Q3 2023 The Bank of Nova Scotia Earnings Call
[music].
This conference is being recorded.
It's gonna say homes that don't go as you see.
Good morning, and welcome to Scotia Bank's 2023 third quarter results presentation. My name is John Mccartney I'm head of Investor Relations here at Scotiabank.
Presenting to you. This morning are Scott Thompson Scotia's President.
CEO Raj Viswanathan, our Chief Financial Officer, and Phil Thomas Our Chief Risk Officer.
Following our comments, we'll be glad to take your questions also present to take questions are the following scotiabank executives, Dan Rees from Canadian banking Glen Gowland from global wealth management Francisco, our recent data from international banking and Jake Lawrence from global banking and markets.
Before we start and on behalf of those speaking today I will refer you to slide two of our presentation, which contains scotiabank caution regarding forward looking statements with that I will now turn the call over to Scott.
You John and good morning, everyone. We appreciate you joining us today.
The Bank reported Q3 adjusted earnings of $2 2 billion or $1 73 per share up 2% sequentially.
Pre tax pre provision earnings of $3 5 billion were up 5% compared to the prior quarter.
The bank's Q3 results reflect both the resilient performance of our retail and commercial businesses and modest improvement in our market sensitive capital markets and wealth businesses.
Although the operating environment has stabilized following the Q2 market dislocation deposit migration to term products in central bank rate increases continued to increase our funding costs.
Importantly, we strengthened our capital liquidity and deposit metrics as we prepare the bank for our next phase of profitable sustainable growth.
We continue to build capital this quarter, resulting in a common equity tier one capital ratio of 12, 7%.
Our liquidity coverage ratio was a strong 133% at quarter end up from 122% in the prior year.
Deposits once again outpaced loan growth in the period from our sustained focused on deposit growth initiatives across our businesses, improving our loan to deposit ratio.
Year over year deposits increased by 9% or approximately $55 billion.
On a sequential basis deposits grew in our Canadian banking and international banking franchises.
Lending volumes in the quarter reflect a more cautious environment from both the household confidence and business investment perspective as seen in activity levels across our various segments and geographies.
The impact of these macroeconomic realities, coupled with a more selective and deliberate approach to new originations has resulted in a moderation of our loan growth.
Expense growth was flat to last quarter and will be a priority as we strive to achieve our medium term objective of delivering positive operating leverage.
Disciplined expense management has always been a core competency of our bank.
The higher for longer interest rate environment that has played out across our operating geographies has already and will continue to impact consumer health.
Through our advanced data and analytics, we are closely monitoring customer behavior and have observed a very rational and responsible shift in spending as households manage through this period of reduced discretionary income.
And our core international banking markets, where the interest rate tightening cycle has led most other global economies. We are seeing the impact of recessionary conditions, which are reflected in our elevated provisions.
With the Chilean economy for example, now in a recession, it's central bank cut rates with 100 basis point policy rate decrease in late July and additional rate cuts are expected in the near term.
Overall, we remain confident that the investment grade bias to our corporate and commercial portfolios coupled with our conservative underwriting standards has the bank very well positioned to manage through this phase of the rate cycle.
We continued to build performing allowances and improve our ACL coverage at the longer term macroeconomic outlook continues to be uncertain.
From a business line performance perspective, I was particularly encouraged by our revenue led pretax pre provision growth in each of Canadian banking and international banking, both up year over year and quarter over quarter.
GBM Manuel both showed positive trends as market volatility stabilized.
And our Canadian banking business as expected profitability was impacted by higher provisions. However, we saw a healthy net interest margin expansion supported by another quarter of double digit deposit growth.
Our <unk> plus loyalty program reached 14 million members in the quarter and has been a strong contributor to new primary client relationships and deeper product penetration with existing customers.
Just this month home hardware. It was added to the <unk> plus program, providing members the opportunity to earn and redeem seen plus points at one of Canada's largest home improvement retailers.
The <unk> plus program was an important driver of the strong growth this quarter in Canadian banking deposits and clients, who use us as their primary bank for day to day payments through credit cards.
Our Tangerine franchise is performing well from a deposit gathering and profitability perspective, and is increasingly focused on deepening client relationships through card and wealth management cross sell.
Importantly over 80% of our Tangerine deposit flows in Q3 originated from digitally engaged multi product clients and once again the business delivered double digit revenue and earnings growth on a year over year basis.
International banking delivered solid performance against the challenging economic backdrop with strong revenue growth and good expense control.
Earnings were impacted by higher provisions and a normalized tax rate.
Our Mexico business continues to show great momentum delivering 16% pretax pre provision growth year over year and a return on equity of 25%.
We are well positioned to strategically support both local and multinational clients in Mexico as a wave of supply chain related foreign direct investment drives outsized industrial activity and economic growth.
Global wealth management earnings grew 4% from the prior quarter strong relative investment performance and continued momentum in our international wealth business tempered the impact of a negative industry investment fund flows.
Global banking and markets delivered solid results on stronger capital markets activity in conjunction with moderating loan growth as the business continues efforts to optimize capital allocation with a focus on return metrics.
Inclusive of continued strong results in GBM, Latam GBM delivered earnings of $748 million up 31% year over year, and 11% sequentially driven largely by growth in our fee and client underwriting and advisory business.
In summary results across our businesses reflect the bank's ability to generate solid earnings through a period of economic uncertainty and transition.
Our results also reflect early actions in support of the priority initiatives I have previously outlined primary client growth purposeful capital allocation and excellence in operating efficiency.
