Good morning, everyone. So now we've got Francisco, Group Head of Scotiabank's International Banking. Francisco, thank you very much for joining us this morning. Before we get started with my questions, let me remind everybody that I will look over my left shoulder every once in a while to see if anyone has any questions. Feel free to populate that chat, and I'll have a look. But for now, Francisco, can you give us a start to talk about your big priorities. You're certainly not new to banking, but you're sort of new to Scotia, so give me an outlook. What are the things that really matter to you at Scotia right now?
Well, great to see you again, Mario, and again, thank you for the opportunity to meet today and connect with the audience. I would have loved to do this in person. I'm 15 minutes away from it, by the way-
Right
... but hopefully next time we will.
Yeah.
Thank you for the question. Listen, I think that what we're focused right now on is execution. We are head down in execution mode, making, I think, very sound progress in the key things that matter. Those are, as you remember on Investor Day, the transformation from being product-centric to being client-centric. Easier said than done in large organizations like Scotia, but I'm very happy to say that the progress is there, and that is being reflected on tremendous client segmentation efforts across all businesses: GBM, commercial, retail, wealth.
Establishing P&Ls by segment across all businesses and geographies, understanding client profitability to a degree that before we didn't, and all of those things combined are allowing us to make capital allocation decisions that you've seen play out in Q1 and Q2 quite effectively, and that will continue until the end of 2025 when the transformation period ends. A lot of work around expenses. That's one of the levers that we're very focused on. As you know, we're committed to reduce CAD 800 million of roll rate expenses by 2028. We are very much on track after the first two quarters of this year to that path, with very material saves as part of our reorganization.
Key initiatives like regionalization of retail are fully rolled out, so level one and level two of the new organization was communicated last week, where roles and responsibilities have changed. That is enabling support functions also to rethink their organization. Same thing with the multinational initiative, was kicked off two months ago with 17 pilot clients that will help us test and validate our value proposition. The transaction banking initiative well on its way. Important hires already on our side to help us build that business to the standard that will drive the connectivity we want. So I would say a lot of executional transformation, which we need to be done by the end of 2025, as you know, but also capturing value in the short term, and that's a very important area of focus, Mario.
We cannot wait until 2025 to show progress to the street, so Q1 and Q2 are demonstrations of the team being able to capture opportunities in the short term while transforming the business for the sustainable new way forward.
For sure. Now, I wanna touch on a number of topics you brought up. One in particular was-
Sure
... the efforts to build a regional banking model. That needs, in my mind, a little fleshing out. I need to understand what that really means. What does that entail? And maybe let's think about what the benefits of this regional banking model are, and when do we see these benefits? I know there's a lot there, but help me think through that.
Sure. The first thing to understand is that regionalization doesn't necessarily mean taking all the stuff out of the countries and putting into a service center. That's not what we're after. It begins with simpler issues, like: Who makes the decisions, and what are the roles and responsibilities? So for example, in the prior model, which I define as a federated model, the countries made the decisions around value proposition, client segmentation, platforms to use, solutions to implement. In the new model, those decisions are made on a regional basis, and the countries execute those value propositions in a way that we can then prioritize for returns and scale.
So it's not the same that every country wants a different flavor of a solution done at their own timing and way, versus the region deciding, "Listen, I'm gonna fund this for the North America corridor and then roll it out to the rest of the countries under the same platform for the same segmentation exercise." What that is allowing us to do is not to require additional expenses or funding beyond what I already have, because I'm able to prioritize and timeline this in a way that I can manage with the existing resources. It's just better use of those resources. So what was communicated last week is the change in roles and responsibilities between region and country, is a redefinition of the structure, level one and two. We will follow with level three and four.
That basically what it does is, okay, if you're sitting in a country, what do you do? If you're managing a product in a country, what is your role now versus what it was before? And basically, the difference is that the regional product team will make the decision on what are the products you're gonna use for a certain segment, and the country executes against that decision by establishing the right distribution and leveraging the right data to make sure that in the affluent, emerging affluent, top of mass and mass, we're driving a consistent value prop at scale. And what we're also doing, Mario, is establishing the P&Ls by segment. So this quarter was the first time we have a P&L for affluent, a P&L for emerging affluent, for top of mass and mass, and that P&L exercise is allowing to establish profitability by segment-...
