Good morning, and welcome to Scotiabank's 2021 third quarter results presentation. My name is John McCartney, Head of Investor Relations at Scotiabank. Presenting to you this morning are Brian Porter, Scotiabank's President and Chief Executive Officer; Raj Viswanathan, our Chief Financial Officer; and Daniel Moore, our Chief Risk Officer. Following our comments, we'll be glad to take your questions. Also present to take questions were the following Scotiabank executives: Dan Rees from Canadian Banking, Glen Gowland from Global Wealth Management, Nacho Deschamps from International Banking, and Jake Lawrence and James Neate 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. The bank's third quarter results announced earlier this morning reflect an acceleration of growth led by our Canadian P&C and Global Wealth businesses, supported by strong earnings progression in our international business against improving economic conditions and a more positive outlook across our footprint. Canadian Banking posted double-digit top-line revenue growth backed by strong mortgage and commercial lending activity and favorable credit quality trends and generated positive operating leverage.
Global Wealth Management delivered another strong quarter, driven by broad-based growth across our businesses and geographic footprint. Canadian Wealth Management earnings grew 20%, delivering double-digit revenue growth with strong contributions from all channels across our advisory and asset management businesses. Global Banking and Markets delivered its third consecutive quarter of earnings in excess of CAD 500 million in the face of a more normalized market environment.
International Banking earnings continue to improve, with earnings approaching pre-pandemic levels. Earnings in Mexico and Chile are ahead of pre-COVID levels, with good secured retail and corporate and commercial asset growth. In summary, our diversified business platform produced good earnings growth, positive operating leverage year to date, and an improving all -bank return on equity. Capital levels remain strong. Our common equity ratio of 12.2% is 80 basis points higher than it was entering the pandemic. That amounts to over CAD 3.2 billion of additional capital compared to Q1 2020.
Our results this quarter reflect the benefits from our continued investments in our businesses and our commitment to our customers that has positioned us well to respond to and capitalize on the economic rebounds in the markets in which we do business. Investments in the future of our bank and the communities we serve gained notable recognition again this past quarter, particularly as it relates to our efforts to digitize the bank. Scotiabank was recognized as the most innovative in data by The Banker Global Innovation in Digital Banking Awards in 2021, highlighting our use of data analytics to identify and support our most vulnerable customers in challenging times. Autonomous Research also recently moved Scotiabank to the top quadrant standing in its annual Digital Leaders and Laggards in Global Banking Study, recognizing banks that have progressed above peers in digitization.
We have remained committed to our growth initiatives throughout the pandemic period. Our sustained investment in our people and technology has clearly positioned us well to benefit from the resurgence of activity as economies and specific business segments recover. Lastly, the bank remains committed to our sustainability initiatives. Recently, Scotiabank was awarded four recognitions from Global Finance Magazine for sustainability, including a global award for outstanding global leadership and sustainability transparency. With that, I'll turn the call over to Raj to discuss the quarter in more detail.
Thank you, Brian. Good morning, everyone. Before I begin, I'd like to note that all my comments are on an adjusted basis for the bank and our business lines. As I did in the past few quarters, I will refer to quarter-over-quarter performance in many areas, given the economic impact of the pandemic in 2020. I will also refer to numbers excluding effects in many areas, as this has an important impact on the year-over-year comparables. We've added slide 37, which discloses the impact of effects on key income lines. I will begin with a review of all bank performance for the quarter on slide five. The bank reported another strong quarter of earnings growth. Year to date, the bank has exceeded all its medium-term objectives of ROE, EPS growth, and operating leverage while maintaining strong capital levels.
Total earnings were CAD 2.6 billion and diluted EPS was CAD 2.01 for the quarter, an increase in EPS of 93% year-over-year and 6% quarter-over-quarter. All operating segments reported strong results again this quarter, reinforcing the strength of our diversified platform. Return on equity improved to 15.1% from 14.9% last quarter, and year-to-date, our return on equity is 14.8%. Pre-tax, pre-provision earnings declined a modest 1% year-over-year. Quarter-over-quarter, all four business lines reported pre-tax, pre-provision growth. Revenue increased 1% year-over-year or up 5%, including the impact of foreign currency translation. Revenue was in line with last quarter, as strong performance from operating segments was offset by lower investment gains in the other segment. Non-interest income increased 3% or up 7%, excluding the impact of foreign currency translation, driven by higher banking fees and wealth management revenues.
Quarter-over-quarter, non-interest income was flat as higher wealth management revenues were partly offset by lower investment gains, trading revenues, and income from associated corporations. Net interest income was down 1% or up 3%, excluding the impact of foreign currency translation, driven by strong loan growth. Core banking margin has remained relatively stable for the past four quarters and is up 13 basis points year-over-year. The margin declined a modest 3 basis points this quarter, driven by business mix changes with continued strong secured retail and business lending growth. The PCL ratio continued to decrease, falling to 24 basis points for the quarter, representing a decline of 112 basis points year-over-year and 9 basis points quarter-over-quarter. This improvement reflects a more favorable credit quality and macroeconomic outlook across the footprint.
