Q2 2024 The Bank of Nova Scotia Earnings Call
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This conference is being recorded so it's going to stay home office. It's also as you see.
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Good morning, and welcome to Scotia Bank's 2024 second quarter results presentation. My name is John Mccartney and I'm head of Investor Relations here at Scotiabank.
If any of you. This morning are Scott Thompson's question, Vice 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.
Your questions.
Speaker Change: Also present to take questions in the form of Scotiabank executives <unk> from Canadian banking, Jackie alert from global wealth management, and Francisco <unk> from International banking and Travis nature from global banking markets.
We start and on behalf of those speaking today.
Turning 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.
Thank you John and good morning, everyone.
We are pleased to share our Q2 results, which reflect solid earnings from each of our four business lines.
This is our second quarter since we shared our enterprise wide strategy and I'm encouraged by our continued progress against our plans.
I want to take a few moments to recap a few key enterprise initiatives.
First disciplined capital allocation to higher return client segments and geographies.
Actually all of our incremental capital deployed in fiscal 2024 as the tour identified priority businesses.
Second deposit growth remains fundamental to our business prioritization and client selection decisions.
Focus on building privacy through deeper relationships has resulted in continued growth with P&C deposits up 7% year to date.
Third cost and process efficiencies, which both drive profitability and ensure frontline teams have the tools and capacity to deliver an excellent client experience.
Well managed expenses and productivity gains are driving positive year to date operating leverage.
And finally, a strong balance sheet, which will allow us to support clients through the cycle, while maintaining optionality to invest in our businesses as evidenced by strong liquidity and our 13, 2% <unk> capital ratio.
In terms of results the bank reported adjusted earnings of $2 1 billion or $1 58 per share in the quarter.
We saw solid revenue growth from both net interest income and fee income coupled with disciplined expense management.
The benefits of our productivity initiatives were particularly notable in our Canadian and international banking segments, where productivity ratio has improved 100 basis points and well over 200 basis points, respectively over last year.
Higher credit provisions, reflecting the uncertain macroeconomic environment and the impact of sustained higher interest rates on certain client segments impacted profitability.
Speaker Change: Overall net loans were 3% lower year over year and in line with Q1.
Balances have stabilized in the Canadian residential mortgage portfolio, while we've seen moderate growth in other personal and commercial portfolios.
Speaker Change: We continue to reposition our business banking portfolios with a view to optimize risk weighted assets and profitability by client.
And importantly return on risk weighted asset metrics are trending positively on a year to date basis.
The all bank loan to deposit ratio continues to improve as a result of $26 billion of deposit growth over the past year, driven largely from focused efforts in our Canadian and international banking retail franchises.
Deposit growth has now outpaced loan growth in Canadian and international banking in each of the past five quarters.
The bank's wholesale funding has been reduced by $34 billion year over year, resulting in our wholesale funding ratio below 20% down from approximately 23% in Q2 of 2023.
Turning to the credit environment, the impact of higher rates is increasingly weighing on consumers and to a lesser extent, our commercial and small business clients.
Although we believe the monetary tightening phase of the rate cycle in Canada is now complete our prior expectation for multiple rate cuts in the back half of the calendar year feels less certain.
The reality of a higher for longer rate scenario will naturally result in the continuation of elevated credit provisioning in our retail portfolios keeping us at the higher end of our 2024 PCL outlook of 55 basis points.
Our commercial banking and global banking and markets portfolio has remained stable from a credit quality perspective, although a continuation of the current rate outlook will weigh on economic activity and industry loan growth.
Speaker Change: In our key Latin American markets, we are now into the easing phase of the interest rate cycle.
Central Bank policy rates in Chile at 6% and Peru at $5 75 per cent are down significantly from peak levels last year as inflation has been successfully managed slower.
Mexico Central Bank has started to ease policy rates as aggressive tightened over the past two years has effectively lowered inflation and manage near term GDP growth expectations to more sustainable levels.
The Mexican economy continues to demonstrate resilient growth in a tight employment market. Despite the impact of double digit interest rates for the past 12 months.
Speaker Change: Our forecasts do not anticipate recessionary conditions in any of our key operating geographies over the next few years.
We are well positioned to execute on our new international banking strategy and what we expect to be a more normalized economic growth environment throughout the region going forward.
A few highlights in terms of performance and strategic progress within each of our business lines.
Speaker Change: Our Canadian banking business contributed approximately $1 billion of earnings in the period.
Favorable business mix shift asset repricing and deposit growth delivered solid margin expansion and the resulting revenue growth in a period, where overall loans were marginally lower year over year.
With continued focus on process and efficiency expense growth was moderate this quarter, resulting in a positive year to date operating leverage of three 1%.
Speaker Change: Our focus on relationships and more deliberate new client selection is driving an increase in the percentage of clients that we consider to be primary.
Our retail bank has added over 95000 net new primary clients year to date, and importantly saw the lowest client attrition in three years as a result of more selective client acquisition and cross selling initiatives.
We are closely tracking client relationship depth and have seen meaningful progress with over 45% of all retail clients currently holding three plus products in the Canadian Bank, a 230 basis point increase from a year ago.
Our <unk> loyalty program continues to drive deeper client relationships with 32% of new clients holding more than three products. After one months with the bank.
These higher value seen plus clients now represent over half of our new to bank clients across day to day banking and credit cards up from 40% last year.
At Tangerine, we continue to add new clients and see lower attrition rates with existing clients year to date, we're tracking well ahead of plan to add new clients in fiscal 2024.
Importantly primary client growth at Tangerine is up 15% year to date was 35% of all clients now, having three or more products with Tangerine.
Tangerine continues to set the industry pace in terms of mobile penetration was 64% of new client sign ups happening exclusively through the mobile channel up 11% year to date versus last year.
Our commercial banking business saw continued moderation of loan growth up 5% against double digit deposit growth.
Ongoing efforts on client selection and capital optimization contributed to a continued improvement in return on risk weighted assets this quarter.
We continue to believe there is a material share gain and profitability growth potential in our domestic retail and commercial bank, which we expect to deliver at least half of the bank's earnings growth over the medium term.
