The CFO of Scotiabank here with us today to chat. And again, with Canadian banks, we always have that fun situation where they just reported last week, so we're going to touch a little bit on the first quarter, touch a little bit about strategy, all that good stuff. And why don't we start with strategy, Raj, because Scotia laid out a strategic plan, and we just got the first quarter result, a little better than anticipated. So maybe we can talk a little bit about how you see that plan progressing, very early stages. And specifically, I want to zero in on some of the plans with respect to the international banking segment where the macro is a little uncertain. And I'd love to hear from you how that's playing into the very early stages of rolling out the plan. So very broad opening.
I'm going to give you the floor here to walk us through how you see the very early stages of this plan working.
Absolutely. First of all, thank you for having me, and thank you all for making the time to sit through this. Now, it is a great question. I think it's unique to us. We spoke to you after the year-end. We spoke to you at Investor Day. We spoke to you at your conference. And now after the first quarter, so it feels like we've done it four times in three months, but always a pleasure. Just to recall a bit on the Investor Day, what we talked about was three real pillars on which we had built the entire plan for the next five years. The first one is about how we want to thoughtfully allocate capital or allocate capital differently looking forward and where we like to put up more capital and where we want to hold our capital to the numbers that they have today.
International banking is one of those, so I'll touch on it. The second thing was just saying, how can we gain more client primacy, which is a term for us to look at how do we make the thoughtful transition from single product, single product relationship customers to multi-product relationship customers, completely acknowledging that it's a long journey for moving customers, but you've got to make a beginning somewhere, and I'll talk a little bit about it. Of course, third one was about operational efficiency. So we took a restructuring charge in Q4 to help us with that. We want to constantly challenge ourselves across all the businesses to see how we can become more efficient, generate more for every dollar we spend, so to speak. On thoughtful capital allocation, international banking, you asked the question, fantastic quarter, CAD 750 million plus.
Haven't done that in a few quarters for a long time, I should say, pre-COVID perhaps. And how we did it, I think, was very impactful. We didn't put up more capital over there. They had the same capital, which is part of the Investor Day strategy, but to do more with the capital that they already have, be it in Mexico, Chile, Peru, as well as leverage the opportunities we have with the investments we've made in the GBM business, which is our capital markets wholesale banking business. We have the capabilities in those countries, which are very, very strong. So when the markets provide these opportunities with rate cuts happening faster than, say, in Canada, for example, it's already happening at scale at Chile, as well as a bit in Peru, and Mexico should start this quarter.
We feel like we had the right people on the ground to capitalize on those opportunities with our corporate clients, be it on FX, derivatives, name the capital markets product where we benefited. The run rate of CAD 372 million of GBM Latin America, as we call it, is likely not sustainable because these are so much market-driven opportunities, which definitely helped with Q1 and set us off on a good path as we start executing on our new strategy. So we're very proud of it. These countries in themselves have about CAD 19 billion of capital allocated to them. So we're not looking to take down their capital. We're looking to make them work more efficiently to produce better returns for the capital. And they've certainly done that in Q1, and we expect them to continue to progress on that over the next couple of years.
On client primacy, I think for us, it's about deliberate choices, specifically, let's pick on the Canadian mortgage business. We've been the only bank who has reduced our mortgage balances, look at it quarter-over-quarter, year-over-year, both being meaningful. And that's by design, Darko, helped by the market. The market itself has been a bit slow because of the rate situation in Canada, as we know. But we certainly have talked to our frontline folks to saying, these are the kind of customers we would like to bring in. And the mortgage-plus product, which we have marketed in the last 4-5 quarters, has been quite popular with all the channels, particularly the broker channel, which we are very, very big in Canada, as you know.
They've adapted to it, which is, how do we get a bundled product out there so that we achieve client primacy while also participating in the mortgage market? Once again, four quarters, early days, but we feel like it's a product that has been well received, and our frontline staff are incented appropriately as well. So that's a journey that we have begun over here, which is going to help the Canadian bank as they look to grow their strategy going forward. And efficiency ratios, Scotiabank has always been good at it. Our productivity ratio has been quite low. But we want to create more capacity so that we can invest more in digital technology, both at the back end. We've done a lot at the front end, customer-facing. The back end is still a bit clunky.
