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

Good morning, everyone. So I'm told I can't ask questions today, which I'm okay with, but I can welcome you all on behalf of the bank to the 26th Annual Scotiabank Financial Summit. And I also want to thank you for your business and for your support. For the next 2 days, this room really is the center of the Canadian financial services universe, and we're tremendously proud of that. I'd like to call up Mike to the stage as formally passing the baton on to him. And it is my pleasure. Please join me in welcoming our first speaker, Scott Thomson, Scotiabank's President and CEO. Have a great conference, everyone.

Good morning, everyone, and good morning, Scott. Nice to see you as always.

Welcome to your first conference.

Thank you very much. I'm excited to be here and getting right into it. I thought maybe we could just start on the quarter. Obviously, we never want to fix it on any given quarter, but just the way the market perceived the quarter, the stock was up 7%. And the biggest gain in the day since May of 2020. So obviously, a lot of things that the investors liked about the quarter. Do you want to just maybe offer some high-level thoughts, really high level and the notion that maybe this is kind of like an inflection point for Scotia, I think investors are thinking that way.

Yes. Listen, we're 7 quarters into the journey, right, that we laid out at Investor Day. And the north star of primacy and the kind of the philosophy change from volume to value. And it was good to see coming through this quarter. It actually came through last quarter as well. It's just with the big performing build that was hard to see. But coming through this quarter, you started to see that optimized balance sheet, but still actually driving revenue growth and whether it was in our commercial bank, where loans were flat, but PTPP was up or in our GBM business, where you saw a 14% reduction in the balance sheet, a 29% increase in fees or what we've seen in our international bank over the last 2 years now where you've seen income grow and return on equity increased by 350 basis points yet balance sheet is kind of flat to down and GBM LatAm is actually down. And so overall, this optimization of the balance sheet, making sure we get the organization focused on value over volume has been important. And now the pivot starts, right, in terms of profitably, sustainably growing into the future. And that's how we're going to meet our medium-term targets that we laid out at Investor Day. So it was a good quarter. Huge credit to the 90,000 Scotia bankers who have been relentlessly executing on the strategy for the last 2 years but more good quarters to come.

And then just on that value versus volume dynamic and obviously, the focus being on the customer primacy. Can you talk about some of the tangible benefits that you're seeing? I know it's not just in the numbers, but in terms of those client relationships developing into something greater than they were in years past. Just maybe touch on that a little bit.

Yes. I mean I think one of the observations through the strategy work that we did with the Board and with the team is we were great lenders, and we used our balance sheet effectively. But primarily, we had a lot of monoline clients that didn't surround the whole bank and the capabilities of the bank. And in some cases, we didn't have the capabilities to drive the fee income, which is more capital-light and higher return on equity driver. And so that is this kind of pivot that we're doing is making sure that we're really focused on multiproduct clients in our retail business and really focused on cash management and a holistic relationship with our corporate and commercial clients. Now that requires -- it takes time because you have to develop the products, you have to make sure the incentives are right. You have to have the capabilities in place. And that's what we've been doing in the last 2 years. And so changing the FTP, the fund transfer pricing was a big step forward for this company because I think historically, we were subsidizing the balance sheet and under incenting deposits. You get that FTP right, allocate the costs appropriately to the business lines and then you start to see the right price incentives. Similarly, getting the capabilities in place, think about Travis' business in GBM, we've been adding product capabilities, whether it's securitization, whether it's CLO whether it's mortgage capital markets. A little bit of leverage lending, DCM, right, which then allows you to create that holistic relationship with your primary clients, make sure you're lending to the right clients and ultimately seeing a higher ROE. And you saw that higher ROE come through. I think it's a 200 or 300 basis point improvement in ROE in our GBM business over the last couple of years as well. So that's the volume-over-value philosophy. I think loan growth is important. It's a primary indicator of client health and macro health. And we will continue to double down with primary clients who need the balance sheet, but are also thinking about other product capabilities. And next year, as you go into 2026, I think you're going to see a combination of this operational excellence approach in terms of effectiveness, efficiency on the cost line and you're going to see loan growth, which will allow you to have positive operating leverage, positive revenue growth and increased ROE as we go into 2026.

