Q4 2023 The Bank of Nova Scotia Earnings Call
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Good morning, and welcome to Scotia, Bank's 2023 fourth quarter results presentation.
My name is John Mccartney and I'm head of Investor Relations here at Scotiabank.
Anything you. This morning are Scott Thompson, Scotiabank, President and Chief Executive Officer, Raj Viswanathan, Our Chief Financial Officer, and Bill Thomas Our Chief Risk Officer. Following our comments, we'll be glad to take your questions.
So present to take questions are the following scotiabank executives.
Aerospace Daenerys from Canadian banking Glen Gowland from global wealth management Francisco Arista gains from international banking Jake Lawrence.
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Before we start and on behalf of those speaking today I'll refer you to slide two of our presentation, which contains scotiabank caution regarding forward looking statements with that I will turn the call over to Scott.
Thank you John and good morning, everyone.
This month marks the completion of my first year in this role as president.
I'm pleased to have had the opportunity to spend the ear listening to and learning from our shareholders clients and employees.
I have seen personally the passion and commitment that scotia bankers across the footprint have to making us a better bank.
Our results for the year reflect the period of decelerating the industry loan growth as well as our own deliberate actions to focus on balanced growth and a thoughtful approach to improving the profitability of our businesses and client relationships.
We've made significant progress on key initiatives that are fundamental to strengthening our balance sheet and improving our business that both will be important.
Portal as we embark on our next phase of growth.
The bank reported adjusted earnings of $8 4 billion or $6.54 per share in fiscal 2023, a return on equity was 11, 7%.
We believe our improved balance sheet strength and liquidity positions us to manage through potentially a more difficult economic scenario that could materialize.
We took actions to strengthen our capital position to meet my January 2023 commitment to a steady one ratio greater than 12% up from 11, 5% at this time last year.
Raj will explain in more detail the impact of the regulatory capital changes, which began in Q2 and will continue to impact us in the future.
We also bolstered liquidity over the course of the year meaningfully improving the liquidity coverage ratio to 136% up from 119% and the net stable funding ratio from 111% to 116%.
Importantly, we made progress focusing the organization on deposits.
That's across the bank increased 9% year over year.
The all bank loan to deposit ratio improved to 110% from 116%, resulting in the wholesale funding ratio dropping 100 basis points year over year to 26%.
2023 reflects early success in our enterprise wide focus on thoughtfully growing both sides of the balance sheet.
In keeping with our commitment to ensure the bank is well positioned to manage through periods of slow growth and uncertain macroeconomic times, we have significantly increased the allowance allowances for credit losses throughout the year across all portfolios by approximately $1 1 billion, mostly in performing allowances.
As previously announced in conjunction with our strategy review process, we made adjustments to our global work force in the fourth quarter.
This productivity effort reflects a continuation of the bank's long term commitment to achieving positive operating leverage while ensuring the appropriate resource allocation in support of our future growth initiatives.
Turning to our economic outlook, our base case assumption is that economic growth will continue to moderate in the near term in North America.
Higher interest rates are having central bank's desired economic impact, which we are seeing through moderating inflation and our own client's behavior.
Recognizing that rates could remain elevated for the foreseeable future. We do expect some interest rate easing in North America later next year, which would be a tailwind to our profitability.
Our international banking markets experienced more notable impacts of higher rates, given an earlier and more rapid tightening response to inflation in the cycle.
Chile, and Peru are currently in the midst of modest economic contractions and has seen central bank easing this past quarter.
Economic growth is expected to rebound in the region later next year.
Mexico has consistently seen GDP growth beyond expectations currently forecast to deliver three 5% growth. This year at 3% plus growth again next year significantly outpacing the sub 1% growth expected for Canada and the U S.
We expect consumer spending to moderate at this higher rate environment persists, leading to the very modest growth in our Canadian economic forecast.
Our current balance sheet strength structural interest rate positioning and deliberate approach to loan growth reflect our cautious near term outlook.
We look forward to sharing detailed business line strategic plans with you at our upcoming Investor day, So I'll be brief today with a few updates on each business.
In Canadian banking, the performing ACL build materially impacted our profitability in Q4.
However, I was encouraged by progress in certain key operating performance metrics.
That's up 10% year over year in Q4, Oh pace loan growth in the Canadian Bank for the fourth consecutive quarter, resulting in notable early progress on reducing our loan to deposit ratio, which moved from 138% to 125% over the course of the year.
Solid net interest margin expansion of 21 basis points benefiting from higher deposit growth loans repricing at higher rates and business mix changes driven by more balanced loan growth across products.
In retail growth in the <unk> plus loyalty program continues to outpace expectations, surpassing 14 million members this quarter.
The program continues to accelerate as a strong customer growth engine are responsible for over half are new to bank customers in the recent quarter.
New day to day account acquisition is up 6% year over year aligned to our commitment to grow everyday banking relationships.
Tangerine delivered another year of strong already and as a result of its strong deposit position and continues to widen its lead as J D. Power's number one ranked bank in its class for retail banking client satisfaction for the 12th year in a row.
Global wealth results this quarter reflect the impact of more challenged market performance in recent months and the resulting impact on investment industry fund flows which have been negative throughout 2023.
We continue to broaden what is already a very robust product offering with the announcement last month of a new alternative asset partnership with Sun life to bring a more complete offering of private credit real estate and infrastructure products to a high net worth clients.
We have a differentiated wealth offering in Canada through our total wealth advice model and a unique international opportunity that our team is delivering on.
Our international wealth management business delivered double digit earnings growth again this year.
Our global banking and markets business has delivered resilient results in a challenging year for capital markets businesses, while continuing to add product capabilities and sectorial advisory expertise.
Loan growth has moderated considerably in recent quarters as our GBM team continues to take a more targeted approach to client selection with a focus on industries and geographies, where we can deliver higher returns and more multi product value add to our clients.
We continue to target deeper client relationships and leverage our footprint to grow our business.
International banking had a solid 2023 results were negatively impacted by higher PCL and moderating capital markets activity offset somewhat by encouraging margin expansion and continued momentum in our deposit strong Caribbean franchise.
Deposit growth in Q4 continued up 3% quarter over quarter and 9% year over year.
This combined with a more disciplined approach to loan growth has seen our loan to deposit ratio improve from 140% to 129%.
Despite inflationary pressures international banking held expense growth to a modest 3% on a constant dollar basis for the year as a result of continuous efforts to rationalize our operations and further digitize the bank.
International banking continued to deliver positive operating leverage.
Our 2023 financial results reflect a year of transition economic transition in the markets in which we operate and transition within the bank as we prepare for our next phase of growth.
We are seeing early signs of progress across the bank on the strategic priorities previously outlined that will lead us to more consistent earnings growth over time, more specifically client privacy, earning a greater share of the client wallet with a focus beyond the balance sheet.
Disciplined capital allocation managing resources with a view to value over volume.
And operational excellence, our continuous focus on productivity process simplification and a relentless effort to build a culture that will give us competitive advantage better faster and at a lower cost.
All underpinned by a strong balance sheet ample liquidity and appropriate allowances for credit losses.
