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

Hi, there. Welcome back to the conference. I'm going to be joined by Brian Porter, the CEO of Scotiabank. He's been the CEO since 2013. Before we begin, I've been asked to tell you that Brian's comments today may include forward-looking statements. Actual results could differ materially from forecasts, projections or conclusions in these statements. Listeners can find additional details in the public filings of Scotiabank. Brian, welcome to the conference. Thank you for attending. If even virtually, it's a little bit clunky, but welcome to the conference.

Good to be here. Thank you for having me, Darko.

And I think I've been sort of launching with credit for most of the CEOs, but one of the questions I get a lot with respect to Scotiabank is the recovery and specifically the recovery, how you see it playing out for your international segment, where you really are talking about a lot of different economies. You're talking about, obviously, Colombia, Mexico, Peru and Chile. And so maybe we can start your session with, in fact, thinking about how you view the recovery is playing out in these countries. And maybe even throw in some the Caribbean, too, while you're at it, to start this whole session.

Good. Well, I'd be happy to. Thank you. I'd start with just give you a bit of a broad brush experience at the 4 countries are having on COVID and then get into some economic data. But it is summertime in Latin America, and I think it's important from a COVID perspective, if you look at the rates of infection per 100,000 inhabitants, in the Pacific Alliance, it would be 80% lower than the experience in the U.S. today and 50% lower than Canada. So -- and all those countries have procured enough vaccines for their population and vaccines are well underway in Chile and Mexico, and starting later this week, early next week in Peru and Colombia. So that's a bit of an update on the COVID story. But look, in terms of economic recovery, the world is reflating. Energy prices are up 40-some percent since October 1; copper is up 21%; the general commodity index is up 10%; and Latin America, in particularly the countries we're in, will be beneficiaries of increased demand for commodities. There's no doubt about that. We're seeing -- as we look at our business, we're increasingly optimistic about the year ahead. We're seeing better volume growth, stable margins across our business in Canada and internationally. And we expect that to continue. So these countries, Mexico, Peru, Chile and Colombia have lots of economic torque, if I can use that word in terms of recovery. In Q4, on our conference call, we stated that we are comfortable that our international business will get back to $500 million of earnings by Q4 of this year. We certainly stand by that. We see a good pipeline of corporate loans. And we think that -- we know that the retail business will get better sequentially quarter by quarter throughout the year. So that's really based on our positive outlook for Latin America. Again, we're encouraged by the macroeconomic trends. What we're seeing in commodity prices, what we're seeing in day-to-day business, and we expect that to continue to get better. And certainly, from a credit perspective, what we've seen in terms of our portfolios and how they're performing, we're comfortably provisioned across all our portfolios. And credit metrics continue to get better in terms of migration, in terms of payment activity week by week.

Okay. Thank you for that. And speaking to the $500 million per quarter that you mentioned for the international segment. Maybe you can talk a little bit about the revenue picture because when we think of the international segment, there were some businesses that were disposed of and then there was obvious impacts from the pandemic in 2020. So how should we view the revenue picture for the international segment? And here, you may want to discuss net interest margins and loan growth, but when can we expect the revenue picture to sort of bounce back to kind of 2019 initial levels?

Well, you're going to see that continually during the course of the year, Darko. But I think given the adjustments we made with our wealth business and of the international segment that the countries we divested ourselves up, if you go back to pretax pre-provision was $5.5 billion in 2019, and we will be back to those levels next year. But again, sequentially, throughout the course of this year, every quarter, we'll be better. So -- and that's based on prior experience what we see in our credit books in terms of behavior from our corporate, commercial and retail customers. And that will be the build during the course of the year.

And now having lived through this pandemic and seeing the vaccination side of things and having a chance to sort of reflect, you mentioned the pruning. Is there anything else that might cross your desk in terms of thought process of perhaps pruning a little more disposals? Or are you really at a place where you like? And perhaps we should think about growth, not necessarily acquisitions, but potentially in the international segment?

