Good morning, everyone. I'm pleased to welcome you to the 25th Annual Scotiabank Financial Summit. My name is Travis Machen, and I'm the CEO and Group Head of Global Banking and Markets at Scotiabank. On behalf of Scotiabank, I want to thank each of you for your business and your partnership, and thank you for being here today. During the next two days, you will hear from a group of some of the most impressive financial services CEOs in Canada. We'll learn about their corporate strategies and financial performances, current themes and trends impacting the industry, and their outlooks for the sector.
As you are well aware, over the past few years, our sector has faced unprecedented events: a global pandemic, wars, energy crisis, highest inflation in nearly 40 years, fastest increase in interest rates in modern banking history, notable banking failures in the U.S., and we are still navigating the unknown effects of quantitative easing and quantitative tightening now. However, our industry, especially in Canada, has successfully navigated these unprecedented challenges and continues to be healthy and dynamic as we remain well prepared to support our client needs. Looking forward, we have reason to be optimistic, as a prospect of rate cuts on both sides of the border provide important relief for borrowers and the odds that policymakers can engineer a soft landing.
The resiliency of the Canadian economy continues to impress, and there are reasons to be hopeful as we look out towards the future. We hope that you gain valuable insights from the important discussions that take place during this conference, and on behalf of Scotiabank, we'd like to thank all of our speakers, our organizers, and everyone in the audience for joining us. I'd now like to invite Scott Thompson, who I can't see 'cause the lights are so bright, but I think he's back there, Scotiabank's President and CEO, and Meny Grauman, Managing Director, Canadian Financial Services Research Analyst at Scotiabank. Please join me in welcoming Scott and Meny. Thank you.
Thanks, Travis. If you wanna grab the first chair.
Yeah.
Scott, good to see you. Thanks very much for opening up another conference.
Thanks, Meny. Back to school.
That's right, and-
Got the kids off successfully, so that's good.
Minimal crying, and thank you to all our clients for the support and for being here. You know, I just had a thought coming out of earnings season, bank earnings season. I mean, say what you want about the banks, you could say a lot of things, but unexciting is not a term you could use. So I'm excited for today. Lots to talk about, and so with your permission, let's get into it. I wanted to start off by first talking about your recent KeyCorp transaction, and really the question is, why Key, why now, and why is the deal so attractive from a return on capital perspective specifically?
Sure. Thanks, Meny. A couple things. One, you know, why Key? So Key is, it's a great bank, adjacent to our operations in large part. Good commercial franchise, deposit-led retail franchise, a good wealth opportunity, and mid-market corporate wholesale bank. So point one, it's a good bank. Why now? You know, I think coming out of the financial dislocation on the back of SVB, I think valuations obviously took a hit in the regional banks, and so as you think about the price that we are buying our stake in, it's a favorable valuation relative to history, and that's important.
As you think about the structure, and why we thought about doing it at this point, you know, with the capital build cycle behind us, and we think with OSFI delaying the Basel III implementation, kind of becomes clear that you're in that 12%-13% range. We had the opportunity to think about capital deployment, and so we compared that to various options we had, you know, primarily obviously share repurchase. And given the capital-efficient nature of this, was significantly more attractive from an ROE and an EPS perspective. And then lastly, this provides some benefits from a, you know, strategic nature in terms of getting board seats, you know, having, an ability to learn more about the, the U.S. banking industry in a very low-cost, low-risk way.
All that coming together, you know, brought us to a few weeks ago when we announced the transaction.
Is the goal to ultimately own 100% of Key, and what are the implications for capital management at Scotiabank? You know, I've heard some accounts use the term. You know, is Scotia in capital conservation mode here over the foreseeable future as they build a war chest? What's your view of the or how are you gonna manage capital going forward?
Yeah, yeah. So you probably saw as part of the transaction, there was a five-year standstill, so thinking about actually acquiring Key isn't even on my mind right now. As we think about what we should run this bank at from a capital perspective, on the last call, we said 12.5%, assuming that the regulator stays where they do, and so that's a 100 basis point buffer to where the regulatory minimum is, and I think that 12.5% is the right level. We took off the DRIP as we think about going into 2025 and starting to see the earnings capacity coming through, that will provide us some additional opportunities to think about capital deployment options.
