Q2 2022 Bank of Nova Scotia Earnings Call
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Good morning, and welcome to Scotia, Bank's 2022 second quarter results presentation My.
My name is John Mccartney and I'm head of Investor Relations here at Scotiabank.
Presenting to you. This morning are Brian quarter, Scotiabank, President and Chief Executive Officer.
Raj Viswanathan, our Chief Financial Officer, and Phil Thomas Our Chief Risk Officer.
Following our comments, we'll be glad to take your questions also present to take questions are the following scotiabank executives, Dan Rees from Canadian banking Glen gallon from global wealth management.
So to shop from international banking, and Jake Lawrence from global banking and markets.
Before we start and on behalf of those 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 to Brian .
Thank you John and good morning, everyone. This morning, we announced our second quarter earnings of $2 8 billion or $2 18 per share representing a very strong 15% year over year increase in earnings per share. The results reflect net income growth of 12%.
Our return on equity of 16, 4%.
<unk> loan growth of 13% and improving net interest margin strong customer and balance sheet.
Bind with prudent expense management positions the bank very well to grow its earnings.
Pro economic back drop for our key geographies remains positive supported by the rise in commodity prices and the underlying strength of businesses and households.
The bank is proving resilient delivering on all our commitments in terms of earnings growth return on equity and expense control.
Maintaining a strong balance sheet.
Continued momentum in Canadian banking and a strong recovery in our international banking segment contributed to solid year over year revenue growth across our operating businesses.
These segments delivered positive operating leverage despite the expense pressures of the current operating environment.
Global wealth management delivered another impressive quarter of growth and positive operating leverage through a period of volatility and broad market declines.
In global banking and markets showed resilience in a period of heightened volatility and muted customer activity in our trading and origination businesses.
Credit trends remained favorable a result of our high quality portfolio supported by strong consumer balance sheets and prudent customer spending behaviors.
Phil Thomas will discuss these factors in more detail later in the call.
Our common equity tier one capital ratio ended the quarter at 11, 6% as we deploy capital in line with our plans to grow the bank organically, while returning capital to our shareholders. This morning, We also announced a 3% increase to our quarterly dividend to $1 three per <unk>.
Share, reflecting our confidence in our earnings outlook.
We expect to continue to deploy internally generated capital in future quarters to support strong loan demand.
The organic while ending <unk> growth of over $27 billion.
Or 62 basis points of capital in the past two quarters will support strong revenue growth in future quarters.
We remain focused on initiatives in each of our business lines that deepen our customer relationships based on convenience connectivity breadth of product offering and best advice.
In Canadian banking were focused on driving multi product relationships with our customers improving customer retention metrics and increasing customer satisfaction scores across our domestic retail business.
The relaunch of our Scotia, plus Scotia rewards combined loyalty program is showing great results to date since January <unk>, plus added 200000, new members transactions and redemptions are up considerably and digital engagement has been very strong with over 3 million log in.
Between mobile and online channels.
Launch with $2 6 million through the C plus apps.
We continue to leverage <unk> digital banking lead and customer satisfaction to deepening client penetration in both credit and investment products Tangerine remains an important driver of deposit growth.
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In Canadian wealth management, we continue to build momentum and advice delivery and investment sales Scotia Smart investor Our digital hybrid advice platform launched earlier this year jointly with Canadian banking has already seen 38000 accounts opened in customer balances in excess of one.
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This past quarter, MD financial and Scotiabank also announced medicus.
<unk> multi employer pension plan designed specifically for Canadian incorporated physicians to access predictable lifetime retirement income.
International banking continues to benefit from loan growth by the quick turnaround.
In the Pacific Alliance economies. The segment continues to grow the corporate and commercial and retail lending books in line with our risk appetite.
This will contribute to stable high quality earnings growth in future quarters.
Digital continues to drive customer experience and efficiencies across our international footprint with adoption, reaching 55% driven by a strong 20% growth in mobile banking users.
In Q2, we also closed the previously announced acquisition of the remaining 16, 8% minority interest in Scotiabank, Chile from our local park, adding approximately $30 million quarterly earnings.
Global banking and markets experienced double digit loan growth in the quarter as clients access capital to grow their businesses financing larger inventories in face of supply chain challenges.
And strategically investing in near shoring plant and that quick.
We anticipate continued momentum in business banking with loan pipelines higher across all of our key markets complemented by a strong M&A pipeline.
In order to enhance our cash management offering to corporate clients GBM recently completed the launch of payments as service, enabling real time customer interaction, allowing for real time payments request for payment and account validation.
And the advisory businesses Gbm's, leading sustainable finance practice had strong participation in global ESG bond markets and as the top ranked Canadian dealer in 2022 year to date.
Enterprise wide, our efforts to create more diverse and inclusive employment opportunities as well as support the accumulation in which we operate continues to gain traction and recognition.
We recently increased our commitment to $10 billion in capital for women owned and women led businesses here in Canada through the Scotiabank women initiatives.
We were also recognized as one of the best places to work in Canada for the third consecutive year by great by the great place to work Institute.
And just last week Scotiabank was the only Canadian Bank recognized with a global award from Global Finance for outstanding leadership, and sustainability transparency and identified as best and count for our sustainable finance initiatives.
