Q1 2023 Bank of Nova Scotia Earnings Call
Speaker 2: This conference is being recorded. This conference is being recorded.
Speaker 3: Good morning and welcome to Scotiabank's 2023 first quarter results presentation. My name is John McCartney. I'm head of investor relations here at Scotiabank. Presenting you this morning are Scott Thompson, Scotiabank's president and chief executive officer, Raj Viswanathan, our chief financial officer, and Phil Thomas, our chief risk officer.
Speaker 3: Following our comments, we'll be glad to take your questions.
Speaker 3: Also present to take questions are the following scholarship bank executives. Dan Rees from Canadian Banking, Glenn Gowland from Global Wealth Management, Nacho Deschamps from International Banking and Jake Lawrence from Global Bank and Markets.
Speaker 3: Before we start, and on behalf of those speaking today, our freedom slide two of our presentation, which contains Scotiabank's caution regarding forward-looking statements.
Speaker 3: With that, I will now turn the call over to Scott.
Speaker 3: Thank you, John , and good morning, everyone. We appreciate you joining us today. Given this is my first quarterly investor call, I would like to begin with sharing some early observations on the bank after four weeks in the CEO role.
Speaker 3: My approach has always been about transparency and partnership, and I'm committed to working with the investment community in this manner.
Speaker 3: I have had the opportunity to spend time with the leadership team as well as to meet with many employees and customers across Canada and in Mexico, Chile, Peru and Colombia.
Speaker 3: I have been energized by meeting our teams across the bank.
Speaker 3: Our people are highly engaged, proud and committed Scotiabankers. In addition to a rock-solid foundation, a diversified revenue base last year of approximately $32 billion, and net profits of over $10 billion, we have many competitive advantages, unique areas of strength, and opportunities for growth in the bank.
Speaker 3: including the credit quality of our loan book, our Scene Plus loyalty program, which will be a key enabler in diversifying our Canadian P&C business. Thanks.
Speaker 3: the long-term commercial banking growth opportunity across our platform, an outstanding wealth management franchise.
Speaker 3: the GBM platform across the Americas, and our performance in Mexico and the upside potential by improving the connectivity across Canada, the US, and Mexico.
Speaker 3: But we have not delivered the level of total shareholder return that our shareholders should expect of us.
Speaker 3: To drive better shareholder returns, my focus will be on delivering profitable and sustainable growth through an even stronger customer orientation by building our solid foundation, aligning on enterprise-wide focus areas, and consistently executing with operational excellence.
Speaker 3: And I really do want to underscore the words consistent execution, is that is what we expect to measure ourselves on with established milestones and targets.
Speaker 3: To do this, I'm aligning our leadership teams around three areas of focus. First, purposely allocating capital. We need to build more discipline in our approach to capital allocation and we need to view this through an enterprise-wide lens.
Speaker 3: Second is focusing on long-term deposit growth. Increasing our core deposit is critical. The current environment of rapidly rising rates and an inverted yield curve highlights the challenges with the structure of our balance sheet.
Speaker 3: Increasing deposits not only reduces funding costs, but it deepens our relationships with our customers, allowing for a more detailed understanding of their needs, thereby enhancing the multi-product opportunity.
Speaker 4: Payroll and cash management capabilities, as an example, could be an area that becomes a higher priority across the platform.
Speaker 4: Third, we will improve our business mix and profitability.
Speaker 4: Building towards profitable and sustainable growth means leading less with the balance sheet alone, but also a focus on prioritizing long-lasting, multi-product, mutually beneficial relationships that enable our customers to succeed.
Speaker 4: This journey will take time and will require a shift in orientation.
Speaker 4: from the way we reward our people to how we collaborate among our business lines to how we allocate our capital to customers and segments.
Speaker 4: Encouragingly, we have a great foundation to build upon as our customer relationships are strong and our leadership team recognizes the opportunity in front of us.
Speaker 4: I am convinced that with an enterprise-wide focus, combined with our continued lean and agile approach to expense management, we will strengthen our results and deliver the performance our shareholders deserve.
Speaker 4: Turning to our Q1 results, the bank's financial performance in the first quarter of 2023 reflects both the merits of a diversified platform, but also the continued relative pressure on our profitability given our funding profile.
Speaker 4: Going forward, we must be consistent and deliberate in our long-term deposit strategies to continue our journey to reduce our reliance on wholesale funding. Rapid loan growth coupled with high-cost funding sources has adversely impacted profitability, and going forward we will be cognizant of the need to pace loan growth particularly in
Speaker 4: the bank for the remainder of the year.
Speaker 4: In the Canadian business, I was pleased to see the continued progress with our commercial customers and encouragingly deposit growth of 10% outpaced 9% year over year loan growth.
Speaker 4: Dan's vision of diversifying Canada's revenue mix beyond mortgages and autos is the right one and will pay dividends over time.
Speaker 4: Turning to international banking, I was encouraged by the performance this past quarter driven by strong results in retail, commercial and our GBM business as well as positive operating leverage.
Speaker 4: Nacho, Jake and I were in the region recently and the businesses we have built in LATAM are impressive with a digital first mindset that will increasingly facilitate better customer and employee experience at a lower productivity ratio.