Where do buybacks fit in all this? Is there room for buybacks in your capital plan?
Yeah, I mean, listen, it's too early to tell. We just shut off the DRIP. But again, as we go into 2025 , buybacks are always an important lever to think about.
Wanted to talk about another important issue that's on investors' minds, and that's Scotiabank's sensitivity to falling rates. And I get a lot of questions about, you know, how to think of that in terms of the magnitude, in terms of the timing. You know, a lot of investors wondering: When should we expect to see that benefit? 'Cause we didn't really see it come through in the Q3 results. So the question is: When can we expect it, and how do you see that evolving over time?
Yeah, I mean, I think we are uniquely positioned relative to other banks, given our balance sheet structure, so coming down with the rate cuts starting in Canada and now in the U.S. is, you know, it's a welcome change for the Bank of Nova Scotia. We did provide disclosure around 25 basis points on the front end results on CAD 100 million annualized NII, and so we see that starting to take hold in 2025 because there's a 90-day kind of gap between the reprice and the wholesale funding, which will ultimately occur, so given where rate cuts started, I think we'll see a little bit of a benefit in Q4, but primarily that will accelerate into 2025.
I wanted to talk more broadly about your strategic plan as you're executing it. You know, I think the feedback from the market is, you know, they're seeing that consistency of execution quarter after quarter now. But I thought it'd be useful to get your appraisal of how that plan is being executed on. It's been eight months since December's Investor Day in this very room. So if you could just give us sort of a progress report in terms of some of the key metrics that you've been highlighting in terms of loan-to-deposit ratio, you know, client deselection, shifting resources to priority businesses, priority geographies. Just your appraisal.
Sure. So we're three quarters in, and I think it's, you know, important that we're doing what we said we were going to do. And so quarter after quarter after quarter, we haven't had any surprises, and we've actually delivered what we said we were gonna do when we were up here in December. And so I'm proud of that 'cause I think part of this is building credibility with all of you, that we can, we can deliver that plan that we, we said we would. A couple things to note. I mean, the balance sheet is just a much different balance sheet than 18 months ago. We've seen a 200 basis point increase in CET1. We've seen a 10-point reduction in the loan-to-deposit ratio, and we've seen a 350 basis point reduction in wholesale funding.
So that's a big part is just having the resilient balance sheet, and that also goes into ACL. As you think about that ACL coverage ratio, it's up 25% since we started eighteen months ago, and a big part of that is performing allowances, $800 million of performing allowances. For that, I feel like we're in a great place as we break into 2025. As you think about the priority businesses and the movement of capital from IB to or developing markets to developed markets, you're starting to see that seven billion dollar RWA reduction year over year. Despite that, we saw ROE improvement and pretty good net income growth. Bringing that back into our priority markets, that North American corridor, is important.
Operating leverage is gonna be really important for us, and so as we saw the improvement in operating leverage both in our Canadian and our international bank, I was really pleased with that. And then the North Star here is primacy. You know, primacy, primary client relationships. Less focus on monoline, less focus on volume, more focus on value, and you're starting to see that through our Canadian Banking results, which I'm sure you'll get to later, 'cause I was pleased with those. In terms of that mortgage plus bundle, in terms of Scene +, in terms of making progress there, and in terms of adding primary clients. So far, so good, and we're on track to do what we said we were gonna do in December, which is to grow earnings into 2025 .
So we gave the market a, you know, a forecast of 5%-7% earnings growth as we go into 2025, and that still holds.
You mentioned Canada, so I think that's a good place to go to next. Canadian Banking segment. Your Canadian Banking segment put up better-than-expected results in Q3.
Mm.
We saw that as a trend across the group, and I'll speak to some of your peers about that as well. But one interesting thing, you know, digging in terms of... We saw a little bit of a change in mortgage balances. They had been contracting, and then sequentially in Q3 we saw growth, and you'd guided to this, and so it wasn't a surprise. But it definitely raises the question in terms of, you know, how is this mortgage growth different than what we've been used to seeing from Scotiabank? Maybe a related question, I'll throw it in there, just in terms of how you're managing the broker channel differently-
Mm
... than you have in the past.
