Q2 2021 Bank of Nova Scotia Earnings Call
And as Ben.
Please standby your conference will begin momentarily to ask a question. Please wait for the monitoring this conference is being recorded.
Of course, the homes that don't have as you see.
Good morning, and welcome to the Scotiabank in 2020, 1 second quarter results presentation.
My name is Philip Smith, and I'm head of Investor Relations share at Scotiabank.
Presenting to you. This morning are Brian Porter Scotia Bank, President and Chief Executive Officer, Raj Viswanathan, Our Chief Financial Officer, and Daniel Moore, our Chief risk Officer.
Following our comments, we'll be glad to take your questions.
Also present and to take questions today of the following Scotiabank executives.
Can range from Canadian banking Glen Gowland from global wealth management, Nacho day shop from the international banking and Jake Lawrence and James Neate from global banking and markets.
Before we begin and on behalf of those speaking today I will refer.
And for you to slide 2 of our presentation, which contains scotiabank caution regarding forward looking statements with the.
I will now turn the call over to Brian.
Thank you Phil and good morning, everyone.
I wanted to make a few comments on the quarter before turning the call over to Raj, who will discuss the results in detail the <unk>.
Bank second quarter results announced earlier this morning reflect the steady improvement and our financial performance, along with stronger economic conditions and a more positive outlook across our footprint.
Our diversified business platform produced good earnings growth positive the year to date of the operating leverage of 3.4%.
And of higher ROE on both of them.
Over a quarter and a year over year basis, Canadian banking showed solid mortgage and commercial loan growth.
The wealth management produced double digit growth and earnings and AUM.
GBM reported another strong quarterly earnings contribution and the international banking continued its steady progress toward its run rate earnings target. We continue to see good operating momentum across the bank and I am encouraged by the steady month to month improvement in both business conditions.
And our results many of our businesses have yet to return to pre pandemic level of earnings, but we see a clear path to achieving this over the near term and.
In addition to the stronger financial performance of the bank strength and customer service and our commitment to ESG also stood out and the second quarter.
Our commitment to excellent customer service across all channels was recognized and the J D. Power 2021, Canada retail banking satisfaction study, where the bank rose to number 2 among large banks, while Tangerine was recognized as number 1 for the 10th consecutive.
Net of year, among mid sized retail banks.
Our focus on responsible environmental and social policy has also been recognized with the rating of AAA and the <unk>.
Sci ESG ratings assessment.
The rating held by only 2% of banks globally, we remain committed to the global efforts to reach net zero by 2050, and we are establishing bank wide quantitative time bound targets for reducing greenhouse gas emissions I will now turn the call over to Raj and to discuss the quarter and.
And more detail.
Thank you, Brian and good morning, everyone.
Before I begin I'd like to note that all of my comments.
And adjusted basis from the bank and our business line.
And last quarter of Ivo referred to quarter over quarter performance in many areas given the economic impact of the pandemic and 2021, reflecting the Q2 was the shorter quarter of a necessity.
I will begin with the review of all bank performance for the quarter on slide 5.
And the bank reported strong performance across key metrics of EPS growth return on equity operating leverage and cash.
Total earnings were $2.5 billion and diluted EPS was $1.90 for the quarter and increase in EPS of <unk>, 83% year over year and growing quarter on quarter, despite the shorter quarter.
All operating segments, Delaware strong results this quarter.
The return on equity continues to improve rising to 14, 9% from 44% last quarter about the bank's medium term objective.
Pre tax pre provision earnings improved 2 percentage year over year, driven by strong expense management.
Revenue declined 3% year over year are in line with last year, excluding the negative impact of foreign currency translation and the Canadian dollar strengthened against most currencies.
Net interest income was down 3% ex.
Excluding the impact of FX as the core buying banking margin declined 9 basis points year over year.
The year over year decline and margin was due to the central bank rate cuts and changes to business makes the most secured retail and highest commercial and corporate loan growth.
Quarter over quarter margin was down only 1 basis point in line with our expectations.
However, non interest income increased 1% with strong 11% growth in fee and commission income offset by lower trading revenues and lower investment gains.
The PCL ratio continued to decrease falling to 33 basis points for the quarter.
This represents a meaningful decline of 16 basis points quarter over quarter, and 86 basis points year over year.
Daniel will discuss credit metrics in more detail and Atlas discussion and based on the call.
We continue to manage the expenses prudently on a year over year basis expenses declined 7% of 1%, excluding the metals business charges taken in 2020 and divestitures.
This decrease was due to lower personal cost foreign exchange translation and lower the advertising business development and professional fees and some offset from higher performance based compensation costs.
Year to date expenses are down per cent.
The productivity ratio continued to decline falling to 51, 9% compared to 54% of year ago.
And the bank generated a strong positive year to date of and leverage of 3.4 per cent.
Yeah.
On slide 6 we provide and evolution of our common equity tier 1 and capital ratio over the quarter.
And the bank reported a strong CET 1 ratio of 12, 3%, improving 10 basis points from Q1, and 140 basis points from a year ago.
This was due primarily to strong internal capital generation offset by good growth and risk weighted assets.
Excluding the impact of FX risk weighted assets grew $6 billion.
Mainly from growth and business banking and retail mortgages and both Canadian and international banking the.