We continue to manage expenses prudently while investing in our businesses to support future growth. Excluding the benefits from foreign currency translation, expenses increased 3% quarter-over-quarter, reflecting higher personnel and technology costs that support business growth, professional fees, and the impact of three additional days in the quarter. Year-to-date expenses are in line with last year, excluding the benefit from foreign currency translation. On an adjusted basis, the productivity ratio was 52.5% this quarter compared to 51.4% a year ago, while operating leverage was a positive 1.6% year-to-date. Quarter-over-quarter loan growth was strong, with mortgages growing at 4%, business loans at 2%, while personal and credit cards were flat, adjusting for the impact of foreign currency. On slide six, we provide an evolution of our CET1 capital ratio over the quarter.
The bank reported a strong common equity tier one ratio of 12.2%, a modest decrease of 10 basis points from Q2, and an increase of 90 basis points from one year ago. Internal capital generation of 21 basis points was driven by strong earnings, offset by increased risk-weighted assets from solid secured retail and business lending growth across the businesses. This quarter, the capital ratio was also impacted by the increase in the SVaR multiplier and the closing of the transaction that increased our stake in our Chilean business by 7% of 22 basis points. Turning now to the business line results beginning on slide seven. Canadian Banking reported very strong earnings of CAD 1.1 billion, up significantly year-over-year and 16% quarter-over-quarter. The earnings were underpinned by a continued rebound in revenue growth, favorable credit quality trends, and operating leverage above 3% for the second consecutive quarter.
pre-tax pre-provision earnings grew 15% year-over-year and 9% quarter-over-quarter to over CAD 1.5 billion. Solid volume growth across assets and deposits and higher fee income were partly offset by modest margin compression. Revenue increased 12% year-over-year and 7% quarter-over-quarter from strong growth in non-interest revenue that grew 11% quarter-over-quarter, driven by higher deposit and mutual fund fees and an increase in card fee revenues. Net interest income grew 5% quarter-over-quarter as the strong growth in mortgage and deposit volumes more than offset the modest margin compression. Residential mortgages grew 10% and business lending grew 7% year-over-year, in line with the strategic priorities of the business. The net interest margin declined 3 basis points since Q2 to 2.23% from strong growth in mortgages and commercial loans, while higher margin unsecured lending balances were flat.
Expenses increased 8% year-over-year and 3% quarter-over-quarter, in line with higher revenues in both periods, primarily driven by higher personal costs associated with the growing sales force and technology costs to support business development. The year-to-date operating leverage remains strong at 2.3%. The PCL ratio decreased to 7 basis points, which is 78 basis points lower year-over-year and 9 basis points lower than Q2. Turning now to Global Wealth Management on slide eight. Earnings of CAD 397 million were up a strong 19% year-over-year and 5% quarter-over-quarter as the trend of strong fee-based asset growth and brokerage revenues continued, though this was partially offset by higher volume-related expenses. Revenue grew a strong 18% with non-interest expenses growing 17%. Global Wealth Management delivered its seventh consecutive quarter of positive operating leverage. The year-to-date operating leverage is a positive 3.7%.
Canadian Wealth Management continued its strong growth once again, up 20% year-over-year with broad-based growth across all business lines. This was the 10th consecutive quarter of double-digit earnings growth for this business. International Wealth also grew a strong 25% year-over-year on a constant dollar basis. AUM and AUA both increased 17% to CAD 344 billion and CAD 587 billion respectively, driven by positive net sales and market appreciation. Of note, year-to-date, we continue to hold the number two position amongst the banks in retail mutual fund sales in Canada. Moving to slide nine, Global Banking and Markets. Global Banking and Markets generated strong earnings of CAD 513 million this quarter, down a modest 1% from Q2. This is the third consecutive quarter for GBM with earnings in excess of CAD 500 million.
Revenue was in line with last quarter, with strong contributions from capital markets and M&A, which had its best quarter since 2014. Year-over-year, earnings and revenue were down 15% and 19% respectively from a record CAD 600 million earnings in Q3 2020. Year-to-date, expenses were in line with the prior year and declined 2% compared to the prior quarter, resulting in a productivity ratio of 49.5%. GBM's operations in Latin America, that is reported as part of International Banking, generated earnings of CAD 182 million this quarter, which is up 8% quarter-over-quarter and 18% year-over-year, driven by strong performance in capital markets businesses in the region. Turning to the next slide on International Banking. My comments that follow are on an adjusted and constant dollar basis.
International Banking reported net income of CAD 493 million, up significantly over the same quarter last year and improving 17% quarter-over-quarter. The business has achieved its target earnings a quarter ahead of our previous expectations. While there has been some volatility in the pace of improvement in the economic and business conditions, sentiment remains positive and the forecasted GDP growth for the region has improved over the last quarter. pre-tax pre-provision earnings for the business line increased 1% from the prior quarter, with revenues up 2%. pre-tax pre-provision earnings in the Pacific Alliance were up 4% year-over-year and a strong 8% from Q2. Notably, Chile and Mexico are above pre-COVID pre-tax pre-provision earnings.
