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

Welcome to another session of the RBC Financial Institutions Conference. So we have with me here, Raj Viswanathan, the CFO [Audio Gap] from forecasts, projections or conclusions in these statements. [Technical Difficulty] details in the public filings of Scotiabank [Technical Difficulty] Thanks for joining us.

[Audio Gap] Very well thanks.

[Audio Gap]

[Audio Gap] is as usual at this time, but we're closely monitoring the situation.

And maybe just to be very clear, just because Scotia has the operations in these emerging markets. I think people just -- maybe just for the record, do you have any Russian exposure in Ukraine [Audio Gap]

No significant impact to their operations and therefore, to our exposures, whether it's in the Pacific Alliance or whether it's in the exposures in the GBM business specifically when we look at our corporate clients. So I'd say material to 0 -- sorry, immaterial to 0, I meant to say.

And just to be very clear and very specific on it, I mean, one of the things that I think I read somewhere is Mexico refuses to sanction Russia. So if you have customers in Mexico that want to transact with somebody in Russia, how does that go? What happens?

Yes, I did speak to our Head of AML recently on these kind of questions, absolutely, right. But the key to this is correspondent banks. Because all the correspondent banks, whether it's U.S. dollar, euro or so one has to go through the countries that have been pulled sanctions, either on the country or on specific individuals. So no money can move. Large clearance of ruble has also stopped in the last 2 days. We don't deal in that country specifically. So that risk is also nonexistent as far as we are concerned. And specifically on whether it's KYC or AML, [Technical Difficulty] in the Pacific Alliance countries, we apply the same rules, which are stringent rules as it's required in the U.S. and Canada in these countries. So even before the situation, I think from an AML perspective, we have no concerns of how we monitor transactions, these payments or acceptance of clients. And in this case, like I mentioned, because of correspondent bank relationships, it sort of go through the U.S. or Europe. So no money can move [ anyway ].

Okay. Great. Well, that's reassuring. So maybe just sticking with the international banking then just since we're on the topic. And we did see a good increase in your net interest margin, it's 7 basis points quarter-over-quarter. It's the first time where we've seen that in quite some time, and you mentioned the rate increases. Now there has been some thought that maybe it's possible your IB banking could sort of reach back 380 to 390 and maybe even exceed that under certain circuits -- let's talk a little bit about the margin, where you think it plays out this year? And what would have to happen to have it sort of go higher than your original range?

Yes. I think the second part of your question is the rate curve, Darko. Like you've seen in Canada, like you've seen in the U.S. over there, the long end of the curve is stubbornly flat. And we put out some disclosures on Mexico and Chile, where we are most rate-sensitive compared to [indiscernible] or Colombia. And although the short end does fairly significantly and fairly quickly as well, the long end of the curve remains flat. Mexico [indiscernible] is actually slightly inverted. So that would be the one key factor I'd call out for rate increases beyond -- sorry, the NIM increase is beyond 380 to 390 from my perspective. But international limb, like I've answered in many, many calls, very complicated. Multiple factors, business mix changes have happened. We've had divestitures that have gone through over the last 2, 3 years. You have inflation-based pricing in these countries. And of course, the rate curve that I mentioned, rapid increase in short-term rates, talk about rate gaps that exist in some of the products in some of the countries makes it very complicated to accurately forecast to some extent, but the trend is positive without a doubt, 7 basis points in one quarter, we like it. It's coming off what we call spread increases. The business mix is actually a headwind because of higher secured and less unsecured compared to, say, previous quarters or previous years. And that, I think will stabilize. We think our secure retail, for example, is going to be around the 73% range, might go up a percentage or so, but not much more significantly. So now we should see unsecured lending growth contributing to NIM increases as well. So business mix should help apart from, like I said, rate curve improvements that we expect to see in the future.

And so maybe let's touch on that while you sort of touched on it. I mean, what should be our expectation for unsecured credit growth, retail growth in the region? And is there any region that is sort of leading and maybe giving you some real positive indicators? Or is it just generally speaking, the 4 countries are -- I mean, like I always think of Colombia being maybe a leading indicator because you got basically a card portfolio there. But maybe you can talk to that growth. What should we expect from the retail side?

Yes. I think retail unsecured lending, you've seen growth this quarter for the first time in 8 quarters. So we're very optimistic about it. Growth rates should be similar to what you've seen this quarter, between 1% and 2% when you look at quarter-over-quarter for the rest of this year. Mexico, we are not a big unsecured lender. We are very small over there, tends to resemble our Canadian portfolio, more mortgages, more corporate, commercial and very small unsecured lending portfolio. Chile has got a reasonable percentage, a good mix, I would call it. Colombia is very skewed towards unsecured lending. So we're seeing growth across unsecured lending across the 3 countries, including Mexico, if I want to include it as a fourth country, but really small. But the trend is positive. So I'd say around the 2% quarter-over-quarter improvement is what we expect to see for the rest of this year.

