Q1 2025 The Bank of Nova Scotia Earnings Call - Q&A
Speaker Change: Please stand by. Your conference will begin momentarily. To ask a question, please wait for the moderator to start the conference, then press star 1. A system tone will be heard when your request has been accepted. To cancel your question, press star 2.
Speaker Change: Our relationship based businesses, including our advisory business in global banking and markets and our advice channels and well coupled with our wealth management product sales throughout our domestic retail channels were all strong contributors to the acceleration of growth.
Speaker Change: Our provisions for credit losses, this quarter remained elevated reflecting the toll on our clients have higher interest rates and inflation over the past few years. In addition to the heightened current geopolitical uncertainty and its potential impact on economic growth.
Speaker Change: Our balance sheet metrics remain strong the.
Speaker Change: The work we have done over the past two years in managing our capital strengthening the balance sheet and responsibly building allowances have set a solid foundation, enabling us to manage through this period of volatility and continue to fund our strategic growth objectives in 2025 and beyond.
Speaker Change: Okay.
Speaker Change: Since the end of 2022, we have improved our capital ratio by approximately 140 basis points built approximately $1 6 billion in additional allowances for credit losses, and significantly improved our liquidity ratios.
Speaker Change: We added almost $350 million to our allowances this quarter.
Speaker Change: We are a much stronger bank today aware of current heightened risks and prepared to respond to more tangible trade developments.
Speaker Change: We remain focused on driving forward are very clear and sound strategic agenda.
Speaker Change: To recap our key focus areas.
Speaker Change: First we continue to focus on allocating incremental capital and resources to our priority markets.
Speaker Change: This quarter, we closed our investment in key Corp, which is an example of our active capital deployment strategy into the U S market.
Speaker Change: This investment is immediately accretive to our earnings growth and return on equity metrics.
Speaker Change: We also announced the sale of our banking operations in Colombia, Costa Rica, and Panama, Stephanie on for an approximate 20% ownership stake in the newly combined entity.
Speaker Change: We expect the transaction to be capital neutral and our earnings pickup to be well ahead of what our Scotiabank franchise would've earned standalone.
Speaker Change: Okay.
Speaker Change: Second we continue to focus on our Northstar, earning client privacy and growing core deposits.
Speaker Change: Our overall bank funding profile continues to strengthen with strong year over year deposit growth of 4% with positive contributions from each of our business lines outpaced loan growth and reduced our loan to deposit ratio to 105%.
Speaker Change: Value over volume remains an enterprise wide priority.
Speaker Change: We continue to see an acceleration of multi product clients in Canadian retail as we enhance our client acquisition strategies through initiatives like mortgage plus and <unk> plus.
Speaker Change: Penetration of the $15 million <unk> plus members across Canada continues to grow.
Speaker Change: 25% of <unk> plus members now have of Scotiabank payment product up 50 basis points in the quarter.
Speaker Change: An impressive 89% of our new mortgage originations in Canada in Q1 came through our mortgage plus packaged offerings.
Speaker Change: In Canadian retail on a cumulative basis since our strategy launch we have now added 200000, new primary clients.
Speaker Change: Although primary client growth has decelerated due to the notable immigration slowdown we continue to see good momentum in the number of clients, we consider primary which reached 30% of total clients in the quarter.
Speaker Change: Client depth and Canadian retail continues to trend above target with clients holding three or more products, increasing sequentially to approximately 47% up 30 basis points.
Speaker Change: And we are also successfully growing primary clients and international retail we have now welcomed 113000, new primary client scotiabank since our strategy launch and are seeing positive trends in overall clients considered primary and revenue per international banking retail client.
Speaker Change: Third we continue to demonstrate operational excellence and return discipline.
Speaker Change: We delivered again on positive operating leverage while investing in frontline product specialists in retail increasing the sales force in wealth and additional sectorial coverage professionals in GBM and our drive to deliver best in class solutions to our clients.
Speaker Change: We delivered an 11, 8% return on equity Q1, representing solid sequential progress, but we know the opportunity exists in each of our business lines and geographic markets to drive stronger ROE performance, we have the scale and strategies in place to do so.
Speaker Change: Yeah.
Speaker Change: Finally, we have updated our approach to business segment presentation to be consistent with management's evaluation of the financial performance of the segments.
Speaker Change: Changes will support better decision, making around pricing and capital allocation to help the bank achieve its financial and strategic medium term objectives.
Speaker Change: Turning to a few key performance metrics and strategic highlights from each of our business lines.
Speaker Change: Starting with the markets facing businesses.
Speaker Change: Global wealth management continued its positive momentum delivering $414 million in earnings as we continue to invest in the growth of our advice channels and broaden the distribution breadth of our differentiated asset management franchise.
Speaker Change: Favorable markets strong trading revenues and a return to positive net fund sales drove fee, earning assets to record levels as we exceeded $730 billion of assets under administration led by our Scotia, Mcleod retail asset management and private investment counsel businesses.
Speaker Change: Growth in investment fund sales across our branch wholesale and Scotia financial planning channels remain our leading strategic priority in this business.
Speaker Change: Strong fund sales in the quarter were up 50% over last year, and we expect strong net sales to accelerate through the year.
Speaker Change: We are tracking ahead of our targets year to date in terms of new clients financial plans delivered and client retention.
Speaker Change: New financial plans delivered in Q1 were up 10% year over year and average revenue per account is up 13% year to date.
Speaker Change: We are performing well on referrals between our wealth and retail business with more work needed to meet referral targets between wealth and commercial banking.
Referral volume between our wealth and retail businesses was $2 5 billion in the quarter, an increase of 16% over last year.
Speaker Change: We continue to invest in technology to make it easier for our advisors to do business with their clients and in frontline staff to deliver total wealth solutions to our wealth and retail clients of the bank.
Speaker Change: Global banking and markets had a very strong start to the year up 33% year over year in Q1, with particular strength across our capital markets businesses as clients reacted and reposition their portfolios in response to evolving macro and geopolitical developments.