Well, a year ago, we closed the divestitures of Thailand, Puerto Rico and El Salvador, and our timing was very fortunate in that regard, given the pandemic and what's pursued are ensued from there. So in terms of our repositioning of the bank is significantly and largely complete. There'll be a few small items on what I would characterize as the housekeeping side. But -- no, we're focused on growing our business. We're investing in our business. We're investing in people, process and technology throughout our businesses, and I can give you many examples for that. And we like how the bank is positioned. But I think that in terms of shareholders or the investment community should think of our international business has actually been derisked significantly due to these divestitures. We got out of countries that weren't rated or low rated from a credit standpoint. Their growth aspects weren't certainly as strong as what we see in Mexico, Peru, Chile and Colombia. And we really like our international business for all the reasons you've heard me articulate before. It's a young population, growing middle class. The last 9 months has been a setback, but the balance sheets of the countries have remained very resilient. And generally, they've handled the pandemic really quite well from a vaccine standpoint, hospital capacity standpoint, tracing and tracking mechanisms that they've had in individual countries or jurisdictions. So we're very optimistic about our international business and the prospects for this coming year and the years ahead.

And what should we think about in terms of the first areas or the really strong emerging growth? Is it commercial? Is it corporate? Is it consumer? And is there a specific country that might lead the way?

Sure. Well, I think Chile is leading the way, and Chile is demonstrating positive GDP growth today and has been for a number of months. And it had -- if I could use the term, a better experience in COVID than some of the other countries did or, in fact, North America for that matter. And it's got leverage to China, it's our largest trading partner. It has leverage to certainly higher copper prices and higher commodity prices. But usually, when you come out of a period like this and a setback like this, it's commercial and corporate that lead the way and then retail fills in gradually after that. So -- and we're starting to see that our pipeline of commercial and corporate business is building for subsequent quarters. Our M&A pipeline is building, and you'll see that come through in subsequent quarters.

Okay. And then maybe we'll switch gears back to Canada now because it seems that we've had some forced savings in the country and the balance sheets are much better. But we're hearing mixed messages on the mortgage front. We've had strong mortgage growth, strong residential house prices, but there's an expectation that's going to slow in 2021, broadly speaking, for the industry. How do you view the growth of the mortgage market in Canada? And your positioning specifically with respect to the mortgage market in Canada?

Sure. Well, we exhibited strong growth last year. Our mortgage business grew at about 5.5%. The early indications starting in the first 2 months of this year are stronger than that. And it's broad-based across the country, Darko. It's not the 3 metropolitan areas of Toronto, Montreal or Vancouver. It's in Penticton, BC; or Brandon, Manitoba; or Moncton, New Brunswick. So again, people are making choices. They're adjusting to the pandemic, and they're saying, gee, this not my housing accommodation. Maybe I have a daughter or son coming home, and I need to make an adjustment and rates are low, so I'm going to do that or I've been thinking about it for some time. So we see fairly strong mortgage demand for the next couple of quarters in Canada. And our commercial loan business in Canada is running at growth rates of mid-single digits, 5%. The auto business is coming back and exhibiting positive growth. So there are definite signs of -- that the Canadian economy has adjusted and absorbed the last 9 or 10 months exceedingly well and is poised for a strong rebound.

And you mentioned the low rates being a bit of a stimulus, but it's also a bit of a drag on the net interest margin. Can you just update us on your thoughts with respect to the net interest margin and the revenue picture?

Sure. Yes. We talked about this on our Q4 call, but net interest margin for all bank is going to be flat to positively up for next year. And that's a function of a lot of things. It's a function of we carried excess liquidity over the past 9 or 10 months. Some of that is burning off and we'll be the beneficiary of that. It's how we positioned our balance sheet. We had the balance sheet positioned for declining rates coming into this. And again, we've been the beneficiary of that. Today, our Canadian balance sheet is positioned for flat or slightly increasing rates. But NIM in all bank will be stable to slightly increasing in that the Canadian bank same picture there in international banking, certainly, margins have troughed. And for Q1, it might be down 1 basis point or 2 or up 1 basis point or 2. But we think it's troughed, and it will gradually increase from there. And that's a function of business mix what we do with excess liquidity and economic conditions at the time.

Okay. And so maybe switching gears to credit quality. I mean, one of the things your bank was good enough to provide a bit of a view on provisions for credit losses. And the view was that it would be close to or just above the level of prior years. Can you help us think about that in terms of impaired losses versus stage 2 releases? And do you think -- has anything changed? I mean we've had lockdowns come around in the country now, and there's even a curfew in Québec. But any of this impact your view on PCLs for 2021?