Revenue increased by 2% quarter-over-quarter, driven by strong growth in non-interest income, benefiting from higher capital markets revenues, insurance services, and a longer quarter. Quarter-over-quarter loan balances were flat, with commercial up 1%, mortgages up 2%, while personal and credit cards were down 3%. In the Pacific Alliance, loans were up 1% quarter-over-quarter. Net interest income declined primarily due to net interest margin declining 23 basis points compared to Q2, 2/3 of which was due to changes in business mix. Mortgages and commercial volumes grew while unsecured lending balances decreased. Provisions for credit losses ratio declined quarter-over-quarter by 18 basis points to 100 basis points. Expenses increased 3% year-over-year and 4% compared to Q2 as we incurred higher personal and technology costs. We would note that year-to-date expenses are down 3% compared to last year.
Now turning to the other segment, we reported a modest loss of CAD 7 million. The year-over-year improvement was primarily driven by strong asset -liability management activities, lower COVID-related costs that were offset by lower investment gains. Quarter-over-quarter, the earnings were substantially lower due primarily to lower investment gains and income from associated corporations. I'll now turn the call over to Daniel to discuss first.
Thank you, Raj. Good morning, everyone. I will begin my remarks on slide 13. I would like to comment on credit quality and our lower PCL ratio. At the onset of the pandemic, we took an intentionally conservative view as we built allowances in an uncertain environment. Looking back, we were appropriately conservative, especially given the subsequent speed with which the business mix has shifted to secured, the high levels of liquidity driven by government support programs, and how rapidly customers have paid down their higher interest revolving unsecured loans. The credit quality of new bookings and the collections performance of the existing book are both improving at a faster rate than we had previously estimated. This has resulted in better credit metrics in recent quarters and moving forward will result in a lower ACL ratio or write-offs and a sustainably lower PCL ratio.
Our current high allowance levels position us well to be appropriately provided for and to continue to release allowances as we expect credit quality to continue to be strong. Additionally, our business mix has shifted, driven by market demand, resulting in the Canadian Banking retail portfolio increasing to 94% secured and International Banking portfolio growing to 73% secured from 66% pre-pandemic. Our GBM portfolio remains high quality at 85% investment grade. Delinquencies are also down quarter-over-quarter in all products in both the Canadian Banking and International Banking retail portfolios and below pre-COVID levels in both business lines. Our new origination quality is very high, with new originations in both CB and IB showing early-stage delinquency below pre-COVID levels. As you can see on the slide, our GIL and net write-off ratios are declining.
The impaired loan ratio improved 8 basis points to 73 basis points, reflecting the high quality of our loan books with both retail and business banking contributing to the improvement. While GILs have reduced from elevated write-offs, more importantly, net write-offs are also decreasing. The all -bank net write-off ratio decreased 62 basis points, driven primarily by lower write-offs in International Banking retail. While write-offs have declined significantly this quarter, write-offs in International Banking remain elevated compared to historical averages as the last of the deferrals age. This quarter, we saw higher write-offs in Colombia, primarily driven by the expected late-stage delinquencies where our deferral programs expired last December. Overall, the results are trending positively. As economies recover and customer liquidity remains high, and with the strong credit performance across the footprint, we continue to expect write-offs in International Retail to decline to pre-pandemic levels by next quarter.
Meanwhile, write-offs in Canadian Banking are below pre-pandemic levels, largely driven by lower write-offs in our auto and revolving portfolios as the credit quality of our customers remains high and payment trends remain strong. At the all -bank level therefore, we expect net write-offs to decline to below pre-pandemic levels. Turning to credit performance on slide 14 and starting with the balance sheet. The bank ended the quarter with total allowances of CAD 6.2 billion. That's a reduction of over CAD 660 million from the prior quarter and our second quarter of reduction. This was driven by both elevated write-offs reducing our impaired loan allowances and improved credit quality, reducing our performing loan allowances. Consequently, the ACL ratio declined to 96 basis points from 109 basis points last quarter.
It's worth noting that as these expected write-offs occur, the overall credit quality of the remaining portfolio improves, and we expect the ACL ratio to trend lower next quarter as well. Performing loan allowances declined approximately CAD 450 million. Approximately 2/3 or CAD 270 million, of performing loan allowances were transferred due to credit migration to impaired. Approximately CAD 180 million was released this quarter due to improving credit performance and a better macroeconomic outlook. Impaired loan allowances declined by CAD 179 million from last quarter, primarily due to higher write-offs in International Banking. Let me now turn to the income statement and provisions for credit loss on slide 15. Our total PCL declined to CAD 380 million. The total PCL ratio was 24 basis points, down 9 basis points from the prior quarter. Impaired provisions were CAD 841 million in Q3, down CAD 351 million from last quarter.
The decrease was mainly driven by international retail as credit migration continues to improve. Similarly, impaired provisions for Canadian retail banking and business banking both declined sequentially. To performing provisions, we had a net reversal of CAD 461 million in Q3. As we previously discussed, CAD 270 million of this was driven by credit migration to Stage 3, while CAD 180 million of the reversal represents a release of allowances built in prior periods that is no longer required. This reflects better credit quality and the improved macroeconomic outlook. This represents an improvement in performance versus our prior expectations, driven by the several factors that I mentioned previously. Let me conclude with a few comments. Our asset quality remains high, and the credit metrics are trending positively. Our credit performance in the quarter exceeds our prior expectations, and we expect this strong performance to continue.
