Good morning, and welcome to Scotiabank's 2022 second quarter results presentation. My name is John McCartney, and I'm Head of Investor Relations here at Scotiabank. Presenting to you this morning are Brian Porter, Scotiabank's President and Chief Executive Officer, Raj Viswanathan, our Chief Financial Officer, and Phil Thomas, our Chief Risk Officer. Following our comments, we will be glad to take your questions. Also present to take questions are the following Scotiabank executives, Dan Rees from Canadian Banking, Glen Gowland from Global Wealth Management, Ignacio Deschamps from International Banking, and Jake Lawrence from Global Banking and Markets. Before we start, and on behalf of those speaking today, I'll refer you to slide two of our presentation, which contains Scotiabank's caution regarding forward-looking statements. With that, I will now turn the call over to Brian.
Thank you, John, and good morning, everyone. This morning, we announced our second quarter earnings of CAD 2.8 billion or CAD 2.18 per share, representing a very strong 15% year-over-year increase in earnings per share. The results reflect net income growth of 12% and a return on equity of 16.4%. Continued loan growth of 13% and improving net interest margin, strong customer balance sheets, combined with prudent expense management positions the bank very well to grow its earnings. The macroeconomic backdrop for our key geographies remains positive, supported by the rise in commodity prices and the underlying strength of businesses and households. The bank is proving resilient, delivering on all our commitments in terms of earnings growth, return on equity, and expense control while maintaining a strong balance sheet.
Continued momentum in Canadian Banking and the strong recovery in our International Banking segment contributed to solid year-over-year revenue growth across our operating business lines. These segments delivered positive operating leverage despite the expense pressures of the current operating environment. Global Wealth Management delivered another impressive quarter of growth and positive operating leverage through a period of volatility and broad market declines. Global Banking and Markets showed resilience in a period of heightened volatility and muted customer activity in our trading and origination businesses. Credit trends remain favorable, a result of our high-quality portfolios supported by strong consumer balance sheets and prudent customer spending behaviors. Phil Thomas will discuss these factors in more detail later in the call.
Our Common Equity Tier 1 capital ratio ended the quarter at 11.6% as we deployed capital in line with our plans to grow the bank organically while returning capital to our shareholders. This morning, we also announced the 3% increase to our quarterly dividend to CAD 1.03 per share, reflecting our confidence in our earnings outlook. We expect to continue to deploy internally generated capital in future quarters to support strong loan demand. The organic lending RWA growth of over CAD 27 billion or 62 basis points of capital in the past two quarters will support strong revenue growth in future quarters. We remain focused on initiatives in each of our business lines that deepen our customer relationships based on convenience, connectivity, breadth of product offering, and best advice.
In Canadian banking, we're focused on driving multi-product relationships with our customers, improving customer retention metrics, and increasing customer satisfaction scores across our domestic retail business. The relaunch of our Scene+ and Scotia Rewards combined loyalty program is showing great results to date. Since January, Scene+ added 200,000 new members. Transactions and redemptions are up considerably, and digital engagement has been very strong with over three million logins between mobile and online channels since our launch, with 2.6 million through the Scene+ app. We continue to leverage Tangerine's digital banking lead and customer satisfaction to deepen client penetration in both credit and investment products. Tangerine remains an important driver of deposit growth for our bank. In Canadian wealth management, we continue to build momentum in advice delivery and investment sales.
Scotia Smart Investor, our digital hybrid advice platform, launched earlier this year, joined with Canadian Banking, has already seen 38,000 accounts opened and customer balances in excess of CAD 1.4 billion. This past quarter, MD Financial and Scotiabank also announced Medicus Pension Plan, a unique multi-employer pension plan designed specifically for Canadian physicians to access predictable lifetime retirement income. International Banking continues to benefit from loan growth by the quick turnaround in the Pacific Alliance economies. The segment continues to grow the corporate and commercial and retail lending books in line with our risk appetite. This will contribute to stable, high-quality earnings growth in future quarters.
Digital continues to drive customer experience and efficiencies across our international footprint, with adoption reaching 55%, driven by a strong 20% growth in mobile banking users. In Q2, we also closed the previously announced acquisition of the remaining 16.8% minority interest in Scotiabank Chile from our local partner, adding approximately CAD 30 million of quarterly earnings. Global Banking and Markets experienced double-digit loan growth in the quarter as clients access capital to grow their businesses, financing larger inventories in face of supply chain challenges and strategically investing in nearshoring plant and equipment. We anticipate continued momentum in business banking with loan pipelines higher across all our key markets, complemented by a strong M&A pipeline.
In order to enhance our cash management offering to corporate clients, GBM recently completed the launch of Payments as a Service, enabling real-time customer interaction, allowing for real-time payments, request for payment, and account validation. In the advisory businesses, GBM's leading sustainable finance practice had strong participation in global ESG bond markets and is the top-ranked Canadian dealer in 2022 year to date. Enterprise-wide, our efforts to create more diverse and inclusive employment opportunities, as well as support the communities in which we operate, continues to gain traction and recognition. We recently increased our commitment to CAD 10 billion in capital for women-owned and women-led businesses here in Canada through The Scotiabank Women Initiative. We were also recognized as one of the best places to work in Canada for the third consecutive year by the Great Place to Work Institute.