Global wealth earnings of $387 million reflects strong performance from our asset management franchise, our integrated multichannel advisory business and continued outsized growth from our international wealth.
Favorable returns in most global equity benchmarks and strong relative performance from our $18 32 fund lineup resulted in solid AUM growth in the quarter and supports continued flows into long term investment products as the year progresses.
Assets under management in our international wealth business grew over 15% in the quarter through a combination of strong investment performance and over $1 billion of net sales in the period.
Our Canadian wealth management advisory businesses Scotia, Mcleod, MD financial and our private investment counsel business are having great success, delivering our fully integrated total wealth offerings to clients.
We've increased the number of financial plans delivered this quarter by 27% year to date, and we continue to add product specialists to deliver comprehensive solutions for clients.
Clients with a financial plan are better prepared for the future are a significant driver of net promoter score and twice as likely to have a multi product relationship with the bank.
We continue to see progress in strengthening the partnership between our wealth in Canadian retail channels with referrals up 15% year over year.
And our global banking and markets business, we reported resilient earnings of $428 million this quarter. Despite headwinds in the Canadian capital markets franchise that were largely offset by strong performance in our U S business.
The business continues to reposition the portfolio with a view to achieving a better balance in our loan to deposit growth as well as align with our strategic geographic priorities and client return objectives.
Deposits were lower by 2% in the quarter, while overall loan volumes were down 6% due to lower new origination activity paydowns and additional deliberate actions to strategically reposition the portfolio.
We were encouraged by Gbm's performance in terms of growth in underwriting and advisory fee revenue in the quarter, an indication of a more effective client selection and product coverage in our GBM business.
We're also pleased to welcome Travis major to our leadership team as our new group head of global banking and markets. Travis brings a career of U S focused corporate and investment banking experience with best in class Global banks.
In our international banking business, we delivered strong results this quarter with a net earnings contribution of $677 million, resulting in a year to date return on equity of 15% up from 13, 3% in the period last year.
Solid revenue growth was driven by continued margin expansion in most geographies coupled with impressive expense discipline, resulting in a significant improvement in the segment's productivity ratio to 51, 1%.
Our capital repositioning continued in the period as risk weighted assets in that business were lower by $2 billion, while deposits were up 3% sequentially and 6% on a year over year basis.
Our GBM Latam contribution moderated to $290 million in the quarter down from an exceptional 372 million contribution in Q1.
We are encouraged by the improved performance and profitability of the business as we look to drive even greater productivity through a more regional standardized operating model.
And international retail, we have a significant client segmentation initiative underway to grow primary clients more selectively in the affluent and emerging affluent and top of mass segments.
While we expect this franchise repositioning including client deselection to be an ongoing process. We saw good progress on priority net client growth in the quarter.
We continue to believe we have sufficient scale and capital deployed in our international banking business.
Optimally grow our retail businesses and capitalize on wholesale opportunities when favorable market conditions and client activity allow as evidenced by solid results again this quarter.
In summary, the bank delivered solid financial performance in the quarter, while executing on key initiatives that will enhance profitability and set us up for more balanced resilient growth over the long term.
I would like to thank our teams Scotia bankers globally, who are delivering on our ambitious plan.
As I continue to meet with our team. It is clear our people understand the important role they play in driving a sustainable profitable growth, we are committed to delivering for our shareholders.
With that I'll turn it over to Raj for a more detailed financial review of the quarter.
Thank you Scott and good morning, everyone.
All my comments that follow will be on an adjusted basis for the usual acquisition related costs.
Starting on slide six for a review of our second quarter results.
The Bank reported quarterly earnings of $2 1 billion and diluted earnings per share of $1 58.
Return on equity was 11, 3% and return on tangible common equity was 13, 8%.
Revenues were up 5% year over year, driven by 5% growth in net interest income.
And also by net interest margin expansion and 6% growth in noninterest income.
All bank net interest margin expanded five basis points year over year.
Margin was down two basis points quarter over quarter, driven mainly by a lower contribution from asset and liability management activities.
Noninterest income was $3 7 billion up 6% year over year, primarily from higher wealth management revenues underwriting and advisory amendment and credit fees, partly offset by lower acceptance fees.
The provision for credit losses were $1 billion and the PCL ratio was 54 basis points up four basis points quarter over quarter.
Expenses grew a modest 3% year over year, driven by higher technology related costs.
Personal cost from inflationary adjustments and higher performance based compensation, partially offset by lower share based compensation and the benefits of the efficiency initiatives.
Quarter over quarter expenses were down 1% driven by seasonally higher share based compensation in the last quarter.
The productivity ratio was 56, 2% this quarter and year to date operating leverage was a positive 1%.
Moving to slide seven which shows the evolution of the common equity tier one ratio and risk weighted office during the quarter.
The bank CET, one capital ratio was 13, 2% an increase of 30 basis points quarter over quarter, and 90 basis points year over year.
Primarily benefiting from arguably optimization efforts.
Total risk weighted assets was $452 billion marginally down from 451 billion in the prior quarter.
Earnings contributed 14 basis points and the drip program contributed 10 basis points offset partially by a reduction of five basis points from the revaluation of securities.
Lower risk weighted asset five degrees, reflecting the benefits of honorably optimization activities contributed 15 basis points.
The Q1 capital flow rate of seven 8 billion was eliminated by changes in book quality and LGD model updates that only impact the model risk weighted asset numbers.
The bank will continue to maintain a strong balance sheet metrics as it executes on its strategic initiatives.
Turning now to the business line results beginning on slide eight.
Canadian banking reported earnings of $1 billion a.
A decrease of 4% year over year as higher revenues were more than offset by significantly higher P. C. L.
The business generated another quarter of positive operating leverage resulting in year to date positive operating leverage of three 1%.
Average loans, and acceptances were flat quarter over quarter and down about 1% from the prior year.
The portfolio mix continues to evolve in line with our strategy as business loans grew 8% year over year credit card balances grew 18% and personal loans grew 2%, while residential mortgage balances declined 5%.
We continue to see deposit growth as year over year deposits grew 7% and the loan to deposit ratio improved to 122% from 132% last year.
Net interest income increased 12% year over year, primarily from solid deposit growth and margin expansion.