Identifying what are the resources I'm investing and using in each of the segments, and validating if that is the right use or not. Basically, what we're concluding very quickly is that we need to migrate to differentiated value props that allow me to maximize returns by segment, and that is also helping me drive the right client acquisition and deselection that will prevail in the first two years. So, regionalization for us is not as much as taking stuff out of countries, as ensuring that I can prioritize on a centralized basis, value props, investments, and rollouts in a way that drive higher returns.
How do you become really confident that the differences between Mexico and Peru - like, they're, Mexico and Peru are extremely different countries in terms of how they're developing right now, and, and their level of profitability, and politically, for sure. How do you make sure that that regional banking model respects those big differences between countries like Mexico, Peru, Colombia, Chile? How do you do that?
Well, listen, I think the first thing is an affluent client in Peru and Mexico have the same needs.
Oh-
The issue is, the issue is what distribution mechanism, how much growth do you push into the system, with sales, offers, campaigns, depending on the macro, which is very much what you're referring to, right? The momentum that Mexico is living versus Peru, very different on a macro basis, or versus Colombia, or versus Chile. So that's where the local team makes a tremendous difference, and their role is critically important. Because one thing is that I give you the value prop for affluent, emerging affluent, top of mass. The other one is that you're gonna price it, and distribute it, and campaign it out to clients domestically on the basis of what works competitively, but also the right timing for the market.
That's where the two teams work together in a very aligned way, and that's how you differentiate how you play Mexico versus Peru, given the macro differences that are, as you say, quite significant.
Yeah. Let's now focus on this North American corridor opportunity. How do you... How would you describe how Scotia's positioned today? What are the opportunities? What are your goals in that, in that construct of a, of a North American corridor?
Listen, what we identified in the very thorough, strategic refresh exercise, where we looked at every single geography, our positioning in each one, by segment, and concluded that the North America corridor offers to Scotia a unique, space to grow disproportionately and increase returns. And the dynamics between those three markets are, at this point, uncontested. And Scotia being the only Canadian player in Mexico at scale, being the fifth-largest bank, with, you know, 10,000 employees, 3.4 million clients, 586 branches nationwide, deployed in all businesses and all segments, really positions Scotia as the enabler of that corridor, for clients that operate in North America and beyond. That's the backbone of our ambition. Now, what does that entail?
We have a ways to go in Canada, so you're gonna see us prioritizing capital investment and deployment in Canada above U.S. and above Mexico.
Mm-hmm.
Second, we wanna develop our capabilities in the US to support our existing client base as they transact with the US. When you look at what's happening in Mexico, what's happening in Canada, and in South America, more and more, the US becomes the destination for trade, and that is right now, again, uncontested. What we want is to make sure that we have the capabilities in the US around transaction banking, commercial banking, and wealth, that support our existing client base in the rest of our footprint in a way that we can capture those flows effectively. Right now, for us, it's not about going into the US and competing for US business as much as capturing the wallet share of our existing clients in GBM, commercial, and wealth in that market that we haven't been able to capture enough of historically.
And thirdly, in that order, Mexico is a market that has the benefit of the diversification of supply chain of the U.S. away from China. That's not gonna change. As you know, I spent five years running Asia for Citi and for State Street globally, and the dynamics between the U.S. and China are unlikely to change. And Mexico sits in a privileged position to be the primary beneficiary of that diversification, and we're seeing that in flows that, over the last five years, has made the U.S. the preeminent trade partner for the U.S.
So Mexico will continue to benefit greatly, as we saw, for example, in Asia, Vietnam benefit as China move up in the value chain, and they benefited, picking up, like India is, pieces of the lower value chain, manufacturing that moved out of China. We will see Mexico, as we have in the last five years, moving up that value chain, meaning higher technology transfer, better education, and ultimately, you will have a dividend in terms of spending power for the majority of the population, that we haven't seen in decades. We're playing for that, right? We're playing for the flows that we're seeing coming into the country, which are expected to be between $35 billion-$60 billion of foreign direct investment coming into Mexico as a result of nearshoring in the next five years.
Over 1.1 million jobs to be created associated to that... and on the back of that, a lot of infrastructure will need to be built. So as you see the positioning of Scotia within that triangle, in the order of preference that I said, Canada, U.S., Mexico, we stand to win a disproportionate share of those flows versus our peers in Canada.
