Good morning everyone and welcome to Scotiabank’s 2016 Fourth Quarter Results Presentation. My name is Jake Lawrence. I am Scotiabank’s Senior Vice President responsible of 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, we'll be glad to take your questions. Also in the room with us to take questions are Scotiabank's business line group heads, James O'Sullivan from Canadian Banking; Nacho Deschamps from International Banking; and Dieter Jentsch from Global Banking and Markets. Before we start the call and on behalf of those speaking today, I would like to refer you to slide two of our presentation, which contains Scotiabank’s caution regarding forward-looking statements. Also some of our comments related to 2016 results are adjusted for the restructuring charge of $278 million after tax that we announced earlier this year in Q2. With that, I'll turn the call over to Brian Porter.

Thank you, Jake, and good morning everyone. I'll start on slide four. I am very pleased with the Bank’s results in 2016. Scotiabank ended the year in a strong position and has good momentum that is driving continued success across our business lines. Our entire team worked hard to deliver these strong results for our shareholders and achieved them despite ongoing market volatility, global economic and political uncertainty, and historically low interest rates. Compared to this time last year, the narrative around Canada’s economic outlook is more positive. Despite some ongoing challenges in certain parts of the country, the bank is forecasting improved growth in 2017. Beyond Canada, we remained focused on our key markets in the Pacific Alliance, mainly Mexico, Peru, Chile and Colombia. These countries will benefit from relatively attractive growth rates and they have great potential. We expect the region will continue to generate strong results for our shareholders. Heading into 2017, we are continuing to move quickly but thoughtfully to improve the Bank. For example, the Bank is focused on a thoughtful construction of our balance sheet to help improve risk adjusted margins. We are growing targeted assets prudently and emphasizing deposit growth. I am pleased to report good progress is being made on both fronts. Also, as you know, the Bank has embarked on a major transformation to become a digital leader. Through this effort, we are strengthening and deepening our customer relationships by removing friction points. And we are driving efficiency improvements across the Bank. Our efforts on this front were recently recognized in digital and mobile banking where Forrester Research awarded Scotiabank, the highest overall score among our Canadian peers for mobile banking functionality. And earlier this month Forrester ranked our online account opening process number one among our peer group. A key…

Thanks, Brian. I will begin on slide six which shows our key financial performance metrics for the current quarter and comparative periods. Q4 diluted earnings per share were $1.57, up 8% year-over-year. All three of our business lines delivered a strong quarter to end the year. Provision for credit losses remains well managed and the Bank’s focus on improving efficiencies helped drive positive operating leverage for the year. Revenue growth was strong, up 10% from Q4 last year with solid asset growth across all of our business lines including personal and commercial lending in International Banking; growth in targeted assets in Canadian Banking; as well as good corporate lending growth in Global Banking and Markets. Revenues are also positively impacted by higher banking fees, wealth management and trading revenues. Gains on sales of real estate were more than offset by lower net gains on investment securities. Our core banking margin was 2.4%, up five basis points year-over-year. Higher margins across all of our business lines were partially offset by higher liquidity and funding costs in the Other segment. Adjusting for the impact of acquisitions, foreign currency translation, a large pension credit and reorganization costs in Q4 of 2015, non-interest expenses were up 5% year-over-year. Higher performance and stock-based compensation as well as technology investments in the business accounted for the growth. Partly offsetting were savings realized by our previously announced structural cost transformation initiatives, which amounted to approximately $30 million in the current quarter and $55 million for the year. The Q4 productivity ratio was 54.1%, up 50 basis points year-over-year while the Bank’s full year productivity ratio improved and declined 50 basis points to 53.7%. For the full year, we delivered positive operating leverage of 1% on an adjusted basis. Moving to capital on slide seven, as mentioned, the…