I'm encouraged by the franchise strength across our businesses. We're recognized again this year by the banker magazine with both the bank of the year in Canada Award and the Global award for banking in the community recognizing our Scotia rise program and the positive impact it is having in our communities.
The Bank has also recognized leader for our commitment to fostering a more sustainable and inclusive future for our stakeholders.
We were recognized by global Finance with five awards for our leadership and sustainable finance, including global leadership in sustainability transparency and best Bank for sustainable financing Canada.
And we continue to build on our position as an employer of choice. This year, we were recognized as one of the best workplaces in Canada by Great Places to work and we were once again included in the Bloomberg gender equality index for a sixth consecutive year.
Going forward as we focus on execution of our strategy and a cohesive enterprise wide mindset to meeting the needs of our clients. We've also made important senior leadership additions to the bank.
I'm confident in the strength and leadership team as we focus on the future and our plans to deliver sustainable profitable growth for our shareholders.
I would like to sincerely. Thank Glen Gowland first contributions since joining the bank over 20 years ago.
I am delighted that we will continue to benefit from his expertise as he transitions to the role of Vice chair reporting directly to me.
As previously announced Jac yard will assume the role of group had global wealth management on December one this year.
I realize 2023 has been a difficult year for nationally, but the actions taken have been decisive deliberate and necessary.
Our strong balance sheet, a relentless focus on becoming more efficient and appropriate allowances will set the bank up for success going forward.
As I look to 2024, I'm confident earnings will increase driven by benefits from the productivity initiatives and a more stable rate environment.
We look forward to sharing our new strategy at our Investor Day on December 13th.
With that I'll turn the call over to Raj for a detailed financial review of our results.
Thank you Scott and good morning, everyone.
This quarter's net income was impacted by adjusting items of $289 million after tax.
24 cents of earnings per share and about six basis points on the common equity tier one ratio all of which were recorded in the other segment.
This consisted of a $258 million restructuring charge relating to workforce reductions.
$603 million charge related to the exit of certain real estate and service contracts.
$159 million impairment charge to the bank's investments in bank of Xeon.
A $114 million impairment of certain software.
These were partially offset by a $319 million gain from the sale of the banks, 20% equity interest in Canadian tire financial services.
The full year results were also impacted by the $579 million of Canada company dividend recorded in Q1 2023.
All my comments that follow will be after adjusting for these items and the usual acquisition related costs on a year over year basis unless specified otherwise.
Starting on slide five on fiscal 2023 performance.
The bank ended the year with adjusted diluted earnings per share of $6.54 and a return on equity of 11, 7%.
Revenue was up 1% and expenses increased 9%, resulting in negative operating leverage of eight 3% for the year.
Provision for credit losses were $3 4 billion in 2023, approximately $2 billion higher of which over $1 billion was performing allowance build.
Phil will speak to this later.
Canadian banking earnings were $4 billion down $757 million or 16%.
I'm only due to higher provision for credit losses increased by $1.2 billion, while revenues grew a strong 7%.
International banking earnings were two and a half billion dollars down.
Down 4% on a constant dollar basis.
<unk> were up $710 million on a strong 7% while provision for credit losses increased $638 million.
Global wealth management earnings of $1 $5 billion were down $126 million or 8% as a result of the very challenging market environment.
Nadine wealth was down 12% impacted by lower fee income, while the international wealth earnings grew 19%.
Global banking and markets reported earnings of $1 $8 billion down.
Down $143 million or 7%.
Even in a slow capital markets environment revenues grew 7%, but expenses were up 15% to support business growth initiatives.
The provision for credit losses were higher by $167 million compared to the prior year.
The other segment reported a net loss of $1 $4 billion compared to a loss of $229 million in 2022.
The higher loss of approximately one point to $1 billion was due to lower revenues.
And by higher funding costs and lower investment gains that were partially offset by higher income from liquid assets. The.
The segment had some offsetting benefits from a lower provision for taxes and lower noninterest expenses.
The bank's earnings in 2024.
Are expected to benefit from strong net interest income growth, while noninterest revenues I'd expect it to grow modestly.
Loan growth is expected to be modest how would we expect the benefits of repricing to support net interest margin expansion.
Expense growth is expected to moderate largely in line with inflation, our strategic investments are mostly offset by efficiency savings.
The bank expects to generate positive operating leverage in 2024.
The bank's earnings are expected to improve marginally this year, despite higher PCL and a higher tax rate with first half profitability improving from the current quarter and the second half of the year being stronger than the bush.
Moving to slide six for a review of the fourth quarter results.
The Bank reported quarterly adjusted earnings of $1 7 billion and diluted earnings per share of $1 26.
The return on equity was eight 9%.
Net interest income was $4 7 billion up 1% year over year, and 2% quarter over quarter from a six basis point margin expansion from higher lending margins and business mix changes, including deposit growth across all business lines.
Deposit growth outpaced loan growth again, this quarter, resulting in a loan to deposit ratio of 110% compared to 116% in the prior year.
Noninterest income was $3 3 billion down 3% year over year, mainly due to lower trading revenues and investment gains offset by higher fee and commission and wealth management revenues.
The provision for credit losses increased $437 million or 53% from the last quarter driven by higher performing loan provisions, which were $454 million this quarter.
The PCL ratio was 65 basis points, this quarter of which 23 basis points with performing PCL loss.
Quarter over quarter expenses were up 4%, mainly from higher technology costs performance based compensation and professional fees.
Expenses increased 10% year over year or 7%, excluding the unfavorable impact of foreign currency translation.
Reflecting higher staffing related costs technology costs and performance and share based compensation.
The productivity ratio was 59, 5% this quarter, an increase of 340 basis points quarter over quarter.
The effective tax rate was 14, 7% this quarter compared to 17, 6% a year ago.
Driven by higher tax exempt income and higher income from lower tax jurisdictions.
Partially offsetting an increase in the bank's tax rate tax rate.
Lower inflationary adjustments.
Moving to slide seven the bank reported a common equity tier one ratio of 13% an increase of approximately 30 basis points this quarter.
Net internal capital generation was 19 basis points.
Sale of our 20% equity interest in Canadian tire financial services contributed 16 basis points and the dividend reinvestment plan contributed 11 basis points.
This was partially offset by 10 basis points impact from the restructuring and one time items and the negative eight basis points from the fair value impact of available for sale Securities.
Risk weighted assets were $440 billion.
<unk> quarter over quarter as a decline in book size was offset by the impact of foreign exchange.
The estimated impact from the adoption of the Basel III reforms is approximately 75 basis points in Q1 2024.
The 2.5% decrease of the capital floor to 67, 5%.
Is approximately 40 basis 45 basis points and the implementation of the fundamental review of trading book is approximately 30 basis points.
In addition, the bank's liquidity coverage ratio of 136% and was significantly up from 119% last year.
The net stable funding ratio also improved to 116% from 111% in the prior year.
The capital and liquidity ratios had expected to remain strong in 2024 with a plan to manage our common equity tier one ratio in the 12, 5% range.
Turning now to the Q4 business line results beginning on slide eight.
Canadian banking reported earnings of $810 million.
A decrease of 31% year over year due to a higher provision for credit losses and higher noninterest expenses.
