I want to hear your perspective on the transaction.
Yeah, thanks, Darko, and thanks for having me. I mean, if you think back to December 2023, when we laid out our new strategy on Investor Day, we'd highlighted Colombia and Central America as turnaround or exit countries. We've been working diligently on those assets in terms of understanding their potential and the improvement opportunity, and also recognize that we're at a low point in the market in terms of the attractiveness of some of these countries. Colombia, as an example, you actually only had one bank in the whole country make money last year. And so, working through that, we came to the conclusion that announcing what we did yesterday, which is a capital-neutral and earnings-accretive transaction, was good for shareholders. It allows us to own a minority stake in the second-largest bank in Colombia.
It allows us to capitalize on the synergies, which are meaningful, about $200 million per year, and then ultimately get liquidity, if we so desire, down in the future, and so recognizing where the macro is, recognizing the opportunity to create synergies, this was the right time to make that move.
And so, I mean, I can imagine bringing this together wouldn't have been easy. And I guess the question is, a couple actually come to mind. First and foremost, when you say that there's a potential liquidity event, how could we see that developing? This doesn't seem like it's a very liquid position. So maybe you can enlighten.
Yeah, it's a combination. The ownership is a combination of preferred shares and common shares. The preferred shares, there's no lockup on those shares, and recognizing it's not a liquid market, but there is an opportunity over time, and then the rest does have a lockup for a period of years, which actually the timing might work. It allows us to execute on the synergies or Davivienda to execute on the synergies, and then also the macro will improve. I mean, we are at definitely a low point in the Colombian market. Over the next three or four years, you're already starting to see a little bit of improvement that will provide a different macro point for the overall investment.
The approval process, if you can just walk us through.
Yeah, I mean, one of the determining factors too here is Davivienda is now the second largest bank in Colombia, and so we're expecting a seamless regulatory approval process, which will probably take six months to a year, so at some point during 2025.
Okay, so with that out of the way now, what's maybe you can talk a bit more about the big focus now. I mean, because we were all sort of expecting some sort of an event. Now that it's occurred, I think back to your Investor Day, and I think about, you know, this is still sort of a transition kind of year for IB. Does something change now for us?
When you think back to December 2023, when we rolled out the strategy, we said these three businesses were up for consideration. So we've now executed on that plan. We also highlighted consumer finance as an opportunity to optimize. We're in the process of selling CrediScotia, which will close at this year at some point. We've announced that transaction. And there's a little bit of cleanup, not material, but in the consumer finance business and the rest of the portfolio. And so as we think forward now, we've got the assets in IB that will continue to optimize. I think Francisco and the team have done a great job in terms of driving that primacy strategy and the operational excellence opportunity. You saw the productivity come down from kind of 54% to 51%. We've laid out a plan to get it to 48%.
This year was the best year ever for our IB business, despite the fact that we pulled CAD 9 billion of RWA out of that business. And so continuing to optimize, grow ROE, which we did in 2024, is going to be the objective between now and 2028. In 2025, we were very clear on the call that we're going to see a little bit of a moderation of earnings because of the GDP environment, because of overall tax environment for us. And then also we had a great year at the start of this year on GBM Latam. It's still going to be a meaningful year, CAD 275 million, but not as high as last year. And so we're going to moderate a little bit this year on 2025, and then 2026, 2027, 2028, get back on that 68% type growth in our IB business.
Can you talk a bit about the big effort that Francisco and his team is undergoing with, and talk a bit about the regionalization model? Because in my discussions with investors, and frankly, even myself, I think of that as a massive undertaking, and so where are you in that process, and where do we go from here?
You think historically these countries had been run as separate countries. And so take Central America and Colombia as an example. The productivity ratio in these countries was close to 70%, right? And that doesn't make sense when you don't have the scale in these countries. And so moving from a geographic to a regional mentality is what we've been doing. And so the first part of that is actually pulling the decision-making, the budgeting decision-making, the tech decision-making out of the countries and making it a regional decision. And that is driving a much different outcome from a cost perspective, from a priority perspective, then also aligning on what customer segments you want to get after. And if you can do that consistently across these regions, focusing on affluent, high-value, top of mass, you can actually drive a lot of productivity opportunity and client experience benefits.
