Bank of Nova Scotia Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 27, 2024

There are 10 speakers on the call.

Operator

Good morning, and welcome to Scotiabank's 2024 Third Quarter Results Presentation. My name is John McCartney, and I'm Head of Investor Relations here at Scotiabank. Presenting to you this morning are Scott Thompson, Scotiabank's President and Chief Executive Officer Raja Swannathan, our Chief Financial Officer and Phil Thomas, our Chief Risk Officer. Following our comments, we'll be glad to take your questions. Also present to take your questions are the following Scotiabank executives: Eris Bogdanaras from Canadian Banking Jack Gillard from Global Wealth Management Francisco Aristegueta from International Banking and Travis Machen from Global Banking and Markets.

Operator

Before we start and on behalf of our those speaking today, I'll refer you to Slide 2 of our presentation, which contains Scotiabank's caution regarding forward looking statements. With that, I will now turn the call over to Scott. Thank you, John, and good morning, everyone. We are pleased to share our Q3 results, which demonstrate another quarter of progress and focused execution against our strategy. Through a challenging market environment, we achieved quarter over quarter EPS growth and continued positive operating leverage.

Operator

Our results reflect the strength of our balance sheet, while demonstrating revenue acceleration led by performance in our Canadian Banking business and ongoing positive momentum in Global Wealth. Importantly, we are seeing the profitability benefits of our shifting focus from volume to value. Let me take a moment to recap a few key enterprise initiatives. Personal and commercial deposit growth. We remain laser focused on developing primary client relationships.

Operator

And while we expect this to be an ongoing and incremental journey, we are well underway with P and C deposit growth across our Canadian and international retail is up 7% on a year over year basis. Since we started this journey 18 months ago, deposits on our Canadian Banking business are up $43,000,000,000 Capital discipline. We are deploying our incremental capital to our priority businesses in line with our medium term objectives. We are starting to see the benefits of this repositioning with strong revenue and earnings growth in Canadian Banking and Wealth and a sharpened focus on returns in GBM and International Banking. Today's results demonstrate our ability to generate earnings growth while focusing on disciplined capital deployment to priority client segments.

Operator

Cost and process efficiencies. Our efforts to increase our productivity will be an important contributor to meeting our medium term profitability metrics. All bank positive operating leverage driven by cost discipline in Canadian International Banking will be an important driver of results going forward. And finally, maintaining a strong balance sheet remains a high priority. Through the challenging rate environment over the past 18 months, we have strengthened our balance sheet with CET1 capital, ACL coverage and liquidity metrics all at significantly improved levels.

Operator

Turning to our Q3 results, the bank reported adjusted earnings of $2,200,000,000 or $1.63 per share in the quarter. The bank delivered solid top line revenue growth again this quarter, driven by higher net interest income and non interest revenue. We are realizing on the productivity initiatives that are already underway at the bank. Specifically in our international and Canadian retail businesses, our productivity ratios improved by 210 basis points and 130 basis points respectively on a year to date basis. Credit costs are at the high end of our previously communicated range as we see the impact of sustained higher rates on our retail portfolios.

Operator

In our international markets, we expect to see credit conditions begin to stabilize in response to the monetary easing over the past few quarters. And we remain focused on delivering favorable risk adjusted margins and returns. Despite higher credit costs, it is important to note that risk adjusted margins have trended higher year to date in both Canadian and International Banking. Loans grew sequentially in the Canadian Bank, in line with our strategic objective to deploy capital to our priority businesses and with our profitable primary relationships. Loan balances trended lower in International Banking and GBM.

Operator

This lending discipline, coupled with early success and what will be a relentless ongoing effort to strengthen our deposit franchise is already showing clear progress. Our wholesale funding requirement has been reduced over the past year by $33,000,000,000 resulting in a 2 50 basis point reduction in our wholesale funding ratio. A few performance highlights across each of our businesses. We were pleased with the strong performance of our Canadian Banking business, which delivered $1,100,000,000 of earnings in the quarter, up 6%. Pre tax pre provision earnings grew 11% year over year.

