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

Very good to have Scott Thomson here, the CEO of Scotiabank with us for this afternoon session. And before I begin, I just want to let you remind you that Scott's comments today may include forward-looking statements. Actual results could differ materially from forecasts, projections or conclusions in these statements, and listeners can find additional details in the public filings of Scotiabank. So Scott, welcome to the stage. Thank you for coming again.

And I think the obvious question is to start with the transaction that was announced yesterday. So why don't I just hand the floor over to you to discuss the transaction. You don't have to go into too many details. We've seen it, but I want to hear your perspective on the transaction.

Yes. Thanks, Darko, and thanks for having me. I mean if you think back to December '23, when we laid out our new strategy at Investor Day, we highlighted Colombia and Central America as turnaround or exit countries. We've been working diligently on those assets in terms of understanding their potential and the improvement opportunity. And also recognize that we're at a low pick place in the market in terms of the attractiveness of some of these countries, Colombia as an example. You actually only had one bank in the whole country make money last year. And so working through that, we came to the conclusion that announcing what we did yesterday, which is a capital neutral and earnings accretive transaction was good for shareholders. It allows us to own a minority stake in the second largest bank in Colombia. It allows us to capitalize on the synergies, which are meaningful, about $200 million per year. And then ultimately, get liquidity if we so desire down in the future. And so recognizing where the macro is, recognizing the opportunity for create synergies, this was the right time to make that move.

And so I mean, I can imagine bringing this together wouldn't have been easy. And I guess the question is a couple actually come to mind. First and foremost, when you say that there's a potential liquidity event, how could we see that developing? This doesn't seem like it's a very liquid position. So maybe you can enlighten us.

Yes, it's a combination. The ownership is a combination of preferred shares and common shares. The preferred shares there's no lockup on those shares and recognizing it's not a liquid market, but there is an opportunity over time. And then the rest does have a lockup for a period of years, which actually the timing might work. It allows us to execute on the synergies or Davivienda to execute on the synergies. And then also the macro will improve. I mean we are at definitely a low place in the Colombian market. And over the next 3 or 4 years, you're already starting to see a little bit of improvement. That will provide a different macro point for the overall investment.

And the approval process, if you can just walk through.

Yes. I mean one of the determining factors, too, here is Davivienda is now the second largest bank in Colombia. And so we're expecting a seamless regulatory approval process, which will probably take 6 months to a year. So at some point during 2025.

Okay. So with that out of the way now, what's -- maybe you can talk a bit more about the big focus now. I mean, because we were all sort of expecting some sort of an event now that it's occurred, I think back to your Investor Day and I think about this is still sort of a transition kind of year for IB. Does something change now?

No, when you think back to December '23, when we rolled out the strategy, we said these 3 businesses were up for consideration. So we've now executed on that plan. We also highlight consumer finance as an opportunity to optimize. We're in the process of selling Credit Scotia, which will close this year at some point, we've announced that transaction. And there's a little bit of cleanup, not material, but on the consumer finance business and the rest of the portfolio. And so as we think forward now, we've got the assets in IB that we'll continue to optimize. I think Francisco and the team have done a great job in terms of driving that primacy strategy and the operational excellence opportunity. You saw the productivity come down from kind of 54% to 51%. We've laid out a plan to get it to 48%. This year was the best year ever for our IB business despite the fact that we pulled $9 billion of RWA out of that business. And so continuing to optimize, grow ROE, which we did in 2024 is going to be the objective between now and '28. '25, we have -- we're very clear on the call that we're going to see a little bit of a moderation of earnings because of the GDP environment, because of overall tax environment for us. And then also, we had a great year at the start of this year on GBM LatAm. It's still going to be a meaningful year, $275 million, but not as high as last year. And so we're going to moderate a little bit this year on '25 and then '26, '27, '28, get back on that 6% to 8% type growth in our IV business.

Can you talk a bit about the big effort that Francisco and his team is undergoing with -- and talk a bit about the regionalization model because in my discussions with investors and frankly, even myself, I think of that as a massive undertaking. And so where are you in that process? And where do we go from here on?