Growing client primacy is critical to delivering on our strategy, which means bringing the entire bank to our clients to earn core relationships.
And each of our business lines, we are evaluating our approach to relationship building and our opportunity for relationship deepening.
We will look to prioritize markets, where we have scale opportunity and target client segments, where we have the product capability and connectivity to be a lead financial services provider.
Allocating capital to the businesses, where we have the highest return to a disciplined approach will result in profitable growth for the bank.
Operational excellence will entail continuing to digitize and streamline the way, we do business to create efficiency across our bank.
We want to make it easier to do business with us through continued digitization simplified internal processes and enhance client interactions.
We are committed to ongoing productivity initiatives and a collaborative culture that positions us to win for our shareholders colleagues and communities.
In closing I would like to welcome Jackie <unk>, who joins US next week as our Deputy had global wealth management, and we will assume leadership of that business early next year.
Jackie will work closely through a transition period with Glen Gowland, who has done a fantastic job building our wealth business to scale in recent years.
I look forward to having Glenn work closely with me on strategic initiatives across the organization in his new role as Vice chair of the bank.
And finally I wanted to acknowledge the devastating wildfires in the northwest territories, and my home Province of British Columbia.
I want all our employees and clients to know that we're thinking of them in here to support.
We have made a donation to the Canadian Red Cross the United way Northwest territories, and the Colonna firefighters to support relief and recovery efforts and we are raising additional funds through our branches across Canada.
We remain focused on the safety of our employees and ensuring we're here to support our clients during this difficult time.
With that I'll turn the call over to Raj for a more detailed review of our financials.
Thank you Scott and good morning, everyone. 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 for the quarter on slide five.
The Bank reported quarterly adjusted earnings of $2 2 billion and diluted EPS of $1 73.
And return on equity was 12, 2%.
All bank pretax pre provision profit decreased 2% year over year, but increased 5% quarter over quarter.
Year over year, the decline was driven mainly by higher funding costs, which is recorded in the other segment and lower wealth management results driven by challenging market conditions.
Net interest income was $4 6 billion.
Down 2% year over year as loan growth and the positive impact of foreign currency translation, but offset by lower margins.
The net interest margin declined 12 basis points year over year.
And three basis points quarter over quarter, mostly from higher funding costs due to central bank rate increases.
Recall, given the increased probability for rates to remain higher for longer.
Last quarter, we modified our interest rate positioning while remaining position to benefit meaningfully from declining interest rates.
For the second quarter in a row deposit growth outpaced loan growth, resulting in a loan to deposit ratio of 114% an improvement of approximately 140 basis points quarter over quarter.
Noninterest income was $3 5 billion.
Up 12% year over year, mainly due to higher banking revenues trading related revenues in fixed income and equities underwriting and advisory fees.
And wealth management revenues.
The PCL ratio was 42 basis points. This quarter of a 12 basis points was performing PCL loss settled will cover PCL in more detail later.
Quarter over quarter expenses were flat or down 1%, excluding the unfavorable impact of foreign currency translation, driven by lower share and performance based compensation and employee benefits.
Partially offset by the three additional days in the quarter.
Expenses increased 9% year over year or 5%, excluding the unfavorable impact of foreign currency translation.
<unk> growth in staffing related costs technology costs, amortization and advertising and business development.
The productivity ratio was 56, 1% this quarter, an improvement of 140 basis points quarter over quarter as revenue growth outpaced expenses.
Year to date operating leverage was negative seven 4%.
The effective tax rate was 18, 4% this quarter compared to 18, 9% a year ago, driven by higher income and lower tax rate jurisdictions and higher tax exempt income in the quarter.
Partly offset by lower inflationary adjustments in international banking.
Turning to slide six.
This slide provides an evolution of the common equity tier one ratio for the quarter as well as the quarters changes in risk weighted assets.
The banks reported a common equity tier one ratio of 12, 7% an increase of approximately 40 basis points.
Net internal capital generation was strong at 37 basis points, including a lower risk weighted asset number.
Under the dividend reinvestment plan the bank issued 7 million shares that contributed 11 basis points.
Risk weighted assets were $439 8 billion during the quarter a decrease of approximately $11 3 billion from the previous quarter.
Lower business loan growth a reduction in the capital flow to add on of approximately $7 billion.
And the benefits from the inaugural synthetic to a sponsored transaction.
Reduce the risk weighted asset during the quarter.
The banks capital ratios are expected to continue to grow in Q4.
In addition, the bank's liquidity coverage ratio or LCR improved 200 basis points quarter over quarter to 133% this quarter and was significantly up from 122% last year.
Turning now to the business line results beginning on slide seven.
Canadian banking reported earnings of $1 1 billion.
A decrease of 13% year over year due to a higher provision for credit losses and noninterest expenses.
Pretax pre provision profit grew 2% year over year as revenue growth of 3% was partially offset by expense growth of 5%.
Pre tax pre provision profit increased a strong 5% quarter over quarter.
Net interest income increased 4% year over year as deposits grew a strong 11% and earning assets grew a modest 3%.
Quarter over quarter margin expanded by five basis points due primarily to higher deposit margins.
Average loans and acceptances grew 3% year over year we.
We saw continued growth in our higher yielding portfolios as business loans grew 13% personal loans grew 4% and credit cards increased 17%.
This was offset by a decline of 1% and residential mortgage balances.
