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

And welcome back to our session starting off with Scotiabank. Brian Porter, the CEO, is here to speak with me today. But before we begin, I'd like to remind 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. With that, Brian, welcome to the conference, and thank you for participating.

Good to be here, Darko. Thank you for having us, and happy New Year to you.

Same to you. Same to you. So we had the wonderful benefit of having the regulator here this morning talking about things that are on Peter's minds as we go forward and seem to have a very structured, a well thought out plan in terms of where he's going to take OSFI and eventually getting us to the net zero sort of thing by 2050. And in there, possibly there's a chance that there's a requirement for higher capital.

So I think the opening question for you is when we sit back and we look at Scotiabank, although high at 12.2%, the common equity ratio is certainly well above regulatory minimums, well above, in fact, but you are in the sort of lower end of your peer group. So with that, how do you view your capital position? I know you've got an NCIB in there. Where do you want to take your capital ratio? Where do you think an optimal ratio is? And how are you going to get there to sort of optimize the returns of the bank?

Well, good question and a timely question. And we've talked about optimal capital for quite some time. And if you take 12.2 over the OSFI buffer minimum of 10.5, that's $4 billion of excess capital. So that's a lot of money. But just to reemphasize our priorities, and we've been very straightforward and transparent on this. Our transport -- or focus is on funding the organic growth opportunities across our 4 business lines in the bank, which we're doing. We obviously increased our dividend 11% in the Q4 call and that gives you some degree of how we view our business and the confidence we have in our business going forward. We have purchased stock back, and we said when the regulator allowed us to purchase stock back, we'd be aggressive because we felt our stock was inexpensive historically and relative to the peer group. Since in the month of December and early January, we've repurchased 10.8 million shares at an average price of $86.50. So those are our priorities in terms of capital deployment, organic growth initiatives within the bank. And we may have something small in the wealth management business, which I'll talk about later on the M&A side. But we're really focused on operating the bank better, more efficiently and being there for our customers. The other point I'd make, just in terms of buybacks, when you go back to the 2 wealth acquisitions we had, we issued 34 million shares at an average price of $77. And we said we've repurchased those shares back in the market. We purchased a good chunk of those shares back. But obviously, the pandemic broke out, we weren't able to complete that. So we issued 34 million shares at a price of approximately $77 million. And we've fulfilled our obligation to repurchase shares, and we've repurchased the 34 million at an average price of around $75.50. So we'll continue to look at our stock and opportunistically buy shares back, but we're going to be focused on organic growth opportunities within our bank. But we're quite comfortable running the bank as I've spoken about before in the 11%, 11.5% range.

And so thank you for that, it's a very good color on the buyback. And, yes, 11%, 11.5% and try as hard as I might, I can't get you there with just the current buyback because you're generating capital to every year, right?

Yes. We certainly are.

So would you consider upping the buyback or introducing a newer one quicker? Are all these options on the table? Or what about an acquisition?

Yes. Well, we like optionality, Darko. So we could look at doing that. It's dependent on price and what other options we have. In the wealth space, we talked about in prior settings like this, a small acquisition, it would be smaller than Jarislowsky Fraser, which was around $900 million that we want to complement our wealth business with more U.S. dollar management capability. So we'll probably do something like that over time. But we don't have any big acquisitions on my desk or anywhere in the bank that we're looking at. We're focused on running our business better. And it's going to be -- it's going to include buybacks, small acquisition, and we'll just watch our time. And if our capital creeps above 12, that's okay, too. We like having some dry powder.

Okay. Fair enough. Now one of the other emerging themes we're getting today apart from having the regulator here and speaking with us was a bit of a focus on inflation and interest rates. And so the obvious next question is how do you see your bank operating. Maybe you could tackle it from both sides of the equation first, maybe on the inflation side with your expense base and then also on the interest rate side. How do you envision operating the bank here in a world where we're likely to see certainly more than 1, maybe as many as 4, 5 increases in interest rates in the next 1.5 years? How do you see that -- how do you see Scotiabank navigating that environment?