No, not really. It's -- if anything, we're a little more positive than we would have been on our Q4 call. And that's a function of what I cited earlier is repayment activity is more robust. Migration is positive. All-bank, we have something less than $3 billion in deferrals, and deferral programs have worked exceedingly well as they have in the past for the bank and the system. And so credit metrics are better. And we built up $2.7 billion of allowances on our balance sheet over the prior 3 quarters. We are very comfortable with that. And write-offs will start in Q2, probably peak in Q3. It's too early to talk about releases. But that could happen later in the year or sometime into 2022 if things unfold as they should.

Okay. And that was actually the lead up to my next question, which is how you view that working out. So that's great. So we can move over to a different topic, which I always find it interesting to ask you a little bit about the capital markets business. 2020 was an extraordinary year in the capital markets business. And myself included, I'm in the camp where very difficult to repeat, but I'd like to hear your views on the capital markets revenue picture and overall earnings picture when you include cost control and PCLs.

Sure. I'd be happy to. Well, look, we're very proud of our capital markets business. And Jake Lawrence and James Neate have done a very good job repositioning the business, and increasing the structural earnings power of the bank and monetizing our balance sheet. And that's been exhibited in the past year. Earnings were up 33%. Just a reminder for the audience is this is the second largest capital markets business. So the Canadian banks, if you include our GBM business and Lat Am, which is a growing and very profitable business. We happen to be the #1 lead arranger of corporate loans in Latin America, not just the countries we operate in, but all of Latin America. And our lending book there is 85% investment-grade across that. So we stuck to our credit quality. We're not in the leveraged loan business. We like this business. But earnings were up 33%, as I said last year. I think you're seeing a bit of a shift from DCM. Activity has been very robust the last couple of years. ECM activity is picking up. Pipeline for loans and project financing is picking up and will pick up as the year progresses. And the M&A pipeline is as big as I've ever seen it. Now monetizing that and bringing it to fruition is another thing. But it's certainly conducive as the CEOs I talk to in our client base are all doing the same thing, knowing that the pandemic will come to an end that all roads lead to a virus. And how do I grow my business going forward? Do I do it organically? Or do I do it selectively by an acquisition? So I think 2021 sets it up for a very good year for the capital markets business on all fronts. And with M&A leading the way and M&A certainly spans a lot of other business, corporate lending and a lot of other ancillary business falls out of that, as we all know.

And the efficiency side of the -- I mean, you mentioned that they did a pretty good job of repositioning, and that repositioning is largely complete -- unless, okay. So what about like at the all-bank level, I think one of the things that you guys have said is that there's multiple opportunities to either reduce or moderate expenses through efficiency and prioritization initiatives. I was wondering if you can maybe elaborate a little bit on this because -- can you give us some examples of what you could do in this current environment? And has the pandemic altered any expense control plans for you at the bank because when we think of a recovery, we think of more activity and with more activity, usually comes more expenses. So can you talk a little bit about the expense side of the equation for your bank in particular?

Sure. Well, look, proud of what we did in 2020 on the expense front, expenses only grew 1%, which I think was industry-leading here in Canada. And we want to produce positive operating leverage for our shareholders and work hard to do that. And we have a $16 billion expense line. So there's lots of opportunity for us to continue to work at our expense base. And you can go through a period like this, and you learn that you can live without some things. And there's always lessons learned here. So we will be opportunistic and look at that. But I think some of the examples I can give you, Darko, and the audience is that, in the international business, we were just in the international business line alone, we've reduced expenses by more than $100 million in just 2 quarters. And that's adjusting to the economic reality, but it's also accelerating our digital dividend in the international business. So away from divestitures within our own franchise, we closed over 300 branches internationally. And that's a function of stronger digital adoption, stronger digital sales, and we see that trending faster, and we're very encouraged by that. So that certainly helps on the efficiency side. But all-bank, I would go back to there's -- on the discretionary expense level, whether it's travel, communication, entertainment, professional fees, there's more room for us to work on our expense base there. And as well as prioritize our expenditures because cutting is one thing, but finding the right balance because we believe good companies grow in difficult times and invest in difficult times. So our technology spend will continue to be in the mid-single -- mid to high single digits. So we're still investing in a lot of our businesses. We consider that an absolute must to invest in people, process and technology. So we'll continue to invest. But our net result is we'll deliver positive operating leverage for our shareholder as we continue to dovetail revenues in the expense line in the bank.

And maybe can you give us a bit of an update on the wealth business and the growth that we saw there last year and what your expectations are for growth as we go through 2021?