Thanks, Sean. We remain comfortable with the underlying fundamentals of the Bank’s risk portfolios including our residential mortgage exposure, as Sean has discussed earlier. The Bank’s credit performance is within expectations. And on a reported basis, I’m pleased to note that our loan loss rate improved by 2 basis points quarter-over-quarter and year-over-year. Looking at our corporate and commercial loan book, this quarter we had a small amount of energy related provisions, but the overall portfolio continues to perform well. Our energy portfolio remains well-managed with the cumulative loan loss rate since 2015 of 2.1%, well-below our guidance of 3% to 3.5% till the end of 2017. And as Brian has noted earlier, assuming commodity prices stabilize at current levels, we now believe cumulative losses will be below 3%. As we are comfortable that we have moved past the key issues in this sector, our energy slide has also been moved into the appendix of the investor presentation deck. Overall, our retail credit performance in both Canada and International is performing as expected. In Canada, we continue to see some regional weakness in Alberta, but that’s being offset by strength in our other markets such as Ontario and B.C. Retail exposures are driving a higher loan loss ratio while commercial improves. In International, overall credit quality remains good and is improving in both retail and commercial portfolios. Now, looking at our credit metrics, our gross impaired loans were up 1% quarter-over-quarter. The increase was driven overall by foreign exchange and is actually down slightly on a bps basis. Our net impaired loans as a percentage of our portfolio also improved two basis points quarter-over-quarter. Net formations amounted to $645 million, down from the $788 million in the prior quarter. The improvement was driven primarily by lower formations in Global Banking…

Thank you, Stephen. Before we open the call for questions, I’d like to provide some thoughts on our outlook for the year. As mentioned earlier, we are very pleased with our operating performance in 2016 and what we have accomplished for Scotiabank shareholders. We are in a strong position as we exit the year and we’ve built strong momentum across all our major businesses. Looking ahead, we expect growth prospects for 2017 to be similar to the past year. We expect global growth to be moderate with strength in North America, partially offset by lower growth in other markets including Europe. We expect the Canadian economy to improve over the course of 2017 with growth approaching 2%. And in the U.S., we are forecasting growth greater than 2%. In the Pacific Alliance region, we expect growth to be in the 2.5% to 3% range led by Peru at 4% and Colombia 2.8%. The U.S. election results have driven some degree of market speculation and volatility. In terms of any impact on Mexico, it would appear the market is discounting a bigger impact to Mexico than we believe is realistic. To that point, we remain confident in our medium-term growth objectives for Mexico, and we will continue to actively and prudently manage our businesses. We remain committed to the Bank’s overall medium-term objectives including those for both International Banking and the Pacific Alliance that we provided at our Investor Day in Mexico City. With this context as a backdrop, I’ll now turn to the outlook for our businesses for 2017. Canadian Banking is focused on delivering a superior customer experience and profitably growing primary banking relationships. More specifically, James and his team are continuing to focus on business mix through the thoughtful construction of Canadian Banking’s balance sheet to produce improved…

Thanks Brian. That concludes our prepared remarks. We’ll now be pleased to take your questions. Please limit yourselves 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?

Thanks. Brian, just a quick one on capital ratios, I mean obviously very robust 11%. I know, there is a little bit of movement because of stuff outside of your control. But, just can I get some thoughts as to what is the right level you think you would like to run at and is 11% above that? And then, maybe also just what are some of the key risks that management is focused on over the next 12 or so months? I mean, you’ve been pretty good in calling out the risks, I think. So, I’d like to hear your thoughts on that for the industry and for the Bank as well.

Okay. Thank you for the question. I’d say on capital that -- as you’ve heard me say before, we like optionality, and 11% common equity Tier 1 gives us optionality to both grow our businesses organically or look selectively at acquisitions that are on strategy. And that’s the position we like to be in. In terms of what’s an optimal capital position for any bank in today’s climate, that’s really an individual question for banks. We’ve got flexibility. As you’ve heard me say, if saw the right acquisition, we’d be comfortable doing that if it’s on strategy and we take our capital levels down. And we drove that but I wouldn’t want to go much below the 10% level. In terms of risk out there, I think the risk that I think about every day would be macro. I’m concerned about developments in Europe; you’ve got 14 different elections there; the rise of populism; you’re going to have governments change in Europe. So that’s a risk. The state of the Italian banks is worrisome for the global banking community, so I think about that. And then in terms of one has to be and think about cyber security and this day and age. We’re very comfortable where we are and we’ve got lots of great people and systems in place to protect the perimeter of the Bank, so we’re comfortable from that perspective. But I think the biggest risk is on a macro basis for the year ahead for us.