And so I know I get the question a lot.
Well, this is going to cost a lot from a technology perspective. There are going to be some technology investments for sure. So cash management, as an example, we're spending CAD 140-CAD 150 million in cash management across the footprint. But you've already seen significant efficiencies by actually not allowing each geography to spend separately. So I'll give you an example. As we were doing our digital transformation, we had 10 different apps, all with 10 different teams. And so we can self-fund this without a big increase in capital, get the prioritization right, run it on a regional basis, drive the efficiencies, and actually get a better client experience. And you saw that in 2024. When you look at 2024 and that productivity improvement, CAD 9 billion of RWA out of the business, productivity ratio goes from 54% to 51%.
ROE goes up on the back of a real laser focus on operational excellence.
And so just a couple of follow-ups on that, and we can move on. But the first initial follow-up is somebody working in Chile, well, there'll be some local differences between Chile and Peru.
Yeah, for sure.
So how does that work if the budgeting is centralized?
Yeah, no, definitely. You have to have that local feel, but you can have consistency across philosophy. And so, for example, GTB cash management, you don't need seven different cash management deployments in each country. You need one cash management platform that you can use across the whole region. And then, of course, when you get into execution in that last mile, you're going to have to tailor it somewhat. But historically, we were running this as separate geographies, and that results in inefficiencies and duplication and, frankly, a disjointed client experience, particularly when you're trying to deal with multinational clients, right? One of the things that we're really trying to drive here is consistency. We think there's a value proposition for clients that are operating across our geographies to interact with us differently. And if you have different deployments of different technologies, that's not possible.
That will drive a better client experience over time as well.
Where are you? You would say like a fifth inning on this?
Yeah, I would say earlier than the fifth inning, right? I mean, we've got the team in place, we've got the budgeting pulled out, we've got the segments highlighted, we've got the financial transparency and the data, but we're a year into this, and so, as we've said to, you know, Francisco has been very clear on, I think 2025 is another transition year, and then as we get to 2026, 2027, 2028, you're going to see that 6%-8% earnings growth in IB that we committed to at December 2023.
And so one of the other sort of strong messages we got from the Investor Day was really a focus on this North American corridor. And here we are with the threat of tariffs against both Mexico and Canada. So maybe you can talk a little bit about how you see that developing and what in the shorter term your preparation would be in the event that this actually occurs.
I mean, definitely there's a lot of uncertainty in the world right now in all three countries. I think if you take a big step back, CAD 1.2 trillion of trade flows and a strong conviction, bipartisan conviction in the U.S. on anti-China, right? And that leads you to the attractiveness of a regional trade block. We were consistent, or we were very clear in December that it was Canada first, U.S. second, Mexico third. And so in an environment like we have now, we're being very thoughtful about deployment of capital into Mexico, as an example. However, longer term, I do believe the economic rationale, the political rationale for a connected corridor continues to exist and we'll be there to capitalize on it when we get more clarity.
Where are you in that journey on connecting the U.S. business?
Yeah, I think the biggest opportunity is cash management. And you see that does report to Francisco as well. It's important that he brings important capabilities from his time at Citibank. We've added a lot of capabilities to that group, Wells Fargo, most recently Mastercard, JPM. We're allocating capital to build out those capabilities. We've got a good cash management proposition in Canada. We've just introduced a new cash management proposition in Mexico, but we've got to continue to accelerate that journey in the US. And we're probably a year or so away from knitting that all together for our multinational clients. Okay.
Okay. And then just maybe to help us sort of better model, because I do have to do this for a living sometimes. When I think of it being a down year, well, now that you've gotten rid of Colombia, there's a little bit of a drag there. But really, I think the issue was there's taxes and there's costs, which is the bigger impact?