Despite the macroeconomic and geopolitical uncertainties in recent months, we are encouraged by the resilience of our businesses and the progress of our organic growth initiatives aimed at enhancing customer experience operating efficiency and future growth for the bank.
And with that I'll turn the call over to Raj for a more detailed financial.
Thank you, Brian and good morning, everyone before I begin I would like to note that all my comments on the bank and business line for Us all.
On an adjusted basis.
I'll start the review of the performance for the quarter on slide five.
The bank reported another strong quarter with earnings of $2 8 billion and diluted EPS of $2 <unk>.
An increase in EPS of 15% year over year.
All four business lines reported strong results again this quarter reinforcing the strength of our diversified platform.
Return on equity improved to 16, 4% this quarter, while pretax pre provision earnings increased 2% year over year.
Revenues were up 3% year over year, driven by strong loan growth.
Net interest income was up 7% year over year and up 3% compared to the prior quarter once again driven by strong loan growth.
All bank net interest margins expanded seven basis points quarter over quarter.
Driven by a three basis point expansion in Canadian banking, and a 10 basis points expansion in international banking.
As detailed in the slide in the appendix.
Canadian banking Nims was supported by higher deposit spreads.
And the impact that the bank of Canada rate increases while international banking net interest margin expanded use of spreads and business mix changes.
Year over year noninterest income was down 3% due to lower investment gains.
Trading revenues and underwriting and advisory fees, while banking and wealth management revenues grew a strong 7%.
The PCL ratio was 13 basis points for the quarter.
Year over year adjusted expenses were up a modest 3% driven by higher personnel and share based compensation professional fees advertising and technology related costs to support business growth.
The productivity ratio was 52, 1% this quarter operating leverage was slightly negative.
At <unk>, 5% year to date.
On slide six we provide an evolution of our common equity tier one ratio over the quarter as well as changes in risk weighted assets.
The bank reported a common equity tier one ratio of 11, 6% down from 12% last quarter, primarily related to strong organic growth and repurchase of shares.
This represents approximately $2 6 billion of excess capital over the 11% level.
Strong internal capital generation of 31 basis points was offset by 33 basis points of growth in risk weighted assets.
$15 2 billion.
During the quarter the bank repurchased approximately 13 9 million shares using 28 basis points of capital.
Year to date, the bank has repurchased $26 3 million shares using 53 basis points of capital.
As previously mentioned the closing of the additional stake of our Chile, Chilean operations accounted for 11 basis points.
Turning now to the business line results beginning on slide seven.
Canadian banking reported very strong earnings of $1 2 billion.
Up 27% year over year.
Pre tax pre provision earnings grew 13% year over year, driven by strong revenue growth.
Net interest income growth of 11% was driven by another strong quarter of loan growth up 14% year over year.
Including 16% growth in mortgages and 19% growth in business loans.
Compared to the prior quarter mortgages grew 3% business loans grew 6%.
Broad based strength in commercial banking reflects our efforts to build Shannon, Quebec, and British Columbia, and growing focus sectors, such as agriculture transportation and manufacturing.
Net interest margin increased by three basis points quarter over quarter benefiting from higher deposit spreads.
The impact from the bank of Canada rate increases, partially offset by lower asset spreads.
The strong non interest income year over year increase of 10% was driven by higher banking revenue foreign exchange and mutual fund distribution fees.
Expenses increased 8% year over year, driven by higher technology personnel and advertising cost to support business growth.
The segment generated positive operating leverage.
<unk> consecutive quarter, which offset positive two 8% in Q2.
The PCL ratio was a natural muscle up one basis point.
Turning now to global wealth management on slide eight.
Earnings of $413 million were up 9% year over year.
Revenue grew 4% underpinned by higher investments one fees net interest income and fee based revenues.
Partially offset by lower discount brokerage revenues due to moderating trading volumes.
Expenses continued to be well controlled and were flat year over year, driven by lower volume driven expenses and lower discretionary spend partially offset by investments in product innovation sales force expansion technology and Digitization.
The division generated positive operating leverage of 360 basis points.
<unk> this quarter was 58, 5%, which is down 210 basis points from last year.
Growth this quarter was broad based with strong results across our asset management advisory and Pennsylvania aligns wealth businesses.
We continue to see strong volume growth in our private banking business with double digit loan and deposit growth along with a solid pipeline for the second half.
Assets under management decreased a modest 1% to 326 billion.
Assets under administration increased 4% to 591 billion compared to last year as higher net sales were partly offset by market depreciation.
In Canada assets under management was up 1% as net sales offset the impact of market depreciation.
Turning to slide nine.
Global banking and markets generated earnings of $488 million this quarter down 6%.
Pretax pre provision income decreased a modest 2%.
Revenue was in line with the prior year with strong growth in business banking driven by continued loan growth, while the capital markets were down reflecting challenging market conditions.
As Brian mentioned, given volatile debt markets. During Q2, we saw more corporate clients accessing bank debt to grow their businesses.
Gbm's loan balances grew 13% year over year, and 3% quarter over quarter.
This was driven by our focus on our growth in the U S market the growth in loans to existing and new clients.
30% year over year.
On the other side of the balance sheet average deposit balances in GBM grew 2% year over year and show good momentum with 10% of annual growth.
Talk basis.