The net interest margin expanded 26 basis points year over year, reflecting benefits of absent repricing business mix changes and growth in deposits.
Margin was stable quarter over quarter as asset margin expansion was offset by deposit margin compression.
Noninterest income was down 11% year over year as the prior year included elevated private equity gains and income from our equity interest in Canadian tire financial services that we divested in October 2023.
The PCL ratio was 40 basis points up six basis points quarter over quarter.
Expenses increased 4% year over year, primarily due to higher technology costs personnel costs and expenses to support business growth quarter.
Quarter over quarter expenses grew 1%, primarily from higher pension and benefits and premises costs.
Yeah.
Turning now to global wealth management on slide nine.
Earnings of $387 million grew 8% year over year, driven by higher revenues in Canada on a mutual fund piece in international wealth, partly offset by higher volume related expenses.
Quarter over quarter earnings went up 3%, primarily due to higher brokerage and mutual fund revenues across Canada, and international partially offset by higher expenses.
Revenues of $1 $4 billion were up $114 million on 9% year over year, driven by higher fee based revenues.
Mutual fund fees from strong assets under management growth and higher net interest income from loan and deposit growth across our Canadian and international businesses.
Expenses were up 9% year over year.
Due to higher volume related expenses sales force expansion and higher costs to support business growth.
Both assets under management increased 6% year over year to $349 billion as market appreciation was partially offset by net redemptions.
Speaker Change: <unk> grew 7% or the same period to $669 billion of market appreciation and net sales.
International wealth management generated earnings of $66 million up 19% year over year.
Driven by higher mutual fund fees in Mexico, and strong deposit growth in Peru.
<unk> and <unk> grew 10% and 15% respectively year over year.
Turning to slide 10, global banking and markets.
Global banking and market generated earnings of $428 million up 7% year over year.
Capital markets revenue was up 5% year over year, primarily from higher fixed income and global equities revenues actually.
All set by lower FX and commodities revenues.
Speaker Change: Quarter over quarter capital markets revenue was down 5% as global equities revenue was down 11%.
Okay offset by growth in F C C.
Business banking revenues declined 8% year over year, and 4% quarter over quarter, primarily due to lower corporate and investment banking revenues as the business continues to optimize capital deployment.
Loans, and acceptances were down 6% quarter over quarter to $115 billion, largely driven by borrowers accessing the debt markets to pay down loans and management's focus on ongoing balance sheet optimization.
Net interest income decreased 14% year over year, primarily due to lower loan volumes, partly offset by lower trading related funding costs.
Noninterest income was up 2% year over year, mainly from higher underwriting and advisory fees.
Partially offset by lower trading related revenue from the impact of the proposed denial of dividend received deduction on southern shareholdings in Canada.
Expenses were up 4% year over year, due mainly to higher personal cost and technology investments to support business growth.
Quarter over quarter expenses were down 3%, mainly due to seasonality of share based compensation, which was higher in the first quarter.
The U S business generated strong earnings of $271 million up 97 million or 55% year, it'll be our but strong contributions from both capital markets and corporate and investment banking, while managing risk weighted asset growth.
GBM Latin America, which is reported as part of international banking deployment earnings up $290 million.
5% compared to the prior year, mainly from Mexico.
The business also onto a 7% year over year reduction in average office.
Moving to slide 11 for a review of international banking.
My comments that follow I don't know, an adjusted and constant dollar basis.
The segment delivered earnings of $677 million down 2% year over year.
Revenue was up 6% year over year as net interest income was up 14%, mainly in Chile and Mexico.
Partly offset by a decline in noninterest income driven by lower trading revenues.
Net interest margin expanded 11 basis points quarter over quarter to 447 basis points, driven by lower cost of funds from rate cuts and higher inflation benefits mainly in Chile.
Year over year loans were down, 2%, primarily in Brazil and Peru.
Total business loans declined, 7%, partially offset by 6% growth in residential mortgages.
Deposits grew a strong 6% year over year, primarily in Mexico, Chile and Brazil.
Personal deposits grew 2% year over year and non personal deposits grew 8%.
The loan to deposit ratio improved to 124% from 138% in the prior year.
Speaker Change: The provision for credit losses was 138 basis points or $566 million.
Down $2 million quarter over quarter.
Expenses were up a modest 3% year over year, driven by technology expenses and business and capital taxes.
Despite the high inflation environment.
Year to date operating leverage was a positive five 5%.
Turning to slide 12.
The other segment reported an adjusted net loss attributable to equity holders of $421 million, an improvement of $53 million compared to the prior quarter, mainly due to higher noninterest revenues, mostly from mark to market benefits from investments in southern better windows.
Lower expenses.
I'll now turn the call over to Phil to discuss with us.
Phil: Thank you Raj and good morning, everyone.
Credit performance is playing out as expected international banking has benefited from a stabilizing macroeconomic environment and specific client segments in Canadian banking are facing headwinds as rate relief is delayed.
As a result this quarter all bank sales were 54 basis points towards the higher end of our range.
This resulted in total PCL of approximately $1 billion up quarter over quarter by $45 million, performing PCL were $32 million or two basis points.
Impaired PCL for $975 million or 52 basis points up 33 basis points quarter over quarter, largely driven by Canadian banking retail, partly offset by lower PCL and Canadian business banking.
We continue to maintain appropriate allowances on loans with an ACL coverage ratio of 88 basis points up two basis points quarter over quarter and up 10 basis points from Q3 2023.
Phil: In Canadian banking PCL for $428 million translating to a PCL ratio of 40 basis points up six basis points quarter over quarter Canadian retail pcl's were $365 million of which $343 million were impaired PCL.
Phil: This represented a $65 million increase quarter over quarter.
Canadian clients continued to be impacted by increased borrowing costs and higher expenses driven by inflation.
<unk> sales were elevated due to deterioration in the Canadian automotive finance portfolio in the used segment and specific cohorts of variable rate mortgage customers.
Specifically variable rate mortgage customers originated in 2022 have shown signs of stress.
These clients are largely from the greater Toronto area in Vancouver.
This resulted in an increase of vulnerable customers from 'twenty 700 in Q1 to 3300 in Q2.