So fair to say that optimization of the client base is well into the later innings and then the loan growth dynamic is going to come as a result of...

I mean listen, we've been at it for 2 years. So I'd say Francisco has been very consistent in IB that, that was a 2-year period transition. I think we're probably a little bit ahead of where we thought we'd be in IB because of the great expense discipline. Going forward now, we've got to get that retail business in IB, firing in all cylinders. And we have to -- we've taken the last couple of years as Mexico has gone through their transition to get the foundations in place. But yes, you're going to see growth in IB next year, modest growth, but you're going to see growth on the asset side. In Canada, I think commercial has been such a great kind of example of this philosophy because you've seen PTPP growth up 16% and loan growth flat. But ultimately, we would like to grow more into the mid-market where we haven't been a player historically. We've been primarily in the real estate sector, so moving into the mid-market. And then in business banking, where we're kind of ranked fifth in Canada relative to RBC at #1. We've got to get that business banking business growing. It's deposit rich. It comes with a great return on risk-weighted assets. And for the last 2 years, we've been growing at 2x the market rate. So there's a path here, but it takes some time in an environment that's competitively tough and macro tough as well. So just keep going quarter by quarter by quarter by quarter.

Got it. So before we get into some of the business lines, maybe a question on credit. I know it's always topical for your investors. Obviously, it's been somewhat volatile for all the banks with the tariff risk and how that's evolved over the past few quarters. Can you offer any thoughts on the bank's sort of view on credit right now? It was a better quarter. There was some good trends in the Canadian retail part of the book as well. And yet it sounded like there was still a bit of cautiousness on the part of -- I guess every Chief Risk Officer tends to be on the more conservative side, but anything beyond just caution for the sake of being seen as prudent as opposed to -- you're not seeing anything necessarily in the book that would concern you?

Well, back up 2.5 years ago when we started, one of the objectives was to get a strong balance sheet, right? And so we've built $2 billion of ACL, $1.3 billion of that is performing. I think our ACL ratio right now is 94 basis points. It was 73 when we started this journey. And so we've really fortified that balance sheet. When Liberation Day came, we had a big performing build last quarter to prepare us for any eventuality. So we didn't have to have that performing build this quarter. And encouragingly, impaired came down this quarter. That was primarily driven by the Canadian retail book. And so we saw some improvements in auto, and that's coming off that 2021, 2022 moment where we're volume-based focus and ended up with some auto loans that we probably shouldn't have. But that's kind of that as Phil said, the pig in the python is coming through. We're going to see that improvement continue. I think our consumer clients or our Canadian clients are still under stress, but they're managing effectively. I'm not really worried about the mortgage book. I continue to worry a little bit about the cards business, but we're fifth out of a relative basis. And then one area where we need to keep an eye on is commercial. And we had a couple of accounts in that commercial side that we're keeping a really close eye on and that had a little bit of an uptick in impaired in this quarter. So we have to be thoughtful about that. In IB, just continued discipline, continued discipline to drive that impaired performance down quarter by quarter by quarter. And so the messaging that Phil said was we're not through the woods, but we do have a pretty good confidence that you're going to see impaired come down throughout 2026. But as it relates to the fourth quarter, I think we said the expectation of about where we are today. So that was a -- whether you call that conservatism or just thoughtful given the uncertain environment we're in, I think that's the right place to be.

Got it. And maybe now we can touch on some of the business lines. Obviously, Canadian Banking has been a big focus for investors. It had been underperforming the peer group for a while. And I guess people are now starting to ask, have we sort of hit that point where Canadian Banking has now truly turned around? And again, not to make too much of one single quarterly result, but certainly, that was probably a big part of why investors really liked the stock's reaction, I guess, on earnings day was largely.

