Q1 2023 Bank of Nova Scotia Earnings Call
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This conference is being recorded so it goes to the homes that don't have as you see.
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Good morning, and welcome to <unk> 2023 first quarter results presentation. My name is John Mccartney I'm head of Investor Relations Here's Fischbeck.
Presenting to you. This morning are Scott Thompson Scotia, banks, 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 for the following Scotiabank executives, Dan Rees from Canadian banking Glen Gowland from global wealth management.
So the shop from international banking.
Jake Lawrence for global banking and markets.
Before we start and on behalf of those speaking today I'll refer you to slide two of our presentation, which contain.
Scotiabank caution regarding forward looking statements with that I will now turn the call over to Scott.
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.
My approach has always been about transparency and partnership and I am committed to working with the investment community on this matter.
I've 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.
I've been energized by meeting our teams across the bank.
Our people are highly engaged crowd and committed Scotia bankers. In addition to a rock solid foundation, a diversified revenue base last year of approximately $32 billion.
And net profit of over $10 billion, we have many competitive advantages unique areas of strengths and opportunities for growth in the bank, including the credit quality of our loan books are seen plus loyalty program, which will be a key enabler in diversifying our Canadian P&C business. Thanks.
The long term commercial banking growth opportunity across our platform and outstanding wealth management franchise the.
The GBM platform across the Americas.
And our performance in Mexico, and the upside potential by improving the connectivity across Canada, the U S and Mexico.
But we have not delivered the level of total shareholder return that our shareholders should expect of us.
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 and I really do want to underscore the words consistent.
Houston is that is what we expect to measure ourselves on with established milestones and targets.
To do this I'm aligning our leadership teams around three areas of focus.
First purposely allocating capital we need to build more disciplined in our approach to capital allocation and we need to view this through an enterprise wide license.
Second is focusing on long term deposit growth increasing our core deposits is critical the current environment of rapidly rising rates and an inverted yield curve highlights the challenges with the structure of our balance sheet.
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.
Payroll and cash management capabilities as an example could be an area that becomes a higher priority across the platform.
Third we will improve our business mix and profitability building.
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.
This journey will take time and it will require a shift in orientation.
The way, we reward our people how we collaborate among our business lines, how we allocate our capital to customers and segments.
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.
I'm 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.
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.
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 less profitable product segments.
Yeah.
The negative operating leverage in the bank certainly warrants attention higher personnel cost and spend on certain technology projects, primarily drove the expense growth in the quarter, we will be even more thoughtful about expense control across the bank for the remainder of the year.
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.
<unk> vision of diversifying Canada's revenue mix beyond mortgages in autos is the right one and will pay dividends over time.
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 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 increase.
Bingley facilitate better customer and employee experience at a lower productivity ratio.
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 were underpenetrated like commercial affluent retail and other high value segments that have a good profitability and risk profile.
Bill.
We are in the process of assessing our international business mix, so that going forward, we allocate our capital to customer segments, where we can get appropriate returns for our shareholders.
Global wealth management saw resilient results in the face of volatile markets and continued industry wide funds flow challenges in the asset management segment.
Glenn and the team have built a very strong franchise and its nice to see the quarter over quarter uptick in net income and strong operating leverage performance. I'm also pleased to see the continued momentum in the international wealth management business.
<unk> also delivered a solid quarter I was particularly pleased to see the contribution from capital markets revenue with a close to equal split between business banking and capital markets.
Record GBM contribution inclusive of GBM Latam demonstrates the continued progress in our efforts to build an Americas wholesale platform.
Lastly, we continue to observe strong credit metrics across our portfolios.
I will now turn the call over to Raj for a more detailed presentation on the financial results.
Thank you Scott and good morning, everyone.
This quarter's net income was impacted by the $579 million of income tax expense payable for the Canada to cover the dividend all 48 of earnings per share and about 12 basis points in the common equity tier one ratio.
And this was recorded in the other segment. So all my comments on the bank on 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 five.
The bank reported quarterly adjusted earnings of $2 4 billion and.
And diluted earnings per share of $1 85.
Return on equity was 13, 4%.
All bank pretax pre provision profit decreased 8% year over year, driven mainly by the impact of higher funding costs.
Revenues were down 1% year over year, driven by lower non interest income, which was down 8%.
Driven primarily from lower wealth management revenues.
And underwriting and advisory fees.
The banking revenues went up a strong 11%.
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%.
Net interest margin declined five basis points year over year.
Interest expense grew six 5 billion or over 300% while interest income only grew 105%.
The decline in margin was mostly driven by higher funding costs and higher balances of high quality low margin liquid assets.