We need to ensure that we appropriately allocate resources to the back end of the businesses that support all these people so that we become efficient there, and therefore the customer experience becomes a more seamless one. We're able to turn around stuff in shorter time frames and so on. So good start. I think across all businesses, we have done well, not just international banking. That's the expectation that we laid out at the Investor Day, and we expect to continue to exceed that quarter after quarter.
And so one of the things that you sort of laid out in your Investor Day was there was going to be a little bit of capital sort of movements. It's very early days. But can you talk a little bit about that?
Sure.
How you see it progressing throughout the year?
No, completely. Our split of capital is actually quite simple. When you look at it business line, we have about CAD 19 billion, like I mentioned, and IB, GBM has about CAD 15 billion, and the Canadian bank has a little about CAD 20 billion. It's almost a third in the Canadian bank and IB, and the remaining between GBM and, of course, Wealth as some capital because of goodwill. So very simple split. Where we'd like this going forward is we want to allocate capital more to North America, part of our strategy in Investor Day. We define North America, including the Caribbean, but mostly Canada, the United States, and Mexico, pretty much in that order. We are under-indexed quite a bit in Canada, multiple products, as you know, whether it's credit cards, lines of credit, and so on. We're very strong in auto, fairly strong in mortgages.
So how do we reallocate as business mix shift happens within those businesses based on customer preferences and all the client primacy and so on? So we need to do a better job over there. GBM's capital, we've looked at them in the last 18 months, frankly, as we thought about capital floors and so on. I'm sure we'll get to it. GBM has been very thoughtful in saying, how do we take down certain client relationships, specifically commitments, to help with the capital they consume, which certainly helped with the Q1 floor impact being minimized from where we started on November 1st. That will continue. GBM has got lots of clients, very high-quality clients, as you know. But with the new capital rules, when capital requirements go up 2.5 times, the client cannot be profitable. It's just not possible.
Either we have to get a significant share of wallet, very difficult to get in corporate customers, or you have to say, this relationship is not profitable. Let's take the capital back and perhaps deploy it elsewhere, not just in GBM, but across the bank. So that should start happening, and it started happening already.
To be clear, that's more like just letting it run down naturally.
That is correct. That is correct. Or it comes up for maturity, and then you don't participate in the renewal, that kind of stuff. They've done, I would say, an extraordinary job in Q1. We knew they'd been working on it for some time. We weren't sure whether we'd get it done in Q1 to the scale that we got done eventually. Some things can spill over to February and so on. But it happened. It certainly helped with the capital ratio. Back to the philosophy, all business lines are signed up to saying, we know that capital is scarce. We know capital is more expensive now. So we are expected to deploy it appropriately for the best returns possible that we can generate within the risk appetite we have. So a lot of constraints, but I think there's a lot of alignment.
But back to the international banking there, we haven't seen much capital flow. The rate environment's pretty dicey down there. How do you see that progressing this year?
International banking, actually, from a rate perspective, Darko is ahead of, say, Canada and the United States. They're starting to see a lot of rate cuts, right? Structure of our balance sheet, pick Chile, for example, or pick Mexico, we're going to benefit, and you already saw that in Q1 where the margin expanded by almost 19 basis points in one quarter. Pretty extraordinary move up. And I don't think it'll be 19 basis points every quarter, to be very clear, right? But I think directionally it should start expanding as rate cuts continue to happen in that footprint. And they went early in rate increases, so the rate cuts are happening earlier. Inflation is starting to come within expectations in all these countries. So there's a lot of momentum from a net interest margin perspective.
Where we are muting it, if you want to call it that, as we want to be selective in asset growth, deploying more capital. So the NII will benefit in the international banking business from margin expansion but might get muted a little bit because of loan growth not being, as you would see it, say, three, four years back. Some of it is by design, and some of it as we change the shift to not being just a monoline lender in Mexico to mortgage product. Again, we want to see if we can get primacy up there as well. And that'll take a couple of years, as we talked about at Investor Day. But directionally, you should start seeing better returns on capital quarter after quarter and sequentially in that business line. And that's the expectation we have of that business.
There are a couple of portfolios in the international banking business where you sort of identified, look, we want to fix it or eventually, if necessary, exit. Is that complicated or easier in the environment that you're in right now?