Year over year revenues grew 6% while expense growth was 9%.
Average loans and acceptances were in line with prior year and down 1% from the prior quarter, while the mix change.
We saw continued growth in our higher yielding portfolios as business loans grew 11% personal loans grew 3% in credit cards increased 18%.
This was offset by a decline of 4% and residential mortgage businesses.
We continue to see deposit growth, primarily in term products with average deposits up 2% quarter over quarter.
Year over year deposits grew 10% and the loan to deposit ratio improved to 125 basis points. So they wanted and 25% from 138% last year.
Net interest income increased 8% year over year as deposits grew a strong 10%.
Quarter over quarter margin expanded by 12 basis points benefiting from asset repricing and intentional changes in business mix.
Noninterest income was in line with last year due to lower banking fees, mostly offset by higher insurance revenue.
Expenses increased 9% year over year, primarily due to higher personnel cost and inflationary adjustments.
Quarter over quarter expenses were up 4%.
The PCL ratio was 63 basis points, an increase of 36 basis points quarter over quarter from significantly higher performing loan provisions.
Looking forward to 2020 for deposit and loan growth is expected to moderate from 2023 levels.
This along with improving net interest margins is expected to drive revenue growth.
Solid revenue growth in retail, including Tangerine is expected to continue while business banking revenues are expected to moderate.
The segment will grow expenses in line with revenue growth, while balancing strategic growth investments.
Turning now to global wealth management on slide nine.
Our earnings of $333 million declined 10% year over year, a strong 8% growth within international World was offset by Canadian wealth vessel results declining, 12% largely due to lower average assets under management.
Revenues grew 3% year over year, due primarily to higher brokerage revenues in Canada, and private banking revenues within our international business.
Expenses were up 11% year over year, driven by higher volume related expenses and technology costs.
Spot asset under management increased 2% year over year to $317 billion as market appreciation was mostly offset by net redemptions.
Assets under administration increased 5% over the same period to $610 billion, some higher net sales and market appreciation.
Investment fund sales in Canada continue to be under pressure with approximately $60 billion in net redemptions over the last year.
Under this backdrop Scotia global asset management and investment results continued to perform well against their benchmarks.
International wealth management generated earnings of $52 million driven.
Driven by higher revenues from business volume growth.
<unk> and AUM grew 12% and 16% respectively year over year.
Yeah.
Global wealth management expects to deliver revenue growth in 2024, driven by retail mutual funds volume growth solid growth across our Canadian advisory businesses and continued expansion across key international markets.
Earnings are expected to grow in line with the recovering market conditions and strong new business volume growth.
Turning to slide 10.
Banking and markets generated earnings of $414 million down 14% year over year.
Capital markets revenue was up 9% year over year as global equities grew 25%.
Our business banking revenues declined 5% as Lawrence will slot year over year.
Net interest income was down 19% year over year as a result of higher trading related funding costs and lower corporate lending margins.
Noninterest income grew 95 million or 11% year over year.
Primarily due to higher fee and commission revenue, partially offset by lower trading related revenue.
Expenses were up a modest 3% quarter over quarter, mainly from higher technology costs and the negative impact of foreign exchange.
On a year over year basis expenses were up 12% due mainly to higher personal cost and technology investments when they pick a business growth.
The provision for credit losses increased 13 basis points quarter over quarter to $39 million, mostly on performing loans.
The U S business generated strong earnings of $228 million.
GBM Latin America, which is reported as part of the international banking.
Segment reported earnings of $251 million down $63 million from a record third quarter with lower earnings in Chile, Peru, and Mexico due to lower capital markets activities.
In 2024 in capital markets revenue growth will be led by <unk>, while the business banking is expected to grow fee based revenues.
Expense growth will be focused on key investments in priority segments and markets.
Earning and earnings in GBM, Latam unexpected to moderate in 2024 to more normal levels from the elevated earnings in 2023, and the impact of reduced capital allocation.
Moving to slide 11 for a review of International banking My comments that follow I don't know on an adjusted and constant dollar basis.
The segment reported net income of $570 million down, 12% or $75 million quarter over quarter, primarily from lower earnings from GBM lifetime of $63 million.
Revenue was up 3% year over year, driven by higher net interest margins.
Year over year loan growth moderated to 2%.
We just went up 7% while business banking decreased 1%.
Deposits grew a strong 9% year over year and 3% quarter over quarter.
The loan to deposit ratio improved by over 1000 basis points year over year to 129%.
Net interest margin expanded eight basis points quarter over quarter from asset margin expansion and business mix changes.
The provision for credit losses was 119 basis points of $512 million up a modest one basis point quarter over quarter.
Expenses were up 3% year over year due to inflationary pressure, partially offset by the benefits of cost reduction initiatives.
Expenses were up 2% quarter over quarter, driven by technology expense.
Operating leverage was positive for the year.
Looking ahead to 2024 revenues in international banking I would expect it to benefit from loan growth and net interest margin expansion.
Expenses are expected to grow at a lower rate than revenue.
Electing expense saving initiatives.
Earnings are expected to be impacted by higher provision for credit losses, and a higher tax rate.
Turning to slide 12.
The other segment reported an adjusted net loss attributable to equity holders of $487 million that was higher by $188 million compared to the prior quarter.
Revenue was lower than last quarter by $222 million.
Higher interest from liquid assets was more than offset by increase in funding costs.
Also contributing was further improvement in our liquidity levels, which comes at a net cost <unk>.
Revenue was also impacted by minimal investment gains and lower income from associated corporations and unrealized gains on non trading derivatives.
This was partly offset by lower taxes and noninterest expenses.
In 2020 for the other segment loss is expected to remain elevated as funding costs are expected to remain at these levels for most of the Europe, but significantly lower investment gains.
We will see improvements in this segment as rates decline towards the second half of 2024.
I'll now turn the call over to Phil to discuss with us.
Thank you Raj and good morning, everyone. We continued to strengthen our balance sheet by increasing our ACL ratio from 71 basis points to 85 basis points. This year.
With this we have now increased our allowances for credit losses by $1 1 billion in 2023 with $780 million of this increase from performing allowances.
Given the macroeconomic backdrop with higher unemployment levels higher for longer interest rates and upcoming renewals or fixed rate mortgages in Canada. We have focused on strengthening the balance sheet, including a further increase in performing allowances this quarter up $448 million leveraging expert credit judgment for Canadian banking.
Global banking and markets.
Higher quality originations with a focus on affluent in international.
And higher credit quality and business banking.
Shifting business mix to a more secured across our footprint and finally, our continued focus on building performance allowances in international.
<unk> and a approximate $200 million increase over the past six quarters.
This improved ACL coverage provides us with a solid foundation to manage through periods of slow growth in an uncertain macroeconomic environment.
It is important to note that while delinquencies are still within historical norms consumer health in Canada continues to weaken and we expect households may continue to experience financial pressure through 2024.
With to build an ACL addressing this.
In business banking, we are not seeing increased defaults due to high quality of our portfolios. However, we are increasing our coverage ratio given the expectation of continued elevated interest rates and the potential impact on client performance.