Average loan balance was in line with last quarter as a decline in mortgage balances was offset by growth in business personal and credit cards.
We continue to see strong deposit growth with average deposits again up 11% year over year and 2% quarter over quarter.
Year over year personal deposits grew 13% primarily in term products and non personal deposits increased 6%.
The loan to deposit ratio has improved to 129% from 139% last year in this segment.
Noninterest income was down 1% year over year, driven by lower cost of revenue and reduced income from associated corporations.
Expenses increased 5% year over year, primarily due to higher personnel costs from increased client facing staff and inflationary adjustments.
Quarter over quarter expenses were down a modest 1%.
The PCL ratio was 27 basis points, an increase of seven basis points quarter over quarter.
Turning now to global wealth management on slide eight.
Earnings of $373 million declined 3% year over year, primarily due to Canadian wealth being down 7%.
International wealth earnings grew a strong 26% year over year.
Earnings grew 4% quarter over quarter in spite of difficult market conditions.
Revenue grew 2% year over year, and 3% quarter over quarter, due primarily to higher mutual fund and brokerage revenues.
Expenses were up 6% year over year from expansion of revenue generating sales force and 3% quarter over quarter driven by higher volumes.
Assets under management increased 4% year over year to $331 billion as market appreciation was partially offset by net redemptions.
Assets under administration increased 9% over the same period to $631 billion from both market appreciation and higher net sales.
While investment funds in Canada remain in net redemptions Scotia Global asset management and investment results continued to perform well against their benchmarks and the bank maintained its number two ranking and investment funds in Canada.
International wealth generated earnings of $16 million, driven by higher net interest income and business volume growth.
International wealth management's EUA grew 21% year over year to 130 billion.
Yes.
Turning to slide nine global banking and markets generated earnings of $434 million.
Up 15% year over year.
Revenues grew 17% year over year outpacing expense growth of 16%.
Capital markets revenue was up 41% year over year as F. ICC grew 52% in global equities grew 28%.
Business banking revenues grew 2%.
And the loans grew 13% year over year.
Net interest income was down 17% year over year as a result of lower corporate lending and deposit margins and lower loan fees.
Noninterest income grew $259 million or 35% year over year.
Primarily due to higher underwriting and advisory fees and growth in trading related revenue and fixed income and equities.
Expenses were up a modest 1% quarter over quarter, mainly from higher performance based compensation and salaries.
On a year over basis.
Expenses were up 16% due mainly to higher personal cost and technology investments related to business growth.
The provision for credit losses was a recovery of $6 million driven by state Street comedies.
The U S business generated earnings of $217 million this quarter.
GBM Latin America, which is reported as part of international banking had another strong quarter reporting earnings of $314 million.
Up 64% year over year, driven by Mexico, Chile and Brazil.
Okay.
Moving to slide 10 for a review of International banking My comments that follow are on unadjusted and constant dollar basis.
The segment reported net income of $635 million down 8% year over year.
However, pre tax pre provision profit grew a strong 11%.
The Pacific Alliance was up 10% with strong growth in Mexico of 16% and 19% growth in Caribbean and Central America.
Revenue was up 8% year over year, driven by good loan growth higher net interest margin and strong capital markets and corporate banking revenues in Mexico and Chile.
Year over year loan growth moderated.
At 5%.
Mortgages were up 10% personal loans and credit cards grew 3% in business banking was up 3%.
Deposits grew a strong 8% year over year, and 1% quarter over quarter, reducing the loan to deposit ratio by approximately 400 basis points year over year.
Net interest margin expanded 15 basis points year over year, the margin was down two basis points quarter over quarter, mostly from lower inflation benefits in Chile and Uruguay.
The provision for credit losses was 118 basis points of $516 million up 15 basis points from last quarter.
On a quarter over quarter basis expenses were down 1% due to lower salaries and employee benefits.
On a year over year basis, noninterest expense was up 5% driven mainly by the inflationary impacts on personnel costs.
The tax rate of 22, 9% for the quarter increased from 27% in the prior quarter due to lower inflationary adjustments in Chile and Mexico.
Turning to slide 11.
The other segment reported an adjusted net loss attributable to equity holders of $299 million, an improvement of $24 million compared to the prior quarter.
Over quarter higher funding costs, mainly driven by continued rate increases.
More than offset by higher income from liquid assets and lower expenses.
Ill now turn the call over to Phil to discuss with us.
You Raj and good morning, everyone.
While we continue to operate in an environment of heightened uncertainty we believe our business is well positioned to navigate this successfully.
<unk> in Q3 were $819 million up $110 million quarter over quarter translating to a PCL ratio of 42 basis points.
Our PCL ratio reflects four basis points of performing allowance build reflecting the continued uncertain macroeconomic outlook.
This fifth consecutive quarter of performing allowance build contributes to our balance sheet strength with a total ACL coverage now at 78 basis points.
Stage three PCL also increased nonperforming provisions of $738 million up $117 million quarter over quarter.
The largest increase was in Chile, and Colombia unsecured retail where the economies continue to slow.
In Canada. Despite two additional rate increases in Q3 variable rate mortgage customers remain resilient.
These customers have adjusted quickly with spending down 15% year over year, driven by a reduction in discretionary areas.
We remain comfortable in our retail commercial and corporate customers' ability to manage through this credit cycle.
Moving to international retail are secured balances remained stable at 73% of total loans for the third consecutive quarter.
While inflation is beginning to ease the absolute levels of price pressures on consumers remain high.