Speaker Change: Capital markets businesses contributed 54% of the GBM revenue this quarter as our origination and advisory business has delivered one of the strongest quarters on record.
Average deposits were up 3% and return on equity improved 350 basis points year over year, while demonstrating capital discipline.
Speaker Change: Our underwriting and advisory practice also had an impressive start to the year up 61% year over year, and 33% sequentially and our pipeline remains strong looking into the year subject to continued constructive market town and supportive financing conditions.
Speaker Change: Our global banking and markets team continues to exceed targets on lead relationship client growth, while deliberately reducing our absolute exposure to lending only client relationships.
Speaker Change: We are seeing good progress and competitive positioning across our footprint.
Speaker Change: In Canada, our debt capital markets and equity capital markets teams delivered number one and number two lead table rankings respectively.
Speaker Change: Our U S debt capital markets team ranked outstanding 11th in the period and on the M&A side. We are the number one adviser by deal value in the Latam markets in which we operate.
Speaker Change: Canadian banking had solid revenue growth driven by asset margin expansion and well diversified fee income growth. However results. This quarter do reflect the impact of higher credit provisions because of the portfolio migration at a more cautious consumer outlook.
Speaker Change: Our commercial banking business delivered growth through capital discipline, while our expanded cash management capabilities drove deposit growth.
Speaker Change: The commercial business continues to show a very attractive funding profile generating deposit growth of over $10 billion year over year, while assets grew a modest $3 billion.
Speaker Change: Commercial is an increasingly important source of cross sell fee revenue to both our GBM and global wealth businesses.
Speaker Change: Retail deposit growth was up 4% year over year as we continue to focus on day to day and savings accounts.
Speaker Change: In addition investment fund at an insurance product sales, which are a key priority to drive higher noninterest revenue saw a double digit growth.
Speaker Change: Capitalizing on our <unk> plus in mortgage plus opportunities will be required to deliver on our client growth objectives.
Speaker Change: Tangerine continues to increase primary clients aligned to our goal of deepening relationships through everyday banking.
Speaker Change: This quarter digital active clients reached an all time high of $1 4 million.
Speaker Change: We have a new leadership team in place at Tangerine, who will be intently focused on relationship depth and client acquisition.
Speaker Change: Primary client growth improve productivity business mix diversification with a focus on fee businesses, coupled with the normalization of the credit environment will be the drivers of future earnings growth from our domestic banking franchise.
Speaker Change: International banking delivered solid results based on diversified revenue growth by segment and geography, coupled with strong expense discipline.
Speaker Change: Our GBM business in this segment had a strong rebound in activity levels and profitability delivering $330 million in earnings with lower capital deployed.
Speaker Change: We continue to reposition our retail business, while strengthening our commercial business.
Speaker Change: Specifically in commercial this quarter, we saw a primary client expansion with deposits growing 9% year over year driving improvement in customer revenue by 8%.
Speaker Change: Our productivity ratio improved to 51% this quarter, a result of 4% revenue growth and disciplined 1% expense growth year over year.
Speaker Change: Productivity ratio is expected to continue to improve as the benefits of our move towards a regional model take effect.
Speaker Change: We are well on pace to achieve our medium term run rate savings commitment of $800 million.
Speaker Change: And in all bank level, we are encouraged by our strong results this quarter.
Speaker Change: Excluding the impact of any potential tariffs we are on track to deliver 2025 earnings growth towards the higher end of our 5% to 7% range prior to the key Corp earnings pickup.
Speaker Change: Our balance sheet strength provides us flexibility in the near term to successfully manage through the various economic and trade scenarios that may evolve.
Speaker Change: We remain mindful of the impacts of possible economic disruption and growth pause could have on businesses across the country.
Speaker Change: We're taking a conservative and proactive approach to ensuring we successfully navigate what could be a volatile period with the long term interests of all stakeholders in mind.
Speaker Change: The capital discipline now in place across our business has us well positioned to fund our organic growth agenda, while resuming dividend growth and capital returned to shareholders over time.
Speaker Change: Looking ahead, we are in a period of heightened geopolitical uncertainty and a less certain economic outlook as new government administrations in two of our priority markets, the United States and Mexico look to define new policy and trade relationships for the next few years.
Speaker Change: This is an important moment for Canada.
Speaker Change: An opportunity to reflect on the trade and productivity challenges that if addressed conserve as a catalyst to redefine our national economic agenda.
Speaker Change: The bank continues to see the potential for an integrated North American economy to further drive competitiveness and collective prosperity.
Speaker Change: I remain confident that candidate can come out of this period of transition with a much clear strategic direction and an economic agenda that is squarely focused on raising our competitiveness.
Speaker Change: Lower taxes less regulation.
Speaker Change: Clear focus on measures to boost investment energy policies that significantly increased export opportunities for Canadian oil and gas and a sharp reduction in the time it takes to develop other natural resource projects should be key objectives.
Speaker Change: And I believe the banking industry will play an important role in supporting a much more deliberate national economic plan.
Speaker Change: In summary, I am pleased with the progress we have made in executing against our strategy and I'm encouraged by our results in this first quarter of fiscal 2025.
Speaker Change: I would like to thank our entire team at Scotia bankers across our footprint are focused on supporting our clients with advice as they navigate the challenges of the current environment.
Speaker Change: As we stay focused on disciplined capital allocation growing client privacy, improving productivity, while maintaining a strong balance sheet I remain confident in the path ahead as we continue to execute on our strategy.
Raj: I will now turn it to Raj for a more detailed financial review of the quarter.
Raj: Thank you Scott and good morning, everyone.
Raj: This quarter's earnings was impacted by $1.10 of adjusting items within approximately 12 basis points impact on common equity tier one.
In addition to unusual adjustment for amortization of acquisition related intangibles recorded a one point to $1 billion. After tax loss net of Noncontrolling interest related to the announced sale of operations in Colombia, and Central America that was recorded in the other segment.