I think historically, these countries have been run as separate countries. And so take Central America and Colombia as an example, the productivity ratio in these countries was close to 70%, right? And that doesn't make sense when you don't have the scale in these countries. And so moving from a geographic to a regional mentality is what we've been doing. And so the first part of that is actually pulling the decision-making, the budgeting decision-making, the tech decision-making out of the countries and making it in a regional decision. And that is driving a much different outcome from a cost perspective, from a priority perspective, then also aligning on what customer segments you want to get after. And if you can do that consistently across these regions, focusing on affluent, high value, top of mass, you can actually drive a lot of productivity opportunity and client experience benefits. And so I know I get the question a lot, well, this is going to cost a lot from a technology perspective. There are going to be some technology investments for sure. So cash management, as an example, we're spending $140 million to $150 million in cash management across the footprint. But you've already seen significant efficiencies by actually not allowing each geography to spend separately. So I'll give you an example. As we were doing our digital transformation, we had 10 different apps, all with 10 different teams. And so we can self-fund this without a big increase in capital, get the prioritization right, run it on a regional basis, drive the efficiencies and actually get a better client experience. And you saw that in 2024. When you look at 2024 and that productivity improvement, $9 billion of RWA out of the business. Productivity ratio goes from 54% to 51%. ROE goes up on all on the back of a real laser focus on operational excellence.

And so a few couple -- just a couple of follow-ups on that, we can move on. But the first initial follow-up is somebody in running -- working in Chile, there'll be some local differences between Chile and Peru for sure. So how does that work if the budgeting is centralized?

Yes, definitely, you have to have that local feel, but you can have consistency across philosophy. And so for example, GTB cash management, you don't need 7 different cash management deployments in each country. You need one cash management platform that you can use across the whole region. And then, of course, when you get into execution in that last mile, you're going to have to tailor it somewhat. But historically, we were running this as separate geographies, and that results in inefficiencies and duplication and frankly, a disjointed client experience, particularly when you're trying to deal with multinational clients, right? One of the things that we're really trying to drive here is consistency. We think there's a value proposition for clients that are operating across our geographies to interact with us differently. And if you have different deployments of different technologies, that's not possible. And so that will drive a better client experience over time as well.

And so where are you, you would say, like fifth inning on this?

Yes, I would say earlier than the fifth inning, right? I mean we've got the team in place. We've got the budgeting pulled out. We've got the segments highlighted. We've got the financial transparency and the data, but we're a year into this. And so as we've said to -- Francisco has been very clear on, I think '25 is another transition year. And then as we get to '26, '27, '28, you're going to see that 6% to 8% earnings growth in IB that we committed to at December 2023.

And so one of the other sort of strong messages we got from the Investor Day was really a focus on this North American convert. And here we are with the threat of tariffs against both Mexico and Canada. So maybe you can talk a little bit about how you see that developing and what in the shorter term, your preparation would be in the event that this actually occurs?

I mean, definitely, there's a lot of uncertainty in the world right now in all 3 countries. I think if you take a big step back, $1.2 trillion of trade flows and a strong conviction, bipartisan conviction in the U.S. on anti-China, right? And that leads you to the attractiveness of a regional trade block. We were consistent or we were very clear in December that it was Canada first, U.S. second, Mexico third. And so in an environment like we have now, we're being very thoughtful about deployment of capital into Mexico, as an example. However, longer term, I do believe the economic rationale, the political rationale for a connected corridor continues to exist, and we'll be there to capitalize on it when we get more clarity.

And so where are you in that journey on connecting the U.S. business?

Yes. I think the biggest opportunity is cash management. And you see that does report to Francisco as well. It's important that he brings important capabilities from his time at Citibank. We've added a lot of capabilities to that group, Wells Fargo, most recently, Mastercard, JPM. We're allocating capital to build out those capabilities. We've got a good cash management proposition in Canada. We've just introduced a new cash management proposition in Mexico, but we've got to continue to accelerate that journey in the U.S. And we're probably a year or so away from knitting that all together for our multinational clients.

Okay. Okay. And then just maybe to help us sort of better model because I do have to do this for a living sometimes. When I think of it being a down year, well, now that you've gotten rid of Colombia, there's a little bit of a drag there. But really, I think the issue was there's taxes and there's costs. Which is the bigger impact?