This erosion of purchasing power is impacting the financial health of consumers in the Pacific Alliance in particular in Chile. This is compounded by a gradual rise in unemployment given the decline in economic activity.
Overall, 90 day delinquency increased eight basis points quarter over quarter within expectations.
In Q3, the international banking retail PCL ratio was 215 basis points compared to 185 basis points in Q2.
Turning to business banking. This portfolio continues to perform well this segment reported <unk> of 18 basis points down from 21 basis points in Q2.
International commercial was stable quarter over quarter, while we had a small release in GBM driven by a recovery on one account.
In Canada, we built performing allowances being cautious on macroeconomic outlook and headwinds facing commercial real estate.
Our global commercial real estate portfolio is $66 2 billion.
Down 1% quarter over quarter, representing approximately 8% of our loan portfolios.
We remain focused on under supplied asset classes was 72% of our CRE exposure in residential and industrial.
Office exposure represents less than 1% of our total loans and we have built performing allowances at the longer term impact of flexible work remains uncertain.
Yeah.
We continue to proactively manage maturities and credit events.
Moving to slide 13.
Gross impaired loans were up three basis points quarter over quarter to 70 basis points, but remain below pre pandemic levels.
Skills were primarily driven by new formations in retail specifically in Chile and Colombia.
Business banking yields were relatively unchanged this quarter.
Canadian commercial gills increased quarter over quarter, However, GBM in international commercial deals were lower.
Moving to slide 14.
Canadian banking reported <unk> of $307 million, the PCL ratio of 27 basis points reflects a performing build.
Four basis points.
The quarter over quarter increase was due to continued uncertain macroeconomic outlook are performing building commercial and higher impairments in Canadian commercial and Prime auto.
International banking PCL were $516 million translating to a PCL ratio of 118 basis points.
The quarter over quarter increase was primarily due to retail driven by delinquency and net write offs, mainly in Chile and Colombia.
Yeah.
In International ACL coverage is now at 218 basis points up nine basis points quarter over quarter.
We continue to build prudent allowances across our portfolios with the all bank ACL ratio of 78 basis points up three basis points quarter over quarter.
We expect key macroeconomic indicators in Chile, and Colombia to remain challenged in the near term owing to a lagged impact of higher interest rates and the loss of purchasing power associated with high inflation.
We continue to closely monitor our portfolio and we will respond with adjustments to allowances are appropriate.
We remain prudent with new exposures and will focus on high quality borrowers with that I will pass the call back to John for Q&A.
Great. Thank you Phil.
Operator, if we could queue for questions.
My first question is from Ebrahim <unk>.
With the Bank of America. Please go ahead.
Hey, good morning.
I guess just wanted to.
Narrow down on the Canadian banking segment.
The loan to deposit ratio.
If we look at loan and deposit balances relative to year end loans had been that it could be flat you have grown deposits.
And I know deposits growth in deposits a big priority for Scott just give us a central is did a targeted loan to deposit to ensure that you want that business to get to before we see loan balances grow like is that.
Intentional and what does the end.
Did you get around the deposit customers, who are coming on are those really sticky customers that you can convert into a multi pronged relationship or is it driven by rates.
<unk>.
It's TBD in terms of it just becomes a lasting relationship with the bank.
Yes.
Great. Thanks, Hey, Brian I'll, just talk Simplistically on the loan to deposit ratio and I'll pass it on to Dan to talk about customers and how we are approaching deposits and loans from our client privacy perspective.
What we have seen in the reduction in loan to deposit ratio, both an IV as well as in the Canadian Bank is what we are going to continuously as baidu achieve and like you point out there's two sides to it loans and deposits.
So the deposit drive I think will continue because we do need to build a deposit base something that we've been quite clear to boats and Scott talked about it I think in January February of this year Youll see that momentum continue.
On the entire relationship will be more thoughtful about how we want to grow the share of the wallet and so on so I'm going to pass it onto die and he can talk about it in greater detail great. Thanks Raj. Thank you Ebrahim Dan here look a couple of things I would call. It we are aiming for.
Ongoing improvement in the LDR ratio in the CEB segment.
We're 129 this quarter, we were 139 a year ago. So that's a substantial change clearly decelerating loan growth, particularly in mortgages has had an important impact of that as well as the <unk>.
Market appetite for term on the personal deposit side I would call out a few key planks of our mission towards deepening with clients or improving our client primacy Scott off the top referred to the importance of seen we've seen on the back of that customer loyalty program about a half a million new day to day.
Counts opened in the last year, those would be core deposit low price.
Sticky accounts, which are often the result of cross selling off the existing stock that would be one we have also seen substantial improvements in our market share position with new Canadians as a result of targeted value propositions for those.
Our improvement in Tangerine has also been noticeable Scott called out in his remarks, the deepening on core there and obviously, we've been improving our deposit growth in commercial for quite some time and in this quarter again at a faster growth rate than loans. So we are intensely decelerating our mortgage growth in favor of.
Clients and we launched in Q3 really important pilot to deepen the deposit cross sell off mortgages at time of origination. So we're being very intentional here as we signaled a number of quarters ago, and we're really pleased with the cost of that deposit growth.
Raj mentioned deposit margin improved again this quarter.
Got it that was helpful and then just separately.
In terms of when you think about expense management not that it was a big issue this quarter.
Are you hearing from peers.
The structuring charges, we saw one this quarter, probably more coming from others going into <unk>, maybe just top of the house.
