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

All right. Perfect. Well, let's get started. I'm going to start with a little quote: "A resilient financial system is one of the cornerstones of prosperity." Those words from Mark Carney capture why gatherings like this matter the most. The banking system is simply not part of the economy. It's one of the foundations upon which economic growth, investments, innovation and opportunity are built. Good morning, everyone. Welcome to the 27th Annual Scotiabank Financial Summit. I'm Travis Machen, CEO and Group Head of Global Banking and Markets. On behalf of our entire team, I want to thank you for joining us today, and thank you for your continued partnership and trust. We are meeting at a critical moment for our industry. AI is transforming the way we work, how we serve our clients and how we create value. At the same time, businesses and investors are navigating a very complex market volatility, geopolitical uncertainty and rapid technological change. But through all of this, 3 things continue to matter the most: trust, resilience, and innovation. Despite the challenges, there is real reason for optimism. Canada's financial system remains very strong, and our banking sector continues to demonstrate resilience and momentum. Investor confidence reflects that strength with Canadian banks outperforming many of their global peers this year. Over the next 2 days, you'll hear from many of the industry's leading CEOs and executives. I hope these conversations challenge perspectives, generate new ideas and provide valuable insights into the opportunities ahead. Thank you for being here. And it's now my pleasure to welcome Scott Thomson, President and CEO of Scotiabank; and Mike Rizvanovic, our Canadian research services research analyst at Scotiabank. Please join me in welcoming Scott and Mike to the stage.

Awesome. So I guess I'd love to start, Scott, with sort of some big picture questions here. And I do have to say, I have a sense of Deja vu here because last year, we talked about how Q3 was so well received and the stock being up 7%. And here we are again a year later, same reaction, 7% upside on that day. And not to fixate on the quarter, but maybe just talking about the ROE and the big step-up that we've seen here, which has come in relatively gradually. And now you're basically 2 years ahead of your scheduled targeted 14%. You got there 2 years early. Just maybe talk a bit about what's driven that and how you've gone from that Investor Day target to actually doing it so much earlier than expected.

Great. Okay. Thanks, Mike, and thanks, everyone, for being here today. Back to conference season and kids back to school. So thanks for your time. So we've been at this for 3.5 years, right? And when you think about where we started, there was a definite initial focus on the balance sheet, making sure the balance sheet was in great shape, and we had a balanced view of deposits and loan growth. And if you think about that period of 3 years, capital ratio is obvious, but LDR, 116% to 103%, wholesale funding improved by 200 basis points. Performing allowances $5 billion now, $1 billion increase over that 3-year period. And margin expansion along the way on the back of positive operating leverage. And this is the exact plan we laid out 3 years ago. It's gone a little bit quicker than we had projected, which is great. And it's because of all business lines. As you look at all 4 of those business lines, International, improvement of 300 basis points in ROE over a 3-year period. Our Wealth business has been growing at 17% CAGR. And that's on the back of a lot of investments. So it wasn't a 1 quarter thing. We added 800 sales force frontline folks to that division and gained market share going from sixth to third. In our Global Banking and Markets Group, you just look at the fee income, lower capital, higher ROE, more fees on the back of a 3-year capability build, and we can talk more about Global Banking and Markets, which Travis runs. And then what was really pleasing was the Canadian Bank. I mean it had a great quarter, but it's had a great last 4 quarters. And that whole business mix move away from mortgage monoline and auto, where we were very good to mid-market commercial, small business, using Mortgage Plus as an anchor that drives deposits day-to-day and seeing the improvement in the day-to-day in savings, which allows you to see that ROE improvement in Canada, which contributes to the overall banking results. And so it's a 2-minute synopsis of the last 3 years, but I'm feeling really good about where the bank is heading.

Great. And I think you did mention on the quarterly call that 14% was not necessarily a ceiling for Scotia on the ROE. Just curious, what are you confident about that maybe that can, over time, get to an even better place?

