Q3 2021 Bank of Nova Scotia Earnings Call
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This conference is being recorded so it's going to stay home if they don't go as you see.
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Good morning, and welcome to Scotia, Bank's 2021 third quarter results presentation.
My name is John Mccartney head of Investor Relations at Scotiabank.
Thank you. This morning is Brian Porter <unk>.
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.
Present to take questions for the following Scotiabank executives.
Dan Rees from Canadian banking.
Glen Gowland from global wealth management Nacho.
The shock from international banking.
And Jake Lawrence and James Neate from global banking and markets.
Before we start.
Speaking today for you to slide two of our presentation, which contains scotiabank caution regarding forward looking statements.
With that I will now turn the call over.
Thank you John and good morning, everyone.
The bank's third quarter results announced earlier this morning reflect an acceleration of growth led by our Canadian P&C and global wealth businesses supported by strong earnings progression in our international business against improving economic conditions and a more positive outlook for us.
Our footprint.
Canadian banking posted double digit topline revenue growth.
Backed by strong mortgage and commercial lending activity.
Favorable credit quality trends and generated positive operating leverage.
Global wealth management delivered another strong quarter, driven by broad based growth across our businesses and geographic footprint.
Canadian wealth management earnings grew 20% delivered double digit revenue growth with strong contributions from all channels across our advisory and asset management businesses.
Global banking and markets delivered its third consecutive quarter of earnings in excess of $500 million and the <unk>.
Face of a more normalized market environment.
International Banking's earnings continued to improve with earnings approaching pre pandemic levels earnings in Mexico, and Chile are ahead of pre COVID-19 levels with good secured retail and corporate and commercial asset growth.
In summary, our diversified business platform produced good or earnings growth positive operating leverage year to date, and then improving all day return of equity.
Capital levels remain strong our common equity ratio of 12, 2% is 80 basis points higher than it was entering the pandemic.
<unk> to over $3.2 billion of additional capital compared to Q1 2020.
Our results this quarter reflects the benefits from our continued investments in our businesses and our commitment to our customers that has positioned us well to respond to and capitalize on the economic rebalance in the markets in which we do business.
Investments in the future of our bank and the communities. We serve gained notable recognition again this past quarter for.
Particularly as it relates to our efforts to digitize the bank.
Scotiabank was recognized as the most innovative and data by the bankers Global innovation and digital banking awards in 2021, highlighting our use of data analytics to identify and support our most vulnerable customers and challenging times.
Economists research also recently move Scotiabank to the top quadrant standing in its annual digital leaders and laggards in global banking study recognizing banks that have progressed above peers and digitization.
We have remained committed to our growth initiatives throughout the pandemic period.
Our sustained investment in our people and technology have clearly positioned us well to benefit from the resurgence of activity as economies and specific business segments recover.
Lastly, the bank remains committed to our sustainability initiatives recently Scotiabank was awarded four recognitions from Global Finance magazine for our sustainability, including our Global award for Outstanding Global leadership, and sustainability transparency with that I'll turn the call over to Raj to disk.
Just the quarter in more detail.
Thank you, Brian and good morning, everyone.
To begin I'd like to note that all my comments are on an adjusted basis for the bank and all business lines.
As I did in the past few quarters I've always look at quarter over quarter performance in many areas given the economic impact of the pandemic in 2020.
I would also reflect the numbers excluding FX in many areas. This has an important impact to the year over year compatibles.
We've added slide 37, which discloses the impact of FX to fee income lines.
I will begin with a review of all bank performance for the quarter on slide five.
The bank reported another strong quarter of earnings growth year.
Year to date, the bank has exceeded all of its medium term objectives of Ottawa EPS growth and operating leverage while maintaining strong capital levels.
Total earnings were $2.6 billion and diluted EPS was $2 <unk> for the quarter, an increase in EPS of 93% year over year and 6% quarter over quarter.
All operating segments reported strong results again this quarter reinforcing the strength of our diversified platform.
Return on equity improved to 15, 1% from 14, 9% last quarter and year to date return on equity is 14, 8%.
Pre tax pre provision earnings declined a modest 1% year over year quarter.
Quarter over quarter, all four business lines reported pretax pre provision growth.
Revenue increased 1% year over year or up 5%, excluding the impact of foreign currency translation.
Revenue was in line with last quarter as strong performance from operating segments was offset by lower investment gains in the auto segment.
Noninterest income increased 3% or up 7%, excluding the impact of foreign currency translation, driven by higher banking fees and wealth management revenues quarter over quarter noninterest income was flat as higher wealth management revenues were partially offset by lower investment gains trading revenue.
And income from associated corporations.
Net interest income was down 1% or up 3%, excluding the impact of foreign currency translation driven by strong loan growth.
Banking margin has remained relatively stable for the past four quarters and is up 13 basis points year over year.
The margin declined a modest three basis points this quarter driven by business mix changes with continued strong secured retail and business lending growth.
The PCL ratio continued to decrease falling to 24 basis points for the quarter, representing a decline of 112 basis points year over year, and nine basis points quarter over quarter.
This improvement reflects a more favorable credit quality and macroeconomic outlook across our footprint.
We continue to manage expenses prudently, while investing in our businesses to support future growth.