Yes. I mean, you have to -- I mean, take a step back, too, right? I mean when you allocate the fund transfer pricing out, which we did, you see that Canadian bank is gapping to its peers by about 500 basis points on ROE, right? And so historically, we've been a very strong mortgage player and a very strong auto player and we've been under penetrated in cards. We've been under penetrated small business. We've been under penetrated commercial mid-market. So there's nothing revolutionary about this strategy. This isn't a 101 strategy to change the business mix over time. And so you start with your service, make sure you're providing great service. We saw very significant NPS results improvements this quarter. You think about sales effectiveness. We've had sales effectiveness up, I think, 11% year-over-year. You think about new product innovation. So we're increasing the product shelf in terms of our deposits and savings programs. I think our deposit market share direct day-to-day was up 70 basis points year-over-year. Our savings was up $1.6 billion. You really start to penetrate into small business and commercial mid-market. We didn't have a small business team effectively before 2 years ago, so really focusing on that. You put the technology investments in place to drive the cards business, which we've done over the last year. And you really focus on the channel mix to get that digital-first mindset. And I think historically, we've been more branch first. And so you start to put all those things in place and quarter by quarter by quarter, you're going to see some improvement. And you're right, this quarter, we saw some green shoots, right? You saw some green shoots in the small business growing at 2x the market. You saw some green shoots in the commercial with that PTPP growth, volume versus value. You saw some green shoots in the day-to-day savings and checking up 6% year-over-year. But we've got a long way to go, right? And this is going to be hard, hard one fight because you've got a macro environment that's not overly positive and you've got a competitive environment that's very strong. So quarter by quarter by quarter, we're going to show improvement to our shareholders, and we'll build credibility in that Canadian bank over time.

Okay. And how about the competitive dynamics in Canada for assets and deposits? Can you talk a little bit about what you're seeing? I'm not sure if it's been changing much with -- it depend on where the rate cycle goes, but how do you sort of see that dynamic?

Yes, it's competitive. I mean, I think if you look at the mortgage rates, we're actually priced a little bit higher than our competitors on the deposit rates were right in line with our competitors. So listen, I think it's a competitive market and Canadian -- Canada is a great banking business with 20% plus ROEs. And so -- and then you've got also some disruptors as well. So it's a market that is really important for us because it's got the highest ROEs in the whole book. We're putting all of our focus in terms of capabilities, resources, technology into this Canadian business. And quarter-by-quarter, you're going to see some improvements. I think one of the areas that we do need to address relatively soon is just this effectiveness efficiency dynamic in that Canadian business. Overall, over the last 2 years, we've driven operating leverage positive across the whole bank, which is good, driven in large part by our international bank, which has had a really strong expense discipline. And then more recently, you've seen a pretty good revenue lift in GBM and a pretty good revenue lift in wealth, but our Canadian bank has been at negative operating leverage. And ultimately, I want that bank to run at positive operating leverage, which then creates the space to make the investments that you need to be successful. And so we've got work to do on that, both being more effective and more efficient in that Canadian bank, and we'll get after that over time.

And not to pin you on a specific time line, but any sort of high-level time line that you'd like to see that operating leverage get to positive territory?

Yes, I think by next year, we want to be running at positive operating leverage in the Canadian bank.

Got it. Okay. So maybe switching over to International Banking. Again, something that investors care a lot about when it comes to Scotiabank. It's been a pretty good 2025. You noted some of the improvements in PTPP earnings despite optimizing the balance sheet. What do you sort of see coming up in the next few quarters? Obviously, expense management and portfolio optimization have been the big drivers. Does that sort of start to shift into that sort of next leg of seeing growth maybe start to come in?

