Conférence téléphonique (BNS T Transcript 2025 02 25)
SCOTIABANK
Q1 2025 EARNINGS CONFERENCE CALL
DISCLAIMER
THIS TRANSCRIPT HAS BEEN FURNISHED FOR YOUR INFORMATION ONLY, IS CURRENT ONLY AS OF THE DATE OF THE CONFERENCE CALL, AND MAY BE SUPERSEDED BY MORE INFORMATION. EXCEPT AS REQUIRED BY LAW,
FORWARD-LOOKING INFORMATION
Forward-looking Statements From time to time, our public communications include oral or written forward-looking statements. Statements of this type are included in this document, and may be included in other filings with Canadian securities regulators or the
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CORPORATE PARTICIPANTS
Aris Bogdaneris
CONFERENCE CALL PARTICIPANTS
Jefferies - Director of Research,
PRESENTATION
Good morning and welcome to Scotiabank's 2025 first-quarter results presentation. My name is
Following our comments, we'll be glad to take your questions. Also present to take questions are the following Scotiabank executives: Aris Bogdaneris, Canadian Banking;
Before we start, and on behalf of those speaking today, I will refer you to slide 2 of our presentation, which contains Scotiabank's caution regarding forward-looking statements.
With that, I will now tuthe call over to Scott.
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Thank you, John, and good morning, everyone. 2025 is off to a strong start. We are seeing encouraging signs in this quarter's results that our enterprise strategy is having the desired impact on our financial performance
We delivered adjusted earnings in the quarter of
Our provisions for credit losses this quarter remain elevated, reflecting the toll on our clients of 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. Our balance sheet metrics remain strong. 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.
Since the end of 2022, we have improved our capital ratio by approximately 140 basis points, built approximately
We are a much stronger bank today, aware of current heightened risks and prepared to respond to more tangible trade developments. We remain focused on driving forward our very clear and sound strategic agenda.
To recap our key focus areas, first, we continue to focus on allocating incremental capital and resources to our priority markets. This quarter, we closed our investment in
We also announced the sale of our banking operations in
Second, we continue to focus on our
Value over volume remains an enterprise-wide priority. We continue to see an acceleration of multi-product clients in Canadian Retail as we enhance our client acquisition strategies through initiatives like Mortgage+ and SCENE+. Penetration of the 15 million SCENE+ members across
In Canadian Retail, on a cumulative basis since our strategy launch, we have now added 200,000 new primary clients. 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.
Client depth in Canadian Retail continues to trend above target, with clients holding three or more products, increasing sequentially to approximately 47%, up 30 basis points. And we are also successfully growing primary clients in International Retail. We have now welcomed 113,000 new primary clients to Scotiabank since our strategy launch and are seeing positive trends in overall clients considered primary and revenue per international banking retail client.
Third, we continue to demonstrate operational excellence and retudiscipline. We delivered again on positive operating leverage while investing in front line product specialists and retail, increasing the sales force in wealth and additional sectoral coverage professionals in GBM in our drive to deliver best-in-class solutions to our clients
We delivered an 11.8% retuon 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.
Finally, we have updated our approach to business segment presentation to be consistent with management's evaluation of the financial performance of the segments. The changes will support better decision-making around pricing and capital allocation to help the bank achieve its financial and strategic medium-term objectives.
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Turning to a few key performance metrics and strategic highlights from each of our business lines, starting with the market-facing businesses. Global Wealth Management continued its positive momentum, delivering
Favorable markets, strong trading revenues, and a retuto positive net fund sales drove fee-earning assets to record levels as we exceeded
Growth in investment fund sales across our branch, wholesale, and Scotia financial planning channels remain our leading strategic priority in this business. Strong fund sales in the quarter were up 50% over last year, and we expect strong net sales to accelerate through the year.
We are tracking ahead of our targets year-to-date in terms of new clients, financial plans delivered and client retention. New financial plans delivered in Q1 were up 10% year over year, and average revenue per account is up 13% year to date.
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
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 repositioned their portfolios in response to evolving macro and geopolitical developments. Capital markets businesses contributed 54% of the GBM revenue this quarter as our origination and advisory businesses delivered one of the strongest quarters on record.
Average deposits were up 3% and retuon equity improved 350 basis points year over year, while demonstrating capital discipline. 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 tone and supportive financing conditions.
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. We are seeing good progress and competitive positioning across our footprint. In
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 portfolio migration and a more cautious consumer outlook.
