Status Update

Mar 31, 2020

Thank you, operator, and good morning, ladies and gentlemen. My name is Philip Smith, Head of Investor Relations. I'd like to welcome you to Scotiabank's update call with CEO, Brian Porter. The call today will be hosted by Scotiabank's Financial Services Analyst, Sumit Malhotra, and will follow a question and answer format. The call today is expected to last approximately 20 to 30 minutes and is being recorded. A replay of the call will be available later this morning on the Investor Relations section of Scotiabank's website. Investors with follow-up questions are encouraged to contact our equity salesperson or Scotiabank's Investor Relations group. I will now turn the call over to Sumit Malhotra. Thanks very much, Phil, and good morning, everyone. As Phil mentioned, my name is Sumit Malhotra, and the Senior Canadian Financial Services Analyst at Scotiabank Global Banking and Markets. I want to thank everyone for taking the time to join us on the call this morning, and I hope that each of you and your families are healthy and safe in these uncertain times. Let me also welcome to the call Mr. Brian Porter, President and Chief Executive Officer of Scotiabank. How are you, Brian? And can you hear me okay? I can. Good morning, everybody, and thank you for joining the call. I want to thank you and Phil for agreeing to speak with us this morning Brian in such a volatile period for the economy and capital markets. I know that shareholders will appreciate the opportunity to hear from you directly. Our format this morning is obviously a bit different Brian than when you and I speak at our financial summit each September, but I want to start the conversation the same way I would at that session by giving you the opportunity to highlight a few specific areas of interest. So let me start with a 2 parter. You were the Chief Risk Officer of the bank during the credit crisis and economic downturn we experienced in 2008, 2009. How would you contrast that environment with what Scotiabank and the sector are facing today? And secondly, in your messaging to the market over the past year or so, you have repeatedly mentioned that Scotia is positioned to be downturn ready. How would you characterize what that positioning means for your investors? Okay. Well, thank you, Sumit. And again, thank you everybody for joining us this morning. Just an opening comment, then I'll answer, Sumit's 2 questions. This is obviously a period of unprecedented uncertainty and the bank is focused on our employees, our employees' safety and taking all the protocols necessary, including having nurses on staff in contact centers and employees having the availability to call our Chief Medical Officer. And so we're going to extra lengths to make sure that our employees are safe and there for our customers. So it's been a very busy time here in Canada. I'll give you some stats here in terms of in Canada, we're handling over 80,000 calls per day in our contact centers. Calls to our mortgage and loan teams are up over 500%. Today in Canada, we'd have about 900 of our 9 60 branches open, And branch traffic is fairly robust given the circumstances. So we're there to assist our customers and answer any questions they have. And customers are also using our online program. So in terms of the mortgage deferral program that went live 5 days ago, there's a very simple app on our web page to fill out 4 or 5 questions and it goes for approval and we've approved over 60,000 mortgage deferrals in 5 days. So in our international units, 95% of our branch network is open. Contact center volumes in our Pacific Alliance countries are up around 25%, so in Mexico, Peru, Chile, Colombia and the Caribbean. Customer assistance programs have been approved there by the regulators and we're actioning those as we speak. I've also been very busy as I have a number of my colleagues speaking to our corporate and commercial clients to make sure that they have the liquidity to fund their operations. And those conversations are going well and we can talk about drawdowns in a moment. I've also as have my counterparts been very engaged with all levels of government and regulators, not just here in Canada, but around the globe. So we've been spending a lot of time with policymakers and politicians in Ottawa as these programs that have been announced get announced and implemented and operationalized throughout the banking system. But through this difficult time, the bank remains very well positioned and committed to supporting our customers to the best of our abilities and keeping our employees safe. So that's my opening comment. In terms of being downturn ready, I would say that in a couple of different ways, one is operationally and one from a balance sheet perspective. So I would say that the last crisis in 2,008 was more a balance sheet issue in terms of asset quality, capital and liquidity. And today, at the end of our Q1, our LCR was 127%. Today, it's running around 123. The bank is very liquid. And in some jurisdictions in Mexico, Chile, some of our international operations, our LCR will be anywhere from a function of how we like to operate in these type of environments. So to give you an idea, our capital level is 11.4 and we're pleased to having closed a number of the divestitures that we announced earlier and having those closed and done is it certainly derisks the organization and our capital level was around 11.4 at the end of Q1. And so the bank has ample capital here. But to put it in perspective, capital levels for not just Scotiabank, but the Canadian industry would be running about 3 times today what they were back in 2,008. So I would say contrasting the 2 different environments today is more operational and to some extent more income statement focused and 2,008 was more balance