Expenses were up 3% year over year, due mainly to technology costs.
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GBM Latin America, which is recorded as part of international banking had another strong quarter with $185 million of earnings up 9% year over year, reflecting strong strong topline revenue growth of 13%.
GBM Latam performance reflects strong and growing results from our business banking franchise, which represents a majority of GBM Latam revenue.
Slide 10 shows the international banking results.
My comments that follow are on an adjusted and constant dollar basis.
International banking reported net income of $613 million up 49% year over year, and 10% quarter over quarter.
Pre tax pre provision grew 9% year over year, driven by a strong 11% increase in the Pacific Alliance, which was well above pre COVID-19 levels.
That's pre provision earnings in the Caribbean and Central America was also up a strong 11% year over year.
The segment's net earnings continued to grow in line with the economics of the company and has steadily Delaware improving results for the last seven quarters.
Year over year loans grew 9% with commercial loans up 10% in mortgages up a strong 14%.
Compared to the prior quarter residential mortgages grew 4% commercial loans grew 3%, while the personal loans and credit cards grew 2%.
Revenue was up 4% year over year, driven by higher net interest income and noninterest income.
Quarter over quarter net interest margin increased to healthy 10 basis points to 386 basis points driven by changes in business mix and the positive impact of higher Central bank rates.
Net interest margin expanded in the personal bank lines by nine basis points.
The Caribbean and Central America increased by 13 basis points.
Noninterest revenue was up 4% year over year.
Net fees and commission were up 7% mainly from strong banking fees in.
And the combined Pacific Alliance, and Caribbean and Central America regions.
The provision for credit loss ratio declined year over year by 41 basis points to 77 basis points.
Noninterest expenses were in line with the prior year as expenses related to business growth and the inflationary impact.
Set by efficiency initiatives and the benefits from the 2021 restructuring charges.
Coupled with strong digital progress.
This segment has generated positive operating leverage of one 5% year to date.
On slide 11, I'd like to highlight the aggregate performance of the four business lines that reflects our strong operating results.
Significantly lower investment gains this year mutes the impact of these strong metrics at the all bank level.
Total revenues for the four business lines together grew 5% year over year, while expenses grew a modest 2%.
Strong loan growth robust lending pipeline and expected growth in net interest margin physicians the business lines for higher net interest income in future quarters.
Pre tax pre provision earnings grew 8% year over year operating leverage was positive two 5% for the quarter.
These metrics demonstrate the steady positive growth that we are realizing from our investments in strategic initiatives across all our business lines and demonstrates the strength was.
Williams and diversified earnings potential of our.
Key operating segments.
Now turning to the other segment.
On slide 12.
We reported a modest adjusted net loss of $10 million as compared to a loss of $67 million in the prior quarter and net income of $130 million in the prior year.
Year over year. The change was a result of significantly lower investment gains.
Higher noninterest expenses that is partly offset by a higher contribution from asset liability management activities.
The higher contribution from asset liability management was a driver of the significant change from the prior quarter as well.
With that I'll turn the call over to Phil to discuss that.
Thank you Raj and good morning, everyone.
I will first highlight the key themes from a credit perspective before moving into the details of the quarter.
The banks credit performance remained strong driven by lower net write offs and a favorable business mix.
We experienced positive performance across our portfolios given the resilience shown by our retail and business banking customers. Despite an uncertain macroeconomic outlook.
Our key portfolios across our footprint are stronger than ever highlighted by the fall.
Canadian consumer balance sheets have significantly improved average customer loan balances have fallen by 3% since the start of the pandemic, while customer deposits in investable assets have grown by 13% over the same period.
Asset quality is strong and FICO scores continue to improve.
28% of our Canadian mortgage portfolio is insured.
Uninsured balances the average loan to value of this portfolio is down to 47% from 55% in 2019.
In international banking retail more than 95% of originations are of high quality up from 77% pre pandemic as we continue to focus on the outflow in the segment.
And finally in business banking credit quality remained strong with a high investment grade that is well diversified by geography and industry approximately 90% of our corporate portfolio has a probability of default of less than 1%.
Yes.
While we are cognizant of the current economic challenges posed by the elevated inflationary forces such as wage growth due to labor shortages and persistent supply chain issue, we remain optimistic about the overall financial health of our customers.
The last two years have highlighted the bank's ability to effectively manage risks through unforeseen economic challenges and we continue to be proactive in supporting our customers where needed.
Turning to slide 14.
Overall credit quality of our portfolios continues to improve.
Gross impaired loans ratio improved by four basis points to 64 basis points since peaking in Q1 of 2021 to 84 basis points.
We continue to see a positive trend with lower formations.
Our net write off ratio continued to decline quarter over quarter to 25 basis points down two basis points from the prior quarter.
We also saw $422 million of write offs and retail down 8% from last quarter as we continue to see lower trends across our footprint.
We ended the quarter with allowances for credit losses of $5 4 billion down approximately $200 million from the prior quarter.
This level of allowances and lower ACL ratio of 75 basis points is reflective of a broad improved improvements across the bank's portfolios and a shift towards secured retail.
Our Canadian and international retail portfolios are now 95, and 71% secured respectively.
Impaired ACL decreased $19 million from last quarter due to improvements mainly across retail and GBS.