Yeah, I think we're going to continue to see progress on costs and you're going to continue to see real optimization of RWA. So that's not going to change. I mean, I think the macro is less clear than probably was a year ago in terms of GDP recovery in some of these regions, Mexico being the obvious example. And so I think we're going to see a little bit of less growth there. And then also, you know, from a tax perspective, which we knew, you're going to see a little bit higher tax. And so we're going to see modest reduction in earnings from our international bank next year off of a great 2024. But we're going to make that up in our Canadian business, which is going to grow at low single digits.
We're going to make that up in the wealth business, which is going to grow at 10% NIAT after growing 10% this year. And we're going to make that up in our GBM business, which is going to grow at low single digits as well. You add that to the other segment, which I'm sure we'll talk about, where we're going to see some tailwinds from lower rates. And that gets you to the 5%-7% earnings growth in 2025 and double-digit earnings growth in 2026 prior to the contribution from Key, which we can talk about a little later.
Okay, great. So maybe just because I've been asking everybody, so I want to sort of touch base on anti-money laundering. And I think of Scotiabank and wow, you got so many different jurisdictions, including the Caribbean. And you know, you were asked by the Federal Reserve, I mean, there was in 2015 to address deficiencies in compliance. So maybe just, you know, were your efforts localized in the U.S.? And again, getting back to Scotia's vast empire of, did some of that AML work go global?
And that was the benefit of it. I mean, we've been working on this in the U.S. since 2015 and received a clear bill of health from the Fed in 2023. And so that work, which was substantial, significant, a lot of resources, has then used that as the blueprint for the rest of the globe. And so there's obviously some local differences and in some countries you have to be more thoughtful about that. But we have a global function. It reports to me. It's someone that I have known well for my seven years on the board. And this is, I mean, as you know, and you can see, it's critically important. And so high priority for me and the team and the board as we work through this.
Is it different though by, like, I just keep thinking to the complexities involved. You've got Mexico, you've got the USA, you've got, do you manage it differently?
Yeah, I think as we think about connecting Canada, U.S., Mexico with a cash management proposition and knitting that together, you're going to have to be really thoughtful about flows of money between Mexico and the U.S. and the U.S., I mean, both ways, and so we're going to have to be really thoughtful about that as we roll out that new proposition over time, but the good news is we're redesigning it right now or designing it right now and investing it with that in mind, and so that will be helpful as we knit this all together for our multinational clients.
Okay. Maybe we'll come back to Canada now in our chat. You know, I've had the question from a few today, and I wanted to talk a bit about the mortgage market and, in particular, in your case because you have a slightly different product that's out there, so we've moved away from concern, I think, with the lower rates, but you would have a good view given your, so I mean, just maybe firstly, I mean, is this now turning from a concern for you to an opportunity, and you know, maybe you can touch on your mortgage strategy and how that product shapes your.
Yeah, I do think it's an opportunity and not a concern. I mean, I had been pretty consistent that we weren't overly concerned about it and we had a bird's eye view into this because of the VRM product. We have seen a little bit of an uptick of write-offs on the VRM product and you saw that in the quarter, but it's localized to Toronto and Vancouver and it's 250 clients, right, out of a million mortgage clients. So I'm not, I am definitely thinking about the renewal opportunity as opposed to the credit risk opportunity in the portfolio. When you look at that renewal opportunity, I think we have CAD 60 billion of mortgages coming up in 2025 and CAD 90 billion of mortgages in 2026. The key for me is continue the discipline that we have around multi-product and this shift from value to volume.
So that's going to be key. We've got a lot of success to date on making that shift. And then second, renewal and retention on the clients that we have. We've seen a 400-500 point improvement in retention rates year over year. And making sure that we take care of the clients we have when you have this type of renewal opportunity is first and foremost for us. And so that discipline, renewal rates focused on primary clients, that's going to lead us to continue to see improved client profitability and improved client NPS or client loyalty.
So that's what I wanted to zero in on because if you've improved your retention rate, it's possible that a way to do that is to offer an exceptionally low rate.
Yeah.
Right. And that would harm the mortgage profitability. So can you talk to mortgage profitability?