Moving to slide 15, the quarter over quarter PCL increase was primarily driven by the performing allowance build which was 23 basis points. This compares to four basis points last quarter to build was primarily in Canadian banking.
As a result of the increased ACL, our total PCL in Q4 were $1, two six building, including $454 million in performing PCL.
Total PCL as were up $437 million quarter over quarter. This translates to a PCL ratio was 65 basis points.
<unk> trended higher at 42 basis points compared to 38 basis points in Q3.
Canadian banking total Pcl's were 63 basis points quarter over quarter total <unk> increased by $393 million, resulting in a total PCL to $700 million.
$414 million or 37 basis points of the <unk> sales were related to performing allowance build of which $240 million was for Canadian retail and $174 million was for business banking.
Retail customers in Canada continued to spend less on discretionary goods and more on our central items year over year. Overall spending has continued to slow as total debit and credit card spend fell 3% quarter over quarter and remained flat year over year, despite inflation <unk>.
We're able rig mortgage customers continued to spend less and they're fixed rate counterparts with total spend down 11% year over year, while spending for fixed rate customers is only down 5%.
Additionally, delinquencies continue to trend up across all products in Canada.
90 day delinquency levels were three basis points quarter over quarter to 25 basis points and were up 10 basis points year over year.
<unk> over quarter, we saw deterioration in <unk> in auto increasing nine and six basis points respectively.
Canadian business banking Canadian business banking, we were cognizant of uncertain macroeconomic economic conditions.
Included in our ACL coverage is an additional build for our real estate portfolio, which includes impacts to collateral values.
Our exposure to U S. Real estate is largely to investment grade borrowers and as disclosed in the investor presentation. Our U S office exposure is immaterial.
Global banking and markets provisions for credit losses were $39 million or 11 basis points. This quarter and included a performing allowance build of $30 million.
Total PCL as an international banking were $512 million or 119 basis points up one basis point from the prior quarter total retail PCL decreased $17 million quarter over quarter to bring the PCL ratio to 211 basis points driven by lower allowance.
Says in increases in Colombia, and Chile.
Performance in these markets have started to stabilize with improving macroeconomic outlook.
Central banks have paused interest rate hikes in Colombia, and in Chile, They have started reducing rates.
Mexico continues to perform within expectations supported by a resilient underlying economic fundamentals.
Headwinds persist in Peru, with delinquencies remaining elevated and GDP contracted Peru entered recession and will likely be further impacted by the upcoming El Nino.
<unk> C plants and loss mitigation tools already and have been deployed where needed.
Looking to fiscal 2024, we expect a challenging environment will persist for consumers and businesses.
And GDP growth is expected to remain muted and inflationary pressures on households is expected to persist with the outlook for rate cuts uncertain.
We expect PCL in 2024 to be in the 45 to 55 basis point range, assuming no significant change.
Changes to our expected economic scenarios with that pass the call back to John.
Great. Thanks, Phil operator could you open the lines for questions.
Thank you.
Please press star one at this time, if you have any questions.
That will it will be small small participants register for questions.
Thank you.
Our first question is from Ebrahim <unk> from Bank of America. Please go ahead.
Hey, good morning.
So I guess, maybe Raj you went through a lot in terms of the outlook for next year and I just want to make sure we heard you right.
It sounds like you're guiding for <unk> to be up.
Either year over year and from fourth quarter levels.
Revenue growth should exceed expense growth.
And do you have any growth driven by NIM expansion.
If you don't mind, just quantify the level of margin expansion you expect at the all bank level. If we don't see any action from bank of Canada from Euro and what does the expense growth that we should think about would be the right.
24, <unk> year over year or ended up the fourth quarter expense subject. Thank you.
Thanks, Hey, Barry miles stock margin expansion should continue for the whole bank in 2024 Ebrahim couple of reasons. One is the repricing of our loans has already commenced as you saw this quarter frankly, you saw it in the last couple of quarters across our portfolios and that should continue in 2024, we know our depth.
<unk> margin contribution to 2023 will be muted in 24, because there's been lots of deposit growth and I said in my prepared remarks that deposit growth is expected to be lower than what we saw in <unk> in 2023. The net of it is you should see pretty decent margin expansion from where we finished Q4 2023, both in the business.
<unk> as well as across a bank like you pointed out with the bank of Canada, and the U S fed expected to stop rate increases obviously, if they do weekly so it'll be a headwind for this bank.
I think margins would be a good news story, that's why would we expect net interest income to grow next quarter in my prepared remarks, what I talked about.
Expenses as Q4 tends to be seasonally higher I think it's not unusual for us like Q1 next year will be higher because we have what we call eligible to retire cost that comes through our business lines, which gets.
<unk> recorded in Q1 across our employee base.
But for the whole year like I mentioned, we expect to generate positive operating leverage for the bank <unk> revenue growth exceeding expense growth by some margin. We note that the Canadian bank has to invest so that we think our revenue growth will be strong and offset the expense growth that is expected as we look forward International bank will continue to generate positive operating leverage.
As it did this year and the wealth in GBM businesses.
A bit on the markets, but I think for the whole bank, we expect to generate positive operating leverage.
Expense growth will be significantly lower than what you saw this year adjusted for FX like I said it was about 7% for the whole year.
And next year, we're going to benefit from the productivity initiatives that we took as well part of it is expected to come through in 'twenty, four and the full year benefits should come through in 2005, So all of that points to an expense growth I would call. It in the low end of the mid single digit range as what we expect next year.
That is helpful. Thank you and just on a separate question George you laid out the 75 basis point impact to <unk> from the Basel I floor TB CVA change is it in the fuel factor in <unk>.
So as we get to 12, 25 remind us where you want to be on CET, one as we think about the zip.
And.
Are there any actions that you can take to materially optimized the balance sheet to reduce that Jack.
On the market to this site <unk>. Thanks.
Thanks.
Thank you, Brian I think as far as capital ratio go as wed like to run around the 12, 5% range for the rest of 2024.
And the drip as a contributor to lock without any doubt a lot of the actions that your FY two on muting loan growth you've already seen it you've seen our <unk>.
Being targeted about where do we want to deploy our capital and we have been pulling back capital from certain parts of the business that it has not been providing the appropriate returns in a capital constrained environment with higher cost of capital coming out of house.
So 250 is what we expect to run for 2024, obviously it also depends on what else people do on some of the other regulatory changes that can come across starting December eight we want to be prudent we want to run at one 5%.
And we will revisit all the actions that we need to take or not as we see how the regulatory.
Environment evolves through 2024.
Beyond that we'll talk about it at Investor day to see what is the right capital levels at this bank should be running at about 424, that's what you should expect from us.
Thank you.
Yes.
Thank you.
Following question is from Gabriel <unk> from National Bank Financial Please go ahead.
Good morning, I just wanted to.
Put a you know a fine tune on the outlook commentary there are quite a few things from a you know Scott and the.
And of course you are.
Suggesting that earnings growth will be marginal in 2024.
That's all for the full year adjusted base from 'twenty to 'twenty three or are you assume and if were you know.
I'm looking at it from a earnings per share standpoint, you know when you got marginal earnings growth, then you've got the drip which might be.