Yes. I mean what we said a year ago is a lot of this is driven by the Canadian bank. And the Canadian bank is a gap relative to our peers on ROE. Year-over-year, we're up 200 basis points. I suspect when we're sitting here next year, we'll look back, we'll be up another 200 basis points. And so when you look at that progression to 14.2% in the quarter, we told you a year ago the path to get there, half of it was Canadian Banking and half of it was the other 3 businesses. In this quarter, we obviously saw a very constructive market backdrop in GBM, which allowed us to increase our NIAT in that group a little higher than what we've historically done. But a big part of the drive was Canadian Banking. And as we look forward, continuing that progress in Canadian Banking is going to be job one.

Awesome. And maybe sticking to Canadian Banking, I've got a bunch of questions on the segments. Just in terms of that Q1 bridge that you showed on the ROE and how Canadian Banking would contribute to a big part of that movement. And now you're sitting at a much higher level. You're 19% plus this past quarter, which is a much better spot than the segment was a couple of years ago. Just wondering what's the next leg for Canadian Banking?

Well, 3 things are driving the improved performance in the Canadian Bank and will continue to drive performance. One is risk-adjusted margin. Two is business mix; and three is efficiency. And so if you start -- let's start with risk-adjusted margin, and this comes to the business mix, bringing on assets that actually have a higher RAM. And that comes to credit cards, that comes to small business that comes to mid-market, which we're starting to see growth at 5%, 7%, 10% in the case of small business. And when you look at the impaired performance, that impaired performance has done pretty well. We're going to be at the high end of our target at the start of the year, but continuing to improve quarter-over-quarter. And so the RAM performance, I think we're up 10 basis points year-over-year. We're going to continue to see continued margin expansion quarter-by-quarter and into next year as well. On the business mix, it comes back to credit cards, 45% now premium acquisition up from 35%. Fee income, which has been insurance now growing, which was not a part of the business 3 years ago, it's now growing at around 10%. We're just getting started on that. And then again, some of these areas like small business and mid-market, which are now growing at 5%, 7%, 10%. And so that's the business mix component. And then lastly is efficiency. And we've been laser-focused on cost and capital discipline over the last 3.5 years. You've seen now 4 quarters in a row of positive operating leverage. You're going to continue to see positive operating leverage in our Canadian P&C Bank, but we're actually taking the investments of the restructuring charges and actually investing in frontline salespeople and technology. And so you've seen a big increase in our technology spend year-over-year, which has allowed us to create the capacity on things like AI, which I'm sure we'll talk about, but also allowed us to drive at the same time, positive operating leverage.

And that improvement in the risk-adjusted margin, as you look to build out the credit card book in a more meaningful way with the mass affluent targeted crowd, it sounds like there's a bit more upside potential on that.

Well, I think the margin story, it's interesting because for some of the banks, they had margin expansion, some didn't have margin expansion in this past quarter. For us, it's been a pretty continual improvement in margin. Part of that is the philosophy has changed from volume to value. But part of that is you look at what we're putting on from an asset perspective comes to this business mix that have higher returning products. And then in our portfolio with mortgages and autos where we've been historically strong, we're repricing into a higher margin as well. Mortgage Plus has been a home run for this bank. Mortgage Plus, which 3 years ago, we put in, there was some skepticism around it. 95% of our originations are Mortgage Plus right now. 70% of our Mortgage Plus customers have a day-to-day account. I think we're having like 85% renewals on Mortgage Plus. We've gone from 20% single monoline mortgage holders to now 15% over the last 3 years. So this is the anchor product where we get people in, multiproduct allows them to then have more products with the bank. So that's on the asset side. On the deposit side, we've been adding more day-to-day and savings accounts. And so that deposit mix is changing, which is allowing the deposit margin to expand. And so when you look forward, I think next quarter, you'll see 1 or 2 basis points of margin expansion in Canada. And next year, you'll see continued margin expansion in Canada. And so that again contributes to the ROE uptick that I'm expecting for next year.

That sort of dovetails well into my next question. Just wanted to touch on the value versus volume. Obviously, something that you've been very clear on to investors that it's all about getting that primacy with the client. Maybe talk about where you see that trending. It sounds like you've gotten a lot of traction already, and there seems to be still a decent amount of upside there.