We’ll go to Gabriel Dechaine with Canaccord. Please go ahead.

Good morning. I have a housekeeping one and a real one. Could you, Sean, go through a bit more of an explanation on the higher liquidity and funding costs that drove down your NII in the Other segment? And then, somewhat related to other topic, the rate moves we’ve seen in the past few weeks have been pretty phenomenal. I’d like to hear both from Sean and -- yes Sean, first of all, what does that do for your margin outlook in 2017, the five-year in particular is up 30 basis points or so since the end of September. Then, Stephen, the second part of it, how much is too much? When we start worrying about the level of rate increase, the sharpness of it and a potential negative impact on credit quality in Canada?

Alright. So, it’s Sean. I’m not sure which one of those is a housekeeping one but I’ll answer the first one. Yes, the higher funding and liquidity costs you saw in the Other segment is that as we continue to position ourselves for some liquidity coverage metrics, the net funding ratio, we’ve been terming out a bit more of a wholesale funding. So, we’ve been bearing a bit more of that cost for these ratios coming to place. So, we’re being well-positioned for that. We expect the growth of that negative carry to moderate next year and come up a bit. So, that’s really what is increasing the funding cost in the Other segment. In terms of the margin outlook, definitely a rising rate environment and a steeper curve definitely adds value to the Bank’s earnings, both from a savings and checking accounts as well as the value of capital but you have to bear in mind. It takes time to work through the system; it doesn’t happen in one quarter because as those deposits are really and capital’s financing, some longer term assets as they renew and re-price up, that’s when we get the margin impact. It’s definitely we will have advantage from the rates risings but it’s just not going to come right away in the next one or two quarters.

Can you quantify that? What should I look at five-year rate and that should help the margin by couple of basis points or something?

We haven’t quantified that but yes, we think a few basis points at this point but we haven’t modeled through all the permutations and comments but definitely it’s going to be an impact, positive impact. Again, it’s going to take time to work to the system. In terms of the pace of the increase, Stephen, do you want to…?

Yes. I mean, as it relates to the credit portfolio, quite frankly that is what on the retail side, what the new measures are looking at for improving the stress test by adding a couple of bps. And we do test our existing clientele for most of higher rates, so they can perform. Quite frankly, yes, at the end of the day, the yield curve today has basically returned to where it was a year ago. It’s just that we lived so long at the last nine months but it really hasn’t moved year-over-year. Having said that, it’s unemployment that I look at from a risk view point as opposed to interest rates; most of our clients are locked in for a longer term, so rising interest rate really doesn’t affect them immediately whereas obviously unemployment does.

So, job growth is stable, we need to see rates move a lot more than we have already.

Exactly, yes.

We’ll go to Steve Theriault with Dundee Capital Markets.

Thanks very much. So, a question on for Brian on the long-term outlook, are we -- as a bank, you cut the target last year and came in above on the ROE front this year. But just above the 14% target. So, Brian, I wanted to ask in the face of still some coming regulatory pressures, the potential to maybe do some modest to medium-size deals, how confident are you that the ROE will head higher versus lower over the next one, two, three years or is 14% in the range where you think the ROE will settle out at the end of the day?

Well, if you look at this quarter’s results, we’ve produced a 14.6% ROE with a common equity Tier 1 ratio of 11%. So, we’re very comfortable with our medium-term guidance. And as we have outlaid here and we talked about our structural cost initiatives, it’s going to definitely help that in terms of the impact on the productivity ratio of 200 to 250 basis points over the next few years. So, we like where we sit, Steve, in terms of the optionality we have to grow our business from a revenue perspective as we’ve demonstrated in the Canadian Bank, the optionality we have in our International Bank and what we’re doing to manage our cost structure.