And presumably activity is certainly much higher than what it has been in the past. So presumably just all NIM we're talking about, there should be some fees that we should see show up in this segment as the year progresses, too.

Absolutely. I think you've seen a lot of the fee recovery that is already showing up in our books that, that reflects the activity that you're referring to, whether it's on credit cards or just unsecured lending in all these countries. We do think there's more fee income goodness to come. We don't talk much about the Caribbean on all these calls. And the Caribbean is still -- we made about $77 million Caribbean in Central America this quarter. We know there's more fee income yet to come as tourism comes back in force as much as tourism levels have actually significantly improved. When you talk -- we look at hotel bookings and occupancy rates and those kind of things to inform ourselves. They're almost up to pre-COVID levels. But now we need to see the consistent level of volume activity that should help us with the fee income, be it ATM fees, foreign currency fees that we earn over there. And that's a tailwind yet to come. But I would say from a banking fees perspective in the Pacific Alliance or in Latin America as a whole, we've seen some good recovery, mostly on the basis of activity driven by our retail customers.

Yes. It's been a tough winter. I can't wait to get back to the Caribbean myself. So maybe just switching gears to Canada. We just saw a rate hike, 25 basis points. Give us a reminder please of the impact and how quick it is? I think sometimes when I talk to investors, -- and then, yes, rate hike does happen. We should see a massive spike in NII. Maybe just give us an idea of how you'd want people to think about the rate increase for your bank? And what if it's followed by a couple of others in quick succession.

Yes. I think rate increases are a positive without a doubt, right? It's going to contribute because are more asset sensitive, at least in our balance sheet. So that's a good thing. This quarter, we put out a disclosure, which is more about the 0 to 3 months, let's increase the rate by 25 basis points, and we put out $48 million as the impact in our quarterly disclosure in the marketing deck. Canada would be between 30% to 40% of that. So call it $15 million to $20 million should be the immediate impact we should see in the net interest income line. It's slightly smaller than the previous estimates that I had given, a 25 basis point, I said it's about $55 million annualized, what would be the impact to our net interest income. And that is back to the rate curve, Darko. If the rate curve also steepens in line with that, sure, the impact will be closer to what I've given earlier. But at this time, a simple way to look at it, assuming the long end of the curve does not move, you should see between $15 million and $20 million in the front end of the net interest income benefit.

Now one of the things Brian reminded us of at the conference was that your balance sheet was positioned for rising rates. So is this separate from this discussion that we're having now? And how should we think about that?

Yes, balance sheet is absolutely positioned for rising rates, and we've talked about this before, right? We actively manage the interest rate risk in our balance sheet. We benefited when rate declines happened at the beginning of the pandemic because we are positioned appropriately. And we have monetized that. So that's going to continue to flow through the income statement. I've given some estimates in the past. Today, we are naturally positioned for rate increases. Like I said, we're more asset-sensitive than deposit sensitive. But we also try to extend duration. For example, in September, October, Darko, as we started to see the longer end of the curve steepen both in the U.S. and Canada, which is what we manage more actively than the Pacific Alliance countries, we started extending duration and part of the benefit flows through the P&L because we have already extended duration and therefore, the volatility that you see in the 100 basis points impact that we all disclosed, is lower because it's already in your numbers, therefore, not expected to be more volatile looking forward. And that's part of our philosophy in managing interest rate risk. Our idea is to maximize the shareholder benefit, but also try to minimize the volatility in our NIM or net interest income from rate changes. Not all the time we're going to be perfect get it right all the time, but we try to manage it as closely as possible to keep the volatility down. So right now, we are positioned for rate increases, both through extending duration as well as with the natural benefit you should get based on the way the balance sheet is positioned for rate decreases that is yet to come.

Okay. Sticking with Canada, we've had pretty strong loan growth, especially mortgages. And you're now one of the top in terms of growth. Now maybe we could speak a little bit about what -- some of those initiatives that you guys have got sort of going on for that, including partnerships between your business lines. Maybe you can speak a little bit about that and sort of what's next? What should we expect next from Scotiabank in that realm?