Speaker 4: However, while we've allocated significant capital to our international bank in the last few years, the returns are not commensurate with our expectations in certain countries. I see areas of strength and I also see segments where we are under penetrated like commercial, affluent retail and other high-value segments that have a good profitability and
Speaker 4: in the face of volatile markets and continued industry-wide fund flow challenges in the asset management segment.
Speaker 4: Glenn and the team have built a very strong franchise and it is nice to see the quarter over quarter uptick in net income and strong operating leverage performance. I am also pleased to see the continued momentum in the international wealth management business.
Speaker 4: GVM also delivered a solid quarter. I was particularly pleased to see the contribution from capital markets revenue with the close to equal split between business banking and capital markets.
Speaker 4: Record GBM contribution inclusive of GBM LATAM demonstrates the continued progress in our efforts to build an America's wholesale platform.
Speaker 4: Lastly, we continue to observe strong credit metrics across our portfolios.
Speaker 4: I will now turn the call over to Raj for a more detailed presentation on the financial results.
Speaker 5: Thank you, Scott, and good morning, everyone. This quarter's net income was impacted by the $579 million income tax expense variable for the Canada recovery dividend, or 48 cents of earnings per share, and about 12 basis points in the Common Equity Tio and Ratio.
Speaker 5: And this was recorded in the other segment.
Speaker 5: So all my comments on the bank and the other segment that follow will be on an adjusted basis for this item and the usual acquisition related costs. I will now review the performance for the quarter on slide 5.
Speaker 5: The bank supported quarterly adjusted earnings of $2.4 billion and diluted earnings per share of $1.85.
Speaker 5: The return on equity was 13.4%.
Speaker 5: All bank pre-tax pre-provision profit decreased 8% year over year, driven mainly by the impact of higher funding costs.
Speaker 5: Revenues were down 1% year-over-year driven by lower non-interest income, which was down 8%.
Speaker 5: driven primarily from lower wealth management revenues and underwriting and advisory fees, all the banking revenues were up a strong 11%.
Speaker 5: Net interest income grew 5% as a result of strong asset growth across all business lines offset by a lower net interest margin. However, quarter over quarter net interest income was down a more modest 1%.
Speaker 5: Net interest margin declined 5 basis points year over year.
Speaker 5: Interest expense grew $6.5 billion or over 300% while interest income only grew 105%.
Speaker 5: The decline in margin was mostly driven by higher funding costs and higher balances of high-quality low margin liquid assets.
Speaker 5: Looking ahead, we believe that we are at the tail end of rate increases and expect to see margin expansion when interest rates stabilize.
Speaker 5: I'll elaborate further on the higher funding costs in my comments in the other segment.
Speaker 5: The PCL ratio was 33 basis points for the quarter in line with our outlook.
Speaker 5: Year over year, adjusted expenses increase by 6% or 4% excluding the impact of the unfavorable impact of foreign currency translation.
Speaker 5: primarily driven by higher personnel and technology span.
Speaker 5: to support business growth. The productivity ratio was elevated at 55.7% this quarter, resulting in the bank generating negative operating leverage of 6.7%.
Speaker 5: We will be even more thoughtful about expense control across the bank for the remainder of the year.
Speaker 5: Slide 6 provides an evolution of the common equity tier 1 ratio over the quarter as well as the quarter's changes in risk weighted assets. The banks reported a common equity tier 1 ratio of 11.5% unchanged from the prior quarter. Common capital generation of 5 basis points.
Speaker 5: combined with nine basis points from revaluation of securities, offset the 12 basis point impact of the Canada Recovery Dividend.
Speaker 5: Risk weighted assets grew $9.1 billion or $6.5 billion excluding foreign exchange.
Speaker 5: This was driven largely by lending, risk-weighted asset growth and retail of approximately 1.9 billion, and business lending of approximately 2.3 billion dollars. The adoption of Basel III reforms in Q2 2023 is estimated to benefit capital where approximately 20 to 30 basis points.
Our priority remains to deploy capital to support profitable organic growth initiatives while prudently managing capital in the face of a less certain economic outlook.
Turning now to the business line results, beginning on slide 7.
Canadian banking reported earnings of $1.1 billion, a decrease of 10% year-over-year, largely driven by higher provision for credit losses.
Pre-tax-free provision profit grew 7% year-over-year, driven by revenue growth of 10%.
Net interest income increased 12% year over year as loans grew 9% while deposits grew 10 salon does less when the
The net interest margin grew 7 basis points year over year due to higher deposit spreads reflecting the 425 basis points of Bank of Canada rate increases.
partly offset by lower spreads across all loan products. Loan growth moderated to 9% year-over-year driven by a 22% increase in business loans and 7% increase in residential mortgages.
loans grew a modest 1% quarter over quarter.
Deposits grew a strong 10% year-over-year, driven by a 13% increase in personal deposits and a 4% increase in non-personal deposits.
Non-interest income increased by 5% year over year driven by higher private equity gains and higher banking revenue.
Expenses increased 13% year-over-year, driven by higher personnel and technology costs to support business growth.
The PCL ratio was 19 basis points, an increase of 4 basis points compared to the prior quarter, or 22 basis points compared to the prior year.
