The Bank of Nova Scotia ($BNS)

All right. Welcome back to back to back. Aris Bogdaneris, Group Head, Canadian Banking of Scotiabank. Welcome to the stage again.

Great to be here.

Let's start with the ROE, like everybody is obsessed with these days, rightfully so. But in Scotia's case, about half of the ROE expansion is expected to come from your business. Contrast that with some other banks where usually it's the ROE expansion in the U.S. or elsewhere, that's the driver. So what are the keys for that? And how do you expect to close the ROE gap with your peers?

Right. So great to be here. The ROE in the first quarter was 18.1% for the Canadian Bank. That's roughly 140 basis points up from a year ago. And I think it's correct to say the performance of the Canadian bank, of course, drives the overall ROE improvement at the enterprise level. And the way we see it in the Canadian bank, there's 4 key levers to improve that ROE from the current base that we're at. First, clearly is improving the business mix or the product mix. This means both on the loan and the deposit side. What does it mean on the loan side, increasing our non-mortgage balances in the subsequent quarters. That's going to help the ROE. Also the mix shift in deposits more day-to-day in checking. The second driver is RAM, risk-adjusted margins. We see 3 drivers there. Interest rates now stabilizing and maybe even increasing, a big mortgage repricing next year in '27, that will be a big lever. And obviously, PCL slowly normalizing over subsequent quarters that will drive the RAM. Third area is fee growth. We saw it in the first quarter, continued double-digit fee growth over subsequent quarters. And then finally, last but not least, will be productivity. And we saw signs of strong productivity in the last few quarters. This will continue. And between collectively, those four, we should continue to grow the ROE. If I was to think about what are the key drivers, probably mix shift and RAM improvement are roughly 70% of the overall puzzle to close the gap.

And mix shift -- sorry, can you...

Mix shift is simply more of the higher-value deposits, checking day-to-day and operating deposits in small business and commercial and more non-mortgage lending where the yields are higher. So that's the shift in the balance sheet.

So this dovetails on a couple of separate discussions, the RAM and the mix shift. I guess, when I think about mix shift and you're talking about deposits, more core deposits, less GICs, whatever, this is a shift of a shift. A few years back, you've been -- part of your strategy was to accelerate deposit growth as a big surge in term deposits. And today, you're, I guess, shifting in the other direction. So that's the -- there's a retention of the deposits that you gathered 4 or 5 years ago and shifting them into a different product. I mean shift a lot, but...

Yes. So yes. So essentially, what's happening is you're getting the shift out of term into day-to-day and savings, but more importantly, in wealth products. But overall, when you think of GICs maturing, 90% stays within the bank, okay? So that's an important point to make. So that's the shift we're seeing into wealth products and into day-to-day and...

And of that 90%, they're going into core, maybe a lesser extent staying into GICs...

Yes, exactly. And moving -- there's a big movement into wealth, but I think that's common across all the Canadian banks that we're seeing, which is now you're starting to see that shift out as rates now are floor starting to stabilize in the most recent period.

And the risk-adjusted margin, you mentioned mortgages. So I'm just thinking that's -- well, PCL next to nothing, God willing...

Yes, it's more the repricing.

Yes. So 2027 is the big year potentially, but....

Big window for renewals in '27. And we underwrote quite a few mortgages -- variable rate mortgages in '21, '22 that were really challenged on the margin side. Those will be up for renewal, and that will provide a tailwind to our RAM as they reprice.

Right. And there's big, I guess, the caveat there is competition, right? And because we've had this discussion with a couple of other presenters today, and they're all saying a similar thing, different timing, but it's -- hopefully, competition is not an issue.

Yes. Up to now, and we've had a big renewal window also this year and a bit last year. We're seeing a very high retention rate on our mortgage renewals, as I mentioned, also on our deposits. So we're really good now and getting better even on just keeping those high-quality clients into the bank.

Okay. And then before I get into more of these product type questions, I do want to go back to targets, and another target or guidance, whatever you want to call it, for this year was to get the consolidated double-digit earnings -- EPS growth in 2026, the Canadian Bank has to whatever, low teens, something like that, I suppose. You did it in -- the bank did it in Q1, largely because of capital markets, the Canadian Bank growth was 5%. So was this part of the plan and you expect it to grade it up? Or is there another interpretation there?