We also had additional benefits from pension re measurement and the quarter driven by high of the foundries and.
And the next quarter on our capital ratio will be impacted by approximately 25 basis points due to the increase and the CVA multiplier and the closing of the transaction to acquire 7% minority interest and Chile.
However, we expect the CET 1 ratio of the remainder of around the 12, 2% level for the rest of the year driven by strong internal capital generation.
Yeah.
Turning now to the business line results beginning on slide 7 and.
Indian banking had another strong quarter as the rebound in earnings continued with net income of $931 million up from 94% year over year and 2% quarter over quarter.
The year over year increase was driven primarily by lower PCL and high and revenues.
The pretax pre provision earnings grew a strong 7% year over year as solid loan and deposit growth.
Fee income and disciplined expense management, partially offset by margin compression.
Revenue was up 4% driven by higher non interest revenue, partially offset by lower net interest income.
Compared to the prior year noninterest revenue increase of significant 20%, while net interest income declined a modest 1% driven by lower margins.
Higher noninterest revenue was driven by high of banking fees mutual fund distribution fees and income from associated corporations.
Residential mortgages grew a strong 8% and business lending grew 4% year over year in line with the strategic priorities of the business.
The net interest margin was stable to the prior quarter of 2.26% and in line with our expectations year over year margin compression was mainly due to changes and business mix and deposit margin compression, but is partially offset by higher margins and residential mortgages and commercial lending as well as high of deposit volume.
Yes.
Expenses increased a modest 1%.
Primarily driven by higher technology costs to support business development.
Good revenue growth and prudent management of expenses.
The strong year to date of positive operating leverage of 1.6%.
The PCL ratio decreased to 16 basis points.
Each of 61 basis points lower year over year, and 7 basis points lower than Q1.
We expect the Canadian banking business earnings to continue to grow for the rest of the our stable PCL.
Turning now to global wealth management on slide 8.
Earnings of $378 million.
The strong 21% year over year, driven by strong mutual fund fees and brokerage revenues offset by higher volume related expenses.
Revenue grew a strong 16%, while noninterest expenses grew 14% and contributing to a positive operating leverage of 2.5 per cent for the quarter and 5.4% year to date.
The global wealth management has generated positive operating leverage and 6 consecutive quarters.
Canadian wealth management grew a strong 25% year over year, and 4% quarter over quarter, excluding the performance fee benefit and the prior quarter.
And by continued sales momentum.
All 8 of our Canadian businesses saw a double digit earnings growth you know who we are.
Assets under management increased 19% to $332 billion was increased.
The increased 20% of $571 billion from the prior year, driven by positive net sales and market appreciation.
And this activity was strong and the quarter, we ranked number 2 for the quarter and retail mutual fund net sales in Canada with record net sales of $4.3 billion.
We expect the global wealth management business to continue to perform strongly from the rest of the year with the improving contributions from our international wealth of operations.
Moving to slide line.
Global banking and markets.
The business generated strong earnings of $517 million, demonstrating consistent earnings from the benefits of and diversified business model net.
Net income was down slightly year over year as the business benefited from very strong capital markets and lending activities at the onset of the pandemic last year.
Revenue growth was impacted by moderating fixed income trading revenues and the negative impact of foreign exchange as partly offset by higher equity trading revenues and underwriting fees.
The business is well positioned to grow as we expect good corporate loan growth and the second half of the year and of advisory business pipelines remained strong.
Expenses increased 3% year over year, as we continued investing in technology and interest higher volume related expenses the.
Productivity ratio was 53 per cent for the quarter in line with our Investor day targets.
Turning to the next slide on International banking and my comments that follow I, dunno, and adjusted and constant dollar basis and.
National Bank reported net income of $429 million up 165% year over year, and 11% quarter over quarter.
Moving economic and business conditions.
The loan growth and the second half of the year and prudent expense management and support our continued optimism for the division and our expectation of achieving 500 million of earnings in this business segment by Q4.2021.
Pretax pre provision earnings declined 8% year over year, and 4% from the prior quarter, but was up 1%, excluding the impact of the shorter quarter.
Strong performance and Mexico was more than offset by a decline and Peru, driven by lower credit cards and personal loans.
Revenue declined 2% waterdog water adjusting from the impacts of the shorter quarter.
Primarily due to lower credit card and personal loan balances while the <unk>.
And commission income and fluid.
4%.
Total loans declined 2% year over year as the <unk>.
<unk>, 6% growth and mortgages was offset by a 11% reduction and credit cards and personal loans and a decline of 2 percentage of commercial loan balances.
However, loans grew 1% quarter over quarter.
Retail was flat as mortgage growth of 1% was offset by a decline and credit cards and personal loans of approximately 3%, while the commercial loans grew 1%.
We expect continued growth and mortgages and commercial lending and the second half of year.
Net interest margin of 395% declined 8 basis points compared to Q1, driven by the lower the interest rate environment changes and business mix with continued increase in credit cards, and personal loans and growth and lower margin commercial loans.
Noninterest income declined 5% quarter over quarter and year over year, reflecting the lower insurance income and.
Income from associated corporations and card fees, the offset partially by higher banking fees.