Turning now to global wealth management on slide 8.
Earnings of $392 million declined 6% year-over-year, primarily due to lower fee income and the impact of elevated seasonal performance fees in the prior year.
Revenue declined 7% year over year, due primarily to lower fee income driven by a decline in trading volumes and lower assets under management, partly offset by strong loan growth in private banking and higher deposit margins.
The division at positive operating leverage this quarter has expenses declined 7% year over year driven by current expense management.
The productivity ratio improved to 59.9%. Assets under management decreased 7% year-over-year to $322 billion primarily due to market depreciation while assets under administration increased 1% to $607 billion.
We saw strong growth in our key international markets with double-digit earnings growth across the Pacific Alliance and the Caribbean wealth management businesses.
Despite investment funds in Canada seeing 10 consecutive months of net redemptions, we continue to be ranked number 2 by assets in the Canadian retail mutual fund industry. Investment results continue to be strong with 69% of 1832 Asset Management Funds in the top 2 quartiles over a 5 year period.
Referring to slide 9, global banking and markets generated earnings of $519 million, down 7% compared to the prior year, but up 7% compared to the prior quarter.
The results were driven by strong loan and deposit growth as loans grew 33% year over year while deposits grew 12%.
Revenue increased 7% as net interest income grew 22% year-over-year driven by solid business banking performance with strong loan and deposit growth and improving margins.
Non-interest income grew a modest 2% as higher trading and banking revenues were partially offset by lower investment banking revenues.
Expenses were up 15% year-over-year due mainly to higher personal costs.
cost to support business growth and regulatory initiatives, and the negative impact of foreign currency translation.
GBM Latin America, which is reported as part of international banking, reported record earnings of $301 million, up 50% year-over-year, with another quarter of strong results from Chile, Mexico and Brazil.
reported net income of $661 million, up 18% year over year.
3 tax 3 probation group 11% year over year with the Pacific Alliance growing 5% the Caribbean and Central America up a strong 36%
to 9%.
mix and spread expansion offset by the impact of lower inflation. The margin was down 8 basis points compared to the prior quarter entirely due to lower inflation primarily in Chile.
The provisions for credit loss ratio was 96 basis points for the segment. Non-interest expenses increased 6% driven by business growth and inflationary impact, partially offset by strong digital progress. The tax rate of 19.7% for the quarter benefited primarily from higher inflationary adjustments in Mexico and Chile.
in inflation.
Turning to slide 11.
The other segment reported an adjusted net loss attributed to equity holders of $334 million.
This was due mainly to lower revenues of $663 million, partly offset by lower expenses and taxes. Approximately three quarters of the lower revenue relates to treasury activities due mainly to higher funding costs and lower income from hedges, reflecting the bank's interest rate position to benefit from declining rates.
This is partially offset by higher income from liquid assets. Also contributing to the lower revenue was lower income from associated corporations and lower investment gains. Quarter over quarter, approximately half of the lower revenue relates to lower treasury activities
due mainly to lower phonics costs and lower income from hedges, partially offset from higher income from liquid assets.
I'll now turn the call over to Phil to discuss risk. Thank you, Raj. Good morning, everyone. As I outlined last quarter, we expect to be in the mid 30s PCL range for fiscal 2023.
Our outlook remains the same as our strong credit practices and high-quality portfolio position as well during this time of economic uncertainty. Overall, the performance of our loan portfolios remains strong and we are seeing a continued normalization of credit trends as customers adjust it to a higher inflation and borrowing costs.
In our commercial and corporate book, we see healthy demand for credit as underwriting opportunities for high quality borrowers during this quarter were strong. In retail, low levels of unemployment across most of our core geographies and driving factor for the stability of household incomes despite inflationary pressures.
Turning to consumer health, we note that our customers are responding to a higher cost of living by making tradeoffs to manage their spending habits. Spending for customers is down approximately 2% for a reporter, as customers are increasingly moderating their discretionary spending on travel, dining, and entertainment.
which saw a decline of 3% quarter-requarter notably over the holiday period. This was partially upset by grocery where spending is a 3% quarter-requarter and 10% year-to-year. Despite variable rate mortgage customers seeing higher payments with the cumulative 425 this point rate increase.
Given the structure of our variable rate product deposits for this group remain above pre-pandemic levels. Variable rate mortgages remain stable at 37% of our total mortgage portfolio. International banking, geopolitical tensions, inflation and rising rates have resulted in software GDP growth. However, we see positive employment trends in our major markets. Average court deposits for customer increased 2% quarter-requarter.
well term decreased 2% quarter recorder, well termed upon this decreased 3% quarter recorder, as specific aligns customers drew down savings to adapt to inflationary pressures. For our Canadian International Retail Portfolios, 90-day delinquencies for all Canadian mortgages are still at historic lows of 11 basis points or approximately half.
pre-pandemic levels.
International retail overall continues to perform well and much better than pre-pandemic. However, normalization continued in Q1 as the winch and C increase by five basis points.
Quarter recorder driven by Chile on secured portfolio is. Turning to credit performance turned the quarter on slide 15.
Our PCL ratio was 33 basis points or a provision of 638 million. Our impaired PCL ratio was 29 basis points or 562 million. We added 76 million performing loans to reflect volume growth and the impact of a less favorable macroeconomic outlook.