Looking ahead, we believe that we are at the tail end of rate increases and I expect to see margin expansion when interest rates stabilize.
I'll elaborate further on the higher funding costs and my comments in the other segment.
The PCL ratio was 33 basis points for the quarter in line with our outlook.
Year over year, adjusted expenses increased by 6% or 4%, excluding the impact of the unfavorable impact of foreign currency translation.
Primarily driven by higher personnel and technology spend to support business growth.
The productivity ratio was elevated at 55, 7% this quarter, resulting in the bank generated negative operating leverage of six 7%.
We will be even more thoughtful about expense control across the bank, but the remainder of the year.
Slide six provides an evolution of the common equity tier one ratio for the quarter as well as some quarters changes in risk weighted assets.
The bank reported a common equity tier one ratio of 11, 5% unchanged from the prior quarter.
Internal capital generation of five basis points combined with nine basis points from revaluation of securities offset that 12 basis point impact of the candidate of company dividends.
Risk weighted assets grew nine 1 billion.
Our $6 $5 billion, excluding foreign exchange.
This was driven largely by lending risk weighted asset growth in retail of approximately $1 9 billion and business lending.
Proximately $2.3 billion.
The adoption of Basel III reforms in Q2, 2023 is estimated to benefit capital by 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 seven.
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 pre provision profit grew 7% year over year.
By revenue growth of 10%.
Net interest income increased 12% year over year as loans grew 9% while deposits grew 10%.
The net interest margin grew seven basis points year over year due to higher deposit spreads, reflecting the 425 basis points or bank of Canada rate increases.
Partially offset by lowest spreads across all loan products.
Loan growth moderated to 9% year over year, driven by a 22% increase in business loans and 7% decrease 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.
Noninterest income decreased by 5% year over year, driven by higher private equity gains and higher banking revenue.
Expenses increased.
Year over year, driven by higher personnel and technology costs to support business growth.
The PCL ratio was 19 basis points, an increase of four basis points compared to the prior quarter at 22 basis points compared to the prior year.
Turning now to global wealth management on slide eight.
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, partially offset by strong loan growth in private banking and higher deposit margins.
The division had positive operating leverage this quarter as expenses declined 7% year over year, driven by prudent 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 the investment funds in Canada seen 10 consecutive months of natural <unk>. We continue to be ranked number two by assets in the Canadian retail mutual fund industry.
Investment results continued to be strong with 69% of 18 32 asset management funds in the top two quartile over a five year period.
Referring to slide nine global banking and markets generated earnings of $519 million down, 7% compared to the prior year, but up 7% compared to the prior quarter.
Our 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.
Noninterest 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 personnel costs.
Cost to support business growth and regulatory initiatives.
And the negative impact of foreign currency translation.
GBM Latin America, just reported as part of International banking reported record earnings of $301 million.
A 50% year over year with another quarter of strong results from Chile, Mexico and Brazil.
Slide 10 highlights this quarter a strong international banking results my comments that follow on an adjusted and constant dollar basis.
The segment reported a net income of $661 million up 18% year over year.
Pretax pre provision grew 11% year over year with the Pacific Alliance growing 5% in the Caribbean and Central America up a strong 36%.
Year over year loans grew 13% with mortgages up 14% and commercial loans up 13%, while personal loans and credit cards also grew 9%.
Revenue was up 8% year over year, driven by higher net interest margin and strong net fee and commissions.
The net interest margin was 400 basis points up 13 basis points, mainly from asset makes sense spread expansion offset by the impact of lower inflation.
The margin was down eight 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.
Noninterest expenses increased 6% driven by business growth and the inflationary impact.
Italy offset by strong digital progress.
The tax rate of 19, 7% for the quarter benefited primarily from higher inflationary adjustments in Mexico, and Chile and changes in earnings mix.
We expect the tax rate to continue to increase in line with the reduction 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.
Partially 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 was partially offset by higher income from Dakota assets.
Also contributing to the lower revenue with lower income from associated corporations and lower investment gains.
Quarter over quarter, approximately half of the lower revenue relates to lower treasury activities.
Mainly to lower funding costs and lower income from hedges, partially offset from higher income from liquid assets.
Now I'll turn the call over to Phil to discuss with us.
Thank you Raj and good morning, everyone.
Our outlook remains the same as our credits strong credit practices and high quality portfolio position us well during this time of economic uncertainty.
Overall, the performance of our loan portfolio remains strong and we are seeing a continued normalization of credit trends as customers adjusted to higher inflation and borrowing costs.
In our commercial and corporate book, we see healthy demand for credit is underwriting opportunities for high quality borrowers during this quarter were strong.