Turning to slide 16, I will now review the PCL performance for the quarter.
I'll think pcl's or $219 million or 13 basis points, driven by a net reversal from performing loans loan PCL in Canadian banking and global banking and markets.
Strong loan growth and a less favorable macroeconomic forecast were offset by continued improvement in credit performance.
In performing PCL. So we had a net reversal of $187 million in Q2.
The reversal was mainly due to improving credit performance net of growth of our Canadian retail portfolio and reversals in GBM related to improved credit metrics.
Impaired PCL.
Our $406 million in Q2 flat to last quarter, driven by continued lower net write offs in international retail offset by lower releases in Canadian retail.
Before I turn the call back to Brian I would like to wrap up with a few highlights.
We've reached the floor of this quarter for PCL and expect provisions to gradually increase in the latter half of the year.
PCL growth was largely driven by lower releases and quality asset growth offset by a favorable shift in business mix to retail secured lending and stable net write offs.
We're cognizant of the uncertain macroeconomic and geopolitical environment, and we continue to see strength and resilience across our portfolios.
Improving origination trends continue to give us confidence that our portfolios are well positioned and I will now turn the call back to Brian for closing remarks.
Thank you Phil we are very pleased with our performance in the first half 2022, the bank is reflecting the full earnings power.
The organization, despite the increased volatility and global macroeconomic developments.
As such we remain confident in our ability to continue to grow the bank and deliver against our key medium term financial objectives growth to date in our core geographies has been resilient, which we expect to continue given healthy consumer balance sheets, and the positive economic impact of higher commodity prices.
Throughout our footprint.
Footprint lending pipelines remain strong across corporate commercial and secured retail businesses, our investments and wealth have added diversification and enhanced our ability to consistently deliver high quality sustainable earnings. The bank has delivered strong performance in <unk>.
<unk> of macroeconomic uncertainty in the past and we feel very well positioned to deal with the challenges of the current environment.
Strong year to date organic <unk> growth of $27 billion for 62 basis points and an improving net interest margin.
We will produce higher net interest income supported by a stable credit environment.
We will continue to manage expenses prudently to generate positive operating leverage for the balance of the year.
We remain highly confident that our diversification of our business model, coupled with prudent risk management and a focus on delivering for our customers, especially through times of uncertainty will yield strong long term results for all our stakeholders with that I will pass the call over to John .
For Q&A.
Thank you, Brian we will now be pleased to take your questions. Please limit yourself to one question and then rejoin the queue to allow everyone the opportunity to.
Participating on the call.
Operator can we have the first question.
Thank you. The first question is from Ebrahim <unk> from Bank of America. Please go ahead.
Good morning.
I guess.
A question on expenses, so adjusted expenses year over year up 3%.
Talk to us.
As you think to like Theres been so much discussion on inflationary pressures wage growth have you been surprised by how.
These have impacted your expenses year to date and as you look forward maybe on a consolidated basis within the segment basis, just talk to us around the outlook for expense growth and how you think about what the core expense run rate should be as we think about this kind of a macro backdrop and then remind us of.
Then any opportunities for savings across segments that would mitigate that thank you.
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If my colleagues my opinion.
If it's a stick to the business line.
From a bank's perspective, you talked about it before prudent expense management as part of our day to day operations and we consider it the cornerstone of how we run this bank.
We've said in previous calls we manage it in line with revenue growth, that's kind of the philosophy, while continuing to invest in people process and technology.
The expense growth this.
This quarter was 3% year over year really good outcome, mainly for the first half of the other agreements like one 7%.
Some of it is helped by FX, which is favorable to walk through our numbers as we look backwards over the last six months.
But looking forward, we know expenses will go up compared to the one 7% in the first half of the year.
Go up too.
Something higher than that but we still think it's going to be in the low single digit range that we indicated in our call in November so theres no change to that from our perspective.
Salaries and benefits go up and inflation is high and there are certain expenses that will.
Go up naturally because of what's happening around us, but if you have a number of levers that we use in this banking a lot of it is discretionary costs, whether it's project related professional services for example, as one category.
Lots of opportunity over there and on the management team, we talk about it a lot not just across the various business lines like very specifically across the bank.
See how we can find offsets.
I'll call on real estate that is one we've been working on it for a long time, not recently continuing to densify, our footprint and so on.
Giving us a lot of benefit some of it is already in the numbers, but there's more to come.
There are many many lines that we think that our opportunities to offset those lines, which we know expenses will go up but it's a balance between investing for the future while continuing to manage expense manage expense.
Expense growth prudently.
Ryan said, we expect to generate positive operating leverage for this year.
Small negative <unk>, 5% at this time, we're quite confident that the second half of the year with the elevated expense growth, we should see positive operating leverage for fiscal 2022.
Got it and just a quick follow up on that.
Employee productivity ratio around 62% slipped hub, that's probably drifting lower maybe closer to 50% of you think about margin expansion on the other side is that kind of the right way to think about it yes, I don't think we would get to 50% for the year just to be clear our target was to get to 50% you should see it trending lower as well yes.
Thanks for taking my questions. Thank you for that.
Thank you.
The next question is from Gabriel <unk> from National Bank Financial. Please go ahead, hey, good morning.
My question is on credit.