The provision for credit loss ratio declined quarter over quarter by 31 basis points to 118 basis points.
Expenses continued to decline, 4% year over year, and 5% compared to Q1, driven by lower personnel cost.
The progress and the other efficiency initiatives.
Now turning to the other segment.
We reported earnings of $140 million, the increase year over year from a net loss of 166 million and 'twenty 'twenty and relates primarily to charges for later from the metals business.
The 2020.
Strong contribution from asset liability management activities, driven by prudent management of wholesale funding and interest rate risk and resulted in higher net interest income and the sector.
I'll now turn the call over to Daniel for the customers.
Thank you Raj and good morning, everyone I'll begin my remarks on slide 12.
Turning first to credit quality.
Our credit quality continues to be hive and the true.
Tens of positive economic growth accelerates and across our footprint.
Our Gil ratio of 81 basis points worth of down 3 basis points from last quarter.
And it has remained stable for the past 4 quarters.
Retail gross impaired loans net of FX the floor.
Kind of modest $91 million.
As new formations were offset by write offs.
Marilee in international retail.
Skills and business banking net of FX and.
<unk> increased $109 million as we saw new formations and 2 accounts for which we have reserved appropriately.
On the bottom of slide 13, and you can see the all bank net write off ratio increased to 76 basis points. The increase was primarily driven by international banking specifically retail.
Last quarter, we spoke to the higher levels of late stage delinquencies and Peru and Colombia.
And which have resulted in the higher levels of which have higher levels of unsecured exposures.
As expected these rolled forward and resulted in elevated write offs of this quarter for which we were comfortably provided.
Given the strong performance of our remaining portfolio, we expect the write offs and international retail to decline next quarter true.
Turning towards our pre pandemic levels by the end of the year.
Meanwhile, the write offs and the Canadian banking or below pre pandemic levels and GBM remains stable.
Sure.
Turning to slide 14.
The bank ended the quarter with total allowances of $6.9 billion.
That's a reduction of over $900 million from the prior quarter driven by elevated write offs.
Consequently, the ACL ratio declined to 109 basis points from 125 basis points last quarter.
Performing loan allowances declined about $700 million to $4.8 billion, excluding the impact of FX.
Approximately 200 million of this was released due to improving credit quality.
And the better and macroeconomic outlook.
The remaining decline and performing loan allowances was primarily related to allowances for impaired loans to support the elevated write offs.
The parent loan Acl's remained in line the last quarter the transfer of allowances on performing loans offset the higher level of write offs we spoke of.
It's worth noting that as these expected write offs occur because the <unk>.
Overall credit quality of the remaining portfolio improves.
And and we expect the ACL ratio to trend below 100 basis points.
And the end of the year.
Yeah.
Let me now turn to the income statement and provisions for credit loss on slide 15.
Our total PCL declined to $496 million.
The total PCL ratio was 33 basis points down 16 basis points from the prior quarter.
Beginning with our impaired PCL, we reported $1, $1.9 billion and Q2 up $430 million from last quarter.
This represents and impaired PCL ratio of 80 basis points.
And the increase of 31 basis points quarter over quarter the.
The increase was primarily driven by international retail and the expiry of deferrals resulted and hard delinquencies and mainly in Peru and Colombia.
And contrast, impaired PCL for GBM and Canadian banking.
Table.
Turning to performing PCL, and we had a net reversal of $696 million and Q2 down from positive $2 million and Q1.
Approximately $200 million of the reversal and represents a relief of allowances built and par periods.
That's no longer required.
This reflects better credit quality.
And the improved macroeconomic outlook.
Yeah.
We expect the center on levels of releases and future quarters.
So let me conclude with a few comments.
First our asset quality remains high.
And the credit trends are favorable.
Secondly, our PCL outlook is positive for the remainder of 2021 with net write offs and impaired provisions having peaked this quarter.
Third we expect to see and additional releases from our performing of allowances for the balance of the year.
And finally, we expect the all bank PCL ratio to be in the mid 30 basis point range for the remainder of financial year 'twenty 1 with.
But the PCL ratio of international banking continuing to improve sequentially for.
For the rest of the year.
These trends are in line with the repositioning and Derisking of the bank, which have taken place in recent years.
And with improving economic growth across our footprint.
We expect strong credit performance and the future.
I will now turn the call over to Brian for closing remarks.
Thank you Daniel I'd like to close our presentation today with a few comments and observations before turning it over to Q&A.
Firstly as I reflect on our results I'm encouraged by the steadily improving operating environment and the more optimistic economic outlook as vaccine deployment and so.
Accelerates across our footprint, we are seeing continual improvement and customer activity as the economic recovery takes hold.
At the same time the forecast for GDP growth this year and our 6 core markets has improved to 6.5% on average up from 5.8% just last quarter that combined with the booming market for commodities makes us increasingly optimistic and our outlook.
Secondly, we are seeing similar business trends across all of our core markets be the developed markets, such as Canada or growth markets in the Pacific Alliance and these trends include strong growth and secured lending such as mortgages, a recovery and automotive lending, where we are the market leader.
And subdued growth in cards and.
And that's the economic recovery gained speed, we expect of recovery to more normal growth rates and the pre pandemic levels of revenue and businesses that have been most effective <unk>.