Total PCLs increased 109 million Porter reporter driven by portfolio growth and a higher retail formations in both Canada and international. Canadian Banking Retail PCLs increased Porter reporter primarily driven by automotive as we see the normalizing of this portfolio. The increased international banking retail PCLs was driven by Chile and Colombia.
consumers adapt to the inflationary environment.
And paired PCLs and GBM declined from the prior order while performing PCLs increased due to a less favorable macroeconomic outlook.
Allowances for credit losses increased 169 million to 5.7 billion, mostly in stage 1 and 2. The ACL ratio was stable quarter recorder, this scheme will be recorded. Despite net write-offs, increasing slightly quarter of recorder to 29 basis points.
We remain well below pre-pandemic norms of 54 basis points. We remain comfortable with our A-Steel Carverge given the high quality retail portfolio and focus on investment-grade lending and business banking. Finally, we continue to see resilience in our customers.
Our highly secured portfolios with strong credit and underrated fundamentals in higher quality customer mix have positioned us well to manage uncertainty across our core markets. Credit portfolio remains strong and well-provisioned and we are well equipped from a collections perspective to work with our customers. We continue to monitor economic indicators in the health of our customers.
If that, I will pass the call back to Scott. Thank you, Phil. We remain cautiously optimistic on the 2023 operating environment in our key geographies anchored by resilient employment and proactive monetary policies that are having the desired impact on inflation.
The interest rate tightening phase appears to be nearing its conclusion in Canada, which should lead to more favorable consumer sentiment and a continuation of the relatively high business confidence we see from our corporate and commercial customers. In the Pacific Alliance countries, growth is moderating in response to the historically aggressive tightening that characterized 2022. Inflation in the region is slowing with GDP growth expected to continue to be modestly positive this year throughout the region except for Chile.
where a modus slowdown in 2023 is expected to be followed by a rebound in 2024. We have been encouraged by the economic resilience of the region and our own credit performance throughout this period of interest rate and political volatility, which has been instructive as we consider how to best position this business for the future. As we look forward.
Our leadership team and I are underway on a collaborative review of the strategy that will result in enterprise-wide objectives and business line initiatives in support of these shared goals. Our intention is to provide a formal strategy update to investors in the analyst community before the end of the calendar year. In the end term, a few notable near-term focus areas.
From an all-bank perspective, achieving a 12% SETI-1 ratio by fiscal year end is important. A 11.5% was a good outcome for the quarter, and we will continue to see internal capital generation throughout the year, as well as the benefits from Basel III implementation next quarter.
However, to be prudent, we have introduced a 2% drip discount given changing rate expectations and our desire to support business growth once we have aligned on our priority organic growth initiatives.
From an all-bank perspective, we will also be focused on better matching our growth and loans with our growth and deposits. In our Canadian business, we'll be focused on the acquisition of primary multi-product customers. New to bank acquisition and Canadian banking is accelerated with the CIM Plus program, which is already delivering meaningful impact.
The percentage of customers entering the Canadian bank as scene plus customers doubled versus a year ago and a significantly higher percentage of those customers enter the bank with three or more Scotia products. Over time, we will also see continued expansion of our commercial banking business.
to our natural share in Canada, resulting in a larger contribution to the Canadian bank. We will also pursue targeted commercial growth within the international banking footprint in the coming years. Our total wealth model, which leverages our capabilities across private banking and wealth advisory, will enable us to capture greater value within the expanding high net worth client segments across our America's platform.
We will continue to leverage our footprint and grow fee revenue to improve profitability and expect to continue to see double-digit growth in our international wealth management business. We will also continue to build our GBM America's capabilities throughout the U.S. and Latin America to fully capitalize on our sector expertise.
and the Establish Scotiabank brand. We are particularly focused on improving the underwriting and advisory revenue to lending revenue ratio as we work to close the gap to our peers.
In summary, our results this quarter are a reminder that while we have a powerful banking franchise, we also have opportunities for improvement which are highlighted in this current rate environment. We have a strong senior leadership team and over 90,000 Scotiabankers across our footprint to our passionate and committed.
to delivering for our customers, communities, and each other and importantly our shareholders. Although I remain cautious on our near-term earnings outlook, I'm confident we'll come out of this year with a strong balance sheet and refresh priorities supported by a macroeconomic backdrop that will allow us to deliver profitable, sustainable growth for you, our shareholders. Thank you Scott.
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 participate in the call. Operator, can we have the first question on the phone please? Thank you. The first question is from Mario Mandonka from TV Securities. Please go ahead. Good morning. Scott, you talked about the positive focus being important going forward. Now, presumably this was an issue was understood, like the wholesale funding issue was understood.
at Scotiate for some time. Could you talk a little bit about what you expect to do differently now going forward? Or is really just the goal now just to squash long growth so that it just matches up with deposit growth going forward? Or are you going to do something more active on the deposit front?