Sure. Well, I'm happy to entertain questions on our wealth business because I don't get enough of them, but very proud of our wealth business. It had a sensational year. And number one, in terms of net income growth among its peer group; number two, in terms of revenue growth and has very good productivity ratio. So we continue to attract assets in our mutual fund business at a good rate. AUM in all our businesses continues to grow, not just organically, but -- or by market, but organically as well. We were the proud recipient of '20 Lipper Awards for performance, which is the highest of our peer group. We're very pleased with our team and what we've delivered there. So we separated wealth out to say to the shareholder base, we're dead serious about this business. We like the business. It's -- we're going to continue to invest and grow the business. And we want it to be in the short, medium term, 15% of the overall bank earnings, and it's well on its way there. So a strong year in 2021, and we expect that to be replicated -- in 2020, and we expect that to be replicated in '21.

And has the -- one of the questions I often get is the MD management in terms of how that's progressing? And did the pandemic alter anything there for you at all? Or is it just business as usual? And you're getting those doctors into the bank?

This business, as usual, Darko. It has been a very good acquisition for us, both financially and culturally. We're proud to make the investments in -- on behalf of the medical community that we've made as part of our arrangement with MD Financial. AUM is up. Retention of people and assets is extremely high. And we like the business very much. We like the predictability and consistency of the business. And as I said, we've reaped all the synergies that we laid out at time of acquisition, and the business will continue to perform very well.

Okay. And then switching gears to capital. Our suspicion is that banks are generating more capital than they can deploy organically right now. And you certainly can't do anything because of restrictions from the regulator. But eventually, those restrictions will be lifted. And you had done some -- quite a bit of acquisition activity in the past. Last few years, you haven't. So coming off with the restrictions, what would you be leaning towards in terms of capital deployment? And are we thinking about really driving the ROE? Or you're more focused on driving the EPS growth? Let me stop there and give me a chance to sort of think about that and give us an answer.

Yes. It's -- we're focused. And I -- again, I mentioned this on the Q4 call, as we're investing in our own businesses. So I gave the example, the Canadian Bank. Dan Rees is hiring more commercial banking officers in British Columbia, Québec and to where we happen to be under indexed. We're hiring more of our officers, sales officers for our mobile mortgage business and for our mobile mutual fund business. So we continue to invest in businesses for sure. And there's lots of opportunity across the 4 business lines to do that. The second point in terms of capital deployment is buying your own stock back. And I've been very clear is when the regulator gives us the green flag, the next day, we'll be out buying stock back. We think our stock is inexpensive on any historical or current valuation metric. And we are a buyer of our own stock because we understand the earnings power of the business. And we think our strategy is clear and the execution of our strategy is clear. So we're focused on that. So we're focused -- Q1 last year, our ROE was 14.1%. We're going to be back at those levels before you know it. And we're well on our way to being a 15% ROE bank with a high degree of consistency.

Okay. Great. That's a great, clear answer for us. Thank you very much for that. So what I'm going to do now is turn to some of the questions that have been coming in from the audience. And I'll start with the first one. Going to look a little closer because there's a lot there. My eye sight is not the best. In its 2020 Annual Report, BNS lists, money laundering, terrorist finance and sanctions compliance as a top and emerging risk, while its Canadian banking peers do not. Which of BNS business segments in Lat Am are most impacted by this risk? And how does BNS try to mitigate this risk?

Well, it's a good question and a topical question. And part of the reason why we divested of some of the smaller countries in the Caribbean was just on that basis is it's not because we can control elicit money flowing through the bank, it's just when you have 1 or 2 branches on a specific island, it's more difficult to do that. So AML is a big consideration. We spend a lot of time and focus on it. I think it's an emerging risk issue for any bank globally. You can look and see what the fines in Europe have been recently with regards to AML. One of the European banks was fined over the holidays for lacks control and process. So it comes down to people, process and technology. And we spent hundreds of millions of dollars of shareholder capital investing in the correct processes in terms of money laundering. And people, process and technology to safeguard the bank, the circumference of the bank against a listed money flows. And I think we've done a very good job of that. And but it continues to evolve. And because the criminal element is always looking at new ways to infiltrate our bank or any bank from that perspective. So I don't know why our peers didn't mention it. We feel strongly about it, given our footprint and our presence in the Americas, I wouldn't say that there's any one country that is more difficult to operate in than another. We run -- if it's Chile, we run our AML processes at the global standard, which would be what the Fed and OSFI and FINTRAC expect.