Variable rate mortgage portfolio delinquency increased two basis points quarter over quarter to 28 basis points or.
Our fixed rate mortgage portfolio, representing 68% of balances had stable delinquency performance.
We will continue to work through our mortgage and auto clients.
And have launched several proactive measures across our collections function, including pre delinquency solutions and new loss mitigation tools.
Turning to international banking.
International banking PCL were $566 million down $8 million from the prior quarter Q2, PCL ratio was 138 basis points up three basis points quarter over quarter.
Phil: Our international business banking portfolio continues to perform well with PCL was down slightly from the prior quarter driven by strong performance across the region slightly offset by continued market deterioration in Colombia.
Retail sales were in line with the prior quarter at $485 million.
Sales in Colombia increased offset by stable performance in Mexico, Chile and Peru.
Central banks across the region continue to cut policy rich rates, which should have a positive impact in these markets.
Phil: Looking forward to the second half of the year, we expect on a full year basis to remain within our guidance of 45 to 55 basis points. However, we expect to remain at the higher end of the range in the next two quarters.
In anticipation of a deteriorating environment in 'twenty and fiscal 2024, we increased ACL from 78 basis points to 85 basis points in Q4 of fiscal 2023.
Phil: Additionally over the last four quarters, we have built approximately $585 million in performing allowances.
Driving elevated provisions Canadian credit performance will continue to gradually worked through the cycle and in international markets. We believe credit performance will remain stable throughout the rest of the fiscal year.
Overall, we are comfortable with or allowances and continue to manage our portfolio proactively with that I will pass it back to John for Q&A.
Thank you Phil operator, please open the line for questions. Please limit your questions to one little participants have the opportunity to ask questions and re queue. If you will.
Operator.
Q.
Speaker Change: If you have any question. Please press star one on your devices keypad.
There will be a brief pause while the participants are just sir thank.
Speaker Change: Thank you for your patience.
The first question is from Ebrahim <unk> from Bank of America. Please go ahead. Your line is now open.
Speaker Change: Yeah.
Hey, good morning.
I guess, maybe the question.
Starting with you just don't credit quality.
Speaker Change: Mentioned is that D. C. D. C is at 55 basis points for the back half.
A sense of your visibility on committed around do you see things, peaking in the back half of the year.
And whether one or two rate cuts from the <unk>.
Speaker Change: We didn't make any significant impact or how we should think about just credit quality as we look beyond the back half and the potential that could be a lot more work.
25.
And we didn't that like where do you see the drivers of the loss content within your loan book. Thank you.
Thank you Brian.
<unk>.
So our guide towards the higher end of the 45 to 55 basis points that we gave in Q4 last year.
A full year basis.
I think the dynamic within our facilities, you'll see as I mentioned earlier international banking, starting to stabilize and we've seen great cuts over the last few quarters and international and those are starting to really bear fruit for and provide relief for our consumers.
I'm more thoughtful about what's going on in the Canadian market and you are seeing the impact of higher for longer really starting to impact.
Particularly our variable rate mortgage customers and into our auto portfolio, we're seeing we're seeing friction in those portfolios.
There's some talk about rate decreases in June and July My I must have the opinion of those rates, even if with those decreases in June July it will take a few quarters, maybe one two or three quarters for it to start to really support the Canadian consumer.
Speaker Change: Maybe a little bit of math to help you.
Some numbers to help just do it with the thought process on the variable rate mortgage customer, particularly those within Toronto and Vancouver.
With the average decrease of 25 basis points or 25 basis point decrease will lead to better than average decrease in payment of about $100 and so as you think about how quickly rates decrease it's happened that that will provide.
Good relief for the average consumer to start making payments on other products and so I think but I think it's going to take probably one to three quarters, depending on the consumer for it to really bear fruit.
And just on that figure 25 basis points should we be looking at the old Lady who would like to meet with you on the variable rate, but when you think about the rest of the book.
Overnight with the five year like how do you think about the sensitivity between the two there shouldn't be one thing the yieldco or needing to move lower as well.
<unk> cuts.
Yeah, I can start and maybe Phil again, yeah, I think for the variable rate mortgage customer like you said the short end of the day Toby is going to have an immediate impact because of our product and therefore, a benefit in the raises that Phil talked about.
Speaker Change: The others they will benefit based on the longer term rates I think most of it anyway. So we are seeing in the three year cohort fixed rates. So on Saturday co moves definitely it's not going to go down 25 basis points at the long enough to go we know where that might go down something you know 510 basis points and gets reflected in some of the relief that these customers are to get at that time or for a new.
Nope.
But I would say, it's more meaningful at the short end of the curve for debate even take mortgage customer.
Thank you.
Speaker Change: Next question is from Doug Young of Foundation Bank Capital markets. Please go ahead. Your line is now open.
Good morning, just sell.
Slide 15, you talk about the low <unk>.
Aligning with PCL in international banking, driven by more retail formations across all countries and then.
I thought the slide 16 that you talked about higher Gil formations driven by higher new retail formations, mainly Chile, Mexico I'm just trying to reconcile these two statements.
This morning, but.
Just trying to kind of understand the movements. There and then just a follow up just I just want to clarify Phil as well you're talking about higher end of your 45 to 55 basis points you see our guidance is that higher end for Q3 Q4 or is it the higher end for the full year.
So I'll start with your supply your question on Slide 16.
And.
What you see a lot of a lot of our increasing deals this quarter.
Related to our Chile commercial real estate.
And so given the given the real estate at higher for longer situation in that market.
We have seen some prolonged stress on the commercial real estate portfolio. There it is.
It's not a big portfolio.
So about $3 billion and really the challenge has been the for the real estate developers the cost to complete.
What we're seeing in Chile, though the dynamic has been we've had about 475 basis point reduction in interest rates already.
And so we're starting to see.
The.
Speaker Change: Construction starting to come back online.
And we.
We're also reassured because we have pre sales in place for the majority of the lending that we've put in that we have there.
So it's gonna be higher for a little bit longer, but we're not expecting to lose any any money. There. So that sort of explains the increase in our ingalls from that part in terms of.
Speaker Change: In terms of the forecast we're expecting.