That discussion around Mexico sounds very different from previous conversations I've had with Scotiabank about Mexico, and what I'm hearing is a difference in Mexico on its own, the nearshoring, and then also a different emphasis from the leader. Do you envision a time when Mexico... we will start thinking of it in the same way we do Canada and the U.S.? Or will we always think of it, and this is not a negative thing, but, you know, a more volatile area, an area that's unpredictable, the politics are messy and scary. Could Mexico ever feel like Canada and the U.S.?
It's a long way to go. I think there's great correlation on macroeconomic performance in Mexico with the U.S., and that correlation started when NAFTA was originally approved. If you go back to the reasons why NAFTA was approved, is that the U.S. didn't want a broke neighbor, right? The tequila crisis basically generated this need for the U.S. to support Mexico out of the crisis. I think it's proven to be a brilliant decision. I think Mexico's destiny was changed with that agreement. Although different administrations have supported more or less the trade agreement, benefit is unquestionable to the country over the years. Now, as you said, I think Mexico will continue to be an emerging market, certainly in our lifetime. They need to continue to improve their institutions over time.
They need to rebalance wealth distribution across the population, which is still very skewed to the very few. So there are fundamental elements that need to continue to improve in Mexico. Now, the vehicle to do that, as I've seen in other emerging markets that have made it past the threshold, is flows of investment from the private sector is what really makes that, over time, the transitional phase, right? And I think Mexico is, within Latin America, uniquely positioned to get there, but it will take a long, long time. The benefit of that for us is that it will command higher returns, right, as a result, because of the uncertainties that at times we'll see, and the volatility associated with changes in regulation that are unforeseen, and things of that nature that emerging markets are known for.
The reality, though, Mario, which encourages us, and for us was a fundamental component of why we put Mexico in a priority stage, is that as Pemex has reduced materially its contribution to the GDP of Mexico and government finances, the dependency of the government on a thriving, successful private sector is fundamental. In spite of governments coming in and out over time, that very fact is the biggest hedge any investor will have in Mexico in the long term. They need a thriving private sector for employment, for investment, for better education, and for job creation, and that is something the government cannot replace because they have no sources of income to replace it.
You know, as promising as Mexico sounds, and as optimistic as you sound about Mexico, there is a less optimistic outlook about the longevity of Peru and Colombia for Scotia. Could you speak to the strategies and your outlook there? And I know it's never appropriate to say, "Is that an area that the bank could exit?" I appreciate that that's not the direction I wanna go. But how do Peru and Colombia fit in, in contrast to Mexico?
Well, listen, what's important, Mario, to understand is go back to our new way forward, and we are not looking to be the largest in any of these markets. We are not looking to be top three, top one, top two. We are looking to create value for investors, and that's the key element to keep in mind. That results in a constant effort to optimize our capital, maximize returns, and drive a client-centric franchise, because the stronger the client franchise, the higher the value of any deployment we have around the world, and Colombia and Peru are very much in the middle of that same objective. Every area would be subject to better capital deployment alternatives, as long as those generate higher, more predictable returns than a Peru or a Colombia, and therefore, we're running these businesses for optimized returns.
We have a plan in Peru, and we have a plan in Colombia for that optimization, as we do in Chile, and we do in the Caribbean, and we do in Mexico. The execution of those plans will determine the future of our presence in those markets. Because right now, again, the journey is to support our clients. Our clients want us in these markets today, and we need to make sure that those markets therefore generate the right returns over time. So that's the way we are approaching it, with a long-term view, because many of these decisions will not turn around in the very short term, but at the same time, being very mindful that we need to generate the right returns.
Now, speak to the sale of CrediScotia in Peru. Is that sounds to me, like, consistent with what you're suggesting. It's a decision where it just wasn't worth the capital allocation. Maybe speak to that sale then for now.
Absolutely. In Investor Day, I mentioned, Mario, if you remember, that there are pieces of our portfolio that will not be with us in the future because they do not contribute to primacy, or they do not generate the right returns over time or bring undesirable volatility. In the case of consumer finance, very much what CrediScotia used to do, very small clients, very small ticket sizes, monoline, single product, those do not contribute to primacy, create unwanted volatility of our results because they swing with the macro movement very violently, and ultimately do not fit into the ambition of a strong client franchise. And therefore, for us, we simply moved on with the decision to execute an exit of that business.