sheet. But in terms of operations and this really strikes at the heart of the question you asked is the bank has been really focused and spent a lot of money on technology and made the necessary investments in technology, cybersecurity and critically in BCP. And we did BCP given our platform because earthquakes in Chile or some countries in the Pacific Alliance. So we learned from our prior experiences and that with most of our staff working remotely today, the investments we've made in BCP are paying off very well. So we're even having people from contact centers today working from home and they've got access to VPN and are able to take care of our customers in that fashion. So obviously, you never prepare for we didn't see this one coming, but I think in terms of asset quality, the bank, we don't have any leverage loans. Asset quality is high. As I said, our divestitures are closed. And so it's not a capital issue. It's not a liquidity issue. We have access to markets. We're doing a covered bond in Europe this morning and markets are open to us. And the plumbing of the financial system is definitely working better today than it was a week ago in terms of commercial paper particularly. So markets are functioning a lot better. So that would be my opening comment. And I would say just because I think it's topical is there's been a lot of talk about drawdowns. And our drawdowns in Commercial and Corporate Banking would be running about 2 times what the normal rate would be. So it's very manageable. Company, most of the drawdowns, if people are drawing companies are drawing down, They're keeping the funds on deposit with us in most instances. So it's more an insurance policy. And the conversations I'm having with CEOs or teams having with CFOs and treasurers throughout our footprint are that if you're drawing down and rather than drawdown on a 3 year facility, if you just need liquidity for a year or 18 months, we'll provide a bilateral for you. And some companies are taking that opportunity to do just that. I would remind people on the call that we're fortunate by the structure of the market in Latin America. All our lines are uncommitted. So that companies don't have the ability to draw down in most of these jurisdictions. So if companies do have a liquidity bind and we'll be there for our customers, then we'll provide a buyback for them. So those are my opening comments, Sumit and contrasting 2,008 to today. I appreciate that, Brian. A lot to dig into. Let me start with a couple of the references you made to the plumbing of the financial system. And from my end, I would say, the swiftness and the significance of the response that's been provided by governments, central banks and regulators over the past month has been quite impressive. And certainly some of the playbook that all of those entities were able to work with 12 years ago has quickly come into place today. Some of the things we've been hearing about though, I guess if we go back to mid March, OSFI did remove the domestic stability buffer or reduced the domestic stability buffer by 125 basis points. Does that give Scotiabank and the industry enough breathing room for some of the upcoming draws on capital that you mentioned? And related to that, how should it impact the ability of the bank to return capital to shareholders? We've heard from certain jurisdictions that dividend payments may be halted in the interim. If we go back to 2008, 2009, the Canadian banks were not buying back stock. They were not raising the dividend, but they continue to pay it out. Is that your expectation for what will occur this time around? Well, first of all, I want to say that the conversations that my counterparts and I have had with policymakers, central bankers and politicians in Ottawa have been very constructive. Clearly, there's a lot of experience and a lot of individuals that have been through this before. So I applaud what's happened here in terms of the rapidness of the response and the quantum of the response. And there's been days obviously that everybody on the phone knows that the commercial paper market in Canada wasn't working very well. And it takes time for these programs to have their intended impact and work their way through the system is what you're seeing is that not just banks have the ability to fund creditworthy Canadian corporations were in the market last week late last week doing term financing. You'll see more of that as the days progress here. And I will say as we return to normal in a number of months, DCM activity will be very brisk as companies have different options. And as business returns to normal, we'll either pay down the facilities that they drew down or go to the DCM market. But in terms of your question on capital, we have ample capital. We have $47,000,000,000 of common equity Tier 1 as of Q1, which as I said is triple what we would have had at the beginning of the financial crisis. And so at 11.40 percent being our common equity Tier 1 ratio, there's lots of buffer there. And if you look at it from a balance sheet perspective, we have $10,000,000,000 of capital in excess of the regulatory minimums and $5,000,000,000 of allowances for credit losses. So we feel to get back to the term downturn ready, we feel nobody feels comfortable in this type of circumstance. But this is more an operational exercise in terms of getting the programs the federal government announced last week operationalized and up and running. We're trying to there's a lot of anxiety out there as everybody can appreciate that if people know that there's a program and then they fit the criteria and then when do I get the funds that are coming, those type of things. So those are the type of calls that we're dealing with in our contact centers and the type of discussions we're having with our branches in