Operator

We're making good progress towards our medium term $1,000,000 new primary client growth objective in domestic retail and $500,000 primary client growth target in Tangerine. Year to date, we've added 143,000 net new primary clients in our Canadian Retail and Tangerine franchises. Although balances in the Canadian residential mortgage portfolio are down slightly year over year, we have clearly reached an inflection point as we've seen the success of our multi product mortgage plus offerings result in sequential residential mortgage growth. Specifically, 82% of mortgage originations in Q3 were mortgage plus offerings with new clients, averaged an additional 3.1 products. Mortgage portfolio retention rates have also improved 190 basis points year over year to over 90%.

Operator

Enhancing the profitability of our Canadian banking franchise will be a key driver of shareholder value creation. I was encouraged by the sequential 150 basis point improvement in Canadian Banking return on equity this quarter. Global Wealth delivered a very strong contribution of $415,000,000 this quarter as a result of continued franchise momentum in our Canadian wealth business, led by growth in our advice channels as well as double digit growth from international wealth. Our Canadian wealth management advisory businesses saw a 19% increase in earnings year over year, led by very strong performance from Scotia McCloud and Private Banking. We continue to invest in advisor growth and technology within Scotia McCloud and have recently achieved a record assets managed in that channel.

Operator

Our total wealth approach to providing full client solutions is driving growth in assets and relationship depth with new and existing clients. Financial plans in place, for example, which we know reflects stronger importantly better outcomes for our clients are up 29% year over year. Stronger collaboration and client cross sell were highlighted as a clear priority for our domestic businesses at our Investor Day. We've seen good success in terms of the partnership between our businesses, driving a 21% year to date increase in closed referrals from the Canadian Retail Bank to our wealth business. These are tangible, measurable metrics that confirm our advisors are working more successfully with their clients and with partners across our organization to bring more value to those clients.

Operator

We expect to see similar significant benefits from the partnership between Global Wealth and our Commercial Banking business going forward. In our Global Banking and Markets business, we reported solid earnings of $418,000,000 this quarter despite lesser activity in the Capital Markets business, offset by stronger corporate banking and U. S. Business results. I have been impressed by GBM's ability to substantially earn through the headwind created by the elimination of the dividend received deduction this year.

Operator

We were encouraged by strong growth in our fee businesses. Underwriting and advisory fees were up over 30% on both a year over year and year to date basis, benefiting from the continued build out of our product capabilities in the U. S. Capital Markets business. A critical component of our client primacy strategy is a more connected transaction banking capability across our primary markets to generate higher deposit growth.

Operator

Scotia Connect, our new cash management platform will elevate our capabilities in both Mexico and Canada with our focus now squarely on enhancing capabilities in the U. S. To make it easier for our multinational, corporate and commercial clients to do business with us. In our international banking business, we delivered strong earnings up 6 percent or 9% PTTT growth year over year, representing a solid 14% return on equity despite elevated credit costs and more normalized GBM LatAm results compared to prior quarters. We continue to reposition capital deployed within our international footprint.

Operator

Customer deposits grew 4% year over year, while loans were managed 2% lower. The resulting loan to deposit ratio in international banking was down 9 points 126% over the period. We are pleased with the early results of our productivity efforts, expense control and capital repositioning in this business. We are confident that the retail client segmentation initiatives underway and our plans to develop a more regional standardized operating model will position our international banking business well for improved efficiency and greater profitability going forward. Our international banking business is doing more with less, generating impressive earnings growth with lower capital deployed.

Operator

Since the beginning of the year, risk weighted assets deployed by the region are lower by $6,700,000,000 Turning to the current economic environment, interest rate increases over the past 2 years are now weighing on consumers and to a lesser extent on our commercial and corporate clients. In Canada, we expect the economy to improve modestly in response to further monetary easing, but remain below average historical growth rates for the foreseeable future. We do expect policy rates in Canada to trend gradually lower into mid next year, providing welcome early relief to the Canadian consumer and driving a likely rebound in home and vehicle sales activity. U. S.