And retail low levels of unemployment across most of our core geographies 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 trade offs to manage their spending habits.
Spending for customers down approximately 2% quarter over quarter as customers are increasingly moderating their discretionary spending on travel dining and entertainment, which saw a decline of 3% quarter over quarter, notably over the holiday period.
This was partially offset by grocery where spending is up 3% quarter over quarter and 10% year over year.
Despite variable rate mortgage customers seeing higher payments with a cumulative 425 basis point rate increase given the structure of our variable rate product deposits for this group remained above pre pandemic levels variable rate mortgages remained stable at 37% of our total mortgage portfolio.
International banking geopolitical tensions inflation and rising rates have resulted in softer GDP growth. However, we see positive employment trends in our major markets.
Average core deposits per customer increased 2% quarter over quarter, while termed decreased 2% quarter over quarter, while term deposits decreased 3% quarter over quarter, a specific alliance customers drew down savings to adapt to inflationary pressures.
For our Canadian and 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 delinquency increased by five basis points.
Quarter over quarter, driven by Chile unsecured portfolios.
Turning to credit performance during 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 of performing loans to reflect volume growth and the impact of a less favorable macroeconomic outlook.
Total PCL increased $109 million quarter over quarter, driven by portfolio growth and a higher and higher retail formations in both Canada and international.
Canadian banking retail PCL increased quarter over quarter, primarily driven by automotive as we see the normalizing of this portfolio.
The increase in international banking retail sales was driven by Chile, and Colombia as consumers adapt to the inflationary environment.
Impaired PCL in GBM declined from the prior quarter.
Forming PCL increased due to a less favorable macroeconomic outlook.
Allowances for credit losses increased 169 million to $5 7 billion, mostly in stage, one and two the ACL ratio was stable quarter over quarter.
Let's give them a corporate quarter, despite net write offs, increasing slightly quarter over quarter to 29 basis points, we remained well below pre pandemic norms of 54 basis points.
We remain comfortable with our ACL coverage, 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 underwriting fundamentals and higher quality customer mix have positioned us well to manage uncertainty across our core markets.
The 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 and the health of our customers with 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 a 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 modest 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 rates 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 and the analyst community before the end of the calendar year in.
In the interim a few notable near term focus areas.
From an all bank perspective, achieving a 12% 31 ratio by fiscal year end is important.
One 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 are aligned on our priority organic growth initiatives.
From an all bank perspective, we will also be focused on better matching our growth in loans with our growth in deposits.
In our Canadian business will be focused on the acquisition of primary multi product customers.
New to bank acquisition in Canadian banking is accelerating with the <unk> plus program, which is already delivering meaningful impact the percentage of customers entering the Canadian bank has seen plus customers doubled versus a year ago versus a year ago and a significantly higher percentage of those customers entered the bank with three or more sculpsure 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 segment across our Americas platform, we will continue to leverage our footprint and grow fee revenue to improve profitability and expect to continue to see them.
<unk> digit growth in our international wealth management business.
We will also continue to build our GBM Americas capabilities throughout the U S and Latin America to fully capitalize on our sector expertise and the established 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.
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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 90000 Scotia bankers across our footprint, who are 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 will come out of this year with a strong balance sheet and our refreshed priorities supported by a macroeconomic backdrop that will allow us to deliver profitable sustainable growth for you our shareholders.
Thank you Scott.
I'll now be pleased to take your questions. Please limit yourself to one question and then rejoin the queue to allow everyone the opportunity participate in the call.
Operator can we have the first question on the phone please.
Thank you. The first question is from Mario Mendonca from TD Securities. Please go ahead.
Good morning, Scott you talked about.
Deposit focus being important going forward now.
Presumably.
This was another.
Issue was understood like the wholesale funding issue was understood.
At Scotia for some time could you talk a little bit about what you expect to do differently now.
Going forward.
Or is really just the gold now just two <unk>.
Squash loan 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 of things one I do think the wholesale funding ratio over time, we've made some progress. So I guess that would be 0.1. So it is a.
The point 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 incent our people how we engage with our customers and so that was encouraging this quarter for example in Canada to see deposit growth of 10% in loan growth over 9%.
But we still got work to do across our portfolio.
And I think let's pick a couple of segments small business right. We're underpenetrated in small business. We know that has four times the deposit growth relative to other segments commercial we know we're underpenetrated, we're making a lot of progress that has good deposits as well now those arent as cheaper deposits, but they are that's deposits corporate we know.
