Global banking and Markets had an excellent quarter. Consistent with the last quarter, strong results were achieved across our diversified product platform and geographic regions. Our recent investments in key businesses continue to incrementally contribute to our profitability. Our fixed income, equity, and foreign exchange businesses all had strong results in the quarter, as did ScotiaMocatta, which did decline modestly after achieving two consecutive record quarters.

Our lending and investment banking business continue to deliver solid results in the face of moderate market activity. Global transaction banking, which is responsible for global cash management products for our clients, continues to provide opportunities for cross sell particularly around deposit growth.

The pipeline for investment banking and advisory revenues for the remaining of the year is reasonably strong. However, we continue to see some challenges for loan underwriting fees. Our corporate loan portfolio showed strong growth this quarter, particularly in the United States where we expect more moderate growth in the fourth quarter. Loan spreads have remained stable over the past few quarters despite competitive pressures and we do not expect this to change significantly.

The credit quality of our loan portfolio remained strong and we expect PCLs to remain modest. Average assets continue to show steady growth in support of our global capital markets platform as we continue to actively manage our risk exposures and optimize capital usage. Expense management remains a key priority and cost saving and efficiency initiatives will help us maintain our positive operating leverage and our strong productivity ratio.

In summary, we had a strong quarter. The performance was solid across all of the business units. Our focus for the past few years has been to diversify our business across products and geographies, and to strengthen the linkage of our products and services with the core clients and geographies of the bank.

Our objective in doing this is to minimize the volatility of GPM’s earnings and therefore improve their quality. We feel quite positive about this quarter because the result suggests that we’re seeing continued progress towards this objective. There are still headwinds that continue to make the wholesale business challenging. The market conditions continue to demand discipline and caution which is consistent with our risk appetite.

And with that I’ll hand it back to Sean.

Sean McGuckin

Thanks, Mike. That concludes our prepared remarks. We would now be pleased to take your questions. Operator, can we have the first question on the phone, please?

Question-and-Answer Session

Operator

Thank you. Your first question comes from Cheryl Pate from Morgan Stanley. Please go ahead.

Cheryl Pate - Morgan Stanley

I just wanted to talk a little bit more about credit and the addition to the collectable allowance this quarter. When I look at through the outlook by Canadian retail, stable. Corporate and commercial, modest. Looks mostly coming from international retail where you mentioned growing in line with portfolio growth, modest softening and some product mix. So maybe, can we spend a little bit of more time on where sort of the biggest areas of concern are coming from and whether Colpatria credit is tracking along with expectations as well?

Rob Pitfield

Cheryl, this is Rob. The $100 million to the collective is not related to the existing portfolio and its performance. It really stems from the fact that back in November we set up a cross-functional team to look at Europe and what might fall out of Europe. And we’ve done a series of stress tests over a long period of time now in various forms, and concluded that there is a possibility that there could be an impact of contagion and that contagion would have an impact on the various business lines. And given the fact that this is a good year, given the fact that it’s a good performance by the bank, this is one of those periods where we believe it was prudent to take a provision against that possible contagion, and that’s all it is.

As far as Colpatria, Colpatria’s performance as far as PCLs is tracking according to our plan. It had a bit of hiccup this last quarter because of credit cards, that is not expected to continue. It’s a temporary situation. There is all sorts of effort against it. We’re pleased with that portfolio.

Cheryl Pate - Morgan Stanley

Okay. Thanks for the color. Maybe if I could ask one for Anatol as well. You mentioned credit card as an area of growth. One of your peers earlier today highlighted some softening of margins coming from the products as customer behavior is sort of changing and more balance is being paid down. Can you just give us some color on sort of your positioning in segment? Whether you’re focusing more on high volume transactor or a customer segment that would be more likely to carry a balance?

Anatol von Hahn

What you see, and you see it also in our non-interest income, when you look at our portfolio and the growth that we’ve had in the credit card portfolio over the last two years, it has been in customers that use the credit card as a means by which they acquire and pay for their things. It’s not so much a financing mechanism. So, when you look at the growth that we’ve had, it’s new credit card sales to customers who will use it occasionally for financing but they transact on it. And that has been part of our payment strategy and something we’ve been very successful at. So, that’s when I’m referring to the growth, that’s what I’m talking about.

Cheryl Pate - Morgan Stanley

Okay. Thanks, very much.