Excluding the benefits from foreign currency translation expenses increased 3% quarter over quarter, reflecting higher personnel and technology costs.
<unk> business growth professional fees and the impact of three additional days in the quarter.
Year to date expenses are in line with last year, excluding the benefit from foreign currency translation.
On an adjusted basis, the productivity ratio was 52, 5% this quarter compared to 51, 4% a year ago.
Operating leverage was a positive one 6% year to date.
Quarter over quarter loan growth was strong as mortgages growing at 4% business loans at 2%, while personal lines of credit costs were flat adjusting for the impact of foreign currency.
On slide six we provide an evolution of our CET one capital ratio over the quarter.
The bank reported a strong common equity tier one ratio of 12, 2% a modest decrease of 10 basis points from Q2.
An increase of 90 basis point points from one year ago.
Total capital generation of 21 basis points was driven by strong earnings offset by increased risk weighted assets from solid secured retail and business lending growth across our businesses.
This quarter the capital ratio was also impacted by the increase in that as far multiplier and the closing of the transaction that increased uptake in our Chilean business by 7%.
22 basis points.
Turning now to the business line results beginning on slide seven.
Canadian banking reported very strong earnings of $1.1 billion up significantly year over year, and 16% quarter over quarter.
The earnings underpinned by a continued rebound in revenue growth favorable credit quality trends and operating leverage of about 3% for the second consecutive quarter.
Pre tax pre provision earnings grew 15% year over year, and 9% quarter over quarter to over one $5 billion.
Solid volume growth across assets and deposits and higher fee income, partially offset by modest margin compression.
Revenue increased 12% year over year, and 7% quarter over quarter from strong growth in noninterest revenue that grew 11% quarter over quarter, driven by higher deposit and mutual fund fees and an increase in card fee revenues.
Net interest income grew 5% quarter over quarter as a strong growth in mortgage and deposit volumes more than offset the modest margin compression.
Residential mortgages grew 10% and business lending grew 7% year over year in line with our strategic priorities of the business.
The net interest margin declined three basis points since Q2, two to two 3% from strong growth in mortgages and commercial loans, while higher margin unsecured lending balances will slot.
Expenses increased 8% year over year, and 3% quarter over quarter in line with higher revenues in both periods, primarily driven by higher personnel costs associated with the growing sales force and technology costs to support business development.
The year to date operating leverage remains strong at two 3%.
The PCL ratio decreased to seven basis points, which is 78 basis points nobody out over year and nine basis points lower than Q2.
Turning now to global wealth management on slide eight.
Earnings of $397 million were up a strong 19% year over year, and 5% quarter over quarter as the threat of strong fee based asset growth and brokerage revenues continue though this was partially offset by higher volume related expenses.
Revenue grew a strong 18% with noninterest expenses growing 17%.
Global wealth management delivered its seventh consecutive quarter of positive operating leverage.
Year to date operating leverage is a positive three 7%.
Canadian wealth management continued its strong growth once again.
20% year over year with broad based growth across all business lines.
This was the 10th consecutive quarter of double digit earnings growth for this business.
International wealth also grew a strong 25% year over year.
On a constant dollar basis.
AUM and <unk> Bolton.
Both increased 17% to 344 billion and 587 billion, respectively, driven by positive net sales and market appreciation.
Of note year to date, we continue to hold the number two position amongst the banks in retail mutual fund sales in Canada.
Moving to slide nine global banking and markets globally.
Global banking and markets generated strong earnings of $513 million this quarter down a modest 1% from Q2.
This is the third consecutive Florida for GBM, but earnings in excess of $500 million.
Revenue was in line with last quarter with strong contributions from capital markets, and M&A, which had its best quarter since 2014.
Year over year earnings and revenue were down, 15% and 19% respectively from a record $600 million earnings in Q3 2020.
Year to date expenses were in line with the prior year.
And declined 2% compared to the prior quarter, resulting in a productivity ratio of 49, 5%.
Gbm's operations in Latin America that is reported as part of an international banking generated earnings of $182 million this quarter.
Which is up 8% quarter over quarter, and 18% year over year, driven by strong performance in capital markets businesses in the region.
Turning to the next slide on International banking My comments that follow on on an adjusted and constant dollar basis.
International banking to afford a net income of $493 million up significantly over the same quarter last year, and improving 17% quarter over quarter.
The business has achieved its target earnings a quarter ahead of our previous expectations.
Well there has been some volatility in the pace of improvement in the economic and business conditions sentiment remains positive and the forecasted GDP growth for the region has improved over the last quarter.
Pretax pre provision earnings for the business line increased 1% from the prior quarter.
Revenue was up 2%.
Pretax pre provision earnings in the Pacific Alliance, but up 4% year over year and a strong 8% from Q2.
Notably, Chile, and Mexico are above pre COVID-19 pretax pre provision earnings.
Revenue increased by 2% quarter over quarter, driven by strong growth in noninterest income benefiting from higher capital markets revenues insurance services and a longer quarter.
Quarter over quarter loan balances low slot with commercial up 1% mortgages up 2%.
First of all on credit costs went down 3%.
In the Pacific Alliance loans went up 1% quarter over quarter.
Net interest income declined primarily due to net interest margin declining 23 basis points compared to Q2.