No, it is complicated because these are complicated plans. Pick on Colombia. We do have a shareholder. We have a 49% shareholder, so we need a lot of alignment with patience and how we need to execute for the goodness of everybody, like both parties in this agreement. Colombia, particularly, just pick on the quarter, Darko. Actually, look back even two, three quarters when we disclose. Everything that we could do, we have done well. Bring down costs quarter-over-quarter. Expenses are actually down year-over-year. It's down in an environment where you have double-digit inflation. So a lot of it is about how can we reduce costs. It's not a business where you can run with 65%, 70% productivity ratio. It's just not efficient.
So the management team, who's fairly new, and Jabar, who's our head over there, very young executive we put over there, but very clear, how can we manage through the situation? You can't outrun the economy. The economy is going through its own challenges over there, and we don't intend to outrun the economy, but we intend to make it more efficient. It's part of the plan. Our revenue growth is actually better than the peers over there. So we're executing on the plan on the revenue side. The challenge is really loan loss allowances over there. The economy is under strain. Customers are under strain over there. So we're going to see some elevated loan losses. That's impacting the bottom line. So that'll continue. I think the plan is actually ahead of what we thought it'll be, but a lot of work to be done, right?
No doubt about it. The other three are smaller entities we talked about. We talked about Central America, which is Costa Rica and Panama for us. Then we have some consumer finance business, specifically Chile. We have an arrangement with a retailer, Cencosud, which is profitable but can be volatile because it's a credit card business with a store over there, and these tend to have volatile losses. If we were to do it all over again, we'd probably structure those transactions differently, but we have it. We have it for another seven years. So we're working with a partner there saying, how can we make it more profitable for both of us? So that'll be the work in progress, which is the fourth pillar we talked about at the Investor Day. I think Colombia is a good news story.
We're seeing some early progress over there in line or better with our plans. Central America is doing quite well with the plans again. They're complicated plans, right? Because these are turnaround projects. Turnaround projects can be complicated because you need a lot of resolve to go through a period of time. But I think I'll quote Francisco, what he said at the Investor Day. If we feel we're not able to turn it around in the timelines we have, then we'll see how we can reallocate the capital, but not now.
Just remind us of the timelines. The timeline.
The plans we have are like 3-year plans, Darko. We are probably at the end of the first year, so to speak. So we probably have two more years. But I don't think we'd wait for three years in case it's not going to plan, be it because we're not able to execute or the macro is not in our line. So we're watching it very closely, but our management teams are very focused on executing on the plan. But sometimes if the macro doesn't cooperate, it might be difficult. So far, so good.
Okay. And again, I'm just going to look into the audience in case there's questions. Please raise your hand or flag me down. I'm looking at my to try and get my attention if you really want to ask a question. So I wanted to go back to the floors because you mentioned how you're working on the floors. The only bank affected by the output floors now, eventually all of them will have an impact. Where can you see this going over the course of the next couple of years? How much can you combat the floor? And clearly, we have one example of how you get there. Are there other areas where you can see some sort of help to the floor?
Yeah. I think in the next two quarters, we should offset the impact of the floor impact of November 1st because we still have more in the pipeline, specifically in GBM, which should help with eliminating the floor, which impacted us about CAD 7.8-CAD 7.9 billion of risk-weighted asset. So that should go down to zero, we think, by Q3. But then again, by November 1st, the floor gets impacted by another 2.5%, which is roughly CAD 17-CAD 18 billion of risk-weighted assets for us. Eventually, it's difficult to take care of the floor completely. You cannot make the floor zero and keep it at zero simply because of how standardized and the model risk-weighted assets work. And there will always be the floor becoming a constraint at some point in time for everybody, right? Just mathematics over there.
How much we delay it will put us in a better position than otherwise. We'll continue working on that. I expect that Q1, the floor impact, 40 basis points is what we've talked about, Q1 of 2025 and then another 40 basis points, Q1 of 2026. We're working on more plans. It's all a trade-off, Darko. How much income are you willing to give up to manage the floor? And back to our philosophy about how can we get more profitable relationships rather than just revenue-generating relationships? The tougher choices we make where we're able to exit those which are lower profitable relationships, we're not giving up income, but we're able to manage the capital impact. It's a science in some respects where you start, but eventually, it becomes more challenging because these are relationships, right? You can't look at it just at point in time.