Just last week, Scotiabank was the only Canadian bank recognized with a global award from Global Finance for outstanding leadership and sustainability, transparency, and identified as best in Canada for our sustainable finance initiatives. Despite the macroeconomic and geopolitical uncertainties in recent months, we are encouraged by the resilience of our businesses and the progress of our organic growth initiatives aimed at enhancing customer experience, operating efficiency, and future growth for the bank. With that, I'll turn the call over to Raj for a more detailed financial review.
Thank you, Brian, and good morning, everyone. Before I begin, I'd like to note that all my comments on the bank and business line results are on an adjusted basis. I'll start the review of the performance for the quarter on slide five. The bank reported another strong quarter with earnings of CAD 2.8 billion and diluted EPS of CAD 2.18, an increase in EPS of 15% year-over-year. All four business lines reported strong results again this quarter, reinforcing the strength of our diversified platform. Return on equity improved to 16.4% this quarter, while pre-tax pre-provision earnings increased 2% year-over-year. Revenues were up 3% year-over-year, driven by strong loan growth.
Net interest income was up 7% year-over-year and up 3% compared to the prior quarter, once again driven by strong loan growth. All bank net interest margins expanded 7 basis points quarter-over-quarter, driven by a 3 basis point expansion in Canadian banking and a 10 basis points expansion in international banking, as detailed in the slide in the appendix. Canadian banking NIMs were supported by higher deposit spreads and the impact of the Bank of Canada rate increases while international banking net interest margin expanded due to spreads and business mix changes. Year-over-year, non-interest income was down 3% due to lower investment gains, trading revenues, and underwriting and advisory fees, while banking and wealth management revenues grew a strong 7%. The PCL ratio was 13 basis points for the quarter.
Year-over-year, adjusted expenses were up a modest 3%, driven by higher personnel and share-based compensation, professional fees, advertising, and technology-related costs to support business growth. The productivity ratio was 52.1% this quarter, while operating leverage was slightly negative at 0.5% year-to-date. On slide 6, we provide an evolution of our common equity Tier 1 ratio over the quarter as well as changes in risk-weighted assets. The Bank reported a common equity Tier 1 ratio of 11.6%, down from 12% last quarter, primarily related to strong organic growth and repurchase of shares. This represents approximately CAD 2.6 billion of excess capital over the 11% level. Strong internal capital generation of 31 basis points was offset by 33 basis points of growth in risk-weighted assets of CAD 15.2 billion.
During the quarter, the bank repurchased approximately 13.9 million shares using 28 basis points of capital. Year to date, the bank has repurchased 26.3 million shares using 53 basis points of capital. As previously mentioned, the closing of the additional stake of our Chilean operations accounted for 11 basis points. Turning now to the business line results beginning on slide seven. Canadian Banking reported very strong earnings of CAD 1.2 billion, up 27% year-over-year. Pre-tax pre-provision earnings grew 13% year-over-year, driven by strong revenue growth. Net interest income growth of 11% was driven by another strong quarter of loan growth, up 14% year-over-year, including 16% growth in mortgages and 19% growth in business loans. Compared to the prior quarter, mortgages grew 3% while business loans grew 6%.
Broad-based strength in commercial banking reflects our efforts to build share in Quebec and British Columbia and grow in focus sectors such as agriculture, transportation, and manufacturing. Net interest margin increased by 3 basis points quarter-over-quarter, benefiting from higher deposit spreads and the impact of the Bank of Canada rate increase, partially offset by lower asset spreads. The strong non-interest income year-over-year increase of 10% was driven by higher banking revenue, foreign exchange, and mutual fund distribution fees. Expenses increased 8% year-over-year, driven by higher technology, personnel, and advertising costs to support business growth. The segment generated positive operating leverage for the sixth consecutive quarter, which was at positive 2.8% in Q2. The PCL ratio was a net reversal of 1 basis point. Turning now to Global Wealth Management on slide eight.
Earnings of CAD 413 million were up 9% year-over-year. Revenue grew 4% underpinned by higher investment fund fees, net interest income, and fee-based revenues, partly offset by lower discount brokerage revenues due to moderating trading volumes. Expenses continued to be well controlled and were flat year-over-year, driven by lower volume-driven expenses and lower discretionary spend, partly offset by investments in product innovation, salesforce expansion, technology, and digitization. The division generated positive operating leverage of 360 basis points. Productivity ratio this quarter was 58.5%, which is down 210 basis points from last year. Growth this quarter was broad-based with strong results across our asset management, advisory, and Pacific Alliance wealth businesses. We continue to see strong volume growth in our private banking business with double-digit loan and deposit growth, along with a solid pipeline for the second half.
Assets under management decreased a modest 1% to CAD 326 billion, while assets under administration increased 4% to CAD 591 billion compared to last year as higher net sales were partly offset by market depreciation. In Canada, assets under management was up 1% as net sales offset the impact of market depreciation. Referring to slide nine. Global Banking and Markets generated earnings of CAD 488 million this quarter, down 6%. Pre-tax pre-provision income decreased a modest 2%. Revenue was in line with the prior year, with strong growth in business banking driven by continued loan growth, while capital markets were down, reflecting challenging market conditions. As Brian mentioned, given volatile debt markets during Q2, we saw more corporate clients accessing bank debt to grow their businesses. GBM's loan balances grew 13% year-over-year and 3% quarter-over-quarter.