Two thirds of which was due to changes in business mix.
Mortgages and commercial volumes grew while unsecured lending balances decrease.
Provisions for credit losses ratio declined quarter over quarter by 18 basis points to 100 basis points.
Expenses increased 3% year over year, and 4% compared to Q2, as we incurred higher personnel and technology costs.
We would note that year to date expenses are down 3% compared to last year.
Now turning to the auto segment.
We reported a modest loss of $7 million the year over year improvement was primarily driven by strong asset liability management activities.
Lower COVID-19 related costs, which was offset by lower investment gains.
Quarter over quarter, the earnings were substantially lower due primarily to lower investment gains.
And income from associated corporations.
I'll now turn the call over to Daniel to discuss about it.
Thank you Raj and good morning, everyone.
In my remarks on slide 13.
I'd like to comment on credit quality.
They were lower PCL ratio.
The onset of the pandemic, we took an intentionally conservative view as we built allowances in an uncertain environment.
Back we were appropriately conservative, especially given the subsequent speed with which the business mix has shifted to secured.
High levels of liquidity, driven by government support programs and how rapidly customers obtained down there are higher interest revolving unsecured loans.
The credit quality of new bookings on the collections performance the existing book.
Both improving at a faster rate than we had previously estimated.
This has resulted in better credit metrics in recent quarters and moving forward will result in a lower ACL ratio.
Or write offs and a sustainably lower PCL ratio.
Our current high allowance levels position us well to be appropriately provided for and to continue to release allowances as we expect credit quality to continue to be strong.
Additionally, our business mix has shifted driven by market demand, resulting in the Canadian banking retail portfolio, increasing to 19, 4% secured and international banking portfolio growing to 73% secured from 66% pre pandemic.
And our GBM portfolio remains high quality at 85% are investment grade.
Delinquencies are also down quarter over quarter in all products in both the Canadian banking and international banking retail portfolios and below pre COVID-19 levels in both business lines.
Our new organization quality is very high.
New originations in both Seabee and <unk> showing early stage delinquencies.
Our low pre COVID-19 levels.
As you can see on the slide are Gil I know write off ratios are declining.
The impaired loan ratio improved eight basis points to 73 basis points affecting the high quality of our loan books with both retail and business banking contributing to the improvement.
Yeah.
So guilts have reduced from elevated write offs more importantly, net write offs are also decreasing.
They all that net write off ratio decreased to 62 basis points, driven primarily by lower write offs in international banking retail.
Well write offs have declined significantly this quarter write offs in international banking remained elevated compared to historical averages.
The last of the deferrals age.
This quarter, we saw higher write offs in Colombia.
Driven by the expected late stage delinquencies were all deferral programs expired last December.
But overall the.
The results are trending positively.
As economies recover and customer liquidity remains high and with the strong credit performance across the footprint. We continue to expect write offs international retail to decline to pre pandemic levels by next quarter.
Meanwhile, write offs in Canadian banking or below pre pandemic levels, largely driven by lower write offs in our auto and revolving portfolios as the credit quality of our customers remains high and.
In payment trends remained strong.
Have you all bank level. Therefore, we expect net write offs to decline to below pre pandemic levels.
Turning to credit performance on slide 14, and starting with the balance sheet.
<unk> ended the quarter with total analysis of $6.2 billion, that's a reduction of over $660 million in the prior quarter and our second quarter of reduction.
This was driven by both elevated write offs, reducing our pure loan allowances.
Improved credit quality.
Reducing our performing loan allowances.
Consequently, the ACL ratio declined to 96 basis points from 109 basis points last quarter.
It's worth noting that these expected write off occurred overall credit quality of the remaining portfolio improves and.
We expect the ACL ratio to trend lower next quarter as well.
Performing loan allowances declined approximately $450 million.
Proximately, two thirds or $270 million of performing loan allowances were transferred due to credit migration to impair.
While approximately $180 million was released this quarter excuse me and improving credit performance and the better macroeconomic outlook.
And paired loan allowances declined $179 million from last quarter.
Primarily due to higher write offs and international banking.
Let me now turn to the income statement and provisions for credit losses on slide 15.
Our total PCL declined to $280 million.
The total PCL ratio was 24 basis points down nine basis points from the prior quarter.
Impaired provisions were $841 million in Q3 down 351 million from last quarter.
The decrease was mainly driven by international retail.
Migration continues to improve.
Similarly impaired provisions for Canadian retail banking and business banking both declined sequentially.
Turning to performing provisions, we had a net reversal of $461 million in Q3.
And as we previously discussed 270 million this was driven by credit migration to stage three.
Well $180 million of reversal represents a relief allowances built in prior periods, that's no longer required.
This reflects a better credit quality.
And the improved macroeconomic outlook.
And this represents an improvement in performance versus our prior expectations.
Driven by several factors I mentioned previously.
So let me conclude with a few comments.
Our asset quality remains high.
Credit metrics are trending positively.
I've got a performance in the quarter exceeded our prior expectations and we expect this strong performance to continue.
The PCL outlook continues to be positive with net write offs in impaired provisions improving from last quarter's peak.
And we expect to see further performing ACL releases.
These trends are in line with improving economic growth forecast across our footprint.
