Q2 2023 The Bank of Nova Scotia Earnings Call

Speaker 1: Year-over-year deposits increased by 11% or approximately $68 billion, and on a sequential basis deposits increased by 2%.

Speaker 1: Importantly, our overall loan-to-deposit ratio improved modestly quarter-over-quarter, driven by improved results in Canadian and international banking.

Speaker 1: Deposit growth in Canada accelerated to 11% year-over-year and 3% quarter-over-quarter, outpacing loan growth for the second consecutive quarter.

Speaker 1: Throughout our international banking footprint, we experience solid deposit growth above our loan growth on both a year over year and quarter over quarter basis.

Speaker 1: The loan-to-deposit ratio improved by approximately 250 basis points quarter over quarter.

Speaker 1: The credit quality of our loan book continues to be high. Our retail loan portfolio is primarily secured and the corporate lending book is mostly investment grade.

Speaker 1: However, in light of a more uncertain macroeconomic outlook and given the significant growth in our loan book over the last year, we are taking a more conservative view and increasing our performing loan allowances and thereby building our overall ACL coverage.

Speaker 1: Specific to our commercial real estate exposure, we provided additional disclosures related to the composition of the portfolio.

Speaker 1: Our exposure and recent growth are heavily weighted to the residential and industrial segments, which together comprise 75% of the portfolio.

Speaker 1: The office segment represents less than 10% of our overall commercial real estate exposure, with U.S. exposure at only $300 million.

Speaker 1: Looking ahead.

Speaker 1: Although I continue to remain cautious on the outlook for the remainder of the year, there are some encouraging signs that lead us to believe our revenue and pre-tax, pre-provision profits should improve modestly in the coming quarters.

Speaker 1: First, the bank's net interest margin modestly improved in Q2, driven by loan repricing in Canada and international banking, which should continue.

Speaker 1: Net interest margin in Canadian banking was up 4 basis points and an international up 12 basis points with a strong Caribbean contribution where we are competitively advantaged from a deposit perspective as the lead relationship bank in many of our markets.

Speaker 1: Second, with the exception of Canadian mortgages, we expect to see modest quarter-over-quarter loan growth across the bank for the balance of the year.

Speaker 1: Finally, on the expense line, we expect quarter over quarter growth to be modest. We will continue to be vigilant on expense growth for the remainder of the year.

Speaker 1: Overall, we believe Q2 will be a low point for our profitability in 2023, with modest improvement going forward.

Speaker 1: Lastly, given the increased probability for rates to remain higher for longer, we have modified our interest rate positioning.

Speaker 1: Even with this repositioning, we stand to meaningfully benefit from declining rates because of the structure of our balance sheet.

Speaker 1: Going forward, our three priority areas are focusing on primary customer growth to drive long-term multi-product profitable relationships.

Speaker 1: purposefully allocating capital to improve our business mix and support profitability and operate in an efficient and agile fashion to drive both revenues and reduce costs.

Speaker 1: I would like to make a few observations on our business performance in the context of these objectives.

Speaker 1: First, focusing on customer orientation.

Speaker 1: This quarter we completed the national rollout of our ScenePlus program in Empire Stores with the Quebec rollout in March. Later this summer we will continue to add to this market leading loyalty program with the addition of home hardware, building off the success of adding Expedia and Rakuten last year.

Speaker 1: The deposit growth and the rollout of ScenePlus are key components of our strategy to grow primary relationships with our customers in Canada. And so far, the ScenePlus program is exceeding our expectations.

Speaker 1: Zine Plus has in excess of 13 million members in climbing with Quebec driving an oversized share of that growth.

Speaker 1: Since the national launch began, we've added over 600,000 new Scoti-Debit and Credit Card accounts into the CNPlus program.

Speaker 1: Our data confirms that customers who are C++ members are four times more likely to have three or more products with the bank.

Speaker 1: Tanjureen is now the sixth largest personal deposit banking Canada with $47 billion in deposits and assets under management of $6.1 billion.

Speaker 1: Our success to date can be attributed to a strong grant, a market leading digital customer experience, and an unrelenting focus on growing deposits.

Speaker 1: Given Tangerine's limited overlap with Scotia Banks customer base, this franchise presents a great opportunity for us to win market share and grow our presence in the Canadian market with a digital first approach.

Speaker 1: In international banking, we continue to focus on priority customer segments, strengthening digital and improving customer experience to drive customer privacy and long-term deposit growth.

Speaker 1: Digital remains instrumental in driving our customer engagement with digital sales reaching almost 70% in the quarter.

Speaker 1: We have seen improvements in customer experience metrics across all of our international markets.

Speaker 1: GBM continues to build capabilities in order to provide a growing product sweeped appliance.

Speaker 1: To further capitalize on the growing private capital space, we recently announced the hiring of a US-based, private credit structuring, syndication and sales team.

Speaker 1: In addition, our domestic Canadian ECM and DCM businesses have moved to leading market share positions in recent quarters. Our US DCM business continues to gain share and the Pacific Alliance countries we rank second year to date in the DCM league tables. Our global wealth business continues to execute on the total wealth strategy bringing fully integrated solutions to our high net worth clients.

Speaker 1: In short, Q2 was a period of progress on client-franchise initiatives already underway.

Speaker 1: The second objective, purposely allocating capital to improve our business mix and support profitability.

