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

I'd like to present Aris Bogdaneris, Group Head, Canadian Banking of the Bank of Nova Scotia or Scotiabank, whichever you prefer. Thanks for joining us again.

Good to be here.

Excused to come back to Montreal, I guess.

Yes.

Let's start off with the -- you've been in the seat for nearly 2 years now, I guess.

18 months.

18 months, yes, nearly 2 years. So what's the biggest learning experience at Scotia itself and then in Canadian Banking, given your background outside of Canada?

I mean the first big learning in my previous life, I oversaw banks in Russia, Moscow and in Manila, Philippines. And the big learning for me that the gridlock in Toronto is equally as in those cities. So that was one learning. But the more important learning, I think, that's interesting to share, branches are very important in this country. And the branch for me, what I've seen here, it's the sun and everything is revolved around that branch network. Your processes are involved, the journeys are involved, the people, the cost, it's very branch-centric. And everyone said that about Canada. But when you come into the bank after 18 months and start to work in it, you realize how integral the branch is to the business model. And having said that then, what it also was a learning is that the digital opportunities are still very large in this country. That's one. I think the other thing is more organizationally, also when you think about where I came from before, the way the banks are organized is also interesting in that they're very vertical. They're vertical by product, they're vertical by segment, and they're organized very vertically. And they're not organized how a customer journey would go, for example, end-to-end. They're not organized horizontally. And so part of the challenge and the opportunity is how do you rotate the bank to work more horizontally. And that's something my colleagues in Scotia hear me speak about often, but I think that opportunity to drive that horizontal end-to-end, people call it agile, I call it horizontal, I think there's a huge opportunity from a client perspective to improve the experience. So there's an organizational aspect. There's a physical aspect, the channel aspect. But again, having said that, there's huge opportunities in Scotiabank, and we've tried to seize them, whether it's the opportunities I highlighted during Investor Day when I talked about the opportunity to build a savings business, an opportunity to build a better card business, an opportunity to do more digital, an opportunity to do more mutual funds and fee business, an opportunity to rejigger the cost base, all those opportunities are still there. And in fact, I'm even more convinced these are opportunities that can be seized.

So in the foreseeable future, a banking market that has increased digitization and improved -- or I guess, funding that via shrinking the physical network, that's not something that we can expect in Canada for the next 5 years or more.

I don't know about that. I just -- everyone here who has children, and you have to ask if your children are going to be the consumers who are going to walk into branch networks to do transactions or whatever they do in the branch. I have my doubts. I think Canada will follow the pattern you see all over the world. It's just lagging, maybe. But I do believe in branch networks and should be clear. And I think what I'm trying to convey to folks is that branch network has to be transformed into, what I call, a high-value, high-touch interaction model where people will get in their car and willingly. I use the example of that people willingly will go and make the trip to an Apple Store to get educated and buy things, the same thing in a branch. Will they go willingly because of the value that's created in there and the specialization you would see there in the network? That's where we need to get to and why people are queuing at the teller stations or in the service lines, that should go away. That shouldn't be the case in 2025 in banking and how you pivot and organize that. So you might have a smaller network perhaps, but you're going to have a highly specialized network where the sales per square foot are dramatically different than what you have today. And the traffic patterns are dramatically different. And you're using your other channels, particularly mobile to do the day-to-day stuff, right? And I also see massive contact centers in Canada. I haven't seen that in a long time. Whenever you have a contact center, it's usually some failure along the way while people are making that call. And so you have to figure that one out, too. So the whole channel mix is something that I'm really focused on.

The bank has embraced a few mantras over the past couple of years, one of which is North American corridor. I don't think it does apply to you, but not as much as the next one is less volume more value. I mean, how is that being applied in your business? Should I -- if I'm stacking Scotia up against its peers and I see loan growth trailing, that's fine because they're just going over -- after more value, but I should see better margin performance or something along those lines?