Headcount is somewhat flattish about 2% up relative to the end of 'twenty, one give us a sense of just how you're thinking about expense management.
The franchise for the current revenue back up.
Thanks, Ebrahim it Scott.
I think it's clear to say are clear for me that's operational excellence will be an important component of the refresh strategy.
And I was pleased to see the cost discipline in the quarter, but also recognize there's more work to do to align the organization and resources around our FERC focus areas for growth. So a good progress, but more to do as we as we look forward.
Thank you.
Thank you.
Our next question is from Gabriel <unk> with National Bank Financial. Please go ahead.
Uh huh.
Just to follow on the balance sheet management question line of questioning them.
But I mean.
You've clearly pointed out the mortgages and the solar within group, we've been shrinking that book is a big part of the plan.
I'm just wondering you know considering it is mortgages I don't I wouldn't expect a big impact your room.
And the Canadian business equally.
Equally wondering if the declines we've seen this quarter and prior.
Were the main drivers of the decline in the capital risk floor alone.
I'll talk about the capital risk Flora and then Dan can probably talk about the business in more detail than you did gave.
The capital risk floor is actually driven by three different confidence and I think it's an important.
Factor that will impact.
What the Florida add on is quarter after quarter.
Because there are drivers that impact the standardized earthquake does drivers that impact the AARP calculation, so youre going to see that movement every quarter not necessarily every quarter down like you saw this quarter. This quarter three continents, it's actually quite simple when you break it down we did this synthetic raws transfer so that benefited the floor and that gave us a.
About $2 billion benefiting in the $6 9 billion that we have called out in the slide the.
The next 2 billion results from.
When you see credit migration within <unk> and standardize as we all know his risk insensitive.
The Florida, Idaho reduces as you see slightly higher credit migration.
We saw this quarter and the third one is the split of the allowances they expected credit losses, and the expected losses, which is useful Basel that will move between <unk> standardized on that moved in a direction that helped with the floored out on this quarter are another $2 billion. So it's not going to do with the mortgages question, but I'll, let Dan answer the <unk>.
Question that you had.
Yes, Thanks Raj Gabe, we're just being more disciplined with regards to customer selection at time of origination or if this is a good time to drive that standard higher here, because it's a softer slower housing market.
That is a definite factor affecting the street, we are also being.
<unk>.
More efficient with regards to our use of capital and using customer deselection that renewal as part of that conversation, we like the mortgage business. Okay.
We're very pleased with the pilot we put in place sequentially spreads expanded as we expected in the mortgage business new spreads are good and the deepening that we've done off the mortgages in the last three or four quarters has been really encouraging I think it slowed a little bit faster than maybe we might have expected a couple of quarters ago, but customers.
Behaving well on the VRM side as Phil mentioned the shift into fixed rate mortgages has been prominent through the course of this calendar year as expected and so we just we know Basel changes are coming we're focused on liquidity and focus on customers and client premises.
Okay, Great and then just a quick one on capital like your CET one ratio is getting very close to 13% I'm wondering a.
What does it take to turn off.
Oklahoma Drip and then ultimately maybe implement the buyback because you are obviously in a good position here.
Thanks, Gabe it's Raj yes. It is it is $12 seven as you pointed out good growth. This quarter, we know how to grow again in Q4 gave I think it will be closer to 13% from what I can tell but those two things we need to think about from scotia's perspective at least.
The Florida is going to go up by two 5%. So that is going to impact. So we are building for that definitely and at this time. The fundamental review of the trading book will be we know it would be something like we don't know the exact number.
As this moves around with how trading positions movement.
CVA risk changes and so on so we are preparing ourselves for those school not to suggest that it would be anywhere close to the 100 basis points.
Go from 13 to be wandering around about 12% and then we also have to wait and see what else fit us in December .
A lot of it to build our balance sheet. So that when we are able to talk about our strategic refresh that we have enough capital balance sheet strength to execute on it from day one.
Yes.
Yeah.
Thank you. Our next question is from Mario Mendonca with TD Securities. Please go ahead, Roger I just wanted to follow up on what you just referred to because that referenced again to 13%, which surprises me a little bit, but us negotiate with target 13%.
Beyond the DSP floors is there something else that's driving this.
Pursuit of a higher capital ratio are you sensitive to whats the deterioration in Latin America for examples or anything else, but I could be missing.
No I think we want to stay above 12% rate, 12% about that hasnt changed at all I just had to go up to 13% drip is going to give us. Another 10 11 basis points, we don't next quarter.
Mario.
It's simply $12 70 to 280, we know what arguably growth has been fairly modest in this whole year I think that'll continue in Q4, it's not the pursuit that 13% how I describe it.
It is more about we will get to 13%, which puts us in a fantastic position as we think about our strategic refresh embedded we wanted to grow going forward apart from the two factors I called it out because the strategic refresh require the bank to have a starting point of 13% is there something about the strategic refresh that necessitates a higher capital ratio.
No. It does not Mario it absolutely does not the 13% is just an outcome of how we manage capital through 2023, it puts us in a great position with capital will not be a constraint for all the growth that we wanted to have.
You referred to the the risk transfer as your inaugural was transfer I took that to mean, there's more to come did I interpret that correctly.
No I meant inaugural simply as the first one we have done it doesn't mean, we will do more but what it does is it gives us another tool in the toolkit as we manage capital.
And basically we are desperate out the plumbing so to speak and we know that if necessary. We will have the ability to do it operationally. That's all I meant to say is there any way to size the.