I mean, I'm just trying to interpret your comments there.
It doesn't sound like you're too concerned.
Wondering between the end of April which marks the end of this quarter and today, where maybe the econ forecast I have got.
We're going to be.
We're doing something with regards to your performing provision inputs like put more waiting on a worst case scenario or anything of that nature. I mean, conceptually I know you can't give too.
Too much guidance there but.
Yeah, let's leave it there.
Thanks, David I appreciate it I appreciate the question, maybe yes, maybe let me add some color to the comments I made in the in my opening remarks.
We're really focused on the quality of the Canadian consumer right now and as I had mentioned earlier, we're seeing people paying down loans over the last.
Over the last two year period at 3%, we've seen investable assets increase in our Canadian portfolio of Canadian consumer portfolio about 313%.
And so we also look at things like FICO scores, we've had improvements in our FICO scores of our customers over the last over the last couple of years on average within our credit book from 720 to 2015, our mortgage book from $7 50 to 790, so with all this sort of gives.
Really good confidence in terms of <unk>.
In terms of what were.
What we're seeing with our with our customers.
I would also like to point out if you have a look at our our net write offs and we've been seeing.
Good stability within those we have seen a decrease this quarter from 27 basis points to 25 basis points, which should also give you some confidence in terms of how customers are paying off their loans with us.
How sort of the Canadian consumer is healthy.
And lastly, maybe just look at our if you look at our mortgage portfolio, we've seen ltvs improve over the last two years.
The average the average LTV in our portfolio is now 47%. So despite we are conscious and we are thoughtful about macroeconomic headwinds were very confident in the health of the Canadian consumer at this point.
I get that but a lot of what we're looking at.
Loans formation.
Rearview booking indicators.
Thank you.
The forward looking indicators.
Theories and thereof, and maybe just more conservatism.
You Wanna established just to be cautious I don't know is there anything like that.
In your mind.
Yes, I mean listen we've said we've hit a trough this quarter in terms of our PCL and we will continue to.
We will continue to build over the over the course of the of the year as we as we looked at the <unk> and how things are happening in the in the economy excuse me.
Yes, I think David gave us Brian .
Sales given a good update on the status of the portfolios, but we run rigorous stress test here in the back of all of our portfolios in Canada International corporate commercial and obviously given the macroeconomic environment.
Run stress test that would have a more harsh inputs today than we would have possibly a year ago. So that's a rigorous process we run hundreds of them during the course of a week.
And.
It's important to do that for obvious reasons.
Okay. Thanks Pam.
Should I think about it the same question for every bank.
Thanks for that.
Thank you. The next question is from Paul Holden from CIBC. Please go ahead.
Thank you good morning.
A quick question in terms of deposit mix and managing.
Liquidity.
Of both.
Both higher interest rates, how that's impacting deposit mix and then also quantitative tightening and how that might be impacting.
Availability and growth in deposits.
Yeah, I'll start Paul at the all bank level, yes deposit growth and deposit initiatives are key to us.
Any type of operation, but clearly the P&C business to see how we can be self funded in many respects, but the loan growth has been fairly strong and deposits have been really good through the pandemic moderating to more normal levels of what we would see.
Deposit strategies are different when it gets to the Canadian bank and as it gets through the international banks, So I won't get into the details I'll pass it on to the too often but in reality liquidity is something that we manage very closely.
Externally, we report LCR ratios, we talk about NSF RV shows and so on so there is a lots of metrics that is used externally and there's numerous metrics that we use internally.
To manage both.
Both sides of the balance sheet, so to speak and ensure that our funding is appropriately in place to support the strong loan growth that we've seen so that's that's at a very high level from the all bank perspective.
Would I pass it on to Dan you could talk about the Canadian Bank, and then maybe Nacho cheese.
Sure. Thanks, Raj I was very pleased with the quarter over quarter growth in deposits in Canadian banking.
That you've seen at one 5% on the average of closer to 3% in spot. If you compare that to loan expansion, which has been significant this quarter. Those two on a spot basis are almost in balance in Q2, and we haven't seen that at any point during the last two years of the three businesses.
Call that we have been intentionally growing the business bank that self funds, so deposits larger and growing faster than loans larger than loans per domain.
And they had the best quarter and sequential balanced growth in deposits.
In the last three years Tangerine had a tremendous improvement as you would expect and deposits and also in the retail Red Bank, where we were softer last quarter in retail term, we made very good progress as consumers repositioned out of savings and ended GIC. So from a liquidity management.
Standpoint, as Phil said consumers and businesses are in good shape in the portfolio saw better deposit growth this quarter than last quarter.
Thank you Dawn following.
Following on international good morning.
We also had a strong quarter in deposits our Q over Q deposit grew 3% and international in line with loan growth and is a key priority similar to Canadian banking in all business lines on the retail side, we have been providing and much faster account opening on deposit to 75% of all that.
I'll cede accounts in the Pacific Country Alliance countries far opened end to end digital. So this is providing us much more productivity, adding wholesale banking, we have a stronger cash management business in Chile, Peru, we're scaling up our technology in Mexico, and Colombia, as well, so definitely a high priority for us as well.
Okay.
Okay. That's great. So it sounds like no no no need for increased the wholesale deposits everything is going well in terms of consumer and business deposit growth.