Yes. I mean the value versus volume, it started where we had historically been a bank that was concentrated using the balance sheet and in relationships that weren't necessarily primary and therefore, didn't have ancillary revenue around it. And so in each business line, we've been pursuing this to different degrees. But look at the International Bank, where we've optimized that Global Banking and Markets portfolio, the corporate portfolio in our IB franchise. That's actually going to start to grow in the fourth quarter and into next year now that it's optimized. So we'll be on a growth curve. You see non-mortgages growing faster than mortgages in our International Bank. You see commercial now starting to improve from a loan growth perspective, leading with cash, cash management as the kind of the entry product into commercial in our International Bank. And then increasingly, we are also introducing a capital market solution in our International Bank, which we didn't have before. So we've got all this expertise in New York and Toronto on capital markets. We've got all this balance sheet deployed in International yet we weren't using capital markets as a core competency in our International Bank. And now we're doing that. And so over the last -- frankly, over the last 2 months, I'll pick Jamaica. We just led a $1 billion sovereign deal for Jamaica last week. We hadn't done that in our 134-year history of the bank. That was the first one we've ever done. So rolling out that expertise we have in the U.S. into clients where we already have great relationships, balance sheet deployed, that actually drives a pretty significant outcome. And so for our International Bank right now, about 50% of it is actually GBM, Global Banking and Markets in that IB business line. In our Global Banking and Markets group run by Travis, look at over the last 3 years, significant investments in product capabilities, whether it's mortgage capital markets, securitization, debt capital markets, levered lending, and you see capital down, fees up, ROE up. And interestingly, deposits in Global Banking and Markets was up 12% last year on the back of Global Transaction Banking and that connection between Global Transaction Banking and GBM. And underwriting fees, I think, are 3x higher on a quarterly basis than they would have been 3 or 4 years ago on a kind of normalized. I mean we had a great quarter on underwriting fees. But just if you look at normalized relative to 3 years ago, underwriting fees -- and so that was one area where we were a little bit behind. And so that's, again, business mix changes. And then Canada, we talked a lot about business changes that we're driving. So that's all coming together to drive a better ROE with capital that's actually aligned with the type of deposits we can drive in the business.

Okay. Thanks for that color. And maybe just one more on Canadian Banking. Just in terms of the credit outlook. Obviously, there's a lot of uncertainty now with the trade negotiations and the tariff issue. How do you sort of see that playing out? Are you hearing anything from clients that is of concern? Or is it just sort of steady state right now?

Yes. So just to put it in perspective, I think we said at the start of the year, high-40s to mid-50s in terms of our impaired. We started the year a little bit higher than mid-50s, which was our expectations. And then last quarter, we're below, I think we're 53%. And our expectations that continues to track down. From our commercial and small business book and auto book, it feels pretty good. There doesn't seem to be any significant issues. There's a little bit of stress in the mortgage portfolio in Toronto and Vancouver, but nothing material. And so our expectation is we'll continue to see that impaired performance improve. Now subject to what happens in the macro. And what happens in the macro to date hasn't been that significant. I mean you saw the announcement yesterday. It's still a relatively small amount of trade is tariffs. And so I don't think that's going to have a huge impact on the credit performance. But obviously, we'll have to stay tuned for what transpires over the next year or so from a credit -- macro perspective and the relationship with the U.S. will be important. I think from The Bank of Nova Scotia perspective, as you think back to Liberation Day, we took an 18 basis point performing build at that time. And you look at our pessimistic scenario and our very pessimistic scenario and our models, they're pretty significantly different and worse than where we are today. And so things would have to erode pretty significantly to see significant performing build. And so overall, I feel pretty good about the credit performance and in line with what we said at the start of the year.

Great. Thanks for that. Maybe switching over to the wealth business. You did allude to the improvement in the ranking #3 in long-term mutual fund sales in Canada year-to-date. So it's not just 1 quarter. It's been something that's been building over some time. Maybe just remind investors how you got there and what's really worked here and is a potential #2 spot within the site?

