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

Death, taxes and technical problems. Those are the certainties in life. We're going to do this in a audio format. That's a picture of Phil Smith, you're probably seeing there, but Den Rees is the one we're talking to, Group Head, Canadian banking. Thanks, Dan, for joining us. Again, apologies, we had some technical delays there.

Dan, I want to start off with the revenue story in Canadian banking, and there's been more of a negative trend there in the industry and for Scotia. Can you give me a -- I mean like list off, what are the 3 biggest issues that have been weighing on your top line over the past year and more importantly, how they're, in some cases, improving.

Sure, Gabe. Thanks for having me on. And hello to everybody. I was pleased with how we finished the quarter in terms of revenue growth on a relative basis, Q1 to Q4. I think we sort of sat at around the #3 spot. But as you say, the environment hasn't been for the system, particularly conducive for revenue growth. Clearly, all participants are sort of working their way through the impact of low interest rates, economic impact of lockdowns as well as some business mix changes. Clearly, the mortgage business is doing well for everybody and some of the higher-margin products like credit cards and so forth have been off owing to kind of consumer behavior. I'm particularly pleased at Scotia with regards to how the business bank has been contributing to revenues in total. And not just in Q1, but for 4 quarters running now, we've seen loans and deposits, and deposits expand at the top of the market. And that's intentional. When I moved into the seat coming on 2 years ago, I said, look, we've got opportunities to gain market share in the business bank. We're going to do that thoughtfully in terms of credit risk, mostly on the sales side. So we've been adding salespeople, investing in technologies. And I think you've begun to see that show up in terms of the public disclosure, but the health of the business has been improving quarter-on-quarter. And I think you'll see that in the revenue line from here. Certainly, the top priority for the Canadian banking is to grow the top line, and you're going to see that show up particularly in the back half of '21.

Okay. And there's a couple of issues in there or topics we'll dovetail into. One, on the consumer side of things, and credit cards are an obvious area of discussion these days. But for Scotia, in particular, your auto business, both whether it's the consumer auto, but also the core financing business. Like where is that business in terms of its momentum today? I know there's been an inventory issue for floor plan, and then there's been maybe some demand like inventory for consumer as well, just to buy cards. Is it getting better now?

Look, I appreciate you raising auto as the #1 player in the market, we've got a particularly good sight lines with regards to the, call it, the supply chain dynamics that you described, whether it's the microchip shortage or simply the flow-through of new car inventory, consumer demand for auto has been good, particularly if I look at the market stats in January and February, if cars are on the lot, particularly the appetite for used cars, the flow-through has been really encouraging. And so our expectation is that this high-margin product volume will continue to grow from February margin onwards, particularly I think as Canadians get more and more confident around the employment outlook. I think the supply challenges might persist for a little while, but demand is healthy in automotive. And as I think back to your question around revenue at the outset, I'm pleased with Q1, when we get credit cards growing again and automotive growing again, which is our full expectation, that will contribute significantly, both to the NII and the NIR lines here in the Canadian business segment.

So you're expecting -- I mean, I know a lot of banks have talked about positive revenue growth in the second half in the Canadian bank. So you're also anticipating positive balance growth in -- mortgage is growing, obviously, but cards and autos as well.

Yes. That's our expectation as we look through to the end of the fiscal and the end of the calendar year, we will see balanced growth in both credit cards and in automotive from here. Yes.

You did -- and you also mentioned in your initial answer, the commercial business and winning market share. You were one of the few banks in the first quarter to have sequential growth in commercial balances. And historically, I mean, that's kind of -- I mean, it's still early, of course, but commercial usually takes a lot longer to recover than consumer. What's the explanation there ? Stuff that you're doing, stuff that you're seeing in the marketplace? Are there signs that utilization rates are going to be moving higher?