Speaker 1: We continue to build more discipline in our approach to capital allocation and we are viewing this through an enterprise-wide lens.

Speaker 1: We will prioritize relationships where we can provide value beyond just the balance sheet.

Speaker 1: I was encouraged to see the improvement in multi-product relationships in Canada during the quarter and pleased to see the discipline around client prioritization in our GBM business.

Speaker 1: to see the improvement in multi-product relationships in Canada during the quarter and pleased to see the discipline around client prioritization in our GBM business. And finally, operational excellence.

Speaker 1: As part of my objective to drive operational excellence throughout the bank, I remain committed to disciplined cost management. Strong expense management has long been an important hallmark of the bank's culture.

Speaker 1: It is notable this quarter that our expenses grew much faster than our revenues.

Speaker 1: I was encouraged to see the deceleration of expense growth on a sequential basis in our Canadian and GBM franchises, but as a management team we recognize the need to deliver positive operating leverage over time.

Speaker 1: by focusing on these strategic priorities will be a more efficient and more profitable bank.

Speaker 1: Before concluding, I wanted to make a comment on our recent leadership announcement. I am thrilled to welcome Francisco Ris-de-gita as our head of International Banking. Francisco joins us with a career of experience in highly successful leadership roles in global banks and brings significant operating experience throughout our international footprint.

Speaker 1: Francisco officially joined the bank early this month and is with us here today on the call. Welcome Francisco. Thank you.

Speaker 1: 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.

Speaker 2: All my comments that follow will be on an adjusted basis for the usual acquisition related costs. I'll begin with a review of the performance of the quarter on slide five. The bank reported quarterly adjusted earnings of $2.2 billion and diluted earnings per share of $1.70.

Speaker 2: The return on equity was 12.4%.

Speaker 2: All banks' free tax pre-provision profit decreased 11% year over year, driven mainly by higher expenses relating to personal costs.

Speaker 2: and relating to business development initiatives.

Speaker 2: Net interest income was in line as growth in mortgages and business banking balances, as well as the benefit from foreign exchange, was offset by margin compression due to significant increase in cost of funds year over year. Net interest margin declined 10 basis points year over year, mostly from higher funding costs. Quarter over quarter, net interest margin improved by 2 basis points.

Speaker 2: from higher margins in both international banking and Canadian banking that expanded 12 basis points and four basis points respectively.

Speaker 2: Non-interest income was $3.5 billion in Q2 in line with last year, as higher banking revenues and other fee and commission were offset by lower wealth management revenues, which were down 4%.

Speaker 2: The PCL ratio was 37 basis points for the quarter.

Speaker 2: The performing PCL ratio was four basis points as the bank continues to prudently build allowances reflecting the uncertain macroeconomic environment.

Speaker 2: Expenses increased by 10% year over year or 7%, excluding the unfavorable impact of foreign currency translation, reflecting the continued investment for business growth and inflationary impact across most expense categories.

Speaker 2: Quarter over quarter expenses were up 2.5% or a modest 1.3% excluding the impact of unfavorable foreign exchange.

Speaker 2: The productivity ratio was 57.5% this quarter, resulting in a year-to-date negative operating leverage of 80.5%.

Speaker 2: The effective tax rate for the bank was 18.4% this quarter compared to 22.9% a year ago, driven by higher income from lower tax rate jurisdictions and higher tax exempt income in the quarter.

Speaker 2: Slide 6 provides an evolution of the Common Equity Tier 1 ratio over the quarter, as well as the quarter's changes and risk weighted assets.

Speaker 2: The bank reported a common equity tier 1 ratio of 12.3% and increase of approximately 80 points quarter over quarter.

Speaker 2: The ratio benefited from the adoption of revised Basel III requirements by 56 basis points.

Speaker 2: Net internal capital generation was strong at 14 basis points.

Speaker 2: while the recently introduced dividend reinvestment plan contributed 9 basis points.

Speaker 2: Presquated assets declined $20 billion during the quarter.

Speaker 2: The adoption of revised Basel III requirements reduced the pre-flored risk-weighted assets to approximately $31.7 billion.

Speaker 2: That was partly offset by the floor add-on of $5.1 billion, resulting in a net reduction of $26.6 billion.

Speaker 2: mostly related to non-retail credit risk.

Speaker 2: due to the elimination of the scalar and adoption of the foundational approach.

Speaker 2: During the quarter, risk-weighted assets grew $1.4 billion, excluding effects, mostly in market risk.

Speaker 2: In addition, the bank's liquidity coverage ratio improved 9% to 131% this quarter.

Speaker 2: Turning now to the business line results beginning on slide 7.

Speaker 2: Canadian banking reported earnings of $1.1 billion, a decrease of 10% year-over-year due to higher provision for credit losses and higher non-interest expenses.

Speaker 2: Pre-tax pre-provision profit grew 6% year over year driven by strong revenue growth of 8%.

Speaker 2: Net interest income increased 9% year-over-year as loans grew 6% while deposits grew a strong 11% supporting year-over-year margin expansion of 8 basis points.

Speaker 2: Lone margin expansion resulted in the margin expanding by 4 basis points quarter over quarter.

Speaker 2: Loan growth was 6% year over year as mortgages grew a modest 3%.