This was driven by a focus on our growth in the U.S. market, where growth in loans to existing and new clients grew 30% year-over-year. On the other side of the balance sheet, average deposit balances in GBM grew 2% year-over-year and show good momentum with 10% annual growth on a spot basis. Expenses were up 3% year-over-year, due mainly to technology costs to support business development. GBM Latin America, which is reported as part of International Banking, had another strong quarter with CAD 185 million of earnings, up 9% year-over-year, reflecting strong top line revenue growth of 13%. GBM LatAm's performance reflects strong and growing results from our business banking franchise, which represents the majority of GBM LatAm's revenue. Slide 10 shows the international banking results. My comments that follow are on an adjusted and constant dollar basis.
International Banking reported net income of CAD 613 million, up 49% year-over-year and 10% quarter-over-quarter. Pretax preprovision grew 9% year-over-year, driven by a strong 11% increase in the Pacific Alliance, which was well above pre-COVID levels. Pretax preprovision earnings in the Caribbean and Central America was also up a strong 11% year-over-year. The segment's net earnings continue to grow in line with economic recovery and has steadily delivered improving results for the last seven quarters. Year-over-year loans grew 9%, with commercial loans up 10% and mortgages up a strong 14%. Compared to the prior quarter, residential mortgages grew 4%, commercial loans grew 3%, while personal loans and credit cards grew 2%. Revenue was up 4% year-over-year, driven by higher net interest income and non-interest income.
Quarter-over-quarter, net interest margin increased a healthy 10 basis points to 386 basis points, driven by changes in business mix and a positive impact of higher central bank rates. Net interest margin expanded in the Pacific Alliance by 9 basis points, while Caribbean and Central America increased by 13 basis points. Non-interest revenue was up 4% year-over-year. Net fees and commission were up 7%, mainly from strong banking fees in the combined Pacific Alliance and Caribbean and Central America regions. The provision for credit loss ratio declined year-over-year by 41 basis points to 77 basis points. Non-interest expenses were in line with the prior year as expenses related to business growth and inflationary impact were offset by efficiency initiatives and the benefits from the 2021 restructuring charge, coupled with strong digital progress.
The segment has generated positive operating leverage of 2.5% year-to-date. On slide 11, I'd like to highlight the aggregate performance of the four business lines that reflects our strong operating results. Significantly lower investment gains this year mute the impact of these strong metrics at the all bank levels. Total revenues for the four business lines together grew 5% year-over-year, while expenses grew a modest 2%. Strong loan growth, robust lending pipelines, and expected growth in net interest margin positions the business lines for higher net interest income in future quarters. Pretax pre-provision earnings grew 8% year-over-year, while operating leverage was positive 2.5% for the quarter.
These metrics demonstrate the steady positive growth that we are realizing from our investment in strategic initiatives across all our business lines and demonstrates the strength, resilience, and diversified earnings potential of our key operating segments. Now turning to the other segment on slide 12. We reported a modest adjusted net loss of CAD 10 million as compared to a loss of CAD 67 million in the prior quarter and net income of CAD 130 million in the prior year. Year-over-year, the change was a result of significantly lower investment gains, higher non-interest expenses that was partly offset by a higher contribution from asset liability management activities. The higher contribution from asset liability management was the driver of the significant change from the prior quarter as well. With that, I'll turn the call over to Phil to discuss this.
Thank you, Raj. Good morning, everyone. I will first highlight the key themes from a credit perspective before moving into the details of the quarter. The bank's credit performance remained strong, driven by lower net write-offs and a favorable business mix. We experienced positive performance across our portfolios, given the resilience shown by our retail and business banking customers despite an uncertain macroeconomic outlook. Our key portfolios across our footprint are stronger than ever, highlighted by the following. Canadian consumer balance sheets have significantly improved. Average customer loan balances have fallen by 3% since the start of the pandemic, while customer deposits and investable assets have grown by 13% over the same period. Asset quality is strong and FICO scores continue to improve. 28% of our Canadian mortgage portfolio is insured.
Of the uninsured balances, the average loan to value of this portfolio is down to 47% from 55% in 2019. In International Banking retail, more than 95% of originations are of high quality, up from 77% pre-pandemic as we continue to focus on the affluent segment. Finally, in business banking, credit quality remains strong with a high investment grade that is well diversified by geography and industry. Approximately 90% of our corporate portfolio has a probability of default of less than 1%. While we are cognizant of the current economic challenges posed by the elevated inflationary forces, such as wage growth due to labor shortages and persistent supply chain issues, we remain optimistic about the overall financial health of our customers.
The last two years have highlighted the bank's ability to effectively manage risk through unforeseen economic challenges, and we continue to be proactive in supporting our customers where needed. Turning to slide 14. The overall credit quality of our portfolios continues to improve. The bank's gross impaired loans ratio improved by 4 basis points to 64 basis points since peaking in Q1 of 2021 at 84 basis points. We continue to see a positive trend with lower formations. Our net write-off ratio continued to decline quarter-over-quarter to 25 basis points, down 2 basis points from the prior quarter. We also saw CAD 422 million of write-offs in retail, down 8% from last quarter as we continue to see lower trends across our footprint.