Operator

Data in recent weeks has resulted in a repricing of the entire yield curve, suggesting much lower policy rates in the near term than were expected a few months ago. This will be a benefit to our earnings in 2025. The larger economies in our Latin American footprint are all now well into a period of monetary accommodation. Central bank policy rates in Chile at 5.75 percent and Peru at 5.5 percent have continued lower from double digit levels last year and Mexico and Colombia have more recently lowered policy rates as well. The LatAm region has experienced relative political stability and stronger growth than anticipated this year because of proactive policy action this cycle and should benefit further going forward from a strengthening global economy.

Operator

We are not anticipating recessionary conditions in any of our key operating geographies in the foreseeable future. In closing, I would like to provide a few additional thoughts on the recent announcement of our agreement to purchase an approximately 14.9% interest in KeyCorp, a leading U. S. Regional commercial focused banking franchise. This investment is consistent with our commitment to reallocate capital from developing to developed markets with a focus on the North American corridor.

Operator

Our investment in KeyCorp represents a low cost, low risk approach to deploying capital in the U. S. Banking market at a time when valuations are favorable and as the regulatory and competitive environment evolves. The additional primary capital will allow KeyCorp to optimize their balance sheet and be more front footed in growing their business, which will also result in increased income to Scotiabank over time. This capital efficient transaction is expected to add greater than $0.25 to EPS in the 1st full year of ownership and approximately 45 basis points to Scotiabank's return on equity.

Operator

Given both confidence in our capital plan and greater clarity on future capital requirements, we evaluated a range of capital deployment options, including share buybacks. The investment in Key is 65% more EPS accretive than the buyback alternative and 20 basis points better from an ROE perspective. The capital impact of a full transaction will be approximately 50 to 55 basis points. We believe that in the current environment, a 12.5% CETI-one ratio represents an appropriate capital level at which to run the bank, 100 basis points above the regulatory minimum. Therefore, shareholders need not be concerned about Scotiabank holding excess capital as we continue to execute on our North American corridor strategy.

Operator

Our investment in Key is financially attractive to our shareholders in the near term and adds strategic value in terms of optionality on future U. S. Platform growth in the long term. It is also important to note that our organic growth plans within our well established U. S.

Operator

Global Banking and Markets business remain unchanged. We continue to enhance our U. S. Capital Markets product offering in highly rated market segments. Our recent mortgage capital market team hire within our structured credit business is the most recent example.

Operator

In summary, I am pleased with the bank's results this quarter in terms of delivering positive earnings progression, while at the same time building balance sheet strength despite a challenging economic backdrop. We are making measurable progress against our strategic plan and our performance in 2024 sets a strong foundation for the resumption of organic earnings growth in 2025 in line with our Investor Day commitments. With that, I will turn it over to Raj for a more detailed financial review of the quarter.

Speaker 1

Thank you, Scott, and good morning, everyone. All my comments that follow will be on an adjusted basis, which exclude the following items. The loss mostly relating to goodwill associated with the sale of Credit Scotiab, our consumer finance business in Peru, which the bank expects to receive regulatory approval in fiscal 2025 a legal provision related to certain value added tax assessed amounts relating to certain client transactions that occurred prior to the bank acquiring the Peruvian subsidiary and the usual acquisition related intangible amortization amounts. Moving to Slide 6 for a review of the 3rd quarter results. The bank reported quarterly earnings of $2,200,000,000 and diluted earnings per share of 1.63 dollars Return on equity was 11.3 percent and return on tangible common equity was 13.7%.

Speaker 1

Revenues were up 5% year over year as net interest income grew 6%, driven by net interest margin expansion, while non interest income grew 4% year over year. The Allbank net interest margin expanded 4 basis points year over year. Margin was down 3 basis points quarter over quarter, driven mainly by lower margins in International Banking and Canadian Banking as well as higher levels of low yielding liquid assets. We expect the margin to modestly improve in Q4 and expand beyond Q4 as the benefits of the rate cuts are fully realized. Non interest income was $3,600,000,000 up 4% year over year primarily from higher wealth management revenues, underwriting and advisory fees and the positive impact of foreign exchange.