Our Commercial Banking business delivered growth through capital discipline, while our expanded cash management capabilities drove deposit growth. The commercial business continues to show a very attractive funding profile, generating deposit growth of over
Retail deposit growth was up 4% year over year as we continue to focus on day-to-day and savings accounts. In addition, investment funded insurance product sales, which are a key priority to drive higher non-interest revenue, saw double-digit growth. Capitalizing on our SCENE+ and Mortgage+ opportunities will be required to deliver on our client growth objectives.
Tangerine continues to increase primary clients aligned to our goal of deepening relationships through everyday banking. This quarter, digital active clients reached an all-time high of 1.4 million. We have a new leadership team in place at Tangerine, who will be intently focused on relationship depth and client acquisition. Primary client growth, improved 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.
International Banking delivered solid results based on diversified revenue growth by segment and geography, coupled with strong expense discipline. Our GBM business in this segment had a strong rebound in activity levels and profitability, delivering
We continue to reposition our retail business while strengthening our commercial business. Specifically, in commercial this quarter,
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we saw primary client expansion with deposits growing 9% year over year, driving improvement in customer revenue by 8%.
Our productivity ratio improved to 51% this quarter, a result of 4% revenue growth and disciplined 1% expense growth year over year. The productivity ratio is expected to continue to improve as the benefits of our move towards a regional model take effect. We are well on pace to achieve our medium-term run rate savings commitment of
At an all bank level, we are encouraged by our strong results this quarter. 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
Our balance sheet strength provides us flexibility in the near term to successfully manage through the various economic and trade scenarios that may evolve. We remain mindful of the impacts of possible economic disruption and growth pause could have on businesses across the country. We are taking a conservative and proactive approach to ensuring we successfully navigate what could be a volatile period with the long-term interest of all stakeholders in mind. 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 retuto shareholders over time.
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 bank continues to see the potential for an integrated North American economy to further drive competitiveness and collective prosperity. I remain confident that
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. I would like to thank our entire team of Scotiabankers across our footprint who are focused on supporting our clients with advice as they navigate the challenges of the current environment. As we stay focused on disciplined capital allocation, growing client primacy, improving productivity while maintaining a strong balance sheet, I remain confident in the path ahead as we continue to execute on our strategy.
I will now tuit to Raj for a more detailed financial review of the quarter.
Thank you, Scott, and good morning, everyone. This quarter's earnings was impacted by
Moving to slide 6 for a review of the first-quarter results, the bank reported quarterly earnings of
Retuon equity improved to 11.8% from 10.6% last quarter, and retuon tangible common equity was 14.3%. Revenues were up 11% year over year, driven by growth in both net interest and non-interest income. Net interest income grew 8% year over year due primarily to loan growth including the BA conversion and a higher net interest margin. The all bank margin expanded 4 basis points year over year and 8 basis points quarter over quarter, driven by lower funding costs as a result of rate cuts.
Non-interest income was
The provision for credit losses was approximately
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Quarter over quarter, expenses were also up 7%, driven by seasonally higher share-based compensation, business and capital taxes, higher personnel costs, technology-related costs, and the unfavorable impact of foreign currency translation. The bank generated positive operating leverage of 2.8% and the productivity ratio at 54.5% improved 160 basis points sequentially. The bank's adjusted effective tax rate increased to 23.8% from 19.6% last year due to changes in earnings mix across jurisdictions and the implementation of the global minimum tax this year.
Moving to slide 7, which shows the evolution of the cCommon Equity Tier 1 ratio and risk-weighted assets during the quarter. The bank's CET1 capital ratio remained strong at 12.9%, a decrease of 20 basis points quarter over quarter and flat year over year. Earnings less dividends contributed 19 basis points and lower risk-weighted assets also contributed 19 basis points, which include the benefits from the Synthetic Risk Transfer transaction.
This was offset by 43 basis points from the closing of the additional investment in
Turning now to the business line results beginning on slide 8. Canadian Banking reported earnings of
We continue to see deposit growth as year-over-year deposits grew 6%, driven by an increase of 10% in non-personal deposits mostly in demand, and 4% in personal deposits, mostly in term. Net interest income grew 6% year over year, primarily from asset and deposit growth and the benefit of BAs converting to loans, partly offset by margin compression.
The net interest margin declined by 1 basis point quarter over quarter and 10 basis points year over year as asset margin expansion of 8 basis points was more than offset by lower deposit margin of 17 basis points, reflecting the impact of rate cuts. Non-interest income was up 4% year over year primarily due to elevated private equity gains, higher mutual fund fees, and insurance income that were partly offset by lower banking fees from the impact of BA conversion. The PCL ratio was 47 basis points, up 13 basis points year over year and 7 basis points quarter over quarter.
Expenses increased 8% year over year, primarily due to higher technology costs and professional fees to support key strategic priorities. Quarter-over-quarter expenses grew 2%, primarily due to higher technology costs and seasonally higher share-based compensation. The operating leverage for the quarter was negative 1.8%.