Speaker 2: Business loans grew 18%, automotive 8%, credit card 16% and personal loans 6%, all higher yielding portfolios.

Speaker 2: Quarter over quarter, average loans were in line with Q1 as the decline in mortgage balances offset growth in other higher yielding loan categories.

Speaker 2: Average deposits grew a strong 11% year over year, driven by a 15% increase in personal deposits and a 5% increase in non-personal deposits, reflecting the strategic focus of the business.

Speaker 2: The loan-to-deposit ratio improved to 132%.

Speaker 2: Non-interest income increased by 5% year over year, driven by higher private equity gains and higher insurance revenue.

Speaker 2: Expenses increase 10% year-over-year, driven by higher personal and advertising and business development costs as the business continues to invest in growth areas.

Speaker 2: Expenses were up a modest 1% quarter over quarter largely due to higher personal costs.

Speaker 2: The PCL ratio was 20 basis points, a slight increase of 1 basis point, quarter over quarter. Turning now to Global Wealth Management on slide 8.

Speaker 2: Earnings of $359 million declined 13% year over year, primarily due to the Canadian wealth being down 17%, while international wealth earnings grew a strong 19%.

Speaker 2: Revenue decline 4% year over year. Cue primarily to lower mutual fund and brokerage revenues.

Speaker 2: partially offset by strong private banking loan growth and higher deposit margins across our Canadian and international businesses.

Speaker 2: Expenses were up a modest 2% year-over-year and quarter-over-quarter relating to Salesforce expansion and technology investments offset by strong expense controls despite the inflationary environment. Assets under management increased 1% year-over-year.

Speaker 2: to $330 billion driven by market appreciation, while assets under administration increased 5%, to $624 billion as a result of higher net sales and market appreciation.

Speaker 2: The bank maintained its number two ranking in investment funds in Canada.

Speaker 2: Strong international wealth results were driven by high net interest income and business volume growth across the Pacific Alliance and the Caribbean.

Speaker 2: Turning to slide 9, Global Banking and Markets.

Speaker 2: Global banking markets generated earnings of $401 million, down 18% compared to the prior year.

Speaker 2: While revenues grew 7%, earnings were impacted by higher operating expenses and increased performing provision for credit losses.

Speaker 2: Solid business banking performance was supported by loan growth of 29%, primarily in Canada and the United States, while average deposits grew 11%.

Speaker 2: Capital Markets revenue was in line with last year.

Speaker 2: Net interest income grew 7% year over year as a result of the strong loan and deposit growth and the positive impact of foreign currency translation.

Speaker 2: Non-interest income also grew 7% year-over-year, primarily due to higher fee income earned in fixed income and prime services businesses while trading income was lower.

Speaker 2: Expenses were down 3% quarter over quarter mainly from lower performance-based compensation and a shorter quarter.

Speaker 2: On a year-over-year basis, expenses were up 15%, due mainly to higher personal costs and technology investments.

Speaker 2: On a year-over-year basis, expenses were up 15%, due mainly to higher personal costs and technology investments, both related to business growth.

Speaker 2: and the negative impact of foreign currency translation. The provision for credit losses was 53 million almost all relating to performing loans.

Speaker 2: GPM Latin America, which is reported as part of international banking, had another strong quarter reporting earnings of $276 million, up 49% year-over-year, driven by good performance in Mexico, Chile, and Brazil. Coming to slide 10 for a review of international banking.

Speaker 2: the Caribbean and Central America are a strong 27%.

Speaker 2: Revenue was up 8% year over year, driven by good loan growth, higher net interest margin, and strong capital markets revenues.

Speaker 2: Year over year loans grew 9% with mortgages up 12% and business banking up 8% while personal loans and credit cards grew.

Speaker 2: 8% as well. Deposits grew a strong 10% year-over-year and 2% quarter-over-quarter that reduced the loan-to-deposit ratio by approximately 250 basis points.

Speaker 2: Compared to the last quarter, the net interest margin was up a strong 12 basis points, with net interest margin expanding in the Caribbean and Central America and Pacific Alliance countries by 32 basis points and 14 basis points respectively.

Speaker 2: We expect the margin to remain at or slightly above these levels for the rest of the year.

Speaker 2: The provision for credit losses was $436 million, up from $422 million last quarter.

Speaker 2: On a quarter over quarter basis, expenses were down 1% due to lower business taxes.

Speaker 2: partly offset by higher personal costs.

Speaker 2: On a year-over-year basis, non-interest expenses were up 9%, driven mainly by the inflationary impacts on compensation, offset by the benefits of efficiency initiatives.

Speaker 2: The tax rate of 20.7% for the quarter increased from 19.6% in the prior quarter due to lower inflation to adjustments in Mexico and Chile.

Speaker 2: We expect the tax rate to continue to increase in line with reduction in inflation.

Speaker 2: Turning to slide 11.

Speaker 2: The other segment reported an adjusted net loss attributable to equity holders of $323 million in line with the previous quarter.

Speaker 2: Quarter over quarter, net interest income was impacted by higher funding costs due to the full quarter impact of previous rate increases.

Speaker 2: partly offset by better returns on high quality liquid assets. Non-interest income benefited from higher investment gains and income from associated corporations. I will now turn the call over to Phil to discuss risk.

