From Scotiabank, and he is the Chief Risk Officer for Scotia. So we're delighted to have you here to talk about all things risk, but welcome to the conference.
Thanks, Darko. My pleasure.
And actually, maybe before we even dive into risk, I think if many of you don't know Phil, he's actually been around Scotiabank for a very long time. And so he's been there, he's seen a lot of executive changes, and he's been through, and he's seen quite a bit. So maybe I thought, instead of just diving into credit, because we're going to talk credit for almost the entire thing, I thought maybe why don't we start off with just maybe asking you something along the lines of, you've seen a lot of changes, there was a big strategic shift, you had a big investor day. So where are you on that roadmap? And as we think about where you are in the process, maybe you can speak about some of the most critical deliverables this year for Scotiabank. So over to you, Phil.
Thank you, Darko. As Darko said, I've been with Scotia just shy of coming up to almost 30 years with the bank. Perhaps I don't look it, but I certainly feel it some days. This is, I think, my fourth CEO with Scott in the chair. So seen a lot of change within the organization over the years. As you mentioned, we had a big investor day almost over a year ago now, and starting to see really great progress against the deliverables. We're delivering everything that we said we would do. As we articulated on that day, we had a two-year transition from our prior strategy into this strategy, and we're starting to see a lot of progress, particularly the international bank, great expense controls by Francisco. We're starting to see a lot of green shoots in that business too. He's done a great job of transitioning the business.
In the Canadian bank, which is really, we've articulated, is going to be one of our main growth engines. We've already seen improvements around primary customers, which we spoke a lot about on investor day. I think we've grown about 200,000 primary customers, which is good in a market like Canada. And then in our markets-facing businesses, you saw last quarter running on all cylinders, and I think Travis and Jacqui have been great additions to our team as well. So lots of transition within the bank. Change management has obviously been a big focus for us, and I think Scott's come in with some good leadership chops, and he's been able to help sort of steer the ship in a different direction. And I'm optimistic for the future of the bank.
As you said, I've been around for a long time, I've seen a lot of things, and I think we've got good positive momentum within the organization right now. Morale is good. People feel charged and pumped up and ready to grow.
So four CEOs. Was it Brian Porter?
No, it was Peter Godsoe .
Rick Waugh, yeah.
Rick Ignacio, Rick.
Peter Scott.
Yeah.
Wow. Okay, great, and so is it fair to say that the most critical deliverable this year is sort of on the international banking file, or do you think that's not the most critical deliverable for the?
I think everything's critical. When we sit around the table, in order to deliver a strategy as ambitious as ours, you have to have everything running. I mentioned international right off the bat because it's somewhere I spent 16 years of my career, so it's meaningful to me, and it's great to see that the way Francisco is pivoting from what was a very decentralized business where you had all the countries had a ton of autonomy to bringing things more towards the center to be able to manage costs more effectively from a risk management perspective gives me a lot of comfort because he's managing the risk very carefully from his office. As before, it was a little bit more dispersed.
And as you recall, prior to the pandemic, we had a lot of portfolios that went a little bit perhaps not in the direction that we wanted them to go, and he's done a wonderful job looking at de-risking, exiting. And so he's been very proactive, making it a safer, more productive, more profitable bank. And you see on Canada, I mean, Canada, obviously, lots of change in that business as well, but really good momentum moving towards the North Star of just driving the heck out of primary customers, building deeper relationships with clients. And again, from my seat, I love that because if you have the full suite of products with the customer, it allows me to know the customer better. And when we do our modeling as it relates to potential losses, having the customer's cash flow and not focused on single-service products is a big opportunity.
Okay, you gave me the lead in modeling. So why don't we start there? Lots of uncertainty. I wasn't sure how banks were going to respond to the tariff threat. In my mind, it was like maximum uncertainty once more, and therefore we have to build reserves. So maybe you can help us understand what drove your assumptions and talk about how you're thinking about stage two or reserves as we often refer to them down here in the U.S.