Rick Waugh

Cheryl, this is Rick again. I just wanted to just add to Rob’s comment which I obviously totally agree with, but Scotia -- and those of you who have followed us for a long time, we’ve always been aggressive on provisioning and later on we take the recoveries. And dealing with the general, while we haven’t got specifics, we all know what’s happening in Europe and what have you and the mythology, now puts us at the top end of our range. And I really view that as a position of strength for us going forward in almost any scenario. So there is concern but it’s a position -- take them when you can, it’s a position of strength and that’s how we view it right now.

Operator

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

Steve Theriault - Bank of America Merrill Lynch

For Brian Porter, please. So, Brian business and government loans in the international look flat to down sequentially on a Canadian dollar basis at any rate. That’s the first time I’ve seen that in some time. So, can you spend just a couple of minutes walking us through the loan growth trends in some of your key markets and specifically, are you seeing any softening of the pipeline in the commercial side?

Brian Porter

Sure. Good question, Steve. I’d just remind everybody that in terms of asset growth year-over-year, our commercial book has grown 21% and our retail book has grown by 22%. So, those are very good numbers and numbers we’re proud of. The numbers were relatively flat on a commercial basis this quarter and that’s a function of two different markets. One being Asia, where we saw our trade finance numbers declined by about $0.5 billion. And that’s a function, trade finance as you know is relatively short dated. We saw some competition from the Japanese banks at spreads where we didn’t want to compete. So that business has amortized off.

The other market would be Mexico where we’re repositioning parts of our commercial portfolio. If you look at the banks down there, our exposure to states and municipalities would be the lowest of our peer group. We continue to continue to deemphasize that business, that with some pay downs in Mexico was another $0.5 billion. So that’s $1 billion of assets in the quarter on an average. If you look at it on a spot basis, we’re actually up 2%. And as I said in my comments, our commercial pipeline remains very strong. We see good underlying growth in all our Latin American markets, Mexico included, Asia. And so we feel very comfortable about our asset growth profile.

Steve Theriault - Bank of America Merrill Lynch

Is that noise in Mexico on the pay downs, could we see that for a few more quarters?

Brian Porter

No, we’ve been amortizing this portfolio down over time, Steve, the bulk of it is done.

Steve Theriault - Bank of America Merrill Lynch

Okay. Well, I have then a question on Peru. The numbers that you gave on Peru looked very strong in first half, but dropped off a bit in Q3. Is there something credit related as there is some noise there, or maybe some seasonality we’re not aware of? It doesn’t look like currency to me.

Brian Porter

I’d say two things. Obviously we had a very strong Q2 in the whole division, and we benefited from strong commercial recoveries last quarter in Peru to the amount of $10 million and in Asia to the amount of $11 million. We obviously didn’t have those recoveries this quarter. But the increase in PCLs, as Rob mentioned in Peru, is $16 million, and that’s a function of the asset growth we’ve seen in the portfolios across the board for a sustained period of time.

We have tightened our underwriting standards on the higher risk part of the portfolio and we’re investing in collections on the back-end. But again, if you look at the other banks in the region you’re going to see NPLs across the board increasing, we’re performing as you’d expect very well against our peer group. So, Peru, we’re comfortable with the credit metrics in our book and we’re operating within our risk profile and our risk appetite.

Steve Theriault - Bank of America Merrill Lynch

Thanks very much. If I could sneak in one last one probably for Mike Durland. Fixed income trading, I think it was a record number. Was there anything unusual in the $183 million of rate in credit rating? Any material mark-to-markets we should be aware of or is this really just a function of some of the initiatives in your expanded business, particularly in the U.S.?

Mike Durland

It’s the latter. There was nothing, no unusual items whatsoever in that number. It was a good number. Probably exceeded our own expectations a little bit. There was a lot of reason to believe that third quarter would’ve been a very challenging quarter but the group performed very well. Toronto, London, New York, the new initiatives did very well, DCM business did very well. So it was broadly based across all of their businesses.

Operator

Your next question comes from Gabriel Dechaine from Credit Suisse. Please go ahead.

Gabriel Dechaine - Credit Suisse

Just talk a bit more about the International business here. And either Rob or Brian, can you clarify the modest softening of the credit outlook I guess in the international business, where are you seeing that? And then more broadly, I’m not a China expert or anything, but there’s an ongoing debate about the strength of that economy. And I’m just wondering if you’ve started to see any impact on your business in some of the more export driven countries like Chile and Peru especially. Whether it’s affecting credit at all or any loan demand from the businesses? Has there kind of, I hate to tie it to one factor but if China GDP growth drops below 7%, is that something that worries you or--?