Speaker 3: Thanks, Raj, and good morning, everyone. The bank's balance sheet continues to be well diversified across business lines, customer segments, and geographies. As we adapt to the evolving landscape, we remain proactive in building our allowances.

Speaker 3: As such, our PCL this quarter was 709 million, or 37 basis points, including performing PCL of 88 million, or 4 basis points.

Speaker 3: The higher provisions quarter over quarter is due to a more unfavourable macroeconomic outlook.

Speaker 3: and provisioning scenarios that reflect more pessimistic GPT forecasts in our key markets.

Speaker 3: compared to the prior quarter. This is driven by our assumptions around the following potential headwinds. Increased risk of a recession and a potentially more challenging credit cycle.

Speaker 3: sustained, elevated inflation, causing a higher-for-longer rate environment, which may impact retail consumers and commercial operating budgets.

Speaker 3: While the quality of our book and our risk appetite remain stable, the recent market turmoil in the U.S. has added an element of financial uncertainty.

Speaker 3: Starting with our Canadian retail portfolio.

Speaker 3: Customer delinquency of 20 basis points in the quarter remained stable, within expectations, and well below pre-pandemic delinquency of approximately 30 basis points.

Speaker 3: Our Canadian Mortgage Book remains solid.

Speaker 3: with stable performance despite 36% of balances being from our variable rate portfolio.

Speaker 3: As you would recall, our variable rate mortgages reprice with monthly payment increases tied to policy rate changes.

Speaker 3: This gives us confidence in understanding our customers' ability to stay current with mortgage payments while maintaining the contractual amortization period.

Speaker 3: Our variable rate portfolio continues to be of high credit quality, with customers FICO scores of approximately 800.

Speaker 3: We continuously monitor the deposit balances of these customers, which on average remain higher than our fixed rate portfolio.

Speaker 3: Our customers are managing through this period of heightened interest rates by making tradeoffs. For example, discretionary spending such as retail spending and entertainment is down 10% year over year for our variable rate customers.

Speaker 3: The strong performance of our Canadian Mortgage Portfolio is reflective of our customers' prudent financial management as they navigate higher rate environments.

Speaker 3: Moving to international retail, the total international retail banking 90 plus day delinquency rate of 2.56% has increased modestly by four basis points quarter over quarter. However, it is still below pre-pandemic levels of 3.22%. International banking maintained its focus on driving...

Speaker 3: with balances remaining at 73% of the portfolio, up from 65% pre-pandemic.

Speaker 3: We continue to leverage our data analytics and collections practices to proactively manage through the credit cycle. Specifically in Chile and Colombia, we are working with our customers as unsecured delinquencies continue their upward trend as customer budgets are strained due to sustained inflation.

Speaker 3: Turning to business banking, the underlying portfolio continues to perform well. Our direct exposure to US regional banks is immaterial, and our well-diversified business lines, customer segments, and geographies give us confidence in our balance sheets and liquidity positions. With respect to commercial real estate, we are committed to the success of our business banking.

Speaker 3: our exposure was $67 billion as of Q2. And of this, Office represents approximately 10%. And two-thirds of the portfolio is investment-graded.

Speaker 3: The bank's real estate portfolio is strong, with 75% of our exposure being residential and industrial.

Speaker 3: These exposures are primarily with top-tier developers where we have long-standing relationships.

Speaker 3: We remain comfortable with our business banking portfolio but remain prudent based on forward-looking macroeconomic indicators.

Speaker 3: Moving to slide 13, we saw modest increases in gross impaired loans in Canadian banking and international banking, with slight improvements in GBM.

Speaker 3: Overall, gills were marginally higher at 67 basis points this quarter. In Canada, the new formations were mainly in prime auto and commercial. Overall, the Canadian banking's 30-day and 90-day delinquency rates continue to trend up modestly.

Speaker 3: In international, gross impaired loans were up $139 million quarter over quarter as a result of foreign exchange and higher retail formations primarily in the Pacific Alliance regions.

Speaker 3: Moving to slide 14, PCLs in Q2 were 709 million or 37 basis points.

Speaker 3: In Canadian banking, total PCLs were stable this quarter at $218 million, translating to a PCL ratio of 20 basis points.

Speaker 3: In international banking, PCLs increase moderately to $436 million, primarily a result of higher delinquencies and challenging market conditions in Chile and Colombia.

Speaker 3: International commercial remains stable quarter over quarter. This translated into an international banking PCL ratio of 103 basis points.

Speaker 3: While credit quality in GBM is solid, given the potential headwinds and sizable asset growth the business has achieved over the past year, we attributed approximately two basis points of the build this quarter to GBM, all in Stage 1 ACL.

Speaker 3: This adjustment will offer greater stability in the medium term.

Speaker 3: From a balance sheet perspective, the bank's Q2 ACL ratio was 75 basis points.

Speaker 3: or $5.9 billion up three basis points quarter over quarter.

Speaker 3: Similar to Q1, we continue to build performing allowances this quarter, and we expect this trend to continue for the remainder of the year.

Speaker 3: In closing, given the current economic outlook, we expect PCLs to remain elevated for the remainder of the year.

Speaker 3: We believe in the strength of our balance sheet, which will offer stability in the medium term.

Speaker 3: We continue to be cognizant of the current operating environment, but are comfortable with how we have positioned our book to perform through economic cycles. With that, I will pass it back to John .