We ended the quarter with allowances for credit losses of CAD 5.4 billion, down approximately CAD 200 million from the prior quarter. This level of allowances and lower ACL ratio of 75 basis points is reflective of broad improvements across the bank's portfolios and a shift towards secured retail. Our Canadian and international retail portfolios are now 95% and 71% secured, respectively. Impaired ACLs decreased CAD 19 million from last quarter due to improvements mainly across retail and GBM. Turning to slide 16, I will now review the PCL performance for the quarter. All bank PCLs are CAD 219 million or 13 basis points, driven by a net reversal from performing loans, loan PCLs in Canadian banking and global banking and markets. Strong loan growth and a less favorable macroeconomic forecast were offset by continued improvement in credit performance.
In performing PCLs, we had a net reversal of CAD 187 million in Q2. The reversal was mainly due to improving credit performance, net of growth of our Canadian retail portfolio and reversals in GBM related to improved credit metrics. Impaired PCLs are CAD 406 million in Q2, flat to last quarter, driven by continued lower net write-offs in international retail, offset by lower releases in Canadian retail. Before I turn the call back to Brian, I would like to wrap up with a few highlights. We've reached the floor this quarter for PCLs and expect provisions to gradually increase in the latter half of the year. PCL growth was largely driven by lower releases and quality asset growth, offset by a favorable shift in business mix to retail secured lending and stable net write-offs.
We are cognizant of the uncertain macroeconomic and geopolitical environment, and we continue to see strength and resilience across our portfolios. Improving origination trends continue to give us confidence that our portfolios are well-positioned. I will now turn the call back to Brian for closing remarks.
Thank you, Phil. We are very pleased with our performance in the first half of 2022. The bank is reflecting the full earnings power of the organization, despite the increased volatility in global macroeconomic developments. As such, we remain confident in our ability to continue to grow the bank and deliver against our key medium-term financial objectives. Growth to date in our core geographies has been resilient, which we expect to continue given healthy consumer balance sheets and the positive economic impact of higher commodity prices. Throughout our footprint, lending pipelines remain strong across corporate, commercial, and secured retail businesses. Our investments in wealth have added diversification and enhanced our ability to consistently deliver high quality, sustainable earnings. The bank has delivered strong performance in periods of macroeconomic uncertainty in the past, and we feel very well positioned to deal with the challenges of the current environment.
Strong year-to-date organic RWA growth of CAD 27 billion for 62 basis points and an improving net interest margin will produce higher net interest income supported by a stable credit environment. We will continue to manage expenses prudently to generate positive operating leverage for the balance of the year. We remain highly confident that our diversification of our business model, coupled with prudent risk management and a focus on delivering for our customers, especially through times of uncertainty, will yield strong long-term results for all our stakeholders. With that, I will pass the call over to John for Q&A.
Thank you, Brian. We will now be pleased to take some questions. Please limit yourself to one question and then rejoin the queue to allow everyone the opportunity to participate in the call. Operator, can we have the first question on the phone?
Thank you. The first question is from Ebrahim Poonawala from Bank of America. Please go ahead.
Good morning. I guess a question on expenses. Adjusted expenses year-over-year, up 3%. Just talk to us as you think through, like, there's been so much discussion around inflationary pressures, wage growth. Have you been surprised by how these have impacted your expenses year to date? As we look forward, maybe on a consolidated basis or on a segment basis, just talk to us around the outlook for expense growth and how you think about what the core expense run rate should be as we think about this kind of a macro backdrop. Remind us if there are any opportunities for savings across segments that would mitigate that. Thank you.
Sure, Ebrahim. I'll start, and you know, any of my colleagues might pitch in if it's specific to the business line. From the bank's perspective, we talked about it before. Prudent expense management is part of our day-to-day operations, and we consider it a cornerstone of how we run this bank. We've said in previous calls, we manage it in line with you know, revenue growth. That's kind of the philosophy, while continuing to invest in people, process, and technology. Expense growth, yes, this quarter was 3% year-over-year, really good outcome. Really for the first half of the year, Ibrahim, it's like 1.7%. But some of it is helped by FX, which is favorable to our numbers as we look back over the last six months.
Looking forward, we know expenses will go up compared to the 1.7% of the first half of the year. You know, it could go up to, you know, something higher than that, but we still think it's going to be in the low single digit range that we indicated in our call in November. There's no change to that from our perspective. You know, salaries and benefits will go up. Inflation is higher. There are certain expenses that will go up naturally because of what's happening around us. We have a number of levers that we use in this bank, Ebrahim. A lot of it is discretionary costs, whether it's project related or just professional services, for example, as one category. Lots of opportunity over there.
Around the management team, we talk about it a lot, not just across the various business lines, but very specifically across the bank to see how we can find offsets to handle it. I'll call out real estate as one. We've been working on it for a long time, not recently, continuing to densify our footprint and so on. That's giving us a lot of benefits. Some of it is already in the numbers, but there's more to come. There are many, many lines that we think there are opportunities to offset those lines, which we know expenses will go up. It's a balance between investing for the future while continuing to manage expense, you know, our expense growth prudently. Like Brian said, we expect to generate positive operating leverage for this year. It's a small negative at 0.5% at this time.
We're quite confident that the second half of the year, with the elevated expense growth, we should see positive operating leverage for fiscal 2022.
All right. Just a quick follow-up on that. Implied productivity ratio around 52% first half, that's probably drifting lower, maybe closer to 49.5% as we think about margin expansion on the other side. Is that kind of the right way to think about it?