What I'm trying to figure out here is.
For every 10 basis point lift you get in your capital ratio is a result of a of a risk transfer.
It is.
Implies a certain percentage decline in your EPS or pennies.
Is there anything you can give me to help me understand that dynamic.
I can speak to you offline on that Mario I think.
Particular tranche four will have a small cost attached to it.
The way, we think about it is what is the cost of equity of the bank and the cost of the equity of the bank and all you can take weighted average cost of capital call. It 11% as long as it significantly south of that we feel like it's accretive to the EPS, which just means that we go to manage capital through other levers. If we continue to produce synthetic costanza and final thing then.
Perhaps this is for Scott you referred I think the phrase you used was prioritized markets.
Perhaps this is gonna be a part of your discussion and a refresh but what do you mean by prioritized markets or are you signaling that the bank with exit certain markets in Latin America for example.
Mario I think.
Going forward, our plan is to prioritize capital allocation to areas, where we see the highest risk adjusted return on a full cycle basis.
We will take into consideration, where we can build competitive advantage and also connectivity across the platform. So we'll have more to say on that at Investor day.
But no I wouldn't read too much into my comments.
That you referred to and then secondly, I'd come back to the capital piece just to reinforce what Raj said, recognizing I'm relatively new enroll right now with what Osophy has highlighted.
12%, that's the right number plus 12% so I don't want it all you to think that we should be running here at 13%.
But we do have a situation, where there's going to be some offsets in Q1 associated with the other when there is uncertainty with what <unk> is doing and so the objective here would be to get off the drip as soon as we can and we also recognize that the the risk transfer.
There is not a good use of capital and so.
Trying to manage this prudently given the uncertainties, but also being really sensitive to the shareholder is the key objective here going forward.
Thank you.
Okay.
Thank you.
Our next question is from Doug Young with Desjardin capital markets. Please go ahead.
Hi, Good morning, just maybe.
Two part a NIM question NIM up in Canada, and international down at the all bank level can you talk a bit about the drivers in corporate.
Raj I think you signaled last quarter that you've made some changes in the hedge book.
And as we think about what you've talked about and Dan talked about the deposit and the loan growth side like how should we think about nims evolving over the next year or maybe at the divisional level, but also as it kind of goes through the corporate to the all bank level as well.
Sure I'll start and I'll try to cover all of the components of your question Doug.
All bank level NIM had a modest compression of three basis points I would attribute all of that to the corporate segment, which relates to the cost of funds increase as you know we recorded there.
Since we talked in May Theres been ratings. This is both in Canada, the United States and at that time, we did not expect a decrease in Canada. So what you're seeing this quarter is the impact of all stock.
The improvement in NIM in the Canadian Bank will continue.
As we pointed out this quarter's improvement was all deposit driven and I think that will continue asset margin is actually starting to show signs of growth like Dan pointed out mortgage margin is starting to go up so I'm optimistic that that will also contribute maybe modestly from next quarter. So that you should see it happen.
International banking them.
Many times in the past I've said there are so many moving parts.
Within the Internet Bank segment, the Caribbean is benefiting from U S rate increases, particularly the English Caribbean.
The Pacific Alliance countries inflation moves around quite a bit business makes also does I think it will remain in at about these levels that might be a quarter, where vehicles are couple of basis points down not up but really take it to the all bank level its about 20% of the assets of the bank. So it wouldn't have a meaningful impact that the bank's NIM going forward.
The biggest impact will always be the cost of funds in this environment and as we talked about before.
Currently the bank is.
Neutralized for the sensitivity across the right code, which is what we disclose however, when you have rate cuts happening at the short end of the go which is where we expect it to benefit us that will be a meaningful benefits when it happens.
Okay.
And then maybe just on the strategic risk transfer Scott If I heard you said, that's not an efficient use of your capital and.
And Raj I heard you.
Wanted to test at the plumbing, but why do a strategic risk transfer.
At this point in time.
Yeah. It does.
Synthetic restaurants, so it's not an actual elimination from the from the balance sheet. As you know so it's a synthetic exposure I think it's capital management is going to be key as we see it going forward because of the significant changes that is happening all around us, including regulatory Basel those kinds of things having another tool in the toolkit is an important component of <unk>.
Manage capital so we look at it from that perspective, we'd rather tested early to see.
Know how to make it work operationally like I mentioned and we've established stock. So we feel very comfortable that we'll be able to do with the asset quality in quarters that we think it has the necessary first step to do.
Appreciate it thank you.
Thanks Chuck.
Thank you.
Next question is from Paul Holden with CIBC. Please go ahead.
Thank you good morning, first question's for so and so I appreciate the color on Kennedy provided on the International Bank and just wanted to ask and past experiences.
Does history tell you in terms of how long unemployment may remain elevated and thereby.
How long Pcl's may remain elevated assuming those to remain correlated.
Thanks, Paul are you, referring to international specifically or or do you want to.
Your candidate pertain to your question pertaining to Canada, mostly.
International mostly.
So.
If you look at where we're having the most pockets of friction in Chile as.
As an example, they have decreased interest rates by about 100 basis points.
A few weeks ago, which we view as promising.
We're going to monitor that over the next quarter or so and we expect that those will start to see some improvements in terms of purchasing power of our customers.
And but this is something that will that will stick around for a little bit.
But.
One of the things I've been really pleased with Paul as the the pivot the strategy pivot we made around originations about two years ago to focus on affluent customers. This is really paying dividends for us right now and as I look and we double double click on that customer base, they're not we're not seeing the level of stress with those customers as we were.
