The Bank of Nova Scotia (BNS) Earnings Call Transcript & Summary

Well, good morning, everyone, and good morning, Brian.

Good morning, Meny.

Let's get into it. I wanted to first ask about Q3 results. We've just come off reporting. And just to get your general views of the results, specifically the highlights. We know it's a very challenging operating environment still. And so what are the key points you would touch on?

Sure. Well, look, thank you, Meny. Before we get started, I wanted to welcome you to Scotiabank, and I appreciate you hosting us here today. So thank you.

Thank you very much. Thank you. I'm hosting you and you're hosting me.

Okay. In terms of Q3 results, I'd start with -- to peel back the onion a bit, and if you look at our pretax pre provision earnings, adjusted for divestitures, up 7% year-over-year. So I think that points to the underlying earnings strength of the franchise and the diversification benefits we have. So if you look at it by business line, clearly, GBM, which in an environment like this, you'd expect very strong results, but we think our results were exceptionally strong. Net income of $600 million, a record results and firing on all 8 cylinders, if you will, in terms of the business. And that's important for us in this type of environment. And I think Jake Lawrence and James Neate have done a very good job focusing the organization, and the credit experience in the business is very strong, too. So we're pleased with that. Our Global Wealth business, very strong results. And I'd just point out that our International business was down 20%, and that's a function of what was going on in our pension businesses in Chile and Peru, which had an impact on our business. So results would have been higher. But good expense management, good performance across all our businesses for our customers, which is very important. And AUM is up as a function of markets, but we're gaining business, which is what we should be doing in this type of environment. So very good underlying results out of our wealth management business. In terms of Canadian Banking, obviously, strong results in terms of our mortgage business, up year-over-year. Commercial banking continues to build assets within our risk appetite. NIM pressures, for sure, as everybody experienced this quarter. PCLs were up a bit, and that's a function of small business and just being conservative in our provisioning, but pretty solid trends in Canadian Banking. We'll come back and talk about customer assistance programs. International Banking. All roads lead to international in a quarter like this. Obviously, our franchise was impacted dramatically by COVID this quarter. And I think it's important to put it in context that if you look at our International business because COVID hit Latin America quite a bit later than, obviously, Europe and North America. So where we are in terms of our operating of our business in Latin America would be kind of where North America was 7 or 8 weeks ago. So look, our international retail business is impacted because of severe lockdowns in the countries. And we think we provisioned more than conservatively. And it doesn't change how we think about these countries. I was on the -- Nacho Deschamps and I were on a phone call last evening with the Finance Minister of Colombia. They're coming out of this. And as we said in our investor call on Tuesday, we would expect economic growth rates of well north of 5.5%, coming out of this for next year. So Latin America will bounce back as it always does.

So lots to talk about there. I definitely want to get back to international banking. But first, I thought we should talk about capital. Very strong capital ratio despite 2 quarters of higher than usual provisions. And so it's really a broader question in terms of how do you see capital ratios coming into this crisis where capital ratio is too high? And coming out of this pandemic, do you expect that we could see a material reduction in the amount of capital that Scotiabank runs with and the sector as a whole, really?

Well, I think that for the past 8 or 10 years, the banking sector globally, there's been a bit of an arms race on capital. And if you go back to the Basel minimum is 4.5 and then everything on top of that is buffers. But look, I think that what has -- we've been through a severe stress test, if I could call it that, over the past 6 months. And it shows you the strength in our capital and the resilience of our capital and the elasticity in our capital. So in Q2, we went out and lent -- largely our corporate customers. A lot of money to see them through in terms of bridge financing. They drew down on their facilities. And a lot of that was repaid through DCM issuance in the last quarter, but it shows you again the resiliency of capital, and that's how it's supposed to work. So to answer your question, I think the investment community at large will think about what's the appropriate capital number if we've been through a stress test like this and is 12 too high, is 11 about right, and that's -- it's a bit of goldilocks, I think. It will take some time to figure that out. But we're very comfortable with our number of 11.3, and again, highlights the resiliency in our capital.