High levels of liquidity.
Better credit performance than estimated earlier.
I will now turn the call back to Brian for closing.
Remarks.
Daniel.
Closing I would like to make a few comments and observations before turning it over to Q&A.
Reflecting on our results I am encouraged by the consistency of the progress we have witnessed each of our business lines to date in fiscal 2021.
At the beginning of the year, we stated our anticipation that 2021 would be a transition year towards a return to the full earnings power of the bank supported by a return to normal PCL levels consistent with the economic recovery.
This expectation has played up year to date earnings for the bank are not only above 2020 levels, but our 17% above the same period in 2019, excluding divestitures today.
Date in 2021 Canadian banking has delivered earnings progression at the high end of our expectations Global wealth continues to deliver double digit growth in Canada and internationally with strong performance across all of its businesses.
Our well diversified GBM businesses continued to produce growing and stable earnings capitalizing well on market opportunities.
International banking has recovered to pre pandemic earnings a quarter ahead of previous expectations.
Economic activity in major markets in which we operate continue to strengthen.
So on the metals remains solid with high household liquidity and pent up demand for a range of goods and services.
Low interest rates and a highly stimulative fiscal stance in the U S and Canada has resulted in high levels of both individual and corporate liquidity.
Incoming economic data continues to meet or beat expectations as the removal of COVID-19 restrictions leads to stronger economic activity.
In summary, I am very proud not only of the business results to date in 2021, but continued progress on the growth and efficiency initiatives in each of our businesses that position us well for long term growth against and I always variable economic background.
With strong capital levels. The bank is well positioned to both invest and return capital as appropriate in the pursuit of our strategic objectives to generate long term sustainable earnings growth in the future.
That concludes my formal remarks, and I'll pass it over to John Mccartney for the Q&A.
Thank you, Brian we will now be please to take your questions.
Please limit yourself to one question and then rejoin the queue to allow everyone the opportunity.
<unk>.
Operator.
Please have the first question.
Thank you. Please press star one at this time, if you have a question and the first question.
Ebrahim <unk> from Bank of America. Please go ahead.
Good morning.
Mhm.
I guess just on international banking I don't know, if Roger Nacho, who wants to handle this one.
Talk to us about revenue growth outlook.
From your from this point on as we look into the fourth quarter and beyond and if you can talk to us about your assumptions around loan growth in international banking as well as the margin outlook Raj as we are seeing some of the central banks and it's interesting if you could remind us of the sensitivity of the margin relative to interest rates in that region.
Yeah, surely brain Mets Raj So I'll start on your margin question and then I'll pass it on to not have to talk about asset growth and revenue growth as we look forward.
Our international margin International Banking's margin was compressed.
Compressed a bit this quarter simply because of business mix, two thirds of that 23 basis points quarter over quarter relates to business mix and the other eight basis points relates to previous rate classes that happened through the pandemic.
Rate increases stop coming back can be expected to come back and you've seen evidence of it in Mexico, you've seen it in shell and you've seen it in Brazil, we have seen it and.
And in other markets as well in our region and that's expected to come in early.
25 basis points would give us roughly $20 million up fundings in NIAD, Indeed international banking business segment, that's going to help both with revenue obviously, but also fall to the bottom line.
When a basketball to Nacho talk about ethical.
Good morning, Ebrahim, well, let me talk about revenue and asset growth I would say, it's very important to see the dynamic that is quite different in the Pacific Alliance countries are rebounding strongly compared to the Caribbean and Central America still lagging revenues in the Pacific Alliance increased 5% Q over Q.
And PTP increased 8% Q over Q EBIT for overall international banking decreased one, 1% and PTP Mexico.
Mexico and Chile.
I had mentioned are well above pre COVID-19 PTP on earning levels with very good dynamics in Peru had a significant improvement. These warranty this quarter offsetting the lower resales in the Caribbean that we expand moving proof in the winter as tourism rebounds strongly in terms of loan growth. We are seeing is strong.
<unk> mortgage and commercial growth, 2% and 1% Q over Q, respectively, and in the case of commercially particular spot balances grew 2% in the quarter and we anticipate a solid Q4.
What is lagging is unsecured loan balances have declined and this is mainly driven liking Canada by very high liquidity in the markets, particularly in Chile, and Peru, you have information during our redact the level of some 14, Chile in terms of fiscal and early pension disbursements.
Is 35% of GDP, so there's a lot of liquidity and consumers and that is the deal.
The recovery of the unsecured loan however bookings.
Bookings have improved significantly in all retail products and we expect a retail loan growth to resume in Q4. So did these these strengths I believe it is.
I Hope I answer your question Ebrahim, which I believe the momentum is coming is going to be gradual but he is going in the right direction, both in loan growth and in revenue.
The revenue growth strong in the Pacific Alliance countries and it will come gradually in the Caribbean. Finally, the economic outlook continues to improve it seemed last quarter GDP for the Pacific Alliance countries now, we should expect it to reach seven 5% compared to 6% last quarter and vaccination.
Also our accelerating across the region.
Okay.
Got it.
Thanks for taking them first.
Thank you Frank.
Thank you.
Next question is from Gabriel <unk> from National Bank Financial Please go ahead.