Turning now to Global Wealth Management on slide 9. The earnings of
The revenues of
Spot AUM increased 16% year over year to
Turning to slide 10, Global Banking and Markets delivered a particularly strong start to the year with earnings of
The net interest income increased 18% year over year 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. Non- interest income was up 25% year over year due to higher client-driven trading-related revenue across the Capital Markets business of fixed income, equities, and FX.
Expenses were up 14% year over year, mainly from higher personnel costs, including performance-based compensation as a
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result of stronger performance, higher technology costs, and the negative impact of FX. Quarter-over-quarter expenses were up 10%, due mainly to seasonally higher share-based compensation and higher personnel costs.
The operating leverage was a strong 9.2%. The effective tax rate increased to 24.5% in this segment due to changes in earnings mix across jurisdictions. The US business generated strong earnings of
Moving to slide 11 for a review of International Banking. The comments that follow are on an unadjusted and constant dollar basis. The segment delivered earnings of
The revenue was up 1% year over year as non-interest income was up 6% driven by higher capital markets revenue that were partly offset by a 1% decrease in net interest income. The margin expanded by 5 basis points year over year, driven by lower funding costs. Net interest margin was down 2 basis points quarter over quarter, driven by lower inflation and lower loan margins in
Year over year, loans were down 2%. Business loans declined 8% that were partly offset by 4% growth in residential mortgages. Deposits were down a modest 1% year over year. While personal deposits grew 1% year over year, non-personal deposits declined 2%.
The provision for credit losses was
Operating leverage for the quarter was positive 0.4%. The effective tax rate increased by 170 basis points to 21.7% due to lower inflation benefits and the impact of the global minimum tax.
Turning to slide 12. The other segment reported an adjusted net loss of
I'll tuthe call over to Phil to discuss risk.
Thank you, Raj, and good morning, everyone. Last quarter, we indicated that PCLs 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 risk. The announcement of potential tariffs has further increased macroeconomic uncertainty. And based on what we knew on
We also incorporated more severe tariffs into our already stressed pessimistic and very pessimistic scenarios. Against this backdrop of increased uncertainty, all bank PCLs were approximately
The remaining drivers of this quarter PCLs included increased impairments across our
Turning to Canadian Banking, PCLs were
Overall, 90-day mortgage delinquency increased a modest 1 basis point quarter over quarter as delinquency in our variable rate mortgage clients begin to stabilize as they experience relief from central bank rate cuts. Furthermore, decreasing payments continue to benefit variable rate mortgage clients as their deposit coverage maintained its upward trend. Commercial PCLs were
Moving to International Banking, PCLs were
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quarter over quarter. And impaired PCLs were flat quarter over quarter, while we had
Commercial PCLs improved quarter over quarter, down
With the backdrop of potential tariffs, we have conducted a significant amount of analysis across various scenarios. This is to ensure the bank is sufficiently prepared to navigate through this uncertainty.
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, any client actions taken to mitigate the impact, and bank actions we take to further support our clients. We are comfortable with the adequacy of our allowances for credit losses that has grown approximately
If tariffs are imposed, we will review and adjust our allowances as needed in the quarter they are finalized. In addition to our allowances, 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.
QUESTIONS AND ANSWERS
Great. Thank you, Phil. We'll now move to the Q&A segment of the call. (Event Instructions) Operator, do we have the first question?
Operator
(Operator Instructions)
I guess maybe just a question on credit outlook. I think if we can break this down in an ex-tariff world, I think, Phil, you mentioned expect PCLs to go down in the second half of '25, and then you referenced higher-for-longer rates. Would you characterize rates today as no longer being higher for longer in terms of the ability of the consumer customer base to service their debt?
So one, if the rate backdrop now low enough where that's not a big risk factor, and ex tariffs, should we -- are you seeing any signs of a cyclical rebound? Maybe if you go back three, four weeks ago before the headline said. Would appreciate any color on those two. Thanks.
Thank you. It's a great question. I'm glad to look out beyond tariffs. Now certainly, as we look at -- there's still a little bit of softness in the Canadian retail portfolio, but we are starting to really see customers starting to benefit from rate cuts, particularly in our variable rate mortgage portfolio as well as those customers that are coming up for renewal. And those rate cuts are benefiting those customers.
As I look out for the remainder of the year, still very positive that, tariffs aside, we'll see our provisions starting to trend down in the latter half of the year. And that's what our models are telling us. That's the way customers -- the consumer trends are shaping up, and we've got confidence in that outlook outside of the side of the tariff landscape.