Well, I'll talk about the inflationary component from our expense line. We're seeing pressure like all banks and all businesses across the country. There's a labor shortage. So we're seeing a little bit on the salary and benefit line. And -- but we're focused, and I think we've done a very good job in the last 5 years of managing expenses and deliver a positive operating leverage for our shareholders and that's a fact, and we'll continue to be focused on that. But look, our view is that we'll be able to manage through this. Revenues are going to be strong this year across all our 4 business lines we're looking for it, and we'll talk a little bit more about this in each of the business lines. We're looking forward to a very good year for Scotiabank in terms of revenue and profitability, and we'll be able to earn through any uptick in expenses that are inflationary. But on the other side of your question, I'm glad that central banks have stopped using that term transitory because I think it was obscuring the facts. And there are some inflationary trends, and we have to be mindful about that. It's good for banking generally. And in our IB business, in our 4 major markets, we've seen rate increases averaging about 150 basis points. And for every 25 basis points, that's $20 million of profitability for us. And so -- and we've -- if you look across a broad range of economists in the International Banking division, we'll see another 100 to 200 basis points increase in our 4 markets. So that will provide some tailwinds for us. In Canada, obviously, we'll be the beneficiary of increasing rates as we will on the U.S. So our balance sheet is geared towards rising rates. It has been for some time. We might have been a little early on that, but rather better early than late. So it's going to provide some tailwinds for us. It's going to provide some -- on the challenges side. Markets are going to be much more volatile here than they have been in the past. That's the fact we're seeing that today. One day does not make a trend. But when you're in a period of rising rates like this, it creates a bit of disequilibrium or volatility, and we'll see that during the course of the year.

Great. Thank you. And so maybe just turning to the business units when we jump right into IB. One of the things that, that business is grappling with is it had a tough time with the initial part of the pandemic, not a certain now about Omicron and the impact there. So maybe you can give us a bit of an update on the Pacific Alliance region and how it's handling this wave. And if you see any sort of negatives out of that or any positives that potentially can come out of that? Maybe just an update there would be great.

Sure. Happy to, Darko. Each country is different, obviously, but the reality is Chile and Mexico are well through pre-COVID levels of profitability and those businesses are performing exceedingly well. And Peru and Colombia are coming back strongly, and that's against the backdrop of a very strong commodity complex, a consumer that's in good shape and what's the liquidity in those markets. So that's what makes us optimistic about the year ahead in terms of the Pacific Alliance countries. But if you look at -- just get down to vaccination rates, this is interesting to look at is the percentage of the population in Chile that's had 2 vaccines is 86.5%. That's way obviously significantly ahead of the U.S. and Canada. 55% of Chileans have had their booster as well. There's more people with double vaccines in Peru than there are in the U.S. Those are facts. So although they were slow getting off a mark in terms of rolling out their vaccine campaigns, they've been successful. And they continue to get more and more citizens vaccinated. So Omicron hasn't had an impact in terms of our business in those regions. Keep in mind that it's -- they're right in the middle of summer in Latin America. So it's -- we'll see what happens during the course of months, but there has absolutely been no impact on our business in terms of the latest variant.

Okay. And maybe I would be remiss if we didn't talk also about political risk given the fact that we've had a couple of elections, Peru, and Chile. Maybe you can give us some thoughts there on those countries, in particular with -- given the elections.

Yes. Look, I think it's timely. And the one thing we said on our Q3 call, which nobody asked a question on, which is fine. But given our decades of experience in Latin America, one thing we've learned with the exception of Brazil, perhaps, but Mexico, Peru, Chile, and Colombia are economics trump politics. And we see that all the time and press love to splash a headline saying a right-wing candidate or a left-wing candidate has won the election. The reality is you've got to look at it, it's like the U.S., if you have a Democratic President and the Republicans control the Senate, and how you're not going to have a lot done. You're probably going to have a degree of gridlock. And that's where you find yourself in Peru today. The important thing about Peru is you have a seasoned finance minister, which is important. You also have a veteran Central Bank Governor in Julio Velarde, who the bank knows very well. And those were 2 very important appointments for Peru. Peru also led the Pacific Alliance and GDP growth last year at 12.6%. And so we expect, again, with the commodity complex where it is, the amount of liquidity in the system, we expect a good economic year for Peru. Turning to Chile is that the Congress is centrist or right wing in terms of its majority. The new President, Boric, is center left. And he and his party want to change the constitution. And our view on that and our partners view in Chile is, that's not a bad thing if they go about it the right way. And Chile has obviously been a very successful democracy, but there's too much concentration of wealth among too few individuals and families, and that has to broaden out. There has to be some redistribution mechanism in Chilean society. So we'll see how that unfolds. But I think his approach so far has been very good, very balanced. His tough -- we'll see when he announces his cabinet next week or later this week, but the people that have been floated for the Finance Ministry job, which is obviously very important, they are all very credible market tested candidates. So we'll see how that goes. So again, I'd go back to economics trump politics. And despite the media and the headlines, sometimes, these countries tend to run economies from right down the middle of the road, and that's what you're seeing. Don't forget, if I could just add to that and expand on it is, when AMLO was elected in Mexico, everybody was, "Oh my god, here we go again and da, da, da." I'm not saying AMLO has been great for the Mexican economy. He certainly hasn't been bad for the Mexican economy or as bad as people thought he has. He might have botched the airport at the very beginning. Energy reform is long needed in Mexico, but he's a populist. And he hasn't done anything to the country's balance sheet that would raise concerns from investors or rating agencies or anything like that. So I think -- and again, I'm reinforcing this message, I think the Pacific Alliance countries led by Chile and Mexico, followed by Peru and Colombia are going to have very, very solid economic years in 2022.