For example, annual annual revenue and autos.
Cards, and insurance and Canadian banking is approximately $400 million below pre pandemic levels and international banking fee and commission revenue is about $200 million lower we expect a gradual recovery of these revenue lines in the coming quarters.
Thirdly, we continue to see strong progress and digital banking with double digit growth of active mobile users and both Canada and the Pacific Alliance over the past 12 months, we have added close to 1 million mobile banking customers, who are attracted by the convenience and high quality.
<unk> of our mobile banking offering this reflects the growing digital dividend, which we will help which will help to drive our productivity ratio lower over time.
Turning to international banking with elections. This year, there's considerable focus on political events and Peru and Mexico.
While there is much focus on the risks associated with potential changes and governments our experience over many decades in the region has taught us that these risks are often overstated invariably it is economic growth the strength of our country's institutions and demographic trends that Matt.
Matter of most simply stated the economic backdrop.
Trump's politics, when we consider the situation and the Pacific Alliance countries. Today, we are encouraged by the number of positive factors Firstly economic growth is accelerating as the internal consumption and international trade increases the strength and commodity prices, which have.
Creased roughly 50% in the past 12 months has created a significant export windfall.
And surging current accounts surpluses, which provide economic tailwind.
Secondly, policymakers have considerable latitude to manage the economic recovery, given the strong balance sheets and a load of Tennessee on foreign capital.
In closing, we are optimistic and our outlook for the remainder of the year driven by continued strong growth and our Canadian banking.
The wealth management, and global banking and markets businesses, and our confidence and the recovery and international banking with that I'll turn it over to Phil for the Q&A.
Thank you, Brian we will now be pleased to take your questions. Please limit yourself to 1 question and then rejoin the queue to allow everyone. The opportunity to participate in the call. Operator can we have the first question on the phone. Please.
Thank you all of your first question is from Ebrahim <unk> with Bank of America Securities. Please go ahead.
Good morning.
Thanks, Brian for that Oh, or beyond that time, and just the update there I guess just sticking with international banking 1.
And the 400 million and Canada and $200 million and.
International banking revenue numbers that you cited do you see based on what you how you see the world today the revenue.
And your recovery and international banking lagging and remind us and.
In terms of just of how you see the revenue contribution from might be and the back half of the year and and the loan growth I think you mentioned, 6% growth last quarter, how you see the playing out thank you.
Thank you I think of Russia is going to start with it and then I think Nacho has a supplementary yeah everybody of miles talked with you of revenue question net recovery of $200 million you can split the fairly centrally and.
The insurance revenue that would be of missing and his credit card and revenues that were missing and that business line, which equates to roughly of about $60 million of quarter. So we've used the approximate number of 200 million notwithstanding all of that is already and come back in Q3 for example, but we see the gradual recovery of <unk>.
Spending starts coming back and retail asset growth happens.
So the insurance revenue that actually tied to the retail lending, particularly the international banking space.
And your question about the revenue of recoveries that we expect to see the international banking, we think you'll see sequential recovery.
Tied to the retail asset growth, so and I.
We expect to have mid single digit asset growth for the rest of the of compared to what balances and Q2, and that's going to be skewed obviously towards secured mortgages lending that youll see and even in the first half of the year and we continue to see Youre seeing good commercial growth starting this quarter and we expect that to continue for the rest of the year unsecured lending on the <unk>.
And of the credit card lending, we expect to be slower coming but certainly its going to stock in Q3, but accelerate perhaps in Q4, maybe not sure you want to add some more of that.
And that's a good summary, maybe I would also highlight that the retail bookings in the quarter what were the best since Covid started improving more than 20% Q over Q and retail so basically I mean, I really Miss 1 engine to go stronger which is credit card personal loans seem interest you made out of what's happening and.
The U S banks and that will happen and the second half of the year of.
Also I I I I have I think it's important to see the the recovery and fees and commissions, which increased 4% Q over Q or 'twenty media and us eyebrows and Brian mentioned, we still have 60 million quarterly GAAP compared to wheat crops to recoveries that we will gradually recover. So overall I think is loan growth and fee.
Recovery that will allow us to to have a stronger growth and revenue the second half of the year.
And and.
And just on that real quick follow up is the VP and lending of loan growth in Latam also impacted by the excess liquidity, we are seeing in U S or Canada or is it more to do with of explanations and political uncertainty.
No I would say each is similar to what we're seeing and other countries. Our credit card billings are still 20% below pre covered level. So a lot of consumers cob and liquidity. There has been a 35 billion disbursements of early pension and Swansea and Peru, and particularly of that is truly the case when we look at Chile.
Ebrahim, we she also lowered the consumer lending demand because of highly predictive, but we expect about 1 positive aspect of <unk> in the region, particularly for Mexico for the Caribbean and Central America tourist and coming back so restaurants travel and entertainment all of these activities are going to allow consumers to interest.
Spending.
Yeah.
Got it thank you.
Operator, the next question please.
Thank you.
Next question is from Scott Chan with Canaccord Genuity. Please go ahead.
Good morning.
The following up on the international briefly if I kind of look at the box and will allow them and a lot of them.
And what specific items it seems like the.
Modest relative to North America, maybe from kind of comment on box and that's fine for.