Speaker 1

The provision for credit losses was approximately $1,100,000,000 and the PCL ratio was 55 basis points, up 1 basis point quarter over quarter. Expenses grew 5% year over year driven by higher personal costs from inflationary adjustments and amortization and other technology related costs that support business growth. Quarter over quarter, expense were up a modest 1% driven by amortization and other technology related costs and professional fees. The productivity ratio is 56% this quarter, in line with the prior quarter and year to date operating leverage was a positive 0.9%. Moving to Slide 7, which shows the evolution of the CET1 capital ratio and risk weighted assets during the quarter.

Speaker 1

The bank CET1 ratio was 13.3%, an increase of 10 basis points quarter over quarter and 60 basis points year over year. Total risk weighted assets was $454,000,000,000 up from $450,000,000,000 in the prior quarter driven by growth in balance sheet assets and undrawn commitments, book quality changes that were partly offset by lower market risk. Earnings contributed 16 basis points. The DRIP contributed 11 basis points and the revaluation of securities through OCI contributed a further 7 basis points. This was offset partly by higher risk weighted assets consuming 11 basis points and FX and other impacts of another 11 basis points.

Speaker 1

As a reminder, the Q3 dividend that the bank announced this morning will be the last dividend eligible for the DRIP discount. Turning now to the business line results beginning on Slide 8. Canadian Banking reported earnings of 1,100,000,000 dollars an increase of 6% year over year as higher revenues were partly offset by higher loan loss provisions and expenses. The business generated another quarter of positive operating leverage resulting in year to date positive operating leverage of 3.1%. Average loans and acceptances were up 1% quarter over quarter and roughly in line with the prior year.

Speaker 1

Business loans grew 7% year over year, credit card balances grew 16%, while residential mortgage balances declined 2%. We continue to see deposit growth as year over year deposits grew 8%, including an increase in personal deposits of 5%. The loan to deposit ratio improved to 120% compared to 129% in Q3 2023. Net interest income increased 11% year over year, primarily from solid deposit growth, margin expansion and the benefit from conversion of bankers acceptances due to the cessation of SEDAR. Net interest margin expanded 16 basis points year over year, driven by higher loan margins and favorable changes to business mix.

Speaker 1

Margin was down 4 basis points quarter over quarter as asset margin expansion was more than offset by lower deposit margins, reflecting the impact of rate cuts and mix shifts. Non interest income was down 1% year over year, primarily due to lower banking fees impacted by the bankers' acceptances converting to loans, partially offset by higher deposit and mutual fund fees and insurance revenue. The PCL ratio was 39 basis points, down 1 basis point for Q3. Expenses increased 5% year over year, primarily due to higher technology, professional and personal costs. Quarter over quarter expenses grew a modest 1%, primarily due to the impact of 2 more days in the quarter, higher professional fees that were offset by good expense management controls.

Speaker 1

Turning now to Global Wealth Management on Slide 9. Earnings of $415,000,000 were up 11% year over year, driven by higher brokerage revenues and net interest income in Canada and higher mutual fund fees across the Canadian and international wealth businesses, partly offset by higher expenses, largely volume related. Quarter over quarter earnings were up 7% primarily due to higher brokerage revenues and mutual fund fees and net interest income partly offset by higher expenses. Revenues of $1,500,000,000 were up 10% year over year driven by higher brokerage revenues and net interest income as well as higher mutual fund fees driven by AUM growth. Expenses were up 9% year over year due to higher volume related expenses, sales force expansion and higher technology costs to support business growth.

Speaker 1

The spot AUM increased 10% year over year to $364,000,000,000 as market appreciation was partly offset by net redemptions. AUA grew 10% over the same period to $694,000,000,000 from market appreciation and higher net sales. International Wealth Management earnings of $68,000,000 were up 11% year over year driven by higher mutual fund fees primarily from Mexico and strong deposit and loan growth across Latin America. Turning to Slide 10, Global Banking and Markets generated earnings of $418,000,000 down 4% year over year, significantly impacted by the denial of the dividend received deduction. Capital markets revenue was down 8% year over year, primarily from lower fixed income revenues that were partly offset by higher FX.

