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

Good morning. We're going to get started here. I'm Brian Morton with I cover Canadian and Latin American banks here at Barclays. We're very pleased to have with us Aris Bogdaneris. He's the Group Head of Canadian Banking with Bank of Nova Scotia. Welcome, Aris.

Great to be here.

Thanks for coming back. Great. Let's start with the macro backdrop. Tariff and trade policy uncertainty is once again kind of clouding the outlook for Canada's economy. How are your customers preparing for the potential of another round of higher tariffs? And to what extent could the build Canada initiative help offset these pressures?

Well, before I get to that, I just want to just mention 2 years ago, I was on this stage, and we talked about early in my tenure, we talked about the plans we had for Canadian Banking. And at that time, I laid out the strategy really about building the foundation and focusing on primacy in Fast forward 2 years, and we'll talk about it, I'm sure we're making really strong progress across all the dimensions we talked about. And I'm very pleased to be here again. And on your question on tariffs. So what are we seeing on tariffs? Tariffs aren't nearly a year ago, we've been dealing with tariffs for the last year and all the noise around it. What we've seen in our commercial bank is our clients are very resilient, and they find a way to keep going and adjust. And we're seeing actually the strongest pipeline deal pipeline we've seen in a long time in our commercial business. On our retail side, we're also very vigilant. We're watching which clients are vulnerable and are close to them, of course. But we're managing. And I think the investment summed this week by our Prime Minister this week is a very important month for Canada in terms of gathering the interest around investment. We saw the GDP figures also recently a very strong. So by and all, we manage and we continue to be vigilant and we're confident that we can continue to build the business, and we're seeing it.

Actually, just coming into -- I saw there was a press release came across that Bank of -- no Scotia is committing $100 billion to Canadian industry -- can I talk about kind of like the timing of that and thoughts about that and maybe opportunities where you could not just do the lending committee -- lending commitments, but just expanding the relationship with your kind of Canadian domestic partners?

Right? So particularly in oil and gas, defense, we're already heavily engaged with our clients in that area. Obviously, the commitment we're making is not only on our current book, but also going forward, and we're obviously building up our presence in Western Canada in the areas and regions we believe, benefit from this commitment. So -- we're very confident that this will be a big plus for our bank and big plus for Canada, and we're going to be right lockstep with that.

Great. And I want to go back to -- you talked about you were out on the stage 2 years ago and kind of laying out the strategy. I think part of that strategy was getting to a 24% ROE for Canadian Banking. After some most compression in 2025, partly due to the PCLs, you've seen some RI expansion has been stronger so far 2 -- maybe kind of talk about what were the key drivers? And what are the key drivers of further improvement? And how are you thinking about that time line to reach the 24%?

So as you saw in the third quarter, the results very visible on the progress we're making. And that progress didn't happen last quarter. It's been a combination of 2 years of effort across the entire Canadian bank. And the effort really is about building a more diverse business, a business that's focused, first and foremost, on driving primacy with their clients versus volume and market share. And third, bringing in a culture of discipline and consistency. And the ROE expansion that we saw in the third quarter driven by 4 key levers, which will continue into the foreseeable future. One is the business mix changing the business mix, moving from being a mortgage kind of driven bank to diversified bank that gets diversification, not just in mortgages, but in small business, commercial banking, credit cards and diversifying the asset side; second, diversifying the liability side. And when I talk about liabilities, I talk about the whole savings rainbow moving from just GICs to day-to-day savings and investment funds. We're seeing that business shift happening. Having a very strong impact on NIM and revenues. The second aspect is improving the RAM, the risk-adjusted margins, particularly in our mortgage and auto business, which is 70% of our loan volume. There's a huge repricing going on in our mortgage book this year and next year, almost in the tune of $80 billion in mortgages going to be repriced. Some of these mortgages were booked 5, 3 years ago at thin spreads, there'll be a huge ramp opportunity also in auto where we see lower RAM cohorts falling off and new business being booked. So the whole RAM improvement and being very disciplined on our pricing will have a big uplift in ROE, particularly in F'27. The third aspect, and you should have seen it in the results, the growth in fees -- we've historically punched under our weight in fee income. That's about to change. And we've seen it in the last 2 quarters where fee revenue is actually growing above 20%, driven by card fees, mutual fund fees and insurance. We want to continue along this time because we know that in terms of ROE accretion, fee income is very important. And more surprised finally, the fourth lever is productivity. And when we talk about productivity, what I mean by productivity is about how we're changing the channel mix, less physical, more digital, how we're adding salespeople, how we're reducing nonsalespeople. -- how we're actually reducing the FTEs you have in the bank yet growing sales? Between those 4 levers, you'll see ROE not only going up, as you mentioned, NIM expanding 5 quarters in a row Op lib, improving 4 quarters in a row, RAM improving 11 points year-on-year. Fee income above 20%, and we're growing non-mortgage lending faster than mortgage lending for the first time in 2 years. So all this put together is driving that ROE expansion that you saw in the third quarter and the second quarter, and we'll continue to see going forward.