Yeah. No, I mean, going into the quarter, there was a lot of big delta between what the analyst community was predicting in terms of PCLs. I read your report. I thought it was very well written, and you had all the right assumptions going into the quarter, and your thinking was very similar to how we were digesting it. It was a really tricky period because you had a quarter coming to a close on the 31st. You had all of this noise in the media and coming from different administrations, and certainly Sheinbaum was making announcements, Trump was making announcements, Trudeau was making announcements. There was a lot of uncertainty, a lot of volatility. We could only do what we knew as of the end of the day on the 31st.
That weekend afterwards, while we're closing the books, I think there was a lot of us that didn't sleep a lot. So running the models, finalizing the data, and certainly we looked at, as we will, as we get towards the end of this quarter, particular sectors that were impacted. We had a look at what potential impacts could be for GDP, for unemployment, which are big determinants of Stage 2, as you well know. So all of these variables come into play, but at the same time, IFRS 9 is accounting at the end of the day, and the accountants, which I am not one of, but the accountants will tell you you can only do what you knew as of 11:59 on the 31st. So at that point in time, we didn't know there was going to be tariffs.
Our models did include from our economics group. They did include some impact from potential tariffs. That's where you saw in our pessimistic scenarios that little bit of downside risk that created the Performing Build that we did this quarter, of which I think about 95% of that was in Stage 2. As we think about take that logic now and let's go into this quarter, we have a bit more time. You're not looking at things over a course of 48 hours trying to make big decisions. Even reading the news this morning, and Nick made a few comments last night, which potentially could give us relief. Trudeau's press conference yesterday, he spoke very briefly on consumer relief on EI and potentially some of the measures that we saw during COVID.
And so those will also enter into our thinking as we think about performing. And so what will the tariff be? What is the indication on duration? Duration is kind of the word of the day, as I've been saying with my team. What's the consumer relief look like? That obviously enters into things. Unemployment will have a massive impact on the models. As you well know, it's probably one of the bigger determinants on the retail models that we have. And then we're going to go customer by customer over the next period, looking at where we see potential strain on the corporate and commercial. We've already started yesterday. I was speaking to the heads of the businesses to see what are customers telling them. So they started a very progressive, proactive outreach over the course of the last 24-48 hours. So that will help me.
The more intel that I have, it allows me to make better decisions. But there's tons of variables right now for us to digest.
Even the on-again, off-again nature of this is certainly not good for anyone either, and that might have to play a role.
I think one of your colleagues who works with us, Meny, coined the term a slow-moving crisis when I was talking to him yesterday morning, and I like that because you can't react to every tweet or every headline, and I think one of the things I've been talking to my folks about is just like you have to be calm. If you're panicking and you're trying to risk, it's never good if you have a risk manager who panics. It's probably a reason why someone should not be in risk management if they are panicky, but this is one of those scenarios whereby you just have to digest all the data, and you have to be very data-driven. You have to take the passion and the emotion out of this and just make good decisions on the data that you have on the given day.
So let me dive into the data a little bit and what you're hearing in these early conversations. So where might you be most sensitive to the tariffs, and how are you thinking about that? And maybe you can even dissect this a little bit because there's kind of two things going on for your bank. You've got Mexico and Canada facing the brunt of these tariffs. So maybe you can chat a little bit about how we should think about that.
I think automotive will be a sector that we'll certainly be looking at. We have about CAD 17 billion in exposure in auto. 92% of that is with dealers and OEMs. The remainder sort of splits out, but about 3% of that is with auto manufacturing or parts manufacturing. So that will be one area where we'll keep a close eye on, Darko. If you look at the dealer networks, particularly in the commercial or even in the corporate space, these are people that are used to dealing with the OEMs and the dealers. They're used to dealing with challenges, used to dealing with auto strikes. They're used to working through things, through problems rather. You saw through COVID how that group managed their business quite well. There's a lot of liquidity in that business as well. It was just reading some research reports.
It looks like if auto prices actually go up in the short term, that's actually a benefit for the dealer network.
Certainly.