Raj: All my comments that follow will be on an adjusted basis.
Raj: Moving to slide six for a review of our first quarter results.
Raj: The Bank reported quarterly earnings of $2 4 billion and diluted earnings per share of $1.76 that improved seven from last year and 19 sends from last quarter.
Raj: Our investment in key Clark contributed approximately <unk> <unk> to this quarter's EPS.
Raj: Return on equity improved to 11, 8% from 10, 6% last quarter and return on tangible common equity was 14, 3%.
Raj: Revenues were up 11% year over year, driven by growth in both net interest and noninterest income.
Raj: Net interest income grew 8% year over year, due primarily to loan growth, including the VA conversion and a higher net interest margin.
Raj: The all bank margin expanded four basis points year over year, and eight basis points quarter over quarter.
Raj: Driven by lower funding costs as a result of the rate cuts.
Raj: Noninterest income was $4.2 billion up 15% year over year, primarily due to higher trading revenues wealth management revenues underwriting and advisory fees and income from associated corporations.
Raj: These were partly offset by the impact of VA conversion and the negative impact of foreign currency translation.
Raj: The provision for credit losses was approximately $1.2 billion and the PCL ratio was 60 basis points up six basis points quarter over quarter, mostly in performing allowances.
Raj: Expenses grew 8% year over year of which 3% was from higher performance and volume driven expenses in GBM and global World.
Raj: The rest of the increase related to higher technology and personal cost to drive business growth.
Raj: Quarter over quarter expenses were also up 7% driven by seasonally higher share based compensation.
Raj: Business and capital taxes higher personal cost 10.
Raj: Holiday related costs, and the unfavorable impact of foreign currency translation.
Raj: The bank generated positive operating leverage of two 8%.
Raj: The productivity ratio at 54, 5% improved 160 basis points sequentially.
Raj: The bank's adjusted effective tax rate increased to 23, 8% from 19, 6% last year.
Raj: Changes in earnings mix across jurisdictions, and the implementation of the global minimum tax this year.
Raj: Moving to slide seven which shows the evolution of the common equity tier one ratio and risk weighted assets during the quarter.
Raj: The bank CET, one capital ratio remained strong at 12, 9%, a decrease of 20 basis points quarter over quarter and flat year over year.
Raj: Our earnings less dividends contributed 19 basis points and lower risk weighted assets also contributed 19 basis points, which includes the benefits from the synthetics restaurants of a transaction.
Raj: This was offset by 43 basis points from the closing of the additional investment in Keycorp and 12 basis points from the announced sale of adult patients in Colombia and Central America.
Raj: The total risk weighted assets was 468 billion up $4 billion.
Raj: Down 4 billion, excluding the impact of foreign currency.
Raj: This included a decline in book size of approximately $12 1 billion, primarily from the synthetic those transaction.
Raj: And although arguably optimization, which is partly offset by an increase in book quality. It is quite a $4 7 million that related primarily to non retail product migration.
Raj: And the impact of from Adobe Calibrations.
Raj: Yeah.
Raj: Turning now to the business line results beginning on slide eight.
Raj: Canadian banking reported earnings of $914 million down 6% year over year.
Raj: Higher revenues were more than offset by higher loan loss provisions and expenses.
Raj: Average loans were up 3% year over year.
Raj: Real estate secured lending was up 4% business loans grew 3% and credit card balances grew 9%.
Raj: Loans grew a more modest 1% sequentially primarily in mortgages.
Raj: We continued to see deposit growth as you entered the year deposits grew 6% driven by an increase of 10% and non personal deposits, mostly in demand and 4% from personal deposits mostly in term.
Raj: Net interest income grew 6% year over year, primarily from asset and deposit growth and the benefit of ba's converting to loans, partly offset by margin compression.
Raj: The net interest margin declined by one basis point quarter over quarter, and 10 basis points year over year as asset margin expansion of eight basis points was more than offset by lower deposit margin of 17 basis points.
Raj: The impact of rate cuts.
Raj: Noninterest income was up 4% year over year, primarily due to elevated private equity gains higher mutual fund fees and insurance income that were partially offset by lower banking fees from the impact on VA coalition.
Raj: The PCL ratio was 47 basis points.
Raj: 14 basis points year over year, and seven basis points quarter over quarter.
Raj: Expenses increased 8% year over year.
Similarly, due to higher technology costs and professional fees to support key strategic priorities.
Raj: Total quarterly expenses grew 2%.
Raj: Primarily due to higher technology costs and seasonally higher share based compensation.
Raj: The operating leverage for the quarter was negative one 8%.
Raj: Turning now to global wealth management on slide nine.
Raj: The earnings of $414 million were up 23% year over year.
Raj: As Canadian earnings went up 27% driven by higher mutual fund fees and wealth advisory revenues, which were partly offset by higher expenses largely volume related.
Raj: Quarter over quarter earnings were up 7%.
Raj: Due to higher brokerage revenues and mutual fund fees and net interest income, partly offset by higher expenses.
Raj: Revenues of $1 6 billion were up 19% year over year from higher mutual fund fees, driven by strong AUM growth and higher brokerage revenues.
Raj: Expenses were also up 17% year over year of which more than half was due to volume related expenses. In addition to higher technology costs and sales force expansion.
Raj: The operating leverage was a strong positive two 8%.
Raj: Spot AUM increased 16% year over year to $396 billion.
Raj: And <unk> grew 13% over the same period to over $730 billion.
Raj: Driven by market appreciation and higher net sales.
International wealth management generated earnings of $54 million up 1% year over year or 5%, excluding the impact of FX driven by higher mutual fund fees and brokerage revenue, partly offset by higher expenses and the impact of the global minimum tax.
Raj: Turning to slide 10, global banking and markets globally.
Raj: Global banking markets, Delaware, a particularly strong start to the year with earnings of $517 million.