Good morning, just a clarification Raj you said $20 million of earnings from a 25 basis point rate type stuff like that.
But the quarterly figure across the region could kind of comment.
That's an annualized number game I should've been clearer okay sorry.
My other question for Daniel Moore, just a numbers question for me today.
Stage two classifications, so the <unk>.
Higher risk of the performing portfolio I guess that that moved up.
One of the 6% or so quarter over quarter or 12, sorry.
Mostly in the mortgage book can you you know how much of that was model driven is there anything regional or otherwise that better explain that increase.
Yes.
Gabriel. Thank you for the question that was really a 100% boardroom recalibration of the model.
Can anticipate because that was mortgage driven there was really no impact on allowances as a result.
By model driven what was the.
The International Canada.
The characteristic of the portfolio the Crosby crews.
It was recapped.
Recalibration in our Canadian mortgage portfolio, but again no one factual analysis.
Thank you.
Thank you.
The next question is from Scott Chan from Canaccord Genuity.
Please go ahead.
Hi, good morning, so on the international banking side, you're you've kind of reached your physical Q4, net income target and Raj maybe looking into fiscal 2022 at a high level, what kind of factors would have to be in place for that to be sustainable or even higher.
Yeah. Thank you talked I think it's a little early to talk about 'twenty, two but I'll try to give you a very high level perspective.
International banking as you have seen growing quarter over quarter, both assets earnings and more importantly, including the noninterest revenue across our footprint that could continue and Nacho talk a little bit about the asset growth expectations. He has a GDP growth had been expecting to see particularly in the Pacific Alliance region. So.
So the comp for 'twenty, two will be fairly easy come back to our Investor day target of 9% that we've talked to look like international banking.
Because of the progression of the earnings that has happened in 2021.
The PCL ratio is expected to be positive to previous estimates that we have had I believe that the V should see good earnings growth in 'twenty to 'twenty, two and we'd be more specific in the November call Scott.
Okay. Thank you very much.
Thank you.
Thank you. The next question is from Paul Holden from CIBC. Please go ahead.
Thank you good morning.
So last quarter, we talked a little bit about the positioning of the Treasury book in order to benefit from higher rates are broadly maybe a quick update there just in terms of if there's been any any changes.
To the to the gearing.
I'll fall it's Raj.
Don't think theres any substantial changes all of our viewers and the balance sheet is naturally positioned to benefit from interest rate increases it continues to show that.
I think some of the disclosures that we put out in.
Consistent with other banks. This is 100 basis points impact do you see a slight uptick in that based on balance sheet changes, one none of which I would call material.
Okay. Thank you.
Okay.
Thank you. The next question is from Doug Young from Vishal Bank capital markets. Please go ahead.
Hi, Good morning, just on Canadian banking notice noninterest income was up I think it's around 10% quarter over quarter and just trying to get a sense. If there's anything unusual in there or what was the key drivers of this and what's the outlook for that line because I know, there's a lot of different things in there, but including the Canadian tire partnership and their.
Houston and whatnot, so I'm, just hoping to get a little bit of color of what drove it this quarter.
And is that sustainable and what's the outlook.
Sure I'll start Doug, It's Raj and then I'll pass it over to Danny feedstock of comments to add to what I have.
Yeah, absolutely I think you know Canadian tide has been quite successful as far as vehicles and then we're seeing the same trends that you're seeing with scotiabank.
For the quality is better because we are seeing that loan loss provision has been lower and therefore, a pickup from the Canadian Thai partnership that'd be able at the 20% ownership. We have is positive definite game content, we don't know and I suspect it to be a contributor for a few quarters to come if they have the same trends that we expect to see in the bank.
But I think more importantly, when you look at banking revenues you look at the wealth management revenues as part of Canadian Bank with the partnership they have with Glen Gowland and as wealth business through their distribution network in the branches. So that's a big contributor to the Canadian Banking's revenue as well as we look forward as well as as we look back in the quarter that has passed.
I'll take that suggests that when credit card revenues start coming back with the activity continuing to increase and Dan can be more specific on what he's seen so far we should expect to see continuous growth in noninterest revenue line.
Next quarter and beyond that is above that now.
Yeah. Thanks, Raj Doug I'd, just add that you know we made some choices a couple of years ago to grow the commercial business at a faster rate because we were optimistic about the opportunity in the marketplace and so you'll see the progression in the NII line also a function of commercial growing at a faster rate and the final piece that I would make.
As our progress as Raj mentioned at working with wealth management has been substantial and we expect that to continue on the investment sales side.
Sure.
Okay. Thank you.
Thank you. The next question is from Nigel D'souza from Veritas.
Please go ahead.
Thank you good morning, I just had a quick clarification first on slide 15.
You noted that you're performing PCL declined four.
$461 million due to lower migration to stage three I'm, assuming you're referring to the migration of stage two loans. The phase one is that correct.
Doug that's lower migration from performing to nonperforming from $3 one two to three yes.
Okay, and if I could.
Build on your expectations for peak sales going forward with the low level of impairments you're currently seeing across your portfolio do you have a sense of how much you would attribute that to fiscal support and ongoing fiscal support versus.
You'd be opening and rebound in the economy that we're currently seeing.
As restrictions are lifted and could you touch on your expectations for that going forward how much of the.