We are happy with the outcome of the process, and we believe that the buyer will be a better owner of that business than we are under the New Way Forward. This is not the only piece that will not be in the future of our portfolio.
Right.
You can apply the same principle to similar businesses elsewhere, and that will be the outcome.
So it's-
We're very focused on executing that.
It's entirely conceivable then that the international business, your business, will be a net contributor of capital back to the parent company, both from organic earnings, but also some of this optimization. You're, you're a capital contributor, would be my guess.
Well, that has been the case in Q1 and Q2. Very material reduction in RWA, as we do certain things. First, optimize capital allocation in GBM clients to ensure that we are allocating capital for wallet share and the right mix of businesses with clients. Remember, we're moving from being a lender to being a relationship bank, right? Fundamental shift. So when you're a lender and you are measuring success on your loans share wallet, is one end. When you're looking at success as your product share wallet and return, very different decisions. So what you're seeing is we're now looking at every relationship in GBM and saying: "Why do I have this amount of capital? What products do I have?
What are my current returns?" And as those loans become due, we're having very insightful conversations with clients saying, "Listen, I've been supporting you for the last 20 years, 25 years, only with lending. I want my fair share of the ancillary business." If the answer is yes, we can accommodate some of that lending going forward. If the answer is no, we're gonna move on and allocate that capital with clients that really do wanna do more with us. And what you're seeing is this recycling of capital within GBM that has led to a reduction in RWA allocation in the IB piece. But the same conversation is happening in commercial, where our focus was in lending and not in cash management, and the same thing is happening in retail.
As a result of the P&L establishment by segment, we are making very well-informed client de-selection decisions, Mario, over this year and next, to exit relationships that we know we're not gonna make the right returns or profit in retail by segment. So it's a combination, right, of capital optimization with relationships that won't go the extra mile for us, and exiting relationships that today are unprofitable for us in retail. So overall, I agree with you, we will be redeploying capital to the enterprise, and that capital will be prioritized, as I said before, Canada, US, Mexico, for higher returns.
You know, when someone like me-
That process, Mario, to finish this off, that process I envision will take us through the end of 2025.
I see. When someone like me hears client de-selection, you kind of think of this, this bank that's gonna be shrinking here in the near term. But there's got to be some growth initiatives at the same time. Let's talk specifically about the strategy around servicing multinational companies, because that's an important part of your agenda as well. Let's speak to the multinational strategies.
Yeah. I think the first element to know is that that's very much on its way. So we kicked it off 2.5 months ago. We now have 17 multinational clients as our pilots. They are very much our advisory board as we build the value proposition, and they will be our first adopters as we put it in place. We now are training parent account managers and subsidiary account managers that are managing these relationships. We've made great progress to have a central repository of compliance and AML documentation to make sure that as these clients open subsidiary accounts, we don't ask for that documentation every time they do. We've made very good progress, and I tell you, I was quite skeptical when we started on how can we evolve our contracting for these clients?
We now have a draft of the master agreement that these clients will sign that basically have all of our subsidiaries and all of our services, and they tick the boxes they need in a master agreements approach, rather than a subsidiary contracting approach, where you will end up having 15, 20 countries in every jurisdiction you operate in. We've made great progress with operations to have a service desk that has an individual assigned to you to handhold you as you transact and open accounts with us around our footprint. All of that is working really well. We now have in place a central risk approval process for these 17 names that avail lines of credit to subsidiaries upon the request of the parent. That's something we didn't have before. We're building the P&L for these businesses well.
That allows us then to make the capital allocating decisions on the back of what we are earning with these clients and the returns we're making. That's well on its way, and we're very excited about the progress. The other area of growth, Mario, is transaction banking. As you know, that's under my remit as well, and we've reconfigured the strategy for connectivity, right? The strategy before was we need to have all the capabilities in all the countries, and a little bit like retail, very federated in that way. Today, it's centralized. Today we have globalized our approach to transaction banking.