But the floor is definitely going to be a constraint. Either we have to continue to raise revenue that we're going to generate from all these people, like non-capital-generating sorry, non-capital-consuming revenue, which is fee income, that we need to get better at it, back to capabilities that we have to continue to build. And the wealth business has to be a bigger component. Five-year Investor Day, you saw the wealth business. We talked about 20% growth. We want to get to 20% ROE in that business. And that is doable. So the proportionality of those going up, it takes away some of the challenges for ROE as we manage the E. So a lot of work to be done in two years.
Okay. Great. I think I want to switch gears and talk a bit about credit quality. There's been a lot of talk, some of it here at the conference, about Canada's mortgage situation being different from that of the U.S., mortgage borrowers. I think, correct me if I'm wrong, 14% of your book is renewing this year, or is it?
Yeah.
It's about 14% of your book. Somewhere in that range, renewing at a higher payment. But you've got and that's the fixed. Of course, your variable rate, Gordy.
It's different.
I've seen it. We've had some discussion. I think we've probably beat this to death a little bit. So my question is not more, it's more about the knock-on effect and some of the impacts we might be seeing in some other portfolios. It doesn't seem to be too pronounced. But maybe you can talk a little bit about the credit card loss rates, how you see those evolving, and auto lending with Scotia is a bigger part of the pie. Maybe you can just start us off talking about how those loss rates came in and where you see them going for the rest of the year.
Totally. I think for us, the bellwether is the auto book. We happen to be the number one. And our auto book tends to be anything between 75%-80% are single-product customers. So they don't have other relationships with us. So the delinquencies for us, other than unsecured lines of credit, we see at scale in our auto book, and that's what we're starting to see. Delinquencies are rising. The strain on the Canadian consumer is certainly rising as we look through that lens. The other one, which we have a unique product, is a variable-rate mortgage, which you're well aware of. So the variable-rate mortgage for us has been going up, the payments for these folks for the last three years, approximately grown by almost 51%, their payments, between where they started before rates started going up to where they're paying now.
How have they managed through it? You've seen some rise in delinquencies, the 90-day pluses, roughly about 27 basis points. I think Phil talked about it on the call. The fixed-rate mortgages are still below 20. They're around 17% sorry, 17 basis points. We expect that to increase based on your comment, right? Some of these are coming up for repricing, mostly in 2025 and then 2026. We think there'll be approximately a 26% rise in their payments, so not as high as a 51%. The 26% is obviously based on today's forward rates, right? If it played out at that time in 2025 and 2026 as they renew, can they weather that? There'll be some strain. The 17 won't remain at 17. We think it might be around the 20-25 basis points for the fixed-rate mortgage.
And then, of course, depending on rate cuts and the assumptions that we make. We're very thoughtful on multiple fronts. Darko, one is we want to manage this very closely. Data is our friend. How can we get ahead of delinquencies before they actually happen? How can we help our customers? So we invested a lot, both in technology as well as in people in collections during COVID. Now we are putting them back to work saying, "Let's get in front of the Canadian consumer to see how we can help them through this process." Now, rate cuts are anybody's guess, right? It feels like every week, it feels like a different situation. And tomorrow, there's a rate announcement in Canada. We'll see what we learn from that again. So all we know is what the markets tell us and what we know and how the consumer can be impacted.
So we're trying to manage with the consumer, how can we help them get through this process? The credit card delinquency is also rising. But we're not the best example of credit cards because most of our credit cards are with our own customers over there. We're not very big in the unsecured lending space, as you know, quite well. But we are seeing some level of uptake. But we're not seeing a lot of revolvers going up. Our balances are going up because we had the Scene+ program, which has been very popular. And through that, we've acquired a lot of customers. A lot of them take a credit card along with the Scene+ loyalty program card. So really high-quality customers. They actually have more revenue we generate off them, so very desirable. The balances are going up, but not the delinquencies or the revolver rate.
So that's good. Eventually, we know revolver rate will go up and delinquencies will go up. There's no doubt, right? Unsecured product, but well within our appetite and not significantly higher than where we expect it to be today. It's the auto book we look very closely to see what are the challenges that we might encounter and then layer it onto our mortgage book and multi-product customers to see if they're appropriately provisioned and if we're making the appropriate efforts to keep our delinquencies down.