Yeah, so thanks Mario. So a couple things one. I do think the whole self-funding ratio over time we've made some progress So I guess that would be point one so it is a Uppoint that the team has recognized But I've also seen great opportunities for improvements in terms of how we go to market to capture those deposits and how we reward our people how we Encent our people how we engage with our customers
relative to other segments. Commercial, we know we're under penetrated, we're making a lot of progress, that has to deposit as well. Now those aren't as cheap as deposits, but they are, you know, it's deposits, corporate. We know we lead with our loan and a lot of cases are balance sheet, and there's an opportunity to increase deposits there. So I do believe that there's an opportunity for us to be more focused, more delicious.
growing the loan book at a rapid rate and profit margins and segments that aren't appropriate. So there will be an adjustment on both sides, both on the deposit side and the loan growth side. Okay, we just squeezed in one other here. So Scott, it sounds like Scoti is going to change in the next little while, but Bank's going to change. There's a lot of things you want to do. You're talking about.
revisiting business mix and I be, you know, deposit. There's just so much that's going to change at this bank over the next, say, 12 to 24 months. My experience that when there are big changes like this,
that the analysts get earnings wrong and awful lot. Myself included or maybe even myself especially. So I think it would be helpful then if you.
are very clear on guidance, like EPS or earnings guidance, earnings growth guidance for 2023 and 24. Is that something you can offer now or is that something you'll do at the investor day later this year?
Yeah, so I guess a couple things one and Mario actually see saw you got the earnings pretty close to where we ended up So I thought that was what that was interesting point 1 point 2 We will be more explicit with milestones and targets and guidance But we will wait till we get through the strategy work at the end of the year to do that I think what we're saying now, you know, we're pretty clear that we're cautious about
objectives will have a strong balance sheet, will have refresh priorities and will give you those types of targets that you're asking for.
Thank you so much. Thank you. The next question is from Doug Young from Desjolais Capital Markets. Please go ahead. Good morning.
Just on the corporate loss garage, can you unpack a little bit more about what's going on? And I guess I struggle a little bit because at the divisional level the results look good. And then I look at other and there's the stick negative in. And so I'm hoping you can unpack that. Maybe if you can talk a little bit about what the outlook is, is going to be for corporate.
And when corporate losses are diminished, I'm not too fast, but when corporate losses become bigger, I start to distrust my divisional outlook just because I'm not sure how much of this corporate loss should be allocated out to the divisional side. So can you help me just kind of put some parameters and thoughts around this? Thank you. Sure. Good morning Doug. Happy to do that. When there is a level of interest rate volatility, like we're seeing now.
The impact of that volatility for our bank shows up in the other segment. So what you're seeing the $334 million loss is obviously an outsized outcome, but it's reflective of the interest rate environment. The velocity of changes that have happened in the interest rate environment. But what it relates to is really is how our funds for pricing methodology works and it's purely intended to remove interest rate volatility from the businesses.
So to your question, doesn't relate to a business segment? I would say simply the answer is no. Go back to 2019 or even 2020, for example, when we had actually big benefits in the other segment, we didn't push it to any of the segments because this relates to how we manage the interest rate risk, how we fund ourselves.
and eventually how the interstate situation plays out. So it's very consistent with how we have done it when it's been the opposite way and the other segment. So it's not specific to any business line, but if you want to really attribute, I can tell you like I said before, it does not relate to the international banking business because their treasury operations is within that segment. When you talk about outlook, yeah, I think for this year or immediate order, the funding cost is going to remain elevated as we know we have had interest rate increases. Hopefully the last encounter.
in the other segment as well.
So that's how I see it evolving and then eventually getting back to some sort of normal range, right? Whatever that might be and we can talk what it would do at the end of the year. But for rest of this year, you should assume that the other segment loss will be somewhere in this range.
Also remember that prior I am talking about three, four years back, we used to have a lot of investment gains that went through this sector as well. The loss relating to an ad interest rate in 2019 was little over $900 million for the whole year. It is not unusual for us. I think the quantum is a bit unusual.
because of the velocity and magnitude of rate changes that have happened in a very short period of time. So just to summarize, this is all interest rate related. It probably continues through this year, so others are going to kind of seem out kind of...
outside normal. It's all more related to Canadian PNC banking. And there's nothing else unusual in here outside of that interest rate impact. Is that a fair kind of characterization of this? Yeah, I think it's a fair characterization. The only thing I'd probably add to the Canadian PNC business comment you made.
So as much as the term funding goes to fund the growth in those assets as we improve our liquidity ratio, that will also be a component that impacts the outcome in the second.
down funding goes to fund the growth in those assets as we improve our liquidity ratio. That will also be a component that impacts the outcome in the second.
Thank you. The next question is from Gabriel DeShane, National Bank Financial. Please go ahead. Good morning. I'd like to explore the comments about the IB segment there with regards to returns not being commensurate to the risk. And I think that's, you know, open and on statement. I just want to know what...
thing to lower PCL level to lower capital required stuff like that.
Okay, this is natural. Good morning. Let me start. I think it's important to what you are saying. We are disclosing ROEs for international banking and more granular level. Both for the Pacific Alliance countries and for the Caribbean and Central America.
What I would say is overall we are pleased to see that international banking ROE this quarter is 13.6% and increase in the compared to 12.4% last year.