Right. So I think it's important context matters. And if you go back a year, in the first 3 quarters of 2025, the rate of earnings growth in the Canadian Bank was actually negative. And it was only in the fourth quarter of last fiscal year that we generated positive earnings growth that was 1%. So that's why the 5% growth that you mentioned in Q1 has to be seen in that context. And going from 1% to 5% sequentially and going from negative to 5% is a visible jump. More importantly, if you look even more deeply into the number, that 5%, if you strip out the onetime private equity gains we had a year ago, that earnings growth in Q1 is not 5%, it's actually on an underlying basis, 8%, closer to the double-digit target we set ourselves. So that's important to understand.

And then if I look at the building blocks of the growth, revenue overall was -- growth was, I think, flat or maybe a drag...

Yes.

But the fee income growth was 8%, something like that. So different stories margin versus fees. And that was encouraging because at the 2023 Investor Day, there was a lot of emphasis put on fee growth. We didn't see much of it for a while, and this is the first -- maybe the first, but a noticeable blip, a positive blip. What's behind that? What would make me believe it's going to continue?

Sure. Clearly, the first quarter, we saw a big jump in fee income, but it didn't just happen. I mean it's a deliberate outcome of investments made over the last 18 months across a number of fronts, and I'll give you a bit of color here. I think the first most important investment we've made is actually building up our investment specialists in the branch network. We added 240 since Investor Day. That's a 40% increase in the sheer number of advisers out in the network dealing with customers. That has driven in the first quarter, $1.2 billion in additional mutual fund sales net. That's double a year ago and actually places us third amongst our peers in long-term investment sales versus sixth a year ago. So going from sixth to third. Second, we've invested heavily also in our card business, a new modern card system, helping us engineer the shift to premium clients in our card business. We've had new product introductions, working the whole value chain, and we're starting to see a lift again in card fees. Third area also is insurance where we're investing, and you'll start to see that slowly climb. And then the fourth key area, I think, which should not be underestimated is our relationship with Wealth, which is very strong. In the first quarter, again, we referred $5.4 billion across our retail, small business and commercial clients to Wealth in which we get compensated. That's a 34% increase from a year ago. So again, sales power, cards, insurance, wealth combined collectively are going to continue to help us drive double-digit fee growth over the coming periods. I'm pretty confident of that.

Fees in general, how do you think about them longer term? And I'm not -- not a BNS Scotia specific question because we have VOS fee that's going to make it easier for fintechs to enter the marketplace and their, I guess, MO is to go after fee-rich environments. So what do you think about your fee structures in the longer term given that dynamic?

Where I see from my experience also in Europe, where we saw fees get attacked primarily initially by fintechs and some of the other players was on the daily banking fees that we saw, but less on the card fees, mutual funds, investment side of the pieces where we're actually growing our fee business. So yes, is there a threat again of fees being challenged by some of the new players who offer things for free. Yes, of course. But in the parts of our business where we are growing, I think we're pretty much protected to a large extent given the makeup of the fees that we're generating.

Okay. Going back to the building block thing, revenue, we had good fee growth, but expenses were flat year-over-year, and that also helped -- that helped your bottom line. What's a more normal expectation that doesn't seem like in an environment where you continually have to invest?

Right. Clearly, flat growth is not a sustainable nor a desirable outcome for the business, of course. We expect low single-digit expense growth on a sustainable basis. But let's not forget, in the fourth quarter, we took a charge where we really reduced substantially the number of head office staff and obviously improved spans and layers and reduced a lot of the clutter in the head office, to be honest. That showed up in Q1. Part of the savings from that charge, we've redeployed into more salespeople, digital and technology, which over time, I would call this quality spend will help you drive more revenues and productivity down the road. So I'm pretty confident not only that we can sustain this cost discipline, operating leverage in the first quarter was the highest in 14 quarters. And we're confident we're going to drive positive operating leverage through the year as well. So all in all, good. But again, we have to continue to invest, but again, invest in productive ways.

Okay. Switching gears, pun intended for the -- I want to talk about auto lending. The Scotia is one of the biggest in the country, has been for years. But every now and then, we have a blip on the screen with someone in the industry having some higher losses, and we have a blip on the screen now or had one recently. What's your reaction to that? And the whole concept, are they play in a different sandbox, you're in the same park. What's -- why might the outcomes be different for Scotia? And what are you seeing in the book, I guess...