We lead with our loan in lot of cases, our balance sheet and there is an opportunity to increase deposits. There. So I do believe that there is an opportunity for us to be more focused more deliberate and more consistent on how we go to the deposits and that will be a big opportunity for us going forward. So I don't see it fully coming through the loan side that being said.
On your loan side, we do have to have a better matching of deposits to loan growth, we can't be wholesale funding on one hand that fairly high cost and then growing the loan book at a rapid rate and <unk>.
Profit with profit margins in the segments that aren't appropriate. So there will be an adjustment on both sides. Both on the deposit side and the loan growth side.
Can we just squeeze in one other here so Scott it sounds like Scotia is going to change in the next little while the bank is going to change there is a lot of things you want to do you're talking about a.
Revisiting business mix and I b.
Deposits Theres, just so much that's going to change at this bank over the next say 12 to 24 months.
My experience that when when.
There are big changes like this.
That the analysts get earnings wrong, an 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 earnings guidance earnings growth guidance for 2023, and 24 is that something you can offer now or is that something you will do at the Investor Day later this year.
So I guess a couple of things one it Mario actually saw you got the earnings were pretty close to where we ended up so I thought that was it was interesting 0.1, 0.2, we will be more explicit with milestones and targets and guidance.
But we will wait till we get through this strategy work at the end of the year to do that I think what we're saying now we're pretty clear that we're cautious about the next quarter in terms of earnings but we're also recognizing we're at the bottom here in terms of NIM or close to the bottom in terms of NIM compression. So that is good news I think as we come out of the <unk>.
Year, we'll give you more targets more clarity more transparency, which once we've aligned around the growth objectives. We will have a strong balance sheet. We will have refreshed priorities and we will give you those types of targets that you are asking for us. Thank you so much.
Yeah.
Thank you. The next question is from Doug Young from Deutsche Bank Capital markets. Please go ahead.
Hi, good morning.
Just on the corporate loss Raj can you unpack a little bit more about what's going on in that and I guess I struggle, a little bit because at the divisional level. The results look good and then I look at out there and there's no big negatives Ian.
And so I'm, hoping you can unpack that maybe if you could talk a little bit about what the outlook is going to be for corporate and when when corporate losses are de minimis I'm not too fast, but when corporate losses become big I start to distressed my divisional.
But 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 on thoughts around this thank you.
Good morning, Doug happy to do that when there is a level of interest rate volatility volatility like we are seeing now.
The impact of that volatility for a bank shows up in the other segment, so what youre, saying the $334 million loss is obviously, an outsized outcome, but it's reflective of the interest rate environment and the velocity of changes that have happened in the interest rate and.
Environment.
But what it relates to us really is how our funds transfer pricing methodology works and it's purely intended to remove interest rate volatility from the businesses. So to your question does it relate to our 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 the do any of the segments. Because this relates to how we manage interest rate risk, how we fund ourselves and eventually how the interest rate situation plays out so it's very consistent with how we've done it when it's been the opposite way in 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 he 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 are immediate quarter.
The funding cost is going to remain elevated as we know we have had interest rate increases hopefully the loss in Canada from what we've heard from the governor so that should have a full quarter impact in the second quarter. The fed rate increases will also have an impact for us. So I think the other segment will look somewhat similar to what you're seeing this quarter, it's not going to improve too much.
But eventually I think as rates stabilize and eventually when rates are declining that happened late in the calendar year or into 2024, we don't know for sure we will see the benefits starting to accumulate 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 about it towards the end of the year, but for the rest of this year you should assume that the other segment loss it would be somewhere in this range.
Also remember that prior I'm talking about three or four years back we used to have a lot of investment gains that went through this sector as well.
The loss for letting go net interest income in 2019 was little over $900 million for the whole year. So it is not unusual for us I think the quantum is a bit unusual because of the velocity and magnitude of any changes that have happened in a very short period of time.
So just to summarize it like this is all interest rate related it probably continues through this year, so others going to kind of theme I kind of.
Outside normal it's all more related to Canadian P&C banking.
And there is nothing else unusual in here inside of that interest rate impact is that a fair kind of characterization of this.
Yes, I think its effect characterization, the only thing I'd, probably add to the Canadian P&C business comments you made.
Only three different confidence when you think about Weibo's investor, if that's where you're going the Canadian bank definitely as a company in global banking and markets as a company and likewise, our investment securities we hold high quality liquid assets, which tend to be lower margin. So as much as that dome funding goes to fund the growth in those assets as we improve our liquidity.
Ratio that could also be a component that impacts he'll come into the second.
Thank you.
Thank you. The next question is from Gabriel Duchesne National Bank Financial Please go ahead.
