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

Good morning, everyone, and thank you for being a part of the 21st Annual Scotiabank Financial Summit, and this is a virtual edition. My name is Meny Grauman, and I'm the Canadian financial services analyst here at Scotiabank. I'm looking forward to 2 days of some really interesting conversations. And starting off with the first one, it's my pleasure to open the conference by welcoming Mr. Brian Porter, President and Chief Executive Officer of Scotiabank. Brian, good morning.

Good morning, Meny.

How are you doing?

I'm well. Thank you. Good to be here. And best of luck over the next 2 days.

Thank you. We've got a great line up here, so I'll just get into it. Certainly, the big focus for investors is Scotiabank's international unit, and we talked a bit about that when we sat down to speak 2 weeks ago. But I just want to push that conversation a little bit further and really start off with a simple straightforward question, which is what gives you confidence in the earnings power of the International business going forward through COVID and beyond?

Okay. Well, thank you, Meny. Our view of our footprint in the Pacific Alliance hasn't changed, and I think it's important to give some high-level macro thoughts and considerations as the -- that these are economies and countries, I believe in 3 markets, have strong institutions. They went into the downturn with strong balance sheets, and they're going to come out of the downturn with relatively strong balance sheets. They're -- They've applied the appropriate amount of monetary considerations for the economy, fiscal considerations for the downturn. And these are young populations, growing middle classes, so our view has not changed. The environment is changing on a weekly basis and getting better. As you know, these countries went into the downturn. COVID was 4 to 6 weeks behind the onset here in North America, so there was a delay for the economies in the Pacific Alliance going into the lockdown, but the countries are coming out. And I think it's important to note that most commodity prices are higher today than they were pre-COVID, copper being probably the most significant and most important. But these countries have robust balance sheets, did what they had to do to weather the storm and are coming out of their lockdowns. And a lot of the economic things that we've looked at in terms of spending, consumer spending are now at pre-COVID levels.

Great. I want to get more into the specific strategy for the key Pacific Alliance countries. But first, I thought I would throw in a bigger picture question. We're hearing a lot lately, given the decoupling with China or the debate about decoupling with China caused by corona, caused by U.S. trade tensions about companies shifting their supply chains to other parts of the world. So the question is, how well positioned is Latin America to benefit from that? Do you think that is a trend with legs here? Or is that just mostly talk?

Well, North America generally is going to benefit from that and Mexico, particularly. And if you look at Mexico as an economy, manufacturing and agriculture, 20% of GDP. And as a manufacturing economy, Mexico, in fact, is bigger than Canada and the ninth largest manufacturing economy in the world. So Mexico will benefit, and we see that in our day-to-day business. We see supply chains being repatriated back to North America, real time, that's happening. And Mexico will continue to be a beneficiary, as the U.S. will and as Canada will.

And then if we could go into the specific -- Pacific Alliance countries and maybe even go kind of one-by-one and just get an update in terms of the strategy for those countries and sort of a more granular outlook for each of those Pacific Alliance Countries?

Sure. Well, I'll start with some macro comments about the Pacific Alliance and then talk about the individual countries. But, yes, there's lots of things for us to do in terms of growing profitable market share and running our businesses. In each of the countries, we're focused on expense management. In international banking, we've taken out $100 million of expenses on a $5 billion expense line in the past 2 quarters. There's certainly more room for us there to make further cuts and enhance productivity. There's room for us on the wealth management business. We're growing our wealth management business in all 4 countries, and we see further room for growth there. In terms of insurance business, we have a joint venture with BNP Cardif, and that partnership is in its early stages, but we see that being a more significant contributor to revenue and earnings going forward. So if you look at Peru, let's start with Peru, is severe lockdowns in Peru, the countries coming out of those lockdowns. There's lots of room for us. We're a top 3 bank in Peru. Our productivity ratio is below 40%. We think we can continue to enhance that, and we'll drive more digital sales through and enhance our productivity in Peru. There's room for us to grow as a commercial bank and a corporate bank in Peru and enhance our wealth management business in Peru. So still lots of room for us to grow. The economy is going to rebound. It's in the process of rebounding, and we expect the Peruvian economy to grow at roughly 8.7% next year. And so the actions that the government has taken in terms of allowing some pension monies to come out to citizens, for example, in some cases, that's equivalent to 2 to 3 months' salary for some workers. That's an important amount of stimulus in the economy. There's been other programs that have been affected as well. So Peru will come back, highly confident in that, and we're starting to see that now. In terms of Mexico, Mexico is really a proxy for the U.S. economy. And as the U.S. economy goes so will Mexico, I made some comments about the manufacturing prowess of the Mexican economy. In terms of our individual business, they're performing pretty well given the circumstances, that there's room for us to grow our GBM business in Mexico. Our unsecured business is relatively low compared to our peers. Our focus in the retail bank has been on mortgages and autos. That will continue. And the Mexican economy, as I said, will grow at 3% plus next year and really be a proxy for the U.S. economy. In terms of Chile, Chile is, again, coming out of COVID a little bit faster than the other economies in the Pacific Alliance, and that's just a function of timing, and that last month had positive GDP. Chile will be a -- obviously a beneficiary of China's GDP and the impact in terms of the exports of copper, certainly. And Chile is an export nation. It's not just copper. It's a lot of different things. It's fresh foods. It's salmon. It's wine. And for example, Chile would export more wine globally than the United States. So Chile is a real export economy that's opening up. In terms of our business, the timing of the acquisition of BBVA and Scotiabank has gone very well. The integration has gone well. That was completed before the onset of COVID. In terms of our particular areas of focus and growth in Chile will be on core deposit growth in Chile, and we're working on some payroll measures in terms of attracting deposits from our client base, room to grow our commercial and our GBM business and our wealth business and enhance our digital offerings in Chile. So that's Peru and Chile. Switching to Colombia. Colombia is -- we expect the economy to grow at 5% next year. Colombia would be more aligned with the U.S. economy in terms of its exports. In terms of the opportunities within our Colombian business, we'll be focused on enhancing our corporate and GBM businesses and our commercial business and obviously, enhancing our digital offering in Colombia. So -- and then moving to -- I think I've covered all 4.