And also, even looking at residual values on used vehicles might be a benefit too. So again, it goes down to duration. So if this extends six months and longer, that's when I think you're really going to have you'll start to see more friction in those businesses. I would say on the retail side, if I look at allowances and provisions and the big impact there, it's probably going to be more driven by retail. And this is where unemployment starts to become a really that will be the catchword for, I think, for the industry and for us more broadly. Small businesses, will they start laying off people because tariffs are impacting their business directly, mid-market commercial? So these will be the clients that we'll be very active with in terms of what support do they need from the bank.
We'll be watching very carefully what government support comes out or is available, rather, and so we're going to be very active with customers. I speak to customers all the time. My team goes out and does meetings with the bankers, and I think that's important from a risk perspective to have that sort of feel of sort of what's going on underneath the covers. In terms of Mexico, we've been, as I mentioned earlier, working very closely with the business heads there in de-risking and making that a more robust business. We had some underlying noise in our numbers from Mexico this week, but it was, sorry, last quarter, but it was mainly driven by some legacy mortgage portfolios that were deferred through the pandemic, but Sheinbaum's having a rally in Mexico City on Sunday.
And so I'm sure she will come out with, if indeed we do go down the path of tariffs, which we'll see what happens. I think there's even another press conference this afternoon by the U.S. administration. So she'll come probably out with retaliatory tariffs. In that market, I'm looking at, on the commercial side, looking very carefully at ag. There's fruit and meat. The fruit side, I'm going to watch it carefully, but I'm also watching what are potential substitutions in the U.S. because that will drive up the price of produce in the U.S., and the U.S. consumer will feel that right in their pocketbook. And then meat will be another watch area for me in Mexico. But again, it's going to come down to what are the tariffs, what's the retaliatory tariff, what's the reciprocal retaliatory tariff.
Hopefully all this stuff, we get more clarity over the next few weeks.
Maybe just size that Mexico exposure for us?
It's not significant. I mean, if you think of where I mean, Mexico, I believe, is sort of around sort of 10% of the portfolio. So it won't have a massive impact, particularly on the commercial and corporate stuff.
It may just be like a business slowdown.
It will be. That's what it will be.
The growth is really, it's not really credit that's keeping you up at night, at least not Mexican credit.
On the Mexico side, yeah. I'd say what keeps me awake at night will be the Canadian retail consumer.
Okay, and so let's think about now the potential for or the roadmap that we might see for impaired PCLs and this on-again, off-again, but you guys run scenarios, right? You modeled it, so let's just assume they stay. How do you see impaired PCLs? How do you see the trajectory? Anything changing in your thinking here?
Let's do tariffs and no tariffs.
Sure.
So let's pretend that we don't have tariffs and there's not an impending trade war across the North American corridor. Canadian GDP is actually performing well. Unemployment is improving. I see green shoots in the economy. Canada is obviously very rate sensitive. Rates are coming down. Things are more digestible for the average consumer. And so when we were giving guidance in Q4, first part of the year slightly elevated, second part of the year, we're starting to see impaired loans starting to trend downwards. So tariffs aside, I still hold that guidance. And actually, if you really just step back and look at, there's a lot of good stuff happening in the Canadian economy as it relates to growth. If we can just get out of this cycle. The problem with tariffs right now is that it's creating this uncertainty where people are not willing to make an investment.
You hear that from corporate clients. They're sort of holding back. You hear that from commercial banking clients. They're holding back in terms of investments. And then even on the retail side, I was speaking to a mortgage broker recently, and he was telling me he had people pulling deals out because they weren't sure if their jobs were going to be affected by this. And so the unfortunate consequence, both for the Canadian consumer and the U.S. consumer, is that people are uncertain. And so uncertainty creates volatility, and uncertainty doesn't lead to the growth that we would want to see. And we've been sitting in this holding pattern since coming out of COVID, where we're waiting for rates to come down. People are keeping their powder dry, and it's just creating this more uncertainty, this spin cycle now.
So that's scenario one is no tariffs, positive momentum the second half of the year. Still see that coming through. So cross my fingers, maybe there'll be some cooler heads will prevail, and we'll all win in the next half of the year. Tariffs come, and then the scenario becomes very different. Obviously, we're looking at, we're running our models and the variables that I spoke about earlier, impact to unemployment, impact to GDP. We will then look at reciprocal tariffs, how that impacts. We'll look at government incentive programs, which will have a big impact as they did through COVID. And as you know, we kind of overcooked government incentives to the point where they became inflationary. And so we'll have to, we'll watch that very carefully. And then sort of taking all of that data, we'll run our scenarios.