Yes. So this value over-volume, and you heard Scott Thompson, our CEO, talk about it often, I talk about it often. So let's think about 1.5 years in, what does that mean for us? And where is it going? So first and foremost, I would reiterate, over the last 2 years, we've added $54 billion in deposits. The loan-to-deposit ratio has gone down 10 points. So that's already valuable to get deposits into the bank at scale more than we've ever done before is one dimension where we're not lending to the same extent as before, we're getting more balanced. That's one. The second, and we might talk about it later is what we call how do you get multiproduct at the point of an origination. We have a big broker network for mortgages. And today, the mortgages we originate in our broker channel, 99% of those mortgages come with 3-plus products. That was never done before. So this idea of getting more value at the mortgage origination point lessens the risk you have if you're unable to renew the mortgage after 3 years or 5 years or whatever the term is, puts less pressure on the renewals, but we are renewing mortgages also tremendously, 90% of our mortgages are being renewed that we've originated. Where else do we see value over volume? You look at the commercial banking business over the last 1.5 years, we haven't really grown lending, but the returns have increased substantially by deselecting, focusing on deposit gathering, focusing on primary, using the BA conversions as an opportunity to reprice. And now the commercial banking business, the returns are really strong. Again, that's another example. And then just the focus on day-to-day in savings, which hasn't been historically a focus of the bank, that is also a focus where we continue to try and get quality deposits in the bank and not chasing promo rates and getting into that promo rate game, but trying to get the quality deposit that will stick with you whether rates go down or up. So that's really where we see value over volume playing out.

If I push -- you did mention the broker channel, and if I push back a little bit on the volume versus value discussion that I think was it 2023, the bank pulled out of the broker channel and then mid-2024 back in. So to me, that seems like a contradiction. How is it -- what am I missing?

I think just a slight correction, we never pulled out of the mortgage broker channel. We've always been in the channel. We have 3 channels. We have our brokers. We have our mobile sales force and then we have our branch channel, which largely does renewals. I think we were growing mortgages too fast and also at margins that probably were not in retrospect, attractive. We pulled back again, to focus on quality originations. Today, our brokerage channel is #1 in the country, roughly generates 65% of our mortgage originations. But as I said earlier, it's changed. When people said, oh, the mortgage broker will not sell anything for you other than mortgage. Not true. Today, 99% of those volumes, as I mentioned, are coming with multiproduct. And we've built a very strong relationship with these brokers. We work with less of them now, but high-quality volume coming through. And we will continue to manage these volumes in line with how we're gathering deposits and how we're ensuring that we have quality volumes coming through. So we're really happy about that actually.

Okay. Before I switch over to commercial, I want to go back to, I guess, some previous comments you've made or your previous experience anyhow. The Tangerine business at Scotia, what kind of update do we have there? Is it still -- when it was acquired, it was primarily a deposit gathering machine, didn't really have -- on the asset side, it was, I guess, suboptimal and for a few years, we kind of stopped paying attention to it, frankly. What's the situation today? Are you more hopeful about it than you were?

Yes. So Tangerine is an interesting asset that we have. I think it's a unique asset in Canada. As you know, it was -- Scotiabank bought it from ING, my former employer in 2011. And over the last 14 years in different stages, it's actually added quite a significant amount of deposits. But I think the opportunity is still to be had. And when you think of -- you have the neobanks that come out, but I think this was the first digital bank. But again, in a different iteration in the year 2000, these banks were launched in the U.S. and Canada, in parts of Europe, Australia. And the promise was always we offer you an attractive rate, come into the bank, experience how we do banking. And over time, you're going to bring more of your wallet, more of your business in. That was the playbook in Europe, and it worked to a large extent. But after that playbook kind of played out its first part, what you also see in these digital banks like Tangerine, they have extremely high Net Promoter Scores, miles ahead of most of the incumbent branch-based banks that you see around the world. And then the epiphany came, how do we monetize this high NPS. And then they start adding product, and that's what ING did successfully in Spain, Germany and everywhere else. Let's start adding lending, let's start adding mutual funds. Let's drive this business further. Let's deepen it because the clients love us. They want to buy more from us, but we have to give them that. So what I think when I look at Tangerine, Tangerine did the first part of the playbook well, gathering close to $50 billion in deposits, but it has to evolve in what I call Tangerine 2.0 by doing 3 things: shoring up the foundation, meaning developing more product capability and mobile-first. That's the first. The second thing, and it shouldn't be underappreciated, you have to renew the tech stack to develop the next generation of capabilities in technology to be a digital bank. That's where AI comes in, and some of the latest technologies out there. This technology that Tangerine has is almost 20 years old. It needs to be revamped, and there's huge opportunity for that. And the third is how do you take this business beyond that original core of customers and extend to small business, wealth. There's other opportunities in Canada where you can get and restart the growth. That said, we have a new leader in Tangerine, who was appointed in November, Terri-Lee Weeks. We're rebuilding the team. We've rebuilt the strategy. We've gone to the Board. And now we're ready for what I call Tangerine 2.0, and it will take time. But the idea here is we have to evolve the model because what got us where we are today won't get us where we need to go, and that exactly is the playbook in Europe. We're in Germany, the equivalent has 11 million customers and makes over EUR 2 billion in profit, the Tangerine of Germany. And in Spain, 45% of the customers at ING Direct Spain are primary customers. So it is possible, but we need to create a more fulsome bank with the technology underpinning it, which we haven't done in the past.