The PCL outlook continues to be positive with net write-offs and impaired provisions improving from last quarter's peak, and we expect to see further performing ACL releases. These trends are in line with improving economic growth forecasts across our footprint, high levels of liquidity, and better credit performance than estimated earlier. I will now turn the call back to Brian for closing remarks.
Thank you, Daniel. In closing, I'd like to make a few comments and observations before turning it over to Q&A. Reflecting on our results, I am encouraged by the consistency of the progress we have witnessed in each of our business lines to date in fiscal 2021. At the beginning of the year, we stated our anticipation that 2021 would be a transition year towards a return to the full earnings power of the bank, supported by a return to normal PCL levels consistent with the economic recovery. This expectation has played out. Year-to-date earnings for the bank are not only above 2020 levels but are 17% above the same period in 2019, excluding divestitures. To date in 2021, Canadian Banking has delivered earnings progression at the high end of our expectations.
Global Wealth continues to deliver double-digit growth in Canada and internationally, with strong performance across all of its businesses. Our well-diversified GBM businesses continue to produce growing and stable earnings, capitalizing well on market opportunities. International Banking has recovered to pre-pandemic earnings a quarter ahead of previous expectations. Economic activity in major markets in which we operate continues to strengthen. Fundamentals remain solid, with high household liquidity and pent-up demand for a range of goods and services. Low interest rates and a highly stimulative fiscal stance in the U.S. and Canada have resulted in high levels of both individual and corporate liquidity. Incoming economic data continues to meet or beat expectations as the removal of COVID restrictions leads to stronger economic activity.
In summary, I am very proud not only of the business results to date in 2021, but continued progress on the growth and efficiency initiatives in each of our businesses that position us well for long-term growth against an always variable economic background. With strong capital levels, the bank is well positioned to both invest and return capital as appropriate in the pursuit of our strategic objectives to generate long-term sustainable earnings growth in the future. That concludes my formal remarks, and I'll pass it over to John McCartney for the Q&A.
Thank you, Brian. We will now be pleased to take your 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 please have the first question?
Thank you. Please press star one at this time if you have a question. Your first question is from Ebrahim Poonawala from Bank of America. Please go ahead.
Good morning. I guess just on International Banking. I don't know if Raj or Nacho wants to handle this; if you could talk to us about your revenue growth outlook from this point on as we look into the fourth quarter and beyond. If you can talk to us about your assumptions around loan growth in International Banking as well as the margin outlook, Raj, as we are seeing some of the central banks raise interest rates. If you could remind us of the sensitivity of the margin relative to interest rates in that region.
Yeah, sure, Ebrahim, it's Raj. I'll start on your margin question, then I'll pass it on to Nacho to talk about asset growth and revenue growth as we look forward. International Banking's margin was compressed a bit this quarter simply because of business mix. 2/3 of the 23 basis points quarter-over-quarter relate to business mix; the other 8 basis points relate to previous rate cuts that happened through the pandemic. As rate increases start coming back, we expect it to come back; you've seen evidence of it in Mexico, you've seen it in Chile, and you've seen it in Brazil.
We have seen it in other markets as well in our region. As expected, they're coming in early. 25 basis points will give us roughly CAD 20 million of earnings in IAB, in the International Banking business segment. That's going to help both with revenue, obviously, but also fall to the bottom line. I'm going to pass it over to Nacho to talk about asset growth.
Good morning, Ebrahim. Well, let me talk about revenue and asset growth. I would say it's very important to see the dynamic that is quite different in the Pacific Alliance countries that are rebounding strongly compared to the Caribbean and Central America that is still lagging. Revenues in the Pacific Alliance increased 5% QoQ; PTPP increased 8% QoQ. Even for overall International Banking, the increase was 1% in PTPP. Mexico and Chile, as Brian mentioned, are well above pre-COVID PTPP and earning levels with very good dynamics. Peru had a significant improvement this quarter, offsetting the lower results in the Caribbean that we expect will improve in the winter as tourism rebounds strongly. In terms of loan growth, we are seeing strong mortgage and commercial growth, 2% and 1% QoQ respectively.
In the case of commercial in particular, spot balances grew 2% in the quarter, and we anticipate a solid Q4. What is lagging is unsecured loan balances that declined, and this is mainly driven, like in Canada, by very high liquidity in the markets, particularly in Chile and Peru. You have information there in our deck. The level of support in Chile in terms of fiscal and early pension disbursements is 35% of GDP, so there's a lot of liquidity in consumers, and that is delaying the recovery of the unsecured loan. However, bookings have improved significantly in all retail products, and we expect retail loan growth to resume in Q4. These trends, I believe, hope to answer your question, Ebrahim, to which I believe the momentum is coming.
It's going to be gradual, but it's going in the right direction, both in loan growth and in revenue growth, strong in the Pacific Alliance countries, and it will come gradually in the Caribbean. The economic outlook continues to improve. Since last quarter, GDP for the Pacific Alliance countries now is expected to be 7.5% compared to 6% last quarter, and vaccinations also are accelerating across the region.
Got it. Thanks for the update.
Our pleasure.
Thank you, friend.