You mentioned primacy twice now. I know it's an important theme that came back from at Investor Day. And you're really talking about closing the gap with peers. Maybe talk about kind of the initiatives. What are you doing to deepen the primary relationships with retail customers and which initiatives should move the needle from here.

Right? So I think the most important element when we talk about primacy is in the whole day-to-day account space and how you build primacy through your day-to-day and how you attach bundles and multiproduct when you are selling your day-to-day or checking accounts, that's the first. But I think the good illustration would be in our mortgage business. where historically, we've run a mortgage business that was a single product business where we were building up balances and spreads would vary depending on the cycle. For the last 2.5 years, we've completely pivoted. And for us, the mortgage business now is an anchor to primacy. And what I mean by being an anchor to primacy is today, 95% of the inflows of our mortgage business comes with a mortgage plus bundle, 3-plus products. And this is very different from how we operated before. So you can imagine when you do a mortgage -- you now get the day-to-day, you get the card and then the additional product could be a savings or investment. And that has driven 10% additional day-to-day volume coming through the mortgage store, 10% more credit card volume coming through that door. And interestingly enough, our mortgage clients are more affluent than our general client base. So these day-to-day accounts hold higher balances and are stickier. And our card accounts that come to our mortgage business have higher purchase volumes, higher balances -- so this is now how we're using our mortgage business to drive primacy. And today, only 13% of our mortgage balances are single product customers. That's very different from years ago. And that's just 1 example. But this idea of privacy has to be at the point of sale and where we're integrating the client view in terms of our incentives, in terms of the way we measure people. All this is helping drive a higher NIM and higher revenue.

Excellent. And then I want to touch on loan growth. Loan growth has been healthy year-to-date, particularly in cards and mortgages. On cards, how are you driving greater usage among retail customers? And alternatively, is this the right point in the cycle to lean into growth with unemployment still elevated?

Right. I think we -- just talking about the cycle. Early in the cycle and saw deterioration, we actually derisk the portfolio more than a year ago. We're also seeing that now in the improvement in the PCLs in our card book. But I think more importantly, our card business is a very interesting business. It's relatively small compared to the other banks and doesn't -- we don't punch our weight when we look at our other products like mortgage or deposits in terms of comparison. But we saw a huge opportunity in our card business to rebuild the card business and help us drive primacy, what do I mean by that? We bought an entirely new team and we launched what we call Brilliant Basics. And I think what's important, if you ever run a card business is how you have to get the whole value chain connected. That's what we've done. Senior people coming in with card expertise and connecting the value chain Second, we've now attached our card product to the different bundles we offer on day-to-day and mortgage. And there's been a whole what I call premiumization of our card business. What do I mean by that? 45% of all new card acquisitions are what I call premium card clients. That's a far cry from how we've done it before. We're also leveraging seem plus, our $15 million strong loyalty program and tapping in to that rich value proposition where we have gas, groceries, entertainment, dining, travel, actually increase engagement for our card users. This is an important driver of our card growth and continuing. We're seeing improvements in RAM. We're seeing increased card balances, and we're seeing the fees growing higher than 20% because of the premium nature of our card business now. It's been a big change. We still have room to go to close the gap with some of our peers. But this is going to be a big driver of revenue growth, RAM improvement and obviously, ROE over time. PCLs, as I mentioned earlier, are coming down quarter-after-quarter. A lot of effort is on, but we've derisked the portfolio, and we're targeting different types of clients than we did in the past.