our branches with our customers. So it's that's what we're focused on. I'm sorry, the last piece of that Brian was in and around the dividends and capital deployment in this environment. Yes. I think that if you're looking what the ECB stated on the weekend, the construct about first of all, about 77% to 80% of our shareholders are Canadian, either institutional or retail. So the construct of our shareholder base is very different than would be a European bank. So if there's concerns about potential dividend cuts, I don't see it. And I think that there's a high degree of recognition in Canada that there's a flow for their retirement or for their day to day living and expenses. And so I don't see that happening. But we're obviously very cognizant of what's happening in Europe, but that's a very different construct than we've had in Canada. And if you went back to 2,008, all the Canadian banks paid their dividend throughout the period. Understood. Thank you for that. Another factor that obviously has come into the conversation given the virtual halt in the economy over the last month has been the outlook for credit quality and how banks are going to work with their customers. I would put forth the fact that if you go back 12 years ago, the banks were certainly viewed in a different light in terms of their role in what was happening in markets and the economy as a whole than they are today in which they're working with governments to provide assistance to commercial, corporate and retail clients. How should we think about the outlook for credit quality coming into the late cycle environment, we've spoken a lot about IFRS 9 and how could how that may change the way we think about the speed of provisioning. When we think about the deferral programs that the banks and the government have made reference to, along with the regulatory flexibility that Asfi mentioned with respect to provisioning in IFRS 9. Is there any comments you could provide to us as to how credit costs are going to migrate for the bank and perhaps also wrap that around what's happening in the energy sector, please? Yes, sure. Well, it's OSP announced some updates last Friday and I think that those have been well publicized. And I think the most meaningful statement in there, there's a number of important statements, but the most meaningful is to see through the cycle, I think is the way it's been termed. And so in terms of provisioning, obviously everything that goes in a deferral bucket will be set aside and have different capital treatment. And as I said, we'll see our clients through. I think it's important to note that and I said this to a few of you before is that from a Scotiabank standpoint, part of our DNA is we understand that our job here is to be a shock absorber for the company for the economy. So we're going to see Canadian households through. We're going to see Canadian small business through and provide them with the capital they need to get through this. There's going to be if you look through the different product groups in Canadian Banking, there's going to be bumps in credit cards for obvious reasons. That's unsecured lending. There's going to be bumps in small business. I think it's too early to tell to what extent those what we're going to see there in terms of loan losses. But keep in mind that in small business, in terms of 35% to 40% of our customers would be non lending customers. So we're just managing cash and balances for them. So in these government programs, we have to wait and see what impact they have for these businesses in terms of providing them liquidity through this period. And of course, how long this period lasts? Does it go to the end of May? Or is it longer or shorter? I don't think anybody knows. So but in terms of energy specifically, because the market is focused on that and clearly our portfolio is smaller and has been production, that's approximately 1% of the bank's loans globally and 53% of those are investment grade. So in Canada, it's about 0.6% of our loans globally and 74% of that would be investment grade. So obviously, not all of those are going to be investment grade by the time we get through this. But it shows you the quality of the portfolio. We're going to have some loan losses as well all banks globally in terms of the energy sector. There's no question about that. But I think you have to look at this from a materiality standpoint. This will be over a number of different quarters. And I would say that, drawing on our experience in 2015 for those companies that aren't investment grade that go into some sort of restructuring, If they have bonds, which most of them do, that don't rank peripassu, it's the bonds that get equitized. And as a bank, we might take a small hit along the way, but those hits aren't very big. And so we rank senior in all our lending facilities. As I said earlier, a lot the vast majority are investment grade and we'll see what sort of government assistance programs come out later this week in Canada for the industry and we'll see how it pans out. I want to switch focus and think about the footprint of the bank in the Pacific Alliance. And clearly, one of the surprising aspects of the COVID-nineteen situation in the last few months is just the rapidness of the speed across geographies. I mean, it wasn't that long ago, go back to early February, a lot of us were thinking about this virus being largely contained to Asia. And obviously, we've seen a quick spread through Europe and into North America. The question comes up as we think about the Pacific Alliance footprint of Scotiabank. In your view, what is the level of preparedness from governments and not to go too far outside of our purview, but even the medical community for the likelihood that COVID-nineteen becomes a larger situation in that part of