Yes. I think it's a really good question. The partnership between Wealth Management and Canadian Banking has been a significant contributor to both businesses. 3, 4 years back, we invested heavily in growing our Wealth Management business through the 2 acquisitions that we did here in Canada sets us up for scale. Now we have a full-service operation from a wealth business. It gives us a lot of torque when we use our branch network and the Canadian bank size to ensure that we're able to bring the complete wealth solution to all our customers. So that's what you're seeing now. Wealth Management revenues, when you look at the Canadian bank's numbers, it's over $100 million a quarter, and that's up like 20% year-over-year, even between '21 and '22, the most recent numbers. So lots of benefits that come with the partnership and being able to offer a full suite of wealth products to our customers. When they walk in, we can provide them a mutual fund solution, we can provide them any other wealth management private banking solution that they might look for or put the money in deposits, depending on how they want to manage their wealth and how and what stage of their life they are in. Smart investor is an initiative that we launched recently to use the digital platform to continue to help our customers to grow their wealth as well as the total exposure to the bank and how we can assist them. So lots of benefits in the partnership over there. You're seeing it in numbers that come through. And with the Canadian bank, it's all very focused on growing in the space where it is exceptionally good at, which is mortgages. We have done it for a long time. We're very good at it. our adjudication happens to be top notch when we compare to any one of our competitors over here, and we have a unique broker network channel, which our peers do not have. So we're leveraging all these initiatives over there to continue to grow where we are strong. We are a secured lender in this market. So I talked a little bit about Mexico earlier, very similar here. We like mortgages. We are the market leader in auto, for example, Dan Morales on the call as well about how we see the auto benefits yet to come. It has been through a difficult time for the last 2 to 3 years, growth has been fairly muted. We think there is more positive growth yet to come. So the Canadian bank, I think, is firing on all cylinders is one way to put it. They manage their expenses quite well. You're seeing it in pretax pre-provision growth, which is stacking up right up the top compared to our competition. All credit to Dan and his management team and the partnership with and wealth, like I talked about, provides a huge opportunity for us to continue to grow in these markets. So we're very optimistic about both those businesses and the partnership that they have.

And this partnership and when you say -- I mean, I'm just curious, I mean you say that it's firing on all cylinders. Does this mean that it's at its peak? Or are we just starting? And can you give us an idea of where do we go from here? I mean, is it possible to see -- you mentioned the $100 million and you saw like very high double digit. Should we be expecting that going forward, markets willing?

Exactly. That's the only caveat I'd put in, right? As far as we are concerned, because we're able to provide the total solution to the customer, they should continue to grow at an accelerated pace. We have talked about wealth management, where we'd like to grow 8% year-over-year Investor Day targets, and the Canadian bank is between 5% and 6%. You put the 2 together, that should be comfortably the biggest business. The 2 together is over 50% of this bank, more closer to 60%. And if that performs at that kind of growth rate because of the partnership as well as market opportunities that complement it, I think we're quite optimistic about how this will contribute in the future.

And just to pinpoint, you discussed a little bit about auto and unsecured in Canada. Are you seeing any little -- I mean, is it died down any of that activity? I mean we thought for a moment there in January, it felt like we saw some early signs. Is it died down since then or now?

No, it hasn't. I think we like the pace of growth to be higher without a doubt, specifically auto because credit cards for us is a much smaller portfolio, although we saw some really good growth Q1 over Q4 of last year, and that has gives us a sense of optimism. But auto is the one which we are quite optimistic, should see the normal level of growth that we've seen, say, let's say, 3 years back. It's been fairly flat when you look for the last 3 years. So it hasn't declined, but it hasn't grown at the level that we'd like it. 1% or 2% is small for auto from our perspective. It should be more like the 5% to 6% growth. So once maybe the supply chain issues normalize a little bit, when you talk about memory and so on in the auto industry. And we are seeing a lot of used auto growth as well, which is also a sense of optimism, it gives us. So once the new car entry also starts building up, we should see better results from that business.

And I guess one of the things that we always think about here is sort of normalizing credit. And the question comes to money because as auto and credit cards rise as a portion of the mix, we should see a rise in the PCL. But we haven't really seen that yet. So I'm very curious to just switch gears here and talk a little bit about credit quality. Your overall PCL ratio was like 13 basis points, which is fairly low in the first quarter. You guided to 25 and a more normalized of 30 in 2023. So should we still be expecting those numbers? I mean you started off really low. Maybe you can talk a little bit about that. And then talk about the impaired PCLs in International Banking segment. And how do you expect that to trend over the remainder the year? There's a lot in there to take your time, but start off with the overall -- the range and the really low level in Q1.