Great. And then maybe touch to like on our mortgages, are you still adding mortgage assets at attractive margins in this rate?

I think that's what I'm most proud in the discipline we showed -- on our mortgage business in terms of pricing, those days are gone, where we're going to fight for market share and lower prices and mortgages to compete on market share. We've actually grown in line with the market this year, and we will roughly 4% mortgage growth this year. But what's important is what I mentioned earlier about how the mortgage is not a stand-alone product simply to grow, but a key enabler to driving primacy and multi-product -- multiproduct acquisition. Our ROEs in our mortgage business have improved, our margins have improved, but we're going to stay disciplined and focus on the renewal we see $75 billion to $80 billion in mortgage renewals are coming up in F '27. There's been a substantial number of renewals, I think, $35 billion in '26, where we're focused on retaining those clients -- we've already paid the acquisition cost, and now the ROE becomes very attractive if you retain them. Here is where we will look at margin, but in the context of the entire relationship. And that's what's important of moving from a product view of margin and returns to a client lifetime view. And that's the change we've brought to the bank also to, again, our mortgage business.

Great. Turning over to the commercial banking side. We can kind of touched on this a little bit earlier, but how is the business positioned to benefit from the Build Canada initiative -- and could that translate into an acceleration in the loan growth as we move into 2027?

Our commercial business is an important business for us. And I think over the last 2 years, what we focused on is, I guess, 2 things. We've put boots on the ground, first and foremost. We've added substantial sales capacity in our commercial business, but primarily in the mid-market segment, which is a rich source of deposits and cash management opportunities and also in the small business segment. So first and foremost, invest in sales, done that. Second, invest in the capabilities in mid-market in those areas that are growing in Canada, you talked about the initiative of Canada in the Prairies, BC and Quebec, where we've been light with boots on the ground, we've added substantial sales capacity in mid-market. The pipeline that we've now built over the last 2 years with this new sales power is starting to materialize, and you're seeing that in the growth in the second quarter, third quarter, and it will continue as this pipeline materializes. And of course, the opportunities around defense, oil and gas energy, again, in parts of the country, we're going to be well positioned with our sales force there and our capabilities to take advantage and support the Canadian economy and be there where the clients need us. So I think on the commercial side, we've also seen the PCLs come down 5 quarters in a row. We have our coverage ratios at the highest level that we've ever had. And I think this will be a motor for us for growth, not only the mid-market, but also the small business, which is growing lending 10% year-on-year. which we don't talk about much. But again, these 2 areas are areas where we're going to focus on and continue to grow, which will also help the NIM, help the ramp and help our overall profitability.

Great. And another thing I'm curious about, too, is earlier, I guess, in the summer, we saw the OSFI lowered the domestic stability buffer 50 basis points to try to spur on lending -- any thoughts on -- how does that change the way you go to market or how you apply capital to kind of different lending relationship?

I mean for us, we have strategy. We understand the businesses we're in. We understand our clients. We drive privacy. We are not now -- we focus on the demand of our clients, the needs of our clients. We know the sectors that we operate in very well. We know the clients are well, we understand the risk reward very well. So it's not something now that we have more capital to deploy that we start to loosen or whatever, we stay disciplined. Now at the margin, could it provide some opportunity? Yes, but it doesn't change much to be honest for us because these are demand-driven and not supply driven for us in terms of how we run our business.

Great. And then switching from loan growth over to deposit growth and you kind of see deposits have kind of lagged a little bit here. We talk -- were there any specific headwinds in this year to deposit growth? And then looking ahead, do you think you can continue to grow deposits in a potentially rising rate environment?