Yes, but you're right. We've had the mother of all stress tests. We're still going through it.

Absolutely.

I wanted to talk about credit. Obviously, that's on top of people's minds. I've heard you talk many times now that you said that recessions are more than one quarter events. So I'm just wondering if you could elaborate on that and tie in your comments to how you see provisions evolving, and I think, more importantly, obviously, the overall reserving level of the bank, how you see that evolving over time?

Sure. Well, it's an important topic, particularly in a period like this. But it's -- I would say about -- I think that it won't be until Q3 next year, approximately, that the book will be written on, on who provided appropriately, and the timing of provisions and the quality of portfolios, to be honest. For some reason, people wanted this to be a 1-quarter event, a 2-quarter event. And that's not the guidance out of Basel. That's not the guidance out of the Bank of England. If you read exactly the guidance that these organizations have put forward is avoid procyclicality and think through the cycle, if I'm to decipher that. But it's -- every bank has to do what's appropriate for them. And clearly, provisions were up for us this quarter, and that's a function of what we saw trending in the Pacific Alliance countries. We've taken our -- if you look on balance sheet, which is the appropriate way to look at it, we've taken our allowances from $5.1 billion to $7.4 billion in 2 quarters. So that shows you the earnings capability of this institution and still meet our dividend requirements, and we talked about capital earlier. So we think this is the high watermark for PCLs for the bank, and they'll trend lower from here, but we think we're conservatively provided and for any outcome. And so we're very comfortable where we are, and that takes into consideration a number of different scenarios. So we'll certainly see how it plays off. But I think it's important for the audience to distinguish between allowance build and write-offs. I think that the community thought we were going to have -- write-offs would be a little faster in terms of timing. Our write-offs or net credit charge-offs this quarter, we're up a little bit. They'll be up a little bit in Q4, but you'll see the balance of those in Q1 and Q2 next year, which I think you'll see for the balance of the banking community at large.

Right. Now I thought we'd switch gears and talk about international banking. You mentioned the region was severely impacted by COVID at a later stage than what we saw in North America. I think the question on investors' minds really has to do with the earnings power of that business. And I guess the question to you is, do you feel that the earnings power of that business has been compromised in any way over a longer period?

No. It's -- we've been in the region for a long period of time, and we've got lots of experience operating in the region. And what we're seeing as these economies come back on track in terms of -- and some it depends where you are, what jurisdiction and what part of the country. But the mining industry is back. The construction industry is back, infrastructure is being built. Agriculture, the fishing industry, those type of industries are certainly back. So you're going to see a strong rebound in economic activity next year. You're seeing it. Last month, GDP in Chile was positive. So it will be somewhat the same experience we've seen in Europe and North America. These will rebound. And I think that there's the headlines in the paper aren't always constructive when it comes to Latin America, and they might be overly focused on Brazil, which has had a bad experience in COVID. But if you look at Chile's experience on COVID and some of the other countries is better than some developed nations like the U.S. or the U.K. So I think you have to put it in perspective. Balance sheets of these countries are in very good shape from a debt-to-GDP perspective, and they've taken appropriate monetary policy action. And in some cases, fiscal policy actions. So what I highlighted on the conference call the other day is in Chile and Peru, a citizen can withdraw money out of their pension. I'm not saying that's good policy or bad policy. But in some cases, it's up to 3 months of salary. And that gives another cushion away from some of the other programs that have been instituted in these countries. So there's a lot in there. But the resilience of these countries from an economic basis -- commodity prices are coming back, whether it's oil or copper, that will have a big influence on the region. And so our view in terms of the resilience of these economies and their ability to rebound hasn't changed at all.

And I'm curious, again, if you take a step back, in terms of how you think about risks to that business in particular, and given this crisis, as you think about it, are there any risks that you underestimated? Any change in thinking in terms of how you view that unit?