Ongoing for the full year.
We're prognosis.
Lower than marginal EPS growth was up you know.
You know a reasonable interpretation.
No I think gave us a shot Scott might have a comment or two on that I think on an EPS basis, you should see.
Like margin growth rate from the $6.54 that we reported this year right.
Definitely increase associate count as you point out Gabe that's inclusive on the comment that I made.
If you just look at net income growth it will be greater than the EPS growth because you know the drip contribution which.
$8 9 million shares a quarter. This this yet and I suspect. It will continue to in 2024 will be an offset but offsetting that we think will have marginal growth in EPS.
Okay, Great and then let me just let me make a couple of comments on that I mean.
Recognizing this has been a difficult year I think the one year anniversary and we wanted to move quickly to address.
A lot of these issues around capital liquidity costs through the restructuring charge.
Allowances and we've done that and that gets you to the 654 and the guidance, we're giving us conviction around growing earnings from here.
And there was a court that's an important message to take away.
Okay.
Well on the building allowances front I mean, one way to look at it as you're being quote unquote Conservative and I think investors appreciate that but the other way to look at it as that.
Oh from a performing ACL ratio standpoint, if I look at it.
Including mortgages or excluding mortgages, you're just out.
Pre COVID-19 levels, so it's a bit of a catch up in that regard.
The outlook or if the outlook remains challenging.
Which undoubtedly will be.
Could we see additional.
Uptick to your performing ACO like beyond the.
The run rate we had before.
Q4.
Thanks, David sell here, great to great to hear you and thanks for the question.
The if I look forward to 2024.
We're guiding towards it said it in my prepared remarks, 45 to 55 basis points.
The portfolio that we have today, we liked and we've done a great job over the last few years really building a strong a strong portfolio.
There is still pockets, where we need to focus on in the international bank, but we've really turned a.
A lot of the.
Portfolio that we had pre pandemic is not the portfolio that we have now, especially with the strong focus on our affluent growth in the international banking platform.
And.
The change in mix shift from unsecured to secured and so that that is giving a different profile.
We built these allowances because we were thoughtful about the macroeconomic outlook. We wanted to continue to strengthen the balance sheet as both Scott and Raj said.
<unk>.
It's really a forward looking perspective for us, but I'm not seeing a ton of weakness in our portfolios, we're going to be mindful of the macroeconomic shifts throughout the year as the year and if we need to build further performing allowances, we will but the portfolio is strong.
No no I'm, not suggesting otherwise just from a management standpoint.
Wherever you see the you know the increase in your ratio next year or is it more from the impaired or more from the performing it.
It would be more from the the impaired with the usual run rate of our performing allowances.
Got it thank you.
Happy holidays coming up.
Thanks Gabe.
Thank you I'm. Following question is from Mario Mendonca from TD Securities. Please go ahead.
Good morning, this might be too simple Roswell, maybe you could help me.
The fundamental review the trading book was meaning there's going to be meaningful at 45 basis points.
The next two years should we is it appropriate to assume that the hit would also be about 45 basis points each year for the next two years as we get to.
Full $72 five in 2026 or is that too simple approach to the to the equation.
No I think the fundamental review of the trading book should not repeat right. So it's a one time hits like you I'm, sorry, I was kind of a Florida, sorry, Raj I'm at the Florida My mistake sorry.
Got it no no.
No problem I think the Florida mathematical calculation will tell you that.
Based 96 ranks up back we disclose what is a standardized risk weighted assets.
If it remained at dose levels, yet they went out for some of that will be around the 45 basis points that you're referring to in 'twenty five 'twenty six Mario.
The flip side to it is Mary will continue to work on optimizing the portfolio. That's that's what we've been doing through 2023, frankly, and we'd make some deliberate choices on how we allocate capital to the various portfolio to ensure we're getting paid for the additional capital that we have to put up but at this time, that's probably the best estimate you have.
Okay.
The question might be more project, either Roger or predict well fundamentally the trading book.
And the title is fundamental.
Is there anything in there that has you rethink scotia's product.
Throughout the company Latam or Canada, there's a fundamental review booked none of them really trading.
Trading book have an effect on your your appetite in that business.
I think you've heard it a couple of times Mario the new regulatory changes, whether it's F. R. A T b or the floor is making us be more thoughtful about how we allocate capital and Scott may want to add in whether its by business by product by customer by segment that disciplined capital allocation and very thoughtful will be a plan moving forward it doesn't lead to any.
Exit of products at this stage, though so.
So we won't be trading a product suite materially.
So Jake you wouldn't been.
The weakness in trading this quarter, you wouldn't tie that into the fundamental the fundamental review the trading book in any way that.
No not at all okay.
Okay and then my final question, if I could go to deposit Tomorrow Blah blah.
The loan to deposit ratio has come down it's meaningful I've certainly noticed that but I have also noticed in <unk>.
Describe the clearly in your presentation that it's coming primarily from Tom.
Can you talk a little bit about your confidence that that those term deposits that were gathered this quarter, maybe talk about where it's coming from is a digital and otherwise and.
And your confidence that this is this is going to be sticky. This is going to stay with you and all of the long term.
Yeah, I'll talk Mario it's Raj on the on the term deposits.
Okay right right, it's customer preferences. When you see this kind of rate increases over the short period of time and that's the right thing what we would advise customers frankly and what customers want.
But a little bit of data as far as the retail banking in Canada goes we have seen it both on the retail bank as well as Tangerine, we've seen the shift to time the.
Deposits grew $32 billion in the retail bank in Canada, and obviously a lot of it was to them right about two thirds of it came from to them as well as some movement between what we would call day to day accounts to them that happened through the year, which has significantly slowed down in Q4.
Big Big increases in the beginning little less right now, but the core deposit mix, what we call. Non told me. If you want to use that phrase is still you know meaningfully higher to over 42% in the Canadian Bank.
Likewise business banking too within the Canadian Bank is a lot of shift to tell them as corporates and lowest C.
Commercial accounts also want to benefit from the rate situation that we have seen.
The term deposits in the commercial bank is becoming to about 26% of the book, which used to be about 15% right of this tangent, but like I referred to again core deposits is down to 65%. So Tangerine does have a lot of really good quality deposits, but it's down from 72% of the previous year. So that tells you that that is <unk>.
Jim shifts that we're seeing value customers right, who are tangerine customers. We think that shift has likely slowed down quite significantly perhaps even may have stopped now as we look forward into 2024.
But a lot of them that we have been taking Mario has been at the shorter rent. It's between the two and three points as we sold more gic's and so on and dock space rather than perhaps in the five year term pretty much to match. What we are doing specifically on the fixed rate mortgage book, which happens to be between two and three years fixed rate. So we're trying to balance that out as best as we can but.
We believe that the shifted to them is likely slowdown perhaps them stop in 'twenty four I guess, the only thing I'd add and Mario is what you don't see is the internal work to focus on client profitability and both sides of the balance sheet and that kind of focus around incentives. How we're allocating our time, how we're allocating resources, how we're enabling the teams cigna.
And so this shift of deposits is not a one year thing it's a <unk>.