Speaker 4: Thank you, Phil. You 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.

Speaker 4: Operator, can we have the person on the phone, please?

Speaker 5: So, Janine, thank you.

Speaker 5: Our first question is from Ibrahim Poonawola from Bank of America. Please go ahead. Thank you.

Speaker 5: Our first question is from Ibrahim Poonawalla from Bank of America. Please go ahead. Good morning.

Speaker 6: So I guess maybe just for the one question on capital, so Raj, maybe for you, maybe Scott wants to add anything.

Speaker 6: But one, the impact from Basel 3 adoption was greater than you expected last quarter. What drove that? And then talk to us the give back from the phase in over the next few years, how you think about the 56 reverses itself over time. And second, you still have I believe the drip on.

Speaker 6: Do you end that now? And just talk to us in terms of the appetite to buy back stock in the near term?

Speaker 2: I'm just wondering does this CET1 ratio drift higher or what your expectations are as we move into the back half of the year? Thank you. Sure, Ibrahim. Thanks for your question. I'll start on the Basel implementation benefit and how we think it will progress and then I'll pass it on to Scott. Alright,

Speaker 2: limitation of Basel III and some of it I thought would not be implemented in time for this quarter. We obviously got it done earlier so that benefit is higher simply because of that which would have anyway flowed through likely in Q3 or Q4. So it's pure timing more than anything else.

Speaker 2: On the specifics of the 56 basis points benefit Abraham,

Speaker 2: I probably categorize it in three particular markets and you can see all of it in our Regulatory Capital Disclosure. particularly the borrowing market.

Speaker 2: So one is Basel III previously had a 6% scale out on all ARB exposures. Through Basel III the reforms implementation, they've eliminated the scale out. That's about 14 billion dollars of RWA benefits, so that's going to stay, right? So that's not going to reverse at all. The second thing I would say is there is a requirement to adopt what they call the foundational IRB approach for some...

Speaker 2: on page 18 in the sub pack all these disclosures

Speaker 2: And that is obviously dependent on inoperational risk and how it's calculated in the future. Smaller benefit that can move one way or the other, it could get better. It could get worse depending on the operational loss experience of the bank.

Speaker 2: Looking forward!

Speaker 2: and if you notice it on page 17 in the subpack you will see that the banks

Speaker 2: was actually impacted by the floor as it is this quarter, roughly $8 billion impact, which I referred to in my prepared remarks as well.

Speaker 2: Now that floor is going to increase 2.5% every year we know. It's going to first one will come through November 23, likewise November 24 and so on in line with Aussie's implementation plans. So that floor will bring down our capital, you know, as of November 1, 2023, depending on where we land October 23.

Speaker 2: The second thing which will happen in November 23 is the fundamental review of the trading book implementation which will impact the market risk and counterparty credit risk capital of the trading businesses.

Speaker 2: I don't have an estimate for you, but I know directionally that it will take down the capital ratio on November 1st, depending on what it would be. We'll probably talk about it more closely in the Q4 call. So that's where I think this will go. And what I will tell you is, considering all this, including the internal capital generation which you've seen this quarter, which I think will continue to contribute positively, the capital ratio relative to release on October 1st is relatively low, then the output must be something that will continue to improve dramatically on November 1st, disability when cases fly out. However in the Common Sector, this theme may be talked about a Handler sucker who has

Speaker 1: as we go through the end of the year in 2024. I do think there's a lot of uncertainty out there from a macro perspective and then also from what Aussie is going to do. That would keep us inclined to stay around these levels of 12% as Raj has highlighted. It doesn't feel good to have the drip on in raising equity at these levels. That's not something that we would continue to do over time once we get some certainty.

Speaker 1: wait to see in June . That's another reason to run at a little bit higher capital levels right now until we get some certainty on that front.

Speaker 7: Thank you. Thank you. Our following question is from Gabriel Deschenes from National Bank Financial. Please go ahead. Hi. A couple questions here. One, the NII Dragon corporate keeps getting bigger and it sounds like you took some actions this quarter to maybe mollify that a little bit in the coming quarters. If you can....

Speaker 7: this type of expense growth to continue as you you may need to invest in in in how you want the bank to you know look and perform in the future. Thanks.

Speaker 2: I'll start, Gabe, and you know, Scott might have a thought on expenses as we look forward. As far as the interest rate NII, what you're seeing in the other segment is simply the increase in the term funding costs. You know, there was administered rate increases last quarter. We're seeing the full quarter impact of it. So a few moving parts NII.

Speaker 2: Term funding cost was definitely a headwind, quarter over quarter. The returns from our what we call high-quality liquid assets for liquidity purposes was actually a tailwind because we're earning more on those liquid assets. And then the hedges are frankly neutral.

Speaker 2: What we did during the quarter, yes, we reduced the sensitivity to approximately $50 million. We can see in the 100 basis points increase in the sensitivity that we disclosed.

Speaker 2: Because we now believe that, you know, rates are likely to remain higher for longer.

Speaker 2: So with inflation being elevated, and all we did was adjusted the risk profile of the bank accordingly. So it sets us up more towards being neutral to the rate curve movements and avoiding any negative NII impact due to short term rate increases.