Great. That's a good well thought on answer. I mean before I jump into Canada because I definitely want to come back on the Canada's strong results. We don't speak a lot about the Caribbean, but the Omicron seems to have had a bit of an impact on the Caribbean. It seems as though flights are being canceled and so on. Any early read on the impact in the Caribbean? Or is it sort of steady state?

Yes. The Caribbean, obviously, was just about to come out of its post-pandemic phase when the latest virus hit. So we're going to be delayed a quarter or 2, but nothing serious there. It's not material. It's just -- I feel for those countries and the businesses in the Caribbean who are dying to get back to some degree of normality. So -- But that will bode well for us in the second half of the year, but it's not material in terms of our P&L for Q1 or Q2.

Okay. Great. So then turning to Canada, where you had very robust results, especially in the last couple of quarters. Maybe we can talk a little bit about your outlook and your expectations here because on the one hand, strong mortgage growth, but we're expecting interest rate increases, right? So NIM expansion, but maybe slower mortgage growth. Maybe you could talk a little bit about the strength that you saw and whether or not we should just continue to see the same strength going into 2022? Or will it change a little bit? And do you see maybe unsecured credit bouncing back a bit more for your Canadian franchise?

Yes. We're proud of our results in Canadian Banking division led by Dan Rees. We had a very good year last year, and I think we're off to a very good start in 2021. And we're a leader in the mortgage market business, and that will continue in '22. And spreads are fairly good right now in the business. Volumes are good. So -- but I think that it's realistic to say there's going to -- obviously, there's going to be some seasonality in Q2. There always is. And I would expect mortgage demand to slow a little bit in the second half of the year. But from a Scotiabank perspective, that will be more than made up in our auto business that's had -- we're the market leader in auto finance here in Canada. And that will come back and is coming back very nicely. We saw it in Q4. We saw our credit card business come back in Q4. You'll see that in Q1 and through the balance of '22. And also the fact that our commercial lending business was growing at about 7% in terms of assets last year. #1 or #2 in the business, and we'll continue to grow that business thoughtfully and professionally aggressively. So all pieces of the Canadian banking puzzle are going to perform exceedingly well this year. So if mortgages slowed down a bit, it will be more made up for other pieces of our businesses.

And so on that topic in Canada, I mean one of the things that I always think about with Scotia is the Tangerine business, right? I mean it was a big acquisition for your perspective-wise. I just always think of that channel being bigger at Scotia than your peers. And so can you give us maybe a bit of an update because from where I sit, and I thought to myself, we went through a pandemic. And it forced everybody to go online. It forced everybody to be digital, and that would be exactly the kind of environment where you would think the Tangerine would prosper. So maybe you can give us an idea of how Tangerine is doing? And where do you think does it pivot from here? Does it accelerate? Any thoughts on Tangerine would be interesting to hear.

Sure, Darko. It is pivoting and Tangerine is a profitable business, makes about $40 million a quarter, and we're expecting increased profitability next year for sure. But it's core business we've got $42 billion of deposits there that continues to grow. And we've been shifting it to an everyday bank for Canadian consumers. And it's been -- our mortgage book grew from $5 billion to $8 billion last year. Importantly, the Street might not know this, but our net fund sales through Tangerine last year were $1 billion, which is a big number. They're $5 billion in the bank, $4 billion in the Canadian bank and $1 billion in Tangerine. So those are big numbers. So we continue to grow the asset base of Tangerine. And obviously, from a JD Power customer perspective, they love the brand. We continue to be #1 bank in the digital channel, and we expect that to continue in 2022. So Tangerine is well on its way in terms of repositioning as an everyday bank, and we'll see better profit contribution through next year.