So at a high level, Canadian Banking results, which was pretty similar across the board for the Canadian banks, but I was really pleased with our performance. You know, we had double-digit PTPP growth, good revenue growth, good expense performance, all on the back of kind of flat RWA, so disciplined capital deployment. Which then comes to your mortgage question. Over the last 18 months, we've reduced monoline mortgages by something like 13%-14%. And so this focus on, you know, value versus volume is critically important to us. Multi-product mortgages through the brokers channel, 'cause the brokers channel is important. I'll come to that. Something like 82% now of our new originations, and 55% of our mortgage clients now have a day-to-day banking account with us.
This movement from just monoline volume to value, multi-product, is in flow, and therefore, we feel comfortable starting to grow that mortgage basis. The broker channel is important. It's gonna continue to be important, but we want to engage with them in a way that drives our aspirations around primary clients, which means you need to have multi-products. And so that comes back to the originations of 82% being originated with a multi-product relationship.
Wanted to stick to the mortgage product and just ask you about really the balance between volume and margin in the mortgage product specifically. It's a big topic. We're hearing, you know, about intense competition continuing. It feels like it's never gone away, but maybe it's intensifying in the mortgage-residential mortgage product in Canada. So how do you think about balancing profitability versus market share? What should win out? How do you navigate that?
I mean, and just in general, the shift here is this volume to value shift that we're trying to do, the philosophy shift with the North Star primary clients, and it wouldn't just be mortgages, it would also be autos, and it would also be corporate lending. You know, not being the biggest just to be the biggest, but, you know, obviously market share is important, but we also want to create value for our shareholders, and value for our clients beyond just that monoline relationship, so as we think about growing forward, you know, obviously it's profitable growth, so we want to grow. We think mortgages are our primary anchor to that primacy, but we're gonna do it in a thoughtful way that has multi-product relationships with them.
And so will we be willing to think about, you know, a competitive price when we have multi-product? Absolutely. Will we think about a competitive price when it's a monoline relationship? Probably not. And so that trade-off will ultimately lead us to profitable growth, which is what you're seeing across the whole bank. You know, as you think about RWA growth or loan growth, it's actually been relatively flat. Yet you've seen sequential net income growth, you've seen sequential ROE growth, and you're starting to see pretty significant PTPP growth. So the strategy and the philosophy is working. We're just three quarters in.
Want to shift, go more south. International Banking results there were essentially in line. We saw good revenue growth in Q3. Expense control remained very strong, but we're still seeing rising PCLs on a sequential basis. We saw some margin pressure this past quarter. So the real question is, you know, has performance here met your expectations, and what should investors expect from this business segment as they look into next year?
Yeah. So as we said in Investor Day, we're going to move capital, incremental capital, from developing to developed markets and focus on that North American corridor. As you look at three quarters in, you know, revenue's up 7%, expense is up 4%, so significant PTPP growth, and ROE up one hundred and fifty basis points on the back of CAD 7 billion of lower RWA. And so when you think about asking that international bank to do more with less, really focus on primacy, really focus on deposits, really focus on growing in the right segments, that is working. Now, we're three quarters in, as Francisco had highlighted here, it's a transition that's gonna take 2024 and 2025, so we're still kind of halfway through that transition. But I'm very pleased to date.
You know, very pleased. And most importantly, I'm really pleased with the employee engagement around this transition, because one of the things I was cognizant of is, as you focus on that North American corridor, and you ask our businesses in Chile and Peru to play a different role, you know, focus on productivity, focus on primacy, deselect clients in some of these segments, like your mass market, you know, you have to be really thoughtful about how you want to incent that behavior, but also how you bring your 40,000 employees along on that behavior. And we're seeing higher employee engagement, we're seeing our senior leaders really lean into it, which is resulting in good financial performance.
Yeah, I guess it's a good, it's a good point. Client deselection is not the natural mode for, for a banker, especially not a, a commercial banker, but, point taken in terms of that.
And by the way, though, this is not client deselection of primary clients. This is doubling down with primary clients, right? This is making sure, though, in some of those segments, like mass, CrediScotia is a perfect example. We've got a mass monoline, volatile relationship here in Peru. That's not something that's gonna create value for shareholders over time, and so that's why we divested that business. As you think about corporate clients, where they're just using us for our balance sheet or just engaging with us for our balance sheet, you can't earn your cost of capital with that type of relationship. And so where clients, where have multi-product, where we can add value, where it's a primary client, where we have the cash management, we will double down in those areas.