Raj: 33% year over year.
Raj: Capital markets revenue was up 41% year over year, and 47% quarter over quarter.
Raj: Driven from higher equities and F C C revenues.
Raj: The business banking revenues also grew 8% year over year, and 7% quarter over quarter due to higher corporate and investment banking revenue, including higher underwriting and advisory fees.
Raj: The net interest income increased 18% year over year.
Raj: From higher corporate lending and deposit margins, while loan balances declined 15% year over year, reflecting market conditions and management's continued focus on balance sheet optimization.
Raj: Noninterest income was up 25% year over year due to higher client driven trading related revenue.
Raj: Across the capital markets business saw fixed income equities and FX.
Raj: Expenses were up 14% year over year, mainly from higher personal cost, including performance based compensation as a result of stronger performance higher.
Raj: Higher technology costs, and the negative impact of FX.
Raj: <unk> expenses were up 10% due mainly to seasonally higher share based compensation and higher personnel costs.
Raj: The operating leverage was a strong nine 2%.
Raj: The effective tax rate increased to 24, 5% in this segment due to changes in earnings mix across jurisdictions.
Raj: The U S business generated strong earnings of $296 million.
Raj: Up 39% year over year, driven by higher capital markets revenues from equities fixed income and effects that were partly offset by higher expenses.
Raj: Moving to slide 11 for a review of International banking My comments that follow on and on an adjusted and constant dollar basis.
Raj: The segment delivered earnings of $657 million up.
Raj: 5% sequentially, but down 7% from last year.
Raj: The GBM business in this segment generated earnings of $330 million from strong client activity, although down 10% compared to the prior year.
Raj: The revenue was up 1% year over year.
Raj: Non interest income was up 6% driven by higher capital markets revenue, which were partially offset by a 1% decrease in net interest income.
Raj: The margin expanded by five basis points year over year, driven by lower funding costs.
Raj: Net interest margin was down two basis points quarter over quarter, driven by lower inflation and lower loan margins in Mexico.
Raj: Year over year loans were down 2%.
Raj: Business loans declined, 8%, but were partially offset by 4% growth in residential mortgages.
Raj: Deposits were down a modest 1% year over year.
Raj: While personal deposits grew 1% year over year non personal debt also declined 2%.
Raj: The provision for credit losses was $602 million translating to 146 basis points up nine basis points quarter over quarter.
Expenses were up a modest 1% year over year, driven mainly by higher salaries and employee benefits.
Raj: Quarter over quarter expenses grew 3% driven by higher benefits and seasonally higher expenses in Jamaica.
Raj: Operating leverage for the quarter was positive 0.4%.
Raj: The effective tax rate increased by 170 basis points from 21, 7% due to lower inflation benefits and the impact of the global minimum tax.
Raj: Turning to slide 12.
Raj: The other segment reported an adjusted net loss of $177 million compared to a loss of $202 million in the prior quarter, an improvement of $25 million.
Raj: Sequentially revenue improved approximately $150 million as net interest income continued to improve benefiting from lower funding costs driven by rate cuts.
Raj: This was partially offset by higher expenses.
Raj: In Texas.
Phil: I'll turn the call over to Phil to discuss it with us.
Phil: Thank you Raj and good morning, everyone.
Speaker Change: Last quarter, we indicated that <unk> would remain elevated in the first half of the year as our clients continue to manage the impacts from higher for longer rate environment, and the increased macroeconomic uncertainty given geopolitical risks.
Speaker Change: The announcement of potential terrorists has further increased macroeconomic uncertainty and based on what we knew on January 31, our base case scenario includes modest tariff risks of approximately 5% on half of Canadian imports and 10% on half of Mexican imports.
Speaker Change: We also incorporated more severe tariffs into our already stressed pessimistic and very pessimistic scenarios.
Speaker Change: Against this backdrop of increased uncertainty all bank tcl's for approximately $1 2 billion or 60 basis points, this quarter up $132 million quarter over quarter.
Speaker Change: Of this performing PCL were $98 million or five basis points.
Speaker Change: Nearly two thirds of this performing build was driven by the inclusion of potential tariffs and continued macroeconomic volatility across our Canadian and Mexican portfolios.
Speaker Change: The remaining drivers of this quarter PCL included increased impairments across our Canada, Mexico, and Chile retail portfolio was driven by credit migration.
Speaker Change: And the full provision of one impaired account in Canadian commercial and the food and beverage industry.
Speaker Change: Turning to Canadian banking, PCL for $538 million, or <unk>, 47 basis points up seven basis points quarter over quarter.
Speaker Change: Retail sales were $423 million up $68 million quarter over quarter, driven primarily by unsecured and auto portfolios.
Speaker Change: Retail performing PCL increased $45 million quarter over quarter, driven by an unfavorable macroeconomic outlook and higher delinquencies.
Speaker Change: And paired retail sales were up $23 million quarter over quarter from higher net write offs in both automotive and unsecured revolving portfolios.
Speaker Change: Overall, 90 day mortgage delinquencies increased a modest one basis point quarter over quarter as delinquency in our variable rate mortgage clients begins to stabilize as they experience relief from central bank rate cuts. Furthermore, decreasing payments continued to benefit variable rate mortgage clients as their deposit coverage maintained its upward trend.
Speaker Change: Yeah.
Speaker Change: Commercial sales were $115 million up $20 million quarter over quarter, which includes the account previously mentioned.
Speaker Change: Moving to international banking PCL for $602 million in Q1.
Speaker Change: Resulting in a PCL ratio of 146 basis points up nine basis points quarter over quarter.
Speaker Change: Impaired PCL, so flat quarter over quarter, while we had $47 million increase in performing provisions.
Speaker Change: Retail sales were up $58 million quarter over quarter as last quarter, we had a $40 million release in performing PCL.
Speaker Change: This quarter's higher performing allowances were driven by Mexico, and Chile offset.