Speaker 1

Quarter over quarter, capital markets revenue was down 5% from lower fixed income revenues partly offset by higher equities and foreign exchange revenues. Business banking revenues grew 8% year over year and 9% quarter over quarter due to higher corporate and investment banking, including higher underwriting and advisory fees. Loans and acceptances were down 5% quarter over quarter to $109,000,000,000 reflecting market conditions and management's continued focus on balance sheet optimization. Net interest income increased 16% year over year, primarily due to higher corporate lending and deposit margins and higher loan fees. Non interest income, however, was down 4% year over year due to lower trading related revenue, including the impact from dividend received deduction, partly offset by higher fee and commission revenues.

Speaker 1

Expenses were up 5% year over year due mainly to higher personal costs and technology costs to support business growth as well as the impact of foreign exchange. Quarter over quarter expenses were up a modest 2%, largely driven by higher personal costs. The U. S. Business generated strong earnings of $244,000,000 up 12% year over year driven by higher corporate and investment banking revenue, equities revenues and lower funding costs, partly offset by higher expenses.

Speaker 1

GBM Latin America, which is reported as part of international banking, reported earnings of $285,000,000 down 9% compared to the prior year and down 2% compared to the prior quarter. Moving to Slide 11 for a review of International Banking. My comments that follow are on an adjusted and constant dollar basis. The segment delivered earnings of $674,000,000 that was up 6% year over year. Revenue was up 6% year over year as net interest income was up 7% mainly in Chile, Mexico and Peru.

Speaker 1

Net interest margin expanded 33 basis points year over year. NIM was down 5 basis points quarter over quarter mainly due to lower inflation benefits in Chile and the impact of rate cuts that reduced asset margins in excess of lower cost of funds. Year over year, loans were down 2%, primarily in Chile and Peru. Total business loans declined 7%, partly offset by 5% growth in residential mortgages. The deposits grew 4% year over year, primarily in Mexico, Chile and Colombia.

Speaker 1

Non personal deposits grew 5%, while personal deposits grew 1% year over year, mostly term. The loan to deposit ratio improved to 126% from 135% in the prior year. The provision for credit losses was $589,000,000 translating to 139 basis points, up only 1 basis point quarter over quarter. The expenses were up 4% year over year, driven mainly by higher salaries and employee benefits and technology costs. Quarter over quarter expenses were flat as the business continues to see the benefits of restructuring, prudent expense management and the focus on regionalization that offset the challenges of operating in a high inflationary environment.

Speaker 1

Year to date operating leverage was a very strong positive 4.6%. Turning to Slide 12, the other segment reported an adjusted net loss attributable to equity holders of $465,000,000 compared to a loss of $421,000,000 in the prior quarter. Net interest income was in line with last quarter and is expected to improve going forward benefiting from rate cuts. The non interest revenue declined mainly due to lower non interest revenue and higher expenses. I'll now turn the call over to Phil to discuss risk.

Speaker 2

Thank you, Raj. Good morning, everyone. All bank PCLs were 55 basis points, slightly above last quarter and are expected to remain around this level for Q4. As we look to finish 2024, we continue to maintain our prudent approach and respond to the responding to the evolving macroeconomic landscape, but we are encouraged by the following trends. Stable delinquency rates in Canada despite elevated unemployment and household expenses.

Speaker 2

Flat net write offs in Guild quarter over quarter in international banking despite a mixed macroeconomic environment. Healthier balance sheet for our borrowing clients with both quarter over quarter and year over year deposits growing faster than loans. The resulting all bank PCL of approximately 1,100,000,000 dollars was up $45,000,000 quarter over quarter. We continue to maintain sufficient allowances for credit losses. Over the last four quarters, we have increased total allowances by approximately $800,000,000 of which $500,000,000 was for performing loans, bringing our ACL coverage ratio to 89 basis points, up 11 basis points from last year.

Speaker 2

Canadian Banking PCLs of 4 35,000,000 dollars were up a modest $7,000,000 but down 1 basis point quarter over quarter as increased provisions for performing loans were partially offset by lower impaired provisions. Canadian Retail PCLs were flat quarter over quarter with decreased impaired provisions offset by an $84,000,000 performing build. Canadian retail clients continue to show resilience and are managing their budgets prudently as discretionary spending hovered around 20% of total spending for the last 6 quarters. Expected rate relief will serve as a tailwind. Product performance remains strong in the meantime.