But for monoline clients that are just reliant on the balance sheet, those are clients that we need to be really thoughtful about going forward.
You mentioned CrediScotia. I get this question a lot, but, you know, on top of people's minds is just the question of: Will we see additional divestitures in the international banking segment from Scotia, beyond CrediScotia? How would you answer that?
Yeah. So in Investor Day, we highlighted Central America and Colombia as the turnaround or exit businesses. We're working very hard to turn those around. And, you know, I think there is some progress. You've seen expenses reduced in Colombia as an example, despite a pretty significant inflationary environment. But there's more work to do. There's more work to do, and we're acutely aware of the fact that it's a drag on overall ROE and a drag on the ROE of the international bank, for sure.
I wanna talk about ROE, but maybe first talk about credit, because I think it flows nicely in terms of this discussion that we just had in on the international banking side. And that's, you know, the adjustments that you're making on the international banking side, CrediScotia part of it, but how is that likely to impact the overall credit performance of Scotiabank going forward? You know, it seems like that de-risking of that business, to some extent, is likely to have a benefit in terms of PCL ratio. So how should investors think about that from a credit impact perspective?
Just from an overall company perspective, we guided at the start of the year 45-55 on PCLs, and we're at 55, and my expectation in Q4 is that we'll remain at 55. We can come back to 2025 at the end. But that's, you know, at the high end of what we thought at the start of the year, but nevertheless, I think you're starting to see some stabilization. And the international bank would be a perfect example of that. And so as you look into each country, and each country is a little bit different, but you started to see GILs stabilize to slightly decline. You started to see delinquencies stabilize, and that would be expected because these countries are further ahead than the U.S. and Canada on that rate reduction cycle.
You know, in some of these countries, you've had four or five hundred basis points of reductions. So looking forward, you know, I'm hopeful, subject to unemployment and subject to, you know, other macro factors. I'm hopeful you're starting to see a stabilization to a slight reduction. Longer term, you know, getting out of these monoline relationships in the mass segment are going to be helpful for overall risk-adjusted margin. So really focusing on primacy, really focusing on segments like affluent, high value, where you can yet provide more than just a monoline relationship, is going to, one, provide you more data and more insights to deal with those clients, but also result in a higher risk-adjusted margin, and that's ultimately where we're trying to get to over time.
Then maybe to focus in on Canada from a credit perspective, it definitely looks like PCL pressure in the Canadian retail book is easing. I think we saw that in Q3. So the question is, you know, what's driving that, and is it sustainable? It feels like the macro is getting worse, but when we looked at your Q3 results, we definitely saw signs of encouragement.
Yeah, I mean, I'm a little bit more encouraged than I probably was three months ago, and the Q3 results, we saw some of that. So, auto stabilized, that was the business that was hurting us a little bit in the first and second quarter. We've seen stabilization there. I think I'd highlighted to folks that I thought credit cards was gonna be the next shoe to drop. And frankly, the payment rate, you know, above 62, I think 62%, was encouraging. And so, you know, the consumer in Canada seems to be more resilient than I would have thought three months ago. And delinquencies on mortgages now are kind of four quarters in a row where they're flat.
And so that all kinda came together to slightly lower Stage 3 in the quarter. And our hope, you know, again, subject to unemployment, which is a key factor in all of this, is that you continue to see, you know, modest improvement as we look into 2025 . We continued to build performing allowances, you know, and on the back of, you know, what we've done, you know, I think CAD 800 million since I began of increase in performing allowances. You saw a little bit of that build in Q3. But again, I think this CAD 55 PCL, which we expect for Q4, I'm hopeful that starts to, you know, modestly improve, particularly in the back half of 2025 .
So that is a good news story. I wanted to talk about ROE. It's something I want to talk to all of your peers about. And just in terms of the building blocks, about how do you get to your medium-term ROE target, that 14% plus? You know, you're not alone, but you, you've been below that level for some time. I think if you look at consensus, it doesn't have you getting back there at least through 2026. But sort of help us walk through how you get there. What are the building blocks to get to that?