So actually, I lied. I do have one more consumer question for you, but on the mortgage book because a year ago, we were in a different situation, clearly, more unique to Scotia that you had retrenched a little bit in the mortgage book and then got back in and you were talking about volumes improving better than you expected this time last year. What are you seeing today? The data doesn't look great.

Yes. So up till the first quarter, I was very, I won't say, bullish, but optimistic that after 2 years where rates were high and there was pent-up demand, this pent-up demand would be released. And we started to see it in the numbers. We started to see it in the origination volumes every quarter we're growing. But now with the tariff discussion and the uncertainty and people watching the news and not understanding what's going on, you're starting to see a little flat lining of the growth trajectory as people now wait a bit. What else are we seeing? We're seeing people moving much more into variable mortgages, which tells you how they're thinking about the future versus fixed. We see almost 30% of the origination now in variable. We're seeing the battle for renewals. There's almost $50 billion plus in mortgage renewals in our bank that we're addressing and over 90% of those up for renewal at a certain period are being renewed, and these are the most profitable mortgages if you renew them. But it's a bit now different now what we're seeing out there in terms of the appetite of consumers on mortgages. And let's say, wait and see in the next few weeks what happens. But our focus is to be disciplined and keep the discipline. We expect mid-single-digit mortgage growth this year, assuming nothing goes [indiscernible] wrong. But it's again focused on the returns, focused on the multiproduct and focusing on renewals, which will be the majority of the new business we book.

And I guess a similar discussion, now we get to the commercial part, but the businesses are probably in a standstill sort of position now given the uncertainty. What do you expect the commercial book to grow at this year? And I don't know if you could put some perspective on utilization rates or how they compare to a normal environment, whatever a normal environment looks like.

As you can expect in commercial, there's definitely a slowdown. You see it. We talk to our clients, what do they say? They're saying they're going to wait. Investment decisions are going to get put on hold. And we see it definitely in what we're seeing on the lending side, particularly in areas we had the auto and then we had -- you think of steel, you think of agriculture, all these things. But every week, it's rotating. We don't know what's going to happen, and we're following. So there's definitely a slowdown, and that will continue because capital doesn't like uncertainty and uncertainty doesn't like capital. So we're just in a wait and see. Utilization rates are normal. It hasn't -- we don't see that in utilization rates, people drawing down. But of course, we're being vigilant like you would expect. We're trying to get ahead of the curve, which of our clients are in industries that could be exposed? How are we trying to help them work through it? We're actually seeing -- you might even see a surge in sales in the second quarter as people try and get in advance of the tariffs and getting their stuff to the U.S. and accelerate sales, that could be happening also. But we're trying to stay close to our clients, of course, and manage through this, but it's -- every week, it's changing. So we're just -- it's a difficult one to plan, although we have our COVID pandemic playbooks that we can dust out in how we get ahead of this, and that's what we're trying to do.

I asked the previous person in that chair about the deposit dynamics at play. And I think it's a much more relevant question to Scotiabank given what took place 2 years ago with a big uptick in deposits and a big uptick in term deposits specifically, bank strategy, but also the 5% 2-year GIC kind of created a lot of demand. Those deposits are repricing today. Is that a big margin tailwind?