Yeah. You know, I don't think we get to 50% for the year, just to be clear. Our target has always been to get to 50%. Yeah, you should see it trending lower as well. Yes.
Got it. Thanks for taking my questions.
Thank you, Ebrahim.
The next question is from Gabriel Dechaine from National Bank Financial. Please go ahead.
Hi, good morning. My question's on credit, I mean, I'm trying to interpret your comments there. Doesn't sound like you're too concerned. I mean, I'm just wondering, between the end of April, which marks the end of this quarter, and today, where you know, maybe the econ forecasts have gotten worse, would you be you know, doing something with regards to your you know, performing provision inputs, like put more weighting on a worst-case scenario, anything of that nature? I mean, conceptually, I know you can't give too much guidance there, but yeah, let's leave it there and see what you come up with.
Thanks, Gabe. Appreciate the question. Maybe let me add some color to the comments I made in my opening remarks. You know, we're really focused on the quality of the Canadian consumer right now. As I'd mentioned earlier, you know, we're seeing people paying down loans over the last, I thought over the last two-year period of 3%. We've seen investable assets increase in our Canadian portfolio, Canadian consumer portfolio, about 13%. You know, we also look at things like FICO scores. We've had improvements in our FICO scores of our customers over the last couple years of, you know, on average within our credit book from 720 to 750, and our mortgage book from 750 to 790.
All this sort of gives us really good confidence in terms of what we're seeing with our customers. I would also like to point out, if you have a look at our net write-offs, you know, we've been seeing, you know, good stability within those. We've seen a decrease this quarter from 27 basis points to 25 basis points, which should also give you some confidence in terms of how customers are paying off their loans with us, how they're and how sort of the Canadian consumer is healthy. You know, lastly, maybe just look at our mortgage portfolio, we've seen LTVs improve over the last two years.
You know, the average LTV in our portfolio is now 47%. You know, despite, we are conscious and we are thoughtful about macroeconomic headwinds, we're very confident in the health of the Canadian consumer at this point.
No, I get that. I mean, but a lot of what we're looking at with paired loans information is they're rear-view looking indicators. I'm thinking more about the forward-looking indicators and, you know, deterioration thereof and maybe just more conservatism that you wanna establish just to be cautious. I don't know. Is there anything like that crossing your mind?
I mean, listen, we’ve hit a trough this quarter in terms of our PCLs, and we will continue to, you know, build over the course of the year as we look at the FLIs and how things are happening in the economy.
Excuse me.
Yeah. Gabe, it's Brian. It's you know Phil's given a good update on the status of the portfolios. You know, we run rigorous stress tests here in the bank of all our portfolios in Canada, international, corporate, and commercial. Obviously, given the macroeconomic environment, you know, we run stress tests that would have a more harsh inputs today than we would have possibly a year ago. That's a rigorous process. We run hundreds of them during the course of a week. It's important to do that for obvious reasons.
Okay, thanks. I'm not singling out Scotiabank. I think I'd have the same question for every bank. Thanks for that.
Thank you. The next question is from Paul Holden from CIBC. Please go ahead.
Thank you. Good morning. Just have a question in terms of, deposit mix and managing liquidity in light of, I guess, both higher interest rates, how that's impacting deposit mix, and then also quantitative tightening and how that might be impacting availability and growth in, deposit.
Yeah. I'll start, Paul, at the whole bank level. Yeah.
Deposit growth and deposit initiatives are key to us. You know, we run a very tight operation, particularly in the P&C business, to see how we can be self-funded in many respects. The loan growth has been, you know, fairly strong, and deposits have been really good through the pandemic, moderating to more normal levels what we would see. Deposit strategies are different when it gets to the Canadian bank and as it gets to the international bank. I won't get into the details. I'll pass it on to the two of them. In reality, liquidity is something that we manage very closely. You know, externally, we report LCR ratios, we talk about NSFR ratios, and so on.
There's lots of metrics that is used externally, and there's numerous metrics that we use internally to manage both, you know, the both sides of the balance sheet, so to speak, and ensure that our funding is appropriately in place to support the strong loan growth that we are seeing. That's at a very high level from the all bank perspective. How about I pass it on to Dan? He can talk about the Canadian bank, and then maybe Nacho about the international bank, please.
Sure. Thanks, Raj. I was very pleased with the quarter-over-quarter growth in deposits in Canadian Banking, that you've seen 1.5% on the average and closer to 3% in spot. If you compare that to loan expansion, which has been significant this quarter, those two on a spot basis are almost in balance in Q2, and we haven't seen that at any point during the last two years. Of the three businesses, recall that we've been intentionally growing the business bank that self-funds, so deposits larger and growing faster than loans. Sorry, larger than loans, pardon me. They had the best quarter in sequential balance growth in deposits in the last three years.
Tangerine had a tremendous improvement, as you would expect in deposits and also in the Retail Red Bank, where we were softer last quarter in retail term. We made very good progress as consumers repositioned out of savings and into GICs. From a liquidity management standpoint, as Phil said, consumers and businesses are in good shape, and the portfolio saw better deposit growth this quarter than last quarter.
Thank you, Dan. Following on international. Good morning. We also had a strong quarter in deposits. Our Q-over-Q deposit grew 3% in international, in line with loan growth. This is a key priority similar to Canadian banking in all business lines. On the retail side, we have been providing much faster account opening on deposits. 75% of all deposit accounts in the Pacific Alliance countries are opened end-to-end digitally, so this is providing us much more productivity. In wholesale banking, we have a stronger cash management business in Chile, Peru. We're scaling up our technology in Mexico and Colombia as well. Definitely a high priority for us as well.