When it comes time to give an update in Q2 on our earnings call, we'll probably hopefully have a much clearer picture on what's going on to be able to give good guidance to the street.
And once again, I will pause here for a moment and take a look. If anybody has a question, raise your hand. Happy to log questions. This is your only chance to get a Chief Risk Officer question of the day. Everybody else is going to be CFOs.
By the way, Raj sends his regrets. He loves this conference and our CFO, and he wanted to pass on his regrets.
Next year, we'll have you both up here.
We'd love that. Raj and I are like tied at the hip.
And so actually, so on that topic, I mean, it's very early days. What's it been like around the table with the CEO, the CFO? And what is your early recommendation to Scott and to Raj here on credit? And what is it that you're telling the business leaders to sort of watch out for?
Yeah. No, listen, I think that's a great question. Raj and Scott and I have been in constant communication, nights, weekends, early mornings. And certainly, Scott's a very data-driven leader. He wants to know what's going on. And so numbers are important, as you know, in this business. And looking at trends, the modeled outputs, the different scenarios. So we've been walking through those. But I think the message Scott's giving to the broader bank is we got to keep communicating. And so we keep hammering home this notion of communicating. And as I told you, intelligence for myself and for Raj and Scott are deeply important. And so if Travis is hearing something in his business, being able to report back because it informs the type of decisions that Raj and I make ultimately and Scott. And so we're having constant risk committees.
We usually meet once every Thursday morning at 8:00 A.M. is our weekly risk committee meeting. But we've been having more and more ad hoc meetings just to pull intel. Obviously, J.F. Perrault, our Chief Economist, who's fantastic, I think he's probably the best economist on the street. He's in these discussions as well. Government relations reports to him. So having a pulse of sort of how Ottawa is thinking, how Washington is thinking, how Mexico City is thinking is constantly important. And I will say Francisco has great connectivity into what's going on in Latin America. He's very well connected from his prior experience before coming to the bank. And so being able to pick up the phone and sort of phone a friend and say, "What are you hearing?
What did the deputy minister or minister of so-and-so say or think about this?" helps me make better decisions with Scott and Raj as well, so I would say the connectivity is strong, and the teamwork is fantastic, and that's, to me, one of the things that gets me going and wants me to come to work every day is working with a good team, and we've got a good team there.
And so maybe just diving into some of the industry trends and maybe the health of the consumer and so on, I wanted to maybe pick your brain a little bit on if I took us back two years ago, we were really worried about mortgage renewal, payment shock, and it seems like, well, now with rates coming down, way down, potentially even further.
Yeah, potentially.
We could see that actually start to change. And actually, with your variable rate portfolio, it probably is changing. You're seeing mortgage payments come down. But we still saw some deterioration in the quarter.
Slight deterioration.
Yeah. Can you talk a little bit about that dynamic and what we should be expecting there?
Sure. I'll start with FRM first, fixed rate. So that's an interesting story because, as I said earlier, Canadians are, the whole Canadian economy is very rate sensitive. And because the mortgage market is such a key component to our economy, we watch it very, very carefully. But FRM now, as people are coming up for that, you and I were talking about rate shock. What's going to happen? Will people be able to weather through it? At that peak period, the average monthly mortgage payment increase from point of origination was about CAD 700 a month. That number now is below CAD 200 a month. And so for the average consumer, that's far more manageable than it was, obviously, at that peak. I know Tiff, we watch very carefully what Tiff Macklem, our central banker, what he's sort of signaling.
And as you said, we're kind of thinking there might be more, depending on, again, what happens in the macro. There might be more rate decreases, which again makes it more and more manageable for those consumers to weather through the repricing shock. But I think for the average person, CAD 200 a month will be more manageable, obviously, than the CAD 700 or CAD 800 that we were during the peak. So I get paid to worry. And so that's a little bit farther down the worry curve than some of the other things that I spend time stressing about. On the VRM side, I would call it stable, Darko. There was one basis point increase in delinquency. And that's just the effect of higher for longer and people weathering that, particularly with bigger size mortgages. And you see that stress a little bit more.