How is that? I mean, how is the auto book? So, the one thing that we always were expecting delinquencies to rise, but loss given default—is it rising? Is it changing at all?
It's rising a bit simply because, go back to the last three years, the used car market was fantastic, right? Because prices were very good. So those have come back to more normal levels. So the asset coverage in case of default has certainly gone down, and therefore, LGDs have gone up. Has it gone up meaningfully? No, it is, but it's ticking up. There's no doubt, Darko. So we're very thoughtful about it. But the greater originations we have now compared to, say, three years back, is more in the new car space. Some of the supply chain issues have got sorted out. I think there is availability of product now compared to what it was three years back because of memory issues and so on. But auto is a very desirable business for us. We are number one.
We tend to have a large share of the market forever. But auto has got this challenge that we have about cross-sell. So we need to become better at that. But the auto product itself and sorry, the customer themselves, I think, are holding up better than we thought, but certainly declining.
How do you get primacy, I mean, is it even possible? I mean.
We made some progress. So give you a couple of data points from, say, 5, 6 years back, cross-sell was low teens at best. Now we are in the low 20s. So it's all about effort incenting our dealers who we work with and our people. It's still a long way to go. 80% or 75% being single-product customers, not what we like. We want to see how it continues to make progress. And Aris and the team are working very hard saying, "What's the plan over here to make it better?" So they're acutely focused on it, but it'll be a multi-year journey as we start progressively increasing the cross-sell in auto.
That's interesting. So just lastly, the behavior of the mortgage customers. Actually, I'm more interested in the so when I think about it holistically, I think about your mortgage book has been running off. And can you just remind me, should we be expecting that for another quarter or two?
I think one more quarter sequentially, Darko. But the pipelines have become stronger than what we thought it'll be because I think it's all driven by rate expectations in Canada. So the demand is going up. But I still think Q2 versus Q1 will be slightly lower, and then it should start growing from Q3 onwards.
Are you seeing the choices that are similar to all the other banks, like 2-3-year fixed-rate mortgages?
Absolutely.
There's nobody really taking to worry about variable-rate mortgages?
No.
Okay. Okay. I wanted to talk a little bit more about some other things, but the topic on credit quality is always very interesting. Is there any questions out there from the floor? No? Okay. So just lastly on credit quality, maybe you can just touch briefly on commercial real estate. It's not a big part of the book, but we've seen sort of different messages from some of the other banks. Maybe you can just talk real briefly on what you're seeing in the commercial real estate book.
No. Ours is small, as you pointed out. It's about CAD 60-odd billion in total. But the ones we're most concerned about is retail and office, as we all know. And office is really small for us, specifically in the U.S. I think our entire exposure in the U.S. to office is like CAD 300 million. So it's really small for us. Any exposure we have is REITs or direct exposure for residential construction as well as industrial construction that we have in Canada. Most of these people we have worked with for a very long period of time. I'm talking about the developers and the people we're exposed to. That's a business that we grew in the last five years, definitely, but we grew in the right space.
So we don't have enough concerns sorry, enough exposures to be very concerned about office specifically, less than 10% for the entire book. So call it CAD 6 billion over there. And these tend to be so far, they're performing, but it's an area that we keep looking at very closely, not an area of concern. But when we look across the board, everybody's concerned about commercial real estate. We don't have the exposures that are the riskiest in that space.
Yeah. And I'm just thinking about from a timing perspective, is there anything special? Or have you looked through the book? Have you sort of been rolling these? I mean, how should I think about it? Because a couple of other of your peers had some issues, and it's sort of falling off now. And so I'm wondering if you're sort of in the same position.
I think so. I think what I hear from the team in the front line is because there are such strong borrowers from us, the people who are developers, they're just sitting on land. They want the rates to come down, then they'll start developing it as they build residential homes and high-rise buildings and so on. We're still involved in so we have no concerns from a credit quality perspective, but we see the behavior to being very rational. Wait, and they can afford to wait. And they're actually looking at other people who are smaller to saying, "If they're not able to survive, here's an opportunity for them to expand their business." So it's a good position to be in based on the exposures we have.