Yeah, I mean, we've gone through the shift, right, of volume led to value. And that's why you've seen mortgage growth a little bit slower in the case of BNS than history and relative to peers. In the last two quarters, you've seen that improve or start to grow sequentially. When you look at pricing, it was interesting. You know, I picked up or I looked at the December pricing relative to others. We were right on top of, or actually slightly higher than the lowest in terms of pricing. So we're kind of on top of people or a little bit back on pricing. I do think you need to be thoughtful about pricing, particularly when you're thinking about primary clients. And would you be willing to, you know, put in some relationship pricing to maintain renewals, et cetera?
I mean, it's dynamic and you have to be thoughtful about that. But we're not using price as a lever. And this comes back to the discipline point to drive volume. That's definitely not the strategy. And it hasn't been the strategy since I've been the CEO.
Okay. I did want to talk a little bit about something that was a bit unique to Scotia in the past, which was, you know, even like last year in Q1, you were affected by the output floor. And now OSFI's pushed it out. But you know, BNS, I guess you're in 2024, you're managing around the output floor. Then there's the KeyCorp acquisition. Maybe now that the floor is not really an immediate concern and KeyCorp is expected to close in the second half. Do you plan on operating at a higher CET1 ratio going forward knowing that that floor could potentially come back? And maybe can you just touch on capital optimization for 2025?
Sure. So I think what's going on in the US is pretty important in terms of Basel and floor impacts. And my view, similar to I think what you've heard here prior, is we're kind of at that peak of capital. I don't think there's going to be continued significant progression in terms of increased capital requirements. And I think for in the US and therefore in the case of Canada, I think OSFI has to be pretty thoughtful about creating a level playing field between Canada and the US. And in my conversations with Peter, I think he recognizes that. And so I guess that would be point one. Point two is for our own capital position, I think we've done a good job getting to 13% plus capital post the Key acquisition or investment, which closed in December, December 27th.
And post what we announced yesterday in Colombia, we'll be right around 12.5%. And we'll get 10 to 15 basis points back on the Colombia acquisition once it closes. And that's why I said it's a capital neutral transaction. So essentially when we report first quarter, we'll be essentially around 12.5%. As we go forward, you know, I think we should run the bank in that kind of 12.5%-13% range. And so as we accrete capital, that will create optionality for us. And that optionality then can be used to either invest in the business and accelerate depending on the environment or repurchase shares. And we'll be thoughtful about that as we, you know, back half of 2025 and into 2026.
Right. Okay. So you, I mean, I know you'd mentioned in the call you were thinking about buybacks. It was on your mind. And so essentially we can think about this as something that really comes around once you're past 12.5 to.
Yeah, I think so. Yeah. I think that 12.5%-13% is the right place to run the bank given the current environment. And so as we back half of 2025 and into 2026, that will be a lever that will be at our disposal.
Okay. Switching gears to credit and credit quality. I mean, you guys provided fairly decent mid-50s total PCL. But it was total PCL. And so in the context of total PCLs, I often think about reserve releases or stage two. So maybe you can talk a little bit about, does that factor, how do you think about that for your evolution of the PCL in 2020?
Yeah. I mean, the guidance we gave in the last call was mid-50s is the right number for us. I think we're at the peak and probably see a moderation into the back half of this year. And so the first and second quarters in that mid-50s range, maybe a little bit moderated in the back half and for the whole year, let's say mid-50s. You know, we're seeing stabilization in the prime auto book. We're seeing a little bit of weakness in our what we call SDA auto, which is to be expected at this type of a cycle. And we're starting to see a little bit of weakness in the cards business. I agree. I think relatively, I think that's okay for us because we're the smallest cards player in Canada. But ultimately, you know, that will play through to PCLs.
And then on the mortgage side, I share your views. I don't think it's a credit issue. You know, I wouldn't expect reserve releases from us. I think we've, you know, built our ACL. I think it's a 25% improvement in the overall ACL coverage since I've become the CEO. And I like where we are from an ACL coverage perspective. So I wouldn't be modeling a, you know, reserve releases for us. But I also do think the macro environment is going to get better in the back half of 2025. And as we look into 2026, particularly you have a new approach to economic development in Canada. And you definitely have that in the U.S. I think the outlook is pretty positive as we go into 2026.