Sure, Darko. Happy to do that. I think we did give guidance of mid-20s is what we thought when we talked in November for the whole year. We always knew that Q1 would be lower and then trend up higher. A couple of reasons for that. One, as I talked about the loan growth, as unsecured lending comes up, you expect to see higher performing loan provisions of IFRS 9 and how it works and so on. So that's definitely a factor which should play out for the rest of this year with volume growth, you should see some uptick in the performing loan provisions, specifically. The second thing which we knew was going to be a benefit is we know we're going to have releases. We took a lot of allowances through the pandemic, and we knew that our write-offs are trending significantly better. So what we saw in Q1 is also a trend which is positive compared to our previous expectations. So there were releases that went through, this quarter as well approximately $200 million. I do believe that there's going to be releases at least for 2 more quarters, Darko. So whether it's going to be 30 basis points or somewhere in that range is likely what we expect to see Q2 and Q3. And then we'll see how we feel around that time how Q4 and perhaps 2023 will play off. But it feels like trends are better than what we thought even when we gave the guidance in November. And we have to give specific guidance for a couple of reasons. One is our portfolio mix has changed completely, either through divestitures and how we've changed a bit of the risk appetite, particularly in international retail. So we wanted all our stakeholders to know that we're not going back to the 50 basis points anytime. So that's why we gave guidance for '23 at mid-30s as well. I think the guidance at this time remains intact. We don't want to change outlook every quarter, it's difficult to do it. Right now, we're dealing with the macro situation that we talked about earlier. But it feels optimistic. International retail write-offs are definitely trending lower. And once again, a few reasons for this. I think you tend to provide conservatively and then you work on all your customers to support them through the process. In Canada, in the U.S., there was a lot of money which was -- which flew from the government, it flowed to the people, while there, they did it through pension plan withdrawals and so on. But the customer behavior has been consistent, Darko. People have been really prudent with how they want to manage their debt and manage the finances through the pandemic, and you're seeing the same results in International Banking. Write-offs at $311 million this quarter, exceptionally low. I don't know if it will stay at $300 million thereabouts, but it will likely stay significantly lower towards, say, pre-COVID write-offs, which were over $400 million in this business in international retail, likely will remain low to that. So optimistic about definitely Q2 and likely even through to Q3. And I think the outlook will update around that time, but likely to either confirm it or be lower, I don't think it's going to be higher.

Okay. Great. That's great. I wanted to touch on GBM because it's been relatively consistent results there, but now we cut this really uncertain environment. Maybe you can talk a little bit about what you've done there and what the environment right now means for that business?

Yes. GBM is a business, which $350 million, we considered a good business. Today, $550 million, we tell, Jake, okay, you've done that, let's do better now, right? And a few things. Jake and James took over leadership a little over 2 years back, almost 3 years now. The partnership between the Corporate Bank and the Capital Market side couldn't be stronger. We're always a strong balance sheet lender. We had a strong balance sheet, whether it's in the U.S., Canada here or whatever we do in Europe and Asia as well. And that's always been consistent, high-quality customers. I talked to a lot of our investors about capital disclosures are a great indicator. If you look at the top 3 CD bands 85% of our exposures are in the top 3 CD bands, that is 50 basis points or less. So very high-quality portfolio, and it continues to be that. So that has helped us in good times, helped us stay away from problems in bad times as well. And that will continue. The benefit we are seeing in capital markets. Because now we're bringing or going to the customer with the full suite of products. So we talk about how we want to be focused on geography product as well as the customer as 3 fillers that Jake talks about. So we don't always lead with the corporate banker anymore. We deal with who is probably the right person to put in front of the customer, and you're seeing a lot of the results. And you're seeing good performance in FICC, you're seeing good performance in the equity derivatives as well in capital markets. And we don't talk much about GBM LatAm, which is where we have now on league tables. We are #1 in lending over there. In this most recent quarter, we declared $200 million of net income over there in an all-time high. So lots of benefits across the GBM portfolio, not just what gets reported within GBM, including what we're doing in GBM LatAm. But the biggest satisfaction we have is the consistency in the results. We want to see less volatility and part of it will come down to having continuous high-quality portfolio that we have. And then when you have a more diversified which includes capital markets, that's why we're optimistic saying that it should always be $500 million plus, likely should be $550 million thereabouts now considering how Q1 went. So that's why we feel good. It's about being a diversified business in the markets we like, including the United States as well as the efforts we're putting into LatAm and the benefits that we're seeing there as well.

And the current environment hasn't caused any sort of strike for you or you haven't seen any sort of big negative spikes and losses in the trading book or anything like that.

No, nothing that we have seen, Darko. I think our trading war is very stable. We have not seen any big losses coming through the trading book or even the loan loss provision relating to some of the exposures that we might have. I'll go back to the quality of the book. I think that is helping us at this time. But I'd also say that it's been 2 weeks, unfortunately, since the events have started. But the way we see, as we do stress tests and we look forward, we don't see much headwinds over there, specifically in the GBM business.

