Bank of Nova Scotia Earnings Call INSIGHTS: Collectable Allowance, Loan Growth Trends

On Tuesday, Bank of Nova Scotia (NYSE:BNS) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Collectable Allowance

Cheryl Pate – Morgan Stanley: I just wanted to talk a little bit more about credit and the (indiscernible) 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 more time on where sort of the bigger areas of concern actually in France and whether Colpatria credit is tracking along with expectations as well?

Robert H. Pitfield – Group Head and CRO: The $100 million to the collective is not related to the existing portfolio and its performance. It really stems on the fact that that back in November, we set up a cross-functional team to look at Europe and one might fall out of Europe and we’ve done a series of stress test 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 not 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 and had a bit of hick up this last quarter because of credit cards that is not expected to continue. It’s a temporary situation. There are all sorts of effort against it and we’re pleased with that portfolio.

Cheryl Pate – Morgan Stanley: Maybe if I could ask one for Anatol as well. You mentioned credit card is an area of growth. One of your peers earlier highlighted some softening, margins coming from the products as customer behavior is sort of chancing and more balance is being paid down. Can you just give us some color on sort of your positioning and the segment whether you’re focusing on high volume transactors or a customer segment that would be more likely to carry a balance?

Anatol von Hahn – Group Head, Canadian Banking: What you see and you see it also in our noninterest 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 of financing mechanism. So, it’s not – 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, when I’m referring to the growth, that’s what I’m talking about.

Rick Waugh – President and CEO: This is Rick again. I just wanted to stay at Rob’s comment which I obviously totally agree with, but Scotia and those of you who follow us for a long time, we’ve always been aggressive on provisioning and later on we take the recoveries and dealing with the general, 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 review that as a position of strength for us going forward in almost any scenario. So take them – there is concern but it’s a position – take them when you can. It’s a position of strength and that’s how we do it right now.

Loan Growth Trends

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 in some time. So, can you just 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 J. Porter – Group Head, International Banking: I’d just remind everybody that in terms of asset growth year-over-year, our Commercial book has grown 21% in 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 a half $1 billion and that’s a function – trade finance as you is relatively short dated. We saw some competition from the Japanese bank that 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 that $1 billion of assets in the quarter on an average. If you look at it on a spot basis, we’re actually up 2%. 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?

Rick Waugh – President and CEO: No, we’ve been amortizing this portfolio down over time Steve, the bulk of it is done.

Steve Theriault – Bank of America Merrill Lynch: 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 J. Porter – Group Head, International Banking: 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: 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 $183 million of rate – 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 – Group Head, Global Capital Markets, and Co-Chief Executive Officer, Global Banking and Markets: 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 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 the businesses.