The board and that and how about the effects of recovery I guess, the subject of a portfolio of book.
Thank you for your question and what you're you know infection rates of coffee and Theres, some volatility like everywhere and the world, but we're seeing infection rates going into the right direction of these countries are managing COVID-19 basically to ensure of hospital capacity is available in terms of vaccination.
Chile sales success story of worldwide more than 50% of the population and <unk> already got a at least once the 1 shot so Chile is doing very well because of the vaccination and because of the commodity cycle that we expected the very strong recovery of the economy in Chile, and the rest of the countries are accelerating vaccine.
The nation rates of vaccination and are between 8.8 and 15%, but we expect that they would reach around 50% of explanation by the end of the summer Colby. However is not impacting the economic recovery of the Pacific Alliance countries all of the all of them and reported higher GDP corals in the first quarter and of <unk>.
21 day estimations and <unk>.
Overall, the economies of the Pacific Alliance countries should grow around 6.5% during 2021.
Thanks, that's helpful and just lots of them just on a global wealth management solid resolved so called out some of them well.
Couple of.
That's absolutely strong honestly, the dot and called out of perhaps to give us an update on the international wealth management.
The lower but just on the.
And this would be helpful.
Sure. Thanks, Glenn here. So as you mentioned I think the strength of our of our Canadian business.
Is really its breath. So we're seeing strong growth revenue growth market share gains across all of the businesses, but that's also starting to happen and international as well. So I think 1 of the benefits of a strong Canadian franchise is our ability to invest and our international growth and so we've been working very closely with Nacho and his team.
We've made very good inroads.
In terms of our institutional ultra high net worth business there as well.
With Jarislowsky Fraser and we expect that to continue so we saw actually quarter over quarter.
Growth within our wealth management business and international and we're seeing that uptick and we would expect that momentum to continue.
Okay. Thank you very much.
Operator can we and the next question.
Thank you as a reminder, you May press star 1 anytime for any questions. Our next question is from Paul Holden with CIBC. Please go ahead.
Thank you good morning, So 1 of the key topics I think has been discussed over the last week is around interest rate sensitivity with increasing probability of that central banks have to move sooner than later. So wondering if you can just provide us with a quick update on what a 25 basis point rate and.
The increase might mean for overall earnings and if you can and what that might mean for international banking in particular, given that rates might increase and that part of the world sooner than our U S and Canada.
Thank you Paul as Raj. Thanks for your question. So I'll address the international banking 1 question and then I'll get to the all bank and total we think about interest rates the risk and how we manage it.
International banking simply look at 25 basis point change and the race and you are absolutely right.
We expect it to be earlier competitor say, Canada, the United States for that matter will be roughly about $30 million per annum or the interest income line. So it's all of them.
Just like a little over 1 basis point.
For more than $1 billion easy way to think about it the Pacific Alliance will be able of $25 million and the Caribbean and we think that 25 basis point annualized would be roughly $30 million. If you do the math, it's little over $30 million from the different financing the whole.
Let me back to the to the fact of the bank as a whole. So we all of the fluids. The 100 basis point impact from the tables, and all cases, and 1 of 300 million sort of 100 basis points increase.
And that's just simple math.
As you probably know what the modern the outcome based on a number of assumptions.
Flex of 100 basis points, you know part of a rate shock effect and the based on the con call and balance sheet and makes no assumptions from management actions as you know from our previous conversations we take a lot of management action to manage the you can take the risk on the balance sheet off the bank.
And that generally does not get reflected.
Case in point and on last year, and Q1.2020, we're the only Canadian bank, which will which is positioned to benefit from rate decline.
And that's what happened in Q2.2020, the monetize a lot of the swaps. It continues to benefit us and they'll tend to go the benefit of strike 2024.
Because of the hedge accounting works and so on but.
For example of that benefit is not in children and the sensitivity tables. So right now we have positioned the bank again.
Rising rates across the across the footprint frankly, because of our balance sheet. So those numbers, which you see and if he created the 25 basis point of banking income from the math of about $75 million for the bank.
That would be significantly higher than the $75 million as rates increase all of our hedges play out and at what time, we take all of those had this and monetize it so a bit of a long weighted answer is stocked with the table of the table and it's kind of a blunt instrument and theres lots of actions, we've taken the bank, which and how.
And homes of eights.
Back on interest income from the bank as a whole.
So if I can have a follow up on the if I may just.
And if I'm using the 75 and recognizing it could be something higher than that I mean, what are the kind of I.
I don't know the bands that might be around that could it be as high of 50% higher or are we talking more 25% higher just any kind of help there would be great.
I'll try and Paul I think that would give you a case and point. If you went back to the Q1 and 2020 disclosure.
The decline for us would have been $197 million and that disclosure and I can tell you the benefit that we had because of the way of swaps played out and about 4 times book.
So it's a little hard to predict how each of these because it depends on future interest rate increases what the markets do and so on and based on the positions. We have taken to enhance set of town and I think it's safe to assume that it would be a minimum of 50% higher likelihood would be significantly higher.
Alright Thats helpful. Thank you.
All of them.
Operator could be of the next question. Please.
Thank you. Our next question is from give me of the Shane with National Bank Financial. Please go ahead.
And like the talk about the write offs and international and I appreciate the.