We have a global head of products that looks at Canada and IB together, and we are prioritizing funding to have the capabilities that then I can upload the data from those products, from the domestic markets to the cloud, and have a portal that allows global treasurers and CFOs to get into the portal and see what they have with us in each of the different countries, and then transact. That is a very different approach than what we had before, right? It's all for connectivity and wallet share. We've made very powerful hires, and we'll continue to. We just hired John Hunter from Wells Fargo. He used to be the CEO of SWIFT, and he's gonna be running our GTB business for the U.S., where we need to build basic capabilities to carry our clients in and out of the U.S.
So certainly, GTB is an area of growth. We're working to create the P&L, associated to that business, with the aim of, in the future, sharing it with the street because we believe that's a business that should be valued at a premium as you see the power behind those flows and how important it is to keeping sticky relationships with our clients. So there's an area of growth. Commercial banking is an area of growth for us as well, Mario, when you compare our strategy with others. Given our deployment in country, we feel uniquely positioned to support the commercial bank space, on an integrated fashion between cash management, lending, and multinational servicing. So you're gonna see us growth also in commercial banking, at a faster pace than you've seen us historically.
There's a lot of growth, but very targeted, very focused, very accountable in the strategy.
So I listened to that. I listened to these strategies. Some of them are... sound very different from what I remember Scotia over the last many years, and so I start immediately thinking about expenses. But at the same time, you talk about this CAD 800 million roll rate reduction over the next five years. Help me reconcile this here. Are expenses going up, or are they going down? Is the roll rate savings there to make room for all the additional spending? How do I think about expenses in this segment?
No, great, and I'm glad you bring it up in the way you bring it up. Expenses will be coming down, and will be coming down at the $800 million roll rate by 2028. That's the fact. Now, because we're reprioritizing, and we're managing decision-making differently than before, that the region or global are prioritizing what to fund, what not to fund, and when to fund it, and taking away structures that supported domestic execution and decision-making to a degree that doesn't fit the new way forward, those expenses are the ones that I'm capturing to fund some of these builds. Where are we gonna be investing the most, which is a non-traditional area of investment? GTB, because the bank did not invest in cash management anywhere near what it should have historically.
It wasn't an area of focus, but it will be going forward. But again, it's not a boil the ocean exercise. It's a very targeted exercise that will drive connectivity. It will drive the portal as the gateway to transact with us. It will drive investment in the U.S. to have minimum capabilities to carry existing clients in and out of that market as the initial phase. So it's not a broad base, "Oh, we're gonna change all the core systems in every country. We're gonna do..." That's not at all the approach. It's we're gonna capture what we have. We're gonna load that in the cloud, pick up that data, show it to clients in the portal, and where we don't have basic capabilities, call it the U.S. and Brazil, for example, where we're gonna build those basic capabilities, potentially leveraging technology in the market or partnerships, right?
Because, again, we need to be credible, Mario, here, for regional RFPs for cash management. So when Amazon or Walmart or América Móvil go out on a regional RFP for cash management, I need to be the bank of choice, and that means I need to be able to give you payroll. I need to be able to give you collections, payments, FX, and investments, as well as factoring domestically, and connect that internationally through the portal. So any investment we're gonna make will serve that purpose of being able to capture our fair share of those regional RFPs through the multinational initiative, and then make it expansive to commercial banking over time to make sure that our transaction banking business is robust and generating the necessary growth.
We've got a minute left, and I left this for the last because I don't see it as a big pressing issue yet, but it's important in Canada. We're talking about credit risk in a big way here. The credit metrics in international banking look pretty strong. Is there anything you'd highlight for us on the credit side?
No, as we said with Phil and I, we believe we are over the hump in terms of the pieces that we're underperforming as a reflection of weaker macro in Chile, in Colombia, and Peru.
Sure.
So we believe we saw that in Q2, and we slowly go back to more normal levels in the coming quarters. So that, to me, is, is where we are. We feel confident that we have the right capabilities in place and the right process in place to make that happen.
Okay. I appreciate you taking the time, and Francisco, thank you again. One final thing, after listening to this presentation, it strikes me that Scotia's due for another International Investor Day, because this is very different from what we heard five years ago, six years ago. Just a plug for-
We'll take that to heart, Mario. And if we do, we'll do it in a cool place, so we bring-
Understood
... the majority of you along.
That'd be wonderful. Thanks again, Francisco, and to everyone who joined us. Have a good afternoon.
Great to see you, everybody.