Would see with some of our other customers and so I think that pivot that the IBP team has been had been doing in Francisco's is now focused on is a has been really positive for us.
But this is going to be this is something we're working on closely there is a lot of activity with collections a lot of activity between Francisco and I am looking at how we manage originations moving forward I think as Scott said in his opening remarks, focusing on primary customer being focused on that affluent segment international will pay dividends.
For us.
Okay.
In the near term, but how long, we'll wait to see okay. Yes, you got it okay.
And then second question, which is probably for Raj just wanted to ask on.
Expenses I see decline in FTE, notably in Canada quarter over quarter.
It seems like expenses were kind of in line with what you would expect yet still negative operating leverage and I would argue for a challenging revenue environment going into next year.
Everyone not just for Scotia prefer everyone. So how are you thinking about the expense management going forward is there potential to take additional actions to rein in.
Operating expenses.
Yes, I think flex Scott referenced in his remarks to the expense management is a cornerstone of this bank I think we've been proving it over many many years Paul as you know this quarter. There is just a reflection of how we manage it in line with revenue we've talked about it before.
Where we'd like to generate positive operating leverage this year as you point out likely Nox.
Probably not as probably a more accurate way of saying it.
Quarter over quarter, you should see our expenses being moderated debate you saw this quarter I wouldn't talk about 2024 at this time I think it's a little early we will talk about it and not outlook call in November back prioritizing our spend investing appropriately that we need to invest and as you point toward managing our staffing costs and through SAP.
The numbers has been an approach we've taken in the past the Canadian banks.
A reduction in employee contact you point out is something that we decided we needed to do in the right spots within the Canadian banks. So it doesn't impact revenue and doesn't impact customers. How can we manage it prudent and I think Dan has done a great job of that in the last three quarters International Bank has always been great in managing that expenses, because many times, we forget they operate in exceptions.
Really high inflationary environment, even in normal times and to have a 5% expense growth year over year.
I think it's very credible of how we pay attention to those lines in that segment as well. So you should expect us to continue doing duck.
Our expectation is always to generate positive operating leverage every year and we hope to start doing that again in 2020 forward worthy mentioned 23.
Oh, and sorry, I guess, just a finer point on it to get to that positive operating leverage in 2024, you believe you're on the right path today or do you think additional actions might be required I.
I think we got on the right path, we always look at what additional actions we need to take every year, we took a.
Q4, if you look at last year, we rationalized some of the expenses in the technology teams as well as in international banking, we always look at that call. We look at it again, so it would be set ourselves in the right.
Before we start the year and I suspect.
As we have done in prior years.
Okay. Thanks for that.
Thanks.
Thanks.
Our next question is from Mike <unk> with.
K B W. Research. Please go ahead.
Good morning, a quick question for Dan on your mortgage growth I'm, just wondering I'm not sure if there's a way to.
Basically removed the impact of the fact that you don't have negative amortization in that DRM product.
What's your sense of what your true market share trend is here I know you've been losing some share I feel like it's largely related to that factor I'm not sure if you're able to split that out but what's your sense in terms of what you guys are doing on the origination side versus industry right now.
Yeah. Thanks, Mike I don't think the new booking mix VRM versus fixed is affecting the total new originations in the quarter I would just reinforce the points I made earlier, which is we're being more.
Deliberate with regards to efficient use of capital pricing to the full customer relationship and potential and taking this time given a slow housing market to put those plans into effect and that the pickup on cross sell off that product is very encouraging we like the mortgage business that we know it's important to our customers and I think the VRM dynamic is more.
Our around.
Client preference for moving into fixed which were supportive of from a financial advice standpoint.
As opposed to anything around volume or market share.
Okay. So you don't think its having an impact on.
The market share losses that you've had the last few quarters, just that negative amortization dynamic that some of the other banks have which you don't.
That's possible.
Certainly we are deliberately.
<unk> slowed the mortgage book as we signaled some time ago and so that's intentional as an outcome. So we're actually pleased by that.
The VRM dynamic might be showing up more fill in guilds, we do have customers who are seeing their payments.
Rise faster than peers, and so we're we've been saying for at least a year now that we've been proactive with those customers. The VRM mix is more around managing credit, which we're pleased with and it is around market share or volume and I would just say on the back of Roger's comments on expenses, we're really pleased with how we've been decelerating quickly.
And in Q3, we printed positive operating leverage with the Big retail bank, which was our ambition with that a quarter ahead of schedule.
Got it thanks for that and then just a quick one for Jay.
Thinking back in and the fact that Scotia had maybe been under investing a little bit in the cap markets business heading into the pandemic and you didn't have the same upward trajectory during that time I'm, just wondering where you currently sit with respect to your just the full platform capabilities.
And do you see any pockets, where maybe you want to allocate more capital and invest in.
But any thoughts on that just in terms of where you sit today and where you want.
You'll have to capabilities.
Yes. Thanks for the question, Mike you are right heading into the pandemic and I think back to our Investor day in Chile, We Werent, where we wanted to be we've definitely grown to our natural share here in Canada, which has been really positive.
But the U S market continues to be a good opportunity theres opportunities to invest there by sector by product.
And really attract into some new areas.
We're not terribly large in non investment grade at this stage. That's an area. We can look to add value. Our U S. Loan book is at zero deals for the past six quarters. So there is an opportunity to grow in some different segments there.