And all the.
The <unk>.
Comment that when we put the peak here.
But the way I look at it is.
Over the past couple of quarters anyway.
The $2 billion of visa.
Loan and they've been written off.
And how important is it to replace those loan for the segment to get back to its pre COVID-19 revenue run rate and.
And is there any possible change of I heard somebody might be risking the bank.
Are you changing the way you approach these originations going forward and or.
Or did I misunderstand that.
So let me take out that the question Gabe and.
Well first I think that we are we have been growing and feed and mortgages and commercial that's where the recovery has started but we expect as I mentioned earlier that the retail is coming back we will come back during the second half of the year.
And basically we are seeing a retail we expect to resume retail loan growth and the index and the third quarter and accelerate particularly in the in the fourth quarter of the year and.
And basically it's around the consumer spending and credit cards, and that's where do we see the most significant GAAP compared to pre COVID-19 levels and.
However, I would say that it's important for us to replace a these balances as long as we kind of do it with good credit quality and and.
And this has been the trend in the market the market we've seen a decline in the unsecured.
We see these gradually flattening and he will come back and he will help us to grow our loan book I would expect by the end of the year at similar pace, both in commercial and retail and.
And when you say retail rebound and you're talking about mortgages and the second half of the cards and other personal loan.
I'm, saying, especially mortgages, we're doing very well and mortgages. We have had very strong growth, but we expect also unsecured to accelerate especially in the last part of the last quarter of the year, Okay, and then quickly on the other segment.
The.
And that's the liability management activities.
NII line.
Having a pretty big number there what are you doing.
Thanks, Gabe it's Raj so I'll try to help you with that the.
The NII line and benefits from 2 different things I talked about the.
The swap monetization that we did so that's going to help the NII line right through till 2024.
The second component I caught all of that is volumes. So the wholesale funding volumes have been lower as the deposits have been very strong across the PNC footprint and we're also being very diligent and managing the volume of issuance as compared to the asset growth that we expect taking into account the deposits.
And we've been having for some time the third 1 I'd call out of as rates were able to finance. These.
Expensive wholesale funding coming off our books of maturity and able to do it at lower rates.
Final thing I would call out is we manage the interest rate risks very closely on the balance sheet. So you can see a lot of benefits attached to it and our retention is that that should continue to support the other segment through future quarters as well.
Great. Thanks.
Operator, the next question please.
Thank you. Our next question is from Tomorrow and.
And Tomorrow Prasad with too much of Securities. Please go ahead.
Thanks. Thanks. My first question is for Daniel Daniel just the point of clarification I think I heard you suggest that the impaired losses of peak and.
And more similar levels of performing of the leases that we saw this quarter, but if I add those 2 up I would I would think that the total PCL guidance from the back half of the year would be below the mid thirty's range, considering that youre at 33 basis points of square. So I'm wondering like did I hear that incorrectly and bad and then.
And you could just clarify that.
None of them are I think you heard that correctly.
So we're definitely guiding towards the mid <unk> on the impaired PCL on the total PCL.
With a trending downwards, but remained slightly above pre COVID-19 on the stage III or or impaired PCL.
And we get our confidence on that and looking at the overall macro picture the performance of our book and the credit quality of our book all 3 are performing very very well.
Reflecting on the quality side of the shift to secured on the customer front and.
And on the performing side the the very good results of our early stage delinquency. So that's as we put all of the numbers together the Mira that's how we look at it and those of all of those of our 4 customer remainder of the year.
Okay, but like your and 33 this quarter and if I assume a lower level of the parents and similar releases I just don't get how you get to the mid thirties.
Of course, there is growth and there as well of our and that goes into the overall piece no calculation as well.
Okay and then my next question is for Dan Rees, just on if I look at your business and government of loan growth and it's actually quite strong this quarter. So I'm wondering if you can.
Talk to what drove this growth and the sustainability going forward.
Sure morning, Thanks, Lamar I think our investments and the business banquet started some 6 or 7 quarters ago continues to pay off last quarter and again this quarter youre seeing that and.
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Hello.
The market is still there and were muted here.
And then I'm still I'm still here and you guys still there.
Okay.
Apologies can explain that and I'll, just keep go and Lamar and thanks everybody.
It's not just the 2 of us on the line.
The first the first of all to repeat in case, you missed the opening of our investments and the business bank kind of continued to pay for and whether that's in our priority provinces or some of the industries, where we have notable expertise that would include real estate and agriculture and particular.
Also seeing good growth and the marketplace, but this quarter again, we think on both deposits and loans so of balance sheet combined we're number 1 and Q2 and and that's an impressive result, given that we had said just 2 short years ago. This was a priority area for us in Q2, we.
<unk> reached the number of 3 spot in terms of total deposits and the sector. There's nothing unusual happening on the government side. This is all of business growth and the business Bank.
Got you. Thank you.
Operator, we of the next question please.
Thank you. Our next question is from Doug Young with digital and the capital markets. Please go ahead.
Hi, good morning, and just going back the international banking quickly and just based on my calculation I mean pretax pre provision earnings and it looks like it's down 31% and Peru by 22% and the Caribbean, Chile, Mexico, and Colombia, it's roughly flat so and and.