Look, maybe I'll step back. Thank you, Gabe. I'll step back for a second. We have opportunity to achieve our natural market share in commercial lending and in commercial deposit. This is a self-funding book. So while with the growing towards the top end of the range on the loan side, our deposit growth has been almost 2x our loan growth. So we like the -- call it, the margin mix that comes along with that. The second thing I would say is working backwards from what clients were telling us when we started this investment program coming on 2 years ago is that, look, if you provided more active coverage, meaning geographic plus industry plus product suite, we would give you more business. And so the bulk of the growth that you're seeing from Scotia is on the one hand, from us being slightly smaller. So the growth rate is going to look a little higher, but also existing customer advances have been the main driver. And in the segment that you would know and our shareholders would know Scotia as being very credit savvy and sensitive, too. So here, I'm speaking about commercial real estate lending, particularly in multi res, not in office. We're a major player in the agricultural space, where we've got excellent expertise. Our business bank includes our professional segment, which is a low-risk, high deposit, high-margin area as well as in technology, where we're growing our franchise particularly in the major -- in the major city centers, where, obviously, technology companies are making important gains. So what we're seeing and what you're seeing in terms of growth is a function of focusing on the customer, getting the top line going based on sales coverage. And I want to make sure I make this point especially clear. We are not expanding our credit risk appetite in commercial lending. Our growth is on the back of sales hustle and sales performance. And I think as you look through this quarter and next, you'll see that in the net write-off lines right across all of our segments, not just commercial but in small business and in retail, we're very sensitive to after loss returns. And I think we're going to see our net write-offs be a positive surprise.

The -- you mentioned the professional segment as one of the commercial loan growth drivers that your -- makes me think of MD Management, obviously, something that big acquisition a couple of years ago, but we kind of forgot to ask about updates on that. Where is the -- where -- what's the growth picture there, growth story there? And what's the experience been over the past year, I think only MD would give you some special insight on the doctors and medical professionals in what was a very interesting time for them. What are they doing with their finances, I guess.

Yes. Look, that's exactly right. And I think in general, the business relationship post to coast between the Canadian banking segment and wealth management has been excellent for years, and we particularly benefited from that during the course of the last 12 months. So speaking about MD, in particular, clearly, doctors like all Canadians were looking for investment advice, but also banking advice, including on the credit side. So on the key metrics post acquisition, and I think my partner, Glenn Gallen would reinforce this with you. We're seeing better retention than we expected, better cross-sell and better upsizing on the investment side. Turning to lending. If doctors were -- are always active on the credit side. The credit risk is low. And I think our cross-sell penetration on banking and lending products, not just with doctors and MD, but also with dentists and the professionals category in general, and here I'm speaking about lawyers, accountants, engineers. We're a #1 player there. And I think through the course of COVID, that high-quality customer base has been rewarding us with higher customer satisfaction and greater product count per customer. So we're pleased with how MD is moving, including in the Canadian bank, and the professional segment is a growing segment in Canada, and we're a top participant there.

Well, mortgage, we kind of -- that's the only one that's growing right now, the headline grabbing asset class. Your outlook for mortgage growth, I think most banks are saying high single digits this year is I mean positive growth or robust growth, whatever adjective you want to use for 2022. If we kind of take a look at year out, is that potentially facing a big drop off if we don't see a migration coming back to Canada? Because that's been the story behind the mortgage market growth for decades or more.

Yes. Certainly, we fully expect that as the vaccine rolls out through the spring, the summer and into the fall, the federal government and all the municipalities that have benefited from immigration will have wide open doors. That's going to contribute to population growth, obviously, but could create a persistent issue with regards to the gap between demand and supply. We are big proponents of the government and businesses playing an active role in creating a housing policy and a strategy and a program that addresses the supply shortages that exist now and will become wider with immigration. We like the outlook for mortgages long term. And by mortgages, I want to re categorize that because at Scotia, where we've been a top participant and as to high single-digit growth rates from here, we have the market-leading Scotia Total Equity Program. This is where we take a broader collateral charge and the revolving credit, whether it's a line or credit card shift inside that secured line. We know from our experience and as part of our strategy to win the household going forward that when the customer chooses depth, they're more -- they're less likely to be price sensitive. They're more likely to purchase multiple products, including having the deposit and investment account. And so one of the intentions we declare to the sales teams and including the brokers, is that we expect to be selling STEP much more than we had in the past. And the numbers over the course of COVID are beginning to prove out that originating STEP is going to be an important part of our cross-sell strategy going forward. And clearly, that will roll into F '22. We see the mortgage as a key anchor product and STEP is a differentiator for us in that regard. And maybe I'll make a quick point about the broker channel for a moment because here we look a little bit different than the peer group. There are some mixed understandings, I think, around the importance of channel. We believe, in general, that customers deserve choice and options and a large and growing proportion of Canadians prefer to have a relationship with a mortgage broker for the purposes of both retention upsize and new business. What the mortgage broker channel gives us is optionality with regards to channels. It's a variable system, so that's attractive to us from an op lev standpoint. And as that broker channel becomes more and more involved in selling the STEP product and participating in warm referrals into our contact center and branch channels, we like where we're positioned here. And I think that the mortgage broker credit risk appetite is actually better than the market standard for all of the banks, at least as we see the stat. So we're optimistic with regards to F '21, and we expect as immigration gets going, if the housing market will continue to motor from here into F '22.