I mean, so the first thing to note is when we sat with you at Investor Day, we said 14% plus, and, my sense at that time was that was a conservative estimate, and it also factored in, you know, Basel III implementation, which now hasn't happened. Nothing's changed, you know, from my perspective, in terms of being able to get to that type of ROE level by 2028 . As you think about just the EPS point, what we said was 24 was gonna be essentially flat. That's how it's played out. As we said, 2025 was gonna grow at 5%-7%. That's what I'm reaffirming today in terms of that, that kind of growth levels for earnings in 2025 . And as you think about beyond 2026 , beyond, we said 7% plus.
What's gonna drive that ROE performance? A couple of things in my mind. One is just this focus on primacy. That is the North Star. The North Star for us is primacy, and you want to have client relationships where you can add value, and you can have increased profitability on that client base. Second, business mix. You know, we're continuing to see this business mix shift, and this takes time. This takes time. But if you look at our Canadian business as an example, you know, mortgage is flat in terms of asset levels, cards up 16%, small business up 10, 10%.
You know, being obviously very cognizant of the environment you're in, and also recognizing that we're starting, you know, as the fifth player, you know, number five market share on the card side, and, you know, beyond, significantly behind the leaders on, on the small business side. Third is productivity. You know, there's just gonna be relentless focus on discipline, cost, and capital management, and you've seen this through the results this year. Operating leverage, you know, positive, at the all bank level, but particularly, good improvement in the Canadian bank and the, and the international bank. And then focus on asset-light businesses, and you're starting to see in the GBM as an example. You met Travis here at the start. 30% year- over- year in our fee businesses, in GBM, which I'm really proud of.
I think that's, you know, where we're trying to head into GBM in the future. We saw something like a 12 or $12 billion reduction in loan value in GBM, 30% increases in fees, and, you know, net income that's earning through that DRD, essentially. And then wealth, you know, the business that I... You know, really proud of what we've built and really excited about what we can do going forward. This is a 15%-20% ROE business. We've highlighted the opportunity in our Investor Day. We're growing that at 10% this year. We'll grow it at another 10% next year, and the international bank is growing at 10%-20%. And so those type of combinations will grow to that 14%-plus ROE over time.
You mentioned, Travis. I wanted to ask about that hire that you made. He's my boss. I only have good things to say about him. But, question I get is, that choice, and Travis is an American. Does it signal anything about the strategic plan that you've set for the global banking and markets business at Scotiabank? Any change there relative to Investor Day? Does it maybe accelerate the push into the U.S. in any way?
So, one, Travis's background, he comes from Morgan Stanley, where he had an investment banking background, financial institutions, and before that was at JP Morgan as a corporate banker. And that combination of corporate banking and investment banking is so critical. And coming from those two organizations, which are leading edge in GBM, I think is really critical. The fact that he's American doesn't give you any terms of guidance in terms of how we're thinking about growing the business. The U.S. is an attractive business, which we can come to, but our Canadian business is an attractive business as well, and I think we have the whole product suite here in Canada, and we have a great opportunity to continue to grow market share. You know, really focus on primacy. We've got great clients here, but we're too concentrated.
We can actually, you know, increase the breadth of our client base here on the back of cash management and some of these products, DCM, ECM, which we're so, so good at. In terms of the U.S. business, you're starting to see us build out that CLO business. You're starting to see us build out the securitized business, securitization business. We just, you know, took a team from JPM on, you know, mortgage securitization, which is gonna be really helpful, and so that's contributing to that 30% growth in fee income, and taking that GBM business and making it more fee-focused, more underwriting, more advisory, more value add, and less balance sheet, that's the key, and Travis is the perfect leader to take us forward in that regard.
In terms of the growth strategy in the US, is it still an organic growth strategy, or are you open to acquisitions and to building that business inorganically? Is that something that you're thinking about, willing to consider, or is it pure organic strategy?
Yeah, primarily an organic strategy. I mean, we're still trying to solve the wealth offshore opportunity. We're doing that organically right now, but if something came up that allowed us to have an offshore booking point on the wealth side, we would think about it. But in terms of Travis's business, that GBM business is primarily going to be organic. And we've got lots of opportunities in terms of, you know, the CLO business, as I've mentioned, the securitization business, leverage lending business, which we're dipping our toe into. So those sorts of high capital velocity businesses, you know, moving businesses in the balance sheet as opposed to storage businesses. Originate to distribute business, as opposed to holding that balance sheet asset. That's what we're focusing on, and that's what Travis is well-placed to take us forward.