I kind of get the Caribbean, 1 of more focus on Peru, and I guess specifically.
What youre seeing and that market and I would imagine most of the credit card comments relate to that market, but really whats and.
Specific to Peru, what are the drivers that are going to turn that around and then just the second part of the question Raj.
Can you remind us how you are hedged in terms of currency for the international banking and if you can kind of talk a bit about it by by region that would be helpful. Thank you.
Yeah, Let me tell you that they can take the first part of the question yes.
Yes definitely leads per group, where we have the biggest opportunity of side in terms of a credit card personal loans growth the unsecured.
Secure portfolio has declined more and just.
And also we expect an acceleration of commercial growth was muted this quarter.
However, in Spain, we have and we have grown significantly and mortgages. We continue to expect to continue to do that 10% year over year.
And the similar to the rest of the country. The positive signal I can share with you is retail bookings not only in mortgages, but also and traded card personal loans.
Had a 20% increase secure acute so we are seeing definitely a better trend on.
And the other half while the revenues have been soft we have got very good expense management, the in Peru, with and 11% reduction year over year. So we're trying to offset as much as we can answer the revenues come back and also like Daniel mentioned credit quality piece of very good story in terms of the PCL and we have the declined 35%.
And it is the year over year and we've had the very good payment behavior on the back of the early disbursement of pension followings employment recovering economy, and our our collections and detailed capacity supporting.
And supporting a collection of so I would say a credit and and expenses are of very good story, and we're really waiting for the economy that we expect a stronger economy is strong and strong recovery starting in the second half of the year with GDP growth of 9% potentially even more true.
To help us grow revenues, we don't secured lending coming back.
Doug It's Brian I, just wanted to add a little something the arris that you're pointing to the recovery and the Pacific Alliance is lumpy and Thats, the nature of our footprint and and.
The maturity of the banking markets and the individual countries and highlights our return on equity and our Mexican business was 15% this quarter and Mexico, and Chile of return to pre COVID-19 level of earnings and peruse. The laggard and that's just a function of the had a very very difficult COVID-19 the nature of the bank.
It's going to take time to come back so and and if were showing signs of that so regardless of the election of the outcome of the GDP or the growth rate and improve this year will be 9% and we'll see how it does next year, but.
We expect a strong recovery and Peru, but it'll work of sequentially quarter by quarter.
And just from currency and Doug It's Raj.
I will tell you of the philosophy, the hedge as appropriate and reduce the volatility of the bank quarterly earnings that's the principle.
And to give you a little bit of context, including the international bank of explosive and use all of earnings actually significantly is higher than that exposure to the domestic alliance countries. So U S. Dollar Jake's business and GBM you of other businesses, which are part of international banking, which of offshore boats.
Let me Henrik onto the several factors expect ex out and see volatility and reason for the volatility is it structural shock the macroeconomics and of course, the ease and cost of hedging, but 1 example, I would give you is the Jamaican dollar it's not possible of the hedge and so we think about it as a basket of currencies and how do we want to manage the.
And the hedge relationships and some of the Volatilities of the deals from an earnings perspective.
So we disclosed the impact of FX as you know and our tables in the quarterly the book this quarter was slightly elevated as you know.
About 6 cents impact of EPS of about $17 million.
So slightly higher than what you would expect but that's because the came dollar strengthened against pretty much every call and say other than the Chilean peso.
Most of that impacts the obviously give you context of the 74 million of the 97 of them and maybe half of the year to date, almost 90% of the nature of the U S. Dollar the us dollar strength and almost 492% I think year over year that has an impact to us and the U S dollar and 1 column C V noble and move around and helps us and.
And it's a little bit outsized impact this quarter, but generally of hedging philosophy is to range with the volatility and we try to hedge it could be 50 per cent, 1 quarter and could be 100 per cent and another quarter. It depends on the media stock price I think and stuff.
Yeah.
Thank you.
Okay. Operator can we of the next question on the line.
Thank you. Our next question is from Mario Mendonca with TD Securities. Please go ahead.
Good morning.
It's probably for you when I listen to the banks talk about results and there seems to me of greater emphasis on a L. M and what you do the hedge interest rate risk of greater emphasis from Scotia, and the what we hear from your peers and <unk>.
Sometimes I struggle to understand whether this is just emphasis or whether its growth is actually doing some things being more active than the peers.
So when I look at the results and I drill down it does seem like there is something more meaningful blowing on here because of the margin for the bank outside of your domestic and U S.
And I am sorry of domestic and international P&C businesses that and Jen. If you will is performing a lot better than what the for your peers. So I guess, what I'm getting out and now is.
If the bank was able to have the successful E L F.
As interest rates declined.
How do you then position yourself for rising rates without some costs like how do you just flip that from 1 quarter to the next whats out there being some costs from changing the hedges how does that work.
Thanks for your question and that's a very detailed question and then I'd be happy to talk to you offline more than what I want to speak on the call here, but the point is valid and use the film that we do hedge the interest rate risk on our balance sheet, what I would call of dynamically and we looked at it.
Not to exaggerate and we looked at it every day and look like the asset profile changes, we look at the liability profile changes we looked at what the market's tell US and then we look at saying, Okay. How should be positioning the bank. So there's a natural and positioning the bank has interest rate risk as you know, there's just any kind of into the business that would be too high.