Right. You've covered them all. And there's a lot there. You mentioned expenses in wealth, in particular, and I wanted to drill down into each of them. But maybe first on expenses, first talking about expense management in the international business. You highlighted that today and a few times in the past, but I wanted to maybe dig a little bit deeper and kind of understand a little bit more granular. Where are the expense savings in the international business coming from? And are they skewed to a particular country or 2? How do you see that?

Yes. Well, it's -- as I mentioned, our productivity ratio in Peru would be industry-leading at -- in the high 30s, it's below 40%. Chile is around 42%, 43%. We think we can get that productivity lower. And Mexico, our productivity ratio was in the low 60s, we've taken it down to 55%, and we have a target of 50%. And there's room for us to do something similar in Colombia. So when you have a $5 billion expense base, there's room to take expenses out in an environment like this, and it's across the board. It's -- in terms of real estate, in terms of -- in some cases, people. We've redeployed people to different jobs and tasks throughout the International Bank. But as I said, we've taken $100 million of expenses out in 2 quarters, and we see more room for that. You'll see it in subsequent quarters. But in terms of the all bank, we have $16 billion of expenses and there's always room for improvement. We -- our expenses are down 4% year-over-year, so we've worked hard at it. We've been disciplined about it. We've been very focused about it. But when you have an expense line, there's always room for improvement. So there's lots of things we can do to continue to work down our expenses.

One thing I'm curious about, and I want to ask all of your peers, is really how do you make investment decisions in such an uncertain environment? If we look out, clearly, there's a lot of question marks about the next months, the next quarters. And so in your seat, how you decide on a go or no-go decision? What kind of factors go through your mind? And again, how do you decide trading off maybe short-term for long-term considerations? How does that all work out to in the current environment?

Okay. Well, good question, Meny. And this is something that myself and the operating committee of the bank spend a lot of time on. And I think we've been very focused and disciplined at this. Is it -- look, first and foremost, and I don't mean this as a trite comment, good companies invest in bad times. We continue to invest in our people. We continue to invest in process that makes the bank better and safer, and we continue to invest in technology. But we're disciplined about it. We have a strict prioritization framework that we use at the bank in terms of what's really important today. So obviously, at the top of the list would be regulatory issues that we have to get done within specific guidelines. And then we look at business line spending that enhances the customer experience, and we prioritize that, and it's worked very well for us, and we'll continue to use this process of strict prioritization in terms of expenses going forward.

Has the pandemic changed any of your investment priorities?

No. I mean it's -- a couple of the business line expenses have been deferred, Meny, but these are things that are -- I would define as important and nice to have, but they're not -- we don't need them tomorrow in terms of running the bank. And we're proud of how we functioned here throughout the pandemic. We've had over 90% of our branch network in Canada and internationally open throughout the pandemic. We did it safely. We put our employees and our customers first, made sure that they were well-protected, and it's worked exceedingly well for us. And our customer satisfaction scores have increased dramatically, and our employee satisfaction scores have as well.

Is the bank at a stage where technology is an area for expense savings? Or is that sort of its own kind of silo that does not touch -- that is not a focus at all for this kind of discussion?

No. It's -- there are no sacred cows in the bank, and we have to look at the cost of delivering what we do on the technology front. And Michael Zerbs and his team have been on their game in terms of looking at our expenses, the delivery of technology to our different business lines, and there's always room to improve that.