Brian Porter

A good question and a question we quite often get asked. I think if you look at Peru as an example, and Peru’s economy is driven by investment. There is going to be over $50 billion of investment over the next 5 to 10 years in different mining and energy projects. So that is what is fueling along with some domestic consumption in Peru. A real turn down in the Asian economies would have some impact. But you know if you look at economic forecast across the board including our own for Peru and Colombia next year, you’re expecting 5%, 6% plus growth in these countries. And the balance sheets of the countries, the fundamentals, the economic fundamentals of the countries remain intact and very strong.

In terms of PCLs for the region, what I’d emphasize here is that with the acquisition in Colombia and the growth of our business in Peru, we’ve tweaked our asset mix in international retail somewhat. Our lead product is still mortgages and auto, but we’re building out consumer finance and personal loans in these countries and the bottom line is you get paid for the risk. The returns are very attractive. The margins in our retail book in Colombia, for instance, are through 10% and they’d be higher than that in Peru.

Gabriel Dechaine - Credit Suisse

So, it really is mix, because I was hearing commentary about softening outlook and it’s kind of mixing a little bit.

Brian Porter

Well it’s -- the question I was asked earlier is that there is a little bit of softening in credit profile across the board in these countries. You can see it in our competitors’ NPLs and that’s just a function of absolute asset growth over time. But from of a Scotia perspective, again we’re comfortable with our risk profile, we’re comfortable with our risk appetite. We’ve had good solid growth from these portfolios. We’d expect PCLs to uptick modestly from here, but again within our appetite.

Gabriel Dechaine - Credit Suisse

Just a commentary here on the -- maybe for your disclosure. It might be helpful to put in some of the spot balances or currency adjusted ,just to kind of get a better sense for it. Because you referred to 2% quarter-over-quarter growth on a spot balance basis, it’s kind of -- the average can play some game sometimes, right. So it might give a better interpretation of what’s going on in the business there.

Sean McGuckin

We’ll take that under consideration, Gabriel.

Operator

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

Rob Sedran - CIBC World Markets

I just want to come back to the trading revenue question, and I hate to ask the questions because there’s a never a good answer to it. But, Mike, you mentioned business growth, but clearly the last three quarters are certainly what you’ve done year-to-date is higher on an average basis than what you did in 2011. And is this is really what it is, business growth? I mean, are you comfortable that the platform, again without getting too bogged down what the markets are doing, are you comfortable with the platform it’s kind of delivering what you would expect this year and that it’s a reasonable run rate going forward?

Mike Durland

We’re very happy with what the platform has delivered. And three years ago, four years ago when we made these investments, obviously we’re hopeful that the results would be the results that we’ve been seeing in last two or three quarters. So we’re very, very happy. Obviously we continue to be pretty cautious as it relates to the current market condition, which to me is a good thing. We’re trying to run this business well within the low-end of our risk appetite which we have. You saw the trading days. We only had five negative days this quarter. Our VaR numbers are very much in line with actually the last three or four year run rate, probably in the low end of that. And the results are showing the quality that was our objective in making the investments.

Anatol von Hahn

One thing that’s been happening is, I have been watching it very closely, is we’re coming from a relatively small base and of course we have a great counterparty. So our on-boarding of clients, institutional clients and what have you in the rates business, the fixed income business, is very, very good. As we know, some of the international banks are having some real difficulties both in their business models, their ability to take on perhaps more counterparty risk and of course the attractiveness of Scotiabank’s counterparty risk, rather that. So we’re into actually a very good spot on that and we’re getting great client reaction about increasing our business with them and so the P&Ls are exceeding our expectations.

Rob Sedran - CIBC World Markets

Okay. And thanks for that. And just to follow up or a point of clarification around the Basel III ratio. When you say that you are in the range, does that mean fully loaded from an IFRS phase-in? Does it include the planned acquisition in China? And if you are in the range, is there a reason why you won’t just give us the number now? I understood when you weren’t in the range, but now if you are, why can’t we just have the actual number?