I think so Paul I think Thats a good summary, yes, okay. That's great. Thank you.
The next question is from Scott Chan from Canaccord Genuity. Please go ahead.
Good morning.
You spoke a lot about the Canadian consumer, but just curious on the international side specifically.
<unk> Alliance.
You kind of guided a couple of quarters ago to a total PCL ratio of 95 bps in 'twenty two.
Well below pre pandemic levels. So maybe an update on the COVID-19 situation and the Pacific Alliance and any change or thought process. We have to think about it in terms of your your past guidance.
Thanks, Thanks, Scott for the for the question I'll start and maybe hand, it over to not sure that's going to add a little bit a little bit more color to the comments, but.
We're very very happy with how the from a risk perspective, and how the international portfolios are performing.
We've seen a shift from 66% secured to 71% secured in that portfolio and.
Not only that we've seen we've seen great work done on our affluent strategy, which is really up tearing the quality of the portfolio both from new originations and as we look at the portfolio altogether.
That's why we've been.
That's why we've been quite confident with our outlook in terms of the international.
Retail PCL ratios.
Thank you feel let me follow up give you a little bit more color on our on the markets in the Pacific Alliance countries, we're seeing a very strong recovery on the back of strong.
A strong 10% GDP growth last year, an expected 3% this quarter.
And this is reflected in our in our growth our loan growth. This quarter was 3% Q over Q for the third consecutive quarter and it was strong in commercial it was strong in mortgages and it was also it also grew as Raj mentioned in personal loans and credit cards, 2% Q over Q. We are seeing also.
Positive impacts of interest rate increases and business mix, you need with a 10 bps increase in the quarter.
PTP continuous also to perform better 9% year over year, 11% in the Pacific Alliance countries specifically.
And we delivered a strong operating leverage a 300 bps I have to say that <unk> is very remarkable that our expenses are flat year over year, even with inflation. In these countries is around 8% driven by strong leading to solid progress on the execution of the restructuring charge, creating quality assay.
You mentioned, how both a balance sheet of households, and companies are strong and we're seeing this momentum to continue in the second half of the year.
Thank you.
Thank you. The next question is from Mario Mendonca from TD Securities. Please.
Good morning, just a broad question on capital to start so the capital ratio of 11, six on an absolute basis, obviously, good do you.
Maybe it's for Raj and Brian do you believe that the bank's capital level is sufficient to both absorb.
Absorb.
The organic growth the strong organic growth that's starting to emerge.
In international and certainly in commercial and at the same time be able to absorb some increased risk density ads as in by as the environment made perhaps deteriorate and then finally also have the capital flexibility to buy back stock or do inorganic things with the capital is 11 six enough to get it all.
Done.
That's a broad question I'm looking at.
Thanks, Mario I'll start and maybe Brian will have some comments to add to Mike.
I thought I think the short answer is yes.
We work on lock in this bank led we talked about optimal capital.
Less optimal capital at this time is about 11, 5%, where we'd like to offer everyone off a little bit north of it you have seen it we generate 30% to 32 basis points of capital every quarter after dividends and we have multiple opportunities like you said organic at the pace of the buyback.
Buyback of stock, which is being quite high in the first half of the year I think that's going to moderate in the second half of the year right, we're going to buy back another 27 million shares.
We see it today.
We have an ability to buy back another 8 million shares based on the approvals we have in place and we think going to execute on that so that should be a tailwind to what you've seen in the first half how we deploy capital.
And.
Organic growth has been very strong as you mentioned across all our businesses.
I think Q3 will continue to be strong, but there'll be some level of moderation at least on the mortgages in the Canadian Bank site led this should be probably at the high end of what you would see as capital consumption.
And finally, what I'd say is.
Capital is something that we manage very closely even at today's level I made a comment that 11%. It gives us $2 $6 billion of capital cushion to look at arguably a density any sort of migration that might happen that could absorb capital pretty quickly and probably doesn't dawn and what Brian said before a lot of the stress scenarios.
One does not get us anywhere close to that at the same time discussing it could be good could be used are quickly based on macroeconomics at how the portfolio might mode. So I feel like for the rest of the year of the capital would be north of 11, 5% for sure after executing on Brian .
Brian Yes, the only thing that's a good question Mario and one we discuss here and obviously management is a key part of management's job is capital allocation and returning capital to shareholders. So we spent a lot of time and focus on this and it's about balance and we've been executing that in terms of.
Buying shares back increasing dividend and investing in our businesses organically, but if you were to look at it in a time of stress I'd refer you to our Reg cap sub debt sub.
<unk>.
And you can see that for our corporate and commercial portfolios were at the high end of the market vis vis all of our competitors in terms of credit quality. So you know and that's by design.
That's what we do here in terms of allocating capital to our customers. So.
In summary, we've been talking about optimal capital at this bank for a long period of time the arms race on capitals over you'll see the U S banks operating in and around the same level. We are 11 411 511, six we think thats more of an appropriate given the environment and what we see coming at us in the future.
And then just one quick.
A detailed question the share based payments options and others dropped to zero. This quarter was there some sort of change in accounting or is that just a quarter to quarter volatility we might see in the slide.