Speaker Change: Improvements in other markets.
Speaker Change: Commercial sales improved quarter over quarter down $12 million.
Speaker Change: We increased all bank allowances for credit losses again, this quarter by a further $344 million and it is now $7 billion. The ACL ratio is at 91 basis points up five basis points.
Speaker Change: Year over year, and three basis points quarter over quarter, we still anticipate our PCL ratio to trend down in the second half of the year. However, this assumes we do not see significant deterioration in the macroeconomic environment and meaningful tariffs.
Speaker Change: With the backdrop of potential tariffs, we have conducted a significant amount of analysis across various scenarios.
Speaker Change: This is to ensure the bank is sufficiently prepared to navigate through this uncertainty.
Speaker Change: Okay.
Speaker Change: Any impact to allowances from tariffs will depend on several variables, including the size and duration of tariffs. The degree of retaliation the amount of government subsidies or intervention.
Speaker Change: Client actions taken to mitigate the impact.
Speaker Change: And bank actions, we take to further support our clients.
Speaker Change: We are comfortable with the adequacy of our allowance for credit losses that has grown approximately $1 6 billion since the end of 2022.
Speaker Change: If tariffs are imposed we will review and adjust our allowance it doesn't need it in the quarter they are finalized.
Speaker Change: In addition to our allowance as we remain well capitalized have a strong liquidity position and are confident in our proven track record in managing through more challenging periods across all our markets, while supporting our clients with that I will pass it back to John for Q&A.
John: Thank you Phil will now move to the Q&A segment of the call. Please limit yourself to one question and re queue. If you have another operator could we have the first question. Thank.
Speaker Change: Thank you.
Speaker Change: Questions from the telephone lines.
Speaker Change: At this time, if you have any question.
Speaker Change: There will be a brief pause them all participants with just a couple questions.
Speaker Change: Thank you for your patience.
Speaker Change: Our first question is from Ebrahim <unk> from Bank of America. Please go ahead.
Speaker Change: Hey, good morning.
Speaker Change: I guess, maybe just a question on <unk>.
Speaker Change: Look I think if we can break this down in an ecstatic.
Phil: Phil you mentioned.
Phil: We expect PC has to go down in the second half of 'twenty five.
Phil: And then you'll be you referenced higher for longer would you go.
Phil: Got it relates to that is no longer being higher for longer in terms of the ability of the consumer customer base to service their debt. So one is the read backdrop now long enough, but that's not a big risk factor.
Phil: <unk> should be are you seeing any signs of a cyclical rebound maybe a few if you go back three four weeks ago before the headlines. It would appreciate any color around those two thanks. Thank you. That's a it's a great question and I'm glad to look out beyond beyond tariffs now certainly as we look at.
Phil: There's still a little bit of softness in the Canadian retail portfolio, but we're starting to really see customers starting to benefit from from rate cuts, particularly in our.
Phil: Our.
Phil: Variable rate mortgage portfolio as well as those customers that are coming up for renewal.
Phil: Those rate cuts are benefiting those customers.
Phil: As I look out for the remainder of the year still very positive that tariffs aside we.
Phil: We will see our provisions starting to trend down in the latter half of the year and Thats. What our models are telling us. That's the way customers are consumer trends or are shaping up and we've got confidence in that outlook outside of the instead of the tariff landscape.
Phil: Got it and one quick follow up maybe Scott for you stocks at very discounted valuations might not initiate buybacks given the capital levels are.
Phil: Yeah.
Phil: First I'm very pleased with the capital discipline in the internal capital generation that we saw this quarter I think as we think about capital return it will be important to see how tariffs play out.
Phil: But my expectation is that we will resume dividend growth, albeit at a modest level next quarter and I'm hopeful that we'll be in a position to start returning capital to shareholders via share repurchases by the end of the year.
Phil: Thank you.
Phil: Yeah.
Phil: Thank you I'm.
Speaker Change: Following question is from John Aiken from Jefferies. Please go ahead.
John Aiken: Good morning, I wanted to focus in on the strong performance that we saw in global banking and markets this quarter.
John Aiken: The productivity ratio showed some market improvements both quarter over quarter year over year I know a lot of that is related to the strong growth that we saw on revenues, but it was a little surprised that it came in this low what.
John Aiken: How should I be interpreting this are we expecting I guess lower expenses were a better productivity ratio through 2025 or is this an indication that we're expecting revenues to significantly decline to a more normalized level that we saw in the first quarter.
Travis: This is Travis let's I appreciate the question.
Travis: If you look at our business in this quarter, we had a lot of segments that really performed where you have great operating leverage and I think that plays out to the profitability of the ROE and the productivity level.
Travis: We expect revenues probably to normalize towards.
Travis: A more normal level in this business.
Travis: We clearly earned.
Travis: Nearly a record amount in this quarter.
Travis: So I expect that productivity level ratio too.
Travis: Product productivity ratio to normalize a little higher.
John Aiken: And John it's.
Speaker Change: John just tried to minimal color, yes. The 517 million earnings is really going to be very pleased because we have this trend to monetize and capitalize in the opportunities come up the normal run rate for this business how much should be between 425 to $4 50, I think assuming normal market conditions, but the expense ratio always benefits like in Scott's comments he talked about.
Speaker Change: Capital markets being 54% of our revenue mix and that plays a big role in reducing product configuration, but they are focused on managing expenses in line with revenue growth and prioritizing spend in that segment I mean, the only other thing I'd add is if when you look at the expense growth. This quarter. It was primarily driven by our market facing businesses. So when you see the wealth expense growth it was.
Speaker Change: The big revenue growth and similarly in controversy, but unless you had great revenue performance, but you also had expense growth with that so you get to a more normalized expense growth for the overall entity. If those businesses came off a little bit from a revenue perspective.