Credit environment do you see developing from a recovery in the economy versus continued fiscal support.
From from governments.
Thanks for that question.
I'll start out and maybe Dan can provide some additional context.
So I think a number of things have been applying a lot has changed in the last 18 months.
It is through government stimulus or changing consumer preferences, and changing consumer behavior, we've seen a remarkable increase in our deposit balances and that's across our footprint both came back and international.
International banking.
That's led to remarkable consumer liquidity as we've talked about so those changes in our provisions are very strongly driven by the change in consumer behavior, which has resulted in.
Lower delinquency lower early stage delinquency, better recoveries, which has driven improvement.
Improvement on the provisions basis and business mix, that's really been a very very strong driver in the outcome.
Ultimately of course are traveling on a cash basis for those lower write offs. So that we think is with us for quite some time.
If we look at the excess deposit balances in Canada that are built up.
Through a mixture of measures over the course of the pandemic.
And if we see spending go back to pre COVID-19 levels. The Canadian consumer on our balance sheet is two years of additional liquidity that gives us a lot of confidence in our outlook from here.
Any additional color and then just two quick adds Daniel first you know the reopening was important for getting consumers shopping again, even even though the summer is sometimes a slower period in purchase volume. We saw we saw units and dollars grow both on the credit side and the debit side through every month of this.
<unk>, which is really encouraging across travel grocery in particular and home improvements. The other piece I wanted to mention is as we sat here a quarter ago.
We're interested in seeing how the automotive book would play out through the summer notwithstanding supply constraints or into the chip shortage, we saw bookings so new account openings.
In Q3 up 30% year over year in auto and so the reopening and the engagement of dealers has been like remarkably dynamic and we're encouraged with what they got booked in the next 12 months.
Okay.
That's a very helpful answer thank you.
Thank you. The next question is from Maryland, That's from TD Securities. Please go ahead.
Good morning, perhaps maybe just follow up on that question around credit card spending.
There are no external sources that would suggest that credit card spending has recovered to 2019 levels.
And in your credit card revenue number I'm not seeing that play out.
Is that really just a function of the domestic side recovering, but international being slow to recover could you talk about the.
The difference in that and the difference in those two regions sympathetic that spending and if I've got it right that that's what that's what we're seeing here a really big disparity in performance.
Yeah. Thanks, Mario It's Dan Rees here I'll start and then pass it to Nacho in the Canadian based card book, we've seen.
Income so transaction driven revenues rise much faster than I think some of US had expected and we're pleased with that trend and the outlook. The reason revenues in cards aren't where we want them to be as consumers have deleverage that card book I think that's true across the street and we don't expect.
That to resume quite as fast so given that's the revolving nature of that portfolio is important to generating yield the revenue mix.
It's heavily impacted by the fact that lending as the source of the use of that card is not yet back to pre COVID-19 levels.
Pass it to Nacho for comments on international.
Good morning, Mario and it really is not too different.
We have seen a recovery of billings of credit cards, but due to the high level of liquidity payments are also higher on revolving balances are Lloyd are lower so that's what is delaying there the growth in revenue. So that's an upside we see forthcoming courts.
Well you know what I was referring to there was not so much the balances, but just in the other income the fee line itself I would have expected to see a better recovery that's spending.
So its spending not really.
The main thing that fee line yet.
Let me see if I can help you Mario I think the contra revenue that you're referring to is quarter over quarter, it's down by about $4 million. What you would've thought it would be higher I think that's what you're getting to right. The 181 to 177, almost like as FX to Mario but I do think that the spending levels in IV as much as it's almost back to where it should.
B is still short of where it used to be so your point is valid.
That's helpful.
Thank you. The next question is from Lamar Prasad from <unk> Securities. Please go ahead.
So apologies. If this question has already been asked I had to hop on a bit late here, but my question is for Nacho definitely the international banking margins would it be fair to suggest that this quarter marks the trough for for.
Or is it possible that we could see another decline.
Border are moving forward.
And tomorrow, it's Raj I'll start and you know Nacho can complement does as he sees fit.
The right film is trough you know the declined to $3.70 could give you a little bit of perspective from $3.95 to 23 basis points quarter over quarter.
15 basis points relates to business makes Lamar we've seen growth in commercial lending secured retail and we have seen the 3% decline in the unsecured lending book, So that's going to contribute to a margin compression that you can expect.
The other eight basis points is really the lag effect of rate cuts that happened last year that has assets a price and that's the truck coming back as interest rates have started increasing in the region and we think that with the asset growth. The answer that <unk> talked about earlier that he expects to see retail roads talked to happen in Q4, we should see.
The backing off the trend of the reduction in our net interest margin.
Actually in line with this quarter might be marginally higher do you know what a basis point or so, but we believe that this might be the low point in the next best margins by international anything to add Nacho. So I think it is.
It's because we expect now more balanced growth between commercial and secured unsecured. So I think it's going to be relatively stable and there is upside potential due to rising interest rates in the markets.
Okay. Thanks.
Squeeze in another follow up would it be possible to see margins in international which reflect a return back to the four and a half percentage range. We used to talk about pre pandemic or is there something structural in nature that would prevent that from happening.
No I think there is this structural adjustment in our balance sheet, our balance sheet is now much more secure desktop.