Speaker 2: So that's what we're positioned from an interest rate risk perspective. And typically this shows up in the other segment like you pointed out. As far as expenses go is great. I think what you're seeing is, you know, the inflation impact year over year. I think I talked about excluding FX a little over 7%. It is high for this bank as you point out.

Speaker 2: A lot of it comes back to all the base solder increases that we have had across the footprint.

Speaker 2: Along with other banks we did interim increases last year and then there is the annual increase. The full quarter impact what you see in Q2 because these things go into effect in January . And there's a general impact of inflation on all expense lines. So that's what you're seeing here over here. Quarter over quarter what we should expect to see going forward is a modest growth in the expense line in absolute terms.

Speaker 2: You know, low single digits is probably a good number to start with from our perspective, and that's what we're targeting. We try to manage expenses as prudently as possible. We prioritize and we try to manage it in line with the income or revenue growth. This will be one of those years where inflation has an outsize impact, not just in Canada.

Speaker 2: You've got to remember in the international banking we operate in a highly inflationary environment and there having 9% growth year over year I think is very credible considering the level of inflation and quarter over quarter the expense in IB is actually lower by 1%. So lot of good things but definitely challenges from an expense perspective.

Speaker 1: Not to say that we don't try to manage it as best as we can but some you know inflation related impacts are tough to manage. Yeah, just a couple comments to add on. I mean, I think that expense growth is we would all recognize it's too high relative to the revenue growth. I think the encouraging things as Raj says the deceleration quarter over quarter which is encouraging and we'll try to keep a control of.

Speaker 1: of expenses going forward. As you think about the strategic refresh, you know, I wouldn't necessarily assume that results in higher expense levels. I think there will be areas that we'll want to invest in, but there will also be areas that we won't invest in as much. And so I think this management team recognizes over, you know, the medium term, we need to get the positive operating leverage and that will, you know, continue to be a hallmark of the bank and what we try to do going forward. Strategic refresh, I got my terminology.

Speaker 8: Have a good one. Thanks.

Speaker 9: Thank you. Thank you.

Speaker 1: Our following question is from Paul Holden from CIBC. Please go ahead. Thank you. Good morning. So with respect to the change in your macro views for the higher rates for longer and more persistent inflation, you've addressed the implications for NIM on that. I think talk a little bit about your PCL expectations.

Speaker 10: Just wondering what's changing in terms of your plan, I guess overall with that change in macro view.

Speaker 2: Sure Paul, it's right, I'll start. I think as far as loan growth is concerned, Canadian bank, international bank, we know that sequentially quarter over quarter there will be modest loan growth. Now with the exception like perhaps on the Canadian mortgage book which we think will be around the levels you've seen now.

Speaker 2: It all depends on how the housing market evolves, rate situation, those kinds of things, as much as we can forecast over here. So that should be reasonable loan growth quarter over quarter across both these businesses. GBM will likely be in line with what you've seen in the loan balances this quarter.

Speaker 2: Where I think the uplift will come in the NII line is, as you saw this quarter, you're going to see margin expansion modestly, but certainly margin expanding as assets reprice and our funding costs remain fairly stable, as I talked about a little earlier in my prepared remarks.

Speaker 2: So that's how we see the macro impacting our NII line and benefiting through the expansion in NEM with loan growth being reasonably modest.

Speaker 2: From a PCL perspective, I think Phil indicated talking about, you know, lightly elevated PCL ratio around the 30-some basis points what you saw this quarter compared to earlier out of where we thought we might be mid-30s. And that relates mostly to how we want to build our performing loans, you know, allowances across the various books that we have. Phil, you might want to comment about it. But the expense question I addressed, hopefully that helps you with how we think about the macro and other things.

Speaker 3: Angels and GBM. I'm very confident on the business that Dan is running in Canadian banking. In fact, if you look at that business, we actually are seeing pay down rates on credit cards continuing to be higher than pre-pandemic levels. FICO scores continue to be higher than pre-pandemic levels. And our customers are weathering the increase in interest rates quite well.

Speaker 3: I look at international banking, I'm very confident in terms of the lending we've been doing in Mexico, Peru and the Caribbean. The strategy that we put in place there is working, but I'm very mindful of the pockets of weakness, particularly in Colombia and in Chile. We are Hopkins 11 skoc.

Speaker 11: That's great, thank you.

Speaker 5: Thank you. Our following question is from Darko Mielic from RBC Capital Markets. Please go ahead. Thank you.

Speaker 4: Hi, thank you. Phil, I appreciate the details on some of the credit quality metrics you mentioned. I wanted to just talk a little bit or just dig into a little bit more of the variable rate mortgage portfolio. And I'm not interested in averages. I'm actually more interested in the

Speaker 4: in a cohort or a vintage where they may have originally underwritten the mortgage with, say, a 2% rate or lower.

Speaker 4: And I want to understand how that group of customers is performing with presumably much higher rate and much higher payment.

Speaker 4: So I wonder if you can dig into that vintage or that that cohort. How are they coping?

Speaker 4: and how you think they will cope if rates stay higher for longer, and are you currently deferring payments or giving them some holidays to help them cope? Thank you.

Speaker 3: That's a good question and I appreciate it. Thanks, Darko. So if we look at that cohort and those customers have had a payment increase given interest rates of about 46%. And so we have to be mindful about how those customers are sort of weathering these increases.