Okay. That's great. It sounds like no need for increased wholesale deposits. Everything's going well in terms of consumer and business deposit growth.
Yeah, I think so, Paul. I think that's a good summary. Yes.
Okay. That's great. Thank you.
Thank you. The next question is from Scott Chan from Canaccord Genuity. Please go ahead.
Good morning. You spoke a lot about the Canadian consumer, but just curious on the international side, specifically, within the Pacific Alliance, you kind of guided a couple of quarters ago to a total PCL ratio of 95 basis points in 2022, well below pre-pandemic levels. Maybe an update on the COVID situation in the Pacific Alliance and any change or thought process we should think about in terms of your past guidance.
Thanks. Thanks, Scott, for the question. I'll start, maybe hand it over to Nacho to add a little bit more color to the comments. You know, we're very happy with how from a risk perspective of how the international portfolios are performing. We've seen a shift from 66% secured to 71% secured in that portfolio. You know, not only that, we've seen great work done on our affluent strategy, which is really up-tiering the quality of the portfolio, both from new originations and as we look at the portfolio altogether.
You know, that's why we've been quite confident with our outlook in terms of the international retail PCL ratios.
Thank you, Phil. Let me follow up, give you a little bit more color on the markets in the Pacific Alliance countries. We're seeing a very strong recovery on the back of a strong 10% GDP growth last year and expected 3% this quarter. This is reflected in our growth. Our loan growth this quarter was 3% year-over-year for the third consecutive quarter. It was strong in commercial, it was strong in mortgages, and it also grew, as Raj mentioned, in personal loans and credit cards, 2% year-over-year. We are seeing positive impact of interest rate increases and business mix in NIM with a 10 basis points increase in the quarter.
PTPP continues also to perform better, 9% year-over-year, 11% in the Pacific Alliance countries specifically. We deliver a strong operating leverage, 300 basis points. I have to say that it's very remarkable that our expenses are flat year-over-year, even when inflation in these countries is around 8%, driven by strong digital progress and the execution of the restructuring charge. Credit quality, as Phil mentioned, both the balance sheet of households and companies are strong.
We're seeing this momentum to continue in the second half of the year.
Thank you.
Thank you. Your next question is from Mario Mendonca from TD Securities. Please go ahead.
Good morning. Just a broad question on capital to start. The capital ratio 11.6 on an absolute basis, obviously good. Do you, maybe this is for Raj and Brian. Do you believe that the bank's capital level is sufficient to both absorb the organic growth, the strong organic growth that's starting to emerge, in international and certainly in commercial. And at the same time, be able to absorb some increased risk density as the environment may perhaps deteriorates. And then finally, also have the capital flexibility to buy back stock or do inorganic things with the capital. Is 11.6 enough to get it all done? That's the broad question I'm looking at.
Thanks, Mario. I'll start, and maybe Brian will have some comments to add to my thoughts. I think the short answer is yes. We work a lot in this bank where we talk about optimal capital. To us, optimal capital at this time is about 11.5% where we'd like to operate. We want to operate a little bit north of it. You've seen it. We generate, you know, 30-32 basis points of capital every quarter after dividends, and we have multiple opportunities, like you said, organic RWA growth, buyback of stock, which has been quite high in the first half of the year. I think that's going to moderate in the second half of the year. I doubt we're going to buy back another 27 million shares as we see it today.
You know, we have an ability to buy back another 8 million shares based on the approvals we have in place, and we think we'll execute on that. That should be, you know, a tailwind to what you've seen in the first half, how we deployed capital. You know, organic growth has been very strong, as you mentioned, across all our businesses. We think Q3 will continue to be strong, but there'll be some level of moderation, at least on the mortgages in the Canadian bank side, where this should be probably the high end of what we would see as capital consumption. Finally, what I'd say is, you know, capital is something that we manage very closely.
Even at today's level, I made a comment at 11%, it gives us CAD 2.6 billion of capital cushion to look at RWA density, any sort of migration that might happen that could absorb capital pretty quickly. You know, I'll probably double down on what Brian said before. A lot of the stress scenarios we run does not get us anywhere close to that, to saying that this capital could be used up quickly based on macroeconomics or how the portfolio might move. I feel like for the rest of the year, the capital will be north of 11.5% for sure after executing all the buybacks. Brian?
Yeah. The only thing. It's a good question, Mario, and one we discuss here, and obviously management, a key part of management's job is capital allocation and returning capital to shareholders. We spend a lot of time and focus on this, and it's about balance. We've been executing that in terms of buying shares back, increasing dividend, and investing in our businesses organically. If you're to look at it in a time of stress, I'd refer you to our reg cap sup deck, supplementary, where you know you can see that for our corporate commercial portfolios, we're at the high end of the market vis-a-vis all our competitors in terms of credit quality. You know, and that's by design. That's what we do here in terms of allocating capital to our customers.
You know, in summary, we've been talking about optimal capital at this bank for a long period of time. The arms race on capital is over. You see the U.S. banks operating in and around the same level we are, 11.4%, 11.5%, 11.6%. We think that's more than appropriate given the environment and what we see coming at us in the future.