10 year journey, and Youre, starting to see the impact of that I said in my opening comments, New day to day account acquisition up 6% year over year seen a massive engine for that are you seeing the mortgage product mortgage profitability up in the quarter significantly as we actually bundle.
From just a mono line mortgage opportunity real focus on auto in terms of cross selling and so this this last year has been the foundation building in terms of getting that client profitability focus across the organization and that's going to pay dividends long term for us.
Thank you again.
Thanks Meyer.
Thank you.
The following question is from Paul Holden from CIBC. Please go ahead.
Thank you good morning, so actually I want to continue with that discussion point on deposit growth because I hear the message that it remains important for the bank and totally understand why and it should but at the same time, you provided 2024 guidance that deposit growth will slow relative to 2023 and so.
So I guess I just want to understand that message on slowing growth or is it just because twenty-three you had outsized growth I'm just simply won't repeat at the same pace or is it related to pricing dynamics, maybe in the deposit market.
Help us maybe understand that 2024.
And that's again relative to the long term importance of growing deposits.
Completely I'll start Paul I tried I think the deposit growth. What we you should expect from US is to grow in line with loans, which is why we talk a lot about loan to deposit growth in the bank both in the Canadian Bank and an international banking so that will continue.
The reason I quoted the deposit growth to be muted as we're coming off a year, where we grew deposits 10%. Okay. That's a lot they talked about the 32 billion in the retail bank and so on in Canada.
We know Doug savings levels that started coming down in Canada. You know inflation is a factor. So it's also about availability of cash with our consumers and so on and if you expect to grow in the low single digit range is what I think it would be in Canada, specifically next year from the for profit plan. They don't numbers that we have we think that's still a strong growth considering that the law.
Growth is expected to be muted. So it's all about balancing both sides of the consumer balance sheet and liquids, we're doing with commercial customers.
Managing capital on the other side and likewise, managing our liquidity ratios to ensure that we have stable deposits funding our loan growth as we look forward. So I wouldn't read it as significantly lower than 2020, I would talk about it as 2023 was a lot of growth, but he targeted and deliberate and we wanted to manage it appropriately in line with our loan growth.
That's what you should see going forward.
Understand okay.
This isn't due to competitive pricing dynamics.
I think they've been very very thoughtful on pricing Paul I referred to earlier call earlier person question clearly about managing both to them as well as how we price both sides of the balance sheet and that discipline that we expect to make this okay got it.
Second question, then is going back to the performing Acl's. So just wanted to understand a little bit better the mechanics in terms of what drove the increase.
Is it no changes in model inputs is it some additional management overlay.
Is it a bit of both maybe you can kind of just walk us through the specifics in terms of why the Acos went up this quarter.
There's probably three things to look at there Paul number one changes to models from a higher for longer perspective.
Some changes as it relates to more pessimistic scenarios, but there was a significant amount of expert credit judgment that we leveraged in the quarter.
Just given our thoughtfulness around where the economy is headed.
The uncertainty around interest rates.
Then looking forward in terms of how fixed rate mortgage customers are going to start to reprice in the Canadian the Canadian environment over the next step the next year or two years.
Okay I'll leave it there thanks for your time.
Thanks, Paul.
Thank you.
Our following question is from Doug Young from Desjardin capital markets. Please go ahead.
Hi, Good morning, maybe Phil just sticking with you and I get to your explanation around the Canadian performing allowance build.
I guess the question is like maybe you can talk a bit about why we shouldn't expect something similar on the international book is there.
Various items that gives you more confidence that you have.
Already taken.
The build appropriate builds on the international banking book or maybe you can kind of just delve into why we should be expecting something similar to that yes. Thanks, Paul Great question.
We have been building ACL.
Performing ACL, particularly in international over the last six quarters, it's around $200 million.
We have been thoughtful we started building in Peru for example, performing ECL about three quarters ago, as we look forward to El Nino.
I'm, if I, if I look at the different markets.
We're starting to see some green shoots in Chile, a 225 basis point reduction in interest rates over the last few quarters.
<unk> performance, there, Chile remains a bit of a conversation point for us, but were well provisioned there.
I'm very happy with how things are going in Mexico, I'm very bullish about that market from a risk perspective.
So overall I would not.
Also add I think the.
The shift in strategy that <unk> has brought focusing on primary acquisition acquisition of primary customers gives me gives me a lot of great consequence from a risk perspective that we're moving in the right way.
As we look at building that franchise.
Okay, and then just thinking about the.
Looking at your stats on your macro assumptions for the Canadian book on Slide 31, and I'm, just really going to simplify this and you can tell me if I'm way off base or its a fair assumption, but in your current ECL for Canada for the performing loan side.
Can we just assume that the unemployment rate has been 78% is that essentially you know within a probability weighting for the different scenarios and then can you talk a bit about like unemployment is one of the bigger drivers of this does it is it 40% of the variables that caused the change here or it's at 50% plus I'm not sure. If there's a way you can kind of quantify.
But yes I mean.
Unemployment rate has a significant impact on our models, but.
Also look at the interest rate impact.
And.
And that's the result of higher for longer, particularly on some of the some of the retail models.
But again I mean, if you step back and look at the overall build.
A good chunk of it are majority of it frankly was in the ECJ section. So a lot of this is our management decision to to freight.
Just just on our thoughtfulness, rather on the macro and how we're moving forward in 2024.
Can you quantify the effect.
For credit judgment.
Something that you'd be willing to go.
It's about if I if I were to look at it's about 50 50.
Model.
E C J.
And the ECJ will be more weighted towards the <unk>.
Towards the business banking side.
Okay, and just a clarification. So my assumption that the unemployment rate built in here is that you know if I look at it an eyeball it 7% to 8% is that a reasonable.
Yes. It is yes, yes, yes.
Okay. Thank you very much.
Thank you.
Following question is from Darko <unk> from RBC capital markets. Please go ahead.
Hi, Thank you good morning, I have some credit quality questions before I go there I just wanted to clarify one thing.
You mentioned in your remarks that you have.
Planning to operate around 12, 5% common equity tier one range.
For 2024, what is your assumption there with respect to the regulatory environment, whether or not.
Theres any pressure for higher capital.
Hmm.
Darko, It's Raj I think we know the domestic stability buffer can be raised up to a maximum of 50 basis points. So that's what's left in the framework. So that takes the minimum to 12% from a regulatory perspective, and that's why the 12, 5% I, obviously have no insight into what will happen on December 8th or beyond the 'twenty 'twenty four but it's a.
A prudent way to manage it.
More importantly for US right, you'll hear more about it at the Investor Day, All we wanted to thoughtfully reallocated capital, which means we have to talk to airports well in advance of that so that's just trying to check can be implemented in the timelines that we want to do it.
So just to be clear Raj than what you're suggesting is.
Even if the.
So the DSP were raised 50 basis points is considered to be an adequate buffer even with the uncertainty in the environment.
Yeah from our perspective, we think it's reasonable obviously, if we see signs that we need to run a higher capital ratio, we will darko, but at this time, we think that's appropriate.
Okay. Thank you just a couple of quick questions for Phil on the <unk>.
On the on the credit.