So it's a combination of both. I mean, when we were at Investor Day several quarters ago, we said, and I think ultimately, by 2028, we'd get to 46% productivity ratio, and we were starting at 55%, and we're now at 51%. So we're kind of halfway through that journey on expense management. And this is on the back of regionalization where we historically ran these countries all separately. And now we're taking a much more regional approach, and we're segmenting our client base consistently across the region and coming up with value propositions that are consistent, which helps on the client experience side. It helps getting primacy. It also helps on the expense side. So you've seen some great results from that team over the last year or 2 years on the expense side, you're right. The plan always was to focus on expense first, create the opportunity then to move to growth. We've actually segmented that retail population effectively now into affluent, high worth, high net worth and top of mass. We're rolling out value propositions for them as we speak. We've got now a cash management proposition that we've been working on for the last 2 years, which I should come back to because I think it's going to be a huge competitive advantage for us, which allows us to not only focus on the asset side of the balance sheet, but also to the liability side. And we'll start to see growth modest growth as we go into 2026. I think some of the things that we've done on Central America have been really helpful as you think about getting out of Central America, getting out of Colombia, merging that into Davivienda which will be value maximizing for shareholders, exiting CrediScotia was a monoline mass proposition. We've got another monoline mass proposition in Chile that we need to be thoughtful about how to execute on that. But in general, now that transition is complete in IB, and we need to move to profitable, sustainable growth, which includes on the asset side as well as the liability side of the equation.

So you mentioned cash management. I'm guessing there's other -- the breadth of products is increasing as you get those deeper relationships, you're offering more to clients. It's really that simple. I'm obviously paraphrasing, but it's a function of just getting more breadth to the client?

I mean, it's not simple at all because it's transaction banking, it's cash management. It's not only management cash, it's accounts receivables, payables, working capital. And as you think about the starting point, we had a very good proposition in Canada. We didn't have a proposition in the U.S. We had an emerging proposition in Mexico. And so over the last 2 years, building that proposition out, which allows us to then approach the client, both with transaction banking proposition and a lending proposition is huge. If you think about Travis' business in GBM, it's the oxygen for Travis' business to grow that U.S. business you need to have sticky deposits to actually grow Travis' business. So that's going to be an important proposition. We just started to pilot our U.S. opportunity. And then in Canada, a big part of that PTPP growth in Canada in flat lending has been GTB, has been our global transaction banking, where we've gotten a pretty good pipeline of clients. We're bringing new product capabilities to them. And therefore, you're actually seeing some nice fee revenue growth come into that commercial bank in Canada. The kind of the end game here is trying to stitch that together, Canada, U.S. and Mexico. And that's going to be the competitive advantage for us when we think about competing with the other Canadian banks. And when you think about competing with the U.S. banks who don't have fully deployed capabilities in Mexico and aren't obviously in Canada. That's when we can actually provide a unique proposition to our multinational clients that others won't be able to.

Got it. And then maybe switching to Global Banking and Markets. Obviously, it's been a pretty good environment for all the banks in the last few quarters? And maybe talk about the outlook there. And obviously, the U.S. is a big part of that. I think it was probably surprising to some investors that the U.S. was as much of a contributor as it was in Q3 north of 40%.

42%.

Maybe talk a little bit about that dynamic and sort of how that translates?

Yes. Well, this is -- we've been working on this for a while as well. And you think about these new capabilities, I'm talking about the CLO now we're top 5 in North America, our DCM, we've increased the league tables. We've added securitization capabilities. We've added this mortgage capital markets capability, done our first couple of transactions JPMorgan team that we brought on, leverage lending. We started enter into leverage lending business and really starting to build out our investment banking capabilities. And so 14% down on balance sheet, yet 29% up on fee. And yes, it was a conducive market, but you've seen, I think, pretty significant outperformance from us throughout the whole year around fee income. Right now, credit to the GBM team, our investment banking advisory fees are at an all-time high, and we're 3 quarters through the year. That's the best ever, 200 years of this bank, best ever right now. And I think a little bit is this kind of changing focus to old industry, oil and gas, mining, et cetera, power and utilities, which we do well at, but also it's been adding the capabilities in Canada and in the U.S. And so league tables improvement continue. I'm not a big focus on the league table guy, more on profitability, but it is an indicator that we're moving in the right direction. And so this GBM transition, I'm really, really excited about. Now we have to keep it in context. It's 14% ROE, right, relative to the Canadian bank, which is 20%, 25% ROE and relative to our wealth business, that's 20% ROE. And so we're going to continue to invest, particularly on the people side in our GBM business, but we're going to do that thoughtfully, recognize the opportunities we have in the other parts of the portfolio as well.