Thank you. The next question is from Gabriel Dechaine from National Bank Financial. Please go ahead.
Good morning. Just a clarification. Raj, you said CAD 20 million of earnings from the 25-basis- point rate hike. Is that the quarterly figure across the region kind of comment?
No, that's an annualized number, Gabe.
That's annualized. [crosstalk]
[crosstalk] I must have been hearing.
Okay, sorry. My other question's for Daniel Moore, just a numbers question from me today. Stage 2 classification, so the higher risk of the performing portfolio, I guess. That moved up what is it, 6% or so quarter-over-quarter? Or 12, sorry. Mostly in the mortgage book. How much of that was model-driven? Is there anything regional or otherwise that explains that increase? Just a bit of a jump.
Gabriel, thank you for your question. That was really 100% model-driven recalibration of the model. As you can anticipate, because that was mortgage-driven, there was really no impact on allowances as a result.
By model-driven, is it international? Is it Canada? What's the characteristic of the portfolio that caused the increase?
It was recalibration in our Canadian mortgage portfolio. Again, no impact on allowances.
Got it. Thank you.
Thank you. The next question is from Scott Chan from Canaccord Genuity. Please go ahead.
Good morning. On the International Banking side, you kind of reached your fiscal Q4 net income target. Raj, maybe looking into fiscal 2022 at a high level, what kind of factors would have to be in place for that to be sustainable or even higher?
Thank you, Scott. I think it's a little early to talk about 2022. I'll try to give you a very high-level perspective. International Banking, as you have seen, is growing quarter-over-quarter in both assets and earnings and, more importantly, including the non-interest revenue across the footprint. That should continue. Nacho Deschamps talked a little bit about the asset growth expectations he has and the GDP growth that we are expecting to see, particularly in the Pacific Alliance region. The comp for 2022 will be fairly easy compared to our Investor Day target of 9% that we talked about for International Banking, simply because of the progression of the earnings that have happened in 2021.
With the PCL ratios expected to be positive to previous estimates that we have had, I believe that we should see good earnings growth in 2022, and we'll be more specific in the November call, Scott.
Okay. Thank you very much.
Thank you. The next question is from Paul Holden from CIBC. Please go ahead.
Thank you. Good morning. Last quarter, we talked a little bit about the positioning of the treasury book in order to benefit from higher rates broadly. Maybe a quick update there, just in terms of if there's been any changes to the gearing.
Paul, it's Raj. I don't think there's any substantial changes, Paul. Our view is still that the balance sheet is naturally positioned to benefit from interest rate increases. It continues to show that. I think some of the disclosures that we put out consistent with other banks, this is 100 basis points. In fact, you see there's a slight uptick in that based on balance sheet changes, but none of which I would call material.
Okay, thank you.
Thank you. The next question is from Doug Young from Desjardins Capital Markets. Please go ahead.
Hi, good morning. Just on Canadian Banking notice non-interest income was up, I think it's around 10% quarter-over-quarter. Just trying to get a sense if there's anything unusual in there. What were the key drivers of this, and what's the outlook for that line? I know there's a lot of different things in there, including the Canadian Tire partnership and their contribution and whatnot. Just hoping to get a little bit of color of what drove it this quarter, and is this sustainable, and what's the outlook?
Sure. I'll start, Doug, it's Raj. Then I'll pass it over to Dan if he's got comments to add to what I have. Yeah, absolutely. I think Canadian Tire has been quite successful as far as we are concerned. We are seeing the same trends that you're seeing with Scotiabank. Their portfolio quality is better. We're seeing their loan loss provisions being lower. Therefore, our pick-up from the Canadian Tire partnership that we have, or the 20% ownership we have, is positive. Definitely a contributor. I expect it'll be a contributor for a few quarters to come if they have the same trends that we expect to see in the bank.
I think more importantly, when you look at banking revenues, you look at the wealth management revenues that are part of Canadian Banking with the partnership they have with Glen Gowland and his wealth business through the distribution network in the branches. That's a big contributor to the Canadian Banking's revenue as well as we look forward as well as we look back in the quarter that has passed. All of it to suggest that when credit card revenues start coming back with the activity continuing to increase, and Dan can be more specific on what he's seeing so far, we should expect to see continuous growth in non-interest revenue line next quarter and beyond that as well. Dan?
Yeah, thanks, Raj. Doug, I'd just add that we made some choices a couple of years ago to grow the commercial business at a faster rate because we were optimistic about the opportunity in the marketplace. You'll see the progression in the NIR, also a function of commercial growing at a faster rate. The final piece I would make is our progress, as Raj mentioned, at working with Global Wealth Management has been substantial, and we expect that to continue on the investment sales side.
Okay. Thank you.
Thank you. The next question is from Nigel D'Souza from Veritas. Please go ahead.
Thank you. Good morning. I just had a quick clarification first. On slide 15, you noted that your performing PCLs declined to CAD 461 million due to lower migration to Stage 3. I'm assuming you're referring to migration of Stage 2 loans to Stage 1. Is that correct?
That's lower migrations from performing to non-performing.
Yeah
from stages 1, 2- 3. Yes.