Sean McGuckin

A few questions there. We are including IFRS and the eventual acquisition of Guangzhou. We are not giving our number now. The number will move around a bit up and down over the next couple of quarters, but again we are in the range and we fully expect to be still in the range in Q1 2013.

Operator

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

Peter Routledge - National bank Financial

Another question for you on China. So, I mean -- and Gabriel outlined the case for the potential of hard landing or maybe a less soft landing, how does that impact how you’re looking at Bank of Guangzhou? Is there any -- how concerned are you about balance sheet risk at Bank of Guangzhou credit losses specifically? And to sum it all up with looking at the acquisition price, anything in light of that?

Rick Waugh

Sure. Peter, the bank went through a transaction 2.5 years ago where the balance sheet was cleaned up and all the bad loans were taken off the balance sheet and new equity pumped into the bank. We sent 22 Scotia bankers to Guangzhou in terms of due diligence. We went through all the loan files up and down and did extensive due diligence.

On the enterprise, we are comfortable with the risk appetite of the bank with one exception and one concentration of a loan, their underwriting practices. There weren’t a lot of real estate loans to speak of in the bank. So, we were comfortable in terms of asset quality. We’ve looked at the quarterly statements of the bank and are comfortable in terms of financial progress of the bank and asset quality and we’ll do that once again before we close the bank.

Peter Routledge - National bank Financial

Okay. And is there a potential for purchase price adjustment if you are not happy?

Rick Waugh

I’m not going to get into that.

Peter Routledge - National bank Financial

Okay. Any thought of when you might get to close on that?

Rick Waugh

Well, the board asked me that question this morning and I’ve given up forecasting to be honest with you. But I was there in July. I was in Beijing seeing the regulator and all the comments were positive, it just takes time.

Operator

Your next question comes from Brad Smith from Stonecap Capital. Please go ahead.

Brad Smith - Stonecap Capital

A question for Brian Porter. Brian, could you just confirm to me the sort of aggregate or cumulative amount of capital that you’ve invested in acquisitions in your segment in the last four quarters? And I was wondering if there are carry-on costs after those acquisitions were made to get them kind of teed up and things like that, and if those are just being run through the expense line in the division currently.

Brian Porter

Brad, I don’t have that at my fingertips so we’ll come back you offline. Way from Colpatria which was a sizable acquisition which was $1 billion U.S., there is a few smaller ones I’d have to add on. So rather than speculate I’ll come back to you with a firm number.

Brad Smith - Stonecap Capital

Okay. That would be helpful. Then one more question, with respect to the return that you’re generating which is just up 12% right now. Could you contrast that with other in-market peer returns that you’re aware of in sort of general terms in the markets you’re in?

Brian Porter

Sure. I think that it’s important to, we’re building a business, we’re acquiring businesses and when you do that you incur goodwill. So that’s part of, as I say when you build an international business, you need capital, time and patience. But if you look at our end-market results, for example in Peru this quarter, our ROE was 18.7%. In Mexico it was 20%. In the English Caribbean, 19%. In Chile it’s a little lower, it’s in single digits, and that’s a function of the goodwill we incurred in Desarrollo. So our end market ROEs in most cases are within the pack of our peer group.

Brad Smith - Stonecap Capital

And Brian, just as a follow-on from that, your leverage in those markets, what would it be roughly in terms of assets to your capital?

Brian Porter

It would be what you’d see here in Canada and I would stress that our capital levels -- as these countries gravitate towards Basel III we’re very well positioned there. We’re running at excess capital levels in most of our jurisdictions.

Sean McGuckin

This is Sean. The leverage would be a bit lighter than what we have in Canada because it’s loaded up for all the capital for the goodwill and the intangibles. So when you back that out it would be more in line with the bank but when you include that then their leverage versus the equity employed would be a lot less.

Brad Smith - Stonecap Capital

So, I mean ten times would be a reasonable estimate for the leverage down there, including the goodwill and the funding?

Sean McGuckin

Yeah, it would probably be closer to 13% to 15%, thereabouts.

Brad Smith - Stonecap Capital

13 to 15 times assets to equity?

Sean McGuckin

Yeah. But we will come back to you with more accurate numbers on that. That’s the general range.

Operator

Your next question comes from Sumit Malhotra from Macquarie Capital Markets. Please go ahead.

Sumit Malhotra - Macquarie Capital Markets

First for Sean McGuckin on capital. If I heard you correctly, the 7% to 7.5% of which you are in the range right now, fully embeds the impact of all acquisitions that have been announced but have not yet closed?