When we look at the.
Increase in delinquencies and in mortgages could you maybe give us an idea is this predominantly coming from the arm portfolio.
And when we think about.
You know characteristics.
Are there any defining characteristics or trends that you could point to on them and I suppose it could be random, but my suspicion is there are some things that or there are some characteristics and I wonder if you could just share those with us and as we think about the fixed rate.
Our mortgage portfolio.
Renewing in in 2024.
What we can sort of think about extrapolating from what we're seeing in the arm portfolio into the fixed rate I mean, any help on that would be it would be.
Very helpful. Thanks, sure and Youre spot on Darko because this is how kind of has is how we've been looking at things too. So happy to happy to share I mean, we have been seeing 91, plus on the variable rate mortgage portfolio, increasing year over year, and we've been monitoring that portfolio very very closely.
Maybe just a few little tidbits of information that we still.
Despite the fact that we've seen.
Customer consumer deposits decreasing your savings buffers decreasing theres still a.
Two times savings payment are two times payment buffer on the VRM portfolio today.
But as I said in my prepared remarks, we're also seeing for those customers with CRM.
Their total spend is actually also down 11% year over year. So what we're seeing is those customers are feeling the pinch now and they are making trade offs. So.
And then if I look at fixed.
That payment buffers that I said was two for VRM is actually at three five for fixed and so the fixed rate customers holding onto a little bit more of a payment buffer, but we're very conscious of the fact that in 'twenty. Four we have about a 10% of our of our fixed rate portfolio is repricing and that moves into 20% and in 2010.
Five and another 25% to 20% in 2026, so we're watching the consumer trends in the consumer behaviors in the VRM and being able to extrapolate some expectations of what may happen on the fixed rate book.
We are optimistic that we will see interest rates start to decrease at the latter half of 2024, so thats built into some of our thinking as well.
And then maybe lastly.
I can't remember, who asked me about Taylor I skipped one of our previous discussions, but maybe just maybe just to give an update on where the tail risk is in the mortgage portfolio.
We have about less than.
1 million customers, we have with mortgages in Canada. The tail risk is about 2500 today and that's up from about that's up about 200 customers quarter over quarter and about 1000 customers year over year, just to give you a sense of sort of people or people are managing through.
But but but they're making tradeoffs and.
Some choice and difficult choices obviously.
Thank you for that and just to confirm the.
The way I should think about your variable rate portfolio.
Or is that they have a higher <unk>.
Score.
And generally underwritten a bit tighter than your fixed rate portfolio is that still true.
Yeah, we definitely had origination see higher FICO scores, but we also fund the VRM.
Our customer tends to be a sophisticated customer because they have been playing the right game within the markets.
Perhaps a little bit more savvy, okay and is there any other characteristics you can share for example, postal code or something like that.
A higher higher AR higher.
Delinquencies.
Is there anything else you could you could provide on on any other defining characteristic here. It is.
Interesting I asked the question on my team last week, what are we seeing from a regional perspective, there's no regional trends across the across the country on this okay. Great. Thank you very much. Thank you.
Our following question is from Sohrab <unk> from BMO capital markets. Please go ahead.
Okay. Okay. Thanks for going over time here, just two quick things hopefully Phil a couple of times when you talked about expert credit judgment.
You mentioned business banking is there a specific bucket within business banking.
Our industry group or a particular area that that's concerning you.
No I mean, our portfolio we have.
We have a good portfolio, we've been conservative in our underwriting and.
Criticized for such at some points in time, but.
We are thoughtful about of our real estate and I as I think everybody is in the market and we have built specifically for for real estate as I mentioned in my prepared remarks, we don't have.
Any significant exposure in U S.
In U S.
Office.
But we're thoughtful about the markets here in Canada, and we've been building appropriately in the performing side for for for that.
But that would be that would be specific to the Canadian business banking portfolio.
It would be significant judgment that was exercised correct.
Okay.
And Raj.
No I know we've talked over the year.
Last couple of years I suppose about the importance of a moderation in the overall rate environment.
Given the way you are positioned from an asset liability management perspective can you remind us if we were just going to take a shortcut then take a look at either that.
10 year, Canada does or the 10 year U S like around what sort of levels are.
Are you would you hit the inflection point, where distract turns into a positive like I know it it becomes less of a drag.
I suppose.
With declining rates, but what do we what do we what do we have our island do we want to get back down to a 10 year three and a half is that right.
That is that Nirvana.
So that'll be nice Sohrab as you know I think so we took some actions in Q2 right in 2023 to position the bank to be appropriately you know depending on the rate situation being higher for longer and I think that's actually paid off in spades, because we have done the right thing he does it reduce the level of drag there.
<unk> had otherwise based on the positioning that the bank had prior to that so today, we are positioned neutral to the V go in one respect.
But the expectation is if the forward rates played out maybe that's an easier way to think about it. So we're up at this time, we're going to see some reasonably meaningful benefits to the net interest income line through 2024 and beyond.
That's the best we have at this time.
For the 3.5% that you quote is when interest rates completely stabilized and you know how long that will take is anybody's guess I think the market's pricing and some of it on 2025 from what I know that these things do tend to change quite a bit but at this time I think we are in in my mind and in our minds position the best we can.
Can be based on the structure of our balance sheet and how we see the forward rates play out which is being neutral do it at this time.
For longer too good part of 'twenty four it is likely going to be the outcome and after that as you point out run rate cuts going to be able to benefit.
I appreciate the color. Thank you.
Thank you.
Our following question is from Mike <unk> from K B W. Research. Please go ahead.
Good morning want to go back to fill and I'm, just looking for new high level guidance here on one specific number so.
And looking at your mortgage book I think you were sitting at a 49 loans 1000, I'm just trying to better understand how much of that gets eroded by the process of taking over home and selling it so between commissions legal and then any other costs related to that process.
Whats a good proxy that we should use based on a percentage of the whole price like a 10% a reasonable number I get asked this question quite a bit by by.
Clients I just want to get your insights on that.
I mean, I can start by saying our recovery rates are quite strong and in that portfolio and that's why you don't see higher gross impaired loans coming off the secured portfolio.
In terms of holding me to a to a certain number I can't give you that number.
Okay, there's 10% sound unreasonable I mean, the commission alone would probably be close to half of that.
It doesn't it doesn't sound unreasonable, Okay fair enough and then just in light of the finance Minister's recent public comments about that.
The renewal cycle I wanted to also ask about the hardship rule and should we now maybe assume that it will be applied more loosely when people do need it.
Is it going to.
It's kind of device did I hear people say that it's very difficult to get the hardship rule.
Apply to your situation and others say that it's probably not so hard do you have any thoughts on that and how that might change in light of the finance Minister's comments.
I don't have any I don't have any thoughts on that I'm not going to comment on that right now.
Okay, and then maybe just a quick one for maybe for Raj just on the dividend payout ratio.
You're a little bit north of 60.
I'm wondering has anything changed for you or are you comfortable holding to that level of bad debt. That's comfortably above your you're targeting 40 to 50 range, if youre going to be in that high sixteens range for an extended period of time potentially is that does that raise any issues for you at all.