But I guess this cycle has been a little bit different, right? It's been a gradual increase. We haven't seen much of a spike. But you've, you know, you've got different geographies that we're working with here. So is it still, as we think about PCLs falling, is it still potentially something that we should see a significant drop in PCLs? Or is this really going to be much more mild?
I think it's going to be more mild. I don't think you're going to see a significant drop. I mean, I think that all the banks have done a pretty good job managing through this environment. As I say, to date, you haven't seen a lot of credit card stress. You haven't seen any mortgage stress. In our case, you've seen some auto stress. From a corporate and commercial side, you know, our book is mostly investment grade. You haven't seen a lot of stress. But in general, I think, you know, our clients have managed through it pretty well. And so I don't see a big drop in PCLs. I don't see a big build. I see, you know, a gradual reduction as we think about the back half of 2025 and into 2026.
Okay. Great. I'm going to take time now to go to the questions from the floor. Okay. So the first question, your NII is most sensitive to rate decreases versus peers. Rates are expected to further decrease in 2025. How do you expect your NIM to move through 2025?
So when I was here last time, a year ago, we said for each 25 basis point reduction, you saw a CAD 100 million annualized contribution to NII. And what was so great to see in the fourth quarter is you started to see that come through with, I think it was CAD 114 million in that other segment, which was contribution from falling rates. As we think about, you know, 2025 and then into 2026, our own forecasts would show another two rate reductions in Canada and probably four overall in the U.S., two in 2025 and two in 2026. And so that definitely is a tailwind to our earnings in both 2025 and 2026. It is a contributor, as I said at the start, to the 5%-7% earnings growth prior to key in 2025.
And then it's also a, you know, even more of a contributor in 2026 when we see double-digit earnings growth. And so we're at the start of that phase. And the fact that the Bank of Canada, because it's primarily the Canadian rate that we're most exposed to, the fact that the Bank of Canada did a 50 basis points cut in December, I think that provides even a little bit more tailwind as we think about 2025. So that was a positive outcome for us.
And maybe just to follow up on that, I mean, the thing that stands out with Scotiabank is your corporate, right? That big loss that you have there. And so when I think about NII and the benefit, it all rolls through that segment. And so should we expect or can we expect that segment to be at net zero when we hit terminal rates? Or how should we think about that?
Yeah. I mean, I think the philosophy has changed a little bit over the last couple of years, right? In terms of how we manage that balance sheet, we're not focused on hedging to enhance the NII. We're focused on using hedging if we do to protect the NII, and then ultimately what I'd like to do over time is get that other segment allocated out into the businesses so that you're sending the right price signal to those businesses, and so what you'll see is naturally that other segment will come down significantly with rates coming down and swaps rolling off, but I also want to get to the point where the North Star vision here where you have it all allocated out to the appropriate businesses, so you're driving the right price signal to your frontline bankers, and so that's the North Star.
It'll take us a little bit of time to get there, but that's what we're trying to do.
Okay. The next question from the floor is, how will you defend your mortgage market share as rates fall? Do you favor competitive pricing or multi-product customer relationships building primacy? So I think I have an idea where you're going to go with this, but.
I mean, the North Star here is primacy, right? Customer primacy, client primacy. And we've been very transparent with all of you in terms of our progress to date. I like the fact on multi-products, you know, we've gone from 46% of our clients that are multi-products to 48% over the last year. I like the fact that 46% of clients coming into this bank right now have a direct account with us, a multi-product account. That's up from 26% two years ago. And so this journey, which is a quarter by quarter, you know, grinded out journey, and we're not going to come off of it, is going to result in better primacy over time for the Bank of Nova Scotia. So when you think about mortgage market, I'm not that interested in monoline mortgage clients that we can't drive a primary relationship with.
And we've seen a reduction in those clients from 16% to 13% over the last two years. And so when we think about renewals, we're really going to be focused on driving that primacy, right? And we're not going to use the price lever to go after market share. And I think to date, over the last year, that's actually proven to both internally and to you that we can do that, drive both profitability and higher ROE, and we'll continue to do that.