Sean McGuckin

Correct.

Sumit Malhotra - Macquarie Capital Markets

And am I also correct in stating that the $1.6 billion in equity that you raised in February was essentially taking into account the impact of same acquisitions you hadn’t yet closed. In other words, you’re not contemplating the need for further capital to stay within regulatory requirements for transactions that have been announced but not closed?

Sean McGuckin

No.

Sumit Malhotra - Macquarie Capital Markets

Okay. Good. Nice and clear. Thanks for that. And then over to Brian on international. I think one of the reasons that there is some concern over the slowdown in asset growth this quarter is that I think we’ve seen Brazil, largest economy in South America where I know Scotia isn’t overly active, but we’ve seen that country require some economic stimulus after the slowdown that’s taken place. Are you seeing the impact of Brazil? I know we talked about China and some further away regions, but is the impact of Brazil causing you any concern in terms of what kind of growth you’re going to see in the areas that have been stronger for you in international in the last couple of years?

Brian Porter

Do I get to give a one word answer too? Look, I’d say that Brazil is a juggernaut as an economy, there’s no question about it. But it’s dangerous to look at all Latin America through the lens of Brazil, and that’s why I made the comments I did about Peru earlier and the investment in these countries. Peru is a very unique country on a different growth trajectory than Brazil. Chile has different fundamentals for a lot of different reasons. But that’s why I stated that it’s investment that’s driving these economies in the mining and energy sector and will continue to do so as the personal growth starts to kick in.

So if Brazil is growing at 2% which it is, or 2.5%, I wouldn’t confuse that with the outlook in the other countries where we’re operating where growth rates are pretty close to double, if not higher. So, the impact of Brazil on its neighbors I don’t think is significant in terms of economic development.

Rick Waugh

So I’d just add one more thing on that business model. In those other countries, ex-Brazil, we really are a PNC bank. We have branches. And so while we do get the foreign direct investment, the average age of these people and the growth rate into the formal economy is quite large. They’re starting to buy furniture and appliances and cars and houses and we’re branch banking in those countries. Brazil, we’re not branch banking. So there’s some different dynamics in fact both our growth rates and our diversification.

And consumption in these countries, it’s phenomenal. When you go down to see it in the Colombia and Peru and the growth of the formal economy and the middle class, and we Scotiabank benefit from that, because we’re not just investment banking down there, we’re banking the real economy.

Sumit Malhotra - Macquarie Capital Markets

And lastly, Brian, I know you are not in the business of building our models for us, but when you think about your business, is international with some of the global headwinds you’ve talked about and we’re seeing every day, is international from an asset growth perspective as you think about 2013, still a double-digit growth type of profile or is it something more in the mid-single digits that you are thinking about going forward as you think about your 2013 plan?

Brian Porter

If you look at our asset growth last year and what we’ve obtained this year, even ex of the acquisition of Colpatria, I would phrase asset growth for next year for low double-digits or high single-digits. So, look the economic trajectory of these countries that we are in remains intact and we’re comfortable with the asset growth levels and targets that we’ve commented about.

Operator

Your next question comes from Michael Goldberg from Desjardins Securities. Please go ahead.

Michael Goldberg - Desjardins Securities

First of all, I always think of setting reserves is a bit of an art as much as a science. So simplistically is there any reason why I can’t think of the way this $100 million strengthening took place as being we’ve got this big gain on the realization of Scotia Plaza, but for the $100 million towards the collective and then got an additional amount so we can tell people we’re now above the 7% level on a common equity tier 1 basis?

Sean McGuckin

This is Sean, I don’t think that’s a fair way to look at it. Maybe ten years ago when the rules were different. But as you heard from Rob, we had looked at some of the contagion from Europe that could apply and bracing ourselves for potentials on softening in the market conditions. But we thought it was great time to do that.

Anatol von Hahn

Put it another way, Michael. If you are going to do it after all the stress testing that you’ve done when would you do it?

Michael Goldberg - Desjardins Securities

I guess when you have a nice gain there, it’s not a bad time to do it.

Anatol von Hahn

Certainly easier.

Michael Goldberg - Desjardins Securities

It makes it easier. Another one, you seem to have more cautious outlook for international banking. To what extent can we expect further penetration of wealth and insurance in those markets to offset the moderation in International banking?