Well, it's -- as we talked about earlier, Meny, as we've been through the ultimate stress test, if you will. So I think banks globally are looking at what are the lessons learned through a period like this. And you're going to have tweaks to different products, if you will. But I think that I'm pleased with how the banks perform generally, whether it's from a capital perspective, a liquidity perspective. We're going to talk a little bit about deferral programs, I would suspect. But from a provisioning perspective, again, we think we're more than adequately provisioned. We've been conservative about how we've gone about it. So I think the bank's positioned well going forward. There's always lessons to be learned. So there'll be tweaks around how we run some product groups but it's not going to be substantive or material.

And just following up on that, in terms of specifically your risk appetite, any changes there in terms of risk appetite?

No, I don't think so. I think that we'll do a good hard look at some of our unsecured lending portfolios in all jurisdictions. I think that's appropriate, and that's -- after an experience like this. But I would say that it's every country is different. People tend to lump these countries together. Chile and Mexico, our product groups look very similar to Canada in terms of big mortgage books, auto lending, a smaller unsecured portfolios, strong commercial and corporate lending and good wealth management businesses. But if you look at a country like Peru or Columbia, which are more nascent in their economic development, the mortgage business is relatively small because homeownership is relatively small. So my point here is that there tends to be more unsecured lending. The rates of return in a normalized environment are extremely attractive. And this is one period where the banking industry as a whole will take larger losses. But if you look at that industry, over a 10- or 20-year perspective or that product group, the returns are very strong for shareholders. So you have to take that into consideration.

Right. I thought we'd switch gears now and talk about expenses. Used to be everyone's favorite topic. I think the pandemic changed that a little bit. But I think what we saw in the quarter across the group for Scotiabank, but across the group was have expenses coming more into focus, good expense management. And I'm just wondering how you view expense management generally, but also specifically, all the banks including Scotiabank talked about the further digitization of banking. We're seeing that happen. And so what does that mean for the branch network, specifically?

Yes. Well, look, we're proud of our expense management, and we'll continue to do that. If you just look at the international business because we were talking about that, we've taken out $100 million of expenses in the last 2 quarters, and there's more to come there. And -- but all bank, our productivity ratio down to 54.1%. We're very pleased with that and -- 51.4%, I apologize. So I inverted the numbers. But so very proud of our performance there. And that continues to be a highlight and a strength of the organization, but we have to grow revenues, too, so we're focused on both those things. But again, digital is and work-from-home has been paused to reflect here is that the bank has invested a lot of money in terms of technology. We had a seamless change to have 80,000 Scotiabankers work from home. That worked exceedingly well. And that just doesn't happen at the click of a switch. You have to invest in people, process and technology to do that. Same thing in terms of our digital offerings for our customers. Digital adoption has been up, digital sales have been up. The experience around those has certainly been enhanced. We're very proud to win a lot of awards in Canada, for instance. On Google Play or the Apple Store, we're the #1 rated mobile app, and that comes through considerable investment over time. But I think that the experiences we're seeing is people became more comfortable using digital. That's not to say the branch isn't important. It is. People will go there for advice or maybe it's out of routine, and they'll continue to do that. But digital is going to become increasingly more important for banking generally. And you'll see adoption on sales numbers in the Pacific Alliance continue to increase. They will in Canada as well, but to a greater degree in the Pacific Alliance.

If you think of it broadly beyond the branch network, just in terms of the overall real estate strategy of the bank, do you foresee any changes there? Or is it too early?

Well, I think that, Meny, we sold a number of our real estate businesses. We basically sold all the real estate underlying our branch network here in Canada 4 or 5 years ago. We think we've got very good value for that for our shareholders. We've sold different pieces of our real estate holdings in different countries. And we had a view that we got a better return in our core business than we did holding all these real estate assets. So I think our timing was very good and appropriate in terms of our dispositions of some of our real estate. But I think it's too early to -- I was speaking to a Canadian government official this morning in terms of return to work and how we're going to look at that in our Global Banking and Markets. In Toronto, for instance, we've got 7% of our workforce back. So when does it get to 20, when does it get to 30? And ultimately, when do we get everybody back. That's going to take time. We want to do it thoughtfully. We provided -- we've surveyed our employees, and there's concerns about public transportation and the safety of public transportation. That will get solved over time. But I think it's too early to say how many people are we going to have in this tower versus the tower next door, and is it going to be a significant change of our business. That's going to play out over time, Meny.