No Mike It's Raj I think we do expect to be outside of the range like <unk> seen in 'twenty, three and 'twenty photo as well and we're quite comfortable with that.
Payout ratio, we want to get back to 40% to 50%, but we know it will take couple of years, because we are going to go through this strategic refresh and how we want to thoughtfully reallocate capital and to US that's fine because the 40% to 50% range to keep it there and hopefully achieve it in the next two to three years gives us confidence that the <unk>.
Earnings power is going to come back for this company and therefore, the ratio will fall within the range and it's also a confidence that we're investing wisely and we'll continue to invest wisely looking forward to continue to reduce that payout ratio to achieve like I said, the 40% to 50%. So for one we won't change it we want to achieve that it'll take us.
All of Us and we're quite comfortable operating outside that range until we get there.
Okay. Thank you for the color.
Thank you. Our following question is from Nigel D'souza from semi test investment research. Please go ahead.
Good morning. Thank you for taking my question I wanted to touch on the residential mortgage book and on the decline in the balance as we've seen in that portfolio in Canada could you comment on how much of that was driven by.
An increase in discharges, perhaps from individuals who are on the adjustable side are experiencing payment increases in.
Electing to sell the property instead of going.
Going delinquent versus more origination over the last let's say year and a half due to rising rate any color there would be helpful.
Sure Nigel it's Raj I'll talk to that it is not about discharges and you know realizing on security and so on like fellow pointed out the portfolio has been actually performing quite well people are paying down. So it's not about delinquencies. It's motorboat our deliberate actions in response to slowing mortgage growth I think that's that's across the industrial world.
So we don't want unique, but we have taken deliberate action to improve the profitability as we had rationale with capital as you know across the portfolio across the bank not necessarily to the mortgage portfolio. So the 4% decline in the mortgage balances is not something that we are concerned about at this time.
The approach that we want to take to ensure that we are thoughtfully allocating capital for the highest return that we can achieve from our for our investors from the loan book that we put out there that's about growing both sides of the balance sheet, we wanted to be sure that.
We have a multi product relationship it starts with the mortgage which is a very important product for us.
But the actions that we've taken I think Scott referred to it that we have net interest margin expansion of the mortgage book some of it driven by the actions we have taken some of it driven by re pricing, but it's not about quality of the book or any any sort of delinquency that drove the decline Nigel.
That's helpful and just following up on the provisions on the mortgage book I think there was a comment on taking into account collateral values and just trying to understand why collateral values.
It would be at play given your healthy LTV ratios.
Tell me, if I'm understanding <unk> 2021 2022 vintages that you address.
Having a loan to value closer to 100%. So is that what you're expecting in terms of what you're modeling in in and why would those individuals' be susceptible to default.
They're not as profitable given that the renewal was still couple of years off.
Sure just to just to be clear Nigel the comment I made in my prepared remarks is that was related to business banking.
And the real estate or commercial real estate portfolio not did not the mortgage portfolio.
Okay. That's very helpful. Last question is just the 'twenty 'twenty four outlook on <unk>.
So does that assume PCL, but the midpoint of your guidance, so 50 basis points or 24.
Yes, that's about the assumption I think Philip talked about 45 to 55, I think 50 basis points is a reasonable assumption to the EPS growth numbers I spoke about Nigel.
That's it for me thanks.
Thank you.
Thank you.
Our following question is from Lamar per song from <unk> Securities. Please go ahead.
Thanks, maybe for Roger Scott I think you guys mentioned, a more modest first half of 2020 for an acceleration in the second half can you talk about what assumptions goes into that outlook.
And in the second half hinged solely on lower interest rates and what happens if rates remain elevated.
Thanks, Omar it's Raj I think there's two factors I'll speak about the first half and how it relates to Q4, we wanted to be clear that Q4 really is like $1 50 quarter right. If you if you take out the ACL build so building off that we think that you should see growth in Q1 Q2, one off items is.
The other segment is expected to be slightly better than the $487 million that you saw this quarter because it was a couple of one off items relating to certain investments, we had and lack of securities gains. So that should help with the first half. The second half is not hinging too much on interest rate declines I think we have what it was a market has you know three rate cuts towards the latter end of.
2024, which doesn't have a meaningful impact to the results. What it does have is two things. One is we are going to have lot of the expense savings, we talked about the productivity initiatives, which kind of kicks into the second half of the year to be meaningful because a lot of the exits are still going to be effective.
In the first half of the year. So that's a benefit and the second thing is asset repricing, what you've already seen in the mortgage book in the Canadian Bank as well as the need transform banking for that matter that should continue to happen rate cuts are expected to be accelerated in the international banking space you already seen that margin expanded this quarter. So those benefits will come in.
The latter part of year and that's why we feel like the second half would be better than the first shop.
Gotcha that makes sense and then maybe turn it over to Phil.
Can you talk about why.
Biggest risks are for PCR is coming in above that 45 to 55 range based on where you sit today would you suggest that simply unemployment because that's obviously the most important input, but maybe you feel good about that assumption that maybe it's the uncertainty in the path of interest rates. So maybe talk about the inputs I give you the most.
Forecast uncertainty and keep you up at night, and then secondly, what geographies are you most concerned with I suspect suspect youre going to point to the international portfolio, but maybe it's a domestic thanks.
Thanks Lamar.
Obviously whenever you look at Canada.
And whenever you look at uncertainty you have to look at unemployment and so you said that you got it and one I mean, we're very we're laser focused and I'm watching.
Watching unemployment.
We're also looking at the effects of higher rates, we're looking at the as I said in my earlier comments to Darcos question, the variable rate mortgage portfolios and the fixed rate portfolios are performing very well right now so I'm I'm very thoughtful about trade offs, so our customers making.
Trick trading off paying another product to pay their mortgage and so we're very focused on looking at payment flows off us outside the bank and to see if customers are paying another product somewhere else and vice versa. So.
Looking at the data looking at payment flows looking at how customers are weathering the higher for longer and obviously very very focused on on interest rates in terms of geography, I think Ibs Ibs C.
Stabilize from where it was last year as I said I'm bullish about Mexico, I think there's great opportunity there.
And right now.
We're very very focused on what's going on in the Canadian market.
Okay, and then is there any way that we can think about the top end for the ACL ratio.
You guys touched 125 basis points at the peak of the pandemic.
85 currently maybe it's just an unreasonably high watermark just given that you know that was a health crisis, that's clearly not what where we're at where we're going into now.
Is there any way, we can kind of size up what that that ratio could look like overtime.
Yeah.
I think we're comfortable with where we are right now.
And as we look at expanding our our business as we look at at our risk appetite as we look at how our business develops.
We'll take performed the appropriate performing acl's in line with in line with business growth moving forward and but.
I feel where we are right now is good.
Yeah. Thanks for the time guys.
Thanks, Laura.
Thank you.
No further question from the line.
Thank you.
Thank you on behalf of the entire management team I want to thank everyone for participating in our call. Today, we look forward to speaking again I thought December 13th Investor Day.
This concludes our fourth quarter results call have a great day.
Thank you.
The conference has now ended.
Please disconnect your lines at this time and we thank you for your participation.