We'll be at sort of 40 $54 45.
<unk> for the next two quarters and so I'm just speaking more on the quarterly the quarterly outlook sorry.
<unk>.
Alright, 54 to 55 basis points for the for the next two quarters.
Thank you.
Thank you.
The next question is from Paul Holden from CIBC. Please go ahead. Your line is now open yes.
Paul Holden: Thank you I wanted to stay on the line of questioning of the higher for longer and potential impact on Canadian retail borrowers specifically.
On the fixed rate mortgages, I'm wondering how you're viewing the difference or similarities and potential payment shock for the fixed rate mortgage borrowers versus what youre seeing with the V. R. M. Today.
Speaker Change: Sure. Thanks for the question Paul.
We haven't.
Most of the asset.
Renewals that are coming up on the fixed rate portfolio are those that were originated in 2017. So we haven't been seeing a a.
A big volume of fixed rate renewals, so far maybe it's interesting to note that 70% of the renewals that are coming through right now are opting for a fixed three year fixed term.
The what we are looking forward to though in terms of you know as we look into sort of 2025 and 26, obviously there is some payment shock anticipated, but we're taking some comfort in terms of how our variable rate mortgage customers are absorbing the shock.
Speaker Change: We have seen.
Discretionary spend decrease as an example, our VRM portfolio those customers discretionary spend has decreased by about 10% on retail expenditures year over year.
And on fixed rate today is around five so we're already starting to see.
Some.
Speaker Change: Consumers, making choices in terms of how they're managing their savings in and I think I've given December in prior calls, but we still see our very well like mortgage customers holding onto the two payments to.
Payments buffer within their deposit accounts and on the fixed rate, it's about three and a half to two four so.
Speaker Change: Comfortable with the credit quality, we're seeing there and just as a reminder.
The average FICO score that we're seeing at AR.
Renewals still remains strong.
And out of our 768 with 91% of those renewed balances being being a prime or above on the fixed rate portfolio.
So hopefully that's helpful.
Thank you and I'll leave it there so my one question. Thanks.
Thank you.
And then next question is from Matthew Li from Mccann Accord Genuity. Please go ahead. Your line is now open.
Hey, good morning, Thanks for taking my question, one regarding balancing primacy and crowd Canadian loans declined by 1% year over year in the quarter and I think part of that was a conscious effort to focus capital on area you achieve primacy.
So we still do you expecting to see accelerating loan growth in the back half of the year, maybe particularly on the mortgage front.
Hi, Matthew its hours here thanks for the question.
Just to give a little context, so on a spot basis in the quarter. We grew our mortgage book by around $2 billion and we continue to grow.
Our credit card.
Look our unsecured lending book, but where where we see.
<unk> is on the auto book as Phil alluded to actually the auto book the retail business is actually down 14% year on year in terms of our originations, but we are slowly seeing now the pipeline for mortgages will continue to go up we're trying to stay extremely focused on what you've heard Scott say often this view.
Speaker Change: <unk> versus volume and just to give you a bit of.
Speaker Change: Background on that so 70% of our new mortgage originations are coming with three or more products and actually in April that number was approaching 80% across all channels. That's one fact, the other fact is renewals we're hitting.
Speaker Change: A very high level of renewals now passing over 80% of renewals for the second quarter far more than just these are the originations or the business, we'd like to book for obvious reasons.
So we're going to see continued mortgage growth in.
In the second half of the year, obviously predicated on how rates go but even if rates come down we will continue to stay disciplined on getting multi product mortgage customers at origination and again focusing on renewals. The auto book will continue to be stress, we're actually pulling back on used car on nonsense.
Rent, it and where we will see some growth will be in this event at new car a business as more new cars come on stream.
With our dealers.
In terms of credit cards will continue to grow double digit the balances, but again, our credit cards, it's not a mono line business, it's actually a cross sell a product where 80% of our new originations in credit card are coming from existing customers and C. Plus so hopefully that gives you a bit of a background.
That's helpful. Thanks.
Thank you.
The next question is from John Aiken from Jefferies. Please go ahead. Your line is now open.
Good morning, I wanted to dive into the appendix actually slide 28, if I may.
Declining balances in our.
Commercial and corporate lending our international not terribly surprising but in context, we're actually we're actually seeing a shift away from investment grade to non investment grade.
First part of this is is this just simple credit migration, where some of the more of a investment grade has slipped into non investment grade given what's going on in the region.
And second part to the question when do we when do we think we can actually start to see the reversion of added growth presumably.
You are looking to to grow the investment grade part of the business or do I have that strategy can correct.
Yeah, I can start John it's Raj what are you seeing any investment in honors great.
Great. That's got both qualities. What you described yes. There is some level of migration that is happening both on the GBM book as well as in the International commercial book do you actually see it in the capital where we see non retail migration so at all.
Obvious reasons right high inflation and low growth in all of these economies high interest rates has got some impact.
The numbers that you see is actually small right I mean, it's moving from 40% to 39% in investment grade and 60% to 61% and non investment grade. There's no deliberate strategy over here is how we are going to deselect clients and those clients, where we believe we are not getting the appropriate returns we are trying to pull back on capital.
From a capital perspective.
International banking as you know every three months, we have the ability to reprice. If we wanted to keep the client or the price. If you want to exit the defined so we usually have you said in the past we continue to use it as we you know we have a finite amount of capital that interventional Bang he hasn't they're making the right choices to improve the returns you can see somebody referenced with skok made referenced in this call.
Comments talking about auto we'd hope it even goes beyond 15% down. These are on contract. It goes to the outcome, which is to have a more profitable business, but there is no significant shift that you should expect to see even going forward. It's just a small shift based upon a couple of factors.
Thanks for the color I'll requeue.
Anytime John.
Thank you.
The next question is from Matt again, but he hasn't been Shane from National Bank Financial. Please go ahead. Your line is now open.
Just a couple here on international the good NIM expansion this quarter, but with the rate cuts that we've seen across the region. How do you expect those to revolve in the coming quarters and then on the credit side.
There's a lot of ways to slice and dice. The you know valuation of your provisions, but one thing I look at the performing ACL ratio today versus pre Covid historical reasons I guess.