Got it. And one quick follow-up, maybe, Scott, for you. Stocks at very discounted valuations. Why not initiate buybacks given where capital levels are?
Hi, Ebrahim. First, I mean, I'm very pleased with the capital discipline and the internal capital generation that we saw this quarter. I
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think as we think about capital return, it will be important to see how tariffs play out. 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.
Operator
Wanted to focus in on the strong performance that we saw in Global Banking and Market this quarter. The productivity ratio showed some market improvement, both quarter over quarter and year over year. And I know a lot of that is related to the strong growth that we saw in revenues, but I was a little surprised that it came in this low. What -- how should I be interpreting this? Are we expecting, I guess, lower expenses or a better productivity ratio through 2025? Or is this an indication that we're expecting revenues to significantly decline to a more normalized level from what we saw in the first quarter?
Travis Machen The
This is Travis. Listen, I appreciate the question. If you look at our business in this quarter, we have a lot of segments that really performed where you have great operating leverage. And I think that plays out to the profitability, the ROE and the productivity level.
We expect revenues probably to normalize towards a more normal level in this business. We clearly earned nearly a record amount in this quarter. So I'd expect that productivity level ratio to -- our productivity ratio to normalize a little higher.
And John, just to add a little more color. Yeah, the
But the expense ratio always benefits, right? Like in Scott's comments, he talked about capital markets being 54% of the revenue mix, and that plays a big role in reducing productivity ratio, but they are focused on managing expenses in line with revenue growth and prioritizing the spend in that segment.
And the only other thing I'd add is that 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 because of the big revenue growth. And similarly and in Travis' business, 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.
And then not to downplay the advisory impact this quarter, but I mean, obviously, exceptionally strong growth on trading. Can you give us a sense in terms of what you're seeing for pipeline on advisory given the fact that there's a lot of, I guess, excitement or exuberance in terms of what the outlook may be?
Travis Machen The
Sure. Yes. Listen, our pipeline remains incredibly strong. We have tremendous client activity across all segments and all sectors. The market is robust. That being said, there's clearly headwinds that persist in the market with rate uncertainty, tariffs, geopolitical. And I would say the US market stock market is priced for perfection right now. So there's a lot of things that can slow down the pipeline. But as of right now, it looks incredibly strong.
What I really liked about this quarter too is the league table performance. So when you look at number one in debt capital markets in
Operator
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Maybe just one on international and the Davivienda transaction. Was taking back equity a strategic decision on your end or maybe more in a way to negotiate more favorable terms on the deal? I guess if you look at divesting more assets, so [would you say] more deals like this one or maybe a greater focus on receiving cash in the transaction?
Great, Matthew, thanks for the question. It's Scott, and then I'll let Francisco follow up. There's not a strategic view here on minority investments if that was the question. I mean, the
On the Davivienda side, we didn't want to sell at the low point in the cycle. And so when we could take advantage of combining with the -- a 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 seems like the right plan for our shareholders.
Maybe Francisco, just give us a sense of --
Absolutely, Scott. Yes. The -- in terms of our footprint, there's no plan to enter into minority agreements as part of our strategic push forward. So that's not at all the way forward. However, when we look at the situation in
We have now created a very strong bank that enjoys a scale that on our own, ranking sixth, we would never achieve and allows us to redeploy management time, capital, and effort to our core growth markets while maintaining, through the referral agreement, the ability to support our multinational and wealth clients, both in
So what this allows us to do is also benefit from the transformation and improvement of the Colombian market because we have no doubt as a management team that
Operator
Questions for Phil, and sorry, Phil, I'm going to go tariff. But you haven't changed your PCL rate guidance for fiscal '25. You were at the higher end this quarter, but you're expecting to be lower in the back half as you kind of talked that you built a little bit of cushion in for tariffs.
Now you've done a lot of stress testing. Can you give us a sense if tariffs are put in as proposed? Like what -- where does your guidance go, or what are the kind of ranges we should be thinking about in terms of your total PCL rate?
Yeah. Thank you. I appreciate the question. Obviously, that's sort of the topic du jour that I'm sure everybody in the financial services industry is looking and trying to come up with some outlook.
Listen, as I said in my prepared remarks, there's going to be a number of variables that we're going to work through -- the size and duration of the tariffs, the degree of retaliation, the amount of government subsidies, client actions, bank actions. And it's really hard to give you a range or an outcome at this point in time without having some understanding of what these tariffs look like.
I think what I wanted to really do stress is that if tariffs come along in Q2, we'll do the appropriate build in Q2. And it will be a sizable 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, and we're well capitalized and we're feeling pretty comfortable that we could -- it will be meaningful, but manageable.
Okay. I would ask what meaningful means. But I'm going to guess you're not going to tell me.
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