And in some, the way I summarize the situation we are, we have three geographies with high return on equity, Bob Ibe and all-time ROE, which are the English Caribbean, Mexico and Peru, and we have seen consistent improvement in these countries driven by organic growth. And we also have two countries which are relatively small with an international banking where we have known.
These aren't strategies that are implemented in a quarter time. What's kind of the timeline of turnaround for those Colombian Central American businesses? Hey, David. It's got. We're working with teams right now. This is part of the whole strategy review. There's a combination of deposits and there's a combination of business mix. And we need to make sure we allocate our capital to the areas where we're going to.
Thank you. The next question is from Paul Holden from CIBC. Please go ahead. Thank you. Good morning. So I guess that question relates to the PCL guidance for mid-30s. You hit 33% this year, which is actually already in mid-30s. And I think my perspectives are kind of closer to the beginning of the normalization and impairments versus midway through or near the end. And from just...
business mix that we've had both in Canada and international. It's certainly from in the international perspective, you know, that the move to 73% secured and then in Canada, the move to 95% secured. And we've been spending a lot of time on the just really focused on high quality acquisition in our international portfolio, focus more on affluent as well. And that's making a big difference.
load net write offs coming out of some of our major portfolios. We are starting to see some of those indicators starting to take up forth, but those are in particularly in gills this quarter, but those tend to be in areas such as Canadian mortgages, Canadian auto, which are sort of secured, which have a good
collections, rates on them, so we don't usually flow into stage three. And then in the commercial side we're seeing, you know, continue to see resilience and strength. We were up slightly in Gills this quarter, but that was one Canadian commercial credit that we already have, you know, letters of intent for. So if I look at the portfolio holistically, you know, we're in really good shape, but you know, having said that, you know, I think if I look at my business partners here, we're not going to turn away healthy growth for the state.
terms of the forward rate curve. Are we looking at a situation where you could see pressure once again next quarter on your margin at the all bank level? So if you've covered this already, but I may have missed your comments.
No worries, Mike. Happy to clarify that as well. Yeah, I don't see any material margin compression looking forward A lot of the forward rates are already built into our positions, I think, and our own estimates and outlook. You know, we might have something marginal, I would say, but certainly not to the extent use of this quarter, the seven basis points. I'm actually quite confident that if Q1 is not the bottom, Q2 will likely be the bottom, and then we're going to start seeing margin six band and therefore contribute to the profitability. Okay, appreciate that. And if I can just sneak one in, I think this one's very important. I get asked this question often by investors.
So maybe better for Scott, but when you think about capital allocation and it sounds like divestitures are certainly something that you could potentially do, when you think about that dynamic between maybe taking a hit on capital because your carrying values are higher than what you could sell these assets, these businesses for.
versus just the natural benefit you get on reducing the risk weighted assets. Maybe some higher risk weighted assets, density type lending. Can you talk about that trade off? What I'm wondering is, do you have any low-hanging fruit where you could maybe sell some of these higher risk lending businesses off and not actually have to take a hit to your CT1? Let me start there. Scott might have a comment or two on this mic. I think.
You know, our investiture program or our repositioning is done. I think that's the simplest way you need to think about it. There will always be something which is housekeeping. And like Naccio commented, there's a couple of countries where we feel like we're not getting the appropriate returns for the capital we have invested in. Our first plan and generally our first plan is saying how can we improve the profitability of these operations? And that's what we're going to be focused on.
These are not bad operations. We like the places where we are and we want to ensure that we're able to deliver to our shareholders. The rest of the church, I think, is a last option. I'm not saying we won't exercise it at some point in time, but this is not the time. And I suspect this car will be able to clarify more when we talk about it at the investor day. And eventually, you know, performance drives actions. And we expect to start performing in these regions or in certain products, even in other parts of our business. If you're not getting the appropriate returns, we're going to be lazy to focus on getting our return on risk-quated asset or return on equity more than we have done in the past, particularly in light of we know capital liquidity. All these are going to be constraints.
either based on market events or just based on regulatory changes that are coming including Basel III and we're going to evaluate all that in the context of how we set our strategy for growth going forward. Yeah, I just add on, I mean, profitable growth. This is the pivot right from growth to profitable growth and return on risk-weighted assets is a big component of that. So we're going through the portfolio right now and making sure and from a cost-for-line as well, right, and making sure we have the appropriate return on risk-weighted assets for the capital that we deploy. And that's going to be the challenge that as a team, we're all going to go through here over the next.
a few months. Thank you for the insights. The next question is from Lamar Persaud from Cornmark Securities. Thanks, and for my question here, maybe I'll turn to Raj on all bank expenses. It would be fair to suggest that this quarter would be the high water Marksville expense And what I'm referring to is expense growth on the year over your basis. And then if that's true, where do you see expense growth ending for the full year? Thanks. Thanks Lamar for the question. I think expenses is going to be one of the most important.
consistent line with how we see our revenue evolving. Not quarter by quarter, but as we think about it over a certain period. So that doesn't change and that will not change. But you're right. I think the year over here comes get a little better as we go through the rest of the year compared to what it has been in the beginning of last year because the inflation started really kicking and the expense started growing. Only the second half of last year.