It's pretty flat for Scotia, your peers have more of a buffer above the pre COVID-19 level.
Given what you know.
Loaded as far as you know some of the challenges our customers are facing and this is across the industry of course, but you know your book in particular in the auto book is it possible plausible, but we could see another bump up required to the performing PCL ratio just because of you know everything that's going on right.
Gabe it's Raj I'll start on the NIM and you Don Francisco might have a comment or two to follow me and then Phil will take hold on the performing PCL ratio yeah.
It's not for backing them gave you.
Probably followed me quite a bit you know a number of countries multiple factors had moved them up and down inflation is a factor and so on.
This quarter the benefit came primarily from a reduction in cost of funds right and we have a significant cost and rates, particularly in Chile, and Peru that we looked at photos NIM is up 15 basis points, Chile is up eight basis points and even Colombia was up 41 basis points for the same reason so that thing I think that's largely done you'll see some marginal benefits.
But I think most of it is baked into the 447 basis points.
That was about three basis points in the fourth 47, it's just inflation related which we know we will give up in Chile. So maybe look at it is $4 45, and then it'll fall, but you know as.
International banking them always is that because of multiple factors I think some of it around that maybe full 50 instead of topping at least over the next few quarters because were not expecting meaningful rate cuts like we've seen in the last two or three quarters, but that would be my sense of how the NIM will behave looking forward I would agree rush.
So I think the one of the Laggards, Mexico, we expect Mexico to quote rates much later much slower.
That would be the remaining benefit, but we don't believe that's going to happen.
In the second half of the year, but rather a 2025 of it okay.
Speaker Change: Mary gave Phil here.
Well said.
Speaker Change: Maybe maybe just on the ACO question U S.
You recall, we did do a large performing building in Q4 last year and.
And we did it on both the business banking side and on the Canadian retail just in anticipation of some of the headwinds we expected for for fiscal 2024.
Speaker Change: If I were to go back and to look at Q1 'twenty. We were at 82 basis points were at 88 basis points. This quarter. So I feel given given where we are given the level of build that we've done over the past four quarters uncomfortable with the level of allowances that we have will we increase performing allowances as we go forward, it's going to dip.
Speaker Change: And on how the macroeconomics scenario.
Plays out and we'll be guided by that amount in our guidance range.
But was for impaired or total.
The 45 to 55, that's her total yeah. Okay alright. Thank you. Thanks kit.
Speaker Change: Thank you.
The next question is from Mario Mendonca from TD Securities. Please go ahead. Your line is now open.
Good morning, probably for Raj the capital ratio looks pretty healthy now north of 13, 2% you may have discussed this spot market in the.
A presentation of our nature I mean, I've seen yet can you update us on what your intentions are with address most of your peers I think all of your peers have dropped the drops I'm interested in your outlook there.
Yeah sure Mario.
Good morning capital ratio, Yeah, definitely healthiest, 13.2% reflects all of the actions that we've taken and we will continue to take as we pivot away from lower profitable segments and businesses to higher profitable segments. So we're seeing good returns over that on the flip side we've made.
So the capital build has been really good particularly over the last two quarters have been very pleased with the results from all the initiatives. If you talk about which we call as arguably optimization initiatives.
We previously indicated that our intention was to turn off the drip in the second half of the year. Our intention still remains the same but quite motivated to doing that and that's what you should expect from us in the second half of the year to turn off the drip, but right now we're just alone.
And then again this is something I may have missed I thought the cadence for dividend increases was probably Q2.
But again I may have missed this I don't see a dividend increase this quarter.
No you haven't missed anything Mario as always I think yesterday, just talking about an increase this quarter is part of what we're thinking is we don't want to grow dividends in line start earnings growth, which we know is going to happen in 2025, innovate situation and other stuff to contribute it. So we decided that it's better to take a pause at this time and we should stock.
Commencing dividend increases in 2025 language, what we do pick up in the second quarter.
Speaker Change: Thank you.
Thank you.
The next question is from Lamar Prasad from <unk> Securities. Please go ahead. Your line is now open.
Speaker Change: Maybe turning to <unk> on the question on Canadian banking.
This separation of seed or is that going to weigh on noninterest income in Canadian banking, because like I I noticed the net fee and commission income dropped to $619 million this quarter.
Table in the North of 636 to 40 range throughout 2023, so I'm wondering if that's going to be a headwind do you have that youre going to see play out for the next couple of quarters. Thanks.
Hey, Tomorrow, it's Raj how would I start and then you know ARAS might have a couple of comments on this yes, absolutely as we turn off the SEDAR and the acceptance of this level of starts going down which would happen in an accelerated manner than Q3, yes. The noninterest revenue will go down but it doesn't impact revenue, it's kind of a geography that moves between noninterest.
And I I. So we don't have the staffing piece, but we pick it up through the NII line.
And as you May know some of these acceptance is tend to be at lower margins. So as they come up for renewal so it'll be a tailwind to the margin of the Canadian bank into the bank as a whole not necessarily in Q3, but as they come up for renewal.
Let's say that's the change you should expect to see the part of the noninterest revenue, indicating back that also don't because we have lost the Canadian tire financial services income, which as you know it was between $16 billion to $18 billion supporter, but that shift will happen just between revenue for the acceptance as part of the business, but not necessarily impact the total revenue been any meaningful amount.
Sure.
And just to add up to now it's been one third we've converted the Bac.
Into loans and that has obviously impacted the NAR, but again as Rob said the net interest income going up by September the remaining part of the B as well will be converted these are not able to reprice like the earlier ones. So we will see a bit of pressure on the NIM as that conversion takes place.
Okay. So net net as just said, we shouldn't expect it to be kind of a ship from.
Our into NII.
Speaker Change: Yes, that's right Lamar it shouldn't be meaningful and I used the $20 billion portfolio compared to the $440 billion, we have in that business, but it does have some impact as it transitions away yeah.
Thank you.
Okay.
Yeah.
Thank you.
Question is from Michael There is is that average from K B W. Research. Please go ahead. Your line is now open.
Michael: Good morning, I have a question for Raj and I wanted to ask about the corporate segment loss.