Speaker 3: had a very large payment buffer coming out of the pandemic. They've been drawing down on that payment buffer. They still have more deposits in their account than they did pre-pandemic, but we're starting to see those deposits run off as payment levels increase. One of the things that's interesting as we dig into the data behind how these customers are performing, and I've touched on it in my prepared remarks, but we are seeing them make trade-offs.

Speaker 3: As a risk manager, the area that I focus most on is our tail risk.

Speaker 3: And at this point, we haven't seen major increases in tail risk in these portfolios.

Speaker 3: And if I look at tailors, just to give you a sense, we have about 950,000 mortgage customers in the bank and I'm looking at maybe around probably a little bit less than 2,000 customers to just to give you some perspective over our entire mortgage book. And with these customers, you know, we're looking at treatments like pre delinquency activities through our collection center and our branches. We're looking at how we can leverage machine learning to identify.

Speaker 3: So there's a really good monitoring in progress on these customers and we're just trying to be as proactive as possible. But again, if you look, we're still our delinquency rates in these books are still below pre-pandemic. But we are going to work with customers if we see further stress in the portfolio will be proactive in helping us to manage that.

Speaker 4: Okay, thank you. So there are deferrals happening? Do you have any statistics on that? No, we're not doing deferrals. No, no. Okay. Great. Thank you. Thank you.

Speaker 7: Following question is on John Haken from Barclays, please go ahead. Good morning, Scott. I think that the market is anxiously waiting the update on your strategic outlook. And even if it's not the market, I know that I am. I know that you're not likely to give us any state secrets on this call. But do you, are you able to give us a timeline as to when you may have been able to wrap up your strategic overview and give us some idea in terms of what you're...

Speaker 1: improve profitability from an improspective, you know, repositioning the balance sheet in terms of interest rate positioning. I mean, I think these are all consistent with what I talked about in January . You know, even through my comments today, you heard me talk about capital life businesses and wealth, and you see the international wealth business up 19%.

Speaker 1: You heard me talk about Tangerine, here's an asset that is a fantastic asset that we need to accelerate. You know, talking here in my comments around seeing, right, in terms of areas in Canada where we're under-penetrated but making progress. And then some of the segments like Jake's business and advisory. You know, I think the improvement in our DCM and ECM positioning.

Speaker 1: over the last three, six, nine months has been really impressive. So you'll hear more, but I think through my comments and through our performance, you're starting to see some of the actions that you can expect going forward. Thanks Scott, I appreciate the hints.

Speaker 1: has been really impressive. So you'll hear more, but I think through my comments and through our performance, you're starting to see some of the actions that you can expect going forward. Thanks Scott, I appreciate the hints. Thank you.

Speaker 1: Our following question is from Mario Mandonca from TD Securities. Please go ahead. Good morning. I took notice of that meaningful increase in the liquidity coverage ratio. It's clear the bank is, as you said, Scott, is intrinsically

Speaker 1: building up liquidity and maybe changing the funding profile a little bit. What I want to get at now is, is this a lasting change, this increase in liquidity coverage ratio? Or is it mostly just a reaction to what happened with US regional banks and you can sort of drift back down to something lower in the near term? And a related question is,

Speaker 1: Do you expect any changes from regulators around the world as it relates to liquidity requirements and funding requirements?

Speaker 1: Great, thanks Mario. Listen, I think the US dislocation was meaningful for all of us. I think the Canadian banks did really well through that period. I think the fact that we had deposit stability and actually deposit inflow should give us all comfort about our diversified business model.

Speaker 1: I think it also highlights the importance of running capital at similar levels to where we are and a little bit more heightened liquidity and that's why we took the liquidity from 121 to 130. I think those liquidity levels are actually pretty relevant for us. I think that's the kind of liquidity levels that we should be running at going forward so I don't think it's there.

Speaker 1: You know, some obviously were on a journey. The results weren't exactly as we'd like them from a P&L perspective, you know, revenues and expenses. But I think there was a lot of progress in this quarter when you look at capital, when you look at liquidity, when you look at interest rate positioning, and when you look at profitability. So I actually was pleased with the progress this quarter, recognizing more work to do.

Speaker 1: higher capital levels and liquidity will be front and center for people. Okay and then Sarah, a different question. You talked about, I think it was Phil, you talked about wanting to...

Speaker 1: be a little more proactive in building outperforming loan reserves. I'm trying to understand what that means. In any given quarter, four or five basis points to me is just your normal level. It's consistent with the overall balance sheet growth.

Speaker 1: So when you say you want to start building performing loan reserves, are you talking about something north of that basic four to five basis point? No, no, that's...

Speaker 3: We usually run it around one to two basis points increasing. And so what we're talking about is getting more to more to the sort of forward of forward-ish every quarter. But again, I mean, listen, we want to be guided by what the macros telling us. So I don't want to commit to, you know,

Speaker 3: a certain percentage build every quarter. We'll watch to see how the economy performs. We've already made some changes to our macroeconomic scenarios to reflect some more pessimism. But that's nothing more substantial than what we're already putting forward this quarter.

Speaker 5: Thank you, very Thank you. The following question is from Doug young, from the order and capital markets. Please go ahead.

Speaker 4: Hi, good morning. On international banking NIM 4.2%, I think Raj, you talked a bit about more upside from here. Just wanted to get a little bit more color of what drives that and then maybe attached to this in international banking, Columbia continues to struggle when we look at the underlying results. I mean what?