Yes. So as rates, I think in the first quarter, they went down 75 basis points. And so you see the dynamic, I think, everywhere as people -- and these GICs are 1 year, they're up for renewal and what people are doing, of course, they're going into savings, mutual funds as the renewal period comes up. And so that dynamic we see. 90% of the GICs up for renewal, those volumes have stayed within the bank. That's a big positive. But what we also see is that there's a huge opportunity for us to again invest in our savings shelf because when rates were high, savings wasn't -- people were in the GICs and going after. Now we see the opportunity also in mutual funds to build that muscle, but also build the muscle in savings. So we see this dynamic. It's going to be hard to grow savings in this environment. We're working hard. But that shift into day-to-day savings and mutual funds. Now you see the mutual funds a bit now hesitating again with the tariffs and what you see in the volatility in the markets. And as you start to see a bit of an interruption in that trajectory we saw in the first quarter, and it will remain to be seen how that plays out. But what I'm very particularly pleased about, as I said, is just we're keeping both, I mentioned, the mortgage renewals and the success we're having, but also on the -- keeping the money in the house. Now for Scotiabank, that's great to keep 90% of the volumes in the house, but we have to grow the pie. We have to grow the savings pie. And when you think of savings and historically how this bank was run when rates were almost at 0, this muscle has to be rebuilt. It's being rebuilt. It's being rebuilt first and foremost in how our frontline views our clients and how they work with them to drive more savings and getting more of the wallet. There's a lot of our clients, primary clients have money outside the bank. So what we've learned is when you sit and do a financial plan with these clients, some of the money that's sitting outside the bank starts to come back in. That's one. You also need value propositions. You need to make savings, renewals and getting a savings product easy. There's a digital aspect that I've talked about. There's the way we incent the frontline important. So all these things, including how we make sure that we do what's right for the customer and getting them into longer-term savings like mutual funds is also important. We're working very closely with our wealth teams like never before, where we're locked in with wealth to make sure that, that customer gets the best advice and gets the best products and services for them. So -- but this is, I would say, first and foremost the biggest challenge that I face, is how to rebuild the savings muscle in the bank. And we've made progress but it's very important that we continue to focus on that.

So is this demand inflow, outflow dynamic a tailwind or...

I think, first of all, it's definitely you see a headwind on the margins, right? As you reprice the GICs down, of course, your margin is being squeezed. But the one way around that is to continue to build the day-to-day and the savings business. So in the short term, yes, but rates will stabilize. And then what you're hoping for is that you've built the muscle to be a strong savings bank, not just a strong mortgage lending bank. That's the idea behind it.

A credit question, credit quality question, and this has been a number of quarters now the bank talks about the unsecured portfolio has been the driver of formations and impairments. And I get that, but I don't typically associate Scotia with unsecured lending, much more geared towards secured. Like what portfolios are we talking about? It cards, obviously, but do you consider auto as unsecured or secured?

Well, when we talk about the unsecured, we talk about the $30 billion we have in ULOC and credit cards. That's $30 billion. And of that $30 billion, $7 billion is roughly the credit card book, relatively small and around $23 billion is the ULOC book. In terms of credit quality and what you see out in the market, what are we seeing? Again, the credit card 90-plus quarter-on-quarter went up 24 basis points. It's probably now at around pre-COVID levels now. The credit card is still rising. There's stress on the consumer still. Whether rates go down, it's short term, they need time. The ULOC has kind of stabilized, the unsecured lines of credit. And you see quarter-on-quarter, I think the 90-plus delinquencies have gone up 1 basis point, so kind of stabilizing. But there's pressure out there, of course. And it's difficult because credit cards is one product where we're relatively underweight versus our peers for all sorts of historical reasons, but this is an area we want to grow. But again, the economic climate, again, we were thinking in the second half of the year, this would start to stabilize and then things would start to normalize on PCLs and whatever. But now there's a bit of -- a little bit of a drag, and we're going to see how that plays out. But generally, we manage this book, like you would expect you'd manage a book, you lower lines when you see the opportunity because of the client. But again, remember one thing, our credit card business, most of our credit card portfolio have multiproduct. And what's interesting, the single product credit card holders in Scotiabank have a 60% higher delinquency rate than the multiproduct credit card holders. And that's never been our strategy to be a single product to grow our book. We've leveraged Scene+. We leverage our current base to use cards as a cross-sell, and that's what we'll continue to do, particularly leveraging the Scene+ base.

And we've got a few seconds. Autos, I mean that's...

Auto is actually now we're starting to see that cohort from 2022 that during post pandemic, it's kind of worked through the system, but the early 30-plus, the entry rates are starting to stabilize now. So it's more the credit card book now is the more difficult one than the auto for us.

All right. Well, that's a wrap. Aris, always great to have you here and maybe next year as well.

Okay. Thank you.