Yes. I think we're going to continue to see progress on costs, and you're going to continue to see real optimization of RWA. So that's not going to change. I mean I think the macro is less clear than probably was a year ago in terms of GDP recovery in some of these regions, Mexico being the obvious example. And so I think we're going to see a little bit of less growth there. And then also from a tax perspective, which we knew, you're going to see a little bit higher tax. And so we're going to see modest reduction in earnings from our international bank next year off of a great 2024. But we're going to make that up in our Canadian business, which is going to grow at low single digits. We're going to make that up in the wealth business, which is going to grow at 10% NIAT after growing 10% this year, and we're going to make that up in our GBM business, which is going to grow at low single digits as well. You add that to the other segment, which I'm sure we'll talk about where we're going to see some tailwinds from lower rates. And that gets you to the 5% to 7% earnings growth in 2025 and double-digit earnings growth in 2026 prior to the contribution from Key, which we can talk about a little later.

Okay. Great. So maybe just -- because I've been asking everybody, so I want to sort of touch base on anti-money laundering. And I think of Scotiabank and wow you've got so many different jurisdictions, including the Caribbean. And you were asked by the Federal Reserve, I mean, it was in 2015 to address deficiencies and compliance. So maybe just -- were your efforts localized in the U.S. And again, getting back to Scotia's vast empire of -- did some of those -- did some of that AML work go global?

And that was the benefit. I mean we've been working on this in the U.S. since 2015 and received a clear bill of health from the Fed in 2023. And so that work, which was substantial, significant, a lot of resources has then used that as the blueprint for the rest of the globe. And so there's obviously some local differences. And in some countries, you have to be more thoughtful about that. But we have a global function. It reports to me. It's someone that I've known well for my 7 years on the Board. And this is -- I mean, as you know, and you can see, it is critically important. And so high priority for me and the team and the Board as we work through this.

Is it different, though, by like I just keep thinking to the complexities involved. You've got Mexico, you've got the U.S.A., you've got -- do you manage it differently?

Yes. I think as we think about connecting Canada, U.S., Mexico with a cash management proposition and knitting that together, you're going to have to be really thoughtful about flows of money between Mexico and the U.S. and the U.S., I mean, both ways. And so we're going to have to be really thoughtful about that as we roll out that new proposition over time. But the good news is we're redesigning it right now or designing it right now and invest in it with that in mind. And so that will be helpful as we knit this all together for our multinational clients.

Okay. Maybe we'll come back to Canada now in our chat. I've had the question from a few today, and I wanted to talk a bit about the mortgage market and in particular, in your case because you have a slightly different product that's out there. So we've moved away from concern, I think, with the lower rates, but you would have a good view given your -- so I mean just maybe firstly, I mean, is this now turning from a concern for you to an opportunity? And maybe you can touch on your mortgage strategy and how that product shapes your share.

I do think it's an opportunity and not a concern. I mean I have been pretty consistent that we weren't overly concerned about it, and we had a bird's eye view into this because of the VRM product. We have seen a little bit of an uptick of write-offs on the VRM product, and you saw that in the quarter, but it's localized to Toronto and Vancouver, and it's 250 clients, right, out of 1 million mortgage clients. So I'm not -- I am definitely thinking about the renewal opportunity as opposed to the credit risk opportunity in the portfolio. When you look at that renewal opportunity, I think we have $60 billion of mortgages coming up in 2025 and $90 billion of mortgages in 2026. The key for me is continue the discipline that we have around multiproduct and this shift from value to volume. So that's going to be key. We've got a lot of success to date on making that shift. And then second, renewal and retention on the clients that we have. We've seen a 400- to 500-point improvement in retention rates year-over-year and making sure that we take care of the clients we have when you have this type of renewal opportunity is first and foremost for us. And so that discipline, renewal rates, focus on primary clients, that's going to lead us to continue to see improved client profitability and improved client NPS or client loyalty.

So that's what I wanted to zero in on because if you've improved your retention rate, it's possible that a way to do that is to offer an exceptionally low rate, right? And that would harm the mortgage profitability. So can you talk to mortgage profitability?

Yes. I mean we've gone through this shift, right, of volume led to value. And that's why you've seen mortgage growth a little bit slower in the case of BNS than history and relative to peers. In the last 2 quarters, you've seen that improve or start to grow sequentially. When you look at pricing, it was interesting. I picked up or looked at the December pricing relative to others, we were right on top of or actually slightly higher than the lowest in terms of pricing. So we're kind of on top of people or a little bit back on pricing. I do think you need to be thoughtful about pricing, particularly when you're thinking about primary clients. And would you be willing to put in some relationship pricing to maintain renewals, et cetera? I mean it's dynamic, and you have to be thoughtful about that. But we're not using price as a lever, and this comes back to the discipline point to drive volume. That's definitely not the strategy, and it hasn't been the strategy since I've been the CEO.