Speaker 4: And what are the issues there? What are you doing to address these? And any discussions with the other entity that owns a good chunk of that around the put option on the Columbia business. Thanks.

Speaker 2: Sure, I think Doug I'll start on the NIM and I'll probably pass it on to Francisco to talk about Colombia and at least his early thoughts on what we're doing in Colombia. The net interest margin of international banking, as I said before, has got too many moving parts out, right? A lot of it changes because of inflation. We have so many countries. Each one has a different rate situation.

Speaker 2: for us, you know, across that footprint. And we think there will be some modest expansion.

Speaker 2: I don't think it's going to be 12 basis points, quarter or quarter. That much I can say with certainty looking forward. But it's something that will be around these levels for the remainder of this year. And then we'll see how the rate situation evolves. On Columbia. Thank you, Raj. Let me first and foremost welcome everybody to the call. Thank you for joining. And I look forward to meeting you in person soon. It's been just a few weeks since I joined the organization. But during that time I've traveled extensively.

Speaker 7: First and foremost, we have scale. We have an envial brand and an envial client base. We're recognized in the market as a strong player. So we have a strong foundation to build upon. I was able to review the plan that we have in place. It's a recently built plan to turn around the operation. And it's a sound plan. And a plan that I will continue to review and adjust.

Speaker 12: as I see and track performance. I also had the opportunity to meet with our partners in Colombia, who I know well from my time there, and they have the full support of the plan and the management team, and we've made recent changes to the management team in Colombia. So we have to see that plan through. I'm confident that we're going to execute it.

Speaker 1: well. And over time we'll keep updating these groups in terms of how performance. Great, thanks, Francis. Scott, just one thing on the put window, we've gone through that, so there's no ability of our partner to exercise that put for another two years. So we'll work closely arm in arm with our partner.

Speaker 9: to improve the performance of Columbia, recognizing the current performance is not acceptable. Appreciate the comment. Thanks. Thank you. Our last question is from Sarab Movahedi from BMO Capital Markets. Please go ahead. Okay, thank you. Maybe just for clarification, Roger, I think you covered quite a bit of it. So when you put it all together in the corporate segments with some of the repositioning,

Speaker 2: Do you expect the drag to lessen in the coming quarters and into next year or are we still in this 250 to $300 million per quarter range? Yes, I think directionally we saw some improvement this quarter, Saurabh. As we had indicated, we thought it would be likely in line with last quarter or maybe even higher. I thought the loss might be. It came in better simply because of all the actions.

Speaker 2: Some of the investment gains we took as well, which you know is not predictable really. I would say for the rest of this year, I won't get into 2024 because the rate situation has such a big impact on the other segments results. I think somewhere around these levels, maybe a little better than this, as we see the interest rate situation evolved today. I think will likely be the way it is going to be. I don't think it will get down leaning fully for the remainder of this year.

Speaker 9: But that might be a different story in 2024, which we can talk about at the end of the year. Okay. And very quickly, just when I look at the capital situation, obviously lots of good news on the numerator in particular. But when you look at the RWA growth, obviously that was also a tailwind, you know, very kind of very minimal overall RWA growth. What do you think that RWA growth?

Speaker 2: is going to do Raj given all the excellent business plans that the business has put in front of you over the next, I don't know, four quarters. I'll also have with the next two quarters, which is probably a little more certain as we think for the macroeconomic environment.

Speaker 2: I think I talked about loan growth being modest, quarter to quarter improvements with the exception of, perhaps the Canadian mortgage book. And that's a modest growth compared to some of the growth we saw, for example, in 2022, so this is gonna be strong internal capital generation. This quarter we saw 14 basis points on frankly, a lower EPS than what we would expect to generate going forward. Such a bit tail went to growing the capital and absorbing any additional art of labor growth.

Speaker 2: But I do think the RWA growth will be fairly muted, similar to what you saw this quarter, for the rest of this year, and that should help with capital accretion. And that's just simply a factor of how loan growth is expected to evolve, considering the macro as we see today across the footprint. 2024 might be a different story, like I said, we can talk about it towards the end of the year.

Speaker 2: Okay, but just for crystal clarity, Raj, the more moderate loan growth is not you pulling back on risk-haking, it's just the function of the environment you're operating in. It's mostly a function of the environment. There's no changes in risk appetite of any significance that we'll talk about, but from time to time, right? I mean, we're trying to focus more on the customers. Your words got talked about it.

Speaker 2: So some of those do drive certain outcomes, but generally the macro, you know, the demand is a little lower, particularly if you get to the International Banking segment, and we're going to react appropriately. So I would say one is greater than the other, but it's mostly relating to the macro if you want to pick one.

Speaker 9: Okay, thank you for taking my questions. Thank you. That's all the time we had four questions. I would not like to turn the meeting over to Raj. Thank you. On behalf of the entire management, the amount of time that everyone for participating in our call today.

Speaker 2: And we look forward to speaking with you again at our Q3 call in August . This concludes our second quarter results call. Have a great day.

Speaker 2: with you again at our Q3 call in August . This concludes our second quarter results call. Have a great day. Thank you.

Speaker 5: The conference says now ended. Please disconnect your lines at this time, and we thank you for your participation.