And you and I've talked about this in the past in sort of the Greater Toronto Area and Vancouver, where you have these bigger ticket size mortgages. I'll tell you, I'm less worried about even going through this cycle. I'm less worried about the secured lending. I'm more focused on the unsecured lending. And we did see a bit of an uptick in delinquency on unsecured lending. And it was interesting when you sort of peel back the onion on what's driving that. It was a lot of single-serve credit card customers. But it didn't just affect BNS. You go and look at the TransUnion or Equifax data. It was right across the board in the industry. And we have a very small credit card portfolio compared to the peers. And in fact, it's a strategic opportunity for us to look at how we can grow that.
But in downtimes, with under IFRS 9, you can really get bitten by unsecured lending. And so that will be the portfolio that I'm focused the most on right now from a retail client perspective. And one of our biggest, I mentioned our risk committee meeting. We had a very good deep dive last week on collections because I think that will be being the first phone call to these folks, being able to provide payment solutions, talking about what the issues are, and again, getting that intel back to be able to feed our models will be very, very important as well. But I think that's a systemic Canadian issue in the short term.
Again, I see it sort of, my hope is rates continue to go down, payment relief for clients, that gets absorbed, and we start to see some stability in that unsecured lending portfolio in the second half of the year.
What about the auto side? If you can just tie that, I mean, or do you have, I mean, clearly, if it's single-serve issue in credit cards, what about the auto portfolio?
Yeah, the auto portfolio. I don't know how many times you've heard me talk about that on the earnings call because I think for a year, I got every call I would get a question on the auto portfolio. And we're still digesting, we're almost through it. We're still digesting these loans on used autos during the pandemic when you couldn't get a new car. People were buying used vehicles. And the residual rates after the pandemic finished, new cars were suddenly more available. Residual values on the used cars were not great. And as that cohort of loans were stressed, when you go and do the repo, you're not getting the resale value that we want. So we still have a pocket of those. But we've done significant de-risking on the origination side in our auto book. So I'm feeling better about where we are with new originations.
But it's just this one, I don't know. For any of you that have worked in the risk management business, we use this term Pig through Python, and so we have this sort of cohort that's working its way through that we're dealing with. Obviously, it's been provisioned, but it's just noise in the portfolio now.
Okay. And we're butting up against the, is there any questions about it? Sort of butting up against the end of the time here. So maybe I've got a Chief Risk Officer up here, so it's been great. But maybe just we can just sort of recap and think about a lot of uncertainty around tariffs, but outside of tariffs. What is your biggest sort of, what is most top of mind, I suppose, for you today? If we could close our eyes and pretend there isn't a tariff, but just outside of tariffs, what would be top of mind for you?
Listen, my job is broad. And while I focus a lot on the financial risk side and when I'm out doing these kinds of conversations or for the earnings call, the landscape on the non-financial risk side is significant. And volatility, we're very focused on provisions, allowances, et cetera. But this kind of volatility creates opportunities for bad actors as well. And so obviously, I'm very thoughtful about cybersecurity. That's sort of one of the areas we spend a lot of time and money making sure that we've got everything buttoned down. Technology is a huge topic for us as well. We're very focused on resiliency, stability. We just onboarded a new CIO who's doing very, very well so far. So spending a lot of time with him, making sure he's anchored and he understands the big risks as we see them.
We just onboarded a new executive vice president of non-financial risks in America. So to work with our CIO to sort of up our game in that space as well. It's been a major focus for us. And then on the other side is regulatory risk. And so obviously, the regulators, whether here in the U.S. and in Canada, changes in government impact sort of their thinking and their philosophies as well. So spending a lot of time with the regulator trying to understand direction of travel is another area that I'm obviously very, very, very engaged in right now.
Okay. With that, I see red on the screen, so we are out of time. Phil, thank you for.
Thank you, Dr. Darko
Working with us.
It was fun.
Great. Cheers.