the world as well? Well, I'd start with the macro issue, which I think is important is that all these countries are investment grade and have a lot of capacity on their balance sheet. So their debt to GDP ratios would be much lower than the developed world. So you saw Peru yesterday announced a stimulus package that accounts for 12% of GDP. That's a big, big number. In Chile, the stimulus package that was announced last Thursday is 5% of GDP. So these are big numbers. The central banks and regulators have taken the same type of action in these four countries as we've seen in Canada, the U. S. And Europe in terms of dropping rates, quantitative easing, different types of measures to make sure that liquidity is flowing throughout the financial system. So in the Pacific Alliance, different countries have different protocols in place, but they're not that dissimilar from Canada or the U. S. Or Europe in terms of quarantines. So we're instituting, as I said in my opening comments, is we're going through these deferral programs, which again are fairly similar to what we would have in Canada and elsewhere. But these are vibrant economies. Average age in these countries is 28, which is significantly lower than the developed world. And we take our role as a liquidity provider seriously. Corporate balance sheets are in good shape. There's certainly less stress than they would be in the developed world. And these economies will come back. And the focus of attention will be much the same as Canada on credit cards and small business to make sure that we manage those accordingly in terms of stress throughout the system. But I think the government officials, regulators, policymakers have taken the appropriate action given the circumstances. I know we wanted to keep this to about half an hour or so. I'll ask one more here and then I'll hand you the baton back for any final comments. This is a bit different one and I'll start by saying at some point we will return to a level of normalcy. It doesn't always feel like that these days. But one thing that's on my mind as we think about what happens in the future is the change that all of us have experienced in the last month. As I said, you and I have done a lot of calls together in our time working together. This one is obviously quite different. But the fact that business has gone on, I've been certainly speaking to clients many times a day for the last month from the home office here and we've continued to be able to do our jobs. It has changed a lot of the way that we work. And I would think based on some of your comments at the beginning, it's also changed the way that your customers are interacting with the bank. How does what we're learning now with respect to the adoption of digital banking result in changes going forward for consumer behavior? And I'll bring this up gently. There has it has been brought to mind to me that it could also have an impact on the cost structure as we look at in the future. So a bit open ended there, but just thinking about how the bank learns from the situation in terms of how it interacts with its customers with technology and what does that mean for expenses going forward? Yes, it's going to have a profound impact. There's no question about it. We're seeing it as Canadians adapt to the circumstances. And I got an email from a colleague last night and we just to give you a frame of reference, but we've had more requests for e statements in the past 2 months than we have for the past year. And that might sound trite, but people are changing the way they bank because necessity is the mother of invention, I guess, and that we're seeing it. And in terms of operationalizing these government programs, the bank is going to be ready and we're going to be there because we've made the appropriate investments in people, process and technology. And a lot of this will be digitally enhanced and just like we did in terms of mortgage deferrals or auto loan deferrals And so people don't have to fill out forms or tie up our contact centers. So this is going to change the way Canadians bank and throughout our footprint and our platform. There's no question about that. But in terms of all our employees are engaged today. In terms of cost structure, we don't intend nor would we think of laying anybody off in this country as we go through this process. We want to keep our employees engaged. We provided them some bonuses for people that are on the front line, and it's important that we keep our employees safe, healthy and engaged in terms of performing for our customers. So that's what we're focused on here. But this will to answer your question, we'll find other ways to manage expenses. And I stick to what myself and my colleagues have said before. We can take our operating our efficiency ratio down in Chile. We can take it down in Mexico. There's further room in the Canadian bank. And there's lots of different ways to do that. So you'll hear more from us in the future about that. But we're focused on our customers right now, seeing them through this difficult period. And as I said before, our balance sheet is in very good shape, ample liquidity, lots of capital. And the loan losses that we see out of energy are not material and very manageable for the bank. I think you covered a lot of it there, but we've come up to the time that we had talked about. So I want to thank you and Phil for agreeing to speak with me and our investors this morning. I will hand it back to you if there's any final points you wanted to emphasize before we close it off. I will give it to you. No. Thank you, Sumit. And thank you, Phil, for organizing it. And thank you for all our shareholders on the line. We really appreciate your time and patience through this period. And we look forward to seeing you in person soon. Thank you.