No, it's okay. Good question. So our auto business differentiates itself in several ways. And I think currently, PCLs are elevated across the industry and across our peer group. But I think what's different for Scotia's auto business is our business model is underpinned by our strong OEM relationships. We have the greatest depth of OEM relationships in Canada. That drives new vehicle sales of a higher quality, right, new prime, near-prime vehicle sales. That's different from some of our competitors. I think the second differentiator is we stay with automotive assets. Some of our smaller competitors have gone into more recreational vehicles, ATVs, which we don't do, okay? We do automotive and particularly prime, and that brings us to the third point of differentiation. We have not chosen to go down the credit curve like some going to subprime. We stay at the prime, near prime level, and you start to see that play out when you start to look at the results around. So I think those are the 3 real differences in our auto business.

So that's them problem, not a you problem.

Yes.

What about the terms of the loans? I know every now and then, we discussed that over the past terms -- auto loan terms have gone 7, 8 years kind of thing?

Yes. What we see -- I haven't seen that being extended. Actually, the effective terms are even maybe a little less, but we haven't seen the terms being extended at least in our business.

All right. We talked about deposits earlier in -- well, risk-adjusted margin mix, you talked about deposits. And the competitive dynamic could always be a curveball there. Are you seeing that -- well, anecdotally, I hear on the commercial side, it's heating up. How big of a challenge is that going to be potentially?

Right. It is competitive, no doubt about it, especially when the pool of deposits is actually shrinking out there. So it is competitive. That said, we've managed to grow our deposit NIM again in the first quarter, and that's the third quarter in a row that we've managed. I think more importantly, we're actively managing our deposit business from a portfolio basis, trying to optimize margin and volume, but also more importantly, at the client level, where you have to make tactical short-term actions at a client level, depending on the primacy of the client, the sensitivity of the clients. So what we call is a lot of data to actually optimize the value at that level. So between the two, we're -- despite the competition, we're actually improving the margin, improving the mix, but it's a daily ground game, no joke. It's competitive out there.

So in -- I don't know if you can give an actual real-world example or illustration. What would Scotia do today versus what -- or not do today versus what it would have done a few years ago? Because you did touch upon the primacy and when we're defending the margin, you're willing to let market share go away. Is that basically it?

I think it's a very important question. And I think the fundamental shift has been less worried about headline deposit growth and more about the qualitative stickiness of the deposits we do gather. And I think that's been the shift. Our deposits overall are down 10% year-on-year. But more importantly, the most valuable deposits, checking day-to-day are up 5%, and you see that accretive to the ROE and accretive to NIM. But you've got to also manage both, but you have to have one foot in front of the other in terms of driving more value, more stickiness. That's the difference from the past, I would say.

And I guess, better partnership with the wealth business...

Of course, of course. And remember...

I'll just add a bit more to that. You mentioned the 90% stays with the bank. What's the split, I guess?

Yes. So a big chunk, again, $5.4 billion in funds and deposits were referred over to wealth. We have to earn through that in the Canadian Bank, right? And so the numbers you're seeing is post that. But the more important thing about the shift is the key fundament for us is getting the right client in front of the right adviser, right? And so that's why this partnership with wealth is so important because if you don't have the right adviser in front of the client, over time, that client won't be served and will leave the bank and you lose everything. So this idea of referrals is to ensure we keep the client in the bank and serve them and actually increase the share of their wallet. That's why these referrals as they're growing are so important to us as an enterprise.

Tangerine, is there anything interesting to update there? I know it kind of...

Quiet...

Comes and goes as far as the topic of discussion. I'm going with it today.

Yes. No, good for you. As you know, in my previous life, I was responsible for probably 11 Tangerines at ING. And we are doing a lot of things under the radar at the moment to rebuild what is, I think, an incredible asset for us, and not a small asset. There's over $50 billion, almost $50 billion in deposits there. But what we need to do is revamp this business for the modern day. And what does that mean? We're investing and it will be unveiled in due course, a new technology, AI-enabled, new value propositions across wealth, small business and generally to get more growth out of it as a full bank, not as a deposit gathering vehicle for the Red Bank, but it's something that can stand alone and compete with the best digital banks in the world. But this is now in process. And in subsequent quarters, you'll hear more and more about how Tangerine now will come and relaunch "Tangerine 2.0, let's call it.