I think that moving versus storage theme is, I think, a theme we can see throughout the bank as an-
I mean, the reality of it is you cannot earn your cost of capital with just a loan, right?
Mm-hmm.
And, historically, we've been focused on being the biggest, in a lot of these areas on the back of the balance sheet, and that's just not gonna work in this new environment. So really see focusing on primacy, focusing on cash management, developing that holistic relationship with the client, where you have value-added services, that's how you get to the ROEs that can contribute to a 14%-plus ROE for the overall bank.
Wanted to shift gears and talk. We talked about capital deployment, but I wanted to talk about an important issue of capital policy. Not so long ago, I think it was in July, OSFI announced that it would delay the ratcheting up of the capital floor. That's particularly important for Scotiabank because Scotiabank was impacted by the capital floor ahead of peers. So the question is, you know, your view of this decision, and should it be made permanent? Maybe taking it back a step, is the question of, you know, have tighter capital rules impacted the supply of credit in Canada? How important is the ratcheting up of the capital floor?
Or how detrimental, maybe that's a better way to put it, is the rationing up of the capital floor in your view?
Yeah. So I applaud OSFI for delaying it, because being out of line with the U.S. or international would not have been ideal. I think the question will be you know, what does the U.S. do going forward? And that will inform what OSFI does going forward. So I in no way think this is a permanent, kind of stop. I think they've highlighted it's a one-year, deferral, and then they'll determine what to do going forward based on what, you know, the international community does. In terms of, you know, has this had an impact? For sure, it's had an impact. You know, we've went from 11.3% to 13% to actually, abide by the rules, and you saw that across all of the banks.
Interestingly, for us, it was at decent timing because we were trying to make this volume-to-value shift, and that really forced the issue. You know, I think you've seen the benefits of that or are starting to see the benefits of that. But as you go forward, you know, running the bank right now at 12.5%, which is the appropriate level, if those capital rules, you know, continue to require more capital, then that is gonna have an impact on capital deployed for the economy. You know, regulators should be cognizant of that in an environment where that capital is required to, you know, keep the economy going.
Just, in the last few minutes that we have, I was just wondering if you would maybe provide us with some concluding message in terms of, you know, what you'd like to leave the audience with. You know, coming out of Q3, momentum here in terms of executing your strategic plan, what's your message to investors at this juncture?
Yeah, well, one thing we hadn't touched on, which is culture and employee engagement, which I think is really important. I continue to say that internally, but I also say it externally, and we're making good progress on that. You know, one of the things that we've been trying to do is focus on enterprise-wide thinking. You know, as you think about making GBM and IB more profitable and redeploying capital from developing to developed and really double down on Canada and wealth, that takes enterprise-wide thinking because you're making trade-offs. And to see the team rally around that, that has been fantastic. Employee engagement is up, you know, which is great. And when you start to see three quarters in a row, you know, that becomes self-fulfilling. So I'm really pleased with that.
In terms of summary comments, I guess a few things is, we're doing what we said we were gonna do, and, and there's been no change to what we've highlighted in December around Investor Day. You know, some things have changed a little bit in terms of, you know, in terms of PCLs, but we've made that up through operating leverage. And so that, you know, forecast around ROE, that forecast around earnings growth is exactly as we said it in December. The North Star here is primacy, and it's gonna be during my whole tenure, primacy with clients. And, you know, I think we're making progress. You look at the deposit growth, which is up significantly. You look at the Scene + program, where 50% of the new-to-bank clients now are coming from Scene. You look at that mortgage bundle that we talked about.
You look at the client deselection that is requiring capital, giving us capital to reinvest. That primacy, that focus on primacy is having an impact. And deposits will lead to, you know, a more balanced growth for this bank going forward. And to see the improvement in deposits, 7%, you know, will continue to allow us to grow this bank in a balanced fashion with both sides of the balance sheet in focus, which will be really important. And so I'm looking forward to 2025 . You know, I think we're gonna demonstrate to all of you that we can do what we say we're gonna do.
With that, I think that's a great place to end. I wanna thank you so much, Scott, again, for kicking off what's gonna be a great two days of discussions, and we've set it off on the right track. So thank you very much.
Great. Thanks, Meny. Excellent. Thank you.