Speaker 2

The number of tail risk clients in our mortgage portfolio continued to improve sequentially and represents less than 1% of our total retail loan balances. The bank has set aside allowances to cover expected losses on these accounts. 90 day delinquency in our variable rate mortgage portfolio has increased by a modest two basis points quarter over quarter. Our fixed rate mortgage portfolio has maintained a stable 90 day delinquency rate of 15 basis points and our variable rate mortgage performance gives us confidence in our book's credit quality. We are comfortable with the amount of allowances for the fixed rate mortgage portfolio.

Speaker 2

Turning to International Banking. International Banking PCLs were $589,000,000 translating to a PCL ratio of 139 basis points. Total retail PCLs were stable and in line with expectations. We are encouraged by the performance in our retail portfolio as delinquency remained flat quarter over quarter for the first time in 2 years. Our clients remain resilient given the macroeconomic environment in the region.

Speaker 2

We remain confident in our clients' resilience as central banks continue managing inflation across our footprint. The overall portfolio continues to perform as expected and we continue to remain within the top end of our outlook for the full year 2024. With that, I'll pass it back to John for Q and A.

Operator

Great. Thank you, Phil. Operator, could you please queue up questions?

Speaker 3

Thank you. The first question is from Ebrahim Poonawala from Bank of America. Please go ahead. Your line is open.

Speaker 4

Good morning. I guess maybe, Raj, for you, just around the net interest margin outlook. So I heard your comments earlier. If we get a series of rate cuts from the Bank of Canada, which is expected at this point, give us a sense of the trajectory of where you see both the Canadian NIM playing out over the next 4 to 6 quarters and the consolidated NIM? And I'm assuming the corporate segment has to play a role somewhere in there with wholesale funding costs coming down.

Speaker 4

Yes.

Speaker 1

Good morning, Ebrahim. Happy to do that. A couple of points before I start on where this would go. So we disclosed in our Analyst Day saying every 25 basis points is about $100,000,000 of benefit in the NII over the full fiscal year. To be clear, it doesn't go as equal each month, little bit back ended because of our assets and liabilities repriced.

Speaker 1

The second thing is, we have seen 2 rate cuts in Canada. In the full quarter, fundings reductions over there. As you know, most of these are on a 90 day repricing schedule. So we'll see some benefits in Q4 in the other segment, but we'll see the full quarter benefit starting from fiscal Q1 in fiscal 2025 and through. And likewise, for every rate cut that will happen both in Canada and the United States.

Speaker 1

Our current forecast is we should have 2 more rate cuts in Canada before the end of the calendar year and likely starting in the United States in September, 2 rate cuts for the remainder of the calendar year and 4 more rate cuts for 2025 and so on in both countries. So all of these benefits should show up in the other segment, as you point out. Even this quarter, if you look at the other segment, Ebrahim, the NII number, the loss is exactly the same as last quarter. So it's plateaued in our opinion and the benefits should start showing up starting next quarter. The Canadian Banks division NIM will continue to show some level of decline because deposit margins will go down in a declining rate environment as you know, but it will pick up as the asset repricing starts happening in line with the fixed rate mortgages, the schedule as 20252026, but likely towards the latter part of 2025.

Speaker 1

So that's the dynamic you will see in the business line. The international banking NIM, I suspect, will be around the range that we operated this quarter. And as you know, it moves around a little bit, multiple factors, different countries, inflation, many things that impact IP NIM, but I think it will be around the levels that you saw this quarter. So the summary would be, we should start seeing NII and NIM benefits modestly in Q4 and then see it accelerate through 2025.

Speaker 4

Got it. And I guess maybe a separate question, maybe for you Scott, the investment you made I think caught folks by surprise. Just I think to me the fact that Scotia was back to playing offense. And just was wondering if you could give us an update like the 2 core pieces in terms of the strategic sort of priorities. 1, give us a mark to market on where we are in improving the deposit franchise within Canada, like early signs of success like outside of rates coming down, What's actually happening from an execution standpoint?