And so, when you think of some of the minimum risk weights and some of the mortgage changes, you don’t think -- do you feel like we’re towards the final innings here where the rules of engagement are relatively known? Obviously, the higher capital requirements and a number of other items have pushed that ROE lower over time. Do you feel like we generally know the rules of the game with the caveat that there is still some uncertainty into next year on some of the known unknowns?

Yes. I we’re close. I think that question has been asked to banks’ CEOs for the last five years and they were probably wrong in terms of their guidance. But no, look, I think that we’re pretty close to the end here. And again, we’re really comfortable with capital levels and our strategy and our ability to execute.

Okay. If I could just ask a quick clarification for Stephen. When you were talking about some of the credit ebbs and flows, you mentioned B.C. as an offset -- B.C. and Ontario to remind you as an offset to the Alberta weakness. When I look, I see B.C. unemployment rising from about 5.5% to over 6% through the quarter; maybe if you could just walk me through how B.C. -- why B.C. is looking stronger. Anecdotally, I would have thought B.C. might be sort of joining Alberta in contributing to the weakness?

We’re certainly not seeing that in our early set delinquencies as yet, Steve. So, at the moment, it’s still reasonable growth. And quite frankly, I mean B.C. is not our largest market, but it is a strong market. We’re not as big in the unsecured area and quite frankly our mortgage book, as Brian said before, is pristine with regard to loan-to-value and insured. So, we’re in a pretty good spot in B.C. vis-à-vis some of the other competitors.

But B.C. was looking incrementally better in the quarter?

From our view point, from the delinquency viewpoint, yes.

We’ll go to Rob Sedran with CIBC.

Hi. Good morning. Sean, just following up on that capital question. You called out pension as one of the issues that gave you a bit of benefit this quarter. But most of the rate move happened subsequent to the quarter. So, if rates happen or hang around these kind of levels, should we expect another sort of outsized move in Q1, all else equal? And then, on the related note, just for Brian, when you think about the optionality you have, given that you said maybe you’re more optimistic on Mexico and LatAm, and the market appears to be today, is this is the time where the bias should be to more aggressive deployment into that opportunity or do you think it’s -- still thinking about a buyback potential?

I’ll take the capital question. For the pension, benefit was about 5 or 6 basis points this quarter. You may recall, we’re still down about 25 basis points over the last 18 months of the lower rate environment. So, the 20 to 30 basis points movement in the longer term rate holds into Q1, we will definitely see a pickup and that could be 10 basis points plus next quarter.

Rob, just on the question on capital, buybacks are always in the toolkit and that’s an option that we think about from time-to-time, although we generally only give some thoughts at option exercise. In terms of capital deployment in the Pacific Alliance, there is lots of options again there for us to do that. I would reiterate our performance in country, if you look at our performance in Mexico, Peru, Chile or Colombia. Mexico, I’d highlight here that if you look at any metric you want revenue growth, EPS growth operating leverage against our peer group, we’re number one or number two across the board. And that’s a function of better management, it’s a function of our cost initiatives there, the amount of money we are investing in the new technology system. So, these investments we’re making in the individual countries are paying off, and we’re going to continue to do those.

We’ll go to Meny Grauman with Cormark Securities.

Hi. Good morning. Hoping you could just refresh us on how you manage FX risk, particularly in Latin America. And then, wondering whether you made any changes to the way you manage that FX risk before in the wake of the U.S. presidential election.