How well we manage the reflecting the results that's the.
Not to say, we get at the right. All the time, our expectation is the either have to reduce the volatility of interest rates on our earnings if we can enhance it even better and some of the examples I quoted was.
How are we positioned the bank Q1, 'twenty and how we benefited by some of your positioning it primarily through the overdose and before and all of US. The simple example of interest rate swaps and how do you use it to position the balance sheet appropriately depending on the tenure of the balance sheet and the assets that are on the line.
EBITDA at these sites and the interest rate book.
And the point that's bothered on net interest margin compression just look across Q1 'twenty from idea of margin was 2.4 of 5% of of the all bank level and it's 2 and 26, that's about an 8% decline.
That's significantly lower than all of our peers. Some of it is because of our asset mix granted the more secure than some of our peers, but some of it is what you pointed out how the amount of the interest interest we'd like to keep it flat, we'd like to keep the staple and we'd like to enhance it and an increasing interest rate environment like right and there will be positioned the bank now.
Through the balance sheet holds the position that also some of these hedging activities of just help us enhance of those like I mentioned.
And happy to talk offline to give you more color and any further questions that you might have all of that as a follow up.
And just as a fellow of them is it fair to say that when rates go down and Scotia wins and rates go up social wins. The Scotia, just cause guesses right is that is that the right way to look at it.
And if we get our hedging the right yes.
Absolutely and and on the past, yes few.
The future I hope so.
Thank you.
Thanks.
The operator the next question please.
Thank you and your next question is from removing <unk> with BMO capital markets. Please go ahead.
Okay.
And of course, if I can not true obviously.
And operating environment in the Pacific Alliance region in particular over the last year and I think.
You will have done quite a bit of work certainly around the expenses, we're seeing the recoveries come through and now.
I'm just curious to know what else is left for you to do besides waiting.
For that economic tailwind.
Or the high tide, that's kind of hopefully raise all boats I'm trying to understand.
And what other leavers alright scotia's.
And behest here to help.
Push this forward and whether or not.
And you can paint the picture of what your Rab.
Non book May look like for example from the secured unsecured retail versus commercial 18.24 months from now.
And how that would compare to a pre pandemic levels and I'm just trying to kind of get a feel for what is happening to the risk appetite.
If anything between now and when we get through it.
Thank you for your questions sort of look.
Look I would put it this way big picture there is a delay we arent going to be thinking of it'll be the longer and the Pacific Alliance countries too.
And 2 of the toward the economies to whom and on each happening in North America, but I think these will happen I'm very optimistic about the economic recovery and I'm thinking of 12 months 18 months I think it's very likely we will see in the Pacific Alliance countries long growth of double digits, 10% growth.
<unk> recovery, let's let's think about again the demographics, the live and relatively low in the low level of lending to GDP. So I wont economies start reactivating financial services will have a very significant opportunity even even today a surround I expect that between Q2.
The numbers and the and the balance of the year, our loan book will grow around the mid single digits and it will be continued to be driven by commercial bank mortgage of continues to be strong, but retail will come back gradually including unsecured lending all show up as I mentioned, we will see and important few recovery. There is the 60 million GAAP.
And I I'm glad you mentioned expenses, because we have I think of very strong performance and expenses were reduced and another $70 million from the last quarter of 5% reduction and expenses and each because there is of great DG channel growth that is helping us to improve NPS scores improved in all of that.
The declines countries and old shot and channels.
Retail sales are around 50% of all the sales and units and the and this is driving tremendous productivity and branches as we deployed the Eaton on boarding that allows us to adjust our sales force capacity and branches. So I see opportunities across the board, but youre right I think loan growth is going to be the <unk>.
River and expect I expect retail to start to resume growth in Q3 and in commercial we are ready group grew 1.5% of this quarter I expect commercial will accelerate in future quarters with the economic recovery.
But not true.
To put too fine yes.
As Brian and I, just want to add to that just to reemphasize that we increased our steak and Scotia Bank, Chile too.
The 7% to 82% and that's an asset we know very well of country a country, we're very comfortable operating in and those type of opportunities.
After a period of time like this come up occasionally and we're obviously and are positioned to capitalize on the I'm. Sorry. You go ahead, sorry, sorry, I just wondering if you just I appreciate that Brian and thank you very much for sort of that reminder, I just wanted to get from but not sure. There is no change and risk appetite is that is that the right way to think about this absolutely there is no change.
<unk> of of risk appetite, so Rob what we have done is to grow we deem our strategy. We are gradually reopening of our lending activity in retail following the economic recovery, that's really following the market opportunities and we expect to have.
The long strong loan growth in the last part of the year and accelerating into 2022, which I expect the international banking will experience strong growth deep driven by.
The loan demand driven by and by double digit growth and loans and deposits and strong economic activity.
Okay. Thank you.
Okay. Thank you.
Yes.
Thank you all for participating and I'll call today on behalf of fan time management team I want to thank everyone for participating and I'll call. It.
We look forward to speaking with you again Q3.2021 column of this.
This concludes the second quarter results call.
Have a great day.
Yes.
Thank you. The conference has now ended please disconnect your lines at this time and we thank you for your participation.