Speaker 4

And then with Travis coming on in the Capital Markets business, is there kind of a heightened focus in terms of growing the U. S. Dollar business going forward? Thanks.

Operator

Sure. So there's 3 parts to that. So I'll start with the key investment. I'll give it to Eris on the deposit franchise. And then Travis, maybe you can talk about the fee business in the U.

Operator

S. So on the key investment, we've gotten increased confidence over the last quarter in terms of the capital site the capital peak in terms of what we need to run from a CET1 ratio with the Basel deferrals and frankly the strength of our balance sheet. And so we evaluated a whole bunch of redeployment options to capital. And the investment in Key was the most financially attractive and the best for our shareholders. And there's a page in the Investor Day, which highlights the differences relative to a share repurchase.

Operator

So that's 1st and foremost. I think the second aspect of that, however, is it's a low cost, low risk way to get into the U. S. Market in a market that's very uncertain right now, both from a political, regulatory and economic perspective. And so the ownership interest in Key, which you know has a 5 year standstill, allows us to dip our toe in the water, learn about the market and actually get the benefits of NII from developed market earnings over time, which has been part of the strategy in the North American corridor.

Operator

We are going to continue to focus and Travis will come to this on growing our U. S. GBM business, particularly through the fee side of that business. So with that maybe Travis you can start on outlook for the U. S.

Operator

Business then we'll

Speaker 5

come to Arizona deposits. Sure. This is Travis. Thanks for the question. As Scott mentioned, we see great opportunities in the U.

Speaker 5

S. Obviously, it's one of the largest markets we see, increased connectivity between our Canadian and U. S. Clients where we can capitalize on some of the fee opportunities that come across. And then you saw a week or so ago, we did announce an investment in a new team there.

Speaker 5

So as we start to build our expertise and our products, I think you'll see continued growth in the U. S. Above some of other markets within GBM. Harris, do you want to talk about the positive?

Speaker 6

Sure. We grew and it's kind of alluded to this. In the last year, we've added more than $28,000,000,000 in deposits to the Canadian business. And you see it primarily in the loan to deposit ratio has gone down I think from $130,000,000 to $120,000,000 or 8,000,000 or 9 point. And this is something I mentioned back at Investor Day about building a more balanced business and we start to see that now quarter on quarter.

Speaker 6

I think what I particularly want to highlight is in the Q3, we actually saw day to day banking balances grow and that is a new development, but is an offshoot of all the work we've done, whether it's booking our mortgage originating our mortgages and getting the mortgage plus and driving deposit first strategies and day to day banking strategies when we lend. We see it in the commercial banking business, small business, retail. And so you're starting to see day to day balances despite the difficulty in the market and in the consumer, we're seeing these balances grow. We added I think 60,000 net day to day banking clients in the Q3. So the strategy is working and it's a continuous focus of ours in all our channels to build this deposit day to day banking muscle and then lend on the back of it.

Speaker 6

I think today 56% of our mortgage customers have a day to day banking account and conversely 46% of our term deposit holders have a day to day banking account. So this continues to be the focus and will continue to be a focus going into next year and we'll build more product muscle, we'll build more incentives in the branch network. We're also of course focusing as I mentioned also during Investor Day to get more mutual fund sales out of our branch network and that also showing early signs of success. The mutual fund sales coming out of our branches increased on a gross basis 44% year on year. So again, this balanced business model we continue to push and we're seeing success and we'll continue going into the following quarters.

Speaker 4

Thank you very much.

Speaker 3

Thank you. The next question is from Gabriel Dechaine from National Bank Financial. Please go ahead. Your line is open.

Speaker 7

Good morning. On the international segment, I think you were saying that the margin is going to be kind of in and around this level for the foreseeable future. I don't know if you said anything similar about the loan loss ratio?

Speaker 2

Gabe, it's Phil. I hope you're well. Good to hear you. The we are as I said earlier, really encouraged by what we're seeing in IV. Gills flat, net write offs flat.

Speaker 2

So that's an early positive sign. I'll give you guidance into Q4 and then happy to come back next quarter and sort of give more clear guidance into 2025. But we're generally seeing things as I look into next quarter in line with this quarter.