It's actually, I mean, when I think of 13% monoline customer, that doesn't sound high.
In the mortgage market.
Yeah. In the mortgage market. I mean, even, I mean, when I think of banks, I would have thought that that number would be higher. What indicators do you use to determine whether or not that monoline will at some point give you more business?
Yeah. I mean, and that's a great point because it's a monoline and you have that client doesn't mean you can't push them into a multi-product relationship over time. And renewal rates provide an opportunity to do that for sure. But what we're trying to get with the team is this discipline in the mortgage broker market, by the way, because we do participate in that market. And our mortgage bundle product has proven extremely successful in driving that primacy as we think about new acquisitions of the bank and making sure it's a multi-product relationship. And so right now, over the last year, more than 75% of the mortgages originated are coming with a multi-product. As we have renewal rates, we're going to be very sensitive about the multi-product.
And then using pricing, you know, in a very disciplined fashion, but also recognizing the benefits of primacy if you can get it. And so those all come together to driving, you know, reasonable growth on the mortgage side because the mortgage product is an important part of primacy, but not outsized volume growth and definitely not focused on market share.
Now, you referenced multi-product in that answer, but as I recall, there was a bit of an emphasis on deposits for your.
I included deposit as a product.
Yeah. Absolutely, so the question is then, how do you push more for the deposit?
Yeah. I mean.
Renewal for a mortgage.
Part of this is having a day-to-day account with us and making sure that the mortgage goes through that day-to-day account so that you have the transactionality with that client. We've been really successful this year on deposits. I think, you know, since we started this journey, CAD 56 billion of more deposits into our Canadian bank. We've actually gotten 50 basis points. I mean, this is a long-term journey, but we've seen improved market share on the day-to-day account. We've got to align the incentives. We've got to make sure we have the capabilities. We've got to make sure we have the technology. We make sure they have the products.
We can simplify the product base to make sure we're driving the right outcomes to actually get that transactionality, that day-to-day deposit, which then allows you to, one, create a primary client, but also helps you on the funding side and helps you grow your loans faster in terms of, you know, a balance between the loan to deposit ratio.
I want to dive into that more, but I don't have time. So, maybe a discussion for another day is, you know, including the Scene. But.
Scene is really important though because Scene is a competitive advantage for us, right? We have 15 million clients. Only a portion of those are Bank of Nova Scotia clients. Through data personalization insights, we can convert a lot of those Scene clients to Bank of Nova Scotia clients. And so when you think about new to Canada coming off a little bit, Scene is going to be a big driver. Similar to Tangerine, it's a competitive advantage in terms of how we drive primacy against the other big banks in Canada.
Okay. So we're at the time now where I ask you for your key takeaways that you'd like to leave the investors with for 2025.
Yeah. I mean, I think three key takeaways. One is this North Star vision of primacy and the journey that we're on and the philosophy shift from volume to value. That is going to drive sustainable, profitable growth for this business. So that's point one. And you're already starting to see the impact of that. Second is the disciplined capital allocation and the movement of capital from developing to developed markets. And I think you saw, you know, yesterday with the Davivienda announcement, you've seen it with the KeyCorp announcement. We're committed to this capital allocation to that North American corridor. And then the third would be around talent and capabilities and culture. And relative to when I've been here now, this is my third time. We've made great progress on both developing our internal talent, but also adding external talent that is world-class.
We're spending a lot of time on the culture. You know, we're calling it Scotia Bond, but it's around bringing the whole enterprise together. That's helping in terms of, you know, the type of enterprise-wide thinking that we're trying to generate at the bank. Those three things together will allow us to execute on the commitments that we made in December 2023. We haven't come off of any of those: 5%-7% growth next year combined with, you know, double-digit growth in 2026 and ROE improving through that period. That's the message that I want people to be left with. This is consistent with what we said in December 2023. I'm looking forward to the next two years and continued execution in that regard.
Okay. That's great. So with that, Scott, we'll end our session. Thank you very much.
Thanks, Darko.
Thank you.