You touched on deferrals. And definitely, I want to get to that. It's clearly a big focus for investors this earnings season. We saw that very, very clearly. And people are just frankly, worried about deferrals. It seems clear that by Q4, the bulk of the deferrals will come off in Canada in particular. We know that CERB is being reduced. The government programs are changing. And so the question is, when you look at your deferral data, Scotiabank's deferral data, is there any reason for worry? What do you see there?

Yes. I this bank has a lot of experience with deferrals, and it comes out of our footprint, whether it's an earthquake in Chile or the dramatic hurricanes we saw in the Caribbean over the past number of years. And at different times, we had the last hurricanes that hit Puerto Rico and the other islands. We had $7.1 billion in deferrals just out of that area. And we had a very good experience coming out of that. So my point here is deferrals work. And because they give customers time to manage through what they have to manage through. And so we call them customer assistance programs for a reason. But in Canada, let me give you an example. So if you look at Canada, the bulk of our customer assistance program are mortgages. There's $39 billion of mortgages in there. So 40% of those are insured, okay? Of the uninsured portion, FICO score is 752. That's defined as super prime. So I'm not worried about any sort of -- and this is not my term. It's another term about a deferral cliff. I'm not worried about that at all. I think -- and the way that our -- as customers exit deferral programs in Canada or internationally, they're at our expectation or better than our expectation, and I would expect that trend to continue. So deferral programs work. You're providing some optionality for the customer, giving them time, and you're seeing it in our credit card balances. Our credit card balances are down about 12%, 13%, I think. So people are saying, okay, I've got deferred my mortgage. I'll pay down my credit card, and I'll deal with my mortgage later. So solid trends out of our customer assistance programs and they work.

And then just as a follow-up in terms of the pattern of insolvencies to come and how you see that playing out through the winter?

Well, it's -- we've incorporated that in our loan loss provisions. And we'll see. I think that -- and obviously, the banking community here in Canada was very involved with the federal government in terms of CERB and CEBA 1, 2, 3 and 4 now and the wage subsidy program. And these programs are having their intended impact. They're providing a form of relief for small business and for Canadian households, and that was the intended impact. So you can see that as I used the term before that this is not a garden-variety recession, okay? And recessions don't last one quarter. There has been some structural damage here to the discretionary part of the economy, whether it's tourism-related or restaurant-related or airlines, that type of thing. And that will work itself through the economy. But the federal government programs are having the intended impact. So look, delinquencies, and as I said earlier, write-offs and charge-offs we have, you'll see those start to come through a little bit in Q4 this year, but that's basically a 2021 event in the first 2 quarters or 3 quarters of 2021.

And then you read my mind in terms of a segue, government programs clearly work. I think that's one clear lesson we're seeing in all the bank results this quarter. But the question is, governments are running big deficits. Presumably, at some point, that has to change. And so when you think about the risk of higher taxes, maybe from the banking sector, in particular, what's your view on that risk?

Well, look, I think it's -- time will tell. I think it's that possibility exists. When I get asked that question, I think back to 2008, 2009, and I think you saw some form of taxation for the banking industry go up everywhere globally. And whether it was some sort of transaction fee or whatever. I would suspect you'll see that again, basically, in all jurisdictions. And if you have a change in administration in the U.S., corporate taxes are going up. And we'll see what happens. I think that will play out over time.

Well, I think that's all the time we have. So I want to thank you very much for speaking with me. And I'll see you in 2 weeks when we host our financial summit, and I'll see everyone else as well there, hopefully.

Okay. Thank you, Meny. Appreciate it.