Okay. If I could build on your expectations for PCLs going forward. With the low -level impairments you're currently seeing across your portfolio, do you have a sense of how much you would attribute that to fiscal support and ongoing fiscal support versus the reopening and rebound in the economy that we're currently seeing as restrictions are lifted? Could you touch on your expectations for that going forward? How much of the credit environment do you see developing from a recovering economy versus continued fiscal support from governments?
Thanks for that question. I'll start out and maybe Dan can provide some additional context. I think a number of things have been at play and a lot has changed in the last 18 months, whether it's through government stimulus or through changing consumer preferences and changing consumer behavior. We've seen a remarkable increase in our deposit balances, and that's across our footprint in both Canadian Banking and International Banking. That's led to remarkable consumer liquidity, as we talked about. Those changes in our provisions are very strongly driven by that changing consumer behavior, which has resulted in lower delinquency, lower early stage delinquency, better recoveries, which has driven improvement on the provisions basis, and business mix. That's been a very, very strong driver in that outcome. Ultimately, of course, translating through on a cash basis to those lower write-offs.
That, we think, is with us for quite some time. If we look at the excess deposit balances in Canada that have built up through a mixture of measures over the course of the pandemic, and if we see spending go back to pre-COVID levels, the Canadian consumer on our balance sheet has two years of additional liquidity. That gives us a lot of confidence in our outlook from here. Dan, any additional comments?
Yeah, just two quick adds, Daniel. First, the reopening was important for getting consumers out and shopping again. Even though the summer is sometimes a slower period in purchase volume, we saw units and dollars grow both on the credit side and the debit side through every month of this quarter, which is really encouraging across travel and grocery in particular.
In home improvements. The other piece I wanted to mention is as we sat here a quarter ago, we were interested in seeing how the automotive book would play out through the summer, notwithstanding supply constraints owing to the chip shortage. We saw bookings, so new account openings in Q3 up 30% year-over-year in auto. The reopening and the engagement of dealers has been remarkably dynamic, and we're encouraged for the outlook of that book in the next 12 months.
That's a very helpful answer. Thank you.
Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead.
Good morning. Perhaps if we just follow up on that question around credit card spending. There are a few external sources that would suggest that credit card spending has recovered to 2019 levels. In your credit card revenue number, I'm not seeing that play out. Is that really just a function of the domestic side recovering, but international being slow to recover? Could you talk about the difference in that and the difference in those two regions in terms of credit card spending? If I've got it right, that's what we're seeing here, a really big disparity in performance.
Thanks, Mario. It's Dan Rees here. I'll start and then pass it to Nacho. In the Canadian-based card book, we've seen fee income, so transaction-driven revenues rise much faster than I think some of us had expected, and we're pleased with that trend and the outlook. The reason revenues in cards aren't where we yet want them to be is consumers have de-leveraged that card book. I think that's true across the street. We don't expect that to resume quite as fast. Given that the revolving nature of that portfolio is important to generating yield, the revenue mix is heavily impacted by the fact that lending as the source or the use of that card is not yet back to pre-COVID levels. I'll pass it to Nacho for comments in International.
Good morning, Mario. Really, it's not too different. We have seen a recovery of billings of credit cards, but due to the high level of liquidity, payments are also higher and revolving balances are lower. That's what is delaying the growth in revenue. That's an upside we see for coming quarters.
What I was referring to there was not so much the balances, but just in the other income, the fee line itself. I would have expected to see a better recovery there as spending has been. Is spending not really augmenting the fee line yet?
Let me see if I can help you, Mario. I think the card revenues you're referring to are quarter-over-quarter; they're down by about CAD 4 million, which you would have thought would be higher. I think that's what you're getting to, right? The CAD 181-CAD 177. Part of it is FX too, Mario, but I do think that the spending levels in IB, as much as it's almost back to where it should be, are still short of where it used to be. Your point is valid on that.
Good. Thank you.
Thank you. The next question is from Lemar Persaud from Cormark Securities. Please go ahead.
Thanks. Apologies if this question has already been asked. I had to hop on a bit late here. My question's for Nacho. Just on International Banking margins, would it be fair to suggest that this quarter marks the trough for high margins, or is it possible that we could see another decline quarter moving forward?
Hey, Lemar, it's Raj. I'll start, and Nacho can complement as he sees fit. Yeah, I think the right term is trough. The decline to 372, to give you a little bit of perspective, from 395, the 23 basis points quarter-over-quarter. About 15 basis points relates to business mix, Lemar. We've seen growth in commercial and in secured retail, and we have seen the 3% decline in the unsecured lending book. That's going to contribute to a margin compression as you can expect. The other 8 basis points is really the lag effect of rate cuts that happened last year as assets reprice. That should start coming back as interest rates have started increasing in the region.
We think that with the asset growth answer that Nacho talked about earlier, where he expects to see retail growth start to happen in Q4, we should see the bucking of the trend of the reduction in the net interest margin. Likely in line with this quarter might be marginally higher, a basis point or so. We believe that this might be the low point in the net interest margin for International. Anything to add, Nacho?
I think it's because we expect now more balanced growth between commercial secured, unsecured. It's going to be relatively stable, and there's upside potential to rising interest rates in the markets.