No. There is no change in accounting Mario as this quarter to quarter and Q1 tends to be seasonally high because you have the eligible to retire that gets picked up at the beginning of the answer you will see that every year. This year was a little higher because of the mark to market of the share based performance will impact quarter over quarter.
Thank you.
Okay.
Thank you. The next question is from Lamar Prasad from <unk> Securities. Please go ahead.
Yeah. Thanks, I just wanted to come back to fill a credit just wanted to revisit the all bank guidance from Q4, just given the macroeconomic backdrop today is admittedly very different language with you guys.
Q4 does it feel like the myths 30 basis points.
The all bank level still makes sense.
Thanks, Amit, we're not going to give that.
Guidance for 2023 year reset guidance today, but I would just point you back to some of the some of the core underlying.
The comments I made earlier about the quality of the portfolio how net write offs are trending.
We really like the positioning of the portfolio right now in terms of where it is with the ratio between secured and unsecured and we feel that we're in a we're in a good position should we have any headwinds come down and as Brian mentioned earlier I mean, we stress the portfolio not only do we stress the portfolio, we stress how our customers will behave.
And under under a big stress scenario.
We leverage advanced analytics to be able to look at.
Identifying truly vulnerable customers and we did the same during the pandemic and we have identified 30000, we do the same run now under stress and we see about 14000 or so.
You look at that and you combine it to the fact that we're still we're still up to where we were in our collections capacity.
We're leveraging Washington, the loss mitigation tools now to proactively reach out to customers. So we feel like we're in really good shape.
And I would just maybe use that in terms of how youre thinking about your guidance for next year.
Okay. That's fair and then maybe for Dan on Canadian banking.
Solid mortgage draws in Q2, but kind of given the backdrop was not materially higher rates and a discussion about a higher probability of a recession can you talk about how you see that evolving for the balance of the year and then are there certain overheated markets that you're looking to pull back on.
Are you guys, making any changes to underwriting standards and in light of some of the higher credit risk.
Yeah. Thank you look we're very pleased with the performance in the quarter, 16% as a result of investments we've been making over several years, both in terms of expanding our sales capacity and our proprietary channel our online offering was positive again this quarter and retention, we now stand well over 90% so.
The the front end and the back end piece of that mortgage business performed as expected based on those investments and we're pleased with our present market position, there, including NBC in Quebec, where I've been signaling for some time, we're undersized you have seen some slowing in the mortgage growths of sequentially. This is.
You see that as opposed to year over year I think we are two 5% sequentially, we do not anticipate making credit adjudication adjustments at this point there are some markets.
<unk>, which are have obviously grown more in the.
The buyers favor, let's say based on softening, but we don't plan to be adjusting our sales our credit stance at this point, we believe that the mortgage is a key part of the retail strategy. If we want to own the home we need to on the mortgage at our cross sell ratios continued to improve in particular, our deposits on pickup. So we're pleased with the <unk>.
Performance to date in terms of outlook. It is slowly slowing so we will be unlikely at the 16% next quarter, but we do expect to see quarter over quarter Q.
Q3, and Q4, perhaps at the high single digits loan growth rates versus prior quarter versus the prior year, so slowly slowing.
And we're pleased with how we stand.
Alright, thanks for taking my questions.
Thank you. The next question is from Microsoft.
Chris Donovan from Stifel GMP. Please go ahead.
Hey, good morning wanted to stick with Dan on that same lineup.
Discussion so just on the on the residential real estate sector. So it's not just the mortgage stuff, but I'm just looking at your real estate and construction category also up 30% year over year, So some pretty pretty good volume growth.
Both of those books of business.
Just wondering at what point are you maybe starting to get a bit concerned you mentioned not changing credit adjudication at this point in time, but just the rate environment. The way it looks right now youre going to have a pretty significant step up in the call.
Cost of carry on existing.
Mortgage balances are you starting to get a big concerned on where this is heading.
It looks like we're potentially going to have both the variable and fixed rate mortgages at a pretty pretty steep level relative to the lows that we saw in 2021 in the next few months.
Yeah look I would just repeat what I had mentioned, Mike which is you are seeing.
A relative deceleration in the expansion of real estate lending through the residential side on.
On the side of commercial I would just reemphasize, we believe that there is a structural imbalance in Canada and that supply is short.
And so to see growth rates on the construction side higher than residential is our way of supporting more supply coming to the market, which will increase the balance in the market and the health of real estate in Canada over the medium and long term this quarter last quarter in the prior quarters or three quarters in a row youre seeing.
Better industry balance across the commercial loan growth. So we saw tremendous improvements in agriculture. This quarter was moved from the number four position after the number three position in terms of market share and it could be number two.
We're expecting to see.
Our relative performance and technology, and health care and transportation and logistics all grow at podium level of rates. So we're less reliant on our real estate now than we would have been a year or two ago, and then speaking with clients and the majority of the growth is from long term top tier.
Since they are taking a long term view.
They're either pausing on bringing product to market or they're picking up land because they know that the immigration wave is continuing and the population of Canada will grow substantially from here. So we acknowledge there are questions in the marketplace around real estate prices, we support the expansion of supply and some moderate.
<unk> is a good thing for a better balance.
Got it so no real change in terms of your strategy you are going to continue to try to gain share at the expense of your peers is that fair yeah.
And Brian Yes, that's correct.