I'd also say, we're underrepresented in private capital.
You've seen we've launched a CLO practice, that's been positive to access the private credit growth. We've seen and then when we look further into our platform Mexico has been really promising with a strong quarter. So we think there's real opportunity across that network in North America as we build out further capabilities, whether it's treasury services cash management et.
Cetera.
Got it got it so is it fair to say that there is some low hanging fruit in your business at this point in time.
Without a doubt as we move forward it will be key that we allocate the capital that the bank has to generate the most profitable returns we can across our footprint, whether its in GBM or other parts of the organization.
Thanks for the color I appreciate it.
Thank you our next.
First question is from Lamar Prasad with Kumar Securities. Please go ahead.
Yeah, Thanks, maybe for Phil I'm, probably front running the Q4 year, but just help me think through peak sales for a moment.
I'm in the PCL ratios.
The total PCL ratio over the last five quarters.
<unk> in Chile, and Colombia, and the domestic it looks like.
Trend to continue.
Perhaps should we expect continued sequential increases in the total PCL L or is there some reason where why we should expect it to kind of move down from a 42 basis points this quarter.
Thanks Lamar I appreciate the question yet this is how this is how I would think about it there's a lot of moving parts in our portfolio I think as I've said in my prepared remarks, and the answer to the last question, Chile, and Colombia remain.
Remain.
An area of great focus for us.
And so I would probably look to Q4 to be at or maybe slightly elevated above where we are today, but then and then I'll come back to you next quarter with a with an outlook for 2024.
Okay, Okay I'll leave it there.
Thank you.
Our next question is from <unk>, Kim with Credit Suisse. Please go ahead.
Hi, good morning, Thank you.
Just one quick one for me and a question on international banking in Chile, specifically.
With the country in a recession and I know this quarter was impacted by impairment losses.
And potential for more as we go forward, but I am trying to get a sense of whether it's possible to grow that business in Chile in an environment like this and maybe if you can speak to on a pretax pre provision basis. Thanks.
Well, thank you very much for the question.
As you said, we're going through a cycle and when we look at our retail business. For example, in Chile is performing quite well from the PCL perspective outside of the commercial space. Similarly on the GBM.
So we are growing.
Quite significantly year on year on a <unk> basis. So we are optimistic on how the business is performing even on a very difficult year, where we're seeing I think rami protraction as.
As we look at 2024, we see Chile coming back to GDP growth.
And that will play strong to our positioning in the market. So we remain optimistic with Chilean art positioning exit the commercial space.
Got it. Thank you that's it for them.
Thank you. Our next question is from Sohrab <unk> with BMO capital markets. Please go ahead.
Okay. Thank you maybe if I can just stay with Francisco mix.
Mexico I think has been highlighted a couple of times both in Scott's remarks changed remarks.
An area of opportunity I think.
Last year this quarter, it's contributed to about 7% of total bank earnings.
Closer to 11%.
It's been a nice offset to Chile within the Pacific Alliance, just curious as to what the growth prospects, there look like and how.
How much.
What's the risk appetite I suppose at the total bank level how.
How much of that how much of the total bank can be.
[noise] accounted for by Mexico in particular, and if you could just give us a little bit of additional color as to what is that.
Sure Don.
And.
Is it going to is it going through a boom benefiting from the U S or.
Is there a chance that we may have a similar there.
I guess slowdown chinas.
Yeah.
Well. Thank you for the question I would say first on a macro basis. We are very bullish on Mexico. We believe the dynamics around that economy will continue to benefit growth and certainly benefit our positioning in country. So we're very very fast to give us as to the outlook and position of a Mexico, given what is going on around efforts like <unk>.
Near shoring.
Other dynamics that are certain to benefit economic growth in Mexico, our business cost structure is very well diversified across different.
Different aspects of our universal banking capabilities. When you look at our corporate commercial positioning is very very strong and as Jay alluded to we're seeing very positive growth in that business.
Certainly commercial will benefit from the near shoring.
Phenomenon that is correct. If you continue to grow sustainably over the coming years.
On the retail perspective, what Youll see is our credit performance has been quite strong is primarily a secured portfolio. So in terms of our exposure currently in Mexico. The overwhelming majority is secured and therefore performing quite well we.
We expect to move through primacy as we are across the bank and we intend to penetrate further those relationships are primarily today, our mono line of mortgages into a more broad based primacy driven relationships. So we expect that again to be a contributor to outsized growth within our franchise. So overall very positive on Mexico, not only the <unk>.
So outlook for certainly our positioning within that macro outlook and in the context of the connectivity of Scotiabank across Canada, and the international footprint, certainly a strong contributor to our long term positioning for growth and capital allocation.
Francisco how important.
Sure.
Are your local presence in places like Colombia, and Peru to future success in mix.
Well it is a mixed story I would say that when you look at our positioning in each of these countries is quite relevant and at scale domestically our ability to connect those markets for the benefit of global initiatives will be very important to determine that.
A lot of importance in the context of the strategy and we're working towards that in a refresh.
So I would say today is important to get improvement in all of our operations in all of the points that Scott has highlighted in terms of efficiency.
Disciplined allocation of capital improvement capital return so that remains our core effort on over time, what we intend is to maximize the opportunity of connectivity across that footprint.
Okay. Thank you very much for taking my questions.
Thank you.
There are no further questions on the line.
Okay on behalf of the entire management team I want to thank everyone for participating in our call today and look forward to our Q4 call. This concludes our third quarter results call have a great day.