I already mentioned it has gone a secure from 66% to 72% of your retail so that reduces our need but it also has a positive offsetting art pcl's. Our PCL ratio is 100 bps, which is 35 bps below pre COVID-19 levels.
Perfect. Thank you.
Yes.
Thank you. The next question is from Darko <unk> from RBC capital markets. Please go ahead.
Thank you and good morning.
Coopervision earnings.
It was sort of down year to date questions for Brian how important is that in your decision.
With respect to a dividend increase once the.
Once the regulators sort of removes that restriction.
You know the way I think of it as all banks, probably Wanna Gibson's token increase.
And that's what I was expecting but it is.
Is it is it really the predominant consideration pretax pre provision earnings and therefore, the spoken increase from Scotia or is there something else that.
It will help drive the decision to create a bigger increase in your AR and your dividend. Thank you.
Okay. Good morning, Darko. Thank you for the question P. T. P. P is the way to look at it and obviously a good solid asset growth drives good solid earnings growth over time for any bank.
But I just moved.
Moved back here and reflect on what's happened over the course of the last two years is remember we took $670 million of the nine out of the bank in terms of divestitures. We've earned through that in a very short period of time and we're proud of that so look we think that the bank is well positioned for growth.
Across all four businesses.
You look at the Canadian Bank this quarter, great numbers, we've been investing in all of our businesses in terms of organic growth opportunities. So youre going to see consistent growth out of the Canadian Bank wealth management, it's demonstrated great earnings growth.
Number two in mutual fund sales number two in terms of earnings growth. This year and we expect that trend to continue GBM is a reposition business and you know sometimes people forget about the scale of business, but if you take GBM in GBM Latam, that's the number two our capital markets Division of.
Of our peer group.
Here in Canada, So a big business that stays within its risk appetite and is delivering consistent and good earnings in international banking and as we've talked about this morning is coming back Mexico, and Chile are through pre COVID-19 level of earnings Peru is coming back and the Caribbean.
In Central America as it always happens lags because theres always a lag between U S GDP growth and economic recovery kind of what happens in the Caribbean because its so skewed towards tourism. So.
Kind of a long winded answer, but a PTP is the way to look at in terms of dividend growth and we feel very positive about that.
The growth rate of the bank going forward Darko.
Great. Thank you.
Thank you. The next question is from Sohrab <unk> from BMO capital markets. Please go ahead.
Thank you I wanted to clarify one answer and then ask a question of clean gallon Raj. The 25 basis point rate sensitivity that you gave for the international banking.
Net income after tax I mean is that basically assuming all of Colombia, Chile, and Mexico, Peru, We're gonna bump by 25 basis points is that is that the way to think about it.
Absolutely, it's a very blunt instrument answer, yes, exactly 25 basis points across our footprint, so Rob you're right.
Okay and that was about $20 million of earnings after tax.
Our annualized okay.
Glen Glen I mean, obviously another good quarter here.
In the wealth business.
Maybe a bit of a tough question to answer but is there any way for you to try and attribute how much of the success.
Youre enjoying right now.
You could get tagged back to the acquisitions that the bank made a couple of years ago in this space.
Yes, I think it's a fair question sort of I would say that.
These were these were great additions and at the time, we really talked about the cultural fit and how they would become part of our business and they are sort of three years down the road completely integrated.
But I think the real story behind the numbers, we're certainly seeing.
Record assets in both of those businesses and they are continuing to grow on their own behalf, but the organic growth across our businesses. If I look at both of those businesses are primarily in Canada, if I look across our Canadian businesses, we're seeing a little bit patient and king.
In the self directed industry with an entre outside of that business every single business, whether it's private banking investment counsel Scotia Mcleod record revenues asset our asset management businesses are north of 20% year over year. So I think the real story here is the bread and Thats whats really setting.
Up for continued growth and you can see we continued to reinvest in the business. We are adding more people in mobile apps for our trade all those kinds of things and not to the flexibility of the P&L. It gives you to invest for future quarters.
<unk>, it's Brian I just wanted to add to this is that we're obviously extremely proud of our wealth management business. If you go down memory Lane a bit here 12, or 13 years ago with consisted of one business and that with Scotia in the cloud, which we're very proud of so we've acquired through acquisition, we built organically and now we have a business that produces.
<unk> in excess of 1 billion and a half dollars a year.
Above all think ROE and we liked the business and the business has a lot of growth potential in our international business more to do here in Canada and the U S. So we think Glenn and his team have done a great job with the business.
It's going to be a growth engine for the bank going forward and really doesn't get the exposure that it's due.
Thank you.
Thank you.
Once again, please press star one at this time, if you have a question and the next question is from Ebrahim <unk> from Bank of America. Please go ahead.
Hey, Thanks for taking my question again.
I just wanted to follow up on international banking on the expense side, maybe Nacho we've thought of.
B as having an expense lever as you get some efficiencies from the investments you've made let's talk to us at all.
Luke level of expenses do you think that goes down from here or is the positive operating leverage is going to be a function of just the revenue growth rebounding in being coming in at a faster clip listen expenses as we look forward.