Speaker Change: And then not to not to downplay the advisory impact this quarter, but it's I mean, obviously the exceptionally strong growth on treating can you give us a sense in terms of what youre seeing for pipeline on advisory given the fact that there's there's a lot of I guess excitement exuberance in terms of what the outlook may be.
Speaker Change: Sure, Yes, let's say our pipeline remains incredibly strong.
Speaker Change: We have tremendous client activity across all segments in all sectors of the market is robust.
Speaker Change: That being said you know, let's call it headwinds that persist in the market with rates rate uncertainty tariffs geopolitical.
Speaker Change: And I would say the U S market stock market is priced for a perfect perfect protection right now.
Speaker Change: So theres a lot of things that can slow down the pipeline, but as of right now it looks incredibly strong.
Speaker Change: I really liked about this quarter too with the lead table performance. So when you look at number one in debt capital markets in Canada, and number 11 in debt capital markets in the U S number one in M&A and Latam Great M&A performance here in Canada, I mean from an advisory perspective. It was really good competitive result for the business this quarter.
Speaker Change: Fantastic Thanks for the color.
Speaker Change: Thank you.
Speaker Change: The following question is from Matthew Olney from Canaccord Genuity. Please go ahead.
Matthew Olney: Hi, Thanks for taking my question, maybe just one on international and the debit transaction.
Speaker Change: It was taking back equity or strategic decision on your end or maybe more of a wait and negotiated more favorable terms of the deal I think I guess, if you look at divesting more assets, so that'd be more deals like this one or.
Speaker Change: Maybe a greater focus on receiving cash in that transaction.
Speaker Change: Great Matthew Thanks for the question, Scott and then I'll, let Francisco follow up.
Speaker Change: There is not a strategic view here on minority investments if that was the question I mean, the key Corp acquisition was done in vessel was done for particular reasons that we talked about in terms of financial attractiveness on the Davita and aside.
Speaker Change: We didn't want to sell at the low point in the cycle.
Speaker Change: So when we could take advantage of combining with the strong bank in the region to become the second largest bank capture a lot of synergies and see both capital neutrality in the short term and earnings accretion in the long term that seemed like the right plan for our shareholders, maybe Francisco just give us a sense of absolutely Scott in terms of our foot.
Speaker Change: There is no plan to enter into minority agreements as part of our strategic push forward. So that's not at all of the way forward. However, when we look at the situation in Colombia is very particular and.
Speaker Change: We identified this opportunity to partner with a very strong operator that culturally provides an extraordinary fit to our culture. They have a footprint that is relevant to our client base. Both in Central America and in Colombia, We have now created a very strong bank that enjoys scale.
Speaker Change: On our own ranking six we would never achieve.
Speaker Change: <unk> allows us to redeploy management time capital an effort to our core growth markets, while maintaining through the referral agreement the ability to support our multinational and wealth clients both in Central America, and Colombia effectively so what this allows us to do is also a benefit from the transformation on improving.
Speaker Change: With the Colombian market, because we have no doubt as a management team that Colombia will turn around over the next few years.
Speaker Change: This will allow us to capture the upswing of Columbia coming back to normal in terms of economic activity of micro performance. So overall, we see this as a very accretive transaction to our current short term strategy, while positioning are strong for the long term.
Speaker Change: Alright, Thanks, that's helpful I'll pass it on.
Speaker Change: Thank you.
Speaker Change: The following question is from Doug Young from Desjardins Capital markets. Please go ahead.
Doug Young: Hi, good morning questions for sell in sorry, So I'm Gonna go tariffs, but you haven't changed your PCL rate guidance for fiscal 'twenty five you're at the higher end this quarter, but youre expecting to be lower back half as you kind of talk to that you built in a little bit of cushion in for.
Doug Young: For tariffs now you've done a lot of stress testing can you give us a sense yes.
Speaker Change: Tariffs are put in as proposed what where does your guidance go where what are.
Speaker Change: The kind of range as we should be thinking about in terms of your total PCL rate.
Speaker Change: Yes. Thank you I appreciate the question obviously, that's the topic de jure that I'm sure everybody in the financial services industry is is looking and trying to come up with.
Speaker Change: Some outlets.
Speaker Change: Listen as I said in my prepared remarks.
Speaker Change: There's going to be a number of variables that we're going to work through the size and duration of the tariffs that degree of retaliation the amount of government subsidies planned actions bank actions and it's really hard to give you a range or an outcome at this at this point in time without having some some understanding of what these tariffs look like I think what I wanted to.
Speaker Change: Really just stress is that.
Speaker Change: If tariffs come along in Q2, we'll we'll do the appropriate build in Q2.
Speaker Change: And.
Speaker Change: It'll be a sizeable but manageable build and we'll work through it we've done a great job over the past couple of years of strengthening the balance sheet.
Speaker Change: Strengthening the balance sheet and.
Speaker Change: And we are well capitalized and do it we're feeling pretty comfortable that we could it'll be meaningful but manageable.
Speaker Change: Okay, I would ask what meaningful means, but I'm going to guess you're not going to tell me.
Speaker Change: Yeah.
Speaker Change: Okay I appreciate the color. Thank you. Thanks.
Speaker Change: Thank you.
Speaker Change: Following question is from Gabriel <unk> from National Bank Financial Please go ahead.
Speaker Change: Hey, good morning, a quick one on international if I strip out the GBM.
Speaker Change: Impact your earnings were down still high single digits and I Wonder you you had guided to a softer performance for that business. This year just wondering if that's a no.
Speaker Change: Better worse in line and what your expectations were.
Speaker Change: Capital actually I'll wait for that answer and I'll ask you a couple of them.
Speaker Change: Thank you for the question.
Speaker Change: Matter of fact Q1 for US in 25 is our second best quarter ever on the back of a record quarter over the first quarter of 2024.
Speaker Change: So it is a very strong showing although we do.
Speaker Change: Believe that.
Speaker Change: Getting to the level, we were in Q1 'twenty four it was very hard to achieve.
Speaker Change: When you look in constant terms.