Good morning, I'm not going to you know just to explore the comments about the I b.
On up there with regards to our you know returns not being commensurate to the risk and I think that you know.
Open and honest statement.
Just wanted to know what are you what are you looking at in particular.
I know over the past couple of years, there has been some businesses like some unsecured consumer that you've been downsizing or de emphasizing.
Wondering I guess geographically what are the product lines that might be looking at and you know what the expected.
Impact is from a sustainable lower PCL level to you know a lower capital required stuff like that.
Okay.
Can you just natural and good morning, Let me let me start by I think it's important to what you were saying we are disclosing roe's for international banking and their more granular level, both for the Pacific Alliance countries and for the Caribbean and Central America, What I would say east overall, we are pleased.
To see that international banking ROE in these quantities 13, 6% in inquiries increased compared to $12 12, 4% last year.
In sum the way I would summarize the situation. We are we have three geographies with high return on equity above I, IV and all bank 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 even international banking, where we acknowledge that we need to improve performance and profitability, We chart, Colombia and Central America and in these countries. We have developed specific business plans that we expect will gradually improve their performance and close the gap in profitability.
So those are and kind of whats.
Uh huh.
Strategies that are implemented.
Order time, like what's kind of the timeline of a.
Turnaround for for those Colombian Central American businesses.
David It's Scott So we're working with the teams right now I mean, this is part of the whole straw.
The strategy review and there is a combination of deposits and Theres a combination of business mix.
And we need to make sure we allocate our capital to the areas, where we're going to get the highest return on risk adjusted our risk weighted assets.
So that's the process that we're going through right now and we'll have more to say on that at the end of the year.
And I'd Echo the comments.
Org changes when quantifying the impact so we can get a better handle on her.
On our modeling and expectations that are pretty important.
Thank you.
Thanks Kipp.
Thank you. The next question is from Paul Holden from CIBC. Please go ahead.
Thank you good morning.
So I guess my question relates to the PCL guidance for mid Thirty's, 33% this year, which is actually already in mid thirties and.
I think we were like my perspective is we're kind of closer to the beginning of the normalization and impairments versus mid way through or near the end. So I'm just wondering.
I'm wondering what it is that gives you comfort that the PCL ratio won't be increasing significantly from Q1.
Thanks, Paul.
I appreciate the question failure.
We're going to as I said in my prepared remarks, we're standing behind our mid thirties guidance for for the year and you know what.
What gives me comfort is the shift in business mix that we've had both in Canada and international certainly from an international perspective.
The move to 73% secured and in Canada and moved to 95% secured and we've been spending a lot of time on.
Just really focused on high quality acquisition in our international portfolio focus more on affluent as well and that's making a big difference in terms of what I'm seeing in the in the numbers coming up.
And so and then finally.
As I go through portfolio by portfolio like where.
We really see a lot of the.
Continued low delinquency.
Delinquency rates continued low net write offs coming out of some of our major portfolios. We are starting to see some of those indicators starting to tick upwards, but those are in particularly in <unk>. This quarter, but those are tend to be in areas such as.
Canadian mortgages Canadian auto, which are sort of secured.
Which has a good.
Collections rates on them. So we don't they just don't usually flow into <unk>.
Into stage three.
And then in the commercial side, we're seeing continue to see resilience and strength, we were up slightly in <unk>. This quarter, but that was one Canadian commercial credit that we already have you know light letters of intent for so so if I look at the portfolio Holistically.
We're in really good shape.
But having having said that.
I think as I look at my business partners here, we're not going to turn away healthy growth for the for the sake of the PCL ratio and we will be thoughtful and over collectively with.
With my partners here to see how we go throughout the year.
I'll leave that as my my one question. Thank you.
Thank you.
Next question is from Mike Richardson of Itch from TCW Research. Please go ahead.
Hey, Good morning, a quick question for Raj just wanted to get some color on the rate impact since quarter end, obviously re rate expectations have moved a little bit.
The forward rate curve.
Are we looking at a situation where you could see pressure once again next quarter at your on your margin at the all bank level, sorry, if you've covered this already but I may have missed your comments.
No no no worries, Mike happy to clarify that as well, yes, I don't see any any material margin compression looking forward into Q2 and a lot of the forward rates are already built into our position, so I think and our own estimates and outlook.
On this might I think.
Our divestiture program or a repositioning is done I think that's the simplest way to think about it they're always see something which is housekeeping and like Nacho commented. This couple of countries, where we feel like we're not getting the appropriate returns for the capital invested in art.