Speaker 7

Okay. Now if I look further ahead and your loss rate now is kind of in line ish with historical levels. There's been obviously some volatility there over the years, but kind of eyeballing it looks at a normalized level, if you will. Yet your consumer portfolio, not the mortgage, but the mostly unsecured consumers is still nearly 20% below where it was in the pre COVID days. Just wondering why maybe beyond next quarter, if you factor in the rate cuts, you factor in the portfolio, the change to the portfolio mix, why that loss rate couldn't actually trend lower in the segment?

Speaker 7

Or is there some other factor I'm not considering?

Speaker 2

No, I think I mean, listen, you've done a thorough analysis there. Francisco and I have been very focused on developing high quality in our portfolios. We've been very focused on primary customer acquisition. We're focusing on sort of our mass and top of mass segments. And so we're encouraged by what we're seeing, Dave.

Speaker 2

And I think the there's more to come from me next quarter on outlook.

Speaker 7

Okay. I wasn't that thorough actually, but thanks for that. Have a good one. Thanks.

Speaker 3

Thank you. Next question is from Paul Holden from CIBC. Please go ahead. Your line is open.

Speaker 8

Thank you. Good morning. A couple of questions, maybe just continuing with international. I think if you look at the macro backdrop, particularly in Chile and Peru, seems to be improving. And then also there's a focus on the client primacy.

Speaker 8

So what I'm trying to figure out is, as the demand environment improves for loans, but put that against sort of your strategy, how should we think about balance sheet growth for international in 2025? Is this somewhere where balance sheet will still be flattish? Or can we expect some decent growth next year? Thank you.

Speaker 9

Well, thank you for the question. It's Francisco here. A couple of thoughts. The first is 2025 going back to our commitment in Investor Day was part of our transitional year. So you're going to see throughout 2025, as you've seen in 2024, the combination of a refocusing of our targeted penetration effort on existing relationships on particularly top of mass, emerging Aflac and Aflac, while an exercise of client deselection drives a reprofiling of our balance sheet.

Speaker 9

So the net effect has been an overriding reduction of RWA, all deliberate, all intended towards focusing on the right clients and the right returns. That exercise will continue throughout 2025, where we're going to be very deliberate on where we place balance sheet, both on retail, commercial and GBM, ensuring that we have a balanced relationship where lending is not the driver or the anchor, but rather the ability to transact on a day to day basis with our clients. So you will see on the commercial and GBM side a deliberate focus on cash management penetration. And on the retail front, it will be about a balanced relationship where payroll, investments, insurance and ultimately transactional credit drive the relationships. So you will see 2025 as a flattish balance sheet year just because of the net effect of deselection and refocusing of our portfolio.

Speaker 8

Understood. That's a helpful answer. Thank you for that. 2nd question, and I guess it's for Phil. If I look at Slide 34, it shows Canadian retail PCL trends.

Speaker 8

And what I see here is sort of I think it's suggesting that the impaired are actually starting to improve. Well, I think you're pretty conservative still on total provision. So does that suggest that at a point in time when macroeconomic forecasts are to improve, there's potential for performing allowance releases? Would that be a correct assessment? Thank you.

Speaker 2

It's a great question, Paul. And obviously, it's something we're spending a lot of time thinking about right now. I have to say, the numbers came in as we had expected quarter over quarter, but I continue to be impressed by how resilient the Canadian consumer has been through this period. The trade offs that they continue to make, we see that coming through our VRM portfolio for sure. I think I've been signaling auto stress in the auto portfolio for about a year now.

Speaker 2

And I was really encouraged this quarter to see we're finally stable as it relates to net write offs and in that portfolio. So have we turned a quarter? I mean, 1 quarter is not a trend, but I'm really encouraged by what I'm seeing for this quarter. And even as I look into next quarter, I see stability in these portfolios moving forward.

Speaker 8

Okay. That's it for me. Thank you.

Speaker 3

Thank you.

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Earnings Conference Call
Bank of Nova Scotia Q3 2024
00:00 / 00:00
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