Okay, thanks. If I could just squeeze in another follow-up. Would it be possible to see margins in International reflect or return back to the 4.5% range we used to talk about pre-pandemic, or is there something structural in nature that would prevent that from happening?
I think there's a structural adjustment in our balance sheet. Our balance sheet is now much more secured. As Daniel mentioned, it has gone secure from 66% - 72% in retail. That reduces our need, but it also has a positive offset in our PCLs. Our PCL ratio is 100 basis points, which is 35 basis points below pre-COVID levels.
Perfect. Thank you.
Thank you. The next question is from Darko Mihelic from RBC Capital Markets. Please go ahead.
Yeah, thank you. Good morning. Pre-tax, pre-provision earnings. Just sort of down year to date. Questions for Brian. How important is that in your decision with respect to a dividend increase once the regulator sort of removes that restriction? The way I think of it is all banks probably want to give some sort of token increase. That's what I'm expecting. Is it really the predominant consideration pre-tax, pre-provision earnings and therefore a token increase from Scotia? Is there something else that will help drive the decision and create a bigger increase in your dividend? Thank you.
Okay. Good morning, Darko. Thank you for the question. PTPP is the way to look at it. Obviously good solid asset growth drives good solid earnings growth over time for any bank. I just moved back here , and I reflect on what's happened over the course of the last two years : remember we took CAD 670 million of NIAT out of the bank in terms of divestitures. We've earned through that in a very short period of time. We're proud of that. Look, we think that the bank is well-positioned for growth across all four businesses. If you look at Canadian Banking this quarter, great numbers. We've been investing in all our businesses in terms of organic growth opportunities. You're going to see consistent growth out of the Canadian Banking. Global Wealth Management has demonstrated great earnings growth. Number two in mutual fund sales.
Number two in terms of earnings growth this year. We expect that trend to continue. GBM is a repositioned business. Sometimes people forget about the scale of the business. If you take GBM and GBM LatAm, that's the number two capital markets division of our peer group here in Canada. A big business that stays within its risk appetite and is delivering consistent and good earnings. International Banking, as we've talked about this morning, is coming back. Mexico and Chile are through pre-COVID level of earnings. Peru is coming back. The Caribbean and Central America, as it always happens, lag because there's always a lag between U.S. GDP growth and economic recovery than what happens in the Caribbean because it's so skewed towards tourism. Kind of long-winded answer. PTPP is the way to look at in terms of dividend growth.
We feel very positive about the growth rate of the bank going forward, Darko.
Great. Thank you.
Thank you. The next question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead.
Thank you. I wanted to clarify one answer and then ask a question of Glen Gowland. Raj, the 25 basis point rate sensitivity that you gave for the International Banking net income after tax, is that basically assuming all of Colombia, Chile, Mexico, Peru were going to bump by 25 basis points? Is that the way to think about it?
Absolutely. It's a very blunt instrument answer. Yeah, exactly. 25 basis points across the footprint, Sohrab, you are right.
Okay. That was about CAD 20 million of earnings after tax.
That is correct.
on an annualized basis. Okay. Thank you.
That's it.
Glen, obviously another good quarter here in the wealth business. Maybe a bit of a tough question to answer, but is there any way for you to try and attribute how much of the success that you're enjoying right now you could tag back to the acquisitions that the bank made a couple of years ago in this space?
Yeah, I think it's a fair question, Sohrab. I would say that these were great additions, and at the time, we really talked about the cultural fit and how they would become part of our business, and they are. We're three years down the road, completely integrated. I think the real story behind the numbers is we're certainly seeing record assets in both those businesses, and they're continuing to grow on their own behalf. The organic growth across our businesses, if I look at both those businesses , is primarily in Canada. If I look across our Canadian businesses, we're seeing a little bit of moderation in trading in the self-directed industry within iTRADE. Outside of that business, every single business, whether it's private banking, investment counsel, ScotiaMcLeod, record revenues, asset management businesses are north of 20% year-over-year.
I think the real story here is the breadth, and that's what's really setting us up for continued growth. You can see we've continued to reinvest in the business. We're adding more people, mobile apps for Scotia iTRADE, all those kinds of things, and that's the flexibility that that P&L gives you to invest for future quarters.
Sohrab, it's Brian. I just wanted to add to this that we're obviously extremely proud of our wealth management business. If you go down memory lane a bit here, 12 or 13 years ago, it consisted of one business, and that was ScotiaMcLeod, which we're very proud of. We've acquired through acquisition, we built organically, and now we have a business that produces profit in excess of a billion and a half CAD a year above all bank ROE, and we like the business, and the business has a lot of growth potential in our International Banking. More to do here in Canada and the U.S. We think Glen and his team have done a great job with the business. It's going to be a growth engine for the bank going forward and really doesn't get the exposure that it's due.
Thank you.
Thank you. Once again, please press star one at this time if you have a question. The next question is from Ebrahim Poonawala from Bank of America. Please go ahead.
Hey, thanks for taking my question again. Just wanted to follow up on International Banking on the expense side, maybe not sure. We've thought of IB as having an expense lever as you get some efficiencies from digital investments you made. Can you talk to us about the absolute level of expenses? Do you think that goes down from here, or is the positive operating leverage going to be a function of just the revenue growth rebounding and coming in at a faster clip versus expenses as we look forward?