Okay. I wanted to talk a little bit about strategy overall and just thinking about the Scotia story as I've followed it over the years. I've been asked by many investors the following question, which I always find kind of awkward to talk to with senior executives. But essentially, there's been a lot of turnover in your senior executive ranks. So I get investors coming to me and, "Hey, Darko, do you know these people? How are all these fresh faces?" So maybe over to you to discuss a little bit about how everybody's fitting in, what the different perspectives are, and how it I mean, essentially, how do you see that team performing in these early stages and what we could expect from this team going forward and how you view it as a CFO?
You've been there for a long time, and you've got all these fresh faces. How's it going for you?
Sure. I'll start with the individuals and a little bit of perspective on why they are and what they bring to the table. Start with Francisco, international banking. He spent his entire life in the footprint that we operate in and more. He's been in Asia and so on, exceptionally experienced in these markets. Pick on any market, he's been there either with Citibank or others that he has worked with. So he comes with a lot of experience, knowledge, and significant connections over there too. Everybody knows him, that kind of stuff. So we couldn't be more fortunate, I'll be honest with you, when Nacho decided that since he didn't win the CEO race, that he'd like to do something different at his personal level. So we're very fortunate to have somebody like Francisco. Francisco also brings a different perspective.
He likes multinational banking, so he talked about it at Investor Day. He believes that the connectivity with the GBM business around, be it in Mexico or the United States or Canada, is very important across Peru and so on. So he brings a perspective from Citi, which I think is very useful to us as we think differently about multinational banking. The other thing he brings to the table constantly is, "Hey, we need to be better at cash management." That's the link to all these things. Now, it's easier said. We need to invest a lot for cash management. He's the first person to acknowledge. But that's the value he brings to the conversation because he's been there, done it, and seen Citi is fairly strong in cash management across the world, as we know.
So we benefit a lot from his experience and counsel around the table, not just in the international banking space. Aris, who joined us from ING, actually retired from ING, as Scott mentioned at the Investor Day. He's Canadian, coming back to Canada. We are thinking about how do we make Tangerine better than what it's been, which we bought from ING in Canada as it was their operation in Canada. So he brings a lot and a wealth of retail experience, certainly not in Canada, but from Europe, where there's different challenges in Europe, brings a perspective to challenge the status quo internally within the bank, which we think is very valuable in all the conversations. So a lot of credibility from a retail perspective, which is the big part of the Canadian bank.
I know commercial is a good growth area for them, but he brings a lot of perspective in retail and that too in the direct lending business, which ING is well known for and being very profitable. So he's got lots of ideas, lots of plans, lots of conversations to challenge status quo, which I think is a good contribution to the management table around Scott. Jackie, we got them from one of the best banks in Canada, so I won't mention the name. And who heads up our wealth business? She's my neighbor in the office, so I get to talk to her more often than anybody else. Unbelievably knowledgeable person, executive.
And again, back to having not just wealth experience with the P&C background that she comes with, specifically in the institution she comes from, very valuable to the conversation beyond wealth, so becomes more an enterprise conversation with her. So all three are very good for the businesses that they are operating in. But more importantly, Darko, the second line below them has been there for a while. So there hasn't been any turnover over there, which is very important. Terri-Lee Weeks, who runs our Canadian retail, also from RBC, and Terri-Lee has been with us for some time, exceptionally qualified in the area she runs. And likewise, the country heads in international banking and wealth management below Jackie, they've all been in their roles for some time, whether it's Neal Kerr and others who run our asset management. So lots of stability below.
It's a leadership that you see externally that has changed. The conversation around the operating committee table, I believe, is more richer because these people come with their perspectives, which I think are very valuable. So I see a lot of positives, but they're very respectful of the history of the bank. What we did well, there's lots of things we do well, right? We talk about the stuff we should do better. So they recognize that and say, "How can we make it better or leave it the way it is because it works well? And here are the areas where we think we should be doing better, and how can they contribute from their leadership perspective?" It's been about a year since all of them have kind of come around the table. I'm quite optimistic just based on the conversations and the early results I've seen.
It's for us to make it better than what it's been in the past. I have a lot of confidence in the executive team below us as well, who I think are contributing exceptionally well to the success, frankly, to the plans. The Investor Day strategy that we put in place was very broad-based contributions. Now it's for us to execute. That's what I'm optimistic about.
Well, thank you for taking that question. I know it's always an awkward one. On that, we can maybe close the session. Thank you very much, Raj. It's always fun to chat with you.
Likewise. Thank you all.