But as I said, my preparatory marks to Lamar will be even more focused on expenses. As we think through the rest of 2023, lots of moving parts. Inflation, we've invested a lot in our businesses and we want to be sure we are in a position to invest as we start formalizing our strategy for growth going forward and expense cannot be a constraint over there. We want to have the right resources, we want to have the right technology and we want to be positioned right so we can continue to grow these businesses. But it should get better when you think what you're aware of the rest of the year.
Okay, and just to leave it with a comment, if you'd like to provide some guidance on that front given the amount of changes you're kind of thinking about here, that would be very helpful. Thank you. Sure, Lamar. I think as we said in the November called relating to 23, we got expenses that will not be the 2% that we saw 22 versus 2021. We knew it would be elevated. I think achieving an expense growth of 4% excluding effects even for this quarter, I would say is quite a good achievement for this bank.
effects is not something that we can forecast. But if you can settle down around the mid-single digit range, call it 4 or 5%, we'd be quite pleased for the whole year. Appreciate it. Thank you. The next question is from Scott Chan, can the corgenuity please go ahead. Thank you. More follow up on your comment on managing our WA growth and maybe pertaining to mortgages and auto, clearly mortgages or struggling with the originations and final bank cover.
I'd like for the recording your basis, so just kind of curious on what you're kind of seeing. I just got a charge, Saul Sartre and any of my colleagues can add on if Dan you want to pitch in. As you saw, mortgage growth has slowed down and that's the market, it's market we all live in, I think we know it quite well. You know, rate increase has been a big component of this load on in the in the out of grade growth in the loan growth and therefore out of grade growth. Autos actually gone the other way. We actually saw expansion in our auto loan book by about a billion dollars in Canada. This quarter, that's quite nice because auto is something we've been waiting for some time. You know, for all the reasons that again, many of you know which is support supply chain issues and memory issues and all those staff.
Autos higher RWD density as we know compared to MoVGIS. There's also going to be a lot of moving parts caught. If you've caught up with the changes that are coming through from a Basel 3 perspective, we know that risk weights are going up on many, many products as they tend to focus more on the floor, standardized calculations, those kinds of things, which is going to continuously increase the risk weighted assets and therefore the capital requirements on all products, not necessarily MoVGIS. So you're going to be thoughtful about it. But I think for the rest of the year, I would suggest that what you've seen in the MoVGIS growth is likely an indicator of what might happen, but I'll leave that to clarify on the few other thoughts you might have on the long growth there.
Yeah, I just confirm the outlook that you're giving with regards to our intentionally slowing the mortgage portfolio, even in light of the fact that the market has been slow. I think that trend will continue. Part of the reason for that is liquidity and risk-weighted assets as Raj mentioned, but also the emphasis on profitable growth through cross-selling and retail. And to give you some comfort a year ago, 18% of new mortgage customers had to day-to-day account. That's now up to 23%. So, deepening with existing customers off the loan portfolios is going to continue to be a prominent story going forward. Auto loans did see good growth this quarter.
That is a relatively higher margin business for us on the loan yield side, so that was encouraging. It is our WADense and does not offer as much cross-sell opportunity. So as we do the portfolio review that Scott mentioned, we will be bearing that in mind in particular. And I would just take the opportunity to reinforce our commitment to commercial profitable loan growth and profitable growth period. The NAR in commercial has been really encouraging and the cross-sell ratios continue to be good as it relates to referrals into wealth management. That loan portfolio does carry higher risk rates, particularly in a forward-basile environment.
I guess a cynical question here, right, just for whatever reason.
At the end, anticipated rate environment doesn't involve the way that would be kind of helpful to you. Is there anything you can do to kind of stop the bleeding in the corporate segment?
anticipated rate environment doesn't involve the way that would be kind of helpful to you. Is there anything you can do to kind of stop the bleeding in the corporate segment?
Thanks, Robert Thruach. I think, you know, interest rate risk management has got multiple factors attached to it, right? It's not just through single-dimensional. Our balance sheet continues to evolve, how we lend, how we borrow, has an impact as the months go forward. Oppositioning, you're just seeing even from the 100 basis points, impact has dropped from $340 million, negative to $304 million, negative. That's the evolution of the balance sheet, which is also going to help. We're very focused on how we manage our interest rate risk, as you know, and we know we're positioned differently.
compared to most of our peer banks, it's not all of them here. We'll think the necessary actions. I think the bulk of the rate increases are in our numbers, so to speak. The assets are continuing to reprise all beta to slow up the pace, and we disclose at least one asset class, which is a mortgage book, how it's going to evolve. There are many components that will drive the outcome in the event that we continue to see significant rate increases.
Now the situation is obviously if there's going to be, you know, 50 basis points, 100 base points increase from the Bank of Canada or from the Feds, yeah definitely that will have an impact to us because of the wave air position. But I think the bulk of it is already there. And based on the forward rate curves that we see and some of the interest rate stress tests that we do, we feel like we can manage the outcome so we're fairly well. so
And I don't think we should see significant margin compression or significant negative outcomes on the other segment as we see it today. Okay, and if I can just sneak one more in for Scott, you know, a year or so ago, it was talked that maybe it would be helpful to have a bit of an international or a US kind of receiving entropy as an added acquisition.
operational excellence agenda in terms of setting milestones, setting targets, and executing. And so, you know, in my mind right now, there's not a big M&A agenda here.