Okay. Maybe shifting gears to the Global Banking and Markets business. Now from -- one of the things that we see is we see that in 2021, it was a good year, but your revenues were down, whereas peers, I think it was down about 8%, peers were up 6%. So maybe you could talk to you about -- a little bit about what happened in 2021 with respect to revenues. And what's your -- more importantly is what's your expectations for 2022?

Yes. Well, look, we're pleased with how the business performed last year. Let me give you some color on this is, obviously, every quarter was at least $500 million or more in terms of profitability. And keep in mind that GBM LatAm business made over $700 million. So in its entirety, the GBM business is a big profitable business with scale and breadth. But in terms of GBM, the comparison was the FICC business in '21 was down a little bit versus the prior year, but the rest of the business was running really well. And the things that we look at and the metrics that we use to monitor the business, the progress in the business. We're #3 in ECM. We are #3 in DCM. We were improved in the M&A business. Top 3 in corporate banking, I think we finished #1 or 2 in corporate banking in terms of new underwriting. So pleased with the progress the business has made under Jake Lawrence's and James Neate's leadership and really optimistic about the future. There's a lot of growth for us in the U.S. We're a top 10 foreign bank in the U.S. We have a sizable balance sheet there, in excess of $40 billion. And we continue to enhance our business in the U.S. So if you look at GBM in its entirety, GBM and GBM LatAm, that's the second largest GBM business of our peer groups in terms of profitability. This is a big business. And another interesting stat that the audience may be interested in, in all of Latin America, which obviously includes Brazil, for the second year in a row, we were the #1 lead underwriter of credit in the area. So we have a big lending platform there, increasing presence in DCM and ECM. And we'll continue to build that business thoughtfully and that's largely an investment-grade business.

And so I guess it's similar as well, I think, when I think of the U.S., when you mentioned you had a $40 billion of assets there. I think back to the remarks earlier, where you have mentioned, hey, with rising interest rates, is going to be some volatility. So how do you manage this business going through a period of increased volatility because of higher rates or maybe QT or end of QE and at least anyway. How do you think about that? And how should we think about your bank's -- your investment bank's performance or GBM, in a period of heightened volatility?

Well, if you look through it, I guess, 2020, the start of COVID was a good example. We didn't have any significant trading losses at all. And some of our peers did because they're in different businesses. That's their risk appetite and their choice to do. So we like to run our banking and markets businesses, the lending is largely investment grade and stick to our sweet spot. We're not a player in the leveraged loan market, which when things get soft, you can get hung with some high-yield positions and some loan positions that are in the midst of transaction. So that's how we run it. It's about risk appetite. Again, we like consistency and predictability in our GBM business.

Okay. Great. I want to shift the focus a little bit to credit. It's been very benign. Your bank was the only bank to provide guidance that took us all the way out to 2023, which I found pretty interesting because a couple of larger banks weren't even in a position to provide an EPCO guidance at all. So what gives you the -- I mean, I guess, why give us guidance well out into 2023? And what is the thought process behind it? Because the guidance is good. I mean it's relatively low PCLs. So just the thought process around the guidance and why give us guidance all the way up to 2023?

Yes. Sure. Darko, the way we looked at it, we have a lot of moving parts in our international business. In January of 2020, just a month before the pandemic hit, we closed on our sale of Thailand, of El Salvador, the Eastern Caribbean. So we had some moving parts and with that some gross loan exposures. So the complexion of our portfolio has changed. You've heard me talk about that in the past, not just from a profitability standpoint, but from a risk standpoint. So the people and their models kept coming back to because we had 45 to 50 basis points of all bank PCLs prior to the pandemic. So that was the number they were using going forward. So we felt it was important for us to provide the guidance and our reasoning behind it. So this year being '22 be mid-20s and next year will be mid-30s in terms of guidance, and that's a function of the complexion of our portfolio has changed with the sales that we did. And it's also changed because of the underwriting we've done since the pandemic is that the amount of secured underwriting in Canada is now 95% of our portfolio versus 93% going in. In international, it's gone from 66% secured to 71% secured. So you you're constantly increasing the denominator and the amount of the secured, which influences obviously your PCLs. But if you look at our Stage 3, we said our Stage 3 provisions will be stable in the course of this year and next year, and that's a function, again, of the quality of our portfolio. So we feel very comfortable about this. We did a lot of work on it, as you can imagine. And we felt it was important to give to the Street guidance in terms of our credit profile and how we thought our portfolios were going to perform.