Okay. And the next question is, again, in your annual report, it shows the bank's total shareholder return has lagged Canadian peers over the last decade. What do you think is necessary to reverse this performance trend?

Yes. Look, the management team is very focused on that. We've repositioned the bank. We've done a lot of heavy lifting. We've exited 23 countries. We've exited 7 or 8 different businesses. We've redeployed capital in the wealth business and increasing our presence in the country of Chile. So the -- and it's never easy selling a business that's making money. And -- but we did that for long-term risk reasons and what we thought the returns for the shareholder would be over a long period of time. So we think, and I've spoken to a number of shareholders this morning that think that the bank is poised for a revaluation in terms of where it trades. And people will see the real earnings power of this institution over the next couple of years. So I know that there's been a lot of moving pieces, and it's been somewhat hard to digest. Over the last 2 or 3 years while we acquired businesses and sold some businesses. But strategically, it was the right thing to do for the bank on a number of fronts, including risk and shareholder return. And we feel good about how the bank is situated today. The earnings power of the bank, and we're well on our way to an ROE of 15%, if not better.

Okay. And I'll just read off the last question, we'll pause with this one. But this question is thoughts on the push towards digital wallets and digital banking in Lat Am. Is BNS doing enough or/benefiting enough from the push towards financial inclusion in Lat Am?

Okay. Good question. And one we spend a lot of time on. And that I gave you an example of the digital dividend we're starting to see in Latin America. And again, digital adoption and digital sales, as I mentioned, in Chile, would be higher than Canada, for instance, and we expect that to continue. In terms of financial inclusion, we play a big role in each of the countries we operate in. In terms of financial inclusion, we work very closely with governments and policymakers. And part of our role as a bank is to bring people from the informal economy into the formal economy. And governments want that because they become taxpayers and it's more transparent for them, and it's better for the country, the economy and the individuals and the families they represent. So we do a lot in terms of financial inclusion. And that's spelled out in our corporate and social responsibility report.

Actually, that's another question, too, is how do you incorporate ESG factors into risk management assessments? So if you've got a second or 2 to touch on ESG, that would be fine.

Yes. ESG is -- it's here to stay, and it's very present. And the bank has always been a leader in terms of governance. In terms of the e part of the ESG is, again, that's spelled out in the report, and it said whether it's tracking greenhouse gas emissions or whatever we do, if we develop a new branch, it's different in terms of composition square footage and makeup and more energy efficient than before. And ourselves, like a lot of banks of the world will be dealing with a sustainability issue. I think the industry has to be focused on what are the metrics to measure sustainability because there's a lot of different measures out there, and it's difficult for all stakeholders to understand the sustainability square and how you measure a bank's input on that. But look, we're going to play a big role in this going forward as we have to help brown industries get to be greener. If you take an industry such as cement making, for example, that uses a lot of energy to produce its product. How do we do that in a more green way? How do we provide the capital to do that? Same thing for shipping. How does shipping become more environmentally friendly? And how do we as a bank play a role in doing that? So this is going to take time, and this is all of the -- part of that transition or a bridge to a greener economy, if you will.

Okay. With thought, we've now reached the portion of the time that we've allot to pass over to you for some final thoughts here. And what key messages would you like to leave for shareholders, investors at the end of this conversation for 2021?

Okay. Well, look, thank you very much, Darko, and thank you for the audience, for your patience and tuning in. As I started off, we're increasingly optimistic about 2021 and the recovery in each of our markets, be it here in Canada or Latin America. Proud of how our 4 business lines performed during the course of the year. And we see asset growth coming back in Canada, for sure, and parts of it in credit cards will become sequentially over the course of the year, but good strong mortgage demand, commercial loan demand, autos are coming back. Corporate loan pipelines are building in Canada and Latin America. And the retail business will come back, as I said, sequentially, quarter-over-quarter. So -- and from a credit perspective, we are very, very comfortable with our provisioning and our credit performance to date, and we'll see that unfold as write-offs increase in Q2 and Q3. But again, we are more than comfortably provided for that. So we're optimistic about the year ahead and the bank will be in full earnings power back to where we were in -- where we started in 2019 back towards the latter part of this year and certainly 2022.

Okay. With that, thank you very much, Brian, for attending our conference again. And we'll end this session here. Thanks again. And --

Darko, my pleasure.

Thank you, and we'll end the session here. Thank you.