And I think we will, you know, through time, prove out that we can improve the profitability and at the same time improve the growth and improve our credibility. Now, as you ask about international wealth, I do feel about the need to create some synergies across this platform. The America's platform is important.
And I see it working in wholesale. I see a small business in wealth but growing at double digit rates. And I also recognize that high network folks are going to want to be able to operate in Canada, US, and international. But I don't see it as an M&A agenda right now. And maybe one has it to you for any comments. Sure.
focus is on organic growth. So in the US we would have some wealth management that gets utilized certainly our trust-structuring business in Miami. It's been very successful but the priorities really on organic growth and we've seen as Scott mentioned strong double-digit growth in international which we think will continue and the Canadian businesses and the advisory businesses continue to grow strongly and gain market share.
And that's actually something we can export into international. It's not the exact same market, but certainly the needs of the clients rhyme. And so we've had good success in terms of building up the capabilities and partnership with Nacho's team and Jake's team with the clients that we have in international. So we think there's very good runway there on the organic side. Thank you for taking my questions. Thank you. The next question is from Nigel D'Souza from Veritas and Viscont Research. Please, glad. Thank you. Good morning. Just a quick point of clarification on your name out look and putting a finer point on this.
It sounds like your expectation is that once rates peak and stabilize, you'll be able to deliver margin extensions. You don't require all three rate cuts for margin six. So I want to make sure I understand that correctly. Yes, drives an ideal absolutely right. It's actually quite simple. If rates stop rising, our term funding cost, which tends to be exposed to the short end of the curve, will stop rising and our assets continue to reprise. So yes, if they stabilize, we should start seeing them benefiting from it and II benefiting from it and obviously will benefit much more than rate cut start happening.
potential leading as indicator for current experience in the Canadian retail portfolio. Yes, it's still all start Nigel and Dan wants to jump in. We have a big auto portfolio. We're outsized in that versus where we would be in versus peers in credit cards. As a risk manager, I always use this portfolio as a bit of a bell weather. I would say if they're stressed coming through the portfolios mostly on the used car side, that's where we're seeing a little bit attention.
I'm watching the portfolio carefully as we look at potentially have residual values trend. But having said that because we're not seeing a lot of new vehicles, especially the Japanese and German manufacturers, there's a little bit more on the American autoside. It's keeping used car values higher than they would have been obviously pre-pandemic. But if I go back to the numbers again, delinquencies, net write-offs, gross impaired loans, this portfolio are still well below pre-pandemic levels. And I would probably close by saying, through the pandemic, we did a lot of investment or collections space, particularly in the auto book. And that remains in place today. So there's big investments in analytics.
in diolar technology and people in loss mitigation tools and training. So I'm pretty confident that we're in good shape in auto in terms of managing sort of future trends. Yeah, the only thing I would add, I don't say it as a front runner for credit risk issues and credit in the credit card book either, which is obviously normally a contributor to net credit lost dollars. You haven't seen pay down rates or revolve rates on the interest journey receiving all balances and credit cards.
So to reemerge is an issue where so way below pre-COVID levels and the majority of the growth in credit card accounts and balances continues to be purchase volume transactors style. So you don't see that tending to flow through the credit line. And I think still on a mixed basis our super prime concentration has gone up at least 500 basis points year over year based on our focus particularly with the advantage of the scene program. So we're focused on auto for for the time being and the growth has been good and the credit risk is being well managed. The next question is from Mary O'Mandonka, TD Securities. Please go ahead.
Good morning. Thanks, take a follow up. Raj, several times during this call you refer to liquidity as potentially being a constraint or a binding constraint. Now, I don't think you were overstating it, but you did mention it a few times. So, obviously, I went and looked at your LCR and your next data funding rate. So, both of which look no different from your peers and are pretty strong relative to cats, to regulatory requirements. So, I reading too much into it. Like, why are you mentioning liquidity at the binding constraint going forward? Thank you, Mario, for the question. I think we think of liquidity and capital as one and the same in many, many respects.
Okay, can I just squeeze one more than related to that? When liquidity comes under pressure, let's say because deposits are running off. It's a very, very simplistic way.
Couldn't a bank just go and raise longer term whole self-funding to cope with that sort of arithmetic impact on your liquidity coverage ratio? And as the point you're making here that while that is an obvious solution to the OS declining liquidity coverage ratio, that's not something special wants to do today. Is that the reason why liquidity is...
always cheaper to go down the deposits route and maintain your red so to speak and the more times you access the market I think it's going to be more difficult to manage what we would call a so-called self-funding ratio in the bank. It has been well managed right? It used to be at 29% four five years back we are at 22% now. So we like it.
But we want to be even lower because that helps with profitable growth. That's why we focused on liquidity as well. It's not about you know adequate of liquidity or availability of liquidity. I think with the franchise value we have we can access liquidity at any time. It's about what are you willing to pay for and what is that you're going to deploy it into. So you can actually produce profitable growth. Thanks for understanding it. Thanks, Mario. Thank you. Don't over the questions on the phone lines at this time. Great. Thank you operator. On behalf of everyone here today, I want to thank you all for participating.
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