The two loan portfolios that are the largest and growing the fastest are the lowest risk. So the PD in residential mortgages and the PD and real estate lending is extremely low. So we're also derisking the book by growing those two large portfolios and bear in mind in our real estate deposit.
That's come along for the ride based on the consumer So we're very pleased with our credit position in those two portfolios.
Great. Thanks for the color.
Well.
Thank you. The next question is from Doug Young from Deutsche Bank Capital markets. Please go ahead.
Hi, just a question on international banking.
Just wanted to dig in and I've looked at Peru pre tax pre provision earnings seems to have stalled out quarter over quarter, I think that might be due to capital market activity and if that's right can you give a little bit more context.
Context to that or quantify what that impact was.
And then maybe a bit of an outlook and then Nacho I think you've talked about NIM outlook for international banking and the 380 to $3 90.
The midpoint right now like is that still what you perceive is achievable or is there room to kind of push that up a little bit.
Thank you for your question and you are right I think PPP in Peru and declined slightly in the quarter was driven by a very strong capital markets revenue in Q1 in Peru. When you exclude that capital markets revenue PTP was flat despite a shorter quarter and the trends are quite positive in terms of.
Their recovery for roof, our business following a very strong economic recovery as well a loan growth was 4% Q over Q, both strong in retail and commercial margin expansion of five beeps in Peru has done an excellent job in terms of digital progress 60% of all new originations in retail are.
Digital and data.
Restructuring charge execution, the combination of both is allowing us to reduce expenses, 5% year over year in Peru, and the operating leverage is 200 bps credit quality trends remain positive. So you will continue to see continued improved results in Peru.
Question in the second half of the year on margin expansion. We are very pleased to see 10 bps increase this quarter seven bps last quarter, we still see an upside in future quarters. So we would expect.
I'm Mark net interest margin to continue to be positive of course, it will depend on market conditions on competition on the steepness of the curve and so on but I would say we are we are positive about NIM expansion International Bank.
Okay. Thank you.
Thank you. The next question is from Darko <unk> from RBC capital markets. Please go ahead.
Great. Thank you and good morning, everyone and Mike My question is for Dan I, just wanted to follow up on some of the line of questioning for Mike.
On mortgages and real estate in particular.
Do you have a mortgage or variable rate mortgage with a unique feature in.
In which the payment goes up when rates go up.
Is that.
A significant part of the mortgage portfolio today and is it a significant part of.
The go forward I mean is it is it a product right now that is.
Overwhelmingly that the choice of product for customers.
Canada, and I realize you probably stress testing portfolio and that's all good but.
I'm just very curious.
The behavior of this portfolio.
A situation of rapidly rising rates.
Yeah. Thanks Darko.
We're not worried about the credit portfolio the VRM book.
Two thirds of the book is fixed that.
Conversion rate out of variable and effects has been accelerating over the last number of months as prices have been rising that's a trend. We've anticipated we do think and we believe very strongly that a variable mortgage should have a payment that theories. We think that's good for customers and as Phil was saying when we stress test the buckets.
Tens of thousands of customers, who we proactively reach out to who might be vulnerable to an adjustment in their monthly payment amount.
Let me put that in perspective, the average balance on the VRM mortgages, $400000 and I'm rounding up and the adjustment to the monthly mortgage should rates rise 100 basis points from here is about $250 on an expense base of a household or a $5000 or is it not.
A significant adjustment prices have already gone up 75 basis points, we have seen no change in the 31, plus or 91, plus delinquency rates and the FICO scores are higher on the VRM product. The income levels are higher and customers that tend to choose that product.
<unk>.
Have been doing so for a long time, because the payment levels are lower and so this is a sophisticated customer taking our advice and are converting to fixed as anticipated. So this is a product. We've had for 20 years, we think it's transparent to the customer it does not have extra credit risk attached to it and we've been proactive with Phil's team on <unk>.
<unk>, those who need to make the modest transition to date.
And just a mechanical question are they I mean, when when rates move on them.
Is it just taken out of their account or is there is there some sort of communication that hey, your mortgage rates going up the mortgage payments going up.
When there is a rate change to prime the VRM customer receives a proactive written notice informing them of the change and the payment comes out of their account.
Okay.
Very helpful and from a design standpoint, we received positive feedback from the regulator in that respect.
And then as it is at the mortgage of choice today.
If it is it has changed significantly in the last three months.
The swings out of variable and effects has been changing during that period. The stock is two thirds fixed the flow is more VRM today based on the price differential between variable and fixed as that narrows that conversion happens very quickly and as I've been saying for <unk>.
Some time now when you want to own the home the ability to cross sell with DRM customer comes in for retention is meaningful and we've been doing a better and better job of that at each time.
Okay. Thank you very much.
No we're going over time here.
I appreciate that thank you. Thanks Erika.
Thank you everyone for participating in our call today.
Very pleased with the strong start to the year, but earnings momentum across all our businesses on.
On behalf of anti management team I want to thank everyone for participating in our call today and look forward to speaking with you again.
Q3 2022 call in August this concludes our second quarter results call.
Great day.
Thank you.
The conference has ended please disconnect your lines and we thank you for your participation.
This conference is no longer being recorded.
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Yeah.
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Yeah.
Okay.
Yeah.