Okay. Great. We're seeing in this environment now that we're past the situation where we had restrictions on capital deployment. We're seeing some of your competitors, your peers go out and make large acquisitions with their excess capital. In your case, you bought up the Chilean bank, which makes a lot of sense. I think the pricing was good. It's obviously very sound strategically. But at the same time, let's be honest about it, I mean, Banamex is for sale in Mexico, and you have a position in Mexico. So what's the take there? I mean, should we think of that you've taken up the Chilean bank as is a nonstarter in Mexico? Or is there still a chance that you might actually think about acquiring, and let's not just contain it in Mexico. I mean there could be other opportunities. But let's first talk about Mexico and how we should think about Scotia there.

Yes, sure. I think Citi announced maybe a couple of months back, they've said that they'll launch the process sometime in the middle of March. So we'll see how the process gets launched. Lots of interest, obviously, because we operate in the region. But let me pivot a little bit and talk about our Mexican operations, and then it might give people some context about why we may or may not be interested in the asset when it becomes available. Our Mexican bank, we used to have less than 5% market share, Darko. If you go back even 5 years, less than 5% market share in a very large market and an important one for us. Today, we are hitting 8%. So we've grown about 3% organically. And a few metrics to support why organic growth is very attractive to us. The Mexico ROE and some numbers we don't publish, but I'm happy to talk about it. Return on equity in Mexico is 20%. That's what we'd like to earn in this business or in this region, obviously significantly higher than the bank's target, and that's very interesting to us, and it contributes to our high-quality earnings that come out of it. Mexico, like I mentioned, is very similar to Canada. We are a secured lender. We'd like to do auto over there. We're a very small unsecured lender over there even organically. So it helps us a lot to keep the stability of the earnings as well as protect the downside risk when things don't go so well, either macroeconomic or Mexico specific. So we like it. We have really good management over there who continue to contribute to how can we continue to grow the business organically, gives a lot of focus on the business. So if you flip that to some of the citi's asset quality over there, they are a 25% credit card market share in that country. Start fitting with our strategic growth, likely not. We're trying to become a more secured lender, particularly after the pandemic. So that's an outlier as far as we are concerned one. The deposits are very attractive because they have a huge core deposit portfolio over there. But size also matters, Darko. When we think about these things, I mean, we've got lots of opportunities to deploy capital organically. You've seen what we did this quarter across the footprint, including International Banking. So we'd like to continue to grow that way. I'd never give a direct answer, is it a go or a no-go because both of which should be wrong or I could be proven wrong in the future. But we don't try to comment on acquisitions or any opportunities that are either not public or the process is not launched. But hopefully, this gives you a sense about how we think about our Mexican operations, how proud we are of the results that we generated there, and we'll see when the asset comes.

And just to be clear though, what is the state -- I mean, the stated goal of Scotia in the 4 Pacific Alliance countries is to attain I think, a 1, 2 or 3 sort of position in the markets. So maybe just give us an idea of where do you stand in Mexico with respect to that?

Yes. We're top 5 and have been for some time over there. We try to measure it based on which of the products we like and the segments that we like and do we have scale. And we try to define it as 10% seems appropriate in all these markets, some are bigger, some are slightly smaller, like Chile is at 14%. But it doesn't mean in every product you want to be like a 10% plus because risk appetite is a big factor. That's kind of how we look at it and how much capital we want to deploy in that segment. We have a lot of opportunities in wealth management or organic growth, both in the Pacific Alliance or in International Banking, as well as across the other 3 business segments. So we look at the balance to seeing how do we deploy our capital for the maximum return to our shareholders. And then we look at, do we have economies of scale in some of these markets because you've got to invest a lot whether to protect the perimeter of the bank, cyber security, think of all the things, which are nonfinancial risks and scale always helps. Part of the reason why we divested some of the countries because we didn't have the scale. We didn't have the growth plans, nor did we think the country would afford us the ability to grow. So you exit those. The approach is very similar even to our existing operations. We'd like to grow and scale within the that we like in all the countries, deploy the capital appropriately and able to produce stable, but consistent results across the footprint. That's kind of how we approach all countries and how we want to deploy capital across all our business plans.

Okay. Well, thank you so much. We're -- we've hit the time limit for our session, Raj. Very useful session. Thanks very much. And hopefully, next time I will do this in person.

Thanks so much, Darko. Great to see you and chat soon. Have a great day.

Thanks. Thanks to everyone. This session is now closed.