And just in light of Scott's comments at the <unk>.
So it sounds like your house you on the number of rate cuts has certainly changed.
So if you think about medium term.
I'm trying to get a sense of the reasonable trajectory that we should expect on that law. So I'm guessing, it's not going to be 400 million plus but if you think about seeing exiting 2025 six quarters from now does this go down to something like sub 300, and if that's the case.
What do we need to see on the maybe the shape of the yield curve to get you there.
Yeah. Thanks, Mike for your question Yeah. The other segment this quarter just to clarify you know it benefited because of mark to market adjustments and I believe for the second half of the year unless rate cuts happen different than what we're expecting which is the only one rate cut we are expecting now in the second half of theater in Canada will remain around the $4 52.
$475 million loss rate unless we benefit again from some late mark to market benefits like I saw this quarter.
But to answer your question on trajectory April follow the trajectory of rate cuts, Mike plus the benefits of the rate cuts will show up in the other segment for us as a business line is compensated through the transfer pricing arrangements that we have to remove the volatility of the business line results.
Each rate cut in December you put out one additional disclosure in the appendix slides, where you said that 25 basis point cost at the short end of the curve gives us about $100 million NII benefit full year. So it gives you a little bit of a perspective of how many rate cuts and how that could play out for the other segment next year.
The more meaningful one Mike as you look at our fixed rate mortgages that is coming up for renewal in 2025, you can make some assumption, saying you know what could be the pick up in the yield that will show up in the other segment because the spreads will remain constant in the business, but it also has to be offset by some of the gic's, which are coming up for renewal even this.
What are the Canadian Bank. We saw did you guys get any new ones in fact a bit.
NIM by about two basis points. So there does that dynamic between fixed rate borrowings that we havent fixed rate mortgages doesn't come up for renewal that should help.
If you have reasonable rates, that's calling for rate cuts right through to 2025, I would say that the other segment will not start that before the quarterly loss should be meaningfully or but it's tough to provide an estimate like you said it depends on how the various parts of the rate move right from the short end all the way to five years, but it should be a meaningful.
Benefit in 2025 or the other segment.
Okay. That's super helpful. So at its rate cuts bank of Canada, and not necessarily the shape of the yield curve that would drive that.
Yeah, I'm, assuming that the rate cuts, obviously benefit the short endoscope hopefully if its not a parallel shift I don't think any of us expect that because of the curve has inverted. So the long end of the cost should go down meaningfully lower than the 25 basis point rate cut we might see at the short end up to go so it might lose something of the 305 viewpoint, but the significant benefits come from.
The short term okay.
Okay, great. Thanks for that and then if I could just squeeze one more in for for aerosol banking just wanted to ask about it sounds like you're getting a bit of traction on those more fulsome relationship which is now your strategy.
On the cost side I'm, just wondering is that something that near term could result in a bit of expense inflation I'm not sure how much incentives play a part in getting back customer too.
Michael: Some more more of a fulsome customer for the bank and any thoughts on near term expense.
Let me just on the primary just to cause a bit of background before I get to your question. So on primarily what we're doing is at the point of sale, where much more deliberate in the types of customers, we want to bring into the bank. So again, having multi product acquisition at the point of sale I talked about mortgage and but it's also in.
Generally in our acquisition in our branch network the mortgage plus as you know I I discussed when we book mortgages, we're looking for the multi product day to day banking Ah.
Additional products along with the mortgage and then again the advisory getting more products. So as you can imagine getting more products to our customers, they're more engaged with us there could be additional of course interactions and cost with that but again in parallel as you know and you see that a bit on the cost side.
He is we're digitizing our business, we're looking to take costs out by digitizing end to end digitizing Onboarding digitizing and that's where our investments are going despite.
The good management on the cost side, there's a lot of work going on behind the scenes on how we're going to digitize. This business in line with what I talked about at Investor Day. So, yes, you will get more engaged customers there'll be interacting with us more about your obviously drive more revenues in there with the operator operating leverage will continue to be strong that's the whole thesis behind it.
Hey, thanks for the color.
Thank you.
Speaker Change: Next question is from Nigel D'souza from Veritas investment research.
Go ahead. Your line is now open.
Thank you good morning, I wanted to follow up on the sample rate mortgages, but.
For some perspective when I Oh.
I think you mentioned those were 2022 vintages, so would you be able to assist them why on vlccs or those mortgages.
And what I'm getting at here is what are those mortgages under underwater or near 100% LTV It wasn't a payments or longevity festival.
Payment structure.
And is there a correlation ultimately between the amount of equity and the Ltvs are going to check the folio and.
And the delinquencies any patterns, you're seeing in that book.
Hi, Nigel itself.
Speaker Change: Our average LTV on that portfolio as it is in the 50. So it is quite low.
At origination.
The average FICO for those products for 800, and so it is a it is a quite a strong credit quality portfolio.
As I pointed to in my prepared remarks earlier that the friction is really coming from Toronto GTA in Vancouver, where youre seeing.
Speaker Change: Well you had higher cost on the mortgage I think people are just in the process now is given the higher for longer rates, they're making tradeoffs in terms of their payments and maybe they got a little bit over their skis at point of origination, but these are good customers.
That are just facing a little bit of tightness in terms of their cash flow.
We've been really focused on the collections efforts and we've been doing a lot of proactive outreach to these individuals.
It's not as if we have.
It sounds like we have a bad customer here. This is just the customers is sort of going through a life event or having just some some some difficulties, making some payments to pay off.
We've expanded our proactive.
Each of these customers.
Yeah.
We've implemented a number of loss mitigation programs to help them through this distressed securities.
So to.
So there is no correlation LCD.
Oh absolutely.
No it's tough to hear you, but I think the answer to your question is no.
Okay.
Okay. So and then just a quick follow up on the NII sensitivity I noticed that.
Yes, there's $100 million benefit for 25 basis points decrease but I.
I believe there's a decline in NII 400 basis point decrease in rate. So just wondering what's driving that dynamic in your hedging program.
Speaker Change: As a benefit for us.
When you're a five basis point decrease, but then there's a number of.
400.
Hey, Nigel that's right that's right.