Yes. I mean Wealth is a great story, and I think it's been somewhat missed just because of the constructive backdrop. So people -- I mean, all wealth businesses are doing well. So you really have to get under the covers and look at market share, in my view. I think the fortunate thing we had with wealth, we had actually a great wealth franchise to begin with. And so Glen Gowland, who ran this business had ran a very strong wealth business. When Jacqui came in, I think she took it to the next level, particularly as it relates to growth in terms of growing the sales force and growing our aspirations, particularly as it related to international and the ability to connect our international client base to the overall wealth franchise. And then particularly as it relates to connection with the Canadian bank. And if you look at the Canadian bank, I think our referrals are $14 billion this year, which is up from $11 billion last year. Our commercial referrals are $4.5 billion this year, which is up 33% to last year. And we've added, as I said, 800 FTE kind of on the frontline sales force to allow us to generate net inflows. So not just market growth, but actually net assets coming in. Year-to-date, we've already achieved what we had last year. So by the third quarter, we're already where we were last year. And as you mentioned, when we started this journey, we were sixth, and I thought we were going to get second this quarter. We were right on the cusp with second. We actually ended up third. But this has been like quarter-by-quarter, just closing the gap with our competitors. And so Wealth is a great story. CAGR of Wealth for the last 3 years, 17% earnings. And so as I think forward, it's a 10% to 15%, 20% ROE business. That becomes more and more of the overall bank from an earnings perspective, that also helps the ROE significantly.

Thanks for that. Maybe switching to International Banking. Obviously, this segment has had some really good traction in the last couple of years. And you've now -- I think excluding the one-off file in Brazil, it would have been a 16.5% ROE in the quarter. And I think what's been clear is that it's the expenses and the optimization have driven that. And the question I get from a lot of investors is, what's the sort of -- what's the next leg of growth? I know it's not going to be a focus on volume. So we're not just going to focus on balance sheet, but what sort of drives that next leg for International is what a lot of investors want?

Yes. So when we started, I mean, all these countries were operated separately. There was a volume-based approach, it was not necessarily focused on high value and affluent. And so the first step was just getting hold of it and optimizing it. And our view is we had enough capital in the business. We now needed to drive better returns on that capital. And Francisco and the team have just done a fantastic job. I mean the cost reduction that's come out of that International Bank on the back of regionalization is amazing. I think he committed on Investor Day to $800 million. I would be shocked if we weren't at that number already, which has driven 13% ROE to 16% ROE. Now we've talked a year ago about the pivot to growth, like how do you actually start growing that business. And that's harder, by the way, than cost reductions. But if you look at this last quarter, you saw 11% revenue growth, 11% earnings growth. You saw non-mortgages growing at twice the rate of mortgages. You saw deposit growth of 6%. You saw primary client growth of 10%. And we're just getting started on this global capital markets opportunity. I mean I just told you about the Jamaica opportunity. That's our first ever. When you think about deploying that type of capability into our International Bank. So my expectation is that we can continue to improve the ROE. I think it's going to be step by step. So I wouldn't expect big changes necessarily next year. We're also dealing with a little bit more capital deployed because of the transition from standardized to AIRB from a models perspective. But I think this business over time can be 18% ROE. That should be our kind of our objective. So if you have this business growing at 7% or 8%, expenses growing at 4%, earnings growing at 10% and ROE going from 16% to 18%, I think that now becomes a much more compelling proposition for our investors as a part of the portfolio. And the other thing we need to keep in mind is relative to when we started or the last 10 years, the whole backdrop has become much more constructive. This is all left leaning governments. They now have mostly transitioned into pro-growth governments. Kast in Chile, Peru, new government, Colombia, probably a new government. And so you're starting to see growth in these countries as well. A couple of things that we've done on the portfolio side have been really helpful. I mean the Davivienda trade that we did has, I think, taken what was a drag from a Colombia, Central America perspective and made it additive from a growth perspective. And so that has been helpful. And now we just need to get Mexico growing. When we can get Mexico growing and we can get comfortable with USMCA as it relates to Mexico, then I think we can deploy more capital into Mexico. We've been hesitant to do too much of that until we get more certainty on the overall macro, but that would be the objective over time.