Speaker Change: Year over year, we're still growing at 1% quarter over quarter to 4%. So revenues still showing strong in spite of the fact that we had to again, our highest quarter on record to compare to year over year. When you look at performance overall very much in line with economic activity, Although we are outperformed.
Speaker Change: Our expectation in Q1.
Speaker Change: We are seeing the benefit of lower rates at a faster pace than we anticipated we had a little bit of higher inflation in some markets that also benefited our positions. So overall, what I see is very much in line with our prior guidance around.
Speaker Change: Around a slower GDP growth for most of our markets in 2025.
Speaker Change: What we're seeing in performance on import domestic us markets allow us to perform well.
Speaker Change: What I really liked about the quarter and international as the productivity ratio when you see the 4% revenue growth in the 1% expense growth do you think about what we've done over the last two years now on bringing that productivity ratio down three or 400 basis points with an outlook to continue to reduce that through the regionalization efforts and I think Colombia will be helpful to very good as well take out the kind of the.
Speaker Change: Over head cost associated with that business. So on plan here for the $800 million reduction that we talked about which gives a lot of running room for earnings international overtime, Wow, while continuing to improve capital deployment.
Speaker Change: Again, another quarter of material improvement on our return on risk weighted assets were now at 199%, which is a massive improvement from where we were while maintaining very strong topline and earnings capacity for the business. Okay.
Speaker Change: No as far as the balance sheet.
Speaker Change: This optimization process whatever you call. It has been ongoing for two years or so.
Speaker Change: I appreciate there's not a process whatever ends, but it's been a bit more oh you know.
Speaker Change: No.
Speaker Change: The activity in the past couple of years.
Speaker Change: Your corporate loan book is down roughly $30 billion from its peak.
Speaker Change: $11 billion of credit risk transfer this quarter I don't know what the cumulative amount is.
Speaker Change: Just wondering if you know we're we're we're done with the Upsized.
Speaker Change: Outside stuff given that are you know Oscar you've put the increases to the Basel III output floor.
Speaker Change: Yeah.
Speaker Change: Shove them anyway.
Speaker Change: As you.
Speaker Change: Are we going to be more business as usual going forward.
Let me just start on the philosophy piece gave and then Raj you can follow up on the specifics on the balance sheet. So we're <unk>.
Speaker Change: In addition in the business to a valuable Arroyo right and we've historically left with the balance sheet and we're trying to grow fee income and holistic client relationship around that balance sheet really focused on creating value for the client, which will create value for our shareholders and so when you think about this loan growth.
Speaker Change: <unk> been really thoughtful about this over the last two years across all of the business whether it be in GBM, whether it be an IV or whether it be in mortgages in Canada and youre starting to see the benefits of that through higher return on risk weighted assets and higher ROE performance and then look at the 15% improvement in fee income year over year and so that's.
Speaker Change: Strategy of discipline on the capital deployment value add for the client relationship based contribution from all of our business lines, you're starting to see that in the numbers and then it comes through in the internal capital generation. This quarter Raj what was internal capital generation close to 30 basis points or 20 basis points in Germany, including the optimization, but Gabe to answer your question.
Speaker Change: You know as the heavy lifting done on it I think most of it is done the synthetic restaurants or like you pointed out it cumulatively, it's almost $20 billion you can see it in the disclosure and those are done simply because we think it enhances our returns.
Speaker Change: Currently it improves our capital ratios as well very selective will be the Doc.
Speaker Change: To Scott's point, we just wanted to ensure we are deploying the capital to the most profitable relationships, but I think we had on the back end of that.
Speaker Change: Alrighty then.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: Following question is from Mario Mendonca from TD Securities. Please go ahead. Good morning go into terrorists again for a moment was there any trend in loan growth throughout the quarter that you could highlight what I'm getting at here is as the threat of tariffs unfolded throughout the quarter did it have a negative effect on commercial loan growth corporate loan.
Speaker Change: With even retail loan growth throughout the quarter.
Speaker Change: Yeah, sorry, I'll start and maybe I don't know, if Scott or others want to join it I think that the as we've been going out speaking to clients. I think people are we get a sense people are sort of holding our powder dry and people are waiting to see what's going to happen and I think as a result, whether it's on the retail side the corporate side the commercial side.
Speaker Change: You kind of see this but.
Speaker Change: A bit of a stasis right now and so its causing people to sort of pause.
Speaker Change: And think about what theyre going to do and hopefully when we get through the through tariffs and we can we can see through the end of it we'll probably see more economic growth occurring at that point right.
Speaker Change: Harris here just on the Canadian banking side, we're seeing that clearly in the commercial banking business, where people are holding back on borrowing we see clearly in the trendy. However on the mortgage side interesting enough as rates have come down you start to see that pent up demand in the mortgage business, starting so that you don't.
Speaker Change: See yet in terms of obviously, the tariffs and all the discussions however, if the tariffs do get implemented and of course, the economy contracts, you'll probably see the mortgage business also start to come down, but we don't see that yet. Okay. Quick question then unimpaired.
Speaker Change: With all due respect to the accountants, who dreamed to buy for us neither of them not all of them.
Speaker Change: Really not.
Speaker Change: It's hard to build up my interest in performing loan reserves.
Speaker Change: What really matters to me is.
Speaker Change: What is the timing and what sort of effect do you expect on your own parents. If in fact, we do see.
Meaningful terrorists like did it do the parents buildup abruptly or is it like 2026, how should we think about the imperative.
Speaker Change: With a little less emphasis on the performing yeah, no I think you're I think you're right Mario where as we've sort of looked out at our scenarios, it's really going to take time for tariffs to grip to the Canadian consumer and there is some obviously some positive tailwind in the economy as it relates to unemployment GDP already and so you add tariffs onto that we're re.
Really looking at that to be more of that from an impaired perspective, I really a lag up to 2026 and <unk> and beyond. So your thesis is correct. That's the thing that's the same way we're thinking about it right. Thank you.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: Following question is from Paul Holden from CIBC. Please go ahead. Thank.