Our first plan and generally our first one is saying how can we improve the profitability of these operations and that's what we are going to be focused on these are not bad operations, we'd like to places, where we are and we want to ensure that being able to delaware to our shareholders.
Divestitures I think is the 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 the Scott 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 are uncertain products, even in other parts of our business, if you're not getting the approach.
<unk> returns, we're going to be laser focused on getting audit Donald risk weighted assets return on equity more than we have done in the past.
Particularly in light of Reno capital liquidity all of these are going to be constraints.
Ada based on market events, which is based on regulatory changes that are coming and getting Basel three and we're going to evaluate all that in the context of hobbies that I was trying to do for growth going forward.
Yeah, I would just add on profitable growth as as the pivot right from growth to profitable growth.
In 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 our customer lines as well, alright, and making sure we have the appropriate return on risk weighted assets for the capital that we deploy.
And that's gonna be the challenge that as a team we're all going to go through here over the next.
A few months.
Got it thank you for the for the insights.
Thank you the next question.
Lamar per song from <unk> Security. Please go ahead.
Thanks <unk> for my question here, maybe I'll turn to Rajan all bank extensive would it be.
Fair to suggested this quarter would be the high water Mark for expense road, and what I'm, referring to you as expensive like a year over year basis, and then if that is true where do you see expense wrote the ending for the full year. Thanks.
Thanks for the question I think expenses is going to be one of the most important topics us here and we all know inflation, we all know what some of the personal cost that has gone up and we think about year over year, all the base salary increases and so on which has been widely publicized so it's definitely going to have an impact.
Our banks philosophy as many of you know is always based on two principles of how we manage expenses. One we prioritize we wanted to be sure to be a continuing to invest in the business doesn't matter, what the environmentalists and.
And second comment also relates in his probably indifferent to the environment is will always look to manage our expenses in line with how we see on revenue evolving not quarter by quarter, but as we think about it or at a certain period, so that doesn't change and that will not change.
But you're right I think the year over year calms 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 inpatient charges really kicking in an extent started growing only the second half of last year.
But as I said in my prepared remarks till tomorrow will be even more focused on expenses as we think through the restaurant restaurant 2023 lots of moving parts inflation, we've invested a lot in our businesses and we wanted to be sure. We are in a position to invest as we've talked formalizing a strategy for growth going forward and expense cannot be a concern.
Oh that'd be one that has the right resources, we want to have the right technology and we Wanna be position right. So we can continue to grow these businesses, but it should get better when you think of what you have to wait for the rest of the year.
Okay, and just leave me with a commendation back to provide some guidance on that front given the amount of changes or what kind of thinking about here that would be very helpful. Thank you.
Sure Lamar I think as we said in the in.
In the November called relating to 23, we thought expenses will not be the 2% that we saw twenty-two versus 2021, we knew to be elevated I think to an extent growth of 4% excluding effects. Even for this quote I would say is you know.
It's quite a good achievement for this bank effects is not something that we can forecast, but if he can settle down around the mid single digit range call at four 5%, we'd be quite pleased for the whole year.
I appreciate that.
Thank you. The next question is from Scott.
Court.
Please go ahead.
Thank you yeah more to follow up on your comment on managing R. W. A growth and maybe pertaining to mortgages and auto clearly mortgages are struggling with community organizations in Toronto Vancouver.
Recorded and you'll be you're basically just kind of curious on on what you're calling to see.
Sure. It's Carter tried salsa and any of my colleagues can't add on if Daniel <unk>.
As you saw mortgage no tasks logged off and thus the market. It's market. We all live in I think we know it quite well.
Rent increases have been a big confident of the slowdown in the in.
In the in the <unk> in the loan growth and therefore, the Big Road.
<unk> has actually gone the other way, we actually saw expansion of our auto loan book by about a billion dollars in Canada. This quarter, that's quite nice because auto something we've been waiting for some time you know for all the reasons that again many of you know which is some books on like Jane issues in memory issues and all those stuff.
Otto is higher audibly identity as you know compared to mortgages. There's also gonna be a lot of moving parts. Scott. If you if you're caught up with the changes that are coming through from a Basel three perspective, we know that earthquakes are going up on many many product says they tend to focus more on the floor standardized calculations those kind of things which is going.
Continuously increase the risk weighted assets and therefore, the capital requirements on all products not necessarily mortgages, so you're going to be thoughtful about it I think for the rest of the year I would suggest that what you've seen in the mortgage growth is likely an indicator of what might happen, but I'll leave tend to clarify on a few other thoughts you might have one of the loan growth Yeah, I'd I'd just confirmed.
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 in risk weighted assets is Raj mentioned, but also the the emphasis on profitable growth through cross selling in retail and to give you some comfort.