Just one quick, detailed question. The share-based payments, options, and others zero this quarter. Was there a change in accounting, or is that just a quarter-to-quarter volatility we might see in this line?
No, there's no change in accounting, Mario. It's just quarter-over-quarter, and Q1 tends to be seasonally high because you have the eligible to retire. That gets picked up at the beginning of the year, so you see that every year. This year was a little higher because of, you know, the mark-to-market of the share-based performance will impact quarter-over-quarter.
That clears it up. Thank you.
Thank you. The next question is from Lemar Persaud from Cormark Securities. Please go ahead.
Yeah. Thanks. I just want to come back to Phil on credit. Just wanted to revisit the all bank guidance from Q4. Just given that the macroeconomic backdrop today is, you know, admittedly very different than when you put the guidance in Q4, does it feel like the mid-30 basis for 2023 at the all bank level still makes sense?
Thanks, Lemar. We're not going to give guidance out for 2023 or restate guidance today. I would just point you back to some of the core underlying, you know, comments I made earlier about the quality of the portfolio, how net write-offs are trending. You know, we really like the positioning of the portfolio right now in terms of where it is with the ratio between secured and unsecured. We feel that, you know, we're in a good position should we have any headwinds come down. As Brian mentioned earlier, I mean, we stress the portfolio. Not only do we stress the portfolio, but we stress how our customers will behave.
You know, under a big stress scenario, we leverage advanced analytics to be able to look at identifying truly vulnerable customers. We did the same during the pandemic, and we had identified 30,000. We do the same run now under stress, and we see about 14,000. You know, you look at that and you combine it to the fact that we're still up to where we were in our collections capacity.
We're leveraging loss mitigation tools now to proactively reach out to customers. You know, we feel like we're in really good shape. I would just maybe use that in terms of how you're thinking about your guidance for next year.
Okay. That's fair. Maybe for Dan on Canadian Banking. Solid mortgage growth in Q2, but kind of given the backdrop of, you know, materially higher rates, the discussion about a higher probability of a recession, can you talk about how you see that evolving for the balance of the year? Are there certain overheated markets that you're looking to pull back on? You know, are you guys making any changes to underwriting standards and in light of some of the higher credit risks?
Yeah, thank you. Look, we're very pleased with the performance in the quarter. 16% is the result of investments we've been making over several years, both in terms of expanding our sales capacity and our proprietary channel. Our online offering was positive again this quarter. Retention, we now stand well over 90%. The front end and the back end piece of the mortgage business performed as expected based on those investments, and we're pleased with our presumed market position there, including in BC and Quebec, where I've been signaling for some time we're undersized. You have seen some slowing in the mortgage growth. Sequentially, you see that as opposed to year-over-year. I think we're 2.5% sequentially. We do not anticipate making credit adjudication adjustments at this point.
There are some markets which have obviously grown more in the buyer's favor, let's say, based on softening, but we don't plan to be adjusting our sales or credit stance at this point. We believe that the mortgage is a key part of the retail strategy. If we wanna own the home, we need to own the mortgage, and our cross-sell ratios continue to improve, in particular, our deposits on pickup. We're pleased with the performance to date. In terms of outlook, it is slowly slowing, so we will be unlikely at the 16% next quarter. We do expect to see quarter-over-quarter, Q3 and Q4, perhaps in the high single digits, loan growth rates versus the prior year. Slowly slowing, and we're pleased with how we stand.
Great. Thanks for taking my questions.
Thank you. The next question is from Mike Rizvanovic from Stifel GMP. Please go ahead.
Hey, good morning. Wanted to stick with Dan, on that same line of discussion. Just on the residential real estate sector. It's not just the mortgage side, but I'm just looking at your real estate and construction category, also up 30% year-over-year. Some pretty good volume growth, in both of those books of business. I'm just wondering, at what point are you maybe starting to get a bit concerned? You mentioned not changing credit adjudication at this point in time, but, you know, just the rate environment, the way it looks right now, you're gonna have a pretty significant step up in the cost of carry on existing, mortgage balances. Are you not starting to get a bit concerned on where this is heading?
Looks like we're potentially going to have both the variable and fixed rate mortgages at a pretty steep level relative to the lows that we saw in 2021 in the next few months.
Yeah. Look, I would just repeat part of what I mentioned, Mike, which is, you know, you are seeing a relative deceleration in the expansion of real estate lending through the residential side. On the side of commercial, I would just reemphasize, you know, we believe that there is a structural imbalance in Canada and that supply is short. To see growth rates on the construction side higher than residential is our way of supporting more supply coming to the market, which will increase the balance in the market and the health of real estate in Canada over the medium and long term. This quarter, last quarter and the prior quarter, so three quarters in a row, you're seeing better industry balance across the commercial loan growth. We saw tremendous improvements in agriculture.
This quarter, we've moved from the number four position up to the number three position in terms of market share, and could be number two. We're expecting to see our relative performance in technology and healthcare, in transportation and logistics all grow at podium level rates. We're less reliant on real estate now than we would've been a year or two ago. In speaking with clients, the majority of the growth is from long term top tier clients, they're taking a long term view. They're either pausing on bringing product to market or they're picking up land because they know that the immigration wave is continuing and the population in Canada will grow substantially from here. We acknowledge there are questions in the marketplace around real estate prices.