Thank you for your question, Ebrahim. I would look at this expense growth as expected, because revenue growth and loans and commercial activity in general have significantly rebounded. As Raj mentioned, this is really stepping up personnel, technology expense, operational and variable expenses. That's why we have an increase this quarter. As Raj mentioned, year to date, our expenses are down 3%. Digital, the digital dividend we have collected is very significant, and I continue to see significant opportunities in the future to continue reducing our expense base as we leverage technology and digital that is really, adoption continues to improve at a very high pace, Ebrahim.
Got it. Expenses net net should still go lower absent any revenue-driven expense growth. Is that fair?
Yes, we expect the trend to continue going lower.
Noted. Thank you.
Thank you. The next question is from Gabriel Dechaine from National Bank Financial. Please go ahead.
Good morning again, and another question for Daniel. You made an interesting comment there to one of the questions about consumer spending returning to pre-COVID levels and that people have two years of excess liquidity to burn through, something along those lines. If you can maybe clarify that statement a little bit. When I hear that, it doesn't make me think , Well, it sounds good, don't get me wrong, but it raises a question about the rebound in consumer lending that, internationally, sounds like it's going to come back starting in Q4. It's going to slowly materialize in Canada, but it seems like a big impediment to that outcome. Maybe you can shed some light on this issue.
Yeah, I'll start and then for outlook on consumer lending, I'll pass over to Dan. Yeah, indeed. You've seen this in the Bank of Canada disclosures and elsewhere, Gabriel, incredible increases across our footprint in liquidity translated really on the retail consumer side of things. Demand deposits, checking balances in Canadian retail up 53% versus pre-pandemic levels. That's really gone to the people that need it the most. You've seen that while we've had reductions in our balances, our loan balance is about 20%, that's disproportionately to the lower FICO score customers. That's really driving the PCL outlook that we have from here. That's been a disproportionate allocation. That's been a good result for the country and for the bank as well. Similarly, in IB, we've had the increase in deposits. Those deposits are up about 20%, demand deposits.
That's really been driven by those pension releases in Chile and Peru largely, but it's across our footprint. I'll turn to Dan on the lending outlook, but I think the notable thing there is that the increase in deposits has gone to the lower FICO customers.
Okay. The demand on notice is up 53% in Canada, 20% in International, and it's disproportionately skewed to the lower end of the credit spectrum.
Correct. Yeah, Gabe, it's Dan here. That is correct. I think the main message on liquidity is consumers have options, point one, and it's great from a risk standpoint. What we saw through the quarter was that consumer lending was strong in every single one of our product lines. That's why I took a moment to highlight automotive, which clearly matters to our top line. We see the mortgage book continuing to grow from here. Credit card interest -earning receivables did grow on a spot basis through the quarter. Consumers are activating, and I think it'll be an interesting year next year when we look at the role that home improvements will play, given that the mortgage market will continue to roll on the secured line portfolio. I wouldn't take the kind of deposit position to give you pause for consumer lending returns.
Quite the opposite, and more to the point, and that's why I called out the relationship that we have with wealth management. We are seeing deposit balances move into stickier mutual fund products as well, which is clearly great on the fee side.
Got it.
Good for consumers. Thank you.
Thank you. The next question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead.
Okay. Just wanted to ask one of Jake here as well. Jake, another obviously strong quarter here also in your business. I think once upon a time, we had talked about maybe GBM having about 75% of its kind of earnings more stable and durable, but that's when we were talking about CAD 400 million-CAD 450 million of kind of earnings contribution quarterly. You've been above CAD 500 million. Any updated thoughts as to what the kind of durability of your earnings is and how much of it right now is due to constructive markets, and how much of it is just sustainable going forward? Thanks.
Yeah. Thanks, Sohrab, for the question. We do think this is a CAD 500 business, ± probably CAD 20-CAD 25. We have seen constructive market conditions fade away a little bit as we move through Q3. We do have a diverse business, and we've talked about that before. We've got a very strong lending book. We've made that clear, and we've been focused on growing that outside of Canada. I believe Brian mentioned earlier the great results out of GBM LatAm, as did Raj. We're continuing to grow America's footprint, including in the U.S. If we look at this quarter, the fee line was very strong, buoyed by one of our best quarters in M&A since 2014. As we look out, the stability won't only come from accrual income, but it'll come from better use of our intellectual capital.
Stronger advisory businesses, ECM, DCM, better cross-sell of that balance sheet into cash management products. We're quite optimistic that this business is repositioned. A great stat, Sohrab, that I want to get out there to show the repositioning. Our year-to-date earnings are actually higher than pre-pandemic levels in 2019. Three quarters into this year, we've already surpassed our total earnings in 2019. A much more durable business, a much larger earnings contribution from the business, not only within GBM, but also in the IB segment, and we're quite pleased about the outlook as we move into 2022.
Thank you.
Thank you. There are no further questions.
Thank you, everyone. Yeah, thank you everyone for participating in our call today. On behalf of the entire management team, I want to thank everyone for participating. We look forward to speaking with you again at our fourth quarter results call, where we will also provide our outlook for fiscal 2022. This concludes our third quarter results call. Have a great day.