We are into over time, but I think we're okay with that. A couple of more minutes. I do want to ask about expenses. The story over the past year has been tightening up, belt tightening, all that stuff. And then in Scotia's case, you've had negative expense growth over the past 3 quarters. Is that something that you can maintain or plan to maintain, more importantly, given that we're in a recovery phase, we're hearing more about investments that need to be made or restarted or whatever to make sure that you're not left behind when the rebound really does start to materialize. So maybe give us an outlook for how you're managing expenses in the next year or 2.

Thank you, Gabe. Look, I'd just take a quick look back over the last 12 months as the pandemic began to bite last March, we anticipated revenue challenges. And so we intentionally moderated some of our growth related investments to put ourselves in a position with option -- to have some optionality. We didn't stop the investment program, but we adjusted the pacing in some cases. And we also saw expenses come down on the business development side as well as on the service side in the branch system. From where we stand now, you should expect to see positive operating leverage from Scotiabank's Canadian Banking segment, you should expect to see the headcount reductions, which have been the primary source of lower expense growth turn the corner as we invest even further into our financial adviser program, our commercial business banking sales force expansion as well as we continue to expand our proprietary mortgage channel. So expense growth should begin to rise a bit from here. We're going to do that thoughtfully, taking the queue from revenue growth. We understand that shareholders are asking the Canadian Bank segment to produce a productive franchise that contributes more earnings the B&F given our attractive ROE profile. And so we're back in growth mode as of a number of months ago, and you should expect to see expenses rise pensively from here.

Okay. And then just one last one. We got regulatory issues brewing there. B20 is going to get revised. I mean, I don't know if there's much to say there yet, but I am thinking more broadly, any regulatory areas that are top of mind for you or -- and an alternative, we have a speaker earlier talk about how they're restructuring, how they charge overdraft fees and stuff like that and some of their deposit products. Are you looking at how you're charging fees to your customers with an eye to potential shifts in the regulatory wins.

Look, I think one of the benefits, Gabe, of COVID was, I think, Basel III and Ottawa got a lot closer together. I think there's a better understanding now of kind of what we contribute to the economy and now Ottawa can play a role in that and vice versa. So I think that proximity is healthy for both stakeholders. The second thing I would say is there are lots of kind of queries and ideas and suggestions. Until those kind of get a little further through the pipeline, we're certainly not hitting the panic button here. We understand the importance of housing, availability and affordability. That's why we're reinforcing the importance of the supply side. We understand the importance of consumer protection and fairness and supporting seniors. We're actively involved in those files and support where the government wants to go there. There is a bit of chatter around interchange fees. These are the kinds of things that are, I would say, normal course exchanges between the private sector banking system and governments. What we like about what we're seeing is the focus is on getting the economy growing again and through productivity. So we like what the government is doing in terms of supporting technology companies. We understand the importance for everybody in terms of growing immigration items like overdraft fees and I think those are on the fringe. And I think what's most important for Canada's prosperity is that the banking system continues to be healthy and a major contributor, and Scotia feels very comfortable with its voice around the table there.

Well, I think that's a good way to end this abridged call. I guess I apologize again for the technical difficulties, but that's life sometimes. Dan, I really appreciate you coming on and answering the questions and giving some thorough perspectives on a bunch of different topics. And I'd like to have a good remainder of the day with all your other meetings. Thank you.

Well, thank you, Gabe, and thanks to everybody for dialing in. We certainly understand the importance that the Canadian segment plays in terms of contributing a larger share of earnings to the overall franchise and the ROE pickup that comes along with that. And hopefully, for shareholders, you'll see us continue to gain market share in some of those higher ROE areas. So thank you, Gabe. I appreciate it.