A year ago, 18% of new mortgage customers have the date the account that's now up to 23% so deeply with existing customers off the loan portfolios isn't going to continue to be a prominent story going forward.
Oh 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 R. W. A dance and does not offer as much cross-sell opportunities 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 N a R.
And 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 are particularly enough forward Basil environment and so in the same way that you saw as you grow below the market in Q1.
Even before adjusting for our smaller loan size, you will continue to see us be diligent and deliberate about R. W. Eight managing the commercial loan growth from here forward with an emphasis in particular on segments and commercial that offer non interest revenues and feed the rest of the franchise.
Alright, Thank you very much.
Thank you the next question as well.
<unk>.
Capital markets.
[laughter].
Thank you.
[laughter].
I guess, a cynical question you know right.
For whatever reason.
At the anticipated raped environment doesn't.
Involved the way that would be.
Oh no.
Helpful to you is there anything you can do.
To kind of stuff.
Stop the bleeding in the corporate sector.
[noise], thanks or of it's Raj.
I think.
Interest rate risk management has it gotten multiple factors attached to it right. It's not just single dimensional or balance sheet continues to evolve how relend. How we borrow has an impact has as the months go forward.
Ah positioning you doesn't even from the hundred basis points impact has dropped from $340 million negative put $340 million negative Ah since the evolution of the balance sheet, which is also going to help you.
We are very focused on how we manage the interest rate was cause you know and be normally a position differently.
Compared to most of our puppy banks, it's not all of them here.
Well, thank goodness reactions I think the bulk of the rate increases are in our numbers so to speak.
The assets are continuing to reprice, albeit at a slower pace than we disclose at least one asset classes into some mortgage book, how it's going to evolve there are many confidence that will drive the outcomes Indy when they'd be continued to see significant rate increases.
Now the situation is obviously, if there's going to be you know 50 basis points hundred basis points increase from from the.
Bank of Canada are from the Feds, Yeah definitely that will have an impact to us because of the baby a position, but I think the bulk of it is already dead and based on the forward rate close that we see in some of the interest rate.
Stress tests that we do we feel like we can manage the outcome sourav fairly well.
And I don't think we should see significant margin compression or significant negative off comes from the other segment as we see it today.
Okay, and if I could just sneak one more and for Scott.
A year or so ago.
There was talk that maybe it would be helpful to have.
A bit of an international or a U S kind of receiving entity.
Okay acquisition into a G global wealth management business.
How do you think about all the things that are on the go right now.
Is capital deployment through an acquisition a high priority items, Scott or is that a little bit further on that on the back burner.
Sort of things were.
Focus I mean, this is going to be an internal operational excellence agenda in terms of setting milestones setting targets and 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 through time prove out with that we can we can improve the profitability and at the same time improve growth and improve our credibility now as you asked about international wealth.
Do feel.
The need to create some synergies across this platform the America's platform is important.
I see it working in wholesale I see a small business and wealth, but growing at double digit rates and I also recognize that.
Hi network folks are gonna Wanna be able to operate in Canada U S and international but I don't see it as an M&A.
Gender right now and maybe one just happened to you for any comments sure. Yeah. In fact sore, but I think it's important because obviously with the opposition to jurors sorosky fruits or an empty those were very opportunistic M. D was.
Very unique business model Jarislowsky Fraser fill the significant copy out on the institutional space, but.
They've been very active in our international business, which has been helpful. In our our real focus is on organic growth. So in the U S. We would have some wealth management that gets utilized certainly are trust structuring business in Miami, some 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 in the advisory businesses continue to grow strongly in gain market share and that's actually something we can export into international it's not the exact same markets, but certainly the needs of the client's requirements. So we've had good success in terms of building up the capabilities in partnership with Nachos Tiedemann <unk> with with the clients that we have an.
Small so we think there's very good runaway, they're only organic site.
Thank you for taking my questions.
Thank you. The next question is.
He was just a very.
Go ahead.
Thank you good morning, just a quick points of clarification on your name I'll look in putting a finer point on this it sounds like your expectation is that one space. He can stabilize you'll be able to liberal margin expansion you don't require pulse rate cuts.
Or margins to extend just Wanna make sure I understand that correctly.
Yeah drive to Nigel absolutely right, it's actually quite simple if rates drop rising item funding costs, which tends to be exposed to the short end of the curve will stop rising at our assets continue at the right price. So yes, if they stabilize we should start seeing names benefiting from it and i-i benefiting from it and obviously would benefit much.
Most of them got started happening.