Chris Hodgson

Michael, it’s Chris Hodgson. I think some of the results that we actually posted this quarter support the longer term opportunities. So, for example in insurance if you look at the underlying results, particularly in Peru and Mexico, there has been strong growth in insurance and we actually expect that to continue into the future. In addition to that with the recent acquisition of Colpatria and now our purchase of Colfondos, we see an opportunity to expand our pension business. I think that’s probably indicative of some of the things we want to do in wealth going forward in partnership with international banking.

We would likely have not entertained the acquisition of Colfondos had there not been a strong P&C presence in Colombia through Colpatria and there’s actually a very strong relationship between the management of those organizations. So, in the region of Latin America we see some good opportunity. The other thing is for the international wealth businesses. On the advisory side, we see some opportunity in again some of these key markets, particularly in Peru, Colombia and Mexico would be the sphere we’re going to focus on.

Michael Goldberg - Desjardins Securities

Okay. And lastly, can you talk again about the possibility of more international businesses becoming available due to distress in Europe?

Brian Porter

Sure, Michael. I can comment about that, it’s Brian, is that as you know, and you’ve heard us comment before, we’re always looking at acquisitions. Acquisitions have been a key part of the international strategy to build out our franchise. We continue to look at them and as you’d expect, in current economic conditions there are some businesses available.

Operator

Your next question comes from John Reucassel from BMO Capital Markets. Please go ahead.

John Reucassel - BMO Capital Markets

Okay. One question. Mike Durland, the trade numbers are very good I guess, and you talked about -- I think Rick talked about counterparty. But how tight are you keeping trading with your origination and credit providing to your clients? Or is this a trading business all onto itself? And then when you think about the loan growth, did you buy those loans in the marketplace or where do these loans come from? I think in the U.S. and Europe I think you picked up $5 billion of loans, if you could….?

Mike Durland

I’ll let Steve handle the loan question, but as I said in the past, we’re a bank. We have customers all around the world. We’ve got relationships that we have nurtured for a long, long time and we’ve been very -- my focus for the last four years has been to connect our product suite with those customers. In some cases, for example, in the fixed income space, we’ve had deep relationship with central banks. To provide liquidity needs to those central banks throughout the world we have on-boarded a lot of buy-side accounts, they trade cash instruments with us. Those relationships by and large have been on-board, that’s been a large initiative for us.

The majority of it when we talk about on-boarding, it’s initiating a different product relationship within existing relationship. And that’s been a very focused effort for us three or four years again. The other point I would make is that, our strategic plan we haven’t deviated from at all for the last four years. We’ve been very focused on the things that we’ve been communicating, the fixed income, the commodity space, our prime brokerage offering which we’ve just launched. And we are very happy with the results and hopefully we continue to sustain them. And I’ll let Steve handle the question on loans.

Stephen Hart

Sure. So, in terms of loan growth, we’re seeing loan growth in Q3 in all our markets. It’s not really much in the way of purchased loans, we saw a lot of that activity around calendar year-end, since then it’s been modest. So, we’re adding net new clients in all our markets and that’s what’s driving their loan growth.

John Reucassel - BMO Capital Markets

But no distrust or European banks looking to unload?

Stephen Hart

Very little of that. As I said, the activity was around calendar year-end, it’s been modest, muted since then. So it’s a steady stream of relatively immaterial numbers as we go weekly.

Operator

Your last question comes from Mario Mendonca from Canaccord Genuity. Please go ahead.

Mario Mendonca - Canaccord Genuity

One quick question for Brian Porter, it sort of goes along the lines of other questions. The organic growth year-over-year in retail and organic this quarter -- sorry retail and commercial loan growth in international this quarter?

Brian Porter

Okay. Our retail loan growth was 2% quarter-over-quarter, commercial was down about 1% on an average basis and that’s a function of the decline in loans in Mexico and Asia I spoke about earlier.

Mario Mendonca - Canaccord Genuity

What I was thinking about was organic year-over-year?

Brian Porter

If you take out the Colpatria acquisition our organic commercial loan growth is 14%, our retail loan growth is about 12%.

Sean McGuckin

All right. Thank you very much for joining us on the call and we look forward to talking to you again at the end of Q4. Bye.

Operator

Ladies and gentlemen, this does conclude our conference for today. Thank you for participating. You may now disconnect your lines.

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