Alright, I’ll handle that. With our international footprint, as you would expect, we have many currency hedging discussions that are at the liability committee sessions. I think it’s also important to note that with the basket of currency that we do have, sometimes you got some appreciating and depreciating. So, this is somewhat of an overall play that offsets each other. And it’s also important to remember that these currency and exposures are also against the local currency, means Canada. So, if the U.S. is extremely higher or lower, that doesn’t necessary translate into lower currency values against the Canadian dollar. But with respect to foreign earnings, I think as we signaled before, we generally hedge about 25% to 35% of the rolling next four quarters’ earnings of our international units currently on the near-term quarters for Mexico with the higher end of that range, but it is something that we talk a lot about around the risk table, about what is the right positioning. We take the forward premium into consideration as well when we think what the hedging options. But we have are active and dynamic on it. In terms of how things changed over the last three or four months, I wouldn’t necessarily so, we still have the same the same conversations; it’s just what level of hedges we want predominantly more or less.

We’ll go next to Mario Mendonca with TD Securities.

Good morning. First, just a quick question on securities gains, we saw that they were down, was offset by the real estate. Is there any reason why securities gains could be depressed going forward? Could it be changed, lower than what we’ve seen in the past?

Yes. We’ve had some higher elevated levels last couple of years. It’s expected to moderate somewhat into next year.

And the reason I am getting there is the real estate gains seemed a little bit unusual but I understand that they were -- they were more than offset by the decline in securities gains. So, where I’m ongoing with is that the securities gains are depressed going forward. Is there -- can we reasonably expect the real estate gains to offset that?

Real estate gains are a little bit lumpy, they come and go but it’s all part of our strategy to look at the value of our assets and we’ve seen cap rates at almost historical lows these days. So, there is some opportunity to grab some good value there. Also, as part of our branch network realignment, there are opportunities to dispose the certain branches. So, it’s the combination of things. I can’t say that real estate gains will be a regular quarterly event. But again, it’s just management [ph]. The overall scheme of things, Mario, really isn’t that material to the Bank’s bottom line.

Going forward and we’ve seen in the past.

Yes.

Yes, okay. And then, Brian, you made a point that you felt like the Bank’s earnings growth going forward in 2017 or rather 2016 and 2017 -- or sorry, 2017 and 2018 would be similar to what we saw this year, 2016, which I think is a little bit over 6%. Now, given everything the Bank has said about restructuring initiatives and cost savings and the increasing rates, I was a little surprised that you wouldn’t talk about a slight acceleration in earnings growth. Is there something else that’s on the horizon that I’m not thinking about?

No. We’re certainly very confident about the year ahead and out into 2018, Mario, we continue to deliver on what we promised to the street. If you look on a macro basis, the International division, we’re very proud of. As I said in my comments, we’ve delivered $2 billion of earnings for the first time in five straight quarters of net income over $500 million. The Canadian business is running very well. We’ve got lots of levers and optionality in that business. James in this team have grown our margin nicely there and keeping risk intact. So, our mortgage book is in terms of quality is very strong. We’ll see better more consistent earnings at GBM. So, we’re very comfortable with our outlook for 2016 -- or 2017, excuse me.

Capital, the 11% capital ratio, two ways to look at that, one that’s great; and then second way to look at it is, is the Bank sort of building the capital ratio in anticipation of something that will consume capital in 2017? And I’m not talking about like acquisitions or buybacks but like any changes that you expect actually consume capital going forward more aggressively than that?

No. Our view on capital is the same as it’s been on prior calls. We like the optionality; we’re not planning for any external event that we haven’t talked about here or that’s in the public domain. It’s that acquisition opportunities will come by for us once in a while. And if it’s on strategy, whether it’s going in the JP Morgan credit card portfolio here in Canada, we’ll execute, or like the Citibank assets in Peru or Costa Rica or so. There are opportunities, if you look at periodically, and we like the flexibility. And I think that I don’t want the marketplace consumed with our capital levels, as I said in this quarter, for instance we delivered 14.6% ROE and 11% common equity Tier 1. So, we’ll continue to deliver for our shareholders and manage capital appropriately.

Alright, thanks Mario. Next question? And for the sake of the time, can you just answer one question, we still have few people that want to ask a question. Next question, please?

Yes. We’ll move on to Darko Mihelic with RBC Capital Markets.