Just a quick question on the auto portfolio, just just awesome and what you're seeing the score does that video Socratic is that how you seem to bother her to use it.
Potential eating as indicated for credit experiencing the Canadian retail portfolio.
Yeah, It's it's still all start Nigel Lynda and Dan wants to jump in.
We have a.
We have a big auto portfolio, we're outsized in that versus where we would be versus.
Versus appears and credit cards, and so as a as a risk manager else use this portfolio is a bit of a bellwether you know so you know I I I would say if there's stress coming through the portfolio, mostly on the used car side, that's where we're seeing a little bit a little bit attention.
I'm watching the portfolio carefully as as we look at essentially have residual values Trent.
Having said that because we're not seeing a lot of new vehicles, especially the Japanese and German manufacturers, there's there's a little bit more on the American auto site, it's keeping used car values higher than than and they would have been obviously pre pandemic, but if I go back to the numbers of.
<unk>.
Linkman sees net write offs gross impaired loans this portfolio of our stillwell below pre pandemic levels and I would I would probably close by saying you know through the pandemic we.
We did a lot of investment or collections a space in the particularly in the auto Brooks and that remains in place today. So we there's big investments in analytics in a in a dialer technology and people in loss mitigation tools and training, so I'm I'm pretty confident that Ah Ah.
We're in good shape and and auto in terms of managing Ah energy sort of future trends.
Yeah. The only thing I would add is I don't I don't see it as a front runner for credit risk issues on the credit and.
And the credit card book, either which is obviously, obviously normally a contributor to the net credit lost dollars you haven't seen pay down rates are revolve rates on the interest, earning receivable balances and credit cards should reemerge as an issue we're still way below pre COVID-19 levels and the majority of the growth in credit card accounts.
Balances continues to be purchase volume Transactor style. So you don't see that tending to flow through the the credit line and I think fell on a mixed basis are super pruyn.
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 and the growth has been good in the credit risk is being well managed.
Okay. That's helpful. Thank you.
Thank you. The next question is from dumping Securities. Please go ahead.
Good morning, Thanks for taking a follow up Roger several times.
Times during this call you referred to.
Liquidity as potentially being a constraint or a binding ministry now I I don't think you're overstating. It but you did mention that a few times. So obviously I went and looked at your <unk> next stable funding ratio.
Both of which look no different from your peers and are pretty strong relative to cats regulatory requirements. So.
Am I reading too much into it like why are you mentioning liquidity is the binding constraint.
[laughter]. Thank you Mary for the question I think we think of liquidity and capital as one and the same in many many respects I think a lot of time was given to Capitol, because it's better undisturbed bad external audience I think.
But liquidity is a big component of how we manage walk in golf financial resources and for US, particularly no it'd be Scott talked a lot about dog wholesale funding exposure and how the balance sheet disposition. That's all about liquidity, that's probably why I, probably will wait emphasized on few of.
A few questions when I answer it's not just what capital capital is actually well understood and we've got a lot of data from 25 years, and we know how to manage it liquidity is also going to be a part of the conversation that's all.
Okay can I just squeeze in one more than related to that.
When when liquidity comes under pressure, let's say because deposits are running off.
Hearing very simplistic way.
Couldn't a bank just golden rays longer term wholesale funding.
To cope with that sort of arithmetic impact on your liquidity coverage ratio at N as the point, you're making here that well.
While that is an obvious solution to deal with declining liquidity coverage ratios. That's not something of course, you'll want to do today is is that the reason why I'm liquidity is more relevant now.
No I think it's two points Mario and I think you're probably right. One is cost of liquidity will continue to go up the more time to access the market and we talked a little bit in this call and you'll go to stop mortarboard profitable growth.
Eventually the more time to go to the wholesale funding market because you pay a credit spread on it it's always cheaper to go down to the policy urban maintain your right so to speak and.
And the more time to access the market I think it is going to be more difficult to manage what we would call a supplemental funding ratio in the bank. It has been it has been well managed right. It used to be a 29% for five years back later 22 per cent now so we like it like we wanna be even lower because that helps it profitable growth.
We were focused on regular D. As well, it's not about you know adequacy of liquidity on availability of liquidity I think with the franchise value be heavy can access liquidity at anytime.
What what are you willing to pay for and what does that they're going to deploy it into so you can actually produce profitable growth.
[noise], thanks for like I understand that.
Thanks Margaret.
Thank you sign up for the questions on the phone lines at this time.
Great. Thank you operator on behalf of everyone here today I Wanna. Thank you all for participating in our call.
I look forward to speaking with you again at our queue to twenty-three calling me.
Have a great day.
Thank you.
[noise].
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