Thank you for your question Ebrahim I would look at D. C expense growth is expected it because revenue grows and our launch and commercial activity in general has significantly rebounded and has matched Raj mentioned this is really stepping up personnel technology expansion operational and variable expenses. So that's.
Why we have an increase this quarter, but as Raj mentioned year to date, our expenses are down 3% D. G to the detail dividend. We have collected these very significant and I continue to see significant opportunities in the future to continue reducing our expense base as we leverage technology and <unk>.
<unk> that is really adoption is continues to improve at a very high high pace ebrahim.
But it's all expenses net net should still go lower absent any revenue upside revenue and expense growth is that fair, yes, we expect that trend to continue going lower.
Thank you.
Thank you. The next question is from Gabriel <unk> from National Bank Financial. Please go ahead.
Good morning, again, and another question for Daniel you made an interesting comment there.
One of the questions about the consumer's spending returning to pre COVID-19 levels and Uh huh.
People will have two years of excess liquidity the burn through something along those lines, but if you can maybe clarify that's taken a little bit, but when I hear that that doesn't.
It makes me think rollie sounds good don't get me wrong, but it doesn't.
The question about the rebound in consumer lending.
You know in international it sounds like it's going to come back sort of Q4, it's going to.
We will be materializing in Canada, but it seems like a big impediment to that but but outcome maybe.
Can you shed some light on this issue.
Yeah, I'll start and then for outlook on consumer lending El Paso or sedan.
Yeah.
You've seen us in the back of kind of disclosures and elsewhere Gabriel incredible increases across our footprint.
And and liquidity translated really on the retail consumer side of things, so demand deposit checking balances and Canadian retail up 53% versus pre pandemic levels and that's really gone to the people.
Needed the most.
So you've seen that.
Long term reductions in our balances of a volatile so about 20% that's disproportionately to the lower FICO score customers.
That should be driving PCL outlook that we have from here.
So that's been a disproportionate allocation that's been a good result for the country and for and for the bank as well Similarly in IV, we'd had their production that that increase in deposits those deposits are up.
About about 20% demand deposits and that.
It's really driven by those pension releases in Chile improved largely thats across our footprint.
So I'll turn it down on the lending outlook, but I think the notable thing there. So that includes the deposits has gone to the lower FICO cost okay.
<unk> noticed.
It is growing.
53% in Canada.
20% in international is disproportionately skewed to the lower end of the credit spectrum.
Correct, Yeah. That's it gave us Dan here that that is correct I think the main message on liquidity as consumers have options, one and it's great from a risk standpoint, what we've saw what we saw through the quarter was consumer lending was strong in every single one of our product line. So that's why I took a moment to high.
Alight, automotive, which clearly matters to our top line, we see the mortgage book continuing to grow from here credit card interest, earning receivables did grow on a spot basis through the quarter. So consumers are activating in and I think it'll be an interesting year next year when we look at the.
The role that palm improvements will play given that the mortgage market will continue to roll on the secured loan portfolio. So I wouldn't take the kind of deposit position to give you pause for consumer lending returning quite the opposite and more to the point and that's why I called out the relationship that we have with wealth management.
We are seeing deposit balances move into stickier mutual fund product as well, which is we're just clearly great on the fee side.
And good for consumers so thank you.
Okay.
Thank you. The next question is from Sohrab <unk> from BMO capital markets. Please go ahead.
I just wanted to ask one that's J Kerr as well I'd take another obviously a strong quarter here also in your business.
I think once upon a time, we had talked about maybe GBM.
Having about 75% up it's kind of our earnings more stable and durable, but that's when we were talking about four to 450 million Bucks that kind of earnings contribution quoted me you've been above 500.
Updated thoughts as to what kind of durability of your earnings and how much of it right now which is constructive.
Constructive markets.
How much of it is just sustainable going forward yes.
Yes, thanks for the question.
We do think this is a 500 business plus or minus probably 2025.
We have seen constructive market conditions fade away a little bit as we move through Q3, but we do have a diverse business and we've talked about that before.
Got a very strong lending book, we've made that we've made that clear and we've been focused on growing that outside of Canada.
I believe Brian mentioned earlier, the great results out of GBM Latam as did Raj and we're continuing to grow that Americas footprint, including in the U S.
We look at this quarter. The fee line was very strong buoyed by one of our best quarters in M&A since 2014.
And as we look out the stability of them only come from accrual income, but it will become from it'll come from better use of our intellectual capital So stronger advisory businesses, ECM DCM better cross sell of that balance sheet and the cash management products. So we're quite optimistic that this business is repositioning and a great stats or they don't want to get out there to show that.
Positioning our year to date earnings are actually higher than pre pandemic levels in 2019, so three quarters into this year, we've already surpassed our total earnings in 2019, so a much more durable business a much larger earnings contribution from the business not only within GBM, but also in the <unk> segment and we're quite pleased about the outlook as we move into <unk>.
'twenty two.
Thank you.
Thank you all right.
Thank you everyone.
Yes.
Yeah. Thank you everyone for participating in our call today on behalf of the entire management team I want to thank everyone.
For participating we look forward to speaking with you again at our fourth quarter results call. We will also provide our outlook for fiscal 2022.
Our third quarter results call.
Have a great day.
Thank you. The conference has now ended please disconnect your lines at this time and thank you for your participation.
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