Hi. Thank you. Just a quick clarification. I think, Stephen, doing your commentary, you mentioned that the expectation would be for the PCLs to go down for next year. Do you mean -- I mean, if I look at $2.4 billion for the year, 50 basis points, you are just suggesting that it’s below 50 basis points next year. And the primary reason for this is just a lack of oil and gas. Is that a good characterization of what you said?

That will be close, yes. We expect our Canadian retail to move up slightly as the asset mix continues to mature. And the commercial corporate will come down overall as it normalizes after the energy.

We’ll move onto John Aiken with Barclays.

Good morning. Outside of capital, I think technology was the word that was used most in both prepared commentary and the questions. What should we look forward in terms of technology spend going forward. If we’re looking backwards, we did see a step-up in this quarter. And I know that this is probably going to be a little bit lumpy but we did see a step up in fourth quarter of last year that actually set a new run rate. So, can you give us some expectations as to what we should be looking for going forward? And how much of this increase in technology spend has been baked in terms of the cost savings guidance that you’ve given us for 2017?

Yes, definitely, technology investment and spend is our highest growing expense category, as you would expect as we make important investments to improve the customer experience build out or digital capabilities. But what’s important though is that we are really trying to repurpose our cost base away from the old traditional cost being more efficient, being better organized, truly help pay for that higher technology spend. And so in terms of rate of growth, the rate of growth next year should be similar to what we saw this year but again it’s various efficiency initiatives we’ve got on play that more than compensates for that growth.

We’ll go to Ebrahim Poonawala with Bank of America.

Good morning. I just had one remaining question in terms of outlook on energy PCLs. I just wanted to get your sense, Stephen, if you could, if we do actually see a sell-off and stay back below $40 post OPEC, what’s the sensitivity to PCLs going forward to a drop in oil price?

Thanks. We’re still working off of our original assumptions of nine months ago. So, we were using $30, $35 oil in our stress test. So that would continue. I am not looking for oil to hit 60; I am not even looking at for it to maintain around 45 to 50. So, we feel, most of the companies, the oil and gas companies have gone through the restructurings. We only have one new formation this quarter and we’re continuing to see it -- them find alternative capital sources. So, if there is any small drop in oil prices, I have no effect on my forecast.

Yes. We’ll go next to Peter Routledge with National Bank Financial.

Hi. Steve, just I noticed your PCL ratio on Canada dropped which is great, but your formation, bad loan formation ratio went up in Canada for retail. So, can you talk about what was driving those two -- that divergence?

Yes, we did see an increase in formations, and mainly in our newer products on the unsecured side, credit cards and to a lesser extent autos. So, at the same time, we’ve been building up our reserves, appropriately. It’s going to take a while for the credit card portfolio to mature. This is one that we’ve moved to expand over the last two or three years; it usually takes three to five years for the portfolios to stabilize; we’re starting to see that. We expect it to happen later in 2017. So, we had a buildup in our reserves appropriately.

Is that pressure coming from Alberta, credit cards and autos…?

It’s broad, but yes, obviously there is a regional weakness that we’re seeing in Alberta and some of the related oil provinces. But, we’ve actually seen a stabilization I would say in Alberta over the last quarter.

Okay.

And just on that, Peter, we’ve seen a higher loan loss but don’t forget our risk-adjusted margin which we focus on is up 9 or 10 basis points year-over-year or so…

You’re getting paid for the risk you’re taking.

We’re getting paid for the risk we’re taking, yes. We’ve got time for one more question, please.

And we’ll go to Doug Young with Desjardins Capital Markets.

Hopefully, this will be quick. I just wanted understand Global Banking and Markets, your net interest income was about 26%, but loans was up 8%. I know you talked a bit about these and what not, just hoping to get a little additional color on that? Thank you.

We had good loan growth in North America, which is coupled with good fee income and also deferred fee income from past quarters and past year just came into this quarter. So, it’s a combination of our fees and our interest on our loan growth, which was quite substantial in North America.

Alright. That concludes our call. Thank you all for participating. We look forward to talking to you in the New Year. Thank you.