And I guess the follow-on question to that, given the answer is, do you think you're going to continue down this path of shifting? I mean, especially it's an interesting statistic, right, with the IB business going from 66% secured to 71%. Do we take that up to 80%? What are your -- what is the longer-term plan there?

Well, it takes a while to get to 80%, but it's going to -- it won't go back down is what I can tell you. And it's a function in the international business of risk-adjusted return in PCLs. So NIM might have come off a bit here, and that's a function of more secured underwriting at lower spreads, but PCLs in the international retail business are up 30 basis points. So your net-net-net 0. So I'd rather getting back to my comment earlier about consistency and predictability. We'd rather deliver that in our international business in terms of consistency. So you'll see the secured portion of the portfolio continue to grow, whether it's through commercial lending, corporate lending, or mortgage lending.

Okay. Great. So we reached the point in the discussion where I'm going to turn to the audience questions. I've got a couple here up on the screen. So I'll go with the first one. By the time you report Q1, you look to be done your 24 million share authorized buyback. Should we expect you to reload on that when you report Q1?

I don't know the answer to that. It goes back to -- I was asked a question in Q2 or Q3 on our earnings call about what are you going to do? And I said, well, obviously, where the stock is trading, we're going to be very aggressive on our buyback. And on day 1, we're going to be buying shares. And that's what we did. And as of Friday close, we were at 10.8 million shares. We'll be thoughtful about it. As I said earlier, we've got a small wealth acquisition, which is not going to consume much capital at all. But I want to keep some dry powder too, and we'll be thoughtful about it. We will be buying back shares, but I'm not going to commit to buying back 2% of the company in a quarter and a half and then go back and reload. We'll see what the market does. We'll see what opportunities we have. As you've heard me say many times before, we like optionality, and we'll stick to that.

Okay. Great. I'll sneak one more in from the audience. If you are satisfied with the dispositions you made in international, when is it time for you to start thinking about acquisitions? Actually, so maybe as an addendum to that, are you actually finished with the dispositions, in fact? And yes, and then would you start thinking about growing some of your businesses through inorganic -- inorganically?

My job and my colleagues? job have to been to reposition the bank. And we're very pleased that we got -- that we were able to get Thailand, Puerto Rico, the Eastern Caribbean, El Salvador done in January 2020. Obviously, those countries have had a difficult time during COVID. So -- and we've done a number of small countries around the edges, which are not material, but we think reduces the risk profile of the bank. There'll be a little bit of housekeeping, but I don't want you to get distracted by that. It will be 1 or 2 in terms of divestitures, but I'd say we're 99% of the way there. And in terms of acquisitions, we increased our ownership percentage in our bank in Chile last year. We like Chile as a country. It's performed exceedingly well, and we have a great bank there, that could possibly be an option. But as I said earlier in Darko's question, there aren't any big files on my desk in terms of buying somebody's stake in a Mexican bank or anything like that. So one thing we've learned in the bank is it's very difficult, no matter who you are, to grow successfully when you're acquiring businesses and to grow organically at the same time. We did what we had to do. The wealth acquisitions have worked out amazingly for us. We believe we've -- in an 8-year span in the wealth business, we've increased our AUM 240%, our AUA 180%, our profitability 210%. So we love that business for all the obvious reasons. If we saw some that came along in the wealth business, we'll take a look at it for sure. But we're focused on organic opportunities across our 4 businesses.

Okay. Great. And so we've also reached the point in our discussion where I'm going to turn the podium back over to you and just ask you for the key messages that you want to leave with the shareholders and investors today.

Sure. Thank you, Darko, and thank you for everybody's attention. The comments I'd make, and I've covered them basically in answering questions. I think as we're very optimistic about the year ahead. We want to show the true earnings potential of Scotiabank in 2022. We did on the Q4 call, say, we're guiding towards PTPP of mid-single digits in terms of growth for the year. We've given you our credit number. And we're optimistic about the year ahead. In January of '20 at our Investor Day in Santiago, Chile, we gave some Investor Day targets for all of 4 of our businesses. We're meeting those or exceeding those as we stand here today. So again, we're optimistic about the year ahead. We're also very realistic about the challenges but we want to show the true earnings potential of the bank in 2022.

All right. Excellent. Thank you very much, Brian, for joining me today and being part of our conference.

Thank you very much, Darko, and thank you for your attention.

Great. Thank you. With that, we'll end this session, and we'll start the next session in about 15 minutes or so time. Thank you.