Okay. I don't want to end on a credit question. I'll ask it now because I ended on a downer a couple of times ago, I don't want to do that. But let's do the credit thing now. Your bank was talking about unsecured credit losses increasing over the last little while. And let's -- which product line, credit cards, the auto book seems to be -- they're not secured, but the auto book seems to be going well. But the credit card is not that big.

No...

At Scotia. So why they need to flag it?

Yes. I think we saw in the previous quarters, the unsecured book, I talked credit cards and you locked, unsecured lines of credit, PCLs growing. So since it started servicing, what have we done? We've done like I heard the previous speaker talk about, obviously, you start looking at the book more deeply and you start tightening the underwriting upstream, right? And we saw that in some of the higher-risk cohorts that we identified. No need to go into details. But more importantly is on the collection side. I also heard it from the previous speaker that what we've also done is invest in collections in a different way. Of course, we've added collectors like everyone would expect in a high-stress environment, but more is digital outreach and self-serve mechanisms where clients, you can get much more contact with them earlier. Because I think the game in unsecured is getting to them earlier. We've seen the impacts of both the underwriting tightening and the collections, I would say, focus where delinquencies, 30-plus, 90-plus entry rates going into delinquency, roll rates, vintages slowly starting to improve in unsecured. Okay? But it's a constant effort. And it's still stressed out there. So it just means you have to do things faster earlier than you otherwise would. And we're seeing the improvement of that. And again, over time, the RAM story will start to materialize as those PCLs gradually come down, particularly in the unsecured business.

So acting early, we're looking at the prospect of more insolvencies and higher rates. We're back on the table. Like is that spurring any at the moment...

Yes. I mean, again, I can't predict now with the latest geopolitics what will happen. I think the only thing that we can manage, and we say it often is what we can control, what do we control, we control actually strengthening and anticipating stress actually continuing and getting ahead of it, both on the underwriting side, but also on the collection side. But it's important to note, too, that in the past quarters, we've actually engineered quite a significant shift in the quality of our unsecured book. Premium clients or premium card products now constitute 40% of new card acquisition, 40%. Premium balances in our unsecured book have grown 10% year-on-year. So there is a qualitative improvement actually in the card balances that we have today. And every quarter, we expect this to continue until we get a much bigger proportion of premium clients in that base.

That's in credit cards or...

Yes.

So 40% are premium...

Of new acquisition is now coming in our premium card products.

Oh, product, not customer...

But obviously, a premium product is linked to a premium customer...

Yes, yes, okay.

Okay.

Wrap up on commercial banking then. And that's one that's been a bit of an evolution over the past couple of years. Can you maybe give us a time line and from where you started to where we are now and what your outlook is for growth there because there's been a deliberate strategy of maybe exiting some relationships. And are we done that? And from here on out, where do we go?

So commercial is a very important business for us, of course. We've actually now at the end of what I call the margin enhancement phase of commercial is coming to the end. Last year, pretax, pre-provision profit in commercial through this mechanism of, we call it value over volume, we call it margin enhancement, 25% up year-on-year last year, but now it's time to grow. And what does that mean? Our pipeline is getting bigger. It's starting to mature. We have put a lot of effort in increasing sales capacity over the last 12 months in our mid-market subsegment. The paydowns we saw in commercial real estate have come almost to an end, the paydowns. Now it's starting to build. So through all this, more RMs, pipeline maturing. We've actually started to see growth in commercial on a spot basis month-on-month and quarter-on-quarter, we'll see it. So now it's really about continuing to build through that pipeline growth and start to come in line with our peers from a market growth perspective. Something we don't talk nearly enough about, though, in Scotia is the small business segment, which also shows up in business banking. That is growing close to double digit as we've launched new value propositions in health care, professional services, accountants, where we're getting double-digit growth at good margin, and we expect this to continue also throughout the year and form a bigger part of what we call business banking lending. Again, part of the mix shift I talked about earlier. So all in all, feeling pretty good about commercial. And we'll see that more in the second half of the year, this growth in the commercial balances.

All right. Well, wrapped up another good discussion here, Aris. Enjoy the rest of your day and enjoy the hockey game tonight.

I will. Okay.