We support the expansion of supply and some moderation is a good thing for better balance.
Got it. No real change in terms of your strategy. You are going to continue to try to gain share at the expense of your peers. Is that fair?
In broad, yes, that's correct. You know, the two loan portfolios that are the largest and growing the fastest are the lowest risk. The PD in residential mortgages and the PD in real estate lending is extremely low. We're also de-risking the book by growing those two large portfolios. Bear in mind, in real estate, deposits come along for the ride based on the consumer. We're very pleased with our credit position in those two portfolios.
Great. Thanks for the color.
Thank you. The next question is from Doug Young from Desjardins Capital Markets. Please go ahead.
Hi, just a question on international banking. Just when I dig in and I look at Peru, pre-tax, pre-provision earnings seems to have stalled out quarter-over-quarter. I think that might be due to capital market activity. If that's right, can you give a little bit more context to that or quantify what that impact was? Maybe a bit of an outlook. Not sure, I think you've talked about NIM outlook for international banking in the 3.80%-3.90%. You're at, I think, the midpoint right now. Like, is that still what you perceive as achievable or is there room to kind of push that up a little bit?
Thank you for your question. You are right. I think PTPP in Peru declines slightly in the quarter. It's driven by a very strong capital markets revenue in Q1 in Peru. When you exclude that capital markets revenue, PTPP was flat despite a shorter quarter. The trends are quite positive in terms of the recovery in Peru for our business, following a very strong economic recovery as well. Loan growth was 4% quarter-over-quarter, both strong in retail and commercial. Margin expansion of five basis points. Peru has done an excellent job in terms of digital progress. 60% of all new originations in retail are digital. The restructuring charge execution, the combination of both is allowing us to reduce expenses 5% year over year in Peru, and operating leverage is 200 basis points. Credit quality trends remain positive.
You will continue to see improved results in Peru sequentially in the second half of the year. On margin expansion, we're very pleased to see 10 basis points increase this quarter, 7 basis points last quarter. We still see an upside in future quarters, so we will expect net interest margin to continue to be positive. Of course, it will depend on market conditions, on competition, on the steepness of the curve and so on. I would say we are positive about NIM expansion in international banking.
Great. Thank you.
Thank you. The next question is from Darko Mihelic from RBC Capital Markets. Please go ahead.
Great. Thank you. Good morning, everyone. My question is for Dan. I just wanted to follow up on some of the line of questioning from Mike on mortgages and real estate in particular. You guys do have a mortgage, a variable rate mortgage with a unique feature in which the payment goes up when rates go up. Is that a significant part of the mortgage portfolio today? Is it a significant part of the go forward? I mean, is it product right now that is overwhelmingly the choice of product for customers in Canada? I realize you probably stress test this portfolio, and that's all good, but I am just very curious the behavior of this portfolio in a situation of rapidly rising rates.
Yeah. Thanks, Darko. We're not worried about the credit portfolio, the VRM book. Two-thirds of the book is fixed. The conversion rate out of variable into fixed has been accelerating over the last number of months as prices have been rising. That's a trend we've anticipated. We do think and we believe very strongly that a variable mortgage should have a payment that varies. We think that's good for customers. As Phil was saying, when we stress test the book, it's tens of thousands of customers who we proactively reach out to who might be vulnerable to an adjustment in their monthly payment amount. Let me put that in perspective. The average balance on a VRM mortgage is CAD 400,000, and I'm rounding up.
The adjustment to the monthly mortgage should rates rise 100 basis points from here is about CAD 250 on an expense base of a household of CAD 5,000. This is not a significant adjustment. Prices have already gone up 75 basis points. We've seen no change in 31+ or 91+ delinquency rates. The FICO scores are higher on the VRM product. The income levels are higher. Customers that tend to choose that product have been doing so for a long time because the payment levels are lower. This is a sophisticated customer taking our advice and are converting to fixed as anticipated. This is a product we've had for 20 years. We think it's transparent to the customer.
It does not have extra credit risk attached to it, and we've been proactive with Phil's team on supporting those who need to make the modest transition to date.
Just a mechanical question. Are they, I mean, when rates move on them, is it just taken out of their account, or is there some sort of communication that, "Hey, your mortgage rate's going up. Your mortgage payment's going up"?
When there's a rate change to prime, the VRM customer receives a proactive written notice informing them of the change, and the payment comes out of their account. Yeah.
Okay. That's very helpful.
From a design standpoint, we receive positive feedback from the regulator in that respect.
Dan, is it the mortgage of choice today?
It has changed significantly in the last three months, and the swing out of variable into fixed has been changing during that period. The stock is 2/3 fixed. The flow is more VRM today based on the price differential between variable and fixed. As that narrows, the conversion happens very quickly. As I've been saying, for some time now, when you wanna own the home, the ability to cross-sell when that VRM customer comes in for retention is meaningful, and we've been doing a better and better job of that at each time.
Okay. Thank you very much. I know we're going over time here. I appreciate that. Thank you.
Thanks, Darko.
Thank you everyone for participating in our call today. We're very pleased with the strong start to the year, with earnings momentum across all our businesses. On behalf of the entire management team, I want to thank everyone for participating in our call today and look forward to speaking with you again at our Q3 2022 call in August. This concludes our second quarter results call. Have a great day.
Thank you. The conference has ended. Please disconnect your lines, and we thank you for your participation.