Simple answer because I don't think there's a battleship right unless we believe that there's going to be a complete battle shift up and down in any mortgage rate environment, yes, the 100 basis points, plus or minus like they say a little happen, but that's not what we expect I think what's more meaningful just a sharpened up the curve.
Speaker Change: Distinction between the two but I'm happy to go into.
Speaker Change: Into more detail with you one on one if you think you have more follow up questions on that topic I think Raj. It's also important to note is that sensitivity disclosure that we've had $100 million or 25 basis points doesn't include the asset repricing industrial so the tailwind here for the bank in the scenario where rates come down it's pretty significant.
Okay. That's helpful. That's it for me thanks.
Yes.
Thanks, guys.
Thank you.
Next question is from Darko <unk> from RBC capital markets. Please go ahead. Your line is now open.
Alright. Thank you for taking my question I know, we're running out of time here I'm just wondering Raj if you could spend a little bit more time to elaborate on the capital floor add on and specifically suggested that it was eliminated because of changes in book quality and model updates and I think I heard you say that there.
There was more work to be.
When the floor kicks back in again and what it is precisely that youre doing.
With respect to model updates thank you.
Yes, sure Doug I missed part of your question you got cut off but I think I caught what you are looking for.
Impact at the end of Q1 off the floor was seven 8 billion approximately 23 basis points, if I recall.
As I also mentioned previously the Florida impact independently will move due to a number of factors in a moment, an a or b capital relative to the standard is equal and movement and ACL was zero. So a lot of things impact the Florida. Unfortunately, it makes it very difficult to follow from quarter to quarter perspective.
But I'd call out two of the things why don't forget you've got strong which impacted the elimination of the flow of this quarter.
Speaker Change: One of client Deselection, if everything worked about client selection. When we think about profitability. If you tried to calculate it recalibrated based on Saturday, 2.5% floor, because that's ultimately where we're going to lined up and see if the clients will continue to remain profitable.
The focus of the business across all three business lines is to look at those clients, who will not be profitable under this kind of like 75% risk weighted asset capital requirements. So they've been deselecting those clients, which has the greatest impact and therefore, you know benefits of Florida, and we looked at it from period to period the.
The most important things that impacted this quarter. It is model changes, so $4 5 billion that impact.
Arguably only and does not impact.
The standardized calculation.
It's led to is one I would call out as his parameter changes you know constantly we look like a probability of default for our costumers based upon market influences on our own performance and so on so doctors all the time and there was some migration to in the non retail book like I pointed out on a different question, which increase the AARP arguably which is obviously insensitive onto this.
A nice calculation.
The other component is an LGD methodology change, we actually put through and so that impacted it Florida lifts, the PD changes or the parameter changes, which we called book quality impacted a little over four and a half. The land you just added up to seven point, Jason in which a soft floor.
Every quarter Darko, Unfortunately, I'm going to see this move around the floor should not get engaged in Q3 Q4 for sure because it cuts directionally supposed to go the other way based on the actions, we're taking but again Q1 25 is going to be a two and a half per cent floor, well see how do we trend up towards that.
Thank you and what could be the impact in Q1 25.
As well as in Q1, 'twenty six our capital plans looking forward through to 'twenty to 'twenty six comfortably cover all these impacts as we think about what is the minimum because we'd like to run and how we can support the business growth. So we feel pretty good about baby are today and the impact of the actions we have taken on our capital ratios.
Thank you Roger I appreciate that and.
One last quick one in here it would it be reasonable for next quarter to get some sort of an estimate on the possible impact of the minimum tax.
Yeah sure I think I can give you the answer now it's obviously due in 2025 impact is not expected to be material.
The jurisdictions, where it's not at 15%, which is what the OECD once there'll be some.
Pick up in and dock tax Bill, but we really don't have too many jurisdictions, which outside of the 15% uncle, but I'm happy to provide more details, but it won't be material at all that I can tell you. Okay. Thank you very much.
Okay.
Thank you.
Our next question is from Michelle had more of a heavy from BMO capital markets. Please go ahead. Your line is now open.
Okay. Thank you very much for squeezing me again I think most of the questions were asked and answered just one clarification I think Raj you mentioned, Brazil at least once.
In your remarks, I think you talked about it in our in the context of good debt.
Deposit growth is Brazil a M.
Is it a battleground for you is this scenario that you're likely to deploy capital in place.
Thank you for the question.
We have built.
Sound a franchise in Brazil, focusing on the right clients, we have a great team on the ground.
But that responded to a strategy of asset growth, which is not the strategy. We're focused on now the focus with proceeds used to ensure that one returns increase privacy drives the clients, we serve and it's an integral part of our connected franchise, we don't expect capital to be deployed.
Going forward we.
We do expect returns to continue to improve and we have every confidence in the quality of the team that we have on the ground to get that resolved and we're seeing it already seeing tremendous progress there.
But ultimately, but it's really it's about how can that franchise continue to contribute to our connected strategy that serves multinational clients not about incremental capital rule.
So we will in San Francisco courtyard, where you say you know P cells are higher because of the impairments in Brazil for example.
No not at all I mean, if you look at the exposure we have in Brazil as I said has been very well managed.
All primary strong clients in terms of quality local names primarily that's what.
Business in Brazil, and that we say are elsewhere. So now we do not anticipate at all or do you see them this year in Brazil.
And so this would be in support of GBM Latam up operations.
Yes, primarily GBM driven.
Our markets business and again, you're going to continue to see us not only in proceeded by political uncertainty in Europe, and Asia and these drive multinational banking really at the heart of who we serve and how we serve them.
This will be in connections to increase share of wallet across all of our footprint with these names. So we would not be focused on for example, Brazilian names that operate only in Brazil, we will be focused on names that operate across our footprint, but also have a presence in Brussels.
We will be aiming to deploy capital to close those relationships not necessarily Audi busey.
I appreciate you taking my questions. Thank you sure.
<unk>.
Thank you there are no further questions registered at this time I would like to turn back the meeting over to rash.
Thank you very much on behalf of fan time management team I want to thank everyone for participating in our call today and we look forward to speaking again at our Q3 call in August. This concludes our second quarter results call.
Dave.
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