Paul Holden: Thank you good morning, I wanted to tie together two predominant themes here tariffs and.
Speaker Change: Capital allocation.
Speaker Change: You know lot of contingency planning I'm sure on the part of Scotia as with many companies. What are you thinking in terms of if if tariffs under the scenario, where there are significant tariffs and maybe more permanent does that change at all Scott sort of your thinking around capital allocation does accelerate the need or desire to do more in the U S. For example.
Yeah. Thanks, Paul.
Speaker Change: There's a question are you still committed to the North American corridor strategy, essentially what you're asking and I don't see a need to pivot at the current time and you know as part of the strategy rollout, We said, Canada first U S. Second in Mexico third candidate represents greater than 50% of our earnings U S. Approaching now 15% in Mexico is less than 10% this path.
Speaker Change: Quarter U S grew by 39% and we've continued to be thoughtful about capital deployment into Mexico.
Speaker Change: Long term I think given the U S. As geopolitical ambitions, we believe the resources of Canada, and the labor in Mexico will be important.
Speaker Change: I think looking at the renegotiation of the U S. MCA will be an important milestone for all of us to consider and so way too early to think about pivoting office strategy, which I think long term is a lot of strategic rationale to it okay.
Speaker Change: Okay got it thank you for that.
Speaker Change: Thank you. Our following question is from Darko <unk> from RBC capital markets. Please go ahead.
Speaker Change: Alright. Thank you good morning, I see things a little bit differently with respect to stage two I see stage two provisioning.
Speaker Change: Somewhat of a reflection of conservatism and given all of the uncertainty I was surprised that you didnt build more and but I guess your answer to Mario was that look do you think that the.
Speaker Change: Problems come in 2026, and maybe it's outside of the 12 month window.
Speaker Change: Yet I still think there could have been an overlay right. So Phil could you speak to me about.
Speaker Change: Because when I look at your base case in your alternative pessimistic cases, they don't change much.
Speaker Change: So you could have at least perhaps put a bigger weighting on the scenario and sort of get ahead of it and build a reserve but is it really the timing that's preventing you from doing that.
So let me give maybe I'll add a little bit more color.
Speaker Change: Darko and it's a great question so.
Speaker Change: We're limited to what we knew as of January 31.
Speaker Change: So the quarter ended the 31st and then we had all that if you recall at the time, we had all of this noise in the.
Speaker Change: Our headline after headline what we're going to do what we're gonna. So we could only from an accounting perspective.
Going back to <unk> comment in Iowa for a site, we can only do what we knew as of the as of the 31st and as such we did you know.
Speaker Change: 5% tariff on half of Canadian imports. This is sort of what went into the scenarios with half retaliation, 10% tariff on Mexico on half of the importance of half retaliation, 15% tariff on China.
Speaker Change: For half of imports with with full retaliation and so you start to think about that.
Speaker Change: But we built about just under $100 million in the quarter of which 95% of it was actually stage two so we're not far off the way youre thinking about it.
Speaker Change: But we can only build what we knew from an economic perspective as at 31st one about two thirds of that build was related to.
Macroeconomic uncertainty and volatility.
Speaker Change: Okay, and so is it fair to say, though then.
Speaker Change: Unless something significantly changes, we should be expecting something.
Speaker Change: Really in Q2.
Speaker Change: If we have if tariffs are imposed then we will look at as I said earlier, we will look at our build within Q2, if theres no tariffs I go back to the comp.
Speaker Change: The comments I made to Abraham earlier.
Speaker Change: We have we continue our guidance is as we get it last quarter and I think we're in good shape to deliver tour lower PCL toward the latter half of the year.
Speaker Change: Okay alright, thank you.
Speaker Change: Thank you. Our following question is from Sohrab <unk> from BMO capital markets. Please go ahead.
Speaker Change: Okay. Thank you Phil.
Speaker Change: Just maybe to take Tom quick question, just a little bit differently. If the quarter was ending two day with those 510, 15% type assumptions be any different.
Speaker Change: No no.
Speaker Change: We have not seen an executive order that relates to the type of tariffs that are.
Speaker Change: That that are being proposed again, we're still.
Speaker Change: We're still digesting what's going on.
Speaker Change: When we have certainty will act uncertainty, it's difficult to act on headlines in Sweden.
Speaker Change: Understood. So big I mean, it doesn't really matter that the quarter ended January 31st you have no better information Youre seeing today versus January 31st is that fair to say a push.
Speaker Change: If tariffs are imposed by the U S government than we have clarity in terms of their actions until then we have no clarity.
Speaker Change: I appreciate that and Scott I just wanted to kind of go back to December 2023, Investor Day, you, obviously laid out a plan, including a five year set.
Speaker Change: Set of kind of.
Speaker Change: Millstone, so what have you.
Speaker Change: You've got a little bit over a year under your belt since then.
Speaker Change: One of the assumptions would you say are being tested at the most.
Speaker Change: In you being able to deliver on that 2028 for example, real clear.
Yeah. So it's a great question one if you look at the different business lines I think international we're right on track.
Speaker Change: In terms of what we said we were going to do we said there's going to be a two year transition that we're going to move through that and we've had some some great progress in that regard said, leading with the productivity ratio of that comes back to my points on productivity ratio I think wealth. We're significantly ahead of what we said at our Investor Day, and I think we said we were going to grow at 10%, we're growing at 15% and that will probably March.
Speaker Change: Right, a little bit, but it's been really good to see that progress.
Speaker Change: <unk>, where we're early but this quarter was a great a great kind of a checkmark for what we're trying to do around fee income, but we have to put up more than one quarter to show that we're on the right track, but I was really pleased with that and in Canada. We're doing the right things the right things in terms of growing primary clients you know 200000, new.
Speaker Change: Hello.
Speaker Change: Hello.
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